FENG2016CMEEXAMOLDTUD2013till2016

A 5-year bond with 10% coupon rate and $1000 face value is selling for $1123. Calculate the
yield to maturity on the bond assuming annual interest payments.
A. 10.0%
B. 8.9%
C. 7.0%
D. None of the above

If the 5-year spot rate is 10% and the 4-year spot rate is 9%, what is the one-year forward rate
of interest four years from now?
A. 14.1%
B. 9.5%
C. 1.0%
D. 11.0%

The constant dividend growth formula P0 = Div1/(r - g) assumes:
I) the dividends are growing at a constant rate g forever.
II) r > g
III) g is never negative.

Otobai Motor Company is currently paying a dividend of $1.40 per year. The dividends are
expected to grow at a rate of 18% for the next three years and then a constant rate of 5%
thereafter. What is the expected dividend per share in year 5?
A. $2.35
B. $2.54
C. $2.91
D. $1.50

Which of the following investment rules may not use all possible cash flows in its calculations?

A firm owns a building with a book value of $150,000 and a market value of $250,000. If the
building is utilized for a project, then the opportunity cost ignoring taxes is:

A firm has a general-purpose machine, which has a book value of $300,000 and is sold for
$500,000 in the market. If the tax rate is 35%, what is the opportunity cost of using the machine in
a project?
A. $500,000
B. $430,000
C. $300,000
D. None of the above

Which of the following countries had the highest spread?

The annual return for three years for stock B comes out to be 0%, 10% and 26%. Annual
returns for three years for the market portfolios are +6%, 18%, 24%.
Calculate the beta for the stock.
A. 0.74
B. 1.36
C. 1.0
D. None of the above

The distribution of returns, measured over a short interval of time, like daily returns, can be
approximated 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%. The correlation
coefficient is equal to zero.
Calculate the mean of returns for each company.
A. FC: 12%, MC: 6%
B. FC: 10%, MC: 12%
C. FC: 20%, MC: 32%
D. None of the above

Suppose you borrow at the risk-free rate an amount equal to your initial wealth and invest in a
portfolio with an expected return of 20% and a standard deviation of returns of 16%. The risk-free
asset has an interest rate of 4%; calculate standard deviation of the resulting portfolio:
A. 28%
B. 40%
C. 32%
D. none of the above

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

Cost of equity can be estimated using

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%.
If the risk-free rate is 4%, calculate the market risk premium.
A. 18.1%
B. 14%
C. 10%
D. None of the above

Which of the following statements is true ?

The following data for year-1 are given. Revenue = $46; Total costs = $30; Depreciation = $6;
Tax rate = 30%. Calculate the operating cash flow for the project for year-1.

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

Hammer Company proposes to invest $6 million in a new type of hammer-making equipment.
The fixed costs are $0.5 million per year. The equipment is expected to last for five years. The
manufacturing cost per hammer is $1and the selling price per hammer is $6. The cost of capital is
20%. Calculate the break-even (i.e. NPV = 0) sales per year. (Ignore taxes, round to the nearest
1,000.)
A. 500,000 units
B. 600,000 units
C. 100,000 units
D. None of the above

Company X has 100 shares outstanding. It earns $1,000 per year and expects repurchase its
shares in the open market instead of paying dividends. Calculate the number of shares outstanding
at the end of year-1, if the required rate of return is 10%.
A. 110
B. 90
C. 100
D. None of the above

If both dividends and capital gains are taxed at the same ordinary income tax rate, the effect of
tax is different because:

If firm U is unlevered and firm L is levered, then which of the following is true:
I) VU = EU
II) VL = EL + DL
III) VL = EU + DL

For a levered firm

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. None of the above

The relative tax advantage of debt with personal and corporate taxes is: Where: TC = (Corporate
tax rate) = 35%; TpE = Personal tax rate on equity income = 30%; and Tp = Personal tax rate on
interest income = 20%: (approximately)
A. 1.76
B. 1.16
C. 1.35
D. None of the given ones

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

The trade-off theory of capital structure predicts that

What signal is sent to the market when a firm decides to issue new stock to raise capital?

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. 25% debt and 75% equity
D. none of the given values

A firm is financed with 30% debt, 60% common equity and 10% preferred equity. The beforetax
cost of debt is 5%, the firm's cost of common equity is 15%, and that of preferred equity is
10%. The marginal tax rate is 30%. What is the firm's weighted average cost of capital?
A. 10.05%
B. 11.05%
C. 12.5%
D. None of the above
 

The Position diagram for a put with the same exercise price and premium as the call on the
same underlying asset with the same maturity is (like):

See pic

The following data are given:
The expiration = 6 months;
Stock price = $80;
exercise price = $75;
call option price = $12;
risk-free rate = 5% per year.
Calculate the price of an equivalent put option using put-call parity:
A. $3.07
B. $5.19
C. $11.43
D. none of the above

Suppose VS's stock price is currently $20. Six-month call option on the stock with an exercise
price of $15 has a value of $7.14. Calculate the price of an equivalent put option if the six-month
risk-free interest rate is 5% (periodic rate).
A. $1.43
B. $9.43
C. $8.00
D. $12.00

If the volatility (variance) of the underlying stock increases then the: [Assume everything else
remaining the same]

The call policy that maximizes shareholder wealth is to call a bond issue when

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

You would like to have enough money saved to receive an $80,000 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 10%.)

A. $1,500,000
B. $880,000
C. $800,000
D. $80,000

One can best describe the term structure of interest rates as the relationship between:

CME 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%

The following are some of the shortcomings of the IRR method except: