Archives

The free cash flow to equity in 2010 is closest to: A) 6,255 B) 10,684 C) 11,559 D) 18,394 Answer: A Explanation: A) After-Tax interest expense = interest expense(1 – Tc) = 8,160(1 – .35) = 5,304 Note Tc = […]

If the risk-free rate is 5% and the expected return of investing in Merck is 11.3%, then the expected return on the market must be: A) 8.0% B) 10.0% C) 10.4% D) 12.0% Nielson Motors has a share price of […]

Which of the following statements is FALSE? A) Bond ratings encourage widespread investor participation and relatively liquid markets. B) Bonds in the top four categories are often referred to as investment grade bonds. C) A bond’s rating depends on the […]

You are considering investing in a zero coupon bond that will pay you its face value of $1000 in ten years. If the bond is currently selling for $485.20, then the IRR for investing in this bond is closest to: […]

Which of the following statements is FALSE? A) The yield to maturity of a coupon bond is a weighted average of the yields on the zero-coupon bonds. B) If the zero-coupon yield curve is downward sloping, the yield to maturity […]

Suppose Novak Company experienced a reduction in its ROE over the last year. This fall could be attributed to: A) an increase in net profit margin. B) a decrease in asset turnover. C) an increase in leverage. D) a decrease […]

An exploration of the effect on NPV of changing multiple project parameters is called: A) scenario analysis. B) IRR analysis. C) accounting break-even analysis. D) sensitivity analysis. If investors believe that others have superior information which they can take advantage […]

Suppose that Rose Industries is considering the acquisition of another firm in its industry for $100 million. The acquisition is expected to increase Rose’s free cash flow by $5 million the first year, and this contribution is expected to grow […]

Nielson Motors (NM) has no debt. Its assets will be worth $600 million in one year if the economy is strong, but only $300 million if the economy is weak. Both events are equally likely. The market value today of […]

Consider a four-year, default-free bond with an annual coupon rate of 4.5% and a face value of $1000. The YTM on this bond is closest to: A) 3.85% B) 4.20% C) 4.35% D) 4.40% Consider the following expected returns, volatilities, […]

The volatility of the market portfolio is 10%, the expected return on the market is 12%, and the risk-free rate of interest is 4%The Sharpe Ratio for Wyatt Oil is closest to: A) 0.40 B) 0.48 C) 0.56 D) 0.80 […]

Consider the following two projects: The NPV for project beta is closest to: A) $24.01 B) $16.92 C) $20.96 D) $14.41 Which of the following is NOT one of Modigliani and Miller’s set of conditions referred to as perfect capital […]

Wyatt Oil’s excess return for 2009 is closest to: A) 18.6% B) 19.6% C) 20.0% D) 21.5% Answer: A Explanation: A) excess returne= (rWO– rrf)2009 Consider a five-year, default-free bond with an annual coupon rate of 5% and a face […]

The Aardvark Corporation is considering launching a new product and is trying to determine an appropriate discount rate for evaluating this new product. Aardvark has identified the following information for three single division firms that offer products similar to the […]

Which of the following statements is FALSE? A) If the market portfolio is efficient, then all securities and portfolios must plot on the SML, not just individual stocks. B) For most stocks the standard errors of the alpha estimates are […]

Von Bora Corporation is expected pay a dividend of $1.40 per share at the end of this year and a $1.50 per share at the end of the second year. You expect Von Bora’s stock price to be $25.00 at […]

Rockwood Enterprises is currently an all equity firm and has just announced plans to expand their current business. In order to fund this expansion, Rockwood will need to raise $100 million in new capital. After the expansion, Rockwood is expected […]

Flagstaff Enterprises expected to have free cash flow in the coming year of $8 million, and this free cash flow is expected to grow at a rate of 3% per year thereafter. Flagstaff has an equity cost of capital of […]

Nielson Motors has a debt-equity ratio of 1.8, an equity beta of 1.6, and a debt beta of 0.20. It is currently evaluating the following projects, none of which would change Nielson’s volatility. (All amounts are in $millions.) Which of […]

Which of the following statements is FALSE? A) With a stock dividend, a firm does not pay out any cash to shareholders. As a result, the total market value of the firm’s assets and liabilities, and therefore of its equity, […]

Which of the following statements is FALSE? A) The most common valuation multiple is the price-earnings (P/E) ratio. B) You should be willing to pay proportionally more for a stock with lower current earnings. C) A firm’s P/E ratio is […]

The Sisyphean Corporation is considering investing in a new cane manufacturing machine that has an estimated life of three years. The cost of the machine is $30,000 and the machine will be depreciated straight line over its three-year life to […]

Which of the following is NOT an advantage of a sole proprietorship? A) Single taxation B) Ease of setup C) Limited liability D) No separation of ownership and control Assume that the corporate tax rate is 40%, the personal tax […]

A default-free security has an annual coupon rate of 3.25% and sells for par. This bond will mature in: A) 1 year B) 2 years C) 3 years D) 4 years The weighted average cost of capital for “Minie” is […]

Which of the following statements is FALSE? A) In general, the IRR rule works for a stand-alone project if all of the project’s positive cash flows precede its negative cash flows. B) There is no easy fix for the IRR […]

JR Industries has a $20 million loan due at the end of the year and under its current business strategy its assets will have a market value of only $15 million when the loan comes due. JR is considering a […]

Taggart Transcontinental has issued at par a zero-coupon bond with a ten-year maturity. Investors believe there is a 10% chance that Taggart Transcontinental will default on these bonds. If they do default, investors expect to receive only 50 cents per […]

Consider the following timeline detailing a stream of cash flows: If the current market rate of interest is 6%, then the future value of this stream of cash flows is closest to: A) $1,723 B) $1,500 C) $1,626 D) $1,288 […]

Iota Industries is an all-equity firm with 50 million shares outstanding. Iota has $200 million in cash and expects future free cash flows of $75 million per year. Management plans to use the cash to expand the firm’s operations, which […]

A limited liability company is essentially: A) a limited partnership without limited partners. B) a limited partnership without a general partner. C) just another name for a limited partnership. D) just another name for a corporation. Which of the following […]

Suppose that all capital gains are taxed at a 20% rate, and that the dividend tax rate is 40%. Rearden Metal is currently trading for $40 per share, and is about to pay a $5 special dividend.Suppose that Rearden Metal […]

Which of the following is NOT considered to be an important choice when estimating beta? A) The choice of the time horizon to use for estimation B) The choice of method used to extrapolate beta C) The choice between weekly […]

Consider the following probability distribution of returns for Alpha Corporation: The standard deviation of the return on Alpha Corporation is closest to: A) 22.4% B) 19.0% C) 21.8% D) 19.4% Consider the following income statement for Kroger Inc. (all figures […]

Which of the following is NOT a systematic risk? A) The risk that oil prices rise, increasing production costs B) The risk that the Federal Reserve raises interest rates C) The risk that the economy slows, reducing demand for your […]

The volatility of the market portfolio is 10%, the expected return on the market is 12%, and the risk-free rate of interest is 4%The Sharpe Ratio for Rearden Metal is closest to: A) 0.40 B) 0.56 C) 0.80 D) 1.00 […]

Omicron Industries’ Market Value Balance Sheet ($ Millions) and Cost of Capital Omicron Industries New Project Free Cash Flows Assume that this new project is of average risk for Omicron and that the firm wants to hold constant its debt […]

The beta for the market portfolio is closest to: A) 1 B) 0 C) Unable to answer this question without knowing the markets expected return D) Unable to answer this question without knowing the markets volatility The NPV profile A) […]

Your son is about to start kindergarten in a private school. Currently, the tuition is $12,000 per year, payable at the start of the school year. You expect annual tuition increases to average 6% per year over the next 13 […]

Consider the following timeline: If the current market rate of interest is 7%, then the future value of this timeline as of year 3 is closest to: A) $1720 B) $1500 C) $1404 D) $1717 When using the internal rate […]

Consider the following zero-coupon yields on default free securities: The YTM of a 3 year default free security with a face value of $1000 and an annual coupon rate of 6% is closest to: A) 5.5% B) 5.8% C) 5.7% […]

You are evaluating a new project and need an estimate for your project’s beta. You have identified the following information about three firms with comparable projects: The unlevered beta for Blinkin is closest to: A) 0.95 B) 1.10 C) 1.00 […]

Which of the following statements is FALSE? A) U.S. Treasury securities are widely regarded to be risk-free because there is virtually no chance the government will default on these bonds. B) In general, if the interest rate is r and […]

Nielson Motors has a debt-equity ratio of 1.8, an equity beta of 1.6, and a debt beta of 0.20. It is currently evaluating the following projects, none of which would change Nielson’s volatility. (All amounts are in $millions.) Nielson Motors […]

Which of the following statements is FALSE? A) The tax deductibility of interest lowers the effective cost of debt financing for the firm. B) When a firm uses debt financing, the cost of the interest it must pay is offset […]

If the expected return on the market is 11% and the expected return of investing in Merck is 10.35%, then the risk-free rate must be: A) 3.0% B) 4.0% C) 4.5% D) 5.0% Luther Industries currently has 5 million shares […]

Sarah Palin reportedly was paid a $11 million advance to write her book Going Rogue. The book took one year to write. In the time she spent writing, Palin could have been paid to give speeches and appear on TV […]

Capital Structure and Unlevered Beta Estimates for Comparable Firms The unlevered beta for Luxottica is closest to: A) 1.00 B) 0.60 C) 0.70 D) 1.50 The person charged with running the corporation by instituting the rules and policies set by […]

At an annual interest rate of 7%, the future value of $5,000 in five years is closest to: A) $3,565 B) $6,750 C) $7,015 D) $7,035 d’Anconia Copper is an all-equity firm with 60 million shares outstanding, which are currently […]

Suppose that Merck (MRK) stock is trading for $36.70 per share with 2.11 billion shares outstanding while Boeing (BA) has 697.5 million shares outstanding and a market capitalization of $38.223 billion. Assume that you hold the market portfolio. Merck’s market […]

Aardvark Industries is considering a project that will generate the following free cash flows: You are also provided with the following market value balance sheet and information regarding Aardvark’s cost of capital: Suppose that to fund this new project, Aardvark […]

Rockwood Industries has 100 million shares outstanding, a current share price of $25, and no debt. Rockwood’s management believes that the shares are under-priced, and that the true value is $30 per share. Rockwood plans to pay $250 million in […]

Your firm is considering building a new office complex. Your firm already owns land suitable for the new complex. The current book value of the land is $100,000, however a commercial real estate again has informed you that an outside […]

A type of agency problem that results in shareholders gaining by choosing not to finance new, positive-NPV projects is: A) asset substitution. B) debt overhang. C) excessive risk-taking. D) distress costs. Consider the following information regarding corporate bonds: Galt Industries […]

In November 2009, Perrigo Co. (PRGO) had a share price of $39.20. They had 91.33 million shares outstanding, a market-to-book ratio of 3.76. In addition, PRGO had $845.01 million in outstanding debt, $163.82 million in net income, and cash of […]

Consider the following information regarding corporate bonds: Wyatt Oil has a bond issue outstanding with seven years to maturity, a yield to maturity of 7.0%, and a BBB rating. The bondholders’ expected loss rate in the event of default is […]

You work for a pharmaceutical company that has developed a new drug. The patent on the drug will last for 17 years. You expect that the drug will produce cash flows of $10 million in its first year and that […]

Which of the following statements is FALSE? A) The long-run growth rate gFCFis typically based on the expected long-run growth rate of the firm’s revenues. B) Because the firm’s free cash flow is equal to the sum of the free […]

Which of the following statements is FALSE? A) Investments with higher volatility have rewarded investors with higher average returns. B) Investments with higher volatility should have a higher risk premium and therefore higher returns. C) Volatility seems to be a […]

Which of the following statements is FALSE? A) When stocks are perfectly positively correlated, the set of portfolios is identified graphically by a straight line between them. B) An investor seeking high returns and low volatility should only invest in […]

Consider the following top federal tax rates in the United States: Personal Tax Rates In 2000, assuming an average dividend payout ratio of 50%, the effective tax advantage for debt (t*) was closest to: A) 40% B) 24% C) 30% […]

Consider the following information regarding corporate bonds: Your estimate of the asset beta for Nielson Motors is closest to: A) 0.59 B) 0.66 C) 0.71 D) 1.75 Consider the following timeline detailing a stream of cash flows: If the current […]

Which of the following statements is FALSE? A) The relative proportions of debt, equity, and other securities that a firm has outstanding constitute its capital structure. B) The most common choices are financing through equity alone and financing through a […]

Consider the following income statement for Kroger Inc. (all figures in $ Millions): The total amount available to payout to all the investors in Kroger in 2006 is closest to: A) $990 million B) $1,525 million C) $1,500 million D) […]

Consider the following four bonds that pay annual coupons: The amount that the price of bond “D” will change if its yield to maturity increases from 8% to 9% is closest to: A) -$36 B) -$39 C) $36 D) $9 […]

Nielson Motors (NM) has no debt. Its assets will be worth $600 million in one year if the economy is strong, but only $300 million if the economy is weak. Both events are equally likely. The market value today of […]

Taggart Transcontinental currently has a bank loan outstanding that requires it to make three annual payments at the end of the next three years or to skip making the next two payments in lieu of making one large payment at […]

Luther Corporation Consolidated Balance Sheet December 31, 2009 and 2008 (in $ millions) If in 2009 Luther has 10.2 million shares outstanding and these shares are trading at $16 per share, then using the market value of equity, the debt […]

Which of the following statements is FALSE? A) Leverage decreases the risk of the equity of a firm. B) Because the cash flows of the debt and equity sum to the cash flows of the project, by the Law of […]

Which of the following statements is FALSE? A) An investor’s preferences will determine only how much to invest in the tangent or efficient portfolio versus the risk-free investment. B) Conservative investors will invest a small amount in the tangent or […]

Consider the following list of projects: Assuming that your capital is constrained, so that you only have $600,000 available to invest in projects, which projects should you invest in and in what order? A) CBFH B) CBGF C) BCFG D) […]

Shepard Industries is evaluating a proposal to expand its current distribution facilities. Management has projected the project will produce the following cash flows for the first two years (in millions). The depreciation tax shield for Shepard Industries project in year […]

*The current tax rates are set to expire in 2008 unless Congress extends them. The tax rates shown are for financial assets held for one year. For assets held less than one year, capital gains are taxed at the ordinary […]

Consider the following timeline detailing a stream of cash flows: If the current market rate of interest is 10%, then the present value of this stream of cash flows is closest to: A) $674 B) $600 C) $460 D) $287 […]

The price today of a two-year default-free security with a face value of $1000 and an annual coupon rate of 5% is closest to: A) $1002.78 B) $1003.31 C) $1028.50 D) $1028.61 Nielson Motors (NM) is a newly public firm […]

Consider the following information regarding corporate bonds: Your estimate of the debt beta for Taggart Transcontinental would be: A) 0.05 B) 0.10 C) 0.17 D) 1.00 If Firm A and Firm B are in the same industry and use the […]

d’Anconia Copper has $200 million in cash that it can use for a share repurchase. Suppose instead that d’Anconia Copper invests the funds in an account paying 5% interest for one year. Assume that the corporate tax rate is 35%, […]