A firm in Australia earns a pretax profit of $A10 per share. It pays a corporate tax of $3
per share (30% tax rate) in taxes. The firm pays the remaining $A7 in dividends to a
shareholder in 40% tax bracket. What is the amount of tax paid by the shareholder
under the imputation tax system?
A. $A1.00
B. Zero
C. $A4.00
D. None of the above
What is the present value annuity factor at a discount rate of 11% for 8 years?
A. 5.7122
B. 11.8594
C. 5.1461
D. None of the above
If a bond is paying interest semi-annually, then:
A. interest is paid once a year
B. interest is paid every six moths
C. interest is paid every three months
D. none of the above
If a stock is under priced it would plot:
A. Above the security market line
B. Below the security market line
C. On the security market line
D. On the Y-axis
If the standard deviation is 19.8% and the number of observations is 107, what is the
standard error?
A. 4.23 %
B. 1.9%
C. 0.47%
D. None of the above
A bond with duration of 10 years has yield to maturity of 10%. This bond’s volatility is:
A. 9.09%
B. 6.8%
C. 14.6%
D. 6.0%
Two mutually exclusive projects have the following NPVs and project lives.
If the cost of capital is 15%, which project would you accept?
A. A
B. B
C. Both A and B
D. Reject both A and B
What has been the average annual rate of return in real terms for a portfolio of U.S.
common stocks between 1900 and 2006?
A. Less than 2%
B. Between 2% and 5%
C. Between 5% and 8%
D. Greater than 8%
Which of the following statements most appropriately describes “Scenario Analysis”.
A. it looks at the project by changing one variable at a time
B. it provides the break-even level of sales for the project
C. it looks at different but consistent combination of variables
D. each of the above statements describes “Scenario Analysis” correctly
If an individual wanted to borrow with limited liability he/she should:
A. Invest in the equity of an unlevered firm
B. Borrow on his/her own account
C. Invest in the equity of a levered firm
D. Invest in a risk-free asset like T-bills
If the present value of $600 expected to be received one year from today is $400, what
is the one-year discount rate?
A. 15%
B. 20%
C. 25%
D. 50%
Dry-Sand Company is considering investing in a new project. The project will need an
initial investment of $1,200,000 and will generate $600,000 (after-tax) cash flows for
three years. Calculate the MIRR (modified internal rate of return) for the project if the
cost of capital is 15%.
A. 14.5%
B. 18.6%
C. 20.2%
D. 23.4%
The law of conservation of value implies that:
A. The value of a firm’s common stock is unchanged when debt is added to its capital
structure
B. The value of any asset is preserved regardless of the nature of the claims against it
C. The value of a firm’s debt is unchanged when common stock is added to its capital
structure
D. None of the above
For each additional 1% change in the market return, Amazon stock return on the
average changes by:
A. 1.26%
B. 1.59%
C. 2.2%
D. None of the above
If the weighted average cost of capital (WACC) is 9% calculate the NPV of the project.
A. -2.5 million
B. +2.5 million
C. zero
D. none of the above
Suppose an investor buys one share of stock and a put option on the stock. What will be
the value of her investment on the final exercise date if the stock price is below the
exercise price? (Ignore transaction costs)
A. The value of two shares of stock
B. The value of one share of stock plus the exercise price
C. The exercise price
D. The value of one share of stock minus the exercise price
Suppose an investor sells (writes) a put option. What will happen if the stock price on
the exercise date exceeds the exercise price?
A. The seller will need to deliver stock to the owner of the option
B. The seller will be obliged to buy stock from the owner of the option
C. The owner will not exercise his option
D. None of the above
MM Proposition I with corporate taxes states that:
I) Capital structure can affect firm value by an amount that is equal to the present value
of the interest tax shield
II) By raising the debt-to-equity ratio, the firm can lower its taxes and thereby increase
its total value
III) Firm value is maximized at an all debt capital structure
A. I only
B. II only
C. III only
D. I, II, and III
What has been the average annual nominal rate of interest on Treasury bills over the
past 107 years (1900 – 2006)?
A. Less than 1%
B. Between 1% and 2%
C. Between 2% and 3%
D. Greater than 3%
If dividends are taxed more heavily than capital gains, the investors:
A. Should be willing to pay more for stocks with low dividend yields
B. Should be willing to pay more for high dividend yields
C. Should be willing to pay the same for stocks regardless of the dividend yields
D. Cannot be predicted as stock prices fluctuate randomly
The standard deviation of the UK market during the period from 2001 through 2006
was: (Approximately)
A. 12.3%
B. 14.1%
C. 9.8%
D. None of the above
Which of the following is a statement of semi-strong form efficiency?
I) If the markets are efficient in the semi-strong form then prices will adjust
immediately to public information
II) If the markets are efficient in the semi-strong form then prices reflect all information
III) If the markets are efficient in the semi-strong form then prices will adjust to newly
published information after a long time delay
A. I only
B. II only
C. II and III only
D. III only
Ocean Co. has paid a dividend $2 per share out of earnings of $4 per share. If the book
value per share is $25, what is the expected growth rate in dividends (g)?
A. 16%
B. 12%
C. 8%
D. 4%
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%. What is the standard deviation of the portfolio with 50% of the funds invested in
FC and 50% in MC?
A. 10.6%
B. 14.4%
C. 9.3%
D. None of the above
Investors are particularly averse to the possibility of even a very small loss and need a
high return to compensate for it. Such a concept is related to what theory?
A. Market efficiency theory
B. Random walk theory
C. Convergence trading
D. Prospect theory
If a put and call cost the same, how can an investor offset the cost of a buying a call?
A. Borrowing money
B. Sell a put
C. Sell a stock
D. Wait for the stock price to rise
In order to find the present value of the tax shields provided by debt, the discount rate
used is the:
A. cost of capital
B. cost of equity
C. cost of debt
D. none of the above
An investment at 12% nominal rate compounded monthly is equal to an annual rate of:
A. 12.68%
B. 12.36%
C. 12%
D. None of the above
A stock with a beta of 1. 25 would be expected to:
A. Increase in returns 25% faster than the market in up markets
B. Increase in returns 25% faster than the market in down markets
C. Increase in returns 125% faster than the market in up markets
D. Increase in returns 125% faster than the market in down markets
The after-tax weighted average cost of capital (WACC) is calculated using the formula:
A. WACC = (rD) (D/V) + (rE) (E/V) where: V = D + E
B. WACC = (rD) (1 – TC ) (D/V) + (rE) (E/V) where: V = D + E
C. WACC = (rD) (D/E) + (rE) (E/D)
D. none of the above
Briefly explain why an option is always riskier than the underlying stock.
How do you compare projects with different lives?
Define the term “perpetuity.”
Briefly explain how the rate of return on equity of a firm changes with changes in
debt-equity ratio when taxes are considered.
Briefly discuss some of the problems associated with the use of the percentage of sales
model.
Briefly explain bankruptcy costs.
Briefly discuss the certainty equivalent approach to estimating the NPV of a project.
Briefly explain the functions of financial markets.
Briefly explain the term limited liability.
What is the difference between simple interest and compound interest?
In the formula for calculating the variance of N-stock portfolio, how many covariance
and variance terms are there?
Briefly explain how individuals can adjust their preferences for current and future
consumption.
Briefly discuss the concept of volatility.
Briefly explain how diversification reduces risk.
List the six lessons of market efficiency.
Briefly discuss some of the important findings of behavioral finance studies.
Briefly explain the reasons for enacting the Sarbanes-Oxley Act of 2002.
Explain the difference between a European option and an American option.