Question 1

All other parameters being held constant, an increase in interest rates

Group of answer choices

a) Decreases the price of call options and increases the price of put options

b) Decreases the price of both call and put options

c) Increases the price of call options and decreases the price of put options

d) None of the above

Flag question: Question 2

IBM stocks are trading at the price of $52. There are two call options on IBM stock with a $50 exercise price. the price of C50Apr compared with C50May will be:

Group of answer choices

a) Higher

b) Lower

c) The same

d) Depends on the interest rates

Flag question: Question 3

Which of the below is an advantage of private firms over public firms

Group of answer choices

a) Allows the firm to disclose less of its operation

b) Easier for the original owner to maintain control of the firm

c) Both "a" and "b" are correct

d) None of the above

Flag question: Question 4

When investors short a call option, they would be better off if:

Group of answer choices

a) Volatility will increase

b) The price of the underlying asset will increase

c) Both "a" and "b" are correct

d) None of the above

Flag question: Question 5

Which of the following is not a method to raise equity?

Group of answer choices

a) Rights issue

b) Dividend reinvestment plans

c) Private placement

d) Leasing

Flag question: Question 6

Stock XYZ is traded today (25/03) at $10. The price of C10May will be

Group of answer choices

a) Positive

b) Negative

c) Zero

d) Either zero or positive

Flag question: Question 7

The main method Australian firms raise debt is:

Group of answer choices

a) Rights issues

b) Securities issued at the domestic market

c) Securities issued overseas

d) None of the above

Flag question: Question 8

Which of the following is a characteristic of debt?

Group of answer choices

a) Temporary contribution of capital by investors

b) In most cases debt holders have voting rights

c) The firm has discretion whether to delay the payment of debt

d) All of the above are correct

Flag question: Question 9

Which of the following is true about rights issues?

Group of answer choices

a) They increase the wealth of existing shareholders as they buy stocks at a discount

b) They often do not require a prospectus

c) Investors tend to decide whether to participate in the rights issue according to their belief about the long-term future prospects of the company

d) None of the above

Flag question: Question 10

When calculating whether to lease or borrow and buy you should discount the cash flows at:

Group of answer choices

a) The risk-free rate

b) The cost of an equivalent loan before tax

c) The cost of capital of the equity holders

d) None of the above

Flag question: Question 11

Which of the following is a characteristic of an operating lease?

Group of answer choices

a) The lessee bears the risk of ownership

b) It is typically a short-term agreement

c) It is not cancellable

d) None of the above is true

Flag question: Question 12

A decrease in volatility is likely to lead to:

Group of answer choices

a) An increase in the prices of put options and a decrease in the prices of call options

b) A decrease in the prices of put options and an increase in the prices of call options

c) An increase in the prices of both call and put options

d) A decrease in the prices of both call and put options

Flag question: Question 13

When deciding whether to buy or lease an asset, the depreciation tax shield is not typically included in the NPV calculation because

Group of answer choices

a) Depreciation is not a cash expense and thus it does not affect the decision

b) Companies do not pay taxes

c) In both alternatives the asset is depreciated by the lessee

d) In both alternatives the asset is depreciated by the lessor

Flag question: Question 14

In private placements made at a discount

Group of answer choices

a) There is a transfer of wealth from old shareholders to the new shareholders

b) The new shares are typically issued at the market price

c) There is no dilution of the voting power of the old shareholders

d) Both "a" and "b" are correct

Flag question: Question 15

EFG Ltd. is a publicly traded firm with 100 million shares outstanding and a share price of $10. EFG announces a 1:N rights issue with a subscription price of $8. If N is a positive integer the price of the right will be:

Group of answer choices

a) Between $0 and $1

b) Between $0 and $2

c) Between $1 and $2

d) Between $8 and $10

e) Not enough data to conclude anything about the price.

Flag question: Question 16

Assume now that the rights issue in the previous question has a pro-rata ratio of 1:4. What is the value of the right?

Group of answer choices

a) $0.2

b) $0.33

c) $1.6

d) $2.00

e) None of the above

Flag question: Question 17

Which of the following is true about IPO underpricing?

Group of answer choices

a) It is mainly an American phenomenon

b) Old (pre-issuance) stockholders are the main beneficiaries of this phenomenon

c) In all IPOs the listing price is higher than the subscription price

d) The price does not tend to revert to the subscription price in the long run

e) Both "a" and "b" are correct

Flag question: Question 18

The payoff of equity holders is equivalent to a long call option with an exercise price that is equal to the face value of debt. The payoff of debtholders is equivalent to a long position in the risk-free asset and short on a put option with an exercise price equal to the face value of the debt. If the company has a risk-free debt (0% chance to default), then:

Group of answer choices

a) The call option is deep in the money and the put option is deep out of the money

b) The call option is deep out of the money and the put option is deep in the money

c) The call option is out of the money and the put option is in the money

d) Both the call and put options are deep in the money

e) None of the above is correct

Flag question: Question 19

An Australian firm with 300 million shares outstanding and a market price of $15.00 raises $1,170 million through a private placement of 90 million shares at $13. As a result of the private placement the old shareholders

Group of answer choices

a) Will lose $180m

b) Will lose $138.5m

c) Will lose $69.2m

d) The wealth of the old shareholders is not affected by the private placement

e) Will gain $180m

Flag question: Question 20

20A. According to the ownership dispersion hypothesis (Ritter, 1998) when firms float, the management:

Group of answer choices

a) Does not care if the ownership is dispersed or not

b) Only red-haired CEOs prefer dispersed ownership

c) Prefers dispersed ownership because it signals future offerings will be profitable

d) Prefers concentrated ownership as it makes it easier for the management to deal with equity holders

e) Prefers dispersed ownership for liquidity reasons

Flag question: Question 21

Which of the following statements is correct about leasing?

Group of answer choices

a) A company will tend to prefer leasing over buying if the company can use accelerated depreciation for the asset

b) A company will tend to prefer leasing over buying if the asset is less sensitive to use and maintenance

c) A company will tend to prefer leasing over buying if the company has a cash flow problem (conservation of capital)

d) A company will tend to prefer leasing over buying for specialised assets

e) None of the above answers is correct

Flag question: Question 22

22B. A stock is currently traded at the price of $100. The price of the stock can go up or down by $20 next year. Assume investors are risk neutral and there are both European put and call options on the stock with an expiration date in one year. A student made the following three arguments.

1. If the interest rates are equal to zero then C(100) = P(100)
2. Even if the interest rates are positive then C(100) = P(100)
3. Investors will never exercise both the put option and the call option

Group of answer choices

a) Only "I"

b) Both "I" and "II"

c) Both "I" and "III"

d) All three arguments are correct

e) None of the arguments is correct