FENG2016CMEEXAMOLDTUD2013till2016

An analyst wishes to determine the value of resources used by a proposed project. Which values should the analyst use to approximate opportunity costs?

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%. The assets 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.

A standard error measures:

If the covariance between stock A and stock B is 100, the standard deviation of stock A is 10% and that of stock B is 20%, calculate the correlation coefficient between the two securities.

A. -0.5
B. +1.0
C. +0.5
D. 0.0

The historical nominal returns for stock A were -8%, +10%, and +22%. The nominal returns for the market portfolio were +6%, +18%, and 24% during this same time. Calculate the beta for stock A.

A. 1.64
B. 0.61
C. 1.00
D. 0.50

FC York (FC) and Mancunian Company (MC) are both service companies. Their stock returns for the past
three years were: FC: -5%, 15%, 20%; MC: 8%, 8%, 20%. If FC and MC are combined into a portfolio with 50% of the funds invested in each stock, calculate the expected return on the portfolio.

A. 12%
B. 10%
C. 11%
D. 9%

An efficient portfolio:
I) has only unique risk;
II) provides the highest expected return for a given level of risk;
III) provides the least risk for a given level of expected return;
IV) has no risk at all

The capital asset pricing model (CAPM) states which of the following:

Assume the following data for a stock: Beta = 0.9; Risk-free rate = 4%; Market rate of return = 14%; and Expected rate of return on the stock = 13%. Then the stock is:

A. Over-priced.
B. Under-priced.
C. correctly priced.
D. cannot be determined.

Company A's historical returns for the past three years are: 6.0%, 15%, and 15%. The market portfolio's
historical returns for the past three years were 10%, 10%, and 16%. Suppose the risk-free rate of return is 4%. Estimate the market risk premium?

A. 4%
B. 8%
C. 12%
D. 16%

A project has an initial investment of 100. You have come up with the following estimates of the project's cash flows:

Suppose the cash flows are perpetuities and the cost of capital is 10%. What does a sensitivity analysis of NPV (no taxes) show? (Answers appear in order: [Pessimistic, Most Likely, Optimistic].)

A. -50, 20, +100.
B. -100, -50, +80.
C. -50, +50, +70.
D. +5, +11, +18.

All else equal, 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

Which of the following simulation outputs is likely to be most useful and easy to interpret? The output shows the distribution(s) of the project's:

Generally, firms engage in stock repurchases during:
I) boom times as firms accumulate excess cash;
II) recessions due to low stock prices;
III) times when competitor's stock prices are dropping

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. $100
C. $90
D. $10

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 a 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 30% income 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. $20

Under what conditions would a policy of maximizing the value of the firm not be the same as a policy of maximizing shareholders' wealth?

The law of conservation of value implies that:
I) the mix of common stock and preferred stock does not affect the value of the firm;
II) the mix of long-term and short-term debt does not affect the value of the firm;
III) the mix of secured and unsecured debt does not affect the value of the firm

Health and Wealth Company is financed entirely by common stock that is priced to offer a 15% expected return. If the company repurchases 25% of the common stock and substitutes an equal value of debt yielding 6%, what is the expected return on the common stock after refinancing? (Ignore taxes.)

A. 18.0%
B. 21.0%
C. 15.0%
D. 10.5%

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. The company wishes to repurchase 50% of the stock and substitutes an equal value of debt yielding 8%. Suppose that before refinancing, an investor owned 100 shares of Learn and Earn common stock. What should he do if he wishes to ensure that risk and expected return on his investment are unaffected by this refinancing?

A. Borrow $3,000 and buy 50 more shares.
B. Continue to hold 100 shares.
C. Sell 50 shares and purchase $3,000 of 8% debt (bonds).
D. Sell 8% of his stock and invest in bonds.

Suppose that a company can direct $1 to either debt interest or to capital gains for equity investors. The capital gains tax rate is 15%. Which investor would not care how the money is channeled? (The marginal corporate tax rate is 35%.)

A. investors paying zero personal tax
B. investors paying a personal tax rate of 53%
C. investors paying a personal tax rate of 17.5%
D. investors paying a personal tax rate of 45%

When financial distress is a possibility, the value of a levered firm consists of:

I) value of the firm if all-equity-financed;
II) present value of tax shield;
III) present value of costs of financial distress;
IV) present value of omitted dividend payments

While calculating the weighted average cost of capital, which values should one use for D, E, and V?

Given are the following data for year 1 to 3 and beyond:
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

On Google stock the following data are given: In June 2017, an investor buys call options with an exercise
of price of $65 and expiring in January 2019. If the stock price in June 2018 is $60, then these options are:
I) in-the-money; II) out-of-the-money; III) a LEAPS option

A. I only
B. II only
C. III only
D. II and III only

Suppose an investor buys one share of stock and a put option on the stock. What will be the value of her investment on the final exercise date if the stock price is below the exercise price? (Ignore transaction costs.)

Consider the following data for a European option: Expiration = 6 months; Stock price = $80; Exercise price = $75; Call option price = $12; Risk-free rate = 5% per year. Using put-call parity, calculate the price of a put option having the same exercise price and expiration date.

A. $3.07
B. $5.19
C. $11.43
D. $3.42

Suppose Carol's stock price is currently $20. In the next six months it will either fall to $10 or rise to $40.
What is the current value of a six-month call option with an exercise price of $12? The six-month risk-free interest rate is 5% per six-month period. [Use the risk-neutral valuation method.]

A. $9.78
B. $10.28
C. $16.88
D. $13.33

Important assumptions justifying the Black-Scholes formula include:

I) The price of the underlying asset follows a lognormal random walk.
II) Investors can adjust their hedge ratio continuously and at no cost.
III) The risk-free rate is known.
IV) The underlying asset does not pay dividends.

A project is worth $15 million today without an abandonment option. Suppose the value of the project is either $20 million one year from today (if product demand is high) or $10 million (if product demand is low). It is possible to sell off the project for $13 million if product demand is low. Calculate the value of the abandonment option if the discount rate is 5% per year.

A. $1.21 million
B. $2.86 million
C. $1.90 million
D. $1.64 million

Which of the following conditions might lead a financial manager to delay a positive-NPV project? (Assume that project NPV—if undertaken immediately—is held constant.)

A corporate bond matures in one year. The bond promises a $50 coupon 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 $907.14, calculate the promised yield on the bond.

A. 6.6%
B. 15.75%
C. 5.0%
D. 8.58%

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

The holder of a $1,000 face value bond has the right to exchange the bond any time before maturity for shares of stock priced at $50 per share. The $50 is called the:

The following are examples of intangible assets except: 

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 

The sale of financial assets is also referred to as the: 

Present Value of $100,000 that is, expected, to be received at the end of one year at a discount rate of 25% per year is: 

A. $80,000
B. $125,000
C. $100,000
D. None of the above 

Which of the following statements regarding the net present value rule and the rate of return rule is not true?

A bond with duration of 5.7 years has yield to maturity of 9%. The bond's volatility is: 

A. 1.9%
B. 5.2%
C. 5.7%
D. 9.0%