30 – Multiple Choice Questions (calculations not required)
Please simply highlight the best answer for each of the following
multiple choice questions;
QUESTION 1. Which of the
following is/are an advantage(s) of incorporation?
A)
Access to capital markets
B)
Limited liability
C)
Unlimited life
D)
All of the above
QUESTION 2. Which of the
following statements is false?
A)
In bankruptcy, management is given the opportunity to reorganize the firm and
renegotiate with debt holders.
B)
Because a corporation is a separate legal entity, when it fails to repay its
debts, the people who lent to the firm (the debt holders) are entitled to seize
the assets of the corporation in compensation for the default.
C)
As long as the corporation can satisfy the claims of the debt holders,
ownership remains in the hands of the equity holders.
D)
If the corporation fails to satisfy debt holders’ claims, equity holders may
take control of the firm.
QUESTION 3. Which of the
following is NOT a financial statement that every public company is required by
IFRS to produce?
A)
Income Statement
B)
Statement of Comprehensive Income
C)
Balance Sheet
D)
Statement of Changes in Equity
QUESTION 4. The
P/E ratio is not useful when the firm’s ________ are negative. In this case, it
is common to look at the firm’s ________ relative to sales.
A)
operating earnings; enterprise value
B)
net earnings; enterprise value
C)
operating earnings; market value
D)
net earnings; market value
QUESTION 5.
Consider the following oil prices:
ExxonMobil Oil (XOM)
$71.75/Bbl
Marathon Petroleum (MPC)
$73.06/Bbl
As
an oil refiner, you are able to produce $76 worth of unleaded gasoline from one
barrel of ExxonMobil Oil (XOM) crude oil.
Because of its lower sulfur content, you can produce $77 worth of
unleaded gasoline from one barrel of Marathon Petroleum (MPC)crude.
Another
oil refiner is offering to trade you 10,150 Bbls of ExxonMobil Oil (XOM)crude
oil for 10,000 Bbls of Marathon Petroleum (MPC)crude oil. Assuming you currently
have 10,000 Bbls of MPC crude, the added benefit (cost) to you if you take the
trade is closest to:
A)
($1,400)
B)
$1,400
C)
($3,908)
D)
$3,908
QUESTION 6. You
have an investment opportunity in France that requires an investment of
$250,000 today and will produce a cash flow of â¬208,650 in one year with no
risk. Suppose the risk-free rate of interest in France is 6% and the current
competitive exchange rate is â¬0.78 to $1.00. What is the NPV of this project?
Would you take the project?
A)
NPV = 0; No
B)
NPV = 2,358; No
C)
NPV = 2,358; Yes
D)
NPV = 13,650; Yes
QUESTION 7.
Consider the following timeline detailing a stream of cash flows:
If
the current market rate of interest is 6%, then the future value of this stream
of cash flows is closest to:
A)
$1,723
B)
$1,500
C)
$1,626
D)
$1,288
QUESTION 8.
After many years teaching finance at Georgetown University, Johnathan wants to
establish a scholarship to offer 4 $1,000 awards each year to students whose
performance is excellent in finance courses. If the university can negotiate a
12.75% effective interest rate, at least how much does Johnathanneed to endorse
over to the scholarship (closest estimate)?
A)
$32,000
B)
$31,000
C)
$31,500
D)
$32,500
QUESTION 9.
Consider the following investment alternatives:
Investment
Rate
Compounding
A
6.25%
Annual
B
6.10%
Daily
C
6.125
Quarterly
D
6.120
Monthly
The
highest effective rate of return you could earn on any of these investments is
closest to:
A)
6.250%
B)
6.267%
C)
6.300%
D)
6.320%
QUESTION 10.
Which of the following statements is false?
A)
The yield curve changes over time.
B)
The formulas for computing present values of annuities and perpetuities cannot
be used in situations in which cash flows need to be discounted at different
rates.
C)
We can use the term structure to compute the present and future values of a
risk-free cash flow over different investment horizons.
D)
The yield curve tends to be inverted as the economy comes out of a recession.
QUESTION 11. The
Millennium Company has a bond outstanding with a face value of $1,000 that
reaches maturity in 15 years. The bond certificate indicates that the stated
coupon rate for this bond is 8% and that the coupon payments are to be made
semi-annually.
Assuming
that this bond trades for $903, then the YTM for this bond is closest to:
A)
8.0%
B)
6.8%
C)
9.9%
D)
9.2%
QUESTION 12.
Consider the following four bonds that pay annual coupons:
Bond
Years to
maturity
Coupon
YTM
A
1
0%
5%
B
5
6%
7%
C
10
10%
9%
D
20
0%
8%
The
percentage change in the price of the bond “A” if its yield to
maturity increases from 5% to 6% is closest to:
A)
-4%
B)
-6%
C)
-1%
D)
4%
QUESTION 13. You
expect that Westonian Enterprises will have earnings per share of $2 for the
coming year. Westonianplans to retain all of its earnings for the next three
years. For the subsequent two years, the firm plans on retaining 50% of its
earnings. It will then retain only 25% of its earnings from that point forward.
Retained earnings will be invested in projects with an expected return of 20%
per year. If Westonianâsequity cost of capital is 12%, then the price of a
share of Westonianâsstock is closest to:
A)
$17.00
B)
$10.75
C)
$27.75
D)
$43.50
QUESTION 14.
McCormick Industries plans to pay a $4.00 dividend this year and you expect
that the firm’s earnings are on track to grow at 5% per year for the
foreseeable future. McCormickâs equity cost of capital is 13%.
Suppose
that McCormickdecides to pay a dividend of only $2 per share this year and use
the remaining $2 per share to repurchase stock. If Defenestration maintains
this dividend and total payout rate, then the rate at which McCormickâs dividends
and earnings per share are expected to grow is closest to:
A)
7%
B)
13%
C)
9%
D)
5%
QUESTION 15.
Edward the Magician has been offered $14 million to star in the lead role of
the next three Magical movie series. If Edward takes this offer, he will have to
forgo acting in other Magician movies that would pay him $5 million at the end
of each of the next three years. Assume Edwardâs personal cost of capital is
10% per year.
The
NPV of Edwardâs three-movie Magical movie series, offer is closest to:
A)
3.5 million
B)
-1.6 million
C)
1.6 million
D)
-1.0 million
QUESTION 16.
Techno-Corp has come up with a new medical instrument. Development will take
Techno-Corp four years and cost $250,000 per year, with the first of the four
equal investments payable today upon acceptance of the project. Once in production the medical instrument is
expected to produce annual cash flows of $200,000 each year for 10 years.
Techno-Corpâs discount rate is 10%.
The
IRR for Techno-Corpâs’ project is closest to:
A)
10.4%
B)
10.0%
C)
11.0%
D)
15.1%
QUESTION 17. The
Giant Corporation is considering investing in a new metal-shelving
manufacturing machine that has an estimated life of three years. The cost of the machine is $30,000 and the
machine will be depreciated straight line over its three-year life to a residual
value of $0.
The
metal-shelving manufacturing machine will result in sales of 2,000
metal-shelves in year 1. Sales are
estimated to grow by 10% per year each year through year three. The price per metal-shelve that Giant will
charge its customers is $18 each and is to remain constant. The metal-shelves have a cost per unit to
manufacture of $9 each.
Installation
of the machine and the resulting increase in manufacturing capacity will
require an increase in various net working capital accounts. It is estimated that the Giant Corporation
needs to hold 2% of its annual sales in cash, 4% of its annual sales in
accounts receivable, 9% of its annual sales in inventory, and 5% of its annual
sales in accounts payable. The firm is
in the 35% tax bracket, and has a cost of capital of 10%.
The
depreciation tax shield (assuming the half-year rule is not applied for
straight-line depreciation) for the Giant Corporation’s project in the first
year is closest to:
A)
$8,000
B)
$3,500
C)
$2,800
D)
$5,200
QUESTION 18. You
are considering adding a carbonated water-dispenser onto one of your firm’s
existing outlets. This will entail an increase in inventory of $8,000, an
increase in accounts payable of $2,500, and an increase in property, plant,and
equipment of $40,000. All other accounts will remain unchanged. The change in
net working capital resulting from the addition of the carbonated
water-dispenser, is:
A)
$45,500
B)
$10,500
C)
$6,500
D)
$5,500
QUESTION 19.
Suppose an investment is equally likely to have a 35% return or a -20% return.
The standard deviation on the return for this investment is closest to:
A)
38.9%
B)
0%
C)
19.4%
D)
27.5%
QUESTION 20.
Suppose that in the coming year, you expect Chevron Corporation stock to have a
volatility of 42% and a beta of 0.9, and BP’s stock to have a volatility of 24%
and a beta of 1.1. The risk free interest rate is 4% and the market’s expected
return is 12%.
The
cost of capital for a project with the same beta as Chevron Corporationâs stock
is closest to:
A)
11.6%
B)
11.2%
C)
12.8%
D)
7.6%
QUESTION 21.
Suppose you invest $20,000 by purchasing 200 shares of ConocoPhillips (COP) at $50
per share, 200 shares of Enterprise Products (EPD) at $30 per share, and 100
shares of Valero Energy (VLO) at $40 per share.
Suppose
over the next year Valero Energy has a return of 12.5%, Lowes has a return of
20%, and ConocoPhillipshas a return of -10%. The weight of Enterprise Products in
your portfolio after one year is closest to:
A)
20.0%
B)
34.8%
C)
30.0%
D)
36.0%
QUESTION 22.
Consider an equally weighted portfolio that contains 100 stocks. If the average
volatility of these stocks is 50% and the average correlation between the
stocks is .7, then the volatility of this equally weighted portfolio is closest
to:
A)
.72
B)
.59
C)
.40
D)
.50
QUESTION 23.
Which of the following statements is false?
A)
Investors may have different information regarding expected returns,
correlations, and volatilities, but they correctly interpret that information
and the information contained in market prices and they adjust their estimates
of expected returns in a rational way.
B)
Investors may learn different information through their own research and
observations, but as long as they understand the differences in information and
learn from other investors by observing prices, the CAPM conclusions still
stand.
C)
Every investor, regardless of how much information he has access to, can
guarantee himself an alpha of zero by holding the market portfolio.
D)
The CAPM requires making the strong assumptions of homogeneous expectations.
QUESTION 24. The
only way it can be possible to earn a positive alpha and beat the market is if
some investors are holding portfolios with ________ alphas.
A)
positive
B)
zero
C)
negative
D)
none of the above
QUESTION 25.
Consider the following graph of the security market line:
Which
of the following statements regarding portfolio “X” is/are correct?
1. Portfolio “X”
has a negative alpha.
2. Portfolio “X”
is overpriced.
3. Portfolio “X”
is less risky than the market portfolio.
4. Portfolio “X”
should not exist if the market portfolio is efficient.
A) 1
and 3
B) 2
and 4
C)
1, 3, and 4
D) 3
only
QUESTION 26.
Uninformed individuals tend to ________ the precision of their knowledge. In
finance, we call this presumptuousness the ________ hypothesis.
A)
underestimate; underconfidence
B)
overestimate; overconfidence
C)
underestimate; overconfidence
D)
overestimate; underconfidence
QUESTION 27.
Consider a project with free cash flows in one year of $90,000 in a weak
economy or $117,000 in a strong economy, with each outcome being equally
likely. The initial investment required for the project is $80,000, and the
project’s cost of capital is 15%. The risk-free interest rate is 5%.
Suppose
that to raise the funds for the initial investment the firm borrows $40,000 at
the risk free rate and issues new equity to cover the remainder. In this
situation, the cash flow that equity holders will receive in one year in a
strong economy is closest to:
A)
$117,000
B)
$75,000
C) $50,000
D)
$0
QUESTION 28. You
are evaluating a new project and need an estimate for your project’s beta. You
have identified the following information about three firms with comparable
projects:
Firm Name
Equity Beta
Debt Beta
Debt to
Equity Ratio
Franklin
1.25
0
0.25
TXR
1.6
0.2
1
Sempcor
2.3
0.3
1.5
20)
The unlevered beta for Sempcor is closest to:
A)
1.00
B)
0.90
C)
0.95
D)
1.10
QUESTION 29.
Consider the following income statement for Smith Corp. (all figures in $
millions):
Year
2006
2005
2004
Total Sales
60,553
56,434
53,791
Cost of goods sold
45,565
42,140
39,637
Selling, general & admin expenses
11,688
12,191
11,575
Depreciation
1,265
1,256
1,209
Operating Income
2,035
847
1,370
Other Income
0
0
0
EBIT
2,035
847
1,370
Interest expense
510
557
604
Earnings before tax
1,525
290
766
Taxes (35%)
534
102
268
Net Income
991
189
498
The
interest rate tax shield for Smith Corp. in 2006 is closest to:
A)
$187 million
B)
$332 million
C)
$534 million
D)
$179 million
QUESTION 30. The
total amount available to pay out to all the investors in Smith Corp. in 2006
is closest to:
A)
$990 million
B)
$1,525 million
C)
$1,500 million
D)
$2,035 million
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