Jim Mahar
I hope you enjoyed the class. It was fast but I think you learned a lot! Having three students really let us cover the material in a greater level of detail. If I can help you in the future please let me know. Please keep in touch. Jim
Relax and good luck!
1. Five years ago, the DCA Corporation issued 20-year bonds with a coupon rate of 12%. If the investors’ required rate of return (IRR) on these bonds is currently 9%, the bonds will be priced:
a. below par. b. above par. c. above and below par. d. at par. e. as a perpetuity.
2. Which of the following is FALSE concerning capital budgeting techniques?
a. The payback method ignores the time value of money.b. The Net Present Value method is the preferred method for investment decisions.
c. The Internal Rate of Return method is best for mutually exclusive projects.
d. The profitability index is frequently used in the presence of rationing.
e. The payback method places no emphasis on cash flows after the cutoff period.
3. Suppose the following information is true:
ABC stock price=$37.00 HIJ stock price =$36.50 DEF $39.00
None of the stocks pay dividends. All quotes are ASK prices.
June call options with a strike price of 40 are quoted at:
ABC $3.25 HIJ $4.00 DEF $2.75Assuming perfect markets, which of the stocks has the highest volatility?
a. ABC4. All of the following are justifiable economic motivations for acquisitions by publicly held firms EXCEPT:
b. HIJ
c. DEF
d. It is impossible to tell from this information
e. ABC and DEF each have the same variance
a. Undervaluation due to poor management5. Which of the following is false?
b. Unrealized tax losses
c. Diversifying into new unrelated businesses
d. Achieving production economies of scale
e. Marketing synergies
a. The definition and measurement of the market portfolio is a controversial topic.6. What is the implied discount rate of a perpetuity that pays $5 and has a present value of $60? (Choose the closest answer)
b. Several anomalies have led people to question the validity of the CAPM.
c. The small-firm effect suggests that over the past 70 years, small firms have on average outperformed CAPM estimates.
d .CAPM assumes that all investors hold diversified portfolios.
e. Fama and French in their 1992 paper conclude that beta is the only measure of risk that is needed to predict future returns.
a. 12% b. 20% c. 8.33% d. 10.30% e. 5.22%7. Consider a project that has an initial investment and positive future cash flows. As the cost of capital is decreased ____________.
a. IRR increases while NPV remains constant.8. Consider the following information
b. IRR and NPV both decrease.
c. IRR increases while NPV remains the same.
d. IRR remains the same, while NPV increases.
e. IRR decreases and NPV remains constant.
| Stock | beta | Number of shares | price |
| Hot Dog Hut | 1.1 | 500 | 8 |
| Taco Tent | 2.1 | 600 | 12 |
| Freddy’s Fajitas | .6 | 400 | 4 |
The risk free rate is 5% and the expected return on the market is 15%.
What is the expected return on your portfolio?
a. 15% b. 23% c. 8.9% d. 18% e. None of the above9. What is the price of a stock who JUST PAID a 2.00 dividend if the company’s beta is 1.2 and they are expected to grow at 3% if the expected market return is 12% and the risk free rate is 5%?
a. $19.80 b. $23.45 c. $16.15 d. $21.34 e. none of the above.10. What is the price of a zero coupon bond that matures in 5 years if the required return is 6%?
a. $1000 b. $747 c. $816 d. $656 e. none of the above11. Which of the following is true?
a. Inflation leads to lower bond prices
b. Rising interest rates tend to slow the economy.
c. Maximizing Shareholder wealth is the goal of the corporation.
d. Investors in corporations have limited liability.
e. all of the above
12. You invested $1,000 ten years ago in Mamsco Industries stock.
If your MAMSCO stock is worth $1,629 today, what is your implied rate of
return?
a. 9.2% b. 10.0% c. 3.5% d. 8.2% e. 5.0%13. The buyer of a ___________ has the obligation to purchase an asset at a specified price on some future date with gains and losses recognized daily.
a. put option14. Pearsall Sails is financed entirely by common stock which is priced to offer a 15 percent expected return. If the company repurchases 25 percent of the common stock and substitutes an equal value of debt yielding 6 percent, what is the expected return on the common stock after the refinancing? (assume no taxes)
b. call option
c. forward contract
d. futures contract
e. swap contract
a. 12.75 percent.15. In event study methodology, which of the following is true?
b. 13.50 percent.
c. 18.00 percent.
d. 17.00 percent
e. None of the above.
a. the event data is called day 0, regardless of when it occurs16. Which of the following is false with regards to using the WACC in capital budgeting decisions?
b. market adjustments are made to correct for market wide movements.
c. a slow period of reaction is suggestive on less than perfect semi-strong form efficiency
d. CAR stands for Cumulative Abnormal Returns
e. all of the above
a. Each project should be evaluated using a discount rate that is appropriate for its riskiness.17. Which of the following is false with respect to the discounted payback period method?
b. The WACC is calculated by multiplying the weights of the firm’s various securities by the cost of that security and then adding up the products.
c. It will cause the firm no problems if the project in question has the same average riskiness as the firms other assets.
d. It may cause the firm to reject high risk positive NPV projects.
e. It will likely cause the firm to pass up low risk positive NPV investments.
a. It ignores the time value of money.18. Alice Pharr is 30 years old. She wants to set aside the same amount of money each year. She plans on retiring in 30 years. She plans on living until she is 100 years old and believes she will earn 8% per year. How much must she set aside to be able to withdraw $120,000 a year throughout her retirement? (assume she plans on dying penniless, and ignore taxes)
b. It is based off an arbitrary cutoff period.
c. It ignores the riskiness of cash flows.
d. It values distant cash flows and current cash flows as equivalent.
e. It ignores payoff after the cutoff date.
a. 15,671 b. 12,959 c. 21,098 d. $16,000 e. 14.10719. Suppose you want to raise $1,000,000. How many zero coupon bonds would you have to sell if investors require an 8% return and the bonds will mature in 10 years?
a. 2,159 b. 1,756 c. 463 d. 655 e. none of the above20. The "Rule of 72" says that if you earn 6% per year, your money will double in ___ years.
a. 12 b. 6 c. 8 d. 9 e. 1021. Consider a project with the following cash flows and assume that the correct discount rate is 10%.
cost c1 c2 c3
c4 c5
8 2
3 4 5
6
What the Net Present Value (NPV) of the investment?
a. 14.44 b. -6.36 c. 6.44 d. 10 e. none of the above22. What is the intrinsic value of a call option on a stock if the following facts are true and it is expiration in 3 minutes?
Strike Price = 40 Stock price = 45 Rf= 8%
a. 4.42 b. 0 c. –100% d. $5.00 e. -$523. Which of the following has not been a current event story in recent weeks?
a. The Fed has raised interest rates and the economy appears to be slowing.24. Which is correct?
b. The Mafia has been linked to fraudulent trading.
c. A US judge has ordered the breakup of Microsoft.
d. The NYSE and Nasdaq have agreed to work together to have 24 hour a day trading in the US.
e. US Airways and United have been in merger talks.
a. A long forward contract is very similar to a short forward contract.25. What is the internal rate of return on an initial outlay is $10,000 that generates cash flows of $2,000 at the end of year one, $5,000 at the end of year 2, and $8000 at the end of year 3?
b. A call option creates an obligation to the buyer of the contract.
c. Derivatives are very volatile
d. Buying a put can be considered a bet that the market is going up.
e. More than one of the above is true.
a. 15% b. 10% c. 23% d. 19% e. 16%
Short answers (5 points each)
1. What is the NPV, Payback, and IRR of the following cash flows? (assume cost of capital is 12%.
Year
0 1
2 3 4
5
-1000 300 200 600 300 500
2. Explain the Capital Asset Pricing Model. Give the equation and what
it is used for.
Essays (answer 2 of 3): 20 points each
Discuss what is meant by market efficiency. Define the 3 types of market
efficiency we discussed in class? What does each definition imply to investors
and to firms? (in other words, what are the implications of each
form of market efficiency. What does empirical evidence suggest?
Discuss Modigliani and Miller's theory on capital structure. Be sure
to discuss their assumptions and the importance of their work,
List, explain and give examples and the economic rationale for the Ten
Finance Axioms.
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