1) narrbegin: bavarian brew float
bavarian brew float
bavarian brew receives about 350 checks a day with an average check size of $550.
currently customers payments spend 2 days in the mail. once a check is received it takes
about 1.5 days to process it and another 4 days to clear the banking system. the firms
opportunity cost is 10%. assume a 365-day year.
narrend
what is the availability float of bavarian brew?
a.2 days
b.4 days
c.7.5 days
d.1.5 days
2) narrbegin: smith credit ln -w/o comp
smith enterprise credit line (w/o comp)
smith enterprise has an one year credit line of $5,000,000 with second bank. on average
smith uses $3,250,000 of the credit line. second bank charges a .45% commitment fee
on the unused portion of the line and the interest rate is set at libor +1.5%. assume that
the libor is 6.3%
narrend
what is smiths effective borrowing rate?
a.8.45%
b.7.59%
c.8.04%
d.7.80%
3) costs associated with the requirement that management divert its attention away from
strategically managing a corporation in favor of spending time with financial attorneys
could be best described as
a.direct bankruptcy costs
b.indirect bankruptcy costs
c.managerial-shareholder related agency costs
d.none of the above
4) 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 the gain from leverage for bavarian brew if the corporate tax rate equals 34%. in
addition the personal tax rate on dividends for investors is 15% and the personal income
tax on interest income equals 40%.
a.$340,000
b.$65,000
c.$150,000
d.$400,000
5) narrbegin: needsalift, inc.
needsalift, inc.
you are analyzing the potential acquisition of nothing better! ice creams, inc. by your
firm, needsalift, inc. the ice cream firm is a wholly owned subsidiary of grand lake
investments, which has set a firm selling price of $10,000,000. from your work you
estimate that nothing better! will generate the following incremental cash flows for
needsalift:
to fund the $10 million price, needsalift can use $2 million from internal sources
(retained earnings) with a required return of 15 percent, while the rest would come from
a new debt issue yielding 10 percent. needsalifts tax rate is 40 percent.
narrend
if the cost of debt increases to 12 percent, should needsalift proceed with the
acquisition?
a.no, with the debt cost at 12 percent, the value of the acquisition falls below $10
million by $853,000
b.no, with the debt cost at 12 percent, the value of the acquisition falls below $10
million by $680,518
c.yes, since the increased cost of debt does not affect the value of the acquisition to
needsalift
d.yes, with the debt cost at 12 percent the value of the acquisition exceeds $10 million
by $335,374
6) investors can eliminate what type of risk by diversifying?
a.systematic risk
b.unsystematic risk
c.beta risk
d.total risk
7) which of the following is not a motivation for hedging?
a.reducing the costs of financial distress
b.enhancing the ability to evaluate managers
c.offsetting the costs of insurance
d.reducing the firms expected tax liability
8) narrbegin: exhibit 17-1
exhibit 23-1
s&p 500 index; $250 index may 2004
narrend
refer to exhibit 23-1. if you hold a long position of 20 june s&p 500 index futures
contracts, how much compensation do you receive for the increase in the futures price
at the end of the trading day?
a.$58,500
b.$11.70
c.$2,925
d.$234
9) the expected possible outcomes for roxy stock are below; what is the expected
standard deviation of roxy stock?
a.2.308%
b.0.053%
c.2.362%
d.0.056%
10) firm y issued $100,000,000 of bonds last year for the purpose of building a new
widget manufacturing plant. firm y instead used the proceeds to fund blackjack
gamblers in las vegas. which of the following best describes the general problem that ys
investors must deal with?
a.the underinvestment problem
b.the overinvestment problem
c.the asset substitution problem
d.the enron problem
11) ____ represents the value of a firm’s equity shown on its balance sheet.
a.book value
b.market value
c.liquidation value
d.present value
e.none of the above
12) an investor bought a stock this morning for $50, and plans to sell the stock one year
from today. the investor believes the stock will pay a $1 dividend during the next year,
and that the stock can be sold for $53 in one year. given the investors beliefs, what is
the return from investing in this stock for the next year?
a.4%
b.6%
c.8%
d.10%
13) narrbegin: bavarian brew lease
bavarian brew lease
bavarian brew wants to lease a new bottling machine. the company obtains a 10 year
lease requiring annual payments of $15,000 at the beginning of the year. the firm is
expected to exercise its option to purchase the machine at the termination of the lease
for $10,000 at the end of year 10. the company is in the 35% tax bracket.
narrend
bavarian brew has also the option to purchase the machine. if the present value of the
cash flows associated with the purchase is $78,000, what is the net present value of the
lease option? assume that the companys cost of debt is 7%.
a.$8,870
b.-$8,870
c.$7,950
d.-$7,950
14) ddp enterprises currently does not pay a dividend but plans to makes its first
dividend payment of $1 in 3 years, if the expected growth rate is 10% per year once
dividends commence, and the appropriate is discount rate is 18%, what is the current
stock price today?
a.$ 8.98
b.$ 8.37
c.$ 13.75
d.$ 14.75
15) consider the following: the market value of emma stock is $40 a share (with
2,000,000 shares outstanding and the next annual dividend is expected to be $3.50), the
bonds are currently selling for $1080 (semi-annual coupon payments of $25; maturing
in 20 years; 10,000 bonds in the market), the preferred stock currently is $40 per share
(paying dividends of $3 in perpetuity, 100,000 shares outstanding); if the tax rate is
40%, what is the firms wacc?
a.8.20%
b.6.88%
c.8.00%
d.8.75%
16) narrbegin: dsss corporation
dsss corporation
dsss corporation is considering a new project to manufacture widgets. the cost of the
manufacturing equipment is $125,000. the cost of shipping and installation is an
additional $10,000. the asset will fall into the 3-year macrs class. the year 1- 4 macrs
percentages are 33.33%, 44.45%, 14.81%, and 7.41%, respectively. sales are expected
to be $225,000 per year. cost of goods sold will be 60% of sales. the project will require
an increase in net working capital of $10,000. at the end of three years, dsss plans on
ending the project and selling the manufacturing equipment for $25,000. the marginal
tax rate is 40% and dsss corporations appropriate discount rate is 15%.
narrend
refer to dsss corporation. what is the after-tax cash flow from selling the machine at the
end of year 3?
a.$25,000
b.$5,999
c.$7,214
d.$19,001
17) the perp, inc. has a preferred stock that will pay its next annual $5 dividend one
year from now. the current price of the stock is $110. what is the required rate of return
on the stock?
a.4.55%
b.4.00%
c.5.50%
d.22.00%
18) all else equal, the higher the call premium,
a.the smaller the drop in rates necessary for a call to be beneficial
b.the larger the drop in rates necessary for a call to be beneficial
c.the more likely any rate drop will lead to a call
d.none of the above; the call premium does not affect the call decision
19) last national bank offers a cd paying 7% interest (compounded annually). if you
invest $1,000 how much will you have at the end of year 5.
a.$712.99
b.$1,402.55
c.$1,350.00
d.$1,000
20) the hurdle rate used in irr analysis should be:
a.the risk-free rate
b.the current corporate bond rate
c.the prime rate
d.the discount rate used in npv analysis