The appropriate discount rate in merger analysis is:
A.the acquirer’s cost of capital because a merger is essentially a capital budgeting
project.
B.the acquirer’s cost of equity because mergers are risky and a rate above the cost of
capital is appropriate.
C.the target’s cost of equity because it best approximates the usually high risk inherent
in this type of equity transaction.
D.a judgmental rate reflecting the risk inherent in the transaction.
A land option contract is considered what type of option?
A.Expansion option
B.Investment timing option
C.Flexibility option
D.Abandonment option
Projects fit into the following three categories:
A.entrenchment, expansion, and capital improvements.
B.replacement, expansion, and new ventures.
C.short-, medium-, and long-term projects.
D.replacement, expansion, and long-term projects.
Cash flows have been estimated in detail for the first six years of a new venture’s life.
Management feels the new business will go on indefinitely, and will probably grow at
an average rate of 3% per year starting at $50M in year seven. The project is being
evaluated using a cost of capital of 11%. What is the contribution of this terminal value
assumption to the project’s NPV?
A.$ 50M
B.$625M
C.$243M
D.$334M
The category of business combination where the firms have a supplier-customer
relationship is known as a:
A.vertical merger.
B.horizontal merger.
C.conglomerate merger.
D.none of the above
Genestek Inc. just paid a $5.00 dividend. Due to a new product about to be released,
analysts expect the company to grow at a supernormal rate of 15% for three years. After
that it is expected to grow at a normal rate of 4% indefinitely. Stocks similar to
Genestek are currently earning shareholders a return of 12%. The estimated selling
price of the stock is:
A.$76.56
B.$86.10
C.$83.43
D.$91.14
Financial assets:
A.are legal documents.
B.give their owners claims to past cash flows.
C.include stocks and bonds.
D.Both a & c
E.All of the above
In estimating project cash flows, ____ is generally excluded.
A.dividends
B.effects on other parts of the company
C.proceeds from sales
D.a and b
E.a and c
The goal of a portfolio owner is to:
A.maximize both risk and return, as the higher the risk, the higher is the return.
B.investment only in risk-free assets that help avoid taxes.
C.capture the high average returns of equities while minimizing the associated risk.
D.avoid diversification and focus on stocks from one particular market.
Privately-held firms:
A.cannot sell securities to the general public.
B.can sell securities with restriction.
C.can sell securities without restriction.
D.None of these are correct.
A call option’s time premium diminishes:
A.as the underlying stock price rises.
B.as the underlying stock price falls.
C.at the point where the exercise price equals the underlying stock price.
D.as the number of months to expiration increases.
Charlie Dobbs is considering investing in Astrotech. His research has revealed the
following:
The market is returning 11%
Three month treasury bills are yielding 5%
Astrotech’s beta is 1.2
Astrotech recently paid a dividend of $1.50
Analysts expect Astrotech to grow at 4% indefinitely
How much should Charlie be willing to pay for a share of Astrotech?
A.$19.02
B.$12.00
C.$10.26
D.$18.29
Which is not considered a part of the firm’s capital structure?
A.Retained earnings
B.Preferred stock
C.Bank loan
D.Depreciation expense
A firm with an equity multiplier of 4.0, will have a debt ratio of:
A..25
B.1.00
C..75
D.4.00
A firm’s financial managers have been asked to evaluate the following investment
proposals:
1. a new mainframe computer to replace an existing computer for administrative
processing
2. a new assembly line to expand production capacity
3. new kitchen equipment for an existing cafeteria kitchen
4. new food vending machines to replace the existing cafeteria kitchen
Which of the above proposals are mutually exclusive?
A.1 and 2
B.3 and 4
C.1, 2, and 3
D.1, 2, 3, and 4
Preemptive rights allow stockholders to:
A.purchase additional shares of stock from the issuing company at a discount.
B.sell their shares of stock back to the issuing company at any time.
C.maintain their proportionate ownership of corporations.
D.purchase preferred stock that may not be available to non-shareholders.
E.all of the above are included in the preemptive rights of a stockholder.
Two bonds are identical in risk, maturity date, and face value, but one coupon rate is
10% and the other is 8%. The market yield on similar bonds is 9%.
A.The 10% coupon bond would be selling at a premium and the 8% coupon bond
would be selling at a discount.
B.The 10% coupon bond would be selling at a discount and the 8% coupon bond would
be selling at a premium.
C.At the maturity date, both bonds would be selling at face value.
D.a and c
Which of the following issues related to a new venture will affect the terminal value
calculation?
A.The magnitude of the cash flow at the end of the detailed forecast period
B.Aggressive assumptions about growth in the long run
C.The generation of substantial revenues in the last years of the detailed forecast period
D.Changing economic conditions that affect long term growth prospects
E.All of the above