1) which of the following is not a difficulty associated with valuing common stock?
a.common stock does not have a specific expiration date
b.the required rate of return is difficult to estimate
c.common stock does not promise a fixed cash flow stream
d.all of the above are considered difficulties associated with valuing common stock
2) narrbegin: bavarian credit terms
bavarian brew credit terms
bavarian brew is producing and selling brewery equipment to microbreweries
nationwide. bavarian is charging $15,000 per unit and all of their sales are on credit.
under the current credit policy bavarian brew expects to sell 500 units. the variable
costs are $6,000/unit and fixed costs are $1,500,000 per year. the company is thinking
about changing their credit terms from net 30 to 3/10 net 30. the effect of this change
would be a 5% increase in unit sales, but also an increase in bad debt expenses from 2%
to 4% of sales. the company expects 75% of its customers to take advantage of the cash
discount. currently the company has an average collection period of 38 days, 30 days
until the customers mail their payments and another 8 days to process the payments
once they arrive. bavarian brews opportunity cost of funds invested in accounts
receivable is 12%.
narrend
what is bavarian brews new average collection period if they introduce the new credit
terms?
a.23 days
b.33 days
c.25 days
d.30 days
3) louis bonds will mature in 16 years, the coupon rate of the bond is 5% paid
semiannually, if the appropriate discount rate is 4%; what is the value of the bond?
a.$ 731.89
b.$1,178.74
c.$1,116.52
d.$1,117.34
4) a companys stock currently trades at $15 per share. the company is going to
undertake a 3-2 stock split. what should be the stock price after the stock split took
place?
a.$10
b.$15
c.$22.50
d.$25
5) after graduating from college with a finance degree, you begin an ambitious plan to
retire in 25 years. to build up your retirement fund, you will make quarterly payments
into a mutual fund that on average will pay 12% apr compounded quarterly. to get you
started, a relative gives you a graduation gift of $5,000. once retired, you plan on
moving your investment to a money market fund that will pay 6% apr with monthly
compounding. as a young retiree, you believe you will live for 30 more years and will
make monthly withdrawals of $10,000. to meet your retirement needs, what quarterly
payment should you make?
a.$2,221.45
b.$2,588.27
c.$2,746.50
d.$2,904.73
6) narrbegin: wimmp venture capital
wimmp venture capital
where is my money professional venture capital (wimmp) made a $10 million
investment in bavarian sausage technology (bst) 5 years ago and in return received 2.5
million shares of convertible preferred stock that can be converted into 1.5 shares of
common stock. after all stock has been converted bst will have 22.5 million shares
outstanding. in addition, the company is planning on issuing an additional 5 million
shares in an ipo.
narrend
if bsts stock trades at $21.50 at the end of the first trading day, what is the annual return
on wimmps investment?
a.51.81%
b.45.69%
c.35.26%
d.68.21%
7) bavarian sausage just issued a 10-year 7% coupon bond. the face value of the bond is
$1,000 and the bond makes semiannual coupon payments. if the required return on the
bond is 10%, what is the bonds price?
a.$815.66
b.$1,000
c.$813.07
d.$1,035.27
8) the operating leverage for abc corporation is currently 125%. given the information
below, what was the growth rate in sales for 2004?
a.20%
b.18%
c.16%
d.12%
9) mendelson implements records the following cash flows at the end of each year for a
project. if the firm’s discount rate is 11%, compounded continously, what is the present
value of the project?
a.$2,509,507
b.$2,547,837
c.$2,517,234
d.$2,499,159
10) among the possible exit strategies employed by venture capitalists, which of the
following describes the redemption option?
a.exit through an initial public offering
b.exit through a sale of the company directly to another company
c.exit through selling the company back to the founders
d.none of the above
11) a bond currently trades at $975 on the secondary market. the bond has 10 years until
maturity and pays an annual coupon at 9% of face value. the face value of the bond is
$1,000. what is the yield to maturity for this bond?
a.8.86%
b.9.00%
c.9.23%
d.9.40%
12) narrbegin: smith credit line
smith enterprise credit line
smith enterprise has a one year credit line of $5,000,000 with second bank. on average
smith uses $3,250,000 of the credit line. second bank charges a .45% commitment fee
on the unused portion of the line and the interest rate is set at libor +1.5%. the bank also
requires a 5% compensating balance.
narrend
if smith needs to borrow $3,250,000, what is the effective borrowing rate if the libor
equals 6.3%?
a.8.62%
b.8.04%
c.7.59%
d.8.43%
13) narrbegin: smith-miler merger
smith-miler merger
smith enterprises can acquire miller, inc for $250,000 in either cash or stock. both
companies are 100% equity financed. the synergy value of the acquisition for smith is
$35,000. currently smith has 25,000 shares outstanding which trade at $29 a share,
whereas miller has 15,000 shares outstanding that trade at $14 a share.
narrend
for smith and miller, what would be the exchange ratio in a pure stock exchange
merger?
a.57.48%
b.34.48%
c.63.48%
d.25.42%
14) which is not correct regarding an ordinary annuity and annuity due?
a.an annuity is a series of equal payments
b.the present value of an ordinary annuity is less than the present value of an annuity
due (assuming interest rate is positive)
c.as the interest rate increases, the present value of an annuity decreases
d.as the length of the annuity increases, the future value of the annuity decreases
15) narrbegin: smith credit ln -w/o comp
smith enterprise credit line (w/o comp)
smith enterprise has an one year credit line of $5,000,000 with second bank. on average
smith uses $3,250,000 of the credit line. second bank charges a .45% commitment fee
on the unused portion of the line and the interest rate is set at libor +1.5%. assume that
the libor is 6.3%
narrend
refer to smith enterprise credit line (w/o comp). what is the change in your ebr if you
only borrow $2,000,000 instead of $3,250,000?
a.increases by .44%
b.decreases by .44%
c.does not change
d.increases by .78%
16) if you invest $2,500 in a bank account that pays 6% interest compounded monthly,
how much will you have in five years?
a.$1,853.43
b.$3,345.56
c.$2,505.20
d.$3,372.13