FENG2016CMEEXAMOLDTUD2013till2016

The total market value (V) of the securities of a firm with both debt (D) and
equity (E) is:
A. V = D - E
B. V = E - D
C. V = D * E
D. V = D + E

Modigliani and Miller's Proposition I states that

If an investor buys "a" proportion of an unlevered firm's (firm U) equity then
his/her payoff is:

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
Tip !
rE = rA + (D/E)(rA - rD)

The main advantage of debt financing for a firm is:
I) no SEC registration is required for bond issue
II) interest expense of a firm is tax deductible
III) unlevered firms have higher value than levered firmsII

If a firm permanently borrows $100 million at an interest rate of 8%, what is the
present value of the interest tax shield? (Assume that the tax rate is 30%)
A. $8.00 million
B. $5.6 million
C. $30 million
D. $26.67 million
E. None of the above

If a firm borrows $50 million for one year at an interest rate of 10%, what is the
present value of the interest tax shield? Assume a 30% tax rate.
(Approximately.)
A. $1.364 million
B. $1.5 million
C. $1.0 million
D. $4.545 million
E. None of the above

Assuming that bonds are sold at a fair price, the benefits from the tax shield go
to the:

For every dollar of operating income paid out as equity income, the shareholder
realizes:
A. (1 - Tp)
B. (1 - TpE) (1 - TC)
C. (1 - TC)
D. None of the above

Tp = personal tax on interest income, TC = corporate tax, TpE = pers. Tax on equity

Given the following information, leverage will add how much value to the
unlevered firm per dollar of debt?
(Approximately) Corporate tax rate: 34% Personal tax rate on income from
bonds: 30% Personal tax rate on income from stocks: 20%
A. $0.66
B. $0.25
C. -$0.66
D. -$0.34

Which of the following statement(s) about financial distress is(are) true:
I) always ends in bankruptcy
II) firms can postpone bankruptcy for many years
III) ultimately the firm may recover and avoid bankruptcy altogether

The trade-off theory of capital structure predicts that:
A. Unprofitable firms should borrow more than profitable ones
B. Safe firms should borrow more than risky ones
C. Rapidly growing firms should borrow more than mature firms
D. Increasing leverage increases firm value

Financial slack includes:
I) Cash
II) Marketable securities
III) Readily salable real assets
IV) Ready access to debt markets or bank loans

Capital budgeting decisions that include both investment and financing
decisions can be analyzed by:
I) Adjusting the present value
II) Adjusting the discount rate
III) Ignoring financing mix

The after-tax weighted average cost of capital (WACC) is calculated as:

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
Tip: use WACC = (D/V) rD (1 - TC) + (E/V) rE; (where V = D + E)

Given the following data for year-1:
Profits after taxes = $20 millions; Depreciation = $6 millions;
Interest expense = $4 millions; Investment in fixed assets = $12 millions;
and Investment in working capital = $4 millions;
Calculate the free cash flow (FCF) for year-1:
A. $4 millions
B. $6 millions
C. $10 millions
D. none of the above

FCF1 = $20 million; FCF2 = $20 million; FCF3 = $20 million; free cash flow grows
at a rate of 5% for year 4 and beyond. If the weighted average cost of capital is
12%,
Calculate the value of the firm.
A. $300 million
B. $261.57 million
C. $213.53 million
D. None of the above
TIP: Calculate Cash Flows: Horizon Value 3 – discounting 1, 2 and 3 à PV

Firms regularly use the following to reduce risk:
I) Currency options
II) Interest-rate options
III) Commodity options

The following are examples of disguised options for firms:
I) acquiring growth opportunities
II) ability of the firm to terminate a project when it is no longer profitable
III) options that are associated with corporate securities that provide flexibility
to change the terms of the issues

An investor, in practice, can buy:
I) an option on a single share of stock
II) options that are in multiples of 100
III) a minimum order of 100 options on a share of stock

An option that can be exercised any time before expiration date is called:

The owner of a regular exchange-listed call-option on the stock:

The owner of a regular exchange-listed put-option on the stock

In June 2007, an investor buys a call option on Amgen stock with an exercise of
price of $65 and expiring in January 2009. If the stock price in June 2008 is $60,
then this option is:
I) in-the-money
II) out-of-the-money
III) a LEAPS (Long Term Equity AnticiPation Security)

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):

In June 2007, an investor buys a put option on Genentech stock with an
exercise of price of $75 and expiring in January 2009. If the stock price in June
2007 is $80, then this option is:
I) in-the-money
II) out-of-the-money
III) a LEAPS (Long Term Equity AnticiPation Security)

The buyer of a call option has the right to exercise, but the writer of the call
option has:
 

The writer (seller) of a regular exchange-listed put-option on the stock:

Which of the following investors would be happy to see the stock price rise
sharply?
I) Investor who owns the stock and a put option
II) Investor who has sold a put option and bought a call option
III) Investor who owns the stock and has sold a call option
IV) Investor who has sold a call option

Given the following data: 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

The value of an option (both call and put) is positively related to:
I) volatility of the underlying stock price
II) time to expiration
III) risk-free rate

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

Suppose Ralph's stock price is currently $50. In the next six months it will
either fall to $30 or rise to $80. What is the option delta of a call option with an
exercise price of $50?
A. 0.375
B. 0.500
C. 0.600
D. 0.75

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

The delta of a put option is always equal to:

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 call 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 "u" equals the quantity (1 + upside change), then the quantity (1 + downside
change) is equal to:

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

The Black-Scholes OPM is dependent on which five parameters?