Monte Carlo simulation is a tool for considering all possible combinations of variables.
Many companies have automatic dividend reinvestment plans (DRIPs).
The original work conducted on the dividend payout practices of companies was
conducted by Lintner.
The U.S. Treasury issues inflation-indexed bonds known as TIPs.
An increase in PVGO will almost always coincide with a decrease in dividends.
Managers are reluctant to make dividend changes that may have to be reversed.
The arbitrage pricing theory (APT) implies that the market portfolio is efficient.
When cost of financial distress is included, the value of a levered firm is given by:
Value of levered firm = Value (all equity financed) + PV (tax shield) – PV (costs of
financial distress).
Firms have long-run target dividend payout ratios.
In constructing a simulation model of an investment project, one can ignore possible
interdependencies between variables.
Postaudits are conducted before the start of the projects.
The return that is expected by investors from a common stock is also called its market
capitalization rate or cost of equity capital.
According to CAPM, all investments plot along the security market line.
Risky projects can be evaluated by discounting certainty equivalent cash flows at the
risk-free interest rate.
Financial leverage increases the expected return and risk of the shareholder.
In an efficient market, investors will not pay others what they can do equally well
themselves.
Treasury bonds do not have default risk, but are subject to inflation risk.
The relationship between nominal interest rate and real interest rate is given by:
(1 + rnominal) = (1 + rreal)(1 + inflation rate)
APV method can be used for valuing businesses.
The average beta of all stocks in the market is zero.
The New York Stock Exchange is the only stock market in the US.
The firm’s mix of long-term securities used to finance its assets is called the firm’s
capital structure.
Investors are mainly concerned with those risks that can be eliminated through
diversification.
Monte Carlo simulation is merely an advanced version of scenario analysis.
The longer a bond’s duration greater is its volatility.
The duration of a zero coupon bond is the same as its maturity.
Position diagrams and profit diagrams are one and the same.
Real assets of a corporation are claims on their financial assets.
When a firm announces a dividend change or publishes its latest earnings, the major
part of the price adjustment takes place within a few minutes of the announcement.
Market value ratios indicate how highly the firm is valued by the managers.
If the term structure of interest rate is flat the nine-year interest rate is equal to the
ten-year interest rate.
Forward rates are always higher than spot rates.
Stock repurchases are like bumper dividends, but they are not typically substitute for
regular cash dividends.
Two common sources of short-term financing are borrowing from a bank and stretching
payables.
One dollar invested in a portfolio of U.S. government bonds in 1900 would have grown
in nominal value by the end of year 2006 to:
A. $719
B. $66
C. $176
D. $2.80
If a bond’s volatility is 5% and the interest rate changes by 0.5% (points) then the price
of the bond:
A. changes by 5%
B. changes by 2.5%
C. changes by 7.5%
D. none of the above
For project A in year-2, inventories increase by $12,000 and accounts payable by
$2,000. Calculate the increase or decrease in net working capital for year-2.
A. Decreases by $14,000
B. Increases by $14,000
C. Decreases by $10,000
D. Increases by $10,000
According to middle-of-the-roaders, a firm’s value is not affected by its dividend policy
because:
A. of the clientele effect
B. of the tax loopholes available to wealthy stockholders
C. well-managed companies prefer to signal their worth by paying high dividends
D. All of the above
Given the following data for Year-1: Profit after taxes = $5 million; Depreciation = $2
million; Investment in fixed assets = $4 million; Investment net working capital = $1
million. Calculate the free cash flow (FCF) for Year-1:
A. $7 million
B. $3 million
C. $11 million
D. $2 million
A forward rate prevailing from period three through to period four can be:
I) readily observed in the market place
II) extracted from spot interest rate with 3 and 4 years to maturity
III) extracted from 1 and 2 year spot interest rates
A. I only
B. II only
C. III only
D. I and III only
If the present value annuity factor at 10% APR for 10 years is 6.1446, what is the
equivalent future value annuity factor?
A. 3.108
B. 15.9374
C. 2.5937
D. None of the above
The present value of $100 expected in two years from today at a discount rate of 6% is:
A. $116.64
B. $108.00
C. $100.00
D. $89.00
If the present value annuity factor at 12% APR for 5 years is 3.6048, what is the
equivalent future value annuity factor?
A. 2.0455
B. 6.3529
C. 1.7623
D. None of the above
A project has an expected risky cash flow of $500, in year-2. The risk-free rate is 4%,
the market rate of return is 14%, and the project’s beta is 1.2. Calculate the certainty
equivalent cash flow for year-2.
A. $622.04
B. $164.29
C. $401.90
D. None of the above
The M&M Company is financed by $4 million (market value) in debt and $6 million
(market value) in equity. The cost of debt is 5% and the cost of equity is 10%. Calculate
the weighted average cost of capital. (Assume no taxes.)
A. 10%
B. 15%
C. 8%
D. None of the above
Value of the debt = $30 millions; Calculate the total value of equity of the firm:
A. $100 millions
B. $70 millions
C. $30 millions
D. none of the given values
Interest represented by “r2” is:
A. Spot rate on a one-year investment (APR)
B. Spot rate on a two-year investment (APR)
C. Expected spot rate 2 years from today
D. Expected spot rate one year from today
The value of a put option is positively related to:
I) Exercise price
II) Time to expiration
III) Volatility of the underlying stock price
IV) Risk-free rate
A. I, II, and III only
B. II, III, and IV only
C. I, II, and IV only
D. IV only
If the markets are efficient, which of the following investors should have above normal
return on assets over time?
A. Those who choose their stocks by throwing darts at a list of stocks found in the
financial pages of a newspaper.
B. Analysts who spend considerable time evaluating the best stocks to buy.
C. Mutual fund managers who manage other people’s money for a living.
D. None of the above
Which portfolio has had the highest average risk premium during the period
1900-2006?
A. Common stocks
B. Government bonds
C. Treasury bills
D. None of the given answers
A government bond issued in Germany has a coupon rate of 5%, face value of euros
100 and maturing in five years. The interest payments are made annually. Calculate the
yield to maturity of the bond (in euros) if the price of the bond is 106 euros.
A. 00%
B. 3.80%
C. 3.66%
D. none of the above
Present Value is defined as:
A. Future cash flows discounted to the present at an appropriate discount rate
B. Inverse of future cash flows
C. Present cash flow compounded into the future
D. None of the above
If the beta of Exxon Mobil is 0.65, risk-free rate is 4% and the market rate of return is
14%, calculate the expected rate of return from Exxon:
A. 12.6%
B. 10.5%
C. 13.1%
D. 6.5%
Given the following data for a stock: beta = 0.5; risk-free rate = 4%; market rate of
return = 12%; and Expected rate of return on the stock = 10%. Then the stock is:
A. overpriced
B. under priced
C. correctly priced
D. cannot be determined
Germany allows firms to choose the following depreciation methods:
I) Straight-line method, and II) Declining-balance method
A. I only
B. II only
C. I and II only
D. Germany allows a totally different system
Mr. Free has $100 dollars income this year and zero income next year. The market
interest rate is 10% per year. If Mr. Free consumes $30 this year, and invests the rest in
the market, what will be his consumption next year?
A. $50
B. $100
C. $77
D. $55
Which of the following stocks is/are a growth stock(s)?
A. Unilever
B. Cummins, Inc
C. Starbucks
D. All of the above are growth stocks
Which of the following countries had the highest risk premium?
A. Germany
B. Denmark
C. Italy
D. None of the above
Long-term U.S. government bonds have:
A. Interest rate risk
B. Default risk
C. Market risk
D. None of the above
Which of the following stocks is (are) an income stock(s)?
A. Dow Chemicals
B. Starbucks
C. Microsoft
D. None of the above
What does a low standard error mean relative to beta?
A. Beta is a reliable measurement of risk
B. Beta has very little meaning
C. There is tremendous benefit to be gained from diversification
D. Nothing
The cost of a new machine is $250,000. The machine has a 3-year life and no salvage
value. If the cash flow each year is equal to 40% of the cost of the machine, calculate
the payback period for the project:
A. 2 years
B. 2.5 years
C. 3 years
D. Cannot be determined because of insufficient data
The opportunity cost of capital for a risky project is
A. The expected rate of return on a government security having the same maturity as
the project
B. The expected rate of return on a well-diversified portfolio of common stocks
C. The expected rate of return on a portfolio of securities of similar risks as the project
D. None of the above
Financial slack includes:
I) Cash
II) Marketable securities
III) Readily salable real assets
IV) Ready access to debt markets or bank loans
A. I only
B. IV only
C. III only
D. I, II, III, and IV
Given the following data for Project M:
A. $85
B. $17.77
C. $22.65
D. None of the above
The country beta for Egypt is:
A. 1.0
B. 0.14
C. 1.35
D. 0.93
Which of the following is not true?
A. Firms have long-run target dividend payout ratios
B. Dividend changes follows shifts in long-term, sustainable earnings
C. Managers are reluctant to make dividend changes that might have to be reversed
D. All of the above
Using the technique of equivalent annual cash flows and a discount rate of 7%, what is
the value of the following project?
A. 3.06
B. 3.61
C. 10.25
D. 12.23
Generally, firms resort to repurchase of stock during:
I) boom times at an increasing rate as firms accumulate excess cash
II) recession at an increasing rate because of the low stock price
III) boom as well as recession at a steady rate
A. I only
B. II only
C. III only
D. II and III only
State the weak form of market efficiency and its implications.
Briefly explain the different categories of financial ratios.
Briefly explain why Microsoft experienced a significant drop in price when it
announced its first ever regular dividend along with huge profits.
Briefly discuss break-even analysis.
Define the term “put option.”
State and explain MM’s Proposition II.
Briefly explain the cash flows associated with a bond to the investor.
A retiree believes that investing in a non-dividend paying growth firm, that requires the
periodic sale of stock for income, will eventually lead to a loss of all shares. Explain the
flaw in this logic.
What function does the Securities and Exchange Commission play in protecting
investors?
How do managers supplement the NPV analysis of a project to gain better
understanding of a project?
What is the relationship between real and nominal rates of interest?
Briefly explain how the beta of equity of a firm changes with changes in debt-equity
ratio when taxes are considered.
What is Toyota’s business philosophy?
Discuss the importance of “beta” as a measure of risk.
Explain the term “corporation.”
What are the common ratios used to measure liquidity of a firm?
Briefly explain the term “yield to maturity.”
What are the primary reasons for a company to use debt in its capital structure?
Briefly explain the advantages of a corporation as a form of business organization.