Finance Multiple Choice Questions
1. (CF = cash flow.) The degree of operating leverage is defined as:
a. % change in Net Income caused by a % change in Operating CF
b. % change in Operating CF caused by a % change in Net Income
c. % change in Operating CF caused by a % change in Sales (or Quantity)
d. % change in Net Income caused by a % change in Sales (or Quantity)
2. In general, as the level of sales (or, similarly, the quantity of output) gets higher & higher (i.e., increases), the degree of operating leverage:
a. increases
b. decreases
c. remains constant
3. For the product line in the prior question, calculate the financial break-even quantity (rounded to the nearest unit)?
a. 2000
b. 1364
c. 2255
d. 1000
4. Calculate degree of operating leverage (DOL) for Louisville Slugger, a firm in Kentucky that makes baseball bats. Louisville Slugger produces 155,000 bats per year, at a selling price of $30/bat and a variable cost of $26/bat. Fixed costs are $420,000. Ignore depreciation expense and taxes.
a. 3.10
b. 1.10
c. 2.10
d. 2.67
e. 1.48
5. You're considering purchasing a share of Emporium Pies, Inc. common stock. You expect to sell it at the end of 1 year for $31.50. You will also receive a dividend of $2.25 at the end of the year (right before you sell the stock). If your required return on this stock is 12%, what is the most you would be willing to pay for the share of Emporium Pies stock now?
a. $20.83
b. $33.75
c. $30.13
d. $28.57
6. A $1,000 face value 7-year bond with a 5% coupon rate has a price of $1,053.49. The YTM is:
a. 5%
b. greater than 5%
c. less than 5%
d. cannot be determined
7. The Cubby Bear bonds pay an annual coupon rate of 10%. If investors' required rate of return is now 13% on these bonds, the bonds will be priced at:
a. par value
b. a discount
c. a premium
d. cannot be determined from information given
8. Consider the dividend-growth formula for valuing a share of common stock. If the common stockhold- ers' required rate of return decreases, and the growth rate of the expected dividend stream increases, how will the value (i.e., the price) of the common stock be a↵ected?
a. It will increase.
b. It will decrease.
c. It will remain una↵ected (i.e., stay the same).
d. Not enough information is provided for us to be able to answer this question.
9. What is the yield to maturity of a 8-year Bowie Corporation (BC) bond that pays a coupon rate of 20% per year, has a $1,000 par value, and is currently priced at $1,689? Round your answer to the nearest whole percent and assume annual coupon payments on the BC bond.
a. 10%
b. 25%
c. 8%
d. 12%
10. Consider the Chicago Mercantile Exchange (CME), the Chicago Board of Trade (CBoT), the New York Stock Exchange (NYSE), and the National Assocation of Securities Dealers Auto-Quotation (NASDAQ) system. The two most important, prominent stock exchanges in the United States are the:
a. NYSE and CBoT
b. CME and CBoT
c. NASDAQ and CME
d. NASDAQ and CBoT
e. NYSE and CME
f. NYSE and NASDAQ
11. Which of the following pieces of information do you need in order to fully identify the entire stream of future cash flows associated with a bond?
a. face value
b. time to maturity
c. coupon rate
d. both a and b
e. a, b, and c
12. All of the following are features of common stock except:
a. Can vote to elect Board of Directors.
b. Shareholders' cash flows come in the form of either dividends received or selling price.
c. Shareholders have residual claims on the firm's operating income.
d. The shareholders' required return is usually equal to the stock's expected return.
e. Payments to shareholders are promised and of a fixed amount.
13. Calculate the value of a 3-year bond that has a coupon rate of 8%, has a face value of $1,000, and includes an extra "bonus" payment at t=2 equal to $121. Use a required rate of return of 8% in your calculation. (The "bonus" payment occurs in addition to the coupon payment at t=2.)
a. $1,104
b. $924
c. $1,000
d. $1,121
14. Investors, when calculating the present value of a bond's future cash flows (i.e., when valuing a bond), technically use which one of the following variables as the discount rate in the present-value calculations?
a. time to maturity
b. required return
c. coupon rate
d. face value
15. Braindead Brewing's common stock is expected to pay a dividend of $3.00/share each year for the next 12 years. The dividend at t=13 is expected to be $3.50/share and then dividends are assumed to grow at a constant rate of 2% thereafter. Using an 9% required rate of return, calculate the value of a share of this company's stock.
a. $71.48
b. $39.26
c. $21.48
d. $50.00