Question 1

1.       Which of the following statements is CORRECT?

8 points   

Question 2

1.       Below is the common equity section (in millions) of Teweles Technology’s last two year-end balance sheets:

2007                                    2006

Common Stock                                $2000                                   $1000

Retained Earnings                             2000                                      2340

Total Common Equity                      $4000                                    $3340

Teweles has never paid a dividend to its common stockholders.  Which of the following statements is CORRECT?

8 points   

Question 3

1.      Suppose firms follow similar financing policies, face similar risks, have equal access to capital, and operate in competitive product and capital markets.  Under these conditions, then firms that have high profit margins will tend to have high asset turnover ratios, and firms with low profit margins will tend to have low turnover ratios.

[removed] True

[removed] False

8 points   

Question 4

1.       Companies E and P each reported the same earnings per share (EPS), but Company E’s stock trades at a higher price.  Which of the following statements is CORRECT?

8 points   

Question 5

1.      Which of the following statements is NOT CORRECT?

8 points   

Question 6

1.      Which of the following statements is CORRECT?

8 points   

Question 7

1.      A highly risk-averse investor is considering adding one additional stock to a 3-stock portfolio, to form a 4-stock portfolio.  The three stocks currently held all have b = 1.0 and a perfect positive correlation with the market.  Potential new Stocks A and B both have expected returns of 15%, and both are equally correlated with the market, with r = 0.75.  However, Stock A’s standard deviation of returns is 12% versus 8% for Stock B.  Which stock should this investor add to his or her portfolio, or does the choice matter?

8 points   

Question 8

1.      If two firms have the same current dividend and the same expected dividend growth rate, their stocks must sell at the same current price or else the market will not be in equilibrium.

[removed] True

[removed] False

8 points   

Question 9

1.      Stock X has a required return of 10%, while Stock Y has a required return of 12%.  Which of the following statements is CORRECT?

8 points   

Question 10

1.      Deeble Construction Co.’s stock is trading at $30 a share.  Call options on

          the company’s stock are also available, some with a strike price of $25 and

          some with a strike price of $35.  Both options expire in three months.  Which

          of the following best describes the value of these options?

8 points   

Question 11

1.      Which of the following is NOT a capital component when calculating the weighted average cost of capital (WACC)?

8 points   

Question 12

1.      When working with the CAPM, which of the following factors can be determined with the most precision?

8 points   

Question 13

1.      You are on the staff of Camden Inc.  The CFO believes project acceptance should be based on the NPV, but Steve Camden, the president, insists that no project can be accepted unless its IRR exceeds the project’s risk-adjusted WACC.  Now you must make a recommendation on a project that has a cost of $15,000 and two cash flows: $110,000 at the end of Year 1 and -$100,000 at the end of Year 2.  The president and the CFO both agree that the appropriate WACC for this project is 10%.  At 10%, the NPV is $2,355.37, but you find two IRRs, one at 6.33% and one at 527%, and a MIRR of 11.32%.  Which of the following statements best describes your optimal recommendation, i.e., the analysis and recommendation that is best for the company and least likely to get you in trouble with either the CFO or the president?

8 points   

Question 14

1.       Edmondson Electric Systems is considering a project that has the following cash flow and WACC data.  What is the project’s NPV?  Note that if a project’s projected NPV is negative, it should be rejected.

WACC:     10.00%

Year:                      0                        1               2                 3                

Cash flows:      -$1000             $500          $500         $500

8 points   

Question 15

1.      Which of the following statements is CORRECT?

8 points   

Question 16

1.      Which of the following statements is CORRECT?

8 points   

Question 17

1.      Which of the following statements is CORRECT?

8 points   

Question 18

1.       1.   Based on the corporate valuation model, Hunsader’s value of operations is $300 million.  The balance sheet shows $20 million of short-term investments that are unrelated to operations, $50 million of accounts payable, $90 million of notes payable, $30 million of long-term debt, $40 million of preferred stock, and $100 million of common equity.  The company has 10 million shares of stock outstanding.  What is the best estimate of the stock’s price per share?

8 points   

Question 19

1.       Which of the following does NOT always increase a company’s market value?

8 points   

Question 20

1.      Firm A has a higher degree of business risk than Firm B.  Firm A can offset this by using less financial leverage.  Therefore, the variability of both firms’ expected EBITs could actually be identical.

[removed] True

[removed] False

8 points   

Question 21

1.      Volga Publishing is considering a proposed increase in its debt ratio, which would also increase the company’s interest expense.  The plan would involve issuing new bonds and using the proceeds to buy back shares of its common stock.  The company’s CFO thinks the plan will not change total assets or operating income, but that it will increase earnings per share (EPS). Assuming the CFO’s estimates are correct, which of the following statements is CORRECT?

8 points   

Question 22

1.       Other things held constant, which of the following will cause an increase in net working capital?

8 points   

Question 23

1.        Which of the following statements is most CORRECT?

8 points   

Question 24

1.       In 1985, a given Japanese imported automobile sold for 1,476,000 yen, or $8,200.  If the car still sold for the same amount of yen today but the current exchange rate is 144 yen per dollar, what would the car be selling for today in U.S. dollars?

8 points   

Question 25

1.      You are negotiating to make a 7-year loan of $25,000 to Breck Inc.  To repay you, Breck will pay $2,500 at the end of Year 1, $5,000 at the end of Year 2, and $7,500 at the end of Year 3, plus a fixed but currently unspecified cash flow, X, at the end of Years 4 through 7.  Breck is essentially riskless, so you are confident the payments will be made, and you regard 8% as an appropriate rate of return on low risk 7-year loans.  What cash flow must the investment provide at the end of each of the final 4 years, that is, what is X?