Which of the following statements is FALSE?
A) The yield to maturity of a coupon bond is a weighted average of the yields on the
zero-coupon bonds.
B) If the zero-coupon yield curve is downward sloping, the yield to maturity will
decrease with the coupon rate.
C) The information in the zero-coupon yield curve is sufficient to price all other
risk-free bonds.
D) When the yield curve is flat, all zero-coupon and coupon-paying bonds will have the
same yield, independent of their maturities and coupon rates.
Which of the following statements is FALSE?
A) We can estimate the value of a firm’s shares by multiplying its current earnings per
share by the average P/E ratio of comparable firms.
B) For valuation purposes, the trailing P/E ratio is generally preferred, since it is based
on actual not expected earnings.
C) Forward earnings are the expected earnings over the coming 12 months.
D) Trailing earnings are the earnings over the previous 12 months.
Your firm is planning to invest in a new electrostatic power generation system.
Electrostat Inc is a firm that specializes in this business. Electrostat has a stock price of
$25 per share with 16 million shares outstanding. Electrostat’s equity beta is 1.18. It
also has $220 million in debt outstanding with a debt beta of 0.08. Your estimate of the
asset beta for electrostatic power generators is closest to:
A) 0.76
B) 0.79
C) 0.93
D) 1.10
Consider the following Price and Dividend data for General Electric Company:
Assume that you purchased General Electric Company stock at the closing price on
December 31, 2008 and sold it after the dividend had been paid at the closing price on
January 26, 2009. Your dividend yield for this period is closest to:
A) -8.15%
B) 0.75%
C) 0.70%
D) -8.80%
Luther Industries has $5 million in excess cash and 1 million shares outstanding. Luther
is considering investing the cash in one-year treasury bills that are currently paying 5%
interest, and then using the cash to pay a dividend next year. Alternatively, Luther can
pay the cash out as a dividend immediately and the shareholders can invest in the
treasury bills themselves. Assume that capital markets are perfect.
If Luther invests the excess cash in treasury bills, then the dividend per share next year
will be closest to:
A) $5.00
B) $5.25
C) $4.75
D) $1.05
Consider the following time line:
If the current market rate of interest is 8%, then the present value of this timeline is
closest to:
A) $1000
B) $857
C) $860
D) $926
A group of portfolios from which we can form an efficient portfolio are called:
A) factor portfolios.
B) semi-efficient portfolios.
C) partially efficient portfolios.
D) characteristic portfolios.
If you buy shares of Coca-Cola on the secondary market:
A) Coca-Cola receives the money because the company has issued new shares.
B) you buy the shares from another investor who decided to sell the shares.
C) you buy the shares from the New York Stock Exchange.
D) you buy the shares from the Federal Reserve.
Boulderado has come up with a new composite snowboard. Development will take
Boulderado four years and cost $250,000 per year, with the first of the four equal
investments payable today upon acceptance of the project. Once in production the
snowboard is expected to produce annual cash flows of $200,000 each year for 10
years. Boulderado’s discount rate is 10%.The NPV for Boulderado’s snowboard project
is closest to:
A) $228,900
B) $46,900
C) $51,600
D) $23,800
Taggart Transcontinental currently has a bank loan outstanding that requires it to make
three annual payments at the end of the next three years of $1,000,000 each. The bank
has offered to allow Taggart Transcontinental to skip making the next two payments in
lieu of making one large payment at the end of the loan’s term in three years. If the
interest rate on the loan is 6%, then the final payment that the bank will require to make
Taggart Transcontinental indifferent between the two forms of payments is closest to:
A) $2,673,000
B) $3,000,000
C) $3,184,000
D) $3,375,000
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 Omicron uses the entire $50 million in excess cash to pay a special
dividend. The amount of the regular yearly dividends in the future is closest to:
A) $4.50
B) $5.00
C) $4.00
D) $9.00
Henry Rearden is saving for retirement and has determined that to live comfortably he
must save $3 million by his 65 birthday. Henry just turned 30 today, and he has decided
that starting today and continuing on every birthday up to and including his 65th
birthday, he will deposit the same amount into an individual retirement account (IRA).
If Henry can earn 8% on his IRA, then the amount he must set aside each year to make
sure that he will have $3 million in his account on his 65th birthday is closest to:
A) $16,035
B) $17,410
C) $83,335
D) $85,715
Suppose that you are considering an investment that will pay you $4000 per year for the
next five years. The appropriate rate of interest is 5%. You want to know the present
value of the cash flows from this investment. To solve this problem in Microsoft Excel,
you would use which of the following excel formulas?
A) =PV(.05,5,4000,0,0)
B) =PV(.05,5,4000,0,1)
C) =PV(5,.05,4000,0)
D) =PV(5,5,4000,0)
Which of the following statements regarding recapitalizations is FALSE?
A) With a recapitalization, even though leverage reduces the total value of equity,
shareholders capture the benefits of the interest tax shield up front.
B) The share price always rises after the completion of the recapitalization.
C) Leveraged recaps were especially popular in the mid- to late-1980s, when many
firms found that these transactions could reduce their tax payments.
D) When a firm makes a significant change to its capital structure, the transaction is
called a recapitalization.
If it is managed efficiently, Luther industries will have assets with market value of $100
million, $300, million, or $500 million next year, with each outcome being equally
likely. Managers may, however, engage in wasteful empire building which will reduce
the firm’s market value by $20 million in all cases. Managers may also increase the risk
of the firm, changing the probability of each outcome to 50%, 20%, and 30%
respectively.
Assume that EGI decides to wait until after the release of the new video game before
they raise the $100 million through the issuance of new shares. The number of new
shares that EGI will issue is closest to:
A) 1.6 million
B) 5.0 million
C) 10 million
D) 6.25 million
Consider the following equation:
rwacc= rU– Ï„cdrD
The term rU in this equation is:
A) the firm’s unlevered cost of debt.
B) the firm’s cost of debt.
C) the project’s unlevered cost of capital.
D) the project’s debt to value ratio.
Two years ago you purchased a new SUV. You financed your SUV for 60 months (with
payments made at the end of the month) with a loan at 5.9% APR. You monthly
payments are $617.16 and you have just made your 24th monthly payment on your
SUV.
Assuming that you have made all of the first 24 payments on time, then how much
interest have you paid over the first two years of your loan?
Consider an ETF that is made up of one share each of IBM, MRK, and C. The current
quote for this ETF currently is $162.85 (bid) $163.00 (ask). What should you do?
Consider the following two quotes for XYZ stock:
What are your net proceeds if you purchased 2500 shares of XYZ stock on November
11th and then sold them a week later on November 18th?
Rockwood Enterprises is currently an all equity firm and has just announced plans to
expand their current business. In order to fund this expansion, Rockwood will need to
raise $100 million in new capital. After the expansion, Rockwood is expected to
produce earnings before interest and taxes of $50 million per year in perpetuity.
Rockwood has already announced the planned expansion, but has not yet determined
how best to fund the expansion. Rockwood currently has 16 million shares outstanding
and following the expansion announcement these shares are trading at $25 per share.
Rockwood has the ability to borrow at a rate of 5% or to issue new equity at $25 per
share.
Show mathematically that the stock price of Rockwood does not depend on whether
they issue new stock or borrow to fund their expansion.
The Aardvark Corporation is considering launching a new product and is trying to
determine an appropriate discount rate for evaluating this new product. Aardvark has
identified the following information for three single division firms that offer products
similar to the one Aardvark is interested in launching:
Based upon the three comparable firms, calculate that most appropriate unlevered cost
of capital for Aardvark to use on this new product.
Consider an ETF that is made up of one share each of IBM, MRK, and C. The current
quote for this ETF currently is 163.15 (bid) $163.20 (ask). What should you do?
Delta Products has decided to spin-off one of its subsidiaries, Gamma Technologies.
Each Delta shareholder will receive 0.125 shares of Gamma for each share of Delta
they own. Delta’s price is $35.00 cum-dividend and immediately after the spin-off
Gamma Technologies was trading for $24.00 per share. In a perfect capital market,
what would Delta Product’s ex-dividend share price be after this transaction?
Consider the following covariances between securities:
The variance on a portfolio that is made up of a $6000 investments in Microsoft and a
$4000 investment in Wal-Mart stock is closest to: