Finance Test Questions


This will be a place to allow finance Students free money from the government (and professors for that matter) to share test questions to help students prepare for tests. (As an aside, for my classes at St. Bonaventure, if you submit a question with your name and it is used on the test, you will get 2 percent added to your test. (PS once you submit questions here you probably want to send me a quick email saying "Hey I submitted some questions")
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A couple of important comments:

DO: only submit your own questions.
DO: include answers to help others study whenever possible
Do NOT submit copyrighted questions.



Finance Test Questions

Antonio (MBA 610)
MC (Correct answer in bold)

Which of the following is NOT Considered a reason for underpricing?
a) Threat of lawsuit
b) Offering higher return to investors
c) Information Asymetry
d) Low cost of Equity

You hold a 1 year call option of ABC stock that can be exercise at $100. Suppose that at expiration date, the stock is worth $120. The call is said to be:
a) Out of the money
b) In the money
c) At the money
d) Worth "0"

When you do not own the underlying asset and you are exposed to price fluctuations, you are said to have a:
a) Covered position
b) Straddle position
c) Strangle position
d) Naked position

What type of orders allow you to limit your losses by placing an order below the market price?
a) Market orders
b) Limit orders
c) Stop orders
d) Long calls

What type of orders allows you to decide the price you want to trade at?
a) Market Order
b) Stop Order
c) Limit Order
d) Long Call

Which of the following is NOT an assumption of the Black Scholes Model
a) Markets are efficient
b) Normally distributed returns of the stock
c) Very high commissions are charged
d) European option terms are used

In terms of options payoffs, Bond Holders' payoff in a firm seem to hold a:
a) Long Call position
b) Short Put position
c) Long Put position
d) Short Call position

Which of the following is a similarity between forward and futures contract:
a) Ability to trade and transfer
b) Liquidity
c) Payoffs
d) Use of intermediaries

Which of the following helps you limit your losses in fuures contracts:
a) Daily cash settlements
b) Price limits
c) both A and B
d) None of the above. You can't limit your losses in futures contracts

In terms of options valuations, If the price of the stock goes up:
a) Price of the call option will lncrease and implied volatility will Decrease
b) Price of the call option will Decrease and implied volatility will Decrease
c) Price of the call option will lncrease and implied volatility will Increase
d) Price of the call option will Decrease and implied volatility will Increase

If we change the strike price of a call option decreases, the price of the call option will:
a) Decrease
b) Stay the same
c) Increase
d) Cannot be determined

Wich firms are more likely to use convertible debt?
a) Good firms
b) Firms with higher bankrupcty costs
c) Firms with higher than industry avg. debt ratios expecting good times ahead
d) all of the above

In Modigliani and Miller preposition 1 for capital structure, they assumed that:
a) Costs of capital was lower than cost of debt
b) There were not taxes or other transaction costs
c) Kd = YTM x (1-tax rate)
d) Firm capital structure greatly affected the value of the firm

What theory is based on idea that managers have more information that us and it suggest that there is a target optimal capital structure that makes manager decided whether or not to take debt or equity?
a) Trade off theory
b) Pecking order theory
c) Hybrid theory
d) Agency Theory
What is the type of offer under which a Investment Bank can NOT guarantee it will sell of the shares?
a) Seasoned Offer
b) Firm Commitment
c) Best Offer
d) Initial Public Offer

Under Modigliani and Miller world, we can increase the value of the firm by:
a) Increasing WACC
b) Decreasing WACC
c) Increasing trasaction costs
d) Issuing more debt than equity

Which of the following was one of only 4 IPOs as of April 2009
a) Visa
b) Rosetta Stone
c) Research in Motion
d) Conoco Phillips

Which U.S automaker already filed for bankrupcy?
a) GM
b) Ford
c) Chrysler
d) Hummer

This person used regression models and found no support pecking orders (He was a Bonaventure Alumni)
a) Eugene Fama
b) Jim Mahar
c) Neal Galpin
d) Kenneth French


Sarah (MBA 610)

Multiple Choice:
The best way for a person to avoid accusations of insider trading is:
A) trade only at the end of the company’s fiscal year
B) disclose any insider information prior to trading
C) trade only with other insiders
D) trade only when the stock price is going down

ROA is equal to:
A) WACC
B) NPV
C) ROI – initial investment
D) EBIT – Taxes

A Shareholder Rights Plan, used to stop takeovers, is also referred to as:
A) A Black Swan
B) A Golden Doodle
C) A Poison Pill
D) A Shelf Offering

When a firm combines its core position with a financial derivative position, it is said to be and that is a _ financial decision
A) Hedging, high risk
B) Hedging, low risk
C) Speculating, high risk
D) Speculating, low risk
True or False: Warren Buffett has invested billions of dollars in GE. (True)
Antonio
Multiple Choice MBA 610
(right answer in bold)

1) Market will tend to reward investors for?
a) Diversifying portfolio with international stocks and U.S Stocks
b) Buying stocks with low market to book value
c) Buying small cap stocks rather than large cap stocks
d) Systematic risk.

2) Assume investors A and B. If Investor A wants compensation for all risk (systematic and unsystematic) and Investor B only wants compensation for systematic risk. Which of the following statements is true
a) Investor B will demand a higher discount rate
b) PV of asset is higher for Investor A
c) Investor A will demand a higher discount rate
d) PV of asset is lower for Investor B

3) When is it useful for investors to diversify?
a) When there is low correlation between assets
b) When assets are highly correlated
c) When there are a lot of mutual funds available
d) When the economy is doing bad


4)Where to get the best home security system in Greensboro ?
a) Alarm Alert
b) from Lowes
c) just buy a dog

CAPM was developed by?
a) Eugene Fama and Kenneth French
b) Jack Treynor, William Sharpe, and John Lintner
c) Harry Markowitz
d) Adam Smith


5) Which of the following is NOT an assumption of CAPM?
a) Investors cannot influence prices
b) Investors are diversified
c) Market portfolio exists, is on the Mean Variance Frontier and it can be measured
d) We assume there is information asymetry

6) What is the average Long Run average standard deviation for large U.S. stocks portfolio?
a) 20%
b) 15%
c) 25%
d) 10%


Multiple Choice:
Christina MBA 610:

Recently Nouriel Roubini and Alan Greenspan have publically indicated they feel the
U.S. should do what to our banks?
a) Privitize them
b) Nationalize them
c) Dilute them
d) Do nothing to them
(B is correct)

Obama recently passed a CEO pay cap for bailed-out banks at what amount?
a) $100,000
b) $1,000,000
c) $500,000
d) $50,000
(C is correct)

The small firm January effect is strongest?
a) In February
b) In the middle of the Month
c) In December
d) Early in the month
(D is correct)

Which of the following have not been considered market anomalies?
a) The small-firm January effect
b) The weather
c) The market-to-book effect
d) All of the above
(D is correct)

Technical analysis differs from Fundamental analysis in that it relies upon?
a) Patterns, momentum, and charts
b) Cash flow analysis
c) Market multiples
d) Finanical statements
(A is correct)

Capital Asset Pricing Theory suggests which of the following?
a) people want a high mean & low standard deviation
b) people want a low mean & low standard deviation
c) people want a low mean & high standard deviation
d) people want a high mean & high standard deviation
(A is correct answer)

Expected Return is which of the following formulas?
a) Expected Return= Risk Free - Beta (Expected Return of the market - risk free)
b) Expected Return= Risk Free + Beta (Expected Return of the market - risk free)
c) Expected Return= Risk Free - Beta (Expected Return of the market + risk free)
d) Expected Return= Risk Free + Beta (Expected Return of the market + risk free)
(B is correct answer)

Our current U.S. Treasury Secretary
a) Henry Paulson
b) Jim Mahar
c) Hillary Clinton
d) Timothy Geithner
(D is correct answer)

Alan Greenspan held what title from 1987-2006?
a) Chairman of our National Bank
b) President of the Federal Reserve
c) Chairman of the Federal Reserve
d) Chairman of the Wall Street Journal
(C is the correct answer)

Our current Chairman of the Federal Reserve is?
a) Alan Greenspan
b) Timothy Geithner
c) Ben Bernake
d) Andy Rooney
(C is the correct answer)




From Sarah in MBA 610:

Beta is:
a) the average interest rate over time
b) a measure of systematic risk
c) a measure of transaction costs
d) a type of fish
(B is correct answer)

A firm's Market Cap is generally defined as

a) the highest stock price over the past 12 months
b) a measure of performance compared to other firms in the same industry
c) number of shares outstanding x price per share
d) total assets divided by total equity
(C is correct answer)

A reasonable risk premium is:

a) 12%
b) 0%
c) 2%
d) 6%
(D is correct answer)


From Brad in MBA 610

Which is not a type of option?

a) American
b) Caribbean
c) European
d) Asian
(B is correct answer)

Derivatives are what type of game?

a) Zero-sum
b) Positive-sum
c) Negative-sum

(A is correct answer)

These are a series of forward contracts put together useful for hedging

a) mutual funds
b) options
c) exchanges
d) Swaps

(D is correct answer)

The net present value of dividends is?

a) positive
b) zero
c) negative

(B is correct answer)

Which characteristic does not describe future contracts?

a) transferable
b) standardized
c) customizable
d) use of clearinghouse

(C is correct answer)


The expected return on the market - the risk free rate. (ERm - Rf) is the equation for?

a) The value of Beta
b) The market risk premium
c) The covariance
d) Systematic risk
(B is correct answer)


Which is not an Anomoly of CAPM we talked about in class?

a) January effect
b) Size effect
c) Information effect
d) Value effect
(C is correct answer)


The State of the economy can be considered what?

a) systematic risk
b) unsystematic risk
c) market risk
d) beta
(A is correct answer)

From Philp -MBA 610
1.) The market risk relating to an individual stock is the:
a. stock's standard deviation
b. variance of the returns of the stock
c. stock's beta
d. variance of the market returns

2.) The return on the market portfolio is currently 15%. Rainmaker's stockholders require a rate of return of 25% and the stock has a beta of
2.75. According to CAPM, what is the risk-free-rate?

a.12% c. 9.3%
b. 5% d. 10.3%


Short Answers

From Amanda:
What is the function of ratios? How are they used? What are some drawbacks?

  • they simplify & reduce large amounts of data into something readable & understandable
  • makes different size companies comparable
  • BUT, they are only startin points
  • use them as red flags to point out possible trouble areas

Describe the differences between a Sensitivity Analysis, Scenario Analysis, & Simulation
  • Sensitivity Analysis--how sensitive a firm's value is to assumptions
  • change one assumption @ a time
  • Scenario Analysis--multiple assumptions can change at once; not just one at a time
  • Simulation--allows all assumptions to change
What is the relationship between the number of assets in a portfolio, firm specific risk, & COV?
  • As the # of assets increase, the only thing that matters is how assets move with other assets
  • COV is all that matters
  • firms specific risk drops away
What do the size factor & value factor in Fama's 3 factor model measure?
  • they are both measures of systematic risk
What are info sets & what are they used for?
  • the size of the database you look at before investing
  • historical data, public, all data
How did Fama test weak, semi-strong, & strong form efficiency?
  • weak--are markets predictable?
    • runs tests & tech tests
  • semi-strong
    • event studies
    • did the market react to new info & did it react correctly?
  • strong
    • tests of private info


(Sarah) Who is the most important stakeholder in a firm, and why? Shareholders since as residual claimants they are in the best position to monitor

Describe what is meant by "Nexus of Contracts" and why is it important to consider when analyzing stakeholder behavior? Essay:If you were in charge of evaluating banks and determining if they qualified for bailout money, what questions and concerns would you have for them? What criteria would you use to determine if a bank qualified for bailout money?


From Kara (slightly edited):

  1. Name at least 3 examples of financial intermediaries and the roles that they play
*Mutual funds lower transaction costs and provide cheap diversification
  • Banks accept deposits and make loans thus bringing SSUs and DSUs together
  • Stock markets: bring buyers and sellers together and improve liquidity.

2. Why is it that the same company sometimes has different Betas?
*Beta may be measured over different times

  • may be an adjustment factor,
3. What are the 3 factors of the Fama-French three factor model that disproved the reliability of CAPM and provide the formula * market risk premium, a size factor, and value factor

4. Explain Moving Averages and how the are used by technical analysts:

  • moving averages take the price over the last X-days. They are seen by some as a measure of when to buy (if the price moves above its moving average) or to sell (if price falls below moving average)

5. In what context was the Challenger Space Shuttle explosion discussed and how it relates to market efficiency

  • stock market reacted quickly to the news and the price of the free energy generator supplier whose O-rings led to the disaster stayed down after the others in the industry bounced back quickly.


From Barry:
What is the most that you can pay for a used car if you have $200 per month budgeted for a car payment and your credit union will offer you 60 month 5.5% APR financing?
  • Use your financial calculator: N=60 I%=5.5/12 PV=? PMT=200 FV=0 solving for PV: $10,470,57 EXCEL FUNCTION: =PV(5.5%/12,60,-200)

How much do you and your spouse have to put into your Roth IRA every month (it grows tax free) if you want to retire in 20 years and then take $7,000 per month out of the account for the next 20 years? The IRA yield is expected to be 12%.

  • To draw $7,000 per year out of the account for 240 months, you must start with a nest egg of $635,745.91 Excel: PV(12%/12, 240, 7000)
  • To create the nest egg you need to contribute $642.64 per month or $7,712 per year. This is over the maximum yearly contribution limit ($5,000) for one person so I added "and your spouse" to the question. Excel formula: PMT(12%/12,240,,635745.91)

Philip MBA- 610


1.) Find the present value of a stream of cash flows of $300 for 5 years. Assume the cash flows are received at the beginning of each year and the first payment is not received until the beginning of the 3rd year. The discount rate is 10%. Round to nearest $100

answer: $1,033.85 or $1,000

2.) What is the present value of a firm that has projected cash flows of $30,000 for the first 2 years and $40,000 for years 3 through 5.In year 6, the cash flows are assumed to begin growing at 5% and continuing indefinitely. The required rate of return is 9%.

answer: $846,410

Essay:

Essay:
Explain why some of Chrysler’s creditors may actually prefer that the company filed for Chapter 11 Bankruptcy protection instead of a federally funded restructuring. Do you think this is a smart move for the creditors? Chrysler has a group of speculators to whom it owes almost $7 billion. Under the Federal government’s proposed restructuring plan, those creditors would have received only $2 billion. They are willing to bet that they will receive more under a court restructuring under Chapter 11 bankruptcy, so they favor Bankruptcy over government restructuring. This may not be best for everyone, because the creditors are foregoing potential returns and settling for a less beneficial alternative.

Explain how Japan’s Keiretsu system for corporate governance is different from the United States’ market based system: In the US, there are many investors in a firm, and the banks play a minimal role. The Board of Directors represents a dispersed group of people. In Japan’s Keiretsu system, the board of directors is dominated by bankers and other corporate insiders. The other board members often represent companies that are closely related to the main firm Versicherungsvergleich, and they all own each others’ stock and lend from the same bank. While the Keiretsu systems lowers transaction costs between the companies, it can potentially cause banks to get into trouble very quickly if one industry is struggling. This type of system also hurts competition because it creates a barrier to entry for new companies.
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Explain Rights


We took this test over at Victoria BC




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