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Exam has two parts: Part 1 is Short
Answer/Multiple Choice) and Part 2 is Essay

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questions/mini-case questions)
Any sources must be footnoted
Total points: 120 including 20 bonus
 
 

 
PART I: MULTIPLE CHOICE / SHORT ANSWER QUESTIONS (50 points; 2 ½ points each)
1. A capital investment’s internal rate of return:
a. Changes when the cost of capital changes.
b. Must exceed the cost of capital in order for the firm to accept the investment.
c. Is similar to the yield to maturity on a bond.
d. Is equal to annual net CF divided by one half of the project’s cost when the cash flows are an
annuity.
e. Statements b and c are correct.
 
2. Risk in a revenue-producing project can best be adjusted for by
a. Ignoring it.
b. Adjusting the discount rate upward for increasing risk.
c. Adjusting the discount rate downward for increasing risk.
d. Picking a risk factor equal to the average discount rate.
e. Reducing the NPV by 10 percent for risky projects
 
3. The primary goal of a publicly-owned firm interested in serving its stockholders should be to:
a. Maximize expected total corporate profit.
b. Maximize expected EPS.
c. Minimize the chances of losses.
d. Maximize expected net income.
e. Maximize the shareholder equity.
 
4. A tender offer in M&A deal is
a. a goodwill gesture by a “white knight.”
b. a would-be acquirer’s friendly takeover attempt.
c. a would-be acquirer’s offer to buy stock directly from shareholders.
d. viewed as sexual harassment when it occurs in the workplace.
 
5. Insight Corporation’s return on equity is 15% and its dividend payout ratio is 60%. The
sustainable growth rate of the firm’s earning and dividends should be:
A). 8%
 

 
B). 9%
C). 7%
D). 6%
E). 5%
 
6. Recent M&A-related accounting changes in the United States:
a. eliminated the purchase method, allowing only the pooling-of-interests method for M&A.
b. eliminated the pooling-of-interests method, allowing only the purchase method for M&A.
c. allow for both the purchase method and the pooling-of-interests method for M&A.
d. outlawed the recording of goodwill for any merger or acquisition.
e. none of above
 
7. What’s the future value of $1,500 after 5 years if the appropriate interest rate is 6%,
compounded semiannually?
a. $1,819
b. $1,915
c. $2,016
d. $2,117
e. $2,223
 
 
 
8. An investor plans to buy a common stock and hold it for two years. The investor expects to
receive $1.5 in dividend a year and $26 from the sales of the stock at the end of year 2. If the
investor wants a 15% return (compound annually), the maximum price the investor should pay for
the stock today is roughly:
A). $24
B). $28
C). $22
D). $32
E). $26
 
 

 
9. Amador Corporation has a stock price of $24 a share. The stock’s year-end dividend is expected
to be $2 a share. The stock’s required rate of return is 12 percent and the stock’s dividend is
expected to grow at the same constant rate forever. What is the expected price of the stock six
years from now?
a. $35
b. $40
c. $25
d. $15
e. $30
 
State if flowing statements are True [T] or False [F]. Briefly justify your answers.
10. Intrinsic value and market price of equity shares are always equal.
True [T] False [F]
Justification:
 
 
 
 
 
 
11. Under DCF method, in general, higher the risk level, higher will be the discount rete.
True [T] False [F]
Justification:
 
 
 
 
 
 
12. Market value per share is expected to be lower than the book value per share in case of
profitable and growing firms.
True [T] False [F]
 

 
Justification:
 
 
 
 
 
 
13. Firms tend to be more profitable when there is higher real growth in the underlying market than
when there is lower real growth.
True [T] False [F]
Justification:
 
 
 
 
 
14. A lower discount would be applied to the cash flows of the government bond.
True [T] False [F]
Justification:
 
 
 
 
 
Questions 15-16 are related to an investment’s time value of money (TVM)
15. How much would $6,000 due in 25 years be worth today if the discount rate were 6%? Show your calculations.
 
 
 
 
 
 

 
16. At a rate of 6%, what is the future value of the following cash flow stream? Show your calculations.
Years: 0 1 2 3 4
| | | | |
CFs: $0 $75 $225 $10 $350
 
 
 
 
 
 
17.
 
a. The company’s net income in 2008 was higher than in 2007.
b. The firm issued common stock in 2008.
c. The market price of the firm’s stock doubled in 2008.
d. The firm had positive net income in both 2007 and 2008, but its net income in 2008 was
lower than it was in 2007.
e. The company has more equity than debt on its balance sheet.
 
18. Stratigent Company is not a growing company and has earnings before interests and taxes of
$20,000, interest payments to a local bank of $3,500 and pay tax at 38% rate. Investors require a 9%
return on the stock and the firm has a cost of debt of 4.5%. What’s the approximante value of the
company’s equity? Show your calculations.
 
 
 
 
 

 
 
19. A bond has a $1000 par value, 10 years to maturity, 7% coupon payments (annual), and currently
sells for $985. What’s the yield to maturity (YTM)? Please show your calculations.
 
 
 
 
 
 
20. Relaxant Inc. operates as a partnership. Now the partners have decided to convert the business
into a corporation. Which of the following statements is CORRECT?
a. The company will probably be subject to fewer regulations and required disclosures.
b. Assuming the firm is profitable, none of its income will be subject to federal income taxes.
c. Relaxant’s shareholders (the ex-partners) will now be exposed to less liability.
d. The firm’s investors will be exposed to less liability, but they will find it more difficult to
transfer their ownership.

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