Use the following information to answer the question(s) below.
Nielson Motors has a debt-equity ratio of 1.8, an equity beta of 1.6, and a debt beta of
0.20. It is currently evaluating the following projects, none of which would change
Nielson’s volatility.
(All amounts are in $millions.)
The total debt overhang associated with accepting project 4, is closest to:
A) $0 million
B) $13.5 million
C) $15.0 million
D) $38.6 million
Equity in a firm with no debt is called
A) levered equity.
B) unlevered equity.
C) riskless equity.
D) risky equity.
Use the following information to answer the question(s) below.
The Market’s average historical excess return is closest to:
A) -2.50%
B) -3.33%
C) -4.33%
D) -5.17%
Which of the following statements is false?
A) We can improve the performance of our portfolio by selling stocks with negative
alphas.
B) The market portfolio is on the SML, and according to the CAPM, since all other
portfolios are inefficient they will not fall on the SML.
C) The difference between a stock’s expected return and its required return according to
the security market line is called the stock’s alpha.
D) The risk premium for any security is proportional to its beta with the market.
Consider a portfolio that consists of an equal investment in 20 firms. For each of these
firms, there is a 70% probability that the firms will have a 16% return and a 30% that
they will have a – 8% return. Each of these firms returns are independent of each other.
The standard deviation of this portfolio is closest to:
A) 2.5%
B) 4.2%
C) 8.8%
D) 11.0%
Which of the following statements regarding monopoly mergers is false?
A) It is often argued that merging with or acquiring a major rival enables a firm to
substantially reduce competition within the industry and thereby increase profits.
B) Financial researchers have found that the share prices of other firms in the same
industry did not significantly increase following the announcement of a merger within
the industry.
C) While only the merging company benefits when competition is reduced, all
companies in an industry pay the associated costs.
D) Society as a whole bears the cost of monopoly strategies, so most countries have
antitrust laws that limit such activity.
Aaron Inc went public at $10 per share. Aaron’s investment banker charged them $0.70
per share for the IPO. This fee is called a(n)
A) allocation spread.
B) underwriting spread.
C) greenshoe fee.
D) IPO fee.
Use the following information to answer the question(s) below.
Assume that the CAPM is a good description of stock price returns. The market
expected return is 8% with 12% volatility and the risk-free rate is 3%. New news
arrives that does not change any of these numbers, but it does change the expected
returns of the following stocks:
The expected alpha for Taggart Transcontinental is closest to:
A) -3.00%
B) -1.00%
C) 1.00%
D) 3.00%
Consider a four-year, default-free bond with an annual coupon rate of 4.5% and a face
value of $1000. The YTM on this bond is closest to:
A) 3.85%
B) 4.20%
C) 4.35%
D) 4.40%
Wyatt Oil pays a regular dividend of $2.50 per share. Typically the stock price drops by
$2.00 per share when the stock goes ex-dividend. Suppose the capital gains tax rate is
20%, but investors pay different tax rates on dividends. Absent transactions cost, the
highest dividend tax rate of an investor who could gain from trading to capture the
dividend is closest to:
A) 0%
B) 20%
C) 24%
D) 36%
A lease where ownership of the asset transfers to the lessee at the end of the lease for a
nominal cost is called a
A) fair market value cap lease.
B) fixed price lease.
C) $1.00 out lease.
D) fair market value lease.
Consider the following equation:
= (1 + ) – 1
the term in this equation refers to
A) the risk-free rate of interest on the dollar.
B) the risk-free rate of interest on the yen.
C) the cost of capital for the firm in terms of yen.
D) the cost of capital in terms of dollars.
Use the table for the question(s) below.
Consider the following three individuals portfolios consisting of investments in four
stocks:
The beta on Paul’s Portfolio is closest to:
A) 1.5
B) 1.8
C) 1.3
D) 1.0
Wyatt Oil has a net profit margin of 4.0%, a total asset turnover of 2.2, total assets of
$525 million, and a book value of equity of $220 million. Wyatt Oil’s current
return-on-assets (ROA) is closest to:
A) 8.8%
B) 9.5%
C) 21.0%
D) 22.8%
Use the following information to answer the question(s) below.
Hammond Motors is considering an investment in the euro area. The expected free cash
flows, in Euros, are uncorrelated with the spot exchange rate and are as follows:
The new project, which Hammond is considering, has similar dollar risk to Hammond’s
other projects. Hammond knows that its overall dollar WACC is 10%, so it feels
comfortable using this WACC for the project. The risk-free interest rate on dollars is 4%
and the risk-free interest rate on Euros is 6%. Hammond is willing to assume that
capital markets in the United States and the Euro area are internationally integrated.
Hammond’s Euro WACC is closest to:
A) 7.9%
B) 8.7%
C) 10.2%
D) 12.1%
Which of the following statements regarding net income transferred to retained earnings
is correct?
A) Net income = net income transferred to retained earnings – dividends
B) Net income transferred to retain earnings = net income + dividends
C) Net income = net income transferred to retain earnings + dividends
D) Net income transferred to retain earnings – net income = dividends
Use the following information to answer the question(s) below.
Your investment portfolio consists of $10,000 worth of Google stock. Suppose that the
risk-free rate is 4%, Google stock has an expected return of 14% and a volatility of
35%, and the market portfolio has an expected return of 10% and a volatility of 18%.
Assume that the CAPM assumptions hold.
What alternative investment has the highest possible expected return while having the
same volatility as Google?
A) -25% in the risk-free asset and +125% in the market portfolio
B) -20% in the risk-free asset and +120% in the market portfolio
C) -94% in the risk-free asset and +194% in the market portfolio
D) 6% in the risk-free asset and +94% in the market portfolio
Use the table for the question(s) below.
Consider the following expected returns, volatilities, and correlations:
The expected return of a portfolio that is equally invested in Duke Energy and
Microsoft is closest to:
A) 28%
B) 29%
C) 24%
D) 23%
Which of the following statements regarding the private debt market is false?
A) Private debt has the advantage that it avoids the cost of registration.
B) Bank loans are an example of private debt, debt that is not publicly traded.
C) Private debt has the disadvantage of being illiquid.
D) The public debt market is larger than the private debt market.
Wyatt Oil purchases goods from its suppliers on terms 3/20 net 40. The effective annual
cost to Wyatt if they do not take the discount and pay on day 50 is closest to:
A) 18%
B) 45%
C) 75%
D) 82%
A(n) ________ is the most common way that firms repurchase shares.
A) targeted repurchase
B) Dutch auction share repurchase
C) tender offer
D) open market share repurchases
Money that has been or will be paid regardless of the decision whether or not to
proceed with the project is
A) cannibalization.
B) considered as part of the initial investment in the project.
C) an opportunity cost.
D) a sunk cost.
Use the information for the question(s) below.
You are evaluating a new project and need an estimate for your project’s beta. You have
identified the following information about three firms with comparable projects:
The unlevered beta for Lincoln is closest to:
A) 0.95
B) 1.00
C) 1.05
D) 0.90
You own 100 shares of a Sub Chapter “S” Corporation. The corporation earns $5.00 per
share before taxes. Once the corporation has paid any corporate taxes that are due, it
will distribute the rest of its earnings to its shareholders in the form of a dividend. If the
corporate tax rate is 40% and your personal tax rate on (both dividend and
non-dividend) income is 30%, then how much money is left for you after all taxes have
been paid?
A) $210
B) $300
C) $350
D) $500
Which of the following statements is false?
A) If there is a fixed supply of resource available, you should rank projects by the
profitability index, selecting the project with the lowest profitability index first and
working your way down the list until the resource is consumed.
B) Practitioners often use the profitability index to identify the optimal combination of
projects when there is a fixed supply of resources.
C) If there is a fixed supply of resources available, so that you cannot undertake all
possible opportunities, then simply picking the highest NPV opportunity might not lead
to the best decision.
D) The profitability index is calculated as the NPV divided by the resources consumed
by the project.
Which of the following statements is false?
A) A firm’s cash cycleis the length of time between when the firm pays cash to purchase
its initial inventory and when it receives cash from the sale of the output produced from
that inventory.
B) The longer a firm’s cash cycle, the more working capital it has, and the more cash it
needs to carry to conduct its daily operations.
C) Most firms buy their inventory on credit, which increases the amount of time
between the cash investment and the receipt of cash from that investment.
D) Any reduction in working capital requirements generates a positive free cash flow
that the firm can distribute immediately to shareholders.
Use the table for the question(s) below.
Consider the following income statement for Kroger Inc. (all figures in $ Millions):
The total amount available to payout to all the investors in Kroger in 2005 is closest to:
A) $190 million
B) $847 million
C) $745 million
D) $290 million
Use the table for the question(s) below.
Consider the following three individuals portfolios consisting of investments in four
stocks:
The beta on Peter’s Portfolio is closest to:
A) 0.7
B) 0.8
C) 1.8
D) 1.0
Which of the following statements is false?
A) The firm’s weighted average cost of capital (WACC) denoted rwacc is the cost of
capital that reflects the risk of the overall business, which is the combined risk of the
firm’s equity and debt.
B) Intuitively, the difference between the discounted free cash flow model and the
dividend-discount model is that in the divided-discount model the firm’s cash and debt
are included indirectly through the effect of interest income and expenses on earnings in
the dividend-discount model.
C) We interpret rwacc as the expected return the firm must pay to investors to
compensate them for the risk of holding the firm’s debt and equity together.
D) When using the discounted free cash flow model we should use the firm’s equity
cost of capital.
Use the following information to answer the question(s) below.
Incorporated Tool, a U.S. firm, is considering its international tax situation. The
corporate tax rate in the U.S. is currently 39%. Incorporated Tool has major operations
in Ireland, where the tax rate is 12.5%, Japan where the tax rate is 40.7%, and Mexico,
where the tax rate is 30.0%. Incorporated Tool’s profits, which are fully and
immediately repatriated, and foreign taxes paid for the current year are as follows:
Incorporated Tools total U.S. tax liability on its foreign earnings is closest to:
A) $0
B) $81 million
C) $106 million
D) $112 million
If ECE’s return on assets (ROA) is 12% , then ECE’s return on equity (ROE) is:
A) 10%
B) 12%
C) 18%
D) 24%
Use the following information to answer the question(s) below.
The volatility of the market portfolio is 10%, the expected return on the market is 12%,
and the risk-free rate of interest is 4%.
Suppose that Google Stock has a beta of 1.06 and Boeing stock has a beta of 1.31. The
beta on a portfolio that consists of 30% Google stock and 70% Boeing stock is closest
to:
A) 1.06
B) 1.14
C) 1.19
D) 1.24
If the risk-free rate of interest is 7.5%, then the value of security “A” is closest to:
A) $91.00
B) $92.50
C) $93.00
D) $100.00
Which of the following statements is false?
A) Finding the present value and compounding are the same.
B) A dollar today and a dollar in one year are not equivalent.
C) If you want to compare or combine cash flows that occur at different points in time,
you first need to convert the cash flows into the same units or move them to the same
point in time.
D) The equivalent value of two cash flows at two different points in time is sometimes
referred to as the time value of money.
Which of the following statements is false?
A) The relationship between the investment term and the interest rate is called the term
structure of interest rates.
B) Real interest rates indicate the rate at which your money will grow if invested for a
certain period.
C) The yield curve is a potential leading indicator of future economic growth.
D) The shape of the yield curve will be strongly influenced by interest rate
expectations.