1) Figure 9.1
In March of 2011, Macklemore Corp. considered an acquisition of Blue Scholar
Learning, Inc. (BSL), a privately-held educational software firm. As a first step in
deciding what price to bid for BSL, Macklemore’s CFO, Ryan Lewis, has prepared a
five-year financial projection for the company assuming the acquisition takes place.
Use this projection and BSL’s 2010 actual financial figures to answer the questions
below.
Assume BSL is worth the book value of its assets at the end of 2015. Macklemore’s
WACC is 8.0 percent. BSL’s WACC is 11.5 percent, and the average of the two
companies’ WACCs, weighted by sales, is 8.2 percent. What is the maximum
acquisition price (in $ millions) Macklemore should pay to acquire BSL’s equity?
A.$1,702.25
B.$2,227.25
C.$2,342.94
D.$2,383.94
E.$2,603.25
2) Jerri currently owns 200 shares of Alpha stock. Each share is currently worth $36.
What will Jerri’s investment in Alpha be worth if the company declares a 4-for-3 stock
dividend?
A.$5,400
B.$7,200
C.$9,000
D.$21,600
E.$28,800
3) Which one of the following statements concerning IPOs and underpricing is correct?
A.IPO underpricing primarily benefits a firm’s pre-issue owners
B.IPO underpricing is a function of the underwriting spread
C.The more an issue is underpriced, the more it tends to be oversubscribed
D.Underpricing tends to discourage investors from participating in the IPO market
E.Undersubscribed shares generally tend to also be underpriced shares
4) You are considering an equipment purchase costing $177,000. This equipment will
be depreciated straight line to zero over its 3-year life. What is the average accounting
return if this equipment produces the following net income?
A.12.29 percent
B.14.38 percent
C.16.56 percent
D.17.44 percent
E.21.00 percent
5) Jet Setters has a cost of equity of 17.8 percent. The market risk premium is 10.2
percent and the risk-free rate is 4.4 percent. The company is acquiring a competitor,
which will increase the company’s beta to 1.6. What effect, if any, will the acquisition
have on the firm’s cost of equity capital?
A.No effect
B.Decrease of 3.39 percent
C.Decrease of 0.84 percent
D.Increase of 2.92 percent
E.Increase of 4.13 percent
6) Which of the following are weaknesses of the dividend growth model?
I. market risk premium fluctuations
II. lack of dividends for some firms
III. reliance on historical beta
IV. sensitivity of model to dividend growth rate
A.II only
B.I and II only
C.I and III only
D.II and IV only
E.I, II, III, and IV
7) JM Case Inc. has a market value of $5 million with 500,000 shares outstanding. The
book value of its equity is $1,750,000. What is JM Case’s price per share?
A.$3.50
B.$5
C.$10
D.$25
E.$50
F.None of the above
8) The Water Works has a return on assets of 13.7 percent, a cost of equity of 18.6
percent, and a pre-tax cost of debt of 7.1 percent. What is the debt-equity ratio? Ignore
taxes.
A.0.44
B.0.47
C.0.61
D.0.68
E.0.74
9) Caldweiler & Co. owes a total of $21,684 in taxes for this year. The taxable income
is $71,509. If the firm earns $100 more in income, it will owe an additional $36 in
taxes. What is the average tax rate on income of $71,609?
A.28.00 percent
B.30.33 percent
C.33.33 percent
D.34.00 percent
E.36.00 percent
10) Eurobonds are best defined as international bonds issued in _____ and denominated
in _____.
A.a single country; multiple currencies
B.a single country; a single currency
C.multiple countries; multiple currencies
D.multiple countries; a single currency
E.euroland; euros
11) Mill Stone Bakery needs $210,000 today to fund a new project. The project will not
produce any cash flows for 2 years and thus the firm agreed to a 2-year, pure discount
loan at 8.6 percent interest. How much will the firm owe on this loan at the time it must
be repaid?
A.$228,060.00
B.$237,540.21
C.$240,860.00
D.$246,120.00
E.$247,673.16
12) Which one of the following is the pre-tax cost of debt?
A.Average coupon rate on the firm’s outstanding bonds
B.Coupon rate on the firm’s latest bond issue
C.Weighted average yield-to-maturity on the firm’s outstanding debt
D.Average current yield on the firm’s outstanding debt
E.Annual interest divided by the market price per bond for the latest bond issue
13) The most common approach to developing proforma financial statements is called
the:
A.cash budget method.
B.financial planning method
C.seasonality approach
D.percent-of-sales method
E.market-oriented approach
14) Gee Whiz Underwriters retains the difference between its buying price and its
offering price on new securities. What is this amount called?
A.Markup
B.Commission
C.Rights price
D.Spread
E.Offer
15) The Outlet has a cost of equity of 16.8 percent, a pre-tax cost of debt of 8.1 percent,
and a return on assets of 14.5 percent. Ignore taxes. What is the debt-equity ratio?
A.0.28
B.0.36
C.0.44
D.0.52
E.0.57
16) Given the following exchange rates, which of the following currencies are selling at
a premium?
A.Japanese yen only
B.Swiss franc and Canadian dollar only
C.U.S. pound only
D.Canadian dollar, Swiss franc, and U.K. pound only
E.all four currencies
17) Daniel’s Market has sales of $36,600, costs of $28,400, depreciation expense of
$3,100, and interest expense of $1,500. If the tax rate is 34 percent, what is the
operating cash flow, OCF?
A.$4,811
B.$5,279
C.$6,466
D.$6,976
E.$7,013
18) You want to have $35,000 in cash to buy a car 4 years from today. You expect to
earn 8 percent, compounded annually, on your savings. How much do you need to
deposit today if this is the only money you save for this purpose?
A.$23,618.92
B.$24,511.68
C.$25,726.04
D.$26,013.01
E.$26,311.15
19) You own a portfolio that is invested 38 percent in stock A, 43 percent in stock B,
and the remainder in stock C. The expected returns on these stocks are 10.7 percent,
15.4 percent, and 9.1 percent, respectively. What is the expected return on the portfolio?
A.10.55 percent
B.11.02 percent
C.11.67 percent
D.12.42 percent
E.13.01 percent
20) Which one of the following will increase the present value of a lump sum future
amount? Assume the interest rate is a positive value and all interest is reinvested.
A.Increase in the time period
B.Increase in the interest rate
C.Decrease in the future value
D.Decrease in the interest rate
E.None of the above
21) Ernst Electrical has 9,000 shares of stock outstanding and no debt. The new CFO is
considering issuing $80,000 of debt and using the proceeds to retire 1,500 shares of
stock. The coupon rate on the debt is 7.5 percent. What is the break-even level of
earnings before interest and taxes between these two capital structure options?
A.$18,500
B.$21,000
C.$24,000
D.$32,500
E.$36,000
22) Currently, you can exchange 100 for $132. The inflation rate in Euroland is
expected to be 3.1 percent as compared to 3.6 percent in the U.S. Assuming that relative
purchasing power parity exists, what should the exchange rate be 5 years from now?
A..7298/$1
B..7351/$1
C..7367/$1
D..7405/$1
E..7423/$1
23) A firm offers credit terms of 1/5, net 25. How long is the net credit period?
A.I day
B.5 days
C.20 days
D.25 days
E.30 days
24) Kay’s House of Sound sells 520 musical instruments a year at an average price per
instrument of $580. All sales are credit sales with terms of 2/10, net 25. Hogan’s has
found that 78 percent of its customers take advantage of the discounted price. What is
the amount of the firm’s average accounts receivables?
A.$9,560
B.$10,990
C.$11,280
D.$12,440
E.$12,620
25) Which one of the following statements is correct?
A.Bond markets have less daily trading volume than equity markets
B.There are less bond issues than there are equity issues
C.Municipal bond prices are highly transparent
D.Bond markets are dealer based
E.Most bond trades occur on the NYSE
26) Tessler Farms has a return on equity of 12.71 percent, a debt-equity ratio of 0.75,
and a total asset turnover of 0.9. What is the return on assets?
A.7.26 percent
B.8.06 percent
C.13.67 percent
D.15.24 percent
E.17.41 percent
27) Suppose a U.S. firm builds a factory in China, staffs it with Chinese workers, uses
materials supplied by Chinese companies, and finances the entire operation with a loan
from a Chinese bank located in the same town as the factory. This firm is most likely
trying to greatly reduce, or eliminate, which one of the following?
A.Interest rate disparities
B.Short-run exposure to exchange rate risk
C.Long-run exposure to exchange rate risk
D.Political risk associated with the foreign operations
E.Translation exposure to exchange rate risk
28) Theodore’s has common stock outstanding at a price of $26 a share. The total
market value of the equity is $429,000. How many shares of stock will be outstanding if
the firm does a 2-for-5 reverse stock split?
A.41,250 shares
B.36,000 shares
C.6,600 shares
D.7,500 shares
E.16,500 shares
29) Which one of the following is an example of long-run exposure to exchange rate
risk? Ignore all fees and transaction costs.
A.A U.S. firm owns land in Mexico valued at three million pesos. That value has
remained constant in Mexican pesos for the past year. However, the firm’s financial
statement reflects a three percent decrease in the value of that land for last year
B.A U.S. firm sells $250,000 worth of goods to Peru. However, when the payment for
those goods arrives and the U.S. firm exchanges the foreign currency, it only receives
$248,700
C.A U.S. firms purchases $120,000 worth of goods from Canada. However, by the time
the goods arrive and the invoice is payable, the cost of those goods has increased to
$120,400
D.A few years ago, a U.S. firm built a factory in Asia to take advantage of the lower
labor costs. Today, the Asian labor costs have increased such that the Asian factory no
longer provides a cost advantage over a U.S. factory
E.A. U.S. traveler withdrew an extra $2,000 in cash from her savings account to take
with her as emergency funds when she traveled to Mexico. Before leaving on her trip,
she exchanged this money into Mexican pesos. She never used any of this money
during her vacation, so exchanged all of it back into U.S. dollars on her return and
received $1,960
30) Plato’s Foods has ending net fixed assets of $84,400 and beginning net fixed assets
of $79,900. During the year, the firm sold assets with a total book value of $13,600 and
also recorded $14,800 in depreciation expense. How much did the company spend to
buy new fixed assets?
A.-$23,900
B.$3,300
C.$32,900
D.$36,800
E.$37,400
31) Martha’s Sweet Shop reduced its fixed assets this year without affecting the shop’s
operations, sales, or equity. This reduction will increase which of the following ratios?
I. Capital intensity ratio
II. Return on assets
III. Total asset turnover
IV. Return on equity
A.I and II only
B.II and III only
C.II, III, and IV only
D.I, II, and IV only
E.I, II, III, and IV
32) The operating cash flows of a project:
A.are unaffected by the depreciation method selected
B.are equal to the project’s total projected net income
C.decrease when net working capital increases
D.include any aftertax salvage values
E.include erosion effects
33) Cash flow from assets is defined as:
A.the cash flow to shareholders minus the cash flow to creditors
B.operating cash flow plus the cash flow to creditors plus the cash flow to shareholders
C.operating cash flow minus the change in net working capital minus net capital
spending
D.operating cash flow plus net capital spending plus the change in net working capital
E.cash flow to shareholders minus net capital spending plus the change in net working
capital
34) What is the expected return on a security given the following information?
A.8.78 percent
B.9.43 percent
C.9.97 percent
D.10.11 percent
E.11.38 percent
35) Which of the following securities has a purely residual claim against a firm’s cash
flows?
A.preferred stock
B.callable bonds
C.common stock
D.non-callable bonds
E.None of the above
36) Fast Cars is considering a project that requires $138,000 of fixed assets that are
classified as 5-year property for MACRS. What is the book value of these assets at the
end of year 3? The MACRS allowance percentages are as follows, commencing with
year one: 20.00, 32.00, 19.20, 11.52, 11.52, and 5.76 percent.
A.$34,210
B.$36,667
C.$39,744
D.$40,450
E.$41,504