An option that gives the holder the right to sell a stock at a specified price at some future time is
a. a covered option.
b. a put option.
c. a naked option.
d. a call option
e. an out-of-the-money option.

BLW Corporation is considering the terms to be set on the options it plans to issue to its executives. Which of the following actions would decrease the value of the options, other things held constant?
a. The Federal Reserve takes actions that increase the risk-free rate.
b. The exercise price of the option is increased.
c. BLW's stock price becomes more risky (higher variance).
d. BLW's stock price suddenly increases.
e. The life of the option is increased, i.e., the time until it expires is lengthened.

Which of the following statements is CORRECT?
a. The market value of an option depends in part on the option's time to maturity and also on the variability of the underlying stock's price.
b. An option's value is determined by its exercise value, which is the market price of the stock less its striking price. Thus, an option can't sell for more than its exercise value.
c. Issuing options provides companies with a low cost method of raising capital.
d. The potential loss on an option decreases as the option sells at higher and higher prices because the profit margin gets bigger.
e. As the stock's price rises, the time value portion of an option on a stock increases because the difference between the price of the stock and the fixed strike price increases.

The Lincoln Company sold a $1,000 par value, noncallable bond several years ago that now has 20 years to maturity and a 7.00% annual coupon that is paid semiannually. The bond currently sells for $925 and the company's tax rate is 40%. What is the component cost of debt for use in the WACC calculation?
a. 4.28%
b. 4.83%
c. 4.65%
d. 5.03%
e. 4.46%

Suppose Acme Industries correctly estimates its WACC at a given point in time and then uses that same cost of capital to evaluate all projects for the next 10 years, then the firm will most likely
a. continue as before, because there is no reason to expect its risk position or value to change over time as a result of its use of a single cost of capital.
b. become riskier over time, but its intrinsic value will be maximized.
c. become less risky over time, and this will maximize its intrinsic value.
d. become more risky and also have an increasing WACC. Its intrinsic value will not be maximized.
e. accept too many low-risk projects and too few high-risk projects.

Your consultant firm has been hired by Eco Brothers Inc. to help them estimate the cost of common equity. The yield on the firm's bonds is 8.75%, and your firm's economists believe that the cost of common can be estimated using a risk premium of 3.85% over a firm's own cost of debt. What is an estimate of the firm's cost of common from reinvested earnings?
a. 12.60%
b. 14.74%
c. 14.17%
d. 13.10%
e. 13.63%

Wiley's Wire Products is considering a project that has the following cash flow and cost of capital (r) data. What is the project's MIRR? Note that a project's MIRR can be less than the cost of capital (and even negative), in which case it will be rejected.
r = 11.00%
Year 0 1 2 3
Cash flows −$800 $350 $350 $350
a. 13.50%
b. 12.15%
c. 8.86%
d. 10.94%
e. 9.84%

You are on the staff of O'Hara Inc. The CFO believes project acceptance should be based on the NPV, but Andrew O'Hara, the president, insists that no project should be accepted unless its IRR exceeds the project's risk-adjusted cost of capital. Now you must make a recommendation on a project that has a cost of $15,000 and two cash flows: $110,000 at the end of Year 1 and −$100,000 at the end of Year 2. The president and the CFO both agree that the appropriate cost of capital for this project is 10%. At 10%, the NPV is $2,355.37, but you find two IRRs, one at 6.33% and one at 527%, and a MIRR of 11.32%. Which of the following statements best describes your optimal recommendation, i.e., the analysis and recommendation that is best for the company and least likely to get you in trouble with either the CFO or the president?
a. You should recommend that the project be rejected because, although its NPV is positive, it has an IRR that is less than the cost of capital.
b. You should recommend that the project be rejected. Although its NPV is positive it has two IRRs, one of which is less than the cost of capital, which indicates that the firm's value will decline if the project is accepted.
c. You should recommend that the project be accepted because (1) its NPV is positive and (2) although it has two IRRs, in this case it would be better to focus on the MIRR, which exceeds the cost of capital. You should explain this to the president and tell him that the firm's value will increase if the project is accepted.
d. You should recommend that the project be rejected because, although its NPV is positive, its MIRR is less than the cost of capital, and that indicates that the firm's value will decline if it is accepted.
e. You should recommend that the project be rejected because its NPV is negative and its IRR is less than the cost of capital.

Which of the following statements is CORRECT?
a. The percentage difference between the MIRR and the IRR is equal to the project's cost of capital.
b. For mutually exclusive projects with normal cash flows, the NPV and MIRR methods can never conflict, but their results could conflict with the discounted payback and the regular IRR methods.
c. If a firm uses the discounted payback method with a required payback of 4 years, then it will accept more projects than if it used a regular payback of 4 years
d. Multiple IRRs can exist, but not multiple MIRRs. This is one reason some people favor the MIRR over the regular IRR.
e. The NPV, IRR, MIRR, and discounted payback (using a payback requirement of 3 years or less) methods always lead to the same accept/reject decisions for independent projects.

In your first job with TBL Inc. your task is to consider a new project whose data are shown below. What is the project's Year 1 cash flow?
Sales revenues $22,250
Depreciation $8,000
Other operating costs $12,000
Tax rate 35.0%
a. $8,903
b. $9,746
c. $9,179
d. $10,039
e. $9,463

Tallant Technologies is considering two potential projects, X and Y. In assessing the projects' risks, the company estimated the beta of each project versus both the company's other assets and the stock market, and it also conducted thorough scenario and simulation analyses. This research produced the following data:
Project X Project Y
Expected NPV $500,000 $500,000
Standard deviation (σNPV) $200,000 $250,000
Project beta (vs. market) 1.4 0.8

Correlation of the project cash flows with cash flows from currently existing projects. Cash flows are not correlated with the cash flows from existing projects. Cash flows are highly correlated with the cash flows from existing projects.
Which of the following statements is CORRECT?
a. Project X has the same level of corporate risk as Project Y.
b. Project X has more market risk than Project Y.
c. Project X has more stand-alone risk than Project Y.
d. Project X has less market risk than Project Y.
e. Project X has more corporate (or within-firm) risk than Project Y.

Which of the following statements is CORRECT?
a. An example of a sunk cost is the cost associated with restoring the site of a strip mine once the ore has been depleted.
b. A good example of a sunk cost is money that a banking corporation spent last year to investigate the site for a new office, then expensed that cost for tax purposes, and now is deciding whether to go forward with the project.
c. A good example of a sunk cost is a situation where a bank opens a new office, and that new office leads to a decline in deposits of the bank's other offices.
d. If sunk costs are considered and reflected in a project's cash flows, then the project's calculated NPV will be higher than it otherwise would be.
e. Sunk costs must be considered if the IRR method is used but not if the firm relies on the NPV method.

Weber Interstate Paving Co. had $450 million of sales and $225 million of fixed assets last year, so its FA/Sales ratio was 50%. However, its fixed assets were used at only 65% of capacity. If the company had been able to sell off enough of its fixed assets at book value so that it was operating at full capacity, with sales held constant at $450 million, how much cash (in millions) would it have generated?
a. $86.82
b. $78.75
c. $82.69
d. $91.16
e. $74.81

Decker Enterprises
Below are the simplified current and projected financial statements for Decker Enterprises. All of Decker's assets are operating assets. All of Decker's current liabilities are operating liabilities.
Income statement Current Projected
Sales na       1,500
Costs na       1,050
Profit before tax na          450
Taxes na          135
Net income na          315
Dividends na             95

Balance sheets Current Projected Current Projected
Current assets       100          115 Current liabilities       70          81
Net fixed assets 1,200       1,440 Long-term debt    300       360
Common stock    500       500
Retained earnings    430       650

If Decker had a financing surplus, it could remedy the situation by
a. borrowing on its line of credit.
b. reducing its dividend.
c. borrowing from its retained earnings
d. issuing more common stock.
e. paying a special dividend

The Besnier Company had $250 million of sales last year, and it had $75 million of fixed assets that were being operated at 80% of capacity. In millions, how large could sales have been if the company had operated at full capacity?
a. $361.8
b. $344.5
c. $312.5
d. $328.1
e. $379.8

Which of the following is NOT normally regarded as being a good reason to establish an ESOP?
a. To help retain valued employees.
b. To enable the firm to borrow at a below-market interest rate.
c. To help prevent a hostile takeover.
d. To make it easier to grant stock options to employees.
e. To increase worker productivity.

Which of the following statements is CORRECT?
a. When firms are deciding on the size of stock splits⎯say whether to declare a 2-for-1 split or a 3-for-1 split, it is best to declare the smaller one, in this case the 2-for-1 split, because then the after-split price will be higher than if the 3-for-1 split had been used.
b. If a firm's stock price is quite high relative to most stocks⎯say $500 per share⎯then it can declare a stock split of say 10-for-1 so as to bring the price down to something close to $50. Moreover, if the price is relatively low⎯say $2 per share⎯then it can declare a "reverse split" of say 1-for-25 so as to bring the price up to somewhere around $50 per share.
c. Back before the SEC was created in the 1930s, companies would declare reverse splits in order to boost their stock prices. However, this was determined to be a deceptive practice, and it is illegal today.
d. When a company declares a stock split, the price of the stock typically declines⎯by about 50% after a 2-for-1 split⎯and this necessarily reduces the total market value of the equity.
e. Stock splits create more administrative problems for investors than stock dividends, especially determining the tax basis of their shares when they decide to sell them, so today stock dividends are used far more often than stock splits.

The Meltzer Corporation is contemplating a 7-for-3 stock split. The current stock price is $75.00 per share, and the firm believes that its total market value would increase by 5% as a result of the improved liquidity that it thinks would follow the split. What is the stock's expected price following the split?
a. $37.21
b. $39.07
c. $35.44
d. $33.75
e. $32.06

Sanchez Company has planned capital expenditures that total $2,000,000. The company wants to maintain a target capital structure that is 35% debt and 65% equity. The company forecasts that its net income this year will be $1,800,000. If the company follows a residual dividend policy, what will be its total dividend payment?
a. $300,000
b. $500,000
c. $100,000
d. $200,000
e. $400,000

Companies HD and LD have identical tax rates, total assets, and return on invested capital (ROIC), and their ROIC exceeds their after-tax cost of debt, (1-T) rd. However, Company HD has a higher debt ratio and thus more interest expense than Company LD. Which of the following statements is CORRECT?
a. Company HD has a higher net income than Company LD.
b. Company HD has a lower ROA than Company LD.
c. Company HD has a lower ROE than Company LD.
d. The two companies have the same ROA.
e. The two companies have the same ROE.

Which of the following would increase the likelihood that a company would increase its debt ratio, other things held constant?
a. The company's stock price hits a new low.
b. An increase in costs incurred when filing for bankruptcy.
c. An increase in the corporate tax rate.
d. The Federal Reserve tightens interest rates in an effort to fight inflation.
e. An increase in the personal tax rate.

Which of the following statements concerning capital structure theory is NOT CORRECT?
a. Under MM with corporate taxes, the effect of business risk is automatically incorporated because rsL is a function of rsU.
b. Under MM with corporate taxes, rs increases with leverage, and this increase exactly offsets the tax benefits of debt financing.
c. Under MM with corporate taxes, the value of a levered firm exceeds the value of the unlevered firm by the product of the tax rate times the market value dollar amount of debt.
d. The major contribution of Miller's theory is that it demonstrates that personal taxes decrease the value of using corporate debt.
e. Under MM with zero taxes, financial leverage has no effect on a firm's value.

After an intensive research and development effort, two methods for producing playing cards have been identified by the Turner Company. One method involves using a machine having a fixed cost of $10,000 and variable costs of $1.00 per deck of cards. The other method would use a less expensive machine (fixed cost = $5,000), but it would require greater variable costs ($1.50 per deck of cards). If the selling price per deck of cards will be the same under each method, at what level of output will the two methods produce the same net operating income (EBIT)?
a. 25,000 decks
b. 5,000 decks
c. 10,000 decks
d. 20,000 decks
e. 15,000 decks

Which of the following statements is CORRECT?
a. If a firm sells on terms of net 60, and if its sales are highly seasonal, with a sharp peak in December, then its DSO as it is typically calculated (with sales per day = Sales for past 12 months/365) would probably be lower in January than in July.
b. If a firm sells on terms of 2/10 net 30, and its DSO is 30 days, then the firm probably has some past-due accounts.
c. Other things held constant, the higher a firm's days sales outstanding (DSO), the better its credit department.
d. If a firm that sells on terms of net 30 changes its policy to 2/10 net 30, and if no change in sales volume occurs, then the firm's DSO will probably increase.
e. If a firm changed the credit terms offered to its customers from 2/10 net 30 to 2/10 net 60, then its sales should increase, and this should lead to an increase in sales per day, and that should lead to a decrease in the DSO.

A lockbox plan is
a. used to slow down the collection of checks our firm writes.
b. used to protect cash, i.e., to keep it from being stolen.
c. used to identify inventory safety stocks.
d. used to speed up the collection of checks received.
e. used primarily by firms where currency is used frequently in transactions, such as fast food restaurants, and less frequently by firms that receive payments as checks.

Which of the following statements is CORRECT?
a. Under normal conditions, a firm's expected ROE would probably be higher if it financed with short-term rather than with long-term debt, but using short-term debt would probably increase the firm's risk.
b. Conservative firms generally use no short-term debt and thus have zero current liabilities.
c. If one of your firm's customers is "stretching" its accounts payable, this may be a nuisance but it will not have an adverse financial impact on your firm if the customer periodically pays off its entire balance.
d. If a firm that can borrow from its bank at a 6% interest rate buys materials on terms of 2/10 net 30, and if it must pay by Day 30 or else be cut off, then we would expect to see zero accounts payable on its balance sheet.
e. A short-term loan can usually be obtained more quickly than a long-term loan, but the cost of short-term debt is normally higher than that of long-term debt.

Suppose a carton of hockey pucks sell in Canada for 105 Canadian dollars, and 1 Canadian dollar equals 0.71 U.S. dollars. If purchasing power parity (PPP) holds, what is the price of hockey pucks in the United States?
a. $147.88
b. $63.00
c. $14.79
d. $85.88
e. $74.55

If the spot rate of the Israeli shekel is 5.51 shekels per dollar and the 180-day forward rate is 5.97 shekels per dollar, then the forward rate for the Israeli shekel is selling at a ____ to the spot rate.
a. premium of 16%
b. discount of 18%
c. premium of 18%
d. discount of 8%
e. premium of 8%

Suppose Yates Inc., a U.S. exporter, sold a consignment of antique American muscle-cars to a Japanese customer at a price of 143.5 million yen, when the exchange rate was 140 yen per dollar. In order to close the sale, Yates agreed to make the bill payable in yen, thus agreeing to take some exchange rate risk for the transaction. The terms were net 6 months. If the yen fell against the dollar such that one dollar would buy 154.4 yen when the invoice was paid, what dollar amount would Yates actually receive after it exchanged yen for U.S. dollars?
a. $1,000,000
b. $975,610
c. $1,025,000
d. $929,404
e. $1,075,958

A U.S.-based company, Stewart, Inc., arranged a 2-year, $1,000,000 loan to fund a project in Mexico. The loan is denominated in Mexican pesos, carries a 10.0% nominal rate, and requires equal semiannual payments. The exchange rate at the time of the loan was 5.75 pesos per dollar, but it dropped to 5.10 pesos per dollar before the first payment came due. The loan was not hedged in the foreign exchange market. Thus, Stewart must convert U.S. funds to Mexican pesos to make its payments. If the exchange rate remains at 5.10 pesos per dollar through the end of the loan period, what effective interest rate will Stewart end up paying on the loan?
a. 10.36%
b. 21.79%
c. 11.50%
d. 20.00%
e. 17.44%

An option that gives the holder the right to sell a stock at a spec...