Finance Midterm #2

he relevant discount rate is 14 percent for a project with cash flows of −$9,200, $4,600, $3,300,and $3,800 for Years 0 to 3, respectively. What is the profitability index? a. .96 b. .99 c. .93 d. 1.08 e. 1.04

b. .99

A project has a contribution margin per unit of $12.07, fixed costs of $67,840, depreciation of$14,310, variable costs per unit of $14.09, and a financial break-even point of 15,624 units. What isthe operating cash flow at this level of output? a.$0 b.$120,742 c.$122,500 d. $102,309 e. $117,673

b.$120,742 OCF break even= (15,624 x 12.07) - 67,840

Okonjo Economics has a debt-equity ratio of .38. All of the firm's outstanding shares were purchased by a small number of investors. The return these investors require is called the: a. capital gains yield b.income return c.cost of capital d .cost of equity e.dividend yield

d .cost of equity

ro forma statements for a proposed project should generally do all of the following, except: a. include taxes b. .include all the incremental cash flows related to the project c.include all project-related fixed asset acquisitions and disposals d.include interest expense e.be compiled on a stand-alone basis

d.include interest expense

company that utilizes the MACRS system of depreciation but does not use bonus depreciation: a. can depreciate the cost of land b.will fully depreciate a MACRS five-year asset within 5 years c.will expense less than the entire cost of an asset d.will have equal depreciation expense each year of an asset's life e.will have a greater depreciation tax shield in Year 2 than in Year 1

e.will have a greater depreciation tax shield in Year 2 than in Year 1

Deep Hollow Markets has a target capital structure of 35 percent debt, 5 percent preferred stock,and 60 percent common stock. The flotation costs are 8.6 percent for common stock, 6.2 percentfor preferred stock, and 3.8 percent for debt. The corporate tax rate is 21 percent. What is the weighted average flotation cost? a. 6.80% b. 6.62% c. 7.17% d. 7.11% e. 6.48%

a. 6.80% Fa= (.35x.038) + (.05x.062) + (.6 x .086)

Goldfarb Paints has 6.8 percent coupon bonds on the market with 11 years left to maturity. The bonds make semiannual payments and currently sell for 98.6 percent of par. What is the effective annual yield? a. 7.11% b. 7.24% c. 7.07% d. 7.33% e. 7.19%

a. 7.11%

Stoessel, Incorporated, issued 20-year bonds 3 years ago at a coupon rate of 8.5 percent. The bondsmake semiannual payments. If these bonds currently sell for 91.4 percent of par value, what is the YTM? a. 9.53% b. 9.13% c. 8.98% d. 8.42% e. 9.27%

a. 9.53%

The Square Box is considering two independent projects with an initial cost of $18,000 each. Thecash inflows of Project A are $3,000, $7,000, and $10,000 for Years 1 to 3, respectively. The cashinflows for Project B are $3,000, $7,000, and $15,000 for Years 1 to 3, respectively. The requiredreturn is 12 percent and the required discounted payback period is 3 years. Based on discountedpayback, which project(s), if either, should be accepted? a. Project A should be rejected and Project B should be accepted. b. Project A should be accepted and Project B should be rejected. c. You should be indifferent to accepting either or both projects d.Both projects should be accepted e.Both projects should be rejecte

a. Project A should be rejected and Project B should be accepted.

Viveros Foods has an investment-grade bond issue outstanding that pays $30 semiannual interestpayments. The bonds sell at par and are callable at a price equal to the present value of all futureinterest and principal payments discounted at a rate equal to the comparable Treasury rate plus .50percent. Which one of the following correctly describes this bond? a. The bond has a "make whole" call price b.The interest payments are variable c.The bond rating is B. d.The coupon rate is 3 percent e.Market value is less than face value

a. The bond has a "make whole" call price

Reyes has a dividend yield of 5.4 percent and a total return for the year of 4.8 percent. Which one of the following must be true? a. The stock has a negative capital gains yield. b. The capital gains yield must be zero. c. The required rate of return for this stock increased over the year d.The firm is experiencing supernormal growth e.The dividend must be constant

a. The stock has a negative capital gains yield.

A premium bond that pays $60 in interest annually matures in seven years. The bond was originally issued three years ago at par. Which one of the following statements is accurate in respect to this bond today? a. The yield to maturity is less than the coupon rate b.The face value of the bond today is greater than it was when the bond was issued c.The bond is worth less today than when it was issued d.The coupon rate is less than the current yield e.The yield to maturity equals the current yield

a. The yield to maturity is less than the coupon rate

Ana just received the semiannual payment of $35 on a bond she owns. This is called the______ payment. a. coupon b. face value c. discount d. call premium

a. coupon

A strength of the average accounting return (AAR) method of project analysis is the fact that AAR: a. is easy to calculate. b. uses a cutoff rate c. is based on accounting values d. considers the time value of money e. ignores the issue of taxes.

a. is easy to calculate.

The cost of preferred stock is equivalent to the: a. rate of return on a perpetuity b.pretax cost of debt c.rate of return on an annuity d.aftertax cost of debt e.cost of an irregular growth common stock

a. rate of return on a perpetuity

Hatch Idea Labs purchased some equipment two years ago for $287,600. These assets are classified as five-year property for MACRS. The MACRS rates are .2, .32, .192, .1152, .1152, and .0576,for Years 1 to 6, respectively. The company is currently replacing this equipment so the oldequipment is being sold for $150,000. What is the aftertax salvage value from this sale if the tax rateis 21 percent and no bonus depreciation is claimed? a.$147,490.08 b.$142,311.12 c.$154,183.20 d. $149,000.00 e. $144,433.20

a.$147,490.08 =150,000 - [.21 x (150,000-138,048)

You are purchasing a 15-year, zero coupon bond. The yield to maturity is 6.85 percent and the facevalue is $1,000. What is the current market price? Assume semiannual compounding. a.$364.11 b.$408.18 c. $358.47 d. $406.67 e.$321.50

a.$364.11

A bond has a coupon rate of 8 percent, seven years to maturity, semiannual interest payments, and aYTM of 7 percent. If interest rates suddenly rise by 1.5 percent, what will be the percentage change inthe bond price?a.-7.64% b. −8.67% c. −8.87% d. −7.56% e. −8.16%

a.-7.64%

Stray Cats has annual sales of $847,000, annual depreciation of $47,000, and net working capital of$43,000. The tax rate is 21 percent and the profit margin is 7.3 percent. The firm has no interest expense. What is the amount of the operating cash flow? a.$121,220 b. $108,831 c. $155,831 d. $14,831 e. $168,480

b. $108,831 OCF= (847,000x.073) + 47,000

How much are you willing to pay for one share of Govender stock if the company just paid an annual dividend of $1.61, the dividends increase by 4.2 percent annually, and you require a return of16.4 percent? a. $13.20 b. $13.75 c.$10.23 d.$9.82 e.$15.36

b. $13.75

A project has expected sales of 63,000 units, ±4 percent; variable costs per unit of $84, ±5 percent;fixed costs of $287,000, ±1 percent; and a sales price per unit of $219, ±2 percent. The depreciationexpense is $53,000 and the tax rate is 23 percent. What is the contribution margin per unit for asensitivity analysis using a variable cost per unit of $85? a. $132 b. $134 c. $136 d. $133 e. $13

b. $134 CM= 219-85

Your local toy store just announced its annual dividend will be $4 dividend next year, $3 the following year, and then a final liquidating dividend of $46 per share in Year 3. At a discount rate of 18 percent, what should one share sell for today? a. $31.48 b. $33.54 c.$39.09 d.$35.64 e. $36.21

b. $33.54 P0 = $4/1.18 + $3/1.18^2 + $46/1.18^3

An investment project provides cash flows of $7,000 per year for 10 years. If the initial cost is$20,000, what is the payback period? a. 2.1 years b. 2.9 years c. Never d. 1.8 years e. 6.7 year

b. 2.9 years payback period = 20,000/7,000

The taxability risk premium compensates bondholders for which one of the following? a. Decrease in a municipality's credit rating b. A bond's unfavorable tax status c. Possibility of default d. Yield decreases in response to market changes e. Lack of coupon payments

b. A bond's unfavorable tax status

Who can access Level 3 of Nasdaq's information? a. Only Nasdaq regulators b. Nasdaq market makers c. Customers who pay an access fee d. Anyone with internet access e. There is no Level 3

b. Nasdaq market makers

Salazar's Salads is considering two projects. Project X consists of creating an outdoor eating areaon the unused portion of the restaurant's property. Project Z would instead use that outdoor spacefor creating a drive-thru service window. When trying to decide which project to accept, the firmshould rely most heavily on which one of the following analytical methods? a. Payback b. Net present value c. internal rate of return d. Profitability index e. Accounting rate of return

b. Net present value

The interest rate risk premium is the: a. difference between the yield to maturity and the current yield b.compensation investors demand for accepting interest rate risk c.difference between the coupon rate and the current yield d.difference between the market interest rate and the coupon rate e. additional compensation paid to investors to offset rising prices

b. compensation investors demand for accepting interest rate risk

Webster Iron Works started a new project last year. As it turns out, the project has been operating at its accounting break-even level of output and is now expected to continue at that level over its lifetime. Given this information, you know that the project: a. is lowering the total net income of the firm. b. is operating at a higher level than if it were operating at its cash break-even level. c. will never pay back d.is operating at a higher level than if it were operating at its financial break-even level e..has a zero net present value

b. is operating at a higher level than if it were operating at its cash break-even level.

A project has a discounted payback period that is equal to the required payback period. Given thisinformation, the project: a. will still be acceptable if the discount rate is increased. b. must have a profitability index that is equal to or greater than 1.0. c. will not be acceptable under the payback rule d. must have an internal rate of return equal to the required return e. must have a zero net present value.

b. must have a profitability index that is equal to or greater than 1.0.

10. Award: 55..0000 ppooiinnttss A project will require $512,000 for fixed assets and $47,000 for net working capital. The fixed assetswill be depreciated straight-line to a zero book value over the six-year life of the project. No bonusdepreciation will be taken. At the end of the project, the fixed assets will be worthless. The networking capital returns to its original level at the end of the project. The project is expected togenerate annual sales of $965,000 and costs of $508,000. The tax rate is 21 percent and therequired rate of return is 14.7 percent. What is the amount of the annual operating cash flow? a.$283,633.33 b.$378,950.00 c.$245,300.00 d. $447,826.67 e. $198,300.00

b.$378,950.00 = (965,000-508,000) x (1-.21) + (512,000/6 x .21)

A project has a discount rate of 15.5 percent, an initial cost of $109,200, an inflow of $56,400 in Year1, and an inflow of $75,900 in Year 2. Your boss requires that every project return a minimum of$1.06 for every $1 invested. Based on this information, what is your recommendation on this project? a. Reject the project because the PI is 1.01 b.Reject the project because the PI is .97 c.Reject the project because the PI is 1.03 d.Accept the project because the PI is .97 e.Accept the project because the PI is 1.03

b.Reject the project because the PI is .97

Which of the following is the main advantage of using the dividend growth model to estimate afirm's cost of equity? a. The model's applicability to all corporations b.The simplicity of the model c.The ability to apply either current or future tax rates d,.The stability of the computed cost of equity over time e.The model's consideration of risk

b.The simplicity of the model

Anya just completed analyzing a project. Her analysis indicates that the project will have a six-yearlife and require an initial cash outlay of $98,000. Annual sales are estimated at $64,000 and the taxrate is 21 percent. The net present value is negative $98,000. Based on this analysis, the project isexpected to operate at the: a. accounting break-even point b.cash break-even point c.minimum possible level of production d.maximum possible level of production e.financial break-even point

b.cash break-even point

Charles owns a reverse convertible bond. At maturity, the principal amount will be repaid in: a. the form of a newly issued bond b.either cash or shares of stock c.either shares of stock or a newly issued bond d.shares of stock e.cash while the interest is paid in shares of stock

b.either cash or shares of stock

The CFO of Shelby & Muhammad receives frequent capital funding requests from the firm's divisionmanagers. These requests are seeking funding for positive net present value projects. The CFO continues to deny all funding requests due to the financial situation of the company. Apparently, the company is: a. operating at maximum capacity b.facing hard rationing. c. operating at the financial break-even point d.operating with zero leverage e.operating at the accounting break-even point.

b.facing hard rationing.

Which one of the following is an example of a sunk cost?$ a. 2,000 project that must be forfeited if another project is accepted b. $2,000 in lost sales because an item was out of stock c. $2,000 paid last year to rent equipment d. $2,000 increase in comic book sales if a store ceases selling puzzles e. $2,000 reduction in Product A revenue if a firm commences selling Product

c. $2,000 paid last year to rent equipment

Altitude Group is expected to pay an annual dividend next year of $2.71 per share. Dividends are expected to increase by 4.3 percent annually. What is one share of this stock worth at a required rate of return of 13.9 percent? a. $20.33 b. $19.50 c. $28.23 d. $32.15 e. $29.4

c. $28.23 Po= 2.71/ (.139-.043)

Overland purchased $387,950 of fixed assets that are classified as three-year property for MACRS.The MACRS rates are .3333, .4445, .1481, and .0741 for Years 1 to 4, respectively. What is the amountof the depreciation expense in Year 3 assuming no bonus depreciation is taken? a.$12,766.59 b.$28,747.10 c. $57,455.40 d. $42,399.29 e. $59,929.1

c. $57,455.40

Nguyen Corporation's common stock has a beta of 1.38. The risk-free rate is 1.78 percent and theexpected return on the market is 14.6 percent. What is the cost of equity? a. 20.15% b. 17.69% c. 22.51% c. 19.47% e. 21.93%

c. 19.47% cost of equity= .0178 + 1.38 (.146-.0178)

You own one share of a cumulative preferred stock that pays quarterly dividends. The firm hasrecently suffered some financial setbacks and has failed to pay the last two dividends. However,new funding has been arranged and the firm intends to restore all dividends, both common andpreferred, this quarter. As a preferred shareholder, you should expect to receive the equivalent of________ quarter(s) of dividends when the next dividend is paid a. either 1, 2, or 3 b. 2 c. 3 d. 0 e. 1

c. 3

Lampson bonds have a face value of $1,000 and are currently quoted at 867.25. The bonds havecoupon rate of 6.5 percent. What is the current yield on these bonds? a. 7.45% b. 8.47% c. 7.49% d. 8.03% e. 7.67%

c. 7.49%

Jensen Shipping has 38,400 shares outstanding and uses cumulative voting. The firm grants onevote for each share of common stock. What is the minimum number of votes required to obtain a seat on the board of directors if there are three open seats? a. 19,201 b. 12,800 c. 9,601 d. 9,600 e. 12,801

c. 9,601

A bond that can be paid off early at the issuer's discretion is referred to as being which type of bond? a. Subordinated b.Unsecured c. Callable d. Par value c. Senior

c. Callable

Which one of the following applies to a premium bond? a. Yield to maturity > Current yield > Coupon rate b. Coupon rate = Current yield = Yield to maturity c. Coupon rate > Current yield > Yield to maturity d. Coupon rate < Yield to maturity < Current yield e. Coupon rate > Yield to maturity > Current yield

c. Coupon rate > Current yield > Yield to maturity

Which one of the following methods of project analysis is defined as computing the value of aproject based on the present value of the project's anticipated cash flows? a. Constant dividend growth model b. Expected earnings model c. Discounted cash flow valuation d. Internal rate of return Average e. accounting return

c. Discounted cash flow valuation

Last year, you purchased a TIPS at par. Since that time, both market interest rates and theinflation rate have increased by .25 percent. Your bond has most likely done which oneof the following since last year? a. Decreased in value due to the change in inflation rates b. Experienced an increase in its bond rating c. Maintained a fixed real rate of return d. Increased in value in response to the change in market rates e. Increased in value due to a decrease in time to maturity

c. Maintained a fixed real rate of return

Ernst & Frank stock is listed on Nasdaq. The firm is planning to issue some new equity shares forsale to the general public. This sale will definitely occur in which one of the following markets? a.Private b. Secondary c. Primary d. Auction e. Tertiary

c. Primary

Assume a profitable, tax-paying company uses the bottom-up approach to compute operating cashflow. An increase in which one of the following items will result in an increase in operating cashflow? a. Fixed expenses b. Erosion effects c. Depreciation expense d. Salaries e.Taxes

c. depreciation expense

he two-stage dividend growth model evaluates the current price of a stock based on the assumption a stock will: a. increase the dividend amount every other year b.pay an increasing dividend for a period of time and then cease paying dividends altogether c.grow at a fixed rate for a period of time after which it will grow at a differentiate indefinitely d.pay a constant dividend for the first two quarters of each year and then increase the dividend the last two quarters of each year e.pay increasing dividends for a fixed period of time, cease paying dividends for a period of time, and then commence paying increasing dividends for an indefinite period of time.

c. grow at a fixed rate for a period of time after which it will grow at a differentiate indefinitely

The internal rate of return is: a. the discount rate that makes the net present value of a project equal to the initial cash outlay. b highly dependent upon the current interest rates offered in the marketplace. c. tedious to compute without the use of either a financial calculator or a computer d. equivalent to the discount rate that makes the net present value equal toone. e. a better methodology than net present value when dealing with unconventional cash flows

c. tedious to compute without the use of either a financial calculator or a computer

If a project has a net present value equal to zero then: a. the total of the cash inflows must equal the initial cost of the projec bt. the project's PI must also be equal to zero c. the project earns a return exactly equal to the discount rate d. a decrease in the project's initial cost will cause the project to have anegative NPV e. any delay in receiving the projected cash inflows will cause the project tohave a positive NPV.

c. the project earns a return exactly equal to the discount rate

The bond market requires a return of 6.2 percent on the 15 year bonds issued by Mingwei manufacturing. The 6.2 percent is referred to as the : a. coupon rate b. call rate c. yield to maturity d. face rate e. current yield

c. yield to maturity

Which one of the following statements concerning bond ratings is correct? a. A "fallen angel" is a term applied to all "junk" bonds b.The highest rating issued by Moody's is AAA c.Split-rated bonds are called crossover bonds d.Investment grade bonds are rated BB or higher by Standard & Poor's e.Bond ratings assess both interest rate risk and default risk

c.Split-rated bonds are called crossover bonds

NYSE designated market makers: a. are also referred to as "$2 brokers b."are guaranteed a profit on every stock purchased and resold c.act as dealers d.provide a one-sided market e.execute trades on behalf of their clients.

c.act as dealers

assume a firm utilizes its WACC as the discount rate for every capital project it implements.Accordingly, the firm will tend to: a. accept all positive net present value projects b.reject all negative net present value projects c.increase the average risk level of the company over time d.reject all high-risk projects e.favor low-risk projects over high-risk projects

c.increase the average risk level of the company over time

Combining scenario analysis with sensitivity analysis can yield a crude form of _____ analysis a..breakeven b.forecasting c.simulation d. combined e. complex

c.simulation

Habibi Gourmet made two announcements concerning its common stock today. First, thecompany announced that the next annual dividend will be $1.54 per share. Secondly, alldividends after that will decrease by 1.16 percent annually. What is the value of this stock at a discount rate of 9 percent? a. $14.98 b. $16.52 c. $16.91 d. $15.16 e. $17.11

d. $15.16 Po= 1.54 / [.09- (-.0116)]

Lopez Novelties is analyzing a proposed project with annual depreciation of $28,750 and a tax rateof 23 percent. The company expects to sell 16,500 units, ±3 percent. The expected variable cost perunit is $1.87, ±1 percent, and the expected fixed costs are $24,900, ±1 percent. The sales price isestimated at $7.99 per unit, ±2 percent. What is the operating cash flow for a sensitivity analysisusing total fixed costs of $26,000? a.$63,591 b.$62,408 c.$60,540 d. $64,347 e. $54,209

d. $64,347 Tax shield approach OCF= [16,500 x (7.99-1.87) - 26,000 ] x (1-.23) + (28,750 x .23)

Decline, Incorporated, is trying to determine its cost of debt. The firm has a debt issue outstandingwith 13 years to maturity that is quoted at 105.2 percent of face value. The issue makes semiannualpayments and has an embedded cost of 6 percent annually. What is the aftertax cost of debt if the tax rate is 21 percent? a. 4.92% b. 4.17% c. 5.58% d. 4.30% e. 5.43%

d. 4.30% r= 2.7*2=5.44 Rd after tax = 5.44* (1-.21)

The common stock of Shepard Auto sells for $47.92 per share. The stock is expected to pay $2.28 per share next year when the annual dividend is distributed. The company increases its dividendsby 1.65 percent annually. What is the market rate of return on this stock? a. 6.14% b. 9.92% c. 7.28% d. 6.41% e. 4.84%

d. 6.41% R= (D1/Po) + G R= 2.28/47.92 + .0165

Coronel Corporation wants to issue new 20-year bonds. The company currently has 8.5percent bonds on the market that sell for $994, make semiannual payments, and mature inseven years. What should the coupon rate be on the new bonds if the firm wants to sellthem at par? a. 8.75% b. 9.23% c. 8.41% d. 8.62% e. 8.87%

d. 8.62% YTM= 4.308 x 2

Which one of the following will increase a bid price? a. A reduction in the net working capital requirement b. A reduction in the firm's tax rate c. A decrease in the fixed costs d. An increase in the required rate of return e. An increase in the salvage value

d. An increase in the required rate of return

A company has four open seats on its board of directors. There are seven candidates vying forthese four positions. There will be a single election to determine the winners. As the owner of 100shares of stock, you will receive one vote per share for each open seat. You decide to cast all 400of your votes for a single candidate. What is this type of voting called? a.Straight b.Deferred c. Proxy d. Cumulative e. Democratic

d. Cumulative

Assume both the discount and tax rates are positive values. At the financial break-even point, the: a. payback period equals the project's life. b. NPV is negative c.contribution margin per unit equals the fixed costs per unit. d. IRR equals the required return e. OCF is zero

d. IRR equals the required return

A firm's managers realize they cannot monitor all aspects of their projects but do want to maintain a constant focus on the most critical aspect of each project in an attempt to maximize their firm's value. Given this specific desire, which type of analysis should they require for each project and why? a.Accounting breakeven; to ensure each project earns its required rate of return b.Cash breakeven; to ensure the firm recoups its initial investment c. Financial breakeven; to ensure each project has a positiveNPV d. Sensitivity analysis; to identify the key variable that affects a project's profitability e. Scenario analysis; to guarantee each project will be profitable

d. Sensitivity analysis; to identify the key variable that affects a project's profitability

Assume the current market price of a bond exceeds its par value. Which one of these equationsapplies? a. Current yield > Coupon rate b. Market value < Face value c. Yield to maturity = Current yield d. Yield to maturity < Coupon rate e. Market value = Face value

d. Yield to maturity < Coupon rate

to determine a firm's cost of capital, one must include: a. the weighted costs of all future funding sources. b. only the return required by the firm's current shareholders c.the company's original debt-equity ratio. d. the returns currently required by both debtholders and stockholders e.only the current market rate of return on equity shares.

d. the returns currently required by both debt holders and stockholders

Which one of these statements is correct? a. Most long-term bond issues are referred to as unfunded debt b.The risk of a company financially failing decreases when the company issues bonds c.All bonds are treated equally in a bankruptcy proceeding d.Bonds often provide tax benefits to issuers e.A debenture is a senior secured debt

d.Bonds often provide tax benefits to issuers

The equivalent annual cost considers all of the following except the: a. required rate of return b.operating costs c.economic life d.costs of research conducted to identify equipment choices e.need for replacement

d.costs of research conducted to identify equipment choices

You would like to know the minimum level of sales that is needed for a project to be accepted based on its net present value. To determine that sales level you should compute the: a. contribution margin per unit and set that margin equal to the fixed costs per unit b.accounting break-even point c.cash break-even point d.financial break-even point e.degree of operating leverage at the current sales level

d.financial break-even point

The flotation cost for a company is computed as: a. the geometric average of the flotation costs associated with each form of financing b.one-half of the flotation cost of debt plus one-half of the flotation cost ofequity c.the arithmetic average of the flotation costs of both debt and equity d .a weighted average based on the book values of the company's outstanding securities e .the weighted average of the flotation costs associated with each form of financing

e .the weighted average of the flotation costs associated with each form offinancing

Carrillo Trophies has a new project with an initial equipment cost of $148,000 and a life of 10 years.The firm generally uses straight-line depreciation to a book value of zero over the equipment's life. Ifthe firm opts instead to use the bonus depreciation method, and has a tax rate of 21 percent, what isthe depreciation tax shield amount for the first year? a. $11,692 b. $1,169 c. $3,108 d. $14,800 e. $31,080

e. $31,080 = 148,00 x .31

Your employer just purchased $218,000 of equipment that is 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 bethe book value of this equipment at the end of three years assuming no bonus depreciation istaken? a.$58,467 b. $159,533 c. $67,670 d. $155,216 e. $62,784

e. $62,784 book value = 218,000 - (.2*218,000+.32*218,000+.192*218,000)

Projects A and B are mutually exclusive. Project A has cash flows of −$10,000, $5,100, $3,400, and$4,500 for Years 0 to 3, respectively. Project B has cash flows of −$10,000, $4,500, $3,400, and$5,100 for Years 0 to 3, respectively. What is the crossover rate for these two projects? a. 2.75% b. 6.71% c. 4.94% d. 5.48% e. 0%

e. 0%

at an output level of 22,500 unit, you calculate that the degree of operating leverage is 1.37. What will be the percentage change in operating cash flow if the new output level is 25,000 units? A. 16.17 % b. 17.78 % c. 15.08 % d. 17.73 % e. 15.22 %

e. 15.22 % DOL=1.37(25,000-22,500) / 22,500

A project has cash flows of -$108,000, $52,800, $53,200, and $83,100 for Years 0 to 3,respectively. The required payback period is two years. Based on the payback period of _____years for this project, you should _____ the project a. .2.46; accept b. 1.98; accept c. 1.79; accept d. 2.29; reject e. 2.02; reject

e. 2.02; reject payback= 2 + (108,000-52,800-53,200) / 83,100 reject because payback period exceeds the requirement

the yield to maturity on a bond is currently 8.76 percent. The real rate of return is 4.48 percent. What is the rate of inflation? a. 13.63% b. 12.04% c. 5.64% d. 7.24% e. 4.10%

e. 4.10%

Which one of the following statements is correct? a. Nominal rates exceed real rates by the amount of the risk-free rate b.Historical real rates of return must be positive c.The risk-free rate represents the change in purchasing power d.Any return greater than the inflation rate represents the risk premium e.Given a positive rate of inflation, the real rate must be less than the nominalrate

e. Given a positive rate of inflation, the real rate must be less than the nominal rate.

Humberto is fairly cautious when analyzing a new project and thus he projects the mostoptimistic, the most realistic, and the most pessimistic outcome that can reasonably beexpected. Which type of analysis is he using? a. Simulation testing b. Sensitivity analysis c. Break-even analysis d. Rationing analysis e. Scenario analysis

e. Scenario analysis

Which one of the following will best reduce the risk of a project by lowering the degree of operatingleverage? a. Lowering the projected selling price per unit b. Buying equipment rather than leasing it short-term c. Hiring additional employees rather than using temporary outside contractors d. Changing the proposed labor-intensive production method to a more capital intensive method e. Subcontracting portions of the project rather than purchasing new equipment to do all the work in-house

e. Subcontracting portions of the project rather than purchasing new equipment to do all the work in-house

The dividend growth model: a. assumes dividends increase at a decreasing rate. b. only values stocks at Time 0. c. cannot be used to value constant dividend stocks. d. can be used to value both dividend-paying and non-dividend-paying stocks. e. requires the growth rate to be less than the required return

e. requires the growth rate to be less than the required return

Arnold Belt and Bearing has identified two mutually exclusive projects. Project A has cash flows of−$40,000, $21,200, $16,800, and $14,000 for Years 0 to 3, respectively. Project B has a cost of$38,000 and annual cash inflows of $25,500 for 2 years. At what rate would you be indifferentbetween these two projects? a. 8.28% b. 6.34% c. −1.72% d. 9.41% e. −4.38

e. −4.38 Cash flows in calculator = difference between cash flow A and cash flow B

a deferred cal provision: a. allows the bond issuer to delay repaying a bond until after the maturity date should the issuer so opt. b. requires the bond issuer pay a call premium that is equal to or greater than one year's coupon should the bond be called c .requires the bond issuer to pay the current market price, minus any accrued interest, should the bond be called d.prohibits the issuer from ever redeeming bonds prior to maturity e.prohibits the bond issuer from redeeming callable bonds prior to a specified date

e.prohibits the bond issuer from redeeming callable bonds prior to a specified ate

ome Furnishings is expanding its product offerings to reach a wider range of customers. Theexpansion project includes increasing floor inventory by $486,000 and increasing its debt tosuppliers by 90 percent of that amount. The company will also spend $947,000 to expand the sizeof its showroom. As part of the expansion plan, the company expects accounts receivable to rise by$205,000. For the project analysis, what amount should be used as the initial cash flow for networking capital? a. -$176,600 b.−$391,000 c.−$156,400 d.−$271,000 e.−$253,600

e.−$253,600 NWCo= -486,000 + (.9x486,000) - 205,000

You want to have $2 million in real dollars in an account when you retire in 35 years. The nominalreturn on your investment is 9.94 percent and the inflation rate is 3.2 percent. What is the real amount you must deposit each year to achieve your goal? a. $16,017 b. $18,887 c. $20,403 d. $7,482 e. $19,711

16,017

The stock of Singleton Builders pays a constant annual dividend, sells for $56.07 per share, and has a market rate of return of 12.2 percent. What is the amount of the next annual dividend? a. $5.67 b. $5.94 c. $6.21 d. 6.84 e. $7.30

D. 6.84 Po=56.07 56.07= D1 / R 56.07= D1/ .122 D1= .122 x 56.07

Currently, a firm has an EPS of $2.08 and a benchmark PE of 12.7. Earnings are expected to grow by3.8 percent annually. What is the estimated current stock price? a. $27.42 b. $27.09 c. $26.42 d. $26.08 e. $28.13

c. $26.42 P0 = $2.08(12.7)

By definition, which one of the following must equal zero at the accounting break-even point? a. Depreciation b. Operating cash flow c. Net income d. Net present value e. Contribution margin

c. Net income

Webster's has sales of $798,000 and a profit margin of 6.8 percent. The annual depreciationexpense is $82,600. What is the amount of the operating cash flow if the company has no long-termdebt? a. $54,264 b. −$28,336 c. $22,160 d. $136,864 e. $104,76

d. $136,864

Ahmad Couture has bonds outstanding with a face value of $1,000, 11 years to maturity, and acoupon rate of 6 percent paid semiannually. What is the company's pretax cost of debt if the bondscurrently sell for $1,067.12? a. 5.34% b. 2.60% c. 2.67% d. 5.19% e. 4.60

d. 5.19% r= 2.59 x 2

The common stock of Salazar Insurance pays a constant annual dividend of $4.80 per share. Whatis one share of this stock worth at a discount rate of 13.3 percent? a. $40.89 b.$57.60 c.$48.00 d.$65.26 e. $36.09

e. $36.09

Ducazau Shipping has 700,000 shares outstanding, which are trading for $23.63 per share. Usingthe firm's required rate of return of 17 percent, a project has an NPV of $202,000. All else constant,if the project is accepted, the stock price per share would be expected to: a. rise to 23.88 b.fall to $19.62 c.fall to $23.34 d.rise to $27.65 e.rise to $23.92

e.rise to $23.92 change in value per share = 202,000/700,000 expected rise: 23.73 +.29

Overland needs to maintain 21 percent of its sales in net working capital. Currently, the store isconsidering a four-year project that will increase sales from its current level of $349,000 to$408,000 the first year and to $414,000 per year for the following three years of the project. Whatamount should be included in the project analysis for net working capital in Year 4 of the project? a. $13,650 b.$86,940 c$21,720 d.$0 e.−$1,260

a. $13,650 NWC recovery = (414,000-349,000) x .21

ssume an investment has cash flows of −$105,000, $140,000, $200,000, and $485,000 for Years0 to 3, respectively. What is the NPV if the required return is 13.5 percent? Should the project beaccepted or rejected? a. $505,307; accept b. $501,656; reject c. $533,466; accept d. $505,307; reject e. $533,466; rejec

a. $505,307; accept

The Whey Station is considering a project with an initial cost of $146,500 and cash inflows for Years1 to 3 of $56,700, $68,500, and $71,200, respectively. What is the IRR? a. 14.37% b.16.17% c. 13.23% d. 12.88% e. 15.56%

e. 15.56%

Petropoulos Resorts common stock sells for $58.49 per share and pays an annual dividend that increases by 1.3 percent annually. The market rate of return on this stock is 12.6 percent. What is the amount of the last dividend paid?a. $6.52 b. $5.64 c. $6.60 d. $6.98 e. $5.86

a. $6.52 $58.49=[D0(1.013)]/(.126−.013)

A bond's principal is repaid on the ________ date .a. coupon b. yield c. maturity d. yield e. dirty price

c. maturity

The next dividend payment by Hernandez Enterprises will be $1.82 per share with future increasesof 2.8 percent annually. The stock currently sells for $38.70 per share. What is the dividend yield? a. 4.20% b. 4.81% c. 4.41% d. 4.56% e. 4.70%

e. 4.70% Dividend yield = $1.82/$38.70

ou are in charge of a project that has a degree of operating leverage of 1.12. What will happen to the operating cash flows if the number of units you sell increases by 5.5 percent? a. 4.38 percent decrease b. 6.62 percent increase c. 4.91 percent decrease d. 4.91 percent increase e. 6.16 percent increase

e. 6.16 percent increase = 1.12 x 5.5 = 6.16%

Which one of the following statements related to corporate dividends is correct? a. The chief executive officer of a corporation is responsible for declaring dividends. b. The chief financial officer of a corporation determines the amount ofdividend to be paid c.Corporate shareholders may receive a tax break on a portion of their dividend income. d.Dividends are nontaxable income to shareholders e.Dividends reduce the taxable income of the corporation

c. Corporate shareholders may receive a tax break on a portion of their dividend income

A preferred stock pays an annual dividend of $7.95 and sells for $48.89 per share. What is the rate of return? a. 6.84% b. 7.95% c. 9.54% d. 6.15% e. 16.26%

e. 16.26% R = $7.95/$48.89

Shook Fitness pays an annual dividend that increases by 1.8 percent per year, commands a market rate of return of 13.8 percent, and sells for $19.08 per share. What is the expected amount of the next dividend? a. $2.37 b. $2.32 c. $2.29 d. $2.24 e. $2.17

c. $2.29 19.08 = D1/(.138 − .018)

Colin is analyzing a 3-year project that has an initial cost of $199,800. This cost will be depreciatedstraight-line to zero over three years. The projected annual net income for the three years is $11,600, $15,900, and $17,200. If the discount rate is 12 percent, what is the average accounting rate of return? a. 14.91% b. 14.75 c. 15.31% d. 15.66% e. 13.94%

a. 14.91% AAR= [(1,600+15,900+17,200)/3 ] / [(199800+0)/2]

A project has an initial cost of $6,900. The cash inflows are $850, $2,400, $3,100, and $4,100 overthe next four years, respectively. What is the payback period?a. 3.13 years b. 2.51 years c. 3.94 years d. 3.73 years e. 3.51 years

a. 3.13 years payback = 3 + (6,900-850-2,400-3,100)/4,100