Finance: Applications and Theory 2nd Edition

1) Ramakrishnan Inc. reported 2008 net income of $20 million and depreciation of $1,500,000. The top part of Ramakrishnan, Inc.'s 2007 and 2008 balance sheets is listed below (in millions of dollars). Calculate the 2008 net cash flow from operating activities for Ramakrishnan, Inc. A.$12,500,000 B.$10,500,000 C.$8,500,000 D.$7,100,000 Answer: C 20 + [1.5 + 2 + 5]

1) You hold the positions in the table below. What is the beta of your portfolio? If you expect the market to earn 10 percent and the risk-free rate is 4 percent, what is the required return of the portfolio? A.12.37% B.9.73% C.10.17% D.11.68% Answer: D Total value = $10 200 + $100.00 50 +

1) Call Premium A 5.5 percent corporate coupon bond is callable in four years for a call premium of one year of coupon payments. Assuming a par value of $1,000, what is the price paid to the bondholder if the issuer calls the bond? (Assume annual interest payments.) A.$55 B.$220 C.$1000 D.$1055 Answer: D principal +

1) A firm has EBIT of $300,000 and depreciation expense of $12,000. Fixed charges total $44,000. Interest expense totals $7,000. What is the firm's cash coverage ratio? A.3.76 times B.4.91 times C.7.25 times D.7.09 times Answer: D (300000 + 12000)/44000 = 7.09 Answer: D (300000 + 12000)/44000 = 7.09 Answer: D (300000 + 12000)/44000 = 7.09 2) You

1) Brady inherited 1750 shares of LNM, Inc. The stock is selling in the market for $82 per share and the company is contemplating a 1-for-3 stock split. Given this information, which of the following statements is correct? A.Brady will have 583.33 shares and stock's price will be near $246.00 B.Brady will

1) Calculating the Probability of Bankruptcy A linear probability model you have developed finds there are two factors influencing the past bankruptcy behavior of firms: the debt-to-equity ratio and the profit margin. Based on past bankruptcy experience, the linear probability model is estimated as: PDi = .02 (debt/equity) + .80 (profit margin) A

1) Portfolio Beta You own $1,000 of City Steel stock that has a beta of 1.5. You also own $5,000 of Rent-N-Co (beta = 1.8) and $4,000 of Lincoln Corporation (beta = 0.9). What is the beta of your portfolio? A.1.4 B.1.5 C.4.2 D.4.65 Answer: AFirst determine the total value of the portfolio and

1) All of the following capital budgeting tools are suitable for non-normal cash flows except ____. A.MIRR B.Profitability Index C.IRR D.NPV Answer: C Answer: C Answer: C 2) Which of the following statements is correct? A.All else the same, an investor will require less return to invest in a callable bond than one that is not callable B.All else the

1) When the firm finances the seasonally adjusted average level of asset demand with long-term debt and equity, the firm is said to follow a _______________. A.Seasonal-dependent financing policy B.Relaxed financing policy C.Restricted financing policy D.Compromise financing policy Answer: D Answer: D Answer: D 2) Firm A and Firm B have the same total assets, ROA and profit

1) On the _____________, the firm will look on its books to find the registered owners so that they can start addressing payments. A.Owner date B.Record date C.Owner of record date D.Ex-dividend date Answer: B Answer: B Answer: B 2) If a firm has retained earnings of $20 million, a common shares account of $40 million, and additional

1) Husker's Tuxedos, Inc., needs to raise $135 million to finance its plan for nationwide expansion. In discussions with its investment bank, Husker's learns that the bankers recommend an offer price (or gross price) of $43.55 per share and they will charge an underwriter's spread of $2.25 per share. Calculate

1) Stock Market Bubble If the NASDAQ stock market bubble peaked at 3,750, and two and a half years later it had fallen to 2,200, what would be the percentage decline? A.-15.87% B.-17.05% C.-41.33% D.-58.67% Answer: C Market decline = (2,200 - 3,750) 3,750 = -0.4133 = -41.33% Answer: C Market decline = (2,200 - 3,750)

1) A $1,000 investment has doubled to $2,000 in seven years. How much longer will it take for the investment to reach $5,000 if it continues to earn the same rate? A.6.16 years B.6.86 years C.7.15 years D.9.25 years Answer: D Step 1: PV = 1000; FV = 2000; n = 7 = > i

1) Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 8 percent, and that the maximum allowable payback and discounted payback statistic for the project are 3 and 3.5 years, respectively. Use

1) Which of the following is a true statement? A.Sectors of the U.S. economy that tend to have quite variable income streams also carry the highest D/E ratios B.Sectors of the U.S. economy that tend to have quite variable income streams also carry the lowest D/E ratios C.Conglomerates tend to have high, unstable

1) A company is considering two mutually exclusive projects, A and B. Project A requires an initial investment of $100, followed by cash flows of $95, $20 and $5. Project B requires an initial investment of $100, followed by cash flows of $0, $20 and $130. What is the IRR

1) Which of the following is a type of merger in which two firms that sell the same products in different market areas are combined? A.vertical B.conglomerate C.product extension D.market extension Answer: D Answer: D Answer: D 2) Your company borrows $55,000 today to funds its growth initiatives. It must repay the bank in 4 annual payments of

1) A firm faces a 30% tax rate and has $200M in assets, currently financed entirely with equity. Equity is worth $10 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected EBIT is $10M. The firm is considering switching

1) Which of these statements is true? A.The age of a firm's cash will affect the current ratio level B.The age of a firm's accounts receivable will affect the current ratio level C.The age of a firm's fixed assets will affect the fixed asset turnover ratio level D.The age of a firm's fixed assets

1) Painting, Inc. has sales of $400,000 and cost of goods sold of $275,000. The firm had a beginning inventory of $42,000 and an ending inventory of $38,000. What is the length of the days' sales in inventory? A.53.09 days B.36.50 days C.38.33 days D.50.44 days Answer: D ($38,000 x 365)/$275,000 = 50.44 days. Answer: D ($38,000

1) Goldilochs Inc. reported sales of $8 million and net income of $1.5 million. The firm has $12 million in total assets and $500,000 in current liabilities. The firm currently pays out 25% of its net income to shareholders. Assume that all assets and current liabilities are expected to grow with

1) Consider the following bond quote: a municipal bond quoted at 101.25. If the municipal bond has a par value of $5,000, what is the price of the bond in dollars? A.$5,089.06 B.$5,050.19 C.$5,062.50 D.$5,109.75 Answer: C 101.25% * 5000 = 5062.50 Answer: C 101.25% * 5000 = 5062.50 Answer: C 101.25% * 5000 = 5062.50 2) If

1) Your firm needs a computerized machine tool lathe which costs $50,000 and another $12,000 in maintenance for each year of its 3-year life. After 3 years, this machine will be replaced. The machine falls into the MACRS 3-year class life category. Assume a tax rate of 30% and a discount

1) Your company has a 38% tax rate and has $800 million in assets, currently financed entirely with equity. Equity is worth $60 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which

1) All of the following are benefits that financial institutions provide to our economy except _________. A.Increased liquidity B.Increased monitoring C.Increased dollar amount of funds flowing from suppliers to fund users D.Increased price risk Answer: D Answer: D Answer: D 2) What annual rate of return is earned on a $13,000 investment made in year 2 when it

1) During the last year you have had a loan commitment from your bank to fund working capital for your business. The total line available was $10,000,000, of which you took down $7,800,000. It is now the end of the loan commitment period and your bank had you pay the

1) Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 8 percent, and that the maximum allowable payback and discounted payback statistics for the project are 3.5 and 4.5 years, respectively.

1) Which of the following statements is true? A.Interest payments paid to U.S. Treasury bond holders are not taxed at the federal level B.Interest payments paid to corporate bond holders are not taxed at the federal level C.Interest payments paid to corporate bond holders are not taxed at the state level D.Interest payments paid

1) Accelerated depreciation allows firms to A.receive less of the dollars of depreciation earlier in the asset's life B.receive more of the dollars of depreciation earlier in the asset's life C.not pay any taxes during an asset's life D.receive more of the dollars of depreciation later in the asset's life Answer: B Answer: B Answer: B 2) Suppose

1) Future Value Given an 8 percent interest rate, compute the year 7 future value if deposits of $1,500 and $2,500 are made in years 2 and 3, respectively, and a withdrawal of $2,000 is made in year 5 . A.$1,909.42 B.$3,272.41 C.$3,433.60 D.$5,656.34 Answer: B Step 1: 0 = CFO 0 = C01, 1 F01

1) Free Cash Flow The 2010 income statement for Betty's Barstools shows that depreciation expense is $100 million, EBIT is $400 million, and taxes are $120 million. At the end of the year, the balance of gross fixed assets was $510 million. The increase in net operating working capital during

1) Most business loans today are __________________. A.Pre-negotiated lines of credit B.Spot loans C.Collateralized lines of credit D.None of these Answer: A Answer: A Answer: A 2) Balance Sheet You are evaluating the balance sheet for Campus Corporation. From the balance sheet you find the following balances: Cash and marketable securities = $400,000, Accounts receivable = $200,000, Inventory

1) Renee's Boutique, Inc., needs to raise $300 million to finance firm expansion. In discussions with its investment bank, Renee's learns that the bankers recommend a debt issue with an offer price of $1,000 per bond and they will charge an underwriter's spread of 7.125 percent of the gross price.

1) When computing the future value of an annuity, the higher the compound frequency, A.the lower the future value will be B.the higher the future value will be C.the less likely the future value can be calculated D.the more likely the future value can be calculated Answer: B Answer: B Answer: B 2) Assume that you contribute $300

1) Which of the following is NOT a factor for determining whether to use the active or passive approach to capital structure changes? A.How much the firm faces in flotation costs under the active management approach B.How much the firm faces in debt costs under the active management approach C.How quickly the firm

1) Which of the following will increase the additional funds needed from external sources? A.The firm's profit margin increases B.The firm's dividend payout ratio decreases C.The firm's debt ratio decreases D.None of these Answer: D Answer: D Answer: D 2) This should be the primary objective of a firm as it may actually be the most beneficial for

1) A stock is expected to pay a $4.00 dividend per share. The growth rate is expected to be -1%. If investors demand 8% on this stock, what is the expected price of the stock 3 years from now? A.$54.68 B.$52.17 C.$41.06 D.$43.12 Answer: D Step 1: Price = 4/[.08 + .01] = $44.44; Step

1) Carrie D's has 6 million shares of common stock outstanding, 2 million shares of preferred stock outstanding, and 10 thousand bonds. If the common shares are selling for $15 per share, the preferred shares are selling for $28 per share, and the bonds are selling for 109 percent of

1) Calculation of Bankruptcy Probability Suppose a linear probability model you have developed finds there are two factors influencing the past bankruptcy behavior of firms: the debt ratio and the profit margin. Based on past bankruptcy experience, the linear probability model is estimated as: PDi = .18 (debt ratio) + .35 (profit

1) HiLo, Inc., doesn't face any taxes and has $100 million in assets, currently financed entirely with equity. Equity is worth $50 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state

1) Future and Present Value of an Annuity Due If you start making $100 monthly contributions today and continue them for 5 years, what's their future value if the compounding rate is 10 percent APR? What is the present value of this annuity? A.$508.14, $487.74 B.$512.64, $491.80 C.$7,743.71, $4,706.53 D.$7,808.24, $4,745.78 Answer: D N =

1) This is a principle of capital budgeting which states that the calculations of cash flows should remain independent of financing. A.generally accepted accounting principle B.financing principle C.separation principle D.WACC principle Answer: C Answer: C Answer: C 2) With regard to depreciation, the time value of money concept tells us that A.delaying the depreciation expense is always better B.taking the

1) Ultra Petroleum (UPL) has earnings per share of $1.75 and P/E of 42.56. What is the stock price? A.$74.48 B.$76.68 C.$85.68 D.$112.98 Answer: A 42.56 * 1.75 = 74.48 Answer: A 42.56 * 1.75 = 74.48 Answer: A 42.56 * 1.75 = 74.48 2) Which of these is defined as an exchange rate regime where a currency's

1) Exchange Rate Risk What is the percentage change in value of a $50 million investment in Russia when the exchange rate changes from $1 = 7 rubles to $1 = 12 rubles? A.41.67% B.58.33% C.36.84% D.63.16% Answer: A The company invests $50 million at a value of $50 million x (7 ruples $1) =

1) Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 8 percent, and that the maximum allowable payback and discounted payback statistics for the project are 3.5 and 4.5 years, respectively.

1) Which of these is the measurement of risk for a collection of stocks for an investor? A.beta B.efficient market C.expected return D.portfolio beta Answer: D Answer: D Answer: D 2) Your company is considering a new project that will require $2,000,000 of new equipment at the start of the project. The equipment will have a depreciable life

1) Compute the expected return given these three economic states, their likelihoods, and the potential returns: A.3.5% B.7.0% C.7.5% D.12.5% Answer: B Expected return = 0.2 23% + 0.6 14% + 0.2 -30% = 7.0% Answer: B Expected return = 0.2 23% + 0.6 14% + 0.2 -30% = 7.0% Answer: B Expected return = 0.2 23% +

1) All of the following are stock market indices except _________________. A.Standard & Poor's 500 Index B.Dow Jones Industrial Average C.Nasdaq Composite Index D.Mercantile 1000 Answer: D Answer: D Answer: D 2) Compound Frequency Payday loans are very short-term loans that charge very high interest rates. You can borrow $600 today and repay $675 in two weeks. What

1) If the U.S. government increased the corporate tax rates: A.We would expect to no change in the capital structure since it is independent of the component costs of capital B.We would expect to see higher levels of equity since there would be less of a tax advantage for debt C.We would expect

1) Which of the following bonds makes no interest payments? A.a bond whose coupon rate is equal to the market interest rates B.a bond whose coupon rates are greater than market interest rates C.a bond whose coupon rates are less than the market interest rates D.zero coupon bond Answer: D Answer: D Answer: D 2) CJ Co stock

1) What is the difference between a prospectus and a red herring prospectus? A.The red herring prospectus is a preliminary version distributed to potential equity investors B.The red herring prospectus is a corrected version of the prospectus C.The red herring prospectus is only for issuing long-term bonds D.The red herring prospectus is the report

1) Which of the following is true regarding The Information Effect of dividend policies? A.Increases in dividends are seen as negative signals concerning the firm's performance B.Increases in dividends are seen as negative signals concerning the firm's expected future cash flow levels C.If a firm announces an increase in the next dividend, analysts

1) LD Inc. declared bankruptcy through a Chapter 7 filing. Consider the following data in millions of dollars and determine the funds available for secured creditors. Proceeds from the liquidation of assets = $225 First mortgage = $50 Administration expenses associated with the bankruptcy = $5 Notes payable to the banks = $205 Subordinated debentures

1) Is it possible for a firm to have positive net income and yet to have cash flow problems? A.No, this is impossible since net income increases the firm's cash B.Yes, this can occur when a firm is growing very rapidly C.Yes, this is possible if the firm window-dressed its financial statements D.No, this

1) "The net amount of current assets that the firm has to fund, above and beyond those that someone else funds for them" is referred to as ______________. A.Net working capital B.Excess capacity C.Safety stock D.Unfunded assets Answer: A Answer: A Answer: A 2) Which of the following statements is incorrect regarding how beta is calculated? A.The company return

1) Oberon Inc. has a $20 million ($1000 face value) 10-year bond issue selling for 99% of par that pays an annual coupon of 7.25%. What would be Oberon's before-tax component cost of debt? A.6.12% B.7.02% C.7.40% D.8.15% Answer: C PV = -990; FV = 1000; PMT = 72.50; n = 10; i = 7.40% Answer:

1) Moving Cash Flows What is the value in year 6 of a $900 cash flow made in year 4 when the interest rates are 8 percent? A.$1,044.00 B.$1,049.76 C.$1,332.00 D.$1,428.19 Answer: B PV = 900, N = (6 - 4) = 2, I = 8, PMT = 0, CPT FV = 1049.76 Answer: B PV

1) Which of the following statements is correct? A.The flotation-adjusted cost of equity will always be less than the cost of equity that has not been adjusted for flotation costs B.The flotation-adjusted cost of equity will always be more than the cost of equity that has not been adjusted for flotation costs C.The

1) Interest rates The Wall Street Journal reports that the current rate on 10-year Treasury bonds is 6.75 percent, on 20-year Treasury bonds is 7.25 percent, and on a 20-year corporate bond is 8.50 percent. Assume that the maturity risk premium is zero. If the default risk premium and liquidity risk

1) The rate on commercial paper is generally higher than the prime rate. A.True B.False Answer: B Answer: B Answer: B 2) Which of the following will not increase a present value? A.Increase the interest rate B.Decrease the number of periods C.Increase the future value D.None of these answers is correct Answer: A Answer: A Answer: A 3) Future Value of Multiple Annuities Assume

1) Oakdale Fashions Inc. had $255,000 in 2011 taxable income. If the firm paid $82,100 in taxes, what is the firm's average tax rate? A.34.70% B.32.20% C.29.90% D.28.20% Answer: B 82100/255000 = 32.20% Answer: B 82100/255000 = 32.20% Answer: B 82100/255000 = 32.20% 2) Suppose a firm has had the historical sales figures shown below. What would be

1) Sports Corp has 10 million shares of common stock outstanding, 5 million shares of preferred stock outstanding, and 1 million bonds. If the common shares are selling for $25 per share, the preferred share are selling for $12.50 per share, and the bonds are selling for 97 percent of

1) A financial analyst calculated that the after-tax salvage value for a machine was $10,200. The current book value of the asset is $12,000 and the firm's tax rate is 30%. How much could the machine be sold for today? A.$6,953.07 B.$7,151.63 C.$9,428.57 D.$9,103.49 Answer: C 10,200 = X - (X - 12,000) * .3;

1) Time to Maturity A bond issued by a corporation on June 15, 2007, is scheduled to mature on June 15, 2017 . If today is December 16, 2008, what is this bond's time to maturity? (Assume annual interest payments.) A.1 year, 6 months B.8 years C.8 years, 6 months D.10 years Answer: C June

1) Suppose a firm has had the historical sales figures shown below. What would be the forecast for next year's sales using the average approach if it is determined that none of the years are 'stale"? A.$1,600,000 B.$1,660,000 C.$1,700,000 D.$1,800,000 Answer: B ($1,600,000 + $1,500,000 + $1,700,000 + $1,700,000 + $1,800,000)/5 = $1,660,000 Answer: B ($1,600,000

1) Annuity Interest Rate What annual interest rate would you need to earn if you wanted a $200 per month contribution to grow to $14,700 in 5 years? A.6.47% B.7.76% C.8.00% D.14.70% Answer: C N = 5*12 = 60, PV = 0, PMT = -200, FV = 14700, CPT I = 8.00 Answer: C N = 5*12