Mathematics and Statistics

1-The beta of the Treasury Bills is

True/ False?

2-If the NPV of a project is positive, it indicates that its

Profitability index will be above 0.

True/ False?

3-In order to generate a positive NPV project, a firm must

have competitive advantage.

4-Cyclical firms, with Revenues & Earnings strongly

dependent on state of business cycle tend to have high

betas.

True/ False?

5-The Prospect theory states that investors are particularly

averse to making even small losses and need a high

return to compensate for it.

True/ False?

6-If two investments have the same variance, then investors

would prefer the investment with lower expected

return.

True/False?

7-If the average annual rate of return for common stocks is

12%, and for treasury bills it is 4.0%, the market risk

premium is 8%?

True/False?

8-Correlation coefficients between any two investments can

range from -1 to +1.

True/ False?

9-If two investments offer the same expected return, most

investors would prefer the investment with higher

variance.

True/ False?

10- Beta of a stock or portfolio is a measure of market

risk.

True/ False?

11-Depreciation acts as a tax shield in reducing the

taxes. True/ False?

12-The NPV of a project decreases as discount rate used to

discount Cash Flows decreases.

True/ False?

13-Diversification reduces risk because prices of different

securities do not move exactly together.

True/

False?

14-If a Bond’s Coupon rate is lower than its Yield to maturity

(YTM), then the Bond will quote at a premium.

True/ False?

15-When calculating cash flows, it is important to consider

them on an incremental basis.

True/ False?

16-The risk that cannot be eliminated by diversification is

called market risk. True/ False?

17=A Bond with a ‘AAA’ rating can be called a Junk Bond.

True/ False?

18-Working capital is needed additional investment in the

project and should considered for cash flow estimation.

True/ False?

19-When resources are limited, the Profitability Index (PI)

provides a tool for selecting among various project combinations and alternatives.

True/False?

20-Generally high growth stocks pay high dividends.

True/ False?

21- Generally, post-audits are conducted for large projects:

A. shortly after the completion of the project

B. after several years after the completion of the project

C. shortly after the project has begun to operate

D. well before the start of the project

22- Which of the following statements most appropriately describes “Scenario Analysis”.

A. it looks at the project by changing one variable at a time

B. it provides the break-even level of sales for the project

C. it looks at different but consistent combination of variables

D. each of the above statements describes “Scenario Analysis” correctly

23- Economic rents are:

A. Returns that are in excess of the opportunity cost of capital

B. Returns that are equal to the opportunity cost of the capital

C. Returns that are less than the opportunity cost of capital

D. None of the above

24- The security market line (SML) is the graph of:

A. Expected rate on investment (Y-axis) vs. variance of return

B. Expected return on investment vs. standard deviation of return

C. Expected rate of return on investment vs. beta

D. A and B

25- The capital asset pricing model (CAPM) states that:

A. The expected risk premium on an investment is proportional to its beta

B. The expected rate of return on an investment is proportional to its beta

C. The expected rate of return on an investment depends on the risk-free rate and the market rate of return

D. The expected rate of return on an investment is dependent on the risk-free rate

26- The beta of the market portfolio is:

A. +0.50

B. +1.00

C. -1.00

D. 0.00

27- When stock options are given to managers as incentives, typically the exercise price of these options is set equal to the firm’s:

A. stock price on the day the options are granted.

B. expected stock price in one year from the day the options are granted.

C. expected stock price on the expiration date of the options.

D. none of the above.

28- According to Michael Porter, managers can secure a competitive advantage for their firm within its industry by:

A. cost leadership only.

B. product differentiation only.

C. focus on a particular market niche only.

D. All or any of the above 3

29- The accounting break-even point occurs when:

A. the total revenue line cuts the fixed cost line

B. the present value of inflows line cuts the present value of outflows line

C. the total revenue line cuts the total cost line

D. none of the above

30- The distribution of returns, measured over a short interval of time, like daily returns, can be approximated by:

A. Normal distribution

B. Lognormal distribution

C. Binomial distribution

D. none of the above

31- A stock with a beta of 1. 25 would be expected to:

A. Increase in returns 25% faster than the market in up markets

B. Increase in returns 25% faster than the market in down markets

C. Increase in returns 125% faster than the market in up markets

D. Increase in returns 125% faster than the market in down markets

32- Everything else remaining the same, an increase in fixed costs:

I) increases the break-even point based on NPV

II) increases the accounting break-even point

III) decreases the break-even point based on NPV

IV) decreases the accounting break-even point

A. I and III only

B. III and IV only

C. II and III only

D. I and II only

33-Investing in gold is like:

I) Investing in a stock that pays quarterly dividends

II) Investing in a stock that pays annual dividends

III) Investing in Treasury bonds

IV) Investing in a stock that pays no dividends

A. I only

B. II only

C. I,II, and III only

D. IV only

34-The following are some of the competitive advantages that can last longer:

I) proprietary technology

II) protected markets with high barriers to entry by other firms

III) strategic assets that competitors cannot easily duplicate

A. I only

B. II only

C. I and II only

D. I, II and III

35-The following are advantages of using EVA (Economic

Value Added) as a measure of performance except:

A. EVA is a substitute for explicit monitoring by top management

B. EVA makes the cost of capital visible to the operating management hence reduce capital employed

C. EVA does not measure present value

D. EVA highlights the parts of business that are not performing

36-One important implication of the efficient markets

hypothesis is that:

A. investors should hold a diversified portfolio and avoid active trading.

B. investors can benefit by engaging in day trading.

C. investors should trade actively help to ensure the highest overall gain in their portfolios.

D. all of the above

37-Discounted Cash Flow (DCF) analysis generally:

I) assumes that firms hold assets passively when it invests in a project

II) considers opportunities to expand a project if the project is successful

III) considers opportunities to abandon a project if the project is a failure

A. I only

B. II only

C. II and III only

D. I, II, and III

38-Project analysis, in addition to NPV analysis, includes the following procedures:

I) Sensitivity analysis

II) Break-even analysis

III) Monte Carlo simulation

IV) Scenario Analysis

A. I only

B. I and II only

C. I, II, and III only

D. I, II, III, and IV

39-Which of the following statement(s) is/are true if the efficient market hypothesis holds?

I) It implies perfect forecasting ability

II) It implies market is irrational

III) It implies that prices follow a particular pattern

IV) It implies that prices reflect all available information

A. I only

B. II only

C. I and III only

D. IV only

40-Variance of stock returns is:

A. always negative

B. always positive

C. sometimes positive sometimes negative

D. zero

41-You are given the following data for year1:

Revenues = $100 million, Fixed costs = $30million;

Total variable costs = $50 million; Depreciation = $10 million; Tax rate = 30%.

Calculate the after tax cash flow for the project for year-1.

(do not enter $ millions in the answer)

42-The covariance between stock A and stock B is 0.01.

The standard deviation of stock A is 10% and that of stock B is 20%.

Calculate the correlation coefficient between the two securities.

43-The covariance between YOHO stock and the market index S&P 500 is 0.05.

The standard deviation of the stock market is 20%.

What is the beta of YOHO?

44-If you invest $10,000 at an annual interest rate of 9%, how much will you have at the end of 8 years (interest compounded annually)?

(do not indicate $, commas and decimals in your Final answers)

45-BilhamInc has an Earnings per Share (EPS) of $5. It declares a Dividend of $3 per share (DPS).

What is the company’sPloughback Ratio (PBR)?

(indicate your answer in decimal, not as %; eg., if your answer is 0.2, indicate your answer as 0.2, not 20%)

46-If the beta of Exxon Mobil is 0.60, risk-free rate is 3% and the market rate of return is 11%, calculate the expected rate of return from Exxon.

(do not include % in your answer)

47-A 3-year US Government Bond has a Face Value of $100 and a Coupon rate of 6% paid annually. If the current Interest rate is 7% pa, what would be the Bond’s Price?

(do not include $ sign in your answer; give your answer in 2 decimals)

48-Suppose you invest 60% of your portfolio in Bayer and 40% in Delta Airlines.

The Standard Deviations of their annualized daily returns are 20% & 16%, respectively.

Assume a correlation coefficient of 0.40. Calculate Portfolio variance.

(give your answer in 2 decimals)

49-An investor is trying to assess the likely return from a stock he is considering to invest.

He polls with 3 analysts, who indicate the likely returns over the investment horizon and the corresponding probabilities (given in table below).

Calculate the Standard Deviation of Returns for the stock

(give your answer in 2 decimals)

Returns % Probability %

6

40

8 35

10 25

1

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