February 26, 2019

Morrison Industrial Tool can either lease or buy some equipment. The lease payments

would be $12,400 a year. The purchase price is $34,900. The equipment has a 3-year

life after which it is expected to have a resale value of $5,500. The firm uses straight-

line depreciation over the asset's life, borrows money at 8 percent, and has a 34 percent

tax rate. What is the incremental cash flow for year 1 if the company decides to lease

the equipment rather than purchase it?

A. -$22,405

B. -$16,805

C. -$12,139

D. -$8,184

E. -$4,905

Sixteen years ago, Alicia invested $1,000. Eight years ago, Travis invested $2,000.

Today, both Alicia's and Travis' investments are each worth $2,400. Assume that both

Alicia and Travis continue to earn their respective rates of return. Which one of the

following statements is correct concerning these investments?

A. Three years from today, Travis' investment will be worth more than Alicia's.

B. One year ago, Alicia's investment was worth less than Travis' investment.

C. Travis earns a higher rate of return than Alicia.

D. Travis has earned an average annual interest rate of 3.37 percent.

E. Alicia has earned an average annual interest rate of 6.01 percent.

Kurt currently owns 3.4 percent of Northeastern Transportation. The company has a

total of 438,000 shares outstanding with a current market price of $26.20 a share. At

present, the firm is offering an additional 25,000 shares at a price of $25 a share. Kurt

decides not to participate in this offering. What will his ownership position be after the

offering is completed?

A. 3.06 percent

B. 3.22 percent

C. 3.27 percent

D. 3.40 percent

E. 3.51 percent

Brubaker & Goss has received requests for capital investment funds for next year from

each of its five divisions. All requests represent positive net present value projects. All

projects are independent. Senior management has decided to allocate the available

funds based on the profitability index of each project since the company has insufficient

funds to fulfill all of the requests. Management is following a practice known as:

A. scenario analysis.

B. sensitivity analysis.

C. leveraging.

D. hard rationing.

E. soft rationing.

Paper Submarine Manufacturing is investigating a lockbox system to reduce its

collection time. It has determined the following:

The total collection time will be reduced by 2 days if the lockbox system is adopted.

What is the NPV of adopting the lockbox system?

A. $600,000

B. $775,000

C. $975,000

D. $1,200,000

E. $1,425,000

The Wildcat Oil Company is trying to decide whether to lease or buy a new computer-

assisted drilling system for its oil exploration business. Management has decided that it

must use the system to stay competitive; it will provide $850,000 in annual pretax cost

savings. The system costs $8 million and will be depreciated straight-line to zero over 5

years. Wildcat's tax rate is 31 percent, and the firm can borrow at 8 percent. Lambert

Leasing Company has offered to lease the drilling equipment to Wildcat for payments

of $2,040,000 per year. Lambert's policy is to require its lessees to make payments at

the start of the year. What is the maximum lease payment that would be acceptable to

the company?

A. $1,892,497

B. $ 1,893,231

C. $1,904,506

D. $1,906,318

E. $1,911,472

Roger is a major shareholder in RB Industrial Supply. Currently, Roger is quite

unhappy with the direction the firm is headed and is rumored to be considering an

attempt to take over the firm by soliciting the votes of other shareholders. To head off

this potential attempt, the board of RB Industrial Supply has decided to offer Roger $35

a share for all the shares he owns in the firm. The current market value per share is $32.

This offer to purchase Roger's shares is commonly referred to as:

A. a golden parachute.

B. standstill payments.

C. greenmail.

D. a poison pill.

E. a white knight.

Colin is analyzing a project and has gathered the following data. Based on this data,

what is the average accounting rate of return? The project's assets will be depreciated

using straight-line depreciation to a zero book value over the life of the project.

A. 6.94 percent

B. 13.88 percent

C. 15.66 percent

D. 27.75 percent

E. 31.31 percent

Automated Manufacturers uses high-tech equipment to produce specialized aluminum

products for its customers. Each one of these machines costs $1,480,000 to purchase

plus an additional $49,000 a year to operate. The machines have a 6-year life after

which they are worthless. What is the equivalent annual cost of one these machines if

the required return is 16 percent?

A. -$450,657

B. -$427,109

C. -$301,586

D. -$295,667

E. -$256,947

You sold ten put contracts on Cross Town Bank stock at an option price per share of

$0.85. The options have an exercise price of $37.50 per share. The options were

exercised today when the stock price was $34 a share. What is your net profit or loss on

this investment assuming that you closed out your positions at a stock price of $34?

Ignore transaction costs and taxes.

A. -$3,500

B. -$2,650

C. $1,800

D. $850

E. $3,500

Which of the following statements are correct concerning diversifiable risks?

I. Diversifiable risks can be essentially eliminated by investing in thirty unrelated

securities.

II. There is no reward for accepting diversifiable risks.

III. Diversifiable risks are generally associated with an individual firm or industry.

IV. Beta measures diversifiable risk.

A. I and III only

B. II and IV only

C. I and IV only

D. I, II and III only

E. I, II, III, and IV

You are considering changing jobs. Your goal is to work for three years and then return

to school full-time in pursuit of an advanced degree. A potential employer just offered

you an annual salary of $41,000, $44,000, and $46,000 a year for the next three years,

respectively. All salary payments are made as lump sum payments at the end of each

year. The offer also includes a starting bonus of $2,500 payable immediately. What is

this offer worth to you today at a discount rate of 6.75 percent?

A. $112,406

B. $115,545

C. $117,333

D. $121,212

E. $134,697

The market value balance sheet for Inbox Manufacturing is shown here. Inbox has

declared a 23 percent stock dividend. The stock goes ex-dividend tomorrow (the

chronology for a stock dividend is similar to that for a cash dividend). There are 13,000

shares outstanding. What is the ex-dividend stock price?

A. $21.21

B. $23.51

C. $25.06

D. $26.86

E. $28.92

A graph depicting the gains and losses a seller of a forward contract would earn at

various market prices is referred to as a:

A. risk profile.

B. payoff profile.

C. risk offer line.

D. scatter plot.

E. risk-return graph.

You are trying to compare the present values of two separate streams of cash flows

which have equivalent risks. One stream is expressed in nominal values and the other

stream is expressed in real values. You decide to discount the nominal cash flows using

a nominal annual rate of 8 percent. What rate should you use to discount the real cash

flows?

A. 8 percent

B. EAR of 8 percent compounded monthly

C. comparable risk-free rate

D. comparable real rate

E. You cannot compare the present values of these two streams of cash flows.

Which one of the following generally has a flip-in provision that significantly increases

the cost to a shareholder who is attempting to gain control over a firm?

A. golden parachute

B. standstill agreement

C. greenmail

D. poison pill

E. white knight

The Corner Bakery has a debt-equity ratio of 0.54. The firm's required return on assets

is 14.2 percent and its cost of equity is 16.1 percent. What is the pre-tax cost of debt

based on M&M Proposition II with no taxes?

A. 7.10 percent

B. 8.79 percent

C. 10.68 percent

D. 17.56 percent

E. 18.40 percent

Which one of the following will increase the value of a firm's net working capital?

A. using cash to pay a supplier

B. depreciating an asset

C. collecting an accounts receivable

D. purchasing inventory on credit

E. selling inventory at a profit

A project has an initial cost of $35,000 and a 3-year life. The company uses straight-line

depreciation to a book value of zero over the life of the project. The projected net

income from the project is $1,200, $2,300, and $1,800 a year for the next 3 years,

respectively. What is the average accounting return?

A. 8.72 percent

B. 10.10 percent

C. 11.26 percent

D. 14.69 percent

E. 15.14 percent

An increase in which of the following will increase the return on equity, all else

constant?

I. sales

II. net income

III. depreciation

IV. total equity

A. I only

B. I and II only

C. II and IV only

D. II and III only

E. I, II, and III only

Your current sales consist of 27 units per month at a price of $225 a unit. You are

weighing the pros and cons of switching to a net 30 credit policy from your current cash

only policy. If you decide to switch your credit policy you also plan to increase the sales

price to $240 a unit. If you make the switch you do not expect your total monthly sales

quantity to change but you do expect a 3 percent default rate. The monthly interest rate

is 1.5 percent. What is the net present value of the proposed credit policy switch?

A. $6,727

B. $6,893

C. $7,206

D. $7,965

E. $8,481

Kelso's has a debt-equity ratio of 0.55 and a tax rate of 35 percent. The firm does not

issue preferred stock. The cost of equity is 14.5 percent and the aftertax cost of debt is

4.8 percent. What is the weighted average cost of capital?

A. 10.46 percent

B. 10.67 percent

C. 11.06 percent

D. 11.38 percent

E. 11.57 percent

The Wine Press is considering a project which has an initial cash requirement of

$187,400. The project will yield cash flows of $2,832 monthly for 84 months. What is

the rate of return on this project?

A. 6.97 percent

B. 7.04 percent

C. 7.28 percent

D. 7.41 percent

E. 7.56 percent

Relationships determined from a firm's financial information and used for comparison

purposes are known as:

A. financial ratios.

B. identities.

C. dimensional analysis.

D. scenario analysis.

E. solvency analysis.

A risk-free asset in the U.S. is currently yielding 3 percent while a Canadian risk-free

asset is yielding 2 percent. Assume the current spot rate is C$1.2103. What is the

approximate three-year forward rate if interest rate parity holds?

A. C$1.1744

B. C$1.2108

C. C$1.2241

D. C$1.2295

E. C$1.2470

Which one of the following collection times is correctly described?

A. The processing delay starts when a firm mails out a billing statement and ends when

the payment is received from a customer.

B. Mailing time begins when a firm mails out a billing statement and ends when the

payment is received.

C. Collection time begins when a firm mails out a billing statement and ends when the

cash payment for that billing is available to the firm.

D. Availability delay begins when a firm deposits a customer's check into its bank

account and ends when the cash from that payment is available to the firm.

E. Processing delay begins when a firm mails out billing statements and ends when the

firm deposits the payment for that statement into its bank account.

Hungry Howie's is currently operating at 94 percent of capacity. What is the required

increase in fixed assets if sales are projected to increase by 14 percent?

A. $0

B. $511

C. $633

D. $708

E. $777

Which one of the following policies most directly affects the projection of the retained

earnings balance to be used on a pro forma statement?

A. net working capital policy

B. capital structure policy

C. dividend policy

D. capital budgeting policy

E. capacity utilization policy

The interest tax shield has no value when a firm has a:

I. tax rate of zero.

II. debt-equity ratio of 1.

III. zero debt.

IV. zero leverage.

A. I and III only

B. II and IV only

C. I, III, and IV only

D. II, III, and IV only

E. I, II, and IV only

Deep Mining, Inc., is contemplating the acquisition of some new equipment for

controlling coal dust that costs $174,000. The firm uses MACRS depreciation which

allows for 33.33 percent, 44.44 percent, 14.82 percent, and 7.41 percent depreciation

over years 1 to 4, respectively. After that time, the equipment will be worthless. The

equipment can be leased for $54,400 a year for 4 years. The firm can borrow money at

11.5 percent and has a 36 percent tax rate. What is the net advantage to leasing?

A. $2,429

B. $2,607

C. $3,611

D. $3,847

E. $3,950

Suppose you purchase the November call option on orange juice futures with a strike

price of 150 at the price shown in the table below. What will be your profit or loss on

this contract if the price of orange juice futures is $0.616 per pound at expiration of the

option contract?

Futures Options

Orange juice: 15,000 lbs, U.S. cents per lb.

A. loss of $2,107.50

B. loss of $1,717.50

C. no profit or loss

D. profit of $1,717.50

E. profit of $2,107.50

You work for a nuclear research laboratory that is contemplating leasing a diagnostic

scanner (leasing is a very common practice with expensive, high-tech equipment). The

scanner costs $3.5 million and it would be depreciated straight-line to zero over 4 years.

Because of radiation contamination, it will actually be completely valueless in 4 years.

You can lease it for $875,000 per year for 4 years. Assume the tax rate is 33 percent.

You can borrow at 10 percent before taxes. What is the net advantage to leasing from

your company's standpoint?

A. $468,216

B. $491,319

C. $516,007

D. $530,468

E. $541,747