Finance

We considered different types (legal forms) of firms. Which statement on legal form is TRUE?

• A limited partnership is a limited Liability Company (LLC) without a general partner.

• In a sole proprietorship there is no separation between ownership and control.

• Sole proprietorships generate the largest fraction of total revenue in the US economy.

• Corporations are the most common firm type in the US.

A firm issued a bond with 10 years until maturity, a face value of $1,000, and a coupon rate of 7% (annual payments). The yield to maturity on this bond when it was issued was 6%. Assuming the yield to maturity remains constant, what is the price of the bond immediately after it makes its first coupon payment?

• $1,084

• $1,074

• $1,068

• $1,038

Which of the following statements related to a corporation’s objectives is FALSE?

• The agency problem for corporations implies that the objectives of the shareholders and the corporate manager do not necessarily coincide.

• Even if the corporation only makes its shareholders better off, as long as nobody else is made worse off by its decisions, increasing the shareholder value is good for society.

• Nowadays, corporations increasingly care about environmental, social and governance objectives provided these do not harm shareholder value.

• Maximizing shareholder value constitutes the sole objective of a corporate manager.

Consider two simultaneously issued bonds: a 30-year coupon bond and a 30-year zero-coupon bond with common face value of $1,000. The coupon bond’s (annual) coupon rate is 5%. Moreover, assume both bonds always exhibit the same yield to maturity. Their current yield to maturity is 4%. Which statement is FALSE?

• The 30-year coupon bond exhibits more interest rate risk than the 30-year zero-coupon bond.

• The coupon bond trades at a premium and the zero-coupon bond trades at a discount

• The price of the coupon bond exceeds the price of the zero-coupon bond.

• The coupon bond will trade at a discount in the future provided the yield to maturity exceeds 5%.

Consider portfolios consisting of two stocks only. The stock with the highest expected return also exhibits the highest standard deviation. We are interested in plotting the expected portfolio return (vertical axis) against the portfolio standard deviation (horizontal axis) for each possible portfolio. Which statement about 2-stock portfolios is FALSE?

• A two-stock portfolio that earns on average the risk free rate exists when the correlation is -1.

• The expected portfolio return does not depend on the correlation between the returns.

• The portfolio variance depends on the correlation between the returns

• The higher the correlation for a given pair of stocks, the lower will be the portfolio standard deviation given the expected portfolio return.

Assume investors only trade on public information that is easy to interpret. Which of the following statements related to the processing of information in market prices and the efficient markets hypothesis is FALSE?

• Corporate managers cannot systematically issue undervalued stocks to investors.

• A positive Net Present Value of a financial investment can only exist for a short period of time.

• Because of arbitrage stocks cannot exhibit different risk in equilibrium: the riskiest stocks will be sold and the safest stocks will be bought.

• Corporate managers cannot fool the market by changing accounting rules.

Which statement on the Net Present Value investment rule, Internal Rate of Return (IRR) and the IRR investment rule is TRUE?

• When the IRR investment rule contradicts the NPV investment rule, investment decisions should be based on the IRR investment rule.

• The NPV investment rule to evaluate a stand-alone project can only be used if all the project’s negative cash flows precede its positive cash flows.

• A project with a lifetime of 3 years can exhibit more than 3 IRR’s.

• A necessary (but insufficient) condition for the IRR investment rule to lead to the right investment decisions is that the project under consideration only exhibits one single IRR.

We considered various ways to value company equity. Which of the following statements is FALSE?

• The more cash the firm uses to repurchase shares, the less it has available to pay dividends.

• The total payout model uses the cost of equity capital as relevant discount rate to calculate the present value of the corporation’s future cash flows.

• The discounted free cash flow Model is typically applied when there is both equity and debt in the corporation’s balance sheet.

• The model of constant dividend growth is a growing annuity.

Which statement related to financial statement analysis or ratio analysis is TRUE?

• The book value of equity is equal to the number of shares outstanding times the market price per share.

• In order to calculate a company’s enterprise value, it suffices to use information from the company’s balance sheet.

• The expertise of the firm’s employees, the firm’s reputation in the marketplace or the quality of the management team are examples of the firm’s tangible assets.

• Value stocks typically exhibit lower market-to-book ratios than growth stocks.

You are about to finally book a post-corona holiday to Australia in August and have two options to pay for it. You can immediately pay €4,600 in cash to the travel agency, or you can get a travel loan that requires you to pay €100 each month for the next 4 years. Suppose you can borrow at an interest rate of 6% APR with monthly compounding. Which statement is TRUE?

• It is optimal to buy the holiday by paying in cash immediately.

• You do not need to know the Effective Annual rate (EAR) of the travel loan.

• The monthly rate which applies to the travel loan is 0.6%

• A travel loan with 4 annual payments of €1,200 and 6% APR would render the same present value as the monthly travel loan.