The price today of a two-year default-free security with a face value of $1000 and an
annual coupon rate of 5% is closest to:
A) $1002.78
B) $1003.31
C) $1028.50
D) $1028.61
Nielson Motors (NM) is a newly public firm with 25 million shares outstanding. You
are doing a valuation analysis of Nielson and you estimate its free cash flow in the
coming year to be $40 million. You expect the firm’s free cash flows to grow by 4% per
year in subsequent years. Because the firm has only been listed on the stock exchange
for a short time, you do not have an accurate assessment of Nielson’s equity beta.
However, you do have the following data for another firm in the same industry:
Nielson has a much lower debt-equity ratio of .5, which is expected to remain stable,
and Nielson’s debt is risk free. Nielson’s corporate tax rate is 40%, the risk-free rate is
5%, and the expected return on the market portfolio is 10%.
Nielson’s estimated equity beta is closest to:
A) 0.95
B) 1.00
C) 1.25
D) 1.45
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 debt to equity ratio is closest to:
A) 0.24
B) 0.50
C) 0.75
D) 0.89
Your investment portfolio consists of $10,000 worth of Google stock. Suppose that the
risk-free rate is 4%, Google stock has an expected return of 14% and a volatility of
35%, and the market portfolio has an expected return of 12% and a volatility of 18%.
Assume that the CAPM assumptions hold.The expected return on the alternative
investment having the highest possible expected return while having the same volatility
as Google is closest to?
A) 21.6%
B) 19.6%
C) 23.4%
D) 35.0%
One factor that can affect the market risk of a project is its degree of operating leverage,
which is:
A) the relative proportion of operating assets versus non-operating assets.
B) the relative proportion of operating assets versus equity.
C) the relative proportion of operating expenses versus non-operating expenses.
D) the relative proportion of fixed versus variable costs.
An exchange traded fund (ETF) is a security that represents a portfolio of individual
stocks. Consider an ETF for which each share represents a portfolio of two shares of
International Business Machines (IBM), three shares of Merck (MRK), and three shares
of Citigroup Inc. (C). Suppose the current market price of each individual stock are
shown below:
The price per share of the ETF in a normal market is closest to:
A) $161.31
B) $322.62
C) $362.36
D) $483.93
Consider the following income statement for Kroger Inc. (all figures in $ Millions):
The total amount available to payout to all the investors in Kroger in 2005 is closest to:
A) $190 million
B) $847 million
C) $745 million
D) $290 million
Consider the following graph of the security market line:
Portfolio “C”:
A) is less risky than the market portfolio.
B) has a relatively lower expected return than predicted.
C) is underpriced.
D) has a negative alpha.
Big Cure and Little Cure are both pharmaceutical companies. Big Cure presently has a
potential “blockbuster” drug before the Food and Drug Administration (FDA) waiting
for approval. If approved, Big Cure’s blockbuster drug will produce $1 billion in net
income for Big Cure. Little Cure has 10 separate less important drugs before the FDA
waiting for approval. If approved, each of Little Cure’s drugs would produce $100
million in net income for Little Cure. The probability of the FDA approving a drug is
50%.
What is the expected payoff for Big Cure’s Blockbuster drug?
A) $100 million
B) $0
C) $1 billion
D) $500 million
Suppose Luther Industries is considering divesting one of its product lines. The product
line is expected to generate free cash flows of $2 million per year, growing at a rate of
3% per year. Luther has an equity cost of capital of 10%, a debt cost of capital of 7%, a
marginal tax rate of 35%, and a debt-equity ratio of 2. This product line is of average
risk and Luther plans to maintain a constant debt-equity ratio.
The unlevered value of Luther’s Product Line is closest to:
A) $25 million
B) $60 million
C) $45 million
D) $40 million
Consider the following list of projects:
Assume that your capital is constrained, so that you only have $600,000 available to
invest in projects. If you invest in the optimal combination of projects given your
capital constraint, then the total NPV for all the projects you invest in will be closest to:
A) $65,000
B) $80,000
C) $69,000
D) $111,000
Your great aunt Matilda put some money in an account for you on the day you were
born. This account pays 8% interest per year. On your 21st birthday the account balance
was $5,033.83.The amount of money that would be in the account if you left the money
there until your 65th birthday is closest to:
A) $29,556
B) $148,780
C) $168,824
D) $748,932
Suppose the current zero-coupon yield curve for risk-free bonds is as follows:
Consider a zero-coupon bond with a $1000 face value and 10 years left until maturity.
If the bond is currently trading for $459, then the yield to maturity on this bond is
closest to:
A) 7.5%
B) 10.4%
C) 9.7%
D) 8.1%
Tom’s portfolio consists solely of an investment in Merck stock. Merck has an expected
return of 13% and a volatility of 25%. The market portfolio has an expected return of
12% and a volatility of 18%. The risk-free rate is 4%. Assume that the CAPM
assumptions hold in the market.Assuming that Tom wants to maintain the current
expected return on his portfolio, then the minimum volatility that Tom could achieve by
investing in the market portfolio and risk-free investment is closest to:
A) 20%
B) 25%
C) 22%
D) 18%
d’Anconia Copper has $200 million in cash that it can use for a share repurchase.
Suppose instead that d’Anconia Copper invests the funds in an account paying 5%
interest for one year. Assume that the corporate tax rate is 35%, the individual capital
gains rate is 15% and the individual rate on ordinary income is 30%.
Net of ordinary income taxes, the amount that investors would have if they invested the
$200 million on their own is closest to:
A) $5.5 million
B) $6.5 million
C) $7.0 million
D) $10.0 million
Von Bora Corporation is expected pay a dividend of $1.40 per share at the end of this
year and a $1.50 per share at the end of the second year. You expect Von Bora’s stock
price to be $25.00 at the end of two years. Von Bora’s equity cost of capital is 10%.
The price you would be willing to pay today for a share of Von Bora stock, if you plan
to hold the stock for two years is closest to:
A) $23.15
B) $20.65
C) $21.95
D) $21.90
Vacinox is a biotechnology firm that is about to announce the results of its clinical trials
of a potential new vaccine. If the trials are successful, Vacinox stock will be worth $80
per share. However, if the trials are not successful, then Vacinox stock will only be
worth $12 per share. If on the morning that the announcement is schedule, Vacinox
stock is trading for $60.96, then the probability that investors place on the trials being
successful are closest to:
A) 48%
B) 50%
C) 60%
D) 72%
Which of the following statements is FALSE?
A) Securities that tend to move more than the market have betas higher than 0.
B) Securities whose returns tend to move in tandem with the market on average have a
beta of 1.
C) Beta corresponds to the slope of the best fitting line in the plot of the securities
excess returns versus the market excess return.
D) The statistical technique that identifies the bets-fitting line through a set of points is
called linear regression.
The following table summarizes prices of various default-free zero-coupon bonds
(expressed as a percentage of face value):
The yield to maturity for the two year zero-coupon bond is closest to:
A) 6.0%
B) 5.8%
C) 5.6%
D) 5.5%
The firm’s asset turnover measures:
A) the value of assets held per dollar of shareholder equity.
B) the return the firm has earned on its past investments.
C) the firm’s ability to sell a product for more than the cost of producing it.
D) how efficiently the firm is utilizing its assets to generate sales.