Use the following information to answer the question(s) below:
The after tax interest expense in 2008 is closest to:
A) 2,380
B) 4,420
C) 6,800
D) 7,820
E) 9,180
Answer:
Consider the following information regarding corporate bonds:
Your estimate of the asset beta for Wyatt Oil is closest to:
A) 0.59
B) 0.66
C) 0.71
D) 0.90
Answer:
Use the table for the question(s) below.
Consider the following information regarding the Fama French Carhart four factor
model:
Using the FFC four factor model and the historical average monthly returns, the
expected monthly return for IBM is closest to:
A) 0.79%
B) 0.53%
C) 0.71%
D) 1.01%
Answer:
Use the following information to answer the question(s) below.
Wyatt Oil, an all-equity financed firm, has just reported EPS of $4.00 per share. Despite
an economic downturn, Wyatt is confident regarding its current investment
opportunities, but do to the current financial crisis, Wyatt does not wish to fund these
investments externally. Wyatt’s board has therefore decided to suspend its stock
repurchase plan and cut its dividend to $1 per share (from its current level of $2 per
share) and retain these funds instead. The firm just paid its current dividend of $1.00
per share and expects to keep its dividend at $1 per share next year as well. In
subsequent years, it expects its growth opportunities to slow, and it will still be able to
fund its growth internally with a target 40% dividend payout ratio, and reinitiating its
stock repurchase plan for a total payout rate of 60%. All dividends and repurchases
occur at the end of each year.
Wyatt’s existing operations are expected to generate the current level of earnings per
share in the future. Assume that the return on new investments is 16% and that
reinvestments will account for all future earnings growth. Wyatt’s current equity cost of
capital is 12%.
Wyatt’s current stock price is closest to:
A) $51.23
B) $54.00
C) $57.38
D) $61.38
Answer:
Which of the following statements is false?
A) Forward rates tend not to be good predictors of future spot rates.
B) Given the risk associated with interest rate changes, corporate managers require
tools to help manage this risk.
C) One of the most important tools to manage the risk of interest rate changes are
interest rate forward contracts.
D) A spot rate is an interest rate that we can guarantee today for a loan or investment
that will occur in the future.
Answer:
Another to method to repurchase shares is the ________, in which the firm lists
different prices at which it is prepared to buy shares, and shareholders in turn indicate
how many shares they are willing to sell at each price.
A) tender offer
B) Dutch auction share repurchase
C) targeted repurchase
D) open market share repurchases
Answer:
Use the following information to answer the question(s) below.
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.)
The total debt overhang associated with accepting project 1, is closest to:
A) $0 million
B) $12.5 million
C) $14.4 million
D) $22.5 million
Answer:
Consider a project with the following cash flows:
If the appropriate discount rate for this project is 15%, then the NPV is closest to:
A) $6,000
B) -$867
C) $1,420
D) $867
Answer:
Which of the following statements is false?
A) A market index reports the value of a particular portfolio of securities.
B) The S&P 500 is the standard portfolio used to represent “the market” when using the
CAPM in practice.
C) Even though the S&P 500 includes only 500 of the more than 7,000 individual U.S.
Stocks in existence, it represents more than 70% of the U.S. stock market in terms of
market capitalization.
D) The S&P 500 is an equal-weighted portfolio of 500 of the largest U.S. stocks.
Answer:
Use the following information to answer the question(s) below.
Rearden Metal, a U.S. manufacturer, has made a purchase of from d’Anconia Copper
and is expecting a cash outflow of 2 million ARS (Argentine Pesos) in six months. The
currency spot rate is $0.2500/ARS and the six-month forward rate is F6months =
$0.2470/ARS. The appropriate annual discount rate for the Argentine Peso is 6.5% and
the annual discount rate for the U.S. dollar is 4%.
The present value of Rearden Metal’s cash outflow computed by first converting to
dollars and then discounting the cash flow at the appropriate Argentine Peso rate is
closest to:
A) $469,500
B) $475,000
C) $481,000
D) $484,500
Answer:
Rearden Metal has just issued a callable, $1000 par value, twenty-year, 8% coupon
bond with semiannual coupon payments. The bond can be called at par in five years or
anytime thereafter on a coupon payment date. If the bond is currently trading for
$1040.79, then it’s yield to maturity is closest to:
A) 3.8%
B) 7.0%
C) 7.6%
D) 8.0%
Answer:
Which of the following statements is false?
A) The swap contractlike forward and futures contractsis typically structured as a
“zero-cost” security.
B) An interest rate swapis a contract entered into with a bank, much like a forward
contract, in which the firm and the bank agree to exchange the coupons from two
different types of loans.
C) In a standard interest rate swap, one party agrees to pay coupons based on a fixed
interest rate in exchange for receiving coupons based on the prevailing market interest
rate during each coupon period.
D) If short-term interest rates were to fall while long-term rates remained stable, then
short-term securities would fall in value relative to long-term securities, despite their
shorter duration.
Answer:
Use the table for the question(s) below.
Consider the information for the following four firms:
The weighted average cost of capital for “Meenie” is closest to:
A) 10.5%
B) 7.4%
C) 10.0%
D) 8.8%
Answer:
A project that you are considering today is expected to provide benefits worth $168,000
in one year. If the risk-free rate of interest (rf) is 4.5%, then the value of the benefits of
this project today are closest to:
A) $160,440
B) $160,766
C) $168,000
D) $175,560
Answer:
Which of the following statements is false?
A) Researchers have hypothesized that boards with a majority of outside directors are
better monitors of managerial effort and actions.
B) Studies have found that firms with independent boards make fewer value-creating
acquisitions but are more likely to act in shareholders’ interests if targeted in an
acquisition.
C) One early study showed that a board was more likely to fire the firm’s CEO for poor
performance if the board had a majority of outside directors.
D) Although the firm’s stock price increases on the announcement of its addition of an
independent board member, the increased firm valueappears to come from the potential
for the board to make better decisions on acquisitions and CEO turnover rather than
from improvements in the firm’s operating performance.
Answer:
Use the following information to answer the question(s) below.
Your investment portfolio consists of $10,000 worth of Google stock. Suppose that the
risk-free rate is 4%, Google stock has an expected return of 14% and a volatility of
35%, and the market portfolio has an expected return of 10% and a volatility of 18%.
Assume that the CAPM assumptions hold.
The expected return on the alternative investment having the highest possible expected
return while having the same volatility as Google is closest to?
A) 21.6%
B) 22.5%
C) 23.4%
D) 35.0%
Answer:
Which of the following statements is false?
A) The relative proportions of debt, equity, and other securities that a firm has
outstanding constitute its capital structure.
B) The most common choices are financing through equity alone and financing through
a combination of debt and equity.
C) The project’s NPV represents the value to the new investors of the firm created by
the project.
D) When corporations raise funds from outside investors, they must choose which type
of security to issue.
Answer:
Which of the following statements is false?
A) When an investment is risky, there are different returns it may earn.
B) In finance, the variance of a return is also referred to as its volatility.
C) The expected or mean return is calculated as a weighted average of the possible
returns, where the weights correspond to the probabilities.
D) The variance is a measure of how “spread out” the distribution of the return is.
Answer:
Use the information for the question(s) below.
KD Industries has 30 million shares outstanding with a market price of $20 per share
and no debt. KD has had consistently stable earnings, and pays a 35% tax rate.
Management plans to borrow $200 million on a permanent basis through a leveraged
recapitalization in which they would use the borrowed funds to repurchase outstanding
shares.
After the recapitalization, the value of KD’s levered equity is closest to:
A) $670 million
B) $400 million
C) $330 million
D) $470 million
Answer:
Use the following information to answer the question(s) below.
Assume that the risk-free rate of interest is 3% and you estimate the market’s expected
return to be 9%.
The risk premium for “Meenie” is closest to:
A) 4.50%
B) 7.50%
C) 9.30%
D) 9.75%
Answer:
Use the following information to answer the question(s) below.
Nielson Motors (NM) has no debt. Its assets will be worth $600 million in one year if
the economy is strong, but only $300 million if the economy is weak. Both events are
equally likely. The market value today of Nielson’s assets is $400 million.
Suppose the risk-free interest rate is 4%. If Nielson borrows $150 million today at this
rate and uses the proceeds to pay an immediate cash dividend, then according to MM,
the market value of its equity just alter the dividend is paid would be closest to:
A) $0 million
B) $150 million
C) $250 million
D) $400 million
Answer:
Which of the following statements is false?
A) The U.S. bankruptcy code was created to organize this process so that creditors are
treated fairly and the value of the assets is not needlessly destroyed.
B) Because the assets of the firm might be more valuable if kept together, creditors
seizing assets in a piecemeal fashion might destroy much of the remaining value of the
firm.
C) Debt holders can then take legal action against the firm to collect payment by seizing
the firm’s assets.
D) Because most firms have multiple creditors, coordination makes it difficult to
guarantee that each creditor will be treated fairly.
Answer:
Assume that the S&P 500 currently has a dividend yield of 3% and that on average, the
dividends of S&P 500 firms have increased by about 5% per year. If the risk-free
interest rate is 4%, then your estimate for the future market risk premium is:
A) 7%
B) 8%
C) 6%
D) 4%
Answer:
Which of the following statements is false?
A) Whether paid by the firm or its creditors, the indirect costs of bankruptcy increase
the value of the assets that the firm’s investors will ultimately receive.
B) In addition to the money spent by the firm, the creditors may incur costs during the
bankruptcy process.
C) The bankruptcy code is designed to provide an orderly process for settling a firm’s
debts.
D) To ensure that their rights and interests are respected, and to assist in valuing their
claims in a proposed reorganization, creditors may seek separate legal representation
and professional advice.
Answer:
Use the information for the question(s) below.
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 first year of Epiphany’s project is closest to:
A) $43,000
B) $25,000
C) $38,000
D) $45,000
Answer:
Rearden Metal is considering the purchase of a new blast furnace costing a total of $5
million dollars. This furnace will qualify for accelerated depreciation: 20% can be
expense immediately, followed by 32%, 19.2%, 11.52%, 11.52% and 5.76% over the
next five years. However, because of Rearden’s substantial tax loss carry forwards,
Rearden estimates its marginal tax rate to be only 10% over the next five years. Since
Rearden will get very little tax benefit from the depreciation expense, they consider
leasing the furnace instead. Suppose that Rearden and the lessor face the same 8%
borrowing rate, but the lessor has a 40% marginal tax rate. Assume that the furnace is
worthless after five years, the lease term is five years, and a lease would qualify as a
true tax lease.
Assuming that Rearden’s annual lease payments are $1.2 million, then the effective
after-tax lease borrowing rate is closest to:
A) 7.2%
B) 8.0%
C) 8.8%
D) 9.1%
Answer:
Use the table for the question(s) below.
Consider the following covariances between securities:
The variance on a portfolio that is made up of equal investments in Duke Energy and
Microsoft stock is closest to:
A) .065
B) 0.090
C) .149
D) -0.020
Answer:
Taggart Transcontinental and Phoenix-Durango have entered into a stock swap merger
agreement whereby Taggart will pay a 30% premium over Phoenix-Durango’s
pre-merger price. If Taggart’s pre-merger price per share was $15 and
Phoenix-Durango’s was $30, then the exchange ratio that Taggart will offer is closest to:
A) 0.4:1
B) 1.8:1
C) 2.0:1
D) 2.6:1
Answer:
A type of agency problem that results in shareholders gaining from decisions that
increase the risk of the firm sufficiently, even if they have negative NPV is
A) asset substitution.
B) debt overhang.
C) underinvestment.
D) cashing out.
Answer:
You own 100 shares of a “C” Corporation. The corporation earns $5.00 per share before
taxes. Once the corporation has paid any corporate taxes that are due, it will distribute
the rest of its earnings to its shareholders in the form of a dividend. If the corporate tax
rate is 40% and your personal tax rate on (both dividend and non-dividend) income is
30%, then how much money is left for you after all taxes have been paid?
A) $210
B) $300
C) $350
D) $500
Answer:
Assume that you have $100,000 to invest and you are interested in creating a
value-weighted portfolio of these four stocks. The percentage of the shares outstanding
of Boeing that you would hold in your portfolio is closest to:
A) .000018%
B) .000020%
C) .000024%
D) .000031%
Answer:
