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1) narrbegin: dsss corporation
dsss corporation
dsss corporation is considering a new project to manufacture widgets. the cost of the
manufacturing equipment is $125,000. the cost of shipping and installation is an
additional $10,000. the asset will fall into the 3-year macrs class. the year 1- 4 macrs
percentages are 33.33%, 44.45%, 14.81%, and 7.41%, respectively. sales are expected
to be $225,000 per year. cost of goods sold will be 60% of sales. the project will require
an increase in net working capital of $10,000. at the end of three years, dsss plans on
ending the project and selling the manufacturing equipment for $25,000. the marginal
tax rate is 40% and dsss corporations appropriate discount rate is 15%.
narrend
refer to dsss corporation. what is the book value of the machine at the end of year 3?
a.$44,996
b.$10,004
c.$60,008
d.$19,994
2) herbilux botanicals forecasts the following cash flows at the beginning of each year
for a project. if the firm's discount rate is 9%, what is the future value of the project?
a.$14,256,825
b.$13,422,825
c.$8,736,914
d.$14,652,679
3) a stock that pays no dividends is currently priced at $40 and is expected to increase
in price to $45 by year end. the expected risk premium on the market portfolio is 6%
and the risk-free is 5%. if the stock has a beta of 0.6, the stock is
a.overpriced
b.underpriced
c.appropriately priced
d.cannot tell from the given information
4) roys toy, inc. currently has no debt outstanding. its current cost of equity is 12% and
the current value of the company is $20,000,000. roy is proposing to finance 1/4 of its
assets with debt at a cost of 8% per annum. what will be roys cost of levered equity if
things go as planned? ignore any tax effects.
a.12.00%
b.13.00%
c.13.33%
d.none of the above
5) suppose investment a and investment b have identical cash flows. why would an
investor pay more for investment a than investment b?
a.this is incorrect. you would always pay the same amount for two investments with
equal future cash flows
b.the risk in the cash flows for investment a is greater than the risk of the cash flows of
investment b
c.the risk in the cash flows for investment b is greater than the risk of the cash flows of
investment a
d.the return required for investment b is lower than the return required for investment a
6) calculate the tax disadvantage to organizing a u.s. business today, after passage of the
jobs and growth tax reconciliation act of 2003, as a corporation versus a partnership,
given the following assumptions. all earnings will be paid out as dividends, and
operating income before taxes will be $750,000. the effective corporate tax rate is 35%,
and the tax rate on corporate dividends is 15%. the average personal tax rate for
partners in the business is 35%.
a.$63,125
b.$64,250
c.$66,000
d.$73,125
7) a call option with a $35 strike price on bavarian sausage stock will expire in one
year. if you know that the risk free rate is 6%, that the stock currently sells at $38 and
the put on the same stock has a value of $3.85, what is the price of the call?
a.$3.85
b.$6.26
c.$7.34
d.$8.83
8) ajax corporation just paid a dividend of $5.23 and has an expected growth rate of 5%
for the foreseeable future, if the discount rate is 17% what is the appropriate stock price
today?
a.$49.20
b.$51.34
c.$50.48
d.cannot be determined with the available information
9) you own a put option on a stock and the strike price of the option is $30. the option
has 3 weeks until expiration and the stock is currently priced at $35 per share. what is
the largest payout possible for this put option? ignore the original cost of the option for
the payout calculation.
a.$0
b.$5
c.$30
d.the payout is unlimited
10) a report from the marketing department indicates that a new product will generate
the following revenue stream: $62,500 in the first year, $89,400 in year two, $136,200
in year three, $128,300 in year four, and $112,000 in year five. if your firm's discount
rate is 11% and the cash flows are received at the end of each year, what is the present
value of this cash flow stream?
a.$379,435.35
b.$421,173.24
c.$476,036.04
d.$528,400.00
11) your supplier offers you trade terms of 3/10 net 40. what is the implicit interest that
you pay on the trade credit if you do not take the discount?
a.37.63%
b.0%
c.36.50%
d.28.22%
12) the expected outcomes for louis stock are below; what is the expected variance of
louis stock?
a.2.885%
b.0.083%
c.2.968%
d.0.088%
13) narrbegin: brooks corporation
brooks corporation
brooks corporation has just received $40 million in net proceeds from a seasoned
offering. the offering was underwritten by abc investments, an investment bank that
focuses on small company offerings. for the offering, 8 million shares of stock were
issued and the underwriting expenses for abc investments were $800,000.
narrend
refer to brooks corporation. for abc investments to make a profit on this offering, what
is the minimum price they must sell the stock for on the secondary market?
a.$5.00
b.$5.04
c.$5.10
d.$5.15
