ACF All Quizzes Spring 2021 Other Variant

Quiz-1
 Return to Assessment List
Part 1 of 1 - Section-1 / 10.0 Points
Question 1 of 101.0 Points

Which of the following statements is true?
 A. A private limited company’s share trade on organized exchanges such as the
Pakistan Stock Exchange (PSX); whereas public companies shares are owned by
governments.
 B. Passive investment approach attempts to outperform the market through timing or
selecting undervalued securities.
 C. Rights offerings are often used when an already listed company raises new equity
 D. More than one of the statements are true
Answer Key:C
Which of the following statements is false?
 A. Profitability ratios show the combined effects of liquidity, asset management, and
debt management on operating results.
 B. A decline in a firm's inventory turnover ratio suggests that it is managing its
inventory more efficiently and also that its liquidity position is improving.
 C. Market value ratios provide management with an indication of how investors view
the firm's past performance and especially its future prospects.
 D. More than one of the statements are false
Answer Key:B
 A. The Principal-Agent Problem arises because managers have little incentive to
work in the interest of shareholders when this means working against their own self-
interest.
 B. Intrinsic value of a stock primarily depends on the cash flows, timing of the cash
flows, and riskiness of the cash flows.
 C. If a firm's goal is to maximize its earnings per share, this is the best way to
maximize the price of the common stock and thus shareholders' wealth.
 D. According to Warren Buffett, “investors should be greedy when the market is
fearful and fearful when the market is greedy.” This statement is consistent with his
value investment style as a contrarian.
 E. More than one of the statements are false
Answer Key:C
 A. Berkshire Hathaway has two classes of common shares: Class A and Class B.
Both classes possess equal rights to dividends but differ in terms of voting rights.
 B. Warren Buffett is widely recognized as a guru of value investment style with a
stellar track record of performance.
 C. A stock is said to be undervalued when its market price is less than its intrinsic
value.
Answer Key:A
If the economy were going into a recession, an attractive industry to invest in would be the
 A. automobile industry.
 B. medical services industry.
 C. construction industry.
 D. automobile and construction industries.
 E. medical services and construction industries.
Answer Key:B
 A. Warren Buffet’s view regarding treatment of risk in evaluation investments is
consistent with the Capital Asset Pricing Model (CAPM)
 B. In acquiring companies, Warren Buffett looks for well-run businesses producing
consistent results and offered at a fair price.
 C. A firm that generates positive market value added (MVA) is in effect creating
value for its shareholders.
Answer Key:A
HHH Inc. reported $12,500 of sales and $7,025 of operating costs (including depreciation).
The company had $18,750 of investor-supplied operating assets (or capital), the weighted
average cost of that capital (the WACC) was 9.5%, and the federal-plus-state income tax rate
was 40%. What was HHH's Economic Value Added (EVA) during the year?
 A. $2,051.25
 B. $3,693.75
 C. $1,503.75
 D. $1,578.94
 E. none of the above is correct
Answer Key:C
 A. Two major styles of investment are value and growth. Investors following value
style typically look for undervalued securities.
 B. If a firm reports positive net income, its Economic Value Added (EVA) must also
be positive.
 C. One way to increase EVA is to generate the same level of ROIC (return on
invested capital) but with lower cost of capital (WACC).
Answer Key:B
Which of the following are not examples of defensive industries?
 A. Food producers
 B. Durable goods producers
 C. Pharmaceutical firms
 D. Public utilities
Answer Key:B
According to Michael Porter, there are five determinants of competition and profitability of
an industry. An example of _____ is when a buyer purchases a large fraction of an industry's
output and can demand price concessions.
 A. threat of new entrants
 B. rivalry among existing competitors
 C. threat of substitute products
 D. bargaining power of buyers
 E. bargaining power of suppliers
Answer Key:D
Quiz 2
Part 1 of 1 - Section-1 / 10.0 Points

Which of the following statements is false? (Source: Case of Unidentified Industries)
 A. Cash received before revenue is reported on the income statement; the result is an
unearned or deferred revenue which is a liability.
 B. The terms debt and liabilities are often used interchangeably. However, debt
strictly speaking refers to interest bearing obligations of the firm.
 C. The amount of cash and marketable securities a firm holds to counter the
uncertainty surrounding its future cash needs is known as speculative balances.
 E. In a common size balance sheet, a large percentage of intangible assets in the form
good will is indicative of an acquisitive company.
Answer Key:C
An analyst has the following data for a company. Based only on the information below, the most
appropriate conclusion is that over the period, the company’s:
2017 2018 2019

ROE 19.8% 20.0% 22.0%
Return on total assets 8.1% 8.0% 7.9%
Total asset turnover 2.0 2.0 2.1
 A.
net profit margin and leverage have increased
 B.
net profit margin and leverage have decreased
 C.
net profit margin has decreased but its leverage has increased
Answer Key:C
Which of the following statements is false? (Source: Approaches for thoughtful forecasting)
 A. Analysts’ over-optimism generally leads to overestimation of expected value in
their forecasts
 B. If the capital intensity ratio (A*/S0) is high, this permits sales to grow more
rapidly without much outside capital.
 C. More than one of the statements are false
 D. The phenomenon of mean reversion refers to the tendency of firms with
outperformance over a certain period to subsequently underperform.
 E. The most critical step in constructing pro forma financial statements is the net
income forecast.
Answer Key:C
 A. Sell side analysts are those who generally make “sell” recommendations as
opposed to “buy” recommendations.
 B. More than one of the statements are true
 C. Growth in sales can be decomposed into two components: unit growth and real
growth
 D. A decrease in a firm’s average collection period or days sales outstanding (DSO)
from 60 to 40 days, other things held constant, would reduce the additional funds
needed requirement.
 E. Tendency of people to look for, or interpret information that is consistent with
their existing beliefs is known as the representativeness bias.
Answer Key:D
Which of the following statements is false? (Source: Bill Miller and Value Trust)
 A. The primary objective of fundamental analysis is to identify mispriced stocks.
 B. Bill Miller mostly relied on fundamental analysis for his stock selection and his
investment style was generally consistent with value investing
 C. Bill Miller was a fund manager of Value Trust which belonged to Black Rock
family of mutual funds
 D. Bill Miller outperformed S&P 500 benchmark in bull markets but underperformed
in bear markets.
Answer Key:E
 A. ROA, ROE, and ROIC are all measures of a firm’s profitability. However, both
ROE and ROIC favor companies with leverage.
 B. One of the key steps in the development of pro forma financial statements is to
identify those assets and liabilities which increase spontaneously with sales.
 C. The self-sustaining growth rate is the maximum achievable growth in sales
without firm having to raise external funds.
 E. The Survivorship Bias refers to the fact that investors take action based on existing
companies ignoring those who have disappeared.
Answer Key:A
 A. A vast majority of mutual funds are passively managed as opposed to actively
managed funds.
 B. ETFs are typically index trackers that trade on stock exchanges like stocks
 C. Net Asset Value (NAV) is defined as market value of assets minus liabilities
divided by shares or units outstanding.
 D. Closed-end fund shares can be directly purchased from the fund company at their
net asset value provided there is no load fee.
 E. more than one of the statements are false
Answer Key:E
A firm has an inventory turnover ratio of 6.08X, a receivables turnover ratio of 10.14X and a
payables turnover rate of 9.125X. Assuming a 365-day year, how long is the company’s Cash
Conversion Cycle? Select the closest value. (Hint: CCC = DSO + DSI – DPO)
 A. 60 days
 B. 36 days
 C. 56 days
 D. 40 days
Answer Key:C
Marshall, Inc. has developed a forecasting model to estimate its AFN for the upcoming year.
All else being equal, which of the following factors is most likely to lead to an increase of the
additional funds needed (AFN)?
 A. The company reduces its dividend payout ratio.
 B. The company discovers that it has excess capacity in its fixed assets.
 C. A sharp increase in its forecasted sales.
 D. A switch to a just-in-time inventory system and outsourcing production.
Answer Key:C
Which of the following would reduce the additional funds needed (AFN) for financing the
firm’s operations (other things held constant)?
 A. an increase in the dividend payout ratio
 B. an increase in the capital intensity ratio (A/S)
 C. an increase in the net profit margin
 D. an increase in the expected growth rate in sales
Answer Key:C
Quiz 3
Part 1 of 2 - Sec-1 / 6.0 Points

 A. A floating rate bond has less interest rate risk than a similar fixed rate bond (all
else constant).
 B. A discount bond will have current yield that is less than its coupon rate
 C. Mortgage bonds are debt obligations that are secured by financial assets such as
Treasury bills and bonds. d. Interest rate risk is a major concern for bondholders.
Interest rate risk refers to the fact that bond’s coupon rate will change as market
interest rate changes.
Answer Key:A
 A. Convertible bonds give the investor the option to share in the price appreciation of
the company's stock.
 B. Interest and principal payment of a revenue bond (municipal) is paid from the
project financed with such an issue.
 C. Including a sinking fund in a bond indenture, is likely to increase the bond yield
(holding all else constant)
 D. bond refunding refers to replacing an old issue with high coupon rate with a new
issue at lower coupon rate
 E. More than one of the above statements are false
Answer Key:C
 A. A Eurobond is an issue denominated in a currency other than the currency of the
country where it is sold.
 B. The written agreement between a corporation and its bondholders is often referred
to as the bond indenture
 C. Other things held constant, a corporation would rather issue non-callable bonds
than callable bonds.
 D. The curvature of the price-yield curve for a given bond is referred to as the bond's
convexity.
Answer Key:C
Listed below are some provisions that are often contained in bond indentures. Which of these
provisions, viewed alone, would tend to reduce the yield to maturity that investors would otherwise
require on a newly issued bond?
1. Fixed assets are used as security for a bond.
2. A given bond is subordinated to other classes of debt.
3. The bond can be converted into the firm's common stock.
4. The bond has a sinking fund.
5. The bond has a call provision.
6. The indenture contains covenants that prevent the use of additional debt.
 A.
1, 2, 3, 4, 6
 B.
1, 2, 3, 4, 5, 6
 C.
1, 4, 6
 D.
1, 3, 4, 6
 E.
1, 3, 4, 5, 6
Answer Key:D
 A. Duration refers to the effective maturity of a bond that incorporates both coupon
and term to maturity
 B. In general, bond markets are less liquid than stock markets since large institutions
such as pension funds and life insurance companies are major investors in the bond
market.
 C. A bond will sell at a premium when its coupon rate is greater than its current yield
and its current yield is greater than its yield to maturity.
 D. Duration of a bond is measure of call risk of a bond
Answer Key:D
Which of the following bonds would most likely sell at the highest yield?
 A. a callable debenture
 B. a convertible bond
 C. a callable mortgage bond
 D. a callable subordinated debenture
Answer Key:D
Part 2 of 2 - Sec-2 / 4.0 Points

Engro Corp. is considering a project that has the following cash flow data. What is the project's IRR?
Year 0 1 2 3
Cash Flow -1,000 425 450 500
 A.
12.55%
 B.
13.21%
 C.
13.87%
 D.
14.56%
 E.
17.25%
Answer Key:E
The current market price of Mattel Corporation’s bond is $891. The coupon rate is 8% (paid
semi-annually), and par value is $1,000. If the bond matures 8 years from today, what is the
bond’s yield-to-maturity?
 A. 4.8%
 B. 6%
 C. 8.9%
 D. 10%
 E. None of the figures is correct
Answer Key:D
JB Corporation's bonds have 15 years to maturity, an 8.75% coupon paid semiannually, and a
$1,000 par value. The bond has a 6.50% nominal yield to maturity, but it can be called in 6
years at a price of $1,050. What is the bond's nominal yield to call?
 A. 5.01%
 B. 5.27%
 C. 5.54%
 D. 5.81%
 E. 6.10%
Answer Key:B
A new investment opportunity for you is an annuity that pays $550 at the beginning of each
year for 3 years. You could earn 5.5% on your money in other investments with equal risk.
What is the most you should pay for the annuity?
 A. $1,412.84
 B. $1,487.20
 C. $1,565.48
 D. $1,643.75
 E. $1,725.94
Answer Key:C
Quiz 4
Part 1 of 2 - Section - 1 / 6.0 Points

Which of the following statements are true?
 A. All portfolios that lie on the CML to the left of market portfolio are known as
lending portfolios.
 B. the risk reducing benefits of diversification do not occur meaningfully until at
least 100 securities are included in the portfolio
 C. If investors become less risk averse, the slope of the Security Market Line (SML)
will increase.
 D. proper diversification can significantly reduce or eliminate systematic risk
 E. More than one of the statements are true
Answer Key:A
 A. Diversification reduces a portfolio’s expected return since diversification reduces
its total risk
 B. As more securities are added to a portfolio, total risk is likely to fall at a
decreasing rate
 C. The underlying assumption of MPT is that investors are rational and risk averse
Answer Key:A
In computing WACC which of the following variables are least controversial with respect to
estimation as reported in the Survey – “Best Practices” in Estimating the Cost of Capital?
I. Market risk premium

II. Cost of debt
III. Beta estimation
IV. Weight of equity capital
 A.
I and III above
 B.
I and II above
 C.
II and IV above
 D.
III and IV above
Answer Key:C
 A. Individual stock betas tend to be unstable over time
 B. Defensive stocks typically have beta greater than the market beta
 C. The required return on a stock is the return that an investor actually realizes over a
particular time period.
 D. The slope of the regression line in the single index model is the stock's standard
deviation.
Answer Key:A
 A. A stock generated a series of following returns over 4 years: 20%; -10%; 20%,
and -10%. The geometric return of the series is about 3.9 percent.
 B. Other things equal, diversification is most effective when returns are perfectly
positively correlated.
 C. The R-square indicates percentage variation in the independent variable as a result
of changes in the dependent variable.
 D. more than one of the statements are true
Answer Key:A
 A. The correlation of a portfolio with the market index was estimated as 0.80. This
indicates that portfolio’s systematic risk in percentage is 36%.
 B. Arithmetic average return of a multi-period series is always equal to or greater
than the geometric mean return.
 C. standard deviation and beta both measure risk, but beta measures only systematic
risk; while standard deviation is a measure of total risk
 D. The slope of CML is determined by the market risk premium
 E. more than one of the statements are false
Answer Key:E
Part 2 of 2 - Part 2 / 4.0 Points

Your boss has asked you to estimate the cost of capital of Dow Corporation. Following is the
balance sheets and some additional information about Dow.
Assets
Current assets $38,000,000
Net plant, property, and equipment $101,000,000
Total Assets $139,000,000
Liabilities and Equity
Accounts payable $10,000,000

Accruals $9,000,000
Current liabilities $19,000,000
Long term debt (40,000 bonds, $1,000 face value) $40,000,000
Total liabilities $59,000,000
Common Stock (10,000,000 shares outstanding) $30,000,000
Retained Earnings $50,000,000
Total Shareholders’ equity $80,000,000
Total liabilities and shareholders’ equity $139,000,000
You check The Wall Street Journal and see that Dow stock is currently selling for $7.50 per
share and that Dow long-term bonds are currently priced at 88.95% of $1,000 face value.
These bonds have a 7.25 percent annual coupon (paid semi-annually) and maturity of 10
years. Dow’s bonds are rated BBB by S&P. The yield on 10-year Treasury bonds is 5.5
percent, while the one-year Treasury was yielding 3.5%. The estimated market risk premium
is 6%. Dow is in the 40 percent tax bracket. Dow is a mature company with a stable growth
rate of 5% and an expected dividend yield of 7%. You collect the following return data on
Dow stock and the S&P 500 for the past five years to estimate the stock’s beta.
Dow Stock Return and Market Data
Year Dow Return % S&P 500 Return %
2015 16 15
2016 -9 -5
2017 16 15
2018 11 15
2019 -14 -10
7. What is your estimate of the firm’s cost of debt after tax? Answer: __________
8. What is the appropriate weight of debt ____________ and equity ____________?
9. What is your estimate of Dow’s beta coefficient? Answer: ____________
10. What is your estimate of the firm’s cost of equity-based on CAPM? Answer: ____________
Write your answer in this format: (Q7. XXX, Q8. XXX , XXX Q9. XXX, Q10. XXX)
Quiz 5
Part 1 of 2 - Part-1 2.0 / 7.0 Points

Consider the four investments with the following sequences of cash flows. The firm’s cost of capital
is 10%.
Project D may have multiple IRRs. Which of the following statements regarding project D
is false?
Project Cash Flows
Year Project A Project B Project C Project D
0 -$50,000 -$30,000 -60,000 -$1,000
1 20,000 15,000 -30,000 3,900
2 20,000 15,000 -30,000 - 5,030
3 30,000 10,000 -30,000 3,145
 A.
One of the IRRs of project D is around 131%
 B.
The NPV of the project D at the firm’s cost of capital is positive
 C.
The MIRR of project D is less than the firm’s cost of capital of 10%
 D.
The MIRR of project D is greater than the firm’s cost of capital of 10%
 E.
The project’s non-discounted payback period is around 2.68 years
Answer Key:C
 A. Unlike IRR, NPV does not follow the value additivity principle
 B. Other things held constant, an increase in the cost of capital will result in a
decrease in a project's IRR.
 C. If the nominal interest rate is 7. 5% and the inflation rate is 4%, then the real
interest rate as per Fisher equation is 3.4%.
 D. No conflict will exist between the NPV and IRR methods, when used to evaluate
two equally risky but mutually exclusive projects, if the projects' cost of capital
exceeds the rate at which the projects' NPV profiles cross.
Answer Key:E
Consider the four investments with the following sequences of cash flows. The firm’s cost of capital
is 10%.
Which of the following statements regarding the four projects is false?
Project Cash Flows
Yea Project A Project B Project C Project D
r
0 -$50,000 -$30,000 -60,000 -$1,000
1 20,000 15,000 -30,000 3,900
2 20,000 15,000 -30,000 - 5,030
3 30,000 10,000 -30,000 3,145
 A.
project A and B are both normal investment projects
 B.
project D may have three IRRs
 C.
The Profitability Index (PI) of project A is 0.145 and its IRR is 17.5%
 D.
Project C is a non-normal project and its IRR cannot be computed
 E.
more than one of the statements are false
Answer Key:C
 A.
A normal investment project is one in which cash inflows are followed by cash
outflows.
 B.
One of the principle in evaluating investment projects is to evaluate inflation adjusted
cash flows at cost of capital rate.
 C.
The multiple IRR problem can be resolved through computing the IRR of the ¿ project.
 D.
Money that has been paid regardless of the decision whether or not to proceed with
the project is called an opportunity cost.
 E.
More than one of the statements are true
Answer Key:B
Two mutually exclusive projects have the following NPVs and project lives. If the cost of capital is
12%, which project would you accept?
Project NPV Life

Project A $5,000 4 years
Project B $6,500 6 years
 A.
A
 B.
B
 C.
Both A and B
 D.
Reject both A and B
Answer Key:A
The following cash flows should be treated as incremental flows when deciding whether to
go ahead with an electric car project except:
 A. The consequent reduction in sales of the company's existing gasoline models (i.e.:
side effects)
 B. Interest payment on debt
 C. The value of tools that can be transferred from the company's existing plants
 D. The expenditure on new plants and equipment
Answer Key:B
 A. The primary advantage to using accelerated rather than straight-line depreciation
is that with accelerated depreciation the present value of the tax savings provided by
depreciation will be higher, other things held constant.
 B. If a firm's projects differ in risk, then one way of handling this problem is to
evaluate each project with the appropriate risk-adjusted discount rate.
 C. An analysis that shows how the NPV varies as one of the underlying assumptions
is changed, is called scenario analysis.
 D. Because of differences in the expected NPV of different investments, the standard
deviation is not always an adequate measure of risk. However, the coefficient of
variation adjusts for differences in expected returns and thus allows investors to make
better comparisons of investments' stand-alone risk.
Answer Key:C
Part 2 of 2 - Part-2 0.0 / 3.0 Points

Use the following information to answer the next 3 questions. You are provided with a partial
projected income statement with some additional information for a project with an economic life of 4
years because of the contractual nature of the investment. The project required an initial investment of
$16,000 in a special printing machine. The machine will be depreciated on straight line over 4 years
with an estimated salvage value of $4,000. Because of rising prices of imported printing machines, the
expected sale price of the machine at the end of year 4 is estimated at $6,000. The working capital
requirement is 10% of revenues but has to be made at the beginning of each period. The working
capital investment can be recovered at the end of year 4. Annual interest expense is $2,000 for debt
portion of the project financing. The firm’s tax rate is 40% and cost of capital of 14%.
Year 0 1 2 3 4
Revenues $12,000 $14,000 $14,000 $10,000
EBITDA 6,000 7,000 7,000 5,000
8. What is the amount of net operating profit after-tax (NOPAT) in year 2 ___________ and year
4 ____________?
9. What is the amount of investment required in working capital in year 2 ________?
10. What are the free cash flow to the firm (FCFF) in year 4 ____________?
Answer in this format: (Q8. XXX, XXX , Q9. XXX, Q10. XXX)
Quiz 6


Return to Assessment List
Part 1 of 2 - P1 / 6.0 Points

 A. A negative cash conversion is always bad.
 B. Most money market securities are free from default risk
 C. Financing part or all of the permanent working capital needs with short-term debt
is known as an aggressive financing policy.
Answer Key:C
 A. An aging schedule categorizes account receivables by the number of days they
have been outstanding on the firm's books.
 B. The lower the cash discount percentage offered, the greater the opportunity cost of
forgoing the discount.
 C. The effective annual rate (EAR) takes into account the compounding effect of
interest
 D. If the yield curve is upward sloping, then short-term interest rates are higher than
long term rates
Answer Key:E
A firm has an inventory turnover ratio of 6X, a receivables turnover ratio of 10X and a
payables turnover rate of 9X. Assuming a 360-day year, how long is the company’s Cash
Conversion Cycle? Select the closest value.
 A. 60 days
 B. 56 days
 C. 40 days
 D. 36 days
Answer Key:B
All of the following are part of the 5-Cs of credit, except:
 A. Character
 B. Collateral
 C. Capacity
 D. Cash
 E. Conditions
Answer Key:D
 A. In a committed line of credit, the borrowing firm pays interest on all of the
committed line.
 B. With a matching maturity financing policy, the firm would use short-term debt
very sparingly to meet its seasonal or fluctuating working capital needs and all
permanent needs with long-term sources.
 C. Working Capital Management policy involves two decisions: (1) How much
working capital is appropriate for the firm? (2) How to finance firm’s working capital
requirement?
Answer Key:A
 A. Factoring of receivables can be with or without recourse to the borrower. In
without recourse, lender can claim the defaulted amount from the borrower.
 B. Money market instruments are debt instrument that are typically sold at a discount
from face value as opposed to coupon-bearing instruments.
 C. Commercial paper (CP) is a money market instrument issued by large most
creditworthy organizations and its interest rate is generally lower than comparable
commercial banks borrowing rate.
Answer Key:A

Which one of the following statements regarding capital structure is not correct?
 A. M&M’s proposition II states that cost of equity of a firm is not affected by capital
structure changes.
 B. M&M theory (in a world without taxes) leads to the conclusion that capital
structure decision is irrelevant, i.e., does not affect firm value.
 C. According to the pecking order theory new debt is preferable to new equity and
internal financing is preferable over debt.
 D. According to static tradeoff theory there is an optimal level of debt which balances
benefits against costs
 E. More than one of the statements are not correct
Answer Key:A
 A. Equity in a firm with debt is called levered equity and Equity without debt is
unlevered equity.
 B. Investors in levered equity require a higher expected return to compensate for its
increased risk.
 C. Franco Modigliani and Merton Miller argued that with perfect capital markets and
zero corporate taxes, the total value of a firm should not depend on its capital
structure.
 D. Although indirect costs of bankruptcy are difficult to measure accurately, they are
typically much smaller than the direct costs of bankruptcy such as legal expenses.
Answer Key:D
 A. The value of the levered firm is reduced below that indicated by M&M in a world
with corporate taxes because of bankruptcy and agency costs.
 B. if a firm has a DOL = 2X and DFL= 1X, then its DTL = 3X
 C. When a firm makes a significant change to its capital structure, the transaction is
called a recapitalization.
 D. When comparing levered vs. unlevered capital structures, leverage works to
increase EPS for high levels of operating income because Interest payments on the
debt stay fixed, leaving more income to be distributed over less shares.
Answer Key:B
What type of companies are likely to have high leverage?
 A. Companies with high growth opportunities in new and cutting edge industries
 B. Companies in stable and defensive industries with reliable cash flows
 C. Technology companies
 D. Companies in cyclical industries
 E. Companies in which the production input prices are highly uncertain
Answer Key:B
Quiz 7
Part 1 of 3 - S2 / 6.0 Points

 A. Firms with high proportions of intangible assets are likely to use more debt
compared with firms with high proportions of tangible assets such as land and
buildings.
 B. One way companies protect themselves from borrowing too much is to put a
constraint on debt rating to remain within investment grade.
 C. Of all the deviations from M&M’s perfect market assumptions that impact capital
structure choices of firms, the most significant imperfection is the existence of
corporate taxes.
 D. The argument for debt as a mechanism to discipline management is built around
the premise that most stockholders have little power over mangers.
Answer Key:A
 A. Agency costs represent another cost of increasing the firm's leverage that will
affect the firm's optimal capital structure choice.
 B. Debt covenants may limit the firm's ability to pay large dividends or the types of
investments that the firm can make.
 C. Computer software firms are likely to have higher indirect financial distress costs
compared to grocery stores
 D. One disadvantage of using leverage is that it does not allow the original owners of
the firm to maintain their equity stake.
Answer Key:D
 A. The WACC approach to valuation is not as useful as the APV in LBOs because
the capital structure keeps changing.
 B. To calculate the adjusted present value (APV), one needs to add the present value
of financing effects to the present value of operating (unlevered) cash flows of an all
equity firm.
 C. The appropriate discount rate in applying APV method to value base case
operating unlevered cash flows is the firm’s weighted average cost of capital.
 D. If the WACC is used in valuing a leveraged buyout, the WACC must be
recalculated as the debt is repaid and the cost of capital changes.
Answer Key:C
 A. A biotech firm developing drugs with tremendous potential, but it has yet to
receive any revenue from these drugs. Such a firm will not have taxable earnings. In
that case, a tax-optimal capital structure does not include debt.
 B. Calculating the precise present value of financial distress costs is a relatively
straightforward process.
 C. Technology firms are likely to incur high costs when they are in financial distress,
due to the potential for loss of customers and key personnel, as well as a lack of
tangible assets that can be easily liquidated.
 D. Real estate firms are likely to have low costs of financial distress, as much of their
value derives from assets that can be sold relatively easily.
Answer Key:B
Agency cost arise anytime there is a conflict between stockholders interest and lenders
interest. Assuming agency problems are high at a company relative to its competitors in the
industry, which of the following would you not expect to observe regarding company’s
borrowing?
 A. It will be able to borrow more than other companies
 B. It will have to pay higher interest rates on its debt than otherwise similar
companies.
 C. It will face less stringent bond indenture covenants (both affirmative and negative)
that otherwise similar companies.
 D. More than one of the given statements are false
Answer Key:D
 A. The unlevered beta measures the market risk of the firm's business activities,
ignoring any additional risk due to leverage.
 B. The total value of the unlevered firm exceeds the value of the firm with leverage
due to the present value of the tax savings from debt.
 C. Given a 21% corporate tax rate, for every $1 in new permanent debt that the firm
issues, the value of the firm increases by $0.79.
 D. When a firm makes a significant change to its capital structure, the transaction is
called a recapitalization
Answer Key:E

Simon Software Co. is trying to estimate its optimal capital structure. Right now, Simon has a
capital structure that consists of 20 percent debt and 80 percent equity, based on market
values. The risk-free rate is 6 percent and the market risk premium, Rm – Rf, is 5 percent.
Currently the company’s beta is 1.44 and its tax rate is 40 percent. What would be Simon’s
estimated cost of equity if it were to change its capital structure to 50 percent debt and 50
percent equity?
 A. 14.35%
 B. 30.00%
 C. 16.00%
 D. 15.60%
 E. 13.64%
Answer Key:C
Use the following information to answer the next 3 questions.
As a financial analyst at Kodak Corporation, you have been asked to analyze the capital
structure of the company and make recommendations on the firm’s future financing mix.
Kodak has 30 million shares outstanding, selling at $30 per share and market value of debt is
$300 million. The current beta of the stock is 1.8, and the firm’s debt is rated as AA with
corresponding YTM of 11.5%. The treasury rates are as follows: 1-year T-bill is yielding 4%
and 10-year bond yield is 7% per year. The market risk premium is estimated at 6%. The
firm’s marginal tax rate is 40%.
8. What is the firm’s current WACC? Select the closest value.
a. 14.33%
b. 12.66
c. 15.08
d. 12.96
e. none of the given figures are correct
9. Kodak is planning to increase its financial leverage by borrowing an additional $100 million in
debt and repurchasing stock with those funds. If it does so its bond rating will decline to “A”,
with market rate of interest increasing to 12% from its current level of 11.5%. What will be
the firm’s new cost of equity with the additional debt in its capital structure? Assume stock
price remains unchanged at $30 with additional leverage.
a. 18.7%
b. 14.9
c. 15.70
d. 12.06
e. none of the given figures are correct
10. Should Kodak recapitalize by borrowing $200 million in debt and repurchasing its own
stock with those funds?
a. Yes, because the firm’s WACC declines with the new structure
b. No, because the firm’s cost of equity rises with the new structure
c. Yes, because the firm’s WACC increases with the new structure
d. Insufficient information to evaluate the impact of recapitalization on WACC
Quiz 8

 A. Most leases involve little or no upfront payment.
 B. In the operating lease versus buy decision, leasing is often preferable when the life
of the project is uncertain.
 C. Financial or capital leases help to pass the risk of obsolescence from the lessee to
the lessor creating an advantage for leasing.
 D. A lease is treated as an operating lease if the property may be purchased by the
lessee at a bargain price.
Answer Key:E
 A. Features of leases are generally priced as part of the lease payment. Terms that
give valuable options to the lessee lower the amount of the lease payments, whereas
terms that restrict these options will raise them.
 B. Because capital leases increase the apparent leverage on the firm's balance sheet,
firms sometimes prefer to have a lease categorized as an operating lease to keep it off
the balance sheet.
 C. The risk of the lease payments is no greater than the risk of secured debt, so it is
reasonable to discount the lease payments at the firm's secured borrowing rate.
 D. Because of the higher recovery value in the event of default, a lessor may be able
to offer more attractive financing through the lease than an ordinary lender could.
Answer Key:A
 A. Most financial analysts and sophisticated investors consider operating leases to be
additional sources of leverage.
 B. Under a leveraged lease, the lessee borrows money and is then used to make the
lease payments.
 C. A lease that combines the features of an operating and financial lease is often
called a combination lease
 D. The full amount of lease payment is a tax-deductible expense provided the
contract is considered a genuine capital lease
Answer Key:E
The lease is treated as a capital lease (financial lease) for the lessee and must be listed on the
firm's balance sheet if it satisfies any of the following conditions, EXCEPT:
 A. the lease contains an option to purchase the asset at its fair market value.
 B. the present value of the minimum lease payments at the start of the lease is 90% or
more of the asset's fair market value.
 C. the title to the property transfers to the lessee at the end of the lease term.
 D. the lease term is 75% or more of the estimated economic life of the asset.
 E. the asset is specialized and has no alternative use to the lessor at the end of the
term
Answer Key:A
 A. If a firm only needs to use the asset for a short time, it is probably less costly to
lease it than to buy and resell the asset.
 B. By carefully avoiding the criteria that define a lease for accounting purposes, a
firm can avoid listing the long-term lease as a liability.
 C. Car dealerships are in a better position to sell a used car at the end of a lease than a
consumer is.
 D. Leasing allows the party best able to bear the risk to hold it. For example, small
firms with a low tolerance for risk may prefer to lease rather than purchase assets.
Answer Key:B
 A. A lease is likely to be more beneficial to a lessee whose borrowing cost is higher
than the lessor’s borrowing cost, holding all else constant.
 B. If the IRR is greater than the after-tax cost of borrowing (in the NAL analysis),
leasing is beneficial from the lessee perspective.
 C. If a firm already owns an asset it would prefer to lease, it can arrange a sale and
leaseback transaction.
 D. In a capital lease, the asset acquired is listed on the lessee's balance sheet, and the
lessee incurs depreciation expenses for the asset.
Answer Key:B
 A. In a leveraged lease, the lessor borrows from a bank or other lender to obtain the
initial capital for the purchase, using the lease payments to pay interest and principal
on the loan.
 B. The amount of the lease payment will depend on the purchase price, the residual
value, and the appropriate discount rate for the cash flows.
 C. Although the legal ownership of the asset resides with the lessor, in an operating
lease the lessee receives the depreciation deductions.
 D. The Financial Accounting Standards Board (FASB) have changed the rules that
now require leases extending beyond one year (both financial and operating) to
recognize lease asset and liabilities on the balance sheet.
Answer Key:C

Use the following information to answer the next 3 questions:
AKD Cleaners needs a new steam finishing machine that costs $100,000. The company is
evaluating whether it should lease or purchase the machine. The equipment falls into the
MACRS 3-year class, and it would be used for 3 years and then sold, because the firm plans
to move to a new facility at that time. The estimated value of the equipment after 3 years is
$30,000. A maintenance contract on the equipment would cost $3,000 per year, payable at the
beginning of each year. Alternatively, the firm could lease the equipment for 3 years for a
lease payment of $29,000 per year, payable at the beginning of each year. The lease would
include maintenance. The firm is in the 20% tax bracket, and it could obtain a 3-year simple
interest loan, interest payable at the end of the year, to purchase the equipment at a before-tax
cost of 10%. The firm’s overall cost of capital (WACC) is 18%. If there is a positive Net
Advantage to Leasing the firm will lease the equipment. Otherwise, it will buy it. (MACRS
3-Year Asset Depreciation percentages: Year1 = 33%; Year2 = 45%; Year3 = 15%; Year4 =
7%) Required: Answer the following questions based on your estimates.
8. What is the present value of owning the steam finishing machine? __________
9. What is the present value of leasing the steam finishing machine? _________
10. What the net advantage of leasing the steam finishing machine? __________
Answer in this format: Q8. XXX, Q9. XXX. Q10. XXX
Quiz 9

 A. Share repurchases are a credible signal that the shares are underpriced, because if
they are over-priced a share repurchase is costly for current shareholders.
 B. M&M argue that in the absence of tax difference there is no reason for investors to
prefer dividends over capital gains since investors can always home-made desired
dividend payout by adjusting their holdings
 C. Differences in tax preferences create clientele effects, in which the dividend policy
of a firm is optimized for the tax preference of its investor clientele.
 D. The residual theory of dividends implies that dividend policy is a more important
area of decision making than investment policy.
Answer Key:D
 A. If you set your dividend payout by looking at the average for the sector in which
you operate, this assumes your company’s growth rate, operating risk, debt ratio, and
clientele are roughly similar.
 B. The dividend-irrelevance proposition of M&M shows that the level of investment
does not influence or matter to the dividend decision.
 C. Dividend dates in proper order from earliest to latest are: declaration date, ex-
dividend date, record date, and payment date
 D. If a firm follows a strict residual dividend policy, then, holding all else constant,
its dividend payout ratio will tend to rise whenever the firm's investment opportunities
decline.
Answer Key:B
 A. If the price of the stock falls too low, a company can engage in a reverse split and
reduce the number of shares outstanding.
 B. From an accounting perspective, dividends generally reduce the firm's current (or
accumulated) retained earnings.
 C. With a stock dividend, a firm does not pay out any cash to shareholders. As a
result, the total market value of the firm's assets and liabilities, and therefore of its
equity, is unchanged.
 D. Because of the increasing popularity of share repurchases, firms cut dividends
much more frequently than they increase them.
Answer Key:D
 A. Stock repurchases tend to reduce financial leverage.
 B. If a firm adheres strictly to the residual dividend policy, the issuance of new
common stock would suggest that no dividends were paid during the year.
 C. One method of repurchasing shares is the Dutch auction share repurchase in which
the firm lists different prices at which it is prepared to buy shares, and shareholders in
turn indicate how many shares they are willing to sell at each price.
 D. The stronger management thinks the clientele effect is, the more likely the firm is
to adopt a strict version of the residual dividend model.
Answer Key:E
M&M argue that dividend policy is irrelevant. On the other hand, Gordon and Lintner (GL)
argue that dividend policy does matter. GL argument rests on the assumption that
 A. Cost of equity does not change with the change in dividend policy
 B. Investors value a dollar dividend more highly than a dollar of expected capital
gain.
 C. Investors are indifferent between dividends and distribution in the form of capital
gains.
 D. Investors require that the dividend yield and capital gains yield equal a constant.
Answer Key:B
 A. Stock repurchases make the most sense at times when the management believes
that company’s stock is overvalued.
 B. If a company has an established clientele of investors who prefer a high dividend
payout, and if management wants to keep stockholders happy, it should follow the
strict residual dividend policy.
 C. One of the reasons why many companies in the US have shifted away from paying
cash dividends to stock repurchases is that companies feel less certain about future
earnings.
 D. Firms with a lot of good investment opportunities and a relatively small amount of
cash tend to have above average payout ratios.
Answer Key:C
 A. Gordon and Lintner believe that the required return on equity increases as the
dividend payout ratio is decreased.
 B. Large stock repurchases financed by debt tend to increase earnings per share, but
they also increase the firm's financial risk.
 C. A firm’s dividend policy decision may be influenced by the constraints imposed
by the firm's bond indenture.
 D. MM's dividend irrelevance theory says that while dividend policy does not affect a
firm's value, it can affect the cost of capital.
Answer Key:D
 A. The typical motivation for a stock split is to keep the share price in a range
thought to be attractive to small investors.
 B. The average size of the stock price reaction depends on the magnitude of the
dividend change and is typically larger for dividend increases than similar dividend
cuts.
 C. While an increase of a firm's dividend may signal management's optimism
regarding its future cash flows, it might also signal a lack of investment opportunities.
 D. While evidence is indicative of the growing importance of share repurchases as a
part of firms' payout policies, it also shows that dividends remain a key form of
payouts to shareholders.
Answer Key:B
 A. Stock repurchases can be used by a firm that wants to recapitalize with a view to
increase its debt ratio.
 B. An increase in the stock price when a company decreases its dividend is consistent
with signaling theory as postulated by MM.
 C. After a 3-for-1 stock split, a company's price per share should fall, but the number
of shares outstanding will rise.
 D. Many high tech companies have never paid any cash dividends to its investors
Answer Key:B

McCann Publishing has a target capital structure of 35% debt and 65% equity. This year's
capital budget is $850,000 and it wants to pay a dividend of $400,000. If the company
follows a residual dividend policy, how much net income must it earn to meet its capital
budgeting requirements and pay the dividend, all while keeping its capital structure in
balance?
 A. $904,875
 B. $1,000,125
 C. $952,500
 D. $1,050,131
 E. $1,102,638
Answer Key:C
Quiz 10

Which of the following statements is not true?
 A. Empirical evidence on IPOs suggests that new equity issues are generally fairly
priced.
 B. Book Building is the process by which an underwriter attempts to determine at
what price to offer an IPO based on demand from qualified investors.
 C. A standby underwriting arrangement for a rights offer provides an alternative
avenue to the company to sell rights not taken up by existing shareholders.
 D. Quiet period refers to period when the company is prohibited from providing any
unusual information beyond what is contained in the prospectus.
Answer Key:A
 A. In the best effort IPO, if the entire issue does not sell out, the underwriter is
committed to take up the remaining issues.
 B. Higher the subscription price in a rights offer relative to rights-on price, higher the
value of a right and consequently greater the reduction in stock price.
 C. Investment banks typically underwrite issues of larger well-known companies but
arrange IPOs of smaller companies on best effort basis.
 D. In a best effort offering the investment banker makes their money primarily by
earning the spread between the buying and offering price.
Answer Key:C
 A. The term "leaving money on the table" refers to the situation where a security is
overpriced by the investment banking house to make extra money.
 B. Bake-off meetings generally take place at the beginning of the IPO process to
select the lead underwriter.
 C. A Dutch auction is a method for pricing shares (often in an IPO) whereby the price
of the shares offered is lowered until there are enough bids to sell all shares at a
common price (striking price).
 D. Companies use tombstone advertisements in the financial press to announce a new
IPO.
Answer Key:A
 A. Free cash flows to the firm (FCFF) are unlevered cash flows that are available
only to shareholders of the firm
 B. Two alternative definitions of P/E are trailing P/E, based on the last 12-months of
EPS, and leading P/E is based on next 12-months EPS.
 C. A limit bid in the book building process indicates the maximum price an investor
is willing to pay for a specified number of shares.
 D. EV/EBITDA multiple may be more appropriate than P/E multiples for comparing
companies with different amounts of financial leverage
Answer Key:A
 A. It is possible for a firm to go public and yet not raise any additional new capital
for the firm when the sole objective of the IPO is to facilitate existing owners exit.
 B. Quiet period refers to period when the company is completely prohibited from
providing any information
 C. As per SECP requirement, only qualified investors are allowed to participate in the
IPO book building process.
 D. The two advantages of going public are greater liquidity and better access to
capital.
Answer Key:B
 A. One advantage of DCF method of valuation over relative valuation is that it
unbundles the cash flows and requires analyst to make explicit assumptions about the
value drivers
 B. Transaction multiples are widely used in valuation of real estate properties and
M&A valuation
 C. EBITDA is usually positive even when EPS is negative
 D. Total equity value = Enterprise value – Total Debt – Non-Operating Cash
Answer Key:D

MBS last dividend was $1.50. Its dividend growth rate is expected to be 25% for the next 2
years, after which dividends are expected to grow at a rate of 5% forever. The firm’s target
capital structure call for 40% debt and 60% equity. After-tax cost of debt is 8%. The firm’s
beta is estimated to be 1.2; risk-free rate = 4.8%, and the estimated market risk premium =
6%. What is the best estimate of the current stock price based on two-stage DDM? Select the
closest value.
 A. $42.64
 B. $31.57
 C. None of the given figures is correct
 D. $44.80
 E. $43.71
Answer Key:B

Use the following questions to answer the next 3 questions:
Ali, a financial analyst at Albaraka Asset Management, has been tasked to assess whether the
shares of ABM Steel would be good addition to the fund’s equity portfolio. ABM stock is
currently selling at $50 per share. Ali collected the following financial data on ABM to
ascertain the share value based on DCF approach.
 Last year revenues were $500 million. Revenues were expected to grow at a rate of
12% for the next two years and then taper off to a steady-state growth rate of 3%.
 The firm’s operating margin and net profit margin has averaged around 20% and
7%, respectively. Given the competitive position of ABM, it is likely to maintain
these margins in the future. ABM tax rate is 40%.
 ABM had long-term debt of $40 million and interest bearing notes payable of $10
million on its books which was close to the market value. The firm had 10 million
shares outstanding. The firm had a stable capital structure with weighted average
cost of capital of 14%.
 The latest values (t = 0) of net property plant and equipment (NPPE) and NWC as
per the balance sheet were, $200 million and $100 million respectively. The firm did
not have any surplus (non-operational) cash.
 Going forward, Ali estimated that the firm is likely to improve its NWC turnover to
4X. However, its NPPE Turnover is likely to remain at 2.5X.
8. What is your estimate of the FCFF in year 1?

9. What is your estimate of the Terminal Value at the end of year 2?
10. What is the total value of equity?
Answer in this format: Q8. XXX, Q9. XXX, Q10. XXX
Quiz 11

Which one of the following statements is false?
 A. Target company shares are typically purchased by an acquirer at a premium over
the prevailing market price prior to the offer and is referred to as the takeover
premium.
 B. A congeneric merger is one where the merging firms operate in related businesses
but do not necessarily produce the same products or have a producer-supplier
relationship.
 C. In a typical financial merger as opposed to an operating merger, the firms involved
are operated as a single unit after the merger.
Answer Key:C
 A. A merger offer may be viewed as either friendly or hostile by the target
company’s management.
 B. A poison pill (flip-in) gives the target company shareholders the right to buy the
target’s shares at extremely attractive prices (i.e., discount from current market value),
which causes dilution and effectively increase the cost to the potential acquirer.
 C. A white knight is a friendly third party that comes to the rescue of the acquirer in
case the target company management resists the takeover.
 D. Golden parachutes are compensations agreements between the target and its senior
management that give the managers lucrative payouts if they leave the target after a
merger.
Answer Key:C
 A. In a tax-free acquisition only shares are exchanged, while in a taxable transaction
the shares are considered sold for cash and realized capital gains or losses are taxed.
 B. In most mergers, the benefits of synergy are generally divided equally between the
shareholders of the acquiring and target firms.
 C. “Bootstrapping” is a technique whereby a high growth (high P/E) company
acquires a low growth (low P/E) target in a stock offering with a view to boost
reported EPS of the combined firm.
Answer Key:B
 A. Typically, synergies usually fall into two categories: cost reductions and revenue
enhancements.
 B. Cost-reduction synergies are often hard to predict and achieve.
 C. A company might not be happy with how its products are being distributed, so it
might decide to take control of its distribution channels. This is an example of
upstream integration.
 D. A defense against a takeover is a recapitalization, in which a company changes its
capital structure to make itself less attractive as a target.
Answer Key:E
 A. A merger in which an entirely new firm is created and both the acquired and
acquiring firm cease to exist is called consolidation.
 B. The discount rate used to value merger cash flows should be the cost of capital of
the new combined firm because it incorporates the actual capital structure of the
merged firms.
 C. When the acquiring firm directly makes the merger proposal to the board of the
target firm instead of the company management, this is referred to as the “Bear Hug”.
Answer Key:B

Which one of the following will cause the value of a call to decrease?
 A. increasing the exercise price
 B. increasing the time to expiration
 C. increasing the risk-free rate
 D. increasing the risk level (volatility) of the underlying security
 E. increasing the stock price
Answer Key:A
 A. An option is a contract that gives its holder the right to buy or sell an asset at a
predetermined price within a specified period of time.
 B. An option that gives the holder the right to sell a stock at a specified price at some
future time is a put option.
 C. At expiration the maximum price of a call is the greater of (Exercise – Stock
Price) or 0
 D. At expiration the maximum price of a put is the greater of (Exercise – Stock Price)
or 0.
 E. American options may be exercised anytime up to expiration. European options
may be exercised only at expiration.
Answer Key:C
A convertible bond has 8% annual coupon and 15 years to maturity. The face value is $1,000
and the conversion ratio is 40. The stock currently sells for $20.875 per share. Similar
nonconvertible bonds are priced to yield 9%. The value of the convertible bond is at least:
 A. $835.00.
 B. $919.39.
 C. $1,000.00.
 D. $815.15.
 E. None of the
Answer Key:B

Which of the following statements is false? (Source: Capital Markets of Pakistan reading)
 A. Foreign investors own a significant percentage of Pakistani equities (around 25%
of free float).
 B. Compared to Bangladesh, Pakistan has a much smaller number of CDC account
holders
 C. Foreign investors face ownership limits for most stocks listed on PSX
 D. Government debt is a dominant component of debt market of Pakistan with
limited private debt issues
 E. More than one of the statements are false.
Answer Key:C
Which of the following does not explain the investors’ optimism about the capital markets of
Pakistan?
 A. Strong domestic consumption
 B. Cross border listings
 C. Technological changes
 D. Investors’ perception about Pakistan
 E. 2017 acquisition of PSX by Chinese consortium
Answer Key:D
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Quiz 12

All of the following are options available to a firm in times of financial distress, except:
 A. Negotiate with lenders
 B. raise new funds by selling securities junior in claim to existing debt
 C. sell major assets and reduce capex and other expenses
 D. merge with another firm
 E. file for reorganization or liquidation
Answer Key:B
 A. Whether default occurs depends on the cash flows, not on the relative values of
the firm's assets and liabilities.
 B. Altman’s Z-score bankruptcy prediction model is structured on the assumption of

sudden collapse of the firm as opposed to evolutionary decay.
 C. Successful private workouts are better for firms than formal bankruptcy because
direct costs are considerably lower in private workouts.
 D. Stock-based insolvency occurs when the operating cash flows of the firm are not
sufficient to meet the contractual obligations of the firm.
Answer Key:C
A firm is adjudged bankrupt under Chapter 7. When do the shareholders receive any
payment?
 A. After the trustee liquidates the assets and pays the administrative expenses, the
shareholders are paid before the creditors.
 B. After the trustee liquidates the assets, the administrative expenses and secured
creditors are paid, then the unsecured creditors, and, then the shareholders divide any
remainder.
 C. After the trustee liquidates the assets, the shareholders are paid, next the
administrative expenses, the secured creditors, and then the unsecured creditors divide
any remainder.
 D. After the trustee liquidates the assets the shareholders are paid first because they
are the owners of the firm and have the principal stake.
Answer Key:B
Which of the following statements is not correct?
 A. Interest Rate Parity (IRP) states that the expected percentage change in the
exchange rate is equal to the difference in interest rates between the two countries.
 B. The international Fisher effect says that nominal interest rates are equal across
countries.
 C. Absolute Purchasing Power Parity (PPP) states that a commodity costs the same
regardless of what currency is used to purchase it.
 D. more than one of the given statements are not correct
Answer Key:B
 A. Aside from the direct legal and administrative costs of bankruptcy, many other
indirect costs are associated with financial distress (whether or not the firm has
formally filed for bankruptcy).
 B. The absolute priority rules (APR) set the order of settlement in liquidation.
 C. As part of financial restructuring, a.k.a. ‘haircuts’, subordinated debt is often

replaced with senior debt.
 D. Bankruptcy is rarely simple and straightforward—equity holders don't just "hand

the keys" to debt holders the moment the firm defaults on a debt payment.
Answer Key:C
Which of the following statements are correct?
 A. The exchange rate quotation in the form Yens 114.6/US$ is called an indirect
quotation for a U.S. based investor.
 B. The spot US$/BP exchange rate is 1.65. The indirect quote will be 0.606 BP/US$.
 C. A currency forward contract is described as agreeing to buy or sell specified

amount of a currency at a later date at a price set in the future.
 D. More than one of the given statements are correct
Answer Key:D
 A. An option is a contract that gives its holder the right to buy or sell an asset at a
predetermined price within a specified period of time.
 B. An option that gives the holder the right to sell a stock at a specified price at some
future time is a put option.
 C. At expiration the maximum price of a call is the greater of (Exercise – Stock

Price) or 0
 D. At expiration the maximum price of a put is the greater of (Exercise – Stock Price)
or 0.
 E. The time value of an option is the difference between its premium (market price)
and its intrinsic value.
Answer Key:C
 A. Involuntary bankruptcy filing is when the firm itself approaches the court to seek
protection from creditors.
 B. Equity holders may prefer a formal bankruptcy filing as opposed to private

workout because the firm can issue Debtor-in-Possession (DIP) securities and delay
or suspend pre-bankruptcy interest payments.
 C. Responses to financial distress include - asset restructuring, financial restructuring

and liquidation.
 D. A firm that fails to make the required interest or principal payments on the debt is
in default.
Answer Key:A
 A. The difference between liquidation and reorganization is that reorganization
terminates all operations of the firm and liquidation only terminates non-profitable
operations.
 B. A judge may allow a firm to submit the reorganization plan if the liquidity
problems are considered temporary in nature.
 C. Indirect costs of financial distress include impaired ability to conduct business,

lack of access to credit, and increased agency costs.
 D. While developing a Chapter 11 reorganization plan, management continues to

operate the business.
Answer Key:A

Assume you are given the following information on Pacific Corporation. (1) Current stock price is
$30, (2) strike price is $35, (3) time to expiration is 3 months, (4) annualize risk-free rate is 5%,
and (5) variance of stock return is 25%. Given the above information, you have calculated the
following components of the Black-Scholes model:
• d1 = -0.4416
• d2 = -0.6916
• N(d1) = 0.3294
• N(d2) = 0.2446
Using the Black-Scholes model, what is the value of the call option? Call = S0*N(d1)-
X*exp(-r*T)*N(d2)
 A.
1.43
 B.
8.23
 C.
7.95
 D.
5.99
Answer Key:A

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Quiz-1

 Return to Assessment List

Part 1 of 1 - Section-1 / 10.0 Points

Question 1 of 101.0 Points

Part 1 of 1 - Section-1 / 10.0 Points

Question 1 of 101.0 Points

2017 2018 2019

Part 1 of 2 - Sec-1 / 6.0 Points

Question 1 of 101.0 Points

Question 7 of 101.0 Points

Part 1 of 2 - Section - 1 / 6.0 Points

Question 1 of 71.0 Points

I. Market risk premium

Question 7 of 74.0 Points

Liabilities and Equity

Accounts payable $10,000,000

2019 -14 -10

Part 1 of 2 - Part-1 2.0 / 7.0 Points

Question 1 of 81.0 Points

Project NPV Life

Question 8 of 83.0 Points

Part 1 of 2 - P1 / 6.0 Points

Question 1 of 101.0 Points

Question 7 of 101.0 Points

Part 1 of 3 - S2 / 6.0 Points

Question 1 of 81.0 Points

Question 7 of 81.0 Points

Part 1 of 2 - P1 / 7.0 Points

Question 8 of 83.0 Points

Part 1 of 2 - P1 / 9.0 Points

Question 1 of 101.0 Points

Question 10 of 101.0 Points

Part 1 of 3 - P1 / 6.0 Points

Question 1 of 81.0 Points

Question 7 of 81.0 Points

Question 8 of 83.0 Points

8. What is your estimate of the FCFF in year 1?

Part 1 of 3 - P1 / 5.0 Points

Question 1 of 101.0 Points

Question 6 of 101.0 Points

Question 9 of 101.0 Points

Part 1 of 2 - P1 / 9.0 Points

Question 1 of 101.0 Points

 B. raise new funds by selling securities junior in claim to existing debt

 C. sell major assets and reduce capex and other expenses

 D. merge with another firm

 E. file for reorganization or liquidation

 B. Altman’s Z-score bankruptcy prediction model is structured on the assumption of

 D. more than one of the given statements are not correct

 C. As part of financial restructuring, a.k.a. ‘haircuts’, subordinated debt is often

 D. Bankruptcy is rarely simple and straightforward—equity holders don't just "hand

 E. More than one of the statements are false

 C. A currency forward contract is described as agreeing to buy or sell specified

 D. More than one of the given statements are correct

 C. At expiration the maximum price of a call is the greater of (Exercise – Stock

 B. Equity holders may prefer a formal bankruptcy filing as opposed to private

 C. Responses to financial distress include - asset restructuring, financial restructuring

 E. More than one of the statements are false

 C. Indirect costs of financial distress include impaired ability to conduct business,

 D. While developing a Chapter 11 reorganization plan, management continues to

 E. More than one of the statements are false

Question 10 of 101.0 Points

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