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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
