The limitations of profit maximization as the goal of a corporation

Question # 00225114 Posted By: kimwood Updated on: 03/19/2016 04:05 AM Due on: 04/18/2016
Subject Mathematics Topic Geometry Tutorials:
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Question 1. 1. The limitations of profit maximization as the goal of a corporation include:
(Points : 1)
It lacks a time dimension
It fails to consider risk
The definition of profit is ambiguous
All the above are limitations

Question 2. 2. Agency costs include all of the following except: (Points : 1)
expenditures to monitor management's actions
providing stock as part of management's compensation
flotation costs
investment banking costs

Question 3. 3. An increase in total assets: (Points : 1)
means that net working capital is also increasing.
requires an investment in fixed assets.
means that shareholders' equity must also increase.
must be offset by an equal increase in liabilities and shareholders' equity.
can only occur when a firm has positive net income.

Question 4. 4. _____ is calculated by adding back non-cash expenses and deferred taxes to net
income. (Points : 1)
Free cash flow
Capital spending
Net working capital

After-tax Cash Flow
Cash flow to creditors

Question 5. 5. An 11% coupon bond paying interest semiannually has a $1,000 par value and 4
years remaining until maturity. At a current market price of $923.50, the yield to maturity on
the bond is ______%. (Points : 1)
6.77
13.54
13.60
14.00
None of the above are within rounding error of the correct calculation.

Question 6. 6. If the default risk on a corporate bond lessens, then its credit rating will ______
and the required rate of return on the bond would ______. (Points : 1)
rise; increase
rise; decrease
fall; decrease
fall; increase

Question 7. 7. Dividends per share of a company are expected to be $3, $5, and $4 for the next
three years. Thereafter, the trend rate of growth is forecast to be 10% annually. To obtain a
return of 15%, an investor would be willing to pay approximately $______ for the stock.
(Points : 1)
59
62
67
88

None of the above are within rounding error of the correct calculation.

Question 8. 8. The expected before-tax cost of capital for long-term debt, preferred stock, and
common equity is 9%, 11%, and 15%, respectively. If the company's tax rate is 33.3% and new
investments are financed by 40% debt, 10% preferred stock, and 50% common equity, then the
weighted average cost of capital to the firm is ______% . (Points : 1)
6
10.7
11
15
None of the above are within rounding error of the correct calculation.

Question 9. 9. A company is considering investing $200 in a long-term asset for which cash
inflows over the subsequent three years are estimated to be $70, $50, and $95 respectively. The
cost of capital for the project is 8%. Which of the following three capital budgeting
calculations is incorrect? (Points : 1)
NPV = -$16.9
IRR = 3.5%
MIRR = 4.9%
All are correct.
More than one of the three are not correct.

Question 10. 10. What would be the times interest earned of a company if its total interest
charges are $20,000, sales are $220,000, and its net profit margin is 6 percent? Assume a tax
rate of 40 percent. (Points : 1)
2.65
1.1
2.1

1.2

Question 11. 11. If Power-On Inc. has a total asset turnover of 1.8, a fixed asset turnover of
3.2, a debt ratio of 0.5 and a total debt of $200,000, then fixed assets are (Points : 1)
$56,250
$711,111
$225,000
$62,250

Question 12. 12. What is the market price per share of Big Whoop, Inc. if the firm had net
income of $200,000, earnings per share of $2.70, total equity of $800,000, and a market to
book ratio of 1.5? (Points : 1)
$16.20
$10.80
$7.20
$12.40

Question 13. 13. How much cash and marketable securities does Gray Day Computer Co. have
if the firm has a current ratio of 2.5, a quick ratio of 1.2, and current liabilities of $12,000.
Gray's credit sales are $98,000 and its average collection period is 40 days? (Assume 365 days
per year.) (Points : 1)
$3,660
$14,440
$10,740
$12,660

Question 14. 14. What is the return on assets (investment) for a firm that has a debt ratio of
0.65, a net profit margin of 6.5%, sales of $740,000, and a total asset turnover of 4? (Points : 1)

26.0%
16.9%
6.5%
4.6%

Question 15. 15. What is the return on stockholders' equity for a firm with a net profit margin
of 5.2 percent, sales of $620,000, an equity multiplier of 1.8, and total assets of $380,000?
(Points : 1)
8.48%
5.74%
15.27%
9.36%

Question 16. 16. As a financial analyst for a corporation, you have been given the
responsibility to compute the firm's cost of equity from retained earnings based on the CAPM
approach. You estimate that the beta for the company's stock is 1.2 and the risk-free and
market rates of return are 4% and 13%, respectively. The appropriate cost of equity is ______
%. (Points : 1)
12.7
13.4
14.1
14.8
None of the above are within rounding error of the correct calculation.

Question 17. 17. The financial executives of a corporation believe that their working capital
management policy is too conservative and wish to make it more aggressive. To achieve this
result, they would seek to ______ short-term liabilities and ______ long-term debt. (Points : 1)
increase; increase

decrease; decrease
increase; decrease
decrease; increase

Question 18. 18. What is the effective compound annual rate of interest on a $10,000 loan
which is paid off by 48 monthly payments of $261 if the first payment is due 1 month after
receipt of the loan? (Points : 1)
8.73%
9.64%
10.56%
12.15%
None of the above are within rounding error of the correct calculation.

Question 19. 19. The annualized (360 day year) cost of not taking the discount on trade credit
of 2/10 net 30 is ______%. (Points : 1)
27
37
46
46
None of the above are within rounding error of the correct calculation.

Question 20. 20. Before expiration, the time value of an in the money call option is always
(Points : 1)
equal to zero.
positive.
negative.

equal to the stock price minus the exercise price.
none of the above.

Question 21. 21. When comparing investments with different horizons the ____________
provides the more accurate comparison. (Points : 1)
arithmetic average
effective annual rate
average annual return
historical annual average
none of the above

Question 22. 22. Which of the following statement(s) is (are) true regarding the selection of a
portfolio from those that lie on the Capital Allocation Line? (Points : 1)
Less risk-averse investors will invest more in the risk-free security and less in the
optimal risky portfolio than more risk-averse investors.
More risk-averse investors will invest less in the optimal risky portfolio and more in
the risk-free security than less risk-averse investors.
Investors choose the portfolio that maximizes their expected utility.
A and C.
B and C.

Question 23. 23. A disadvantage of using stock options to compensate managers is that
(Points : 1)
it encourages mangers to undertake projects that will increase stock price.
it encourages managers to engage in empire building.
it can create an incentive for mangers to manipulate information to prop up a stock
price temporarily, giving them a chance to cash out before the price returns to a level reflective

of the firms true prospects.
all of the above.
none of the above.

Question 24. 24. The percentage change in the stock call option price divided by the
percentage change in the stock price is called (Points : 1)
the elasticity of the option.
the delta of the option.
the theta of the option.
the gamma of the option.
none of the above.

Question 25. 25. A trader who has a __________ position in gold futures wants the price of
gold to __________ in the future. (Points : 1)
long; decrease
short; decrease
short; stay the same
short; increase
long; stay the same

Question 26. 26. In order for you to be indifferent between the after tax returns on a corporate
bond paying 8.5% and a tax-exempt municipal bond paying 6.12%, what would your tax
bracket need to be? (Points : 1)
33%
72%
15%

28%
Cannot tell from the information given

Question 27. 27. Assume you sell short 100 shares of common stock at $45 per share, with
initial margin at 50%. What would be your rate of return if you repurchase the stock at
$40/share? The stock paid no dividends during the period, and you did not remove any money
from the account before making the offsetting transaction. (Points : 1)
20%
25%
22%
77%
none of the above

Question 28. 28. If a portfolio had a return of 12%, the risk free asset return was 4%, and the
standard deviation of the portfolio's excess returns was 25%, the Sharpe measure would be
_____. (Points : 1)
0.12
0.04
0.32
0.16
0.25

Question 29. 29. A European put option allows the holder to (Points : 1)
buy the underlying asset at the striking price on or before the expiration date.
sell the underlying asset at the striking price on or before the expiration date.
potentially benefit from a stock price decrease with less risk than short selling the
stock.

sell the underlying asset at the striking price on the expiration date.
C and D.

Question 30. 30. You purchase one JNJ 75 call option for a premium of $3. Ignoring
transaction costs, the breakeven price of the position is (Points : 1)
$75
$72
$3
$78
none of the above

Question 31. 31. Consider the following three stocks:
Stock

Price

Stock A
Stock B
Stock C

$40
$70
$10

Number of Shares
Outstanding
200
500
600

Assume at these prices the value-weighted index constructed with the three stocks is 490.
What would the index be if stock B is split 2 for 1 and stock C 4 for 1?
(Points : 1)
265
430
355
490
1000

Question 32. 32. You purchased JNJ stock at $50 per share. The stock is currently selling at

$65. Your gains may be protected by placing a __________. (Points : 1)
stop-buy order
limit-buy order
market order
limit-sell order
none of the above.

Question 33. 33. You sold short 100 shares of common stock at $75 per share. The initial
margin is 50%. At what stock price would you receive a margin call if the maintenance margin
is 30%? (Points : 1)
$90.23
$88.52
$86.54
$87.12
none of the above

Question 34. 34. A statistic that measures how the returns of two risky assets move together
is: (Points : 1)
variance.
standard deviation.
covariance.
correlation.
C and D.

Question 35. 35. Given an optimal risky portfolio with expected return of 14% and standard
deviation of 22% and a risk free rate of 6%, what is the slope of the best feasible CAL?
(Points : 1)

0.64
0.14
0.08
0.33
0.36

Question 36. 36. The current market price of a share of AT&T stock is $50. If a put option on
this stock has a strike price of $45, the put (Points : 1)
is out of the money.
is in the money.
sells for a lower price than if the market price of AT&T stock is $40.
A and C.
B and C.

Question 37. 37. The price that the buyer of a put option pays to acquire the option is called
the (Points : 1)
strike price
exercise price
execution price
acquisition price
premium

Question 38. 38. Suppose that you purchased a call option on the S&P 100 index. The option
has an exercise price of 700 and the index is now at 760. What will happen when you exercise
the option? (Points : 1)
You will have to pay $6,000.

You will receive $6,000.
You will receive $700.
You will receive $760.
You will have to pay $7,000.

Question 39. 39. The current market price of a share of a stock is $80. If a put option on this
stock has a strike price of $75, the put (Points : 1)
is in the money.
is out of the money.
sells for a higher price than if the market price of the stock is $75.
A and C.
B and C.

Question 40. 40. You sold one corn future contract at $2.29 per bushel. What would be your
profit (loss) at maturity if the corn spot price at that time were $2.10 per bushel? Assume the
contract size is 5,000 ounces and there are no transactions costs. (Points : 1)
$950 profit
$95 profit
$950 loss
$95 loss
none of the above.

Question 41. 41. Consider the following probability distribution for stocks A and B to answer
questions 12 through 15:
State Probability Return on Stock Return on Stock
A
B
1
0.10
10%
8%

2
3
4
5

0.20
0.20
0.30
0.20

13%
12%
14%
15%

7%
6%
9%
8%

The expected rates of return of stocks A and B are _____ and _____ , respectively. (Points : 1)
13.2%; 9%
14%; 10%
13.2%; 7.7%
7.7%; 13.2%
none of the above

Question 42. 42. The standard deviations of stocks A and B are _____ and _____,
respectively. (Points : 1)
1.5%; 1.9%
2.5%; 1.1%
3.2%; 2.0%
1.5%; 1.1%
none of the above

Question 43. 43. The coefficient of correlation between A and B is (Points : 1)
0.47.
0.60.
0.58
1.20.
none of the above.

Question 44. 44. If you invest 40% of your money in A and 60% in B, what would be your
portfolio's expected rate of return and standard deviation? (Points : 1)
9.9%; 3%
9.9%; 1.1%
11%; 1.1%
11%; 3%
none of the above

Question 45. 45. Which of the following measures of risk best highlights the potential loss
from extreme negative returns? (Points : 1)
Standard deviation
Variance
Upper partial standard deviation
Value at Risk (VaR)
None of the above

Question 46. 46. If a country experiences an increase in interest rates relative to U.S. interest
rates, the inflow of U.S. funds to purchase its securities should ______________, the outflow
of its funds to purchase U.S. securities should _______________, and there is
______________ pressure on its currency's equilibrium value. (Points : 1)
increase; decrease; downward
increase; increase; upward
increase; decrease; upward
decrease; increase; upward

Question 47. 47. If the Fed desires to weaken the dollar without affecting the dollar money
supply, it should: (Points : 1)

exchange foreign currencies for dollars, and buy existing Treasury securities with
dollars.
exchange dollars for foreign currencies, and buy existing Treasury securities with
dollars.
exchange foreign currencies for dollars, and sell some of its existing Treasury security
holdings for dollars.
exchange dollars for foreign currencies, and sell some of its existing Treasury security
holdings for dollars.

Question 48. 48. Frank is an option speculator. He anticipates the Danish kroner to appreciate
from its current level of $0.19 to $0.21. Currently, kroner call options are available with an
exercise price of $0.18 and a premium of $0.02. Should Frank attempt to buy this option? If
the future spot rate of the Danish kroner is indeed $0.21, what is his profit or loss per unit?
(Points : 1)
no; -$0.01.
yes; $0.03.
yes; -$0.01.
yes; $0.01.

Question 49. 49. Assume the spot rate of the Swiss franc is $.62 and the one-year forward rate
is $.66. The forward rate exhibits a ___________ of ____________. (Points : 1)
premium; about 6.45%
premium; about 6%
discount; about 6.45%
discount; about 6%

Question 50. 50. It has been argued that the exchange rate can be used as a policy tool. Assume
that the U.S. government would like to reduce unemployment. Which of the following is an
appropriate action given this scenario? (Points : 1)

Strengthen the dollar
Buy dollars with foreign currency in the foreign exchange market
Implement a tight monetary policy
Weaken the dollar

Question 51. 51. Which of the following is true regarding the options markets? (Points : 1)
Hedgers attempt to lower risk, while speculators attempt to make riskless profits.
Hedgers and speculators both attempt to lower risk.
Hedgers and speculators are both necessary in order for the market to be liquid.
All of the above.

Question 52. 52. Assume that the total value of investment transactions between U.S. and
Mexico is minimal. Also assume that total dollar value of trade transactions between these two
countries is very large. Now assume that Mexico's inflation has suddenly increased, and
Mexican interest rates have suddenly increased. Overall, this would put _______________
pressure on the value of Mexican peso. The inflation effect should be _______________
pronounced than the interest rate effect. (Points : 1)
downward; less
upward; more
downward; more
upward; less

Question 53. 53. Which of the following is the most likely strategy for a U.S. firm that will be
receiving Swiss francs in the future and desires to avoid exchange rate risk (assume the firm
has no offsetting position in francs)? (Points : 1)
Sell a futures contract on francs.
Purchase a call option on francs.

Obtain a forward contract to purchase francs forward.
All of the above are appropriate strategies for the scenario described.

Question 54. 54. Any event that reduces the U.S. demand for Japanese yen should result in
a(n) _____________ in the value of the Japanese yen with respect to ____________, other
things being equal. (Points : 1)
increase; nondollar currencies
decrease; nondollar currencies
decrease; U.S. dollar
increase; U.S. dollar

Question 55. 55. If interest rates on the euro are consistently below U.S. interest rates, then for
the international Fisher effect (IFE) to hold: (Points : 1)
The value of the euro would often appreciate against the dollar.
The value of the euro would often depreciate against the dollar.
The value of the euro would remain constant most of the time.
The value of the euro would appreciate in some periods and depreciate in other periods,
but on average have a zero rate of appreciation.

Question 56. 56. Assume U.S. and Swiss investors require a real rate of return of 3%. Assume
the nominal U.S. interest rate is 6% and the nominal Swiss rate is 4%. According to the
international Fisher effect, the franc will _____________ by about _______________.
(Points : 1)
appreciate; 3%
appreciate; 2%
depreciate; 3%
depreciate; 2%

Question 57. 57. Assume that the inflation rate in Singapore is 3%, while the inflation rate in
the U.S. is 8%. According to PPP, the Singapore dollar should ____ by ____%. (Points : 1)
appreciate; 4.85
depreciate; 3.11
appreciate; 3.11
depreciate; 4.85

Question 58. 58. Assume that the U.S. one-year interest rate is 5% and the one-year interest
rate on euros is 8%. You have $100,000 to invest and you believe that the international Fisher
effect (IFE) holds. The euro's spot exchange rate is $1.40. What will be the yield on your
investment if you invest in euros? (Points : 1)
8%
5.86%
3%
2.78%

Question 59. 59. If it was determined that the movement of exchange rates was not related to
previous exchange rate values, this implies that a ____ is not valuable for speculating on
expected exchange rate movements. (Points : 1)
technical forecast technique
fundamental forecast technique
all of the above
none of the above

Question 60. 60. If an MNC invests excess cash in a foreign county, it would like the foreign
currency to _______________; if an MNC issues bonds denominated in a foreign currency, it
would like the foreign currency to ______________. (Points : 1)
appreciate; depreciate

appreciate; appreciate
depreciate; depreciate
depreciate; appreciate
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