FE 848 Midterm 1 | Course Paper

Unlock access to all the studying documents.

View Full Document

1) narrbegin: running shoes, inc.

running shoes, inc.

running shoes, inc. has 2 million shares of stock outstanding. the stock currently sells

for $12.50 per share. the firms debt is publicly traded and was recently quoted at 90%

of face value. it has a total face value of $10 million, and it is currently priced to yield

8%. the risk free rate is 2% and the market risk premium is 8%. youve estimated that

the firm has a beta of 1.20. the corporate tax rate is 40%.

narrend

what is the percentage of equity used by running shoes, inc.?

a.74.63%

b.73.53%

c.72.46%

d.68.97%

2) narrbegin: bavarian brewhouse ipo

bavarian brewhouse ipo

bavarian brewhouse is planning an ipo. under the terms of the ipo, bavarian brewhouse

will issue 8 million shares at an offer price of $25 per share. the underwriter charges an

9% underwriting fee and direct costs are estimated to be $7 million. the stock is

expected to trade at $30 at the end of the first trading day.

narrend

what are the total costs (underwriting and underpricing) of the bavarian brewhouse ipo?

a.$25 million

b.$40 million

c.$65 million

d.$80 million

3) roxy international has earnings per share of $4.05; just paid dividend $2.03 and

expects a roi next year (and the foreseeable future) of 15%. if the appropriate discount

rate is 20% what is the intrinsic value of the stock?

a.$29.020

b.$16.216

c.$17.429

d.not enough information

4) narrbegin: far corporation

far corporation

far corporation is considering a new project to manufacture widgets. the cost of the

manufacturing equipment is $150,000. the cost of shipping and installation is an

additional $15,000. 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 $300,000 per year. cost of goods sold will be 80% of sales. the project will require

an increase in net working capital of $15,000. at the end of three years, far plans on

ending the project and selling the manufacturing equipment for $35,000. the marginal

tax rate is 40% and far corporations appropriate discount rate is 12%.

narrend

refer to far corporation. what is the operating cash flow for year 1?

a.$55,470

b.$60,000

c.$48,798

d.$37,686

5) you are asked to choose between a 4-year investment that pays 10% compound

interest and a similar investment that pays 11.5% simple interest. which investment will

you choose?

a.the 10% compound interest investment

b.the 11.5% simple interest investment

c.you are indifferent between the investment choices

d.there is not enough information to answer the question

6) employee stock options are typically ____ when they are issued.

a.in the money

b.out of the money

c.at the money

d.for the money

7) narrbegin: competitive mesh shirts

competitive mesh shirts

competitive mesh shirts is considering a plan to ease its credit terms in order to generate

greater revenues. last year, competitive had sales of 1,000,000 units at a price and

variable cost of $20 and $15, respectively. its current average collection period is 20

days and its percentage of bad debt expense is 2% while it required return on

investment is 10%. if competitive were to ease its credit terms, the firm anticipates that

its sales would increase to 1,200,000 units without a change in price or variable costs.

however, the average collection period is expected to increase to 30 days and bad debt

expense is expected to increase to 3%.

narrend

what will be competitives cost of marginal investment in accounts receivable?

a.$1,479,452.84

b.$821,917.81

c.$65,753.50

d.there is not enough information given

8) louis international needs $100 million in new equity capital; currently shares are

trading at $40 per share. morgan steely (the investment banker) requires a 6% spread of

the offer price which will be $38 per share and is fully subsribed at that price. the fixes

costs (legal, accounting, etc.) are estimated at $250,000. how many shares must be sold

for the $100 million?

a.2,659,574

b.2,799,552

c.2,808,989

d.2,631,579

9) oogle corp. has decided to do things differently with respect to their corporate bond

issue. they have a bond outstanding that makes quarterly coupon payments instead of

semiannually. the stated coupon rate on the bond is 10% and the yield to maturity on the

5-year bond is 12%. what is the price of the bond?

a.$927.90

b.$926.40

c.$925.61

d.none of the above

10) 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 are the annual after tax debt payments on the new

bond?

a.$1,112,700

b.$1,148,400

c.$1,235,300

d.$1,478,900

11) the treasury department sells a zero-coupon bond that will mature in two years. the

bond has a face value of $10,000, and sold at auction for $9,400. what is the annual

return for an investor buying the bond?

a.3.00%

b.3.14%

c.6.38%

d.7.00%