Question 1

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A successful ride-sharing company has decided to raise money for its second phase of expansion by issuing shares of stock and becoming a publicly-traded company, so they prospectus for potential investors.

What type of stock market transaction is taking place?

• IPO
• Private placement
• Secondary market offering
• Share buyback

Question 2

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You invest $7,000 in a stock that has a 25% chance of a 6% return, a 35% chance of a 9% return and a 40% chance of a 10% return.

What is your expected return after one year?

• 8.65%
• 8.25%
• 7.85%
• 9.00%

Question 3

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The risk that your investment will lose value because your return is dependant on the stability of a secondary investment is known as __________.

• liquidity risk
• asset-backed risk
• prepayment risk
• model risk

Question 4

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Which of the following credit ratings would make a country or company have the easiest time raising capital?

• BBB
• CC
• AAA
• A

Question 5

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A security that falls above the security market line has __________.

• a low expected return and a low price
• a high expected return and a high price
• a low expected return and a high price
• a high expected return and a low price

Question 6

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You own a small manufacturing business that produces widgets. You have spent $150,000 acquiring the fixed assets you need to produce widgets. Each widget costs you $2 to make and they sell for $15 each, so your variable cost is 13.3% of the overall revenue.

At your current level of operating leverage, how many widgets must you sell to break even?

• 11,539
• 10,000
• 19,950
• 13,482

Question 7

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Before selling bonds to investors, Matteo's company must provide audited financial statements and a detailed description of the terms of the bonds.

By doing so, which federal regulation is he complying with?

• Securities Act Amendments of 1975
• Securities Act of 1933
• Securities Exchange Act of 1934
• Sarbanes-Oxley Act of 2002

Question 8

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What is the amount of money foregone by investing in one asset compared to another known as?

• The weighted average cost of capital
• The opportunity cost of capital
• The overall cost of capital
• The required rate of return on capital

Question 9

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Curtis purchased stock with an initial share price of $140, and sold it when the share price was $119. While he owned the stock, he earned $10 in dividends.

What was histotal percentage return on the investment?

• -17.65%
• -15.00%
• -7.86%
• -9.24%

Question 10

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Company A Company B

Market Value of Equity $700,000 $900,000

Market Value of Debt $300,000 $200,000

Cost of Equity 8% 10%

Cost of Debt 1.5% 3%

Tax Rate 30% 25%

Based solely on their current weighted average cost of capital, which company should pursue an investment opportunity with an expected return of 7%?

• Neither Company A nor Company B
• Only Company A
• Both Company A and Company B
• Only Company B

Question 11

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Which of the following portfolios theoretically diversifies away the most risk?

• One whose investments have a large covariance
• One whose investments have zero correlation
• One whose investments have a negative covariance
• One whose investments are highly correlated

Question 12

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Using the following variables, calculate an organization's cost of debt on a $500,000 bond.

• Rf: 1%
• credit-risk rate: 5%
• t: 15%
• $25,500
• $30,000
• $29,550
• $4,500

Question 13

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Which of the following is a tenet of semi-strong-form efficiency?

• Share prices respond immediately to new information that is made public.
• Some forms of fundamental analysis can provide investors excess returns.
• Individual investors can "beat" the market if enough information is made public.
• Historical data can be used to generate excess returns in the present day.

Question 14

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The discounted cash flow approach is useful for __________.

• graphing an asset's position on the security market line
• determining the value of future profits (or losses) in today's terms
• evaluating whether an asset is over-valued, under-valued or correctly priced
• determining the value of a company's publicly traded equity

Question 15

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What is the benefit of choosing an exchange-traded fund over an individual stock?

• An exchange-traded fund will have a higher return than an individual stock.
• An exchange-traded fund is diversified and therefore carries less risk than an individual stock.
• An exchange-traded fund has a higher variance than an individual stock.
• An exchange-traded fund eliminates more systemic risk than an individual stock.

Question 16

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Which of the following is true ofunsystematicrisk?

• Its presence commands a return in excess of the risk-free rate.
• It can be diversified away by relying on the lack of a tight positive relationship among the returns of a set of individual assets.
• The correlation among the returns of assets within a portfolio are irrelevant to this type of risk.
• It is also known as non-diversifiable risk.

Question 17

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Calculate a company's total leverage given the following information:

• Change in sales = 7%
• Change in earnings = 10%
• Cannot calculate without net income data
• 1.43
• 0.7
• Cannot calculate without EBIT data

Question 18

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Select the true statement about the bankruptcy process.

• Companies that cannot meet their debts can try to reduce their debt obligations before filing for bankruptcy.
• In a Chapter 7 bankruptcy, creditors are guaranteed to recoup at least part of what is owed to them.
• Filing for bankruptcy is the best way for a company to remedy financial distress.
• A Chapter 11 bankruptcy is a liquidation filing.

Question 19

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A company is considering a new plan for its capital structure.

Which of the following is true if, under the new plan, the company's weighted average cost of capital exceeds the expected return?

• The company's value will increase.
• The company is over-leveraged.
• The company's cost of capital is still at a comfortable level.
• The company's proposed capital structure may put it at risk for bankruptcy.