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The discounted cash flow approach is useful for __________.

  • evaluating whether an asset is over-valued, under-valued or correctly priced
  • graphing an asset's position on the security market line
  • determining the value of future profits (or losses) in today's terms
  • determining the value of a company's publicly traded equity


You own a small manufacturing business that produces widgets. You have spent $600,000 acquiring the fixed assets you need to produce widgets. Each widget costs you $20 to make and they sell for $65 each, so your variable cost is 30.8% of the overall revenue.


At your current level of operating leverage, how many widgets must you sell to break even?

  • 7,059
  • 18,000
  • 9,231
  • 13,333


Calculate a company's total leverage given the following information:

  • Change in sales = 5.5%
  • Change in earnings = 7%
  • Cannot calculate without EBIT data
  • 0.79
  • Cannot calculate without ROE data
  • 1.27


A security that falls above the security market line is __________.

  • over-valued for its level of risk
  • correctly valued for its level of risk
  • attractive for an investor
  • attractive for a company raising capital


Which of the following is a tenet of strong-form efficiency?

  • Some forms of technical analysis techniques can be useful for producing excess returns.
  • Investors can use the past prices of securities to predict their future prices.
  • Share prices respond immediately to all information, whether public or private.
  • Future prices cannot be predicted based on past prices.


One reason a company may choose to issue additional debt instead of equity when raising capital is that __________.

  • the company will be less leveraged
  • debt interest payments are tax-deductible
  • too much equity raises the risk of bankruptcy
  • equity increases volatility


Mason is a financial analyst who specializes in securities. When providing an analysis of securities to which he has a personal connection, he discloses his conflict of interest.


By doing so, which federal regulation is he complying with?

  • Securities Act of 1933
  • Securities Exchange Act of 1934
  • Securities Act Amendments of 1975
  • Sarbanes-Oxley Act of 2002


The risk that your investment in a stock will lose value because the company's labor force goes on strike is known as __________.

  • market risk
  • asset-backed risk
  • default risk
  • operational risk


Select the true statement about the bankruptcy process.

  • Companies that cannot meet their debts can try to reduce their debt obligations before filing for bankruptcy.
  • Filing for bankruptcy is the best way for a company to remedy financial distress.
  • A Chapter 11 bankruptcy is a liquidation filing.
  • In a Chapter 7 bankruptcy, creditors are guaranteed to recoup at least part of what is owed to them.


If you invest in two stocks, and their values both rise on one day and then fall on the next day, they have __________.

  • a positive beta value
  • a large covariance
  • a negative beta value
  • a zero covariance


Which of the following is true of systematic risk?

  • Research shows that investors can best mitigate this type of risk by holding ≤ 30 assets within a portfolio.
  • It is affected by the level of diversification within a portfolio.
  • It is the risk associated with a general downward turn of the market or a market segment.
  • It can be hedged against by choosing investments with negative correlations.


Marty receives a tip that the price of shares of an oil company are about to fall significantly. In order to avoid a huge loss, he goes into his online brokerage account and sells all of the stock that he owns in the oil company.


What type of market transaction is taking place?

  • Secondary market offering
  • Primary market offering
  • Private placement
  • Share buyback


Using the following variables, calculate an organization's cost of debt on a $500,000 bond.

  • Rf: 1%
  • credit-risk rate: 5%
  • t: 15%
  • $30,000
  • $29,550
  • $4,500
  • $25,500


Anais purchased stock with an initial share price of $52, and sold it when the share price was $60. While she owned the stock, she earned $7 in dividends.


What was her total percentage return on the investment?

  • 28.85%
  • 13.33%
  • 19.83%
  • 25.00%


Which of the following credit ratings would make a country or company have the easiest time raising capital?

  • CC
  • AAA
  • A
  • BBB


You invest $3,000 in a stock that has a 10% chance of a 2% return, a 70% chance of a 6% return and a 20% chance of a 15% return.


What is your expected return after one year?

  • 8.8%
  • 7.4%
  • 5.6%
  • 6.0%


Why is an investment portfolio containing a mix of stocks and bonds less risky than one containing a single asset class?

  • Because stocks and bonds are negatively correlated.
  • Because the markets for stocks and bonds tend to move in the same direction at the same time.
  • Because stocks and bonds are positively correlated.
  • Because bonds typically have a high variance and stocks typically have a low variance.


What is the weighted average cost of capital for a borrower equivalent to?

  • The calculated required return of all sources of capital
  • The net present value of all current investments
  • The valuation of the company's equity
  • The opportunity cost of foregone investments

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