If the NPV of project A is + $120, and that of project B is -$40 and that of project C is +
$40, what is the NPV of the combined project?
A. +$100
B. -$40
C. +$70
D. +$120
The first step in the preparation of cash budget is:
A. preparing the sources and uses of funds statement
B. sales forecast
C. estimating cash inflows
D. estimating cash outflows
Story Company is investing in a giant crane. It is expected to cost 6.0 million in initial
investment and it is expected to generate an end of year cash flow of 3.0 million each
year for three years. Calculate the NPV at 12% (approximately).
A. 2.4 million
B. 1.2. million
C. 0.80 million
D. 0.20 million
A bond with duration of 10 years has yield to maturity of 10%. This bond’s volatility is:
A. 09%
B. 6.8%
C. 14.6%
D. 6.0%
Financing decisions differ from investment decisions for which of the following
reasons?
I) You cannot use NPV to evaluate financing decisions
II) The market for financial assets is more active
III) It is easier to find financing decisions with positive NPV than to find investment
decisions with positive NPV
A. I only
B. II only
C. III only
D. I and III only
Suppose ABCD’s stock price is currently $50. In the next six months it will either fall to
$40 or rise to $80. What is the current value of a six-month call option with an exercise
price of $50? The six-month risk-free interest rate is 2% (periodic rate).
A. $2.40
B. $15.00
C. $8.25
D. $8.09
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 required rate of return (cost of equity) for Stock B using CAPM. (The risk-free rate
of return = 4%)
A. 8.6%
B. 12.6%
C. 14.3%
D. None of the above
Given the following cash flows for project Z: C0 = -1,000, C1 = 600, C2 = 720 and C3 =
2000, calculate the discounted payback period for the project at a discount rate of 20%.
A. 1 year
B. 2 years
C. 3 years
D. None of the above
The value of N(d) in the Black-Scholes model can take any value between:
A. -1 and +1
B. 0 and +1
C. -1 and 0
D. None of the above
If the depreciation amount is $100,000 and the marginal tax rate is 35%, then the tax
shield due to depreciation is:
A. $35,000
B. $100,000
C. $65,000
D. None of the above
Financial practitioners include short-term debt in WACC calculations:
I) If the short-term debt is at least 10% of total liabilities
II) If the short-term debt is at least 10% of the total assets
III) If the net working capital is negative
IV) If the net working capital is positive
A. I and IV only
B. I and III only
C. II and IV only
D. II and III only
The after-tax weighted average cost of capital is determined by:
A. Multiplying the weighted average after tax cost of debt by the weighted average cost
of equity
B. Adding the weighted average before tax cost of debt to the weighted average cost of
equity
C. Adding the weighted average after tax cost of debt to the weighted average cost of
equity
D. Dividing the weighted average before tax cost of debt to the weighted average cost
of equity
Firms can pay out cash to their shareholders in the following ways:
I) Dividends
II) Share repurchases
III) Interest payments
A. I only
B. II only
C. I and II only
D. III only
Suppose that a company can direct $1 to either debt interest or capital gains for equity
investors. If there were no personal taxes on capital gains, which of the following
investors would not care how the money was channeled? (The corporate tax rate is
35%)
A. Investors paying personal tax of 17.5%
B. Investors paying personal tax of 35%
C. Investors paying personal tax of 53%
D. None of the above
When comparing levered vs. unlevered capital structures, leverage works to increase
EPS for high levels of operating income because:
A. Interest payments on the debt vary with EBIT levels
B. Interest payments on the debt stay fixed leaving less income to be distributed over
fewer shares
C. Interest payments on the debt stay fixed, leaving less income to be distributed over
more shares
D. Interest payments on the debt stay fixed, leaving more income to be distributed over
less number of shares
The efficient portfolios:
I) have only unique risk
II) provide highest returns for a given level of risk
III) provide the least risk for a given level of returns
IV) have no risk at all
A. I only
B. II and III only
C. IV only
D. II only
Studies on behavioral finance have been developed using:
A. market evidence
B. economic evidence
C. psychological evidence
D. none of the above
You have been asked to evaluate a project with infinite life. Sales and costs are
projected to be $1000 and $500 respectively. There is no depreciation and the tax rate is
30%. The real required rate of return is 10%. The inflation rate is 4% and is expected to
be 4% forever. Sales and costs will increase at the rate of inflation. If the project costs
$3000, what is the NPV?
A. $500.00
B. $1629.62
C. $365.38
D. None of the above
If e is the base of natural logarithms, and () is the standard deviation of the continuously
compounded annual returns on the asset, and h is the interval as a fraction of a year,
then the quantity (1 + upside change) is equal to:
A. e^[() * SQRT(h)]
B. e^[h * SQRT()]
C. () * e^[SQRT(h)]
D. none of the above.
Ms. Colonial has just taken out a $150,000 mortgage at an interest rate of 6% per year.
If the mortgage calls for equal monthly payments for twenty years, what is the amount
of each payment? (Assume monthly compounding or discounting.)
A. $1254.70
B. $1625.00
C. $1263.06
D. None of the above are true
If a firm permanently borrows $100 million at an interest rate of 8%, what is the present
value of the interest tax shield? (Assume that the tax rate is 30%)
A. $8.00 million
B. $5.6 million
C. $30 million
D. $26.67 million
E. 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 a
European call option on the stock with an exercise price of $50 and a maturity of two
months. (use the two-stage binomial method)
A. $5.10
B. $2.71
C. $4.78
D. $3.62
The “beta” is a measure of:
A. Unique risk
B. Total risk
C. Market risk
D. None of the above
Seven-Seas Co. has paid a dividend $3 per share out of earnings of $5 per share. If the
book value per share is $40 and the market price is 52.50 per share, calculate the
required rate of return on the stock.
A. 12%
B. 11%
C. 5%
D. 6%
When evaluating a projects with positive NPV but variable life spans, the proper
technique to employ is the equivalent annual annuity (EAA) approach.
Driscoll Company is considering investing in a new project. The project will need an
initial investment of $2,400,000 and will generate $1,200,000 (after-tax) cash flows for
three years. Calculate the IRR for the project.
A. 14.5%
B. 18.6%
C. 20.2%
D. 23.4%
Which bond is more sensitive to an interest rate change of 0.75%?
Bond A: YTM = 4.00%, Maturity = 8 years, Coupon = 6% or $60, Par Value = $1,000
Bond B: YTM = 3.50%, Maturity = 5 years, Coupon = 7% or $70, Par Value = $1,000
A. A
B. B
C. Both the same
D. Cannot be determined
Money that a firm has already spent or committed to spend regardless of whether a
project is taken is called:
A. Fixed cost
B. Opportunity cost
C. Sunk cost
D. None of the above
Net profit margin is calculated as:
A. (EBIT-tax)/Sales
B. Net income/sales
C. Net income/Cost of goods sold
D. none of the above
The beta of market portfolio is:
A. + 1.0
B. +0.5
C. 0
D. -1.0
If the present annuity factor is 3.8896, what is the present value annuity factor for an
equivalent annuity due if the interest rate is 9%?
A. 3.5684
B. 4.2397
C. 3.8896
D. None of the above.
Figure-3 depicts the:
A. position diagram for the writer (seller) of a call option
B. profit diagram for the writer (seller) of a call option
C. position diagram for the writer (seller) of a put option
D. profit diagram for the writer (seller) of a put option
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 20% and a standard deviation of returns
of 16%. The risk-free asset has an interest rate of 4%; calculate standard deviation of
the resulting portfolio:
A. 28%
B. 40%
C. 32%
D. none of the above
If the future value of $1 invested today at an interest rate of r% for n years is 9.6463,
what is the present value of $1 to be received in n years at r% interest rate?
A. $9.6463
B. $1.00
C. $0.1037
D. None of the above