Course Introduction
Financial Economics
Final Exam Questions
Financial Economics explores the principles and analytical frameworks underlying the functioning of financial markets and institutions, with a focus on the allocation of resources under uncertainty. The course covers topics such as asset pricing, portfolio theory, market efficiency, and the role of information in financial decision-making.
Students examine the behavior of investors, the factors influencing financial instruments valuations, and the implications of financial regulation and market structure. Through theoretical models and empirical analysis, the course equips learners with a comprehensive understanding of how financial markets operate and how economic theory is applied to real-world financial problems.
Recommended Textbook
Corporate Finance The Core 4th Edition by Jonathan Berk
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Page 2
Chapter 1: The Corporation
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Q1) If you buy shares of Coca-Cola on the secondary market:
A)Coca-Cola receives the money because the company has issued new shares.
B)you buy the shares from another investor who decided to sell the shares.
C)you buy the shares from the New York Stock Exchange.
D)you buy the shares from the Federal Reserve.
Answer: B
Q2) The largest stock market in the world by volume is:
A)the London Stock Exchange.
B)NASDAQ.
C)the American Stock Exchange.
D)the New York Stock Exchange.
Answer: B
Q3) If you buy shares of Coca-Cola on the primary market:
A)Coca-Cola receives the money because the company has issued new shares.
B)you buy the shares from another investor who decided to sell the shares.
C)you buy the shares from the New York Stock Exchange.
D)you buy the shares from the Federal Reserve.
Answer: A
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Chapter 2: Introduction to Financial Statement Analysis
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Sample Questions
Q1) Perrigo's book value of equity is closest to:
A)$952.16 million
B)$3580.14 million
C)$4168.06 million
D)$4425.15 million
Answer: A
Q2) The DuPont Identity expresses the firm's ROE in terms of:
A)profitability,asset efficiency,and leverage.
B)valuation,leverage,and interest coverage.
C)profitability,margins,and valuation.
D)equity,assets,and liabilities.
Answer: A
Q3) If Moon Corporation's gross margin declined,which of the following is TRUE?
A)Its cost of goods sold increased.
B)Its cost of goods sold as a percent of sales increased.
C)Its sales increased.
D)Its net profit margin was unaffected by the decline.
Answer: B
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4
Chapter 3: Financial Decision Making and the Law of One
Price
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Sample Questions
Q1) Assuming you currently have 10,000 Bbls of WTI crude,the added benefits to you if you were to sell the 10,000 Bbls of WTI crude and use the proceeds to purchase and refine ANS crude is closest to:
A)$730,600
B)$770,000
C)$40,800
D)$43,308
Answer: D
Q2) Walgreen Company (NYSE: WAG)is currently trading at $48.75 on the NYSE.Walgreen Company is also listed on NASDAQ and assume it is currently trading on NASDAQ at $48.50.Does an arbitrage opportunity exists and if so how would you exploit it and how much would you make on a block trade of 100 shares?
A)No,no arbitrage opportunity exists.
B)Yes,buy on NASDAQ and sell on NYSE,make $25.
C)Yes,buy on NYSE and sell on NASDAQ,make $25.
D)Yes,buy on NASDAQ and sell on NYSE,make $250.
Answer: B
Q3) The price per share of the ETF in a normal market is:
Answer: Value of ETF = 2 × 121.57 + 3 × 36.59 + 3 × 3.15 = $362.36
Page 5
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Chapter 4: The Time Value of Money
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Sample Questions
Q1) Suppose that you deposit $10,000 in an account that pays 6% interest and you want to know how much will be in your account at the end of 10 years.To solve this problem in Microsoft Excel,you would use which of the following Excel formulas?
A)=FV(.06,10000,0,10)
B)=PV(.06,10000,0,10)
C)=FV(.06,10,0,10000)
D)=PV(.06,10,0,10000)
Q2) Assuming that costs continue to increase an average of 4% per year,tuition and other costs for one year for this student in 18 years when she enters college will be closest to:
A)$12,500
B)$21,500
C)$320,568
D)$25,323
Q3) The future value at retirement (age 65)of your savings is:
Q4) Assume that college costs continue to increase an average of 4% per year and that all her college savings are invested in an account paying 7% interest.Draw a timeline that details the amount of money she will need to have in the future four each of her four years of her undergraduate education.
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Chapter 5: Interest Rates
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Q1) If the current inflation rate is 4.2% and you are earning a real rate of return on an investment of 3.8%,then the nominal rate on this investment is closest to:
A)3.8%
B)4.2%
C)8.0%
D)8.2%
Q2) If the current inflation rate is 5%,then the nominal rate necessary for you to earn an 8% real interest rate on your investment is closest to:
A)13.0%
B)13.4%
C)4.9%
D)3.0%
Q3) The total amount of principal that Dagny will pay during the first month of her mortgage is closest to:
A)$246
B)$446
C)$1800
D)$2245
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7
Chapter 6: Valuing Bonds
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Sample Questions
Q1) Which of the following statements is FALSE?
A)Bond traders typically quote bond prices rather than bond yields .
B)Treasury bills are zero-coupon bonds.
C)Zero-coupon bonds always trade at a discount.
D)The yield to maturity is typically stated as an annual rate by multiplying the calculated YTM by the number of coupon payment per year,thereby converting it to an APR.
Q2) The price today of a two-year default-free security with a face value of $1000 and an annual coupon rate of 5% is closest to:
A)$1002.78
B)$1003.31
C)$1028.50
D)$1028.61
Q3) Assuming that Luther's bonds receive a AAA rating,the price of the bonds will be closest to:
A)$1021
B)$1014
C)$1000
D)$937
Q4) Plot the zero-coupon yield curve (for the first five years).
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Chapter 7: Investment Decision Rules
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Sample Questions
Q1) When using the internal rate of return (IRR)investment rule,we compare:
A)the average return on the investment opportunity to returns on all other investment opportunities in the market.
B)the average return on the investment opportunity to returns on other alternatives in the market with equivalent risk and maturity.
C)the NPV of the investment opportunity to the average return on the investment opportunity.
D)the average return on the investment opportunity to the risk-free rate of return.
Q2) Assume that projects Alpha and Beta are mutually exclusive.The correct investment decision and the best rational for that decision is to:
A)invest in project Beta since NPV<sub>Beta</sub> > 0.
B)invest in project Alpha since NPV<sub>Beta</sub> < NPV<sub>Alpha.</sub>
C)invest in project Beta since IRR<sub>B</sub> > IRR<sub>A.</sub>
D)invest in project Beta since NPV<sub>Beta</sub> > NPV<sub>Alpha </sub>> 0.
Q3) What is one of the incremental IRRs for project B over project A? Would you feel comfortable basing your decision on the incremental IRR?
Q4) If the discount rate for project A is 16%,then what is the NPV for project A?
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Page 9
Chapter 8: Fundamentals of Capital Budgeting
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Q1) The free cash flow for the last year of Epiphany's project is closest to:
A)$53,000
B)$38,000
C)$35,000
D)$43,000
Q2) Construct a simple income statement showing the incremental EBIT and the incremental unlevered net income for all three years of the Sisyphean Companies project.
Q3) Assuming that Casa Grande Farms depreciates these tractors using MACRS depreciation method for three-year property starting immediately,then the annual depreciation tax shield in year 2 is closest to:
A)20,785
B)27,991
C)84,000
D)180,000
Q4) The NPV for Epiphany's Project is closest to:
A)$4825
B)$39,000
C)$11,946
D)$20,400
Page 10
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Chapter 9: Valuing Stocks
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Sample Questions
Q1) Which of the following statements is FALSE?
A)Future dividend payments and stock prices are not known with certainty; rather these values are based on the investor's expectations at the time the stock is purchased.
B)The capital gain is the difference between the expected sale price and the purchase price of the stock.
C)The sum of the dividend yield and the capital gain rate is called the total return of the stock.
D)We divide the capital gain by the expected future stock price to calculate the capital gain rate.
Q2) If CCM has $150 million of debt and 12 million shares of stock outstanding,then the share price for CCM is closest to:
A)$49.50
B)$11.25
C)$20.50
D)$22.75
Q3) Calculate the enterprise value for DM Corporation.
Q4) If DM has $500 million of debt and 14 million shares of stock outstanding,then what is the price per share for DM Corporation?
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Page 11
Chapter 10: Capital Markets and the Pricing of Risk
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Sample Questions
Q1) Suppose that KAN's beta is 1.5.If the market risk premium is 8% and the risk-free interest rate is 4%,then then expected return for KAN stock is?
A)8.0%
B)16.0%
C)13.5%
D)10.0%
Q2) Suppose that you want to use the 10 year historical average return on the Market to forecast the expected future return on the Market.Calculate the 95% confidence interval for your estimate of the expect return.
Q3) If the market risk premium is 6% and the risk-free rate is 4%,then the expected return of investing in Ford Motor Company is closest to:
A)10.0%
B)16.2%
C)17.1%
D)20.6%
Q4) Using the data provided in the table,calculate the average annual return,the variance of the annual returns,and the standard deviation of the average returns for the market from 2000 to 2009.
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Page 12
Chapter 11: Optimal Portfolio Choice and the Capital Asset Pricing Model
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Sample Questions
Q1) The covariance between Stock X's and Stock Z's returns is closest to:
A)0.05
B)0.06
C)0.10
D)0.71
Q2) The beta on Peter's Portfolio is closest to:
A)0.7
B)0.8
C)1.8
D)1.0
Q3) The volatility of your investment is closest to:
A)40%
B)20%
C)30%
D)24%
Q4) The beta for the market portfolio is closest to:
A)1
B)0
C)Unable to answer this question without knowing the markets expected return
D)Unable to answer this question without knowing the markets volatility
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Chapter 12: Estimating the Cost of Capital
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Q1) Suppose that you are holding a market portfolio and you have invested $18,000 in Taggart Transcontinental.The number of shares of Wyatt Oil that you hold is closest to:
A)90 shares
B)460 shares
C)615 shares
D)770 shares
Q2) Luther's unlevered cost of capital is closest to:
A)7.0%
B)9.8%
C)10.8%
D)11.5%
Q3) The value of the gas and convenience store division is closest to:
A)$4500
B)$6000
C)$8600
D)$15,000
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Page 14
Chapter 13: Investor Behavior and Capital Market Efficiency
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Q1) If investors have relative wealth concerns,they care most about:
A)the return on their portfolio relative to their overall current wealth.
B)the performance of their portfolio relative to that of their peers.
C)their current portfolio performance relative to their past portfolio performance.
D)the performance of their current wealth relative to their past wealth.
Q2) Assume that you are an investor with the disposition effect and you bought each of these stocks in January.Suppose that it is currently the end of March,which stocks are you most inclined to sell?
1.Taggart Transcontinental
2.Rearden Metal
3.Wyatt Oil
4.Nielson Motors
A)1 only
B)1 and 3 only
C)2 only
D)2 and 4 only
Q3) Explain why the market portfolio proxy may not be efficient.
Q4) What does the existence of a positive alpha investment strategy imply?
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15
Chapter 14: Capital Structure in a Perfect Market
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Sample Questions
Q1) What is Luther's enterprise value?
A)$16 billion
B)$10.5 billion
C)$24 billion
D)$20 billion
Q2) Which of the following is NOT one of Modigliani and Miller's set of conditions referred to as perfect capital markets?
A)All investors hold the efficient portfolio of assets.
B)There are no taxes,transaction costs,or issuance costs associated with security trading.
C)A firm's financing decisions do not change the cash flows generated by its investments,nor do they reveal new information about them.
D)Investors and firms can trade the same set of securities at competitive market prices equal to the present value of their future cash flows.
Q3) Show mathematically that the stock price of Rockwood does not depend on whether they issue new stock or borrow to fund their expansion.
Q4) What is a market value balance sheet and how does it differ from a book value balance sheet?
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Page 16
Chapter 15: Debt and Taxes
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Q1) The interest rate tax shield for Kroger in 2006 is closest to:
A)$187 million
B)$332 million
C)$534 million
D)$179 million
Q2) The present value of LCMS' interest tax shield is closest to:
A)$45.5 million
B)$20.0 million
C)$24.5 million
D)$35.0 million
Q3) The total amount available to payout to all the investors in Kroger in 2006 is closest to:
A)$990 million
B)$1525 million
C)$1500 million
D)$2035 million
Q4) Calculate the interest tax shield,the total amount available to payout to all the investors,and the income that would be available to equity holders if Kroger was not levered for the year 2004.
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Chapter 16: Financial Distress,managerial Incentives,and Information
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Q1) What is the overall expected payoff under JR's new riskier business strategy?
A)$4 million
B)$11 million
C)$20 million
D)$15 million
Q2) Which of the following is NOT an indirect cost of bankruptcy?
A)Legal fees
B)Delayed liquidation
C)Costs to creditors
D)Loss of customers
Q3) Assuming your cost of capital is 6 percent,the present value of your expected wage if you accept Wyatt Oil's offer is closest to:
A)$138,000
B)$140,000
C)$144,000
D)$150,000
Q4) Suppose that MI has zero-coupon debt with a $140 million face value due next year.Calculate the value of levered equity,the value of debt,and the total value of MI with leverage.
Q5) List five general categories of indirect costs associated with bankruptcy.
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Chapter 17: Payout Policy
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Q1) Wyatt Oil's current stock price is closest to:
A)$11.00
B)$12.50
C)$14.00
D)$17.50
Q2) Omicron's enterprise value is closest to:
A)$500 million
B)$900 million
C)$450 million
D)$400 million
Q3) Assume that Omicron uses the entire $50 million to repurchase shares.The number of shares that Omicron will have outstanding following the repurchase is closest to:
A)8.8 million
B)1.2 million
C)9.0 million
D)8.9 million
Q4) Calculate the effective tax disadvantage for retaining cash in 1999,2001,and 2005.
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Chapter 18: Capital Budgeting and Valuation With Leverage
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Q1) Luther's Unlevered cost of capital is closest to:
A)8.0%
B)8.5%
C)9.0%
D)6.4%
Q2) Omicron's Unlevered cost of capital is closest to:
A)8.75%
B)7.10%
C)9.60%
D)7.50%
Q3) Assuming that to fund the investment Taggart will take on $250 million in permanent debt and assuming Taggart will incur a 2% (after-tax)underwriting fee on the new debt issue,the NPV of Taggart's new rail line is closest to:
A)$195 million
B)$200 million
C)$235 million
D)$240 million
Q4) Calculate the present value of the interest tax shield provided by Omicron's new project.
Q5) Calculate the debt capacity of Omicron's new project for years 0,1,and 2.
Page 20
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Chapter 19: Valuation and Financial Modeling: a Case Study
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Q1) Assuming that Ideko has a EBITDA multiple of 8.5,then the continuation equity value of Ideko in 2010 is closest to:
A)$181.7 million
B)$272.8 million
C)$152.8 million
D)$301.7 million
Q2) With the proper changes it is believed that Ideko's credit policies will allow for an account receivables days of 60.The forecasted accounts receivable for Ideko in 2006 is closest to:
A)$19,690
B)$16,970
C)$22,710
D)$14,525
Q3) The free cash flow to equity in 2008 is closest to:
A)-5005
B)-1755
C)5575
D)9995
Q4) What is the purpose of the sensitivity analysis?
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