FENG2016CMEEXAMOLDTUD2013till2016

For the case of an electric car project, which of the following costs or cash flows should be categorized as incremental when analyzing whether to invest in the project?

A project requires an initial investment of $200,000 and expects to produce a cash flow before taxes of 120,000 per year for two years (i.e., cash flows will occur at t = 1 and t = 2). The corporate tax rate is 30%. Thenassets will depreciate using the MACRS - 3-year schedule: (t = 1, 33%); (t = 2: 45%); (t = 3: 15%); (t = 4: 7%). The company's tax situation is such that it can use all applicable tax shields. The opportunity cost of capital is 12%. Assume that the asset can sell for book value at the end of the project. Calculate the NPV of the project (approximately):

A. $22,463.
B. $19,315.
C. $16,244.
D. $5,721.

If the standard deviation of annual returns is 19.8% and the number of years of observation is 107, what is the standard error?

A. 4.23%
B. 1.91%
C. 0.47%
D. 19.8%

Macro Corporation has had the following returns for the past three years, -10%, 10%, and 30%. Calculate the standard deviation of the returns.

A. 10%
B. 20%
C. 25%
D. 30%

Florida Company (FC) and Minnesota Company (MC) are both service companies. Their stock returns for the past three years were: FC: -5%, 15%, 20%; MC: 8%, 8%, 20%. Calculate the correlation coefficient between the returns of FC and MC.

A. 0.000
B. -0.655
C. +0.655
D. 0.500

The presence of a risk-free asset enables the investor to:

I) invest in the market portfolio;
II) find an interior portfolio using quadratic programming;
III) borrow or lend at the risk-free rate;
IV) form portfolios having greater Sharpe ratios

Company A's historical returns for the past three years are: 6%, 15%, and 15%. Similarly, the market portfolio's returns were: 10%, 10%, and 16%. Calculate the beta for Stock A.

A. 1.75
B. 1.0
C. 0.57
D. 0.75

Company A's historical returns for the past three years are: 6.0%, 15%, and 15%. Similarly, the market portfolio's returns were: 10%, 10%, and 16%. Suppose the risk-free rate of return is 4%. What is the cost of equity capital (required rate of return of company A's common stock), computed with the CAPM?

A. 18%
B. 14%
C. 12%
D. 10%

A project has the following cash flows: C0 = -100,000; C1 = 50,000; C2 = 150,000; C3 = 100,000. If the discount rate changes from 12% to 15%, what is the CHANGE in the NPV of the project (approximately)?

A. 12,750 increase
B. 12,750 decrease
C. 14,240 increase
D. 14,240 decrease

After completing a project analysis, an analyst should rely on which tool to make a final recommendation on the project?

If investors do not like dividends because of the additional taxes that they have to pay, how would you expect stock prices to behave on the ex-dividend date?

A. Fall by more than the amount of the dividend
B. Fall exactly by the amount of the dividend
C. Fall by less than the amount of the dividend
D. Cannot be predicted

If an investor buys a portion (X) of both the debt and equity of a levered firm, then his/her payoff is:

An EPS-operating income graph, for different debt ratios, shows the:

I) greater risk associated with debt financing, which is evidenced by a greater slope;
II) the break-even point where EPS of two different debt ratios are equal;
III) the minimum earnings needed to pay the debt financing for a given level of debt

Which of the following statements is true ?

I. The technical lifetime is always longer than the economic lifetime.
II. It is economically seen wise that the economic life is longer than the technical life.
III. Build a new structure when Integral cost of the new structure is lower than the total cost of the old structure.
IV. Build a new structure when integral cost of the new structure is lower than the variable cost of the old structure.

If a firm borrows $50 million for one year at an interest rate of 9%, what is the present value of the interest tax shield? Assume a 30% marginal corporate tax rate.

A. $50.00 million
B. $17.50 million
C. $1.45 million
D. $1.24 million

If a corporation cannot use its interest payments as a tax shield for a particular year because it has suffered a loss, it is still possible to use the tax shield because:
I) the carry-back provision allows corporations to carry back the loss and receive a tax refund up to the amount of taxes paid in the previous two years;
II) the carry-forward provision allows corporations to carry forward the loss and use it to shield income in subsequent years

For every dollar of operating income paid out as equity income, the shareholder realizes:

What does "risk shifting" imply?

When faced with financial distress, managers of firms acting on behalf of their shareholders' interests will tend to:

I) issue large quantities of low-quality debt versus low quantities of high-quality debt;
II) favor paying high dividends to shareholders;
III) delay the onset of bankruptcy as long as they can

A firm has a total market value of $10 million while its debt has a market value of $4 million. What is the aftertax weighted average cost of capital if the before-tax cost of debt is 10%, the cost of equity is 15%, and the tax rate is 35%?

A. 13.0%
B. 11.6%
C. 8.8%
D. 10.4%

Consider the following data:
FCF1 = $7 million; FCF2 = $45 million; FCF3 = $55 million. Assume that free cash flow grows at a rate of 4% for year 4 and beyond. If the weighted average cost of capital is 10%, calculate the value of the firm.

A. $953.33 million
B. $801.12 million
C. $716.25 million
D. $736.02 million

A firm uses $30 million of debt, $10 million of preferred stock, and $60 million of common equity to finance its assets. If the before-tax cost of debt is 8%, cost of preferred stock is 10%, and the cost of common equity is 15%, calculate the weighted average cost of capital for the firm assuming a tax rate of 35%.

A. 12.4%
B. 11.56%
C. 10.84%
D. 19.27%

The writer (seller) of a regular exchange-listed put-option on a stock:

The next figure 4 depicts the:

Buying the stock and the put option on the stock provides the same payoff as:

Suppose the underlying stock pays a dividend before the expiration of options on that stock. This will:
I) increase the value of a call option;
II) increase the value of a put option;
III) decrease the value of a call option;
IV) decrease the value of a put option

Suppose Ralph's stock price is currently $50. In the next six months it will either fall to $30 or rise to $80. What is the option delta of a call option with an exercise price of $50?

A. 0.375
B. 0.500
C. 0.600
D. 0.750

What is the current value of a six-month call option with an exercise price of $15? The six-month risk-free interest rate is 5% per six-month period. [Use the replicating portfolio method.]
A. $8.73
B. $10.28
C. $16.88
D. $13.33

Petroleum Inc. owns a lease to extract crude oil from sea. It is considering the construction of a deep-sea oil rig at a cost of $50 million (C0). The construction costs are expected to remain constant. The price of oil P is $40/bbl., and extraction costs are $25/bbl. The rig can extract a quantity of oil, Q = 300,000 bbl. per year forever. (For tractability, assume that all first-year production occurs at the end of the first year.) Assume that the cost of capital and the risk-free rate are both 6% per year. (Ignore taxes.)
Calculate the NPV from investing today.
A. +40 million
B. +75 million
C. +25 million
D. +150 million

A project is worth $12 million today without an abandonment option. Suppose the value of the project is either $18 million one year from today (if product demand is high) or $8 million (if product demand is low). It is possible to sell off the project for $10 million if product demand is low. Calculate the value of the abandonment option if the discount rate is 5% per year.

A. $1.03 million
B. $0.88 million
C. $1.90 million
D. $5.14 million

The value of a corporate bond can be thought of as:

Which of the following are included in the typical bond indenture?
I) the basic terms of the bond;
II) details of the protective covenants;
III) sinking fund arrangements;
IV) call provisions

The recovery rate on defaulting debt is the highest for the following type of debt:

If a corporate security can be exchange for a fixed number of shares of stock, the security is said to be:

The controller usually oversees the following functions of a corporation:
I) preparation of financial statements; II) internal accounting; III) cash management; and IV) taxes

You would like to have enough money saved to receive a $50,000 per year perpetuity after retirement. How much would you need to have saved in your retirement fund to achieve this goal? (Assume that the perpetuity payments start on the day of your retirement. The annual interest rate is 8%.)
A. $1,000,000
B. $675,000
C. $625,000
D. $500,000

If the nominal interest rate per year is 10% and the inflation rate is 4%, what is the real rate of interest?
A. 6.0%
B. 4.1%
C. 5.8%
D. 14.0%

One can estimate the dividend growth rate for a stable firm as:

Lake Co. just paid a dividend of $3 per share out of earnings of $5 per share. If its book value per share is $40, what is the expected growth rate in dividends?

A. 7.5%
B. 8%
C. 12.5%
D. 5%

You are given a job to make a decision on project X, which is composed of three independent projects A, B, and C that have NPVs of + $70, -$40 and + $100, respectively. How would you go about making the decision about whether to accept or reject the project?