Q&A Hero

Q: According to the put-call parity theorem, the value of a European put option on a nondividend paying stock is equal to A. the call value plus the present value of the exercise price plus the stock price. B. the call value plus the present value of the exercise price minus the stock price. C. the present value of the stock price minus the exercise price minus the call price. D. the present value of the stock price plus the exercise price minus the call price. E. None of the options are correct.

Q: A covered call position is A. the simultaneous purchase of the call and the underlying asset. B. the purchase of a share of stock with a simultaneous sale of a put on that stock. C. the short sale of a share of stock with a simultaneous sale of a call on that stock. D. the purchase of a share of stock with a simultaneous sale of a call on that stock. E. the simultaneous purchase of a call and sale of a put on the same stock.

Q: The current market price of a share of MSI stock is $24. If a call option on this stock has a strike price of $24, the call A. is out of the money. B. is in the money. C. is at the money. D. None of the options are correct.

Q: The current market price of a share of CAT stock is $76. If a call option on this stock has a strike price of $76, the call A. is out of the money. B. is in the money. C. is at the money. D. None of the options are correct.

Q: The current market price of a share of Disney stock is $60. If a call option on this stock has a strike price of $65, the call A. is out of the money. B. is in the money. C. can be exercised profitably. D. is out of the money and can be exercised profitably. E. is in the money and can be exercised profitably.

Q: The current market price of a share of CSCO stock is $22. If a call option on this stock has a strike price of $20, the call A. is out of the money. B. is in the money. C. sells for a higher price than if the market price of CSCO stock is $21. D. is out of the money and sells for a higher price than if the market price of CSCO stock is $21. E. is in the money and sells for a higher price than if the market price of CSCO stock is $21.

Q: The current market price of a share of Boeing stock is $75. If a call option on this stock has a strike price of $70, the call A. is out of the money. B. is in the money. C. sells for a higher price than if the market price of Boeing stock is $70. D. is out of the money and sells for a higher price than if the market price of Boeing stock is $70. E. is in the money and sells for a higher price than if the market price of Boeing stock is $70.

Q: The current market price of a share of AT&T stock is $50. If a call option on this stock has a strike price of $45, the call A. is out of the money. B. is in the money. C. sells for a higher price than if the market price of AT&T stock is $40. D. is out of the money and sells for a higher price than if the market price of AT&T stock is $40. E. is in the money and sells for a higher price than if the market price of AT&T stock is $40.

Q: All else equal, call option values are higher A. in the month of May. B. for low dividend-payout policies. C. for high dividend-payout policies. D. in the month of May and for low dividend-payout policies. E. in the month of May and for high dividend-payout policies.

Q: All else equal, call option values are lower A. in the month of May. B. for low dividend-payout policies. C. for high dividend-payout policies. D. in the month of May and for low dividend-payout policies. E. in the month of May and for high dividend-payout policies.

Q: To adjust for stock splits A. the exercise price of the option is reduced by the factor of the split, and the number of options held is increased by that factor. B. the exercise price of the option is increased by the factor of the split, and the number of options held is reduced by that factor. C. the exercise price of the option is reduced by the factor of the split, and the number of options held is reduced by that factor. D. the exercise price of the option is increased by the factor of the split, and the number of options held is increased by that factor.

Q: A European put option can be exercised A. any time in the future. B. only on the expiration date. C. if the price of the underlying asset declines below the exercise price. D. immediately after dividends are paid.

Q: A European call option can be exercised A. any time in the future. B. only on the expiration date. C. if the price of the underlying asset declines below the exercise price. D. immediately after dividends are paid.

Q: Consider a one-year maturity call option and a one-year put option on the same stock, both with striking price $100. If the risk-free rate is 5%, the stock price is $103, and the put sells for $7.50, what should be the price of the call? A. $17.50 B. $15.26 C. $10.36 D. $12.26 E. None of the options.

Q: Consider a one-year maturity call option and a one-year put option on the same stock, both with striking price $45. If the risk-free rate is 4%, the stock price is $48, and the put sells for $1.50, what should be the price of the call? A. $4.38 B. $5.60 C. $6.23 D. $12.26 E. None of the options.

Q: Trading in "exotic options" takes place primarily A. on the New York Stock Exchange. B. in the over-the-counter market. C. on the American Stock Exchange. D. in the primary marketplace. E. None of the options.

Q: Asian options differ from American and European options in that A. they are only sold in Asian financial markets. B. they never expire. C. their payoff is based on the average price of the underlying asset. D. they are only sold in Asian financial markets and they never expire. E. they are only sold in Asian financial markets and their payoff is based on the average price of the underlying asset.

Q: A callable bond should be priced the same as A. a convertible bond. B. a straight bond plus a put option. C. a straight bond plus a call option. D. a straight bond plus warrants. E. a straight bond.

Q: ING Stock currently sells for $38. A one-year call option with strike price of $45 sells for $9, and the risk-free interest rate is 4%. What is the price of a one-year put with strike price of $45? A. $9.00 B. $12.89 C. $16.00 D. $18.72 E. $14.27

Q: Common size balance sheets make it easier to compare firms A. with different degrees of leverage. B. of different sizes. C. in different industries. D. that use different inventory valuation methods (FIFO vs. LIFO).

Q: Common size income statements make it easier to compare firms A. that use different inventory valuation methods (FIFO vs. LIFO). B. in different industries. C. with different degrees of leverage. D. of different sizes.

Q: Common size financial statements make it easier to compare firms A. of different sizes. B. in different industries. C. with different degrees of leverage. D. that use different inventory valuation methods (FIFO vs. LIFO).

Q: To create a common size balance sheet, ____________ all items on the balance sheet by ____________. A. multiply; owners'equity B. multiply; total assets C. divide; owners'equity D. divide; total assets E. multiply; debt

Q: To create a common size income statement, ____________ all items on the income statement by A. multiply; net income B. multiply; total revenue C. divide; net income D. divide; total revenue E. multiply; COGS

Q: Which of the following are issues when dealing with the financial statements of international firms? I) Many countries allow firms to set aside larger contingency reserves than the amounts allowed for U.S. firms. II) Many firms outside the U.S. use accelerated depreciation methods for reporting purposes, whereas most U.S. firms use straight-line depreciation for reporting purposes. III) Intangibles, such as goodwill, may be amortized over different periods or may be expensed rather than capitalized. IV) There is no way to reconcile the financial statements of non-U.S. firms to GAAP. A. I and II B. II and IV C. I, II, and III D. I, III, and IV E. I, II, III, and IV

Q: Economic value added (EVA) is also known asA. excess capacity.B. excess income.C. value of assets.D. accounting value added.E. residual income.

Q: The dollar value of a firm's return in excess of its opportunity costs is called its A. profitability measure. B. excess return. C. economic value added. D. prospective capacity. E. return margin.

Q: The P/E ratio that is based on a firm's financial statements and reported in the newspaper stock listings is different from the P/E ratio derived from the dividend discount model (DDM) because A. the DDM uses a different price in the numerator. B. the DDM uses different earnings measures in the denominator. C. the prices reported are not accurate. D. the people who construct the ratio from financial statements have inside information. E. They are not different this is a "trick" question.

Q: Suppose that Chicken Express, InC. has an ROA of 7% and pays a 6% coupon on its debt. Chicken Express has a capital structure that is 70% equity and 30% debt. Relative to a firm that is 100% equity-financed, Chicken Express's net profit will be ________, and its ROE will be ________. A. lower; lower B. higher; higher C. higher; lower D. lower; higher E. It is impossible to predict.

Q: Which of the financial statements recognizes only transactions in which cash changes hands? A. Balance sheet B. Income statement C. Statement of cash flows D. Balance sheet and income statement E. All of the options are correct.

Q: Proceeds from a company's sale of stock to the public are included in A. par value. B. additional paid-in capital. C. retained earnings. D. par value and additional paid-in capital. E. All of the options are correct.

Q: ______ is a measure of what the firm would have earned if it didn't have any obligations to creditors or tax authorities. A. Net Sales B. Operating Income C. Net Income D. Non-operating Income E. Earnings before interest and taxes

Q: The financial statements of Snapit Company are given below. Note: The common shares are trading in the stock market for $100 each. Refer to the financial statements of Snapit Company. The firm's market-to-book value for 2009 is A. 0.7256. B. 1.5294. C. 2.9400. D. 3.6142.

Q: The financial statements of Snapit Company are given below. Note: The common shares are trading in the stock market for $100 each. Refer to the financial statements of Snapit Company. The firm's return on equity ratio for 2009 is A. 0.1235. B. 0.0296. C. 0.2960. D. 2.2960.

Q: The financial statements of Snapit Company are given below. Note: The common shares are trading in the stock market for $100 each. Refer to the financial statements of Snapit Company. The firm's return on sales ratio for 2009 is A. 0.0133. B. 0.1325. C. 1.325. D. 1.260.

Q: FOX Company has a ratio of (total debt/total assets) that is above the industry average, and a ratio of (long term debt/equity) that is below the industry average. These ratios suggest that the firm A. utilizes assets effectively. B. has too much equity in the capital structure. C. has relatively high current liabilities. D. has a relatively low dividend-payout ratio. E. None of the options are correct.

Q: Return on total assets is the product of A. interest rates and pre-tax profits. B. the debt-equity ratio and P/E ratio. C. the after-tax profit margin and the asset turnover ratio. D. sales and fixed assets. E. None of the options are correct.

Q: During periods of inflation, the use of FIFO (rather than LIFO) as the method of accounting for inventories causes A. higher reported sales. B. higher incomes taxes. C. lower ending inventory. D. higher incomes taxes and lower ending inventory. E. None of the options are correct.

Q: A measure of asset utilization is A. sales divided by working capital. B. return on total assets. C. return on equity capital. D. operating profit divided by sales. E. None of the options are correct.

Q: A firm has a (net profit/pretax profit) ratio of 0.6, a leverage ratio of 2, a (pretax profit/EBIT) of 0.6, an asset turnover ratio of 2.5, a current ratio of 1.5, and a return on sales ratio of 4%. The firm's ROE is A. 4.2%. B. 5.2%. C. 6.2%. D. 7.2%. E. None of the options are correct.

Q: A firm has an ROE of 2%, a debt/equity ratio of 1.0, a tax rate of 0%, and an interest rate on debt of 10%. The firm's ROA is A. 2%. B. 4%. C. 6%. D. 8%. E. None of the options are correct.

Q: A firm has an ROA of 14%, a debt/equity ratio of 0.8, a tax rate of 35%, and the interest rate on the debt is 10%. The firm's ROE is A. 11.18%. B. 8.97%. C. 11.54%. D. 12.62%.

Q: A firm has a net profit/pretax profit ratio of 0.625, a leverage ratio of 1.2, a pretax profit/EBIT of 0.9, an ROE of 17.82%, a current ratio of 8, and a return on sales ratio of 8%. The firm's asset turnover is A. 0.3. B. 1.3. C. 2.3. D. 3.3.

Q: The financial statements of Black Barn Company are given below. Note: The common shares are trading in the stock market for $40 each. Refer to the financial statements of Black Barn Company. The firm's market-to-book value for 2009 is A. 1.13. B. 1.62. C. 1.00. D. 1.26.

Q: The financial statements of Black Barn Company are given below. Note: The common shares are trading in the stock market for $40 each. Refer to the financial statements of Black Barn Company. The firm's P/E ratio for 2009 is A. 8.88. B. 7.63. C. 7.88. D. 7.32.

Q: The financial statements of Black Barn Company are given below. Note: The common shares are trading in the stock market for $40 each. Refer to the financial statements of Black Barn Company. The firm's return on equity ratio for 2009 is A. 16.88%. B. 15.63%. C. 14.00%. D. 15.00%. E. 16.24%.

Q: The financial statements of Black Barn Company are given below. Note: The common shares are trading in the stock market for $40 each. Refer to the financial statements of Black Barn Company. The firm's return on sales ratio for 2009 is A. 15.5%. B. 14.6%. C. 14.0%. D. 15.0%. E. 16.5%.

Q: The financial statements of Black Barn Company are given below. Note: The common shares are trading in the stock market for $40 each. Refer to the financial statements of Black Barn Company. The firm's asset turnover ratio for 2009 is A. 1.79. B. 1.63. C. 1.34. D. 2.58. E. None of the options are correct.

Q: The financial statements of Black Barn Company are given below. Note: The common shares are trading in the stock market for $40 each. Refer to the financial statements of Black Barn Company. The firm's fixed asset turnover ratio for 2009 is A. 2.04. B. 2.58. C. 2.97. D. 1.58. E. None of the options are correct.

Q: The financial statements of Black Barn Company are given below. Note: The common shares are trading in the stock market for $40 each. Refer to the financial statements of Black Barn Company. The firm's inventory turnover ratio for 2009 is A. 3.15. B. 3.63. C. 3.69. D. 2.58. E. 4.20.

Q: The financial statements of Black Barn Company are given below. Note: The common shares are trading in the stock market for $40 each. Refer to the financial statements of Black Barn Company. The firm's average collection period for 2009 is A. 59.31. B. 55.05. C. 61.31. D. 49.05. E. None of the options are correct.

Q: The financial statements of Black Barn Company are given below. Note: The common shares are trading in the stock market for $40 each. Refer to the financial statements of Black Barn Company. The firm's times interest earned ratio for 2009 is A. 8.86. B. 7.17. C. 9.66. D. 6.86. E. None of the options are correct. $1,240,000/$140,000 = 8.86.

Q: The financial statements of Black Barn Company are given below. Note: The common shares are trading in the stock market for $40 each. Refer to the financial statements of Black Barn Company. The firm's leverage ratio for 2009 is A. 1.65. B. 1.89. C. 2.64. D. 1.31. E. 1.56.

Q: The financial statements of Black Barn Company are given below. Note: The common shares are trading in the stock market for $40 each. Refer to the financial statements of Black Barn Company. The firm's quick ratio for 2009 is A. 1.69. B. 1.52. C. 1.23. D. 1.07. E. 1.00.

Q: The financial statements of Black Barn Company are given below. Note: The common shares are trading in the stock market for $40 each. Refer to the financial statements of Black Barn Company. The firm's current ratio for 2009 is A. 2.31. B.1.87. C. 2.22. D. 2.46.

Q: A firm has a P/E ratio of 12, an ROE of 13%, and a market-to-book value of A. 0.64. B. 0.92. C. 1.08. D. 1.56.

Q: If a firm has a positive tax rate, a positive ROA, and the interest rate on debt is the same as ROA, then ROA will be A. greater than the ROE. B. equal to the ROE. C. less than the ROE. D. greater than zero, but it is impossible to determine how ROA will compare to ROE. E. negative in all cases.

Q: __________ provides a snapshot of the financial condition of the firm at a particular time. A. The balance sheet B. The income statement C. The statement of cash flows D. All of the options are correct. E. None of the options are correct.

Q: An example of a liquidity ratio is A. fixed asset turnover. B. current ratio. C. acid test or quick ratio. D. fixed asset turnover and acid test or quick ratio. E. current ratio and acid test or quick ratio.

Q: A firm has a lower quick (or acid test) ratio than the industry average, which implies A. the firm has a lower P/E ratio than other firms in the industry. B. the firm is less likely to avoid insolvency in the short run than other firms in the industry. C. the firm may be more profitable than other firms in the industry. D. the firm has a lower P/E ratio than other firms in the industry, and the firm is less likely to avoid insolvency in the short run than other firms in the industry. E. the firm is less likely to avoid insolvency in the short run than other firms in the industry, and the firm may be more profitable than other firms in the industry.

Q: A firm has a higher quick (or acid test) ratio than the industry average, which implies A. the firm has a higher P/E ratio than other firms in the industry. B. the firm is more likely to avoid insolvency in the short run than other firms in the industry. C. the firm may be less profitable than other firms in the industry. D. the firm has a higher P/E ratio than other firms in the industry, and the firm is more likely to avoid insolvency in the short run than other firms in the industry. E. the firm is more likely to avoid insolvency in the short run than other firms in the industry, and the firm may be less profitable than other firms in the industry.

Q: Sure Tool Company is expected to pay a dividend of $2 in the upcoming year. The risk-free rate of return is 4%, and the expected return on the market portfolio is 14%. The beta of Sure Tool Company's stock is 1.25. If Sure's intrinsic value is $21.00 today, what must be its growth rate? A. 0.0% B. 10% C. 4% D. 6% E. 7%

Q: Sure Tool Company is expected to pay a dividend of $2 in the upcoming year. The risk-free rate of return is 4%, and the expected return on the market portfolio is 14%. Analysts expect the price of Sure Tool Company shares to be $22 a year from now. The beta of Sure Tool Company's stock is 1.25. What is the intrinsic value of Sure's stock today? A. $20.60 B. $20.00 C. $12.12 D. $22.00

Q: Sure Tool Company is expected to pay a dividend of $2 in the upcoming year. The risk-free rate of return is 4%, and the expected return on the market portfolio is 14%. Analysts expect the price of Sure Tool Company shares to be $22 a year from now. The beta of Sure Tool Company's stock is 1.25. The market's required rate of return on Sure's stock is A. 14.0%. B. 17.5%. C. 16.5%. D. 15.25%. E. None of the options are correct.

Q: The most popular approach to forecasting the overall stock market is to use A. the dividend multiplier. B. the aggregate return on assets. C. the historical ratio of book value to market value. D. the aggregate earnings multiplier. E. Tobin's Q.

Q: One of the problems with attempting to forecast stock market values is that A. there are no variables that seem to predict market return. B. the earnings multiplier approach can only be used at the firm level. C. the level of uncertainty surrounding the forecast will always be quite high. D. dividend-payout ratios are highly variable. E. None of the options are correct.

Q: Paper Express Company has a balance sheet which lists $85 million in assets, $40 million in liabilities, and $45 million in common shareholders'equity. It has 1,400,000 common shares outstanding. The replacement cost of the assets is $115 million. The market share price is $90. What is Paper Express's market value per share? A. $1.68 B. $2.60 C. $32.14 D. $60.71 E. None of the options are correct.

Q: Paper Express Company has a balance sheet which lists $85 million in assets, $40 million in liabilities, and $45 million in common shareholders'equity. It has 1,400,000 common shares outstanding. The replacement cost of the assets is $115 million. The market share price is $90. What is Paper Express's book value per share? A. $1.68 B. $2.60 C. $32.14 D. $60.71 E. None of the options are correct.

Q: Consider the free cash flow approach to stock valuation. Utica Manufacturing Company is expected to have before-tax cash flow from operations of $500,000 in the coming year. The firm's corporate tax rate is 30%. It is expected that $200,000 of operating cash flow will be invested in new fixed assets. Depreciation for the year will be $100,000. After the coming year, cash flows are expected to grow at 6% per year. The appropriate market capitalization rate for unleveraged cash flow is 15% per year. The firm has no outstanding debt. The total value of the equity of Utica Manufacturing Company should be A. $1,000,000. B. $2,000,000. C. $3,000,000. D. $4,000,000.

Q: Consider the free cash flow approach to stock valuation. Utica Manufacturing Company is expected to have before-tax cash flow from operations of $500,000 in the coming year. The firm's corporate tax rate is 30%. It is expected that $200,000 of operating cash flow will be invested in new fixed assets. Depreciation for the year will be $100,000. After the coming year, cash flows are expected to grow at 6% per year. The appropriate market-capitalization rate for unleveraged cash flow is 15% per year. The firm has no outstanding debt. The projected free cash flow of Utica Manufacturing Company for the coming year is A. $150,000. B. $180,000. C. $300,000. D. $380,000.

Q: Mature Products Corporation produces goods that are very mature in their product life cycles. Mature Products Corporation is expected to pay a dividend in year 1 of $2.00, a dividend of $1.50 in year 2, and a dividend of $1.00 in year 3. After year 3, dividends are expected to decline at a rate of 1% per year. An appropriate required rate of return for the stock is 10%. The stock should be worth A. $9.00. B. $10.57. C. $20.00. D. $22.22.

Q: Antiquated Products Corporation produces goods that are very mature in their product life cycles. Antiquated Products Corporation is expected to pay a dividend in year 1 of $1.00, a dividend of $0.90 in year 2, and a dividend of $0.85 in year 3. After year 3, dividends are expected to decline at a rate of 2% per year. An appropriate required rate of return for the stock is 8%. The stock should be worth A. $8.98. B. $10.57. C. $20.00. D. $22.22.

Q: Exercise Bicycle Company is expected to pay a dividend in year 1 of $1.20, a dividend in year 2 of $1.50, and a dividend in year 3 of $2.00. After year 3, dividends are expected to grow at the rate of 10% per year. An appropriate required return for the stock is 14%. The stock should be worth _______ today. A. $33.00 B. $39.86 C. $55.00 D. $66.00 E. $40.68

Q: JCPenney Company is expected to pay a dividend in year 1 of $1.65, a dividend in year 2 of $1.97, and a dividend in year 3 of $2.54. After year 3, dividends are expected to grow at the rate of 8% per year. An appropriate required return for the stock is 11%. The stock should be worth _______ today. A. $33.00 B. $40.67 C. $71.80 D. $66.00 E. None of the options are correct.

Q: The market-capitalization rate on the stock of Fast Growing Company is 20%. The expected ROE is 22%, and the expected EPS are $6.10. If the firm's plowback ratio is 90%, the P/E ratio will be A. 7.69. B. 8.33. C. 9.09. D. 11.11. E. 50.

Q: The market-capitalization rate on the stock of Flexsteel Company is 12%. The expected ROE is 13%, and the expected EPS are $3.60. If the firm's plowback ratio is 75%, the P/E ratio will be A. 7.69. B. 8.33. C. 9.09. D. 11.11. E. None of the options are correct.

Q: The market-capitalization rate on the stock of Flexsteel Company is 12%. The expected ROE is 13%, and the expected EPS are $3.60. If the firm's plowback ratio is 50%, the P/E ratio will be A. 7.69. B. 8.33. C. 9.09. D. 11.11. E. None of the options are correct.

Q: Risk Metrics Company is expected to pay a dividend of $3.50 in the coming year. Dividends are expected to grow at a rate of 10% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 13%. The stock is trading in the market today at a price of $90.00. What is the approximate beta of Risk Metrics's stock? A. 0.8 B. 1.0 C. 1.1 D. 1.4 E. None of the options are correct.

Q: Risk Metrics Company is expected to pay a dividend of $3.50 in the coming year. Dividends are expected to grow at a rate of 10% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 13%. The stock is trading in the market today at a price of $90.00. What is the market-capitalization rate for Risk Metrics? A. 13.6% B. 13.9% C. 15.6% D. 16.9% E. None of the options are correct.

Q: High Tech Chip Company paid a dividend last year of $2.50. The expected ROE for next year is 12.5%. An appropriate required return on the stock is 11%. If the firm has a plowback ratio of 60%, the dividend in the coming year should be A. $1.00. B. $2.50. C. $2.69. D. $2.81. E. None of the options are correct.