FIN 3716 final exam

capital

Different divisions with differing lines of business use different costs of capital because their cost of ________ could be different. • debt • equity • capital • assets

optimal debt-equity ratio

Different divisions with differing lines of business use different costs of capital because their cost of equity is different and also because the ________ could be different. • optimal volatility • optimal current ratio • optimal asset mix • optimal debt-equity ratio

hold on to stocks that have lost value and sell stocks that have risen in value since the time of purchase

Disposition effect is the tendency of individual investors to _____. • trade too much based on the mistaken belief that they can pick winners and losers better than investment professionals • buy stocks that have been in the news, advertised more, have very high trading volume, or recently had extreme (high or low) returns • put too much weight on their own experience rather than considering historical evidence • hold on to stocks that have lost value and sell stocks that have risen in value since the time of purchase

stocks do not move identically

Diversification reduces the risk of a portfolio because ________, and some of the risks are averaged out of the portfolio. • stocks do not move identically • stocks have common risks • stocks are fully predictable • stocks are not affected by the market

different

Divisional costs of capital are more appropriate when evaluating a project for a line of business when the types of business in a firm are ________. • mature businesses • similar • new businesses • different

0.17, 0.83

Epiphany is an all-equity firm with an estimated market value of $300,000. The firm sells $250,000 of debt and uses the proceeds to purchase outstanding equity. Compute the weight in equity and the weight in debt after the proposed financing and repurchase of equity. • 0.42, 0.58 • 0.50, 0.50 • 0.17, 0.83 • 0.58, 0.42

0.44, 0.56

Epiphany is an all-equity firm with an estimated market value of $400,000. The firm sells $225,000 of debt and uses the proceeds to purchase outstanding equity. Compute the weight in equity and the weight in debt after the proposed financing and repurchase of equity. • 0.28, 0.72 • 0.44, 0.56 • 0.39, 0.61 • 0.56, 0.44

0.70, 0.30

Epiphany is an all-equity firm with an estimated market value of $500,000. The firm sells $150,000 of debt and uses the proceeds to purchase outstanding equity. Compute the weight in equity and the weight in debt after the proposed financing and repurchase of equity. • 0.15, 0.85 • 0.18, 0.82 • 0.30, 0.70 • 0.70, 0.30

systematic risk

Fluctuations of a stock's return that are due to market-wide news representing common risk is the _____. • idiosyncratic risk • systematic risk • unique risk • unsystematic risk

Capital Asset Pricing Model

For an unlevered firm, the cost of capital can be determined by using the ________. • yield on the traded debt • Capital Asset Pricing Model • dividend yield • preferred stock yield

beta

For each 1% change in the market portfolioʹs excess return, the investmentʹs excess return is expected to change by ________ due to risks that it has in common with the market. • beta • alpha • 0% • 1%

15.00%

Ford Motor Company had realized returns of 10%, 20%, -10%, and -10% over four quarters. What is the quarterly standard deviation of returns for Ford? • 12.75% • 14.25% • 13.50% • 15.00%

27.39%

Ford Motor Company had realized returns of 15%, 30%, -15%, and -30% over four quarters. What is the quarterly standard deviation of returns for Ford? • 24.65% • 32.86% • 27.39% • 30.12%

5.77%

Ford Motor Company had realized returns of 20%, 30%, 30%, and 20% over four quarters. What is the quarterly standard deviation of returns for Ford calculated from this sample? • 5.77% • 5.20% • 6.06% • 4.62%

$96.24 million

Gonzales Corporation generated free cash flow of $81 million this year. For the next two years, the company's free cash flow is expected to grow at a rate of 9%. After that time, the company's free cash flow is expected to level off to the industry long-term growth rate of 4% per year. If the weighted average cost of capital is 11% and Gonzales Corporation has cash of $100 million, debt of $300 million, and 100 million shares outstanding, what is Gonzales Corporation's expected free cash flow in year 2? • $1429.79 million • $86.61 million • $1572.77 million • $96.24 million

$12.49

Gonzales Corporation generated free cash flow of $86 million this year. For the next two years, the company's free cash flow is expected to grow at a rate of 10%. After that time, the company's free cash flow is expected to level off to the industry long-term growth rate of 4% per year. If the weighted average cost of capital is 11% and Gonzales Corporation has cash of $100 million, debt of $275 million, and 100 million shares outstanding, what is Gonzales Corporation's expected current share price? • $14.37 • $11.87 • $12.49 • $16.24

$1384.24

Gonzales Corporation generated free cash flow of $88 million this year. For the next two years, the company's free cash flow is expected to grow at a rate of 10%. After that time, the company's free cash flow is expected to level off to the industry long-term growth rate of 4% per year. If the weighted average cost of capital is 12% and Gonzales Corporation has cash of $100 million, debt of $300 million, and 100 million shares outstanding, what is Gonzales Corporation's expected terminal enterprise value in year 2? • $1384.24 • $1245.82 • $1107.39 • $968.97

-87.50%

Greg purchased stock in Bear Stearns and Co. at a price of $88 per share one year ago. The company was acquired by JP Morgan at a price of $11 per share. What is Greg's return on his investment? • -87.50% • -113.75% • -100.62% • -96.25%

higher, higher

Historically, stocks have delivered a _____ return on average compared to Treasury bills but have experienced _____ fluctuations in values. • higher, higher • higher, lower • lower, higher • lower, lower

will decrease

Holding everything else constant, an increase in cash ________ a firmʹs net debt. • will decrease • will have no impact on • will increase • may increase or decrease

11.50 %

IBM expects to pay a dividend of $2 next year and expects these dividends to grow at 9% a year. The price of IBM is $80 per share. What is IBMʹs cost of equity capital? • 9.20% • 10.35 % • 10.93% • 11.50 %

12.56 %

IBM expects to pay a dividend of $5 next year and expects these dividends to grow at 7% a year. The price of IBM is $90 per share. What is IBMʹs cost of equity capital? • 3.77% • 5.02% • 7% • 12.56 %

-4.49%

IGM Realty had stock prices of $33, $33, $38, $36, and $28 at the end of the last five quarters. If IGM pays a dividend of $1 at the end of each quarter, what is the annual realized return on IGM? • -5.62% • -4.49% • -4.72% • -4.94%

Rannual = (1 + R1)(1 + R2)(1 + R3)(1 + R4) - 1

If a stock pays dividends at the end of each quarter, with realized returns of R1, R2, R3, and R4 each quarter, then the annual realized return is calculated as _____. • Rannual = (1 + R1)(1 + R2)(1 + R3)(1 + R4) - 1 • Rannual = R1 + R2 + R3 + R4 • Rannual = (1 + R1)(1 + R2)(1 + R3)(1 + R4) • Rannual = (R1 + R2 + R3 + R4) / 4

2

If asset A's return is exactly two times asset B's return, then following risk return tradeoff, the standard deviation of asset A should be _____ times the standard deviation of asset B. • 3 • 2 • 1 • 4

lower than

If returns on stock A are more volatile than the returns on stock B, the geometric average return of stock A will be _____ and the geometric average return of stock B when their arithmetic average returns are the same. • same as • higher than • lower than • always same as

systematic risk

If the Federal Reserve were to change from an expansionary to a contractionary monetary policy, this would be an example of _____. • unsystematic risk • systematic risk • independent risk • diversification risk

50%

If the returns on a stock index can be characterized by a normal distribution with mean 12%, the probability that returns will be lower than 12% over the next period equals _____. • 50% • 25% • 46% • 33%

AT&Tʹs beta is positive.

If this pattern of stock returns is typical of AT&T stock, and you calculated a beta against the S&P 500, which of the following is true? • AT&Tʹs beta is negative. • AT&Tʹs beta is zero. • AT&Tʹs beta is positive. • Cannot be determined from information given.

unsystematic, systematic

If you build a large enough portfolio, you can diversify away all ________ risk, but you will be left with ________ risk. • diversifiable, unsystematic • unsystematic, systematic • systematic, undiversifiable • undiversifiable, diversifiable

the discounted free cash flow model

If you want to value a firm but do not want to explicitly forecast its dividends, the simplest model for you to use is _____. • the discounted free cash flow model • the dividend-discount model • the enterprise value model • None of the above models can be used if you do not want to forecast dividends or use of debt.

dividend-discount model

If you want to value a firm that consistently pays out its earnings as dividends, the simplest model for you to use is the _____. • enterprise value model • method of comparables • dividend-discount model • discounted free cash flow model

unsystematic

In general, it is possible to eliminate _____ risk by holding a large portfolio of assets. • unsystematic • systematic • unsystematic and systematic • market specific

unsystematic risk

Independent risk is more closely related to _____. • unsystematic risk • systematic risk • common risk • diversification risk

the investor overconfidence hypothesis

Individual investors' tendency to trade too much based on the mistaken belief that they can pick winners and losers better than investment professionals is known as _____. • the disposition effect • the investor attention hypothesis • the investor overconfidence hypothesis • the excessive trading costs hypothesis

they do not like risk

Investors demand a higher return for investments that have larger fluctuations in values because _____. • they do not like risk • they are risk seeking • they invest for the long term • they prefer fluctuations

debt

Leverage is the amount of ________ on a firmʹs balance sheet. • equity • debt • preferred stock • retained earnings

the return investors require as compensation for taking on the risk of investing in equity markets has diminished over a period of time

Many financial managers use market risk premiums that are closer to 5%, which is lower than historical averages, because ________. • the return investors require as compensation for taking on the risk of investing in equity markets has diminished over a period of time • investors require a higher risk premium for holding risky securities than in the past • investors require a supernormal risk premium for holding risky securities as compared with the past • investors require the same premium for holding risky securities as in the

unsystematic

Many former employees at Alpha Energy, an energy trading and supply company, had a large part of their portfolio invested in AlphaEnergy's stock. These employees were bearing a high degree of _____ risk. • unsystematic • systematic • market-specific • non-diversifiable

33.89%

McCoy paid a one-time special dividend of $3.20 on October 18, 2010. Suppose you bought McCoy stock for $47.00 on July 18, 2010, and sold it immediately after the dividend was paid for $62.93. What was your capital gain yield from holding McCoy? • 4.07% • 6.11% • 33.89% • 40.70%

42.38%

McCoy paid a one-time special dividend of $3.40 on October 18, 2010. Suppose you bought McCoy stock for $47.00 on July 18, 2010, and sold it immediately after the dividend was paid for $63.52%. What was your realized return from holding McCoy? • 4.24% • 6.36% • 33.91% • 42.38%

No, since the difference between his calculated stock price and the actual stock price most likely indicates that his estimate of dividend growth rate was incorrect.

On a certain date, Kastbro has a stock price of $37.50, pays a dividend of $0.64, and has an equity cost of capital of 8%. An investor expects the dividend rate to increase by 6% per year in perpetuity. He then sells all stocks that he owns in Kastbro. Given Kastbro's share price, was this a reasonable action? • No, since the constant dividend growth rate gives a stock estimate of $37.50. • No, since the constant dividend growth rate gives a stock estimate greater than $37.50. • Yes, since the constant dividend growth rate gives a stock estimate greater than $37.50. • No, since the difference between his calculated stock price and the actual stock price most likely indicates that his estimate of dividend growth rate was incorrect.

$4.77

On a particular date, FedEx has a stock price of $89.27 and an EPS of $7.11. Its competitor, UPS, had an EPS of $0.38. What would be the expected price of UPS stock on this date, if estimated using the method of comparables? • $4.77 • $7.16 • $9.54 • $10.50

$2.63

On a particular date, the above information concerning Office Depot, Incorporated, was given on Google Finance. Its competitor, Staples Incorporated, had a stock price of $24.33. Which of the following is closest to the EPS of Staples Incorporated if it is estimated using valuation multiples based on price-earnings ratios? • $1.58 • $1.84 • $2.63 • $14.15

Investors would determine that the estimates of the firm's value on the date prior to the announcement were too high.

On a particular day, a mining company reveals that, due to new extraction technology, the extractable yield from several of its nickel / lead mines has risen by 15%. Which of the following is the LEAST likely consequence of such an announcement? • The price of the stock would rise. • Investors would determine that the estimates of the firm's values on the date prior to the announcement were too high. • Investors would increase their forecast of future cash flows in that firm. • Investors would revise their estimates of the net present value (NPV) of the firm.

3.00%

Outstanding debt of Home Depot trades with a yield to maturity of 5%. The tax rate of Home Depot is 40%. What is the effective cost of debt of Home Depot? • 4.50% • 4.65% • 3.60% • 3.00%

4.55%

Outstanding debt of Home Depot trades with a yield to maturity of 7%. The tax rate of Home Depot is 35%. What is the effective cost of debt of Home Depot? • 4.55% • 5.01% • 5.46% • 5.69%

5.60%

Outstanding debt of Home Depot trades with a yield to maturity of 8%. The tax rate of Home Depot is 30%. What is the effective cost of debt of Home Depot? • 5.88% • 8% • 6.44% • 5.60%

Revise her estimate of Praetorian's dividend growth.

Praetorian Industries will pay a dividend of $2.50 per share this year and has an equity cost of capital of 8%. Praetorian's stock is currently trading at $84 per share. By comparing Praetorian with similar firms, an investor expects that its dividends will by up to 5% per year. What is the best next step that the investor should take regarding Praetorian's stock? • Sell any Praetorian stock that she owns. • Short Praetorian's stock. • Revise Praetorian's equity cost of capital. • Revise her estimate of Praetorian's dividend growth.

are averse to

Rational investors _____ fluctuations in the value of their investments. • are averse to • prefer • are indifferent to • are in favor of

$5.64 million

SAP Inc. received a $1.5 million grant under its Small Business Innovation program. SAP invested the grant money and developed a system to remove metal contaminants from storm water in shipyards. The firm estimates that each shipyard spends $500,000 a year on storm water clean-up efforts. If SAP is able to sign up and retain four shipyards in the first year onwards, what is the present value (PV) of the project (net of investment) if the cost of capital for SAP is 14% per year? Assume a cost of operations and other costs for SAP equal 50% of revenue. • $4.51 million • $4.80 million • $5.93 million • $5.64 million

15.17 %

SIROM Scientific Solutions has $10 million of outstanding equity and $5 million of bank debt. The bank debt costs 5% per year. The estimated equity beta is 2. If the market risk premium is 9% and the risk-free rate is 3%, compute the weighted average cost of capital if the firmʹs tax rate is 30%. • 15.17 % • 15.93 % • 16.68% • 17.44 %

9.70%

SIROM Scientific Solutions has $12 million of outstanding equity and $4 million of bank debt. The bank debt costs 4% per year. The estimated equity beta is 1. If the market risk premium is 8% and the risk-free rate is 4%, compute the weighted average cost of capital if the firmʹs tax rate is 30%. • 8.73% • 9.22% • 9.70% • 10.67 %

11.30%

SIROM Scientific Solutions has $5 million of outstanding equity and $5 million of bank debt. The bank debt costs 4% per year. The estimated equity beta is 2. If the market risk premium is 8% and the risk-free rate is 4%, compute the weighted average cost of capital if the firmʹs tax rate is 35%. • 11.87 % • 12.43 % • 11.30% • 13.00 %

common economic events

Stocks tend to move together if they are affected by ________. • company specific events • common economic events • events unrelated to the economy • idiosyncratic shocks

high variability

Stocks with high returns are expected to have _____. • high variability • low variability • no relation to variability • inverse relationship with variability

16.57%

Suppose that a stock gave a realized return of 20% over a two-year time period and a 10% return over the third year. The geometric average annual return is _____. • 8.28% • 12.43% • 14.08% • 16.57%

11.67%

Suppose the quarterly arithmetic average return for a stock is 10% per quarter and the stock gives a return of 15% each over the next two quarters. The arithmetic average return over the six quarters is _____. • 15.17% • 11.67% • 12.83% • 16.33%

-26%

Suppose you have $10,000 in cash and you decide to borrow another $10,000 at a(n) 6% interest rate to invest in the stock market. You invest the entire $20,000 in an exchange -traded fund (ETF) with a 10% expected return and a 20% volatility. Assume that the ETF you invested in returns -10%. Then the realized return on your investment is closest to ________. • -18% • -10% • -23% • -26%

7%

Suppose you have $10,000 in cash and you decide to borrow another $10,000 at a(n) 6% interest rate to invest in the stock market. You invest the entire $20,000 in an exchange -traded fund (ETF) with a 11% expected return and a 20% volatility. The expected return on your of your investment is closest to ________. • 7% • 8% • 4% • 9.1%

20.00%

Suppose you invest $15,000 by purchasing 200 shares of Abbott Labs (ABT) at $40 per share, 200 shares of Lowes (LOW) at $20 per share, and 100 shares of Ball Corporation (BLL) at $30 per share. The weight of Ball Corporation in your portfolio is _____. • 50.00% • 40.00% • 20.00% • 30.00%

$20,872

Suppose you invest $20,000 by purchasing 200 shares of Abbott Labs (ABT) at $50 per share, 200 shares of Lowes (LOW) at $30 per share, and 100 shares of Ball Corporation (BLL) at $40 per share. Suppose over the next year Ball has a return of 12.3%, Lowes has a return of 23%, and Abbott Labs has a return of -10%. The value of your portfolio over the year is _____. • $21,916 • $19,828 • $20,872 • $22,959

3.8%

Suppose you invest $20,000 by purchasing 200 shares of Abbott Labs (ABT) at $50 per share, 200 shares of Lowes (LOW) at $30 per share, and 100 shares of Ball Corporation (BLL) at $40 per share. Suppose over the next year Ball has a return of 12.5%. Lowes has a return of 21%, and Abbott Labs has a return of -10%. The return on your portfolio over the year is _____. • 0% • 7.6% • 3.8% • 5.7%

48.89%

Suppose you invest $22,500 by purchasing 200 shares of Abbott Labs (ABT) at $55 per share, 200 shares of Lowes (LOW) at $35 per share, and 100 shares of Ball Corporation (BLL) at $45 per share. The weight of Abbott Labs in your portfolio is _____. • 48.89% • 39.11% • 29.33% • 19.56%

31.11%

Suppose you invest $22,500 by purchasing 200 shares of Abbott Labs (ABT) at $55 per share, 200 shares of Lowes (LOW) at $35 per share, and 100 shares of Ball Corporation (BLL) at $45 per share. The weight of Lowers in your portfolio is _____. • 40.44% • 21.78% • 49.78% • 31.11%

-1.54%

Suppose you invest in 100 shares of Harley-Davidson (HOG) at $40 per share and 230 shares of Yahoo (YHOO) at $25 per share. If the price of Harley-Davidson increases to $50 and the price of Yahoo decreases to $20 per share, what is the return on your portfolio? • -1.54% • 12.25% • -10.50% • -5.20%

2.57%

Suppose you invest in 110 shares of Merck (NRK) at $40 per share and 120 shares of Yahoo (YHOO) at $25 per share. If the price of Merck increases to $45 and the price of Yahoo decreases at $22 per share, what is the return on your portfolio? • 7.70% • 4.11% • 2.57% • 3.47%

8.51%

Suppose you invest in 220 shares of Johnson and Johnson (JNJ) at $70 per share and 240 shares of Yahoo (YHOO) at $20 per share. If the price of Johnson and Johnson increases to $80 and the price of Yahoo decreases to $18 per share, what is the return on your portfolio? • 12.77% • 8.51% • 9.37% • 10.22%

2%, 0%

Suppose you invested $100 in the Shares High Yield Fund (HYG) a month ago. It paid a dividend of $2 today and then you sold it for $100. What was your dividend yield and capital gains yield on the investment? • 2%, 2% • 0%, 2% • 3%, 2% • 2%, 0%

2%, -5%

Suppose you invested $100 in the Shares High Yield Fund (HYG) a month ago. It paid a dividend of $2 today and then you sold it for $95. What was your dividend yield and capital gains yield on the investment? • 2%, -5% • 2%, 5% • -2%, 5% • 5%, 2%

12.51%

Suppose you invested $59 in the Ishares Dividend Stock Fund (DVY) a month ago. It paid a dividend of 0.38 today and then you sold it for $66. What was your return on the investment? • 8.75% • 13.76% • 12.51% • 10.01%

9.38%

Suppose you invested $60 in the Ishares Dividend Stock Fund (DVY) a month ago. It paid a dividend of $0.63 today and then you sold it for $65. What was your return on the investment? • 6.57% • 7.51% • 9.38% • 10.32%

-$15.94%

Suppose you invested $79 in the Ishares Dividend Stock Fund (DVY) a month ago. It paid a dividend of $0.41 today and then you sold it for $66. What was your return on the investment? • -20.72% • -$15.94% • -18.33% • -17.53%

0.57%, 1.08%

Suppose you invested $93 in the Ishares High Yield Fund (HYG) a month ago. It paid a dividend of $0.53 today and then you sold it for $94. What was your dividend yield and capital gains yield on the investment? • 0.54%, 1.13% • 0.57%, 1.08% • 0.57%, 1.13% • 1.08%, 1.18%

is equal to the risk-free rate plus a risk premium for systematic risk

The Capital Asset Pricing Model asserts that the expected return ________. • is equal to the risk-free rate plus a risk premium for unsystematic risk • is equal to the risk-free rate plus a risk premium for systematic risk • is equal to the risk premium plus a risk-free rate for systematic risk • is equal to the risk premium plus a risk-free rate for unsystematic risk

-5%, 15%

The Ishares Bond Index fund (TLT) has a mean and annual standard deviation of returns of 5% and 10%, respectively. What is the 66% confidence interval for the returns on TLT? • -7%, 10% • 5%, 10% • -5%, 15% • -10%, 10%

2.50%

The S&P 500 index delivered a return of 10%, 15%, 15%, and -30% over four successive years. What is the arithmetic average annual return for four years? • 3.00% • 3.50% • 2.25% • 2.50%

8.75%

The S&P 500 index delivered a return of 20%, -10%, 20%, and 5% over four successive years. What is the arithmetic average annual return for four years? • 10.50% • 13.13% • 8.75% • 9.63%

0%

The S&P 500 index delivered a return of 25%, 15%, -35%, and -5% over four successive years. What is the arithmetic average annual return for four years? • -5% • 0% • 5% • 3%

value weighted

The S&P 500 index traditionally is a(n) ________ portfolio of the 500 largest U.S. stocks. • value weighted • equally weighted • chain weighted • price weighted

yield to maturity

The ________ of a firmʹs debt can be used as the firmʹs current cost of debt. • current yield • coupon rate • yield to maturity • discount yield

is always less than

The after-tax cost of debt ________ the before-tax cost of debt for a firm that has a positive marginal tax rate. • is always greater than • is always equal to • is always less than • may be greater than or less than

the same as

The after-tax cost of equity is ________ the pretax cost of equity. • higher than • lower than • the same as • less than or equal to

depends on the portfolio that you add it to

The amount of a stockʹs risk that is diversified away ________. • is independent of the portfolio that you add it to • depends on market risk premium • depends on risk-free rate of interest • depends on the portfolio that you add it to

-35%, 65%

The average annual return for the S&P 500 from 1886 to 2006 is 15%, with a standard deviation of 25%. Based on these numbers, what is a 95% confidence interval for 2007's returns? • -35%, 65% • -17.5%, 32.5% • -25%, 55% • -20%, 50%

-25%, 35%

The average annual return for the S&P 500 from 1886 to 2006 is 5%, with a standard deviation of 15%. Based on these numbers, what is a 95% confidence interval for 2007's returns? • -12.5%, 17.5% • -15%, 25% • -25%, 35% • -25%, 25%

-26.5%, 45.5%

The average annual return for the S&P 500 from 1886 to 2006 is 9.5%, with a standard deviation of 18%. Based on these numbers, what is a 95% confidence interval for 2007's returns? • -13.25%, 22.75% • -16.5%, 35.5% • -26.5%, 45.5% • -11.5%, 30.5%

16.07%

The average annual return on IBM from 1996 to 2005 is closest to _____. • 18.48% • 16.07% • 19.28% • 28.93%

8.68%

The average annual return on the S&P 500 from 1996 to 2005 is closest to _____. • 8.68% • 4.34% • 5.21% • 9.55%

-8.6%, 34.2%

The average annual return over the period 12=926-2009 for the S&P 500 is 12.8%, and the standard deviation of returns is 21.4%. Based on these numbers, what is a 67% confidence interval for 2010 returns? • -1.3%, 20.5% • -8.6%, 34.2% • -25.8%, 54.7% • -25.8%, 47.9%

-21.2%, 63.6%

The average annual return over the period 1926-2009 for small stocks is 21.2%, and the standard deviation of returns is 21.2%. Based on these numbers, what is a 95% confidence interval for 2010 returns? • -10.6%, 31.8% • 0%, 42.4% • -21.2%, 42.4% • -21.2%, 63.6%

-30.6%, 54.6%

The average annual return over the period 1926-2009 for the S&P 500 is 12.0%, and the standard deviation of returns is 21.3%. Based on these numbers, what is a 95% confidence interval for 2010 returns? • -1.5%, 21.8% • -10.7%, 32.8% • -30.6%, 54.6% • -30.6%, 76.4%

1

The beta of the market portfolio is ________. • 0 • -1 • 2 • 1

$260 million

The book value of a firmʹs equity is $100 million and its market value of equity is $200 million. The face value of its debt is $50 million and its market value of debt is $60 million. What is the market value of assets of the firm? • $150 million • $160 million • $260 million • $250 million

Treasury bills

The excess return is the difference between the average return on a security and the average return for _____. • Treasury bonds • a portfolio of securities with similar risk • a broad-based market portfolio like the S&P 500 index • Treasury bills

higher than

The expected return is usually ________ the baseline risk-free rate of return that we demand to compensate for inflation and the time value of money. • lower than • higher than • similar to • none of the above

expensed

The fact that the after-tax cost of debt is lower than the pretax cost of debt implicitly assumes that interest expense can be ________. • expensed • margined • refinanced • capitalized

8.65%

The geometric average annual return for a large capitalization stock portfolio is 10% for ten years and 6% per year for the next five years. The geometric average annual return for the entire 15 year period is _____. • 9.08% • 8.65% • 8.22% • 9.52%

in proportion to their value

The market portfolio is the portfolio of all risky investments held ________. • in descending weights • in ascending weights • in proportion to their value • based on previous year performance

8.5%

The outstanding debt of Berstin Corp. has eight years to maturity, a current yield of 7%, and a price of $85. What is the pretax cost of debt if the tax rate is 40%? • 5.1% • 5.9% • 8.5% • more information needed

6.9%

The outstanding debt of Berstin Corp. has five years to maturity, a current yield of 6%, and a price of $95. What is the pretax cost of debt if the tax rate is 30%. • 4.2% • 4.8% • 6.9% • more information needed

7.37%

The outstanding debt of Berstin Corp. has ten years to maturity, a current yield of 7%, and a price of $95. What is the pretax cost of debt if the tax rate is 30%. • 4.9% • 6.5% • 7.0% • 7.37%

22.67%, 16.30%

The price of Microsoft is $25 per share and that of Apple is $50 per share. The price of Microsoft increases to $36 per share after one year and to $41 after two years. Also, shares of Apple increase to $56 after one year and to $66 after two years. If your portfolio comprises 100 shares of each security, what is your portfolio return over year 1 and year 2? Assume no dividends are paid. • 21.53%, 14.67% • 22.67%, 16.30% • 24.93%, 18.75% • 22.21%, 18.26%

19.32%, 7.62%

The price of Microsoft is $30 per share and that of Apple is $58 per share. The price of Microsoft increases to $39 per share after one year and to $42 after two years. Also, shares of Apple increase to $66 after one year and to $71 after two years. If your portfolio comprises 100 shares of each security, what is your portfolio return over year 1 and year 2? Assume no dividends are paid. • 19.32%, 7.62% • 28.01%, 8.38% • 23.18%, 11.43% • 22.22%, 13.71%

13.75%, 16.48%

The price of Microsoft is $37 per share and that of Apple is $43 per share. The price of Microsoft increases to $42 per share after one year and to $47 after two years. Also, shares of Apple increase to $49 after one year and to $59 after two years. If your portfolio comprises 100 shares of each security, what is your portfolio return over year 1 and year 2? Assume no dividends are paid. • 13.06%, 14.84% • 10.31%, 18.96% • 13.75%, 16.48% • 11.69%, 19.78%

95%

The probability mass between two standard deviations around the mean for a normal distribution is _____. • 66% • 90% • 75% • 95%

capital structure

The relative proportion of debt, equity, and other securities that a firm has outstanding constitute its ________. • asset ratio • current ratio • capital structure • retained earnings

systematic, unsystematic

The risk premium of a security is determined by its _____ risk and does not depend on its _____ risk. • systematic, undiversifiable • systematic, unsystematic • undiversifiable, diversifiable • diversifiable, undiversifiable

unsystematic risk

The risk premium of a stock is NOT affected by its _____. • undiversifiable risk • market risk • systematic risk • unsystematic risk

unsystematic risk

The risk premium of a stock is not affected by its _____. • undiversifiable risk • typical risk • systematic risk • unsystematic risk

common risk

The risk that is linked across outcomes is called _____. • diversifiable risk • common risk • uncorrelated risk • independent risk

I and III

The standard deviation of returns of _____. I. small stocks is higher than that of large stocks II. large stocks is lower than that of corporate bonds III. corporate bonds is higher than that of Treasury bills Which statement is true? • I and III • I, II, and III • I and II • I only

unchanged

The systematic risk (beta) of a portfolio is ________ by holding more stocks, even if they each had the same systematic risk. • unchanged • increased • decreased • turned to 0

$7.17

The table above shows the stock prices and multiples for a number of firms in the newspaper publishing industry. Another newspaper publishing firm (not shown) had sales of $600 million, EBITDA of $84 million, excess cash of $68 million, $18 million of debt, and 120 million shares outstanding. If the average enterprise value to sales for comparable businesses is used, which of the following is the best estimate of the firm's share price? • $6.45 • $7.20 • $7.17 • $7.53

-$0.13

The table above shows the stock prices and multiples for a number of firms in the newspaper publishing industry. Another newspaper publishing firm (not shown) had sales of $620 million, EBITDA of $81 million, excess cash of $62 million, $11 million of debt, and 120 million shares outstanding. If the firm had an EPS of $0.41, what is the difference between the estimated share price of this firm if the average price-earnings ratio is used and the estimated share price if the average enterprise value / EBITDA ratio is used? • -$0.08 • -$0.13 • -$1.27 • -$1.39

Enterprise Value/Sales

The table above shows the stock prices and multiples for a number of firms in the newspaper publishing industry. Which of the following ratios would most likely be the most reliable in determining the stock price of a comparable firm? • P/E • Price/Book • Enterprise Value/Sales • Enterprise Value/EBITDA

$6.27 to $8.86

The table above shows the stock prices and multiples for a number of firms int he newspaper publishing industry. Another newspaper publishing firm (not shown) had sales of $640 million, EBITDA of $84 million, excess cash of $67 million, $14 million of debt, and 120 million shares outstanding. If the average enterprise value to sales for comparable businesses is used, which of the following is the range of reasonable share price estimates? • $6.27 to $8.86 • $4.59 to $12.23 • $1.15 to $1.53 • $6.19 to $9.32

less than 50%

The volatility of Home Depot Share prices is 50% and that of General Motors shares is 50%. When I hold both stocks in my portfolio and the stocks returns have zero correlation, the overall volatility of returns of the portfolio is ________. • more than 25% • less than 50% • more than 50% • less than 25%

not possible to calculate as information is inadequate

The volatility of Home Depot share prices is 20% and that of General Motors shares is 20%. When I hold both stocks in my portfolio, the overall volatility of that portfolio is _____. • 20% • 16% • 18% • not possible to calculate as information is inadequate

unchanged at 30%

The volatility of Home Depot share prices is 30% and that of General Motors shares is 15%. When I hold both stocks in my portfolio and the stocks returns have a correlation of 1, the overall volatility of returns of the portfolio is ________. • more than 15% • less than 30% • unchanged at 30% • equal to 15%

zero

The volatility of Home Depot share prices is 30% and that of General Motors shares is 30%. When I hold both stocks in my portfolio with an equal amount in each, and the stocks returns have a correlation of minus 1, the overall volatility of returns of the portfolio is ________. • more than 30% • unchanged at 30% • zero • equal to 60%

size, risk

There is an overall relationship between _____ and _____. Larger stocks have a lower volatility overall. • size, risk • mean, standard deviation • risk aversion, size • volatility, mean

1.29%

Treasury bill returns are 4%, 3%, 2%, and 5% over four years. The standard deviation of returns of Treasury bills is _____. • 1.55% • 1.03% • 0.90% • 1.29%

Machine A

Two slot machines offer to double your money 3 times out of 5. Machine A takes $10 bets and Machine B takes $100 bets on each occasion. A risk-average investor prefers to bet on _____. • Machine A • Machine B • does not matter • none of the above

9.74%

UPS, a delivery services company, has a beta of 1.1, and Wal-Mart has a beta of 0.7. The risk-free rate of interest is 4% and the market risk premium is 7%. What is the expected return on a portfolio with 30% of its money in UPS and the balance in Wal -Mart? • 9.74% • 10.23 % • 9.25% • 9.55

10.9%

UPS, a delivery services company, has a beta of 1.4, and Wal-Mart has a beta of 0.9. The risk-free rate of interest is 4% and the market risk premium is 6%. What is the expected return on a portfolio with 50% of its money in UPS and the balance in Wal -Mart? • 10.9% • 10.4% • 12.0% • 13.1%

16.62%

UPS, a delivery services company, has a beta of 1.6, and Wal-Mart has a beta of 0.9. The risk-free rate of interest is 6% and the market risk premium is 9%. What is the expected return on a portfolio with 40% of its money in UPS and the balance in Wal -Mart? • 14.96 % • 15.79 % • 16.62% • 18.28 %

III only

Valuation models use the relationship between share value, future cash flows, and the cost of capital to estimate these quantities for a given firm. Realistically, for a publicly traded firm, what can we reliably use such models to determine? I. the firm's future cash flows II. the firm's cost of capital III. the firm's market price • I only • II only • III only • I and II

7.0%

Verano Inc. has two business divisions a software product line and a waste water clean-up product line. The software business has a cost of equity capital of 10% and the waste water clean-up business has a cost of equity capital of 7%. Verano has 50% of its revenue from software and the rest from the waste water business. Verano is considering a purchase of another company in the waste water business using equity financing. What is the appropriate cost of capital to evaluate the business? • 10.0% • 7.0% • 8.5% • 9.0%

8.0%

Verano Inc. has two business divisions a software product line and a waste water clean-up product line. The software business has a cost of equity capital of 10% and the waste water clean-up business has a cost of equity capital of 8%. Verano has 50% of its revenue from software and the rest from the waste water business. Verano is considering a purchase of another company in the waste water business using equity financing. What is the appropriate cost of capital to evaluate the business? • 10.0% • 8.0% • 9.0% • 11.0%

4.0%

Verano Inc. has two business divisions a software product line and a waste water clean-up product line. The software business has a cost of equity capital of 11% and the waste water clean-up business has a cost of equity capital of 4%. Verano has 50% of its revenue from software and the rest from the waste water business. Verano is considering a purchase of another company in the waste water business using equity financing. What is the appropriate cost of capital to evaluate the business? • 11.0% • 7.5% • 4.0% • 6.0%

is less than the weighted average volatility

We can reduce volatility by investing in less than perfectly correlated assets through diversification because the expected return of a portfolio is the weighted average of the expected returns of its stocks, but the volatility of a portfolio ________. • is higher than the weighted average volatility • is independent of weights in the stocks • is less than the weighted average volatility • depends on the expected return

0%

What is the excess return for Treasury bills? • 0% • -9.1% • -3.2% • -2.4%

2.6%

What is the excess return for corporate bonds? • 2.6% • 1.3% • 5.2% • 0%

9.3%

What is the excess return for the S&P 500? • 11.5% • 16.3% • 0% • 9.3%

19.5%

What is the excess return for the portfolio of small stocks? • 11.7% • 16.6% • 19.5% • 17.6%

cash and risk-free securities

When calculating the WACC, it is a standard practice to subtract ________ to compute the net debt outstanding. • equity • dividends • cash and risk-free securities • coupons

increases

When corporate tax rates decline, the net cost of debt financing ________. • decreases • is unchanged • increases • doubles

cumulative, average

When investing for a long term, investors care about the volatility of _____ returns and not the volatility of _____ returns. • average, cumulative • cumulative, average • mean, cumulative • mean, average

market risk

When we compute the cost of equity capital for a project we assume that the ________ of the project is equivalent to the average market risk of the firmʹs investments. • diversifiable risk • market risk • unsystematic risk • volatility

debt to equity

When we use the WACC to assess a project, we assume that the ________ ratio does not change. • reward to systematic risk • risk to reward • debt to equity • volatility to systematic risk

Corr(Ri,Rj)

Which of the following equations is INCORRECT? • Cov(Ri,Rj) • Var(Rp) • Corr(Ri,Rj) • Cov(Ri,Rj)

xi = total value of portfolio / value of investment i

Which of the following equations is INCORRECT? • xi = total value of portfolio / value of investment i • Rp = sigmaixiPi • Rp = x1P1 + x2P2 + ... + xnPn • E[Rp] = E[sigmaixiRi]

small stocks

Which of the following investments had the largest fluctuations overall return over the past eighty years? • small stocks • S&P 500 • corporate bonds • Treasury bills

small stocks

Which of the following investments offered the highest overall return over the past eighty years? • Treasury bills • S&P 500 • small stocks • corporate bonds

Treasury bills

Which of the following investments offered the lowest overall return over the past eighty years? • small stocks • Treasury bills • S&P 500 • corporate bonds

the risk that oil prices rise, increasing production costs

Which of the following is NOT a diversifiable risk? • the risk that oil prices rise, increasing production costs • the risk that the CEO is killed in a plane crash • the risk of a key employee being hired away by a competitor • the risk of a product liability lawsuit

Determine the mean weighted average cost of capital for the firmʹs industry.

Which of the following is NOT a step in the WACC valuation method? • Compute the weighted average cost of capital. • Discount the incremental free cash flows of the investment using the weighted average cost of capital. • Determine the incremental free cash flows of the investment. • Determine the mean weighted average cost of capital for the firmʹs industry.

the risk that your new product will not receive regulatory approval

Which of the following is NOT a systematic risk? • the risk that oil prices rise, increasing production costs • the risk that the economy slows, reducing demand for your firm's products • the risk that your new product will not receive regulatory approval • the risk that the Federal Reserve raises interest rates

takes into account important differences between different firms

Which of the following is NOT an advantage of the valuation multiple method as compared to the discounted cash flow method? • calculations based upon widely available information • based upon actual stock prices of real firms • does not reply on estimates of future cash flows • takes into account important differences between different firms

P0 = (V0 + Cash0 - Debt0) / (Shares Outstanding0)

Which of the following is the appropriate way to calculate the price of a share of a given company using the free cash flow valuation model? • P0 = Div1 / (rE - g) • P0 = PV (Future Free Cash Flow of Firm) / (Shares Outstanding0) • P0 = [Div1 / (rE - g)] / (Shares Outstanding0) • P0 = (V0 + Cash0 - Debt0) / (Shares Outstanding0)

Competition between investors works to make the net present value (NPV) of all trading opportunities zero.

Which of the following is the best statement of the efficient markets hypothesis? • Investors with information that a stock had a positive net present value (NPV) will buy it. • Investor's decisions are dependent on complete current information of a firm's cash flows and accurate predictions of future cash flows. • Competition between investors works to make the net present value (NPV) of all trading opportunities zero. • A share's price is the aggregate of the information of many investors.

I only

Which of the following should be done by a manager wishing to raise his stock's price? I. Focus on maximizing the present value (PV) of the free cash flow. II. Focus on accounting earnings. III. Focus on financial policy. • I only • II only • I and II • II and III

Valuation multiples take into account differences in the risk and future growth between the firms being compared.

Which of the following statements concerning the valuation of firms using the method of comparables is FALSE? • If two different firms generate identical cash flows, the Law of One Price will imply that both firms have the same value. • Comparables adjust for scale differences wen valuing similar firms. • Valuation multiples take into account differences in the risk and future growth between the firms being compared. • Two firms that sell very similar products or offer very similar services will have different values if they are of different sizes.

When using the discounted free cash flow model, we should use a firm's equity cost of capital.

Which of the following statements is FALSE? • A firm's weighted average cost of capital, denoted rwacc, the cost of capital that reflects the risk of the overall business, which is the combined risk of the firm's equity and debt. • Intuitively, the different between the discounted free cash flow model and the dividend-discount model is that in the dividend-discount model, a firms' cash and debt are included indirectly through the effect of interest income and expenses on earnings in the dividend-discount model. • We interpret rwacc as the expected return a firm must pay to investors to compensate them for the risk of holding the firm's debt and equity together. • When using the discounted free cash flow model, we should use a firm's equity cost of capital.

The variance of a portfolio depends only on the variance of the individual stocks

Which of the following statements is FALSE? • A stockʹs return is perfectly positively correlated with itself. • When the covariance equals 0, the stocks have no tendency to move either together or in opposition of one another. • The closer the correlation is to -1, the more the returns tend to move in opposite directions. • The variance of a portfolio depends only on the variance of the individual stocks.

As the enterprise value represents the entire value of a firm before the firm pays its debt, to form an appropriate multiple, we divide it by a measure of earnings or cash flows after interest payments are made.

Which of the following statements is FALSE? • As the enterprise value represents the entire value of a firm before the firm pays its debt, to form an appropriate multiple, we divide it by a measure of earnings or cash flows after interest payments are made. • We can compute a firm's price-earnings ratio by using either trailing earnings or forward earnings with the resulting ratio called the trailing price-earnings or forward price-earnings. • It is common practice to use valuation multiples based on a firm's enterprise value. • Using a valuation multiple based on comparables is best viewed as a "shortcut" to the discounted cash flow method of valuation.

Graphically, when the tangent line goes through the market portfolio, it is called the security market line (SML).

Which of the following statements is FALSE? • Because all investors should hold risky securities in the same proportions as the efficient portfolio, their combined portfolio will also reflect the same proportions as the efficient portfolio. • The Capital Asset Pricing Model (CAPM) assumptions hold that the return on any portfolio is the combination of the risk-free rate of return plus a risk premium proportional to the amount of systematic risk in the investment. • Graphically, when the tangent line goes through the market portfolio, it is called the security market line (SML). • A portfolioʹs risk premium and volatility are determined by the fraction that is invested in the market.

A valuation multiple is a ratio of some measure of a firm's scale to the value of the firm.

Which of the following statements is FALSE? • Even two firms in the same industry selling the same types of products, while similar in many respects, are likely to be of different size or scale. • In the method of comparables, we estimate the value of a firm based on the value of other, comparable firms or investments that we expect will generate very similar cash flows in the future. • Consider the case of a new firm that is identical to an existing publicly traded company. If these firms will generate identical cash flows, the Law of One Price implies that we can use the value of the existing company to determine the value of the new firm. • A valuation multiple is a ratio of some measure of a firm's scale to the value of the firm.

Smaller stocks have a lower volatility than larger stocks.

Which of the following statements is FALSE? • Expected return should rise proportionately with volatility. • Investors would not choose to hold a portfolio that is more volatile unless they expected to earn a higher return. • Smaller stocks have lower volatility than larger stocks. • The largest stocks are typically more volatile than a portfolio of large stocks.

The covariance allows us to gauge the strength of the relationship between stocks.

Which of the following statements is FALSE? • If two stocks move in opposite directions, the covariance will be negative. • The correlation between two stocks has the same sign as their covariance, so it has a similar interpretation. • The covariance of a stock with itself is simply its variance. • The covariance allows us to gauge the strength of the relationship between stocks

Volatility seems to be a reasonable measure of risk when evaluating returns on large portfolios and the returns of individual securities.

Which of the following statements is FALSE? • Investments with higher volatility have rewarded investors with higher average returns. • Investments with higher volatility should have a higher risk premium and, therefore, higher returns. • Volatility seems to be a reasonable measure of risk when evaluating returns on large portfolios and the returns of individual securities. • Riskier investments must offer investors higher average returns to compensate them for the extra risk they are taking on.

External equity is less expensive than retained earnings.

Which of the following statements is FALSE? • Issuance costs increase the WACC. • External equity is less expensive than retained earnings. • A project that can be financed with internal funds will be less costly than the same project if it were financed with external funds. • Issuance costs should be treated as cash outflows in NPV analysis.

On average, larger stocks have higher volatility than smaller stocks.

Which of the following statements is FALSE? • On average, larger stocks have higher volatility than smaller stocks. • Portfolios of large stocks are typically less volatile than individual large stocks. • On average, smaller stocks have higher returns than larger stocks. • On average, Treasury Bills have lower returns than corporate bonds.

Almost all of the correlations between stocks are negative, illustrating the general tendency of stocks to move together.

Which of the following statements is FALSE? • Stock returns will tend to move together if they are affected similarly by economic events. • Stocks in the same industry tend to have more highly correlated returns than stocks in different industries. • Almost all of the correlations between stocks are negative, illustrating the general tendency of stocks to move together. • With a positive amount invested in each stock, the more the stocks move together and the higher their covariance or correlation, the more volatile the portfolio will be.

Correlation is the expected product of the deviations of two returns.

Which of the following statements is FALSE? • The covariance and correlation allow us to measure the co-movement of returns. • Correlation is the expected product of the deviations of two returns. • Because the stocksʹ prices do not move identically, some of the risk is averaged out in a portfolio. • The amount of risk that is eliminated in a portfolio depends on the degree to which the stocks face common risks and their prices move together.

The geometric average return will always be above the arithmetic average return, and the difference grows with the volatility of the annual returns.

Which of the following statements is FALSE? • The geometric average return is a better description of the long-run historical performance of an investment. • The geometric average return will always be above the arithmetic average return, and the difference grows with the volatility of the annual returns. • The compounded geometric average return is most often used for comparative purposes. • We should use the arithmetic average return when we are trying to estimate an investment's expected return over a future horizon based on its past performance.

If a firm has no debt, then rwacc equals the risk-free rate of return.

Which of the following statements is FALSE? • The long-run growth rate gFCF is typically based on the expected long-run growth rate of a firm's revenues. • Since a firm's free cash flow is equal to the sum of the free cash flows from the firm's current and future investments, we can interpret the firm's enterprise value as the total net present value (NPV) that the firm will earn from continuing its existing projects and initiating new ones. • If a firm has no debt, then rwacc equals the risk-free rate of return. • When using the discounted free cash flow model, we forecast a firm's free cash flow up to some horizon, together with some terminal (continuation) value of the enterprise.

Free cash flow measures the cash generated by a firm after payments to debt or equity holders are considered.

Which of the following statements is FALSE? • The more cash a firm uses to repurchase shares, the less it has available to pay dividends. • Free cash flow measures the cash generated by a firm after payments to debt or equity holders are considered. • We estimate a firm's current enterprise value by computing the present value (PV) of the firm's free cash flow. • We can interpret the enterprise value of a firm as the net cost of acquiring the firm's equity, taking its cash, and paying off all debts.

You should be willing to pay proportionally more for a stock with lower current earnings.

Which of the following statements is FALSE? • The most common valuation multiple is the price-earnings ratio. • You should be willing to pay proportionally more for a stock with lower current earnings. • A firm's price-earnings ratio is equal to the share price divided by its earnings per share. • The intuition behind the use of the price-earnings ratio is that when you buy a stock, you are in a sense buying the rights to the firm's future earnings, and differences in the scale of firms' earnings are likely to persist.

Fluctuations of a stock's return that are due to firm-specific news are common risks.

Which of the following statements is FALSE? • The risk premium of a security is determined by its systematic risk and does not depend on its diversifiable risk. • When we combine many stocks in a large portfolio, the firm-specific risks for each stock will average out and be diversified. • Fluctuations of a stock's return that are due to firm-specific news are common risks. • The volatility of a large portfolio will decline until only the systematic risk remains.

The risk premium of a security is equal to the market risk premium divided by the amount of market risk present in the securityʹs returns measured by its beta with the market.

Which of the following statements is FALSE? • The risk premium of a security is equal to the market risk premium divided by the amount of market risk present in the securityʹs returns measured by its beta with the market. • The beta of a portfolio is the weighted average beta of the securities in the portfolio. • There is a linear relationship between a stockʹs beta and its expected return. • A security with a negative beta has a negative correlation with the market, which means that this security tends to perform well when the rest of the market is doing poorly.

For valuation purposes, the trailing price-earnings ratio is generally preferred, since it is based on actual not expected earnings.

Which of the following statements is FALSE? • We can estimate the value of a firm's shares by multiplying its current earnings per share by the average price-earnings ratio of comparable firms. • For valuation purposes, the trailing price-earnings ratio is generally preferred, since it is based on actual not expected earnings. • Forward earnings are the expected earnings over the coming 12 months. • Trailing earnings are the earnings over the previous 12 months.

We say a portfolio is an efficient portfolio whenever it is possible to find another portfolio that is better in terms of both expected return and volatility

Which of the following statements is FALSE? • We say a portfolio is an efficient portfolio whenever it is possible to find another portfolio that is better in terms of both expected return and volatility. • We can rule out inefficient portfolios because they represent inferior investment choices. • The volatility of the portfolio will differ, depending on the correlation between the securities in the portfolio. • Correlation has no effect on the expected return on a portfolio.

Efficient portfolios can be easily ranked, because investors will choose from among them those with the highest expected returns.

Which of the following statements is FALSE? • When stocks are perfectly positively correlated, the set of portfolios is identified graphically by a straight line between them. • An investor seeking high returns and low volatility should only invest in an efficient portfolio. • When the correlation between securities is less than 1, the volatility of the portfolio is reduced due to diversification. • Efficient portfolios can be easily ranked, because investors will choose from among them those with the highest expected returns.

While the sign of a correlation is easy to interpret, its magnitude is not.

Which of the following statements is FALSE? • While the sign of a correlation is easy to interpret, its magnitude is not. • Independent risks are uncorrelated. • When the covariance equals 0, the returns are uncorrelated. • To find the risk of a portfolio, we need to know more than the risk and return of the component stocks; we need to know the degree to which the stocksʹ returns move together.

Without trading, the portfolio weights will decrease for the stocks in the portfolio whose returns are above the overall portfolio return.

Which of the following statements is FALSE? • Without trading, the portfolio weights will decrease for the stocks in the portfolio whose returns are above the overall portfolio return. • The expected return of a portfolio is simply the weighted average of the expected returns of the investments within the portfolio. • Portfolio weights add up to 1 so that they represent the way we have divided our money between the different individual investments in the portfolio. • A portfolio weight is the fraction of the total investment in the portfolio held in an individual investment in the portfolio.

Graphically, the line through the risk-free investment and the market portfolio is called the capital market line (CML).

Which of the following statements is FALSE? • The expected return of a portfolio should correspond to the portfolioʹs beta. • Graphically, the line through the risk-free investment and the market portfolio is called the capital market line (CML). • The beta of a portfolio is the weighted average beta of the securities in the portfolio. • By holding a negative-beta security, an investor can reduce the overall market risk of her portfolio.

Portfolios of smaller stocks are typically less volatile than individual small stocks.

Which of the following statements is TRUE? • On average, smaller stocks have lower volatility than Treasury bills. • Portfolios of smaller stocks are typically less volatile than individual small stocks. • On average, smaller stocks have lower returns than larger stocks. • On average, Treasury bills have higher returns than stocks.

volatility, volatility

While _____ seems to be a reasonable measure of risk when evaluating a large portfolio, the _____ of an individual security does not explain the size of its average return. • volatility, volatility • the mean return, standard deviation • mode, volatility • mode, mean return

$12.61

Year 1, Free Cash Flow $12 million Year 2, Free Cash Flow $18 million Year 3, Free Cash Flow $22 million Year 4, Free Cash Flow $26 million Conundrum Mining is expected to generate the above free cash flows over the next four years, after which they are expected to grow at a rate of 5% per year. If the weighted average cost of capital is 11% and Conundrum has cash of $85 million, debt of $65 million, and 30 million shares outstanding, what is Conundrum's expected current share price? • $12.61 • $16.40 • $20.18 • $20.81

$459.3 million

Year 1, Free Cash Flow $12 million Year 2, Free Cash Flow $18 million Year 3, Free Cash Flow $22 million Year 4, Free Cash Flow $26 million Conundrum Mining is expected to generate the above free cash flows over the next four years, after which they are expected to grow at a rate of 6% per year. If the weighted average cost of capital is 12% and Conundrum has cash of $80 million, debt of $60 million, and 30 million shares outstanding, what is Conundrum's expected terminal enterprise value? • $413.4 million • $459.3 million • $505.3 million • $528.2 million

$7.78

Year 1, Free Cash Flow $22 million Year 2, Free Cash Flow $26 million Year 3, Free Cash Flow $29 million Year 4, Free Cash Flow $30 million Year 5, Free Cash Flow $32 million General Industries is expected to generate the above free cash flows over the next five years, after which free cash flows are expected to grow at a rate of 5% per year. If the weighted average cost of capital is 9% and General Industries has cash of $15 million, debt of $45 million, and 80 million shares outstanding, what is General Industries' expected current share price? • $7.78 • $8.17 • $9.34 • $11.67

XOM, XOM

You expect General Motors (GM) to have a beta of 1 over the next year and the beta of Exxon Mobil (XOM) to be 1.2 over the next year. Also, you expect the volatility of General Motors to be 30% and that of Exxon Mobil to be 40% over the next year. Which stock has more systematic risk? Which stock has more total risk? • GM, GM • GM, XOM • XOM, XOM • XOM, GM

GM, GM

You expect General Motors (GM) to have a beta of 1.3 over the next year and the beta of Exxon Mobil (XOM) to be 0.9 over the next year. Also, you expect the volatility of General Motors to be 40% and that of Exxon Mobil to be 30% over the next year. Which stock has more systematic risk? Which stock has more total risk? • XOM, GM • XOM, XOM • GM, XOM • GM, GM

XOM, GM

You expect General Motors (GM) to have a beta of 1.5 over the next year and the beta of Exxon Mobil (XOM) to be 1.9 over the next year. Also, you expect the volatility of General Motors to be 50% and that of Exxon Mobil to be 35% over the next year. Which stock has more systematic risk? Which stock has more total risk? • XOM, GM • GM, XOM • GM, GM • XOM, XOM

Fordʹs beta appears to be positive.

You observe the following scatterplot of Fordʹs weekly returns against the S&P 500. Which of the following statements is true about Fordʹs beta against the S&P 500? • Fordʹs beta appears to be positive. • Fordʹs beta appears to be negative. • Fordʹs beta appears to be zero. • Beta has nothing to do with the relationship seen in this scatterplot.

47.83%

You own shares in Supernova Inc. that were purchased at a price of $23 per share. Quicksilver Inc. has offered to purchase Supernova Inc. and buy your shares at a price of $34 per share. What will be your return if you tender your shares to Quicksilver Inc. and the deal is completed? • 47.83% • 33.48% • 50.22% • 45.42%

-100%

You purchase Alpha Innovative Inc. stock at a price of $25 per share. Its price was $15 after six months and the company declared bankruptcy at the end of the next six months. The realized return over the last year is _____. • -99% • -75% • -150% • -100%

4.73%

You purchase a 30-year, zero-coupon bond for a price of $25. The bond will pay back $100 after 30 years and make no interim payments. The annual compounded return (geometric average return) on this investment is _____. • 4.49% • 5.68% • 4.02% • 4.73%

12.4%

Your estimate of the market risk premium is 6%. The risk-free rate of return is 4% and General Motors has a beta of 1.4. What is General Motorsʹ cost of equity capital? • 11.2% • 12.4% • 11.8% • 13.0%

13.6%

Your estimate of the market risk premium is 6%. The risk-free rate of return is 4%, and General Motors has a beta of 1.6. According to the Capital Asset Pricing Model (CAPM), what is its expected return? • 12.2% • 12.9% • 13.6% • 14.3%

15.2%

Your estimate of the market risk premium is 7%. The risk-free rate of return is 4% and General Motors has a beta of 1.6. What is General Motorsʹ cost of equity capital? • 15.2% • 14.4% • 16.0% • 13.7%

13.8%

Your estimate of the market risk premium is 7%. The risk-free rate of return is 4%, and General Motors has a beta of 1.4. According to the Capital Asset Pricing Model (CAPM), what is its expected return? • 10.4% • 11.7% • 13.1% • 13.8%

16.4%

Your estimate of the market risk premium is 9%. The risk-free rate of return is 3.8% and General Motors has a beta of 1.4. According to the Capital Asset Pricing Model (CAPM), what is its expected return? • 14.8% • 15.6% • 16.4% • 17.2%

20.3%

Your estimate of the market risk premium is 9%. The risk-free rate of return is 4.1% and General Motors has a beta of 1.8. What is General Motorsʹ cost of equity capital? • 20.3% • 18.3% • 19.3% • 21.3%

$108.57

Your investment over one year yielded a capital gains yield of 5% and no dividend yield. If the sale price was $114 per share, what was the cost of the investment? • $119.43 • $103.14 • $108.57 • $114.00

8.74%

Your retirement portfolio comprises 100 shares of the Standard & Poor's 500 fund (SPY) and 100 shares of iShares Barclays Aggregate Bond Fund (AGG). The price of SPY is $118 and that of AGG is $97. If you expect the return on SPY to be 11% in the next year and the return on AGG to be 6%, what is the expected return for your retirement portfolio? • 8.74% • 10.06% • 7.43% • 7.87%

9.42%

Your retirement portfolio comprises 200 shares of the S&P 500 fund (SPY) and 100 shares of iShares Barclays Aggregate Bond Fund (AGG). The price of SPY is $134 and that of AGG is $110. If you expect the return on SPY to be 10% in the next year and the return on AGG to be 8%, what is the expected return for your retirement portfolio? • 8.48% • 154.10% • 9.89% • 9.42%

10.81%

Your retirement portfolio comprises 300 shares of the S&P 500 fund (SPY) and 100 shares of iShares Barclays Aggregate Bond Fund (AGG). The price of SPY is $136 and that of AGG is $97. If you expect the return on SPY to be 11% in the next year and the return on AGG to be 10%, what is the expected return for your retirement portfolio? • 9.73% • 8.65% • 10.81% • 10.27%

between 5% and 7%

15) Historically, the average excess return of the S&P 500 over the return of U.S. Treasury bonds has been ________ and is proxy for the market risk premium. • between 10% and 12% • between 14% and 16% • between 5% and 7% • between 11% and 13%

9.53%

22) An all-equity firm had a dividend expense of $30,000 last year. The market value of the firm is $900,000 and the dividend is expected to increase at 6% each year. What is the cost of equity for this firm? • 9.53% • 10.01 % • 10.96% • 11.44 %

unsystematic risk

A company's stock price jumped when it announced that its revenue had decreased because of the quality issues of its products. This is an example of _____. • market risk • unsystematic risk • systematic risk • undiversifiable risk

5.49%

A firm has $1 million market value and it sells preferred stock with a par value of $100. If the coupon rate on the preferred stock is 5% and the preferred stock trades at $91, what is the cost of preferred stock capital? • 4.67% • 4.95% • 5.22% • 5.49%

6.12%

A firm has $2 million market value and it sells preferred stock with a par value of $100. If the coupon rate on the preferred stock is 6% and the preferred stock trades at $98, what is the cost of preferred stock capital? • 5.82% • 6.12% • 6.43% • 6.73%

8.70%

A firm has $3 million market value and it sells preferred stock with a par value of $100. If the coupon rate on the preferred stock is 8% and the preferred stock trades at $92, what is the cost of preferred stock capital? • 8.26% • 8.70% • 9.13% • 9.57%

5.67%

A firm has a capital structure with $50 million in equity and $100 million of debt. The cost of equity capital is 11% and the pretax cost of debt is 5%. If the marginal tax rate of the firm is 40%, compute the weighted average cost of capital of the firm. • 4.5% • 5.1% • 5.67% • 6.5%

7.8%

A firm has a capital structure with $75 million in equity and $45 million of debt. The cost of equity capital is 10% and the pretax cost of debt is 7%. If the marginal tax rate of the firm is 40%, compute the weighted average cost of capital of the firm. • 6.7% • 7.0% • 7.8% • 8.6%

7.3%

A firm has a capital structure with $75 million in equity and $75 million of debt. The cost of equity capital is 10% and the pretax cost of debt is 7%. If the marginal tax rate of the firm is 35%, compute the weighted average cost of capital of the firm. ` • 7.3% • 7.6% • 8.0% • 8.4%

5.9%

A firm has a pre-tax cost of debt of 9.0%. If the firm has a marginal tax rate of 35%, what is its effective cost of debt? • 5.9% • 4.1% • 9.4% • 9.1%

3.3%

A firm has outstanding debt with a coupon rate of 5%, ten years maturity, and a price of $1,000. What is the after-tax cost of debt if the marginal tax rate of the firm is 35%? • 2.6% • 2.9% • 3.3% • 3.4%

4.8%

A firm has outstanding debt with a coupon rate of 8%, nine years maturity, and a price of $1,000. What is the after-tax cost of debt if the marginal tax rate of the firm is 40%? • 3.8% • 4.8% • 4.3% • 4.4%

5.2%

A firm has outstanding debt with a coupon rate of 8%, seven years maturity, and a price of $1,000. What is the after-tax cost of debt if the marginal tax rate of the firm is 35%? • 5.2% • 5.5% • 5.7% • 6.0%

$24,500.00

A firm incurs $35,000 in interest expenses each year. If the tax rate of the firm is 30%, what is the effective after-tax interest rate expense for the firm? • $22,050.00 • $24,500.00 • $28,175.00 • $29,400.00

$28,000.00

A firm incurs $40,000 in interest expenses each year. If the tax rate of the firm is 30%, what is the effective after-tax interest rate expense for the firm? • $21,000.00 • $22,400.00 • $23,800.00 • $28,000.00

$49,000.00

A firm incurs $70,000 in interest expenses each year. If the tax rate of the firm is 30%, what is the effective after-tax interest rate expense for the firm? • $34,300.00 • $39,200.00 • $49,000.00 • $56,350.00

$30 million

A firm is considering acquiring a competitor. The firm plans on offering $160 million for the competitor. The firm will need to issue new debt and equity to finance the acquisition. You estimate the issuance costs to be $10 million. The acquisition will generate an incremental free cash flow of $20 million in the first year and this cash flow is expected to grow at an annual rate of 3% forever. If the firmʹs WACC is 13%, what is the value of this project? • $30 million • $38 million • $45 million • $53 million

$155.6 million

A firm is considering investing in a new project with an upfront cost of $400 million. The project will generate an incremental free cash flow of $50 million in the first year and this cash flow is expected to grow at an annual rate of 3% forever. If the firmʹs WACC is 12%, what is the value of this project? • $155.6 million • $555.6 million • $583.3 million • $183.3 million

unlevered

A firm raised all its capital via equity rather than debt. Such a firm is also referred to as a(n) ________ firm. • levered • margined • risk less • unlevered

weighted average cost of capital

A firmʹs overall cost of capital that is a blend of the costs of the different sources of capital is known as the firmʹs ________. • weighted average cost of capital • cost of equity infusion • cost of debt • cost of preferred stock

capital

A firmʹs sources of financing, which usually consists of debt and equity, represent its ________. • total assets • capital • total liabilities • current liabilities

debt

A levered firm is one that has ________ outstanding. • debt • equity • preferred stock • equity options

beta

A linear regression to estimate the relation between General Motorsʹ stock returns and the marketʹs return gives the best fitting line that represents the relation between the stock and the market. The slope of this line is our estimate of ________. • alpha • beta • risk-free rate • volatility

Sprintʹs beta is 1.47.

A linear regression was done to estimate the relation between Sprintʹs stock returns and the marketʹs return. The intercept of the line was found to be 0.23 and the slope was 1.47. Which of the following statements is true regarding Sprintʹs stock? • Sprintʹs beta is 0.23. • Sprintʹs beta is 1.47. • The risk-free rate is 1.47%. • The standard deviation of Sprintʹs excess returns is 23%.

1.00

A portfolio comprises Coke (beta of 1.3) and Wal-Mart (beta of 0.7). The amount invested in Coke is $20,000 and in Wal-Mart is $20,000. What is the beta of the portfolio? • 0.9 • 0.95 • 1.00 • 1.10

1.04

A portfolio comprises Coke (beta of 1.4) and Wal-Mart (beta of 0.8). The amount invested in Coke is $20,000 and in Wal-Mart is $30,000. What is the beta of the portfolio • 1.04 • 1.20 • 1.35 • 1.25

0.93

A portfolio comprises Coke (beta of 1.6) and Wal-Mart (beta of 0.6). The amount invested in Coke is $10,000 and in Wal-Mart is $20,000. What is the beta of the portfolio? • 0.93 • 0.84 • 1.03 • 0.98

27.78%

A portfolio has 30% of its value in IBM shares and the rest in Microsoft (MSFT). The volatility of IBM and MSFT are 35% and 30%, respectively, and the correlation between IBM and MSFT is 0.5. What is the standard deviation of the portfolio? • 23.61% • 27.78% • 31.95% • 30.56%

20.18%

A portfolio has 40% of its value in IBM shares and the rest in Microsoft (MSFT). The volatility of IBM and MSFT are 40% and 30%, respectively, and the correlation between IBM and MSFT is -0.3. What is the standard deviation of the portfolio? • 19.17% • 18.16% • 22.20% • 20.18%

24.31%

A portfolio has 45% of its value in IBM shares and the rest in Microsoft (MSFT). The volatility of IBM and MSFT are 33% and 35%, respectively, and the correlation between IBM and MSFT is 0. What is the standard deviation of the portfolio? • 19.45% • 27.96% • 34.04% • 24.31%

14.2%, 27.1%

A portfolio has three stocks - 110 shares of Yahoo (YHOO), 210 Shares of General Motors (GM), and 70 shares of Standard and Poor's Index Fund (SPY). If the price of YHOO is $20, the price of GM is $20, and the price of SPY is $130, calculate the portfolio weight of YHOO and GM. • 10.6%, 13.5% • 9.9%, 25.7% • 13.5%, 24.4% • 14.2%, 27.1%

42.6%, 26.6%

A portfolio has three stocks - 240 shares of Yahoo (YHOO), 150 Shares of General Motors (GM), and 40 shares of Standard and Poor's Index Fund (SPY). If the price of YHOO is $30, the price of GM is $30, and the price of SPY is $130, calculate the portfolio weight of YHOO and GM. • 42.6%, 26.6% • 23.4%, 49.3% • 12.8%, 16.0% • 40.5%, 28.0%

22.2%, 33.3%

A portfolio has three stocks - 300 shares of Yahoo (YHOO), 300 Shares of General Motors (GM), and 80 shares of Standard and Poor's Index Fund (SPY). If the price of YHOO is $20, the price of GM is $30, and the price of SPY is $150, calculate the portfolio weight of YHOO and GM. • 11.1%, 20.0% • 16.7%, 28.3% • 22.2%, 33.3% • 22.2%, 43.3%

not perfectly positively correlated

A portfolio of stocks can achieve diversification benefits if the stocks that comprise the portfolio are _____. • not perfectly positively correlated • perfectly correlated • susceptible to common risks only • both B and C

$138,000

A stock market comprises 1500 shares of stock A and 3000 shares of stock B. The share prices for stocks A and B are $24 and $34 , respectively. What is the capitalization of the market portfolio? • $138,000 • $117,300 • $110,400 • $151,800

Stock A is 62.5% and Stock B is 37.5%.

A stock market comprises 2100 shares of stock A and 2100 shares of stock B. The share prices for stocks A and B are $25 and $15 , respectively. What proportion of the market portfolio is comprised of each stock? • Stock A is 62.5% and Stock B is 37.5%. • Stock A is 37.5% and Stock B is 62.5%. • Stock A is 50% and Stock B is 50%. • Stock A is 200% and Stock B is 100%.

$48,000

A stock market comprises 2400 shares of stock A and 2400 shares of stock B. The share prices for stocks A and B are $15 and $5, respectively. What is the capitalization of the market portfolio? • $43,200 • $48,000 • $55,200 • $52,800

$8846.15

A stock market comprises 4600 shares of stock A and 1600 shares of stock B. Assume the share prices for stocks A and B are $15 and $30 , respectively. If you have $15,000 to invest and you want to hold the market portfolio, how much of your money will you invest in Stock A? • $10,615.38 • $8846.15 • $6153.85 • $5307.69

$185,000

A stock market comprises 4600 shares of stock A and 2000 shares of stock B. Assume the share prices for stocks A and B are $25 and $35 , respectively. What is the capitalization of the market portfolio? • $185,000 • $157,250 • $175,750 • $203,500

63.0%

A stock market comprises 4700 shares of stock A and 2300 shares of stock B. Assume the share prices for stocks A and B are $25 and $30 , respectively. What proportion of the market portfolio is comprised of stock A? • 63.0% • 62.0% • 61.3% • 79%

trade very actively, despite the fact that their performance is actually worse because of trading costs

A study of trading behavior of individual investors at a discount brokerage found that individual investors _____. • trade very actively, despite the fact that their performance is actually worse because of trading costs • trade very conservatively, despite the fact that their performance is actually worse because of trading costs • trade very actively, partly because their performance is better than the professionals' due to low trading costs • trade very conservatively, partly because their performance is better than the professionals' due to low trading costs

$2.02

Advanced Chemical Industries is awaiting the verdict from a court case over whether it is liable for the clean-up of wastes on a disused factory site. If it is liable, this will result in a reduction of its free cash flow by $11 million per year for ten years. If it is not liable, there will be no effect. On the close of trading the day before the announcement of the verdict, Advanced Chemicals was trading at $20 per share. Most investors calculate that there is a 100% chance that Advanced Chemicals will have a verdict returned against them. One investor, Jo, has performed extensive research into the outcome of the trial and estimates that there is no chance Advanced Chemicals will have a verdict returned against them. Given that Advanced Chemicals has 40 million shares outstanding and an equity cost of capital of 6% with no debt, Jo's estimate of the value of a share of Advanced Chemicals would be how much more than the market price? • $2.02 • $20.81 • $21.01 • $21.62

$1.03

Aerelon Airways, a commercial airline, suffers a major crash. As a result, passengers are considered to be less likely to choose Aerelon as their carrier, and it is expected free cash flows will fall by $15 million per year for five years. If Aerelon has 55 million shares outstanding, an equity cost of capital of 10%, and no debt, by how much would Aerelon's shares be expected to fall in price as a result of their accident? • $0.93 • $1.03 • $1.14 • $1.34

-4.45%

Amazon.com stock prices gave a realized return of 15%, 15%, -15%, and -15% over four successive quarters. What is the annual realized return for Amazon.com for the year? • -4.45% • -7.12% • -5.12% • 0%

67.30%

Amazon.com stock prices gave a realized return of 15%, 15%, 15%, and 10% over four successive quarters. What is the annual realized return for Amazon.com for the year? • 60.57% • 67.30% • 53.84% • 74.03%

-1.46%

Amazon.com stock prices gave a realized return of 5%, -5%, 11%, and -11% over four successive quarters. What is the annual realized return for Amazon.com for the year? • -1.46% • 2.91% • 0.00% • 1.46%

8.50%

An all-equity firm had a dividend expense of $20,000 last year. The market value of the firm is $600,000 and the dividend is expected to increase at 5% each year. What is the cost of equity for this firm? • 6.80% • 7.65% • 8.50% • 9.35%

13.02%

An all-equity firm had a dividend expense of $45,000 last year. The market value of the firm is $800,000 and the dividend is expected to increase at 7% each year. What is the cost of equity for this firm? • 11.72 % • 12.37 % • 13.02% • 14.32 %

all of the above

An investor estimates the value of a firm which manufactures cookware by examining the cash flows of similar firms. Which of the following is assumed to be the same for these firms? • P/E • annual growth rates • payout rates • all of the above

WACC of Six Flags

Anheuser Busch, a manufacturer of beverages, is planning to purchase Six Flags theme parks. Anheuser Busch should use the ________ to evaluate the business of Six Flags. • WACC of Anheuser Busch • WACC of Six Flags • average market return • divisional cost of capital

increasing its leverage

As a firm increases its level of debt relative to its level of equity, the firm is ________. • increasing the fraction of its equity • decreasing the fraction of its debt • decreasing its leverage • increasing its leverage

at the outset

As we add more uncorrelated stocks to a portfolio where the stocks are held in equal weights, the benefit of diversification is most dramatic ________. • after 20 stocks have been added • when there are more than 500 stocks • when there are more than 1,000 stocks • at the outset

decreases

As we increase the number of stocks in a portfolio, the standard deviation of returns of the portfolio _____. • increases • remains unchanged • decreases • doubles

$2.5 billion of equity and $18.5 billion of debt

Assume Bismuth Electronics has a book value of $6 billion of equity and a face value of $19.7 billion of debt. The market values of equity and debt are $2.5 billion and $18.5 billion. A Wall Street financial analyst determines values of equity and debt as $3 billion and $20 billion. Which of the following values should be used for calculating the firmʹs WACC? • $6 billion of equity and $19.7 billion of debt • $2.5 billion of equity and $20 billion of debt • $3 billion of equity and $19.9 billion of debt • $2.5 billion of equity and $18.5 billion of debt

6.96%

Assume Ford Motor Company is discussing new ways to recapitalize the firm and raise additional capital. Its current capital structure has a 10% weight in equity, 20% in preferred stock, and 70% in debt. The cost of equity capital is 16%, the cost of preferred stock is 10%, and the pretax cost of debt is 8%. What is the weighted average cost of capital for Ford if its marginal tax rate is 40%? • 6.61% • 6.96% • 7.31% • 7.66%

7.27%

Assume Ford Motor Company is discussing new ways to recapitalize the firm and raise additional capital. Its current capital structure has a 25% weight in equity, 10% in preferred stock, and 65% in debt. The cost of equity capital is 13%, the cost of preferred stock is 9%, and the pretax cost of debt is 8%. What is the weighted average cost of capital for Ford if its marginal tax rate is 40%? • 6.91% • 7.27% • 8.00% • 8.36%

9.09%

Assume Ford Motor Company is discussing new ways to recapitalize the firm and raise additional capital. Its current capital structure has a 30% weight in equity, 15% in preferred stock, and 55% in debt. The cost of equity capital is 16%, the cost of preferred stock is 11%, and the pretax cost of debt is 8%. What is the weighted average cost of capital for Ford if its marginal tax rate is 40%? • 9.09% • 9.54% • 10.00% • 10.45 %

$360 million

Assume Ford Motors expects a new hybrid-engine project to produce incremental cash flows of $45 million each year, and expects these to grow at 3% each year. The upfront project costs are $380 million and Fordʹs weighted average cost of capital is 9%. If the issuance costs for external finances are $10 million, what is the net present value (NPV) of the project? • $324 million • $378 million • $360 million • $396 million

$560 million

Assume Ford Motors expects a new hybrid-engine project to produce incremental cash flows of $50 million each year, and expects these to grow at 4% each year. The upfront project costs are $420 million and Fordʹs weighted average cost of capital is 9%. If the issuance costs for external finances are $20 million, what is the net present value (NPV) of the project? • $504 million • $560 million • $588 million • $616 million

$580 million

Assume Ford Motors expects a new hybrid-engine project to produce incremental cash flows of $90 million each year and expects these to grow at 3% each year. The upfront project costs are $900 million and Fordʹs weighted average cost of capital is 9%. If the issuance costs for external finances are $20 million, what is the net present value (NPV) of the project? • $986 million • $696 million • $609 million • $580 million

$26.0 million

Assume General Motors has a weighted average cost of capital of 10%. GM is considering investing in a new plant that will save the company $30 million over each of the first two years, and then $15 million each year thereafter. If the investment is $150 million, what is the net present value (NPV) of the project? • $18.2 million • $20.8 million • $23.4 million • $26.0 million

$108.7 million

Assume General Motors has a weighted average cost of capital of 10%. GM is considering investing in a new plant that will save the company $30 million over each of the first two years, and then $25 million each year thereafter. If the investment is $150 million, what is the net present value (NPV) of the project? • $65.2 million • -$76.1 million • -$86.9 million • $108.7 million

$28.7 million

Assume General Motors has a weighted average cost of capital of 9%. GM is considering investing in a new plant that will save the company $20 million over each of the first two years, and then $10 million each year thereafter. If the investment is $100 million, what is the net present value (NPV) of the project? • $25.8 million • $31.6 million • $28.7 million • $27.3 million

12.86 %

Assume IBM just paid a dividend of $4.50 and expects these dividends to grow at 8% a year. The price of IBM is $100 per share. What is IBMʹs cost of equity capital? • 3.86% • 8% • 12.22% • 12.86 %

9.12%

Assume JUP has debt with a book value of $20 million, trading at 120% of par value. The bonds have a yield to maturity of 7%. The firmʹs book value of equity is $16 million, and it has 2 million shares trading at $19 per share. The firmʹs cost of equity is 12%. What is JUPʹs WACC if the firmʹs marginal tax rate is 35%? • 10.03 % • 9.12% • 9.57% • 7.29%

41.86 % for debt, 58.14 % for equity

Assume JUP has debt with a book value of $24 million, trading at 120% of par value. The firm has book equity of $28 million, and 2 million shares trading at $20 per share. What weights should JUP use in calculating its WACC? • 41.86 % for debt, 58.14 % for equity • 37.67 % for debt, 62.33 % for equity • 33.49 % for debt, 66.51 % for equity • 29.30 % for debt, 70.70 % for equity

0.168, 0.832

Assume Lavender Corporation has a market value of $4 billion of equity and a market value of $19.8 billion of debt. What are the weights in equity and debt that are used for calculating the WACC? • 0.10, 0.90 • 0.832 , 0.168 • 0.168, 0.832 • 0.90, 0.10

$3.00 million

Assume SAP Inc. received a $1 million grant under its Small Business Innovation program. SAP invested the grant money and developed a system to remove metal contaminants from storm water in shipyards. The firm estimates that each shipyard spends $500,000 a year on storm water clean-up efforts. If SAP is able to sign up and retain four shipyards from the first year onwards, what is the present value (PV) of the project (net of investment) if the cost of capital for SAP is 20% per year? Assume a cost of operations and other costs for SAP equal 60% of revenue. • $3.00 million • $3.30 million • 3.60 million • $3.90 million

$4.86 million

Assume SAP Inc. received a $2 million grant under its Small Business Innovation program. SAP invested the grant money and developed a system to remove metal contaminants from storm water in shipyards. The firm estimates that each shipyard spends $600,000 a year on storm water clean-up efforts. If SAP is able to sign up and retain four shipyards from the first year onwards, what is the present value (PV) of the project (net of investment) if the cost of capital for SAP is 14% per year? Assume a cost of operations and other costs for SAP equal 60% of revenue. • $3.89 million • $4.13 million • $4.86 million • $5.10 million

6.88%

Assume Time Warner shares have a market capitalization of $40 billion. The company is expected to pay a dividend of $0.25 per share and each share trades for $40 . The growth rate in dividends is expected to be 7% per year. Also, Time Warner has $20 billion of debt that trades with a yield to maturity of 9%. If the firmʹs tax rate is 40%, what is the WACC? • 5.85% • 6.54% • 6.88% • 7.57%

7.11%

Assume Time Warner shares have a market capitalization of $60 billion. The company is expected to pay a dividend of $0.30 per share and each share trades for $40 . The growth rate in dividends is expected to be 7% per year. Also, Time Warner has $20 billion of debt that trades with a yield to maturity of 8%. If the firmʹs tax rate is 35%, compute the WACC? • 6.05% • 6.40% • 6.76% • 7.11%

8.11%

Assume Time Warner shares have a market capitalization of $65 billion. The company just paid a dividend of $0.40 per share and each share trades for $25 . The growth rate in dividends is expected to be 7.00% per year. Also, Time Warner has $10 billion of debt that trades with a yield to maturity of 7%. If the firmʹs tax rate is 40%, compute the WACC? • 7.70% • 8.11% • 8.92% • 9.33%

15.0%

Assume preferred stock of Ford Motors pays a dividend of $3.00 each year and trades at a price of $20 . What is the cost of preferred stock capital for Ford? • 12.0% • 13.5% • 15.0% • 16.5

11.7%

Assume preferred stock of Ford Motors pays a dividend of $3.50 each year and trades at a price of $30 . What is the cost of preferred stock capital for Ford? • 10.5% • 11.7% • 11.1% • 10.7%

11.4%

Assume preferred stock of Ford Motors pays a dividend of $4 each year and trades at a price of $35 . What is the cost of preferred stock capital for Ford? • 11.4% • 12.6% • 13.7% • 14.9%

-3.85%

Assume that you purchased Quicksilver's stock at the closing price on December 31, 2004 and sold it after the dividend had been paid at the closing price on January 26, 2005. Your capital gains rate (yield) for this period is closest to _____. • 0.93% • 1.02% • -3.85% • -2.93%

0.74%

Assume that you purchased Quicksilver's stock at the closing price on December 31, 2004 and sold it after the dividend had been paid at the closing price on January 26, 2005. Your dividend yield for this period is closest to _____. • -7.80% • -8.53% • 0.74% • 0.81%

-4.00%

Assume that you purchased Quicksilver's stock at the closing price on December 31, 2004 and sold it after the dividend had been paid at the closing price on January 26, 2005. Your total return rate (yield) for this period is closest to _____. • 0.97% • -4.00% • -4.97% • 1.06%

-45.1%

Assume that you purchased Quicksilver's stock at the closing price on December 31, 2004 and sold it at the closing price on December 30, 2005. Your realized annual return for the year 2005 is closest to _____. • -47.4% • -45.1% • -42.9% • -40.6%

9.31%

Assume the market value of Fordsʹ equity, preferred stock and debt are $6 billion, $3 billion, and $13 billion, respectively. Ford has a beta of 1.7, the market risk premium is 8%, and the risk-free rate of interest is 3%. Fordʹs preferred stock pays a dividend of $2.50 each year and trades at a price of $30 per share. Fordʹs debt trades with a yield to maturity of 9.5%. What is Fordʹs weighted average cost of capital if its tax rate is 35%? • 9.78% • 10.24 % • 9.31% • 11.18 %

9.05%

Assume the market value of Fordsʹ equity, preferred stock and debt are $7 billion, $4 billion and $10 billion respectively. Ford has a beta of 1.4, the market risk premium is 6% and the risk-free rate of interest is 4%. Fordʹs preferred stock pays a dividend of $3 each year and trades at a price of $25 per share. Fordʹs debt trades with a yield to maturity of 8.5%. What is Fordʹs weighted average cost of capital if its tax rate is 35%? • 7.69% • 8.15% • 8.60% • 9.05%

9.48%

Assume the market value of Fordsʹ equity, preferred stock, and debt are $6 billion, $2 billion, and $13 billion, respectively. Ford has a beta of 1.7, the market risk premium is 8%, and the risk-free rate of interest is 3%. Fordʹs preferred stock pays a dividend of $4 each year and trades at a price of $30 per share. Fordʹs debt trades with a yield to maturity of 8.0%. What is Fordʹs weighted average cost of capital if its tax rate is 30%? • 9.95% • 9.48% • 10.43% • 11.38 %

0.60, 0.40

Assume the total market value of General Motors (GM) is $10 billion. GM has a market value of $6 billion of equity and a face value of $12 billion of debt. What are the weights in equity and debt that are used for calculating the WACC? • 0.30, 0.70 • 0.60, 0.40 • 0.40, 0.60 • cannot be determined

$3.27

Banco Industries expect sales to grow at a rapid rate over the next 3 years, but settle to an industry growth rate of 5% in year 4. The spread sheet above shows a simplified pro forma for Banco Industries. Banco Industries has a weighted average cost of capital is 11%, $40 million in cash, $70 million in debt, and 18 million shares outstanding. If Banco Industries can reduce its operating expenses so that EBIT becomes 12% of sales, by how much will its stock price increase? • $3.27 • $3.92 • $5.72 • $9.80

$13.04

Banco Industries expect sales to grow at a rapid rate over the next three years, but settle to an industry growth rate of 5% in year 4. The spreadsheet above shows a simplified pro forma for Banco Industries. If Banco Industries has a weighted average cost of capital is 11%, $50 million in cash, $80 million in debt, and 18 million shares outstanding, which of the following is the best estimate of Banco's stock price at the start of year 1? • $6.52 • $11.74 • $13.04 • $23.48

$42.96

Bear Sterns' stock price closed at $98, $103, $58, $29, $4 over five successive weeks. The weekly standard deviation of the stock price calculated from this sample is _____. • $30.07 • $49.40 • $42.96 • $34.37

do not require a risk premium for bearing it

Because investors can eliminate unsystematic risk "for free" by diversifying their portfolios, they _____. • do not require a risk premium for bearing it • require a risk premium for bearing it • are indifferent about credit spread and risk premium • do not require a credit spread

$400 million

Big Cure and Little Cure are both pharmaceutical companies. Big Cure presently has a potential "blockbuster" drug before the Food and Drug Administration (FDA) waiting for approval. If approved, Big Cure's blockbuster drug will produce $1 billion in net income for Big Cure. Little Cure has ten separate, less important drugs before the FDA waiting for approval. If approved, each of Little Cure's drugs would produce $100 million in net income. The probability of the FDA approving a drug is 40%. What is the expected payoff for Big Cure's blockbuster drug? • $100 million • $0 • $1 billion • $400 million

$250 million

Big Cure and Little Cure are both pharmaceutical companies. Big Cure presently has a potential "blockbuster" drug before the Food and Drug Administration (FDA) waiting for approval. If approved, Big Cure's blockbuster drug will produce $1 billion in net income for Big Cure. Little Cure has ten separate, less important drugs before the FDA waiting for approval. If approved, each of Little Cure's drugs would produce $50 million in net income. The probability of the FDA approving a drug is 50%. What is the expected payoff for Little's Cure's ten drugs? • $250 million • $50 million • $1 billion • $0

rise by $6.43

Carbondale Oil announces that a well that it has sunk in a new oil province has shown the existence of substantial oil reserves. The exploitation of these reserves is expected to increase Carbondale's free cash flow by $100 million per year for eight years. If investors had not been expecting this news, what is the most likely effect on Carbondale's stock price upon the announcement, given that Carbondale has 80 million shares outstanding, no debt, and an equity cost of capital of 11%? • no effect • rise by $5.15 • rise by $6.43 • rise by $7.72

low

Companies that sell household products and food have very little relation to the state of the economy because such basic needs do not go away. These stocks tend to have ________ betas. • high • low • negative • infinity

-20%

Consider an economy with two types of firms, S and I. S firms always move together, but I firms move independently of each other. For both types of firms there is a 20% probability that they will have a 20% return and an 80% probability that they will have a -30% return. What is the expected return for an individual firm? • -12% • -20% • 10% • 20%

24.49%

Consider an economy with two types of firms, S and I. S firms always move together, but I firms move independently of each other. For both types of firms there is a 40% probability that the firm will have a 20% return and a 60% probability that the firm will have a -30% return. The standard deviation for the return on an individual firm is closest to _____. • 24.49% • -10.00% • 12.25% • 9.80%

5.48%

Consider an economy with two types of firms, S and I. S firms always move together, but I firms move independently of each other. For both types of firms there is a 60% probability that the firm will have a 20% return and a 30% probability that the firm will have a -30% return. The standard deviation for the return on a portfolio of 20 type I firms is closest to _____. • 0.00% • 12.25% • 5.48% • 24.49%

22.91%

Consider an economy with two types of firms, S and I. S firms always move together, but I firms move independently of each other. For both types of firms there is a 70% probability that the firm will have a 20% return and a 30% probability that the firm will have a -30% return. The standard deviation for the return on an portfolio of 20 type S firms is closest to _____. • 13.75% • 22.91% • 5.00% • 4.58%