FC 60727 | Course Paper

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Which of the following statements regarding the net present value rule and the rate of

return rule is not true?

A. Accept a project if NPV > cost of investment

B. Accept a project if NPV is positive

C. Accept a project if return on investment exceeds the rate of return on an equivalent

investment in the financial market

D. Reject a project if NPV is negative

If the depreciable investment is $1,000,000 and the MACRS 5-Year class schedule is:

Year-1: 20%; Year-2: 32%; Year-3: 19.2%; Year-4: 11.5%; Year-5: 11.5% and Year-6:

5.8%

Calculate the depreciation tax shield for Year-2 using a tax rate of 30%:

A. $224,000

B. $60,000

C. $96,000

D. $300,000

Which of the following provides a correct measure of the opportunity cost of capital

regardless of the timing of the cash flows?

A. Arithmetic average

B. Geometric average

C. Hyperbolic mean

D. None of the above

According to the net present value rule, an investment in a project should be made if

the:

A. Net present value is greater than the cost of investment

B. Net present value is greater than the present value of cash flows

C. Net present value is positive

D. Net present value is negative

Real cash flow occurring in year-2 is $60,000. If the inflation rate is 5% per year, the

real rate of interest is 2%, calculate the cash flow for the year-2.

A. $60,000

B. $55,422

C. $66,150

D. None of the above

A company has forecast sales in the first 3 months of the year as follows (figures in

millions): January, $80; February, $60; March, $40. 70% of sales are usually paid for in

the month that they take place, 20% in the following month, and the final 10% in the

next month. Receivables at the end of December were $23 million. What are the

forecasted collections on accounts receivable in March?

A. $180 million

B. $13 million

C. $40 million

D. $48 million

The following is an example of a dealer market:

A. New York Stock Exchange

B. London Stock Exchange

C. Tokyo Stock Exchange

D. Nasdaq

Which portfolio had the highest average annual return in real terms between 1900 and

2006?

A. Portfolio of U.S. Common stocks

B. Portfolio of U.S. government bonds

C. Portfolio of Treasury bills

D. None of the given answers

If the covariance of Stock A with Stock B is – 100, what is the covariance of Stock B

with Stock A?

A. +100

B. -100

C. 1/100

D. Need additional information

Generally, the simulation models for projects are developed using a:

A. Pair of dice

B. Roulette wheel

C. Computer

D. Pack of cards

What forward rate is embedded in a two year zero coupon bonds with a yield to

maturity of 6% and a three year zero coupon bond and a yield to maturity of 6.5%?

Assume both bonds are currently priced at par.

A. 5.50%

B. 6.00%

C. 6.50%

D. 7.50%

Total sources of funds are calculated as:

A. operating cash flows + new issues of equity

B. operating cash flows + new issues of equity + new issues of long-term debt

C. operating cash flows + new issues of equity-new issues of long-term debt

D. operating cash flows + new issues of equity-dividend paid to shareholders

If an investor buys “a” proportion of an both debt and equity of a levered firm (firm L)

then his/her payoff is:

A. (a) * (profits)

B. (a) * (interest)

C. (a) * (profits – interest)

D. none of the above

Which of the following statement(s) about financial distress is(are) true:

I) always ends in bankruptcy

II) firms can postpone bankruptcy for many years

III) ultimately the firm may recover and avoid bankruptcy altogether

A. I only

B. II only

C. II and III only

D. III only

A firm has a project with a NPV of -$52 million. If they have access to risk free

government financing that can create an annual tax shield of $5 mil, what is the APV of

the project assuming the risk free interest rate is 6%?

A. -$52 mil

B. $5 mil

C. $31 mil

D. $83 mil

The higher the underlying stock price: (everything else remaining the same)

A. higher the put price

B. lower the put price

C. has no effect on put price

D. none of the above

Capital budgeting decisions that include both investment and financing decisions can be

analyzed by:

I) Adjusting the present value

II) Adjusting the discount rate

III) Ignoring financing mix

A. I only

B. II only

C. III only

D. I and II only

If the standard deviation of annual returns on the asset is 30% and the interval is a year,

then the downside change is equal to :

A. 26%

B. 53.6%

C. 33.0%

D. 38.7%

A fudge factor might include:

A. Commodity price changes

B. Labor costs

C. Stock price fluctuations

D. Risk of government non-approval

The market value of Charcoal Corporation’s common stock is $20 million, and the

market value of its risk-free debt is $5 million. The beta of the company’s common

stock is 1.25, and the market risk premium is 8%. If the Treasury bill rate is 5%, what is

the company’s cost of capital? (Assume no taxes.)

A. 15%

B. 14.6%

C. 13%

D. None of the above

The term structure of interest rates can be described as the:

A. Relationship between the spot interest rates and the bond prices

B. Relationship between spot interest rates and stock prices

C. Relationship between spot interest rates and maturity of a bond

D. None of the above

If beta of debt is zero, then the relationship between equity beta and asset beta is given

by:

A. equity beta = 1 + [(Beta of assets)/(debt-equity ratio)]

B. equity beta = (1 – Debt-equity ratio)(beta of assets)

C. equity beta = (1 + Debt-equity ratio)(beta of assets)

D. None of the above

The value of [d1] is (approximately):

A. 0.0226

B. 0.175

C. -0.3157

D. 0.3157

If the discount rate is stated in real terms, then in order to calculate the NPV in a

consistent manner requires that project:

I) cash flows be estimated in nominal terms

II) cash flows be estimated in real terms

III) accounting income be used

A. I only

B. II only

C. III only

D. None of the above

Earnings before interest and taxes is calculated as:

A. Total revenues-costs

B. Total revenues-costs-depreciation

C. Total revenues-costs-depreciation-taxes

D. None of the above

A project requires an initial investment in equipment of $90,000 and then requires an

investment in working capital of $10,000 at the beginning (t = 0). The project is

expected to produce sales revenues of $120,000 for three years. Manufacturing costs

are estimated to be 60% of the revenues. The assets are depreciated using straight-line

depreciation. At the end of the project, the firm can sell the equipment for $10,000. The

corporate tax rate is 30% and the cost of capital is 15%. Cash flows from the project

are:

A. CF0: -90,000; CF1: 12,600; CF2: 12,600; CF3: 29,600

B. CF0: -100,000; CF1: 42,600; CF2: 42,600; CF3: 59,600

C. CF0: -100,000; CF1: 42,600; CF2: 42,600; CF3: 42,600

D. none of the above

A company forecasts growth of 6% for 5 years and 3% thereafter. Given last year’s cash

flow was $100, what is the horizon value if the company cost of capital is 8%?

A. $0

B. $1,672

C. $2,000

D. $2,676

Investment in inventories includes investment in:

I) Raw material

II) Work-in-progress

III) Finished goods

A. I only

B. I and II only

C. I, II, and III

D. III only

A 5-year treasury bond with a coupon rate of 8% has a face value of $1000. What is the

semi-annual interest payment?

A. $80

B. $40

C. $100

D. None of the above

A bond with a face value of $1,000, coupon rate of 0%, yield to maturity of 9%, and ten

years to maturity. This bond’s duration is:

A. 6.7 years

B. 7.5 years

C. 9.6 years

D. 10.0 years

Generally high growth stocks pay:

A. Low or no dividends

B. High dividends

C. Erratic dividends

D. Both A and C