By undertaking the analysis in real terms, the financial manager avoids having to
forecast inflation.
Treasury bonds do not have default risk, but are subject to inflation risk.
For an European option: Value of put = (Value of call)-share price + PV (exercise
price).
N(d1) and N(d2) are probabilities and therefore take values between 0 and 1.
Ratios can help you to ask the right questions, they rarely answer these questions.
The discounted payback rule calculates the payback period and then discounts it at the
opportunity cost of capital.
Net present value is found by subtracting the required investment from the present
value of future cash flows.
Generally, APV is not suitable for international projects.
A dollar today is worth more than a dollar tomorrow if the interest rate is positive.
Do not forget to include interest and dividend payments when calculating the project’s
cash flows.
A stock with a covariance with the market higher than the variance of the market will
always high a beta above 1.0.
Portfolio betas for an industry are usually higher than the beta of individual stocks in
that same industry.
A positive NPV will always generate a profitability index above 0.
Managers, Shareholders, and lenders of firm have identical information about the value
of the firm.
Both the CAPM and the APT stress that expected return is not affected by unique risk.
If you write a put option, you acquire the right to buy stock at a fixed strike price.
The pecking order theory implies that firms prefer internal to external financing.
Decommissioning and clean-up cost for any project is always insignificant and should
always be ignored.
Risk shifting, refusing to contribute equity and playing for time are some of the
consequences of firms facing bankruptcy.
For an European option: Value of call + PV(exercise price) = Value of put + share price.
P/E ratio measures the price that investors are prepared to for each dollar of earnings.
An alternative to paying cash dividends is to pay stock dividends.
Generally, the value to use for the risk-free rate is the short-term Treasury bill rate.
Working capital is one of the most common sources of mistakes in estimating project
cash flows.
APV = NPV(base-case assuming all equity financing) – NPV(financing decisions
caused by project financing).
Option delta for a put option is always positive.
Usually ‘special” or “extra” dividend is unlikely to be repeated in the future.
Efficiency ratios indicate how productively the company is using its assets to generate
profits.
Short-term and long-term interest rates always move in parallel.
If the NPV of project A is + $30 and that of project B is – $60, then the NPV of the
combined project is:
A. +$30
B. -$60
C. -$30
D. None of the above.
German laws and accounting procedures are designed, generally, to protect interests of
the:
A. Shareholders
B. Managers
C. Creditors
D. Employees
Company X has a P/E ratio of 10 and a stock price of $50 per share. Calculate earnings
per share of the company.
A. $6 per share
B. $10 per share
C. $0.20 per share
D. $5 per share
Which of the following formulas regarding earnings to price ratio is true:
A. EPS/Po = r[1 + (PVGO/Po]
B. EPS/Po = r[1 – (PVGO/Po)]
C. EPS/Po = [r + (PVGO/Po)]
D. EPS/Po = [r + (1 + (PVGO/Po)]/r
Given the following assets;
I) Long-term assets
II) Inventories
III) Receivables
IV) Marketable securities
Arrange the above assets in the order of liquidity. (The most liquid being first)
A. I, II, III and IV
B. II, III, IV and I
C. III, IV, II, and I
D. IV, III, II and I
The following are examples of the United States-based corporations except:
I) Boeing; II) Microsoft; III) Bank of America; IV) Sony
A. I only
B. I and II only
C. I, II, and III only
D. IV only
The following are measures used by firms when making capital budgeting decisions
except:
A. Payback period
B. Internal rate of return
C. P/E ratio
D. Net present value
In order to test the strong form of market efficiency, researchers have:
I) examined the recommendations of professional security analysts
II) performance of mutual funds
III) performance of pension funds
A. I only
B. I and II only
C. I, II, and III only
D. II and III only
River Co. has paid a dividend $2 per share out of earnings of $4 per share. If the book
value per share is $25 and is currently selling for $40 per share, calculate the required
rate of return on the stock.
A. 15.2%
B. 7.2%
C. 14.7%
D. 13.4%
The law of conservation of value implies that:
I) the mix of common stock and preferred stock does not affect the value of the firm
II) the mix of long-term and short-term debt does not affect the value of the firm
III) the mix of secured and unsecured debt does not affect the value of the firm
A. I only
B. II only
C. III only
D. I, II, and III
The following are foreign companies that are traded on the New York Stock Exchange:
I) Toyota, II) Brasil Telecom, III) Nokia, IV) Endesa, V) General Electric
A. I, II and III only
B. I,II, III and IV only
C. I,II,III and V only
D. All of the given companies are foreign companies
A firm owns a building with a book value of $150,000 and a market value of $250,000.
If the building is utilized for a project, then the opportunity cost ignoring taxes is:
A. $100,000
B. $150,000
C. $250,000
D. None of the above
The firm has only twenty million to invest. What is the maximum NPV that the
company can obtain?
A. 3.5
B. 4.0
C. 4.5
D. None of the above
At an interest rate of 10%, which of the following cash flows should you prefer?
A. Option A
B. Option B
C. Option C
D. Option D
How does an investor earn more than the return generated by the tangency portfolio and
still stay on the security market line?
A. Borrow at the risk free rate and invest in the tangency portfolio.
B. Add high risk/return assets to the portfolio.
C. Adjust the weight of stock in the portfolio to include more high return stocks.
D. It cannot be done.
The covariance between YOHO stock and the S&P 500 is .05. The standard deviation
of the stock market is 20%. What is the beta of YOHO?
A. 0.00
B. 1.00
C. 1.25
D. 1.42
The principal short-term assets are:
I) Cash, II) Accounts receivable, III) Inventories, and IV) Accounts Payable
A. I only
B. I and IV only
C. I, II, and III
D. IV only
The difference between Total Assets of a firm and its Total Liabilities is called.
A. Net working capital
B. Net current assets
C. Net worth
D. None of the above
Hammer Company proposes to invest $6 million in a new type of hammer-making
equipment. The fixed costs are $0.5 million per year. The equipment is expected to last
for five years. The manufacturing cost per hammer is $1and the selling price per
hammer is $6. Calculate the break-even (i.e. NPV = 0) volume per year. (Ignore taxes.)
A. 500,000 units
B. 600,000 units
C. 100,000 units
D. None of the above
The value of a common stock today depends on:
A. Number of shares outstanding and the number of shareholders
B. The expected future dividends and the discount rate
C. The Wall Street analysts
D. Present value of the future earnings per share
The idea of “maximizing shareholder value” is widely accepted in:
I) U.S.A.; II) U.K; III) Germany; IV) France; V) Japan
A. I only
B. I and II only
C. III, IV and V only
D. I, II, III, IV and V
Given the following data: Sales = 3200; Cost of goods sold = 1600; Average total assets
= 1600; Average inventory = 200, calculate the asset turnover ratio:
A. 2.0
B. 0.9375
C. 1.33
D. None of the above
Normal and lognormal distributions are completely specified by:
I) mean
II) standard deviation
III) third moment
A. I only
B. I and II only
C. II only
D. III only
A statistical measure of the degree to which securities’ returns move together is called:
A. Variance
B. Correlation Coefficient
C. Standard Deviation
D. None of the above
Suppose you invest equal amounts in a portfolio with an expected return of 16% and a
standard deviation of returns of 20% and a risk-free asset with an interest rate of 4%;
calculate the standard deviation of the returns on the resulting portfolio:
A. 8%
B. 10%
C. 20%
D. none of the above
In the case of freely traded resources, opportunity cost is the:
A. book value
B. market value
C. historical value
D. none of the above
The firm’s internal growth rate is defined as:
A. retained earnings/net income
B. retained earnings/net assets
C. retained earnings/total assets
D. none of the above
The historical returns data for the past three years for Stock B and the stock market
portfolio are: Stock B: 24%, 0%, 24%, Market Portfolios: 10%, 12%, 20%. Calculate
the variance of the market portfolio returns.
A. 192
B. 128
C. 28
D. None of the above
R&D Technology Corporation has just paid a dividend of $0.50 per share. The
dividends are expected to grow at 24% per year for the next two years and at 8% per
year thereafter. If the required rate of return in the stock is 16% (APR), calculate the
current value of the stock.
A. $1.11
B. $7.71
C. $8.82
D. None of the above
If you invest $100 at 12% APR for three years, how much would you have at the end of
3 years using compound interest?
A. $136
B. $140.49
C. $240.18
D. None of the above
The most important difference between stock repurchases and cash dividends is that
they:
I) Benefit different groups
II) Have different effects on corporate cash flow
III) May have different tax consequences
A. I only
B. II only
C. III only
D. I, II, and III
Spill Oil Company’s stocks had -8%, 11% and 24% rates of return during the last three
years respectively; calculate the average rate of return for the stock.
A. 8% per year
B. 9% per year
C. 11% per year
D. None of the above
Michigan Co. is currently paying a dividend of $2.00 per share. The dividends are
expected to grow at 20% per year for the next four years and then grow 6% per year
thereafter. Calculate the expected dividend in year 5.
A. $4.15
B. $2.95
C. $4.40
D. $3.81
Briefly explain the term ‘soft rationing”.
Explain the main differences between the position diagrams and the profit diagrams.
Define the term “abandonment value.”
List the three forms of market efficiency and explain the basis for it.
Briefly explain the sequence flow of cash between financial markets and the firm.
Briefly explain the term “Agency costs” as related to a corporation.
Briefly explain how WACC can be used for valuing a business.
Briefly explain how APV can be used for valuing a business.
Why is sensitivity analysis less realistic than Monte Carlo Simulation?
State how the present value of tax shield is changed when personal taxes are included.
Discuss why a dollar tomorrow cannot be worth less than a dollar the day after
tomorrow.
Briefly explain how changes in debt-equity ratio impacts on the beta of the firm’s
equity?
Briefly explain how individual securities affect portfolio risk.
Explain why “maximization of shareholders’ wealth” is the appropriate goal of the firm.
Briefly explain how EPS-Operating Income analysis helps determine the capital
structure of a firm?