Business Finance Final Exam (Chap 7-13 Quizzes)
The weighted average cost of capital at QuizCompany is 10%. If the maximum allowable discounted payback for projects at the QuizCompany is 5 years, what would your decision on this project be?
accept
The weighted average cost of capital at QuizCompany is 10%. If the maximum allowable payback for projects at the QuizCompany is 4 years, what would your decision on this project be?
accept
The NASDAQ Composite includes:
all of the stocks listed on the NASDAQ stock exchange
Which of these is the portion of total risk that is attributable to overall economic factors?
market risk
The total risk of the S&P 500 Index is equal to:
nondiversifiable risk
which of these is the dollar return characterized as a percentage of money invested?
percentage return
Which of these is the process of estimating expected future cash flows of a project using only the relevant parts of the balance sheet and income statements?
pro forma analysis
QuizCompany Incorporated is also considering another project called CheaterBeaterPlus. If the company uses the profitability index (PI) to evaluate projects and the PI on the CheaterBeaterPlus project is 0.2, what would your decision on this project be?
reject
Stock A has a required return of 12 percent. Stock B has a required return of 15 percent. Assume a risk-free rate of 4.75 percent. Which of the following is a correct statement about the two stocks?
stock b is riskier
A stock has an expected return of 12 percent and a standard deviation of 25 percent. Long-term Treasury bonds have an expected return of 5 percent and a standard deviation of 9 percent. Given this data, which of the following statements is correct?
the bond investment has a better risk return trade off
Which of the following terms means that during periods when interest rates change substantially, bondholders experience distinct gains and losses in their bond investments?
interest rate risk
Value stocks usually have:
low P/E ratios and high growth rates
All of the following are necessary conditions for an efficient market EXCEPT
low stock prices
A 5.5 percent corporate coupon bond is callable in four years for a call premium of one year of coupon payments. Assuming a par value of $1,000, what is the price paid to the bondholder if the issuer calls the bond? (Assume annual interest payments.)
$1,055
Suppose you sell a fixed asset for $86,600 when its book value is $75,000. If your company's marginal tax rate is 39 percent, what is the gain or loss on the sale of the asset?
$11,600 86,600 − 75,000 = $11,600
Suppose you sell a fixed asset for $122,000 when it's book value is $149,000. If your company's marginal tax rate is 33 percent, what will be the effect on cash flows of this sale (i.e., what will be the after-tax cash flow of this sale)?
$130,910 AT CF = $149,000 + ($122,000 − $149,000) x (1 − .33) = $130,910
A stock recently paid a dividend of $2.5 per share. Its growth rate is expected to be 8 percent. Investors require a 10 percent return. The stock is selling in the market for $150. What is this stock worth and is the stock undervalued or overvalued?
$135; overvalued 2.5(1.08)/[0.1 − 0.08] = $135; overvalued
Calculate the price of a zero coupon bond that matures in 20 years if the market interest rate is 8.5 percent. (Assume annual compounding and a par value of $1,000.)
$195.62
At your full-service brokerage firm, it costs $110 per stock trade. How much money do you receive after selling 100 shares of Time Warner, Inc. (TMX), which trades at $22.62?
$2,152.00 ($22.62 per share times 100 shares) − $110 = $2,152.00
At your discount brokerage firm, it costs $10.50 per stock trade. How much money do you need to buy 100 shares of Apple (AAPL), which trades at $202.64?
$20,274.50 ($202.64 per share times 100 shares) + $10.50 = $20,274.50
A 6 percent coupon bond with 12 years left to maturity is priced to offer a 6.5 percent yield to maturity. You believe that in one year, the yield to maturity will be 6.25 percent. What is the change in price the bond will experience in dollars? (Assume semi-annual interest payments and $1,000 par value.)
$21.55 Compute the current bond price:N = 24, I = 3.25, PMT = 30, FV = 1000, CPT PV = −958.78Now compute the price in one year:N = 22, I = 3.125, PMT = 30, FV = 1000, CPT PV = −980.33So the dollar change in price is:$980.33 − $958.78 = $21.55
Pfizer, Inc. (PFE) has earnings per share of $2.09 and a P/E ratio of 11.02. What is the stock price?
$23.03 $2.09 × 11.02 = $23.03
GEN has 1 million shares outstanding and a P/E ratio of 12. Its earnings per share is $2.00. What is GEN's market capitalization?
$24,000,000 Step 1: P/E × EPS = Price = 12 × 2 = $24; Step 2: 24 × 1,000,000 = $24,000,000
Equipment was purchased for $250,000 plus $1000 in freight charges. Installation costs were $750 and sales tax totaled $18,750. Hiring a special consultant to provide advice during the selection of the equipment cost $500. What is this asset's depreciable basis?
$270,500
You would like to sell 400 shares of International Business Machines (IBM). The current bid and ask quotes are $96.24 and $96.17, respectively. You place a limit sell-order at $96.20. If the trade executes, how much money do you receive from the buyer?
$38,480.00 $96.20 per share times 400 shares = $38,480.00
A firm does not pay a dividend. It is expected to pay its first dividend of $0.10 per share in two years. This dividend will grow at 11 percent indefinitely. Using a 13 percent discount rate, compute the value of this stock.
$4.42 Step 1:P2 = (0.10 × 1.11)/(0.13 - 0.11) = $5.55 Step 2:FV = 5.55 + 0.10 = $5.65N = 2, I = 13, PMT = 0, CPT PV = $4.42
if a preferred stock from Pfizer Inc. (PFE) pays $3.00 in annual dividends, and the required return on the preferred stock is 7 percent, what's the value of the stock?
$42.86 $3.00/7% = $42.86
Your firm needs a machine which costs $45,000, and requires $2,000 in maintenance for each year of its three-year life. After three years, this machine will be replaced. The machine will be depreciated using the straight-line method. Assume a tax rate of 35 percent and a discount rate of 10 percent. What is the depreciation tax shield for this project in year 3?
$5,250.00 Depreciation in year 3 will be 1/3 of $45,000 = $15,000. This will save the firm $15,000 × 0.35 = $5,250.00 in taxes
Calculate the price of a zero coupon bond that matures in 10 years if the market interest rate is 6 percent. (Assume semi-annual compounding and $1,000 par value.)
$553.68 PV = FVN(1+i)N = $1,0001.8061 = $553.6792
Financial analysts forecast ABC Inc. growth for the future to be 12 percent. ABC's recent dividend was $1.60. What is the value of ABC stock when the required return is 15 percent?
$59.73 1.6(1.12)/(0.15 − 0.12) = 59.73
A firm is expected to pay a dividend of $2.00 next year and $2.14 the following year. Financial analysts believe the stock will be at their target price of $75.00 in two years. Compute the value of this stock with a required return of 10 percent.
$65.57
You are evaluating a project for your company. You estimate the sales price to be $10 per unit and sales volume to be 3,000 units in year 1; 10,000 units in year 2; and 1,000 units in year 3. The project has a three-year life. Variable costs amount to $3 per unit and fixed costs are $25,000 per year. The project requires an initial investment of $50,000 in assets that will be depreciated straight-line to zero over the three-year project life. The actual market value of these assets at the end of year 3 is expected to be $10,000. NWC requirements at the beginning of each year will be approximately 10 percent of the projected sales during the coming year. The tax rate is 34 percent and the required return on the project is 15 percent. What change in NWC occurs at the end of year 1?
$7000 Sales will go from $30,000 to $100,000 between years 1 and 2, so NWC will have to increase from $3,000 to $10,000, an increase of $7,000
Your Company is considering a new project that will require $540,000 of new equipment at the start of the project. The equipment will have a depreciable life of 10 years and will be depreciated to a book value of $100,000 using straight-line depreciation. The cost of capital is 13 percent, and the firm's tax rate is 30 percent. Estimate the present value of the tax benefits from depreciation.
$71,626 Depreciation = ($540,000 − $100,000)/10 = $44,000$44,000 x .3 = $13,200 tax savings each period.Across the entire project, these savings will constitute a 10 period annuity.Pmt = 13,200, FV = 0, I = 13, N = 10, PV = 71,626
Suppose you sell a fixed asset for $69,000 when its book value is $99,000. If your company's marginal tax rate is 39 percent, what will be the effect on cash flows of this sale (i.e., what will be the after-tax cash flow of this sale)?
$80,700 99,000 + (69,000 − 99,000) (1 − 0.39) = $80,700
A firm is expected to pay a dividend of $2.00 next year and $3.75 the following year. Financial analysts believe the stock will be at their price target of $125.00 in two years. Compute the value of this stock with a required rate of return of 15 percent.
$99.09 2/1.15 + (3.75 + 125)/1.15 ^ 2 = 99.09
Your company is considering a project that will cost $188.87. The project will generate after-tax cash flows of $37.50 per year for five years. The WACC is 10 percent and the firm's D/A ratio is 0.62. The flotation cost for equity is 5 percent, the flotation cost for debt is 3 percent, and your firm does not plan on issuing any preferred stock within its capital structure. If your firm follows the practice of incorporating flotation costs into the project's initial investment, what is the firm's flotation-adjusted cash flow in year 0?
-$196.25 Step 1: (0.62)(3%) + (0.38)(5%) = 3.76%; Step 2: −188.87/[1 − 0.0376] = −196.25
TechNo stock was $25 per share at the end of last year. Since then, it paid a $1.50 per share dividend last year. The stock price is currently $23. If you owned 300 shares of TechNo, what was your percent return?
-2 percent Dollar Return = (Ending Value − Beginning Value) + Income = $23 × 300 − $25 × 300 + $1.50 × 300 = −$150Percentage Return = −$150 ÷ ($25 × 300) = −0.02 = −2 percent
If the NASDAQ stock market bubble peaked at 3,750, and two and a half years later it had fallen to 2,200, what would be the percentage decline?
-41.33 percent
The weighted average cost of capital at QuizCompany is 10%. What is the profitability index on this project?
1.04 Profitability index is (NPV+CF0)/CF0. In this case ($52.52+$15000)/$15000=1.04.
You have a portfolio with a beta of 0.9. What will be the new portfolio beta if you keep 40 percent of your money in the old portfolio and 60 percent in a stock with a beta of 1.5?
1.26 New portfolio beta = 0.40 × 0.9 + 0.60 × 1.5 = 1.26.
A manager believes his firm will earn a 15 percent return next year. His firm has a beta of 2.1, the expected return on the market is 6 percent, and the risk-free rate is 2 percent. Compute the return the firm should earn given its level of risk and determine whether the manager is saying the firm is undervalued or overvalued.
10.4 percent, undervalues Use CAPM to determine the firm's required return = 2% + 2.1 ×(6% − 2%) = 10.4%.Since the return required for the level of risk is 10.4 percent and the manager believes a 15 percent return will be achieved, the manager is saying the firm is undervalued.
The weighted average cost of capital at QuizCompany is 10%. What is the modified internal rate of return of this project?
10.76% Use =MIRR(cash flows, 10%,10%) in Excel.
Suppose your firm has decided to use a divisional WACC approach to analyze projects. The firm currently has 2 divisions, A and B, with betas for each division of 1.25 and 2.5, respectively. If all current and future projects will be financed with half debt and half equity, and if the current cost of equity (based on an average firm beta of 1.0 and a current risk-free rate of 4 percent) is 12 percent and the after-tax yield on the company's bonds is 8 percent, what are the WACCs for divisions A and B?
11.00 percent; 16.00 percent Step 1: Find the market risk premium. 12% = 4% + 1.0(MRP); => MRP = 8%Step 2: Find the cost of equity for each division using CAPM; A: 4 + 1.25 × 8 = 14%; B: 24%Step 3: Find the WACCs for each division; A: 0.5(14%) + 0.5(8%) = 11.00%; B: 16.00%
Crab Cakes Ltd. has 5 million shares of stock outstanding selling at $15 per share and an issue of $10 million in 10 percent, annual coupon bonds with a maturity of 25 years, selling at 97 percent of par ($1,000). If Crab Cakes' weighted average tax rate is 30 percent, its next dividend is expected to be $1.00 per share, and all future dividends are expected to grow at 5 percent per year, indefinitely, what is its WACC?
11.16 percent To calculate Rd:FV = 1000, PMT = 100, PV = −970, N = 25, I = 10.3392To calculate Rs:Rs = ($1/$15) + 5% = 6.67% + 5% = 11.67%To calculate weights:Common Stock: 5,000,000 × $15 = $75,000,000, so 75,000,000/84,700,000 = 0.8855Preferred Stock: $0 = 0Bonds: 10,000,000 × 0.97 = $9,700,000, so 9,700,000/84,700,000 = 0.1145 Total = $84,700,000To calculate WACC:0.8855 × 11.67% + 0.0 × 0% + 0.1145 × 10.34% × (1 − 0.3) = 11.16%
The weighted average cost of capital at QuizCompany is 10%. What is the internal rate of return of this project?
11.36% Use =IRR(cash flows, guess) in Excel.
Hastings Entertainment has a beta of 1.24. If the market return is expected to be 10 percent and the risk-free rate is 4 percent, what is Hastings' required return?
11.44 percent Hastings' required return = 4% + 1.24 × (10% − 4%) = 11.44%.
A company's current stock price is $65.40 and it is likely to pay a $2.25 dividend next year. Since analysts estimate the company will have an 11.25 percent growth rate, what is its expected return?
14.69 percent Use Equation 10.6: i=D1+g=$2.25+0.1125=0.1469=14.69P0$65.40
Bill's Boards has 20 million shares of common stock outstanding, 4 million shares of preferred stock outstanding, and 20 thousand bonds. If the common shares are selling for $30 per share, the preferred shares are selling for $17 per share, and the bonds are selling for 96 percent of par, what would be the weight used for debt in the computation of Bill's WACC?
2.79 percent (20,000 × 0.96 × 1,000)/(20,000,000 × 30 + 4,000,000 × 17 + 20,000 × 0.96 × 1,000) = 19.2m/687.2m = 2.79 percent
A 6.5 percent coupon bond with 12 years left to maturity can be called in four years. The call premium is one year of coupon payments. It is offered for sale at $1,190.25. What is the yield to call of the bond? (Assume interest payments are paid semi-annually and par value is $1,000.)
2.96 percent
Coca-Cola recently paid a $3.00 dividend. Investors expect a 12 percent return on this stock. What is the percentage change in price if Coca-Cola is expected to grow at 7 percent versus 8 percent?
26.17 percent Step 1: Price at 7 percent growth: 3(1.07)/[0.12 − 0.07] = $64.20; Step 2: Price at 8 percent growth: 3(1.08)/[0.12 − 0.08] = $81; Difference in price = $16.8; Percentage change in price = 16.8/64.20
Year-to-date, Company O had earned a −2.10 percent return. During the same time period, Company V earned 8.00 percent and Company M earned 6.25 percent. If you have a portfolio made up of 40 percent Company O, 30 percent Company V, and 30 percent Company M, what is your portfolio return?
3.435 percent Portfolio Return is 0.4 × −2.10% + 0.3 × 8% + 0.3 × 6.25% = 3.435%
Sharif's portfolio generated returns of 12 percent, 15 percent, −15 percent, 19 percent, and −12 percent over five years. What was his average return over this period?
3.8 percent (12 + 15 − 15 − 12 + 19)/5 = 3.8
The weighted average cost of capital at QuizCompany is 10%. If the company uses the payback method for assessing projects, what would the payback statistic be?
3.86 years Initial investment is $1500. After three years, $1200 is paid back. Also need $300/350 or 0.86 of year 4 cash flow. Total payback time 3.86 years
The Dow Jones Industrial Average (DJIA) includes:
30 of the largest (market capitalization ) and most active companies in the U.S. economy
Rank the following bonds, from highest to lowest interest rate risk: 2-year zero coupon, 2-year 5 percent coupon bond, 30-year 5 percent coupon bond, 30-year, zero coupon bond.
30-year, zero coupon bond, 30-year 5 percent coupon bond, 2-year zero coupon bond, 2-year 5 percent coupon bond
A company has a beta of 3.25. If the market return is expected to be 14 percent and the risk-free rate is 5.5 percent, what is the company's required return?
33.125 percent
The weighted average cost of capital at QuizCompany is 10%. If the QuizCompany uses the Discounted Payback method, what would the discounted payback statistic be?
4.83 years
Solar Shades has 8 million shares of common stock outstanding, 4 million shares of preferred stock outstanding, and 10 thousand bonds. If the common shares are selling for $13 per share, the preferred shares are selling for $30 per share, and the bonds are selling for 105 percent of par, what would be the weight used for equity in the computation of Solar Shades' WACC?
44.35 percent
A firm uses only debt and equity in its capital structure. The firm's weight of equity is 75 percent. The firm's cost of equity is 16 percent and it has a tax rate of 30 percent. If the firm's WACC is 13%, what is the firm's before-tax cost of debt?
5.71 percent 13% = 0.75(16%) + (1 − 0.75)(cost of debt)(1 − 0.3); cost of debt = 5.71%
Rx Corp. stock was $60.00 per share at the end of last year. Since then, it paid a $1.00 per share dividend last year. The stock price is currently $62.50. If you owned 400 shares of Rx, what was your percent return?
5.83 percent Dollar Return = (Ending Value − Beginning Value) + Income = ($62.50 × 400) − ($60.00 × 400 + $1.00 × 400) = $1,400Percentage Return = $1,400 ÷ ($60 × 400) = 0.0583 = 5.83 percent
What's the current yield of a 6 percent coupon corporate bond quoted at a price of 101.70?
5.9 percent
The weighted average cost of capital at QuizCompany is 10%. What is the net present value of the project?
52.52
A 5.75 percent coupon bond with 12 years left to maturity is offered for sale at $978.83. What yield to maturity is the bond offering? (Assume interest payments are paid semi-annually and par value is $1,000.)
6.00 percent N = 24, PV = −978.83, PMT = 28.75, FV = 1000, CPT I = 3%, YTM = 3% × 2 = 6%
FarCry Industries, a maker of telecommunications equipment, has 6 million shares of common stock outstanding, 1 million shares of preferred stock outstanding, and 10 thousand bonds. If the common shares are selling for $27 per share, the preferred shares are selling for $15 per share, and the bonds are selling for 119 percent of par ($1,000), what weight should you use for debt in the computation of FarCry's WACC?
6.30 percent 1,190 × 0.01/[1190 × 0.01 + 6 × 27 + 1 × 15] = 6.30 percent
Suppose that TW, Inc. has a capital structure of 25 percent equity, 15 percent preferred stock, and 60 percent debt. If the before-tax component costs of equity, preferred stock and debt are 13.5 percent, 9.5 percent and 4 percent, respectively, what is TW's WACC if the firm faces an average tax rate of 30 percent?
6.48 percent To calculate WACC: 0.25 × 13.5% + 0.15 × 9.5% + 0.60 × 4% × (1 − 0.3) = 6.48%
Apple's 9 percent annual coupon bond has 10 years until maturity and the bonds are selling in the market for $890. The firm's tax rate is 36 percent. What is the firm's after-tax cost of debt?
6.95 percent Step 1: PV = −890; PMT = 90; FV = 1000; N = 10; => I = 10.86%Step 2: 10.86%(1 − 0.36) = 6.95%
If you invested $30,000 in Disney and $10,000 in Oracle and the two companies returned 6 percent and 12 percent respectively, what was your portfolio's return?
7.5 percent Total invested: $40,000; 3/4 × 6% + 1/4 × 12% = 7.5%
Rings N Things Industries has 40 million shares of common stock outstanding, 20 million shares of preferred stock outstanding, and 50 thousand bonds. If the common shares are selling for $25 per share, the preferred shares are selling for $15 per share, and the bonds are selling for 100 percent of par ($1,000), what would be the weights used in the calculation of Rings' WACC for common stock, preferred stock, and bonds, respectively?
74.07 percent, 22.22 percent, 3.71 percent Common Stock: 40,000,000 × $25 = $1,000,000,000, so 1,000,000,000/1,350,000,000 = 0.7407Preferred Stock: $20,000,000 × 15 = 300,000,000, so 300,000,000/1,350,000,000 = 0.2222Bonds: 50,000 × 1.00 × 1,000 = $50,000,000, so 50,000,000/1,350,000,000 = 0.0371 Total = $1,350,000,000
A company has a beta of 0.85. If the market return is expected to be 9 percent and the risk-free rate is 2.5 percent, what is the company's required return?
8.025 percent Required return = 2.5% + 0.85 ×(9% − 2.5%) = 8.025%.
Expected Return Compute the expected return given these three economic states, their likelihoods, and the potential returns: Economic State |Probability| Return| Fast Growth| 0.2 30.0% Slow Growth| 0.5 6.00% Recession| 0.3 -2.00%
8.4 percent Expected return = .2 × 30.0% + .5 × 6.00% + .3 × -2.00% = 8.4%
A company has a beta of 0.50. If the market return is expected to be 12 percent and the risk-free rate is 5 percent, what is the company's required return?
8.5 percent Required return = 5% + 0.50 × (12% − 5%) = 8.5%.
The weighted average cost of capital at QuizCompany is 10%. If QuizCompany uses MIRR to evaluate project proposals, what would your decision on this project be?
Accept
If you own 100 shares of Air Line Inc. at $42.50, 250 shares of BuyRite at $53.25, and 350 shares of MotorCity at $7.75, what are the portfolio weights of each stock?
Air Line = 0.2096, BuyRite = 0.6566, MotorCity = 0.1338 Total portfolio is 100 × $42.50 + 250 × $53.25 + 350 × $7.75 = $20,275Air Line weight = 100 × $42.50 / $20,275 = 0.2096BuyRite weight = 250 × $53.25 / $20,275 = 0.6566MotorCity weight = 350 × $7.75 / $20,275 = 0.1338
If you own 1,000 shares of Alaska Corporation at $19.95, 250 shares of Best Company at $17.50, and 250 shares of Motor Company at $2.50, what are the portfolio weights of each stock?
Alaska = 0.7996, Best = 0.1754, Motor = 0.0250 Total portfolio is 1,000 × $19.95 + 250 × $17.50 + 250 × $2.50 = $24,950Alaska weight = 1,000 × $19.95 / $24950 = 0.7996Best weight = 250 × $17.50 / $24950 = 0.1754Motor weight = 250 × $2.50 / $24950 = 0.0250
To correctly project cash flows, we need to consider all of the factors EXCEPT:
All of the options are factors that need to be considered.
Which of the following statements is correct?
An increase in NWC involves either a reduction in current assets, which generates cash, or an increase in current liabilities, thereby freeing up the shareholder's cash for other things. A decrease in NWC involves either an increase in current assets, which generates cash, or a decrease in current liabilities, thereby freeing up the shareholder's cash for other things. An example of an increase in a net working capital is to buy more machines or another plant. None of the statements are correct.
Junk bonds are those bonds with a credit rating of:
BB and lower
If an NPV profile shows multiple IRRs, it is likely that....
Project cash flows are non-normal
Which of these is a measure of risk to reward earned by an investment over a specific period of time?
Coefficient of variation
Compute the price of a 6 percent coupon bond with 10 years left to maturity and a market interest rate of 8.75 percent. (Assume interest payments are semi-annual and par value is $1,000.) Is this a discount or premium bond?
Discount N = 20, I = 4.375, PMT = 30, FV = 1000, CPT PV = −819.19Since this is less than $1,000, it is a discount bond.
Which of these is an estimated WACC computed using some sort of proxy for the average equity risk of the projects in a particular division?
Divisional WACC
Which of these includes any capital gain (or loss) that occurred as well as any income that you received from a specific investment?
Dollar Return
When calculating operating cash flow for a project, one would calculate it as being mathematically equal to which of the following?
EBIT - Taxes + Depreciation
Concerning incremental project cash flow, which of these is a cost one would never count as an expense of the project?
Financing Costs
Which of the following statements is correct?
For a few firms in completely different industries, it is possible to have a correlation that approaches −2.0. A correlation of −1.0 means that the two firms are uncorrelated or that they have no relationship. Most common stocks have low correlation with each other since they operate in different industries. None of the statements are correct.
Which of the following statements is correct?
If the market is strong-form efficient it must also be weak-form efficient and semi-strong efficient. There is evidence to suggest that the market is strong-form efficient because corporate insiders have made extraordinary profits by trading on inside information. The Efficient Market Hypothesis states that security prices will be based on their expected return. none of these choices are complete.
Which of the following statements is true?
If the new project is riskier than the firm's existing projects, then it should be charged a higher cost of capital. If the new project is riskier than the firm's existing projects, then it should be charged a lower cost of capital. If the new project is riskier than the firm's existing projects, then it should be charged the firm's cost of capital. The new project's risk is not a factor in determining its cost of capital.
Which of the following is most correct?
In an efficient market, investors will buy overvalued stock which will drive its price down. In an efficient market, investors will sell undervalued stock which will drive its price down. In an efficient market, investors will sell overvalued stock which will drive its price down. none of these choices are complete.
You are evaluating two different machines. Machine A costs $15,000, has a seven-year life, and has an annual OCF (after tax) of −$2,000 per year. Machine B costs $10,000, has a five-year life, and has an annual OCF (after tax) of −$2,500 per year. If your discount rate is 14 percent, using EAC which machine would you choose?
Machine B
Which of the following is incorrect?
Most firms would want to sell additional shares of common stock if they feel their stock is undervalued. Most firms would not want to repurchase shares of common stock if they feel their stock is overvalued. It is important for financial managers to understand market efficiency because it helps them understand how their stock prices will react to different types of decisions and news announcements. none of these choices are complete.
Rank the following three stocks by their risk-return relationship, best to worst. Night Ryder has an average return of 33 percent and standard deviation of 40 percent. The average return and standard deviation of WholeMart are 10 percent and 20 percent; and of Fruit Fly are 19 percent and 33 percent.
Night Ryder, Fruit Fly, WholeMart
Which of the following statements is correct regarding total risk?
None of the statements are correct.
Which of the following is a true statement regarding the appropriate tax rate to be used in the WACC?
One would use the weighted average of the marginal tax rates that would have been paid on the taxable income shielded by the interest deduction.
f Zeus Energy bonds are upgraded from BBB- to BBB+, which of the following statements is true?
The current bond price will increase and interest rate on new bonds issue will decrease
Which of the following will increase the cost of equity?
The firm's share price falls 10 percent.
A client in the 28 percent marginal tax bracket is comparing a municipal bond that offers a 3.25 percent yield to maturity and a similar-risk corporate bond that offers a 4.10 percent yield. Which bond will give the client more profit after taxes?
The municipal bond
The weighted average cost of capital at QuizCompany is 10%. If QuizCompany uses net present value evaluate project proposals, what would your decision on this project be?
accept
A client in the 35 percent marginal tax bracket is comparing a municipal bond that offers a 4.25 percent yield to maturity and a similar-risk corporate bond that offers a 5.10 percent yield. Which bond will give the client more profit after taxes?
The municipal bond First determine the ETY: Equivalent taxable yield = Muni yield1 − tax rate = 4.25%1 − 0.35 = 6.54%Equivalent taxable yield = Muni yield1 - tax rate = 4.25%1 - 0.35 = 6.54% Since 6.54% > 5.1%, the client should take the municipal bond.
Which of the following statements is correct?
The weighted average cost of capital is calculated on a before-tax basis. An increase in the market risk premium is likely to increase the weighted average cost of capital. The weights of debt and equity should be based on the balance sheet because this is the most accurate assessment of the valuation. All of the statements are correct.
Which of the following is a true statement?
To estimate the before-tax cost of debt, we need to solve for the Yield to Maturity (YTM) on the firm's existing debt. To estimate the before-tax cost of debt, we need to solve for the Yield to Call (YTC) on the firm's existing debt. To estimate the before-tax cost of debt, we use the coupon rate on the firm's existing debt. To estimate the before-tax cost of debt, we use the average rate on the firm's existing debt.
Which of the following is not a correct statement?
Treasury inflation protected securities have fixed coupon rates The federal government adjusts the par value of treasury inflation protected securities at the rate of inflation at maturity an investor in treasury inflation protected securities receives an inflation adjusted principle amount all statements are correct
In a different project called SuperSecret, you have found that cash flows are normal and IRR is higher than the weighted average cost of capital. Given this, NPV for the SuperSecret project will be a positive number.
True
Which of these statements is true regarding divisional WACC?
Using a simple firmwide WACC to evaluate new projects would give an unfair advantage to projects that present more risk than the firm's average beta.
Company could use any of following methods to evaluate whether to move forward with the CheaterBeater project EXCEPT
Weighted Average Cost of Capital
From 1950 to 2007, the average return in the stock market, as measured by the S&P 500, was 13.2 percent and a standard deviation of 17 percent. Given this information, which of the following statements is correct?
With a standard deviation this high, it is likely that an investor will lose money in some years over a 25-year investment period.
Which of the following statements is correct?
Yield spreads between bonds of different quality remain static over time. Yield spreads are set by the Securities Exchange Commission. Yield spreads between bonds of different quality change over time. None of the statements are correct.
Which of the following will only be executed if the order's price conditions are met?
a limit order
We often use the P/E ratio model with the firm's growth rate to estimate:
a stocks future price
Which of these is a measure of the sensitivity of a stock or portfolio to market risk?
beta
Investors sell stock at the:
bid price
The best approach to convert an infinite series of asset purchases into a perpetuity is known as the:
equivalent annual cost approach
Which of the following is defined as the portion of total risk that is attributable to firm or industry factors and can be reduced through diversification?
firm specific risk
In 2000, the S&P 500 Index earned 11 percent while the T-bill yield was 4.4 percent. Given this information, which of the following statements is correct with respect to the market risk premium?
the market risk premium must have been positive
Which of these makes this a true statement? When determining the appropriate weights used in calculating a WACC, it should reflect:
the relative sizes of the total market capitalizations for each kind of security that the firm issues.
When making a capital budgeting decision using either NPV or IRR, a company should use _________ as the discount rate
weighted average cost of capital