Volatility of a bond is given by:
I) Duration/ (1 + yield)
II) Slope of the curve relating the bond price to the interest rate
III) Yield to maturity
A. I only
B. II only
C. III only
D. I and II only
Generally, postaudits for projects are conducted:
I) to identify problems that need fixing
II) to check the accuracy of forecasts
III) to come up with questions that should have been asked before the project was
undertaken
A. I only
B. II only
C. I and II only
D. I, II, and III
KMW Inc. sells a finance textbook for $150 each. The variable cost per book is $30 and
the fixed cost per year is $30,000. The process of creating a textbook costs $150,000
and the average book has a life span of 3 years. Using straight line depreciation and a
tax rate of 25%, what is the economic or present value break even number of books that
must be sold given a discount rate of 12%?
A. 582
B. 667
C. 805
D. 953
A firm has a debt-to-equity ratio of 0.5. Its cost of equity is 22%, and its cost of debt is
16%. If the corporate tax rate is .40, what would its cost of equity be if the
debt-to-equity ratio were 0?
A. 20.62%
B. 16.00%
C. 26.8%
D. None of the above
If a firm borrows $50 million for one year at an interest rate of 9%, what is the present
value of the interest tax shield? Assume a 30% tax rate.
A. $50.00 million
B. $150 million
C. $1.445 million
D. $1.239 million
A capital equipment costing $400,000 today has no (zero) salvage value at the end of 5
years. If straight-line depreciation is used, what is the book value of the equipment at
the end of three years?
A. $120,000
B. $80,000
C. $160,000
D. $240,000
Capital equipment costing $250,000 today has 50,000 salvage value at the end of 5
years. If the straight line depreciation method is used, what is the book value of the
equipment at the end of two years?
A. $200,000
B. $170,000
C. $140,000
D. $50,000
If a firm uses the same company cost of capital for evaluating all projects, which of the
following is likely?
I) Rejecting good low risk projects
II) Accepting poor high risk projects
III) Correctly accept projects with average risk
A. I only
B. I and II only
C. I, II, and III
D. II only
The cash budget is the primary short-term financial planning tool. The key reasons a
cash budget is created are:
I) To estimate your investment in assets
II) To estimate the size and timing of your new cash flows
III) To prepare for potential financing needs
A. I only
B. II and III only
C. II only
D. III only
Of the following list, which is a stakeholder?
I) Employee; II) Customer; III) Community; IV) Supplier
A. I, II and IV only
B. III only
C. I and II only
D. All
The value of a put option is negatively related to:
I) stock price
II) risk-free rate
III) exercise price
A. I only
B. II only
C. I and II only
D. III only
For example, in case of an electric car project, the following cash flows should be
treated as incremental flows when deciding whether to go ahead with the project
except:
A. The consequent reduction in sales of the company’s existing gasoline models (i.e.:
incidental effects)
B. Interest payment on debt
C. The value of tools that can be transferred from the company’s existing plants
D. The expenditure on new plants and equipment
In the U.S.A. and the U.K. laws and accounting procedures are designed, generally, to
benefit the:
A. Shareholders
B. Managers
C. Creditors
D. Employees
For example, when Honda develops a new engine, the incidental effects might include
the following:
I) demand for replacement parts
II) profitable service facilities
III) offer modified or improved versions of the engine for other uses
A. I only
B. I and II only
C. I,II, and III
D. None of the given ones
A project costs $15 million and is expected to produce cash flows of $3 million a year
for 10 years. The opportunity cost of capital is 14%. If the firm has to issue stock to
undertake the project and issue costs are $500,000, what is the project’s APV
(approximately)?
A. -$352,000
B. $148,350
C. $648,350
D. $952,000
The profitability index can be used for ranking projects under:
A. Soft capital rationing
B. Hard capital rationing
C. Capital rationing at t = 0
D. Both A and B
The Marble Paving Co. has an equity cost of capital of 17%. The debt to equity ratio is
1.5 and a cost of debt is 11%. What is the cost of equity if the firm was unlevered?
(Assume a tax rate of 33%)
A. 14. 0%
B. 11. 0%
C. 16. 97%
D. None of the above
The historical data for the past three years for the market portfolio are 10%, 10% and
16%. If the risk-free rate of return is 4%, what is the market risk premium?
A. 4%
B. 8%
C. 16%
D. None of the above
Project analysis, in addition to NPV analysis, includes the following procedures:
I) Sensitivity analysis
II) Break-even analysis
III) Monte Carlo simulation
IV) Scenario Analysis
A. I only
B. I and II only
C. I, II, and III only
D. I, II, III, and IV
When shareholders pursue selfish strategies such as taking large risks or paying
excessive dividends, these will result in:
I) no action by debtholders since these are equity holder concerns
II) positive agency costs, as bondholders impose various restrictions and covenants,
which will diminish firm value
III) investments of the same risk class that the firm is in
A. I only
B. II only
C. III only
D. I and III only
You are given the following data for year-1: Revenues = 100, Fixed costs = 30; Total
variable costs = 50; Depreciation = $10; Tax rate = 30%. Calculate the after tax cash
flow for the project for year-1.
A. $17
B. $7
C. $10
D. None of the above
The Granite Paving Company has a debt equity ratio of 1.5. The before-tax cost of debt
is 11% and the unlevered equity is 14%. Calculate the weighted average cost of capital
for the firm if the tax rate is 33%.
A. 33%
B. 7.37%
C. 25.1%
D. 11.22%
Which of the following portfolios have the least risk?
A. A portfolio of Treasury bills
B. A portfolio of long-term United States Government bonds
C. Portfolio of U.S. common stocks of small firms
D. None of the above
Suppose ACC’s stock price is currently $25. In the next six months it will either fall to
$15 or rise to $40. What is the current value of a six-month call option with an exercise
price of $20? The six-month risk-free interest rate is 5% (periodic rate). [Use the
replicating portfolio method]
A. $20.00
B. $8.57
C. $9.52
D. $13.10
If the delta of a call option is 0.4 calculate the delta of an equivalent put option:
A. 0.6
B. 0.4
C. -0.4
D. -0.6
Ms. Anderson has $60,000 income this year and $40,000 next year. The market interest
rate is 10% per year. Suppose Ms. Anderson consumes $80,000 this year. What will be
her consumption next year?
A. $60,000
B. $30,000
C. $70,000
D. $18,000
If the corporate tax rate is 35%, what is the maximum effective tax rate on dividends
received by another corporation?
A. 35%
B. 30%
C. 10.5%
D. None of the above
The value of a put option at expiration is:
A. market price of the share minus the exercise price
B. higher of the exercise price minus market price of the share and zero
C. the exercise price
D. none of the above
The following are some of the shortcomings of the IRR method except:
A. IRR is conceptually easy to communicate
B. Projects can have multiple IRRs
C. IRR method cannot distinguish between a borrowing project and a lending project
D. It is very cumbersome to evaluate mutually exclusive projects using the IRR method
The relative tax advantage of debt with personal and corporate taxes is: Where: TC =
Corporate tax rate; TpE = Personal tax rate on equity income; and Tp = Personal tax rate
on interest income.
A.
B.
C.
D.
You are given the following data for year-1. Revenue = $43; Total costs = $30;
Depreciation = $3; Tax rate = 30%. Calculate the operating cash flow for the project for
year-1.
A. $7
B. $10
C. $13
D. None of the above
The main difference between short-term and long-term finance is:
A. The risk of long-term cash flows being more important than short-term risks
B. The present value of long-term cash flows being greater than short-term cash flows
C. The timing of short-term cash flow being within a year or less
D. All of the above