Financial Calculator Company proposes to invest $12 million in a new calculator
making plant. Fixed costs are $3 million a year. A financial calculator costs $10 per unit
to manufacture and can be sold for $30 per unit. If the plant lasts for 4 years and the
cost of capital is 20%, what is the accounting break-even level? (Approximately)
(Assume no taxes.)
A. 300,000 units
B. 150,000 units
C. 381,777 units
D. None of the above
The owner of a regular exchange-listed put-option on the stock:
A. has the right to buy 100 shares of the underlying stock at the exercise price
B. has the right to sell 100 shares of the underlying stock at the exercise price
C. has the obligation to buy 100 shares of the underlying stock at the exercise price
D. has the obligation to sell 100 shares of the underlying stock at the exercise price
Which of the following investors would be happy to see the stock price rise sharply?
I) Investor who owns the stock and a put option
II) Investor who has sold a put option and bought a call option
III) Investor who owns the stock and has sold a call option
IV) Investor who has sold a call option
A. I and II only
B. III and IV only
C. III only
D. IV only
If the efficient market hypothesis holds, investors should expect:
I) to receive a fair price for their security
II) to earn a normal rate of return on their investments
III) to be able to pick stocks that will outperform the market
A. I only
B. II only
C. III only
D. I and II only
Last year Axle Inc. reported total assets of $400, equity of $200, net income of $50,
dividends of $10 and earnings retained in the period of $40. What is Axle Inc.’s
sustainable growth rate?
A. 25.0%
B. 57.1%
C. 20.0%
D. 71.4%
(p. 136) Benefit-cost ratio is defined as the ratio of:
A. Net present value cash flow to initial investment
B. Present value of cash flow to initial investment
C. Net present value of cash flow to IRR
D. Present value of cash flow to IRR
For European options, the value of a call plus the present value of the exercise price is
equal to:
A. The value of a put minus the value of a share
B. The value of a share minus the value of a call
C. The value of a put plus the value of a share
D. The value of a share minus the value of a put
If investors do not like dividends because of the additional taxes that they have to pay,
how would you expect stock prices to behave on the ex-dividend date?
A. Fall by more than the amount of the dividend
B. Fall exactly by the amount of the dividend
C. Fall by less than the amount of the dividend
D. Cannot be predicted
For an all equity firm,
A. As earnings before interest and taxes (EBIT) increases, the earnings per share (EPS)
increases by the same percent
B. As EBIT increases, the EPS increases by a larger percent
C. As EBIT increases, the EPS decreases
D. None of the above
Suppose ABC’s stock price is currently $25. In the next six months it will either fall to
$15 or rise to $40. What is the current value of a six-month call option with an exercise
price of $20? The six-month risk-free interest rate is 5% (periodic rate). [Use the
risk-neutral valuation method]
A. $20.00
B. $8.57
C. $9.52
D. $13.10
The hurdle rate for capital budgeting decisions is:
A. The cost of capital
B. The cost of debt
C. The cost of equity
D. All of the above
The annual expected dividend on the S&P index was about 154.6. If the dividend is
expected to grow at a steady rate of 8% a year and the required annual rate of return is
10%, what is the value of the index?
A. 1193
B. 1700
C. 7730
D. None of the above
A company has forecast sales in the first 3 months of the year as follows (figures in
millions): January, $60; February, $80; March, $100. 60% of sales are usually paid for
in the month that they take place and 40% in the following month. Receivables at the
end of December were $24 million. What are the forecasted collections on accounts
receivable in March?
A. $88 million
B. $92 million
C. $100 million
D. $140 million
A random walk process consists of the toss of a fair coin at the end of each day. If the
outcome is heads stock price increases by 1.25% and if the outcome is tails the stock
price decreases by 0.75%. What is the drift of such a process?
A. +1.25%
B. -0.75%
C. +0.25%
D. None of the above
Agency costs are incurred by a corporation because:
A. managers may not attempt to maximize the value of the firm to shareholders
B. shareholders incur monitoring cost
C. separation of ownership and management
D. all of the above
If the depreciation amount is 600,000 and the marginal tax rate is 35%, then the tax
shield due to depreciation is:
A. $210,000
B. $600,000
C. $390,000
D. None of the above
Suppose the exchange rate between US dollars and British pound is US$1.50 = BP1.00.
If the interest rate is 6% per year what is the adjusted price of the British pound when
valuing a foreign currency option with an expiration of one year? (Approximately)
A. $1.905
B. $1.4151
C. $0.7067
D. None of the above
Which measure would be most useful in comparing the operating profitability of two
firms in different industries?
A. Net profit margin
B. Return on equity
C. Sales to total assets
D. Return on assets
A bond with duration of 5.7 years has yield to maturity of 9%. The bond’s volatility is:
A. 1.9%
B. 5.2%
C. 5.7%
D. 0%
The historical returns data for the past three years for Stock B and the stock market
portfolio are: Stock B: 24%, 0%, 24%, Market Portfolios: 10%, 12%, 20%. Calculate
the expected return for Stock B and the market portfolio.
A. Stock B 16%, Market Portfolio: 14%
B. Stock B 14%, Market Portfolio: 16%
C. Stock B 24%, Market Portfolio: 12%
D. None of the above
The line that connects the maximum that one can consume this year (now) and the
maximum one can consume next year:
A. Has a slope of (1 + r)
B. Has a slope of -(1 + r)
C. Has a slope of r
D. Has a slope of 1/r
Predictable cycles in stock price movements:
I) persist for a long time
II) self destruct as soon as investors recognize them
III) never appear as the stock price movements are random
A. I only
B. II only
C. III only
D. I, II, and III
After retirement, you expect to live for 25 years. You would like to have $75,000
income each year. How much should you have saved in the retirement to receive this
income, if the interest is 9% per year (assume that the payments start one year after the
retirement)?
A. $736,693.47
B. $6,352,567.22
C. $1,875,000
D. None of the above
The following table gives the available projects for a firm.
If the firm has a limit of 210 million to invest, what is the maximum NPV the company
can obtain?
A. 200
B. 283
C. 307
D. None of the above
Which bond is more sensitive to an interest rate change of 0.75%?
Bond A: YTM = 4.00%, Maturity = 8 years, Coupon = 6% or $60, Par Value = $1,000
Bond B: YTM = 3.50%, Maturity = 5 years, Coupon = 7% or $70, Par Value = $1,000
A. A
B. B
C. Both the same
D. Cannot be determined
The M & M Company is financed by $10 million in debt (market value) and $40
million in equity (market value). The cost of debt is 10% and the cost of equity is 20%.
Calculate the weighted average cost of capital assuming no taxes.
A. 18%
B. 20%
C. 10%
D. None of the above
The term structure of interest rates can be described as the:
A. Relationship between the spot interest rates and the bond prices
B. Relationship between spot interest rates and stock prices
C. Relationship between spot interest rates and maturity of a bond
D. None of the above
The company cost of capital is the appropriate discount rate for a firm’s:
A. low risk projects
B. high risk projects
C. average-risk projects
D. all of the above
On a graph with common stock returns on the Y- axis and market returns on the X-axis,
the slope of the regression line represents the:
A. Alpha
B. Beta
C. R-squared
D. Adjusted beta
The value of a call option is positively related to the following:
I) underlying stock price
II) risk-free rate
III) time to expiration
IV) volatility of the underlying stock price
A. I only
B. II only
C. III only
D. I, II, III, and IV
If the discount rate is stated in nominal terms, then in order to calculate the NPV in a
consistent manner requires that project:
I) cash flows be estimated in nominal terms
II) cash flows be estimated in real terms
III) accounting income be used
A. I only
B. II only
C. III only
D. None of the above
The market value of Charter Cruise Company’s equity is $15 million, and the market
value of its risk-free debt is $5 million. If the required rate of return on the equity is
20% and that on the debt is 8%, calculate the company’s cost of capital. (Assume no
taxes.)
A. 20%
B. 17%
C. 14%
D. None of the above
The main shortcoming of CAPM is that it
A. ignores the return on the market portfolio
B. uses too many factors
C. requires a single risk measure of systematic risk
D. ignores risk-free rate of return
Strong-form efficiency implies that mutual fund managers:
A. Buy the index that maximizes diversification and minimizes cost of managing
portfolios
B. Actively seek under performing stocks and buy them
C. Fund mangers can consistently earn superior returns year after year
D. None of the above