The risk-free rate is 5%, the market risk premium is 8% and the project’s beta is 1.25.
Calculate the certainty equivalent cash flow for
year-3.
A. $228.35
B. $197.25
C. $300
D. None of the above
Generally, which of the following is true?
A. rE < rD < rA
B. rD < rA < rE
C. rE < rA < rD
D. None of the above is true
Corporations, potentially, have infinite life because:
A. it is a legal entity
B. of separation of ownership and management
C. it has limited liability
D. none of the above
If the abnormal return for a stock during the first week is +5% and during the second
week is +3%, what is the abnormal return for the two-week period?
A. 5%
B. 3%
C. 8.15%
D. None of the above
The growth rate in dividends is a function of two ratios. They are:
A. ROA and ROE.
B. Dividend yield and growth rate in dividends.
C. ROE and the Retention Ratio.
D. Book value per share and EPS.
Volatility of a bond is given by:
I) Duration/ (1 + yield)
II) Slope of the curve relating the bond price to the interest rate
III) Yield to maturity
A. I only
B. II only
C. III only
D. I and II only
If the nominal interest rate per year is 10% and the inflation rate is 4%, what is the real
rate of interest?
A. 10%
B. 4%
C. 5.8%
D. None of the above
A 5-year bond with 10% coupon rate and $1000 face value is selling for $1123.
Calculate the yield to maturity on the bond assuming annual interest payments.
A. 10.0%
B. 8.9%
C. 7.0%
D. None of the above
A bond with a face value of $1,000 has coupon rate of 7%, yield to maturity of 10%,
and twenty years to maturity. The bond’s duration is:
A. 10.0 years
B. 7.4 years
C. 20.0 years
D. 12.6 years
The type of bonds where the identities of bonds’ owners are recorded and the coupon
interest payments are sent automatically are called:
A. Bearer bonds
B. Government bonds
C. Registered bonds
D. None of the above
Briefly explain the major types of exchanges prevalent in the USA.
Beta measure indicates:
A. The ability to diversify risk
B. The change in the rate of return on an investment for a given change in the market
return
C. The actual return on an asset
D. A and C
The cost that is incurred as a result of past, irrevocable decisions and is irrelevant to
future decisions is called:
A. Opportunity cost
B. Sunk cost
C. Incremental cost
D. None of the above
In Miller’s model, when Personal tax rate on income from bonds is equal to the personal
tax rate on income from stocks:
A. relative advantage of debt depends only on the corporate tax rate
B. relative advantage of debt depends only on the personal tax rate on interest income
C. relative advantage of debt depends only on the personal tax rate on income from
equity
D. none of the above
An investor, in practice, can buy:
I) an option on a single share of stock
II) options that are in multiples of 100
III) a minimum order of 100 options on a share of stock
A. I only
B. II and III only
C. II only
D. III only
In Miller’s model, when the quantity (1 – TC)(1 – TpE) = (1 – Tp), then:
A. The firm should hold no debt
B. The value of the levered firm is greater than the value of the unlevered firm
C. The tax shield on debt is exactly offset by higher personal taxes paid on interest
income
D. None of the above
If the delta of a call option is 0.6, calculate the delta of an equivalent put option.
A. 0.6
B. 0.4
C. -0.4
D. -0.6
The procedure where the firm states a series of prices at which it is prepared to
repurchase stock. Shareholders submit offers indicting how many shares they wish to
sell at each price. The firm then calculates the lowest price at which it is able to buy the
desired number of shares. This procedure is known as:
A. Open market transaction
B. Dutch auction
C. Green mail
D. None of the above
Bombay Company’s balance sheet is as follows:
(NWC = net working capital; LTA = long term assets; D = debt; E = equity; V = firm
value):
According to MM’s Proposition I corrected for taxes, what will be the change in
company value if Bombay issues $200 of equity and uses it to make a permanent
reduction in the company’s debt? Assume a 35% tax rate.
A. +$140
B. +$70
C. $0
D. -$70
Given the following data for a stock: risk-free rate = 4%; factor-1 beta = 1.5; factor-2
beta = 0.5; factor-1 risk-premium = 8%; factor-2 risk-premium = 2%. Calculate the
expected rate of return on the stock using the two-factor APT model.
A. 13%
B. 17%
C. 10%
D. none of the above
The concept of compound interest is most appropriately described as:
A. Interest earned on an investment
B. The total amount of interest earned over the life of an investment
C. Interest earned on interest
D. None of the above
The following situations typically require that the financial manager value an entire
business in order to make important decisions:
I) If firm A is about make a takeover offer for firm B, then A’s financial managers have
to decide how much the combined business A + B is worth under A’s management.
II) If firm C is considering the sale of one of its divisions or a business line, it has to
decide what the division or the business line is worth in order to negotiate with potential
buyers.
III) When a firm goes public, the investment bank must evaluate how much the firm is
worth in order to set the price.
A. I only
B. I and II only
C. III only
D. I, II and III
Generally, the value to use for the risk-free interest rate is:
A. Short-term Treasury bill rate
B. Long-term Corporate bond rate
C. Medium-term Corporate bond rate
D. none of the above
Given the following data for a stock: beta = 0.9; risk-free rate = 4%; market rate of
return = 14%; and Expected rate of return on the stock = 13%. Then the stock is:
A. overpriced
B. under priced
C. correctly priced
D. cannot be determined
Given the following data: Total current assets = $852; Total current liabilities = $406;
Long-term debt = $442, calculate the net working capital.
A. $446
B. $852
C. $410
D. None of the above
Which portfolio has had the lowest average annual nominal rate of return during the
1900-2006 periods?
A. Portfolio of U.S. Common stocks
B. Portfolio of U.S. government bonds
C. Portfolio of Treasury bills
D. None of the given answers
You are planning to produce a new action figure called “Hillary”. However, you are
very uncertain about the demand for the product. If it is a hit, you will have net cash
flows of $50 million per year for 3 years (starting next year). If it fails, you will only
have net cash flows of $10 million per year for 2 years (starting next year). There is an
equal chance that it will be a hit or failure (probability = 50%). You will not know
whether it is a hit or a failure until the first year’s cash flows are in. You have to spend
$80 million immediately for equipment and the rights to produce the figure. If you can
sell your equipment for $60 million once the first year’s cash flows are received,
calculate the NPV with the abandonment option. (The discount rate is 10%)
A. -9.1
B. +9.1
C. +13.99
D. -14.4
For log-normally distributed returns the annul compound returns is equal to:
A. the arithmetic average returns minus half the variance
B. the arithmetic average returns plus half the variance
C. the arithmetic average returns minus half the standard deviation
D. the arithmetic average returns plus half the standard deviation
After the completion of project analysis, the final decision on the project would be
from:
A. Sensitivity analysis
B. Break-even analysis
C. Decision trees
D. NPV
When a firm improves (lowers) its days in inventories it generally:
A. Requires additional cash investment in inventory
B. Releases cash locked up in inventory
C. Does not alter its cash position
D. A firm cannot reduce its inventories