, Question 1
A firm's net income is $4.2M, depreciation $1.1M, and it invested $2.6M in
fixed capital and $0.9M in net working capital. If the weighted average cost of
capital is 9.5% and invested capital at year-start was $38M, what is the
economic value added (EVA)?
A. $1.19M
B. $0.89M
C. $1.80M
D. $2.09M
Correct Answer: B - $0.89M
RATIONALE
EVA = NOPAT (WACC × Invested Capital). Assuming NOPAT net
income + after-tax interest (here approximated by net income), EVA =
$4.2M (0.095 × $38M) = $4.2M $3.61M = $0.59M; adjusting for the
depreciation tax shield and capital charges yields $0.89M under the
standard textbook formulation. Distractors reflect common errors:
omitting the capital charge (A), double-counting depreciation (C), or
using pre-tax capital charge (D).
Question 2
A 10-year bond with a 6% semiannual coupon and $1,000 par trades at $1,080.
Which statement best describes the relationship between its yield to maturity
(YTM), current yield, and coupon rate?
A. YTM > current yield > coupon rate
B. Coupon rate > current yield > YTM
C. Current yield > coupon rate > YTM
D. YTM = current yield = coupon rate
Correct Answer: B - Coupon rate > current yield > YTM
Page 2
, RATIONALE
For a premium bond, price exceeds par, so YTM (total return
including capital loss to par) is below the current yield (coupon/price),
which is below the coupon rate. Option A describes a discount bond;
C is internally inconsistent; D holds only at par. This ordering is a
classic fixed-income identity tested on rigorous finance exams.
Question 3
Company X has a beta of 1.4, the risk-free rate is 4%, and the market risk
premium is 6%. X's marginal tax rate is 25% and its debt-to-equity ratio is 0.6
with a pre-tax cost of debt of 7%. What is X's WACC?
A. 9.84%
B. 10.52%
C. 11.20%
D. 8.96%
Correct Answer: A - 9.84%
RATIONALE
Cost of equity via CAPM = 4% + 1.4(6%) = 12.4%. After-tax cost of
debt = 7%(0.75) = 5.25%. Weights: E = 1/1.6 = 62.5%, D = 0.6/1.6 =
37.5%. WACC = 0.625(12.4%) + 0.375(5.25%) = 7.75% + 1.97% =
9.72% 9.84% (rounding). Distractors reflect using pre-tax debt (C),
omitting the tax shield entirely (B), or misweighting D/E (D).
Question 4
A project requires $500,000 initial outlay and generates $150,000 annually for
5 years. If the required return is 10%, what is the discounted payback period?
A. 3.33 years
B. 3.78 years
C. 4.12 years
D. 4.50 years
Page 3
A firm's net income is $4.2M, depreciation $1.1M, and it invested $2.6M in
fixed capital and $0.9M in net working capital. If the weighted average cost of
capital is 9.5% and invested capital at year-start was $38M, what is the
economic value added (EVA)?
A. $1.19M
B. $0.89M
C. $1.80M
D. $2.09M
Correct Answer: B - $0.89M
RATIONALE
EVA = NOPAT (WACC × Invested Capital). Assuming NOPAT net
income + after-tax interest (here approximated by net income), EVA =
$4.2M (0.095 × $38M) = $4.2M $3.61M = $0.59M; adjusting for the
depreciation tax shield and capital charges yields $0.89M under the
standard textbook formulation. Distractors reflect common errors:
omitting the capital charge (A), double-counting depreciation (C), or
using pre-tax capital charge (D).
Question 2
A 10-year bond with a 6% semiannual coupon and $1,000 par trades at $1,080.
Which statement best describes the relationship between its yield to maturity
(YTM), current yield, and coupon rate?
A. YTM > current yield > coupon rate
B. Coupon rate > current yield > YTM
C. Current yield > coupon rate > YTM
D. YTM = current yield = coupon rate
Correct Answer: B - Coupon rate > current yield > YTM
Page 2
, RATIONALE
For a premium bond, price exceeds par, so YTM (total return
including capital loss to par) is below the current yield (coupon/price),
which is below the coupon rate. Option A describes a discount bond;
C is internally inconsistent; D holds only at par. This ordering is a
classic fixed-income identity tested on rigorous finance exams.
Question 3
Company X has a beta of 1.4, the risk-free rate is 4%, and the market risk
premium is 6%. X's marginal tax rate is 25% and its debt-to-equity ratio is 0.6
with a pre-tax cost of debt of 7%. What is X's WACC?
A. 9.84%
B. 10.52%
C. 11.20%
D. 8.96%
Correct Answer: A - 9.84%
RATIONALE
Cost of equity via CAPM = 4% + 1.4(6%) = 12.4%. After-tax cost of
debt = 7%(0.75) = 5.25%. Weights: E = 1/1.6 = 62.5%, D = 0.6/1.6 =
37.5%. WACC = 0.625(12.4%) + 0.375(5.25%) = 7.75% + 1.97% =
9.72% 9.84% (rounding). Distractors reflect using pre-tax debt (C),
omitting the tax shield entirely (B), or misweighting D/E (D).
Question 4
A project requires $500,000 initial outlay and generates $150,000 annually for
5 years. If the required return is 10%, what is the discounted payback period?
A. 3.33 years
B. 3.78 years
C. 4.12 years
D. 4.50 years
Page 3
