1) if a bond has a sinking fund provision then the actual maturity of the bond will
probably be
a.greater than the stated maturity on the bond
b.exactly equal to the state maturity on the bond
c.less than the stated maturity on the bond
d.none of the above
2) a stock just paid a $2.00 dividend this morning. you believe that dividends will grow
constantly starting today at a rate of 5% per year. if you require a 10% to own this
stock, what is a fair price to pay for the stock?
a.$40.00
b.$41.00
c.$42.00
d.$43.00
3) fox entertainment is evaluating the npv of launching a new ipet product. fox paid a
market research firm $120,000 last year to test the market viability of ipet. fox
entertainment should treat this $120,000 as a ____ for the capital budgeting decision
now confronting the firm.
a.fixed cost
b.opportunity cost
c.sunk cost
d.cannibalization cost
4) narrbegin: bavarian brew
bavarian brew
bavarian brew, an unlevered firm, has an expected ebit of $500,000. the required return
on assets for the firms assets is 10%. the company has 250,000 shares outstanding. the
company is considering raising $1 million in debt with a required return of 6% and
would use the proceeds to repurchase outstanding stock.
narrend
what is the value of bavarian brew after restructuring. assume no corporate taxes.
a.$3,300,000
b.$5,000,000
c.$500,000
d.$1,000,000
5) you must know the discount rate of an investment project to compute its
a.npv, irr, pi, and discount payback period
b.npv, pi, discount payback period
c.npv, pi, irr
d.npv, accounting rate of return, pi, discount payback period
6) inflation, recession, and higher interest rates are economic events that are
characterized as:
a.company-specific risk that can be diversified away
b.market risk
c.systematic risk that can be diversified away
d.diversifiable risk
7) narrbegin: bavarian brew lease
bavarian brew lease
bavarian brew wants to lease a new bottling machine. the company obtains a 10 year
lease requiring annual payments of $15,000 at the beginning of the year. the firm is
expected to exercise its option to purchase the machine at the termination of the lease
for $10,000 at the end of year 10. the company is in the 35% tax bracket.
narrend
if bavarian brew capitalizes the lease, what would be the value of the corresponding
asset on the companys balance sheet?
a.$80,461
b.$76,960
c.$72,580
d.$83,890
8) considering the following information what is the value of the call?
a.$5.72
b.$8.09
c.$11.67
d.$4.17
9) currently, a $1 million, 91-day t-bill sells for a 2.5% discount. what is the bond
equivalent yield?
a.2.500%
b.2.516%
c.2.551%
d.2.532%
10) consider the cash receipts projections of emma inc. that is developing a cash budget
for october , november and december; sales in august and september were $200,000 and
$500,000 respectively. the forecast sales are $800,000, $900,000 and $200,000 for
october, november and december respectively. 15 % of sales are cash sales and 85% are
credit sales; collects about 60% of each months sales in the next month but waiting until
the following month for the remaining 25% of sales. bad debts are negligible. the firm
is expectsing cash dividend of $25,000 in december from a subsidiary.what are the total
cash receipts in november? (in thousands)
a.$795
b.$770
c.$740
d.$825
11) an electric company has offered the following perpetuity to investors to raise capital
for the firm. the perpetuity will pay $1 next year, and it is promised to grow at 5% per
year thereafter. if you can earn 10% on invested money, how much would you pay
today for this perpetuity?
a.$100
b.$50
c.$40
d.$20
12) debt holders:
a.are the residual owners of a corporation
b.have little say in how the firm conducts its business
c.cannot force the firm into bankruptcy court if it fails to make the scheduled interest
and principal payments on time
d.are willing to accept more risk than the stockholders in the corporation
13) you are looking to hedge a position and you require that the hedge that you take on
be extremely liquid. therefore you
a.look to the forward market to hedge
b.look to the futures market to hedge
c.both of the above are extremely liquid
d.none of the above are very liquid
14) you would like to have $1,000 one year (365 days) from now and you find that the
bank is paying 7% compounded daily. how much will you have to deposit with the bank
today to be able to have the $1,000?
a.$934.58
b.$933.51
c.$932.40
d.none of the above
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
refer to bavarian brew bond. what are the annual after tax savings from paying off the
old bonds?
a.$985,270
b.$1,544,400
c.$1,256,569
d.$1,502,467
16) narrbegin: sea grove beach co.
sea grove beach company
sea grove beach company needs to raise $30 million of new equity capital. its common
stock is currently selling for $44 per share. the investment bankers require an
underwriting spread of 7 percent of the offering price, and the companys legal,
accounting, and printing expenses associated with the seasoned offering are estimated
to be $500,000.
narrend
refer to sea grove beach company. how many new shares must the company sell to net
$30 million?
a.745,357
b.745,857
c.746,127
d.746,327
17) if absolute priority rules are enforced in a chapter 7 bankruptcy, which of the
following is most likely to receive payment?
a.local, state, and federal governments owed taxes
b.owners of common stock
c.owners of bonds
d.banks holding loans secured by collateral
18) narrbegin: bear lake lease purchase
bear lake equipment company (blec)
bear lake equipment company (blec) is considering an expansion which will require a
new machine that costs $125,000. blec can either lease or buy the equipment. the
companys tax rate is 40% and its after tax cost of debt is 5%.
lease: annual payments of $26,400 made at the beginning of each year over five years.
the lessor covers all maintenance, while the lessee covers insurance and other costs. the
lessee has the option to purchase the machine for $31,250 paid along with the final
lease payment.
purchase: the $125,000 cost will be financed over five years with annual end of year
payments of $31,580. the machine will be depreciated on the five year macrs schedule,
and the firm will pay $3,500 per year for a service contract to cover all maintenance.
the company will cover all insurance and other costs.
narrend
refer to blec. what is the after-tax cash flow per year for the lease?
a.$26,400
b.$15,840
c.$10,560
d.$39,600
19) which of the following asset classes would give you the greatest probability of
achieving a return that is closest to its expected return?
a.treasury bills
b.treasury bonds
c.corporate bonds
d.stocks
20) louis international has earnings per share of $2.25; just paid dividend $1.05 and
expects a roi next year (and the foreseeable future) of 16% what is the dividend payout
ratio?
a.46.67%
b.16.00%
c.53.33%
d.30.67%
