B2- Long term financial management

Question - CMA212332A gold mining company expects to sell 10,000 ounces of gold 6
months from today. The revenue risk of selling the gold can be hedged byselling the gold in
the spot market 6 months from today.buying a gold futures contract for 10,000 ounces today
that expires in 6 months.selling a gold futures contract for 10,000 ounces today that expires in
6 months.buying a gold futures contract for 5,000 ounces today that expires in 6 months, and
selling a gold futures contract for 5,000 ounces today that expires in 6 months.
Option C is correct
A futures contract is an agreement to buy or sell a specified quantity of a specified asset on a
future date for a specified price. The gold mining company expecting to sell 10,000 ounces of
gold in 6 months can sell a 6-month futures contract today in order to be certain of the price it
will receive. The gold mining company will be committed to delivering the gold in 6 months,
and the price it will receive is also committed because it is stated in the contract. The futures
contract will serve as a hedge for the revenue risk, because regardless of what the market
price is for the gold in 6 months, the mining company will receive the revenue stated in the
futures contract. Whether the mining company benefits from the futures contract or loses
money on the contract depends upon the market price of gold in 6 months. If the market price
is lower than the contract price in 6 months, the mining company will receive the higher
contract price for the gold and will benefit. If the market price is higher than the contract
price, the mining company will also receive the contract price. The mining company will not
be able to benefit from the higher market price and thus will lose the difference between the
contract price and the higher market price. However, the mining company will have locked in
the revenue it will receive in 6 months for the sale of the gold and thus will have eliminated
the uncertainty of not knowing how much it will receive.

Option A is incorrect
Selling the gold in the spot market 6 months from today would be no hedge at all, because the
gold would simply be sold at the market price in effect on that date. The gold mining
company would bear the revenue risk of selling at whatever the market price is in 6 months.

Option B is incorrect
Buying a gold futures contract for 10,000 ounces today that expires in 6 months would
commit the gold mining company to buying 10,000 ounces of gold in 6 months. It would not
serve to hedge the revenue risk of selling 10,000 ounces of gold in 6 months.

Option D is incorrect
This will accomplish nothing, because the purchase of the futures contract and the sale of the
same futures contract will cancel each other out. The mining company will have nothing but
some unnecessary brokerage costs.
Question - PART22111125
Which one of the following situations would prompt a firm to issue debt, as opposed to
equity, the next time it raises external capital
High breakeven point
Significant percentage of assets under capital lease
Low effective tax rate
High effective tax rate
Option D is correct
A firm would be inclined to issue debt rather than equity when the effective tax rate is high as
the interest expense associated with debt reduces income and therefore reduces tax expense.

Option A is incorrect
A high breakeven point, which is the level of sales at which a company covers all its costs but
doesn't generate a profit, is not directly related to the choice between issuing debt or equity.
The breakeven point is more about a company's cost structure and operational efficiency
rather than its capital-raising decisions.

Option B is incorrect
The percentage of assets under capital lease, while an important financial indicator, is not a
direct factor in choosing between debt and equity issuance. It represents the proportion of
assets that a company has financed through capital leases, and it reflects the company's
financing choices rather than future capital-raising decisions.

Option C is incorrect
A low effective tax rate means that the tax benefits associated with debt are less significant.
When a firm's income is not heavily taxed, the interest deductions from debt may not provide
substantial tax advantages. This could make equity financing more attractive because there
are no tax benefits associated with issuing new shares.
Question - PART22111145
Four zero-coupon bonds each will pay $1,000 at maturity. The bonds mature in either 10
years or 20 years, and have a price today of either $300 or $500. The bond with the largest
yield to maturity is the bond that has the
$300 price and matures in 10 years.
$500 price and matures in 10 years
$300 price and matures in 20 year
$500 price and matures in 20 years.
Option A is correct.
Bond value = $1,000/(1 + YTM)maturity
YTM is larger the smaller is bond value (other things equal) and the smaller the maturity
(other things equal), so no calculation is needed to answer this. This implies (a) $300 and 10
years is correct. If one were to back out (solve for YTM) using a little algebra the YTM for
each the result is approximately
a .1279
b .0718
c .062
d .0352

Option B is incorrect
$500 price and matures in 10 years:

 Bond value = $1,000 / (1 + YTM)^10

 YTM for this bond is approximately 7.18%.

Option C is incorrect
$300 price and matures in 20 years:

 Bond value = $1,000 / (1 + YTM)^20

  YTM for this bond is approximately 6.2%.

Option D is incorrect
$500 price and matures in 20 years:

 Bond value = $1,000 / (1 + YTM)^20

 YTM for this bond is approximately 3.52%.

Question - PART27111649
Williams, Inc. is interested in measuring its overall cost of capital and has gathered the
following data. Under the terms described as follows, the company can sell unlimited
amounts of all instruments.

 Williams can raise cash by selling $1,000, 8%, 20-year bonds with annual interest
payments. In selling the issue, an average premium of $30 per bond would be
received, and the firm must pay flotation costs of $30 per bond. The after-tax cost of
funds is estimated to be 4.8%.
 Williams can sell 8% preferred stock at par value, which is $100 per share. The cost
of issuing and selling the preferred stock is expected to be $5 per share.
 Williams\' common stock is currently selling for $100 per share. The firm expects to
pay cash dividends of $7 per share next year, and the dividends are expected to
remain constant. The stock will have to be underpriced by $3 per share, and flotation
costs are expected to amount to $5 per share.
 Williams expects to have available $100,000 of retained earnings in the coming year.
Once these retained earnings are exhausted, the firm will use new common stock as
the form of common stock equity financing.
 The capital structure that Williams would like to use for any future financing is:
o Long-term debt: 30%
o Preferred stock: 20%
o Common stock: 50%

If Williams, Inc. needs a total of $200,000, the firm's weighted marginal cost of capital would
be
20.2%.
4.8%.
6.6%.
6.9%.
Option C is correct
Williams' preferred capital structure for future financing includes 50% common stock.
$100,000 of retained earnings (50% of the required $200,000 of capital) will be used before
any common stock is issued. Thus, no new common stock will need to be issued. The
weighted marginal cost of capital will be determined based on the respective costs of the
bonds, preferred stock, and retained earnings. The after-tax cost of the bonds is given as
4.8%. The cost of the preferred stock is 8.4%, calculated as the annual dividend of $8 per
share divided by the sale proceeds of $95 ($100 per share less $5 per share flotation cost).
The cost of the retained earnings to be used is 7% ($7 annual dividend divided by the $100
market price of the common stock). These three costs are then weighted according to the
preferred capital structure ratios for new capital:
Long-term debt: 30% × 4.8% = 1.44%
Preferred stock: 20% × 8.4% = 1.68%
Common equity: 50% × 7.0% = 3.50%
Total 6.62%
(WMCC)
Rounding to the nearest tenth produces the correct answer of 6.6%.

Option A is incorrect
20.2% represents the sum of the three elements of cost. What is needed is the weighted
average of the marginal costs of the three components of capital, weighted according to each
one's weight in the mix of total capital to be used in the new project.

Option B is incorrect
4.8% is the cost of the long-term debt. All funding will not be obtained from debt because the
firm wants to maintain a capital structure in which debt represents only 30% of the total
capital.

Option D is incorrect
An answer of 6.9% can be obtained only if a new common stock will be sold to fulfill the
common equity portion of the new capital. New stock will not be sold because the company
needs $200,000, of which 50%, or $100,000, will come from common equity. There will be
no need to sell stock when the total capital required is only $200,000. Since the full $100,000
needed from common equity is available in retained earnings, the company will use its
retained earnings to fulfill the common equity portion of the spending. The cost of the
retained earnings is lower than the cost of new common stock, because there are no issuance
fees.
Question - PART213321
What would be the primary reason for a company to agree to a debt covenant limiting the
percentage of its long-term debt?
To cause the price of the company's stock to rise.
To lower the company's bond rating.
To reduce the risk for existing bondholders.
To reduce the interest rate on the bonds being sold.
Option D is correct
The primary reason for a company to agree to a debt covenant that limits the percentage of its
long-term debt is to reduce the interest rate on the bond being sold.

Option A is incorrect
This option is incorrect because debt covenant is not likely to affect the price of the
company's stock.

Option B is incorrect
This option is incorrect because debt covenant would most likely increase the bond rating of
the company.

Option C is incorrect
This option is incorrect because debt covenant does not have any effect on the existing
bondholders.
Question - PART222005Corbin, Inc. can issue 3-month commercial paper with a face value
of $1,000,000 for $980,000. Transaction costs will be $1,200. The effective annualized
percentage cost of the financing, based on a 360-day year, will be8.66%.2.00%.8.00%.8.17%.
Option A is correct
The effective annual interest rate on a security or loan is calculated by calculating the cost for
the holding period (including discounted interest or other costs), annualizing it, and dividing
the annualized cost by the average balance outstanding for the period, which in this case is
the amount of cash actually received. The cost for 90 days will be $21,200, consisting of the
$20,000 discount that is given to sell the paper and the $1,200 transaction cost. Corbin will
receive only $978,800 from this issuance, so the effective cost for 90 days is $21,200.
However, this is the cost for only 90 days, so it must be annualized by dividing it by the
number of days (90) to find the cost per day and multiplying the cost per day by 360 to find
the cost for a full year. $21,200 ÷ 90 × 360 = $84,800. The annual cost is then divided by the
average balance outstanding, which in this case is $978,800. $84,800 ÷ $978,800 = 0.0866 or
8.66%.

Option B is incorrect:
This is the stated rate for three months. See the correct answer for a complete explanation.

Option C is incorrect:
This answer does not include the $1,200 of transaction costs, which must be included as a
cost to Corbin and it considers that all of the $1,000,000 face amount was received by
Corbin. See the correct answer for a complete explanation

Option D is incorrect:
This answer does not include the $1,200 of transaction costs, which must be included as a
cost to Corbin. See the correct answer for a complete explanation.
Question - PART22111135
Kielly Machines Inc. is planning an expansion program estimated to cost $100 million. Kielly
is going to raise funds according to its target capital structure shown below.
Debt 0.30
Preferred stock 0.24
Equity 0.46
Kielly had net income available to common shareholders of $184 million last year of which
75% was paid out in dividends. The company has a marginal tax rate of 40%.

Additional data:
• The before-tax cost of debt is estimated to be 11%.
• The market yield of preferred stock is estimated to be 12%.
• The after-tax cost of common stock is estimated to be 16%.

What is Kielly’s weighted average cost of capital?

12.22%
13.00%
13.54%
14.00%
Option A is correct
Kielly’s cost of capital is 12.22% as shown below.
Debt 30% x [11% (1 - .4)] 1.98%
Preferred stock 24% x 12% 2.88%
Equity 46% x 16% 7.36%
12.22%
Option B is incorrect
This option overestimates the WACC. The correct WACC is 12.22%, as calculated in the
previous response.

Option C is incorrect
This option also overestimates the WACC. The correct WACC is 12.22%, not 13.54%.

Option D is incorrect
This option significantly overestimates the WACC. The correct WACC is 12.22%, and
14.00% is not a valid estimate based on the provided data.
Question - CMA212290
Karggo Inc.’s stock is currently trading at $75 and Kenfly Investments expects the stock price
to be $90 in 6 months. If Kenfly wants to trade in Options (where we assume that the options
are exercisable only at the maturity date), to make profit, Kenfly should:
Sell a call option at an exercise price of $100.
Buy a call option at an exercise price of $90.
Buy a put option at an exercise price of $90.
Sell a put option at an exercise price of $100.
Option A is correct
Kenfly can earn the option premium by selling call options at an exercise price of $100. In
this case, Kenfly expects the price of the stock to be $90. The call option buyer will not
exercise the option as the market price is $90 and the call option holder has the right to buy
the stock from Kenfly at a price of $100 and will sell it for a price of $90. If the option
premium is $2, the option holder will exercise the option at a price above $102 (i.e. exercise
price + premium).

Option B is incorrect
This option is incorrect because by exercising the option @ $90, Kenfly can only buy the
stock at the market price and no profit.

Option C is incorrect
This option is incorrect because buying an option will make Kefly pay a premium. To have
an option to sell at $90, Kenfly would not exercise and therefore he will lose out on the
premium.

Option D is incorrect
This option is incorrect because selling an option will earn Kenfly a premium. However, the
option holder can buy the stock at $75 from market today and Kenfly is obliged to buy it at
$100.
Question - PART27111605
New Company's sales and profits are growing rapidly, and so is its dividend. Its dividend is
growing at an annual rate of 25%. This growth in the dividend is expected to continue for two
years. After that, the rate of growth is expected to slow down to 10% per year. The investors'
required rate of return on the stock is 16%. The next annual dividend is expected to be $1.00.
The beta of New Company's stock is 1.5. The U.S. Treasury bill rate is 4%.
What is an appropriate market price for New Company's stock?
$4.00
$18.88
$13.80
$23.00
Option B is correct
Finding the market price of this stock requires the use of the 2-stage dividend discount model,
since the annual rate of growth in the dividend is expected to be 25% for two years and then
decrease to 10%.
The first step is to find the present values of the dividends to be received during the first two
years and sum the results. The Year 2 dividend is 125% of the Year 1 dividend.
End of Year Dividen PV Factor @ 16% Present Value
d of Dividend
1 $1.00 0.862 $ 0.862
2 1.25 0.742 0.929
PV of future dividends - Years 1 and 2: $1.791
We next project the dividend for Year 3 by multiplying the Year 2 dividend ($1.25) by 1 +
the growth rate for Year 3 (1.10). The Year 3 dividend is therefore projected to be $1.25 ×
1.10, or $1.38.
Now, we use the Constant Growth Model (Dividend Growth Model), and we pretend that
Year 3 is Year 1, and so the end of Year 2 becomes Year 0. We use this model to calculate
what the value of the stock will be at the end of Year 2, assuming a required rate of return of
16% and an annual growth in dividends of 10% going forward from the end of Year 2,
beginning with Year 3:
P2 = d3 / (r − g)
P2 = $1.38 / (0.16 − 0.10)
P2 = $23.00
This present value of $23.00 occurs at the end of Year 2, not at Year 0. Therefore, it needs to
be discounted back 2 years to Year 0. We will discount it back as though it is a single sum
that will be received in 2 years. The present value of $1 factor for 2 years at 16% is 0.743, so
the present value of $23.00 two years from now is $23.00 × 0.743, or $17.09. This is the
present value as of Year 0 of the dividends to be received beginning at the end of Year 3 and
continuing indefinitely.
The final step is to add together the present value of the future dividends for Years 1 and 2
($1.79) and the present value of the dividends to be received from Year 3 to infinity ($17.09)
to calculate the value today, at Year 0, for a share of this stock:
$1.79 + $17.09 = $18.88
$18.88 is an appropriate market price for this stock, given the projected dividends and the
16% required rate of return by investors in the stock.

Option A is incorrect
$4.00 is the current annual dividend divided by the current rate of growth.

Option C is incorrect
$13.80 is the projected Year 3 dividend divided by the Year 3 growth rate.

Option D is incorrect
This is the Year 3 dividend divided by the difference between the investors' required rate of
return and the growth rate, as in the Dividend Growth Model. This is only one part of the
calculation needed to determine the appropriate market price for the stock.
Question - CMA212210
Which of the following is an example of securitization?
Collateralizing accounts receivables to create a security.
Creating a portfolio by pooling bonds and equity securities.
Alternative investments using pooled investments from high net worth individuals and
institutions.
Creation of investment vehicle made up of a pool of moneys collected from many investors
to invest in bonds and equities.
Option A is correct.
Companies often offer debt that is collateralized by their accounts receivable or any other
financial asset. The creation of such asset-backed securities (generally out of illiquid assets)
is called securitization.

Option B is incorrect
In portfolio management, a portfolio is created by investing in bonds and equities.

Option C is incorrect
This represents the definition of hedge fund.

Option D is incorrect
This represents the definition of mutual fund.
Question - CMA212285
For options, the time value is referred as the:
The discounted value of the option price at settlement.
The duration between the time of purchase of the option and the settlement date.
Difference between an option’s price and the option premium.
Difference between an option’s price and its intrinsic value.
Option D is correct.
Time value is the difference between an option’s price and its intrinsic value. It is the
measure of the value of options and not related to time.

Option A is incorrect
This option is incorrect because this represents the settlement value.

Option B is incorrect
This option is incorrect because this represents the time period of the option.

Option C is incorrect
This option is incorrect because this represents the intrinsic value.
Question - CMA212232
When the interest rate offered on a bond is more than the market interest rate:
The bond will sell at a discount.
The bond will sell at a premium.
The bond will sell at face value.
The bond will sell at fair value.
Option B is correct.
Bonds sell at premium or discount because of the interest rate offered by bond in comparison
to market interest rate. When the bonds offer interest rate more than market interest rate they
are sold at premium. When bonds offer interest that is less than market rate, then they are
sold at discount. When the bonds offer interest rate equal to market interest rate they are sold
at face value.

Option A is incorrect
This option is not correct in the given scenario. When the bond's interest rate (coupon rate) is
more than the market interest rate, the bond is considered more attractive, and investors are
willing to pay a premium, not a discount, to purchase it.

Option C is incorrect
This option is not correct in the given scenario. If the bond's interest rate is more than the
market interest rate, it will sell at a premium, which means it will be sold at a price higher
than its face value.

Option D is incorrect
This option is not accurate. "Fair value" is a general financial term, and the pricing of bonds
is based on the interaction of supply and demand in the market. When the bond's interest rate
is more than the market interest rate, it will sell at a premium, not "fair value." The term "fair
value" is often used in the context of determining the intrinsic value of an asset rather than its
market price.
Question - PART22111129
Preferred stock may be retired through the use of any one of the following except a
conversion
call provision.
refunding
sinking fund.
Option C is correct
Refunding is replacing an old debt issue with a new one, usually to lower interest cost.
Therefore, refunding is not a method for retiring preferred stock.

Option A is incorrect .
Preferred stock can sometimes be converted into common stock, allowing the shareholders to
exchange their preferred shares for common shares. This is a way for the company to retire
preferred stock by replacing it with common stock.

Option B is incorrect
Many preferred stocks have a call provision, which allows the company to redeem the
preferred shares at a predetermined price. This provides a way for the company to retire the
preferred stock.

Option D is incorrect
A sinking fund is a pool of money set aside by the company to redeem or repurchase a
portion of the outstanding preferred stock at regular intervals or upon maturity. It is a method
used to retire preferred stock over time.
Question - CMA212348A company has recently purchased some stock of a competitor.
However, it is somewhat concerned that the market price of this stock could decrease over the
short run. The company could hedge against the possible decline in the stock\'s market price
bySelling a put option on that stock.Purchasing a call option on that stock.Obtaining a
warrant option on that stock.Purchasing a put option on that stock.
Option D is correct
A put option is the right to sell stock at a given price within a certain period. If the market
price falls, the put option may allow the sale of stock at a price above market, and the profit
of the option holder will be the difference between the price stated in the put option and the
market price, minus the cost of the option, commissions, and taxes. Note that the company
that issues the stock has nothing to do with put (and call) options traded on the market by
investors. It does not issue the options.

Option A is incorrect
Selling a put option would earn the company a little revenue from the sale. But it would not
provide a hedge against a possible decline in market value of the stock the company already
holds. A put option gives the buyer the right (but not the obligation) to sell the underlying
stock at a specified price. The seller of the put option must buy the stock at that price if the
buyer of the put option exercises the option. If the market price of the stock drops below the
exercise price, the buyer of the put option will exercise the option, because the buyer would
be able to sell the stock for more by exercising the put than by selling the stock on the open
market. The seller of the put option would be required to buy the stock at a price higher than
the market price.

Option B is incorrect
A call option is the right to purchase shares at a given price within a specified period. That
would not provide a hedge against a decline in market price of the shares the company
already owns.

Option C is incorrect
A warrant gives the holder a right to purchase stock from the issuer at a given price. A
warrant is usually distributed by the issuing company along with debt. A warrant would not
provide a hedge against a decline in market price of the shares the company already owns.
Question - CMA212306
At initiation, the value of a swap will be:
The notional amount.
The LIBOR times the notional amount.
Zero.
Its premium.
Option C is correct
Swaps are derivative contracts in which a series of payments are exchanged on periodic
settlement dates over a certain time period. At each settlement date, the two payments are
netted so that only one (net) payment is made. In a simple interest-rate swap, one party pays a
floating rate and the other pays a fixed rate on a notional principal amount and no cash is
exchanged at the contract inception. Note that unlike options, there is no premium for swaps.

Option A is incorrect
The notional amount represents the principal amount used to calculate the cash flows in a
swap. While it is an important component, it does not represent the value of the swap at
initiation.

Option B is incorrect
LIBOR is used to determine the cash flows in interest rate swaps, but the value of the swap at
initiation is not equal to the LIBOR multiplied by the notional amount.

Option D is incorrect
Swaps do not have premiums like options. Premiums are associated with options, where the
option buyer pays a premium to the option seller to acquire the option. Swaps involve the
exchange of cash flows based on agreed-upon terms, but no premium is exchanged at
initiation.
Question - CMA212227
A bond’s coupon rate is LIBOR +2%. It will most likely be a:
Foreign bond.
Treasury bond.
Junk bond.
Floating rate bond.
Option D is correct.
In a floating rate bond (also called floater), interest rate keeps fluctuating / floating; equal to a
money market reference rate plus a spread (E.g. LIBOR + 2%).

Option A is incorrect
This option is incorrect because most of the foreign bonds pay fixed coupon rate.

Option B is incorrect
This option is incorrect because it pays fixed coupon rate.

Option C is incorrect
This option is incorrect because most of the junk bonds pay fixed coupon rate. It’s a bond
with a poor credit rating; as the risk of default is high, these pay higher than the normal
interest rate.
Question - CMA212269
Choose the incorrect answer. Financial derivatives can be used by financial instruments to
manage:
Credit risk.
Interest rate risk.
Liquidity risk.
Commodity risk.
Option C is correct.
A derivative is a contract whose value is based on another contract or an index. The buyer
agrees to purchase the asset on a specific date at a specific price. Derivatives derive their
values based on the price, volatility and riskiness of an underlying stock, bond, commodity,
interest rate or currency-exchange rate. Prices of derivatives fluctuate as the price of a
reference security, commodity, bond, interest rate or currency rises or falls in the market.
Businesses and investors use derivatives to increase or decrease exposure to four common
types of risk:- commodity risk, stock market risk, interest rate risk and credit risk (also known
as default risk).

Option A is incorrect
This option is incorrect because financial instruments use derivatives to manage credit risk,
interest rate risk and commodity risk.

Option B is incorrect
This option is incorrect because financial instruments use derivatives to manage credit risk,
interest rate risk and commodity risk.

Option D is incorrect
This option is incorrect because financial instruments use derivatives to manage credit risk,
interest rate risk and commodity risk.
Question - PART27111658
Which of the following is true regarding the calculation of a firm's cost of capital?
All costs should be expressed as pre-tax costs.
The time value of money should be excluded from the calculations.
The cost of capital is the cost of equity.
The cost of capital of a firm is the weighted-average cost of its various financing components.
Option D is correct.
The cost of capital is the weighted average cost of its various sources of financing.

Option A is incorrect.
Taxes are included in the calculation of a firm's cost of capital. For instance, the cost of debt
is affected by the fact that interest expense is a deductible expense. Therefore, all costs
should be expressed as after-tax costs.

Option B is incorrect.
The time value of money is incorporated in the calculation of a firm's cost of capital.

Option C is incorrect.
The cost of capital includes the cost of equity, but it is not equal to the cost of equity.
Question - PART22111136
Following is an excerpt from Albion Corporation’s balance sheet.

Long-term debt (9% interest rate) $30,000,000

Preferred stock (100,000 shares, 12% 10,000,000
dividend)
Common stock (5,000,000 shares outstanding) 60,000,000

Albion’s bonds are currently trading at $1,083.34, reflecting a yield to maturity of 8%. The
preferred stock is trading at $125 per share. Common stock is selling at $16 per share, and
Albion’s treasurer estimates that the firm’s cost of equity is 17%. If Albion’s effective
income tax rate is 40%, what is the firm’s cost of capital?
12.6%.
13.1%.
13.9%
14.1%
Option B is correct
Albion’s cost of capital is 13.1% as calculated below
Capital Market Proportion of Total Market Return Weighted
Value Financing (‘000) Cost
Long-term debt $32,500 26% [.08 x (1 - .4)] = .048 1.25%
(30,000 bonds x
$1,083.34)
Preferred stock 12,500 10% 1,200(dividend)/ 12,500 0.96%
(100,000 shares x (market value) = .096
$125)
Common stock 80,000 64% .17 10.88%
(5,000,000 shares x
$16)
125,000 100% 13.09%
Option A is incorrect
This option is not correct. It doesn't accurately represent Albion Corporation's weighted
average cost of capital (WACC). The calculated WACC is 13.1%.

Option C is incorrect
This option is also not correct. It overestimates Albion's WACC. The correct WACC is
13.1%.

Option D is incorrect
This option is not correct. It overestimates Albion's WACC. The correct WACC is 13.1%.
Question - CMA212286
An American put option provides the:
Holder the right to sell the underlying at an exercise or strike price at the end of its life.
Holder the right to buy the underlying at an exercise or strike price at the end of its life.
Holder the right to sell the underlying at an exercise or strike price, anytime during the life of
the option.
Holder the right to buy the underlying at an exercise or strike price, anytime during the life of
the option.
Option C is correct.
An American put option provides the holder the right to sell the underlying at an exercise or
strike price, anytime during the life of the option. A gain accrues to the holder as the market
price of the underlying falls below the strike price. A European option can only be exercised
at the end of its life, at its maturity.

Option A is incorrect
This option is incorrect because this represents a European put option.

Option B is incorrect
This option is incorrect because this represents a European call option.

Option D is incorrect
This option is incorrect because this represents an American call option.
Question - CMA212328All of the following are differences between forward contracts and
futures contracts exceptForward contracts are agreements between two parties negotiated by
dealers; futures contracts are traded on exchanges.Forward contracts have no standard
conditions; futures contracts are standardized.Forward contracts have credit risk; futures
contracts have no credit risk because futures exchanges guarantee all transactions.Forward
contracts are used by a wide variety of firms; futures contracts are limited to large firms.
Option D is correct
It is not true that forward contracts are used by a wide variety of firms while futures contracts
are limited to large firms. Just the opposite is true. A forward contract is an over-the-counter
agreement between two parties to buy or sell an asset at a certain time in the future for a
certain price. Forward contracts are negotiated between the two parties by brokers. Because
of the costs involved, their use is limited to large firms.

Option A is incorrect
This option is incorrect because This is a true statement.

Option B is incorrect
This option is incorrect because This is a true statement.

Option C is incorrect
This option is incorrect because This is a true statement.
Question - CMA212322The Chief Financial Officer (CFO) of a large manufacturing
company is a member of the board’s Risk Committee. During a regular meeting, the CFO
said that the level of debt the company was carrying was a matter for concern. He said that
“this increased debt level is negatively impacting share value.” Concerning the CFO’s
statement, is the CFO correct about the connection between debt level and share value?Yes.
Because debt is a tax-deductible expense and is cheaper than equity, the more debt a
company takes on, the higher the company’s weighted average cost of capital (WACC).
Therefore, shareholder value is decreased.No. Because debt is a tax-deductible expense and is
cheaper than equity, there is no limit to how much companies can increase shareholder value
by increasing the company’s level of debt.Yes. Even though debt is a tax-deductible expense
and is cheaper than equity, above a certain level, the more debt a company takes on, the more
shareholders have to be compensated for the increased risk of default, and the company’s
weighted average cost of capital increases.No. The cost of debt and the cost of equity are the
same so it does not matter what the company’s debt-equity ratio is.Question -
PART22111128
Which one of the following best describes the record date as it pertains to common stock?
Four business days prior to the payment of a dividend.
The 52-week high for a stock published in the Wall Street Journal.
The date that is chosen to determine the ownership of shares
The date on which a prospectus is declared effective by the Securities and Exchange
Commission.
Question - PART22111140
In calculating the component costs of long-term funds, the appropriate cost of retained
earnings, ignoring flotation costs, is equal to
the cost of common stock
the same as the cost of preferred stock.
the weighted average cost of capital for the firm
zero, or no cost
Option A is correct
Since common stock equity is the sum total of common stock at par, additional paid-in
capital, and retained earnings, the appropriate cost retained earnings is the cost of common
stock.

Option B is incorrect.
The same as the cost of preferred stock: This statement is not accurate. Retained earnings and
preferred stock are different sources of capital with different costs. Preferred stock represents
a form of equity financing, while retained earnings are part of the common equity.

Option C is incorrect
The weighted average cost of capital for the firm: This is not accurate either. The weighted
average cost of capital (WACC) takes into account all sources of capital (debt, equity,
preferred stock, etc.), including retained earnings. Retained earnings have a cost, but it is a
component of the overall cost of equity in the WACC calculation.

Option D is incorrect
Zero, or no cost: This is also not accurate. Retained earnings do have an associated cost. The
cost of retained earnings is based on the opportunity cost of not distributing those earnings as
dividends to shareholders. It represents the return shareholders could have earned if those
earnings were paid out as dividends or invested elsewhere. Therefore, it's not considered
"zero cost."
Question - CMA212354On July 14, an investor goes short on a put option for 100 shares of
OSC, Inc. common stock with a strike price of $9.00, expiring on August 16, at an option
premium of $1.50 per share. The market price of OSC stock on July 14 is $8.00. On August
16, the market price of OSC stock is $6.00. How much has the investor gained or lost on the
option transaction? Disregard any brokerage commissions involved.Gain of $150Loss of
$150Loss of $300Gain of $450Question - CMA212312
The value of a foreign currency swap at inception is:
The notional amount of domestic currency.
Zero.
The notional amount of foreign currency.
Infinity.
Option B is correct
The value of a currency swap is normally zero when it is first negotiated. If the two principals
are worth exactly the same using the exchange rate at the start of the swap, the value of the
swap is also zero immediately after the initial exchange of principal.

Option A is incorrect
The value of a currency swap is not equal to the notional amount of domestic currency at
inception. It is generally zero, as explained above.

Option C is incorrect
Similar to option A, the value of a currency swap is not equal to the notional amount of
foreign currency at inception. It is generally zero.

Option D is incorrect
The value of a currency swap is not equal to infinity at inception. It is typically zero, as it
reflects the net present value of the initial exchange of notional amounts and exchange rates.
Question - PART222009Which one of the following provides the best measure of interest
rate risk for a corporate bond?Yield to maturity.Maturity.Bond rating.Duration

Option D is correct
Interest rate risk is the risk that the value of the investment will change over time as a result
of changes in the market rate of interest. The duration of a fixed income security measures
how vulnerable the market value of the security is to future changes in market interest rates.
When market interest rates increase, market values of fixed income securities decrease. And
when market interest rates decrease, market values of fixed income securities increase. But
not all fixed income securities vary in value by the same extent. How much an individual
fixed income security will vary in value with changes in interest rates depends upon its
duration. As the duration increases, the volatility of the price of the debt instrument increases.
The longer the time to wait until a future payment is received, the greater will be the effect of
a change in the rate of interest on the present value of the payment. So the market value of
short-term securities such as money market financial instruments will be only slightly
affected, if at all, by changes in the market interest rate. But the market value of a long-term
corporate bond with several years to maturity will be significantly affected by market interest
rate changes.

Option A is incorrect:
The yield to maturity of a bond is its effective annual yield, including the amortization of any
premium or discount, if the bond is held until it matures. It does not provide any measure of
interest rate risk for a corporate bond.

Option B is incorrect:
The maturity date of a fixed income security is the date it matures and the date the issuer of
the security must repay the full amount of the principal plus any accrued and unpaid interest
to the investors. The length of time to the security's maturity date is a factor in measuring the
amount of interest rate risk for a corporate bond, but it is not the only factor. The lengths of
time to the scheduled payments of interest prior to its maturity are also important.

Option is incorrect:
Interest rate risk is the risk that the value of the investment will change over time as a result
of changes in the market rate of interest. A bond's rating assigned by the rating agencies does
not provide a measure of its interest rate risk. A bond's rating provides a means to judge the
security's credit, or default, risk.
Question - CMA212220
Coupon rate is the:
Fixed interest rate which is applied on the market value of the bonds to calculate the period
interest payout.
Fixed interest rate which is applied on the face value of the bonds to calculate the period
interest payout.
Fixed interest rate which is applied on the intrinsic value of the bonds to calculate the period
interest payout.
Fixed interest rate which is applied on the fair value of the bonds to calculate the period
interest payout.
Option B is correct.
Stated rate (coupon / face / nominal rate) is the fixed interest rate which is applied on the face
value of the bonds to calculate the period interest payout.

Option A is incorrect
This option is not accurate. The coupon rate is based on the face value of the bond, not the
market value. The market value of a bond can fluctuate due to various factors, including
changes in interest rates and investor demand, but the coupon rate remains fixed based on the
face value.

Option C is incorrect
This option is not accurate. The coupon rate is based on the face value of the bond, not its
intrinsic value. Intrinsic value is a concept related to the underlying fundamentals and
financials of an investment, and it's not directly used to calculate interest payments.

Option D is incorrect
This option is not accurate. The coupon rate is based on the face value of the bond, not its fair
value. The fair value of a bond can differ from the face value based on market conditions, but
the coupon rate remains fixed based on the face value.
Question - PART27111646
Which one of the following factors might cause a firm to increase the debt in its financial
structure?
An increase in the corporate income tax rate.
Increased economic uncertainty.
An increase in the Federal funds rate.
An increase in the price-earnings (PE) ratio.
Option A is correct
Because the interest that is paid on debt is tax deductible, an increase in the tax rate may
cause a firm to increase the debt in its capital structure. It would do this because the increased
tax rate will decrease the after tax cost of debt to the company.

Option B is incorrect
Increased uncertainty about the future would probably lead the company to issue more equity.
If the company issued more debt they will have more fixed interest costs in the future which
will increase the risks related to the uncertainty about the future.

Option C is incorrect
An increase in the Federal Fund rate will decrease debt financing because the interest that
will need to be paid on the debt will be higher because of the higher Fed rate.

Option D is incorrect
If the PE ratio is increasing, that means that the company is becoming a more attractive
investment opportunity. Therefore, more people will want to buy the shares and the cost of
equity will decrease. This means that the company is more likely to issue equity as the PE
ratio increases.
Question - PART222004Price Publishing is considering a change in its credit terms from
n/30 to 2/10, n/30. The company's budgeted sales for the coming year are $24,000,000, of
which 90% are expected to be made on credit. If the new credit terms are adopted, Price
estimates that discounts will be taken on 50% of the credit sales; however, credit losses will
be unchanged. The new credit terms will result in expected discounts taken in the coming
year of$480,000.$240,000.$432,000.$216,000.Question - PART27111636
A company is in the process of considering various methods of raising additional capital to
grow the company. The current capital structure is 25% debt totaling $5 million with a pre-
tax cost of 10%, and 75% equity with a current cost of equity of 10%. The marginal income
tax rate is 40%. The company’s policy is to allow a total debt to total capital ratio of up to
50% and a maximum weighted-average cost of capital (WACC) of 10%. The company has
the following options.
Option 1: Issue debt of $15 million with a pre-tax cost of 10%.
Option 2: Offer shares to the public to generate $15 million. The cost of equity is 10%.
Which option should the company select?
Option 1 because it has the lower WACC of 7.72%.
Option 1 because the equity to total capital ratio will be 43%.
Option 2 because the equity to total capital ratio will be 86%.
Either Option 1 or 2 because both will yield a WACC of 10%.
Question - CMA212189
ABC Co. had debt with a market value of $1 million and an after-tax cost of financing of 8%.
ABC also had equity with a market value of $2 million and a cost of equity capital of 9%.
ABC's weighted-average cost of capital would be?
8.0%
8.5%
8.7%
9.0%
Question - CMA212299
A European call option provides the:
Holder the right to sell the underlying at an exercise or strike price at the end of its life.
Holder the right to buy the underlying at an exercise or strike price at the end of its life.
Holder the right to sell the underlying at an exercise or strike price, anytime during the life of
the option
Holder the right to buy the underlying at an exercise or strike price, anytime during the life of
the option.
Option B is correct
A European call option provides the holder the right to buy the underlying at an exercise or
strike price at the end of its life only. A gain accrues to the holder as the strike price of the
underlying falls below the market price. An American option can be exercised at anytime
during the life of the option.

Option A is incorrect
This option is incorrect because this represents a European put option.

Option C is incorrect
This option is incorrect because this represents an American put option.

Option D is incorrect
This option is incorrect because this represents an American call option.
Question - PART27111591
A company's stock trades rights on for $50.00 and ex-rights for $48.00. The subscription
price for rights holders is $40.00, and four rights are required to purchase one share of stock.
The value of a right while the stock is still trading rights-on is
$0.40
$0.50
$1.60
$2.00
Question - PART27111616
Archer Inc. has 500,000 shares of $10 par value common stock outstanding. For the current
year, Archer paid a cash dividend of $4.00 per share and had earnings per share of $3.20. The
market price of Archer’s stock is $36 per share. The average price-earnings ratio for Archer’s
industry is 14.00. When compared to the industry average, Archer’s stock appears to be
Overvalued by approximately 25%.
Overvalued by approximately 10%.
Undervalued by approximately 10%.
Undervalued by approximately 25%.
Question - PART27111631
Colt, Inc. is planning to use retained earnings to finance anticipated capital expenditures. The
beta coefficient for Colt\'s stock is 1.15, the risk-free rate of interest is 8.5%, and the market
return is estimated at 12.4%. If a new issue of common stock were used in this model, the
flotation costs would be 7%. By using the Capital Asset Pricing Model (CAPM) equation:
R = RF + β(RM - RF)
The cost of using retained earnings to finance the capital expenditures is:
13.96%.
12.99%.
12.40%.
14.71%.
Question - CMA212300
A call option is said to be out-the-money if the price if the:
Underlying asset is equal to the spot price.
Underlying asset is equal to the strike price.
Strike price is lower than the current stock price.
Strike price is greater than the current stock price.
Option D is correct
An option contract is in the money if it has intrinsic value. A Call option is in the money if
the price of the underlying asset is higher than the option contract strike price. Conversely, a
Put option is in the money if the price of the underlying security is lower than
the option contract strike price.
An out-of-the-money call option is one in which the strike price of the underlying is greater
than the current stock price.

Option A is incorrect
This option is incorrect because this is irrelevant.

Option B is incorrect
This option is incorrect because this is an at-the-money option.

Option C is incorrect
This option is incorrect because this is an in-the-money option.
Question - CMA212289
Which of the following is a feature which is not common to futures and forward contracts?
They account for the time value of money.
They are firm and binding financial agreements to act at a later date.
They are regulated by independent statutory bodies.
They can either be settled by physical delivery or cash.
Option C is correct.
Futures are traded on an exchange. They are regulated by independent bodies. Forwards are
customized contracts between two knowledgeable parties. They are not regulated or traded on
exchanges.

Option A is incorrect .
This option is incorrect because both forward and future contracts are based on the time value
of money.

Option B is incorrect
This option is incorrect because they are firm and binding financial agreements to act at a
later date.

Option D is incorrect
This option is incorrect because they can have physical settlement or cash settlement.
Question - CMA212295
Which of the following is the break-even point of a call option?
Strike price minus premium.
Premium.
Strike price plus premium.
Strike price.
Option C is correct
In a call option, the buyer has the right to purchase an underlying asset at a predetermined
price. The buyer pays an option premium for the right and seller receives the premium for
taking the risk. If a stock is selling at $100, option premium is $5 and the strike price is $80,
the investor can purchase the stock at $80 by exercising the option and sell the stock in the
open market at the spot price of $100. At a selling price of $85, if the option holder exercises
the option, it can buy at $80 and sell at $85. However, it will have zero profit as it would
have already paid $5 to acquire the option. Thus, the break-even point is strike price ($80)
plus the premium ($5).

Option A is incorrect
This is not the break-even point for a call option. It represents a point at which the option
buyer makes a profit.

Option B is incorrect
This is not the break-even point. It represents the cost incurred by the option buyer for
acquiring the call option.

Option D is incorrect
This is not the break-even point. It represents the point at which the option buyer can exercise
the call option, but it does not account for the premium paid.
Question - CMA212203
Which of the following is true of preferred dividends?
Cumulative dividends can be paid only if the dividends are paid to common stockholders.
Yield of preferred dividends is always lower than the cost of debt.
Preferred dividends are an example of perpetuity.
Preferred dividends cannot be deferred.
Option C is correct.
Preferred stocks pay dividends indefinitely. Thus, it is called as an example of perpetuity.

Option A is incorrect
It should be paid before the dividends are paid to common stockholders.

Option B is incorrect
Yield of preferred dividends is higher than the cost of debt.

Option D is incorrect
If stipulated dividends are not declared in a particular year(s), these accumulate as dividends
in arrears and must be paid in later years before the common stockholders can receive any
distribution.
Question - PART27111657
A firm seeking to optimize its capital budget has calculated its marginal cost of capital and
projected rates of return on several potential projects. The optimal capital budget is
determined by
Calculating the point at which marginal cost of capital meets the projected rate of return,
assuming that the most profitable projects are accepted first.
Calculating the point at which average marginal cost meets average projected rate of return,
assuming the largest projects are accepted first.
Accepting all potential projects with projected rates of return exceeding the lowest marginal
cost of capital.
Accepting all potential projects with projected rates of return lower than the highest marginal
cost of capital.
Question - CMA212211
Which of the following is an example of unsecured bonds?
Mortgage bonds.
Equipment trust bonds.
Debentures.
Collateral trust bonds.
Option C is correct.
Debentures are unsecured bonds. Secured bonds are backed by certain collateral whereas
unsecured are not backed by any collateral. Due to this reason, unsecured bonds have higher
risk and they yield higher returns.

Option A is incorrect
It is a secured bond. Equipment trust bonds are secured bonds where a physical asset is held
as a collateral.

Option B is incorrect
Since it is a secured bond.

Option D is incorrect
Since it is a secured bond.
Question - CMA212233
Market value of the bond is:
Present value of face value of bond and future interest payments discounted at effective
interest rate.
Present value of face value of bond and future interest payments discounted at bond interest
rate.
Present value of face value of bond discounted at effective interest rate and present value of
future interest payments discounted at bond interest rate.
Present value of face value of bond discounted at bond interest rate and present value of
future interest payments discounted at effective interest rate.
Option A is correct.
Market value of the bond is present value of the proceeds for the bond discounted at effective
interest rate. Thus, market value of the bond is present value of face value of bond and future
interest payments, both discounted at effective interest rate.

Option B is incorrect
This option is incorrect because Present value of face value of bond and future interest
payments discounted at effective interest rate is the market rate

Option C is incorrect
This option is incorrect because Present value of face value of bond and future interest
payments discounted at effective interest rate is the market rate

Option D is incorrect
This option is incorrect because Present value of face value of bond and future interest
payments discounted at effective interest rate is the market rate
Question - PART27111655
Rogers Inc. operates a chain of restaurants located in the Southeast. The company has
steadily grown to its present size of 48 restaurants. The board of directors recently approved a
large-scale remodeling of the restaurant, and the company is now considering two financing
alternatives.
The first alternative would consist of

 - Bonds that would have a 9% coupon rate and would net $19.2 million after flotation
costs
 - Preferred stock with a stated rate of 6% would yield $4.8 million after a 4% flotation
cost
 - Common stock that would yield $24 million after a 5% flotation cost

The second alternative would consist of a public offering of bonds that would have an 11%
coupon rate and would net $48 million after flotation costs.
Rogers' current capital structure, which is considered optimal, consists of 40% long-term
debt, 10% preferred stock, and 50% common stock. The current market value of the common
stock is $30 per share, and the common stock dividend during the past 12 months was $3 per
share. Investors are expecting the growth rate of dividends to equal the historical rate of 6%.
Rogers is subject to an effective income tax rate of 40%.
Assuming the after-tax cost of common stock is 15%, the after-tax weighted marginal cost of
capital for Rogers' first financing alternative consisting of bonds, preferred stock, and
common stock would be
11.725%
8.725%
10.285%
7.285%
Question - CMA212248
If a bond’s credit rating changes from C to Caa, market price of the bond would:
Increase. The price of the bond would increase if credit risk of a bond is reduced.
Increase. The price of the bond would increase if credit risk of a bond is increased.
Not necessarily change. The price of the bond is not dependent upon credit rating.
Would remain the same. The credit rating of the bond is still in the same category.
Option A is correct.
Price of the bond is dependent upon the current risk-free interest rate and the credit risk of the
bond. Change of credit rating from C to Caa would mean that the risk related to the bond has
reduced leading to increase in the market price. The credit risk and market price are inversely
related.

Option B is incorrect
This option is not correct. If the credit risk of a bond increases, it means that the bond is
perceived as riskier. In such a case, the bond's market price would typically decrease, not
increase. As credit risk goes up, investors would require a higher yield to compensate for the
increased risk, causing the bond's price to fall.

Option C is incorrect
This option is not correct. The price of a bond is indeed dependent on its credit rating. A
change in credit rating reflects a change in the perceived credit risk of the bond, and this
change usually has a direct impact on the bond's market price. As credit risk changes, so does
the bond's pricing.
Option D is incorrect .
This option is not correct. The credit rating has changed from C to Caa, which represents a
different credit category. As a result, the market's perception of the bond's credit risk has
changed, and this should have an impact on the bond's market price. A bond's market price is
influenced by its credit rating, among other factors.
Question - CMA212321The following capital structure information is available for Pixel
Inc. • Pixel Inc. has a target capital structure of 40% debt and 60% equity. • Six years ago, the
company issued 10,000 10-year bonds which pay a 5% coupon rate (annual payout) for
$859.53. The bonds mature in 4 years. The current market rate for bonds with the same term
and risk characteristics is 7%. The market price of the bonds currently is $932.27. • The
company’s beta is 1.25. • The risk free rate is 2.75% and the market risk premium is 5.5%. •
The company is a constant growth firm that paid an annual dividend last year of $1.30. The
dividend has an expected growth rate of 3%. • The market price of the stock is $20.00 per
share. • The company has 500,000 shares outstanding. • The company’s marginal tax rate is
25%. Pixel’s current weighted average cost of capital is closest
to:7.34%7.60%7.40%7.92%Question - CMA213226
Callable bonds have:
Higher coupon rate than non-callable bonds because callable bonds are favourable to the
issuer.
Lower coupon rate than non-callable bonds because callable bonds are unfavourable to the
issuer.
Higher coupon rate than non-callable bonds because callable bonds are favourable to the
bondholder.
Lower coupon rate than non-callable bonds because callable bonds are unfavourable to the
bondholder.
Option A is correct
In callable bonds, the issuer has an option to repay the bonds before the maturity date. As this
is favorable to the issuer (but adverse to the bondholders), these bonds generally have a
higher coupon rate.

Option B is incorrect
This option is not accurate. Callable bonds are often associated with a higher coupon rate
compared to non-callable bonds because the issuer provides a higher return to investors to
compensate for the risk of early redemption.

Option C is incorrect
This option is also not accurate. Callable bonds are not typically favorable to the bondholder.
They are favorable to the issuer. The higher coupon rate on callable bonds is intended to
attract investors to take on the added risk that the issuer may choose to call the bond, which
would result in early repayment and potentially lower future interest payments to
bondholders.

Option D is incorrect
This option is not correct either. As mentioned earlier, callable bonds usually come with a
higher coupon rate, which is meant to compensate bondholders for the risk associated with
the issuer potentially calling the bond before its maturity date.
Question - CMA212265
Which of the following financial instruments is not considered a derivative financial
instrument?
Interest-rate swaps.
Currency futures.
Stock-index options.
Bank certificates of deposit.
Option D is correct.
Derivative is a contract whose value is based on another contract or an index.
{Like the Midas gold, Derivatives shine like the SUN!}
Derivatives always possess ALL three of the following characteristics:

 Settlement in cash or equivalents,

 Underlying and notional amount and
 No or negligible net investment.

Interest rate swaps, currency futures, stock-index options are the types of derivative
instruments. Bank certificates of deposit does not meet any of the three characteristics
mentioned above.

Option A is incorrect
This option is incorrect because these are types of derivative instruments.

Option B is incorrect
This option is incorrect because these are types of derivative instruments.

Option C is incorrect
This option is incorrect because these are types of derivative instruments.
Question - PART222003A company's stock was trading rights-on for $50.00, and when it
went ex-rights the market price was $48.00. The subscription price for rights holders is
$40.00, and four rights are required to purchase one share of stock. The value of a right when
the stock was trading ex-rights was$2.00$0.50$2.50$0.40Question - CMA212309
Which of the following risks do swaps have?
Interest rate risk.
Reinvestment risk.
Prepayment risk.
Counterparty credit risk.
Option D is correct
In a swap, the party with the greater liability makes a payment to the other party. Thus, there
will be counterparty credit risk as it is not regulated through an organized exchange.

Option A is incorrect
This option is incorrect because interest rate risk can be mitigated using swaps.

Option B is incorrect
This option is incorrect because reinvestment risk is the risk that the proceeds from the
payment of principal and interest, which have to be reinvested at a lower rate than the
original investment. It cannot be managed by swaps. For a bank, during the period of falling
interest rates, individuals prepay the principal and it can reinvest at a lower rate.

Option C is incorrect
This option is incorrect because prepayment risk is the risk involved with the premature
return of principal on a fixed-income security. It cannot be managed by swaps.
Question - PART27111622
Firm XYZ pays an annual dividend of $3.75 on its preferred stock. Any additional issues of
preferred stock will cost the firm $1.25 per share in flotation costs. What will be the cost of
new preferred stock if the latest closing price of Firm XYZ preferred stock was $40?
0.0938%.
0.0968%.
9.38%.
9.68%.
Option D is correct
The cost of a new preferred share is the amount of the dividend divided by the proceeds from
the sale of the share. The dividend is $3.75 and the proceeds from the sale of a share (at the
latest closing price) will be $40.00 − $1.25, or $38.75. Therefore, the cost of the new
preferred stock is $3.75 ÷ $38.75, which equals 0.09677 or 9.68% (rounded).

Option A is incorrect
Option A: 0.0938% is not the correct answer. This percentage seems to be calculated
incorrectly.

Option B is incorrect
Option C: 9.38% is not the correct answer. This percentage also appears to be calculated
incorrectly.

Option C is incorrect
The correct cost of new preferred stock is approximately 9.68%, as explained in the correct
answer (Option D) above.
Question - PART27111656
Rogers Inc. operates a chain of restaurants located in the Southeast. The company has
steadily grown to its present size of 48 restaurants. The board of directors recently approved a
large-scale remodeling of the restaurant, and the company is now considering two financing
alternatives.
The first alternative would consist of

 Bonds that would have a 9% effective annual rate and would net $19.2 million after
flotation costs
 Preferred stock with a stated rate of 6% that would yield $4.8 million after a 4%
flotation cost
 Common stock that would yield $24 million after a 5% flotation cost

The second alternative would consist of a public offering of bonds that would have an 11%
effective annual rate and would net $48 million after flotation costs.
Rogers' current capital structure, which is considered optimal, consists of 40% long-term
debt, 10% preferred stock, and 50% common stock. The current market value of the common
stock is $30 per share, and the common stock dividend during the past 12 months was $3 per
share. Investors are expecting the growth rate of dividends to equal the historical rate of 6%.
Rogers is subject to an effective income tax rate of 40%.
The after-tax weighted marginal cost of capital for Rogers' second financing alternative
consisting solely of bonds would be
5.13%
5.40%
6.27%
6.60%
Question - PART22111123
A requirement specified in an indenture agreement which states that a company cannot
acquire or sell major assets without prior creditor approval is known as a
protective covenant.
call provision.
warrant
put option.
Option A is correct
Protective clauses or restrictions in bond indentures and loan agreements are known as
covenants and can include items such as working capital requirements and capital
expenditure limitations.

Option B is incorrect
A call provision is a feature in a bond indenture that allows the issuer of the bond to redeem
(call in) the bond before its maturity date. This is typically done at a specified call price,
which may include a call premium. The issuer initiates this action, not the bondholder.

Option C is incorrect
A warrant is a financial instrument that gives the holder the right, but not the obligation, to
buy or sell a security (usually common stock) at a specific price within a certain time frame.
It's typically not related to major asset transactions in bond indentures.

Option D is incorrect
A put option is a financial contract that provides the holder with the right, but not the
obligation, to sell a financial instrument at a predetermined price on or before a specified
date. This is initiated by the bondholder, not the company, and is not directly related to major
asset transactions.
Question - PART27111647
In general, it is more expensive for a company to finance with equity capital than with debt
capital because
long-term bonds have a maturity date and must therefore be repaid in the future.
investors are exposed to greater risk with equity capital.
the interest on debt is a legal obligation.
equity capital is in greater demand than debt capital.
Option B is correct
With equity capital (shares) investors are exposed to a greater risk because there is no
collateral supporting the investment and shareholders are last to receive money in the case of
liquidation. Because of these higher risks, the cost of equity is generally higher than the cost
of debt.

Option A is incorrect
It is true that long-term bonds have a maturity date and must therefore be repaid in the future.
However, that is not the reason why it is more expensive for a company to finance with
equity capital than with debt capital.

Option C is incorrect
Because the interest on the debt is a legal obligation, the debt holder has more certainty that
the interest will be paid. There is no obligation to pay anything to shareholders so there is
more risk for shareholders, which increase the cost of the equity.

Option D is incorrect
The demand for equity capital compared to the demand for debt depends on the company that
is issuing the equity and the debt.
Question - CMA212294
Which of the following is the breakeven point of a put option?
Strike price minus premium.
Strike price plus premium.
Spot price minus premium.
Spot price plus premium.
Option A is correct
An investor selling a put option believes that the stock price will rise. If the premium is $2,
strike price is $100, the option buyer will not exercise until it is $98. If the spot price is $90,
the option buyer can buy it from market and sell at $100 by exercising the option. At $98, he
will have zero profit and at $97, the option buyer will have $1 profit and at $99, the option
buyer will not exercise the option.

Option B is incorrect
This would not be the breakeven point. It represents a point at which the option writer incurs
a loss.

Option C is incorrect
This represents the point at which the option writer makes a profit. It is not the breakeven
point.

Option D is incorrect
This represents a point at which the option writer incurs a loss. It is not the breakeven point.
Question - PART27111655
Rogers Inc. operates a chain of restaurants located in the Southeast. The company has
steadily grown to its present size of 48 restaurants. The board of directors recently approved a
large-scale remodeling of the restaurant, and the company is now considering two financing
alternatives.
The first alternative would consist of

 - Bonds that would have a 9% coupon rate and would net $19.2 million after flotation
costs
 - Preferred stock with a stated rate of 6% would yield $4.8 million after a 4% flotation
cost
 - Common stock that would yield $24 million after a 5% flotation cost

The second alternative would consist of a public offering of bonds that would have an 11%
coupon rate and would net $48 million after flotation costs.
Rogers' current capital structure, which is considered optimal, consists of 40% long-term
debt, 10% preferred stock, and 50% common stock. The current market value of the common
stock is $30 per share, and the common stock dividend during the past 12 months was $3 per
share. Investors are expecting the growth rate of dividends to equal the historical rate of 6%.
Rogers is subject to an effective income tax rate of 40%.
Assuming the after-tax cost of common stock is 15%, the after-tax weighted marginal cost of
capital for Rogers' first financing alternative consisting of bonds, preferred stock, and
common stock would be
11.725%
8.725%
10.285%
7.285%
Question - PART27111650
Williams, Inc. is interested in measuring its overall cost of capital and has gathered the
following data. Under the terms described as follows, the company can sell unlimited
amounts of all instruments.

 Williams can raise cash by selling $1,000, 8%, 20-year bonds with annual interest
payments. In selling the issue, an average premium of $30 per bond would be
received, and the firm must pay flotation costs of $30 per bond. The after-tax cost of
funds is estimated to be 4.8%.
 Williams can sell 8% preferred stock at par value, $100 per share. The cost of issuing
and selling the preferred stock is expected to be $5 per share.
 Williams' common stock is currently selling for $100 per share. The firm expects to
pay cash dividends of $7 per share next year, and the dividends are expected to
remain constant. The stock will have to be underpriced by $3 per share, and flotation
costs are expected to amount to $5 per share.
 Williams expects to have available $100,000 of retained earnings in the coming year.
Once these retained earnings are exhausted, the firm will use new common stock as
the form of common stock equity financing.
 The capital structure that Williams would like to use for any future financing is:
o Long-term debt: 30%
o Preferred stock: 20%
o Common stock: 50%

If Williams, Inc. needs a total of $1,000,000, the firm\'s weighted marginal cost of capital
would be
6.9%.
4.8%.
6.6%.
27.8%.
Question - CMA212323
A firm's marginal cost of capital
Should be the same as the firm’s rate of return on equity.Is unaffected by the firm’s capital
structureIs inversely related to the firm’s required rate of return used in capital budgetingIs a
weighted-average of the investors’ required returns on debt and equity
Option D is correct
This answer could be the definition of either the weighted average cost of capital or the
weighted marginal cost of capital, because the definition as given in answer choice d does not
specify whether it is the definition of weighted average overall cost of capital (WACC) or the
weighted average cost for the last dollar of capital (weighted marginal capital). Even though
answer choice d is not perfect, it is the best answer from among those given. The weighted
marginal cost of capital is also a weighted average, except it is the weighted average of the
last dollar of capital raised or spent instead of the weighted average of all existing capital.
Option A is incorrect
The weighted marginal cost of capital is also a weighted average, except it is the weighted
average of the last dollar of capital raised or spent instead of the weighted average of all
existing capital.

Option B is incorrect
The weighted marginal cost of capital is also a weighted average, except it is the weighted
average of the last dollar of capital raised or spent instead of the weighted average of all
existing capital.

Option C is incorrect
The weighted marginal cost of capital is also a weighted average, except it is the weighted
average of the last dollar of capital raised or spent instead of the weighted average of all
existing capital.

Question - PART22111120
A public company’s shareholders expect to receive a dividend one year from now of $20 per
share. Immediately after the dividend payout, analysts are expecting that the stock will trade
at $244 per share. If the investors have a required rate of return of 20%, what is the current
value of the stock?
$220
$224
$244
$264
Option A is correct
Current price=(Expected future price + Next dividend)/(1+required rate of return)
Current Price=($244+20)/(1+0.2)=$264/1.2=$220

Option B is incorrect
This option doesn't represent the correct calculation. To arrive at this value, you would need
to divide the expected future price ($244) by (1 + the required rate of return, 0.20). $244 / (1
+ 0.20) = $203.33, so this is not the correct answer.

Option C is incorrect
This option is the expected future price but not the current value of the stock. To find the
current value, you need to discount the future price and dividend back to the present using the
required rate of return.

Option D is incorrect
This option is incorrect as it represents the sum of the expected future price and next year's
dividend without discounting them to their present value. To find the current value, you
should use the formula as mentioned in option A.
Question - PART27111609
An analyst is in the process of determining what the current share price should be for
PaperToy Inc. In early January, the analyst collected the following information on PaperToy
Inc.

 Dividend at end of current year = $1.00

 Yearly dividend increase = 5%
  Expected investor return = 10%

Based on the data provided, the current share price for PaperToy Inc. should be
$21.00.
$20.00.
$7.00.
$6.67.
Option B is correct
The dividend growth model should be used to calculate the fair value of the stock. The
dividend growth model is:
P = d1
0 r−g

Where P0 = the fair value today of a share of stock;

:
d1 = the next annual dividend to be paid;
r = the investors' required rate of return; and
g = the expected growth rate of the dividend.
The next annual dividend to be paid (d1) is the $1.00 dividend at the end of the current year.
Note that the analysis is taking place in early January, and the $1.00 dividend is to be paid at
the end of the current year. Therefore, $1.00 is the next annual dividend to be paid. It should
not be increased by 5% for the purposes of this calculation.
The investors' required rate of return (r) is 10% or 0.10.
The expected growth rate of the dividend (g) is 5% or 0.05.
Therefore,
P = $1.00
0 0.10 − 0.05

P0 = $20

Option A is incorrect
This answer results from increasing the dividend at the end of the current year by 5% for use
in the dividend growth model. Note that the analysis is taking place in early January, and the
$1.00 dividend is to be paid at the end of the current year. Therefore, $1.00 is
the next annual dividend to be paid. It should not be increased by 5% for the purposes of this
calculation.

Option C is incorrect
This is $1.05 divided by 0.15. This is an incorrect use of the dividend growth model for two
reasons:
(1 The analysis is taking place in early January, and the $1.00 dividend is to be paid at the
) end of the current year. Therefore, $1.00 is the next annual dividend to be paid, and that
should be the numerator in the model. It should not be increased by 5% for the purposes
of this calculation.
(2 The denominator used should be the investors' required rate of return (r, or
) 0.10) minus the expected growth rate of the dividend (g, or 0.05). This answer uses r + g
instead of r − g in the denominator.
Option D is incorrect
This is $1.00 divided by 0.15. This is an incorrect use of the dividend growth model. The
denominator used should be the investors' required rate of return (r, or 0.10) minus the
expected growth rate of the dividend (g, or 0.05). This answer uses r + g instead of r − g in
the denominator.
Question - PART27111642
Challenger, Inc. has established the target capital structure below. The firm has a marginal
income tax rate of 30%. Its investment banking firm has provided the following estimates of
the before-tax cost for funds acquired in the near future.
Target Capital Mix Before-tax Component Cost
Debt 25% Bonds 8%
Preferred stock 20% Preferred stock 12%
Common equity 55% Retained earnings 19%
Common stock 24%
If the firm expects to have $150,000 in retained earnings and needs to invest a total of
$1,000,000 in new equipment next year, what is the firm's projected after-tax weighted
average cost of capital to the nearest percent?
12%.
14%.
16%.
17%.
Option C is correct
The size of each component of the new capital is as follows:
Debt: $1,000,000 × 0.25 = $250,000
Preferred equity: $1,000,000 × 0.20 = $200,000
Common equity: $1,000,000 × 0.55 = $550,000
Since Challenger will have $150,000 in new retained earnings available, the common equity
portion of the capital will be fulfilled by retained earnings first. After the retained earnings
are exhausted, Challenger will issue new common equity to fulfill the remainder of the
common equity component, which will be $400,000 ($550,000 − $150,000 provided by
retained earnings). The components of capital and their after-tax costs are as follows. Note
that the after-tax cost of debt is its before-tax cost multiplied by 70% because interest paid on
debt is tax-deductible, and Challenger's tax rate is 30%. However, dividends are not tax-
deductible, so the after-tax cost of equity is the same as the before-tax cost of equity.
Component Balance % of After-tax After-tax
Capital rate Cost
Debt $ 250,000 0.25 0.056 $ 14,000
Preferred equity $ 200,000 0.20 0.120 $ 24,000
Common equity - Retained earnings $ 150,000 0.15 0.190 $ 28,500
Common equity - New Issue $ 400,000 0.40 0.240 $ 96,000
$1,000,000 $162,500
The weighted average cost of capital is $162,500 ÷ $1,000,000 = 0.1625, or 16.25%.
The weighted average cost of capital can also be calculated using the percentages of total
capital represented by each component and the after-tax rate of each:
WACC = (0.25 × 0.056) + (0.20 × 0.12) + (0.15 × 0.19) + (0.40 × 0.24) = 0.1625 or 16.25%.

Option A is incorrect
This answer results from incorrectly using an after-tax cost for all the components of the new
capital that is lower than the before-tax cost. Dividends paid are not tax-deductible, so the
after-tax cost of equity is the same as its before-tax cost. Please see the correct answer
explanation for more information.

Option B is incorrect
This answer results from using 19% as the cost of the full common equity component of the
new capital. A portion of the common equity will come from retained earnings which will
cost 19%, but a portion of it will come from a new issue of common stock, which will cost
24%. Please see the correct answer explanation for more information.

Option D is incorrect
This answer results from incorrectly using the before-tax costs for all the components of the
new capital. Interest on debt is tax-deductible, so the after-tax cost of debt, which is lower
than the before-tax cost of debt, should be used for that component. Please see the correct
answer explanation for more information.
Question - PART27111611
Jack Saunders is analyzing Barco Inc., an industrial conglomerate company. Saunders is
estimating the intrinsic value for Barco Inc. by forecasting the company’s earnings per share
and earnings multiple. Which of the following attributes of Barco is least likely to increase
the company’s earnings multiple?
Barco has never had a restructuring charge in its history.
Barco’s earnings move in tandem with overall economic growth.
Barco consistently generates free cash flow.
Barco’s dividend has been increasing for the last 30 years.
Option B is correct
An “earnings multiple” is a P/E ratio that has been adjusted for perceived risk, either upward
if perceived risk is low or downward if perceived risk is high. The adjusted P/E ratio is used
to calculate a valuation for the business. When the P/E ratio has been adjusted for perceived
risk, it is called an “earnings multiple” instead of a P/E ratio.
Anything that would cause a potential buyer of Barco to perceive increased risk in the
company would cause the buyer to decrease the earnings multiple used to value the
company. Anything that would cause a potential buyer to perceive decreased risk in the
company would cause the buyer to increase the earnings multiple used to value the company.
This question asks “which of the following attributes of Barco is least likely to increase the
company’s earnings multiple?” Therefore, all of the incorrect answers will be things
that would be likely to cause a potential buyer to increase the company’s earnings multiple
used to value the company. Things that would be likely to cause a buyer to increase the
company’s earnings multiple would be things that would cause the buyer to
perceive decreased risk. Therefore, the correct answer is one that would either cause the
perceived risk to be greater or would not cause it to be lower.

Option A is incorrect.
Option A, "Barco has never had a restructuring charge in its history," would likely decrease
the perceived risk associated with the company and increase the earnings multiple used to
value the company. Companies that have a history of not incurring restructuring charges are
often seen as more stable and less risky.

Option C is incorrect.
Option C, "Barco consistently generates free cash flow," would also likely increase the
perceived stability and financial health of the company, leading to an increase in the earnings
multiple.
Option D is incorrect.
Option D, "Barco’s dividend has been increasing for the last 30 years," demonstrates a
consistent and positive track record, which would generally increase the perceived
attractiveness of the company and lead to a higher earnings multiple.
Question - CMA212320Keller Industries currently has a capital structure consisting of 40%
debt and 60% equity, which it believes is the optimal structure. The common stock produced
a 12% capital gain in the recent 12-month period and paid a 5% dividend. Keller’s effective
income tax rate is 30%. Its debt is rated AA and the issues outstanding are as follows. • $20
million of 7% coupon bonds with a yield to maturity of 10% • $20 million of 12% coupon
bonds with a yield to maturity of 11% Keller’s investment banker informed the firm that
long-term AA rated debt is currently being issued to yield 11%. The banker also estimates
that equity investors currently require a 20% pre-tax yield. Keller’s marginal cost of capital is
approximately12.8%.13.1%.14.7%.15.1%.Question - CMA212319A firm has $10 million in
equity and $30 million in long-term debt to finance its operations. The firm’s beta is 1.125,
the risk-free rate is 6%, and the expected market return is 14%. The firm issued long-term
debt at the market rate of 9%. Assume the firm is at its optimal capital structure. The firm’s
effective income tax rate is 40%. What is the firm’s weighted average cost of capital?
7.8%.8.6%.9.5%.10.5%.
Option A is correct
The cost of equity is calculated using the Capital Asset Pricing Model: R = RF + β(RM −
RF). R = 0.06 + 1.125(0.14 − 0.06) R = 0.15 The after-tax cost of debt is the interest rate on
the debt multiplied by 1 − the tax rate: 0.09(1 − 0.40) = 0.054 Total capital is $40 million
($10 million equity plus $30 million debt). Debt is 75% of total capital ($30 million ÷ $40
million) and equity is 25% of total capital ($10 million ÷ $40 million). Therefore, the firm's
weighted average cost of capital is (0.75 × 0.054) + (0.25 × 0.15) = 0.078 or 7.8%.

Option B is incorrect
This answer results from weighting the firm's equity at 33-1/3% and weighting the firm's debt
at 66-2/3% in calculating the weighted average cost of capital. The firm has $10 million in
equity and $30 million in long-term debt, for total capital of $40 million. $10 million in
equity is 25% of total capital while $30 million in debt is 75% of total capital.

Option C is incorrect
This is not the correct answer. Please see the correct answer for an explanation.

Option D is incorrect
This answer results from using the firm's cost of debt at its gross amount in calculating the
weighted average cost of capital. The firm's cost of debt should by reduced to its tax-
equivalent rate by multiplying it by 1 − the tax rate.
Question - CMA212253
Increase in which of the following would not increase cost of equity calculated on the basis of
capital asset pricing model?
Risk premium.
Expected market rate of interest.
Effective tax rate.
Equity beta.
Option C is correct.
Cost of equity (using CAPM) is calculated by using the following formula:
Risk free rate + [Beta x (Expected market rate – Risk free rate)] where Beta x (Expected
market rate – Risk free rate) is the risk premium.
Effective tax rate is not used in the calculation of cost of existing equity calculated using
capital asset pricing model (CAPM). Thus, increase in effective tax rate would not increase
cost of equity.

Option A is incorrect
This option is incorrect because risk premium is used for calculating cost of existing equity
using capital asset pricing model and increase of risk premium would increase the cost of
equity.

Option B is incorrect
This option is incorrect because based on the formula of cost of equity calculated using
CAPM model increase in expected market rate of interest and equity beta would increase the
cost of equity.

Option D is incorrect
This option is incorrect because based on the formula of cost of equity calculated using
CAPM model increase in expected market rate of interest and equity beta would increase the
cost of equity.
Question - PART27111619
A company's stock has a market price of $50 per share. The company is expected to pay a
steady dividend of $2.50 per share each year starting the next year. The dividend is not
expected to grow. If the investors' required rate of return changes to 8%, the effect would be
the share price would decrease by $4.00.
the share price would increase to $62.50.
the share price would decrease to $31.25.
no change in the share price.
Option C is correct
According to the Zero Growth Model, the intrinsic value of a stock with a dividend of $2.50
and an investor's required rate of return of 8% would be $2.50 divided by 0.08, which equals
$31.25.

Option A is incorrect
A decrease of $4.00 in the share price means the share price would decrease to $46.00. A
share price and a dividend of $2.50 implies an investor's required rate of return of 5.35%.
However, the investors' required rate of return changes to 8%.

Option B is incorrect
A share price of $62.50 and a dividend of $2.50 implies an investor's required rate of return
of 4%. However, the investors' required rate of return changes to 8%.

Option D is incorrect
The share price would change.
Question - PART27111635
When calculating the cost of capital, the cost assigned to retained earnings should be
Zero.
Lower than the cost of external common equity.
Equal to the cost of external common equity.
Higher than the cost of external common equity
Option B is correct
Newly issued or external common equity is more costly than retained earnings. The company
incurs issuance costs when raising new, outside funds.

Option A is incorrect
The cost of retained earnings is the rate of return shareholders require on equity capital the
firm obtains by retaining earnings. The opportunity cost of retained funds should be positive.

Option C is incorrect
Retained earnings will always be less costly than external equity financing because earnings
retention does not require the payment of issuance costs.

Option D is incorrect
Retained earnings will always be less costly than external equity financing because earnings
retention does not require the payment of issuance costs.
Question - CMA212339The current market price of ActionPharmaceutical\'s common stock
is $34. A 6-month call option has been written on the stock. The option has an exercise price
of $40 and a market price of $4. A financial analyst estimates that, at the end of 6 months, the
expected value of the stock is $42. What is the intrinsic value of the option on the date it is
written?$4.00$0$6.00$8.00
Option B is correct
At the time the call option was written, it had no intrinsic value. This is because the option
exercise price ($40) was higher than the market price ($34). Because of this, no one would
use the option to buy a share since it would be cheaper to buy a share on the open market.
However, the option had some time value, and for that reason, its market price on that date
was $4.

Option A is incorrect
This is the market price of the option. However, the market price is not the same as the
intrinsic value of the option on the date it is written.

Option C is incorrect
This is the amount by which the exercise price of the option was greater than the current
market price of the stock on the date the call option was written. However, because the
exercise price was higher than the current price of the stock on that date, that difference was
not the intrinsic value of the option on that date.

Option D is incorrect
This is the difference between the expected market value of the stock and the current market
value of the stock. However, this is not the intrinsic value of the option on the date it is
written.
Question - PART27111654
Field's new financing will be in proportion to the market value of its present financing, shown
below.
Book Value
Long-term debt $7,000,000
Preferred stock (100,000 shares) 1,000,000
Common stock (200,000 shares) 7,000,000
The firm's bonds are currently selling at 80% of par, generating a current market yield of 9%,
and the corporation has a 40% tax rate. The preferred stock is selling at its par value and pays
a 6% dividend. The common stock has a current market value of $40 and is expected to pay a
$1.20 per share dividend this fiscal year. Dividend growth is expected to be 10% per year.
Field's weighted average cost of capital is (round your calculations to tenths of a percent).
11.0%.
10.8%.
9.6%.
9.0%.
Question - CMA212279
Which of the following does not affect option prices?
Interest rates.
Dividends.
Underlying price.
None of the above.
Option D is correct .
Interest rates – Interest rates have a small effect on an option’s value. When interest rates rise
a call option's value will also rise and a put option's value will fall. Considering a call option
vs speculating by owning the underlying, there are costs associated with owning the
underlying: The purchase incurs either interest expense (if the money is borrowed) or lost
interest income (if existing funds are used to purchase the shares). Instead, by buying a call
option, the purchase of the underlying would be delayed and interest could be earned on the
money. Thus, higher the interest rates, higher the demand for call options and would increase
the price of call options. In case of put options, the sale of the underlying would be delayed
and interest would be lost. Thus, higher the interest rates, lesser will be the demand for put
options and would decrease the price of put options.
Dividends - Options do not receive dividends so their value fluctuates when dividends are
released. When a company releases dividends they have an ex-dividend date. If you own the
stock on that date you will be awarded the dividend. Also on this date the value of the stock
will decrease by the amount of dividend. There is more demand for owning the stock now,
rather than purchasing a call option at the time of dividend declaration. This would lead to a
decrease in demand for call options, thereby decreasing prices. Similarly, at the time of
dividend declaration there would be lesser people willing to sell an underlying and would be
more interested in buying a put option. With an increase in demand for the put option, the put
option’s value increase.
Underlying price - The most influential factor on an option price is the current market price
of the underlying asset. In general, as the price of the underlying increases, there would be
more demand to buy a call at a strike price lower than the anticipated increased market price
and the increase in demand for call options would increase call prices and similarly, put
prices would decrease (as if the price of the underlying increases, it would be more profitable
to sell directly in the market and thus the demand for put will decrease, thereby decreasing
the price). Conversely, as the price of the underlying decreases, call prices decrease and put
prices increase.

Option A is incorrect
This option is incorrect because it affects the value of an option.

Option B is incorrect
This option is incorrect because it affects the value of an option.
Option C is incorrect
This option is incorrect because it affects the value of an option.
Question - PART27111621
Acme Corporation is selling $25 million of cumulative, non-participating preferred stock.
The issue will have a par value of $65 per share with a dividend rate of 6%. The issue will be
sold to investors for $68 per share, and issuance costs will be $4 per share. The cost of
preferred stock to Acme is:
5.42%.
5.74%.
6.00%.
6.09%.
Option D is correct
The cost of the preferred stock is based on the amount that they will pay out as dividends and
the amount that is received from the sale. The company will receive only $64 per share, but
the dividend that they will pay is 6% of the $65 par value, or $3.90. So the cost of the
preferred shares is $3.90 ÷ $64, or 6.09%.

Option A is incorrect
This answer has added the issue costs to determine the proceeds from the sale rather than
subtracting them.

Option B is incorrect
This answer does not subtract the issue costs from the sales price to calculate the proceeds
from the sale of the securities.

Option C is incorrect
This is the stated rate of dividends that the preferred stock will pay. The cost needs to be
calculated using the dividends to be paid and the proceeds from the sale.
Question - CMA212191
A company has the following target capital structure and costs:
Proportion of Cost of

capital structure capital

Debt 10%
30%
Common stock 12%
60%
Preferred stock 10%
10%

The company's marginal tax rate is 30%. What is the company's weighted-average cost of
capital?
7.84%
9.30%
10.30%
11.20%
Option C is correct.
Weighted Average Cost of Capital (WACC) = Firm's effective cost of capital taking into
account the portion of its capital that was obtained by debt, preferred stock, and common
stock. Firstly, determine the weighted cost of debt and equity:
Weighted Cost of Debt = Weight of Debt x [cost of debt x (1 - Tax Rate)]
= 30% x [10% x (1-30%)] = 2.1%
Weighted Cost of Equity = Weight of Equity x Cost of equity
= 60% x 12% = 7.2%.
Weighted Cost of Preferred Stock = Weight of Preferred Stock x Cost of preferred stock
= 10% x 10% = 1%.
Therefore, WACC = 10.3% (2.1% + 7.2% + 1%).

Options A is incorrect
after tax cost of equity and preferred stock is calculated. However, the cost of equity and
preferred stock are not deductible and therefore should not be considered. They are not tax
deductible expense {7.84% = 30% x [10% x (1-30%)] + 60% x [12% x (1-30%)] + 10%
x [10% x (1-30%)]}.

Option B is incorrect
it does not consider cost of preferred Stock (9.3% = 2.1% + 7.2%).

Option D is incorrect
it does not consider after tax cost of debt [11.2% = (30% x 10%) + (60% x 12%) + (10%
x 10%)].
Question - CMA212314
Which of following will least likely affect exchange rate risk?
Market beta.
Inflation rates.
Monetary policy.
Interest rates.
Option A is correct
The risk of fluctuations in the relative value of foreign currencies is referred to as exchange
rate risk. Different factors which affect the exchange rate risk include inflation, interest rates,
monetary policy, fiscal policy etc. Market beta is a theoretical value and it is one. It will least
likely affect the exchange rate risk.

Option B is incorrect
Inflation rates can have a significant impact on exchange rate risk. Higher inflation rates in
one country may lead to depreciation of that country's currency, affecting the exchange rate.

Option C is incorrect
Monetary policy decisions, such as changes in interest rates and money supply, can influence
exchange rates. Central banks use monetary policy as a tool to manage their currency's value.

Option D is incorrect
Interest rates play a crucial role in exchange rate movements. Higher interest rates in a
country may attract foreign capital and increase demand for its currency, leading to
appreciation. Conversely, lower interest rates can lead to depreciation.
Question - CMA212224
Which of the following is an assumption of yield to maturity?
It assumes that all the interest payments from the bond are reinvested at the current yield until
the bond’s maturity date.
It assumes that all the interest payments from the bond are reinvested at YTM until the
bond’s maturity date.
It assumes that all the interest payments from the bond are reinvested at coupon rate until the
bond’s maturity date.
It assumes that all the interest payments from the bond are reinvested at risk-free rate until the
bond’s maturity date.
Option B is correct.
Yield to maturity (YTM) assumes that all the interest payments from the bond are reinvested
at a constant interest rate (that is, YTM rate) until the bond’s maturity date.

Option A is incorrect
This option is not accurate. Yield to maturity (YTM) assumes that all the interest payments
are reinvested at the YTM rate, not the "current yield." The YTM rate is the rate that equates
the present value of the bond's cash flows to its market price..

Option C is incorrect
This option is not accurate. YTM does not assume that interest payments are reinvested at the
coupon rate. Instead, it assumes that they are reinvested at the YTM rate, which may be
different from the coupon rate.

Option D is incorrect
his option is not accurate. YTM is specifically based on the assumption that interest payments
are reinvested at the YTM rate of the bond itself, not the risk-free rate. The risk-free rate may
be used in other financial calculations, but it is not the basis for YTM calculations.
Question - CMA212359
The owner of a call option wants to know the respective effects on the call’s market price of a
decrease in the underlying stock's price volatility and a decrease in the call's time to
expiration. The respective effects on the call’s price are which of the following?

Decrease in Stock-Return Volatility Decrease in Call's Time to Expiration

I. Decrease Decrease
II. Decrease Increase
III. Increase Decrease
IV. Increase Increase
I.IIIIIIV
Option A is correct
A decrease in the stock's volatility and a decrease in the call's time to expiration will both
cause the call's market price to decrease. The market price of any option consists of its
intrinsic value and its extrinsic value. The intrinsic value of a call option is the amount by
which the underlying stock’s current market price is higher than the call option’s strike price,
if any. The market value of a call option that has not expired will change every time the
underlying market price of the stock changes until the underlying market price of the stock
falls below the strike price of the call option, at which point the intrinsic value of the call
option will become zero. The other part of the market price of a call option is its extrinsic
value, and that is the portion of the call option’s market value that this question is referring
to. The call option’s extrinsic value is affected by both the volatility of the underlying stock
and the time to expiration of the call option. If the market price movements of the underlying
stock are extremely volatile (down 15% in one day, then up 20% the next, for example), the
possibility of an outsize gain for the call option holder is increased, the extrinsic value of the
call option will increase, and the market price of the call option will increase). However, if
the volatility of the underlying stock decreases, the possibility of an outsize gain for the
option holder also decreases, and the extrinsic value and the market price of the call option
will decrease. The longer the time to expiration of a call option, the more time there is for a
favorable price movement in the underlying stock to take place and the greater will be the
extrinsic value of the option. Therefore, as the time to expiration decreases, the extrinsic
value of the call option decreases and the market price of the call option decreases because
there is less time for a favorable price movement in the stock to take place. Just before the
call option’s expiration, its market value will consist of only its intrinsic value (the amount by
which the strike price of the option is below the market price of the stock, if any) because its
extrinsic value will be zero.

Option B is incorrect
A decrease in the call option's time to expiration will not cause the option's market price to
increase. As the time to expiration of a call option decreases, the market price of the call
option decreases because there is less time for a favorable price movement in the stock to
take place.

Option C is incorrect
A decrease in the stock's volatility will not cause the call option's market price to increase. If
the market price movements of the underlying stock are extremely volatile (down 15% in one
day, then up 20% the next, for example), the possibility of an outsize gain for the call option
holder is increased. However, if the volatility of the underlying stock decreases, the
possibility of an outsize gain for the option holder also decreases, and the market price of the
call option will decrease.

Option D is incorrect
Neither a decrease in the stock's volatility nor a decrease in the call option's time to expiration
will cause the call's market price to increase. If the market price movements of the underlying
stock are extremely volatile (down 15% in one day, then up 20% the next, for example), the
possibility of an outsize gain for the call option holder is increased. However, if the volatility
of the underlying stock decreases, the possibility of an outsize gain for the option holder also
decreases, and the market price of the call option will decrease. As the time to expiration of a
call option decreases, the market price of the call option decreases because there is less time
for a favorable price movement in the stock to take place.
Question - CMA212273
As interest rates increase the writer of a bond call option stands to make:
Limited gains.
Unlimited losses.
Limited losses.
Unlimited gains.
Option A is correct.
A bond call option is an option to buy a bond on or before a certain date in future for a
predetermined price. Writing an option refers to the selling the call option to the option
buyer. When writing a call option, the seller agrees to deliver the specified amount of
underlying shares to a buyer if the buyer so opts for it at the strike price in the contract for a
specific fee / commission.
Interest rates and bond prices are inversely related. When interest rate for new bonds
increase, the demand of new bonds would increase, which would lead to the need to sell the
older bonds (that were issued in the past and is now being traded in the market) at lesser
price, thus the price of the old bonds would decrease. Similarly, if interest rates for new
bonds fall, the price of old bonds would increase due to the increase in demand for the old
bonds.
Generally, one buys a call option on the bond if one believes that interest rates will fall,
causing an increase in bond prices. To enter into a call option, the buyer of the call option
pays a fee / commission to the writer of the option. If the interest rates increase, the bond
prices would decrease (it would be lesser than the strike price in the contract) and the buyer
of the option would not exercise the option. The writer of the option would be left with a gain
made on the fee / commission received at the time of writing the call option.

Option B is incorrect
This option is incorrect because an increase in interest rates would earn gains and not losses
for a writer of a bond.

Option C is incorrect
This option is incorrect because an increase in interest rates would earn gains and not losses
for a writer of a bond.

Option D is incorrect
This option is incorrect because gain would be limited to the fee received by the writer.
Question - CMA212249
Equity financing will be considered better than debt financing because of the fact that:
Issuance cost is lesser than that of debt.
Dividend is tax deductible.
It is more attractive for investors because of potential for higher returns.
It is less expensive than debt.
Option C is correct.
Investing in equity will have a higher potential of return for the investor because equity
investing has a more upside as compared to debt financing.

Option A is incorrect
This option is incorrect because issuance cost of equity is more than debt issuance cost.

Option B is incorrect
This option is incorrect because dividend is not tax deductible, but interest on debt is tax
deductible.

Option D is incorrect
This option is incorrect because debt financing is less expensive than equity financing.
Question - PART22111141
The Hatch Sausage Company is projecting an annual growth rate for the foreseeable future of
9%. The most recent dividend paid was $3.00 per share. New common stock can be issued at
$36 per share. Using the constant growth model, what is the approximate cost of capital for
retained earnings?
9.08%.
17.33%.
18.08%
19.88%.
Option C is correct
The cost of capital for Hatch’s retained earnings is equal to the required rate of return on the
company’s common stock or 18.08% as calculated below using the constant growth model.
Required rate of return = (Dividend next period ÷ Value) + Growth rate
= [($3 x 1.09) ÷ $36] + .09
= .0908 + .09
= 18.08%

Option A is incorrect
9.08%: This answer is incorrect because it is significantly lower than the correct answer. The
cost of capital for retained earnings is calculated to be 18.08% as explained in the previous
response, not 9.08%.

Option B is incorrect
17.33%: This answer is also incorrect. The cost of capital for retained earnings is not 17.33%,
as calculated using the Gordon Growth Model.

Option C is incorrect
19.88%: This answer is incorrect because it does not match the calculated cost of capital for
retained earnings, which is 18.08%. The provided data and calculations support the 18.08%
figure, not 19.88%.
Question - CMA212321The following capital structure information is available for Pixel
Inc. • Pixel Inc. has a target capital structure of 40% debt and 60% equity. • Six years ago, the
company issued 10,000 10-year bonds which pay a 5% coupon rate (annual payout) for
$859.53. The bonds mature in 4 years. The current market rate for bonds with the same term
and risk characteristics is 7%. The market price of the bonds currently is $932.27. • The
company’s beta is 1.25. • The risk free rate is 2.75% and the market risk premium is 5.5%. •
The company is a constant growth firm that paid an annual dividend last year of $1.30. The
dividend has an expected growth rate of 3%. • The market price of the stock is $20.00 per
share. • The company has 500,000 shares outstanding. • The company’s marginal tax rate is
25%. Pixel’s current weighted average cost of capital is closest
to:7.34%7.60%7.40%7.92%Question - PART222001A company can finance an equipment
purchase through a loan. Alternatively, it often can obtain the same equipment through a
lease arrangement. A factor that would not be considered when comparing the lease financing
with the loan financing is:Whether the lessor has a higher cost of capital than the
lessee.Whether the property category has a history of rapid obsolescence.The capacity of the
equipment.Whether the lessor and lessee have different tax reduction opportunities.Question
- PART222007Which one of the following statements concerning debt instruments is
correct?A 25-year bond with a coupon rate of 9% and one year to maturity has more interest
rate risk than a 10-year bond with a 9% coupon issued by the same firm with one year to
maturity.A bond with one year to maturity would have more interest rate risk than a bond
with 15 years to maturity.For long-term bonds, price sensitivity to a given change in interest
rates is greater the longer the maturity of the bond.The coupon rate and yield of an
outstanding long-term bond will change over time as economic factors change.Question -
PART22111139
Cox Company has sold 1,000 shares of $100 par, 8% preferred stock at an issue price of $92
per share. Stock issue costs were $5 per share. Cox pays taxes at the rate of 40%. What is
Cox’s cost of preferred stock capital?
8.00%
8.25%
8.70%
9.20%.
Option D is correct
Cox’s cost of preferred stock capital is 9.20% as shown below.
Cost of preferred stock = Stated annual dividend ÷ (Market price – cost of issue)
= $8 ÷ ($92 - $5)
= 9.20%

Option A is incorrect
8.00%: This option is incorrect because it doesn't take into account the stock issue costs,
which should be subtracted from the market price to determine the cost of preferred stock.

Option B is incorrect
8.25%: This option is incorrect because it also doesn't account for the stock issue costs. To
calculate the cost of preferred stock, you need to subtract these costs from the market price.

Option C is incorrect
8.70%: This option is incorrect for the same reason as the previous options. It doesn't
consider the stock issue costs, which should be subtracted from the market price when
calculating the cost of preferred stock.
Question - CMA212231
When a company repurchases its shares:
The investors will consider it as a positive signal that the management believes the stock is
overvalued.
The earnings per share will increase.
The dividend per share will increase.
The number of outstanding shares will increase.
Option B is correct.
The formula for earnings per share is: (Net income - Dividends on preferred stock) / Average
outstanding shares. When a company repurchases it’s shares the number of shares
outstanding will decrease; in other words the number of shares being traded will decrease.
Thus, the earnings per share will increase.

Option A is incorrect
This option is incorrect because when a company repurchases its shares the investors will
consider it as a positive signal that the management believes the stock is undervalued. This is
because the management will have material non-public information about the business.

Option C is incorrect
This option is incorrect because dividends are not affected by share repurchase.

Option D is incorrect
This option is incorrect because the number of shares outstanding will decrease.
Question - CMA212230
Which of the following is the mathematical expression of the cost of debt?
Cost of debt = (Interest expense – Tax deduction for interest) / Face value of debt.
Cost of debt = Current Yield × (1 - Effective tax rate).
Cost of debt = Current Yield × (1 + Effective tax rate).
Cost of debt = (Interest expense – Tax deduction for interest) / Carrying value of debt.
Option D is correct.
Cost of debt = (Interest expense – Tax deduction for interest) / Carrying value of debt.
Cost of debt = Yield to maturity × (1 - Effective tax rate).
Option A is incorrect
This option is not the correct mathematical expression for the cost of debt. It calculates the
cost of debt based on the face value of the debt, which does not account for the time value of
money. The cost of debt is usually determined based on the carrying value or present value of
the debt, as it considers the actual cash flows involved.

Option B is incorrect
This option is not the correct mathematical expression for the cost of debt. It combines the
current yield with the effective tax rate, but it doesn't provide an accurate calculation of the
cost of debt. The cost of debt should be based on the actual interest payments, not just the
yield.

Option C is incorrect
This option is not the correct mathematical expression for the cost of debt. It also combines
the current yield with the effective tax rate, but it does not represent the actual cost of debt
accurately. The cost of debt calculation should consider both the interest expense and the tax
implications, as shown in option D.
Question - PART27111638
Recently, the CFO of a mid-sized U.S. manufacturing company stated that she believed her
company’s stock to be 15% undervalued. Because the company is experiencing good sales
growth, the CFO believes the company’s stock is poised to experience substantial gains in the
coming year.
The company paid a dividend of $1.50 per share last year, and dividends are expected to
grow by 5% per year for the foreseeable future. The company’s investors require a minimum
return of 10%. If the current stock price is equal to the expected stock price based on the
dividend growth model, what stock price does the CFO believe is appropriate, since she
believes the company’s stock to be 15% undervalued?
$37.06 per share.
$36.23 per share.
$27.40 per share.
$31.50 per share.
Option A is correct
The dividend growth model formula is:
Po = D1
R–G
Where:

P0 = Common stock price today

D1 = The next annual dividend to be paid (last year’s dividend multiplied by 1 + the annual
expected annual % growth in dividends)
R = The investors’ required rate of return
G = The annual expected % growth in dividends
According to the dividend growth model, the market price should be $31.50 per share [(1.50
× 1.05) / (0.10 − 0.05)].
If the current stock price is equal to the expected stock price, and if the CFO believes the
share price is 15% undervalued, then the CFO believes the current stock price should be
approximately $37.06 per share [31.50 ÷ (1 − 0.15)].

Option B is incorrect
As per the calculation, $37.06 would be the appropriate stock price.

Option C is incorrect
Option C: $27.40 per share is not the correct answer. The correct answer is higher than this
value.

Option D is incorrect
Option D: $31.50 per share is not the correct answer. This is the value calculated using the
dividend growth model, but the question is asking for the stock price that the CFO believes is
appropriate considering the stock is 15% undervalued. The correct answer is $37.06 per
share.

Question - CMA212222
Current yield is defined as the:
Estimated rate of return if the bond is held to maturity.
Ratio of the yield to maturity to the current market price.
Ratio of the coupon rate to the current market price.
Ratio of the current interest rate to the bond’s fair value.
Option C is correct.
Current yield is the fixed interest payment divided by the current market price of the bond.
Thus, it is the ratio of the coupon rate to the current market price of the bond.

Option A is incorrect
This option is wrong because it is the definition of yield to maturity.

Option B is incorrect
This option is wrong because it is irrelevant to the question

Option D is incorrect
This option is wrong because it is irrelevant to the question
Question - PART222015Which one of the following entities is most likely to assist investors
in assessing the default risk of a specific corporate bond?Investment banks.Bond
dealers.Credit rating agencies.Brokerage firms.
Option C is correct
Credit rating agencies assist investors in assessing the default risk of a specific corporate
bond.

Option A is incorrect:
Investment banks do not assist investors in assessing the default risk of a specific

Option B is incorrect:
Bond dealers do not assist investors in assessing the default risk of a specific

Option D is incorrect:
Brokerage firms do not assist investors in assessing the default risk of a specific corporate
bond.
Question - CMA212355On October 12, an investor goes short on a naked call option for 100
shares of CDM Corporation common stock with a strike price of $70.00, expiring on
December 15, at an option premium of $3.00 per share. The market price of CDM stock on
October 12 is $68.00. On December 15, the market price of CDM stock is $65.00. How much
has the investor gained or lost on the option transaction? Disregard any brokerage
commissions involved.Loss of $300Loss of $200Gain of $300Gain of $200
Option C is correct
The short party to an option is the one who sells the option and who must comply if the buyer
of the option chooses to exercise it. Here, the short party sold a call option to buy the stock at
$70.00. If the option is exercised, the option seller will be forced to sell the underlying stock
to the option buyer at $70.00 a share. The option is a naked call option to the option seller,
meaning the seller of the option does not already own the underlying stock. Therefore, if the
call option is exercised, the option seller will need to purchase the stock at the market price in
order to sell it at the option price of $70.00. However, on the option’s expiration date, the
market price of CDM stock is $65.00. Because the market price is lower than the strike price,
the buyer of the option lets the option expire because the stock can be purchased at the
market price for less than the option price. The seller of the option does not need to purchase
the stock in order to sell it and gets to keep the premium of $3.00 per share received for
selling the option. The seller of the naked call option has a gain of $300.00.

Option A is incorrect
This is the option premium paid by the purchaser of the call option (the long party). This
would be the loss sustained by the long party to an option transaction with these
characteristics.

Option B is incorrect
This would be the loss sustained by the short party to a put option transaction (the seller of an
option to sell the underlying stock) with these characteristics.

Option D is incorrect
This is the gain that would be earned by the long party (the option buyer) to a put option
transaction with these characteristics.
Question - CMA212280
A prudent investor is interested in buying a listed stock at a future date, but anticipates that
the prices will rise in future. Which of the following hedging options will protect the investor
from the increased prices of the stock?
I. Enter into a future contract in long position.
II. Enter into a future contract in short position.
III. Buy a put option on that stock.
IV. Buy a call option on that stock.
I or IV only.
II or III only.
II or IV only.
I or III only
Option A is correct.
Entering into a future contract in a long position would lock the price of the stock which the
investor wants to buy, which would be lower than the anticipated increase in price and thus
protect the investor from increased price of stock in future. Also, buying a call option would
give an option to the buyer (i.e. the investor) to buy the stock at the predetermined price when
the prices have increased thus also protecting the investor from increased price of stock in
future.

Option B is incorrect
This option is incorrect because it includes II or III. Entering into a future contract in short
position will hedge against the future decline in stock price and also buying a put option on
that stock will also be effective in hedging in case of anticipated decline in price.

Option C is incorrect
This option is incorrect because it includes II or III. Entering into a future contract in short
position will hedge against the future decline in stock price and also buying a put option on
that stock will also be effective in hedging in case of anticipated decline in price.

Option D is incorrect
This option is incorrect because it includes II or III. Entering into a future contract in short
position will hedge against the future decline in stock price and also buying a put option on
that stock will also be effective in hedging in case of anticipated decline in price.
Question - PART27111631
Colt, Inc. is planning to use retained earnings to finance anticipated capital expenditures. The
beta coefficient for Colt\'s stock is 1.15, the risk-free rate of interest is 8.5%, and the market
return is estimated at 12.4%. If a new issue of common stock were used in this model, the
flotation costs would be 7%. By using the Capital Asset Pricing Model (CAPM) equation:
R = RF + β(RM - RF)
The cost of using retained earnings to finance the capital expenditures is:
13.96%.
12.99%.
12.40%.
14.71%.
Option B is correct
The information on flotation costs in the question is not relevant to the calculation that needs
to be done. All we need to do is put the information into the CAPM formula that is given in
the problem. This gives us: 8.5% + [1.15 × (12.4% − 8.5%)] = 12.99% as the cost of retained
earnings.

Option A is incorrect
This is the cost of retained earnings divided by 100% minus the flotation cost of 7%. The
information on flotation costs is not relevant to the calculation that needs to be done. Using
retained earnings does not involve issuing new equity and thus no flotation costs are incurred.

Option C is incorrect
This is the market rate of interest, not the cost of the retained earnings.

Option D is incorrect
This answer results from using the flotation cost as RF in the Capital Asset Pricing Model.
The information on flotation in the question is not relevant to the calculation that needs to be
done
Question - CMA212351On January 10, an investor goes long on a call option for 100 shares
of Sander Corporation common stock with a strike price of $150.00, expiring on March 21, at
an option premium of $21.50 per share. The market price of Sander stock on January 10 is
$170.00. On March 21, the market price of Sander stock is $145.00. How much has the
investor gained or lost on the option transaction? Disregard any brokerage commissions
involved.Loss of $2,150Gain of $2,150Loss of $1,650Gain of $350
Option A is correct
The long party to an option is the one who purchases the option and who has the right but not
the obligation to exercise it. Here, the long party purchased the call option to buy the stock at
$150.00. On the expiration date, the stock’s market price is $145.00. The purchaser of the
option will let the option expire rather than buying the stock for a price greater than the
market price. So the option buyer’s loss is the premium paid for the option, which is $21.50
per share, multiplied by 100, or $2,150 in total.

Option B is incorrect
This is the gain the short party, the seller of the option, would have earned on a transaction
with these characteristics because the buyer of the option would not exercise it and the seller
would get to keep the premium received for the sale.

Option C is incorrect
This is the strike price of the 100 shares ($15,000) minus the premium for the option ($2,150)
minus the market price of the 100 shares on the expiration date ($14,500).

Option D is incorrect
This is the market price of the 100 shares on January 10 ($17,000) minus the market price of
the 100 shares on the expiration date ($14,500) minus the option premium ($2,150).
Question - PART27111595
The market price of Mulva Corporation's common stock is $60 per share, and each share
gives its owner one subscription right. Four rights are required to purchase an additional
share of common stock at the subscription price of $54 per share.
What is the theoretical value of one share of Mulva common stock when it goes "ex-rights"?
$54.00
$58.50
$58.80
$59.04
Option C is correct.
In order to determine the value of one share after it is selling ex-rights, we need to subtract
the value of the right from the price of the share when it was selling rights-on.
The formula for determining the value of one stock right when the price of the stock is rights-
on is
Vr = P0 − Pn
r+1

Where: P = The market value of one share with the rights still attached
o
P = The subscription (sales) price of a share
n
r = The number of rights needed to buy one new share
V = The value of one right when the stock is selling rights-on
r
Putting the information from the question into the formula, we get [($60 − $54) / (4 + 1)].
Solving the formula, we get $1.20 as the value of the right when the share is selling rights-on.
Subtracting this $1.20 from the rights-on price, we get the value of the share when it is selling
ex-rights. So, the value of the share ex-rights is $58.80 ($60 − $1.20).
Option A is incorrect
This is the subscription price.

Option B is incorrect
This was calculated using $1.50 as the value of a right while it is attached to the share. This
$1.50 value of a right while it is attached to the share was calculated incorrectly as the
difference between the market price of the stock and the subscription price divided by the
number of rights required to purchase one share. This is not the correct way to calculate the
value of a right while it is attached to the share. The difference between the market price of
the stock and the subscription price should be divided by the number of rights required to
purchase one share + 1.

Option D is incorrect
This is not the right answer
Question - PART22111133
Which of the following, when considered individually, would generally have the effect of
increasing a firm’s cost of capital?
The firm reduces its operating leverage.
II. The corporate tax rate is increased.
III. The firm pays off its only outstanding debt.
IV. The Treasury Bond yield increases.
I and III
II and IV
III and IV
I, III and IV
Option C is correct
If a firm pays off its only outstanding debt, the cost of capital is likely to increase because the
cost of equity is greater than the cost of debt. If the Treasury Bond yield increases, the overall
required rate of return will likely increase causing an increase in the cost of capital.

Option A is incorrect

The firm pays off its only outstanding debt: Paying off its only outstanding debt would
generally increase the firm's cost of capital. This is because the cost of debt is usually lower
than the cost of equity. When the firm pays off its debt, it loses the tax benefits associated
with the interest payments (interest expense is tax-deductible). As a result, the overall cost of
capital increases because equity becomes a larger proportion of the firm's capital structure,
and equity is typically more expensive than debt.So, options I and II would generally have
the effect of decreasing the firm's cost of capital, while options III and IV would generally
have the effect of increasing it.

Option B is incorrect
The Treasury Bond yield increases: An increase in the Treasury Bond yield would generally
have the effect of increasing the firm's cost of capital. Treasury Bonds are often used as a
risk-free benchmark for determining the risk-free rate in the cost of capital calculations.
When the Treasury Bond yield increases, it implies that the risk-free rate has gone up. As a
result, the required return on all investments, including those of the firm, tends to increase.
This means that the cost of capital, which reflects the overall required return, also
increases.So, options I and II would generally have the effect of decreasing the firm's cost of
capital, while options III and IV would generally have the effect of increasing it.

Option D is incorrect
The firm pays off its only outstanding debt: Paying off its only outstanding debt would
generally increase the firm's cost of capital. This is because the cost of debt is usually lower
than the cost of equity. When the firm pays off its debt, it loses the tax benefits associated
with the interest payments (interest expense is tax-deductible). As a result, the overall cost of
capital increases because equity becomes a larger proportion of the firm's capital structure,
and equity is typically more expensive than debt.So, options I and II would generally have
the effect of decreasing the firm's cost of capital, while options III and IV would generally
have the effect of increasing it.
Question - PART22111133
Which of the following, when considered individually, would generally have the effect of
increasing a firm’s cost of capital?
The firm reduces its operating leverage.
II. The corporate tax rate is increased.
III. The firm pays off its only outstanding debt.
IV. The Treasury Bond yield increases.
I and III
II and IV
III and IV
I, III and IV
Option C is correct
If a firm pays off its only outstanding debt, the cost of capital is likely to increase because the
cost of equity is greater than the cost of debt. If the Treasury Bond yield increases, the overall
required rate of return will likely increase causing an increase in the cost of capital.

Option A is incorrect

The firm pays off its only outstanding debt: Paying off its only outstanding debt would
generally increase the firm's cost of capital. This is because the cost of debt is usually lower
than the cost of equity. When the firm pays off its debt, it loses the tax benefits associated
with the interest payments (interest expense is tax-deductible). As a result, the overall cost of
capital increases because equity becomes a larger proportion of the firm's capital structure,
and equity is typically more expensive than debt.So, options I and II would generally have
the effect of decreasing the firm's cost of capital, while options III and IV would generally
have the effect of increasing it.

Option B is incorrect
The Treasury Bond yield increases: An increase in the Treasury Bond yield would generally
have the effect of increasing the firm's cost of capital. Treasury Bonds are often used as a
risk-free benchmark for determining the risk-free rate in the cost of capital calculations.
When the Treasury Bond yield increases, it implies that the risk-free rate has gone up. As a
result, the required return on all investments, including those of the firm, tends to increase.
This means that the cost of capital, which reflects the overall required return, also
increases.So, options I and II would generally have the effect of decreasing the firm's cost of
capital, while options III and IV would generally have the effect of increasing it.
Option D is incorrect
The firm pays off its only outstanding debt: Paying off its only outstanding debt would
generally increase the firm's cost of capital. This is because the cost of debt is usually lower
than the cost of equity. When the firm pays off its debt, it loses the tax benefits associated
with the interest payments (interest expense is tax-deductible). As a result, the overall cost of
capital increases because equity becomes a larger proportion of the firm's capital structure,
and equity is typically more expensive than debt.So, options I and II would generally have
the effect of decreasing the firm's cost of capital, while options III and IV would generally
have the effect of increasing it.
Question - CMA212268
Whether recognized or unrecognized in an entity's financial statements, disclosure of the fair
values of the entity's financial instruments is required when
It is practicable to estimate those values.
The entity maintains accurate cost records.
Aggregated fair values are material to the entity.
Individual fair values are material to the entity.
Option A is correct.
Where it is practicable to estimate the fair values, entities must disclose the same in respect of
financial instruments along with their carrying amounts showing clearly whether the amounts
represent assets or liabilities. This is required whether this fair value is recognized or
unrecognized in the financial statements. Where it is not practicable to estimate the fair value,
the entity should disclose information pertinent to estimating the fair value and reasons why it
is not practicable to estimate fair value.

Option B is incorrect
This option is incorrect because accurate cost records are not pertinent in determining the fair
value and fair value should be disclosed even if accurate cost records are not maintained.

Option C is incorrect
This option is incorrect because fair values must be disclosed even if the individual and /or
aggregate fair values are not material to the company.

Option D is incorrect
This option is incorrect because fair values must be disclosed even if the individual and /or
aggregate fair values are not material to the company.
Question - PART22111130
All of the following are characteristics of preferred stock except that
it may be callable at the option of the corporation
it may be converted into common stock
its dividends are tax deductible to the issuer
it usually has no voting rights
Option C is correct.
Unlike interest expense, dividends are not tax-deductible to the issuer.

Option A is incorrect
Preferred stock may be callable at the option of the corporation, allowing the issuer to redeem
the shares under certain conditions.

Option B is incorrect
Preferred stock may be converted into common stock, giving shareholders the option to
exchange their preferred shares for common shares.

Option D is incorrect
Preferred stock usually has no voting rights, meaning preferred shareholders typically do not
have voting power in the company's decision-making processes.
Question - CMA212255
Market value of stocks of a company reflects:
Investor’s expected dividend growth.
Investors’ expected earnings growth.
Likelihood of takeover.
All of the above.
Option D is correct.
All of the given factors are reflected by the market value of stocks of a company based on the
following:
Investor’s expected dividend growth and earnings growth: Market value of stocks of the
company reflects financial health of a company. Company's stock price reflects investor
perception of its ability to earn and grow its profits in the future. Thus, market value of stocks
of a company can be said to reflect the investors’ expected dividend growth and expected
earnings growth.
Likelihood of takeover: When a company's stock price falls, the likelihood of a takeover
increases as the company's market value is cheaper. Thus, market value of stocks of a
company can be said to reflect likelihood of takeover.

Option A is incorrect
based on the above explanation. The market value of stocks reflects a combination of these
and other factors that investors consider when making investment decisions

Option B is incorrect
based on the above explanation. The market value of stocks reflects a combination of these
and other factors that investors consider when making investment decisions

Option C is incorrect
based on the above explanation. The market value of stocks reflects a combination of these
and other factors that investors consider when making investment decisions
Question - CMA212356On July 14, an investor goes short on a put option for 100 shares of
OSC, Inc. common stock with a strike price of $9.00, expiring on August 16, at an option
premium of $1.50 per share. The market price of OSC stock on July 14 is $8.00. On August
16, the market price of OSC stock is $11.00. How much has the investor gained or lost on the
option transaction? Disregard any brokerage commissions involved.Gain of $200Loss of
$50Loss of $150Gain of $150
Option D is correct
The short party to an option is the one who sells the option and who must comply if the buyer
of the option chooses to exercise it.
Here, the short party sold a put option, giving the buyer of the put the option the right to sell
the underlying stock for $9.00.
However, the market price of the stock on the expiration date is greater than $9.00, so the
buyer of the put option will not exercise the option to sell stock for $9.00, a share that could
instead be sold at the market price of $11.00 a share.
Therefore, the buyer of the put option will let the option expire, and the seller of the option
gets to keep the premium of $1.50 per share received for having sold the option.
Thus, for 100 shares, the option seller’s gain is $150.00.

Option A is incorrect
This is the market price of 100 shares on the option's expiration date ($1,100.00) minus the
strike price multiplied by 100 ($900.00).

Option B is incorrect
This is the loss that would be sustained by the short party to a call option transaction with the
same characteristics.

Option C is incorrect
This is the loss that would be sustained by the long party to a put option transaction (the
buyer of the option) with the same characteristics.
Question - CMA212263
DQZ Telecom is considering a project for the coming year that will cost $50 million. DQZ
plans to use the following combination of debt and equity to finance the investment.

 Issue $15 million of 20-year bonds at a price of 101, with a coupon rate of 8%, and
flotation costs of 2% of par.
 Use $35 million of funds generated from earnings.

The equity market is expected to earn 12%. US Treasury bonds are currently yielding 5%.
The beta coefficient for DQZ is estimated to be 0.60. DQZ is subject to an effective corporate
income tax rate of 40%.
The Capital Asset Pricing Model (CAPM) computes the expected return on a security by
adding the risk-free rate of return to the incremental yield of the expected market return that
is adjusted by the company’s beta. Compute DQZ’s expected rate of return.
9.20%
12.20%
7.20%
12.00%
Option A is correct.
The Capital Asset Pricing Model cost of equity = Risk free rate of return + Beta x (Expected
market rate - Risk free rate) = 5% + 0.60 x (12% - 5%) = 9.20%.

Option B is incorrect
This option is incorrect because the beta is multiplied with the expected market rate, without
subtracting the risk free rate from it.

Option C is incorrect
This option is incorrect because the risk free rate of return is not considered in the entire
formula. The beta is multiplied only with the expected market rate.

Option D is incorrect
This option is incorrect because the beta is not considered in the calculation.
Question - PART27111610
Firm ABC recently paid a dividend of $1.00 to its common shareholders. The dividends are
expected to grow by 3% every year and the firm is expected to pay cash dividends every year
to infinity. If the required rate of return is 10%, what will be the fair value of ABC's common
stock?
$10.00
$10.30.
$14.28.
$14.71.
Option D is correct
The value of a common share is calculated as the next dividend divided by the required rate
of return minus the expected growth rate. The question states that the last dividend paid was
$1.00 and the rate of growth of dividends is expected to be 3% per year. Therefore, the next
dividend will be $1.00 × 1.03, or $1.03. Use the Dividend Growth Model to find the fair
value of a share of stock, as follows.
P0 = Next Annual Dividend / (Investors’ Required Rate of Return – Annual Future Growth
Rate of the Dividend)
P0 = $1.03 / (0.10 - 0.03) = $14.71

Option A is incorrect.
Option A is incorrect. $10.00 is not the correct fair value for ABC's common stock. The fair
value is $14.71.

Option B is incorrect.
Option B is incorrect. $10.30 is not the correct fair value for ABC's common stock. The fair
value is $14.71.

Option C is incorrect.
Option C is incorrect. $14.28 is not the correct fair value for ABC's common stock. The fair
value is $14.71.

Question - CMA212218
In callable bonds:
The issuer has an obligation to repay the bonds before the maturity date.
The bondholder has the right to demand the early payment of the principal.
The issuer has an option to repay the bonds before the maturity date.
The bondholder has the obligation to demand the early payment of the principal.
Option C is correct.
In callable bonds, the issuer has an option to repay the bonds before the maturity date.

Option A is incorrect
This option is wrong because The issuers do not have any obligation.

Option B is incorrect
This option is wrong because This represents the definition of a puttable bond.

Option D is incorrect
This option is wrong because because a callable bond is issued by the bond issuer and it gives
them right not obligation.
Question - CMA212259
Which of the following is not a characteristic of dividend which is paid to the stock holders?
It is not tax deductible.
Entity has no specific obligation to pay dividends.
If dividend is not paid for a particular year, it is paid along with the arrears when declared.
Dividend yield affects the entity’s cost of equity.
Option C is correct.
Entity has no specific obligation to declare dividends every year. Dividend is paid with
arrears only for cumulative preference shareholders, not for other classes of common stock or
preference stock.

Option A is incorrect
This option is incorrect because dividend is actually not tax deductible as it is paid out of
earnings after interest and tax.

Option B is incorrect
This option is incorrect because entity has no specific obligation to pay dividends. It is
usually paid if the company has excess earnings after interest and taxes.

Option D is incorrect
This option is incorrect because dividend yield actually affects the entity’s cost of equity. As
per dividend yield plus growth rate model, cost of equity is the sum of dividend yield plus
growth rate of earnings.
Question - PART222004Price Publishing is considering a change in its credit terms from
n/30 to 2/10, n/30. The company's budgeted sales for the coming year are $24,000,000, of
which 90% are expected to be made on credit. If the new credit terms are adopted, Price
estimates that discounts will be taken on 50% of the credit sales; however, credit losses will
be unchanged. The new credit terms will result in expected discounts taken in the coming
year of$480,000.$240,000.$432,000.$216,000.

Option D is correct
Of the $24,000,000 of sales, 90% are expected to be credit sales. This is $21,600,000 of
expected credit sales. They expect that one-half of the customers will take the discount. Half
of the customers is $10,800,000 and the discount is 2%. 2% of the receivables for which the
discount will be used is $216,000.

Option A is incorrect:
This is what the discount would be if it were applied to all of the sales. See the correct answer
for a complete explanation.

Option B is incorrect:
This is what the discount would be if it were applied to one-half of all the sales. The discount
would be applied only to one-half of the credit sales. See the correct answer for a complete
explanation.

Option C is incorrect:
This is what the discount would be if it were applied to all of the credit sales. See the correct
answer for a complete explanation.
Question - CMA212331The long party to a futures contract isthe party who has the choice to
exercise or not exercise the contract.the party who has no choice but who must comply with
the will of the other party to the contract.the party who is committing to buy the underlying
asset as a protection against a possible increasing price of the actual asset.the party who is
committing to sell the underlying asset as a protection against a possible declining price of
the actual asset.
Option C is correct
The party to a futures contract who is committing to buy the underlying asset as a protection
against a possible increasing price of the actual financial instrument or physical commodity
holds the long position.

Option A is incorrect
Neither party to a futures contract has a choice to exercise or not to exercise the contract. The
contract must be fulfilled by the holders on its maturity date by one's selling and one's buying
the underlying asset, or by exiting the futures position in another manner. Option

Option B is incorrect
Neither party to a futures contract has a choice to exercise or not to exercise the contract; and
so neither one complies with the will of the other party. The contract must be fulfilled by the
holders on its maturity date by one's selling and one's buying the underlying asset, or by
exiting the futures position in another manner. Option

Option D is incorrect
The party to a futures contract who is committing to sell the underlying asset as a protection
against a possible declining price of the actual financial instrument or physical commodity
holds the short position.
Question - CMA213335
A company is currently using trade credit as a form of short term financing and pays on the
last day of credit period and does not take the cash discount which can be availed if payment
is made after certain days of purchase. The company should ideally carry on with this
practice of making payments if:
Cost of other credit alternative is lower.
Cost of other credit alternative is higher.
If percentage of discount offered is lower than the annual financing cost.
If percentage of discount offered is higher than the annual financing cost.
Option B is correct
The company should continue to use the trade credit and make payment on last day of the
credit period if the cost of credit of the other alternative option is higher.

Option A is incorrect
Option A is incorrect because it suggests the opposite scenario, where the cost of other credit
alternatives is lower. Options C and D are also incorrect as they are unrelated to the
company's decision to use trade credit and make payments on the last day of the credit period.
Thank you for the clarification.

Options C is incorrect
Option C is not the ideal scenario. If the percentage of discount offered (for early payments)
is lower than the annual financing cost, it suggests that taking the cash discount for early
payment would be more cost-effective compared to not taking the discount. So, if the
discount percentage is lower than the annual financing cost, the company should ideally not
continue with the practice of making late payments.

Options D is incorrect
Option D is also not the ideal scenario. If the percentage of discount offered for early
payments is higher than the annual financing cost, it means that taking the cash discount for
early payment is more cost-effective compared to not taking the discount. In such a case, the
company should ideally take advantage of the discount and make early payments.
Question - CMA213335
A company is currently using trade credit as a form of short term financing and pays on the
last day of credit period and does not take the cash discount which can be availed if payment
is made after certain days of purchase. The company should ideally carry on with this
practice of making payments if:
Cost of other credit alternative is lower.
Cost of other credit alternative is higher.
If percentage of discount offered is lower than the annual financing cost.
If percentage of discount offered is higher than the annual financing cost.
Option B is correct
The company should continue to use the trade credit and make payment on last day of the
credit period if the cost of credit of the other alternative option is higher.

Option A is incorrect
Option A is incorrect because it suggests the opposite scenario, where the cost of other credit
alternatives is lower. Options C and D are also incorrect as they are unrelated to the
company's decision to use trade credit and make payments on the last day of the credit period.
Thank you for the clarification.

Options C is incorrect
Option C is not the ideal scenario. If the percentage of discount offered (for early payments)
is lower than the annual financing cost, it suggests that taking the cash discount for early
payment would be more cost-effective compared to not taking the discount. So, if the
discount percentage is lower than the annual financing cost, the company should ideally not
continue with the practice of making late payments.

Options D is incorrect
Option D is also not the ideal scenario. If the percentage of discount offered for early
payments is higher than the annual financing cost, it means that taking the cash discount for
early payment is more cost-effective compared to not taking the discount. In such a case, the
company should ideally take advantage of the discount and make early payments.
Question - CMA213335
A company is currently using trade credit as a form of short term financing and pays on the
last day of credit period and does not take the cash discount which can be availed if payment
is made after certain days of purchase. The company should ideally carry on with this
practice of making payments if:
Cost of other credit alternative is lower.
Cost of other credit alternative is higher.
If percentage of discount offered is lower than the annual financing cost.
If percentage of discount offered is higher than the annual financing cost.
The correct answer is (b).
The company should continue to use the trade credit and make payment on last day of the
credit period if the cost of credit of the other alternative option is higher.
Option (a) is incorrect based on the above explanation.

Options (c) and (d) are incorrect because discount percentage offered for early payments
should not be compared to annual financing cost to evaluate the credit options.
Question - CMA213335
A company is currently using trade credit as a form of short term financing and pays on the
last day of credit period and does not take the cash discount which can be availed if payment
is made after certain days of purchase. The company should ideally carry on with this
practice of making payments if:
Cost of other credit alternative is lower.
Cost of other credit alternative is higher.
If percentage of discount offered is lower than the annual financing cost.
If percentage of discount offered is higher than the annual financing cost.
The correct answer is (b).
The company should continue to use the trade credit and make payment on last day of the
credit period if the cost of credit of the other alternative option is higher.

Option (a) is incorrect based on the above explanation.

Options (c) and (d) are incorrect because discount percentage offered for early payments
should not be compared to annual financing cost to evaluate the credit options.
Question - CMA212320Keller Industries currently has a capital structure consisting of 40%
debt and 60% equity, which it believes is the optimal structure. The common stock produced
a 12% capital gain in the recent 12-month period and paid a 5% dividend. Keller’s effective
income tax rate is 30%. Its debt is rated AA and the issues outstanding are as follows. • $20
million of 7% coupon bonds with a yield to maturity of 10% • $20 million of 12% coupon
bonds with a yield to maturity of 11% Keller’s investment banker informed the firm that
long-term AA rated debt is currently being issued to yield 11%. The banker also estimates
that equity investors currently require a 20% pre-tax yield. Keller’s marginal cost of capital is
approximately12.8%.13.1%.14.7%.15.1%.Question - PART27111620
A preferred stock is sold for $101 per share, has a face value of $100 per share, underwriting
fees of $5 per share, and annual dividends of $10 per share. If the tax rate is 40%, the cost of
funds (capital) for the preferred stock is:
4.2%
6.25%
10.0%
10.4%
Question - CMA212342The difference between an American option and a European option
isa European option can be exercised only on its maturity date, whereas an American option
can be exercised anytime up to and including its expiration date.an American option is a
covered option, whereas a European option is not.a European option is binding on both
parties, whereas the long party in an American option has the right but not the obligation to
exercise the option.a European option is binding on both parties, whereas the short party in an
American option has the right but not the obligation to exercise the option.Question -
PART27111655
Rogers Inc. operates a chain of restaurants located in the Southeast. The company has
steadily grown to its present size of 48 restaurants. The board of directors recently approved a
large-scale remodeling of the restaurant, and the company is now considering two financing
alternatives.
The first alternative would consist of
  - Bonds that would have a 9% coupon rate and would net $19.2 million after flotation
costs
 - Preferred stock with a stated rate of 6% would yield $4.8 million after a 4% flotation
cost
 - Common stock that would yield $24 million after a 5% flotation cost

The second alternative would consist of a public offering of bonds that would have an 11%
coupon rate and would net $48 million after flotation costs.
Rogers' current capital structure, which is considered optimal, consists of 40% long-term
debt, 10% preferred stock, and 50% common stock. The current market value of the common
stock is $30 per share, and the common stock dividend during the past 12 months was $3 per
share. Investors are expecting the growth rate of dividends to equal the historical rate of 6%.
Rogers is subject to an effective income tax rate of 40%.
Assuming the after-tax cost of common stock is 15%, the after-tax weighted marginal cost of
capital for Rogers' first financing alternative consisting of bonds, preferred stock, and
common stock would be
11.725%
8.725%
10.285%
7.285%
Question - CMA212270
A futures contract:
Is a direct contract between two parties created to meet the needs of the parties.
Has more counterparty risk than a forward contract.
Is used more frequently than swaps.
None of the above.
Question - PART222003A company's stock was trading rights-on for $50.00, and when it
went ex-rights the market price was $48.00. The subscription price for rights holders is
$40.00, and four rights are required to purchase one share of stock. The value of a right when
the stock was trading ex-rights was$2.00$0.50$2.50$0.40Question - PART27111616
Archer Inc. has 500,000 shares of $10 par value common stock outstanding. For the current
year, Archer paid a cash dividend of $4.00 per share and had earnings per share of $3.20. The
market price of Archer’s stock is $36 per share. The average price-earnings ratio for Archer’s
industry is 14.00. When compared to the industry average, Archer’s stock appears to be
Overvalued by approximately 25%.
Overvalued by approximately 10%.
Undervalued by approximately 10%.
Undervalued by approximately 25%.
Question - PART27111633
The DCL Corporation is preparing to evaluate the capital expenditure proposals for the
coming year. Because the firm employs discounted cash flow methods of analyses, the cost of
capital for the firm must be estimated. The following information for DCL Corporation is
provided:

 Market price of common stock is $50 per share.

 The dividend next year is expected to be $2.50 per share.
 Expected growth in dividends is a constant 10%.
 New bonds can be issued at face value with a 13% coupon rate.
 The current capital structure of 40% long-term debt and 60% equity is considered to
be optimal.
  Anticipated earnings to be retained in the coming year are $3 million.
 The firm has a 40% marginal tax rate.

If the firm must assume a 10% flotation cost on new stock issuances, what is the cost of new
common stock?
16.11%.
15.56%.
15.05%.
15.00%.
Question - PART27111600
Below is a partial Statement of Financial Position for Monosone, Inc.:
Monosone, Inc.
Statement of Financial Position
December 31, Year 1
Total assets $10,000,000
Current liabilities $ 2,000,000
Long-term debt 3,000,000
Common stock (1,000,000 shares authorized, 500,000
100,000 shares outstanding at $5 par value)
Paid-in capital in excess of par 1,600,000
Retained earnings 2,900,000
Total liabilities and shareholder\'s equity $10,000,000
Expected dividend payments:
December 31, year 2 $2.00
December 31, year 3 $2.10
December 31, year 4 $2.25
Expected selling price on:
December 31, year 4 $25.00
An investor is considering buying Monosone, Inc.'s common stock on January 1, year 2, and
anticipates, with reasonable assurance, selling it on December 31, year 4 at $25.00 per share.
What is the approximate intrinsic value on January 1, year 2 of each share (rounded to the
nearest dollar) when the required rate of return is 10%?
$31.
$30.
$24.
$19.
Question - CMA212340The current market price of ActionPharmaceutical\'s common stock
is $34. A 6-month call option has been written on the stock. The option has an exercise price
of $40 and a market value of $4. A financial analyst estimates that, at the end of 6 months,
the expected value of the stock is $42. What is the value just prior to expiration of the option
if the stock closes at $42 at the end of 6 months?$4.00$0$6.00$2.00Question - CMA212298
A stock is currently trading at $15 and the call option is selling at $3 for the same strike price.
If the stock is later trading at $14, the call option holder will have a:
Net gain of $3.
Net loss of $3.
Net gain of $1.
Net loss of $1.
Question - PART2210158
Bull & Bear Investment Banking is working with the management of Clark, Inc., in order to
take the company public in an initial public offering. Selected financial information for Clark
is as follows.

Long-term debt (8% interest

$10,000,000
rate)
Common equity:
Par value ($1 per share) $3,000,000
Additional paid-in-capital $24,000,000
Retained earnings $6,000,000
Total assets $55,000,000
Net income $3,750,000
Dividend (annual) $1,500,000

If public companies in Clarks industry are trading at a market to book ratio of 1.5, what is the
estimated value per share of Clark?
$13.50$16.50$21.50$27.50Question - PART222012When calculating a firm's cost of
capital, all of the following are true except thatThe cost of capital of a firm is the weighted
average cost of its various financing components.The calculation of the cost of capital should
focus on the historical costs of alternative forms of financing rather than market or current
costs.The time value of money should be incorporated into the calculations.All costs should
be expressed as after-tax costs.Question - CMA212196
An individual holds a 10-year fixed-rate bond as an investment. Three years of its life remain.
When the bond was issued, interest rates were much higher than they are now. Interest rates
are expected to be stable for the next three years. Which of the following statements is correct
regarding the bond?
The bond will become more sensitive to changes in interest rates during the next three years.
The bond is currently selling at a discount.
The bond will increase in value during the next three years.
The bond is currently selling at a premium.
Question - PART27111656
Rogers Inc. operates a chain of restaurants located in the Southeast. The company has
steadily grown to its present size of 48 restaurants. The board of directors recently approved a
large-scale remodeling of the restaurant, and the company is now considering two financing
alternatives.
The first alternative would consist of

 Bonds that would have a 9% effective annual rate and would net $19.2 million after
flotation costs
 Preferred stock with a stated rate of 6% that would yield $4.8 million after a 4%
flotation cost
 Common stock that would yield $24 million after a 5% flotation cost

The second alternative would consist of a public offering of bonds that would have an 11%
effective annual rate and would net $48 million after flotation costs.
Rogers' current capital structure, which is considered optimal, consists of 40% long-term
debt, 10% preferred stock, and 50% common stock. The current market value of the common
stock is $30 per share, and the common stock dividend during the past 12 months was $3 per
share. Investors are expecting the growth rate of dividends to equal the historical rate of 6%.
Rogers is subject to an effective income tax rate of 40%.
The after-tax weighted marginal cost of capital for Rogers' second financing alternative
consisting solely of bonds would be
5.13%
5.40%
6.27%
6.60%
Question - PART27111636
A company is in the process of considering various methods of raising additional capital to
grow the company. The current capital structure is 25% debt totaling $5 million with a pre-
tax cost of 10%, and 75% equity with a current cost of equity of 10%. The marginal income
tax rate is 40%. The company’s policy is to allow a total debt to total capital ratio of up to
50% and a maximum weighted-average cost of capital (WACC) of 10%. The company has
the following options.
Option 1: Issue debt of $15 million with a pre-tax cost of 10%.
Option 2: Offer shares to the public to generate $15 million. The cost of equity is 10%.
Which option should the company select?
Option 1 because it has the lower WACC of 7.72%.
Option 1 because the equity to total capital ratio will be 43%.
Option 2 because the equity to total capital ratio will be 86%.
Either Option 1 or 2 because both will yield a WACC of 10%.
Question - CMA212296
The maximum gain of a call buyer is:
Strike price plus premium.
Premium received.
Unlimited.
Strike price minus premium.
Question - CMA212333A company has a foreign-currency-denominated trade payable, due
in 60 days. In order to eliminate the foreign currency exchange-rate risk associated with the
payable, the company couldSell foreign currency forward today.Wait 60 days and pay the
invoice by purchasing foreign currency in the spot market at that time.Buy foreign currency
forward today.Borrow foreign currency today, convert it to domestic currency on the spot
market, and invest the funds in a domestic bank deposit until the invoice payment
date.Question - CMA212281
A European put option provides the:
Holder the right to sell the underlying at an exercise or strike price at the end of its life.
Holder the right to buy the underlying at an exercise or strike price at the end of its life.
Holder the right to sell the underlying at an exercise or strike price, anytime during the life of
the option.
Holder the right to buy the underlying at an exercise or strike price, anytime during the life of
the option.
Question - CMA212257
A company’s stock is currently selling for $50 per share. Current year’s dividend was $2 per
share and the earnings of the company is expected to increase by 5%. What is the firm’s cost
of existing equity?
9.2%
14.0%
9.4%
4.0%
Question - CMA212214
In term bonds:
The principal is repaid in instalments over the life of the bond.
Bondholders have the option to demand redemption.
Bondholders have the option to convert the bonds into a specified number of common stock.
The principal is repaid on a single maturity date.
Question - CMA212293
Alan Investments Inc. has a long call position on the stock of Admire Consulting Solutions at
a strike price of $135. If Admire’s stocks are selling at $150, the option premium is $3, Alan
will:
Not exercise the call option.
Exercise the call option and make a profit a $15.
Exercise the call option and make a profit a $12.
Exercise the call option and make a profit a $3.
Question - PART27111630
Williams, Inc. is interested in measuring its overall cost of capital and has gathered the
following data. Under the terms described as follows, the company can sell unlimited
amounts of all instruments.

 Williams can raise cash by selling $1,000, 8%, 20-year bonds with annual interest
payments. In selling the issue, an average premium of $30 per bond would be
received, and the firm must pay flotation costs of $30 per bond. The after-tax cost of
funds is estimated to be 4.8%.
 Williams can sell 8% preferred stock at par value, $100 per share. The cost of issuing
and selling the preferred stock is expected to be $5 per share.
 Williams' common stock is currently selling for $100 per share. The firm expects to
pay cash dividends of $7 per share next year, and the dividends are expected to
remain constant. The stock will have to be underpriced by $3 per share, and flotation
costs are expected to amount to $5 per share.
 Williams expects to have available $100,000 of retained earnings in the coming year.
Once these retained earnings are exhausted, the firm will use new common stock as
the form of common stock equity financing.
 The capital structure that Williams would like to use for any future financing is:
o Long-term debt: 30%
o Preferred stock: 20%
o Common stock: 50%

The cost of funds from retained earnings for Williams, Inc. is

7.0%.
7.6%.
7.4%.
8.1%.
Question - PART27111657
A firm seeking to optimize its capital budget has calculated its marginal cost of capital and
projected rates of return on several potential projects. The optimal capital budget is
determined by
Calculating the point at which marginal cost of capital meets the projected rate of return,
assuming that the most profitable projects are accepted first.
Calculating the point at which average marginal cost meets average projected rate of return,
assuming the largest projects are accepted first.
Accepting all potential projects with projected rates of return exceeding the lowest marginal
cost of capital.
Accepting all potential projects with projected rates of return lower than the highest marginal
cost of capital.
Question - CMA212262
DQZ Telecom is considering a project for the coming year that will cost $50 million. DQZ
plans to use the following combination of debt and equity to finance the investment.

 Issue $15 million of 20-year bonds at a price of 101, with a coupon rate of 8% and
flotation costs of 2% of par.
 Use $35 million of funds generated from earnings.

The equity market is expected to earn 12%. US Treasury bonds are currently yielding 5%.
The beta coefficient for DQZ is estimated to be 0.60. DQZ is subject to an effective corporate
income tax rate of 40%.
Assume that an after-tax cost of debt is 7% and the cost of equity is 12%. Determine the
weighted-average cost of capital.
10.50%
8.50%
9.50%
6.30%
Question - CMA212305
Which of the following derivatives is traded over-the-counter?
Currency futures.
Interest rate swap.
Exchange traded funds.
Mortgage backed securities.
Question - CMA212337An entity is planning on issuing at par, £5 million of 10-year, non
prepayable debt at 9% interest. The entity wants to convert its fixed-rate interest payments to
floating-rate interest payments based on the SOFR (Secured Overnight Financing Rate).
Which one of the following contracts should the entity consider?
OptionsForwardsFuturesSwapsQuestion - PART27111599
Fayette Company plans to raise $4 million through a rights offering. The subscription price is
$20 per share. The company currently has 2,000,000 shares outstanding and the current
market price of the shares is $24. What is the ex-rights price of the firm’s stock?
$20.00
$24.00
$23.64
$19.92
Question - PART22111132
Which one of the following statements concerning debt instruments is correct?
The coupon rate and yield of an outstanding long-term bond will change over time as
economic factors change
A 25-year bond with a coupon rate of 9% and one year to maturity has more interest rate risk
than a 10-year bond with a 9% coupon issued by the same firm with one year to maturity
For long-term bonds, price sensitivity to a given change in interest rates is greater the longer
the maturity of the bond
A bond with one year to maturity would have more interest rate risk than a bond with 15
years to maturity.
Question - CMA212256
Which of the following methods of determining cost of equity considers systematic risk of a
firm?
Bond yield plus model.
Dividend discount model.
Capital asset pricing model.
Gordon growth model.
Question - CMA212197
Which of the following types of bonds is most likely to maintain a constant market value?
Zero-coupon.
Floating-rate.
Callable.
Convertible.
Question - CMA212357A Bangladeshi wholesale export company publishes a price list in
Euros for the products sold by its European Union business unit. The management of the
export company has determined that even if there are fluctuations in exchange rates between
the Bangladeshi Taka and European Euro, it is not practical for it to change its product prices
every six months. Which one of the following is the most appropriate solution available to the
export company to managing this risk?Hedging the risk through financial
instruments.Diversifying its product offerings.Disposing of the business unit.Establishing
operational sales limits.Question - PART27111653
Datacomp Industries, which has no current debt, has a beta of 0.95 for its common stock.
Management is considering a change in the capital structure to 30% debt and 70% equity.
This change would increase the beta on the stock to 1.05, and the after-tax cost of debt will be
7.5%. The expected return on equities is 16%, and the risk-free rate is 6%. Should
Datacomp\'s management proceed with the capital structure change?
No, because the cost of equity capital will increase.
Yes, because the weighted average cost of capital will decrease.
No, because the weighted average cost of capital will increase.
Yes, because there will be no effect on the weighted average cost of capital.
Question - PART27111617
A financial analyst is using the two-stage model of dividend growth to value a corporation
that paid an annual dividend last year of $4 per share. The annual dividend is assumed to
grow at 10% per year for the next three years, and then grow at 5% per year thereafter. A
12% required return is assumed. Which change in one of the assumptions would cause the
analyst to find a higher value for the stock?
The required return is changed from 12% to 14%.
The growth rate is changed from 5% to 4%.
The three-year assumption is changed to five years.
The 10% growth rate is changed to 8%.
Question - CMA212313
Which of the following is the only derivative that is valued using Black-Scholes method?
Swaps.
Forwards.
Options.
Futures.
Question - PART222010Fayette Company plans to raise $4 million through a rights
offering. The subscription price is $20 per share. The company currently has 2,000,000
shares outstanding and the current market price of the shares is $24. What is the ex-rights
price of the firm’s stock?$24.00$19.92$20.00$23.64Question - CMA212250
Which of the following types of bonds cannot be redeemed or converted at the option of the
bondholder?
Zero coupon bonds.
Convertible bonds.
Callable bonds.
Term bonds.
Question - PART22111016
Protective clauses set forth in an indenture are known AS
provisions
requirements.
addenda
covenants.
Question - CMA212330How is a forward contract closed out?On the maturity date, the
underlying asset is purchased and delivery taken or sold and delivery made by the holder of
the contract.Buyers and sellers usually offset their positions on or before the delivery
date.The contract is returned to the party it was purchased from.The contract expires on the
maturity date, and there is no need to do anything to close it out.Question - CMA212349On
January 10, an investor goes long on a call option for 100 shares of Sander Corporation
common stock with a strike price of $150.00, expiring on March 21, at an option premium of
$21.50 per share. The market price of Sander stock on January 10 is $170.00. On March 21,
the market price of Sander stock is $180.00. How much has the investor gained or lost on the
option transaction? Disregard any brokerage commissions involved.$850 loss$3,000
gain$850 gain$2,150 lossQuestion - CMA212251
A company is considering different combinations of debt and equity in its capital structure.
Which of the following costs should be compared for a company to have a most suitable
capital structure?
Cost of debt (after tax).
Weighted average cost of capital.
Cost of common stock.
Cost of preferred stock.
Question - CMA212217
In which of the following bonds, bondholders have the option to demand repayment of the
bonds before the maturity date?
Put bonds.
Callable bonds.
Convertible bonds.
Term bonds.
Question - CMA212245
Livo Ltd. raised debt funds by issuing 10 year $1,000 face value bonds at a premium of
10%.The coupon rate is 10% and the market interest rate is 8%. The flotation cost for each
bond is $30. What is after tax cost of debt if effective tax rate is 40%?
9.35%
6%
5.61%
10%
Question - PART27111652
Osgood Products has announced that it plans to finance future investments so that the firm
will achieve an optimum capital structure. Which one of the following corporate objectives is
consistent with this announcement?
Maximize earnings per share
Minimize the cost of debt.
Maximize the net worth of the firm.
Minimize the cost of equity.
Question - CMA212287
Which of the following statements is true of a forward contract?
The party who has taken a long position in a forward contract has no default risk.
The profit of a long position holder is limited.
The long position holder will receive the money at maturity.
The party who has taken a short position in a forward contract is obliged to deliver the asset.
Question - CMA212200
A company is trying to determine the cost of capital for a major expansion project. A survey
of commercial lenders indicates that cost of debt is currently 8% based on the company's debt
ratio of 40%. The company complies with this requirement and has determined that a stock
issuance would require a 10% return in order to attract investors. Which of the following is
the company's cost of capital?
8.8%
9.2%
10.6%
18.0%
Question - PART27111624
Ten years ago, Ellison Group issued perpetual preferred shares with a par value of $50 and an
annual dividend rate of 6%. Currently, there are no dividends in arrears. Since the issue date,
interest rates have risen, and the shares are now selling at $38. The market’s current required
rate of return on these shares is
4.56%
6.00%
7.89%
15.79%
Question - PART22111020
Which one of the following is a debt instrument that generally has a maturity of ten years or
more?
A bond.
A note
A chattel mortgage
A financial lease
Question - PART27111607
Bull & Bear Investment Banking is working with the management of Clark Inc. in order to
take the company public in an initial public offering. Selected financial information for Clark
is as follows.
Long-term debt (8% interest rate) $10,000,000
Common equity:
Common stock, par value $1 per share 3,000,000
Additional paid-in capital 24,000,000
Retained earnings 6,000,000
Total assets 55,000,000
Net income 3,750,000
Dividend (annual) 1,500,000
If public companies in Clark’s industry are trading at twelve times earnings, what is the
estimated value per share of Clark?
$9.00.
$12.00.
$15.00.
$24.00.
Question - PART22111013
The yield curve shows the relationship between bond yields that differ by the
credit risk of the issuer of the bonds
dividend yield of the issuer of the bonds
par value of the bonds
years to maturity of the bonds
Question - PART27111606
A share has a market price of $50.00. It is expected to be able to pay a steady dividend of
$2.50 per share each year starting in one year's time. There will not be any growth in the
dividend. Assuming the current market price reflects the investors' required rate of return, if
the investors' required rate of return changes to 8%, the effect should be
the dividend would increase to $4.00.
there will be no change in either the dividend or the share price.
the share price will go down to $31.25.
the share price will go up to $62.50.
Question - CMA212322The Chief Financial Officer (CFO) of a large manufacturing
company is a member of the board’s Risk Committee. During a regular meeting, the CFO
said that the level of debt the company was carrying was a matter for concern. He said that
“this increased debt level is negatively impacting share value.” Concerning the CFO’s
statement, is the CFO correct about the connection between debt level and share value?Yes.
Because debt is a tax-deductible expense and is cheaper than equity, the more debt a
company takes on, the higher the company’s weighted average cost of capital (WACC).
Therefore, shareholder value is decreased.No. Because debt is a tax-deductible expense and is
cheaper than equity, there is no limit to how much companies can increase shareholder value
by increasing the company’s level of debt.Yes. Even though debt is a tax-deductible expense
and is cheaper than equity, above a certain level, the more debt a company takes on, the more
shareholders have to be compensated for the increased risk of default, and the company’s
weighted average cost of capital increases.No. The cost of debt and the cost of equity are the
same so it does not matter what the company’s debt-equity ratio is.Question -
CMA212326Ninad Inc. has the following capital structure mix. Debt 20% Preferred stock
10% Common equity 70% If management intends to maintain the above capital structure,
how much investment in total may be financed if the firm issues $30,000 of preferred stock?
$30,000.00$60,000.00$210,000.00$300,000.00Question - PART27111650
Williams, Inc. is interested in measuring its overall cost of capital and has gathered the
following data. Under the terms described as follows, the company can sell unlimited
amounts of all instruments.

 Williams can raise cash by selling $1,000, 8%, 20-year bonds with annual interest
payments. In selling the issue, an average premium of $30 per bond would be
received, and the firm must pay flotation costs of $30 per bond. The after-tax cost of
funds is estimated to be 4.8%.
  Williams can sell 8% preferred stock at par value, $100 per share. The cost of issuing
and selling the preferred stock is expected to be $5 per share.
 Williams' common stock is currently selling for $100 per share. The firm expects to
pay cash dividends of $7 per share next year, and the dividends are expected to
remain constant. The stock will have to be underpriced by $3 per share, and flotation
costs are expected to amount to $5 per share.
 Williams expects to have available $100,000 of retained earnings in the coming year.
Once these retained earnings are exhausted, the firm will use new common stock as
the form of common stock equity financing.
 The capital structure that Williams would like to use for any future financing is:
o Long-term debt: 30%
o Preferred stock: 20%
o Common stock: 50%

If Williams, Inc. needs a total of $1,000,000, the firm\'s weighted marginal cost of capital
would be
6.9%.
4.8%.
6.6%.
27.8%.
Question - PART222001A company can finance an equipment purchase through a loan.
Alternatively, it often can obtain the same equipment through a lease arrangement. A factor
that would not be considered when comparing the lease financing with the loan financing
is:Whether the lessor has a higher cost of capital than the lessee.Whether the property
category has a history of rapid obsolescence.The capacity of the equipment.Whether the
lessor and lessee have different tax reduction opportunities.Question - CMA212288
The forward price of an asset:
With benefits and / or costs is equal to the settlement price discounted plus the present value
of those benefits and costs associated with the underlying assets.
With benefits and / or costs is equal to the settlement price discounted minus the present
value of those benefits and costs associated with the underlying assets.
With benefits and / or costs is equal to the settlement price compounded at the risk-free rate
minus the future value of those benefits and costs associated with the underlying assets.
With benefits and / or costs is equal to the settlement price compounded at the risk-free rate
plus the future value of those benefits and costs associated with the underlying.
Question - CMA213235
If the bond is trading at a premium:
Current yield < YTM / Effective rate < Stated rate.
Current yield < Stated rate < YTM / Effective rate.
YTM / Effective rate < Current yield < Stated rate.
YTM / Effective rate < Stated rate < Current yield.
Question - CMA212360An investor wrote a $45 call option and bought a $50 put option on
the same stock, both of which had the same time to expiration. On the transaction date, the
stock price was $45, and the prices for the call and put options were $8 and $10 per share,
respectively. Subsequently, the stock price fell by $10, where it remained through the option
expiration date. As of the expiration date, the investor’s total profit per share on the combined
option position, ignoring commissions and other transactions, is$3$7$13$17Question -
CMA212195
Which of the following observations regarding the valuation of bonds is correct?
The market value of a discount bond is greater than its face value during a period of rising
interest rates.
When the market rate of return is less than the stated coupon rate, the market value of the
bond will be more than its face value, and the bond will be selling at a premium.
When interest rates rise so that the required rate of return increases, the market value of the
bond will increase.
For a given change in the required return, the shorter its maturity, the greater the change in
the market value of the bond.
Question - CMA212352On June 20, an investor goes long on a put option for 100 shares of
Mani Corporation common stock with a strike price of $78.00, expiring on July 25, at an
option premium of $4.25 per share. The market price of Mani stock on June 20 is $75.00. On
July 25, the market price of Mani stock is $85.00. How much has the investor gained or lost
on the option transaction? Disregard any brokerage commissions involved.Gain of
$1,000.Gain of $125Loss of $425Gain of $425Question - PART27111643
Rogers Inc. operates a chain of restaurants located in the Southeast. The company has
steadily grown to its present size of 48 restaurants. The board of directors recently approved a
large-scale remodeling of the restaurant, and the company is now considering two financing
alternatives.
The first alternative would consist of

 Bonds that would have a 9% effective annual rate and would net $19.2 million after
flotation costs
 Preferred stock with a stated rate of 6% that would yield $4.8 million after a 4%
flotation cost
 Common stock that would yield $24 million after a 5% flotation cost

The second alternative would consist of a public offering of bonds that would have an 11%
effective annual rate and would net $48 million after flotation costs.
Rogers' current capital structure, which is considered optimal, consists of 40% long-term
debt, 10% preferred stock, and 50% common stock. The current market value of the common
stock is $30 per share, and the common stock dividend during the past 12 months was $3 per
share. Investors are expecting the growth rate of dividends to equal the historical rate of 6%.
Rogers is subject to an effective income tax rate of 40%.
The interest rate on the bonds is greater for the second alternative consisting of pure debt than
it is for the first alternative consisting of both debt and equity because
The diversity of the combination alternative creates greater risk for the investor.
The pure debt alternative would flood the market and be more difficult to sell.
The pure debt alternative carries the risk of increasing the probability of default.
The combination alternative carries the risk of increasing dividend payments
Question - PART22111142
The management of Old Fenske Company (OFC) has been reviewing the company’s
financing arrangements. The current financing mix is $750,000 of common stock, $200,000
of preferred stock ($50 par) and $300,000 of debt. OFC currently pays a common stock cash
dividend of $2. The common stock sells for $38, and dividends have been growing at about
10% per year. Debt currently provides a yield to maturity to the investor of 12%, and
preferred stock pays a dividend of 9% to yield 11%. Any new issue of securities will have a
flotation cost of approximately 3%. OFC has retained earnings available for the equity
requirement. The company’s effective income tax rate is 40%. Based on this information, the
cost of capital for retained earnings is
9.5%.
14.2%
15.8%.
16.0%.
Question - PART222002The long party to a futures contract isthe party who is committing
to sell the underlying asset as a protection against a possible declining price of the actual
asset.the party who is committing to buy the underlying asset as a protection against a
possible increasing price of the actual asset.the party who has the choice to exercise or not
exercise the contract.the party who has no choice but who must comply with the will of the
other party to the contract.
Option B is correct
The party to a futures contract who is committing to buy the underlying asset as a protection
against a possible increasing price of the actual financial instrument or physical commodity
holds the long position.

Option A is incorrect:
The party to a futures contract who is committing to sell the underlying asset as a protection
against a possible declining price of the actual financial instrument or physical commodity
holds the short position.

Option C is incorrect:
Neither party to a futures contract has a choice to exercise or not to exercise the contract. The
contract must be fulfilled by the holders on its maturity date by one's selling and one's buying
the underlying asset, or by exiting the futures position in another manner.

Option D is incorrect:
Neither party to a futures contract has a choice to exercise or not to exercise the contract; and
so neither one complies with the will of the other party. The contract must be fulfilled by the
holders on its maturity date by one's selling and one's buying the underlying asset, or by
exiting the futures position in another manner.
Question - CMA212310
Which of the following derivatives cannot be separated from its underlying?
Convertible bonds.
Put options.
Future contracts.
Swap.
Option A is correct
Convertible bonds are bonds that can be converted into a specified number of shares of
common stock in the issuing company or cash of equal value. The convertible option cannot
be detached from the bond.

Option B is incorrect
Put options are standalone financial derivatives that provide the option holder with the right,
but not the obligation, to sell an underlying asset at a specified strike price. Put options can be
traded independently and are not tied to a specific underlying asset.

Option C is incorrect
Futures contracts are standardized agreements to buy or sell an underlying asset at a future
date. While they are associated with an underlying asset, futures contracts themselves can be
freely traded and are not permanently linked to the specific asset used as the reference.
Option D is incorrect
Swaps are financial contracts involving the exchange of cash flows based on predetermined
terms and conditions. While they are linked to underlying reference rates or assets, swap
agreements can be structured to be separate from the underlying assets and are not inherently
inseparable.
Question - CMA212185
The capital structure of a firm includes bonds with a coupon rate of 12% and an effective
interest rate is 14%. The corporate tax rate is 30%. What is the firm's net cost of debt?
8.4%
9.8%
12.0%
14.0%
Option B is correct.
The cost of debt financing is the after-tax cost of interest payments as measured by yield to
maturity.
Cost of Debt:
=> Yield to Maturity x (1- Effective Tax Rate).
= 14% x (1 - 30%)
= 9.8%.

Option A is incorrect
it uses the coupon rate for the calculation of the cost of debt.
[8.4% = 12% x (1 - 30%)].

Option C is incorrect
it is the coupon rate of the bonds.

Option D is incorrect
it does not consider the tax benefit as interest expense is tax deductible.
Question - CMA212321The following capital structure information is available for Pixel
Inc. • Pixel Inc. has a target capital structure of 40% debt and 60% equity. • Six years ago, the
company issued 10,000 10-year bonds which pay a 5% coupon rate (annual payout) for
$859.53. The bonds mature in 4 years. The current market rate for bonds with the same term
and risk characteristics is 7%. The market price of the bonds currently is $932.27. • The
company’s beta is 1.25. • The risk free rate is 2.75% and the market risk premium is 5.5%. •
The company is a constant growth firm that paid an annual dividend last year of $1.30. The
dividend has an expected growth rate of 3%. • The market price of the stock is $20.00 per
share. • The company has 500,000 shares outstanding. • The company’s marginal tax rate is
25%. Pixel’s current weighted average cost of capital is closest
to:7.34%7.60%7.40%7.92%Question - PART27111613
The CFO of Clean Waterworks, a publicly traded company, is expecting to pay a dividend
next year of $1.25 and projecting that the price of the company’s stock will be $45 in one
year. The CFO has determined that the required rate of return for Clean Waterworks is 10%.
Based on the data available, what is the value of one share of Clean Waterworks stock today?
$42.05
$45.00
$46.25
$51.39
Option A is correct
This problem does not give the expected rate of growth in the dividend. In this case, an
adapted form of the Dividend Growth Model incorporating the expected stock price at the
end of one year along with the expected dividend for the next year can be used to value the
stock. The adapted formula, which calculates the present value of the future cash flows, is:
P0 = (D1 + P1) / (1 + R)
Where:
P0 = the fair value today of a share of stock;
P1 = the expected price of the stock at the end of one year
D1 = the next annual dividend to be paid; and
R = the investors’ required rate of return.
P0 = ($1.25 + $45) / (1 + 0.10) = $46.25 / 1.10 = $42.045, or $42.05.

Option B is incorrect
$45.00 is the expected stock price in one year. Since the investors' required rate of return for
the stock is 10% and the dividend yield rate is not that high, some of the stockholders' return
must come from appreciation in the stock price over the one-year period. Therefore, the value
of the stock today will be less than $45.

Option C is incorrect
$46.25 is the expected stock price in one year ($45) plus the next annual dividend to be paid
($1.25). An investor who paid $46.25 for the stock today would receive a zero return on their
investment.

Option D is incorrect
This answer results from using the following formula:
P0 = (D1 + P1) / (1 − R)
Where:
P0 = the fair value today of a share of stock;
P1 = the expected price of the stock at the end of one year
D1 = the next annual dividend to be paid; and
R = the investors’ required rate of return.
The correct formula to use is:
P0 = (D1 + P1) / (1 + R)
Question - PART27111593
A stockholder owns 10 shares of Shudo Corporation common stock at a current market price
of $10 per share. The corporation will allow each shareholder to buy proportional new shares
of stock at $9 per share. Currently, there are 5,000 shares outstanding and 500 new shares
will be issued. What is the value of one right (rounded to the nearest cent)?
$10.00.
$9.09.
$.91
$.09.
Question - CMA212327Which of the following is least likely to be part of a plain vanilla
interest rate swap?A swap facilitator.The time frame covered by the swap.The exchange of
notional amounts.The index used to determine the fixed and variable rates.
Option C is correct
There is no exchange of notional amounts in a plain vanilla interest rate swap since the
notional amounts (the principal of the parties’ loans) are the same for both parties. Only the
interest payments, one fixed and one variable, are swapped.
Option A is incorrect
A swap facilitator is typically involved in arranging and facilitating swaps, but it is not an
inherent part of a plain vanilla interest rate swap. The primary components of a plain vanilla
interest rate swap are the exchange of fixed and variable interest rate payments between two
parties.

Option B is incorrect
The time frame covered by the swap is a critical component of any interest rate swap. In a
plain vanilla interest rate swap, the parties agree on the start and end dates of the swap, which
determine the duration of the swap.

Option D is incorrect
The index used to determine the fixed and variable rates is a fundamental aspect of an interest
rate swap. It defines the reference rate against which the variable interest rate payments are
calculated. The most common index for interest rate swaps is often a widely recognized
benchmark interest rate like LIBOR (London Interbank Offered Rate).
Question - CMA212205
Which of the following is an advantage of preferred stock?
Issuance costs are less than that for debt.
Preferred dividends are tax-deductible.
Accumulated dividends-in-arrears will not adversely affect the stock price.
Increase in equity reduces the risk to lenders and reduces borrowing costs.
Option D is correct.
Increase in equity reduces the risk to lenders and reduces borrowing costs. This is because the
interest payments will drop which will reduce the risk and borrowing costs.

Option A is incorrect because issuance costs are greater than that for debt.

Option B is incorrect because preferred dividends are not tax-deductible.

Option C is incorrect because if stipulated dividends are not declared in a particular year(s),
these accumulate as dividends in arrears and must be paid in later years before the common
stockholders can receive any distribution. Any accumulated dividends-in-arrears could create
financial challenges for the entity resulting in potential drop in the stock price.
Question - CMA212324Coles Co. had the following information in its accounting records on
December 31: Pre-tax operating income $4,000,000 Total assets 20,000,000 Long-term assets
16,000,000 Current Liabilities 2,000,000 Long-term liabilities 5,000,000 Total Equity
13,000,000 The market interest rate on long-term debt of the same term and similar risk
characteristics was 8%, and the market value of the debt was equal to its book value at that
time. The market value of the equity was $2 million greater than the book value. Coles’
income tax rate is 25% and its cost of equity is 10%. What was Coles’ weighted-average cost
of capital?8.00%8.89%9.00%10.00%Question - PART22111137
Thomas Company’s capital structure consists of 30% long-term debt, 25% preferred stock,
and 45% common equity. The cost of capital for each component is shown below.

Long-term debt 8%
Preferred stock 11%
Common equity 15%
If Thomas pays taxes at the rate of 40%, what is the company’s after-tax weighted average
cost of capital?
7.14%.
9.84%.
10.94%.
11.90%
Question - PART27111651
The firm's marginal cost of capital
should be the same as the firm's rate of return on equity.
is unaffected by the firm's capital structure.
is inversely related to the firm's required rate of return used in capital budgeting.
is a weighted average of the investors' required returns on debt and equity.
Option D is correct
The marginal cost of capital is the cost of obtaining the next dollar of financing. It is
approximately equal to the weighted average of the investors' required returns on debt and
equity.

Option A is incorrect
The marginal cost of capital should be less than the return on equity. If the capital costs more
than the return received, the company would not have an incentive to invest.

Option B is incorrect
The marginal cost of capital is greatly affected by the capital structure of the firm.

Option C is incorrect
Any relationship between the company's marginal cost of capital and the required rate of
return used in a particular capital budgeting analysis is specific to that capital budgeting
analysis only. The required rate of return used in a particular capital budgeting analysis can
be any rate that management considers appropriate for the specific capital budgeting project
being analyzed. That may be the marginal cost of capital, it may be the company's weighted
average cost of capital, or it could be any rate higher or lower than either of those rates.
Higher or lower rates can be used to incorporate into a capital budgeting analysis an
allowance for a level of risk that is judged to be higher or lower than the company's usual
business risk.
Question - CMA212208
Dustler’s current stock price is $105. As per analysts, the company is expected to pay $3 per
share, 35% of its EPS, as dividends next year and the expected ROE is 15%. Based on this
information, calculate the cost of equity.
8.11%
11.61%
12.61%
17.86%
Question - CMA212209
Which of the following statements are assumptions of CAPM?
Statement I: Investors are rational and risk-neutral.
Statement II: Markets are frictionless.
Statement III: Investors have homogenous expectations.
Statement IV: Investors can borrow and lend at risk-free rates.
Statement V: Investors are price takers.
Statement VI: All investments are infinitely divisible.
Statement I, Statement II, Statement III and Statement V only.
Statement II, Statement III, Statement IV and Statement V only.
Statement I, Statement III, Statement IV and Statement V only.
Statement I, Statement II, Statement III, Statement IV, Statement V and Statement VI.
Question - CMA212311
When the interest rates decrease after a swap contract is initiated:
The present value of floating-rate payments will be more than the present value of fixed-rate
payments.
The swap will have a positive value for the fixed-rate payer.
The swap will be a liability for the floating-rate receiver.
The swap will be an asset to the floating-rate receiver.
Option C is correct
In a plain vanilla interest rate swap, one party makes fixed-rate interest payments on a
notional principal amount specified in the swap in return for floating-rate payments from the
other party. If interest rates decrease after swap initiation, the present value of floating-rate
payments will be less than the present value of fixed-rate payments. The swap will have a
negative value for the fixed-rate payer or floating-rate receiver. The swap will be a liability to
the fixed-rate payer (floating rate receiver) and an asset for the floating-rate payer (fixed rate
receiver).

Option A is incorrect
This statement is not accurate. When interest rates decrease, the present value of floating-rate
payments is typically less than the present value of fixed-rate payments, favoring the fixed-
rate payer.

Option B is incorrect
This statement is not correct. If interest rates decrease, the swap generally has a negative
value for the fixed-rate payer, not a positive value.

Option D is incorrect
This statement is accurate. When interest rates decrease, the floating-rate payer (receiving the
floating rate) may find themselves receiving payments that are higher than the prevailing
market rate, resulting in the swap being an asset for them..
Question - PART27111612
An analyst is using the following information to value AGF Company’s preferred and
common stock:
Preferred Stock: AGF’s 6%, $100 par preferred stock is currently yielding 8%.
Common Stock: AGF paid a dividend of $1.90 per share last year. Dividends are expected to
grow at 6% in perpetuity (that is, continuing forever or for a very long time). The risk-free
rate is 5%, the market risk premium is 7%, and the stock’s beta is 1.3.
The values of AGF Company’s preferred and common stock are closest to
Preferred stock $75.00; Common stock $23.46
Preferred stock $75.00; Common stock $24.81
Preferred stock $133.33; Common stock $24.81
Preferred stock $133.33; Common stock $23.46
Question - PART2210167
Residco, Inc., expects net income of $800,000 for the next fiscal year. Its targeted and current
capital structure is 40% debt and 60% common equity. The director of capital budgeting has
determined that the optimal capital spending for next year is $1.2 million. If Residco follows
a strict residual dividend policy, what is the expected dividend-payout ratio for next year?
90.0%66.7%40.0%10.0%Question - PART22111134
An accountant for Stability Inc. must calculate the weighted average cost of capital of the
corporation using the following information.
Interest Rate
Accounts payable $35,000,000 -0-
Long-term debt 10,000,000 8%
Common stock 10,000,000 15%
Retained earnings 5,000,000 18%

What is the weighted average cost of capital of Stability?

6.88%
8.00%
10.25%
12.80%
Question - PART27111637
MOP Industries paid a dividend of $2.00 per common share last year, and dividends are
expected to grow by 3% per year for the foreseeable future. MOP’s historical beta is 0.8, and
the risk-free rate of return is 2%. The expected rate of return for the market portfolio is 12%.
MOP’s management has developed a budget for the coming year that incorporates a return on
investment of 14%. What is the intrinsic value of the firm’s common stock?
$18.73 per share.
$28.57 per share.
$18.18 per share.
$29.43 per share.
Question - CMA212216
The value of convertible bonds increases when:
The interest rates increase and the stock price decreases.
Both the interest rates and the stock price decrease.
Both the interest rates and the stock price increase.
The interest rates decreases and the stock price increases.
Option D is correct.
When the interest rate decreases the value of the bond will increase. Assume the current
interest rate and coupon rates are 8%. When the interest rates falls to 7%, investors find the
bond attractive as it has more yield. When the stock price increases, the value of bond will
increase. For instance, if a bond value worth $1,000 can be converted to five shares and if the
value of five shares increases to $1,500, the price of the bond will also increase.

Option A is incorrect
This option is wrong because increase in interest rate decreases bond value and the decrease
in stock price decreases bond value.

Option B is incorrect
This option is wrong because this is non-conclusive. Decrease in interest rate increases bond
value and the decrease in stock price decreases bond value.

Option C is incorrect
This option is wrong because this is non-conclusive. Increase in interest rate decreases bond
value and the increase in stock price increases bond value.
Question - CMA212344Which of the following best describes an option that gives the owner
the right to sell 100 shares of stock only on the expiration date three months from now at a
strike price of $35 when the current stock price is $25? This option is called anin-the-money
American put option.in-the-money European put optionout-of-the-money European call
optionout-of-the-money American call optionQuestion - CMA212184
The cost of debt most frequently is measured as
Actual interest rate.
Actual interest rate adjusted for inflation.
Actual interest rate plus a risk premium.
Actual interest rate minus tax savings.
Option D is correct.
The cost of debt financing is the after-tax cost of interest payments as measured by yield to
maturity.
Cost of Debt:
=> Yield to maturity x (1- Effective tax rate).
(OR)
=> (Interest Expense - Tax deduction for Interest)/Carrying value of debt.

Option A is incorrect
the interest rate is adjusted for the tax savings.

Option B is incorrect
the interest rate is adjusted for tax savings and not for inflation.

Option C is incorrect
the interest rate includes the risk premium. It is adjusted for tax savings as interest expense is
deductible for tax purposes.
Question - CMA212258
As per bond yield plus risk premium approach, risk premium of 3% to 5% is added to which
of the following to calculate the cost of equity?
Cost of preferred stock of the firm.
Expected growth rate of the firm.
Risk free rate of equity.
Interest rate on long term debt.
Option D is correct.
Under bond yield plus method, cost of equity is calculated by simply adding 3% to 5% to the
interest rate on the entity’s long term debt. This uses the normal relationship between debt
and equity.

Option A is incorrect
Adding a risk premium to the cost of preferred stock is not a common practice. The cost of
preferred stock is usually determined based on the dividend rate of preferred stock, and the
risk associated with it is already incorporated into that rate. Preferred stock dividends are
generally fixed, and preferred stockholders have a higher claim on company assets compared
to common stockholders, so there is not a direct relationship between the cost of preferred
stock and the bond yield plus risk premium approach.

Option B is incorrect
The expected growth rate of the firm is related to estimating future earnings and dividends,
but it is not directly used in the bond yield plus risk premium approach to calculate the cost of
equity. This approach focuses on the relationship between the cost of debt and the cost of
equity rather than the expected growth rate.

Option C is incorrect
The risk-free rate is typically associated with the cost of debt rather than the cost of equity.
While it's important in finance, it is not directly added to the risk premium in the bond yield
plus risk premium approach to estimate the cost of equity. The risk-free rate is used as a
component in the capital asset pricing model (CAPM) to estimate the cost of equity based on
beta and market risk.
Question - CMA212353On October 12, an investor goes short on a naked call option for 100
shares of CDM Corporation common stock with a strike price of $70.00, expiring on
December 15, at an option premium of $3.00 per share. The market price of CDM stock on
October 12 is $68.00. On December 15, the market price of CDM stock is $75.00. How much
has the investor gained or lost on the option transaction? Disregard any brokerage
commissions involved.$200 gainGain of $300Loss of $500Loss of $200Question -
PART222011From the viewpoint of the investor, which of the following securities provides
the least risk?Subordinated debenture.Income bond.Debenture.Mortgage bond.
Option D is correct .
A mortgage bond is secured with specific fixed assets, usually real property. Thus, under the
rights enumerated in the bond indenture, creditors will be able to receive payments from
liquidation of the property in case of default. In a bankruptcy proceeding, these amounts are
paid before any transfers are made to other creditors, including those preferences. Hence,
mortgage bonds are less risky than the others listed.

Option A is incorrect:
A subordinated debenture is unsecured and has a lower (inferior) claim than other bonds have
on the assets of the company in the event of a bankruptcy. Subordinated debentures have a
claim on the debtor's assets that may be satisfied only after senior debt has been paid in full.
A subordinated debenture would not have the least risk among the answer choices.

Option B is incorrect:
An income bond pays interest only if the issuer achieves a certain level of income. Such
bonds are riskier than bonds that carry a stated interest rate because the payment of interest
on income bonds is not guaranteed. An income bond would not have the least risk among the
answer choices.

Option C is incorrect:
Debenture bonds are unsecured bonds, meaning they are not backed by any specific asset as
collateral. A debenture bond would not have the least risk among the answer choices.
Question - CMA212354On July 14, an investor goes short on a put option for 100 shares of
OSC, Inc. common stock with a strike price of $9.00, expiring on August 16, at an option
premium of $1.50 per share. The market price of OSC stock on July 14 is $8.00. On August
16, the market price of OSC stock is $6.00. How much has the investor gained or lost on the
option transaction? Disregard any brokerage commissions involved.Gain of $150Loss of
$150Loss of $300Gain of $450Question - CMA212267
Neron Co. has two derivatives related to two different financial instruments, instrument A
and instrument B, both of which are debt instruments. The derivative related to instrument A
is a fair value hedge, and the derivative related to instrument B is a cash flow hedge. Neron
experienced gains in the value of instruments A and B due to a change in interest rates.
Which of the gains should be reported by Neron in its income statement?
Gain in value of debt instrument A not debt instrument B.
Gain in value of both debt instrument A and debt instrument B.
Gain in value of neither debt instrument A nor debt instrument B.
Gain in value of debt instrument B not debt instrument A.
Question - CMA212308
Hardy Enterprises plans to issue 20-year bonds at a coupon rate of 8% and the market rate is
6%. Hardy anticipates that the interest will drop considerably in next 3 years. To manage the
risk of interest rate decreasing, the best recommended action Hardy should do is to:
Issue callable bonds.
Enter into forward contract.
Sell put options.
Enter into a swap contract.
Question - CMA212187
The stock of Fargo Co. is selling for $85. The next annual dividend is expected to be $4.25
and is expected to grow at a rate of 7%. The corporate tax rate is 30%. What percentage
represents the firm's cost of common equity?
12%.
8.4%.
7.0%.
5.0%.
Question - CMA212240
Eurobonds are:
Bonds issued by European entities.
Denominated in Euros.
Bonds which can be sold in European exchanges.
Bonds that have more stringent registration and disclosure requirements than SEC registered
bonds.
Option C is correct.
Euro bonds are bonds issued by US entities, denominated in US dollars and which can be
sold outside of the US. These can be sold on the European exchanges.

Option A is incorrect
This option is incorrect because Eurobonds are bonds issued to sell in an expanded market or
to avoid the laws and regulations of the country in which the currency is based.

Option B is incorrect
This option is incorrect because Eurobonds are denominated in a currency different from the
currency of the countries in which they are issued and sold.

Option D is incorrect
This option is incorrect because Eurobonds have less stringent registration and disclosure
requirements than SEC registered bonds.
Question - CMA212334Which of the following is not true about forward contracts?Forward
contracts are not traded on exchanges.Forward contracts are agreements between two parties
to buy or sell an asset at a certain time in the future for a certain price.Forward contracts
permit the seller to decide later which specific day within the specified month will be the
delivery date.Gains and losses on forward contracts are settled only on the contracts’ maturity
dates.
Option C is correct
A forward contract calls for settlement on its maturity date. It does not permit the seller to
decide later which specific day within the specified contract period will be the delivery date.

Option A is incorrect.
This statement is true. Unlike futures contracts, which are standardized and traded on
organized exchanges, forward contracts are private agreements negotiated directly between
two parties. As a result, they are not traded on exchanges.

Option B is incorrect.
This statement is true. Forward contracts are indeed agreements between two parties to buy
or sell an asset (e.g., a commodity, currency, or financial instrument) at a specified future
date (maturity or delivery date) for an agreed-upon price.

Option D is incorrect.
This statement is true. Gains and losses on forward contracts are realized and settled upon the
contract's maturity date. At that point, the agreed-upon price (the forward price) is compared
to the prevailing market price, and the difference represents the gain or loss to one of the
parties.
Question - PART27111644
Vega Inc. needs to raise $50,000,000 for expansion. The two available options are to sell 7%,
10-year bonds at face value or to sell 5% preferred stock at par for which annual dividends
would be paid. Vega’s effective income tax rate is 30%. Which one of the following best
describes the difference in Vega’s cash flow for the second year after the issue?
Cash flow with the bond issue is $50,000 higher.
Cash flow with the bond issue is $225,000 higher.
Cash flow with the stock issue is $525,000 higher.
Cash flow with the stock issue is $700,000 higher.
Question - CMA212204
Which of the following is a disadvantage of issuing preferred stock?
Increase in preferred stock increases the risk to lenders and increases borrowing costs.
Common stockholders still retain control of the entity.
Companies are obliged to pay dividends annually.
Dividends are not tax-deductible.
Option D is correct.
Unlike interest expenses, dividends are not tax-deductible for companies.

Option A is incorrect
increase in equity reduces the risk to lenders and reduces borrowing costs.

Option B is incorrect
this represents an advantage of issuing preferred stocks.

Option C is incorrect
companies have no obligation to pay dividends until declared, thereby, increasing financial
flexibility.
Question - PART27111597
Classic Co. needs to raise $2 million through a rights offering. The subscription price is $2
per share. The firm currently has 2,000,000 shares outstanding and the current market price is
$6. What is the ex-rights price of the firm’s stock?
$5.25.
$6.00.
$2.00.
$4.67.
Question - CMA212193
When calculating a company's cost of common stock, an analyst evaluates the following four
components: risk-free rate, stock's beta coefficient, rate of return on the market portfolio, and
required rate of return on the company's stock. Which of the following measurement models
is being used?
Constant growth.
Weighted marginal cost of capital.
Capital asset pricing.
Overall cost of capital.
Option C is correct.
The cost of common stock using the CAPM model is calculated as:
RF + Beta (RM - RF).
Where,
RF is the risk free rate.
Beta is the stock's beta coefficient.
RM is the rate of return on the market portfolio.

Option A is incorrect
The constant growth model, also known as the Gordon Growth Model, is used to value a
company's common stock when dividends are expected to grow at a constant rate
indefinitely. It calculates the present value of all expected future dividends using the constant
growth rate. This model does not use the four components mentioned in the question. It's
primarily used for valuing companies with stable, predictable dividend growth.

Option B is incorrect
The weighted marginal cost of capital is a financial concept used to determine the optimal
capital structure for a company by considering the weighted cost of debt and equity at the
margin. It is not a model for calculating the cost of common stock, and it doesn't directly
involve the four components mentioned in the question.

Option D is incorrect
Overall Cost of Capital: The overall cost of capital, often referred to as the Weighted Average
Cost of Capital (WACC), is a measure that represents the average cost of all the sources of
capital used by a company, including debt and equity. It is used to assess the cost of financing
a company's operations and investments, but it doesn't directly involve the four components
used to calculate the cost of common stock as mentioned in the question.
Question - CMA212317
A company has 12% stake in its main supplier and it plans to acquire a controlling stake in
the company. Due to the volatility in the market, it fears to buy the shares as the prices may
drop significantly. However, it is also concerned about the supplier’s stock price increasing.
Which of the following is best recommended for the company?
Buy a put option.
Buy a call option.
Sell a put option.
Sell a call option.
Question - PART22111143
Angela Company’s capital structure consists entirely of long-term debt and common equity.
The cost of capital for each component is shown below
Long-term debt 8%
Common equity 15%
Angela pays taxes at a rate of 40%. If Angela’s weighted average cost of capital is 10.41%,
what proportion of the company’s capital structure is in the form of long-term debt?
34%.
45%
55%.
66%.
Question - PART222014The difference between an American option and a European option
isan American option is a covered option, whereas a European option is not.a European
option can be exercised only on its maturity date, whereas an American option can be
exercised anytime up to and including its expiration date.a European option is binding on
both parties, whereas the short party in an American option has the right but not the
obligation to exercise the option.a European option is binding on both parties, whereas the
long party in an American option has the right but not the obligation to exercise the option.
Option B is correct
A European option can be exercised only on its maturity date, but an American option can be
exercised anytime up to and including its expiration date.

Option A is incorrect:
This is not a true statement about American and European options.

Option C is incorrect:
This is not a true statement about American and European options.

Option D is incorrect:
This is not a true statement about American and European options.
Question - CMA212336An agreement to exchange a fixed interest rate on a loan with a
floating interest rate on a loan is called a(n)interest rate swapinterest rate
guaranteeswaptionbasis swap
Option A is correct
An interest rate swap takes place when two parties exchange interest payments, one at a fixed
rate and one at a floating (or variable) rate that is pegged to some sort of market rate of
interest and changes whenever the market rate changes. The primary purpose of an interest
rate swap is to match the characteristics of the firm's revenue stream with the characteristics
of its payment stream. For example, if a firm has a revenue stream that increases or decreases
with the market rate of interest, it would want its payment stream to also increase or decrease
with interest rates. If the firm has a fixed rate loan, swapping the fixed rate loan for a floating
rate loan would achieve this goal, and reduce the firm's overall risk.

Option B is incorrect.
An agreement to exchange a fixed interest rate on a loan with a floating interest rate on a loan
is not an interest rate guarantee.

Option C is incorrect.
A swaption is an option to enter into a swap transaction at a specified future date, with the
terms of the swap being fixed at the time the swaption is transacted. A swaption may be an
option to enter into an agreement to exchange a fixed interest rate on a loan with a floating
interest rate on a loan. However, a swaption is not the agreement to do so.

Option D is incorrect.
A basis swap has is an interest rate swap with floating payments on both sides, each tied to
two different indexes. So a basis swap does not involve a fixed interest rate on one side.
Question - PART27111602
The current price of Mutts, Inc. stock is $30 per share, and during the current year, the stock
paid a 5% dividend. The stock’s beta is 1.2. The expected return to the market is 9%, and the
risk-free rate is 3%. Mutts, Inc.'s cost of retained earnings is 10.2%. What should the
company’s next year’s dividend be?
$1.574 per share.
$2.70 per share
$1.545 per share
$1.80 per share
Question - PART27111634
Rogers Inc. operates a chain of restaurants located in the Southeast. The company has
steadily grown to its present size of 48 restaurants. The board of directors recently approved a
large-scale remodeling of the restaurant, and the company is now considering two financing
alternatives.
The first alternative would consist of

 Bonds that would have a 9% effective annual rate and would net $19.2 million after
flotation costs
 Preferred stock with a stated rate of 6% that would yield $4.8 million after a 4%
flotation cost
 Common stock that would yield $24 million after a 5% flotation cost

The second alternative would consist of a public offering of bonds that would have an 11%
effective annual rate and would net $48 million after flotation costs.
Rogers' current capital structure, which is considered optimal, consists of 40% long-term
debt, 10% preferred stock, and 50% common stock. The current market value of the common
stock is $30 per share, and the common stock dividend during the past 12 months was $3 per
share. Investors are expecting the growth rate of dividends to equal the historical rate of 6%.
Rogers is subject to an effective income tax rate of 40%.
The after-tax cost of the common stock proposed in Rogers' first financing alternative would
be
16.00%
16.53%
16.60%
17.16%
Question - PART27111598
A company's stock trades rights-on for $50.00 and ex-rights for $48.00. The subscription
price for rights holders is $40.00, and four rights are required to purchase one share of stock.
The value of a right when the stock is trading ex-rights is
$0.40
$0.50.
$2.00.
$2.50.
Option C is correct
The value of a right when the share is trading ex-rights is:
(Market value of a share ex-rights minus subscription price of one share) divided by (Number
of rights needed to buy one share)
Putting the numbers from the problem into the equation and solving it results in:
($48 − $40) ÷ 4 = $2

Option A is incorrect
The value of a right when the share is trading ex-rights is:
(Market value of a share ex-rights minus subscription price of one share) divided by (Number
of rights needed to buy one share)
This answer results from three errors:
(1) using the market value of a share with rights attached as the first factor in the
numerator (instead of the market value of a share ex-rights);
(2) using the market value of a share ex-rights as the second factor in the numerator
(instead of the subscription price); and
(3) using the number of rights needed to buy one share + 1 in the denominator instead of
the number of rights needed to buy one share.

Option B is incorrect
The value of a right when the share is trading ex-rights is:
(Market value of a share ex-rights minus subscription price of one share) divided by (Number
of rights needed to buy one share)
This answer results from two errors:
(1) using the market value of a share with rights attached as the first factor in the
numerator (instead of the market value of a share ex-rights) and
(2) using the market value of a share ex-rights as the second factor in the numerator
(instead of the subscription price).

Option D is incorrect
The value of a right when the share is trading ex-rights is:
(Market value of a share ex-rights minus subscription price of one share) divided by (Number
of rights needed to buy one share)
This answer results from using the
market value of a share with rights attached
minus the subscription price of one share in the numerator (instead of the market value of a
share ex-rights minus the subscription price of one share).
Question - PART22111128
Which one of the following best describes the record date as it pertains to common stock?
Four business days prior to the payment of a dividend.
The 52-week high for a stock published in the Wall Street Journal.
The date that is chosen to determine the ownership of shares
The date on which a prospectus is declared effective by the Securities and Exchange
Commission.
Option C is correct
The record date, set when a dividend is declared, is the date on which an investor must be a
shareholder in order to be entitled to receive the upcoming dividend.

Option A is incorrect
"four business days prior to the payment of a dividend." This description is not accurate. The
record date is the specific date chosen by a company's board of directors when they declare a
dividend. It is the date on which an investor must be a registered shareholder in order to be
eligible to receive the dividend. The record date is typically set a few weeks in advance of the
dividend payment date, not just four business days. This allows time for the company to
compile a list of eligible shareholders based on the records of the stock's ownership.
Therefore, option A is not a correct description of the record date as it pertains to common
stock.

Option B is incorrect
This option is not related to the record date. The 52-week high is the highest trading price a
stock reached in the past 52 weeks. It's useful for investors to understand a stock's recent
price history but has no direct connection to the record date.

Option D is incorrect
This option is also unrelated to the record date. The date when a prospectus is declared
effective is significant for companies conducting initial public offerings (IPOs) or other
securities offerings, but it doesn't relate to common stock dividends or shareholder
entitlements..
Question - CMA212254
Which of the following is not an advantage of using capital asset pricing model for estimating
the cost of equity?
Simplistic calculation.
Takes into account systematic risk.
Can be applied to portfolio or individual security.
Takes into account the fact that risk free rate of return keeps on changing.
Option D is correct.
Risk free rate of return which is the yield on short-term government debt is not fixed but
changes regularly with changing economic circumstances. Capital asset pricing model
(CAPM) does not take this into account to calculate cost of existing equity. Thus, this is not
an advantage of capital asset pricing model for estimating the cost of equity.

Option A is incorrect
This option is incorrect because calculations involved when using CAPM is simple and is an
advantage of CAPM.

Option B is incorrect
This option is incorrect because CAPM takes into account systematic risk (beta) reflecting a
reality in which most investors have diversified portfolios from which unsystematic risk has
been essentially eliminated. This is an advantage of CAPM.

Option C is incorrect
This option is incorrect because CAPM can be applied to an individual security and a
portfolio of securities. This is an advantage of CAPM.
Question - CMA212316
A swaption (swap option) is the option to enter into an interest rate swap or some other type
of swap. In exchange for an option premium, the buyer gains the right but not the obligation
to enter into a specified swap agreement with the issuer on a specified future date. Swaption
is an option:
Of a swap that provides the issuer with the obligation to exit a swap at a specified future date
with specified terms or to extend or terminate the life of an existing swap.
Of a swap that provides the holder with the right to exit a swap at a specified future date with
specified terms or to extend or terminate the life of an existing swap.
Of a swap that provides the holder with the right to enter into a swap at a specified future date
with specified terms or to extend or terminate the life of an existing swap.
Of a swap that provides the issuer with the right to exit a swap at a specified future date with
specified terms or to extend or terminate the life of an existing swap.
Question - CMA212189
ABC Co. had debt with a market value of $1 million and an after-tax cost of financing of 8%.
ABC also had equity with a market value of $2 million and a cost of equity capital of 9%.
ABC's weighted-average cost of capital would be?
8.0%
8.5%
8.7%
9.0%
Option C is correct.
Weighted Average Cost of Capital (WACC) = Firm's effective cost of capital taking into
account the portion of its capital that was obtained by debt, preferred stock, and common
stock. Accordingly, first determine the weighted costs of debt & equity:
Weighted Cost of Debt = Cost of debt x Weight of debt = 8% x ($1,000,000/3,000,000) =
2.7%
Weighted Cost of Equity = Cost of equity x Weight of equity = 9% x ($2,000,000/3,000,000)
= 6%
Therefore, WACC = 8.7% (2.7% + 6%)

Option A is incorrect
8% is the after-tax cost of debt, not WACC.

Option B is incorrect
it is the simple average of cost of debt and cost of equity not weighted average. [8.5% = (8%
+9%)/2].

Option D is incorrect
it is the cost of the equity, not WACC.
Question - CMA212221
Which of the following bonds has the highest effective annual rate?
Bond I: A monthly bond with the face value of $100 with a stated rate of 8%.
Bond II: A semi-annual bond with the face value of $1,000 with a stated rate of 8%.
Bond III: An annual bond with the face value of $10,000 with a stated rate of 8%.
Bond IV: A quarterly bond with the face value of $1,000 with a stated rate of 8%.
Bond I.
Bond II.
Bond III.
Bond IV.
Question - CMA212335The purpose of the margin requirement in derivatives trading is
toleverage the derivative trade.lessen the risk for the trader.limit the size of the derivative
trade.lessen the risk for the broker
Option D is correct
The margin is the market value of stocks and cash that a trader who borrows from the broker
to purchase securities is required to keep on account with the broker. Its purpose is to lessen
the lending risk to the broker. The maintenance margin is the minimum amount of equity that
the trader must have in the margin account at all times. “Equity” in a margin account is the
market value of the securities and cash in the account minus the amount borrowed from the
broker. The trader’s margin account is evaluated at the end of every trading session, and if the
equity in the account has fallen below the maintenance margin due to market value losses to
the securities held, the trader is required to replenish the account by depositing either cash or
additional securities.

Option A is incorrect.
This option is not accurate. The margin requirement is not meant to "leverage" the trade. In
fact, it's intended to limit the leverage and exposure of the trader to the trade. Leverage in
derivatives often comes from the use of borrowed funds, which increases risk.

Option B is incorrect.
This option is not entirely accurate. While margin requirements do help control and limit risk
for traders by ensuring they have sufficient funds in their accounts to cover potential losses, it
doesn't eliminate all risk. Derivatives trading can still be risky, and margin requirements aim
to mitigate some of that risk.

Option C is incorrect.
This option is closer to the actual purpose of margin requirements. One of the primary
purposes of margin is to limit the size of derivative trades. By requiring traders to have a
certain amount of their own capital (margin) in the trading account, it restricts the size of
positions they can take and helps prevent excessive risk-taking.
Question - CMA212237
A company has obtained a revolving line of credit of $500,000, having a maturity of one
year. The interest rate charged is 8% along with fee of 1% on unused credit. What is the
annual cost of the debt when average of $200,000 was used during the entire year?
$19,000
$16,000
$18,000
$13,000
Question - CMA212343All of the following statements about the intrinsic value of an option
are true exceptThe intrinsic value of an option is equal to its market value.The intrinsic value
of an option is only one part of its market value.The intrinsic value of an option is the amount
by which it is "in the money."The intrinsic value of an option is its value, before transaction
costs, to an investor who would buy the option and exercise it immediately.Question -
PART27111615
Zeta Corporation’s current year earnings are $2.00 per share. Using a discounted cash flow
model, the controller determines that Zeta’s common stock is worth $14 per share. Assuming
a 5% long-term growth rate, Zeta’s required rate of return is which one of the following?
20%
15%
10%
7%
Question - PART27111596
Which of the following brings in additional capital to the firm?
Two-for-one stock split.
Conversion of convertible bonds to common stock
Exercise of warrants.
Purchase of option through an option exchange.
Question - CMA212252
Company A’s capital structure: 2,000 common stock of face value of $100 each and
$200,000 debt at 8% interest.
Company B’s capital structure: 2,000 common stock of face value of $100 each and $500,000
debt at 7% interest.
Cost of equity and marginal tax rate of both the companies is the same, which is 12% and
15% respectively.
Which company has a lower weighted average cost of capital?
Company B of 7.68%.
Company A of 6.8%.
Company A of 9.4%.
Company B of 5.95%.
Question - CMA212188
The optimal capitalization for an organization usually can be determined by the
Maximum degree of financial leverage (DFL).
Maximum degree of total leverage (DTL).
Lowest total weighted-average cost of capital (WACC).
Intersection of the marginal cost of capital and the marginal efficiency of investment.
Question - PART27111640
The following capital structure information is available for Pixel Inc.

 Pixel Inc. has a target capital structure of 40% debt and 60% equity.
 Six years ago, the company issued 10,000 10-year bonds which pay a 5% coupon rate
(annual payout) for $859.53. The bonds mature in 4 years. The current market rate for
bonds with the same term and risk characteristics is 7%. The market price of the
bonds currently is $932.27.
 The company’s beta is 1.25.
 The risk free rate is 2.75% and the market risk premium is 5.5%.
 Pixel does not pay a dividend.
 The market price of the stock is $20.00 per share.
 The company has 500,000 shares outstanding.
 The company’s marginal tax rate is 25%.

Pixel’s cost of equity used in calculating its weighted average cost of capital is
9.63%.
6.19%.
8.25%.
6.88%.
Question - PART27111608
Morton Starley Investment Banking is working with the management of Kell Inc. in order to
take the company public in an initial public offering. Selected information for the year just
ended for Kell is as follows.
Long-term debt (8% interest rate) $10,000,000
Common equity:
Common stock, par value $1 per share 3,000,000
Additional paid-in capital 24,000,000
Retained earnings 6,000,000
Total assets 55,000,000
Net income 3,750,000
Dividend (annual) 1,500,000
If public companies in Kell’s industry are trading at a market to book ratio of 1.5, what is the
estimated value per share of Kell?
$13.50.
$16.50
$21.50
$27.50.
Question - CMA212213
Which of the following principles best explains higher interest rate of income bonds than that
of mortgage bonds?
Higher the risk, higher the realized return.
Unsystematic risk can be diversified away.
Systematic risk cannot be diversified away.
Higher the risk, higher the expected return.
Question - CMA212239
Which of the following statements are true concerning bond financing?
Redeemable bonds may be redeemed by the bondholder before the maturity date.
Bond’s current yield reports interest payments as a percentage of current market prices of the
bonds.
If bond is trading at a discount, then the current yield will be less than the stated rate.
Callable bonds can be demanded to be repaid by the bond holder before maturity date.
Question - PART2210160
Rogers, Inc., operates a chain of restaurants located in the Southeast. The company has
steadily grown to its present size of 48 restaurants. The board of directors recently approved a
large-scale remodeling of the restaurants, and the company is now considering two financing
alternatives.
The first alternative would consist of

 Bonds that would have a 9% coupon rate and reissued at their base amount would net
$19.2 million after a 4% flotation cost
 Preferred stock with a stated rate of 6% that would yield $4.8 million after a 4%
flotation cost
 Common stock that would yield $24 million after a 5% flotation cost

The second alternative would consist of a public offering of bonds that would have a 9%
coupon rate and an 11% market rate and would net $48 million after a 4% flotation cost.
Rogers current capital structure, which is considered optimal, consists of 40% long-term debt,
10% preferred stock, and 50% common stock. The current market value of the common stock
is $30 per share, and the common stock dividend during the past 12 months was $3 per share.
Investors are expecting the growth rate of dividends to equal the historical rate of 6%. Rogers
is subject to an effective income tax rate of 40%.

Assuming the after-tax cost of common stock is 15%, the after-tax weighted marginal cost
ofcapital for Rogers first financing alternative consisting of bonds, preferred stock, and
common stock would be
7.285%
8.725%
10.375%
11.700%
Question - CMA212278
Which of the following can affect a stock option price?
Underlying price.
Strike price.
Time until expiration.
All of the above.
Question - CMA213335
A company is currently using trade credit as a form of short term financing and pays on the
last day of credit period and does not take the cash discount which can be availed if payment
is made after certain days of purchase. The company should ideally carry on with this
practice of making payments if:
Cost of other credit alternative is lower.
Cost of other credit alternative is higher.
If percentage of discount offered is lower than the annual financing cost.
If percentage of discount offered is higher than the annual financing cost.
Option B is correct
The company should continue to use the trade credit and make payment on last day of the
credit period if the cost of credit of the other alternative option is higher.

Option A is incorrect
Option A is incorrect because it suggests the opposite scenario, where the cost of other credit
alternatives is lower. Options C and D are also incorrect as they are unrelated to the
company's decision to use trade credit and make payments on the last day of the credit period.
Thank you for the clarification.

Options C is incorrect
Option C is not the ideal scenario. If the percentage of discount offered (for early payments)
is lower than the annual financing cost, it suggests that taking the cash discount for early
payment would be more cost-effective compared to not taking the discount. So, if the
discount percentage is lower than the annual financing cost, the company should ideally not
continue with the practice of making late payments.

Options D is incorrect
Option D is also not the ideal scenario. If the percentage of discount offered for early
payments is higher than the annual financing cost, it means that taking the cash discount for
early payment is more cost-effective compared to not taking the discount. In such a case, the
company should ideally take advantage of the discount and make early payments.
Question - CMA213335
A company is currently using trade credit as a form of short term financing and pays on the
last day of credit period and does not take the cash discount which can be availed if payment
is made after certain days of purchase. The company should ideally carry on with this
practice of making payments if:
Cost of other credit alternative is lower.
Cost of other credit alternative is higher.
If percentage of discount offered is lower than the annual financing cost.
If percentage of discount offered is higher than the annual financing cost.
Option B is correct
The company should continue to use the trade credit and make payment on last day of the
credit period if the cost of credit of the other alternative option is higher.

Option A is incorrect
Option A is incorrect because it suggests the opposite scenario, where the cost of other credit
alternatives is lower. Options C and D are also incorrect as they are unrelated to the
company's decision to use trade credit and make payments on the last day of the credit period.
Thank you for the clarification.

Options C is incorrect
Option C is not the ideal scenario. If the percentage of discount offered (for early payments)
is lower than the annual financing cost, it suggests that taking the cash discount for early
payment would be more cost-effective compared to not taking the discount. So, if the
discount percentage is lower than the annual financing cost, the company should ideally not
continue with the practice of making late payments.

Options D is incorrect
Option D is also not the ideal scenario. If the percentage of discount offered for early
payments is higher than the annual financing cost, it means that taking the cash discount for
early payment is more cost-effective compared to not taking the discount. In such a case, the
company should ideally take advantage of the discount and make early payments.
Question - CMA213335
A company is currently using trade credit as a form of short term financing and pays on the
last day of credit period and does not take the cash discount which can be availed if payment
is made after certain days of purchase. The company should ideally carry on with this
practice of making payments if:
Cost of other credit alternative is lower.
Cost of other credit alternative is higher.
If percentage of discount offered is lower than the annual financing cost.
If percentage of discount offered is higher than the annual financing cost.
The correct answer is (b).
The company should continue to use the trade credit and make payment on last day of the
credit period if the cost of credit of the other alternative option is higher.

Option (a) is incorrect based on the above explanation.

Options (c) and (d) are incorrect because discount percentage offered for early payments
should not be compared to annual financing cost to evaluate the credit options.
Question - CMA213335
A company is currently using trade credit as a form of short term financing and pays on the
last day of credit period and does not take the cash discount which can be availed if payment
is made after certain days of purchase. The company should ideally carry on with this
practice of making payments if:
Cost of other credit alternative is lower.
Cost of other credit alternative is higher.
If percentage of discount offered is lower than the annual financing cost.
If percentage of discount offered is higher than the annual financing cost.
The correct answer is (b).
The company should continue to use the trade credit and make payment on last day of the
credit period if the cost of credit of the other alternative option is higher.

Option (a) is incorrect based on the above explanation.

Options (c) and (d) are incorrect because discount percentage offered for early payments
should not be compared to annual financing cost to evaluate the credit options.
Question - PART27111601
The price of Investors, Inc. stock is $31.25, and its beta is 1.2. The stock’s next annual
dividend will be $1.25, and dividends are expected to grow at the rate of 5% per year. The
risk-free rate is 3%. What is the expected return to the market?
9.00%
8.00%
10.20%
8.17%
Question - PART222007Which one of the following statements concerning debt instruments
is correct?A 25-year bond with a coupon rate of 9% and one year to maturity has more
interest rate risk than a 10-year bond with a 9% coupon issued by the same firm with one year
to maturity.A bond with one year to maturity would have more interest rate risk than a bond
with 15 years to maturity.For long-term bonds, price sensitivity to a given change in interest
rates is greater the longer the maturity of the bond.The coupon rate and yield of an
outstanding long-term bond will change over time as economic factors change.Question -
PART27111625
Assume that nominal interest rates just increased substantially but that the expected future
dividends for a company over the long run were not affected. As a result of the increase in
nominal interest rates, the company's stock price should
Increase.
Decrease.
Stay constant.
Change, but in no obvious direction.
Question - PART222013Burke Industries has a revolving credit arrangement with its bank
which specifies that Burke can borrow up to $5 million at an annual interest rate of 9%
payable monthly. In addition, Burke must pay a commitment fee of 0.25% per month on the
unused portion of the line, payable monthly. Burke expects to have a $2 million cash balance
and no borrowings against this line of credit on April 1, net cash inflows of $2 million in
April, net outflows of $7 million in May, and net inflows of $4 million in June. If all cash
flows occur at the end of the month, approximately how much will Burke pay to the bank
during the second quarter related to this revolving credit arrangement?
$62,500.$52,600.$60,200.$47,700.Question - PART27111639
An analyst has assembled the following information regarding Net-Zone Incorporated and the
market in general:
Net-Zone dividend (paid yesterday) $2.15 per share
Net-Zone expected dividend 3% per year
growth
Net-Zone expected ROE 16.2%
Net-Zone beta 1.8
Net Zone long-term bond yield 8.6%
Expected return on S&P 500 Index 10.7%
30-day Treasury bill yield 3.5%
10-year Treasury bond yield 4.8%
When reviewing the data provided by the analyst, the CFO of Net-Zone was surprised by the
value of the company’s beta. The CFO understands that the beta value is an indicator of risk,
and investors need to be compensated for their risk of investing. The company’s current stock
price is just under $17 per share, which the CFO believes is too low considering the
company’s increased profit margins. If the CFO believes the stock price should be no less
than $25 per share, and assuming the CFO is correct, that would imply that the company’s
beta is
1.22
1.19
1.13
1.16
Question - PART27111594
The market price of Mulva Corporation's common stock is $60 per share, and each share
gives its owner one subscription right. Four rights are required to purchase an additional
share of common stock at the subscription price of $54 per share.
If Mulva's common stock is currently selling "rights-on," the theoretical value of a right is
closest to
$0.96
$1.20
$1.50
$6.00
Question - PART27111614
The CFO of ChemGen Ltd., a publicly-traded chemical manufacturer, is in the process of
evaluating the company’s dividend policy in relation to shareholder value. ChemGen’s
dividend per share has been held constant at $2.30 for the last 10 years. The CFO would like
to implement a 5% yearly dividend growth policy at ChemGen starting next year. The CFO
has determined that the required return in the market for ChemGen stock is 13%.
What is the forecasted value of ChemGen stock in 5 years if the CFO’s dividend growth
policy is implemented?
$38.53
$36.69
$30.19
$23.71
Question - PART213318
A corporation obtains a loan of $200,000 at an annual rate of 12%. The corporation must
keep a compensating balance of 20% of any amount borrowed on deposit at the bank, but
normally does not have a cash balance account with the bank. What is the effective cost of
the loan?
12.0%
13.3%
15.0%
16.0%
Option C is correct
Whenever a loan agreement requires borrower to maintain a compensating balance (such as a
cash deposit at bank) in lieu of loan, it leads to an increase in the effective interest rate of the
loan.
The effective cost of loan in this case is computed as follows:
Actual interest expense = $200,000 x 12% = $24,000
Compensating balance required to be maintained (20% of funds borrowed) = $200,000 x
20% = $40,000
Net funds available = Principal - Compensating Balance
= $200,000 - $40,000 = $160,000
Effective interest rate = Interest paid / Net funds available
= $24,000 / $160,000 =15%
Option A is incorrect
This option is incorrect because 12% is the annual rate for the amount borrowed.

Option B is incorrect
This option is incorrect because of improper calculations

Option D is incorrect
This option is incorrect because of improper calculations
Question - CMA212242
Interest payments on which of the following bonds would decrease with increase in reference
interest rate?
Reverse floater bond.
Floating rate bond.
Decreasing interest bond.
Reference rate bond.
Option A is correct.
Reverse floater bonds work in opposite direction of the actual movement of underlying
reference interest rate. Increase in the reference interest rate actually reduces interest
payments and vice-versa. Thus, interest payments for reverse floater bonds would decrease
with increase in reference interest rate.

Option B is incorrect
This option is incorrect because for floating rate bonds, interest rates keep fluctuating equal
to a money market reference rate plus a spread. Thus, interest payments for floating rate
bonds would increase (not decrease) with increase in reference interest rate.

Option C is incorrect
This option is incorrect because there are no bonds classified as decreasing interest bonds and
reference rate bonds.

Option D is incorrect
This option is incorrect because there are no bonds classified as decreasing interest bonds and
reference rate bonds.
Question - CMA212212
Which of the following bonds has the highest rate of return?
Debentures.
Income bonds.
Collateral trust bonds.
Mortgage bonds.
Option B is correct.
Income bonds have the highest risk. The order of increasing risk: Mortgage bonds <
Collateral trust bonds < Debentures < Income bonds. Asset backed securities are backed by
securities and they have lower risk. Bonds with higher risks have higher risk premiums and
will yield higher returns for bearing higher risk.

Option A is incorrect
Debentures are unsecured bonds, meaning they are not backed by specific collateral, it has
less risk compare to Income bonds
Option C is incorrect
Collateral trust bonds are backed by a specific pool of assets or securities, it has less risk
compare to Income bonds

Option D is incorrect
Mortgage bonds are secured by a pool of mortgages, it has less risk compare to Income
bonds
Question - PART27111626
Which of the following is directly applied in determining the value of a stock when using the
dividend growth model?
The firm's capital structure.
The firm's cash flows.
The firm's liquidity.
The investors' required rate of return on the firm's stock.
Option D is correct
The dividend growth model is used to calculate the cost of retained earnings (investors'
required rate of return). The simplified formula is
C = (D1 / P0) + G
where C is the investors' required rate of return, D1 is the next dividend, P0 is the stock's
price, and G is the growth rate in dividends.
The model can be restated and used to determine the stock price when the next year's
dividend, the investors' rate of return (cost of retained earnings) and the growth rate in
dividends are known. The restated formula is
P0 = D1 / (C − G)

Option A is incorrect
The firm's capital structure is not used in determining the value of a stock when using the
dividend growth model. The formula for the dividend growth model is:
C = (D1 / P0) + G
When restated to determine the value of a stock, the formula is:
P0 = D1 / (C − G)

Option B is incorrect
The firm's cash flow is not used in determining the value of a stock when using the dividend
growth model. The formula for the dividend growth model is:
C = (D1 / P0) + G
When restated to determine the value of a stock, the formula is:
P0 = D1 / (C − G)

Option C is incorrect
The firm's liquidity is not used in determining the value of a stock when using the dividend
growth model. The formula for the dividend growth model is:
C = (D1 / P0) + G
When restated to determine the value of a stock, the formula is:
P0 = D1 / (C − G)
Question - PART27111604
Preferred stock with a par value of $100 pays an annual dividend of 5%. If investors require a
3.75% rate of return, what is the price of the preferred stock?
$98.75
$100.00
$103.75
$133.33
Option D is correct
If the preferred stock pays a 5% annual dividend on the par value of $100, the annual
dividend will be $100 × 0.05, or $5. If investors require a 3.75% rate of return, we use the
perpetual annuity model and divide the annual dividend of $5 by the required rate of return to
calculate the market value of the stock. $5 ÷ 0.0375 = $133.33.

Option A is incorrect
If the investors' required rate of return is lower than the rate of return based on the par value,
the price of the preferred stock will be above its par value, not below.

Option B is incorrect
This is the par value of the stock.

Option C is incorrect
This is the par value of the stock plus the investors' required rate of return.
Question - CMA212198
Which of the following statements is correct regarding the weighted-average cost of capital
(WACC)?
One of a company's objectives is to minimize the WACC.
A company with a high WACC is attractive to potential shareholders.
An increase in the WACC increases the value of the company.
WACC is always equal to the company's borrowing rate.
Option A is correct.
Weighted Average Cost of Capital (WACC) is the firm's effective cost of capital taking into
account the portion of its capital that was obtained by debt, preferred stock, and common
stock. The optimal capital structure is a mix of financing sources with the lowest WACC
which maximizes stock price resulting in increased value of the firm.

Option B is incorrect
Higher Weighted Average Cost of Capital (WACC) is a signal of higher risk associated with
a firm's operations, which would decrease the value of the company.

Option C is incorrect
Higher Weighted Average Cost of Capital (WACC) is a signal of higher risk associated with
a firm's operations, which would decrease the value of the company.

Option D is incorrect
WACC is determined by weighting the cost of each specific type of capital by its proportion
to the firm's capital structure. Therefore, WACC is not equal to the company's borrowing
rate.
Question - CMA212341Which of the following is not a way to exit an option position?The
option may be offset, to reverse the original transaction.The option may be returned to the
party it was purchased from.The option may be exercised.The option may be allowed to
expire on the expiration date.
Option B is correct
Returning the option to the party it was purchased from is not a way to exit an option.

Option A is incorrect
 Offsetting the option is a way of exiting an option position. To offset a position, a person
who had bought a call would have to sell a call with the same strike price and expiration, or a
person who sold a call would have to buy a call with the same strike price and expiration. A
put would work the same way.

Option C is incorrect
Exercising the option is a way of exiting an option position. The option may be exercised by
choosing to purchase the underlying security (if a call), or choosing to sell the underlying
security (if a put).

Option D is incorrect
Allowing the option to expire on the expiration date is a way of exiting an option position. If
an option is not exercised by its expiration date, it simply becomes worthless.
Question - CMA212350On June 20, an investor goes long on a put option for 100 shares of
Mani Corporation common stock with a strike price of $78.00, expiring on July 25, at an
option premium of $4.25 per share. The market price of Mani stock on June 20 is $75.00. On
July 25, the market price of Mani stock is $70.00. How much has the investor gained or lost
on the option transaction? Disregard any brokerage commissions involved.Loss of $375Gain
of $125Gain of $800Gain of $375Question - PART22111148
Mason Inc. is considering four alternative opportunities. Required investment outlays and
expected rates of return for these investments are given below
Project Investment Cost IRR
A $200,000 12.5
B $350,000 14.2
C $570,000 16.5
D $390,000 10.6

The investments will be financed through 40% debt and 60% common equity. Internally
generated funds totaling $1,000,000 are available for reinvestment. If the cost of capital is
11%, and Mason strictly follows the residual dividend policy, how much in dividends would
the company likely pay?
$120,000.
$328,000.
$430,000.
$650,000.
Question - CMA212274
Which one of the following actions will offset a long position in a futures contract that
expires in April?
Buy futures contract regardless of its expiration date.
Sell futures contract that expires in April.
Hold the futures contract until it expires.
Buy futures contract that expires in April.
Option B is correct.
A long position in a futures contract is the right and obligation to buy in the future at a price
set today.
An offset involves assuming an opposite position in regards to the original opening position.
Additionally, to offset is to liquidate a futures position by entering an equivalent but opposite
transaction that eliminates the delivery obligation. The goal of offsetting is to reduce an
investor's net position in an investment to zero so that no further gains or losses are
experienced from that position.
Thus, to do an equivalent opposite transaction that eliminates the delivery obligation one
could sell futures contract that expires in the same month- April.

Option A is incorrect
This option is incorrect because this would not eliminate the delivery obligation of the long
position.

Option C is incorrect
This option is incorrect because this would not eliminate the delivery obligation of the long
position.

Option D is incorrect
This option is incorrect because this would not eliminate the delivery obligation of the long
position.
Question - CMA212346Which of the following statements about long positions in put and
call options is most accurate? Profits from a long putand a long call are both negatively
correlated with stock prices.and a long call are both positively correlated with stock prices.are
positively correlated with the stock price and profits from a long call are negatively correlated
with the stock price.are negatively correlated with the stock price and profits from a long call
are positively correlated with the stock price.
Option D is correct
The “long” party to an option transaction is the buyer of the option, whether the option is a
put or a call. The potential gain on a put option for the buyer is equal to the (strike price less
the premium) minus the market price. A put option is in-the-money when the stock’s market
price (S) is less than the option’s strike price (X). The buyer of a put option wants a high
exercise price and a low stock price because the buyer of the put option can sell the stock at a
price that is above the market price. Therefore, the buyer of a put option’s profits are
negatively correlated with the stock price. For a call option, a buyer’s potential gain is
unlimited. The call option is in-the-money when S > X. As the market price increases, the
value of the call option increases by an equal amount for the buyer of the option. Therefore,
the profits of a call option’s buyer are positively correlated with the stock price.

Option A is incorrect.
This statement is not accurate. Profits from a long put are negatively correlated with stock
prices, but profits from a long call are positively correlated with stock prices.

Option B is incorrect.
This statement is also not accurate. Profits from a long put are negatively correlated with
stock prices (they increase when stock prices fall), while profits from a long call are
positively correlated with stock prices (they increase when stock prices rise).

Option C is incorrect.
"Profits from a long put are positively correlated with the stock price, and profits from a long
call are negatively correlated with the stock price."
Question - PART27111591
A company's stock trades rights on for $50.00 and ex-rights for $48.00. The subscription
price for rights holders is $40.00, and four rights are required to purchase one share of stock.
The value of a right while the stock is still trading rights-on is
$0.40
$0.50
$1.60
$2.00
Option D is correct
The value of a right when the share is trading rights-on is:
(Market value of a share with rights attached minus subscription price of one share) divided
by (Number of rights needed to buy one share + 1)
Putting the numbers from the problem into the equation and solving it results in:
($50 − $40) ÷ (4 + 1) = $2

Option A is incorrect
The value of a right when the share is trading rights-on is:
(Market value of a share with rights attached minus subscription price of one share) divided
by (Number of rights needed to buy one share + 1)
This answer results from using the market value of a share with rights attached minus
the market value of a share when it is trading ex-rights in the numerator (instead of the
market value of a share with rights attached minus the subscription price of one share).

Option B is incorrect
The value of a right when the share is trading rights-on is:
(Market value of a share with rights attached minus subscription price of one share) divided
by (Number of rights needed to buy one share + 1)
This answer has two errors:
(1) The numerator of the formula is the market value of a share with rights attached minus
the market value of a share when it is trading ex-rights (instead of the market value of a
share with rights attached minus the subscription price of one share), and
(2) the denominator of the formula is the number of rights needed to buy one
share (instead of the number of rights needed to buy one share + 1).

Option C is incorrect
The value of a right when the share is trading rights-on is:
(Market value of a share with rights attached minus subscription price of one share) divided
by (Number of rights needed to buy one share + 1)
This answer results from using the
market value of a share when it is trading ex-rights
minus the subscription price of one share in the numerator (instead of the market value of a
share with rights attached minus the subscription price of one share)
Question - CMA212291
The profit of a put option writer will be:
Unlimited amount.
Limited to the option premium.
Limited to the difference between the exercise price and the option premium.
Limited to the current stock price.
Option B is correct
In a put option, the seller or the writer has the obligation to buy a stock at a predetermined
price from the option buyer who has the right to sell the stock. The writer will receive a
premium as he is holding the downside risk. If the exercise price is $100 and the spot rate is
$110, the writer will gain the option premium as the option holder will not exercise since he
can sell the instrument at a higher price of $110 in the market.

Option A is incorrect
This is not correct. The writer's potential losses are unlimited if the price of the underlying
asset falls significantly, but the profit is limited to the premium received..

Option C is incorrect
This option describes the potential loss, not profit, of the put option writer.

Option D is incorrect
This option does not accurately describe the profit potential of the put option writer; it's
related to the exercise price and not the profit.
Question - PART27111628
By using the dividend growth model, estimate the cost of equity capital for a firm with a
stock price of $30.00, an estimated dividend at the end of the first year of $3.00 per share,
and an expected growth rate of 10%
21.0%
11.0%
10.0%
20.0%
Option D is correct
The cost of common equity can be calculated with the following formula:
Cre = d1 + g
P
0

Where:
Cre = Cost of retained earnings
d1 = The next dividend to be paid
P0 = Common stock price today
g = Annual expected % growth in dividends
Note that the question says the estimated dividend at the end of the first year is $3.00 per
share. Since the dividend is estimated, it is the next dividend to be paid and does not need to
be adjusted upward.
Inputting the information into this equation we get:
Cre = 3 + 0.10 = 0.20, or 20.0%
30

Option A is incorrect
This answer results from increasing the estimated dividend at the end of the first year ($3.00
per share) by 10%. The dividend to be used in the dividend growth model is
the next dividend to be paid. In this question, the next dividend to be paid is $3.00, because
that is the estimated dividend at the end of the first year. Therefore, it should not be
increased by 10% to $3.30.

Option B is incorrect
This answer results from increasing the $3.00 estimated dividend at the end of the first year
by 10% and dividing the result ($3.30) by the stock price ($30). This is incorrect for two
reasons: (1) The dividend to be used in the dividend growth model is the next dividend to be
paid. In this question, the next dividend to be paid is $3.00, because that is the estimated
dividend at the end of the first year. Therefore, it should not be increased by 10% to $3.30.
And (2) after dividing the next dividend by the stock price, the result should be added to the
expected growth rate to find the cost of common equity.

Option C is incorrect
This is the growth rate of the dividend. It is also the amount of the dividend divided by the
stock price. However, neither of these is the cost of equity capital for this firm. See the
correct answer for a complete explanation.
Question - CMA212277
Who has the right to sell an asset at a predetermined price?
A call buyer.
A call writer.
A put writer.
A put buyer.
Option D is correct.
An option contract is the right but not the obligation to purchase or sell in the future. A call-
option is the right to acquire shares / bonds or other assets in the future. A put-option is the
right to sell shares / bonds or other assets in the future.
Writing a call or put option refers to the selling the call or put option to the option buyer. A
writer of an option has an obligation to act on the contract if the buyer exercises his right.
Thus, the right is available only with the buyer. The right to sell is with the buyer of the put
option as the put option is the right to sell in the future.

Option A is incorrect
This option is incorrect because the call buyer has the right to buy an asset, not sell, at a
predetermined price.

Option B is incorrect
This option is incorrect because the writer has an obligation and not the right based on the
above explanation.

Option C is incorrect
This option is incorrect because the writer has an obligation and not the right based on the
above explanation.
Question - CMA212275
A call option for a stock with a strike price of $42 can be bought for $5. What would be the
net profit (or loss) for the writer of the call if the stock price is $39 when the call expires?
$3
($3)
$5
($5)
Option C is correct.
An option contract is the right but not the obligation to purchase or sell in the future. A call-
option is the right to acquire shares / bonds or other assets in the future. A put-option is the
right to sell shares / bonds or other assets in the future.
Writing an option refers to the selling the call option to the option buyer. When writing a call
option, the seller agrees to deliver the specified amount of underlying shares to a buyer if the
buyer so opts for it at the strike price in the contract for a specific fee / commission.
In the given question, the writer of the call option receives $5 to enter into the contract and
agrees to sell the stock for $42 when the call expires. The same stock is selling in the market
for $39 when the call expires. The buyer of the stock would not exercise his right as it would
be more expensive to buy the stock at the strike price than the market price. Thus, the option
would not be exercised. The writer of the call would be left with the $5 received at the time
of entering into the contract.

Option A is incorrect
This option is incorrect because the option will not be exercised as the difference between the
strike price and the market price will not have an impact in the profit or loss of the writer.

Option B is incorrect
This option is incorrect because the option will not be exercised as the difference between the
strike price and the market price will not have an impact in the profit or loss of the writer.

Option D is incorrect
This option is incorrect because the buyer of the call will have a loss of $5, not the writer.
Question - PART27111632
Newmass, Inc. paid a cash dividend to its common shareholders over the past 12 months of
$2.20 per share. The current market value of the common stock is $40 per share, and
investors are anticipating the common dividend to grow at a rate of 6% annually. The cost to
issue new common stock will be 5% of the market value. The cost of a new common stock
issue will be
11.50%.
11.79%.
11.83%.
12.14%.
Option D is correct
The question says "Newmass, Inc. paid a cash dividend to its common shareholders over the
past 12 months of $2.20 per share." That means $2.20 is a past dividend. The Dividend
Growth Model requires the use of the next dividend − a future dividend − so $2.20 must be
increased by the dividend's expected growth rate of 6% before using it in the formula.
$2.20 × 1.06 = $2.332 and we will use that as d1 in the formula.
Here is the Dividend Growth Model formula. The cost of funds from the sale of new shares
of stock can be calculated with the following formula:
Cns = d1 + g
Pn

Where:
Cns = Cost of the new issuance of common stock
d1 = The next dividend to be paid
Pn = Net proceeds of the issue (selling price minus issuance costs)
g = Annual expected % growth in dividends
Inputting the information into this equation we get:
Cns = 2.332 + 0.06 = 0.1214, or 12.14%
40 − (0.05 ×
40)

Option A is incorrect
This answer uses the current dividend instead of the next dividend and does not take into
account the flotation costs. The question says "Newmass, Inc. paid a cash dividend to its
common shareholders over the past 12 months of $2.20 per share." That means $2.20 is
a past dividend. The Dividend Growth Model requires the use of the next dividend − a future
dividend − so $2.20 must be increased by the dividend's expected growth rate of 6% before
using it in the formula. Also, the denominator needs to be net of flotation costs. See the
correct answer for a complete explanation.

Option B is incorrect
This answer uses the current dividend instead of the next dividend. The question says
"Newmass, Inc. paid a cash dividend to its common shareholders over the past 12 months of
$2.20 per share." That means $2.20 is a past dividend. The Dividend Growth Model requires
the use of the next dividend − a future dividend − so $2.20 must be increased by the
dividend's expected growth rate of 6% before using it in the formula. See the correct answer
for a complete explanation.

Option C is incorrect
This answer does not take into account the flotation costs. The denominator of the formula
needs to be net of flotation costs. See the correct answer for a complete explanation.
Question - PART2210155

The yield curve shown implies that the

Credit risk premium of corporate bonds has increased.
Credit risk premium of municipal bonds has increased.
Long-term interest rates have a higher annualized yield than short-term rates.
Short-term interest rates have a higher annualized yield than long-term rates.

Option C is correct
The term structure of interest rates is the relationship between yield to maturity and time to
maturity. This relationship is depicted by a yield curve. Assuming the long-term interest rate
is an average of expected future short-term rates, the curve will be upward-sloping when
future short-term interest rates are expected to rise. Furthermore, the normal expectation is
for long-term investments to pay higher rates because of their higher risk. Thus, long-term
interest rates have a higher annualized yield than short-term rates.

Option A is incorrect
This option does not directly relate to the shape of the yield curve. The yield curve primarily
reflects the relationship between interest rates and their maturities. The credit risk premium of
corporate bonds can change for various reasons, but it's not directly implied by the shape of
the yield curve.

Option B is incorrect
Similar to option A, the credit risk premium of municipal bonds is not directly related to the
shape of the yield curve. Changes in the credit risk premium of municipal bonds can occur
independently of the yield curve shape.

Option D is incorrect
This option is the opposite of what is indicated by the upward-sloping yield curve. An
upward-sloping yield curve implies that long-term interest rates have a higher annualized
yield than short-term rates, which is the opposite of what this option suggests.

Question - PART222008The effective annual interest rate to the borrower of a $100,000

one-year loan with a stated rate of 7% and a 20% compensating balance
is13.0%.8.4%.8.75%.7.0%.
Option C is correct
The annual interest on $100,000 at a stated interest rate of 7% is $7,000 ($100,000 × 0.07).
The net available funds to the borrower if a 20% compensating balance is required is 80% of
$100,000, or $80,000. The effective annual interest rate on a loan with a compensating
balance when no interest is received on the compensating balance is the annual interest due
divided by the net funds the borrower will have available to use. Thus the effective annual
interest rate on the loan is $7,000 ÷ $80,000, which equals 0.0875 or 8.75%.

Option A is incorrect.
This is 20% minus 7%. That is not the correct way to find the answer to this question. The
correct way to calculate the effective annual rate on this loan is to first calculate the annual
interest that will be due on $100,000 at a stated rate of 7% for one year. Then, find the net
funds from the loan the borrower will have available after deducting the compensating
balance requirement. The effective annual interest rate on a loan with a compensating balance
when no interest is received on the compensating balance is the annual interest due divided
by the net funds the borrower will have available to use.

Option B is incorrect.
This is 7% × 1.20. This is not the correct way to find the answer to this question. The correct
way to calculate the effective annual rate on this loan is to first calculate the annual interest
that will be due on $100,000 at a stated rate of 7% for one year. Then, find the net funds from
the loan the borrower will have available after deducting the compensating balance
requirement. The effective annual interest rate on a loan with a compensating balance when
no interest is received on the compensating balance is the annual interest due divided by the
net funds the borrower will have available to use.

Option D is incorrect.
7.0% is the stated interest rate on the loan. Because the borrower has a compensating balance
requirement, not all of the loan proceeds will be available to the borrower to use. The
effective annual interest rate on a loan with a compensating balance when no interest is
received on the compensating balance is the annual interest due divided by the net funds the
borrower will have available to use, and it is different from the stated interest rate.
Question - PART27111654
Field's new financing will be in proportion to the market value of its present financing, shown
below.
Book Value
Long-term debt $7,000,000
Preferred stock (100,000 shares) 1,000,000
Common stock (200,000 shares) 7,000,000
The firm's bonds are currently selling at 80% of par, generating a current market yield of 9%,
and the corporation has a 40% tax rate. The preferred stock is selling at its par value and pays
a 6% dividend. The common stock has a current market value of $40 and is expected to pay a
$1.20 per share dividend this fiscal year. Dividend growth is expected to be 10% per year.
Field's weighted average cost of capital is (round your calculations to tenths of a percent).
11.0%.
10.8%.
9.6%.
9.0%.
Question - CMA212207
Which of the following is the CAPM model?
Cost of equity = Risk-free rate + Beta × (Expected market rate + Risk free rate).
Cost of equity = Risk-free rate + Beta × Expected market rate – Risk free rate.
Cost of equity = (Risk-free rate + Beta) × Expected market rate – Risk free rate.
Cost of equity = Risk-free rate + Beta × (Expected market rate – Risk free rate).
Option D is correct.
Capital Asset Pricing Model (CAPM) model expected return of a stock depends on its
volatility / riskiness (beta) relative to the overall stock market.
Cost of equity = Risk-free rate + Beta × (Expected market rate – Risk free rate).

Option A is incorrect
This option is incorrect because it adds the Risk-free rate to both the Risk-free rate and the
Expected market rate, which is not the correct formula for CAPM.

Option B is incorrect
This option is also incorrect because it subtracts the Risk-free rate from the product of Beta
and the Expected market rate, which results in an incorrect formula for CAPM.

Option C is incorrect
This option is incorrect because it multiplies the sum of Risk-free rate and Beta by the
Expected market rate and then subtracts the Risk-free rate. This is not the correct formulation
of the CAPM.
Question - CMA212234
A company borrowed $200,000 from a bank at the interest rate of 10.25%. A term attached
with the loan requires the company has to maintain a minimum balance of 20% of the loan
amount. What is the effective cost of loan?
10%
12.81%
10.25%
9.32%
Option B is correct.
Effective cost of the loan when compensating balance needs to be maintained is interest paid
on the loan divided by the amount available for use from the loan amount.
Interest paid on loan = 10.25% of $200,000 = $20,500.
Amount available for use = $200,000 - $40,000 = $160,000.
Thus, effective cost of loan = $20,500 / $160,000 = 12.82%.

Option A is incorrect
This option is incorrect because 10% is a lower rate than the interest rate on loan, which can’t
be possible because of compensating balance that needs to be maintained.
Effective cost of loan when compensating balance needs to be maintained would always be
higher than the actual interest rate paid on the loan.

Option C is incorrect
This option is incorrect because 10.25% is actual interest rate on loan. Actual interest on loan
can’t be same as effective cost of loan when compensating balance needs to be maintained.

Option D is incorrect
This option is incorrect because 9.32% is a lower rate than the interest rate on loan, which
can’t be possible because of compensating balance that needs to be maintained.
Question - CMA212228
A company issued common stock and preferred stock. Projected growth rate of the common
stock is 5%. The current quarterly dividend on preferred stock is $1.60. The current market
price of the preferred stock is $80 and the current market price of the common stock is $95.
What is the expected rate of return on the preferred stock?

2%
7%
8%
13%
Option C is correct.
Expected rate of return on the preferred stock = Annual dividend/ Current Market price
As Quarterly dividend is = $1.60, Annual dividend = $1.60 x 4 = $6.40.
Given, current market price of preferred stock = $80,
Expected rate of return = $ 6.40/ $80 = 8%.

Option A is incorrect
This option is not the correct expected rate of return on the preferred stock. The expected rate
of return on the preferred stock is 8%, as you correctly calculated.

Option B is incorrect
This option is not the correct expected rate of return on the preferred stock. The expected rate
of return on the preferred stock is 8%, as you calculated.

Option D is incorrect
This option is not the correct expected rate of return on the preferred stock. The expected rate
of return on the preferred stock is 8%, as calculated based on the given data.
Question - CMA212276
A call option for a stock with a strike price of $42 can be bought for $5. What would be the
net profit (or loss) for the buyer of the call if the stock price is $44 when the call expires?
($3)
$2
$3
($5)
Option A is correct.
An option contract is the right but not the obligation to purchase or sell in the future. A call-
option is the right to acquire shares / bonds or other assets in the future. A put-option is the
right to sell shares / bonds or other assets in the future.
When writing a call option, the seller agrees to deliver the specified amount of underlying
shares to a buyer if the buyer so opts for it at the strike price in the contract for a specific fee /
commission.
In the given question, the writer of the call option receives $5 to enter into the contract and
agrees to sell the stock for $42 when the call expires. The same stock is selling in the market
for $44 when the call expires.
The buyer, by exercising his option would make a profit of $2 (he can buy the stock at the
strike price of $42 rather than buying it at the market price of $44). However, having spent $5
for entering into the contract, his net loss would be $3 (i.e. $5 - $2).

Option B is incorrect
This option is incorrect because the $5 paid as option fee should also be considered in
calculating the net profit or loss.

Option C is incorrect
This option is incorrect because the writer of the call (seller of the call) would make a profit
of $3, not the buyer.

Option D is incorrect
This option is incorrect because the loss would reduce to the extent of the profit made due to
the difference between the market price and strike price.
Question - PART22111124
Dorsy Manufacturing plans to issue mortgage bonds subject to an indenture. Which of the
following restrictions or requirements are likely to be contained in the indenture?
I. Receiving the trustee’s permission prior to selling the property.
II. Maintain the property in good operating condition.
III. Insuring plant and equipment at certain minimum levels.
IV. Including a negative pledge clause.
I and IV only
II and III only
I, III, and IV only.
I, II, III and IV.
Option D is correct
All of the restrictions listed are likely to be included as protective covenants in the indenture.

Option A is incorrect
This option is incorrect these restrictions or requirements are common in bond indentures to
protect the interests of bondholders and to ensure the security backing the bonds remains
intact and valuable.

Option B is incorrect
This option is incorrect these restrictions or requirements are common in bond indentures to
protect the interests of bondholders and to ensure the security backing the bonds remains
intact and valuable.
Option C is incorrect
This option is incorrect these restrictions or requirements are common in bond indentures to
protect the interests of bondholders and to ensure the security backing the bonds remains
intact and valuable.
Question - PART27111603
A share has a market price of $2.50. It is expected to be able to pay a steady dividend of 30
cents per share each year starting in one year\'s time. There will not be any growth in
dividends. Other things being equal, if the expected dividend goes up to 33 cents:
The share price would stay at $2.50.
The share price would go down to $2.25.
The share price would go up to $2.53.
The share price would go up to $2.75.
Option D is correct.
If the expected dividend increases, the share price should increase. Because the amount of the
dividend is not expected to change after it increases, this is a perpetual annuity.
We first need to calculate the current investors' expected rate of return on this perpetual
annuity. The expected return is calculated as the annual dividend divided by the market value
of the investment, or $0.30 ÷ $2.50, which is 12%.
Now that we know the investors' expected rate of return, we can calculate what the share
price should go up to if the annual dividend goes up to $0.33, a new perpetual annuity. The
equation to solve is $0.33 ÷ X = 0.12. Solving for X, we get a share price of $2.75.

Option A is incorrect
If the expected dividend increases, the share price should increase.

Option B is incorrect
If the expected dividend increases, the share price should increase.

Option C is incorrect
This answer is the current share price plus the increase in the dividend.
Question - PART27111629
Williams, Inc. is interested in measuring its overall cost of capital and has gathered the
following data. Under the terms described as follows, the company can sell unlimited
amounts of all instruments.

 Williams can raise cash by selling $1,000, 8%, 20-year bonds with annual interest
payments. In selling the issue, an average premium of $30 per bond would be
received, and the firm must pay flotation costs of $30 per bond. The after-tax cost of
funds is estimated to be 4.8%.
 Williams can sell 8% preferred stock at par value, $100 per share. The cost of issuing
and selling the preferred stock is expected to be $5 per share.
 Williams' common stock is currently selling for $100 per share. The firm expects to
pay cash dividends of $7 per share next year, and the dividends are expected to
remain constant. The stock will have to be underpriced by $3 per share, and flotation
costs are expected to amount to $5 per share.
 Williams expects to have available $100,000 of retained earnings in the coming year.
Once these retained earnings are exhausted, the firm will use new common stock as
the form of common stock equity financing.
 The capital structure that Williams would like to use for any future financing is:
o Long-term debt: 30%
 o Preferred stock: 20%
o Common stock: 50%

The cost of funds from the sale of common stock for Williams, Inc. is
7.0%.
7.6%.
7.4%.
8.1%
Question - CMA212229
Which of the following is an advantage of leasing?
Overall cost of leasing generally is less than the cost of purchasing the asset.
Lease provisions are generally less stringent than a bond indenture.
A company can go for off-balance sheet financing in case of leases.
Creditors have no claims on leased assets till the end of the asset’s life.
Option B is correct.
Lease provisions generally are less stringent than a bond indenture. This is an advantage of
leasing.

Option A is incorrect
This option is incorrect because the overall cost of leasing generally is more than the cost
of purchasing the asset.

Option C is incorrect
This option is incorrect because a company cannot go for off-balance sheet financing in case
of leases.

Option D is incorrect
This option is incorrect because creditor claims on leased assets are restricted. It is incorrect
to state that creditors have no claims.
Question - CMA212266
A derivative financial instrument is best described as
Evidence of an ownership interest in an entity such as shares of common stock.
A contract that has its settlement value tied to an underlying notional amount.
A contract that conveys to a second entity a right to receive cash from a first entity.
A contract that conveys to a second entity a right to future collections on accounts receivable
from a first entity.
Option B is correct.
Derivative is a contract whose value is based on another contract or an Index.
{Like the Midas gold, Derivatives shine like the SUN!}.
Derivatives always possess ALL three of the following characteristics:-

 Settlement in cash or equivalents.

 Underlying and notional amount and
 No or negligible net investment.

Option A is incorrect
This option is incorrect because these are features of a financial instrument, not a derivative.

Option C is incorrect
This option is incorrect because these are features of a financial instrument, not a derivative.
Option D is incorrect
This option is incorrect because these are features of a financial instrument, not a derivative.
Question - CMA212219
Which of the following is true of callable bonds?
Bond issuer has the obligation to repay the bonds before the maturity date.
Callable bonds have lower interest rate than non-callable bonds.
Redemption price is usually set higher than the face value.
Bondholder may have the option to demand redemption (repayment) of the bonds before the
maturity date under specific circumstances.
Option C is correct.
In callable bonds, the issuer of the bond has an option to repay the bonds before the maturity
date. As this is favorable to the issuer (but adverse to the bondholders), these bonds generally
have a higher coupon rate. The redemption price is usually set higher than the face value.

Option A is incorrect
This option is wrong because the bond issuer has the right or option, not obligation, to repay
the bonds before the maturity date.

Option B is incorrect
This option is wrong because callable bonds have higher interest rate than non-callable
bonds.

Option D is incorrect
This option is wrong because it is the feature of redeemable bonds.