You are considering a project in Norway with an initial cost of NKr135,000. The project
is expected to return a one-time payment of NKr200,000 at the end of Year 5. The
risk-free rate of return is 2.6 percent in the U.S. and 3.1 percent in Norway. The
inflation rate is 1.6 percent in the U.S. and 2.3 percent in Norway. Currently, the
exchange rate is $1 = NKr7.0305. Approximately how much will the payment at the
end of 5 Years be worth in U.S. dollars?
A. $27,747
B. $28,108
C. $27,472
D. $28,311
E. $27,006
Answer:
Foamsoft sells customized boat shoes. Currently, it sells 16,850 pairs of shoes annually
at an average price of $79 a pair. It is considering adding a lower-priced line of shoes
which sell for $49 a pair. Foamsoft estimates it can sell 5,000 pairs of the lower-priced
shoes but will sell 1,250 less pairs of the higher-priced shoes by doing so. What is the
estimated value of the erosion cost that should be charged to the lower-priced shoe
project?
A. $138,750
B. $146,250
C. $98,750
D. $52,000
E. $123,240
Answer:
The type of analysis that is most dependent upon the use of a computer is _____
analysis.
A. scenario
B. financial break-even
C. sensitivity
D. accounting break-even
E. simulation
Answer:
Brewster’s is considering a project with a 5-year life and an initial cost of $120,000. The
discount rate for the project is 12 percent. The firm expects to sell 2,100 units a year at
a net cash flow per unit of $20. The firm will have the option to abandon this project
after three years at which time it could sell the project for $50,000. The firm is
interested in knowing how the project will perform if the sales forecasts for Years 4 and
5 of the project are revised such that there is a 50 percent chance the sales will be either
1,400 or 2,500 units a year. What is the net present value of this project given these
revised sales forecasts?
A. $23,617
B. $23,719
C. $25,002
D. $26,877
E. $28,745
Answer:
The major difference between Chapter 7 and Chapter 11 is that:
A. liquidation occurs in Chapter 11 but reorganization is the objective under Chapter 7.
B. there is no priority of claims under Chapter 11.
C. liquidation automatically occurs in Chapter 7 but may or may not occur under
Chapter 11.
D. no administrative or legal costs are incurred under Chapter 7.
E. Chapter 11 is voluntary and Chapter 7 is involuntary.
Answer:
The cash flow resulting from a firm’s ongoing, normal business activities is referred to
as the:
A.operating cash flow.
B.net capital spending.
C.additions to net working capital.
D.cash flow to retained earnings.
E.cash flow to investors.
Answer:
A firm announces that it is willing to purchase a number of shares back at various prices
and shareholders have the option to indicate how many shares they are willing to sell at
the various prices. This process is called a:
A. homemade dividend.
B. tender offer.
C. free market sale.
D. Dutch auction.
E. targeted repurchase.
Answer:
Which one of these applies to the after market period?
A. The red herrings are distributed.
B. Underwriters generally only sell shares at or above the offer price.
C. Book building is conducted.
D. The lead underwriter determines the offer price.
E. Underwriting negotiations are completed.
Answer:
Costs of the firm that fall with increased levels of investment in its current assets are
called _____ costs.
A. carrying
B. shortage
C. debt
D. equity
E. payables
Answer:
In the absence of taxes, the capital structure chosen by a firm doesn’t really matter
because of:
A. taxes.
B. the interest tax shield.
C. the relationship between dividends and earnings per share.
D. the effects of leverage on the cost of equity.
E. homemade leverage.
Answer:
At expiration, the maximum price of a ____ is the greater of the:
A. call; stock price minus the exercise price, or 0.
B. call; the exercise price or 0.
C. put; stock price minus the exercise price, or 0.
D. put; stock price or 0.
E. put; exercise price or the stock price.
Answer:
The market has an expected rate of return of 9.8 percent. The long-term government
bond is expected to yield 4.5 percent and the U.S. Treasury bill is expected to yield 3.4
percent. The inflation rate is 3.1 percent. What is the market risk premium?
A. 2.2%
B. 3.3%
C. 5.3%
D. 6.4%
E. 6.7%
Answer:
When estimating the cost of equity using the DDM, which one of these is most apt to
add error to this estimate?
A. next year’s dividend
B. firm’s tax rate
C. beta
D. dividend growth rate
E. current stock price
Answer:
RTF stock is expected to return 10.6 percent if the economy booms and only 4.2 percent
if the economy goes into a recessionary period. The probability of a boom is 55 percent
while the probability of a recession is 45 percent. What is the standard deviation of the
returns on RTF stock?
A. 4.03%
B. 2.97%
C. 3.18%
D. 3.69%
E. 5.27%
Answer:
Break-even analysis:
A. based on accounting profits is preferable to the financial break-even method.
B. identifies the optimal maximum level of output for any given level of fixed assets.
C. ignores both taxes and interest when computing the financial break-even point.
D. is unaffected by the sources of funds used to finance a project.
E. identifies the optimal sales price for any new product.
Answer:
Psychologists generally agree that irrational traits such as those related to behavioral
finance are generally:
A. temporary and limited to a small sector of the population.
B. pervasive across individuals.
C. offset within the overall population.
D. cyclical in nature.
E. unique to a few individuals.
Answer:
MM Proposition II is the proposition that:
A. supports the argument that the capital structure of a firm is irrelevant to the value of
the firm.
B. the cost of levered equity depends solely on the return on debt, the debt-equity ratio,
and the tax rate.
C. a firm’s cost of equity capital is a positive linear function of the firm’s capital
structure.
D. the cost of equity is equivalent to the required return on the total assets of a levered
firm.
E. supports the argument that the size of the pie does not depend on how the pie is
sliced.
Answer:
Two mutually exclusive projects have 3-year lives and a required rate of return of 10.5
percent. Project A costs $75,000 and has cash flows of $18,500, $42,900, and $28,600
for Years 1 to 3, respectively. Project B costs $72,000 and has cash flows of $22,000,
$38,000, and $26,500 for Years 1 to 3, respectively. Using the IRR, which project, or
projects, if either, should be accepted?
A. accept both projects
B. select either project as there is no significant difference between them
C. accept Project A and reject Project B.
D. accept Project B and reject Project A.
E. reject both projects
Answer:
A firm has negotiated a seasoned equity offer that will provide the firm with $1.68
million in net proceeds. The underwriting spread is 7.35 percent and the firm needs to
sell 50,000 shares. What is the offer price?
A. $36.07
B. $37.25
C. $36.27
D. $34.50
E. $33.60
Answer:
The payback method:
A. is the most frequently used method of capital budgeting analysis.
B. is a more sophisticated method of analysis than the profitability index.
C. considers the time value of money.
D. applies mainly to projects where the actual results will be known relatively soon.
E. generally results in decisions that conflict with the decision suggested by NPV
analysis.
Answer:
You are borrowing $5,200 at 7.8 percent, compounded monthly. The monthly loan
payment is $141.88. How many loan payments must you make before the loan is paid
in full?
A. 30
B. 36
C. 40
D. 42
E. 48
Answer:
Which one of the following is an argument in favor of a low dividend policy?
A. The tax on capital gains is deferred until the gain is realized.
B. Few, if any, positive net present value projects are available to the firm.
C. A preponderance of stockholders have minimal taxable income.
D. A majority of stockholders have other investment opportunities that offer higher
rewards with similar risk characteristics.
E. Corporate tax rates exceed personal tax rates.
Answer:
Bigelow has a levered cost of equity of 14.29 percent and a pretax cost of debt of 7.23
percent. The required return on the assets is 11 percent. What is the firm’s debt-equity
ratio based on MM Proposition II with no taxes?
A. .67
B. .87
C. .72
D. .75
E. .81
Answer:
Which one of these statements is correct?
A. A farmer generally uses trust receipt financing to finance operations during the
growing season.
B. An auto dealer is most apt to use purchase order financing.
C. A drug store is most apt to use trust receipt financing.
D. Trust receipt financing is most applicable to large, easily identifiable types of
inventory.
E. Blanket inventory lien financing is another term for purchase order financing.
Answer:
Explain 1) the factors that determine a security’s beta and 2) how asset beta relates to
equity beta.
Answer:
The key intuition of a Z-score model like Altman’s is that:
A. only publicly traded firms can be evaluated.
B. one will be just as well off by guessing on default rates.
C. all corporations will default at least once.
D. financial profiles of bankrupt and non-bankrupt firms are very different one year
prior to bankruptcy.
E. privately traded firms have better financial information which are disclosed to
lenders and need not rely on any efficient market notions.
Answer:
The average collection period measures the average:
A. time necessary to collect a credit sale.
B. number of customers per day who charge their purchases.
C. time for a credit customer to return to make a second purchase.
D. number of times a credit customer charges a purchase during a year.
E. number of items purchased in each credit transaction.
Answer:
The Lo Sun Corporation offers a bond with a current market price of $1,029.75, a
coupon rate of 8 percent, and a yield to maturity of 7.52 percent. The face value is
$1,000. Interest is paid semiannually. How many years is it until this bond matures?
A. 8.5 years
B. 8.0 years
C. 9.0 years
D. 17 years
E. 16 years
Answer:
The highest effective annual rate that can be derived from an annual percentage rate of
9% is computed as:
A. [1 + (.09 / 365)] 365.
B. e.09 q.
C. e (1 + .09).
D. e.09 −1.
E. [1 + (.09 / 365)]365 −1.
Answer:
What is the cost of equity for a firm that has a beta of 1.2 if the risk-free rate of return is
2.9 percent and the expected market return is 11.4 percent?
A. 13.1%
B. 10.8%
C. 12.8%
D. 14.4%
E. 13.6%
Answer:
A bond with a face value of $5,000 can be exchanged for 70 shares of stock. The bond
has a coupon rate of 6.5 percent which equals the market rate of interest. Assume the
option premium is $50. What is the market value of the bond if the stock is selling for
$68.90 a share and the bond matures in exactly one year?
A. $4,744.84
B. $4,873.00
C. $5,000.00
D. $4,940.00
E. $5,050.00
Answer:
Suppose the spot exchange rate is $1 = .6402 and the forward rate is $1 = .6403. Given
this, you know the:
A. U.S. inflation rate is higher than the U.K.’s.
B. U.S. nominal interest rate is higher than the U.K.’s.
C. pound is selling at a discount.
D. U.S. real risk-free interest rate is higher than the U.K.’s.
E. pound is selling at a premium.
Answer:
There is a 25 percent probability the economy will boom; otherwise, it will be normal.
Stock Q is expected to return 18 percent in a boom and 9 percent otherwise. Stock R is
expected to return 9 percent in a boom and 5 percent otherwise. What is the standard
deviation of a portfolio that is invested 40 percent in Stock Q and 60 percent in Stock
R?
A. .7%
B. 1.4%
C. 2.6%
D. 6.8%
E. 8.1%
Answer:
The forecast of cash receipts and disbursements for the next planning period is called a:
A. pro forma income statement.
B. statement of cash flows.
C. cash budget.
D. receivables analysis.
E. credit analysis.
Answer:
A project which is designed to improve the manufacturing efficiency of a firm but will
generate no additional sales revenue is referred to as a(n) _____ project.
A. sunk cost
B. opportunity
C. cost-cutting
D. revenue-cutting
E. revenue-generating
Answer:
Identify six components that comprise the total costs associated with issuing securities.
Answer:
Financial distress may benefit firms if it prompts them to “restructure their assets”.
Explain what this means and how it can be beneficial.
Answer:
You want to become a very successful entrepreneur. Your desire is to operate a business
from a single location without becoming so large you lose personal touch with all of the
firm’s employees and operations. Before determining what type of business you want to
open, you have decided to compile a list of options that would add value to whatever
business you select. Identify options that you would include in this list.
Answer:
Answer:
Should financing costs be included as an incremental cash flow in capital budgeting
analysis?
Answer:
Based on historical market performance, what can we conclude about the relationship
between return and risk?
Answer:
What are the upper and lower bounds of an American call option?Explain what would
happen in each case if the bound was violated.
Answer:
Define the three forms of market efficiency.
Answer:
What is the benefit of scenario analysis if it does not produce a definitive accept or
reject decision for a proposed project?
Answer:
Draw the SML and plot asset C such that it has less risk than the market but plots above
the SML, and asset D such that it has more risk than the market and plots below the
SML. (Be sure to indicate where the market portfolio is on your graph.) Explain how
assets like C or D can plot as they do and explain why such pricing cannot persist in a
market that is in equilibrium.
Answer: