1) Which of the following is true regarding The Information Effect of dividend
policies?
A.Increases in dividends are seen as negative signals concerning the firm’s performance
B.Increases in dividends are seen as negative signals concerning the firm’s expected
future cash flow levels
C.If a firm announces an increase in the next dividend, analysts see such
announcements as a very positive signal
D.If a firm announces an increase in the next dividend, analysts see such
announcements as a very negative signal
2) Debt versus Equity Financing You are considering a stock investment in one of two
firms (AllDebt, Inc. and AllEquity, Inc.), both of which operate in the same industry
and have identical operating income of $600,000. AllDebt, Inc. finances its $1.2 million
in assets with $1 million in debt (on which it pays 10 percent interest annually) and $.2
million in equity. AllEquity, Inc. finances its $1.2 million in assets with no debt and
$1.2 million in equity. Both firms pay a tax rate of 30 percent on their taxable income.
What are the asset funders’ (the debt holders and stockholders’) resulting return on
assets for the two firms?
A.29.17%, and 35%, respectively
B.37.5%, and 35%, respectively
C.37.5%, and 37.5%, respectively
D.50%, and 50%, respectively
3) TIPS Interest and Par Value A 3 3/4 percent TIPS has an original reference CPI of
175.8. If the current CPI is 207.7, what is the current interest payment and par value of
the TIPS? (Assume semi-annual interest payments and $1,000 par value.)
A.$1000, $18.75, respectively
B.$1000, $37.50, respectively
C.$1181.46, $22.15, respectively
D.$1181.46, $37.50, respectively
4) Your company doesn’t face any taxes and has $300 million in assets, currently
financed entirely with equity. Equity is worth $15 per share, and book value of equity is
equal to market value of equity. Also, let’s assume that the firm’s expected values for
EBIT depend upon which state of the economy occurs this year, with the possible
values of EBIT and their associated probabilities as shown below:
The firm is considering switching to a 30-percent debt capital structure, and has
determined that they would have to pay a 10 percent yield on perpetual debt in either
event. What will be the level of expected EPS if they switch to the proposed capital
structure?
A.$1.21
B.$1.41
C.$1.55
D.$2.21
5) Suppose that a company’s equity is currently selling for $22 per share and that there
are 4 million shares outstanding and 30 thousand bonds outstanding, which are selling
at 101 percent of par ($1,000). If the firm was considering an active change to their
capital structure so that the firm would have a D/E of 0.9, which type of security (stocks
or bonds) would they need to sell to accomplish this, and how much would they have to
sell?
A.$25,736,842 in new debt
B.$10,434,060 in new debt
C.$10,434,060 in new equity
D.$25,742,080 in new equity
6) Yields of a Bond A 4.5 percent coupon municipal bond has 10 years left to maturity
and has a price quote of 97.75. The bond can be called in 4 years. The call premium is
one year of coupon payments. What is the bond’s taxable equivalent yield for an
investor in the 33 percent marginal tax bracket? (Assume interest payments are paid
semi-annually and a par value of $5,000.)
A.4.5%
B.4.78%
C.7.13%
D.14.48%
7) Calculating Fees on a Loan Commitment Calculate the total fees a firm would have
to pay when its bank offers the firm the following loan commitment: A loan
commitment of $7,500,000 with an up-front fee of 80 basis points and a back-end fee of
50 basis points. The take-down on the loan is 60%.
A.$37,500
B.$60,000
C.$61,500
D.$75,000
8) Suppose that LilyMac Photography has annual sales of $290,000; cost of goods sold
of $155,000; average inventories of $3,500; average accounts receivable of $21,000;
and an average accounts payable balance of $10,000. Assuming that all of LilyMac’s
sales are on credit, what will be the firm’s cash cycle?
A.11.12 days
B.13.01 days
C.14.99 days
D.16.97 days
9) Which of the following is NOT one of the cautions in using ratios to evaluate firm
performance?
A.The firm has seasonal cash flow differences
B.The firm has different accounting procedures
C.The firm has a different capital structure
D.The firm had a one-time event
10) A linear probability model you have developed finds there are two factors
influencing the past bankruptcy behavior of firms: the debt-to-equity ratio and the profit
margin. Based on past bankruptcy experience, the linear probability model is estimated
as:
PDi = .01 (debt/equity) + .76 (profit margin)
A firm you are thinking of lending to has a debt-to-equity ratio of 121 percent and its
expected probability of default, or bankruptcy, is estimated to be 8.125 percent. If sales
are $1 million, calculate the firm’s net income.
A.$81,600
B.$87,700
C.$91,000
D.$97,400
11) One of the reasons that so much commercial paper is outstanding is because
___________.
A.Companies with strong credit ratings can generally borrow money at a lower interest
rate by issuing commercial paper than by directly borrowing from banks
B.Many banks prefer to lend to small and mid-sized companies because they can charge
higher interest rates
C.Commercial paper is generally unsecured which gives firms more flexibility if they
suddenly want to sell fixed assets
D.None of these are reasons why commercial paper is outstanding
12) The 2011 income statement for Duffy’s Pest Control shows that depreciation
expense is $180 million, EBIT is $420 million, EBT is $240 million, and the tax rate is
30 percent. At the beginning of the year, the balance of gross fixed assets was $1,500
million and net operating working capital was $500 million. At the end of the year gross
fixed assets was $1,803 million. Duffy’s free cash flow for the year was $425 million.
Calculate the end of year balance for net operating working capital.
A.$403 million
B.$300 million
C.$203 million
D.$103 million
13) An average home in Chicago costs $295,000. If house prices are expected to grow
at an average rate of 3% per year, what will a house cost in 5 years?
A.$328,995.61
B.$338,941.27
C.$341,985.85
D.$347,028.19
14) The main reason for a vertical merger is _________________.
A.Avoidance of fixed costs
B.Elimination of costs of searching for input prices
C.Control over input prices
D.All of these
15) This is the rule under which claimants are paid in a Chapter 7 bankruptcy.
A.first come, first served
B.absolute priority
C.term structure priority
D.date due priority
16) Future Value of Multiple Annuities Assume that you contribute $100 per month to a
retirement plan for 20 years. Then you are able to increase the contribution to $200 per
month for another 20 years. Given a 6 percent interest rate, what is the value of your
retirement plan after 40 years?
A.$225,353
B.$19,155
C.$245,353
D.$199,359
17) A firm’s stock is selling at $75.00 per share. Its growth rate is 10% and investors
demand 17% on this stock. What is the firm’s expected dividend?
A.$4.75
B.$5.95
C.$6.25
D.$5.25
18) Valuation of a Merger The managers of BSW Inc. have been approached by EAG
Corp. for a possible merger. EAG Corp. is asking a price of $20.5 million to be
purchased by BSW Inc. The two firms currently have cumulative total cash flows of $1
million that are growing at 3 percent annually. Managers of EAG estimate that because
of synergies the merged firm’s cash flows will increase by an additional 4 percent for
the first three years following the merger. After the first three years, managers of EAG
have estimated that cash flows will grow at a rate of 2 percent. The WACC for the
merged firms is 8 percent. Managers of BSW Inc. agree that cash flows should grow at
an additional 4 percent for the first three years, but are unsure of the long-term growth
rate in cash flows estimated by EAG. Calculate the minimum growth rate needed after
the first three years such that BSW Inc. would see this merger as a positive NPV
project.
A.3.00%
B.2.82%
C.4.05%
D.8.00%
19) You have been asked by the president of your company to evaluate the proposed
acquisition of a new special-purpose truck for $70,000. The truck falls into the MACRS
three-year class, and it will be sold after three years for $5,000. Use of the truck will
require an increase in NWC (spare parts inventory) of $10,000. The truck will have no
effect on revenues, but it is expected to save the firm $32,000 per year in before-tax
operating costs, mainly labor. The firm’s marginal tax rate is 40 percent. What will the
operating cash flow for this project be during year 2?
A.$531
B.$885
C.$31,646
D.$50,315
20) Profitability and Asset Management Ratios You are thinking of investing in Wave
Runnerz, Inc. You have only the following information on the firm at year-end 2011:
net income = $10 million, total debt = $65 million, and debt ratio = 35%. What is Wave
Runnerz’s ROE for 2011?
A.8.28%
B.15.38%
C.28.57%
D.43.96%
21) KADS, Inc. has spent $400,000 on research to develop a new computer game. The
firm is planning to spend $50,000 on a machine to produce the new game. Shipping and
installation costs of the machine will be capitalized and depreciated; they total $50,000.
The machine has an expected life of 3 years, a $10,000 estimated resale value, and falls
under the MACRS 5-Year class life. Revenue from the new game is expected to be
$500,000 per year, with costs of $200,000 per year. The firm has a tax rate of 35
percent, an opportunity cost of capital of 15 percent, and it expects net working capital
to increase by $25,000 at the beginning of the project. What will the year 3 free cash
flow for this project be?
A.$222,600
B.$197,400
C.$212,200
D.$243,300
22) You are evaluating a project for your company. You estimate the sales price to be
$10 per unit and sales volume to be 3,000 units in year 1; 10,000 units in year 2; and
1000 units in year 3 . The project has a three-year life. Variable costs amount to $3 per
unit and fixed costs are $25,000 per year. The project requires an initial investment of
$50,000 in assets which will be depreciated straight-line to zero over the three-year
project life. The actual market value of these assets at the end of year 3 is expected to
be $10,000. NWC requirements at the beginning of each year will be approximately 25
percent of the projected sales during the coming year. The tax rate is 34 percent and the
required return on the project is 15 percent. What change in NWC occurs at the end of
year 1?
A.$11,550
B.$14,875
C.$17,500
D.$23,167
23) Which of the following statements is correct?
A.If the unbiased expectations theory is correct, we could see an inverted yield curve
B.If a yield curve is inverted, long-term bonds have higher yields than short-term bonds
C.If the maturity risk premium is zero, the yield curve would be flat
D.If the unbiased expectations theory is correct, the maturity risk premium is zero
24) ABC has a net profit margin of 3.3% on Sales of $10,000,000. The firm has 50,000
shares outstanding. If the firm’s P/E is 19 times, how much is the stock selling for?
A.$41.72
B.$34.96
C.$125.40
D.$99.16
25) Compute the MIRR statistic for Project X and note whether the firm should accept
or reject the project with the cash flows shown below if the appropriate cost of capital is
10 percent.
A.13.26%, accept
B.13.89%, accept
C.13.26%, reject
D.15.73%, accept
26) You have approached your local bank for a start-up loan commitment for $290,000
needed to open a computer repair store. You have requested that the term of the loan be
one year. Your bank has offered you the following terms: size of loan commitment =
$290,000, term = 1 year, up-front fee = 45 basis points, back-end fee = 80 basis points,
and rate on the loan = 9.5%. If you immediately take down $175,000 and no more
during the year, calculate the total interest and fees you have paid on this loan
commitment.
A.$17,995
B.$18,850
C.$19,125
D.$18,295
27) Primary market financial instruments include stock issues from firms allowing their
equity shares to be publicly traded on stock market for the first time. We usually refer to
these first-time issues as which of the following?
A.initial public offerings
B.direct transfers
C.money market transfers
D.over-the-counter stocks
28) All of the following capital budgeting tools are suitable for non-normal cash flows
except ____.
A.MIRR
B.Profitability Index
C.Payback
D.NPV
29) Sipe’s Paint and Wallpaper, Inc., needs to raise $1.19 million to finance plant
expansion. In discussions with its investment bank, Sipe’s learns that the bankers
recommend a gross price of $42 per share and that 33,000 shares of stock be sold. If the
net proceeds on the stock sale leave Sipe’s with $1.19 million, what percent of the total
raised represents net proceeds to the firm?
A.81.98%
B.79.57%
C.85.86%
D.87.67%
30) Annuity Interest Rate What’s the interest rate of a 6-year, annual $3,000 annuity
with present value of $14,000?
A.5.64%
B.7.69%
C.10.17%
D.11.32%
31) Which of the following statements is correct?
A.A single stock has a lot of diversifiable risk
B.A single stock has more market risk than a diversified portfolio of stocks
C.Bonds and stocks have a high correlation because they are both financial assets
D.None of these statements are correct
32) Which of the following involves a firm and its creditors agreeing to a private
reorganization outside the formal bankruptcy process?
A.consolidation bankruptcy
B.prepackaged bankruptcy
C.Chapter 13
D.Chapter 7
33) Compute the present value of $3,000 paid in four years using the following discount
rates: 3% in year 1, 4% in year 2, 5% in year 3, and 6% in year 4 .
A.$1,998.73
B.$2,109.14
C.$2,491.28
D.$2,516.26
34) Which of the following statements is correct regarding total risk?
A.A conglomerate will have more total risk than a firm that has one line of business
B.All firms have about the same total risk because they are all exposed to the same
market risk
C.Total risk can be quantified by measuring the covariance between the firm and the
overall market
D.None of these statements are correct
35) Which of the following statements is correct?
A.If the risk-free rate increases, it will have no impact on the weighted average cost of
capital
B.Investor returns are reduced when float costs increase, and therefore float costs
reduce the weighted average cost of capital
C.The weighted average cost of capital is a historical cost
D.None of these statements is correct
36) This ratio measures the number of dollars of operating earnings available to meet
each dollar of interest obligations on the firm’s debt.
A.Fixed charge coverage ratio
B.Times interest earned
C.Cash coverage ratio
D.ROA
37) Calculation of Average Costs with Economies of Scope Blinds N Such is
considering a merger with Window Supply Stores. Blinds’ total operating costs of
producing services are $750,000 for sales volume of $6 million. Window’s total
operating costs of producing services are $100,000 for a sales volume (JP) of $1
million. For a sales volume of $7 million, calculate the reduction in production costs the
merged firms need to experience such that the total average cost (TAC) for the merged
firms is equal to 12%.
A.decrease of $840,000
B.decrease of $10,000
C.decrease of $40,000
D.decrease of $90,000
38) The present value of annuity payments made far into the future is
A.worth very little today
B.worth much more today
C.valued as having no time value of money
D.valued as worthless as their value is not determinable
39) The past five monthly returns for Kohl’s are 2.55 percent, -8.62 percent, -14.44
percent, -1.52 percent, and 4.75 percent. What is the average monthly return?
A.2.21%
B.1.21%
C.-3.46%
D.-6.17%