A project will produce an operating cash flow of $7,300 a year for three years. The
initial investment for fixed assets will be $11,600, which will be depreciated
straight-line to zero over the asset’s 4-year life. The project will require an initial $500
in net working capital plus an additional $500 every year with all net working capital
levels restored to their original levels when the project ends. The fixed assets can be
sold for an estimated $2,500 at the end of the project, the tax rate is 34 percent, and the
required rate of return is 12 percent. What is the net present value of the project?
A. $7,532.27
B. $9,896.87
C. $7,072.72
D. $6,353.41
E. $8,398.29
Answer:
Kida Consultants has 100,000 shares of stock outstanding. The firm’s value net of debt
is $2 million. Kida has 1,000 warrants outstanding with an exercise price of $18, where
each warrant entitles the holder to purchase one share of stock. Calculate the gain from
exercising a single warrant.
A. $1.87
B. $1.72
C. $1.45
D. $.38
E. $1.98
Answer:
Pat’s Boats is being liquidated. The administrative costs of liquidation, taxes, and wage
payments are expected to be $450,000. Secured creditors have a mortgage lien for $1.4
million on the real estate which was just liquidated and netted proceeds of $1.2 million.
The other secured creditors have submitted claims totaling $274,000 and the unsecured
submitted claims are $323,000. The remaining assets are expected to net $475,000.
What payout should the unsecured creditors expect per each $1 claim?
A. $.13
B. $0
C. $.08
D. $.06
E. $.02
Answer:
Thornley Machines is considering a 3-year project with an initial cost for fixed assets of
$618,000. The project will reduce operating costs by $265,000 a year. The equipment
will be depreciated straight-line to a zero book value over the life of the project. At the
end of the project, the equipment will be sold for an estimated $60,000. The tax rate is
34 percent. The project will require $23,000 in extra inventory over the project’s life.
What is the NPV if the discount rate assigned to the project is 14 percent?
A. −$2,646.00
B. −$30,086.23
C. −$32,593.78
D. $43,106.54
E. $16,884.40
Answer:
Given the all-equity cost of capital, the cost of levered equity can be computed as:
A. RS = (B /S)(R0) + (1 ” tc)B.
B. RS = R0 + (B / S)(1 ” tc)(R0 ” RB).
C. RS = R0 + (1 ” tc)B.
D. R0 = Rs + (B / S)(1 ” tc)(R0 ” RB).
E. R0 = Rs + (1 ” tc)B.
Answer:
When shareholders are granted preemptive rights, they obtain the right:
A. to elect members to the board of directors.
B. to share proportionally in regular and liquidating dividends.
C. of first refusal for their proportionate percentage of new shares offered.
D. to receive dividends prior to any preferred shareholders.
E. to resell their shares to the issuer at any time at a predetermined price.
Answer:
Bilt Rite has sales of $610,000 and cost of goods sold equal to 68 percent of sales. The
beginning accounts receivable balance is $58,900 and the ending accounts receivable
balance is $61,050. How long on average does it take the firm to collect its receivables?
A. 35.89 days
B. 44.09 days
C. 41.07 days
D. 25.98 days
E. 26.52 days
Answer:
Insider trading is:
A. prohibited by the Securities Act of 1933.
B. prohibited by the Securities Exchange Act of 1934.
C. impossible in today’s efficient markets.
D. highly discouraged, but still legal.
E. prohibited by the Sarbanes-Oxley Act of 2002.
Answer:
Rembrandt bonds are associated with which country?
A. Netherlands
B. Switzerland
C. Germany
D. Belgium
E. Austria
Answer:
In a limited partnership each limited partner’s:
A. liability is limited to his or her personal net worth.
B. liability is limited to the amount he or she invested into the partnership.
C. liability is limited to his or her total earnings received from the partnership.
D. contribution to the partnership is limited.
E. liability is limited to the total amount invested by all partners.
Answer:
The yield to maturity:
A. that is expected will be realized any time a bond is sold.
B. will exceed the coupon rate when the bond is selling at a premium.
C. equals the current yield for all annual coupon bonds.
D. can only be realized if a bond is purchased on the issue date at par value.
E. equals both the current yield and the coupon rate for par value bonds.
Answer:
The disposition effect refers to:
A. the underreaction of investors to bad news.
B. selling any security that creates a tax liability.
C. the hesitancy to sell a security of any firm with which you are affiliated.
D. the urge to sell all of your securities when market values decline.
E. selling your winners while holding your losers.
Answer:
Welders Supply is reorganizing and has presented a proposal based on a going-concern
value of $2 million after reorganization costs and delinquent wages, benefits, and taxes.
The proposed financial structure is $750,000 in new mortgage debt, $250,000 in
subordinated debt and $1,000,000 in new equity. Secured creditors currently have a
mortgage lien for $1.5 million on the factory and the unsecured creditors’ claims total
$1.2 million. How much of the new debt and equity securities should the secured
creditors receive?
A. $1.1 million
B. $1.0 million
C. $1.3 million
D. $1.5 million
E. $.75 million
Answer:
The hypothesis that market prices reflect all available information of every kind is
called _____ form efficiency.
A. open
B. strong
C. semistrong
D. weak
E. stable
Answer:
Stock S is expected to return 12 percent in a boom, 9 percent in a normal economy, and
2 percent in a recession. Stock T is expected to return 4 percent in a boom, 6 percent in
a normal economy, and 9 percent in a recession. There is a 10 percent probability of a
boom and a 25 percent probability of a recession. What is the standard deviation of a
portfolio which is comprised of $4,500 of Stock S and $3,000 of Stock T?
A. 1.4%
B. 1.9%
C. 2.6%
D. 5.7%
E. 7.2%
Answer:
The net present value method of capital budgeting analysis does all of the following
except:
A. incorporate risk into the analysis.
B. consider all relevant cash flow information.
C. use all of a project’s cash flows.
D. discount all future cash flows.
E. provide a specific anticipated rate of return.
Answer:
You purchased five WXO 30 call option contracts at a quoted price of $.34. What is
your total profit on this investment if the price of WXO is $33.60 on the option
expiration date?
A. -$170
B. $326
C. $1,630
D. $1,440
E. $1,576
Answer:
Which one of these bonds has the highest duration?
A. 15-year high coupon
B. 15-year zero coupon
C. 10-year zero coupon
D. 10-year high coupon
E. 15-year low coupon
Answer:
Frederico’s has a net income of $29,600, a total asset turnover of 1.4, total assets of
$318,600, and a debt-equity ratio of .35. What is the return on equity?
A. 16.72%
B. 8.40%
C. 12.54%
D. 14.67%
E. 17.56%
Answer:
Otto Enterprises has a 15-year bond issue outstanding with a coupon of 8 percent. The
bond is currently priced at $923.60 and has a par value of $1,000. Interest is paid
semiannually. What is the yield to maturity?
A. 8.67%
B. 9.93%
C. 9.16%
D. 8.93%
E. 8.45%
Answer:
Modern Windows issued warrants for one share per warrant with an exercise price of
$21. On May 1, the common stock is selling for $23 a share. The lower and upper limits
on the warrant value on this date are:
A. $0 and $23. .. B. $0 and $21.
B. $2 and $21.
C. ANSD. $2 and $23.
D. $21 and $23.
Answer:
The proposition that the value of a levered firm is equal to the value of an unlevered
firm is known as:
A. MM Proposition I with no tax.
B. MM Proposition II with no tax.
C. MM Proposition I with tax.
D. MM Proposition II with tax.
E. both MM I with and without tax..
Answer:
Preferred stock dividends:
A. become a debt of the firm if unpaid.
B. can be deferred indefinitely.
C. are only paid if common stock dividends are also paid.
D. have priority over debt interest payments but not common stock dividends.
E. are a tax-deductible business expense.
Answer:
L&R’s stock is currently valued at $32.70 a share. The firm had earnings per share of
$1.88 last year and projects earnings of $2.10 a share for next year. What is the forward
price-earnings ratio?
A. 15.57
B. 14.38
C. 17.39
D. 16.43
E. 15.06
Answer:
Beatrice invests $1,000 in an account that pays 5 percent simple interest. How much
more could she have earned over a 10-year period if the interest had compounded
annually?
A. $132.45
B. $135.97
C. $128.89
D. $117.09
E. $121.67
Answer:
You sold ten put option contracts on PLT stock with an exercise price of $32.50 and an
option price of $1.10. Today, the option expires when the underlying stock is selling for
$34.30 a share. Ignoring trading costs and taxes, what is your total profit on this
investment?
A. -$2,900
B. -$1,100
C. $700
D. $1,100
E. $2,900
Answer:
MM Proposition I with no tax supports the argument that:
A. business risk determines the return on assets.
B. the cost of equity rises as leverage rises.
C. it is completely irrelevant how a firm arranges its finances.
D. a firm should borrow money to the point where the tax benefit from debt is equal to
the cost of the increased probability of financial distress.
E. financial risk is determined by the debt-equity ratio.
Answer:
DC Motors recently paid $1.10 as its annual dividend. Future dividends are projected at
$1.06 $1.02, and $1.00 over the next three years, respectively. After that, the dividend is
expected to decrease by 2 percent annually. What is one share of this stock worth at a
rate of return of 17 percent?
A. $5.62
B. $5.50
C. $5.21
D. $5.33
E. $5.98
Answer:
A bond is listed in a newspaper at a bid of 105.4844. This quote should be interpreted to
mean:
A. the bond will pay semiannual interest payments of $105.4844 per $1,000 of face
value.
B. you can sell that bond at a price equal to 105.4844 percent of face value.
C. the bond will pay annual interest payments of $105.4844 per $1,000 of face value.
D. you can buy that bond at a price equal to 105.4844 percent of face value.
E. the bond dealer is willing to sell that bond for a price equal to 105.4844 percent of
par.
Answer:
An investment with an initial cost of $15,000 produces cash flows of $5,000 annually
for 5 years with each cash flow spread evenly over its respective year. At a discount rate
of 10 percent, what is the discounted payback period?
A. 3.00 years
B. 3.21 years
C. 3.75 years
D. 3.89 years
E. never
Answer:
In the binomial option pricing model the:
A. number of intervals required for convergence is quite large.
B. interval time span decreases as time moves forward.
C. result based on infinitesimally small intervals will differ significantly from the value
developed by the Black Scholes model.
D. percentage increase in price in each interval can differ from the percentage decrease
in price.
E. value of u remains constant as the number of intervals increases.
Answer:
A business entity operated and taxed like a partnership, but with limited liability for the
owners, is called a:
A. limited liability company.
B. general partnership.
C. limited proprietorship.
D. limited partnership.
E. corporation.
Answer:
Discuss what a Dutch auction is and how it works.
Answer:
The market value of an investment project should be viewed as the sum of the standard
NPV and the value of the managerial options. Identify three common project options
available to management, when each might be employed, and how each of those
options would influence a project’s value.
Answer:
Explain why in an efficient market all investments have an expected NPV of zero.
Answer:
Given the tax rates as shown, what is the average tax rate for a firm with taxable
income of $218,700?
Answer:
Explain the differences between a market order, a limit order, and a stop order.
Answer:
Explain the conceptual differences in the theoretical development of the CAPM and the
APT.
Answer:
Explain homemade leverage and why it matters.
Answer:
What is the difference between the EV/EBITDA ratio and the PE ratio?
Answer:
Explain why the weighted average cost of capital is invariant to the firm’s debt-equity
ratio in the absence of corporate taxes.
Answer:
Verbally describe a graph that illustrates the one-factor model.
Answer:
Explain the general characteristics of a tender offer.
Answer:
This chapter introduced three new methods for calculating project operating cash flow
(OCF). Under what circumstances is each method appropriate?
Answer:
Why is straight NPV analysis flawed as compared to models that include option pricing
in the analysis?
Answer: