Archives: Quiz

A default-free security has an annual coupon rate of 3.25% and sells for par. This bond will mature in: A) 1 year B) 2 years C) 3 years D) 4 years The weighted average cost of capital for “Minie” is […]

Which of the following statements is FALSE? A) Investments with higher volatility have rewarded investors with higher average returns. B) Investments with higher volatility should have a higher risk premium and therefore higher returns. C) Volatility seems to be a […]

Taggart Transcontinental currently has a bank loan outstanding that requires it to make three annual payments at the end of the next three years or to skip making the next two payments in lieu of making one large payment at […]

Nielson Motors has a debt-equity ratio of 1.8, an equity beta of 1.6, and a debt beta of 0.20. It is currently evaluating the following projects, none of which would change Nielson’s volatility. (All amounts are in $millions.) Nielson Motors […]

Which of the following is NOT considered to be an important choice when estimating beta? A) The choice of the time horizon to use for estimation B) The choice of method used to extrapolate beta C) The choice between weekly […]

If the risk-free rate is 5% and the expected return of investing in Merck is 11.3%, then the expected return on the market must be: A) 8.0% B) 10.0% C) 10.4% D) 12.0% Nielson Motors has a share price of […]

Consider the following zero-coupon yields on default free securities: The YTM of a 3 year default free security with a face value of $1000 and an annual coupon rate of 6% is closest to: A) 5.5% B) 5.8% C) 5.7% […]

Rockwood Enterprises is currently an all equity firm and has just announced plans to expand their current business. In order to fund this expansion, Rockwood will need to raise $100 million in new capital. After the expansion, Rockwood is expected […]

Consider the following two projects: The NPV for project beta is closest to: A) $24.01 B) $16.92 C) $20.96 D) $14.41 Which of the following is NOT one of Modigliani and Miller’s set of conditions referred to as perfect capital […]

Which of the following statements is FALSE? A) The relative proportions of debt, equity, and other securities that a firm has outstanding constitute its capital structure. B) The most common choices are financing through equity alone and financing through a […]

Consider the following probability distribution of returns for Alpha Corporation: The standard deviation of the return on Alpha Corporation is closest to: A) 22.4% B) 19.0% C) 21.8% D) 19.4% Consider the following income statement for Kroger Inc. (all figures […]

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 is expected to grow […]

Consider the following four bonds that pay annual coupons: The amount that the price of bond “D” will change if its yield to maturity increases from 8% to 9% is closest to: A) -$36 B) -$39 C) $36 D) $9 […]

Which of the following statements is FALSE? A) With a stock dividend, a firm does not pay out any cash to shareholders. As a result, the total market value of the firm’s assets and liabilities, and therefore of its equity, […]

Which of the following statements is FALSE? A) The tax deductibility of interest lowers the effective cost of debt financing for the firm. B) When a firm uses debt financing, the cost of the interest it must pay is offset […]

Which of the following is NOT an advantage of a sole proprietorship? A) Single taxation B) Ease of setup C) Limited liability D) No separation of ownership and control Assume that the corporate tax rate is 40%, the personal tax […]

Consider the following list of projects: Assuming that your capital is constrained, so that you only have $600,000 available to invest in projects, which projects should you invest in and in what order? A) CBFH B) CBGF C) BCFG D) […]

Shepard Industries is evaluating a proposal to expand its current distribution facilities. Management has projected the project will produce the following cash flows for the first two years (in millions). The depreciation tax shield for Shepard Industries project in year […]

The price today of a two-year default-free security with a face value of $1000 and an annual coupon rate of 5% is closest to: A) $1002.78 B) $1003.31 C) $1028.50 D) $1028.61 Nielson Motors (NM) is a newly public firm […]

Suppose Novak Company experienced a reduction in its ROE over the last year. This fall could be attributed to: A) an increase in net profit margin. B) a decrease in asset turnover. C) an increase in leverage. D) a decrease […]

You are considering investing in a zero coupon bond that will pay you its face value of $1000 in ten years. If the bond is currently selling for $485.20, then the IRR for investing in this bond is closest to: […]

*The current tax rates are set to expire in 2008 unless Congress extends them. The tax rates shown are for financial assets held for one year. For assets held less than one year, capital gains are taxed at the ordinary […]

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.Suppose that Rearden Metal […]

Which of the following statements is FALSE? A) Bond ratings encourage widespread investor participation and relatively liquid markets. B) Bonds in the top four categories are often referred to as investment grade bonds. C) A bond’s rating depends on the […]

Consider the following information regarding corporate bonds: Wyatt Oil has a bond issue outstanding with seven years to maturity, a yield to maturity of 7.0%, and a BBB rating. The bondholders’ expected loss rate in the event of default is […]

If the expected return on the market is 11% and the expected return of investing in Merck is 10.35%, then the risk-free rate must be: A) 3.0% B) 4.0% C) 4.5% D) 5.0% Luther Industries currently has 5 million shares […]

Which of the following statements is FALSE? A) In general, the IRR rule works for a stand-alone project if all of the project’s positive cash flows precede its negative cash flows. B) There is no easy fix for the IRR […]

An exploration of the effect on NPV of changing multiple project parameters is called: A) scenario analysis. B) IRR analysis. C) accounting break-even analysis. D) sensitivity analysis. If investors believe that others have superior information which they can take advantage […]

Your firm is considering building a new office complex. Your firm already owns land suitable for the new complex. The current book value of the land is $100,000, however a commercial real estate again has informed you that an outside […]

A limited liability company is essentially: A) a limited partnership without limited partners. B) a limited partnership without a general partner. C) just another name for a limited partnership. D) just another name for a corporation. Which of the following […]

Your son is about to start kindergarten in a private school. Currently, the tuition is $12,000 per year, payable at the start of the school year. You expect annual tuition increases to average 6% per year over the next 13 […]

Nielson Motors has a debt-equity ratio of 1.8, an equity beta of 1.6, and a debt beta of 0.20. It is currently evaluating the following projects, none of which would change Nielson’s volatility. (All amounts are in $millions.) Which of […]

Which of the following statements is FALSE? A) The most common valuation multiple is the price-earnings (P/E) ratio. B) You should be willing to pay proportionally more for a stock with lower current earnings. C) A firm’s P/E ratio is […]

d’Anconia Copper has $200 million in cash that it can use for a share repurchase. Suppose instead that d’Anconia Copper invests the funds in an account paying 5% interest for one year. Assume that the corporate tax rate is 35%, […]

A type of agency problem that results in shareholders gaining by choosing not to finance new, positive-NPV projects is: A) asset substitution. B) debt overhang. C) excessive risk-taking. D) distress costs. Consider the following information regarding corporate bonds: Galt Industries […]

Nielson Motors (NM) has no debt. Its assets will be worth $600 million in one year if the economy is strong, but only $300 million if the economy is weak. Both events are equally likely. The market value today of […]

Omicron Industries’ Market Value Balance Sheet ($ Millions) and Cost of Capital Omicron Industries New Project Free Cash Flows Assume that this new project is of average risk for Omicron and that the firm wants to hold constant its debt […]

Which of the following statements is FALSE? A) Leverage decreases the risk of the equity of a firm. B) Because the cash flows of the debt and equity sum to the cash flows of the project, by the Law of […]

Which of the following statements is FALSE? A) The long-run growth rate gFCFis typically based on the expected long-run growth rate of the firm’s revenues. B) Because the firm’s free cash flow is equal to the sum of the free […]

The Sisyphean Corporation is considering investing in a new cane manufacturing machine that has an estimated life of three years. The cost of the machine is $30,000 and the machine will be depreciated straight line over its three-year life to […]

Iota Industries is an all-equity firm with 50 million shares outstanding. Iota has $200 million in cash and expects future free cash flows of $75 million per year. Management plans to use the cash to expand the firm’s operations, which […]

Which of the following is NOT a systematic risk? A) The risk that oil prices rise, increasing production costs B) The risk that the Federal Reserve raises interest rates C) The risk that the economy slows, reducing demand for your […]

Luther Corporation Consolidated Balance Sheet December 31, 2009 and 2008 (in $ millions) If in 2009 Luther has 10.2 million shares outstanding and these shares are trading at $16 per share, then using the market value of equity, the debt […]

Which of the following statements is FALSE? A) The yield to maturity of a coupon bond is a weighted average of the yields on the zero-coupon bonds. B) If the zero-coupon yield curve is downward sloping, the yield to maturity […]

Consider the following income statement for Kroger Inc. (all figures in $ Millions): The total amount available to payout to all the investors in Kroger in 2006 is closest to: A) $990 million B) $1,525 million C) $1,500 million D) […]

The volatility of the market portfolio is 10%, the expected return on the market is 12%, and the risk-free rate of interest is 4%The Sharpe Ratio for Rearden Metal is closest to: A) 0.40 B) 0.56 C) 0.80 D) 1.00 […]

Wyatt Oil’s excess return for 2009 is closest to: A) 18.6% B) 19.6% C) 20.0% D) 21.5% Answer: A Explanation: A) excess returne= (rWO– rrf)2009 Consider a five-year, default-free bond with an annual coupon rate of 5% and a face […]

Consider the following information regarding corporate bonds: Your estimate of the asset beta for Nielson Motors is closest to: A) 0.59 B) 0.66 C) 0.71 D) 1.75 Consider the following timeline detailing a stream of cash flows: If the current […]

Which of the following statements is FALSE? A) If the market portfolio is efficient, then all securities and portfolios must plot on the SML, not just individual stocks. B) For most stocks the standard errors of the alpha estimates are […]

Nielson Motors (NM) has no debt. Its assets will be worth $600 million in one year if the economy is strong, but only $300 million if the economy is weak. Both events are equally likely. The market value today of […]