Which of the following statements is FALSE?
A) Leverage decreases the risk of the equity of a firm.
B) Because the cash flows of the debt and equity sum to the cash flows of the project,
by the Law of One Price the combined values of debt and equity must be equal to the
cash flows of the project.
C) Franco Modigliani and Merton Miller argued that with perfect capital markets, the
total value of a firm should not depend on its capital structure.
D) It is inappropriate to discount the cash flows of levered equity at the same discount
rate that we use for unlevered equity.
Floyd Ferris invested $3,000 into an account five years ago. Today his account has
grown to have a balance of $3,927.50. Given that his account offered monthly
compounding of interest, the APR on this account is was closest to:
A) 5.00%
B) 5.25%
C) 5.40%
D) 5.54%
Big Blue Banana (BBB) is a clothing retailer with a current share price of $10.00 and
with 25 million shares outstanding. Suppose that Big Blue Banana announces plans to
lower its corporate taxes by borrowing $100 million and using the proceeds to
repurchase shares.
Suppose that BBB pays corporate taxes of 35% and that shareholders expects the
change in debt to be permanent. Assume that capital markets are perfect except for the
existence of corporate taxes and financial distress costs. If the price of BBB’s stock rises
to $10.85 per share following the announcement, then the present value of BBB’s
financial distress costs is closest to:
A) $21.25 million
B) $35.00 million
C) $11.40 million
D) $13.75 million
The Market’s average historical return is closest to:
A) -2.50%
B) -3.33%
C) -4.33%
D) -5.17%
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 unlevered net income Shepard Industries in year one is closest to:
A) $510
B) $415
C) $600
D) $355
Which of the following is NOT a step in valuation using the flow to equity method?
A) Determine the equity cost of capital, rE.
B) Compute the equity value, E, by discounting the free cash flow to equity using the
equity cost of capital.
C) Determine the free cash flow to equity of the investment.
D) Determine the before-tax cost of capital, rU.
Which of the following statements is FALSE?
A) Because expected returns are not easy to estimate, each portfolio that is added to a
multifactor model increases the difficulty of implementing the model.
B) The self-financing portfolio made from high minus low book-to-market stocks is
called the high-minus-low (HML) portfolio.
C) The FFC factor specification was identified a little more than ten years ago.
Although it is widely used in academic literature to measure risk, much debate persists
about whether it really is a significant improvement over the CAPM.
D) A trading strategy that each year short sells portfolio S (small stocks) and uses this
position to buy portfolio B (big stocks) has produced positive risk adjusted returns
historically. This self-financing portfolio is widely known as the small minus big
(SMB) portfolio.
Dagny Taggart has just purchased a home and taken out a $400,000 mortgage. The
mortgage has a 30-year term with monthly payments and has an APR of 5.4%.
The total amount of interest that Dagny will pay during the first month of her mortgage
is closest to:
A) $1,110
B) $1,785
C) $1,800
D) $2,245
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 total sales for 2009 were $610.1, and gross profit was $109.0.
Accounts payable days for 2009 is closest to:
A) 27.5
B) 5.71
C) 52.4
D) 63.8
Which of the following is NOT a valid time value of money function in Excel?
A) PMT
B) NPER
C) I
D) FV
Which of the following statements is FALSE?
A) A significant fraction of investors might care about aspects of their portfolios other
than expected return and volatility, and so would be unwilling to hold inefficient
investment portfolios.
B) Although the true market portfolio of all invested wealth might be efficient, the
proxy portfolio might not track the actual market very well.
C) We might be using the wrong proxy portfolio when we calculate alphas.
D) The true market portfolio consists of all traded investment wealth in the economy.
Which of the following statements is FALSE?
A) The plot of the relationship between the investment risk and the interest rate is call
the yield curve.
B) Each of the last six recessions in the United States was preceded by a period with an
inverted yield curve.
C) The nominal interest rate does not represent the increase in purchasing power that
will result from investing
D) A risk-free cash flow received in two years should be discounted at the two-year
interest rate.
Which of the following statements regarding timelines is FALSE?
A) Timelines are an important first step in organizing and then solving a financial
problem.
B) We refer to a series of cash flows lasting several periods as a stream of cash flows.
C) Not every stream of cash flows can be represented on a timeline.
D) A timeline is a linear representation of the timing of the (expected) cash flows.
Consider the following regression model:
Rs– rf= as+ (RF1– rf) + (RF2– rf) + e
The term is a(n):
A) measure of the expected percent change in the excess return of a security for a 1%
change in the excess return of the second factor portfolio.
B) constant term.
C) error term that has an expectation of zero and is uncorrelated with either factor.
D) measure of the expected percent change in the excess return of a security for a 1%
change in the excess return of the first factor portfolio.
Dagny Taggart is a graduating college senior and she is considering the costs of going
to medical school. Beginning next fall, Dagny expects medical school tuition to run
$45,000 for the first year and she estimates that tuition will increase by 6% each year. If
Dagny is able to invest her money in an account paying 8% interest per year, then the
present value to Dagny of four years of medical school tuition is closest to:
A) $149,045
B) $155,930
C) $162,095
D) $180,000
Which of the following statements is FALSE?
A) The risk premium of a security is equal to the market risk premium (the amount by
which the market’s expected return exceeds the risk-free rate), divided by the amount of
market risk present in the security’s returns measured by its beta with the market.
B) We refer to the beta of a security with the market portfolio simply as the securities
beta.
C) There is a linear relationship between a stock’s beta and its expected return.
D) A security with a negative beta has a negative correlation with the market, which
means that this security tend to perform will when the rest of the market is doing
poorly.
Luther Industries has no debt, a total equity capitalization of $20 billion, and a beta of
1.8. Included in Luther’s assets are $4 billion in cash and risk-free securities
Considering the fact that Luther’s Cash is risk-free,Luther’s unlevered beta is closest to:
A) 1.90
B) 2.25
C) 1.50
D) 1.45
Rearden Metals has a current stock price of $30 share, is expected to pay a dividend of
$1.20 in one year, and its expected price right after paying that dividend is $33.
Rearden’s equity cost of capital is closest to:
A) 4.0%
B) 6.4%
C) 8.2%
D) 14.0%
Which of the following is NOT a section on the cash flow statement?
A) Income generating activities
B) Investing activities
C) Operating activities
D) Financing activities