Lernkartei FENG2016CMEEXAMOLDTUD2013till2016 (Seite 10 von 12)

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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 variances of returns for FC and MC.

A. FC: 100 MC: 256
B. FC: 350 MC: 96
C. FC: 175 MC: 48
D. FC: 48 MC: 175

C. FC: 175 MC: 48

Var(FC) = [( -5 - 10)^2 + (15 - 10)^2 + (20 - 10)^2]/(3 - 1) = 175;
Var(MC) = [(8 - 12)^2 + (8 - 12)^2 + (20 - 12)^2]/(3 - 1) = 48.

A stock return's beta measures:

A. the stock's covariance with the risk-free asset.

B. the change in the stock's return for a given change in the market return.

C. the return on the stock.

D. the standard deviation on the stock's return.

If a firm uses the same company cost of capital for evaluating all projects, which situation(s) will likely occur?

I) The firm will reject good low-risk projects;
II) The firm will accept poor high-risk projects;
III) The firm will correctly accept projects with average risk

A. I only

B. IandIIonly

C. I, II, and III

D. II only

Company A's historical returns for the past three years were: 6%, 15%, and 15%. Similarly, the market portfolio's returns were: 10%, 10%, and 16%. According to the security market line (SML), Stock A was:

A. overpriced.
B. underpriced.
C. correctly priced.
D. need more information.

D. need more information.

The given numbers enable the calculation of beta for Company A. However, one needs to know the risk- free rate to construct the SML.

You obtain the following data for year 1: Revenue = $43; Variable costs = $30; Depreciation = $3; Tax rate = 30%. Calculate the operating cash flow for the project for year 1.

A. $7
B. $10
C. $13
D. $16

B. $10

Pretax income = (43 - 30 - 3) = 10;
Tax = 10(0.3) = 3;
Net profit = 10 - 3 = 7;
Operating cash flow = 7+3 =10

The Solar Calculator Company proposes to invest $5 million in a new calculator-making plant that will depreciate on a straight-line basis. Fixed costs are $2 million per year. A calculator costs $5 per unit to manufacture and sells for $20 per unit. If the plant lasts for three years and the cost of capital is 12%, what is the accounting break-even level of annual sales? (Assume no taxes.)

A. 133,334 units
B. 272,117 units
C. 244,444 units
D. 466,666 units

C. 244,444 units

Fixed costs and depreciation equal $2M and $1.67M per year, respectively. Let X = the annual sales rate.
Given a price of $20 and variable cost of $5,
X = (2,000,000 + 1,666,667)/(20 - 5) = 244,444 units.

Miller and Modigliani's indifference proposition regarding dividend policy:

A. assumes that tax rates increase at the same rate as inflation.

B. assumes that investors can sell their stock at a fair price.

C. states that investors are indifferent between stock dividends and cash dividends.

D. states that investors are indifferent between stock repurchases and cash dividends.

Company X has 100 shares outstanding. It earns $1,000 per year and announces that it will use all $1,000 to repurchase its shares in the open market instead of paying dividends. Calculate the number of shares outstanding at the end of year 1, after the first share repurchase, if the required rate of return is 10%.

A. 110.0
B. 100.0
C. 90.91
D. 89.0

C. 90.91

Share price at beginning of year = [$1000/0.1]/100 = $100 per share. Share price at end of year, before repurchase, equals $100 × 1.10 = $110. Number of shares purchased = $1,000/$110 = 9.09. 100 - 9.09 = 90.91 shares remain.

A firm in Australia earns a pretax profit of $A10 per share. Suppose that it pays a corporate tax of $3 per share (30% tax rate) in taxes. The firm pays the remaining $A7 in dividends to a shareholder in the 30% marginal tax bracket. What is the amount of additional tax paid by the shareholder under an imputation tax system?

A. $A 2.10
B. $A 0.00
C. $A3.00
D. $A 5.10

B. $A 0.00

Imputation tax system: shareholders’ returns are not taxed twice, p408 in 10th edition

If a firm is financed with both debt and equity, the firm's equity is known as:

A. unlevered equity.

B. levered equity.

C. preferred equity.

D. none of the options.

Capital structure is irrelevant if:

I) capital markets are efficient;
II) each investor can borrow/lend on the same terms as the firm;
III) there are no tax benefits to debt

A. I only

B. II only

C. III only

D. I, II, and III

According to an EPS-operating income graph, debt financing is the preferred outcome in the case when expected operating income is:

A. less than the break-even income.

B. greater than the break-even income.

C. equal to the break-even income.

D. not able to be determined.

Learn and Earn Company is financed entirely by common stock that is priced to offer a 20% expected rate of return. The stock price is $60 and the earnings per share are $12. If the company repurchases 50% of the stock and substitutes an equal value of debt yielding 8%, what is the expected earnings per share value after refinancing?

A. $12.00
B. $19.20
C. $24.00
D. $15.60

B. $19.20

Interest per share = $30(0.08) = $2.40; EPS = (12 - 2.4)/0.5 = $19.20.
New equity requires = 20 + (.50/.50) × (20 - 8) = 32%;
32% return on the $60 stock investment = (60 × 0.32) = $19.20.

A firm has zero debt in its capital structure. Its overall cost of capital is 10%. The firm is considering a new capital structure with 60% debt. The interest rate on the debt would be 8%. Assuming there are no taxes, its cost of equity capital with the new capital structure would be:

A. 8%
B. 16%
C. 13%
D. 10%

C. 13%

rE =10+(60/40)(10-8)=10+3=13.

A firm has a debt-to-equity ratio of 0.50. Its cost of debt is 10%. Its overall cost of capital is 14%. What is its cost of equity if there are no taxes?

A. 13%
B. 16%
C. 15%
D. 18%

B. 16%

14 = [1/3](10) + (2/3)(X); solve for X; 42 = 10 + 2X; X = 16%.

In order to calculate the tax shield of interest payments for a corporation, always use the:

I) average corporate tax rate;
II) marginal corporate tax rate;
III) marginal rate on personal income tax

A. I only

B. II only

C. III only

D. I and III only

Assume the marginal corporate tax rate is 30%. The firm has no debt in its capital structure. It is valued at $100 million. What would be the value of the firm if it issued $50 million in perpetual debt and repurchased the same amount of equity?

A. $65 million
B. $115 million
C. $100 million
D. $150 million

B. $115 million

VU =100;(TC)(B)=0.3(50)=15;VL =VU +TCB=100+15=$115.

Suppose that your firm's current unlevered value is $800,000, and its marginal corporate tax rate is 35%. Also, you model the firm's PV of financial distress as a function of its debt ratio (D/V) according to the relation: PV of financial distress = 800,000 × (D/V)2. What is the firm's levered value if it issues $200,000 of perpetual debt to buy back stock?

A. $820,000.
B. $869,555.
C. $920,000.
D. $350,000.

A. $820,000.

Value of firm = value of unlevered firm + PV(tax shield) - PV(cost of financial distress);
Value of firm (in 000s) = 800 + (0.35 × 200) - 800 × [(200/800)^2] = 820K.

Given are 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 Golf Corporation that you should use for estimating its 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. 66.7% debt and 33.3% equity.

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%).

Given are the following data for year 1:
Profits after taxes = $14 million; Depreciation = $6 million; Interest expense = $6 million; Investment in fixed assets = $12 million; Investment in working capital = $3 million. Calculate the free cash flow (FCF) for year 1:

A. $4 million.
B. $5 million.
C. $6 million.
D. $7 million.

B. $5 million.

FCF = 14 + 6 - 12 - 3 = $5 million.

Given the following data for Outsource Company: PV (of FCFs for years 1-3) = $35 million; PV (horizon value) = $65 million.

Calculate the value of the firm:

A. $100 million
B. $65 million
C. $30 million
D. $170 million

A. $100 million

PV(firm) = PV (of FCFs for years 1-3) + PV (horizon value) = 35 + 65 = 100.

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

A. $5.39

Replicating portfolio method: Call option payoff = 60 - 50 = 10 and zero;
(60)(A) + (1.02)(B) = 10, (40)(A) + 1.02(B) = 0; Solving for A = 0.5 (option delta) &
B = -19.6; call option price (current) = 0.5(50) - 19.61 = $5.39.
Risk-neutral valuation: Risk-neutral probability of a rise in value = (interest rate - % downside change)/(upside change - % downside change); [0.02 - (-10/50)]/[(10/50) - (-10/50)] = 0.55; Call option value = [(0.55)(10) + (0.45)(0)]/(1.02) = $5.39.

If the delta of a call option is 0.4, calculate the delta of an equivalent put option:

A. 0.6.
B. 0.4.
C. -0.4.
D. -0.6.

D. -0.6.

0.4 - 1 = -0.6.

An example of a real option is:

A. the option to make follow-on investments.

B. the option to abandon a project.

C. the option to wait before investing.

D. all of the options.

A corporate bond matures in one year. The bond promises interest of $50 and principal of $1,000 at maturity. Suppose the bond has a 10% probability of default and payment under default is $400. If an investor buys the bond for $890.19, calculate the promised yield on the bond.

A. 6.6%
B. 18.0%
C. 7.0%
D. 10.7%

B. 18.0%

Promised yield = 1050/890.19 = 17.95%.

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

A. asset value - value of call option on assets.

B. asset value + value of call option on assets.

C. asset value + value of a default-free bond.

D. asset value - value of put option on assets.

Two major differences between a warrant and a call option are:

I) warrants are contracts outside of the firm while options are within the firm;
II) warrants have long maturities while options are usually short maturities;
III) warrant exercise dilutes the value of equity while options exercise usually does not

A. II and III only

B. I only

C. II only

D. III only

Project finance is extensively used in developing countries to finance:

A. power projects.

B. telecommunications projects.

C. transportation projects.

D. all of the options.

Firms can pay out cash to their shareholders in the following ways:
I) Dividends
II) Share repurchases
III) Interest payments

I only

II only

I and II only

III only

Dividends are decided by:

I) The managers of a firm
II) The government
III) The board of directors

I only

II only

III only

I and II only

Which of these dates occurs last in time (when arranged in the chronological
order)?
A. Payment date
B. Ex-dividend date
C. Record date
D. Dividend declaration date

Answer A: Payment date
Order: Declaration date è Ex-dividend date èRecord date è Payment date

Which of the following lists events in the chronological order from earliest to
latest?
A. Record date, declaration date, ex-dividend date
B. Declaration date, record date, ex-dividend date
C. Declaration date, ex-dividend date, record date
D. None of the above

Answer C: Declaration date, ex-dividend date, record date
Because: Declaration date --> Ex-dividend date --> Record date --> Payment date

Which of the following dividends is never in the form of cash?
I) Regular dividend
II) Special dividend
III) Stock dividend
IV) Liquidating dividend

I only

II only

III only

I, II and IV only

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

I only

II only

I and II only

III only

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 today. (The required rate of return is 10%)
A. $110
B. $90
C. $100
D. None of the above

Answer C:
Dividends = 1000/100 = $10;
P = 10/0.1 = $100 (p26 Sum of Perpetuity)

Which of the following is true?

Firms have long-run target dividend payout ratios

Dividend changes follows shifts in long-term, sustainable earnings

Managers are reluctant to make dividend changes that might have to be reversed

All of the above

One possible reason that shareholders often insist on higher dividends is:

They agree with Miller and Modigliani

Tax consideration

The stock market is efficient

They do not trust managers to spend retained earnings wisely

If dividends are taxed more heavily than capital gains, the investors

Should be willing to pay more for stocks with low dividend yields

Should be willing to pay more for high dividend yields

Should be willing to pay the same for stocks regardless of the dividend yields

Cannot be predicted as stock prices fluctuate randomly

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

Answer C:
NPV = -25 + 2.25/0.09 = 0

When a firm has no debt, then such a firm is known as:

I) an unlevered firm
II) a levered firm
III) an all-equity firm

I only

II only

III only

I and III only

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