Fin 78239 | Course Paper

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Limited liability is an important feature of:

A. Sole proprietorships

B. Partnerships

C. Corporations

D. All of the above

The MM theory with taxes implies that firms should issue maximum debt. In practice,

this is not true because:

I) Debt is more risky than equity

II) Bankruptcy and its attendant costs is a disadvantage to debt

III) The payment of personal taxes may offset the tax benefit of debt

A. I only

B. II only

C. III only

D. II and III only

Generally, bonds issued in the following countries pay interest semi-annually.

I) USA, II) UK, III) Canada, IV) Germany, & V) Japan

A. I, II, III, & IV

B. I, II, III, & V

C. II, III, & IV only

D. None of the above

You are considering investing in a retirement fund that requires you to deposit $5,000

per year, and you want to know how much the fund will be worth when you retire.

What financial technique should you use to calculate this value?

A. Future value of a single payment

B. Future value of an annuity

C. Present value of an annuity

D. None of the above

The law of conservation of value implies that:

I) the mix of senior and subordinated debt does not affect the value of the firm

II) the mix of convertible and non-convertible debt does not affect the value of the firm

III) the mix of common stock and preferred stock does not affect the value of the firm

A. I only

B. II only

C. III only

D. I, II, and III

Interest represented by “r2” is:

A. Spot rate on a one-year investment (APR)

B. Spot rate on a two-year investment (APR)

C. Expected spot rate 2 years from today

D. Expected spot rate one year from today

Relative to the underlying stock, a call option always has:

A. a higher beta and a higher standard deviation of return

B. a lower beta and a higher standard deviation of return

C. a higher beta and a lower standard deviation of return

D. a lower beta and a lower standard deviation of return

Cash budget may be prepared on a

A. monthly basis

B. weekly basis

C. daily basis

D. all of the above

Weak form efficiency implies that past stock price(s)

A. patterns tend to repeat itself in the future

B. are major inputs to the investors for forming trading strategies

C. do not matter

D. none of the above

Monte Carlo simulation involves the following steps:

I) Step 1: Modeling the project

II) Step 2: Specifying probabilities

III) Step 3: Simulate the cash flows

IV) Step 4: Calculate present value

A. I and II only

B. I, II, and III only

C. II, III, and IV only

D. I, II, III, and IV

Net working capital is defined as:

A. The current assets in a business

B. The difference between current assets and current liabilities

C. The present value of all short-term cash flows

D. The difference between all assets and liabilities

High standard deviation always translates into high beta.

Mr. William expects to retire in 30 years and would like to accumulate $1 million in the

pension fund. If the annual interest rate is 12% per year, how much should Mr. Williams

put into the pension fund each month in order to achieve his goal? Assume that Mr.

Williams will deposit the same amount each month into his pension fund and also use

monthly compounding.

A. $286.13

B. $771.60

C. $345.30

D. None of the above

The following statements regarding the NPV rule and the rate of return rule are true

except:

A. Accept a project if its NPV > 0

B. Reject a project if the NPV < 0

C. Accept a project if its rate of return > 0

D. Accept a project if its rate of return > opportunity cost of capital

The market value of Cable Company’s equity is $60 million, and the market value of its

risk-free debt is $40 million. If the required rate of return on the equity is 15% and that

on the debt is 5%, calculate the company’s cost of capital. (Assume no taxes.)

A. 15%

B. 10%

C. 11%

D. None of the above

The exchange-traded fund (EFT) that tracks the Nasdaq 100 index is called:

A. SPDR

B. DIAMONDS

C. QQQQ

D. None of the above

Generally, investors interpret the announcement of an increase in dividends as:

A. bad news and the stock price drops

B. good news and the stock price increases

C. a non-event and does not affect the stock price

D. very bad news and the stock price plunges

The constant dividend growth formula P0 = Div1/(r – g) assumes:

I) the dividends are growing at a constant rate g forever.

II) r > g

III) g is never negative.

A. I only

B. II only

C. I and II only

D. III only

The following are examples of tangible assets except:

I) Machinery; II) Office buildings; III) Warehouse; IV) Training for employees

A. I only

B. I and II only

C. IV only

D. I, II, and III only

If the present value of $250 expected to be received one year from today is $200, what

is the discount rate?

A. 10%

B. 20%

C. 25%

D. None of the above

You would like to have enough money saved to receive a $50,000 per year perpetuity

after retirement so that you and your family can lead a good life. How much would you

need to save in your retirement fund to achieve this goal (assume that the perpetuity

payments starts on the day of retirement. The interest rate is 8%)?

A. $1,000,000

B. $675,000

C. $625,000

D. None of the above

Florida Company (FC) and Minnesota Company (MC) are both service companies.

Their historical return for the past three years are: FC: – 5%, 15%, 20%; MC: 8%, 8%,

20%. What is the variance of the portfolio with 50% of the funds invested in FC and

50% in MC (approximately)?

A. 85.75

B. 150

C. 55.75

D. None of the above

The following statements are true of dividend reinvestment plans (DRIPs):

I) offered by the companies to their shareholders

II) generally, new shares are issued at a discount

III) the dividends are taxable as ordinary income

A. I only

B. I and II only

C. I, II and III

D. III only

Florida Company (FC) and Minnesota Company (MC) are both service companies.

Their historical return for the past three years are: FC: – 5%, 15%, 20%; MC: 8%, 8%,

20%.

Calculate the standard deviation (S.D.) of return for FC and MC.

A. FC: 10% MC: 12%

B. FC: 17% MC: 9.8%

C. FC: 13.2% MC: 6.9%

D. None of the above

If a bond’s volatility is 5% and the interest rate changes by 0.5% (points) then the price

of the bond:

A. changes by 5%

B. changes by 2.5%

C. changes by 7.5%

D. none of the above

The pecking order theory of capital structure implies that:

I) Risky firms will end up borrowing more

II) Firms prefer internal finance

III) Firms prefer debt to equity when external financing is required

A. I only

B. II only

C. II and III only

D. III only

When preferred stock financing is also used by the firm; the after-tax weighted average

cost of capital (WACC) is calculated as follows,

A. WACC = rD (D/V) + rP (P/V) + rE (E/V); (where V = D + P + E)

B. WACC = rD (1 – TC)(D/V) + rP (P/V) + rE (E/V); (where V = D + P + E)

C. WACC = rD (D/V) + (1 – TC)[rP (P/V) + rE (E/V)]; (where V = D + P + E)

D. None of the above

The expectations hypothesis states that the forward interest rate is the:

I) expected future spot rate

II) always greater than the spot rate

III) yield to maturity

A. I only

B. II only

C. III only

D. II and III only

Internal growth rate is calculated as:

A. Internal growth rate = plowback ratio profit margin

B. Internal growth rate = plowback ratio return on equity

C. Internal growth rate = plowback ratio return on equity [equity/net assets]

D. None of the above

The beta of Nestle measured relative to its home market is:

A. 0.17

B. 1.54

C. 1.01

D. none of the above

Ms. Venus has $100 income this year and $110 next year. The market interest rate is

10% per year. Suppose Ms. Venus consumes $60 this year. What will be her

consumption next year?

A. $154

B. $170

C. $120

D. None of the above

A stock with a beta of zero would be expected to:

A. Have a rate of return equal to zero

B. Have a rate of return equal to the market risk premium

C. Have a rate of return equal to the risk-free rate

D. Have a rate of return equal to the market rate of return

The historical returns data for the past four years for Stock C and the stock market

portfolio returns are: Stock C: 10%, 30%, 20%,20%; Market Portfolio: 5%, 15%, 25%,

15%. Calculate the beta for the stock:

A. 0.86

B. 0.5

C. 1.5

D. none of the above

If the interest rate is 12%, what is the 2-year discount factor?

A. 0.7972

B. 0.8929

C. 1.2544

D. None of the above

If the stock makes a dividend payment before the expiration date then the put-call parity

is:

A. Value of call = value of put + share price – present value (PV) of dividend -PV of

exercise price

B. Value of call = value of put – share price + PV of dividend – PV of exercise price

C. Value of call = value of put + share price + PV of dividend + PV of exercise price

D. Value of call = value of put + share price + PV of dividend – PV of exercise price