Consider the following timeline detailing a stream of cash flows:
If the current market rate of interest is 6%, then the future value of this stream of cash
flows is closest to:
A) $1,723
B) $1,500
C) $1,626
D) $1,288
Because debtor-in-possession (DIP) financing is senior to all existing creditors:
A) it allows a firm that has filed for bankruptcy renewed access to financing to keep
operating.
B) it is an important cost for firms that rely heavily on trade credit.
C) it is likely to be small for producers of raw materials, as the value of those goods,
once delivered, does not depend on the seller’s continued success.
D) it allows debtors to assume they may have an opportunity to avoid their obligations
to a firm.
Nielson Motors (NM) has no debt. Its assets will be worth $600 million in one year if
the economy is strong, but only $300 million if the economy is weak. Both events are
equally likely. The market value today of Nielson’s assets is $400 million.Suppose the
risk-free interest rate is 4%. If Nielson borrows $150 million today at this rate and uses
the proceeds to pay an immediate cash dividend, then according to MM, the expected
return of Nielson’s stock just after the dividend is paid would be closest to:
A) -17.5%
B) -12.5%
C) 12.5%
D) 17.5%
(Include the MACRS Table from the Appendix.)
Casa Grande Farms is considering purchasing multiple tractors for a total purchase
price of $540,000. These tractors are expected to generate EBITDA of $250,000 for
each of the next three years. Casa Grande Farms has a 35% tax rate and has a cost of
capital of 10%.
Assuming that Casa Grande Farms depreciates these tractors using MACRS
depreciation method for three-year property starting immediately, then the annual
depreciation tax shield in year 2 is closest to:
A) 20,785
B) 27,991
C) 84,000
D) 180,000
If the market risk premium is 6% and the risk-free rate is 4%, then the expected return
of investing in Ford Motor Company is closest to:
A) 10.0%
B) 16.2%
C) 17.1%
D) 20.6%
Which of the following statements is FALSE?
A) Because investors are risk averse, they will demand a risk premium to hold
unsystematic risk.
B) Over any given period, the risk of holding a stock is that the dividends plus the final
stock price will be higher or lower than expected, which makes the realized return risky.
C) The risk premium for diversifiable risk is zero, so investors are not compensated for
holding firm-specific risk.
D) Because investors can eliminate firm-specific risk “for free” by diversifying their
portfolios, they will not require a reward or risk premium for holding it.
Which of the following formulas is INCORRECT?
A) Divt= × Dividend Payout Rate
B) PN=
C) earnings growth rate = retention rate × return on new investment
D) P0= + + … + + ×
Consider the following equation:
rwacc= rE+ rD(1 – Ï„c)
the term D in this equation is:
A) the dollar amount of debt.
B) the required rate of return on equity.
C) the required rate of return on debt.
D) the dollar amount of equity.
Consider a project with free cash flows in one year of $90,000 in a weak economy or
$117,000 in a strong economy, with each outcome being equally likely. The initial
investment required for the project is $80,000, and the project’s cost of capital is 15%.
The risk-free interest rate is 5%.
Suppose that you borrow $30,000 in financing the project. According to MM
proposition II, the firm’s equity cost of capital will be closest to:
A) 21%
B) 15%
C) 20%
D) 25%
Consider the following information regarding corporate bonds:
Rearden Metal has a bond issue outstanding with ten years to maturity, a yield to
maturity of 8.6%, and a B rating. The bondholders expected loss rate in the event of
default is 50%. Assuming the economy is in recession, then the expected return on
Rearden Metal’s debt is closest to:
A) 0.6%
B) 1.6%
C) 4.6%
D) 6.0%
Using just the return data for 2009, your estimate of Wyatt Oil’s Beta is closest to:
A) 0.84
B) 0.87
C) 1.00
D) 1.16
Suppose all possible investment opportunities in the world are limited to the four stocks
list in the table below:
Suppose that you have invested $30,000 in the market portfolio. Then the number of
shares of Wyatt Oil that you hold is closest to:
A) 150 shares
B) 300 shares
C) 350 shares
D) 450 shares
Consider the following timeline detailing a stream of cash flows:
If the current market rate of interest is 8%, then the future value of this stream of cash
flows is closest to:
A) $11,699
B) $10,832
C) $12,635
D) $10,339
Consider a project with the following cash flows:
Assume the appropriate discount rate for this project is 15%. The profitability index for
this project is closest to:
A) .14
B) .22
C) .60
D) .15
The British government has just issued a new consol bond that sells for £1000 and
pays interest of 8%. The annual interest payment on this bond must be:
A) £80
B) £8
C) £1000
D) £12,500
Suppose you have $500 today and the risk-free interest rate (rf) is 5%. The equivalent
value in one year is closest to:
A) $475
B) $476
C) $500
D) $525
The tendency of uninformed individuals to overestimate the precision of their
knowledge is known as:
A) overconfidence bias.
B) herd behavior.
C) familiarity bias.
D) disposition bias.
Wyatt Oil has assets with a market value of $600 million, $70 million of which are
cash. It has debt of $250 million, and 20 million shares outstanding. Assume perfect
capital markets.
If Wyatt Oil distributes the $70 million as a dividend, then its stock price after the
dividend will be closest to:
A) $12.50
B) $14.00
C) $17.50
D) $26.50