Test- MsC CFIB

The goal of this quiz is to test your knowledge in corporate finance, financial analysis.

mandatory answer

Question 1

First Name and Name

Question 2

What is the main reason that it is necessary for public companies to follow the rules and format set out in the Generally Accepted Accounting Principles (GAAP) when creating financial statements?

It ensures that the market value of assets and debt are reported accurately.

It ensures that information on the performance of public companies is reported on cash-basis accounting

It ensures that important budgetary information is not omitted.

It makes it easier to compare the financial results of different firms.

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Question 3

Which of the following best describes why the left and right sides of a balance sheet are equal?

In a properly run business, the value of liabilities will not exceed the assets held by the company.

By definition, the assets plus the liabilities will be the same as the stockholders' equity.

The assets must equal liabilities plus stockholders' equity because stockholders' equity is the difference between the assets and the liabilities.

By accounting convention, the assets of a company must be equal to the liabilities of that company.

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Question 4

A small company has current assets of $112,000 and current liabilities of $117,000. Which of the following statements about that company is most likely to be true?

Since net working capital is negative, the company will not have enough funds to meet its obligations.

Since net working capital is high, the company will likely have little difficulty meeting its obligations.

Since net working capital is very high, the company will have ample money to invest after it meets its obligations.

Since net working capital is nearly zero, the company is well run and will have little difficulty attracting investors

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Question 5

GenCorp. has a total debt of $140 million and stockholders' equity of $50 million. It also has 26 million shares outstanding, with a market price of $4.00 per share. What is GenCorp's market debt-equity ratio?

0.67

1.08

2.80

1.35

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Question 6

A company has a share price of $22.15 and 118 million shares outstanding. Its market-to-book ratio is 4.2, its book debt-equity ratio is 3.2, and it has cash of $800 million. How much would it cost to take over this business assuming you pay its enterprise value?

$1.9 billion

$3.044 billion

$4.566 billion

$3.8 billion

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Question 7

You own 1000 shares of Newstar Financial stock, currently trading for $57 per share. You are offered a deal where you can exchange these stocks for 900 shares of Amback Financial Group stock, currently trading at $63 per share. What is the value of this trade, if you choose to make it?

-$320

-$340

-$300

$300

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Question 8

On Commodity Exchange A, it is possible to buy and sell crude oil at $116 per barrel, while on Commodity Exchange B crude oil can be bought and sold at $117 per barrel. If there are transaction costs of 1% when buying or selling on either exchange, what is the net effect of buying a barrel of oil on Exchange A and selling it on Exchange B?

-$1.33

-$0.67

$1.06

$1.60

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Question 9

Owen expects to receive $30,000 at the end of next year from a trust fund. If a bank loans money at an interest rate of 8.2%, how much money can he borrow from the bank on the basis of this information?

$2460

$13,863

$27,726

$32,460

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Question 10

Samantha has holdings of 250 troy ounces of platinum, currently valued at $820 dollars per ounce. She estimates that the price of platinum will rise to $869.20 per ounce in the next year. If the interest rate is 12%, should she sell the platinum today?

Yes, as the difference between the present value of selling now and selling in one year is $12,300 dollars today.

Yes, as the difference between the present value of selling now and selling in one year is $10,982 dollars today.

Yes, as the difference between the present value of selling now and selling in one year is $9840 dollars today

No, as the difference between the present value of selling now and selling in one year is -$8786 dollars today.

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Question 11

If the one-year discount factor is equal to 0.94340, the interest must be equal to:

3.0%

4,8%

5,58%

6,0%

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Question 12

What is the coupon payment of a 25-year $1000 bond with a 4.5% coupon rate with quarterly payments?

$3.75

$11.25

$22.50

$45.00

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Question 13

An investor holds a Ford bond with a face value of $5000, a coupon rate of 8.5%, and semiannual payments that matures on January 15, 2029. How much will the investor receive on January 15, 2029?

$2606.25

$5000.00

$5212.50

$5425.00

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Question 14

Why is the yield to maturity of a zero-coupon, risk-free bond that matures at the end of a given period the risk-free interest rate for that period?

Since such a bond provides a risk-free return over that period, the Law of One Price guarantees that the risk-free interest rate equals the yield to maturity.

Since a bond's price will converge on its face value as the bond approaches the maturity date, the Law of One Price dictates that the risk-free interest rate will reflect this convergence.

Since interest rates will rise and fall in response to the movement in bond prices.

Since there is, by definition, no risk in investing in such bonds, the return from such bonds is the best that can be expected from any investment over the period.

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Question 15

The current zero-coupon yield curve for risk-free bonds is shown above. What is the price of a zero-coupon, four-year, risk-free bond of $100?

$85.64

$87.99

$92.15

$96.67

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Question 16

A company issues a ten-year $1,000 face value bond at par with a coupon rate of 6.7% paid semiannually. The YTM at the beginning of the third year of the bond (8 years left to maturity) is 8.1%. What was the percentage change in the price of the bond over the past two years?

-6.50%

-9.75%

-8.13%

-11.38%

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Question 17

Owen Inc. has a current stock price of $15.00 and is expected to pay a $0.80 dividend in one year. If Owen's equity cost of capital is 12%, what price would its stock be expected to sell for immediately after it pays the dividend?

$11.20

$12.80

$16.80

$16.00

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Question 18

Jumbuck Exploration has a current stock price of $3.00 and is expected to sell for $3.15 in one year's time, immediately after it pays a dividend of $0.28. Which of the following is closest to Jumbuck Exploration's equity cost of capital?

7.17%

8.60%

14.33%

17.91%

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Question 19

NoGrowth Industries presently pays an annual dividend of $1.20 per share and it is expected that these dividend payments will continue indefinitely. If NoGrowth's equity cost of capital is 10%, then the value of a share of NoGrowth's stock is closest to :

$9.60

$14.40

$13.20

$12.00

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Question 20

Sunnyfax Publishing pays out all its earnings and has a share price of $37. In order to expand, Sunnyfax Publishing decides to cut its dividend from $3.00 to $2.00 per share and reinvest the retained funds. Once the funds are reinvested, they are expected to grow at a rate of 13%. If the reinvestment does not affect Sunnyfax's equity cost of capital, what is the expected share price as a consequence of this decision?

$36.67

$41.90

$52.38

$62.86

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Question 21

Sultan Services has 1.2 million shares outstanding. It expects earnings at the end of the year of $6.0 million. Sultan pays out 60% of its earnings in total: 40% paid out as dividends and 20% used to repurchase shares. If Sultan's earnings are expected to grow by 5% per year, these payout rates do not change, and Sultan's equity cost of capital is 10%, what is Sultan's share price?

$12.00

$24.00

$36.00

$60.00

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Question 22

The present value (PV) of an investment is:

the amount that an investment would yield if the benefit were realized today

the difference between the cost of the investment and the benefit of the investment in dollars today

the amount you need to invest at the current interest rate to re-create the cash flow from the investment

the amount by which the cash flow of an investment exceeds or falls short of the cash flow generated by the same amount of money invested at market rate

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Question 23

A firm has an opportunity to invest $95,000 today that will yield $109,250 in one year. If interest rates are 4%, what is the net present value (NPV) of this investment?

$10,048

$11,053

$16,077

$14,250

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Question 24

An auto-parts company is deciding whether to sponsor a racing team for a cost of $1 million. The sponsorship would last for three years and is expected to increase cash flows by $570,000 per year. If the discount rate is 6.9%, what will be the change in the value of the company if it chooses to go ahead with the sponsorship?

$498,597

$747,896

$797,756

$847,615

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Question 25

Which of the following statements is FALSE?

In general, the difference between the cost of capital and the internal rate of return (IRR) is the maximum amount of estimation error in the cost of capital estimate that can exist without altering the original decision.

The internal rate of return (IRR) can provide information on how sensitive your analysis is to errors in the estimate of your cost of capital.

If you are unsure of your cost of capital estimate, it is important to determine how sensitive your analysis is to errors in this estimate.

If the cost of capital estimate is more than the internal rate of return (IRR), the net present value (NPV) will be positive.

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Question 26

Which of the following statements is FALSE?

The payback rule is useful in cases where the cost of making an incorrect decision might not be large enough to justify the time required for calculating the net present value (NPV).

The payback rule is reliable because it considers the time value of money and depends on the cost of capital.

For most investment opportunities, expenses occur initially and cash is received later.

Fifty percent of firms surveyed reported using the payback rule for making decisions.

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Question 27

The book value of a firm's equity is $100 million and its market value of equity is $200 million. The face value of its debt is $50 million and its market value of debt is $60 million. What is the market value of assets of the firm?

$150 million

$160 million

$260 million

$250 million

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Question 28

Assume Lavender Corporation has a market value of $4 billion of equity and a market value of $19.8 billion of debt. What are the weights in equity and debt that are used for calculating the WACC?

0.10 and 0.90

0.832 and 0.168

0.168 and 0.832

0.90 and 0.10

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Question 29

Outstanding debt of Home Depot trades with a yield to maturity of 8%. The tax rate of Home Depot is 30%. What is the effective cost of debt of Home Depot?

5.88%

8.00%

6.44%

5.60%

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Question 30

Assume preferred stock of Ford Motors pays a dividend of $3.50 each year and trades at a price of $30. What is the cost of preferred stock capital for Ford?

10.5%

11.7%

11.1%

10.7%

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Question 31

IBM expects to pay a dividend of $2 next year and expects these dividends to grow at 9% a year. The price of IBM is $80 per share. What is IBM's cost of equity capital?

9.20%

10.35%

10.93%

11.50%

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Question 32

The relative proportions of debt, equity, and other securities that a firm has outstanding constitute its:

capital structure

dividend expense

retained earnings

paid out capital

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Question 33

A project will give a one-time cash flow of $22,000 after one year. If the project risk requires a return of 11%, what is the levered value of the firm with perfect capital markets?

$15,855.86

$19,819.82

$23,783.78

more information needed

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Question 34

A firm requires an investment of $18,000 and will return $25,000 after one year. If the firm borrows $10,000 at 6%, what is the return on levered equity?

80%

64%

96%

112%

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Question 35

A firm requires an investment of $25,000 and will return $36,500 after 1 year. If the firm borrows $20,000 at 7%, what is the return on levered equity?

162%

202%

242%

283%

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Question 36

A firm requires an investment of $30,000 and borrows $7500 at 7%. If the return on equity is 18%, what is the firm's pretax WACC?

7.6%

18.3%

21.4%

15.3%

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