Strategic Financial Management
Suppose the U.S. Treasury offers to sell you a bond for $597.25. No payments will be made until the bond matures 5 years from now, at which time it will be redeemed for $1,000. What interest rate would you earn if you bought this bond at the offer price? 11.08% 11.94% 9.01% 9.56% 10.86%
10.86%
Ehrmann Data Systems is considering a project that has the following cash flow and WACC data. What is the project's MIRR?WACC: 8.00%Year 0 1 2 3 Cash flows -$1,000 $425 $425 $425 12.05% 11.33% 14.20% 9.81% 10.35%
11.33%
Ehrmann Data Systems is considering a project that has the following cash flow and cost of capital data. What is the project's MIRR? Cost of capital: 8.00%Year 0 1 2 3 Cash flows -$1,000 $450 $450 $450 21.50% 14.20% 15.04% 16.28% 13.47%
13.47%
Taggart Inc. is considering a project that has the following cash flow data. What is the project's payback?Year 0 1 2 3 Cash flows -$1,100 $500 $500 $500 2.07 years 2.20 years 2.70 years 1.86 years 2.50 years
2.20 years
Taussig Corp.'s bonds currently sell for $1,220. They have a 6.35% annual coupon rate and a 20-year maturity, but they can be called in 5 years at $1,050. What rate of return should an investor expect to earn if he or she purchases these bonds? 2.56% 4.46% 6.72% 4.64% 3.52%
2.56%
What is the payback period for a project with the following expected net cash flows? year cash flow 0 (20,000) 1 13,0002 2,000 3 6,000 4 (2,000,000) 4.00 years 2.17 years Correct! 2.83 years 2.50 years Due to the large negative cash flow in year 4, the payback period cannot be determined.
2.83 years
Simms Corp. is considering a project that has the following cash flow data. If the firm's cost of capital is 9%, what is the project's Margin of Error?Year 0 1 2 3 Cash flows -$1,000 $475 $475 $475 20.24% 5.69% 18.13% 34.56% 13.21%
20.24%
You have just won the Nebraska Lottery which pays you $100,000 per year for 30 years. Vito Corleone of the renowned Chicago Corleone Family heard of your good fortune and has made you an offer you cannot refuse. He will pay you $300,000 today for your lottery winnings. What interest rate is the Corleone Family offering you? 33.32% 8.20% 160.80% 120.00% 56.58%
33.32%
Sadik Inc.'s bonds currently sell for $1,300 and have a par value of $1,000. They pay a $105 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,100. What is their yield to call (YTC)? 5.10% 6.00% 5.31% 4.94% 3.80%
5.31%
You plan to purchase a new Audi for $80,000 from Honest John's Autoworld. Honest John can offer you a rebate of $8,000 or a low financing rate of 1.9% for 60 months, your choice. What is the implicit interest rate Honest John is truly charging? 6.20% 5.56% 11.94% 3.01% 1.08%
6.20%
Lotta just purchased a bond from Ahlstrom Inc. The bond has a coupon rate of 8% with annual payments and will mature in 10 years at a par value of $1,000. If bonds with the same risk and same maturity have a yield of 6%, what will be the Current Yield on the Ahlstrom's bond over the next year? 9.38% 6.97% 8.90% 5.50% 10.12%
6.97%
Malko Enterprises' bonds currently sell for $1,020. They have a 6-year maturity, an annual coupon of $75, and a par value of $1,000. What is their current yield? 6.40% 6.91% 8.46% 7.35% 6.62%
7.35%
Maxwell Feed & Seed is considering a project that has the following cash flow data. What is the project's IRR? Year: 0 1 2 3 4 5 Cash flows: -$8,000 $1,800 $2,025 $2,050 $2,075 $2,100 3.71% 3.82% 2.57% 5.47% 7.93%
7.93%
Dyl Inc.'s bonds currently sell for $870 and have a par value of $1,000. They pay a $65 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,100. What is their yield to maturity (YTM)? 9.71% 6.66% 8.02% 8.66% 7.38%
8.02%
You plan to invest in securities that pay 7.0%, compounded annually. If you invest $5,000 today, how many years will it take for your investment to grow to $9,140.20? 10.79 6.78 9.63 8.92 9.01
8.92
Bauer Inc's bonds currently sell for $1,275 and have a par value of $1,000. They pay a $120 annual coupon and have a 20-year maturity, but they can be called in 5 years at $1,120. What is their yield to maturity (YTM)? 9.41% 8.78% 9.33% 8.99% 9.15%
8.99%
Tuotto Industries has a bond outstanding with 10 years to maturity and a 10% coupon paid semiannually. The bond has an 8% nominal yield to maturity, but it can be called in 5 years at a price of $ 1,200. What is the bond's nominal yield to call? 9.70% 5.91% 8.28% 4.29% 7.82%
9.70%
What is the firm's horizon value at the end of Yr 4? $13,011.28 $8,326.23 $14,637.70 $12,198.08 $9,035.50
$12,198.08
What is the firm's current equity value of price per share? $150.26 $115.85 $146.91 $121.19 $129.77
$121.19
Bob has $2,500 invested in a bank that pays 6.8% annually. How long will it take for his funds to double? 9.06 years 8.64 years 10.96 years 10.64 years 10.54 years
10.54 years
Barry Company is considering a project that has the following cash flow and cost of capital data. What is the project's Equivalent Annual Annuity?Cost of capital: 11.00%Year 0 1 2 3 4 5 Cash flows -$1,100 $500 $490 $380 $370 $360 $99.22 $123.99 $35.73 $74.45 $130.79
$130.79
Suppose a State of Nebraska zero coupon bond will pay $1,000 at par ten years from now with no annual payments over the 10 year period. If the going interest rate on these 10-year bonds is 4.9%, how much is the bond worth today? $464.84 $669.37 $650.78 $625.99 $619.79
$619.79
Anderson Systems is considering a project that has the following cash flow and cost of capital data. What is the project's NPV? Cost of capital: 10.00%Year 0 1 2 3 Cash flows -$1,000 $500 $500 $500 $392.21 $417.40 $243.43 $265.65 $307.52
$243.43
Morin Company's bonds mature in 8 years, have a par value of $1,000, and make an annual coupon interest payment of $65. The market requires an interest rate of 6.1% on these bonds. What is the bond's price? $1,116.97 $1,280.93 $1,024.74 $1,147.71 $1,096.47
$1,024.74
Last year Dania Corporation's sales were $525 million. If sales grow at 9.5% per year, how large (in millions) will they be 8 years later? $1,085.11 $976.60 $1,204.47 $1,020.00 $965.74
$1,085.11
Leggio Corporation issued 20-year, 7% annual coupon bonds at their par value of $1,000 one year ago. Today, the market interest rate on these bonds has dropped to 6%. What is the new price of the bonds, given that they now have 19 years to maturity? $1,111.58 $1,177.78 $1,046.59 $1,189.04 $1,133.40
$1,111.58
You deposited $1,000 in a savings account that pays 8 percent interest, compounded monthly, and plan to use it to finish your last year in college. Sixteen months later, you decide to go to the Rocky Mountains to become a ski instructor rather than continue in school, so you close out your account. How much money will you receive?
$1,112
A 15 year, $1000 par value bond has a coupon rate of 17% with semiannual payments. Your required return on bonds of similar risk is 10.7%. What is the maximum amount you should be willing to pay for the bond? $1,006.98 $1,465.50 $923.07 $839.15 $750.35
$1,465.50
Suppose Boyson Corporation's projected free cash flow for next year is FCF1 = $100,000, and FCF is expected to grow at a constant rate of 5.0%. If the company's weighted average cost of capital is 10.5%, what is the firm's total corporate value? $1,980,000 $1,900,000 $1,666,667 $2,000,000 $1,818,182
$1,818,182
(Use the following information for the next four questions)Spirialtex Inc., announced aggressive growth plans over the next three years. Below are the expected investments in fixed and working capital and corresponding pro forma income statements for each of the next 3 years. Year123 Tax rate40%40%40% Capital Expenditures253550 Change in NWC567 Shares Outstanding666 Sales (000,000)150200250 COGS75100125 Sales & Administrative Expense152025 Depreciation & Amortization505152 Total Operating Costs140171202 Operating Income (EBIT)102948 Interest Expense456 Earnings Before Taxes62442 Taxes2.49.616.8 Net Income3.6014.4025.20 EPS0.602.404.20 What is the free cash flow to the firm in Year 1? $26.00 $21.00 $31.00 $10.00 $100.21
$26.00
Mia was recently hired by the Fiat Corporation to assist with capital purchases. If the following cash flows are anticipated, what should Mia pay for the piece of equipment assuming a discount rate of 7.5%: 01234561030456585125 $260.36 $221.10 $259.42 $277.04 $335.85
$260.36
Lauri plans to place $120 into his savings account today and every month for the next 23 months. If the current rate paid on his account is 4% with monthly compounding, how much will be in his account in 2 years? $2,113 $1,479 $5,543 $4,233 $3,003
$3,003
You just graduated, and you plan to work for 10 years and then to leave for the Australian "Outback" bush country. You figure you can save $1,000 a year for the first 5 years and $2,000 a year for the next 5 years. These savings cash flows will start one year from now. In addition, your family has just given you a $5,000 graduation gift. If you put the gift now, and your future savings when they start, into an account that pays 8 percent compounded annually, what will your financial "stake" be when you leave for Australia 10 years from now? $21,432 $16,651 $28,393 $20,000 $31,148
$31,148
Assuming the firm has no short-term investments, what is the total value of the firm? $274.99 $321.61 $390.32 $350.00 $418.00
$321.61
Spirialtex has a corporate cost of capital of 11% and is expected to have a long run growth rate of 4%. What is the horizon value of the firm? $177.11 $309.40 $332.80 $439.40 $353.60
$353.60
You deposit $1,125 today in a savings account that pays 6% interest, compounded annually. How much will your account be worth at the end of 25 years? $4,876.64 $3,669.55 $4,828.35 $5,456.04 $5,842.31
$4,828.35
Jutta plans to tour across Finland and has just purchased a Harley Davidson 1000 cc motorcycle. She borrowed $20,000 toward the purchase. The amount is to be repaid over a period of 5 years at an APR (nominal rate) of 8%. What are her monthly payments? $230.63 $405.52 $350.00 $502.89
$405.52
Spirialtex has 6 million common shares outstanding and $75 million in debt. What is the current equity value of the firm's stock price? $41.10 $48.39 $28.96 $20.83 $85.50
$41.10
Ross Inc.'s CFO thinks the company should rely primarily on the NPV method, but the president prefers the IRR, so decisions are based on the IRR. The CFO wants you to show the president that at times decisions based on the IRR result in a reduction in the company's value relative to its value if the NPV criterion were used. The CFO then asked you to analyze two projects that the company is now considering, S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the higher IRR, how much value will Ross be foregoing? WACC = 11% Year: 0 1 2 3 4 5 CFS: -$1,025 $493 $493 $493 $493 CFL: -$1,025 $425 $425 $425 $425 $425 $42.00 $25.47 $39.85 $48.34 Correct! $41.25
$41.25
Barry Company is considering a project that has the following cash flow and WACC data. What is the project's NPV?WACC: 10.00%Year 0 1 2 3 4 5 Cash flows -$1,000 $400 $390 $380 $370 $360 $447.70 $305.73 $336.31 $345.09 $386.87
$447.70
What is the present value of the following cash flow stream at a rate of 7.00%? Years:01234 CFs:$0$75$225$0$300 $485.58 $589.63 $490.53 $436.03 $495.49
$495.49
Mooradian Corporation's free cash flow during the just-ended year (t = 0) was $250 million, and its FCF is expected to grow at a constant rate of 5.0% in the future. If the weighted average cost of capital is 10.0%, what is the firm's total corporate value, in millions? $4,900 $3,255 $3,500 $4,130 $5,250
$5,250
You plan to invest $100 every three months (quarterly) for the next 10 years into an account that pays 8% with daily compounding. How much will you have in the account in 10 years?
$6,066
Bill plans to deposit $200 into a bank account at the end of every month. The bank account has a nominal interest rate of 8 percent and interest is compounded monthly. How much will Bill have in the account at the end of 2½ years (30 months)? $7,656.74 $6,594.88 $6,617.77 $5,232.43 $8,502.50
$6,617.77
(Use the following information for the next 5 questions.) Good Times Inc. has current sales of $7,500 (in millions), an operating ratio of 6%, a capital requirement ratio of 40%, a tax rate of 40% and a corporate cost of capital of 8%. Under new management sales are expected to grow 15% in Yr 1, 15% in Yr 2, 10% in Yr 3, 5% in Yr 4 and then grow at a constant rate of 4% after Yr 4. In addition, the firm has the following balance sheet items: (000,000) Short-term investments = $25 Short-term debt (notes payable) = $250 Long-term debt (bonds) = $300 Preferred stock = $30 Number of shares of common stock = 75 What is the firm's free cash flow at the end of Yr 1? $67.50 $72.00 $128.96 $34.77 $81.00
$67.50
An investment of $100 generates after-tax operating net cash flows of $50 in year one, $80 in year two, and $120 in year 3. The cost of capital is 15%. The net present value is $66.67 $90.25 $40.42 $58.33 $82.87
$82.87
What is the firm's total value today? $9,669.57 $10,312.54 $11,598.48 $12,308.94 $11,228.96
$9,669.57
Assume that you are considering the purchase of a 20-year, noncallable bond with an annual coupon rate of 9.5%. The bond has a face value of $1,000, and it makes semiannual interest payments. If you require an 10.7% nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond? $721.44 $901.80 $874.74 $910.81 $1,000.99
$901.80
Three $1,000 face value, 10-year, noncallable, bonds have the same amount of risk, hence their YTMs are equal. Bond 8 has an 8% annual coupon, Bond 10 has a 10% annual coupon, and Bond 12 has a 12% annual coupon. Bond 10 sells at par. Assuming that interest rates remain constant for the next 10 years, which of the following statements is CORRECT? Since the bonds have the same YTM, they should all have the same price, and since interest rates are not expected to change, their prices should all remain at their current levels until maturity. Over the next year, Bond 8's price is expected to decrease, Bond 10's price is expected to stay the same, and Bond 12's price is expected to increase. Bond 8 sells at a discount (its price is less than par), and its price is expected to increase over the next year. Bond 8's current yield will increase each year. Bond 12 sells at a premium (its price is greater than par), and its price is expected to increase over the next year.
Bond 8 sells at a discount (its price is less than par), and its price is expected to increase over the next year.
The regular payback method has a number of disadvantages. Which of the following items is NOT a disadvantage of this method? Does not provide any indication regarding a project's liquidity. Ignores cash flows beyond the payback period. Lack of an objective, market-determined benchmark for making decisions. Does not directly account for the time value of money.
Does not provide any indication regarding a project's liquidity.
Markas Hasan, CFO for American National Air, is evaluating the possible takeover of a competitor air carrier. He found a Return on Investment, ROI, of 35% for the hostile take over. Markas should: Ignore the ROI because of theoretical problems with the method. Compare the ROI to the corporation's cost of capital and accept the project if greater than what it cost the company to borrow the funds. Recalculate the ROI because the rate is above the usual range of a standard ROI of 15 to 25%. Proceed with the takeover given the high profitability.
Ignore the ROI because of theoretical problems with the method.
The primary goal of a publicly-owned firm should be to: Maximize expected net income. Maximize the stock price per share. Minimize the chances of losses. Maximize expected total corporate profit. Maximize expected EPS.
Maximize the stock price per share.
As the director of capital budgeting for UNO Corporation, you are evaluating two mutually exclusive projects with the following net cash flows:Year Project L Project S0 -$100,000 -$100,0001 50,000 10,0002 40,000 30,0003 30,000 40,0004 10,000 60,000If UNO's cost of capital is 15 percent, you would choose? Project S should be accepted because it has the higher NPV Project L should be accepted because it has the higher IRR Project L should be accepted because it has the higher NPV Neither project should be accepted Project L should be accepted because it has the higher ROI
Neither project should be accepted
Which of the following statements is CORRECT? The IRR method does not consider all relevant cash flows, particularly, cash flows beyond the payback period. The NPV method does not consider all relevant cash flows, particularly, cash flows beyond the payback period. The NPV method assumes that cash flows will be reinvested at the WACC, while the IRR method assumes reinvestment at the IRR. The NPV method assumes that cash flows will be reinvested at the risk-free rate, while the IRR method assumes reinvestment at the IRR. The NPV method assumes that cash flows will be reinvested at the WACC, while the IRR method assumes reinvestment at the risk-free rate.
The NPV method assumes that cash flows will be reinvested at the WACC, while the IRR method assumes reinvestment at the IRR.
Although the NPV method is presented as a superior strategic budgeting method compared to other metrics, the NPV method does have weaknesses. Which of the following is a weakness of the NPV method? The NPV method may result in multiple values for non-normal projects. The NPV method is dependent on the cost of capital. The NPV method ignores to time value of money. The NPV method is biased towards longer life projects. The NPV method ignores cash flows after the cut off period.
The NPV method is biased towards longer life projects.
Which of the following statements is NOT CORRECT? The free cash flow valuation model can be used to find the value of a division. The constant growth model cannot be used for a zero growth stock, where free cash flows are expected to remain constant over time. The free cash flow valuation model discounts free cash flows by the required return on equity. An important step in applying the free cash flow valuation model is forecasting the firm's pro forma financial statements. Free cash flows are assumed to grow at a constant rate beyond a specified date in order to find the horizon, or terminal, value. The free cash flow valuation model can be used both for companies that pay dividends and those that do not pay dividends.
The free cash flow valuation model discounts free cash flows by the required return on equity.
Which of the following statements is NOT CORRECT? The free cash flow valuation model discounts free cash flows by the required return on equity. An important step in applying the free cash flow valuation model is forecasting the firm's pro forma financial statements. Free cash flows are assumed to grow at a constant rate beyond a specified date in order to find the horizon, or terminal, value. The free cash flow valuation model can be used to find the value of a division. The free cash flow valuation model can be used both for companies that pay dividends and those that do not pay dividends.
The free cash flow valuation model discounts free cash flows by the required return on equity.
Your bank account pays a 6% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT? The periodic rate of interest is 1.50% and the effective rate of interest is 3.50%. The periodic rate of interest is 3.00% and the effective rate of interest is greater than 6.13%. The periodic rate of interest is 1.50% and the effective rate of interest is also 6.09%. The periodic rate of interest is 1.50% and the effective rate of interest is greater than 6.13%. The periodic rate of interest is 3.00% and the effective rate of interest is 6.09%.
The periodic rate of interest is 1.50% and the effective rate of interest is greater than 6.13%.
Two fellow financial analysts are evaluating a project with the following net cash flows: Year Cash Flow 0 -$10,000 1 100,000 2 -100,000 One analyst says that the project has an IRR of less than 20%. The other analyst calculates an IRR of over 600%, but fears his calculator∍s battery is low and may have caused an error. You agree to settle the dispute by analyzing the project cash flows. Which statement best describes the IRR for this project? This project has two imaginary IRRs of 18.1% and 710.0%. This project has no IRR, because the NPV profile does not cross the X axis. The project has an IRR of approximately 12.7 percent. There are multiple IRRs of approximately 12.7 percent and 787 percent There are an infinite number of IRRs between 20 percent and 600 percent that can define the IRR for this project.
There are multiple IRRs of approximately 12.7 percent and 787 percent
Empirical research shows that countries adopting a more ______________ economy have done a better job in eliminating poverty, protecting the environment, improving health and enhancing the life satisfaction for its citizens. communist fair capitalist extractive socialist
capitalist
