A limited liability company is essentially:
A) a limited partnership without limited partners.
B) a limited partnership without a general partner.
C) just another name for a limited partnership.
D) just another name for a corporation.
Which of the following statements is FALSE?
A) Holding cash has the opposite effect of leverage on risk and return.
B) We use the market value of the firm’s net debt when computing its WACC and
unlevered beta to measure the cost of capital and market risk of the firm’s business
assets.
C) Since the WACC does not change with the use of leverage, the value of the firm’s
free cash flow evaluated using the WACC does not change, and so the enterprise value
of the firm does not depend on its financing choices.
D) Even if the firm’s capital structure is more complex, the WACC is calculated by
computing the weighted average cost of only the firm’s debt and equity.
Which of the following statements is FALSE?
A) The expected return of a portfolio should correspond to the portfolio’s beta.
B) Graphically the line through the risk-free investment and the market portfolio is
called the capital market line (CML).
C) The beta of a portfolio is the weighted average beta of the securities in the portfolio.
D) By holding a negative beta security, an investor can reduce the overall market risk of
her portfolio.
If it is managed efficiently, Luther industries will have assets with market value of $100
million, $300, million, or $500 million next year, with each outcome being equally
likely. Managers may, however, engage in wasteful empire building which will reduce
the firm’s market value by $20 million in all cases. Managers may also increase the risk
of the firm, changing the probability of each outcome to 50%, 20%, and 30%
respectively.
If it is managed efficiently, then the expected market value of Luther’s assets is closest
to:
A) $300 million
B) $260
C) $240
D) $280 million
If the risk-free interest rate is 10%, then the NPV for Moe is closest to:
A) -3.64
B) 2.73
C) 3.18
D) 3.64
If managed effectively, Rearden Metal will have assets with a market value of $200
million, $300 million, or $400 million next year, with each outcome being equally
likely. Managers, however, may decided to engage in wasteful empire building, which
will reduce Rearden’s market value by $20 million in all cases. Managers may also
increase the risk of the firm, changing the probability of each outcome to 50%, 5%, and
45% respectively.
What is the expected value of Rearden’s assets if it were run efficiently?
A) $265 million
B) $280 million
C) $295 million
D) $300 million
Consider the following returns:
The Volatility on Stock Y’s returns is closest to:
A) 35%
B) 31%
C) 42%
D) 18%
Suppose that a security with a risk-free cash flow of $1000 in one year trades for $930
today. If there are no arbitrage opportunities, then the current risk-free rate is closest to:
A) 6.0%
B) 6.5%
C) 7.0%
D) 7.5%
Which of the following statements is FALSE?
A) Even two firms in the same industry selling the same types of products, while
similar in many respects, are likely to be of different size or scale.
B) In the method of comparables we estimate the value of the firm based on the value
of other, comparable firms or investments that we expect will generate very similar cash
flows in the future.
C) Consider the case of a new firm that is identical to an existing publicly traded
company. If these firms will generate identical cash flows, the Law of One Price implies
that we can use the value of the existing company to determine the value of the new
firm.
D) A valuation multiple is a ratio of some measure of the firm’s scale to the value of the
firm.
Which of the following is NOT an assumption used in deriving the Capital Asset
Pricing Model (CAPM)?
A) Investors have homogeneous expectations regarding the volatilities, correlation, and
expected returns of securities.
B) Investors have homogeneous risk adverse preferences toward taking on risk.
C) Investors hold only efficient portfolios of traded securities, that is portfolios that
yield the maximum expected return for the given level of volatility.
D) Investors can buy and sell all securities at competitive market prices without
incurring taxes or transactions cost and can borrow and lend at the risk-free interest
rate.
Iota Industries Market Value Balance Sheet ($ Millions) and Cost of Capital
Iota Industries New Project Free Cash Flows
Assume that this new project is of average risk for Iota and that the firm wants to hold
constant its debt to equity ratio.
The NPV for Iota’s new project is closest to:
A) $25.25
B) $13.25
C) $9.00
D) $18.50
If the risk-free interest rate is 10%, then of the four projects listed, if you could only
invest in one project, which on e would you select?
A) Eenie
B) Meenie
C) Mighty
D) Moe
Pro Forma Income Statement for Ideko, 2005-2010
Pro Forma Balance Sheet for Ideko, 2005-2010
Assuming that Ideko has a EBITDA multiple of 9.4, then the continuation enterprise
value of Ideko in 2010 is closest to:
A) $181.7 million
B) $152.8 million
C) $272.8 million
D) $301.7 million
Galt Industries has 50 million shares outstanding and a market capitalization of $1.25
billion. It also has $750 million in debt outstanding. Galt Industries has decided to
delever the firm by issuing new equity and completely repaying all the outstanding
debt. Assume perfect capital markets.
Suppose you are a shareholder in Galt industries holding 100 shares, and you disagree
with this decision to delever the firm. You can undo the effect of this decision by
A) borrowing $1500 and buying 60 shares of stock.
B) selling 32 shares of stock and lending $800.
C) borrowing $1000 and buying 40 shares of stock.
D) selling 40 shares of stock and lending $1000.
KT Enterprises is considering undertaking a new project. Based upon analysis of firms
with similar projects, KT has determined that an unlevered cost of equity of 12% is
suitable for their project. KT’s marginal tax rate is 35%, its borrowing rate is 7%, and
KT does not believe that its borrowing rate will change if the new project is accepted.If
KT expects to maintain a debt to equity ratio for this project of .6 then KT’s equity cost
of capital, rE, for this project is closest to:
A) 5.0%
B) 12%
C) 15.0%
D) 17.0%
Which of the following firms is likely to maintain low levels of debt?
A) An electric utility
B) A tobacco company
C) An Internet firm
D) A mature restaurant chain
Luther Corporation
Consolidated Balance Sheet
December 31, 2009 and 2008 (in $ millions)
Luther’s quick ratio for 2008 is closest to:
A) 0.77
B) 0.87
C) 1.15
D) 1.30
*The current tax rates are set to expire in 2008 unless Congress extends them. The tax
rates shown are for financial assets held for one year. For assets held less than one year,
capital gains are taxed at the ordinary income tax rate (currently 35% for the highest
bracket); the same is true for dividends if the assets are held for less than 61 days.
The effective dividend tax rate for a buy and hold individual investor in 2006 is closest
to:
A) 0%
B) 35%
C) 15%
D) 20%