Four Wheels requires $1.75 million to fund a new project and has decided to raise the
funds via a seasoned stock offering. Assume the firm will incur $140,000 in indirect
costs and pay 8.63 percent of the gross proceeds in direct costs. How much does the
firm need to raise in total to cover all of the costs as well as fund the new project?
A. $2,055,289
B. $2,037,825
C. $2,068,513
D. $1,914,650
E. $1,984,294
Answer:
What is the current ratio for 2015?
A. 1.95
B. .95
C. 2.06
D. 1.98
E. .98
Answer:
Which one of these is least associated with takeovers?
A. leveraged buyouts
B. management buyouts
C. proxy contests
D. acquisition of assets
E. spin-offs
Answer:
If a bond issue is callable, the call price generally is:
A. less than par value.
B. variable based on the market rate of interest.
C. equal to par value.
D. constant over the life of the debt.
E. set so it decreases as the bond approaches maturity.
Answer:
You spent $500 last week fixing the transmission in your car. Now, the brakes are acting
up and you are trying to decide whether to fix them or trade the car in for a newer
model. In analyzing the brake situation, the $500 you spent fixing the transmission is
a(n) _____ cost.
A. opportunity
B. fixed
C. incremental
D. sunk
E. relevant
Answer:
A cumulative cash deficit indicates a firm:
A. has at least a short-term need for external funding.
B. is facing long-term financial distress.
C. will go out of business within the year.
D. is capable of funding all of its needs internally.
E. is using its cash wisely.
Answer:
Schroeder Electronics is considering a project which will require the purchase of $5.68
million in new equipment that will be depreciated straight-line to a zero book value
over the 5-year life of the project. Schroeder desires a 12 percent rate of return and the
tax rate is 35 percent. What is the value of the depreciation tax shield in Year 5 of the
project?
A. $225,608.92
B. $228,406.12
C. $334,800.00
D. $397,600.00
E. $1,136,000.00
Answer:
The Adept Co. is analyzing a proposed project. The company expects to sell 3,100
units, give or take 5 percent. The expected variable cost per unit is $9 and the expected
fixed costs are $10,500. Cost estimates are considered accurate within a plus or minus 4
percent range. The depreciation expense is $4,000. The sale price is estimated at $18 a
unit, give or take 3 percent. What is the sales revenue under the optimistic case
scenario?
A. $59,208.92
B. $57,491.61
C. $57,474.00
D. $60,347.70
E. $62,408.15
Answer:
One of the reasons why cash flow analysis is popular is because:
A.cash flows are more subjective than net income.
B.deferred taxes require future cash payment.
C.cash flows are strictly defined by generally accepted accounting principles (GAAP).
D.it is difficult to manipulate, or spin the cash flows.
E.operating cash flows are found on the income statement.
Answer:
_____ holds because of the possibility of covered interest arbitrage.
A. Uncovered interest parity
B. Interest rate parity
C. The international Fisher effect
D. Unbiased forward rates
E. Purchasing power parity
Answer:
Interest rate parity:
A. eliminates covered interest arbitrage opportunities.
B. exists when spot rates are equal for multiple countries.
C. means that the nominal risk-free rate of return must be the same across countries.
D. exists when the spot rate is equal to the futures rate.
E. eliminates exchange rate fluctuations.
Answer:
Western has a market value of $950 with 50 shares outstanding and a price per share of
$19. Eastern has a market value of $3,000 with 120 shares outstanding and a price per
share of $25. Eastern is acquiring Western by exchanging 40 of its shares for all 50 of
Western’s shares. What is the cost of the merger to Eastern’s stockholders if the merger
creates $200 of synergy?
A. $1,333.33
B. $1,225.00
C. $1,037.50
D. $1,000.00
E. $950.00
Answer:
Which set of circumstances would best ensure the price of a bond with attached
warrants will increase given no change in the bond’s credit quality or terms?
A. an increase in both the market rate of interest and the underlying stock price
B. a decrease in the market rate of interest and an increase in the underlying stock price
C. an increase in the market rate of interest and a decrease in the underlying stock price
D. a decrease in both the market rate of interest and the underlying stock price
E. a decrease in the market rate of interest with no change in the underlying stock price
Answer:
Assume today you can exchange $100 for either Can$115 or Ps1,399. Also assume that
last year, $100 was worth Can$109 or Ps1,410. Which one of the following statements
is correct given this information?
A. $100 invested in Canadian dollars last year would now be worth Ps1,148.20.
B. $100 invested in Mexican pesos last year would now be worth $99.22.
C. $100 invested in Mexican pesos last year would now be worth $102.03
D. $100 invested in Canadian dollars last year would now be worth $105.50.
E. $100 invested in Canadian dollars last year would now be worth Ps1,326.01.
Answer:
Periods of financial distress are most associated with:
A. continued increases in earnings.
B. steady growth.
C. dividend reductions.
D. increasing growth rates.
E. decreasing production costs.
Answer:
Collection float includes:
A. availability time and processing time only.
B. billing time, mail time, processing time, and availability time.
C. mail time, processing time, and availability time.
D. availability time only.
E. mail time and processing time only.
Answer:
Which one of these countries tends to have the highest stock market risk premium?
A. Italy
B. Ireland
C. Switzerland
D. Spain
E. Norway
Answer:
According to theory, studying historical prices in order to identify mispriced stocks
will:
A. only work if the market is at least weak form efficient.
B. work as long as the market is less than strong form efficient.
C. work only in a strong form efficient market.
D. not work in any market regardless of the level of efficiency.
E. not work if the market is at least weak form efficient.
Answer:
Studies of the performance of professionally managed mutual funds find that these
funds:
A. all have a tendency to consistently outperform the overall market.
B. perform in a manner consistent with semistrong form efficiency.
C. all have a tendency to underperform the market consistently year after year.
D. perform in a manner that definitely refutes both strong and semistrong form
efficiency.
E. indicate that stock prices consistently adhere to a daily continuation pattern.
Answer:
Firm A and Firm B join to create Firm AB. This is an example of:
A. a tender offer.
B. an acquisition of assets.
C. an acquisition of stock.
D. a consolidation.
E. a merger.
Answer:
The IRS is most apt to disallow an acquisition if it:
A. moves the foreign operations of the acquired firm to the U.S.
B. is totally financed with debt.
C. is designed primarily to reduce federal taxes.
D. is designed to transfer technology in a tax-free transfer.
E. allows shareholders to avoid currently realizing their gains from a stock acquisition.
Answer:
The date on which the board of directors passes a resolution authorizing payment of a
dividend to the shareholders is the _____ date.
A. ex-rights
B. ex-dividend
C. record
D. payment
E. declaration
Answer:
Sun Lee’s is considering two mutually exclusive projects that have been assigned the
same discount rate of 10.5 percent. Project A has an initial cost of $54,500, and should
produce cash inflows of $16,400, $28,900, and $31,700 for Years 1 to 3, respectively.
Project B has an initial cost of $79,400, and should produce cash inflows of $0,
$48,300, and $42,100, for Years 1 to 3, respectively. What is the incremental IRR?
A. −15.40%
B. −11.23%
C. 4.08%
D. 7.83%
E. 13.89%
Answer:
At Stage 2 of the decision tree it shows that if a project is successful, the payoff will be
$53,000 with a 2/3 chance of occurrence. There is also the 1/3 chance of a −$24,000
payoff. The cost of getting to Stage 2 (1 year out) is $24,000. The cost of capital is 15
percent. What is the NPV of the project at Stage 1?
A. −$349.16
B. −$231.88
C. $108.17
D. $133.33
E. $147.59
Answer:
Free cash flow is:
A.the money generated from the sale of new shares of stock.
B.another term for operating cash flow.
C.the cash generated by decreasing net working capital.
D.cash that the firm can distribute to creditors and stockholders.
E.the net income of a firm after taxes have been paid.
Answer:
The _____ premium is that portion of the bond yield that represents compensation for
potential difficulties that might be encountered should the bond holder wish to sell the
bond prior to maturity.
A. default risk
B. taxability
C. inflation
D. liquidity
E. interest rate risk
Answer:
MM Proposition I with taxes states that:
A. capital structure does not affect firm value.
B. increasing the debt-equity ratio increases firm value.
C. firm value is maximized when the firm is all-equity financed.
D. the cost of equity rises as the debt-equity ratio increases.
E. the unlevered cost of equity is equal to RWacc.
Answer:
A trust has been established to fund scholarships in perpetuity. The next annual
distribution will be $1,200 and future payments will increase by 3 percent per year.
What is the value of this trust at a discount rate of 7.4 percent?
A. $17,189.19
B. $19,960.00
C. $27,272.73
D. $24,609.11
E. $30,388.18
Answer:
Fixed costs:
A. change as the quantity of output produced changes.
B. are constant over the short-run regardless of the quantity of output produced.
C. reflect the change in a variable when one more unit of output is produced.
D. are subtracted from sales to compute the contribution margin.
E. can be ignored in scenario analysis since they are constant over the life of a project.
Answer:
Which one of the following is most likely a good candidate for an acquisition that could
benefit from the use of complementary resources?
A. a sports arena that is home only to an indoor hockey team
B. a hotel in a busy downtown business district of a major city
C. a day care center located near a major route into the main business district of a large
city
D. an amusement park located in a centralized Florida location
E. a fast food restaurant located near a major transportation hub
Answer:
You have $2,500 to deposit into a savings account. The five banks in your area offer the
following rates. In which bank should you deposit your savings?
A. Bank A: 3.75%, compounded annually
B. Bank B: 3.69%, compounded monthly
C. Bank C: 3.70% compounded semi-annually
D. Bank D: 3.67% compounded continuously
E. Bank E; 3.65% compounded quarterly
Answer:
Suzette is receiving $10,000 today, $15,000 one year from today, and $25,000 four
years from today. She will immediately invest these funds for retirement. If she earns
9.6 percent on her investments, how much will she have in savings 30 years from
today?
A. $586,124.93
B. $591,414.14
C. $646,072.91
D. $620,008.77
E. $641,547.39
Answer:
Sometimes when businesses are critically delinquent on their tax liabilities, the tax
authority comes in and literally seizes the business by chasing all of the employees out
of the building and changing the locks. What does this tell you about the importance of
taxes relative to our discussion of cash flow? Why might a business owner want to
avoid such an occurrence?
Answer:
Describe some of the sources of business risk and financial risk. Do financial decision
makers have the ability to “trade off” one type of risk for the other?
Answer:
Explain the purpose of a safety stock and how this relates to reorder points.
Answer:
Explain the risk that often accompanies the behavioral concept of familiarity.
Answer:
A CEO is being granted 1,000,000 at-the-money options. The current stock price is $45,
the continuously compounded risk-free rate is 5 percent, and the variance on the stock’s
return is .04. The options expire in 5 years. What is the value of the options contract? If
the CEO had negotiated a larger salary and only 10,000 options, what would be the
value of that options contract?
Answer:
Suppose you have $30,000 invested in the stock market and your banker comes to you
and tries to get you to move that money into the bank’s certificates of deposit (CDs). He
explains that the CDs are 100 percent government insured and that you are taking
unnecessary risks by being in the stock market. How would you respond?
Answer:
There are multiple factors that affect the present value of an annuity. Explain what these
three factors are and discuss how an increase in each will impact the both the present
value and the future value of the annuity.
Answer:
Identify several factors that affect the length of the credit period and provide an
explanation of each.
Answer: