Finance 14542 | Course Paper

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Given the following data: Current assets = 500; Current liabilities = 250; Inventory =

200; Account receivables = 200; calculate the cash ratio: (assume that the firm has no

marketable securities)

A. 0.4

B. 2.0

C. 1.5

D. None of the above

When using the weighted average cost of capital (WACC) to discount cash flows from a

project we assume the following:

I) the project’s risk are the same as those of firm’s other assets and remain so for the life

of the project.

II) the project supports the same fraction of debt to value as the firm’s overall capital

structure that remains constant for the life of the project.

III) the cash flows from the project is always a perpetuity.

A. I only

B. II only

C. I and II only

D. I, II and III

Using the company cost of capital to evaluate a project is:

I) Always correct

II) Always incorrect

III) Correct for projects that are about as risky as the average of the firm’s other assets

A. I only

B. II only

C. III only

D. I and III only

When a firm improves (lowers) its average collection period it generally:

A. Requires additional cash investment in inventory

B. Releases cash locked up in accounts receivables

C. Does not alter its cash position

D. A firm cannot reduce its inventories

Everything else remaining the same, an increase in fixed costs:

I) increases the break-even point based on NPV

II) increases the accounting break-even point

III) decreases the break-even point based on NPV

IV) decreases the accounting break-even point

A. I and III only

B. III and IV only

C. II and III only

D. I and II only

The statement that stock prices follow a random walk implies that:

I) Successive price changes are independent of each other

II) Successive price changes are positively related

III) Successive price changes are negatively related

IV) The autocorrelation coefficient is either +1 or -1

A. I only

B. II and III only

C. IV only

D. III only

The APV method includes all equity NPV of a project and the NPV of financing effects.

The financing effects are:

A. Tax subsidy of dividends, cost of issuing new securities, subsidy of financial distress

and cost of debt financing

B. Cost of issuing new securities, cost of financial distress, tax subsidy of debt and

other subsidies

C. Cost of issuing new securities, cost of financial distress, tax subsidy of dividends and

cost of debt financing

D. Subsidy of financial distress, tax subsidy of debt, cost of other debt financing and

cost of issuing new securities

If a firm borrows $50 million for one year at an interest rate of 10%, what is the present

value of the interest tax shield? Assume a 30% tax rate. (Approximately.)

A. $1.364 million

B. $1.5 million

C. $1.0 million

D. $4.545 million

E. None of the above

(Approximately) Corporate tax rate: 34% Personal tax rate on income from bonds: 30%

Personal tax rate on income from stocks: 20%

A. $0.66

B. $0.25

C. -$0.66

D. -$0.34

If the volatility of the underlying asset decreases, then the:

A. Value of the put option will increase, but the value of the call option will decrease

B. Value of the put option will decrease, but the value of the call option will increase

C. Value of both the put and call option will increase

D. Value of both the put and call option will decrease

In an EPS-Operating Income graphical relationship, the slope of the debt line is steeper

than the equity line. The debt line has a negative value for intercept because:

A. The break-even point is higher with debt

B. A fixed interest charge must be paid even at low earnings

C. The amount of interest per share has only a positive effect on the intercept

D. The higher the interest rate the greater the slope

A large part of cash outflow in cash budgeting is due to:

A. Capital expenditures

B. Labor costs and other expenditures

C. Payments on accounts payable

D. Taxes, interest payments and dividend payments

The treasurer usually oversees the following functions of a corporation except:

I) Preparation of financial statements; II) Investor relationships; III) Cash management;

IV) raising new capital

A. I only

B. I and II only

C. II, III and IV only

D. III only

A project requires an investment of $900 today. It has sales of $1,100 per year forever.

Costs will be $600 the first year and increase by 20% per year. Ignoring taxes calculate

the NPV of the project at 12% discount rate.

A. $65.00

B. $57.51

C. $100.00

D. Cannot be calculated as g > r

The controller usually oversees the following functions of a corporation:

I) Preparation of financial statements; II) Internal accounting; III) Cash management

and IV) Taxes

A. I, II and IV only

B. III only

C. I and II only

D. II and III

A firm has zero debt in its capital structure. Its overall cost of capital is 8%. The firm is

considering a new capital structure with 50% debt. The interest rate on the debt would

be 5%. Assuming that the corporate tax rate is 40%, its cost of equity capital with the

new capital structure would be?

A. 9.8%

B. 9.2%

C. 11%

D. None of the above

In order to test the efficient-market hypothesis in the weak form, researchers have used

the following methods except:

A. Estimation of the serial correlation (autocorrelation) for securities and markets

B. Measurement of the profitability of trading rules used by technical analysts

C. Measurement of how rapidly security prices adjust to different news items

D. All of the above are methods used for testing weak-form market efficiency

Calculator Company proposes to invest $5 million in a new calculator making plant.

Fixed costs are $2 million a year. A calculator costs $5/unit to manufacture and can be

sold for $20/unit. If the plant lasts for 3 years and the cost of capital is12%, what is the

approximate break-even level (i.e. NPV = 0) of annual sales? (Assume no taxes.)

(approximately)

A. $133,333 units

B. $272,117 units

C. $227,533 units

D. None of the above

Given the following data: Earnings per share = $6; Dividends per share = $3; Price per

share = $60, calculate the P/E ratio:

A. 16.7

B. 10

C. 25

D. None of the above

Which of the following dividends is never in the form of cash?

I) Regular dividend

II) Special dividend

III) Stock dividend

IV) Liquidating dividend

A. I only

B. II only

C. III only

D. I, II, and IV only

If the sign of the cash flows for a project changes two times then the project has:

A. one IRR

B. two IRRs

C. three IRRs

D. None of the above

The historical returns data for the past three years for Company A’s stock is -6.0%,

15%, 15% and that of the market portfolio is 10%, 10% and 16%. According to the

security market line (SML), the Stock A is:

A. Over priced

B. Under priced

C. Correctly priced

D. Need more information

If the three-year present value annuity factor is 2.673 and two-year present value

annuity factor is 1.833, what is the present value of $1 received at the end of the 3

years?

A. $1.1905

B. $0.84

C. $0.89

D. None of the above

Company X has 100 shares outstanding. It earns $1,000 per year and expects

repurchase its shares in the open market instead of paying dividends. Calculate the

number of shares outstanding at the end of year-1, if the required rate of return is 10%.

A. 110

B. 90

C. 100

D. None of the above

The effect of financial leverage on the performance of the firm depends on:

A. The rate of return on equity

B. The firm’s level of operating income

C. The current market value of the debt

D. The rate of dividend growth

A firm might categorize its projects into:

I) Cost improvement projects

II) Expansion projects (existing business)

III) New products projects

IV) Speculative ventures

A. III only

B. I, II and III only

C. II and IV only

D. I,II,III, and IV

The graphical representation of CAPM (Capital Asset Pricing Model) is called:

A. Capital Market Line

B. Characteristic Line

C. Security Market Line

D. None of the above

What is the beta of a security where the expected return is double that of the stock

market, there is no correlation coefficient relative to the US stock market and the

standard deviation of the stock market is .18?

A. 0.00

B. 1.00

C. 1.25

D. 2.00

A cash flow received in two years is expected to be $10,816 in nominal terms. If the

real rate of interest is 2% and the inflation rate is 4%, what is the real cash flow for

year-2?

A. $11,236

B. $10,816

C. $10,000

D. $9,246

If a bond’s volatility is 10% and the interest rate goes down by 0.75% (points) then the

price of the bond:

A. decreases by 10%

B. decreases by 7.5%

C. increases by 7.5%

D. increases by 0.75%

Investments B and C both have the same standard deviation of 20%. If the expected

return on B is 15% and that of C is 18%, then the investors would

A. Prefer B to C

B. Prefer C to B

C. Reject both B and C

D. None of the above

A project requires an initial investment of $200,000 and is expected to produce a cash

flow before taxes of 120,000 per year for two years. [i.e. cash flows will occur at t = 1

and t = 2]. The corporate tax rate is 30%. The assets will be depreciated using MACRS

– 3 year schedule: (t=1, 33%); (t = 2: 45%); (t = 3: 15%); (t = 4: 7%). The company’s

tax situation is such that it can make use of all applicable tax shields. The opportunity

cost of capital is 11%. Assume that the asset can be sold for book value. Calculate the

IRR for the project: (approximately)

A. 12.00%

B. 11.00%

C. 17.73%

D. None of the above

A firm forecasts of cash flows ($millions) in years 1 thru 4 to be $120, $130, 135, and

$137, respectively. If the project ends at the end of the fourth year, what is the horizon

value given the company has historical growth of 3% and a discount rate of 10%?

(answers in $millions)

A. $0

B. $1.37

C. $1.96

D. $4.87

If the project terminates, there is no horizon value.

The following are disadvantages of using the payback rule except:

A. The payback rule ignores all cash flow after the cutoff date

B. The payback rule does not use the time value of money

C. The payback period is easy to calculate and use

D. The payback rule does not have the value additive property

The writer (seller) of a regular exchange-listed call-option on the stock:

A. has the right to buy 100 shares of the underlying stock at the exercise price

B. has the right to sell 100 shares of the underlying stock at the exercise price

C. has the obligation to buy 100 shares of the underlying stock at the exercise price

D. has the obligation to sell 100 shares of the underlying stock at the exercise price