Finance 32192 | Course Paper

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You would like to have enough money saved to receive a growing annuity for 25 years,

growing

at a rate of 4% per year, the first payment being $60,000 after retirement, so that you

and your

family can lead a good life. How much would you need to save in your retirement fund

achieve this goal? (assume that the growing perpetuity payments start one year from the

date of

your retirement. The interest rate is 12%)?

A. $1,500,000

B. $632,390

C. $452,165

D. None of the above

The net present value formula for one period is:

I) NPV = C0 + [C1/(1 + r)]; II) NPV = PV required investment; and III) NPV = C0/C1

A. I only

B. I and II only

C. III only

D. None of the above

In order to calculate the tax shields provided by debt, the tax rate used is the:

A. average corporate tax rate

B. marginal corporate tax rate

C. average of shareholders’ tax rates

D. average of bondholders’ tax rates

Parcel Corporation is expected to pay a dividend of $5 per share next year, and the

dividends pay out ratio is 50%. If the dividends are expected to grow at a constant rate

of 8% forever and the required rate of return on the stock is 13%, calculate the present

value of the growth opportunity.

A. $100

B. $76.92

C. $23.08

D. None of the above

Assets are listed on the balance sheet in order of:

I) Decreasing liquidity

II) Decreasing size

III) Increasing size

IV) Relative life

A. I only

B. III and IV only

C. II only

D. IV only

The rightist position is that the market will reward firms that:

A. Have high dividend yield.

B. Have low dividend yield.

C. Are well managed, regardless of dividend yield.

D. None of the above.

Which of the following statements about implied volatility is true?

A. VIX is the implied volatility on the Standard and Poor’s index and VXN is the

implied volatility on the New York Stock Exchange Index

B. VIX is the implied volatility on the Standard and Poor’s index and VXN is the

implied volatility on the NASDAQ index

C. VIX is the implied volatility on the NASDAQ index and VXN is the implied

volatility on the Standard and Poor’s index

D. VIX is the implied volatility on the New York Stock Exchange index and VXN is the

implied volatility on the Standard and Poor’s index

Which of the following factors would be influential in a typical financial plan?

I) how a firm can generate superior long-term returns

II) choice of industry

III) position within the industry

A. I only

B. I and II only

C. II and III only

D. I, II and III

Managers’ actions are monitored by:

A. The board of directors

B. Commercial banks that have loaned funds to the firm

C. The Wall Street analysts

D. All of the above

One possible reason that shareholders often insist on higher dividends is:

A. They agree with Miller and Modigliani

B. Tax consideration

C. The stock market is efficient

D. They do not trust managers to spend retained earnings wisely

The beta of an all equity firm is 1.2. If the firm changes its capital structure to 50% debt

and 50% equity using 8% debt financing, what will be the beta of the levered firm? The

beta of debt is 0.2. (Assume no taxes.)

A. 1.2

B. 2.2

C. 2.4

D. None of the above

Standard error is estimated as:

A. Average annual rate of return divided by the square root of the number of

observations

B. Variance divided by the number of observations

C. Standard deviation of returns divided by the square root of the number of

observations

D. None of the above

Generally, bonds issued in the following countries pay interest semi-annually.

I) USA, II) UK, III) Canada, IV) Germany, & V) Japan

A. I, II, III, & IV

B. I, II, III, & V

C. II, III, & IV only

D. None of the above

Present value of $121,000 expected to be received one year from today at an interest

rate

(discount rate) of 10% per year is:

A. $121,000

B. $100,000

C. $110,000

D. None of the above

The following are examples of disguised options for firms:

I) acquiring growth opportunities

II) ability of the firm to terminate a project when it is no longer profitable

III) options that are associated with corporate securities that provide flexibility to

change the terms of the issues

A. I only

B. II only

C. I and III only

D. I, II, and III

Which of the following statements regarding guarantees and government restrictions on

international projects is (are) true?

I) The value of the guarantees is added to the APV

II) The value of the guarantees is subtracted from the APV

III) The value of the government restrictions is added to the APV

IV) The value of the government restrictions is subtracted from the APV

A. I and III only

B. II and III only

C. II and IV only

D. I and IV only

Given the following data: Sales = 3200; Cost of goods sold = 1600; Average total assets

= 1600; Average inventory = 200, calculate the days in inventory:

A. 18.3

B. 45.6

C. 22.8

D. None of the above

If both dividends and capital gains are taxed at the same ordinary income tax rate, the

effect of tax is different because:

A. Capital gains are actually taxed, while dividends are taxed on paper only

B. Dividends are taxed when distributed while capital gains are deferred until the stock

is sold

C. Both dividends and capital gains are taxed every year

D. Both A and C

If the Wall Street Journal Quotation for a company has the following values close:

55.14; Net chg: = + 1.04; then the closing price for the stock for the previous trading

day was?

A. $56.18

B. $54.10

C. $55.66

D. None of the above.

Under the trade off theory, how will a government loan guarantee impact financing?

A. Prefer to issue debt

B. Prefer to issue stock

C. Prefer internal money

D. No impact

Last year Axle Inc. reported net assets of 400, equity of $200, net income of $50,

dividends of $10 and earnings retained in the period of $40. What is Axle Inc.’s internal

growth rate?

A. 10.0%

B. 57.1%

C. 20.0%

D. 71.4%

The real interest rate is 3% and the inflation rate is 5%. What is the nominal interest

rate?

A. 3%

B. 5%

C. 8.15%

D. 2%

Modigliani-Miller (MM) formula for after-tax discount rate is given by:

A. rMM = r(1 – TCD/V)

B. rMM = r(1 + TCD/V)

C. rMM = r/(1 – TCD/V)

D. None of the above

Although the use of debt provides tax benefits to the firm, debt also puts pressure on the

firm to:

I) Meet interest and principal payments which if not met can put the company into

financial distress

II) Make dividend payments which if not met can put the company into financial

distress

III) Meet both interest and dividend payments which when met increase the firm cash

flow

IV) Meet increased tax payments thereby increasing firm value

A. I only

B. II only

C. II and III only

D. III and IV only

Suppose VS’s stock price is currently $20. Six-month call option on the stock with an

exercise price of $15 has a value of $7.14. Calculate the price of an equivalent put

option if the six-month risk-free interest rate is 5% (periodic rate).

A. $1.43

B. $9.43

C. $8.00

D. $12.00

A put option on the ABC stock, with an exercise price of $60, is selling for $4.00 and

the stock price is also $60. The put option has a delta of 0. If within a short period of

time the stock price increases to $61, what would be the change in the price of the put

option?

A. increases by $0.50

B. decreases by $0.50

C. increases by $1.00

D. decreases by $1.00

Efficiency ratios indicate:

I) How productively is the firm utilizing its assets.

II) How liquid is the firm.

III) How profitable is the firm.

IV) How highly is the firm valued by investors.

A. I only

B. II only

C. III only

D. III and IV only

If the one-year discount factor is 0.90, what is the present value of $120 to be received

one year from today?

A. $100

B. $96

C. $108

D. None of the above

For a levered firm,

A. As earnings before interest and taxes (EBIT) increases, the earnings per share (EPS)

increases by the same percent

B. As EBIT increases, the EPS increases by a larger percent

C. As EBIT increases, the EPS decreases

D. None of the above

If the future value annuity factor at 10% and 5 years is 6.1051, calculate the equivalent

present value annuity factor

A. 6.1051

B. 3.7908

C. 6.7156

D. None of the given ones

Using the binomial model, what is the value of a three month option given the

following data and assuming there are no time periods other than three months? The

exercise price is $40; stock price is $46; the upside price is $48; the downside price is

$34; the 3 month interest rate is 2%. The upside and down side have equal probabilities.

A. $3.92

B. $4.00

C. $5.88

D. $6.00

The binomial price is never less than the intrinsic value. The derived binomial price is

3.92, but the intrinsic value is 6. Thus, the answer is 6.

Given the following data: Sales = 3200; Cost of good sold = 1600; Average receivables

= 200, calculate the average collection period:

A. 3

B. 22.8

C. 137

D. None of the above