FIR 4440 FINAL EXAM
You want to create a portfolio equally as risky as the market, and you have $1,000,000 to invest. Given this information, what is the amount of investment for the risk-free asset? Asset Investment Beta Stock A $300,000 1.6 Stock B ?? 0.8 Market Index Fund $320,000 ? Risk-free asset ? ? a. $ 130,000 b. $ 210,000 c. $ 250,000 d. $ 280,000 e. $316,667
a. $ 130,000
Internet Ideas, Inc. is offering 20,000 shares in an initial public offering. The underwriters have agreed upon a best efforts offering with an offer price of $27 and a 5 percent spread. The underwriters were able to sell 18,500 shares to the general public. The stock opened at a price of $31 a share on its first day of trading. How much did Internet Ideas, Inc. receive from this offering? a. $474,525 b. $499,500 c. $513,000 d. $573,500 e. $620,000
a. $474,525
David is considering an investment project that is expected to produce cash flows of $10,000 each year for the next 4 years and $12,000 each year for the following 5 years. The IRR of this 9-year project is 10 percent. If the firm's cost of capital is 8 percent, what is the project's NPV? a. $5,569.85 b. $5,650.52 c. $5,890.90 d. $5,970.45 e. $6,070.58
a. $5,569.85
University of Texas is considering purchasing a power supply system. The system costs $300,000, has a useful life of 10 years, and will cost $20,000 per year to keep running. The system uses straight line depreciation and the salvage value is zero at the end of year 10. The tax rate is 30% and cost of capital is 12%. What is the (after taxes) equivalent annual cost of the battery? a. $58,095 b. $58,879 c. $59,762 d. $60,092 e. $61,891
a. $58,095
Marthas Grapevines, Inc. has an EBIT of $46,000, no debt, a 34% tax rate, and a 15% cost of capital. After issuing $75,000 of debt at 10% interest rate, what is the cost of equity for Marthas Grapevines? a. 16.62% b. 16.98% c. 17.10% d. 17.33% e. 17.65%
a. 16.62%
Which of the following sources of risk are systematic in nature? 1. A labor strike against Boeing company 2. An increase in inflation rates 3. An increase in international oil prices 4. Bankruptcy of a mortgage company in Arizona 5. Unexpected entry of a new competitor into the market a. 2 and 3 b. 4 and 5 c. 1, 2 and 3 d. 1, 3 and 5 e. 1, 4 and 5
a. 2 and 3
Berkley Industrial Supply declared a dividend on Monday, August 3 to holders of record on Monday, August 17. The dividend is payable on Friday, September 4. The last day you can purchase shares of this stock and receive the September 4 dividend is: a. August 12 b. August 13 c. August 17 d. September 1
a. August 12
The absolute priority rule establishes the order in which: a. Claims are paid in a bankruptcy proceeding. b. Firms are liquidated by the bankruptcy courts. c. Reorganization events must occur. d. Bankruptcy cases are heard by the courts. e. Judges are assigned to bankruptcy cases.
a. Claims are paid in a bankruptcy proceeding.
Which one of the following allows the underwriters to purchase additional shares at the offer price to cover overallotments? a. Green Shoe option b. Red Herring statement c. The quie period d. lockup agreements
a. Green Shoe option
The markets reaction to the announcement of a change in the firms dividend payout is the: a. Information content effect. b. Clientele effect. c. Efficient Markets Hypothesis. d. Tax preference effect. e. Bird-in-the-hand theory.
a. Information content effect.
The primary idea behind the net present value rule is that an investment: a. Is worthwhile if it creates value for the owners. b. Must have total cash flows that equal zero. c. Should be accepted if it enhances management's position. d. Should break-even from an accounting point of view. e. Should earn a rate of return that is less than the discount rate.
a. Is worthwhile if it creates value for the owners.
Given the NPV profiles shown above for mutually exclusive projects X and Y, which of the following statements is true? a. Project X's IRR is greater than project Y's IRR. b. Conflicts between NPV and IRR occur when the cost of capital is greater than 10%. c. If the cost of capital is 8%, project X is to be accepted. d. Project X's net cash flows (sum of cash inflows minus initial costs) are greater than Project Y's net cash flows. e. The NPV profiles indicate that Project X's net present value is more sensitive to changes in discount rate.
a. Project X's IRR is greater than project Y's IRR.
Over the past 70 years, which of the following investments has provided the smallest average return? a. Treasury bills b. Treasury bonds c. Corporate bonds d. Common stocks e. Small company stocks
a. Treasury bills
A portfolio beta can be defined as the: a. Weighted average of the betas of the individual securities within the portfolio. b. Total of the betas of the individual securities within the portfolio. c. Amount of unsystematic risk remaining after the portfolio is diversified. d. Measure of the unsystematic risk of the portfolio relative to the level of market risk. e. Measure of the total risk of the portfolio in excess of the level of market risk.
a. Weighted average of the betas of the individual securities within the portfolio.
If capital markets are semistrong form efficient, then ____________ . a. all public information is rapidly incorporated into security prices b. it is possible to profit regularly from publicly available information c. prices will adjust slowly when reacting to new information d. historical price trends will give you a good idea of where prices are headed in the future
a. all public information is rapidly incorporated into security prices
The NPV calculation implicitly assumes that all cash flows are discounted and reinvested at a rate of return equal to the: a. cost of capital. b. the internal rate of return on the particular project examined. c. the cost of debt d. the cost of preferred stock
a. cost of capital.
An investment project has a positive net value. The internal rate of return is ... a. greater than the cost of capital b. less than the cost of capital. c. equal to the cost of capital. d. indeterminate; it depends on the length of the project.
a. greater than the cost of capital
Which one of the following refers to the ability of shareholders to undo a firm's dividend policy and create an alternative dividend policy by reinvesting dividends or selling shares of stock? a. homemade dividends b. information content of dividends c. bird-in-the-hand theory d. personal tax effect
a. homemade dividends
Jones & Co. is funded by a group of individual investors for the sole purpose of providing funding for individuals who are trying to convert their new ideas into viable products. What is this type of funding called? a. venture capital b. green shoe funding c. red herring funding d. life cycle capital
a. venture capital
Marthas Grapevines, Inc. has an EBIT of $46,000, no debt, a 34% tax rate, and a 15% cost of capital. What will the value of the firm be if Marthas Grapevines issues $75,000 in debt? a. $202,400 b. $227,900 c. $267,300 d. $291,100 e. $330,000
b. $227,900
Circus Town is offering 700 shares of stock in a Dutch auction. The bids include: Bidder Quantity Price A 100 $16 B 300 $15 C 400 $14 D 700 $13 How much cash will Circus Town receive from this stock offering? Ignore all costs. a. $9,100 b. $9,800 c. $10,300 d. $10,500 e. $11,200
b. $9,800
3M Co. stock produced total returns of 9.09%, 15.12%, -2.05%, and 4.56% over the past four years, respectively. What is the variance on this set of returns? a. 0.0041 b. 0.0053 c. 0.0067 d. 0.0125 e. 0.0140
b. 0.0053
The annual returns on pharmaceutical stocks are normally distributed with an average historical return of 16% and a standard deviation of 27.6%. What is the probability that annual return on pharmaceutical stocks is between 0% and 25%? a. 0.27 b. 0.34 c. 0.43 d. 0.58 e. 0.66
b. 0.34
Mrs Gomez has a portfolio with an expected return of 7%. The portfolio is evenly invested in a stock and a risk-free asset. The market has an expected return of 12% and the risk-free asset has an expected return of 4%. What is the beta of the stock? a. 0.50 b. 0.75 c. 1.00 d. 1.25 e. 1.50
b. 0.75
A stock has a beta of 1.5. The expected return on the market is 8% and the T-bill is yielding 4%. What is the expected return on the stock? a. 5% b. 10% c. 13% d. 16% e. 17%
b. 10%
The procedure for liquidating a corporation under the Federal Bankruptcy Reform Act of 1978 is set forth in Chapter: a. 5. b. 7. c. 9. d. 11. e. 13.
b. 7.
Mr. Brown is considering a project that costs $25,000. The project produces cash inflows of $8,000, $10,000, $12,000, and $8,000 respectively for the next four years. Mr Brown wants to recoup his money within 3 years after applying a 8% discount rate. He should: a. Accept the project because it produces $23,879 on a discounted payback basis. b. Accept this project because the discounted payback period is 2.95 years. c. Accept this project because the payback period is exactly 3 years. d. Reject this project because the payback period is 2.83 years. e. Reject this project because the discounted payback period is 3.78 years.
b. Accept this project because the discounted payback period is 2.95 years.
Beta is defined as the: a. Slope of the security market line. b. Amount of systematic risk in a risky asset relative to that in an average asset. c. Ratio of unsystematic risk in a risky asset relative to the systematic risk in the overall market. d. Ratio of the total risk in a risky asset relative to the systematic risk in the overall market. e. Amount of systematic risk in a risky asset relative to that of a risk-free asset.
b. Amount of systematic risk in a risky asset relative to that in an average asset.
As a firm increases its debt/asset ratio, the value of the firm initially increases, reaches a maximum point, and then decreases. Why does the value of a firm decrease beyond the maximum point? a. The decision by the firm to use more debt beyond the optimal target causes an upward shift in the market line. b. As the firm increases its debt ratio beyond the optimal target, marginal bankruptcy costs begin to exceed the marginal tax advantage of debt. c. As the firm increases its debt ratio beyond the optimal target, it is required to pay higher taxes. d. If the firm whishes to raise more new capital beyond the optimal target, it must offer stock and bond investors lower rates of return.
b. As the firm increases its debt ratio beyond the optimal target, marginal bankruptcy costs begin to exceed the marginal tax advantage of debt.
Which of the following is the correct chronology of a dividend payment? a. Declaration date, Date of record, Ex-dividend date, Date of payment b. Declaration date, Ex-dividend date, Date of record, Date of payment c. Declaration date, Date of record, Date of payment, Ex-dividend date d. Declaration date, Date of payment, Date of record, Ex-dividend date e. Declaration date, Ex-dividend date, Date of payment, Date of record
b. Declaration date, Ex-dividend date, Date of record, Date of payment
Which of the following are considered cash flows of a project? I. Taxes II. Financing costs III. Sunk costs IV. Opportunity costs a. I and II only b. I and IV only c. III and IV only d. II and IV only e. I, II, and IV only
b. I and IV only
Which of the following are indirect costs of bankruptcy? I. Loss of key employees II. Foregone profitable projects due to debt restrictions III. Loss created by sale of assets which was required to improve liquidity IV. Accounting and legal fees incurred in the bankruptcy process a. I and III only b. I, II, and III only c. I, III, and IV only d. II, III, and IV only e. I, II, III, and IV
b. I, II, and III only
Firm A has a debt-equity ratio of .5. Firm B has a debt-equity ratio of .8. All other features of these firms are identical. The return on equity of Firm A is: a. Equally as volatile as the return of equity of Firm B. b. Less volatile than the return on equity of Firm B. c. More volatile than the return on equity of Firm B. d. Unaffected by the debt-equity ratio.
b. Less volatile than the return on equity of Firm B
The cash flows for projects A, B, and C are given below. The cost of capital for each project is 9%. If A and B are mutually exclusive and C is independent, which project, or combination of projects should be accepted? Year Project A Project B Project C 0 -$1,500 -$1,500 -$2,000 1 200 1,000 700 2 700 400 750 3 1,100 550 800 a. Project A b. Project B c. Projects A and C d. Projects B and C e. Projects A, B and C
b. Project B
The option of keeping a financially distressed firm as an operating concern is called a(n): a. Liquidation. b. Reorganization. c. Acquisition. d. Merger. e. Technical solvency.
b. Reorganization.
The federal regulations that apply to all new interstate security issues are set forth in the: a. SEC rule 415. b. Securities Act of 1933. c. Securities Exchange Act of 1934. d. NASD Guidelines for the Financial Markets.
b. Securities Act of 1933.
If a company insider uses all of her knowledge about the company stock and still has no advantage in the marketplace over outside investors, the market has to be defined as: a. Semistrong efficient. b. Strong form efficient. c. Weak form efficient. d. Overpriced. e. Underpriced.
b. Strong form efficient.
You currently own 100 shares of stock in Beverly Brothers Inc. The stock currently trades at $120 a share. The company is contemplating a 3-for-1 stock split. Which of the following best describes your position after the proposed stock split takes place? a. You will have 300 shares of stock, and the stock will trade at or near $120 a share. b. You will have 300 shares of stock, and the stock will trade at or near $40 a share. c. You will have 100 shares of stock, and the stock will trade at or near $40 a share. d. You will have 50 shares of stock, and the stock will trade at or near $120 a share. e. You will have 50 shares of stock, and the stock will trade at or near $40 a share.
b. You will have 300 shares of stock, and the stock will trade at or near $40 a share.
Diversification refers to the process of: a. reducing risk by holding only U.S. Government bonds. b. reducing risk by investing in securities that are not perfectly positively correlated. c. increasing expected return by investing in more than one security. d. using the correlation between securities to increase risk and hence expected return.
b. reducing risk by investing in securities that are not perfectly positively correlated.
An investment's return usually has two components, one of which is ___________ which reflects the cash you receive directly while you own the investment. a. the capital gain b. the income component c. your reward for bearing risk d. your total dollar return e. your gross return on that investment
b. the income component
Smythe Tool has 12,000 shares of stock outstanding with a par value of $1 per share and a market value of $41 per share. The company just declared a 2-for-1 stock split. As a result of this split: a. the total value of the owners' equity will be cut in half. b. the number of shares outstanding will increase to 24,000. c. market price per share will increase to $82 a share. d. par value per share will remain at $1 per share.
b. the number of shares outstanding will increase to 24,000.
KLM Corp. common stock is currently selling for $4 a share. Due to NYSE listing requirements, KLM decided to declare a non-discretionary 1-for-7 reverse stock split. As a result of the split, KLM common stock market price per share will be _____, all else constant. a. $8 b. $24 c. $28 d. $30 e. $32
c. $28
DRI inc. is considering a project with an initial cost of $432,000 and is expected to yield after-tax cash flows of $40,000 per year for the first ten years, $60,000 per year for the next ten years, and $80,000 per year for the following ten years. DRI's cost of capital is 10.00%. Calculate this project's net present value. a. $17,874 b. $20,805 c. $28,991 d. $29,398 e. $34,890
c. $28,991
Aaron's Sailboats has decided to take the company public by offering a total of 120,000 shares of common stock to the public. The firm has hired an underwriter who arranges a full commitment underwriting and suggests an initial selling price of $28 a share with an 8.5 percent spread. As it turns out, the underwriters only sell 97,400 shares. How much cash will Aaron's Sailboats receive from its first public offering? a. $2,727,200 b. $2,495,388 c. $3,074,400 d. $3,360,000 e. $3,645,600
c. $3,074,400
The annual returns over the past five years for the market and the stock of Soprano Pizza Inc. are given by the following table: Year Soprano Pizza Inc. Market 2012 -0.15 -0.17 2013 -0.03 -0.05 2014 0.11 0.17 2015 -0.08 -0.1 2016 0.15 0.18 Diamond Exports Inc. beta is: a. beta < 0 b. beta = 0 c. 0 < beta < 1.0 d. beta = 1.0 e. beta > 1.0
c. 0 < beta < 1.0
Assume that annual returns on common stocks are normally distributed with an average historical return of 14.3% and a standard deviation of 20.4%. What is the probability that annual return on common stocks is negative? (Hint: Z-table) a. 0.021. b. 0.158. c. 0.242 d. 0.412. e. 0.701
c. 0.242
Calculate beta coefficient for the following stock CSX? Economy Probability Market CSX Bust 0.2 -0.15 -0.10 Below average 0.2 0.01 -0.02 Average 0.2 0.25 0.14 Above average 0.2 0.42 0.27 Boom 0.2 0.53 0.31 a. 0.43 b. 0.55 c. 0.63 d. 0.78 e. 1.23
c. 0.63
A firm is worth $1,400, has a 35% tax rate, total debt of $600, an unlevered return of 15%, and a cost of debt of 9%. What is the cost of equity? a. 12.07% b. 16.67% c. 17.93% d. 18.75% e. 20.20%
c. 17.93%
It is now the beginning of a year. Jared is considering the purchase of a 8 percent (coupon rate), 15-year bond that is presently priced to yield 10 percent (i.e. market interest rate is 10 percent). Based on extensive analysis of market interest rates, he thinks rates will fall so that at the end of this year the market yield of this issue will drop to 9 percent. If his expectations are correct, what kind of realized return will Jared earn by purchasing the bond today and selling the bond at the end of the year? (Assuming annual interest payments) a. 8.76% b. 12.75% c. 18.19% d. 24.03% e. 28.85%
c. 18.19%
George purchased a stock one year ago at a price of $35.09. Over the past year he has received a total of $2.13 in dividends. Today he sold the stock for $33.85 What percentage total return did Marti earn on this investment? a. 1.89% b. 2.23% c. 2.54% d. 1.90% e. - 2.72%
c. 2.54%
Financial Appraisals Inc. is considering purchasing a new software. Determine the payback period (in years) for this project. Software initial cost is $140,000 and would yield after-tax cash flows of $40,000 the first year, $35,000 the second year, $30,000 the third year, $40,000 the fourth year, $50,000 the fifth year, and $45,000 the sixth year. a. 2.66 b. 3.56 c. 3.88 d. 3.95 e. 4.23
c. 3.88
Wear Ever is expanding and needs $12.6 million to help fund this growth. The firm estimates it can sell new shares of stock for $32.50 a share. It also estimates it will cost an additional $340,000 for filing and legal fees related to the stock issue. The underwriters have agreed to a 7.5 percent spread. How many shares of stock must Wear Ever sell if it is going to have $12.6 million available for its expansion needs? a. 370,376 shares b. 419,127 shares c. 430,437 shares d. 454,209 shares e. 461,806 shares
c. 430,437 shares
The static theory of capital structure states that firms borrow up to the point where the tax benefit of one additional dollar of debt is equal to the marginal cost of: a. Sales. b. Equity. c. Financial distress. d. Leverage. e. Financial capital.
c. Financial distress.
Which of the following are included in the market prices if the market is semistrong efficient? I. All historical information II. All insider information III. All public information IV. All information of any kind a. I only b. III only c. I and III only d. I, II, and III only e. I, II, III, and IV
c. I and III only
What are the internal rate of return (IRR) and the net present value (NPV) at a cost of capital of 12% for a project with the following cash flows? Year Cash outflow Cash inflows 0(initial cost) $3,000 1 $1,200 2 800 3 1,500 a. IRR is 14.57%; NPVis $86.04 b. IRR is 13.09%; NPV is $40.75 c. IRR is 7.78%; NPV is -$223.15 d. IRR is 8.56%; NPV is $102.86 e. IRR is 9.93%; NPV is - $102.86
c. IRR is 7.78%; NPV is -$223.15
Consider a project with an initial investment and positive future cash flows. As the discount rate increases the______________ . a. IRR remains constant while the NPV increases b. IRR decreases while the NPV remains constant c. IRR remains constant while the NPV decreases d. IRR increases while the NPV remains constant e. IRR decreases while the NPV decreases
c. IRR remains constant while the NPV decreases
If a change is made to depreciate an asset using MACRS over three years instead of five years, the cash flow in year one will: a. Decrease b. Remain constant c. Increase d. Cannot be determined without having the MACRS tables e. Cannot be determined without having both the MACRS tables and the tax rate
c. Increase
The 95% probability range is defined as the: a. Risk premium plus or minus two times the standard deviation. b. Risk premium plus or minus two times the variance. c. Mean plus or minus two times the standard deviation. d. Mean plus or minus three times the standard deviation. e. Mean plus or minus three times the variance.
c. Mean plus or minus two times the standard deviation.
______________ is the return on the best alternative use of an asset, or the highest return that will not be earned if funds are invested in a particular project. a. Externalities b. Sunk cost c. Opportunity cost d. Cannibalization
c. Opportunity cost
The reward-to-risk ratio can be defined as the: a. Risk premium minus the risk-free rate of return. b. Market risk premium divided by the beta of a risky stock. c. Slope of the security market line. d. Beta of a risky stock. e. Market risk premium minus the risk free rate of return divided by a stock's beta.
c. Slope of the security market line.
The expected return on an individual asset depends only on that assets _______ risk. a. Total b. Incremental c. Systematic d. Unsystematic e. Portfolio
c. Systematic
The optimal firm value is achieved when the: a. Present value of the bankruptcy cost is minimized. b. The interest tax shield on debt is maximized. c. Weighted average cost of capital is minimized. d. Debt-equity ratio is maximized. e. Total net gain from leverage is equal to zero.
c. Weighted average cost of capital is minimized.
It is important to identify and use only incremental cash flows in capital investment decisions a. because they are the simplest to identify b. only when the stand alone principle fails to hold c. because ultimately it is the change in a firm's overall future cash flows that matter d. in order to accommodate unforeseen changes that might occur e. whenever sunk costs are involved
c. because ultimately it is the change in a firm's overall future cash flows that matter
Tony currently owns 12,000 shares of GL Tools. He has just been notified that the firm is issuing additional shares of stock and that he is being given a chance to purchase some of these shares prior to the shares being offered to the general public. What is this type of an offer called? a. best efforts offer b. priority offer c. rights offer d. general cash offer e. firm commitment offer
c. rights offer
Advertisements in a financial newspaper announcing a public offering of securities, along with a list of the investment banks handling the offering, are called: a. red herrings. b. green Shoes. c. tombstones. d. winner's curses.
c. tombstones.
Which one of the following favors a high dividend payout? a. flotation costs b. dividend restrictions c. uncertainty resolution d. high personal tax rate on dividend income
c. uncertainty resolution
A firm has a tax rate of 35%, an unlevered rate of return of 14%, total debt of $1,000,000, and an EBIT of $300,000. What is the unlevered value of the firm? a. $27,000 b. $393,000 c. $1,027,000 d. $1,393,000 e. $2,143,000
d. $1,393,000
ADA, Inc. currently has 20,000 shares of stock outstanding at a market value of $40 a share. The firm is currently 100% financed with equity. ADA is considering a restructuring which will include issuing $400,000 of bonds at par value with a coupon rate of 6%. What is the break-even EBIT? a. $12,000 b. $24,000 c. $36,000 d. $48,000 e. $60,000
d. $48,000
U-ship it inc. is considering a new four-year project with an initial investment requirement of $140,000. The equipment will be depreciated straight-line to zero over the life of the project and will be worthless at the end of the project. Sales are estimated at $240,000 with costs of $125,000. The tax rate is 34%. What is the project OCF? a. $54,200 b. $56,610 c. $76,400 d. $87,800 e. $88,520
d. $87,800
John douglas' best friend is offering him an investment opportunity that has the following cash flows: End of year Cash Outflow Cash Inflow 0 (initial cost) $6,000 1 $3,000 2 0 3 10,000 The internal rate of return (IRR) of this investment is .. a. 23.60%. b. 27.23%. c. 28.15%. d. 37.79%. e. 38.53%
d. 37.79%
Stone West Mining Corp. has 10,000 shares outstanding with a market price per share of $24. The net after-tax earnings of the firm are $60,000. Stone West marketing department forecasts an abnormal growth over the next few years; hence the firm has just declared a 5-for-2 stock split. What will the price-earnings ratio be after the stock split? a. 0.2 b. 2.0 c. 3.0 d. 4.0 e. 5.0
d. 4.0
The cash flows for two mutually exclusive investment projects S and L are listed below. What is the crossover rate for these two projects? Project Year 0 Year 1 Year 2 Year 3 Year 4 S -$1,000 $750 $600 $450 $150 L -$2,000 $200 $600 $800 $1,000 a. 3.40% b. 4.09% c. 4.28% d. 7.35% e. 8.41%
d. 7.35%
Various management actions provide investors with clues as to the future prospects for the firm. Which of the following actions by management contains the most positive economic information for common stock investors?: a. A two for one stock split. b. A 20 percent stock dividend. c. A 20 percent one-shot extra cash dividend. d. A 20 percent increase in cash dividends per share.
d. A 20 percent increase in cash dividends per share.
ABC Company is considering three independent investment opportunities. The cost of capital for projects A, B, and C is 12%. The following measures have been established for the projects: Project Pay Back Period NPV at 12% IRR A 5 years $500 16% B 4 years 700 14% C 3 years -180 10% In order to help maximize its market value, which project(s) should ABC Company select? a. B because its NPV at 12% is the highest. b. A because its IRR is the highest. c. C because its payback period is the lowest. d. A and B because both projects have positive NPVs.
d. A and B because both projects have positive NPVs.
Which of the following are true when a firm is operating at its target capital structure point? I. The WACC is at its minimum point. II. The debt-equity ratio is equal to 1. III. Shareholder value is maximized. IV. The total value of the firm is maximized. a. I and IV only b. II and III only c. I and III only d. I, III, and IV only e. I, II, III, and IV
d. I, III, and IV only
Coughlin Motors is considering a project with the following expected cash flows: Year Cash Flow 0 -$1,000 million 1 500 million 2 400 million 3 300 million 4 250 million The projects WACC is 15 percent. What is the projects payback period and discounted payback period? a. Payback period= 2 years and discount payback period= 2.68 years b. Payback period= 2.25 years and discount payback period= 2.68 years c. Payback period= 2.33 years and discount payback period= 3.21 years d. Payback period= 2.33 years and discount payback period= 3.46 years e. Payback period= 3 years and discount payback period= 3.21 years
d. Payback period= 2.33 years and discount payback period= 3.46 years
The cash flows for projects A, B, and C are given below. The cost of capital for each project is 7.5%. If A and B are mutually exclusive and C is independent, which project, or combination of projects should be accepted? Project Year A B C 0 -$300 -$300 -$300 1 180 100 90 2 170 140 100 3 130 170 a. project A b. project B c. project C d. Projects A and C e. Projects B and C
d. Projects A and C
The market return on the U.S. Treasury bill is generally used as the measure of the: a. Real rate of market return. b. Real rate of return on a risk-free investment. c. Nominal risk premium rate of return. d. Risk-free rate of return. e. Risk premium on government bonds.
d. Risk-free rate of return.
The equivalent annual cost can be defined as: a. The yearly costs, which are standard in two mutually exclusive projects that have equal lives. b. The net present value of a project divided by the number of years that the project is expected to last. c. The amount of the yearly fixed costs of a project, which remains constant over the life of the project. d. The amount paid each year over the life of a project that has the same net present value as the project.
d. The amount paid each year over the life of a project that has the same net present value as the project.
RFS firm is considering a new project that will cause accounts payable to increase by $55,000, accounts receivable to increase by $80,000 and inventory to decrease by $15,000. Which one of the following statements is true? a. The project will not affect net working capital. b. The change in accounts payable is a use of cash. c. The change in inventory is a use of cash. d. The project will decrease the amount of operating cash flow. e. Net working capital will decrease.
d. The project will decrease the amount of operating cash flow.
The decline in the price of the currently outstanding shares of stock that frequently occurs when a new issue of stock is announced is referred to as the: a. gross spread. b. underpricing. c. indirect expense. d. abnormal return.
d. abnormal return.
Golden overseas shipping purchased a new truck two years ago for $300,000. The company uses MACRS depreciation for accounting purposes. The truck is classified as 5-year property, which has depreciation allowances of 20%, 32%, and 19.2% for the first three years, respectively. The company is in the 35% marginal tax bracket. Today the company received an offer of $160,000 for the truck. What will be the net cash flow from the sale if the company decides to sell the truck today? a. $126,500 b. $130,000 c. $145,000 d. $150,890 e. $154,400
e. $154,400
West Inc. reported the following common equity account in its balance sheet. The company just declared a 5 percent stock dividend when the market value of its stock was $15 per share. What is the capital surplus account after the 5 percent stock dividend? Common stock ($1 par value) $ 620,000 Capital Surplus 2,480,000 Retained earnings 3,216,000 Total owners' equity $ 6,316,000 a. $2,111,000 b. $2,318,000 c. $2,501,000 d. $2,708,000 e. $2,914,000
e. $2,914,000
PHP inc. is considering purchasing a security system costing $500,000. The equipment will be depreciated as 5-year property under MACRS, which provides for depreciation allowance percentages of 20%, 32%, 19.20%, 11.52%, 11.52%, and 5.76% respectively for each of the five years. What is the anticipated tax shield in year three on this equipment if the company is in the 22% marginal tax bracket? a. $12,409 b. $13,700 c. $14,987 d. $16,896 e. $21,120
e. $21,120
Amazon Corp. is considering the purchase of a new $1,000,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $200,000 at the end of that time. Amazon will save $400,000 before taxes per year in order processing costs and they will be able to reduce working capital by $200,000 (this is a one-time reduction). If the tax rate is 35 percent and cost of capital is 16%, what is the NPV for this project? a. -$134,987 b. $145,862 c. $222,908 d. $226,322 e. $247,189
e. $247,189
Last year, ARK Corporation reported after-tax Operating Cash Flow (OCF) of $50,000. The following information was also reported for the same period: Beginning Ending Accounts receivable $35,000 $40,000 Inventory 60,540 56,400 Accounts payable 70,700 72,810 Based on this information, what was ARK's cash flow? (Assuming zero depreciation expenses and zero capital spending) a. $44,500 b. $45,690 c. $47,580 d. $50,670 e. $51,250
e. $51,250
Use the following information to answer the question below. State Probability Return on A Return on B Boom 0.3 10% 5% Normal 0.6 5% 15% Bust 0.1 8% -10% What is the standard deviation of return of a portfolio with weights of 40% in security A and the remainder in security B? a. 0.021 b. 0.027 c. 0.034 d. 0.038 e. 0.041
e. 0.041
If DMI stock has the following returns in different economic conditions, what is the standard deviation of its return? Outcome Probability Return Better 0.40 0.25 Same 0.35 0.17 Worse 0.25 -0.22 a. 0.094 b. 0.142 c. 0.162 d. 0.178 e. 0.191
e. 0.191
Marthas Grapevines, Inc. has an EBIT of $46,000, no debt, a 34% tax rate, and a 15% cost of capital. After issuing $75,000 of debt at 10% interest rate, what is the weighted average cost of capital (WACC) for Marthas Grapevines? a. 12.37% b. 12.61% c. 12.88% d. 13.05% e. 13.32%
e. 13.32%
Which of the following is likely to be associated with the highest level of risk? a. Long-term corporate bonds b. US Treasury bills c. Long-term government bonds d. Common stock of the largest companies in the US e. Common stock of the smallest companies listed on NYSE
e. Common stock of the smallest companies listed on NYSE
The Best Company is reviewing two options for replacing a piece of machinery. The first machine costs $86,500 and has a four-year life. The second machine costs $123,000 and has a six-year life. Neither machine will have a salvage value. The machines will be replaced at the end of their life. What method should be used to determine which machine to be purchased? a. Net present value b. Internal rate of return c. Accounting rate of return d. Total cash flows e. Equivalent annual cost
e. Equivalent annual cost
The principle of diversification states that spreading an investment over a number of assets will eliminate: a. All of the risk. b. All of the systematic risk and part of the unsystematic risk. c. All of the unsystematic risk and part of the systematic risk. d. Most of the systematic risk. e. Most of the unsystematic risk.
e. Most of the unsystematic risk.
A firm plans to split its stock 2-for-1. Which of the following most likely will NOT occur? a. Price per share will fall by half. b. Par value per share will be reduced by half. c. The number of shares owned by each individual investor will double. d. The number of shares outstanding will double. e. Total shareholders' equity will be reduced by half.
e. Total shareholders' equity will be reduced by half.
Standard deviation measures the ____ risk and beta measures the ____ risk of a portfolio. a. Unsystematic/ systematic b. Systematic/ unsystematic c. Unsystematic/ total d. Total/ unsystematic e. Total/ systematic
e. Total/ systematic
Which one of the following statements is true concerning market performance from 1926 - 2015? a. Over the short-term, small-company stocks are less volatile than large-company stocks. b. U.S. Treasury bills tend to pay a higher rate of return than do long-term government bonds. c. U.S. Treasury bills do not pay sufficient return to cover inflation. d. Over the long-term, large-company stocks outperform small-company stocks. e. U.S. Treasury bills have paid returns in excess of 10% in some years.
e. U.S. Treasury bills have paid returns in excess of 10% in some years.
You are an investor who studies the price movements of stock to identify patterns that are repetitive. By doing this, you have been able to earn higher returns than normal. This would be a violation of: a. The risk-return tradeoff. b. The normal risk premium reward. c. Strong form efficiency. d. Semistrong form efficiency. e. Weak form efficiency.
e. Weak form efficiency.
1. A taxable gain occurs when an asset is sold for more than its book value. For capital budgeting purposes, the taxes on the sale _____________. a. are treated as a reduction in cash and added to operating cash flow b. are treated as a noncash event similar to depreciation c. are treated as a reduction in cash and deducted from the book value of the asset d. are treated as a reduction in cash and deducted from the taxable gain e. are treated as a reduction in cash and are deducted from the sale price
e. are treated as a reduction in cash and are deducted from the sale price
The statistic theory of capital structure advocates borrowing to the point where:
the tax benefit from debt is equal to the cost of the increased probability of financial distress.
