FENG2016CMEEXAMOLDTUD2013till2016
FENG2016CMEEXAMOLDTUD2013till2016
FENG2016CMEEXAMOLDTUD2013till2016
Fichier Détails
| Cartes-fiches | 462 |
|---|---|
| Langue | English |
| Catégorie | Finances |
| Niveau | Université |
| Crée / Actualisé | 11.09.2016 / 28.10.2016 |
| Lien de web |
https://card2brain.ch/box/financialengineering2016
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A firm's investment decision is also called the:
Mr. Dell has $100 income this year and zero income next year. The market interest rate is 10%
per year. Mr. Dell also has an investment opportunity in which he can invest $50 this year and
receive $80 next year. Suppose Mr. Dell consumes $50 this year and invests in the project. What is
the NPV of the investment opportunity?
A. $5
B. $22.73
C. $0 (zero)
D. None of the above.
B. $22.73
NPV = (80/1.1) - 50 = + 22.73
An initial investment of $500 produces a cash flow $550 one year from today. Calculate the rate
of return on the project
A. 10%
B. 15%
C. 25%
D. none of the above
A. 10%
Rate of return = (550 - 500)/500 = 10%
What is the present value of $10,000 per year perpetuity at an interest rate of 10%?
A. $10,000
B. $100,000
C. $200,000
D. None of the above
B. $100,000
PV = (10,000/0.1) = 100,000
After retirement, you expect to live for 25 years. You would like to have $75,000 income each
year. How much should you have saved in the retirement to receive this income, if the interest is
9% per year (assume that the payments start on the day of retirement)?
A. $736,693.47
B. $802,995.88
C. $2,043,750
D. None of the above
B. $802,995.88
PV = [[(1/0.09) - (1/((0.09)(1.09^25)))] * 75,000] * (1.09) = 802,995.88
Remark from Chris:
\(x = 1.09 *[{75,000 \over 0.09}-{75,000 \over (0.09)(1.09^{25})}]\)
Zie page 27: aftrekken van twee perpetuities met een 25-jaar discount factor. Kan je afleiden!
In class gedaan op het boord.
Op de eerste dag van retirement heb je 1 periode meer nodig, dus annuiteit maal 1,09
Which of the following statements about the relationship between interest rates and bond prices
is true?
What forward rate is embedded in a two year zero coupon bonds with a yield to maturity of 6%
and a three year zero coupon bond and a yield to maturity of 6.5%? Assume both bonds are
currently priced at par.
A. 5.50%
B. 6.00%
C. 6.50%
D. 7.50%
D. 7.50%
First calculate the future value of $1 at each YTM. You get 1.1236 for the 2 year bond and 1.2079
for the 3 year bond. Now determine the IRR over between years 2 and 3.
1.06^2 = 1.1236
1.065^3 = 1.2079
IRR= 1.2079/1.1236 = 7,5%
Super Computer Company's stock is selling for $100 per share today. It is expected that this
stock will pay a dividend of 6 dollars per share, and then be sold for $114 per share at the end of
one year. Calculate the expected rate of return for the shareholders.
A. 20%
B. 15%
C. 10%
D. 25
A. 20%
r = (114 + 6 - 100)/100 = 20%
The expected rate of return or the cost of equity capital is estimated as follows:
If the net present value (NPV) of project A is + $100, and that of project B is + $60, then the
net present value of the combined project is:
Music Company is considering investing in a new project. The project will need an initial
investment of $2,400,000 and will generate $1,200,000 (after-tax) cash flows for three years.
Calculate the NPV for the project if the cost of capital is 15%.
A. $169, 935
B. $1,200,000
C. $339,870
D. $125,846
C. $339,870
NPV = -2,400,000 + [(1,200,000)/(1.15)] + [(1,200,000/(1.15)^2] + [1,200,000/(1.15)^3] =
339,1870
When a firm has the opportunity to add a project that will utilize excess factory capacity (that is
currently not being used), which costs should be used to determine if the added project should be
undertaken?
If the discount rate is stated in nominal terms, then in order to calculate the NPV in a consistent
manner requires that project:
I) cash flows be estimated in nominal terms
II) cash flows be estimated in real terms
III) accounting income be used
Capital equipment costing $250,000 today has 50,000 salvage value at the end of 5 years. If the
straight line depreciation method is used, what is the book value of the equipment at the end of two
years?
A. $200,000
B. $170,000
C. $140,000
D. $50,000
B. $170,000
Annual depreciation = (250,000 - 50,000)/5 = 40,000
Book value at the end of two years = 250,000 - 80,000 = 170,000
Using the technique of equivalent annual cash flows and a discount rate of 7%, what is the value
of the following project?
0: -22
1: +8
2: +9
3: +11
4: +13
A. 3.06
B. 3.61
C. 10.25
D. 12.23
B. 3.61
NPV of the project is 12.23 and the EAA of the airplane is 3.61
NPV = -22 + (8/1,07^1) + (9/1,07^2) ...
EAA: (0,07*NPV)/(1-1,07^-4)
For a two-stock portfolio, the maximum reduction in risk occurs when the correlation coefficient
between the two stocks is:
What is the beta of a security where the expected return is double that of the stock market,
there is no correlation coefficient relative to the US stock market and the standard deviation of the
stock market is .18?
A. 0.00
B. 1.00
C. 1.25
D. 2.00
A. 0.00
No correlation means no covariance, thus no beta.
Portfolio Theory was first developed by:
Florida Company (FC) and Minnesota Company (MC) are both service companies. Their historical
return for the past three years are: FC: - 5%, 15%, 20%; MC: 8%, 8%, 20%. If FC and MC are
combined in a portfolio with 50% of the funds invested in each, calculate the expected return on the
portfolio.
A. 12%
B. 10%
C. 11%
D. None of the above.
C. 11%
Rp = (10)(0.5) + (12)(0.5) = 11%
(-5+15+20)/3 = 10
(8+8+20)/3 = 12
Suppose you invest equal amounts in a portfolio with an expected return of 16% and a standard
deviation of returns of 20% and a risk-free asset with an interest rate of 4%; calculate the standard
deviation of the returns on the resulting portfolio
A. 8%
B. 10%
C. 20%
D. none of the above
B. 10%
Standard deviation = 0.5(20) = 10% (want “equal amounts”)
--> equal amounts --> 50% of 20% standard deviation, other had no standard deviation
If a stock is under priced it would plot:
The market value of Cable Company's equity is $60 million, and the market value of its risk-free
debt is $40 million. If the required rate of return on the equity is 15% and that on the debt is 5%,
calculate the company's cost of capital. (Assume no taxes.)
A. 15%
B. 10%
C. 11%
D. None of the above
C. 11%
Company cost of capital = (40/100)(5) + (60/100)(15) = 11%
The market value of Charcoal Corporation's common stock is $20 million, and the market value
of its risk-free debt is $5 million. The beta of the company's common stock is 1.25, and the market
risk premium is 8%. If the Treasury bill rate is 5%, what is the company's cost of capital? (Assume
no taxes.)
A. 15%
B. 14.6%
C. 13%
D. None of the above
C. 13%
rE = 5 + 1.25(8) = 15 ; rD = 5%
Company Cost of capital = 5 (5/25) + 15(20/25) = 1 + 12 = 13%
The beta of the computer company is 1.7 and the standard error of the estimate is 0.3. What is
the range of values for beta, that has 95% chance of being right?
A. 1.1 - 2.3
B. 1.4 - 2.0
C. 1.5 - 2.0
D. None of the above
A. 1.1 - 2.3
Range = 1.7 +/- 2(0.3) i.e. (1.1 - 2.3)
Calculator Company proposes to invest $5 million in a new calculator making plant. Fixed costs
are $2 million a year. A calculator costs $5/unit to manufacture and can be sold for $20/unit. If the
plant lasts for 3 years and the cost of capital is12%, what is the approximate break-even level (i.e.
NPV = 0) of annual sales? (Assume no taxes.)(approximately)
A. $133,333 units
B. $272,117 units
C. $227,533 units
D. None of the above
B. $272,117 units
EAC = 5,000,000/2.40183 = 2,081,745 million; (X) (20 - 5) - 2,000,000 = 2,081745;
X = (4,081,745/15) = 272,117 units
Taj Mahal Tour Company proposes to invest $3 million in a new tour package project. Fixed
costs are $1 million per year. The tour package costs $500 and can be sold at $1500 per package to
tourists. This tour package is expected to be attractive for the next five years. If the cost of capital
is 20%, what is the NPV break-even number of tourists per year? (Ignore taxes, give an
approximate answer)
A. 1000
B. 2000
C. 15000
D. None of the above
B. 2000
EAC = $3 million/2.9906 = $1.00 million; (X) * (1500 - 500) - 1,000,000 = 1,000,000 X (1000) =
2,000,000
X = 2,000,000/1000 = 2000
Firms can repurchase shares in the following ways:
I) Open market repurchase
II) Through a tender offer
III) Through a Dutch auction process
IV) Through direct negotiation with a major shareholder
Company X has 100 shares outstanding. It earns $1,000 per year and expects to pay all of it as
dividends. If the firm expects to maintain this dividend forever, Calculate the stock price after the
dividend payment. (The required rate of return is 10%)
A. $110
B. $90
C. $100
D. None of the above
B. $90
Dividends = 1000/100 = $10; P = 10/0.1 = $100;
Price after dividend payment = $90
Capital structure is irrelevant if:
Health and Wealth Company is financed entirely by common stock that is priced to offer a 15%
expected return. If the company repurchases 25% of the common stock and substitutes an equal
value of debt yielding 6%, what is the expected return on the common stock after refinancing?
(Ignore taxes.)
A. 18%
B. 21%
C. 15%
D. None of the above
A. 18%
rE = rA + (D/E)(rA - rD) = 15 + (0.25/0.75)(15 - 6) = 18%
In order to calculate the tax shield effect of interest payment for a corporation, always use the:
I) average corporate tax rate
II) marginal corporate tax rate
III) state mandated tax rate
Given the following data for Golf Corporation:
market price/share = $12; Book value/share = $10; Number of shares outstanding = 100 million;
market price/bond = $800; Face value/bond = $1,000; Number of bonds outstanding = 1 million;
Calculate the proportions of debt (D/V) and equity (E/V) for the firm that you would use for
estimating the weighted average cost of capital (WACC):
A. 40% debt and 60% equity
B. 50% debt and 50% equity
C. 45.5% debt and 54.5% equity
D. none of the given values
A. 40% debt and 60% equity
Use market values (in Millions):
E = (12) * (100) = $1,200; D = (800) * (1) = $800; V = D + E = $2,000
D/V = 800/2,000 = 0.4 (40%); E/V = 1,200/2,000 = 0.6 (60%)
See Pic
Buying a call option, investing the present value of the exercise price in T-bills, and short selling
the underlying share is the same as:
A call option has an exercise price of $100. At the final exercise date, the stock price could be
either $50 or $150. Which investment would combine to give the same payoff as the stock?
A. Lend PV of $50 and buy two calls
B. Lend PV of $50 and sell two calls
C. Borrow $50 and buy two calls
D. Borrow $50 and sell two calls
A. Lend PV of $50 and buy two calls
Value of two calls 2 (150 - 100) = 100 or value of two calls =: 2(0) = 0 (not exercised); payoff =
100 + 50 = 150 or payoff = 0 + 50 = 50
Suppose Caroll's stock price is currently $20. In the each next six month periods it will either fall
by 50% or rise by 100%. What is the current value of a one-year call option with an exercise price
of $15? The six-month risk-free interest rate (periodic rate) is 5%. [Use the two stage binomial
method]
A. $8.73
B. $10.03
C. $16.88
D. $13.33
B. $10.03
20 = [40( x) + (10)(1 - x)]/1.05; x = 0.36667; (1 - x) = 0.6333
C1UP = [(65)(0.36667) + (5)(0.6333)]/1.05 = 25.714; C1DN = (5)(0.36667)/1.05 = 1.746
C = [25.714 * 0.36667 + 1.746 * 0.6333]/1.05 = 10.03
The opportunity to invest in a project can be thought of as a three-year real option that is worth
$500 million with an exercise price of $800 million. Calculate the value of the option given that,
N(d1) = 0. 3 and N(d2) = 0.15. Assume that the interest is 6% per year.
A. $150 million
B. $49.25 million
C. Zero
D. None of the above.
B. $49.25 million
C = 500(0.3) - (0.15)(800)/(1.06^3) = 49. 25
Which of the following conditions might lead a financial manager to decide to expedite a positive
Net Present Value investment project that previously he/she had decided to delay?
Generally, you can insure corporate bonds through:
A 5% debenture (face value = $1000) pays interest on June 30 and December 31. It is callable
at a price of 105% together with accrued interest. Suppose the company decides to call the bonds
on September 30. What price must it pay for each bond?
A. $1000.00
B. $1037.50
C. $1062.50
D. $1050.00
C. $1062.50
1050 + ((25)(90)/180) = $1062.50
