Assignment 2. Multiple-choice questions. Accounting, Finance, SPSS.

PartA multiple-choice questions (requires a hand-written detailed process to send photos) and PartB question 3 require detailed steps. The other two questions do not need to write too many 150-250 words each, but you have to answer the ideas
Assignment #2
Due: April 2,2020
Student Name:_
(Print)
Student ID Number: _
INSTRUCTIONS
1 Work must be submitted before 6 pm. No late assignment can be accepted.
2. Detailed solution will be available online after collection.
3. This assignment has two parts in 15 pages
4 Part A: 45 multiple-choice questions Attempt all.
5. Leave your answers in the space provided. Each correct response is worth one point.
6. Part B: 3 conventional questions. Attempt all.
7. Each answer is worth a maximum of 10 points with complete justifications.
8. With a perfect score of 75 points, this assignment is worth 10% of the overall grade.
KEEP QUESTION PAPERS FOR EXAM REVIEW
PART A: MULTIPLE-CHOICE QUESTIONS arc designed
to test general understanding of a variety of concepts and their applications.
1 Firm X having 100 shares outstanding considers acquiring Firm Y with 50 shares outstanding. The pre-merger prices of Firms X and Y arc $55 and $24 persharc, respectively. With the term of one share of X for two shares of Y, what is the equivalent cash cost in this merger?
A)“ SI,375
B) $2,750
C) $4,800
D) $5,500
Hint: Share exchange ratio = Offer price / Acquirer’s share price
2. What is the NPV from a merger of Firm V and Firm A? V is worth $475 and A has a market value of $425. V acquires A for $450 because it thinks the combination of the two firms will be worth $1,000.
AT” $25
B) $50
C) $75
D) $100
Hint: NPV jcqure = V ttrjr, - cost of purchase
3. Which of the following merger and acquisition is viable?
A) VAT = $400; VA = $200; VT = $205
B) VAT = $390; VA = $200; VT = $ 190
C) Vat = $410; VA = $200; VT = $ 190
D) VAT = $600; VA = $400; VT = $205
4 Which of the following is true regarding the use of risk management for firm value enhancement?
A) Risk management can increase debt capacity
B) Risk management can help a firm maintain its optimal capitd budget
C) Risk management can reduce the expected costs of financial distress
D) All of the above
A) A pays a fixcd-ratc of 9%, while B pays LIBOR+1 5%
B) A pays a fixcd-ratc of 8 95%, while B pays LIBOR+1 45%
C) A pay's LIBOR+1 %, while B pays a fixcd-ratc of 9 4%
D) A pays a fixed-rate of 7.95%, while B pays LIBOR
6 If you had sold a futures contract for $2.6/bushel and the contract ended at $2 7/bushcl after several days of trading at $2 .5? $2 57, $2,62, $2 68 and $2 70. What would the marking-to-market sequence be?
A) -$0 08, $0.05, $0.05, $0.06, $0.02
B) $0 08, -$0.05, -$0.05, -$0.06, -$0.02
C) $0 08, $0.03, -$0 02, -$0.06, -$0 10
D) -$0 08, -$0.03, $0.02, $0.06, $0.10
7. If the producer of a product has ertcred into a fixed price sales agreement for that output, the producer faces
A) A nice steady profit because the output price is fixed
B) An uncertain profit if the input prices are volatile. This risk can be reduced by a short hedge
C) An uncertain profit if the input prices are volatile. This risk can be reduced by a long hedge
D) A modest profit if the input prices are stable. The risk can be reduced by a short hedge
8. On March 1, you have entered a futures contract to make delivery of one ounce of gold for $415. The agreement is good for any day up to April I. Throughout March, the piice of gold hit a low of $385 and hit ahigh of $435. The closing price on March 31 is $430. On Apnl 1, your futures agreement is settled with a delivery notificatioa What is your net profit?
A) -$30
B) $20
C) $5
D) -$15
9. Hedging in the futures markets can reduce all risk if
A) Price movements in both the cash and futures markets are perfectly correlated
B) Pricc movements in both the cash and futures markets have zero correlation
C) The hedge is a short hedge, but not a long hedge
D) The hedge is a long hedge, but not a short hedge
10, The buyer of a copper futures contract noticed that his margin account was marked with a $500 yesterday. If the standard contract requires delivery of 25,000 pounds of cofpcr, what happened to the pricc of coppcr on that day?
A) The price closed down by $0.02 per pound
B) The price closed up by $0 02 per pound
C) TTie price closed down by $0 2 per pound
D) The price closed up by $0 2 per pound
Hint: Profit to seller = initial futures pricc - ultimate market price
11. Regarding the forward contract pricc, which of the following is not considered a “cost of carry”?
A) A risk premium for uncertainty
B) Commission for physical storage
C) A premium forthe convenience of consuming the asset now
D) An opportunity cost for the net amount of invested capital Hint: Fr = S x erT
12. If a bank manager wants to protect the bank against losses that would be incurred on its portfolio of treasury securities if interest rates rise, then he can
A) Buy put options on financial futures
B) Buy call options on financial futures
C) Sell put options on financial futures
D) Sell call options on financial futures
13. Which of the following feature of futures contracts is not designed to increase liquidity?
A) Standardized contracts
B) Traded up until maturity
C) Marking-to-market daily
D) Not restricted to one specific deliverable instrument
14 The main disadvantage of futures contracts as compared to options is that ftlurcs
A) Increase transaction cost
B) Involve higher credit risk
C) Remove the possibility of gains
D) Are not as an effective hedge
15. From a buyer’s perspective, which of the following is clearly an arbitrage?
A) The spot price is $78, the exercise price of a call is $75, and the call premium is $5
B) The spot price is $78, the exercise pnee of a put is $75, and the put premium is $2
C) Both (A) and (B)
D) Neither (A) nor (B)
16 Which of the following is tnie for the <*vncr of a September put, valued at $20, on CBA Corp. with an exercise price of $80? CBA currently trades at $67 per share.
A) The option will continue to gain value until its September expiration
B) The owner profits $ 13 per share by exercising now
C) Further decrease in CBA stock price will be translated directly into additional option value
D) $20 is the maximum value for this put option
17. XYZ Inc.’s stock is currently trading at $32 per share. Conadcr a put option on XYZ stock with an exercise price of $30 The maximum value of this put option is
A) $0
B) $32
C) $30
D) $2
18. Which of the following call options will have the lowest premium, other things being equal?
A) June 2020 expiration with an exercise price of $40
B) March 20209 expiration with an exercise price of $45 Q December 2019 expiration with an exercise price of $40
D) October 2019 expiration with an exercise price of $45
19. The writer of a call option has
A) The obligation to buy a security for a given price
B) The obligation to sell a security for a given price
C) The right to buy a security for a given price
D) The right to sell a security for a given price
(The following information relates to Questions 20 to 22)
Inputs to the Black-Scholes option pricing formula arc given below:
Current stock price $36
Exercise price $35
Continuous risk-free rate 3% per year
Annualized variance 0.25
Expiration time ** 30 days
N(d,) = 0.6124 N(d2) = 0.5565
20. Compute the appropriate price for this call option contract
A~ $6.36
B) $1.54
C) $2.75
D) $4.11
Hint: K-«/>*//(</,)-^*//(4)
21. If you want to replicate the payoff of this call by buying stocks, how much do you need to borrow for the purchase?
AT $19 43
B) $25.00
C) $34.31
D) $10.67
22. Instead, if you want to mimic the return from investing in one share of stock, how many calls do you need to buy?
A)“ 0.6124
B) 1.6329
C) 0.9370
D) 0.5565
Hint: Hedge ratio 8 = AC/AS
A) The opuon to expand production if the product is suoccssful
B) The option to buy shares of stock if its pricc goes up
C) The opuon to switch the type of fuel used in an industrial furnace
D) None of the above
24 A project has an expected NPV of $25 based on the tradiional DCF analysis
However, using the real option valuation model, the expcctcd NPV becomes $75. What is the option value?
A)~ S25
B) S50
C) $75
D) $100
When you do not have the option to wait, it is optimal to invest in_project
When you have the option of dcading when to invest, it is usually optimal to invest only when the NPV is_.
A) Any positive-NPV, substantially greater than zero
B) Any positive-NPV, marginally smaller than one
C) Any negative-NPV, substantially greater than zero
D) Any zcro-NPV, marginally greater than zero
26. When a firm in financial distress acccpts very risky projects, the shareholders benefits at the expense of the bondholders. In terms of real option theory, the gain to the shareholders occurs bccause
A) The stock is a put option on the firm’s assets, and risky projects decrease the exercise price of the option
B) The stock is a put option on the firm’s assets, and risky projects increase the exercise pnee of the option
C) The stock is a call option on the firm’s assets, and risky projects increase the volatility of those assets
D) The stock is a call option on the film’s assets, and risky projects decrease the volatility of those assets
You own a small manufacturing plant that currently generates revenues of $2 million per year Next year, based upon a decision on a long-term government contract, your revenues will either increase by 25% or decrease by 10%, with equal probability, and stay at that le\cl as long as you operate the plant Other costs run $ I 6 m illion per year You can sdl the plant at any time to a large conglomerate for $5 million Your cost of capital is 10%27 Given the embedded option to sell the plant, how much will the value of your plant be?
A) $9 0 million
B) $7 0 million
C) $6 5 million
D) $5.5 million
28. Assume that you cannot sell the plant, but you are able to shut down the plant at no cost at any time Given the embedded option to abandon production, what will be the value of your plant?
A) $9.0 million
B) $7.0 million
C) $5.5 million
D) $4 5 million
29 When a bank enters into an agreemcit with a customer to providb a fixed-rate loan whenever this customer wants it, the bank has
A) Given the customer a call option to buy the loan
B) Given the customer a put option to buy the loan
C) Given the customer a put option to sell the equivalent of a bond to the bank
D) None of the above as th is transaction is no way related to options
30. Which of the following is a disadvartage of the swap as a method for controlling interest rate risk?
A) Swaps arc more complex
B) Swaps arc more expensive than simply restructuring the balance sheet
C) Swaps may not accomplish the goal
D) Swaps lack liquidity
NST Trust is in the market to borrow $2 million for five years. Because of its small size and lack of diversification in its loan portfolio, NST prefers fixed-rate debt to minimize fluctuations in its interest payments
PBC Bank is a large bank wth SI 50 billion in assets. It is in the market to borrow $2 million to finance a loan to a customer The rate on the loin is floating because of the customer’s preferences. Therefore, PBC prefers to borrow on a floating-rate basisIt happens that NST and PBC have talked to the same money market dealer about their needs The dealer’s observations after checking the market are summarized as below
PBC Bank NST Trust
Fixed-rate Market 6.50% 8.50%
Floating-rate Market T-bill rate plus IX T-blll rate plus 2.25%
31 What is the net quality differential?
A) 2.00%
B) 0.75%
C) 3.25%
D) 1.25%
Hint: NQD = ARn-ARn
32. Which of the following is true?
A) PBC Bank has the absolute advantages in both the fixed-rate and floating-rate markets
B) NST has comparative advaitages in the floating-rate market
C) $15,000/year in interest costs can be saved by allowing PBC and NST to borrow at their preferred terms through a swap arangement
D) All of the above
33. In order to share equally the savings in interest costs, what rate will NST pay in the swap contract as a fixed-payment party to PBC in the fixed-rate market?
A)“ 8 125%
B) 7.500%
C) 7.750%
D) 7.250%
34 Л protective put strategy is adding a long put to a portfolio consisting of an asset Typically, a protective put is
A) In the money
B) Out of the money
C) At the money
D) Deep in the money
35. You are planning to purchase a call option on ABC Corp shares Currently, ABC shares arc trading at $40 apiece. TTie option expires in 25 days. During this period, you can invest your money at a risk-free rate of 3%, continuously compounded. The call’s exercise price is $38. The option premium is $4.26. What is the time value of this call option?
A) $200
B) $2.15
C) $2.26
D) $3.32
36. Suppose you find a call option and a put optx>n with the same expiration, and a strike price that is exactly to the price of the underlying stock. You know
A) The price of the call is greater than the price of the put
B) The price of the put is greater than the price of the call
C) The price of the call is equal to the price of the put
D) Insufficient information to draw any conclusion
37. A Canada bond futures contract has a quoted price of $100. The contract matures in a year The underlying bond has a coupon rate of 7%. The current market interest rate is 7%. The current dividend yield is zero. Spot-futures panty implies a cash bond-price roughly of
A) $93
B) $100
C) $107
D) $114
Hint: FT = So(I+r-d)T
38. The effect of marking a futures contract to market issimilar to
A) Requiring daily payments from the contract buyer
B) Requiring daily payments from the contract seller
C) Closing the current position and opening a new position 
D) Imposing a daily fee on both buyers and sellers
39. Electric utOitics companies and coal minesagrec to undertake a derivative transaction to reduce their risks. They form a good example of
A) Perfect hedge
B) Fair hedge
C) Natural hedge
D) Short hedge
40. An effective strategy for reducing operating costs is
A) Acccssing new capital markets
B) Developing economics of vertical integration
C) Seeking risk reduction through international asset diversification
D) Following the customers
41 A is worth S450 with 100 shares outstanding With a market value of $375, B has 40 shares outstanding To acquire B, A will swap 80 shares of its own for the 40 shares of B The combined firm value will be $925. What is the premium of acquiring B if A and B merge?
AT $100
B) $325
C) $360
D) -$15
42. An acquisition may take place because of a real or perceived strategic advantage, Which of the following is a legitimate example?
A) An aircraft manufacturer buying a laser-guidance company for possible advanced flight control without pilots
B) A corporation out-sourcing to achieve cost economics
C) A manufacturer integrating its supply by acquiring upstream company
D) A firm completing a spin-off
43. “The traditional view of finance” suggests that investors
A) Are risk neutral
B) Let emotion override logic
C) Act irrationally and make systematic errors
D) Consider all available information
44. When investors dislike risk but are willing to undertake risk if they arc compensated in the form of higher returns, this is an example of
A) Loss aversion
B) Anchoring
C) Mental accounting
D) Risk aversion
45. You have been assigned to value a project Your analysis shows that it is a loser But top management decides to accept the project since they believe that this one will be a success based on their experiences with similar projects in the past This is an example of
A) Affect heuristic
B) Illusion of control
C) Availability bias
D) Affection investing