FENG2016CMEEXAMOLDTUD2013till2016

Michigan Co. is currently paying a dividend of $2.00 per share. The dividends are expected to grow at 20% per year for the next four years and then grow 6% per year thereafter. Calculate the expected dividend in year 5. 

A. $4.15
B. $2.95
C. $4.40
D. $3.81 

Seven-Seas Co. has paid a dividend $3 per share out of earnings of $5 per share. If the book value per share is $40 and the market price is 52.50 per share, calculate the required rate of return on the stock. 

A. 12%
B. 11%
C. 5%
D. 6% 

The payback period rule: 

Profitability index is the ratio of: 

Net Working Capital should be considered in project cash flows because: 

The real interest rate is 3% and the inflation rate is 5%. What is the nominal interest rate? 

A. 8,02%
B. 5,20%
C. 8.15%
D. 2,00% 

If the depreciation amount is 600,000 and the marginal tax rate is 35%, then the tax shield due to depreciation is:

A. $210,000
B. $600,000
C. $390,000
D. None of the above 

Standard error is estimated as: 

Mega Corporation has the following returns for the past three years: 8%, 12% and 10%. Calculate the variance of the return and the standard deviation of the returns. 

A. 64 and 8%
B. 124 and 11.1%
C. 4 and 2%
D. None of the above 

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%.
Calculate the variances of return for FC and MC. 

A. FC: 100 MC: 256
B. FC: 350 MC: 96
C. FC: 175 MC: 48
D. None of the above 

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 expected return on the resulting portfolio: 

A. 10%
B. 4%
C. 12%
D. none of the above 

Given the following data for a stock: beta = 0.5; risk-free rate = 4%; market rate of return = 12%; and Expected rate of return on the stock = 10%. Then the stock is: 

A. overpriced
B. under priced
C. correctly priced
D. cannot be determined 

The historical returns data for the past three years for Stock B and the stock market portfolio are: Stock B: 24%, 0%, 24%, Market Portfolios: 10%, 12%, 20%. Calculate the beta for Stock B. 

A. 0.86
B. 1.0
C. 0.125
D. None of the above 

The risk-free rate is 4%, the market rate of return is 14%, and the project's beta is 1.2. Calculate the certainty equivalent cash flow for year-3. 

A. $622.04
B. $360.33
C. $401.90
D. None of the above 

Financial Calculator Company proposes to invest $12 million in a new calculator making plant. Fixed costs are $3 million a year. A financial calculator costs $10 per unit to manufacture and can be sold for $30 per unit. If the plant lasts for 4 years and the cost of capital is 20%, what is the break- even level (i.e. NPV = 0) of annual rates? (Approximately)(Assume no taxes.) 

A. 150,000 units
B. 342,290 units
C. 381,777 units
D. None of the above 

Everything else remaining the same, an increase in fixed costs:

I) increases the break-even point based on NPV
II) increases the accounting break-even point
III) decreases the break-even point based on NPV
IV) decreases the accounting break-even point 

Generally, firms resort to repurchase of stock because:

I) Firms have accumulated large amount of excess cash
II) Firms want to change their capital structure
III) Firms want to substitute it for regular dividends 

Two corporations A and B have exactly the same risk and both have a current stock price of $100. Corporation A pays no dividend and will have a price of $120 one year from now. Corporation B pays dividends and will have price of $113 one year from now after paying the dividend. The corporations pay no taxes and investors pay no taxes on capital gains but pay a tax of 30% income tax on dividends. What is the value of the dividend that investors expect corporation B to pay one year from today? 

A. $7
B. $13
C. $10
D. None of the above 

Capital structure is irrelevant if: 

When comparing levered vs. unlevered capital structures, leverage works to increase EPS for high levels of operating income because: 

Wealth and Health Company is financed entirely by common stock that is priced to offer a 15% expected return. The common stock price is $40/share. The earnings per share (EPS) is expected to be $6. If the company repurchases 25% of the common stock and substitutes an equal value of debt yielding 6%, what is the expected value of earnings per share after refinancing? (Ignore taxes.) 

A. $6.00
B. $7.52
C. $7.20
D. None of the above 

The relative tax advantage of debt with personal and corporate taxes is: Where: TC = Corporate tax rate; TpE = Personal tax rate on equity income; and Tp = Personal tax rate on interest income. 

A. \({{1-Tc} \over (1-Tpe)(1-Tp)}\)

B. \({{1-Tp} \over (1-Tpe)(1-Tc)}\)

C. \({{1-Tpe} \over (1-Tp)(1-Tc)}\)

D. \({{1-Tpe} \over (1-Tp)(1+Tc)}\)

The costs of financial distress depend on the:

I) probability of financial distress
II) corporate and personal tax rates
III) the magnitude of costs encountered if financial distress occurs 

Risk shifting implies: 

Project M requires an initial investment of $25 millions. The project is expected to generate $2.25 millions in after-tax cash flows each year forever.

If the weighted average cost of capital (WACC) is 9% calculate the NPV of the project. 

A. -2.5 million
B. +2.5 million
C. zero
D. none of the above 

If the risk-free interest rate increases: 

A call option has an exercise price of $150. At the final exercise date, the stock price could be either $100 or $200. Which investment would combine to give the same payoff as the stock? 

A. Lend PV of $100 and buy two calls
B. Lend PV of $100 and sell two calls
C. Borrow $100 and buy two calls
D. Borrow $100 and sell two calls 

Suppose ABCD's stock price is currently $50. In the next six months it will either fall to $40 or rise to $60. What is the current value of a six-month call option with an exercise price of $50? The six-month risk-free interest rate is 2% (periodic rate). 

A. $5.39
B. $15.00
C. $8.25
D. $8.09 

Suppose VS's stock price is currently $20. In the next six months it will either fall by 50% or rise by 50%. What is the current value of a put option with an exercise price of $15 and expiration of one year? The six-month risk-free interest rate is 5% (periodic rate). Use the two stage binomial method. 

A. $5.00
B. $2.14
C. $7.86
D. $8.23 

If the strike price increases then the: [Assume everything else remaining the same] 

A. Value of the put option increases and that of the call option decreases
B. Value of the put option decreases and that of the call option increases
C. Value of both the put option and the call option increases
D. Value of both the put option and the call option decreases 

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) and is expected to remain constant. The price of oil P is $40/bbl and the extraction costs are $25/bbl. The quantity of oil Q = 300,000 bbl per year forever. The risk-free rate is 6% per year and that is also the cost of capital (Ignore taxes). Bbl is short for barrel.
Calculate the NPV to invest today. 

A. +40 million
B. +75 million
C. +25 million
D. None of the above 

The value of a bond that has a probability of default is given by: 

I) bond value = asset value - value of call option on assets
II) bond value = value of an equivalent default-free bond + value of put option on assets
III) bond value = value of an equivalent default-free bond + value of put option on the stock
IV) bond value = asset value + value of call option on the stock 

In general which of the following statement(s) is (are) true:

I) Bonds issued in the United States are registered
II) Bonds issued in the United States are bearer bonds
III) Eurobonds are registered
IV) Eurobonds are bearer bonds 

Firms often bundle up a group of assets and then sell the cash flows from these assets in the form of securities. They are called: 

A firm's investment decision is also called the:

The following are important functions of financial markets:

I) Source of financing; II) Provide liquidity; III) Reduce risk; IV) Source of information

The opportunity cost of capital for a risky project is:

If a bond's volatility is 10% and the interest rate goes down by 0.75% (points) then the price of the bond:

A.decreases by 10%

B.decreases by 7.5%

C.increases by 7.5%

D.increases by 0.75

MJ Co. pays out 60% of its earnings as dividends. Its return on equity is 15%. What is the stable dividend

growth rate for the firm?

A.9%

B.5%

C.6%

D.15%

Seven-Seas Co. has paid a dividend $3 per share out of earnings of $5 per share. If the book value per share is $40 and the market price is 52.50 per share, calculate the required rate of return on the stock.

A.12%

B.11%

C.5%

D.6%