If the appropriate interest rate is 8%, then present value of $500 paid at the end of each of the next 40 years is closest to:

A) $23
B) $5962
C) $6439
D) $20,0000

B

Henry Rearden is saving for retirement and has determined that to live comfortably he must save $3 million by his 65th birthday. Henry just turned 30 today, and he has decided that starting on his 31 birthday and continuing on every birthday up to and including his 65th birthday, he will deposit the same amount into an individual retirement account (IRA). If Henry can earn 8% on his IRA, then the amount he must set aside each year to make sure that he will have $3 million in his account on his 65^th birthday is closest to:

A) $18,912
B) $17,410
C) $83,335
D) $85,715

B

Wyatt oil is considering drilling a new oil well at a cost of $1,000,000. This well will produce $100,000 worth of oil during the first year, but as oil is removed from the well the amount worth of oil produced will decline by 2% per year forever. If the Wyatt oil's appropriate discount rate is 8%, then the NPV of this oil well is closest to:

A) -$250,000
B) $0
C) $250,000
D) $1,000,000

B

You are considering purchasing a new home. You will need to borrow $250,000 to purchase the home. A mortgage company offers you a 15-year fixed rate mortgage (180 months) at 9% APR (0.75% month). If you borrow the money from this mortgage company, your monthly mortgage payment will be closest to:

A) $2585
B) $660
C) $2536
D) $1390

C

You are looking for a new truck and see the following advertisement. "Own a new truck! No money down. Just five easy annual payments of $8000." You know that you can get the same truck from the dealer across town for only $31,120. The interest rate for the deal advertised is closest to:

A) 9%
B) 8%
C) 8.5%
D) 10%

A

The effective annual rate (EAR) for a loan with a stated APR of 10% compounded quarterly is closest to:

A) 9.65%
B) 10.00%
C) 10.38%
D) 12.50%

C

Consider a zero coupon bond with 20 years to maturity. The amount that the price of the bond will change if its yield to maturity decreases from 7% to 5% is closest to:

A) $118
B) -$53
C) $53
D) $673

A

Which of the following statements is FALSE?

A) Investors pay less for bonds with credit risk than they would for an otherwise identical
default-free bond.
B) The yield to maturity of a defaultable bond is equal to the expected return of investing in the bond.
C) The risk of default, which is known as the credit risk of the bond, means that the bond's cash flows are not known with certainty.
D) For corporate bonds, the issuer may default—that is, it might not pay back the full amount
promised in the bond certificate.

B

A key difference between sovereign and corporate bonds is:

A) unlike a corporation, a country facing difficulty meeting its financial obligations cannot default.
B) unlike corporate debt, sovereign debt prices are not inverse to yields.
C) unlike a corporation, any country can turn to the EMU to pay off its debts.
D) unlike a corporation, a country facing difficulty meeting its financial obligations typically has the option to print more currency.

D

The internal rate of return rule can result in the wrong decision if the projects being compared have:

A) differences in scale.
B) differences in timing.
C) differences in NPV.
D) A and B are correct.

D

Assuming that your capital is constrained, which investment tool should you use to determine the correct investment decisions?

A) Profitability Index
B) Payback method
C) NPV
D) IRR

A

Nielson Motors has a share price of $25 today. If Nielson Motors is expected to pay a dividend of $0.75 this year, and its stock price is expected to grow to $26.75 at the end of the year, then Nielson's dividend yield and equity cost of capital are:

A) 3.0% and 7.0% respectively.
B) 3.0% and 10.0% respectively.
C) 4.0% and 6.0% respectively.
D) 4.0% and 10.0% respectively.

B

The Sisyphean Company's common stock is currently trading for $25.00 per share. The stock is expected to pay a $2.50 dividend at the end of the year and the Sisyphean Company's equity cost of capital is 14%. If the dividend payout rate is expected to remain constant, then the expected growth rate in the Sisyphean Company's earnings is closest to:

A) 8%
B) 6%
C) 4%
D) 2%

C

A firm's net investment is:

A) its capital expenditures in excess of depreciation.
B) its free cash flow net of increases in working capital.
C) its enterprise value in excess of debt owed.
D) the market value of equity plus debt.

A

General Industries is expected to generate the following free cash flows over the next five years:

Year Free Cash Flow
1 $22 million
2 $26 million
3 $29 million
4 $30 million
5 $32 million

After the fifth year, the free cash flows are expected to grow at a rate of 5% per year. If the weighted average cost of capital is 9% and General Industries has cash of $15 million, debt of $45 million, and 80 million shares outstanding, what is General Industries' expected current share price?

A) $7.78
B) $8.17
C) $9.34
D) $11.67

A

Assuming that Novartis AG (NVS) has an EPS of $3.35, based upon the average P/E ratio for its competitors, Novartis' stock price is closest to:

A) $13.00
B) $31.86
C) $43.47
D) $44.35

D

Which of the following statements is FALSE?

A) The variance increases with the magnitude of the deviations from the mean.
B) The variance is the expected squared deviation from the mean.
C) Two common measures of the risk of a probability distribution are its variance and standard deviation.
D) If the return is riskless and never deviates from its mean, the variance is equal to one.

D

Suppose an investment is equally likely to have a 35% return or a -20% return. The standard
deviation of the return for this investment is closest to:

A) 38.9%
B) 0%
C) 19.4%
D) 27.5%

D

The firm's unlevered (asset) beta is:

A) the weighted average of the equity beta and the debt beta.
B) the weighted average of the levered beta and the equity beta.
C) the debt beta minus the equity beta.
D) the unlevered beta minus the cost of capital.

A

Your estimate of the asset beta for Taggart Transcontinental is closest to:

A) 0.42
B) 0.59
C) 0.66
D) 0.71

C

Suppose that because of the large need for steel in building railroad infrastructure, Taggart
Transcontinental and Rearden Metal decide to form into one large conglomerate. Your estimate of the asset beta for this new conglomerate is closest to:

A) 0.42
B) 0.59
C) 0.66
D) 0.68

D