FIN 413 - Final Exam
Use the figure for the question(s) below. The above screen shot from Google Finance shows the basic stock information for Logitech International SA (USA) after the close of business on August 22, 2008. What is the difference between the opening and closing price of the stock on this date?
$0.24
The Sisyphean Company is considering a new project that will have an annual depreciation expense of $3.6 million. If Sisyphean's marginal corporate tax rate is 35% and its average corporate tax rate is 30%, then what is the value of the depreciation tax shield on the company's new project?
$1,260,000
CathFoods will release a new range of candies which contain antioxidants. New equipment to manufacture the candy will cost $2 million, which will be depreciated by straight-line depreciation over four years. In addition, there will be $5 million spent on promoting the new candy line. It is expected that the range of candies will bring in revenues of $4 million per year for four years with production and support costs of $1.5 million per year. If CathFoods' marginal tax rate is 35%, what are the incremental free cash flows in the second year of this project?
$1.800 million
A company buys tracking software for its warehouse which, along with the computer system and ancillaries to run it, will cost $1.6 million. This purchase will be deducted over five years. It is expected that the software will reduce inventory by $10.7 million at the end of the first year after it is installed, though there will be an annual cost of $120,000 per year to run the system. If the company's marginal tax rate is 40%, how will the purchase of this item change the company's free cash flows in the first year?
$10.756 million
A firm is considering changing their credit terms. It is estimated that this change would result in sales increasing by $1,600,000. This in turn would cause inventory to increase by $125,000, accounts receivable to increase by $100,000, and accounts payable to increase by $90,000. What is the firm's expected change in net working capital?
$135,000
Vernon-Nelson Chemicals is planning to release a new brand of insecticide, Bee-Safe, that will kill many insect pests but not harm useful pollinators. Buying new equipment to manufacture the product will cost and there will be an additional cost to reconfigure existing plant. The equipment is expected to have a lifetime of nine years and will be depreciated by the straight-line method over its lifetime. The firm expects that they should be able to sell 1,500,000 gallons per year at a price of $53 per gallon. It will take $36 per gallon to manufacture and support the product. If Vernon-Nelson's marginal tax rate is 40%, what are the incremental earnings after tax in year 3 of this project?
$14.3 million
A garage is installing a new "bubble-wash" car wash. It will promote the car wash as a fun activity for the family, and it is expected that the novelty of this approach will boost sales in the medium term. If the cost of capital is 10%, what is the net present value (NPV) of this project?
$150,548
JRN Enterprises just announced that it plans to cut its dividend from $3.00 to $1.50 per share and use the extra funds to expand its operations. Prior to this announcement, JRN's dividends were expected to grow indefinitely at 4% per year and JRN's stock was trading at $25.50 per share. With the new expansion, JRN's dividends are expected to grow at 8% per year indefinitely. Assuming that JRN's risk is unchanged by the expansion, the value of a share of JRN after the announcement is closest to ________.
$19.32
CathFoods will release a new range of candies which contain anti-oxidants. New equipment to manufacture the candy will cost which will be depreciated by straight-line depreciation over six years. In addition, there will be spent on promoting the new candy line. It is expected that the range of candies will bring in revenues of per year for five years with production and support costs of $1.5 million per year. If CathFoods' marginal tax rate is 35%, what are the incremental earnings in the second year of this project?
$2.492 million
Big Cure and Little Cure are both pharmaceutical companies. Big Cure presently has a potential "blockbuster" drug before the Food and Drug Administration (FDA) waiting for approval. If approved, Big Cure's blockbuster drug will produce $1 billion in net income for Big Cure. Little Cure has ten separate, less important drugs before the FDA waiting for approval. If approved, each of Little Cure's drugs would produce $50 million in net income. The probability of the FDA approving a drug is 50%.What is the expected payoff for Little Cure's ten drugs?
$250 million
A firm is considering investing in a new machine that will cost $400,000 and will be depreciated straight-line over five years. If the firm's marginal tax rate is 39%, what is the annual depreciation tax shield of purchasing the machine?
$31,200
A small manufacturer that makes clothespins and other household products buys new injection molding equipment for a cost of $500,000. This will allow the manufacturer to make more clothespins in the same amount of time with an estimated increase in sales of 25%. If the manufacturer currently makes 75 tons of clothespins per year, which sell at $18,000 per ton, what will be the increase in revenue next year from the new equipment?
$337,500
A firm is considering a new project that will generate cash revenue of $1,300,000 and cash expenses of $700,000 per year for five years. The equipment necessary for the project will cost $300,000 and will be depreciated straight line over four years. What is the expected free cash flow in the second year of the project if the firm's marginal tax rate is 35%?
$416,250
Epiphany Industries is considering a new capital budgeting project that will last for three years. Epiphany plans on using a cost of capital of 12% to evaluate this project. Based on extensive research, it has prepared the following incremental cash flow projects: The free cash flow for the last year of Epiphany's project is closest to ________.
$65,750
The above screen shot from Google Finance shows basic stock information for PepsiCo. If you owned of PepsiCo for the period shown, how much would you have earned in dividend payments?
$688.00
Shepard Industries is evaluating a proposal to expand its current distribution facilities. Management has projected the project will produce the following cash flows for the first two years (in millions). The depreciation tax shield for Shepard Industries project in year 1 is closest to ________.
$69 million
The current zero-coupon yield curve for risk-free bonds is shown above. What is the price of a zero-coupon, four-year, risk-free bond of $100?
$87.99
The average annual return for the S&P 500 from 1886 to 2006 is 9.5%, with a standard deviation of 18%. Based on these numbers, what is a 95% confidence interval for 2007's returns?
-26.5%, 45.5%
The average annual return over the period 1926-2009 for the S&P 500 is 12.8%, and the standard deviation of returns is 21.4%. Based on these numbers, what is a 67% confidence interval for 2010 returns?
-8.6%, 34.2%
Consider the following yields to maturity on various one-year, zero-coupon securities: The credit spread of the B corporate bond is closest to ________.
1.4%
A brewer is launching a new product: brewed ginger ale with a low alcohol content. The brewer plans to spend promoting this product this year, which is expected to expand the sales of this product to this year and next year. They do expect there will be loss of sales of this year and next year in their other products as customers switch to drinking the new ginger ale. The gross profit margin for the new ginger ale is 40%, the gross profit margin of all of the brewer's other products is 30%, and the brewer's marginal corporate tax rate is 35%. What are incremental earnings arising from the promotional campaign this year?
1.625 million
Consider the following realized annual returns: The average annual return on IBM from 1996 to 2005 is closest to ________.
16.07%
The S&P 500 index delivered a return of 10%, 15%, 15%, and -30% over four successive years. What is the arithmetic average annual return for four years?
2.5%
Consider an economy with two types of firms, S and I. S firms always move together, but I firms move independently of each other. For both types of firms there is a 70% probability that the firm will have a 20% return and a 30% probability that the firm will have a -30% return.The standard deviation for the return on an portfolio of 20 type S firms is closest to ________.
22.91%
Use the figure for the question(s) below. The above screen shot from Google Finance shows the basic stock information for Kraft Foods Inc. after the close of the stock market on May 30, 2008. What is the highest that the stock has traded at in the last 12 months?
35.29
Consider the following average annual returns: Investment Average Return Small Stocks 23.7% S&P 50013.8% Corporate Bonds 7.9% Treasure Bonds 6.5% Treasury Bills 4.5% What is the excess return for the S&P 500?
9.3%
The probability mass between two standard deviations around the mean for a normal distribution is ________.
95%
Which of the following is NOT a factor that a manager should bear in mind when estimating a project's revenues and costs?
A new product typically has its highest sales immediately after release as customers are attracted by the novelty of the product.
Which of the following is true about the face value of a bond?
All of these are true.
________ options allow the holder to exercise the option on any date up to and including the expiration date.
American
Lloyd Industries raised $28 million in order to upgrade its roller kiln furnace for the production of ceramic tiles. The company funded this by issuing 15-year bonds with a face value of $1,000 and a coupon rate of 6.2%, paid annually. The above table shows the yield to maturity for similar 15-year corporate bonds of different ratings issued at the same time. When Lloyd Industries issued their bonds, they received a price of $962.63. Which of the following is most likely to be the rating these bonds received?
BBB
Luther Industries needs to raise $25 million to fund a new office complex. The company plans on issuing ten-year bonds with a face value of $1,000 and a coupon rate of 7.0% (annual payments). The following table summarizes the YTM for similar ten-year corporate bonds of various credit ratings: Suppose that when these bonds were issued, Luther received a price of $972.42 for each bond. What is the likely rating that Luther's bonds received?
BBB
Which of the following statements regarding bonds and their terms is FALSE?
By convention, the coupon rate is expressed as an effective annual rate.
Which of the following formulas will correctly calculate Net Working Capital?
Cash + Inventory + Receivables - Payables
________ options allow the holder to exercise the option only on the expiration date.
European
A capital budget lists the potential projects a company may undertake in future years.
False
A floor broker is a person at the NASDAQ with a trading license who represents orders on the floor.
False
A real option is the obligation to take a particular business action.
False
A stock whose return does not depend on overall economic conditions has a high systematic risk.
False
Before it matures, the price of any bond is always less than its face value.
False
Bond traders generally quote bond yields rather than bond prices, since yield to maturity depends on the face value of the bond.
False
Capital budgeting decisions use the Net Present Value rule so that those decisions maximize net present value (NPV).
False
Investors should earn a risk premium for bearing unsystematic risk.
False
Prior to its maturity date, the price of a zero-coupon bond is its face value.
False
Rational investors may be willing to choose an investment that has additional risk but does not offer additional reward.
False
The coupon value of a bond is the face value of the bond.
False
The credit spread of a bond shrinks if it is perceived that the probability of the issuer defaulting increases.
False
There is a clear link between the volatility of returns for individual stocks and the returns for individual stocks.
False
To evaluate a capital budgeting decision, it is sufficient to determine its consequences for the firm's earnings.
False
Treasury bonds have original maturities from one to ten years, while Treasury notes have original maturities of more than ten years.
False
When evaluating the effectiveness of an improved manufacturing process we should evaluate the total sales and costs generated by this process.
False
Which of the following statements is FALSE?
Fluctuations of a stock's return that are due to firm-specific news are common risks.
Which of the following will be a source of cash flows for a shareholder of a certain stock?I. Sale of the shares at a future dateII. The firm in which the shares are held paying out cash to shareholders in the form of dividendsIII. The firm in which the shares are held increasing the total number of shares outstanding through a stock split.
I and II
The standard deviation of returns of ________. I.small stocks is higher than that of large stocks II. large stocks is lower than that of corporate bonds III.corporate bonds is higher than that of Treasury bills Which statement is true?
I and III
Which of the following models directly values all of the firm's equity, rather than a single share? I. Dividend-discount model II.Total payout model III. Discounted cash flow model
II only
A company planning to market a new model of motor scooter analyzes the effect of changes in the selling price of the motor scooter, the number of units that will be sold, the cost of making the motor scooter, the effect on Net Working Capital, and the cost of capital for the project. They predict that the break-even point for sales price for the motor scooter is $2,480. What does this mean?
If the motor scooter is sold for $2,480, then the net present value (NPV) for the product will be zero.
Which of the following will NOT increase a company's dividend payments?
It can issue more shares.
A maker of kitchenware is planning on selling a new chef-quality kitchen knife. The manufacturer expects to sell 1.6 million knives at a price of $120 each. These knives cost $80 each to produce. Selling, general, and administrative expenses are $500,000. The machinery required to produce the knives cost $1.4 million, depreciated by straight-line depreciation over five years. The maker determines that the EBIT break-even point for units sold and sale price is less than these estimates and that the EBIT break-even point for costs per unit, SG&A, and depreciation are greater than these estimates, so decides to go ahead with manufacturing the knife. Was this the correct decision?
It cannot be determined whether the decision was correct, since other factors contributing to the project's net present value (NPV), such as the upfront investment, have not been included in the analysis.
Use the figure for the question(s) below. The above screen shot from Google Finance shows the basic stock information for Logitech International SA (USA). What is Logitech International SA (USA)'s ticker symbol?
LOGI
Two slot machines offer to double your money 3 times out of 5. Machine A takes $10 bets and Machine B takes $100 bets on each occasion. A risk-averse investor prefers to bet on ________.
Machine A
The above screen shot from Google Finance shows the price history of Progenics, a pharmaceutical company. In the time period shown, Progenics released information that an intravenously-administered formulation of their leading product had failed in a Phase III clinical trial. In which of the months shown in the price history is this most likely to have occurred?
March 2008
Which of the following statements is FALSE?
Scenario analysis breaks the net present value (NPV) calculation into its component assumptions and shows how the net present value (NPV) varies as each one of the underlying assumptions changes.
Why is the yield to maturity of a zero-coupon, risk-free bond that matures at the end of a given period the risk-free interest rate for that period?
Since such a bond provides a risk-free return over that period, the Law of One Price guarantees that the risk-free interest rate equals the yield to maturity.
How are investors in zero-coupon bonds compensated for making such an investment?
Such bonds are purchased at a discount, below their face value.
Which of the following statements is FALSE?
The break-even level of an input is the level for which the investment has an internal rate of return (IRR) of zero.
Which of the following statements is FALSE?
The geometric average return will always be above the arithmetic average return, and the difference grows with the volatility of the annual returns.
Which of the following best describes why the predicted incremental earnings arising from a given decision are not sufficient in and of themselves to determine whether that decision is worthwhile?
These earnings are not actual cash flows.
Which of the following investments offered the lowest overall return over the past eighty years?
Treasury bills
A bond is said to mature on the date when the issuer repays its notional value.
True
A bond will trade at a discount if its coupon rate is less than its yield to maturity.
True
A firm can either pay its earnings to its investors, or it can keep them and reinvest them.
True
Bonds with a high risk of default generally offer high yields.
True
Historical evidence on the returns of large portfolios of stock and bonds shows that investments with higher volatility have rewarded investors with higher returns.
True
In the United States over the long term, small stocks have provided the highest return followed by the large stocks in the S&P 500.
True
Independent risks can be diversified by holding a large number of uncorrelated assets with independent risks.
True
Interest and other financing-related expenses are excluded when determining a project's unlevered net income.
True
On average, stocks have delivered higher returns than bonds in the long run.
True
The Valuation Principle states that the value of a stock is equal to the present value (PV) of both the dividends and future sale price of that stock which the investor will receive.
True
The cash flow effect from a change in Net Working Capital is always equal in size and opposite in sign to the changes in Net Working Capital.
True
The most difficult part of the capital budgeting process is accurately estimating cash flows and cost of capital.
True
The only cash payment an investor in a zero-coupon bond receives is the face value of the bond on its maturity date.
True
The ownership in a corporation is divided into shares of stock, which carry rights to a share in the profits of the firm through future dividend payments.
True
The risk that inflation rates are likely to increase in the next year is an example of common risk.
True
A company's stock price dropped when it announced that its revenue had decreased because of the quality issues of its products. This is an example of ________.
Unsystematic risk
Independent risk is more closely related to ________.
Unsystematic risk
Which of the following statements is FALSE?
Volatility seems to be a reasonable measure of risk when evaluating returns on large portfolios and the returns of individual securities.
Which of the following statements regarding bonds and their terms is FALSE?
When prices are quoted in the bond market, they are conventionally quoted in increments of $1,000.
Which of the following will cause the EBIT Break-Even for sales to increase?
a decrease in the sales price
What are dividend payments?
a share of the profits paid to each shareholder on the basis of the number of shares they hold
Which of the following bonds will be least sensitive to a change in interest rates?
a ten-year bond with a $2,000 face value whose yield to maturity is 5.8% and coupon rate is 5.8% APR paid semiannually
After research into where to place a new restaurant, Burger Billies, a small fast-food chain, plans to open a new store near a small college. The anticipated customer base is students attending the college. They learn that a major fast food chain will be opening a franchise within the college, which leads the owners of Burger Billies to revise their estimate of sales to one below the break-even point. Which of the following is most likely the best real option for Burger Billies to take with regard to the proposed restaurant site?
abandon
Rational investors ________ fluctuations in the value of their investments.
are averse to
When the exercise price of an option is equal to the current price of the stock, the option is said to be ________.
at-the-money
A call option gives the owner the right to ________ an asset at a fixed price at some future date.
buy
The capital budgeting process begins by ________.
compiling a list of potential projects
When investing for a long term, investors care about the volatility of ________ returns and not the volatility of ________ returns.
cumulative, average
The ultimate goal of the capital budgeting process is to ________.
determine the effect of the decision to accept or reject a project on the firm's cash flows
Because investors can eliminate unsystematic risk "for free" by diversifying their portfolios, they ________.
do not require a risk premium for bearing it
Using options to reduce risk is called ________.
hedging
Stocks with high returns are expected to have ________.
high variability
Historically, stocks have delivered a ________ return on average compared to Treasury bills but have experienced ________ fluctuations in values.
higher, higher
When the exercise price of a call option is lower than the current price of the stock, the option is said to be ________.
in-the-money
You placed an order to purchase stock where you specified the maximum price you were willing to pay. This type of order is known as a ________.
limit order
A portfolio of stocks can achieve diversification benefits if the stocks that comprise the portfolio are ________.
not perfectly positively correlated
Jim owns a farm that he wants to sell. He learns that a highway will be built near the farm in the future, giving access to the farmland from a nearby city and thus making the land attractive to housing developers. Expecting the net present value (NPV) of the sale to be greater after the highway is built, he decides not to sell at this time. What real option is Jim taking?
option to delay
When the exercise price of a call option is higher than the current price of the stock, the option is said to be ________.
out-of-the-money
An options contract gives the owner the ________ but not the ________ to buy or sell an asset at a fixed price at some future date.
right, obligation
Which of the following statements is true of bond prices?
rise in interest rates causes bond prices to fall.
An exploration of the effect of changing multiple project parameters on net present value (NPV) is called ________.
scenario analysis
A put option gives the owner the right to ________ an asset at a fixed price at some future date.
sell
There is an overall relationship between ________ and ________. Larger stocks have a lower volatility overall.
size, risk
Fluctuations of a stock's return that are due to market-wide news representing common risk is the ________.
systematic risk
Which of the following best defines incremental earnings?
the amount by which a firm's earnings are expected to change as a result of an investment decision
Which of the following would you NOT consider when making a capital budgeting decision?
the cost of a marketing study completed last year
A bond certificate includes ________.
the terms of the bond
Investors demand a higher return for investments that have larger fluctuations in values because ________.
they don't like risk
The excess return is the difference between the average return on a security and the average return for ________.
treasury bills
The risk premium of a stock is NOT affected by its ________.
unsystematic risk
While ________ seems to be a reasonable measure of risk when evaluating a large portfolio, the ________ of an individual security does not explain the size of its average return.
volatility, volatility
