# Managerial finance multiple choice questions

Problem: A currency trader observes the following quotes in the spot market:

1 U.S. dollar = 10.875 Mexican pesos

1 British pound = 3.955 Danish kro ...there is moreshow problem

A currency trader observes the following quotes in the spot market:

1 U.S. dollar = 10.875 Mexican pesos

1 British pound = 3.955 Danish krone

1 British pound = 1.65 U.S. dollars

Given this information, how many Mexican pesos can be purchased for 1 Danish krone?

Answer

5.3083

3.6750

5.6259

3.4935

4.5370

Which of the following events is likely to decrease the value of call options on the common stock of GCC Company?

Answer

An increase in GCC's stock price.

An increase in the exercise price of the option.

An increase in the amount of time until the option expires.

An increase in the risk-free rate.

GCC's stock price becomes more risky (higher variance).

Quaid Co.'s common stock sells for $34, pays a dividend of $2.10, and has an expected long-term growth rate of 6%. The firm's straight-debt bonds pay 10.8%. Quaid is planning a convertible bond issue. The bonds will have a 20-year maturity, pay a 10% annual coupon, have a par value of $1,000, and a conversion ratio of 25 shares per bond. The bonds will sell for $1,000 and will be callable after 10 years. Assuming that the bonds will be converted at Year 10, when they become callable, what will be the expected return on the convertible when it is issued?

Answer

12.86%

13.63%

11.32%

12.35%

11.96%

Simpson Inc. is considering a vertical merger with The Lachey Company. Simpson currently has a required return of 11%, while Lachey's required return is 15%. The market risk premium is 5% and the risk-free rate is 5%. Assume the market is in equilibrium. If Simpson is going to make up 45% of the new firm (and Lachey will comprise the remaining 55%), what will be the beta of the new merged firm? There will be no additional infusion of debt in the merger.

Answer

2.00

1.82

1.64

1.77

1.74

Ellis Enterprises is considering whether to lease or buy some necessary equipment it needs for a project that will last the next 3 years. If the firm buys the equipment, it will borrow $4,600,000 at 8% interest. The firm's tax rate is 35% and the firm's before-tax cost of debt is 8%. Annual maintenance costs associated with ownership are estimated to be $300,000 and the equipment will be depreciated on a straight-line basis over 3 years. What is the annual end-of-year lease payment (in thousands of dollars) for a 3-year lease that would make the firm indifferent between buying or leasing the equipment? (Suggestion: Delete 3 zeros from dollars and work in thousands.)

Answer

$2,437

$2,312

$2,604

$2,083

$2,541

A 6-month call option on Romer Technologies' stock has a strike price of $45.00 and sells in the market for $8.25. Romer's current stock price is $48.75. What is the exercise value of the option?

Answer

$4.25

$3.70

$3.15

$3.75

$3.40

Emerson Electrical Engineering Inc. is issuing new 20-year bonds that have warrants attached. If not for the attached warrants, the bonds would carry an 11% interest rate. However, with the warrants attached the bonds will pay a 9% annual coupon. There are 31 warrants attached to each bond, which have a par value of $1,000. The exercise price of the warrants is $25.00 and the expected stock price 10 years from now (when the warrants may be exercised) is $50.77. What is the investor's expected overall pre-tax rate of return for this bond-with-warrants issue?

Answer

11.79%

12.41%

14.52%

10.8%

10.67%

An option that an investor holds without holding an offsetting position in the underlying stock is called a(n)

Answer

Call option.

Put option.

Out-of-the-money option.

Naked option.

Covered option.

Herbert Engineering is issuing new 15-year bonds that have warrants attached. If not for the attached warrants, the bonds would carry a 9% annual interest rate. However, with the warrants attached the bonds will pay a 6.1% annual coupon. There are 30 warrants attached to each bond, which has a par value of $1,000. What is the value of the straight-debt portion of the bonds?

Answer

$796.09

$720.27

$835.89

$766.24

$877.69

A box of candy costs 28.80 Swiss francs in Switzerland and $17.5 in the United States. Assuming that purchasing power parity (PPP) holds, how many Swiss francs are required to purchase one U.S. dollar?

Answer

1.3659

1.2507

1.4153

1.7938

1.6457

A riskless hedge can best be defined as

Answer

A situation in which aggregate risk can be reduced by derivatives transactions between two parties.

A hedge in which an investor buys a stock and simultaneously sells a call option on that stock and ends up with a riskless position.

Standardized contracts that are traded on exchanges and are "marked to market" daily, but where physical delivery of the underlying asset is virtually never taken.

Two parties agree to exchange obligations to make specified payment streams.

Simultaneously buying and selling a call option with the same exercise price.

A lease versus purchase analysis should compare the cost of leasing to the cost of owning, assuming that the asset purchased

Answer

is financed with short-term debt.

is financed with long-term debt.

is financed with debt whose maturity matches the term of the lease.

is financed with a mix of debt and equity based on the firm's target capital structure, i.e., at the WACC.

is financed with retained earnings.

An investor who sells an option to offset a stock position he/she holds is said to be selling a(n)

Answer

Call option.

Put option.

Out-of-the-money option.

Naked option.

Covered option.

A product sells for $750 in the United States. The spot exchange rate is $1 to 1.25 Swiss francs. If purchasing power parity (PPP) holds, what is the price of the product in Switzerland?

Answer

956.25

890.63

1,040.63

1,021.88

937.50

#### Solution Preview

Given this information, how many Mexican pesos can be purchased for 1 Danish krone?

Answer

4.5370

Which of the following events is likely to decrease the value of call options on the common stock of GCC Company?

Answer

An increase in GCC's stock price.

GCC's stock price becomes more risky (higher variance).

Quaid Co.'s common stock sells for $34, pays a dividend of $2.10, and has an expected long-term growth rate of 6%. The firm's straight-debt bonds pay 10.8%. Quaid is planning a convertible bond issue. The bonds will have a 20-year maturity, pay a 10% annual coupon, have a par value of $1,000, and a conversion ratio of 25 shares per bond. The bonds will sell for $1,000 and will be callable after 10 years. Assuming that the bonds will be converted at Year 10, when they become callable, what will be the expected return on the convertible when it is issued?

Answer

11.96%

Simpson Inc. is considering a vertical merger with The Lachey Company. Simpson currently has a required return of 11%, while Lachey's required return is 15%. The market ...

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