FIN303 FULL

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70. The cost of equity: Rubber Chicken, Inc., was paid a dividend of $1.87 last year. If the firm's growth in dividends is expected to be 10 percent next year and then zero thereafter, then what is the cost of equity capital for Rubber Chicken if the price of its common shares is currently $25.71? A) 7.27% B) 8.00% C) 18.00% D) The problem is not solvable with the information that is given.

70. Which one of the following statements about the sustainable growth rate (SGR) is NOT true? A) The higher a firm's ROE, the higher the SGR. B) The higher the plowback ratio, the larger the proportion of net income retained in the firm and the greater the firm's SGR. C) Both a and b are true D) None of the above.

71. Addition to retained earnings: Hilton Corp. has revenues of $1,214,800 and costs of $816,355, and pays a tax rate of 32 percent. If the firm pays out 50 percent of its earnings as dividends every year, what is the amount of retained earnings? A) $135,471.30 B) $270,942.60 C) $413,032.00 D) None of the above.

71. How stock repurchases differ from dividends: You purchased 2,500 shares of DotCom.com several years ago for $40 per share. The company is offering a fixed-price tender offer repurchase for $54 per share. What is the amount of after-tax proceeds you would receive from taking part in the repurchase if capital gains are taxed at 15 percent? A) $120,000 B) $121,250 C) $129,750 D) $135,000

58. Private equity firms improve the performance of firms in which they invest by: A) making sure that the firms have the best possible management teams. B) closely monitoring each firm's performance and providing advice and counsel to the firm's management team. C) facilitating mergers and acquisitions that help improve the competitive positions of the companies in which they invest. D) All of the above.

71. IPO: Dienz Pharma issues an IPO sold on a best-efforts basis. The company's investment bank demands a spread of 16 percent of the selling price. The offer price is set at $32 per share. Three million shares are issued. However, the bank was able to see the shares at $26.25 per share. What are the proceeds for the issuer? A) $96.00 million B) $78.75 million C) $66.15 million D) None of the above

33. Which ONE of the following statements is true when managing working capital accounts? A) Maintain minimal raw material inventories without causing manufacturing delays. B) Use as little labor as possible to manufacture the product while producing a quality product. C) Delay paying accounts payable as long as possible without suffering any penalties. D) All of the above are true.

35. Which one of the following statements is NOT true? A) The value of a put option can never be negative. B) The value of a put option can never be worth more than the underlying asset. C) The value of a put option can never be less than the present value of the strike price minus the current value of the underlying asset. D) All the above statements are true.

36. A financial restructuring A) will not change the value of a firm's real assets under M&M Proposition 1. B) includes financial transactions that change the capital structure of the firm. C) means that a firm has issued equity to retire debt. D) both a and b.

36. Suppose you own a call option on a stock with a strike price of $20 that expires today. The price of the underlying stock is $15. If you exercise the option and immediately sell the stock, A) you will earn $5. B) you will lose $5. C) you will lose $15. D) you will earn $15.

38. M&M Proposition 2 states that the cost of a firm's common stock is related to A) the debt-to-equity ratio. B) the required rate of return on the firm's underlying assets. C) the return of the market index. D) a and b.

38. Provisions that are part of venture capital agreements include A) timing of exit, number of board positions after exit, and what price is acceptable. B) timing of exit, the method of exit, and what price is acceptable. C) the method of exit, number of board positions after exit, and what price is acceptable. D) None of the above.

38. The firm can be viewed as A) a portfolio of individual projects, each with their own risks, cost of capital, and returns. B) a collection of equity shares comprising it. C) a collection of debt instruments financing it. D) none of the above.

38. Which type of stock repurchase often takes place at a price below the current market price of the stock? A) Open-market repurchase B) Fixed-price tender offer repurchase C) Dutch auction tender offer repurchase D) Targeted stock repurchase

39. According to M&M Proposition 2, the cost of a firm's equity A) increases with the debt-to-equity ratio. B) decreases with the debt-to-equity ratio. C) increases and then falls with the debt-to-equity ratio. D) decreases and then increases with the debt-to-equity ratio.

39. According to the text, the financial plan covers a period of A) one year. B) three to five years. C) ten years. D) None of the above.

39. Consider an American and a European call option on a dividend-paying stock, with otherwise identical features (same strike price, etc.). Which one of the following statements is true? A) The American call option will never be worth less than the European call option. B) The European call option will never be worth less than the American call option. C) Both options should always have the same value. D) None of the above statements is true.

39. In order for a firm to estimate its cost of debt capital by observing the price of its debt instruments, A) the firm must depend on markets being reasonably efficient. B) the debt must be privately held. C) the beta of the debt must be greater than the beta of the firm's equity. D) None of the above.

39. The restrictive strategy is a high-risk, high-return alternative to the flexible strategy because of A) financial shortage costs. B) production shortage costs. C) human resources shortages costs. D) None of the above.

39. The three principal ways in which venture capital firms exit venture-backed companies are A) selling to a strategic buyer, buying out the founder, and offering stock to the public. B) selling to a strategic buyer, selling to a financial buyer, and buying out the founder. C) selling to a strategic buyer, selling to a financial buyer, and offering stock to the public. D) None of the above.

39. Which type of stock repurchase allows management to set the repurchase price at the lowest level necessary to repurchase the desired number of shares? A) Open-market repurchase B) Fixed-price tender offer repurchase C) Dutch auction tender offer repurchase D) All of the above will generate the same purchase price.

44. If the price of the underlying asset increases, what happens to the value of call and put options? A) Put options will be worth more, call options will be worth less. B) Put options will be worth less, call options will be worth more. C) Both call and put options will be worth more. D) Both call and put options will be worth less.

46. Which of these statements about direct bankruptcy costs is not true? A) Direct bankruptcy costs include the hiring of additional accountants, lawyers, and consultants. B) Direct bankruptcy costs are less than indirect costs. C) Suppliers requiring cash on delivery is part of a firm's direct bankruptcy costs. D) Negotiating with lenders may help a firm reduce direct bankruptcy costs.

46. Which one of the following is NOT part of a financing plan? A) The dollar amount of funds that has to be raised externally and the sources of funds available to the firm B) The desired capital structure for the firm C) The firm's dividend policy D) All of the above are part of a financial plan.

60. The ex-dividend date: ABC Co. stock is currently trading at $38.15 per share. The company pays a regular cash dividend of $0.80 every quarter. Tomorrow is ex-dividend day for the upcoming regular dividend. The tax rate on dividends is 15 percent. Assuming there is no new information released about the company, how much do you expect the company's stock to trade for tomorrow? A) $37.47 B) $37.35 C) $37.32 D) $37.23

63. The cost of debt: Beckham Corporation has semiannual bonds outstanding with 13 years to maturity and are currently priced at $746.16. If the bonds have a coupon rate of 8.5 percent, then what is the after-tax cost of debt for Beckham if its marginal tax rate is 35%? Assume that your calculation is made as on Wall Street. A) 6.250% B) 8.125% C) 12.500% D) 12.890%

63. Types of dividends: Distressed Capital, Inc., is being liquidated. The company's assets can be sold for $20 million. It will cost $18 million for the company to meet all its previous obligations and to payoff debt holders. The company has 30 million shares outstanding. If you own 2,000 shares, how much do you expect to receive in liquidating dividends? Ignore taxes. A) $0.00 B) $133.33 C) $266.66 D) $1,200.00

70. Option payoffs: You have sold a call option on ABC Co. stock with a strike price of $40. You do not intend to make any other transactions before the options expiration date. The current stock price is $20. Which of the following statements best describes your hopes for the stock? A) You want the stock price to fall. B) You want the stock price to rise. C) You are indifferent, as long as the stock price stays under $40. D) It doesn't matter; you are indifferent to changes in the stock price.

70. IPO: Fortune Hotels issues an IPO sold on a best-efforts basis. The company's investment bank demands a spread of 20 percent. Five million shares are issued. However, the bank was overly optimistic and could not sell at the offer price of $31. If the net proceeds to the issuer is $110 million, how much did the investment bank receive? A) $22.0 million B) $27.5 million C) $31.0 million D) None of the above

70. Lockbox: Porter Corp. has just signed up for a lockbox. Management expects the lockbox to reduce the mail float by 2.3 days. The firm's remittances average $41,250 a day, with the average check being $165. The bank charges $0.39 per processed check. Assume that there are 270 business days in a year and their opportunity cost of funds is 5 percent. What will the firm's savings be from using the lockbox? A) $4,743.75 B) $975.50 C) $2,632.50 D) $94,875.00

50. Which of the following compensation methods is NOT likely to reduce agency costs between stockholders and managers? A) Stock compensation—giving the CEO stock in the company as part of her salary. B) A golden parachute—a guaranteed large lump-sum payment in the event that the CEO is fired. C) A higher salary than that of other CEOs in similar companies. D) Performance bonuses—a higher bonus if the company's cash flows are higher then expected.

51. Stock splits: Split-Gram, Inc., has announced a 4-to-1 stock split. If the company currently has 1 million shares outstanding, how many outstanding shares will it have after the split? A) 4 million B) 3 million C) 2 million D) 1 million

51. The recommended model to estimate the cost of common equity for a firm is A) a one-stage constant growth model. B) a multistage growth model. C) the CAPM. D) none of the above.

51. Which of the following reasons is NOT a valid explanation of why managers sometimes choose to take on negative-NPV Projects: A) The NPV analysis does not include a valuable real option to expand the project if things go well. B) If the firm has debt, managers may create value for shareholders by taking on some risky negative-NPV projects. C) Managers' payoff functions represent the payoffs of lenders. By taking negative-NPV projects, the managers can create value for lenders. D) All of the above descriptions are valid explanations for why managers sometimes take on negative NPV projects.

51. Which of the following supports the trade-off theory of capital structure? A) Firms use cash on hand first, since issuing equity and debt is expensive. B) A firm's capital structure is the result of past equity and debt issuance decisions. C) Firms have a target capital structure. D) a and b.

57. Which one of the following statements is NOT true? A) Private equity firms pool money from wealthy investors, pension funds, insurance companies, and other sources to make investments. B) Private equity firms invest in more mature companies. C) Private equity firms invest in new companies. D) Private equity investors focus on firms that have stable cash flows because they use a lot of debt to finance their acquisitions.

57. Which statement is NOT true for a firm that is operating at full capacity? A) Fixed assets vary directly with sales. B) Fixed assets can never vary directly with sales. C) Fixed assets can be incrementally changed. D) All of the above are true

58. How firms estimate their cost of capital: You are analyzing the cost of capital for a firm that is financed with $300 million of equity and $200 million of debt. The cost of debt capital for the firm is 9 percent, while the cost of equity capital is 19 percent. What is the overall cost of capital for the firm? A) 13.0% B) 14.0% C) 15.0% D) 16.0%

58. M&M Proposition 1: What are the interest payments that you receive after you undo the restructuring, and what are your total cash flows? A) $1.58 and $12.38 B) $23.55 and $75 C) $1.125 and $12.38 D) None of the above.

70. M&M Proposition 2: Suppose a firm has a cost of equity of 12%, a D/E or 1/6, and the YTM on its bonds is 7.5%. The risk-free rate is currently 3%. What is the current required rate of return on its assets and equity if the D/E is changed to 1/3? A) 11.35% and 13.25% B) 11.35% and 8.25% C) 13.25% and 11.35% D) None of the above.

71. Lockbox: Rocky Corp. has daily sales of $18,100. The financial manager determined that a lockbox would reduce the collection time by 2.2 days. Assuming the company can earn 6 percent interest per year, what are the savings from the lockbox? Round to the nearest dollar. A) $3,620.50 B) $2,389.20 C) $39,820 D) $1,100.45

71. Option payoffs: What is the payoff for a put option with a strike price of $20 if the price of the underlying stock at expiration is $18? A) $0 B) $2 C) $18 D) $20

71. The benefits of debt: Packman Corporation has a reported EBIT of $500, which is expected to remain constant in perpetuity. If the firm borrows $2,000, its YTM will be 6.5% and its coupon rate will be 8%. If the company's marginal tax rate is 30% and its average tax rate is 20%, what are its after-tax earnings? A) $238 B) $272 C) $259 D) None of the above.

71. The cost of equity: The Dedus Shoes, Inc., has common shares with a price of $28.76 per share. The firm paid a dividend of $1.00 yesterday, and dividends are expected to grow at 10 percent for two years and then at 5 percent thereafter. What is the implied cost of common equity capital for Dedus? A) 7.00% B) 8.00% C) 9.00% D) 10.00%

72. Addition to retained earnings: Tangent, Inc., has revenues of $4,375,233 and costs of $2,467,321, and pays a tax rate of 34 percent. If the firm pays out 60 percent of its earnings as dividends every year, what is the amount of retained earnings? A) $171,254.18 B) $755,533.15 C) $503,688.77 D) None of the above.

72. Cost of trade credit: Senter Corp. sells its goods with terms of 2/10 EOM, net 30. What is the implicit cost of the trade credit? A) 18.50% B) 30.00% C) 44.59% D) 21.89%

72. General cash offering: Star Corporation, an auto fuel cell maker, is planning a new plant and needs to raise $30 million to finance it. The company plans to raise the money through a general cash offering priced at $23.50 a share. Star's underwriters charge a 6 percent spread. How many shares does the company have to sell to achieve its goal? A) 1,358,081 shares B) 1,276,596 shares C) 1,200,000 shares D) None of the above

72. How stock is repurchased: ABC Co has 3 million shares outstanding. The shares are currently selling for $40. If the firm repurchases $10 million at market prices, approximately how much will the stock be worth after the repurchase? Ignore taxes. A) $40 B) $38 C) $42 D) $50

72. Option valuation: Consider a call option with a strike price of $20, which expires in one year. The risk-free rate of interest is 5 percent. The underlying stock price is $30. Without arbitrage, which of the following is a possible price for the call option? A) $0 B) $8 C) $15 D) None of the above

72. The benefits of debt: A firm plans to issue $1 million worth of debt at a YTM of 9%. The debt is trading at par. The firm's marginal corporate tax rate is 25%, while its average tax rate is 15%. By how much will this debt issuance reduce the firm's annual tax liability? A) $13,500 B) $22,500 C) $32,500 D) None of the above.

72. The cost of equity: Tranquility, Inc., has common shares with a price of $18.37 per share. The firm paid a dividend of $1.50 yesterday, and dividends are expected to grow at 9 percent for three years and then at 2 percent thereafter. What is the implied cost of common equity capital for Tranquility? A) 9% B) 10% C) 11% D) 12%

73. Bank lending: Jasper, Inc., is looking for a five-year term loan of $3 million. Its bank is willing to make the loan. The firm will have to pay a premium of 1.5 percent for default risk and another 0.75 percent for maturity risk. The current prime rate is 7.5 percent. What is the loan rate on this bank loan? A) 9% B) 8.25% C) 9.75% D) None of the above

73. Cost of trade credit: Kearns, Inc., sells its goods with terms of 3/15 EOM, net 60. What is the implicit cost of the trade credit? A) 15% B) 45% C) 34% D) 28%

73. How stock repurchases differ from dividends: You purchased 500 shares in Div Choice, Inc., several years ago for $20. The company previously announced it will be distributing cash to shareholders in a novel way. First, the company will a have a tender offer stock repurchase at $30 per share. After the repurchase, it will issue a special dividend of $5.00 per share to the remaining stockholders. Suppose that you want to convert your holdings in Div Choice, Inc., into cash. Assume the tax on dividends is 30 percent and the tax on capital gains is 15 percent. The shares are currently trading for $30. Assume no new information comes out about the company. How much cash will you receive from taking part in the repurchase? A) You will receive $14,250 by taking part in the repurchase. B) You will receive $15,000 by taking part in the repurchase. C) You will receive $15,750 by taking part in the repurchase. D) You will receive $16,000 by taking part in the repurchase.

73. Option valuation: Consider a call option with a strike price of $10, which expires in one year. The risk-free rate of interest is 10 percent. The current underlying stock price is $30. Without arbitrage, which of the following is a possible price for the call option? A) $0 B) $20.50 C) $21.00 D) None of the above

73. Retention ratio: A firm paid out $163,961.60 as dividends on net income of $298,112. What is the firm's retention ratio? A) 55% B) 45% C) 50% D) None of the above.

73. The benefits of debt. A firm plans to issue $1 million worth of debt at a YTM of 9%. The debt is trading at par. The firm's marginal corporate tax rate is 35%. What is the present value of the tax savings in perpetuity? A) $11,025 B) $20,475 C) $350,000 D) $227,500

73. The cost of equity: Oasis, Inc., has common shares with a price of $21.12 per share. The firm is expected to pay a dividend of $1.75 one year from today, and dividends are expected to grow at 10 percent for two years after that and then at 5 percent thereafter. What is the implied cost of common equity capital for Oasis? A) 13% B) 14% C) 15% D) 16%

74. Bank lending: Suppose two firms want to borrow money from a bank for a period of 10 years. Firm A has excellent credit and can borrow at the prime rate, whereas Firm B's credit standing is prime + 2. The current prime rate is 5.75 percent, the 30-year Treasury bond yield is 4.35 percent, the three-month Treasury bill yield is 3.54 percent, and the 10-year Treasury note yield is 4.24 percent. What are the appropriate loan rates for each customer? A) 6.45%, 7.75% B) 6.45%, 8.45% C) 5.75%, 8.45% D) None of the above

74. Factoring: Pride, Inc., sells $150,000 of its accounts receivable to factors at 2.875 percent discount. The firm's average collection period is 75 days. What is the simple annual interest cost of the factors loan? A) 35.5% B) 32.9% C) 27.8% D) 31.1%

74. How stock repurchases differ from dividends: Using the same information from the preceding question, approximately how much will you receive by waiting until after the ex-dividend day and then selling the shares in the market? A) You will receive about $13,500 by selling after the ex-dividend day. B) You will receive about $14,775 by selling after the ex-dividend day. C) You will receive about $14,512 by selling after the ex-dividend day. D) You will receive about $15,000 by selling after the ex-dividend day.

74. Option valuation: Consider a put option with a strike price of $40, which expires in one year. The risk-free rate of interest is 8 percent. The current underlying stock price is $20. Without arbitrage, which of the following is a possible price for the put option? A) $0.50 B) $16.50 C) $25.00 D) None of the above

74. Payout and retention ratio: Tradewinds Corp. has revenues of $9,651,220, costs of $6,080,412, interest payment of $511,233, and a tax rate of 34 percent. It paid dividends of $1,384,125 to shareholders. Find the firm's dividend payout ratio and retention ratio. A) 66%, 34% B) 25%, 75% C) 69%, 31% D) 34%, 66%

74. The cost of equity: What is its value without debt in the capital structure? A) $350 B) $650 C) $2,917 D) $5,417

74. The cost of preferred equity: Billy's Goat Coats has a preferred share issue outstanding with a current price of $38.89. The firm last paid a dividend on the issue of $3.50 per share. What is the firm's cost of preferred equity? A) 7% B) 8% C) 9% D) 10%

77. Agency costs: What is the expected value of the bonds to the lenders if the stockholders sell the debt? A) $100mm B) $88.8mm C) $48.8 mm D) None of the above.

77. Binomial pricing: Assume that the stock of Malcolm's Mufflers, Inc,. is currently trading for $18 and will either rise to $20 or fall to $14 in one year. The risk-free rate for one year is 10 percent. What is the value of a call option with a strike price of $15? A) $4.39 B) $3.33 C) $2.04 D) $0.83

77. Capital intensity ratio: Michael Holdings, Inc., has total assets of $1,480,072 and sales of $2,236,625. What is the firm's capital intensity ratio? A) 66.2% B) 53.7% C) 151.1% D) None of the above.

77. Dividend policy and firm value: You purchased 4,000 shares of High-Div Co. several years ago at $50 per share. The company has decided to pay a special dividend of $2.00 per share. Dividend payments are taxed at 15 percent. You intend to reinvest in the company through the dividend reinvestment program. If the company's stock is trading at $48.20 following the dividend payment, how many additional shares can you buy through the dividend reinvestment program? A) 166 shares B) 141 shares C) 134 shares D) 125 shares

77. Using the WACC in practice: Swirlpool, Inc., has found that its cost of common equity capital is 18 percent, and its cost of debt capital is 8 percent. If the firm is financed with 60 percent common shares and 40 percent debt, then what is the after-tax weighted average cost of capital for Swirlpool if it is subject to a 40 percent marginal tax rate? A) 10.37% B) 12.00% C) 12.72% D) 14.00%

78. Agency costs: What is the expected value of the equity if the stockholders sell the debt? A) $175mm B) $97.5mm C) $51mm D) None of the above.

78. Binomial pricing: Assume that the stock of Malcolm's Mufflers, Inc., is currently trading for $43 and will either rise to $55 or fall to $17 in one year. The risk-free rate for one year is 8 percent. What is the value of a call option with a strike price of $45? A) $4.40 B) $5.84 C) $6.84 D) $7.17

78. Capital intensity ratio: Dennis Compton, Inc., has total assets of $5,335,901 and a capital intensity of 53.9%. What is the firm's sales? A) $5,335,901 B) $2,828,028 C) $9,899,631 D) None of the above.

78. Castle Co. needs to borrow $10 million for process improvement upgrades. Management decides to sell 20-year bonds. They determine that the 3-month Treasury bill rate is 2.75 percent, the firm's credit rating is A, and the yield on 20-year Treasury bonds is 1.80 percent higher than that for 3-month Treasury bills. Bonds with an A rating are selling for 50 basis points above the 20-year Treasury bond rate. What is the borrowing cost to do this transaction? a. 4.55% b. 5.05% c. 7.75% d. 9.55%

33. The optimal capital structure of a firm A) minimizes the cost of financing a firm's projects. B) minimizes interest payments to creditors. C) maximizes firm value. D) both a and c.

100. Real options: Consider a lease agreement recently offered by a car dealership. The agreement gives the customer the right to use a new SUV for three years in exchange for payments of $550 per month. At the end of the lease, the customer can choose to purchase the SUV for $15,000. What sort or option does this resemble? A) A put option on the SUV with a strike price of $15,000 B) A call option on the SUV with a strike price of $15,000 C) A put option on the SUV with a strike price of $19,800 D) A call option on the SUV with a strike price of $19,800

101. Risk management: CoolHaus, Inc., is a manufacturer of residential air conditioning equipment. Air conditioning equipment requires a lot of copper. In six months the company will purchase its copper supply for the next two years. Management is very concerned about the volatility of copper prices. Assume the risk-free rate of interest is 0 percent. Which of the following transactions will ensure the company does not have to pay more then $8,100 per ton of copper six months from now? A) The company purchases a put option for the necessary amount of copper with a strike price of $8,000 per ton, a premium of $100 per ton, and an expiration date six months from now. B) The company purchases a call option for the necessary amount of copper with a strike price of $8,000 per ton, a premium of $100 per ton, and an expiration date six months from now. C) The company sells a put option for the necessary amount of copper with a strike price of $8,000 per ton, a premium of $100 per ton and an expiration date six months from now. D) The company sells a call option for the necessary amount of copper with a strike price of $8,000 per ton, a premium of $100 per ton, and an expiration date six months from now.

102. When a company issues convertible bonds with a $1,000 par value that can be converted to 10 shares of common stock, each bond includes A) A put with an exercise price of $100 per share B) A call with an exercise price of $100 per share C) A put with an exercise price of $10 per share D) A call with an exercise price of $10 per share

103. What are the options to purchase common stock that are bundled with the common shares that are being sold in an IPO are called? A) puts B) convertibles C) warrants D) preferred stock

104. What is the value of the conversion feature if the company can issue either for a par value of $1000: 20 year, semiannual plain vanilla bonds at 6.5% or 20 year, semiannual 4.8% convertible bonds (convertible to 15 shares of common stock) a. $811.23 b. $540.82 c. $217.02 d. $188.77

28. Which one of the following statements is NOT true? A) Gross working capital is the funds invested in a company's current liabilities. B) Net working capital (NWC) refers to the difference between current assets and current liabilities. C) Working capital efficiency refers to the length of time between when a working capital asset is acquired and when it is converted into cash. D) Working capital management involves making decisions regarding the use and sources of current assets.

29. Which one of the following statements is NOT true? A) The higher the cash balance, the better the ability of the firm to meet its short-term financial obligations. B) The lower the cash balance, the better the ability of the firm to meet its short-term financial obligations. C) The level of the cash balance has no bearing on the firm's ability to meet its short-term financial obligations. D) None of the above.

30. A small soybean farmer wants to hedge the price risk of his next crop, but he is financially constrained. He can't raise capital by either borrowing money or selling his current assets. Instead, he sells call options on his soybean crop with a strike price of $14 per bushel at a premium of $0.50 a bushel. Using the proceeds from selling the call options, he buys put options on his soybean crop with a strike price of $11.00 per bushel at a premium of $0.35 per bushel. The risk-free interest rate is 0 percent. By taking these derivative positions, the farmer has guaranteed that he will earn somewhere between $14.15 and $11.15 per bushel. A) True B) False

30. The cash conversion cycle A) shows how long the firm keeps its inventory before selling it. B) begins when the firm invests cash to purchase the raw materials that would be used to produce the goods that the firm manufactures. C) begins when the firm uses its cash to purchase raw materials and ends when the firm collects cash payments on its credit sales. D) estimates how long it takes on average for the firm to collect its outstanding accounts receivable balance.

31. The initial seed money comes from A) public investors. B) investment banks. C) the entrepreneur or other founders. D) commercial banks.

31. Which one of the following statements is NOT true? A) The cash conversion cycle begins when the firm invests cash to purchase the raw materials that would be used to produce the goods that the firm manufactures. B) The cash conversion cycle begins when the firm uses its cash to purchase raw materials and ends when the firm collects cash payments on its credit sales. C) To measure the cash conversion cycle, we need another measure called the days' payables outstanding. D) The cash conversion cycle ends not with the finished goods being sold to customers and the cash collected on the sales; but when you take into account the time taken by the firm to pay for its purchases.

31. Which type of dividend is most likely to be used to distribute the revenue from a one-time sale of a large asset? A) Regular cash dividend B) Extra dividend C) Special dividend D) Liquidating dividend

32. A firm's capital structure is the mix of financial securities used to finance its activities and can include all of the following except A) stock. B) bonds. C) equity options. D) preferred stock.

32. An investor (the buyer) purchases a call option from a seller. On the expiration date of a call option, A) the buyer has the obligation to buy the underlying asset and the seller has the obligation to sell it. B) the buyer has the right to buy the underlying asset and the seller has the obligation to sell it. C) the buyer has the obligation to buy the underlying asset and the seller has the right to sell it. D) None of the above.

32. Bootstrapping is the process by which A) many entrepreneurs raise "seed" money and obtain other resources necessary to start their businesses. B) the entrepreneur often fleshes out his or her ideas and makes them operational. C) most businesses are started by an entrepreneur. D) none of the above.

32. The operating cycle A) begins when the firm receives the raw materials it purchased that would be used to produce the goods that the firm manufactures. B) begins when the firm uses its cash to purchase raw materials and ends when the firm collects cash payments on its credit sales. C) To measure operating cycle we need another measure called the days' payables outstanding. D) ends not with the finished goods being sold to customers and the cash collected on the sales; but when you take into account the time taken by the firm to pay for its purchases.

32. Which type of dividend is used to distribute any remaining value when the company's assets are being sold as the company is terminated? A) Regular cash dividend B) Extra dividend C) Special dividend D) Liquidating dividend

33. An investor (the buyer) purchases a put option from a seller. On the expiration date of a call option, A) the buyer has the obligation to sell the underlying asset and the seller has the right to buy it. B) the buyer has the obligation to sell the underlying asset and the seller has the obligation to buy it. C) the buyer has the right to sell the underlying asset and the seller has the obligation to buy it. D) None of the above

33. Consider a company that had unexpectedly higher earnings last quarter and intends to pay out some additional value to shareholders. Which type of dividend is the company likely to use? A) Regular cash dividend B) Extra dividend C) Special dividend D) Liquidating dividend

33. Firms have no way to directly estimate the discount rate that reflects the risk of A) a publicly traded security. B) its debt securities. C) the incremental cash flows from a particular project. D) none of the above.

33. Which one of the following statements is NOT true? A) The process by which many entrepreneurs raise "seed" money and obtain other resources necessary to start their businesses is often called bootstrapping. B) Most businesses are started by an entrepreneur who has a vision for a new business or product and a passionate belief in the concept's viability. C) The initial "seed" money usually comes from the entrepreneur or other founders. D) The seed money is spent on developing an initial public offering.

34. A firm's overall cost of capital is A) equal to its cost debt. B) a weighted average of the costs of capital for the collection of individual projects that the firm is working on. C) best measured by the cost of capital of the riskiest projects that the firm is working on. D) none of the above.

34. M&M Proposition 1 assumes all of the following except that A) there are no taxes. B) there are no costs to acquiring information. C) there are no transactions costs. D) the real investment policy of the firm is affected by its capital structure decisions.

34. Which ONE of the following statements is true? A) Cash conversion cycle = DSO + DSI +DPO B) Cash conversion cycle = DSO + DSI - DPO C) Cash conversion cycle = DSO - DPO D) None of the above.

34. Which ONE of the following statements is true? A) The venture capital industry as we know it today emerged in the late 1960s with the formation of the first venture capital limited partnerships. B) Modern venture capital firms tend to specialize in a specific line of business, such as hospitality, food manufacturing, or medical devices. C) A significant number of venture capital firms focus on high-technology investments. D) All of the above are true statements.

34. Which one of the following statements is NOT true? A) The value of a call option can never be negative. B) The value of a call option can never be more than the value of the underlying asset. C) The value of a call option can never be worth less than the current value of the asset minus present value of the strike price. D) The value of a call option can never be worth more than the strike price.

34. Which step in the dividend payment process for a public company usually results in a change in the company's stock price? Assume the dividend has changed from the last dividend paid. A) Public announcement B) Ex-dividend date C) Payable date D) Both a and b

35. A firm's enterprise value is given by A) the value of equity plus the value of debt. B) the value of equity minus the value of debt. C) the value of equity minus the value of debt plus the value of future projects. D) none of the above.

35. The finance balance sheet is A) the same as the accounting balance sheet, but it is based on market values. B) the same as the accounting balance sheet, but it does not have to balance. C) based on cash rather than accrual accounting. D) net income.

35. The shares of ABC, Inc., fell sharply today after the company announced that it is increasing its regular cash dividend distributions. Which one of the following explanations may explain investors' negative reaction? A) Changes in regular cash dividends are made frequently so that the company's management can adjust for changes in short-term earnings. The decrease in the stock price is probably related to some other negative event. B) Investors previously believed the company had many lucrative growth opportunities. By announcing higher regular cash dividends, the company is sending a signal that it doesn't have enough positive-NPV projects to use all the money. C) Investors expected that the company would announce a stock repurchase rather then a cash dividend increase. Since a change in dividend policy is commonly viewed as a weaker signal than a stock repurchase, the share price fell on the news of the dividend increase. D) None of the above explanations can possibly explain investor's reaction.

35. Which one of the following statements is NOT true? A) Approximately $23 billion was invested in venture capital funds in 2010. B) The venture capital industry as we know it today emerged in the late 1990s. C) Modern venture capital firms tend to specialize in a specific line of business, such as hospitality, food manufacturing, or medical devices. D) A significant number of venture capital firms focus on high-technology investments.

35. Which one of the following statements is NOT true? A) Cash conversion cycle = DSO + DSI - DPO B) Operating cycle = DSO +DSI C) a and b D) None of the above

38. Consider an option that gives the owner the right to buy a stock for $20 only on the third Friday of May, next year. The option being described is A) an American call option. B) a European put option. C) an American put option. D) a European call option.

36. Tactics that venture capitalists use to reduce the risk of their investment include A) funding the ventures in stages, requiring entrepreneurs to make no personal investments, syndicating investments, and maintaining in-depth knowledge about the industry in which they specialize. B) funding the ventures completely in the beginning, requiring entrepreneurs to make personal investments, syndicating investments, and maintaining in-depth knowledge about the industry in which they specialize. C) funding the ventures in stages, requiring entrepreneurs to make personal investments, syndicating investments, and maintaining in-depth knowledge about the industry in which they specialize. D) None of the above.

36. The flexible current asset investment strategy A) has a high percent of current assets to sales. B) calls for management to invest large amounts in cash, marketable securities, and inventory. C) leads to high levels of accounts receivable. D) All of the above.

36. The value of the cash flows that the assets of the firm are expected to generate must equal A) the value of the cash flows claimed by the equity investors. B) the value of the cash flows claimed by the debt investors. C) the value of the cash flows claimed by both the equity and debt investors. D) the revenue produced by the firm.

36. Which of the following components make up a financial plan A) the strategic plan. B) the investment plan. C) the financing plan. D) All of the above.

36. Which one of these examples does NOT meet the strict definition for a dividend? A) Steel Gen Corp regularly distributes $0.05 to each shareholder for every share they own. B) Chalone Vineyards once offered their investors discounts on wine in proportion to the number of shares they owned. C) Churchill Downs, Inc., which operates several horse racing tracks, including the location for the Kentucky Derby, distributes two free general admission tickets to every investor who holds more then 100 shares in the company (as of 2008). D) Both b and c do not meet the definition for a dividend.

37. Suppose you own a put option on a stock with a strike price of $35 that expires today. The price of the underlying stock is $25. If you purchase the stock and exercise the put option, A) you will earn $10. B) you will lose $10. C) you will earn $25. D) you will lose $25.

37. The beta for a firm can be estimated by A) adding up the betas of the individual projects of the firm. B) taking the weighted average of the beta for the individual projects of the firm. C) taking the simple average of the beta for the individual projects of the firm. D) None of the above.

37. The financial plan addresses the following issue(s): A) Where is the company headed? B) What capital resources does the management need to get there? C) How is the firm going to pay for the resources needed? D) All of the above.

37. The weighted average cost of capital (WACC) includes A) the required return on equity and required return on underlying firm assets. B) the cost of any debt and the cost of equity. C) the cost of any debt and required return on underlying firm assets. D) none of the above.

37. Which of the following is NOT a possible result of a stock repurchase? A) Removing a large number of shares from circulation can change the ability of certain shareholders to control the firm. B) If the number of remaining shares is relatively small, the remaining shares will be less liquid. C) The company will decrease its leverage ratio (debt-to-equity ratio). D) By repurchasing stock when it is undervalued, managers can effectively transfer value from selling stockholders to stockholders who don't take part in the repurchase.

37. Which one of the following is NOT true about the flexible current asset investment strategy? A) The strategy promotes a liberal trade credit policy for customers. B) The flexible strategy calls for management to invest large amounts in cash, marketable securities, and inventory. C) The flexible strategy is perceived be a high-risk and high-return course of action for management to follow. D) The strategy's downside is the high inventory carrying cost.

37. Which one of the following statements is NOT true? A) Venture capitalists often require an entrepreneur to make a substantial personal investment in the business. B) Syndication occurs when the originating venture capitalist buys off other venture capitalists involved in the venture. C) Another factor that reduces risk is the venture capitalist's in-depth knowledge of the industry and technology. D) The key idea behind staged funding is that each funding stage gives the venture capitalist an opportunity to reassess the management team and the firm's financial performance.

38. A restrictive current asset investment strategy calls for A) current assets kept to a minimum. B) the firm barely investing in cash and inventory. C) tight terms of sale intended to curb credit sales and accounts receivable. D) All of the above

38. All but one of the following issues are addressed in the financial plan. A) What is the growth rate for a firm's main competitor? B) Where is the company headed? C) What capital resources does the management need to get there? D) How is the firm going to pay for the resources needed?

40. A straddle is a combination of a put option and a call option on the same asset with the same strike price. Which one of the following statements about a straddle is NOT true? A) The owner of a straddle will receive a payoff if the price of the underlying asset is higher than the strike price at expiration. B) The owner of a straddle will receive a payoff if the price of the underlying asset is lower than the strike price at expiration. C) The owner of a straddle will never exercise the put and the call option at the same time. D) The owner of a straddle will receive a higher payoff if the price of the underlying asset at expiration is near the strike price.

40. Financial risk A) refers to the effect that a firm's financing decisions has on the riskiness to cash flows that investors will receive. B) increases a firm's business risk. C) decreases a firm's business risk. D) is related to how debt affects the business decisions of a firm.

40. If markets are not reasonably efficient, then A) the estimates of expected returns are not needed. B) the need for a discount rate to analyze project cash flows is not needed. C) estimates of expected returns that were based on security prices will not be reliable. D) none of the above.

40. The strategic plan identifies A) the lines of business in which a firm will compete. B) major areas of investment in real assets. C) capital expenditures, acquisitions. and new lines of business. D) All of the above.

40. Which ONE of the following statements is true? A) A typical venture capital fund may generate annual returns of 15 to 25 percent on the money that it invests, compared with an average annual return for the S&P 500 of almost 12 percent. B) A typical venture capital fund may generate annual returns of 12 percent on the money that it invests, compared with an average annual return for the S&P 500 of about 20 percent. C) A typical venture capital fund may generate annual returns of 12 percent on the money that it invests, compared with an average annual return for the S&P 500 of about 25 percent. D) None of the above

40. Which ONE of the following statements is true? A) Financial shortage costs arise mainly from illiquidity—shortage of cash or a lack of marketable securities to sell for cash. B) Operating shortage costs result from lost production and sales. C) Operating shortage costs can be substantial, especially if the product markets are competitive. D) All of the above.

40. Which of the following explanations is NOT a possible benefit of dividends? A) Some investors prefer dividend-paying stocks and will be willing to pay a higher price for stocks with regular dividends. B) Paying out large regular dividends can force management to regularly raise more capital. The extra scrutiny involved in raising capital can increase the incentives of management to run the company efficiently. C) Dividends can be used to manage the capital structure of the company. D) Paying dividends reduces the probability that the firm will enter financial distress.

41. Advantages of going public include all EXCEPT A) Larger amount of capital can be raised this way than the amount that can be raised through private sources. B) Publicly traded firms find it harder to attract top management talent. C) Going public can enable an entrepreneur to fund a growing business without giving up control. D) Additional equity capital can usually be raised through follow-on seasoned public offerings at a low cost.

41. Operating shortage costs that result from lost production and sales are caused by A) not holding enough raw materials in inventory. B) running out of finished goods. C) restrictive sale policies. D) All of the above.

41. The strategic plan does NOT identify A) major areas of investment in real assets. B) future mergers, alliances, and divestitures. C) working capital strategies. D) the lines of business a firm will compete in.

41. When estimating the cost of debt capital for the firm, we are primarily interested in A) the cost of short-term debt. B) the cost of long-term debt. C) the coupon rate of the debt. D) none of the above.

41. Which of the following changes, when considered individually, will increase the value of a call option? A) The value of the underlying asset becomes more volatile. B) The price of the underlying asset goes down. C) Getting closer to the expiration date (the passage of time). D) A higher strike price.

41. Which of the following is a reason financial policy might matter? A) Firms must pay corporate income taxes. B) Capital structure choices can affect investment decisions, such as R&D and PP&E. C) Issuing equity is expensive. D) All of the above.

41. Which of the following statements about the relative advantages of stock repurchases over dividends is NOT true? A) Stock repurchases send a stronger signal than dividends to the market about management's belief that the firm's prospects are good. B) Open-market stock purchases allow management more flexibility because investors are less likely to react if the management cuts back or ends a stock repurchase as compared to cutting back on dividend payments. C) Stock repurchases allow stockholders to choose whether or not to participate in the stock repurchase. This allows stockholders to have more control over their tax burden. D) Historically, taxes on dividend payment have been higher than those on stock repurchases.

42. In early 2003, the U.S. government cut the tax rate on dividends to a flat 15 percent instead of treating dividend payments as other income. All else being equal, how would we expect the number of companies paying dividends to change. A) We would expect the number of dividend-paying companies to increase. B) We would expect the number of dividend-paying companies to decrease. C) We would expect the number of dividend-paying companies to stay relatively constant. D) None of the above.

42. Long-term debt typically describes A) debt with a maturity greater than one year. B) only coupon debt. C) publicly traded debt. D) none of the above.

42. The interest tax shield A) does not affect the WACC. B) makes it less costly to distribute cash to the security holder through interest payments than through dividends. C) is given by D × (1 - t). D) b and c.

42. Which ONE of the following statements about working capital tradeoff is true? A) Financial managers need to balance shortage costs against carrying costs to find an optimal strategy. B) If carrying costs are larger than shortage costs, then the firm will maximize value by adopting a more restrictive strategy. C) If shortage costs dominate carrying costs, the firm will need to move toward a more flexible policy. D) All of the above

42. Which ONE of the following statements is true? A) After the IPO, there is a less active secondary market for the firm's shares. B) Only smaller amounts of capital can be raised through an IPO than the amount that can be raised through private sources. C) Publicly traded firms find it easier to attract top management talent. D) Going public can enable an entrepreneur to fund a growing business but not without giving up control.

42. Which of the following changes, when considered individually, will increase the value of a put option? A) An increase in the risk-free interest rate B) Lower volatility of the price of the underlying asset C) A higher strike price D) None of the above

42. Which one of the following is true about capital expenditures? A) It is part of a firm's investment plan. B) Once a capital investment is made, they are almost always impossible to reverse. C) Capital expenditures can be one-time investments or routine investments that allow the firm to continue its operations. D) All of the above are true of capital investments.

43. Disadvantages of going public include all EXCEPT A) Managers' tendency to focus on long-term profits. B) The high cost of the IPO itself. C) The costs of complying with ongoing SEC disclosure requirements. D) The transparency that results from this compliance can be costly for some firms.

43. In order to calculate the present value of debt tax savings, the _______ is used as the discount rate. A) WACC B) risk-free rate C) required rate of return on debt D) none of the above

43. Suppose you are advising a retiree who holds 2,000 shares of LargeDiv Corp. The company is largely held by tax-paying institutional investors and has announced that it will shortly be issuing a large dividend. Because the shares are held in the retiree's Roth IRA, she will not incur taxes on either capital gains or dividends. The retiree has decided to sell the shares sometime this year, and use the money for living expenses. You expect the only upcoming change in the stock price will result from the dividend. Ignoring any discounting for time, what advice should you give? A) Sell the stock now—the stock price is likely to decrease more than just the dividend amount. B) Sell the stock ex-dividend—the stock price is likely to decline, but by less than the dividend amount. C) It doesn't matter when the stock is sold. D) Sell the stock now—it is always better to sell the stock immediately regardless of the tax consequences.

43. What happens to the value of call and put options if the volatility of the price of underlying asset decreases? A) Put options will be worth more, call options will be worth less. B) Put options will be worth less, call options will be worth more. C) Both call and put options will be worth more. D) Both call and put options will be worth less.

43. Which of the following need to be excluded from the calculation of the firm's amount of permanent debt? A) Long-term debt B) Revolving lines of credit C) Mortgage debt D) None of the above

43. Which one of the following is NOT true about the capital budgeting process? A) Management identifies a list of potential projects that are consistent with the business strategy and ranks them according to the value they would create for the shareholders. B) Senior management reviews the list. C) The list is revised to comply with the firm's budget constraints. D) All of the above are true of the capital budgeting process.

43. Which one of the following statements about working capital trade-off is NOT true? A) Financial managers need to balance shortage costs against carrying costs to find an optimal strategy. B) If carrying costs are smaller than shortage costs, then the firm will maximize value by adopting a more restrictive strategy. C) If shortage costs dominate carrying costs, the firm will need to move toward a more flexible policy. D) Management will try to find the level of current assets that minimizes the sum of the carrying costs and shortage costs.

44. Academic studies have estimated that the tax benefit of debt realized by firms is approximately A) 10% of firm value. B) a 10% reduction in WACC. C) a 10% reduction in the cost of debt D) 10% of debt value.

44. Basic services investment bankers provide when bringing securities to market include A) Origination B) Underwriting C) distribution. D) All of the above.

44. Suppose you own shares of ThreeFor, Inc., which has just announced a 3-for-1 stock split. Immediately after the announcement, the price of the company's shares rose by 5 percent. You don't expect any new information about the company until after the stock split. Ignoring any discounting for time, if you intend to sell your shares soon, you should A) sell the stock now—the single share you have now is likely to be worth more than the three shares you'll have after the split. B) sell the stock after the split—typically, the marker reacts positively to stock splits. The three shares you'll have after the split will be worth more than the single share you have now. C) sell the stock now—the stock is likely to be more liquid before the split when there are fewer shares. D) It doesn't matter when the stock is sold. If there is no new information about the stock, then the value of three shares after the split should be the same as the value of the single share you hold now.

44. The aging schedule A) shows the breakdown of the firm's accounts receivable by their date of sale. B) identifies and then tracks delinquent accounts and to see that they are paid. C) are an important financial tool for analyzing the quality of a company's receivables. D) All of the above.

44. When analyzing a firm's cost of debt, we are typically interested in A) the cost of the debt on the date that the analysis is being completed. B) the coupon rate on the firm's bonds. C) the risk-free rate plus half a percent. D) none of the above.

44. Which one of the following is NOT true about the capital budgeting process? A) Management identifies a list of potential projects that are consistent with the business strategy and ranks them according to the value they would create for the shareholders. B) Senior management reviews the list. C) Once the list is made, no management review can change it. D) All of the above are true of the capital budgeting process.

45. Generally, management undertakes a reverse stock split to A) send a signal to investors that the company is expected to perform poorly. B) meet the minimum requirements to be listed on one of the major stock exchanges. C) increase the liquidity of shares by decreasing the number of share available. D) reduce the administrative costs associated with investor relations.

45. If a firm has bonds outstanding and the firm would like to calculate the current cost of debt for the bonds, then the firm would A) use the coupon rate of the bonds to estimate the cost. B) use the current yield to maturity of the bonds to estimate the cost. C) use the current coupon yield of the bonds to estimate the cost. D) none of the above.

45. The financing plan of a firm will indicate A) the dollar amount of funds that has to be raised externally and the sources of funds available to the firm, the desired capital structure for the firm, and the firm's dividend policy. B) the dollar amount of funds that has to be raised externally and the sources of funds available to the firm, the desired capital structure for the firm, and the firm's working capital policy. C) the dollar amount of funds that has to be raised externally and the sources of funds available to the firm, the firm's dividend policy, and the firm's working capital policy. D) the firm's dividend policy, the desired capital structure for the firm, and the firm's working capital policy.

45. The use of debt financing A) may cause a manager to take on riskier projects in order to make interest payments. B) is more expensive than issuing equity due to the use of covenants. C) allows managers to make discretionary interest payments. D) limits the ability of managers to waste stockholder money.

45. Which ONE of the following statements is true? A) The economic order quantity (EOQ) mathematically determines the minimum total inventory cost. B) The EOQ takes into account reorder costs and inventory carrying costs. C) The optimal order size is determined by the EOQ model. D) All of the above

45. Which one of the following statements is NOT true? A) Investment bankers provide three basic services when bringing securities to market—origination, underwriting, and distribution. B) During the origination phase, the investment banker helps the firm determine whether it is ready for an IPO. C) Origination is the risk-bearing part of investment banking. D) Origination includes giving the firm financial advice and getting the issue ready to sell.

45. With everything else constant, as the expiration date gets closer, what happens to the value of call and put options? A) Call option will be worth more, put options will be worth less. B) Call option will be worth less, put options will be worth more. C) Both call and put options will be worth more. D) Both call and put options will be worth less.

46. A bond has a coupon rate of 6 percent and the bond makes semiannual coupon payments. The dollar amount of coupon interest received every six months is A) $60. B) $30. C) $30 plus or minus the prorate portion of the discount or premium that the bond was purchased for. D) none of the above.

46. All of the following about a firm-commitment underwriting is true EXCEPT: A) The investment banker guarantees the issuer a fixed amount of money from the stock sale. B) The investment banker actually buys the stock from the firm. C) The issuer bears the risk that the resale price might be lower than the price the underwriter pays. D) The underwriter bears the risk that the resale price might be lower than the price the underwriter pays.

46. Which one of the following statements describes the finding from academic studies on corporate dividend policy? A) Managers tend to increase regular cash dividends in response to unexpectedly high earnings. B) Managers tend to maintain a level dividend payment at an amount that they are relatively certain they can maintain in the future. C) Managers tend to focus on dividends rather than stock repurchases because institutional investors tend to prefer regular dividends. D) Dividend policy doesn't matter because investors can re-create dividends by selling a fraction of their shares.

46. Which one of the following statements is NOT true? A) The economic order quantity (EOQ) mathematically determines the minimum total inventory cost. B) The EOQ ignores reorder costs and inventory carrying costs. C) The optimal order size is determined by the EOQ model. D) All of the above.

46. With everything else held constant, what happens to the value of call and put options if the risk-free interest rate increases? A) Call options will be worth more, put options will be worth less. B) Call options will be worth less, put options will be worth more. C) Both call and put options will be worth less. D) Both call and put options will be worth more.

47. Bond issuance costs include A) investment banking fees. B) legal fees. C) accountant fees. D) all of the above.

47. The financial plan includes A) the strategic plan, financing plan, and options plan. B) the strategic plan, investment plan, and financing plan. C) the financing plan, investment plan, and options plan. D) none of the above.

47. The management at Socrates Motors considered the option to abandon when building their new manufacturing plant. The design of the plant allows it to be easily converted to manufacture other types of large machinery. If their new line of cars is poorly received, their plant should be easy to sell to another manufacturing company. In this example, the price at which they expect to sell the plant if things go poorly resembles A) the premium of a put option on the plant. B) the premium of a call option on the plant. C) the strike price of a put option on the plant. D) the strike price of a call option the plant.

47. Which of the following considerations should NOT be related to management's concerns when setting a dividend or stock repurchase policy? A) Over the long term, how much does the company's level of earnings exceed its investment requirements? How certain is this level? B) Is the stock currently undervalued? Can the management add value to the company by initiating a stock repurchase? C) Does the firm have enough financial reserves to maintain the dividend policy in periods when earnings are down or investment requirements are up? D) Can the firm quickly raise equity capital if necessary?

47. Which of these is not an example of indirect bankruptcy costs? A) A firm's customers become concerned about whether or not warranties will be honored. B) Employees begin to leave the firm. C) New accountants are brought in to help with the bankruptcy process. D) A bankruptcy judge orders new projects to be halted.

47. Which one of the following statements about just-in-time inventory management policy is NOT true? A) It calls for the exact day-by-day, or even hour-by-hour raw material needs to be delivered by the suppliers. B) If the supplier fails to make the needed deliveries, then production shuts down. C) A big disadvantage in this system is that there are high raw inventory costs. D) It eliminates obsolescence or loss to theft.

47. With a best-efforts underwriting A) the investment banking firm makes no guarantee to sell the securities at a particular price. B) the investment banker does not bear the price risk associated with underwriting the issue. C) compensation is based on the number of shares sold. D) All of the above.

48. Income taxes have the effect of A) increasing the cost of debt. B) decreasing the cost of debt. C) decreasing the cost of capital for the firm. D) both b and c are correct.

48. Socrates Motors is very likely to enter financial distress. Without a dramatic change of events over the next couple of years, the company will be unable to pay its lenders, who will then gain control of the company's assets. A group of stockholders has pressured the company's management to begin manufacturing and selling one of the company's concept cars in the hope that it will be a big hit. Concept cars are prototypes that are developed to test new ideas and to show off at auto shows. Although elements of concept cars are often incorporated into product lines, rushing a concept car into production is very risky. The best estimates about the concept car make it appear to be a negative-NPV project. This is a good example of A) the dividend payout problem. B) the underinvestment problem. C) the asset substitution problem. D) the agency cost of equity.

48. The financial plan focuses on A) the inventory accounting method decision and the accounts payables decision. B) the current assets decision and the current liabilities decision. C) the investment decision and the financing decision. D) none of the above.

48. The use of debt financing A) reduces agency costs between the stockholders and management by increasing the amount of risk the managers take. B) increases agency costs between the stockholders and management by limiting the amount of risk the managers take. C) increases agency costs since managers prefer to keep more retained earnings rather than pay a dividend. D) b and c.

48. Which one of the following statements about collection time is NOT true? A) Collection time, or float, is the time between when a customer makes a payment and when the cash becomes available to the firm. B) Collection time can be broken down into three components. C) Delivery time or mailing time is not part of the float. D) Processing delay is part of the collection time.

50. Which ONE of the following statements about short term funding strategy is true? A) All working capital and a portion of fixed assets are funded with short-term debt. B) This strategy lowers the cost under some interest rate scenarios. C) It forces the firm to continually refinance the funding of the long-term assets in a changing interest rate environment. D) All of the above.

48. Which one of the following statements is NOT true? A) In a best-efforts offering, the underwriters will suffer a financial loss if the offer price is set too high. B) In a best-efforts agreement, the issuing firm will lose if the offer price is set too high. C) If the underpricing is significant, the investment banking firm will suffer a loss of reputation for failing to price the new issue correctly and raising less money for its client than it could have. D) Underpricing is defined as offering new securities for sale at a price below their true value.

48. Which one of these actions could by itself have an impact on the control of the firm? A) A tender offer stock repurchase B) A special dividend payment C) A stock split D) A regular cash dividend payment

49. Consider a CEO who holds neither stock nor stock options in the company she runs. Her payoff function regarding the firm's performance is most likely to resemble A) stockholders. B) lenders. C) owners of a call option on the firm. D) holders of a risk-free bond with coupon payments equal to her salary.

49. Financial planning models A) help management make investment decisions. B) help management make financing decisions. C) make the process speedy and accurate. D) all of the above are true.

49. GHI Co. has just announced that the board has reached a targeted stock repurchase agreement with a large stockholder. The company will repurchase all of the large investor's stock for 90 percent of the current market value. When the stock repurchase was announced, the shares of GHI Co. fell by 7 percent. Which one of these explanations could reasonably explain the drop in share price? A) The willingness of the large investor to accept the targeted stock repurchase signals that the large investor believes the company will not do well in the future. B) A targeted stock repurchase essentially transfers value from the average investor to the targeted investor. C) Investors believe that the company's management is entrenching itself by buying off any large block shareholders. D) Both a and c are possible explanations.

49. The appropriate risk-free rate to use when calculating the cost of equity for a firm is A) a long-term Treasury rate. B) a short-term Treasury rate. C) a 50/50 mix of short-term and long-term Treasury rates. D) none of the above.

49. The asset substitution problem occurs when A) managers substitute riskier assets for less risky ones to the detriment of bondholders. B) managers substitute less risky assets for riskier ones to the detriment of bondholders. C) managers substitute riskier assets for less risky ones to the detriment of equity holders. D) managers substitute less risky assets for riskier ones to the detriment of equity holders.

49. The three basic costs associated with issuing stock in an IPO are A) price premium, out-of-pocket expenses, and underpricing. B) underwriting spread, out-of-pocket expenses, and underpricing. C) underwriting spread, price premium, and underpricing. D) None of the above.

49. Which ONE of the following statements about matching maturity strategy is true? A) All working capital is funded with short-term borrowing. B) As the level of sales varies seasonally, short-term borrowing fluctuates between some minimum and maximum level. C) All fixed assets are funded with long-term financing. D) All of the above.

50. Data from the marketplace show that the shares sold in an IPO are typically A) priced between 2 and 5 percent below the price at which they close at the end of first day of trading. B) priced between 10 and 15 percent above the price at which they close at the end of first day of trading. C) priced between 10 and 15 percent below the price at which they close at the end of first day of trading. D) priced between 2 and 5 percent above the price at which they close at the end of first day of trading.

50. Good Signal Co. is currently trading for $10 with 1 million shares outstanding. Which of the following actions would be the most credible signal that management believes that the long-term prospects for a company has improved? A) Pay a $0.20 extra dividend in addition to the company's $0.20 regular quarterly dividend. B) Increase the company's regular quarterly dividend from $0.20 to $0.40. C) Initiate an open-market stock repurchase of 2 percent of the company's stock. D) Initiate a Dutch auction tender offer stock repurchase for 2 percent of the company's stock.

50. The average risk-premium for the market from 1926 to 2009 was A) 8.00%. B) 7.50%. C) 6.01%. D) 6.51% + the Treasury rate.

50. The sales forecasts used in financial planning A) are developed using a variety of techniques. B) are generated within the firm. C) utilize macroeconomic variables as input. D) All of the above are true.

50. The underinvestment problem occurs in a financially distressed firm when A) the value of investing in a positive-NPV project is likely to go to debt holders instead of equity holders. B) the value of investing in a positive-NPV project is likely to go to equity holders instead of debt holders. C) management invests in negative-NPV projects to reduce their own risk. D) issuing equity becomes difficult due to increased risk.

51. Which one of the following statements is NOT true? A) Firms using matching maturity strategy fund all working capital needs with long-term borrowing. B) Long-term financing strategy relies on long-term debt to finance both capital assets and working capital. C) All working capital and a portion of fixed assets are funded with short-term debt when firms use the aggressive funding strategy. D) Firms using a matching maturity strategy fund all working capital needs with short-term borrowing.

51. Which one of the following statements is NOT true? A) In a competitive sale, the firm specifies the type and amount of securities it wants to sell. B) In a negotiated sale, the issuer selects the underwriter at the beginning of the origination process. C) In a general cash offer, management must decide whether to sell the securities on a competitive or a negotiated basis. D) For equity securities, competitive sales generally provide the lowest-cost method of sale.

51. Which one of the following statements is NOT true? A) Sales forecasts models are typically very basic and use no complicated analysis. B) are generated within the firm. C) utilize macroeconomic variables as input. D) All of the above are true.

52. As the manager of a sporting goods company, you are presented with a new golf project. An inventor has recently patented the design for a new golf club that makes playing golf much easier. Your company has made contact with the inventor, who is willing to sell the exclusive rights to the technology, but if you don't act fast he will sell the rights to a rival company. You are not certain whether the new golf club will become popular, but your analysts have completed a basic NPV analysis. Given the available information, the project has a positive NPV. However, you know there are several real options associated with the project, including the option to abandon the project and the option to make follow-on investments. Which one of the following statements regarding the project is correct? A) Based on the NPV analysis, you should accept the project. The value of the project may be worth more than the NPV analysis but not less. B) Based on the NPV analysis, you should accept the project. The NPV analysis contains all the information about the value of the project. C) Based on the NPV analysis, you should reject the project. Without additional information about the value of the real options, there is no way to make a decision. D) Based on the NPV analysis, you should reject the project. The NPV analysis contains all the information about the value of the project.

52. In order to use the WACC to evaluate a future project's flows, which of the following must hold? A) The project will be financed with the same proportion of debt and equity as the firm. B) The systematic risk of the project is the same as the overall systematic risk of the firm. C) The project must be viable. D) a and b above.

52. M&M Proposition 1: How much is Dynamo worth today? A) $1,765 B) $1,500 C) $2,143 D) None of the above.

52. Stock splits: You own 3,000 shares of Split Holdings Co. The shares are currently selling for $48. The company has just announced a 4-for-1 stock split. How many shares will you own after the split, and approximately what will your holdings in Split Holdings Co be worth? A) 12,000 shares worth about $144,000 B) 12,000 shares worth about $576,000 C) 15,000 shares worth about $144,000 D) 15,000 shares worth about $720,000

52. The inputs used in building financial planning models include A) financial statements, sales forecasts, and the firm's investment decisions. B) pro forma statements, sales forecasts, and macroeconomic variables. C) pro forma statements, sales forecasts, and financing decisions. D) none of the above.

52. Which one of the following statements is NOT true? A) Accounts payable (trade credit), bank loans, and commercial paper are common sources of short-term financing. B) An informal line of credit is a verbal agreement between the firm and the bank, allowing the firm to borrow up to an agreed-upon upper limit. C) An informal line of credit is also known as "revolving credit." D) A formal line of credit is also known as "revolving credit."

52. Which one of the following statements is NOT true? A) Shelf registration gives firms less flexibility in bringing securities to market. B) During a two-year window, the firm can take the securities "off the shelf" and sell them as needed. C) Shelf registration allows firms to periodically sell small amounts of securities. D) A shelf registration statement can cover multiple securities, and there is no penalty if authorized securities are not issued.

53. A start-up company is making a decision on whether to develop a new internet social networking site. The site will cost $1 million to develop, but it is unclear whether the new technology critical to the site will work correctly. If development is successful, it will cost an additional $20 million next year to advertise the site to Internet users. If the site becomes popular with Internet users, it is expected to generate a present value of $100 million in advertising revenue. There is a 10 percent chance that the site will be successfully developed and subsequently become popular with Internet users. The company's cost of capital is 15 percent. Should the company pursue the project? A) No, the project has a negative NPV. B) Yes, the project has a positive NPV. C) It doesn't matter. The project has zero NPV. D) There is not enough information to make a decision.

53. Benefits from shelf registration include all EXCEPT: A) Greater flexibility in bringing securities to market. B) Shelf registration allows firms to periodically sell small amounts of securities and raise capital as needed. C) A shelf registration statement can cover multiple securities, but there is a penalty if authorized securities are not issued. D) Costs associated with selling the securities are reduced because only a single registration statement is required.

53. M&M Proposition 1: How much are your cash flows today? A) $12.38 B) $15 C) $4.50 D) $150

53. Operating cycle: Trend Foods distributes its products to more than 100 restaurants and delis. The company's collection period is 32 days, and it keeps its inventory for 10 days. What is Trend's operating cycle? A) 22 days B) 32 days C) 42 days D) None of the above.

53. Overall cost of capital: If the market risk premium is currently 6 percent and the risk-free rate of return is 4 percent, then what is the expected return on a common share with a beta equal to 2? A) 8.0% B) 10.0% C) 12.0% D) 16.0%

53. Stock dividends and stock splits: Split-Div, Inc., has issued quarterly dividends of $0.10 per share each quarter over the last few years. This quarter Split-Div initiated a 2-for-1 stock split. What is the minimum quarterly dividend the board of Split-Div should approve to avoid sending a bad signal to investors? A) $0.02 per share B) $0.05 per share C) $0.10 per share D) $0.20 per share

53. Which one of the following is NOT an input in financial planning models? A) Financial statements B) Pro forma financial statements C) Investment decisions D) Financing decisions

54. M&M Proposition 1: If Dynamo wishes to change its capital structure from 75 percent to 60 percent equity and use the debt proceeds to pay a special dividend to shareholders, how much debt should they issue? A) $321 B) $375 C) $600 D) $225

54. Operating cycle: Stamp, Inc., has an operating cycle of 81 days and takes 47 days to collect on its receivables. What is its level of inventory if the firm's cost of goods sold is $312,455? Round to the nearest dollar. A) $9,190 B) $14,685 C) $29,105 D) $69,339

54. Overall cost of capital: What is the beta of a firm whose equity has an expected return of 21.3 percent when the risk-free rate of return is 7.0 percent and the expected return on the market is 18.0 percent? A) 0.79 B) 1.30 C) 1.57 D) none of the above

54. Stock splits: You own 1,200 shares of ABC, Co. The company has recently announced a 1-for-3 reverse stock split. How many shares will you own after the reverse split? A) 300 shares B) 400 shares C) 3,600 shares D) 4,800 shares

54. The employment contracts for professional athletes often contain options for either the player or the team. Consider one recent contract in Major League Baseball. The player's salary was guaranteed for the first couple years. However, after several years, the team had the option to cancel the contract if the player became injured. If we think of each player as a project for the team, this option feature of the contract is best described as A) the option to defer investment. B) the option to make follow-on investments. C) the option to change operations. D) the option to abandon projects.

54. Which one of the following statements is NOT true about financial planning models? A) Financial statements serve as the first major input and become the baseline to compare the projected financial statements. B) Macroeconomic forecasts and their impact on the firm's sales are also included. C) Investment and financing decisions are not considered as inputs. D) Changes in the firm's balance sheet and income statement items as a result of the growth in sales are also used in these models.

54. Which one of the following statements is NOT true? A) For many smaller firms and firms of lower credit standing that have limited access, or no access, to the public markets, the cheapest source of external funding is often the private markets. B) Bootstrapping and venture capital financing are not part of the private market. C) Bootstrapping and venture capital financing are part of the private market. D) Many private companies that are owned by entrepreneurs, families, or family foundations and are sizable companies of high credit quality prefer to sell their securities in the private markets.

55. M&M Proposition 1: How much does Dynamo currently pay in interest, and how much will it have to pay after the restructuring in the prior problem, assuming that the cost of debt is constant? A) $42 and $26.25 B) $26.25 and $42 C) $160 and $37.50 D) $37.50 and $60

55. Operating cycle: Le Baron Company, a men's designer firm, has an operating cycle of 123 days. The firm's days' sales in inventory is 73 days. How much does the firm have in receivables if it has credit sales of $433,450? Round to the nearest dollar. A) $59,377 B) $71,252 C) $47,501 D) $64,233

55. Overall cost of capital: Stryder, Inc., has 3 million shares outstanding at a current price of $15 per share. The book value of the shares is $10 per share. The firm also has $30 million in par value of bonds outstanding. The bonds are selling at a price equal to 101 percent of par. What is the market value of the firm? A) $30.0 million B) $45.0 million C) $75.0 million D) $75.3 million

55. Planning models that are more sophisticated than the percent of sales method have A) all variable costs change directly with sales. B) working capital accounts like inventory, accounts receivables, and accounts payables vary directly with sales. C) fixed assets that do not always vary directly with sales. D) All of the above are true.

55. RealEstates LLP is considering the construction of a new development of condominiums in downtown Austin, Texas. The site for the new development is currently occupied by an office building owned by the city. The project's profitability will depend largely on the population increase in Austin over the next several years. Rather than buy the site, RealEstates has entered into an agreement with the city to pay $200,000 for the right to purchase the site for $10 million two years from now. The real option embedded in this contract is best described as A) the option to defer investment. B) the option to make follow-on investments. C) the option to change operations. D) the option to abandon projects.

55. Stock dividends: ABC Co. stock is currently trading for $54. Assume there is no new information about the company. If the company issues a 10 percent stock dividend, what will the approximate price of the stock be after the stock dividend is issued? A) $47.80 per share B) $48.60 per share C) $49.09 per share D) $54.00 per share

55. Which one of the following statements is NOT true? A) Private placement occurs when a firm sells unregistered securities directly to investors such as insurance companies, commercial banks, or wealthy individuals. B) All corporate debt is sold through the private placement market. C) About half of all corporate debt is sold through the private placement market. D) Investment banks and money center banks often assist firms with private placements.

56. Advantages of private placements include: A) Cost of funds may be lower. B) Private lenders are more willing to negotiate changes to a bond contract. C) The speed of private placement deals and flexibility in issue size. D) All of the above.

56. Consider a new firm that is working on the first generation of long-awaited consumer jet packs. The project will take a tremendous amount of R&D expenditure. Even if the development is successful, manufacturing the first generation of jet packs is likely to be so expensive that only a select few consumers will be able to afford them. The projected sales of the first generation of jet packs almost certainly won't cover the development and manufacturing costs—the project has a negative NPV. Which of these reasons would validate the firm's decision to pursue the jet pack project? A) If development is unsuccessful, it can abandon the project before spending money on manufacturing. B) If the project is successful, it may lead to a very profitable second project—a cheaper jet pack that will be a positive-NPV project. C) Because it is a high-tech firm, the cash flows generated by a project are not important to valuing the company. D) None of these reasons support the decision to pursue the project.

56. How firms estimate their cost of capital: The Diverse Co. has invested 40 percent of the firm's assets in a project with a beta of 0.4 and the remaining assets in a project with a beta of 1.8. What is the beta of the firm? A) 0.96 B) 1.24 C) 1.28 D) None of the above

56. M&M Proposition 1: How much of the special dividend do you receive, and how much do you receive in regular dividends per annum after the restructuring? A) $15 and $60 B) $60 and $15 C) $10.80 and $22.50 D) $22.50 and $10.80

56. One statement that is NOT true about more sophisticated financial planning model is that: A) only fixed costs change directly with sales. B) working capital accounts like inventory, accounts receivables, and accounts payables vary directly with sales. C) fixed assets do not always vary directly with sales. D) All of the above are true

56. Operating cycle: All Stars, Inc., has inventory of $44,233 and cost of goods sold of $512,902. The company has an operating cycle of 74 days. What is the firm's days' sales outstanding (DSO)? A) 43 days B) 32 days C) 49 days D) 26 days

56. Types of dividends: ABC Co. will be distributing $40 million to shareholders through a special dividend. The company has 160 million shares outstanding. If you own 100 shares of ABC Co., how much will you receive? Ignore taxes. A) $400 B) $100 C) $25 D) None of the above

57. A local city government has awarded a contract to sequentially build five new elementary schools over the next 10 years. The price for each school has been spelled out in the contract, but at the beginning of each year the city can cancel the order for the remaining schools. The city government is concerned that if the population of the town does not grow as expected it may not need all of the schools. What sort of financial option does the option to cancel the order resemble? A) Owning a call option on the value of the new schools B) Owning a put option on the value of the new schools C) Selling a call option on the value of the new schools D) Selling a put option on the value of the new schools

57. How firms estimate their cost of capital: You are analyzing the cost of capital for a firm that is financed with 65 percent equity and 35 percent debt. The cost of debt capital is 8 percent, while the cost of equity capital is 20 percent for the firm. What is the overall cost of capital for the firm? A) 12.2% B) 14.0% C) 15.8% D) 20.0%

57. M&M Proposition 1: According to M&M Proposition 1, what transaction do you need to take in order to undo the restructuring? A) Sell $22.50 of stock. B) Sell $10.80 worth of stock. C) Buy $22.50 worth of debt. D) Buy $10.80 worth of debt.

57. The ex-dividend date: ABC Co. has announced it will pay its regular cash dividend of $0.45 per share. If dividends are taxed at 15 percent, about how much do you expect the price of ABC to drop on the ex-dividend day? A) $0.07 B) $0.38 C) $0.45 D) $0.52

58. Purchasing a house is a somewhat complicated process. Typically, if the buyer's offer is accepted by the seller, the transaction will not be completed or "closed" for several weeks. During this time the buyer may gather more information about the house or research other houses in the area. Some home purchase contracts include an option fee. The buyer may pay the seller a few hundred dollars for the right to walk away from the contract prior to closing for any reason. This option fee is best described as A) the option to defer investment. B) the option to make follow-on investments. C) the option to change operations. D) a put option on the house.

58. The ex-dividend date: You own 10,000 shares of ABC Co., which is currently trading for $11.50 per share. The company has announced that it will soon pay a special dividend of $1.50 per share. Tomorrow is the ex-dividend day. Ignoring taxes, what do you expect your block of shares will be worth tomorrow? A) $15,000 B) $100,000 C) $115,000 D) $200,000

58. Which one of the following statements is NOT true? A) The ratio of total assets to sales is called the capital intensity ratio. B) The ratio of sales to total assets is called the capital intensity ratio. C) The higher the ratio, the more capital a firm needs to generate sales. D) Firms that are highly capital intensive are more risky than those that are not.

59. Cash conversion cycle: Wolfgang Electricals estimates that it takes the company 31 days on average to pay off its suppliers. It also knows that it has days' sales in inventory of 54 days and days sales' outstanding of 34 days. What is its cash conversion cycle? A) 119 days B) 34 days C) 57 days D) 46 days

59. How firms estimate their cost of capital: The WACC for a firm is 19.75 percent. You know that the firm is financed with $75 million of equity and $25 million of debt. The cost of debt capital is 7 percent. What is the cost of equity for the firm? A) 19.75% B) 24.00% C) 32.50% D) 58.00%

59. In using more sophisticated planning models, which one of the following statements is NOT true? A) Current liabilities are likely to vary directly with sales. B) Long-term liabilities and equity accounts change as a direct result of managerial decisions. C) Retained earnings will vary directly as sales changes. D) All of the above are true

59. M&M Proposition 2: Rubber Chicken Inc. currently has a capital structure that is 40% debt and 60% equity. If the firm's cost of equity is 12%, the cost of debt is 8%, and the risk-free rate is 3%, what is the appropriate WACC? A) 8.4% B) 9.6% C) 10.4% D) 9.2%

59. The ex-dividend date: ABC Co. stock is currently trading at $25.70 per share. The company pays a regular cash dividend of $0.40 every quarter. Tomorrow is ex-dividend day for the upcoming regular dividend. The tax rate on dividends is 15 percent. Assuming there is no new information released about the company, how much do you expect the company's stock to trade for tomorrow? A) $0.40 B) $25.24 C) $25.30 D) $25.36

59. The management at Socrates Motors considered the option to abandon when building their new manufacturing plant. The design of the plant allows it to easily be converted to manufacture other types of large machinery. If their new line of cars is poorly received, their plant should be easy to sell to another manufacturing company. In this example, the extra cost of building the plant in such a way that it can easily be converted for other uses resembles A) the premium of a put option on the plant. B) the premium of a call option on the plant. C) the strike price of a put option on the plant. D) the strike price of a call option on the plant.

59. Which one of the following statements is NOT true? A) PIPE transactions are registered with the SEC. B) PIPE transactions are not registered with the SEC. C) In a PIPE transaction, investors purchase securities (equity or debt) directly from a publicly traded company in a private placement. D) The securities are virtually always sold to the investors at a discount to the price at which they would sell in the public markets.

60. Cash conversion cycle: Renald Corp. estimates that it takes the company 27 days on average to pay off its suppliers. It also knows that it has days' sales in inventory of 43 days and days sales' outstanding of 45 days. What is its cash conversion cycle? A) 61 days B) 115 days C) 57 days D) 46 days

60. Franklin Foods has made the decision to invest in a new line of organic microwave dinners. The new line of dinners is a negative-NPV project; paying its suppliers to convert to organic practices will be expensive. However, the company will be in a good position to expand into more profitable lines of food if consumer demand for organic foods grows more then expected. The negative value of the organic dinner project most closely resembles: A) the premium of a put option on future organic projects. B) the premium of a call option on future organic projects. C) the strike price of a put option on future organic projects. D) the strike price of a call option on future organic projects.

60. How firms estimate their cost of capital: The WACC for a firm is 13.00 percent. You know that the firm's cost of debt capital is 10 percent and the cost of equity capital is 20%. \ What proportion of the firm is financed with debt? A) 30% B) 33% C) 50% D) 70%

60. In using more sophisticated planning models, which one of the following statements is NOT true? A) Current liabilities are likely to vary directly with sales. B) Long-term liabilities and equity accounts change as a direct result of managerial decisions. C) Retained earnings will vary as sales changes but not directly as it is affected by the firm's dividend payout policy. D) All of the above are true

60. M&M Proposition 2: Gangland Water Guns, Inc., has a debt-to-equity ratio of 0.5. If the firm's cost of debt is 7% and its cost of equity is 13%, what is the appropriate WACC? A) 9% B) 10% C) 11% D) None of the above.

60. Which ONE of the following statements is true? A) Under federal securities law, they can be resold to investors in the public markets immediately even if they are not registered. B) As part of the PIPE contract, the company often agrees to register the restricted securities with the SEC, usually within 90 days of the PIPE closing. C) As part of the PIPE contract, the company often agrees to register the restricted securities with the SEC after 90 days of the PIPE closing. D) PIPE transactions involving a healthy firm can also be executed without the use of an investment bank but result in a cost increase of 7 to 8 percent of the proceeds.

61. Cash conversion cycle: Your boss asks you to compute the company's cash conversion cycle. Looking at the financial statements, you see that the average inventory for the year was $126,300, accounts receivable were $97,900, and accounts payable were at $115,100. You also see that the company had sales of $324,000 and that cost of goods sold was $282,000. What is your firm's cash conversion cycle? Round to the nearest day. A) 119 days B) 34 days C) 57 days D) 125 days

61. Gnu Homes, Inc., is a developer of planned residential communities. It has entered into an option contract with a land owner outside Austin, Texas. It will pay the land owner $100,000 for the option to buy the land in two years at a price of $20 million. During that time Gnu Homes will evaluate population and real estate trends in Austin. Their plan is to buy the land if real estate prices in Austin increase enough that developing the land would be worth more then the $20 million price. The $20 million purchase price resembles A) the premium price of a put option on the land. B) the premium price of a call option on the land. C) the strike price of a put option on the land. D) the strike price of a call option on the land.

61. M&M Proposition 2: Swirlpool, Inc., has a WACC of 11%, a cost of debt of 8%, and a cost of equity of 12%. What must the debt-to-equity ratio be? A) 1/2 B) 1/4 C) 1/6 D) None of the above.

61. Some weaknesses in financial planning models include: A) Interest expense is not accounted for. B) All working capital accounts do not necessarily vary directly with sales, especially cash and inventory. C) How fixed assets are adjusted. D) All of the above are weaknesses.

61. The cost of debt: Bellamee, Inc., has semiannual bonds outstanding with five years to maturity and are priced at $920.87. If the bonds have a coupon rate of 7 percent, then what is the YTM for the bonds? A) 4.5% B) 7.0% C) 9.0% D) 9.2%

61. The ex-dividend date: ABC. Co is currently trading at $37.00 per share. The company is paying a regular cash dividend of $0.40 per share and an extra dividend of $0.10 per share. Tomorrow is the ex-dividend day. The tax rate on dividends is 15 percent. Assuming there is no new information released about the company, how much do you expect the company's stock to trade for tomorrow? A) $36.43 B) $36.50 C) $36.58 D) $37.00

62. Cash conversion cycle: West Handicrafts, Inc., has net sales of $423,000 with 30 percent of it being credit sales. Its cost of goods sold is $324,000. The firm's cash conversion cycle is 47.9 days. The firm's operating cycle is 86.3 days. What is the firm's accounts payable? Round to the nearest dollar A) $34,087 B) $126,900 C) $71,203 D) $56,322

62. In accounting for changes in fixed assets, which one of the following statements is NOT true? A) When a firm is not operating at full capacity, sales may be increased without adding any new fixed assets. B) Since it requires time to get new assets operational, they are added in small discrete quantities. C) Fixed assets are added in large discrete amounts called lumpy assets. D) All of the above are true.

62. M&M Proposition 2: Melba's Toast has a capital structure with 30% debt and 70% equity. Its pretax cost of debt is 6%, and its cost of equity is 10%. The firm's marginal corporate income tax rate is 35%. What is the appropriate WACC? A) 8.17% B) 6.35% C) 8.80% D) 7.44%

62. The claim stockholders hold on cash flows in a company with outstanding debt is often described as A) a call option on the firm's assets. B) a put option on the firm's assets. C) an interest-free bond with the same value as the firm's assets. D) none of the above

62. The cost of debt: Dynamo Corporation has semiannual bonds outstanding with 12 years to maturity and are currently priced at $1,080.29. If the bonds have a coupon rate of 8 percent, then what is the equivalent annual return (EAR) to the investor for purchasing the bonds at the described price? A) 3.5% B) 7.00% C) 7.12% D) 8.00%

62. The ex-dividend date: ABC. Co is currently trading at $22.00 per share. The company is paying a regular cash dividend of $0.30 per share, and an extra dividend of $0.05 per share. Tomorrow is the ex-dividend day. The tax rate on dividends is 15 percent. Assuming there is no new information released about the company, how much do you expect the company's stock to trade for tomorrow? A) $21.70 B) $21.65 C) $21.60 D) $21.55

63. Effective interest rate: Serengeti Travels has borrowed $50,000 at a stated APR of 8.5 percent. The loan calls for a compensating balance of 8 percent. What is the effective interest rate for this company? A) 9.24% B) 8.50% C) 8.00% D) 16.50%

63. In accounting for changes in fixed assets, which one of the following statements is NOT true? A) When a firm is not operating at full capacity, sales may be increased without adding any new fixed assets. B) Since it requires time to get new assets operational, they are added as the firm nears full capacity. C) Fixed assets are added in large discrete amounts called lumpy assets. D) All of the above are true.

63. M&M Proposition 2: A firm has $300mm in outstanding debt and $900mm in outstanding equity. Its cost of equity is 11%, and its cost of debt is 7%. What is the appropriate WACC? A) 6% B) 8% C) 9% D) 10%

63. Which of the following statements is NOT an example of the agency cost of debt? A) ABC Co. shareholders pressure management to invest in very risky projects in hopes that one of the investments might pay off. The company is highly leveraged, so shareholders have little to lose. B) ABC Co. has a large amount of debt but very few investment opportunities. The board of directors decides to pay out a large special dividend, and the company subsequently enters bankruptcy. Lenders collect about 60 percent of the face value of the debt. C) ABC Co. is very close to financial distress. The company has a positive-NPV investment opportunity, but even with the project the company is likely to enter bankruptcy. Investors refuse to invest the additional funds necessary to pursue the project, even though it has a positive NPV. D) Investors are unsure of the value for ABC Co. ABC Co. decides to issue equity to pay down debt. The market assumes that ABC Co.'s managers are issuing equity because they think that the company's stock is overvalued. As a result, the company's stock price falls when the equity issue is announced.

64. Effective interest rate: Sun Prairie Traders borrowed $63,000 at an APR of 10 percent. The loan called for a compensating balance of 10 percent. What is the effective interest rate on the loan? A) 10.00% B) 11.11% C) 8.00% D) 12.50%

64. External funding needed (EFN) is A) the additional debt or equity a firm needs to issue so that it can purchase additional assets to support an increase in sales. B) the additional funds raised by a firm to pay off existing short-term debt. C) the additional funds raised by a firm to pay off existing long-term debt. D) None of the above are true.

64. IPO pricing: Pau, Inc., issues a $38.6 million IPO priced at $12.50 per share, and the offering price to the public is $19.30 per share. The firm's legal fees, SEC registration fees, and other administrative costs are $270,000. The firm's stock price increases 18 percent on the first day. What is the underpricing cost of issuing the securities to the firm? A) $13.6 million B) $20.6 million C) $6.96 million D) $7.57 million

64. M&M Proposition 2: A firm has a WACC of 8.5%, a pretax cost of debt of 5%, a cost of equity of 12%, and a marginal corporate income tax rate of 35%. What percent of the firm is financed with equity? A) 50% B) 60% C) 70% D) None of the above

64. The claim lenders' hold on cash flows in a company with outstanding risky debt is often thought of as A) holding a call option on the firm's assets. B) holding a put option on the firm's assets. C) selling a put option on the firm's assets and holding a risk-free bond. D) selling a call option on the firm's asset and holding a risk-free bond.

64. The cost of debt: PackMan Corporation has semiannual bonds outstanding with nine years to maturity and are currently priced at $754.08. If the bonds have a coupon rate of 7.25 percent, then what is the after-tax cost of debt for Beckham if its marginal tax rate is 30 percent? Complete the calculation as is done on Wall Street. A) 7.050% B) 8.225% C) 11.750% D) 12.095%

64. Types of dividends: You own 20,000 shares of stock in Casi-knows, Inc., which has just sold one of its large resort hotels for $300 million. Management intends to return the entire revenue from the sale to shareholders by issuing a special dividend. If Casi-knows has 20 million shares outstanding, how large a dividend payment do you expect to receive? A) $20,000 B) $200,000 C) $300,000 D) $1,000,000

65. Adding stock options and bonuses for performance to the compensation of a manager is intended to closer align the interest of the manager with A) stockholders. B) lenders. C) employees. D) none of the above.

65. Effective interest rate: Good Homes Furnishings is borrowing $225,000. The loan requires a 10 percent compensating balance, and the effective interest rate on the loan is 8.25 percent. What is the stated APR on this loan? Round to one decimal place. A) 10.00% B) 11.11% C) 7.4% D) 8.25%

65. IPO pricing: Pau, Inc., issues a $38.6 million IPO priced at $12.50 per share, and the offering price to the public is $19.30 per share. The firm's legal fees, SEC registration fees, and other administrative costs are $270,000. The firm's stock price increases 18 percent on the first day. What is the underwriting cost? A) $13.6 million B) $20.6 million C) $6.96 million D) None of the above.

65. M&M Proposition 2: Bellamee, Inc., has a required rate of return on its assets of 12% and a cost of debt of 6.25%. Their current debt-to-equity ratio is 1/5. What is the required rate of return on their equity? A) 12.15% B) 13.15% C) 14.15% D) None of the above

65. The cost of equity: Jacque Ewing Drilling, Inc., has a beta of 1.3 and is trying to calculate its cost of equity capital. If the risk-free rate of return is 8 percent and the expected return on the market is 12 percent, then what is the firm's after-tax cost of equity capital if the firm's marginal tax rate is 40 percent? A) 7.92% B) 13.20% C) 15.57% D) 23.60%

65. Types of dividends: ABC Co. has a policy of returning a minimum of 40 percent of earnings to shareholders every year through dividend issues and open-market stock repurchases. In each quarter this year, the company earned $0.35 per share. In each of the first three quarters the company paid a regular cash dividend of $0.10 per share. What combination of dividends could the company's board approve to meet their target payout percentage? A) A regular cash dividend of $0.10 per share. B) A regular cash dividend of $0.10 per share and an extra dividend of 0.56 per share. C) A regular cash dividend of $0.10 per share and an extra dividend of $0.46 per share. D) A regular cash dividend of $0.10 per share and an extra dividend of $0.16 per share.

65. Which one of the following statements is NOT true? A) The internal growth rate (IGR) is defined as the maximum growth rate that a firm can achieve without external financing. B) The higher the retained earnings generated by a firm, the higher the growth possible without using external funding. C) Given the same level of retained earnings, a firm that has the higher amount of total assets, the higher the growth possible without using external funding. D) All of the above are true.

66. Effective interest rate: Maggie's Bistro is borrowing $375,000. The loan requires an 8 percent compensating balance, and the effective interest rate on the loan is 10.326 percent. What is the stated APR on this loan? Round to one decimal place. A) 10.0% B) 9.5% C) 7.4% D) 8.5%

66. Firms that achieve higher growth rates without seeking external financing A) have a high plowback ratio. B) have less equity and/or are able to generate high net income leading to a high ROE. C) are not highly leveraged. D) All of the above are true.

66. IPO pricing: Pau, Inc., issues a $38.6 million IPO priced at $12.50 per share, and the offering price to the public is $19.30 per share. The firm's legal fees, SEC registration fees, and other administrative costs are $270,000. The firm's stock price increases 18 percent on the first day. What is the total cost of issuing the securities to the firm? A) $13.6 million B) $20.83 million C) $20.6 million D) None of the above

66. M&M Proposition 2: Using the information for Bellamee from Question 64, what is its required return on equity if its debt-to-equity ratio changes to 2/5 and this increases the required rate of return on their debt to 7%? A) 14% B) 14.25% C) 14.50% D) 15%

66. Option payoffs: What is the payoff for a call option with a strike price of $45 if the underlying stock price at expiration is $75? A) $30 B) $45 C) $75 D) None of the above

66. The cost of equity: TeleNyckel, Inc., has a beta of 1.4 and is trying to calculate its cost of equity capital. If the risk-free rate of return is 9 percent and the market risk premium is 5 percent, then what is the firm's after-tax cost of equity capital if the firm's marginal tax rate is 30 percent? A) 11.20% B) 10.60% C) 15.14% D) 16.00%

66. Types of dividends: ABC Co. has a policy of returning a minimum of 25 percent of earnings to shareholders every year through dividend issues and open-market stock repurchases. In each quarter this year, the company earned $0.20 per share. In each of the first three quarters, the company paid a regular cash dividend of $0.05 per share. What combination of dividends could the company's board approve to meet their target payout percentage? A) A regular cash dividend of $0.05 B) A regular cash dividend of $0.05 per share and an extra dividend of 0.05 per share C) A regular cash dividend of $0.05 per share and an extra dividend of $0.10 per share D) A regular cash dividend of $0.05 per share and an extra dividend of $0.20 per share

67. Firms that achieve higher growth rates without seeking external financing A) have a low plowback ratio. B) have less equity and/or are able to generate high net income leading to a high ROE. C) are highly leveraged. D) None of the above.

67. Formal line of credit: Gibbs, Inc., has just set up a formal line of credit of $1 million with First National Bank. The line of credit is good for up to five years. The bank will be charging them an interest rate of 6.25 percent on the loan, and in addition the firm will pay an annual fee of 50 basis points on the unused balance. The firm borrowed $600,000 on the first day the credit line became available. What is the firm's effective interest rate on this line of credit? A) 8.00% B) 7.25% C) 6.58% D) 8.25%

67. How stock repurchases differ from dividends: ABC Co. has a policy of returning a minimum of 25 percent of earnings to shareholders every year through dividend issues and open-market stock repurchases. In each quarter this year, the company earned $0.25 per share. In each of the first three quarters, the company paid a regular cash dividend of $0.05 per share. The company has 2 million shares of common stock outstanding. What combination of dividends and stock repurchases could the company's board approve to meet their target payout percentage? A) A regular cash dividend of $0.05 B) A regular cash dividend of $0.05 per share and an open-market stock repurchase of $100,000 in stock C) A regular cash dividend of $0.05 per share and an open-market stock repurchase of $400,000 in stock D) A regular cash dividend of $0.05 per share and an open-market stock repurchase of 500,000 in stock

67. IPO underpricing: When Geo Corp. went public in September 2008, the offer price was $19.00 per share and the closing price at the end of the first day was $24.70. The firm issued 4 million shares. What was the loss to the company due to underpricing? A) $13.6 million B) $20.83 million C) $20.6 million D) $22.8 million

67. M&M Proposition 2: What percent of the firm's costs are fixed, and what percent are variable with the added debt? A) 27.9% and 72.1% B) 72.1% and 27.9% C) 25.23 and 74.77% D) 74.77% and 25.23%

67. Option payoffs: What is the payoff for a call option with a strike price of $30 if the underlying stock price at expiration is $25? A) $5 B) $25 C) $30 D) None of the above

67. The cost of equity: RadicalVenOil, Inc., has a cost of equity capital equal to 22.8 percent. If the risk-free rate of return is 10 percent and the expected return on the market is 18 percent, then what is the firm's beta if the firm's marginal tax rate is 35 percent? A) 1.0 B) 1.28 C) 1.60 D) 4.10

68. Formal line of credit: Trend, Inc., has just set up a formal line of credit of $5 million with First National Bank. The line of credit is good for up to three years. The bank will be charging them an interest rate of 7.5 percent on the loan, and in addition the firm will pay an annual fee of 50 basis points on the unused balance. The firm borrowed $2,300,000 on the first day the credit line became available. What is the firm's effective interest rate on this line of credit? Round to one decimal place. A) 8.5% B) 7.25% C) 9.0% D) 8.1%

68. How stock repurchases differ from dividends: ABC Co. has a policy of returning a minimum of 40 percent of earnings to shareholders every year through dividend issues and open-market stock repurchases. In each quarter this year, the company earned $0.20 per share. In each of the first three quarters, the company paid a regular cash dividend of $0.05 per share. The company has 8 million shares of common stock outstanding. What combination of dividends and stock repurchases could the company's board approve to meet their target payout percentage? A) A regular cash dividend of $0.05 B) A regular cash dividend of $0.05 per share and an open-market stock repurchase of $960,000 in stock C) A regular cash dividend of $0.05 per share and a special dividend of $0.12 D) Both b and c will meet the target payout percentage

68. IPO: Bethesda Biosys issues an IPO sold on a best-efforts basis. The company's investment bank demands a spread of 18 percent of the offer price, which is set at $25 per share. Four million shares are issued. However, the bank was overly optimistic and eventually is able to sell the stock for only $23 per share. What are the proceeds for the issuer? A) $74 million B) $92 million C) $100 million D) None of the above

68. M&M Proposition 2: What is the net income of Banana without and with the debt? A) $500 and $484.2 B) $484.2 and $500 C) $500 and $465 D) $490 and $500

68. Option payoffs: What is the payoff for a put option with a strike price of $65 if the underlying stock price at expiration is $33? A) $0 B) $33 C) $32 D) $65

68. The cost of equity: Gangland Water Guns, Inc., is expected to pay a dividend of $2.10 one year from today. If the firm's growth in dividends is expected to remain at a flat 3 percent forever, then what is the cost of equity capital for Gangland if the price of its common shares is currently $17.50? A) 12.00% B) 14.65% C) 15.00% D) 15.36%

68. The sustainable growth rate (SGR) A) is a function of the plowback ratio and the ROE. B) the rate of growth that the firm can sustain without selling additional shares of equity. C) helps management determine whether they can avoid issuing new equity. D) All of the above are true of the SGR.

69. Formal line of credit: Storm Electronics has set up a formal line of credit of $2 million with First Kentucky Bank. The line of credit is good for up to three years. The bank will be charging them an interest rate of 6.25 percent on the loan, and in addition the firm will pay an annual fee of 60 basis points on the unused balance. The firm borrowed $1,500,000 on the first day the credit line became available. What is the firm's effective interest rate on this line of credit? Round to two decimal places. A) 7.50% B) 6.45% C) 6.25% D) 7.15%

69. How stock repurchases differ from dividends: You purchased 3,000 shares of Space Apparition Co. four years ago at $40 per share You have just received a mailing from the company announcing a fixed-price tender offer stock repurchase at $70 per share. Capital gains are taxed at 20 percent. If you participate in the repurchase, how much will you receive? A) $31,500 B) $192,000 C) $178,000 D) $210,000

69. IPO: Fortune Hotels issues an IPO sold on a best-efforts basis. The company's investment bank demands a spread of 20 percent. Five million shares are issued. However, the bank was overly optimistic and could not sell at the offer price of $31. If the net proceeds to the issuer were $110 million, what was the per share price at which the shares were sold? A) $27.50 B) $22 C) $31 D) None of the above

69. M&M Proposition 2: Suppose revenues fall by $300. What is the percent change in net income with and without the debt? Assume that the total variable productions costs remain the same. A) 64.5% and 60% B) 60% and 64.5% C) 59.2% and 40.8% D) 40.8% and 59.2%

69. Option payoffs: You own a put option on ABC. Co. stock with a strike price of $40. The current stock price is $40. You will benefit if A) the stock price goes up. B) the stock price goes down. C) the stock price stays the same. D) It doesn't matter; you are indifferent to changes in the stock price.

69. The cost of equity: UltraFlex Diving Boards, Inc., is just paid a dividend of $1.50. If the firm's growth in dividends is expected to remain at a flat 4 percent forever, then what is the cost of equity capital for Ultra Flex Diving Boards if the price of its common shares is currently $26.00? A) 5.77% B) 6.00% C) 9.77% D) 10.00%

69. Which one of the following statements about the sustainable growth rate (SGR) is NOT true? A) The SGR is a function of the plowback ratio and the ROE. B) The SGR determines the rate of growth that the firm can sustain without selling additional shares of equity. C) The SGR helps management determine whether they can avoid issuing new debt. D) All of the above are true of the SGR.

70. How stock repurchases differ from dividends: You purchased 3,000 shares of Purple Stuff Beverage Co. four years ago at $30 per share. You have just received a mailing from the company announcing a fixed-price tender offer stock repurchase at $36 per share. Capital gains are taxed at 15 percent. If you participate in the repurchase, how much will you receive? A) $18,000 B) $91,800 C) $105,300 D) $108,800

75. Bank lending: Marigold Corp. wants to borrow money from Howard Bank for a period of five years. The firm's credit standing calls for a premium of 1.5 percent over the prime rate. The current prime rate is 6.5 percent, the 30-year Treasury bond yield is 5.375 percent, the three-month Treasury bill yield is 3.525 percent, and the 5-year Treasury note yield is 4.25 percent. What is the appropriate loan rate for this customer? A) 8.725% B) 7.225% C) 6.500% D) None of the above

75. Dividend policy and firm value: You purchased 2,000 shares of NoDiv Technologies several years ago at $50 per share. The company does not pay a regular cash dividend. You want to "manufacture" your own dividend by selling a little bit of stock each quarter. The company's stock is currently trading at $75. If capital gains are taxed at 15 percent, how many shares would you have to sell to receive $3,420 in cash? A) 27 shares B) 46 shares C) 48 shares D) 51 shares

75. Factoring: A firm sells $125,000 of its accounts receivable to factors at 3 percent discount. The firm's average collection period is one month. What is the dollar cost of the factoring service? A) $3,000 B) $4,500 C) $3,750 D) $4,250

75. Option payoffs: Kelvin's Thermostats, Inc., stock is currently trading at $20 per share. There are two types of options written on the stock. Call options with a strike price of $15, which expire next month, are currently trading at $6.00. Put options with a strike price of $15 which expire next month are currently trading at $1.00. Steve invests $120 in common stock. Carol invests $120 in the call options. Paul invests $120 in the put options. At the end of one month, the price of Kelvin's Thermostats, Inc., is $23. Who made the most money off of their investment? A) Steve B) Carol C) Paul D) Steve and Carol Tied

75. Payout and retention ratio: Drekker, Inc., has revenues of $312,766, costs of $220,222, interest payment of $31,477, and a tax rate of 34 percent. It paid dividends of $34,125 to shareholders. Find the firm's dividend payout ratio and retention ratio. A) 85%, 15% B) 45%, 55% C) 55%, 45% D) 15%, 85%

75. The cost of equity: Wally's War Duds has a preferred share issue outstanding with a current price of $26.57. The firm is expected to pay a dividend of $1.86 per share a year from today. What is the firm's cost of preferred equity? A) 6.50% B) 7.00% C) 7.50% D) 8.00%

75. The cost of equity: What is Millennium's value after the debt issuance? A) $5,417 B) $5,942 C) $6,392 D) None of the above.

76. Agency costs: What will the equity value of UBM be in one-year without shareholders taking on the project? A) $100mm B) $80mm C) $20mm D) $8mm

76. Capital intensity ratio: Comacho Traders has total assets of $513,480 and sales of $723,062. What is the firm's capital intensity ratio? A) 1.41 B) 0.71 C) 1.23 D) None of the above.

76. Dividend policy and firm value: You purchased 8,000 shares of NoDiv Technologies several years ago at $20 per share. The company does not pay a regular cash dividend. You want to "manufacture" your own dividend by selling a little bit of stock each quarter. The company's stock is currently trading at $60. If capital gains are taxed at 15 percent, how many shares would you have to sell to receive $2,000 in cash? A) 30 shares B) 33 shares C) 37 shares D) 39 shares

76. Option payoffs: Haumer Hardware Co. stock is currently trading at $20. There are two types of options written on the stock. Call options with a strike price of $20, which expire next year, are currently trading at $8. Put options with a strike price of $20, which expire next year, are currently trading for $2. Steve invests $120 in common stock. Carol invests $120 in the call options. Paul invests $120 in the put options. At the end of one year the price of Haumer Hardware Co. stock is $18. Who made the most money off of their investment? A) Steve B) Carol C) Paul D) Steve and Carol tied

76. The cost of equity: Melba's Toast has a preferred share issue outstanding with a current price of $19.50. The firm is expected to pay a dividend of $2.34 per share a year from today. What is the firm's cost of preferred equity? A) 11.50% B) 11.75% C) 12.00% D) 12.25%

76. The most likely reason that underpricing of new issues occurs more frequently than overpricing is the: A) Underwriters' desire to reduce the risk of a firm commitment. B) Demand for a new issue is typically too high. C) Underwriters earn low rates of return D) Issuing firms demand that equity be underpriced

77. A firm is making an initial public offering. The investment bankers agree to a firm underwriting commitment of 500,000 shares priced to the public at $50 a share. The underwriter's spread is 12%. In addition, the underwriter charges $600,000 in legal fees. On the first day of trading, the firm's stock closed at $61. What were the total costs of the issue? a. $3,000,000 b. $3,600,000 c. $8,500,000 d. $9,100,000

78. Dividend policy and firm value: You own 7,000 shares of No-Drip Co. The company has decided to pay a special dividend of $1.00 per share. Dividend payments are taxed at 15 percent. You intend to reinvest your dividend back into the company, but the company does not have a dividend reinvestment program. To reinvest through your broker, you will have to pay a $46 commission. If the company's stock is trading at $12.43 following the dividend payment, how many additional shares will you be able to purchase? A) 563 shares B) 481 shares C) 478 shares D) 475 shares

78. Using the WACC in practice: Maloney's, Inc., has found that its cost of common equity capital is 17 percent and its cost of debt capital is 6 percent. If the firm is financed with $3,000,000 of common shares (market value) and $2,000,000 of debt, then what is the after-tax weighted average cost of capital for Maloney's if it is subject to a 40 percent marginal tax rate? A) 8.96% B) 11.16% C) 11.64% D) 12.60%

78. Which of the following is the equation for net working capital? A) Total assets - total liabilities B) Current assets - current liabilities C) Current assets/current liabilities D) Total assets/total liabilities

79. Agency costs: Given the payoffs of the project, what does the percent chance of success need to be in order for the expected value of equity with the project to be equal to the expected value of equity without the project? A) 1/3 B) 1/4 C) 1/5 D) 1/6

79. Binomial pricing: ABC, Inc., stock is currently trading for $45 and will either rise to $47 or fall to $42 in one year. The risk-free rate for one year is 5 percent. You own a call option with a strike price of $30, which expires in one year. What is the value of your call option? A) 0 B) 2.27 C) 12.05 D) 16.43

79. Internal growth rate: Swan Supply Company has net income of $1,212,335 on assets of $12,522,788 and retains 70 percent of its income every year. What is the company's internal growth rate? A) 7.6% B) 6.8% C) 8.6% D) 9.3%.

79. Stock price reactions to dividend announcements: The Dimples Golf Ball Co. has paid a regular dividend of $0.20 quarterly for the last three years. The company has 2 million shares outstanding. Over the next year the company will have to spend $800,000 to service its debt and spend $200,000 in capital expenditures. The company has $500,000 of cash and cash equivalents. Over the next year how much cash must be provided from operations to continue to make the same quarterly dividend payment, and still have $500,000 in cash at the end of the year? A) 1,000,000 B) 1,600,000 C) 2,000,000 D) 2,600,000

79. Using the WACC in practice: Ronnie's Comics has found that its cost of common equity capital is 15 percent and its cost of debt capital is 12 percent. If the firm is financed with $250,000,000 of common shares (market value) and $750,000,000 of debt, then what is the after-tax weighted average cost of capital for Ronnie's if it is subject to a 35 percent marginal tax rate? A) 6.05% B) 9.6% C) 8.75% D) 13.65%

79. Which of the following is a short-term financing instrument? A) Accounts payable B) Bank loans with a maturity of less than 1 year C) Commercial paper D) All of the above

79. Why is the total cost of bringing a general cash offer to the market lower than issuing an IPO? a. They do not include a large underpricing b. Underwriting spreads are smaller c. There is less risk involved with a general cash offer than an IPO d. all of the above

80. Agency costs: Suppose that JMK, Inc., has debt with a face value of $100mm and assets worth $70mm. Firm management has just identified a project that will require an initial outlay of $10mm and will return a NPV of $16mm, risk-free. The firm currently has no cash. What would be the net return to shareholders if they took on this project? A) $-10mm B) $0mm C) $26mm D) $70mm

80. Binomial pricing: Assume that the stock of ABC, Inc., is currently trading for $17 and will either rise to $23 or fall to $12 in one year. The risk-free rate for one year is 10 percent. What is the value of a call option with a strike price of $25? A) $0 B) $6.23 C) $5.72 D) None of the above

80. Internal growth rate: Mercantile Company has net income of $3,413,500 on assets of $16,109,445 and retains 55 percent of its income every year. What is the company's internal growth rate? A) 21.2% B) 8.6% C) 11.7% D) 9.4%

80. Stock price reactions to dividend announcements: The Wyoming Boot Co. has paid a regular dividend of $0.25 quarterly for the last several years. The company has 1 million shares outstanding. Over the next year the company will have to spend $600,000 to service its debt and spend $500,000 in capital expenditures. The company has $600,000 of cash and cash equivalents. Over the next year how much cash must be provided from operations to continue to make the same quarterly dividend payment and still have $250,000 in cash at the end of the year? A) 1,000,000 B) 1,100,000 C) 1,750,000 D) 2,100,000

80. Ticktock Clocks sells 10,000 alarm clocks each year. If the total cost of placing an order is $65 and it costs $85 per year to carry the alarm clock in inventory, use the EOQ formula to calculate the optimal order size. A) 124 clocks B) 161 clocks C) 15,294 clocks D) 26,154 clocks

80. Using the WACC in practice: Poly's Parrot Shops has found that its cost of common equity capital is 17 percent. It has 7-year maturity semiannual bonds outstanding with a price of $767.03 that have a coupon rate of 7 percent. If the firm is financed with $120,000,000 of common shares (market value) and $80,000,000 of debt, then what is the after-tax weighted average cost of capital for Poly's if it is subject to a 35 percent marginal tax rate? A) 10.20% B) 11.76% C) 11.88% D) 13.32%

81. Binomial pricing: Assume that the stock of ABC, Inc., is currently trading for $22 and will either rise to $31 or fall to $18 in one year. The risk-free rate for one year is 0 percent. What is the value of a put option with a strike price of $25? A) $0 B) $1.85 C) $3.00 D) $4.85

81. Internal growth rate: Mandolin Bottlers has net income of $4,272,335 and retains 65 percent of its income every year. If the company's internal growth rate is 8.6 percent, what is the firm's total assets? A) $32,290,904 B) $238,824 C) $30,388,235 D) None of the above.

81. The pecking order theory: A firm wishes to undertake a project that costs $150mm. It currently has $10mm in cash on hand and believes that it can raise $75mm in debt and $100mm in equity if needed. According to the pecking order theory of the capital structure, what percent of the project will be financed by debt? A) 0% B) 26.67% C) 50% D) None of the above

81. Using the WACC in practice: Marley's Pipe Shops has found that its common equity capital shares have a beta equal to 1.5 while the risk-free return is 8 percent and the expected return on the market is 14 percent. Its cost of debt financing is 12 percent. If the firm is financed with $120,000,000 of common shares (market value) and $80,000,000 of debt, then what is the after-tax weighted average cost of capital for Marley's if it is subject to a 35 percent marginal tax rate? A) 10.20% B) 11.76% C) 11.88% D) 13.32%

82. Binomial pricing: Assume that the stock of ABC, Inc., is currently trading for $44 and will either rise to $50 or fall to $29 one year. The risk-free rate for one year is 4 percent. What is the value of a put option with a strike price of $40? A) $0 B) $2.20 C) $3.14 D) $5.54

82. Internal growth rate: Meredith, Inc., has a return on equity of 21.5 percent, an equity ratio of 55 percent, and a dividend payout ratio of 70 percent. What is the company's internal growth rate? A) 8.3% B) 3.6% C) 6.4% D) 4.8%

82. Using the WACC in practice: Droz's Hiking Gear, Inc., has found that its common equity capital shares have a beta equal to 1.5 while the risk-free return is 8 percent and the expected return on the market is 14 percent. It has 7-year semiannual maturity bonds outstanding with a price of $767.03 that have a coupon rate of 7 percent.. If the firm is financed with $120,000,000 of common shares (market value) and $80,000,000 of debt, then what is the after-tax weighted average cost of capital for Droz's if it is subject to a 35 percent marginal tax rate? Calculate the cost of debt as it would be done on Wall Street. A) 10.20% B) 11.76% C) 11.88% D) 13.32%

83. Binomial pricing: Assume that the stock of ABC, Inc., is currently trading for $16 and will either rise to $23.50 or fall to $9 in one year. The risk-free rate for one year is 3 percent. What is the value of a put option with a strike price of $18 that expires in three months? A) $0 B) $2.75 C) $4.23 D) $5.73

83. External financing needed: Sterling Resorts has total assets worth $13,442,975. It is expecting to grow its revenue at a rate of 25 percent next year. For next year they expect a net income of $3,475,321 and will pay out 45 percent as dividends. What is the external financing needed by this firm to meet its growth expectations? A) $1,796,849.30 B) $1,449,317.20 C) No external funding is needed. D) None of the above

83. Which type of project do financial managers typically use the highest cost of capital when evaluating? A) Extension projects B) New product projects C) Efficiency projects D) Market expansion projects

84. After-tax cost of debt financing A recent leveraged buyout was financed with $50M. This amount comprised of partner's equity capital of $12M, $20M unsecured debt borrowed at 7% from one bank and the remainder from another bank at 8.5%. What is the overall after-tax cost of the debt financing if you expect the firm's tax rate to be 33%? A) 2.55% B) 3.34% C) 5.17% D) 7.71%

84. Binomial pricing: Assume that the stock of ABC, Inc., is currently trading for $29 and will either rise to $32 or fall to $5 in one year. The risk-free rate for one year is 2 percent. What is the value of a put option with a strike price of $30? A) $0 B) $0.41 C) $1.78 D) $2.08

84. External financing needed: Nederland Finance Company has total assets worth $9,751,223. It is expecting to grow its revenue at a rate of 20 percent next year and will have a net income of $2,213,564 next year. The firm pays out 65 percent of its net income as dividends. What is the external financing needed by this firm to meet its growth expectations? A) $1,175,497.20 B) $511,428.00 C) No external funding is needed. D) None of the above

85. Binomial pricing: Assume that the stock of ABC, Inc., is currently trading for $18 and will either rise to $30 or fall to $12 in one year. The risk-free rate for one year is 0 percent. What is the value of a put option with a strike price of $15? A) $0 B) $2 C) $5 D) $6

85. External financing needed: Triumph Company has total assets worth $6,413,228. Next year it expects a net income of $3,145,778 and will pay out 70 percent as dividends. If the firm wants to limit its external financing to $1 million, what is the growth rate it can support? A) 32.9% B) 6.4% C) 30.3% D) 26.5%

85. If a company's weighted average cost of capital is less than the required return on equity, then the firm: A) Is financed with more than 50% debt. B) Is perceived to be safe C) Has debt in its capital structure D) Must have preferred stock in its capital structure

95. Combining options: Suppose you are creating a portfolio that consists of zero-interest bonds, stock from a single company, and call and put options on the stock. Holding which of the following combination of securities will give the payoff shown in the following diagram? CÓ HÌNH A) Buy $20 in risk-free bonds, and sell short one call option with a strike price of $60. B) Buy $20 in risk-free bonds, and buy one put option with a strike price of $60. C) Buy one share of stock, and buy one call option with a strike price of $60. D) Buy one share of stock, and sell one put option with a strike price of $60. Ans: A

85. LMNO Manufacturing needs a new laser and is comparing buying or leasing. Under either alternative, the company will only need the laser for 5 years. Assume LMNOs marginal tax rate is 30 percent. Purchase Alternative: It would cost $50,000 to purchase the laser and the amount could be financed with a five year balloon loan at 9%. The laser will be depreciated on straight line and have no salvage value. Maintenance on the laser is expected to be $1,200 per year. Lease alternative: The company that manufactures the laser offers a 5 year leasing option with annual lease payments of $12,500.With this option the lessor will be responsible for maintenance of the laser and will take it back after 5 years. The lease will be classified as an operating lease. Which is the best option for LMNO Manufacturing? A) Purchase, the company will be $4,416 better off. B) Lease, the company will be $4,416 better off. C) Purchase, the company is $10,496 better off D) Lease, the company is $10,496 better off

86. Binomial pricing: Assume that the stock of ABC, Inc., is currently trading for $2.60 and will either rise to $10 or fall to $0 in one year. The risk-free rate for one year is 1 percent. What is the value of a put option with a strike price of $5? A) $0 B) $2.35 C) $3.65 D) $3.70

86. External financing needed: Jockey Company has total assets worth $4,417,665. At year-end it will have net income of $2,771,342 and pay out 60 percent as dividends. If the firm wants no external financing, what is the growth rate it can support? A) 32.9% B) 25.1% C) 30.3% D) 27.3%

87. Binomial pricing: You own a share of common stock in ABC, Inc., which is currently trading for $18 and will either rise to $30 or fall to $12 in one year. The risk-free rate for one year is 0 percent. You also own an American put option on the stock with a strike price of $20, which expires in one year. What is the value of the put option, and what would be the net payoff from exercising the option now? A) Option Value: $3.33 - Net Payoff $2 B) Option Value: $3.33 - Net Payoff $6 C) Option Value: $5.33 - Net Payoff $2 D) Option Value: $5.33 - Net Payoff $6

88. Binomial pricing: You are fortunate enough to own a put option with a strike price of $50 on the stock of ABC, Inc. The current stock price is $4. When the option expires, you expect the stock price to be either $2 or $5. The risk-free rate of interest is zero. What is the value of your option? A) 0 B) 45 C) 46 D) 48

88. Sustainable growth rate: If Merton Corp. has a ROE of 23.4 percent, what is the plowback ratio needed to achieve a sustainable growth rate of 7 percent? A) 34% B) 30% C) 24% D) 28%

89. Binomial pricing: Assume that the stock of ABC, Inc., is currently trading for $16 and will either rise to $18 or fall to $12 in one year. The risk-free rate for one year is 1 percent. What is the value of a put option with a strike price of $10? A) $0 B) $2.00 C) $2.33 D) $5.00

89. Sustainable growth rate: Sterling, Inc., currently has sales of $4,512,644 and net income of $736,253. It has a debt ratio of 47 percent and a dividend payout ratio of 65 percent. The company has total assets of $3,812,832. What is the company's sustainable growth rate? A) 12.7% B) 23.7% C) 18.9% D) 20.1%

90. Binomial pricing: Assume that the stock of ABC, Inc., is currently trading for $21 and will either rise to $30 or fall to $18 in one year. The risk-free rate for one year is 0 percent. You own a portfolio that consists of one call option and one put option. Both options have a strike price of $25, and both expire in one year. What is the value of your portfolio? A) $0 B) $25.00 C) $6.00 D) $6.50

90. Sustainable growth rate: Courtney Bike Company has a net profit margin of 7.8 percent, a debt ratio of 45 percent, total assets of $2,112,370, and sales of $4,276,990. If the company has a dividend payout ratio of 60 percent, what is the company's sustainable growth rate? A) 17.2% B) 15.6% C) 11.5% D) 18.9%

91. Binomial pricing: Assume that the stock of ABC, Inc., is currently trading for $16 and will either rise to $50 or fall to $2 in one year. The risk-free rate for one year is 8 percent. You own a portfolio that consists of one call option and one put option. Both options have a strike price of $15, and both expire in one year. What is the value of your portfolio? A) $0 B) $15 C) $21.40 D) $18.52

92. Binomial pricing: Consider two call options written on different stocks. Both call options have a strike price of $15 and expire one year from today. The first option is written on LowVol Co., whose current stock price is $16. One year from now, shares of LowVol Co. will either rise to $18 or fall to $14. The second option is written on HighVol, Inc., whose current stock price is also $16. One year from now shares of HighVol Inc. will either rise to $22, or fall to $0. The risk-free interest rate is 0 percent. Which call option is worth more? A) The call option on LowVol is worth more. B) The call option on HighVol is worth more. C) They are both worth the same amount. D) There is not enough information to make a comparison.

93. Binomial pricing: Consider a call option and a put option both written on ABC, Inc. stock. Both options have a strike price of $20 and expire in one year. The stock of ABC, Inc., is currently selling for $20. In one month the stock will be at either $24 or $18. The risk-free rate is 0 percent. Which is worth more, the put option or the call option? A) The put option is worth more. B) The call option is worth more. C) They are worth the same. D) There is not enough information.

94. Combining options: Suppose you are creating a portfolio that consists of zero-interest bonds, stock from a single company, and call and put options on the stock. Holding which of the following combination of securities will give the payoff shown in the following diagram? CÓ HÌNH A) Buy one call option and one put option on the stock with a strike price of $60. B) Buy one call option with a strike price of $60 and sell short one call option with a strike price of $80. Buy one put option at a strike price at $60 and sell short one put option with a strike price of $40. C) Buy one share of the underlying stock. In addition, buy two call options, one with a $40 strike price, and one with a $80 strike price. D) Buy one share of the underlying stock, and a put option with a strike price of $60. Sell short call two call options—one with a strike price of $40 and one with a strike price of $80.

96. Combining options: Suppose you are creating a portfolio that consists of zero-interest bonds, stock from a single company, and call and put options on the stock. Holding which of the following combination of securities will give the payoff shown in the following diagram? CÓ HÌNH A) Buy one put option of the stock with a strike price of $60. Sell short a call option with a strike price of $120. B) Buy $60 in zero-interest bonds. Sell short one call option with a strike price of $60. Sell short one put option with a strike price of $60. C) Buy one share of stock. Sell one call option with a strike price of $120. D) Buy one share of the stock. Sell short two call options with a strike price of $60. Buy one call option with a strike price of $120.

97. Combining options: Suppose you are creating a portfolio that consists of zero-interest bonds, stock from a single company, and call and put options on the stock. Holding which of the following combination of securities will give the payoff shown in the following diagram? CÓ HÌNH A) Buy one call option with a strike price of $40 and one put option with a strike price of $80. B) Buy one call option with a strike price of $80 and one put option with a strike price of $40. C) Sell one call option with a strike price of $40 and one put option with a strike price of $80. D) Sell one call option with a strike price of $80 and one put option with a strike price of $40.

98. Risk management: OilDog Co. is a privately owned oil drilling and hot dog producing company with a significant amount of debt. Most of the company's cash flows come from the very safe hot dog unit of the business. With only the assets in place, the company is very likely to avoid financial distress for the foreseeable future. Avoiding financial distress is very important to the owners, who founded the company. The company is considering a new oil field project, determined to have a positive NPV. Because of the nature of oil prices, the project is very risky. At any oil price above $110 the project would add value to the company. However, if oil prices were to fall below $90 the losses could push the entire business into financial distress. The risk-free interest rate is 0 percent. Which one of the following strategies would allow the firm to pursue the positive-NPV project while hedging the oil price risk? A) The firm purchases call options with a strike price of $120 for each barrel of oil it expects to produce. Each call option costs $5. B) The firm sells call options with a strike price of $120 on each barrel of oil it expects to produce. Each option costs $5. C) The firm purchases put options with a strike price of $120 on each barrel of oil it expects to produce. Each option costs $5. D) The firm sells put options with a strike price of $120 on each barrel of oil it expects to produce. Each option costs $5.

99. Risk management: Consider a wheat farmer who expects to produce 50,000 bushels of wheat at the end of this season. To hedge the risk associated with wheat prices, the farmer purchases put options to cover his entire crop. The put options have a strike price of $7.50 per and a premium of $0.30 per bushel. He also sells an equal amount of call options with a strike price of $7.50 per bushel and a premium of $0.43 a bushel. Which of the following statements is NOT correct? A) From this transaction the farmer can pocket $6,500 immediately. B) If wheat prices go up substantially, the farmer will earn more money. C) The put options guarantee that the farmer will receive at least $7.50 per bushel at the end of the season. D) The farmer has guaranteed that he will sell his wheat for $7.50 a bushel.

Economic order quantity: Jensen Autos, one of the largest car dealers in Eau Claire, sells about 700 vehicles a year. The cost of placing an order with their supplier is $1,100, and the inventory carrying costs are $120 for each car. Most of their sales are in late fall of each year. 76. What is the number of cars per order? A) 80 cars B) 101cars C) 58 cars D) 113 cars

Economic order quantity: Jensen Autos, one of the largest car dealers in Eau Claire, sells about 700 vehicles a year. The cost of placing an order with their supplier is $1,100, and the inventory carrying costs are $120 for each car. Most of their sales are in late fall of each year. 77. How many orders will the dealer need to place this year? A) 4 orders B) 5 orders C) 6 orders D) 7 orders

IPO pricing: Stump, Inc., a technology firm in Prairie View, Texas, issues a $66 million IPO priced at $17 per share, and the offering price to the public is $22 per share. The firm's legal fees, SEC registration fees, and other administrative costs are $350,000. The firm's stock price increases 15 percent on the first day 62. What is the underpricing on this issue? A) $9,900,000 B) $24,900,000 C) $15,000,000 D) None of the above.

IPO pricing: Stump, Inc., a technology firm in Prairie View, Texas, issues a $66 million IPO priced at $17 per share, and the offering price to the public is $22 per share. The firm's legal fees, SEC registration fees, and other administrative costs are $350,000. The firm's stock price increases 15 percent on the first day 63. What is the firm's total cost of issuing the securities? A) $24.9 million B) $15.35 million C) $25.25 million D) None of the above

IPO pricing: Stump, Inc., a technology firm in Prairie View, Texas, issues a $66 million IPO priced at $17 per share, and the offering price to the public is $22 per share. The firm's legal fees, SEC registration fees, and other administrative costs are $350,000. The firm's stock price increases 15 percent on the first day. 61. What is the underpricing spread? A) $51 million B) $15 million C) $66 million D) None of the above.

M&M Proposition 1 assumes that the mix of debt and equity that a firm chooses does not affect real investment policy.

Sustainable growth rate: If Newell Corp. has a ROE of 18.6 percent and a dividend payout ratio of 60 percent, what is its sustainable growth rate? A) 7.4% B) 2.15% C) 0.47% D) 8.2%

Which of the following arises because the lessee can have the incentive to use the asset more than the lessor would prefer? A) Operating lease conflict B) Capital lease conflict C) Intensity of use conflict D) Maintenance conflict

Which of the following should a company consider when deciding to buy or lease an asset? A) Taxes B) Information or transaction costs C) If the choice would affect the real investment policy of the firm D) All of the above

Which of the following will limit the asset abuse problem for the lessor? A) Track the total services obtained from the asset and charge the lessee based on usage B) Bundle the lease contract with a service contract C) Provide the lessee with the right to buy the asset when the lease expires D) All of the above

You are provided the following working capital information for the Ridge Company: Ridge Company Account $ Inventory $12,890 Accounts receivable 12,800 Accounts payable 12,670 Net sales $124,589 Cost of goods sold 99,630 57. Operating cycle: What is the operating cycle for Ridge Company? A) 47 days B) 85 days C) 36 days D) 51 days

You are provided the following working capital information for the Ridge Company: Ridge Company Account $ Inventory $12,890 Accounts receivable 12,800 Accounts payable 12,670 Net sales $124,589 Cost of goods sold 99,630 58. Cash conversion cycle: What is the cash conversion cycle for Ridge Company? A) 83.5 days B) 38.3 days C) 129.9 days D) 46.4 days

FIN303 FULL

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