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 risk of bankruptcy as well as the bondholder’s ability
to lay claim to the firm’s assets in the event of a bankruptcy.
D) Debt issues with a low-priority claim in bankruptcy will have a better rating than
issues from the same company that have a higher priority in bankruptcy.
A stock’s ________ measures the stock’s return relative to that predicted based on its
beta, at the time of some event.
A) excessive abnormal return
B) cumulative average return
C) excessive predicted return
D) cumulative abnormal return
Which of the following statements is FALSE?
A) Finding the present value and compounding are the same.
B) A dollar today and a dollar in one year are not equivalent.
C) If you want to compare or combine cash flows that occur at different points in time,
you first need to convert the cash flows into the same units or move them to the same
point in time.
D) The equivalent value of two cash flows at two different points in time is sometimes
referred to as the time value of money.
Luther’s price – earnings ratio (P/E) for the year ending December 31, 2009 is closest to:
A) 7.9
B) 10.1
C) 15.4
D) 16.0
Your great aunt Matilda put some money in an account for you on the day you were
born. This account pays 8% interest per year. On your 21st birthday the account balance
was $5,033.83.
The amount of money that your great aunt Matilda originally put in the account is
closest to:
A) $600
B) $800
C) $1,000
D) $1,200
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 13%, a debt cost of capital of 7%, and it is in the 35%
corporate tax bracket.
If Flagstaff currently maintains a .5 debt to equity ratio, then the value of Flagstaff as a
levered firm is closest to:
A) $114 million
B) $100 million
C) $111 million
D) $140 million
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%, the individual capital
gains rate is 15% and the individual rate on ordinary income is 30%.
Suppose that d’Anconia Copper retained the $200 million in cash so that it would not
need to raise new funds from outside investors for an expansion it has planned for next
year. If it did raise new funds, it would have to pay issuance fees. Assuming that these
fees can be expensed for corporate tax purposed, the amount that d’Anconia Copper
needs to save in issuance fees to make retaining the cash beneficial for its investors is
closest to:
A) $2.0 million
B) $5.5 million
C) $6.5 million
D) $7.0 million
Based upon the information provided about securities A, B, and C, the risk-free rate of
interest is closest to:
A) 4%
B) 5%
C) 8%
D) 10%
Consider two firms, With and Without, that have identical assets that generate identical
cash flows. Without is an all-equity firm, with 1 million shares outstanding that trade
for a price of $24 per share. With has 2 million shares outstanding and $12 million
dollars in debt at an interest rate of 5%.
According to MM Proposition 1, the stock price for With is closest to:
A) $8.00
B) $24.00
C) $6.00
D) $12.00
Assume that Rose Corporation’s (RC) EBIT is not expected to grow in the future and
that all earnings are paid out as dividends. RC is currently an all equity firm. It expects
to generate earnings before interest and taxes (EBIT) of $6 million over the next year.
Currently RC has 5 million shares outstanding and its stock is trading for a price of
$12.00 per share. RC is considering borrowing $12 million at a rate of 6% and using the
proceeds to repurchase shares at the current price of $12.00.
Following the borrowing of $12 and subsequent share repurchase, the number of shares
that RC will have outstanding is closest to:
A) 4.0 million
B) 6.0 million
C) 4.9 million
D) 4.5 million
The lowest effective rate of return you could earn on any of these investments is closest
to:
A) 6.150%
B) 6.250%
C) 6.289%
D) 6.300%
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
$257.09 million.
Perrigo’s price-earnings ratio (P/E) is closest to:
A) 15.96
B) 21.85
C) 29.77
D) 35.64
Which of the following statements is FALSE?
A) A market index reports the value of a particular portfolio of securities.
B) The S&P 500 is the standard portfolio used to represent “the market” when using the
CAPM in practice.
C) Even though the S&P 500 includes only 500 of the more than 7,000 individual U.S.
Stocks in existence, it represents more than 70% of the U.S. stock market in terms of
market capitalization.
D) The S&P 500 is an equal-weighted portfolio of 500 of the largest U.S. stocks.
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 Nod is closest to:
A) 1.00
B) 0.90
C) 0.95
D) 1.10
The Rufus Corporation has 125 million shares outstanding and analysts expect Rufus to
have earnings of $500 million this year. Rufus plans to pay out 40% of its earnings in
dividends and they expect to use another 20% of their earnings to repurchase shares. If
Rufus’ equity cost of capital is 15% and Rufus’ earnings are expected to grow at a rate
of 3% per year, then the value of a share of Rufus stock is closest to:
A) $13.35
B) $33.50
C) $20.00
D) $16.00
Assume that you presently have a monthly home mortgage with a stated interest rate of
7% APR. If your income tax rate is 20%, then the after tax EAR for your home
mortgage is closest to:
A) 5.6%
B) 7.2%
C) 5.8%
D) 7.0%
Based upon the enterprise value to EBITDA ratio, the value of a share of Texas
Trucking is closest to:
A) $33.00
B) $82.50
C) $43.10
D) $21.25
Suppose you have the following Loans/Investments
If your income tax rate is 30%, then the after-tax EAR for your home equity loan is
closest to:
A) 6.0%
B) 5.9%
C) 8.6%
D) 5.8%
Which of the following equations is INCORRECT?
A) Pcum– Pex= Div ×
B) Pcum – Pex = Div ×
C) =
D) (Pcum – Pex)(1 – Ï„d) = Div(1 – Ï„g)