In November 2009, Perrigo Co. (PRGO) had a share price of $39.20. They had 91.33
million shares outstanding, a market-to-book ratio of 3.76. In addition, PRGO had
$845.01 million in outstanding debt, $163.82 million in net income, and cash of
$257.09 million.
Perrigo’s enterprise value is closest to:
A) $952.16 million
B) $3,580.14 million
C) $4,168.06 million
D) $4,425.15 million
Assume that the risk-free rate of interest is 3% and you estimate the market’s expected
return to be 9%.
The equity cost of capital for “Meenie” is closest to:
A) 4.50%
B) 7.50%
C) 9.30%
D) 9.75%
Assume that the CAPM is a good description of stock price returns. The market
expected return is 8% with 12% volatility and the risk-free rate is 3%. New news
arrives that does not change any of these numbers, but it does change the expected
returns of the following stocks:
The expected alpha for Wyatt Oil is closest to:
A) -3.00%
B) -1.00%
C) 0.00%
D) 3.00%
If you buy shares of Coca-Cola on the primary market:
A) Coca-Cola receives the money because the company has issued new shares.
B) you buy the shares from another investor who decided to sell the shares.
C) you buy the shares from the New York Stock Exchange.
D) you buy the shares from the Federal Reserve.
Which of the following is NOT a situation where a trader is able to identify positive
NPV trading opportunities in the securities markets?
A) An investor who has access to information known only to a few investors
B) An investor who has lower trading costs than other market participants
C) An investor who gets up really early in the morning so he can be the first to read and
act upon the information contained in that day’s Wall Street Journal
D) An investor who has expertise in a highly complicated area for which a company has
just released information
d’Anconia Copper is an all-equity firm with 60 million shares outstanding, which are
currently trading at $20 per share. Last month, d’Anconia announced that it will change
its capital structure by issuing $300 million in debt. The $200 million raised by this
issue, plus another $200 million in cash that d’Anconia already has, will be used to
repurchase existing shares of stock. Assume that capital markets are perfect.
At the conclusion of this transaction, the value of a share of d’Anconia Copper will be
closest to:
A) $18.33
B) $20.00
C) $25.00
D) $27.50
Luther Corporation
Consolidated Balance Sheet
December 31, 2009 and 2008 (in $ millions)
Luther Corporation’s cash ratio for 2009 is closest to:
Luther Corporation’s stock price is $39 per share and the company has 20 million shares
outstanding. Its Market value Debt-Equity Ratio for 2009 is closest to:
A) 2.29
B) 0.37
C) 1.89
D) 0.31
The Sarbanes-Oxley Act (SOX) was passed by Congress in 2002, in response to:
A) financial scandals, including WorldCom and Enron.
B) financial scandals, including Bernie Madoff and AIG.
C) financial scandals, including General Motors and Chrysler.
D) the Troubled Asset Relief Program (TARP).
Suppose that you have received two job offers. Rearden Metal offers you a contract for
$75,000 per year for the next two years while Wyatt Oil offers you a contract for
$90,000 per year for the next two years. Both jobs are equivalent. Suppose that Rearden
Metal’s contract is certain, but Wyatt Oil has a 60% chance of going bankrupt at the end
of the year. In the event that Wyatt Oil files for bankruptcy, it will cancel your contract
and pay you the lowest amount possible for you to not quit. If you do quit, you expect
you could find an new job paying $75,000 per year, but you would be unemployed for
four months while searching for this new job.If you take the job with Wyatt Oil, then, in
the event of bankruptcy, the least amount that Wyatt Oil would pay you next year is
closest to:
A) $45,000
B) $50,000
C) $54,000
D) $75,000
Suppose the current zero-coupon yield curve for risk-free bonds is as follows:
Consider a zero coupon bond with 20 years to maturity. The price will this bond trade if
the YTM is 6% is closest to:
A) $215
B) $312
C) $335
D) $306
Suppose that all stocks can be grouped into two mutually exclusive portfolios (with
each stock appearing in only one portfolio): growth stocks and value stocks. Assume
that these two portfolios are equal in size (market value), the correlation of their returns
is equal to 0.6, and the portfolios have the following characteristics:
The risk free rate is 3.5%.
The expected return on the market portfolio (which is a 50-50 combination of the value
and growth portfolios) is closest to:
A) 12.0%
B) 13.5%
C) 15.0%
D) 19.0%
The Sisyphean Company has a bond outstanding with a face value of $1000 that
reaches maturity in 15 years. The bond certificate indicates that the stated coupon rate
for this bond is 8% and that the coupon payments are to be made semiannually.
Assuming the appropriate YTM on the Sisyphean bond is 9%, then this bond will trade
at
A) a premium.
B) a discount.
C) par.
D) None of the above
The risk-free rate of interest is 3% and the market risk premium is 5%.
The cost of capital for the oil exploration division is closest to:
A) 6.0%
B) 7.0%
C) 8.5%
D) 10.0%
If Ideko’s future expected growth rate is 5% and its WACC is 9%, then the continuation
value in 2010 is closest to:
A) 164,200
B) 278,775
C) 280,450
D) 303,425
Which of the following statements is FALSE?
A) The IRR of an investment in a zero-coupon bond is the rate of return that investors
will earn on their money if they buy a default free bond at its current price and hold it to
maturity.
B) The yield to maturity of a bond is the discount rate that sets the future value of the
promised bond payments equal to the current market price of the bond.
C) Financial professionals also use the term spot interest rates to refer to the
default-free zero-coupon yields.
D) When we calculate a bond’s yield to maturity by solving the formula, Price of an
n-period bond = + + … + , the yield we compute
will be a rate per coupon interval.
Suppose the term structure of risk-free interest rates is given as:
Term 1 year 2 years 3 years 5 years 10 years
Rate 2.25% 2.80% 3.20% 4.10% 6.30%
The present value of an investment that pays $2,000 in one year and $3,000 in three
years for certain is closest to:
A) $4,707
B) $4,685
C) $4,729
D) $5,000
The British government has a consol bond outstanding that pays ₤100 in interest each
year If the current rate of interest is 8%, then the present value of an investment that
pays $1000 per year and lasts 20 years is closest to:
A) $18,519
B) $45,761
C) $9,818
D) $20,000
Which of the following statements is FALSE?
A) The amount of each coupon payment is determined by the coupon rate of the bond.
B) Prior to its maturity date, the price of a zero-coupon bond is always greater than its
face value.
C) The simplest type of bond is a zero-coupon bond.
D) Treasury bills are U.S. government bonds with a maturity of up to one year.
Aardvark Industries is considering a project that will generate the following free cash
flows:
You are also provided with the following market value balance sheet and information
regarding Aardvark’s cost of capital:
Suppose that to fund this new project, Aardvark borrows $120 with the principal to be
paid in three equal installments at the end each year. The present value of Aardvark’s
interest tax shield is closest to:
A) $5.15
B) $5.00
C) $5.90
D) $5.25
KD Industries has 30 million shares outstanding with a market price of $20 per share
and no debt. KD has had consistently stable earnings, and pays a 35% tax rate.
Management plans to borrow $200 million on a permanent basis through a leveraged
recapitalization in which they would use the borrowed funds to repurchase outstanding
shares.
The preset value of KD’s interest tax shield is closest to:
A) $130 million
B) $200 million
C) $400 million
D) $70 million
Consider the following four corporate bonds that have semiannual compounding:
Which of these bonds sells at a discount?
A) #1
B) #2
C) #3
D) #4
Which of the following is NOT one of the simplifying assumptions made for the three
main methods of capital budgeting?
A) The firm pays out all earnings as dividends.
B) The project has average risk.
C) Corporate taxes are the only market imperfection.
D) The firm’s debt-equity ratio is constant.
The beginning of the modern theory of finance was marked by:
A) the approach used by Modigliani and Miller.
B) the approach used by John and Williams.
C) the approach taken by Berk and DeMarzo.
D) the approach taken by Dan Harris.