FIN 310 Quiz Questions

T-Mobile announced an all-stock deal valued at $26.5 billion to acquire Sprint. This would be an example of: A) Vertical Merger B) Horizontal Merger C) Conglomerate Merger D) Co-generic Merger E) Subsidiary Merger

B) Horizontal Merger

EMC is considering a stock split. The stock currently sells for $120 with 100,000 shares outstanding. What will be the number of shares outstanding and stock price if they have a 2 for 5 reverse stock split? A) 100,000; $120 B) 150,000; $80 C) 120,000; $75 D) 250,000; $72 E) 40,000; $300

E) 40,000; $300

Your bank pays you a nominal interest rate of 6%, but interest is compounded daily. Your plan is to deposit $500 in the account today. You also plan to deposit $1,000 in the account at the end of each of the next three years. How much will you have in the account at the end of three years after making the final deposit? ( 1+.06/365)365 - 1= 6.18% A) $3,787.76 B) $3,500.72 C) $4,000.50 D) $7387.47 E) $4500.72

A) $3,787.76 CF)= 500, CF1=1000, F1=3, CPT NPV I/Y= 6.18%

What would be SPC's WACC in the above question? Hint: (R= WdRd(1-t) + WeRe A) 11.77% B) 7.12% C) 15.5% D) 5% E)6.79%

A) 11.77%

W Co. follows a strict residual dividend policy. Given the following information, what can be the maximum capital raised if all of the Net Income is retained? Formula= NI=Equity ratioX NI= 12m; Target capital structure = 70% equity and 30% debt; Capital budget = 10 million Formula = NI- (Capital budget*Equity ratio) A) 17.14m B) 14.17m C) 10m D) 12.17m E) 13m

A) 17.14m

For the above question, will the bonds be called back? Compare your YTM and coupon rate when you answer the question. A) Yes B) No

A) Yes YTM: PV= -1300, FV=1000, N=40, PMT= 60 CPT I/Y= 4.39*2= 8.78% YTC: 6.58% The YTM is higher than the YTC and coupon rates are higher than both. It the investors hold all the way up to maturity their return is 8.78% and the coupon rate is 12%. The company will save by calling back as the company will save in interest expenses.

You just graduated and plan to work for 10 years and then to leave for the "Australian Outback" bush country. You figure you can save $1,000 a year for the first five years and $2,000 a year for the next five years. These savings cash flows will start one year from now. In addition, your family has given you a $5,000 graduation gift. If you put the gift away now and your future savings when they start at an account that pays 8% compounded annually, what will be your financial stake when you leave for Australia 10 years from now? A)$14,427.45 B)$31,148.78 C) $11,148.78 D) $15,427.45 E) $21,148.78

B) $31,148.78 CF0=5000, CF1=1000, F1=5, CF2=2000, F2=5, CPT NPV I/Y=8% = $14,427.45 PV=14,427.45, N= 10, I/Y=8%, CPT FV= $31,148.78

What would be the optimal capital budget for SPC in the above question? A) $250 B) $375 C)$200 D) $350 E) $150

B) $375

What is the total future value six years from now of $800 received in one year, $3,000 received in two years, and $7,000 received in six years if the discount rate is 10%? A) 7,157.93 B) 12,680.71 C) 10,800 D) 11,000 E) 12,000

B) 12,680.71 CF0=0, CF1=800, F1=1, CF2=3,000, F2=1, CF3=0, F3=3, CF4=7,000, F4=1 CPT NPV, I/Y=10%, =7,157.93 PV=7,157.93, N=6, I/Y=10% CPT FV= 12,680.71

EMC is considering a stock split. The stock currently sells for $120 with 100,000 shares outstanding. What will be the number of shares outstanding and stock price if they have a 3 for 2 stock split? A) 100,000; $120 B) 150,000; $80 C) 120,000; $75 D) 66,667; 180 E) 77,667; 240

B) 150,000; $80

EMC would like to acquire Inkomi and is trying to determine the terminal value at year 2024 using the DCF approach. EMC decided to use the cost of equity as the discount rate due to the higher level of risk. Calculate the terminal value using the discount rate of 15%. Here are the cash flows for Inktomi: 2020= 10m 2021= 12m 2022= 13m 2023= 14m 2024= 15m After 2024, the cash flows of Inktomi is expected to grow at a constant growth rate of 5% A) 150m B) 157.50m C) 145.50m D) 172.50m E) 181m

B) 157.50m

Projects A and B have an initial Investment of $50,000. Project A has a life of 2 years and has cash flows of $30,000 each year. Project B has a life of 4 years and has cash flows of $17,000 each year. What is the common life NPV of Project A? A) 2,066 B) 3,773 C) 3,887 D) 4,553 E) 3,553

B) 3,773

If M Corp. has a debt ratio of 40%, Profit margin of 10%, Sales= $100,000, Assets= 50,000, what would be the ROE? ROE= Net Income/Total Equity A) 28% B) 33.33% C) 40% D) 15% E) 20.33%

B) 33.33%

B Corp's 12% coupon rate bond, semiannual payments matures in 20 years and has a call price of $1,100 five years from now. The bonds sell at a price of $1,300 and the yield curve is flat. Assuming that the interest rates in the economy are expected to remain at current levels, what would be the YTC? A) 3.29% B) 6.58% C) 8.78% D) 5.68% E) 7.87%

B) 6.58% PV= 1300, FV= 1100, N= 5*2=10, PMT= 60 CPT I/Y= 3.29x2= 6.58%

H's Net Income for most recent year was $15,185, tax rate 21%. The firm paid $3,806 in interest expense and has a depreciation expense of $2,485. Calculate Cash Coverage ratio. Formula: Cash Coverage ratio= (EBIT + Depreciation)/ Interest expense A) 7.7 B) 6.7 C) 5.7 D)4.7 E) 3.7

B) 6.7

VSK Enterprises is interested in issuing bonds with warrants attached. The bonds will have a 30-year maturity and annual interest payments. Each bond will come with 30 warrants that give the holder the right to purchase one share of stock per warrant. The investment bankers estimate that each warrant will have a value of $10.00. A similar straight-debt issue would require a 10% coupon. What coupon rate should be set on the bonds-with-warrants so that the package would sell for $1,000? A) 7.88% B) 6.82% C)8.62% D) 8.78% E) 5.82%

B) 6.82%

Calculate the MIRR for the following set of cash flows at the rate of 10% CF0= -250 CF1= 100 CF2= 91 CF3= 83 CF4= 60 A) 10% B) 13.84% C) 12% D) 9.74% E) 7.94%

C) 12%

What is Allison's marginal cost of equity capital if it issues new capital in the above question? A) 6% B) 12% C) 15.8% D)13.86% E) 14.33%

C) 15.8%

The Raggio Company has a Net Income of $52,300. There are currently 21.50 days sales in receivables. Total assets are $430,000, Total Receivables are $59,300 and debt equity ratio is 1.30. What would be the Return on Equity ( ROE) A) 10% B) 16.98% C) 27.97% D) 9.27% E) 5.2%

C) 27.97%

W Co. follows a strict residual dividend policy. Given the following information, what would be the total dividends paid and the payout ratio? NI= 12m; Target capital structure = 70% equity and 30% debt; Capital budget = 10 million Formula = NI- (Capital budget*Equity ratio) A) 12m: 40.5% B) 10 m; 60% C) 5 m; 41.67% D) 6m; 61.47% E) 9 m; 16.74%

C) 5m; 41.67%

Firm A and B have total debt ratios of 45% and 35% and ROA of 9% and 12%. Which firm has a greater ROE? A) A has a higher ROE as it has a higher debt ratio B) B has a higher ROE as it has a lower tax C) B has a higher ROE of 18.46% D) The ROE's are equal for A and B E) None of the above

C) B has a higher ROE as it has lower tax

You are been offered two salary options. You can either have $75,000 per year for the next two years or you can have $55,000 per year for the next two years along with a signing bonus of $30,000 today. If the interest rate is 10% compounded MONTHLY which do you prefer? A) Choose Option 1 since it has a signing bonus of $30,000 today B) Choose Option 2 since it has higher cash flows compared to B C) Choose Option 1 since it has a higher PV D) Choose Option 2 since it has a higher PV E) Either options are fine

C) Choose Option 1 since it has a higher PV Option 1: PMT=75,000, N=2, I/Y=10.47%, CPT PV= $129,348.90 Option 2: PMT=55,000, N=2, I/Y=10.47% CPT PV= 94,855 +30,000 =$124,844

Chrysler is offering a choice of either (Option 1) "42 months, 2.2% APR" financing or (Option 2) $2,000 cash back a on car you have decided to buy. The stated price for the car is $23,000. Which option would you choose? A) Choose option 1 as the APR is low B) Choose option 2 as you are getting a discount of $2000 C) Choose Option 1 as it has lower monthly payments D) Choose Option 2 as it has lower monthly payments E) Either option is fine.

C) Choose option 1 as it has lower monthly payments Option 1: PV=-23,000, N= 42, I/Y=2.2/12=.1833 CPT PMT =$569.47 Option 2: PV=-21,000, N= 42/12=3.5, I/Y=8.3% CPT PMT= 7,157.64 Monthly payment= 7157.64/12= $596.47

EMC corporation has EBIT of $50,000, total assets= 100,000, and its capital structure consists of 40% debt and 60% equity. Total assets were equal to total operating capital. The firm's after tax cost of capital is 10% and its tax rate is 21%. Calculate the economic value added EVA= EBIT(1-tax)- After tax cost of all capital A) $30,000 B) $50,000 C) $39,500 D) $29,500 E) $23,500

D) $29,500

EMC would like to acquire Inkomi and is trying to determine the terminal value at year 2024 using the DCF approach. EMC decided to use the cost of equity as the discount rate due to the higher level of risk. The cost of equity is 15%. What would be the maximum price EMC is willing to pay for Inktomi? 2020= 10m 2021= 12m 2022= 13m 2023= 14m 2024= 15m After 2024, the cash flows of Inktomi is expected to grow at a constant growth rate of 5% A) 150m B) 157.50m C) 145.50m D) 120m E) 42m

D) 120m

SPC uses only debt and equity. It can borrow unlimited at an interest rate of 12%, as long as it finances at its target capital structure, which calls for 45% debt and 55% equity. Its last divided was $2.40, its expected constant growth rate is 5%, and its stock sells for $24. SPC's tax rate is 40%. Four projects are available: Project A- Cost $250 million and Return=13% Project B- Cost $125 million and Return=12% Project C- Cost $200 million and Return=11% Project D- Cost $150 million and Return=10% What is SPC's cost of common stock? Hint: D1/Po + g A) 5% B) 10% C) 15% D) 15.5% E) 5.15%

D) 15.5%

EMC is considering a stock split. The stock currently sells for $120 with 100,000 shares outstanding. What will be the number of shares outstanding and stock price if they have a 5 for 3 stock split? A) 100,000; $120 B) 150,000; $80 C) 120,000; $75 D) 166,667; $72 E) 77,667; 240

D) 166,667; $72

Given the following information, calculate ROE(Use Dupont Identity). Debt ratio of 60%; Net income = 22,000; Sales= $220,000; Assets= 150,000 (Hint Dupont Equation= PM*TAT*EM) A) 10% B) 14.7% C) 28% D) 36.67% E)23.4%

D) 36.67%

Marissa Mayer, CEO of Yahoo was given a severance payment of 25 million when Verizon Acquired Yahoo. This is an example of: A) White Knight B) Poison Pill C) Bear hug D) Golden parachute E) Crown Jewel

D) Golden Parachute

Allison Engines Corp. has established target capital structure of 40% debt and 60% equity. The current price of the firm's stock is $28 and its last paid dividend would be $2.20. The expected dividend growth rate is 6%. Allison can issue new common stock at a flotation cost of 15%. What is Allison's marginal cost of equity capital using DCF? A) 6% B) 12% C) 15% D)13.86% E) 14.33%

E) 14.33%

Which of the following statements is false regarding warrants/convertibles? A) Warrants results in lower dilution compared to Convertibles B) Convertibles can be called back, but warrants cannot be called back C) Warrants have higher flotation cost compared to convertible. D) Exercise of warrants brings in new equity capital. E) Convertible conversion brings new capital when conversion occurs.

E) Convertible conversion brings new capital when conversion occurs

Which of the following arguments is/are not true with regard to low payout policy? A) Higher taxes for investors B) Increases Flotation cost C) Results in lower debt ratios D) Enhances growth and capital appreciation E) Statements A and B

E) Statements A and B