Which of the following money market investments is short-term debt issued by a bank
with a minimum denomination of $100,000?
A) Treasury Bill
B) Banker’s Acceptance
C) Repurchase Agreement
D) Commercial Paper
E) Certificates of Deposit (CD)
Answer:
Interest on James Taggart’s credit card balances are compounded daily at an effect
annual rate of 14.91%. The APR on his credit card is closest to:
A) 13.90%
B) 13.95%
C) 14.91%
D) 16.08%
Answer:
The British government has a consol bond outstanding that pays ₤100 in interest each
year. Assuming that the current interest rate in Great Britain is 5% and that you will
receive your first interest payment immediately upon purchasing the consol bond, then
the value of the consol bond is closest to:
A) ₤2000
B) ₤2100
C) ₤1000
D) ₤1100
Answer:
Which of the following statements is false?
A) FV =
B) PV =
C) FV = Cn x (1 + r)n
D) Most investment opportunities have multiple cash flows that occur at different points
in time.
Answer:
Which of the following statements is false?
A) Cost-reduction synergies are hard to predict and achieve.
B) Because the CEOs of small firms receive information so quickly, small firms are
often able to react in timely way to changes in the economic environment.
C) Synergies usually fall into two categories: cost reductions and revenue
enhancements.
D) There may also be costs associated with size.
Answer:
Which of the following statements is false?
A) Dividing the covariance by the volatilities ensures that correlation is always between
-1 and +1.
B) Volatility is the square root of variance.
C) The closer the correlation is to 0, the more the returns tend to move together as a
result of common risk.
D) If two stocks move together, their returns will tend to be above or below average at
the same time, and the covariance will be positive.
Answer:
Which of the following statements is false?
A) The option delta, Δ, has a natural interpretation: It is the change in the price of the
stock given a $1 change in the price of the option.
B) Because a leveraged position in a stock is riskier than the stock itself, this implies
that call options on a positive beta stock are morerisky than the underlying stock and
therefore have higher returns and higher betas.
C) Only one parameter input for the Black-Scholes formula, the volatility of the stock
price, is not observable directly.
D) Because a stock’s volatility is much easier to measure (and forecast) than its
expected return, the Black-Scholes formula can be very precise.
Answer:
Use the following information to answer the question(s) below.
The risk-free rate of interest is 3% and the market risk premium is 5%.
The overall cost of capital for Wyatt Oil is closest to:
A) 8.1%
B) 8.5%
C) 8.8%
D) 9.3%
Answer:
Suppose you have $1,000 today and the risk-free rate of interest (rf) is 3.5%. The
equivalent value in one year is closest to
A) $965.00 today.
B) $966.18 today.
C) $1000.00 today.
D) $1035 today.
Answer:
You have an investment opportunity in Germany that requires an investment of
$250,000 today and will produce a cash flow of €208,650 in one year with no risk.
Suppose the risk-free rate of interest in Germany is 6% and the current competitive
exchange rate is €0.78 to $1.00. What is the NPV of this project? Would you take the
project?
A) NPV = 0; No
B) NPV = -$2,358; No
C) NPV = $2,358; Yes
D) NPV = $13,650; Yes
Answer:
Use the following information to answer the question(s) below.
Rearden Metal imports ore from South America. Rearden Metal is worried that the
South American mines may enter into a long-term contract with the Chinese to sell all
of their ore output to China, hence cutting off Rearden Metal’s supply. In the event of
such a contract with the Chinese, Rearden Metal will face much higher costs for its raw
materials causing its operating profits to decline substantially and its marginal tax rate
to fall from its current level of 35% down to 10%. An insurance firm has agreed to
write a trade insurance policy that will pay Rearden Metal $2,500,000 in the event of
the South American supply of ore being cut off. The chance of the South American
supply being cut off is estimated to be 20%, with a beta of -2.0. The risk-free rate of
interest is 4% and the return on the market is estimated to be 12%.
To cover the costs that result if some aspect of the business causes harm to a third party
or someone else’s property a firm would purchase
A) business interruption insurance.
B) property insurance.
C) business liability insurance.
D) key personnel insurance.
Answer:
Consider the following balance sheet:
What is Luther’s net working capital in 2008?
A) $12 million
B) $27 million
C) $39 million
D) $63.6 million
Answer:
Which of the following statements is false?
A) Personal taxes have the potential to offset some of the corporate tax benefits of
leverage.
B) The actual interest tax shield depends on the reduction in the total taxes (both
corporate and personal) that are paid.
C) The amount of money an investor will pay for a security ultimately depends on the
benefits the investor will receivenamely, the cash flows the investor will receive before
all taxes have been paid.
D) Just like corporate taxes, personal taxes reduce the cash flows to investors and
diminish firm value.
Answer:
Use the following information to answer the question(s) below.
Nielson Motors sold 10 million shares of stock in an SEO. The market price of
Nielson’s stock at the time was $37.50. Of the 10 million shares sold, 4 million shares
were primary shares sold by the company, and the remaining 6 million shares were
being sold by the venture capital investors. Assume the underwriter charges 4% of the
gross proceeds as an underwriting fee which is shared proportionately between the
primary and secondary shares.
The amount of money raised by the venture capitalists is closest to:
A) $144 million
B) $150 million
C) $216 million
D) $219 million
Answer:
Which of the following statements is false?
A) The variance of a portfolio is equal to the weighted average correlation of each stock
within the portfolio.
B) The variance of a portfolio is equal to the sum of the covariances of the returns of all
pairs of stocks in the portfolio multiplied by each of their portfolio weights.
C) The variance of a portfolio is equal to the weighted average covariances of each
stock within the portfolio.
D) The volatility declines as the number of stocks in a portfolio grows.
Answer:
Which of the following statements is false?
A) The project’s free cash flow to equity shows the expected amount of additional cash
the firm will have available to pay dividends (or conduct share repurchases) each year.
B) The value of the project’s FCFE should be identical to the NPV computed using the
WACC and APV methods.
C) The value of the project’s FCFE represents the gain to shareholders from the project.
D) Because interest payments are deducted before taxes, we adjust the firm’s FCF by
their before-tax cost.
Answer:
Regarding board size, researchers have found that
A) smaller boards are associated with greater firm value and performance, since small
groups make better decisions than larger groups.
B) smaller boards are associated with lower firm value and performance, since small
groups are more likely to be compromised by connections to management.
C) larger boards are associated with greater firm value and performance, since larger
boards tend to have directors with a more diverse range of backgrounds and talents.
D) larger boards are associated with lower firm value and performance, since larger
groups are more likely to be compromised by connections to management.
Answer:
Use the following information to answer the question(s) below.
Incorporated Tool, a U.S. firm, is considering its international tax situation. The
corporate tax rate in the U.S. is currently 39%. Incorporated Tool has major operations
in Ireland, where the tax rate is 12.5%, Japan where the tax rate is 40.7%, and Mexico,
where the tax rate is 30.0%. Incorporated Tool’s profits, which are fully and
immediately repatriated, and foreign taxes paid for the current year are as follows:
Assuming that the Japanese and Mexican subsidiaries did not exist, the U.S. tax liability
on the Irish subsidiary would be closest to:
A) $81 million
B) $103 million
C) $106 million
D) $156 million
Answer:
Consider the following equation:
The term x in this equation refers to
A) the value of the synergies created by the merger.
B) the premerger, or standalone, value of the acquirer.
C) new shares to pay for the target.
D) the premerger (standalone) value of the target.
Answer:
Consider the following equation for the Project WACC with a fixed debt schedule:
rwacc= rU– dτc[rD + f(rU – rD)]
The term d in this equations represents
A) a measure of the permanence of the debt level.
B) the annual adjustment percentage to the amount of debt.
C) the debt-to-value ratio.
D) the dollar amount of debt outstanding.
Answer:
Use the following information to answer the question(s) below.
Nielson Motors is currently an all equity financed firm. It expects to generate EBIT of
$20 million over the next year. Currently Nielson has 8 million shares outstanding and
its stock is trading at $20.00 per share. Nielson is considering changing its capital
structure by borrowing $50 million at an interest rate of 8% and using the proceeds to
repurchase shares. Assume perfect capital markets.
Nielson’s EPS if they choose not to change their capital structure is closest to:
A) $2.00
B) $2.30
C) $2.50
D) $2.90
Answer:
Consider a corporate bond with a $1000 face value, 8% coupon with semiannual
coupon payments, 7 years until maturity, and a YTM of 9%. It has been 57 days since
the last coupon payment was made and there are 182 days in the current coupon period.
The dirty (cash) price for this bond is closest to:
A) $949.70
B) $961.40
C) $936.40
D) $948.90
Answer:
Use the following information to answer the question(s) below:
Ideko’s Planned Debt
If Ideko’s loans will have an interest rate of 6.8%, then the interest expense paid in 2008
is closest to:
A) $6,800
B) $7,310
C) $7,820
D) $7,990
E) $8,160
Answer:
Which of the following statements regarding commercial paper is false?
A) With dealer paper, dealers sell the commercial paper to investors in exchange for a
spread (or fee) for their services.
B) With dealer paper, the spread increases the proceeds that the issuing firm receives,
thereby decreasing the effective cost of the paper.
C) The minimum face value is $25,000, and most commercial paper has a face value of
at least $100,000.
D) With direct paper, the firm sells the security directly to investors.
Answer:
Consider the following two projects:
The internal rate of return (IRR) for project Beta is closest to:
A) 25.0%
B) 22.7%
C) 24.5%
D) 22.2%
Answer:
Suppose that a security with a risk-free cash flow of $1000 in one year trades for $930
today. If there are no arbitrage opportunities, then the current risk-free rate is closest to:
A) 6.0%
B) 6.5%
C) 7.0%
D) 7.5%
E) 8.0%
Answer:
Which of the following statements is false?
A) The standard error provides an indication of how far the sample average might
deviate from the expected return.
B) The 95% confidence interval for the expected return is defined as the Historical
Average Return plus or minus three standard errors.
C) We can use a security’s historical average return to estimate its actual expected
return.
D) The standard error is the standard deviation of the average return.
Answer:
Use the information for the question(s) below.
Big Cure and Little Cure are both pharmaceutical companies. Big Cure presently has a
potential “blockbuster” drug before the Food and Drug Administration (FDA) waiting
for approval. If approved, Big Cure’s blockbuster drug will produce $1 billion in net
income for Big Cure. Little Cure has 10 separate less important drugs before the FDA
waiting for approval. If approved, each of Little Cure’s drugs would produce $100
million in net income for Little Cure. The probability of the FDA approving a drug is
50%.
What is the expected payoff for Little Cure’s ten drugs?
A) $500 million
B) $100 million
C) $1 billion
D) $0
Answer:
Use the information for the question(s) below.
Suppose that Rose Industries is considering the acquisition of another firm in its
industry for $100 million. The acquisition is expected to increase Rose’s free cash flow
by $5 million the first year, and this contribution us expected to grow at a rate of 3%
every year there after. Rose currently maintains a debt to equity ratio of 1, its marginal
tax rate is 40%, its cost of debt rD is 6%, and its cost of equity rE is 10%. Rose
Industries will maintain a constant debt-equity ratio for the acquisition.
The unlevered value of Rose’s acquisition is closest to:
A) $63 million
B) $50 million
C) $167 million
D) $100 million
Answer:
Use the information for the question(s) below.
As an oil refiner, you are able to produce $76 worth of unleaded gasoline from one
barrel of Alaska North Slope (ANS) crude oil. Because of its lower sulfur content, you
can produce $77 worth of unleaded gasoline from one barrel of West Texas
Intermediate (WTI) crude.
Another oil refiner is offering to trade you 10,150 Bbls of Alaska North Slope (ANS)
crude oil for 10,000 Bbls of West Texas Intermediate (WTI) crude oil. Assuming you
just purchased 10,000 Bbls of WTI crude at the current market price, the total benefit
(cost) to you if you take the trade is closest to:
A) $730,600
B) $770,000
C) $771,400
D) $773,908
Answer:
Use the information for the question(s) below.
Suppose the purchase price of a bulldozer is $90,000, its residual value in four years is
certain to be $15,000, and there is no risk that the lessee will default on the lease.
Assume that capital markets are perfect and the risk-free interest rate is 6% APR with
monthly compounding.
The monthly lease payments for a four year lease of the Bulldozer are closest to:
A) $1,870
B) $1,825
C) $1,750
D) $2,115
Answer:
Which of the following statements is false?
A) An American call on a non-dividend-paying stock has the same price as its European
counterpart.
B) The price of any call option on a non-dividend-paying stock always exceeds its
intrinsic value.
C) It is neveroptimal to exercise a call option on a dividend-paying stock early you are
always better off just selling the option.
D) If present value of the dividend payment is large enough, the time value of a
European call option can be negative, implying that its price could be less than its
intrinsic value.
Answer:
Which of the following statements is false?
A) Bank loans are typically initiated with a promissory note, which is a written
statement that indicates the amount of the loan, the date payment is due, and the interest
rate.
B) The most straightforward type of bank loan is a single, end-of-period-payment loan.
C) With a fixed interest rate, the specific rate that the bank will charge is stipulated at
the time the loan is made.
D) One of the primary sources of short-term financing, especially for small businesses,
is the investment bank.
Answer:
If investors believe that others have superior information which they can take advantage
of by copying their trades, this can lead to
A) an informational cascade effect.
B) a disposition effect.
C) a sensation seeking effect.
D) an overconfidence bias.
Answer: