Consider the following investment alternatives:
Which alternative offers you the highest effective rate of return?
A) Investment A
B) Investment B
C) Investment C
D) Investment D
Savings that come from combining the marketing and distribution of different types of
related products. are called
A) horizontal integration.
B) vertical integration.
C) economies of scale.
D) economies of scope.
Which of the following statements is false?
A) Graphically, the efficient portfolios are those on the northeast edge of the set of
possible portfolios, an area which we call the efficient frontier.
B) To arrive at the best possible set of risk and return opportunities, we should keep
adding stocks until all investment opportunities are represented.
C) We say a portfolio is short those stocks that have negative portfolio weights.
D) Adding new investment opportunities allows for greater diversification and
improves the efficient frontier.
Use the following information to answer the question(s) below.
Rearden Metals has a current stock price of $30 share, is expected to pay a dividend of
$1.20 in one year, and its expected price right after paying that dividend is $33.
Rearden’s expected capital gains yield is closest to:
A) 4.0%
B) 6.4%
C) 8.2%
D) 10.0%
Use the table for the question(s) below.
Pro Forma Income Statement for Ideko, 2005-2010
With the proper changes it is believed that Ideko’s credit policies will allow for an
account receivables days of 60. The forecasted accounts receivable for Ideko in 2007 is
closest to:
A) $14,525
B) $16,970
C) 22,710
D) $19,690
Which of the following types of risk doesn’t belong?
A) Market risk
B) Unique risk
C) Idiosyncratic risk
D) Unsystematic risk
Use the table for the question(s) below.
Ideko Sales and Operating Cost Assumptions
Based upon Ideko’s Sales and Operating Cost Assumptions, what production capacity
will Ideko require in 2007?
A) 1,505 units
B) 1,323 units
C) 1,914 units
D) 1,115 units
E) 1,702 units
Which of the following equations is incorrect?
A)
B)
C) Free Cash Flow = EBIT x (1 – τc) + Depreciation – Capital Expenditures – DNWC
D) Enterprise Value = Market Value of Equity + Debt – Cash
Rearden Metal has just issued a callable, $1000 par value, twenty-year, 8% coupon
bond with semiannual coupon payments. The bond can be called at par in five years or
anytime thereafter on a coupon payment date. If the bond is currently trading for
$1040.79, then it’s yield to call is closest to:
A) 3.8%
B) 7.0%
C) 7.6%
D) 8.0%
The most senior financial manager in a corporation is usually called:
A) the chief executive officer.
B) the chief financial officer.
C) the chief operating officer.
D) the chairman of the board.
Consider the following equation:
the term E in this equation is
A) the dollar amount of equity.
B) the dollar amount of debt.
C) the required rate of return on debt.
D) the required rate of return on equity.
Rearden Metal needs to order a new blast furnace that will be delivered in one year. The
$1,000,000 price for the blast furnace is due in one year when the new furnace is
installed. The blast furnace manufacturer offers Rearden Metal a discount of $50,000 if
they pay for the furnace now. If the interest rate is 7%, then the NPV of paying for the
furnace now is closest to:
A) ($15,421)
B) $15,421
C) ($46,729)
D) $46,729
The firm’s unlevered (asset) cost of capital is
A) the weighted average of the equity cost of capital and the debt cost of capital.
B) the weighted average of the levered cost of capital and the equity cost of capital.
C) the debt cost of capital minus the equity cost of capital.
D) the unlevered beta minus the cost of capital.
Suppose Novak Company experienced a reduction in its ROE over the last year. This
fall could be attributed to
A) an increase in Net Profit Margin.
B) a decrease in Asset Turnover.
C) an increase in Leverage.
D) a decrease in Equity.
Use the following information to answer the question(s) below.
Suppose that the market portfolio is equally likely to increase by 24% or decrease by
8%. Security “X” goes up on average by 29% when the market goes up and goes down
by 11% when the market goes down. Security “Y” goes down on average by 16% when
the market goes up and goes up by 16% when the market goes down. Security “Z” goes
up on average by 4% when the market goes up and goes up by 4% when the market
goes down.
The expected return on security “Y” is closest to:
A) 0%
B) 4%
C) 10%
D) 15%
Use the table for the question(s) below.
Consider the following realized annual returns:
The standard deviation of the returns on Stock A from 2000 to 2009 is closest to:
A) 33.2%
B) 16.4%
C) 31.5%
D) 11.0%
Consider a corporate bond with a $1000 face value, 10% coupon with semiannual
coupon payments, 5 years until maturity, and currently is selling for (has a cash price
of) $1,113.80. The next coupon payment will be made in 63 days and there are 182 days
in the current coupon period. The clean price for this bond is closest to:
A) $1146.50
B) $1065.70
C) $1113.80
D) $1081.10
You are offered an investment opportunity in which you will receive $25,000 in one
year in exchange for paying $23,750 today. Suppose the risk-free interest rate is 6% per
year. Should you take this project? The NPV for this project is closest to:
A) Yes; NPV = $165
B) No; NPV = $165
C) Yes; NPV = -$165
D) No; NPV = -$165
Use the table for the question(s) below.
Consider the following returns:
The variance on a portfolio that is made up of equal investments in Stock x and Stock Y
stock is closest to:
A) 0.12
B) 0.10
C) 0.69
D) 0.29
2Var(R
2Var(R
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 NPV for this project is closest to:
A) $176,270
B) $123,420
C) $450,000
D) $179,590
Use the information for the question(s) below.
KT Enterprises is considering undertaking a new project. Based upon analysis of firms
with similar projects, KT has determined that an unlevered cost of equity of 12% is
suitable for their project. KT’s marginal tax rate is 35%, its borrowing rate is 7%, and
KT does not believe that its borrowing rate will change if the new project is accepted.
If KT expects to maintain a debt to equity ratio for this project of 1, then KT’s equity
cost of capital, rE, for this project is closest to:
A) 17.0%
B) 5.0%
C) 15.0%
D) 12%
Use the following information to answer the question(s) below.
Google Corporation has no debt on its balance sheet in 2008, but paid $1.6 billion in
taxes. Assume that Google’s marginal tax rate is 35% and Google’s borrowing cost is
7%.
Assume that investors in Google pay a 15% tax rate on income from equity and a 25%
tax rate on interest income. If Google were to issue sufficient debt to reduce its taxes by
$600 million per year permanently, then the effective tax advantage of this debt would
be closest to:
A) 10%
B) 15%
C) 25%
D) 30%
Use the information for the question(s) below.
JR Industries has a $20 million loan due at the end of the year and under its current
business strategy its assets will have a market value of only $15 million when the loan
comes due. JR is considering a new much riskier business strategy. While this new
riskier strategy can be implemented using JR’s existing assets without any additional
investment, the new strategy has only a 40% probability of succeeding. If the new
strategy is a success, the market value of JR’s assets will be $30, but if the strategy fails
the assets will be worth only $5 million.
What is the expected payoff to equity holders with the speculative oil lease deal?
A) $10 million
B) $160 million
C) $275 million
D) $85 million
Which of the following statements regarding value additivity is false?
A) The value of a portfolio is equal to the sum of the values of its parts.
B) The price or value of the entire firm is equal to the sum of the values of all projects
and investments within the firm.
C) To maximize the value of the entire firm, managers should make decisions that
maximize NPV.
D) Value additivity does not have important consequences for the value of the entire
firm, only on portfolios of firms.
Which of the following statements is false?
A) Rather than relying on the efficiency of a single portfolio (such as the market),
multifactor models rely on the weaker condition that an efficient portfolio can be
constructed from a collection of well-diversified portfolios or factors.
B) A positive alpha in a single factor model means that the portfolios that implement the
trading strategy capture risk that is not captured by the market portfolio.
C) Multifactor models have a distinct advantage over single-factor models in that it is
much easier to identify a collection of portfolios that captures systematic risk than just a
single portfolio.
D) Trading strategies based on market capitalization, book-to-market ratios, and
momentum have been developed that appear to have zero alphas.
Use the information for the question(s) below.
KT Enterprises is considering undertaking a new project. Based upon analysis of firms
with similar projects, KT has determined that an unlevered cost of equity of 12% is
suitable for their project. KT’s marginal tax rate is 35%, its borrowing rate is 7%, and
KT does not believe that its borrowing rate will change if the new project is accepted.
If KT expects to maintain a debt to equity ratio for this project of .6 then KT’s project
based WACC, rwacc, for this project is closest to:
A) 10.5%
B) 11.1%
C) 9.6%
D) 10.8%
Which of the following statements is false?
A) Firms adjust dividends relatively infrequently, and dividends are much less volatile
than earnings. This practice of maintaining relatively constant dividends is called
dividend signaling.
B) When a firm increases its dividend, it sends a positive signal to investors that
management expects to be able to afford the higher dividend for the foreseeable future.
C) The average size of the stock price reaction increases with the magnitude of the
dividend change, and is larger for dividend cuts.
D) When managers cut the dividend, it may signal that they have given up hope that
earnings will rebound in the near term and so need to reduce the dividend to save cash.
On the balance sheet, short-term debt appears
A) in the Stockholders’ Equity section.
B) in the Operating Expenses section.
C) in the Current Assets section.
D) in the Current Liabilities section.
Which of the following statements is false?
A) Under the Modigliani-Miller assumptions of perfect capital markets, the amount of
inventory is irrelevant.
B) Unlike trade credit, inventory represents one of the required factors of production.
C) It is the firm’s financial manager who must arrange for the financing necessary to
support the firm’s inventory policy and who is responsible for ensuring the firm’s
overall profitability.
D) Inventory management receives extensive coverage in courses on operations
management.
Use the information for the question(s) below.
Rockwood Enterprises is currently an all equity firm and has just announced plans to
expand their current business. In order to fund this expansion, Rockwood will need to
raise $100 million in new capital. After the expansion, Rockwood is expected to
produce earnings before interest and taxes of $50 million per year in perpetuity.
Rockwood has already announced the planned expansion, but has not yet determined
how best to fund the expansion. Rockwood currently has 16 million shares outstanding
and following the expansion announcement these shares are trading at $25 per share.
Rockwood has the ability to borrow at a rate of 5% or to issue new equity at $25 per
share.
If Rockwood finances their expansion by issuing new stock, what will Rockwood’s cost
of equity capital be?
A) 12%
B) 15%
C) 8%
D) 10%
Use the information for the question(s) below.
Shepard Industries is evaluating a proposal to expand its current distribution facilities.
Management has projected the project will produce the following cash flows for the
first two years (in millions).
The free cash flow from Shepard Industries project in year two is closest to:
A) $345
B) $455
C) $275
D) -$5
