Which of the following statements is most CORRECT?
a.The primary test of feasibility in a reorganization is whether every claimant agrees
with the reorganization plan.
b.The basic doctrine of fairness states that all debt holders must be treated equally.
c.Since the primary issue in bankruptcy is to determine the sharing of losses between
owners and creditors, the “public interest” is not a relevant concern.
d.While the firm is in bankruptcy, the existing management is always allowed to remain
in control of the firm, though the court monitors its actions closely.
e.To a large extent, the decision to dissolve a firm through liquidation or to keep it alive
through reorganization depends upon the value of the firm if it is rehabilitated versus its
value if its assets are sold off individually.
Hanratty Inc.’s stock and the stock market have generated the following returns over the
past five years:
What is the estimated beta of Hanratty Inc.’s stock?
a.1.0333
b.1.1481
c.1.2757
d.1.4032
e.1.5436
Which of the following statements is most CORRECT?
a.If a company that produces military equipment merges with a company that manages
a chain of motels, this is an example of a horizontal merger.
b.A defensive merger is one where the firm’s managers decide to merge with another
firm to avoid or lessen the possibility of being acquired through a hostile takeover.
c.Acquiring firms send a signal that their stock is undervalued if they choose to use
stock to pay for the acquisition.
d.In a liquidation, the firm’s existing stockholders are given new stock representing
separate ownership rights in the division that was divested. The division establishes its
own board of directors and officers, and it becomes a separate company.
e.If there are no synergistic benefits to be gained from a merger, the acquiring company
will stop its plans for the merger. However, if synergistic gains are large, plans for the
merger will continue. In fact, the greater the synergistic gains, the smaller the gap
between the target’s current price and the maximum the acquiring company could pay
because of the acquiring company’s upper hand in the merger.
At the beginning of the year, you purchased a 5-year zero coupon bond with a yield to
maturity of 6.8% and a face value of $1,000. Your tax rate is 30%. What is the total tax
that you will have to pay on the bond during the first year?
a.$13.95
b.$14.68
c.$15.42
d.$16.19
e.$17.00
Which of the following is NOT one of the steps taken in the financial planning process?
a.Assumptions are made about future levels of sales, costs, and interest rates for use in
the forecast.
b.The entire financial plan is reexamined, assumptions are reviewed, and the
management team considers how additional changes in operations might improve
results.
c.Projected ratios are calculated and analyzed.
d.Develop a set of projected financial statements.
e.Consult with key competitors about the optimal set of prices to charge, i.e., the prices
that will maximize profits for our firm and its competitors.
Assume that a piece of leased equipment has a relatively high expected residual value.
From the lessee’s viewpoint, it might be better to own the asset rather than lease it
because with a high residual value the lessee will likely face a higher lease rate.
a.True
b.False
Which of the following statements is CORRECT?
a.If Mutual Fund A held equal amounts of 100 stocks, each of which had a beta of 1.0,
and Mutual Fund B held equal amounts of 10 stocks with betas of 1.0, then the two
mutual funds would both have betas of 1.0. Thus, they would be equally risky from an
investor’s standpoint, assuming the investor’s only asset is one or the other of the mutual
funds.
b.If investors become more risk averse but rRF does not change, then the required rate
of return on high-beta stocks will rise and the required return on low-beta stocks will
decline, but the required return on an average-risk stock will not change.
c.An investor who holds just one stock will generally be exposed to more risk than an
investor who holds a portfolio of stocks, assuming the stocks are all equally risky. Since
the holder of the 1-stock portfolio is exposed to more risk, he or she can expect to earn
a higher rate of return to compensate for the greater risk.
d.There is no reason to think that the slope of the yield curve would have any effect on
the slope of the SML.
e.Assume that the required rate of return on the market, rM, is given and fixed at 10%.
If the yield curve were upward sloping, then the Security Market Line (SML) would
have a steeper slope if 1-year Treasury securities were used as the risk-free rate than if
30-year Treasury bonds were used for rRF.
Which of the following statements is NOT CORRECT?
a.Any bond sold outside the country of the borrower is called an international bond.
b.Foreign bonds and Eurobonds are two important types of international bonds.
c.Foreign bonds are bonds sold by a foreign borrower but denominated in the currency
of the country in which the issue is sold.
d.The term Eurobond applies only to foreign bonds denominated in U.S. currency.
e.A Eurodollar is a U.S. dollar deposited in a bank outside the U.S.
At a rate of 6.5%, what is the future value of the following cash flow stream?
a.$526.01
b.$553.69
c.$582.83
d.$613.51
e.$645.80
Last year Rennie Industries had sales of $305,000, assets of $175,000 (which equals
total invested capital), a profit margin of 5.3%, and an equity multiplier of 1.2. The
CFO believes that the company could reduce its assets by $51,000 without affecting
either sales or costs. The firm finances using only debt and common equity. Had it
reduced its assets by this amount, and had the debt/total invested capital ratio, sales, and
costs remained constant, how much would the ROE have changed?
a.4.10%
b.4.56%
c.5.01%
d.5.52%
e.6.07%
Walter Industries is a family owned concern. It has been using the residual dividend
model, but family members who hold a majority of the stock want more cash dividends,
even if that means a slower future growth rate. Neither the net income nor the capital
structure will change during the coming year as a result of a dividend policy change to
the indicated target payout ratio. By how much would the capital budget have to be cut
to enable the firm to achieve the new target dividend payout ratio?
a.$2,741,538
b.$3,046,154
c.$3,384,615
d.$3,723,077
e.$4,095,385
Exhibit 8A.1
You have been asked to use a CAPM analysis to choose between Stocks R and S, with
your choice being the one whose expected rate of return exceeds its required return by
the widest margin. The risk-free rate is 6%, and the required return on an average stock
(or the “market”) is 10%. Your security analyst tells you that Stock S’s expected rate of
return is equal to 11%, while Stock R’s expected rate of return is equal to 12%. The
CAPM is assumed to be a valid method for selecting stocks, but the expected return for
any given investor (such as you) can differ from the required rate of return for a given
stock. The following past rates of return are to be used to calculate the two stocks’ beta
coefficients, which are then to be used to determine the stocks’ required rates of return:
Note: The averages of the historical returns are not needed, and they are generally not
equal to the expected future returns.
Refer to Exhibit 8A.1. Calculate both stocks’ betas. What is the difference between the
betas? That is, what is the value of betaR – betaS? (Hint: The graphical method of
calculating the rise over run, or (Y2 – Y1) divided by (X2 – X1) may aid you.)
a.1.3538
b.1.4250
c.1.5000
d.1.5750
e.1.6538
The return on invested capital measures the total return that a company has provided for
its investors.
a.True
b.False
Warr Company is considering a project that has the following cash flow data. What is
the project’s IRR? Note that a project’s projected IRR can be less than the WACC or
negative, in both cases it will be rejected.
a.14.05%
b.15.61%
c.17.34%
d.19.27%
e.21.20%
Klein Cosmetics has a profit margin of 5.0%, a total assets turnover ratio of 1.5 times,
no debt and therefore an equity multiplier of 1.0, and an ROE of 7.5%. The CFO
recommends that the firm borrow funds using long-term debt, use the funds to buy back
stock, and raise the equity multiplier to 2.0. The size of the firm (assets) would not
change. She thinks that operations would not be affected, but interest on the new debt
would lower the profit margin to 4.5%. This would probably be a good move, as it
would increase the ROE from 7.5% to 13.5%.
a.True
b.False
Which of the following statement completions is NOT CORRECT? For a profitable
firm, when MACRS accelerated depreciation is compared to straight-line depreciation,
MACRS accelerated allowances produce
a.Higher depreciation charges in the early years of an asset’s life.
b.Larger cash flows in the earlier years of an asset’s life.
c.Larger total undiscounted profits from the project over the project’s life.
d.Smaller accounting profits in the early years, assuming the company uses the same
depreciation method for tax and book purposes.
e.Lower tax payments in the earlier years of an asset’s life.
Chua Chang & Wu Inc. is planning its operations for next year, and the CEO wants you
to forecast the firm’s additional funds needed (AFN). Data for use in your forecast are
shown below. Based on the AFN equation, what is the AFN for the coming year?
a.-$14,440
b.-$15,200
c.-$16,000
d.-$16,800
e.-$17,640
Which of the following statements is CORRECT?
a.Under normal conditions, a firm’s expected ROE would probably be higher if it
financed with short-term rather than with long-term debt, but using short-term debt
would probably increase the firm’s risk.
b.Conservative firms generally use no short-term debt and thus have zero current
liabilities.
c.A short-term loan can usually be obtained more quickly than a long-term loan, but the
cost of short-term debt is normally higher than that of long-term debt.
d.If a firm that can borrow from its bank at a 6% interest rate buys materials on terms of
2/10, net 30, and if it must pay by Day 30 or else be cut off, then we would expect to
see zero accounts payable on its balance sheet.
e.If one of your firm’s customers is ‘stretching” its accounts payable, this may be a
nuisance but it will not have an adverse financial impact on your firm if the customer
periodically pays off its entire balance.