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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
