Corporate Finance: The Core 0th Edition

Exam Name___________________________________ MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Which of the following statements is false? 1) A) Because a corporation is a separate legal entity, when it fails to repay its debts, the people who lent to the firm, the debt holders are entitled to seize the assets

Exam Name___________________________________ MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Use the table for the question(s) below. Consider the following realized annual returns: Year End S&P 500 Realized Return IBM Realized Return 1996 23.6% 46.3% 1997 24.7% 26.7% 1998 30.5% 86.9% 1999 9.0% 23.1% 2000 -2.0% 0.2% 2001 -17.3% -3.2% 2002 -24.3% -27.0% 2003 32.2% 27.9% 2004 4.4% -5.1% 2005 7.4% -11.3% 1) Suppose that you

Use the table for the question(s) below. Consider the following realized annual returns: Year End S&P 500 Realized Return IBM Realized Return 1996 23.6% 46.3% 1997 24.7% 26.7% 1998 30.5% 86.9% 1999 9.0% 23.1% 2000 -2.0% 0.2% 2001 -17.3% -3.2% 2002 -24.3% -27.0% 2003 32.2% 27.9% 2004 4.4% -5.1% 2005 7.4% -11.3% 41) Suppose that you want to use the 10 year historical average return on IBM to forecast the

Use the table for the question(s) below. Consider the following Price and Dividend data for Ford Motor Company: Date Price ($) Dividend ($) December 31, 2004 $14.64 January 26, 2005 $13.35 $0.10 April 28, 2005 $9.14 $0.10 July 29, 2005 $10.74 $0.10 October 28, 2005 $8.02 $0.10 December 30, 2005 $7.72 67) Assume that you purchased Ford Motor Company stock

Exam Name___________________________________ MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Which of the following statements is false? 1) A) The variance of a portfolio is equal to the weighted average covariances of each stock within the portfolio. B) The volatility declines as the number of stocks in a portfolio grows. C) The variance of

Use the table for the question(s) below. Consider the following returns: Year End Lowes Realized Return Home Depot Realized Return IBM Realized Return 2000 20.1% -14.6% 0.2% 2001 72.7% 4.3% -3.2% 2002 -25.7% -58.1% -27.0% 2003 56.9% 71.1% 27.9% 2004 6.7% 17.3% -5.1% 2005 17.9% 0.9% -11.3% 44) The Volatility on IBM's returns is closest to: 44) A) 13% B) 18% C) 16% D) 3% Answer:BExplanation:A)B)YearEndLowesRealizedReturnIBM RealizedReturnLowesDeviation(RL-RL)IBMDeviation(RI-RI)(RL-RL)(RI-RI)2000 20.1% 0.2% -4.7% 3.3% -0.001555422001 72.7% -3.2% 47.9% -0.1% -0.000488712002 -25.7%

ESSAY. Write your answer in the space provided or on a separate sheet of paper. Use the table for the question(s) below. Consider the following covariances between securities: Duke Microsoft Wal-Mart Duke 0.0568 -0.0193 0.0037 Microsoft -0.0193 0.2420 0.1277 Wal-Mart 0.0037 0.1277 0.1413 69) What is the variance on a portfolio that has $2000 invested in Duke Energy,

Exam Name___________________________________ MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Use the information for the question(s) below. Suppose that the risk-free rate is 5% and the market portfolio has an expected return of 13% with a volatility of 18%. Monsters Inc. has a 24% volatility and a correlation

Use the table for the question(s) below. Consider the following stock price and shares outstanding data: Stock Name Price per Share Shares Outstanding (Billions) Lowes $28.80 1.53 Wal-Mart $47.90 4.17 Intel $19.60 5.77 Boeing $75.00 0.79 40) The total market capitalization for all four stocks is closest to: 40) A) $479 Billion B) $2,100 Billion C) $415 Billion D) $200 Billion Answer:CExplanation:A)B)C)StockNamePrice perShareSharesOutstanding(Billions)MarketCapitalization(Billions)Lowes $28.80 1.53 $44.06 Wal-Mart $47.90 4.17 $199.74 Intel $19.60 5.77 $113.09

Exam Name___________________________________ MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Use the table for the question(s) below. Consider the following information regarding the Fama French Carhart four factor model: Factor Portfolio Average Monthly Return (%) IBM Factor Betas GE Factor Betas Wal-Mart Factor Betas Rm-rf0.64 0.712 0.937 0.782 SMB 0.17 -0.103 -0.214 0.224 HML 0.53 0.124 0.154 0.123 PR1 YR 0.76 0.276 -0.147 0.247 1) Using

Use the table for the question(s) below. Consider the following information regarding the Fama French Carhart four factor model: Factor Portfolio Average Monthly Return (%) IBM Factor Betas GE Factor Betas Wal-Mart Factor Betas Rm-rf0.64 0.712 0.937 0.782 SMB 0.17 -0.103 -0.214 0.224 HML 0.53 0.124 0.154 0.123 PR1 YR 0.76 0.276 -0.147 0.247 28) Using the FFC four factor model and the historical average monthly returns, the expected monthly return

Exam Name___________________________________ MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Use the information for the question(s) below. 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: Firm Name Equity Beta Debt Beta Debt to Equity Ratio Lincoln 1.25 00.25 Blinkin 1.6

Use the information for the question(s) below. Consider a project with free cash flows in one year of $90,000 in a weak economy or $117,000 in a strong economy, with each outcome being equally likely. The initial investment required for the project is $80,000, and the project's cost of capital is 15%. The

Use the information for the question(s) below. 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: Firm Name Equity Beta Debt Beta Debt to Equity Ratio Lincoln 1.25 00.25 Blinkin 1.6 0.2 1 Nod 2.3 0.3 1.5 72) Based upon the three comparable firms, what asset beta would

Exam Name___________________________________ MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Which of the following statements is false? 1) A) Because the cash flows of the levered firm are equal to the sum of the cash flows from the unlevered firm plus the interest tax shield, by the Law of One

41) Which of the following statements is false? 41) A) In general, as a firm's interest expense approaches its expected taxable earnings, the marginal tax advantage of debt increases, limiting the amount of equity the firm should use. B) No corporate tax benefit arises from incurring interest payments that regularly exceed EBIT. C) The optimal level of leverage from

Exam Name___________________________________ MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Which of the following statements is false? 1) A) Firms have an incentive to increase leverage to exploit the tax benefits of debt. But with too much debt, they are more likely to risk default and incur financial distress costs. B) According

Use the information for the question(s) below. Monsters Incorporated (MI) in ready to launch a new product. Depending upon the success of this product, MI will have a value of either $100 million, $150 million, or $191 million, with each outcome being equally likely. The cash flows are unrelated to the state of

Exam Name___________________________________ MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Use the information for the question(s) below. Omicron Technologies has $50 million in excess cash and no debt. The firm expects to generate additional free cash flows of $40 million per year in subsequent years and will pay

49) Which of the following statements is false? 49) A) From an accounting perspective, dividends generally reduce the firms current (or accumulated) retained earnings. B) The way a firm chooses between paying dividends and retaining earnings is referred to as its payout policy. C) Occasionally, a firm may pay a one-time, special dividend that is usually much larger than a regular

Exam Name___________________________________ MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Use the information for the question(s) below. Omicron Industries' Market Value Balance Sheet ($ Millions) and Cost of Capital Assets Liabilities Cost of Capital Cash 0Debt 200 Debt 6% Other Assets 500 Equity 300 Equity 12% c35% Omicron Industries New Project Free

Use the information for the question(s) below. Aardvark Industries is considering a project that will generate the following free cash flows: Year 0 1 2 3 Free Cash Flows ($200) $100 $80 $60 You are also provided with the following market value balance sheet and information regarding Aardvark's cost of capital: Assets Liabilities Cost of

63) Consider the following equation: rwacc =E E + D rE+D E + D rD(1 -c) the term rD(1 -c) in this equation is? 63) A) the required rate of return on debt B) the required rate of return on equity C) the dollar amount of equity. D) the after tax required rate of return on debt Answer:DExplanation:A)B)C)D) Answer:DExplanation:A)B)C)D) Answer: D Explanation: A) B) C) D) Use the information for the question(s) below. Suppose Luther

Exam Name___________________________________ MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Use the tables for the question(s) below. Pro Forma Income Statement for Ideko, 2005-2010 Year 2005 2006 2007 2008 2009 2010 Income Statement ($ 000) 1 Sales 75,000 88,358 103,234 119,777 138,149 158,526 2 Cost of Goods Sold 3 Raw Materials (16,000)

Use the tables for the question(s) below. Estimated 2005 Income Statement and Balance Sheet Data for Ideko Corporation Year 2005 Year 2005 Income Statement ($ 000) Balance Sheet ($ 000) 1 Sales 75,000 Assets 2 Cost of Goods Sold 1 Cash and Equivalents 12,664 3 Raw Materials (16,000) 2 Accounts Receivable 18,493 4 Direct Labor Costs (18,000)

Exam Name___________________________________ MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Which of the following statements regarding the income statement is incorrect? 1) A) The last or "bottom" line of the income statement shows the firm's net income. B) The first line of an income statement lists the revenues from the sales

25) Which of the following adjustments to net income is not correct if you are trying to calculate cash flow from operating activities? 25) A) Add increases in accounts payable B) Add increases in accounts receivable C) Deduct increases in inventory D) Add back depreciation Answer:BExplanation:A)B)C)D)16 Answer:BExplanation:A)B)C)D)16 Answer: B Explanation: A) B) C) D) 16 Use the table for the question(s) below. Consider the following balance sheet: Luther Corporation Consolidated Balance Sheet December 31, 2006 and

Exam Name___________________________________ MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Which of the following statements is false? 1) A) You can think of the debt holders as owning the firm and having sold a call option with a strike price equal to the required debt payment. B) If the value of the

Exam Name___________________________________ MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Which of the following statements is false? 1) A) The Black-Scholes formula can be used to price American or European call options on non-dividend-paying stocks. B) We can use the Black-Scholes formula to compute the price of a European put option on

Exam Name___________________________________ MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Which of the following is not a real option? 1) A) An expansion option B) An abandonment option C) An investment timing option D) A stock option Answer:DExplanation:A)B)C)D) Answer:DExplanation:A)B)C)D) Answer: D Explanation: A) B) C) D) Use the information for the question(s) below. Kinston Industries has come up with a new mountain bike prototype and is

25) Assume that you are not able to sell the plant, but you are able to shut down the plant at no cost at any time. The value of the option to abandon production will be closest to: 25) A) $1.0 million B) -$1.0 million C) $0.5 million D) $3.0 million Answer:CExplanation:A)B)C)Value if revenues increaseV=$2.0(1.20) - $1.6.10 = $8 millionValue if revenue

Exam Name___________________________________ MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Which of the following statements is false? 1) A) At an IPO, a firm offers a large block of shares for sale to the public for the first time. B) Many IPOs, especially the larger offerings, are managed by a group

Use the information for the question(s) below. You founded your own firm three years ago. You initially contributed $200,000 of your own money and in return you received 2 million shares of stock. Since then, you have sold an additional 1 million shares of stock to angel investors. You are now considering raising

Exam Name___________________________________ MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Which of the following statements is false? 1) A) In the event of default, the assets not pledged as collateral for outstanding bonds cannot be used to pay off the holders of subordinated debentures until all more senior debt has

Exam Name___________________________________ MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Which of the following statements is false? 1) A) Leasing allows the party best able to bear the risk to hold it. For example, small firms with a low tolerance for risk may prefer to lease rather than purchase assets. B) When

Exam Name___________________________________ MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Your firm purchases goods from its supplier on terms of 2/10, net 40. The effective annual cost to your firm if it chooses not to take advantage of the trade discount offered and stretches the accounts payable to

Exam Name___________________________________ MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Which of the following statements is false? 1) A) When following a conservative financing policy, a firm would use long-term sources of funds to finance its fixed assets, permanent working capital, and some of its seasonal needs. B) To implement a conservative

Exam Name___________________________________ MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Which of the following statements regarding mergers and taxes is false? 1) A) Like a large portfolio, large firms bear less idiosyncratic risk, so often mergers are justified on the basis that the combined firm is less risky. B) Because most stockholders

Exam Name___________________________________ MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Which of the following statements is false? 1) A) The conflict of interest between managers and investors derives from the separation of ownership and control in a corporation. B) The separation of ownership and control is perhaps the most important reason for

Exam Name___________________________________ MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Use the information for the question(s) below. An independent film maker is considering producing a new movie. The initial cost for making this movie will be $20 million today. Once the movie is completed, in one year, the

Use the table for the question(s) below. Security Bid Ask IBM 79.45 79.50 MRK 39.95 40.05 C48.50 48.55 38) Consider an ETF that is made up of one share each of IBM, MRK, and C. The minimum bid price for this ETF in a normal market is closest to: 38) A) $167.80 B) $167.90 C) $168.00 D) $168.10 Answer:DExplanation:A)B)C)D)Here we use the ask prices Value = 79.50

Exam Name___________________________________ MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) To insure their assets against hazards such as fire, storm damage, vandalism, earthquakes, and other natural and environmental risks firms commonly purchase 1) A) business liability insurance. B) business interruption insurance. C) property insurance. D) key personnel insurance. Answer:CExplanation:A)B)C)D) Answer:CExplanation:A)B)C)D) Answer: C Explanation: A) B) C) D) Use the information for the question(s) below. Your firm faces

Exam Name___________________________________ MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Consider the following equation: r* =1 +r 1 +r$(1 +r* $) - 1 the term r in this equation refers to 1) A) the cost of capital for the firm in terms of yen. B) the cost of capital in terms of dollars. C) the risk-free rate of

Exam Name___________________________________ MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) 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: 1) A) $600 B) $674 C) $460 D) $287 Answer:CExplanation:A)B)C)PV = 100 / (1.10)1+ 100 /

42) Consider the following timeline: If the current market rate of interest is 10%, then the future value of this timeline is closest to: 42) A) $605 B) $666 C) $500 D) $650 Answer:BExplanation:A)B)FV =PV(1 +r)n= 500(1.10)3= 665.50 which is approximately $666C)D) Answer:BExplanation:A)B)FV =PV(1 +r)n= 500(1.10)3= 665.50 which is approximately $666C)D) Answer: B Explanation: A) B) FV =PV(1 +r)n= 500(1.10)3= 665.50 which is approximately $666 C) D) Use the table for the

Exam Name___________________________________ MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Use the table for the question(s) below. Consider the following investment alternatives: Investment Rate Compounding A6.25% Annual B6.10% Daily C6.125 Quarterly D6.120 Monthly 1) Which alternative offers you the highest effective rate of return? 1) A) Investment A B) Investment B C) Investment C D) Investment D Answer:DExplanation:A)B)C)D)EAR (A) = (1 +APR / k)k-

Use the table for the question(s) below. Suppose the term structure of interest rates is shown below: Term 1 year 2 years 3 years 5 years 10 years 20 years Rate (EAR%) 5.00% 4.80% 4.60% 4.50% 4.25% 4.15% 33) Consider an investment that pays $1000 certain at the end of each of the next four years.

Exam Name___________________________________ MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Which of the following statements is false? 1) A) When the risks of two projects are different, only the NPV rule will give a reliable answer. B) When using the incremental IRR rule, you must keep track of which project is

Use the table for the question(s) below. Consider the following two projects: Project Year 0 Cash Flow Year 1 Cash Flow Year 2 Cash Flow Year 3 Cash Flow Year 4 Cash Flow Discount Rate A-100 40 50 60 N/A .15 B-73 30 30 30 30 .15 39) Assume that projects A and B are mutually exclusive. The correct investment decision and the best rational for that decision is

ESSAY. Write your answer in the space provided or on a separate sheet of paper. Use the table for the question(s) below. Consider two mutually exclusive projects with the following cash flows: Project C/F0C/F1C/F2C/F3C/F4C/F5C/F6 A$(41,215) $12,500 $14,000 $16,500 $18,000 20,000 N/A B$(46,775) $15,000 $15,000 $15,000 $15,000 $15,000 $15,000 63) Assuming that the discount rate for project A

Exam Name___________________________________ MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Which of the following statements is false? 1) A) Managers sometimes continue to invest in a project that has a negative NPV because they have already invested a large amount in the project and feel that by not continuing it,

41) Which of the following statements is false? 41) A) The firm deducts a fraction of the investments in plant, property, and equipment each year as depreciation. B) Sunk cost fallacy is a term used to describe the tendency of people to ignore sunk costs in capital budgeting analysis. C) A good rule to remember is that if our decision

65) Epiphany is worried about the reliability of the sales forecast. How sensitive is the project's NPV to a 10% change in sales. Answer:Base CaseYear 0 1 2 3Sales (Revenues) 100,000 100,000 100,000- Cost of Goods Sold (50% of Sales) 50,000 50,000 50,000- Depreciation 30,000 30,000 30,000= EBIT 20,000 20,000 20,000- Taxes (35%)

Exam Name___________________________________ MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Which of the following statements is false? 1) A) The yield to maturity is typically stated as an annual rate by multiplying the calculated YTM by the number of coupon payment per year, thereby converting it to an APR. B) Treasury bills

41) Which of the following equations is incorrect? 41) A) Expected future spot interest rate = forward interest rate + risk premium B) fn= (1 +YTMn - 1)n - 1 (1 +YTMn)n- 1 C) (1 +YTMn)n= (1 +YTMn - 1)n - 1(1 +fn) D) (1 + f1) (1 + f2) (1 + f3) ... (1 +fn) = (1 +YTMn)n Answer:BExplanation:A)B)C)D) Answer:BExplanation:A)B)C)D) Answer: B Explanation: A) B) C) D) Use the table for

Exam Name___________________________________ MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Use the information for the question(s) below. 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

Use the information for the question(s) below. 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 the end of two years.