35. The lease analysis should compare the cost of leasing to the
a. Cost of owning using debt.
b. Cost of owning using equity.
c. After-tax cost of debt to measure the effect of leasing on the cost of equity.
d. Average cost of all fixed charges.
e. Cost of owning using the weighted average cost of capital for the firm.
36. Which of the following statements about warrants and convertibles is NOT CORRECT?
a. Both warrants and convertibles are types of option securities.
b. One primary difference between warrants and convertibles is that warrants bring in additional funds when exercised, while convertibles do not.
c. The coupon rate on convertible debt is lower than the coupon rate on similar straight debt because convertibles are less risky.
d. The value of a warrant depends on its exercise price, its term, and the underlying stock price.
e. Warrants usually can be detached and traded separately from their associated debt.
37. Which of the following statements is CORRECT?
a. A warrant is basically a long-term option that enables the holder to sell common stock back to the firm at an agreed upon price, at a specified time in the future.
b. Generally, warrants are distributed along with preferred stock in order to make the preferred stock less risky.
c. If a company issuing coupon-paying debt wanted to reduce the cash outflows associated with the coupon payments, it could issue warrants with the debt to accomplish this.
d. One of the disadvantages of warrants to the issuing firm is that they are detachable and can be traded separately from the debt with which they are issued.
e. Warrants are attractive to investors because when they are issued with stock investors receive dividends on the warrants they own, as well as on the underlying stock.
38. The straight-debt value of a 20-year, 10.375% annual coupon bond with 30 warrants is $760.00, and the bond would sell at par of $1,000 with market rates at 14%. Which of the following is NOT CORRECT?
a. The total value of the warrants is $240.00.
b. The implied value of each warrant is $8.00.
c. The company will have a lower current cost of debt by using the bond with warrants than if it issued straight debt.
d. If the warrants are exercised, current shareholder wealth will be diluted.
e. If the bonds did not have warrants attached, they could be issued at an even lower coupon rate.
39. Which of the following statements concerning preferred stock is CORRECT?
a. Preferred stock usually has a higher component cost than common stock.
b. By law in most states, all preferred stock issues must be cumulative, meaning that the cumulative, compounded total of all unpaid preferred dividends must be paid before dividends can be paid on the firm's common stock.
c. From the issuer's point of view, preferred stock is less risky than bonds.
d. Preferred stock, because of the current tax treatment of dividends, is bought mostly by individuals in high tax brackets.
e. Unlike bonds, preferred stock cannot have a convertible feature.
40. Which of the following statements is CORRECT?
a. From the issuing corporation's perspective, preferred stock is more risky than bonds.
b. From the investor's perspective, preferred stock is less risky than bonds.
c. Issuing preferred stock allows corporations to reduce their tax burden, since preferred stock dividends are deductible.
d. If a preferred issue is cumulative this means that the issuing company is permitted to pay dividends on its common stock even if it failed to pay the dividend on its preferred stock.
e. Most nonconvertible preferred stock is owned by corporations.
41.Which of the following statements concerning preferred stock is NOT CORRECT?
a. Preferred stock has a par (or liquidating) value.
b. Most preferred issues are cumulative, meaning that the cumulative total of all unpaid preferred dividends must be paid before dividends can be paid on the common stock.
c. Unpaid preferred dividends are called warrants.
d. Preferred stock is a hybrid it is similar to bonds in some respects and to common stock in other ways.
e. Preferred stock normally has no voting rights.
42. Which of the following statements concerning preferred stock is NOT CORRECT?
a. Adjustable rate preferred stocks are preferred stocks whose dividends are tied to the rate on Treasury securities.
b. Preferred dividends in arrears do not earn interest; thus, arrearages do not grow in a compound interest sense they only grow from additional nonpayments of the preferred dividend.
c. Failure to pay a preferred dividend precludes payment of common dividends.
d. If preferred dividends are not paid for two consecutive years, the firm is judged to be in default and is thrown into bankruptcy proceedings.
e. It is possible to issue preferred stock that may convertible to common stock.
43. In the lease versus buy decision, leasing is often preferable
a. Since it does not limit the firm's ability to borrow to make other investments.
b. Because, generally, no down payment is required, and there are no indirect interest costs.
c. Because lease obligations do not affect the riskiness of the firm.
d. Because leases offer firms a greater salvage value for the equipment.
e. Because it does not appear on the firm's balance sheet and gives the firm a stronger appearance in a superficial credit analysis.
44. Which of the following is NOT a reason why companies move into international operations?
a. To take advantage of lower production costs in regions of inexpensive labor.
b. To develop new markets for their finished products.
c. To better serve their primary customers.
d. Because important raw materials are located abroad.
e. Taxes are lower for companies that do business outside of their home country.
45. Multinational financial management requires all of the following EXCEPT:
a. The effects of changing currency values must be included in financial analyses.
b. Legal and economic differences must be considered in financial decisions.
c. Political risk should be excluded from multinational corporate financial analyses.
d. Cultural differences must be accounted for when considering firm goals and employee management.
e. The roles of different governments must be accounted for since they may vary greatly and usually affect the nature of competition.
46. If the inflation rate in the United States is greater than the inflation rate in Sweden, other things held constant, the Swedish currency will
a. Appreciate against the U.S. dollar.
b. Depreciate against the U.S. dollar.
c. Remain unchanged against the U.S. dollar.
d. Appreciate against other major currencies.
e. Appreciate against the dollar and other major currencies.
47. Which of the following is NOT an example of a derivative security?
d. Forward contracts.
e. Preferred stock.
48. The value of a stock option depends on all of the following EXCEPT:
a. Exercise price.
b. Variability of the stock price.
c. Optionâ??s time to maturity.
d. Risk-free rate of interest.
e. Bond price.
49. A commercial bank estimates that its net income suffers whenever interest rates increase. The bank is looking to use derivatives to reduce its interest rate risk. Which of the following strategies best protects the bank against rising interest rates?
a. Buying inverse floaters.
b. Entering into an interest rate swap where the bank receives a fixed payment stream, and in return agrees to make payments that float with market interest rates.
c. Purchase principal only (PO) strips that decline in value whenever interest rates rise.
d. Enter into a short hedge in which the bank agrees to sell interest rate futures.
e. Sell some of the banks floating rate loans and use the proceeds to make fixed rate loans.
50. Which of the following statements is CORRECT?
a. An option's value is determined by its exercise value, which is the market price of the stock less its strike price. Thus, an option can't sell for more than its exercise value.
b. As stock price rises, the premium portion of an option on a stock increases because the difference between the price of the stock and the fixed strike price increases.
c. If the company is consistently profitable, its call options will always be in-the-money.
d. The market value of an option depends in part on the option's time to maturity and on the variability of the underlying stock's price.
e. The potential loss on an option decreases as the option sells at higher and higher prices because the profit margin gets bigger.
51. Warnes Motors stock is trading at $20 a share. Three-month call options with an exercise price of $20 have a price of $1.50. Which of the following will occur if the stock price increases 10% to $22 a share?
a.The price of the call option will increase by $2.
b.The price of the call option will increase by less than $2, but the percentage increase in price will be more than 10%.
c.The price of the call option will increase by less than $2, and the percentage increase in price will be less than 10%.
d.The price of the call option will increase by more than $2.
e.The price of the call option will increase by more than $2, but the percentage increase in price will be less than 10%.
52. Firms use defensive tactics to fight off undesired mergers. Which of the following is NOT one of these tactics:
a. Raising antitrust issues.
b. Taking poison pills.
c. Getting a white knight to bid for the firm.
d. Repurchasing their own stock.
e. Issuing new stock.
53. Which of the following is NOT given as a reason for the high level of merger activity in the U.S.?
a. Synergistic benefits arising from mergers.
b. Reduction in competition resulting from mergers.
c. Attempts to stabilize earnings by diversifying.
d. Making an offer for and following through with the acquisition of another company tends to have a positive effect on an acquiring company's stock price.
e. Tax considerations from a target company's accumulated losses.
54. Which of the following statements concerning mergers is CORRECT?
a. A conglomerate merger is a merger of firms in the same general industry, but for which no customer or supplier relationship exists.
b. A horizontal merger is a combination of two firms that produce the same type of good or service.
c.A congeneric merger is a merger of companies in totally different industries.
d.Congeneric mergers tend to offer the greatest synergistic benefits.
e.Congeneric mergers are the most likely to be attacked by the Justice Department for being anticompetitive.
55. Which of the following actions does NOT assist managers in defending against a hostile takeover?
a. Establishing a poison pill provision.
b. Granting lucrative golden parachutes to senior managers.
c. Establishing a super-majority provision in the company's bylaws that raises the percentage of the board of directors that must approve an acquisition from 50% to 75%.
d. Issuing new common stock in a seasoned equity offering.
e. Giving stock purchase rights that allow stockholders to buy at half-price the stock of an acquiring firm.
56. Which of the following statements is CORRECT?
a. A conglomerate merger occurs when a firm combines with another firm in the same industry.
b. Regulations in the United States prohibit acquiring firms from using common stock to purchase another firm.
c. Defensive mergers are designed to make a company less vulnerable to a takeover.
d. If a company that produces military equipment merges with a company that manages a chain of motels, this is an example of a horizontal merger.
e. Acquiring firms send a signal that their stock is undervalued if they choose to use stock to pay for the acquisition.
57. Which of the following statements is CORRECT?
a. Leveraged buyouts (LBOs) occur when a firm issues equity and uses the proceeds to take a firm public.
b. In a typical LBO, bondholders do well but shareholders realize a decline in value.
c. Firms are unable to sell any assets in the first five years following a leveraged buyout.
d. A lot of the risk in an LBO is due to the heavy use of equity to finance the merger.
e. LBOs were popular in the 1980s, but have since been far less common.
58. Which of the following statements concerning merger analysis is NOT CORRECT?
a. The goal of merger valuation is to value the target firm's equity, because a firm is acquired from its owners, not from its creditors.
b. Two key items needed to apply the DCF approach to valuing a business are (1) pro forma statements that forecast the incremental free cash flows expected to result from the merger and (2) a discount rate, or cost of capital, to apply to these projected cash flows.
c. A financial merger is a merger in which operations of the firms involved are integrated in hope of achieving synergistic benefits.
d. Merger analysis usually accounts for interest expenses in the cash flow forecast because acquiring firms rarely assume the target firm's debt, so new debt must be obtained by the acquiring firm and the interest expense of this debt must be imputed in the analysis.
e. Merger analysis usually incorporates interest expense into the cash flow forecast, because if the subsidiary is to grow in the future, new debt will have to be issued over time to support the expansion.
59. Which of the following statements is CORRECT?
a. Tax considerations often play a part in mergers. If one firm has excess cash, purchasing another firm exposes the purchasing firm to additional taxes. Thus, firms with excess cash rarely undertake mergers.
b. The smaller the synergistic benefits of a particular merger, the greater the incentive to bargain in negotiations, and the higher the probability that the merger will be completed.
c. Since mergers are frequently financed by debt more than equity, financial economies that imply a lower cost of debt or greater debt capacity are rarely a relevant rationale for mergers.
d. Managers who purchase other firms often assert that the new combined firm will enjoy benefits from diversification such as more stable earnings. However, since shareholders are free to diversify their own holdings at lower cost, such a rationale is generally not a valid motive for publicly held firms.
e. Because of government regulations, a firm cannot finance a merger with more debt than equity (Debt ratio < 50%).
60. Which of the following statements is CORRECT?
a. A firm acquiring another firm in a horizontal merger will not have its required return affected because the two firms will have similar betas.
b. Financial theory says that the choice of how to pay for a merger is irrelevant because, despite affecting the firm's capital structure, it will not affect the firm's overall required return.
c. The basic rationale for any financial merger is synergy and thus, development of pro-forma cash flows is the single most important part of the analysis.
d. In most mergers, the benefits of synergy and the price premium the acquirer pays over market price are summed and then divided equally between the shareholders of the acquiring and target firms.
e. The primary rationale for any operating merger is synergy, but it is also possible that mergers can include aspects of both operating and financial mergers.
This post includes multiple choice questions accross a vast array of security and investionment tools.
Investment Multiple Choice Questions: Preferred stock, tax equivalent yield of a municipal bond, security market line (SML), efficient market hypothesis, market anomaly, ticker symbol, leading economic indicator, Dow Jones Industrial Average, EAFE index, call option, geometric average of the quarterly returns, mutual fund
a. Is actually a form of equity
b. Pays dividends not fully taxable to U.S. corporations
c. Is normally considered a fixed-income security
d. All of the above
2. Find the tax equivalent yield of a municipal bond paying 4% for someone in the 30% tax bracket (assume this investor resides in the same state as the municipal bond). Show your work.
4. What does NASDAQ stand for? I need a word for each letter.
5. Which of the following statements about the security market line (SML) are true (only 1 is true)?
a. The SML provides a benchmark for evaluating expected investment performance
b. The SML leads all investors to invest in the same portfolio of risky assets
c. The SML is a graphic representation of the relationship between expected return and beta
d. Properly valued assets plot exactly on the SML
6. In relation to this course, what does CAPM stand for? I need one word for each letter.
7. The security market line (SML) depicts:
a. A security's expected return as a function of its systematic risk.
b. The market portfolio as the optimal portfolio of risky securities.
c. The relationship between a security's return and the return on an index.
d. The complete portfolio as a combination of the market portfolio and the risk-free asset.
8. Which of the following statements are true if the efficient market hypothesis holds (only 1 is true)?
a. It implies perfect forecasting ability
b. It implies that prices reflect all available information
c. It implies that the market is irrational
d. It implies that prices do not fluctuate
9. A market anomaly refers to:
a. An exogenous shock to the market that is sharp but not persistent
b. A price or volume event that is inconsistent with historical price or volume trends
c. A trading or pricing structure that interferes with efficient buying and selling of securities
d. Price behavior that differs from the behavior predicted by the efficient market hypothesis
10. As of the close of the stock market on Wednesday June 13, 2007; which stock had a higher price: Walmart or Target? Use the price as of 4pm EST as the price may change during after hours trading.
11. The ticker symbol for Intel is:
12. Which of the following is not considered a leading economic indicator?
a. Stock prices, 500 common stocks
b. Money supply (M2)
c. Index of consumer expectations
d. 30 year mortgage rate
13. The current Federal Reserve chairman is:
a. Alan Greenspan
b. Ben Bernanke
c. George Bush
d. Pete Rose
14. The Dow Jones Industrial Average is comprised of how many stocks?
15. The EAFE index stands for:
a. The East and Far East Index
b. European and France East Index
c. European, Australian, Far East Index
d. None of the above
16. A call option gives its holder the right to purchase an asset for a specified price, called the __________ price, on or before some specified expiration date.
17. All stocks trade only on the New York Stock Exchange. This statement is:
18. The formula for holding period return (HPR) is:
(Ending price - Beginning Price + BLANK)
Fill in the BLANK:
a. stock price
b. cash dividend
c. stock dividend
d. none of the above
19. The geometric average of the quarterly returns is equal to the single per-period return that would give the same cumulative performance as the sequence of actual returns. This statement is:
20. A mutual fund can hold all of the following:
c. cash/money market
d. all of the above