All the following are true statements except:
A. Ratios are convenient summary measures but always have to be viewed
with healthy skepticism.
B. Financial analysis is primarily about computing ratios.
C. Ratios should be used to analyze past performance, for assessing
current financial standing, and to understand the future prospects.
D. Ratios provide answers but often provide the basis for asking questions.
Answer:
Really, the answer depends on your lecturer. Personally, I believe
that B. Financial analysis is far more than financial ratios. It
includes almost everything that helps to analyze financial data: trend
analysis, common size statements, cost-volume-product analysis, break
even point, etc, etc... So my answer is ?B?.
However... Some people would opt for ?C?. Market has almost no memory,
past performance and historical ratios cannot be used to predict the
future. But in fact, we compute financial ratios to make some
predictions, so yes, we try to understand future prospects using
ratios, but we support ratios with additional information (about the
company?s competitors, situation in the industry). Historical ratios
alone cannot be used to predict the future. As you can see, the answer
depends on what your lecturer considers to be more suspicious, he /
she probably said something about financial analysis during the
lecture. Try to review your notes from lectures or ask your mates.
2. What happens to the market value of a firm's equity as the book
value of the firm's equity increases?
A. It increases by the same amount.
B. It decreases by the same amount.
C. It remains constant.
D. There is no set relationship to determine this outcome.
Answer:
D ? market value depends on many different factors and there is no
obvious and constant relationship between market and book value.
Normally, an increase in book value should increase the market value,
but in some situations it may not be the case. There are many
companies that issued new shares but the market prices dropped and
increase in book value was accompanies by decrease in the market
price.
3. A credit card company charges its customers an annual interest
rate of 24% on the outstanding monthly balance. The effective annual
rate for the customer will be:
A. 24%
B. 27%
C. 33%
D. 124%
Answer: B
B: 1+24%/12)^ 12 = (1+r)^1 so: r = 26.82%
4. Translating a value in the future into a value today is referred to as:
A. discounting
B. compounding
C. deferring
D. annuitizing
Answer:
A - dicounting
Answer: B
5. Assume that the interest rate is greater than zero. Which of the
following cash-inflow streams should you prefer?
Year1 Year2 Year3 Year4
A. $400 $300 $200 $100
B. $100 $200 $300 $400
C. $250 $250 $250 $250
D. Any of the above, since they each sum to $1,000.
Answer:
Again it depends what your lecturer had in mind. Zero interest rate
does not necessarily mean that the discount rate is also equal to
zero. So there might be some risk in the economy, anyway. If this is
true, we choose A ? we want our money back as soon as possible. In A
payback period is the shortest. I think this question is about payback
period method, so choose A.
6. A firm has annual cash disbursements of $365 million made
continuously over the year. Although annual costs would increase
$100,000, the firm is considering writing all checks on a small bank
in North Dakota. The firm estimates this will allow an additional 1 ½
days of cash usage. If the firm earns a return on other equally risky
investments of 12%, the net benefits of using the North Dakota bank
would be:
A. $180,000
B. $80,000
C. $88,000
D. There would be no net benefit.
Answer: B:
365 million USD per year = 1 million USD daily
cash usage: 1,5 day means we have cash 1,5 day longer each day
which means: 1,5 day * 1 milion = 1,5 milion
so the firm would have additional 1,5 million USD at hand, so they
don;t have to borrow that money
A yearly interest on 1,5 million credit would be: 12% * 1,5 = 0,18
which is 180 000 USD
additional costs are: 100 000 USD
which gives total savings for the company: 80 000 USD
7. The ?Cash Discount Period? is
A. the number of days until full payment is required
B. always longer than the credit period
C. the number of days after the beginning of the credit period during
which the cash discount is available
Answer: C
8. What is the economic order quantity for a firm that sells 60,000
units annually, each unit has a $6 carrying cost, and the fixed cost
of placing an order is $40?
A. 598 units
B. 894 units
C. 999 units
D. 1215 units
Answer: B = (2 * 60 000 * 40 / 6) ^ (0,5) = 894
9. Students, and managers alike, are continually reminded to avoid
negative-NPV projects. Which of the following projects may be
acceptable even at a loss?
A. A capacity expansion project
B. A cost-reduction project
C. A pollution-control project
D. A machine replacement project
Answer: C some resources cannot be measurable as our quality of life
10. Forecasting inconsistencies can be minimized by:
A. allowing managers to establish their own forecasts.
B. establishing a standardized economic forecast to be used by the
firm, year in, year out.
C. generating current economic forecasts that are used throughout the firm.
D. requiring managers to establish their own forecasts.
Answer:
11. For a $1,000 bond with a 6% coupon, four years until maturity and
a price of $750, what is the current yield?
A. 12.0%
B. 10.0%
C. 8.0%
D. 6.5%
Answer: C
6% * 1000 = 60 , 60 / 750 = 8%
12. If the coupon rate is lower than current interest rates, then the
yield to maturity will be:
A. higher than the coupon rate.
B. lower than the coupon rate.
C. equal to the coupon rate.
D. lower than current interest rates.
Answer: A I don?t like this question, but my answer would be as follows.
Yield to maturity depends on the current price of a bond. When
interest rates increase investors get rid of bonds because they can
earn more in the bank. So they sell bonds, prices of bonds go down.
The difference between current price and nominal value of a bond
becomes bigger so yield to maturity increases. In this way, yield to
maturity becomes similar to market interest rates and is higher than
coupon rate.
13. Sam's Company expects to pay a dividend of $6 per share at the
end of year one, $9 per share at the end of year two and then be sold
for $136 per share. If the required rate on the stock is 20%, what is
the current value of the stock?
A. $100.10
B. $105.69
C. $110.00
D. $120.29
Answer: The author of the question did not define whether he meant
two-year rate of return equal to 20% or one-year rate of return 20%.
Usually we assume that we speak about one-year rate of return, so in
two years we want to earn (1+20%)^2 ? 1. If so, the closest price is
105,69. However, my result was 104,86. Unless we have to include
personal income tax paid on dividends. Then ?real? dividends we
receive are smaller: 6 USD * (1-19%), 9 USD * (1-19%), but personal
income tax was not mentioned in the question.
Expected 2 ? year rate of return = (Future price ? purchase price +
all dividends) / purchase price
Expected 2?year rate of return = (1+yearly rate)^2 ? 1 = (1+20%)^2 - 1
14. If a stock's earnings are $9 per year and its P/E ratio is 13.5,
then what is the stock's current price?
A. $121.50
B. $40.50
C. $13.50
D. $4.50
Answer: A
EPS * P/E = P so: 13,5 * 9 = 121,5 USD
15. Stock prices vary from their ?real? or ?intrinsic? value because:
A. the information necessary to value stocks correctly is not generally available.
B. investors often over-react or misinterpret the information that is available.
C. the stock market is manic-depressive.
D. all the above.
Answer: C
16. What is the expected yield on the market portfolio at a time when
Treasury bills yield 5% and a stock with a beta of 1.20 is expected to
yield 18%?
A. 6.12%
B. 15.83%
C. 18.53%
D. 21.50%
Answer: B 18% = 5% + 1,2 ( market rate ? 5%) so market = 13% / 1,2 + 5% = 15,83%
17. In the evaluation of an anticipated capital expenditure for new,
larger machinery, all the following would be considered relevant cash
flows, except:
A. The funds expended to remove the old machinery
B. The increase in working capital occasioned by larger volumes
C. The funds invested to upgrade the old machinery made just last month
D. The expected salvage value of the old machinery.
E. none of the above
Answer: C these are sunk costs
18. Increased depreciation expense from a new piece of equipment
results in a cash inflow because:
A. the new equipment increases revenue
B. the tax break from increased depreciation causes an inflow
C. the new equipment?s depreciation is offset by the net operating cash flow
D. depreciation doesn?t affect cash inflow only changes in revenues
and operating expenses do
E. increased depreciation expense doesn?t result in a cash inflow, it
causes a cash outflow
Answer: B
19. After the completion of a complete project analysis, the final
decision on the project would probably be mostly based on:
A. Ratio analysis
B. Break-even analysis
C. A toss of a coin
D. NPV
Answer: D
20. If a three year investment project has a two year payback period,
which of the following can be deduced?
A. The IRR is greater than the cost of capital
B. The NPV is positive
C. Neither 'a' nor 'b'
D. Both 'a' and 'b'
Answer: C
21. Capital structure of the firm can be defined as:
A. The firm's mix of debt and equity
B. The firm's investment policies and procedures
C. The market imperfection that the firm's manager can exploit
D. All of the above
Answer: A
22. The minimum acceptable expected rate of return on a project of a
specific risk is the:
A. project cost of capital.
B. company cost of capital.
C. risk-free rate of return.
D. project beta times market risk premium.
Answer: Specific risk represents diversifiable part of standard
deviation of company?s rates of return. I don?t quite follow what the
author had in mind. Only reasonable answer is A, anyway.
23. If changing discount rates from the company cost of capital to
the project cost of capital changes NPV from positive to negative,
then the project should use the:
A. company cost of capital and be accepted.
B. company cost of capital and be rejected.
C. project cost of capital and be accepted.
D. project cost of capital and be rejected.
Answer: D ? project cost of capital shows what would be the real cost
of this new investment
24. Your firm is considering leasing a new computer. The lease lasts
for 9 years. The lease calls for 10 payments of $1,000 per year with
the first payment occurring immediately. The computer would cost
$8,100 to buy and would be straight-line depreciated to a zero salvage
over 9 years. The firm can borrow at a rate of 8%. The corporate tax
rate is 30%. What is the NPV of the lease? (Hint: The NPV of the
lease is the difference between the PV of the lease and the PV of the
purchase. Be sure to take taxes into account.)
A. -$1039.78
B. $6,610.22
C. $686.00
D. $360.00
Answer: C firm can borrow at 8%, but we need to include tax shield,
so the real discount rate is 8%*(1 ? 30%) ? interest is deductive from
the corporate tax
lease
year 0 1 2 3 4 5 6 7 8 9
lease payment -1000 -1000 -1000 -1000 -1000 -1000 -1000 -1000 -1000 -1000
tax savings 300 300 300 300 300 300 300 300 300 300
cash flow -700 -700 -700 -700 -700 -700 -700 -700 -700 -700
discount factor 1,000 0,947 0,897 0,849 0,804 0,762 0,721 0,683 0,647 0,612
PV(i) -700,0 -662,9 -627,7 -594,4 -562,9 -533,1 -504,8 -478,0 -452,7 -428,7
PV -5 545
buy 0 1 2 3 4 5 6 7 8 9
cash outflow -8100
depreciation -900 -900 -900 -900 -900 -900 -900 -900 -900
tax savings 270 270 270 270 270 270 270 270 270
plus: depreciation 900 900 900 900 900 900 900 900 900
cash flow -8100 270 270 270 270 270 270 270 270 270
discount factor 1 0,947 0,897 0,849 0,804 0,762 0,721 0,683 0,647 0,612
PV(i) -8100,0 255,7 242,1 229,3 217,1 205,6 194,7 184,4 174,6 165,3
PV -6 231
25. The capital structure for X Corporation (market values) is the
following: bonds $3000, and common stocks $6750. If X Corp. has an
cost of debt of 10%, a 50% tax rate, and a 15% cost of equity, what is
its WACC?
A. 11.92%
B. 18.75%
C. 26.23%
D. 32.33%
Answer:A ? coupon is tax - deductible
WACC = 3000/9750 * 10%*(1-50%)+6750/9750*15%
26. Which of the following is not a takeover defense:
A. Dancing waters
B. Poison pill
C. White knight
D. Shark repellant
Answer: A
27. A currency forward contract is described by:
A. Agreeing today to buy or sell specified amount of a currency at a
later date at a price set in the future
B. Agreeing today to buy or sell specified amount of a currency today
at its current price
C. Agreeing today to buy or sell specified amount of a currency at a
later date at a price set today
D. None of the above
Answer: C
28. Political risk is defined as:
A. Unanticipated changes in exchange rates
B. Unanticipated actions by the host government affecting the cash
flows of a project
C. Unanticipated actions by the World Bank affecting the cash flows of a project
D. All of the above
Answer: B
29. When conducting credit analyses of potential customers, companies might:
A. Examine financial statements supplied by the customer
B. Do credit scoring
C. Apply subjective judgment
D. All the above
Answer: D but usually start with B
30. Which of the following changes in working capital will result in
a decrease in cash flows?
A. Decrease in accounts payable
B. Decrease in inventories
C. Decrease in accounts receivable
D. Increase in other current liabilities
Answer: A
31. According to decision-tree analysis, investment projects should
be discontinued when:
A. the probability of success is less than 50%.
B. NPV is calculated to be negative.
C. the expected return is less than 25%.
D. the present value of the failure outcome exceeds the initial investment.
Answer: B However, some companies would pursue D ? big companies
cannot afford investments that can shatter their targeted EPS. So
instead of analyzing the expected value of an investment, they analyze
only the worst scenario wondering whether they can suffer such a loss
(if it happens).
32. If an investor purchases a bond when its current yield is less
than the coupon rate, then the bond's price will be expected to:
A. be less than the face value at maturity.
B. exceed the face value at maturity.
C. decline over time, reaching par value at maturity.
D. increase over time, reaching par value at maturity.
Answer: A
33. Which of the following does not change during the life of a bond?
A. coupon rate
B. yield to maturity
C. current yield
D. current price
Answer:
Stupid question, everything may change, some bonds have variable
coupon, indexed for instance to inflation. But as we must choose one
answer A is the most probable answer, as all remaining change every
day.
34. Discounted cash flow formulas work for the valuation of:
A. Investment opportunities
B. Businesses
C. Stocks with either constant or super normal dividend growth
D. All of the above
Answer: D
35. The Dividend Discount Model suggests that the value of a stock:
A. Increases as the dividend growth rate increases
B. Increases as the required rate of return decreases
C. Increases as the required rate of return increases
D. Both A and B
Answer: D
price = Dividend / (required rate ? growth rate)
36. What should be the price of a common stock paying $3.78 annually
in dividends if the growth rate is zero and the discount rate is 7%?
A. $54.27
B. $54.00
C. $53.73
D. $50.22
Answer: B
Gordon Shapiro model
3,78 / 0,07 = 54
37. What is the expected return on a portfolio that will decline in
value by 15% in a recession, will increase by 12% in normal times, and
will increase by 24% during boom times if each scenario has equal
likelihood?
A. 3.64%
B. 7.00%
C. 10.50%
D. 17.00%
Answer:
D =1/3*15%+1/3*12%+1/3*24% = 17%
38. The after-tax weighted average cost of capital is determined by:
A. Multiplying the weighted average after tax cost of debt by the
weighted average cost of equity
B. Adding the weighted average before tax cost of debt to the weighted
average cost of equity
C. Adding the weighted average after tax cost of debt to the weighted
average cost of equity
D. Dividing the weighted average before tax cost of debt to the
weighted average cost of equity
Answer:
C
39. Money that a firm has already spent or committed to spend
regardless of whether a project is taken is called:
A. Sunk costs
B. Opportunity costs
C. Indirect costs
D. None of the above
Answer:
A sunk costs.
40. The opportunity cost of a resource should be considered in
project analysis, unless:
A. no cash flows result from its use.
B. the resource was purchased in a prior time period.
C. the resource has been fully depreciated.
D. the resource has no identifiable market value.
Answer:
Stupid question. A and D seem to have some point, I would personally
choose A ? if a resource generates no cash-flow neither from its sale
nor from using it, it simply does not influence the value of the
project. But does ?using? include selling? It might be considered as a
sunk cost as well, question does not say anything if it was a sunk
cost. Still, if we cannot estimate cash-flows generated by the
resource we cannot include them in calculations, so D also makes
sense. Again, what is the right answer here would depend on your
teacher (sorry).
41. What is the NPV of a project that costs $50,000 and returns
$30,000 annually for three years if the opportunity cost of capital is
12%?
A. $12,047.88
B. $16,887.97
C. $22,054.94
D. $25,374.23
Answer:
C
year 0 1 2 3
cash flow -50 30 30 30
discount factor 1 0,892857 0,797194 0,71178
present value -50 26,78571 23,91582 21,35341
NPV 22,05494
42. At the end of the life of a project that initially required a
$50,000 increase in net working capital, what effect is expected?
A. The depreciated working capital must be replaced
B. The $50,000 must now be paid
C. The firm receives a $50,000 cash inflow
D. There is no effect; opportunity costs are not real
Answer:
C ? usually we assume the firm can sell its working capital (Compare:
Ross, Westerfield Jordan, Corporate finance, chapter 10 - capital
budgeting decisions).
43. A new grocery store cost $30 million in initial investment. It is
estimated that the store will generate 2 million dollars after tax
cash flow for five years. At the end of 5 years it can be sold for $40
million. What is the NPV of the project at a discount rate of 10%?
A) $2.42 million
B) $18 million
C) $.69 million
D) None of the above
Answer:
A:
years 0 1 2 3 4 5
cash-flow -30 2 2 2 2 42
discount factor 1 0,909091 0,826446 0,751315 0,683013 0,620921
PV -30 1,818182 1,652893 1,50263 1,366027 26,0787
NVP 2,418426
44. The average beta of individual stocks in the market portfolio is:
A. one.
B. zero.
C. 1/2 (midway between one and zero).
D. Cannot be calculated without knowing the stocks in the portfolio.
Answer: D NOT A ? market portfolio beta equals 1 which means if we
take all shares publicly quoted with the amounts they were issued.
45. The major difference(s) between legitimate investing and casino
roulette is/are:
A. there is always less risk in investing.
B. investment outcomes are unpredictable.
C. roulette outcomes are certain, but occur randomly.
D. investment outcomes are uncertain but predictable, and subject to risk.
E. Both C & D.
F. Both A & B.
Answer:
E ? investment outcomes are uncertain but predictable, roulette
outcomes are certain, but occur randomly. You know all possible
results from roulette, you don?t know which one will occur (assume
casino does not cheat). In the case of investment, outcomes are not
certain, you can only predict their distribution. |
