FE 724 Test | Course Paper

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1) Which of the following is NOT a factor for determining whether to use the active or

passive approach to capital structure changes?

A.How much the firm faces in flotation costs under the active management approach

B.How much the firm faces in debt costs under the active management approach

C.How quickly the firm is growing

D.How strongly and how quickly they wish to change the capital structure

2) Howett Pockett, Inc., plans to issue 10 million new shares of its stock. In discussions

with its investment bank, Howett Pockett learns that the bankers recommend a net

proceed of $15 per share and they will charge an underwriter’s spread of 6.5 percent of

the gross proceeds. In addition, Howett Pockett must pay $1 million in legal and other

administrative expenses for the seasoned stock offering. Calculate the gross proceeds

per share from the sale of the 10 million shares of stock.

A.$17.29

B.$16.15

C.$19.37

D.$18.03

3) These are valued as a special zero-growth case of the constant growth rate model.

A.common stocks

B.preferred stocks

C.future dividends

D.future stock prices

4) Triangular Arbitrage The U.S. dollar spot exchange rate with the Australian dollar is

$1 = AU$1.2219. The U.S. dollar and euro exchange rate is $1 = 0.7595. If the

cross-rate between the euro and Australian dollar is 1 = AU$1.575 then show that an

arbitrage is possible. What positions should be taken to profit from the mispricing?

A.Starting with U.S. dollars, buy Australian dollars and convert them to euros and then

back to U.S. dollars

B.Starting with U.S. dollars, buy euros and convert them to Australian dollars and then

back to U.S. dollars

C.Starting with euros, buy U.S. dollars and convert them to Australian dollars and then

back to euros

D.Starting with Australian dollars, buy euros and convert them to U.S. dollars and then

back to Australian dollars

5) All of the following are cash flows from operations except _____________.

A.Increases or decreases in cash

B.Net Income

C.Depreciation

D.Increases or decreases in accounts payable

6) Zero Coupon Bond Price Calculate the price of a zero coupon bond that matures in 5

years if the market interest rate is 7.50 percent. (Assume semi-annual compounding and

$1,000 par value.)

A.$692.02

B.$696.57

C.$962.50

D.$1000.00

7) This is the term for portfolios with the highest return possible for each risk level.

A.efficient portfolios

B.modern portfolios

C.optimal portfolios

D.total portfolios

8) Currency Exchange Compute the number of dollars that can be bought with 2 million

of foreign currency units:

$1 = 15,990 Vietnam Dong

A.$125.0782

B.$3,198.00

C.$12,507.82

D.$198.7577

9) Rose Resources faces a smooth annual demand for cash of $10 million; incurs

transaction costs of $325 every time they sell marketable securities; and can earn 3.9

percent on their marketable securities. What will be their optimal cash replenishment

level?

A.$28,867.51

B.$288,675.13

C.$40,824.83

D.$408,248.29

10) Due to poor spending habits, Ricky has accumulated $10,000 in credit card debt. He

has missed several payments and now the annual interest rate on the card is 18.95%! If

he pays $175 per month on the card, in total, how much interest expense does Ricky

pay to the credit card company?

A.$15,987.50

B.$17,008.52

C.$12,905.13

D.$8,714.62

11) Interest rates You are considering an investment in 30-year bonds issued by a

corporation. The bonds have no special covenants. The Wall Street Journal reports that

1-year T-bills are currently earning 3.50 percent. Your broker has determined the

following information about economic activity and the corporation bonds:

Real interest rate = 2.50%

Default risk premium = 1.75%

Liquidity risk premium = 0.70%

Maturity risk premium = 1.50%

What is the inflation premium? What is the fair interest rate on the corporation’s 30-year

bonds?

A.1% and 1.49%, respectively

B.1% and 6.45%, respectively

C.1% and 7.45%, respectively

D.3.50% and 9.95%, respectively

12) Cup Cake Ltd. has 20 million shares of stock outstanding selling at $25 per share

and an issue of $30 million in 8 percent, annual coupon bonds with a maturity of 16

years, selling at 98 percent of par ($1000). If Cup Cake’s weighted average tax rate is

34 percent, its next dividend is expected to be $2.00 per share, and all future dividends

are expected to grow at 4 percent per year, indefinitely, what is its WACC?

A.7.94%

B.10.00%

C.11.64%

D.11.79%

13) Solving for Rates What annual rate of return is earned on a $5,000 investment when

it grows to $7,000 in six years?

A.1.40%

B.5.45%

C.5.77%

D.40.00%

14) Compute the NPV statistic for Project Y given the following cash flows and if the

appropriate cost of capital is 10 percent.

Project Y

A.$894.37

B.$993.97

C.$964.72

D.$1,008.03

15) You are scheduled to receive a $750 cash flow in one year, a $1,000 cash flow in 2

years, and pay a $300 payment in 4 years. If interest rates are 6% per year, what is the

combined present value of these cash flows?

A.$1,359.92

B.$1,413.92

C.$1,592.63

D.$1,613.02

16) Suppose a firm has had the historical sales figures shown below. What would be the

forecast for next year’s sales using the average approach?

A.$1,370,000

B.$1,430,000

C.$1,510,000

D.$1,625,000

17) Suppose your firm is considering investing in a project with the cash flows shown

below, that the required rate of return on projects of this risk class is 8 percent, and that

the maximum allowable payback and discounted payback statistic for the project are 3

and 3.5 years, respectively.

Use the discounted payback decision rule to evaluate this project; should it be accepted

or rejected?

A.1.23 years, accept

B.2.45 years, accept

C.2.77 years, accept

D.5.36 years, reject

18) If a firm has a cash cycle of 25 days and an operating cycle of 80 days, what is its

average payment period?

A.25

B.80

C.55

D.105

19) Which statement makes this a false statement? When a firm pays commissions to

underwriting firms that float the issuance of new stock,

A.the component cost will need to be integrated to figure project WACCs

B.the component cost will need to be integrated only for the firm’s WACC

C.the firm can increase the project’s WACC to incorporate the flotation costs’ impact

D.the firm can leave the WACC alone and adjust the project’s initial investment

upwards

20) Valuation of a Merger Windows N Such, Inc., is asking a price of $195 million to be

purchased by Curtain Rods Corp. The two firms currently have cumulative total cash

flows of $15 million which are growing at 1 percent annually. Managers estimate that

because of synergies the merged firm’s cash flows will increase by an additional 3

percent for the first four years following the merger. After the first four years cash flows

will grow at a rate of 2 percent. The WACC for the merged firms is 10 percent.

Calculate the NPV of the merger. Should Curtain Rods Corporation agree to acquire

Windows N Such, Inc., for the asking price of $195 million?

A.yes, the NPV is $0

B.yes, the NPV is £ $0

C.no, the NPV is $0

D.no, the NPV is £ $0

21) If you start making $115 monthly contributions today and continue them for 6

years, what is their present value if the compounding rate is 12% APR? What is the

present value of this annuity?

A.$5,512.90

B.$5,633.10

C.$5,882.30

D.$5,941.12

Set BEG mode. PMT = 115; n = 72; i = 1; FV = 0; = > PV = 5941.12

22) The bond’s annual coupon rate divided by its market price is referred to as the

__________.

A.Yield to Call

B.Yield to Maturity

C.Current Yield

D.Term Structure of Interest Rates

23) Interest Rate Parity Assume the spot rate between the U.S. dollar and the Taiwan

dollar is $1 = TWD32.456. If the interest rate in the United States is 4 percent and in

Taiwan is 3 percent, then what should be the one-month forward exchange rate?

A.$0.0308

B.$0.0311

C.$1.0097

D.$1.0008

24) What annual interest rate would you need to earn if you wanted a $1,250 per month

contribution to grow to $65,000 in 3 years?

A.18.59%

B.21.26%

C.24.00%

D.25.19%

25) Which of the following is correct regarding the total risk of a company?

A.A company can change its risk level over time

B.Some firms are riskier because they offer many different products and/or services

C.Companies can change their risk by reducing the amount of money they have

borrowed

D.None of these statements are correct

26) The Wall Street Journal reports that the rate on 4-year Treasury securities is 7.50%

and the rate on 5-year Treasury securities is 9.15%. According to the unbiased

expectations hypotheses, what does the market expect the 1-year Treasury rate to be

four years from today, E(5r1)?

A.16.0%

B.18.4%

C.15.9%

D.13.7%

27) Which of these is defined as a professionally managed pool of money used to

finance new and often high-risk firms?

A.equity capital

B.debt capital

C.venture capital

D.expertise capital

28) Free Cash Flow You are considering an investment in Crew Cut, Inc. and want to

evaluate the firm’s free cash flow. From the income statement, you see that Crew Cut

earned an EBIT of $23 million, paid taxes of $4 million, and its depreciation expense

was $8 million. Crew Cut’s gross fixed assets increased by $10 million from 2007 to

2008 . The firm’s current assets increased by $6 million and spontaneous current

liabilities increased by $4 million. What is Crew Cut’s operating cash flow, investment

in operating capital and free cash flow for 2008, respectively in millions?

A.$23, $10, $13

B.$23, $12, $11

C.$27, $10, $17

D.$27, $12, $15

29) The constant growth model assumes which of the following?

A.That there is privately held information

B.That the stock is efficiently priced

C.That there are executive stock options available to managers

D.That there is no restricted stock

30) When choosing between two mutually exclusive projects using the payback period

method for evaluating capital projects, one would choose

A.either project if they both are more than managers’ maximum payback period

B.neither project if they both are less than managers’ maximum payback period

C.the project that pays back the soonest

D.the project that pays back the soonest if it is equal to or less than managers’ maximum

payback period

31) A firm is expected to pay a $2.00 dividend per share. The stock is selling in the

market place for $50.00 per share. If investors are demanding 10% on this stock, what

is this stock’s growth rate?

A.4.73%

B.5.92%

C.6.00%

D.7.29%

32) The optimal cash replenishment level will decrease with all of the following

changes except ____.

A.The transaction cost decreases

B.The annual demand for cash decreases

C.The interest rate decreases

D.All of these will decrease the optimal cash replenishment level

33) Your company is considering a new project that will require $250,000 of new

equipment at the start of the project. The equipment will have a depreciable life of 8

years and will be depreciated to a book value of $10,000 using straight-line

depreciation. The cost of capital is 12%, and the firm’s tax rate is 34%. Estimate the

present value of the tax benefits from depreciation.

A.$63,617.52

B.$50,669.93

C.$75,017.54

D.$86,997.13

34) Stubborn Motors, Inc., is asking a price of $10.5 million to be purchased by Rubber

Tire Motor Corp. Rubber Tire currently has total cash flows of $6 million which are

growing at 1 percent annually. Managers estimate that because of synergies the merged

firm’s cash flows will increase by an additional 4 percent for the first four years

following the merger. After the first four years, incremental cash flows will grow at a

rate of 3 percent annually. The WACC for the merged firms is 9.75 percent. Calculate

the NPV of the merger. Should Rubber Tire Motor Corporation agree to acquire

Stubborn Motors for the asking price of $10.5 million?

A.Agree to the merger because the NPV = -$2.32 million

B.Agree to the merger because the NPV = $1.03 million

C.Disagree to the merger because the NPV = -$0.96 million

D.Agree to the merger because the NPV = $2.48 million