In merger analysis, a terminal value represents:
A.the estimated value of the target company exactly three years in the future.
B.the book value of the target’s assets at the end of the period of cash flow estimation.
C.the target’s value after a period of detailed cash flow estimation, generally assuming it
will grow at a constant rate indefinitely.
D.the net income of the target company during its last full year prior to acquisition.
E.None of the above describes the terminal value concept.
Jane wants to have $200,000 in an account in 20 years. If it earns 11 percent per annum
over the accumulation period, how much must she save per year (end of year) to have
the $200,000?
A.$25,116
B.$3,115
C.$10,000
D.$3,492
The clientele effect suggests that:
A.Some investors count on dividends as a steady source of income and expect
companies that pay dividends to continue to do so.
B.Investors who are looking for income tend to buy stocks that have a history of paying
regular dividends.
C.Investors who are looking for price appreciation gravitate toward stocks that pay
dividends regularly.
D.Both a. and b. are correct.
E.All of the above are correct.
If a project comes with its own funding offered at a rate lower than the cost of capital,
the capital budgeting analysis should be conducted using:
A.the offered rate because it is appropriate to match sources and uses of funding
whenever possible.
B.the cost of capital because to do otherwise would be unfair to departments whose
projects don’t happen to have separate funding.
C.the cost of capital because doing otherwise leads to irrational capital budgeting
decisions.
D.an average of the offered rate and the cost of capital because that gives the best
measure of the effect of the offer on the firm.
The functions of the finance department include all of the following activities except:
A.paying employees and vendors.
B.selling products to customers.
C.receiving payments from customers.
D.selling stock.
E.paying dividends.
When unhappy, shareholders solicit other shareholders to join them in removing certain
board members, the action is called a:
A.a staggering of the election of directors.
B.seeking a white knight.
C.a proxy fight.
D.the board’s adoption of a poison pill.
The price of a stock today can be determined by:
A.its dividend.
B.its rate of return.
C.kPo= D1+(P1-Po).
D.return on stock investment.
The most difficult part of the capital budgeting process is:
A.choosing which method to use.
B.doing the correct calculations.
C.many parts are equally important and difficult.
D.estimating the cash flows involved.
The probability of a path is the product of all the branch probabilities along it and is
called a:
A.joint probability.
B.conditional probability.
C.basic probability.
D.None of the above
Suppose that the cost of a real option is $1 million, and that using the real option will
improve the expected NPV of a project by $900,000. How should management react to
the use of this real option?
A.Since the real option costs more than it generates in NPV, it should not be considered
for implementation.
B.If the real option provides more flexibility in how management reacts to various
project outcomes, it should at least be considered for implementation.
C.Management should study whether or not the use of this real option will reduce the
risk of the project. They will have to weigh the $100,000 potential loss against the
reduced risk.
D.Both b. and c. are correct.
When interest rates move up or down, bond prices move:
A.in the opposite direction.
B.in the same direction.
C.in the opposite direction and further the longer is the term until maturity.
D.a and c
Which is not a legitimate form of business organization?
A.Partnership
B.C-type corporation
C.T-type corporation
D.LLC