Quiz Quiz Quiz Quiz

QUESTION 11. Which of the following statements is CORRECT?A.Ifa stock becomes riskier (more volatile), call options on the stock are likelyto decline in value.B.Becauseof the put-call parity relationship, under equilibrium conditions a put optionon a stock must sell at exactly the same price as a call option on the stock.C.Calloptions generally sell at prices above their exercise value, but for anin-the-money option, the greater the exercise value in relation to the strikeprice, the lower the premium on the option is likely to be.D.Ifthe underlying stock does not pay a dividend, it makes good economic sense toexercise a call option as soon as the stock's price exceeds the strike priceby about 10%, because this permits the option holder to lock in an immediateprofit.E.Calloptions generally sell at a price less than their exercise value.QUESTION 21. Which of the following bonds has the greatest interest rateprice risk?A.All10-year bonds have the same price risk since they have the same maturity.B.A10-year, $1,000 face value, 10% coupon bond with semiannual interestpayments.C.A10-year, $1,000 face value, 10% coupon bond with annual interest payments.D.A10-year, $1,000 face value, zero coupon bond.QUESTION 31. 4. Which of the following statements is CORRECT? Assume that theproject being considered has normal cash flows, with one cash outflow at t = 0followed by a series of positive cash flows.A.Tofind a project's MIRR, we compound cash inflows at the regular IRR and thenfind the discount rate that causes the PV of the terminal value to equal theinitial cost.B.Tofind a project's MIRR, the textbook procedure compounds cash inflows at theWACC and then finds the discount rate that causes the PV of the terminalvalue to equal the initial cost.C.Aproject's MIRR is always less than its regular IRR.D.Ifa project's IRR is greater than its WACC, then its MIRR will be greater thanthe IRR.E.Aproject's MIRR is always greater than its regular IRR.QUESTION 41. Puckett Inc. risk-adjusts its WACC to account for project risk.It uses a WACC of 8% for below-average risk projects, 10% for average-riskprojects, and 12% for above-average risk projects. Which of the followingindependent projects should Puckett accept, assuming that the company uses theNPV method when choosing projects?A.ProjectC, which has above-average risk and an IRR = 11%.B.Withoutinformation about the projects' NPVs we cannot determine which project(s)should be accepted.C.ProjectA, which has average risk and an IRR = 9%.D.ProjectB, which has below-average risk and an IRR = 8.5%.E.Allof these projects should be accepted.QUESTION 51. Laramie Labs uses a risk-adjustment when evaluating projects ofdifferent risk. Its overall (composite) WACC is 10%, which reflects the cost ofcapital for its average asset. Its assets vary widely in risk, and Laramieevaluates low-risk projects with a WACC of 8%, average-risk projects at 10%,and high-risk projects at 12%. The company is considering the followingprojects:Project Risk Expected ReturnA High 15%B Average 12%C High 11%D Low 9%ELow 6%A.A,B, and C.B.A,B, and D.C.A,B, C, D, and E.D.Aand B.E.A,B, C, and D.QUESTION 61. Which of the following statements is CORRECT?A.Fora project with normal cash flows, any change in the WACC will change both theNPV and the IRR.B.Tofind the MIRR, we first compound cash flows at the regular IRR to find theTV, and then we discount the TV at the WACC to find the PV.C.TheNPV and IRR methods both assume that cash flows can be reinvested at theWACC. However, the MIRR method assumes reinvestment at the MIRR itself.D.Iftwo projects have the same cost, and if their NPV profiles cross in the upperright quadrant, then the project with the lower IRR probably has more of itscash flows coming in the later years.E.Iftwo projects have the same cost, and if their NPV profiles cross in the upperright quadrant, then the project with the higher IRR probably has more of itscash flows coming in the later years.QUESTION 71. Stock X has a beta of 0.7 and Stock Y has a beta of 1.7. Whichof the following statements must be true, according to the CAPM?A.Ifyou invest $50,000 in Stock X and $50,000 in Stock Y, your 2-stock portfoliowould have a beta significantly lower than 1.0, provided the returns on thetwo stocks are not perfectly correlated.B.StockY's return has a higher standard deviation than Stock X.C.StockY's realized return during the coming year will be higher than Stock X'sreturn.D.Ifthe expected rate of inflation increases but the market risk premium is unchanged,the required returns on the two stocks should increase by the same amount.E.Ifthe market risk premium declines, but the risk-free rate is unchanged, StockX will have a larger decline in its required return than will Stock Y.QUESTION 81. With its current financial policies, Flagstaff Inc. will have toissue new common stock to fund its capital budget. Since new stock has a highercost than reinvested earnings, Flagstaff would like to avoid issuing new stock.Which of the following actions would REDUCE its need to issue new common stock?A.Increasethe percentage of debt in the target capital structure.B.Reducethe amount of short-term bank debt in order to increase the current ratio.C.Increasethe dividend payout ratio for the upcoming year.D.Reducethe percentage of debt in the target capital structure.E.Increasethe proposed capital budget.QUESTION 91. Stocks X and Y have the following data. Assuming the stockmarket is efficient and the stocks are in equilibrium, which of the followingstatements is CORRECT? X YPrice $30 $30Expected growth (constant) 6% 4%Requiredreturn 12% 10%A.StockX has the higher expected year-end dividend.B.StockY has a higher dividend yield than Stock X.C.StockX has a higher dividend yield than Stock Y.D.StockY has a higher capital gains yield.E.Oneyear from now, Stock X's price is expected to be higher than Stock Y's price.QUESTION 101. Weatherall Enterprises has no debt or preferred stock¾it is anall-equity firm¾and has a beta of 2.0. The chieffinancial officer is evaluating a project with an expected return of 14%,before any risk adjustment. The risk-free rate is 5%, and the market riskpremium is 4%. The project being evaluated is riskier than an average project,in terms of both its beta risk and its total risk. Which of the followingstatements is CORRECT?A.Riskier-than-averageprojects should have their expected returns increased to reflect their higherrisk. Clearly, this would make the project acceptable regardless of theamount of the adjustment.B.Theproject should definitely be accepted because its expected return (before anyrisk adjustments) is greater than its required return.C.Capitalbudgeting projects should be evaluated solely on the basis of their totalrisk. Thus, insufficient information has been provided to make theaccept/reject decision.D.Theproject should definitely be rejected because its expected return (beforerisk adjustment) is less than its required return.E.Theaccept/reject decision depends on the firm's risk-adjustment policy. IfWeatherall's policy is to increase the required return on ariskier-than-average project to 3% over rS, then it should reject theproject.