FE 19355 | Course Paper

Unlock access to all the studying documents.

View Full Document

An investor can create the effect of leverage on his/her account by:

I) buying equity of an unlevered firm

II) by investing in risk-free debt like T-bills

III) by borrowing on his/her own account

A. I only

B. II only

C. III only

D. I and III only

What is the present value annuity factor at an interest rate of 9% for 6 years?

A. 7.5233

B. 4.4859

C. 1.6771

D. None of the above

The basic relationship for determining external capital required is:

A. External capital required = operating cash flow – investment in net working capital

B. External capital required = operating cash flow – investment in net working capital –

investment in fixed assets

C. External capital required = operating cash flow – investment in net working capital –

investment in fixed assets – dividends

D. None of the above

The present value formula for one period cash flow is:

A. PV = C1(1 + r)

B. PV = C1/(1 + r)

C. PV = C1/r

D. None of the above

One year discount factor at a discount rate of 25% per year is:

A. 1.25

B. 1.0

C. 0.8

D. None of the above

For European options, the value of a put is equal to:

A. The value of a call minus the value of a share plus the present value of the exercise

price

B. The value of a call plus the value of a share plus the present value of the exercise

price

C. The value of the share minus the value of a call plus the present value of the exercise

price

D. The value of the share minus the present value of the exercise price plus the valued

of a call

Capital structure is irrelevant if:

A. the capital markets are perfect

B. each investor holds a fully diversified portfolio

C. each investor holds the same proportion of debt and equity of the firm

D. all of the above

In which of the following stock exchange specialists act as the auctioneers:

A. New York Stock Exchange

B. London Stock Exchange

C. Tokyo Stock Exchange

D. Frankfurt Stock Exchange

A government bond issued in Germany has a coupon rate of 5%, face value of euros

100 and maturing in five years. The interest payments are made annually. Calculate the

price of the bond (in euros)if the yield to maturity is 3.5%.

A. 100

B. 106.77

C. 106.33

D. none of the above

The “event study” methodology is used in the test of:

A. weak form efficiency

B. semi-strong form efficiency

C. strong form efficiency

D. none of the above

A put option gives the owner the right:

A. and the obligation to buy an asset at a given price

B. and the obligation to sell an asset at a given price

C. but not the obligation to buy an asset at a given price

D. but not the obligation to sell an asset at a given price

Abnormal stock return is calculated as:

A. actual stock return-expected stock return

B. return on stock-return on market

C. return on stock for the current period-return on stock for the previous period

D. none of the above

Given a book value per share of $5 and a market value of $12, what is the market value

added of a firm with 2,000,000 outstanding shares?

A. $1,000,000

B. $10,000,000

C. $14,000,000

D. $24,000,000

If the expected return of stock A is 12% and that of stock B is 14% and both have the

same variance, then investors would prefer stock B to stock A.

Given the following data for year-1:

Profits after taxes = $14 millions; Depreciation = $6 millions; Interest expense = $6

millions; Investment in fixed assets = $12 millions; and Investment in working capital =

$3 millions; Calculate the free cash flow (FCF) for year-1:

A. $4 millions

B. $5 millions

C. $6 millions

D. none of the above

The following are real options except:

A. Stock options

B. Timing options

C. Option to expand

D. Option to abandon

The value of an option (both call and put) is positively related to:

I) volatility of the underlying stock price

II) time to expiration

III) risk-free rate

A. I and II only

B. II and III only

C. I and III only

D. III only

If the stock price follows a random walk successive price changes are statistically

independent. If 2 is the variance of daily price change, and there are t days until

expiration, the variance of the cumulative price changes is:

A. 2

B. (2) * (t)

C. (2)/t

D. none of the above

Firms regularly use the following to reduce risk:

I) Currency options

II) Interest-rate options

III) Commodity options

A. I only

B. II only

C. III only

D. I, II, and III

An initial investment of $500 produces a cash flow $550 one year from today. Calculate

the rate of return on the project

A. 10%

B. 15%

C. 25%

D. none of the above

Which of the following features increase(s) the value of a call option?

A. A high interest rate

B. A long time to maturity

C. A higher volatility of the underlying stock price

D. All of the above

Calculate the IRR for the project.

A. 10%

B. 9%

C. 8%

D. none of the above

Which of the following statements is true?

A. The process of discounting is the inverse of the process of compounding.

B. Ending balances using simple interest is always greater than the ending balance

using compound interest at positive interest rates.

C. Present value of an annuity due is always less than the present value of an equivalent

annuity at positive interest rates.

D. All of the above are true.

If the capital markets are efficient, then the sale or purchase of any security at the

prevailing market price is:

A. Always a positive NPV transaction

B. Generally a zero NPV transaction

C. Is always a negative NPV transaction

D. None of the above

Investment in net working capital is not depreciated because:

A. It is not a cash flow

B. It is recovered during or at the end of the project and is not a depreciating asset

C. It is a sunk cost

D. All of the above

The value of a call option is negatively related to:

I) Exercise price

II) Risk-free rate

III) Time to expiration

A. I only

B. II only

C. III only

D. II and III only

The Granite Paving Co. wants to be levered at a debt equity ratio of 1.5. The before-tax

cost of debt is 11% and the cost of equity for an all equity firm is 14%. What will be the

firm’s cost of levered equity? (Assume a tax rate of 33%.)

A. 22%

B. 16%

C. 17%

D. None of the above

Consider a bond with a face value of $1,000, a coupon rate of 6%, a yield to maturity of

8%, and ten years to maturity. This bond’s duration is:

A. 8.7 years

B. 7.6 years

C. 0.1 years

D. 6.5 years

The following are examples of tangible assets except:

A. Machinery

B. Factories

C. Trademarks

D. Offices

The most important function of a short-term financial plan is:

A. to develop cash budget

B. to cover the forecasted requirements in the most economical way possible

C. to help develop the long-term financial plan

D. none of the above

Suppose that a company can direct $1 to either debt interest or capital gains for equity

investors. If half of equity income were subject to personal tax (e.g.: half is taxable

dividends and half is tax-free capital gains) which investor would not care how the

money is channeled?

(The corporate tax rate is 35%)

A. Investors paying zero personal tax

B. Investors paying a personal tax rate of 53%

C. Investors paying a personal tax rate of 17.5%

D. None of the above