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In calculating the weighted average cost of capital, the values used for D, E and V are:
A. book values
B. liquidating values
C. market values
D. none of the above
Generally, which of the following is true? (b = beta)
A. bD < bA < bE
B. bE < bA < bD
C. bA < bE < bD
D. None of the above is true
Financial slang referring to the reduction of the cash flow from its forecasted value to
its certainty equivalent is a
A. Deep discount
B. Haircut for risk
C. Arbitrage profit
D. Speculative gain
If the 5-year spot rate is 10% and the 4-year spot rate is 9%, what is the one-year
forward rate of interest four years from now?
A. 14.1%
B. 9.5%
C. 1.0%
D. 11.0%
According to the graph of WACC for Union Pacific, the following is (are) true:
I) cost of equity is an increasing function of the debt-equity ratio.
II) cost of debt is an increasing function of the debt-equity ratio.
III) weighted average cost of capital (WACC) is a decreasing function of the
debt-equity ratio.
A. I only
B. I and II only
C. III only
D. I, II and III
A firm in Australia earns a pretax profit of $A10 per share. It pays a corporate tax of $3
per share (30% tax rate) in taxes. The firm pays the remaining $A7 in dividends to a
shareholder in 30% tax bracket. What is the amount of tax paid by the shareholder
under the imputation tax system?
A. $A2.10
B. Zero
C. $A3.00
D. None of the above
Which of the following observations would provide evidence against the strong form of
efficient market theory?
I) Mutual fund managers do not on average make superior returns
II) In any year approximately 50% of all pension funds outperform the market
III) Managers who trade in their own firm's stocks make superior returns
A. I only
B. II only
C. III only
D. I and II only
In the case of look back option:
A. the option holder must decide before maturity whether the option is a call or a put.
B. the option holder chooses as the exercise price any of the asset prices that occurred
before the final date.
C. the option payoff is zero if the asset price is on the wrong side of the exercise price
and otherwise is a fixed sum.
D. the exercise price is equal to the average of the asset's price during the life of the
option.
The real rate of interest is 3% and the inflation is 4%. What is the nominal rate of
interest?
A. 3%
B. 4%
C. 7.12%
D. 1%
The survey of CFOs indicates that IRR method is used for evaluating investment
projects by:
A. 12% of firms
B. 20% of firms
C. 76% of firms
D. 57% of firms
You have come up with the following estimates of project cash flows:
The cash flows are perpetuities and the cost of capital is 8%. What does a sensitivity
analysis of NPV (without taxes) show?
A. 25, +232.50, +440
B. -100, +500, +800
C. -90, -55, -20
D. None of the above
You would like to have enough money saved to receive an $80,000 per year perpetuity
after retirement so that you and your family can lead a good life. How much would you
need to save in your retirement fund to achieve this goal (assume that the perpetuity
payments starts on the day of retirement. The interest rate is 10%)?
A. $1,500,000
B. $880,000
C. $800,000
D. None of the above
You would like to have enough money saved to receive $80,000 per year perpetuity
after retirement so that you and your family can lead a good life. How much would you
need to save in your retirement fund to achieve this goal (assume that the perpetuity
payments start one year from the date of your retirement. The interest rate is 8%)?
A. $7,500,000
B. $750,000
C. $1,000,000
D. None of the above
If the value of d1 is 1.25, then the value of N(d1) is equal to:
A. -0.1056
B. 1.25
C. 0.25
D. 0.8944
Standard error measures:
A. Nominal annual rate of return on a portfolio
B. Risk of a portfolio Reliability of an estimate
C. Reliability of an estimate
D. Real annual rate of return on a portfolio
The IRR is defined as:
A. The discount rate that makes the NPV equal to zero
B. The difference between the cost of capital and the present value of the cash flows
C. The discount rate used in the NPV method
D. The discount rate used in the discounted payback period method
The mixture of debt and equity, used to finance a corporation is also known as:
A. Capital budgeting
B. Capital structure
C. Investing
D. Treasury
A project has an initial investment of $150. You have come up with the following
estimates of revenues and costs. Calculate the NPV assuming that cash flow and
perpetuities. (No taxes.) (Cost of capital = 10%)
A. 50, -100, +400
B. -50, +300, +500
C. -100, +150, +350
D. None of the above
The after-tax weighted average cost of capital (WACC) is calculated as:
A. WACC = rD (D/V) + rE (E/V); (where V = D + E)
B. WACC = rD (1 - TC)(D/V) + rE (E/V); (where V = D + E)
C. WACC = rD (D/V) + rE (1 - TC)(E/V); (where V = D + E)
D. None of the above
Figure-2 depicts the:
A. position diagram for the buyer of a call option
B. profit diagram for the buyer of a call option
C. position diagram for the buyer of a put option
D. profit diagram for the buyer of a put option
An investor can undo the effect of leverage on his/her own account by:
I) investing in the equity of a levered firm
II) by borrowing on his/her own account
III) by investing in risk-free debt like T-bills
A. I only
B. II only
C. III only
D. I and III above
Mr. Dell has $100 income this year and zero income next year. The market interest rate
is 10% per year. Mr. Dell also has an investment opportunity in which he can invest $50
this year and receive $80 next year. Suppose Mr. Dell consumes $50 this year and
invests in the project. What is the NPV of the investment opportunity?
A. $5
B. $22.73
C. $0 (zero)
D. None of the above.
Corporate tax rate: 34% Personal tax rate on income from bonds: 10% Personal tax rate
on income from stocks: 50%
A. -$0.188
B. $0.340
C. $0.633
D. None of the above
If the 4-year spot rate is 7% and the 3-year spot rate is 6%, what is the one-year forward
rate of interest three years from now?
A. 10.0%
B. 6.5%
C. 9.6%
D. None of the above
The after-tax weighted average cost of capital (WACC) is given by: (Corporate tax rate
= TC )
A. WACC = (rD)(D/V) + (rE)(E/V)
B. WACC = (rD)(D/V) +[(rE )(E/V)/(1 - TC)]
C. WACC = [(rD)(D/V) + (rE)(E/V)]/(1 - TC)
D. WACC = (rD)(1 - TC)(D/V) + (rE)(E/V)
Two machines, A and B, which perform the same functions, have the following costs
and lives.
Which machine would you choose? The two machines are mutually exclusive and the
cost of capital is 15%.
A. Machine A as the EAC is $1789.89
B. Machine B as the EAC is $1922.88
C. Don't buy either machine
D. Accept both A and B
A company has forecast sales in the first 3 months of the year as follows (figures in
millions): January, $200; February, $140; March, $100. 50% of sales are usually paid
for in the month that they take place, 30% in the following month, and the final 20% in
the next month. Receivables at the end of December were $100 million. What are the
forecasted collections on accounts receivable in March?
A. $132 million
B. $100 million
C. $240 million
D. $92 million
As the number of stocks in a portfolio is increased:
A. Unique risk decreases and approaches to zero
B. Market risk decreases
C. Unique risk decreases and becomes equal to market risk
D. Total risk approaches to zero
In the case of a portfolio of N-stocks, the formula for portfolio variance contains:
A. N covariance terms
B. N(N - 1)/2 covariance terms
C. N2 covariance terms
D. None of the above
An investment at 10% nominal rate compounded continuously is equal to an equivalent
annual rate of:
A. 10.250%
B. 10.517%
C. 10.381%
D. None of the above
Universal Air is a no growth firm and has two million shares outstanding. It is expected
to earn a constant 20 million per year on its assets. If all earnings are paid out as
dividends and the cost of capital is 10%, calculate the current price per share for the
stock.
A. $200
B. $150
C. $100
D. $50
Buying the stock and the put option on the stock provides the same payoff as:
A. investing the present value of the exercise price in T-bills and buying the call option
B. on the stock
C. short selling the stock and buying a call option on the stock
D. writing (selling) a put option and buying a call option on the stock
E. none of above
If the present value of the cash flow X is $240, and the present value cash flow Y $160,
then the present value of the combined cash flow is:
A. $240
B. $160
C. $80
D. $400
Given the following data: Long term debt = 100; Value of leases = 20; Book value of
equity = 80; Market value of equity = 100, calculate the debt-equity ratio.
A. 0.50
B. 0.60
C. 1.50
D. 1.0
Briefly explain the major provisions of the Sarbanes-Oxley Act of 2002 (SOX).
Explain the concept of "value additivity." '
State the "net present value rule."
Define the term cash flow for a project.
Briefly explain the difference between an equivalent annual cost and an equivalent
annual annuity.
Briefly explain what is meant by "the term structure of interest rates."
What discount rate should be used for calculating the present value of safe, nominal
cash flows?
What are TIPs? Briefly explain.
Briefly explain how a firm's cost of equity is estimated using the capital asset pricing
model (CAPM).
What are the main purposes of the Sarbanes-Oxley Act of 2002 (SOX).
Briefly explain how the cost of excess capacity is taken into consideration.
Briefly explain the difference between beta as a measure of risk and variance as a
measure of risk.
How do firms finance investments in current assets?
What is the relationship between real and nominal rates of interest?
Discuss some examples of the conflicts of interest that may arise between bondholders
and stockholders when a firm is in financial distress.
