The Blue Lagoon is considering a project with a five-year life. The project requires
$110,000 of fixed assets that are classified as five-year property for MACRS. Variable
costs equal 71 percent of sales, fixed costs are $9,600, and the tax rate is 35 percent.
What is the operating cash flow for year 4 given the following sales estimates and
MACRS depreciation allowance percentages?
A. -$1,806
B. $640
C. $1,809
D. $2,342
E. $2,811
What is the legal document called that is provided to potential investors and describes a
new security offering?
A. Security agreement
B. Prospectus
C. Public statement
D. Registration statement
E. Formal filing
Isaac only has $690 today but needs $800 to buy a new laptop. How long will he have
to wait to buy the laptop if he earns 5.4 percent compounded annually on his savings?
A. 2.29 years
B. 2.48 years
C. 2.51 years
D. 2.77 years
E. 2.81 years
Which one of the following is the primary advantage of payback analysis?
A. Incorporation of the time value of money concept
B. Ease of use
C. Research and development bias
D. Arbitrary cutoff point
E. Long-term bias
Your grandparents would like to establish a trust fund that would pay annual payments
to you and your heirs of $100,000 a year forever. How much do your parents need to
deposit into this trust fund today to achieve their goal if the fund can earn 6 percent
interest?
A. $678,342.13
B. $700,000.00
C. $1,413,435.76
D. $1,620,975.32
E. $1,666,666.67
Industrial Services is analyzing a proposed investment that would initially require
$538,000 of new equipment. This equipment would be depreciated on a straight-line
basis to a zero balance over the four-year life of the project. The estimated salvage
value is $187,000. The project requires $39,000 initially for net working capital, all of
which will be recouped at the end of the project. The projected operating cash flow is
$194,900 a year. What is the internal rate of return on this project if the relevant tax rate
is 34 percent?
A. 15.54 percent
B. 15.92 percent
C. 18.01 percent
D. 18.67 percent
E. 20.49 percent
There are two open seats on the board of directors. If two separate votes occur to elect
the new directors, the firm is using a type of voting that is best described as _____
voting.
A. simultaneous
B. straight
C. proxy
D. cumulative
E. sequential
Which one of the following is an example of a direct bankruptcy cost?
A. Operating at a debt-equity ratio that is less than the optimal ratio
B. Reducing the dividend payout ratio as a means of increasing a firms equity
C. Forgoing a positive net present value project to conserve current cash
D. Incurring legal fees for the preparation of bankruptcy filings
E. Losing a key customer due to concerns over a firms financial viability
The Plaza Cafe has an operating cash flow of $78,460, depreciation expense of $8,960,
and taxes paid of $21,590. A partial listing of its balance sheet accounts is as follows:
What is the amount of the cash flow from assets?
A. $58,913
B. $61,246
C. $61,487
D. $63,909
E. $64,128
You want to create a $48,000 portfolio that consists of three stocks and has an expected
return of 14.5 percent. Currently, you own $16,700 of Stock A and $24,200 of Stock B.
The expected return for Stock A is 18.7 percent, and for Stock B it is 11.2 percent. What
is the expected rate of return for Stock C?
A. 13.67 percent
B. 14.14 percent
C. 15.38 percent
D. 15.87 percent
E. 16.11 percent
Consider a three-year project with the following information: initial fixed asset
investment = $770,000; straight-line depreciation to zero over the three-year life; zero
salvage value; price = $34.99; variable costs = $23.16; fixed costs = $245,000; quantity
sold = 94,500 units; tax rate = 40 percent. How sensitive is OCF to an increase of one
unit in the quantity sold?
A. $7.10
B. $7.73
C. $8.67
D. $9.97
E. $11.83
Which one of the following is correct based on the static theory of capital structure?
A. A firm receives the greatest benefit from debt financing when its tax rate is relatively
low.
B. A debt-equity ratio of 1 is considered to be the optimal capital structure.
C. The costs of financial distress decrease the value of a firm.
D. The more debt a firm assumes, the greater the incentive to acquire even more debt
until such time as the firm is financed with 100 percent debt.
E. At the optimal level of debt a firm also optimizes its tax shield on debt.
When you refer to a bonds coupon, you are referring to which one of the following?
A. Difference between the purchase price and the face value
B. Annual interest divided by the current bond price
C. Difference between the bid and ask price
D. Annual interest payment
E. Principal amount of the bond
Business Solutions, Inc. is expected to pay its first annual dividend of $1.00 per share
three years from now. Starting in year 6, the company is expected to start increasing the
dividend by 2 percent per year. What is the value of this stock today at a required return
of 12 percent?
A. $7.70
B. $8.09
C. $8.29
D. $9.03
E. $9.34
Which one of the following is the correct formula for computing the present value of
$600 to be received in 6 years? The discount rate is 7 percent.
A. PV = $600 (1 + 6)7
B. PV = $600 (1 + 0.07)6
C. PV = $600 x (0.07 x 6)
D. PV = $600/(1 + 0.07)6
E. PV = $600/(1 + 6)0.07
Stock J has a beta of 1.17 and an expected return of 14.4 percent, while Stock K has a
beta of 0.68 and an expected return of 7.6 percent. You want a portfolio with the same
risk as the market. What is the expected return of your portfolio?
A. 10.67 percent
B. 11.18 percent
C. 11.62 percent
D. 12.04 percent
E. 13.13 percent