Twenty questions that test the whole volume at practitioner depth: valuation, deals, bonds, derivatives, portfolio risk, forensic accounting, governance, regulation and history. Work the numbers first, then reveal each answer.
20 questions covering the whole volume. Decide on your answer first, then click “Reveal Answer.”
1. A company expects free cash flow of $100 million in Year 5, growing 3% a year afterward, with a WACC of 8%. What is the Year 5 terminal value by the Gordon growth formula?
- $1,250 million
- $3,333 million
- $2,000 million
- $2,060 million
Reveal Answer
Answer: D. TV = FCF × (1 + g) ÷ (WACC − g) = 100 × 1.03 ÷ 0.05 = $2,060 million. Forgetting the (1 + g) gives $2,000 million.
2. An LBO buys a company for 8.0 times EBITDA of $100 million and finances it with $500 million of debt and $300 million of equity. After five years EBITDA is $130 million, the exit multiple is 8.0 times and debt has been paid down to $350 million. What are the money multiple and IRR?
- 3.0x and about 24.6%
- 2.3x and about 18.1%
- 1.8x and about 12.5%
- 2.3x and about 23.0%
Reveal Answer
Answer: B. Exit equity = 8.0 × 130 − 350 = $690 million; MOIC = 690 ÷ 300 = 2.3x; IRR = 2.3^(1/5) − 1 ≈ 18.1%.
3. A three-year bond pays a 5% annual coupon and its yield rises to 6%. What is its price per $100 of face value?
- About $97.33
- About $102.67
- About $95.00
- About $100.00
Reveal Answer
Answer: A. The price is 5 ÷ 1.06 + 5 ÷ 1.06² + 105 ÷ 1.06³ ≈ $97.33, below par because the yield exceeds the coupon.
4. A bond has modified duration of 10 and convexity of 100. Using both terms, what is the approximate price change when its yield rises by 1 percentage point?
- About −10.5%
- About −10.0%
- About −9.5%
- About +9.5%
Reveal Answer
Answer: C. ΔP/P ≈ −10 × 0.01 + 0.5 × 100 × 0.01² = −10.0% + 0.5% = −9.5%. Convexity softens the loss when yields rise.
5. A stock trades at $100 and the one-year risk-free rate is 5% (annual compounding). A European call and put share the same $100 strike and one-year expiry. Put-call parity says call minus put equals what?
- About $100.00
- About $0.00
- About $5.00
- About $4.76
Reveal Answer
Answer: D. C − P = S − K ÷ (1 + r) = 100 − 100 ÷ 1.05 ≈ $4.76. The call is worth more than the put by the present value of the interest saved by not paying the strike today.
6. You are short 100 call options on one share each, and the delta of each call is 0.60. How many shares make the position delta-neutral?
- Buy 60 shares
- Buy 100 shares
- Buy 40 shares
- Sell 60 shares
Reveal Answer
Answer: A. Short calls lose when the stock rises: delta exposure is −0.60 × 100 = −60 shares, so buying 60 shares offsets it. The hedge must be rebalanced as delta changes.
7. A portfolio holds two assets in equal weights, each with 20% volatility and a correlation of 0.5. What is the portfolio volatility?
- About 14.1%
- 20.0%
- About 17.3%
- 10.0%
Reveal Answer
Answer: C. σp² = 0.25 × 0.04 + 0.25 × 0.04 + 2 × 0.25 × 0.5 × 0.2 × 0.2 = 0.03, so σp ≈ 17.3%. Imperfect correlation produces the diversification benefit.
8. A fund returns 12% with 16% volatility while the risk-free rate is 4%. What is its Sharpe ratio?
- 0.33
- 0.50
- 0.25
- 0.75
Reveal Answer
Answer: B. Sharpe = (12% − 4%) ÷ 16% = 0.50. It measures excess return per unit of total volatility.
9. A fund’s annual return is 12%, the long-run mean return is 8% and the standard deviation is 10%. What is the z-score of that return?
- 0.4
- 1.2
- 4.0
- 0.04
Reveal Answer
Answer: A. z = (12% − 8%) ÷ 10% = 0.4: the return sits 0.4 standard deviations above the mean, which is unremarkable, since about one year in three lands that far above the mean or higher.
10. A $10 million portfolio has daily volatility of 1.2%. What is the one-day 95% parametric VaR under the normal distribution (z = 1.645)?
- About $235,400
- About $120,000
- About $197,400
- About $394,800
Reveal Answer
Answer: C. VaR = 1.645 × 1.2% × $10 million ≈ $197,400. It says nothing about losses beyond that threshold, which is why expected shortfall is also used.
11. A project costs $100 and returns $60 at the end of each of the next two years. At a 10% discount rate, what is its NPV?
- About +$13.07
- About −$4.13
- About +$20.00
- About +$4.13
Reveal Answer
Answer: D. NPV = −100 + 60 ÷ 1.10 + 60 ÷ 1.21 ≈ +$4.13. The IRR is about 13.1%, above the 10% hurdle, so both tests accept the project.
12. A stock has a beta of 1.2, the risk-free rate is 4% and the equity risk premium is 5%. What is the CAPM cost of equity?
- 9.0%
- 10.0%
- 11.0%
- 6.0%
Reveal Answer
Answer: B. Cost of equity = 4% + 1.2 × 5% = 10.0%.
13. A firm is 60% equity at a 10% cost and 40% debt at a 6% pre-tax cost, with a 25% tax rate. What is its WACC?
- 6.6%
- 9.1%
- 7.8%
- 8.4%
Reveal Answer
Answer: C. WACC = 0.6 × 10% + 0.4 × 6% × (1 − 0.25) = 6.0% + 1.8% = 7.8%. Debt is cheaper after the interest tax shield.
14. A target trades at $48 and the cash offer is $50, with closing expected in six months. What is the simple annualized merger-arbitrage spread?
- About 12.5%
- About 2.0%
- About 4.2%
- About 8.3%
Reveal Answer
Answer: D. Gross spread = 2 ÷ 48 ≈ 4.17% over six months, or about 8.3% annualized, before deal-break risk. The spread is the market’s price for that risk.
15. Spot EUR/USD is 1.10, the one-year US rate is 4% and the one-year euro rate is 2%. What one-year forward does covered interest parity imply?
- About 1.1216
- About 1.1000
- About 1.1440
- About 1.0784
Reveal Answer
Answer: A. F = S × (1 + r_USD) ÷ (1 + r_EUR) = 1.10 × 1.04 ÷ 1.02 ≈ 1.1216. The euro trades at a forward premium because its interest rate is lower.
16. How does deferred tax asset recognition differ between US GAAP and IFRS?
- Neither framework allows deferred tax assets on tax losses, so both expense the losses in the year they arise and never recover them
- US GAAP records the asset and then reduces it by a valuation allowance, while IAS 12 recognizes only the amount that is probable of being used
- US GAAP recognizes only the amount that is probable of being used, while IAS 12 records the asset and then reduces it by a valuation allowance
- IFRS requires a valuation allowance on every deferred tax asset, while US GAAP forbids any reduction of the recorded asset
Reveal Answer
Answer: B. Section 6.5: Deferred Tax — Assets, Liabilities, and Why They Exist: US GAAP uses a more-likely-than-not valuation allowance, while IAS 12 recognizes a deferred tax asset only to the extent that future taxable profit is probable.
17. Which statement about say-on-pay is correct?
- The US vote is binding and the UK vote is advisory, so UK shareholders cannot block a pay policy
- Neither vote has any legal effect anywhere, so boards may ignore shareholders on pay without consequence
- The UK shareholder vote on the remuneration policy is binding, while the US say-on-pay vote is advisory
- Both votes are binding in every jurisdiction, so a failed vote automatically removes the executives
Reveal Answer
Answer: C. Section 7.5: Say-on-Pay and Compensation Committees: UK law makes the remuneration policy vote binding and the annual report vote advisory; US say-on-pay is advisory by statute.
18. Which law created the mandatory clearing obligation for standardized over-the-counter derivatives in the European Union?
- MiFID II
- Basel III
- Dodd-Frank Title VII
- EMIR
Reveal Answer
Answer: D. Section 9.4: Dodd-Frank vs MiFID II Compared: the EU clearing mandate comes from EMIR. MiFID II governs trading venues and investor protection; Dodd-Frank is the US counterpart.
19. Who founded Long-Term Capital Management in 1994, with Myron Scholes and Robert Merton as partners?
- John Meriwether
- Nick Leeson
- Fischer Black
- Michael Milken
Reveal Answer
Answer: A. Section 10.4: LTCM’s 1998 Collapse: LTCM was founded by John Meriwether, a former Salomon Brothers bond trader. Merton and Scholes shared the 1997 Nobel Prize in economics.
20. What does a three-scenario comparison with a flip point teach a practitioner?
- That every scenario leads to the same decision, so the choice between inputs never really matters
- The input value at which the better decision changes, so a decision rests on how far an assumption can move
- Which scenario is always correct regardless of inputs, so the decision can be fixed in advance and never revisited
- That inputs should never be varied, because a single base case is the only reliable estimate available
Reveal Answer
Answer: B. The worked examples in this volume locate the flip point so that a decision is tested against how far an assumption can move before the answer changes.