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1) an investor put 40% of her money in stock a and 60% in stock b. stock a has a beta of
1.2 and stock b has a beta of 1.6. if the risk-free rate is 5% and the expected return on
the market is 12%, whats the investors expected return?
a.22.28%
b.14.80%
c.15.08%
d.21.80%
2) narrbegin: big thompson credit terms
big thompson industries (bti)
big thompson industries (bti) currently produces and sells 50,000 units of a motor relay
used in high-end electronics. all sales are on credit, for a price of $750 per unit to all
customers. these motor relays incur $525 in variable costs and $3,000,000 in fixed costs
per year. with current credit standards, btis average collection period is 30 days.
managers are considering a relaxation in standards, and forecast a 6 percent increase in
sales, along with an increase in the average collection period to 45 days. additionally,
bad debt expense is expected to increase from 1.5 percent to 2.5 percent of sales.
investments of this type are expected to earn a 14% return. assume a 365 day year
narrend
with the current standards, what is btis average investment in receivables?
a.$1,080,247
b.$2,157,534
c.$2,746,854
d.$3,240,741
3) capco has a capital structure that is composed of $10 million of debt and $30 million
of common equity. if capco is in the 30% marginal tax rate, what is its wacc if the yield
to investors on capco debt is 8% and the cost of capco common equity is 12%?
a.8.3%
b.10.4%
c.11.0%
d.none of the above
4) the equilibrium relationship that predicts that the real interest rate will be the same in
every country is:
a.the fisher effect
b.real interest rate parity
c.forward-spot parity
d.interest rate parity
e.both (a) and (b)
5) consider the cash receipts projections of roxy inc. that is developing a cash budget
for october , november and december; sales in august and september were $600,000 and
$500,000 respectively. the forecast sales are $400,000, $300,000 and $200,000 for
october, november and december respectively. 20 % of sales are cash sales and 80% are
credit sales; collects about 70% of each months sales in the next month but waiting until
the following month for the remaining 10% of sales. bad debts are negligible. the firm
is expectsing cash dividend of $10,000 in december from a subsidiary.what are the
accounts receivable collected in october? (in thousands)
a.$410
b.$490
c.$350
d.$390
6) narrbegin: exhibit 22-1 liquidation
exhibit 23-1
narrend
if the company has $3,000,000 in funds to distribute to unsecured creditors, what is the
settlement that is received by the holders of the subordinated debentures in case i?
a.$1,050,534
b.$1,250,000
c.$367,647
d.$882,353
7) after 2007, the free cash flows are expected to grow at an annual rate of 5%. the
weighted average cost of capital for normaltown is 12%. if the market value of the
firms debt is $100 million, find the value of the firms equity.
a.$201.81 million
b.$213.00 million
c.$231.43 million
d.$271.20 million
8) find the break even point given the following information: sale price per unit = $50,
variable cost per unit = $35; fixed costs = $50,000.
a.2,298
b.3,000
c.3,333
d.4,000
9) narrbegin: loose cannon refunding
loose cannon co.
loose cannon co. is evaluating a new $75 million bond issue, the proceeds of which
would be used to call and retire its outstanding $75 million bonds. details on both bond
issues are presented below. the firm is in the 35% tax bracket.
old bonds the old issue sold at par, with a coupon rate of 11 percent. it was issued five
years ago with a twenty year maturity. the issue had $350,000 in flotation costs and
carries a call price of $1150.
new bonds the new issue are expected to sell at par with an 8.5 percent coupon rate and
a 15 year maturity. flotation costs are forecast to be $500,000. interest payments will
overlap for 2 months while the old bonds are retired.
narrend
refer to loose cannon co. what are the annual cash flows associated with the new bonds?
a.$4,143,750
b.$6,375,000
c.$4,132,083
d.$6,357,051
10) narrbegin: exhibit 8-2
exhibit 8-2
a piece of equipment costs $1.2m. the equipment has a useful life of 4 years. in each of
the four years, the investment generates a cash inflow of $0.5m. the impact of the
investment project on net income is derived by subtracting depreciation from cash flow
each year.
narrend
refer to exhibit 8-2. the projects average accounting rate of return equals the average
contribution to net income divided by the average book value of the investment.
assume the equipment is depreciated on a straight-line basis over 4 years, what is the
average accounting rate of return?
a.16.7%
b.33.3%
c.66.7%
d.cannot tell from the given information
11) narrbegin: wimmp venture capital
wimmp venture capital
where is my money professional venture capital (wimmp) made a $10 million
investment in bavarian sausage technology (bst) 5 years ago and in return received 2.5
million shares of convertible preferred stock that can be converted into 1.5 shares of
common stock. after all stock has been converted bst will have 22.5 million shares
outstanding. in addition, the company is planning on issuing an additional 5 million
shares in an ipo.
narrend
if the value of bst stock is $21.50 at the end of the first trading day, what is the value of
wimmps investment?
a.$48.375m
b.$80.625m
c.$63.425m
d.$37.557m
12) hedging is
a.buying derivatives to take advantage of likely changes in the market
b.buying stocks firms own stock
c.insuring against risks a firm likely faces
d.making sure that the hedges are not too high at the firms headquarters
13) louis international recently conducted an ipo, louis received $22 per share and the
offer price was $25 per share and the stock price rose to $35 per share. what was the
total percentage cost of the ipo?
a.45.45%
b.52.00%
c.59.09%
d.40.00%
14) which of the following may prevent purchasing power parity from holding across
different countries?
a.import taxes
b.transportation costs
c.transaction costs
d.all of the above
15) a $1,000 par value bond makes two coupon payments per year of $60 each. what is
the bonds yield to maturity if the bond currently trades at $1,200 and will mature in two
years?
a.1.78%
b.3.48%
c.6.00%
d.6.43%
16) the alteration of a companys capital structure to reduce high fixed charges is called
a.recapitalization
b.cramdown procedure
c.involuntary reorganization
d.absolute priority rule
17) narrbegin: bavarian credit terms
bavarian brew credit terms
bavarian brew is producing and selling brewery equipment to microbreweries
nationwide. bavarian is charging $15,000 per unit and all of their sales are on credit.
under the current credit policy bavarian brew expects to sell 500 units. the variable
costs are $6,000/unit and fixed costs are $1,500,000 per year. the company is thinking
about changing their credit terms from net 30 to 3/10 net 30. the effect of this change
would be a 5% increase in unit sales, but also an increase in bad debt expenses from 2%
to 4% of sales. the company expects 75% of its customers to take advantage of the cash
discount. currently the company has an average collection period of 38 days, 30 days
until the customers mail their payments and another 8 days to process the payments
once they arrive. bavarian brews opportunity cost of funds invested in accounts
receivable is 12%.
narrend
what is bavarian brews cost of marginal bad debts?
a.$150,000
b.$165,000
c.$142,500
d.$175,000
18) narrbegin: cash disbursements
bavarian brews schedule of projected cash disbursement
the companys purchases are 75% of its sales. of those purchases 15% are paid in cash,
50% are paid in the following month and the remainder in the month after that. the
companys wages and salaries equal 15% of sales each month plus $50. taxes of $125
are due in april. the company is going to purchase new machinery worth $1000 in
march and pay 50% right away and the rest in april. in addition, the company will pay a
$175 dividend in february.
narrend
what are the cash disbursements for february? assume bavarian brew had sales of $490
in december.
a.$598.25
b.$773.25
c.$548.25
d.$419.65
