Nielson Motors has a debt-equity ratio of 1.8, an equity beta of 1.6, and a debt beta of
0.20. It is currently evaluating the following projects, none of which would change
Nielson’s volatility.
(All amounts are in $millions.)
Nielson Motors should accept those projects with profitability ratios greater than:
A) 0.15
B) 0.175
C) 0.20
D) 0.225
Nielson Motors is currently an all equity financed firm. It expects to generate EBIT of
$20 million over the next year. Currently Nielson has 8 million shares outstanding and
its stock is trading at $20.00 per share. Nielson is considering changing its capital
structure by borrowing $50 million at an interest rate of 8% and using the proceeds to
repurchase shares. Assume perfect capital markets.
Nielson’s EPS if they choose not to change their capital structure is closest to:
A) $2.00
B) $2.30
C) $2.50
D) $2.90
Assume that the CAPM is a good description of stock price returns. The market
expected return is 8% with 12% volatility and the risk-free rate is 3%. New news
arrives that does not change any of these numbers, but it does change the expected
returns of the following stocks:
The expected alpha for Taggart Transcontinental is closest to:
A) -3.00%
B) -1.00%
C) 1.00%
D) 3.00%
Wyatt Oil’s average historical excess return is closest to:
A) -2.50%
B) -3.33%
C) -4.33%
D) -5.17%
You are considering adding a microbrewery on to one of your firm’s existing
restaurants. This will entail an increase in inventory of $8,000, an increase in Accounts
payable of $2,500, and an increase in property, plant, and equipment of $40,000. All
other accounts will remain unchanged. The change in net working capital resulting from
the addition of the microbrewery is:
A) $45,500
B) $10,500
C) $6,500
D) $5,500
The effective tax disadvantage for retaining cash in 2002 is closest to:
A) 15.00%
B) 14.75%
C) 30.00%
D) 35.00%
Omicron Technologies has $50 million in excess cash and no debt. The firm expects to
generate additional free cash flows of $40 million per year in subsequent years and will
pay out these future free cash flows as regular dividends. omicrons unlevered cost of
capital is 10% and there are 10 million shares outstanding. Omicron’s board is meeting
to decide whether to pay out its $50 million in excess cash as a special dividend or to
use it to repurchase shares of the firm’s stock.
Assume that Omicron uses the entire $50 million in excess cash to pay a special
dividend. Omicron’s ex-dividend price is closest to:
A) $40.00
B) $5.00
C) $50.00
D) $45.00
If the interest rate is 7%, the NPV of alternative #3 is closest to:
A) $350,000
B) $357,196
C) $370,561
D) $401,121
If it is managed efficiently, Luther industries will have assets with market value of $100
million, $300, million, or $500 million next year, with each outcome being equally
likely. Managers may, however, engage in wasteful empire building which will reduce
the firm’s market value by $20 million in all cases. Managers may also increase the risk
of the firm, changing the probability of each outcome to 50%, 20%, and 30%
respectively.
If its managers increase the risk of the firm, then the expected market value of Luther’s
assets is closest to:
A) $260
B) $240
C) $300 million
D) $280 million
Consider the following Price and Dividend data for General Electric Company:
Assume that you purchased General Electric Company stock at the closing price on
December 31, 2008 and sold it after the dividend had been paid at the closing price on
January 26, 2009. Your capital gains rate (yield) for this period is closest to:
A) 0.75%
B) 0.70%
C) -8.80%
D) -8.15%
Which of the following statements is FALSE?
A) We say a portfolio is long those stocks that have negative portfolio weights.
B) The efficient portfolios are those portfolios offering the highest possible expected
return for a given level of volatility.
C) When two stocks are perfectly negatively correlated, it becomes possible to hold a
portfolio that bears absolutely no risk.
D) The lower the correlation of the securities in a portfolio the lower the volatility we
can obtain.
Pro Forma Income Statement for Ideko, 2005-2010
Pro Forma Balance Sheet for Ideko, 2005-2010
Assuming that Ideko has a EBITDA multiple of 9.4, then the continuation equity value
of Ideko in 2010 is closest to:
A) $152.8 million
B) $181.7 million
C) $301.7 million
D) $272.8 million
(Include the MACRS Table from the Appendix.)
Casa Grande Farms is considering purchasing multiple tractors for a total purchase
price of $540,000. These tractors are expected to generate EBITDA of $250,000 for
each of the next three years. Casa Grande Farms has a 35% tax rate and has a cost of
capital of 10%.
Assuming that Casa Grande Farms depreciates these tractors straight line over the three
year life, then the annual depreciation tax shield in year 2 is closest to:
A) 63,000
B) 80,000
C) 84,000
D) 117,000
Consider the following top federal tax rates in the United States:
Personal Tax Rates
In 2000, assuming an average dividend payout ratio of 50%, the effective tax rate for
equity holders was closest to:
A) 69%
B) 65%
C) 55%
D) 30%
Nielson Motors plans to issue 10-year bonds that it believes will have an BBB rating.
Suppose AAA bonds with the same maturity have a 3.5% yield. Assume that the market
risk premium is 5% and the expected loss rate in the event of default on the bonds is
60%. The yield that these bonds will have to pay during a recession is closest to:
A) 3.50%
B) 3.75%
C) 4.00%
D) 5.50%
Assume that the EFT you invested in returns -10%, then the realized return on your
investment is closest to:
A) -20%
B) -10%
C) -24%
D) -26%
Which of the following statements is FALSE?
A) The difference between an annuity and a perpetuity is that an annuity ends after
some fixed number of payments.
B) Most car loans, mortgages, and some bonds are annuities.
C) A growing perpetuity is a cash flow stream that occurs at regular intervals and grows
at a constant rate forever.
D) An annuity is a stream of N equal cash flows paid at irregular intervals.
Consider the following graph of the security market line:
Portfolio “A”:
A) has a relatively lower expected return than predicted.
B) has a positive alpha.
C) falls below the SML.
D) is overpriced.
You are considering investing $600,000 in a new automated inventory system that will
provide after-tax cost savings of $50,000 next year. These cost savings are expected to
grow at the same rate as sales. If sales are expected to grow at 5% per year and your
cost of capital is 10%, then what is the NPV of the automated inventory system?
A) $400,000
B) $500,000
C) -$100,000
D) $1,000,000