FIN 12623 | Course Paper

Unlock access to all the studying documents.

View Full Document

In order to calculate the tax shield effect of interest payment for a corporation, always

use the:

I) average corporate tax rate

II) marginal corporate tax rate

III) state mandated tax rate

A. I only

B. II only

C. III only

D. I and III only

Inclusion of restrictions in the bond contract leads to:

A. Higher agency costs

B. Higher bankruptcy costs

C. Higher interest costs

D. None the above

Free cash flow (FCF) and net income (NI) differ in the following ways:

I) net income is the return to shareholders, calculated after interest expense; free cash

flow is calculated before interest.

II) net income is calculated after various non-cash expenses, including depreciation; we

add back depreciation when we calculate free cash flow.

III) capital expenditures and investments in working capital do not appear in net income

calculations; they do reduce free cash flows.

IV) net income is never negative; free cash flows can be negative for rapidly growing

firms, even if the firm is profitable, because investments exceed cash flows from

operations.

A. I only

B. I and II only

C. I, II and III only

D. I, II, III and IV

If a bond’s volatility is 10% and the interest rate goes down by 0.75% (points) then the

price of the bond:

A. decreases by 10%

B. decreases by 7.5%

C. increases by 7.5%

D. increases by 0.75%

Capital structure of the firm can be defined as:

I) the firm’s debt-equity ratio

II) the firm’s mix of different securities used to finance assets

III) the market imperfection that the firm’s manager can exploit

A. I only

B. II only

C. III only

D. I, II, and III

Cash inflow in cash budgeting comes mainly from:

A. Collection on accounts receivable

B. Short-term debt

C. Issue of securities

D. None of the above

Analysis of past monthly movements in Wal-Mart’s stock price has produced the

following estimates: = -0.45% and = 0. 5. If the market index subsequently rises by 5%

one month and Wal-Mart’s stock price rises by 3%, what is the abnormal change in

Wal-Mart’s stock price?

A. -0.95%

B. +0.95%

C. +0.05%

D. None of the above

A firm has issued $5 par value preferred stock that pays a $0.80 annual dividend. The

stock currently sells for $9.50. In calculating a WACC, what would be the value of the

firm’s preferred stock?

A. $0.80

B. $4.50

C. $5.00

D. $9.50

Summer Co. is expected to pay a dividend or $4.00 per share out of earnings of $7.50

per share. If the required rate of return on the stock is 15% and dividends are growing at

a current rate of 10% per year, calculate the present value of the growth opportunity for

the stock (PVGO).

A. $80

B. $30

C. $50

D. $26

Suppose you borrow at the risk-free rate an amount equal to your initial wealth and

invest in a portfolio with an expected return of 16% and a standard deviation of returns

of 20%. The risk-free asset has an interest rate of 4%; calculate the expected return on

the resulting portfolio:

A. 20%

B. 32%

C. 28%

D. none of the above

Analysis of past monthly movements in IBM’s stock price produces the following

estimates: = 2. 5% and = 1. 6. If the market index subsequently rises by 12% in one

month and IBM’s stock price increases by 20%, what is the abnormal change in IBM’s

stock price?

A. +1.7%

B. +8%

C. -1.7%

D. None of the above

Given the following data for U&P Company: Debt (D) = $100 million;

Equity (E) = $300 Million; rD = 6%; rE = 12% and TC = 30%.

Calculate the after-tax weighted average cost of capital (WACC):

A. 10.5%

B. 15%

C. 10.05%

D. 9.45%

Buying a call option, investing the present value of the exercise price in T-bills, and

short selling the underlying share is the same as:

A. Buying a call and a put

B. Buying a put and a share

C. Buying a put

D. Selling a call

The correlation between the efficient portfolio and the risk-free asset is:

A. +1

B. -1

C. 0

D. cannot be calculated

Florida Company (FC) and Minnesota Company (MC) are both service companies.

Their historical return for the past three years are: FC: -5%, 15%, 20%; MC: 8%, 8%,

20%.

Calculate the variances of return for FC and MC.

A. FC: 100 MC: 256

B. FC: 350 MC: 96

C. FC: 175 MC: 48

D. None of the above

For example, in the case of an electric car project, which of the following cash flows

should be treated as incremental flows when deciding whether to go ahead with the

project?

A. The cost of research and development undertaken for developing the electric car in

the past three years

B. The annual depreciation charge

C. Tax savings resulting from the depreciation charges

D. Dividend payments

In the case of Asian option:

A. the option is exercisable on discrete dates before maturity.

B. the option holder chooses as the exercise price any of the asset prices that occurred

before the final date.

C. the option payoff is zero if the asset price is on the wrong side of the exercise price

and otherwise is a fixed sum.

D. the exercise price is equal to the average of the asset’s price during the life of the

option.

Greenmail refers to the practice of a company purchasing its stock, usually at a high

price, from:

A. Small shareholders who are happy with performance of the firm

B. A hostile shareholder who threatens to take over the firm

C. Large shareholders who are happy with performance of the firm

D. None of the above

A government bond issued in Germany has a coupon rate of 5%, face value of euros

100 and maturing in five years. The interest payments are made annually. Calculate the

price of the bond (in euros)if the yield to maturity is 5%.

A. 100

B. 106.77

C. 106.33

D. none of the above

Suppose Caroll’s stock price is currently $ In the each next six month periods it will

either fall by 50% or rise by 100%. What is the current value of a one-year call option

with an exercise price of $15? The six-month risk-free interest rate (periodic rate) is

5%. [Use the two stage binomial method]

A. $8.73

B. $10.03

C. $16.88

D. $13.33

The owner of a regular exchange-listed call-option on the stock:

A. has the right to buy 100 shares of the underlying stock at the exercise price

B. has the right to sell 100 shares of the underlying stock at the exercise price

C. has the obligation to buy 100 shares of the underlying stock at the exercise price

D. has the obligation to sell 100 shares of the underlying stock at the exercise price

A project has an expected risky cash flow of $200, in year-1. The risk-free rate is 6%,

the market rate of return is 16%, and the project’s beta is 1.5. Calculate the certainty

equivalent cash flow for year-1.

A. $175.21

B. $164.29

C. $228.30

D. None of the above

The BSC Co. is planning to raise $2.5 million in perpetual debt at 11%. They have just

received an offer from the governor to raise the financing for them at 8%, if they locate

themselves in the state. What is the total value added from debt financing if the tax rate

is 34% and the state raises the loan for the company?

A. $2.5 million

B. $1.2 million

C. $1.3 million

D. None of the above

Subsidized loans have the effect of:

A. Increasing the NPV of the loan, thereby reducing the APV.

B. Decreasing the NPV of the loan, thereby reducing the APV.

C. Decreasing the NPV of the loan, thereby increasing the APV.

D. Increasing the NPV of the loan, thereby increasing the APV.

“Value additivity” works for:

I) combining assets

II) splitting up of assets

III) mix of debt securities issued by the firm

A. I only

B. II only

C. I and II only

D. I, II, and III

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

shareholders’ interests will:

A. favor high risk, high return projects even if they have negative NPV

B. refuse to invest in low risk, low return projects with positive NPVs

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

D. all of the above

Profitability ratios indicate:

I) How productively is the firm utilizing its assets.

II) How liquid is the firm.

III) How profitable is the firm.

IV) How highly is the firm valued by the investors.

A. I only

B. II only

C. III only

D. III and IV only

The following is the general formula for calculating the “Ending accounts receivable

(AR):”

A. Ending (AR) = beginning (AR) – sales + collections

B. Ending (AR) = beginning (AR) + sales – collections

C. Ending (AR) = beginning (AR) + sales + collections

D. none of the above

If a firm is financed with both debt and equity, the firm’s equity is known as:

A. unlevered equity

B. levered equity

C. preferred equity

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 expected

return on the resulting portfolio:

A. 10%

B. 4%

C. 12%

D. none of the above

When financial distress is a possibility, the value of a levered firm consists of:

I) value of the firm if all-equity-financed

II) present value of tax shield

III) present value of costs of financial distress

IV) present value of omitted dividend payments

A. I only

B. I + II

C. I + II – III

D. I + II – III – IV