Fin 16489 | Course Paper

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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