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Finance
Q:
A bond is selling in the market for $1100 and has a duration of 4.5 years. Market interest rates are 5% and are expected to increase to 7% in the near future. What will this bond's price be after the change in market interest rates?
A) $1006
B) $1194
C) $1122
D) $1078
E) $1100
Q:
Discounted cash flow (DCF) analysis generally:
I) assumes that firms hold assets passively when it invests in a project
II) considers opportunities to expand a project if the project is successful
III) considers opportunities to abandon a project if the project is a failure
A. I only
B. II only
C. II and III only
D. I, II, and III
Q:
A bond is selling in the market for $950 and has a duration of 6 years. Market interest rates are 9% and are expected to decrease to 7% in the near future. What will this bond's price be after the change in market interest rates?
A) $969
B) $931
C) $1055
D) $854
E) $950
Q:
Why is sensitivity analysis less realistic than Monte Carlo Simulation?
Q:
A bond has a face value of $1000 and coupon payments of $120 annually. This bond matures in three years and is selling in the market for $1160. Market interest rates are 6%. What is this bond's duration?
A) 3 years
B) 5.71 years
C) 1.96 years
D) 2.71 years
E) None of the above
Q:
Explain the usefulness of decision trees in project analysis.
Q:
A bond has a face value of $1000 and coupon payments of $80 annually. This bond matures in three years and is selling for $1000 in the market. Market interest rates are 8%. What is this bond's duration?
A) 3 years
B) 2.78 years
C) 1.95 years
D) 4.31 years
E) None of the above
Q:
Briefly explain timing options.
Q:
Which assets are excluded from risk assets?
A) Real Estate Loans
B) Commercial Paper
C) Plant and Equipment
D) Commercial and Industrial Loans
E) All of the above are risk assets
Q:
Define the term "abandonment value."
Q:
Net Profit Margin
5% Net Income
$1000 Total Assets
$62,500 Total Equity
$6250 What is this banks total operating revenue?
A) $125
B) $8000
C) $488,281
D) $31,250,000
E) None of the above
Q:
Briefly discuss various real options associated with capital budgeting projects.
Q:
Harrison Bank has the following financial information. ROE
16% Net Income
$1000 Total Assets
$62,500 Total Equity
$6250 What is this banks asset utilization ratio?
A) 1.6%
B) 10%
C) 12.8%
D) 16%
E) None of the above
Q:
Briefly explain the term "real options."
Q:
Net Profit Margin
5% Net Income
$1000 Total Assets
$62,500 Total Equity
$6250 What is this banks Equity Multiplier
A) 1.6 times
B) 10 times
C) 12.8 times
D) 16 times
E) None of the above
Q:
Briefly discuss the usefulness of Monte Carlo simulation in project analysis.
Q:
Net Profit Margin
5% Net Income
$1000 Total Assets
$62,500 Total Equity
$6250 What is this banks ROE?
A) 1.6%
B) 10 %
C) 12.8%
D) 16%
E) None of the above
Q:
Briefly discuss break-even analysis.
Q:
How do managers supplement the NPV analysis of a project to gain better understanding of a project?
Q:
Net Profit Margin
5% Net Income
$1000 Total Assets
$62,500 Total Equity
$6250 What is this banks ROA?
A) 1.6%
B) 10%
C) 12.8%
D) 16%
E) None of the above
Q:
Harrison Bank has the following financial information.
Q:
Briefly describe sensitivity analysis used for project analysis.
Q:
Castle State Bank has the following financial information. Balance Sheet Income Statement Cash
$100
Interest Income
$400 Securities Investments
$600
Interest Expenses
($150) Net Loans
$1200
Non-Interest Income
$50 Net Premises and Equip.
$300
Non-Interest Expenses
($100) Total Assets
$2200
Provision for Loan Losses
($60) Deposits
$1100
Pre Tax Net Operating Income
$140 Non-Deposit Borrowings *
$800
Securities Gains (Losses)
($40) Equity Capital
$300
Taxes
($45) Total Liabilities and Equity
$2200
Net Income
$55 * All Purchased Funds Use this information to calculate Castle State Banks earnings spread
A) 37.5%
B) 22.22%
C) 14.33%
D) 7.89%
E) 2.5%
Q:
Discuss the importance of conducting post audits.
Q:
Castle State Bank has the following financial information. Balance Sheet Income Statement Cash
$100
Interest Income
$400 Securities Investments
$600
Interest Expenses
($150) Net Loans
$1200
Non-Interest Income
$50 Net Premises and Equip.
$300
Non-Interest Expenses
($100) Total Assets
$2200
Provision for Loan Losses
($60) Deposits
$1100
Pre Tax Net Operating Income
$140 Non-Deposit Borrowings *
$800
Securities Gains (Losses)
($40) Equity Capital
$300
Taxes
($45) Total Liabilities and Equity
$2200
Net Income
$55 * All Purchased Funds Use this information to calculate Castle State Banks equity multiplier
A) 20.45 times
B) 18.33 times
C) 12.22 times
D) 7.33 times
E) 2.5 times
Q:
Indicate some of the problems associated with capital investment process.
Q:
Castle State Bank has the following financial information. Balance Sheet Income Statement Cash
$100
Interest Income
$400 Securities Investments
$600
Interest Expenses
($150) Net Loans
$1200
Non-Interest Income
$50 Net Premises and Equip.
$300
Non-Interest Expenses
($100) Total Assets
$2200
Provision for Loan Losses
($60) Deposits
$1100
Pre Tax Net Operating Income
$140 Non-Deposit Borrowings *
$800
Securities Gains (Losses)
($40) Equity Capital
$300
Taxes
($45) Total Liabilities and Equity
$2200
Net Income
$55 * All Purchased Funds Use this information to calculate Castle State Banks asset utilization ratio
A) 20.45%
B) 18.33%
C) 12.22%
D) 7.33%
E) 2.5%
Q:
Monte Carlo simulation is merely an advanced version of scenario analysis.
Q:
Castle State Bank has the following financial information. Balance Sheet Income Statement Cash
$100
Interest Income
$400 Securities Investments
$600
Interest Expenses
($150) Net Loans
$1200
Non-Interest Income
$50 Net Premises and Equip.
$300
Non-Interest Expenses
($100) Total Assets
$2200
Provision for Loan Losses
($60) Deposits
$1100
Pre Tax Net Operating Income
$140 Non-Deposit Borrowings *
$800
Securities Gains (Losses)
($40) Equity Capital
$300
Taxes
($45) Total Liabilities and Equity
$2200
Net Income
$55 * All Purchased Funds Use this information to calculate Castle State Banks net profit margin
A) 20.45%
B) 18.33%
C) 12.22%
D) 7.33%
E) 2.5%
Q:
Castle State Bank has the following financial information. Balance Sheet Income Statement Cash
$100
Interest Income
$400 Securities Investments
$600
Interest Expenses
($150) Net Loans
$1200
Non-Interest Income
$50 Net Premises and Equip.
$300
Non-Interest Expenses
($100) Total Assets
$2200
Provision for Loan Losses
($60) Deposits
$1100
Pre Tax Net Operating Income
$140 Non-Deposit Borrowings *
$800
Securities Gains (Losses)
($40) Equity Capital
$300
Taxes
($45) Total Liabilities and Equity
$2200
Net Income
$55 * All Purchased Funds Use this information to calculate Castle State Banks ROA
A) 20.45%
B) 18.33%
C) 12.22%
D) 7.33%
E) 2.5%
Q:
In almost al cases the present value break even quantity is higher than the accounting break even quantity.
Q:
Castle State Bank has the following financial information. Balance Sheet Income Statement Cash
$100
Interest Income
$400 Securities Investments
$600
Interest Expenses
($150) Net Loans
$1200
Non-Interest Income
$50 Net Premises and Equip.
$300
Non-Interest Expenses
($100) Total Assets
$2200
Provision for Loan Losses
($60) Deposits
$1100
Pre Tax Net Operating Income
$140 Non-Deposit Borrowings *
$800
Securities Gains (Losses)
($40) Equity Capital
$300
Taxes
($45) Total Liabilities and Equity
$2200
Net Income
$55 * All Purchased Funds Use this information to calculate Castle State Banks ROE
A) 20.45%
B) 18.33%
C) 12.22%
D) 7.33%
E) 2.5%
Q:
In drawing a decision tree, it is important to include all possible eventualities.
Q:
The Garic State Bank of New Orleans was under water for three weeks after Hurricane Katrina hit the state. The lobby is full of mud and other debris. Many of the valuables stored in the banks safety deposit boxes have been ruined. John Garic, the President and CEO of the bank, has been working night and day to reopen the bank. What type of risk has John been dealing with?
A) Credit risk
B) Liquidity risk
C) Market risk
D) Interest rate risk
E) Operational risk
Q:
In drawing a decision tree, a square represents a decision point, and a triangle represents a decision point for fate.
Q:
Paul Smith is thinking about investing in Capital City Bank. He is examining certain ratios of the bank including the ratio of interest sensitive assets to interest sensitive liabilities and uninsured deposits to total deposits. What type of risk is Paul attempting to measure with these ratios?
A) Credit risk
B) Liquidity risk
C) Market risk
D) Interest rate risk
E) Operational risk
Q:
Abandonment option is a call option, while the option to expand is a put option.
Q:
Amy Farmer is thinking about investing in the Guthrie National Bank. She is examining certain ratios of the bank including the ratio of the book value of the assets to the market value of the assets and the market value of the bonds held by the bank to their recorded value. What type of risk is Amy attempting to measure with these ratios?
A) Credit risk
B) Liquidity risk
C) Market risk
D) Interest rate risk
E) Operational risk
Q:
Tangible assets usually have higher abandonment value than intangible ones.
Q:
Gerald Wilkens is thinking about investing in Tallahassee State Bank. He is examining certain ratios of the bank including the ratio of cash assets and government securities to total assets and purchased funds to total assets. What type of risk is Gerald attempting to measure with these ratios?
A) Credit risk
B) Liquidity risk
C) Market risk
D) Interest rate risk
E) Operational risk
Q:
Monte Carlo simulation should be used to get the distribution of NPV values for a project.
Q:
Forrest Fennell is thinking about investing in Capital City Bank. He is examining certain ratios of the bank including the ratio of nonperforming loans to total loans and leases and the provision for loan losses to total loans and leases. What type of risk is Forrest attempting to measure with these ratios?
A) Credit risk
B) Liquidity risk
C) Market risk
D) Interest rate risk
E) Operational risk
Q:
In constructing a simulation model of an investment project, one can ignore possible interdependencies between variables.
Q:
Norman Bank made a loan of $1,000,000 to Jarod LeFevre. Jarod has declared bankruptcy and Norman Bank has just learned that the judge in the case has ruled that Jarod does not have to pay any of the loan back or forfeit any of his assets. Which type of risk would this be an example of?
A) Operational risk
B) Legal risk
C) Compliance risk
D) Strategic risk
E) Reputation risk
Q:
Monte Carlo simulation is a tool for considering all possible combinations of variables.
Q:
Firms that use break-even on an accounting basis are really losing the opportunity cost of capital on their investments.
Q:
Everett Bank has just learned that there is a disgruntled former employee who has created a blog that is telling everyone that Everett Bank has halved their customer service representatives and so customers have great difficulty getting through to a live person when there is a problem with their account. Everett is worried that they may lose customers as a result. Which type of risk would this be an example of?
A) Operational risk
B) Legal risk
C) Compliance risk
D) Strategic risk
E) Reputation risk
Q:
The break-even point in terms of NPV is usually lower than the break-even point on an accounting basis.
Q:
Carson County State Bank has a ratio of equity capital to total assets of 2.5%. The FDIC which regulates this bank has determined that this is not enough equity capital and is making the bank issue new stock in the market. In addition, they are not allowing the bank to issue a dividend to their current stockholders. Which type of risk would this be an example of?
A) Operational risk
B) Legal risk
C) Compliance risk
D) Strategic risk
E) Reputation risk
Q:
Projects with high fixed costs have lower break-even points.
Q:
Chaos State Bank has an old computer system which can go down for weeks at a time, leaving customers unable to access their accounts online. Many customers have left the bank for banks with more reliable computer systems. Which type of risk would this be an example of?
A) Operational risk
B) Legal risk
C) Compliance risk
D) Strategic risk
E) Reputation risk
Q:
Most firms keep track of the progress of projects by conducting postaudits shortly after the projects have begun to operate.
Q:
Brian Smith, CEO of Carter National Bank, decides that interest rates are going to fall in the future and as a result buys $100 million in 30 year Treasury Bonds for the banks security portfolio. Instead, interest rates rise causing the value of these bonds to fall. This would be an example of which of the following types of risk?
A) Operational risk
B) Legal risk
C) Compliance risk
D) Strategic risk
E) Reputation risk
Q:
Postaudits are conducted before the start of the projects.
Q:
Operational risk includes which of the following?
A) Failure of banks computer system
B) Closure of a bank for three months due to flooding from a major hurricane
C) Embezzlement of funds of a bank by a teller of the bank
D) Closure of a bank for two weeks due to a fire from a lightening strike
E) All of the above are example of operational risk
Q:
KMW Inc. sells a finance textbook for $150 each. The variable cost per book is $30 and the fixed cost per year is $30,000. The process of creating a textbook costs $150,000 and the average book has a life span of 3 years. Using straight line depreciation and a tax rate of 25%, What is the accounting break even number of books that must be sold?
A. 582
B. 667
C. 805
D. 953
Q:
In recent years banks have been __________ profitable than (as) S&Ls and Savings Banks.
A) More
B) Less
C) As
D) Much more
E) Much less
Q:
KMW Inc. sells a finance textbook for $150 each. The variable cost per book is $30 and the fixed cost per year is $30,000. The process of creating a textbook costs $150,000 and the average book has a life span of 3 years. Using straight line depreciation and a tax rate of 25%, what is the economic or present value break even number of books that must be sold given a discount rate of 12%?
A. 582
B. 667
C. 805
D. 953
Q:
Which of the following ratios would be a measure of market risk?
A) Nonperforming Loans/Net Loans
B) Net Loans/Total Assets
C) Interest Sensitive Assets/Interest Sensitive Liabilities
D) Equity Capital/Total Assets
E) None of the above
Q:
Which of the following ratios would be a measure of credit risk?
A) Nonperforming Loans/Net Loans
B) Net Loans/Total Assets
C) Interest Sensitive Assets/Interest Sensitive Liabilities
D) Equity Capital/Total Assets
E) None of the above
Q:
The Consumer- Mart Company is going to introduce a new consumer product. If brought to market without research about consumer tastes the firm believes that there is a 60% chance that the product will be successful. If successful, the project has a NPV = $500,000. If the product is a failure (40%) and withdrawn from the market, then NPV = -$100,000. A consumer survey will cost $60,000 and delay the introduction by one year. If the survey is successful, then there is an 80% chance of consumer acceptance, in which case the NPV = $500,000. If, on the other hand the survey is a failure, then NPV = -$100,000. The discount rate is 10%. By how much does the marketing survey change the expected net present value of the project? (approximately)
A. Increase the NPV by $25,455
B. decrease the NPV by $5950
C. decrease the NPV by $8955
D. decrease the NPV by $25,455
Q:
What is the equity multiplier for a bank where equity is equal to 10 percent of total assets?
A) 90.0
B) 10.0
C) 1.1
D) 110.0
E) 1.0
Q:
(p. 300) Given the following net future values for harvesting trees (one time harvest): If the cost of capital is 15%, calculate the optimal year to harvest:
A. Year 1
B. Year 2
C. Year 3
D. Year 4
Q:
The Smith-James Bank has an ROE of 17.5%, an asset utilization ratio of 13% and a net profit margin of 9%. What must this bank's equity multiplier be?
A) 14.96 times
B) 1.58 times
C) 1.17 times
D) 134.62 times
E) None of the above
Q:
The following options associated with a project increases managerial flexibility:
I) Option to expand
II) Option to abandon
III) Production options
IV) Timing options
A. I only
B. II only
C. I, II, III, and IV
D. IV only
Q:
The Smith-James Bank has an ROE of 17.5%, an asset utilization ratio of 13% and a net profit margin of 9%. What is this bank's ROA?
A) 14.96 percent
B) 1.58 percent
C) 1.17 percent
D) 134.62 percent
E) None of the above
Q:
You are planning to produce a new action figure called "Hillary". However, you are very uncertain about the demand for the product. If it is a hit, you will have net cash flows of $50 million per year for 3 years (starting next year). If it fails, you will only have net cash flows of $10 million per year for 2 years (starting next year). There is an equal chance that it will be a hit or failure (probability = 50%). You will not know whether it is a hit or a failure until the first year's cash flows are in. You have to spend $80 million immediately for equipment and the rights to produce the figure. If you can sell your equipment for $60 million once the first year's cash flows are received, calculate the value of the abandonment option. (The discount rate is 10%)
A. -9.15
B. +13.99
C. +23.14
D. None of the above
Q:
The TRC Bank has a net profit margin of 7.5%, an asset utilization ratio of 18%, an equity multiplier of 20 times. What is this bank's ROE?
A) 27.00 percent
B) 1.35 percent
C) 7.50 percent
D) 1.50 percent
E) 3.6 percent
Q:
You are planning to produce a new action figure called "Hillary". However, you are very uncertain about the demand for the product. If it is a hit, you will have net cash flows of $50 million per year for 3 years (starting next year). If it fails, you will only have net cash flows of $10 million per year for 2 years (starting next year). There is an equal chance that it will be a hit or failure (probability = 50%). You will not know whether it is a hit or a failure until the first year's cash flows are in. You have to spend $80 million immediately for equipment and the rights to produce the figure. If you can sell your equipment for $60 million once the first year's cash flows are received, calculate the NPV with the abandonment option. (The discount rate is 10%)
A. -9.1
B. +9.1
C. +13.99
D. -14.4
Q:
The TRC Bank has a net profit margin of 7.5%, an asset utilization ratio of 18%, an equity multiplier of 20 times. What is this bank's ROA?
A) 27.00 percent
B) 1.35 percent
C) 7.50 percent
D) 1.50 percent
E) 3.6 percent
Q:
You are planning to produce a new action figure called "Hillary". However, you are very uncertain about the demand for the product. If it is a hit, you will have net cash flows of $50 million per year for 3 years (starting next year). If it fails, you will only have net cash flows of $10 million per year for 2 years (starting next year). There is an equal chance that it will be a hit or failure (probability = 50%). You will not know whether it is a hit or a failure until the first year's cash flows are in. You have to spend $80 million immediately for equipment and the rights to produce the figure. If the discount rate is 10%, calculate the NPV without the abandonment option.
A. -9.15
B. +13.99
C. +9.15
D. -14.4
Q:
Option to abandon a project is a:
A. Call option
B. Put option
C. Stock option
D. Swap
Q:
Using the information listed below for Carter State Bank, what is this bank's asset utilization ratio? Net income
$55 million Total operating revenue
$650 million Total assets
$4,055 million Total equity Capital
$350 million A) 8.46 percent
B) 16.03 percent
C) 15.71 percent
D) 1.36 percent
E) None of the above
Q:
Using the information listed below for Carter State Bank, what is this bank's net profit margin? Net income
$55 million Total operating revenue
$650 million Total assets
$4,055 million Total equity capital
$350 million A) 8.46 percent
B) 16.03 percent
C) 15.71 percent
D) 1.36 percent
E) None of the above
Q:
Option to expand a project is a:
A. Call option
B. Put option
C. Stock option
D. Swap
Q:
Using the information listed below for Carter State Bank, what is this bank's ROA? Net income
$55 million Total operating revenue
$650 million Total assets
$4,055 million Total equity capital
$350 million A) 8.46 percent
B) 16.03 percent
C) 15.71 percent
D) 1.36 percent
E) None of the above
Q:
Petroleum Inc. owns a lease to extract crude oil from sea. It is considering the construction of a deep-sea oil rig at a cost of $50 million (I0) and is expected to remain constant. The price of oil is $50/bbl and the extraction costs are $20/bbl. The quantity of oil Q = 200,000 bbl per year forever. The risk-free rate is 10% per year which is also the cost of capital (Ignore taxes). Suppose the oil price is uncertain and can be $70/bbl or $40/bbl next year. If the project if postponed by one year, calculate the value of the option to wait for one year: (approximately)
A. +15,000,000
B. +40,000,000
C. +10,000,000
D. none of the above
Q:
Using the information listed below for Carter State Bank, what is this bank's ROE? Net income
$55 million Total operating revenue
$650 million Total assets
$4,055 million Total equity capital
$350 million A) 8.46 percent
B) 16.03 percent
C) 15.71 percent
D) 1.36 percent
E) None of the above
Q:
The following are real options except:
A. Stock options
B. Timing options
C. Option to expand
D. Option to abandon
Q:
A bank expects to pay a dividend next year of $3.45 and also expects dividends to grow at a rate of 7% from now on. If the appropriate discount rate is 15%, what should this bank's stock price be in the market?
A) $23.00
B) $43.13
C) $46.14
D) $49.29
E) $24.61