25 Finance Multiple Choice Questions 2015

| October 3, 2018

Question 1

Which of the following statements is most correct?

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. The potential loss on a call option increases
as the underlying stock sells at higher and higher prices because the profit
margin gets bigger.

C. Issuing options
provides companies with a low cost method of raising capital

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.

Question 2

An analyst is interested in using the Black-Scholes model to
value call options on the stock of QU, Inc.
The analyst has accumulated the following information:

Stock price

Strike price

Time until maturity
6 months

Standard deviation of the stock

Risk free rate of return

Using the Black-Scholes model, what is the value of the call

A. $1.94

B. $0.30

C. $3.76


E. $2.12

Question 3

A ______ is a contract that requires the holder to buy or
sell a stated commodity at a specified price at a specified time in the future.

A. option

B. convertible contract

C. futures

D. warrant


Question 4

The intrinsic value of a call option equals __________.

A. X-P0

B. P0-X

C. c0-(P0-X)

D. p0-(X-P0)


Question 5

The price at which the stock or asset may be purchased from
(or sold to) the option writer is referred to as the __________.

A. option premium

B. open interest

C. exercise value

D. strike price


Question 6

A stock is currently selling for $20. In three months (91 days), the stock price
will be either $30 or $11. If you are
considering a call option for this stock with an exercise price of $21, what
would be the value of this option today?
The risk free rate of return is 4.5%.

A. $18.79

B. $4.32

C. $8.90

D. $9.23

4 points
Question 7

Google’s closing price today was $501.71. You think it’s now a bargain, so you’re
looking to buy a call option with a strike price of $600. Those LEAP things sound good, and you can get
a call with an expiration date of August 2015.
If GOOG’s standard deviation of returns is 25% annually and the
risk-free rate is 3.5%, what would be the value of the LEAP today?

A. $49.05

B. $132.24

C. $57.73

D. $0


Question 8

What is the exercise value of a 6-month put option that has
an exercise price of $50, a corresponding call option value of $4.17 and a
current market price of the underlying stock of $43.50? Assume that the annual risk-free rate is 5

A. $0

B. $2.33

C. $9.44

D. $6.50


Question 9

You own a call option.
The underlying common stock is selling for $15 and the option’s exercise
price is $12. This option:

A. must be sold to
the call writer.

B. is out-of-the-money.

C. must be bought by the call holder.

D. is in-the-money.


Question 10

Considering each action independently and holding other
things constant, which of the following actions would reduce a firm’s need for
additional capital?

A. an increase in
the dividend payout ratio

B. a decrease in the
profit margin

C. a decrease in expected sales growth

D. a decrease in the accrual accounts (accrued
wages and taxes)

Question 11

Which of the following statements is most correct?

A. One reason that
companies tend to avoid stock repurchases is that dividend payments are taxed
more favorably than stock repurchases

B. One advantage of
dividend reinvestment plans is that they allow shareholders to avoid paying
taxes on the dividends that they choose to reinvest

C. If a company announces a 2-for-1 stock split
and the overall value of the firm remains unchanged, the company’s stock price
must have doubled

D. None of the statements above is correct.


Question 12

Which of the following lists events in chronological order
from earliest to latest?

A. Date of Record,
Declaration Date, Ex-dividend Date

B. Date of Record, Ex-dividend Date, Declaration

C. Declaration Date,
Date of Record, Ex-dividend Date

D. Declaration Date, Ex-dividend Date, Date of

Question 13

How can a gold futures contract be used as a hedge against a
potential decrease in the price of gold for a firm that uses gold in making
computer chips?

A. the company should sell gold futures

B. the company should
buy gold futures contracts

C. this would be a situation that shouldn’t be hedged

D. the company should
lower the price it pays for gold


Question 14

A futures trader who bets on the future direction of prices
by taking either a long or a short position is called a:

A. hedger

B. short seller

C. speculator

D. dealer


Question 15

Ledbetter’s Sweaters has a mutually exclusive project; to
produce and sell wool sweaters or to produce and sell cashmere sweaters. The investment into production of wool
sweaters is $110,000. The investment
into cashmere sweaters is $125,000. The
projects’ respective DCF’s given future sales projections are:

What is the NPV of the wool line?

A. $41,000

B. $6,000

C. $56,000

D. $21,000

Question 16

It is now August 2013 (in case you forgot). The cost to stage Pirates of the Caribbean on
Ice is $3 million. This cost won’t be
incurred until 2015. The company will
stage the show in 2016 and 2017, generating cash inflows of $2 million each
year. In 2018, the show will be
cancelled at an overall net cost of $500,000.
What is the IRR of this project?

A. 14.36%

B. 21.53%

C. 10.17%

D. 12.7%


Question 17

The _____ designates the date on which the corporation lists
the shareholders who are entitled to receive a dividend payment.

A. declaration date

B. ex-dividend date

C. date of record

D. payment date


Question 18

What is the fundamental purpose of a stock split?

A. A split shows the
company’s preference for retaining funds.

B. A split increases the threat of a hostile

C. A split
immediately increases the investor’s wealth.

D. A split immediately brings the
stock price to a lower trading range.


Question 19

Which of the following is a spontaneous source of financing?

A. accrued expenses

B. notes payable

C. common stock

D. retained earnings


Question 20

Which of the following accounts would not normally or be
least likely to increase in proportion with a planned increase in sale?

A. Accounts

B. Inventory

C. Accounts payable

D. Accrued expenses

E. Notes payable


Question 21

Which of the following dividend policies would cause
dividends per share to fluctuate the least?

A. Constant Payout

B. Constant Dollar

C. Small regular plus special

D. Residual Dividend Method


Question 22

The first step involved in predicting a firm’s financial
needs is

A. projecting the firm’s sales and expenses over
the planning period

B. estimating the levels of investment in
current and fixed assets that are necessary to support the projected sales

C. determining the firm’s financing needs
throughout the planning period

D. none of the above


Question 23

Which of the following is not consistent with the life cycle
theory of a dividend policy?

A. In the maturing
stage, a company should pay dividends

B. In the infancy stage, a company should pay

C. In the declining stage, a company should pay dividends

D. In the growth stage, a company could pay a
low dividend


Question 24

Norman Necktie Company’s balance sheet showed the following
as of December 31:


Accounts payable

Accounts receivable



Notes payable

Total current assets

Total current

Net fixed assets

LT debt

Common stock

Retained earnings

Total assets

Total liabilities
& equity

The company expects sales to double, from $10,000 to
$20,000. Net income is anticipated to be
$1000. Current assets, accounts payable and accruals will grow in proportion to
sales. There is no anticipated change
in net fixed assets. Will the company
need any additional funds, if there are no dividends paid next year? If so, how much?

A. No, $0

B. Yes, $7,700

C. Yes, $1,700

D. Yes, $700


Question 25

Albany Motors recently completed a 3-for-1 stock split.
Prior to the split, the company had 10 million shares outstanding and its stock
price was $150 per share. After the split, the total market value of the
company’s stock equaled $1.5 billion. What was the price of the company’s stock
following the stock split?

A. $15

B. $45

C. $450

D. $50

E. $150

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