Practice questions for final exam - page 1

Practice Questions for Final
1. JLP Industries has 6.5 million shares of common stock outstanding with a market price of $14 per share. The company also has outstanding preferred stock with a market value of $10 millon, and 25,000 bonds outstanding, each with a face value of $1,000 and selling at 90% of par value. The cost of equity is 14%, the cost of preferred is 10%, and the before-tax cost of debt is 7.25%. If JLP’s tax rate is 34%, what is the WACC? a) 9.5% b) 10.0% c) 10.8% d) 11.6% e) 12.0%

2. Eastward Co. has 80,000 shares outstanding at a price of $36 per share. It also has bonds outstanding with a market value of $1,500,000 (8% coupon rate, face value of the bonds is $1,875,000). Eastwards cost of equity is 15%, the YTM on the bonds is 10%. If the firm’s tax rate is 38%, what is its Weighted Average Cost of Capital (WACC)?
a) b) c) d) e)

12.41% 11.99% 12.50% 9.40% 10.47%

3. A financial manager at Westward Co., an all equity financed firm, is evaluating the following projects: Project A B C ß 1.8 1.3 0.8 Forecast Return 15% 11.8% 9.1%

The risk free rate is 6% and the expected market return is 10%. Which projects should be accepted? a) b) c) d) e) A only B only A and B B and C A and C

Practice questions for final exam - page 2

4.

Which of the following may be true concerning debt and equity?

a) The cost of debt for Firm A is greater than the cost of equity for Firm A. b) The cost of debt for Firm A is greater than the cost of equity for Firm B. c) The cost of debt for Firm A is equal to the cost of equity for Firm A. d) More than one of the above may be true. e) None of the statements above could be true. 5. The firm's target (optimal) capital structure is most consistent with which of the following?

a) Maximum earnings per share (EPS). b) Minimum cost of debt (RD). c) Minimum risk. d) Minimum cost of equity (RE). e) Minimum weighted average cost of capital (WACC).

6.

The market value of the debt of Larvets Inc. is $1,500,000 (face value is $1,000,000). Larvets’ tax rate is 34%, their costs of equity and debt (before-tax) are 15% and 8%, respectively. The current stock price is $60/share, and there are 50,000 shares of stock outstanding (book value is $23 per share). Calculate the appropriate equity weight to be used in computing Larvets’ weighted average cost of capital. 0.50 0.67 0.33 0.75 1.38

a) b) c) d) e)

7. A company has the following optimal capital structure: Source Long-term debt Preferred stock Common stock Market Value Book Value Cost $50,000,000 $40,000,000 8.8% (after-tax) $10,000,000 $9,000,000 12.0% $140,000,000 $135,000,000 15.0%

The weighted average cost of capital (WACC) is a) b) c) d) e) less than 8.8% 11.9% 12.0% 13.3% more than 13.3%

As the dollar volume of financing needs increases. 10. increases as the firm issues more equity. declare a dividend equal to the remaining balance. if the firm’s equity need is less than the amount of retained earnings.Practice questions for final exam . a) b) c) d) e) The WACC is less than 11%. raising decrease. to increase. Financial risk a) b) c) d) e) is the same as business risk. the firm would a) b) c) d) e) borrow to pay the cash dividend. what is the firm’s weighted average cost of capital (WACC)? Select the range in which the correct answer falls. not need to consider its dividend policy. issue new common equity to make up the difference. is caused by underlying changes in the firm's operations. the costs of the various types of financing will eventually _____. 9. causes the cost of equity. and the tax rate is 35%. lowering decrease. pay no cash dividends.Suppose that your firm has a cost of equity of 18% and a cost of debt of 8%. The WACC is greater than or equal to 11% but less than 12%. The WACC is greater than or equal to 13% but less than 14%. . RE. The WACC is greater than or equal to 12% but less than 13%. RD. raising The costs will never change and the WACC will remain constant. a) increase. to exceed its cost of equity. lowering b) c) d) e) increase. RE. causes the firm's cost of debt. If the target debt/equity ratio is 0. 11. The WACC is greater than or equal to 14%.page 3 8.60.According to the residual theory of dividends. _____ the firm’s weighted average cost of capital.

000 27.58 yrs.61 c) $11. put. is presented with following possible projects for investment: Year 0 1 2 3 4 5 Project A($) -73. call.5 yrs. Puts put. _________ are purchased if the stock price is expected to fall. 3. 3. Calls call.61 e) -$5.71 b) $6.000 20.100¥. a) b) c) d) e) Project A 4 yrs.000 27. Puts call. Once inside the shop. would you save if you bought the camera for $220 rather than 23. call.01 yrs. How much money (in $).100¥? a) $5. whereas a ________ option is an option to sell a specified number of shares of a stock on or before some future date at a specified price. .000 20.4 yrs. A __________ option is an option to purchase a specified number of shares of a stock on or before some future date at a specified price. put. 4 yrs. Just prior to entering the shop you had noticed that the bank next door had a posted exchange rate of 107. 4.00 d) -$6.80¥/$. if any. AC/DC Co.95 yrs.page 4 12.000 15.You are on vacation in Tokyo and you see a vase in a shop window with a price of 23.000 Project B($) -85. 4 yrs. the owner offers to sell you the camera for $220. call.5 yrs. 3. Calls call.000 24.000 18.000 18. Calls 14.000 17.71 13. a) b) c) d) e) put.Practice questions for final exam . 3. Project B 3.000 Compute the pay-back periods in years for projects A and B.000 24. 5 yrs.

000. a) b) c) d) e) $0 $150. but it is expected to save the firm $20. What is its NPV? a) b) c) d) e) -$1. and it will cost another $10. Only answers (b) and (c) are correct. The 2000 investment opportunity schedule totals $1.547 -$562 $0 $562 $1. If the 1999 retained earnings are $900.500.000 17. The truck’s cost of capital is 10 percent. it would pay ______ in dividends. mainly labor. Walton's expects the dollar to depreciate over the next month and thus forecasts that .000 to modify it for special use by your firm. The truck will have no effect on revenues. and it will be sold after three years for $20.000.000. ignores cash flows beyond the payback period.You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck. An investor is considering buying 500 shares of ABC Company at $32 per share.000. As an alternative.034 18. The company has an agreed price of 16 pesos/pound of jalapeno peppers and it buys peppers once a month.A corporation has an optimal capital structure of 40 percent debt and 60 percent equity.000. a) b) c) d) e) A major disadvantage of the payback period method is that it is useless as a risk indicator. 16. The truck falls into the MACRS three-year class life.Walton's Consumer Products imports jalapeno peppers from Mexico for use in its Rosa's Cantina Salsa. At what stock price would the investor break even on her option purchase? a) b) c) d) e) $35 $40 $42 $45 $50 19.Practice questions for final exam . the investor could purchase a 120-day call option on 500 shares at a striking price of $30/share for $5.000 $1. Analysts agree that the firm’s stock price may increase to $45 per share in the next 4 months.000 and the firm follows the residual theory of dividends.page 5 15.500.000 per year in before-tax operating costs. Use of the truck will require an increase in net working capital (spare parts inventory) of $2. The firm’s marginal tax rate is 40 percent. All of the answers above are correct. The truck’s basic price is $50. does not directly account for the time value of money.000 $450.000 $540.

28/lb. and particularly cash flows beyond the payback period. $2.000. $2. No Hedge $2. what will one pound of jalapenos cost in dollars 30 days from today if Walton's hedges. $2. $2. e) The NPV method does not consider all relevant cash flows. What is the internal rate of return (IRR) for this investment? a) b) c) d) e) The IRR is less than 6%. but less than 7%.Which of the following statements is most correct? a) The NPV method assumes that cash flows will be reinvested at the cost of capital while the IRR method assumes reinvestment at the IRR. Kappa Computer has no debt outstanding and its shareholders require an 8% return.0126 pesos/$. $2.5930 pesos/$.11/lb. The IRR is greater than or equal to 8%. but less than 8%. b) The NPV method assumes that cash flows will be reinvested at the risk-free rate while the IRR method assumes reinvestment at the IRR. The corporate tax rate is 34%.04/lb.Practice questions for final exam . c) The NPV method assumes that cash flows will be reinvested at the cost of capital while the IRR method assumes reinvestment at the risk-free rate. d) The NPV method does not consider the inflation premium.04/lb.000 forever. .28/lb. 21.Your company is considering purchasing the Kappa Computer Co.000 and its variable costs are 77% of sales.page 6 the spot rate 30 days from today will be 7. for a price of $425. are expected to remain constant at $580. The IRR is greater than or equal to 6%.8247 pesos/$ and the 30-day forward rate is 7. The IRR is greater than or equal to 9%. The firm incurs annual fixed costs of $85.04/lb. but less than 9%.11/lb. The annual sales of Kappa Computer Co. The IRR is greater than or equal to 7%.11/lb.28/lb. $2. If the current spot rate is 7. $2. 20. $2. and if it doesn't hedge? Hedge a) b) c) d) e) $2.11/lb.

200.000. is considering an investment in a new paper mill that costs $230 million. . decreased None of the above are correct. The mill will generate after-tax operating cash flows of $55 million at the end of each of the next 8 years. decreased increases. the repurchase of stock _____ the earnings per share and _____ the market price of stock. Assume the fleet is sold for $420 million after 10 years. Transatlantic uses a weighted average cost of capital of 12% and the corporate tax rate is 25%.15% b) 12. The company is considering a $10 million expansion program.000) with a 12% coupon Plan B: Issue new common stock at $50 per share The company has a 40% marginal tax rate.73% e) not enough information provided 25. The investment will be straight-line depreciated (no half-year convention) to zero during the period. f) g) h) i) j) $13. increased decreases. What is the IRR of the paper mill investment? a) 7.200. decreased. 24. ____ in leverage result in _____ return and ____ risk.Transatlantic Airlines is considering an investment in an airplane fleet that costs $1.000 $11. which can be financed in either of two ways: Plan A: Issue new bonds at par ($1. What is the NPV of the investment in the new airplane fleet (to the closest million $)? a) b) c) d) e) -$852 million -$322 million -$288 million -$146 million -$112 million 26.73%. increased.All else constant.Jet Industries currently has $5 million in bonds with a 10% coupon and 2 million shares of common stock outstanding. increased. increases.page 7 22.25 billion.54% c) 17. The fleet would generate revenues of $425 million and costs of $230 million each year for the next 10 years.000 $1. decreased.000 $13.Practice questions for final exam .General Paper Corp. increased increases.500. Next year’s expected EBIT is $4 million if the expansion project is accepted. The firm’s WACC equals 7.000 $12.15% and the after-tax cost of debt is 5. The level of EBIT that would result in the same EPS for either financing plan is a) b) c) d) e) 23.000 Generally.700.19% d) 5.

67% . decreases decreases. Which of the following statements is incorrect? a) Assuming a project has normal cash flows. b) If the multiple IRR problem does not exist. c) Should exceed the weighted average cost of capital in order for the firm to accept the investment.733.356. the NPV will be positive if the IRR is less than the cost of capital. b) 6.70SF 29. increases increases. 28. The internal rate of return (IRR) of a capital investment a) Changes when the cost of capital changes. c) If IRR is equal to the cost of capital.A Swiss family wants to visit the Japanese gardens in Japan and a travel agent has quoted them a price of 109. 31. decreases increases.Practice questions for final exam . does not change 27.00% c) 0. Firms with a high operating leverage are more likely to rely on debt financing. what is the cost of the trip in Swiss Francs (SF)? a) 13. Answers (a) and (c) are correct.23¥/$ and 15. 30. What is its internal rate of return? a) Cannot be determined with the information provided.page 8 a) b) c) d) e) increases. b) Is equal to the annual net cash flows divided by one half of the project's cost when the cash flows are an annuity. d) NPV can be negative if the IRR is positive.40SF b) 87. None of the statements above is correct.000 will return $60 annually forever. then NPV = 0.61SF c) 173. increases decreases.81SF/$. An investment of $1. e) Answers (c) and (d) are correct.65SF d) 693. If the current exchange rates are 126. any independent project acceptable by the NPV method will also be acceptable by the IRR method. e) The NPV method is not affected by the multiple IRR problem.546.60% d) 16. Firms with lower fixed costs tend to have greater operating leverage.650¥. Which of the following statements is most correct? a) b) c) d) e) Firms whose sales are very sensitive to changes in the business cycle are more likely to rely on debt financing. d) Is calculated in a manner similar to the yield to maturity on a bond.55SF e) 1.995.

The project should be accepted without any further consideration.An investor is considering buying 500 shares of ABC Company at $32 per share. a) b) c) d) e) The project will also be acceptable using payback criteria.00% 32. c) Must exceed the cost of capital in order for the firm to accept the investment. None of the statements above is correct. 33. e) More than one of the above are correct.000 d) $6.000 e) None of the above are correct. d) Is similar to the yield-to-maturity on a bond.Practice questions for final exam . The IRR should be calculated to insure that the project’s projected rate of return exceeds the cost of capital. . Only answers (a) and (c) are correct. As an alternative.page 9 e) 60. When a project’s NPV exceeds zero. What profit would the investor realize on their option purchase if the stock price increased to $42 per share? a) $0 b) $1. Analysts agree that the firm’s stock price may increase to $45 per share in the next four months. the investor could purchase a 120-day call option for 500 shares at a striking price of $30/share for $5. 34.The internal rate of return of a capital investment a) Changes when the cost of capital changes.000 c) $4. assuming we are confident that the cash flows and the cost of capital have been properly estimated.000. b) Is equal to the annual net cash flows divided by one half of the project’s cost when the cash flows are an annuity.

c) The owner of a put option essentially has unlimited upside profit potential. dollar. The options with the $25 exercise price have a payoff value greater than $5. The options with the $25 exercise price will sell for less than the options with the $35 exercise price. The options with the $35 exercise price have a payoff value greater than $0.If the inflation rate in the United States is greater than the inflation rate in Sweden. dollar. the payoff value of the options with the $25 exercise price would also increase by $5. the value of a put option on the stock also falls. If Steinbach’s stock price rose by $5.S. .Which of the following statements is true? a) Option contracts are a zero sum game. Appreciate against the dollar and all other major currencies. a) b) c) d) e) ex-rights ex-dividend record payment declaration 38. other things held constant and assuming that interest rate parity holds.’s stock is trading at $30 a share. the Swedish currency will a) b) c) d) e) Appreciate against the U. Depreciate against the U. Which of the following best describes the value of these options? a) b) c) d) e) The options with the $25 exercise price will sell for $5. d) One disadvantage to buying options on a stock rather than the stock itself is that it requires a larger initial investment per share. 36.S. There are also call options on the company’s stock. Remain unchanged against the U. All options expire in three months.Steinbach Construction Co.page 10 35.Practice questions for final exam . 37. e) As the price of a stock falls. b) If an in-the-money option is not exercised at expiration.The date on which the board of directors passes a resolution authorizing payment of a dividend to the shareholders is the _______ date. dollar. some with an exercise price of $25 and some with an exercise price of $35. Appreciate against all other major currencies. the owner has zero net cash flow for the investment.S.

Either (c) or (d) above could be used.What is the expected percentage change in EBIT if sales increase by 2%? a) b) c) d) e) 1.38 1. out of a new issue of common stock. then if its optimal capital budget requires the use of all the firm’s earnings for that year (along with new debt according to the optimal debt/total assets ratio).76 40. dividends by borrowing the money (debt).000 $9.If a firm adheres strictly to the residual dividend policy.Practice questions for final exam .82% 4. .57 1.000 units) Variable cost per unit Operating income (EBIT) Earnings after taxes Tax rate $800.79 2.64% 41. in effect. no dividends to common stockholders.23% 5.page 11 INSTRUCTION: Use the following information for problem 39 and 40: The DMB Co.. is financed with debt and equity and has the following data available: Sales (20.00 $220.41% 2.000 35% 39.What is DMB’s degree of financial leverage at the current level of sales? a) b) c) d) e) 1.000 $80. the firm should pay a) b) c) d) e) no dividends except out of past retained earnings.00 1. dividends. which produces a single product.00% 2.

The proposed project will have a 5-year life and will require the purchase of new capital equipment with a total purchase price of $175. greater than 22 percent but less than or equal to 23 percent.page 12 42.Practice questions for final exam .50 SF = $1. The new product line is expected to increase annual cash sales by $80. manufactures waterbeds. The project’s internal rate of return is a) b) c) d) e) less than or equal to 20 percent. Inc. The Internal Rate of Return (IRR) for this expansion project is a) between 5% and 6% .S.000 $350. Assume the marginal tax rate is 34 percent. 43.You are the financial manager for a large and highly profitable manufacturing company. the dollar value of VV’s equity is a) b) c) d) e) $140. You are currently evaluating a project proposal involving the construction of a new product line.000 per year. The project is expected to last for 3 years.000 and increase annual cash operating expenses by $10. Waves.000 $875. it will be terminated and the equipment is expected to be worthless. greater than 20 percent but less than or equal to 21 percent. greater than 21 percent but less than or equal to 22 percent.000. Inc.000 SF. The project is expected to increase cash revenue by $450.000.Val Venis. The financial manager is considering a project proposal involving expansion of productive capacity through the purchase of new manufacturing equipment.000 $600. The purchase price of the equipment is $750. Use a 34% marginal tax rate for your calculations.000 Use the following information to answer questions 44-45. greater than 23 percent. The equipment will have no salvage value at project’s end. The new equipment will have a 3-year MACRS class life (see attached MACRS table for depreciation calculations).00. At the end of this time.000 SF and liabilities of 450. dollars and Swiss francs is 2. If the current exchange rate between U.000 per year. (VV) has assets denominated in Swiss francs (SF) of 800.000 $320. Assume that the equipment will be depreciated for tax purposes over three years at $250.000 per year and increase cash operating expenses by $150.000 for the life of the project. The payback period for this expansion project is a) b) c) d) e) less than 1 year between 1 year and 2 years between 2 years and 3 years more than 3 years cannot be determined 45. 44.

The computer would increase the firm’s before-tax revenues by $20.5 and a DFL (Degrees of financial leverage) of 2.Practice questions for final exam . conventional) cash flows has an IRR which exceeds the weighted average cost of capital. and it falls into the MACRS 3-year class.The president of Dex-Tor Laboratories Inc. The computer’s price is $40. The price per share of HHH common stock is $32. What is the project’s NPV? (round your final answer to the nearest dollar) a) $2. has asked you to evaluate the proposed acquisition of a new computer. The computer is expected to be used for 3 years and then be sold for $25.page 13 b) c) d) e) between 6% and 7% between 7% and 8% between 8% and 9% between 9% and 10% 46.803 c) $2.100. If the IRR of Project A exceeds the IRR of Project B.917 d) $5. The firm’s marginal tax rate is 40 percent. is financed with long-term debt and 250.000 and that the optimal capital budget will be $1..000 shares of common stock. For the coming year.5% equity. What is the expected dividend per share for the coming year if the company uses a residual dividend policy? a) b) c) d) e) $0.712 e) $6.0.e.000 per year. then the project must have a positive NPV. while B has a DOL of 1. More than one of the above are correct. The capital structure is 37.The HHH Corp.000. greater than zero) if the IRR is positive. None of the above are correct.e. which is considered to be optimal.0 and a DFL of 3. Based on this information.000 per year but would also increase before-tax operating costs by $5.000. 47.50 $0. which of the following statements is true? a) A’s EAT will increase by approximately 6% and B’s EAT will increase approximately 4%. and the firm’s weighted average cost of capital (WACC) is 14 percent.000.63 $0.000.622 b) $2.60 $0.25 $0.5% debt and 62. Which of the following statements is most correct? a) b) c) d) e) If a project with normal (i. NPV must be positive (i.0.. the financial manager has estimated that earnings after taxes (EAT) will be $750. Purchase of the computer would require an increase in net working capital of $2. Both companies will have a 4% increase in sales in the coming year. .438 49.A and B are identical companies except A has a DOL (Degrees of operating leverage) of 1.75 48. then Project A must also have a higher NPV.

GCC’s stock price becomes more risky (higher variance).27 1.200 gain $47. the change in EBIT will be greater for B than for A. . dollars as a result of the change in exchange rates? a) b) c) d) e) $240.473 gain 51.00 and the exchange rate between the U. II. For a given change in sales.page 14 b) c) d) e) A’s EAT will increase by approximately 8% and B’s EAT will increase approximately 12%. The inventory in Britain is still valued at 240. any independent project acceptable by the NPV method will also be acceptable by the IRR method. 53. III. If the multiple IRR problem does not exist.00 = 1.41 = $1.000 loss $43.000 pounds. The IRR can be positive even if the NPV is negative. The exchange rate for dollars to pounds was 1 pound = 2 U. None of the above.Practice questions for final exam .64 0. the change in EAT will be greater for B than for A. dollars. 50.41 1. a) I only The Net Present Value (NPV) will be positive if the Internal Rate of Return (IRR) is less than the weighed average cost of capital.A year ago. dollar and the German mark is $1.82 U.64 DM.86 52.Which of the following events is likely to decrease the value of call options on the common stock of GCC Company? a) b) c) d) e) An increase in GCC’s stock price.S.Suppose exchange rates between U.S.S. What is the cross-rate of Swiss francs to German marks? a) b) c) d) e) 2. More than one of the above are correct.S. An increase in the exercise price of the option.200 loss $0 $43. For a given change in EBIT. dollars and Swiss francs is SF 1. MC Hammer Company had inventory in Britain valued at 240. An increase in the amount of time until the option expires. dollars. Which of the following statements is false? I.S. This year the exchange rate is 1 pound = 1.000 pounds.43 0. What is the gain or loss in inventory value in U.

what is the minimum after-tax cash flow that would make the investment acceptable to Ace? a) b) c) d) e) $15.The Ace Company is considering investing in a piece of property which costs $105.394 .450 $2.000.831 $9. is expected to last for 10 years and produce after-tax cash flows (the effects of depreciation have already been accounted for in these cash flows) of $44. If the firm’s cost of capital is 14 percent and its tax rate is 40 percent. Mars will use the MACRS accelerated method to depreciate the machine (which has a 5-year class life) to zero dollars. Mar’s marginal tax rate is 40 percent. None of the above.375 $5.000 55. remain unchanged. The firm expects to be able to reduce net working capital by $15.503 per year. is considering the purchase of a new machine which will reduce manufacturing costs by $5.The capital budgeting director of Sparrow Corporation is evaluating a project which costs $200. what is the project’s net present value (NPV)? MACRS depreciation schedule is attached with formula sheet. If the firm’s cost of capital is 9 percent and the corporate tax rate is 40 percent.Mars Inc.000 annually for the next 5 years. decrease. but required working capital will return to the original level when the machine is sold after 5 years. Mars expects to sell the machine at the end of its 5-year operating life for $10.As fixed operating costs increase and all other factors are held constant.000. the degree of operating leverage will a) b) c) d) e) increase. 56. If the machine costs $60.) a) -$15. change in an undetermined direction.000.942 $10. what is the project’s IRR? a) b) c) d) e) –5% 8% 12% 14% 18% 57. (Round your final answer to the nearest dollar.Practice questions for final exam . The property will return a constant cash flow forever.000.000 when the machine is installed.page 15 b) c) d) e) II only III only I and II I and III 54. and it uses a 12 percent weighted average cost of capital to evaluate projects of this nature.

29 1.000 and a tax rate of 40 percent.S.S. preferred dividends of $6. at the spot rate of 1. (a) and (c) Use the following information for Questions 62-63.A firm has EBIT of $375.Practice questions for final exam .S. The firm’s degree of financial leverage at a base EBIT level of $375.493 -$46.512 -$21. and the U.000 is a) b) c) d) e) 0. If the spot rate in 90 days is actually 1.97 1. firm have saved in U.901 58.682 marks.000.960 marks or $24. interest expense of $75.Sunware Corporation. 61.665 marks per dollar.09 None of the above. based importer. The terms of the purchase are net 90 days. but anyone who purchases the stock on or after this date will not receive it. a U. firm wants to cover this trade payable with a forward market hedge to eliminate its exchange rate risk.284 -$58.000.638 marks.Anyone who purchases a share of stock before the ________ will receive the declared dividend. .S. Suppose the firm completes a forward hedge at the 90-day forward rate of 1.page 16 b) c) d) e) -$14. how much will the U. makes a purchase of crystal glassware from a firm in Germany for 39. dollars by hedging its exchange rate exposure? (round final answer to nearest dollar) a) b) c) d) e) -$396 -$243 $0 $243 $638 60. a) b) c) d) e) declaration date date of record ex-dividend date payment date none of the above 59.000.Which of the following capital budgeting methods might not consider the salvage value of a machine being considered for purchase? a) b) c) d) e) Internal rate of return Net present value Payback period All of the above would always consider the salvage value of the machine.27 1.

The breakeven (i.25 75 1.75 100 2.47% 14.25.70 125 4.6 years. c) For call.05 25 APR 200 5. b) The April 25 call is in-the-money.05% 13. The project has a payback period of 3.75 33. b) measures the percentage increase in shareholder wealth if a project is accepted.e.75 30 MAR 150 1.00 100 2. What is the project’s internal rate of return (IRR)? a) b) c) d) e) 11.25 125 5. and then generates inflows of $50 a year for the next five years.25 36. A speculator sells the April 30 call @$3. . d) The April 30 put is in-the-money. but not for puts. an increase in the time to maturity will cause an increase in the option price.An investment project has an initial cost. b) For both calls and puts.The NPV of a project a) measures the dollar change in shareholder wealth if a project is accepted. e) increases as the the firm’s WACC increases. an increase in the time to maturity will cause an increase in the option price. 63.Practice questions for final exam . 65. Which of the following statements is false? a) The April 20 call is in-the-money.18% 12.page 17 Listed Options Quotations (CBOE) SBM Call Call Put Put Close Strike Exp Volume Last Volume Last 26 20 MAR 100 7.90 30 APR 150 3.25 62.50 26. d) is positive if IRR = WACC.Which of the following statements is true? a) For both calls and puts.50 64. c) equals the net investment cash outflow when the discount rate is 0%.66% 15.40 75 0. c) The April 25 put is in-the-money. an increase in the exercise price will cause an increase in the option price.50 40. e) None of the above statements are false. profit = zero) share price at expiration is closest to: a) $ b) $ c) $ d) $ e) $ 23.25 25 MAR 200 4.89% 66.70 20 APR 100 9.

Practice questions for final exam . Assume the stock price remains unchanged by the transaction. 6-month German securities have an annualized return of 6 percent (and therefore have a 6-month periodic return equal to 3 percent). 6month U.54 68. and the company’s tax rate is 34 percent. but not for calls.6 million (before any recapitalization).5961 marks 1 dollar = 1.S.page 18 d) For puts. The company currently has 900.000 shares of common stock outstanding and has no debt.60 German marks.0000 marks 1 dollar = 1. 1 U.5 percent and a periodic return of 3. dollar equals 1.26 $4.25 percent.45 $3.6265 marks 1 dollar = 1. If interest rate parity holds. securities have an annualized return of 6. The company’s stock trades at $40 a share. The company is considering a recapitalization where it will issue $10 million worth of debt with a coupon rate of 10 percent.6039 marks . 67.Cornell Brothers anticipates that its net income at the end of the year will be $3.In the spot market.52 $5. an increase in the time to maturity will cause an increase in the option price.23 $2. e) More than one of the above is true.6235 marks 1 dollar = 0. What will be the company’s earnings per share (EPS) if it proceeds with the recapitalization? a) b) c) d) e) $2. what is the dollar-mark exchange rate in the 180-day forward market? a) b) c) d) e) 1 dollar = 0.S. and use the proceeds to repurchase common stock.

page 19 69.000 $250. . inverted axiom theory. Upon receiving the 10% stock dividend the value of his shares is a) b) c) d) e) $220.The theory suggesting that for any given issuer. T owned 10% of the outstanding stock. a) If two-year rates exceed one-year rates. long-term interest rates tend to be higher than shortterm rates is called the a) b) c) d) e) expectations hypothesis.Mr.000. and so on).67% -10. what was the real rate of return on Treasury Bills in 1992? a) b) c) d) e) -11.000 $210.Assume that the pure expectations theory holds. then the market expects one-year rates to be 6. three-year rates apply to bonds which will mature in 3 years. e) Answers (b) and (c) are correct.000 shares of ABC Corporation stock. d) Answers (a) and (c) are correct. 72.The CPI was 100 at the end of 1990.38% not enough information 71. or $10 per share. 105 at the end of 1991. b) If two-year rates are 7 percent.5 percent in one year. The company is planning to issue a stock dividend. Which of the following statements about Treasury bill rates is most correct? (Two-year rates apply to bonds which will mature in two years. Mr. liquidity preference theory. T (I pity the fool who doesn’t know Mr. then five-year rates must also be 7 percent.28% -6.000 $200. T) owns 20. market segmentation theory. None of the above is correct. If the average return on Treasury Bills was 6% in 1991 and 7% in 1992. which had a market value of $200.Practice questions for final exam . and three-year rates are 7 percent. Before the dividend.83% -7. and 120 at the end of 1992.000 None of the above 70. then the market expects interest rates to rise. c) If one-year rates are 6 percent and two-year rates are 7 percent.

H. Helmsley’s real rate of return? a) b) c) d) e) 8. Treasury coupon bond. b) The yield on a 10-year bond will always be higher than the yield on a 1-year bond because of maturity premiums. what is H.The key participants in financial transactions are individuals.S. d) The yields to maturity on the two bonds are equal.page 20 73.Which of the following is likely to increase the level of interest rates in the economy? Assume that households are the primary supplier of capital in the economy and that businesses (corporations) are the primary demander. 75.50% -2. He earned an 8. Treasury securities are due primarily to the fact that the probability of default is higher on long-term bonds than on short-terms bonds. Individuals are net _________ of funds. demanders.50% 77. c) It is impossible to tell without knowing the coupon rates of the bonds. e) It is impossible to tell without knowing the relative risks of the two bonds. and that as a result.S. users: providers. when he invested in DX Enterprises. 74. T-bond? a) The yield on the 10-year bond is less than the yield on a 1-year bond.H. the yield curve is normally upward sloping.If the yield curve on U. suppliers. and businesses are net _________ of funds. the Consumer Price Index (CPI) was at 125. purchasers: sellers. Today.50% -1. b) The liquidity preference theory of the term structure of interest rates states that borrowers generally prefer to borrow on a long-term basis while savers generally prefer to lend on a short-term basis.S.S. However. the CPI is at 139. None of the answers above is correct. have an upward slope. Helmsley invested in DX Enterprises one year ago. what is the yield to maturity on a 10-year U.H. Treasuries is downward sloping.S.Which of the following statements is most correct? a) The maturity premiums embedded in the interest rates on U. and governments. Treasury securities would. . Assuming that changes in the CPI accurately reflect inflation in the economy. a) b) c) d) e) demanders.Practice questions for final exam .70% rate of return on this investment over the past year.37% 4. then the yield curve for U. c) If the maturity risk premium were zero and the rate of inflation were expected to decrease in the future. suppliers.70% 2. relative to that on a 1-year U. other things held constant. d) More than one of the above statements is correct. businesses. e) None of the above statements are correct. 76.

S. e) None of the statements above are correct. what should be the interest rate on 3-year (i. c) The level of inflation is expected to decline. What does the market believe the annual rate will be on two-year U.e.0% 79.5% per year.U. Treasury securities with 2 years to maturity currently yield 7% per year. It is impossible to say unless we know whether investors require a positive or negative maturity risk premium. Treasury securities with 4 years to maturity currently yield 5. Investors expect short-term rates to decrease in the future.S. Assume that households are willing to loan their savings to corporations. . jump to 5 percent next year (Year 2). Inflation is expected to be 4 percent this coming year. e) The maturity risk premium must be positive.S.Practice questions for final exam . Assume that the pure expectations theory holds.0% 5.. and we observe a downward sloping yield curve.0% 10. and run at 6 percent the year after (Year 3). which of the following is a true statement? a) b) c) d) Investors expect short-term rates to be constant over time.0% 8. U. they have three years to maturity) risk-free securities today? a) b) c) d) e) 18% 12% 6% 8% 10% 80. According to the expectations theory. Treasury securities two years from now? a) b) c) d) e) 4. b) Corporations step up their plans for expansion and increase their demand for capital.If the expectations theory of the term structure of interest rates is correct. 78. d) All of the statements above are correct.page 21 a) Households start saving a larger percentage of their income.The real risk-free rate of interest is 3 percent. Investors expect short-term rates to increase in the future.5% 7.

page 22 81. Wind & Fire Black Eyed Peas The Backstreet Boys Best of luck on the real exam!! .Practice questions for final exam .The greatest band of all-time is a) b) c) d) e) Guns N’ Roses The Monkees Earth.

g).[Market Value .RRF) β RE = {D1 / Nn} + g RP = DP / NP .T) PVt = PMTt+1 / (r .Practice questions for final exam . RE = (D1 / P0 )+ g RE = {D1 / [P0 (1 .tax rate) = RD X (1 .T) (± )Incremental Costs × (1 .Book Value] X T THE INITIAL CASH OUTLAY (-) Installed cost of the asset (± ) Net working capital change (-) Incremental cash expenses (1-T) (+)After-tax cash flow from old asset = INITIAL CASH OUTLAY THE ANNUAL OPERATING CASH FLOWS Incremental Sales × (1 .F)]} + g RP = DP / VP RE = RRF + (RM .T) + Depreciation for new asset × T .Depreciation for old asset × T = Annual Operating Cash Flow THE TERMINAL CASH FLOWS ± NWC invested at start of project + After-tax cash flow from selling new asset = TERMINAL CASH FLOW Total risk = firm-specific risk + market risk = diversifiable risk + non-diversifiable risk b portfolio = b i wi ∑ i= 1 N Bond Value = $COUPON 1 −1 /(1 + YTM / m)t    1 PMT   + FACE VALUE  t  YTM / m (1 + YTM / m)    after-tax cost of debt = YTM X (1 .page 23 Formula Sheet Total capital = MV of debt + MV of equity + MV of preferred ATCF from asset sales= Market Value .

T) + wp RP + wE RE Income Statement Sales -Expenses -Depreciation EBIT -Interest Expense EBT -Taxes EAT Cross rate example = (Dollars/Pound) X (Francs/Dollar) = Francs/Pound FV = PV X (1 + r/m)t PV = FV / (1 + r/m)t P o a n ity V f nu = $P T M  − /(1 +r / m) t  1 1   r/m   F o A n ity V f nu =P T $ M 1 (1 +r / m)t −    r/m   PT M F V =  + / m) t − (1 r 1   r /m   PT M P V =  − / 1 + / m) t  .page 24 RP = DP / [VP (1 . 1 1( r   r/m   P o p r e ity V f e p tu P o a go i g V f rw n t P T t+ M 1 = r/m pr eut ept i y =V P t P T t+ M 1 = r− g .F)] WACC = wD RD (1 .Practice questions for final exam .

Practice questions for final exam .I .T))] EBIT DTL = percentage percentage change in EPS = DOL x DFL change in sales Earnings per share (EPS) = (EBIT .T) # of shares outstandin g Dividend payout ratio = $ of common dividend $ of earnings available to common shareholde rs .variable costs) (sales .page 25 MACRS table Percentage by recovery year Recovery year 1 2 3 4 5 6 7 8 9 10 11 3 years 33% 45 15 7 5 years 20% 32 19 12 12 5 7 years 14% 25 18 12 9 9 9 4 10 years 10% 18 14 12 9 8 7 6 6 6 4 DOL = percentage percentage change in EBIT change in sales or (sales .(PD/(1 .variable costs .I) (1 .fixed costs) DFL = percentage change in EPS percentage change in EBIT or [EBIT .