The unlevered cost of capital is:
A. the cost of capital for a firm with no equity in its capital structure.
B. the cost of capital for a firm with no debt in its capital structure.
C. the interest tax shield times pretax net income.
D. the cost of preferred stock for an all-equity firm.
E. equal to the profit margin for a firm with some debt in its capital structure.
Answer:
What would be the maximum an investor should pay for the common stock of a firm
that has no growth opportunities but pays a dividend of $1.36 per year? The required
rate of return is 12.5 percent.
A. $9.52
B. $10.88
C. $11.24
D. $10.64
E. $11.47
Answer:
The Felix Corp. will pay an annual dividend of $1.00 next year. The dividend will
increase by 12 percent a year for the following two years before growing at 4 percent
indefinitely thereafter. If the required rate of return is 10 percent, what is the stock’s
current value?
A. $13.38
B. $14.05
C. $19.11
D. $9.80
E. $10.38
Answer:
Under risk neutrality, the expected return on an asset will equal:
A. the market risk premium.
B. the market rate of return.
C. zero.
D. the risk-free rate of interest.
E. the asset beta times the market risk premium.
Answer:
The cash flow of the firm must be equal to:
A.cash flow to stockholders minus cash flow to creditors.
B.cash flow to creditors minus cash flow to stockholders.
C.cash flow to governments plus cash flow to stockholders.
D.cash flow to stockholders plus cash flow to creditors.
E.the aftertax operating cash flow.
Answer:
A three-factor APT model would most likely include factors such as:
A. tax rates, inflation, and profit margin.
B. PE ratio, price-to-book ratio, and firm size.
C. firm size, inflation, and GNP.
D. inflation, GNP, and interest rates.
E. GNP, interest rates, and PE ratio.
Answer:
The discounted payback period of a project will decrease whenever the:
A. discount rate applied to the project is increased.
B. initial cash outlay of the project is increased.
C. time period of the project is increased.
D. amount of each project cash inflow is increased.
E. costs of the fixed assets utilized in the project increase.
Answer:
Serial correlation:
A. measures the relationship between the current return on a security with that of a
second security.
B. involves multiple securities within the same industry.
C. indicates a tendency for continuation when the correlation is positive.
D. indicates a tendency toward reversal when the correlation coefficient is zero.
E. supports weak form efficiency when the correlation coefficient is near zero.
Answer:
Assume personal tax rates are lower than corporate tax rates. From a tax-paying
shareholder point of view, how should a firm spend its excess cash once it has funded
all positive net present value projects?
A. repurchase shares
B. acquire another firm
C. purchase financial assets
D. increase cash dividends
E. increase executive compensation
Answer:
Next year’s annual dividend divided by the current stock price is called the:
A. yield to maturity.
B. total yield.
C. dividend yield.
D. capital gains yield.
E. earnings yield.
Answer:
Assume a firm has a market value equal to its book value, excess cash of $900, other
assets of $16,500, and equity valued at $17,400. The firm has 1,200 shares of stock
outstanding and net income of $15,400. If the firm spends all of its excess cash on share
repurchases, how many shares will be outstanding after the repurchases are completed?
(Round your answer up to the nearest whole share)
A. 1,148 shares
B. 1,135 shares
C. 1,138 shares
D. 1,164 shares
E. 1,142 shares
Answer:
Ignoring taxes and all else held constant, the market value of a stock should decrease by
the amount of the dividend on the:
A. dividend declaration date.
B. ex-dividend date.
C. date of record.
D. date of payment.
E. day after the date of payment.
Answer:
Which one of these statements is correct?
A. Flotation costs increase the value of RS.
B. The weighted average cost of capital is equal to B /S(RS)(1 ” tc).
C. The discount rate for levered equity is unaffected by the debt-equity ratio.
D. The cost of equity for an all-equity firm is less than the cost of equity for a levered
firm.
E. The cost of levered equity is indirectly related to beta.
Answer:
The Wolf’s Den Outdoor Gear is considering replacing the equipment it uses to produce
tents. The equipment would cost $1.4 million and lower manufacturing costs by an
estimated $215,000 a year. The equipment will be depreciated over 8 years using
straight-line depreciation to a book value of zero. The required rate of return is 13
percent and the tax rate is 34 percent. The equipment will be used for 8 years and
thereafter will be worthless. What is the annual operating cash flow from this proposed
project?
A. $141,900
B. $201,400
C. $232,400
D. $160,000
E. $40,000
Answer:
Blue Water Boats is considering a new project with perpetual cash inflows of $435,000,
cash costs of $310,000, and a tax rate of 35 percent. The firm plans to issue $250,000 of
debt at an interest rate of 7.3 percent to help finance the initial project cost of $475,000.
The levered discount rate is 16.7 percent. What is the net present value of this project?
A. $190,494.01
B. $84,022.11 C. $128,211.14
C. -$59,505.99
D. -68,424.09
Answer:
Martinique’s has a 60-day collection period. Sales for the next calendar year are
estimated at $1,550, $1,230, $1,780 and $2,800, respectively, by quarter starting with
the first quarter of the year. Given this information, which one of the following
statements is correct? Assume a 360-day year.
A. The firm will collect $1,133.33 in Quarter 2.
B. The accounts receivable balance at the beginning of Quarter 4 will be $1,066.67.
C. The firm will collect $593.33 from Quarter 2 sales in Quarter 3.
D. The firm will have an accounts receivable balance of $1,866.67 at the end of the
year.
E. The firm will collect a total of $1,033.33 in Quarter 4.
Answer:
A company must file a registration statement with the SEC providing various financial
and company information in order to sell new securities to the public. This registration
statement does not need to be filed if the:
A. issue is less than $50 million.
B. securities are loans that mature in one year or less.
C. issue is less than $2.5 million.
D. securities are valued at less than $5 million and are being sold on the Internet.
E. securities are loans that mature within 9 months.
Answer:
Your parents plan to give you $200 a month for four years while you are in college. At a
discount rate of 6 percent, compounded monthly, what are these payments worth to you
when you first start college?
A. $8,797.40
B. $8,409.56
C. $8,198.79
D. $8,516.06
E. $8,279.32
Answer:
An interest rate that is compounded monthly, but is expressed as if the rate were
compounded annually, is called the _____ rate.
A. stated interest
B. compound interest
C. effective annual
D. periodic interest
E. daily interest
Answer:
Financial managers frequently broaden their definition of cash to include:
A. currency, bank checking accounts, as well as stock and bond investments.
B. currency, bank checking accounts, and bond investments.
C. cash, bond investments, bank checking accounts, and short-term marketable
securities.
D. currency, bank checking accounts, and short-term marketable securities.
E. cash and bank accounts only.
Answer:
A rights offer was set at four rights plus $25 for each new share. What is the rights-on
price if the ex-rights price is $30?
A. $35.00
B. $25.00
C. $30.00
D. $31.25
E. $32.50
Answer:
Credit terms of 1/5, net 15 should be interpreted as granting:
A. a 1/5 percent discount for payments within 15 days.
B. a five percent discount for next day payments.
C. a total credit period of 20 days.
D. a credit period of 10 days.
E. a one percent discount for payments received within five days.
Answer:
Assume the euro is selling in the spot market for $1.10. Simultaneously, in the 3-month
forward market the euro is selling for $1.12. Which one of these statements correctly
describes this situation?
A. The spot market is out of equilibrium.
B. The forward market is out of equilibrium.
C. The dollar is selling at a premium relative to the euro.
D. The euro is selling at a premium relative to the dollar.
E. The euro is less expensive in the forward market.
Answer:
Catherine’s Consulting has net income of $4,400 and total equity of $39,450. The
debt-equity ratio is 1 and the plowback ratio is 40 percent. What is the return on assets?
A. 6.24%
B. 6.09%
C. 5.23%
D. 5.58%
E. 5.72%
Answer:
S&P Enterprises will pay an annual dividend of $2.08 a share on its common stock next
year. Last week, the company paid a dividend of $2.00 a share. The company adheres to
a constant rate of growth dividend policy. What will one share of S&P common stock
be worth ten years from now if the applicable discount rate is 8 percent?
A. $71.16
B. $74.01
C. $76.97
D. $80.05
E. $83.25
Answer:
What is net capital spending for 2015?
A.
-$850
B.
$1,759
C.
$311
D.
$2,057
E.
Answer:
In 2008, the S&P 500 Index lost approximately what percent of its value?
A. 28
B. 51
C. 43
D. 33
E. 37
Answer:
Jelco has a target debt-to-value ratio of .55. The pretax cost of debt is 8.6 percent, the
tax rate is 35 percent, and the unlevered cost of equity 13.4 percent. What is the target
cost of equity?
A. 15.72%
B. 16.48%
C. 14.09%
D. 17.21%
E. 15.12%
Answer:
Phil’s Carvings wants to have a weighted average cost of capital of 9.5 percent. The
firm has an aftertax cost of debt of 6.5 percent and a cost of equity of 12.75 percent.
What debt-equity ratio is needed for the firm to achieve its targeted weighted average
cost of capital?
A. .84
B. .92
C. 1.08
D. .76
E. .67
Answer:
Samuel’s has 42,000 shares of stock outstanding with a par value of $1 per share and a
market price per share of $41. The balance sheet shows $1,358,000 in the capital in
excess of par account and $2,212,500 in the retained earnings account. The firm just
announced a 50 percent stock dividend. What is the value of the capital in excess of par
account after the dividend?
A. $1,358,000
B. $612,500
C. $518,000
D. $497,000
E. $221,900
Answer:
In a merger the:
A. legal status of both the acquiring firm and the target firm is terminated.
B. acquiring firm retains its name and legal status.
C. acquiring firm acquires the assets but not the liabilities of the target firm.
D. stockholders of the target firm have little, if any, say as to whether or not the merger
occurs.
E. target firm always continues to exist as a subsidiary of the acquiring firm.
Answer:
Shareholders in a levered firm might wish to accept a negative net present value project
if it:
A. increases the standard deviation of the returns on the firm’s assets. B. lowers the
variance of the returns on the firm’s assets.
B. lowers the firm’s volatility.
C. diversifies the cash flows of the firm.
D. decreases the risk that a firm will default on its debt.
Answer:
Assume the spot rate for the Japanese yen currently is 117.89 per dollar while the
one-year forward rate is 118.06. A risk-free asset in Japan is currently earning 4.6
percent. If interest rate parity holds, approximately what rate can you earn on a
one-year risk-free U.S. security?
A. 4.45%
B. 5.08%
C. 4.62%
D. 4.78%
E. 4.91%
Answer:
Three weeks ago, you purchased a July 45 put option on RPJ stock at an option price of
$3.20. The market price of RPJ stock three weeks ago was $42.70. Today, RPJ stock is
selling at $44.75 a share and the July 45 put is priced at $.80. What is the intrinsic value
of your put contract per share?
A. -$295
B. -$210
C. $0
D. $25
E. $110
Answer:
Identify the general rights that are commonly granted to common stock shareholders.
Answer:
Explain why the flow to equity approach uses levered, not unlevered, cash flows.
Answer:
Note that in all of our cash flow computations to determine cash flow of the firm, we
never include the addition to retained earnings. Why not? Is this an oversight?
Answer:
Explain the differences and similarities between net present value (NPV) and the
profitability index (PI).
Answer:
Why do corporations issue 100-year bonds, knowing that interest rate risk is highest for
very long-term bonds? How does the interest rate risk affect the issuer?
Answer:
Discuss the factors that management must consider before calling a convertible bond.
Answer:
Suppose you look in the newspaper and see ABC trading at $50 per share. Calls on
ABC with one month to expiration and an exercise price of $45 are trading at $6.50
each. Puts on ABC with one month to expiration and an exercise price of $55 are
trading at $3.50 each. Are these prices reasonable?
Answer:
What does the historical record reveal about the relationship between the returns on
U.S. Treasury bills and the rate of inflation as measured by the consumer price index? Is
this relationship what investors would tend to expect? Why or why not?
Answer:
According to the CAPM, the expected return on a risky asset depends on three
components. Describe each component, and explain its role in determining expected
return.
Answer:
Bond issuers will call bonds when it is favorable for them to do so. The benefit the
issuer receives is a cost to the bondholders. Explain some of the ways in which
bondholders are protected from calls.
Answer:
The empirical evidence strongly indicates that the stockholders of the target firm realize
wealth gains while the stockholders in the acquiring firm gain little, if anything from an
acquisition. Although there exists no definitive answer as to why this is the case, several
possible explanations have been proposed. List and explain three of possible
explanations for the minimal returns to the acquiring firm’s stockholders.
Answer:
The net float of a firm is made up of disbursement float and collection float. Identify
and describe the components of both disbursement and collection float.
Answer:
Based on MM with taxes and without taxes, how much time should a financial manager
spend analyzing the capital structure of his firm?
Answer: