FIN

22. The enterprise value of Oxford Inc is closest to:

A. $12.14 million

32. What is the value of a six month European call option with a strike price of $150 and the current price of the underlying asset is $160. The risk free rate is 5% and the standard deviation is 30% per annum.

A. $20.80

Assume that the present value of the unlevered free cash flows for a company is $500 million. The present value of the terminal value is $3,000 million. Net debt is $200 million. The cost of the equity is 11% and the weighted average cost of capital is 9%. There are 100.0 million diluted shares outstanding. What is the equity value per share?

A. $33

17. What is the variance of a risk free asset?

A. 0

18. What is the covariance between stock A ( exp return= 8.67%) and a risk free asset?

A. 0

2. Which of the following statements is most accurate?

A. A price-to-book ratio that is higher than the industry average suggest that investors believe that the company has more significant future growth opportunities than its industry peers.

8. Recall our discussion on Real Options and Discounted Cash Flow valuation methodology. If you use a real options argument to value an asset that you have already valued using a DCF valuation model, which of the following will you expect to see as a real option value?

A. A value greater than the DCF value

If the pro forma EPS of the two combined companies is higher than the EPS of the acquirer on a standalone basis, the transaction is said to be:

A. Accretive

39. The least likely common dividend policy practice is for managers to:

A. Aim for a target payout ratio relying on forecasts of short term earnings

1. Which of the following statements regarding a firm's return on equity is least accurate?

A. An increase in ROE is always a positive sign for the firm.

In performing a comprehensive valuation of a given target, where would precedent transactions values be expected to be?

A. At the high end of the range

37. Which of the following comparisons of the capital asset pricing model and the arbitrage pricing model is true?

A. CAPM bases the expected return on an asset on one factor the market portfolio; the APT bases the expected return on a number of economic factors

12. The cost of a firms equity

A. Can be substantially higher than the firms weighted average cost of capital

40. Investors are most likely to be indifferent between share repurchase and cash dividends when the:

A. Capital gains tax rate equals tax rate on dividend income.

During Mergers and Acquisitions, which of the following is an example of something that would generate synergies?

A. Closing of nearby situated, overlapping facilities

Assume that Company A has a WACC of 10% and Company B has a WACC of 8%. Both companies have a projected year 5 terminal year EBITDA of $100 million, but Company A's exit multiple is 10.0x and Company B's is 8.0x. Who has the higher present value of the terminal value?

A. Company A

31. Ratios must be compared to a benchmark. Comparing firms to other firms or to its industry is known as_______

A. Cross Sectional Analysis

12. A portfolio manager adds a new stock to a portfolio that has the same standard deviation of returns as the existing portfolio but has a correlation coefficient with the existing portfolio that is less than +1. If the new stock is added, the portfolios standard deviation will:

A. Decrease

In calculating terminal value for Ole Miss inc. in a DCF model , using the perpetuity growth rate method, you initially assume that the required rate of return is 10% and the perpetuity growth rate assumption is 4%. After further research you decide to lower the assumed long term growth rate to 3.5% and the discount rate to 9.5%. What will happen to your DCF terminal value?

A. Decrease

With the perpetuity growth rate method, which one of the following components below is NOT necessarily needed to calculate the terminal value?

A. EBITDA exit multiple

The primary difference between an acquisition (transaction) comparable multiple and a public comparable multiple is that the acquisition comparable multiple typically

A. Factors in a control premium

7. Rebel Gold Inc is a gold mining company with substantial undeveloped reserves of gold and relatively little gold production. Which of the following combinations will make its gold reserves more valuable?

A. High gold prices with high volatility in those prices

In class we discussed the Private Equity buyout of RJR Nabisco by KKR. This deal was one of the largest PE buyouts of all times. Before this deal, RJR Nabisco was publicly traded. Let us now imagine a PE target that is private. For an LBO (Leveraged buy out) of a private company, in what situation would the banker or you be able to locate the target's financial information?

A. If public debt securities, such as registered high yield bonds, were used in the financing structure.

34. Given that there are taxes but no bankruptcy, agency, and lost tax shield costs, as the proportion of a debt in a company's capital structure increases, the value of the company:

A. Increases

In a merger or acquisition, a firm should be acquired if:

A. It generates a positive net present value to the shareholders of the acquiring firm.

37. Agency costs of equity are most likely to be higher for a company relative to its peers if it has:

A. Lower debt to equity ratio

26. Under MM Proposition I - with no taxes, an increase in the proportion of debt in the capital structure results in:

A. No impact on future cash flows and no impact on the cost of capital

10. Some argue that a merger between companies in unrelated industries creates value because of it diversifies risk. Is this statement correct? And all else equal, what should happen to the total market cap of the two companies after such a merger?

A. No, because such diversification only reduces the unsystematic risk. As a result, it will not affect the way that future cash flows are valued, and the total market cap will not change.

Which of the following multiples is a good multiple?

A. Price/Earnings

29. As you increase the number of stocks in a portfolio, the systematic risk will:

A. Remain Constant

25. Fama and French came up with a three factor asset pricing model as discussed in class. The following are the three factors according to this model:

A. SMB, HML, and the Market Factor

35. The CFO of Ole Miss Business Inc informs the company's CEO that the value of the firm will be maximized when the weighted average cost of capital is minimized and that this minimization occurs when the company's debt to equity ratios at a level where the marginal benefits of debt financing are exactly offset by the marginal costs of debt financing. The CFO most likely believes in the:

A. Static Trade Off theory

25. Given that there are no taxes and no costs of financial distress, as the proportion of debt in a company's capital structure increases:

A. The cost of equity increases, but the WACC remains the same

5. Which of the following statements is true regarding NPV profiles?

A. The point of intersection between the NPV profile and the X axis is the IRR of the project.

Which part of Discounted Cash Flow (DCF) valuation tends to drive more of the value?

A. The terminal value

Why might selling (target) shareholders prefer cash consideration?

A. They think the sale price is high and want to guarantee value.

21. If you are thinking of debt in terms of a fraction of firm value, would you prefer WACC or APV? If you are thinking of debt in terms of a dollar amount that will vary predictably in the future, would you prefer WACC or APV?

A. WACC; APV

The Adjusted Present Value (APV) method to value a firm should be used:

A. When the firms level of debt is known over the life of the firm

30. You are trying to evaluate a funds performance. You run the F-F 3 factor regression and obtain the following estimates: E(R)fund - Rf = .005 + .9(E(Rm)-Rf) + .8(SMB)........ Does the firm manager seem to have any skill and why?

A. Yes because the alpha is higher than zero

28. An investor is fully invested in the market portfolio that has a Sharpe ratio of Sm. Subsequently she decides to borrow 20% at the risk free rate, so that she is able to invest 120% in the market portfolio. The levered portfolio has a Sharpe ratio of Sl. Is this new levered portfolio still efficient and what is the relationship between Sm and Sl?

A. Yes, and Sm=Sl

Do strategic buyers typically pay more than financial sponsors when making an acquisition, and if so, why?

A. Yes, because they can realize cost synergies.

9. A writer of a call option will want the value of the underlying asset to _________ and a buyer of a put option will want the value of the underlying asset to _________

A. decrease, decrease

20. In early 2012 the stocks of Amgen and Cisco Systems had a similar volatility. Amgen, however, has a much lower beta. why do you think that is the case?

A. while their volatilities are similar, much more of the risk of Amgen's stock is diversifiable risk, where as Ciscos stock has a much greater proportion of systematic risk.

5. You bought a call option with a $35 strike price for $0.25 when the underlying stock was selling for $34. Just prior to expiration, the stock was selling for $34.50. What was your gain or loss on this transaction?

B. $0.25 loss

During our discussions of the HBS case, Boston Beer Company, we talked about the use of exit multiple method to calculate the terminal value. Using the same logic of the exit multiple method, calculate terminal value range for a firm, given terminal year EBITDA of $200 million, debt of $300 million, and a comparable company's range of 6.0x to 7.0x.

B. $1.2 billion to $1.4 billion

36. MS Inc has 5 million shares outstanding. The stock is currently trading for $40 with an EPS of $1.60 and a P/E multiple of 25. The company's directors announce a 10% stock dividend. The company's stock price after the stock dividend will be closest to:

B. $36.36

31. Suppose that current stock price is $52, and the risk free rate is 5%. You have found a quote for a 3 month put option with an exercise price of $50. The put price is $1.5. what is the price of a 3 month call option?

B. $4.12

Based upon the assumptions presented below, calculate enterprise value. Current Share Price: $20.00 Fully Diluted Shares Outstanding: 50.00 Total Debt: $250 Preferred Stock: $25.00 Non-Controlling Interest: $15.00 Cash and Cash equivalents: $50.00

B. 1,240

Using the perpetuity growth method, calculate terminal value given a discount rate of 11% a perpetuity growth rate of 3% and a terminal year FCF of $100 million.

B. 1,287.5

6. A firm that is worth $1 million and is financed with 30% risk free debt and 70% equity grows in value to $1.5 million. What is its new debt/equity ratio?

B. 25%

Given the assumptions below, calculate premium paid. Offer Price per share: $20 Target unaffected share price: $16

B. 25%

38. An analyst has gathered the following data about Ole Miss Inc's publicly traded shares: a beta of 1.375; an actual return of 10.5%; The market rate of return is 6%; the risk free rate is 2%. Compute the stocks abnormal return.

B. 3%

14. A portfolio to the right of the market portfolio on the CML is:

B. A borrowing portfolio

4. Which of the following companies has the lowest creditworthiness?

B. A company with a high number of days of receivables.

16. Which of the following statements is true?

B. By diversification, you can have the same expected return with less risk exposure.

15. A measure of how well the returns of two risky assets move together is the:

B. Covariance

11. Which of the following statements is false?

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

19. Which of the following statements about stock valuation is FALSE?

B. If the estimated value < the market price, buy the stock; its underpriced.

What would be the impact on valuation if you switched from a 5.0% to an 8.0% market risk premium?

B. Lower

Revenue Synergies tend to be more________ than cost synergies

B. Speculative

4. According to Modern Portfolio Theory, the idea that investors with different indifference curves will hold the same portfolio of risky securities is a result of:

B. The Separation Theorem

When might the day prior to the actual transaction announcement not serve as the appropriate benchmark for establishing the "unaffected" share price?

B. The deal was widely rumored in the market

Once valued is determined using the DCF approach, why does the banker put the value conclusion in a football field display alongside valuation conclusions from the comparable analysis and precedent transaction approaches?

B. To illustrate the valuation differences of the different approaches.

15. A manager should attempt to maximize the value of the firm by:

B. changing the capital structure if and only if the value of the firm increases to the benefit of the stockholders.

18. Which of the following is a key financial characteristic to examine when screening for financial ratios for comparable companies?

B. growth profile

24. Consider the following statements: 1. According to Jensens free cash flow hypothesis, higher debt levels increase agency costs. 2. The costs associated with asymmetric information decrease as more debt is issued. Which of the following is most likely?

B. only statement 2 is correct

3. Ole Miss Inc is a start up company and is not expected to pay any dividends for 4 years. Beginning in year 5, earnings are expected to stabilize and grow at a sustainable rate of 6% indefinitely and the firm is expected to pay out 40% of its earnings in dividends. Analysts estimate that the firm's earnings in year 5 are going to be $2.95 per share. Given a required rate of return of 11%, the value of the stock today is closest to:

C. $15.55

28. Alabama Inc. has $100 in inventories, a current ratio equal to 1.2, and a quick ratio equal to 1.1. What is Alabama Inc's Net working capital?

C. $200

23. The company's cost of equity is closest to:

C. 10.88%

32. Oxford Inc has a net profit margin of 12%, a total asset turnover of 1.2 times, and a financial leverage multiplier of 1.2 times. Oxford's ROE is:

C. 17.3%

Ole Miss private equity is planning to buy Alabama Inc for $500 million. Ole Miss will invest 30% of the purchase price in equity. In 5 years time, Ole Miss private equity expects to sell Alabama Inc for 7.1x Year 5 EBITDA of $96.6 million. Ole Miss expects Alabama Inc to have a net debt of $200 million at the time of exit. The IRR to Ole Miss Private Equity is:

C. 26.5%

1. Your boss has asked you to put together a due diligence to help you determine whether or not the company she will be visiting is a good LBO candidate. Which of the following questions is probably most important when assessing whether or not a company is a good LBO candidate?

C. Are the company's cash flows stable?

27.Consider the following statements: 1. A higher degree of information asymmetry generally tends to encourage greater use of debt financing relative to equity financing. 2. Companies in countries with lower taxes on dividends generally have relatively lower debt in their capital structures. Which of the following is most likely?

C. Both statements are correct

33. Following are the most reliable factors that can explain a firm's leverage, except,

C. CEO of the firm

Which business profile characteristic is least likely to be considered in comparable company analysis?

C. Discontinued Operations

16. The Modigliani Miller theorem says that in a frictionless world, it does not matter whether you finance your firm with debt or equity, because in such a world, the expected rate of return on equity is equal to the expected rate of return on debt. Is this statement true or false?

C. First half of the statement is true, but the second half of the statement is false

13.Which of the following is a FALSE statement?

C. Interest payments are obligations only after the board of directors declares them.

26. An executive is given two choices, either receive nontransferable one year European call options on 1000 shares with an exercise price of 100 or get an extra $1000 in bonus at the end of the year for every point that the company that the stock exceeds 100 dollars. Which bonus plan should she choose to provide her with the largest dollar payout?

C. It does not matter

Fama and French have come up with a five factor asset pricing model as discussed in class and also in the last HBS case. The following are one of the five factors according to this model except:

C. MOM

Which of the following is not typically a primary goal of a leveraged buyout (LBO)?

C. Minimize the amount of debt carried by the target

Which of the following is the most common exit strategy when the financial sponsors monetize their investments?

C. Sale to strategic buyer

40. When the CAPM is depicted graphically, the result is the:

C. Security Market Line

38. Which of the following statements is most accurate?

C. Taxes matter in capital budgeting analysis

6. An investor buys a call with a strike price of $40 and sells a call on the same stock and the same expiration date that has a strike price of $35. What will be the total payoff from strategy be if the price of the stock is $43 when the options expire?

D. -$5.00

A company has an annual dividend growth rate of 5% and a retention rate of 40%. The company's dividend payout ratio is

D. 60%

30. Financial ratios that indicate the efficiency of a firm in utilizing its various assets are commonly known as:

D. Activity Ratios

13. A certain analyst boasts that she earned 30% on her stock picks this year while the S&P 500 returned only 15%. She claims that this is proof that she has developed a superior trading strategy. What are other possible reasons for the results she has reported?

D. All of the above are possible reasons for her extraordinary year

Which of the following is not a reason that strategic acquirers can pay a higher price than financial sponsors?

D. Fewer antitrust concerns and costs

When calculating unlevered free cash flow for the purpose of a DCF valuation, which one of the following items is not deducted from EBITDA?

D. Interest expense

21. Real Option Value is equal to:

D. NPV with option- NPV without option

Which of the following generally provides the highest valuation on a football field graphic display?

D. Precedent transactions analysis

33. Which of the following statements is incorrect?

D. Put option sellers have the option to buy the asset from the holder of the put option, for the given exercise price, should the option holder choose to exercise the option.

35. Which of the following statements about the SML and the CML is False?

D. Securities that fall on the SML have no intrinsic value to the investor.

14. Among the answer options, select the most secure, cheapest security:

D. Senior Debt

As discussed in class, the empirical evidence from the Mergers and Acquisitions literature suggests that, on average,

D. Shareholders of the target firm gain, and shareholders of the acquiring firm lose.

11. What is the risk measure associated with the Capital Market Line (CML)?

D. Standard Deviation

10. A stock split increases the number of outstanding shares, while______

D. The total owners equity remains constant

27. The law of one price implies:

D. Two well diversified portfolios with the same beta should have the same expected returns

7. Which of the following statements about Internal Rate of Return is not true?

D. Using IRR to measure return assumes that all income earned over the investment horizon is reinvested at the cost of capital.

9. Which of the following usually occur with a stock dividend?

D. both (b) and (c)

In M&A's, all of the following are advantages of a negotiated sale except:

D. conservative

20. Ole Miss Inc has a 5% cost of debt capital, a 20% cost of equity capital, and a weighted average cost of capital of 10%. What is its D/E ratio? Assume that there are no taxes.

E. 2

Why do you think corporations hold cash?

E. All of the above

36. We discussed in class that you only get rewarded for taking on systematic risk. Which risks below do you think will affect the risk premium that investors will demand?

E. Both (a) and (d)

Recall that in the Boston Beer Company Case, we decided that Pete's brewing was a better comparable to BBC than Redhook brewing not only because of their business model but also because of their similar financial ratios. Let's say two firms, Company A and CompanyB, are peer companies in terms of business characteristics and are considered good comparables, but they are currently trading at substantially different multiples. What discrepancies in financial characteristics could help explain this situation?

E. Company A is expected to grow faster.

17. Which of the following is not a step in comparable company analysis?

E. Discount future cash flows using the weighted average cost of capital.

22. Which statement below is incorrect?

E. European options are more valuable than American options

3. Recall the HBS case titled, "The Allergan Board Under Fire", that we discussed in class. The case was about an attempted hostile takeover of Allergan by Valeant, with the support of Pershing Square Capital Management, a hedge fund, led by Bill Ackman. Following are the reasons why hedge funds are important for the financial markets, except:

E. Hedge fund activists are short termists

Which of the following are desirable characteristics for the traditional LBO candidate? I. strong market positions II. High cyclicality III. Large asset base IV. Speculative Business model

E. I and III

23. Following are the assumptions of CAPM except:

E. Investors are not rational mean variance optimizers like in the Markowitz world

2. The following are the internal mechanisms for corporate governance in a firm except:

E. Market for corporate control

8. Which of the following predicts the existence of an optimum capital structure for an individual firm that is financed with both debt and equity?

E. None of the above

1.Empirically, which corporate governance mechanism has been found to be the weakest in tackling agency problems?

E. Product Market Competition

29. The following are the limitations of ratio analyses, except:

E. Ratios cannot be used for comparisons across time for the same firm.

39.Which of the following statements is NOT true?

E. The betas of most stocks are constant over time.

34. Following are the examples of real options, except:

E. The options to invest in the only positive NPV project

Which of the following is NOT a valid reason for IPO underpricing?

E. Underpricing is a way to make more money for the venture capitalists when financing at early stages of firm's life

19. If there are two risky portfolios that have a correlation of -1 with positive investment weights, what would the expected rate of return on this portfolio be if you want it to be fully diversified?

E. same return as that on the risk free rate