You are given the following information concerning Around Town Tours:Debt: 8,500,
7.1 percent coupon bonds outstanding, with 14 years to maturity and a quoted price of
102.6. These bonds pay interest semiannually.Common stock: 265,000 shares of
common stock selling for $76 per share. The stock has a beta of 0.92 and will pay a
dividend of $2.48 next year. The dividend is expected to grow by 4 percent per year
indefinitely.Preferred stock: 7,500 shares of 6 percent preferred stock selling at $88 per
share.Market: A 13.2 percent expected return, a 4.5 percent risk-free rate, and a 34
percent tax rate.Calculate the WACC for this firm.
A. 8.22 percent
B. 8.67 percent
C. 9.29 percent
D. 9.57 percent
E. 10.08 percent
Rochester, Inc. has 7,500 shares of stock outstanding at a market price of $42 each and
earnings per share of $1.90. The firm has decided to repurchase $63,000 worth of stock.
What will the PE ratio be after the repurchase, all else held constant?
A. $1.30
B. $1.44
C. $1.90
D. $2.02
E. $2.38
Which one of the following will generally receive the highest priority in a bankruptcy
liquidation, assuming the absolute priority rule is followed?
A. Claims by unsecured creditors
B. Employee wages
C. Government tax claims
D. Contributions to employee retirement plans
E. Bankruptcy administrative expenses
The financial statements of James Auto Repair reflect cash of $14,600, accounts
receivable of $11,500, accounts payable of $22,900, inventory of $17,800, long-term
debt of $42,000, and net fixed assets of $63,800. The firm estimates that if it wanted to
cease operations today it could sell the inventory for $35,000 and the fixed assets for
$49,000. The firm could also collect 100 percent of its receivables. What is the market
value of the assets?
A. $32,800
B. $39,900
C. $74,000
D. $95,500
E. $110,100
Which one of the following statements concerning debt issues is correct?
A. Firms often pay higher interest rates on term loans than on public issues of debt.
B. The only difference between a term loan and a private placement is the size of the
issue.
C. A prospectus is required for equity issues but not for debt issues.
D. The flotation costs of issuing debt tend to be more expensive than for issuing equity.
E. Direct long-term loans must be registered with the SEC.
Which one of the following is directly related to increases in a firms current assets?
A. Reorder costs
B. Shortage costs
C. Restocking costs
D. Out-of-stock events
E. Carrying costs
Lesters BBQ has $121,000 in current assets and $109,000 in current liabilities. These
values as referred to as the firms:
A. capital structure.
B. cash equivalents.
C. working capital.
D. net assets.
E. fixed accounts.
The next dividend payment by Swenson, Inc. will be $1.80 per share. The dividends are
anticipated to maintain a 5.5 percent growth rate, forever. If the stock currently sells for
$48.50 per share, what is the required return?
A. 8.20 percent
B. 8.88 percent
C. 9.21 percent
D. 9.74 percent
E. 10.02 percent
Charles Henri is considering investing $36,000 in a project that is expected to provide
him with cash inflows of $12,000 in each of the first two years and $18,000 for the
following year. At a discount rate of zero percent this investment has a net present value
of ____, but at the relevant discount rate of 17 percent the projects net present value is
____.
A. $0; -$5,739
B. $0; -$3,406
C. $6,000; -$5,739
D. $6,000; -$3,406
E. $6,000; $1,897
You recently sold an antique car you owned and valued greatly. However, you needed
money and agreed to sell the car at a price of $58,000, to be paid in monthly payments
of $1,500 each for 48 months. What interest rate did you charge for financing the sale?
A. 10.33 percent
B. 10.44 percent
C. 10.60 percent
D. 11.03 percent
E. 11.33 percent
Which one of the following statements is correct?
A. Dividends are irrelevant.
B. Flotation costs are a good reason to support a high-dividend payout.
C. Current tax laws favor high current dividends for individual investors.
D. Dividend policy is the time pattern of dividend payout.
E. Corporate investors tend to prefer low-dividend payouts on securities they own.
The optimal credit policy will do which one of the following?
A. Maximize sales
B. Minimize bad debts
C. Maximize units sold
D. Minimize the total costs of granting credit
E. Minimize carrying costs
Which one of the following factors favors a high-dividend payout?
A. Low transaction costs on stock trades
B. Lower taxes on capital gains than on dividends
C. Tax deferment on capital gains, but not on dividend income
D. Flotation costs
E. Corporate shareholders
Stock prices tend to _____ following the announcement of a new equity issue and tend
to _____ following the announcement of a new debt issue.
A. increase; increase
B. increase; decrease
C. increase; remain relatively constant
D. decrease; increase
E. decrease; remain relatively constant
Which of the following are factors that help explain why the percentage of U.S.
industrial firms paying dividends has increased since the early 2000s?I. Decrease in the
number of non-dividend-paying firmsII. Maturing of young, successful firmsIII.
Signaling of a firms financial healthIV. May 2003 tax act
A. I and III only
B. II and IV only
C. I, II, and III only
D. II, III, and IV only
E. I, II, III, and IV
In which one of the following situations would the payback method be the preferred
method of analysis?
A. A project that can easily be expanded
B. Two mutually exclusive projects
C. A proposed expansion of a firms current operations
D. Different-sized projects
E. Investment funds available only for a limited period of time
Which one of the following is minimized when the value of a firm is maximized?
A. Return on equity
B. WACC
C. Debt
D. Taxes
E. Bankruptcy costs