Part 2 Risk & Return; Raising Capital; Corporate Restructuring and Bankruptcy

Question 1
Company ABC is considering acquiring Company XYZ in a stock-for-stock exchange. Financial data for the
two companies are as follows:

Using the comparative P/E ratio method, what would be the maximum combined common shares
outstanding required to maintain an EPS of $8.75 in the new combined organization?

A. 7,714,286
B. 1,657,143
C. 6,057,143
D. 4,400,000

Question 2
The treasurer of a European company plans to raise $500 million to finance its new business expansion
into the Asia Pacific region. The treasurer is analyzing initial public offerings. All of the following are
correct except that

A. under an underwritten offering, the investment bank will guarantee the sale of stock at an
offering price. However, the commission charged to the company will be higher compared to a
best efforts offering.
B. an initial public offering will increase the liquidity of the company's stock and establish the
company's value in the market.
C. one of the advantages of an initial public offering is that stock price can accurately reflect the
true net worth of the company after it goes public.
D. it is necessary for the company to file a registration statement with the SEC if it decides to
launch an initial public offering.

Question 3
Which of the following theories states that security prices reflect all information, whether public or
private?

A. Weak-form efficiency
B. Semi-strong-form efficiency
C. Strong-form efficiency
D. Nominal-form efficiency

Question 4
Beta, Inc. recently made an investment in a startup company. The initial investment was $100,000. Over
the most recent reporting period, Beta, Inc. received a $10,000 dividend payment. The value of the
 Part 2 Risk & Return; Raising Capital; Corporate Restructuring and Bankruptcy

investment also increased by $10,000. What is the rate of return of Beta's investment (round to 2
decimals)?

A. 9%
B. 10%
C. 18%
D. 20%

Question 5
Which of the following is not a common reason that business combinations take place?

A. Increase revenue
B. Decrease costs
C. Expand market share
D. Government regulation

Question 6
The process by which investment banks ready a debt or equity security for sale is called:

A. due diligence.
B. underwriting.
C. initial public offering.
D. origination.

Question 7
Using the acquisition method for business combinations, how are the costs paid to attorneys and
accountants for services in arranging the merger handled?

A. Considered part of the overall fair value acquired in the merger.

B. Recognized as goodwill in the business combination.
C. Considered an expense in the period of the merger.
D. Written off over time as an asset similar to depreciation.

Question 8
A company paid $10 dividends per share in the current year and is expected to pay 3% more of this next
year. Assuming the company's cost of equity is 8%, and dividend growth remains the same in perpetuity,
what is the price of the company's stock?

A. $200
B. $206
C. $333
D. $125

Question 9
A pension fund manager utilizes the Capital Asset Pricing Model (CAPM) to guide the decision process.
The manager has been presented with the following three investment options by the fund advisor, all of
which are large, fully diversified investment funds.
 Part 2 Risk & Return; Raising Capital; Corporate Restructuring and Bankruptcy

Which one of the following is correct with regard to the returns for these portfolios?

A. Portfolio C can be expected to earn the lowest return.

B. Portfolios A and C can be expected to earn similar returns.
C. Portfolio B has more risk than Portfolio C and less risk than Portfolio A.
D. Portfolio A can be expected to earn the highest return.

Question 10
A company’s stock has a beta of 0.50. If the current risk-free rate of return is 2%, and the market risk
premium is 6%, what is the required return on the company’s stock according to the Capital Asset
Pricing Model (CAPM)?

A. 4%
B. 5%
C. 6%
D. 8%

Question 11
When using the discounted cash flow method to evaluate a business combination, what is the
appropriate assumption about longevity of the target firm?

A. Three to five years

B. Product's projected useful life
C. Industry average firm life
D. Indefinite life

Question 12
This type of risk is often manageable as it pertains only to a specific business. However, mitigating it
often results in relatively less positive performance but at the same time reduces possible losses.

A. Industry risk
B. Market risk
C. Unsystematic risk
D. Nondiversifiable risk

Question 13
The interest rate risk of a bond is the

A. risk that arises from the uncertainty about the bond's return caused by changes in interest rates
over time.
B. risk related to the possibility of bankruptcy of the bond's issuer.
C. unsystematic risk caused by factors unique in the bond.
 Part 2 Risk & Return; Raising Capital; Corporate Restructuring and Bankruptcy

D. Risks related to the possibility of bankruptcy of the bond's issuer and that arises from the
uncertainty of the bond's return caused by the change in interest rates.

Question 14
On January 1, Year 1, Liberty Company sold one of its product lines to Bell Corporation in an “arms
length” transaction. Bell signed a noninterest bearing note requiring payment of $20,000 annually for 10
years. The first payment was made on January 1, Year 1. The prevailing rate of interest for this type of
note at date of issuance was 12%. Information on present value factors is as follows:*

Liberty should record the above sale in January, Year 1 at:

A. $126,560
B. $106,560.
C. $133,000.
D. $113,000.

Question 15
Which of the following theories states that security prices reflect all public information, but not all
private information?

A. Weak-form efficiency
B. Semi-strong-form efficiency
C. Strong-form efficiency
D. Nominal-form efficiency

Question 16
A portfolio with a level of systematic risk that is the same as that of the market has a beta that is which
of the following?

A. Equal to zero
B. Equal to one
C. Less than the beta of the risk-free asset
D. Less than zero

Question 17
The ease with which a security can be converted into cash is called:

A. marketability.
B. liquidity.
C. solvency.
D. tradability.
 Part 2 Risk & Return; Raising Capital; Corporate Restructuring and Bankruptcy

Question 18
Which of the following best describes a major risk for Leveraged Buyouts (LBOs)?

A. Highly leveraged, with large debt service payments

B. Financed based on predictable cash flows.
C. Private, so quarterly earnings reports are not required.
D. Financed based on the fixed assets of the target company

Question 19
Beta measures the volatility of a stock in relation to the movements of the market. A well-diversified
portfolio is expected to have a beta close to:

A. −1.0
B. 0
C. 1.0
D. 2.0

Question 20
What is insider trading?

A. A legal practice where individuals with public information trade on investments for profits.
B. An illegal practice where individuals with confidential or nonpublic information trade on
investments for profits.
C. An illegal practice where individuals with public information trade on investments for profits.
D. A legal practice where individuals with confidential or nonpublic information trade on
investments for profits.

Question 21
If the Fed caused the risk-free rate to increase, we would expect the cost of capital to:

A. decrease.
B. remain unchanged.
C. Need more information to answer question.
D. increase.

Question 22
A stock has a beta of 1.5 and an expected return of 14%. Given a risk-free rate of 2% and a market risk
premium of 6%, an investor should:

A. Buy the stock because it is undervalued.

B. Buy the stock because it is overvalued.
C. Sell the stock because it is undervalued.
D. Sell the stock because it is overvalued.

Question 23
A government agency announced a violation of pollution regulations by a publicly traded trucking
company, where the related penalties included a temporary suspension of the company’s permit to
operate. According to the semi-strong market efficiency, what is the likely impact of such an
announcement?
 Part 2 Risk & Return; Raising Capital; Corporate Restructuring and Bankruptcy

A. The market will react immediately to the announcement, and the stock's market price will drop.
B. The market will react immediately to the announcement, and the stock's market price will rise.
C. The market has already accounted for all information in the current stock price, so such an
announcement will have no effect.
D. It is difficult to predict its impact on stock prices because historical trends are independent of
future price movements.

Question 24
When corporate insiders buy and sell securities of their own firm, they must report their trades to the:

A. FASB.
B. PCAOB.
C. IRS.
D. SEC.

Question 25
Using the Capital Asset Pricing Model (CAPM), the required rate of return for a firm with a beta of 1.25
when the market return is 14% and the risk-free rate is 6% is:

A. 16%
B. 7.5%.
C. 14%.
D. 17.5%.

Question 26
Which of the following provides very large payouts to executives released as part of an acquisition?

A. Leveraged recapitalization
B. Golden parachute
C. White knight defense
D. Staggered board of directors

Question 27
Which of the following types of business divestitures would a firm use in order to most effectively
monitor the performance of a strategic business unit?

A. Spin-off
B. Equity carve-out
C. Split-up
D. Tracking stock

Question 28
Based on the assumptions of the Capital Asset Pricing Model, the risk premium on an investment with a
beta of 0.5 is equal to

A. the risk-free rate.

B. the risk premium on the market.
C. twice the risk premium on the market.
D. half the risk premium on the market.
 Part 2 Risk & Return; Raising Capital; Corporate Restructuring and Bankruptcy

Question 29
An investment bank has limited resources and can only accommodate one initial public offering (IPO) in
a month. Two offers came into its table, namely: Company A, who wants an underwriting agreement
with an underwriting spread of $0.05/share for 100,000 shares, and Company B, who wants a
best effort sale with 0.5% commission with an offer price per share of $100 for 100,000 shares but
expects only 95% of this will be taken. Assuming no regulatory restrictions are in place, which IPO should
the investment bank undertake?

A. Company A
B. Company B
C. Either; both offers give the same revenue
D. Neither; both offers are non-revenue-generating.

Question 30
A company belongs to an industry that had an average P/E of 10.0x in the previous year. However,
because the industry is booming, investors re-rated the industry and expect an average forward P/E of
20.0x already. Suppose that the company's EPS is expected to be $30.00 next year from just $15.00 last
year; how much is the company's stock using the forward multiple?

A. $200.00
B. $300.00
C. $600.00
D. $150.00

Question 31
Who must approve the payment of dividends?

A. Chief Executive Officer

B. Chief Financial Officer
C. Shareholders
D. Board of Directors

Question 32
Why is the term “money market” used?

A. Firms that issue securities in this market are in dire need of cash.
B. It is a market where stocks are converted into money.
C. The instruments traded in this market are close substitutes for cash.
D. Investors use money to purchase the securities.

Question 33
The interest rate risk of a bond is the:

A. risk that arises from the uncertainty about the bond's return caused by changes in interest rates
over time.
B. risk related to the possibility of bankruptcy of the bond's issuer.
C. unsystematic risk caused by factors unique in the bond.
 Part 2 Risk & Return; Raising Capital; Corporate Restructuring and Bankruptcy

D. risks related to the possibility of bankruptcy of the bond's issuer and that arises from the
uncertainty of the bond's return caused by the change in interest rates.

Question 34
Assume the following for Brady Company stock:

What is the required rate of return on Brady Company stock?

A. 12.6%
B. 19%
C. 13.1%
D. 17.6%

Question 35
Country A's stock index includes 30 companies across eight sectors. Country B's stock index includes
2,500 companies across two sectors. Country C's stock index includes 500 names across 11 sectors.
Finally, Country D's stock index includes 30 companies across 10 sectors. Based only on the given
information, which country index is the most diversified?

A. Country A
B. Country B
C. Country C
D. Country D

Question 36
Which one of the following would have the least impact on a firm's beta value?

A. Industry characteristics
B. Payout ratio
C. Operating leverage
D. Debt-to-equity ratio

Question 37
With regard to dividends, which of the following can be true for both preferred and common stocks?

A. A fixed amount of dividend is given out to both types of stocks regardless of earnings.
B. Companies are not required to pay the dividends to either common or preferred stock in a given
financial period.
C. Dividends are often cumulative
D. Both have the contractual right to receive dividends.
 Part 2 Risk & Return; Raising Capital; Corporate Restructuring and Bankruptcy

Question 38
All of the following statements accurately describe investment beta except:

A. stocks with a beta greater than 1.0 are unusually sensitive to market movements.
B. the average beta of all stocks is 1.0.
C. U.S. Treasury bills have a beta of 0.
D. betas for individual stocks tend to be stable over time.

Question 39
Of the following statements, which theory best justifies consolidated financial statements?

A. In form, the companies are one entity

B. In form, the companies are separate.
C. In form, the companies are one entity; in substance they are separate.
D. In form, the companies are separate; in substance they are one entity.

Question 40
What is a commercial bank?

A. A bank that offers financial services such as checking accounts, savings accounts, lines of credit,
and term-loans
B. A bank that specializes in helping companies sell new debt and equity in the primary markets
C. A bank that specializes in the sale of derivative instruments
D. A bank that helps advertising agencies fund the creation of commercials

Question 41
According to the capital asset pricing model (CAPM), the expected risk premium of a portfolio varies:

A. based on investor attitudes toward risk.

B. based on the number of securities in the portfolio.
C. in direct proportion to beta in a competitive environment.
D. in direct proportion to the prime interest rate.

Question 42
Which of the following statements is true of amortization?

A. Amortization solely refers to the total value to be paid by the borrower at the end of maturity.
B. The amortization schedule represents only the interest portion of the loan.
C. The computation of loan amortization is wholly based on the computation of simple interest.
D. The amortization schedule provides the data of equated monthly payments for which the
classification of principal and interest along with unpaid principal balance is provided.

Question 43
All of the following are sources of diversifiable risks except:

A. Financial leverage.
B. Company management.
C. Sales cycle.
D. Economic cycle.