You would like to have enough money saved to receive $100,000 per year perpetuity
after retirement so that you and your family can lead a good life. How much would you
need to save in your retirement fund to achieve this goal (assume that the perpetuity
payments start one year from the date of your retirement. The interest rate is 12.5%)?
A. $1,000,000
B. $10,000,000
C. $800,000
D. None of the above
The value of the firm in the presence of debt may risk financial distress. Bankruptcy,
the most severe type of financial distress, has an impact on value by:
I) the risk or probability that it may occur
II) the level of risk aversion investors have to debt
III) the total value of the firm being siphoned off to cover bankruptcy costs
A. I only
B. I and II only
C. III only
D. II only
The asset beta of a levered firm is 1.1. The beta of debt is 0.3. If the debt equity ratio is
0.5, what is the equity beta? (Assume no taxes.)
A. 1.5
B. 1.1
C. 0.3
D. None of the above
One of the indirect costs to bankruptcy is the incentive toward under investment.
Following this strategy may result in:
I) the firm always choosing projects with the positive NPVs
II) stockholders turning down low risk low return but positive NPV projects
III) stockholders would declare and receive high cash dividends
A. I only
B. II only
C. III only
D. II and III only
For European options, the value of a call minus the value of a put is equal to:
A. The present value of the exercise price minus the value of a share
B. The present value of the exercise price plus the value of a share
C. The value of a share plus the present value of the exercise price
D. The value of a share minus the present value of the exercise price
Which of the following is an example of liquidity ratios?
A. Times interest earned (TIE)
B. P/E ratio
C. Return on equity
D. Quick ratio
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 12%. Calculate the NPV of the
project:
A. 14,418
B. 8443
C. -2735
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 of the
project be if the revenues were higher by 10% and the costs were 65% of the revenues?
A. $8443
B. $964
C. $5566
D. None of the above
One dollar invested in a portfolio of U.S. common stocks in 1900 would have grown in
nominal value by the end of year 2006 to:
A. $21,536
B. $176
C. $719
D. $6.81
If the nominal interest rate per year is 10% and the inflation rate is 4%, what is the real
rate of interest?
A. 10%
B. 4%
C. 5.8%
D. None of the above
According to behavioral finance investors prefer dividends because:
A. investors prefer the discipline that comes from spending only the dividends
B. of the tax consideration
C. stock market is efficient
D. all of the above
The type of the risk that can be eliminated by diversification is called:
A. Market risk
B. Unique risk
C. Interest rate risk
D. Default risk
Which of the following investment rules does not use the time value of the money
concept?
A. Net present value
B. Internal rate of return
C. The payback period
D. All of the above use the time value concept
Which of the following is true?
A. bD > bA > bE
B. bE > bA > bD
C. bA > bE > bD
D. None of the above is true
When a firm has the opportunity to add a project that will utilize excess factory capacity
(that is currently not being used), which costs should be used to determine if the added
project should be undertaken?
A. Opportunity cost
B. Sunk cost
C. Incremental costs
D. None of the above
As a legal entity a corporation can perform the following functions except:
I) borrow money; II) lend money; III) sue and be sued; IV) vote
A. I and II only
B. I, II, and III only
C. IV only
D. I, II, III and IV
A firm’s capital investment proposals should reflect:
I) Capital budgeting process
II) Strategic planning process
III) Middle managers’ ideas and views
A. I only
B. I and II only
C. I, II, and III
D. III only
Generally, a corporation is owned by the:
I) Managers; II) Board of Directors; III) Shareholders
A. I only
B. II and III
C. III only
D. I, II and III
A government bond issued in Germany has a coupon rate of 5%, face value of euros
100 and maturing in five years. The interest payments are made annually. Calculate the
yield to maturity of the bond (in euros) if the price of the bond is 106 euros.
A. 5.00%
B. 80%
C. 66%
D. none of the above
The present value of a $100 per year perpetuity at 10% per year interest rate is $1000.
What would be the present value if the payments were compounded continuously?
A. $1000.00
B. $1049.21
C. $1024.40
D. None of the above
The historical returns data for the past three years for Company A’s stock is -6.0%,
15%, 15% and that of the market portfolio is 10%, 10% and 16%. If the risk-free rate of
return is 4%, what is the cost of equity capital (required rate of return of company A’s
common stock) using CAPM?
A. 18%
B. 14%
C. 12%
D. None of the above
The unique risk is also called the:
A. Unsystematic risk
B. Diversifiable risk
C. Firm specific risk
D. All of the above
When weighted average cost of capital (WACC) is used to value a levered firm, the
interest tax shield is:
A. ignored.
B. considered by deducting the interest payment from the cash flows.
C. automatically considered because the after-tax cost of debt is used in the WACC
formula.
D. none of the above
The buyer of a call option has the right to exercise, but the writer of the call option has:
A. The choice to offset with a put option
B. The obligation to deliver the shares at exercise price
C. The choice to deliver shares or take a cash payoff
D. The choice of exercising the call or not
The discount rate is used for calculating the NPV is:
A. Determined by the financial markets
B. Found by the government
C. Found by the CEO
D. None of the above
Generally, which of the following is true?
A. rD > rA > rE
B. rE > rD > rA
C. rE > rA > rD
D. None of the above is true
What is the net present value (NPV) of the following cash flows at a discount rate of
9%?
A. $122,431.81
B. $200,000
C. $155,950.68
D. None of the above
Monte Carlo simulation is likely to be most useful:
A. For very complex problems
B. For problems of moderate complexity
C. For very simple problems
D. Regardless of the problem’s complexity
Briefly explain the term “option delta.”
If the Volume is reported in 100s as 292,059 in the Wall Street Journal quotation, then
the trading volume for that day of trading is:
A. 292,059 shares
B. 2,920,590 shares
C. 29,205,900 shares
D. 292,059,000 shares
Briefly discuss how you would use Fama-French three-factor model to estimate the cost
of equity for a firm.
What are some of the additional factors that have to be considered while estimating
cash flows in other countries and currencies?
What is the relative tax advantage of debt when corporate and personal taxes are
considered?
Briefly explain what “beta” of a stock means.
Explain the usefulness of decision trees in project analysis.
Briefly discuss capital rationing.
Briefly explain the term “market capitalization rate.”
Define the term, “real interest rate.”
Briefly explain the advantages and disadvantages of Sarbanes-Oxley Act of 2002
(SOX).
Define the term “option.”
What is the relationship between spot and forward rates?
State Modigliani-Miller’s proposition I corrected to include corporate income taxes.
Briefly explain what is meant by put-call parity?
Briefly explain the information content of share repurchase.
Briefly explain different views taken in different countries about the corporation’s goals.
Indicate some of the problems associated with capital investment process.
Briefly describe the traditional position on capital structure.
How does the random walk theory explain market crashes?