The cost of capital may be different for a foreign project than for an equivalent
domestic project because foreign projects may be more or less risky.
a.True
b.False
Mike Flannery holds the following portfolio:
What is the portfolio’s beta?
a.1.06
b.1.17
c.1.29
d.1.42
e.1.56
Firms use defensive tactics to fight off undesired mergers. These tactics do NOT
include
a.raising antitrust issues.
b.developing poison pills.
c.getting white knights to bid for the firm.
d.repurchasing their own stock.
e.engaging in risk arbitrage.
Lintner Beverage Corp. reported the following information from their financial
statements:
Operating income (EBIT) = $20,000,000
Interest payments on long-term debt = $1,750,000
Dividend income = $1,000,000
Calculate Lintner’s total tax liability using the corporate tax schedule below:
a.$6,167,875
b.$6,492,500
c.$6,817,125
d.$7,157,982
e.$7,515,881
Which of the following statements is CORRECT?
a.When diversifiable risk has been diversified away, the inherent risk that remains is
market risk, which is constant for all stocks in the market.
b.Portfolio diversification reduces the variability of returns on an individual stock.
c.Risk refers to the chance that some unfavorable event will occur, and a probability
distribution is completely described by a listing of the likelihoods of unfavorable
events.
d.The SML relates a stock’s required return to its market risk. The slope and intercept of
this line cannot be controlled by the firms’ managers, but managers can influence their
firms’ positions on the line by such actions as changing the firm’s capital structure or the
type of assets it employs.
e.A stock with a beta of -1.0 has zero market risk if held in a 1-stock portfolio.
Which of the following statements is CORRECT?
a.A large portfolio of randomly selected stocks will always have a standard deviation of
returns that is less than the standard deviation of a portfolio with fewer stocks,
regardless of how the stocks in the smaller portfolio are selected.
b.Diversifiable risk can be reduced by forming a large portfolio, but normally even
highly-diversified portfolios are subject to market (or systematic) risk.
c.A large portfolio of randomly selected stocks will have a standard deviation of returns
that is greater than the standard deviation of a 1-stock portfolio if that one stock has a
beta less than 1.0.
d.A large portfolio of stocks whose betas are greater than 1.0 will have less market risk
than a single stock with a beta = 0.8.
e.If you add enough randomly selected stocks to a portfolio, you can completely
eliminate all of the market risk from the portfolio.
FAS 13 requires that for an unqualified audit report, financial (or capital) leases must be
included in the balance sheet by reporting the
a.residual value as a fixed asset.
b.residual value as a liability.
c.present value of future lease payments as an asset and also showing this same amount
as an offsetting liability.
d.undiscounted sum of future lease payments as an asset and as an offsetting liability.
e.undiscounted sum of future lease payments, less the residual value, as an asset and as
an offsetting liability.
You recently sold 200 shares of Disney stock, and the transfer was made through a
broker. This is an example of:
a.A money market transaction.
b.A primary market transaction.
c.A secondary market transaction.
d.A futures market transaction.
e.An over-the-counter market transaction.
Torrence Inc. has the following data. If it uses the residual dividend model, how much
total dividends, if any, will it pay out?
a.$183,264
b.$192,909
c.$203,063
d.$213,750
e.$225,000
At the beginning of the year Ham Inc.’s management is considering making an offer to
buy Egg Corporation. Egg’s projected operating income (EBIT) for the current year is
$30 million, but Ham believes that if the two firms were merged, it could consolidate
some operations, reduce Egg’s expenses, and raise its EBIT to $40 million. Neither
company uses any debt, and they both pay income taxes at a 40% rate. Ham has a better
reputation among investors, who regard it as better managed and also less risky, so
Ham’s stock has a P/E ratio of 15 versus a P/E of 12 for Egg. Since Ham’s management
will be running the entire enterprise after a merger, investors will value the resulting
corporation based on Ham’s P/E. Based on expected market values, how much synergy
should the merger create?
a.$129.96
b.$136.80
c.$144.00
d.$151.20
e.$158.76
Jim Angel holds a $200,000 portfolio consisting of the following stocks:
What is the portfolio’s beta?
a.0.938
b.0.988
c.1.037
d.1.089
e.1.143
How much should you be willing to pay for an account today that will have a value of
$1,000 in 10 years under continuous compounding if the nominal rate is 10%?
a.$349.49
b.$367.88
c.$386.27
d.$405.59
e.$425.87
Using the Security Market Line concept in capital budgeting, which of the following
statements is CORRECT?
a.If the expected rate of return on a given capital project lies above the SML, the project
should be accepted even if its beta is greater than the beta of the firm’s average project.
b.If a project’s return lies below the SML, it should be rejected if it has a beta greater
than the firm’s existing beta but accepted if its beta is below the firm’s beta.
c.If two mutually exclusive projects’ expected returns are both above the SML, the
project with the lower risk should be accepted.
d.If a project’s expected rate of return is greater than the expected rate of return on an
average project, it should be accepted.
e.None of the statements is correct.
The return on invested capital (ROIC) differs from the return on assets (ROA). First,
ROIC is based on total invested capital rather than total assets. Second, the numerator
of the ROIC is after-tax operating income rather than net income.
a.True
b.False
Which of the following statements best describes the optimal capital structure?
a.The optimal capital structure is the mix of debt, equity, and preferred stock that
maximizes the company’s earnings per share (EPS).
b.The optimal capital structure is the mix of debt, equity, and preferred stock that
maximizes the company’s stock price.
c.The optimal capital structure is the mix of debt, equity, and preferred stock that
minimizes the company’s cost of equity.
d.The optimal capital structure is the mix of debt, equity, and preferred stock that
minimizes the company’s cost of debt.
e.The optimal capital structure is the mix of debt, equity, and preferred stock that
minimizes the company’s cost of preferred stock.
Assume that Besley Golf Equipment commenced operations on January 1, 2014, and it
was granted permission to use the same depreciation calculations for shareholder
reporting and income tax purposes. The company planned to depreciate its fixed assets
over 15 years, but in December 2014 management realized that the assets would last for
only 10 years. The firm’s accountants plan to report the 2014 financial statements based
on this new information. How would the new depreciation assumption affect the
company’s financial statements?
a.The firm’s reported net fixed assets would increase.
b.The firm’s EBIT would increase.
c.The firm’s reported 2014 earnings per share would increase.
d.The firm’s cash position in 2014 and 2015 would increase.
e.The provision will increase the company’s tax payments.
Which of the following statements is CORRECT?
a.If the returns on two stocks are perfectly positively correlated (i.e., the correlation
coefficient is +1.0) and these stocks have identical standard deviations, an equally
weighted portfolio of the two stocks will have a standard deviation that is less than that
of the individual stocks.
b.A portfolio with a large number of randomly selected stocks would have more market
risk than a single stock that has a beta of 0.5, assuming that the stock’s beta was
correctly calculated and is stable.
c.If a stock has a negative beta, its expected return must be negative.
d.A portfolio with a large number of randomly selected stocks would have less market
risk than a single stock that has a beta of 0.5.
e.According to the CAPM, stocks with higher standard deviations of returns must also
have higher expected returns.