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1) the globe incorporated has ebit of $20 million for the current year. on the firm
balance sheet, there is $80 million of debt outstanding that carries a coupon rate of 8
percent. investors seek a return of 12 percent on the firm, and the firm has a corporate
tax rate of 40%. what is the value of the firm?
a.$124,000,000
b.$128,000,000
c.$132,000,000
d.$136,000,000
2) roxy is evaluating a treasury bill. it is a $1 million face value with a discount of
2.75% and maturing in 182 days. what is the bond equivalent yield?
a.2.789%
b.2.828%
c.2.750%
d.2.788%
3) shareholders are said to have a residual claim on the firms assets. what does this
mean?
a.shareholders have limited liability in their investment
b.shareholders do not receive any payoff from the firm until all creditors are paid
c.shareholders are allowed to recover their investment first if the firm experiences
financial distress
d.shareholders have priority in electing the board of directors for the firm
4) in general, what is the determining factor in the underwriting spread charged by
investment banks?
a.the size of the issue
b.the risk inherent in the security to be issued
c.the name recognition of the underwriter
d.none of the above
5) roxy bonds have 14 years to maturity, with a coupon rate of 8%, paid annually; if the
appropriate discount rate is 8% what is the current value of roxy bonds?
a.$1,000
b.$ 920
c.$1,080
d.$1,800
6) all of the following options are call options on nixon industries, which currently is
trading at $35. they all have the same expiration date. which of the following options
should trade at the highest price.
a.a call option with a strike price of 20
b.a call option with a strike price of 30
c.a call option with a strike price of 40
d.a call option with a strike price of 50
7) narrbegin: big thompson credit terms
big thompson industries (bti)
big thompson industries (bti) currently produces and sells 50,000 units of a motor relay
used in high-end electronics. all sales are on credit, for a price of $750 per unit to all
customers. these motor relays incur $525 in variable costs and $3,000,000 in fixed costs
per year. with current credit standards, btis average collection period is 30 days.
managers are considering a relaxation in standards, and forecast a 6 percent increase in
sales, along with an increase in the average collection period to 45 days. additionally,
bad debt expense is expected to increase from 1.5 percent to 2.5 percent of sales.
investments of this type are expected to earn a 14% return. assume a 365 day year
narrend
refer to big thompson. what is the cost of the marginal investment in accounts
receivable?
a.$480,267
b.$302,055
c.$274,185
d.$178,212
8) youve just won $1 million dollars in a lottery. for your prize, you may except a $1
million lump sum paid immediately, a constant perpetuity of $80,000 per year (with the
first payment arriving in one year), or a stream of cash flows that starts at $45,000 next
year and grows at 3.5% per year in perpetuity. if the interest rate is 8%, which of these
choices has a higher present value?
a.a $1 million lump sum
b.a constant stream of $80,000 per year in perpetuity
c.a stream that begins at $45,000 and grows at 3.5% in perpetuity
d.all three choices have the same present value
9) which of the following statements is true?
a.it is very difficult for investors to remove their exposure to unsystematic risk
b.it is very easy for investors to remove their exposure to systematic risk
c.it is very easy for investors to remove their exposure to unsystematic risk
d.both (a) and (b) are true
e.none of the above statements is true
10) find the break even point given the following information: total costs: $135,000;
variable costs per unit = $10; sale price per unit = $25; sales = 10,000 units.
a.3,000
b.2,333
c.1,667
d.1,886
11) you are given the opportunity to play a game of high stakes gambling. the game
begins by you paying an entry fee of $35,000,000 followed by a fair coin toss. if the
coin toss is heads then you have an 80% probability of receiving a perpetuity of
$10,000,000 per year and a 20% probability of receiving a perpetuity of $1,000,000 per
year. assume that the proper discount rate for the perpetual cash flow is 10%. if the coin
toss is tailsyou can continue to play but you will lose $50,000,000 with certainty.
alternatively, you can make a make an opt-out payment of $10,000,000 after a tail to
prevent you from going down such a costly path. what is the present value of playing
such a game?
a.$1,000,000
b.-$1,000,000
c.-$39,000,000
d.none of the above
12) which of the following statements is true?
a.u.s. treasury securities with relevant maturities are used as the basic cost of money
and lenders add premiums for risk and other factors
b.some lenders determine a prospective borrower's risk class and determine the rates
charged on loans with similar maturities by firms in the same risk class
c.all borrowers are charge the same rate regardless of their risk class
d.both (a) and (b) are true
e.none of the above statements are true
13) narrbegin: exhibit 22-1 liquidation
exhibit 23-1
narrend
if the company has $5,245,000 in funds to distribute to unsecured creditors, what is the
settlement that is received by the holders of the subordinated debentures in case ii?
a.$420,300
b.$1,829,700
c.$2,250,000
d.$1,256,200
14) 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 net cash flow savings from issuing the
new bonds?
a.$236,734
b.$478,923
c.$386,367
d.$529,645
15) narrbegin: coyote valley
coyote valley products
coyote valley products has daily cash collections of $500,000. the cash management
staff has determined (1) customers payments are in the mail an average of 3 days; (2)
processing after receipt averages 1 day; and (3) after deposit funds are cleared on
average in 2 days. assume a 365 day year.
narrend
coyote valleys bank, grand lake national, proposes a lock-box collection and processing
arrangement that will reduce collection float by 2 days. if the system will cost coyote
valley $115,000 per year, what is the minimum opportunity cost of funds that would
make the system beneficial?
a.23.0%
b.15.6%
c.19.8%
d.11.5%
16) if a firm increases its financial leverage, then what would we generally expect for
the effect of that increased leverage on eps to be if the firms eps is already quite high?
a.eps would be lower with financial leverage
b.eps would always be the same with financial leverage
c.eps would be higher with financial leverage
d.it is not possible to determine
