1) louis international is considering easing credit standards to increase sales, and
potentially profits. currently the firm sells 200,000 units at a sales price of $125 per unit
and variable cost of $103 per unit. currently the average collection period is 15 days
and the bad debt expense is 3% of sales. the required return on investment is 18%. if
credit standards are eased, the sales will increase to 250,000 units; the acp will increase
to 35 days; and the bad debt expense will increase to 5% all else will remain the same.
what is the increase in bad debt expense?
a.$ 812,500.00
b.$6,250,000.00
c.$1,562,500.00
d.$ 750,000.00
2) 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
3) narrbegin: bavarian brew bond
bavarian brew bond
bavarian brew is thinking about recalling $30 million of 15 year, $1,000 par value
bonds, that were issued ten years ago. the bonds carry a coupon rate of 7.8% and have a
call price of $1,110. initially the bonds generated total proceeds of $28.65 million and
the flotation costs were $500,000. bavarian brew wants to sell $30 million of 5 year,
$1,000 par value bonds with a 5.8% coupon rate to retire the old bonds. the flotation
costs on the new bond issue are estimated to be $525,000. due to having to issue the
new bonds before the old bonds can be retired the company expects a period of 3
months were they have to pay interest on the old and the new bonds. assume a tax rate
of 34%
narrend
refer to bavarian brew bond. what is the call premium per bond?
a.$110
b.$100
c.$90
d.$125
4) the terms of sale for customers are called the
a.credit terms
b.collection policy
c.cash discounts
d.none of the above
5) 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 is the initial investment required to refund the bonds?
a.$11,250,000
b.$8,614,375
c.$7,312,500
d.$3,937,500
6) what is the present value of these cash flows, if the discount rate is 10% annually?
a.$18,380.00
b.$12,620.90
c.$22,358.69
d.$14,765.52
7) you own a bond that pays a 12% annualized semiannual coupon rate and has 10
years to maturity. if the discount rate increases from 14% to 16% during the next two
years of the bonds life, then what is the dollar increase (decrease) in value for the bond
during the two year period?
a.($69.42)
b.($71.09)
c.$69.42
d.$71.09
8) which of the following statements is false with regard to cash flows resulting from
financing costs?
a.they should be included in the cash flow calculations
b.financing cash flows can include dividend payments to stockholders and interest
payments to bondholders
c.financing costs are captured in the discount of a projects cash flows
d.if cash outflows associated with financing costs were deducted from the cash flows
for a project, it would be double-counting the financing costs of the investment
e.all of the above statements are false
9) what is the largest (trading volume) over-the-counter (otc) market in the united
states?
a.amex
b.nyse
c.nasdaq
d.chicago board of trade
10) capital budgeting techniques should:
a.fully account for expected risk and return
b.recognize the time value of money
c.lead to higher stock prices when applied
d.all of the above
11) which form of invested capital is subject to most of the firms business and financial
risk?
a.debt capital
b.equity capital
c.borrowed capital
d.intellectual capital