FE 73093 | Course Paper

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When faced with financial distress; managers of firms acting on behalf of their

shareholders’ interests will:

A. favor issuing large quantity of low quality debt to low quantity of high quality debt

B. favor paying high dividends to the shareholders

C. delay the onset of bankruptcy as long as they can

D. all of the above

Mega Corporation has the following returns for the past three years: 8%, 12% and 10%.

Calculate the variance of the return and the standard deviation of the returns.

A. 64 and 8%

B. 124 and 11.1%

C. 4 and 2%

D. None of the above

The In-Tech Co. has just paid a dividend of $1 per share. The dividends are expected to

grow at 25% per year for the next three years and at the rate of 5% per year thereafter.

If the required rate of return on the stock is 18%(APR), what is the current value of the

stock?

A. $12.97

B. $11.93

C. $15.20

D. None of the above

Why does the Black Scholes call formula use the present value of the exercise price and

not merely the exercise price in the formula?

A. All finance must use the time value of money

B. Call options are rarely exercised early

C. You cannot exercise an option early

D. Because the put option uses the future value

According to EPS-operating income graph, debt financing is preferred if the expected

operating income is:

A. less than the break-even income

B. greater then the break-even income

C. equal to the break-even income

Costs associated with the conflicts of interest between the bondholders and the

shareholders of a corporation are called:

A. Legal costs

B. Bankruptcy costs

C. Administrative costs

D. Agency costs

Given the following assets;

I) Long-term assets

II) Inventories

III) Receivables

IV) Marketable securities

Which is the least liquid of these assets?

A. I

B. II

C. III

D. IV

Given the following data: Earnings per share = $5; Dividends per share = $3; Price per

share = $50. calculate the dividend yield:

A. 10%

B. 5%

C. 60%

D. None of the above

Major disadvantages of the Sarbanes-Oxley Act of 2002 (SOX) are the following

except:

A. good investor protection

B. increase in compliance costs

C. that it constrains managers’ ability to run the firm

D. that it may discourage development of human capital in the firm

The following are examples of financial assets except:

A. Common stock

B. Bank loan

C. Preferred stock

D. Buildings

Mr. Bird has $100 income this year and zero income next year. The market interest rate

is 10% per year. Mr. Bird also has an investment opportunity in which he can invest $50

today and receive $80 next year. Suppose Mr. Bird consumes $30 this year and invests

in the project. What will be his consumption next year?

A. $88

B. $102

C. $80

D. $100

Adjusted stock return is calculated as:

A. actual stock return-expected stock return

B. return on stock-return on market

C. return on stock for the current period-return on stock for the previous period

D. none of the above

The value of a call option, beyond the stock price less the exercise price, is most likely

to be realized when the option is:

A. out of the money.

B. in the money.

C. at the money.

D. cannot be determined.

If a firm is unlevered and has a cost of equity capital 9%, what would the cost of equity

be if the firms became levered at a debt-equity ratio of 2? The expected cost of debt is

7%. (Assume no taxes.)

A. 15.0%

B. 16.0%

C. 14.5%

D. 13%

Cumulative capital requirement can be met by:

I) long-term financing

II) short-term financing

A. I only

B. II only

C. I and II

D. None of the above

If the standard deviation of annual returns on the asset is 20% and the interval is half a

year, then the downside change is equal to:

A. 37.9%

B. 19.3%

C. 20.1%

D. 13.2%

Discounted cash flow (DCF) analysis generally:

I) assumes that firms hold assets passively when it invests in a project

II) considers opportunities to expand a project if the project is successful

III) considers opportunities to abandon a project if the project is a failure

A. I only

B. II only

C. II and III only

D. I, II, and III

In June 2007, an investor buys a call option on Amgen stock with an exercise of price

of $65 and expiring in January 2009. If the stock price in June 2003 is $60, then this

option is:

I) in-the-money

II) out-of-the-money

III) a LEAPS

A. I only

B. II only

C. III only

D. II and III only

Strong form market efficiency states that the market incorporates all information in the

stock price. Strong form efficiency implies that:

I) An investor can only earn risk-free rates of return

II) An investor can always rely on technical analysis

III) An insider or corporate officer can not outperform the market by trading on the

inside information

A. I only

B. II only

C. III only

D. I, II, and III

Last year Foley Inc. reported total assets of $500, equity of $400, net income of $100,

dividends of $50 and earnings retained in the period of $50. What is Foley Inc.’s

sustainable growth rate?

A. 17.5%

B. 30.0%

C. 10.0%

D. 12.5%

The correlation coefficient between stock B and the market portfolio is 0.8. The

standard deviation of the stock B is 35% and that of the market is 20%. Calculate the

beta of the stock.

A. 1.0

B. 1.4

C. 0.8

D. 0.7

Given the following data for the a stock: risk-free rate = 5%; beta (market) = 1.5; beta

(size) = 0.3; 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. 11.5%

D. none of the above

For a levered firm, beta of equity (bE) is equal to:

A. bE = bA

B. bE = bA + (D/E) * [bA – bD]

C. bE = bA + (D/(D + E)) * [bA – bD]

D. None of the above

Mr. Smith has an income of $40,000 this year and $60,000 next year. He can invest in a

project that costs $30,000 this year, which generates an income of $36,000 next year.

The market interest rate is 10%. What will be his consumption next year, if Mr. Smith

invests in the project and consumes $50,000 this year?

A. $40,000

B. $52,000

C. $60,000

D. None of the above

Portfolio Theory was first developed by:

A. Merton Miller

B. Richard Brealey

C. Franco Modigliani

D. Harry Markowitz

The rate of return is also called: I) discount rate; II) hurdle rate; III) opportunity cost of

capital

A. I only

B. I and II only

C. I, II, and III

D. None of the given ones

If the beta of Microsoft is 1.13, risk-free rate is 3% and the market risk premium is 8%,

calculate the expected return for Microsoft.

A. 12.04%

B. 15.66%

C. 13.94%

D. 8.65%

A firm is financed with 30% debt, 60% common equity and 10% preferred equity. The

before-tax cost of debt is 5%, the firm’s cost of common equity is 15%, and that of

preferred equity is 10%. The marginal tax rate is 30%. What is the firm’s weighted

average cost of capital?

A. 10.05%

B. 11.05%

C. 12.5%

D. None of the above

The dividend-irrelevance proposition of Miller and Modigliani depends on the

following relationship between investment policy and dividend policy.

A. The level of investment does not influence or matter to the dividend decision

B. Once the dividend policy is set the investment decision can be made as desired

C. The investment policy is set before the dividend decision and not changed by

dividend policy

D. None of the above

What is the present value of the following cash flow at a discount rate of 16% APR?

A. $136,741.97

B. $122,948.87

C. $158,620.69

D. None of the above