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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
to
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
