Which of the following statements is false?
A) Firms generally do not possess better information than outside investors regarding
the risk of future commodity price changes, nor can they influence that risk through
their actions.
B) Cash flows are exchanged on a monthly basis, rather than waiting until the end of
the contract, through a procedure called marking to market.
C) The firm may speculateby entering into contracts that do not offset its actual risks.
D) When a firm authorizes managers to trade contracts to hedge, it opens the door to the
possibility of speculation.
Answer:
Which of the following statements is false?
A) The terminal of continuation value of the project represents the market value (as of
the last forecast period) of the free cash flow from the project at all future dates.
B) The incremental effect of a project on the firm’s available cash is the project’s free
cash flow.
C) (1 – τc) x Depreciation is called the depreciation tax shield.
D) To evaluate a capital budgeting decision, we must determine its consequences for the
firm’s available cash.
Answer:
After your grandmother retired, she purchased an annuity contract for $250,000 that
will pay her $25,000 at the end of every year until she dies. The appropriate interest rate
for this annuity is 8%. The number of years that your grandmother must live in order to
get more value out of the annuity than what she paid for it is closest to:
A) 21
B) 16
C) 8
D) 10
Answer:
A lease will be treated as a non-tax lease if it satisfies any of the following conditions
except:
A) The property may be acquired the fair market value of the asset at the time when the
option may be exercised.
B) Some portion of the lease payments is specifically designated as interest or its
equivalent.
C) The lessee receives ownership of the asset on completion of all lease payments.
D) The total amount that the lessee is required to pay for a relatively short period of use
constitutes an inordinately large proportion of the total value of the asset.
Answer:
Which of the following statements is false?
A) If the bond trades at a discount, and investor who buys the bond will earn a return
both from receiving the coupons and from receiving a face value that exceeds the price
paid for the bond.
B) Most coupon bond issuers choose a coupon rate so that the bonds will initially trade
at, or very near to, par.
C) Coupon bonds always trade for a discount.
D) At any point in time, changes in market interest rates affect a bond’s yield to
maturity and its price.
Answer:
Which of the following statements is false?
A) Because we are getting the entire asset when we purchase it with the loan, the loan
payments are higher than the lease payments.
B) In a perfect market, the cost of leasing and then purchasing the asset is equivalent to
the cost of borrowing to purchase the asset.
C) With a lease we are financing the entire cost of the asset, with a standard loan we are
financing only the cost of the economic depreciation of the asset during its life.
D) The amount of the lease payment will depend on the purchase price, the residual
value, and the appropriate discount rate for the cash flows.
Answer:
Which of the following money market investments is essentially a loan arrangement
wherein a securities dealer is the “borrower” and the investor is the “lender.” The
investor buys securities from the securities dealer, with an agreement to sell the
securities back to the dealer at a later date for a specified higher price?
A) Certificates of Deposit (CD)
B) Commercial Paper
C) Banker’s Acceptance
D) Repurchase Agreement
E) Treasury Bill
Answer:
When banks resecuritize other asset-backed securities, the new asset-backed security is
known as a
A) mortgage-backed security.
B) double-barreled security.
C) collateralized debt obligation.
D) resecuritized security.
Answer:
Use the figure for the question(s) below.
Which of the following statements regarding the timeline is false?
A) Date 1 is the end of the first year.
B) Date 0 is the beginning of the first year.
C) The space between date 0 and date 1 represents the time period between two specific
dates.
D) You will find the timeline most useful in tracking cash flows if you interpret each
point on the timeline as a period or interval of time.
Answer:
One factor that can affect the market risk of a project is its degree of operating leverage,
which is
A) the relative proportion of operating assets versus non-operating assets.
B) the relative proportion of operating assets versus equity.
C) the relative proportion of operating expenses versus non-operating expenses.
D) the relative proportion of fixed versus variable costs.
Answer:
Use the information for the question(s) below.
Consider two firms, ChihuahuaCorporation and Bernard Industries that are each
expected to pay the same $1.5 million dollar dividend every year in perpetuity.
Chihuahua Corporation is riskier and has a cost of capital of 15%. Bernard Industries is
not as shaky as Chihuahua, so Bernard has a cost of capital of only 10%. Assume that
the market portfolio is not efficient. Both stocks have the same beta and the CAPM
would assign them both an expected return of 12% to both.
The market value for Chihuahua is closest to:
A) $10.0 million
B) $12.5 million
C) $12.0 million
D) $15 million
Answer:
Use the following information to answer the question(s) below.
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 beta for the market is closest to:
A) 0.80
B) 1.00
C) 1.10
D) 1.25
Answer:
Use the following information to answer the question(s) below.
(Please use a copy of the Cumulative Probabilities for the standard normal distribution
for these problems.)
Taggart Transcontinental’s stock has a volatility of 25% and a current stock price of $40
per share. Taggart pays no dividends. The risk-free interest rate is 4%.
The Black-Scholes Δ of a one-year, at-the-money put option on Taggart stock is closest
to:
A) -0.2850
B) 0.2850
C) -0.3859
D) -0.6141
Answer:
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 out these future free cash flows as regular dividends. Omicrons unlevered cost of
capital is 10% and there are 10 million shares outstanding. Omicron’s board is meeting
to decide whether to pay out its $50 million in excess cash as a special dividend or to
use it to repurchase shares of the firm’s stock.
Assume that you own 2500 shares of Omicron stock and that Omicron uses the entire
$50 million to pay a special dividend. Suppose you are unhappy with Omicron’s
decision and would prefer that Omicron used the excess cash to repurchase shares. The
number of shares that you would have to buy in order to undo the special cash dividend
that Omicron paid is closest to:
A) 125
B) 275
C) 250
D) 310
Answer:
Consider the following income statement and other information:
Luther’s Operating Margin for the year ending December 31, 2008 is closest to:
A) 0.5%
B) 0.7%
C) 5.4%
D) 6.8%
Answer:
Which of the following statements is false?
A) A capital budget lists the projects and investments that a company plans to undertake
during the coming year.
B) Income Tax = EBIT x (1 – τc).
C) When sales of a new product displace sales of an existing product, the situation is
often referred to as cannibalization.
D) Overhead expenses are often allocated to the different business activities for
accounting purposes.
Answer:
Use the following information to answer the question(s) below.
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
Answer:
Use the following information to answer the question(s) below.
Dagny Taggart has just purchased a home and taken out a $400,000 mortgage. The
mortgage has a 30-year term with monthly payments and has an APR of 5.4%.
Dagny’s monthly payments are closest to:
A) $1,110
B) $1,800
C) $2,215
D) $2,245
Answer:
Use the table for the question(s) below.
If the risk-free interest rate is 10%, then of the four projects listed, if you could only
invest in one project, which on e would you select?
A) Eenie
B) Meenie
C) Mighty
D) Moe
Answer:
Use the information for the question(s) below.
Defenestration industries plans to pay a $4.00 dividend this year and you expect that the
firm’s earnings are on track to grow at 5% per year for the foreseeable future.
Defenestration’s equity cost of capital is 13%.
Assuming that Defenestration’s dividend payout rate and expected growth rate remain
constant, and Defenestration does not issue or repurchase shares, then Defenestration’s
stock price is closest to:
A) $50.00
B) $32.30
C) $22.25
D) $30.75
Answer:
Use the information for the question(s) below.
The Sisyphean Company has a bond outstanding with a face value of $1000 that
reaches maturity in 15 years. The bond certificate indicates that the stated coupon rate
for this bond is 8% and that the coupon payments are to be made semiannually.
Assuming the appropriate YTM on the Sisyphean bond is 9%, then this bond will trade
at
A) a premium.
B) a discount.
C) par.
D) None of the above
Answer:
Use the information for the question(s) below.
KT Enterprises is considering undertaking a new project. Based upon analysis of firms
with similar projects, KT has determined that an unlevered cost of equity of 12% is
suitable for their project. KT’s marginal tax rate is 35%, its borrowing rate is 7%, and
KT does not believe that its borrowing rate will change if the new project is accepted.
If KT expects to maintain a debt to equity ratio for this project of .6 then KT’s equity
cost of capital, rE, for this project is closest to:
A) 5.0%
B) 12%
C) 15.0%
D) 17.0%
Answer:
Packaging a portfolio of financial securities and issuing an asset-backed security backed
by this portfolio is known as
A) asset securitization.
B) revenue securitization.
C) backup securitization.
D) payment securitization.
Answer:
Suppose you invest $15,000 in Merck stock and $25,000 in Home Depot stock. You
receive an actual return of -8% for Merck and 12% for Home Depot. What is the actual
return on your portfolio?
A) 4.50%
B) 4.00%
C) 10.00%
D) 2.00%
Answer:
Use the table for the question(s) below.
Pro Forma Income Statement for Ideko, 2005-2010
The amount of net working capital for Ideko in 2007 is closest to:
A) $30,510
B) $26,420
C) $22,170
D) $35,195
Answer:
Frank Dewey Esquire from the firm of Dewey, Cheatum, and Howe, has been offered
an upfront retainer of $30,000 to provide legal services over the next 12 months to
Taggart Transcontinental . In return for this upfront payment, Taggart Transcontinental
would have access to 8 hours of legal services from Frank for each of the next 12
months. Frank’s normal billable rate is $250 per hour for legal services.
Assuming that Dewey’s cost of capital is 12% EAR, then the IRR of his retainer offer is
closest to:
A) -39.3%
B) -3.3%
C) 20.0%
D) 39.3%
Answer:
A rights offering that gives existing target shareholders the right to buy shares in either
the target or the acquirer at a deeply discounted price once certain conditions are met is
called a
A) golden parachute.
B) poison pill.
C) classified board.
D) white knight.
Answer:
Use the information for the question(s) below.
Luther Industries has no debt, a total equity capitalization of $20 billion, and a beta of
1.8. Included in Luther’s assets are $4 billion in cash and risk-free securities.
Considering the fact that Luther’s Cash is risk-free, Luther’s unlevered beta is closest to:
A) 1.90
B) 2.25
C) 1.50
D) 1.45
Answer:
Consider the following income statement and other information:
Luther’s price – earnings ration (P/E) for the year ending December 31, 2009 is closest
to:
A) 7.9
B) 10.1
C) 15.4
D) 16.0
Answer:
Which of the following statements is false?
A) The forward rate for year 1 is the rate on an investment that starts today and is repaid
in one year; it is equivalent to an investment in a one-year zero-coupon bond.
B) The forward rate is only a good predictor of spot interest rates in the future when
investors are risk adverse.
C) We can use the law of one price to calculate the forward rate from the zero-coupon
yield curve.
D) An interest rate forward contract is a contract today that fixes the interest rate for a
loan or investment in the future.
Answer:
Which of the following statements is false?
A) The conflict of interest between managers and investors derives from the separation
of ownership and control in a corporation.
B) Any discussion of corporate controlsthe system of controls, regulations, and
incentives designed to prevent fraudis a story of conflicts of interest and attempts to
minimize them.
C) Once control and ownership are separated a conflict of interest arises between the
owners and the people in control of a corporation.
D) The separation of ownership and control is perhaps the most important reason for the
success of the corporate organizational form. Because any investor can hold an
ownership stake in a corporation, investors are able to diversify and thus, with no costs,
reduce their risk exposures.
Answer:
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
Answer:
Use the following information to answer the question(s) below.
Dagny Taggart has just purchased a home and taken out a $400,000 mortgage. The
mortgage has a 30-year term with monthly payments and has an APR of 5.4%.
The total amount of interest that Dagny will pay during the first month of her mortgage
is closest to:
A) $1,110
B) $1,785
C) $1,800
D) $2,245
Answer: