At an annual interest rate of 7%, the future value of $5,000 in five years is closest to:
A) $3,565
B) $6,750
C) $7,015
D) $7,035
d’Anconia Copper is an all-equity firm with 60 million shares outstanding, which are
currently trading at $20 per share. Last month, d’Anconia announced that it will change
its capital structure by issuing $300 million in debt. The $200 million raised by this
issue, plus another $200 million in cash that d’Anconia already has, will be used to
repurchase existing shares of stock. Assume that capital markets are perfect.
At the conclusion of this transaction, the number of shares that d’Anconia Copper will
repurchase is closest to:
A) 5 million
B) 15 million
C) 20 million
D) 40 million
Which of the following statements is FALSE?
A) Depreciation is not a cash expense paid by the firm.
B) Net Working Capital = Cash + Inventory + Payables – Receivables.
C) Since 1997, companies can “carry back” losses for two years and “carry forward”
losses for 20 years.
D) Earnings do not represent real profits.
Consider the following two projects:
Assume that projects A and B are mutually exclusive. An incremental IRR of Project B
over Project A is closest to:
A) 12.6%
B) 23.3%
C) 1.7%
D) 17.3%
Taggart Transcontinental pays no dividends, but spent $4 billion on share repurchases
last year. Taggart’s equity cost of capital is 13% and if the amount spent on repurchases
is expected to grow by 5% per year. Taggart currently has 2 billion shares outstanding.
Taggart’s stock price is closest to:
A) $12.50
B) $15.40
C) $20.00
D) $25.00
The largest stock market in the world is:
A) the London Stock Exchange.
B) NASDAQ.
C) the American Stock Exchange.
D) the New York Stock Exchange.
A(n) ________ is the most common way that firms repurchase shares.
A) targeted repurchase
B) Dutch auction share repurchase
C) tender offer
D) open market share repurchases
Which of the following statements is FALSE?
A) The IRR investment rule states you should turn down any investment opportunity
where the IRR is less than the opportunity cost of capital.
B) The IRR investment rule states that you should take any investment opportunity
where the IRR exceeds the opportunity cost of capital.
C) Since the IRR rule is based upon the rate at which the NPV equals zero, like the
NPV decision rule, the IRR decision rule will always identify the correct investment
decisions.
D) There are situations in which multiple IRRs exist.
If the current rate of interest is 8% APR, then the future value of an investment that
pays $500 every two years and lasts 20 years is closest to:
A) $10,979
B) $10,661
C) $22,881
D) $20,000
Suppose that you deposit $10,000 in an account that pays 6% interest and you want to
know how much will be in your account at the end of 10 years. To solve this problem in
Microsoft Excel, you would use which of the following Excel formulas?
A) =FV(.06,10000,0,10)
B) =PV(.06,10000,0,10)
C) =FV(.06,10,0,10000)
D) =PV(.06,10,0,10000)
Suppose you invest $20,000 by purchasing 200 shares of Abbott Labs (ABT) at $50 per
share, 200 shares of Lowes (LOW) at $30 per share, and 100 shares of Ball Corporation
(BLL) at $40 per share.Suppose over the next year Ball has a return of 12.5%, Lowes
has a return of 20%, and Abbott Labs has a return of -10%. The weight on Abbott Labs
in your portfolio after one year is closest to:
A) -10.0%
B) 43.5%
C) 45.0%
D) 50.0%
An agency problem can be alleviated by:
A) requiring all firms to be sole proprietorships.
B) compensating managers in such a way that acting in the best interest of shareholders
is also in the best interest of managers.
C) asking managers to take on more risk than they are comfortable taking.
D) A and B.
Consider the following equation:
rwacc= rE+ rD(1 – Ï„c)
the term rE in this equation is:
A) the after tax required rate of return on debt.
B) the required rate of return on debt.
C) the required rate of return on equity.
D) the dollar amount of equity.
Which of the following statements is FALSE?
A) To improve the performance of their portfolios, investors who are holding the
market portfolio will compare the expected return of each security with its required
return from the security market line.
B) The Sharpe ratio of a portfolio will increase if we sell stocks with positive alphas.
C) When a stock’s alpha is not zero, investors can improve upon the performance of the
market portfolio.
D) When the market portfolio is efficient, all stocks are on the security market line and
have an alpha of zero.
Consider the following information regarding corporate bonds:
Trucks R’ Us has a market capitalization of $142 billion, $78 billion in BB rated debt,
and $10 billion in cash. If Trucks R’ Us’ equity beta is 1.68, then their underlying asset
beta is closest to:
A) 1.00
B) 1.20
C) 1.32
D) 1.48
Which of the following statements is FALSE?
A) In general, the gain to investors from the tax deductibility of interest payments is
referred to as the interest tax shield.
B) The interest tax shield is the additional amount that a firm would have paid in taxes
if it did not have leverage.
C) Because Corporations pay taxes on their profits after interest payments are deducted,
interest expenses reduce the amount of corporate tax firms must pay.
D) As Modigliani and Miller made clear in their original work, capital structure matters
in perfect capital markets. Thus, if capital structure does not matter, then it must stem
from a market imperfection.
Luther Industries needs to raise $25 million to fund a new office complex. The
company plans on issuing ten-year bonds with a face value of $1000 and a coupon rate
of 7.0% (annual payments). The following table summarizes the YTM for similar
ten-year corporate bonds of various credit ratings:
Assuming that Luther’s bonds receive a AAA rating, the number of bonds that Luther
must issue to raise the needed $25 million is closest to:
A) 24,655
B) 25,000
C) 24,477
D) 26,681
Which of the following statements is FALSE?
A) Depreciation expenses have a positive impact on free cash flow.
B) Free Cash Flow = (Revenues – Costs – Depreciation) × (1 – Ï„c) – Capital
Expenditures – ΔNWC + Ï„c× Depreciation.
C) The firm cannot use its earnings to buy goods, pay employees, fund new
investments, or pay dividends to shareholders.
D) The depreciation tax shield is the tax savings that results from the ability to deduct
depreciation.
The internal rate of return rule can result in the wrong decision if the projects being
compared have:
A) differences in scale.
B) differences in timing.
C) differences in NPV.
D) A and B are correct.
If the appropriate interest rate is 8%, then present value of $500 paid at the beginning of
each of the next 40 years is closest to:
A) $23
B) $5,962
C) $6,439
D) $20,0000
Which of the following statements is FALSE?
A) When a firm faces financial distress, creditors can gain by making sufficiently risky
investments, even if they have negative NPV.
B) When a firm has leverage, a conflict of interest exists if investment decisions have
different consequences for the value of equity and the value of debt.
C) In some circumstances, managers may take actions that benefit shareholders but
harm the firm’s creditors and lower the total value of the firm.
D) Agency costs are costs that arise when there are conflicts of interest between
stakeholders.
Nielson Motors plans to issue 10-year bonds that it believes will have an BBB rating.
Suppose AAA bonds with the same maturity have a 3.5% yield. Assume that the market
risk premium is 5% and the expected loss rate in the event of default on the bonds is
60%. The yield that these bonds will have to pay during average economic times is
closest to:
A) 3.50%
B) 3.75%
C) 4.00%
D) 5.50%
Suppose Luther Industries is considering divesting one of its product lines. The product
line is expected to generate free cash flows of $2 million per year, growing at a rate of
3% per year. Luther has an equity cost of capital of 10%, a debt cost of capital of 7%, a
marginal tax rate of 35%, and a debt-equity ratio of 2. This product line is of average
risk and Luther plans to maintain a constant debt-equity ratio.
Luther’s Unlevered cost of capital is closest to:
A) 8.0%
B) 8.5%
C) 9.0%
D) 6.4%
If the current rate of interest is 8% APR, then the future value of an investment that
pays $250 per quarter and lasts 20 years is closest to:
A) $18,519
B) $48,443
C) $9,936
D) $20,000
A(n) ________ may occur if a major shareholder desires to sell a large number of
shares but the market for the shares is not sufficiently liquid to sustain such a large sale
without severely affecting the price.
A) open market share repurchases
B) Dutch auction share repurchase
C) tender offer
D) targeted repurchase
Consider two mutually exclusive projects with the following cash flows:
You are considering using the incremental IRR approach to decide between the two
mutually exclusive projects A & B. If the discount rate for project B is 15%, then what
is the NPV for project B?
Consider the following covariances between securities:
What is the variance on a portfolio that has $2000 invested in Duke Energy, $3000
invested in Microsoft, and $5000 invested in Wal-Mart stock?
Consider the following realized annual returns:
Suppose that you want to use the 10 year historical average return on Stock B to
forecast the expected future return on Stock B. Calculate the 95% confidence interval
for your estimate of the expect return.
Consider the following three individuals portfolios consisting of investments in four
stocks:
Assuming that the risk-free rate is 4% and the expected return on the market is 12%,
then calculate the required return on Mary’s portfolio.
What are the implications of the efficient market hypothesis for corporate managers?
Kinston Industries is considering investing in a machine that will cost $125,000 and
will last for three years. The machine will generate revenues of $120,000 each year and
the cost of goods sold will be 50% of sales. At the end of year three the machine will be
sold for $15,000. The appropriate cost of capital is 10% and Kinston is in the 35% tax
bracket.Assume that Kinston’s new machine will be depreciated straight line to a
salvage value of $5,000 at the end of year three. What is the NPV for this project?
Assume that the risk-free interest rate is 10%. Rank each of the four projects from most
desirable to least desirable based upon NPV. Which project would you invest in first?
Are there any projects that you wouldn’t invest in?
You are purchasing a new home and need to borrow $325,000 from a mortgage lender.
The mortgage lender quotes you a rate of 6. 5% APR for a 30-year fixed rate mortgage
(with payments made at the end of each month). The mortgage lender also tells you that
if you are willing to pay 1 point, they can offer you a lower rate of 6.25% APR for a
30-year fixed rate mortgage. One point is equal to 1% of the loan value. So if you take
the lower rate and pay the points you will need to borrow an additional $3250 to cover
points you are paying the lender. Assuming that you do not intend to prepay your
mortgage (pay off your mortgage early), are you better off paying the 1 point and
borrowing at 6.25% APR or just taking out the loan at 6.5% without any points?
You currently own $100,000 worth of Wal-Mart stock. Suppose that Wal-Mart has an
expected return of 14% and a volatility of 23%. The market portfolio has an expected
return of 12% and a volatility of 16%. The risk-free rate is 5%. Assuming the CAPM
assumptions hold, what alternative investment has the lowest possible volatility while
having the same expected return as Wal-Mart? What is the volatility of this portfolio?