Finance Final
Jazz World Inc. is considering a project that has the following cash flow and WACC data. If the IRR criteria is used to evaluate the project, should the firm accept the project?
Yes because the IRR is 16.46%
The primary operating goal of a publicly-owned firm interested in serving its stockholders should be to:
maximize the stock price per share over the long run, which is the stock's intrinsic value.
Relative to bondholders, stock holders are _________ likely to prefer that a firm take on a risker project because they receive ________ of the upside risk if the project succeeds.
more; more
When you subtract the initial cost of a project from the present value of all future cash flows the project will generate, you are calculating the project's __________.
net present value
A stock's value is equal to
the present value of the future cash flows that the stock generates
Suppose a firm has a bond issue currently outstanding that has 25 years left to maturity. The coupon rate is 9%, and coupons are paid semiannually. The bond is currently selling for $1,107.41. What is the after-tax cost of debt if the relevant tax rate is 40 percent?
4.8%
Use the following information to calculate the standard deviation of Pirate Corporation's projected returns. State of Economy Probability of State Occurring Rate of Return Strong 0.3 20% Normal 0.4 10% Weak 0.3 5%
5.94%
Royce Corp's sales last year were $280,000, and its net income was $23,000. What was its profit margin?
8.21%
You are given the following information regarding Cunningham Corporation: The stock just paid a dividend of $1.75 (i.e. Do) that is expected to grow at a constant annual rate of 3.6%. The stock is currently selling for $37.95. What is the cost of common equity for Cunningham Corporation?
8.37%
Brooker Inc. recently hired you as a consultant to estimate the company's WACC. You have obtained the following information. (1) The firm's bonds mature in 20 years, have an 8.00% annual coupon, a par value of $1,000, and a market price of $1,050.00. (2) The company's tax rate is 40%. (3) The risk-free rate is 4.50%, the market risk premium is 5.50%, and the stock's beta is 1.20. (4) The target capital structure consists of 35% debt and 65% common equity. The firm uses the CAPM to estimate the cost of equity. What is its WACC?
8.79%
O'Brien Ltd.'s outstanding bonds have a $1,000 par value, and they mature in 25 years. Their yield to maturity is 9.25%, they pay interest semiannually, and they sell at a price of $975. What is the bond's annual coupon rate?
8.99%
A stock just paid a dividend of $1.75, today (i.e. Do). If the dividend is expected to grow at a constant rate of 3.6% and the current price of the stock is $32.00, what is the stock's required rate of return?
9.26
You put $7,265 into an account that compounds interest semi-annually. Ten years later, your account balance is $18,654. What was your annual compound rate of interest over the ten year period?
9.66%
Taussig Corp.'s bonds currently sell for $1,150. They have a 6.35% annual coupon rate and a 20-year maturity, but they can be called in 5 years at $1,067.50. What is the annual Yield to Call of Taussig Corp.'s bonds?
4.20%
You are considering an investment that will pay you $775 at the end of year 1, $14,350 at the end of year 2, and $500 at the end of year 3. If you want to earn 5 percent on your money, what is the present value of this investment?
$14,185.89
Murphy Pharmaceuticals is expected to generate $50 million in free cash flow (FCF) next year, and FCFs are expected to grow at a constant rate of 8% per year indefinitely. Murphy Pharmaceuticals has no debt or preferred stock, and its WACC (i.e. discount rate) is 12%. If the firm has 80 million shares of stock outstanding, what is the stock's value per share?
$15.63
A stock is expected to pay a dividend of $0.75 at the end of the year. The required rate of return is 10.5%, and dividends are expected to grow at a constant is of 6.4%. What is the stock's current price?
$18.29
Suppose you are considering an annuity which pays $1,000 every six months, for 20 years. What is the present value of this annuity? Assume a discount rate of 8 percent and that payments occur at the end of each period.
$19,792.77
Gatsby, Inc. will pay no dividends over the next four years. However, beginning in five years, the company will pay annual dividends of $5 per share and dividends will grow by a rate of 10 percent, per year thereafter. If the required rate of return on this stock is 20 percent, what is the current price?
$24.11
Suppose you inherited $275,000 and invested it at 8.25% per year. How much could you withdraw at the end of each of the next 20 years?
$28,532
What is the future value of $150,000 at 7% interest, compounded quarterly, in 12 years?
$344,939.81
Goodell Corporation just paid its annual dividend of $1.75, today. Dividends for the Goodell Corporation are expected to increase by 27.5 percent in year one and 13.8 percent in year 2. After year two, dividends are expected to increase at a rate of 5 percent per year. What is the current price of Goodell Corporation's stock? Assume the required rate of return is 10 percent.
$48.26
You want to purchase shares of Green World's preferred stock which pays a constant annual dividend of $.90 per share. If the appropriate required rate of return is 15 percent, what is the price of one share of Green World's preferred stock?
$6.00
A manager thinks that, every year, she can sell 50,000 units of a product at a price of $4 per unit. It costs about $2.50 per unit to make the product and the project has a 3 year life. Fixed costs run $12,000 per year and the manager needs to invest in $90,000 worth of manufacturing equipment to start the project. Depreciation expenses are $30,000 per year. Also, the project will require an initial investment of $20,000 in net operating working capital (NOWC) but the NOWC will be recovered at the end of the life of the project (i.e. Year 3). What is the project's Year 3 free cash flow? Assume a 20% WACC and a 34% tax bracket.
$71,780
Faye is considering purchasing a bond that pays semi-annual coupons at a rate of 8 percent and matures in 12 years. If the YTM on this bond is 10 percent, how much should Faye pay for this bond if she purchases the bond today?
$862.01
You are considering a project that will require an initial cost of $8,000. Revenues for the 5 year life of the project are expected to be $7,000 each year and costs (including taxes) are expected to be $2,000 each year. If the WACC is 14%, what is the NPV of the project?
$9,165
Your company, Temple Corp., is considering a new project whose data are shown below. What is the project's Year 1 free cash flow? Sales revenues, each year = $22,250 Depreciation, each year = $8,000 Other operating costs, each year = $12,000 Tax rate = 35.0%
$9,463
Project B costs $52,125. The project's cash revenues are expected to be $12,000 per year for 5 years. If the WACC is 12%, what is the project's simple payback period?
4.34 years
Simms Corp. is considering a project that has the following cash flow data. If the appropriate WACC is 8%, what is the project's NPV?
$95.27
Behil Enterprises is considering a project that has the following cash flow and WACC data. What is the project's profitability index?
1.09
You currently hold a portfolio containing shares of Google (beta = 1.5), Coca-Cola (beta = 2.0), Apple (.75), and IBM (beta = 1.25). If the appropriate portfolio weight are .3 for Google, .2 for Coca-Cola, .1 for Apple, and .4 for IBM, what is the beta of your portfolio?
1.43
Brennan Inc.'s perpetual preferred stock sells for $97.50 per share, and it pays a $9.96 annual dividend. Ignoring flotation costs, what is the company's cost of preferred stock?
10.22%
Bob has $15,000 invested in a bank that pays 7% annually. How many years will it take for his funds to double?
10.24 years
Mulherin's stock has a beta of 1.23, its required return is 11.75%, and the risk-free rate is 4.30%. What is the required rate of return on the market?
10.36%
Garnet Corporation's optimal capital structure is 35% debt, 5% preferred stock, and 60% common equity. The cost of debt is 8%, the cost of preferred stock is 6%, and the cost of equity is 14%. The relevant tax rate is 35%. What is Garnet Corporation's WACC?
10.52%
King Inc. has the following data: risk free rate = 5.00%; market risk premium = 6.00%; and beta = 1.05. What is the firm's cost of equity based on the CAPM?
11.30%
Murphy Manufacturing has preferred stock outstanding that sells for $40 per share and pays a dividend of $5 at the end of each year. What is the required rate of return?
12.50%
The beta of Pirate Corporation's stock is 1.65. If the Tbill rate (i.e. risk free rate) is 3 percent and the expected return of the market portfolio is 9 percent, what is the expect return of Pirate Corporation's stock?
12.9%
Refer to the financial statements below and note that the average days sales outstanding (DSO) ratio for firms in Chema Corp.'s industry is 18.53. Chema Corp.'s DSO of ______ in 2016 indicates that the firm is __________ to collect on sales than the average firm in the industry.
15.77; quicker
Precision Aviation had a profit margin of 4.25%, a total assets turnover of 2.5, and an equity multiplier of 1.5. What was the firm's ROE?
15.94%
Jason manually calculated the present value of $350,000 at 12 percent 15 years from now to be $58,374.18 when interest is compounded monthly. If Jason used the notation in the formula below to arrive at his answer, what is the numerical value of "t" in his formula?
180
Refer to the financial statements below. What is the fixed asset turnover ratio for Behil Food Inc. in 2016?
3.22
Gold Corporation just paid a dividend of $2.50 per share, today (i.e. Do). The dividend is expected to increase every year by 4 percent. If the market requires a return of 12 percent, what is the price of Gold Corporation's stock?
32.50
Jim recently received a credit card with a 15% nominal interest rate. With the card, he purchased a new computer for $2,000.00. The minimum monthly payment on the card is $70 per month. If he makes the minimum monthly payment and makes no other charges, how many months will it take him to pay off the card?
35.57 months
The manager of a firm is considering the following three mutually exclusive projects: Project A's NPV is $1.2 million and its IRR is 18.25%. Project B's NPV is $3.7 million and its IRR is 2.03%. Project C's NPV is -$1.05 million and its IRR is -22.22%. If the manager of this firm hired you as a consultant to evaluate these mutually exclusive projects, what should be your recommendation to the manager?
Accept Project B only
Which of the following is not a capital component when calculating the weighted average cost of capital (WACC) for use in capital budgeting?
Accounts payable.
All of the following are methods that discourage managers from acting in their own self-interest except:
All of the above are methods used to discourage managers from acting in their own self-interest.
Which of the following statements is correct?
Corporations are taxed less favorably than sole proprietorships
Which of the following figures depicts the correct calculation for the NPV of a three year project with an initial outlay of $300,000 and net cash inflows of $100,000 in each of the three years of the project? Assume a WACC of 4 percent.
Figure D
__________ risk is the risk that can be eliminated in a portfolio by adding stocks while ________ risk is the risk that remains even if the portfolio holds every stock in the market.
Diversifiable; market
Which of the following figures depicts the correct calculation for the price of a bond that matures in 2 years, makes semi-annual coupon payments at a rate of 8 percent, and a YTM of 10 percent?
Figure A
Which of the following statements is(are) true? I. An annuity is a finite series of equal payments that occur at regular intervals. II. If the first payment of an annuity occurs at the beginning of the period, it is called an ordinary annuity. III. A perpetuity is an infinite series of equal payments that occur at regular intervals.
I & III only
Which of the following statements is(are) true? I. In most large corporations, the CFO is responsible for accounting, asset acquisition and investor relations. II. A Sole Proprietorship is a legal entity created by a state that is separate and distinct from its owners and managers. III. The board of directors are a group of individuals that represent the stockholders of a firm.
I & III only
Which of the following statements regarding capital budgeting is(are) correct? I. Capital budgeting is the process of planning expenditures on assets with cash flows that are expected to extend beyond one year. II. Capital budgeting decisions are long-term decisions that often involve large expenditures. III. When making capital budgeting decisions, managers do not need to consider whether the project will add value to the firm.
I and II only
Which of the following statements is (are) true? I. For a given interest rate, the longer the time period, the lower the present value. II. For a given interest rate, the longer the time period, the higher the present value. III. For a given time period, the higher the interest rate, the smaller the present value. IV. For a given time period, the lower the interest rate, the smaller the present value.
I and III only
Which of the following statements is(are) true? I. A sensitivity analysis is one method managers can use to examine the stand-alone risk of a project. II. When performing a scenario analysis, it is never necessary to estimate the cash flows of the base case economic scenario. III. Monte Carlo analysis can be viewed as a more sophisticated version of scenario analysis.
I and III only
Which of the following statements is(are) true? I. Preferred stocks are an example of constant dividend stocks. II. The corporate valuation model cannot be used unless a company pays dividends. III. For non-constant growth firms, stock price is not equal to the present value of all future dividend payments.
I only
Which of the following statements regarding the cost of debts is(are) true? I. The cost of debt is the interest rate that a firm must pay on its new debt. II. The coupon rate of outstanding bonds is the best measure of the cost of debt for a firm. III. Firms should never consider the after-tax cost of debt when calculating WACC.
I only
Which of the following statements is(are) true? I. The optimal capital budget is the annual investment in long term assets that maximizes the value of the firm. II. If a firm can receive financing for all projects, the firm should accept all projects with positive NPVs and all mutually exclusive projects with higher NPVs. III. When making capital budgeting decisions, managers need to only consider cash flows that are relevant to the project.
I, II and III are all correct
Which of the following statements regarding a stock's beta is(are) true? I. A beta equal to 1 implies the stock has the same market risk as the overall market. II. A beta greater than 1 implies the stock has more market risk than the overall market. III. Beta measures the market risk of a stock.
I, II, & III are all correct
Which of the following statements is (are) true? I. All else equal, if a firm uses more debt, ROA will decline. II. The current ratio indicates a company's ability to pay back short-term liabilities. III. A potential limitation of financial ratio analysis is that different accounting and operating practices can distort comparisons across otherwise similar firms.
I, II, & III are all true
Which of the following statements is (are) true? I. Starting to invest early for retirement increases the benefits of compound interest. II. If the discount rate is positive, the future value of an expected series of payments will always exceed the present value of the same series. III. The greater the number of compounding periods within a year, the greater the future value of a lump sum invested at Time 0.
I, II, & III are all true
Which of the following statements is (are) true? I. A stock with a market price below its intrinsic value is undervalued. II. The dividend discount model determines the value of a stock as the present value of the expected future dividends III. If markets are efficient, investors cannot profit from publicly available data on stocks because stock prices already incorporate all publicly available information
I, II, and III are all correct
Which of the following statements regarding relevant (i.e. incremental) cash flows is(are) true? I. Managers should not consider opportunity costs when making capital budgeting decisions. II. Managers should not consider sunk costs when making capital budgeting decisions. III. An externality is an effect of a project on the firm that is not reflected in the project's cash flows.
II and III only
A bond has a market price that exceeds its face value. Which of the following statements apply to this bond? I. The bond is discount bond II. The bond is a premium bond III. The YTM of the bond exceeds the coupon rate IV. The YTM of the bond is less than the coupon rate
II and IV only
Natalia is considering two investment opportunities. Investment A has a stated rate of 4 percent, compounded daily. Investment B has a stated rate of 4.25, compounded semi-annually. Which investment should Natalia choose if she wishes to maximize the value of her account?
Investment B because it has an effective annual rate of 4.30 percent.
All of the following are true statements regarding financial statement ratios except
Investors should never compare the financial ratios of a given firm to the ratios of the average firm in the industry.
What is the present value of a perpetuity that pays $550 per year if the appropriate interest rate is 10%?
None of the above answers are correct.
Pooser Manufacturing Company has 8 percent coupon bonds on the market with 17 years left until maturity. The bond makes semiannual payments. If the bond currently sells for $838.07, what is the annual YTM?
None of the above are correct
Which of the following statements is correct?
One advantage of forming a corporation is that equity investors are usually exposed to less liability than they would be in a partnership.
LaPango Inc. estimates that its average-risk projects have a WACC of 10%, its below-average risk projects have a WACC of 8%, and its above-average risk projects have a WACC of 12%. Which of the following projects (A, B, and C) should the company accept?
Project B, which is of below-average risk and has a return of 8.5%.
Stock A has an expected return of 9 percent and the standard deviation of its returns is 30 percent. Stock B has an expected return of 5 percent and the standard deviation of its returns is 20 percent. If we are a risk averse investor, which stock would we prefer to own?
Stock A because it has lower risk per unit of return.
Which of the following is not a relevant cash flow and thus should not be reflected in the analysis of a capital budgeting project?
Sunk costs.
Ashley is currently in a 20 percent federal tax bracket. Ashley has the opportunity to purchase a taxable corporate bond with a yield of 7.25 percent or a municipal bond with a yield of 4 percent. Which bond should Ashley purchase if she wishes to maximize her end wealth? Assume the municipal bond is exempt from state and federal taxes and that the corporate bond is exempt from state taxes.
The corporate bond because it has an after tax yield of 5.8 percent, which is larger than the after tax yield of the municipal bond.
Chema Corporation is considering the purchase of a new computer system which will be able to digitally process customer orders. Currently, Chema Corporation pays a number of employees a total of $50,000 per year to process orders and the new computer system will eliminate that expense. The new computer system costs $150,000 to purchase and install and has a 5 year life. The computer system will be sold at the end of the project for a net cash inflow of $10,800. Depreciation expenses will be $30,000 per year. If the tax rate is 28 percent and the WACC is 15 percent, should Chema Corporation purchase the new computer system? Use the NPV criteria to make your decision.
The new computer system should be purchased because it will increase firm value by $4,205.
Gold Corporation is considering a project. The data for the 3 year project are given below. Should the manager of Gold Corporation accept this project? Use the NPV criteria to make your decision. Sales revenue, each year: $50,000 Variable costs, each year: $12,000 Fixed costs, each year: $0 Sunk costs: $30,000 Initial outlay: $45,000 Depreciation, each year: $15,000 Tax rate: 20% WACC: 12%
The project should be accepted because it has an NPV of $35,221
All else equal, when market interest rates rise, what happens to the value of an outstanding bond?
The value of the bond declines
Inflation, recession and high interest rates are economic events that are best characterized as being
among the factors that are responsible for market risk.
The mix of debt and equity that a firm uses to finance new projects is referred to as the ___________ of the firm.
capital structure