A(n) ________ invests in the equity of existing privately held firms.
A) venture capital firm
B) private debt firm
C) vulture fund
D) private equity firm
Answer:
Use the table for the question(s) below.
Consider the information for the following four firms:
The unlevered cost of capital for “Moe” is closest to:
A) 8.25%
B) 7.75%
C) 8.50%
D) 10.00%
Answer:
Use the following information to answer the question(s) below.
Wyatt Oil is considering an investment in a new project with an unlevered cost of
capital of 11%. Wyatt’s marginal corporate tax rate is 35% and its debt cost of capital is
6%. The project has free cash flows of $25 million per year which are expected to
decline by 3% per year.
If Wyatt adjusts its debt once per year to maintain a constant debt-equity ratio of 50%,
then the appropriate WACC for this new project is closest to:
A) 7.5%
B) 8.6%
C) 10.3%
D) 10.8%
Answer:
Use the following information to answer the question(s) below.
Wyatt Oil’s average historical excess return is closest to:
A) -2.50%
B) -3.33%
C) -4.33%
D) -5.17%
Answer:
Inventory can be used as collateral for a loan in all of the following ways except
A) a floating lien.
B) a warehouse arrangement.
C) a factoring arrangement.
D) a trust receipt.
Answer:
If the risk-free rate of interest is 7.5%, then the value of security “B” is closest to:
A) $91.00
B) $92.50
C) $93.00
D) $100.00
Answer:
Suppose all possible investment opportunities in the world are limited to the four stocks
list in the table below:
Suppose that you are holding a market portfolio and you have invested $18,000 in
Taggart Transcontinental. The number of shares of Wyatt Oil that you hold is closest to:
A) 90 shares
B) 460 shares
C) 615 shares
D) 770 shares
Answer:
Which of the following statements is false?
A) A venture capital firmis a limited partnership that specializes in raising money to
invest in the private equity of young firms.
B) Venture capitalists typically control about three-quarters of the seats on a start-up’s
board of directors, and often represent the single largest voting block on the board.
C) The initial capital that is required to start a business is usually provided by the
entrepreneur herself and her immediate family.
D) Individual investors who buy equity in small private firms are called angel investors.
Answer:
If Microsoft merged with the Coca-Cola Company, this would be an example of a
________ merger.
A) conglomerate
B) vertical
C) horizontal
D) diagonal
Answer:
Asset securitization is the process of creating a(n)
A) collateralized security.
B) asset-backed security.
C) municipal security.
D) payment security.
Answer:
Which of the following statements is false?
A) Most financial analysts and sophisticated investors consider operating leases (which
must be listed in the footnotes of the financial statements) to be additional sources of
leverage.
B) By carefully avoiding the four criteria that define a operating lease for accounting
purposes, a firm can avoid listing the long-term lease as a liability.
C) Because a lease is equivalent to a loan, the firm can increase its actual leverage
without increasing the debt-to-equity ratio on its balance sheet.
D) For most large corporations, the amount of leverage the firm can obtain through a
lease is unlikely to exceed the amount of leverage the firm can obtain through a loan.
Answer:
Which of the following statements is false?
A) Given the spot interest rates, we can determine the price and yield of any other
default-free bond.
B) As the coupon increases, earlier cash flows become relatively less important than
later cash flows in the calculation of the present value.
C) 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.
D) When U.S. bond traders refer to “the yield curve,” they are often referring to the
coupon-paying Treasury yield curve.
Answer:
Use the information for the question(s) below.
You are purchasing a new home and need to borrow $250,000 from a mortgage lender.
The mortgage lender quotes you a rate of 6.25% APR for a 30-year fixed rate mortgage.
The mortgage lender also tells you that if you are willing to pay 2 points, they can offer
you a lower rate of 6.0% APR for a 30-year fixed rate mortgage. One point is equal to
1% of the loan value. So if you take the lower rate and pay the points you will need to
borrow an additional $5000 to cover points you are paying the lender.
Assuming you pay the points and borrow from the mortgage lender at 6.00%, then your
monthly mortgage payment (with payments made at the end of the month) will be
closest to:
A) $708
B) $1530
C) $1540
D) $1600
Answer:
Use the information for the question(s) below.
JR Industries has a $20 million loan due at the end of the year and under its current
business strategy its assets will have a market value of only $15 million when the loan
comes due. JR is considering a new much riskier business strategy. While this new
riskier strategy can be implemented using JR’s existing assets without any additional
investment, the new strategy has only a 40% probability of succeeding. If the new
strategy is a success, the market value of JR’s assets will be $30, but if the strategy fails
the assets will be worth only $5 million.
What is the expected payoff to equity holders under JR’s new riskier business strategy?
A) $15 million
B) $11 million
C) $20 million
D) $4 million
Answer:
Which of the following statements is false?
A) Unlike taxes on capital gains or interest income, which are paid annually, taxes on
dividends are paid only at the time the investor sells the stock.
B) Deferring the payment of capital gains taxes lowers the present value of the taxes,
which can be interpreted as a lower effective capital gains tax rate.
C) Investors with longer holding periods or with accrued losses face a lower tax rate on
equity income, decreasing the effective tax advantage of debt.
D) Investors with accrued losses that they can use to offset gains face a zero effective
capital gains tax rate.
Answer:
Which of the following statements is false?
A) Nonzero alphas may merely indicate that the wrong market proxy is beings used;
they do not necessarily indicate forgone positive NPV investment opportunities.
B) The true market portfolio contains much more than just stocks, it includes bonds,
real estate, art, precious metals, and any other investment vehicles available.
C) If the true market portfolio is efficient, but the proxy portfolio is not highly
correlated with the true market portfolio, then the true market portfolio will not be
efficient and stocks will have nonzero alphas.
D) Much of the investment wealth cannot be included in the proxy for the market
portfolio since it does not trade in competitive markets.
Answer:
Use the following information to answer the question(s) below.
Suppose that the market portfolio is equally likely to increase by 24% or decrease by
8%. Security “X” goes up on average by 29% when the market goes up and goes down
by 11% when the market goes down. Security “Y” goes down on average by 16% when
the market goes up and goes up by 16% when the market goes down. Security “Z” goes
up on average by 4% when the market goes up and goes up by 4% when the market
goes down.
The beta for security “Z” is closest to:
A) -1.00
B) -0.25
C) 0.00
D) 0.25
Answer:
Which of the following statements is false?
A) If the market portfolio were not efficient, investors could find strategies that would
“beat the market” with higher average returns and lower risk.
B) The CAPM states that the cost of capital depends only on systematic risk.
C) Efficient capital markets is a much stronger hypothesis than the CAPM.
D) The market portfolio is an efficient portfolio.
Answer:
Which of the following statements regarding the valuing of costs and benefits is not
correct?
A) The first step in evaluating a project is to identify its costs and benefits.
B) In the absence of competitive markets, we can use one-sided prices to determine
exact cash values.
C) Competitive market prices allow us to calculate the value of a decision without
worrying about the tastes or opinions of the decision maker.
D) Because competitive markets exist for most commodities and financial assets, we
can use them to determine cash values and evaluate decisions in most situations.
Answer:
Which of the following statements is false?
A) The main components of net working capital are cash, inventory, receivables, and
payables.
B) The firm’s cash cycleis the average length of time between when a firm originally
purchases its inventory and when it receives the cash back from selling its product.
C) Working capital includes the cash that is needed to run the firm on a day-to-day
basis. It does not include excess cash, which is cash that is not required to run the
business and can be invested at a market rate.
D) If the firm pays cash for its inventory, the firm’s operating cycle is identical to the
firm’s cash cycle.
Answer:
Use the information for the question(s) below.
KT Enterprises, a U.S. import-export trading, is considering its international tax
situation. Currently KT is U.S. tax rate is 35%. KT has significant operations in both
Japan and Ireland. In Japan the current exchange rate is 118.4/$ and earnings in Japan
are taxed at 41%. In Ireland the current exchange rate is $1.27/€ and earnings in Ireland
are taxed at 12.5%. KT’s profits, which are fully and immediately repatriated, and
foreign taxes paid for the current year are shown here (in millions):
The amount of the taxes paid in dollars for the Japanese operations is closest to:
A) $29.5 million
B) $5.1 million
C) $50.0 million
D) $20.5 million
Answer:
Suppose all possible investment opportunities in the world are limited to the four stocks
list in the table below:
The weight on Wyatt Oil stock in the market portfolio is closest to:
A) 15%
B) 20%
C) 25%
D) 30%
Answer:
Use the following information to answer the question(s) below.
Suppose that the market portfolio is equally likely to increase by 24% or decrease by
8%. Security “X” goes up on average by 29% when the market goes up and goes down
by 11% when the market goes down. Security “Y” goes down on average by 16% when
the market goes up and goes up by 16% when the market goes down. Security “Z” goes
up on average by 4% when the market goes up and goes up by 4% when the market
goes down.
The beta for security “X” is closest to:
A) 0
B) 0.80
C) 1.00
D) 1.25
Answer:
Use the following information to answer the question(s) below.
If the expected return on the market risk 11% and the risk-free rate is 4%, then the
expected return of investing in IBM is closest to:
A) 9.1%
B) 10.3%
C) 11.0%
D) 12.0%
Answer:
Which of the following is an example of an intangible asset?
A) Brand names and trademarks
B) Patents
C) Customer relationships
D) All of the above are intangible assets.
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 expected return for Rearden Metal is closest to:
A) 10.0%
B) 11.4%
C) 11.8%
D) 12.0%
Answer:
As part of the registration statement, called the preliminary prospectus, circulates to
investors before the stock is offered. This preliminary prospectus is also called a(n)
A) IPO filing.
B) 10-K filing.
C) blue whale.
D) red herring.
Answer:
Use the information for the question(s) below.
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’s
interest tax shield is closest to:
A) $11 million
B) $18 million
C) $10 million
D) $24 million
Answer:
Use the information for the question(s) below.
Monsters Incorporated (MI) in ready to launch a new product. Depending upon the
success of this product, MI will have a value of either $100 million, $150 million, or
$191 million, with each outcome being equally likely. The cash flows are unrelated to
the state of the economy (i.e. risk from the project is diversifiable) so that the project
has a beta of 0 and a cost of capital equal to the risk-free rate, which is currently 5%.
Assume that the capital markets are perfect.
Assume that in the event of default, 20% of the value of MI’s assets will be lost in
bankruptcy costs. Suppose that at the start of the year, MI has no debt outstanding, but
has 5.6 million shares of stock outstanding. If MI issues debt of $125 million due next
year and uses the proceeds to repurchase shares, the share price following the
announcement of the repurchase will be closest to:
A) $23.90
B) $23.75
C) $25.00
D) $5.15
Answer:
Use the table for the question(s) below.
Luther Industries had sales of $980 million and a cost of goods sold of $560 million in
2006. A simplified balance sheet for the firm appears below:
Luther Industries
Balance Sheet
As of December 31, 2006
(millions of dollars)
Luther’s Accounts Receivable days is closest to:
A) 42 days
B) 39 days
C) 32 days
D) 59 days
Answer:
Recycle America Inc. has the opportunity to trade 8,000 pounds of plastic pellets made
from recycled soda bottles for 5,000 pounds of aluminum cans. If the current market
price of scrap aluminum is $0.83 per pound and the current market price for plastic
pellets is $0.57 per pound, then the added benefit (cost) of making this trade is:
A) ($410)
B) $410
C) ($780)
D) $780
Answer:
Which of the following equations is incorrect?
A) Cov(Ri,Rj) = Σ(Ri – Ri)(Rj – Rj)
B) Var(Rp) = x1
2Var(R1) + x2
2Var(R2) + 2X1X2Cov(R1,R2)
C) Corr(Ri,Rj) =
D) Cov(Ri,Rj) =E[(Ri – E[Ri])(Rj – E[Rj])]
Answer:
The Sarbanes-Oxley Act (SOX) stiffened penalties for providing false information by
A) requiring the CEO and CFO to return bonuses or profits from the sale of stock that
are later shown to be due to misstated financial reports.
B) imposing large compliance costs on small companies.
C) requiring auditing firms to have long-standing relationships with their clients and
receive lucrative auditing and consulting fees from them.
D) putting strict limits on the amount of non-audit fees (consulting or otherwise) that an
accounting firm can earn from a firm that it audits.
Answer:
Use the information for the question(s) below.
Iota Industries is an all-equity firm with 50 million shares outstanding. Iota has $200
million in cash and expects future free cash flows of $75 million per year. Management
plans to use the cash to expand the firm’s operations, which in turn will increase future
free cash flows by 12%. Iota’s cost of capital is 10% and assume that capital markets are
perfect.
The value of Iota if they use the $200 million to expand is closest to:
A) $825 million
B) $688 million
C) $840 million
D) $950 million
Answer: