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FIN/534 FIN534 FIN 534 Week 11 Final Exam Part 1

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FIN 534 Week 11 Final Exam Part 1 • Question 1 The current price of a stock is $50, the annual risk-free rate is 6%, and a 1-year call option with a strike price of $55 sells for $7.20. What is the value of a put option, assuming the same strike price and expiration date as for the call option? • Question 2 An option that gives the holder the right to sell a stock at a specified price at some future time is • Question 3 Which of the following statements is most correct, holding other things constant, for XYZ Corporation’s traded call options? • Question 4 Which of the following statements is CORRECT? • Question 5 Which of the following statements is CORRECT? • Question 6 The current price of a stock is $22, and at the end of one year its price will be either $27 or $17. The annual risk-free rate is 6.0%, based on daily compounding. A 1-year call option on the stock, with an exercise price of $22, is available. Based on the binomial model, what is the option’s value? (Hint: Use daily compounding.) • Question 7 You have been hired as a consultant by Feludi Inc.’s CFO, who wants you to help her estimate the cost of capital. You have been provided with the following data: rRF = 4.10%; RPM = 5.25%; and b = 1.30. Based on the CAPM approach, what is the cost of common from reinvested earnings? • Question 8 Which of the following is NOT a capital component when calculating the weighted average cost of capital (WACC) for use in capital budgeting? • Question 9 Which of the following statements is CORRECT? • Question 10 2 out of 2 points As a consultant to Basso Inc., you have been provided with the following data: D1 = $0.67; P0 = $27.50; and g = 8.00% (constant). What is the cost of common from reinvested earnings based on the DCF approach? • Question 11 Suppose Acme Industries correctly estimates its WACC at a given point in time and then uses that same cost of capital to evaluate all projects for the next 10 years, then the firm will most likely • Question 12 With its current financial policies, Flagstaff Inc. will have to issue new common stock to fund its capital budget. Since new stock has a higher cost than reinvested earnings, Flagstaff would like to avoid issuing new stock. Which of the following actions would REDUCE its need to issue new common stock? • Question 13 Suppose a firm relies exclusively on the payback method when making capital budgeting decisions, and it sets a 4-year payback regardless of economic conditions. Other things held constant, which of the following statements is most likely to be true? • Question 14 Which of the following statements is CORRECT? • Question 15 Which of the following statements is CORRECT? • Question 16 Which of the following statements is CORRECT? • Question 17 Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows. • Question 18 Which of the following statements is NOT a disadvantage of the regular payback method? • Question 19 Which of the following procedures does the text say is used most frequently by businesses when they do capital budgeting analyses? • Question 20 A firm is considering a new project whose risk is greater than the risk of the firm’s average project, based on all methods for assessing risk. In evaluating this project, it would be reasonable for management to do which of the following? . • Question 21 When evaluating a new project, firms should include in the projected cash flows all of the following EXCEPT: • Question 22 Collins Inc. is investigating whethe

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