Fin 3150 Mid-Term Exam

Bob's Pizza is considering either leasing or buying a new oven. The lease payments would be $19,000 a years. The purchase price is $54,000. The equipment has a 3-year life and then is expected to have a resale value of $9,000. Bob's Pizza uses straight-line depreciation, borrows money at 7 percent and has a 33 percent tax rate. What is the net advantage to leasing?

$-2,395 SEE CONNECT FOR WORK

Benji's is considering leasing a machine for 4 years with monthly payments of $680. The firm can borrow at a rate of 9 percent and has a tax rate of 40 percent. If the lease is classified as an operating lease, what amount, if any, should appear in the asset section of the balance sheet on the effective date of the lease?

$0 Operating leases are not recorded on the balance sheet; capital leases are recorded as both an asset and a liability equal to the present value of the lease payments.

Fresh Fish has assets valued at $1.2 million and equity of $.98 million. The firm wants to obtain new equipment via a capital lease. The equipment costs $200,000 and the present value of the lease payments is $175,000. With the lease, firm's balance sheet will show assets of ____and liabilities of ____.

$1,375,000; $1,155,000

A stock has a rights-on price of $20, an ex-rights price of $18.25, and the number of rights needed to buy one new share is 5. Assuming everything else is held constant, what is the subscription price?

$18.25 = [(5 ×$20) + Subscription price] / 6 Subscription price = $9.50

A rights offer was set at four rights plus $25 for each new share. What is the rights-on price if the ex-rights price is $30?

$30 = [(4 × Prights-on) + $25] / 5 Prights-on = $31.25

Assume a stock has an ex-rights price of $32. The rights offer has a requirement of 3 rights per new share and a subscription price of $30. What is the rights-on stock price?

$32 = [(3 × Prights-on) + $30] / 4 Prights-on = $32.67

National Event Coordinators is contemplating the acquisition of a new tent that will be used for major outdoor events. The purchase price is $141,000. The firm uses MACRS depreciation which allows for 33.33 percent, 44.44 percent, 14.82 percent, and 7.41 percent depreciation over years 1 to 4, respectively. The tents have a 4-year life after which time they are worthless. The tent can be leased for $37,000 a year. The firm can borrow money at 7 percent and has a 34 percent tax rate. What is the net advantage to leasing?

$9,731 SEE CONNECT FOR WORK

Al-Tek is considering leasing some new equipment for 5 years with annual payments. The equipment would cost $115,000 to buy and would be depreciated straight-line to a zero salvage value. The actual salvage value is zero. The applicable pretax borrowing rate is 8 percent. The lessee does not expect to owe taxes for several years. The lessor's tax rate is 35 percent. What is the minimum lease payment that will be acceptable to both parties?

0 = -$115,000 + [($115,000 / 5)(.35) + LMin(1 - .35)]PVIFA^.08(1 - .35),5 LMIN = $28,706.34

Nu-Tek is considering leasing some equipment for 4 years with equal annual lease payments. The equipment would cost $74,000 to buy and would be depreciated straight-line over 4 years to a zero salvage value. The actual salvage value is zero. The applicable pretax borrowing rate is 7.3 percent. The lessee does not expect to owe taxes for several years while the lessor's tax rate is 34 percent. What is the minimum lease payment that will be acceptable to both parties?

0 = -$74,000 + [($74,000 / 4)(.34) + LMin(1 - .34)]PVIFA^.073(1 - .34),4 LMIN = $21,955.64

Green Shoe options generally last ____ days and benefit ____.

30; the underwriting syndicate

In a typical deal, the venture capitalist will receive at least ______ percent of the equity of financed firm.

40

With an S corporation: A. income is taxed as direct income to stockholders. B. the life of the corporation is limited. C. stockholders have the same liability as members of a partnership. D. the number of stockholders is unlimited.

A. income is taxed as direct income to stockholders.

Given the following, what is free cash flow? Cash flow from operating activities $200,000 Cash flow from investing activities $140,000 Cash flow from financing activities $56,000 Building purchases $50,000 Dividends paid $20,000 A. $130,000 B. $326,000 C. $396,000 D. $270,000

A. $130,000 Operating cash flows are = $200,000 less: building purchase = $50,000 less: dividends paid = $20,000 FCF = $130,000

The Bubba Corp. had earnings before taxes of $400,000 and sales of $2,000,000. If it is in the 40% tax bracket, its after-tax profit margin is: A. 12%. B. 25%. C. 40%. D. 20%.

A. 12%.

Which one of the following statements is correct concerning ratio analysis? A. A single ratio is often computed differently by different individuals. B. Ratios do not address the problem of size differences among firms. C. Only a very limited number of ratios can be used for analytical purposes. D. Each ratio has a specific formula that is used consistently by all analysts. E. Ratios cannot be used for comparison purposes over periods of time.

A. A single ratio is often computed differently by different individuals.

Many companies such as Tyco, Enron, and WorldCom that suffered financial distress in the late 1990s and early 2000s: A. All of the options are true. B. went bankrupt. C. committed fraud. D. had failed corporate governance oversight.

A. All of the options are true.

Which one of the following depicts a correct relationship? A. Dividend payout ratio = 1 - Retention ratio B. Total asset turnover = 1 + Capital intensity ratio C. ROA = ROE × (1 + Debt-equity ratio) D. ROE = 1 - ROA E. Equity multiplier = 1 - Debt-equity ratio

A. Dividend payout ratio = 1 - Retention ratio

The return on equity can be calculated as: A. ROA × Equity multiplier. B. Profit margin × ROA. C. Profit margin × ROA × Total asset turnover. D. ROA ×(Net income / Total assets). E. ROA × Debt-equity ratio.

A. ROA × Equity multiplier.

Which of the following is not an asset utilization ratio? A. Return on assets B. Fixed asset turnover C. Average collection period D. Inventory turnover

A. Return on assets

The sustainable growth rate will be equivalent to the internal growth rate when, and only when,: A. a firm has no debt. B. the growth rate is positive. C. the plowback ratio is positive but less than 1. D. a firm has a debt-equity ratio equal to 1. E. the retention ratio is equal to 1.

A. a firm has no debt.

A quick ratio that is much smaller than the current ratio reflects: A. a large portion of current assets is in inventory. B. that the firm will have a high return on assets. C. that the firm will have a high inventory turnover. D. a small portion of current assets is in inventory

A. a large portion of current assets is in inventory.

Ratios that measure how efficiently a firm uses its assets to generate sales are known as _______ ratios. A. asset management B. long-term solvency C. short-term solvency D. profitability E. market value

A. asset management

The equity multiplier measures: A. financial leverage. B. returns to stockholders. C. operating efficiency. D. management efficiency. E. asset use efficiency.

A. financial leverage.

An S corporation: A. has all the organizational benefits of a corporation and its income is only taxed once. B. is similar to a partnership in that it carries unlimited liability. C. All of the options. D. is a separate legal entity that is treated like a normal corporation.

A. has all the organizational benefits of a corporation and its income is only taxed once.

If a firm produces a return on assets of 15 percent and also a return on equity of 15 percent, then the firm: A. has no debt of any kind. B. is using its assets as efficiently as possible. C. has no net working capital. D. also has a current ratio of 15. E. has an equity multiplier of 2.

A. has no debt of any kind.

The higher the inventory turnover, the: A. less time inventory items remain on the shelf. B. higher the inventory as a percentage of total assets. C. longer it takes a firm to sell its inventory. D. greater the amount of inventory held by a firm. E. lesser the amount of inventory held by a firm.

A. less time inventory items remain on the shelf.

Enterprise value is based on the: A. market value of interest bearing debt plus the market value of equity minus cash. B. book values of debt and assets, other than cash. C. market value of equity plus the book value of total debt minus cash. D. book value of debt plus the market value of equity. E. book values of debt and equity less cash.

A. market value of interest bearing debt plus the market value of equity minus cash.

Which account is least apt to vary directly with sales? A. notes payable B. inventory C. cost of goods sold D. accounts payable E. accounts receivable

A. notes payable

The financial ratio measured as net income divided by sales is known as the firm's: A. profit margin. B. return on assets. C. return on equity. D. asset turnover. E. earnings before interest and taxes.

A. profit margin.

Which one of the following is a liquidity ratio? A. quick ratio B. cash coverage ratio C. total debt ratio D. EV multiple E. times interest earned ratio

A. quick ratio

Asset utilization ratios: A. relate balance sheet assets to income statement sales. B. measure the firm's ability to generate a profit on sales. C. are most important to stockholders. D. measure how much cash is available for reinvestment into current assets.

A. relate balance sheet assets to income statement sales.

Assume BGL Enterprises increases its operating efficiency by lowering its costs while holding its sales constant. As a result, given all else constant, the: A. return on equity will increase. B. return on assets will decrease. C. profit margin will decline. D. equity multiplier will decrease. E. price-earnings ratio will increase.

A. return on equity will increase.

One of the major disadvantages of a sole proprietorship is: A. that there is unlimited liability to the owner. B. high organizational costs. C. the simplicity of decision making. D. high operating costs.

A. that there is unlimited liability to the owner

The most effective method of directly evaluating the financial performance of a firm is to compare the financial ratios of the firm to: A. the firm's ratios from prior time periods and to the ratios of firms with similar operations. B. the average ratios of all firms within the same country over a period of time. C. those of other firms located in the same geographic area that are similarly sized. D. the average ratios of the firm's international peer group. E. those of the largest conglomerate that has operations in the same industry as the firm.

A. the firm's ratios from prior time periods and to the ratios of firms with similar operations.

A firm's purchase of plant and equipment would be considered a: A. use of cash for investment activities. B. source of cash for operating activities. C. use of cash for operating activities. D. use of cash for financing activities.

A. use of cash for investment activities.

Which one of these characteristics does not apply to a financial lease? A. The lease is usually not fully amortized. B. The lessee is responsible for the maintenance of the leased assets. C. Generally, the lease cannot be cancelled. D. The lessee usually has the right to renew the lease on expiration. E. The lessee must pay all of the lease payments.

A. The lease is usually not fully amortized.

In the presence of corporate taxes, riskless cash flows should be discounted at the: A. aftertax riskless rate of interest. B. aftertax cost of firm debt. C. pretax riskless rate of interest. D. pretax cost of firm debt. E. market rate of interest.

A. aftertax riskless rate of interest.

A leveraged lease typically involves a non-recourse loan which means that in the case of default the: A. lease payments go directly to the lender. B. the lessee obtains a first lien on the leased assets. C. lessor is obligated to fulfill the terms of both the lease and the loan. D. lessee assumes the loan obligation in exchange for the title to the leased assets. E. lease is automatically cancelled.

A. lease payments go directly to the lender.

If the lessor borrows the majority of the purchase price of a leased asset, the lease is called a: A. leveraged lease. B. sale-and-leaseback arrangement. C. capital lease. D. nonrecourse lease. E. bargain purchase lease.

A. leveraged lease.

Precision Tool is trying to decide whether to lease or buy some new equipment for its tool and die operations. The equipment costs $57,000, has a 3-year life and will be worthless after the 3 years. The pre-tax cost of borrowed funds is 10 percent and the tax rate is 34 percent. The equipment can be leased for $19,500 a year. What is the net advantage to leasing? (Do not round intermediate calculations.)

Aftertax lease payment = $19,500 (1 - 0.34) = $12,870 Annual depreciation tax shield = ($57,000/3) (0.34) = $6,460 Aftertax discount rate = 0.1 (1 - 0.34) = 6.6 percent NAL = $57,000 - ($12,870 + $6,460) (PVIFA^6.6%, 3) = $5,899

contribution margin decreases

All else constant, as the variable cost per unit increases, the:

depreciation expense decreases

All else constant, the accounting break-even level of sales will decrease when the:

the variable cost per unit declines

All else equal, the contribution margin must increase as:

break-even

An analysis of the relationship between the sales volume and various measures of profitability is called _____ analysis.

sensitivity

An analysis of what happens to the estimate of net present value when only one variable is changed is called _____ analysis.

scenario

An analysis of what happens to the estimate of the net present value when you examine a number of different likely situations is called _____ analysis.

simulation

An analysis which combines scenario analysis with sensitivity analysis is called _____ analysis.

sensitivity analysis

An investigation of the degree to which NPV depends on assumptions made about any singular critical variable is called a(n):

more attention management should place on accurately forecasting the future value of that variable

As the degree of sensitivity of a project to a single variable rises, the:

Reed Machinery just signed a capital lease agreement with a present value of $130,000. How would this lease first appear on Reed Machinery's balance sheet?

Assets under capital lease $130,000 Obligations under capital lease $130,000

Allen Lumber Company had earnings after taxes of $750,000 in the year 2015 with 300,000 shares outstanding on December 31, 2015. On January 1, 2016, the firm issued 50,000 new shares. The company took the proceeds from these new shares as well as other operating improvements and earned $937,500 earnings after taxes in 2016. Earnings per share for the year 2016 were A. $3.13. B. $2.68. C. $2.14. D. None of the options.

B. $2.68. Earnings per share for the year 2016 were =937,500/(300,000+50,000) =2.68

Compute the cash flows from operations using the indirect method if Star Corporation had $250,000 in net income, $30,000 in depreciation expense, a decrease of $20,000 in accounts receivable and an increase in bonds payable of $50,000. A. $250,000 B. $300,000 C. $310,000 D. $370,000

B. $300,000 Cash flow from operations = Net income + Depreciation + Decrease in A/R = $250,000 + $30,000 + $20,000 = $300,000

Which of the following would represent a positive source of funds and, indirectly, an increase in cash balances? A. A reduction in notes payable B. A reduction in accounts receivable C. The repurchase of shares of the firm's stock D. A decrease in net income

B. A reduction in accounts receivable

A corporation is: A. a separate legal entity with unlimited life. B. All of the above. C. owned by stockholders who enjoy the privilege of limited liability. D. easily divisible between owners.

B. All of the above.

The statement of cash flows does not include which of the following sections? A. Cash flows from operating activities B. Cash flows from sales activities C. Cash flows from financing activities D. Cash flows from investing activities

B. Cash flows from sales activities

How many of the following items decrease cash flow in the statement of cash flows? • Increase in accounts receivable • Increase in notes payable • Depreciation expense • Increase in investments • Decrease in accounts payable • Decrease in prepaid expenses • Dividend payment • Increase in accrued expenses A. Three of these items decrease cash flow B. Four of these items decrease cash flow C. Two of these items decrease cash flow D. Five of these items decrease cash flow

B. Four of these items decrease cash flow

The DuPont identity can be computed as: A. Net income × Profit margin × (1 + Debt-equity ratio). B. Profit margin × (1 / Capital intensity) × (1 + Debt-equity ratio). C. Net income × Total asset turnover × Equity multiplier. D. Profit margin × Total asset turnover × Debt-equity ratio. E. Return on equity × Profit margin × Total asset turnover.

B. Profit margin × (1 / Capital intensity) × (1 + Debt-equity ratio).

How many of the following items are found on the income statement, rather than the balance sheet? •Sales •Notes payable (due in six months •Bonds payable (mature in 10 years •Common stock •Depreciation expense •Inventories •Capital in excess of par value •Net income (earnings after taxes) •Income tax payable A. Five of these items are found on the income statement. B. Three of these items are found on the income statement. C. Two of these items are found on the income statement. D. Four of these items are found on the income statement.

B. Three of these items are found on the income statement.

A supplier, who requires payment within ten days, should be most concerned with which one of the following ratios when granting credit? A. current B. cash C. debt-equity D. quick E. total debt

B. cash

From a cash flow position, which one of the following ratios best measures a firm's ability to pay the interest on its debts? A. times interest earned ratio B. cash coverage ratio C. cash ratio D. quick ratio E. interval measure

B. cash coverage ratio

The current ratio is measured as: A. current assets minus current liabilities. B. current assets divided by current liabilities. C. current liabilities minus inventory, divided by current assets. D. cash on hand divided by current liabilities. E. current liabilities divided by current assets.

B. current assets divided by current liabilities.

Preferred stock dividends __________ earnings available to common stockholders. A. There is not enough information to determine B. decrease C. increase D. do not effect

B. decrease

Turner's Inc. has a price-earnings ratio of 16. Alfred's Co. has a price-earnings ratio of 19. Thus, you can state with certainty that one share of stock in Alfred's: A. has a higher market price than one share of stock in Turner's. B. has a higher market price per dollar of earnings than does one share of Turner's. C. sells at a lower price per share than one share of Turner's. D. represents a larger percentage of firm ownership than does one share of Turner's stock. E. earns a greater profit per share than does one share of Turner's stock.

B. has a higher market price per dollar of earnings than does one share of Turner's.

The sustainable growth rate: A. assumes there is no external financing of any kind. B. is normally higher than the internal growth rate. C. assumes the debt-equity ratio is variable. D. is based on receiving additional external debt and equity financing. E. assumes the dividend payout ratio is equal to zero.

B. is normally higher than the internal growth rate.

Ratios that measure a firm's financial leverage are known as ________ ratios. A. asset management B. long-term solvency C. short-term solvency D. profitability E. market value

B. long-term solvency

One of the major advantages of a sole proprietorship is: A. that stock in the proprietorship can be easily transferred. B. low operating costs. C. that the owner has limited liability. D. that it is exempt from many tax rules that would otherwise apply when employees are hired by the firm

B. low operating costs.

In the financial planning model, the external financing needed (EFN) as shown on a pro forma balance sheet is equal to the changes in assets: A. plus the changes in liabilities minus the changes in equity. B. minus the changes in both liabilities and equity. C. minus the changes in liabilities. D. plus the changes in both liabilities and equity. E. minus the change in retained earnings.

B. minus the changes in both liabilities and equity.

Agency theory examines the relationship between the: A. shareholders of the firm and the firm's investment banker. B. owners of the firm and the managers of the firm. C. board of directors and large institutional investors. D. shareholders and the firm's transfer agent.

B. owners of the firm and the managers of the firm.

Corporate governance is the: A. governance of the company by the board of directors with a focus on pleasing management. B. relationship and exercise of oversight by the board of directors of the company. C. operation of a company by the chief executive officer (CEO) and other senior executives on the management team. D. relationship between the chief financial officer (CFO) and institutional investors.

B. relationship and exercise of oversight by the board of directors of the company.

The measure of net income returned from every dollar invested in total assets is the: A. profit margin. B. return on assets. C. return on equity. D. asset turnover. E. earnings before interest and taxes.

B. return on assets.

The receivables turnover ratio is measured as: A. sales plus accounts receivable. B. sales divided by accounts receivable. C. sales minus accounts receivable, divided by sales. D. accounts receivable times sales. E. accounts receivable divided by sales.

B. sales divided by accounts receivable.

The total asset turnover ratio measures the amount of: A. total assets needed for every $1 of sales. B. sales generated by every $1 in total assets. C. fixed assets required for every $1 of sales. D. net income generated by every $1 in total assets. E. net income than can be generated by every $1 of fixed assets.

B. sales generated by every $1 in total assets.

Which one of the following is most apt to cause a firm to have a higher price-earnings ratio? A. slow industry outlook B. very low current earnings C. low market share D. low prospect of firm growth E. low investor opinion of firm

B. very low current earnings

For accounting purposes, which one of the following conditions would automatically cause a lease to be classified as a capital lease? A. The lessee can purchase the asset at fair market value at the end of the lease. B. The lease transfers ownership of the asset to the lessee by the end of the lease term. C. The lease term equals 60 percent of the asset's estimated economic life. D. The present value of the lease payments equals 76 percent of the asset's fair market value at lease inception. E. The lessor can renew the lease at the end of the lease term.

B. The lease transfers ownership of the asset to the lessee by the end of the lease term.

A lease with which one of these characteristics would not be qualified by the IRS? A. term of 25 years B. early balloon payments C. lessee option to purchase asset at fair market value at lease expiration D. no lease provision limiting the lessee' right to issue additional debt E. lessee granted first option to meet a competing outside renewal offer

B. early balloon payments

Assume the net present value of a lease relative to a purchase is $150. This indicates that the: A. purchase price is less than the reduction in optimal debt level if leasing. B. lease is preferred. C. optimal lease payment is $150 per period. D. net advantage of leasing is negative. E. lease provides an advantage only to the lessor.

B. lease is preferred.

When computing the incremental cash flows from leasing relative to purchasing, the: A. cost of the asset is a negative cash flow. B. lost depreciation tax benefit is a negative cash flow. C. pretax lease payment is a positive cash flow. D. lease payments are ignored. E. tax benefit of the lease payment is a negative cash flow.

B. lost depreciation tax benefit is a negative cash flow.

To meet IRS guidelines for leasing, the lease should: A. limit the lessee's right to issue debt or pay dividends while the lease is operative. B. offer renewal options only at fair market value. C. pay a very low rate of return to the lessor. D. transfer ownership of the asset at the end of the lease at below fair market value. E. have a term of 30 years or more.

B. offer renewal options only at fair market value.

When a lease must be recorded on the balance to meet FAS 13, the asset amount is set equal to the: A. amount of the lease payments due within the next 12 months. B. present value of the lease payments. C. amount of the lease payments due within the current fiscal year. D. present value of the lease payments due within the next 12 months. E. total sum of all of the remaining lease payments.

B. present value of the lease payments.

Projected future financial statements are called: A. plug statements. B. pro forma statements. C. reconciled statements. D. aggregated statements. E. comparative statements.

B. pro forma statements

ABC Co. has an average collection period of 90 days for its accounts receivable. If total credit sales for the year were $6,000,000, what is the balance in accounts receivable at year-end? Assume a 360-day calendar year. A. $2,250,000 B. $40,000 C. $1,500,000 D. $150,000

C. $1,500,000

A firm with earnings per share of $3 and a price-earnings (P/E) ratio of 24 will have a stock market price of: A. $15.00. B. $6.67. C. $72.00. D. $3.00.

C. $72.00. 24 x 3= $72

A firm's long-term assets = $100,000, total assets = $400,000, inventory = $50,000 and current liabilities = $200,000. What are the firm's current ratio and quick ratio? A. Current ratio = 1.0; quick ratio = 2.0 B. Current ratio = 2.5; quick ratio = 2.0 C. Current ratio = 1.5; quick ratio = 1.25 D. Current ratio = 0.5; quick ratio = 1.25

C. Current ratio = 1.5; quick ratio = 1.25

The external funds needed (EFN) equation projects the addition to retained earnings as: A. PM × Δ Sales. B. PM ×Δ Sales× (1 - d). C. PM × Projected sales × (1 - d). D. Projected sales × (1 - d). E. PM ×Projected sales.

C. PM × Projected sales × (1 - d).

Which of the following is an inflow of cash? A. The purchase of a new factory B. The retirement of the firm's bonds C. The sale of the firm's bonds D. Funds spent in normal business operations

C. The sale of the firm's bonds

Puffy's Pastries generates five cents of net income for every $1 in equity. Thus, Puffy's has _______ of 5 percent. A. a return on assets B. a profit margin C. a return on equity D. an EV multiple E. a price-earnings ratio

C. a return on equity

The partnership form of an organization: A. has unlimited life. B. simplifies decision making. C. avoids the double taxation of earnings and dividends found in the corporate form of organization. D. usually provides limited liability to the partners.

C. avoids the double taxation of earnings and dividends found in the corporate form of organization.

The inventory turnover ratio is measured as: A. total sales minus inventory. B. inventory times total sales. C. cost of goods sold divided by inventory. D. inventory divided by cost of goods sold. E. inventory divided by sales.

C. cost of goods sold divided by inventory.

Trend and industry analysis provide all of the following information except: A. a basis for decision making about capital structure. B. benchmarking. C. future information about the company. D. the progress of the company.

C. future information about the company.

An increase in which one of the following accounts increases a firm's current ratio without affecting its quick ratio? A. accounts payable B. cash C. inventory D. accounts receivable E. fixed assets

C. inventory

Ratios that measure a firm's ability to pay its bills over the short run without undue stress are known as: A. asset management ratios. B. long-term solvency measures. C. liquidity measures. D. profitability ratios. E. market value ratios.

C. liquidity measures.

Maximization of shareholder wealth is a concept in which: A. profits are maximized on an annual basis. B. virtually all earnings are paid as dividends to common stockholders. C. optimally increasing the long-term value of the firm is emphasized. D. increased earnings is of primary importance.

C. optimally increasing the long-term value of the firm is emphasized.

A public firm's market capitalization is equal to the: A. total book value of assets less book value of debt. B. par value of common equity. C. price per share multiplied by number of shares outstanding. D. firm's stock price multiplied by the number of shares authorized. E. the maximum value an acquirer would pay for the firm in an acquisition.

C. price per share multiplied by number of shares outstanding.

If stockholders want to know how much profit the firm is making on their entire investment in that firm, the stockholders should refer to the: A. profit margin. B. return on assets. C. return on equity. D. equity multiplier. E. earnings per share.

C. return on equity.

The financial ratio that measures the accounting profit per dollar of book equity is referred to as the: A. profit margin. B. price-earnings ratio. C. return on equity. D. equity turnover. E. market profit-to-book ratio.

C. return on equity.

The debt-equity ratio is measured as: A. total equity divided by long-term debt. B. total equity divided by total debt. C. total debt divided by total equity. D. long-term debt divided by total equity. E. total assets minus total debt, divided by total equity.

C. total debt divided by total equity.

It is easier to evaluate a firm using its financial statements when the firm: A. is a conglomerate. B. is global in nature. C. uses the same accounting procedures as other firms in its industry. D. has a different fiscal year than other firms in its industry. E. tends to have one-time events such as asset sales and property acquisitions.

C. uses the same accounting procedures as other firms in its industry.

Reed Machinery just signed a capital lease agreement with a present value of $130,000. How would this lease first appear on Reed Machinery's balance sheet? A. Capital leases do not appear on the balance sheet. B. Assets under capital lease $260,000; Obligations under capital lease $260,000 C. Assets under capital lease $130,000; Obligations under capital lease $130,000 D. Assets under capital lease $260,000; Retained earnings committed to leases $260,000 E. Assets under capital lease $130,000; Retained earnings committed to leases $130,000

C. Assets under capital lease $130,000; Obligations under capital lease $130,000

The city of Plainview sold its maintenance facility in an all-cash transaction and used the proceeds to improve the city's financial position. The city then leased the building from the new owner on a non-cancellable basis. The city will be responsible for the maintenance and upkeep of the facility. These transactions illustrate: A. an operating lease. B. a leveraged lease. C. a sale and leaseback. D. a fully amortized lease. E. both an operating lease and a sale and leaseback.

C. a sale and leaseback.

Assume that both the lessor and the lessee have the same interest and tax rates and there are no transaction costs. Given this, the best lease agreement results in: A. a benefit for the lessor and a zero gain for the lessee. B. a benefit for the lessee and a zero gain for the lessor. C. an NPV of zero for both parties. D. a benefit for both parties. E. a loss for both parties.

C. an NPV of zero for both parties.

Which one of these can be ignored when valuing a purchase versus a lease? A. tax shield from depreciation B. investment outlay for the asset C. changes in operating costs related to the acquired asset D. lease payments E. taxes

C. changes in operating costs related to the acquired asset

One key reason why the IRS is concerned about the structure of lease contracts is because: A. firms that lease generally pay no taxes. B. leasing usually leads to bankruptcy. C. leases can be set up solely to avoid taxes. D. leasing leads to off-balance-sheet-financing. E. lease payments can never be deducted as a business expense.

C. leases can be set up solely to avoid taxes.

The appropriate discount rate that a lessee should use to value a financial lease is the: A. lessee's aftertax weighted average cost of capital. B. lessor's aftertax cost of borrowing. C. lessee's aftertax cost of secured borrowing. D. capitalization rate stated in the lease contract. E. current U.S. Treasury T-bill rate.

C. lessee's aftertax cost of secured borrowing.

In a direct lease arrangement, the owner of the asset is: A. either the lessee or the lessor. B. the lessee. C. the lessor. D. either the lessee or the manufacturer. E. the asset's manufacturer.

C. the lessor.

Artisan's is considering leasing a new computer. The lease terms include five annual payments of $1,650 with the first payment occurring at the lease signing. The computer would cost $8,500 to buy and would be depreciated straight-line to a zero salvage value over 5 years. The actual salvage value is negligible because of technological obsolescence. The firm can borrow at a rate of 7.5 percent and has a tax rate of 34 percent. What is the cash flow from leasing relative to purchasing in Year 0?

CF0 = $8,500 - $1,650(1 - .34) = $7,411

Morrison Industrial Tool can either lease or buy some equipment. The lease payments will be $13,000 a year. The purchase price is $37,000. The equipment has a 3-year life after which time it is expected to have a resale value of $6,000. The firm uses straight-line depreciation, borrows money at 8 percent and has a 34 percent tax rate. What is the incremental cash flow for year 1 if the company decides to lease the equipment rather than purchase it?

CF1 = -1 {[$13,000 (1 - 0.34)] + [($37,000/3) (0.34)]} = $-12,773

Daily Enterprises is contemplating the acquisition of some new equipment. The purchase price is $32,000. The equipment has a 4-year life. The company expects to sell the equipment at the end of year 4 for $5,000. The firm uses MACRS depreciation which allows for 33.33 percent, 44.44 percent, 14.82 percent, and 7.41 percent depreciation over years 1 to 4, respectively. The equipment can be leased for $10,000 a year. The firm can borrow money at 8 percent and has a 34 percent tax rate. What is the incremental annual cash flow for year 4 if the company decides to lease the equipment rather than purchase it?

CF4 = -1 {[$10,000 (1 - 0.34)] + [$32,000 (0.0741) (0.34)] + [$5,000 (1 - 0.34)]} = $-10,706

A new robotic welder can be leased for 3 years with annual payments of $225,000 with the first payment occurring at lease inception. The system would cost $850,000 to buy and would be depreciated straight-line to a zero salvage value over five years. The actual salvage value is $65,000 at the end of the five years. The firm can borrow at 8 percent and has a tax rate of 34 percent. What is the Year 0 incremental cash flow from leasing instead of buying?

CFYear 0 = $850,000 - $225,000(1 - .34) = $701,500

A lessor can borrow at a rate of 7 percent and has a tax rate of 35 percent. The lessee can borrow at a rate of 8 percent and has a tax rate of 34 percent. Assume an asset costs $138,000 and can be leased in exchange for two annual payments of $70,000 with the first payment due at the time of signing. What is the incremental cash flow at Time 0 for the lessee for a purchase instead of a lease?

CFYear 0 = -$138,000 + $70,000(1 - .34) = -$91,800

A lease has a term of 3 years and annual payments of $25,000. The leased asset would cost $74,000 to buy and would be depreciated straight-line to a zero salvage value over 3 years. The actual salvage value is negligible. The lessee can borrow at a rate of 12 percent and has a tax rate of 35 percent. What is the incremental cash flow of purchasing instead of leasing for Year 3 from the lessee's perspective?

CFYear 3 = $25,000(1 - .35) + ($74,000 / 3)(.35) = $24,883.33

Artisan's is considering leasing a new computer. The lease terms include five annual payments of $1,500 with the first payment occurring when the lease is signed. The computer would cost $7,200 to buy and would be depreciated straight-line to a zero salvage value over 5 years. The actual salvage value is negligible because of technological obsolescence. The firm can borrow at a rate of 8 percent and has a tax rate of 35 percent. What is the cash flow from leasing relative to purchasing in Year 3?

CFYear 4 = -$1,500(1 - .35) - ($7,200 / 5)(.35) = -$1,479

Hi-Tek Industries is considering a 4-year lease with annual payments of $4,000. The firm can borrow at a rate of 6.7 percent and has a tax rate of 34 percent. The leased asset would cost $15,000 to purchase, have a 4-year tax life, and would be depreciated on a straight-line basis to zero. What would be the incremental cash flow in Year 4 from leasing instead of purchasing if the purchased asset had a pretax salvage value of $500?

CFYear 4 = {-$4,000(1 - .34) - [($15,000 / 4)(.34)]} - [$500 × (1 - .34)] = -$4,245

A lease has a term of 5 years with annual payments of $6,400. The asset would cost $45,000 to buy and would be depreciated straight-line to a zero salvage value over 5 years. The actual salvage value is zero. If the firm has a tax rate of 34 percent, what is the incremental cash flow in Year 5 of leasing rather than purchasing?

CFYear 5 = -$6,400(1 - .34) - ($45,000 / 5)(.34) = -$7,284

potential range of outcomes from a proposed project

Conducting scenario analysis helps managers see the:

Lasko's has 250,000 shares of stock outstanding, $400,000 in perpetual annual earnings, and a discount rate of 16 percent. The firm is considering a new project that has initial costs of $350,000 and annual perpetual cash flows of $60,000. What will be the change in the firm's stock price per share if this project is accepted?

Current price per share = ($400,000 / 250,000) / .16 = $10 Firm value with project = -$350,000 + [($400,000 + 60,000) / .16] = $2,525,000 Price per share with project = $2,525,000 / 250,000 = $10.10 Change in price per share = $10.10 - 10 = $.10

The quick ratio is measured as: A. current assets divided by current liabilities. B. cash on hand plus current liabilities, divided by current assets. C. current liabilities divided by current assets, plus inventory. D. current assets minus inventory, divided by current liabilities. E. current assets minus inventory minus current liabilities.

D. current assets minus inventory, divided by current liabilities.

A firm has a total debt ratio of .47. This means the firm has 47 cents in debt for every: A. $1 in total equity. B. $.53 in total assets. C. $1 in current assets. D. $.53 in total equity. E. $1 in fixed assets.

D. $.53 in total equity.

Farah Snack Co. has earnings after taxes of $150,000. Interest expense for the year was $20,000; preferred dividends paid were $20,000; and common dividends paid were $30,000. Taxes were $22,500. The firm has 100,000 shares of common stock outstanding. Earnings per share on the common stock was: A. $0.75. B. $1.10. C. $0.80. D. $1.30.

D. $1.30. EPS = (Net income - Dividend on Preferred Stock) \Oustanding Common Stock EPS = (1,50,000 - 20,000) \div 1,00,000 EPS = (1,30,000 ) \ 1,00,000 EPS = 1.30

Consider the following information for Ball Corp. Selling and administrative expense $40,000 Depreciation expense $70,000 Sales $350,000 Interest expense $30,000 Cost of goods sold $110,000 Taxes $17,500 What is the operating profit for Ball Corp.? A. $71,450 B. $90,000 C. None of the options D. $130,000

D. $130,000 Operating Profit = Sales - Cost of Goods Sold - Selling and Administrative Expense - Depreciation Expense = 350,000 - 110,000 - 40,000 - 70,000 = $130,000.

Density Farms Inc. had sales of $750,000, cost of goods sold of $200,000, selling and administrative expense of $70,000, and operating profit of $150,000. What was the value of depreciation expense? A. $0 B. $230,000 C. $150,000 D. $330,000

D. $330,000 Sales $750,000 Less cost of goods sold $200,000 Less selling and admin exp $70,000 Less operating profit $150,000 Depreciation expense= $330,000

A firm has total assets of $3,000,000 and stockholders equity is $1,000,000. What is the debt-to-total asset ratio? A. 55% B. 45% C. 75% D. 67%

D. 67%

A statement of cash flows allows a financial analyst to determine: A. whether a cash dividend is affordable. B. whether long-term assets are being financed with long-term or short-term financing. C. how increases in assets have been financed. D. All of the options

D. All of the options

Price-earnings (P/E) ratio is influenced by all of the following BUT: A. earnings per share. B. quality of management. C. the business risk the firm takes on. D. All of the options are true.

D. All of the options are true.

Joe's has old, fully depreciated equipment. Moe's just purchased all new equipment which will be depreciated over eight years. If Joe's and Moe's have the same sales, costs, tax rate, and enterprise value, then: A. Joe's will have a lower profit margin. B. Joe's will have a lower return on equity. C. Moe's will have a higher net income. D. Moe's and Joe's will have the same EV multiple. E. Moe's will have a lower EV multiple.

D. Moe's and Joe's will have the same EV multiple.

Which one of the following statements is correct if a firm has a receivables turnover of 10? A. It takes the firm 10 days to collect payment from its customers. B. It takes the firm 36.5 days to sell its inventory and collect the payment from the sale. C. It takes the firm an average of 36.5 days to sell its items. D. The firm collects on its sales in an average of 36.5 days. E. The firm has ten times more in accounts receivable than it does in cash.

D. The firm collects on its sales in an average of 36.5 days.

Which of the following is an outflow of cash? A. The sale of the company's common stock B. Profitable operations C. The sale of equipment D. The payment of cash dividends

D. The payment of cash dividends

In examining the liquidity ratios, the primary emphasis is the firm's: A. ability to earn an adequate return or profits. B. ability to effectively employ its resources. C. overall debt position. D. ability to pay short-term obligations on time.

D. ability to pay short-term obligations on time.

If a firm bases its growth projection on the rate of sustainable growth, shows positive net income, and has a dividend payout ratio of 30 percent, then the: A. fixed assets will have to increase at the same rate, even if the firm is currently operating at only 78 percent of capacity. B. number of common shares outstanding will increase at the same rate of growth. C. debt-equity ratio will have to increase. D. debt-equity ratio will remain constant while retained earnings increase. E. fixed assets, the debt-equity ratio, and number of common shares outstanding will all increase.

D. debt-equity ratio will remain constant while retained earnings increase.

Financial planning, when properly executed: A. ignores the normal restraints encountered by a firm. B. is based on the internal rate of growth. C. reduces the necessity of daily management oversight of the business operations. D. ensures internal consistency among the firm's various goals. E. eliminates the need to plan more than one year in advance.

D. ensures internal consistency among the firm's various goals.

Vinnie's Motors has a market-to-book ratio of 3.4. The book value per share is $34 and earnings per share are $1.36. Holding the market-to-book ratio and earnings per share constant, a $1 increase in the book value per share will: A. decrease the price-earnings ratio. B. decrease the EV multiple. C. decrease the market price per share. D. increase the price-earnings ratio. E. increase the return on equity.

D. increase the price-earnings ratio.

Asset accounts on the balance sheet are listed in order of: A. importance. B. profitability. C. dollar amount. D. liquidity.

D. liquidity.

The long-term debt ratio is probably of most interest to a firm's: A. credit customers. B. employees. C. suppliers. D. mortgage holder. E. stockholders.

D. mortgage holder.

Earnings per share is: A. operating profit divided by number of shares outstanding. B. net income divided by number of shares outstanding. C. net income divided by stockholders' equity. D. net income minus preferred dividends divided by number of shares outstanding.

D. net income minus preferred dividends divided by number of shares outstanding.

The amount that investors are willing to pay for each dollar of annual earnings is reflected in the: A. return on assets. B. return on equity. C. debt-equity ratio. D. price-earnings ratio. E. DuPont identity.

D. price-earnings ratio.

Ratios that measure how efficiently a firm's management uses its assets and equity to generate bottom line net income are known as _______ ratios. A. asset management B. long-term solvency C. short-term solvency D. profitability E. market value

D. profitability

Which one of the following sets of ratios would generally be of the most interest to stockholders? A. return on assets and profit margin B. quick ratio and times interest earned C. price-earnings ratio and debt-equity ratio D. return on equity and price-earnings ratio E. cash coverage ratio and equity multiplier

D. return on equity and price-earnings ratio

Marcie's Mercantile wants to maintain its current dividend policy, which is a payout ratio of 35 percent. The firm does not want to increase its equity financing but is willing to maintain its current debt-equity ratio. Given these requirements, the maximum rate at which Marcie's can grow is equal to: A. 35 percent of the internal rate of growth. B. 65 percent of the internal rate of growth. C. the internal rate of growth. D. the sustainable rate of growth. E. 65 percent of the sustainable rate of growth.

D. the sustainable rate of growth.

A capital intensity ratio of 1.03 means a firm has $1.03 in: A. total debt for every $1 in equity. B. equity for every $1 in total debt. C. sales for every $1 in total assets. D. total assets for every $1 in sales. E. long-term assets for every $1 in short-term assets.

D. total assets for every $1 in sales.

In addition to comparison with industry ratios, it is also helpful to analyze ratios using: A. only industry ratios provide valid comparisons. B. historical data C. future projections D. trend analysis and historical comparisons

D. trend analysis and historical comparisons

Fresh Fish has assets valued at $1.2 million and equity of $.98 million. The firm wants to obtain new equipment via a capital lease. The equipment costs $200,000 and the present value of the lease payments is $175,000. With the lease, firm's balance sheet will show assets of ____and liabilities of ____. A. $1,375,000; $1,375,000 B. $1,400,000; $1,180,000 C. $1,400,000; $1,400,000 D. $1,375,000; $1,155,000 E. $1,400,000; $1,155,000

D. $1,375,000; $1,155,000

Which of the following would represent a use of funds and, indirectly, a reduction in cash balances? A. A decrease in marketable securities B. The sale of new bonds by the firm C. An increase in accounts payable D. An increase in inventories

D. An increase in inventories

Why must some debt be eliminated when a firm enters a lease agreement? A. Lessors require an increase in equity to offset the lease obligation which is accomplished by replacing other current debt with equity. B. Lessors require lessees to reduce their debt to demonstrate ability to make the lease payments. C. FASB 13 requires a debt offset equal to the present value of the lease payments. D. Leases are all debt which causes an imbalance in the firm's debt-to-equity ratio. E. FASB 13 requires lease payments be offset by an equal decrease in debt payments.

D. Leases are all debt which causes an imbalance in the firm's debt-to-equity ratio.

Which one of these statements is false? A. Lenders are concerned about a firm's total liabilities including lease obligations. B. Debt displacement occurs with leasing. C. Less future debt can be raised for a growing firm when leasing occurs. D. Leasing allows the lessee to increase the benefits of debt capacity. E. If a firm uses operating leases, then it should think in terms of the liability-to-equity ratio rather than the debt-to-equity ratio.

D. Leasing allows the lessee to increase the benefits of debt capacity.

Sizzler's is considering either purchasing or leasing an asset that costs $28,000, has a 6-year life, and a zero salvage value. The firm has a 35 percent tax rate and a borrowing rate of 7 percent. The firm can lease the asset for five years with lease payments of $4,500 payable the first of each year. This lease would be classified as a(n): A. operating lease because the asset life is less than 10 years. B. operating lease because there is no cost reduction. C. leveraged lease because it is being financed with debt. D. capital lease because the lease term is greater than 75 percent of the economic life. E. sale and leaseback arrangement because Sizzler's obtains full use of the asset.

D. capital lease because the lease term is greater than 75 percent of the economic life.

If a lease is for 35 years the IRS will classify the lease as a: A. financial lease. B. operating lease. C. capital lease. D. conditional sale. E. sale and leaseback arrangement.

D. conditional sale.

FAS 13 sets forth four criteria for determining whether or not a lease must be classified as a capital lease. How many of these criteria must be met for capital lease classification? A. all four B. three C. two D. only one E. depends on the limit set by the lessee

D. only one

An operating lease generally: A. has a term that exceeds the economic life of the leased asset. B. is fully amortized. C. cannot be cancelled. D. requires the lessee to return the leased asset to the lessor if the lease is cancelled. E. requires the lessee to maintain the leased asset.

D. requires the lessee to return the leased asset to the lessor if the lease is cancelled.

The lease payment that the lessee sets as its bound is known as the: A. present value of the tax shields. B. reservation payment, LMIN. C. present value of operating savings. D. reservation payment, LMAX. E. reservation payment, LOPTIMAL.

D. reservation payment, LMAX.

If Alby's leases equipment directly from the equipment's manufacturer the lease must be a: A. leveraged lease. B. sales and leaseback arrangement. C. capital lease. D. sales-type lease. E. bargain lease.

D. sales-type lease.

Which one of the following is probably the best reason for leasing instead of buying? A. increased ROA B. circumvent expenditure controls C. 100 percent financing D. tax reduction E. increased uncertainty

D. tax reduction

Fargo North is considering the purchase of some new equipment costing $70,000. This equipment has a 2-year life after which time it will be worthless. The firm uses straight-line depreciation and borrows funds at a 8 percent rate of interest. The company's tax rate is 34 percent. The firm also has the option of leasing the equipment. What is the amount of the break-even lease payment?

Depreciation tax shield = ($70,000/2) (0.34) = $11,900 Discount rate = 0.08(1 - 0.34) = 0.0528 $70,000 = C(PVIFA^5.28%, 2); C = $37,795.77 Break-even lease payment = ($37,795.77 - $11,900)/(1 - 0.34) = $39,236

A new robotic welder can be leased for 5 years with annual payments of $300,000 with the first payment occurring at lease inception. The system would cost $1,050,000 to buy and would be depreciated straight-line to a zero salvage value. The actual salvage value is zero. The firm can borrow at 8 percent and has a tax rate of 34 percent. What discount rate should be used for valuing the lease?

Discount rate = .08(1 - .34) = .0528, or 5.28%

A banker considering loaning money to a firm for ten years would most likely prefer the firm have a debt ratio of _______ and a times interest earned ratio of _______. A. .50; .75 B. .50; 1.00 C. .45; 1.75 D. .40; .75 E. .40; 1.75

E. .40; 1.75

If a firm decreases its operating costs, all else constant, then the: A. profit margin will decrease. B. return on assets will decrease. C. total asset turnover rate will increase. D. cash coverage ratio will decrease. E. price-earnings ratio will decrease.

E. price-earnings ratio will decrease.

The financial ratio days' sales in inventory is measured as: A. inventory turnover plus 365 days. B. inventory times 365 days. C. inventory plus cost of goods sold, divided by 365 days. D. 365 days divided by the inventory. E. 365 days divided by the inventory turnover.

E. 365 days divided by the inventory turnover.

The equity multiplier is measured as total: A. equity divided by total assets. B. equity plus total debt. C. assets minus total equity, divided by total assets. D. assets plus total equity, divided by total debt. E. assets divided by total equity.

E. assets divided by total equity.

Which statement expresses all accounts as a percentage of total assets? A. pro forma balance sheet B. common-size income statement C. statement of cash flows D. pro forma income statement E. common-size balance sheet

E. common-size balance sheet

The least problem encountered when comparing the financial statements of one firm with those of another firm occurs when the firms: A. are in different lines of business. B. have geographically diverse operations. C. use different methods of depreciation. D. are both classified as conglomerates. E. have the same fiscal year-end.

E. have the same fiscal year-end.

One of the primary weaknesses of many financial planning models is that they: A. rely too much on financial relationships and too little on accounting relationships. B. are iterative in nature. C. ignore the goals and objectives of senior management. D. ignore cash payouts to stockholders. E. ignore the size, risk, and timing of cash flows.

E. ignore the size, risk, and timing of cash flows.

The market-to-book ratio is measured as the: A. market price per share divided by the par value per share. B. net income per share divided by the market price per share. C. market price per share divided by the net income per share. D. market price per share divided by the dividends per share. E. market value per share divided by the book value per share.

E. market value per share divided by the book value per share.

The extended version of the percentage of sales method: A. assumes that all net income will be paid out in dividends to stockholders. B. assumes that all net income will be retained by the firm and offset by a reduction in debt. C. is based on a capital intensity ratio of 1.0. D. requires that all financial statement accounts change at the same rate. E. separates accounts that vary with sales from those that do not vary with sales.

E. separates accounts that vary with sales from those that do not vary with sales.

The maximum rate at which a firm can grow while maintaining a constant debt-equity ratio is best defined by its: A. rate of return on assets. B. internal rate of growth. C. average historical rate of growth. D. rate of return on equity. E. sustainable rate of growth.

E. sustainable rate of growth.

Last year, Alfred's Automotive had a price-earnings ratio of 15 and earnings per share of $1.20. This year, the price earnings ratio is 18 and the earnings per share is $1.20. Based on this information, it can be stated with certainty that: A. the price per share decreased. B. the earnings per share decreased. C. investors are paying a lower price per share this year as compared to last year. D. investors are receiving a higher rate of return this year. E. the investors' outlook for the firm has improved.

E. the investors' outlook for the firm has improved.

FAS 13, Accounting for Leases requires: A. all leases, of any type, be recorded on the lessee's balance sheet. B. capital leases be recorded in the footnotes or scheduled section of the lessees' financial statements. C. sale and leaseback arrangements be recorded on the lessee's balance sheet with all other leases recorded elsewhere in the financial statements. D. operating leases be recorded on the lessee's balance sheet as an asset and offsetting liability. E. all leases with bargain purchase price options to be recorded on the lessee's balance sheet.

E. all leases with bargain purchase price options to be recorded on the lessee's balance sheet.

A financial lease has which one of the following characteristics? A. lessor maintains leased asset B. no right of renewal C. cancellation clause D. lessor must make all lease payments E. fully amortized

E. fully amortized

Operating leases: A. appear as offsetting items on the lessee's balance sheet. B. are fully expensed at the time the lease is established. C. are not included in the lessee's financial reports. D. are treated the same as a purchase. E. must be disclosed in the lessee's annual report.

E. must be disclosed in the lessee's annual report.

Which of these are offered as key considerations in the lease versus purchase decision according to the research findings of Smith and Wakeman? A. price discrimination opportunities and debt displacement options B. cash flows and sensitivity to use and maintenance decisions. C. attracting clients with low prices and debt displacement D. cash flows and debt displacement E. price discrimination opportunities and sensitivity to use and maintenance decisions

E. price discrimination opportunities and sensitivity to use and maintenance decisions

Kelso Electric is debating between a leveraged and an unleveraged capital structure. The all equity capital structure would consist of 19,000 shares of stock. The debt and equity option would consist of 12,000 shares of stock plus $240,000 of debt with an interest rate of 6 percent. What is the break-even level of earnings before interest and taxes between these two options? Ignore taxes.

EBIT/19,000 = [EBIT - ($240,000 x .06)]/12,000 EBIT = $39,085.71

Western Markets has 150,000 shares outstanding with a market price per share of $15. Each share is entitled to one right. If the firm sets a rights offer as 5 rights plus $10 for each new share, what will be the ex-rights price per share?

Ex-rights price = {[(5 × $15) + $10] / 6} = $14.17

You own 25 percent of Unique Vacations, Inc. You have decided to retire and want to sell your shares in this closely held, all-equity firm. The other shareholders have agreed to have the firm borrow $1.5 million to purchase your 1,000 shares of stock. What is the total value of this firm today if you ignore taxes?

Firm value = $1.5 million / .25 = $6.0 million

Thompson amp; Thomson is an all-equity firm that has 280,000 shares of stock outstanding. The company is in the process of borrowing $2.4 million at 5.5 percent interest to repurchase 75,000 shares of the outstanding stock. What is the value of this firm if you ignore taxes?

Firm value = ($2,400,000 / 75,000) × 280,000 = $8,960,000

Uptown Interior Designs is an all-equity firm that has 40,000 shares of stock outstanding. The company has decided to borrow $74,000 to buy out the 2,100 shares of a deceased stockholder. What is the total value of this firm if you ignore taxes?

Firm value = ($74,000 / 2,100) × 40,000 = $1,409,524

are constant over the short-run regardless of the quantity of output produced

Fixed costs:

I, II, and III only

Fixed costs: I. are variable over long periods of time. II. must be paid even if production is halted. III. are generally affected by the amount of fixed assets owned by a firm. IV. per unit remain constant over a given range of production output.

measured as cost per unit of time

Fixed production costs are:

Four Wheels requires $1.75 million to fund a new project and has decided to raise the funds via a seasoned stock offering. Assume the firm will incur $140,000 in indirect costs and pay 8.63 percent of the gross proceeds in direct costs. How much does the firm need to raise in total to cover all of the costs as well as fund the new project?

Gross proceeds = ($1,750,000 + 140,000) / (1 - .0863) / 50,000 = $2,068,513

The Market Place recently offered 5,000 shares of stock for sale via a Dutch auction. The firm received bids as follows: 500 shares at $22.50; 2,500 shares at $22.20; 3,300 shares at $22; and 5,500 shares at $21. Ignoring all costs, how much will the firm receive from this auction?

Gross proceeds = 5,000 × $22 = $110,000

both early stage decisions are probably riskier and should not likely use the same discount rate; and if a negative NPV is actually occurring, management should opt out of the project and minimize the firm's loss

In a decision tree, caution should be used in the analysis because:

all cash flows and probabilities

In a decision tree, the NPV to make the yes/no decision is dependent on:

one starts farthest out in time to make the first decision

In order to make a decision with a decision tree:

allocate the initial investment at its opportunity cost over the life of the project

In the present-value break-even the EAC is used to:

increase the net present value of a project

Including the option to expand in your project analysis will tend to:

HiTek is considering leasing some new equipment for 5 years with annual payments of $27,500. The equipment would cost $115,000 to buy and would be depreciated straight-line to a zero salvage value. The actual salvage value is zero. The firm can borrow at 8 percent and has a tax rate of 35 percent. What is the maximum lease payment HiTek would be willing to pay?

LMAX = $115,000 / PVIFA^(8% × (1 - .35),5 = $26,709.12

All-Tek is considering leasing some new equipment for 5 years with annual payments of $27,500. The equipment would cost $115,000 to buy and would be depreciated straight-line to a zero salvage value. The actual salvage value is zero. The firm can borrow at 8 percent and does not expect to owe any taxes for the next several years. What is the maximum lease payment All-Tek would be willing to pay?

LMAX = $115,000 / PVIFA^8%,5 = $28,802.49

expand

Last month you introduced a new product to the market. Consumer demand has been overwhelming and it appears that strong demand will exist over the long-term. Given this situation, management should consider the option to:

Why must some debt be eliminated when a firm enters a lease agreement?

Leases are all debt which causes an imbalance in the firm's debt-to-equity ratio.

Which one of these statements is FALSE?

Leasing allows the lessee to increase the benefits of debt capacity.

The effects of financial leverage depend on the operating earnings of the company. Based on this relationship, assume you graph the EPS and EBI for a firm, while ignoring taxes. Which one of these statements correctly states a relationship illustrated by the graph?

Leverage only provides value above the break-even point.

The concept of homemade leverage is most associated with:

MM Proposition I with no tax.

The proposition that the value of a levered firm is equal to the value of an unlevered firm is known as:

MM Proposition I with no tax.

The proposition that the cost of equity is a positive linear function of capital structure is called:

MM Proposition II (no taxes).

more complex than sensitivity or scenario analysis

Monte Carlo simulation is:

Green Valley Farms is considering either leasing or buying some new farm equipment. The lessor will charge $19,000 a year lease. The purchase price is $62,000. The equipment has a 3-year life after which time it will be worthless. Green Valley Farms uses straight-line depreciation, has a 32 percent tax rate, borrows money at 8 percent, and has sufficient tax loss carryovers to offset any potential taxable income the firm might have over the next five years. What is the net advantage to leasing?

NAL = $62,000 - ($19,000) (PVIFA^8%, 3) = $13,035

The Button Company is considering the purchase of a new machine for $30,000 that has a 5-year life and would be depreciated on a straight-line basis to a zero salvage value over its life. The machine is expected to save the firm $12,500 per year in operating costs. There is no actual salvage value. Alternatively, the firm can lease the machine for $7,300 annually for 5 years, with the first payment due at the end of the first year. The firm's tax rate is 34 percent and its cost of debt is 10 percent. What is the net advantage to leasing for the lessee?

NAL = NPV = $30,000 - [$7,300(1 - .34) + ($30,000 / 5)(.34)] × PVIFA^.10(1 - .34),5 = $1,577.10

A 5-year lease has annual payments of $115,000. The leased asset would cost $500,000 to buy, would be depreciated straight-line to a zero salvage value over 5 years, and has an actual salvage value of zero. The firm can borrow at 8 percent on a pretax basis and has a tax rate of 34 percent. What is the net advantage of leasing?

NPV = $500,000 - {$115,000(1 - .34) + [($500,000 / 5)(.34)]}[PVIFA^.08(1 - .34),5] = $27,850.89

A 6-year lease calls for annual payments of $2,100. The leased asset would cost $9,200 to buy and would be depreciated straight-line to a zero salvage value over 6 years. The actual salvage value is negligible. The firm can borrow at a rate of 8 percent. What is the NPV of the lease relative to the purchase if the lessee's tax rate is 35 percent?

NPV = $9,200 + {-$2,100(1 - .35) - [($9,200 / 6)(.35)]} × PVIFA^8%(1 - .35), 6 = -$390.86

A machine that costs $280,000 would be depreciated using the straight-line method by a leasing firm over a period of 3 years. Both the book value and the market value would be zero at the end of the 3 years. The lessor has a 34 percent tax rate while the lessee's tax rate is 20 percent. What is the NPV of the lease relative to the purchase to the lessor if the applicable pretax cost of borrowing is 7 percent and the lease payments are set at $102,100 annually for 3 years?

NPVLessor = -$280,000 + [($280,000 / 3)(.34) + $102,100(1 - .34)] × PVIFA^.07(1 - .34),3 NPVLessor = -$8,139.92

Schraeder Corporation has 20,000 shares outstanding at $30 each. The firm expects to raise $200,000 via a rights offering at a subscription price of $25. How many rights are required for each new share?

New shares = $200,000 / $25 = 8,000 Number of rights required per share = 20,000 / 8,000 = 2.5

Regional Power wants to raise $2.4 million in new equity via a rights offering with a subscription price of $12. There are currently 2.6 million shares outstanding, each with one right. How many rights are needed to purchase one new share?

Number of new shares = $2,400,000 / $12 = 200,000 Number of rights needed to obtain one share = 2,600,000 / 200,000 = 13

The Wordsmith Corporation has 40,000 shares outstanding with a market price of $25 each. The firms expects to raise $200,000 via a rights offering at a subscription price of $20. How many rights must be submitted to acquire one new share?

Number of new shares = $200,000 / $20 = 10,000 Number of rights needed per new share = 40,000 / 10,000 = 4

A.K. Stevenson wants to raise $20 million through a rights offering. The subscription price is set at $20. Currently, the company has 3 million shares outstanding with a current market price of $21.51 a share. Each shareholder will receive one right for each share of stock they currently own. How many rights will be needed to purchase one new share of stock in this offering?

Number of rights issued = 1 x 3,000,000 = 3,000,000 Number of shares needed = $20,000,000/ $20 = 1,000,000 Rights needed for each new share = 3,000,000/1,000,000 = 3 rights

Nelson's Metallurgy needs $1.36 million to fund an expansion project. The firm has decided to raise the funds through a negotiated offering. The terms of the offer include an offer price of $22.50 a share and an underwriting spread of 8.1 percent. How many shares must the firm sell in order to raise the funds it needs?

Number of shares = $1,360,000 / (1 - .081) / $22.50 = 65,772

You currently own 5 percent of the 2 million outstanding shares of Webster Mills. The company has just announced a rights offering with a subscription price of $40. One right will be issued for each share of outstanding stock. This offering will provide $20 million of new financing for the firm, ignoring all issue costs. Assume that all rights are exercised. What will be your new ownership position if you opted to sell your rights rather than exercise them personally?

Number of shares owned = .05 x 2,000,000 = 100,000.00 shares Number of shares offered = $20,000,000/$40 = 500,000.00 shares New ownership position = 100,000.00 /(2,000,000 + 500,000.00) = 4.00 percent

A firm has negotiated a seasoned equity offer that will provide the firm with $1.68 million in net proceeds. The underwriting spread is 7.35 percent and the firm needs to sell 50,000 shares. What is the offer price?

Offer price = $1,680,000 / (1 - .0735) / 50,000 = $36.27

Which one of these statements related to debt financing is correct?

Private placements generally have longer maturities than term loans.

Longmont Inc. is a levered firm with a cost of equity of 12 percent and a cost of debt of 6 percent. The required return on the assets is 10 percent. What is the firm's debt-equity ratio if there are no taxes?

RS = .12 = .10 + B/S(.10 - .06) B/S = .50

A firm has a debt-equity ratio of .64, a pretax cost of debt of 8.5 percent, and a required return on assets of 12.6 percent. What is the cost of equity if you ignore taxes?

RS = .126 + .64(.126 - .085) = .1522, or 15.22%

The Spartan Co. has an unlevered cost of capital of 11.6 percent, a cost of debt of 7.9 percent, and a tax rate of 35 percent. What is the target debt-equity ratio if the targeted levered cost of equity is 12.6 percent?

RS = .126 = .116 + B/S × (.116 - .079) × (1 - .35) B/S = .42

A firm has a debt-equity ratio of .64, a cost of equity of 13.04 percent, and a cost of debt of 8 percent. The corporate tax rate is 35 percent. What would be the cost of equity if the firm were all-equity financed?

RS = .1304 = R0 + .64(1 - .35) (R0 - .08) R0 = .1156, or 11.56%

Rosita's has a cost of equity of 13.76 percent and a pretax cost of debt of 8.5 percent. The debt-equity ratio is .60 and the tax rate is 34 percent. What is Rosita's unlevered cost of capital?

RS = .1376 = RU + .60 × (1 - .34) × (RU - .085) RU = .1227, or 12.27%

Wild Flowers Express has a debt-equity ratio of .60. The pretax cost of debt is 9 percent while the unlevered cost of capital is 14 percent. What is the cost of equity if the tax rate is 34 percent?

RS = .14 + .60 × (1 - .34) × (.14 - .09) = .1598, or 15.98%

Bigelow has a levered cost of equity of 14.29 percent and a pretax cost of debt of 7.23 percent. The required return on the assets is 11 percent. What is the firm's debt-equity ratio based on MM Proposition II with no taxes?

RS = .1429 = .11 + B/S(.11 - .0723) B/S = .87

A firm has a pretax cost of debt of 7.35 percent and an unlevered cost of capital of 12.8 percent. The tax rate is 34 percent and the levered cost of equity is 15.07 percent. What is the debt-equity ratio?

RS = .1507 = .128 + B/S × (1 - .34) × (.128 - .0735) B/S = .63

The Backwoods Lumber Co. has a debt-equity ratio of .68. The firm's required return on assets is 11.7 percent and its levered cost of equity is 15.54 percent. What is the pretax cost of debt based on MM Proposition II with no taxes?

RS = .1554 = .117 + .68(.117 - RB) RB = .0605, or 6.05%

A firm has a debt-equity ratio of .48. Its cost of debt is 7 percent and its overall cost of capital is 10.8 percent. What is its cost of equity if there are no taxes or other imperfections?

RWACC = .108 = (.48 / 1.48)(.07) + (1 / 1.48)RS RS = .1262, or 12.62%

A firm has debt of $7,000, equity of $12,000, a cost of debt of 7 percent, a cost of equity of 14 percent, and a tax rate of 30 percent. What is the firm's weighted average cost of capital?

RWACC = {[$12,000 / ($7,000 + 12,000)] × .14} + [$7,000 / ($7,000 + 12,000)] × .07 × (1 - .30) RWACC = .1065, or 10.65%

A firm has debt of $5,000, equity of $16,000, a cost of debt of 8 percent, a cost of equity of 12 percent, and a tax rate of 34 percent. What is the firm's weighted average cost of capital?

RWACC = {[$16,000 / ($5,000 + 16,000)] × .12} + [($5,000 / ($5,000 + 16,000) × .08 × (1 - .34)] RWACC = .1040, or 10.40%

A firm has zero debt in its capital structure and has an overall cost of capital of 10 percent. The firm is considering a new capital structure with 60 percent debt at an interest rate of 8 percent. Assuming there are no taxes or other imperfections, what would be the cost of equity with the new capital structure?

Rs = .10 + .60 / .40(.10 - .08) = .13, or 13%

If a firm is unlevered and has a cost of equity capital of 13.7 percent, what would be the cost of equity if its debt-equity ratio was revised to .4? The expected cost of debt is 7.4 percent and there are no taxes.

Rs = .137 + .4(.137 - .074) = .1622, or 16.22%

A firm has zero debt and an overall cost of capital of 13.8 percent. The firm is considering a new capital structure with 40 percent debt. The interest rate on the debt would be 7.2 percent and the corporate tax rate is 34 percent. What would be the cost of equity with the new capital structure?

Rs = .138 + (.4 / .6)(1 - .34)(.138 - .072) =.1670, or 16.70%

A firm has a debt-equity ratio of .57, and unlevered cost of equity of 14 percent, a levered cost of equity of 15.6 percent, and a tax rate of 34 percent. What is the cost of debt?

Rs = .156 = .14 + .57(1 - .34)(.14 - RB) RB = .0975, or 9.75%

A firm has a debt-equity ratio of 1, a cost of equity of 16 percent, and a cost of debt of 8 percent. If there are no taxes or other imperfections, what is its unlevered cost of equity?

Rs = .16 = r0 + 1(r0 - .08) r0 =.12, or 12%

because several variables are changed overtime

Scenario analysis is different than sensitivity analysis:

all of these

Sensitivity analysis evaluates the NPV with respect to:

degree to which the net present value reacts to changes in a single variable

Sensitivity analysis helps you determine the:

changing the value of a single variable and computing the resulting change in the current value of a project

Sensitivity analysis is conducted by:

Both whether the NPV should be trusted and may provide a false sense of security if all NPVs are positive; and the need for additional information as it tests each variable in isolation

Sensitivity analysis provides information on:

wide range of values to multiple variables simultaneously

Simulation analysis is based on assigning a _____ and analyzing the results.

Monte Carlo simulation

The approach that further attempts to model real world uncertainty by analyzing projects the way one might analyze gambling strategies is called:

the decision as to when a project should be started

The investment timing decision relates to:

Which one of these characteristics does NOT apply to a financial lease?

The lease is usually not fully amortized.

For accounting purposes, which one of the following conditions would automatically cause a lease to be classified as a capital lease?

The lease transfers ownership of the asset to the lessee by the end of the lease term.

present value break-even point

The point where a project produces a rate of return equal to the required return is known as the:

all of these

The potential decision to abandon a project has option value because:

present value break-even covers the economic opportunity costs of the investment

The present value break-even point is superior to the accounting break-even point because:

accounting

The sales level that results in a project's net income exactly equaling zero is called the _____ break-even.

present value

The sales level that results in a project's net present value exactly equaling zero is called the _____ break-even.

Which one of the following statements is true concerning a rights offering?

The subscription price is generally less than the market price.

I, II and IV only

The timing option that gives the option to wait: I. may be of minimal value if the project relates to a rapidly changing technology. II. is partially dependent upon the discount rate applied to the project being evaluated. III. is defined as the situation where operations are shut down for a period of time. IV. has a value equal to the net present value of the project if it is started today versus the net present value if it is started at some later date.

simulation

The type of analysis that is most dependent upon the use of a computer is _____ analysis.

all of these

Theoretically, the NPV is the most appropriate method to determine the acceptability of a project. A false sense of security can overcome the decision-maker when the procedure is applied properly but the positive NPV results are accepted blindly. Sensitivity and scenario analysis aid in the process by:

sensitivity

To ascertain whether the accuracy of the variable cost estimate for a project will have much effect on the final outcome of the project, you should probably conduct _____ analysis.

You are a broker and have been instructed to place an order for a client to purchase 100 shares of every IPO that comes to market. The next two IPOs are each priced at $30 a share and will begin trading on the same day. The client is allocated 20 shares of IPO A and 100 shares of IPO B. At the end of the first day of trading, IPO A was selling for $57 a share and IPO B was selling for $27 a share. What is the client's total profit or loss on these two IPOs as of the end of the first day of trading?

Total profit = [20 x ($57 - $30)] + [100 x ($27 - $30)] = $240

Assume there are three upcoming IPOs (A, B, and C) that are priced at $20 a share. You place an order with your broker to purchase 500 shares of each of the three offerings. Further assume that A is oversubscribed and your allocation is only 100 shares. You receive a full allocation on both B and C. Offer A is undervalued by $13, B is overvalued by $8, and C is overvalued by $1. What will be your combined total profit or loss on these three investments?

Total profit/(loss) = 100 × $13 + 500 × (-$8) + 500 × (-$1) = -$3,200

Wear Ever is expanding and needs $9 million to help fund this growth. The firm estimates it can sell new shares of stock for $40 a share. It also estimates it will cost an additional $250,000 for filing and legal fees related to the stock issue. The underwriters have agreed to a 5 percent spread. How many shares of stock must the firm sell if it is going to have $9 million available for its expansion needs?

Total value of issue = ($9,000,000 + $250,000)/(1 - 0.05) = $9,736,842.11 Number of shares needed = $9,736,842.11/$40 = 243,421 shares

Lee started a firm which he recently took public with a new stock issue of 1 million shares. As the firm's founder he personally owns 1.2 million shares, all of which he owned prior to the new stock issue. The offer price of the IPO was $16 a share. The price paid to the firm was $14.20 a share and the closing price on the IPO date was $19 a share. How much of a loss did Lee personally experience due to the IPO's underpricing?

Underpricing loss to Lee = 1,000,000($19 − 16) = $3,000,000

Which one of these applies to the after market period?

Underwriters generally only sell shares at or above the offer price.

Aspen's Distributors has a levered cost of equity of 13.84 percent and an unlevered cost of capital of 12.5 percent. The company has $5,000 in debt that is selling at par. The levered value of the firm is $14,600 and the tax rate is 34 percent. What is the pretax cost of debt?

VE = $14,600 - 5,000 = $9,600 RS = .1384 = .125 + ($5,000 / $9,600) × (1 - .34) × (.125 - RB) RB = .0860, or 8.60%

The Dance Studio is currently an all-equity firm that has 22,000 shares of stock outstanding with a market price of $27 a share. The current cost of equity is 12 percent and the tax rate is 35 percent. The firm is considering adding $225,000 of debt with a coupon rate of 6.25 percent to its capital structure. The debt will sell at par. What will be the levered value of the equity?

VL = (22,000 × $27) + (.35 × $225,000) = $672,750 VE = $672,750 - 225,000 = $447,750

Anderson's Furniture Outlet has an unlevered cost of capital of 10.3 percent, a tax rate of 34 percent, and expected earnings before interest and taxes of $1,900. The company has $4,000 in bonds outstanding that have an annual coupon of 7 percent. If the bonds are selling at par, what is the cost of equity?

VL = {[$1,900 × (1 - .34)] / .103} + (.34 × $4,000) = $13,534.76 VS = $13,534.76 - 4,000 = $9,534.76 RS = .103 + [($4,000 / $9,534.76) × (1 - .34) × (.103 - .07)] = .1121, or 11.21%

An unlevered firm has a cost of capital of 13.6 percent and earnings before interest and taxes of $138,000. A levered firm with the same operations and assets has both a book value and a face value of debt of $520,000 with an annual coupon of 7 percent. The applicable tax rate is 34 percent. What is the value of the levered firm?

VL = {[$138,000 × (1 - .34)] / .136} + (.34 × $520,000) = $846,505.88

Alexandria's Dance Studio is currently an all-equity firm with earnings before interest and taxes of $338,000 and a cost of equity of 14.2 percent. The tax rate is 34 percent. Alexandria is considering adding $400,000 of debt with a coupon rate of 7 percent to her capital structure. The debt will be sold at par value. What is the levered value of the equity?

VL = {[$338,000 × (1 - .34)] / .142} + (.34 × $400,000) = $1,706,986 VE = $1,706,986 - 400,000 = $1,306,986

Salmon Inc. has debt with both a face and a market value of $227,000. This debt has a coupon rate of 7 percent and pays interest annually. The expected earnings before interest and taxes is $87,200, the tax rate is 35 percent, and the unlevered cost of capital is 12 percent. What is the firm's cost of equity?

VL = {[$87,200 × (1 - .35)] / .12} + (.35 × $227,000) = $551,783.33 VE = $551,783.33 - 227,000 = $324,783.33 Rs = .12 + [($227,000 / $324,783.33) × (1 - .35) × (.12 - .07)] = .1427, or 14.27%

Joe's Leisure Time Sports is an unlevered firm with an aftertax net income of $78,400. The unlevered cost of capital is 11.4 percent and the tax rate is 35 percent. What is the value of this firm?

VU = $78,400 / .114 = $687,719.30

Johnson Tire Distributors has an unlevered cost of capital of 13 percent, a tax rate of 34 percent, and expected earnings before interest and taxes of $1,800. The company has $3,200 in bonds outstanding that have an 8 percent coupon and pay interest annually. The bonds are selling at par value. What is the cost of equity?

VU = [$1,800 x (1- .34)]/.13 = $9,138.46 VL = $9,138 + (.34 x $3,200) = $10,226.46 VE = $10,226 - $3,200 = $7,026.46 RE = 0.13 + [(0.13 - 0.08) x ($3,200/$7,026.46) x (1 - .34)] = 14.5 percent

Jemisen's firm has expected earnings before interest and taxes of $1,900. Its unlevered cost of capital is 13 percent and its tax rate is 34 percent. The firm has debt with both a book and a face value of $2,900. This debt has an 8 percent coupon and pays interest annually. What is the firm's weighted average cost of capital?

VU = [$1,900 x (1 - .34)]/.13 = $9,646.15 VL = $9,646.15 + (.34 x $2,900) = $10,632.15 VE = $10,632.15 - $2,900 = $7,732.15 RE = 0.13 + (0.13 - 0.08) x ($2,900/$7,732.15) x (1 - 0.34) = 0.142377 WACC = [($7,732.15/$10,632.15) x 0.142377] + [($2,900/$10,632.15) x 0.08 x (1 - 0.34)] = 11.79 percent

The Montana Hills Co. has expected earnings before interest and taxes of $17,100, an unlevered cost of capital of 12.4 percent, and debt with both a book and face value of $25,000. The debt has an annual 6.2 percent coupon. If the tax rate is 34 percent, what is the value of the firm?

VU = [$17,100 × (1 - .34) ] / .124 = $91,016.13 VL = $91,016.13 + (.34 × $25,000) = $99,516.13

L.A. Clothing has expected earnings before interest and taxes of $2,000, an unlevered cost of capital of 16 percent and a tax rate of 34 percent. The company also has $2,800 of debt that carries a 7 percent coupon. The debt is selling at par value. What is the value of this firm?

VU = [$2,000 x (1 - .34)]/.16 = $8,250.00 VL = $8,250.00 + .34 ($2,800) = $9,202.00

The Winter Wear Company has expected earnings before interest and taxes of $3,800, an unlevered cost of capital of 15.4 percent and a tax rate of 35 percent. The company also has $2,600 of debt with a coupon rate of 5.7 percent. The debt is selling at par value. What is the value of this firm?

VU = [$3,800 ×(1 - .35)] / .154 = $16,038.96 VL = $16,038.96 + (.35 × $2,600) = $16,948.96

You own 200 shares of a stock valued at $21 a share. Each share is entitled to one right. A rights offer grants you the option of obtaining one new share for two rights plus $17. What is the value of each right?

Value of one right = $21 - [(2 × $21) + $17]/3 = $1.33

Assume it requires 3 rights to obtain a new share in a rights offering. If the stock's price prior to the ex-rights date is $25 and the ex-rights price is $22.75, what is the value of each right?

Value of one right = $25 - 22.75 = $2.25

all of these

Variable costs:

change in direct relationship to the quantity of output produced

Variable costs:

all of these

Which of the following are hidden options in capital budgeting

both present value break-even; and accounting profit break-even

Which of the following are types of break-even analysis?

I and III only

Which of the following statements are correct concerning the accounting break-even point? I. The net income is equal to zero at the accounting break-even point. II. The net present value is equal to zero at the accounting break-even point. III. The quantity sold at the accounting break-even point is equal to the total fixed costs plus depreciation divided by the contribution margin. IV. The quantity sold at the accounting break-even point is equal to the total fixed costs divided by the contribution margin.

I and III only

Which of the following statements are correct concerning the present value break-even point of a project? I. The present value of the cash inflows equals the amount of the initial investment. II. The payback period of the project is equal to the life of the project. III. The operating cash flow is at a level that produces a net present value of zero. IV. The project never pays back on a discounted basis.

II only

Which of the following statements concerning variable costs is (are) correct? I. Variable costs minus fixed costs equal marginal costs. II. Variable costs are equal to zero when production is equal to zero. III. An increase in variable costs increases the operating cash flow.

direct labor costs

Which one of the following is most likely a variable cost?

In a best efforts offering the investment bank makes its money primarily by earning:

a commission on each share sold.

MM Proposition II is the proposition that:

a firm's cost of equity capital is a positive linear function of the firm's capital structure.

In an EPS-EBI graphical relationship, the slope of the debt ray is steeper than the equity ray. The debt ray has a lower intercept because:

a fixed interest charge must be paid even at low earnings.

The increase in risk to shareholders when financial leverage is introduced is best evidenced by:

a higher variability of EPS with debt than with all-equity financing.

A registration statement is effective on the 20th day after filing unless:

a letter of comment suggesting changes is issued by the SEC.

The city of Plainview sold its maintenance facility in an all-cash transaction and used the proceeds to improve the city's financial position. The city then leased the building from the new owner on a non-cancellable basis. The city will be responsible for the maintenance and upkeep of the facility. These transactions illustrate:

a sale and leaseback.

Which one of the following will tend to increase the benefit of the interest tax shield given a progressive tax rate structure?

a sizeable increase in taxable income

In the presence of corporate taxes, riskless cash flows should be discounted at the:

aftertax riskless rate of interest.

FAS 13, Accounting for Leases requires:

all leases with bargain purchase price options to be recorded on the lessee's balance sheet.

Assume that both the lessor and the lessee have the same interest and tax rates and there are no transaction costs. Given this, the best lease agreement results in:

an NPV of zero for both parties.

Venture capitalists provide financing for new firms from the seed and start-up stage all the way to mezzanine and bridge financing. In exchange for this financing, venture capitalists generally receive:

an equity position and board of director positions.

Which one of the following is NOT one of the four main functions provided by underwriters?

auditing the financial statements

In which one of these cases is a lease most beneficial to both parties? A. when the lessor's tax rate is lower than the lessee's . b. when the lessor's tax rate is equal to the lessee's C. when the lessor's tax rate is higher than the lessee's D. never, because a lease cannot be beneficial to both parties E. since leases always have a zero NPV the best the parties can do is to break even

b. when the lessor's tax rate is equal to the lessee's

The price at which offered securities are sold in a Dutch auction underwriting is determined by the:

bidders

Sizzler's is considering either purchasing or leasing an asset that costs $28,000, has a 6-year life, and a zero salvage value. The firm has a 35 percent tax rate and a borrowing rate of 7 percent. The firm can lease the asset for five years with lease payments of $4,500 payable the first of each year. This lease would be classified as a(n):

capital lease because the lease term is greater than 75 percent of the economic life.

Which one of these can be ignored when valuing a purchase versus a lease?

changes in operating costs related to the acquired asset

If a lease is for 35 years the IRS will classify the lease as a:

conditional sale.

In comparison to debt issuance expenses, the total direct costs of equity issues are:

considerably greater.

The green shoe provision is used to:

cover over-subscriptions.

An equity issue up to $1 million offered in small increments to a large number of people via the Internet is most commonly referred to as:

crowdfunding

Empirical evidence suggests that upon announcement of a seasoned equity issue, current stock prices generally:

decrease perhaps because the issue reflects management's view the stock is overvalued.

Assuming everything else is constant, when a stock goes ex-rights the stock price should:

decrease since the stockholder is losing an option.

Which type(s) of dilution are relevant to a firm's shareholders when the firm's shares are issued with rights?

dilution of stock price per share

A lease with which one of these characteristics would NOT be qualified by the IRS?

early balloon payments

Under the _______ method, the underwriter buys the securities for less than the offering price and accepts the risk of not selling the issue, while under the _______ method, the underwriter does not purchase the shares but merely acts as an agent.

firm commitment; best efforts

Dream Makers has expended almost all of its start-up funds and is seeking venture capital to begin manufacturing. Which type of financing is it seeking?

first-round financing

A financial lease has which one of the following characteristics?

fully amortized

The first equity issue offered to the general public by a firm is a:

general cash offer.

Direct expenses of an IPO include the:

gross spread plus other direct expenses.

MM Proposition II with taxes:

has the same general implications as MM Proposition II without taxes.

All of the following are major requirements needed to qualify for shelf registration except:

having no violations of the Securities Act of 1933 in the past three years.

Venture capitalists will frequently:

hold voting preferred stock which grants them priorities over common stockholders in the event of a sale or liquidation.

In the absence of taxes, the capital structure chosen by a firm doesn't really matter because of:

homemade leverage.

Shareholders who have rights are always:

in the same financial position if they sell or if they exercise their rights.

MM Proposition I with taxes states that:

increasing the debt-equity ratio increases firm value.

A key underlying assumption of MM Proposition I without taxes is that:

individuals and corporations borrow at the same rate.

A preliminary prospectus contains:

information very similar to the final prospectus but excludes the selling price.

The first public equity issue offered by a company is commonly referred to as a(n):

initial public offering (IPO)

Venture capitalists are:

intermediaries that raise funds from outside investors.

A firm commitment arrangement with an investment banker occurs when the:

investment banker buys the securities for less than the offering price and accepts the risk of not being able to sell them.

A standby underwriting arrangement in conjunction with a rights offering provides the:

issuer with an alternative avenue of sale to ensure success of the rights offering.

MM Proposition I with no tax supports the argument that:

it is completely irrelevant how a firm arranges its finances.

Assume the net present value of a lease relative to a purchase is $150. This indicates that the:

lease is preferred.

A leveraged lease typically involves a non-recourse loan which means that in the case of default the:

lease payments go directly to the lender.

One key reason why the IRS is concerned about the structure of lease contracts is because:

leases can be set up solely to avoid taxes.

The appropriate discount rate that a lessee should use to value a financial lease is the:

lessee's aftertax cost of secured borrowing.

MM Proposition I without taxes proposes that:

leverage does not affect the value of the firm.

If the lessor borrows the majority of the purchase price of a leased asset, the lease is called a:

leveraged lease.

The reason that MM Proposition I does not hold in the presence of corporate taxation is because:

levered firms pay less taxes compared with identical unlevered firms.

Dilution commonly refers to the:

loss in existing shareholder's value.

When computing the incremental cash flows from leasing relative to purchasing, the:

lost depreciation tax benefit is a negative cash flow.

Debt capacity is often offered as a reason for a stock price to decline when additional equity securities are issued. The primary reason that supports this argument is that:

management feels the probability of default has risen, which limits the firm's debt capacity and thus an equity issue is necessary.

Which one of these characteristics is least applicable to term loans?

maturity in excess of five years

A firm should select the capital structure which:

maximizes the value of the firm.

Operating leases:

must be disclosed in the lessee's annual report.

Management's first step in any issue of securities to the public is to:

obtain approval from the board of directors.

To meet IRS guidelines for leasing, the lease should:

offer renewal options only at fair market value.

FAS 13 sets forth four criteria for determining whether or not a lease must be classified as a capital lease. How many of these criteria must be met for capital lease classification?

only one

Corporations primarily use the shelf registration method of security sales because:

preregistered securities can be quickly brought to market.

When a lease must be recorded on the balance to meet FAS 13, the asset amount is set equal to the:

present value of the lease payments.

Which of these are offered as key considerations in the lease versus purchase decision according to the research findings of Smith and Wakeman?

price discrimination opportunities and sensitivity to use and maintenance decisions

The market for venture capital refers to the:

private financial marketplace for servicing small, young firms.

Which one of the following services is least apt to be offered to a corporation by an investment bank?

providing checking account management

Potential investors primarily obtain detailed information regarding a new issue by reading the:

red herring.

According to MM Proposition II with no taxes, the:

required return on equity is a linear function of the firm's debt-equity ratio.

An operating lease generally:

requires the lessee to return the leased asset to the lessor if the lease is cancelled.

The lease payment that the lessee sets as its bound is known as the:

reservation payment, LMAX.

Negotiated offers generally:

result in higher issue costs than do competitive offers.

An equity issue sold to the firm's existing stockholders is called a:

rights offer.

If Alby's leases equipment directly from the equipment's manufacturer the lease must be a:

sales-type lease.

A company must file a registration statement with the SEC providing various financial and company information in order to sell new securities to the public. This registration statement does not need to be filed if the:

securities are loans that mature within 9 months.

Bryan invested in Bryco stock when the firm was financed solely with equity. The firm now has a debt-equity ratio of .3. To maintain the same level of leverage he originally had, Bryan needs to:

sell some shares of Bryco stock and loan out the proceeds.

When comparing levered versus unlevered capital structures, leverage works to increase EPS for high levels of EBIT because interest payments on the debt:

stay fixed, leaving more income to be distributed over fewer shares.

Which type of offering will generally incur the lowest direct issue costs as a percentage of gross proceeds?

straight bonds

If current shareholders want to acquire one share of stock under a rights plan they must:

submit the number of rights required plus the subscription price.

To determine the value of a rights offering, the stockholder needs to know the following two pieces of information in addition to the current stock price, the:

subscription price and the number of rights needed to acquire a new share.

Which one of the following is probably the best reason for leasing instead of buying?

tax reduction

One argument against the use of shelf-registration is:

the age of the information disclosure.

The interest tax shield has no value for a firm when:

the firm is unlevered.

In a direct lease arrangement, the owner of the asset is:

the lessor.

The interest tax shield is a key reason why:

the net cost of debt to a firm is generally less than the cost of equity.

Arguments offered as explanations, with or without market evidence, as to why most U.S. equity issues are sold without rights include all of the following except:

the underwritten offer price is generally set 48 hours prior to the offering while the rights price must be set much further in advance.

MM Proposition I with taxes is based on the concept that:

the value of the firm increases as total debt increases because of the interest tax shield.

MM Proposition I with taxes supports the theory that:

there is a positive linear relationship between the amount of debt in a levered firm and its value.

Empirical evidence suggests that new equity issues are generally:

underpriced, in part, to counteract the winner's curse.

Oversubscription is most commonly the result of:

underpricing.

Security issues that are governed by Regulation A are:

valued at less than $5 million.

In which one of these cases is a lease most beneficial to both parties?

when the lessor's tax rate is equal to the lessee's