In a strong-form efficient market, insider trading is not profitable.
Answer:
Current liabilities are defined as liabilities with a maturity of less than a year.
Answer:
All else equal, a terminal value based on a no-growth perpetuity would be higher than a
terminal value based on a perpetuity with 2 percent growth.
Answer:
Which one of the following statements is FALSE ?
A. Financial executives must design financial securities to meet the needs of the firm
and its investors.
B. Financial instruments are subject to full disclosure requirements.
C. The design of financial instruments is greatly constrained by law and regulation.
D. Financial instruments are claims against a company’s cash flows and assets.
E. None of the above.
Answer:
All else equal, if two competing firms in industry X are valuing the same plant in
industry Y for a potential acquisition, the firm with the more volatile stock should arrive
at a lower valuation for the plant.
Answer:
When projected cash flows are in nominal dollars, they should be discounted with a
nominal discount rate.
Answer:
Cash budgets are less informative than pro forma financial statements.
Answer:
If the maturity of a company’s liabilities is less than that of its assets, the company
incurs a refinancing risk.
Answer:
Asset betas measure financial risk and business risk.
Answer:
Which of the following statements are TRUE?
I. Underwriters help private companies access public stock markets through IPOs.
II. Shelf registrations and private placements are examples of seasoned security issues.
III. Issue costs for debt are typically greater than issue costs for equity.
IV. Bearer bonds make it easier for investors to avoid paying taxes on interest income.
A. I and II only
B. I and III only
C. I, II, and IV only
D. I, III, and IV only
E. I, II, III, and IV
F. None of the above.
Answer:
Bond investors should be more concerned with real returns than with nominal returns.
Answer:
When evaluating investments under capital rationing that are independent and can be
acquired fractionally, ranking by the BCR is the appropriate technique.
Answer:
Return on assets can be calculated as profit margin times asset turnover.
Answer:
You are estimating your company’s external financing needs for the next year. At the
end of the year you expect that owners’ equity will be $80 million, total assets will
amount to $170 million, and total liabilities will be $70 million. How much will your
firm need to borrow, or otherwise acquire, from outside sources during the year?
A. $20 million
B. $70 million
C. $150 million
D. $160 million
E. $180 million
F. None of the above.
Answer:
Which of the following should be included in the cash flow projections for a new
product?
I. Money already spent for research and development of the new product
II. Capital expenditures for equipment to produce the new product
III. Increase in working capital needed to finance sales of the new product
IV. Interest expense on the loan used to finance the new product launch
A. II 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
F. None of the above.
Answer:
Your brother, age 40, is the regional manager at an office supply company. He thinks he
might want to leave his job to go back to school for an MBA. He expects that his
current job, if he were to stay at it, would pay him a real income stream of $75,000 per
year until retirement at age 65. If he goes back to school, he would forego two years of
income, but his real income after graduation would be $115,000 per year until
retirement at age 65. He has been accepted to an MBA program that costs a real
$22,000 per year. If his real opportunity cost is 8 percent, would leaving his job to get
an MBA be a smart financial decision?
Answer:
Ptarmigan Travelers had sales of $420,000 in 2013 and $480,000 in 2014. The firm’s
current asset accounts remained constant. Given this information, which one of the
following statements must be TRUE?
A. The total asset turnover rate increased.
B. The days’ sales in receivables increased.
C. The inventory turnover rate increased.
D. The fixed asset turnover decreased.
E. The collection period decreased.
Answer:
Which one of the following ratios identifies the amount of sales a firm generates for
every $1 in assets?
A. current ratio
B. debt-to-equity
C. retention
D. asset turnover
E. return on assets
Answer:
A times-interest-earned ratio of 3.5 indicates that the firm:
A. pays 3.5 times its earnings in interest expense.
B. has interest expense equal to 3.5% of EBIT.
C. has interest expense equal to 3.5% of net income.
D. has EBIT equal to 3.5 times its interest expense.
Answer:
Which of the following actions would help a firm’s growth problem if its actual sales
growth exceeds its sustainable rate of growth?
I. Increase prices
II. Decrease financial leverage
III. Decrease dividends
IV. Prune away less-profitable products
A. I and II only
B. I and III only
C. I, II, and IV only
D. I, III, and IV only
E. I, II, III, and IV
F. None of the above.
Answer:
The following table presents forecasted financial and other information for Havasham
Industries:
What is an appropriate estimate of Havasham’s terminal value as of the end of 2014,
using a warranted price-to-earnings multiple as your estimate?
A. $225 million
B. $3,833.0 million
C. $4,207.5 million
D. $4,365.0 million
E. $6,788.1 million
F. None of the above.
Answer:
A project will produce after-tax operating cash inflows of $3,200 a year for 5 years. The
after-tax salvage value of the project is expected to be $2,500 in year 5. The project’s
initial cost is $9,500. What is the net present value of this project if the required rate of
return is 16 percent?
A. -$311.02
B. $2,168.02
C. $4,650.11
D. $9,188.98
E. $21,168.02
F. None of the above.
Answer:
The excess return earned by a risky asset, for example with a beta of 1.4, over that
earned by a risk-free asset is referred to as a:
A. market risk premium.
B. risk premium.
C. systematic return.
D. total return.
E. real rate of return.
F. None of the above.
Answer:
A company purchases a new $10 million building, financed half with cash and half with
a bank loan. How would this transaction affect the company’s balance sheet?
A. Net plant and equipment rises $10 million; cash falls $10 million; bank debt rises $5
million.
B. Net plant and equipment rises $5 million; cash falls $10 million; bank debt rises $5
million.
C. Net plant and equipment rises $5 million; cash falls $5 million; bank debt rises $5
million.
D. Net plant and equipment rises $10 million; cash falls $5 million; bank debt rises $5
million.
Answer:
Which of the following is NOT an important step in the financial evaluation of an
investment opportunity?
A. Calculate a figure of merit for the investment.
B. Estimate the accounting rate of return for the investment.
C. Estimate the relevant cash flows.
D. Compare the figure of merit to an acceptance criterion.
E. All of the above are important steps.
Answer:
Kahuku Corporation has 100 million shares outstanding trading at $20 per share. The
company announces its intention to raise $150 million by selling new shares.
a. What do market signaling studies suggest will happen to Kahuku’s stock price on the
announcement date? Why?
b. How large a gain or loss in aggregate dollar terms do market signaling studies
suggest existing Kahuku shareholders will experience on the announcement date?
c. What percentage of the value of Kahuku’s existing equity prior to the announcement
is this expected gain or loss?
d. At what price should Kahuku expect its existing shares to sell immediately after the
announcement?
Answer:
Which one of the following will increase the sustainable rate of growth a corporation
can achieve?
A. avoidance of external equity financing
B. increase in corporate tax rates
C. reduction in the retention ratio
D. decrease in the dividend payout ratio
E. decrease in sales given a positive profit margin
F. None of the above.
Answer:
In a discounted cash flow analysis of Giant Corp.’s project described in the problem
above, what would be the projected Year 2 free cash flow?
A. $1,300
B. $1,450
C. $1,700
D. $1,750
(Note that the salvage value from the equipment includes the $800 resale value plus $50
tax savings from the $100 loss on the equipment relative to book value.)
Answer:
Preston Fencing Company’s sales, half of which are for cash and the other half sold on
credit, over the past three months were:
a. Estimate Preston’s cash receipts in October if the company’s collection period is 30
days.
b. Estimate Preston’s cash receipts in October if the company’s collection period is 45
days.
c. What would be Preston’s accounts receivable balance at the end of October if the
company’s collection period is 30 days? 45 days?
Answer:
The most common approach to developing pro forma financial statements is called the:
A. cash budget method.
B. financial planning method.
C. seasonality approach.
D. percent-of-sales method.
E. market-oriented approach.
F. None of the above.
Answer:
Westcomb, Inc. had equity of $150,000 at the beginning of the year. At the end of the
year, the company had total assets of $195,000. During the year, the company sold no
new equity. Net income for the year was $72,000 and dividends were $44,640. What is
Westcomb’s sustainable growth rate?
A. 15.32 percent
B. 15.79 percent
C. 17.78 percent
D. 18.01 percent
E. 18.24 percent
Answer:
“A firm can’t use interest tax shields unless it has (taxable) income to shield.” What
does this statement imply for capital structure? Explain briefly, comparing the following
two examples: a start-up biotech firm and an electric utility company.
Answer:
A venture capital firm wants to invest $5 million in Artichoke Corp., a startup biotech
firm. Artichoke is expected to go public in 4 years. Earnings will be negligible until
year 4, but are projected to be $4 million in year 4. Comparable biotech firms are
trading at P/E ratios of 18 on average. Artichoke has 3 million shares of stock
outstanding. The VC firm will apply a discount rate of 40% to the investment. How
many shares of stock should the VC firm be given for its $5 million investment?
Answer:
Complete the following pro forma financial statements for XYZ Corporation. Use the
percent-of-sales method and use long-term debt as the plug figure (balancing item).
Assume the following: 20% sales growth, capital expenditures of 200 in 2015, no
equity issues or repurchases in 2015, no sale or disposal of fixed assets in 2015, and a
50% dividend payout ratio. Round figures to the nearest whole dollar.
Answer:
Please refer to the selected financial information for Hard Knock Doors above. Is the
increase in dividends between 2010 and 2013 a good idea for Hard Knock Doors?
Answer:
Given the forecast below, estimate the fair market value of Kenmore Air’s equity per
share at the end of 2012 under the following assumptions:
– EBIT in year 2016 is $210 million, and then grows at 4 percent per year forever.
– To support the perpetual growth in EBIT, capital expenditures in year 2017 exceed
depreciation by $25 million, and this difference grows 4 percent per year forever.
– Similarly, working capital investments are $10 million in 2017, and this amount grows
4 percent per year forever.
– Kenmore Air’s weighted-average cost of capital is 11 percent and its tax rate is 40
percent.
– Kenmore Air has 50 million shares outstanding and the market value of its
interest-bearing liabilities on the valuation date equals $300 million.
Answer: