Use the information for the question(s) below.
Assume that you are 30 years old today, and that you are planning on retirement at age
65. Your current salary is $45,000 and you expect your salary to increase at a rate of 5%
per year as long as you work. To save for your retirement, you plan on making annual
contributions to a retirement account. Your first contribution will be made on your 31st
birthday and will be 8% of this year’s salary. Likewise, you expect to deposit 8% of
your salary each year until you reach age 65. Assume that the rate of interest is 7%.
The present value (at age 30) of your retirement savings is closest to:
A) $87,000
B) $108,000
C) $46,600
D) $75,230
Which of the following statements is false?
A) As firms mature, their earnings exceed their investment needs and they begin to pay
dividends.
B) Total return equals earnings multiplied by the dividend payout rate.
C) Cutting the firm’s dividend to increase investment will raise the stock price if, and
only if, the new investments have a positive NPV.
D) We cannot use the constant dividend growth model to value the stock of a firm with
rapid or changing growth.
Use the information for the question(s) below.
Suppose you invest $20,000 by purchasing 200 shares of Abbott Labs (ABT) at $50 per
share, 200 shares of Lowes (LOW) at $30 per share, and 100 shares of Ball Corporation
(BLL) at $40 per share.
The weight on Ball Corporation in your portfolio is:
A) 50%
B) 40%
C) 20%
D) 30%
Which of the following statements is false?
A) A portfolio is efficient if it has the highest possible Sharpe ratio; that is it is efficient
if it provides the largest increase in expected return possible for a given increase in
volatility.
B) The required return for an investment is equal to a risk premium that is equal to the
risk premium of the investor’s current portfolio scaled by .
C) Increasing the investment in investment I will increase the Sharpe ratio of portfolio P
if its expected return E[Ri] exceeds the required return ri, which is given by ri = rf +
x (E[Rp] – rf).
D) If a security i‘s expected return is less than the required return ri, we should reduce
our holding of security i.
Consider the following list of projects:
Assuming that your capital is constrained, which project should you invest in first?
A) Project C
B) Project G
C) Project B
D) Project F
Use the table for the question(s) below.
Consider the following stock price and shares outstanding data:
The total market capitalization for all four stocks is closest to:
A) $479 Billion
B) $415 Billion
C) $2,100 Billion
D) $200 Billion
Galt Industries has just issued a callable, $1000 par value, five-year, 6% coupon bond
with semiannual coupon payments. The bond can be called at par in three years or
anytime thereafter on a coupon payment date. If the bond is currently trading for
$978.94, then it’s yield to maturity is closest to:
A) 3.4%
B) 6.0%
C) 6.5%
D) 6.8%
Which of the following organization forms for a business does not avoid double
taxation?
A) Limited Partnership
B) “C” Corporation
C) “S” Corporation
D) Limited Liability Company
What kind of corporate debt can be secured by any specified assets?
A) Mortgage bonds
B) Notes
C) Asset-backed bonds
D) Debentures
While the Sarbanes-Oxley Act (SOX) contains many provisions, the overall intent of
the legislation was to improve the accuracy of information given to both boards and to
shareholders. SOX attempted to achieve this goal in all of the following ways except
A) overhauling incentives and independence in the auditing process.
B) mandating the separation of the positions of CEO and Chairman of the Board.
C) stiffening penalties for providing false information.
D) forcing companies to validate their internal financial control processes.
When target shareholders exchange their old stock for new stock in the acquiring firm,
this is known as a(n)
A) exchange swap.
B) stock exchange.
C) term swap.
D) stock swap.
Suppose that you want to use the 10 year historical average return on Stock A to
forecast the expected future return on Stock A. The standard error of your estimate of
the expect return is closest to:
A) 16.4%
B) 3.32%
C) 3.15%
D) 33.20%
Which of the following statements is false?
A) While firms do still pay dividends, substantial evidence shows that many firms have
recognized their tax disadvantage.
B) The fact that firms continue to issue dividends despite their tax disadvantage is often
referred to as the dividend puzzle.
C) At the end of the 1990s dividend payments exceeded the value of repurchases for
U.S. industrial firms.
D) While evidence is indicative of the growing importance of share repurchases as a
part of firms’ payout policies, it also shows that dividends remain a key form of payouts
to shareholders.
The duration of a five-year bond with 8% annual coupons trading at par is closest to:
A) 2.5 Years
B) 4.3 Years
C) 5.0 Years
D) 6.2 Years
Which of the following statements is false?
A) Depreciation is not a cash expense paid by the firm.
B) Net Working Capital = Cash + Inventory + Payables – Receivables.
C) Since 1997, companies can “carry back” losses for two years and “carry forward”
losses for 20 years.
D) Earnings do not represent real profits.
Which of the following statements is false?
A) There are two primary mechanisms by which ownership and control of a public
corporation can change: Either another corporation or group of individuals can acquire
the target firm, or the target firm can merge with another firm.
B) Merger activity is greater during economic contractions than during expansions.
C) Mergers and acquisitions are part of what is often referred to as “the market for
corporate control.”
D) The takeover market is also characterized by merger waves peaks of heavy activity
followed by quiet troughs of few transactions.
Use the following information to answer the question(s) below.
Suppose that all capital gains are taxed at a 20% rate, and that the dividend tax rate is
40%. Rearden Metal is currently trading for $40 per share, and is about to pay a $5
special dividend.
The effective dividend tax rate for an investor in Rearden Metal is closest to:
A) 0%
B) 20%
C) 25%
D) 30%
If Flagstaff currently maintains a debt to equity ratio of 1, then the value of Flagstaff’s
interest tax shield is closest to:
A) $10 million
B) $18 million
C) $11 million
D) $24 million
Use the following information to answer the question(s) below.
Two years ago the Krusty Krab Restaurant purchased a grill for $50,000. The owner,
Eugene Krabs, has learned that a new grill is available that will cook Krabby Patties
twice as fast as the existing grill. This new grill can be purchased for $80,000 and
would be depreciated straight line over 8 years, after which it would have no salvage
value. Eugene Krab expects that the new grill will produce EBITDA of $50,000 per
year for the next eight years while the existing grill produces EBITDA of only $35,000
per year. The current grill is being depreciated straight line over its useful life of 10
years after which it will have no salvage value. All other operating expenses are
identical for both grills. The existing grill can be sold to another restaurant now for
$30,000. The Krusty Krab’s tax rate is 35%.
The incremental after tax cash flow that the Krusty Krab will receive from selling the
existing grill is closest to:
A) 19,500
B) 30,000
C) 33,500
D) 50,000
Use the information for the question(s) below.
Suppose that you currently have $250,000 invested in a portfolio with an expected
return of 12% and a volatility of 10%. The efficient (tangent) portfolio has an expected
return of 17% and a volatility of 12%. The risk-free rate of interest is 5%.
The Sharpe ratio for the efficient portfolio is closest to:
A) 0.7
B) 1.0
C) 1.4
D) 1.2
Which of the following costs would you consider when making a capital budgeting
decision?
A) Sunk cost
B) Opportunity cost
C) Interest expense
D) Fixed overhead cost
You are considering investing in a start up project at a cost of $100,000. You expect the
project to return $500,000 to you in seven years. Given the risk of this project, your cost
of capital is 20%.
The IRR for this project is closest to:
A) 15.60%
B) 18.95%
C) 20.00%
D) 25.85%
If the current rate of interest is 8%, then the present value of an investment that pays
$1000 per year and lasts 20 years is closest to:
A) $18,519
B) $45,761
C) $9,818
D) $20,000
A firm issued three-month commercial paper with a $2,000,000 face value and received
$1,964,000. The effective annual rate that this firm is paying is closest to:
A) 8.0%
B) 7.5%
C) 1.8%
D) 7.3%
Which of the following statements is false?
A) In many other countries, the central conflict is between what are called “controlling
shareholders” and “minority shareholders.”
B) Controlling shareholders can make decisions that benefit them disproportionately
relative to the minority shareholders, such as employing family members rather than the
most talented managers or establishing contracts favorable to other family controlled
firms.
C) As recent events and corporate scandals have shown, investor protection in the
United States is generally seen as substandard when compared to the developed
economies in the world.
D) Much of the focus in the United States is on the agency conflict between
shareholders, who own the majority of a firm but are a dispersed group, and managers,
who own little of the firm and must be monitored.
Use the following information to answer the question(s) below.
Assume that the risk-free rate of interest is 3% and you estimate the market’s expected
return to be 9%.
Which firm has the highest cost of equity capital?
A) Eenie
B) Meenie
C) Miney
D) Moe
You are saving for retirement. To live comfortably, you decide that you will need $2.5
million dollars by the time you are 65. If today is your 30th birthday, and you decide,
starting today, and on every birthday up to and including your 65th birthday, that you
will deposit the same amount into your savings account. Assuming the interest rate is
5%, the amount that you must set aside each and every year on your birthday is closest
to:
A) $71,430
B) $27,680
C) $26,100
D) $26,260
Consider a zero coupon bond with 20 years to maturity. The amount that the price of the
bond will change if its yield to maturity decreases from 7% to 5% is closest to:
A) $120
B) -$53
C) $53
D) $673
The firm mails dividend checks to the registered shareholders on the
A) ex-dividend date.
B) declaration date.
C) distribution date.
D) record date.
Which of the following statements is false?
A) The bond’s expected return, which is equal to the firm’s debt cost of capital, is less
than the yield to maturity if there is a risk of default.
B) The two best-known bond-rating companies are Standard & Poor’s and Dow Jones.
C) Bonds in the bottom five categories are often call speculative bonds, junk bonds, or
high-yield bonds.
D) Bond ratings encourage widespread investor participation and relatively liquid
markets.
Use the information for the question(s) below.
Electronic Gaming Incorporated (EGI) is a firm with no debt and its 20 million shares
are currently trading for $16 per share. Based on the prospects for EGI’s new hand held
video game, management feels the true value of the firm is $20 per share. Management
believes that the share price will reflect this higher value after the video game is
released next fall. EGI has already announced plans to raise $100 million from
investors to build a new factory.
Assume that EGI decides to raise the $100 million through the issuance of new shares
prior to the release of the new video game. The number of new shares that EGI will
issue is closest to:
A) 5.0 million
B) 6.25 million
C) 10 million
D) 1.6 million
You are a shareholder in a “C” corporation. This corporation earns $4 per share before
taxes. After it has paid taxes, it will distribute the remainder of its earnings to you as a
dividend. The dividend is income to you, so you will then pay taxes on these earnings.
The corporate tax rate is 35% and your tax rate on dividend income is 15%. The
effective tax rate on your share of the corporations earnings is closest to:
A) 15%
B) 35%
C) 45%
D) 50%
Which of the following statements is false?
A) The covered interest parity equation states that the difference between the forward
and spot exchange rates is related to the interest rate differential between the currencies.
B) By entering into a currency forward contract, a firm can lock in an exchange rate in
advance and reduce or eliminate its exposure to fluctuations in a currency’s value.
C) When the interest rate differs across countries, investors have an incentive to borrow
in the low-interest rate currency and invest in the high interest rate currency.
D) A currency forward is usually written between two firms, and it fixes a currency
exchange rate for a transaction that will occur at a future date.