Which of the following statements is false?
A) If a firm only needs to use the asset for a short time, it is probably less costly to lease
it than to buy and resell the asset.
B) While owners of assets are likely to resell them only if the assets are “lemons,” a
short-term lease can commit the user of an asset to return it regardless of its quality. In
this way leases can help mitigate the adverse selection problem in the used goods
market.
C) Car dealerships are in a better position to sell a used car at the end of a lease than a
consumer is.
D) If the asset’s tax depreciation deductions are faster than its lease payments, there are
tax gains from a true tax lease if the lessor is in a lower tax bracket than the lessee.
Answer:
Use the information for the question(s) below.
Electronic Gaming Incorporated (EGI) is a firm with no debt and its 20 million shares
are currently trading for $16 per share. Based on the prospects for EGI’s new hand held
video game, management feels the true value of the firm is $20 per share. Management
believes that the share price will reflect this higher value after the video game is
released next fall. EGI has already announced plans to raise $100 million from
investors to build a new factory.
Assume that EGI decides to raise the $100 million through the issuance of new shares
prior to the release of the new video game. EGI’s share price following the release of
the new video game will be closest to:
A) $18.00
B) $19.00
C) $20.00
D) $16.00
Answer:
Which of the following statements is false?
A) All else being equal, larger firms, because they are more diversified, have an
increased probability of bankruptcy.
B) To justify a takeover based on operating losses, management would have to argue
that the tax savings are over and above what the firm would save using carryback and
carryforward provisions.
C) It is possible to combine two companies with the result that the earnings per share of
the merged company exceed the premerger earnings per share of either company, even
when the merger itself creates no economic value.
D) When an acquirer buys a private target, it provides the target’s owners with a way to
reduce their risk exposure by cashing out their investment in the private target and
reinvesting in a diversified portfolio.
Answer:
A(n) ________ may occur if a major shareholder desires to sell a large number of
shares but the market for the shares is not sufficiently liquid to sustain such a large sale
without severely affecting the price.
A) open market share repurchases
B) Dutch auction share repurchase
C) tender offer
D) targeted repurchase
Answer:
Consider the following two projects:
The NPV of project B is closest to:
A) 12.6
B) 23.3
C) 12.0
D) 15.0
Answer:
Use the following information to answer the question(s) below.
Rearden Metals has a current stock price of $30 share, is expected to pay a dividend of
$1.20 in one year, and its expected price right after paying that dividend is $33.
Rearden’s equity cost of capital is closest to:
A) 4.0%
B) 6.4%
C) 8.2%
D) 10.0%
E) 14.0%
Answer:
Use the following information to answer the question(s) below.
Suppose that the market portfolio is equally likely to increase by 24% or decrease by
8%. Security “X” goes up on average by 29% when the market goes up and goes down
by 11% when the market goes down. Security “Y” goes down on average by 16% when
the market goes up and goes up by 16% when the market goes down. Security “Z” goes
up on average by 4% when the market goes up and goes up by 4% when the market
goes down.
The expected return on the market rate is closest to:
A) 0%
B) 4%
C) 8%
D) 16%
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 most sensitive to a one percent increase in the YTM?
A) Bond A
B) Bond B
C) Bond C
D) Bond D
Answer:
Use the following information for ECE incorporated:
Perrigo’s enterprise value is closest to:
A) $952.16 million
B) $3,580.14 million
C) $4,168.06 million
D) $4,425.15 million
Answer:
Use the following information to answer the question(s) below.
Rearden Metal has earnings per share of $2. It has 10 million shares outstanding and is
trading at $20 per share. Rearden Metal is thinking of buying Associated Steel, which
has earnings per share of $1.25, 4 million shares outstanding, and a price per share of
$15. Rearden Metal will pay for Associated Steel by issuing new shares. There are no
expected synergies from the transaction.
If Rearden offers an exchange ratio such that, at current pre-announcement share prices
for both firms, the offer represents a 20% premium to buy Associated Steel, then
Rearden’s earnings per share after the merger will be closest to:
A) $1.85
B) $1.90
C) $2.00
D) $2.25
Answer:
Use the following information to answer the question(s) below.
Two years ago the Krusty Krab Restaurant purchased a grill for $50,000. The owner,
Eugene Krabs, has learned that a new grill is available that will cook Krabby Patties
twice as fast as the existing grill. This new grill can be purchased for $80,000 and
would be depreciated straight line over 8 years, after which it would have no salvage
value. Eugene Krab expects that the new grill will produce EBITDA of $50,000 per
year for the next eight years while the existing grill produces EBITDA of only $35,000
per year. The current grill is being depreciated straight line over its useful life of 10
years after which it will have no salvage value. All other operating expenses are
identical for both grills. The existing grill can be sold to another restaurant now for
$30,000. The Krusty Krab’s tax rate is 35%.
The incremental cash flow that the Krusty Krab will incur today (Year 0) if they elect to
upgrade to the new grill is closest to:
A) -80,000
B) -50,000
C) -46,500
D) +30,000
Answer:
Consider the following equation:
S x =
The term in this equation is
A) the appropriate cost of capital from the standpoint of a U.S. investor.
B) the risk-free rate for a foreign investor.
C) the risk-free rate for a U.S. investor.
D) the appropriate cost of capital from the standpoint of a foreign investor.
Answer:
Use the information for the question(s) below.
Consider the following tax rates:
*The current tax rates are set to expire in 2008 unless Congress extends them. The tax
rates shown are for financial assets held for one year. For assets held less than one year,
capital gains are taxed at the ordinary income tax rate (currently 35% for the highest
bracket); the same is true for dividends if the assets are held for less than 61 days.
The effective dividend tax rate for a buy and hold individual investor in 1999 is closest
to:
A) 25%
B) 0%
C) 20%
D) 40%
Answer:
Use the following information to answer the question(s) below:
The after tax interest expense in 2010 is closest to:
A) 0
B) 2,856
C) 5,304
D) 8,160
E) 11,016
Answer:
Use the information for the question(s) below.
Suppose that Texas Trucking (TT) has earnings per share of $3.45 and EBITDA of $45
million. TT also has 5 million shares outstanding and debt o $150 million (net of cash).
You believe that Oklahoma Logistics and Transport (OLT) is comparable to TT in terms
of its underlying business, but OLT has no debt. OLT has a P/E of 12.5 and an
enterprise value to EBITDA multiple of 7.
Based upon the enterprise value to EBITDA ratio, the value of a share of Texas
Trucking is closest to:
A) $33.00
B) $82.50
C) $43.10
D) $21.25
Answer:
Consider the following balance sheet:
Luther’s quick ratio for 2008 is closest to:
A) 0.77
B) 0.87
C) 1.15
D) 1.30
Answer:
Use the tables for the question(s) below.
Pro Forma Income Statement for Ideko, 2005-2010
Pro Forma Balance Sheet for Ideko, 2005-2010
Assuming that Ideko has a EBITDA multiple of 9.4, then the continuation enterprise
value of Ideko in 2010 is closest to:
A) $181.7 million
B) $152.8 million
C) $272.8 million
D) $301.7 million
Answer:
The NPV profile
A) shows the payback period – the point at which NPV is positive.
B) shows the internal rate of return – the point at which NPV is zero.
C) shows the NPV over a range of discount rates.
D) B and C are correct.
Answer:
Accounts payable is a
A) Long-term Liability.
B) Current Asset.
C) Long-term Asset.
D) Current Liability.
Answer:
Which of the following statements is false?
A) Firms may hold inventory because factors such as seasonality in demand mean that
customer purchases do not perfectly match the most efficient production cycle.
B) Inventory helps minimize the risk that the firm will not be able to obtain an input it
needs for production.
C) If a firm holds too much inventory, stock-outs, the situation when a firm runs out of
product, may occur, leading to lost sales.
D) Because excessive inventory uses cash, efficient management of inventory increases
firm value.
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 $40 per share.
The weight on Abbott Labs in your portfolio is:
A) 50%
B) 40%
C) 30%
D) 20%
Answer:
Use the information for the question(s) below.
Omicron Industries’ Market Value Balance Sheet ($ 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 0 is closest to:
A) $38.75
B) $75.50
C) $50.25
D) $10.25
Answer:
Use the following information to answer the question(s) below.
Using the average historical excess returns for both Wyatt Oil and the Market portfolio,
your estimate of Wyatt Oil’s Beta is closest to:
A) 0.75
B) 0.84
C) 1.00
D) 1.19
Answer:
The difference between a firm’s operating cycle and its cash cycle is
A) there is no difference between the cash and operating cycles.
B) its account receivable days.
C) its accounts payable days.
D) its inventory days.
Answer:
Use the following information to answer the question(s) below.
Rearden Metal has earnings per share of $2. It has 10 million shares outstanding and is
trading at $20 per share. Rearden Metal is thinking of buying Associated Steel, which
has earnings per share of $1.25, 4 million shares outstanding, and a price per share of
$15. Rearden Metal will pay for Associated Steel by issuing new shares. There are no
expected synergies from the transaction.
If Rearden offers an exchange ratio such that, at current pre-announcement share prices
for both firms, the offer represents a 20% premium to buy Associated Steel, then the
price per share of the Associated Steel immediately after the announcement will be
closest to:
A) $15.00
B) $17.20
C) $18.60
D) $19.10
Answer:
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
Answer:
Use the table for the question(s) below.
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 three year zero-coupon bond is closest to:
A) 5.4%
B) 5.8%
C) 5.6%
D) 6.0%
Answer:
The Sarbanes-Oxley Act (SOX) overhauled incentives and the independence in the
auditing process by
A) requiring the CEO and CFO to return bonuses or profits from the sale of stock that
are later shown to be due to misstated financial reports.
B) imposing large compliance costs on small companies.
C) requiring auditing firms to have long-standing relationships with their clients and
receive lucrative auditing and consulting fees from them.
D) putting strict limits on the amount of non-audit fees (consulting or otherwise) that an
accounting firm can earn from a firm that it audits.
Answer:
Use the following information to answer the question(s) below.
(Please use a copy of the Cumulative Probabilities for the standard normal distribution
for these problems.)
Taggart Transcontinental’s stock has a volatility of 25% and a current stock price of $40
per share. Taggart pays no dividends. The risk-free interest rate is 4%.
The Black-Scholes value of a one-year call option on Taggart stock with a strike price
of $50 is closest to:
A) $1.45
B) $3.15
C) $4.75
D) $9.50
Answer:
Suppose that Luther’s beta is 0.9. If the market risk premium is 8% and the risk-free
interest rate is 4%, then then expected return for Luther stock is?
A) 7.6%
B) 11.6%
C) 11.2%
D) 12.9%
Answer:
Which of the following statements is false?
A) The Sharpe ratio measures the ratio of volatility-to-reward provided by a portfolio.
B) Borrowing money to invest in stocks is referred to as buying stocks on margin.
C) The Sharpe ratio is the number of stand deviations the portfolio’s return would have
to fall to under-perform the risk-free investment.
D) The slope of the line through a given portfolio is often referred to as the Sharpe ratio
of the portfolio.
Answer:
Which of the following statements is false?
A) The tradeoff theoryweighs the costs of debt that result from shielding cash flows
from taxes against the benefits from the effects of financial distress associated with
leverage.
B) Leverage has costs as well as benefits.
C) According to the tradeoff theory, the total value of a levered firm equals the value of
the firm without leverage plus the present value of the tax savings from debt, less the
present value of financial distress costs.
D) Firms have an incentive to increase leverage to exploit the tax benefits of debt. But
with too much debt, they are more likely to risk default and incur financial distress
costs.
Answer:
Use the information for the question(s) below.
Iota Industries Market Value Balance Sheet ($ Millions) and Cost of Capital
Iota Industries New Project Free Cash Flows
Assume that this new project is of average risk for Iota and that the firm wants to hold
constant its debt to equity ratio.
Iota’s weighted average cost of capital is closest to:
A) 8.40%
B) 9.75%
C) 10.85%
D) 11.70%
Answer:
Consider the following equation:
S x =
The term S in this equation is
A) the forward exchange rate.
B) the amount of foreign currency.
C) the future spot exchange rate.
D) the current spot exchange rate.
Answer:
Which of the following statements is false?
A) Beta differs from volatility.
B) The risk premium investors can earn by holding the market portfolio is the
difference between the market portfolio’s expected return and the risk-free interest rate.
C) Stocks in cyclical industries, in which revenues tend to vary greatly over the
business cycle, are likely to be more sensitive to systematic risk and have higher betas
than stocks in less sensitive industries.
D) If we assume that the market portfolio (or the S&P 500) is efficient, then changes in
the value of the market portfolio represent unsystematic shocks to the economy.
Answer: