finance test 2

B) $11.25 $1000 × 0.045 / 4 = $11.25

4. What is the coupon payment of a 25-year $1000 bond with a 4.5% coupon rate with quarterly payments? A) $3.75 B) $11.25 C) $22.50 D) $45.00

B) $450 $10,000 × 0.09 /2 = $450

5. What is the coupon payment of a 15-year $10,000 bond with a 9% coupon rate with semiannual payments? A) $150.00 B) $450 C) $900.00 D) $1800.00

B) a 10-year bond with a face value of $2,000 and a coupon rate of 5.8% with monthly payments $9.67 × 12 / (2,009.67 - 9.67) = 5.802%

6. corporate bond makes payments of $9.67 every month for ten years with a final payment of $2009.67. Which of the following best describes this bond? A) a 10-year bond with a face value of $2,000 and a coupon rate of 4.8% with monthly payments B) a 10-year bond with a face value of $2,000 and a coupon rate of 5.8% with monthly payments C) a 10-year bond with a face value of $2,009.67 and a coupon rate of 4.8% with monthly payments D) a 10-year bond with a face value of $2,009.67 and a coupon rate of 5.8% with monthly payments

C) $5212.50 $5000 + $5000 × 0.085 /2 = $5212.5

7) An investor holds a Ford bond with a face value of $5000 , a coupon rate of 8.5%, and semiannual payments that matures on January 15, 2029. How much will the investor receive on January 15, 2029? A) $2606.25 B) $5000.00 C) $5212.50 D) $5425.00

D) 0 1 2 3 9 10 +-----+-----+-----+--- . . . -----+-----+ $50 $50 $50 $50 $2050

8. Which of the following best shows the timeline for cash flows from a five-year bond with a face value of $2,000, a coupon rate of 5.0%, and semiannual payments?

B) The price of the bond will fall by $15.78 Using FV = $1000 periods to maturity = 16 PMT = 31.00 discount rate = 4.15%, calculate PV = $878.9937 ; Using FV = $1000 periods to maturity = 16 PMT = 31.00 and discount rate = 4.30% calculate PV = $863.2168 ; difference = $878.9937 - $863.2168 = $15.7769

A $1000 bond with a coupon rate of 6.2% paid semiannually has eight years to maturity and a yield to maturity of 8.3%. If interest rates rise and the yield to maturity increases to 8.6%, what will happen to the price of the bond? A) The price of the bond will fall by $18.93 . B) The price of the bond will fall by $15.78 . C) The price of the bond will rise by $15.78 . D) The price of the bond will not change.

D) The price of the bond will rise by $293.50 Using FV = $5000 periods to maturity = 20 PMT = $142.50 discount rate = 6.4/2%, calculate PV = $4744.3939 ; Using FV = $5000 periods to maturity = 20 PMT = $142.50 discount rate = 5.6/2% , calculate PV = $5037.8909 ; difference = $5037.8909 - $4744.3939 = $293.4969 .

A $5000 bond with a coupon rate of 5.7% paid semiannually has ten years to maturity and a yield to maturity of 6.4%. If interest rates fall and the yield to maturity decreases by 0.8%, what will happen to the price of the bond? A) The price of the bond will fall by $293.50 . B) The price of the bond will fall by $352.20 . C) The price of the bond will rise by $410.90 . D) The price of the bond will rise by $293.50

B) $969.21 FV = $1,000 PV = -959.71 n = 20, i = 2.15% solve for PMT. PMT = $19.00 , so coupon rate per 6 month period = 1.90%. Accrued interest for three months = $19.00 /2= $9.50 dirty price =$959.71 + $9.50 = $969.21

A 20-year bond with a $1,000 face value was issued with a yield to maturity of 4.3% and pays coupons semi-annually. After ten years, the yield to maturity is still 4.3% and the clean price of the bond is $959.71 . After three more months go by, what would you expect the dirty price to be? A) $978.71 B) $969.21 C) $997.71 D) Cannot be determined from information given.

A) $1.625 million $11 - $4 - $1 = $6; $6 × 0.6 = $3.6; $3.6 × 0.65 = $2.34 million ($11 - $4) × 40% - ($1 × 30%) = $2.5; $2.5 × 0.65 = $1.625 million

A brewer is launching a new product: brewed ginger ale with a low alcohol content. The brewer plans to spend $4 million promoting this product this year, which is expected to expand the sales of this product to $11 million this year and $8 million next year. They do expect there will be loss of sales of $1 million this year and next year in their other products as customers switch to drinking the new ginger ale. The gross profit margin for the new ginger ale is 40%, the gross profit margin of all of the brewerʹs other products is 30%, and the brewerʹs marginal corporate tax rate is 35%. What are incremental earnings arising from the promotional campaign this year? A) $1.625 million B) $1.26 million C) $2.11 million D) $4.40 million

A) $667 $14,000 / (1 + 0.05 ) = $13,333.3333 ; $14,000 - $13,333 = $667

A car dealership offers a car for $14,000 , with up to one year to pay for the car. If the interest rate is 5%, what is the net present value (NPV) of this offer to buyers who elect not to pay for the car for one year? A) $667 B) $1333 C) $13,333 D) $14,000

D) -$4507 Using a financial calculator, NPV = -$17,996 equivalent annual annuity = -$4507

A company buys a color printer that will cost $16,000 to buy, and last 5 years. It is assumed that it will require servicing costing $500 each year. What is the equivalent annual annuity of this deal, given a cost of capital of 8%? A) -$3155 B) -$3606 C) -$4057 D) -$4507

A) $10.756 million (-$0.12 - $1.6 / 5) * 60% + $1.6 / 5 + 10.7 = $10.756 million

A company buys tracking software for its warehouse which, along with the computer system and ancillaries to run it, will cost $1.6 million. This purchase will be deducted over five years. It is expected that the software will reduce inventory by $10.7 million at the end of the first year after it is installed, though there will be an annual cost of $120,000 per year to run the system. If the companyʹs marginal tax rate is 40%, how will the purchase of this item change the companyʹs free cash flows in the first year? A) $10.756 million B) $10.380 million C) $9.680 million D) $11.832 million

B) a perpetuity that generates a cash flow at the end of year 1 of $800,000, has a growth rate of 2.25%, and a cost of capital of 11.8% NPV (B) = -1.2 + 0.8 / (0.118 - 0.0225) = $7.177 million

A company has identified the following investments as looking promising. Each requires an initial investment of $1.2 million. Which is the best investment? A) a perpetuity that generates a cash flow at the end of year 1 of $100,000, has a growth rate of 1.25%, and a cost of capital of 11.0% B) a perpetuity that generates a cash flow at the end of year 1 of $800,000, has a growth rate of 2.25%, and a cost of capital of 11.8% C) an investment that generates a cash flow of $400,000 at the end of each of the next five years, when the cost of capital is 6.1% D) an investment that generates a cash flow of $200,000 at the end of each of the next ten years, when the cost of capital is 6.1%

A) 0.98% Growth rate = 0.07 - ($2.50 / $41.50 ) = 0.98%

A company has stock which costs $41.50 per share and pays a dividend of $2.50 per share this year. The companyʹs cost of equity is 7%. What is the expected annual growth rate of the companyʹs dividends? A) 0.98% B) 1.96% C) 2.94% D) 3.92%

B) If the motor scooter is sold for $2,480, then the net present value (NPV) for the product will be zero.

A company planning to market a new model of motor scooter analyzes the effect of changes in the selling price of the motor scooter, the number of units that will be sold, the cost of making the motor scooter, the effect on Net Working Capital, and the cost of capital for the project. They predict that the break-even point for sales price for the motor scooter is $2,480. What does this mean? A) If the motor scooter is sold for $2,480, then the project will make a profit. B) If the motor scooter is sold for $2,480, then the net present value (NPV) for the product will be zero. C) The predicted selling price of the motor scooter is $2,480. D) The maximum that the motor scooter can sell for and still make the project have a positive net present value (NPV) is $2,480.

D) 10%

A company releases a five-year bond with a face value of $1000 and coupons paid semiannually. If market interest rates imply a YTM of 8%, which of the following coupon rates will cause the bond to be issued at a premium? A) 7% B) 6% C) 8% D) 10%

A) as a sunk cost

A company spends $20 million researching whether it is possible to create a durable plastic from the process waste from feedstock preparation. The $20 million should best be considered _____. A. as a sunk cost B. as an opportunity cost C. as a fixed overhead expense D. as a capital cost

B) $175,034 Annual difference = $160,000 - $115,000 = $45,000 ; PV over 5 years at 9% = $175,034

A consultancy calculates that it can supply crude oil assaying services to a small oil producer for $115,000 per year for five years. There are some upfront costs the consultancy will require the oil producer to absorb. What is the maximum that these upfront costs could be, if the equivalent annual annuity to the oil company is to be under $160,000 , given that the cost of capital is 9%? A) $45,000 B) $175,034 C) $201,289 D) $160,000

B) $1.7 million

A consumer good company is developing a new brand of organic toothpaste. Above is the sensitivity analysis for this product. If the best-case assumptions for Net Working Capital are met, what will the net present value (NPV) of this project be? A) $0.65 million B) $1.7 million C) $2 million D) $3 million

C) cost of goods

A consumer good company is developing a new brand of organic toothpaste. Above is the sensitivity analysis for this product. The assumptions regarding which parameter should be scrutinized most carefully in the estimation process? A) units sold B) sales price C) cost of goods D) cost of capital

D) No, since the value of the cash flows over the first two years are less than the initial investment.

A convenience store owner is contemplating putting a large neon sign over his store. It would cost $50,000, but is expected to bring an additional $24,000 of profit to the store every year for five years. Would this project be worth-while if evaluated using a payback period of two years or less and if the cost of capital is 10%? A) Yes, since it will pay back its initial investment in two years. B) Yes, since the value of the cash flows into the store, in present dollars, are greater than the initial investment. C) Yes, since the cash flows after two years are greater than the initial investment. D) No, since the value of the cash flows over the first two years are less than the initial investment.

C) $0 (350,000 - $93,200 ) / (1 + 0.07) - 240,000 = $0

A farmer sows a certain crop. It costs $240,000 to buy the seed, prepare the ground, and sow the crop. In one yearʹs time it will cost $93,200 to harvest the crop. If the crop will be worth $350,000 , and the interest rate is 7%, what is the net present value (NPV) of this investment? A) $240,000 B) $87,103 C) $0 D) $567,103

A) $10,048 $109,250 / (1 + 0.04 ) = $105,048.077 ; $105,048.077 - $95,000 = $10,048

A firm has an opportunity to invest $95,000 today that will yield $109,250 in one year. If interest rates are 4%, what is the net present value (NPV) of this investment? A) $10,048 B) $11,053 C) $16,077 D) $14,250

C) $416,250 Annual depreciation = $300,000 / 4 = $75,000 . Free Cash Flow ($1,300,000 - $700,000 - $75,000 ) × (1 - 0.35 ) + $75,000 = $416,25

A firm is considering a new project that will generate cash revenue of $1,300,000 and cash expenses of $700,000 per year for five years. The equipment necessary for the project will cost $300,000 and will be depreciated straight line over four years. What is the expected free cash flow in the second year of the project if the firmʹs marginal tax rate is 35%? A) $374,625 B) $341,250 C) $416,250 D) $499,500

D) $135,000 $125,000 + $100,000 - $90,000 = $135,000

A firm is considering changing their credit terms. It is estimated that this change would result in sales increasing by $1,600,000 . This in turn would cause inventory to increase by $125,000 , accounts receivable to increase by $100,000 , and accounts payable to increase by $90,000. What is the firmʹs expected change in net working capital? A) $1,735,000 B) $315,000 C) $225,000 D) $135,000

B) $31,200 $400,000 / 5 = $80,000 ; $80,000 × 0.39 = $31,200

A firm is considering investing in a new machine that will cost $400,000 and will be depreciated straight-line over five years. If the firmʹs marginal tax rate is 39%, what is the annual depreciation tax shield of purchasing the machine? A) $80,000 B) $31,200 C) $28,080 D) $156,000

C) net present value (NPV)

A firm is considering several mutually exclusive investment opportunities. The best way to choose between them is which of the following? A) profitability index B) payback period C) net present value (NPV) D) internal rate of return (IRR)

B) $7.1 million $5.0 + $3.0 - $2.0 + $1.1 = $7.1 million

A firm reports that in a certain year it had a net income of $5.0 million, depreciation expenses of $3.0 million, capital expenditures of $2.0 million, and Net Working Capital decreased by $1.1 million. What is the firmʹs free cash flow for that year? A) $11.1 million B) $7.1 million C) $5.1 million D) $4.9 million

D) 26.00 months Payback period = 78,000 / 3000 = 26.00 months

A florist is buying a number of motorcycles to expand its delivery service. These will cost $78,000 but are expected to increase profits by $3000 per month over the next four years. What is the payback period in this case? A) 10.40 months B) 15.60 months C) 19.50 months D) 26.00 months

D) Hoist B, since it has a greater equivalent annual annuity. Using a financial calculator, NPV(A) = -$23,393 equivalent annual annuity (A) = -$3,331 NPV(B) = -$19,777 equivalent annual annuity (B) = -$3,312

A garage is comparing the cost of buying two different car hoists. Hoist A will cost $20,000, will require servicing of $1000 every two years, and last ten years. Hoist B will cost $15,000, require servicing of $800 per year, and last eight years. If the cost of capital is 7%, which is the better option, given that the firm has an ongoing requirement for a hoist? A) Hoist A, since it has a greater present value (PV). B) Hoist B, since it has a greater present value (PV). C) Hoist A, since it has a greater equivalent annual annuity. D) Hoist B, since it has a greater equivalent annual annuity.

D) Option B, since it has a greater equivalent annual annuity. Using a financial calculator, NPV(A) = -$2,298.54 equivalent annual annuity (A) = -$575.68 NPV(B) = -$1257.71 equivalent annual annuity (B) = -$488.03

A janitorial services firm is considering two brands of industrial vacuum cleaners to equip their staff. Option A will cost $1,500, require servicing of $200 per year, and it will last five years. Option B will cost $1,000, require servicing of $100 per year, and it will last three years. If the cost of capital is 8%, which is the better option, given that the firm has an ongoing requirement for vacuum cleaners? A) Option A, since it has a lower equivalent annual annuity. B) Option B, since it has a lower equivalent annual annuity. C) Option A, since it has a greater equivalent annual annuity. D) Option B, since it has a greater equivalent annual annuity.

B) The mower is only expected to be needed for three years.

A lawn maintenance company compares two ride-on mowers- the Excelsior, which has an expected working-life of six years, and the Grass-assinator, which has a working life of four years. After examining the equivalent annual annuities of each mower, the company decides to purchase the Excelsior. Which of the following, if true, would be most likely to make them change that decision? A) Fuel prices are expected to rise and raise the annual running costs of all mowers. B) The mower is only expected to be needed for three years. C) The prices of equivalent mowers are expected to grow in the future as lawnmower manufacturers consolidate. D) The number of customers requiring lawn-mowing services is expected to sharply increase in the near future.

C) $6.32 million Using a financial calculator, enter PMT = 1.5, N = 5, I = 6%; calculate PV = $6.32 million.

A local government awards a landscaping company a contract worth $1.5 million per year for five years for maintaining public parks. The landscaping company will need to buy some new machinery before they can take on the contract. If the cost of capital is 6%, what is the most that this equipment could cost if the contract is to be worthwhile for the landscaping company? A) $5.69 million B) $6.00 million C) $6.32 million D) $6.63 million

A) Yes, because it agrees with the Net Present Value rule. Using a financial calculator, enter PMT = 600,000, N = 16, I = 4%; calculate PV = $6,991,377 , which is greater than $6,000,000.

A lottery winner can take $6 million now or be paid $600,000 at the end of each of the next 16 years. The winner calculates the internal rate of return (IRR) of taking the money at the end of each year and, estimating that the discount rate across this period will be 4%, decides to take the money at the end of each year. Was her decision correct? A) Yes, because it agrees with the Net Present Value rule. B) Yes, because it agrees with the payback rule. C) Yes, because it agrees with both the Net Present Value rule and the payback rule. D) Yes, because it disagrees with the Net Present Value rule.

D) $33,684 Units sold = $1,280,000 / $38 = $33,684 units

A maker of computer games expects to sell 475,000 games at a price of $48 per game. These units cost $10 to produce. Selling, general, and administrative expenses are $1.0 million and depreciation is $280,000 . What is the EBIT break-even point for the number of games sold in this case? A) $26,667 B) $26,316 C) $100,000 D) $33,684

D) It cannot be determined whether the decision was correct, since other factors contributing to the projectʹs net present value (NPV), such as the upfront investment, have not been included in the analysis.

A maker of kitchen-ware is planning on selling a new chef-quality kitchen knife. The manufacturer expects to sell 1.6 million knives at a price of $120 each. These knives cost $80 each to produce. Selling, general, and administrative expenses are $500,000. The machinery required to produce the knives cost $1.4 million, depreciated by straight-line depreciation over five years. The maker determines that the EBIT break-even point for units sold and sale price is less than these estimates and that the EBIT break-even point for costs per unit, SG&A, and depreciation are greater than these estimates, so decides to go ahead with manufacturing the knife. Was this the correct decision? A) No, since the cost per unit should be greater than the EBIT break-even point for cost of goods if the project is to have a positive EBIT. B) Yes, since if the estimates for each parameter are correct , the EBIT will be positive. C) Yes, since a positive EBIT ensures that the project will have a positive net present value (NPV). D) It cannot be determined whether the decision was correct, since other factors contributing to the projectʹs net present value (NPV), such as the upfront investment, have not been included in the analysis.

B) option to expand

A manufacturer of peripheral devices for PCs decides to try and capture some of the PC gaming market by creating gaming versions of its traditional peripheral devices. It decides to start with a gaming version of its standard keyboard, increasing the number of macro keys, adding a small LCD screen to display game data, and giving the user the ability to backlight keys in different colors. If this device is a success, the manufacturer plans to release gaming versions of its track-balls and other peripherals. What option is the manufacturer gaining by the release of the new keyboard? A) option to delay B) option to expand C) option to abandon D) option to switch

A) $950,349 Using a financial calculator, enter CF0 = -830,000, CF1 = 0, F1 = 1, CF2 = -830,000, F2 = 1, CF3 = 1,200,000, F3 = 3; calculate NPV for I = 10 = $950,349 .

A manufacturer of video games develops a new game over two years. This costs $830,000 per year with one payment made immediately and the other at the end of two years. When the game is released, it is expected to make $1.20 million per year for three years after that. What is the net present value (NPV) of this decision if the cost of capital is 10%? A) $950,349 B) $1,045,384 C) $1,520,559 D) $1,805,663

C) -87.10% Bring all negative cash flows to time 0; thus, PV shut-down cost = -6 / (1 + 0.13 )6 = 2.88191116 ; FV positive cash flows at time 6 = 51.2589405 ; MIRR of the project = -87.10%.

A mining company plans to mine a beach for rutile. To do so will cost $14 million up front and then produce cash flows of $7 million per year for five years. At the end of the sixth year the company will incur shut-down and clean-up costs of $6 million. If the cost of capital is 13.0%, then what is the MIRR for this project? A) -60.97% B) -78.39% C) -87.10%

D) -$36,475 Using a financial calculator, NPV = -$281,652 equivalent annual annuity = -$36,475

A security company offers to provide CCTV coverage for a parking garage for ten years for an initial payment of $50,000 and additional payments of $30,000 per year. What is the equivalent annual annuity of this deal, given a cost of capital of 5%? A) -$21,885 B) -$25,533 C) -$29,180 D) -$36,475

D) No, since net present value (NPV) is negative.

A security firm is offered $80,000 in one year for providing CCTV coverage of a property. The cost of providing this coverage to the security firm is $74,000, payable now, and the interest rate is 8.5%. Should the firm take the contract? A) Yes, since net present value(NPV) is positive. B) It does not matter whether the contract is taken or not, since NPV= 0. C) Yes, since net present value (NPV) is negative. D) No, since net present value (NPV) is negative.

C) $337,500 Incremental revenue = 25% × 75 × $18,000 = $337,500

A small manufacturer that makes clothespins and other household products buys new injection molding equipment for a cost of $500,000. This will allow the manufacturer to make more clothespins in the same amount of time with an estimated increase in sales of 25%. If the manufacturer currently makes 75 tons of clothespins per year, which sell at $18,000 per ton, what will be the increase in revenue next year from the new equipment? A) $125,000 B) $303,750 C) $337,500 D) $837,500

D) It will reduce taxes by $2.8 million. $8 × 0.35 = $2.8 million

A stationery company plans to launch a new type of indelible ink pen. Advertising for the new product will be heavy and will cost the company $8 million, although the company expects general revenues of $280 million next year from sources other than sales of the new pen. If the company has a corporate tax-rate of 35% on its pretax income, what effect will the advertising for the new pen have on its taxes? A) It will increase taxes by $8 million. B) It will increase taxes by $2.8 million. C) It will have no effect on taxes. D) It will reduce taxes by $2.8 million.

B) $24.96 P0 = (0.5 × $641 million) / (0.11 - 0.07 ) = $8012.5 million; Price per share = $8012.5 million / 321 million = $24.96

Aaron Inc. has 321 million shares outstanding. It expects earnings at the end of the year to be $641 million. The firmʹs equity cost of capital is 11%. Aaron pays out 50% of its earnings in total: 30% paid out as dividends and 20% used to repurchase shares. If Aaronʹs earnings are expected to grow at a constant 7% per year, what is Aaronʹs share price? A) $12.48 B) $24.96 C) $37.44 D) $49.92

C) IRR, NPV, Payback period

According to Graham and Harveyʹs 2001 survey (Figure 8.2 in the text), the most popular decision rules for capital budgeting used by CFOs are ________. A) NPV, IRR, MIRR B) MIRR, IRR, Payback period C) IRR, NPV, Payback period D) Profitability index, NPV, IRR

C) option to abandon

After research into where to place a new restaurant, Burger Billies, a small fast-food chain, plans to open a new store near a small college. The anticipated customer base is students attending the college. They learn that a major fast food chain will be opening a franchise within the college, which leads the owners of Burger Billies to revise their estimate of sales to one below the break-even point. Which of the following is most likely the best real option for Burger Billies to take with regard to the proposed restaurant site? A) option to delay B) option to expand C) option to abandon D) option to switch

D) sensitivity analysis

An analysis that breaks the net present value (NPV) calculation into its component assumptions and shows how the net present value (NPV) varies as one of the underlying assumptions changes is called _____. A. scenario analysis B. internal rate of return (IRR) analysis C. accounting break-even analysis D. sensitivity analysis

A) $498,597 NPV = -1,000,000 + 570,000 / (1 + 0.069 ) + 570,000 / (1 + 0.069 )^2 + 570,000 / (1 + 0.069 )^3 = $498,597

An auto-parts company is deciding whether to sponsor a racing team for a cost of $1 million. The sponsorship would last for three years and is expected to increase cash flows by $570,000 per year. If the discount rate is 6.9%, what will be the change in the value of the company if it chooses to go ahead with the sponsorship? A) $498,597 B) $747,896 C) $797,756 D) $847,615

A) scenario analysis

An exploration of the effect of changing multiple project para-meters on net present value (NPV) is called ________. A) scenario analysis B) internal rate of return (IRR) analysis C) accounting break-even analysis D) sensitivity analysis

D) the cost of the research into the feasibility of renting the sixth floor

An insurance office owns a large building downtown. The sixth floor of this building currently houses its entire Human Resources Dept. After carrying out a survey to see whether the sixth floor could be rented and for what price, the company must decide whether to split the Human Resources Department between currently unoccupied spaces on several floors and rent out the entire sixth floor or to leave things as they currently are. Which of the following should NOT be considered when deciding whether to rent out the sixth floor? A) the amount obtained by renting the sixth floor B) the cost of refurbishing the new space to be occupied by the Human Resources Department C) cost involved with a loss of efficiency resulting from the Human Resources Department being split between several spaces D) the cost of the research into the feasibility of renting the sixth floor

D) Initial investment: $60,000; Cash flow in year 1: $6,000; Growth Rate: 2.50%; Cost of Capital: 7.2% NPV project D = -60,000 + 6,000 / (0.072 - 0.025) = $67,660

An investor has the opportunity to invest in four new retail stores. The amount that can be invested in each store, along with the expected cash flow at the end of the first year, the growth rate of the concern, and the cost of capital is shown for each case. It is assumed each investment will operate in perpetuity after the initial investment. Which investment should the investor choose? A) Initial investment: $100,000; Cash flow in year 1: $12,000; Growth Rate: 1.25%; Cost of Capital: 9.1% B) Initial investment: $90,000; Cash flow in year 1: $10,000; Growth Rate: 1.50%; Cost of Capital: 9.3% C) Initial investment: $80,000; Cash flow in year 1: $8,000; Growth Rate: 1.75%; Cost of Capital: 8.0% D) Initial investment: $60,000; Cash flow in year 1: $6,000; Growth Rate: 2.50%; Cost of Capital: 7.2%

B) $2.91 million Bring all negative cash flows to time 0; thus, PV shut-down cost = -400,000 / (1 + 0.044 )5 = -$322,520.63 ; FV positive cash flows at time 5 = $4,013,810.7 ; PV of positive cash flows at time 0 = $3,139,085; NPV at 4.4% = 2.91 million

An investor is considering a project that will generate $900,000 per year for four years. In addition to upfront costs, at the completion of the project at the end of the fifth year there will be shut-down costs of $400,000 . If the cost of capital is 4.4%, based on the MIRR, at what upfront costs does this project cease to be worthwhile? A) $2.62 million B) $2.91 million C) $3.21 million D) $3.50 million

C) 8.40%

An investor purchases a 30-year, zero-coupon bond with a face value of $5000 and a yield to maturity of 8.4%. He sells this bond ten years later. What is the rate of return on his investment, assuming yield to maturity does not change? A) 6.72% B) 5.04% C) 8.40% D) 4.20%

C) $3.3 million $(15 + 1.5) / 5 = $3.3 million

An oil company is buying a semi-submersible oil rig for $15 million. Additionally, it will cost $1.5 million to move the oil rig to the oil-field and to prepare it for operations. If it is depreciated over five years using straight-line depreciation, what are the yearly depreciation expenses in this case? A) $2.7 million B) $3.0 million C) $3.3 million D) $3.8 million

A) -$42,098 Using financial calculator, enter CF0 = -110,000, CF1 = 0, F1 = 4, CF2 = 10,500, F2 = 20; calculate NPV for I = 9% = -$42,098

An orcharder spends $110,000 to plant pomegranate bushes. It will take four years for the bushes to provide a usable crop. He estimates that every year for 20 years after that he will receive a crop worth $10,500 per year. If the discount rate is 9%, what is the net present value (NPV) of this investment? A) -$42,098 B) -$21,049 C) $8420 D) $12,629

C) $9.23 P0 = $1.20 / (0.16 - 0.03 ) = $9.23

Avril Synchronistics will pay a dividend of $1.20 per share this year. It is expected that this dividend will grow by 3% each year in the future. What will be the current value of a single share of Avrilʹs stock if the firmʹs equity cost of capital is 16%? A) $6.46 B) $6.92 C) $9.23 D) $10.15

B) $210 million FCF = NI + Dep - Capital Ex - inc.in NWC = $290 million + $100 million - $150 million - $30 million = $210 million

Bubba Ho-Tep Company reported net income of $290 million for the most recent fiscal year. The firm had depreciation expenses of $100 million and capital expenditures of $150 million. Although it had no interest expense, the firm did have an increase in net working capital of $30 million. What is Bubba Ho-Tepʹs free cash flow? A) $10 million B) $210 million C) $270 million D) $570 million

B) $668,667 ($4 million + $12,000 ) / 6 = $668,667

Cameron Industries is purchasing a new chemical vapor depositor in order to make silicon chips. It will cost $4 million to buy the machine and $12,000 to have it delivered and installed. Building a clean room in the plant for the machine will cost an additional $3 million. The machine is expected to have a working life of six years. If straight-line depreciation is used, what are the yearly depreciation expenses in this case? A) $666,667 B) $668,667 C) $1,166,667 D) $1,168,667

C) $2,434,000 Depreciation = ($5,000,000 + $10,000 ) / 6 = $835,000 ; $4,500,000 - 1,000,000 - $835,000 = $2,665,000 ; $2,665,000 × (0.6) = $1,599,000 ; add back depreciation to get $2,434,000 .

Cameron Industries is purchasing a new chemical vapor depositor in order to make silicon chips. It will cost $5,000,000 to buy the machine and $10,000 to have it delivered and installed. Building a clean room in the plant for the machine will cost an additional $3 million. The machine is expected to raise gross profits by $4,500,000 per year, starting at the end of the first year, with associated costs of $1 million for each of those years. The machine is expected to have a working life of six years and will be depreciated over those six years. The marginal tax rate is 40%. What are the incremental free cash flows associated with the new machine in year 2? A) $835,000 B) $2,665,000 C) $2,434,000 D) $831,667

C) the redesign of the plant only

Cameron Industries is purchasing a new chemical vapor depositor in order to make silicon chips. It will cost $6 million to buy the machine and $10,000 to have it delivered and installed. Building a clean room in the plant for the machine will cost an additional $3 million. The machine is expected to have a working life of six years. Which of these activities will be reported as an operating expense? A) the delivery and install cost only B) the cost of the depositor only C) the redesign of the plant only D) the delivery and install cost and the cost of the depositor

A) -$6,020,000 -$6,000,000 - $20,000 = -$6,020,000

Cameron Industries is purchasing a new chemical vapor depositor in order to make silicon chips. It will cost $6,000,000 to buy the machine and $20,000 to have it delivered and installed. Building a clean room in the plant for the machine will cost an additional $3 million. The machine is expected to raise gross profits by $4,000,000 per year, starting at the end of the first year, with associated costs of $1 million for each of those years. The machine is expected to have a working life of five years and will be depreciated over those five years. The marginal tax rate is 40%. What are the incremental free cash flows associated with the new machine in year 0? A) -$6,020,000 B) -$6,000,000 C) -$5,418,000 D) $1,204,000

A) $2.492 million Depreciation = 4 / 6 = $0.66666667 million; earnings before tax = $6 - $1.5 - $0.66666667 = $3.83333333 million; earnings after tax = $3.83333333 × 0.65 = $2.492 million

CathFoods will release a new range of candies which contain anti-oxidants. New equipment to manufacture the candy will cost $4 million, which will be depreciated by straight-line depreciation over six years. In addition, there will be $5 million spent on promoting the new candy line. It is expected that the range of candies will bring in revenues of $6 million per year for five years with production and support costs of $1.5 million per year. If CathFoodʹs marginal tax rate is 35%, what are the incremental earnings in the second year of this project? A) $2.492 million B) $2.100 million C) $3.833 million D) $1.342 million

A) $1.800 million Depreciation = $2 / 4 = $0.5; earnings = $4 - 1.5 - $0.5 = $2; earnings after tax = $2 × 0.65 = $1.3000 ; add back depreciation = $1.3000 + $0.5 = $1.800 million.

CathFoods will release a new range of candies which contain anti-oxidants. New equipment to manufacture the candy will cost $2 million, which will be depreciated by straight-line depreciation over four years. In addition, there will be $5 million spent on promoting the new candy line. It is expected that the range of candies will bring in revenues of $4 million per year for four years with production and support costs of $1.5 million per year. If CathFoodʹs marginal tax rate is 35%, what are the incremental free cash flows in the second year of this project? A) $1.800 million B) $1.400 million C) $2.000 million D) $0.700 million

C) $7.47 P0 = (0.3 × $960 million) / (0.09 - 0.03 ) = $4800 million; Price per share = $4800 million / 643 million = $7.47

Chittenden Enterprises has 643 million shares outstanding. It expects earnings at the end of the year to be $960 million. The firmʹs equity cost of capital is 9%. Chittenden pays out 30% of its earnings in total: 20% paid out as dividends and 10% used to repurchase shares. If Chittendenʹs earnings are expected to grow at a constant 3% per year, what is Chittendenʹs share price? A) $3.74 B) $2.24 C) $7.47 D) $14.94

B) $34.27 FV = 100 I = YTM PMT = 0 N = 15 Compute PV = FV / (1 + i)^N = 100 / (1 + 0.074 )^15 = 34.27

Consider a zero-coupon bond with $100 face value and 15 years to maturity. If the YTM is 7.4%, this bond will trade at a price closest to ________. A) $41.13 B) $34.27 C) $47.98 D) $54.83

D) $379 FV = 1000 I = 10.2 PMT = 0 N = 10 Compute PV = FV / (1 + i)^N = 1000 / (1 + 10.200 )^10 = 378.60

Consider a zero-coupon bond with a $1000 face value and 10 years left until maturity. If the YTM of this bond is 10.2%, then the price of this bond is closest to ________. A) $1000 B) $454.32 C) $530.04 D) $379

$139,000 $175,000 - (cannibalized sales) = $175,000 - 0.40 × $90,000 = $139,000

Food For Less (FFL), a grocery store, is considering offering one-hour photo developing in their store. The firm expects that sales from the new one-hour machine will be $175,000 per year. FFL currently offers overnight film processing with annual sales of $90,000 . While many of the one-hour photo sales will be to new customers, FFL estimates that 40% of their current overnight photo customers will switch and use the one-hour service. The level of incremental sales associated with introducing the new one hour photo service is closest to ________. A) $139,000 B) $175,000 C) $36,000 D) $70,000

A) $15.0 million ($80 - $30 ) × 0.30 = $15.0 million

Ford Motor Company is considering launching a new line of hybrid diesel-electric SUVs. The heavy advertising expenses associated with the new SUV launch would generate operating losses of $30 million next year. Without the new SUV, Ford expects to earn pre-tax income of $80 million from operations next year. Ford pays a 30% tax rate on its pre-tax income. The amount that Ford Motor Company owes in taxes next year with the launch of the new SUV is closest to _______. A) $15.0 million B) $9.0 million C) $33.0 million D) $24.0 million

A) $28.0 million $80 × 0.35 = $28.0 million

Ford Motor Company is considering launching a new line of hybrid diesel-electric SUVs. The heavy advertising expenses associated with the new SUV launch would generate operating losses of $35 million next year. Without the new SUV, Ford expects to earn pre-tax income of $80 million from operations next year. Ford pays a 35% tax rate on its pre-tax income. The amount that Ford Motor Company owes in taxes next year without the launch of the new SUV is closest to ________. A) $28.0 million B) 12.3 million C) $40.3 million D) $15.8 million

B) 12% Cost of capital = ($1.90 / $23.50 ) + 0.04 = 12%

Gremlin Industries will pay a dividend of $1.90 per share this year. It is expected that this dividend will grow by 4% per year each year in the future. The current price of Gremlinʹs stock is $23.50 per share. What is Gremlinʹs equity cost of capital? A) 11% B) 12% C) 14% D) 16%

Most popular financial calculators can help compute the price of a coupon bond in several ways. Two such ways may be using ʹʺtime value of moneyʺ (TVM) keys and ʺcash flowʺ (CF) keys.

How can the financial calculator be used to calculate the price of a coupon bond from its yield to maturity?

D) a bond with a $1,000 face value, five years to maturity and 6.3% annual coupon payments

If the yield to maturity of all of the following bonds is 6%, which will trade at the greatest premium per $100 face value? A) a bond with a $10,000 face value, four years to maturity and 6.2% semiannual coupon payments B) a bond with a $500 face value, seven years to maturity and 5.2% annual coupon payments C) a bond with a $5,000 face value, seven years to maturity and 5.5% annual coupon payments D) a bond with a $1,000 face value, five years to maturity and 6.3% annual coupon payments

A) $19.32 Step 1: Solve for rE: rE = Div1 / P0 + g = $3.00 /$25.50 + 0.04 = 0.15765 or 15.77% Step 2: Solve for new stock price: P0 = Div1 / (rE - g) = $1.50 /(0.15765 - 0.08 ) = $19.32

JRN Enterprises just announced that it plans to cut its dividend from $3.00 to $1.50 per share and use the extra funds to expand its operations. Prior to this announcement, JRNʹs dividends were expected to grow indefinitely at 4% per year and JRNʹs stock was trading at $25.50 per share. With the new expansion, JRNʹs dividends are expected to grow at 8% per year indefinitely. Assuming that JRNʹs risk is unchanged by the expansion, the value of a share of JRN after the announcement is closest to ________. A) $19.32 B) $12.75 C) $38.63 D) $25.50

D) -$111 Using a financial calculator, spreading $45,000 over 10 years = $5827.70587; thus, EAA = $9172.29413; spreading $60,000 over 8 years = $9283.30882; thus, the difference = -$111 .

Jenkins Security has learned that a rival has offered to supply a parking garage with security for ten years for $45,000 up front and a further $15,000 per year. If Jenkins Security offers to provide security for eight years for an upfront cost of $60,000 and a separate yearly payment, by what maximum amount can this yearly payment be over $20,000, so that Jenkinsʹ offer matches the equivalent annual annuity of their rivalʹs offer? (Assume a cost of capital of 5%.) A) -$89 B) -$94 C) -$100 D) -$111

A) option to delay

Jim owns a farm that he wants to sell. He learns that a highway will be built near the farm in the future, giving access to the farmland from a nearby city and thus making the land attractive to housing developers. Expecting the net present value (NPV) of the sale to be greater after the highway is built, he decides not to sell at this time. What real option is Jim taking? A) option to delay B) option to expand C) option to abandon D) option to switch

A) Yes, since he invested a valuable asset, his time, in a project based on its previous costs.

Joe pre-orders a non-refundable movie ticket. He then reads a number of reviews of the movie in question that make him realize that he will not enjoy it. He goes to see it anyway, rationalizing that otherwise his money will have been wasted. Is Joe succumbing to the Sunk Cost Fallacy, and why? A) Yes, since he invested a valuable asset, his time, in a project based on its previous costs. B) No, because the cost of the movie was not recoverable and would have been lost whatever action he took. C) No, because going to see the movie means that the product of his initial investment was realized as originally planned. D) Yes, because he incurred no further costs by going to see the movie.

D) $21.18 D1 = $2.00 × (1 - 0.1) = $1.8; g = 0.1 × 0.25 = 0.025 ; P0 = $1.8 / (0.11 - 0.025 ) = $21.18

Jumbo Transport, an air-cargo company, expects to have earnings per share of $2.00 in the coming year. It decides to retain 10% of these earnings in order to lease new aircraft. The return on this investment will be 25%. If its equity cost of capital is 11%, what is the expected share price of Jumbo Transport? A) $12.71 B) $14.83 C) $16.94 D) $21.18

A) 1.48% rE1 = $2.15 / $27 = 7.96296296 %; rE2 = $1.75 / $27 = 6.48148148 %; growth rate = 7.96296296 % - 6.48148148 % = 1.48%

Kirkevue Industries pays out all its earnings as dividends and has a share price of $27. In order to expand, Kirkevue announces it will cut its dividend payments from $2.15 to $1.75 per share and reinvest the retained funds. What is the growth rate that should be achieved on the reinvested funds to keep the equity cost of capital unchanged? A) 1.48% B) 0.14% C) 0.17% D) 0.15%

A) 5.5% A) rE = Div1 / P0 + g 0.1 = 0.045 + g, so g = 5.5%

Luther Industries has a dividend yield of 4.5% and a cost of equity capital of 10%. Luther Industriesʹ dividends are expected to grow at a constant rate indefinitely. The growth rate of Lutherʹs dividends is closest to ________. A) 5.5% B) 14.5% C) 11.0% D) 5.0%

D) 5 years The number of years the tax loss carryforwards will last can be calculated as the tax loss carryforward dividend by the annual pre-tax income or: years with no tax = ($72 million / $15 million) = 4.80 years, so Luther wonʹt have to pay taxes for the next four years, but will have to start paying some taxes five years from now.

Luther Industries has outstanding tax loss carryforwards of $72 million from losses over the past four years. If Luther earns $15 million per year in pre-tax income from now on, in how many years will Luther first pay taxes? A) 7 years B) 2 years C) 4 years D) 5 years

D) $5,449,600 Book Value = $10 million - (10 × 0.6876) million = $3.124 million; capital gain = $7 million - $3.124 million = $3.876 million; tax owed = 0.4 × $3.876 million = $1.5504 million; after-tax cash flow = $7 million - $1.5504 million = $5,449,600

MARCS / dep rate Y0 / 14.29% Y1 / 17.49 Y2 / 12.49 Y3 / 8.93 Y4 / 8.93 Y5 / 8.92 Y6 / 8.93 Y7 / 4.46 A textile company invests $10 million in an open-end spinning machine. This was depreciated using the seven-year MACRS schedule shown above. If the company sold it immediately after the end of year 3 for $7 million, what would be the after-tax cash flow from the sale of this asset, given a tax rate of 40%? A) $1,550,400 B) $3,124,000 C) $3,876,000 D) $5,449,600

B) $1,218,350 MACRS depreciation for year 4 = 0.0893 × $65 million = $5.805 million; straight-line depreciation for year 4 = $65 / 7 = $9.286 million; difference = $3.481 million; tax shield = 0.35 × $3.481 = $1,218,350

MARCS / dep rate Y0 / 14.29% Y1 / 17.49 Y2 / 12.49 Y3 / 8.93 Y4 / 8.93 Y5 / 8.92 Y6 / 8.93 Y7 / 4.46 Massive Amusements, an owner of theme parks, invests $65 million to build a roller coaster. This can be depreciated using the MACRS schedule shown above. How much less is the depreciation tax shield for year 4 under MACRS depreciation than under 7 -year, straight-line depreciation, if the tax rate is 35%? A) $974,680 B) $1,218,350 C) $2,193,030 D) $6,091,750

D) $17,208 Accumulated depreciation = $40,000 × 0.712 = $28,480; book value = $40,000 - $28,480 = $11,520 ; capital gain = $21,000 - $11,520 = $9480 ; tax owed = 0.4 × $9480 = $3792 ; after-tax cash flow = $21,000 - $3792 = $17,208

MARCS / dep rate Y0 / 20.00% Y1 / 17.49 Y2 / 32.00 Y3 / 19.20 Y4 / 11.52 Y5 / 5.76 A bakery invests $40,000 in a light delivery truck. This was depreciated using the five-year MACRS schedule shown above. If the company sold it immediately after the end of year 2 for $21,000 , what would be the after-tax cash flow from the sale of this asset, given a tax rate of 40%? A) $11,520 B) $9480 C) $3792 D) $17,208

D) $190,321 Incremental cash flows: CF0 = -$0.7333333 , CF1 = -$0.24456667 , CF2 = $0.40751333 , CF3 = $0.57031333 ; using a financial calculator, NPV at 10% equals $190,321

MARCS / dep rate Y0 / 33.33% Y1 / 44.45 Y2 / 14.81 Y3 / 7.41 A fast-food company invests $2.2 million to buy machines for making slurpees. These can be depreciated using the MACRS schedule shown above. If the cost of capital is 10%, what is the increase in the net present value (NPV) of the product gained by using MACRS depreciation over straight-line depreciation for three years? A) $28,559 B) $47,599 C) $76,158 D) $190,321

A) $0 At the end of three years, both will be completely depreciated, thus $0 - $0 = 0

MARCS / dep rate Y0 / 33.33% Y1 / 44.45 Y2 / 14.81 Y3 / 7.41 A firm is considering the purchase of a new machine for $325,000 . The firm is unsure if it should use the 3-Year MACRS schedule or straight-line depreciation over three years. What is the difference in the book value after three years if the firm uses MACRS instead of straight -line depreciation? A) $0 B) $24,083 C) $48,166 D) $300,918

D) $63,663 Book Value at end of Year 2: $575,000 × .0741 = $42,608 Capital Gain = $75,000 - $42,608 = $32,392 After-Tax Cash Flow = $75,000 - (0.35 × $32,392 ) = $63,663

MARCS / dep rate Y0 / 33.33% Y1 / 44.45 Y2 / 14.81 Y3 / 7.41 A machine is purchased for $575,000 and is used through the end of Year 2. The machine will be depreciated using the 3-Year MACRS schedule. At the end of Year 2, the machine is sold for $75,000 . What is the after-tax cash flow from the sale of the machine at the end of Year 2 if the firmʹs marginal tax rate is 35%? A) $42,608 B) $15,916 C) $32,392 D) $63,663

C) 3% ($6180 - $6000) / $6000 = 3%

Martin is offered an investment where for $6000 today, he will receive $6180 in one year. He decides to borrow $6000 from the bank to make this investment. What is the maximum interest rate the bank needs to offer on the loan if Martin is at least to break even on this investment? A) 1% B) 2% C) 3% D) 4%

Rule I only Using a financial calculator, enter CF0 = 100,000, CF1 = 26,000, F1 = 5; calculate NPV for I = 8 = $203,810, which is greater than $200,000.

Mary is in contract negotiations with a publishing house for her new novel. She has two options. She may be paid $100,000 up front, and receive royalties that are expected to total $26,000 at the end of each of the next five years. Alternatively, she can receive $200,000 up front and no royalties. Which of the following investment rules would indicate that she should take the former deal, given a discount rate of 8%? Rule I: The Net Present Value rule Rule II: The Payback Rule with a payback period of two years Rule III: The internal rate of return (IRR) Rule A) Rule I only B) Rule III only C) Rule II and III D) Rule I and II

D) present value (PV)

Most corporations measure the value of a project in terms of which of the following? A) discount value B) discount factor C) future value (FV) D) present value (PV)

D) $12.00 P0 = Div1 / (rE - g) = $1.20 / (0.1 - 0) = $12.00

NoGrowth Industries presently pays an annual dividend of $1.20 per share and it is expected that these dividend payments will continue indefinitely. If NoGrowthʹs equity cost of capital is 10%, then the value of a share of NoGrowthʹs stock is closest to ________. A) $9.60 B) $14.40 C) $13.20 D) $12.00

B) $69,000

Project/ Investment/ NPV A $135,000 / $6,000 B 200,000 / 30,000 C 125,000 / 20,000 D 150,000 / 2,000 E 175,000 / 10,000 F 75,000 / 10,000 G 80,000 / 9,000 H 200,000 / 20,000 I 50,000 / 4,000 Assume that your capital is constrained, so that you only have $500,000 available to invest in projects. If you invest in the optimal combination of projects given your capital constraint, then the total net present value (NPV) for all the projects you invest in will be closest to ________. A) $111,000 B) $69,000 C) $80,000 D) $58,000

B) $80,000

Project/ Investment/ NPV A $135,000 / $6,000 B 200,000 / 30,000 C 125,000 / 20,000 D 150,000 / 2,000 E 175,000 / 10,000 F 75,000 / 10,000 G 80,000 / 9,000 H 200,000 / 20,000 I 50,000 / 4,000 Assume that your capital is constrained, so that you only have $600,000 available to invest in projects. If you invest in the optimal combination of projects given your capital constraint, then the total net present value (NPV) for all the projects you invest in will be closest to ________. A) $65,000 B) $80,000 C) $69,000 D) $111,000

A) CBFH

Project/ Investment/ NPV A $135,000 / $6,000 B 200,000 / 30,000 C 125,000 / 20,000 D 150,000 / 2,000 E 175,000 / 10,000 F 75,000 / 10,000 G 80,000 / 9,000 H 200,000 / 20,000 I 50,000 / 4,000 Assuming that your capital is constrained, so that you only have $600,000 available to invest in projects, which project should you invest in and in what order? A) CBFH B) CBGF C) BCFG D) CBFG

A) Project H

Project/ Investment/ NPV A $135,000 / $6,000 B 200,000 / 30,000 C 125,000 / 20,000 D 150,000 / 2,000 E 175,000 / 10,000 F 75,000 / 10,000 G 80,000 / 9,000 H 200,000 / 20,000 I 50,000 / 4,000 Assuming that your capital is constrained, what is the fifth project that you should invest in? A) Project H B) Project I C) Project B D) Project A

A) profitability Index

Project/ Investment/ NPV A $135,000 / $6,000 B 200,000 / 30,000 C 125,000 / 20,000 D 150,000 / 2,000 E 175,000 / 10,000 F 75,000 / 10,000 G 80,000 / 9,000 H 200,000 / 20,000 I 50,000 / 4,000 Assuming that your capital is constrained, which investment tool should you use to determine the correct investment decisions? A) profitability Index B) incremental IRR C) net present value (NPV) D) internal rate of return (IRR)

A) Project C

Project/ Investment/ NPV A $135,000 / $6,000 B 200,000 / 30,000 C 125,000 / 20,000 D 150,000 / 2,000 E 175,000 / 10,000 F 75,000 / 10,000 G 80,000 / 9,000 H 200,000 / 20,000 I 50,000 / 4,000 Assuming that your capital is constrained, which project should you invest in first? A) Project C B) Project G C) Project B D) Project F

C) Project D

Project/ Investment/ NPV A $135,000 / $6,000 B 200,000 / 30,000 C 125,000 / 20,000 D 150,000 / 2,000 E 175,000 / 10,000 F 75,000 / 10,000 G 80,000 / 9,000 H 200,000 / 20,000 I 50,000 / 4,000 Assuming that your capital is constrained, which project should you invest in last? A) Project A B) Project I C) Project D D) Project C

A) $90 million $300 × 0.30 = $90 million

Shepard Industries is evaluating a proposal to expand its current distribution facilities. Management has projected that the project will produce the following cash flows for the first two years (in millions of dollars). year / 1 / 2 revenues / 1000 / 1325 op exp / 4005 / 550 dep / 230 / 300 inc in cap / 40 / 80 cap exp / 250 / 300 marg corp tax rate / 30% / 30% The depreciation tax shield for Shepard Industries project in year 2 is closest to ________. A) $90 million B) $69 million C) $135 million D) $108 million

D) $69 million $230 × 0.30 = $69 million

Shepard Industries is evaluating a proposal to expand its current distribution facilities. Management has projected the project will produce the following cash flows for the first two years (in millions). year / 1 / 2 revenues / 1050 / 1425 op exp / 375 / 550 dep / 230 / 280 inc in cap / 50 / 80 cap exp / 270 / 320 marg corp tax rate / 30% / 30% The depreciation tax shield for Shepard Industries project in year 1 is closest to ________. A) $84 million B) $104 million C) $83 million D) $69 million

D) $34.29 P0 = $2.40 / (0.12 - 0.05 ) = $34.29

Spacefood Products will pay a dividend of $2.40 per share this year. It is expected that this dividend will grow by 5% per year each year in the future. What will be the current value of a single share of Space-foodʹs stock if the firmʹs equity cost of capital is 12%? A) $24.00 B) $22.29 C) $30.86 D) $34.29

D) $60.00 P0 = (0.6 × $6.0 million) / (0.1 - 0.05 ) = $72 million; P0 = $72 million / 1.2 million = $60.00

Sultan Services has 1.2 million shares out-standing. It expects earnings at the end of the year of $6.0 million. Sultan pays out 60% of its earnings in total: 40% paid out as dividends and 20% used to repurchase shares. If Sultanʹs earnings are expected to grow by 5% per year, these payout rates do not change, and Sultanʹs equity cost of capital is 10%, what is Sultanʹs share price? A) $12.00 B) $24.00 C) $36.00 D) $60.00

C) $52.38 Cost of capital = $3/$37 = 0.08108108; g = 0.33 × 0.13 = 0.0429; P0 = $2 / (0.08108108 - 0.0429) = $52.38

Sunnyfax Publishing pays out all its earnings and has a share price of $37. In order to expand, Sunnyfax Publishing decides to cut its dividend from $3.00 to $2.00 per share and reinvest the retained funds. Once the funds are reinvested, they are expected to grow at a rate of 13%. If the reinvestment does not affect Sunnyfaxʹs equity cost of capital, what is the expected share price as a consequence of this decision? A) $36.67 B) $41.90 C) $52.38 D) $62.86

Tanner should be indifferent between the two investments, since both are equivalent to the same amount of cash today.

Tanner is choosing between two investment options. He can invest $500 now and get (guaranteed) $550 in one year, or invest $500 now and get (guaranteed) $531.40 back later today. The risk-free rate is 3.5%. Which investment should Tanner prefer? A) $531.40 later today, since $1 today is worth more than $1 in one year. B) $550 in one year, since it is $50 more than he invested rather than $31.40 more than he invested. C) Neither - both investments have a negative NPV. D) Tanner should be indifferent between the two investments, since both are equivalent to the same amount of cash today.

A) $2,956,522 FCF = ($21 - $8 - $2) × (1 - 0.35) + $2 = $9.15 million So, NPV = -$5 + $9.15 / 1.15 = $2,956,522

Temporary Housing Services Incorporated (THSI) is considering a project that involves setting up a temporary housing facility in an area recently damaged by a hurricane. THSI will lease space in this facility to various agencies and groups providing relief services to the area. THSI estimates that this project will initially cost $5 million to set up and will generate $21 million in revenues during its first and only year in operation (paid in one year). Operating expenses are expected to total $8 million during this year and depreciation expense will be another $2 million. THSI will require no working capital for this investment. THSIʹs marginal tax rate is 35% Assume that THSIʹs cost of capital for this project is 15%. The net present value (NPV) of this temporary housing project is closest to ________. A) $2,956,522 B) -$9.15 C) $5,913,044 D) -$2,956,522

D) $7.85 million FCF = (revenues - expenses - depreciation) × (1 - tax rate) + depreciation FCF = ($22 - $11 - $2) × (1 - 0.35) + $2 = $7.85 million

Temporary Housing Services Incorporated (THSI) is considering a project that involves setting up a temporary housing facility in an area recently damaged by a hurricane. THSI will lease space in this facility to various agencies and groups providing relief services to the area. THSI estimates that this project will initially cost $6 million to set up and will generate $22 million in revenues during its first and only year in operation (paid in one year). Operating expenses are expected to total $11 million during this year and depreciation expense will be another $2 million. THSI will require no working capital for this investment. THSIʹs marginal tax rate is 35%. Ignoring the original investment of $5 million, what is THSIʹs free cash flow for the first and only year of operation? A) $6.00 million B) $3.85 million C) $9.81 million D) $7.85 million

A) (Units Sold × Sale Price) - (Units Sold × Cost per unit) - SG&A - Depreciation = 0

The EBIT break-even point can be calculated using which of the following formulas? A) (Units Sold × Sale Price) - (Units Sold × Cost per unit) - SG&A - Depreciation = 0 B) (Units Sold × Sale Price) + (Units Sold × Cost per unit) - SG&A - Depreciation = 0 C) (Units Sold × Sale Price) - (Units Sold × Cost per unit) + SG&A + Depreciation = 0 D) (Units Sold × Sale Price) + (Units Sold × Cost per unit) + SG&A - Depreciation = 0

B) $1,260,000 Here we need to use the marginal tax rate. So, depreciation tax shield = $3.6 million × 0.35 = $1.26 million

The Sisyphean Company is considering a new project that will have an annual depreciation expense of $3.6 million. If Sisypheanʹs marginal corporate tax rate is 35% and its average corporate tax rate is 30%, then what is the value of the depreciation tax shield on the companyʹs new project? A) $1,080,000 B) $1,260,000 C) $1,890,000 D) $1,134,000

C) -0.98% P0 = Div1 / (rE - g) = $25.50 = $2.80 / (0.1 - g), so g = -0.0098 or -0.98%

The Sisyphean Companyʹs common stock is currently trading for $25.50 per share. The stock is expected to pay a $2.80 dividend at the end of the year and the Sisyphean Companyʹs equity cost of capital is 10%. If the dividend payout rate is expected to remain constant, then the expected growth rate in the Sisyphean Companyʹs earnings is closest to ________. A) -1.96% B) -1.47% C) -0.98% D) -0.49%

B) $3500 Depreciation tax shield = depreciation × tax rate = ($30,000 / 3) × 0.35 = $3500

The Sisyphean Corporation is considering investing in a new cane manufacturing machine that has an estimated life of three years. The cost of the machine is $30,000 and the machine will be depreciated straight line over its three-year life to a residual value of $0. The cane manufacturing machine will result in sales of 2000 canes in year 1. Sales are estimated to grow by 10% per year each year through year 3. The price per cane that Sisyphean will charge its customers is $18 each and is to remain constant. The canes have a cost per unit to manufacture of $9 each. Installation of the machine and the resulting increase in manufacturing capacity will require an increase in various net working capital accounts. It is estimated that the Sisyphean Corporation needs to hold 2% of its annual sales in cash, 4% of its annual sales in accounts receivable, 9% of its annual sales in inventory, and 5% of its annual sales in accounts payable. The firm is in the 35% tax bracket and has a cost of capital of 10%. The depreciation tax shield for the Sisyphean Corporationʹs project in the first year is closest to ________. A) $10,500 B) $3500 C) $3150 D) $2800

C) compiling a list of potential projects

The capital budgeting process begins by ________. A) analyzing alternate projects B) evaluating the net present value (NPV) of each projectʹs cash flows C) compiling a list of potential projects D) forecasting the future consequences for the firm of each potential project

C) scenario analysis considers the effect on net present value (NPV) of changing multiple project parameters

The difference between scenario analysis and sensitivity analysis is ________. A) scenario analysis is based upon the internal rate of return (IRR) and sensitivity analysis is based upon net present value (NPV) B) only sensitivity analysis allows us to change estimated inputs of net present value (NPV) analysis C) scenario analysis considers the effect on net present value (NPV) of changing multiple project parameters D) only scenario analysis breaks the net present value (NPV) calculation into its component assumptions

A) scenario analysis

The manufacturer of a brand of kitchen knives is investigating the likely effects that an increase in the cost of the raw materials required to make these knives will have on the cost of manufacturing the knives, the selling price of the knives, the number of knives that will then be sold, and the projectʹs net present value (NPV). Which of the following best describes what type of analysis the manager is performing? A) scenario analysis B) sensitivity analysis C) break-even analysis D) EBIT-break even analysis

D) The vertical axis crossing point cannot be calculated since the cash inflows are in perpetuity.

The owner of a hair salon spends $1,000,000 to renovate its premises, estimating that this will increase her cash flow by $220,000 per year. She constructs the above graph, which shows the net present value (NPV) as a function of the discount rate. At what dollar value should the NPV profile cross the vertical axis? A) $780,000 B) $1,000,000 C) Cannot be determined because inadequate information is given. D) The vertical axis crossing point cannot be calculated since the cash inflows are in perpetuity.

B) No, because the NPV is negative at that rate.

The owner of a hair salon spends $1,000,000 to renovate its premises, estimating that this will increase her cash flow by $220,000 per year. She constructs the above graph, which shows the net present value (NPV) as a function of the discount rate. If her discount rate is 6%, should she accept the project? A) Yes, because the NPV is positive at that rate. B) No, because the NPV is negative at that rate. C) No, because the NPV is positive at that rate. D) Cannot be determined from the information given.

B) 3.78% Using a financial calculator, PMT = 120,536 , N = 5, PV = 540,000 , compute I = 3.78%.

The owner of a number of gas stations is considering installing coffee machines in his gas stations. It will cost $270,000 to install the coffee machines, and they are expected to boost cash flows by $120,536 per year for their five-year working life. What must the cost of capital be if this investment has a profitability index of 1? A) 1.89% B) 3.78% C) 7.55% D) 9.44%

D) Yes, as it has a net present value (NPV) of $22.23 million. Using financial calculator, enter CF0 = -25,000,000, CF1 = 11,000,000, F1 = 5; calculate NPV for I = 5.3% = $22,231,874.40

The owners of a chain of fast-food restaurants spend $25 million installing donut makers in all their restaurants. This is expected to increase cash flows by $11 million per year for the next five years. If the discount rate is 5.3%, were the owners correct in making the decision to install donut makers? A) No, as it has a net present value (NPV) of -$4.45 million. B) No, as it has a net present value (NPV) of -$2.22 million. C) Yes, as it has a net present value (NPV) of $13.34 million. D) Yes, as it has a net present value (NPV) of $22.23 million.

A) the amount that an investment would yield if the benefit were realized today

The present value (PV) of an investment is ________. A) the amount that an investment would yield if the benefit were realized today B) the difference between the cost of the investment and the benefit of the investment in dollars today C) the amount you need to invest at the current interest rate to re-create the cash flow from the investment D) the amount by which the cash flow of an investment exceeds or falls short of the cash flow generated by the same amount of money invested at market rate

A) decrease in the sales of current project caused by the launching of new project

The term ʺcannibalizationʺ refers to ________. A) decrease in the sales of current project caused by the launching of new project B) decrease in the sunk cost caused by launching of new project C) decrease in overhead expenses incurred due to launch of new project D) cost of using a resource for the best value it could provide in its best alternative

D) determine the effect of the decision to accept or reject a project on the firmʹs cash flows

The ultimate goal of the capital budgeting process is to ________. A) determine how the consequences of making a particular decision affects the firmʹs revenues and costs B) list the projects and investments that a company plans to undertake in the future C) forecast the consequences of a list of future projects for the firm D) determine the effect of the decision to accept or reject a project on the firmʹs cash flows

C) 13% -7 + 2.0 / r = -7 + 1 / (r - 0.04 ); r = 13%

Two mutually exclusive investment opportunities require an initial investment of $7 million. Investment A pays $2.0 million per year in perpetuity, while investment B pays $1.4 million in the first year, with cash flows increasing by 4% per year after that. At what cost of capital would an investor regard both opportunities as being equivalent? A) 3% B) 7% C) 13% D) 15%

D) $75.12 P0 = (0.4 × $800 million) / (0.09 - 0.07 ) = $16,000 million; Price per share = $16,000 million / 213 million = $75.12

Valence Electronics has 213 million shares outstanding. It expects earnings at the end of the year of $800 million. Valence pays out 40% of its earnings in total - 15% paid out as dividends and 25% used to repurchase shares. If Valenceʹs earnings are expected to grow by 7% per year, these payout rates do not change, and Valenceʹs equity cost of capital is 9%, what is Valenceʹs share price? A) $11.27 B) $22.54 C) $60.10 D) $75.12

B) $14.3 million 1.5 million × ($53 - $36 ) = $25.5 million; depreciation = 15 / 9 = $1.7 million; earnings before tax = $23.8 million; earnings after tax = $23.8 million × 0.6 = $14.3 million

Vernon-Nelson Chemicals is planning to release a new brand of insecticide, Bee-Safe, that will kill many insect pests but not harm useful pollinators. Buying new equipment to manufacture the product will cost $15 million, and there will be an additional $2 million cost to reconfigure existing plant. The equipment is expected to have a lifetime of nine years and will be depreciated by the straight-line method over its lifetime. The firm expects that they should be able to sell 1,500,000 gallons per year at a price of $53 per gallon. It will take $36 per gallon to manufacture and support the product. If Vernon-Nelsonʹs marginal tax rate is 40%, what are the incremental earnings after tax in year 3 of this project? A) $25.5 million B) $14.3 million C) $23.8 million D) $9.5 million

A) $42.86 P0 = Div1 / (rE - g) = $3.00 / (0.13 - 0.06 ) = $42.86

Von Bora Corporation (VBC) is expected to pay a $3.00 dividend at the end of this year. If you expect VBCʹs dividend to grow by 6% per year forever and VBCʹs equity cost of capital to be 13%, then the value of a share of VBS stock is closest to ________. A) $42.86 B) $15.79 C) $25.72 D) $17.14

C) It is difficult to calculate.

Which of the following is NOT a limitation of the payback rule? A) It does not consider the time value of money. B) Lacks a decision criterion that is economically based. C) It is difficult to calculate. D) It does not consider cash flows occurring after the payback period.

B) so that the projects can be compared on their cost or value created per year

When comparing two projects with different lives, why do you compute an annuity with an equivalent present value (PV) to the net present value (NPV)? A) so that you can see which project has the greatest net present value (NPV) B) so that the projects can be compared on their cost or value created per year C) to reduce the danger that changes in the estimate of the discount rate will lead to choosing the project with a shorter timeframe D) to ensure that cash flows from the project with a longer life that occur after the project with the shorter life has ended are considered

D) subtracting depreciation expenses from taxable earnings

Which of the following adjustments should NOT be made when computing free cash flow from incremental earnings? A) adding depreciation B) adding all non-cash expenses C) subtracting increases in Net Working Capital D) subtracting depreciation expenses from taxable earnings

B) the amount by which a firmʹs earnings are expected to change as a result of an investment decision

Which of the following best defines incremental earnings? A) cash flows arising from a particular investment decision B) the amount by which a firmʹs earnings are expected to change as a result of an investment decision C) the earnings arising from all projects that a company plans to undertake in a fixed time span D) the net present value (NPV) of earnings that a firm is expected to receive as the result of an investment decision

A) Take any investment opportunity where the net present value (NPV) is not negative; turn down any opportunity when it is negative.

Which of the following best describes the Net Present Value rule? A) Take any investment opportunity where the net present value (NPV) is not negative; turn down any opportunity when it is negative. B) Take any investment opportunity where the net present value (NPV) exceeds the opportunity cost of capital; turn down any opportunity where the cost of capital exceeds the net present value (NPV) C) When choosing among any list of investment opportunities where resources are limited, always choose those projects with the highest net present value (NPV). D) If the difference between the present cost of an investment and the present value (PV) of its benefits after a fixed number of years is positive the investment should be taken, otherwise it should be rejected.

C) These earnings are not actual cash flows.

Which of the following best describes why the predicted incremental earnings arising from a given decision are not sufficient in and of themselves to determine whether that decision is worthwhile? A) They do not tell how the decision affects the firmʹs reported profits from an accounting perspective. B) They are not easily predicted from historical financial statements of a firm and its competitors. C) These earnings are not actual cash flows. D) They do not show how the firmʹs earnings are expected to change as the result of a particular decision.

D) The firm will receive greater benefits to its cash flow earlier in the depreciation timeline and thus increase net present value (NPV).

Which of the following best explains why is it sensible for a firm to use an accelerated depreciation schedule such as MACRS rather than straight-line depreciation? A) The firm will substantially decrease its depreciation tax shield across all of the depreciation timeline. B) The firm can decide over how many years an item may be depreciated, thus allowing it full control of its depreciation expenses. C) The firm will have substantially fewer depreciation expenses later in the depreciation timeline. D) The firm will receive greater benefits to its cash flow earlier in the depreciation timeline and thus increase net present value (NPV).

B. Opportunity cost

Which of the following costs would you consider when making a capital budgeting decision? A. sunk cost B. opportunity cost C. interest expense D. fixed overhead cost

D) payback period

Which of the following decision rules is best defined as the amount of time it takes to pay back the initial investment? A) internal rate of return (IRR) B) profitability index C) net present value (NPV) D) payback period

D) payback period

Which of the following decision rules might best be used as a supplement to net present value (NPV) by a firm that favors liquidity? A) profitability index B) MIRR C) equivalent annual annuity D) payback period

B) PN = (rE - g) × DivN+1

Which of the following formulas is INCORRECT? A) Divt = EPSt × Dividend Payout Rate B) PN = (rE - g) × DivN+1 C) earnings growth rate = retention rate × return on new investment D) rE = (Divt / P0) + g

D) rE = (Div1 / P0) - g

Which of the following formulas is INCORRECT? A) g = Retention Rate × Return on New Investment B) Divt = EPSt × Dividend Payout Rate C) P0 = Div1 / (rE - g) D) rE = (Div1 / P0) - g

B) Cash + Inventory + Receivables - Payables

Which of the following formulas will correctly calculate Net Working Capital? A. Cash + Inventory + Receivables + Payables B. Cash + Inventory + Receivables - Payables C. Cash + Inventory - Receivables + Payables D. Cash - Inventory + Receivables + Payables

B) A new product typically has its highest sales immediately after release as customers are attracted by the novelty of the product.

Which of the following is NOT a factor that a manager should bear in mind when estimating a projectʹs revenues and costs? A) Sales of a product will typically accelerate, stabilize, and then decline as the product becomes outdated or faces increased competition. B) A new product typically has its highest sales immediately after release as customers are attracted by the novelty of the product. C) The prices of technology products tend to fall over time as newer, superior technologies emerge and production costs decline. D) Prices and costs tend to rise with the general level of inflation in the economy.

B) It is difficult to calculate.

Which of the following is NOT a limitation of the payback period rule? A) It does not account for the time value of money. B) It is difficult to calculate. C) It ignores cash flows after payback. D) It does not account for changes in the discount rate.

D) Turn multiple negative cash flows into a single negative cash flow by summing all negative cash flows over the projectʹs lifetime.

Which of the following is NOT a valid method of modifying cash flows to produce a MIRR? A) Discount all of the negative cash flows to time 0 and leave the positive cash flows alone. B) Leave the initial cash flow alone and compound all of the remaining cash flows to the final period of the project. C) Discount all of the negative cash flows to the present and compound all of the positive cash flows to the end of the project. D) Turn multiple negative cash flows into a single negative cash flow by summing all negative cash flows over the projectʹs lifetime.

D) relies on accurate estimate of the discount rate

Which of the following is a disadvantage of the Net Present Value rule? A) can be misleading if inflows come before outflows B) not necessarily consistent with maximizing shareholder wealth C) ignores cash flows after the cutoff point D) relies on accurate estimate of the discount rate

A) It cannot handle negative growth rates.

Which of the following is a limitation of the dividend-discount model? A) It cannot handle negative growth rates. B) It requires accurate dividend forecasts, which is not possible. C) It requires that the growth rate always be higher than the required rate of return, which is not realistic. D) It does not consider past earnings and performance.

A) A toothpaste manufacturer adds a new line of toothpaste (that contains baking soda) to its product line.

Which of the following is an example of cannibalization? A) A toothpaste manufacturer adds a new line of toothpaste (that contains baking soda) to its product line. B) A grocery store begins selling T-shirts featuring the local universityʹs mascot. C) A basketball manufacturer adds basketball hoops to its product line. D) A convenience store begins selling pre-paid cell phones.

C) Attention must be taken when using it to make sure that all of the constrained resource is utilized.

Which of the following is true regarding the profitability index? A) It does not use the net present value (NPV) to assess benefits. B) It is very simple to compute. C) Attention must be taken when using it to make sure that all of the constrained resource is utilized. D) It is unreliable when used for choosing between different projects.

A) the fluctuations in the cost of capital over the period in question

Which of the following is usually NOT a factor that must be considered when estimating the revenues and costs arising from a new product? A) the fluctuations in the cost of capital over the period in question B) the sales of a new product will typically accelerate, plateau, and ultimately decline over time C) the prices of technology products generally fall over time D) competition tends to reduce profit margins over time in most industries

B) II only

Which of the following models directly values all of the firmʹs equity, rather than a single share? I. Dividend-discount model II. Total payout model III. Discounted cash flow model A) I only B) II only C) III only D) II and III

D) All of the above can lead to IRR giving a different decision than NPV.

Which of the following situations can lead to IRR giving a different decision than NPV? A) delayed investment B) multiple IRRs C) differences in project scale D) All of the above can lead to IRR giving a different decision than NPV.

D) During periods of high growth, it is not unusual for firms to pay out 100% of their earnings to shareholders in the form of dividends.

Which of the following statements is FALSE about dividend payout and growth? A) A common approximation is to assume that in the long run, dividends will grow at a constant rate. B) The dividend each year is the firmʹs earnings per share (EPS) multiplied by its dividend payout rate. C) There is a tremendous amount of uncertainty associated with any forecast of a firmʹs future dividends. D) During periods of high growth, it is not unusual for firms to pay out 100% of their earnings to shareholders in the form of dividends.

If the cost of capital estimate is more than the internal rate of return (IRR), the net present value (NPV) will be positive.

Which of the following statements is FALSE? A) In general, the difference between the cost of capital and the internal rate of return (IRR) is the maximum amount of estimation error in the cost of capital estimate that can exist without altering the original decision. B) The internal rate of return (IRR) can provide information on how sensitive your analysis is to errors in the estimate of your cost of capital. C) If you are unsure of your cost of capital estimate, it is important to determine how sensitive your analysis is to errors in this estimate. D) If the cost of capital estimate is more than the internal rate of return (IRR), the net present value (NPV) will be positive.

B) When evaluating a capital budgeting decision, we generally include interest expense.

Which of the following statements is FALSE? A) Many projects use a resource that the company already owns. B) When evaluating a capital budgeting decision, we generally include interest expense. C) Only include as incremental expenses in your capital budgeting analysis the additional overhead expenses that arise because of the decision to take on the project. D) As a practical matter, to derive the forecasted cash flows of a project, financial managers often begin by forecasting earnings.

D) When we are certain regarding the input to a capital budgeting decision, it is often useful to determine the break-even level of that input.

Which of the following statements is FALSE? A) Sensitivity analysis allows us to explore the effects of errors in our estimated inputs in our net present value (NPV) analysis for the project. B) To compute the net present value (NPV) for a project, you need to estimate the incremental cash flows and choose a discount rate. C) Estimates of the cash flows and cost of capital are often subject to significant uncertainty. D) When we are certain regarding the input to a capital budgeting decision, it is often useful to determine the break-even level of that input.

A) The break-even level of an input is the level for which the investment has an internal rate of return (IRR) of zero.

Which of the following statements is FALSE? A) The break-even level of an input is the level for which the investment has an internal rate of return (IRR) of zero. B) The most difficult part of capital budgeting is deciding how to estimate the cash flows and the cost of capital. C) When evaluating a capital budgeting project, financial managers should make the decision that maximizes net present value (NPV). D) Sensitivity analysis reveals those aspects of the project which are most critical when we are actually managing the project.

B) An internal rate of return (IRR) will always exist for an investment opportunity.

Which of the following statements is FALSE? A) The payback investment rule is based on the notion that an opportunity that pays back its initial investments quickly is a good idea. B) An internal rate of return (IRR) will always exist for an investment opportunity. C) A net present value (NPV) will always exist for an investment opportunity. D) In general, there can be as many internal rates of return (IRRs) as the number of times the projectʹs cash flows change sign over time.

B) The payback rule is reliable because it considers the time value of money and depends on the cost of capital.

Which of the following statements is FALSE? A) The payback rule is useful in cases where the cost of making an incorrect decision might not be large enough to justify the time required for calculating the net present value (NPV). B) The payback rule is reliable because it considers the time value of money and depends on the cost of capital. C) For most investment opportunities, expenses occur initially and cash is received later. D) Fifty percent of firms surveyed reported using the payback rule for making decisions.

C) Investments in plant, property, and equipment are directly listed as expense when calculating earnings.

Which of the following statements is FALSE? A) We begin the capital budgeting process by determining the incremental earnings of a project. B) The marginal corporate tax rate is the tax rate the firm will pay on an incremental dollar of pre-tax income. C) Investments in plant, property, and equipment are directly listed as expense when calculating earnings. D) The opportunity cost of using a resource is the value it could have provided in its best alternative use.

D) Scenario analysis breaks the net present value (NPV) calculation into its component assumptions and shows how the net present value (NPV) varies as each one of the under-lying assumptions changes.

Which of the following statements is FALSE? A) We can use scenario analysis to evaluate alternative pricing strategies for our project. B) Scenario analysis considers the effect on net present value (NPV) of changing multiple project parameters. C) The difference between the internal rate of return (IRR) of a project and the cost of capital tells you how much error in the cost of capital it would take to change the investment decision. D) Scenario analysis breaks the net present value (NPV) calculation into its component assumptions and shows how the net present value (NPV) varies as each one of the underlying assumptions changes.

B) Real options enhance the forecast of a projectʹs expected future cash flows by incorporating, at the start of the project, the effect of decisions that will be made at a later date.

Which of the following statements regarding real options is NOT correct? A) Real options should only be exercised when they increase the NPV of a project. B) Real options enhance the forecast of a projectʹs expected future cash flows by incorporating, at the start of the project, the effect of decisions that will be made at a later date. C) Real options give owners the right, but not the obligation, to exercise these opportunities at a later date. D) Real options build greater flexibility into a project and thus increase its net present value (NPV).

A) It can issue more shares.

Which of the following will NOT increase a companyʹs dividend payments? A) It can issue more shares. B) It can increase its earnings. C) It can decrease the number of shares outstanding. D) It can increase its dividend payout rate.

A) a decrease in the sales price

Which of the following will cause the EBIT Break-Even for sales to increase? A. a decrease in the sales price B. a decrease in depreciation expense C. a decrease in selling, general, and administrative expenses D. a decrease in the number of units sold

B) the cost of a marketing study completed last year This is a sunk cost.

Which of the following would you NOT consider when making a capital budgeting decision? A) the additional taxes a firm would have to pay in the next year B) the cost of a marketing study completed last year C) the opportunity to lease out a warehouse instead of using it to house a new production line D) the change in direct labor expense due to the purchase of a new machine

D) $6400 NWC = CA - CL = $8700 - $2300 = $6400

You are considering adding a microbrewery onto one of your firmʹs existing restaurants. This will entail an increase in inventory of $8700 , an increase in accounts payables of $2300 , and an increase in property, plant, and equipment of $48,000 . All other accounts will remain unchanged. The change in net working capital resulting from the addition of the microbrewery is ________. A) $54,400 B) $11,000 C) $7680 D) $6400

A) $3290 First figure out the straight-line depreciation. $47,000 / 5 years = $9400 depreciation per year. Then 0.35 × $9400 = $3290 depreciation tax shield per year.

You are considering adding a microbrewery onto one of your firmʹs existing restaurants. This will entail an investment of $47,000 in new equipment. This equipment will be depreciated straight-line over five years. If your firmʹs marginal corporate tax rate is 35%, then what is the value of the micro-breweryʹs depreciation tax shield in the first year of operation? A) $3290 B) $16,450 C) $6110 D) $30,550

D) profitability index

You are opening up a brand new retail strip mall. You presently have more potential retail outlets wanting to locate in your mall than you have space available. What is the most appropriate tool to use if you are trying to determine the optimal allocation of your retail space? A) internal rate of return (IRR) B) payback period C) net present value (NPV) D) profitability index

A) net present value (NPV)

You are trying to decide between three mutually exclusive investment opportunities. The most appropriate tool for identifying the correct decision is ________. A) net present value (NPV) B) profitability index C) internal rate of return (IRR) D) incremental internal rate of return (IRR)

C) $62.50 g = Retention rate × Return on new investment = ($5 - $2.50 )/$5 × 0.14 = 0.07 or 7% P0 = Div1 / (rE - g) = $2.50 / (0.11 - 0.07 ) = $62.50

You expect KT industries (KTI) will have earnings per share of $5 this year and expect that they will pay out $2.50 of these earnings to share-holders in the form of a dividend. KTIʹs return on new investments is 14% and their equity cost of capital is 11%. The value of a share of KTIʹs stock today is closest to ________. A) $75.00 B) $37.50 C) $62.50 D) $25.00

B) 9.8% g = Retention rate × Return on new investment = ($5 - $1.25 ) / $5 × 0.13 = 0.0975 or 9.8%

You expect KT industries (KTI) will have earnings per share of $5 this year and expect that they will pay out $1.25 of these earnings to shareholders in the form of a dividend. KTIʹs return on new investments is 13% and their equity cost of capital is 15%. The expected growth rate for KTIʹs dividends is closest to ________. A) 11.3% B) 9.8% C) 5.9% D) 3.9%

B) limit order

You placed an order to purchase stock where you specified the maximum price you were willing to pay. This type of order is known as a ________. A) maximum order B) limit order C) floor order D) market order

A) $700,000 It is appropriate to use the market value. If taxes are included, the value would be the after-tax value of the land.

Your firm is considering building a new office complex. Your firm already owns land suitable for the new complex. The current book value of the land is $130,000 ; however, a commercial real estate agent has informed you that an outside buyer is interested in purchasing this land would be willing to pay $700,000 for it. When calculating the net present value (NPV) of your new office complex, ignoring taxes, the appropriate incremental cash flow for the use of this land is ________. A) $700,000 B) $0 C) $130,000 D) $830,000

C) $46 thousand Current assets - current liabilities = $86 - $40 = $46 thousand

cash - 47 acc / rec - 23 inventories - 16 total curr assets - 86 PP&E - 164 total lt assets - 164 total assets = 250 acc pay - 40 total curr liab - 40 LT debt - 170 total LT liab - 170 total liab - 210 SE - 40 total liab and SE - 250 The balance sheet for a small firm is shown above. All amounts are in thousands of dollars. What is this firmʹs Net Working Capital? A) $126 thousand B) $7 thousand C) $46 thousand D) $86 thousand

A) 0.110 Using a financial calculator, NPV = 110,190.266 ; PI = NPV/Initial Inv = 0.110

investment B 0 - -1 mill 1 - 550,000 2 - 400,000 3 - 325,000 The timeline of an investment is shown above. If the cost of capital is 8%, what is the profitability index of this investment? A) 0.110 B) 0.121 C) 0.275 D) 0.441

sunk cost

payments already made or that will be made that are independent of the project under discussion. These are costs for which the firm is already liable.

A) 0.16 PI = NPV / Investment (or resources consumed) NPV = -100 + 40 / (1 + 0.13 )^1 + 50 / (1 + 0.13 )^2 + 60 / (1 + 0.13 )^3 = 16.138574 So, PI = 16.138574 / 100 = 0.1614

project / cash flow project A / B 0 / -100 / -73 1 / 40 / 30 2 / 50 / 30 3 / 60 / 30 4 / NA / 30 discount rate - 0.13 The profitability index for project A is closest to ________. A) 0.16 B) 32.28 C) 0.24 D) 16.14

C) 0.15 PI = NPV / Investment (or resources consumed) NPV = -73 + 30 / (1 + 0.16 )^1 + 30 / (1 + 0.16 )^2 + 30 / (1 + 0.16 )^3 + 30 / (1 + 0.16 )^4 = 10.9454191 So, PI = 10.9454191 / 73 = 0.1499

project / cash flow project A / B 0 / -100 / -73 1 / 40 / 30 2 / 50 / 30 3 / 60 / 30 4 / NA / 30 discount rate 0.16 The profitability index for project B is closest to ________. A) 22.49 B) 14.99 C) 0.15 D) 0.09

C) Project B and Project C

project /initial investment / cash flow A / 35 mill / 14 mill / 4 yrs B / 21 mill / 7 mill / 5 yrs C / 14 mill / 7 mill / 4 yrs D / 21 mill / 10.5 mill / 3 yrs An investor has a budget of $35 million. He can invest in the projects shown above. If the cost of capital is 8%, what investment or investments should he make? A) Project A B) Project B C) Project B and C D) Project C and D

B) Project B NPVA= $615.55 , NPVB= $4521.61

time / Project A / B time 0 / -10,000 / -10,000 time 1 / 5,000 / 4,000 time 2 / 4,000 / 3,000 time 3 / 3,000 / 10,000 If WiseGuy Inc is choosing one of the above mutually exclusive projects (Project A or Project B), given a discount rate of 7%, which should the company choose? A) Project A B) Project B C) Neither project - both have negative NPV. D) Both projects - both have positive NPV.

C) The investor should take investment B since it has a greater net present value (NPV). Using a financial calculator, NPV(A) = $17,629; NPV(B) = $44,048; comparison of NPV is used to decide between mutually exclusive projects.

time / investment A / B 0 / -1 mill / -1mill 1 / 300,000 / 500,000 2 / 400,000 / 400,000 3 / 500,000 / 300,000 An investor is considering the two investments shown above. Her cost of capital is 8%. Which of the following statements about these investments is true? A) The investor should take investment A since it has a greater net present value (NPV). B) The investor should take investment A since it has a greater internal rate of return (IRR). C) The investor should take investment B since it has a greater net present value (NPV). D) The investor should take investment B since it has a greater internal rate of return (IRR).

Neither investment should be taken since they both have a negative net present value (NPV). Using a financial calculator, NPV(A) = -$0.01906 million, IRR(A) = 7.56%, NPV(B) = -$0.014567, IRR(B) = 6.46%; Comparison of NPV is used to decide between mutually exclusive projects.

time / investment A / B 0 / -1.5 mill / -1.3 mill 1 / 300,000 / 500,000 2 / 300,000 / 400,000 3 / 300,000 / 300,000 4 / 500,000 / 200,000 5 / 500,000 / 100,000 discount rate A= 8%, B=7% An investor is considering the two investments shown above. Which of the following statements about these investments is true? A) The investor should take investment A since it has a greater net present value (NPV). B) The investor should take investment A since it has a greater internal rate of return (IRR). C) The investor should take investment B since it has a greater net present value (NPV). D) Neither investment should be taken since they both have a negative net present value (NPV).

B) Project B

time / project A/ B 0 / -10,000 / -10,000 1 / 5,000 / 4,000 2 / 4,000 / 3,000 3 / 3,000 / 10,000 If WiseGuy Inc. uses IRR rule to choose projects, which of the projects (Project A or Project B) will rank highest? A) Project A B) Project B C) Project A and Project B have the same ranking. D) Cannot calculate a payback period without a discount rate

A) Project A

time / project A/ B 0 / -10,000 / -10,000 1 / 5,000 / 4,000 2 / 4,000 / 3,000 3 / 3,000 / 10,000 If WiseGuy Inc. uses payback period rule to choose projects, which of the projects (Project A or B) will rank highest? A) Project A B) Project B C) Project A and Project B have the same ranking. D) Cannot calculate a payback period without a discount rate.

A) $0

year / cash flow 0 - -12,000 1 - 3,000 2 - 3,000 3 - 3,000 4 - 3,000 Given the cash flows in the table above, the point at which the NPV profile crosses the vertical axis is ________. A) $0 B) $12,000 C) 23% D) 19%

C) -$3077 NPV = -12,000 + 3000 / (1 + 0.13 )^1 + 3000 / (1 + 0.13 )^2 + 3000 / (1 + 0.13 )^3 + 3000 / (1 + 0.13 )^4 = -$3077

year / cash flow 0 - -12,000 1 - 3,000 2 - 3,000 3 - 3,000 4 - 3,000 If the appropriate discount rate for this project is 13%, then the net present value (NPV) is closest to ________. A) $24,000 B) -$1846 C) -$3077 D) -$2154

B) 2.40 years Payback = 12,000 / 5000 = 2.40 years

year / cash flow 0 / -12,000 1 / 5,000 2 / 5,000 3 / 5,000 4 / 5,000 Assume the appropriate discount rate for this project is 13%. The payback period for this project is closest to ________. A) 2.88 years B) 2.40 years C) 1.92 years D) 3.60 years

A) 0.17

year / cash flow 0 / -8,000 1 / 3200 2 / 3200 3 / 3200 4 / 3200 Assume the appropriate discount rate for this project is 14%. The profitability index for this project is closest to ________. A) 0.17 B) 0.25 C) 0.66 D) 0.18

A) $3.56 P0 using the capital gain rate formula = ($1.70 + $62 ) / (1 + 0.09 ) = $58.44; Capital gain = P1 - P0 = $62 - $58.44 = $3.56

Credenza Industries is expected to pay a dividend of $1.70 at the end of the coming year. It is expected to sell for $62 at the end of the year. If its equity cost of capital is 9%, what is the expected capital gain from the sale of this stock at the end of the coming year? A) $3.56 B) $56.88 C) $5.12 D) $58.44

D) 5.77% FV = 1000 PV = -431 PMT = 0 N = 15 Compute I = 5.7714 %.

Consider a zero-coupon bond with a $1000 face value and 15 years left until maturity. If the bond is currently trading for $431 , then the yield to maturity on this bond is closest to ________. A) 2.89% B) 56.90% C) 43.10% D) 5.77%

A) a 15-year bond with a notional value of $5000 and a coupon rate of 4.6% paid quarterly

0 1 2 3 59 60 +----+----+----+--- . . . ----+-----+ $57.5 $57.5 $57.5 $57.5 $5057.5 A corporation issues a bond that generates the above cash flows. If the periods are of 3 -month intervals, which of the following best describes that bond? A) a 15-year bond with a notional value of $5000 and a coupon rate of 4.6% paid quarterly B) a 15-year bond with a notional value of $5000 and a coupon rate of 1.2% paid annually C) a 30-year bond with a notional value of $5000 and a coupon rate of 3.5% paid semiannually D) a 60-year bond with a notional value of $5000 and a coupon rate of 4.6% paid quarterly

A) the terms of the bond

12. A bond certificate includes ________. A) the terms of the bond B) the individual to whom payments will be made C) the yield to maturity of the bond D) the price of the bond

C) 14.33% $0.28 + $3.15 - $3.00 = $0.43; cost of capital = $0.43 /$3.00 = 14.33%

Jumbuck Exploration has a current stock price of $3.00 and is expected to sell for $3.15 in one yearʹs time, immediately after it pays a dividend of $0.28 . Which of the following is closest to Jumbuck Explorationʹs equity cost of capital? A) 7.17% B) 8.60% C) 14.33% D) 17.91%

A) A FV = $1,000 PMT = $70 N = 10 I = 7.00% (yield for A rating) Compute PV = $1,000.00.

Luther Industries needs to raise $25 million to fund a new office complex. The company plans on issuing ten-year bonds with a face value of $1,000 and a coupon rate of 7.0% (annual payments). The following table summarizes the YTM for similar ten-year corporate bonds of various credit ratings: AAA- 6.70% AA- 6.80% A- 7.00% BBB- 7.40% BB- 8.00% What rating must Luther receive on these bonds if they want the bonds to be issued at par? A) A B) B C) BBB D) AA

C) $23.33 PV0 = $2.10 / 0.09 = $23.33

Matilda Industries pays a dividend of $2.10 per share and is expected to pay this amount indefinitely. If Matildaʹs equity cost of capital is 9%, which of the following would be closest to Matildaʹs stock price? A) $14.00 B) $18.66 C) $23.33 D) $29.16

A) 1.4% 6.1% - 4.7% (B Yield - risk-free yield) = 1.4%

Security / Yield (%) treasury- 4.7 AAA Corporate- 4.9 BBB Corporate- 5.7 B Corporate- 6.1 The credit spread of the B corporate bond is closest to ________. A) 1.4% B) 1.70% C) 2.80% D) 0.70%

B) $222.5 Coupon payment = (coupon rate × face value)/number of coupons per year = (0.089 × 5000 ) / 2 = $222.5

The Sisyphean Company has a bond outstanding with a face value of $5000 that matures in 10 years. The bond certificate indicates that the stated coupon rate for this bond is 8.9% and that the coupon payments are to be made semiannually. How much will each semiannual coupon payment be? A) $445.0 B) $222.5 C) $667.5 D) $890.0

D) When prices are quoted in the bond market, they are conventionally quoted in increments of $1,000.

Which of the following statements regarding bonds and their terms is FALSE? A) Zero-coupon bonds are also called pure discount bonds. B) The internal rate of return (IRR) of an investment opportunity is the discount rate at which the net present value (NPV) of the investment opportunity is equal to zero. C) The yield to maturity for a zero-coupon bond is the return you will earn as an investor from holding the bond to maturity and receiving the promised face value payment. D) When prices are quoted in the bond market, they are conventionally quoted in increments of $1,000.

C) $82.55 Calculate the PV of the bond with FV = $100, YTM = 6.6%, and N = 3, which = $82.55

security / yield (%) treasury - 5.2 AAA corporate - 5.4 BBB corporate - 6.6 B corporate - 6.9 The above table shows the yields to maturity on a number of three-year, zero-coupon securities. What is the price per $100 of the face value of a three-year, zero-coupon corporate bond with a BBB rating? A) $99.06 B) $115.57 C) $82.55 D) $66.04

B) 2.0% 7.2 - 5.2% = 2

security / yield (%) treasury - 5.2 AAA corporate - 5.4 BBB corporate - 6.6 B corporate - 6.9 The above table shows the yields to maturity on a number of two -year, zero-coupon securities. What is the credit spread on a two -year, zero-coupon corporate bond with a B rating? A) 2.4% B) 2.0% C) 2.8% D) 1.6%

D) All of the above are true.

13. Which of the following is true about the face value of a bond? A) It is the notional amount we use to compute coupon payments. B) It is the amount that is repaid at maturity. C) It is usually denominated in standard increments, such as $1,000. D) All of the above are true.

C) Such bonds are purchased at a discount, below their face value.

3. How are investors in zero-coupon bonds compensated for making such an investment? A) Such bonds are purchased at their face value and sold at a premium on a later date. B) Such bonds make regular interest payments. C) Such bonds are purchased at a discount, below their face value. D) Such bonds have a lower face value as compared to other bonds of similar term.

D) When an investor buys a bond from an issuer, the investor is giving money to the issuer, with the assurance that it will be repaid at a date in the future.

3. Which of the following best illustrates why a bond is a type of loan? A) The issuers of bonds make regular payments to bondholders. B) When a company issues a bond, the buyer of that bond becomes an owner of the issuing company. C) Funds raised are used to finance long-term projects. D) When an investor buys a bond from an issuer, the investor is giving money to the issuer, with the assurance that it will be repaid at a date in the future.

D) $105.34 Calculate the PV of the bond with FV = $100, YTM = 1.95%, PMT = 3.35, and N = 4 which = $105.34

A firm issues two -year bonds with a coupon rate of 6.7%, paid semi-annually. The credit spread for this firmʹs two -year debt is 0.8%. New two -year Treasury notes are being issued at par with a coupon rate of 3.1%. What should the price of the firmʹs outstanding two -year bonds be per $100 of face value? A) $126.40 B) $147.47 C) $84.27 D) $105.34

B) $400 The expected difference in this bondʹs price will be $400 since the bond pays semiannual coupon of $400 .

A bond has a $10,000 face value, ten years to maturity, and 8% semiannual coupon payments. What would be the expected difference in this bondʹs price immediately before and immediately after the next coupon payment? A) $800 B) $400 C) $1200 D) $200

D) 9.51% Using FV = $1000 , periods to maturity = 5, PMT = 55.00 , and PV = $846.11 , calculate discount rate = 9.5089 % per period.

A bond has five years to maturity, a $1000 face value, and a 5.5% coupon rate with annual coupons. What is its yield to maturity if it is currently trading at $846.11 ? A) 11.41% B) 13.31% C) 7.61% D) 9.51%

D) B or C above

A bond is currently trading below par. Which of the following must be true about that bond? A) The bondʹs yield to maturity is less than its coupon rate. B) The bond is a zero-coupon bond. C) The bondʹs yield to maturity is greater than its coupon rate. D) B or C above

A) $883.91 FV = 1000 PMT = 30.5 N = 16 I = 4.05 Solve for PV

A company issues a ten-year $1,000 face value bond at par with a coupon rate of 6.1% paid semiannually. The YTM at the beginning of the third year of the bond (8 years left to maturity) is 8.1%. What is the new price of the bond? A) $883.91 B) $1060.69 C) $1237.47 D) $1,000.00

C) -8.13% The new price would be $918.73 . ($918.73 - $1000)/1000 = -8.13%

A company issues a ten-year $1,000 face value bond at par with a coupon rate of 6.7% paid semiannually. The YTM at the beginning of the third year of the bond (8 years left to maturity) is 8.1%. What was the percentage change in the price of the bond over the past two years? A) -6.50% B) -9.75% C) -8.13% D) -11.38%

C) 6%

A company releases a five-year bond with a face value of $1000 and coupons paid semiannually. If market interest rates imply a YTM of 6%, what should be the coupon rate offered if the bond is to trade at par? A) 3% B) 5% C) 6% D) 7%

B) an investment grade bond

A corporate bond which receives a BBB rating from Standard & Poorʹs is considered ________. A) a junk bond B) an investment grade bond C) a defaulted bond D) a high-yield bond

A) $932.28 Calculate the PV of the bond with FV = $1,000, YTM = 3.150%, PMT = 23.50 N = 10, which = $932.28

A firm issues 5-year bonds with a coupon rate of 4.7%, paid semi-annually. The credit spread for this firmʹs 5-year debt is 1.2%. New 5-year Treasury notes are being issued at par with a coupon rate of 5.1%. What should the price of the firmʹs outstanding 5-year bonds be if their face value is $1,000? A) $932.28 B) $12.00 C) $1305.19 D) $745.82

D) $1057.23 Calculate the clean price right after second coupon payment using FV = $1,000. YTM = 5.0% PMT = 60 N = 3; clean price = $1027.23 ; accrued interest six months after last coupon is $30; dirty price = $1027.23 + $30 = $1057.23

A five-year bond with a $1,000 face value has a yield to maturity is 5.0% and itʹs coupon rate is 6.0% paid annually. The dirty price of this bond exactly 6 months after its second coupon payment is closest to ________. A) $1087.23 B) $1147.23 C) $1027.23 D) $1057.23

C) $553.15 Price = (Face value) / (1 + YTM)^N. Price = ($1000 ) / (1 + 6.1%)^10 = $553.15

A risk-free, zero-coupon bond has 15 years to maturity. Which of the following is closest to the price per $1000 of face value that the bond will trade at if the YTM is 6.1%? A) $663.78 B) $774.42 C) $553.15 D) $885.05

A) 1.936% YTM = (Face Value / Price)^(1/n) - 1; YTM = ($5000 / $3750 )^(1/15) - 1 = 1.936%

A risk-free, zero-coupon bond with a $5000 face value has 15 years to maturity. The bond currently trades at $3750 . What is the yield to maturity of this bond? A) 1.936% B) 0.968% C) 62.500 % D) 75.000 %

D) $4114 Price = (Face value) / (1 + YTM)^N. Price = ($10,000 ) / (1 + 6.1%)^15 = $4114

A risk-free, zero-coupon bond with a face value of $10,000 has 15 years to maturity. If the YTM is 6.1%, which of the following would be closest to the price this bond will trade at? A) $4937 B) $5760 C) $6582 D) $4114

D) 17.39% Capital gain rate = (P1 - P0) / P0 = ($27.00 - $23.00 ) / $23.00 = 17.39%

A stock is bought for $23.00 and sold for $27.00 one year later, immediately after it has paid a dividend of $1.50. What is the capital gain rate for this transaction? A) 3.48% B) 8.70% C) 13.91% D) 17.39%

A) $8.86 P0 = $0.70 / 0.079 = $8.86

A stock is expected to pay $0.70 per share every year indefinitely. If the current price of the stock is $18.90 , and the equity cost of capital for the company that released the shares is 7.9%, what price would an investor be expected to pay per share five years into the future? A) $8.86 B) $14.18 C) $14.62 D) $15.06

A) $14.88 P0 = $1.25 / 0.084 = $14.88

A stock is expected to pay $1.25 per share every year indefinitely and the equity cost of capital for the company is 8.4%. What price would an investor be expected to pay per share ten years in the future? A) $14.88 B) $22.32 C) $29.76 D) $37.20

D) $23.64 P0 = $2.60 / 0.11 = $23.64

A stock is expected to pay $2.60 per share every year indefinitely and the equity cost of capital for the company is 11%. What price would an investor be expected to pay per share next year? A) $5.91 B) $11.82 C) $17.73 D) $23.64

C) 4.00%

A ten-year, zero-coupon bond with a yield to maturity of 4% has a face value of $1000 . An investor purchases the bond when it is initially traded, and then sells it four years later. What is the rate of return of this investment, assuming the yield to maturity does not change? A) 3.20% B) 2.40% C) 4.00% D) 2.00%

C) semiannually

A university issues a bond with a face value of $5000 and a coupon rate of 4.41% that matures on July 15, 2018. The holder of such a bond receives coupon payments of $110.25 . How frequently are coupon payments made in this case? A) monthly B) quarterly C) semiannually D) annually

C) 100

A ʺround lotʺ consists of how many shares? A) 1 B) 10 C) 100 D) 1,000

A) $28.87 Using a financial calculator, PV = -$22.60 PMT = $1.20 n = 6 I = 18% / 2; calculate FV = $28.87 .

Coolibah Holdings is expected to pay dividends of $1.20 every six months for the next three years. If the current price of Coolibah stock is $22.60 , and Coolibahʹs equity cost of capital is 18%, what price would you expect Coolibahʹs stock to sell for at the end of three years? A) $28.87 B) $31.76 C) $33.20 D) $34.64

D) 94.61 Assuming face value of the coupon is $100, P = $100 / (1 + 5.7 / 100) = 94.61

Security / Yield (%) treasury- 5.5 AAA Corporate- 5.7 BBB Corporate- 6.5 B Corporate- 7.1 The price (expressed as a percentage of the face value) of a one-year, zero-coupon corporate bond with a AAA rating is closest to ________. A) 113.53 B) 132.45 C) 75.69 D) 94.61

C) $1054.48 Calculate the PV of the bond with FV = $1,000, YTM = 6.1%, PMT = 65.00 N = 30, which = $1054.48

Security / Yield (%) AAA Corporate- 5.6 AA Corporate- 5.7 A Corporate- 6.1 BBB Corporate-6.4 BB Corporate- 7.0 A mining company needs to raise $100 million in order to begin open-pit mining of a coal seam. The company will fund this by issuing 30-year bonds with a face value of $1,000 and a coupon rate of 6.5%, paid annually. The above table shows the yield to maturity for similar 30-year corporate bonds of different ratings. If the companyʹs bonds are rated A, what will be their selling price? A) $1265.37 B) $1476.27 C) $1054.48 D) $843.58

C) 23,724 FV = $1,000 PMT = $73.00 N = 10 I = 6.55 Compute PV = $1053.79 . Total number of bonds = $25,000,000 / $1053.79 = 23,723.89 .

Luther Industries needs to raise $25 million to fund a new office complex. The company plans on issuing ten-year bonds with a face value of $1,000 and a coupon rate of 7.3% (annual payments). The following table summarizes the YTM for similar ten-year corporate bonds of various credit ratings: AAA- 6.55% AA- 6.75% A- 6.85% BBB- 7.25% BB- 7.75% Assuming that Lutherʹs bonds receive a AAA rating, the number of bonds that Luther must issue to raise the needed $25 million is closest to ________. A) 28,469 B) 33,213 C) 23,724 D) 18,979

A) $1064 FV = $1,000 PMT = $75 N = 10 I = 6.60 Compute PV = $1064.40 .

Luther Industries needs to raise $25 million to fund a new office complex. The company plans on issuing ten-year bonds with a face value of $1,000 and a coupon rate of 7.5% (annual payments). The following table summarizes the YTM for similar ten-year corporate bonds of various credit ratings: Rating / YTM AAA- 6.60% AA- 6.80% A- 6.90% BBB- 7.30% BB- 7.80% Assuming that Lutherʹs bonds are rated AAA, their price will be closest to ________. A) $1064 B) $1277 C) $1490 D) $852

D) 2.85% Calculate the discount rate that equates $100 to $94.53 in two years. 1 + YTMn = (Face value / price)1/n. YTMn = 2.85%

Maturity (years) /price 1- $97.25 2- $94.53 3- $91.83 4- $89.23 5- $87.53 The above table shows the price per $100-face value bond of several risk-free, zero-coupon bonds. What is the yield to maturity of the two year, zero-coupon, risk-free bond shown? A) 1.43% B) 5.71% C) 0.05% D) 2.85%

D) $16.00 (1 + 0.12 ) × $15.00 = $16.80 ; $16.80 - $0.80 = $16.00

Owen Inc. has a current stock price of $15.00 and is expected to pay a $0.80 dividend in one year. If Owenʹs equity cost of capital is 12%, what price would its stock be expected to sell for immediately after it pays the dividend? A) $11.20 B) $12.80 C) $16.80 D) $16.00

A) $21.96 Using a financial calculator, PV = -31.27 PMT = 5.70 n = 4 I = 12; Calculate FV = $21.96

Rylan Industries is expected to pay a dividend of $5.70 year for the next four years. If the current price of Rylan stock is $31.27 , and Rylanʹs equity cost of capital is 12%, what price would you expect Rylanʹs stock to sell for at the end of the four years? A) $21.96 B) $39.53 C) $17.57 D) $61.49

A) 0.8% 5.8% - 5.0% (BBB Yield - risk-free yield) = 0.8%

Security / Yield (%) treasury- 5.0 AAA Corporate- 5.2 BBB Corporate- 5.8 B Corporate- 6.6 The credit spread of the BBB corporate bond is closest to ________. A) 0.8% B) 1.10% C) 1.60% D) 0.40%

D) 93.90 Assuming face value of the coupon is $100, P = $100 / (1 + 6.5 / 100) = 93.90

Security / Yield (%) treasury- 5.5 AAA Corporate- 5.7 BBB Corporate- 6.5 B Corporate- 7.1 The price (expressed as a percentage of the face value) of a one-year, zero-coupon corporate bond with a BBB rating is closest to ________. A) 112.68 B) 131.46 C) 75.12 D) 93.90

B) $2.15 100 × 4.300% = $4.30; $4.30 / 2 = $2.15

Shown above is information from FINRA regarding one of Bank of Americaʹs bonds. How much would the holder of such a bond earn each coupon payment for each $100 in face value if coupons are paid semiannually? A) $1.49 B) $2.15 C) $2.32 D) $4.30

C) $4.00 $97.05 × 4% = $4.00

Shown above is information from FINRA regarding one of Caterpillar Financial Servicesʹ bonds. How much would the holder of such a bond earn each coupon payment for each $100 in face value if coupons are paid annually? A) $1.38 B) $3.95 C) $4.00 D) $4.36

D) 15% $29.50 +$0.59 - $26.10 = $3.99; $3.99 / $26.10 = 15.29%; rounded to 15%

The Busby Corporation had a share price at the start of the year of $26.10, paid a dividend of $0.59 at the end of the year, and had a share price of $29.50 at the end of the year. Which of the following is closest to the rate of return of investments in companies with equal risk to The Busby Corporation for this period? A) 14% B) 13% C) 12% D) 15%

B) $816 FV = 1000 I = 5.55 (11.1 /2) PMT = $40 ($80/2) N = 20 (10 × 2) Compute PV = 815.54

The Sisyphean Company has a bond outstanding with a face value of $1000 that reaches maturity in 10 years. The bond certificate indicates that the stated coupon rate for this bond is 8.0% and that the coupon payments are to be made semiannually. Assuming the appropriate YTM on the Sisyphean bond is 11.1%, then the price that this bond trades for will be closest to ________. A) $652 B) $816 C) $979 D) $1142

A) $1063 FV = $1000 I = 3.65 (7.3/2) PMT = $41 N = 20 (10 × 2) Compute PV = 1063.10

The Sisyphean Company has a bond outstanding with a face value of $1000 that reaches maturity in 10 years. The bond certificate indicates that the stated coupon rate for this bond is 8.2% and that the coupon payments are to be made semiannually. Assuming the appropriate YTM on the Sisyphean bond is 7.3%, then the price that this bond trades for will be closest to ________. A) $1063 B) $850 C) $1276 D) $1488

C) a premium As the coupon rate of 10.0% is more than the YTM of 7.5% on the bonds, so the bonds will trade at a premium.

The Sisyphean Company has a bond outstanding with a face value of $1000 that reaches maturity in 5 years. The bond certificate indicates that the stated coupon rate for this bond is 10.0% and that the coupon payments are to be made semiannually. Assuming the appropriate YTM on the Sisyphean bond is 7.5%, then this bond will trade at ________. A) par B) a discount C) a premium D) none of the above

B) a discount As the coupon rate of 8.1% is less than the YTM of 10.6% on the bonds, so they will trade at a discount.

The Sisyphean Company has a bond outstanding with a face value of $1000 that reaches maturity in 5 years. The bond certificate indicates that the stated coupon rate for this bond is 8.1% and that the coupon payments are to be made semiannually. Assuming the appropriate YTM on the Sisyphean bond is 10.6%, then this bond will trade at ________. A) a premium B) a discount C) par D) none of the above

C) 6.56% FV = $1000 PMT = $42.50 ($85 / 2) N = 10 (5 × 2) PV = -$1081.73 Compute I = 3.2783 × 2 = 6.5565 %.

The Sisyphean Company has a bond outstanding with a face value of $1000 that reaches maturity in five years. The bond certificate indicates that the stated coupon rate for this bond is 8.5% and that the coupon payments are to be made semiannually. Assuming that this bond trades for $1081.73 , then the YTM for this bond is closest to ________. A) 5.2% B) 7.87% C) 6.56% D) 9.18%

Coupon payments = (coupon rate × face value) / number of coupons per year = (.08 × $1,000) / 2 = $40 FV = 1,000 I = 4.4% (8.8/2) PMT = $40 ($80/2) N = 30 (15 × 2) Compute PV = $934.07

The Sisyphean Company has a bond outstanding with a face value of $1000 that reaches maturity in 15 years. The bond certificate indicates that the stated coupon rate for this bond is 8% and that the coupon payments are to be made semiannually. How much are each of the semiannual coupon payments? Assuming the appropriate YTM on the Sisyphean bond is 8.8%, then at what price should this bond trade for?

D) 9.9% FV = $5000 PMT = $205 ($410 /2) N = 16 (8 × 2) PV = -$4541.53 Compute I = 4.9426 × 2 = 9.8852 %.

The Sisyphean Company has a bond outstanding with a face value of $5000 that reaches maturity in 8 years. The bond certificate indicates that the stated coupon rate for this bond is 8.2% and that the coupon payments are to be made semiannually. Assuming that this bond trades for $4541.53 , then the YTM for this bond is closest to ________. A) 7.9% B) 11.9% C) 13.8% D) 9.9%

C) that the yield curve is downward sloping

The following table summarizes prices of various default-free zero-coupon bonds (expressed as a percentage of face value): Maturity (years)/ price 1- 94.52 2-89.68 3-85.40 4-81.65 5- 78.35 Based upon the information provided in the table above, you can conclude ________. A) that the yield curve is flat B) nothing about the shape of the yield curve C) that the yield curve is downward sloping D) that the yield curve is upward sloping

A) 5.40% Yield = (100/price)^(1/n) - 1 = (100/85.40 )^(1/3) - 1 = 0.054 or 5.40%

The following table summarizes prices of various default-free zero-coupon bonds (expressed as a percentage of face value): Maturity (years)/ price 1- 94.52 2-89.68 3-85.40 4-81.65 5- 78.35 The yield to maturity for the three -year zero-coupon bond is closest to ________. A) 5.40% B) 2.70% C) 10.80% D) 0.15%

C) $38.09 Using a financial calculator, CF0 = 0, CF1 = 1.75,CF2 = (41 + 2.35 ) = 43.35; calculate NPV at I = 9%, equals $38.09

Valorous Corporation will pay a dividend of $1.75 per share at this yearʹs end and a dividend of $2.35 per share at the end of next year. It is expected that the price of Valorousʹ stock will be $41 per share after two years. If Valorous has an equity cost of capital of 9%, what is the maximum price that a prudent investor would be willing to pay for a share of Valorous stock today? A) $32.38 B) $36.19 C) $38.09 D) $39.99

A) 4.888% Using FV = $10,000 periods to maturity = 16 discount rate = 3.25%, calculate PMT = $244.4000 ; annual coupon payment = $244.4000 × 2 = $488.8000 ; coupon rate = 4.888%.

What is the coupon rate of an eight-year, $10,000 bond with semiannual coupons and a price of $9006.6568 , if it has a yield to maturity of 6.5%? A) 4.888% B) 5.87% C) 6.84% D) 3.91%

B) the bondʹs actual cash price

What is the dirty price of a bond? A) the bondʹs price based only on the bondʹs yield B) the bondʹs actual cash price C) the bondʹs price based only on coupon payments D) the bondʹs price less an adjustment for changes in interest rates

C) 6.383% Calculate the discount rate that equates $10,000 to $9400 in one year.

What is the yield to maturity of a one-year, risk-free, zero-coupon bond with a $10,000 face value and a price of $9400 when released? A) 3.191% B) 6.000% C) 6.383% D) 0.009%

C) 6.49% Using FV = $10,000 , periods to maturity = 20, PMT = 270.00 PV = $9207.93 , calculate discount rate = 3.2445 % per period; 3.2445 × 2 = 6.489%.

What is the yield to maturity of a ten-year, $10,000 bond with a 5.4% coupon rate and semiannual coupons if this bond is currently trading for a price of $9207.93 ? A) 7.79% B) 9.08% C) 6.49% D) 3.24%

B) 5.26% Using FV = $5000 , periods to maturity = 16, PMT = 110.00 , PV = $4724 , calculate discount rate = 2.6275% per period; 2.6275 × 2 = 5.255%.

What is the yield to maturity of a(n) eight-year, $5000 bond with a 4.4% coupon rate and semiannual coupons if this bond is currently trading for a price of $4723.70? A) 6.31% B) 5.26% C) 7.36% D) 2.63%

A) $8494.26 Using FV = $10,000 , periods to maturity = 10, PMT = 305.00 , periodic discount rate = 5.0% per period, calculate PV = $8494.26 .

What must be the price of a $10,000 bond with a 6.1% coupon rate, semiannual coupons, and five years to maturity if it has a yield to maturity of 10% APR? A) $8494.26 B) $10,193.11 C) $11,891.97 D) $6795.41

C) $800.68 Using FV = $1000 periods to maturity = 20 PMT = $58.00 and discount rate = 7.8% per period, calculate PV = $800.68

What must be the price of a $1000 bond with a 5.8% coupon rate, annual coupons, and 20 years to maturity if YTM is 7.8% APR? A) $960.82 B) 1120.95 C) $800.68 D) $640.54

D) generally lacks the characteristics of a desirable investment

Which of the following best describes a bond rated by Standard & Poorʹs and Moody as B? A) judged to be high quality by all standards B) considered to be medium grade obligations C) neither highly protected nor poorly secured D) generally lacks the characteristics of a desirable investment

A) a five-year bond with a $2,000 face value whose yield to maturity is 7.0% and coupon rate is 7.2% APR paid semiannually

Which of the following bonds is trading at a premium? A) a five-year bond with a $2,000 face value whose yield to maturity is 7.0% and coupon rate is 7.2% APR paid semiannually B) a ten-year bond with a $4,000 face value whose yield to maturity is 6.0% and coupon rate is 5.9% APR paid semiannually C) a 15-year bond with a $10,000 face value whose yield to maturity is 8.0% and coupon rate is 7.8% APR paid semiannually D) a two-year bond with a $50,000 face value whose yield to maturity is 5.2% and coupon rate is 5.2% APR paid monthly

C) a bond with a $1,000 face value trading at $1,000

Which of the following bonds is trading at par? A) a bond with a $2,000 face value trading at $1,987 B) a bond with a $1,000 face value trading at $999 C) a bond with a $1,000 face value trading at $1,000 D) a bond with a $2,000 face value trading at $2,012

A) a ten-year bond with a $2,000 face value whose yield to maturity is 5.8% and coupon rate is 5.8% APR paid semiannually

Which of the following bonds will be least sensitive to a change in interest rates? A) a ten-year bond with a $2,000 face value whose yield to maturity is 5.8% and coupon rate is 5.8% APR paid semi-annually B) a 15-year bond with a $5,000 face value whose yield to maturity is 7.4% and coupon rate is 6.2% APR paid annually C) a 20-year bond with a $3,000 face value whose yield to maturity is 6.0% and coupon rate is 5.4% APR paid semi-annually D) a 30-year bond with a $1,000 face value whose yield to maturity is 5.5% and coupon rate is 6.4% APR paid annually

C) a 20-year bond with a $1,000 face value whose coupon rate is 5.8% APR paid semiannually

Which of the following bonds will be most sensitive to a change in interest rates if all bonds have the same initial yield to maturity? A) a ten-year bond with a $1,000 face value whose coupon rate is 5.8% APR paid semiannually B) a ten-year bond with a $1,000 face value whose coupon rate is 7.4% APR paid semiannually C) a 20-year bond with a $1,000 face value whose coupon rate is 5.8% APR paid semiannually D) a 20-year bond with a $1,000 face value whose coupon rate is 7.4% APR paid semiannually

D) a 30-year bond with a $1,000 face value whose yield to maturity is 5.5% and coupon rate is 6.4% APR paid annually

Which of the following bonds will be most sensitive to a change in interest rates? A) a ten-year bond with a $2,000 face value whose yield to maturity is 5.8% and coupon rate is 5.8% APR paid semiannually B) a 15-year bond with a $5,000 face value whose yield to maturity is 7.4% and coupon rate is 6.2% APR paid annually C) a 20-year bond with a $3,000 face value whose yield to maturity is 6.0% and coupon rate is 5.4% APR paid semiannually D) a 30-year bond with a $1,000 face value whose yield to maturity is 5.5% and coupon rate is 6.4% APR paid annually

A) by increasing its retention rate

Which of the following is NOT a way that a firm can increase its dividend? A) by increasing its retention rate B) by decreasing its shares outstanding C) by increasing its earnings (net income) D) by increasing its dividend payout rate

D) one with a face value of $1,000, a YTM of 5.9%, and 20 years to maturity A) Price = $1,000 / (1 + 4.8%)5 = $791 B) Price = $1,000 / (1 + 3.2%)8 = $777 C) Price = $1,000 / (1 + 6.8%)10 = $518 D) Price = $1,000 / (1 + 5.9%)20 =$318 (lowest price)

Which of the following risk-free, zero-coupon bonds could be bought for the lowest price? A) one with a face value of $1,000, a YTM of 4.8%, and 5 years to maturity B) one with a face value of $1,000, a YTM of 3.2%, and 8 years to maturity C) one with a face value of $1,000, a YTM of 6.8%, and 10 years to maturity D) one with a face value of $1,000, a YTM of 5.9%, and 20 years to maturity

A) We cannot use the dividend-discount model to value the stock of a firm with rapid or changing growth.

Which of the following statements is FALSE of the dividend-discount model? A) We cannot use the dividend-discount model to value the stock of a firm with rapid or changing growth. B) As firms mature, their growth slows to rates more typical of established companies. C) The dividend-discount model values the stock based on a forecast of the future dividends paid to shareholders. D) The simplest forecast for the firmʹs future dividends states that they will grow at a constant rate, i.e., forever.

A) If a firm wants to increase its share price, it must diversify.

Which of the following statements is FALSE regarding profitable and unprofitable growth? A) If a firm wants to increase its share price, it must diversify. B) If a firm retains more earnings, it will pay out less of those earnings, reducing its dividends. C) A firm can increase its growth rate by retaining more of its earnings. D) Cutting a firmʹs dividend to increase investment will raise the stock price if the new investment has a positive net present value (NPV).

B) Total return equals earnings multiplied by the dividend payout rate.

Which of the following statements is FALSE? A) As firms mature, their earnings exceed their investment needs and they begin to pay dividends. B) Total return equals earnings multiplied by the dividend payout rate. C) Cutting the firmʹs dividend to increase investment will raise the stock price if, and only if, the new investments have a positive net present value (NPV). D) We cannot use the constant dividend growth model to value the stock of a firm with rapid or changing growth.

D) According to the constant dividend growth model, the value of the firm depends on the current dividend level, divided by the equity cost of capital plus the grow rate.

Which of the following statements is FALSE? A) Estimating dividends, especially for the distant future, is difficult. B) A firm can only pay out its earnings to investors or reinvest their earnings. C) Successful young firms often have high initial earnings growth rates. D) According to the constant dividend growth model, the value of the firm depends on the current dividend level, divided by the equity cost of capital plus the grow rate.

C) A rise in interest rates causes bond prices to fall.

Which of the following statements is true of bond prices? A) A fall in bond prices causes interest rates to fall. B) A fall in interest rates causes a fall in bond prices. C) A rise in interest rates causes bond prices to fall. D) Bond prices and interest rates are not connected.

B) By convention, the coupon rate is expressed as an effective annual rate.

Which of the following statements regarding bonds and their terms is FALSE? A) Bonds are securities sold by governments and corporations to raise money from investors today in exchange for a promised future payment. B) By convention, the coupon rate is expressed as an effective annual rate. C) Bonds typically make two types of payments to their holders. D) The time remaining until the repayment date is known as the term of the bond.

B) Unlike the case of bonds that pay coupons, for zero-coupon bonds, there is no formula to solve for the yield to maturity.

Which of the following statements regarding bonds and their terms is FALSE? A) One advantage of quoting the yield to maturity rather than the price is that the yield is independent of the face value of the bond. B) Unlike the case of bonds that pay coupons, for zero-coupon bonds, there is no formula to solve for the yield to maturity. C) Because we can convert any bond price into a yield, and vice versa, bond prices and yields are often used interchangeably. D) The internal rate of return (IRR) of a bond is given a special name, the yield to maturity (YTM).

B) Prior to its maturity date, the price of a zero-coupon bond is always greater than its face value.

Which of the following statements regarding bonds and their terms is FALSE? A) The amount of each coupon payment is determined by the coupon rate of the bond. B) Prior to its maturity date, the price of a zero-coupon bond is always greater than its face value. C) The zero-coupon bond has no periodic interest payments. D) Treasury bills are U.S. government bonds with a maturity of up to one year.

C) The only cash payments the investor will receive from a zero-coupon bond are the interest payments that are paid up until the maturity date.

Which of the following statements regarding bonds and their terms is FALSE? A) The bond certificate typically specifies that the coupons will be paid periodically until the maturity date of the bond. B) The bond certificate indicates the amounts and dates of all payments to be made. C) The only cash payments the investor will receive from a zero-coupon bond are the interest payments that are paid up until the maturity date. D) The face value of a bond is repaid at maturity.

B) The yield to maturity of a bond is the discount rate that sets the future value (FV) of the promised bond payments equal to the current market price of the bond.

Which of the following statements regarding bonds and their terms is FALSE? A) The internal rate of return (IRR) of an investment in a zero-coupon bond is the rate of return that investors will earn on their money if they buy a default-free bond at its current price and hold it to maturity. B) The yield to maturity of a bond is the discount rate that sets the future value (FV) of the promised bond payments equal to the current market price of the bond. C) Financial professionals also use the term spot interest rates to refer to the default-free zero-coupon yields. D) When we calculate a bondʹs yield to maturity by solving the formula, Price of an n-period bond = Coupon/ (1 + YTM)1 + Coupon/ (1 + YTM)2 + ... + Coupon + Face /(1 + YTM)n , the yield we compute will be a rate per coupon interval.

C) I and II

Which of the following will be a source of cash flows for a shareholder of a certain stock? I. Sale of the shares at a future date II. The firm in which the shares are held paying out cash to shareholders in the form of dividends III. The firm in which the shares are held increasing the total number of shares outstanding through a stock split A) I only B) II only C) I and II D) II and III

C) U.S. Treasury securities are widely regarded to be risk-free.

Why are the interest rates of U.S. Treasury securities less than the interest rates of equivalent corporate bonds? A) The U.S. government has a high credit spread. B) There is significant risk that the U.S. government will default. C) U.S. Treasury securities are widely regarded to be risk-free. D) U.S. Treasury securities yield inflation adjusted interest rates.

A) Since such a bond provides a risk-free return over that period, the Law of One Price guarantees that the risk-free interest rate equals the yield to maturity.

Why is the yield to maturity of a zero-coupon, risk-free bond that matures at the end of a given period the risk-free interest rate for that period? A) Since such a bond provides a risk-free return over that period, the Law of One Price guarantees that the risk-free interest rate equals the yield to maturity. B) Since a bondʹs price will converge on its face value as the bond approaches the maturity date, the Law of One Price dictates that the risk-free interest rate will reflect this convergence. C) Since interest rates will rise and fall in response to the movement in bond prices. D) Since there is, by definition, no risk in investing in such bonds, the return from such bonds is the best that can be expected from any investment over the period.