FIN 3716 Final

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 Conundrumʹs expected current share price? A) $12.61 B) $16.40 C) $20.18 D) $20.81

A) $12.61

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? A) $138,000 B) $117,300 C) $110,400 D) $151,800

A) $138,000

Gonzales Corporation generated free cash flow of $88 million this year. For the next two years, the companyʹs free cash flow is expected to grow at a rate of 10%. After that time, the companyʹs 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 Corporationʹs expected terminal enterprise value in year 2? A) $1384.24 B) $1245.82 C) $1107.39 D) $968.97

A) $1384.24

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? A) $155.6 million B) $555.6 million C) $583.3 million D) $183.3 million

A) $155.6 million

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? A) $185,000 B) $157,250 C) $175,750 D) $203,500

A) $185,000

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. A) $3.00 million B) $3.30 million C) 3.60 million D) $3.90 million

A) $3.00 million

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 spreadsheet above shows a simplified pro forma for Banco Industries. Banco industries has a weighted average cost of capital of 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? A) $3.27 B) $3.92 C) $5.72 D) $9.80

A) $3.27

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? A) $30 million B) $38 million C) $45 million D) $53 million

A) $30 million

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? A) $4.77 B) $7.16 C) $9.54 D) $10.50

A) $4.77

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 Industriesʹ expected current share price? A) $7.78 B) $8.17 C) $9.34 D) $11.67

A) $7.78

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? A) -1.46% B) 2.91% C) 0.00% D) 1.46%

A) -1.46%

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? A) -1.54% B) 12.25% C) -10.50% D) -5.20%

A) -1.54%

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 2007ʹs returns? A) -35%, 65% B) -17.5%, 32.5% C) -25%, 55% D) -20%, 50%

A) -35%, 65%

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? A) -4.45% B) -7.12% C) -5.12% D) 0%

A) -4.45%

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 Gregʹs return on his investment? A) -87.50 % B) -113.75 % C) -100.62 % D) -96.25 %

A) -87.50 %

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? A) 0.93 B) 0.84 C) 1.03 D) 0.98

A) 0.93

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? A) 1.04 B) 1.20 C) 1.35 D) 1.25

A) 1.04

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? A) 10.9% B) 10.4% C) 12.0% D) 13.1%

A) 10.9%

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? A) 11.4% B) 12.6% C) 13.7% D) 14.9%

A) 11.4%

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%. A) 15.17 % B) 15.93 % C) 16.68% D) 17.44 %

A) 15.17 %

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? A) 15.2% B) 14.4% C) 16.0% D) 13.7%

A) 15.2%

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. A) 19.32%, 7.62% B) 28.01%, 8.38% C) 23.18 %, 11.43 % D) 22.22 %, 13.71 %

A) 19.32%, 7.62%

Suppose you invested $100 in the Ishares 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? A) 2%, -5% B) 2%, 5% C) -2%, 5% D) 5%, 2%

A) 2%, -5%

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? A) 20.3% B) 18.3% C) 19.3% D) 21.3%

A) 20.3%

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 ________ A) 24.49 % B) -10.00 % C) 12.25% D) 9.80%

A) 24.49 %

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? A) 4.55% B) 5.01% C) 5.46% D) 5.69%

A) 4.55%

A portfolio has three stocks 240 shares of Yahoo (YHOO), 150 Shares of General Motors (GM), and 40 shares of Standard and Poorʹs 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. A) 42.6%, 26.6% B) 23.4%, 49.3% C) 12.8%, 16.0% D) 40.5%, 28.0%

A) 42.6%, 26.6%

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? A) 47.83 % B) 33.48 % C) 50.22% D) 45.43 %

A) 47.83 %

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 ________. A) 48.89 % B) 39.11 % C) 29.33% D) 19.56 %

A) 48.89 %

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%? A) 5.2% B) 5.5% C) 5.7% D) 6.0%

A) 5.2%

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? A) 5.77% B) 5.20% C) 6.06% D) 4.62%

A) 5.77%

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? A) 5.9% B) 4.1% C) 9.4% D) 9.1%

A) 5.9%

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 ________. A) 50% B) 25% C) 46% D) 33%

A) 50%

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? A) 63.0% B) 62.0% C) 61.3% D) 79%

A) 63.0%

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. A) 7.3% B) 7.6% C) 8.0% D) 8.4%

A) 7.3%

Your retirement portfolio comprises 100 shares of the Standard & Poorʹs 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? A) 8.74% B) 10.06 % C) 7.43% D) 7.87%

A) 8.74%

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%? A) 9.09% B) 9.54% C) 10.00% D) 10.45 %

A) 9.09%

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? A) 9.53% B) 10.01 % C) 10.96% D) 11.44 %

A) 9.53%

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? A) 9.74% B) 10.23 % C) 9.25% D) 9.55%

A) 9.74%

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 Aerelonʹs shares be expected to fall in price as a result of this accident? A) $0.93 B) $1.03 C) $1.14 D) $1.34

B) $1.03

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? A) $22,050.00 B) $24,500.00 C) $28,175.00 D) $29,400.00

B) $24,500.00

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 Conundrumʹs expected terminal enterprise value? A) $413.4 million B) $459.3 million C) $505.3 million D) $528.2 million

B) $459.3 million

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? A) $43,200 B) $48,000 C) $55,200 D) $52,800

B) $48,000

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? A) $504 million B) $560 million C) $588 million D) $616 million

B) $560 million

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? A) $10,615.38 B) $8846.15 C) $6153.85 D) $5307.69

B) $8846.15

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? A) -20.72% B) -$15.94% C) -18.33% D) -17.53%

B) -$15.94%

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 a 80% probability that they will have a -30% return. What is the expected return for an individual firm? A) -12% B) -20% C) 10% D) 20%

B) -20%

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? A) -5.62% B) -4.49% C) -4.72% D) -4.94%

B) -4.49%

The average annual return over the period 1926-2009 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? A) -1.3%, 20.5% B) -8.6%, 34.2% C) -25.8%, 54.7% D) -25.8%, 47.9%

B) -8.6%, 34.2%

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? A) -5% B) 0% C) 5% D) 3%

B) 0%

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. A) 0.28, 0.72 B) 0.44, 0.56 C) 0.39, 0.61 D) 0.56, 0.44

B) 0.44, 0.56

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? A) 0.54%, 1.13% B) 0.57%, 1.08% C) 0.57%, 1.13% D) 1.08%, 1.18%

B) 0.57%, 1.08%

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? A) 0.30, 0.70 B) 0.60, 0.40 C) 0.40, 0.60 D) cannot be determined

B) 0.60, 0.40

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 ________. A) 15.17 % B) 11.67 % C) 12.83% D) 16.33 %

B) 11.67 %

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? A) 10.5% B) 11.7% C) 11.1% D) 10.7%

B) 11.7%

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? A) 11.2% B) 12.4% C) 11.8% D) 13.0%

B) 12.4%

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. A) 21.53 %, 14.67 % B) 22.67 %, 16.30 % C) 24.93 %, 18.75 % D) 22.21 %, 18.26 %

B) 22.67 %, 16.30 %

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 ________. A) 13.75 % B) 22.91 % C) 5.00% D) 4.58%

B) 22.91 %

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? A) 23.61 % B) 27.78 % C) 31.95% D) 30.56 %

B) 27.78 %

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%? A) 3.8% B) 4.8% C) 4.3% D) 4.4%

B) 4.8%

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? A) 5.82% B) 6.12% C) 6.43% D) 6.73%

B) 6.12%

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%? A) 6.61% B) 6.96% C) 7.31% D) 7.66%

B) 6.96%

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? A) 60.57 % B) 67.30 % C) 53.84% D) 74.03 %

B) 67.30 %

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%? A) 6.91% B) 7.27% C) 8.00% D) 8.36%

B) 7.27%

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? A) 7.70% B) 8.11% C) 8.92% D) 9.33%

B) 8.11%

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? A) 12.77 % B) 8.51% C) 9.37% D) 10.22 %

B) 8.51%

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 ________. A) 9.08% B) 8.65% C) 8.22% D) 9.52%

B) 8.65%

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? A) 8.26% B) 8.70% C) 9.13% D) 9.57%

B) 8.70%

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%? A) 10.03 % B) 9.12% C) 9.57% D) 7.29%

B) 9.12%

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%? A) 9.95% B) 9.48% C) 10.43% D) 11.38 %

B) 9.48%

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? A) $119.43 B) $103.14 C) $108.57 D) $114.00

C) $108.57

Gonzales Corporation generated free cash flow of $86 million this year. For the next two years, the companyʹs free cash flow is expected to grow at a rate of 10%. After that time, the companyʹs 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 Corporationʹs expected current share price? A) $14.37 B) $11.87 C) $12.49 D) $16.24

C) $12.49

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 of 11%, $50 million in cash, $80 million in debt, and 18 million shares outstanding, which of the following is the best estimate of Bancoʹs stock price at the start of year 1? A) $6.52 B) $11.74 C) $13.04 D) $23.48

C) $13.04

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? A) $1.58 B) $1.84 C) $2.63 D) $14.15

C) $2.63

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 ________. A) $21,916 B) $19,828 C) $20,872 D) $22,959

C) $20,872

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? A) $150 million B) $160 million C) $260 million D) $250 million

C) $260 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? A) $25.8 million B) $31.6 million C) $28.7 million D) $27.3 million

C) $28.7 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? A) $324 million B) $378 million C) $360 million D) $396 million

C) $360 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. A) $3.89 million B) $4.13 million C) $4.86 million D) $5.10 million

C) $4.86 million

Bear Stearnsʹ 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 ________. A) $30.07 B) $49.40 C) $42.96 D) $34.37

C) $42.96

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? A) $34,300.00 B) $39,200.00 C) $49,000.00 D) $56,350.00

C) $49,000.00

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 2007ʹs returns? A) -12.5%, 17.5% B) -15%, 25% C) -25%, 35% D) -25%, 25%

C) -25%, 35%

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 2007ʹs returns? A) -13.25 %, 22.75 % B) -16.5%, 35.5% C) -26.5%, 45.5% D) -11.5%, 30.5%

C) -26.5%, 45.5%

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? A) -1.5%, 21.8% B) -10.7%, 32.8% C) -30.6%, 54.6% D) -30.6%, 76.4%

C) -30.6%, 54.6%

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? A) -7%, 10% B) 5%, 10% C) -5%, 15% D) -10%, 10%

C) -5%, 15%

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? A) 0.10, 0.90 B) 0.832 , 0.168 C) 0.168, 0.832 D) 0.90, 0.10

C) 0.168, 0.832

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. A) 0.42, 0.58 B) 0.50, 0.50 C) 0.17, 0.83 D) 0.58, 0.42

C) 0.17, 0.83

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? A) 0.9 B) 0.95 C) 1.00 D) 1.10

C) 1.00

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? A) 9.73% B) 8.65% C) 10.81% D) 10.27 %

C) 10.81%

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%. A) 11.87 % B) 12.43 % C) 11.30% D) 13.00 %

C) 11.30%

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? A) 8.76% B) 13.76 % C) 12.51% D) 10.01 %

C) 12.51%

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? A) 11.72 % B) 12.37 % C) 13.02% D) 14.32 %

C) 13.02%

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? A) 12.2% B) 12.9% C) 13.6% D) 14.3%

C) 13.6%

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 in year 1 and year 2? Assume no dividends are paid. A) 13.06 %, 14.84 % B) 10.31 %, 18.96 % C) 13.75 %, 16.48 % D) 11.69 %, 19.78 %

C) 13.75 %, 16.48 %

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? A) 12.0% B) 13.5% C) 15.0% D) 16.5%

C) 15.0%

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? A) 14.8% B) 15.6% C) 16.4% D) 17.2%

C) 16.4%

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? A) 14.96 % B) 15.79 % C) 16.62% D) 18.28 %

C) 16.62%

Suppose you invest in 110 shares of Merck (MRK) 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 to $22 per share, what is the return on your portfolio? A) 7.70% B) 4.11% C) 2.57% D) 3.47%

C) 2.57%

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 ________. A) 50.00 % B) 40.00 % C) 20.00% D) 30.00 %

C) 20.00%

A portfolio has three stocks 300 shares of Yahoo (YHOO), 300 Shares of General Motors (GM), and 80 shares of Standard and Poorʹs 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. A) 11.1%, 20.0% B) 16.7%, 28.3% C) 22.2%, 33.3% D) 22.2%, 43.3%

C) 22.2%, 33.3%

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? A) 24.65 % B) 32.86 % C) 27.39% D) 30.12 %

C) 27.39%

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%? A) 2.6% B) 2.9% C) 3.3% D) 3.4%

C) 3.3%

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 ________. A) 0% B) 7.6% C) 3.8% D) 5.7%

C) 3.8%

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? A) 4.07% B) 6.11% C) 33.89% D) 40.70 %

C) 33.89%

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 40% 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 ________. A) 0.00% B) 12.25 % C) 5.48% D) 24.49 %

C) 5.48%

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. A) 4.5% B) 5.1% C) 5.67% D) 6.5%

C) 5.67%

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? A) 5.85% B) 6.54% C) 6.88% D) 7.57%

C) 6.88%

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%. A) 4.2% B) 4.8% C) 6.9% D) more information needed

C) 6.9%

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. A) 6.7% B) 7.0% C) 7.8% D) 8.6%

C) 7.8%

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%? A) 5.1% B) 5.9% C) 8.5% D) more information needed

C) 8.5%

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? A) 6.80% B) 7.65% C) 8.50% D) 9.35%

C) 8.50%

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? A) 10.50 % B) 13.13 % C) 8.75% D) 9.63%

C) 8.75%

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%? A) 9.78% B) 10.24 % C) 9.31% D) 11.18 %

C) 9.31%

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? A) 6.57% B) 7.51% C) 9.38% D) 10.32 %

C) 9.38%

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%. A) 8.73% B) 9.22% C) 9.70% D) 10.67 %

C) 9.70%

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? A) $65.2 million B) -$76.1 million C) -$86.9 million D) $108.7 million

D) $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 $15 million each year thereafter. If the investment is $150 million, what is the net present value (NPV) of the project? A) $18.2 million B) $20.8 million C) $23.4 million D) $26.0 million

D) $26.0 million

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? A) $21,000.00 B) $22,400.00 C) $23,800.00 D) $28,000.00

D) $28,000.00

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. A) $4.51 million B) $4.80 million C) $5.93 million D) $5.64 million

D) $5.64 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? A) $986 million B) $696 million C) $609 million D) $580 million

D) $580 million

6) Gonzales Corporation generated free cash flow of $81 million this year. For the next two years, the companyʹs free cash flow is expected to grow at a rate of 9%. After that time, the companyʹs 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 Corporationʹs expected free cash flow in year 2? A) $1429.79 million B) $86.61 million C) $1572.77 million D) $96.24 million

D) $96.24 million

You purchased 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 ________. A) -99% B) -75% C) -150% D) -100%

D) -100%

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? A) -10.6%, 31.8% B) 0%, 42.4% C) -21.2%, 42.4% D) -21.2%, 63.6%

D) -21.2%, 63.6%

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. A) 0.15, 0.85 B) 0.18, 0.82 C) 0.30, 0.70 D) 0.70, 0.30

D) 0.70, 0.30

Treasury bill returns are 4%, 3%, 2%, and 5% over four years. The standard deviation of returns of Treasury bills is ________. A) 1.55% B) 1.03% C) 0.90% D) 1.29%

D) 1.29%

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? A) 9.20% B) 10.35 % C) 10.93% D) 11.50 %

D) 11.50 %

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? A) 3.77% B) 5.02% C) 7% D) 12.56 %

D) 12.56 %

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? A) 3.86% B) 8% C) 12.22% D) 12.86 %

D) 12.86 %

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? A) 10.4% B) 11.7% C) 13.1% D) 13.8%

D) 13.8%

A portfolio has three stocks 110 shares of Yahoo (YHOO), 210 Shares of General Motors (GM), and 70 shares of Standard and Poorʹs 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. A) 10.6%, 13.5% B) 9.9%, 25.7% C) 13.5%, 24.4% D) 14.2%, 27.1%

D) 14.2%, 27.1%

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? A) 12.75 % B) 14.25 % C) 13.50% D) 15.00 %

D) 15.00 %

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 ________. A) 8.28% B) 12.43 % C) 14.08% D) 16.57 %

D) 16.57 %

Suppose you invested $100 in the Ishares 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? A) 2%, 2% B) 0%, 2% C) 3%, 2% D) 2%, 0%

D) 2%, 0%

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? A) 3.00% B) 3.50% C) 2.25% D) 2.50%

D) 2.50%

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? A) 19.17 % B) 18.16 % C) 22.20% D) 20.18 %

D) 20.18 %

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? A) 19.45 % B) 27.96 % C) 34.04% D) 24.31 %

D) 24.31 %

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? A) 4.50% B) 4.65% C) 3.60% D) 3.00%

D) 3.00%

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 Lowes in your portfolio is ________. A) 40.44 % B) 21.78 % C) 49.78% D) 31.11 %

D) 31.11 %

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 ________. A) 4.49% B) 5.68% C) 4.02% D) 4.73%

D) 4.73%

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? A) 4.24% B) 6.36% C) 33.91% D) 42.38 %

D) 42.38 %

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? A) 4.67% B) 4.95% C) 5.22% D) 5.49%

D) 5.49%

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? A) 5.88% B) 8% C) 6.44% D) 5.60%

D) 5.60%

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? A) 6.05% B) 6.40% C) 6.76% D) 7.11%

D) 7.11%

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%. A) 4.9% B) 6.5% C) 7.0% D) 7.37%

D) 7.37%

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%? A) 7.69% B) 8.15% C) 8.60% D) 9.05%

D) 9.05%

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 A) 8.48% B) 154.10 % C) 9.89% D) 9.42%

D) 9.42%

31) The probability mass between two standard deviations around the mean for a normal distribution is ________. A) 66% B) 90% C) 75% D) 95%

D) 95%