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Short-term financial decisions:
I) involve short lived assets
II) involve short lived liabilities
III) are easily reversed
A. I only
B. II only
C. I, II, and III
D. III only
The value of a previously purchased machine to be used by a proposed project is an
example of:
A. Sunk cost
B. Opportunity cost
C. Fixed cost
D. None of the above
If the value of d is -0.75, calculate the value of N(d):
A. 0.2266
B. -0.2266
C. 0.7734
D. -0.2734
The following are known as current assets:
I) Cash
II) Marketable securities
III) Receivables
IV) Inventories
V) Payables
A. I, II and III only
B. I, II, III and IV only
C. II, III, IV and V only
D. III, IV and V only
Given the following data: Current assets = 500; Current liabilities = 250; Inventory =
200; Account receivables = 200; calculate the current ratio:
A. 2.0
B. 1.0
C. 1.5
D. None of the above
Casino Inc. is expected to pay a dividend of $3 per share at the end of year-1 (D1) and
these dividends are expected to grow at a constant rate of 6% per year forever. If the
required rate of return on the stock is 18%, what is current value of the stock today?
A. $25
B. $50
C. $100
D. $54
The following are drawbacks of sensitivity analysis except:
A. it provides ambiguous results.
B. underlying variables are likely to be interrelated.
C. it provides additional information about the project that is useful.
D. all of the above statements are drawbacks of sensitivity analysis.
The following groups are stakeholders of a public company:
I) Shareholders
II) The government
III) Suppliers
IV) Employees
V) Bondholders
VI) Management
A. I and II only
B. I, II, and III only
C. I, II, III, and IV only
D. I, II, III, IV, V, and VI
Which of the following is an example of leverage ratios?
A. Debt-Equity ratio
B. Quick ratio
C. Payout ratio
D. Return on equity
Which of the following statement(s) is/are true if the efficient market hypothesis holds?
I) It implies perfect forecasting ability
II) It implies market is irrational
III) It implies that prices follow a particular pattern
IV) It implies that prices reflect all available information
A. I only
B. II only
C. I and III only
D. IV only
Proper treatment of inflation in the NPV calculation involves:
I) Discounting nominal cash flows using the nominal discount rate
II) Discounting real cash flows using the real discount rate
III) Discounting nominal cash flows using the real discount rates
A. I only
B. II only
C. III only
D. I and II only
The accounting break-even point occurs when:
A. the total revenue line cuts the fixed cost line
B. the present value of inflows line cuts the present value of outflows line
C. the total revenue line cuts the total cost line
D. none of the above
Generally, a bond can be valued as a package of:
I) Annuity, II) Perpetuity, III) Single payment
A. I and II only
B. II and III only
C. I and III only
D. none of the above
What is the profitability index of an investment with cash flows in years zero thru 4 of
-340, 120, 130, 153, and 166, respectively and a discount rate of 16%?
A. .15
B. .22
C. .35
D. .42
Assume General Electric (GE) has about 10.3 billion shares outstanding and the stock
price is $37.10. Also assume the P/E ratio is about 18.3. Calculate the market
capitalization for GE. (Approximately)
A. $679 billion
B. $188 billion
C. $382 billion
D. None of the above
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 break-even level (i.e. NPV = 0) of annual rates?
(Approximately)(Assume no taxes.)
A. 150,000 units
B. 342,290 units
C. 381,777 units
D. None of the above
If firm U is unlevered and firm L is levered, then which of the following is true:
I) VU = EU
II) VL = EL + DL
III) VL = EU + DL
A. I only
B. I and II only
C. I, II, and III
D. III only
The distribution of returns, measured over long intervals, like annual returns, can be
approximated by
A. Normal distribution
B. Binomial distribution
C. Lognormal distribution
D. none of the above
Suppose Ralph's stock price is currently $50. In the next six months it will either fall to
$30 or rise to $80. What is the option delta of a call option with an exercise price of
$50?
A. 0.375
B. 0.500
C. 0.600
D. 0.75
A project requires an initial investment in equipment of $90,000 and then requires an
investment in working capital of $10,000 at the beginning (t = 0). The project is
expected to produce sales revenues of $120,000 for three years. Manufacturing costs
are estimated to be 60% of the revenues. The assets are depreciated using straight-line
depreciation. At the end of the project, the firm can sell the equipment for $10,000. The
corporate tax rate is 30% and the cost of capital is 15%. Calculate the NPV of the
project:
A. 3840
B. 8443
C. -2735
D. None of the above
Total uses of funds are calculated as:
A. investments in net working capital + investments in fixed assets
B. investments in fixed assets + dividend paid to shareholders
C. investments in net working capital + investments in fixed assets + dividend paid to
shareholders
D. investments in net working capital + investments in fixed assets-dividend paid to
shareholders
Put-call parity can be used to show:
A. How far in-the-money put options can get
B. How far in-the-money call options can get
C. The precise relationship between put and call option prices given equal exercise
prices and equal expiration dates
D. That the value of a call option is always twice that of a put given equal exercise
prices and equal expiration dates
Different forms of market efficiency are:
I) Weak form
II) Semi-strong form
III) Strong form
A. I only
B. I and II only
C. I and III only
D. I, II and III
A project has the following cash flows: C0 = -100,000; C1 = 50,000; C2 = 150,000; C3
= 100,000. If the discount rate changes from 12% to 15%, what is the change in the
NPV of the project (approximately)?
A. 12,750 increase
B. 12,750 decrease
C. 122,650 increase
D. 135,400 decrease
Which portfolio had the highest standard deviation during the period between 1900 and
2006?
A. Common stocks
B. Government bonds
C. Treasury bills
D. None of the given answers
An initial investment of $400,000 will produce an end of year cash flow of $480,000.
What is the NPV of the project at a discount rate of 20%?
A. $176,000
B. $80,000
C. $0 (zero)
D. None of the above
Briefly explain the assumptions associated with the constant dividend growth formula.
Given the following data: Current assets = 500; Current liabilities = 250; Inventory =
200; Account receivables = 200; calculate the quick ratio:
A. 1.0
B. 2.0
C. 1.2
D. None of the above
Given the following data for the a stock: risk-free rate = 5%; beta (market) = 1.4; beta
(size) = 0.4; beta (book-to-market) = -1.1; market risk premium = 7%; size risk
premium = 3.7%; and book-to-market risk premium = 5.2%. Calculate the expected
return on the stock using the Fama-French three-factor model.
A. 22.3%
B. 7.8%
C. 10.6%
D. none of the above
A reduction in the sales of existing products caused by the introduction of a new
product is an example of:
A. incidental effects
B. opportunity cost
C. sunk cost
D. none of the above
