Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
You are given a job to make a decision on project X, which is composed of three
independent projects A, B, and C which have NPVs of + $70, -$40 and + $100,
respectively. How would you go about making the decision about whether to accept or
reject the project?
A. Accept the firm's joint project as it has a positive NPV
B. Reject the joint project
C. Break up the project into its components: accept A and C and reject B
D. None of the above
A project requires an initial investment in equipment of $90,000 and then requires an
investment in working capital of $10,000 at the beginning (t = 0). The project is
expected to produce sales revenues of $120,000 for three years. Manufacturing costs
are estimated to be 60% of the revenues. The assets are depreciated using straight-line
depreciation. At the end of the project, the firm can sell the equipment for $10,000. The
corporate tax rate is 30% and the cost of capital is 15%. What would the NPV if the
discount rate were higher by 10%?
A. $5648
B. $3840
C. -$2735
D. None of the above
An equity option's theoretical delta reflects the sensitivity of its market price to changes
in:
A. the volatility of the underlying stock price
B. the dividends paid to the underlying stockholders
C. the underlying stock price
D. the time to expiration
The one-year discount factor at an interest rate of 100% per year is:
A. 1.5
B. 0.5
C. 0.25
D. None of the above
What has been the standard deviation of returns of common stocks during the period
between 1900 and 2006?
A. 19.8%
B. 33.4%
C. 8.1%
D. 7.8%
Given the following data: Earnings per share = $5; Dividends per share = $3; Price per
share = $50. Calculate the payout ratio:
A. 10%
B. 5%
C. 60%
D. None of the above
Important points to remember while estimating cash flows of projects are:
I) only cash flow is relevant
II) always estimate cash flows on an incremental basis
III) be consistent in the treatment of inflation
A. I only
B. I and II only
C. II, and III only
D. I,II, and III
The expectations hypothesis states that the forward interest rate is the:
I) expected future spot rate
II) always greater than the spot rate
III) yield to maturity
A. I only
B. II only
C. III only
D. II and III only
Which of the following investment rules may not use all possible cash flows in its
calculations?
A. NPV
B. Payback period
C. IRR
D. All of the above
The historical returns data for the past three years for Stock B and the stock market
portfolio are: Stock B: 24%, 0%, 24%, Market Portfolios: 10%, 12%, 20%. If the
risk-free rate is 4%, calculate the market risk premium.
A. 18.1%
B. 14%
C. 10%
D. None of the above
Calculator Company proposes to invest $5 million in a new calculator making plant.
Fixed costs are $2 million a year. A calculator costs $5/unit to manufacture and can be
sold for $20/unit. If the plant lasts for 3 years and the cost of capital is 12%, what is the
approximate break-even level (accounting) of annual sales? (Assume no taxes.)
(approximately)
A. $133,334 units
B. $272,117 units
C. $244,444 units
D. None of the above
Net Working Capital is the:
I) short-term assets
II) short term liabilities
III) long-term assets
IV) long term liabilities
A. I only
B. (I - II)
C. (III - I)
D. (III - IV)
If the standard deviation of returns of the market is 20% and the beta of a
well-diversified portfolio is 1.5, calculate the standard deviation of the portfolio:
A. 30%
B. 20%
C. 10%
D. none of the above
MM's Proposition I corrected for the inclusion of corporate income taxes is expressed
as:
A. VL = VU
B. VL = VU + D(1 - TC)
C. VL = VU + (TC)(D)
D. VU = VL + (TC)(D)
Health and Wealth Company is financed entirely by common stock that is priced to
offer a 15% expected return. If the company repurchases 25% of the common stock and
substitutes an equal value of debt yielding 6%, what is the expected return on the
common stock after refinancing? (Ignore taxes.)
A. 18%
B. 21%
C. 15%
D. None of the above
A stock is currently selling for $50. The stock price could go up by 10% or fall by 5%
each month. The monthly interest rate is 1% (periodic rate). Calculate the price of an
American put option on the stock with an exercise price of $55 and a maturity of two
months. (Use the two-stage binomial method)
A. $5.10
B. $3.96
C. $4.78
D. None of the above
Given the following cash flow for project A: C0 = -3,000, C1 = +500, C2 = +1,500 and
C3 = +5,000, calculate the NPV of the project using a 15% discount rate.
A. $5,000
B. $2,352
C. $3,201
D. $1,857
For a levered firm, return on equity (rE) is equal to:
A. rE = rA
B. rE = rA + (D/E) * [rA - rB]
C. rE = rA + (D/(D + E)) * [rA - rB]
D. None of the above
Learn and Earn Company is financed entirely by common stock that is priced to offer a
20% expected rate of return. The stock price is $60 and the earnings per share are $12.
If the company repurchases 50% of the stock and substitutes an equal value of debt
yielding 8%, what is the expected earnings per share value after refinancing?
A. $12.00
B. $19.20
C. $24.00
D. None of the above
The risk-free rate is 4%, the market rate of return is 14%, and the project's beta is 1.2.
Calculate the certainty equivalent cash flow for year-3.
A. $622.04
B. $360.33
C. $401.90
D. None of the above
Learn and Earn Company is financed entirely by Common stock that is priced to offer a
20% expected return. If the company repurchases 50% of the stock and substitutes an
equal value of debt yielding 8%, what is the expected return on the common stock after
refinancing?
A. 32%
B. 28%
C. 20%
D. None of the above
Conflicts of interest between shareholders and managers of a firm result in:
A. Principal-agent problem
B. Increased agency costs
C. Both A and B
D. Managers owning the firm
A 3-year bond with 10% coupon rate and $1000 face value yields 8% APR. Assuming
annual coupon payment, calculate the price of the bond.
A. $857.96
B. $951.96
C. $1000.00
D. $1051.54
Firms can repurchase shares in the following ways:
I) Open market repurchase
II) Through a tender offer
III) Through a Dutch auction process
IV) Through direct negotiation with a major shareholder
A. I only
B. II only
C. III only
D. I, II, III, and IV
An annuity is defined as
A. Equal cash flows at equal intervals of time for a specified period of time
B. Equal cash flows at equal intervals of time forever
C. Unequal cash flows at equal intervals of time forever
D. None of the above
A four-year bond has an 8% coupon rate and a face value of $1000. If the current price
of the bond is $878.31, calculate the yield to maturity of the bond (assuming annual
interest payments).
A. 8%
B. 10%
C. 12%
D. 6%
Given the following data: EBIT = 100; Depreciation = 40; Interest = 20; Dividends =
10; calculate the Times Interest Earned (TIE) ratio.
A. 7.0
B. 5.0
C. 4.7
D. 14.0
In the case of a portfolio of N-stocks, the formula for portfolio variance contains:
A. N variance terms
B. N(N - 1)/2 variance terms
C. N2 variance terms
D. None of the above
Minimizing the weighted average cost of capital (WACC) is the same as:
A. Maximizing the market value of the firm
B. Maximizing the book value of the firm
C. Maximizing the profits of the firm
D. Maximizing the liquidating value of the firm
Consider a bond with a face value of $1,000, a coupon rate of 6%, a yield to maturity of
8%, and ten years to maturity. This bond's duration is:
A. 8.7 years
B. 6 years
C. 0.1 years
D. 6.5 years
The historical returns data for the past three years for Stock B and the stock market
portfolio are: Stock B: 24%, 0%, 24%, Market Portfolios: 10%, 12%, 20%. Calculate
the beta for Stock B.
A. 0.86
B. 1.0
C. 0.125
D. None of the above
