1. I am investing NOK 15,000 at a 13% annual interest rate, paid twice a year for 7 years. My wealth at the end of the 7
years is:
(a) NOK 31,472
(b) NOK 36,223
(c) NOK 39,413
(d) NOK41,111
(e) I choose not to answer.
2. As a legacy from your great uncle Bord Odd Hanson's last will and testament you will receive an annuity of NOK
100,000, which will begin payment in I years time and last for 4 years. Assume your discount rate is 16%. The
present value of the annuity is:
(a) NOK 229,832
(b) NOK 279,818
(c) NOK 349,000
(d) NOK 389,821
(e) I choose not to answer.
3. You have won in a lottery and may choose how to receive the prize. The alternatives are:
A: 180.000 kroner in 5 years.
B: 19.000 kroner annually for 10 years, the first amount in one year
C: 6.500 kroner in year one, increasing by 5 % annually for 100 years.
D: 100.000 kroner today
Which alternative has the greatest economic value given a discount rate of 12%?
(a) A
(b) B
(c) C
(d) D
(e) I choose not to answer.
4. In a single period consumption-investment framework managers should invest in physical assets up to the point where
the rate of return on physical assets is equal to the rate of return in the capital markets. This is because:
(a) At this point all investors' consumption plans are satisfied.
(b) Investors obtain higher utility by investing in the capital market after this point than investing in physical assets.
(c) Dividends are maximised at this point.
(d) Current consumption is maximised at this point.
(e) I choose pot to answer.
5. An investment project generates net cash flows of NOK 24,000 one year from now and NOK -14,375 two years
from now. If the project is undertaken an immediate cash outflow of NOK 10,000 is required.
The internal rate of return (IRR) from this project is:
(a)
(b)
(c)
(d)
(e)
10%
15%
5% and 10%
15% and 25%
I choose not to answer
6. In the presence of inflation, capital budgeting analyses should discount:
(a) Real cash flows at the real interest rate.
(b) Non-final cash flows at the real interest rate.
(c) Real cash flows at the nominal interest rate.
(d) Real cash flows at the risk-less interest rate.
(e) I choose not to answer.
7. Rosenborg football club is considering the purchase of one out of two players. In doing so they expect to
improve performance in the Champions League, which will generate additional revenue. Both players are
expected to have a playing life of 5 years. Player I will cost NOK 556,000 and can be sold at the end of the
5th year for NOK 56,000. If this player is purchased, it is estimated that annual net cash flows will be
increased by NOK 200,000. Player 2 will cost NOK 1,616,000 and can be sold at the end of the 5th year for
NOK 301,000. It is estimated that the purchase of player 2 will generate additional net cash flows of NOK
500,000 per year. Rosenborg's cost of capital is 15%.
According to the NPV criterion Rosenborg should purchase:
(a) Player I
(b) Player 2
(c) Indifferent between them.
(d) Not enough information to answer the question.
(e) I choose not to answer.
8. Your are considering two mutually exclusive investments A and B with the following annual cash flows (the
first in year 0):
A: -200, 247, 190, -240
B: -200, 217, 200, -216
For what discount rates would you choose investment A?
(a) For all discount rates below approximately 8%.
(b) For all discount rates between approximately 8% and 11%
(c) For all discount rates between approximately 11% and 17 %.
(d) For all discount rates between approxlmately8% and 17%.
(e) I choose not to answer.
9. Assume that the investments described in question 8 above are dependent in the sense that if you invest in one
of them, you must also invest in the other one.
For what discount rates would you choose to invest?
(a) For all discount rates below approximately 2%.
(b) For all discount rates above approximately 2%.
(c) For all discount rates between approximately 2% and 13%.
(d) For all discount rates above approximately 13%.
(e) I choose not to answer.
10. You are considering investing in one or both of two stocks, X and Y. You are provided with the following
information:
Stock
State of the economy
Estimate of Return
Probability of Occurring
x
recession
normal
high growth
30%
25%
20%
0.3
0.4
0.3
y
recession
normal
high growth
50%
30%
10%
0.3
0.4
0.3
The expected return on a portfolio consisting of 60% invested in X and 40% invested in Y is:
(a) 18%
(b) 20%
(c) 24%
(d) 27%
(e) I choose not to answer.
11. Consider again the information provided in question 10. For the portfolio comprising 60% invested in X and
40% in Y, the risk, as measured by standard deviation, is:
(a) 4.13%
(b) 6.19%
(c) 8.52%
(d) 11.35%
(e) I choose not to answer.
12. The stocks of companies A, B, and C have the following variances and covariances:
A
B
C
A
400
200
300
B
200
700
100
C
300
100
1000
Defining the correlation coefficient between stock i and j as rho(i, j), the correlation coefficient rho(A,B),
rho(A,C) and rho(B, C) are:
(a) 0.38, 0.47, and 0.12
(b) 0.38,0.30, and0.12
(c) 0.41, 0.47, and 0.21
(d) 0.41, 0.29, and 0.12
(e) I choose not to answer.
13. You are given the following information about stock i and the market portfolio: standard deviation of i = 10%,
standard deviation of the market portfolio = 6%, the expected return on the market portfolio = 14%, the
correlation coefficient between stock i and the market portfolio = 0.6, and the risk free rate of return is 10%.
The expected return on stock i is:
(a) 8.4%
(b) 10%
(c) 14%
(d) 16%
(e) I choose not to answer.
14. You are provided with information on two, stocks. Stock X has a return of 10% and a beta of 0.8. Stock Y has
a return of 15% and a beta of 0.8. Arbitrage profits can be made by:
(a) Selling asset X and buying asset Y. (b) Borrowing at the riskfrec rate to buy asset X. (c) Selling stock Y and
buying stock X. (d) Borrowing at the riskfree rate to buy stock X. (e) I choose not to answer.
15.
In the CAPM, the efficient set consists of.
(a) All risky assets held in equal weights.
(b) All risky assets held in market value weights.
(c) All risky assets and riskless assets held in market value weights.
(d) None of the above.
(e) I choose not to answer.
16.
Long Term Capital Management (LTCM) is a hedge fund that recently got into trouble because of excessive
leverage. It had borrowed 200 mill. USD with an equity base of only 5 mill. USD.
Assume that LTCM invests all its funds in a portfolio with an expected return of 10% and a standard deviation of
20%. Assume furthermore that LTCM's borrowing rate is 6%.
What is the expected return, (E) and standard deviation of return, «Y) on LTCM's equity?
(a)
(b)
(c)
(d)
(e)
E = 70% and  = 40%
E = 70% and  = 320%
E = 170% and  = 770%
E = 170% and  = 820%
I choose not to answer.
17. You want to estimate the asset beta of your company. It consists of two divisions. The value of Division A
equals 40% of the asset value of the company, while the value of Division B equals 60%.
In order to estimate the asset beta, you have obtained the following data on two companies listed on the stock
exchange. These companies are in similar lines of business as the two divisions.
Debt as a % of
Equity beta
total financin
Competitor of Division A:
0.8
30
Competitor of Division B:
1.4
70
What is the asset beta of your company (assume that the debt of all the companies is risk free)?
(a) 0.476 (b) 0.680 (c) 0.698 (d) 1.160 (e) I choose not to answer.
18. You are provided with the following information regarding a company's capital structure: share price = NOK 83,
growth rate in dividends = 7%, current dividend = NOK 5,240,000 shares outstanding, price of consol = NOK
l10 (par value = NOK 100), coupon rate = 15%, number of consols issued is 250,000. The corporate tax rate is
assumed to be 35%.
The weighted average cost of capital is:
(a) 8.41%
(b) 10.79%
(c) 11.91%
(d) 13.01%
(e) I choose not to answer.
19. Bill's Cigars A.S. is a successful and growing cigar importer. Over the last 5 years it has increased its share of the
Norwegian cigar market by 30%. The company is financed entirely by equity. You are provided with the
following information:
Net dividend per share (NOK)
Cost of equity capital = 24%.
t=-4
4.86
t=-3
5.832
t=-2
6.998
t=-1
8.398
Current year
10.078
The price of stock in BM's Cigars A.S is expected to be:
(a) 302
(b) 323
(c) 362
(d) 371
(e) I choose not to answer.
20.
The ability of an investor to earn abnormal returns based on past stock returns contradicts:
(a) Weak form market efficiency.
(b) Semi strong form market efficiency.
(c) Strong form market efficiency.
(d) All these forms of market efficiency.
(e) I choose not to answer.
21. Manchester United Plc issued £10 million of 5% (annual interest payments) bonds seven years ago. It is due to
be redeemed at par (£100 per bond) in three years time. The bonds have a current market value of £96.
What is the current cost of debt for Manchester United?
(a) 5.00%
(b) 5.75%
(c) 6.25 %
(d) 6.50%
(e) I choose not to answer.
22. Cocane A.S has just made a rights issue allowing current shareholders to purchase I new share for every 8 shares
they hold at a price of NOK 3 per share. Before the rights issue there was 20 million shares outstanding and the
share price was NOK 3.50. If the rights offer is successful, what is the ex-rights price, and what is the value of
one right?
(a) 3.44 and 0. 10
(b) 3.44 and 0.06
(c) 3.45 and 0.05
(d) 3.45 and 0.01
(e) I choose not to answer.
23. Which of the following statements about stock dividends is correct?
(a) It transfers cash to shareholders.
(b) The firm purchases some of its own outstanding shares in the capital market and distributes these as
dividends to shareholders.
(c) It transfers part of current earnings to shareholders.
(d) It involves no transfer of cash to shareholders.
(e) I choose not to answer.
24. Which of the following statements is NOT a good reason for leasing?
(a) Leasing may reduce taxes.
(b) The lease contract may reduce the lessee's ("leietakers") uncertainty about the asset's residual value.
(c) Transaction costs are usually lower if we lease an asset than if we finance a purchase with new debt and
equity.
(d) Leasing provides 100% financing.
(e) I choose not to answer.
25. A passive residual dividend policy suggests that:
(a) Dividends should be paid only if the firm does not have enough acceptable investment projects to utilise all
earnings internally.
(b) Dividends should be paid only when the firm has ready access to markets for new equity.
(c) Retained earnings, being the residual earnings of the firm, should always be paid out to existing
shareholders
(d) Investment policy and dividend policy decisions should always be made independently.
(e) I choose not to answer.
26. In investment appraisal, the Adjusted Present Value (APV) technique is required when:
(a)
(b)
(c)
(d)
(e)
The risk of the project is different to that of the firm as a whole.
The capital structure of the firm changes when a new investment is undertaken.
When interest payments on debt is tax deductible.
None of the above.
I choose not to answer.
27. Which of the following is NOT a characteristic of exchange traded option contracts?
(a)
(b)
(c)
(d)
(e)
They are traded on an exchange.
They are priced every trading day.
Contracts of any size may be purchased.
They mature at fixed dates.
I choose not to answer.
28. The difference between a warrant and a call option is:
(a) A warrant gives the holder the right to buy a share at the existing share price, whereas a call option gives
the right to buy at a predetermined price
(b) The exercising of a warrant increases the number of shares outstanding, whereas the exercising of an
exchange listed call option does not.
(c) A warrant gives the holder the right to sell and buy stock, whereas a call option provides only the right to
buy.
(d) The exercising of a warrant has the same effect on the value of the firm as the exercising of an exchange
listed call option.
(e)
I choose not to answer.
29. The following diagram illustrates the payoff from:
(a)
(b)
(c)
(d)
(e)
Buying a share.
Selling a put.
Selling a call.
Buying a call.
I choose not to answer.
30. Using options with equal exercise prices and stocks, a riskless return can be obtained by the following strategy:
(a)
(b)
(c)
(d)
(e)
Buying the stock, buying a put and selling a call.
Selling the stock, buying a put and selling a call.
Buying the stock, buying a put and buying a call.
Buying the stock, selling a put and selling a call.
I choose not to answer.