Given the following data for Golf Corporation:
market price/share = $12; Book value/share = $10; Number of shares outstanding = 100
million; market price/bond = $800; Face value/bond = $1,000; Number of bonds
outstanding = 1 million; Calculate the proportions of debt (D/V) and equity (E/V) for
the firm that you would use for estimating the weighted average cost of capital
(WACC):
A. 40% debt and 60% equity
B. 50% debt and 50% equity
C. 45.5% debt and 54.5% equity
D. none of the given values
What dividend policy is probably the best from a financial standpoint, but not likely to
be accepted by the market place or investors?
A. High dividend
B. Low dividend
C. Residual dividend
D. Signaling dividend
Stock P and stock Q have had annual returns of -10%, 12%, 28% and 8%, 13%, 24%
respectively. Calculate the covariance of return between the securities.
A. -149
B. +149
C. 100
D. None of the above
Two corporations A and B have exactly the same risk and both have a current stock
price of $100. Corporation A pays no dividend and will have a price of $120 one year
from now. Corporation B pays dividends and will have price of $113 one year from
now after paying the dividend. The corporations pay no taxes and investors pay no
taxes on capital gains but pay a tax of 30% income tax on dividends. What is the value
of the dividend that investors expect corporation B to pay one year from today?
A. $7
B. $13
C. $10
D. None of the above
A firm has a debt-to-equity ratio of 1.0. If it had no debt, its cost of equity would be
12%. Its cost of debt is 9%. What is its cost of equity if there are no taxes?
A. 21%
B. 18%
C. 15%
D. 16%
The cost of a resource that may be relevant to an investment decision even when no
cash changes hand is called a (an):
A. Sunk cost
B. Opportunity cost
C. Working capital
D. None of the above
The following options associated with a project increases managerial flexibility:
I) Option to expand
II) Option to abandon
III) Production options
IV) Timing options
A. I only
B. II only
C. I, II, III, and IV
D. IV only
Dividend growth rate for a stable firm can be estimated as:
A. Plow back rate/the return on equity (ROE)
B. Plow back rate * the return on equity (ROE)
C. Plow back rate + the return on equity (ROE)
D. Plow back rate – the return on equity (ROE)
KMW Inc. sells a finance textbook for $150 each. The variable cost per book is $30 and
the fixed cost per year is $30,000. The process of creating a textbook costs $150,000
and the average book has a life span of 3 years. Using straight line depreciation and a
tax rate of 25%, What is the accounting break even number of books that must be sold?
A. 582
B. 667
C. 805
D. 953
The following groups are some of the claimants to a firm’s income stream:
I) Shareholders; II) Bondholders; III) Employees; IV) Management and V) Government
A. I and II only
B. I, II, and III only
C. I, II, III and IV only
D. I, II, III, IV and V
Music Company is considering investing in a new project. The project will need an
initial investment of $2,400,000 and will generate $1,200,000 (after-tax) cash flows for
three years. Calculate the NPV for the project if the cost of capital is 15%.
A. $169, 935
B. $1,200,000
C. $339,870
D. $125,846
Figure-4 depicts the:
A. position diagram for the writer (seller) of a call option
B. profit diagram for the writer (seller) of a call option
C. position diagram for the writer (seller) of a put option
D. profit diagram for the writer (seller) of a put option
Company X has 100 shares outstanding. It earns $1,000 per year and expects to pay all
of it as dividends. If the firm expects to maintain this dividend forever, Calculate the
stock price after the dividend payment. (The required rate of return is 10%)
A. $110
B. $90
C. $100
D. None of the above
The important assumptions of the Black-Scholes formula are:
I) the price of the underlying asset follows a lognormal random walk.
II) investors can adjust their hedge continuously and at no cost.
III) the risk-free rate is known.
IV) the underlying asset does not pay dividends.
A. I only
B. I and II only
C. I, II, III and IV
D. III and IV only
Corporate tax rate: 34% Personal tax rate on income from bonds: 40% Personal tax rate
on income from stocks: 30%
A. $0.246
B. $0.340
C. $0.006
D. $0.23
A lawyer works for a firm that advises corporate firms planning to sue other
corporations for antitrust damages. He finds that he can “beat the market” by short
selling the stock of the firm that will be sued. This finding is in violation of the:
A. Weak form market efficiency
B. Semi-strong form market efficiency
C. Strong form market efficiency
D. None of the above
Which of the following statements regarding the discounted payback period rule is
true?
A. The discounted payback rule uses the time value of money concept.
B. The discounted payback rule is better than the NPV rule.
C. The discounted payback rule considers all cash flows.
D. The discounted payback rule exhibits the value additive property.
If you invest $100 at 12% APR for three years, how much would you have at the end of
3 years using simple interest?
A. $136
B. $140.49
C. $240.18
D. None of the above
Hammer Company proposes to invest $6 million in a new type of hammer-making
equipment. The fixed costs are $1.0 million per year. The equipment is expected to last
for five years. The manufacturing cost per hammer is $1 and the selling price per
hammer is $6. Calculate the break-even (i.e. NPV = 0) volume per year. (Ignore taxes.)
A. 500,000 units
B. 600,000 units
C. 100,000 units
D. None of the above
The historical returns data for the past three years for Company A’s stock is -6%, 15%,
15% and that of the market portfolio is 10%, 10% and 16%. Calculate the beta for
Stock A.
A. 1.75
B. 1.0
C. 0.57
D. None of the above
If firms use the company cost of capital for evaluating all of their projects, which of the
following is likely?
I) Accepting poor low risk projects.
II) Rejecting good high risk projects.
III) Correctly accept projects with average risk.
A. I only
B. II only
C. III only
D. I,II and III
If the debt ratio is 0.5 what is the debt-equity ratio? (assume no leases)
A. 0.5
B. 1.0
C. 2.0
D. 4.0
Wealth and Health Company is financed entirely by common stock that is priced to
offer a 15% expected return. The common stock price is $40/share. The earnings per
share (EPS) is expected to be $6. If the company repurchases 25% of the common stock
and substitutes an equal value of debt yielding 6%, what is the expected value of
earnings per share after refinancing? (Ignore taxes.)
A. $6.00
B. $7.52
C. $7.20
D. None of the above
The positive value to the firm by adding debt to the capital structure in the presence of
corporate taxes is:
I) Due to the extra cash flow going to the investors of the firm rather than the tax
authorities
II) Due to the earnings before interest and taxes being fully taxed at the corporate rate
III) Because personal-tax rates are the same as corporate tax rates
A. I only
B. II only
C. III only
D. II and III only
The NPV value obtained by discounting nominal cash flows using the nominal discount
rate is the:
I) same as the NPV value obtained by discounting real cash flows using the real
discount rate
II) same as the NPV value obtained by discounting real cash flows using the nominal
discount rate
III) same as the NPV value obtained by discounting nominal cash flows using the real
discount rate
A. I only
B. II only
C. III only
D. II and III only
Financing decisions differ from investment decisions because:
I) it is easy to reverse a financing decision
II) the market for financial assets is very competitive
III) generally, financing decisions have zero NPV
A. I only
B. I and II only
C. I, II, and III
D. II and III only
Market value ratios indicate:
I) How productively is the firm utilizing its assets.
II) How liquid is the firm.
III) How profitable is the firm.
IV) How highly is the firm valued by the investors.
A. I only
B. II only
C. II and III only
D. IV only
CK Company stockholders expect to receive a year-end dividend of $5 per share and
then be sold for $115 dollars per share. If the required rate of return for the stock is
20%, what is the current value of the stock?
A. $100
B. $122
C. $132
D. $110
Beta of the market portfolio is:
A. Zero
B. +0.5
C. -1.0
D. +1.0
Internal rate of return (IRR) method is also called:
A. Discounted payback period method
B. Discounted cash-flow (DCF) rate of return method
C. Modified internal rate of return (MIRR) method
D. None of the above
Stock price cycles or patterns self-destruct as soon as investors recognize them through:
A. stock market regulation by the Securities and Exchange Commission (SEC)
B. price fixing by the specialists on New York Stock Exchange
C. trading by the investors
D. none of the above
An EPS-Operating Income graph shows the trade-off between financing plans and:
I) Greater risk associated with debt financing, which is evidenced by the greater slope
II) Their break-even point
III) The minimum earnings needed to pay the debt financing for a given level of debt
A. I only
B. II only
C. III only
D. I, II, and III only
Briefly explain what is meant by risk-neutral probability.
What items of good corporate governance serve to mitigate the tension between owners
and managers?
State the generalized version of Modigliani-Miller proposition I.
What method would you use for evaluating international projects?
State the law of conservation of value.
Briefly discuss principal – agent problems as related to a corporation
Where would under priced and overpriced securities plot on the SML (security market
line)?
Discuss the factors that determine the value of a call option.
Briefly discuss various real options associated with capital budgeting projects.
State Miller and Modigliani’s proposition on dividend irrelevance.
Briefly explain the expectations theory.
Briefly explain what is meant by “the term structure of interest rates.”
Briefly describe the cash cycle.
Briefly explain timing options.
Briefly describe the factors that determine asset betas.
When calculating a weighted average profitability index should you apply an index of 0
to left over money?
Briefly explain the expectations theory.
Discuss a successful example of corporations trying to add value through innovative
financing.
Briefly explain why discounted cash flow method (DCF) does not work for valuing
options.