February 26, 2019

Precise Machining is considering a rights offer. The company has determined that the

ex-rights price would be $46. The current price is $53 per share, and there are 7 million

shares outstanding. The rights offer would raise a total of $70 million. What is the

subscription price?

A. $26.48

B. $27.06

C. $27.50

D. $28.18

E. $29.10

Southern Tours is considering acquiring Holiday Vacations. Management believes

Holiday Vacations can generate cash flows of $187,000, $220,000, and $245,000 over

the next three years, respectively. After that time, they feel the business will be

worthless. Southern Tours has determined that a 13.5 percent rate of return is applicable

to this potential acquisition. What is Southern Tours willing to pay today to acquire

Holiday Vacations?

A. $503,098

B. $538,615

C. $545,920

D. $601,226

E. $638,407

Which one of the following statements related to the internal rate of return (IRR) is

correct?

A. The IRR yields the same accept and reject decisions as the net present value method

given mutually exclusive projects.

B. A project with an IRR equal to the required return would reduce the value of a firm if

accepted.

C. The IRR is equal to the required return when the net present value is equal to zero.

D. Financing type projects should be accepted if the IRR exceeds the required return.

E. The average accounting return is a better method of analysis than the IRR from a

financial point of view.

Pure financial mergers:

A. are beneficial to stockholders.

B. are beneficial to both stockholders and bondholders.

C. are detrimental to stockholders.

D. add value to both the total assets and the total equity of a firm.

E. reduce both the total assets and the total equity of a firm.

Over the past five years, a stock produced returns of 11 percent, 14 percent, 2 percent,

-9 percent, and 5 percent. What is the probability that an investor in this stock will not

lose more than 10 percent in any one given year?

A. greater than 0.5 but less than 1.0 percent

B. greater than 1.0 percent but less than 2.5 percent

C. greater than 2.5 percent but less than 16 percent

D. greater than 84 percent but less than 97.5 percent

E. greater than 95 percent

The Stiller Corporation will pay a $3.80 per share dividend next year. The company

pledges to increase its dividend by 2.4 percent indefinitely. How much are you willing

to pay to purchase this company's stock today if you require a 6.9 percent return on

your investment?

A. $55.07

B. $63.09

C. $72.22

D. $78.47

E. $84.44

Charleston Marina is considering either leasing or buying some new equipment it needs

for repairing boats. The lease payments would be $7,200 a year for 3 years. The

purchase price is $20,800. The equipment has a 3-year life and then is expected to have

a resale value of $4,700. The firm uses straight-line depreciation, borrows money at 8.5

percent, and has a 34 percent tax rate. What is the net advantage to leasing?

A. -$1,507

B. -$1,222

C. -$975

D. $408

E. $611

The proposition that a firm borrows up to the point where the marginal benefit of the

interest tax shield derived from increased debt is just equal to the marginal expense of

the resulting increase in financial distress costs is called:

A. the static theory of capital structure.

B. M&M Proposition I.

C. M&M Proposition II.

D. the capital asset pricing model.

E. the open markets theorem.

The preferred stock of Casco has a 5.48 percent dividend yield. The stock is currently

priced at $59.30 per share. What is the amount of the annual dividend?

A. $2.80

B. $2.95

C. $3.10

D. $3.25

E. $3.40

The accounting break-even production quantity for a project is 11,640 units. The fixed

costs are $216,000 and the contribution margin per unit is $28. The fixed assets

required for the project will be depreciated on straight-line basis to zero over the

project's 5-year life. What is the amount of fixed assets required for this project?

A. $325,920

B. $549,600

C. $748,500

D. $1,080,000

E. $1,629,600

Brustle's Pottery either factors or assigns all of its receivables to other firms. This is

known as:

A. accounts receivable financing.

B. pledged financing.

C. capital funding.

D. daily funding.

E. capital financing.

Callander Enterprises stock is listed on NASDAQ. The firm is planning to issue some

new equity shares for sale to the general public. This sale will occur in which one of the

following markets?

A. private

B. auction

C. exchange floor

D. secondary

E. primary

Uptown Men's Wear has accounts payable of $2,214, inventory of $7,950, cash of

$1,263, fixed assets of $8,400, accounts receivable of $3,907, and long-term debt of

$4,200. What is the value of the net working capital to total assets ratio?

A. 0.31

B. 0.42

C. 0.47

D. 0.51

E. 0.56

Consider a project to supply 60,800,000 postage stamps to the U.S. Postal Service for

the next 5 years. You have an idle parcel of land available that cost $760,000 five years

ago; if the land were sold today, it would net you $912,000, aftertax. The land can be

sold for $1,500,000 after taxes in 5 years. You will need to install $2,356,000 in new

manufacturing plant and equipment to actually produce the stamps; this plant and

equipment will be depreciated straight-line to zero over the project's 5-year life. The

equipment can be sold for $456,000 at the end of the project. You will also need

$469,000 in initial net working capital for the project, and an additional investment of

$38,000 in every year thereafter. All net working capital will be recovered when the

project ends. Your production costs are 0.38 cents per stamp, and you have fixed costs

of $608,000 per year. Your tax rate is 31 percent and your required return on this project

is 11 percent. What bid price per stamp should you submit?

A. $0.018

B. $0.020

C. $0.023

D. $0.026

E. $0.029

Technical Sales, Inc. has 6.6 percent coupon bonds on the market with 9 years left to

maturity. The bonds make semiannual payments and currently sell for 88.79 percent of

par. What is the effective annual yield?

A. 8.34 percent

B. 8.40 percent

C. 8.52 percent

D. 8.58 percent

E. 8.60 percent

Monika's Dinor is operating at 94 percent of its fixed asset capacity and has current

sales of $611,000. How much can the firm grow before any new fixed assets are

needed?

A. 4.99 percent

B. 5.78 percent

C. 6.02 percent

D. 6.38 percent

E. 6.79 percent

Which one of the following grants its owner the right to buy or to sell an asset at a

prespecified price at any time during a stated period?

A. option

B. forward contract

C. futures contract

D. swap

E. intrinsic contract

Down River Markets has decided to acquire a controlling interest in Blue Jays by

purchasing shares of stock in the public markets. Which of the following statements

correctly apply to this acquisition?

I. The purchase of publicly-traded shares may be more expensive than an outright

merger with Blue Jays would have been.

II. Down River Markets can avoid dealing with the board of directors of Blue Jays by

purchasing shares in this manner.

III. If Down River Markets is successful in acquiring at least 80 percent of the

outstanding shares of Blue Jays, the remaining shareholders in Blue Jays will be forced

to also sell their shares to Down River Markets.

IV. Whether or not Down River Markets gains control of Blue Jays depends upon the

willingness of Blue Jays shareholders to sell their shares.

A. I and III only

B. II and IV only

C. I, II, and IV only

D. I, II, and III only

E. I, II, III, and IV

Details Corp. has a book net worth of $8,150. Long-term debt is $1,650. Net working

capital, other than cash, is $2,150. Fixed assets are $2,000. How much cash does the

company have?

A. $4,250

B. $4,550

C. $5,150

D. $5,650

E. $6,750

This morning, you purchased a call option on Schoolhouse Supply Co. stock that

expires in one year. The exercise price is $40. The current price of the stock is $43.40

and the risk-free rate of return is 3.6 percent. Assume the option will finish in the

money. What is the current value of the call option?

A. $0

B. $1.49

C. $3.97

D. $4.79

E. $5.46

A stock with an actual return that lies above the security market line has:

A. more systematic risk than the overall market.

B. more risk than that warranted by CAPM.

C. a higher return than expected for the level of risk assumed.

D. less systematic risk than the overall market.

E. a return equivalent to the level of risk assumed.

Which one of the following actions will provide you with the right, but not the

obligation, to sell the underlying asset at a specified price during a specified period of

time?

A. purchase of a call option

B. sale of a call option

C. purchase of a put option

D. sale of a put option

E. swap

When you assign the lowest anticipated sales price and the highest anticipated costs to a

project, you are analyzing the project under the condition known as:

A. best case sensitivity analysis.

B. worst case sensitivity analysis.

C. best case scenario analysis.

D. worst case scenario analysis.

E. base case scenario analysis.

What are the distributions to shareholders by a corporation called?

A. retained earnings

B. net income

C. dividends

D. capital payments

E. diluted profits

The implied volatility of the returns on the underlying asset that is computed using the

Black-Scholes option pricing model is referred to as which one of the following?

A. residual error

B. implied mean return

C. derived case volatility (DCV)

D. forecast rho

E. implied standard deviation (ISD)

Frostbite Thermal Wear has a zero coupon bond issue outstanding with a face value of

$20,000 that matures in one year. The current market value of the firm's assets is

$23,000. The standard deviation of the return on the firm's assets is 52 percent per year,

and the annual risk-free rate is 6 percent per year, compounded continuously. What is

the market value of the firm's equity based on the Black-Scholes model? (Round your

answer to the nearest $100.)

A. $6,400

B. $6,700

C. $6,900

D. $7,000

E. $7,200

Which one of the following statements is correct?

A. Pro forma statements must assume that no new equity is issued.

B. Pro forma statements are projections, not guarantees.

C. Pro forma statements are limited to a balance sheet and income statement.

D. Pro forma financial statements must assume that no dividends will be paid.

E. Net working capital needs are excluded from pro forma computations.

Eads Industrial Systems Company (EISC) is trying to decide between two different

conveyor belt systems. System A costs $427,000, has a 6-year life, and requires

$112,000 in pretax annual operating costs. System B costs $517,000, has an 8-year life,

and requires $79,000 in pretax annual operating costs. Both systems are to be

depreciated straight-line to zero over their lives and will have a zero salvage value.

Whichever system is chosen, it will not be replaced when it wears out. The tax rate is

33 percent and the discount rate is 24 percent. Which system should the firm choose

and why?

A. A; The net present value is $211,516.

B. A; The net present value is -$582,720.

C. A; The net present value is -$314,216.

D. B; The net present value is $308,222.

E. B: The net present value is -$625,123.

If a firm produces a twelve percent return on assets and also a twelve percent return on

equity, then the firm:

A. may have short-term, but not long-term debt.

B. is using its assets as efficiently as possible.

C. has no net working capital.

D. has a debt-equity ratio of 1.0.

E. has an equity multiplier of 1.0.

Last year, you purchased 500 shares of Analog Devices, Inc. stock for $11.16 a share.

You have received a total of $120 in dividends and $7,190 from selling the shares. What

is your capital gains yield on this stock?

A. 26.70 percent

B. 26.73 percent

C. 28.85 percent

D. 29.13 percent

E. 31.02 percent