罗斯公司理财题库全集
罗斯公司理财题库全集
Chapter 22Options and Corporate Finance Multiple Choice Questions1. A financial contract that gives its owner the right, but not the obligation, to buy or sell a specified asset at an agreed-upon price on or before a given future date is called a(n) _____ contract.A. optionB. futuresC. forwardD. swapE. straddle2. The act where an owner of an option buys or sells the underlying asset, as is his right, is called ______ the option.A. strikingB. exercisingC. openingD. splittingE. strangling3. The fixed price in an option contract at which the owner can buy or sell the underlying asset is called the option's:A. opening price.B. intrinsic value.C. strike price.D. market price.E. time value.4. The last day on which an owner of an option can elect to exercise is the _____ date.A. ex-paymentB. ex-optionC. openingD. expirationE. intrinsic5. An option that may be exercised at any time up to its expiration date is called a(n) _____ option.A. futuresB. AsianC. BermudanD. EuropeanE. American6. An option that may be exercised only on the expiration date is called a(n) _____ option.A. EuropeanB. AmericanC. BermudanD. futuresE. Asian7. A _____ is a derivative security that gives the owner the right, but not the obligation, to buy an asset at a fixed price for a specified period of time.A. futures contractB. call optionC. put optionD. swapE. forward contract8. A _____ is a derivative security that gives the owner the right, but not the obligation, to sell an asset at a fixed price for a specified period of time.A. futures contractB. call optionC. put optionD. swapE. forward contract9. A trading opportunity that offers a riskless profit is called a(n):A. put option.B. call option.C. market equilibrium.D. arbitrage.E. cross-hedge.10. The value of an option if it were to immediately expire, that is, its lower pricing bound, is called an option's _____ value.A. strikeB. marketC. volatilityD. timeE. intrinsic11. The relationship between the prices of the underlying stock, a call option, a put option, anda riskless asset is referred to as the _____ relationship.A. put-call parityB. covered callC. protective putD. straddleE. strangle12. The effect on an option's value of a small change in the value of the underlying asset is called the option:A. theta.B. vega.C. rho.D. delta.E. gamma.13. An option that grants the right, but not the obligation, to sell shares of the underlying asset on a particular date at a specified price is called:A. either an American or a European option.B. an American call.C. an American put.D. a European put.E. a European call.14. Which one of the following provides the option of selling a stock anytime during the option period at a specified price even if the market price of the stock declines to zero?A. American callB. European callC. American putD. European putE. either an American or a European put15. Given an exercise price, time to maturity, and European put-call parity, the present value of the strike price plus the call option is equal to:A. the current market value of the stock.B. the present value of the stock minus a put option.C. a put option minus the market value of the share of stock.D. the value of a U.S. Treasury bill.E. the share of stock plus the put option.16. You can realize the same value as that derived from stock ownership if you:A. sell a put option and invest at the risk-free rate of return.B. buy a call option and write a put option on a stock and also borrow funds at the risk-free rate.C. sell a put and buy a call on a stock as well as invest at the risk-free rate of return.D. lend out funds at the risk-free rate of return and sell a put option on the stock.E. borrow funds at the risk-free rate of return and invest the proceeds in equivalent amounts of put and call options.17. Which one of the following statements correctly describes your situation as the owner of an American call option?A. You are obligated to buy at a set price at any time up to and including the expiration date.B. You have the right to sell at a set price at any time up to and including the expiration date.C. You have the right to buy at a set price only on the expiration date.D. You are obligated to sell at a set price if the option is exercised.E. You have the right to buy at a set price at any time up to and including the expiration date.18. Jeff opted to exercise his August option on August 10 and received $2,500 in exchange for his shares. Jeff must have owned a (an):A. warrant.B. American call.C. American put.D. European call.E. European put.19. Jillian owns an option which gives her the right to purchase shares of WAN stock at a price of $20 a share. Currently, WAN stock is selling for $24.50. Jillian would like to profit on this stock but is not permitted to exercise her option for another two weeks.Which of the following statements apply to this situation?I. Jillian must own a European call option.II. Jillian must own an American put option.III. Jillian should sell her option today if she feels the price of WAN stock will decline significantly over the next two weeks.IV. Jillian cannot profit today from the price increase in WAN stock.A. I and III onlyB. II and IV onlyC. I and IV onlyD. II and III onlyE. I, III, and IV only20. The difference between an American call and a European call is that the American call:A. has a fixed exercise price while the European exercise price can vary within a small range.B. is a right to buy while a European call is an obligation to buy.C. has an expiration date while the European call does not.D. is written on 100 shares of the underlying security while the European call covers 1,000 shares.E. can be exercised at any time up to the expiration date while the European call can only be exercised on the expiration date.21. If a call has a positive intrinsic value at expiration the call is said to be:A. funded.B. unfunded.C. at the money.D. in the money.E. out of the money.22. A put option with a $35 exercise price on ABC stock expires today. The current price of ABC stock is $36.The put is:A. funded.B. unfunded.C. at the money.D. in the money.E. out of the money.23. The maximum value of a call option is equal to:A. the strike price minus the initial cost of the option.B. the exercise price plus the price of the underlying stock.C. the strike price.D. the price of the underlying stock.E. the purchase price.24. The lower bound on a call's value is either the:A. strike price or zero, whichever is greater.B. stock price minus the exercise price or zero, whichever is greater.C. strike price or the stock price, whichever is lower.D. strike price or zero, whichever is lower.E. stock price minus the exercise price or zero, whichever is lower.25. The lower bound of a call option:A. can be a negative value regardless of the stock or exercise prices.B. can be a negative value but only when the exercise price exceeds the stock price.C. can be a negative value but only when the stock price exceeds the exercise price.D. must be greater than zero.E. can be equal to zero.26. The intrinsic value of a call is:I. the value of the call if it were about to expire.II. equal to the lower bound of a call's value.III. another name for the market price of a call.IV. always equal to zero if the call is currently out of the money.A. I and III onlyB. II and IV onlyC. I and II onlyD. II, III, and IV onlyE. I, II, and IV only27. The intrinsic value of a put is equal to the:A. lesser of the strike price or the stock price.B. lesser of the stock price minus the exercise price or zero.C. lesser of the stock price or zero.D. greater of the strike price minus the stock price or zero.E. greater of the stock price minus the exercise price or zero.28. Which of the following statements are correct concerning option values?I. The value of a call increases as the price of the underlying stock increases. II. The value of a call decreases as the exercise price increases.III. The value of a put increases as the price of the underlying stock increases. IV. The value of a put decreases as the exercise price increases.A. I and III onlyB. II and IV onlyC. I and II onlyD. II and III onlyE. I, II, and IV only29. The value of a call increases when:I. the time to expiration increases.II. the stock price increases.III. the risk-free rate of return increases.IV. the volatility of the price of the underlying stock increases.A. I and III onlyB. II, III, and IV onlyC. I, III, and IV onlyD. I, II, and III onlyE. I, II, III, and IV30. Which one of the following will cause the value of a call to decrease?A. lowering the exercise priceB. increasing the time to expirationC. increasing the risk-free rateD. lowering the risk level of the underlying securityE. increasing the stock price31. Assume that you own both a May 40 put and a May 40 call on ABC stock. Which one of the following statements is correct concerning your option positions? Ignore taxes and transaction costs.A. An increase in the stock price will increase the value of your put and decrease the value of your call.B. Both a May 45 put and a May 45 call will have higher values than your May 40 options.C. The time premiums on both your put and call are less than the time premiums on equivalent June options.D. A decrease in the stock price will decrease the value of both of your options.E. You cannot profit on your position as your profits on one option will be offset by losses on the other option.32. You own both a May 20 call and a May 20 put. If the call finishes in the money, then the put will:A. also finish in the money.B. finish at the money.C. finish out of the money.D. either finish at the money or in the money.E. either finish at the money or out of the money.33. You own stock in a firm that has a pure discount loan due in six months. The loan has a face value of $50,000. The assets of the firm are currently worth $62,000. The stockholders in this firm basically own a _____ option on the assets of the firm with a strike price of ______A. put; $62,000.B. put; $50,000.C. warrant; $62,000.D. call; $62,000.E. call; $50,000.34. The owner of a call option has the:A. right but not the obligation to buy a stock at a specified price on a specified date.B. right but not the obligation to buy a stock at a specified price during a specified period of time.C. obligation to buy a stock on a specified date but only at the specified price.D. obligation to buy a stock sometime during a specified period of time at the specified price.E. obligation to buy a stock at the lower of the exercise price or the market price on the expiration date.35. In the Black-Scholes option pricing formula, N(d1) is the probability that a standardized, normally distributed random variable is:A. less than or equal to N(d2).B. less than one.C. equal to one.D. equal to d1.E. less than or equal to d1.36. To compute the value of a put using the Black-Scholes option pricing model, you:A. first have to apply the put-call parity relationship.B. first have to compute the value of the put as if it is a call.C. compute the value of an equivalent call and then subtract that value from one.D. compute the value of an equivalent call and then subtract that value from the market price of the stock.E. compute the value of an equivalent call and then multiply that value by e-RT.37. If you consider the equity of a firm to be an option on the firm's assets then the act of paying off debt is comparable to _____ on the assets of the firm.A. purchasing a put optionB. purchasing a call optionC. exercising an in-the-money put optionD. exercising an in-the-money call optionE. selling a call option38. For every positive net present value project that a firm undertakes, the equity in the firm will increase the most if the delta of the call option on the firm's assets is:A. equal to one.B. between zero and one.C. equal to zero.D. between zero and minus one.E. equal to minus one.39. Shareholders in a leveraged firm might wish to accept a negative net present value project if:A. it increases the standard deviation of the returns on the firm's assets.B. it lowers the variance of the returns on the firm's assets.C. it lowers the risk level of the firm.D. it diversifies the cash flows of the firm.E. it decreases the risk that a firm will default on its debt.40. Which of the following statements is true?A. American options are options on securities of U.S. corporations, and the options are traded on American exchanges. European options are options on securities of U.S. corporations, but the options are traded on European exchanges.B. American options are options on securities which are traded on American exchanges. European options, also traded on American exchanges, are options on European corporations.C. American options give the holder the right to the dividend payment. European options do not.D. American options may be exercised anytime up to expiration. European options may be exercised only at expiration.E. None of the above.41. An out-of-the-money call option is one that:A. has an exercise price below the current market price of the underlying security.B. should not be exercised.C. has an exercise price above the current market price of the underlying security.D. Both A and B.E. Both B and C.42. Which of the following is not true concerning call option writers?A. Writers promise to deliver shares if exercised by the buyer.B. The writer has the option to sell shares but not an obligation.C. The writer's liability is zero if the option expires out-of-the-money.D. The writer receives a cash payment from the buyer at the time the option is purchased.E. The writer has a loss if the market price rises substantially above the exercise price.43. An in-the-money put option is one that:A. has an exercise price greater than the underlying stock price.B. has an exercise price less than the underlying stock price.C. has an exercise price equal to the underlying stock price.D. should not be exercised at expiration.E. should not be exercised at any time.44. Which of the following statements is true?A. At expiration the maximum price of a call is the greater of (Stock Price - Exercise) or 0.B. At expiration the maximum price of a call is the greater of (Exercise - Stock Price) or 0.C. At expiration the maximum price of a put is the greater of (Stock Price - Exercise) or 0.D. At expiration the maximum price of a put is the greater of (Exercise - Stock Price) or 0.E. Both A and D.45. Put-call parity can be used to show:A. how far in-the-money put options can get.B. how far in-the-money call options can get.C. the precise relationship between put and call prices given equal exercise prices and equal expiration dates.D. that the value of a call option is always twice that of a put given equal exercise prices and equal expiration dates.E. that the value of a call option is always half that of a put given equal exercise prices and equal expiration dates.Tele-Tech Com announces a major expansion into Internet services. This announcement causes the price of Tele-Tech Com stock to increase, but also causes an increase in price volatility of the stock.46. Which of the following correctly identifies the impact of these changes on a call option of Tele-Tech Com?A. Both changes cause the price of the call option to decrease.B. Both changes cause the price of the call option to increase.C. The greater uncertainty will cause the price of the call option to decrease. The higher price of the stock will cause the price of the call option to increase.D. The greater uncertainty will cause the price of the call option to increase. The higher price of the stock will cause the price of the call option to decrease.E. The greater uncertainty has no direct effect on the price of the call option. The higher price of the stock will cause the price of the call option to decrease.47. Which of the following correctly identifies the impact of these changes on a put option of Tele-Tech Com?A. Both changes cause the price of the put option to decrease.B. Both changes cause the price of the put option to increase.C. The greater uncertainty will cause the price of the put option to decrease. The higher price of the stock will cause the price of the put option to increase.D. The greater uncertainty will cause the price of the put option to increase. The higher price of the stock will cause the price of the put option to decrease.E. The greater uncertainty has no direct effect on the price of the put option. The higher price of the stock will cause the price of the put option to decrease.48. The delta of a call measures:A. the change in the ending stock value.B. the change in the ending option value.C. the swing in the price of the call relative to the swing in stock price.D. the ratio of the change in the exercise price to the change in the stock price.E. None of the above.49. The Black-Scholes option pricing model is dependent on which five parameters?A. Stock price, exercise price, risk free rate, probability, and time to maturityB. Stock price, risk free rate, probability, time to maturity, and varianceC. Stock price, risk free rate, probability, variance and exercise priceD. Stock price, exercise price, risk free rate, variance and time to maturityE. Exercise price, probability, stock price, variance and time to maturity50. What is the cost of five November 25 call option contracts on KNJ stock given the following price quotes?A. $615B. $660C. $2,500D. $3,075E. $3,30051. What is the value of one November 35 put contract?A. $70B. $460C. $510D. $4,600E. $5,10052. What is the intrinsic value of the August 25 call?A. $0.10B. $5.86C. $6.15D. $10.00E. $25.0053. You purchased six TJH call option contracts with a strike price of $40 when the option was quoted at $1.30. The option expires today when the value of TJH stock is $41.90. Ignoring trading costs and taxes, what is your total profit or loss on your investment?A. $60B. $320C. $360D. $420E. $54054. You purchased four WXO 30 call option contracts at a quoted price of $.34. What is your net gain or loss on this investment if the price of WXO is $33.60 on the option expiration date?A. -$1,576B. -$136C. $1,304D. $1,440E. $1,57655. You wrote ten call option contracts on JIG stock with a strike price of $40 and an option price of $.40. What is your net gain or loss on this investment if the price of JIG is $46.05 on the option expiration date?A. -$6,450B. -$5,650C. $400D. $5,650E. $6,45056. The market price of ABC stock has been very volatile and you think this volatility will continue for a few weeks. Thus, you decide to purchase a one-month call option contract on ABC stock with a strike price of $25 and an option price of $1.30. You also purchase aone-month put option on ABC stock with a strike price of $25 and an option price of $.50. What will be your total profit or loss on these option positions if the stock price is $24.60 on the day the options expire?A. -$180B. -$140C. -$100D. $0E. $18057. Several rumors concerning Wyslow, Inc. stock have started circulating. These rumors are causing the market price of the stock to be quite volatile. Given this situation, you decide to buy both a one-month put and a one month call option on this stock with an exercise price of $15. You purchased the call at a quoted price of $.20 and the put at a price of $2.10. What will be your total profit or loss on these option positions if the stock price is $4 on the day the options expire?A. -$230B. $870C. $890D. $910E. $1,31058. Three months ago, you purchased a put option on WXX stock with a strike price of $60 and an option price of $.60. The option expires today when the value of WXX stock is $62.50. Ignoring trading costs and taxes, what is your total profit or loss on your investment?A. -$310B. -$60C. $0D. $60E. $19059. You sold ten put option contracts on PLT stock with an exercise price of $32.50 and an option price of $1.10. Today, the option expires and the underlying stock is selling for $34.30 a share. Ignoring trading costs and taxes, what is your total profit or loss on this investment?A. -$2,900B. -$1,100C. $700D. $1,100E. $2,90060. You sold a put contract on EDF stock at an option price of $.40. The option had an exercise price of $20. The option was exercised. Today, EDF stock is selling for $19 a share. What is your total profit or loss on all of your transactions related to EDF stock assuming that you close out your positions in this stock today? Ignore transaction costs and taxes.A. -$140B. -$60C. $40D. $60E. $14061. You own two call option contracts on ABC stock with a strike price of $15. When you purchased the contracts the option price was $1.20 and the stock price was $15.90. What is the total intrinsic value of these options if ABC stock is currently selling for $14.50 a share?A. -$280B. -$180C. -$100D. $0E. $10062. You own five put option contracts on XYZ stock with an exercise price of $25. What is the total intrinsic value of these contracts if XYZ stock is currently selling for $24.50 a share?A. -$250B. -$50C. $0D. $50E. $25063. Last week, you purchased a call option on Denver, Inc. stock at an option price of $1.05. The stock price last week was $28.10. The strike price is $27.50. What is the intrinsic value per share if Denver, Inc. stock is currently priced at $29.03?A. -$1.05B. $0C. $.48D. $.93E. $1.5364. Three weeks ago, you purchased a July 45 put option on RPJ stock at an option price of $3.20. The market price of RPJ stock three weeks ago was $42.70. Today, RPJ stock is selling at $44.75 a share and the July 45 put is priced at $.80. What is the intrinsic value of your put contract?A. -$295B. -$210C. $0D. $25E. $11065. You own a call option on Jasper Co. stock that expires in one year. The exercise price is $42.50. The current price of the stock is $56.00 and the risk-free rate of return is 3.5%. Assume that the option will finish in the money. What is the current value of the call option?A. $13.04B. $13.50C. $13.97D. $14.94E. $15.4666. You currently own a one-year call option on Way-One, Inc. stock. The current stock price is $26.50 and the risk-free rate of return is 4%. Your option has a strike price of $20 and you assume that it will finish in the money. What is the current value of your call option?A. $6.25B. $6.50C. $6.76D. $7.13E. $7.2767. The common stock of Mercury Motors is selling for $43.90 a share. U.S. Treasury bills are currently yielding 4.5%. What is the current value of a one-year call option on Mercury Motors stock if the exercise price is $37.50 and you assume the option will finish in the money?A. $6.12B. $6.40C. $6.69D. $7.67E. $8.0168. The common stock of Winsson, Inc. is currently priced at $52.50 a share. One year from now, the stock price is expected to be either $54 or $60 a share. The risk-free rate of return is 4%. What is the value of one call option on Winsson stock with an exercise price of $55?A. $0.39B. $0.41C. $0.45D. $0.48E. $0.5169. You own one call option with an exercise price of $30 on Nadia Interiors stock. This stock is currently selling for $27.80 a share but is expected to increase to either $28 or $34 a share over the next year. The risk-free rate of return is 5% and the inflation rate is 3%. What is the current value of your option if it expires in one year?A. $0.76B. $0.79C. $0.89D. $0.92E. $0.9570. The assets of Blue Light Specials are currently worth $2,100. These assets are expected to be worth either $1,800 or $2,300 one year from now. The company has a pure discount bond outstanding with a $2,000 face value and a maturity date of one year. The risk-free rate is 5%. What is the value of the equity in this firm?A. $166.67B. $231.42C. $385.71D. $405.00E. $714.2971. Big Ed's Electrical has a pure discount bond that comes due in one year and has a face value of $1,000. The risk-free rate of return is 4%. The assets of Big Ed's are expected to be worth either $800 or $1,300 in one year. Currently, these assets are worth $1,140. What is the current value of the debt of Big Ed's Electrical?A. $222.46B. $370.77C. $514.28D. $769.23E. $917.5472. Martha B's has total assets of $1,750. These assets are expected to increase in value to either $1,800 or $2,400 by next year. The company has a pure discount bond outstanding with a face value of $2,000.This bond matures in one year. Currently, U.S. Treasury bills are yielding 6%. What is the value of the equity in this firm?A. $16.98B. $34.59C. $36.67D. $37.08E. $51.8973. Tru-U stock is selling for $36 a share. A 3-month call on Tru-U stock with a strike price of $40 is priced at $1. Risk-free assets are currently returning 0.25% per month. What is the price of a 3-month put on Tru-U stock with a strike price of $40?A. $2.98B. $3.00C. $4.03D. $4.70E. $4.9074. GS, Inc. stock is selling for $28 a share. A 3-month call on GS stock with a strike price of $30 is priced at $1.50. Risk-free assets are currently returning 0.3% per month. What is the price of a 3-month put on GS stock with a strike price of $30?A. $0.50B. $2.02C. $2.73D. $3.23E. $4.0275. J&L, Inc. stock has a current market price of $55 a share. The one-year call on J&L stock with a strike price of $55 is priced at $2.50 while the one-year put with a strike price of $55 is priced at $1. What is the risk-free rate of return?A. 2.71%B. 2.76%C. 2.80%D. 2.84%E. 2.87%76. What is the value of d2 given the following information on a stock?Stock price $63Exercise price $60Time to expiration .50Risk-free rate 6%Standard deviation 20%d1 .627841A. .3133B. .4864C. .5460D. .6867E. .734977. Given the following information, what is the value of d2 as it is used in the Black-Scholes Option Pricing Model?Stock price $42Time to expiration .25Risk-free rate .055Standard deviation .50d1 .375161A. .021608B. .125161C. .175608D. .200161E. .25016178. What is the value of a 9-month call with a strike price of $45 given the Black-Scholes Option Pricing Model and the following information?Stock price $48Exercise price $45Time to expiration .75Risk-free rate .05N(d1) .718891N(d2) .641713A. $2.03B. $4.86C. $6.69D. $8.81E. $9.2779. Assume that the delta of a call option on a firm's assets is .792. This means that a $50,000 project will increase the value of equity by:A. $27,902.B. $39,600.C. $43,820.D. $63,131.E. $89,600.80. The current market value of the assets of Bigelow, Inc. is $86 million, with a standard deviation of 15% per year. The firm has zero-coupon bonds outstanding with a total face value of $45 million. These bonds mature in 2 years. The risk-free rate is 4% per year compounded continuously. What is the value of d1?A. 3.54B. 3.62C. 3.68D. 3.71E. 3.75。
罗斯公司理财题库全集
Chapter 20Issuing Securities to the Public Multiple Choice Questions1. An equity issue sold directly to the public is called:A. a rights offer.B. a general cash offer.C. a restricted placement.D. a fully funded sales.E. a standard call issue.2. An equity issue sold to the firm's existing stockholders is called:A. a rights offer.B. a general cash offer.C. a private placement.D. an underpriced issue.E. an investment banker's issue.3. Management's first step in any issue of securities to the public is:A. to file a registration form with the SEC.B. to distribute copies of the preliminary prospectus.C. to distribute copies of the final prospectus.D. to obtain approval from the board of directors.E. to prepare the tombstone advertisement.4. A rights offering is:A. the issuing of options on shares to the general public to acquire stock.B. the issuing of an option directly to the existing shareholders to acquire stock.C. the issuing of proxies which are used by shareholders to exercise their voting rights.D. strictly a public market claim on the company which can be traded on an exchange.E. the awarding of special perquisites to management.5. Companies use tombstone advertisements in the financial press to:A. announce the death of the company.B. announce the failure of a financial strategy.C. announce the availability of a new issue of a corporate security.D. notify the public of foreclosure.E. None of the above.6. The first public equity issue made by a company is a(n):A. initial private offering.B. initial public offering.C. secondary offering.D. seasoned new issue.E. None of the above.7. The first public equity issue that is made by a company is referred to as:A. a rights issue.B. a general cash offer.C. an initial public offering.D. an unseasoned issue.E. Both C and D.8. A new public equity issue from a company with equity previously outstanding is called a(n):A. initial public offering.B. seasoned equity issue.C. unseasoned equity issue.D. private placement.E. syndicate.9. The green shoe option is used to:A. cover oversubscription.B. cover excess demand.C. provide additional reward to the investment bankers for a risky issue.D. provide additional reward to the issuing firm for a risky issue.E. Both A and B.10. Dilution refers to:A. the increase in stock value due to wider ownership of stock.B. the loss in existing shareholder's equity.C. the loss in new shareholder's equity.D. the loss in all shareholder's equity, both existing shareholders and new shareholders.E. None of the above.11. During the SEC waiting period the potential issuing company can issue a preliminary prospectus which contains:A. exactly the same information as the final prospectus except an indication of SEC approval.B. all the information as the final prospectus including red writing stating it is a red herring.C. very limited financial information and red writing stating it is preliminary.D. only a description of what the funds are to be used for.E. information very similar to the final prospectus without a price nor with SEC approval.12. A company must file a registration statement with the SEC providing various financial and company history information. The registration statement does not need to be filed if:A. the issue is less than $50 million.B. the loan matures within 9 months.C. the issue is less than $5.0 million.D. Both A and B.E. Both B and C.13. Regulation A security issues are exempt from full SEC registration filing and use only a brief offering statement if:A. the issue is for less than $5,000,000.B. insiders sell no more than $1,500,000 of stock.C. insiders sell no more than 100,000,000 shares.D. Both A and C.E. Both A and B.14. Potential investors learn of the information concerning the firm and its new issue from the:A. pre-underwriting negotiating meeting.B. red herring.C. letter of commitment.D. emails from their former finance professor.E. rights offering.15. A registration statement is effective on the 20th day after filing unless:A. the SEC is backlogged with statements.B. a tombstone ad is issued indicating its demise.C. a letter of comment suggesting changes is issued by the SEC.D. a syndicate can be formed sooner.E. None of the above.16. Investment banks perform which of the following services for corporate issuers:A. formulating the method used to issue the securities.B. pricing the new securities.C. selling the new securities.D. All of the above.E. None of the above.17. A group of investment bankers who pool their efforts to underwrite a security are known as a(n):A. amalgamate.B. conglomerate.C. green shoe group.D. klatch.E. syndicate.18. A firm commitment arrangement with an investment banker occurs when:A. the syndicate is in place to handle the issue.B. the spread between the buying and selling price is less than one percent.C. the issue is solidly accepted in the market evidenced by a large price increase.D. when the investment banker buys the securities for less than the offering price and accepts the risk of not being able to sell them.E. when the investment banker sells as much of the security as the market can bear without a price decrease.19. Which of the following is not normally an example of the services offered by investment bankers?A. Aiding in the sale of securitiesB. Facilitating mergersC. Acting as brokers to both individuals and institutional clientsD. Offering checking accounts to corporationsE. Both C and D20. In a best efforts offering the investment banker makes their money primarily by:A. earning the spread between the buying and offering price.B. earning a commission on each share sold.C. earning the discount between the buying and offering price.D. charging a flat fee for all services.E. None of the above.。
罗斯公司理财题库全集
Chapter 23 Options and Corporate Finance: Extensions and Applications Answer KeyMultiple Choice Questions1. The option to abandon is:A. a real option.B. usually of little value because of the cost associated with abandonment.C. irrelevant in capital budgeting analysis.D. nearly always less relevant the option to expand.E. All of the above.Difficulty level: MediumTopic: OPTION TO ABANDONType: DEFINITIONS2. An example of a special option is:A. an executive stock option.B. the embedded option in a start-up company.C. the option in simple business contracts.D. the option to shut down and reopen a project.E. All of the above.Difficulty level: MediumTopic: SPECIAL OPTIONType: DEFINITIONS3. Executives can not exercise their options for a fixed period of time. This is the:A. investing period.B. freeze-out period.C. valuation period.D. guaranteed growth period.E. strike period.Difficulty level: MediumTopic: FREEZE-OUT PERIODType: DEFINITIONS4. The NPV approach must be:A. augmented by added analysis if there are a few embedded options.B. augmented by added analysis if a decision has significant embedded options.C. jettisoned if there are any embedded options.D. computed carefully to identify the options.E. None of the above.Difficulty level: MediumTopic: EMBEDDED OPTIONSType: CONCEPTS5. Options are granted to top corporate executives because:A. executives will make better business decisions in line with benefiting the shareholders.B. executive pay is at risk and linked to firm performance.C. options are tax-efficient and taxed only when they are exercised.D. All of the above.E. None of the above.Difficulty level: MediumTopic: EXECUTIVE OPTIONSType: CONCEPTS6. The call option on a dividend paying stock compared to a non-dividend paying stock is:A. more valuable because of the extra dividend payment.B. equal in value because cash dividends are paid on stock only.C. less valuable because cash dividends are paid on stock only.D. less valuable if the dividend paying stock is in-the-money while the non-dividend paying stock if out-of-the-money.E. None of the above.Difficulty level: ChallengeTopic: CALL OPTION ON DIVIDEND PAYING STOCKType: CONCEPTS7. The value of the options awarded executives is much less than face value to the executives because:A. the value to the executive depends on the stock price being greater than the exercise price.B. the options must be held beyond the freeze-out period.C. a highly undiversified portfolio can have a large drop in value with high variance stocks.D. All of the above.E. None of the above.Difficulty level: MediumTopic: EXECUTIVE OPTIONSType: CONCEPTS8. By rewarding executives with large option positions, corporations:A. cause the executives to hold highly undiversified portfolios.B. put the firm in a risky position to pay off the options.C. cause the value of the stock to fall because the options are theft.D. are really valueless because most options are never exercised.E. None of the above.Difficulty level: ChallengeTopic: EXECUTIVE OPTIONSType: CONCEPTS9. Investing in a negative NPV project today is a feasible choice if:A. there are future option alternatives.B. investing is sequentially limited.C. the discount rate is low.D. Both A and B.E. Both A and C.Difficulty level: MediumTopic: NEGATIVE NPV PROJECTS AND REAL OPTIONSType: CONCEPTS10. The opportunity to defer investing to a later date may have value because:A. the cost of capital may decline in the near future.B. certainty may be reduced in the future.C. investment costs fluctuate in time.D. All of the above.E. None of the above.Difficulty level: EasyTopic: OPTION TO DEFERType: CONCEPTS11. Rejecting an investment today forever may not be a good choice because:A. the size of the firm will decline.B. there are always errors in the estimation of NPVs.C. the option value is negative.D. the company's foregoing the future rights or option to the investment.E. None of the above.Difficulty level: MediumTopic: REAL OPTIONSType: CONCEPTS12. A financial manager who does not follow the general constraints of the NPV rule may:A. accept a negative NPV project for fear of losing an investment opportunity.B. accept a marginally acceptable NPV project limiting the corporation's ability to choose a competing project.C. not consider all options available in a capital budgeting decision.D. not take a positive NPV project even if the NPV is adequate reward to forego the option.E. All of the above.Difficulty level: MediumTopic: REAL OPTIONSType: CONCEPTS13. The volatility of interest rates can affect the value of the project by:A. increasing the value as volatility increases.B. increasing the value as volatility decreases.C. decreasing the value as volatility increases.D. interest rate volatility does not affect value.E. None of the above.Difficulty level: MediumTopic: INTEREST RATE VOLATILITYType: CONCEPTS14. Which of the following statements is true?A. The Black Scholes model is the simplest to use and best used for complex situations.B. The binomial model does not handle options with dividend payments prior to expiration date.C. The Black Scholes model adequately handles the valuation of an American put.D. The binomal model is better for complex situations and is the simplest tool to use.E. The Black Scholes model is simpler to use, but for complex situations, the binomial model is the necessary tool.Difficulty level: MediumTopic: OPTION PRICING TOOLSType: CONCEPTS15. If a project has optionality:A. the shorter the available life of the project the less valuable the project is.B. the longer the available life of the project the less valuable the project is.C. the shorter the available life of the project the more valuable the project is.D. available project life does not change optionality.E. None of the above.Difficulty level: EasyTopic: OPTIONALITYType: CONCEPTS16. The equal rate of price change from each subsequent up state and fixed rate price change from each subsequent down state are reasonable if:A. there is a constant variability.B. any new information impacting prices is similar period to period.C. interest or discount rates are constant.D. Both A and C.E. Both A and B.Difficulty level: MediumTopic: VARIABILITY AND INFORMATIONType: CONCEPTS17. The most correct method to determine the current value of future payoffs would be to:A. take the discounted expected value at the risk-free rate.B. take the expected value using the probabilities.C. take the discounted expected value using the risk-neutral probabilities and the risk free rate.D. sum the payoffs discounted at the risk free rate.E. None of the above.Difficulty level: MediumTopic: VALUATION OF FUTURE PAYOFFSType: CONCEPTS18. The risk-neutral probabilities for an asset, with a current value equal to the present value of future payoffs are:A. given by the probability of each state occurring.B. given by the value of the underlying asset under good news and the risk free rate.C. given by the value of the underlying asset under good news and bad news.D. given by the value of the underlying asset under good news, bad news, and the risk free rate.E. None of the above.Difficulty level: ChallengeTopic: VALUATION OF FUTURE PAYOFFSType: CONCEPTS19. A branching tree for the binomial model:A. should capture all possible futures paths for the asset.B. has a move down followed by a move up on a subsequent branch to end at the same value as the reverse path.C. has a move down followed by a move up on a subsequent branch to end at a lower value than a move up then a move down.D. Both A and C.E. Both A and B.Difficulty level: ChallengeTopic: BINOMIAL MODELType: CONCEPTS20. Increasing the number of intervals in the binomial model causes the price shift parameters to change. New estimates are related to:A. the standard deviation of the underlying asset.B. the up state multiplier equals the standard deviation divided by root n.C. the number of intervals in a year.D. All of the above.E. None of the above.Difficulty level: MediumTopic: BINOMIAL MODELType: CONCEPTS21. Which of the following is not part of the Black Scholes option pricing model?A. Standard deviationB. Time to maturityC. Exercise priceD. Par value of the company's stockE. Interest rateDifficulty level: MediumTopic: BLACK SCHOLES OPTION PRICING MODELType: CONCEPTS22. What are the u, the up state multiplier, and d, the down state multiplier, if there are monthly intervals and the standard deviation is .38?A. 1.1159; .8961B. .0317; 31.5789C. .0317; .9683D. .2193; .7807E. None of the aboveDifficulty level: MediumTopic: BLACK SCHOLES OPTION PRICING MODELType: CONCEPTS23. On the notion of embedded options, which of the following is/are true?A. If virtually all projects have embedded options, ignoring options is likely to lead to serious undervaluation.B. There are at least two possible outcomes for virtually every business idea.C. Virtually every business has both the option to abandon and the option to expand.D. All of the above.E. Both B and C.Difficulty level: MediumTopic: EMBEDDED OPTIONSType: CONCEPTS24. A firm in the extraction industry whose major assets are cash, equipment and a closed facility may appear to have extraordinary value. This value can be primarily attributed to:A. the potential sale of the company.B. the low exercise price held by the shareholders.C. the option to open the facility when prices rise dramatically.D. All of the above.E. None of the above.Difficulty level: MediumTopic: REAL OPTIONSType: CONCEPTSNote: Correct answers to later questions are dependent on correct answers to earlier questions. Ima Greedy, the CFO of Financial Saving Techniques has been granted options on 200,000 shares. The stock is currently trading at $22 a share and the options are at the money. The variance of the stock has been about .07 on an annual basis over the last several years. The options mature in 3 years and the risk free rate is 4%.25. What is d1?A. .1842B. .4102C. .4583D. .4909E. .5412d1 = [ln(22/22) + [.04 + (.50x.07)(3)]/ (.07)3d1 = .225/.4583 = .4909Difficulty level: MediumTopic: BLACK SCHOLES OPTION PRICING MODELType: PROBLEMS26. What is d2?A. .0121B. .0252C. .0326D. .0452E. .0525d2 = d1 - √σ2t = .4909 - √(.07)(3) = .4909 - .4583 = .0326 Difficulty level: MediumTopic: BLACK SCHOLES OPTION PRICING MODELType: PROBLEMS27. What is e-rt?A. .6087B. .7087C. .7952D. .8476E. .8869e-.04(3) = .8869Difficulty level: MediumTopic: BLACK SCHOLES OPTION PRICING MODELType: PROBLEMS28. Calculate N(d1).A. .5054B. .6508C. .6882D. .7047E. .8096N(d1) = .50 + .1882 = .6882Difficulty level: MediumTopic: BLACK SCHOLES OPTION PRICING MODELType: PROBLEMSChapter 23 - Options and Corporate Finance: Extensions and Applications29. Calculate N(d2).A. .5130B. .5578C. .6085D. .7085E. .7142N(d2) = .50 + .0130 = .5130Difficulty level: MediumTopic: BLACK SCHOLES OPTION PRICING MODELType: PROBLEMS30. What is the value of a call option?A. $4.14B. $4.86C. $5.13D. $5.62E. $6.1623-11。
罗斯公司理财题库全集
Chapter 30Financial Distress Multiple Choice Questions1. Financial distress can be best described by which of the following situations in which the firm is forced to take corrective action?A. Cash payments are delayed to creditors.B. The market value of the stock declines by 10%.C. The firm's operating cash flow is insufficient to pay current obligations.D. Cash distributions are eliminated because the board of directors considers the surplus account to be low.E. None of the above.2. Insolvency can be defined as:A. not having cash.B. being illiquid.C. an inability to pay one's debts.D. an inability to increase one's debts.E. the present value of payments being less than assets.3. Stock-based insolvency is a:A. income statement measurement.B. balance sheet measurement.C. a book value measurement only.D. Both A and C.E. Both B and C.4. Flow-based insolvency is:A. a balance sheet measurement.B. a negative equity position.C. when operating cash flow is insufficient to meet current obligations.D. inability to pay one's debts.E. Both C and D.5. Financial restructuring can occur as:A. a private workout.B. an employee buy-out.C. a bankruptcy reorganization.D. Both A and C.E. Both B and C.6. Financial distress can involve which of the following:A. asset restructuring.B. financial restructuring.C. liquidation.D. All of the above.E. None of the above.7. APR, as it relates to financial distress, means the rules of:A. absolute profitability.B. arbitration priority.C. absolute priority.D. arbitration profitability.E. automatic profitability.8. The difference between liquidation and reorganization is:A. reorganization terminates all operations of the firm and liquidation only terminatesnon-profitable operations.B. liquidation terminates only profitable operations and reorganization terminates onlynon-profitable operations.C. liquidation terminates all operations and reorganization maintains the option of the firm as a going concern.D. liquidation only deals with current assets and reorganization only consolidates debt.E. None of the above.9. A firm that has a series of negative earnings, sales declines and workforce reductions is likely headed to:A. acquisition of another firm.B. a merger.C. financial distress.D. new financing.E. None of the above.10. Some of the various events which typically occur around the period of financial distress fora firm are:A. continued increase in earnings.B. steady growth.C. dividend reductions.D. Both A and B.E. Both A and C.11. Bankruptcy reorganizations are used by management to:A. forestall the inevitable liquidation in all cases.B. provide time to turn the business around.C. allow the courts time to set up an administrative structure.D. All of the above.E. None of the above.12. A firm has several options available to it in times of financial distress. The firm may:A. reduce capital and R & D spending.B. raise new funds by selling securities or major assets.C. file for bankruptcy.D. negotiate with lenders.E. All of the above statements are true.13. Most firms in financial distress do not fail and cease to exist. Many firms can actually benefit from distress by:A. forcing a firm to reevaluate their core operations.B. realigning their capital structure to reduce interest costs.C. entering Chapter 11 and liquidating the firm.D. Both A and B.E. Both A and C.14. Whether bankruptcy is entered voluntarily or involuntarily the major difference between Chapter 7 and Chapter 11 is:A. that liquidation occurs in Chapter 11 but reorganization is the objective under Chapter 7.B. that there is no priority of claims under Chapter 11.C. that liquidation occurs in Chapter 7 but reorganization is the objective under chapter 11.D. no lawyers fees are necessary under Chapter 7.E. None of the above.15. If a firm has a stock based insolvency in both book and market value terms and liquidates:A. the payoff will not be 100% to all investors.B. the unsecured creditors are likely to get less than full value.C. the equityholders typically should receive nothing.D. All of the above.E. None of the above.16. A firm in financial distress that reorganizes:A. continues to run the business as a going concern.B. must have acceptance of the plan by the creditors.C. may distribute new securities to creditors and shareholders.D. All of the above.E. None of the above.17. A corporation is adjudged bankrupt under Chapter 7. When do the shareholders receive any payment?A. After the trustee liquidates the assets and pays the administrative expenses, the shareholders are paid before the creditors.B. After the trustee liquidates the assets, the administrative expenses and secured creditors are paid, then the unsecured creditors, and then the shareholders divide any remainder.C. After the trustee liquidates the assets, the shareholders are paid, next the administrative expenses, the secured creditors, and then the unsecured creditors divide any remainder.D. After the trustee liquidates the assets the shareholders are paid first because they are the owners of the firm and have the principal stake.E. None of the above.18. What is the absolute priority rule of the following claims once a corporation is determined to be bankrupt?A. administrative expenses, wages claims, government tax claims, debtholder and then equityholder claimsB. administrative expenses, wages claims, government tax claims, equityholder and then debtholder claimsC. wage claims, administrative expenses, debtholder claims, government tax claims and equityholder claimsD. wage claims, administrative expenses, debtholder claims, equityholder claims and government tax claimsE. None of the above19. The absolute priority rule:A. is set to ensure senior claims are paid first.B. is the priority rule in liquidations.C. distributes proceeds of secured assets sales to the secured creditors first and the remainder to the unsecured.D. All of the above.E. None of the above.20. Many corporations choose Chapter 11 bankruptcy proceedings voluntarily because the management can:A. take up to 120 days to file a reorganization plan.B. continue to run the business.C. reorganize if the required fractions of creditors approve of the plan and it is confirmed when the reorganization takes place.D. All of the above.E. None of the above.21. Which of the following statements about private workouts of financial distress is NOT true?A. Senior debt is usually replaced with junior debt.B. Debt is usually replaced with equity.C. Private workouts account for about three quarters of all reorganizations.D. Top management is often dismissed or takes pay reductions.E. None of the above.22. Successful private workouts are better for firms than formal bankruptcy because:A. direct costs are considerably lower in private workouts.B. private workout firms can issue new debt senior to all prior debt.C. stock price increases are greater for private workouts than for firms emerging from formal bankruptcy.D. Both A and B.E. Both A and C.23. Equityholders may prefer a formal bankruptcy filing because:A. the firm can issue debtor in possession debt.B. the firm can delay pre-bankruptcy interest payments.C. the lack of information about the length and magnitude of the cash flow problem favors equityholders.D. All of the above.E. None of the above.24. Prepackaged bankruptcies are:A. described as a combination of a private workout and a liquidation.B. the easiest way to transfer wealth to the shareholders.C. described as a combination of a completed private workout and the formal bankruptcy filing.D. All of the above.E. None of the above.25. In a prepackaged bankruptcy the firm:A. and creditors agree to a private reorganization outside formal bankruptcy.B. must reach agreement privately with most of the creditors.C. will have difficulty when there are thousands of reluctant trade creditors.D. All of the above.E. None of the above.26. Financial distress may be more expensive if the:A. information about the permanency of the shortfall is limited.B. firm has many different types of creditors and other investors.C. firm has never entered into bankruptcy before.D. Both A and B.E. Both B and C.27. The net payoff to creditors in formal bankruptcy may be low in present value terms because:A. the financial structure may be complicated with several groups and types of creditors.B. indirect costs of bankruptcy may have been costly in lost revenues and poor maintenance.C. administrative costs are high and increase with the complexity and length of time in the formal bankruptcy process.D. All of the above.E. None of the above.28. Firms deal with financial distress by:A. selling major assets.B. merging with another firm.C. issuing new securities.D. exchanging debt for equity.E. All of the above.29. Perhaps equally, if not more damaging are the indirect costs of financial distress. Some examples of indirect costs are:A. loss of current customers.B. loss of business reputation.C. management consumed in survival and not on a strategic direction.D. All of the above.E. Both A and B.30. Credit scoring models are used by lenders to:A. determine the borrowers capacity to pay.B. aid in the prediction of default or bankruptcy.C. determine the optimal debt equity ratio.D. Both A and B.E. Both A and C.31. Altman develop the Z-score model for publicly traded manufacturing firms. Using financial statement data and multiple discriminant analysis, he found that:A. in actual use, a Z-score greater than 2.99 meant bankruptcy within one year.B. in actual use, a Z-score greater than 1.81 implied a 90% chance of bankruptcy within one year.C. in actual use, a Z-score of less than 1.81 would predict bankruptcy within one year.D. in actual use, a Z-score less than 2.99 meant non-bankruptcy within one year.E. None of the above.32. The key intuition of a Z-score model like Altman's is that:A. only publicly traded firms can be evaluated.B. one will be just as well off by guessing on default rates.C. all corporations will default at least once.D. financial profiles of bankrupt and non-bankrupt firms are very different one year before bankruptcy.E. privately traded firms have better financial information which are disclosed to lenders and need not rely on any efficient market notions.33. Approximately ____ of all firms going through a Chapter 11 bankruptcy successfully reorganize.A. 0%B. 15%C. 25%D. 50%E. 85%34. Altman's Z-score predicts the:A. percentage of payout to equityholders in liquidations.B. percentage of payout to equityholders in reorganization.C. likelihood of a private workout.D. likelihood of bankruptcy of a firm within one year.E. None of the above.35. Very small firms (i.e. firms with assets less than $100,000) are more likely to:A. file for strategic bankruptcy.B. file for bankruptcy protection earlier than large firms.C. reorganize than liquidate compared to large firms.D. liquidate than reorganize compared to large firms.E. None of the above.36. A large negative equity position will lead a firm to be more likely to try to:A. not file bankruptcy.B. liquidate.C. reorganize.D. consolidate.E. None of the above.Magic Mobile Homes is to be liquidated. All creditors, both secured and unsecured, are owed $2 million. Administrative costs of liquidation and wage payments are expected to be $500,000.A sale of assets is expected to bring $1.8 million after taxes. Secured creditors have a mortgage lien for $1,200,000 on the factory which will be liquidated for $900,000 out of the sale proceeds. The corporate tax rate is 34%.37. How much and what percentage of their claim will the unsecured creditors receive, in total?A. $100,000; 12.50%.B. $290,909; 36.36%.C. $300,000; 37.50%.D. $600,000; 75.00%.E. Not enough information to answer38. How much and what percentage of their claim will the secured creditors receive, in total?A. $900,000; 75%B. $981,818; 81.82%C. $1,009,091; 84.1%D. $1,200,000; 100%E. Not enough information to answer.The management of Magic Mobile Homes has proposed to reorganize the firm. The proposal is based on a going-concern value of $2 million. The proposed financial structure is $750,000 in new mortgage debt, $250,000 in subordinated debt and $1,000,000 in new equity. All creditors, both secured and unsecured, are owed $2.5 million dollars. Secured creditors have a mortgage lien for $1,500,000 on the factory. The corporate tax rate is 34%.39. How much should the secured creditors receive?A. $1,000,000B. $1,250,000C. $1,333,333D. $1,500,000E. None of the above.40. How much should the unsecured creditors receive?A. $500,000B. $667,000C. $750,000D. $1,000,000E. None of the above.41. What will the equityholders receive if they had 5 million shares with a par value of $0.50 each?A. $0B. $35,714C. $583,333D. $1,000,000E. None of the above.The management of Schroeder Books has proposed to reorganize the company. The proposal is based on a going-concern value of $2.3 million. The proposed financial structure is $500,000 in new mortgage debt, $300,000 in subordinated debt and $1,500,000 in new equity. All creditors, both secured and unsecured, are owed $3 million dollars. Secured creditors have a mortgage lien for $2,000,000 on the book bindery. The corporate tax rate is 34%.42. How much should the secured creditors receive?A. $1,500,000B. $2,000,000C. $2,300,000D. $3,000,000E. None of the above.43. How much should the unsecured creditors receive?A. $300,000B. $500,000C. $1,000,000D. $2,300,000E. None of the above.44. What will the equityholders receive if they had 5 million shares with a par value of $0.50 each?A. $0B. $35,714C. $583,333D. $1,000,000E. None of the above.Essay Questions45. The Steel Pony Company, a maker of all-terrain recreational vehicles, is having financial difficulties due to high interest payments. The estimated "going concern" value of Steel Pony is $4.0 million. The senior debt claim is on all fixed assets. The balance sheet of the firm is as shown:If Steel Pony decides to file for formal bankruptcy and expects to sell the firm for the "going concern" value and pay administrative fees which amount to 5% of the total going concern value, determine the distribution of the proceeds under the rules of absolute priority.46. The Here Today Corporation has applied to your bank for a loan. You have their financial statements and the revised Z-score model of:Z = 6.56 (Net Working Capital/Total Assets) + 3.26 (Accumulated Retained Earnings/Total Assets) + 1.05 (EBIT/Total Assets) + 6.72 (Book Value of Equity/Total Liabilities) where:Z < 1.23 predicts bankruptcy. A Z score between 1.23 and 2.90 indicates gray area. A Z score greater than 2.90 indicates no bankruptcy. From the financial statements you gathered net working capital of $237,500; accumulated retained earnings of $120,000; book value of equity of $950,000; total assets of $4,750,000; EBIT of $261,250; and total liabilities of $3,800,000. Should the bank lend to Here Today?47. When choosing between liquidation and reorganization, what are some of the empirical factors that lead a firm toward one choice or the other?Chapter 30 Financial Distress Answer KeyMultiple Choice Questions1. Financial distress can be best described by which of the following situations in which the firm is forced to take corrective action?A. Cash payments are delayed to creditors.B. The market value of the stock declines by 10%.C. The firm's operating cash flow is insufficient to pay current obligations.D. Cash distributions are eliminated because the board of directors considers the surplus account to be low.E. None of the above.Difficulty level: EasyTopic: FINANCIAL DISTRESSType: DEFINITIONS2. Insolvency can be defined as:A. not having cash.B. being illiquid.C. an inability to pay one's debts.D. an inability to increase one's debts.E. the present value of payments being less than assets.Difficulty level: EasyTopic: INSOLVENCYType: DEFINITIONS3. Stock-based insolvency is a:A. income statement measurement.B. balance sheet measurement.C. a book value measurement only.D. Both A and C.E. Both B and C.Difficulty level: EasyTopic: STOCK-BASED INSOLVENCYType: DEFINITIONS4. Flow-based insolvency is:A. a balance sheet measurement.B. a negative equity position.C. when operating cash flow is insufficient to meet current obligations.D. inability to pay one's debts.E. Both C and D.Difficulty level: EasyTopic: FLOW-BASED INSOLVENCYType: DEFINITIONS5. Financial restructuring can occur as:A. a private workout.B. an employee buy-out.C. a bankruptcy reorganization.D. Both A and C.E. Both B and C.Difficulty level: MediumTopic: FINANCIAL RESTRUCTURINGType: DEFINITIONS6. Financial distress can involve which of the following:A. asset restructuring.B. financial restructuring.C. liquidation.D. All of the above.E. None of the above.Difficulty level: EasyTopic: FINANCIAL DISTRESSType: DEFINITIONS7. APR, as it relates to financial distress, means the rules of:A. absolute profitability.B. arbitration priority.C. absolute priority.D. arbitration profitability.E. automatic profitability.Difficulty level: MediumTopic: RULES OF ABSOLUTE PRIORITYType: DEFINITIONS8. The difference between liquidation and reorganization is:A. reorganization terminates all operations of the firm and liquidation only terminatesnon-profitable operations.B. liquidation terminates only profitable operations and reorganization terminates onlynon-profitable operations.C. liquidation terminates all operations and reorganization maintains the option of the firm as a going concern.D. liquidation only deals with current assets and reorganization only consolidates debt.E. None of the above.Difficulty level: MediumTopic: REORGANIZATION AND LIQUIDATIONType: DEFINITIONS9. A firm that has a series of negative earnings, sales declines and workforce reductions is likely headed to:A. acquisition of another firm.B. a merger.C. financial distress.D. new financing.E. None of the above.Difficulty level: MediumTopic: FINANCIAL DISTRESSType: CONCEPTS10. Some of the various events which typically occur around the period of financial distress fora firm are:A. continued increase in earnings.B. steady growth.C. dividend reductions.D. Both A and B.E. Both A and C.Difficulty level: EasyTopic: FINANCIAL DISTRESSType: CONCEPTS11. Bankruptcy reorganizations are used by management to:A. forestall the inevitable liquidation in all cases.B. provide time to turn the business around.C. allow the courts time to set up an administrative structure.D. All of the above.E. None of the above.Difficulty level: EasyTopic: REORGANIZATIONType: CONCEPTS12. A firm has several options available to it in times of financial distress. The firm may:A. reduce capital and R & D spending.B. raise new funds by selling securities or major assets.C. file for bankruptcy.D. negotiate with lenders.E. All of the above statements are true.Difficulty level: MediumTopic: FINANCIAL DISTRESSType: CONCEPTS13. Most firms in financial distress do not fail and cease to exist. Many firms can actually benefit from distress by:A. forcing a firm to reevaluate their core operations.B. realigning their capital structure to reduce interest costs.C. entering Chapter 11 and liquidating the firm.D. Both A and B.E. Both A and C.Difficulty level: EasyTopic: FINANCIAL DISTRESSType: CONCEPTS14. Whether bankruptcy is entered voluntarily or involuntarily the major difference between Chapter 7 and Chapter 11 is:A. that liquidation occurs in Chapter 11 but reorganization is the objective under Chapter 7.B. that there is no priority of claims under Chapter 11.C. that liquidation occurs in Chapter 7 but reorganization is the objective under chapter 11.D. no lawyers fees are necessary under Chapter 7.E. None of the above.Difficulty level: EasyTopic: LIQUIDATION OR REORGANIZATIONType: CONCEPTS15. If a firm has a stock based insolvency in both book and market value terms and liquidates:A. the payoff will not be 100% to all investors.B. the unsecured creditors are likely to get less than full value.C. the equityholders typically should receive nothing.D. All of the above.E. None of the above.Difficulty level: EasyTopic: STOCK BASED INSOLENCYType: CONCEPTS16. A firm in financial distress that reorganizes:A. continues to run the business as a going concern.B. must have acceptance of the plan by the creditors.C. may distribute new securities to creditors and shareholders.D. All of the above.E. None of the above.Difficulty level: EasyTopic: REORGANIZATIONType: CONCEPTS17. A corporation is adjudged bankrupt under Chapter 7. When do the shareholders receive any payment?A. After the trustee liquidates the assets and pays the administrative expenses, the shareholders are paid before the creditors.B. After the trustee liquidates the assets, the administrative expenses and secured creditors are paid, then the unsecured creditors, and then the shareholders divide any remainder.C. After the trustee liquidates the assets, the shareholders are paid, next the administrative expenses, the secured creditors, and then the unsecured creditors divide any remainder.D. After the trustee liquidates the assets the shareholders are paid first because they are the owners of the firm and have the principal stake.E. None of the above.Difficulty level: EasyTopic: LIQUIDATIONType: CONCEPTS18. What is the absolute priority rule of the following claims once a corporation is determined to be bankrupt?A. administrative expenses, wages claims, government tax claims, debtholder and then equityholder claimsB. administrative expenses, wages claims, government tax claims, equityholder and then debtholder claimsC. wage claims, administrative expenses, debtholder claims, government tax claims and equityholder claimsD. wage claims, administrative expenses, debtholder claims, equityholder claims and government tax claimsE. None of the aboveDifficulty level: MediumTopic: RULES OF ABSOLUTE PRIORITYType: CONCEPTS19. The absolute priority rule:A. is set to ensure senior claims are paid first.B. is the priority rule in liquidations.C. distributes proceeds of secured assets sales to the secured creditors first and the remainder to the unsecured.D. All of the above.E. None of the above.Difficulty level: EasyTopic: RULES OF ABSOLUTE PRIORITYType: CONCEPTS20. Many corporations choose Chapter 11 bankruptcy proceedings voluntarily because the management can:A. take up to 120 days to file a reorganization plan.B. continue to run the business.C. reorganize if the required fractions of creditors approve of the plan and it is confirmed when the reorganization takes place.D. All of the above.E. None of the above.Difficulty level: EasyTopic: REORGANIZATIONType: CONCEPTS21. Which of the following statements about private workouts of financial distress is NOT true?A. Senior debt is usually replaced with junior debt.B. Debt is usually replaced with equity.C. Private workouts account for about three quarters of all reorganizations.D. Top management is often dismissed or takes pay reductions.E. None of the above.Difficulty level: MediumTopic: PRIVATE WORKOUTSType: CONCEPTS22. Successful private workouts are better for firms than formal bankruptcy because:A. direct costs are considerably lower in private workouts.B. private workout firms can issue new debt senior to all prior debt.C. stock price increases are greater for private workouts than for firms emerging from formal bankruptcy.D. Both A and B.E. Both A and C.Difficulty level: MediumTopic: PRIVATE WORKOUTSType: CONCEPTS23. Equityholders may prefer a formal bankruptcy filing because:A. the firm can issue debtor in possession debt.B. the firm can delay pre-bankruptcy interest payments.C. the lack of information about the length and magnitude of the cash flow problem favors equityholders.D. All of the above.E. None of the above.Difficulty level: MediumTopic: FINANCIAL DISTRESS- EQUITY HOLDER PREFERENCESType: CONCEPTS24. Prepackaged bankruptcies are:A. described as a combination of a private workout and a liquidation.B. the easiest way to transfer wealth to the shareholders.C. described as a combination of a completed private workout and the formal bankruptcy filing.D. All of the above.E. None of the above.Difficulty level: EasyTopic: PREPACKAGED BANKRUPTCIESType: CONCEPTS25. In a prepackaged bankruptcy the firm:A. and creditors agree to a private reorganization outside formal bankruptcy.B. must reach agreement privately with most of the creditors.C. will have difficulty when there are thousands of reluctant trade creditors.D. All of the above.E. None of the above.Difficulty level: MediumTopic: PREPACKAGED BANKRUPTCIESType: CONCEPTS26. Financial distress may be more expensive if the:A. information about the permanency of the shortfall is limited.B. firm has many different types of creditors and other investors.C. firm has never entered into bankruptcy before.D. Both A and B.E. Both B and C.Difficulty level: MediumTopic: COSTS OF FINANCIAL DISTRESSType: CONCEPTS27. The net payoff to creditors in formal bankruptcy may be low in present value terms because:A. the financial structure may be complicated with several groups and types of creditors.B. indirect costs of bankruptcy may have been costly in lost revenues and poor maintenance.C. administrative costs are high and increase with the complexity and length of time in the formal bankruptcy process.D. All of the above.E. None of the above.Difficulty level: MediumTopic: PAYOFF TO CREDITORSType: CONCEPTS28. Firms deal with financial distress by:A. selling major assets.B. merging with another firm.C. issuing new securities.D. exchanging debt for equity.E. All of the above.Difficulty level: MediumTopic: FINANCIAL DISTRESSType: CONCEPTS29. Perhaps equally, if not more damaging are the indirect costs of financial distress. Some examples of indirect costs are:A. loss of current customers.B. loss of business reputation.C. management consumed in survival and not on a strategic direction.D. All of the above.E. Both A and B.Difficulty level: EasyTopic: INDIRECT COSTS FO FINANCIAL DISTRESSType: CONCEPTS。
罗斯公司理财题库全集
Chapter 20Issuing Securities to the Public Multiple Choice Questions1. An equity issue sold directly to the public is called:A. a rights offer.B. a general cash offer.C. a restricted placement.D. a fully funded sales.E. a standard call issue.2. An equity issue sold to the firm's existing stockholders is called:A. a rights offer.B. a general cash offer.C. a private placement.D. an underpriced issue.E. an investment banker's issue.3. Management's first step in any issue of securities to the public is:A. to file a registration form with the SEC.B. to distribute copies of the preliminary prospectus.C. to distribute copies of the final prospectus.D. to obtain approval from the board of directors.E. to prepare the tombstone advertisement.4. A rights offering is:A. the issuing of options on shares to the general public to acquire stock.B. the issuing of an option directly to the existing shareholders to acquire stock.C. the issuing of proxies which are used by shareholders to exercise their voting rights.D. strictly a public market claim on the company which can be traded on an exchange.E. the awarding of special perquisites to management.5. Companies use tombstone advertisements in the financial press to:A. announce the death of the company.B. announce the failure of a financial strategy.C. announce the availability of a new issue of a corporate security.D. notify the public of foreclosure.E. None of the above.6. The first public equity issue made by a company is a(n):A. initial private offering.B. initial public offering.C. secondary offering.D. seasoned new issue.E. None of the above.7. The first public equity issue that is made by a company is referred to as:A. a rights issue.B. a general cash offer.C. an initial public offering.D. an unseasoned issue.E. Both C and D.8. A new public equity issue from a company with equity previously outstanding is called a(n):A. initial public offering.B. seasoned equity issue.C. unseasoned equity issue.D. private placement.E. syndicate.9. The green shoe option is used to:A. cover oversubscription.B. cover excess demand.C. provide additional reward to the investment bankers for a risky issue.D. provide additional reward to the issuing firm for a risky issue.E. Both A and B.10. Dilution refers to:A. the increase in stock value due to wider ownership of stock.B. the loss in existing shareholder's equity.C. the loss in new shareholder's equity.D. the loss in all shareholder's equity, both existing shareholders and new shareholders.E. None of the above.11. During the SEC waiting period the potential issuing company can issue a preliminary prospectus which contains:A. exactly the same information as the final prospectus except an indication of SEC approval.B. all the information as the final prospectus including red writing stating it is a red herring.C. very limited financial information and red writing stating it is preliminary.D. only a description of what the funds are to be used for.E. information very similar to the final prospectus without a price nor with SEC approval.12. A company must file a registration statement with the SEC providing various financial and company history information. The registration statement does not need to be filed if:A. the issue is less than $50 million.B. the loan matures within 9 months.C. the issue is less than $5.0 million.D. Both A and B.E. Both B and C.13. Regulation A security issues are exempt from full SEC registration filing and use only a brief offering statement if:A. the issue is for less than $5,000,000.B. insiders sell no more than $1,500,000 of stock.C. insiders sell no more than 100,000,000 shares.D. Both A and C.E. Both A and B.14. Potential investors learn of the information concerning the firm and its new issue from the:A. pre-underwriting negotiating meeting.B. red herring.C. letter of commitment.D. emails from their former finance professor.E. rights offering.15. A registration statement is effective on the 20th day after filing unless:A. the SEC is backlogged with statements.B. a tombstone ad is issued indicating its demise.C. a letter of comment suggesting changes is issued by the SEC.D. a syndicate can be formed sooner.E. None of the above.16. Investment banks perform which of the following services for corporate issuers:A. formulating the method used to issue the securities.B. pricing the new securities.C. selling the new securities.D. All of the above.E. None of the above.17. A group of investment bankers who pool their efforts to underwrite a security are known as a(n):A. amalgamate.B. conglomerate.C. green shoe group.D. klatch.E. syndicate.18. A firm commitment arrangement with an investment banker occurs when:A. the syndicate is in place to handle the issue.B. the spread between the buying and selling price is less than one percent.C. the issue is solidly accepted in the market evidenced by a large price increase.D. when the investment banker buys the securities for less than the offering price and accepts the risk of not being able to sell them.E. when the investment banker sells as much of the security as the market can bear without a price decrease.19. Which of the following is not normally an example of the services offered by investment bankers?A. Aiding in the sale of securitiesB. Facilitating mergersC. Acting as brokers to both individuals and institutional clientsD. Offering checking accounts to corporationsE. Both C and D20. In a best efforts offering the investment banker makes their money primarily by:A. earning the spread between the buying and offering price.B. earning a commission on each share sold.C. earning the discount between the buying and offering price.D. charging a flat fee for all services.E. None of the above.21. Under the _____ method, the underwriter buys the securities for less than the offering price and accepts the risk of not selling the issue, while under the _____ method, the underwriter does not purchase the shares but merely acts as an agent.A. best efforts; firm commitmentB. firm commitment; best effortsC. general cash offer; best effortsD. competitive offer; negotiated offerE. seasoned; unseasoned22. Professor Jay Ritter found best-efforts offerings are:A. reserved for the premier customers because they deserve 'best-efforts'.B. used most often with seasoned equity issues.C. used with small IPO issues.D. attractive because of price stability.E. None of the above.23. Empirical evidence suggests that new equity issues are generally:A. priced efficiently by the market.B. overpriced by investor excitement concerning a new issue.C. overpriced resulting from SEC regulation.D. underpriced, in part, to counteract the winner's curse.E. underpriced resulting from SEC regulation.24. The diagonal listing of investment bankers on tombstone advertisements reflects their ____ relative to the other investment bankers listed below.A. prestigeB. ability to manage selling syndicatesC. role as a firm commitment buyerD. role as a best efforts sellerE. None of the above25. The reputational capital of investment bankers is based on their roles as intermediaries with more in-depth knowledge of the issuer. Investment bankers maintain their reputation by:A. certifying the issue.B. monitoring the issuing firm's management and performance.C. pricing issues fairly.D. All of the above.E. None of the above.26. The key difference between a negotiated offer and a competitive offer is that:A. the underwriters can not set the spread in a negotiated bid but can in a competitive offer.B. the issuing firm can offer its securities to the highest bidder in a competitive bid but in a negotiated bid only one investment banker is used.C. the issuing firm works the underwriter for the best spread in a negotiated bid which will be less than that available in a competitive offer.D. the underwriter will not do a full investigation in a negotiated bid because the company is at their mercy, while in a competitive bid the underwriter must be extra diligent.E. None of the above.27. The offering price is set to make an issue attractive to the market and provide a good price to the issuer. Which of the following is/are true?A. Empirical studies by Ritter have shown that the average firm commitments have had a17.8% underpricing on the first day of trading.B. Empirical studies have shown that best efforts sales have underpricing on the first day of trading.C. Some issues which rose dramatically on the first day of trading were viewed as successfully priced by the underwriter because it helped build a long-term investment base.D. All of the above.E. None of the above.28. Empirical evidence suggests that upon announcement of a new equity issue, current stock prices generally:A. drop, perhaps because the new issue reflects management's view that common stock is currently overvalued.B. remain about the same since an efficient market anticipates a new equity issue.C. increase, perhaps because the issues are associated with positive NPV projects.D. increase, because the market supply is always less than demand.E. increase, because underwriters exercise their green shoe option.29. Underpricing can possibly be explained by:A. oversubscription of an issue.B. strong demand by investors.C. undersubscription of an issue.D. Both B and C.E. Both A and B.30. Debt capacity is often given as a reason for the value of the stock falling when equity is issued. The reason for this is:A. the high issue costs of a debt offering must be paid by the shareholders.B. the priority position of the equity is lowered.C. management has information that the probability of default has risen, limiting the debt capacity and causing the firm to raise equity capital.D. All of the above.E. None of the above31. A study by Lee, Lockhead, Ritter, and Zhao that examined the underwriting discount and other direct costs of going public with a debt or equity offering, found:A. the direct expenses are higher for equity than debt offerings.B. substantial economies of scale are prevalent.C. underpricing, on average, is similar in magnitude to total direct expenses.D. All of the above.E. None of the above.32. The six components that make up the total costs of new issues are:A. the spread; other direct expenses such as filing fees; indirect expenses such as management time; economies of scale; abnormal returns and the Green Shoe option.B. the discount; other direct expenses such as filing fees; indirect expenses such as management time; due diligence costs; abnormal returns and the Green Shoe option.C. the spread; other direct expenses such as filing fees; indirect expenses such as management time; abnormal returns; underpricing and the Green Shoe option.D. the spread; other direct expenses such as filing fees; economies of scale; due diligence costs; abnormal returns and underpricing.E. None of the above.33. In comparison to debt issuance expenses, the total direct costs of equity issues are:A. considerably less.B. about the same.C. meaningless.D. considerably greater.E. None of the above.34. To determine the value of a rights offering, the stockholder needs to know the following two pieces of information in addition to the current stock price:A. the subscription price and the number of rights needed to acquire a new share.B. the amount of new equity to be raised and the number of rights needed to acquire a new share.C. the amount of new equity to be raised and standby fee.D. the detachment date and the subscription price.E. None of the above.35. Assuming everything else is constant, when a stock goes ex-rights its price should:A. decrease since the stockholder is losing an option.B. increase since the corporation no longer has the right to force the stockholder to convert.C. remain the same since an efficient market would anticipate this change.D. move up or down depending on whether a small investor wanted to exercise his/his rights.E. None of the above.36. If a shareholder or investor wants to acquire new stock under a rights plant they must:A. acquire new stock in the market to get a controlling fraction of shares to be eligible for rights.B. simply pay a registration fee and turn in the subscription price.C. acquire the correct rights per share desired, then turn the rights and the total subscription price into the subscription agent.D. acquire the correct rights and wait for the company to send you the stock.E. call their broker and sell some CBOE options to make any money.37. Which of the following statements is true?A. The subscription price is generally above the old stock price.B. The subscription price is generally above the ex-rights price.C. The subscription price is generally below the old stock price.D. Both A and B.E. Both B and C.38. A shareholder who has rights is:A. always better off to exercise the rights.B. always better off to sell the rights into the market.C. able to exercise their rights or sell them.D. never in the same ownership position again with rights.E. None of the above.39. A standby underwriting arrangement provides the:A. company with methods to cancel the offering.B. company with an alternate investment banker if there is conflict between the issuer and the agent.C. investment banker with an oversubscription privilege to ensure profits are earned.D. company with an alternative avenue of sale to ensure success of the rights offering.E. investment bankers with an added syndication for the rights offering.40. Professor Clifford W. Smith, in evaluating issuance costs from underwritten issues, rights issues with standby underwriting, and a pure rights issues, found that 90% of the issues are underwritten, which was the most expensive method. This is done because:A. investment bankers know more than CFOs and they may buy the issue at an agreed upon price and disburse the funds sooner.B. investment bankers can increase the price received by increasing confidence in the issue, and they will buy the issue at an agreed upon price and disburse the cash sooner.C. investment bankers provide other services including price counseling, increasing public confidence, and providing funds to the issuer sooner.D. investment bankers know how to price the issue, and would not need to set as low as a price as the subscription price and provide price counseling.E. None of the above.41. Corporations use the shelf registration method of security sales because:A. preregistered securities can be quickly brought to market.B. the main registration process is eliminated for up to two years.C. their stock is below investment grade.D. Both A and B.E. Both B and C.42. In terms of costs of issuing equity, Professor Clifford W. Smith finds that the ranking of methods, from cheapest to most expensive, is:A. rights issue with standby underwriting, equity issue with underwriting, pure rights issue.B. pure rights issue, rights issue with standby underwriting, equity issue with underwriting.C. pure rights issue, preferred stock and debt issue with underwriting for an IPO, rights issue with standby underwriting.D. equity issue with underwriting, rights issue with standby underwriting, pure rights issue.E. equity issue with underwriting, pure rights issue, rights issue with standby underwriting.43. Arguments to explain why most equity issues are underwritten versus sold through a rights offering are:A. underwriters buy at an agreed upon price and bear some risk of selling the issue.B. cash proceeds are available sooner in underwriting and the issue is available to a wider market.C. investment bankers can provide market advice and certify the issue for potential investors.D. All of the above.E. None of the above.44. Corporations are allowed to use the shelf registration method if they:A. are rated investment grade and have aggregate market stock value of more than $150 million.B. have not violated the 1934 Securities Act in the past 12 months.C. have not defaulted on its debt in the past 3 years.D. All of the above.E. None of the above.45. Arguments against the use of the shelf-registration are:A. only technology and manufacturing-based firms can use it.B. less current information available to investors might raise the cost of debt.C. possible market overhang from future issues depressing price.D. Both A and C.E. Both B and C.46. The market for venture capital refers to the:A. private financial marketplace for servicing small, young firms.B. bond markets.C. market for selling rights to individuals who already own shares.D. market for selling equity securities for firms with equity already outstanding.E. None of the above.47. Rule 144A provides the framework for the issuance of private securities to qualified institutional investors. To buy private securities, institutional investors:A. must be willing to hold a less liquid security and manage a fund.B. must be willing to make a market in the security and be a primary market dealer.C. must be a limited partner in the issue and willing to reduce the illiquidity of the security.D. must be willing to hold a less liquid security and have $100 million under management.E. None of the above.48. Venture capitalists provide financing for new firms from the seed and start-up stage all the way to mezzanine and bridge financing. In exchange for financing, entrepreneurs give:A. a high interest rate debt instrument and control.B. an equity position and usually board of director positions.C. up the right to have an initial public offering.D. control to a court appointed trustee.E. the venture capitalists jobs as CEOs and CFOs.49. An IPO of a firm formerly financed by venture capital is carried out for what primary purposes?A. Insiders can sell their shares or cash outB. Generate cash to pay down bank indebtednessC. To establish a market value for the equity and provide funds for operationsD. All of the above.E. None of the above.50. Which of the following is not one of the four main functions that underwriters provide?A. Risk bearingB. MarketingC. Auditing the financial statementsD. CertificationE. Monitoring51. Types of dilution include:A. dilution of percentage ownershipB. dilution of market shareC. dilution of book value and earnings per shareD. A and CE. All of the above52. The Wordsmith Corporation has 10,000 shares outstanding at $30 each. They expect to raise $150,000 by a rights offering with a subscription price of $25. How many rights must you turn in to get a new share?A. 0.60B. 1.20C. 1.67D. 2.00E. Insufficient data to determine53. Assuming everything else is constant, if a stock's old price is $25 and the ex-rights or new stock price is $19, then the value of the right is:A. $-6.B. $6.C. impossible to determine without the subscription price.D. impossible to determine without the number of rights needed to buy one share.54. The LaPorte Corporation has a new rights offering that allows you to buy one share of stock with 3 rights and $20 per share. The stock is now selling ex-rights for $26. The price rights-on is:A. $22.00B. $24.00C. $26.00D. $28.00E. impossible to determine without the cum-rights price.55. Regional Power wants to raise $10 million in new equity. The subscription price is $20. There are currently 3 million shares outstanding, each with 1 right. How many rights are needed to purchase 1 share?A. 1B. 3C. 5D. 6E. 856. The Overland Corporation intends to issue 50,000 new shares to raise funds for expansion of current plant facilities. The current share price is $40 and there are 500,000 shares outstanding. The number of rights needed to buy a share of stock should be:A. 1B. 10C. 40D. 400E. indeterminate without the subscription price.57. The Schroeder Corporation has 20,000 shares outstanding at $20 each. They expect to raise $200,000 by a rights offering with a subscription price of $25. How many rights must you turn in to get a new share?A. 1.25B. 1.50C. 2.00D. 2.50E. Insufficient data to determine58. Assuming everything else is constant, if a stock's old price is $40 and the ex-rights or new stock price is $32, then the value of the right is:A. $-8.B. $8.C. impossible to determine without the subscription price.D. impossible to determine without the number of rights needed to buy one share.59. The Holly Corporation has a new rights offering that allows you to buy one share of stock with 4 rights and $25 per share. The stock is now selling ex-rights for $30. The price rights-on is:A. $21.00B. $25.00C. $30.00D. $31.25E. impossible to determine without the cum-rights price.60. Bradley Power wants to raise $40 million in new equity. The subscription price is $25. There are currently 5 million shares outstanding, each with 1 right. How many rights are needed to purchase 1 share?A. 1.000B. 3.000C. 3.125D. 4.525E. 6.52561. The Shields Corporation intends to issue 100,000 new shares to raise funds for expansion of current plant facilities. The current share price is $20 and there are 500,000 shares outstanding. The number of rights needed to buy a share of stock should be:A. 1B. 5C. 20D. 50E. indeterminate without the subscription price.62. For a particular stock the old stock price is $20, the ex-rights price is $15, and the number of rights needed to buy a new share is 2. Assuming everything else constant, the subscription price is ______ .A. $5B. $13C. $17D. $18E. $20Essay QuestionsThe Holyoke Corporation has 120,000 shares outstanding with a current market price of $8.10 per share. The company needs to raise an additional $36,000 to finance new expenditures, and has decided on a rights issue. The issue will allow current stockholders to purchase one additional share for 20 rights at a subscription price of $6 per share.63. Calculate the ex-rights price that would make a new stockholder indifferent between buying shares at the old stock price and exercising the rights or buying the shares ex-rights.64. If the ex-rights price were set at $7.90, would you as a potential new stockholder choose to buy shares ex-rights or buy shares at the old price and exercise your rights?65. Suppose that the company was also considering structuring the rights issue to allow for an additional share to be purchased for 10 rights at a subscription price of $3. Prove that a stockholder with 100 shares would be indifferent between purchasing a new share for 10 rights at $3 or purchasing a new share for 20 rights at $6.66. Explain the advantages of a shelf-registration to an issuer. How can timeliness of disclosure and a potential market overhang work against a shelf-registration?67. The evidence on IPO sales is varied from issue to issue, but there are three common themes; underpricing, underperformance, and the reasons for going public. Explain these three themes.68. The Direct Interactive Publishing Company is planning to raise $200 million dollars in new capital. There are currently 50 million shares outstanding with an estimated market price of $60 each. The corporate officers are debating whether to use a rights offering (with or without a standby underwriting) or have the issue fully underwritten. The company is currently listed on a regional exchange and plans to list on a national exchange after the security issue. List and explain three advantages/disadvantages of each method.69. Discuss what a Dutch auction is and how it works.70. Lamar Inc. is attempting to raise $5,000,000 in new equity with a rights offering. The subscription price will be $40 per share. The stock currently sells for $50 per share and there are 250,000 shares outstanding. How many rights are needed to buy a new share?71. Lamar Inc. is attempting to raise $5,000,000 in new equity with a rights offering. The subscription price for the 125,000 new shares will be $40 per share. The stock currently sells for $50 per share and there are 250,000 shares outstanding. What will the price per share be if all rights are exercised?Chapter 20 Issuing Securities to the Public Answer KeyMultiple Choice Questions1. An equity issue sold directly to the public is called:A. a rights offer.B. a general cash offer.C. a restricted placement.D. a fully funded sales.E. a standard call issue.Difficulty level: EasyTopic: EQUITY ISSUEType: DEFINITIONS2. An equity issue sold to the firm's existing stockholders is called:A. a rights offer.B. a general cash offer.C. a private placement.D. an underpriced issue.E. an investment banker's issue.Difficulty level: EasyTopic: RIGHTS OFFERType: DEFINITIONS3. Management's first step in any issue of securities to the public is:A. to file a registration form with the SEC.B. to distribute copies of the preliminary prospectus.C. to distribute copies of the final prospectus.D. to obtain approval from the board of directors.E. to prepare the tombstone advertisement.Difficulty level: EasyTopic: SECURITY ISSUANCEType: DEFINITIONS4. A rights offering is:A. the issuing of options on shares to the general public to acquire stock.B. the issuing of an option directly to the existing shareholders to acquire stock.C. the issuing of proxies which are used by shareholders to exercise their voting rights.D. strictly a public market claim on the company which can be traded on an exchange.E. the awarding of special perquisites to management.Difficulty level: MediumTopic: RIGHTS OFFERINGType: DEFINITIONS5. Companies use tombstone advertisements in the financial press to:A. announce the death of the company.B. announce the failure of a financial strategy.C. announce the availability of a new issue of a corporate security.D. notify the public of foreclosure.E. None of the above.Difficulty level: EasyTopic: NEW ISSUANCEType: DEFINITIONS6. The first public equity issue made by a company is a(n):A. initial private offering.B. initial public offering.C. secondary offering.D. seasoned new issue.E. None of the above.Difficulty level: EasyTopic: INITIAL PUBLIC OFFERINGType: DEFINITIONS7. The first public equity issue that is made by a company is referred to as:A. a rights issue.B. a general cash offer.C. an initial public offering.D. an unseasoned issue.E. Both C and D.Difficulty level: MediumTopic: INITIAL PUBLIC OFFERINGType: DEFINITIONS8. A new public equity issue from a company with equity previously outstanding is called a(n):A. initial public offering.B. seasoned equity issue.C. unseasoned equity issue.D. private placement.E. syndicate.Difficulty level: EasyTopic: SEASONED EQUITY OFFERINGType: DEFINITIONS9. The green shoe option is used to:A. cover oversubscription.B. cover excess demand.C. provide additional reward to the investment bankers for a risky issue.D. provide additional reward to the issuing firm for a risky issue.E. Both A and B.Difficulty level: MediumTopic: GREEN SHOE PROVISIONType: DEFINITIONS。
【实用资料】罗斯公司理财题库全集.doc
Chapter 13 Risk, Cost of Capital, and Capital Budgeting Answer KeyMultiple Choice Questions1. The weighted average of the firm's costs of equity, preferred stock, and after tax debt is the:A. reward to risk ratio for the firm.B. expected capital gains yield for the stock.C. expected capital gains yield for the firm.D. portfolio beta for the firm.E. weighted average cost of capital (WACC).Difficulty level: EasyTopic: WACCType: DEFINITIONS2. If the CAPM is used to estimate the cost of equity capital, the expected excess market return is equal to the:A. return on the stock minus the risk-free rate.B. difference between the return on the market and the risk-free rate.C. beta times the market risk premium.D. beta times the risk-free rate.E. market rate of return.Difficulty level: EasyTopic: CAPMType: DEFINITIONS3. The best fit line of a pairwise plot of the returns of the security against the market index returns is called the:A. Security Market Line.B. Capital Market Line.C. characteristic line.D. risk line.E. None of the above.Difficulty level: MediumTopic: CHARACTERISTIC LINEType: DEFINITIONS4. The use of debt is called:A. operating leverage.B. production leverage.C. financial leverage.D. total asset turnover risk.E. business risk.Difficulty level: MediumTopic: USE OF DEBTType: DEFINITIONS5. The weighted average cost of capital for a firm is the:A. discount rate which the firm should apply to all of the projects it undertakes.B. overall rate which the firm must earn on its existing assets to maintain the value of its stock.C. rate the firm should expect to pay on its next bond issue.D. maximum rate which the firm should require on any projects it undertakes.E. rate of return that the firm's preferred stockholders should expect to earn over the long term. Difficulty level: MediumTopic: WEIGHTED AVERAGE COST OF CAPITALType: DEFINITIONS6. The WACC is used to _______ the expected cash flows when the firm has ____________.A. discount; debt and equity in the capital structureB. discount; short term financing on the balance sheetC. increase; debt and equity in the capital structureD. decrease; short term financing on the balance sheetE. None of the above.Difficulty level: MediumTopic: WACCType: CONCEPTS7. Using the CAPM to calculate the cost of capital for a risky project assumes that:A. using the firm's beta is the same measure of risk as the project.B. the firm is all-equity financed.C. the financial risk is equal to business risk.D. Both A and B.E. Both A and C.Difficulty level: MediumTopic: CAPMType: CONCEPTS8. The use of WACC to select investments is acceptable when the:A. correlation of all new projects are equal.B. NPV is positive when discounted by the WACC.C. risk of the projects are equal to the risk of the firm.D. firm is well diversified and the unsystematic risk is negligible.E. None of the above.Difficulty level: EasyTopic: WACCType: CONCEPTS9. If the risk of an investment project is different than the firm's risk then:A. you must adjust the discount rate for the project based on the firm's risk.B. you must adjust the discount rate for the project based on the project risk.C. you must exercise risk aversion and use the market rate.D. an average rate across prior projects is acceptable because estimates contain errors.E. one must have the actual data to determine any differences in the calculations. Difficulty level: EasyTopic: DISCOUNT RATEType: CONCEPTS10. If the project beta and IRR coordinates plot above the SML the project should be:A. accepted.B. rejected.C. It is impossible to tell.D. It will depend on the NPV.E. None of the above.Difficulty level: MediumTopic: SECURITY MARKET LINEType: CONCEPTS11. The beta of a security provides an:A. estimate of the market risk premium.B. estimate of the slope of the Capital Market Line.C. estimate of the slope of the Security Market Line.D. estimate of the systematic risk of the security.E. None of the above.Difficulty level: EasyTopic: BETAType: CONCEPTS12. Regression analysis can be used to estimate:A. beta.B. the risk-free rate.C. standard deviation.D. variance.E. expected return.Difficulty level: EasyTopic: BETA ESTIMATIONType: CONCEPTS13. Beta measures depend highly on the:A. direction of the market variance.B. overall cycle of the market.C. variance of the market and asset, but not their co-movement.D. covariance of the security with the market and how they are correlated.E. All of the above.Difficulty level: MediumTopic: BETAType: CONCEPTS14. The formula for calculating beta is given by the dividing the ___________ of the stock with the market portfolio by the ___________ of the market portfolio.A. variance; covarianceB. covariance; varianceC. standard deviation; varianceD. expected return; varianceE. expected return; covarianceDifficulty level: MediumTopic: BETAType: CONCEPTS15. The slope of the characteristic line is the estimated:A. intercept.B. beta.C. unsystematic risk.D. market variance.E. market risk premium.Difficulty level: MediumTopic: BETA AND CHARACTERISTIC LINEType: CONCEPTS16. Companies that have highly cyclical sales will have a:A. low beta if sales are highly dependent on the market cycle.B. high beta if sales are highly dependent on the market cycle.C. high beta if sales are independent of the market cycle.D. All of the above.E. None of the above.Difficulty level: MediumTopic: CYCLICAL BUSINESS AND BETAType: CONCEPTS17. Betas may vary substantially across an industry. The decision to use the industry or firm beta to estimate the cost of capital depends on:A. how small the estimation errors are of all betas across industries.B. how similar the firm's operations are to the operations of all other firms in the industry.C. whether the company is a leader or follower.D. the size of the company's public float.E. None of the above.Difficulty level: MediumTopic: INDUSTRY OR FIRM BETAType: CONCEPTS18. Beta is useful in the calculation of the:A. company's variance.B. company's discount rate.C. company's standard deviation.D. unsystematic risk.E. company's market rate.Difficulty level: MediumTopic: BETAType: CONCEPTS19. For a multi-product firm, if a project's beta is different from that of the overall firm, then the:A. CAPM can no longer be used.B. project should be discounted using the overall firm's beta.C. project should be discounted at a rate commensurate with its own beta.D. project should be discounted at the market rate.E. project should be discounted at the T-bill rate.Difficulty level: MediumTopic: PROJECT AND FIRM BETAType: CONCEPTS20. The problem of using the overall firm's beta in discounting projects of different risk is the:A. firm would accept too many high-risk projects.B. firm would reject too many low risk projects.C. firm would reject too many high-risk projects.D. firm would accept too many low risk projects.E. Both A and B.Difficulty level: MediumTopic: FIRM'S BETAType: CONCEPTS21. The asset beta of a levered firm is generally:A. equal to the equity beta.B. different from the equity beta.C. different from the debt beta.D. the simple average of the equity beta and debt beta.E. Both B and C.Difficulty level: MediumTopic: ASSET BETAType: CONCEPTS22. Comparing two otherwise equal firms, the beta of the common stock of a levered firm is ____________ than the beta of the common stock of an unlevered firm.A. equal toB. significantly lessC. slightly lessD. greaterE. None of the above.Difficulty level: MediumTopic: LEVERED VS. UNLEVERED BETAType: CONCEPTS23. The beta of a firm is determined by which of the following firm characteristics?A. Cycles in revenuesB. Operating leverageC. Financial leverageD. All of the above.E. None of the above.Difficulty level: MediumTopic: DETERMINANTS OF BETAType: CONCEPTS24. The beta of a firm is more likely to be high under what two conditions?A. High cyclical business activity and low operating leverageB. High cyclical business activity and high operating leverageC. Low cyclical business activity and low financial leverageD. Low cyclical business activity and low operating leverageE. None of the above.Difficulty level: MediumTopic: FACTORS AFFECTING BETAType: CONCEPTS25. A firm with cyclical earnings is characterized by:A. revenue patterns that vary with the business cycle.B. high levels of debt in its capital structure.C. high fixed costs.D. high price per unit.E. low contribution margins.Difficulty level: MediumTopic: CYCLICAL EARNINGSType: CONCEPTS26. A firm with high operating leverage has:A. low fixed costs in its production process.B. high variable costs in its production process.C. high fixed costs in its production process.D. high price per unit.E. low price per unit.Difficulty level: MediumTopic: OPERATING LEVERAGEType: CONCEPTS27. If a firm has low fixed costs relative to all other firms in the same industry, a large change in sales volume (either up or down) would have:A. a smaller change in EBIT for the firm versus the other firms.B. no effect in any way on the firms as volume does not effect fixed costs.C. a decreasing effect on the cyclical nature of the business.D. a larger change in EBIT for the firm versus the other firms.E. None of the above.Difficulty level: MediumTopic: OPERATING LEVERAGEType: CONCEPTS28. A firm with high operating leverage is characterized by __________ while one with high financial leverage is characterized by __________.A. low fixed cost of production; low fixed financial costsB. high variable cost of production; high variable financial costsC. high fixed costs of production; high fixed financial costsD. low costs of production; high fixed financial costsE. high fixed costs of production; low variable financial costsDifficulty level: MediumTopic: OPERATING AND FINANCIAL LEVERAGEType: CONCEPTS29. Firms whose revenues are strongly cyclical and whose operating leverage is high are likely to have:A. low betas.B. high betas.C. zero betas.D. negative betas.E. None of the above.Difficulty level: MediumTopic: DETERMINANTS OF BETAType: CONCEPTS30. An industry is likely to have a low beta if the:A. stream of revenues is stable and less volatile than the market.B. economy is in a recession.C. market for its goods is unaffected by the market cycle.D. Both A and B.E. Both A and C.Difficulty level: MediumTopic: DETERMINANTS OF BETAType: CONCEPTS31. For the levered firm the equity beta is __________ the asset beta.A. greater thanB. less thanC. equal toD. sometimes greater than and sometimes less thanE. None of the above.Difficulty level: MediumTopic: ASSET AND EQUITY BETASType: CONCEPTS32. All else equal, a more liquid stock will have a lower ________.A. betaB. market premiumC. cost of capitalD. Both A and B.E. Both A and C.Difficulty level: ChallengeTopic: LIQUIDITYType: CONCEPTS33. Two stock market based costs of liquidity that affects the cost of capital are the:A. bid-ask spread and the specialist spread.B. market impact cost and the brokerage costs.C. investor opportunity cost and the brokerage costs.D. bid-ask spread and the market impact costs.E. None of the above.Difficulty level: MediumTopic: LIQUIDITYType: CONCEPTS34. When a specialist is caught in the middle of a trade between informed and uniformed traders, which effectively eliminates the spread or causes a loss, is subject to:A. market impact costs.B. adverse selection.C. broker's quotation bias.D. increasing the number of uninformed traders.E. None of the above.Difficulty level: ChallengeTopic: ADVERSE SELECTIONType: CONCEPTS35. All else equal, new shareholders will ____ the capital gains of existing shareholders.A. diluteB. hold constantC. increaseD. All of the aboveE. It is impossible to tell.Difficulty level: MediumTopic: CAPITAL GAINSType: CONCEPTS36. The following are methods to estimate the market risk premium:A. use historical data to estimate future risk premium.B. use the dividend discount model to estimate risk premium.C. use the bond valuation model to estimate growth in bond prices with different costs of capital.D. A and B.E. A and C.Difficulty level: MediumTopic: MARKET RISK PREMIUMType: CONCEPTS37. Beta is the slope of the:A. efficient frontier.B. market portfolio.C. security market line.D. characteristic line.E. None of the above.Difficulty level: MediumTopic: BETAType: CONCEPTS38. Two stocks that have the same beta ____ have the same correlation because _______:A. may; because correlation measures the sensitivity of the S&P to the market portfolio.B. will; because correlation measures the tightness of fit around the regression line.C. may not; because correlation measures the tightness of fit around the regression line.D. may not; because correlation measures the sensitivity to change.E. None of the above.Difficulty level: MediumTopic: BETA AND CORRELATIONType: CONCEPTS39. When using the cost of debt, the relevant number is the:A. pre-tax cost of debt since most corporations pay taxes at the same tax rate.B. pre-tax cost of debt since it is the actual rate the firm is paying bondholders.C. post-tax cost of debt since dividends are tax deductible.D. post-tax cost of debt since interest is tax deductible.E. None of the above.Difficulty level: MediumTopic: COST OF DEBTType: CONCEPTS40. Jack's Construction Co. has 80,000 bonds outstanding that are selling at par value. Bonds with similar characteristics are yielding 8.5%. The company also has 4 million shares of common stock outstanding. The stock has a beta of 1.1 and sells for $40 a share. The U.S. Treasury bill is yielding 4% and the market risk premium is 8%. Jack's tax rate is 35%. What is Jack's weighted average cost of capital?A. 7.10%B. 7.39%C. 10.38%D. 10.65%E. 11.37%R e = .04 + (1.1 ⨯ .08) = .128Debt: 80,000 ⨯ $1,000 = $80mCommon: 4m ⨯ $40 = $160mTotal = $80m + $160m = $240mDifficulty level: MediumTopic: WEIGHTED AVERAGE COST OF CAPITALType: PROBLEMS41. Peter's Audio Shop has a cost of debt of 7%, a cost of equity of 11%, and a cost of preferred stock of 8%. The firm has 104,000 shares of common stock outstanding at a market price of $20 a share. There are 40,000 shares of preferred stock outstanding at a market price of $34 a share. The bond issue has a total face value of $500,000 and sells at 102% of face value. The tax rate is 34%. What is the weighted average cost of capital for Peter's Audio Shop?A. 6.14%B. 6.54%C. 8.60%D. 9.14%E. 9.45%Debt: $500,000 ⨯ 1.02 = $.51mPreferred: 40,000 ⨯ $34 = $1.36mCommon: 104,000 ⨯ $20 = $2.08mTotal = $.51m + $1.36m + $2.08m = $3.95mDifficulty level: MediumTopic: WEIGHTED AVERAGE COST OF CAPITALType: PROBLEMS42. Phil's Carvings, Inc. wants to have a weighted average cost of capital of 9%. The firm has an after-tax cost of debt of 5% and a cost of equity of 11%. What debt-equity ratio is needed for the firm to achieve its targeted weighted average cost of capital?A. .33B. .40C. .50D. .60E. .67.09 = [W e⨯ .11] + [(1 - W e) ⨯ .05) = .11W e + .05 - .05W e; .04 = .06W e; W e = 66.67%; W d = 1 - W e = 100% - 66.67% = 33.33%; Debt - equity ratio = 33.33% ÷ 66.67% = .50Difficulty level: MediumTopic: WEIGHTED AVERAGE COST OF CAPITALType: PROBLEMS43. Jake's Sound Systems has 210,000 shares of common stock outstanding at a market price of $36 a share. Last month, Jake's paid an annual dividend in the amount of $1.593 per share. The dividend growth rate is 4%. Jake's also has 6,000 bonds outstanding with a face value of $1,000 per bond. The bonds carry a 7% coupon, pay interest annually, and mature in 4.89 years. The bonds are selling at 99% of face value. The company's tax rate is 34%. What is Jake's weighted average cost of capital?A. 5.3%B. 5.8%C. 6.3%D. 6.9%E. 7.2%Debt: 6,000 ⨯ $1,000 ⨯ .99 = $5.94mCommon: 210,000 ⨯ $36 = $7.56mTotal = $5.94m + $7.56m = $13.50mR e = [($1.593 ⨯ 1.04) ÷ $36] + .04 = .08602Difficulty level: MediumTopic: WEIGHTED AVERAGE COST OF CAPITALType: PROBLEMS44. The Consolidated Transfer Co. is an all-equity financed firm. The beta is .75, the market risk premium is 8% and the risk-free rate is 4%. What is the expected return of Consolidated?A. 7%B. 8%C. 9%D. 10%E. 13%.04 + 0.75(.08) = .10 = 10%Difficulty level: EasyTopic: CAPMType: PROBLEMS45. Assuming the CAPM or one-factor model holds, what is the cost of equity for a firm if the firm's equity has a beta of 1.2, the risk-free rate of return is 2%, the expected return on the market is 9%, and the return to the company's debt is 7%?A. 10.4%B. 10.8%C. 12.8%D. 14.4%E. None of the above.Rs = Rf + β(Rm - Rf) = .02 + 1.2(.09 - .02) = .104 = 10.4%Difficulty level: MediumTopic: CAPMType: PROBLEMS46. The cost of equity for Ryan Corporation is 8.4%. If the expected return on the market is 10% and the risk-free rate is 5%, then the equity beta is ___.A. 0.48B. 0.68C. 1.25D. 1.68E. Impossible to calculate with information given.Rs = Rf + β (Rm - Rf); .084 = .05 + β (.10 - .05); β = .68Difficulty level: MediumTopic: EQUITY BETAType: PROBLEMS47. Suppose that the Simmons Corporation's common stock has a beta of 1.6. If the risk-free rate is 5% and the market risk premium is 4%, the expected return on Simmons' common stock is:A. 4.0%.B. 5.0%.C. 5.6%.D. 10.6%.E. 11.4%.Rs = Rf + β(Rm - Rf) = .05 + 1.6(.04) = .114 = 11.4%Difficulty level: EasyTopic: CAPMType: PROBLEMS48. Suppose the Barges Corporation's common stock has an expected return of 12%. Assume that the risk-free rate is 5%, and the market risk premium is 6%. If no unsystematic influence affected Barges' return, the beta for Barges is ______.A. 1.00B. 1.17C. 1.20D. 2.50E. It is impossible to calculate with the information given.Rs = Rf + β(Rm - Rf); .12 = .05 + β(.06); β = .07/.06 = 1.17Difficulty level: MediumTopic: CALCULATING BETAType: PROBLEMS49. Slippery Slope Roof Contracting has an equity beta of 1.2, capital structure with 2/3 debt, and a zero tax rate. What is its asset beta?A. 0.40B. 0.72C. 1.20D. 1.80E. None of the aboveβA = (E/(D + E.) βE = (1/3)(1.2) = .40Difficulty level: MediumTopic: ASSET BETAType: PROBLEMS50. The Template Corporation has an equity beta of 1.2 and a debt beta of .8. The firm's market value debt to equity ratio is .6. Template has a zero tax rate. What is the asset beta?A. 0.70B. 0.72C. 0.96D. 1.04E. 1.05.8(.6/1.6) + 1.2(1/1.6) = 1.05Difficulty level: MediumTopic: ASSET BETAType: PROBLEMS51. The NuPress Valet Co. has an improved version of its hotel stand. The investment cost is expected to be $72 million and will return $13.5 million for 5 years in net cash flows. The ratio of debt to equity is 1 to 1. The cost of equity is 13%, the cost of debt is 9%, and the tax rate is 34%. The appropriate discount rate, assuming average risk, is:A. 8.65%B. 9%C. 9.47%D. 10.5%E. 13%WACC = .09(1 - .34)(.5) + .13(.5) = .0297 + .065 = .0947 = 9.47%Difficulty level: EasyTopic: WACCType: PROBLEMSEssay Questions。
(完整word版)罗斯公司理财题库全集(word文档良心出品)
Chapter 21Leasing Multiple Choice Questions1. In a lease arrangement, the owner of the asset is:A. the lesser.B. the lessee.C. the lessor.D. the leaser.E. None of the above.2. In a lease arrangement, the user of the asset is:A. the lesser.B. the lessee.C. the lessor.D. the leaser.E. None of the above.3. Which of the following would not be a characteristic of a financial lease?A. They are not usually fully amortized.B. They usually do not have maintenance necessary for the leased assets.C. They usually do not include a cancellation option.D. The lessee usually has the right to renew the lease at expiration.E. All of the above are characteristics of financial leases.4. An independent leasing company supplies ___________ leases versus the manufacturer who supplies ________________ leases.A. leveraged; directB. sales and leaseback; sales-typeC. capital; sales-typeD. direct; sales-typeE. None of the above5. Which of the following is not a financial lease?A. A leveraged leaseB. An operating leaseC. A sale-and-leasebackD. Both A and B.E. None of the above.6. If the lessor borrows much of the purchase price of a leased asset, the lease is called:A. a leveraged lease.B. a sale-and-leaseback.C. a capital lease.D. a nonrecourse lease.E. None of the above.7. An operating lease's primary characteristics are:A. fully amortized, lessee maintains equipment and there is no cancellation clause.B. not fully amortized, lessor maintains equipment and there is a cancellation clause.C. fully amortized, lessor maintains equipment and there is a cancellation clause.D. not fully amortized, lessor maintains equipment and there is not cancellation clause.E. fully amortized, lessee maintains equipment and lessee can acquire assets at end of lease for fair market value.8. If a lease is for 35 years, it is regarded as a:A. financial lease.B. operating lease.C. capital lease.D. conditional sale.E. sale and leaseback.9. The city of Oakland sold some buildings and used the proceeds to improve its financial position. The city then leased the buildings back in order to continue to use these facilities. This is an example of:A. an operating lease.B. a short-term lease.C. a sale and leaseback.D. a fully amortized lease.E. None of the above.10. A financial lease has the following as its primary characteristics:A. is fully amortized, lessee maintains equipment and there is no renewal clause and no cancellation clause.B. is not fully amortized, lessor maintains equipment and there is a renewal clause but no cancellation clause.C. is fully amortized, lessor maintains equipment and there is a renewal clause and a no cancellation clause.D. is not fully amortized, lessor maintains equipment and there is a renewal clause.E. is fully amortized, lessee maintains equipment and there is a renewal clause and a no cancellation clause.11. An advantage of leasing is that the lessor does not own the asset and can cancel:A. only financial leases.B. only operating leases.C. only capital leases.D. any kind of leases anytime.E. None of the above.12. A leveraged lease typically involves a non-recourse loan in which:A. the lessee's payments go directly to the lender in case of default.B. the lessor is not obligated in case of default.C. the third party lenders have a first lien on the assets.D. All of the above.E. None of the above.13. For accounting purposes, which of the following conditions would automatically cause a lease to be a capital lease?A. The lessee can purchase the asset below fair market value at the end of the lease.B. The lease transfers ownership of the asset to the lessee by the end of the lease.C. The lease term is more than 75% of the asset's economic life.D. The present value of the lease payments is more than 90% of the asset's market value at lease inception.E. All of the above would lead to the lease being considered a capital lease.14. Capital leases would show up on the balance sheet of the firm in which manner for a six year machinery lease worth $700,000?A. Capital leases do not have to be put on the balance sheet; only financial leases do.B. Asset - Machinery $700,000; Liabilities - Long Term debt $700,000 because of debt displacement.C. Asset - Assets under Capital Lease $700,000; Liabilities - Obligations under Capital Lease $700,000.D. Assets - Assets under Capital Lease $700,000; Liabilities - Long Term Debt $700,000 because of debt displacement.E. None of the above.15. Prior to FASB 13, "Accounting for Leases", lease activity was only reported in financial footnotes. This off-balance-sheet-financing made firms with:A. capital leases appear financially stronger than firms that used debt to purchase the asset.B. operating leases appear financially stronger than firms that used debt to purchase the asset.C. leases of any type appear financially stronger than firms that used debt to purchase the asset.D. All of the above.E. None of the above.16. Which of the following is not an implication of FASB 13, Accounting for Leases?A. FASB 13 requires that the PV of the lease payments appear on the right hand side of the balance sheet.B. FASB 13 requires that the present value of the asset appear on the left hand side of the balance sheet.C. FASB 13 allows for off-balance-sheet financing for operating leases.D. All of the above.E. None of the above.17. The reason the IRS is most concerned about lease contracts is:A. firms that lease generally pay no taxes.B. that leasing usually leads to bankruptcy.C. that leases can be set up solely to avoid taxes.D. because leasing leads to off-balance-sheet-financing.E. All of the above.18. A lease with high payments early in its life which then decline to termination would:A. provide greater cash flow to the lessee in the beginning years.B. be evidence of tax avoidance and not acceptable to the IRS.C. be qualified as a capital lease under FASB 13.D. provide a lower residual value and thus ensure a bargain-purchase price option.E. All of the above.19. In valuing the lease versus purchase option, the relevant cash flows are the:A. tax shield from depreciation.B. investment outlay for the equipment.C. a decrease in the firm's operating costs that are not affected by leasing.D. All of the above are relevant.E. None of the above are relevant.20. The appropriate discount rate for valuing a financial lease is:A. the firm's after-tax weighted average cost of capital.B. the after-tax required return on assets of risks similar to the leased asset.C. the after-tax cost of secured borrowing.D. Either A or B.E. All of the above.21. The WACC is not used in the lease versus purchase decision because:A. the WACC was used in the decision to acquire the asset, this is only a financing decision.B. the WACC is used only when a lease alone is considered and not a lease versus purchase.C. the WACC does not include the lease cost of capital and therefore should not be used.D. tax rates of the lessor may be different than the lessee and therefore the WACC is incorrect.E. when a bank arranges a lease they do not consider the lessee's cost of capital.22. Firms that use financial leases must consider their debt-to-equity ratios as inadequate measures of financial leverage because:A. lenders are concerned about the firm's total liabilities and related cash flow.B. debt displacement occurs with leasing.C. less future debt can be raised for a growing firm when a lease is used.D. All of the above.E. None of the above.23. ______ would be evidence the lease is being used to avoid taxes and not a legitimate business purpose.A. Early balloon paymentsB. Late balloon paymentsC. Capitalizing a leaseD. Transfer of lease payments to a second ownerE. None of the above24. Debt displacement is associated with leases because:A. all assets not purchased with equity use debt financing.B. debt is always a cheaper source of financing and preferred to equity financing.C. FASB 13 and the IRS mandate debt displacement.D. lease financing is all debt and causes an imbalance in the optimal debt to equity ratio which reduces future debt financing.E. None of the above.25. A lease is likely to be most beneficial to both parties when:A. the lessor's tax rate is lower than the lessee's.B. the lessor's tax rate is higher than the lessee's.C. the lessor's tax rate is equal to the lessee's.D. a lease cannot be beneficial to both parties.E. a lease always has zero NPV, so both parties always break even.26. The price or lease payment that the lessee sets as their bound is known as:A. the present value of the tax shields.B. the reservation payment, L MIN.C. the present value of operating savings.D. the reservation payment, L MAX.E. None of the above.27. Which of the following is probably not a good reason for leasing instead of buying?A. Taxes may be reduced by leasing.B. Leasing may reduce transactions costs.C. Leasing may provide a beneficial reduction of uncertainty.D. All of the above are good reasons.E. All of the above are not good reasons.28. Which of the following is probably a good reason for leasing instead of buying?A. Leasing provides 100% financing.B. Leasing is not considered a form of debt financing.C. Leasing may increase EPS relative to buying.D. All of the above are good reasons.E. None of the above is a good reason.29. Some assets are leased more than others because:A. the value of the asset under a lease is not highly affected by term of use or maintenance decisions.B. a lease may be used to fool clients into "buying" high priced assets above market value.C. leasing allows sellers to attract clients with low prices as the basis for setting the contract.D. Both A and B.E. Both A and C.30. To meet IRS guidelines for leasing, the lease should:A. limit the lessee's right to issue debt or pay dividends while the lease is operative.B. not limit the lessee's right to issue debt or pay dividends while the lease is operative.C. pay a very high return to the lessor.D. transfer ownership of the asset at the end of the lease at below fair market value.E. be over 30 years.Your firm is considering leasing a new computer. The lease lasts for 9 years. The lease calls for 10 payments of $1,000 per year with the first payment occurring immediately. The computer would cost $7,650 to buy and would be straight-line depreciated to a zero salvage value over 9 years. The actual salvage value is negligible because of technological obsolescence. The firm can borrow at a rate of 8%. The corporate tax rate is 30%.31. What is the after-tax cash flow from leasing relative to the after-tax cash flow from purchasing in years 1-9?A. $-255B. $-955C. $-1,295D. $-1,850E. None of the above32. What is the after-tax cash flow from leasing relative to the after-tax cash flow from purchasing in year 0?A. $-4,865B. $-700C. $6,950D. $7,650E. None of the above33. What is the NPV of the lease relative to the purchase?A. $-1,039.78B. $339.78C. $360.22D. $6,610.22E. None of the above34. What would the after-tax cash flow in year 9 be if the asset had a residual value of $500 (ignoring any possible risk differences)?A. $-605B. $-955C. $-1,455D. $-1,305E. None of the above35. This lease would be classified as a(n):A. operating lease because the asset will be obsolete.B. operating lease because there is no amortization.C. leveraged lease because it is being financed.D. capital lease because the lease life is greater than 75% of the economic life.E. sale and leaseback because the company gets full use of the asset.Your firm is considering leasing a new robotic milling control system. The lease lasts for 5 years. The lease calls for 6 payments of $300,000 per year with the first payment occurring at lease inception. The system would cost $1,050,000 to buy and would be straight-line depreciated to a zero salvage value. The actual salvage value is zero. The firm can borrow at 8%, and the corporate tax rate is 34%.36. What is the appropriate discount rate for valuing the lease?A. 2.72%B. 5.28%C. 8.00%D. 12.12%E. None of the above.37. What is the after-tax cash flow from leasing in year 0?A. $300,000B. $495,000C. $852,000D. $948,000E. None of the above38. What is the after-tax cash flow in years 1 through 5?A. $-126,600B. $-198,000C. $-269,400D. $-287,250E. None of the above39. What is the NPV of the lease?A. $-111,690B. $-295,040C. $-305,388D. $-309,690E. None of the above40. What is the maximum lease payment that you would be willing to make?A. $170,655B. $175,000C. $187,842D. $210,307E. None of the above41. What is the minimum lease payment that the lessor would be willing to accept?A. $161,000B. $176,995C. $217,645D. $237,083E. None of the aboveYour firm is considering leasing a new laser light. The lease lasts for 3 years. The lease calls for 4 payments of $10,000 per year with the first payment occurring immediately. The computer would cost $45,000 to buy and would be straight-line depreciated to a zero salvage value over 3 years. The actual salvage value is negligible because of technological obsolescence. The firm can borrow at a rate of 10%. The corporate tax rate is 35%.42. What is the after-tax cash flow from leasing relative to the after-tax cash flow from purchasing in years 1-3?A. $-32,775B. $-11,750C. $-1,750D. $-1,850E. None of the above43. What is the after-tax cash flow from leasing relative to the after-tax cash flow from purchasing in year 0?A. $-35,000B. $-38,500C. $35,000D. $38,500E. None of the above44. What is the NPV of the lease relative to the purchase?A. $-6,500B. $7,380C. $4,678D. $12,400E. None of the above45. What would the after-tax cash flow in year 3 be if the asset had a residual value of $1,000 (ignoring any possible risk differences)?A. $-11,750B. $11,750C. $12,400D. $-12,400E. None of the above46. This lease would be classified as a(n):A. operating lease because the asset will be obsolete.B. operating lease because there is no amortization.C. leveraged lease because it is being financed.D. capital lease because the lease life is greater than 75% of the economic life.E. sale and leaseback because the company gets full use of the asset.Essay Questions47. Sardinas Sardines has assets valued at $10 million and equity of $10 million. The firm recently leased new equipment worth $1 million. Present the balance sheet under two conditions; the lease is judged to be an operating lease, and the lease is judged to be a capital lease.48. The Blank Button Company is considering the purchase of a new machine for $30,000. The machine is expected to save the firm $12,500 per year in operating costs over a 5 year period, and can be depreciated on a straight-line basis to a zero salvage value over its life. Alternatively, the firm can lease the machine for $6,500 per year for 5 years, with the first payment due in 1 year. The firm's tax rate is 34%, and its cost of debt is 10%. Calculate the NPV of the lease versus the purchase decision. Calculate the reservation payment of the lessee.49. The Plastic Iron Company has decided to acquire a new electronic milling machine. Plastic Iron can purchase the machine for $87,000 which has an expected life of 8 years and will be depreciated using 7 class MACRS rates of .1428, .2449, .1749, .125, .0892, .0892, .0892 and any remainder in year 8. Miller Leasing has offered to lease the machine to Plastic Iron for $14,000 a year for 8 years. Plastic Iron has an 18.64% cost of equity, 12% cost of debt, a 1:1 D/E ratio and faces a 34% marginal tax rate. Should they lease or buy? Show all work.50. What are some of the advantages and disadvantages of leasing?Chapter 21 Leasing Answer KeyMultiple Choice Questions1. In a lease arrangement, the owner of the asset is:A. the lesser.B. the lessee.C. the lessor.D. the leaser.E. None of the above.Difficulty level: EasyTopic: LESSORType: DEFINITIONS2. In a lease arrangement, the user of the asset is:A. the lesser.B. the lessee.C. the lessor.D. the leaser.E. None of the above.Difficulty level: EasyTopic: LESSEEType: DEFINITIONS3. Which of the following would not be a characteristic of a financial lease?A. They are not usually fully amortized.B. They usually do not have maintenance necessary for the leased assets.C. They usually do not include a cancellation option.D. The lessee usually has the right to renew the lease at expiration.E. All of the above are characteristics of financial leases.Difficulty level: MediumTopic: FINANCIAL LEASEType: DEFINITIONS4. An independent leasing company supplies ___________ leases versus the manufacturer who supplies ________________ leases.A. leveraged; directB. sales and leaseback; sales-typeC. capital; sales-typeD. direct; sales-typeE. None of the aboveDifficulty level: EasyTopic: TYPES OF LEASESType: DEFINITIONS5. Which of the following is not a financial lease?A. A leveraged leaseB. An operating leaseC. A sale-and-leasebackD. Both A and B.E. None of the above.Difficulty level: EasyTopic: TYPES OF LEASESType: DEFINITIONS6. If the lessor borrows much of the purchase price of a leased asset, the lease is called:A. a leveraged lease.B. a sale-and-leaseback.C. a capital lease.D. a nonrecourse lease.E. None of the above.Difficulty level: EasyTopic: TYPES OF LEASESType: DEFINITIONS7. An operating lease's primary characteristics are:A. fully amortized, lessee maintains equipment and there is no cancellation clause.B. not fully amortized, lessor maintains equipment and there is a cancellation clause.C. fully amortized, lessor maintains equipment and there is a cancellation clause.D. not fully amortized, lessor maintains equipment and there is not cancellation clause.E. fully amortized, lessee maintains equipment and lessee can acquire assets at end of lease for fair market value.Difficulty level: MediumTopic: OPERATING LEASEType: DEFINITIONS8. If a lease is for 35 years, it is regarded as a:A. financial lease.B. operating lease.C. capital lease.D. conditional sale.E. sale and leaseback.Difficulty level: MediumTopic: TYPES OF LEASESType: DEFINITIONS9. The city of Oakland sold some buildings and used the proceeds to improve its financial position. The city then leased the buildings back in order to continue to use these facilities. This is an example of:A. an operating lease.B. a short-term lease.C. a sale and leaseback.D. a fully amortized lease.E. None of the above.Difficulty level: EasyTopic: TYPES OF LEASEType: CONCEPTS10. A financial lease has the following as its primary characteristics:A. is fully amortized, lessee maintains equipment and there is no renewal clause and no cancellation clause.B. is not fully amortized, lessor maintains equipment and there is a renewal clause but no cancellation clause.C. is fully amortized, lessor maintains equipment and there is a renewal clause and a no cancellation clause.D. is not fully amortized, lessor maintains equipment and there is a renewal clause.E. is fully amortized, lessee maintains equipment and there is a renewal clause and a no cancellation clause.Difficulty level: EasyTopic: FINANCIAL LEASEType: CONCEPTS11. An advantage of leasing is that the lessor does not own the asset and can cancel:A. only financial leases.B. only operating leases.C. only capital leases.D. any kind of leases anytime.E. None of the above.Difficulty level: EasyTopic: ADVANTAGE TO LEASINGType: CONCEPTS12. A leveraged lease typically involves a non-recourse loan in which:A. the lessee's payments go directly to the lender in case of default.B. the lessor is not obligated in case of default.C. the third party lenders have a first lien on the assets.D. All of the above.E. None of the above.Difficulty level: MediumTopic: LEVERAGED LEASEType: CONCEPTS13. For accounting purposes, which of the following conditions would automatically cause a lease to be a capital lease?A. The lessee can purchase the asset below fair market value at the end of the lease.B. The lease transfers ownership of the asset to the lessee by the end of the lease.C. The lease term is more than 75% of the asset's economic life.D. The present value of the lease payments is more than 90% of the asset's market value at lease inception.E. All of the above would lead to the lease being considered a capital lease.Difficulty level: MediumTopic: CAPITAL LEASEType: CONCEPTS14. Capital leases would show up on the balance sheet of the firm in which manner for a six year machinery lease worth $700,000?A. Capital leases do not have to be put on the balance sheet; only financial leases do.B. Asset - Machinery $700,000; Liabilities - Long Term debt $700,000 because of debt displacement.C. Asset - Assets under Capital Lease $700,000; Liabilities - Obligations under Capital Lease $700,000.D. Assets - Assets under Capital Lease $700,000; Liabilities - Long Term Debt $700,000 because of debt displacement.E. None of the above.Difficulty level: EasyTopic: CAPITAL LEASEType: CONCEPTS15. Prior to FASB 13, "Accounting for Leases", lease activity was only reported in financial footnotes. This off-balance-sheet-financing made firms with:A. capital leases appear financially stronger than firms that used debt to purchase the asset.B. operating leases appear financially stronger than firms that used debt to purchase the asset.C. leases of any type appear financially stronger than firms that used debt to purchase the asset.D. All of the above.E. None of the above.Difficulty level: ChallengeTopic: FASB 13Type: CONCEPTS16. Which of the following is not an implication of FASB 13, Accounting for Leases?A. FASB 13 requires that the PV of the lease payments appear on the right hand side of the balance sheet.B. FASB 13 requires that the present value of the asset appear on the left hand side of the balance sheet.C. FASB 13 allows for off-balance-sheet financing for operating leases.D. All of the above.E. None of the above.Difficulty level: MediumTopic: FASB 13Type: CONCEPTS17. The reason the IRS is most concerned about lease contracts is:A. firms that lease generally pay no taxes.B. that leasing usually leads to bankruptcy.C. that leases can be set up solely to avoid taxes.D. because leasing leads to off-balance-sheet-financing.E. All of the above.Difficulty level: EasyTopic: TAX IMPLICATIONSType: CONCEPTS18. A lease with high payments early in its life which then decline to termination would:A. provide greater cash flow to the lessee in the beginning years.B. be evidence of tax avoidance and not acceptable to the IRS.C. be qualified as a capital lease under FASB 13.D. provide a lower residual value and thus ensure a bargain-purchase price option.E. All of the above.Difficulty level: MediumTopic: TAX IMPLICATIONSType: CONCEPTS19. In valuing the lease versus purchase option, the relevant cash flows are the:A. tax shield from depreciation.B. investment outlay for the equipment.C. a decrease in the firm's operating costs that are not affected by leasing.D. All of the above are relevant.E. None of the above are relevant.Difficulty level: MediumTopic: LEASE VS. BUYType: CONCEPTS20. The appropriate discount rate for valuing a financial lease is:A. the firm's after-tax weighted average cost of capital.B. the after-tax required return on assets of risks similar to the leased asset.C. the after-tax cost of secured borrowing.D. Either A or B.E. All of the above.Difficulty level: EasyTopic: APPROPRIATE DISCOUNT RATEType: CONCEPTS21. The WACC is not used in the lease versus purchase decision because:A. the WACC was used in the decision to acquire the asset, this is only a financing decision.B. the WACC is used only when a lease alone is considered and not a lease versus purchase.C. the WACC does not include the lease cost of capital and therefore should not be used.D. tax rates of the lessor may be different than the lessee and therefore the WACC is incorrect.E. when a bank arranges a lease they do not consider the lessee's cost of capital.Difficulty level: ChallengeTopic: APPROPRIATE DISCOUNT RATEType: CONCEPTS22. Firms that use financial leases must consider their debt-to-equity ratios as inadequate measures of financial leverage because:A. lenders are concerned about the firm's total liabilities and related cash flow.B. debt displacement occurs with leasing.C. less future debt can be raised for a growing firm when a lease is used.D. All of the above.E. None of the above.Difficulty level: MediumTopic: FINANCIAL LEASEType: CONCEPTS23. ______ would be evidence the lease is being used to avoid taxes and not a legitimate business purpose.A. Early balloon paymentsB. Late balloon paymentsC. Capitalizing a leaseD. Transfer of lease payments to a second ownerE. None of the aboveDifficulty level: MediumTopic: TAX IMPLICATIONSType: CONCEPTS24. Debt displacement is associated with leases because:A. all assets not purchased with equity use debt financing.B. debt is always a cheaper source of financing and preferred to equity financing.C. FASB 13 and the IRS mandate debt displacement.D. lease financing is all debt and causes an imbalance in the optimal debt to equity ratio which reduces future debt financing.E. None of the above.Difficulty level: ChallengeTopic: LEASES AND DEBTType: CONCEPTS25. A lease is likely to be most beneficial to both parties when:A. the lessor's tax rate is lower than the lessee's.B. the lessor's tax rate is higher than the lessee's.C. the lessor's tax rate is equal to the lessee's.D. a lease cannot be beneficial to both parties.E. a lease always has zero NPV, so both parties always break even.Difficulty level: ChallengeTopic: TAX IMPLICATIONSType: CONCEPTS26. The price or lease payment that the lessee sets as their bound is known as:A. the present value of the tax shields.B. the reservation payment, L MIN.C. the present value of operating savings.D. the reservation payment, L MAX.E. None of the above.Difficulty level: MediumTopic: RESERVATION PAYMENTType: CONCEPTS27. Which of the following is probably not a good reason for leasing instead of buying?A. Taxes may be reduced by leasing.B. Leasing may reduce transactions costs.C. Leasing may provide a beneficial reduction of uncertainty.D. All of the above are good reasons.E. All of the above are not good reasons.Difficulty level: MediumTopic: REASON FOR LEASINGType: CONCEPTS。
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Chapter 12 An Alternative View of Risk and Return: The Arbitrage Pricing Theory Multiple Choice Questions1. In the equation R = + U, the three symbols stand for:A. average return, expected return, and unexpected return.B. required return, expected return, and unbiased return.C. actual total return, expected return, and unexpected return.D. required return, expected return, and unbiased risk.E. risk, expected return, and unsystematic risk.2. The acronym APT stands for:A. Arbitrage Pricing Techniques.B. Absolute Profit Theory.C. Arbitrage Pricing Theory.D. Asset Puting Theory.E. Assured Price Techniques.3. The acronym CAPM stands for:A. Capital Asset Pricing Model.B. Certain Arbitrage Pressure Model.C. Current Arbitrage Prices Model.D. Cumulative Asset Price Model.E. None of the above.4. The unexpected return on a security, U, is made up of:A. market risk and systematic risk.B. systematic risk and unsystematic risk.C. idiosyncratic risk and unsystematic risk.D. expected return and market risk.E. expected return and idiosyncratic risk.5. Systematic risk is defined as:A. a risk that specifically affects an asset or small group of assets.B. any risk that affects a large number of assets.C. any risk that has a huge impact on the return of a security.D. the random component of return.E. None of the above.6. The term Corr(ε R, ε T) = 0 tells us that:A. all error terms of company R and T are 0.B. the unsystematic risk of companies R and T is unrelated or uncorrelated.C. the correlation between the returns of companies R and T is -1.D. the systematic risk of companies R and T is unrelated.E. None of the above.7. A factor is a variable that:A. affects the returns of risky assets in a systematic fashion.B. affects the returns of risky assets in an unsystematic fashion.C. correlates with risky asset returns in a unsystematic fashion.D. does not correlate with the returns of risky assets in an systematic fashion.E. None of the above.8. A security that has a beta of zero will have an expected return of:A. zero.B. the market risk premium.C. the risk free rate.D. less than the risk free rate but not negative.E. less than the risk free rate which can be negative.9. Which of the following is true about the impact on market price of a security when a company makes an announcement and the market has discounted the news?A. The price will change a great deal; even though the impact is primarily in the future, the future value is discounted to the present.B. The price will change little, if at all, since the impact is primarily in the future.C. The price will change little, if at all, since the market considers this information unimportant.D. The price will change little, if at all, since the market considers this information untrue.E. The price will change little, if at all, since the market has already included this information in the security's price.10. Shareholders discount many corporate announcements because of their prior expectations. If an announcement causes the price to change it will mostly be driven by:A. the expected part of the announcement.B. market inefficiency.C. the unexpected part of the announcement.D. the systematic risk.E. None of the above.11. A company owning gold mines will probably have a _____ inflation beta because an ___ increase in inflation is usually associated with an increase in gold prices.A. negative; anticipatedB. positive; anticipatedC. negative; unanticipatedD. positive; unanticipatedE. None of the above.12. If company A, a medical research company, makes a new product discovery and their stock rises 5%, this will have:A. no effect on Company B's, a newspaper, stock price because it is a systematic risk element.B. no effect on Company B's, a newspaper, stock price because it is an unsystematic risk element.C. a large effect on Company B's, a newspaper, stock price because it is a systematic risk element.D. a large effect on Company B's, a newspaper, stock price because it is an unsystematic risk element.E. None of the above.13. What would not be true about a GNP beta?A. If a stock's β GNP = 1.5, the stock will experience a 1.5% increase for every 1% surprise increase in GNP.B. If a stock's β GNP = -1.5, the stock will experience a 1.5% decrease for every 1% surprise increase in GNP.C. It is a measure of risk.D. It measures the impact of systematic risk associated with GNP.E. None of the above.14. If the expected rate of inflation was 3% and the actual rate was 6.2%; the systematic response coefficient from inflation, βI, would result in a change in any security return of ___ βI.A. 9.2B. 3.2C. -3.2D. 3.0E. 6.215. In a portfolio of risky assets, the response to a factor, Fi, can be determined by:A. summing the weighted βi s and multiplying by the factor F i.B. summing the F i s.C. adding the average weighted expected returns.D. summing the weighted random errors.E. All of the above.16. In the one factor (APT) model, the characteristic line to estimate i passes through the origin, unlike the estimate used in the CAPM because:A. the relationship is between the actual return on a security and the market index.B. the relationship measures the change in the security return over time versus the change in the market return.C. the relationship measures the change in excess return on a security versus GNP.D. the relationship measures the change in excess return on a security versus the return on the factor about its mean of zero.E. Cannot be determined without actual data.17. The betas along with the factors in the APT adjust the expected return for:A. calculation errors.B. unsystematic risks.C. spurious correlations of factors.D. differences between actual and expected levels of factors.E. All of the above.18. The single factor APT model that resembles the market model uses _________ as the single factor.A. arbitrage feesB. GNPC. the inflation rateD. the market returnE. the risk-free return19. For a diversified portfolio including a large number of stocks, the:A. weighted average expected return goes to zero.B. weighted average of the betas goes to zero.C. weighted average of the unsystematic risk goes to zero.D. return of the portfolio goes to zero.E. return on the portfolio equals the risk-free rate.20. Which of the following statements is true?A. A well-diversified portfolio has negligible systematic risk.B. A well-diversified portfolio has negligible unsystematic risk.C. An individual security has negligible systematic risk.D. An individual security has negligible unsystematic risk.E. Both A and D.21. Assuming that the single factor APT model applies, the beta for the market portfolio is:A. zero.B. one.C. the average of the risk free beta and the beta for the highest risk security.D. impossible to calculate without collecting sample data.E. None of the above.22. In normal market conditions if a security has a negative beta:A. the security always has a positive return.B. the security has an expected return above the risk-free return.C. the security has an expected return less than the risk-free rate.D. the security has an expected return equal to the market portfolio.E. Both A and B.23. A criticism of the CAPM is that it:A. ignores the return on the market portfolio.B. ignores the risk-free return.C. requires a single measure of systematic risk.D. utilizes too many factors.E. None of the above.24. To estimate the cost of equity capital for a firm using the CAPM, it is necessary to have:A. company financial leverage, beta, and the market risk premium.B. company financial leverage, beta, and the risk-free rate.C. beta, company financial leverage, and the industry beta.D. beta, company financial leverage, and the market risk premium.E. beta, the risk-free rate, and the market risk premium.25. An advantage of the APT over CAPM is:A. APT can handle multiple factors.B. if the factors can be properly identified, the APT may have more explanation/predictive power for returns.C. the APT forces unsystematic risk to be negative to offset systematic risk; thus making the total portfolio risk free, allowing for an arbitrage opportunity for the astute investor.D. Both A and B.E. All of the above.26. Parametric or empirical models rely on:A. security betas explaining systematic factor relationships.B. finding regularities and relations in past market data.C. there being no true explanations of pricing relationships.D. always being able to find the exception to the rule.E. None of the above27. A growth stock portfolio and a value portfolio might be characterized:A. each by their P/E relative to the index P/E; high P/E for growth and lower for value.B. as earning a high rate of return for a growth security and a low rate of return for value security irrespective of risk.C. low unsystematic risk and high systematic risk respectively.D. moderate systematic risk and zero systematic risk respectively.E. None of the above.28. Style portfolios are characterized by:A. their stock attributes; P/Es less than the market P/E are value funds.B. their systematic factors, higher systematic factors are benchmark portfolios.C. their stock attributes; higher stock attribute factors are benchmark portfolios.D. their systematic factors, P/Es greater than the market are value portfolios.E. There is no difference between systematic factors and stock attributes.29. The most realistic APT model would likely include:A. multiple factors.B. only one factor.C. a factor to measure inflation.D. Both A and C.E. Both B and C.30. Which of the following statements is/are true?A. Both APT and CAPM argue that expected excess return must be proportional to the beta(s).B. APT and CAPM are the only approaches to measure expected returns in risky assets.C. Both CAPM and APT are risk-based models.D. Both A and B.E. Both A and C.31. Three factors likely to occur in the APT model are:A. unemployment, inflation, and current rates.B. inflation, GNP, and interest rates.C. current rates, inflation and change in housing prices.D. unemployment, college tuition, and GNP.E. This cannot be determined or even estimated.32. Both the APT and the CAPM imply a positive relationship between expected return and risk. The APT views risk:A. very similarly to the CAPM via the beta of the security.B. in terms of individual intersecurity correlation versus the beta of the CAPM.C. via the industry wide or marketwide factors creating correlation between securities.D. as the standardized deviation of the covariance.E. None of the above.33. The Fama-French three factor model includes the following factors:A. beta, expected return on the market, risk free rate of interest, a size factor, and a value factor.B. the market risk premium, a volume factor, and a size factor.C. beta, expected return on the market, risk free rate of interest, a volume factor, and a value factor.D. the yield on corporate bonds, a size factor, and a market factor.E. None of the above.34. A value company is defined as one that:A. tends to have a lower average return than a growth company.B. tends to have higher average return than a growth company.C. has a high ratio of book equity to market equity.D. a and b.E. a and c.35. The Fama-French three factor model predicts the expected return on a portfolio increases:A. linearly with its factor loading of the size factor.B. linearly with its factor loading of the volume.C. exponentially with its factor loading of the size factor.D. exponentially with its factor loading of the volume factor.E. None of the above.36. The systematic response coefficient for productivity, βp, would produce an unexpected change in any security return of __ βP if the expected rate of productivity was 1.5% and the actual rate was 2.25%.A. 0.75%B. -0.75%C. 2.25%D. -2.25%E. 1.5%37. Assume that the single factor APT model applies and a portfolio exists such that 2/3 of the funds are invested in Security Q and the rest in the risk-free asset. Security Q has a beta of 1.5. The portfolio has a beta of:A. 0.00B. 0.50C. 0.75D. 1.00E. 1.5038. Suppose the JumpStart Corporation's common stock has a beta of 0.8. If the risk-free rate is 4% and the expected market return is 9%, the expected return for JumpStart's common stock is:A. 3.2%.B. 4.0%.C. 7.2%.D. 8.0%.E. 9.0%.39. Suppose the MiniCD Corporation's common stock has a return of 12%. Assume therisk-free rate is 4%, the expected market return is 9%, and no unsystematic influence affected Mini's return. The beta for MiniCD is:A. 0.89.B. 1.60.C. 2.40.D. 3.00.E. It is impossible to calculate beta without the inflation rate.Suppose that we have identified three important systematic risk factors given by exports, inflation, and industrial production. In the beginning of the year, growth in these three factors is estimated at -1%, 2.5%, and 3.5% respectively. However, actual growth in these factors turns out to be 1%, -2%, and 2%. The factor betas are given by βEX = 1.8, βI = 0.7, and βIP = 1.0.40. If the expected return on the stock is 6%, and no unexpected news concerning the stock surfaces, calculate the stock's total return.A. 2.95%B. 4.95%C. 6.55%D. 7.40%E. 8.85%41. Calculate the stock's total return if the company announces that an important patent filing has been granted sooner than expected and will earn the company 5% more in return.A. 7.95%B. 9.95%C. 11.55%D. 7.90%E. 9.35%42. Calculate the stock's total return if the company announces that they had an industrial accident and the operating facilities will close down for some time thus resulting in a loss by the company of 7% in return.A. -4.05%B. -2.05%C. 4.55%D. 0.40%E. 1.85%43. What would the stock's total return be if the actual growth in each of the factors was equal to growth expected? Assume no unexpected news on the patent.A. 4%B. 5%C. 6%D. 7%E. 8%Essay Questions44. An investor is considering the three stocks given below:Calculate the expected return and beta of a portfolio equally weighted between stocks B and C. Demonstrate that holding stock A actually reduces risk by comparing the risk of a portfolio equally weighted between stock B and T-Bills with a portfolio equally weighted between stocksB and A.45. Explain the conceptual differences in the theoretical development of the CAPM and APT.46. You have a 3 factor model to explain returns. Explain what a factor represents in the context of the APT? Each factor is multiplied by a beta. What do these represent and how do they relate to the actual return?47. Discuss the Fama-French three factor model; both what it means and the factors of the model.Chapter 12 An Alternative View of Risk and Return: The Arbitrage Pricing Theory Answer KeyMultiple Choice Questions1. In the equation R = + U, the three symbols stand for:A. average return, expected return, and unexpected return.B. required return, expected return, and unbiased return.C. actual total return, expected return, and unexpected return.D. required return, expected return, and unbiased risk.E. risk, expected return, and unsystematic risk.Difficulty level: EasyTopic: ARBITRAGE PRICING THEORYType: DEFINITIONS2. The acronym APT stands for:A. Arbitrage Pricing Techniques.B. Absolute Profit Theory.C. Arbitrage Pricing Theory.D. Asset Puting Theory.E. Assured Price Techniques.Difficulty level: EasyTopic: ARBITRAGE PRICING THEORYType: DEFINITIONS3. The acronym CAPM stands for:A. Capital Asset Pricing Model.B. Certain Arbitrage Pressure Model.C. Current Arbitrage Prices Model.D. Cumulative Asset Price Model.E. None of the above.Difficulty level: EasyTopic: CAPITAL ASSET PRICING MODELType: DEFINITIONS4. The unexpected return on a security, U, is made up of:A. market risk and systematic risk.B. systematic risk and unsystematic risk.C. idiosyncratic risk and unsystematic risk.D. expected return and market risk.E. expected return and idiosyncratic risk.Difficulty level: MediumTopic: UNEXPECTED RETURNType: DEFINITIONS5. Systematic risk is defined as:A. a risk that specifically affects an asset or small group of assets.B. any risk that affects a large number of assets.C. any risk that has a huge impact on the return of a security.D. the random component of return.E. None of the above.Difficulty level: EasyTopic: SYSTEMATIC RISKType: DEFINITIONS6. The term Corr(ε R, ε T) = 0 tells us that:A. all error terms of company R and T are 0.B. the unsystematic risk of companies R and T is unrelated or uncorrelated.C. the correlation between the returns of companies R and T is -1.D. the systematic risk of companies R and T is unrelated.E. None of the above.Difficulty level: MediumTopic: CORRELATIONType: DEFINITIONS7. A factor is a variable that:A. affects the returns of risky assets in a systematic fashion.B. affects the returns of risky assets in an unsystematic fashion.C. correlates with risky asset returns in a unsystematic fashion.D. does not correlate with the returns of risky assets in an systematic fashion.E. None of the above.Difficulty level: EasyTopic: FACTORSType: DEFINITIONS8. A security that has a beta of zero will have an expected return of:A. zero.B. the market risk premium.C. the risk free rate.D. less than the risk free rate but not negative.E. less than the risk free rate which can be negative.Difficulty level: MediumTopic: ZERO BETAType: DEFINITIONS9. Which of the following is true about the impact on market price of a security when a company makes an announcement and the market has discounted the news?A. The price will change a great deal; even though the impact is primarily in the future, the future value is discounted to the present.B. The price will change little, if at all, since the impact is primarily in the future.C. The price will change little, if at all, since the market considers this information unimportant.D. The price will change little, if at all, since the market considers this information untrue.E. The price will change little, if at all, since the market has already included this information in the security's price.Difficulty level: EasyTopic: ANNOUNCEMENT EFFECTSType: CONCEPTS10. Shareholders discount many corporate announcements because of their prior expectations. If an announcement causes the price to change it will mostly be driven by:A. the expected part of the announcement.B. market inefficiency.C. the unexpected part of the announcement.D. the systematic risk.E. None of the above.Difficulty level: MediumTopic: ANNOUNCEMENT EFFECTSType: CONCEPTS11. A company owning gold mines will probably have a _____ inflation beta because an ___ increase in inflation is usually associated with an increase in gold prices.A. negative; anticipatedB. positive; anticipatedC. negative; unanticipatedD. positive; unanticipatedE. None of the above.Difficulty level: MediumTopic: INFLATION AND BETAType: CONCEPTS12. If company A, a medical research company, makes a new product discovery and their stock rises 5%, this will have:A. no effect on Company B's, a newspaper, stock price because it is a systematic risk element.B. no effect on Company B's, a newspaper, stock price because it is an unsystematic risk element.C. a large effect on Company B's, a newspaper, stock price because it is a systematic risk element.D. a large effect on Company B's, a newspaper, stock price because it is an unsystematic risk element.E. None of the above.Difficulty level: EasyTopic: UNSYSTEMATIC RISKType: CONCEPTS13. What would not be true about a GNP beta?A. If a stock's β GNP = 1.5, the stock will experience a 1.5% increase for every 1% surprise increase in GNP.B. If a stock's β GNP = -1.5, the stock will experience a 1.5% decrease for every 1% surprise increase in GNP.C. It is a measure of risk.D. It measures the impact of systematic risk associated with GNP.E. None of the above.Difficulty level: MediumTopic: BETAType: CONCEPTS14. If the expected rate of inflation was 3% and the actual rate was 6.2%; the systematic response coefficient from inflation, βI, would result in a change in any security return of ___ βI.A. 9.2B. 3.2C. -3.2D. 3.0E. 6.2Difficulty level: EasyTopic: FACTORS AND INFLATIONType: CONCEPTS15. In a portfolio of risky assets, the response to a factor, Fi, can be determined by:A. summing the weighted βi s and multiplying by the factor F i.B. summing the F i s.C. adding the average weighted expected returns.D. summing the weighted random errors.E. All of the above.Difficulty level: MediumTopic: FACTORSType: CONCEPTS16. In the one factor (APT) model, the characteristic line to estimate βi passes through the origin, unlike the estimate used in the CAPM because:A. the relationship is between the actual return on a security and the market index.B. the relationship measures the change in the security return over time versus the change in the market return.C. the relationship measures the change in excess return on a security versus GNP.D. the relationship measures the change in excess return on a security versus the return on the factor about its mean of zero.E. Cannot be determined without actual data.Difficulty level: ChallengeTopic: APT AND CAPMType: CONCEPTS17. The betas along with the factors in the APT adjust the expected return for:A. calculation errors.B. unsystematic risks.C. spurious correlations of factors.D. differences between actual and expected levels of factors.E. All of the above.Difficulty level: ChallengeTopic: BETAS AND FACTORSType: CONCEPTS18. The single factor APT model that resembles the market model uses _________ as the single factor.A. arbitrage feesB. GNPC. the inflation rateD. the market returnE. the risk-free returnDifficulty level: EasyTopic: SINGLE FACTOR APTType: CONCEPTS19. For a diversified portfolio including a large number of stocks, the:A. weighted average expected return goes to zero.B. weighted average of the betas goes to zero.C. weighted average of the unsystematic risk goes to zero.D. return of the portfolio goes to zero.E. return on the portfolio equals the risk-free rate.Difficulty level: EasyTopic: UNSYSTEMATIC RISK AND DIVERSIFICATIONType: CONCEPTS20. Which of the following statements is true?A. A well-diversified portfolio has negligible systematic risk.B. A well-diversified portfolio has negligible unsystematic risk.C. An individual security has negligible systematic risk.D. An individual security has negligible unsystematic risk.E. Both A and D.Difficulty level: EasyTopic: UNSYSTEMATIC RISK AND DIVERSIFICATIONType: CONCEPTS21. Assuming that the single factor APT model applies, the beta for the market portfolio is:A. zero.B. one.C. the average of the risk free beta and the beta for the highest risk security.D. impossible to calculate without collecting sample data.E. None of the above.Difficulty level: EasyTopic: SINGLE FACTOR APTType: CONCEPTS22. In normal market conditions if a security has a negative beta:A. the security always has a positive return.B. the security has an expected return above the risk-free return.C. the security has an expected return less than the risk-free rate.D. the security has an expected return equal to the market portfolio.E. Both A and B.Difficulty level: MediumTopic: NEGATIVE BETAType: CONCEPTS23. A criticism of the CAPM is that it:A. ignores the return on the market portfolio.B. ignores the risk-free return.C. requires a single measure of systematic risk.D. utilizes too many factors.E. None of the above.Difficulty level: EasyTopic: CAPMType: CONCEPTS24. To estimate the cost of equity capital for a firm using the CAPM, it is necessary to have:A. company financial leverage, beta, and the market risk premium.B. company financial leverage, beta, and the risk-free rate.C. beta, company financial leverage, and the industry beta.D. beta, company financial leverage, and the market risk premium.E. beta, the risk-free rate, and the market risk premium.Difficulty level: EasyTopic: CAPMType: CONCEPTS25. An advantage of the APT over CAPM is:A. APT can handle multiple factors.B. if the factors can be properly identified, the APT may have more explanation/predictive power for returns.C. the APT forces unsystematic risk to be negative to offset systematic risk; thus making the total portfolio risk free, allowing for an arbitrage opportunity for the astute investor.D. Both A and B.E. All of the above.Difficulty level: EasyTopic: APT AND CAPMType: CONCEPTS26. Parametric or empirical models rely on:A. security betas explaining systematic factor relationships.B. finding regularities and relations in past market data.C. there being no true explanations of pricing relationships.D. always being able to find the exception to the rule.E. None of the aboveDifficulty level: ChallengeTopic: EMPIRICAL MODELINGType: CONCEPTS27. A growth stock portfolio and a value portfolio might be characterized:A. each by their P/E relative to the index P/E; high P/E for growth and lower for value.B. as earning a high rate of return for a growth security and a low rate of return for value security irrespective of risk.C. low unsystematic risk and high systematic risk respectively.D. moderate systematic risk and zero systematic risk respectively.E. None of the above.Difficulty level: MediumTopic: PORTFOLIOSType: CONCEPTS28. Style portfolios are characterized by:A. their stock attributes; P/Es less than the market P/E are value funds.B. their systematic factors, higher systematic factors are benchmark portfolios.C. their stock attributes; higher stock attribute factors are benchmark portfolios.D. their systematic factors, P/Es greater than the market are value portfolios.E. There is no difference between systematic factors and stock attributes.Difficulty level: MediumTopic: STYLE PORTFOLIOSType: CONCEPTS29. The most realistic APT model would likely include:A. multiple factors.B. only one factor.C. a factor to measure inflation.D. Both A and C.E. Both B and C.Difficulty level: MediumTopic: APTType: CONCEPTS30. Which of the following statements is/are true?A. Both APT and CAPM argue that expected excess return must be proportional to the beta(s).B. APT and CAPM are the only approaches to measure expected returns in risky assets.C. Both CAPM and APT are risk-based models.D. Both A and B.E. Both A and C.Difficulty level: MediumTopic: APT AND CAPMType: CONCEPTS31. Three factors likely to occur in the APT model are:A. unemployment, inflation, and current rates.B. inflation, GNP, and interest rates.C. current rates, inflation and change in housing prices.D. unemployment, college tuition, and GNP.E. This cannot be determined or even estimated.Difficulty level: MediumTopic: APT FACTORSType: CONCEPTS32. Both the APT and the CAPM imply a positive relationship between expected return and risk. The APT views risk:A. very similarly to the CAPM via the beta of the security.B. in terms of individual intersecurity correlation versus the beta of the CAPM.C. via the industry wide or marketwide factors creating correlation between securities.D. as the standardized deviation of the covariance.E. None of the above.Difficulty level: EasyTopic: ARBITRAGE PRICING THEORYType: CONCEPTS。
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Chapter 23 Options and Corporate Finance: Extensions and Applications Answer KeyMultiple Choice Questions1. The option to abandon is:A. a real option.ually of little value because of the cost associated with abandonment.C.irrelevant in capital budgeting analysis.D.nearly always less relevant the option to expand.E.All of the above.Difficulty level: MediumTopic: OPTION TO ABANDONType: DEFINITIONS2. An example of a special option is:A.an executive stock option.B.the embedded option in a start-up company.C.the option in simple business contracts.D.the option to shut down and reopen a project.E.All of the above.Difficulty level: MediumTopic: SPECIAL OPTIONType: DEFINITIONS3. Executives can not exercise their options for a fixed period of time. This is the:A.investing period.B.freeze-out period.C.valuation period.D.guaranteed growth period.E.strike period.Difficulty level: MediumTopic: FREEZE-OUT PERIODType: DEFINITIONS4. The NPV approach must be:A.augmented by added analysis if there are a few embedded options.B.augmented by added analysis if a decision has significant embedded options.C.jettisoned if there are any embedded options.puted carefully to identify the options.E.None of the above.Difficulty level: MediumTopic: EMBEDDED OPTIONSType: CONCEPTS5. Options are granted to top corporate executives because:A.executives will make better business decisions in line with benefiting the shareholders.B.executive pay is at risk and linked to firm performance.C.options are tax-efficient and taxed only when they are exercised.D.All of the above.E.None of the above.Difficulty level: MediumTopic: EXECUTIVE OPTIONSType: CONCEPTS6. The call option on a dividend paying stock compared to a non-dividend paying stock is:A.more valuable because of the extra dividend payment.B.equal in value because cash dividends are paid on stock only.C.less valuable because cash dividends are paid on stock only.D.less valuable if the dividend paying stock is in-the-money while the non-dividend paying stock if out-of-the-money.E.None of the above.Difficulty level: ChallengeTopic: CALL OPTION ON DIVIDEND PAYING STOCKType: CONCEPTS7. The value of the options awarded executives is much less than face value to the executives because:A.the value to the executive depends on the stock price being greater than the exercise price.B.the options must be held beyond the freeze-out period.C. a highly undiversified portfolio can have a large drop in value with high variance stocks.D.All of the above.E.None of the above.Difficulty level: MediumTopic: EXECUTIVE OPTIONSType: CONCEPTS8. By rewarding executives with large option positions, corporations:A.cause the executives to hold highly undiversified portfolios.B.put the firm in a risky position to pay off the options.C.cause the value of the stock to fall because the options are theft.D.are really valueless because most options are never exercised.E.None of the above.Difficulty level: ChallengeTopic: EXECUTIVE OPTIONSType: CONCEPTS9. Investing in a negative NPV project today is a feasible choice if:A.there are future option alternatives.B.investing is sequentially limited.C.the discount rate is low.D.Both A and B.E.Both A and C.Difficulty level: MediumTopic: NEGATIVE NPV PROJECTS AND REAL OPTIONSType: CONCEPTS10. The opportunity to defer investing to a later date may have value because:A.the cost of capital may decline in the near future.B.certainty may be reduced in the future.C.investment costs fluctuate in time.D.All of the above.E.None of the above.Difficulty level: EasyTopic: OPTION TO DEFERType: CONCEPTS11. Rejecting an investment today forever may not be a good choice because:A.the size of the firm will decline.B.there are always errors in the estimation of NPVs.C.the option value is negative.D.the company's foregoing the future rights or option to the investment.E.None of the above.Difficulty level: MediumTopic: REAL OPTIONSType: CONCEPTS12. A financial manager who does not follow the general constraints of the NPV rule may:A.accept a negative NPV project for fear of losing an investment opportunity.B.accept a marginally acceptable NPV project limiting the corporation's ability to choose a competing project.C.not consider all options available in a capital budgeting decision.D.not take a positive NPV project even if the NPV is adequate reward to forego the option.E.All of the above.Difficulty level: MediumTopic: REAL OPTIONSType: CONCEPTS13. The volatility of interest rates can affect the value of the project by:A.increasing the value as volatility increases.B.increasing the value as volatility decreases.C.decreasing the value as volatility increases.D.interest rate volatility does not affect value.E.None of the above.Difficulty level: MediumTopic: INTEREST RATE VOLATILITYType: CONCEPTS14. Which of the following statements is true?A.The Black Scholes model is the simplest to use and best used for complex situations.B.The binomial model does not handle options with dividend payments prior to expiration date.C.The Black Scholes model adequately handles the valuation of an American put.D.The binomal model is better for complex situations and is the simplest tool to use.E.The Black Scholes model is simpler to use, but for complex situations, the binomial model is the necessary tool.Difficulty level: MediumTopic: OPTION PRICING TOOLSType: CONCEPTS15. If a project has optionality:A.the shorter the available life of the project the less valuable the project is.B.the longer the available life of the project the less valuable the project is.C.the shorter the available life of the project the more valuable the project is.D.available project life does not change optionality.E.None of the above.Difficulty level: EasyTopic: OPTIONALITYType: CONCEPTS16. The equal rate of price change from each subsequent up state and fixed rate price change from each subsequent down state are reasonable if:A.there is a constant variability.B.any new information impacting prices is similar period to period.C.interest or discount rates are constant.D.Both A and C.E.Both A and B.Difficulty level: MediumTopic: VARIABILITY AND INFORMATIONType: CONCEPTS17. The most correct method to determine the current value of future payoffs would be to:A.take the discounted expected value at the risk-free rate.B.take the expected value using the probabilities.C.take the discounted expected value using the risk-neutral probabilities and the risk free rate.D.sum the payoffs discounted at the risk free rate.E.None of the above.Difficulty level: MediumTopic: VALUATION OF FUTURE PAYOFFSType: CONCEPTS18. The risk-neutral probabilities for an asset, with a current value equal to the present value of future payoffs are:A.given by the probability of each state occurring.B.given by the value of the underlying asset under good news and the risk free rate.C.given by the value of the underlying asset under good news and bad news.D.given by the value of the underlying asset under good news, bad news, and the risk free rate.E.None of the above.Difficulty level: ChallengeTopic: VALUATION OF FUTURE PAYOFFSType: CONCEPTS19. A branching tree for the binomial model:A.should capture all possible futures paths for the asset.B.has a move down followed by a move up on a subsequent branch to end at the same value as the reverse path.C.has a move down followed by a move up on a subsequent branch to end at a lower value than a move up then a move down.D.Both A and C.E.Both A and B.Difficulty level: ChallengeTopic: BINOMIAL MODELType: CONCEPTS20. Increasing the number of intervals in the binomial model causes the price shift parameters to change. New estimates are related to:A.the standard deviation of the underlying asset.B.the up state multiplier equals the standard deviation divided by root n.C.the number of intervals in a year.D.All of the above.E.None of the above.Difficulty level: MediumTopic: BINOMIAL MODELType: CONCEPTS21. Which of the following is not part of the Black Scholes option pricing model?A.Standard deviationB.Time to maturityC.Exercise priceD.Par value of the company's stockE.Interest rateDifficulty level: MediumTopic: BLACK SCHOLES OPTION PRICING MODELType: CONCEPTS22. What are the u, the up state multiplier, and d, the down state multiplier, if there are monthly intervals and the standard deviation is .38?A. 1.1159; .8961B..0317; 31.5789C..0317; .9683D..2193; .7807E.None of the aboveDifficulty level: MediumTopic: BLACK SCHOLES OPTION PRICING MODELType: CONCEPTS23. On the notion of embedded options, which of the following is/are true?A.If virtually all projects have embedded options, ignoring options is likely to lead to serious undervaluation.B.There are at least two possible outcomes for virtually every business idea.C.Virtually every business has both the option to abandon and the option to expand.D.All of the above.E.Both B and C.Difficulty level: MediumTopic: EMBEDDED OPTIONSType: CONCEPTS24. A firm in the extraction industry whose major assets are cash, equipment and a closed facility may appear to have extraordinary value. This value can be primarily attributed to:A.the potential sale of the company.B.the low exercise price held by the shareholders.C.the option to open the facility when prices rise dramatically.D.All of the above.E.None of the above.Difficulty level: MediumTopic: REAL OPTIONSType: CONCEPTSNote: Correct answers to later questions are dependent on correct answers to earlier questions.Ima Greedy, the CFO of Financial Saving Techniques has been granted options on 200,000 shares. The stock is currently trading at $22 a share and the options are at the money. The variance of the stock has been about .07 on an annual basis over the last several years. The options mature in 3 years and the risk free rate is 4%.25. What is d?1A..1842B..4102C..4583D..4909E..5412= [ln(22/22) + [.04 + (.50x.07)(3)]/ (.07)3 d1= .225/.4583 = .4909d1Difficulty level: MediumTopic: BLACK SCHOLES OPTION PRICING MODELType: PROBLEMS26. What is d2?A..0121B..0252C..0326D..0452E..0525d 2 = d1- √σ2t = .4909 - √(.07)(3) = .4909 - .4583 = .0326Difficulty level: MediumTopic: BLACK SCHOLES OPTION PRICING MODEL Type: PROBLEMS27. What is e-rt?A..6087B..7087C..7952D..8476E..8869e-.04(3) = .8869Difficulty level: MediumTopic: BLACK SCHOLES OPTION PRICING MODEL Type: PROBLEMS28. Calculate N(d).1A..5054B..6508C..6882D..7047E..8096) = .50 + .1882 = .6882 N(d1Difficulty level: MediumTopic: BLACK SCHOLES OPTION PRICING MODEL Type: PROBLEMS29. Calculate N(d).2A..5130B..5578C..6085D..7085E..7142) = .50 + .0130 = .5130N(d2Difficulty level: MediumTopic: BLACK SCHOLES OPTION PRICING MODELType: PROBLEMS30. What is the value of a call option?A.$4.14B.$4.86C.$5.13D.$5.62E.$6.16。
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Chapter 20Issuing Securities to the Public Multiple Choice Questions1. An equity issue sold directly to the public is called:A. a rights offer.B. a general cash offer.C. a restricted placement.D. a fully funded sales.E. a standard call issue.2. An equity issue sold to the firm's existing stockholders is called:A. a rights offer.B. a general cash offer.C. a private placement.D. an underpriced issue.E. an investment banker's issue.3. Management's first step in any issue of securities to the public is:A. to file a registration form with the SEC.B. to distribute copies of the preliminary prospectus.C. to distribute copies of the final prospectus.D. to obtain approval from the board of directors.E. to prepare the tombstone advertisement.4. A rights offering is:A. the issuing of options on shares to the general public to acquire stock.B. the issuing of an option directly to the existing shareholders to acquire stock.C. the issuing of proxies which are used by shareholders to exercise their voting rights.D. strictly a public market claim on the company which can be traded on an exchange.E. the awarding of special perquisites to management.5. Companies use tombstone advertisements in the financial press to:A. announce the death of the company.B. announce the failure of a financial strategy.C. announce the availability of a new issue of a corporate security.D. notify the public of foreclosure.E. None of the above.6. The first public equity issue made by a company is a(n):A. initial private offering.B. initial public offering.C. secondary offering.D. seasoned new issue.E. None of the above.7. The first public equity issue that is made by a company is referred to as:A. a rights issue.B. a general cash offer.C. an initial public offering.D. an unseasoned issue.E. Both C and D.8. A new public equity issue from a company with equity previously outstanding is called a(n):A. initial public offering.B. seasoned equity issue.C. unseasoned equity issue.D. private placement.E. syndicate.9. The green shoe option is used to:A. cover oversubscription.B. cover excess demand.C. provide additional reward to the investment bankers for a risky issue.D. provide additional reward to the issuing firm for a risky issue.E. Both A and B.10. Dilution refers to:A. the increase in stock value due to wider ownership of stock.B. the loss in existing shareholder's equity.C. the loss in new shareholder's equity.D. the loss in all shareholder's equity, both existing shareholders and new shareholders.E. None of the above.11. During the SEC waiting period the potential issuing company can issue a preliminary prospectus which contains:A. exactly the same information as the final prospectus except an indication of SEC approval.B. all the information as the final prospectus including red writing stating it is a red herring.C. very limited financial information and red writing stating it is preliminary.D. only a description of what the funds are to be used for.E. information very similar to the final prospectus without a price nor with SEC approval.12. A company must file a registration statement with the SEC providing various financial and company history information. The registration statement does not need to be filed if:A. the issue is less than $50 million.B. the loan matures within 9 months.C. the issue is less than $5.0 million.D. Both A and B.E. Both B and C.13. Regulation A security issues are exempt from full SEC registration filing and use only a brief offering statement if:A. the issue is for less than $5,000,000.B. insiders sell no more than $1,500,000 of stock.C. insiders sell no more than 100,000,000 shares.D. Both A and C.E. Both A and B.14. Potential investors learn of the information concerning the firm and its new issue from the:A. pre-underwriting negotiating meeting.B. red herring.C. letter of commitment.D. emails from their former finance professor.E. rights offering.15. A registration statement is effective on the 20th day after filing unless:A. the SEC is backlogged with statements.B. a tombstone ad is issued indicating its demise.C. a letter of comment suggesting changes is issued by the SEC.D. a syndicate can be formed sooner.E. None of the above.16. Investment banks perform which of the following services for corporate issuers:A. formulating the method used to issue the securities.B. pricing the new securities.C. selling the new securities.D. All of the above.E. None of the above.17. A group of investment bankers who pool their efforts to underwrite a security are known as a(n):A. amalgamate.B. conglomerate.C. green shoe group.D. klatch.E. syndicate.18. A firm commitment arrangement with an investment banker occurs when:A. the syndicate is in place to handle the issue.B. the spread between the buying and selling price is less than one percent.C. the issue is solidly accepted in the market evidenced by a large price increase.D. when the investment banker buys the securities for less than the offering price and accepts the risk of not being able to sell them.E. when the investment banker sells as much of the security as the market can bear without a price decrease.19. Which of the following is not normally an example of the services offered by investment bankers?A. Aiding in the sale of securitiesB. Facilitating mergersC. Acting as brokers to both individuals and institutional clientsD. Offering checking accounts to corporationsE. Both C and D20. In a best efforts offering the investment banker makes their money primarily by:A. earning the spread between the buying and offering price.B. earning a commission on each share sold.C. earning the discount between the buying and offering price.D. charging a flat fee for all services.E. None of the above.21. Under the _____ method, the underwriter buys the securities for less than the offering price and accepts the risk of not selling the issue, while under the _____ method, the underwriter does not purchase the shares but merely acts as an agent.A. best efforts; firm commitmentB. firm commitment; best effortsC. general cash offer; best effortsD. competitive offer; negotiated offerE. seasoned; unseasoned22. Professor Jay Ritter found best-efforts offerings are:A. reserved for the premier customers because they deserve 'best-efforts'.B. used most often with seasoned equity issues.C. used with small IPO issues.D. attractive because of price stability.E. None of the above.23. Empirical evidence suggests that new equity issues are generally:A. priced efficiently by the market.B. overpriced by investor excitement concerning a new issue.C. overpriced resulting from SEC regulation.D. underpriced, in part, to counteract the winner's curse.E. underpriced resulting from SEC regulation.24. The diagonal listing of investment bankers on tombstone advertisements reflects their ____ relative to the other investment bankers listed below.A. prestigeB. ability to manage selling syndicatesC. role as a firm commitment buyerD. role as a best efforts sellerE. None of the above25. The reputational capital of investment bankers is based on their roles as intermediaries with more in-depth knowledge of the issuer. Investment bankers maintain their reputation by:A. certifying the issue.B. monitoring the issuing firm's management and performance.C. pricing issues fairly.D. All of the above.E. None of the above.26. The key difference between a negotiated offer and a competitive offer is that:A. the underwriters can not set the spread in a negotiated bid but can in a competitive offer.B. the issuing firm can offer its securities to the highest bidder in a competitive bid but in a negotiated bid only one investment banker is used.C. the issuing firm works the underwriter for the best spread in a negotiated bid which will be less than that available in a competitive offer.D. the underwriter will not do a full investigation in a negotiated bid because the company is at their mercy, while in a competitive bid the underwriter must be extra diligent.E. None of the above.27. The offering price is set to make an issue attractive to the market and provide a good price to the issuer. Which of the following is/are true?A. Empirical studies by Ritter have shown that the average firm commitments have had a17.8% underpricing on the first day of trading.B. Empirical studies have shown that best efforts sales have underpricing on the first day of trading.C. Some issues which rose dramatically on the first day of trading were viewed as successfully priced by the underwriter because it helped build a long-term investment base.D. All of the above.E. None of the above.28. Empirical evidence suggests that upon announcement of a new equity issue, current stock prices generally:A. drop, perhaps because the new issue reflects management's view that common stock is currently overvalued.B. remain about the same since an efficient market anticipates a new equity issue.C. increase, perhaps because the issues are associated with positive NPV projects.D. increase, because the market supply is always less than demand.E. increase, because underwriters exercise their green shoe option.29. Underpricing can possibly be explained by:A. oversubscription of an issue.B. strong demand by investors.C. undersubscription of an issue.D. Both B and C.E. Both A and B.30. Debt capacity is often given as a reason for the value of the stock falling when equity is issued. The reason for this is:A. the high issue costs of a debt offering must be paid by the shareholders.B. the priority position of the equity is lowered.C. management has information that the probability of default has risen, limiting the debt capacity and causing the firm to raise equity capital.D. All of the above.E. None of the above31. A study by Lee, Lockhead, Ritter, and Zhao that examined the underwriting discount and other direct costs of going public with a debt or equity offering, found:A. the direct expenses are higher for equity than debt offerings.B. substantial economies of scale are prevalent.C. underpricing, on average, is similar in magnitude to total direct expenses.D. All of the above.E. None of the above.32. The six components that make up the total costs of new issues are:A. the spread; other direct expenses such as filing fees; indirect expenses such as management time; economies of scale; abnormal returns and the Green Shoe option.B. the discount; other direct expenses such as filing fees; indirect expenses such as management time; due diligence costs; abnormal returns and the Green Shoe option.C. the spread; other direct expenses such as filing fees; indirect expenses such as management time; abnormal returns; underpricing and the Green Shoe option.D. the spread; other direct expenses such as filing fees; economies of scale; due diligence costs; abnormal returns and underpricing.E. None of the above.33. In comparison to debt issuance expenses, the total direct costs of equity issues are:A. considerably less.B. about the same.C. meaningless.D. considerably greater.E. None of the above.34. To determine the value of a rights offering, the stockholder needs to know the following two pieces of information in addition to the current stock price:A. the subscription price and the number of rights needed to acquire a new share.B. the amount of new equity to be raised and the number of rights needed to acquire a new share.C. the amount of new equity to be raised and standby fee.D. the detachment date and the subscription price.E. None of the above.35. Assuming everything else is constant, when a stock goes ex-rights its price should:A. decrease since the stockholder is losing an option.B. increase since the corporation no longer has the right to force the stockholder to convert.C. remain the same since an efficient market would anticipate this change.D. move up or down depending on whether a small investor wanted to exercise his/his rights.E. None of the above.36. If a shareholder or investor wants to acquire new stock under a rights plant they must:A. acquire new stock in the market to get a controlling fraction of shares to be eligible for rights.B. simply pay a registration fee and turn in the subscription price.C. acquire the correct rights per share desired, then turn the rights and the total subscription price into the subscription agent.D. acquire the correct rights and wait for the company to send you the stock.E. call their broker and sell some CBOE options to make any money.37. Which of the following statements is true?A. The subscription price is generally above the old stock price.B. The subscription price is generally above the ex-rights price.C. The subscription price is generally below the old stock price.D. Both A and B.E. Both B and C.38. A shareholder who has rights is:A. always better off to exercise the rights.B. always better off to sell the rights into the market.C. able to exercise their rights or sell them.D. never in the same ownership position again with rights.E. None of the above.39. A standby underwriting arrangement provides the:A. company with methods to cancel the offering.B. company with an alternate investment banker if there is conflict between the issuer and the agent.C. investment banker with an oversubscription privilege to ensure profits are earned.D. company with an alternative avenue of sale to ensure success of the rights offering.E. investment bankers with an added syndication for the rights offering.40. Professor Clifford W. Smith, in evaluating issuance costs from underwritten issues, rights issues with standby underwriting, and a pure rights issues, found that 90% of the issues are underwritten, which was the most expensive method. This is done because:A. investment bankers know more than CFOs and they may buy the issue at an agreed upon price and disburse the funds sooner.B. investment bankers can increase the price received by increasing confidence in the issue, and they will buy the issue at an agreed upon price and disburse the cash sooner.C. investment bankers provide other services including price counseling, increasing public confidence, and providing funds to the issuer sooner.D. investment bankers know how to price the issue, and would not need to set as low as a price as the subscription price and provide price counseling.E. None of the above.41. Corporations use the shelf registration method of security sales because:A. preregistered securities can be quickly brought to market.B. the main registration process is eliminated for up to two years.C. their stock is below investment grade.D. Both A and B.E. Both B and C.42. In terms of costs of issuing equity, Professor Clifford W. Smith finds that the ranking of methods, from cheapest to most expensive, is:A. rights issue with standby underwriting, equity issue with underwriting, pure rights issue.B. pure rights issue, rights issue with standby underwriting, equity issue with underwriting.C. pure rights issue, preferred stock and debt issue with underwriting for an IPO, rights issue with standby underwriting.D. equity issue with underwriting, rights issue with standby underwriting, pure rights issue.E. equity issue with underwriting, pure rights issue, rights issue with standby underwriting.43. Arguments to explain why most equity issues are underwritten versus sold through a rights offering are:A. underwriters buy at an agreed upon price and bear some risk of selling the issue.B. cash proceeds are available sooner in underwriting and the issue is available to a wider market.C. investment bankers can provide market advice and certify the issue for potential investors.D. All of the above.E. None of the above.44. Corporations are allowed to use the shelf registration method if they:A. are rated investment grade and have aggregate market stock value of more than $150 million.B. have not violated the 1934 Securities Act in the past 12 months.C. have not defaulted on its debt in the past 3 years.D. All of the above.E. None of the above.45. Arguments against the use of the shelf-registration are:A. only technology and manufacturing-based firms can use it.B. less current information available to investors might raise the cost of debt.C. possible market overhang from future issues depressing price.D. Both A and C.E. Both B and C.46. The market for venture capital refers to the:A. private financial marketplace for servicing small, young firms.B. bond markets.C. market for selling rights to individuals who already own shares.D. market for selling equity securities for firms with equity already outstanding.E. None of the above.47. Rule 144A provides the framework for the issuance of private securities to qualified institutional investors. To buy private securities, institutional investors:A. must be willing to hold a less liquid security and manage a fund.B. must be willing to make a market in the security and be a primary market dealer.C. must be a limited partner in the issue and willing to reduce the illiquidity of the security.D. must be willing to hold a less liquid security and have $100 million under management.E. None of the above.48. Venture capitalists provide financing for new firms from the seed and start-up stage all the way to mezzanine and bridge financing. In exchange for financing, entrepreneurs give:A. a high interest rate debt instrument and control.B. an equity position and usually board of director positions.C. up the right to have an initial public offering.D. control to a court appointed trustee.E. the venture capitalists jobs as CEOs and CFOs.49. An IPO of a firm formerly financed by venture capital is carried out for what primary purposes?A. Insiders can sell their shares or cash outB. Generate cash to pay down bank indebtednessC. To establish a market value for the equity and provide funds for operationsD. All of the above.E. None of the above.50. Which of the following is not one of the four main functions that underwriters provide?A. Risk bearingB. MarketingC. Auditing the financial statementsD. CertificationE. Monitoring51. Types of dilution include:A. dilution of percentage ownershipB. dilution of market shareC. dilution of book value and earnings per shareD. A and CE. All of the above52. The Wordsmith Corporation has 10,000 shares outstanding at $30 each. They expect to raise $150,000 by a rights offering with a subscription price of $25. How many rights must you turn in to get a new share?A. 0.60B. 1.20C. 1.67D. 2.00E. Insufficient data to determine53. Assuming everything else is constant, if a stock's old price is $25 and the ex-rights or new stock price is $19, then the value of the right is:A. $-6.B. $6.C. impossible to determine without the subscription price.D. impossible to determine without the number of rights needed to buy one share.54. The LaPorte Corporation has a new rights offering that allows you to buy one share of stock with 3 rights and $20 per share. The stock is now selling ex-rights for $26. The price rights-on is:A. $22.00B. $24.00C. $26.00D. $28.00E. impossible to determine without the cum-rights price.55. Regional Power wants to raise $10 million in new equity. The subscription price is $20. There are currently 3 million shares outstanding, each with 1 right. How many rights are needed to purchase 1 share?A. 1B. 3C. 5D. 6E. 856. The Overland Corporation intends to issue 50,000 new shares to raise funds for expansion of current plant facilities. The current share price is $40 and there are 500,000 shares outstanding. The number of rights needed to buy a share of stock should be:A. 1B. 10C. 40D. 400E. indeterminate without the subscription price.57. The Schroeder Corporation has 20,000 shares outstanding at $20 each. They expect to raise $200,000 by a rights offering with a subscription price of $25. How many rights must you turn in to get a new share?A. 1.25B. 1.50C. 2.00D. 2.50E. Insufficient data to determine58. Assuming everything else is constant, if a stock's old price is $40 and the ex-rights or new stock price is $32, then the value of the right is:A. $-8.B. $8.C. impossible to determine without the subscription price.D. impossible to determine without the number of rights needed to buy one share.59. The Holly Corporation has a new rights offering that allows you to buy one share of stock with 4 rights and $25 per share. The stock is now selling ex-rights for $30. The price rights-on is:A. $21.00B. $25.00C. $30.00D. $31.25E. impossible to determine without the cum-rights price.60. Bradley Power wants to raise $40 million in new equity. The subscription price is $25. There are currently 5 million shares outstanding, each with 1 right. How many rights are needed to purchase 1 share?A. 1.000B. 3.000C. 3.125D. 4.525E. 6.52561. The Shields Corporation intends to issue 100,000 new shares to raise funds for expansion of current plant facilities. The current share price is $20 and there are 500,000 shares outstanding. The number of rights needed to buy a share of stock should be:A. 1B. 5C. 20D. 50E. indeterminate without the subscription price.62. For a particular stock the old stock price is $20, the ex-rights price is $15, and the number of rights needed to buy a new share is 2. Assuming everything else constant, the subscription price is ______ .A. $5B. $13C. $17D. $18E. $20Essay QuestionsThe Holyoke Corporation has 120,000 shares outstanding with a current market price of $8.10 per share. The company needs to raise an additional $36,000 to finance new expenditures, and has decided on a rights issue. The issue will allow current stockholders to purchase one additional share for 20 rights at a subscription price of $6 per share.63. Calculate the ex-rights price that would make a new stockholder indifferent between buying shares at the old stock price and exercising the rights or buying the shares ex-rights.64. If the ex-rights price were set at $7.90, would you as a potential new stockholder choose to buy shares ex-rights or buy shares at the old price and exercise your rights?65. Suppose that the company was also considering structuring the rights issue to allow for an additional share to be purchased for 10 rights at a subscription price of $3. Prove that a stockholder with 100 shares would be indifferent between purchasing a new share for 10 rights at $3 or purchasing a new share for 20 rights at $6.66. Explain the advantages of a shelf-registration to an issuer. How can timeliness of disclosure and a potential market overhang work against a shelf-registration?67. The evidence on IPO sales is varied from issue to issue, but there are three common themes; underpricing, underperformance, and the reasons for going public. Explain these three themes.68. The Direct Interactive Publishing Company is planning to raise $200 million dollars in new capital. There are currently 50 million shares outstanding with an estimated market price of $60 each. The corporate officers are debating whether to use a rights offering (with or without a standby underwriting) or have the issue fully underwritten. The company is currently listed on a regional exchange and plans to list on a national exchange after the security issue. List and explain three advantages/disadvantages of each method.69. Discuss what a Dutch auction is and how it works.70. Lamar Inc. is attempting to raise $5,000,000 in new equity with a rights offering. The subscription price will be $40 per share. The stock currently sells for $50 per share and there are 250,000 shares outstanding. How many rights are needed to buy a new share?71. Lamar Inc. is attempting to raise $5,000,000 in new equity with a rights offering. The subscription price for the 125,000 new shares will be $40 per share. The stock currently sells for $50 per share and there are 250,000 shares outstanding. What will the price per share be if all rights are exercised?Chapter 20 Issuing Securities to the Public Answer KeyMultiple Choice Questions1. An equity issue sold directly to the public is called:A. a rights offer.B. a general cash offer.C. a restricted placement.D. a fully funded sales.E. a standard call issue.Difficulty level: EasyTopic: EQUITY ISSUEType: DEFINITIONS2. An equity issue sold to the firm's existing stockholders is called:A. a rights offer.B. a general cash offer.C. a private placement.D. an underpriced issue.E. an investment banker's issue.Difficulty level: EasyTopic: RIGHTS OFFERType: DEFINITIONS3. Management's first step in any issue of securities to the public is:A. to file a registration form with the SEC.B. to distribute copies of the preliminary prospectus.C. to distribute copies of the final prospectus.D. to obtain approval from the board of directors.E. to prepare the tombstone advertisement.Difficulty level: EasyTopic: SECURITY ISSUANCEType: DEFINITIONS4. A rights offering is:A. the issuing of options on shares to the general public to acquire stock.B. the issuing of an option directly to the existing shareholders to acquire stock.C. the issuing of proxies which are used by shareholders to exercise their voting rights.D. strictly a public market claim on the company which can be traded on an exchange.E. the awarding of special perquisites to management.Difficulty level: MediumTopic: RIGHTS OFFERINGType: DEFINITIONS5. Companies use tombstone advertisements in the financial press to:A. announce the death of the company.B. announce the failure of a financial strategy.C. announce the availability of a new issue of a corporate security.D. notify the public of foreclosure.E. None of the above.Difficulty level: EasyTopic: NEW ISSUANCEType: DEFINITIONS6. The first public equity issue made by a company is a(n):A. initial private offering.B. initial public offering.C. secondary offering.D. seasoned new issue.E. None of the above.Difficulty level: EasyTopic: INITIAL PUBLIC OFFERINGType: DEFINITIONS7. The first public equity issue that is made by a company is referred to as:A. a rights issue.B. a general cash offer.C. an initial public offering.D. an unseasoned issue.E. Both C and D.Difficulty level: MediumTopic: INITIAL PUBLIC OFFERINGType: DEFINITIONS8. A new public equity issue from a company with equity previously outstanding is called a(n):A. initial public offering.B. seasoned equity issue.C. unseasoned equity issue.D. private placement.E. syndicate.Difficulty level: EasyTopic: SEASONED EQUITY OFFERINGType: DEFINITIONS9. The green shoe option is used to:A. cover oversubscription.B. cover excess demand.C. provide additional reward to the investment bankers for a risky issue.D. provide additional reward to the issuing firm for a risky issue.E. Both A and B.Difficulty level: MediumTopic: GREEN SHOE PROVISIONType: DEFINITIONS。
罗斯公司理财题库全集
罗斯公司理财题库全集公司内部编号：（GOOD-TMMT-MMUT-UUPTY-UUYY-DTTI-Chapter 24Warrants and Convertibles Multiple Choice Questions1.A warrant gives the owner:？A.the obligation to sell securities directly to the firm at a fixed price for a specified time.B.the right to purchase securities directly from the firm at a fixed price for a specified time.C.the obligation to purchase securities directly from the firm at a fixed price for a specified time.D.the right to sell securities directly to the firm at a fixed price for a specified time.E.None of the above.2.Warrants are most often issued in combination with:？A.new publicly placed common stock.B.new privately placed common stock.C.new publicly placed debt.D.new privately placed debt.E.preferred stock.3.An "equity kicker" most often refers to a:？A.bond with conversion privileges.B.preferred stock offering with conversion privileges.C.warrant.D.lettered common stock.E.None of the above.4.Warrants are similar to traded options except:？A.only warrants have exercise prices.B.only warrants depend on changes in the underlying stock to determine value.C.warrants affect the number of shares outstanding.D.Both A and C.E.Both A and B.5.BrightView Windows issued warrants with an exercise price of $17. BrightView's common stock currently sells for $20 per share. The warrants are:？A.in the money.B.out of the money.C.valuable.D.not very valuable.E.Both A and C.6.Warrants are similar to options, in that the value of the warrant is limited by:？A.expiring worthless if the stock price is below the total warrant exercise price.B.the trading capabilities of the exchange used.C.the price of the underlying stock divided by the number of warrants needed to purchase a share.D.Both A and C.E.Both B and C.7.Which of the following would not describe the difference between warrants and call options？A.Warrants are issued by firms whereas call options are issued by individuals.B.Call options have an exercise price whereas warrants do not.C.Exercising of warrants creates dilution whereas exercising call options does not.D.When call options are exercised existing shares trade hands whereas if warrants are exercised new stock must be issued.E.None of the above.8.Two major differences between a warrant and a call option are:？A.warrants are contracts outside of the firm while options are within the firm.B.warrants have long maturities while options are usually short maturities.C.warrant exercise dilutes the value of equity while option exercise does not.D.Both A and C.E.Both B and C.9.Concerning warrants and call options, which of the following statements generally is correct？A.The issue procedures for both are quite similar.B.When a call option is exercised, the firm must issue new stock.C.When a warrant is exercised, existing stock changes hands.D.Exercise of a call option does not affect share value, but warrant exercise does.E.None of the above is correct.10.Which of the following would harm the position of a warrant holder？A.a 3 for 1 stock splitB.a large stock dividend of 20%C.a large cash dividendD.listing of the warrants on the NYSEE.None of the above would harm the warrant holders.11.The gain from exercising a warrant is similar to the gain from exercising a call option except:？A.the gain on a warrant is greater by the fraction of warrant shares divided by total shares.B.the gain on a warrant is limited by the firm's value after being reduced by the debt of the firm.C.the gain on a warrant is decreased by the fraction of original shares divided by total post exercise shares.D.Both A and B.E.Both B and C.12.The exercise of warrants creates new shares which:？A.increases the total number of shares but does not affect share value.B.increases the total number of shares which can reduce an individual share value.C.does not change the number of shares outstanding, similar to options.D.increases share value because cash is paid into the firm at the time of warrant exercise.E.None of the above.13.If a corporate security can be exchanged for a fixed number of shares of stock, the security is said to be:？A.callable.B.convertible.C.protected.D.putable.E.None of the above.14.A convertible preferred stock is similar to a convertible bond except:？A.the conversion ratio is fixed (given).B.the conversion price is fixed (given).C.the time to maturity is infinite.D.All of the above.E.None of the above.15.The holder of a $1,000 face value bond has the right to exchange the bond anytime before maturity for shares of stock priced at $50 per share. The $50 is called the:？A.conversion price.B.stated price.C.exercise price.D.striking price.E.None of the above.16.Concerning convertible bonds, which of the following statements is not correct？A.The value of a convertible bond will generally be greater than its straight bond value.B.The value of a convertible bond will generally be greater than its conversion value.C.The difference between the conversion value and the straight bond value is the conversion or option premium.D.The coupon rate on a nonconvertible bond will generally exceed the coupon rate on an otherwise identical convertible bond.E.All of the above are correct.17.Concerning convertible bonds, which of the following statements is not correct？A.A convertible bond issue would generally have fewer restrictive covenants than an otherwise identical nonconvertible bond.B.Convertible bonds can be issued at a lower coupon compared with otherwise non-convertible bonds.C.If the value of a convertible bond exceeds the maximum of its straight bond value or its conversion value, the difference would be referred to as the option value.D.Since convertible bonds will be exchanged for common stock, convertible bonds are generally not callable.E.More than one of the above is incorrect.18.Concerning convertible bonds, which of the following statements is not correct？A.With regard to security, most convertible bonds are secured by common stock ., they are collateral trust bonds).B.For most convertible bonds, the issuing firm can, under certain circumstances, effectively force bondholders to convert to common stock.C.When a convertible bond is called, the owner has the option of receiving cash or stock for the bond.D.All of the above are incorrect.E.All of the above are correct.19.A convertible bond has an option value which is equal to:？A.the market value of the convertible bond minus the straight bond value.B.The market value of the convertible bond minus the conversion value.C.the market value of the convertible bond minus the conversion premium.D.the market value of the convertible bond minus the maximum of the straight bond value or conversion value.E.None of the above.20.A firm has experienced a significant increase in share value. In retrospect, which of the following securities would have been best to have been issued prior to the change in share value？mon stockB.Bond/warrant packageC.Convertible preferred stockD.Straight bondsE.Convertible bonds21.A firm has experienced a significant decrease in share value. In retrospect, which of the following securities would have been best to have been issued prior to the change in share value？A.Convertible bondsB.Convertible preferred stockC.Straight debtD.Indifferent between A and B.E.Indifferent between A, B, and C.22.Issuing convertible bonds or bonds with warrants is useful for a company of unknown risk because:？A.the effects of risk are opposite on the two value components and tend to cancel each other out.B.if the firm is high risk, the option premium will be higher while the straight bond value is fixed.C.only risky companies issue these instruments.D.the equity value is dependent on current risks only, not the future risk at conversion.E.None of the above.23.Transfer or expropriation of wealth from bondholders to stockholders is less likely to occur when:？A.subordinated straight debt is issued because there are other senior bondholders to protect them.B.convertible debt is issued because the equity component will reduce these agency costs when value is shared.C.convertible debt is issued because the holders can more readily sue when a high-risk project is undertaken.D.subordinated debt is issued because monitoring is much easier when subordinated straight debt is issued.E.None of the above.24.From the shareholder's point of view, the optimum time to call a convertible bond is when the bond's conversion value is:？A.less than the call price, but greater than the face value.B.greater than the call price, but less than straight debt's value.C.equal to the face value.D.less than straight debt's value, but greater than the call price.E.None of the above.25.Based on empirical studies, firms tend to call convertible bonds when the conversion value is:？A.less than the conversion price.B.greater than the straight bond value.C.greater than the call price.D.less than the face value.E.None of the above.26.Which of the following would not be a sensible explanation of why convertibles and warrants are issued if markets are efficient？A.Cash flow from these securities best match cash flow of the firm.B.If the firm does well, convertible bonds will turn out to have been the better alternative versus issuing common stock.C.The securities are useful when it is costly to assess the risk of the issuing firm.D.The securities may resolve agency problems associated with raising money.E.All of the above are sensible explanations.27.BrightView Windows issued warrants with an exercise price of $17for one share per warrant. On May 1, BrightView's common stock is at $20 per share. The lower and upper limits on the warrant value on May 1 are:？A.$0 and $3B.$0 and $17C.$3 and $17D.$3 and $20E.$17 and $20Diamond Drill Inc. has 150,000 shares and 15,000 warrants outstanding.A warrant holder can purchase a new share of stock for five warrants and $ per warrant. The stock is currently selling for $27 per share.28.The holder of a $1,000 face value bond can exchange the bond any time for 25 shares of stock. The conversion ratio is:？A.25.B.40.C.100.D.Depends on the current market price of the bond.E.None of the above.29.The holder of a $1,000 face value bond can exchange the bond any time for 25 shares of stock. The conversion price is:？A.$25.B.$40.C.$100.D.Depends on the current market price of the bond.E.None of the above.30.If all warrants are exercised, what will your fraction of ownership be if you owned 20,000 shares originally？A.%B.%C.%D.%E.Without knowing the exercise price the percent can not be determined.31.If the warrants are all exercised immediately, what would be the market price of the stock？A.$B.$C.$D.$E.$32.What would your gain per share be from exercising the warrants, assuming all are exercised？A.$ per shareB.$ per shareC.$ per shareD.$ per shareE.$ per share33.A firm has 100 shares of stock and 40 warrants outstanding. The warrants are about to expire, and all of them will be exercised. The market value of the firm's assets is $2,000, and the firm has no debt. Each warrant gives the owner the right to buy 2 shares at $15 per share. What is the price per share of the stock？A.$B.$C.$D.$E.None of the above.The holders of Xenron Corporation's bond with a face value of $1,000 can exchange that bond for 35 shares of stock. The stock is selling for $.34.What is the conversion price？A.$B.$C.$D.$1,E.No conversion premium is given.35.What is the conversion premium？A.%B.%C.%D.%E.None of the above.36.What would the conversion price and conversion ratio be if Xenron had a 3 for 1 stock split？A.$; 75B.$; 105C.$; 25D.$; 35E.None of the above.37.What is the conversion value of the bond？A.$25B.$40C.$770D.$1,000E.No conversion premium is given.The holders of Mikayla Corporation's bond with a face value of $1,000 can exchange that bond for 30 shares of stock. The stock is selling for $.38.What is the conversion price？A.$B.$C.$D.$1,E.No conversion premium is given.39.What is the conversion premium？A.%B.%C.%D.%E.None of the above.40.What would the conversion price and conversion ratio be if Mikayla had a 4 for 1 stock split？A.$; 75B.$; 120C.$; 125D.$; 135E.None of the above.41.What is the conversion value of the bond？A.$25B.$40C.$750D.$1,000E.No conversion premium is given.42.A convertible bond has an 8% annual coupon and 15 years to maturity. The face value is $1,000 and the conversion ratio is 40. The stock currently sells for $ per share. Similar nonconvertible bonds arepriced to yield 9%. The value of the convertible bond is at least:？A.$.B.$.C.$1,.D.$1,.E.None of the above.43.A convertible bond is selling for $800. It has 10 years to maturity,a $1,000 face value, and a 10% coupon. Similar nonconvertible bondsare priced to yield 14%. The conversion price is $50 per share. The stock currently sells for $ per share. The conversion premium is:？A.%.B.%.C.%.D.%.E.None of the above.Essay Questions44.A firm has 500 shares of stock and 100 warrants outstanding. The warrants are about to expire, and all of them will be exercised. The market value of the firm's assets is $25,000, and the market value of the debt is $8,000. Each warrant gives the owner the right to buy 5 shares at $25 per share. What is the value of a warrant45.A firm has 2,000 shares of stock and 200 warrants outstanding. The warrants are about to expire, and all of them will be exercised. The market value of the firm's assets is $14,000, and the firm has no debt. Each warrant gives the owner the right to buy 1 share at $5. What isthe warrant's effective exercise price46.Kida Consultants has 100,000 shares of stock outstanding. Thefirm's value net of debt is $2 million. Kida has 1,000 warrants outstanding with an exercise price of $18, where each warrant entitles the holder to purchase one share of stock. Calculate the gain from exercising a single warrant.47.Kida Consultants currently has 300,000 shares of common outstanding. Firm value net of debt is $3,900,000. Kida has warrants outstandingwith an exercise price of $10. How many warrants must the firm have issued if the gain from exercising a single warrant is $a $1,000 face value, and an 8% coupon paid semi-annually. Similar non-convertible bonds are priced to yield %. The conversion ratio is 20. The stock currently sells for $ per share. Calculate the convertible bond's option value.49.A convertible bond is selling for $1,. It has 10 years to maturity,a $1,000 face value, and a 10% coupon paid semi-annually. Similar non-convertible bonds are priced to yield 8%. The conversion ratio is 40. The stock currently sells for $ per share. Calculate the convertible bond's option value.50.A bond/warrant package is priced to sell at a face value of $1,000. Each bond comes with 50 detachable warrants. A warrant gives the owner the right to buy 1 share of stock at $20 per share. The value of a warrant has been estimated at $2. The bonds mature in 20 years.Similar bonds without warrants yield 10%. What is the bond's annual coupona $1000 face value, and a 10% coupon paid semi-annually. Similar nonconvertible bonds are priced to yield 14%. The conversion price is $50 per share. The stock currently sells for $ per share. Determine the bond's option premium.52.Explain why there is neither a "Free" nor "Expensive Lunch" when convertible bonds are issued53.Illustrate and explain how a convertible bond value is based on both debt and equity value. What is the option value54.Why are warrants and convertibles issuedChapter 24 Warrants and Convertibles Answer KeyMultiple Choice Questions1.A warrant gives the owner:？A.the obligation to sell securities directly to the firm at a fixed price for a specified time.B.the right to purchase securities directly from the firm at a fixed price for a specified time.C.the obligation to purchase securities directly from the firm at a fixed price for a specified time.D.the right to sell securities directly to the firm at a fixed price for a specified time.E.None of the above.Difficulty level: EasyTopic: WARRANTType: DEFINITIONS2.Warrants are most often issued in combination with:？A.new publicly placed common stock.B.new privately placed common stock.C.new publicly placed debt.D.new privately placed debt.E.preferred stock.Difficulty level: Easy Topic: WARRANTType: DEFINITIONS3.An "equity kicker" most often refers to a:？A.bond with conversion privileges.B.preferred stock offering with conversion privileges.C.warrant.D.lettered common stock.E.None of the above.Difficulty level: EasyTopic: WARRANTType: DEFINITIONS4.Warrants are similar to traded options except:？A.only warrants have exercise prices.B.only warrants depend on changes in the underlying stock to determine value.C.warrants affect the number of shares outstanding.D.Both A and C.E.Both A and B.Difficulty level: MediumTopic: WARRANTType: DEFINITIONS5.BrightView Windows issued warrants with an exercise price of $17. BrightView's common stock currently sells for $20 per share. The warrants are:？A.in the money.B.out of the money.C.valuable.D.not very valuable.E.Both A and C.Difficulty level: MediumTopic: VALUE OF WARRANTSType: DEFINITIONS6.Warrants are similar to options, in that the value of the warrant is limited by:？A.expiring worthless if the stock price is below the total warrant exercise price.B.the trading capabilities of the exchange used.C.the price of the underlying stock divided by the number of warrants needed to purchase a share.D.Both A and C.E.Both B and C.Difficulty level: MediumTopic: VALUE OF WARRANTType: CONCEPTS7.Which of the following would not describe the difference between warrants and call options？A.Warrants are issued by firms whereas call options are issued by individuals.B.Call options have an exercise price whereas warrants do not.C.Exercising of warrants creates dilution whereas exercising call options does not.D.When call options are exercised existing shares trade hands whereas if warrants are exercised new stock must be issued.E.None of the above.Difficulty level: EasyTopic: WARRANTS AND CALL OPTIONSType: CONCEPTS8.Two major differences between a warrant and a call option are:？A.warrants are contracts outside of the firm while options are within the firm.B.warrants have long maturities while options are usually short maturities.C.warrant exercise dilutes the value of equity while option exercise does not.D.Both A and C.E.Both B and C.Difficulty level: MediumTopic: WARRANTS AND CALL OPTIONSType: CONCEPTS9.Concerning warrants and call options, which of the following statements generally is correct？A.The issue procedures for both are quite similar.B.When a call option is exercised, the firm must issue new stock.C.When a warrant is exercised, existing stock changes hands.D.Exercise of a call option does not affect share value, but warrant exercise does.E.None of the above is correct.Difficulty level: MediumTopic: WARRANTS AND CALL OPTIONSType: CONCEPTS10.Which of the following would harm the position of a warrant holder？A.a 3 for 1 stock splitB.a large stock dividend of 20%C.a large cash dividendD.listing of the warrants on the NYSEE.None of the above would harm the warrant holders.Difficulty level: ChallengeTopic: WARRANTS AND DIVIDENDSType: CONCEPTS11.The gain from exercising a warrant is similar to the gain from exercising a call option except:？A.the gain on a warrant is greater by the fraction of warrant shares divided by total shares.B.the gain on a warrant is limited by the firm's value after being reduced by the debt of the firm.C.the gain on a warrant is decreased by the fraction of original shares divided by total post exercise shares.D.Both A and B.E.Both B and C.Difficulty level: ChallengeTopic: WARRANTS AND CALL OPTIONSType: CONCEPTS12.The exercise of warrants creates new shares which:？A.increases the total number of shares but does not affect share value.B.increases the total number of shares which can reduce an individual share value.C.does not change the number of shares outstanding, similar to options.D.increases share value because cash is paid into the firm at the time of warrant exercise.E.None of the above.Difficulty level: EasyTopic: EXERCISE OF WARRANTSType: CONCEPTS13.If a corporate security can be exchanged for a fixed number of shares of stock, the security is said to be:？A.callable.B.convertible.C.protected.D.putable.E.None of the above.Difficulty level: EasyTopic: CONVERTIBLESType: CONCEPTS14.A convertible preferred stock is similar to a convertible bond except:？A.the conversion ratio is fixed (given).B.the conversion price is fixed (given).C.the time to maturity is infinite.D.All of the above.E.None of the above.Difficulty level: EasyTopic: CONVERTIBLESType: CONCEPTS15.The holder of a $1,000 face value bond has the right to exchange the bond anytime before maturity for shares of stock priced at $50 per share. The $50 is called the:？A.conversion price.B.stated price.C.exercise price.D.striking price.E.None of the above.Difficulty level: EasyTopic: CONVERSION PRICEType: CONCEPTS16.Concerning convertible bonds, which of the following statements is not correct？A.The value of a convertible bond will generally be greater than its straight bond value.B.The value of a convertible bond will generally be greater than its conversion value.C.The difference between the conversion value and the straight bond value is the conversion or option premium.D.The coupon rate on a nonconvertible bond will generally exceed the coupon rate on an otherwise identical convertible bond.E.All of the above are correct.Difficulty level: MediumTopic: CONVERTIBLE BONDSType: CONCEPTS17.Concerning convertible bonds, which of the following statements is not correct？A.A convertible bond issue would generally have fewer restrictive covenants than an otherwise identical nonconvertible bond.B.Convertible bonds can be issued at a lower coupon compared with otherwise non-convertible bonds.C.If the value of a convertible bond exceeds the maximum of its straight bond value or its conversion value, the difference would be referred to as the option value.D.Since convertible bonds will be exchanged for common stock, convertible bonds are generally not callable.E.More than one of the above is incorrect.Difficulty level: MediumTopic: CONVERTIBLE BONDSType: CONCEPTS18.Concerning convertible bonds, which of the following statements is not correct？A.With regard to security, most convertible bonds are secured by common stock ., they are collateral trust bonds).B.For most convertible bonds, the issuing firm can, under certain circumstances, effectively force bondholders to convert to common stock.C.When a convertible bond is called, the owner has the option of receiving cash or stock for the bond.D.All of the above are incorrect.E.All of the above are correct.Difficulty level: MediumTopic: CONVERTIBLE BONDSType: CONCEPTS19.A convertible bond has an option value which is equal to:？A.the market value of the convertible bond minus the straight bond value.B.The market value of the convertible bond minus the conversion value.C.the market value of the convertible bond minus the conversion premium.D.the market value of the convertible bond minus the maximum of the straight bond value or conversion value.E.None of the above.Difficulty level: MediumTopic: CONVERTIBLE BONDSType: CONCEPTS20.A firm has experienced a significant increase in share value. In retrospect, which of the following securities would have been best to have been issued prior to the change in share value？mon stockB.Bond/warrant packageC.Convertible preferred stockD.Straight bondsE.Convertible bondsDifficulty level: MediumTopic: STRAIGHT BONDS AND SHARE VALUEType: CONCEPTS21.A firm has experienced a significant decrease in share value. In retrospect, which of the following securities would have been best to have been issued prior to the change in share value？A.Convertible bondsB.Convertible preferred stockC.Straight debtD.Indifferent between A and B.E.Indifferent between A, B, and C.Difficulty level: MediumTopic: CONVERTIBLE BONDS AND SHARE VALUEType: CONCEPTS22.Issuing convertible bonds or bonds with warrants is useful for a company of unknown risk because:？A.the effects of risk are opposite on the two value components and tend to cancel each other out.B.if the firm is high risk, the option premium will be higher while the straight bond value is fixed.C.only risky companies issue these instruments.D.the equity value is dependent on current risks only, not the future risk at conversion.E.None of the above.Difficulty level: ChallengeTopic: CONVERTIBLES AND RISKType: CONCEPTS23.Transfer or expropriation of wealth from bondholders to stockholders is less likely to occur when:？A.subordinated straight debt is issued because there are other senior bondholders to protect them.B.convertible debt is issued because the equity component will reduce these agency costs when value is shared.C.convertible debt is issued because the holders can more readily sue when a high-risk project is undertaken.D.subordinated debt is issued because monitoring is much easier when subordinated straight debt is issued.E.None of the above.Difficulty level: ChallengeTopic: CONVERTIBLE DEBTType: CONCEPTS24.From the shareholder's point of view, the optimum time to call a convertible bond is when the bond's conversion value is:？A.less than the call price, but greater than the face value.B.greater than the call price, but less than straight debt's value.C.equal to the face value.D.less than straight debt's value, but greater than the call price.E.None of the above.Difficulty level: MediumTopic: TIMING OF CONVERSIONType: CONCEPTS25.Based on empirical studies, firms tend to call convertible bonds when the conversion value is:？A.less than the conversion price.B.greater than the straight bond value.C.greater than the call price.D.less than the face value.E.None of the above.Difficulty level: MediumTopic: EMPIRICAL RESEARCH - CALLING CONVERTIBLESType: CONCEPTS。
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Chapter 15Long-Term Financing: An Introduction Multiple Choice Questions1. The book capital of a corporation is determined by:A. the sum of the capital in excess of par and the retained earnings.B. the par value of preferred stock.C. the sum of the treasury stock and the preferred stock.D. the number of shares issued multiplied by the par value of each share.E. the market price of the company's debt.2. Retained earnings are:A. the amount of cash that the firm has saved up.B. the difference between the net income earned and the dividends paid.C. the difference between the market price of the stock and the book value.D. the amount of stock repurchased.E. None of the above.3. The book value of the shareholders' ownership is represented by:A. the sum of the par value of common stock, the capital surplus and the accumulated retained earnings.B. the total assets minus the net worth.C. the sum of the preferred stock, debt and the capital surplus.D. the sum of the total assets minus the current liabilities.E. None of the above.4. Shares of stock that have been repurchased by the corporation are called:A. treasury stock.B. undistributed capital stock.C. retained equity.D. capital surplus shares.E. None of the above.5. The market value of the ownership of the firm equals:A. the market price of the stock times the number of shares outstanding.B. the sum of the market price of the bonds and the stock.C. the par value of the stock times the number of shares outstanding.D. the market price of the stock minus the retained earnings.E. None of the above.6. A grant of authority allowing someone else to vote shares of stock that you own is called:A. a power-of-share authorization.B. a proxy.C. a share authority grant (SAG).D. a restricted conveyance.E. None of the above.7. Unsecured corporate debt is called a(n):A. indenture.B. debenture.C. bond.D. mortgage.E. None of the above.8. A standard arrangement for the orderly retirement of long-term debt calls for the corporation to make regular payments into a(n):A. custodial account.B. sinking fund.C. retirement fund.D. irrevocable trustee fund.E. None of the above9. Debt that may be extinguished before maturity is referred to as:A. sinking-fund debt.B. debentures.C. callable debt.D. indenture debt.E. None of the above.10. If a long-term debt instrument is perpetual, it is called a(n):A. secured debt issue.B. subordinated debt issue.C. consol.D. capital debt issue.E. indenture.11. The amount of loan a person or firm borrows from a lender is the:A. creditor.B. indenture.C. debenture.D. principal.E. amortization.12. The written agreement between a corporation and its bondholders is called:A. the collateral agreement.B. the deed.C. the indenture.D. the deed of conveyance.E. None of the above.13. If cumulative voting is permitted:A. the total number of votes a shareholder has is equal to the number of shares owned.B. the total number of votes a shareholder has is equal to the number of shares owned times the average number of years the shareholder has owned the shares.C. the total number of votes a shareholder has can be calculated as the number of shares owned times the number of directors to be elected.D. the total number of votes a shareholder has is equal to the number of shares times the number of board meetings the shareholder has attended.E. None of the above.14. The market-to-book value ratio is implies growth and success when it is:A. greater than 0.B. less than 10.C. less than 0.D. less than 1.E. greater than 1.15. There are 3 directors' seats up for election. If you own 1,000 shares of stock and you can cast 3,000 votes for a particular director, this is illustrative of:A. cumulative voting.B. absolute priority voting.C. sequential voting.D. straight voting.E. None of the above.16. If you own 1,000 shares of stock and you can cast only 1,000 votes fora particular director, then the stock features:A. cumulative voting.B. absolute priority voting.C. sequential voting.D. straight voting.E. None of the above.17. If a group other than management solicits the authority to vote shares to replace management, a _____ is said to occur.A. proxy fightB. stockholder derivative actionC. tender offerD. vote of confidenceE. None of the above.18. Shareholders usually have which of the following right(s)A. To elect board members, the authorizing of new shares and other matters of great importance to shareholders such as being acquired.B. To share proportionally in regular and liquidating dividends.C. To share proportionally in any new stock sold.D. All of the above.E. None of the above.19. Different classes of stock usually are issued to:A. maintain ownership control by holding the class of stock with greater voting rights.B. pay less in dividends between the classes of stock.C. fool investors into thinking that equity is equity and there is no difference in control or value features.D. extract perquisites without the other class of stockholders knowing.E. None of the above.20. Which of the following statements is falseA. Creditors do not have voting power.B. Payment on interest on debt in considered an expense, while payment of dividends is a return on capital.C. Unpaid debt is a liability of the firm, and if not paid, can result in liquidation of the firm. Unpaid common stock dividends cannot force liquidation.D. One of the costs of issuing equity is the possibility of financial distress, while no financial distress is associated with debt.E. None of the above.21. Corporations try to create hybrid securities that look like equity but are called debt because:A. debt interest expense is tax deductible.B. bankruptcy costs are eliminated or reduced.C. these securities have lower risk than debt.D. Both A and C.E. Both A and B.22. Technically speaking, a long-term corporate debt offering that features a specific attachment to corporate property is generally called:A. a debenture.B. a bond.C. a long-term liability.D. a preferred liability.E. None of the above.23. If a firm retires or extinguishes a debt issue before maturity, the specific amount they pay is:A. the amortization amount.B. the call price.C. the sinking fund amount.D. the spread premium.E. None of the above.24. If a debenture is subordinated, it:A. has a higher priority status than specified creditors.B. is secondary to equity.C. must give preference to the specified creditor in the event of default.D. has been issued because the company is in default.E. None of the above.25. Not paying the dividends on a cumulative preferred issue may result in:A. preferred dividend arrears that can be eliminated by the common shareholders only after common dividends are paid.B. voting rights are granted to preferred stockholders if preferred dividends are in arrears.C. no payment of dividends to common shareholders.D. Both A and B.E. Both B and C.26. Preferred stock has both a tax advantage and a tax disadvantage. These two are:A. in default there are no taxes and dividends are taxed in corporate hands at 70%.B. corporate dividends are taxed on 30% of the dividends received and expenses are deductible.C. dividends are not a tax-deductible expense but are 70% exempt from corporate taxation.D. dividends are fully tax deductible but are not equity capital.E. None of the above.27. Preferred stock may be desirable to issue for which of the following reason(s)A. If there is no taxable income, preferred stock does not impose a tax penalty.B. The failure to pay preferred dividends, cumulative or noncumulative, will not cause bankruptcy.C. Preferred dividends are not tax deductible and therefore will not provide a tax shield but will reduce net income.D. Both B and C.E. Both A and B.28. Preferred stock may exist because:A. losses before income taxes prevent a company from enjoying the tax advantages of debt interest while there is no tax advantage for preferred dividends.B. an advantage exists for the firm; preferred shareholders can not force the company into bankruptcy because of unpaid dividends.C. corporations get a 70% tax exemption on preferred dividends received.D. All of the above.E. None of the above.29. The written agreement between a corporation and its bondholders might contain a prohibition against paying dividends in excess of current earnings. This prohibition is an example of a(n):A. maintenance of security provision.B. collateral restriction.C. affirmative indenture.D. restrictive covenant.E. None of the above.30. What percentage of the dividends received by one corporation from another is taxableA. 15%B. 30%C. 34%D. 70%E. 100%31. Which of the following statements about preferred stock is trueA. Unlike dividends paid on common stock, dividends paid on preferred stock are a tax-deductible expense.B. Unpaid dividends on preferred stock are a debt of the corporation.C. If preferred dividends are non-cumulative, then preferred dividends not paid in a particular year will be carried forward to the next year.D. There is no difference in the voting rights of preferred and common stockholders.E. None of the above.32. If a debt issue is callable, the call price is generally ____ par.A. greater thanB. less thanC. equal toD. unrelated toE. It varies widely based on the risk of the firm.33. There was an upward trend in the ratio of the book value of debt to the book value of debt and equity throughout the 1990s. Some of this was due to the repurchasing of stock. The market value ratio of debt to debt and equity exhibited no upward trend. This can be explained by:A. the change in the accounting rules of the period.B. the difference between tax accounting and accounting for financial accounting purposes.C. a large increase in the market value of equity that was greater than the increase in debt.D. All of the above.E. None of the above.34. Based on historical experience, which of the following best describes the "pecking order" of long-term financing strategy in the .A. Long-term debt first, new common equity, internal financing last.B. Long-term debt first, internal financing, new common equity last.C. Internal financing first, new common equity, long-term borrowing last.D. Internal financing first, long-term borrowing, new common equity last.E. None of the above.35. Financial deficits are created when:A. profits and retained earnings are greater than the capital-spending requirement.B. profits and retained earnings are less than the capital-spending requirement.C. profits and retained earnings are equal to the capital-spending requirement.D. All of the above.E. None of the above.36. Financial economists prefer to use market values when measuring debt ratios because:A. market values are more stable than book values.B. market values are a better reflection of current value than historical value.C. market values are readily available and do not have to be calculated like book values.D. market values are more difficult to calculate which makes financial economists more valuable.E. None of the above.37. Corporate financial officers prefer to use book values when measuring debt ratios because:A. book values are more stable than market values.B. debt covenant restriction are usually expressed in book value terms.C. rating agencies measure debt ratios in book values terms.D. All of the above.E. None of the above.38. Rockwell Corporation had net income of $150,000 for the year ending 2008. The company decided to payout 40% of earnings per share as a dividend. Rockwell has 120,000 shares issued and outstanding. What are the retained earnings for 2008A. $40,000B. $60,000C. $90,000D. $150,000E. None of the above39. Nelson Company had equity accounts in 2008 as follows:Projected income is $150,000 and 40% of this amount will be paid out immediately as dividends. What will the ending retained earnings account beA. $90,000B. $92,000C. $122,000D. $210,000E. $242,00040. Holden Bicycles has 1,000 shares outstanding each with a par value of $. If they are sold to shareholders at $10 each, what would the capital surplus beA. $100B. $900C. $9,900D. $10,000E. $11,00041. The Lory Bookstore used internal financing as a source of long-term financing for 80% of its total needs in 2008. The company borrowed an additional 27% of its total needs in the long-term debt markets in 2008. What were Lory's net new stock issues in that yearA. -20%B. -7%C. 7%D. 20%E. 27%42. David's Building Equipment (DBE) had net income of $200,000 for the year ending 2008. The company decided to payout 30% of earnings per share as a dividend. DBE has 50,000 shares issued and outstanding. What are the retained earnings for 2008A. $60,000B. $140,000C. $150,000D. $200,000E. None of the above.43. Alexandra Investments had equity accounts in 2008 as follows:Projected income is $200,000 and 20% of this amount will be paid out immediately as dividends. What will the ending retained earnings account beA. $160,000B. $250,000C. $270,000D. $410,000E. $470,00044. Michael's Motor Scooters has 1,000 shares outstanding each with a par value of $. If they are sold to shareholders at $5 each, what would the capital surplus beA. $4,400B. $4,500C. $4,750D. $4,950E. $5,00045. Calhoun Computech used internal financing as a source of long-term financing for 80% of its total needs in 2008. The company borrowed an additional 15% of its total needs in the long-term debt markets in 2008. What were Calhoun's net new stock issues, in percentage terms, for 2008A. -10%B. -5%C. 5%D. 10%E. 15%Essay QuestionsInformation on shareholder's equity as currently shown on the books of the Eaton Corporation is given as:46. From this information, calculate Eaton's book value per share.47. Rework the shareholder's equity as it appears on the books if the company issues 40,000 new shares of common at $70 per share.48. Preferred Stock, as a hybrid security, presents somewhat of a puzzle as to why they are issued. What elements give rise to the puzzle and how is it explained49. Different countries have different sources of funds. For example, in the United States, internally generated funds count for over 4/5 of all funds while in Japan, it is about ½ with externally generated funds making up the remainder. The disparities are less in the United Kingdom and Germany, with about 2/3 of funds coming from internal sources. Discuss this disparity and why it might exist.Chapter 15 Long-Term Financing: An Introduction Answer KeyMultiple Choice Questions1. The book capital of a corporation is determined by:A.the sum of the capital in excess of par and the retained earnings.B.the par value of preferred stock.C.the sum of the treasury stock and the preferred stock.D.the number of shares issued multiplied by the par value of each share.E.the market price of the company's debt.Difficulty level: EasyTopic: BOOK CAPITALType: DEFINITIONS2. Retained earnings are:A.the amount of cash that the firm has saved up.B.the difference between the net income earned and the dividends paid.C.the difference between the market price of the stock and the book value.D.the amount of stock repurchased.E.None of the above.Difficulty level: EasyTopic: RETAINED EARNINGSType: DEFINITIONS3. The book value of the shareholders' ownership is represented by:A.the sum of the par value of common stock, the capital surplus and the accumulated retained earnings.B.the total assets minus the net worth.C.the sum of the preferred stock, debt and the capital surplus.D.the sum of the total assets minus the current liabilities.E.None of the above.Difficulty level: MediumTopic: BOOK VALUEType: DEFINITIONS4. Shares of stock that have been repurchased by the corporation are called:A.treasury stock.B.undistributed capital stock.C.retained equity.D.capital surplus shares.E.None of the above.Difficulty level: EasyTopic: TREASURY STOCKType: DEFINITIONS5. The market value of the ownership of the firm equals:A.the market price of the stock times the number of shares outstanding.B.the sum of the market price of the bonds and the stock.C.the par value of the stock times the number of shares outstanding.D.the market price of the stock minus the retained earnings.E.None of the above.Difficulty level: EasyTopic: MARKET VALUE OF EQUITYType: DEFINITIONS6. A grant of authority allowing someone else to vote shares of stock that you own is called:A. a power-of-share authorization.B. a proxy.C. a share authority grant (SAG).D. a restricted conveyance.E.None of the above.Difficulty level: EasyTopic: PROXYType: DEFINITIONS7. Unsecured corporate debt is called a(n):A.indenture.B.debenture.C.bond.D.mortgage.E.None of the above.Difficulty level: EasyTopic: DEBENTUREType: DEFINITIONS8. A standard arrangement for the orderly retirement of long-term debt calls for the corporation to make regular payments into a(n):A.custodial account.B.sinking fund.C.retirement fund.D.irrevocable trustee fund.E.None of the aboveDifficulty level: EasyTopic: SINKING FUNDType: DEFINITIONS9. Debt that may be extinguished before maturity is referred to as:A.sinking-fund debt.B.debentures.C.callable debt.D.indenture debt.E.None of the above.Difficulty level: EasyTopic: CALLABLE DEBTType: DEFINITIONS10. If a long-term debt instrument is perpetual, it is called a(n):A.secured debt issue.B.subordinated debt issue.C.consol.D.capital debt issue.E.indenture.Difficulty level: EasyTopic: CONSOL OR PERPETUAL DEBTType: DEFINITIONS11. The amount of loan a person or firm borrows from a lender is the:A.creditor.B.indenture.C.debenture.D.principal.E.amortization.Difficulty level: EasyTopic: LOAN PRINCIPALType: DEFINITIONS12. The written agreement between a corporation and its bondholders is called:A.the collateral agreement.B.the deed.C.the indenture.D.the deed of conveyance.E.None of the above.Difficulty level: EasyTopic: INDENTUREType: DEFINITIONS13. If cumulative voting is permitted:A.the total number of votes a shareholder has is equal to the number of shares owned.B.the total number of votes a shareholder has is equal to the number of shares owned times the average number of years the shareholder has owned the shares.C.the total number of votes a shareholder has can be calculated as the number of shares owned times the number of directors to be elected.D.the total number of votes a shareholder has is equal to the number of shares times the number of board meetings the shareholder has attended.E.None of the above.Difficulty level: EasyTopic: CUMULATIVE VOTINGType: CONCEPTS14. The market-to-book value ratio is implies growth and success when it is:A.greater than 0.B.less than 10.C.less than 0.D.less than 1.E.greater than 1.Difficulty level: MediumTopic: MARKET-TO-BOOK RATIOType: CONCEPTS15. There are 3 directors' seats up for election. If you own 1,000 shares of stock and you can cast 3,000 votes for a particular director, this is illustrative of:A.cumulative voting.B.absolute priority voting.C.sequential voting.D.straight voting.E.None of the above.Difficulty level: EasyTopic: CUMULATIVE VOTINGType: CONCEPTS16. If you own 1,000 shares of stock and you can cast only 1,000 votes fora particular director, then the stock features:A.cumulative voting.B.absolute priority voting.C.sequential voting.D.straight voting.E.None of the above.Difficulty level: EasyTopic: STRAIGHT VOTINGType: CONCEPTS17. If a group other than management solicits the authority to vote shares to replace management, a _____ is said to occur.A.proxy fightB.stockholder derivative actionC.tender offerD.vote of confidenceE.None of the above.Difficulty level: EasyTopic: PROXY FIGHTType: CONCEPTS18. Shareholders usually have which of the following right(s)A.To elect board members, the authorizing of new shares and other matters of great importance to shareholders such as being acquired.B.To share proportionally in regular and liquidating dividends.C.To share proportionally in any new stock sold.D.All of the above.E.None of the above.Difficulty level: EasyTopic: SHAREHOLDER RIGHTSType: CONCEPTS19. Different classes of stock usually are issued to:A.maintain ownership control by holding the class of stock with greater voting rights.B.pay less in dividends between the classes of stock.C.fool investors into thinking that equity is equity and there is no difference in control or value features.D.extract perquisites without the other class of stockholders knowing.E.None of the above.Difficulty level: MediumTopic: CLASSES OF STOCKType: CONCEPTS20. Which of the following statements is falseA.Creditors do not have voting power.B.Payment on interest on debt in considered an expense, while payment of dividends is a return on capital.C.Unpaid debt is a liability of the firm, and if not paid, can result in liquidation of the firm. Unpaid common stock dividends cannot force liquidation.D.One of the costs of issuing equity is the possibility of financial distress, while no financial distress is associated with debt.E.None of the above.Difficulty level: MediumTopic: COSTS OF LONG TERM FINANCINGType: CONCEPTS21. Corporations try to create hybrid securities that look like equity but are called debt because:A.debt interest expense is tax deductible.B.bankruptcy costs are eliminated or reduced.C.these securities have lower risk than debt.D.Both A and C.E.Both A and B.Difficulty level: MediumTopic: HYBRID SECURITIESType: CONCEPTS22. Technically speaking, a long-term corporate debt offering that features a specific attachment to corporate property is generally called:A. a debenture.B. a bond.C. a long-term liability.D. a preferred liability.E.None of the above.Difficulty level: EasyTopic: BONDType: CONCEPTS23. If a firm retires or extinguishes a debt issue before maturity, the specific amount they pay is:A.the amortization amount.B.the call price.C.the sinking fund amount.D.the spread premium.E.None of the above.Difficulty level: EasyTopic: CALLABLE DEBTType: CONCEPTS24. If a debenture is subordinated, it:A.has a higher priority status than specified creditors.B.is secondary to equity.C.must give preference to the specified creditor in the event of default.D.has been issued because the company is in default.E.None of the above.Difficulty level: MediumTopic: SUBORDINATED DEBENTUREType: CONCEPTS25. Not paying the dividends on a cumulative preferred issue may result in:A.preferred dividend arrears that can be eliminated by the common shareholders only after common dividends are paid.B.voting rights are granted to preferred stockholders if preferred dividends are in arrears.C.no payment of dividends to common shareholders.D.Both A and B.E.Both B and C.Difficulty level: MediumTopic: PREFERRED STOCK AND DIVIDENDSType: CONCEPTS26. Preferred stock has both a tax advantage and a tax disadvantage. These two are:A.in default there are no taxes and dividends are taxed in corporate hands at 70%.B.corporate dividends are taxed on 30% of the dividends received and expenses are deductible.C.dividends are not a tax-deductible expense but are 70% exempt from corporate taxation.D.dividends are fully tax deductible but are not equity capital.E.None of the above.Difficulty level: MediumTopic: PREFERRED STOCKType: CONCEPTS27. Preferred stock may be desirable to issue for which of the following reason(s)A.If there is no taxable income, preferred stock does not impose a tax penalty.B.The failure to pay preferred dividends, cumulative or noncumulative, will not cause bankruptcy.C.Preferred dividends are not tax deductible and therefore will not provide a tax shield but will reduce net income.D.Both B and C.E.Both A and B.Difficulty level: ChallengeTopic: PREFERRED STOCKType: CONCEPTS28. Preferred stock may exist because:A.losses before income taxes prevent a company from enjoying the tax advantages of debt interest while there is no tax advantage for preferred dividends.B.an advantage exists for the firm; preferred shareholders can not force the company into bankruptcy because of unpaid dividends.C.corporations get a 70% tax exemption on preferred dividends received.D.All of the above.E.None of the above.Difficulty level: MediumTopic: PREFERRED STOCKType: CONCEPTS29. The written agreement between a corporation and its bondholders might contain a prohibition against paying dividends in excess of current earnings. This prohibition is an example of a(n):A.maintenance of security provision.B.collateral restriction.C.affirmative indenture.D.restrictive covenant.E.None of the above.Difficulty level: EasyTopic: RESTRICTIVE COVENANTType: CONCEPTS30. What percentage of the dividends received by one corporation from another is taxableA.15%B.30%C.34%D.70%E.100%Difficulty level: EasyTopic: TAXABLE CORPORATE DIVIDENDSType: CONCEPTS31. Which of the following statements about preferred stock is trueA.Unlike dividends paid on common stock, dividends paid on preferred stock are a tax-deductible expense.B.Unpaid dividends on preferred stock are a debt of the corporation.C.If preferred dividends are non-cumulative, then preferred dividends not paid in a particular year will be carried forward to the next year.D.There is no difference in the voting rights of preferred and common stockholders.E.None of the above.Difficulty level: MediumTopic: PREFERRED STOCKType: CONCEPTS32. If a debt issue is callable, the call price is generally ____ par.A.greater thanB.less thanC.equal toD.unrelated toE.It varies widely based on the risk of the firm.Difficulty level: EasyTopic: CALLABLE DEBTType: CONCEPTS33. There was an upward trend in the ratio of the book value of debt to the book value of debt and equity throughout the 1990s. Some of this was due to the repurchasing of stock. The market value ratio of debt to debt and equity exhibited no upward trend. This can be explained by:A.the change in the accounting rules of the period.B.the difference between tax accounting and accounting for financial accounting purposes.C. a large increase in the market value of equity that was greater than the increase in debt.D.All of the above.E.None of the above.Difficulty level: EasyTopic: DEBT FINANCING TRENDSType: CONCEPTS。
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Chapter 12 An Alternative View of Risk and Return: The Arbitrage Pricing TheoryMultiple Choice Questions1. In the equation R = + U, the three symbols stand for:A. average return, expected return, and unexpected return.B. required return, expected return, and unbiased return.C. actual total return, expected return, and unexpected return.D. required return, expected return, and unbiased risk.E. risk, expected return, and unsystematic risk.2. The acronym APT stands for:A. Arbitrage Pricing Techniques.B. Absolute Profit Theory.C. Arbitrage Pricing Theory.D. Asset Puting Theory.E. Assured Price Techniques.3. The acronym CAPM stands for:A. Capital Asset Pricing Model.B. Certain Arbitrage Pressure Model.C. Current Arbitrage Prices Model.D. Cumulative Asset Price Model.E. None of the above.4. The unexpected return on a security, U, is made up of:A. market risk and systematic risk.B. systematic risk and unsystematic risk.C. idiosyncratic risk and unsystematic risk.D. expected return and market risk.E. expected return and idiosyncratic risk.5. Systematic risk is defined as:A. a risk that specifically affects an asset or small group of assets.B. any risk that affects a large number of assets.C. any risk that has a huge impact on the return of a security.D. the random component of return.E. None of the above.6. The term Corr(ε R, ε T) = 0 tells us that:A. all error terms of company R and T are 0.B. the unsystematic risk of companies R and T is unrelated or uncorrelated.C. the correlation between the returns of companies R and T is -1.D. the systematic risk of companies R and T is unrelated.E. None of the above.7. A factor is a variable that:A. affects the returns of risky assets in a systematic fashion.B. affects the returns of risky assets in an unsystematic fashion.C. correlates with risky asset returns in a unsystematic fashion.D. does not correlate with the returns of risky assets in an systematic fashion.E. None of the above.8. A security that has a beta of zero will have an expected return of:A. zero.B. the market risk premium.C. the risk free rate.D. less than the risk free rate but not negative.E. less than the risk free rate which can be negative.9. Which of the following is true about the impact on market price of a security when a company makes an announcement and the market has discounted the news?A. The price will change a great deal; even though the impact is primarily in the future, the future value is discounted to the present.B. The price will change little, if at all, since the impact is primarily in the future.C. The price will change little, if at all, since the market considers this information unimportant.D. The price will change little, if at all, since the market considers this information untrue.E. The price will change little, if at all, since the market has already included this information in the security's price.10. Shareholders discount many corporate announcements because of their prior expectations. If an announcement causes the price to change it will mostly be driven by:A. the expected part of the announcement.B. market inefficiency.C. the unexpected part of the announcement.D. the systematic risk.E. None of the above.11. A company owning gold mines will probably have a _____ inflation beta because an ___ increase in inflation is usually associated with an increase in gold prices.A. negative; anticipatedB. positive; anticipatedC. negative; unanticipatedD. positive; unanticipatedE. None of the above.12. If company A, a medical research company, makes a new product discovery and their stock rises 5%, this will have:A. no effect on Company B's, a newspaper, stock price because it is a systematic risk element.B. no effect on Company B's, a newspaper, stock price because it is an unsystematic risk element.C. a large effect on Company B's, a newspaper, stock price because it is a systematic risk element.D. a large effect on Company B's, a newspaper, stock price because it is an unsystematic risk element.E. None of the above.13. What would not be true about a GNP beta?A. If a stock's βGNP = 1.5, the stock will experience a 1.5% increase for every 1% surprise increase in GNP.B. If a stock's β GNP = -1.5, the stock will experience a 1.5% decrease for every 1% surprise increase in GNP.C. It is a measure of risk.D. It measures the impact of systematic risk associated with GNP.E. None of the above.14. If the expected rate of inflation was 3% and the actual rate was 6.2%; the systematic response coefficient from inflation, β, would result in a change inI.any security return of ___ βIA. 9.2B. 3.2C. -3.2D. 3.0E. 6.215. In a portfolio of risky assets, the response to a factor, Fi, can be determined by:A. summing the weightedi s and multiplying by the factor Fi.B. summing the Fis.C. adding the average weighted expected returns.D. summing the weighted random errors.E. All of the above.16. In the one factor (APT) model, the characteristic line to estimate i passes through the origin, unlike the estimate used in the CAPM because:A. the relationship is between the actual return on a security and the market index.B. the relationship measures the change in the security return over time versus the change in the market return.C. the relationship measures the change in excess return on a security versus GNP.D. the relationship measures the change in excess return on a security versus the return on the factor about its mean of zero.E. Cannot be determined without actual data.17. The betas along with the factors in the APT adjust the expected return for:A. calculation errors.B. unsystematic risks.C. spurious correlations of factors.D. differences between actual and expected levels of factors.E. All of the above.18. The single factor APT model that resembles the market model uses _________ as the single factor.A. arbitrage feesB. GNPC. the inflation rateD. the market returnE. the risk-free return19. For a diversified portfolio including a large number of stocks, the:A. weighted average expected return goes to zero.B. weighted average of the betas goes to zero.C. weighted average of the unsystematic risk goes to zero.D. return of the portfolio goes to zero.E. return on the portfolio equals the risk-free rate.20. Which of the following statements is true?A. A well-diversified portfolio has negligible systematic risk.B. A well-diversified portfolio has negligible unsystematic risk.C. An individual security has negligible systematic risk.D. An individual security has negligible unsystematic risk.E. Both A and D.21. Assuming that the single factor APT model applies, the beta for the market portfolio is:A. zero.B. one.C. the average of the risk free beta and the beta for the highest risk security.D. impossible to calculate without collecting sample data.E. None of the above.22. In normal market conditions if a security has a negative beta:A. the security always has a positive return.B. the security has an expected return above the risk-free return.C. the security has an expected return less than the risk-free rate.D. the security has an expected return equal to the market portfolio.E. Both A and B.23. A criticism of the CAPM is that it:A. ignores the return on the market portfolio.B. ignores the risk-free return.C. requires a single measure of systematic risk.D. utilizes too many factors.E. None of the above.24. To estimate the cost of equity capital for a firm using the CAPM, it is necessary to have:A. company financial leverage, beta, and the market risk premium.B. company financial leverage, beta, and the risk-free rate.C. beta, company financial leverage, and the industry beta.D. beta, company financial leverage, and the market risk premium.E. beta, the risk-free rate, and the market risk premium.25. An advantage of the APT over CAPM is:A. APT can handle multiple factors.B. if the factors can be properly identified, the APT may have more explanation/predictive power for returns.C. the APT forces unsystematic risk to be negative to offset systematic risk; thus making the total portfolio risk free, allowing for an arbitrage opportunity for the astute investor.D. Both A and B.E. All of the above.26. Parametric or empirical models rely on:A. security betas explaining systematic factor relationships.B. finding regularities and relations in past market data.C. there being no true explanations of pricing relationships.D. always being able to find the exception to the rule.E. None of the above27. A growth stock portfolio and a value portfolio might be characterized:A. each by their P/E relative to the index P/E; high P/E for growth and lower for value.B. as earning a high rate of return for a growth security and a low rate of return for value security irrespective of risk.C. low unsystematic risk and high systematic risk respectively.D. moderate systematic risk and zero systematic risk respectively.E. None of the above.28. Style portfolios are characterized by:A. their stock attributes; P/Es less than the market P/E are value funds.B. their systematic factors, higher systematic factors are benchmark portfolios.C. their stock attributes; higher stock attribute factors are benchmark portfolios.D. their systematic factors, P/Es greater than the market are value portfolios.E. There is no difference between systematic factors and stock attributes.29. The most realistic APT model would likely include:A. multiple factors.B. only one factor.C. a factor to measure inflation.D. Both A and C.E. Both B and C.30. Which of the following statements is/are true?A. Both APT and CAPM argue that expected excess return must be proportional to the beta(s).B. APT and CAPM are the only approaches to measure expected returns in risky assets.C. Both CAPM and APT are risk-based models.D. Both A and B.E. Both A and C.31. Three factors likely to occur in the APT model are:A. unemployment, inflation, and current rates.B. inflation, GNP, and interest rates.C. current rates, inflation and change in housing prices.D. unemployment, college tuition, and GNP.E. This cannot be determined or even estimated.32. Both the APT and the CAPM imply a positive relationship between expected return and risk. The APT views risk:A. very similarly to the CAPM via the beta of the security.B. in terms of individual intersecurity correlation versus the beta of the CAPM.C. via the industry wide or marketwide factors creating correlation between securities.D. as the standardized deviation of the covariance.E. None of the above.33. The Fama-French three factor model includes the following factors:A. beta, expected return on the market, risk free rate of interest, a size factor, and a value factor.B. the market risk premium, a volume factor, and a size factor.C. beta, expected return on the market, risk free rate of interest, a volume factor, and a value factor.D. the yield on corporate bonds, a size factor, and a market factor.E. None of the above.34. A value company is defined as one that:A. tends to have a lower average return than a growth company.B. tends to have higher average return than a growth company.C. has a high ratio of book equity to market equity.D. a and b.E. a and c.35. The Fama-French three factor model predicts the expected return on a portfolio increases:A. linearly with its factor loading of the size factor.B. linearly with its factor loading of the volume.C. exponentially with its factor loading of the size factor.D. exponentially with its factor loading of the volume factor.E. None of the above.36. The systematic response coefficient for productivity, β, would produce anpif the expected rate of unexpected change in any security return of __ βPproductivity was 1.5% and the actual rate was 2.25%.A. 0.75%B. -0.75%C. 2.25%D. -2.25%E. 1.5%37. Assume that the single factor APT model applies and a portfolio exists such that 2/3 of the funds are invested in Security Q and the rest in the risk-free asset. Security Q has a beta of 1.5. The portfolio has a beta of:A. 0.00B. 0.50C. 0.75D. 1.00E. 1.5038. Suppose the JumpStart Corporation's common stock has a beta of 0.8. If the risk-free rate is 4% and the expected market return is 9%, the expected return for JumpStart's common stock is:A. 3.2%.B. 4.0%.C. 7.2%.D. 8.0%.E. 9.0%.39. Suppose the MiniCD Corporation's common stock has a return of 12%. Assume the risk-free rate is 4%, the expected market return is 9%, and no unsystematic influence affected Mini's return. The beta for MiniCD is:A. 0.89.B. 1.60.C. 2.40.D. 3.00.E. It is impossible to calculate beta without the inflation rate.Suppose that we have identified three important systematic risk factors given by exports, inflation, and industrial production. In the beginning of the year, growth in these three factors is estimated at -1%, 2.5%, and 3.5% respectively. However, actual growth in these factors turns out to be 1%, -2%, and 2%. The factor betas are given by βEX = 1.8, βI = 0.7, and βIP = 1.0.40. If the expected return on the stock is 6%, and no unexpected news concerning the stock surfaces, calculate the stock's total return.A. 2.95%B. 4.95%C. 6.55%D. 7.40%E. 8.85%41. Calculate the stock's total return if the company announces that an important patent filing has been granted sooner than expected and will earn the company 5% more in return.A. 7.95%B. 9.95%C. 11.55%D. 7.90%E. 9.35%42. Calculate the stock's total return if the company announces that they had an industrial accident and the operating facilities will close down for some time thus resulting in a loss by the company of 7% in return.A. -4.05%B. -2.05%C. 4.55%D. 0.40%E. 1.85%43. What would the stock's total return be if the actual growth in each of the factors was equal to growth expected? Assume no unexpected news on the patent.A. 4%B. 5%C. 6%D. 7%E. 8%Essay Questions44. An investor is considering the three stocks given below:Calculate the expected return and beta of a portfolio equally weighted between stocks B and C. Demonstrate that holding stock A actually reduces risk by comparing the risk of a portfolio equally weighted between stock B and T-Bills with a portfolio equally weighted between stocks B and A.45. Explain the conceptual differences in the theoretical development of the CAPM and APT.46. You have a 3 factor model to explain returns. Explain what a factor represents in the context of the APT? Each factor is multiplied by a beta. What do these represent and how do they relate to the actual return?47. Discuss the Fama-French three factor model; both what it means and the factors of the model.Chapter 12 An Alternative View of Risk and Return: The Arbitrage Pricing Theory Answer KeyMultiple Choice Questions1. In the equation R = + U, the three symbols stand for:A.average return, expected return, and unexpected return.B.required return, expected return, and unbiased return.C.actual total return, expected return, and unexpected return.D.required return, expected return, and unbiased risk.E.risk, expected return, and unsystematic risk.Difficulty level: EasyTopic: ARBITRAGE PRICING THEORYType: DEFINITIONS2. The acronym APT stands for:A.Arbitrage Pricing Techniques.B.Absolute Profit Theory.C.Arbitrage Pricing Theory.D.Asset Puting Theory.E.Assured Price Techniques.Difficulty level: EasyTopic: ARBITRAGE PRICING THEORYType: DEFINITIONS3. The acronym CAPM stands for:A.Capital Asset Pricing Model.B.Certain Arbitrage Pressure Model.C.Current Arbitrage Prices Model.D.Cumulative Asset Price Model.E.None of the above.Difficulty level: EasyTopic: CAPITAL ASSET PRICING MODELType: DEFINITIONS4. The unexpected return on a security, U, is made up of:A.market risk and systematic risk.B.systematic risk and unsystematic risk.C.idiosyncratic risk and unsystematic risk.D.expected return and market risk.E.expected return and idiosyncratic risk.Difficulty level: MediumTopic: UNEXPECTED RETURNType: DEFINITIONS5. Systematic risk is defined as:A. a risk that specifically affects an asset or small group of assets.B.any risk that affects a large number of assets.C.any risk that has a huge impact on the return of a security.D.the random component of return.E.None of the above.Difficulty level: EasyTopic: SYSTEMATIC RISKType: DEFINITIONS6. The term Corr(ε R, ε T) = 0 tells us that:A.all error terms of company R and T are 0.B.the unsystematic risk of companies R and T is unrelated or uncorrelated.C.the correlation between the returns of companies R and T is -1.D.the systematic risk of companies R and T is unrelated.E.None of the above.Difficulty level: MediumTopic: CORRELATIONType: DEFINITIONS7. A factor is a variable that:A.affects the returns of risky assets in a systematic fashion.B.affects the returns of risky assets in an unsystematic fashion.C.correlates with risky asset returns in a unsystematic fashion.D.does not correlate with the returns of risky assets in an systematic fashion.E.None of the above.Difficulty level: EasyTopic: FACTORSType: DEFINITIONS8. A security that has a beta of zero will have an expected return of:A.zero.B.the market risk premium.C.the risk free rate.D.less than the risk free rate but not negative.E.less than the risk free rate which can be negative.Difficulty level: MediumTopic: ZERO BETAType: DEFINITIONS9. Which of the following is true about the impact on market price of a security when a company makes an announcement and the market has discounted the news?A.The price will change a great deal; even though the impact is primarily in the future, the future value is discounted to the present.B.The price will change little, if at all, since the impact is primarily in the future.C.The price will change little, if at all, since the market considers this information unimportant.D.The price will change little, if at all, since the market considers this information untrue.E.The price will change little, if at all, since the market has already included this information in the security's price.Difficulty level: EasyTopic: ANNOUNCEMENT EFFECTSType: CONCEPTS10. Shareholders discount many corporate announcements because of their prior expectations. If an announcement causes the price to change it will mostly be driven by:A.the expected part of the announcement.B.market inefficiency.C.the unexpected part of the announcement.D.the systematic risk.E.None of the above.Difficulty level: MediumTopic: ANNOUNCEMENT EFFECTSType: CONCEPTS11. A company owning gold mines will probably have a _____ inflation beta because an ___ increase in inflation is usually associated with an increase in gold prices.A.negative; anticipatedB.positive; anticipatedC.negative; unanticipatedD.positive; unanticipatedE.None of the above.Difficulty level: MediumTopic: INFLATION AND BETAType: CONCEPTS12. If company A, a medical research company, makes a new product discovery and their stock rises 5%, this will have:A.no effect on Company B's, a newspaper, stock price because it is a systematic risk element.B.no effect on Company B's, a newspaper, stock price because it is an unsystematic risk element.C. a large effect on Company B's, a newspaper, stock price because it is a systematic risk element.D. a large effect on Company B's, a newspaper, stock price because it is an unsystematic risk element.E.None of the above.Difficulty level: EasyTopic: UNSYSTEMATIC RISKType: CONCEPTS13. What would not be true about a GNP beta?A.If a stock's βGNP = 1.5, the stock will experience a 1.5% increase for every 1% surprise increase in GNP.B.If a stock's β GNP = -1.5, the stock will experience a 1.5% decrease for every 1% surprise increase in GNP.C.It is a measure of risk.D.It measures the impact of systematic risk associated with GNP.E.None of the above.Difficulty level: MediumTopic: BETAType: CONCEPTS14. If the expected rate of inflation was 3% and the actual rate was 6.2%; the, would result in a change in systematic response coefficient from inflation, βI.any security return of ___ βIA.9.2B. 3.2C.-3.2D. 3.0E. 6.2Difficulty level: EasyTopic: FACTORS AND INFLATIONType: CONCEPTS15. In a portfolio of risky assets, the response to a factor, Fi, can be determined by:A.summing the weighted βi s and multiplying by the factor Fi.B.summing the Fis.C.adding the average weighted expected returns.D.summing the weighted random errors.E.All of the above.Difficulty level: MediumTopic: FACTORSType: CONCEPTS16. In the one factor (APT) model, the characteristic line to estimate βi passes through the origin, unlike the estimate used in the CAPM because:A.the relationship is between the actual return on a security and the market index.B.the relationship measures the change in the security return over time versus the change in the market return.C.the relationship measures the change in excess return on a security versus GNP.D.the relationship measures the change in excess return on a security versus the return on the factor about its mean of zero.E.Cannot be determined without actual data.Difficulty level: ChallengeTopic: APT AND CAPMType: CONCEPTS17. The betas along with the factors in the APT adjust the expected return for:A.calculation errors.B.unsystematic risks.C.spurious correlations of factors.D.differences between actual and expected levels of factors.E.All of the above.Difficulty level: ChallengeTopic: BETAS AND FACTORSType: CONCEPTS18. The single factor APT model that resembles the market model uses _________ as the single factor.A.arbitrage feesB.GNPC.the inflation rateD.the market returnE.the risk-free returnDifficulty level: EasyTopic: SINGLE FACTOR APTType: CONCEPTS19. For a diversified portfolio including a large number of stocks, the:A.weighted average expected return goes to zero.B.weighted average of the betas goes to zero.C.weighted average of the unsystematic risk goes to zero.D.return of the portfolio goes to zero.E.return on the portfolio equals the risk-free rate.Difficulty level: EasyTopic: UNSYSTEMATIC RISK AND DIVERSIFICATIONType: CONCEPTS20. Which of the following statements is true?A. A well-diversified portfolio has negligible systematic risk.B. A well-diversified portfolio has negligible unsystematic risk.C.An individual security has negligible systematic risk.D.An individual security has negligible unsystematic risk.E.Both A and D.Difficulty level: EasyTopic: UNSYSTEMATIC RISK AND DIVERSIFICATIONType: CONCEPTS21. Assuming that the single factor APT model applies, the beta for the market portfolio is:A.zero.B.one.C.the average of the risk free beta and the beta for the highest risk security.D.impossible to calculate without collecting sample data.E.None of the above.Difficulty level: EasyTopic: SINGLE FACTOR APTType: CONCEPTS22. In normal market conditions if a security has a negative beta:A.the security always has a positive return.B.the security has an expected return above the risk-free return.C.the security has an expected return less than the risk-free rate.D.the security has an expected return equal to the market portfolio.E.Both A and B.Difficulty level: MediumTopic: NEGATIVE BETAType: CONCEPTS23. A criticism of the CAPM is that it:A.ignores the return on the market portfolio.B.ignores the risk-free return.C.requires a single measure of systematic risk.D.utilizes too many factors.E.None of the above.Difficulty level: EasyTopic: CAPMType: CONCEPTS24. To estimate the cost of equity capital for a firm using the CAPM, it is necessary to have:pany financial leverage, beta, and the market risk premium.pany financial leverage, beta, and the risk-free rate.C.beta, company financial leverage, and the industry beta.D.beta, company financial leverage, and the market risk premium.E.beta, the risk-free rate, and the market risk premium.Difficulty level: EasyTopic: CAPMType: CONCEPTS25. An advantage of the APT over CAPM is:A.APT can handle multiple factors.B.if the factors can be properly identified, the APT may have more explanation/predictive power for returns.C.the APT forces unsystematic risk to be negative to offset systematic risk; thus making the total portfolio risk free, allowing for an arbitrage opportunity for the astute investor.D.Both A and B.E.All of the above.Difficulty level: EasyTopic: APT AND CAPMType: CONCEPTS26. Parametric or empirical models rely on:A.security betas explaining systematic factor relationships.B.finding regularities and relations in past market data.C.there being no true explanations of pricing relationships.D.always being able to find the exception to the rule.E.None of the aboveDifficulty level: ChallengeTopic: EMPIRICAL MODELINGType: CONCEPTS27. A growth stock portfolio and a value portfolio might be characterized:A.each by their P/E relative to the index P/E; high P/E for growth and lower for value.B.as earning a high rate of return for a growth security and a low rate of return for value security irrespective of risk.C.low unsystematic risk and high systematic risk respectively.D.moderate systematic risk and zero systematic risk respectively.E.None of the above.Difficulty level: MediumTopic: PORTFOLIOSType: CONCEPTS28. Style portfolios are characterized by:A.their stock attributes; P/Es less than the market P/E are value funds.B.their systematic factors, higher systematic factors are benchmark portfolios.C.their stock attributes; higher stock attribute factors are benchmark portfolios.D.their systematic factors, P/Es greater than the market are value portfolios.E.There is no difference between systematic factors and stock attributes. Difficulty level: MediumTopic: STYLE PORTFOLIOSType: CONCEPTS29. The most realistic APT model would likely include:A.multiple factors.B.only one factor.C. a factor to measure inflation.D.Both A and C.E.Both B and C.Difficulty level: MediumTopic: APTType: CONCEPTS30. Which of the following statements is/are true?A.Both APT and CAPM argue that expected excess return must be proportional to the beta(s).B.APT and CAPM are the only approaches to measure expected returns in risky assets.C.Both CAPM and APT are risk-based models.D.Both A and B.E.Both A and C.Difficulty level: MediumTopic: APT AND CAPMType: CONCEPTS31. Three factors likely to occur in the APT model are:A.unemployment, inflation, and current rates.B.inflation, GNP, and interest rates.C.current rates, inflation and change in housing prices.D.unemployment, college tuition, and GNP.E.This cannot be determined or even estimated.Difficulty level: MediumTopic: APT FACTORSType: CONCEPTS32. Both the APT and the CAPM imply a positive relationship between expected return and risk. The APT views risk:A.very similarly to the CAPM via the beta of the security.B.in terms of individual intersecurity correlation versus the beta of the CAPM.C.via the industry wide or marketwide factors creating correlation between securities.D.as the standardized deviation of the covariance.E.None of the above.Difficulty level: EasyTopic: ARBITRAGE PRICING THEORYType: CONCEPTS。
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Chapter 14Efficient Capital Markets and Behavioral Challenges Multiple Choice Questions1. An efficient capital market is one in which:A. brokerage commissions are zero.B. taxes are irrelevant.C. securities always offer a positive rate of return to investors.D. security prices are guaranteed by the U.S. Securities and Exchange Commission to be fair.E. security prices reflect available information.2. The notion that actual capital markets, such as the NYSE, are fairly priced is called the:A. Efficient Markets Hypothesis (EMH).B. Law of One Price.C. Open Markets Theorem.D. Laissez-Faire Axiom.E. Monopoly Pricing Theorem.3. The hypothesis that market prices reflect all available information of every kind is called_____ form efficiency.A. openB. strongC. semistrongD. weakE. stable4. The hypothesis that market prices reflect all publicly available information is called _____ form efficiency.A. openB. strongC. semistrongD. weakE. stable5. The hypothesis that market prices reflect all historical information is called _____ form efficiency.A. openB. strongC. semistrongD. weakE. stable6. In an efficient market, the price of a security will:A. always rise immediately upon the release of new information with no further price adjustments related to that information.B. react to new information over a two-day period after which time no further price adjustments related to that information will occur.C. rise sharply when new information is first released and then decline to a new stable level by the following day.D. react immediately to new information with no further price adjustments related to that information.E. be slow to react for the first few hours after new information is released allowing time for that information to be reviewed and analyzed.7. If the financial markets are efficient, then investors should expect their investments in those markets to:A. earn extraordinary returns on a routine basis.B. generally have positive net present values.C. generally have zero net present values.D. produce arbitrage opportunities on a routine basis.E. produce negative returns on a routine basis.8. Which one of the following statements is correct concerning market efficiency?A. Real asset markets are more efficient than financial markets.B. If a market is efficient, arbitrage opportunities should be common.C. In an efficient market, some market participants will have an advantage over others.D. A firm will generally receive a fair price when it sells shares of stock.E. New information will gradually be reflected in a stock's price to avoid any sudden change in the price of the stock.9. According to the efficient market hypothesis, financial markets fluctuate daily because they:A. are inefficient.B. slowly react to new information.C. are continually reacting to new information.D. offer tremendous arbitrage opportunities.E. only reflect historical information.10. Insider trading does not offer any advantages if the financial markets are:A. weak form efficient.B. semiweak form efficient.C. semistrong form efficient.D. strong form efficient.E. inefficient.11. According to theory, studying historical prices in order to identify mispriced stocks will not work in markets that are _____ efficient.I. weak formII. semistrong formIII. strong formA. I onlyB. II onlyC. I and II onlyD. II and III onlyE. I, II, and III12. Which of the following tend to reinforce the argument that the financial markets are efficient?I. Information spreads rapidly in today's world.II. There is tremendous competition in the financial markets.III. Market prices continually fluctuate.IV. Market prices react suddenly to unexpected news announcements.A. I and III onlyB. II and IV onlyC. I, II, and III onlyD. II, III, and IV onlyE. I, II, III, and IV13. If you excel in analyzing the future outlook of firms, you would prefer that the financial markets be ____ form efficient so that you can have an advantage in the marketplace.A. weakB. semiweakC. semistrongD. strongE. perfect14. Your best friend works in the finance office of the Delta Corporation. You are aware that this friend trades Delta stock based on information he overhears in the office. You know that this information is not known to the general public. Your friend continually brags to you about the profits he earns trading Delta stock. Based on this information, you would tend to argue that the financial markets are at best _____ form efficient.A. weakB. semiweakC. semistrongD. strongE. perfect15. The U.S. Securities and Exchange Commission periodically charges individuals for insider trading and claims those individuals have made unfair profits. Based on this fact, you would tend to argue that the financial markets are at best _____ form efficient.A. weakB. semiweakC. semistrongD. strongE. perfect16. Individuals that continually monitor the financial markets seeking mispriced securities:A. tend to make substantial profits on a daily basis.B. tend to make the markets more efficient.C. are never able to find a security that is temporarily mispriced.D. are always quite successful using only well-known public information as their basis of evaluation.E. are always quite successful using only historical price information as their basis of evaluation.17. Efficient capital markets are financial markets:A. in which current market prices reflect available information.B. in which current market prices reflect the present value of securities.C. in which there is no excess profit from using available information.D. All of the above.E. None of the above.18. If the efficient market hypothesis holds, investors should expect:A. to earn only a normal return.B. to receive a fair price for their securities.C. to always be able to pick stocks that will outperform the market averages.D. Both A and B.E. Both B and C.19. Financial managers can create value through financing decisions that:A. reduce costs or increase subsidies.B. increase the product prices.C. create a new security.D. Both A and B.E. Both A and C.20. In an efficient market when a firm makes an announcement of a new product or product enhancement with superior technology providing positive NPV, the price of the stock will:A. rise gradually over the next few days.B. decline gradually over the next few days.C. rise on the same day to the new price.D. stay at the same price, with no net effect.E. drop on the same day to the new price.21. An investor discovers that for a certain group of stocks, large positive price changes are always followed by large negative price changes. This finding is a violation of the:A. moderate form of the efficient market hypothesis.B. semistrong form of the efficient market hypothesis.C. strong form of the efficient market hypothesis.D. weak form of the efficient market hypothesis.E. None of the above.22. Which of the following would be indicative of inefficient markets?A. Overreaction and reversionB. Delayed responseC. Immediate and accurate responseD. Both A and B.E. Both A and C.23. When the stock price follows a random walk, the price today is said to be equal to the prior period price plus the expected return for the period with any remaining difference to the actual return due to:A. a predictable amount based on the past prices.B. a component based on new information unrelated to past prices.C. the security's risk.D. the risk free rate.E. None of the above.24. Which form of the efficient market hypothesis implies that security prices reflect only information contained in past prices?A. Weak formB. Semistrong formC. Strong formD. Hard formE. Past form25. If the weak form of efficient markets holds, then:A. technical analysis is useless.B. stock prices reflect all information contained in past prices.C. stock prices follow a random walk.D. All of the above.E. None of the above.26. Under the concept of an efficient market, a random walk in stock prices means that:A. there is no driving force behind price changes.B. technical analysts can predict future price movements to earn excess returns.C. the unexplained portion of price change in one period is unrelated to the unexplained portion of price change in any other period.D. the unexplained portion of price change in one period that can not be explained by expected return can only be explained by the unexplained portion of price change in a prior period.E. None of the above.27. A semistrong form efficient market is distinct from a weak form efficient market by:A. incorporating only random movements in the price.B. incorporating all publicly available information in the price.C. incorporating inside information in the price.D. All of the above.E. None of the above.28. If a market is strong form efficient, it also implies that:A. semistrong form efficiency holds.B. weak form efficiency holds.C. one cannot earn abnormal returns with inside information.D. Both A and C.E. A, B and C.29. An investor discovers that predictions about weather patterns published years in advance and found in the Farmer's Almanac are amazingly accurate. In fact, these predictions enable the investor to predict the health of the farm economy and therefore certain security prices. This finding is a violation of the:A. moderate form of the efficient market hypothesis.B. semistrong form of the efficient market hypothesis.C. strong form of the efficient market hypothesis.D. weak form of the efficient market hypothesis.E. None of the above.30. A lawyer works for a firm that advises corporate firms planning to sue other corporations for antitrust damages. He finds that he can "beat the market" by short-selling the stock of the firm that will be sued. This finding is a violation of the:A. moderate form of the efficient market hypothesis.B. semistrong form of the efficient market hypothesis.C. strong form of the efficient market hypothesis.D. weak form of the efficient market hypothesis.E. None of the above.31. An investor discovers that stock prices change drastically as a result of certain events. This finding is a violation of the:A. moderate form of the efficient market hypothesis.B. semistrong form of the efficient market hypothesis.C. strong form of the efficient market hypothesis.D. weak form of the efficient market hypothesis.E. None of the above.32. The semistrong form of the efficient market hypothesis states that:A. all information is reflected in the price of securities.B. security prices reflect all publicly available information.C. future prices are predictable.D. Both A and C.E. None of the above.33. The market price of a stock moves or fluctuates daily. This fluctuation is:A. inconsistent with the semistrong efficient market hypothesis because prices should be stable.B. inconsistent with the weak form efficient market hypothesis because all past information should be priced in.C. consistent with the semistrong form of the efficient market hypothesis because as new information arrives daily prices will adjust to it.D. consistent with the strong form because prices are controlled by insiders.E. None of the above.34. An investor who picks a portfolio by throwing darts at the financial pages:A. believes that efficient markets will protect the portfolio from harm as all information is priced.B. believes that riskier portfolios earn the same as less risky portfolios.C. does so because stock prices do not matter; only cash flow generated matters.D. Both A and C.E. Both B and C.35. Suppose that firms with unexpectedly high earnings earn abnormally high returns for several months after the announcement. This would be evidence of:A. efficient markets in the weak form.B. inefficient markets in the weak form.C. efficient markets in the semistrong form.D. inefficient markets in the semistrong form.E. inefficient markets in the strong form.36. Which of the following is not true about serial correlation?A. It measures the correlation between the current return on a security and the current return on another security.B. It involves only one security.C. Positive serial correlation indicates a tendency for continuation.D. Negative serial correlation indicates a tendency toward reversal.E. Significant positive or negative serial correlation coefficients are indicative of market inefficiency in the weak form.37. Which of the following is true?A. A random walk for stock price changes is inconsistent with observed patterns in price changes.B. If the stock market follows a random walk, price changes should be highly correlated.C. If the stock market is weak form efficient, then stock prices follow a random walk.D. All of the above.E. Both B and C.38. Event studies attempt to measure:A. the influence of information released to the market on returns in days surrounding its announcement.B. if the market is at least semistrong form efficient.C. whether there is a significant reaction to public announcements.D. All of the above.E. None of the above.39. The abnormal return in an event study is described as:A. the return earned on the day of announcement for the stock.B. the excess return earned on the day of announcement for the stock.C. the total return earned for the investment holding period.D. All of the above.E. None of the above.40. Evidence on stock prices finds that the sudden death of a chief executive officer causes stock prices to fall and the sudden death of an active founding chief executive officer causes stock price to rise. This contrary evidence happens because:A. markets are inefficient and unsure of the real value of the events.B. death is inevitable and market prices are random.C. things simply happen.D. the value of the founding executive was a negative to the firm.E. None of the above.41. Studies of the performance of professionally managed mutual funds find that these funds:A. do not outperform a market index. Assuming mutual fund managers rely primarily on public information, this finding refutes the semistrong form of the efficient market hypothesis.B. do not outperform a market index. Assuming mutual fund managers rely primarily on public information, this finding supports the semistrong form of the efficient market hypothesis.C. outperform a market index. Assuming mutual fund managers rely primarily on public information, this finding refutes the semistrong form of the efficient market hypothesis.D. outperform a market index. Assuming mutual fund managers rely primarily on public information, this finding supports the semistrong form of the efficient market hypothesis.E. Both C and D.42. Which of the following statements is true?A. In efficient markets, a stock's price should change with the arrival of new information.B. Average stock returns are higher in January than other months.C. Studies by Fama and French and others find that returns of high book to market stocks are much higher than low book to market value stocks to be consistent with the efficient market hypothesis.D. All of the above.E. None of the above.43. Which of the following is true?A. Most empirical evidence is consistent with strong form efficiency.B. Most empirical evidence is inconsistent with weak form efficiency.C. Strong form market efficiency is not supported by the empirical evidence.D. Both A and C.E. Both B and C.44. In examining the issue of whether the choice of accounting methods affects stock prices, studies have found that:A. accounting depreciation methods can significantly affect stock prices.B. switching depreciation methods can significantly affect stock prices.C. accounting changes that increase accounting earnings also increases stock prices.D. accounting changes can affect stock prices if the company were either to withhold information or provide incorrect information.E. All of the above.45. Market efficiency says:A. prices may not reflect underlying value.B. a good financial manager can time stock sales.C. managers may profitablly speculate in foreign currency.D. managers cannot boost stock prices through creative accounting.E. None of the above.46. The abnormal returns for initial public offerings over longer time periods seem to call market efficiency into question because:A. the average returns at announcement are large and positive while the long-term results are much lower than the returns for seasoned equity offerings.B. the average returns at announcement are small and negative while the long-term results are much lower than the returns for seasoned equity offerings.C. the average returns at announcement are zero while the long-term results are much higher than the returns for seasoned equity offerings.D. the average returns at announcement are large and positive while the long-term results are much higher than the returns for seasoned equity offerings.E. the average returns at announcement are insignificant while the long-term results are much lower than the returns for seasoned equity offerings.47. An example of financially irrational behavior is:A. gambling in Las Vegas.B. when a firm announces an increase in earnings and the stock price enjoys three days of large abnormal returns.C. when a firm announces an increase in earnings and the stock price enjoys an immediate surge in value which is captured in one day.D. Both A and B.E. Both A and C.48. Ritter's study of Initial Public Offerings (IPOs) showed that the post offering stock performance was:A. less than the control group by about 2% in the five years following the IPO.B. incorrectly priced at issuance because over the next five years the abnormal returns were greater than zero on average.C. immaterial to the pricing of the IPO because future market performance is unknown at issuance.D. equal across IPOs, irrespective of risk or which year they were issued.E. All of the above.49. If the securities market is efficient, an investor need only throw darts at the stock pages to pick securities and be just as well off.A. This is true because there are no differences in risk and return.B. This is true because in an efficient stock market prices do not fluctuate.C. This is false because professional portfolio managers prefer to generate commissions by active trading.D. This is false because investors may not hold a desirable risk-return combination in their portfolio.E. This is false because the markets are controlled by the institutional investors.50. Financial managers must be cognizant of market efficiency because:A. manipulating earnings by accounting changes does not fool the market.B. timing security sales is futile because without private information the current price reflects all known information.C. there is limited price pressure from any large sale of stock depressing prices only momentarily before recovering to prior levels.D. All of the above.E. None of the above.51. Event studies have been used to examine:A. IPOs, SEOs, and other equity issuances.B. changes in earnings.C. mergers and acquisitions.D. most financial events.E. All of the above.52. If the market is weak form efficient:A. semistrong form efficiency holds.B. strong form efficiency must hold.C. semistrong form efficiency may hold.D. markets are not weak form efficient.E. None of the above.53. In order to create value from capital budgeting decisions, the firm is likely to:A. locate an unsatisfied demand for a particular product or service.B. create a barrier to make it more difficult for other firms to compete.C. produce products or services at a lower cost than the competition.D. A and C.E. A, B, and C.54. Valuable financing opportunities can be created by:A. fooling investors.B. reducing costs or increasing subsidies.C. the creation of a new security.D. A and B.E. A, B, and C.55. The following time period(s) is/are consistent with the bubble theory:A. the stock market crash of 1929.B. the stock market crash of 1972.C. the stock market crash of 1987.D. A and C.E. A, B, and C.56. In the five years after the offering, ___ underperform matched control groups.A. initial public offeringsB. seasoned equity offeringsC. bond offeringsD. A and BE. A, B, and C57. In the three years prior to a forced departure of management, stock prices, adjusted for market performance, on average will:A. decline about 20%.B. decline about 40%.C. decline about 60%.D. remain stable.E. increase about 20%.Essay Questions58. Define the three forms of market efficiency.59. Explain why it is that in an efficient market, investments have an expected NPV of zero.60. Do you think the lessons from capital market history will hold for each year in the future? That is, as an example, if you buy small stocks will your investment always outperformU.S. Treasury bonds?61. Suppose your cousin invests in the stock market and doubles her money in a single year while the market, on average, earned a return of only about 15%. Is your cousin's performance a violation of market efficiency?62. Why should a financial decision maker such as a corporate treasurer or CFO be concerned with market efficiency?Chapter 14 Efficient Capital Markets and Behavioral Challenges Answer KeyMultiple Choice Questions1. An efficient capital market is one in which:A. brokerage commissions are zero.B. taxes are irrelevant.C. securities always offer a positive rate of return to investors.D. security prices are guaranteed by the U.S. Securities and Exchange Commission to be fair.E. security prices reflect available information.Difficulty level: EasyTopic: EFFICIENT CAPITAL MARKETType: DEFINITIONS2. The notion that actual capital markets, such as the NYSE, are fairly priced is called the:A. Efficient Markets Hypothesis (EMH).B. Law of One Price.C. Open Markets Theorem.D. Laissez-Faire Axiom.E. Monopoly Pricing Theorem.Difficulty level: EasyTopic: EFFICIENT MARKETS HYPOTHESISType: DEFINITIONS3. The hypothesis that market prices reflect all available information of every kind is called _____ form efficiency.A. openB. strongC. semistrongD. weakE. stableDifficulty level: EasyTopic: STRONG FORM EFFICIENCYType: DEFINITIONS4. The hypothesis that market prices reflect all publicly available information is called _____ form efficiency.A. openB. strongC. semistrongD. weakE. stableDifficulty level: EasyTopic: SEMI STRONG FORM EFFICIENCYType: DEFINITIONS5. The hypothesis that market prices reflect all historical information is called _____ form efficiency.A. openB. strongC. semistrongD. weakE. stableDifficulty level: EasyTopic: WEAK FORM EFFICIENCYType: DEFINITIONS6. In an efficient market, the price of a security will:A. always rise immediately upon the release of new information with no further price adjustments related to that information.B. react to new information over a two-day period after which time no further price adjustments related to that information will occur.C. rise sharply when new information is first released and then decline to a new stable level by the following day.D. react immediately to new information with no further price adjustments related to that information.E. be slow to react for the first few hours after new information is released allowing time for that information to be reviewed and analyzed.Difficulty level: MediumTopic: MARKET EFFICIENCYType: CONCEPTS7. If the financial markets are efficient, then investors should expect their investments in those markets to:A. earn extraordinary returns on a routine basis.B. generally have positive net present values.C. generally have zero net present values.D. produce arbitrage opportunities on a routine basis.E. produce negative returns on a routine basis.Difficulty level: MediumTopic: MARKET EFFICIENCYType: CONCEPTS8. Which one of the following statements is correct concerning market efficiency?A. Real asset markets are more efficient than financial markets.B. If a market is efficient, arbitrage opportunities should be common.C. In an efficient market, some market participants will have an advantage over others.D. A firm will generally receive a fair price when it sells shares of stock.E. New information will gradually be reflected in a stock's price to avoid any sudden change in the price of the stock.Difficulty level: MediumTopic: MARKET EFFICIENCYType: CONCEPTS9. According to the efficient market hypothesis, financial markets fluctuate daily because they:A. are inefficient.B. slowly react to new information.C. are continually reacting to new information.D. offer tremendous arbitrage opportunities.E. only reflect historical information.Difficulty level: MediumTopic: MARKET EFFICIENCYType: CONCEPTS10. Insider trading does not offer any advantages if the financial markets are:A. weak form efficient.B. semiweak form efficient.C. semistrong form efficient.D. strong form efficient.E. inefficient.Difficulty level: EasyTopic: MARKET EFFICIENCYType: CONCEPTS11. According to theory, studying historical prices in order to identify mispriced stocks will not work in markets that are _____ efficient.I. weak formII. semistrong formIII. strong formA. I onlyB. II onlyC. I and II onlyD. II and III onlyE. I, II, and IIIDifficulty level: MediumTopic: MARKET EFFICIENCYType: CONCEPTS12. Which of the following tend to reinforce the argument that the financial markets are efficient?I. Information spreads rapidly in today's world.II. There is tremendous competition in the financial markets.III. Market prices continually fluctuate.IV. Market prices react suddenly to unexpected news announcements.A. I and III onlyB. II and IV onlyC. I, II, and III onlyD. II, III, and IV onlyE. I, II, III, and IVDifficulty level: MediumTopic: MARKET EFFICIENCYType: CONCEPTS13. If you excel in analyzing the future outlook of firms, you would prefer that the financial markets be ____ form efficient so that you can have an advantage in the marketplace.A. weakB. semiweakC. semistrongD. strongE. perfectDifficulty level: EasyTopic: MARKET EFFICIENCYType: CONCEPTS14. Your best friend works in the finance office of the Delta Corporation. You are aware that this friend trades Delta stock based on information he overhears in the office. You know that this information is not known to the general public. Your friend continually brags to you about the profits he earns trading Delta stock. Based on this information, you would tend to argue that the financial markets are at best _____ form efficient.A. weakB. semiweakC. semistrongD. strongE. perfectDifficulty level: MediumTopic: MARKET EFFICIENCYType: CONCEPTS15. The U.S. Securities and Exchange Commission periodically charges individuals for insider trading and claims those individuals have made unfair profits. Based on this fact, you would tend to argue that the financial markets are at best _____ form efficient.A. weakB. semiweakC. semistrongD. strongE. perfectDifficulty level: MediumTopic: MARKET EFFICIENCYType: CONCEPTS16. Individuals that continually monitor the financial markets seeking mispriced securities:A. tend to make substantial profits on a daily basis.B. tend to make the markets more efficient.C. are never able to find a security that is temporarily mispriced.D. are always quite successful using only well-known public information as their basis of evaluation.E. are always quite successful using only historical price information as their basis of evaluation.Difficulty level: MediumTopic: MARKET EFFICIENCYType: CONCEPTS。
罗斯公司理财题库全集
Chapter 23 Options and Corporate Finance: Extensions and A p p l i c a t i o n s A n s w e r K e yMultiple Choice Questions1.The option to abandon is:A.a real option.ually of little value because of the cost associated with abandonment.C.irrelevant in capital budgeting analysis.D.nearly always less relevant the option to expand.E.All of the above.Difficulty level: MediumTopic: OPTION TO ABANDONType: DEFINITIONS2.An example of a special option is:A.an executive stock option.B.the embedded option in a start-up company.C.the option in simple business contracts.D.the option to shut down and reopen a project.E.All of the above.Difficulty level: MediumTopic: SPECIAL OPTIONType: DEFINITIONS3.Executives can not exercise their options for a fixed period of time. This is the:A.investing period.B.freeze-out period.C.valuation period.D.guaranteed growth period.E.strike period.Difficulty level: MediumTopic: FREEZE-OUT PERIODType: DEFINITIONS4.The NPV approach must be:A.augmented by added analysis if there are a few embedded options.B.augmented by added analysis if a decision has significant embedded options.C.jettisoned if there are any embedded options.D puted carefully to identify the options.E.None of the above.Difficulty level: MediumTopic: EMBEDDED OPTIONSType: CONCEPTS5.Options are granted to top corporate executives because:A.executives will make better business decisions in line with benefiting the shareholders.B.executive pay is at risk and linked to firm performance.C.options are tax-efficient and taxed only when they are exercised.D.All of the above.E.None of the above.Difficulty level: MediumTopic: EXECUTIVE OPTIONSType: CONCEPTS6.The call option on a dividend paying stock compared to a non-dividend paying stock is:A.more valuable because of the extra dividend payment.B.equal in value because cash dividends are paid on stock only.C.less valuable because cash dividends are paid on stock only.D.less valuable if the dividend paying stock is in-the-money while thenon-dividend paying stock if out-of-the-money.E.None of the above.Difficulty level: ChallengeTopic: CALL OPTION ON DIVIDEND PAYING STOCKType: CONCEPTS7.The value of the options awarded executives is much less than face value to the executives because:A.the value to the executive depends on the stock price being greater than the exercise price.B.the options must be held beyond the freeze-out period.C.a highly undiversified portfolio can have a large drop in value with high variance stocks.D.All of the above.E.None of the above.Difficulty level: MediumTopic: EXECUTIVE OPTIONSType: CONCEPTS8.By rewarding executives with large option positions, corporations:A.cause the executives to hold highly undiversified portfolios.B.put the firm in a risky position to pay off the options.C.cause the value of the stock to fall because the options are theft.D.are really valueless because most options are never exercised.E.None of the above.Difficulty level: ChallengeTopic: EXECUTIVE OPTIONSType: CONCEPTS9.Investing in a negative NPV project today is a feasible choice if:A.there are future option alternatives.B.investing is sequentially limited.C.the discount rate is low.D.Both A and B.E.Both A and C.Difficulty level: MediumTopic: NEGATIVE NPV PROJECTS AND REAL OPTIONSType: CONCEPTS10.The opportunity to defer investing to a later date may have value because:A.the cost of capital may decline in the near future.B.certainty may be reduced in the future.C.investment costs fluctuate in time.D.All of the above.E.None of the above.Difficulty level: EasyTopic: OPTION TO DEFERType: CONCEPTS11.Rejecting an investment today forever may not be a good choice because:A.the size of the firm will decline.B.there are always errors in the estimation of NPVs.C.the option value is negative.D.the company's foregoing the future rights or option to the investment.E.None of the above.Difficulty level: MediumTopic: REAL OPTIONSType: CONCEPTS12.A financial manager who does not follow the general constraints of the NPV rule may:A.accept a negative NPV project for fear of losing an investment opportunity.B.accept a marginally acceptable NPV project limiting the corporation's ability to choose a competing project.C.not consider all options available in a capital budgeting decision.D.not take a positive NPV project even if the NPV is adequate reward to forego the option.E.All of the above.Difficulty level: MediumTopic: REAL OPTIONSType: CONCEPTS13.The volatility of interest rates can affect the value of the project by:A.increasing the value as volatility increases.B.increasing the value as volatility decreases.C.decreasing the value as volatility increases.D.interest rate volatility does not affect value.E.None of the above.Difficulty level: MediumTopic: INTEREST RATE VOLATILITYType: CONCEPTS14.Which of the following statements is trueA.The Black Scholes model is the simplest to use and best used for complex situations.B.The binomial model does not handle options with dividend payments prior to expiration date.C.The Black Scholes model adequately handles the valuation of an American put.D.The binomal model is better for complex situations and is the simplest tool to use.E.The Black Scholes model is simpler to use, but for complex situations, the binomial model is the necessary tool.Difficulty level: MediumTopic: OPTION PRICING TOOLSType: CONCEPTS15.If a project has optionality:A.the shorter the available life of the project the less valuable the project is.B.the longer the available life of the project the less valuable the project is.C.the shorter the available life of the project the more valuable the project is.D.available project life does not change optionality.E.None of the above.Difficulty level: EasyTopic: OPTIONALITYType: CONCEPTS16.The equal rate of price change from each subsequent up state and fixed rate price change from each subsequent down state are reasonable if:A.there is a constant variability.B.any new information impacting prices is similar period to period.C.interest or discount rates are constant.D.Both A and C.E.Both A and B.Difficulty level: MediumTopic: VARIABILITY AND INFORMATIONType: CONCEPTS17.The most correct method to determine the current value of future payoffs would be to:A.take the discounted expected value at the risk-free rate.B.take the expected value using the probabilities.C.take the discounted expected value using the risk-neutral probabilities and the risk free rate.D.sum the payoffs discounted at the risk free rate.E.None of the above.Difficulty level: MediumTopic: VALUATION OF FUTURE PAYOFFSType: CONCEPTS18.The risk-neutral probabilities for an asset, with a current value equal to the present value of future payoffs are:A.given by the probability of each state occurring.B.given by the value of the underlying asset under good news and the risk free rate.C.given by the value of the underlying asset under good news and bad news.D.given by the value of the underlying asset under good news, bad news, and the risk free rate.E.None of the above.Difficulty level: ChallengeTopic: VALUATION OF FUTURE PAYOFFSType: CONCEPTS19.A branching tree for the binomial model:A.should capture all possible futures paths for the asset.B.has a move down followed by a move up on a subsequent branch to end at the same value as the reverse path.C.has a move down followed by a move up on a subsequent branch to end at a lower value than a move up then a move down.D.Both A and C.E.Both A and B.Difficulty level: ChallengeTopic: BINOMIAL MODELType: CONCEPTS20.Increasing the number of intervals in the binomial model causes the price shift parameters to change. New estimates are related to:A.the standard deviation of the underlying asset.B.the up state multiplier equals the standard deviation divided by root n.C.the number of intervals in a year.D.All of the above.E.None of the above.Difficulty level: MediumTopic: BINOMIAL MODELType: CONCEPTS21.Which of the following is not part of the Black Scholes option pricing model A.Standard deviationB.Time to maturityC.Exercise priceD.Par value of the company's stockE.Interest rateDifficulty level: MediumTopic: BLACK SCHOLES OPTION PRICING MODELType: CONCEPTS22.What are the u, the up state multiplier, and d, the down state multiplier, if there are monthly intervals and the standard deviation is .38A.; .8961B..0317;C..0317; .9683D..2193; .7807E.None of the aboveDifficulty level: MediumTopic: BLACK SCHOLES OPTION PRICING MODELType: CONCEPTS23.On the notion of embedded options, which of the following is/are trueA.If virtually all projects have embedded options, ignoring options is likely to lead to serious undervaluation.B.There are at least two possible outcomes for virtually every business idea.C.Virtually every business has both the option to abandon and the option to expand.D.All of the above.E.Both B and C.Difficulty level: MediumTopic: EMBEDDED OPTIONSType: CONCEPTS24.A firm in the extraction industry whose major assets are cash, equipment and a closed facility may appear to have extraordinary value. This value can be primarily attributed to:A.the potential sale of the company.B.the low exercise price held by the shareholders.C.the option to open the facility when prices rise dramatically.D.All of the above.E.None of the above.Difficulty level: MediumTopic: REAL OPTIONSType: CONCEPTSNote: Correct answers to later questions are dependent on correct answers to earlier questions.Ima Greedy, the CFO of Financial Saving Techniques has been granted options on 200,000 shares. The stock is currently trading at $22 a share and the options are at the money. The variance of the stock has been about .07 on an annual basis over the last several years. The options mature in 3 years and the risk free rate is 4%.25.What is d1A..1842B..4102C..4583D..4909E..5412= ln22/22 + .04 + .3/ .073d1= .225/.4583 = .4909d1Difficulty level: MediumTopic: BLACK SCHOLES OPTION PRICING MODELType: PROBLEMS26.What is d2A..0121B..0252C..0326D..0452E..0525d 2 = d1- 2t = .4909 - .073 = .4909 - .4583 = .0326Difficulty level: MediumTopic: BLACK SCHOLES OPTION PRICING MODEL Type: PROBLEMS27.What is e-rtA..6087B..7087C..7952D..8476E..88693 = .8869Difficulty level: MediumTopic: BLACK SCHOLES OPTION PRICING MODEL Type: PROBLEMS28.Calculate Nd.1A..5054B..6508C..6882D..7047E..8096= .50 + .1882 = .6882 Nd1Difficulty level: MediumTopic: BLACK SCHOLES OPTION PRICING MODEL Type: PROBLEMS29.Calculate Nd.2A..5130B..5578C..6085D..7085E..7142= .50 + .0130 = .5130Nd2Difficulty level: MediumTopic: BLACK SCHOLES OPTION PRICING MODELType: PROBLEMS30.What is the value of a call optionA.$B.$C.$D.$E.$。
【实用资料】罗斯公司理财题库全集.doc
Chapter 13 Risk, Cost of Capital, and Capital Budgeting Answer KeyMultiple Choice Questions1. The weighted average of the firm's costs of equity, preferred stock, and after tax debt is the:A. reward to risk ratio for the firm.B. expected capital gains yield for the stock.C. expected capital gains yield for the firm.D. portfolio beta for the firm.E. weighted average cost of capital (WACC).Difficulty level: EasyTopic: WACCType: DEFINITIONS2. If the CAPM is used to estimate the cost of equity capital, the expected excess market return is equal to the:A. return on the stock minus the risk-free rate.B. difference between the return on the market and the risk-free rate.C. beta times the market risk premium.D. beta times the risk-free rate.E. market rate of return.Difficulty level: EasyTopic: CAPMType: DEFINITIONS3. The best fit line of a pairwise plot of the returns of the security against the market index returns is called the:A. Security Market Line.B. Capital Market Line.C. characteristic line.D. risk line.E. None of the above.Difficulty level: MediumTopic: CHARACTERISTIC LINEType: DEFINITIONS4. The use of debt is called:A. operating leverage.B. production leverage.C. financial leverage.D. total asset turnover risk.E. business risk.Difficulty level: MediumTopic: USE OF DEBTType: DEFINITIONS5. The weighted average cost of capital for a firm is the:A. discount rate which the firm should apply to all of the projects it undertakes.B. overall rate which the firm must earn on its existing assets to maintain the value of its stock.C. rate the firm should expect to pay on its next bond issue.D. maximum rate which the firm should require on any projects it undertakes.E. rate of return that the firm's preferred stockholders should expect to earn over the long term. Difficulty level: MediumTopic: WEIGHTED AVERAGE COST OF CAPITALType: DEFINITIONS6. The WACC is used to _______ the expected cash flows when the firm has ____________.A. discount; debt and equity in the capital structureB. discount; short term financing on the balance sheetC. increase; debt and equity in the capital structureD. decrease; short term financing on the balance sheetE. None of the above.Difficulty level: MediumTopic: WACCType: CONCEPTS7. Using the CAPM to calculate the cost of capital for a risky project assumes that:A. using the firm's beta is the same measure of risk as the project.B. the firm is all-equity financed.C. the financial risk is equal to business risk.D. Both A and B.E. Both A and C.Difficulty level: MediumTopic: CAPMType: CONCEPTS8. The use of WACC to select investments is acceptable when the:A. correlation of all new projects are equal.B. NPV is positive when discounted by the WACC.C. risk of the projects are equal to the risk of the firm.D. firm is well diversified and the unsystematic risk is negligible.E. None of the above.Difficulty level: EasyTopic: WACCType: CONCEPTS9. If the risk of an investment project is different than the firm's risk then:A. you must adjust the discount rate for the project based on the firm's risk.B. you must adjust the discount rate for the project based on the project risk.C. you must exercise risk aversion and use the market rate.D. an average rate across prior projects is acceptable because estimates contain errors.E. one must have the actual data to determine any differences in the calculations. Difficulty level: EasyTopic: DISCOUNT RATEType: CONCEPTS10. If the project beta and IRR coordinates plot above the SML the project should be:A. accepted.B. rejected.C. It is impossible to tell.D. It will depend on the NPV.E. None of the above.Difficulty level: MediumTopic: SECURITY MARKET LINEType: CONCEPTS11. The beta of a security provides an:A. estimate of the market risk premium.B. estimate of the slope of the Capital Market Line.C. estimate of the slope of the Security Market Line.D. estimate of the systematic risk of the security.E. None of the above.Difficulty level: EasyTopic: BETAType: CONCEPTS12. Regression analysis can be used to estimate:A. beta.B. the risk-free rate.C. standard deviation.D. variance.E. expected return.Difficulty level: EasyTopic: BETA ESTIMATIONType: CONCEPTS13. Beta measures depend highly on the:A. direction of the market variance.B. overall cycle of the market.C. variance of the market and asset, but not their co-movement.D. covariance of the security with the market and how they are correlated.E. All of the above.Difficulty level: MediumTopic: BETAType: CONCEPTS14. The formula for calculating beta is given by the dividing the ___________ of the stock with the market portfolio by the ___________ of the market portfolio.A. variance; covarianceB. covariance; varianceC. standard deviation; varianceD. expected return; varianceE. expected return; covarianceDifficulty level: MediumTopic: BETAType: CONCEPTS15. The slope of the characteristic line is the estimated:A. intercept.B. beta.C. unsystematic risk.D. market variance.E. market risk premium.Difficulty level: MediumTopic: BETA AND CHARACTERISTIC LINEType: CONCEPTS16. Companies that have highly cyclical sales will have a:A. low beta if sales are highly dependent on the market cycle.B. high beta if sales are highly dependent on the market cycle.C. high beta if sales are independent of the market cycle.D. All of the above.E. None of the above.Difficulty level: MediumTopic: CYCLICAL BUSINESS AND BETAType: CONCEPTS17. Betas may vary substantially across an industry. The decision to use the industry or firm beta to estimate the cost of capital depends on:A. how small the estimation errors are of all betas across industries.B. how similar the firm's operations are to the operations of all other firms in the industry.C. whether the company is a leader or follower.D. the size of the company's public float.E. None of the above.Difficulty level: MediumTopic: INDUSTRY OR FIRM BETAType: CONCEPTS18. Beta is useful in the calculation of the:A. company's variance.B. company's discount rate.C. company's standard deviation.D. unsystematic risk.E. company's market rate.Difficulty level: MediumTopic: BETAType: CONCEPTS19. For a multi-product firm, if a project's beta is different from that of the overall firm, then the:A. CAPM can no longer be used.B. project should be discounted using the overall firm's beta.C. project should be discounted at a rate commensurate with its own beta.D. project should be discounted at the market rate.E. project should be discounted at the T-bill rate.Difficulty level: MediumTopic: PROJECT AND FIRM BETAType: CONCEPTS20. The problem of using the overall firm's beta in discounting projects of different risk is the:A. firm would accept too many high-risk projects.B. firm would reject too many low risk projects.C. firm would reject too many high-risk projects.D. firm would accept too many low risk projects.E. Both A and B.Difficulty level: MediumTopic: FIRM'S BETAType: CONCEPTS21. The asset beta of a levered firm is generally:A. equal to the equity beta.B. different from the equity beta.C. different from the debt beta.D. the simple average of the equity beta and debt beta.E. Both B and C.Difficulty level: MediumTopic: ASSET BETAType: CONCEPTS22. Comparing two otherwise equal firms, the beta of the common stock of a levered firm is ____________ than the beta of the common stock of an unlevered firm.A. equal toB. significantly lessC. slightly lessD. greaterE. None of the above.Difficulty level: MediumTopic: LEVERED VS. UNLEVERED BETAType: CONCEPTS23. The beta of a firm is determined by which of the following firm characteristics?A. Cycles in revenuesB. Operating leverageC. Financial leverageD. All of the above.E. None of the above.Difficulty level: MediumTopic: DETERMINANTS OF BETAType: CONCEPTS24. The beta of a firm is more likely to be high under what two conditions?A. High cyclical business activity and low operating leverageB. High cyclical business activity and high operating leverageC. Low cyclical business activity and low financial leverageD. Low cyclical business activity and low operating leverageE. None of the above.Difficulty level: MediumTopic: FACTORS AFFECTING BETAType: CONCEPTS25. A firm with cyclical earnings is characterized by:A. revenue patterns that vary with the business cycle.B. high levels of debt in its capital structure.C. high fixed costs.D. high price per unit.E. low contribution margins.Difficulty level: MediumTopic: CYCLICAL EARNINGSType: CONCEPTS26. A firm with high operating leverage has:A. low fixed costs in its production process.B. high variable costs in its production process.C. high fixed costs in its production process.D. high price per unit.E. low price per unit.Difficulty level: MediumTopic: OPERATING LEVERAGEType: CONCEPTS27. If a firm has low fixed costs relative to all other firms in the same industry, a large change in sales volume (either up or down) would have:A. a smaller change in EBIT for the firm versus the other firms.B. no effect in any way on the firms as volume does not effect fixed costs.C. a decreasing effect on the cyclical nature of the business.D. a larger change in EBIT for the firm versus the other firms.E. None of the above.Difficulty level: MediumTopic: OPERATING LEVERAGEType: CONCEPTS28. A firm with high operating leverage is characterized by __________ while one with high financial leverage is characterized by __________.A. low fixed cost of production; low fixed financial costsB. high variable cost of production; high variable financial costsC. high fixed costs of production; high fixed financial costsD. low costs of production; high fixed financial costsE. high fixed costs of production; low variable financial costsDifficulty level: MediumTopic: OPERATING AND FINANCIAL LEVERAGEType: CONCEPTS29. Firms whose revenues are strongly cyclical and whose operating leverage is high are likely to have:A. low betas.B. high betas.C. zero betas.D. negative betas.E. None of the above.Difficulty level: MediumTopic: DETERMINANTS OF BETAType: CONCEPTS30. An industry is likely to have a low beta if the:A. stream of revenues is stable and less volatile than the market.B. economy is in a recession.C. market for its goods is unaffected by the market cycle.D. Both A and B.E. Both A and C.Difficulty level: MediumTopic: DETERMINANTS OF BETAType: CONCEPTS31. For the levered firm the equity beta is __________ the asset beta.A. greater thanB. less thanC. equal toD. sometimes greater than and sometimes less thanE. None of the above.Difficulty level: MediumTopic: ASSET AND EQUITY BETASType: CONCEPTS32. All else equal, a more liquid stock will have a lower ________.A. betaB. market premiumC. cost of capitalD. Both A and B.E. Both A and C.Difficulty level: ChallengeTopic: LIQUIDITYType: CONCEPTS33. Two stock market based costs of liquidity that affects the cost of capital are the:A. bid-ask spread and the specialist spread.B. market impact cost and the brokerage costs.C. investor opportunity cost and the brokerage costs.D. bid-ask spread and the market impact costs.E. None of the above.Difficulty level: MediumTopic: LIQUIDITYType: CONCEPTS34. When a specialist is caught in the middle of a trade between informed and uniformed traders, which effectively eliminates the spread or causes a loss, is subject to:A. market impact costs.B. adverse selection.C. broker's quotation bias.D. increasing the number of uninformed traders.E. None of the above.Difficulty level: ChallengeTopic: ADVERSE SELECTIONType: CONCEPTS35. All else equal, new shareholders will ____ the capital gains of existing shareholders.A. diluteB. hold constantC. increaseD. All of the aboveE. It is impossible to tell.Difficulty level: MediumTopic: CAPITAL GAINSType: CONCEPTS36. The following are methods to estimate the market risk premium:A. use historical data to estimate future risk premium.B. use the dividend discount model to estimate risk premium.C. use the bond valuation model to estimate growth in bond prices with different costs of capital.D. A and B.E. A and C.Difficulty level: MediumTopic: MARKET RISK PREMIUMType: CONCEPTS37. Beta is the slope of the:A. efficient frontier.B. market portfolio.C. security market line.D. characteristic line.E. None of the above.Difficulty level: MediumTopic: BETAType: CONCEPTS38. Two stocks that have the same beta ____ have the same correlation because _______:A. may; because correlation measures the sensitivity of the S&P to the market portfolio.B. will; because correlation measures the tightness of fit around the regression line.C. may not; because correlation measures the tightness of fit around the regression line.D. may not; because correlation measures the sensitivity to change.E. None of the above.Difficulty level: MediumTopic: BETA AND CORRELATIONType: CONCEPTS39. When using the cost of debt, the relevant number is the:A. pre-tax cost of debt since most corporations pay taxes at the same tax rate.B. pre-tax cost of debt since it is the actual rate the firm is paying bondholders.C. post-tax cost of debt since dividends are tax deductible.D. post-tax cost of debt since interest is tax deductible.E. None of the above.Difficulty level: MediumTopic: COST OF DEBTType: CONCEPTS40. Jack's Construction Co. has 80,000 bonds outstanding that are selling at par value. Bonds with similar characteristics are yielding 8.5%. The company also has 4 million shares of common stock outstanding. The stock has a beta of 1.1 and sells for $40 a share. The U.S. Treasury bill is yielding 4% and the market risk premium is 8%. Jack's tax rate is 35%. What is Jack's weighted average cost of capital?A. 7.10%B. 7.39%C. 10.38%D. 10.65%E. 11.37%R e = .04 + (1.1 ⨯ .08) = .128Debt: 80,000 ⨯ $1,000 = $80mCommon: 4m ⨯ $40 = $160mTotal = $80m + $160m = $240mDifficulty level: MediumTopic: WEIGHTED AVERAGE COST OF CAPITALType: PROBLEMS41. Peter's Audio Shop has a cost of debt of 7%, a cost of equity of 11%, and a cost of preferred stock of 8%. The firm has 104,000 shares of common stock outstanding at a market price of $20 a share. There are 40,000 shares of preferred stock outstanding at a market price of $34 a share. The bond issue has a total face value of $500,000 and sells at 102% of face value. The tax rate is 34%. What is the weighted average cost of capital for Peter's Audio Shop?A. 6.14%B. 6.54%C. 8.60%D. 9.14%E. 9.45%Debt: $500,000 ⨯ 1.02 = $.51mPreferred: 40,000 ⨯ $34 = $1.36mCommon: 104,000 ⨯ $20 = $2.08mTotal = $.51m + $1.36m + $2.08m = $3.95mDifficulty level: MediumTopic: WEIGHTED AVERAGE COST OF CAPITALType: PROBLEMS42. Phil's Carvings, Inc. wants to have a weighted average cost of capital of 9%. The firm has an after-tax cost of debt of 5% and a cost of equity of 11%. What debt-equity ratio is needed for the firm to achieve its targeted weighted average cost of capital?A. .33B. .40C. .50D. .60E. .67.09 = [W e⨯ .11] + [(1 - W e) ⨯ .05) = .11W e + .05 - .05W e; .04 = .06W e; W e = 66.67%; W d = 1 - W e = 100% - 66.67% = 33.33%; Debt - equity ratio = 33.33% ÷ 66.67% = .50Difficulty level: MediumTopic: WEIGHTED AVERAGE COST OF CAPITALType: PROBLEMS43. Jake's Sound Systems has 210,000 shares of common stock outstanding at a market price of $36 a share. Last month, Jake's paid an annual dividend in the amount of $1.593 per share. The dividend growth rate is 4%. Jake's also has 6,000 bonds outstanding with a face value of $1,000 per bond. The bonds carry a 7% coupon, pay interest annually, and mature in 4.89 years. The bonds are selling at 99% of face value. The company's tax rate is 34%. What is Jake's weighted average cost of capital?A. 5.3%B. 5.8%C. 6.3%D. 6.9%E. 7.2%Debt: 6,000 ⨯ $1,000 ⨯ .99 = $5.94mCommon: 210,000 ⨯ $36 = $7.56mTotal = $5.94m + $7.56m = $13.50mR e = [($1.593 ⨯ 1.04) ÷ $36] + .04 = .08602Difficulty level: MediumTopic: WEIGHTED AVERAGE COST OF CAPITALType: PROBLEMS44. The Consolidated Transfer Co. is an all-equity financed firm. The beta is .75, the market risk premium is 8% and the risk-free rate is 4%. What is the expected return of Consolidated?A. 7%B. 8%C. 9%D. 10%E. 13%.04 + 0.75(.08) = .10 = 10%Difficulty level: EasyTopic: CAPMType: PROBLEMS45. Assuming the CAPM or one-factor model holds, what is the cost of equity for a firm if the firm's equity has a beta of 1.2, the risk-free rate of return is 2%, the expected return on the market is 9%, and the return to the company's debt is 7%?A. 10.4%B. 10.8%C. 12.8%D. 14.4%E. None of the above.Rs = Rf + β(Rm - Rf) = .02 + 1.2(.09 - .02) = .104 = 10.4%Difficulty level: MediumTopic: CAPMType: PROBLEMS46. The cost of equity for Ryan Corporation is 8.4%. If the expected return on the market is 10% and the risk-free rate is 5%, then the equity beta is ___.A. 0.48B. 0.68C. 1.25D. 1.68E. Impossible to calculate with information given.Rs = Rf + β (Rm - Rf); .084 = .05 + β (.10 - .05); β = .68Difficulty level: MediumTopic: EQUITY BETAType: PROBLEMS47. Suppose that the Simmons Corporation's common stock has a beta of 1.6. If the risk-free rate is 5% and the market risk premium is 4%, the expected return on Simmons' common stock is:A. 4.0%.B. 5.0%.C. 5.6%.D. 10.6%.E. 11.4%.Rs = Rf + β(Rm - Rf) = .05 + 1.6(.04) = .114 = 11.4%Difficulty level: EasyTopic: CAPMType: PROBLEMS48. Suppose the Barges Corporation's common stock has an expected return of 12%. Assume that the risk-free rate is 5%, and the market risk premium is 6%. If no unsystematic influence affected Barges' return, the beta for Barges is ______.A. 1.00B. 1.17C. 1.20D. 2.50E. It is impossible to calculate with the information given.Rs = Rf + β(Rm - Rf); .12 = .05 + β(.06); β = .07/.06 = 1.17Difficulty level: MediumTopic: CALCULATING BETAType: PROBLEMS49. Slippery Slope Roof Contracting has an equity beta of 1.2, capital structure with 2/3 debt, and a zero tax rate. What is its asset beta?A. 0.40B. 0.72C. 1.20D. 1.80E. None of the aboveβA = (E/(D + E.) βE = (1/3)(1.2) = .40Difficulty level: MediumTopic: ASSET BETAType: PROBLEMS50. The Template Corporation has an equity beta of 1.2 and a debt beta of .8. The firm's market value debt to equity ratio is .6. Template has a zero tax rate. What is the asset beta?A. 0.70B. 0.72C. 0.96D. 1.04E. 1.05.8(.6/1.6) + 1.2(1/1.6) = 1.05Difficulty level: MediumTopic: ASSET BETAType: PROBLEMS51. The NuPress Valet Co. has an improved version of its hotel stand. The investment cost is expected to be $72 million and will return $13.5 million for 5 years in net cash flows. The ratio of debt to equity is 1 to 1. The cost of equity is 13%, the cost of debt is 9%, and the tax rate is 34%. The appropriate discount rate, assuming average risk, is:A. 8.65%B. 9%C. 9.47%D. 10.5%E. 13%WACC = .09(1 - .34)(.5) + .13(.5) = .0297 + .065 = .0947 = 9.47%Difficulty level: EasyTopic: WACCType: PROBLEMSEssay Questions。
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Chapter 13 Risk, Cost of Capital, and Capital Budgeting Answer KeyMultiple Choice Questions1. The weighted average of the firm's costs of equity, preferred stock, and after tax debt is the:A. reward to risk ratio for the firm.B. expected capital gains yield for the stock.C. expected capital gains yield for the firm.D. portfolio beta for the firm.E. weighted average cost of capital (WACC).Difficulty level: EasyTopic: WACCType: DEFINITIONS2. If the CAPM is used to estimate the cost of equity capital, the expected excess market return is equal to the:A. return on the stock minus the risk-free rate.B. difference between the return on the market and the risk-free rate.C. beta times the market risk premium.D. beta times the risk-free rate.E. market rate of return.Difficulty level: EasyTopic: CAPMType: DEFINITIONS3. The best fit line of a pairwise plot of the returns of the security against the market index returns is called the:A. Security Market Line.B. Capital Market Line.C. characteristic line.D. risk line.E. None of the above.Difficulty level: MediumTopic: CHARACTERISTIC LINEType: DEFINITIONS4. The use of debt is called:A. operating leverage.B. production leverage.C. financial leverage.D. total asset turnover risk.E. business risk.Difficulty level: MediumTopic: USE OF DEBTType: DEFINITIONS5. The weighted average cost of capital for a firm is the:A. discount rate which the firm should apply to all of the projects it undertakes.B. overall rate which the firm must earn on its existing assets to maintain the value of its stock.C. rate the firm should expect to pay on its next bond issue.D. maximum rate which the firm should require on any projects it undertakes.E. rate of return that the firm's preferred stockholders should expect to earn over the long term. Difficulty level: MediumTopic: WEIGHTED AVERAGE COST OF CAPITALType: DEFINITIONS6. The WACC is used to _______ the expected cash flows when the firm has ____________.A. discount; debt and equity in the capital structureB. discount; short term financing on the balance sheetC. increase; debt and equity in the capital structureD. decrease; short term financing on the balance sheetE. None of the above.Difficulty level: MediumTopic: WACCType: CONCEPTS7. Using the CAPM to calculate the cost of capital for a risky project assumes that:A. using the firm's beta is the same measure of risk as the project.B. the firm is all-equity financed.C. the financial risk is equal to business risk.D. Both A and B.E. Both A and C.Difficulty level: MediumTopic: CAPMType: CONCEPTS8. The use of WACC to select investments is acceptable when the:A. correlation of all new projects are equal.B. NPV is positive when discounted by the WACC.C. risk of the projects are equal to the risk of the firm.D. firm is well diversified and the unsystematic risk is negligible.E. None of the above.Difficulty level: EasyTopic: WACCType: CONCEPTS9. If the risk of an investment project is different than the firm's risk then:A. you must adjust the discount rate for the project based on the firm's risk.B. you must adjust the discount rate for the project based on the project risk.C. you must exercise risk aversion and use the market rate.D. an average rate across prior projects is acceptable because estimates contain errors.E. one must have the actual data to determine any differences in the calculations. Difficulty level: EasyTopic: DISCOUNT RATEType: CONCEPTS10. If the project beta and IRR coordinates plot above the SML the project should be:A. accepted.B. rejected.C. It is impossible to tell.D. It will depend on the NPV.E. None of the above.Difficulty level: MediumTopic: SECURITY MARKET LINEType: CONCEPTS11. The beta of a security provides an:A. estimate of the market risk premium.B. estimate of the slope of the Capital Market Line.C. estimate of the slope of the Security Market Line.D. estimate of the systematic risk of the security.E. None of the above.Difficulty level: EasyTopic: BETAType: CONCEPTS12. Regression analysis can be used to estimate:A. beta.B. the risk-free rate.C. standard deviation.D. variance.E. expected return.Difficulty level: EasyTopic: BETA ESTIMATIONType: CONCEPTS13. Beta measures depend highly on the:A. direction of the market variance.B. overall cycle of the market.C. variance of the market and asset, but not their co-movement.D. covariance of the security with the market and how they are correlated.E. All of the above.Difficulty level: MediumTopic: BETAType: CONCEPTS14. The formula for calculating beta is given by the dividing the ___________ of the stock with the market portfolio by the ___________ of the market portfolio.A. variance; covarianceB. covariance; varianceC. standard deviation; varianceD. expected return; varianceE. expected return; covarianceDifficulty level: MediumTopic: BETAType: CONCEPTS15. The slope of the characteristic line is the estimated:A. intercept.B. beta.C. unsystematic risk.D. market variance.E. market risk premium.Difficulty level: MediumTopic: BETA AND CHARACTERISTIC LINEType: CONCEPTS16. Companies that have highly cyclical sales will have a:A. low beta if sales are highly dependent on the market cycle.B. high beta if sales are highly dependent on the market cycle.C. high beta if sales are independent of the market cycle.D. All of the above.E. None of the above.Difficulty level: MediumTopic: CYCLICAL BUSINESS AND BETAType: CONCEPTS17. Betas may vary substantially across an industry. The decision to use the industry or firm beta to estimate the cost of capital depends on:A. how small the estimation errors are of all betas across industries.B. how similar the firm's operations are to the operations of all other firms in the industry.C. whether the company is a leader or follower.D. the size of the company's public float.E. None of the above.Difficulty level: MediumTopic: INDUSTRY OR FIRM BETAType: CONCEPTS18. Beta is useful in the calculation of the:A. company's variance.B. company's discount rate.C. company's standard deviation.D. unsystematic risk.E. company's market rate.Difficulty level: MediumTopic: BETAType: CONCEPTS19. For a multi-product firm, if a project's beta is different from that of the overall firm, then the:A. CAPM can no longer be used.B. project should be discounted using the overall firm's beta.C. project should be discounted at a rate commensurate with its own beta.D. project should be discounted at the market rate.E. project should be discounted at the T-bill rate.Difficulty level: MediumTopic: PROJECT AND FIRM BETAType: CONCEPTS20. The problem of using the overall firm's beta in discounting projects of different risk is the:A. firm would accept too many high-risk projects.B. firm would reject too many low risk projects.C. firm would reject too many high-risk projects.D. firm would accept too many low risk projects.E. Both A and B.Difficulty level: MediumTopic: FIRM'S BETAType: CONCEPTS。