Suppose an acquiring firm pays $100 million for a target firm and the target’s assets
have a book value of $70 million and an estimated replacement value of $80 million.
What amount would be allocated to the acquiring firm’s goodwill account?
A. $0 million
B. $20 million
C. $30 million
D. $70 million
E. $80 million
F. None of the above.
Answer:
Unsystematic risk:
A. can be effectively eliminated by portfolio diversification.
B. is compensated for by the risk premium.
C. is measured by beta.
D. is measured by standard deviation.
E. is related to the overall economy.
F. None of the above.
Answer:
Which of the following are viable techniques to cope with the uncertainty inherent in
realistic financial projections?
I. Simulation
II. Ad hoc adjustments
III. Scenario analysis
IV. Sensitivity analysis
A. II and IV only
B. III and IV only
C. II, III, and IV only
D. I, II, and III only
E. I, III, and IV only
F. I, II, III, and IV
Answer:
Use Law Specialists’s selected financial information above to answer the following
questions:
a. Calculate Law Specialists’s sustainable growth rate in each year.
b. Comparing the company’s sustainable growth rate with its actual growth rate in sales,
what growth problems did the company face over this period?
Answer:
Milano Corporation has experienced growth of 20% for each of the last 5 years. Over
this 5-year period, Milano’s return on equity has never exceeded 15%, its profit margin
has held steady at 5%, and its total asset turnover has not changed. Over the 5-year
period, Milano paid no dividends and issued no new equity. Based on this information,
which of the following can you most likely infer about Milano’s performance over the
past 5 years?
A. Milano’s leverage has decreased.
B. Milano’s leverage has remained constant.
C. Milano’s leverage has increased.
D. None of the above.
Answer:
Atmosphere, Inc. has offered $860 million cash for all of the common stock in ACE
Corporation. Based on recent market information, ACE is worth $710 million as an
independent operation. For the merger to make economic sense for Atmosphere, what
would the minimum estimated present value of the enhancements from the merger have
to be?
A. $0
B. $75 million
C. $150 million
D. $710 million
E. $860 million
F. None of the above.
Answer:
Please refer to the financial information for Squamish Equipment above. For next year,
calculate Squamish’s times-burden-covered ratio if Squamish sells 2 million new shares
at $20 a share.
A. 1.03
B. 1.38
C. 1.60
D. 1.89
E. 2.10
F. None of the above.
Answer:
Which of the following statements regarding interest tax shields is correct?
A. Taxes are reduced by the amount of a firm’s interest-bearing debt.
B. Taxable income is reduced by the amount of a firm’s interest-bearing debt.
C. Taxes are reduced by the amount of the interest on a firm’s debt.
D. Taxable income is reduced by the amount of the interest on a firm’s debt.
Answer:
Which of the following is NOT an implication of the pecking order theory of capital
structure?
A. On average, a firm’s stock price drops when it announces an equity issue.
B. Firms may want to maintain a reserve of cash or unused borrowing capacity.
C. More-profitable firms (all else equal) should have higher debt ratios.
D. Firms may fail to undertake positive-NPV projects if they would have to be
financed with a new issue of equity.
Answer:
The cost of equity for a firm:
A. tends to remain static for firms with increasing levels of risk.
B. increases as the unsystematic risk of the firm increases.
C. can be estimated from the capital asset pricing model or the dividend growth model.
D. equals the risk-free rate plus the market risk premium.
E. equals the firm’s pre-tax weighted-average cost of capital.
F. None of the above.
Answer:
On May 1, Vaya Corp. had a beginning cash balance of $175. Vaya’s sales for April
were $430 and May sales were $480. During May, the firm had cash expenses of $110
and made payments on accounts payable of $290. Vaya’s accounts receivable period is
30 days. What is the firm’s beginning cash balance on June 1?
A. $145
B. $155
C. $205
D. $215
E. $265
Answer:
Which of the following figures of merit does not directly take into consideration the
time value of money?
I. Payback period
II. Internal rate of return
III. Net present value (NPV)
IV. Accounting rate of return
A. IV only
B. I & III only
C. II & III only
D. I & II only
E. I & IV only
F. I, II, III, and IV
Answer:
You plan to buy a new Mercedes four years from now. Today, a comparable car costs
$82,500. You expect the price of the car to increase by an average of 4.8 percent per
year over the next four years. How much will your dream car cost by the time you are
ready to buy it?
A. $98,340.00
B. $98,666.67
C. $99,517.41
D. $99,818.02
E. $100,023.16
F. None of the above.
Answer:
Gujarat Corporation doubled its shareholders’ equity during the year 2014. Gujarat did
not issue any new equity, repurchase any equity, or pay out any dividends during the
year. What is Gujarat’s sustainable growth rate for 2014?
A. 50%
B. 100%
C. 150%
D. 200%
Answer:
Which of the following would increase a company’s need for external finance, all else
equal?
A. An increase in the dividend payout ratio
B. A decrease in sales growth
C. An increase in profit margin
D. A decrease in the collection period
Answer:
You are the beneficiary of a life insurance policy. The insurance company informs you
that you have two options for receiving the insurance proceeds. You can receive a lump
sum of $200,000 today or receive payments of $1,400 a month for 20 years. You can
earn a 6 percent annual rate on your money, compounded monthly. Which option
should you take and why?
A. You should accept the monthly payments because they are worth $209,414 to you.
B. You should accept the $200,000 lump sum because the monthly payments are only
worth $16,057 to you today.
C. You should accept the monthly payments because they are worth $336,000 to you.
D. You should accept the $200,000 lump sum because the monthly payments are only
worth $189,311 to you today.
E. You should accept the $200,000 lump sum because the monthly payments are only
worth $195,413 to you today.
F. None of the above.
Answer:
Tutter Corporation is being valued using discounted cash flow methodology with
terminal value calculated as a growing perpetuity. Not including the terminal value, the
present value of projected free cash flows for years 1 through 5 is $200 million (total).
In year 5, projections show free cash flow of $60 million. What is the estimated fair
market value of Tutter Corporation? Assume a WACC of 10% and a growth rate of 2%.
A. $666 million
B. $675 million
C. $950 million
D. $965 million
Answer:
Which of these ratios are the determinants of a firm’s sustainable growth rate?
I. Assets-to-equity ratio
II. Profit margin
III. Retention ratio
IV. Asset turnover ratio
A. I and III only
B. II and III only
C. II, III, and IV only
D. I, II, and III only
E. I, II, III, and IV
F. None of the above.
Answer: