Which of the following statements is FALSE?
A) The relative proportions of debt, equity, and other securities that a firm has
outstanding constitute its capital structure.
B) The most common choices are financing through equity alone and financing through
a combination of debt and equity.
C) The project’s NPV represents the value to the new investors of the firm created by
the project.
D) When corporations raise funds from outside investors, they must choose which type
of security to issue.
Suppose that Merck (MRK) stock is trading for $36.70 per share with 2.11 billion
shares outstanding while Boeing (BA) has 697.5 million shares outstanding and a
market capitalization of $38.223 billion. Assume that you hold the market portfolio.
If you hold 1,000 shares of Merck, then the number of shares of Boeing that you hold is
closest to:
A) 240 shares
B) 330 shares
C) 510 shares
D) 780 shares
Firms should adjust for execution risk by:
A) assigning a higher cost of capital to new projects.
B) ignoring execution risk since it is diversifiable.
C) capturing this risk in the expected cash flows generated by the project.
D) noticing missteps in the firm’s execution of new projects.
The volatility of the market portfolio is 10%, the expected return on the market is 12%,
and the risk-free rate of interest is 4%The expected return for Wyatt Oil is closest to:
A) 11.4%
B) 11.8%
C) 12.0%
D) 12.6%
The cost of capital for a project with the same beta as Exxon Mobil’s stock is closest to:
A) 11.6%
B) 11.2%
C) 12.8%
D) 7.6%
You expect KT Industries (KTI) will have earnings per share of $3 this year and expect
that they will pay out $1.50 of these earnings to shareholders in the form of a dividend.
KTI’s return on new investments is 15% and their equity cost of capital is 12%. The
value of a share of KTI’s stock is closest to:
A) $39.25
B) $20.00
C) $33.35
D) $12.50
Which of the following statements regarding annuities is FALSE?
A) PV of an annuity = C ×
B) The difference between an annuity and a perpetuity is that a perpetuity ends after
some fixed number of payments.
C) An annuity is a stream of N equal cash flows paid at regular intervals.
D) Most car loans, mortgages, and some bonds are annuities.
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.
The initial value of MI’s equity without leverage is closest to:
A) $133 million
B) $147 million
C) $140 million
D) $150 million
Fly by Night Aviation (FBNA) expects to have net income next year of $24 million and
interest expense of $3 million. FBNA’s marginal corporate tax rate is 40%.IF FBNA
increases leverage so that its interest expense rises by $1 million, then the amount its
unlevered EBIT will change is closest to:
A) $0
B) -$400,000
C) $600,000
D) $400,000
Which of the following statements is FALSE?
A) Sensitivity analysis allows us to explore the effects of errors in our estimated inputs
in our NPV analysis for the project.
B) To compute the NPV for a project, you need to estimate the incremental cash flows
and choose a discount rate.
C) Estimates of the cash flows and cost of capital are often subject to significant
uncertainty.
D) When we are certain regarding the input to a capital budgeting decision, it is often
useful to determine the break-even level of that input.
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 excess cash in 2009 is $23.4. If EBIT is 41.2 and tax rate is 35%, its
Return on Invested Capital in 2009 is closest to:
A) 0.104
B) 0.064
C) 0.038
D) 0.068
A firm’s net investment is:
A) its capital expenditures in excess of depreciation.
B) its free cash flow net of increases in working capital.
C) its enterprise value in excess of debt owed.
D) the market value of equity plus debt.
Luther Industries has 25 million shares outstanding trading at $18 per share. In addition,
Luther has $150 million in outstanding debt. Suppose Luther’s equity cost of capital is
13%, its debt cost of capital is 7%, and the corporate tax rate is 40%.
Luther’s after-tax debt cost of capital is closest to:
A) 4.2%
B) 5.4%
C) 7.0%
D) 9.8%
The Sisyphean Company is planning on investing in a new project. This will involve
the purchase of some new machinery costing $450,000. The Sisyphean Company
expects cash inflows from this project as detailed below:
The appropriate discount rate for this project is 16%.The payback period for this project
is closest to:
A) 2.1 years
B) 3.0 years
C) 2.0 years
D) 2.2 years
Luther Industries needs to raise $25 million to fund a new office complex. The
company plans on issuing ten-year bonds with a face value of $1000 and a coupon rate
of 7.0% (annual payments). The following table summarizes the YTM for similar
ten-year corporate bonds of various credit ratings:
Assuming that Luther’s bonds receive a AAA rating, the price of the bonds will be
closest to:
A) $1021
B) $1014
C) $1000
D) $937
Which of the following organization forms accounts for the most revenue?
A) “S” corporation
B) Limited partnership
C) “C” corporation
D) Limited liability company
Which of the following statements is FALSE?
A) Because diversification improves with the number of stocks held in a portfolio an
efficient portfolio should be a large portfolio containing many different stocks.
B) The beta of a security is the sensitivity of the security’s return to the return of the
overall market.
C) An efficient portfolio cannot be diversified further, that is there is no way to reduce
the risk of the portfolio without lowering its expected return.
D) We call a portfolio that contains only unsystematic risk an efficient portfolio.
At an annual interest rate of 7%, the future value of this timeline in year 2 is closest to:
A) $3,080
B) $3,525
C) $3,770
D) $4,035
Consider the following yields to maturity on various one-year zero-coupon securities:
The price (expressed as a percentage of the face value) of a one-year, zero-coupon
corporate bond with a BBB rating is closest to:
A) 95.60
B) 94.16
C) 95.42
D) 94.70
Another to method to repurchase shares is the ________, in which the firm lists
different prices at which it is prepared to buy shares, and shareholders in turn indicate
how many shares they are willing to sell at each price.
A) tender offer
B) Dutch auction share repurchase
C) targeted repurchase
D) open market share repurchases
Suppose the term structure of interest rates is shown below:
The NPV of an investment that costs $2700 and pays $1000 certain at the end of one,
three, and five years is closest to:
A) 21.47
B) $1665.62
C) -100.26
D) -71.38
Which alternative offers you the lowest effective rate of return?
A) Investment A
B) Investment B
C) Investment C
D) Investment D
Pro Forma Income Statement for Ideko, 2005-2010
The amount of net working capital for Ideko in 2006 is closest to:
A) $22,750
B) $35,195
C) $30,510
D) $26,420