Which of these dates occurs last in time (when arranged in the chronological order)?
A. Payment date
B. Ex-dividend date
C. Record date
D. Dividend declaration date
The Granite Paving Co. wishes to have debt-to-equity ratio of 1.5. Currently it is an
unlevered (all equity) firm with a beta of 1.1. What will be the beta of the firm if it goes
through the capital restructuring process and attains the target debt-to-equity ratio?
Assume a tax rate of 30%.
A. 2.26
B. 1.65
C. 1.5
D. None of the above
If the underlying stock pays a dividend before the expiration of the options that will
have the following effect on the price of the options:
I) increase the value of the call option
II) increase the value of the put option
III) decrease the value of the call option
IV) decrease the value of the put option
A. I and II only
B. III and IV only
C. I and IV only
D. II and III only
If an investment project (normal project) has IRR equal to the cost of capital, the NPV
for that project is:
A. Positive
B. Negative
C. Zero
D. Unable to determine
What has been the average annual real rate of interest on Treasury bills over the past
107 years (from 1900 to 2006)?
A. Less than 1%
B. Between 1% and 2%
C. Between 2% and 3%
D. Greater than 3%
A bond with duration of 5.7 years has yield to maturity of 9%. The bond’s volatility is:
A. 1.9%
B. 5.2%
C. 5.7%
D. 9.0%
The flow to equity method provides an accurate estimate of the value of a firm if:
A. debt-equity ratio remains constant for the life of the firm
B. amount of debt remains constant for the life of the firm
C. free cash flows remain constant for the life of the firm
D. the financial leverage changes significantly over the life of the firm
MJ Co. pays out 60% of its earnings as dividends. Its return on equity is 15%. What is
the stable dividend growth rate for the firm?
A. 9%
B. 5%
C. 6%
D. 15%
In the principal-agent framework:
A. Shareholders are the principals
B. Managers are the principals
C. Managers are the agents
D. A and D
In practice, efficient portfolios are generated using:
A. regression analysis
B. quadratic programming
C. trial and error method
D. graphical method
In June 2007, an investor buys a put option on Genentech stock with an exercise of
price of $75 and expiring in January 2009. If the stock price in June 2007 is $80, then
this option is:
I) in-the-money
II) out-of-the-money
III) a LEAPS
A. I only
B. II only
C. III only
D. I and III only
What has been the average annual nominal rate of return on a portfolio of U.S. common
stocks over the past 107 years (from 1900 to 2006)?
A. Less than 2%
B. Between 2% and 5%
C. Between 5% and 11%
D. Greater than 11%
If the standard deviation of the annual returns ( ) on the asset is 40%, and the time
interval is a year, then the upside change is equal to:
A. 88.2%
B. 8.7%
C. 63.2%
D. 49.18%
If the present value of $1.00 received n years from today at an interest rate of r is 0.621,
then what is the future value of $1.00 invested today at an interest rate of r% for n
years?
A. $1.00
B. $1.61
C. $1.621
D. Not enough information to solve the problem
The Wall Street Journal quotation for a company has the following values: Div: $1.12,
PE: 18.3, Close: $37.22. Calculate the dividend pay out ratio for the company
(Approximately).
A. 18%
B. 55%
C. 45%
D. None of the above
APV method is most useful in analyzing:
A. large international projects
B. domestic projects
C. small projects
D. none of the above
The MFC corporation needs to raise $200 million for its mega project. The NPV of the
project using all equity financing is $40 million. If the cost of raising funds for the
project is $20 million, what is the APV of the project?
A. $40 million.
B. $240 million.
C. $20 million.
D. $160 million.
Which of the following investment rules has value adding-up property?
A. The payback period method
B. Net present value method
C. The book rate of return method
D. The internal rate of return method
The historical returns data for the past three years for Stock B and the stock market
portfolio are: Stock B: 24%, 0%, 24%, Market Portfolios: 10%, 12%, 20%. Calculate
the covariance of returns between Stock B and the market portfolio.
A. 24
B. 28
C. 292
D. None of the above
Given the following data for Project M:
A. $51.70
B. $35.54
C. $45.21
D. None of the above
A firm’s equity beta is 1.2 and its debt is risk free. Given a .7 debt to equity ratio, what
is the firm’s asset beta?
A. .7
B. 1.0
C. 1.2
D. 0
Cost of capital is the same as cost of equity for firms:
A. financed entirely by debt
B. financed by both debt and equity
C. financed entirely by equity
D. none of the above
The cost of capital for a project depends on:
A. The company’s cost of capital
B. The use to which the capital is put, i.e. the project
C. The industry cost of capital
D. All of the above
In order to test the efficient-market hypothesis in the semi-strong form, researchers
have used (the):
A. Estimation of the serial correlation (autocorrelation) for securities and markets
B. Measurement of the performance of mutual fund managers over the years
C. Measurement of how rapidly security prices adjust to different news items
D. All of the above
What would be the weighted average profitability index of the following two
investments, given the firm only has $250 to invest?
Project A: Cost = $120, NPV = 80
Project B: Cost = $100, NPV = 75
A. .62
B. .67
C. .75
D. .79
The reason that MM Proposition I does not hold good in the presence of corporate taxes
is because:
A. Levered firms pay lower taxes when compared with identical unlevered firms
B. Bondholders require higher rates of return compared with stockholders
C. Earnings per share are no longer relevant with taxes
D. Dividends are no longer relevant with taxes
Petroleum Inc. owns a lease to extract crude oil from sea. It is considering the
construction of a deep-sea oil rig at a cost of $50 million (I0) and is expected to remain
constant. The price of oil is $50/bbl and the extraction costs are $20/bbl. The quantity
of oil Q = 200,000 bbl per year forever. The risk-free rate is 10% per year which is also
the cost of capital (Ignore taxes). Suppose the oil price is uncertain and can be $70/bbl
or $40/bbl next year. If the project if postponed by one year, calculate the value of the
option to wait for one year: (approximately)
A. +15,000,000
B. +40,000,000
C. +10,000,000
D. none of the above
Dutch auction process is the same as:
A. discriminatory price auction
B. uniform price auction
C. English auction
D. none of the above
The sale of financial assets is also referred to as the:
A. Capital decision
B. CFO decision
C. Financing decision
D. Investment decision
Which of the following investors have the strongest tax reason to prefer dividends over
capital gains?
A. Pension funds
B. Financial institutions
C. Individuals
D. Corporations
Given the following data: EBIT = 400; NI = 100; Average Equity = 1000, calculate the
ROE (Return on Equity):
A. 10%
B. 12%
C. 7.5%
D. None of the above
The following stocks are examples of income stocks except:
A. Cummins, Inc.
B. Dow Chemicals
C. Starbucks
D. All of the above are income stocks
A high proportion of the value of a growth stock comes from:
A. Past dividend payments
B. Past earnings
C. PVGO (Present Value of the Growth Opportunities)
D. Both A and B