1) WHAT SHOULD THE FINANCIAL MANAGER MAXIMIZE?  EXPLAIN BRIEFLY WHY.

OR

2) “WHEN DIFFERENT FIRMS LOOK AT THE SAME PROJECT, THE VALUE OF THE ASSETS IS THE SAME FOR ALL FIRMS.” TRUE OR FALSE?  EXPLAIN BRIEFLY WHY.

 

1) WHAT IS NECESSARY IN ORDER FOR THE CONCEPT OF PRESENT AND FUTURE VALUE TO EXIST?  (DESCRIBE BRIEFLY.)

OR

2) “WHEN A CAPITAL MARKET DOES NOT EXIST, IF YOU HAVE $100 TOMORROW, ITS PV TODAY WILL BE LESS THAN $100.” TRUE OR FALSE?  EXPLAIN BRIEFLY WHY.

OR

3) “WHEN A FIRM TAKES A NEW PROJECT, THE WEALTH OF STOCKHOLDERS INCREASES BY THE PV OF THE PROJECT.”  TRUE OR FALSE?  EXPLAIN BRIEFLY WHY.

 

1) “IF I PROPOSE TO TAKE SOME MONEY THAT WAS INVESTED AT THE RISKFREE RATE OF 1.5%, AND USE THAT MONEY TO BUY A STOCK, MY OPPORTUNITY COST OF CAPITAL FOR INVESTING IN THE STOCK IS 1.5%.”  TRUE OR FALSE?  EXPLAIN BRIEFLY.

OR

2) “THE NPV RULE IS GUARANTEED TO MAXIMIZE THE WEALTH OF STOCKHOLDERS.”  TRUE OR FALSE?  EXPLAIN BRIEFLY WHAT MAKES IT TRUE OR FALSE.

OR

3) “IN CAPITAL BUDGETING, YOU SHOULD DISCOUNT REAL CASHFLOWS AT THE REAL DISCOUNT RATE, INSTEAD OF DISCOUNTING NOMINAL CASHFLOWS AT THE NOMINAL DISCOUNT RATE.”  TRUE OR FALSE?  EXPLAIN BRIEFLY.

 

1) SHOULD A FIRM’S DEBT RATIO BE HIGH OR LOW?  EXPLAIN BRIEFLY.

OR

2) “REAL CASHFLOW AT TIME t MEANS THE AMOUNT OF DOLLARS YOU WILL ACTUALLY RECEIVE AT TIME t.”  TRUE OR FALSE?  EXPLAIN BRIEFLY.

OR

3) “A HIGH MARKET-TO-BOOK RATIO (MTB) IS GENERALLY GOOD, BUT YOU HAVE TO BE CAREFUL WHEN COMPARING MTB FOR A YOUNG FIRM AND A MATURE FIRM.”  TRUE OR FALSE?  EXPLAIN BRIEFLY.

 

1)  EXPLAIN BRIEFLY WHY YOU NEED TO BE CAREFUL WHEN COMPARING MARKET-TO-BOOK FOR A YOUNG FIRM AND A MATURE FIRM.

OR

2) EXPLAIN BRIEFLY WHAT IS THE POSSIBLE DOWNSIDE OF HAVING A HIGH SALES-TO-ASSETS RATIO.

OR

3) WHEN WOULD YOU COMPUTE A RATIO USING THE AVERAGE VALUE OF A BALANCE SHEET VARIABLE?

 

1) AS A COMPANY SLIDES INTO FINANCIAL DISTRESS AND APPROACHES BANKRUPTCY, WHAT TYPICALLY HAPPENS TO S-T AND L-T DEBT, AND WHY?  (KEEP IT BRIEF PLEASE!)

OR

2) EXPLAIN BRIEFLY WHAT ROLE THE LEVERAGE RATIO AND DEBT BURDEN PLAY IN DETERMINING ROE. 

OR

3) “WHEN YOU INVEST IN A STOCK YOU RECEIVE RETURN PARTLY THROUGH DIVIDENDS AND PARTLY THROUGH PRICE APPRECIATION. HOWEVER, WE STILL COMPUTE THE STOCK PRICE AS THE PRESENT VALUE OF DIVIDENDS ALONE.”  TRUE OR FALSE?  EXPLAIN BRIEFLY WHY.

 

1) A FIRM WITH A REQUIRED RETURN OF 10% PAYS OUT 65% OF ITS EARNINGS AND REINVESTS 35%.  ON THE AMOUNT REINVESTED THEY EARN AN EXPECTED RETURN OF 10%.  DOES THIS RESULT IN MEANINGFUL GROWTH?  EXPLAIN BRIEFLY.

OR

2) “A NON-CONSTANT GROWTH STOCK CAN HAVE A SHORT-TERM GROWTH RATE IN DIVIDENDS THAT IS DIFFERENT FROM THE LONG-TERM GROWTH RATE.  HOWEVER, BOTH GROWTH RATES NEED TO BE LESS THAN THE REQUIRED RETURN.”  TRUE OR FALSE?  EXPLAIN BRIEFLY WHY.

OR

3) “THE VALUE OF A STOCK CONSISTS OF THE VALUE OF EXISTING ASSETS PLUS THE PV TODAY OF THE POSITIVE NPV THE FIRM IS EXPECTED TO GENERATE IN THE FUTURE.”  TRUE OR FALSE?  NO EXPLANATION NECESSARY.

 

1) WHAT ARE THE TWO FACTORS THAT AFFECT A FIRM’S P/E RATIO?  (JUST STATE BOTH FACTORS; NO EXPLANATION NECESSARY.)

OR

2) WHAT IS THE PROBLEM IF YOU TRY TO CHOOSE BETWEEN TWO MUTUALLY EXCLUSIVE PROJECTS BY PICKING THE ONE WITH THE HIGHER IRR?  MAKE SURE YOU EXPLAIN YOUR ANSWER FULLY (BUT KEEP IT BRIEF).

OR

3) THE INCREMENTAL CASHFLOWS FOR PROJECT A – PROJECT B ARE:

          0                  1                   2                         3

                 1,500       -800              -800        -800        

THE IRR OF THESE CASHFLOWS IS 28%, WHILE THE REQUIRED RETURN IS 15%.  WOULD YOU ACCEPT PROJECT A OR PROJECT B?  EXPLAIN BRIEFLY.

 

1) A & B ARE MUTUALLY EXCLUSIVE PROJECTS, AND BOTH HAVE IRRs GREATER THAN 10%.  THE INCREMENTAL CASHFLOWS FOR B – A HAVE 2 IRRs – 8% AND 18%.  THE REQUIRED RETURN IS 10%.  WHEN WOULD YOU PICK A OVER B?  EXPLAIN BRIEFLY.

OR

2) “WHEN THERE IS A LIMITED CAPITAL BUDGET (CAPITAL RATIONING), YOU ARE GUARANTEED TO MAKE THE CORRECT INVESTMENT DECISION IF YOU PICK PROJECTS IN ORDER OF PROFITABILITY INDEX (HIGHEST P.I. FIRST).”  TRUE OR FALSE?  EXPLAIN BRIEFLY.

OR

3) “EVEN IF A PROJECT IS DEBT-FINANCED, WE DO NOT SUBTRACT INTEREST WHEN WE COMPUTE THE PROJECT’S OPERATING CASHFLOWS.”  TRUE OR FALSE?  EXPLAIN BRIEFLY.

 

BONUS QUESTION: DRAW THE NPV CURVES FOR THE TWO PROJECTS DESCRIBED IN Q. 1, ASSUMING IRRA > IRRB.

 

1) WE DON’T SUBTRACT INTEREST IN COMPUTING A PROJECT’S OPERATING CASHFLOWS EVEN WHEN THE PROJECT IS DEBT-FINANCED.  EXPLAIN WHY.

OR

2) “YOU INVESTED $60,000 IN A PROJECT ONE YEAR AGO.  IF THE PROJECT IS ABANDONED TODAY, $20,000 IS RECOVERABLE.  IN COMPUTING NPV TODAY, YOU WILL THEREFORE CHARGE THE PROJECT $40,000 AT TIME –1.”  WHAT PART OF THIS IS TRUE (IF ANY) AND WHAT PART IS FALSE (IF ANY)?  EXPLAIN BRIEFLY.

OR

3) “IF YOU HAVE TWO EXISTING MACHINES THAT YOU ARE CONSIDERING REPLACING TODAY, YOU WILL EITHER REPLACE BOTH OR NONE.” TRUE OR FALSE?  (NO EXPLANATION NECESSARY.) 

 

1)  IN PRACTICE, WHY IS IT THAT A PROJECT’S OPERATING CASHFLOWS WILL NEVER GROW AT THE INFLATION RATE?  EXPLAIN BRIEFLY.

OR

2) WHEN WE CHOOSE BETWEEN TWO MACHINES WITH UNEQUAL LIVES, DO WE USE REAL CASHFLOWS OR NOMINAL?  EXPLAIN WHY.

OR

3) IF THERE ARE TWO EXISTING MACHINES TO BE REPLACED TODAY, WHAT IS THE REASON WHY YOU MAY SOMETIMES CHOOSE TO REPLACE JUST ONE MACHINE (i.e. GET ONE NEW MACHINE AND KEEP ONE OLD MACHINE)?  EXPLAIN BRIEFLY.       

 

1)  “IF STOCK A HAS TWICE THE SYSTEMATIC RISK OF STOCK B, THEN IT SHOULD HAVE TWICE THE REQUIRED RETURN.”  TRUE OR FALSE?  EXPLAIN BRIEFLY.

OR

2) WHEN WE DEFINE THE SYSTEMATIC RISK OF A STOCK, WHY DO WE DO IT WITH REFERENCE TO THE VARIANCE OF THE MARKET PORTFOLIO?  EXPLAIN BRIEFLY.

OR

3) OIL DRILLING IS A BUSINESS WITH HIGH TOTAL RISK, BUT THE BETA IS LIKELY TO BE VERY SMALL.  EXPLAIN BRIEFLY WHY.  

 

1) WHY ARE INVESTORS WILLING TO HOLD A NEGATIVE BETA STOCK EVEN THOUGH THE EXPECTED RETURN IS LESS THEN THE RISK-FREE RATE?  EXPLAIN BRIEFLY.

OR

2) IN AN EVENT STUDY, WHAT ARE THE TWO THINGS WE DO TO MAKE SURE WE ISOLATE JUST THE EFFECT OF THE EVENT WE WANT TO STUDY? (JUST LIST BOTH; NO EXPLANATIONS REQUIRED.)

OR

3) “THE SHORT-TERM RF IS THE YIELD ON 3-MONTH T-BILLS; THE LONG-TERM RF IS THE YIELD ON LONG-TERM T-BONDS” TRUE OR FALSE?  EXPLAIN BRIEFLY.

 

1) “THE AVERAGE HISTORICAL YIELD ON 20-YEAR T-BONDS IS GREATER THAN THAT ON 3-MONTH T-BILLS, BUT THE AVERAGE HISTORICAL LONG-TERM RF IS THE SAME AS THE AVERAGE HISTORICAL SHORT-TERM RF.” TRUE OR FALSE?  EXPLAIN BRIEFLY.

OR

2) EXPLAIN HOW, AS YOU INCREASE A FIRM’S DEBT RATIO, THE WEIGHTED AVERAGE OF DEBT BETA AND EQUITY BETA CAN STAY CONSTANT EVEN THOUGH BOTH BETAS INCREASE.

OR

3) “EVEN THOUGH YOU COME UP WITH A POSITIVE NPV FOR A PROJECT, YOU DO NOT NECESSARILY ACCEPT THE PROJECT RIGHT AWAY”.  TRUE OR FALSE?  EXPLAIN WHY.

 

 

1) DESCRIBE BRIEFLY WHAT THE TERM “REAL OPTION” MEANS.

OR

2) WE USE DECISION TREES TO DO TWO DIFFERENT THINGS.  STATE EITHER ONE.

OR

3) “THIS COURSE REALLY SUCKS.”  TRUE OR FALSE?  NO EXPLANATIONS NECESSARY.

 

1) “THE GOLD PRICE TODAY IS $550 PER OUNCE; IF YOU EXPECT TO PRODUCE 60 OUNCES AT TIME 1, AND THE REQUIRED RETURN FOR GOLD IS 10%, THE PV TODAY OF YOUR FUTURE GOLD IS $30,000.” TRUE OR FALSE?  EXPLAIN WHY.

OR

2) EXPLAIN BRIEFLY WHAT MAKES INFORMATION VALUE (OR WHAT DETERMINES THE VALUE).

OR

3) EXPLAIN VERY BRIEFLY WHY STOCK PRICES SHOULD FOLLOW A RANDOM WALK.

 

1) EXPLAIN VERY BRIEFLY WHAT IT MEANS TO PERFORM A REALITY CHECK FOR A PROJECT WHOSE ESTIMATED NPV IS POSITIVE, AND WHY YOU DO IT.

OR

2) WHY WOULD STOCKHOLDERS AND MANAGERS HAVE DIFFERENT ATTITUDES TO BANKRUPTCY RISK?  (EXPLAIN BRIEFLY.)

OR

3) WHEN YOU DO AN EVENT STUDY FOR A GOOD NEWS ANNOUNCEMENT, WHAT SHAPE SHOULD THE CAR GRAPH HAVE IF THE MARKET IS EFFICIENT?  EXPLAIN BRIEFLY WHY.

 

1) “THE LITERAL IMPLICATION OF MARKET EFFICIENCY IS THAT ALL SECURITIES ARE ALWAYS CORRECTLY PRICED.  IN PRACTICE, THERE MAY BE MIS-PRICING FROM DAY TO DAY.  HOWEVER, FOR ALL PRACTICAL PURPOSES, MARKETS ARE STILL EFFICIENT.” TRUE OR FALSE?  EXPLAIN BRIEFLY.

OR

2) WHAT DOES THE DEMAND CURVE FOR STOCKS LOOK LIKE, AND WHY?  (EXPLAIN BRIEFLY.)

OR

3) “IN THE CONTEXT OF THE CAPITAL STRUCTURE DECISION, MANAGERS SHOULD NO LONGER TRY TO MAXIMIZE THE STOCK PRICE.” TRUE OR FALSE?  EXPLAIN BRIEFLY.

 

1) WHAT ARE PERFECT CAPITAL MARKETS?  (LIST ALL 3 CONDITIONS.)

OR

2) “IF A FIRM CHOOSES TO BECOME LEVERED, A STOCKHOLDER WHO PREFERS RISKIER INVESTMENTS WILL SIMPLY BUY EQUAL PROPORTIONS OF THE FIRM’S DEBT AND EQUITY TO CREATE THE KIND OF INVESTMENT SHE WANTS.”  TRUE OR FALSE? (NO EXPLANATION REQUIRED.)

OR

3) “WHEN WE CONSIDER JUST CORPORATE TAXES ALONE, WACC DECREASES AS A FIRM INCREASES LEVERAGE.”  TRUE OR FALSE?  EXPLAIN BRIEFLY WHY.

 

1) IN A WORLD WITH CORPORATE TAXES ALONE, DRAW A GRAPH TO SHOW HOW Re AND WACC CHANGE AS D/V INCREASES (COMPARED TO HOW THEY WOULD CHANGE IN PERFECT CAPITAL MARKETS).

OR

2) EXPLAIN BRIEFLY WHY PERSONAL TAXES ON EQUITY INCOME ARE LOWER THAN PERSONAL TAXES ON DEBT INCOME. 

OR

3) EXPLAIN BRIEFLY WHY A LEVERED FIRM MAY SOMETIMES REJECT A POSITIVE NPV PROJECT.

 

1) “CAPITAL STRUCTURE IS IRRELEVANT IN PCM BECAUSE WE ASSUME THERE’S NO BANKRUPTCY.  IF  BANKRUPTCY WERE TAKEN INTO ACCOUNT, THERE WOULD BE A MARGINAL COST OF ISSUING DEBT, AND CAPITAL STRUCTURE WOULD  BE RELEVANT.”  TRUE OR FALSE?  EXPLAIN BRIEFLY.

OR

2) “A LEVERED FIRM MAY ACCEPT A NEGATIVE NPV PROJECT IF IT’S IN FINANCIAL DISTRESS AND THE PROJECT’S CASHFLOWS ARE NEGATIVELY CORRELATED WITH EXISTING CASHFLOWS.”  TRUE OR FALSE?  EXPLAIN BRIEFLY.

OR

3) “FIRMS WITH A HIGHER PROPORTION OF INTANGIBLE ASSETS SHOULD HAVE A HIGHER DEBT RATIO.”  TRUE OR FALSE?  EXPLAIN BRIEFLY.

 

1) “EVEN IF COFD ARE IGNORED, THE VALUE OF THE LEVERED FIRM WILL NOT KEEP INCREASING AS IT ISSUES MORE AND MORE DEBT.”  TRUE OR FALSE?  EXPLAIN BRIEFLY.

OR

2) CAREFULLY DRAW A GRAPH TO SHOW HOW, IN THE REAL WORLD, THE MB AND MC OF ISSUING DEBT CHANGE AS THE DEBT RATIO INCREASES.  ON THE GRAPH, MARK THE OPTIMAL DEBT RATIO.

OR

3) “IF A FIRM NEEDS TO RAISE $1,000,000 IN NEW CAPITAL TO FINANCE A PROJECT, AND ISSUE COSTS ARE 5%, THE ISSUE COST WILL BE $50,000.”  TRUE OR FALSE?  EXPLAIN BRIEFLY.

 

1) “IF A PROJECT REQUIRES INVESTMENT OF $100,000, AND $25,000 COMES FROM INTERNALLY GENERATED FUNDS, $35,000 FROM NEW EQUITY AND $40,000 FROM NEW DEBT, THE PROJECT HAS A DEBT-TO-VALUE RATIO OF 0.4 (IF ISSUE COSTS ARE ASSUMED TO BE ZERO).”  TRUE OR FALSE?  EXPLAIN BRIEFLY.

OR

2) “WACC FOR A PROJECT CANNOT BE COMPUTED TILL YOU HAVE FIRST FIGURED OUT THE NPV OF THE PROJECT.”  TRUE OR FALSE?  EXPLAIN BRIEFLY.

OR

3) “IF YOU WANT TO CHANGE JUST YOUR DIVIDEND POLICY AND NOTHING ELSE (A PURE DIVIDEND POLICY CHANGE), DIVIDEND INCREASES HAVE TO BE FINANCED BY ISSUING NEW SHARES.”  TRUE OR FALSE?  EXPLAIN BRIEFLY.

 

1) IN PRACTICE, WHY DOES A FIRM’S DIVIDEND PAYOUT RATIO FLUCTUATE OVER TIME?

OR

2) EXPLAIN BRIEFLY WHY DIVIDENDS HAVE INFORMATION CONTENT.

OR

3) “CORPORATIONS PREFER DIVIDEND INCOME TO CAPITAL GAINS INCOME.” TRUE OR FALSE?  EXPLAIN WHY.

 

 

1) IN THE BLACK-SCHOLES FORMULA, WHAT DOES N(d1) REPRESENT?  EXPLAIN FULLY.

OR

2)“IT MAY MAKE SENSE TO TAKE A NEGATIVE NPV PROJECT TODAY IF THERE IS A FOLLOW-UP PROJECT ‘TOMORROW’ WHOSE EXPECTED NPV IS POSITIVE.”  TRUE OR FALSE?   EXPLAIN BRIEFLY.

OR

3) “I’M REALLY LOOKING FORWARD TO THE FINAL EXAM.”

·        TRUE

·        FALSE

·        YEAH, RIGHT!