Consider the following list of projects:
Assuming that your capital is constrained, so that you only have $600,000 available to
invest in projects, which projects should you invest in and in what order?
A) CBFH
B) CBGF
C) BCFG
D) CBFG
Consider the following formula:
VL= VU+ Ï„cD
The term Ï„cD represents:
A) the present value of the interest tax shield.
B) the value of firm with leverage.
C) the preset value of the future interest payments.
D) the interest tax shield each year.
The firm’s unlevered (asset) beta is:
A) the weighted average of the equity beta and the debt beta.
B) the weighted average of the levered beta and the equity beta.
C) the debt beta minus the equity beta.
D) the unlevered beta minus the cost of capital.
Sisyphean industries is seeking to raise capital from a large group of investors to fund a
new project. Suppose that the efficient portfolio has an expected return of 14% and a
volatility of 20%. Sisyphean’s new project is expected to have a volatility of 40% and a
70% correlation with the efficient portfolio. The risk-free rate is 4%.
The beta for Sisyphean’s new project is closest to:
A) 1.25
B) 1.40
C) 0.70
D) 1.75
Which of the following statements is FALSE?
A) A portfolio is efficient if it has the highest possible Sharpe ratio; that is it is efficient
if it provides the largest increase in expected return possible for a given increase in
volatility.
B) The required return for an investment is equal to a risk premium that is equal to the
risk premium of the investor’s current portfolio scaled by .
C) Increasing the investment in investment I will increase the Sharpe ratio of portfolio P
if its expected return E[Ri] exceeds the required return ri, which is given by ri= rf+
× (E[Rp] – rf).
D) If a security i‘s expected return is less than the required return ri, we should reduce
our holding of security i.
Which of the following statements is FALSE?
A) The total payout model allows us to ignore the firm’s choice between dividends and
share repurchases.
B) By repurchasing shares, the firm increases its share count, which decreases its
earning and dividends on a per-share basis.
C) The total payout model discounts the total payouts that the firm makes to
shareholders, which is the total amount spent on both dividends and share repurchases.
D) In the dividend discount model we implicitly assume that any cash paid out to the
shareholders takes the form of a dividend.
Iota Industries is an all-equity firm with 50 million shares outstanding. Iota has $200
million in cash and expects future free cash flows of $75 million per year. Management
plans to use the cash to expand the firm’s operations, which in turn will increase future
free cash flows by 12%. Iota’s cost of capital is 10% and assume that capital markets are
perfect.
The price per share of Iota if they not to use the $200 million to expand and hold the
cash instead is closest to:
A) $16.50
B) $16.80
C) $19.00
D) $13.75
Consider the following stock price and shares outstanding data:
If you are interested in creating a value-weighted portfolio of these four stocks, then the
percentage amount that you would invest in Lowes is closest to:
A) 25%
B) 11%
C) 20.0%
D) 12%
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 $40,000 at the
risk free rate and issues new equity to cover the remainder. In this situation, the cash
flow that equity holders will receive in one year in a weak economy is closest to:
A) $90,000
B) $0
C) $50,000
D) $48,000
Frank Dewey Esquire from the firm of Dewey, Cheatum, and Howe, has been offered
an upfront retainer of $30,000 to provide legal services over the next 12 months to
Taggart Transcontinental. In return for this upfront payment, Taggart Transcontinental
would have access to 8 hours of legal services from Frank for each of the next 12
months. Frank’s normal billable rate is $250 per hour for legal services.
Assuming that Dewey’s cost of capital is 12% EAR, then the IRR of his retainer offer is
closest to:
A) -39.3%
B) -3.3%
C) 20.0%
D) 39.3%
Galt Industries is expected to generate free cash flows of $24 million per year. Galt has
permanent debt of $80 million, a corporate tax rate of 40%, and an unlevered cost of
capital of 12% and its cost of debt capital is 6%.The value of Galt’s equity using the
WACC method is closest to:
A) $150 million
B) $180 million
C) $230 million
D) $240 million
Consider the following stock price and shares outstanding data:
Assume that you have $100,000 to invest and you are interested in creating a
value-weighted portfolio of these four stocks. The number of shares of Wal-Mart that
you would hold in your portfolio is closest to:
A) 710
B) 1390
C) 1000
D) 870
Taggart Transcontinental has announced a $2 dividend. If Taggart’s last price
cum-dividend is $45, then, assuming perfect capital markets, what should its first
ex-dividend price be?
A) $0
B) $2
C) $43
D) $45
Which of the following statements is FALSE?
A) The payback investment rule is based on the notion that an opportunity that pays
back its initial investments quickly is a good idea.
B) An IRR will always exist for an investment opportunity.
C) A NPV will always exist for an investment opportunity.
D) In general, there can be as many IRRs as the number of times the project’s cash
flows change sign over time.
Which of the following statements is FALSE?
A) Because very little trading is required to maintain it, an equal-weighted portfolio is
called a passive portfolio.
B) If the number of shares in a value weighted portfolio does not change, but only the
prices change, the portfolio will remain value weighted.
C) The CAPM says that individual investors should hold the market portfolio, a
value-weighted portfolio of all risky securities in the market.
D) A price weighted portfolio holds an equal number of shares of each stock,
independent of their size.
Which of the following statements is FALSE?
A) Even after adjusting for personal taxes, the value of an unlevered firm exceeds the
value of a levered firm, and there is a tax advantage to using debt financing.
B) In Modigliani and Miller’s setting of perfect capital markets, firms could use any
combination of debt and equity to finance their investments without changing the value
of the firm.
C) When firms raise new capital from investors, they do so primarily by issuing debt.
D) In most years aggregate equity issues are negative, meaning that firms are reducing
the amount of equity outstanding by buying shares.
Which of the following statements is FALSE?
A) There may be reasons to exclude certain historical data as anomalous when
estimating beta.
B) Many practitioners use adjusted betas, which are calculated by averaging the
estimated beta with 1.0.
C) The beta estimated we obtain from linear regression can be very sensitive to outliers,
which are returns of unusually small magnitude.
D) If we use very old data to when estimating beta, they data may be unrepresentative
of the current market risk of the security.
Wyatt Oil has 25 million shares outstanding and has a marginal corporate tax rate of
40%. Wyatt Oil announces that it will payout $40 million in cash to investors through a
special dividend. Shareholders had previously assumed that Wyatt Oil would retain this
excess cash permanently. The amount that Wyatt Oil’s share price can be expected to
change upon this announcement is closest to:
A) $0.56
B) $0.64
C) $0.96
D) $1.56
Do corporate decisions that increase the value of the firm’s equity benefit society as a
whole?
A) Yes, as long as the value of the firm’s equity increases, society is better off.
B) Yes, as long as the increase in the value of the firm’s equity does not come at the
expense of others.
C) No, any gain in the value of the firm’s equity is always less than the cost to society.
D) No, any gains in the value of the firm’s equity are perfectly offset by societal costs.
Which of the following statements regarding the balance sheet is INCORRECT?
A) The balance sheet provides a snapshots of the firm’s financial position at a given
point in time.
B) The balance sheet lists the firm’s assets and liabilities.
C) The balance sheet reports stockholders’ equity on the right hand side.
D) The balance sheet reports liabilities on the left hand side.
If you forgo the $2,500 rebate and finance your new car through the dealership your
monthly payments (with payments made at the end of the month) will be closest to:
A) $520
B) $573
C) $595
D) $799
Which of the following investments offered the highest overall return over the past
eighty years?
A) Treasury Bills
B) S&P 500
C) Small stocks
D) Corporate bonds
Taggart Transcontinental is considering a $250 million investment to launch a new rail
line. The project is expected to generate a free cash flow of $32 million per year, and its
unlevered cost of capital is 8%. Taggart’s marginal corporate tax rate is 35%.Assume
that to fund the investment Taggart will take on $150 million in permanent debt with
the remainder of the investment funded through issuance of new equity. Assume
Taggart will incur a 2% (after-tax) underwriting fee on the new debt issue and a 5%
underwriting fee on the issuance of new equity. If management believes Taggart’s
current share price of $25 is $3 less than its true value, then the NPV of Taggart’s new
rail line is closest to:
A) $185 million
B) $195 million
C) $200 million
D) $235 million