fin362 exxam 1

Shares of PLS United have been selling with rights attached. Tomorrow, the stock will sell independent of these rights. Which one of the following terms applies to tomorrow in relation to this stock?

Ex-rights date

Which one of the following represents the level of output where a project produces a rate of return just equal to its requirement?

Financial break-even

Jones & Co. recently went public and received $23.07 a share on their entire offer of 30,000 shares. Keeser & Co. served as the underwriter and sold 28,500 shares to the public at an offer price of $26.50 a share. What type of underwriting was this?

Firm commitment

Mobile Units recently offered 75,000 new shares of stock for sale. The underwriters sold a total of 78,500 shares to the public at a price of $16 a share. The additional 3,500 shares were purchased in accordance with which one of the following?

Green Shoe provision

Kelley's Baskets makes handmade baskets and is currently considering making handmade wreaths as well. Which one of the following is the best example of an incremental operating cash flow related to the wreath project?

Hiring additional employees to handle the increased workload should the firm accept the wreath project

Which of the following values will be equal to zero when a firm is operating at the accounting break-even level of output?

IRR and net income

Assume both the discount and tax rates are positive values. At the financial break-even point, the:

IRR equals the required return.

JLK is a partnership that was formed two years ago and has been extremely successful thus far. The owners have decided to incorporate and offer shares of stock to the general public. What is this type of an equity offering called?

Initial public offering

The operating cash flow for a project should exclude which one of the following?

Interest expense

Steve, the sales manager for TL Products, wants to sponsor a one-week "Customer Appreciation Sale" where the firm offers to sell additional units of a product at the lowest price possible without negatively affecting the firm's profits. Which one of the following represents the price that should be charged for the additional units during this sale?

Marginal cost

Which one of the following statements concerning dilution is correct?

Market value dilution occurs when the net present value of a project is negative

Which one of the following should not be included in the analysis of a new product?

Money already spent for research and development of the new product

The option that is forgone so that an asset can be utilized by a specific project is referred to as which one of the following?

Opportunity cost

Before a seasoned stock offering, you owned 500 shares of a firm that had 20,000 shares outstanding. After the seasoned offering, you still owned 500 shares but the number of shares outstanding rose to 25,000. Which one of the following terms best describes this situation?

Percentage ownership dilution

What is a seasoned equity offering?

Sale of newly issued equity shares by a publicly owned company

Which one of the following best illustrates erosion as it relates to a hot dog stand located on the beach?

Selling fewer hot dogs because hamburgers were added to the menu

Pearson Electric recently registered 180,000 shares of stock under SEC Rule 415. The company plans to sell 100,000 shares this year and the remaining 80,000 shares next year. What type of registration was this?

Shelf registration

GL Plastics spent $1,200 last week repairing a machine. This week the company is trying to decide if the machine could be better utilized if they assigned it a proposed project. When analyzing the proposed project, the $1,200 should be treated as which type of cost?

Sunk

Which one of the following best describes the concept of erosion?

The cash flows of a new project that come at the expense of a firm's existing cash flows

The depreciation tax shield is best defined as the:

amount of tax that is saved because of the depreciation expense.

Changes in the net working capital requirements:

can affect the cash flows of a project every year of the project's life.

Valerie just completed analyzing a project. Her analysis indicates that the project will have a six-year life and require an initial cash outlay of $120,000. Annual sales are estimated at $189,000 and the tax rate is 21 percent. The net present value is negative $120,000. Based on this analysis, the project is expected to operate at the:

cash break-even point.

Sensitivity analysis determines the:

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

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

greater is the importance of accurately predicting the value of that variable.

The difference between the underwriters' cost of buying shares in a firm commitment and the offering price of those securities to the public is called the:

gross spread.

The date on which a shareholder is officially listed as the recipient of stock rights is called the:

holder-of-record date.

You are considering the purchase of a new machine. Your analysis includes the evaluation of two machines that have differing initial and ongoing costs and differing lives. Whichever machine is purchased will be replaced at the end of its useful life. You should select the machine that has the:

lowest equivalent annual cost.

Direct business loans typically ranging from one to five years are called:

term loans

The bid price is the:

the minimum price that will provide your target rate of return.

When you assign the lowest anticipated sales price and the highest anticipated costs to a project, you are analyzing the project under the condition known as:

worst-case scenario analysis.

Windows and More is reviewing a project with sales of 6,200 units, ±2 percent, at a sales price of $29, ±1 percent, per unit. The expected variable cost per unit is $11, ±3 percent, and the expected fixed costs are $87,000, ±1 percent. The depreciation expense is $68,000 and the tax rate is 21 percent. What is the net income under the worst-case scenario?

−$39,713 Net incomeWorst Case = ({[$29 (.99) − $11 (1.03)] (6,200)(.98)} − $87,000 (1.01) − $68,000) (1 − .21) Net incomeWorst Case = −$39,713

Kelly's Corner Bakery purchased a lot in Oil City six years ago at a cost of $98,700. Today, that lot has a market value of $128,900. At the time of the purchase, the company spent $6,500 to level the lot and another $12,000 to install storm drains. The company now wants to build a new facility on the site at an estimated cost of $494,200. What amount should be used as the initial cash flow for this project?

−$623,100 CF0= -128,900 - 494,200

Jeff's is granting one right for each share of stock outstanding for its new rights offering. The new shares in this offering are priced at $16 plus four rights. The current market price of the stock is $20 a share. What is the value of one right?

$.80 cost per share=($16+4($20))/(1+4) = $19.20 value of one right=$20-$19.20 = .80

Better Beverages purchased $139,700 of fixed assets that are classified as five-year MACRS property. The MACRS rates are .2, .32, .192, .1152, .1152, and .0576 for Years 1 to 6, respectively. What will the accumulated depreciation be at the end of Year 4 if the tax rate is 21 percent and no bonus depreciation is taken?

$115,559.84 accumulated dep4= 139,700(.2 + .32 + .192 + .1152)

At a production level of 5,280 units, a project has total costs of $150,000. The variable cost per unit is $23.12. Assume the firm can increase production by 750 units without increasing its fixed costs. What will the total costs be if 6,000 units are produced?

$166,646 Total cost6,000 = $150,000 + (6,000 − 5,280) ($23.12) Total cost6,000 = $166,646

The Lunch Counter is expanding and expects operating cash flows of $49,500 a year for nine years as a result. This expansion requires $36,500 in new fixed assets. These assets will be worthless at the end of the project. In addition, the project requires $2,200 of net working capital throughout the life of the project. What is the net present value of this expansion project at a required rate of return of 15.6 percent?

$193,132.81 NPV = -36,500 - 2200 + 49,500((1-(1/1.156^9))/.156) + 2200/1.156^9

The Boat Works decided to go public by offering a total of 135,000 shares of common stock to the public. The company hired an underwriter who arranged a firm commitment underwriting and an initial selling price of $24 a share with a spread of 8.3 percent. As it turned out, the underwriters only sold 122,400 shares to the public. What is the amount paid to the issuer?

$2,971,080 total cash received=135,000($24)(1-.083) = $2,971,080

Dependable Motors just purchased some MACRS five-year property at a cost of $216,000. The MACRS rates are .2, .32, and .192 for Years 1 to 3, respectively. Assume the firm opted to forego any bonus depreciation. Which one of the following will correctly give you the book value of this equipment at the end of Year 2?

$216,000(1 − .2 − .32)

A new molding machine is expected to produce operating cash flows of $109,000 a year for 4 years. At the beginning of the project, inventory will decrease by $8,700, accounts receivables will increase by $9,500, and accounts payable will decrease by $5,200. All net working capital will be recovered at the end of the project. The initial cost of the molding machine is $319,000. The equipment will be depreciated straight-line to a zero book value over the life of the project. No bonus depreciation will be taken. The equipment will be salvaged at the end of the project creating an aftertax cash inflow of $51,600. What is the net present value of this project given a required return of 14.2 percent?

$25,162.45 CF0= -319,000 + 8700 - 9500 - 5200 CF0= -325000 CF4= 109,000 + 51,600 - 8,700 + 9,500 + 5200 CF4= 166,600 NPV= -325,000 + 109,000((1-(1/1.142^3))/.142) + 166,600/1.142^4 NPV = 25,162.45

Precise Machinery is analyzing a proposed project that is expected to have sales of 2,450 units, ±8 percent. The expected variable cost per unit is $246 and the expected fixed costs are $309,000. Cost estimates are considered accurate within a ±3 percent range. The depreciation expense is $106,000. The sales price is estimated at $599 per unit, ±2 percent. What is the amount of the total costs per unit under the worst-case scenario?

$394.58 Total costs per unitWorst-case = [2,450 (.92) ($246) (1.03) + $309,000 (1.03)]/[2,450 (.92)] Total costs per unitWorst-case = $394.58

The Creamery is analyzing a project with expected sales of 5,700 units, ±5 percent. The expected variable cost per unit is $168 and the expected fixed costs are $424,000. Cost estimates are considered accurate within a ±3 percent range. The depreciation expense is $156,000. The sales price is estimated at $339 per unit, ±5 percent. The tax rate is 21 percent. The company is conducting a sensitivity analysis with fixed costs of $425,000. What is the OCF given this analysis?

$467,023 OCF = {[($339 − 168) 5,700] − $425,000} {1 − .21} + $156,000 (.21) OCF = $467,023

Currently, GH Co. sells 42,600 handbags annually at an average price of $149 each. It is considering adding a lower-priced line of handbags that sell for $79 each. The firm estimates it can sell 21,000 of the lower-priced handbags but expects to sell 7,200 less of the higher-priced handbags by doing so. What is the amount of the annual sales that should be used when evaluating the addition of the lower-priced handbags?

$586,200 sales= 21,000($79) - 7200($149)

LC Delivery has decided to sell 1,800 shares of stock through a Dutch auction. The bids received are as follows: 600 shares at $37 a share, 800 shares at $36, 900 shares at $35, 200 shares at $34, and 100 shares at $32 a share. How much will the company receive in total from selling the 1,800 shares? Ignore all transaction and flotation costs.

$63,000 total cash received=1800($35) = 63,000

Mason Farms purchased a building for $689,000 and made repairs costing $136,000. The annual taxes on the property are $8,200. The building has a current market value of $730,000 and a current book value of $394,000. The building is mortgage-free. If the company decides to use this building for a new project, what value, if any, should be included in the initial cash flow of the project for this building?

$730,000 opportunity cost

Jefferson & Sons is evaluating a project that will increase annual sales by $198,600 and annual cash costs by $94,500. The project will initially require $187,000 in fixed assets that will be depreciated straight-line to a zero book value over the four-year life of the project. No bonus depreciation will be taken. The applicable tax rate is 22 percent. What is the operating cash flow for this project?

$91,483 OCF= (198,600-94,500)(1-.22) + (187,000/4)(.22)

You have been instructed to place an order for a client to purchase 500 shares of every IPO that comes to market. The next two IPOs are each priced at $26 a share and will begin trading on the same day. The client is allocated 500 shares of IPO A and 240 shares of IPO B. At the end of the first day of trading, IPO A was selling for $23.90 a share and IPO B was selling for $29.40 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?

-$234 total profit=(500($23.90-26))+(240($29.40-26)) = -234

ALUM Inc. uses high-tech equipment to produce specialized products. Each one of its machines costs $1,243,000 to purchase plus an additional $78,000 a year to operate. The machines have a five-year life after which they are worthless. What is the equivalent annual cost of one these machines if the required return is 16.5 percent?

-$462,061.04 NPV = −$1,243,000 − $78,000[(1 − 1/1.1655)/.165] NPV = -$1,495,444.25 −$1,495,444.25 = EAC[(1 − 1/1.1655)/.165] EAC = −$462,061.04

S&S wants to raise $11.3 million through a rights offering with a subscription price of $15 a share. The company has 1.24 million shares outstanding and a market price of $17.50 a share. Each shareholder will receive one right for each share of stock owned. How many rights will be needed to purchase one new share of stock in this offering?

1.65 # new shares=$11,300,000/$15 = 753,333 rights needed for each new share= 1,240,000/753,333 = 1.65

Outdoor Goods needs $3.8 million to modernize its production equipment. The underwriters set the stock price at $29.50 a share with an underwriting spread of 7.35 percent. This would be a firm commitment underwriting. The estimated issue costs are $272,000. How many shares of stock must be sold to finance this project?

148,984 total value of issue=($3,800,000+272,000)/(1-.0735) = $4,395,035.08 shares to be sold=$4,395,035.08/$29.50 = 148,984

Wear Ever is expanding and needs $6.8 million to help fund this growth. The company estimates it can sell new shares of stock for $43 a share. It also estimates it will cost an additional $352,000 for filing and legal fees related to the stock issue. The underwriters have agreed to a spread of 7.5 percent. How many shares of stock must be sold for the company to fund its expansion?

179,811 total value of issue=($6,800,000 + 352,000)/(1-.075) = $7,731,891.89 shares to be sold=$7,731,891.89/$43 = 179,811

Mountain Mining requires $3.3 million to expand its current operations and has decided to raise these funds through a rights offering at a subscription price of $18 a share. The current market price of the company's stock is $24.70 a share. How many shares of stock must be sold to fund the expansion plans?

183,333 # new shares=$3,300,000/$18 = 183,333

The Coffee Express has computed its fixed costs to be $.27 for every cup of coffee it sells given annual sales of 739,000 cups. The sales price is $.99 per cup while the variable cost per cup is $.12. How many cups of coffee must it sell to break even on a cash basis?

229,345 QCash break-even = $.27 (739,000)/($.99 − .12) QCash break-even = 229,345

A project has a unit price of $29.99, a variable cost per unit of $9.06, fixed costs of $487,020, and depreciation expense of $38,009. Ignore taxes. What is the accounting break-even quantity?

25,085 units Q Accounting break-even = ($487,020 + 38,009)/($29.99 − 9.06) Q Accounting break-even = 25,085 units

The Motor Works is considering an expansion project with estimated fixed costs of $127,000, depreciation of $16,900, variable costs per unit of $41.08, and an estimated sales price of $79.90 per unit. How many units must the firm sell to break even on a cash basis?

3,272 units QCash break-even = $127,000/($79.90 − 41.08) QCash break-even = 3,272 units

You are in charge of a project that has a degree of operating leverage of 1.06. What will happen to the operating cash flows if the number of units you sell increase by 3.7 percent?

3.92 percent increase %ΔOCF = 1.06 (3.7%) %ΔOCF = 3.92% increase

A project has an accounting break-even quantity of 28,700 units, a cash break-even quantity of 17,120 units, a life of 10 years, fixed costs of $178,000, variable costs of $18.40 per unit, and a required return of 14 percent. Depreciation is straight-line to zero over the project life. Ignoring taxes, what is the financial break-even quantity?

39,320 units 17,120 = $178,000/(P − $18.40)P = $28.797 28,700 = ($178,000 + D)/($28.797 − 18.40)D = $120,399.53 Initial investment = 10 ($120,399.53) Initial investment = $1,203,995.33 $1,203,995.33 = OCF [(1 − 1/1.1410)/.14] OCF = $230,822.21 QFinancial break-even = ($178,000 + 230,822.21)/($28.797 − 18.40) QFinancial break-even = 39,320 units

you are the manager of a project that has a degree of operating leverage of 1.84 and a required return of 15 percent. Due to the current state of the economy, you expect unit sales to decrease by 3.5 percent next year. What change should you expect in the operating cash flows next year given your sales prediction?

6.44 percent decrease %ΔOCF = 1.84 (−3.5%) %ΔOCF = −6.44%

Which one of the following is the relationship between the percentage change in operating cash flow and the percentage change in quantity sold?

Degree of operating leverage

Given the following, which feature identifies the most desirable level of output for a project?

Discounted payback period equal to the project's life