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ABA CTFA Practice Test - Questions Answers, Page 12

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When using a probability tree approach, we discount the various cash flows to their present value at:

A.
The firm's weighted-average cost of capital
A.
The firm's weighted-average cost of capital
Answers
B.
The project's required rate of return
B.
The project's required rate of return
Answers
C.
The risk-free rate
C.
The risk-free rate
Answers
D.
The after-tax cost of the firm's long-term debt
D.
The after-tax cost of the firm's long-term debt
Answers
Suggested answer: C

A managerial option, in effect:

A.
Limits the flexibility of management's decision-making
A.
Limits the flexibility of management's decision-making
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B.
Limits the downside risk of an investment project
B.
Limits the downside risk of an investment project
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C.
Limits the profit potential of a proposed project
C.
Limits the profit potential of a proposed project
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D.
Applies only to new projects
D.
Applies only to new projects
Answers
Suggested answer: B

The presence of managerial, or real, options the worth of an investment project.

A.
Increases
A.
Increases
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B.
Decreases
B.
Decreases
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C.
Does not affect
C.
Does not affect
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D.
Increases or decrease
D.
Increases or decrease
Answers
Suggested answer: A

A firm's degree of operating leverage (DOL) depends primarily upon its:

A.
Sales variability
A.
Sales variability
Answers
B.
Level of fixed operating costs
B.
Level of fixed operating costs
Answers
C.
Closeness to its operating break-even point
C.
Closeness to its operating break-even point
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D.
Debt-to-equity ratio
D.
Debt-to-equity ratio
Answers
Suggested answer: C

EBIT is usually the same thing as:

A.
Funds provided by operations
A.
Funds provided by operations
Answers
B.
Earnings before taxes
B.
Earnings before taxes
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C.
Net income
C.
Net income
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D.
Operating income
D.
Operating income
Answers
Suggested answer: D

In the context of operating leverage break-even analysis, if selling price per unit rises and all other variables remain constant, the operating break-even point in units will:

A.
Fall
A.
Fall
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B.
Rise
B.
Rise
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C.
Stay the same
C.
Stay the same
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D.
Still be indeterminate until interest and preferred dividends paid are known
D.
Still be indeterminate until interest and preferred dividends paid are known
Answers
Suggested answer: A

This statistic can be used as a quantitative measure of relative 'financial risk.'

A.
Coefficient of variation of earnings per share (CVEPS)
A.
Coefficient of variation of earnings per share (CVEPS)
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B.
Coefficient of variation of operating income (CVEBIT)
B.
Coefficient of variation of operating income (CVEBIT)
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C.
(CVEPS - CVEBIT)
C.
(CVEPS - CVEBIT)
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D.
(CVEPS + CVEBIT)
D.
(CVEPS + CVEBIT)
Answers
Suggested answer: C

Espinosa Coffee & Trading, Inc.'s common stock measured beta is calculated to be 0.75. The market beta is, of course, 1.00 and the beta of the industry of which the company is a part is 1.10. If Merrill Lych were to calculate an 'adjusted beta' for Espinosa's common stock, that adjusted beta would most likely be .

A.
less than 0.75
A.
less than 0.75
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B.
more than 0.75, but less than 1.10
B.
more than 0.75, but less than 1.10
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C.
equal to 1.10
C.
equal to 1.10
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D.
equal to 0.95 {i.e., (1/3) x (0.75 + 1.00 + 1.10)}
D.
equal to 0.95 {i.e., (1/3) x (0.75 + 1.00 + 1.10)}
Answers
Suggested answer: B

What's the value to you of a $1,000 face-value bond with an 8% coupon rate when your required rate of return is 15 percent?

A.
More than its face value
A.
More than its face value
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B.
Less than its face value
B.
Less than its face value
Answers
C.
$1000
C.
$1000
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D.
True
D.
True
Answers
Suggested answer: B

If the intrinsic value of a stock is greater than its market value, which of the following is a reasonable conclusion?

A.
The stock has a low level of risk
A.
The stock has a low level of risk
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B.
The stock offers a high dividend payout ratio
B.
The stock offers a high dividend payout ratio
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C.
The market is undervaluing the stock
C.
The market is undervaluing the stock
Answers
D.
The market is overvaluing the stock
D.
The market is overvaluing the stock
Answers
Suggested answer: C
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