Which of the following is NOT considered to be an important choice when estimating
beta?
A) The choice of the time horizon to use for estimation
B) The choice of method used to extrapolate beta
C) The choice between weekly and monthly returns
D) The choice of index used as the market portfolio
The Sisyphean Company is planning on investing in a new project. This will involve
the purchase of some new machinery costing $450,000. The Sisyphean Company
expects cash inflows from this project as detailed below:
The appropriate discount rate for this project is 16%.
The IRR for this project is closest to:
A) 18.9%
B) 22.7%
C) 34.1%
D) 39.1%
Boulderado has come up with a new composite snowboard. Development will take
Boulderado four years and cost $250,000 per year, with the first of the four equal
investments payable today upon acceptance of the project. Once in production the
snowboard is expected to produce annual cash flows of $200,000 each year for 10
years. Boulderado’s discount rate is 10%.Calculate the IRR for the snow board project
and use it to determine he maximum deviation allowable in the cost of capital estimate
that leaves the investment decision unchanged. The maximum deviation allowable is
closest to:
A) 11.0%
B) 0.0%
C) 2.5%
D) 1.0%
The term moral hazard refers to:
A) the chance the firm will default and impose losses on its debtholders.
B) the under-investment problem.
C) the over-investment problem.
D) the idea that individuals will change their behavior if they are not fully exposed to
its consequences.
Which of the following statements is FALSE?
A) Even though firms have not issued new equity, the market value of equity has risen
over time as firms have grown.
B) While firms seem to prefer debt when raising external funds, not all investment is
externally funded.
C) To receive the full tax benefits of leverage a firm needs to use 100% debt financing.
D) If bankruptcy is costly, these costs might offset the tax advantages of debt financing.
If the appropriate interest rate is 8%, then present value of $500 paid at the end of each
of the next 40 years is closest to:
A) $23
B) $5,962
C) $6,439
D) $20,0000
Consider the following equation:
Pcum– Pex= Div ×
The term Pex is:
A) the personal tax rate for dividend.
B) the price per share before a dividend is paid.
C) the price per share after a dividend is paid.
D) the personal tax rate for capital gains.
Which of the following statements is FALSE?
A) The size effect is the observation that small stocks have positive alphas.
B) When considering portfolios formed based on the book-to-market ratio, most of the
portfolios plot below the security market line.
C) The largest alphas occur in the smallest size deciles.
D) When considering portfolios formed based on size, although the portfolios with the
higher betas yield higher returns, most size portfolios plot above the security market
line.
Which of the following statements is FALSE?
A) Stock markets aggregate the information and view of many different investors.
B) Only in the relatively rare case in which we have some superior information that
other investors lack regarding the firm’s cash flows and cost of capital would it make
sense to second-guess the market stock price.
C) In most situations, a valuation model is best applied to tell us something about the
value of the firm’s stock.
D) The efficient market hypothesis implies that securities will be fairly priced, based on
their future cash flows, given all information that is available to investors.
Which of the following statements is FALSE?
A) An inverted yield curve generally signals an expected decline in future interest rates.
B) An inverted yield curve is often interpreted as a positive forecast for economic
growth.
C) All the formulas for computing present values of annuities and perpetuities are based
upon discounting all of the cash flows at the same rate.
D) The rate of growth of your purchasing power is determined by the real interest rate.
Consider the following two quotes for XYZ stock:
How much would you have to pay to purchase 100 shares of XYZ stock on November
18th?
A) $2520
B) $2525
C) $2593
D) $2600
Which of the following statements is INCORRECT?
A) In general, money today is worth more than money in one year.
B) We define the risk-free interest rate, rffor a given period as the interest rate at which
money can be borrowed or lent without risk over that period.
C) We refer to (1 – rf) as the interest rate factor for risk-free cash flows.
D) For most financial decisions, costs and benefits occur at different points in time.
Suppose all possible investment opportunities in the world are limited to the four stocks
list in the table below:
The weight on Taggart Transcontinental stock in the market portfolio is closest to:
A) 15%
B) 20%
C) 25%
D) 30%
Which of the following statements is FALSE?
A) Bond prices converge to the bond’s face value due to the time effect, but
simultaneously move up and down due to unpredictable changes in bond yields.
B) As interest rates and bond yields fall, bond prices will rise.
C) Bonds with higher coupon rates are more sensitive to interest rate changes.
D) Shorter maturity zero coupon bonds are less sensitive to changes in interest rates
than are longer-term zero coupon bonds.
Suppose you invest $20,000 by purchasing 200 shares of Abbott Labs (ABT) at $50 per
share, 200 shares of Lowes (LOW) at $30 per share, and 100 shares of Ball Corporation
(BLL) at $40 per share.Suppose over the next year Ball has a return of 12.5%, Lowes
has a return of 20%, and Abbott Labs has a return of -10%. The value of your portfolio
over the year is:
A) $21,000
B) $20,000
C) $20,700
D) $21,500
Assume that Rose Corporation’s (RC) EBIT is not expected to grow in the future and
that all earnings are paid out as dividends. RC is currently an all equity firm. It expects
to generate earnings before interest and taxes (EBIT) of $6 million over the next year.
Currently RC has 5 million shares outstanding and its stock is trading for a price of
$12.00 per share. RC is considering borrowing $12 million at a rate of 6% and using the
proceeds to repurchase shares at the current price of $12.00.
Following the borrowing of $12 and subsequent share repurchase, the equity cost of
capital for RC is closest to:
A) 12%
B) 9%
C) 11.0%
D) 10%
The statement of financial position is also known as the:
A) balance sheet.
B) income statement.
C) statement of cash flows.
D) statement of stockholder’s equity.
Pfizer Inc. (PFE) stock is currently trading on the NYSE with a quoted bid of $18.35
and an ask price of $18.40. At the same time NASDAQ dealers are posting for
following bid and ask prices for PHE:
Which of these NASDAQ represents an arbitrage opportunity when compared to the
NYSE quotes?
A) Only NASDAQ dealer #1
B) Only NASDAQ dealer #2
C) Only NASDAQ dealer #3
D) Both NASDAQ dealer #1 and dealer #3
E) None of the above
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%The expected return for Rearden Metal is closest
to:
A) 10.0%
B) 11.4%
C) 11.8%
D) 12.0%