Finance 3120 FINAL

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

determine the effect of the decision to accept or reject a project on the firm's cash flows

) The outstanding debt of Berstin Corp. has ten years to maturity, a current yield of 7%, and a price of $95. What is the pretax cost of debt if the tax rate is 30%.

7.37%

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?

$0

The Sisyphean Company is considering a new project that will have an annual depreciation expense of $3.6 million. If Sisyphean's 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 company's new project?

$1,260,000

Consider the above Income Statement for CharmCorp. All values are in millions of dollars. If CharmCorp. has 4 million shares outstanding, and its managers and employees have stock options for 2 million shares, what is its diluted EPS in 2008?

$1.67

Which of the following formulas is INCORRECT?

rE = (Div 1 / P0) - g

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?

$10,048

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: Assuming that Luther's bonds are rated AAA, their price will be closest to ________.

$1064

You are borrowing money to buy a car. If you can make payments of $320 per month starting one month from now at an interest rate of 12%, how much will you be able to borrow for the car today if you finance the amount over 4 years?

$12,151.67

Sara wants to have $600,000 in her savings account when she retires. How much must she put in the account now, if the account pays a fixed interest rate of 8%, to ensure that she has $600,000 in 20 years?

$128,729

Refer to the table above. An international seafood supplier is offered 9.52 million yen today for 1000 pounds of abalone frozen in the shell. One thousand pounds of abalone can be sourced from various countries at the prices shown above. The current market exchange rates between the United States and the other relevant currencies are also shown. In addition, $1 U.S. = 102 yen. What is the value, in U.S. dollars, of the best deal the international seafood supplier can make?

$13,333

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 firm's expected change in net working capital?

$135,000

Refer to the income statement above. Luther's earnings before interest, taxes, depreciation, and amortization (EBITDA) for the year ending December 31, 2005 is closest to ________.

$135.9 million

A garage is installing a new "bubble-wash" car wash. It will promote the car wash as a fun activity for the family, and it is expected that the novelty of this approach will boost sales in the medium term. If the cost of capital is 10%, what is the net present value (NPV) of this project?

$150,548

Matthew wants to take out a loan to buy a car. He calculates that he can make repayments of $5000 per year. If he can get a four-year loan with an interest rate of 7.9 %, what is the maximum price he can pay for the car?

$16,598

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%?

$17,208

A bank is negotiating a loan. The loan can either be paid off as a lump sum of $80,000 at the end of four years, or as equal annual payments at the end of each of the next four years. If the interest rate on the loan is 6%, what annual payments should be made so that both forms of payment are equivalent?

$18,287

Dan buys a property for $210,000 . He is offered a 30-year loan by the bank, at an interest rate of 8% per year. What is the annual loan payment Dan must make?

$18,653.76

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, JRN's dividends were expected to grow indefinitely at 4% per year and JRN's stock was trading at $25.50 per share. With the new expansion, JRN's dividends are expected to grow at 8% per year indefinitely. Assuming that JRN's risk is unchanged by the expansion, the value of a share of JRN after the announcement is closest to ________.

$19.32

Shown above is information from FINRA regarding one of Bank of America's 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?

$2.15

Consider the above statement of cash flows. If all amounts shown above are in millions of dollars, what were AOS Industries' retained earnings for 2008?

$2.2 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?

$2.91 mi

Two years ago you purchased a new SUV. You financed your SUV for 60 months (with payments made at the end of the month) with a loan at 5.95% APR. Your monthly payments are $386.19 and you have just made your 24th monthly payment on your SUV. The amount of your original loan is closest to ________.

$20,000

Martin wants to provide money in his will for an annual bequest to whichever of his living relatives is oldest. That bequest will provide $4000 in the first year, and will grow by 7% per year, forever. If the interest rate is 9%, how much must Martin provide to fund this bequest?

$200,000.00

Sinclair Pharmaceuticals, a small drug company, develops a vaccine that will protect against Helicobacter pylori , a bacteria that is the cause of a number of diseases of the stomach. It is expected that Sinclair Pharmaceuticals will experience extremely high growth over the next three years and will reinvest all of its earnings in expanding the company over this time. Earnings were $1.10 per share before the development of the vaccine and are expected to grow by 40% per year for the next three years. After this time, it is expected that growth will drop to 5% and stay there for the expected future. Four years from now Sinclair will pay dividends that are 75% of its earnings. If its equity cost of capital is 12%, what is the value of a share of Sinclair Pharmaceuticals today?

$24.17

Clarissa wants to fund a growing perpetuity that will pay $10,000 per year to a local museum, starting next year. She wants the annual amount paid to the museum to grow by 5% per year. Given that the interest rate is 9%, how much does she need to fund this perpetuity?

$250,000.00

The book value of a firm's equity is $100 million and its market value of equity is $200 million. The face value of its debt is $50 million and its market value of debt is $60 million. What is the market value of assets of the firm?

$260 million

A C corporation earns $8.30 per share before taxes and the company pays a dividend of $4.00 per share. The corporate tax rate is 39%, the personal tax rate on dividends is 15%, and the personal tax rate on non-dividend income is 36%. What is the after-tax amount an individual would receive from the dividend?

$3.40

An investment will pay you $120 in one year and $200 in two years. If the interest rate is 4%, what is the present value of these cash flows?

$300.29

Suppose the term structure of interest rates is shown below: The present value (PV) of receiving $1100 per year with certainty at the end of the next three years is closest to ________.

$3010

You are considering purchasing a new home. You will need to borrow $290,000 to purchase the home. A mortgage company offers you a 20-year fixed rate mortgage (240 months) at 12% APR (1% month). If you borrow the money from this mortgage company, your monthly mortgage payment will be closest to ________.

$3193

In 2009, an agricultural company introduced a new cropping process which reduced the cost of growing some of its crops. If sales in 2008 and 2009 were steady at $30 million, but the gross margin increased from 2.8% to 3.9% between those years, by what amount was the cost of sales reduced?

$330,000

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?

$337,500

What is the present value (PV) of an investment that pays $100,000 every year for four years if the interest rate is 5% APR, compounded quarterly?

$353,818

Assume Ford Motors expects a new hybrid-engine project to produce incremental cash flows of $45 million each year, and expects these to grow at 3% each year. The upfront project costs are $380 million and Ford's weighted average cost of capital is 9%. If the issuance costs for external finances are $10 million, what is the net present value (NPV) of the project?

$360 million

Since your first birthday, your grandparents have been depositing $1200 into a savings account on every one of your birthdays. The account pays 6% interest annually. Immediately after your grandparents make the deposit on your 18th birthday, the amount of money in your savings account will be closest to ________.

$37,086.78

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 firm's marginal tax rate is 35%?

$416,250

What is the coupon payment of a 15-year $10,000 bond with a 9% coupon rate with semiannual payments?

$450

The balance sheet for a small firm is shown above. All amounts are in thousands of dollars. What is this firm's Net Working Capital?

$46 thousand

A firm incurs $70,000 in interest expenses each year. If the tax rate of the firm is 30%, what is the effective after-tax interest rate expense for the firm?

$49,000.00

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?

$498,597

SAP Inc. received a $1.5 million grant under its Small Business Innovation program. SAP invested the grant money and developed a system to remove metal contaminants from storm water in shipyards. The firm estimates that each shipyard spends $500,000 a year on storm water clean-up efforts. If SAP is able to sign up and retain four shipyards in the first year onwards, what is the present value (PV) of the project (net of investment) if the cost of capital for SAP is 14% per year? Assume a cost of operations and other costs for SAP equal 50% of revenue.

$5.64 million

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 Sunnyfax's equity cost of capital, what is the expected share price as a consequence of this decision?

$52.38

Since your first birthday, your grandparents have been depositing $100 into a savings account every month. The account pays 9% interest annually. Immediately after your grandparents make the deposit on your 18th birthday, the amount of money in your savings account will be closest to ________.

$53,635

Assume Ford Motors expects a new hybrid-engine project to produce incremental cash flows of $50 million each year, and expects these to grow at 4% each year. The upfront project costs are $420 million and Ford's weighted average cost of capital is 9%. If the issuance costs for external finances are $20 million, what is the net present value (NPV) of the project?

$560 million

Sultan Services has 1.2 million shares outstanding. 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 Sultan's earnings are expected to grow by 5% per year, these payout rates do not change, and Sultan's equity cost of capital is 10%, what is Sultan's share price?

$60.00

Chittenden Enterprises has 643 million shares outstanding. It expects earnings at the end of the year to be $960 million. The firm's 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 Chittenden's earnings are expected to grow at a constant 3% per year, what is Chittenden's share price?

$7.47

You own 1000 shares of Newstar Financial stock, currently trading for $57 per share. You are offered a deal where you can exchange these stocks for 900 shares of Amback Financial Group stock, currently trading at $63 per share. What is the value of this trade, if you choose to make it?

-$300

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%?

-$4,507

The profitability index for project B is closest to ________.

0.15

Assume Lavender Corporation has a market value of $4 billion of equity and a market value of $19.8 billion of debt. What are the weights in equity and debt that are used for calculating the WACC?

0.168 , 0.832

Refer to the balance sheet above. Luther's quick ratio for 2006 is closest to ________.

0.87

A company has stock which costs $41.50 per share and pays a dividend of $2.50 per share this year. The company's cost of equity is 7%. What is the expected annual growth rate of the company's dividends?

0.98%

Panjandrum Industries, a manufacturer of industrial piping, is evaluating whether it should expand into the sale of plastic fittings for home garden sprinkler systems. It has made the above estimates of free cash flows resulting from such a decision (all quantities in millions of dollars). There are some concerns that estimates of manufacturing expenses may be low, due to the rising cost of raw materials. What is the break-even point for manufacturing expenses, if all other estimates are correct and the cost of capital is 9%?

1.66 million

Refer to the balance sheet above. If in 2006 Luther has 10.2 million shares outstanding and these shares are trading at $16 per share, then using the market value of equity, the debt-equity ratio for Luther in 2006 is closest to ________.

1.72

Assume IBM just paid a dividend of $4.50 and expects these dividends to grow at 8% a year. The price of IBM is $100 per share. What is IBM's cost of equity capital?

12.86 %

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?

13%

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?

15%

Your estimate of the market risk premium is 7%. The risk-free rate of return is 4% and General Motors has a beta of 1.6 . What is General Motors' cost of equity capital?

15.2%

Refer to the balance sheet above. When using the book value of equity, the debt-equity ratio for Luther in 2006 is closest to ________.

2.25

Refer to the income statement above. Luther's return on assets (ROA) for the year ending December 31, 2005 is closest to ________.

24.32%

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 5.6% (annual payments). The following table summarizes the YTM for similar ten-year corporate bonds of various credit ratings: Assuming that Luther's bonds receive a AA rating, the number of bonds that Luther must issue to raise the needed $25 million is closest to ________.

27,848

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?

3%

What is the internal rate of return (IRR) of an investment that requires an initial investment of $11,000 today and pays $15,400 in one year's time?

40%

Assume JUP has debt with a book value of $24 million, trading at 120% of par value. The firm has book equity of $28 million, and 2 million shares trading at $20 per share. What weights should JUP use in calculating its WACC?

41.86 % for debt, 58.14% for equity

Luther Industries has a dividend yield of 4.5% and a cost of equity capital of 10%. Luther Industries' dividends are expected to grow at a constant rate indefinitely. The growth rate of Luther's dividends is closest to ________.

5.5%

Martin is offered an investment where for $4000 today, he will receive $4240 in one year. He decides to borrow $4000 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?

6%

You are considering investing in a zero-coupon bond that will pay you its face value of $1000 in twelve years. If the bond is currently selling for $496.97, then the internal rate of return (IRR) for investing in this bond is closest to ________.

6.0%

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?

6.383%

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 ________.

6.56%

What is the real interest rate given a nominal rate of 8.9% and an inflation rate of 1.9%?

6.9%

Assume Ford Motor Company is discussing new ways to recapitalize the firm and raise additional capital. Its current capital structure has a 25% weight in equity, 10% in preferred stock, and 65% in debt. The cost of equity capital is 13%, the cost of preferred stock is 9%, and the pretax cost of debt is 8%. What is the weighted average cost of capital for Ford if its marginal tax rate is 40%?

7.27%

Assume the market value of Fords' equity, preferred stock and debt are $6 billion, $3 billion, and $13 billion, respectively. Ford has a beta of 1.7, the market risk premium is 8%, and the risk-free rate of interest is 3%. Ford's preferred stock pays a dividend of $2.50 each year and trades at a price of $30 per share. Ford's debt trades with a yield to maturity of 9.5 %. What is Ford's weighted average cost of capital if its tax rate is 35%?

9.31%

SIROM Scientific Solutions has $12 million of outstanding equity and $4 million of bank debt. The bank debt costs 4% per year. The estimated equity beta is 1. If the market risk premium is 8% and the risk-free rate is 4%, compute the weighted average cost of capital if the firm's tax rate is 30%.

9.70 %

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. KTI's return on new investments is 13% and their equity cost of capital is 15%. The expected growth rate for KTI's dividends is closest to ________.

9.8%

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 ________.

9.9%

Why should you approach every problem by drawing a timeline?

A timeline identifies events in a transaction or investment which might otherwise be easily overlooked.

What is a firm's net income?

A) a measure of the firm's profitability over a given period B) the difference between the sales and other income generated by a firm, and all costs, taxes, and expenses incurred by the firm in a given period C) the last or "bottom" line of the income statement ALL OF THE ABOVE

Which of the following statements regarding the Law of One Price is INCORRECT?

An important property of the Law of One Price is that it holds even in markets where arbitrage is possible.

Which of the following would be best considered to be an agency conflict problem in the behavior of the following financial managers?

Bill chooses to pursue a risky investment for the company's funds because his compensation will substantially rise if it succeeds.

Which of the following types of firms does NOT have limited liability? A. Limited Partnerships B. Corporations C. Sole Proprietorships D. None of the Above

C. Sole Proprietorships

Which of the following statements is FALSE? A) Issuance costs increase the WACC. B) Issuance costs should be treated as cash outflows in NPV analysis. C) External equity is less expensive than retained earnings. D) A project that can be financed with internal funds will be less costly than the same project if it were financed with external funds.

External equity is less expensive than retained earnings.

Which of the following statements is FALSE?

For a risk-free project, the opportunity cost of capital will typically be greater than the interest rate of U.S. Treasury securities with a similar term.

According to Graham and Harvey's 2001 survey (Figure 8.2 in the text), the most popular decision rules for capital budgeting used by CFOs are ________.

IRR, NPV, Payback period

Which of the following statements is FALSE regarding profitable and unprofitable growth?

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

Which alternative offers you the lowest effective rate of return?

Investment A

Which alternative offers you the highest effective rate of return?

Investment D

Which of the following investments has a higher present value, assuming the same (strictly positive) interest rate applies to both investments?

Investment Y has a higher present value.

Which of the following is a way that the operating activity section of the statement of cash flows adjusts Net Income from the balance sheet?

It adds all non-cash entries related to a firm's operating activities.

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

It is difficult to calculate.

What is the main reason that it is necessary for public companies to follow the rules and format set out in the Generally Accepted Accounting Principles (GAAP) when creating financial statements?

It makes it easier to compare the financial results of different firms.

Which of the following best describes why the Valuation Principle is a key concept in making financial decisions?

It shows how to make the costs and benefits of a decision comparable so that we can weigh them properly

Outstanding Job Hours to Print Job Penalty for not completing job in 24 hours Job A 6 -$120 Job B 9 -$200 Job C 12 -$360 Job D 16 -$400 Job E 2 -$50 A print shop has contracted to print a number of jobs within 24 hours. Any jobs not completely printed within this time will result in a penalty, as shown in the table above. However too many jobs have been accepted, and not all can be printed. Which jobs should be printed in the next 24 hours?

Job C, Job B, and Job E

Heavy Duty Company, a manufacturer of power tools, decides to offer a rebate of $130 on its 16-inch mid-range chain saw, which currently has a retail price $490. Heavy Duty's marketers estimate that, as a result of the rebate, sales of this model will increase from 60,000 to 80,000 units next year. The profit margin for Heavy Duty before the rebate is $180. Based on the given information, is the decision to give the rebate a wise one?

No, since costs are $6,800,000 more than benefits.

Which of the following is/are TRUE? I. The EAR can never exceed the APR. II. The APR can never exceed the EAR. III. The APR and EAR can never be equal.

Only II. is true.

Most corporations measure the value of a project in terms of which of the following?

Present Value (PV)

Use the information for the question(s) below. Project A Project 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 12) If WiseGuy Inc. uses payback period rule to choose projects, which of the projects (Project A or Project B) will rank highest?

Project B

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 give owners the right, but not the obligation, to exercise these opportunities at a later date. C) Real options build greater flexibility into a project and thus increase its net present value (NPV). D) Real options enhance the forecast of a project's expected future cash flows by incorporating, at the start of the project, the effect of decisions that will be made at a later date.

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

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 only

Which of the following is a measure of the aggregate price level of collections of pre -selected stocks?

S&P 500

Which of the following is true about perpetuities?

Since a perpetuity generates cash flows every period infinitely, the cash flow generated equals the PV times the interest rate.

A small company has current assets of $112,000 and current liabilities of $117,000. Which of the following statements about that company is most likely to be true?

Since net working capital is negative, the company will not have enough funds to meet its obligations.

Which of the following best describes the Net Present Value rule? A) When choosing among any list of investment opportunities where resources are limited, always choose those projects with the highest net present value (NPV). B) Take any investment opportunity where the net present value (NPV) is not negative; turn down any opportunity when it is negative. C) 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. D) 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)

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

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?

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

If the above balance sheet is for a retail company, what indications about this company would best be drawn from the changes in the balance sheet between 2007 and 2008?

The company is having difficulties selling its product.

If the above balance sheet is for a retail company, what indications about this company would best be drawn from the changes in stockholders' equity between 2007 and 2008?

The company's net income in 2008 was negative.

Which of the following statements regarding annuities is FALSE?

The difference between an annuity and a perpetuity is that a perpetuity ends after some fixed number of payments.

A lawn maintenance company compares two ride -on mowersthe Excelsior, which has an expected working-life of six years, and the Grassassinator, 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?

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

What is the major way in which the roles and obligations of the owners of a limited liability company differ from the roles and obligations of limited partners in a limited partnership?

The owners of a limited liability company can take an active role in running the company.

A printing company prints a brochure for a client and then bills them for this service. At the time the printing company's financial disclosure statements are prepared, the client has not yet paid the bill for this service. How will this transaction be recorded?

The sale will be added to Net Income on the income statement but deducted from Net Income on the statement of cash flows.

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?

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

Which of the following statements regarding bonds and their terms is FALSE?

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.

Why is it difficult to determine the market price of a private corporation's shares at any point in time?

There is no organized market for its shares.

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 show how the firm's earnings are expected to change as the result of a particular decision. 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 tell how the decision affects the firm's reported profits from an accounting perspective.

These earnings are not actual cash flows.

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 the present and compound all of the positive cash flows to the end of the project. B) Discount all of the negative cash flows to time 0 and leave the positive cash flows alone. C) Turn multiple negative cash flows into a single negative cash flow by summing all negative cash flows over the project's lifetime. D) Leave the initial cash flow alone and compound all of the remaining cash flows to the final period of the project.

Turn multiple negative cash flows into a single negative cash flow by summing all negative cash flows over the project's lifetime.

Which of the following statements regarding growing perpetuities is FALSE?

We assume that r < g for a growing perpetuity.

Which of the following statements is INCORRECT based on the time value of money?

We refer to (1 - rf) as the interest rate factor for risk-free cash flows.

A lender lends $10,100 , which is to be repaid in annual payments of $2070 for 6 years. Which of the following shows the timeline of the loan from the lender's perspective?

Year 0 - 10,100 Year 1 2070 Year 2 2070 Year 3 2070 Year 4 2070 Year 5 2070 Year 6 2070

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?

Yes, because it agrees with the Net Present Value rule.

Peter has a business opportunity that requires him to invest $10,000 today, and receive $12,000 in one year. He can either use $10,000 that he already has for this investment or borrow the money from his bank at an interest rate of 10%. However, the $10,000 he has right now is needed for urgent repairs to his home, repairs that will cost at least $15,000 if he delays them for a year. What is the best alternative for Peter out of the following choices?

Yes, since he can borrow the $10,000 from a bank, repair his home, invest $10,000 in the business opportunity, which, since it has a NPV > 0 will mean he will still come out ahead after repaying the loan

Which of the following situations is best described by the timeline shown below?

You make payments of $250 per month for six months.

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

Which of the following bonds is trading at par?

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

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

Which of the following firms would be expected to have a high ROE?

a grocery store chain that has very high turnover, selling many multiples of its assets per year

Which of the following firms would be expected to have a high ROE based on that firm's high profitability?

a medical supply company that provides very precise instruments at a high price to large medical establishments such as hospitals

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 premium

What are dividend payments?

a share of the profits paid to each shareholder on the basis of the number of shares they hold

Over four-fifths of all U.S. business revenue is generated by which type of firms?

corporations

A software company acquires a smaller company in order to acquire the patents that it holds. Where will the cost of this acquisition be recorded on the statement of cash flows?

as an outflow under investment activities

Consider the above statement of cash flows. What were AOS Industries' major means of raising money in 2008?

by issuing debt

A factory owner wants his workers to produce as many widgets as they can so he pays his workers based on how many widgets they produce. However, in order to make sure that the workers do not rush and produce a large number of poorly made widgets, he checks the widgets at random at various stages of their manufacture. If a defect is found in a widget, the pay of the entire section of the factory responsible for that defect is docked. How is this factory owner seeking to solve the agency conflict problem in this case?

by supplying incentives so the agents act in the way principal desires

A corporate raider gains a controlling fraction of the shares of a poorly managed company and replaces the board of directors. How does the corporate raider hope to make a profit in this case?

by the rise in the value of the stock held by the raider when the new board of directors is judged to be superior to the ousted board of directors

The after-tax cost of debt ________ the before-tax cost of debt for a firm that has a positive marginal tax rate.

is always less than

A sole proprietorship is owned by ________.

one person

Which of the following risk-free, zero-coupon bonds could be bought for the lowest price?

one with a face value of $1,000, a YTM of 5.9%, and 20 years to maturity

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 trackballs and other peripherals. What option is the manufacturer gaining by the release of the new keyboard?

option to abandon

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?

option to delay

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) payback period B) profitability index C) MIRR D) equivalent annual annuity

payback period

Which of the following is NOT a role of financial institutions?

printing money for borrowers

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?

profitability index

A delivery company is creating a balance sheet. Which of the following would most likely be considered a short-term liability on this balance sheet?

revenue received for the delivery of items that have not yet been delivered

An exploration of the effect of changing multiple project parameters on net present value (NPV) is called?

scenario 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?

sensitivity analysis

Which of the following is NOT a financial statement that every public company is required to produce?

statement of sources and uses of cash

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

subtracting depreciation expenses from taxable earnings

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

the amount by which a firm's earnings are expected to change as a result of an investment decision

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

the cost of a marketing study completed last year

An insurance office owns a large building downtown. The sixth floor of this building currently houses its entire Human Resources Department. 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?

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

In which of the following relationships is an agency conflict problem LEAST likely to arise?

the relationship between a driver and the passengers in a car regarding the safe driving of that car

Which of the following is NOT an advantage of a sole proprietorship?

unlimited liability

Holding everything else constant, an increase in cash ________ a firm's net debt

will decrease