Which of the following statements is false?
A) Investments with higher volatility have rewarded investors with higher average
returns.
B) Investments with higher volatility should have a higher risk premium and therefore
higher returns.
C) Volatility seems to be a reasonable measure of risk when evaluating returns on large
portfolios and the returns of individual securities.
D) Riskier investments must offer investors higher average returns to compensate them
for the extra risk they are taking on.
Answer:
Forward interest rates
A) accurately predict future spots rates because of the law of one price.
B) tend not to be good predictors of future spot rates.
C) tend to be biased downward as predictors of future spot rates when the yield curve is
upward sloping.
D) tend to be biased upward as predictors of future spot rates when the yield curve is
downward sloping.
Answer:
Use the table for the question(s) below.
Pro Forma Income Statement for Ideko, 2005-2010
The amount of the increase in net working capital for Ideko in 2008 is closest to:
A) $4,685
B) $3,665
C) $4,090
D) $5,230
Answer:
Use the table for the question(s) below.
Consider the following information on options from the CBOE for Merck:
The open interest for January 2009 put option that is closest to being at-the-money is:
A) 7174
B) 982
C) 319
D) 8422
Answer:
Use the following information to answer the question(s) below.
(Please use a copy of the Cumulative Probabilities for the standard normal distribution
for these problems.)
Taggart Transcontinental’s stock has a volatility of 25% and a current stock price of $40
per share. Taggart pays no dividends. The risk-free interest rate is 4%.
Consider a one-year, at-the-money call option on Taggart stock. The effect on the price
of this call option of an increase in the volatility from 25% to 40% is closest to:
A) $0.70 increase
B) $1.70 decrease
C) $2.30 increase
D) $2.80 increase
Answer:
Use the following information to answer the question(s) below.
Galt Industries has no debt, total equity capitalization of $600 million, and an equity
beta of 1.2. Included in Galt’s assets is $90 million in cash and risk-free securities.
Assume the risk-free rate is 4% and the market risk premium is 6%.
The beta on Galt’s assets is closest to:
A) 1.1
B) 1.2
C) 1.3
D) 1.4
Answer:
Consider the following income statement and other information:
Luther’s return on assets (ROA) for the year ending December 31, 2009 is closest to:
A) 1.6%
B) 2.0%
C) 2.3%
D) 2.6%
Answer:
An analysis that breaks the NPV calculation into its component assumptions and shows
how the NPV varies as one of the underlying assumptions is changed is called
A) scenario analysis.
B) IRR analysis.
C) accounting break-even analysis.
D) sensitivity analysis.
Answer:
Suppose all possible investment opportunities in the world are limited to the four stocks
list in the table below:
Suppose that you have invested $30,000 invested in the market portfolio. Then the
amount that you have invested in Wyatt Oil is closest to:
A) $4,500
B) $6,000
C) $7,715
D) $9,000
Answer:
Consider the following two projects:
The payback period for project A is closest to:
A) 2.0 years
B) 2.4 years
C) 2.5 years
D) 2.2 years
Answer:
Consider the following formula:
The terms represent
A) the after tax wacc.
B) the reduction due to equity financing.
C) the before tax wacc.
D) the reduction due to the interest tax shield.
Answer:
An American Depository Receipt (ADR) is a security issued by a U.S. bank and traded
on a U.S. stock exchange that represents a specific number of shares of a foreign stock.
Siemens AG has an ADR that trades on the NYSE and is equivalent to one share of
Seimens AG trading on the Frankfurt Stock Exchange in Germany. If Seimans trades
for $95.19 on the NYSE and for €64.10 on the Frankfurt Stock Exchange, then under
the law of one price, the current exchange rate is closest to:
A) $0.6744/€
B) €0.6744/$
C) €1.4850/$
D) $1.5274/€
Answer:
Rearden Metal is considering the purchase of a new blast furnace costing a total of $5
million dollars. This furnace will qualify for accelerated depreciation: 20% can be
expense immediately, followed by 32%, 19.2%, 11.52%, 11.52% and 5.76% over the
next five years. However, because of Rearden’s substantial tax loss carry forwards,
Rearden estimates its marginal tax rate to be only 10% over the next five years. Since
Rearden will get very little tax benefit from the depreciation expense, they consider
leasing the furnace instead. Suppose that Rearden and the lessor face the same 8%
borrowing rate, but the lessor has a 40% marginal tax rate. Assume that the furnace is
worthless after five years, the lease term is five years, and a lease would qualify as a
true tax lease.
Assuming that Rearden’s annual lease payments are $1.1 million, then the amount of the
lease-equivalent loan is closest to:
A) $3.7 million
B) $3.8 million
C) $3.9 million
D) $4.0 million
Answer:
Consider the following two projects:
The internal rate of return (IRR) for project B is closest to:
A) 21.6%
B) 23.3%
C) 42.9%
D) 7.7%
Answer:
The effective annual rate (EAR) for a savings account with a stated APR of 4%
compounded daily (use 365 day year) is closest to:
A) 3.92%
B) 4.00%
C) 4.08%
D) 14.60%
Answer:
Which of the following statements is false?
A) Stock markets aggregate the information and view of many different investors.
B) Only in the relatively rare case in which we have some superior information that
other investors lack regarding the firm’s cash flows and cost of capital would it make
sense to second-guess the market stock price.
C) In most situations, a valuation model is best applied to tell us something about the
value of the firm’s stock.
D) The efficient market hypothesis implies that securities will be fairly priced, based on
their future cash flows, given all information that is available to investors.
Answer:
Consider the following equation:
The term T in this equation refers to
A) the premerger, or standalone, value of the acquirer.
B) the value of the synergies created by the merger.
C) the premerger (standalone) value of the target.
D) new shares to pay for the target.
Answer:
The justification for the benefits of diversification from mergers include all of the
following except
A) tax loss benefits.
B) lower cost of debt or increased debt capacity.
C) direct risk reduction.
D) liquidity enhancement.
Answer:
Use the information for the question(s) below.
Consider a project with free cash flows in one year of $90,000 in a weak economy or
$117,000 in a strong economy, with each outcome being equally likely. The initial
investment required for the project is $80,000, and the project’s cost of capital is 15%.
The risk-free interest rate is 5%.
Suppose that to raise the funds for the initial investment the firm borrows $80,000 at the
risk free rate, then the cash flow that equity holders will receive in one year in a strong
economy is closest to:
A) $0
B) $6,000
C) $33,000
D) $10,000
Answer:
Use the information for the question(s) below.
Monsters Incorporated (MI) in ready to launch a new product. Depending upon the
success of this product, MI will have a value of either $100 million, $150 million, or
$191 million, with each outcome being equally likely. The cash flows are unrelated to
the state of the economy (i.e. risk from the project is diversifiable) so that the project
has a beta of 0 and a cost of capital equal to the risk-free rate, which is currently 5%.
Assume that the capital markets are perfect.
Assume that in the event of default, 20% of the value of MI’s assets will be lost in
bankruptcy costs. Suppose that at the start of the year, MI has no debt outstanding, but
has 5.6 million shares of stock outstanding. If MI does not issue debt, its share price is
closest to:
A) $5.15
B) $23.75
C) $23.90
D) $25.00
Answer:
Suppose that Gold Digger’s beta is -0.8. If the market risk premium is 8% and the
risk-free interest rate is 4%, then the expected return for Gold Digger’s stock is?
A) -2.4%
B) 4.8%
C) 2.4%
D) 10.4%
Answer:
Which of the following statements is false?
A) With a stock dividend, a firm does not pay out any cash to shareholders. As a result,
the total market value of the firm’s assets and liabilities, and therefore of its equity, is
unchanged.
B) If the price of the stock falls too low, a company can engage in a reverse splitand
reduce the number of shares outstanding.
C) Stock dividends of 50% or higher are generally referred to as stock splits.
D) Rather than pay a dividend using cash or shares of its own stock, a firm can also
distribute shares of a subsidiary in a transaction referred to as a off-shoot.
Answer:
Suppose that when these bonds were issued, Luther received a price of $972.42 for each
bond. What is the likely rating that Luther’s bonds received?
A) AA
B) BBB
C) B
D) A
Answer:
Use the information for the question(s) below.
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:
The unlevered value of Aardvark’s new project is closest to:
A) $205
B) $100
C) $164
D) $202
Answer:
Rearden Metal wants to raise $5 million using six-month commercial paper. The net
proceeds to Rearden will be $4,865,000. The effect annual rate for this financing is
closest to:
A) 5.6%
B) 6.6%
C) 7.2%
D) 8.4%
Answer:
Use the information for the question(s) below.
Shepard Industries is evaluating a proposal to expand its current distribution facilities.
Management has projected the project will produce the following cash flows for the
first two years (in millions).
The incremental EBIT for Shepard Industries in year one is closest to:
A) $360
B) $750
C) $595
D) $510
Answer:
Consider the following formula:
The term τi is
A) the effective personal tax rate on interest income.
B) the effective personal tax rate on equity.
C) the effective corporate tax rate on income.
D) the effective tax advantage of debt.
Answer:
Suppose you have $500 today and the risk-free interest rate (rf) is 5%. The equivalent
value in one year is closest to:
A) $475
B) $476
C) $500
D) $525
Answer:
Which of the following statements is false?
A) Similar to the situation with its accounts receivable, a firm should monitor its
accounts payable to ensure that it is making its payments at an optimal time.
B) Some firms ignore the payment due period and pay later, in a practice referred to as
pushing the accounts payable.
C) Suppliers may react to a firm whose payments are always late by imposing terms of
cash on delivery (COD) or cash before delivery (CBD).
D) If the accounts payable outstanding is 40 days and the terms are 2/10, net 30, the
firm can conclude that it generally pays late and may be risking supplier difficulties.
Answer:
The idea that managers who perceive the firm’s equity is under-priced will have a
preference to fund investment using retained earnings, or debt, rather than equity is
known as the
A) signaling theory of debt.
B) lemons principle.
C) pecking order hypothesis.
D) credibility principle.
Answer:
The NPV profile graphs
A) the project’s NPV over a range of discount rates.
B) the project’s IRR over a range of discount rates.
C) the project’s cash flows over a range of NPVs.
D) the project’s IRR over a range of NPVs.
Answer:
Taggart Transcontinental shares are currently trading at $200 per share. The split ratio
need to brink the stock price down to $80 is:
A) 2:1
B) 3:1
C) 2:5
D) 5:2
Answer:
Your firm purchases goods from its supplier on terms of 1/10, net 30. The effective
annual cost to your firm if it chooses not to take advantage of the trade discount offered
and stretches the accounts payable to 45 days is closest to:
A) 13.0%
B) 11.1%
C) 15.9%
D) 20.1%
Answer: