In almost al cases the present value break even quantity is higher than the accounting
break even quantity.
Short-term financial decisions are conceptually easier to make than long-term decisions.
An European option gives its owner the right to exercise the option at any time before
expiration.
In theory, the CAPM requires that the market portfolio consist of all common stocks.
It is more likely than not that a high tech growth company which reports record
earnings and announces its first ever dividend will have the stock price of the firm drop.
Buying a stock and a put option, and depositing the present value of the exercise price
in a bank account and buying a call provide the same payoff.
In case of a loan project, one should accept the project if the IRR is more than the cost
of capital.
The main source of cash in a cash budget is collection on accounts receivable.
The value of a five-year annuity is equal to the sum of two perpetuities. One makes its
first
payment in year 1, and the other makes its first payment in year 6.
The break-even point in terms of NPV is usually lower than the break-even point on an
accounting basis.
Diversification reduces risk because prices of different securities do not move exactly
together.
Multi-period binomial model can be used to evaluate an American put option.
The longer a bond’s duration greater is its volatility.
Financial distress always results in bankruptcy.
The term structure of interest rate is the relationship between yield to maturity and
maturity.
In the US, most bonds make coupon payments annually.
The expectations theory implies that the only reason for a declining term structure is
that investors expect spot interest rates to fall.
In the US, most bonds make coupon payments annually.
Dividend payments are used to change the capital structure by replacing equity with
debt.
The treasurer’s responsibilities include preparation of financial statements.
Adoption of Rule 10b-18 by the SEC, in the year 1982, has protected firms from being
prosecuted for manipulating their share price through share repurchases.
Compound interest assumes that you are reinvesting the interest payments at the rate of
return.
Generally, the imposition of government restrictions increases the APV of a project.
ROA can be increased by increasing asset turnover.
The relationship between nominal interest rate and real interest rate is given by:
(1 + rnominal) = (1 + rreal)(1 + inflation rate)
Strategy B implies that the firm is a short-term lender during a part of the year and a
borrower during the rest.
A firm bankrupt from excess use of debt, which receives government bailout funds and
government loan guarantees is incentivized to issue more high risk debt.
The IRR rule states that firms should accept any project offering an internal rate of
return in
excess of the cost of capital.
Cyclical firms tend to have high betas.
The growth rate that a company can achieve using external funds is called the internal
growth rate.
As you increase the time interval in a binomial model the result will approach the
Black-Scholes model.
The evidence against market efficiency are called puzzles or anomalies.
If the term structure of interest rate is flat the nine-year interest rate is equal to the
ten-year interest rate.
The board of directors is ultimately responsible for all large investment decisions.
Finance, generally, deals with:
I) Money; II) Markets; III) People
A. I only
B. I and II only
C. I and III only
D. I, II and III
How can one invest today at the 2-year forward rate of interest?
I) By buying a 2-year bond and selling a 1-year bond with the same coupon
II) By buying a 1-year bond and selling a 2-year bond with the same coupon
III) By buying a 1-year bond and then after a year reinvesting in a further 1-year bond
A. I only
B. II only
C. III only
D. II and III only
If the correlation coefficient between stock C and stock D is +1.0% and the standard
deviation of return for stock C is 15% and that for stock D is 30%, calculate the
covariance between stock C and stock D.
A. +45
B. -450
C. +450
D. None of the above
Stock M and Stock N have had the following returns for the past three years of -12%,
10%, 32%; and 15%, 6%, 24% respectively. Calculate the covariance between the two
securities.
A. -99
B. +99
C. +250
D. None of the above
According to the trade-off theory of capital structure:
A. optimal capital structure is reached when the present value of tax savings on account
of additional borrowing is just offset by increases in the present value of costs of
distress.
B. optimal capital structure is reached when stockholders’ right to default is balanced by
the the bondholders’ right to get interest and principal payments.
C. optimal capital structure is reached when the benefits of limited liability is just offset
by the value of the lawyers’ claim.
D. none of the above
Given the following data for Vinyard Corporation:
Calculate the proportions of debt (D/V) and equity (E/V) for the firm that you would
use for estimating the weighted average cost of capital (WACC):
A. 40% debt and 60% equity
B. 50% debt and 50% equity
C. 25% debt and 75% equity
D. none of the given values
If an investor buys “a” proportion of an unlevered firm’s (firm U) equity then his/her
payoff is:
A. (a) * (profits)
B. (a) * (interest)
C. (a) * (profits – interest)
D. none of the above
If the covariance between stock A and stock B is 100, the standard deviation of stock A
is 10% and that of stock B is 20%, calculate the correlation coefficient between the two
securities.
A. -0.5
B. +1.0
C. +0.5
D. None of the above
The payback period rule:
A. Varies the cut-off point with the interest rate.
B. Determines a cut-off point so that all projects accepted by the NPV rule will be
accepted by the payback period rule.
C. Requires an arbitrary choice of a cut-off point.
D. Both A and C.
Indirect costs of bankruptcy are borne principally by:
A. Bondholders
B. Stockholders
C. Managers
D. The federal government
The financial goal of a corporation is to:
A. Minimize stockholder wealth
B. Maximize profit
C. Maximize value of the corporation to the stockholders
D. Decrease job security
Which of the following type of projects has the lowest risk?
A. Speculation ventures
B. New products
C. Expansion of existing business
D. Cost improvement
A major advantage of the Sarbanes-Oxley Act of 2002 (SOX) is:
A. good investor protection
B. increase in compliance costs
C. that it constrains managers’ ability to run the firm
D. that it may discourage development of human capital in the firm
A bond with a face value of $1,000 has coupon rate of 7%, yield to maturity of 10%,
and twenty years to maturity. The bond’s duration is:
A. 10.0 years
B. 7.4 years
C. 20.0 years
D. 12.6 years
A company has forecast sales in the first 3 months of the year as follows (figures in
millions): January, $90; February, $20; March, $30. 70% of sales are usually paid for in
the month that they take place and 30% in the following month. Receivables at the end
of December were $20 million. What are the forecasted collections on accounts
receivable in March?
A. $27 million
B. $50 million
C. $23 million
D. $35 million
Preferably, cash flows for a project are estimated as:
A. Cash flows before taxes
B. Cash flows after taxes
C. Accounting profits before taxes
D. Accounting profits after taxes
The three factors in the Three-Factor Model are:
I) Market factor
II) Size factor
III) Book-to-market factor
A. I only
B. I and II only
C. I,II, and III
D. III only
The pecking order theory of capital structure predicts that:
A. If two firms are equally profitable, the more rapidly growing firm will borrow more,
other things equal
B. Firms prefer equity to debt financing
C. Risky firms will end up borrowing less
D. Risky firms will end up borrowing more
The difference between Current Assets of a firm and its Current Liabilities is called.
A. Net worth
B. Net working capital
C. Gross working capital
D. None of the above
A call option has an exercise price of $150. At the final exercise date, the stock price
could be either $100 or $200. Which investment would combine to give the same
payoff as the stock?
A. Lend PV of $100 and buy two calls
B. Lend PV of $100 and sell two calls
C. Borrow $100 and buy two calls
D. Borrow $100 and sell two calls
Deluxe Company expects to pay a dividend of $2 per share at the end of year-1, $3 per
share at the end of year-2 and then be sold for $32 per share. If the required rate on the
stock is 15%, what is the current value of the stock?
A. $28.20
B. $32.17
C. $32.00
D. None of the given answers
Given the following data for year-1:
Profits after taxes = $20 millions; Depreciation = $6 millions; Interest expense = $4
millions; Investment in fixed assets = $12 millions; and Investment in working capital =
$4 millions; Calculate the free cash flow (FCF) for year-1:
A. $4 millions
B. $6 millions
C. $10 millions
D. none of the above
Total market value of a firm (V): [D = market value of debt; E = market value of
equity]
A. V = D + E
B. V = D + E + tax shield effect of debt
C. V = D + E + tax shield effect of debt-Present value of bankruptcy costs
D. None of the given ones
Figure-1 depicts the:
A. position diagram for the buyer of a call option
B. profit diagram for the buyer of a call option
C. position diagram for the buyer of a put option
D. profit diagram for the buyer of a put option
You would like to have enough money saved to receive a growing annuity for 20 years,
growing at a rate of 5% per year, the first payment being $50,000 after retirement. That
way, you hope that you and your family can lead a good life after retirement. How
much would you need to save in your retirement fund to achieve this goal.(assume that
the growing annuity payments start one year from the date of your retirement. The
interest rate is 10%)?
A. $1,000,000
B. $425,678.19
C. $605,604.20
D. None of the above
The beta of the computer company is 1.7 and the standard error of the estimate is 0.3.
What is the range of values for beta, that has 95% chance of being right?
A. 1.1 – 2.3
B. 1.4 – 2.0
C. 1.5 – 2.0
D. None of the above
Range = 1.7 +/- 2(0.3) i.e. (1.1 – 2.3)
Suppose VS’s stock price is currently $20. In the next six months it will either fall to
$10 or rise to $30. What is the current value of a put option with an exercise price of
$15? The six-month risk-free interest rate is 5% (periodic rate).
A. $5.00
B. $2.14
C. $0.86
D. $7.86
Given the following data: plow back ratio = 50%; return on equity = 20%; equity to net
assets ratio = 60%. Calculate the internal growth rate for the firm:
A. 6%
B. 10%
C. 12%
D. none of the above
Relative to the underlying stock, a call option always has:
A. A higher beta and a higher standard deviation of return
B. A lower beta and a higher standard deviation of return
C. A higher beta and a lower standard deviation of return
D. A lower beta and a lower standard deviation of return
If the strike price increases then the: [Assume everything else remaining the same]
A. Value of the put option increases and that of the call option decreases
B. Value of the put option decreases and that of the call option increases
C. Value of both the put option and the call option increases
D. Value of both the put option and the call option decreases
A firm has a general-purpose machine, which has a book value of $300,000 and is sold
for $500,000 in the market. If the tax rate is 35%, what is the opportunity cost of using
the machine in a project?
A. $500,000
B. $430,000
C. $300,000
D. None of the above
The range of values that correlation coefficients can take can be:
A. zero to +1
B. -1 to +1
C. – infinity to +infinity
D. zero to + infinity
Briefly explain the relationship between risk and option values.
Briefly explain the term “market portfolio.”
Briefly explain, “continuous compounding.”
Briefly describe sensitivity analysis used for project analysis.
Intuitively explain the concept of the present value.
Briefly explain the Fama-French Three-Factor Model.
Discuss the DuPont system.
State the semi-strong form of market efficiency and its implications.
Discuss the basic idea behind Miller’s arguments about debt and taxes.
What are some of the advantages of using the IRR method?
Briefly explain risk-neutral valuation in the context of option valuation.
Explain the term “primary market.”
Explain why the cost of equity and the cost of debt are concave upward at high levels of
debt.
Briefly discuss some of the applications of the law of conservation of value.
Discuss the advantages and limitations of using the weighted average cost of capital as
a discount rate to evaluate capital budgeting projects.
Discuss why one might use an industry beta to estimate a company’s cost of capital.
Explain the concept of arbitrage.
Briefly explain what is meant by “protective put.”
Briefly explain what value should be used for the risk-free interest rate.