FIN 823 Test 1 | Course Paper

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1) A financial analyst calculated that the after-tax salvage value for a machine was

$10,200. The current book value of the asset is $12,000 and the firm’s tax rate is 30%.

How much could the machine be sold for today?

A.$6,953.07

B.$7,151.63

C.$9,428.57

D.$9,103.49

2) Valuation of a Merger Department Stores, Inc., is asking a price of $25 million to be

purchased by Discount Stores Corp. The two firms currently have cumulative total cash

flows of $2 million which are growing at 2.5 percent annually. Managers estimate that

because of synergies the merged firm’s cash flows will increase by an additional 5

percent for the first four years following the merger. After the first four years cash flows

will grow at a rate of 4.5 percent. The WACC for the merged firms is 13 percent.

Calculate the NPV of the merger. Should Discount Stores Corporation agree to acquire

Department Stores, Inc., for the asking price of $25 million?

A.yes, the NPV is $0

B.yes, the NPV is £ $0

C.no, the NPV is $0

D.no, the NPV is £ $0

3) Suppose your firm is seeking a 3-year, amortizing $300,000 loan with annual

payments and your bank is offering you the choice between a $305,000 loan with a

$5,000 compensating balance and a $300,000 loan without a compensating balance. If

the interest rate on the $300,000 loan is 8 percent, how low would the interest rate on

the loan with the compensating balance have to be in order for you to choose it?

A.8%

B.7.09%

C.1.67%

D.7.98%

4) Calculating the Probability of Bankruptcy A linear probability model you have

developed finds there are two factors influencing the past bankruptcy behavior of firms:

the debt-to-equity ratio and the profit margin. Based on past bankruptcy experience, the

linear probability model is estimated as:

PDi = .03 (debt/equity) + .65 (profit margin)

A firm you are thinking of lending to has a debt-to-equity ratio of 105 percent and its

expected probability of default, or bankruptcy, is estimated to be 7 percent. If sales are

$3 million, calculate the firm’s net income.

A.$177,692

B.$210,000

C.$193,846

D.$300,000

5) The Wall Street Journal states that the yield curve for Treasuries is downward sloping

and there is no liquidity premium or maturity risk premium. Given this information,

which of the following statements is correct?

A.A 30-year corporate bond must have a higher yield than a 5-year corporate bond

B.A 5-year corporate bond must have a higher yield than a 30-year Treasury bond

C.A 5-year Treasury bond must have a higher yield than a 5-year corporate bond

D.All of these statements are correct.

6) Which of following are backed only by the reputation and financial stability of the

corporation?

A.Debentures

B.Unsecured bonds

C.Both a and b

D.None of these

7) A firm has operating income of $1,000, depreciation expense of $185 and its

investment in operating capital is $400. The firm is 100% equity financed and has a

35% tax rate. What is the firm’s operating cash flow?

A.$725

B.$795

C.$835

D.$965

8) Rings N Things Industries has 40 million shares of common stock outstanding, 20

million shares of preferred stock outstanding, and 50 thousand bonds. If the common

shares are selling for $25 per share, the preferred shares are selling for $15 per share,

and the bonds are selling for 100 percent of par ($1000), what would be the weights

used in the calculation of Ring’s WACC for common stock, preferred stock, and bonds,

respectively?

A.33.33%, 33.33%, 33.33%

B.74.07%, 22.22%, 3.71%

C.66.61%, 33.31%, 0.08%

D.17.86%, 10.71%, 71.43%

9) The board of directors announces its intention to pay a dividend on the

____________________.

A.Ex-dividend date

B.Record date

C.Declaration date

D.Dividend announcement date

10) Due to rapid growth, a computer superstore is contemplating expanding by adding

another location. Which of the following items should the financial officer NOT include

in estimating the cash flow associated with this expansion?

A.The company owns the land of the future site of the new location

B.The new location is expected to take sales away from the existing location

C.The company spent $100,000 six months ago in a major advertising campaign which

will help the new store become profitable sooner

D.All of these items should be included in the analysis

11) Suppose your firm is considering two mutually exclusive, required projects with the

cash flows shown below. The required rate of return on projects of both of their risk

class is 8 percent, and the maximum allowable payback and discounted payback

statistic for the projects are 2 and 3 years, respectively.

Use the NPV decision rule to evaluate these projects; which one(s) should be accepted

or rejected?

A.accept both A and B

B.accept neither A nor B

C.accept A, reject B

D.reject A, accept B

12) Cups N Saucers, Inc. normally pays a quarterly dividend. The last such dividend

paid was $1.00, all future quarterly dividends are expected to grow at 7 percent, and the

firm faces a required rate of return on equity of 15 percent. If the firm just announced

that the next dividend will be an extraordinary dividend of $3.00 per share that is not

expected to affect any other future dividends, what should the stock price be?

A.$12.00

B.$13.38

C.$14.18

D.$15.05

13) Required Return If the risk-free rate is 10 percent and the market risk premium is 4

percent, what is the required return for the market?

A.4%

B.7%

C.10%

D.14%

14) Discount Rates A financial manager has determined that the appropriate discount

rate for a foreign project is 15 percent. However, that discount rate applies in the United

States using dollars. What discount rate should be used in the foreign country using the

foreign currency? The inflation rate in the United States and in the foreign country is

expected to be 5 percent and 7 percent, respectively.

A.13%

B.17%

C.18%

D.20%

15) Brenda’s Bar and Grill has total assets of $17 million of which $5 million are

current assets. Cash makes up 12 percent of the current assets and accounts receivable

makes up another 40 percent of current assets. Brenda’s gross plant and equipment has a

cost value of $12 million and other long-term assets have a cost value of $1,000,000.

Using this information, what is the balance of inventory and the balance of depreciation

on Brenda’s Bar and Grill’s balance sheet?

A.$2.4 million; $1 million

B.$3.4 million; $2 million

C.$1.4 million; $1 million

D.$0.4 million; $3 million

16) Suppose your firm is considering investing in a project with the cash flows shown

below, that the required rate of return on projects of this risk class is 8 percent, and that

the maximum allowable payback and discounted payback statistic for the project are 3

and 3.5 years, respectively.

Use the NPV decision rule to evaluate this project; should it be accepted or rejected?

A.$35,995.86, reject

B.$38,875.53, accept

C.$138,875.53, accept

D.$238,875.53, accept

17) This refers to the amount of debt versus equity a firm has on its balance sheet.

A.capital coverage

B.capital structure

C.debt structure

D.financial structure

18) Fern has preferred stock selling for 95 percent of par that pays an 8 percent annual

coupon. What would be Fern’s component cost of preferred stock?

A.7.60%

B.8.00%

C.8.42%

D.9.00%

19) Suppose your firm is considering two mutually exclusive, required projects with the

cash flows shown below. The required rate of return on projects of both of their risk

class is 10 percent, and the maximum allowable payback and discounted payback

statistic for the projects are 2.5 and 3.5 years, respectively.

Use the IRR decision rule to evaluate these projects; which one(s) should be accepted

or rejected?

A.accept both A and B

B.accept neither A nor B

C.accept A, reject B

D.reject A, accept B

20) You are evaluating two different machines. Machine A costs $25,000, has a

five-year life, and has an annual OCF (after tax) of -$6,000 per year. Machine B costs

$30,000, has a seven-year life, and has an annual OCF (after tax) of -$5,500 per year. If

your discount rate is 10 percent, using EAC which machine would you choose?

A.Machine A

B.Machine B

C.Both Machines A and B

D.Neither Machine A nor B

21) Calculate the times interest earned ratio using the following information. Sales =

$1.5 million, cost of goods sold = $800,000, depreciation expense = $100,000, addition

to retained earnings = $85,000, dividends per share = $1.2, tax rate = 30%, and number

of shares of common stock outstanding = 100,000. Assume the firm has no preferred

stock.

A.2.25 times

B.1.25 times

C.1.95 times

D.2.75 times

22) Teaser Rate Mortgage A mortgage broker is offering a 30-year mortgage with a

teaser rate. In the first two years of the mortgage, the borrower makes monthly

payments on only a 5 percent APR interest rate. After the second year, the mortgage

interest charged increases to 8 percent APR. What is the effective interest rate in the

first two years? What is the effective interest rate after the second year?

A.4.89%, 7.72% respectively

B.5.00%, 8.00% respectively

C.5.12%, 8.30% respectively

D.12.59%, 12.65% respectively

23) Your company borrows $75,000 today to fund its growth initiatives. It must repay

the bank in 4 annual payments of $26,600 at the end of each year. What annual interest

rate is your firm paying?

A.15.62%

B.17.18%

C.14.74%

D.16.97%

24) A firm faces a 30% tax rate and has $500M in assets, currently financed entirely

with equity. Equity is worth $100 per share, and book value of equity is equal to market

value of equity. Also, let’s assume that the firm’s expected EBIT is $60M. The firm is

considering switching to a 25 percent debt capital structure, and has determined that

they would have to pay a 10 percent yield on perpetual debt. How much will ROE

change if they switch to the proposed capital structure?

A.There will no change in the firm’s ROE

B.The ROE will increase by 0.47%

C.The ROE will increase by 1.15%

D.The ROE will increase by 0.82%

25) To trace cash flows through the firm’s operations, we must measure this. It is the

time necessary to acquire raw materials, turn them into finished goods, sell them, and

receive payment for them.

A.cash cycle

B.operating cycle

C.transaction cycle

D.production cycle

26) Suppose that the financial ratios of a potential borrowing firm took the following

values: X1 = Net working capital/Total assets = .15, X2 = Retained earnings/Total

assets = .27, X3 = Earnings before interest and taxes/Total assets = .28, X4 = Market

value of equity/Book value of long-term debt = .68, X5 = Sales/Total assets ratio = 0.9.

Calculate and interpret the Altman’s Z-score for this firm.

A.1.92; Low risk

B.2.01 Indeterminate

C.2.79 Low risk

D.2.79; Indeterminate

27) Calculating Fees on a Loan Commitment You have approached your local bank for

a start-up loan commitment for $200,000 needed to open a computer repair store. You

have requested that the term of the loan be one-year. Your bank has offered you the

following terms: size of loan commitment = $200,000, term = 1 year, up-front fee = 50

basis points, back-end fee = 80 basis points. If you take down 95 percent of the total

loan commitment, calculate the total fees you have paid on this loan commitment.

A.$1000

B.$1080

C.$1600

D.$2520

28) Suppose that Wave Industries currently has the balance sheet shown below, and that

sales for the year just ended were $25 million. The firm also has a profit margin of 10

percent, a retention ratio of 20 percent, and expects sales of $27 million next year. If

fixed assets have enough capacity to cover the increase in sales and all other assets and

current liabilities are expected to increase with sales, what amount of additional funds

will the company need from external sources to fund the expected growth?

A.$0

B.$300,000

C.$340,000

D.$20,000

29) Present Value of a Perpetuity A perpetuity pays $100 per year and interest rates are

6.5 percent. How much would its value change if interest rates increased to 9 percent?

A.$250.00 increase

B.$250.00 decrease

C.$427.35 increase

D.$427.35 decrease