The free cash flow to equity in 2010 is closest to:
A) 6,255
B) 10,684
C) 11,559
D) 18,394
Assume that the risk-free rate of interest is 3% and you estimate the market’s expected
return to be 9%.
The risk premium for “Meenie” is closest to:
A) 4.50%
B) 7.50%
C) 9.30%
D) 9.75%
Consider the following information regarding the Fama French Carhart four factor
model:
Using the FFC four factor model and the historical average monthly returns, the
expected monthly return for Wal-Mart is closest to:
A) 0.71%
B) 0.53%
C) 1.38%
D) 0.79%
You have an $8,000 balance on your credit card, which charges 12% interest annually
(1% per month). If you can afford to pay $100 per month, how many months will it take
to pay the credit card in full?
A) 170 months
B) 14 months
C) 162 months
D) You will never get the card paid off at that rate.
Which of the following statements is FALSE?
A) When a firm pays a dividend, shareholders are taxed according to the dividend tax
rate. If the firm repurchases shares instead, and shareholders sell shares to create a
homemade dividend, the homemade dividend will be taxed according to the capital
gains tax rate.
B) When the tax rate on dividends exceeds the tax rate on capital gains, shareholders
will pay lower taxes if a firm uses share repurchases for all payouts rather than
dividends.
C) Firms that use dividends will have to pay a lower after-tax return to offer their
investors the same pre-tax return as firms that use share repurchases.
D) The optimal dividend policy when the dividend tax rate exceeds the capital gain tax
rate is to pay no dividends at all.
Suppose all possible investment opportunities in the world are limited to the four stocks
list in the table below:
Suppose that you have invested $30,000 in the market portfolio. Then the number of
shares of Rearden Metal that you hold is closest to:
A) 450 shares
B) 700 shares
C) 1,400 shares
D) 2,300 shares
Rearden Metals has a current stock price of $30 share, is expected to pay a dividend of
$1.20 in one year, and its expected price right after paying that dividend is $33.
Rearden’s expected dividend yield is closest to:
A) 3.40%
B) 3.65%
C) 4.00%
D) 4.20%
A ________ is when a rich individual or organization purchases a large fraction of the
stock of a poorly performing firm and in doing so gets enough votes to replace the
board of directors and the CEO.
A) shareholder proposal
B) leveraged buyout
C) shareholder action
D) hostile takeover
Which of the following statements is FALSE?
A) Because the WACC incorporates the tax savings from debt, we can compute the
levered value of an investment, which is its value including the benefit of interest tax
shields given the firm’s leverage policy, by discounting its future free cash flow using
the WACC.
B) The WACC incorporates the benefit of the interest tax shield by using the firm’s
before-tax cost of capital for debt.
C) When the market risk of the project is similar to the average market risk of the firm’s
investments, then its cost of capital is equivalent to the cost of capital for a portfolio of
all of the firm’s securities; that is, the project’s cost of capital is equal to the firm’s
weighted average cost of capital (WACC).
D) A project’s cost of capital depends on its risk.
The after tax interest expense in 2010 is closest to:
A) 0
B) 2,856
C) 5,304
D) 8,160
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 news as a political commentator. Given her
popularity, assume that she could have earned $8 million over the year (paid at the end
of the year) she spent writing the book. Assume that she was unable to fulfill her media
commitments of appearing on TV news as a political commentator or give
speeches.while she was writing the book.
The IRR of Palin’s book deal is closest to:
A) -27.25%
B) -37.50%
C) 27.25%
D) 37.50%
Pro Forma Income Statement for Ideko, 2005-2010
Pro Forma Balance Sheet for Ideko, 2005-2010
Assuming that Ideko has a EBITDA multiple of 9.4, then the continuation levered P/E
ratio of Ideko in 2010 is closest to:
A) 17.2
B) 14.5
C) 19.0
D) 16.4
Suppose the current zero-coupon yield curve for risk-free bonds is as follows:
Suppose a five- year bond with a 7% coupon rate and semiannual compounding is
trading for a price of $951.58. Expressed as an APR with semiannual compounding,
this bonds yield to maturity (YTM) is closest to:
A) 7.0%
B) 7.5%
C) 7.8%
D) 8.2%
You are considering investing in a start up project at a cost of $100,000. You expect the
project to return $500,000 to you in seven years. Given the risk of this project, your cost
of capital is 20%.
The IRR for this project is closest to:
A) 15.60%
B) 18.95%
C) 20.00%
D) 25.85%
An investment is said to be liquid if the investment:
A) has large day to day fluctuations in price.
B) has a large bid-ask spread.
C) can easily be converted into cash.
D) is traded on a stock exchange.
Which of the following statements is FALSE?
A) The volatility declines as the number of stocks in a portfolio grows.
B) An equally weighted portfolio is a portfolio in which the same amount is invested in
each stock.
C) As the number of stocks in a portfolio grows large, the variance of the portfolio is
determined primarily by the average covariance among the stocks.
D) When combining stocks into a portfolio that puts positive weight on each stock,
unless all of the stocks are uncorrelated with the portfolio, the risk of the portfolio will
be lower than the weighted average volatility of the individual stocks.
Which of the following statements is FALSE?
A) Whether paid by the firm or its creditors, the indirect costs of bankruptcy increase
the value of the assets that the firm’s investors will ultimately receive.
B) In addition to the money spent by the firm, the creditors may incur costs during the
bankruptcy process.
C) The bankruptcy code is designed to provide an orderly process for settling a firm’s
debts.
D) To ensure that their rights and interests are respected, and to assist in valuing their
claims in a proposed reorganization, creditors may seek separate legal representation
and professional advice.
The firm’s assets and liabilities at a given point in time are reported on the firm’s:
A) income statement or statement of financial performance.
B) income statement or statement of financial position.
C) balance sheet or statement of financial performance.
D) balance sheet or statement of financial position.