FENG2016CMEEXAMOLDTUD2013till2016
FENG2016CMEEXAMOLDTUD2013till2016
FENG2016CMEEXAMOLDTUD2013till2016
Kartei Details
| Karten | 462 |
|---|---|
| Sprache | English |
| Kategorie | Finanzen |
| Stufe | Universität |
| Erstellt / Aktualisiert | 11.09.2016 / 28.10.2016 |
| Weblink |
https://card2brain.ch/box/financialengineering2016
|
| Einbinden |
<iframe src="https://card2brain.ch/box/financialengineering2016/embed" width="780" height="150" scrolling="no" frameborder="0"></iframe>
|
Corporations, potentially, have infinite life because
The opportunity cost of capital for a risky project is
If the five-year present value annuity factor is 3.60478 and four-year present value annuity factor
is 3.03735, what is the present value at the $1 received at the end of five years?
A. $0.63552
B. $1.76233
C. $0.56743
D. None of the above
$0.56743
PV = (3.60478 - 3.03735) * (1) = 0.56743
Casino Inc. is expected to pay a dividend of $3 per share at the end of year-1 (D1) and these
dividends are expected to grow at a constant rate of 6% per year forever. If the required rate of
return on the stock is 18%, what is current value of the stock today?
A. $25
B. $50
C. $100
D. $54
A. $25
P0 = Div1/(r - g) = (3/(0.18 - 0.06)) = 25
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
C. $4.40
Div6 = (2.0) * (1.20^4) * (1.06) = 4.40
Given the following cash flows for project A:
C0 = -1000, C1 = +600 ,C2 = +400, and C3 = +1500
calculate the payback period.
A. One year
B. Two years
C. Three years
D. None of the above
B. Two years
Initial investment: 1000 = CF1 + CF2 = 600 + 400; Payback period = 2 years
Muscle Company is investing in a giant crane. It is expected to cost 6.5 million in initial
investment and it is expected to generate an end of year cash flow of 3.0 million each year for three
years. Calculate the IRR approximately.
A. 14.6 %
B. 16.4 %
C. 18.2 %
D. 22.1%
C. 18.2 %
0 = -6.5 + ((3/(1 + IRR) + (3/((1 + IRR)^2)) + (3/((1 + IRR)^3)));
IRR = 18.2% (by trial & error)
Net Working Capital is the:
I) short-term assets
II) short term liabilities
III) long-term assets
IV) long term liabilities
If the discount rate is stated in real 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
Given the following data for Project M:
C0 -100 ; C1 +75; C2 +60
Real discount Rate 5%
Nominal discount Rate 10%
NPV:
A. $25.85
B. $17.77
C. $22.65
D. None of the above
B. $17.77
NPV = -100 + 75/1.1 + 60/(1.1^2) = 17.77
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
A. $210,000
Tax shield effect = (600,000)(0.35) = 210,000
Two machines, A and B, which perform the same functions, have the following costs and lives.
Which machine would you choose? The two machines are mutually exclusive and the cost of capital
is 15%.
A: 6000$ 5a
B: 8000$ 7a
A. Machine A as the EAC is $1789.89
B. Machine B as the EAC is $1922.88
C. Don't buy either machine
D. Accept both A and B
A. Machine A as the EAC is $1789.89
EAC = Equivalent Annual Cost (annuity) – see tables
EAC(A) = 6,000/3.35215 = 1789.89
EAC(B) = 8000/4.1604 = 1922.88
Given the following data: risk-free rate = 4%, average risk premium = 7.7%.
Calculate the required rate of return:
A. 5.6%
B. 7.6%
C. 11.7%
D. None of the given answers
C. 11.7%
Required rate of return = 4 + 7.7 = 11.7 %
The "beta" is a measure of:
By combining lending and borrowing at the risk-free rate with the efficient portfolios, we can I)
extend the range of investment possibilities
II) change efficient set of portfolios from being curvilinear to a straight line.
III) provide a higher expected return for any level of risk except the tangential portfolio
If the beta of Microsoft is 1.13, risk-free rate is 3% and the market risk premium is 8%,
calculate the expected return for Microsoft.
A. 12.04%
B. 15.66%
C. 13.94%
D. 8.65%
A. 12.04%
E(R) = 3 + 1.13(8) = 12.04%
Given the following data for a stock: beta = 1.5; risk-free rate = 4%; market rate of return =
12%; and Expected rate of return on the stock = 15%. Then the stock is:
A. overpriced
B. under priced
C. correctly priced
D. cannot be determined
A. overpriced
r = 4 + (1.5) * (12 - 4) = 16%; the expected rate of return is less than the required rate of return.
The stock is overpriced.
The market value of Charter Cruise Company's equity is $15 million, and the market value of its
risk-free debt is $5 million. If the required rate of return on the equity is 20% and that on the debt
is 8%, calculate the company's cost of capital. (Assume no taxes.)
A. 20%
B. 17%
C. 14%
D. None of the above
B. 17%
Company cost of capital = (5/20)(8) + (15/20)(20) = 17%
The after-tax weighted average cost of capital (WACC) is calculated using the formula
The historical data for the past three years for the market portfolio are 10%, 10% and 16%. If
the risk-free rate of return is 4%, what is the market risk premium?
A. 4%
B. 8%
C. 16%
D. None of the above
B. 8%
rM = (10 + 10 + 16)/3 = 12%; RPM = (12 - 4)= 8%
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
accounting break-even level? (Approximately)(Assume no taxes.)
A. 300,000 units
B. 150,000 units
C. 381,777 units
D. None of the above
A. 300,000 units
X = (FC + D)/(p-v) = (3,000,000 + 3,000,000)/(30 - 10) = 300,000
The most important difference between stock repurchases and cash dividends is that they:
I) Benefit different groups
II) Have different effects on corporate cash flow
III) May have different tax consequences
An investor can undo the effect of leverage on his/her own account by:
I) investing in the equity of a levered firm
II) by borrowing on his/her own account
III) by investing in risk-free debt like T-bills
Learn and Earn Company is financed entirely by Common stock that is priced to offer a 20%
expected return. If the company repurchases 50% of the stock and substitutes an equal value of
debt yielding 8%, what is the expected return on the common stock after refinancing?
A. 32%
B. 28%
C. 20%
D. None of the above
A. 32%
rE = rA + (D/E)(rA - rD)
RE = 0.2 + (0.5/0.5)[0.20 - 0.08] = 0.32 = 32%
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% tax rate.
A. $50.00 million
B. $17.50 million
C. $1.445 million
D. $1.239 million
D. $1.239 million
PV of interest tax shield = [(0.3)(50)(0.09)]/1.09 = $1.239 million
Divide by 1.09,because the PV is asked !
Bombay Company's balance sheet is as follows:
(NWC = net working capital; LTA = long term assets; D = debt; E = equity; V = firm value)
According to MM's Proposition I corrected for taxes, what will be the change in company value if
Bombay issues $200 of equity and uses it to make a permanent reduction in the company's debt?
Assume a 35% tax rate.
A. +$140
B. +$70
C. $0
D. -$70
D. -$70
PV of tax shield = -200 (0.35) = -$70 million
Given the following data: Cost of debt = rD = 6%; Cost of equity = rE = 12.1%; Marginal tax
rate = 35%; and the firm has 50% debt and 50% equity. Calculate the after-tax weighted average
coat of capital (WACC):
A. 8%
B. 7.1%
C. 9.05%
D. None of the given values
A. 8%
WACC = (D/V) rD (1 - TC) + (E/V) rE; (where V = D + E)
WACC = (0.5)(1 - 0.35) (6) + (0.5)(12.1) = 8%
Given the following data for Kriya Company:
C1: 4
C2: 5
C3: 6
C4: 6,24
A constant growth rate of 4% is sustained forever after year 3. The weighted average cost of capital
is 10%.
A. $90.4 millions
B. $104 millions
C. $82.6 millions
D. none of the above
A. $90.4 millions
PV(firm) = 4/(1.1) + 5/(1.1)^2 + [ 6 + 6.24/(0.1 - 0.04)]/(1.1)^3 = 90.4
A put option gives the owner the right:
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
The opportunity to invest in a project can be thought of as a two year option on an asset which
is worth $400 million (PV of the cash flows from the project) with an exercise price of $600 million
(investment needed). Calculate the value of the option given that N(d1) = 0.6 and N(d2) = 0.4 and
interest rate is 6%.
A. $26.4 million
B. Zero
C. $200 million.
D. None of the above.
A. $26.4 million
C = 400(0.6) - (0.4)(600)/(1.06^2) = 26.4
Which of the following conditions might lead a financial manager to delay a positive NPV project?
Assume project NPV if undertaken immediately is held constant.
If a bond with one year maturity with a coupon rate of 5% and face value of $1,000 is selling for
$881.94. Calculate the promised yield on the bond.
A. 5%
B. 8%
C. 19.06%
D. none of the above
C. 19.06%
Promised yield = (1050/881.94) - 1 = 19.06%
What is the most important difference between a corporate bond and an equivalent Treasury
bond?
Very large bond issues that are marketed both internationally as well as in individual domestic
markets are called:
LIBOR means:
The following are secured bonds except:
Limited liability is an important feature of
You would like to have enough money saved to receive $100,000 per year perpetuity after
retirement so that you and your family can lead a good life. How much would you need to save in
your retirement fund to achieve this goal (assume that the perpetuity payments start one year from
the date of your retirement. The interest rate is 12.5%)?
A. $1,000,000
B. $10,000,000
C. $800,000
D. None of the above
C. $800,000
PV = (100,000/0.125) = 800,000
