If next year’s dividend is forecast to be $5.00, the constant growth rate is 4%, and the discount rate is 16%, then the current stock price should be:
$31.25
$40.00
$41.67
$43.33
Look up prices of 10 U.S. Treasury bonds with different coupons and different maturities. Calculate how their price would change is their yields to maturity increased by 1 percentage point. Are long-or short-term bonds most affected by the change in yield? Are high-or low-coupon bonds most affected? Which of the following statement is CORRECT?
In general, yield changes have the greatest impact on short-maturity, low-coupon bonds.
In general, yield changes have the greatest impact on long-maturity, low-coupon bonds.
In general, yield changes have the greatest impact on long-maturity, high-coupon bonds.
In general, yield changes have the greatest impact on short-maturity, high-coupon bonds.
Two mutually exclusive projects have the following NPVs and project lives.
Project |
NPV |
Life |
A |
5,000/per year |
3 |
B |
6,500/per year |
5 |
A
B
Both A and B
Reject both A and B
Stock X has a standard deviation of return of 10%. Stock Y has a standard deviation of return of 20%. The correlation coefficient between stocks is 0.5. If you invest 60% of the funds in stock X and 40% in stock Y, what is the standard deviation of a portfolio?
10%
20%
12.2%
11.5%
If the standard deviation of returns of the market is 20% and the beta of a well-diversified portfolio is 1.5, calculate the standard deviation of the portfolio:
30%
20%
10%
8%
Suppose you borrow at the risk-free rate an amount equal to your initial wealth and invest in a portfolio with an expected return of 16% and a standard deviation of returns of 20%. The risk-free asset has an interest rate of 4%; calculate standard deviation of the resulting portfolio:
28%
40%
32%
30%
If the beta of Microsoft is 1.13, risk-free rate is 3% and the market risk premium is 8%, calculate the expected return for Microsoft.
12.04%
15.66%
13.94%
8.65%
The market value of Cable Company’s equity is $60 million and the market value of its risk-free debt is $40 million. If the required rate of return on the equity is 15% and that on the debt is 5%, calculate the company’s cost of capital. (Assume the tax rate is 40%).
9.8%
10.2%
11.8%
12.2%
12,750 increase
12,750 decrease
122,650 increase
135,400 decrease
Option to abandon a project is a:
Call option
Put option
Stock option
Swap
If the weak form of market efficiency holds then:
(I)Technical analysis is useless
(II)Stock prices reflect information contained in past prices
(III)Stock price changes follow a random walk
I only
I and II only
I, II and III
I and III only
Firms can pay out cash to their shareholders in the following ways:
(I)Dividends
(II)Share repurchases
(III)Interest payments
I only
II only
I and II only
III only
One key assumption of the Miller and Modigliani (MM) dividend irrelevance argument is that:
Future stock prices are certain
There are no capital gains taxes
All investments are risk-free
New shares are sold at a fair price
If a firm permanently borrows $100 million at an interest rate of 8%, what is the present value of the interest tax shield? (Assume that the tax rate is 30%)
$8.00 million
$5.6 million
$30 million
$26.67 million
Risk shifting implies when faced with financial distress; managers of firms acting on behalf of their shareholders’ interests will:
Favor high risk, high return projects even if they have negative NPV
Refuse to invest in low risk, low return project with positive NPVs
Delay the onset of bankruptcy as long as they can
All of the above
The pecking order theory of capital structure implies that:
(I)Risky firms will end up borrowing more
(II)Firms prefer internal finance
(III)Firms prefer debt to equity when external financing is required
I only
II only
II and III only
III only
What are some of the possible consequences of financial distress?
(I)bondholders, who face the prospect of getting only part of their money back, are likely to want the company to take additional risks.
(II)Equity investors would like the company to cut its dividend payments to conserve cash.
(III)Equity investors would like the firm to shift toward riskier lines of business
I only
II only
III only
I and II only
If a firm borrows $50 million for one year at an interest rate of 10%, what is the present value of the interest tax shield? Assume a 30% tax rate (the discount rate is equal to the cost of debt). (Approximately)
$1.364 million
$1.5 million
$1.0 million
$4.545 million
The efficient portfolios:
(I)have only unique risk
(II)provide highest returns for a given level of risk
(III)provide the least risk for a given level of returns
(IV)have no risk at all
I only
II and III only
IV only
II only
Since some countries have a lower cost of capital, there is a kind of famous trade between countries named Carry Trade. Explain how these carry trades made the Japanese yen markedly increasing against its most-traded counterparts after the worst earthquake on March 11, 2011.
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