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A project costs $7 million and is expected to produce cash flows if $2 million a year for
10 years. The opportunity cost of capital is 16%. If the firm has to issue stock to
undertake the project and issue costs are $0.5 million, what is the project's APV?
A. $9.67 million
B. $2.17 million
C. $1.67 million
D. $0.67 million
Higher the standard deviation of a stock higher is its beta.
Option to abandon a project is a:
A. Call option
B. Put option
C. Stock option
D. Swap
Historical nominal return for stock A is -8%, +10% and +22%. The nominal return for
the market portfolio is +6%, +18% and 24%. Calculate the beta for stock A.
A. 1.64
B. 0.61
C. 1.0
D. None of the above
Mr. Hopper is expected to retire in 25 years and he wishes accumulate $750,000 in his
retirement fund by that time. If the interest rate is 10% per year, how much should Mr.
Hopper put into the retirement fund each year in order to achieve this goal? [Assume
that the payments are made at the end of each year]
A. $4,559.44
B. $2,500
C. $7,626.05
D. None of the above
If the correlation coefficient between Stock A and Stock B is +0.6, what is the
correlation between Stock B with Stock A?
A. +0.6
B. -0.6
C. +0.4
D. -0.4
Working capital is one of the most common causes of misunderstanding in estimating
project cash flows. The following are the most common errors:
I) forgetting about working capital entirely
II) forgetting that working capital may change during the life of the project
III) forgetting that working capital is recovered at the end of the project
IV) forgetting to depreciate the working capital
A. I and II only
B. I, II, and III only
C. II,III and IV only
D. I,II and IV only
A three-year bond has 8.0% coupon rate and face value of $1000. If the yield to
maturity on the bond is 10%, calculate the price of the bond assuming that the bond
makes semi-annual coupon interest payments.
A. $857.96
B. $949.24
C. $1057.54
D. $1000.00
Calculate the value of the firm:
A. $100 millions
B. $65 millions
C. $30 millions
D. none of the given values
The sustainable growth rate is equal to:
A. plowback ratio return on equity
B. return on equity/plowback ratio
C. return on assets plowback ratio
D. plowback ratio return on equity (equity/net assets)
The Granite Paving Company has a debt to total value ratio of 0.5. The cost of debt is
8% and that of unlevered equity is 12%. Calculate the weighted average cost of capital
if the tax rate is 30%.
A. 14.8%
B. 10.2%
C. 12.0%
D. None of the above
If the present value of a cash flow generated by an initial investment of $200,000 is
$250,000,
what is the NPV of the project?
A. $250,000
B. $50,000
C. $200,000
D. None of the above
Given the following data:
FCF1 = $7 million; FCF2 = $45 million; FCF3 = $55 million; free cash flow grows at a
rate of 4% for year 4 and beyond. If the weighted average cost of capital is 10%,
calculate the value of the firm.
A. $953.33 million
B. $801.12 million
C. $716.25 million
D. None of the above
Generally, investors view the announcement of open-market repurchase of stocks as:
A. bad news and the stock price drops
B. good news and the stock price increases
C. a non-event and does not affect the stock prices
D. very good news and the stock price jumps up
The following entities issue bonds to raise long-term loans except:
A. The federal government
B. State and local governments
C. Companies
D. Individuals
Generally, investors interpret the announcement of a decrease in dividends as:
A. bad news and the stock price drops
B. good news and the stock price increases
C. a non-event and does not affect the stock prices
D. very good news and the stock price jumps up
An option that can be exercised any time before expiration date is called:
A. an European option
B. an American option
C. a call option
D. a put option
After retirement, you expect to live for 25 years. You would like to have $75,000
income each year. How much should you have saved in the retirement to receive this
income, if the interest is 9% per year (assume that the payments start on the day of
retirement)?
A. $736,693.47
B. $802,995.88
C. $2,043,750
D. None of the above
When firms prepare a financial plan they use the following:
I) develop several financial plans using most likely outcomes and also unexpected
outcomes.
II) sensitivity analysis.
III) scenario analysis.
A. I only
B. I and II only
C. I, II, and III
D. II and III only
If the risk-free interest rate increases:
A. the direct effect of it on the call option price is positive
B. the direct effect of it on the call option price is negative
C. the direct effect of it on the call option price is unknown
D. none of the above
OM Construction Company must choose between two types of cranes. Crane A costs
$600,000, will last for 5 years, and will require $60,000 in maintenance each year.
Crane B costs $750,000 and will last for seven years and will require $30,000 in
maintenance each year. Maintenance costs for cranes A and B are incurred at the end of
each year. The appropriate discount rate is 12% per year. Which machine should OM
Construction purchase?
A. Crane A as EAC is $226,444
B. Crane B as EAC is $194,336
C. Crane A as the PV is $816,286
D. Cannot be calculated as the revenues for the project are not given
The annual return for three years for stock B comes out to be 0%, 10% and 26%.
Annual returns for three years for the market portfolios are +6%, 18%, 24%. Calculate
the beta for the stock.
A. 0.74
B. 1.36
C. 1.0
D. None of the above
The option delta in the case of Black-Scholes formula is:
A. d1
B. N(d1)
C. d2
D. N(d2)
Investments A and B both offer an expected rate of return of 12%. If the standard
deviation of A is 20% and that of B is 30%, then investors would:
A. Prefer A to B
B. Prefer B to A
C. Prefer a portfolio of A and B
D. Cannot answer without knowing investor's risk preferences
Modigliani and Miller's Proposition I states that:
A. The market value of any firm is independent of its capital structure
B. The market value of a firm's debt is independent of its capital structure
C. The market value of a firm's common stock is independent of its capital structure
D. None of the above
World-Tour Co. has just now paid a dividend of $2.83 per share (D0); the dividends are
expected to grow at a constant rate of 6% per year forever. If the required rate of return
on the stock is 16%, what is the current value on stock, after paying the dividend?
A. $30
B. $56
C. $70
D. $48
The treasurer is usually responsible the following functions of a corporation:
I) Tax obligations; II) Investor relationships; III) Cash management; IV) raising new
capital
A. I only
B. I and II only
C. II, III and IV only
D. I, II, III and IV
The controller is usually responsible for the following functions of a corporation
except:
I) Preparation of financial statements; II) Internal accounting; III) Cash management;
IV) Taxes
A. I only
B. III only
C. I and II only
D. IV only
Florida Company (FC) and Minnesota Company (MC) are both service companies.
Their historical return for the past three years are: FC: - 5%, 15%, 20%; MC: 8%, 8%,
20%.
Calculate the covariance between the returns of FC and MC.
A. 60
B. 80
C. 40
D. None of the above
If the five-year present value annuity factor is 3.60478 and four-year present value
annuity factor is 3.03735, what is the present value at the $1 received at the end of five
years?
A. $0.63552
B. $1.76233
C. $0.56743
D. None of the above
The writer (seller) of a regular exchange-listed put-option on the stock:
A. has the right to buy 100 shares of the underlying stock at the exercise price
B. has the right to sell 100 shares of the underlying stock at the exercise price
C. has the obligation to buy 100 shares of the underlying stock at the exercise price
D. has the obligation to sell 100 shares of the underlying stock at the exercise price
The relative tax advantage of debt with personal and corporate taxes is: Where: TC =
(Corporate tax rate) = 35%; TpE = Personal tax rate on equity income = 30%; and Tp =
Personal tax rate on interest income = 20%: (approximately)
A. 1.76
B. 1.16
C. 1.35
D. None of the given ones
