February 27, 2019

Scenario analysis is best suited to accomplishing which one of the following when

analyzing a project?

A. determining how fixed costs affect NPV

B. estimating the residual value of fixed assets

C. identifying the potential range of reasonable outcomes

D. determining the minimal level of sales required to break-even on an accounting basis

E. determining the minimal level of sales required to break-even on a financial basis

Alicia is considering adding toys to her gift shop. She estimates that the cost of

inventory will be $7,500. The remodeling expenses and shelving costs are estimated at

$1,500. Toy sales are expected to produce net cash inflows of $1,800, $2,700, $3,200,

and $3,400 over the next four years, respectively. Should Alicia add toys to her store if

she assigns a three-year payback period to this project? Why or why not?

A. No; The payback period is 2.93 years.

B. No; The payback period is 3.38 years.

C. Yes; The payback period is 2.93 years.

D. Yes; The payback period is 3.01 years.

E. Yes; The payback period is 3.38 years.

The _____ tax rate is equal to total taxes divided by total taxable income.

A. deductible

B. residual

C. total

D. average

E. marginal

Tucker's Trucking is considering a project with a discounted payback period just equal

to the project's life. The projections include a sales price of $38, variable cost per unit

of $18.50, and fixed costs of $32,000. The operating cash flow is $19,700. What is the

break-even quantity?

A. 631 units

B. 1,211 units

C. 1,641 units

D. 2,301 units

E. 2,651 units

Delaware Trust has 450 shares of common stock outstanding at a market price per share

of $27. Currently, the firm has excess cash of $400, total assets of $28,900, and net

income of $1,320. The firm has decided to pay out all of its excess cash as a cash

dividend. What will the earnings per share be after this dividend is paid?

A. $2.69

B. $2.86

C. $2.93

D. $3.07

E. $3.24

The present value of the interest tax shield is expressed as:

A. (TC × D)/RA.

B. VU + (TC × D).

C. [EBIT × (TC × D)]/RU.

D. [EBIT × (TC × D)]/RA.

E. Tc × D.

Which one of the following statements related to capital gains is correct?

A. The capital gains yield includes only realized capital gains.

B. An increase in an unrealized capital gain will increase the capital gains yield.

C. The capital gains yield must be either positive or equal to zero.

D. The capital gains yield is expressed as a percentage of the sales price.

The basic factors to be evaluated in the credit evaluation process, the five Cs of credit,

are:

A. conditions, control, cessation, capital, and capacity.

B. conditions, character, capital, control, and capacity.

C. capital, collateral, control, character, and capacity.

D. character, capacity, control, cessation, and collateral.

E. character, capacity, capital, collateral, and conditions.

The Purple Martin has annual sales of $687,400, total debt of $210,000, total equity of

$365,000, and a profit margin of 5.20 percent. What is the return on assets?

A. 6.22 percent

B. 6.48 percent

C. 7.02 percent

D. 7.78 percent

E. 9.79 percent

Exports Unlimited is an unlevered firm with an aftertax net income of $47,800. The

unlevered cost of capital is 14.1 percent and the tax rate is 32 percent. What is the value

of this firm?

A. $270,867

B. $294,380

C. $339,007

D. $378,444

E. $447,489

When warrants are exercised, the:

A. earnings per share decrease.

B. earnings per share remain constant.

C. total equity in a firm remains constant.

D. total equity in a firm decreases.

E. number of bonds outstanding increases.

Which one of the following describes the maximum value of a call option?

A. strike price minus the initial cost of the option

B. exercise price plus the price of the underlying stock

C. strike price

D. market price of the underlying stock

E. purchase price

Murray's can borrow money at a fixed rate of 10.5 percent or a variable rate set at prime

plus 2.25 percent. Fred's can borrow money at a variable rate of prime plus 1.5 percent

or a fixed rate of 12 percent. Murray's prefers a variable rate and Fred's prefers a fixed

rate. Given this information, which one of the following statements is correct?

A. After swapping interest rates with Fred's, Murray's may be able to pay prime plus 2

percent.

B. Both companies can profit in a swap which will allow Murray's to pay a variable rate

of prime plus one percent.

C. Fred's will end up with a fixed rate of 10 percent.

D. Fred's has the best chance of profiting if it does an interest rate swap with Murray's.

E. There are no terms under which Murray's and Fred's can swap interest rates.

Amy is a current shareholder of DJ Industries. She has been given the right to purchase

an additional 25 shares of DJ Industries stock at a price of $32 a share if she exercises

that right within the next 12 months. What is this security called that Amy has been

given?

A. convertible bond

B. warrant

C. straddle

D. spread

E. put

Today, October 12, Nadine's Fashions purchased $511 worth of merchandise from a

supplier. The credit terms are 1/5, net 20. By what day does Nadine's have to make the

payment to receive the discount? Note: October has 31 days.

A. October 13

B. October 15

C. October 17

D. October 27

E. November 1

Jefferson & Sons is evaluating a project that will increase annual sales by $138,000 and

annual costs by $94,000. The project will initially require $110,000 in fixed assets that

will be depreciated straight-line to a zero book value over the 4-year life of the project.

The applicable tax rate is 32 percent. What is the operating cash flow for this project?

A. $11,220

B. $29,920

C. $38,720

D. $46,480

E. $46,620

The current book value of a fixed asset that was purchased two years ago is used in the

computation of which one of the following?

A. depreciation tax shield

B. tax due on the salvage value of that asset

C. current year's operating cash flow

D. change in net working capital

E. MACRS depreciation for the current year

The Blue Marlin is owned by a group of 5 shareholders who all vote independently and

who all want personal control over the firm. What is the minimum percentage of the

outstanding shares one of these shareholders must own if he or she is to gain personal

control over this firm given that the firm uses straight voting?

A. 17 percent

B. 20 percent plus one vote

C. 25 percent plus one vote

D. 50 percent plus one vote

E. 51 percent

Simulation analysis is based on assigning a _____ and analyzing the results.

A. narrow range of values to a single variable

B. narrow range of values to multiple variables simultaneously

C. wide range of values to a single variable

D. wide range of values to multiple variables simultaneously

E. single value to each of the variables

Keyser Mining is considering a project that will require the purchase of $980,000 in

new equipment. The equipment will be depreciated straight-line to a zero book value

over the 7-year life of the project. The equipment can be scraped at the end of the

project for 5 percent of its original cost. Annual sales from this project are estimated at

$420,000. Net working capital equal to 20 percent of sales will be required to support

the project. All of the net working capital will be recouped. The required return is 16

percent and the tax rate is 35 percent. What is the value of the depreciation tax shield in

year 4 of the project?

A. $49,000

B. $52,200

C. $68,600

D. $71,400

E. $76,500

Jen owns 30 shares of stock in Delta Fashions and wants to win a seat on the board of

directors. The firm has a total of 100 shares of stock outstanding. Each share receives

one vote. Presently, the company is voting to elect three new directors. Which one of

the following statements must be true given this information?

A. Regardless of the voting procedure, Jen does not own enough shares to gain a seat

on the board.

B. If straight voting applies, Jen is assured a seat on the board.

C. If straight voting applies, Jen can control all of the open seats.

D. If cumulative voting applies, Jen is assured one seat on the board.

E. If cumulative voting applies, Jen can control all of the open seats.

Rosie's has 1,800 shares outstanding at a market price per share of $23.50. Sandy's has

2,500 shares outstanding at a market price of $21 a share. Neither firm has any debt.

Sandy's is acquiring Rosie's. The incremental value of the acquisition is $1,200. What is

the value of Rosie's to Sandy's?

A. $41,100

B. $41,900

C. $42,300

D. $42,700

E. $43,500

The dividend growth model:

I. assumes that dividends increase at a constant rate forever.

II. can be used to compute a stock price at any point in time.

III. can be used to value zero-growth stocks.

IV. requires the growth rate to be less than the required return.

A. I and III only

B. II and IV only

C. I, III, and IV only

D. I, II, and IV only

E. I, II, III, and IV

The Woods Co. and the Mickelson Co. have both announced IPOs at $43 per share. One

of these is undervalued by $20, and the over is overvalued by $14, but you have no way

of knowing which is which. You plan on buying 1,000 shares of each issue. If an issue

is underpriced, it will be rationed, and only half your order will be filled. What is the

amount of the difference between your expected profit and the amount of profit you

could earn if you could get 1,000 shares of Woods and 1,000 shares of Mickelson?

A. -$10,000

B. -$6,000

C. -$4,000

D. $4,000

E. $6,000

A limited partnership:

A. has an unlimited life.

B. can opt to be taxed as a corporation.

C. terminates at the death of any limited partner.

D. has a greater ability to raise capital than a sole proprietorship.

E. consists solely of limited partners.

Direct business loans typically ranging from one to five years are called:

A. private placements.

B. debt SEOs.

C. notes payable.

D. debt IPOs.

E. term loans.

Wind Power Systems has 20-year, semi-annual bonds outstanding with a 5 percent

coupon. The face amount of each bond is $1,000. These bonds are currently selling for

114 percent of face value. What is the company's pre-tax cost of debt?

A. 3.98 percent

B. 4.42 percent

C. 4.71 percent

D. 5.36 percent

E. 5.55 percent

You are expecting a payment of C$100,000 four years from now. The risk-free rate of

return is 3.8 percent in the U.S. and 4.1 percent in Canada. The inflation rate is 2

percent in the U.S. and 3 percent in Canada. Suppose the current exchange rate is C$1 =

$0.8273. How much will the payment four years from now be worth in U.S. dollars?

A. $61,129

B. $62,414

C. $66,667

D. $78,202

E. $81,745

Sally and Alicia currently are general partners in a business located in Atlanta, Georgia.

They are content with their current tax situation but are both very uncomfortable with

the unlimited liability to which they are each subjected. Which form of business entity

should they consider to replace their general partnership assuming they wish to remain

the only two owners of their business? Whichever organization they select, they wish to

be treated equally.

A. sole proprietorship

B. joint stock company

C. limited partnership

D. limited liability company

E. corporation

Which one of the following statements related to risk is correct?

A. The beta of a portfolio must increase when a stock with a high standard deviation is

added to the portfolio.

B. Every portfolio that contains 25 or more securities is free of unsystematic risk.

C. The systematic risk of a portfolio can be effectively lowered by adding T-bills to the

portfolio.

D. Adding five additional stocks to a diversified portfolio will lower the portfolio's beta.

E. Stocks that move in tandem with the overall market have zero betas.