Managerial Finance Final Exam

.A 6-month put option on Makler Corp.’s stock has a strike price of $47.50 and sells in the market for $8.90.  Makler’s current stock price is $41.00.  What is the exercise value of the option?Answer

$6.10

$7.30

$6.50

$6.05

$6.45

 

Lissa Co.’s stock price is currently $26.75.  A 6-month call option on Lissa’s stock has a strike price of $25 and has an expected volatility of 40% (i.e., expected standard deviation = 40%).  The risk-free rate is 6%.  According to the Black-Scholes option pricing model, what is the value of the option?Answer

$5.05

$4.45

$5.27

$4.28

$3.25

 

If one U.S. dollar buys 1.46 Canadian dollars, how many U.S. dollars can you purchase for one Canadian dollar?Answer

0.7123

0.5548

0.6849

0.5685

0.6781

 

Warren Corporation’s stock sells for $42 per share. The company wants to sell some 20-year, annual interest, $1,000 par value bonds. Each bond would have 75 warrants attached to it, each exercisable into one share of stock at an exercise price of $47. The firm’s straight bonds yield 10%. Each warrant is expected to have a market value of $4.00 given that the stock sells for $42. What coupon interest rate must the company set on the bonds in order to sell the bonds-with-warrants at par?Answer

5.89%

6.74%

6.48%

5.63%

8.03%

 

Operating leases often have terms that include:

maintenance of the equipment by the lessor.

full amortization over the life of the lease.

very high penalties if the lease is cancelled.

restrictions on how much the leased property can be used.

much longer lease periods than for most financial leases.

 

Which of the following statements is most CORRECT?Answer                              A.Preferred stock generally has a higher component cost of capital to the firm than does common stock.

B.   By law in most states, all preferred stock must be cumulative, meaning that the compounded total of all unpaid preferred dividends must be paid before any dividends can be paid on the firm’s common stock.

C.  From the issuer’s point of view, preferred stock is less risky than bonds.

D.  Whereas common stock has an indefinite life, preferred stocks always have a specific maturity date, generally 25 years or less.

E.  Unlike bonds, preferred stock cannot have a convertible feature.

 

Which of the following statements concerning risk management is NOT CORRECT?Answer

A. Risk management can reduce the volatility of cash flows, and this decreases the probability of bankruptcy.

B.   Risk management makes sense for firms directly engaged in activities that involve commodities whose values can be hedged, and it doesn’t make much sense for most other firms.

C.   Companies with volatile earnings pay more taxes than more stable companies due to the treatment of tax credits and the rules governing corporate loss carry-forwards and carry-backs.  Therefore, our tax system encourages risk management to stabilize earnings.

D.  Risk management can reduce the likelihood of low cash flows, and therefore reduce the probability of financial distress.

E.  Risk management involves identifying events that could have adverse financial consequences and then taking actions to prevent and/or to minimize the damage caused by these events.

 

The text gives a number of valid, acceptable reasons for companies to merge.  Which of the following is not acceptable?Answer

A.Synergistic benefits arising from mergers.

B.  Reduction in competition resulting from mergers.

C.  Attempts to stabilize earnings by diversifying.

D. Attempts to minimize taxes by acquiring a firm with large accumulated losses that can be used immediately.

E. Using surplus cash to acquire another firm and prevent unfavorable tax consequences for shareholders.

 

Which of the following statements is CORRECT?Answer

A. An option’s value is determined by its exercise value, which is the market price of the stock less its strike price.  Thus, an option can’t sell for more than its exercise value.

B.  As stock price rises, the premium portion of an option on a stock increases because the difference between the price of the stock and the fixed strike price increases.

C.  If the company is consistently profitable, its call options will always be in the money.

D.   The market value of an option depends in part on the option’s time to maturity and on the variability of the underlying stock’s price.

E. The potential loss on an option decreases as the option sells at higher and higher prices because the profit margin gets bigger.

 

 

Thomson Engineering is issuing new 30-year bonds that have warrants attached.  If not for the attached warrants, the bonds would carry an 11% annual interest rate.  However, with the warrants attached the bonds will pay an 8% annual coupon.  There are 30 warrants attached to each bond, which have a par value of $1,000.  What is the value of the straight-debt portion of the bonds?Answer

A. $739.19

B. $790.93

C.$872.24

D.$835.28

E. $768.75

 

 

Suppose in the spot market 1 U.S. dollar equals 1.5 Canadian dollars.  6-month Canadian securities have an annualized return of 6% (and thus a 6-month periodic return of 3%).  6-month U.S. securities have an annualized return of 6.5% and a periodic return of 3.25%.  If interest rate parity holds, what is the U.S. dollar-Canadian dollar exchange rate in the 180-day forward market?  In other words, how many Canadian dollars are required to purchase one U.S. dollar in the 180-day forward market?Answer

A. 1.8705

B.1.6610

C. 1.5114

D. 1.4964

E. 1.4366

 

If one British pound can purchase $1.90 U.S. dollars, how many British pounds can one U.S. dollar buy?Answer

A. 0.4947

B.0.6105

C. 0.4053

D. 0.5263

E. 0.4579

 

A commercial bank recognizes that its net income suffers whenever interest rates increase.  Which of the following strategies would protect the bank against rising interest rates?

Answer

[removed]   Buying inverse floaters.
[removed]   Entering into an interest rate swap where the bank receives a fixed payment stream, and in return agrees to make payments that float with market interest rates.
[removed]   Purchase principal only (PO) strips that decline in value whenever interest rates rise.
[removed]   Enter into a short hedge where the bank agrees to sell interest rate futures.
[removed]   Sell some of the bank’s floating-rate loans and use the proceeds to make fixed-rate loans.
     

 

 

Suppose hockey skates sell in Canada for 165 Canadian dollars, and 1 Canadian dollar equals 0.71 U.S. dollars.  If purchasing power parity (PPP) holds, what is the price of hockey skates in the United States?

Answer

[removed]   $94.89
[removed]   $99.58
[removed]   $113.64
[removed]   $131.21
[removed]   $117.15

 

Quaid Co.’s common stock sells for $34, pays a dividend of $2.10, and has an expected long-term growth rate of 6%.  The firm’s straight-debt bonds pay 10.8%.  Quaid is planning a convertible bond issue.  The bonds will have a 20-year maturity, pay a 10% annual coupon, have a par value of $1,000, and a conversion ratio of 25 shares per bond.  The bonds will sell for $1,000 and will be callable after 10 years.  Assuming that the bonds will be converted at Year 10, when they become callable, what will be the expected return on the convertible when it is issued?

Answer

[removed]   12.86%
[removed]   13.63%
[removed]   11.32%
[removed]   12.35%
[removed]   11.96%

 

Herbert Engineering is issuing new 15-year bonds that have warrants attached. If not for the attached warrants, the bonds would carry a 9% annual interest rate. However, with the warrants attached the bonds will pay a 6.1% annual coupon. There are 30 warrants attached to each bond, which has a par value of $1,000. What is the value of the straight-debt portion of the bonds?

Answer

[removed]   $796.09
[removed]   $720.27
[removed]   $835.89
[removed]   $766.24
[removed]   $877.69

 

 

Suppose that currently, 1 British pound equals 1.98 U.S. dollars and 1 U.S. dollar equals 1.40 Swiss francs.  How many Swiss francs are needed to purchase 1 pound?

Answer

[removed]   2.3008
[removed]   3.1046
[removed]   2.5225
[removed]   2.8274
[removed]   2.7720

 

 

In the lease versus buy decision, leasing is often preferable

Answer

[removed]   because it has no effect on the firm’s ability to borrow to make other investments.
[removed]   because, generally, no down payment is required, and there are no indirect interest costs.
[removed]   because lease obligations do not affect the firm’s risk as seen by investors.
[removed]   because the lessee owns the property at the end of the lease term.
[removed]   because the lessee may have greater flexibility in abandoning the project in which the leased property is used than if the lessee bought and owned the asset.

 

 

Blenman Corporation, based in the United States, arranged a 2-year, $1,000,000 loan to fund a project in Mexico.  The loan is denominated in Mexican pesos, carries a 11.0% nominal rate, and requires equal semiannual payments.  The exchange rate at the time of the loan was 5.75 pesos per dollar, but it dropped to 5.10 pesos per dollar before the first payment came due.  The loan was not hedged in the foreign exchange market.  Thus, Blenman must convert U.S. funds to Mexican pesos to make its payments.  If the exchange rate remains at 5.10 pesos per dollar through the end of the loan period, what effective annual interest rate will Blenman end up paying on the loan?

Answer

[removed]   23.91%
[removed]   22.76%
[removed]   20.46%
[removed]   21.84%
[removed]   22.99%

 

 

One year ago, a U.S. investor converted dollars to yen and purchased 100 shares of stock in a Japanese company at a price of 3,150 yen per share.  The stock’s total purchase cost was 315,000 yen.  At the time of purchase, in the currency market 1 yen equaled $0.00952.  Today, the stock is selling at a price of 3,465 yen per share, and in the currency market $1…

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