KUIS 1

Question 1
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Which one of the following statements is correct concerning a portfolio beta?

Select one:
a. Portfolio betas range between -1.0 and +1.0.
b. A portfolio beta is a weighted average of the betas of the individual securities
contained in the portfolio.
c. A portfolio beta cannot be computed from the betas of the individual securities
comprising the portfolio because some risk is eliminated via diversification.
d. A portfolio of U.S. Treasury bills will have a beta of +1.0.

Question 2
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Which one of the following indicates a portfolio is being effectively diversified?

Select one:
a. an increase in the portfolio beta
b. an increase in the portfolio rate of return
c. a decrease in the portfolio beta
d. a decrease in the portfolio standard deviation
Question 3
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The principle of diversification tells us that:

Select one:
a. concentrating an investment in three companies all within the same industry will
greatly reduce the systematic risk. Memfokuskan suatu investasi pada tiga perusahaan
dalam satu industry akan mengurangi risiko sistematis secara besar.
b. concentrating an investment in two or three large stocks will eliminate all of the
unsystematic risk. Memfokuskan suatu investasi pada dua atau tiga saham besar akan
menghilangkan semua risiko tidak sistematis.
c. spreading an investment across many diverse assets will eliminate some of the total
risk. Menyebar investasi pada banyak asset berbeda akan menghilangkan beberapa dari
total risiko.
d. spreading an investment across five diverse companies will not lower the total risk.
Menyebar suatu investasi pada lima perusahaan yang berbeda tidak akan mengurangi
risiko total.

Question 4
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If you invested the following stock and got the following return for 5 years.
Year    Return
 1          0.12
 2         0.15 
 3         0.11
 4       -0.15
 5         0.30
 The arithmatic return is
Select one:
a. 10.35
b. 10.90
c. 11.54
d. 10.60

Question 5
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If you invest the stock A 60% and the Stock B 40% in your portfolio. Stock A has
expected return of 10% and standard deviation of 15%, and stock B has expected return
of 18% and standard deviation of 25%, and the correlation of the two stock is -0.5. Then
the standard deviation of your portfolio is
Select one:
a. 11.13%
b. 11.66%
c. 14.70%
d. 10.54%

Question 6
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The common stock of Alpha Manufacturers has a beta of 1.47 and an actual expected
return of 15.26 percent. The risk-free rate of return is 4.3 percent and the market rate of
return is 12.01 percent. Which one of the following statements is true given this
information?

Select one:
a. The actual expected stock return indicates the stock is currently overpriced.
b. The stock has less systematic risk than the overall market.
c. To be correctly priced according to CAPM, the stock should have an expected return
of 21.95 percent.
d. The actual expected stock return will graph above the Security Market Line.

Question 7
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The expected return on a portfolio:

I. can never exceed the expected return of the best performing security in the portfolio.
II. must be equal to or greater than the expected return of the worst performing security
in the portfolio.
III. is independent of the unsystematic risks of the individual securities held in the
portfolio.
IV. is independent of the allocation of the portfolio amongst individual securities.

Select one:
a. II and IV only
b. I and II only
c. I, II, and III only
d. I and III only

Question 8
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You own the following portfolio of stocks. What is the portfolio weight of stock C?
Stock    Number of Shares   Price per Share
 A                      500                      $14
 B                      200                      $23
 C                      600                      $18
 D                      100                       $47
Select one:
a. 39.85 percent
b. 42.86 percent
c. 48.09 percent
d. 44.41 percent

Question 9
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Which one of the following is an example of systematic risk?

Select one:
a. a flood washes away a firm's warehouse. Banjir yang menghanyutkan gudang sebuah
pabrik.
b. a city imposes an additional one percent sales tax on all products. Kota yang
menerapkan penambahan satu persen pajak pada semua produk.
c. a toymaker has to recall its top-selling toy. Perusahaan mainan menarik kembali jenis
mainan yang paling laku.
d. investors panic causing security prices around the globe to fall precipitously.
Kepanikan investor menyebabkan harga sekuritas global menurun tajam

Question 10
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Which one of the following should earn the most risk premium based on CAPM?

Select one:
a. stock with a beta of 1.38
b. diversified portfolio with returns similar to the overall market
c. stock with a beta of 0.74
d. U.S. Treasury bill

Question 11
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If you invest the stock A 60% and the Stock B 40% in your portfolio. Stock A has
expected return of 10% and standard deviation of 15%, and stock B has expected return
of 18% and standard deviation of 25%, and the correlation of the two stock is -0.5. Then
the expected return of your portfolio is

Select one:
a. 14.80%
b. 13.20%
c. 14.30%
d. 13.50%

Question 12
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If a stock portfolio is well diversified, then the portfolio variance:

Select one:
a. will equal the variance of the most volatile stock in the portfolio.
b. will be a weighted average of the variances of the individual securities in the portfolio.
c. may be less than the variance of the least risky stock in the portfolio.
d. must be equal to or greater than the variance of the least risky stock in the portfolio.

Question 13
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If you invested the following stock and got the following return for 5 years.
       Year      Return
         1             0.12
         2            0.15
         3            0.11
         4           -0.15
         5             0.30
The standard deviation of the stock is

Select one:
a. 14.51
b. 13.12
c. 15.41
d. 16.23

Question 14
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If you invested the following two stocks and got the following return for 5 years.
  Year        Stock A       Stock B
     1                 0.12            0.15
     2                0.15            0.12
     3                0.11             0.30
     4              -0.15           -0.30
     5                0.30          -0.10
The correlation of two stock is

Select one:
a. 0.3707 SALAH
b. -0.3213
c. 0.1276
d. 0.4324

Question 15
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Which one of the following is an example of unsystematic risk?

Select one:
a. income taxes are increased across the board
b. consumer spending on entertainment decreased nationally B YANG BENER
c. an increased feeling of prosperity is felt around the globe
d. a national sales tax is adopted

Question 1
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A stock with an actual return that lies above the security market line has:

Select one:

a. more risk than that warranted by CAPM.

b. more systematic risk than the overall market.

c. less systematic risk than the overall market.

d. a higher return than expected for the level of risk assumed.
Question 2
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If you invest the stock A 60% and the Stock B 40% in your portfolio. Stock A has expected return
of 10% and standard deviation of 15%, and stock B has expected return of 18% and standard
deviation of 25%, and the correlation of the two stock is -0.5. Then the expected return of your
portfolio is

Select one:

a. 13.50%

b. 14.30%

c. 14.80%

d. 13.20%

Question 3
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The risk-free rate of return is 3.9 percent and the market risk premium is 6.2 percent. What is the
expected rate of return on a stock with a beta of 1.21?

Select one:
a. 11.40 percent

b. 12.22 percent

c. 12.47 percent

d. 10.92 percent

Question 4
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Which one of the following statements is correct concerning a portfolio of 20 securities with
multiple states of the economy when both the securities and the economic states have unequal
weights?

Select one:

a. Given the unequal weights of both the securities and the economic states, the standard
deviation of the portfolio must equal that of the overall market.

b. Given both the unequal weights of the securities and the economic states, an investor might
be able to create a portfolio that has an expected standard deviation of zero.

c. The weights of the individual securities have no effect on the expected return of a portfolio
when multiple states of the economy are involved.

d. The standard deviation of the portfolio will be greater than the highest standard deviation of
any single security in the portfolio given that the individual securities are well diversified.

Question 5
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Which one of the following is represented by the slope of the security market line?

Select one:

a. beta coefficient

b. market standard deviation

c. market risk premium

d. reward-to-risk ratio

Question 6
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If you invested the following stock and got the following return for 5 years.
Year    Return
 1          0.12
 2         0.15 
 3         0.11
 4       -0.15
 5         0.30
 The arithmatic return is

Select one:

a. 10.35
b. 11.54

c. 10.60

d. 10.90

Question 7
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Which one of the following indicates a portfolio is being effectively diversified?

Select one:

a. an increase in the portfolio beta

b. a decrease in the portfolio beta

c. a decrease in the portfolio standard deviation

d. an increase in the portfolio rate of return

Question 8
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Which one of the following statements is correct concerning a portfolio beta?

Select one:

a. A portfolio beta is a weighted average of the betas of the individual securities contained in the
portfolio.

b. Portfolio betas range between -1.0 and +1.0.

c. A portfolio of U.S. Treasury bills will have a beta of +1.0.

d. A portfolio beta cannot be computed from the betas of the individual securities comprising
the portfolio because some risk is eliminated via diversification.

Question 9
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If a stock portfolio is well diversified, then the portfolio variance:

Select one:

a. must be equal to or greater than the variance of the least risky stock in the portfolio.

b. will be a weighted average of the variances of the individual securities in the portfolio.

c. may be less than the variance of the least risky stock in the portfolio.

d. will equal the variance of the most volatile stock in the portfolio.

Question 10
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The standard deviation of a portfolio:

Select one:

a. is a weighed average of the standard deviations of the individual securities held in that
portfolio.

b. can be less than the weighted average of the standard deviations of the individual securities
held in that portfolio.

c. serves as the basis for computing the appropriate risk premium for that portfolio.

d. is a measure of that portfolio's systematic risk.

Question 11
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If you invest the stock A 60% and the Stock B 40% in your portfolio. Stock A has expected return
of 10% and standard deviation of 15%, and stock B has expected return of 18% and standard
deviation of 25%, and the correlation of the two stock is -0.5. Then the standard deviation of
your portfolio is

Select one:

a. 14.70%

b. 11.13%
c. 10.54%

d. 11.66%

Question 12
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If you invested the following two stocks and got the following return for 5 years.
  Year        Stock A       Stock B
     1                 0.12            0.15
     2                0.15            0.12
     3                0.11             0.30
     4              -0.15           -0.30
     5                0.30          -0.10
The correlation of two stock is

Select one:

a. -0.3213

b. 0.4324

c. 0.3707

d. 0.1276

Question 13
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You recently purchased a stock that is expected to earn 22 percent in a booming economy, 9
percent in a normal economy, and lose 33 percent in a recessionary economy. There is a 5
percent probability of a boom and a 75 percent chance of a normal economy. What is your
expected rate of return on this stock?

Select one:

a. -2.25 percent

b. -3.40 percent

c. 1.25 percent

d. 2.60 percent

Question 14
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If you invested the following stock and got the following return for 5 years.
       Year      Return
         1             0.12
         2            0.15
         3            0.11
         4           -0.15
         5             0.30
The standard deviation of the stock is
Select one:

a. 16.23

b. 13.12

c. 14.51

d. 15.41

Question 15
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Steve has invested in twelve different stocks that have a combined value today of $121,300.
Fifteen percent of that total is invested in Wise Man Foods. The 15 percent is a measure of which
one of the following?

Select one:

a. price-earnings ratio

b. degree of risk

c. portfolio return

d. portfolio weight

KUIS 2

Question 1
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Jemisen has expected earnings before interest and taxes of $6,200. Its unlevered cost of
capital is 13 percent and its tax rate is 34 percent. The firm has debt with both a book
and a face value of $2,500. This debt has a 9 percent coupon and pays interest annually.
What is the firm's weighted average cost of capital?

Select one:
a. 13.87 percent
b. 12.66 percent
c. 12.48 percent
d. 14.14 percent

Question 2
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You currently own 600 shares of JKL, Inc. JKL is an all equity firm that has 75,000 shares
of stock outstanding at a market price of $40 a share. The company's earnings before
interest and taxes are $140,000. JKL has decided to issue $1 million of debt at 8 percent
interest. This debt will be used to repurchase shares of stock. How many shares of JKL
stock must you sell to unlever your position if you can loan out funds at 8 percent
interest?

Select one:
a. 150 shares
b. 180 shares
c. 200 shares
d. 120 shares

Question 3
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Jessica invested in Quantro stock when the firm was unlevered. Since then, Quantro has
changed its capital structure and now has a debt-equity ratio of 0.30. To unlever her
position, Jessica needs to:
Select one:
a. sell some shares of Quantro stock and loan out the sale proceeds.
b. create a personal debt-equity ratio of 0.30.
c. sell some shares of Quantro stock and hold the proceeds in cash.
d. borrow some money and purchase additional shares of Quantro stock.

Question 4
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Homemade leverage is:

Select one:
a. the incurrence of debt by a corporation in order to pay dividends to shareholders.
b. best defined as an increase in a firm's debt-equity ratio.
c. the exclusive use of debt to fund a corporate expansion project.
d. the borrowing or lending of money by individual shareholders as a means of
adjusting their level of financial leverage.

Question 5
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In general, the capital structures used empirically

Select one:
a. vary significantly across industries.
b. are fairly standard for all SIC codes.
c. tend to be those which maximize the use of the firm's available tax shelters.
d. generally result in debt-equity ratios between 0.45 and 0.60.

Question 6
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ABC Co. and XYZ Co. are identical firms in all respects except for their capital structure.
ABC is all equity financed with $480,000 in stock. XYZ uses both stock and perpetual
debt; its stock is worth $240,000 and the interest rate on its debt is 11 percent. Both
firms expect EBIT to be $58,400. Ignore taxes. The cost of equity for ABC is _____ percent,
and for XYZ it is ______ percent.

Select one:
a. 12.17; 12.68
b. 12.17; 13.33
c. 12.17; 12.94
d. 12.29; 12.68

Question 7
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Stacy owns 38 percent of The Town Centre. She has decided to retire and wants to sell
all of her shares in this closely held, all equity firm. The other shareholders have agreed
to have the firm borrow $650,000 to purchase her shares of stock. What is the total
market value of The Town Centre? Ignore taxes.

Select one:
a. $1,748,219
b. $1,710,526
c. $1,771,089
d. $1,801,406

Question 8
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The unlevered cost of capital refers to the cost of capital for a :

Select one:
a. private entity.
b. governmental entity.
c. all-equity firm.
d. private individual.

Question 9
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M&M Proposition II is the proposition that:

Select one:
a. the cost of equity depends on the return on debt, the debt-equity ratio, and the tax
rate. SALAH
b. the cost of equity is equivalent to the required rate of return on a firm's assets.
c. the capital structure of a firm has no effect on the firm's value.
d. a firm's cost of equity is a linear function with a slope equal to (RA - RD).

Question 10
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Based on M&M Proposition II with taxes, the weighted average cost of capital:
Select one:
a. is equal to the aftertax cost of debt.
b. has a linear relationship with the cost of equity capital.
c. decreases as the debt-equity ratio increases.
d. is unaffected by the tax rate.

Question 11
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Country Markets has an unlevered cost of capital of 12 percent, a tax rate of 38 percent,
and expected earnings before interest and taxes of $15,700. The company has $11,000
in bonds outstanding that have a 6 percent coupon and pay interest annually. The
bonds are selling at par value. What is the cost of equity?

Select one:
a. 12.55 percent
b. 13.36 percent
c. 14.07 percent
d. 13.64 percent

Question 12
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Tuckers has $21,000 of debt outstanding that is selling at par and has a coupon rate of
7.5 percent. The tax rate is 32 percent. What is the present value of the tax shield?

Select one:
a. $6,200
b. $6,720
c. $615
d. $644

Question 13
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Wholesale Supply has earnings before interest and taxes of $106,000. Both the book and
the market value of debt is $170,000. The unlevered cost of equity is 15.5 percent while
the pre-tax cost of debt is 8.6 percent. The tax rate is 38 percent. What is the firm's
weighted average cost of capital?
Select one:
a. 12.65 percent
b. 14.01 percent
c. 13.45 percent
d. 11.94 percent

Question 14
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You have computed the break-even point between a levered and an unlevered capital
structure. Assume there are no taxes. At the break-even level, the:
Select one:
a. firm's earnings before interest and taxes are equal to zero.
b. firm has a debt-equity ratio of .50.
c. advantages of leverage exceed the disadvantages of leverage.
d. firm is just earning enough to pay for the cost of the debt.

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Which one of the following is a direct bankruptcy cost?

Select one:
a. company CEO's time spent in bankruptcy court
b. maintaining cash reserves
c. paying an outside accountant fees to prepare bankruptcy reports
d. losing a key company employee

Question 16
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M&M Proposition I with tax supports the theory that:

Select one:
a. a firm's weighted average cost of capital decreases as the firm's debt-equity ratio
increases.
b. the value of an unlevered firm is equal to the value of a levered firm plus the value of
the interest tax shield.
c. a firm's cost of capital is the same regardless of the mix of debt and equity used by
the firm.
d. the value of a firm is inversely related to the amount of leverage used by the firm.

Question 17
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The business risk of a firm:

Select one:
a. depends on the firm's level of unsystematic risk.
b. is dependent upon the relative weights of the debt and equity used to finance the
firm.
c. has a positive relationship with the firm's cost of equity.
d. is inversely related to the required return on the firm's assets.

Question 1
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Stacy owns 38 percent of The Town Centre. She has decided to retire and wants to sell all of her
shares in this closely held, all equity firm. The other shareholders have agreed to have the firm
borrow $650,000 to purchase her shares of stock. What is the total market value of The Town
Centre? Ignore taxes.

Select one:
a. $1,710,526

b. $1,748,219

c. $1,801,406

d. $1,771,089

Question 2
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The proposition that a firm borrows up to the point where the marginal benefit of the interest
tax shield derived from increased debt is just equal to the marginal expense of the resulting
increase in financial distress costs is called:

Select one:

a. M&M Proposition II.

b. the capital asset pricing model.

c. M&M Proposition I.

d. the static theory of capital structure.

Question 3
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Tuckers has $21,000 of debt outstanding that is selling at par and has a coupon rate of 7.5
percent. The tax rate is 32 percent. What is the present value of the tax shield?

Select one:

a. $615

b. $6,200

c. $6,720

d. $644

Question 4
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The Jean Outlet is an all equity firm that has 146,000 shares of stock outstanding. The company
has decided to borrow the $1.1 million to repurchase 7,500 shares of its stock from the estate of
a deceased shareholder. What is the total value of the firm if you ignore taxes?

Select one:

a. $19,666,667

b. $18,500,000

c. $21,413,333

d. $21,000,000

Question 5
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Holly's is currently an all equity firm that has 9,000 shares of stock outstanding at a market price
of $42 a share. The firm has decided to leverage its operations by issuing $120,000 of debt at an
interest rate of 9.5 percent. This new debt will be used to repurchase shares of the outstanding
stock. The restructuring is expected to increase the earnings per share. What is the minimum
level of earnings before interest and taxes that the firm is expecting? Ignore taxes.

Select one:

a. $38,516

b. $44,141

c. $35,910

d. $42,000

Question 6
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 Which of the following are correct according to pecking-order theory? I. Firms stockpile
internally-generated cash. II. There is an inverse relationship between a firm's profit level and its
debt level. III. Firms avoid external debt at all costs. IV. A firm's capital structure is dictated by its
need for external financing.

Select one:
a. I, III, and IV only

b. I and III only

c. I, II, and IV only

d. II and IV only

Question 7
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The Pizza Palace has a cost of equity of 15.3 percent and an unlevered cost of capital of 11.8
percent. The company has $22,000 in debt that is selling at par value. The levered value of the
firm is $41,000 and the tax rate is 34 percent. What is the pre-tax cost of debt?

Select one:

a. 6.18 percent

b. 7.22 percent

c. 4.73 percent

d. 6.59 percent

Question 8
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Question text

Edwards Farm Products was unable to meet its financial obligations and was forced into using
legal proceedings to restructure itself so that it could continue as a viable business. The process
this firm underwent is known as a:

Select one:

a. liquidation.

b. repurchase program.

c. merger.

d. reorganization.

Question 9
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ABC Co. and XYZ Co. are identical firms in all respects except for their capital structure. ABC is all
equity financed with $480,000 in stock. XYZ uses both stock and perpetual debt; its stock is
worth $240,000 and the interest rate on its debt is 11 percent. Both firms expect EBIT to be
$58,400. Ignore taxes. The cost of equity for ABC is _____ percent, and for XYZ it is ______ percent.

Select one:

a. 12.17; 12.68

b. 12.29; 12.68

c. 12.17; 13.33

d. 12.17; 12.94

Question 10
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M&M Proposition I with no tax supports the argument that:

Select one:

a. a firm should borrow money to the point where the tax benefit from debt is equal to the cost
of the increased probability of financial distress.

b. the cost of equity rises as leverage rises.

c. business risk determines the return on assets.

d. the debt-equity ratio of a firm is completely irrelevant. YANG BENER

Question 11
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You have computed the break-even point between a levered and an unlevered capital structure.
Assume there are no taxes. At the break-even level, the:

Select one:

a. advantages of leverage exceed the disadvantages of leverage.

b. firm has a debt-equity ratio of .50.

c. firm is just earning enough to pay for the cost of the debt.

d. firm's earnings before interest and taxes are equal to zero.

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Sewer's Paradise is an all equity firm that has 5,000 shares of stock outstanding at a market price
of $15 a share. The firm's management has decided to issue $30,000 worth of debt and use the
funds to repurchase shares of the outstanding stock. The interest rate on the debt will be 10
percent. What are the earnings per share at the break-even level of earnings before interest and
taxes after issuing debt? Ignore taxes.

Select one:

a. $1.46

b. $1.67

c. $1.50

d. $1.88

Question 13
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A firm should select the capital structure that:

Select one:

a. is fully unlevered.

b. maximizes the value of the firm.

c. minimizes taxes.

d. produces the highest cost of capital.

Question 14
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The concept of homemade leverage is most associated with:

Select one:

a. M&M Proposition I with no tax.

b. M&M Proposition II with tax.

c. M&M Proposition II with no tax.

d. M&M Proposition I with tax.

Question 15
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Butter & Jelly reduced its taxes last year by $350 by increasing its interest expense by $1,000.
Which of the following terms is used to describe this tax savings?

Select one:

a. current tax yield

b. interest credit

c. financing shield

d. interest tax shield

Question 16
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AA Tours is comparing two capital structures to determine how to best finance its operations.
The first option consists of all equity financing. The second option is based on a debt-equity
ratio of 0.45. What should AA Tours do if its expected earnings before interest and taxes (EBIT)
are less than the break-even level? Assume there are no taxes.

Select one:

a. select the unlevered option since the debt-equity ratio is less than 0.50

b. select the leverage option because the debt-equity ratio is less than 0.50

c. select the leverage option since the expected EBIT is less than the break-even level
d. select the unlevered option since the expected EBIT is less than the break-even level

Question 17
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Which one of the following will generally have the highest priority when assets are distributed in
a bankruptcy proceeding?

Select one:

a. consumer claim

b. payment of employee wages

c. company contribution to the employees' retirement account

d. payment to an unsecured creditor