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1) smith enterprises stock currently sells for $17.50. a put option on the stock has a
strike price of $15 and currently sells at $4.50. what is the time value of the option?
a.$0
b.$2.50
c.$4.50
d.$2.00
2) narrbegin: bavarian brew
bavarian brew
bavarian brew, an unlevered firm, has an expected ebit of $500,000. the required return
on assets for the firms assets is 10%. the company has 250,000 shares outstanding. the
company is considering raising $1 million in debt with a required return of 6% and
would use the proceeds to repurchase outstanding stock.
narrend
what is bavarian brews required return on equity before the restructuring. assume no
corporate taxes.
a.10%
b.6%
c.11%
d.12%
3) a stock was purchased two years ago for $20. the stock does not pay dividends and
sells today for $26.00. if sold today, what was the annual realized return on your
investment?
a.9%
b.12%
c.14%
d.15%
4) bond ratings:
a.have no impact on a bond's price
b.are based upon the bond rating agencies' assessment of the borrower's default risk
c.result in yield spreads between different quality bonds
d.both (b) and (c)
e.all of the above
5) one of the tasks for financial managers when identifying projects that increase firm
value is to identify those projects where
a.benefits are at least equal to the projects costs
b.taking the project will increase the book value of the firms common stock
c.taking the project will decrease the book value of the firms debt outstanding
d.none of the above
6) bavarian brewhouse had after-tax earnings of $1,500,000 in 2004. the company
needs $2,500,000 for new investments and plans to finance 50% of those investments
with debt. if bavarian brew follows a residual dividend policy, what total dividend will
be paid?
a.$1,500,000
b.$0
c.$250,000
d.$500,000
7) calculate the tax disadvantage to organizing a u.s. business today, after passage of the
jobs and growth tax reconciliation act of 2003, as a corporation versus a partnership,
given the following assumptions. all earnings will be paid out as dividends, and
operating income before taxes will be $200,000. the effective corporate tax rate is 35%,
and the tax rate on corporate dividends is 15%. the average personal tax rate for
partners in the business is 35%.
a.$17,500
b.$19,500
c.$20,000
d.$22,250
8) narrbegin: earthcom
earthcom
on october 4th, 2000, long distance company, earthcom, issued bonds to finance a new
wireless product. the bonds were issued for 30 years (mature on october 4th, 2030),
with a face value of $1,000, and semiannual coupons. the coupon rate on these bonds is
8% apr. over the last 4 years, the company has experienced financial difficulty as the
long distance market has grown more competitive.
narrend
refer to earthcom. the risk associated with earthcom bonds has increased dramatically,
as investors now want a 15% apr return to hold the bonds. what price should the bonds
trade at today (october 4th, 2004)?
a.$544.19
b.$545.66
c.$794.99
d.$800.15
9) narrbegin: sea grove beach corp.
sea grove beach corporation
sea grove beach corporation is executing an initial public offering with the following
characteristics. the company will sell 12 million shares at an offer price of $20 per
share, the underwriter will charge a 7 percent underwriting fee, and the shares are
expected to sell for $27.50 per share by the end of the first days trading. assuming this
ipo is executed as expected.
narrend
refer to sea grove beach corporation. what is the initial return earned by investors
allocated shares in the ipo?
a.20.27%
b.27.27%
c.30.50%
d.37.50%
10) which of the following is a strength of a sole proprietorship?
a.unlimited life
b.easy to form
c.limited liability
d.limited access to capital
11) assuming that current currencies are currently in equilibrium and the exchange rate
is /$ = 0.721 and that the u.s. expects inflation over the next year to be 4% while in
europe there is an expectation of 2.3%; what must the exchange rate be in one year? (/$)
a.0.709
b.0.750
c.0.738
d.0.705
12) which of the following terms describes when a firm is unable to pay its liabilities as
they come due because assets cannot be converted into cash within a reasonable period
of time?
a.bankruptcy
b.insolvency bankruptcy
c.liquidity crisis
d.economic failure
e.technical insolvency
