FINANCE 301: Practice Exam #2
Note: Numbers in parentheses are negative values.
1. 1. You write a put option on a stock for a premium of $0.50. The exercise price is $32.50.
What is the options prot or loss if just prior to expiration
Quiz #1 With Answers
1. How long does it take for a deposit of $700 to grow to $1225 if invested at
the interest rate of 15%?
Your answer should be in years and percent of a year. For example, the
answer of 5.25 would be interpre
FINANCE 301: Practice Exam #1
1. Which of the following comes closest to the present value of receiving $1,000 in 0.5 years (one-half of
one-year) if the interest rate is 2%?
2. Which of the following co
University of Massachusetts - Amherst
TABLE OF CONTENTS
Topic 1: Time Value of Money
Topic 2: Foundations of Finance .
Topic 3: Markets and Contracts .
Topic 4: Valu
Review Questions Options
1. Options are securities that provide the potential to act (to buy or sell something) or to do nothing.
~ Buyers of options who do nothing will suffer a loss equal to what?
- The current value of the underlying asset
- The option
OWL Review Question Valuation
1. What is perpetuity?
- An annuity with an infinite life
2. Which of the following is a measure of the average rate of return of a bond?
- The yield to maturity (YTM)
3. Bond XYZ was issued three years ago at par, and is now
Class Topic #4: Valuation
Expected Class Time Is Two Sessions (Sessions 8 and 9)
Associated Reading: Text Chapters 5
Remember Jack and Diane, the winners of the million dollar lottery? What we discovered in
Topic 1 Time Value of Money is that while their
Topic 2 Review
1. In the context of calculating present values, what is another name for the
The simple rate
The discount rate
The effective rate
The compound rate
The profit rate
2. Ray is in a situation where he
The first job you had, on an auto-parts assembly line, was an absolute nightmare, mostly
because of your boss. If you were literally one minute late for your shift, he docked you a
half-hour of pay. If you werent
Topic 1 Review
1. What do we call the process of turning future cash flows into current cash
2. Dollars to be received or paid out through time are different commodit
Topic 3 Review
1. According to the arguments made in the text, what is the primary financial
objective of the corporation?
Maximize profits to everyone
Maximize the wealth of shareholders
Increase the size of a corporation
Topic 7 Review
1. Which of the following is a measure of the average rate of return of a
The coupon payment divided by the price
The coupon payment divided by the par value
The coupon rate
The par or maturity value
1. John is an investor who is looking at two investment opportunities. One has higher risk than the other.
John is willing to invest in the higher risk opportunity, but only if it offers higher expected return. How
would we describe John?
- A risk-adverse
Review Questions Financial Leverage
1. Markets that operate under highly restrictive assumptions, such as a zero tax
rate, zero transactions costs, and full information of all market participants, are
known as what?
- Perfect Markets
2. How is financial l
1. Which of the following is true of U.S. Treasury bills?
a. The come in minimum denominations of $1 million
b. They pay quarterly coupons
c. They come in maturities of between 1 and 5 years
d. They come in minimum denominations of $1,
Topic 4 Review
1. Suppose you invest $20,000 of your own money in a business as a sole
proprietor, and then borrow an additional $10,000. Suppose the business
fails. Which of the following describes your situation, and what is your total
Review Questions Dividends
1. On May 10, the CEO of MassMachine announced a quarterly dividend of $.50 per share to be paid on June 25 to all
stockholders on the record as of Friday June 6. What is the latest date that you could purchase the stock and rec
Topic 6 Review
1. If you open a brokerage account and buy shares of Apple on the open
market, you are buying which of the following?
A primary security
A secondary security
A real asset
An auctioned security
2. Assets tha
Topic 5 Review
1. Which of the following represents a financial asset?
2. With respect to agency relationships, which of the following is true
regarding the compensation plan?
a. The compe
OWL Review Questions
Time Value of Money
1. What do we call the process of turning future cash flows into current cash flows?
2. Dollars to be received or paid out through time are different commodities that cannot simply be
added together o
The basics of options: options provide the opportunity to buy or sell something at a specific
price, within a specific period of time, or to do nothing. (you know the most you can lose going
A call option is an option to buy and become more valuable
1. Net Present Value (NPV) = PV of Inflows - PV of Outflows
NPV measures the change in wealth from investing. Invest when NPV is greater than zero as
the positives exceed the negatives.
1. Internal rate of Return (IRR) =
The IRR is the projects average ra
TVM: an economic principle stating that dollars to be received or paid out through time are different
commodities that cannot simply be added together or subtracted from each other
Borrowing: the trading of dollars in the future for dollars today
Future Value Lump Sum
Annual Compounding vs. Simple Compounding:
You bought $1,000 of stock ABC. Over the next 15 years, stock ABC appreciates
by 20% each year. How much is the stock worth after the 15 years.
FV= PV*(1+r)^n = 1,000
Review Questions Foundations of Finance
1. According to the arguments made in the text, what is the primary objective of the
- Maximize the wealth of shareholders
2. Which form of business organization contains the feature known as limited li
Review Questions Working Capital Management
1. The EOQ model for cash management defines the optimal level of cash to order through a variable
known as "storage costs". What do storage costs represent in this model?
- The "opportunity" cost of lost invest
OWL Review Questions:
Markets and Contracts
1. Which of the following represents a financial asset?
2. With respect to agency relationships, which of the following is true regarding the compensation plan?
- The compensation plan is used as an atte
Review Questions Capital Budgeting
1. What is the name of the capital budgeting model that compares the
present value of the project's PV benefits to the present value of the
project's PV costs?
- Net present Value NPV
2. When calculating cash flow, why i
9/30/2014 Take Test: Exam 1 practice problems
Take Test: Exam 1 practice problems
Description These are practice problems for Exam 1
Instructions These are practice problems for Exam 1 for FINANCE 301 (2014 Fall online
Instructor: Ye Chen
achieve this objective?
A. A 20-for1 stock split (also denoted as 20:1)
B. A 1-for4 stock split (also denoted as 1:4)
A 4for-1 stock split (also denoted 4:1)
. A 5-for1 stock split (also denoted 5:1)
E. A 1for5 stock split (also denoted 1:5)
22. Brown is
machine does carry extra costs such that project outflows will be $10 million per year, beginning one
year from today, for ten consecutive years. If the firms tax rate is 25% and the required rate of return
is 15%, which of the following comes closest to
17. Consider a standard project whose IRR is exactly 2%. Which ofthe following is true ofthe same
projects NPV if the required rate of return is 9%?
A. The NPV is equal to 9
', l ' l
C. The NPV is equa o '
D. The NPV is equal to 0
E. The NPV is greater th
5. A portfolio is comprised of equal weights oftwo s
X and Stock Y is 0.15. The variance of Stock X is
following comes closest to the correlation coe
tocks labeled X and Y. The covariance between Stock
0.30, and the variance of Stock Y is
Part 5: International Finance concepts and problems worth 5 pts each (total of 15 pts in this section)
Use the data in the table below to answer the following? questions.
Currencies U.S. dollar foreign-exchange rates.
Countr currenc in US er US