Capital Structure and Unlevered Beta Estimates for Comparable Firms
The unlevered beta for Luxottica is closest to:
A) 1.00
B) 0.60
C) 0.70
D) 1.50
The person charged with running the corporation by instituting the rules and policies set
by the board of directors is called:
A) the chief operating officer.
B) the company president.
C) the chief executive officer.
D) the chief financial officer.
The third party who checks annual financial statements to ensure that they are prepared
according to GAAP and verifies that the information reported is reliable is the:
A) NYSE Enforcement Board.
B) Accounting Standards Board.
C) Securities and Exchange Commission (SEC).
D) auditor.
Consider the following stock price and shares outstanding data:
The total market capitalization for all four stocks is closest to:
A) $479 Billion
B) $415 Billion
C) $2,100 Billion
D) $200 Billion
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 you own 2500 shares of Omicron stock and that Omicron uses the entire
$50 million to repurchase shares. Suppose you are unhappy with Omicron’s decision
and would prefer that Omicron used the excess cash to pay a special dividend. The
number of shares that you would have to sell in order to receive the same amount of
cash as if Omicron paid the special dividend is closest to:
A) 275
B) 310
C) 125
D) 250
Rosewood Industries has EBIT of $450 million, interest expense of $175 million, and a
corporate tax rate of 35%.
If Rosewood had no interest expense, its net income would be closest to:
A) $405 million
B) $160 million
C) $450 million
D) $290 million
Galt Industries has 50 million shares outstanding and a market capitalization of $1.25
billion. It also has $750 million in debt outstanding. Galt Industries has decided to
delever the firm by issuing new equity and completely repaying all the outstanding
debt. Assume perfect capital markets.
Suppose you are a shareholder in Galt industries holding 600 shares, and you disagree
with this decision to delever the firm. You can undo the effect of this decision by:
A) Borrow $6,000 and buy 240 shares of stock
B) Sell 240 shares of stock and lend $6,000
C) Borrow $9,000 and buy 360 shares of stock
D) Sell 360 shares of stock and lend $9,000
Luther Industries has outstanding tax loss carryforwards of $70 million from losses
over the past four years. If Luther earns $15 million per year in pre-tax income from
now on, Luther first pays taxes in:
A) 7 years
B) 2 years
C) 4 years
D) 5 years
The firm mails dividend checks to the registered shareholders on the:
A) ex-dividend date.
B) declaration date.
C) distribution date.
D) record date.
Suppose you invest $15,000 in Merck stock and $25,000 in Home Depot stock. You
expect a return of 16% for Merck and 12% for Home Depot. What is the expected
return on your portfolio?
A) 13.50%
B) 14.00%
C) 13.75%
D) 14.50%
Suppose the current zero-coupon yield curve for risk-free bonds is as follows:
A three-month treasury bill sold for a price of $99.311998 per $100 face value. The
yield to maturity of this bond expressed as an EAR is closest to:
A) 2.5%
B) 2.8%
C) 3.2%
D) 4.0%
Consider the following formula:
VL= VU+
The term represents:
A) the value of firm with leverage.
B) the present value of the interest tax shield.
C) the preset value of the future interest payments.
D) the interest tax shield each year.
Which of the following statements regarding perpetuities is FALSE?
A) To find the value of a perpetuity one cash flow at a time would take forever.
B) A perpetuity is a stream of equal cash flows that occurs at regular intervals and lasts
forever.
C) PV of a perpetuity =
D) One example of a perpetuity is the British government bond called a consol.
Dagny Taggart has just purchased a home and taken out a $400,000 mortgage. The
mortgage has a 30-year term with monthly payments and has an APR of 5.4%.
The total amount of principal that Dagny will pay during the first three months of her
mortgage is closest to:
A) $1,340
B) $1,345
C) $5,395
D) $6,740
Wyatt Oil is contemplating issuing a 20-year bond with semiannual coupons, a coupon
rate of 7%, and a face value of $1000. Wyatt Oil believes it can get a BBB rating from
Standard and Poor’s for this bond issue. If Wyatt Oil is successful in getting a BBB
rating, then the issue price for these bonds would be closest to:
A) $800
B) $891
C) $901
D) $1,000
Which of the following statements is FALSE?
A) We say a portfolio is an efficient portfolio whenever it is possible to find another
portfolio that is better in terms of both expected return and volatility.
B) We can rule out inefficient portfolios because they represent inferior investment
choices.
C) The volatility of the portfolio will differ, depending on the correlation between the
securities in the portfolio.
D) Correlation has no effect on the expected return on a portfolio.
Really Big Conglomerate (RBC) is considering acquiring POP, Inc. a smaller
unsuccessful Internet firm. POP has outstanding tax loss carry forwards of $320 million
from losses over the past six years. RBC has pre-tax income of $100 million per year, a
cost of capital of 10%, and pays 35% in taxes.If RBC acquires POP, then the NPV of
POP tax loss carry forwards to RBC is closest to:
A) $92 million
B) $236 million
C) $262 million
D) $320 million
If a stock pays dividends at the end of each quarter, with realized returns of R1, R2, R3,
and R4each quarter, then the annual realized return is calculated as:
A) Rannual=
B) Rannual= (1 + R1)(1 + R2)(1 + R3)(1 + R4)
C) Rannual= (1 + R1)(1 + R2)(1 + R3)(1 + R4) – 1
D) Rannual= R1+ R2+ R3+ R4
An independent film maker is considering producing a new movie. The initial cost for
making this movie will be $20 million today. Once the movie is completed, in one year,
the movie will be sold to a major studio for $25 million. Rather than paying for the $20
million investment entirely using its own cash, the film maker is considering raising
additional funds by issuing a security that will pay investors $11 million in one year.
Suppose the risk-free rate of interest is 10%.
Assuming that the film maker issues the new security, the NPV for this project is closest
to what amount? Should the film maker make the investment?
A) $1.7 million; Yes
B) $1.7 million; No
C) $2.7 million; Yes
D) $2.7 million; No
Consider the following yields to maturity on various one-year zero-coupon securities:
The credit spread of the BBB corporate bond is closest to:
A) 1.0%
B) 5.6%
C) 1.6%
D) 0.8%
Which of the following statements is FALSE?
A) Fluctuations of a stock’s returns that are due to firm-specific news are common risks.
B) The volatility in a large portfolio will decline until only the systematic risk remains.
C) When we combine many stocks in a large portfolio, the firm-specific risks for each
stock will average out and be diversified.
D) The risk premium of a security is determined by its systematic risk and does not
depend on its diversifiable risk.
Which of the following statements is FALSE?
A) There are two potential sources of cash flows from owning a stock.
B) An investor will be willing to pay a price today for a share of stock up to the point
that this transaction has a zero NPV.
C) An investor might generate cash by choosing to sell the shares at some future date.
D) Because the cash flows from stock are known with certainty, we can discount them
using the risk-free interest rate.