FE 776 Quiz 1 | Course Paper

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1) a firms dividend policy refers to all of the following except to its choice of

a.whether to pay shareholders a cash dividend

b.how large the cash dividend should be

c.how frequently a cash dividend should be distributed

d.who should receive a cash dividend

2) emma international has earnings per share of $3.29; just paid dividend $1.25 and

expects a roi next year (and the foreseeable future) of 14% what is the retention ratio?

a.37.99%

b.14.00%

c.62.01%

d.23.99%

3) you are contemplating purchasing a $1,000,000 181 day t-bill that is selling at a

discount of 4.25%. what is the bond market yield of the t-bill?

a.4.25%

b.4.34%

c.4.40%

d.4.15%

4) you notice that the price of a one-year put option, with a $60 strike price, is $1. the

current price of the underlying stock is also $58. what should the price of a one-year

call option be with a strike price of $60? assume that the interest rate on a one-year risk

free bond is 10%.

a.$0

b.$2

c.$2.45

d.$4.45

5) specialized equipment that may become obsolete quickly

a.may be more attractive to purchase than lease

b.may be more attractive to lease than purchase

c.cannot easily be evaluated in the lease versus purchase context

d.should be deferred until newer equipment is available

6) narrbegin: smith-miler merger

smith-miler merger

smith enterprises can acquire miller, inc for $250,000 in either cash or stock. both

companies are 100% equity financed. the synergy value of the acquisition for smith is

$35,000. currently smith has 25,000 shares outstanding which trade at $29 a share,

whereas miller has 15,000 shares outstanding that trade at $14 a share.

narrend

what is the merger premium over millers stock price?

a.19%

b.16%

c.21%

d.23%

7) a financial advisor recommends saving $1,000,000 for a comfortable retirement. with

investment returns of 8%, what is the annual year-end cash flow generated by the $1

million for 25 years, assuming you spend all of the principal and interest?

a.$80,000

b.$86,740

c.$93,679

d.$94,978

8) al bert seeks $15 million from a vc fund. al and the vc agree that the company should

be ready to go public in 6 years. at that time the company should have a market

capitalization of $161.1 million. if the vc requires a 45% return on their investment,

what is the fraction of the firm that the vc fund will receive for its $15 million

investment?

a.69.32%

b.13.46%

c.56.89%

d.86.54%

9) a firm that moves from traditional inventory stocking methods to a just-in-time (jit)

system should expect to see

a.reduced inventory levels

b.funds released for alternative uses

c.potentials for production halts

d.all of the above

10) emmacat industries estimates that the scratching post project wonder post will have

the following end of the year cash flows. what is the present value of the inflows of

wonder post if the annual rate of interest is 10% compounded monthly?

a.$3208.22

b.$3210.73

c.$3199.11

d.$3102.32

11) which of the following will cause a decrease in the value of the respective

derivative?

a.an increase in volatility for a call option

b.a decrease in volatility for a call option

c.an increase in the length to expiration for a call option

d.an increase in the length to expiration for a put option

12) the discount rate used to evaluate a firm’s projects should:

a.reflect the opportunity costs of investing in either the firm’s project or a similar project

b.be high enough to compensate investors for the risk of the project

c.be the same across all the firm’s projects

d.both (a) and (b) are true

e.all of the above

13) targetcorp. shareholders will be receiving 6 shares of acquire inc. for each 10 shares

of targetcorp. that they own. targetcorp.s shares are currently priced at $15 per share

while the shares of acquire are (and will remain) worth $30 per share. what is the dollar

premium that acquire is paying for each 100 shares of targetcorp?

a.$3,500

b.$1,800

c.$1,500

d.$300

14) contract terms that specify things a borrower mustdo are referred to as

a.instructive covenants

b.informative covenants

c.negative covenants

d.positive covenants

15) 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

how much overlapping interest does bavarian brew have to pay on the old bonds after

taxes?

a.$585,000

b.$386,100

c.$198,900

d.$494,500

16) which of the following is a strength of the corporate form of business?

a.limited life of the business

b.unlimited access to capital

c.unlimited liability

d.double taxation of income

17) 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 total cash flow generated in year 3?

a.$83,799

b.$54,797

c.$29,001

d.$15,098

18) the investment contract provision that gives the venture capital fund the right to

compel the firm to file with the sec for a public offering is a

a.repurchase rights provision

b.participation rights provision

c.demand registration rights provision

d.ownership rights agreement

19) what term refers to the number of shares issued by a firm multiplied by the current

price of the shares on the secondary market?

a.financial leverage

b.market capitalization

c.additional paid-in capital

d.liquidation value