Use the figure for the question(s) below.
Consider the following graph of the security market line:
Which of the following statements regarding portfolio “A” is/are correct?
1. Portfolio “A” has a positive alpha.
2. Portfolio “A” is overpriced.
3. Portfolio “A” is less risky than the market portfolio.
4. Portfolio “A” should not exist if the market portfolio is efficient.
A) 1 and 2
B) 1, 3, and 4
C) 1 and 3
D) 1, 2, 3, and 4
Use the following information to answer the question(s) below.
Nielson Motors sold 10 million shares of stock in an SEO. The market price of
Nielson’s stock at the time was $37.50. Of the 10 million shares sold, 4 million shares
were primary shares sold by the company, and the remaining 6 million shares were
being sold by the venture capital investors. Assume the underwriter charges 4% of the
gross proceeds as an underwriting fee which is shared proportionately between the
primary and secondary shares.
The amount of money raised by Nielson Motors is closest to:
A) $144 million
B) $150 million
C) $216 million
D) $219 million
Use the following information to answer the question(s) below:
If Ideko’s future expected growth rate is 5%, then the estimated free cash flow for 2011
is closest to:
A) 6,568
B) 11,151
C) 11,218
D) 12,137
E) 19,314
Use the table for the question(s) below.
Capital Structure and Unlevered Beta Estimates for Comparable Firms
If the risk-free rate of interest is 6% and the market risk premium has historically
averaged 5%, then the cost of capital for Oakley is closest to:
A) 13.5%
B) 10.2%
C) 9.1%
D) 14.7%
The person charged with running the corporation by instituting the rules and policies set
by the board of directors is called
A) the Chief Operating Officer.
B) the Company President.
C) the Chief Executive Officer.
D) the Chief Financial Officer.
Use the information for the question(s) below.
Ford Motor Company is considering launching a new line of Plug-in Electric SUVs.
The heavy advertising expenses associated with the new SUV launch would generate
operating losses of $35 million next year. Without the new SUV, Ford expects to earn
pre-tax income of $80 million from operations next year. Ford pays a 30% tax rate on
its pre-tax income.
The amount that Ford Motor Company owe in taxes next year without the launch of the
new SUV is closest to:
A) $24.0 million
B) $56.0 million
C) $31.5 million
D) $13.5 million
Which of the following statements is false?
A) The data show a clear preference for equity as a source of external financing for the
total population of U.S. firms.
B) Debt as a fraction of firm value has varied in a range from 30-45% for the average
firm.
C) Capital expenditures greatly exceed firms’ external financing, implying that most
investment and growth is supported by internally generated funds, such as retained
earnings.
D) Firms in growth industries like biotechnology or high technology carry very little
debt, whereas airlines, auto makers, utilities, and financial firms have high leverage
ratios.
Which of the following formulas is incorrect?
A) P0 = + + … +
B) P0 =
C) rE =
D) P0 =
Use the information for the question(s) below.
Epiphany Industries is considering a new capital budgeting project that will last for
three years. Epiphany plans on using a cost of capital of 12% to evaluate this project.
Based on extensive research, it has prepared the following incremental cash flow
projects:
The free cash flow for the last year of Epiphany’s project is closest to:
A) $53,000
B) $38,000
C) $35,000
D) $43,000
Use the information for the question(s) below.
Suppose that you currently have $250,000 invested in a portfolio with an expected
return of 12% and a volatility of 10%. The efficient (tangent) portfolio has an expected
return of 17% and a volatility of 12%. The risk-free rate of interest is 5%.
The Sharpe ratio for your portfolio is closest to:
A) 1.2
B) 0.6
C) 1.0
D) 0.7
Consider a five-year, default-free bond with an annual coupon rate of 5% and a face
value of $1000. The YTM on this bond is closest to:
A) 3.85%
B) 4.20%
C) 4.35%
D) 4.40%
A currency forward contract specifies all of the following except
A) the amount of currency to exchange.
B) the spot exchange rate.
C) the delivery date on which the exchange will take place.
D) the currencies to be exchanged.
Consider the following two projects:
When choosing between projects, an alternative to comparing their IRRs is
A) to compute the incremental IRR, which tells us the discount rate at which it becomes
profitable to switch from one project to the other.
B) to compute the incremental payback period, which tells us the number of years
during which it becomes profitable to switch from one project to the other.
C) to compute the incremental NPV, which tells us the discount rate at which it
becomes profitable to switch from one project to the other.
D) There is no alternative selection criterion to comparing IRRs.
Use the table for the question(s) below.
Capital Structure and Unlevered Beta Estimates for Comparable Firms
The unlevered beta for Luxottica is closest to:
A) 1.00
B) 0.60
C) 0.70
D) 1.50
You expect Whirlpool Corporation (WHR) to have earnings per share of $6.10 over the
coming year. If the average P/E ratio for the appliance industry sector is 17.0, the value
of a share of Whirlpool stock based upon the comparables approach is closest to:
A) $103.75
B) $27.90
C) $35.90
D) $23.10
Use the following information to answer the question(s) below.
Dagny Taggart has just purchased a home and taken out a $400,000 mortgage. The
mortgage has a 30-year term with monthly payments and has an APR of 5.4%.
The total amount of principal that Dagny will pay during the first month of her
mortgage is closest to:
A) $246
B) $446
C) $1,800
D) $2,245
vSuppose a security with a risk-free cash flow of $1000 in one year trades for $909
today. If there are no arbitrage opportunities, then the current risk-free interest rate is
closest to:
A) 8%
B) 10%
C) 11%
D) 12%
Use the information for the question(s) below.
Suppose the market portfolio’s excess return tends to increase by 30% when the
economy is strong and decline by 20% when the economy is weak. A type S firm has
excess returns increase by 45% when the economy is strong and decrease by 30% when
the economy is weak. A type I firm will also have excess returns of either 45% or -30%,
but the type I firm’s excess returns will depend only upon firm-specific events and will
be completely independent of the state of the economy.
What is the Beta for a type S firm?
A) 1.5
B) 0.0
C) 1.0
D) 0.75
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%.
If the Krusty Krab’s opportunity cost of capital is 12%, then the IRR for upgrading to
the new grill is closest to:
A) 3.25%
B) 16.00%
C) 18.25%
D) 21.00%
Investors that suffer from a familiarity bias
A) prefer not to invest in companies they are familiar with.
B) favor investments in companies they are familiar with.
C) invest in the same stocks that their friends or family recommend.
D) tend to overestimate the precision of their knowledge.
Which of the following formulas is incorrect?
A) i = – 1
B) 1 + rr =
C) rr ≈ i – r
D) rr=
Rearden Metal is evaluating a project that requires an investment of $150 million today
and provides a single cash flow of $180 million for sure one year from now. Rearden
decides to use 100% debt financing for this investment. The risk-free rate is 5% and
Rearden’s corporate tax rate is 40%. Assume that the investment is fully depreciated at
the end of the year.
The NPV of this project using the APV method is closest to:
A) $10 million
B) $13 million
C) $42 million
D) $71 million
Which of the following statements is false?
A) Firms with seasonal cash flows may find themselves with a surplus of cash during
some months that is sufficient to compensate for a shortfall during other months.
However, because of timing differences, such firms often have short-term financing
needs.
B) A company forecasts its cash flows to determine whether it will have surplus cash or
a cash deficit for each period.
C) Like seasonalities, positive cash flow shocks can create short-term financing needs.
D) When sales are concentrated during a few months, sources and uses of cash are also
likely to be seasonal.
Dustin’s Donuts experienced a decrease in the value of the trademark of a company it
acquired two years ago. This reduction in value results in
A) an impairment charge.
B) depreciation expense.
C) an operating expense.
D) goodwill.
Because of a catastrophic plane crash, the FAA announced that it is withdrawing its air
worthiness certification for Fly by Night Aviation’s (FBNA) new four seat private plane.
As a result FBNA’s future expected free cash flows will decline by $40 million a year
for the next eight years. FBNA has 20 million shares outstanding, no debt, and an
equity cost of capital of 12% If this news is a complete surprise to investors, then the
amount that FBNA’s stock price should fall upon the announcement is closest to:
A) $2.00
B) $16.00
C) $16.70
D) $9.90
Rearden Metal is considering the purchase of a new blast furnace costing a total of $5
million dollars. This furnace will qualify for accelerated depreciation: 20% can be
expense immediately, followed by 32%, 19.2%, 11.52%, 11.52% and 5.76% over the
next five years. However, because of Rearden’s substantial tax loss carry forwards,
Rearden estimates its marginal tax rate to be only 10% over the next five years. Since
Rearden will get very little tax benefit from the depreciation expense, they consider
leasing the furnace instead. Suppose that Rearden and the lessor face the same 8%
borrowing rate, but the lessor has a 40% marginal tax rate. Assume that the furnace is
worthless after five years, the lease term is five years, and a lease would qualify as a
true tax lease.
Assuming that Rearden’s annual lease payments are $1.2 million, then Rearden Metal
should
A) lease the furnace since the amount saved in year zero from leasing is greater than the
amount of the lease equivalent loan.
B) buy the furnace since the amount saved in year zero from leasing is greater than the
amount of the lease equivalent loan.
C) lease the furnace since the amount saved in year zero from leasing is less than the
amount of the lease equivalent loan.
D) buy the furnace since the amount saved in year zero from leasing is less than the
amount of the lease equivalent loan.
Which of the following statements is false?
A) The existence of the momentum trading strategy has been widely known for at least
ten years.
B) The information required to implement a momentum strategy is not readily available
to investors.
C) If the market portfolio is not efficient, then a stock’s beta with the market is not an
adequate measure of its systematic risk.
D) If the market portfolio is not efficient, then the so-called profits from a positive
alpha trading strategy are really returns for bearing risk that investors are averse to and
the CAPM doesn’t capture.
Taggart Transcontinental has announced a $2 dividend. If Taggart’s last price
cum-dividend is $45, then, assuming perfect capital markets, what should its first
ex-dividend price be?
A) $0
B) $2
C) $43
D) $45
Which of the following is not a diversifiable risk?
A) The risk that oil prices rise, increasing production costs
B) The risk of a product liability lawsuit
C) The risk that the CEO is killed in a plane crash
D) The risk of a key employee being hired away by a competitor
Assume that MM’s perfect capital markets conditions are met and that you can borrow
and lend at the same 5% rate as with. You have $5000 of your own money to invest and
you plan on buying Without stock. Using homemade leverage, how much do you need
to borrow in your margin account so that the payoff of your margined purchase of
Without stock will be the same as a $5000 investment in With stock?
A) $10,000
B) $5000
C) $2,500
D) $0