Brookman Inc’s latest EPS was $2.75, its book value per share was $22.75, it had
315,000 shares outstanding, and its debt/total invested capital ratio was 44%. The firm
finances using only debt and common equity and its total assets equal total invested
capital. How much debt was outstanding?
a.$4,586,179
b.$4,827,557
c.$5,081,639
d.$5,349,094
e.$5,630,625
When considering the risk of a foreign investment, a higher risk might arise from
exchange rate risk and political risk while lower risk might result from international
diversification.
a.True
b.False
Stock A has a beta of 0.7, whereas Stock B has a beta of 1.3. Portfolio P has 50%
invested in both A and B. Which of the following would occur if the market risk
premium increased by 1% but the risk-free rate remained constant?
a.The required return on Portfolio P would increase by 1%.
b.The required return on both stocks would increase by 1%.
c.The required return on Portfolio P would remain unchanged.
d.The required return on Stock A would increase by more than 1%, while the return on
Stock B would increase by less than 1%.
e.The required return for Stock A would fall, but the required return for Stock B would
increase.
Dewey Corporation has the following data, in thousands. Assuming a 365-day year,
what is the firm’s cash conversion cycle?
a.25 days
b.28 days
c.31 days
d.35 days
e.38 days
Which of the following statements is CORRECT?
a.Put options give investors the right to buy a stock at a certain exercise price before a
specified date.
b.Call options give investors the right to sell a stock at a certain exercise price before a
specified date.
c.Options typically sell for less than their exercise value.
d.LEAPS are very short-term options that have begun trading on the exchanges in
recent years.
e.Option holders are not entitled to receive dividends unless they choose to exercise
their option.
Assume you are the director of capital budgeting for an all-equity firm. The firm’s
current cost of equity is 16%; the risk-free rate is 10%; and the market risk premium is
5%. You are considering a new project that has 50% more beta risk than your firm’s
assets currently have, that is, its beta is 50% larger than the firm’s existing beta. The
expected return on the new project is 18%. Should the project be accepted if beta risk is
the appropriate risk measure? Choose the correct statement.
a.Yes; its expected return is greater than the firm’s WACC.
b.Yes; the project’s risk-adjusted required return is less than its expected return.
c.No; a 50% increase in beta risk gives a risk-adjusted required return of 24%.
d.No; the project’s risk-adjusted required return is 2% above its expected return.
e.No; the project’s risk-adjusted required return is 1% above its expected return.
Multinational financial management requires that
a.the effects of changing currency values be included in financial analyses.
b.legal and economic differences need not be considered in financial decisions because
these differences are insignificant.
c.political risk should be excluded from multinational corporate financial analyses.
d.traditional U.S. and European financial models incorporating the existence of a
competitive marketplace not be recast when analyzing projects in other parts of the
world.
e.cultural differences need not be accounted for when considering firm goals and
employee management.
Which of the following statements is CORRECT?
a.The focal point of the income statement is the cash account, because that account
cannot be manipulated by “accounting tricks.”
b.The reported income of two otherwise identical firms cannot be manipulated by
different accounting procedures provided the firms follow generally accepted
accounting principles (GAAP).
c.The reported income of two otherwise identical firms must be identical if the firms are
publicly owned, provided they follow procedures that are permitted by the Securities
and Exchange Commission (SEC).
d.If a firm follows generally accepted accounting principles (GAAP), then its reported
net income will be identical to its reported cash flow.
e.The income statement for a given year is designed to give us an idea of how much the
firm earned during that year.
A bond trader observes the following information:
The Treasury yield curve is downward sloping.
Empirical data indicate that a positive maturity risk premium applies to both Treasury
and corporate bonds.
Empirical data also indicate that there is no liquidity premium for Treasury securities
but that a positive liquidity premium is built into corporate bond yields.
On the basis of this information, which of the following statements is most CORRECT?
a.A 10-year corporate bond must have a higher yield than a 5-year Treasury bond.
b.A 10-year Treasury bond must have a higher yield than a 10-year corporate bond.
c.A 5-year corporate bond must have a higher yield than a 10-year Treasury bond.
d.The corporate yield curve must be flat.
e.Since the Treasury yield curve is downward sloping, the corporate yield curve must
also be downward sloping.
A 2-year, zero coupon Treasury bond with a maturity value of $1,000 has a price of
$873.4387. A 1-year, zero coupon Treasury bond with a maturity value of $1,000 has a
price of $938.9671. If the pure expectations theory is correct, for what price should
1-year, zero coupon Treasury bonds sell one year from now?
a.$797.54
b.$839.52
c.$883.70
d.$930.21
e.$976.72
A major contribution of the Miller model is that it demonstrates, other things held
constant, that
a.personal taxes increase the value of using corporate debt.
b.personal taxes lower the value of using corporate debt.
c.personal taxes have no effect on the value of using corporate debt.
d.financial distress and agency costs reduce the value of using corporate debt.
e.debt costs increase with financial leverage.
A lease-versus-purchase analysis should compare the cost of leasing to the cost of
owning, assuming that the asset purchased
a.is financed with short-term debt.
b.is financed with long-term debt.
c.is financed with debt whose maturity matches the term of the lease.
d.is financed with a mix of debt and equity based on the firm’s target capital structure,
i.e., at the WACC.
e.is financed with retained earnings.
You work for Whittenerg Inc., which is considering a new project whose data are shown
below. What is the project’s Year 1 cash flow?
a.$25,816
b.$27,175
c.$28,534
d.$29,960
e.$31,458
Brown Fashions Inc.’s December 31, 2014, balance sheet showed total common equity
of $4,050,000 and 200,000 shares of stock outstanding. During 2014, the firm had
$450,000 of net income, and it paid out $100,000 as dividends. What was the book
value per share at 12/31/14, assuming no common stock was either issued or retired
during 2014?
a.$20.90
b.$22.00
c.$23.10
d.$24.26
e.$25.47
Which of the following statements is CORRECT?
a.Increasing its use of financial leverage is one way to increase a firm’s return on
investors’ capital (ROIC).
b.If a firm lowered its fixed costs but increased its variable costs by just enough to hold
total costs at the present level of sales constant, this would increase its operating
leverage.
c.The debt ratio that maximizes expected EPS generally exceeds the debt ratio that
maximizes share price.
d.If a company were to issue debt and use the money to repurchase common stock, this
would reduce its return on investors’ capital (ROIC). (Assume that the repurchase has
no impact on the company’s operating income.)
e.If a change in the bankruptcy code made bankruptcy less costly to corporations, this
would tend to reduce corporations’ debt ratios.
You need a down payment of $19,000 in order to purchase your first home 4 years from
today. You currently have $14,014 to invest. In order to achieve your goal, what
nominal interest rate, compounded continuously, must you earn on this investment?
a.7.61%
b.7.99%
c.8.39%
d.8.81%
e.9.25%