Which of the following is NOT a systematic risk?
A) The risk that oil prices rise, increasing production costs
B) The risk that the Federal Reserve raises interest rates
C) The risk that the economy slows, reducing demand for your firm’s products
D) The risk that your new product will not receive regulatory approval
Wyatt Oil’s average historical return is closest to:
A) -2.50%
B) -3.33%
C) -4.33%
D) -5.17%
Epiphany Industries is considering a new capital budgeting project that will last for
three years. Epiphany plans on using a cost of capital of 12% to evaluate this project.
Based on extensive research, it has prepared the following incremental cash flow
projects:
The free cash flow for the last year of Epiphany’s project is closest to:
A) $53,000
B) $38,000
C) $35,000
D) $43,000
Which of the following statements is FALSE?
A) Individuals in the highest tax brackets have a preference for stocks that pay high
dividends, whereas tax-free investors and corporations have a preference for stocks
with no or low dividends.
B) To compare investor preferences, we must quantify the combined effects of dividend
and capital gains taxes to determine an effective dividend tax rate for an investor.
C) The dividend-capture theory states that absent transaction costs, investors can trade
shares at the time of the dividend so that non-taxed investors receive the dividend.
D) Differences in tax preferences create clientele effects, in which the dividend policy
of a firm is optimized for the tax preference of its investor clientele.
Which of the following statements is FALSE?
A) The agency costs of debt can arise only if there is no chance the firm will default and
impose losses on its debt holders.
B) Agency costs represent another cost of increasing the firm’s leverage that will affect
the firm’s optimal capital structure choice.
C) An under-investment problem occurs when shareholders choose to not invest in a
positive-NPV project.
D) When a firm faces financial distress, it may choose not to finance new, positive-NPV
projects.
Consider the following returns:
The Correlation between Stock X’s and Stock Y’s returns is closest to:
A) 0.58
B) 0.29
C) 0.69
D) 0.10
Iota Industries is an all-equity firm with 50 million shares outstanding. Iota has $200
million in cash and expects future free cash flows of $75 million per year. Management
plans to use the cash to expand the firm’s operations, which in turn will increase future
free cash flows by 12%. Iota’s cost of capital is 10% and assume that capital markets are
perfect.
The value of Iota if they use the $200 million to expand is closest to:
A) $825 million
B) $688 million
C) $840 million
D) $950 million
If the interest rate is 7%, the alternative with the lowest NPV is:
A) Alternative #1 with an NPV of approximately $350,000
B) Alternative #2 with an NPV of approximately $370,561
C) Alternative #3 with an NPV of approximately $357,196
D) Alternative #2 with an NPV of approximately $380,561
Which of the following statements is FALSE?
A) The interest rates that banks offer on investments or charge on loans depends on the
horizon of the investment or loan.
B) The Federal Reserve determines very short-term interest rates through its influence
on the federal funds rate.
C) The interest rates that are quoted by banks and other financial institutions are
nominal interest rates.
D) Fundamentally, interest rates are determined by the Federal Reserve.
Fly by Night Aviation (FBNA) expects to have net income next year of $24 million and
interest expense of $3 million. FBNA’s marginal corporate tax rate is 40%.FBNA’s
EBIT is closest to:
A) $43 million
B) $40 Million
C) $45 million
D) $60 million
Which of the following statements is FALSE?
A) For capital budgeting purposes, the project’s financing is the incremental financing
that results if the firm takes on the project.
B) Projects with safer cash flows can support more debt before they increase the risk of
financial distress for the firm.
C) If the positive free cash flow from a project will increase the firm’s cash holdings,
then this growth in cash is equivalent to a reduction in the firm’s leverage.
D) The incremental financing of a project corresponds directly to the financing that is
directly tied to the project.
The risk-free rate of interest is 3% and the market risk premium is 5%.
The overall value of Wyatt Oil (in $ millions) is closest to:
A) $25,000
B) $18,846
C) $31,250
D) $15,000
The tendency to hang on to losers and sell winners is known as the:
A) cascade effect.
B) disposition effect.
C) overconfidence bias.
D) systematic behavior bias.
Consider the following two projects:
The internal rate of return (IRR) for project A is closest to:
A) 7.7%
B) 21.6%
C) 23.3%
D) 42.9%
Taggart Transcontinental pays no dividends, but spent $4 billion on share repurchases
last year. Taggart’s equity cost of capital is 13% and if the amount spent on repurchases
is expected to grow by 5% per year. Taggart currently has 2 billion shares outstanding.
Taggart’s market capitalization is closest to:
A) $25 billion
B) $31 billion
C) $40 billion
D) $50 billion
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.The weight on Ball Corporation in your portfolio is:
A) 50%
B) 40%
C) 20%
D) 30%
Consider the following zero-coupon yields on default free securities:
The forward rate for year 5 (the forward rate quoted today for an investment that begins
in four years and matures in five years) is closest to:
A) 4.0%
B) 3.8%
C) 4.8%
D) 4.2%
*The current tax rates are set to expire in 2008 unless Congress extends them. The tax
rates shown are for financial assets held for one year. For assets held less than one year,
capital gains are taxed at the ordinary income tax rate (currently 35% for the highest
bracket); the same is true for dividends if the assets are held for less than 61 days.
The effective dividend tax rate for a one-year individual investor in 2006 is closest to:
A) 20%
B) 15%
C) 35%
D) 0%
