1) an investor who employs a short straddle strategy is hoping that the underlying stock
price
a.is extremely volatile
b.is stable
c.trends above the strike price of the options
d.trends below the strike price of the options
2) molotov cranberry cocktail corp finds that the value of the firm is equal to
$100,000,000 with no debt. it knows that if it issues new debt, the value of the tax
shield will be $3,000,000 while the value of the bankruptcy costs, outside agency costs
and inside agency costs will be $1,000,000, $2,000,000, and $4,000,000 in that order.
what will the value of molotov be if it issues the debt?
a.$0
b.$96,000,000
c.$100,000,000
d.none of the above
3) in a world with only company-level taxation of operating profits, no costs of
bankruptcy, and tax-deductible interest payments, what is the optimal corporate
strategy?
a.the firm should use all equity to maximize firm value
b.the firm should use all debt to maximize its value
c.the firms value is independent of the way it is financed
d.the firm should maximize the use of preferred stock to create value
4) working capital management:
a.involves managing the firms long-term assets, such as plant and equipment
b.requires very little in terms of people skills as it mostly involves analyzing numbers
c.deals with the firms seasonal financing, inventory needs, collecting accounts
receivable and investing surplus cash
d.all of the above
e.none of the above
5) narrbegin: smith enterprises
smith enterprises
smith enterprises recently conducted an ipo. in this, smith received $14 per share from
the underwriter, the offering price per share was $16 and the stock price rose to $19 on
the first day of trading.
narrend
refer to smith enterprises. what is the first day return on an investment in the ipo?
a.21.42%
b.15.79%
c.18.75%
d.12.56%
6) which of the following is the lowest in the priority of claims in chapter 7?
a.secured creditors
b.wages
c.preferred shareholders
d.common shareholders
7) if a firm increases its use of financial leverage, then what would we generally expect
for the effect of that increased leverage to have on the dispersion of the firms net
income distribution?
a.less dispersion
b.no effect on dispersion
c.greater dispersion
d.there is not enough information to determine
8) narrbegin: exhibit 17-2
exhibit 23-2
coffee; 37,500 lbs per contract, $ per lb. may 2004
narrend
refer to exhibit 23-2. what was the highest contract price that the september coffee
future has traded for over its lifetime?
a.$40,125
b.$56,625
c.$40,500
d.$42,375
9) which finance career classification involves analyzing a firms business processes and
strategies as well as recommending a change in practice in order to make a firm more
competitive?
a.corporate finance
b.commercial banking
c.investment banking
d.consulting
10) liquidation is seen as a means
a.of providing breathing space to viable firms that are in temporary financial distress
b.of winding up the operations of firms that are not economically viable
c.of punishing management of firms that have defrauded shareholders
d.all of the above
11) bavarian sausages enterprise value is $75,000,000, the market value of its debt is
$23,000,000 and the market value of its preferred stock is $5,000,000. if the company
has 3,500,000 shares outstanding, what should be bavarian sausages stock price?
a.$14.86
b.$21.43
c.$13.43
d.$6.57
12) millers dairy products reported sales of $1.5 million in 2002 and $2.25 million in
2003. their ebit in 2002 was $550,000 and in 2003 the ebit rose to $925,000. what is the
companys operating leverage?
a.2.36
b.1.36
c.1.96
d.2.86
13) narrbegin: smart acquires snazzy
smart acquires snazzy
smart products plans to acquire snazzy snaps, which will create $8 million in
incremental cash flows for smart each year for the first six years. smart products plans
to divest snazzy snaps at the end of the sixth year for $112,500,000. smarts beta (b) is
1.2, and is expected to remain so after the acquisition. the risk free rate is 5 percent and
the expected return on the market is 16 percent. smart products has a 100 percent equity
capital structure which will be maintained post-acquisition.
narrend
refer to smart acquires snazzy. if smart products beta (b) falls to 0.95 post-acquisition,
what would its weighted average cost of capital be?
a.9.05%
b.18.2%
c.12.10%
d.15.45%
14) narrbegin: kennesaw steel corp.
kennesaw steel corporation
as chief financial officer of the kennesaw steel corporation (ksc), you are considering a
recapitalization plan that would convert ksc from its current all-equity capital structure
to one including substantial financial leverage. ksc now has 100,000 shares of common
stock outstanding, which are selling for $50.00 each, and the recapitalization proposal is
to issue $2,000,000 worth of long-term debt at an interest rate of 8.0 percent and use the
proceeds to repurchase $2,000,000 of common stock.
narrend
refer to kennesaw steel corporation. how many shares will be left outstanding after the
re-capitalization? (assume that the stock can be repurchased at $50 per share)
a.60,000
b.50,000
c.45,000
d.40,000
15) what is the term that describes an arrangement a firm can make with its creditors
that enables it to bypass many of the costs involved in legal bankruptcy proceedings if it
becomes technically insolvent?
a.voluntary reorganization
b.composition
c.liquidation
d.workout
e.none of the above
16) lightyear technology corporation finances its operations with $75 million in stock
with a required return of 12 percent and $45 million in bonds with a required return of 8
percent. suppose the firm issues $15 million in additional bonds at 8 percent, using the
proceeds to retire $15 million worth of equity. what will be the firms new debt to equity
ratio? (assume zero taxes and perfect capital markets)
a.0.75
b.0.90
c.1.00
d.1.10
17) balance corp. has a weighted average cost of capital equal to 5.5%. if the firm is
financed with 25% equity and 75% debt and if the after-tax of that debt is 4%, then
what is the cost of equity for the firm?
a..025
b..06
c..1
d.none of the above
18) a financial publication states that stone cold stock had a return of 15% last year. if
the price of stone cold went from $20 to $20.75 over the last year, what was the
dividend yield over the last year?
a.10.25%
b.11.25%
c.13.25%
d.14.25%
19) you have written a call option on 1 share of z stock that is currently worth $15. you
expect the price of the stock to either move to $20 or $10 over the next year. if the
one-year risk-free interest rate is 10% and the strike price on the option is $15, what
should have been the proceeds of the option?
a.$5.45
b.$2.95
c.$.45
d.$0