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1) kimball johnson has just purchased a put option on reut corporation which currently
trades at $58 per share. the put option has a strike price of $50, 6 months until
expiration, and trades at a premium of $3. what is the breakeven price for johnsons put
option.
a.$47
b.$53
c.$55
d.$61
2) narrbegin: speed racer, inc.
speed racer, inc.
speed racer, inc. is thinking about retiring a $100,000,000 issue of bonds that it sold to
the public 20 years ago. the original maturity date for the bonds was 30 years.
narrend
refer to speed racer, inc. if the bonds were initially sold at 98, then what is the after-tax
cash flow effect, today, of the accelerated amortization if speed racer is in the 40%
marginal tax bracket?
a.$26,666.67
b.$266,666.67
c.$800,000.00
d.$1,306,666.67
3) a transaction in which two or more business organizations combine into a single
entity is called a(n)
a.acquisition
b.merger
c.consolidation
d.none of the above
4) narrbegin: exhibit 22-1 liquidation
exhibit 23-1
narrend
if the company has $3,000,000 in funds to distribute to unsecured creditors, how much
do the owners of the firm receive in case i?
a.$125,678
b.$0
c.$357,250
d.$475,000
5) narrbegin: bear lake lease purchase
bear lake equipment company (blec)
bear lake equipment company (blec) is considering an expansion which will require a
new machine that costs $125,000. blec can either lease or buy the equipment. the
companys tax rate is 40% and its after tax cost of debt is 5%.
lease: annual payments of $26,400 made at the beginning of each year over five years.
the lessor covers all maintenance, while the lessee covers insurance and other costs. the
lessee has the option to purchase the machine for $31,250 paid along with the final
lease payment.
purchase: the $125,000 cost will be financed over five years with annual end of year
payments of $31,580. the machine will be depreciated on the five year macrs schedule,
and the firm will pay $3,500 per year for a service contract to cover all maintenance.
the company will cover all insurance and other costs.
narrend
refer to blec. what is the present value of the five years of after-tax cash flows from
purchasing the machine?
a.$92,504
b.$108,120
c.$77,351
d.$123,273
6) roxy bonds have 15 years to maturity, with a coupon rate of 4%, paid annually; if the
bonds sell for $800, what is the yield to maturity of roxy bonds?
a.4.00%
b.5.25%
c.5.92%
d.6.07%
7) narrbegin: bavarian brew bond
bavarian brew bond
bavarian brew is thinking about recalling $30 million of 15 year, $1,000 par value
bonds, that were issued ten years ago. the bonds carry a coupon rate of 7.8% and have a
call price of $1,110. initially the bonds generated total proceeds of $28.65 million and
the flotation costs were $500,000. bavarian brew wants to sell $30 million of 5 year,
$1,000 par value bonds with a 5.8% coupon rate to retire the old bonds. the flotation
costs on the new bond issue are estimated to be $525,000. due to having to issue the
new bonds before the old bonds can be retired the company expects a period of 3
months were they have to pay interest on the old and the new bonds. assume a tax rate
of 34%
narrend
refer to bavarian brew bond. what are the annual tax savings from the amortization of
the discount on the old bond?
a.$1,500,000
b.$30,600
c.$160,000
d.$61,200
8) which of the following has led to an increase in demand for strategies to hedge
corporate risk?
a.fluctuations in interest rates
b.fluctuations in exchange rates
c.fluctuations in the price of raw materials
d.all of the above
9) narrbegin: far corporation
far corporation
far corporation is considering a new project to manufacture widgets. the cost of the
manufacturing equipment is $150,000. the cost of shipping and installation is an
additional $15,000. the asset will fall into the 3-year macrs class. the year 1-4 macrs
percentages are 33.33%, 44.45%, 14.81%, and 7.41%, respectively. sales are expected
to be $300,000 per year. cost of goods sold will be 80% of sales. the project will require
an increase in net working capital of $15,000. at the end of three years, far plans on
ending the project and selling the manufacturing equipment for $35,000. the marginal
tax rate is 40% and far corporations appropriate discount rate is 12%.
narrend
refer to far corporation. what is the irr of the project?
a.12.01%
b.8.74%
c.5.92%
d.4.78%
10) narrbegin: bavarian sausage 2
bavarian sausage 2
you bought a share of bavarian sausage stock for $46.50 at the beginning of the year.
during the year the stock paid a $2.75 dividend and at the end of the year it trades at
$44.75.
narrend
refer to bavarian sausage 2 . what is the total return on your investment?
a.2.15%
b.-3.76%
c.8.06%
d.5.91%
11) you notice that the spot price of beef loin is $30 per pound and the 9-month forward
rate is $33.00 per pound. the annualized 9-month risk free rate of interest is 12%. what
amount of arbitrage profits are available to you?
a.$.60
b.$.34
c.-$.34
d.-$.60
12) bavarian sausage stock has an average historical return of 16.3% and a standard
deviation of 5.3%. what is the probability that the return on bavarian sausage will be
higher than 26.9 %?
a.5%
b.2.5%
c.16%
d.95%
13) which of the following is not considered an advantage of going public?
a.new capital for the company
b.listed stock for use as compensation
c.stock price emphasis
d.personal wealth and liquidity
14) the beta of the risk-free asset is:
a.-1.0
b.0.0
c.0.5
d.1.0
