BA 660 Final

True or False: The balance sheet is a financial statement that measures the flow of funds into and out of various accounts over time, while the income statement measures the firm's financial position at a point in time

False

True or False: The interest and dividends paid by a corporation are considered to be deductible operating expenses, hence they decrease the firm's tax liability

False

True or False: The tighter the probability distribution of its expected future returns, the greater the risk of a given investment as measured by its standard deviation.

False

Bloome Co.'s stock has a 25% chance of producing a 30% return, a 50% chance of producing a 12% return, and a 25% chance of producing a −18% return. What is the firm's expected rate of return?

9.00%

EP Enterprises has the following income statement. How much net operating profit after taxes (NOPAT) does the firm have? Sales $1,800.00 Costs 1,400.00 Depreciation 250.00 EBIT $ 150.00 Interest expense 70.00 EBT $ 80.00 Taxes (25%) 20.00 Net income $60.00

$112.50

A company is expected to have free cash flows of $0.75 million next year. The weighted average cost of capital is WACC 10.5%, and the expected constant growth rate (g) 6.4%. The company has $2 million in short-term investments, $2 million in debt, and 1 million shares. What is the stock's current intrinsic stock price?

$18.29

A stock is expected to pay a dividend of $0.75 at the end of the year. The required rate of return is rs 10.5%, and the expected constant growth rate (g) 6.4%. What is the stock's current price?

$18.29

$35.50 per share is the current price for Foster Farms' stock. The dividend is projected to increase at a constant rate of 5.50% per year. The required rate of return on the stock, rs, is 9.00%. What is the stock's expected price 3 years from today?

$41.69

Barnes' Brothers has the following data for the year ending 12/31/2015: Net income $600; Net operating profit after taxes (NOPAT) $700; Total assets $2,500; Short-term investments $200; Stockholders' equity $1,800; Total debt $700; and Total operating capital $2,100. Barnes' weighted average cost of capital is 10%. What is its economic value added (EVA)?

$490.00

Bae Inc. has the following income statement. How much net operating profit after taxes (NOPAT) does the firm have? Sales $2,000.00 Costs 1,200.00 Depreciation 100.00 EBIT $ 700.00 Interest expense 200.00 EBT $ 500.00 Taxes (25%) 125.00 Net income $375.00.

$525.00

Brandt Enterprises is considering a new project that has a cost of $1,000,000, and the CFO set up the following simple decision tree to show its three most likely scenarios. The firm could arrange with its work force and suppliers to cease operations at the end of Year 1 should it choose to do so, but to obtain this abandonment option, it would have to make a payment to those parties. How much is the option to abandon worth to the firm? WACC 11.5%. Scenario 1: probability 20%, T0 -$1000, T1 $800, t2 $800, T3 $800, NPV $938.10. Probability x NPV is $187.62. Scenario 2: probability 60%, T0 -$1000, T1 $520, t2 $520, T3 $520, NPV $259.76. Probability x NPV is $155.86. Scenario 3: probability 20%, T0 -$1000, T1 -$200, t2 -$200, T3 -$200, NPV -$1,484.52. Probability x NPV is $296.90. Expected total NPV: $46.57.

$61.03

Yoga Center Inc. is considering a project that has the following cash flow and cost of capital (r) data. What is the project's NPV? Note that a project's expected NPV can be negative, in which case it will be rejected. R is 14%. Year 0 cash flows are -$1,200. Year 1 cash flows are $400. Year 2 cash flows $450. year 3 cash flows are $450. Year 4 cash flows are $475.

$62.88

Bartling Energy Systems recently reported $9,250 of sales, $5,750 of operating costs other than depreciation, and $700 of depreciation. The company had no amortization charges, it had $3,200 of outstanding bonds that carry a 5% interest rate, and its federal-plus-state income tax rate was 25%. In order to sustain its operations and thus generate sales and cash flows in the future, the firm was required to make $1,250 of capital expenditures on new fixed assets and to invest $300 in net operating working capital. By how much did the firm's net income exceed its free cash flow?

$730.00

Kessen Inc.'s bonds mature in 7 years, have a par value of $1,000, and make an annual coupon payment of $70. The market interest rate for the bonds is 8.5%. What is the bond's price?

$923.22

A box of chocolate candy costs 28.80 Swiss francs in Switzerland and $20 in the United States. Assuming that purchasing power parity (PPP) holds, what is the current exchange rate?

1 US dollar equals 1.44 swiss francs

One year ago Lerner and Luckmann Co. issued 15-year, noncallable, 7.5% annual coupon bonds at their par value of $1,000. Today, the market interest rate on these bonds is 5.5%. What is the current price of the bonds, given that they now have 14 years to maturity?

1,191.79

Rogoff Co.'s 15-year bonds have an annual coupon rate of 9.5%. Each bond has face value of $1,000 and makes semiannual interest payments. If you require an 11.0% nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond?

891.00

5-year Treasury bonds yield 5.5%. The inflation premium (IP) is 1.9%, and the maturity risk premium (MRP) on 5-year bonds is 0.4%. What is the real risk-free rate, r*?

3.20%

Assume that all interest rates in the economy decline from 10% to 9%. Which of the following bonds would have the largest percentage increase in price?

A 10-year zero coupon bond.

HHH Inc. reported $12,500 of sales and $7,025 of operating costs (including depreciation). The company had $18,750 of investor-supplied operating assets (or capital), the weighted average cost of that capital (the WACC) was 9.5%, and the federal-plus-state income tax rate was 25%. What was HHH's Economic Value Added (EVA), i.e., how much value did management add to stockholders' wealth during the year?

EVA : NOPAT-(WACC)(Capital). Sales $12500, Operating costs + depreciation $7025, EBIT $5475, Tax Rate 25%, NOPAT $4106.25, WACC 9.50%, Capital $18750, EVA $2325.0

Wells Water Systems recently reported $8,250 of sales, $4,500 of operating costs other than depreciation, and $950 of depreciation. The company had no amortization charges, it had $3,250 of outstanding bonds that carry a 6.75% interest rate, and its federal-plus-state income tax rate was 25%. In order to sustain its operations and thus generate sales and cash flows in the future, the firm was required to spend $750 to buy new fixed assets and to invest $250 in net operating working capital. How much free cash flow did Wells generate? (Show your work)

FCF: NOPAT+depreciation+ammortization-capital expenditures+NOWC. Income Statement: Sales $8250.00, Operating costs: $4500.00 Depreciation $950.00, Ammortization $0.00, EBIT$ 2800.00, Interest $219.38, EBT $2580.63, Taxes $645.16, Net Income $1935.47, NOPAT $2100, Depreciation+ammortization 950 Capital expenditures + NOWC $1000, FCF $2050.

True or False: Consumer welfare is lower in capitalist free market economies than in communist or socialist economies.

False

True or False: Exchange rate quotations consist solely of direct quotations.

False

True or False: If debt is to be used to finance a project, then when cash flows for a project are estimated, interest payments should be included in the analysis.

False

True or False: If the IRR of normal Project X is greater than the IRR of mutually exclusive (and also normal) Project Y, we can conclude that the firm should always select X rather than Y if X has NPV > 0

False

True or False: In accounting, emphasis is placed on determining net income in accordance with generally accepted accounting principles. In finance, the primary emphasis is also on net income because that is what investors use to value the firm. However, a secondary financial consideration is cash flow, because cash is needed to operate the business.

False

How would the Security Market Line be affected, other things held constant, if the expected inflation rate decreases and investors also become more risk averse?

The y-axis intercept would decline, and the slope would increase

Ann has a portfolio of 20 average stocks, and Tom has a portfolio of 2 average stocks. Assuming the market is in equilibrium, which of the following statements is CORRECT?

Tom's portfolio will have more diversifiable risk, the same market risk, and thus more total risk than Ann's portfolio, but the required (and expected) returns will be the same on both portfolios.

A firm can change its beta through managerial decisions, including capital budgeting and capital structure decisions.

True

The prices of high-coupon bonds tend to be less sensitive to a given change in interest rates than low-coupon bonds, other things held constant.

True

True of False: Interest paid by a corporation is a tax deduction for the paying corporation, but dividends paid are not deductible. This treatment, other things held constant, tends to encourage the use of debt financing by corporations.

True

True or False: "Risk aversion" implies that investors require higher expected returns on riskier than on less risky securities.

True

True or False: A bond has a $1,000 par value, makes annual interest payments of $100, has 5 years to maturity, cannot be called, and is not expected to default. The bond should sell at a premium if interest rates are below 10% and at a discount if interest rates are greater than 10%.

True

True or False: A foreign currency will, on average, depreciate against the U.S. dollar at a percentage rate approximately equal to the amount by which its inflation rate exceeds that of the United States.

True

True or False: Any cash flows that can be classified as incremental to a particular project⎯i.e., results directly from the decision to undertake the project⎯should be reflected in the capital budgeting analysis.

True

True or False: Debt is a less risky than equity because a debtholder's claim has priority to an equity holder's claim.

True

True or False: Exchange rate risk is the risk that the cash flows from a foreign project, when converted to the parent company's currency, will be worth less than was originally projected because of exchange rate changes.

True

True or False: For bonds, price sensitivity to a given change in interest rates is generally greater the longer before the bond matures.

True

True or False: Free cash flows should be discounted at the firm's weighted average cost of capital to find the value of its operations.

True

True or False: If a firm's projects differ in risk, then one way of handling this problem is to evaluate each project with the appropriate risk-adjusted discount rate.

True

True or False: If you construct a two-stock portfolio and the correlation between stocks is 0.7, then portfolio risk is reduced but not eliminated in this case

True

True or False: Interest paid by a corporation is a tax deduction for the paying corporation, but dividends paid are not deductible. This treatment, other things held constant, tends to encourage the use of debt financing by corporations.

True

True or False: Intrinsic value of a stock is the sum of all the future expected free cash flows when converted into today's dollars

True

True or False: On the balance sheet, total assets must always equal total liabilities and equity.

True

True or False: Opportunity costs include those cash inflows that could be generated from assets the firm already owns if those assets are not used for the project being evaluated.

True

True or False: The United States and most other major industrialized nations currently operate under a system of floating exchange rates.

True

True or False: To estimate the cash flow from operations, depreciation must be added back to net income because it is a non-cash charge that has been deducted from revenue.

True

Define in one sentence what is Yield to Maturity of a bond

YTM is the annual rate of return you earn on the bond if you buy the bond today and hold it until maturity.

Lower inflation leads to lower interest rates, so borrowing in low-interest countries may appear attractive to multinational firms. However, currencies in low-inflation countries tend to appreciate against those in high-inflation rate countries, so the true interest cost _______ over the life of the loan. A. increases. B. decreases. C. remains the same.

a. Increases

One drawback of switching from a partnership to the corporate form of organization is the following: a. It subjects the firm to additional regulations. b. It makes it more difficult for the firm to raise additional capital. c. It makes the firm's investors subject to greater potential personal liabilities. d. It makes it more difficult for the firm's investors to transfer their ownership interests. e. It cannot affect the amount of the firm's operating income that goes to taxes.

a. It subjects the firm to additional regulations.

Which of the following statements is CORRECT? a. Potential agency problems can arise between managers and stockholders, because managers hired as agents to act on behalf of the owners may instead make decisions favorable to themselves rather than the stockholders. b. Large, publicly owned firms like IBM and GE are controlled by their management teams. Ownership is generally widely dispersed; hence managers have great freedom in how they run the firm. Managers may operate in stockholders' best interests, but they also may operate in their own personal best interests. As long as they stay within the law, there is no way to either force or motivate managers to act in the stockholders' best interests. c. The financial manager should seek that combination of assets, liabilities, and capital that will generate the largest expected projected after-tax income over the relevant time horizon, generally the coming year. d. The riskiness inherent in a firm's earnings per share (EPS) depends on the characteristics of the projects the firm selects, and thus on the firm's assets. However, EPS is not affected by the manner in which those assets are financed. e. The financial manager's proper goal should be to attempt to maximize the firm's expected cash flows, since that will add the most to the individual shareholders' wealth.

a. Potential agency problems can arise between managers and stockholders, because managers hired as agents to act on behalf of the owners may instead make decisions favorable to themselves rather than the stockholders.

Money markets are markets for a. ​Short-term debt securities. b. ​U.S. stocks. c. ​Long-term bonds. d. ​Foreign stocks. e. ​Consumer automobile loans.

a. Short-term debt securities.

After the passage of the 2017 Tax Cut and Jobs Act, corporations now pay what flat tax rate? A. 15% b. 21% c. 27% d. 31% e. 39%

b. 21%

Which of the following statements is CORRECT? a. The difference between the total assets reported on the balance sheet and the debts reported on this statement tells us the current market value of the stockholders' equity, assuming the statements are prepared in accordance with generally accepted accounting principles (GAAP). b. A typical industrial company's balance sheet lists the firm's assets that will be converted to cash first, and then goes on down to list the firm's longest lived assets last. c. The balance sheet for a given year tells us how much money the company earned during that year. d. For most companies, the market value of the stock equals the book value of the stock as reported on the balance sheet. e. The balance sheet for a given year is designed to give us an idea of what happened to the firm during that year.

b. A typical industrial company's balance sheet lists the firm's assets that will be converted to cash first, and then goes on down to list the firm's longest lived assets last.

Which of the following items is NOT included in current assets? a. Inventory. b. Bonds. c. Cash. d. Short-term, highly liquid, marketable securities. e. Accounts receivable.

b. Bonds

You are expected to recieve a payment (recievables) in Swiss Francs (SF) in six months. You want to hedge this exchange rate risk using the money market hedge. What are the correct steps to take? A. Borrow $, convert to SF, invest SF, use SF to pay off loan in SF b. Borrow SF, convert to $, invest $, use recievables in SF to pay off loan in SF c. Covert SF to $ in six months using the forward rate today d. Lend SF, convert to $, invest $, use recievables in SF to pay off loan in SF

b. Borrow SF, convert to $, invest $, use recievables in SF to pay off loan in SF

Which of the following statements is CORRECT? a. If companies have fewer good investment opportunities, interest rates are likely to increase. b. If expected inflation increases, interest rates are likely to increase. c. If individuals in general increase the percentage of their income that they save, interest rates are likely to increase. d. Interest rates on long-term bonds are more volatile than rates on short-term debt securities like T-bills. e. Interest rates on all debt securities tend to rise during recessions because recessions increase the possibility of bankruptcy, hence the riskiness of all debt securities.

b. If expected inflation increases, interest rates are likely to increase.

Suppose the U.S. Treasury announces plans to issue $50 billion of new bonds. Assuming the announcement was not expected, what effect, other things held constant, would that have on bond prices and interest rates? a. Prices and interest rates would both decline. b. Prices would decline and interest rates would rise. c. There would be no changes in either prices or interest rates. d. Prices and interest rates would both rise. e. Prices would rise and interest rates would decline.

b. Prices would decline and interest rates would rise.

Collins Inc. is investigating whether to develop a new product. In evaluating whether to go ahead with the project, which of the following items should NOT be explicitly considered when cash flows are estimated? a. The project will utilize some equipment the company currently owns but is not now using. A used equipment dealer has offered to buy the equipment. b. The company has spent and expensed for tax purposes $3 million on research related to the new detergent. These funds cannot be recovered, but the research may benefit other projects that might be proposed in the future. c. The new product will cut into sales of some of the firm's other products. d. If the project is accepted, the company must invest $2 million in working capital. However, all of these funds will be recovered at the end of the project's life. e. The company will produce the new product in a vacant building that was used to produce another product until last year. The building could be sold, leased to another company, or used in the future to produce another of the firm's products.

b. The company has spent and expensed for tax purposes $3 million on research related to the new detergent. These funds cannot be recovered, but the research may benefit other projects that might be proposed in the future.

Which of the following items is NOT included in current assets? a. Accounts receivable. B. Short-term, highly liquid, marketable securities. C. bonds. D. cash. E. inventory

c. Bonds

A firm is considering a new project whose risk is greater than the risk of the firm's average project, based on all methods for assessing risk. In evaluating this project, it would be reasonable for management to do which of the following? a. Ignore the risk differential if the project would amount to only a small fraction of the firm's total assets. b. Increase the estimated IRR of the project to reflect its greater risk. c. Increase the cost of capital used to evaluate the project to reflect its higher-than-average risk. d. Reject the project, since its acceptance would increase the firm's risk. e. Increase the estimated NPV of the project to reflect its greater risk.

c. Increase the cost of capital used to evaluate the project to reflect its higher-than-average risk.

Which of the following statements is CORRECT? a. If individuals in general increase the percentage of their income that they save, interest rates are likely to increase. b. Interest rates on long-term bonds are more volatile than rates on short-term debt securities like T-bills. c. Interest rates on all debt securities tend to rise during recessions because recessions increase the possibility of bankruptcy, hence the riskiness of all debt securities. d. If expected inflation increases, interest rates are likely to increase. e. If companies have fewer good investment opportunities, interest rates are likely to increase.

d. If expected inflation increases, interest rates are likely to increase.

Consider two projects, X and Y. Project X's IRR is 19% and Project Y's IRR is 17%. The projects have the same risk and the same lives, and each has constant cash flows during each year of their lives. If the cost of capital is 10%, Project Y has a higher NPV than X. Given this information, which of the following statements is CORRECT? a. Project X is larger in the sense that it has the higher initial cost. b. The crossover rate must be less than 10%. c. If the cost of capital is 8%, Project X will have the higher NPV. d. The crossover rate must be greater than 10%. e. If the cost of capital is 18%, Project Y will have the higher NPV.

d. The crossover rate must be greater than 10%

Which of the following statements is CORRECT? a. Preferred stockholders have a priority over bondholders in the event of bankruptcy to the income, but not to the proceeds in a liquidation. b. Preferred dividends are not generally cumulative. c. A big advantage of preferred stock is that dividends on preferred stocks are tax deductible by the issuing corporation. d. The preferred stock of a given firm is generally less risky to investors than the same firm's common stock. e. Corporations cannot buy the preferred stocks of other corporations.

d. The preferred stock of a given firm is generally less risky to investors than the same firm's common stock.

Assume a project has normal cash flows. All else equal, which of the following statements is CORRECT? a. A project's IRR increases as the cost of capital declines. b. A project's MIRR is unaffected by changes in the cost of capital. c. A project's discounted payback increases as the cost of capital declines. d. A project's regular payback increases as the cost of capital declines. e. A project's NPV increases as the cost of capital declines.

e. A project's NPV increases as the cost of capital declines.

If you randomly select stocks and add them to your portfolio, which of the following statements best describes what you should expect? a. Adding more such stocks will have no effect on the portfolio's risk. b. Adding more such stocks will decrease the portfolio's expected rate of return. c. Adding more such stocks will increase the portfolio's expected rate of return. d. Adding more such stocks will reduce the portfolio's market risk but not its diversifiable risk. e. Adding more such stocks will reduce the portfolio's diversifiable risk.

e. Adding more such stocks will reduce the portfolio's diversifiable risk.

Which of the following is a primary market transaction? a. ​You sell 200 shares of Johnson & Johnson stock on the NYSE through your broker. b. ​One financial institution buys 200,000 shares of Johnson & Johnson stock from another institution. An investment banker arranges the transaction. c. ​You buy 200 shares of Johnson & Johnson stock from your younger brother. You just give him cash and he gives you the stock; the trade is not made through a broker. d. ​You invest $10,000 in a mutual fund, which then uses the money to buy $10,000 of Johnson & Johnson shares on the NYSE. e. ​Johnson & Johnson issues 2,000,000 shares of new stock and sells them to the public through an investment banker.

e. Johnson & Johnson issues 2,000,000 shares of new stock and sells them to the public through an investment banker.

Which of the following statements is CORRECT? a. In comparing two projects using sensitivity analysis, the one with the steeper lines would be considered less risky, because a small error in estimating a variable such as unit sales would produce only a small error in the project's NPV. b. The primary advantage of simulation analysis over scenario analysis is that scenario analysis requires a relatively powerful computer, coupled with an efficient financial planning software package, whereas simulation analysis can be done efficiently using a PC with a spreadsheet program or even with just a calculator. c. Sensitivity analysis is a type of risk analysis that considers both the sensitivity of NPV to changes in key input variables and the probability of occurrence of these variables' values. d. As computer technology advances, simulation analysis becomes increasingly obsolete and thus less likely to be used as compared to sensitivity analysis. e. Sensitivity analysis as it is generally employed is incomplete in that it fails to consider the probability of occurrence of the key input variables.

e. Sensitivity analysis as it is generally employed is incomplete in that it fails to consider the probability of occurrence of the key input variables.

What economic conditions affect the cost of money? A. Federal Reserve policies b. Budget deficits/surpluses c. Level of business activity (recession or boom) d. International trade deficits/surpluses e. All of the above are correct

e. all of the above are correct

Money markets are markets for​ a. Consumer automobile loans. b. ​U.S. stocks. c. ​Long-term bonds. d. ​Foreign stocks. e. ​Short-term debt securities.

e. ​Short-term debt securities.

A stock with a beta equal to −1.0 has zero systematic (or market) risk.

false

If an investor buys enough stocks, he or she can, through diversification, eliminate all of the market risk inherent in owning stocks, but as a general rule it will not be possible to eliminate all diversifiable risk.

false

True or False: Individuals and corporations can buy or sell forward currencies to hedge their exchange rate exposure. Essentially, the process involves simultaneously selling the currency expected to appreciate in value and buying the currency expected to depreciate.

false

True or False: Two disadvantages of a proprietorship are (1) the relative difficulty of raising new capital and (2) the owner's unlimited personal liability for the business' debts.

true