Which of the following statements is false?
A) In a rights offer, the firm offers the new shares only to existing shareholders.
B) Secondary shares are shares sold by existing shareholders, including the company’s
founder.
C) If a firm’s management is concerned that its equity may be under priced in the
market, by using a rights offering the firm can continue to issue equity without
imposing a loss on its current shareholders.
D) In the United States most offers are rights offers.
Answer:
Which of the following statements is false?
A) Stock returns will tend to move together if they are affect similarly by economic
events.
B) Stocks in the same industry tend to have more highly correlated returns than stocks
in different industries.
C) Almost all of the correlations between stocks are negative, illustrating the general
tendency of stocks to move together.
D) With a positive amount invest in each stock, the more the stocks move together and
the higher their covariance or correlation, the more variable the portfolio will be.
Answer:
If Firm A and Firm B are in the same industry and use the same production method, and
Firm A’s asset turnover is higher than that of Firm B, then all else equal we can
conclude
A) Firm A is more efficient than Firm B.
B) Firm A has a lower dollar amount of assets than Firm B.
C) Firm A has higher sales than Firm B.
D) Firm A has a lower ROE than Firm B.
Answer:
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.
Answer:
Use the information for the question(s) below.
Assume that Rose Corporation’s (RC) EBIT is not expected to grow in the future and
that all earnings are paid out as dividends. RC is currently an all equity firm. It expects
to generate earnings before interest and taxes (EBIT) of $6 million over the next year.
Currently RC has 5 million shares outstanding and its stock is trading for a price of
$12.00 per share. RC is considering borrowing $12 million at a rate of 6% and using the
proceeds to repurchase shares at the current price of $12.00.
Following the borrowing of $12 and subsequent share repurchase, the equity cost of
capital for RC is closest to:
A) 12%
B) 9%
C) 11.0%
D) 10%
Answer:
Use the information for the question(s) below.
Luther Industries is in the process of selling shares of stock in an auction IPO. At the
end of the bidding period, Luther’s investment bank has received the following bids:
The proceeds from the IPO be if Luther is selling 1.25 million shares is closest to:
A) $20.6 million
B) $21.6 million
C) $21.1 million
D) $20.9 million
Answer:
Consider the following equation:
E +D = U = A
The A in this equation represents
A) the value of the firm’s debt.
B) the market value of the firm’s assets.
C) the value of the firm’s equity.
D) the value of the firm’s unlevered equity.
Answer:
Use the information for the question(s) below.
Omicron Industries’ Market Value Balance Sheet ($ Millions)
and Cost of Capital
Omicron Industries New Project Free Cash Flows
Assume that this new project is of average risk for Omicron and that the firm wants to
hold constant its debt to equity ratio.
The Debt Capacity for Omicron’s new project in year 1 is closest to:
A) $38.75
B) $48.25
C) $50.25
D) $58.00
Answer:
An investment is said to be liquid if the investment
A) has large day to day fluctuations in price.
B) has a large bid-ask spread.
C) can easily be converted into cash.
D) is traded on a stock exchange.
Answer:
Which of the following statements is false?
A) The Check Clearing for the 21st Century Act (Check 21), which became effective on
October 28, 2004, eliminated the disbursement float due to the check-clearing process.
B) Trade credit is, in essence, a loan from the selling firm to its customer.
C) The accounts receivable balance represents the amount that a firm owes its suppliers
for goods that it has received but for which it has not yet paid.
D) Providing financing at below-market rates is an indirect way to lower prices for only
certain customers.
Answer:
According to MM Proposition 1, the stock price for With is closest to:
A) $8.00
B) $24.00
C) $6.00
D) $12.00
Answer:
Consider the following two projects:
Assume that projects A and B are mutually exclusive. The correct investment decision
and the best rational for that decision is to
A) invest in project A since NPVB < NPVA.
B) invest in project B since IRRB > IRRA.
C) invest in project B since NPVB > NPVA.
D) invest in project A since NPVA > 0.
Answer:
Consider the following equation:
= (1 + ) – 1
the term in this equation refers to
A) the cost of capital in terms of dollars.
B) the risk-free rate of interest on the yen.
C) the risk-free rate of interest on the dollar.
D) the cost of capital for the firm in terms of yen.
Answer:
Use the following information to answer the question(s) below.
John Galt is a mutual fund manager at Atlas Asset Management. He can generate an
alpha of 2% a year up to $500 million of invested capital. After that amount his skills
are spread too thin, so he cannot add value and his alpha is zero for all investments over
$500 million. Atlas Asset Management charges a fee of 0.80% on the total amount of
money under management. Assume that there are always investors looking for positive
alpha investments and no investor would invest in a fund with a negative alpha. Assume
that the fund is in equilibrium, meaning that no investor either takes out money or
wishes to invest new money into the fund.
The amount of fee income that Galt’s fund will generate is closest to:
A) $3.75 million
B) $8.00 million
C) $10.00 million
D) $25.00 million
Answer:
In November 2009, Perrigo Co. (PRGO) had a share price of $39.20. They had 91.33
million shares outstanding, a market-to-book ratio of 3.76. In addition, PRGO had
$845.01 million in outstanding debt, $163.82 million in net income, and cash of
$257.09 million.
Perrigo’s earnings per share (EPS) is closest to:
A) $0.19
B) $1.79
C) $2.81
D) $3.76
Answer:
Given that Rose issues new debt of $50 million initially to fund the acquisition, the
present value of the interest tax shield for this acquisition is closest to:
A) $24 million
B) $50 million
C) $20 million
D) $15 million
Answer:
Which of the following statements is false?
A) Because capital expenditures can vary substantially from period to period, most
practitioners rely on enterprise value to free cash flow multiples.
B) Common multiples to consider are enterprise value to EBIT, EBITDA, and free cash
flow.
C) If two stocks have the same payout and EPS growth rates as well as equivalent risk,
then they should have the same P/E ratio.
D) Looking at enterprise value as a multiple of sales can be useful if it is reasonable to
assume that the firms will maintain similar margins in the future.
Answer:
Use the table for the question(s) below.
Consider the following four bonds that pay annual coupons:
Which of the four bonds is the least sensitive to a one percent increase in the YTM?
A) Bond A
B) Bond B
C) Bond C
D) Bond D
Answer:
You are offered an investment that offers and effective annual rate of 8%. If this
investment offers continuous compounding, then the APR for this investment is closest
to:
A) 7.70%
B) 8.00%
C) 8.25%
D) 8.33%
Answer:
Which of the following statements regarding lines of credit is false?
A) The line of credit agreement may also stipulate that at some point in time the
outstanding balance must be zero. This policy ensures that the firm does not use the
short-term financing to finance its long-term obligations.
B) A revolving line of creditis an uncommitted line of credit that involves an informal
agreement from the bank for a longer period of time, typically two to three years.
C) The line of credit may be uncommitted, meaning it is an informal agreement that
does not legally bind the bank to provide the funds.
D) A revolving line of credit with no fixed maturity is called evergreen credit.
Answer:
A project you are considering is expected to provide benefits worth $225,000 in one
year. If the risk-free rate of interest (rf) is 8%, then the value of the benefits of this
project today are closest to:
A) $190,333
B) $208,333
C) $225,000
D) $243,000
Answer:
Which of the following statements is false?
A) To improve the performance of their portfolios, investors who are holding the
market portfolio will compare the expected return of each security with its required
return from the security market line.
B) The Sharpe ratio of a portfolio will increase if we sell stocks with positive alphas.
C) When a stock’s alpha is not zero, investors can improve upon the performance of the
market portfolio.
D) When the market portfolio is efficient, all stocks are on the security market line and
have an alpha of zero.
Answer:
Use the information for the question(s) below.
Suppose you invest $20,000 by purchasing 200 shares of Abbott Labs (ABT) at $50 per
share, 200 shares of Lowes (LOW) at $30 per share, and 100 shares of Ball Corporation
(BLL) at $40 per share.
The weight on Lowes in your portfolio is:
A) 40%
B) 20%
C) 50%
D) 30%
Answer:
The volatility of your of your investment is closest to:
A) 40%
B) 20%
C) 30%
D) 24%
Answer:
Use the figure for the question(s) below.
This graph depicts the payoffs of
A) a short position in a put option at expiration.
B) a short position in a call option at expiration.
C) a long position in a put option at expiration.
D) a long position in a call option at expiration.
Answer:
Use the following information to answer the question(s) below.
Consider an American put option on Rearden Metal stock with a strike price of $60 and
one year to expiration. Assume that Rearden pays no dividends, is stock is currently
trading at $15 per share, and the one year interest rate is 5%. Also assume that it is
optimal to exercise this put option early.
The maximum value of a one-year American call option on Rearden Metal with a strike
price of $60 per share is closest to:
A) $0
B) $1.84
C) $2.48
D) $2.86
Answer:
Consider the following equation:
E + D = U = A
The U in this equation represents
A) the value of the firm’s equity.
B) the market value of the firm’s assets.
C) the value of the firm’s unlevered equity.
D) the value of the firm’s debt.
Answer:
Use the information for the question(s) below.
Consider two firms, ChihuahuaCorporation and Bernard Industries that are each
expected to pay the same $1.5 million dollar dividend every year in perpetuity.
Chihuahua Corporation is riskier and has a cost of capital of 15%. Bernard Industries is
not as shaky as Chihuahua, so Bernard has a cost of capital of only 10%. Assume that
the market portfolio is not efficient. Both stocks have the same beta and the CAPM
would assign them both an expected return of 12% to both.
The alpha for Bernard is closest to:
A) +5%
B) -2%
C) -3%
D) +2%
Answer:
Which of the following statements is false?
A) Short-term margin loans from a broker are often 1% to 2% lower than the rates paid
on short-term Treasury securities.
B) In the real world investors have different information and expectations regarding
securities.
C) The SML is still valid when interest rates differ.
D) When borrowing and lending occur at different rates there are different tangent
portfolios identified.
Answer:
Consider the following balance sheet:
The change in Luther’s quick ratio from 2008 to 2009 is closest to:
A) a decrease of .10
B) an increase of .10
C) a decrease of .15
D) an increase of .15
Answer:
When we express the value of a cash flow or series of cash flows in terms of dollars
today, we call it the ________ of the investment. If we express it in terms of dollars in
the future, we call it the ________.
A) present value; future value
B) future value; present value
C) ordinary annuity; annuity due
D) discount factor; discount rate
Answer:
Insurance that compensates for the loss or unavoidable absence of crucial employees in
the firm is called
A) key personnel insurance.
B) business liability insurance.
C) property insurance.
D) business interruption insurance.
Answer: