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:
A) 12%
B) 8.0%
C) 7.5%
D) 10%
The date on which the board authorizes the dividend is the:
A) declaration date.
B) distribution date.
C) record date.
D) ex-dividend date.
Which of the following statements is FALSE?
A) Many projects use a resource that the company already owns.
B) When evaluating a capital budgeting decision, we generally include interest expense.
C) Only include as incremental expenses in your capital budgeting analysis the
additional overhead expenses that arise because of the decision to take on the project.
D) As a practical matter, to derive the forecasted cash flows of a project, financial
managers often begin by forecasting earnings.
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 with
the market of .60, while California Gold Mining has a 32% volatility and a correlation
with the market of -.7. Assume the CAPM assumptions hold.California Gold Mining’s
beta with the market is closest to:
A) 0.9
B) 1.25
C) -0.9
D) -1.25
Galt Industries has 50 million shares outstanding and a market capitalization of $1.25
billion. It also has $750 million in debt outstanding. Galt Industries has decided to
delever the firm by issuing new equity and completely repaying all the outstanding
debt. Assume perfect capital markets.
The number of shares that Galt must issue is closest to:
A) 15 million
B) 25 million
C) 30 million
D) 40 million
Which of the following statements is FALSE?
A) The IRR investment rule will identify the correct decision in many, but not all,
situations.
B) By setting the NPV equal to zero and solving for r, we find the IRR.
C) If you are unsure of your cost of capital estimate, it is important to determine how
sensitive your analysis is to errors in this estimate.
D) The simplest investment rule is the NPV investment rule.
Which of the following statements is FALSE?
A) A serious concern for large corporations is that managers may make large,
unprofitable investments.
B) While overspending on personal perks may be a problem for large firms, these costs
are likely to be small relative to the overall value of the firm.
C) Some financial economists explain a manager’s willingness to engage in
negative-NPV investments as empire building.
D) While ownership is often diluted for small, young firms, ownership typically
becomes concentrated over time as a firm grows.
Which of the following equations is INCORRECT?
A) Cov(Ri,Rj) = Σ(Ri– Ri)(Rj– Rj)
B) Var(Rp) = x12Var(R1) + x22Var(R2) + 2X1X2Cov(R1,R2)
C) Corr(Ri,Rj) =
D) Cov(Ri,Rj) = E[(Ri– E[Ri])(Rj– E[Rj])]
Consider the following two projects:
Assume that projects Alpha and Beta are mutually exclusive. Which of the following
statements is true regarding the investment decision tools’ suitability for deciding
between projects Alpha & Beta?
A) The incremental IRR should not be used since the projects have different lives.
B) The incremental IRR should not be used since the projects have different discount
rates
C) The incremental IRR should not be used since the projects have different cash flow
patterns.
D) Both the NPV and incremental IRR approaches are appropriate to solve this
problem.
Consider the following regression model:
Rs– rf= as+ (RF1– rf) + (RF2– rf) + e
The term ε is a(n):
A) measure of the expected percent change in the excess return of a security for a 1%
change in the excess return of the first factor portfolio.
B) error term that has an expectation of zero and is uncorrelated with either factor.
C) measure of the expected percent change in the excess return of a security for a 1%
change in the excess return of the second factor portfolio.
D) constant term.
Which of the following statements is FALSE?
A) Aside from taxes, another important difference between debt and equity financing is
that debt payments must be made to avoid bankruptcy, whereas firms have no similar
obligation to pay dividends or realize capital gains.
B) Increasing the level of debt increases the probability of bankruptcy.
C) A firm receives a tax benefit only if it is paying taxes in the first place.
D) To the extent that a firm has other tax shields, its taxable earnings will be increased
and it will rely more heavily on the interest tax shield.
Which of the following statements is FALSE?
A) To determine the true tax benefit of leverage, we need to evaluate the combined
effect of both corporate and personal taxes.
B) A personal tax disadvantage for debt causes the WACC to decline more slowly with
leverage than it otherwise would.
C) Personal taxes have an indirect effect on the firm’s weighted average cost of capital.
D) In the United States and many other countries, capital gains from equity have
historically been taxed more heavily than interest income.
Which of the following statements is FALSE?
A) The bond certificate typically specifies that the coupons will be paid periodically
until the maturity date of the bond.
B) The bond certificate indicates the amounts and dates of all payments to be made.
C) The only cash payments the investor will receive from a zero coupon bond are the
interest payments that are paid up until the maturity date.
D) Usually the face value of a bond is repaid at maturity.
Consider the following two projects:
The NPV of project A is closest to:
A) 12.0
B) 12.6
C) 15.0
D) 42.9
Which of the following statements is FALSE?
A) Investors pay less for bonds with credit risk than they would for an otherwise
identical default-free bond.
B) The yield to maturity of a defaultable bond is equal to the expected return of
investing in the bond.
C) The risk of default, which is known as the credit risk of the bond, means that the
bond’s cash flows are not known with certainty.
D) For corporate bonds, the issuer may default’”that is, it might not pay back the full
amount promised in the bond certificate.