According to Strategy C, a firm would:
A. Be in permanent need of short-term borrowing
B. Have high current cash holdings
C. Use low or no short-term debt and more long-term financing
D. None of the above
The main advantage of the payback rule is:
A. Adjustment for uncertainty of early cash flows
B. It is simple to use
C. Does not discount cash flows
D. Both A and C
The correlation measures the:
A. Rate of movements of the return of individual stocks
B. Direction of movement of the return of individual stocks
C. Direction of movement between the returns of two stocks
D. Stock market volatility
Net working capital (NWC) is calculated as:
A. Total assets-total liabilities
B. Current assets + current liabilities
C. Current assets-current liabilities
D. None of the above
A “factor” in APT is a variable that:
A. is pure “noise”
B. correlates with risky asset returns in an unsystematic manner
C. affects the return of risky assets in a systematic manner
D. affects the return of a risky asset in a random manner
If the present value of $480 to be paid at the end of one year is $400, what is the
one-year discount factor?
A. 0.8333
B. 1.20
C. 0.20
D. None of the above
What forward rate is embedded in a two year zero coupon bonds with a yield to
maturity of 6% and a three year zero coupon bond and a yield to maturity of 6.5%?
Assume both bonds are currently priced at par.
A. 5.50%
B. 6.00%
C. 6.50%
D. 7.50%
Then [d1] has a value of (approximately):
A. 0.3
B. 0.7
C. -0.7
D. 0.5
Generally, firms resort to repurchase of stock because:
I) Firms have accumulated large amount of excess cash
II) Firms want to change their capital structure
III) Firms want to substitute it for regular dividends
A. I only
B. II only
C. I and II only
D. III only
Given the following cash flows for Project M: C0 = -1,000, C1 = +200, C2 = +700, C3 =
+698, calculate the IRR for the project.
A. 23%
B. 21%
C. 19%
D. None of the above
If the standard deviation for annual returns on the asset is 40% and the interval is a year,
then the downside change is equal to:
A. 27.4%
B. 53.6%
C. 32.97%
D. 38.7%
The Consumer- Mart Company is going to introduce a new consumer product. If
brought to market without research about consumer tastes the firm believes that there is
a 60% chance that the product will be successful. If successful, the project has a NPV =
$500,000. If the product is a failure (40%) and withdrawn from the market, then NPV =
-$100,000. A consumer survey will cost $60,000 and delay the introduction by one year.
If the survey is successful, then there is an 80% chance of consumer acceptance, in
which case the NPV = $500,000. If, on the other hand the survey is a failure, then NPV
= -$100,000. The discount rate is 10%. By how much does the marketing survey change
the expected net present value of the project? (approximately)
A. Increase the NPV by $25,455
B. decrease the NPV by $5950
C. decrease the NPV by $8955
D. decrease the NPV by $25,455
Value of the debt = $30 millions; Number of shares outstanding = 5 millions; Calculate
the value per share for the firm.
A. $20
B. $14
C. $13
D. none of the given values
The NPV break-even point occurs when:
A. the present value of inflows line cuts the present value of outflows line
B. the total revenue line cuts the fixed cost line
C. the total revenue line cuts the total cost line
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
The expected rate of return or the cost of equity capital is estimated as follows:
A. Dividend yield – expected rate of growth in dividends
B. Dividend yield + expected rate of growth in dividends
C. Dividend yield/expected rate of growth in dividends
D. (Dividend yield) * (expected rate of growth in dividends)
The firm’s asset beta is usually higher than the firm’s equity beta.
A firm has zero debt in its capital structure. Its overall cost of capital is 10%. The firm
is considering a new capital structure with 60% debt. The interest rate on the debt
would be 8%. Assuming there are no taxes its cost of equity capital with the new capital
structure would be:
A. 8%
B. 16%
C. 13%
D. 10%
E. None of the above
If the weak form of market efficiency holds then:
I) Technical analysis is useless
II) Stock prices reflect information contained in past prices
III) Stock price changes follow a random walk
A. I only
B. I and II only
C. I, II, and III
D. I and III only
Assuming that bonds are sold at a fair price, the benefits from the tax shield go to the:
A. managers of the firm
B. bondholders of the firm
C. stockholders of the firm
D. lawyers of the firm
If the present value annuity factor for 10 years at 10% interest rate is 6.1446, what is the
present value annuity factor for an equivalent annuity due?
A. 6.1446
B. 7.38
C. 6.759
D. None of the above
Generally, postaudits are conducted for large projects:
A. shortly after the completion of the project
B. after several years after the completion of the project
C. shortly after the project has begun to operate
D. well before the start of the project
The major secondary market for GE shares is:
A. London Stock Exchange
B. New York Stock Exchange
C. Nasdaq
D. none of the above
The equity beta of a levered firm is 1.2. The beta of debt is 0.2. The firm’s market value
debt to equity ratio is 0.5. What is the asset beta if the tax rate is zero?
A. 1.2
B. 0.73
C. 0.2
D. None of the above
The idea that “firms should be run for stakeholders welfare ” is accepted in:
I) U.S.A.; II) U.K; III) Germany; IV) France; V) Japan
A. I only
B. I and II only
C. III, IV and V only
D. I, II, III, IV and V
If the net present value (NPV) of project A is + $100, and that of project B is + $60,
then the net present value of the combined project is:
A. +$100
B. +$60
C. +$160
D. None of the above
Net Working Capital should be considered in project cash flows because:
A. Firms must invest cash in short-term assets to produce finished goods
B. They are sunk costs
C. Firms need positive NPV projects for investment
D. None of the above
If a stock is overpriced it would plot:
A. Above the security market line
B. Below the security market line
C. On the security market line
D. On the Y-axis
Will Co. is expected to pay a dividend of $2 per share at the end of year -1(D1) and the
dividends are expected to grow at a constant rate of 4% forever. If the current price of
the stock is $20 per share calculate the expected return or the cost of equity capital for
the firm.
A. 10%
B. 4%
C. 14%
D. None of the above.
Sharpe ratio is defined as:
A. (rP – rf)/P
B. (rP – rM)/P
C. (rP – rf)/bP
D. none of the above