Part I -
A - True / False Questions
1. In the steps a company takes to prepare for an IPO, the "road show" precedes the "bake-off',
True
False
2. The only reason why the price would fall on a corporate bond is if market interest rates increase.
True
False
3. After issue, the market price of a fixed-rate bond can differ substantially from its par value.
True
False
4. Bond investors should be more concerned with real returns than with nominal returns.
True
False
5. Investment-grade bonds are usually defined as bonds with ratings of BBB- or higher.
True
False
6. Private equity firms comprise a relatively insignificant portion of the American economy.
True
False
7. Shelf registration is possible for both debt and equity issues.
True
False
8. In a strong-form efficient market, insider trading is not profitable.
True
False
B - Multiple Choices Questions
9. Carbon8 Corporation wants to raise $120 million in a seasoned equity offering, net of all fees. Carbon8 stock currently sells for $28.00 per share. The underwriters will require a fee of $1.25 per share, and indicate that the issue must be underpriced by 7,5%. In addition to the underwriter's fee, the firm will incur $785,000 in legal, administrative, and other costs. How many shares must Carbon8 sell in order to raise the desired amount of capital?
A. 4.3 million
B. 4.5 million
C. 4.6 million
D. 4.9 million
10. At the end of 2013, Crane Industries Inc.'s stock price was $30.75. A year later it was $34.88. Per share dividends over the year were $0.55, while earnings per share were $1.33. What rate of return did the common stockholders earn in fiscal year 2014?
A. 1.79%
B. 4.33%
C. 13,43%
D. 15.22%
E. 17.76%
F. None of the above.
11. At the end of 2013, Crane Industries Inc.'s stock price was $30.75. A year later it was $34.88. Per share dividends over the year were $0.55, while earnings per share were $1.33. What was the dividend yield in fiscal year 2014?
A. 1.79%
B. 4.33%
C. 13.43%
D. 15.22%
E. 17.76%
F. None of the above.
12. At the end of 2013, Crane Industries Inc.'s stock price was $30.75. A year later it was $34.88. Per share dividends over the year were $0.55, while earnings per share were $1.33. What was the percentage change in the share price in fiscal year 2014?
A. 1.79%
B. 4.33%
C. 13.43%
D. 15.22%
E. 17.76%
F. None of the above.
13 Presents evidence that the average annual rate of return or common stooks over many years has exceeded the return on government bonds in the United States, while returns on common stocks have also exhibited more volatility than returns on U.S. government bonds. Suppose that last year, the realized rate of return on government bonds exceeded the return on common stocks. Your colleague suggests that "last year shows us that investors are now willing to settle for lower returns on stocks than on bonds." How would you interpret this result?
Part II -
A - True False Questions
1. The evidence indicates that, on average, a company's stock price declines when it announces a new issue of equity.
True
False
2. Debt financing results in lower after-tax earnings relative to equity financing.
True
False
3. The M&M irrelevance proposition assures financial managers that their choice between equity or debt financing will ultimately have no impact on firm value.
True
False
4. In some instances, additional debt financing can encourage managers to act more in the interests of owners.
True
False
5. If the maturity of a company's liabilities is less than that of its assets, the company incurs a refinancing risk.
True
False
6. When a company is in financial distress, its shareholders may have an incentive to undertake excessively risky investments.
True
False
7. Financial leverage:
I. increases expected ROE but does not affect its variability.
II. increases breakeven sales, like operating leverage, but increases the rate of earnings per share growth once breakeven is achieved.
III. is a fundamental financial variable affecting sustainable growth.
IV. increases expected return and risk to owners.
A. I and II only
B. I and III only
C. II and IV only
D. II, III, and IV only
E. I, II, III, and IV
F. None of the above.
8. The best financing choice is the one that:
A. sets the debt-to-assets ratio equal to 1.
B. trades off the tax disadvantage of debt against the signaling effects of equity.
C. maximizes expected cash flows.
D. ignores the false comfort of financial flexibility,
E. results in the lowest possible financial distress costs.
9. Homemade leverage is:
A. the incurrence of debt by a corporation in order to pay dividends to shareholders.
B. the exclusive use of debt to fund a corporate expansion project.
C. the borrowing or lending of money by individual shareholders as a means of adjusting their level of financial leverage.
D. best defined as an increase in a firm's debt-equity ratio.
E. the term used to describe the capital structure of a levered firm.
F. None of the above.
10. The basic lesson of the M&M theory is that the value of a firm is dependent upon:
A. the firm's capital structure.
B. the total cash flow of the firm.
C. minimizing the marketed claims.
D. the amount of marketed claims to that firm.
E. the size of the stockholders' claims.
F. None of the above.
11. The term "financial distress costs" includes which of the following?
I. Direct bankruptcy costs
II. Indirect bankruptcy costs
III. Direct costs related to being financially distressed, but not bankrupt
IV. Indirect costs related to being financially distressed, but not bankrupt
A. I only
B. III only
C. I and II only
D. III and IV only
E. I, II, III, and IV
F. None of the above.
Part III -
A - True False Questions
1. The accounting rate of return is deficient as a figure of merit because it is insensitive to the timing of cash flows.
True
False
2. The IRR and NPV always yield the same investment recommendations.
True
False
3. When evaluating investments under capital rationing that are independent and can be acquired fractionally, ranking by the BCR is the appropriate technique.
True
False
4. When conducting a discounted cash flow analysis of a project, it is important to always include a careful estimate of financing costs in the project's cash flows.
True
False
5. The IRR is the discount rate at which an investment's NPV equals its initial cost.
True
False
6. As a noncash expense, depreciation is irrelevant in the determination of a project's cash flows.
True
False
7. Which of the following is NOT an important step in the financial evaluation of an investment opportunity?
A. Calculate a figure of merit for the investment.
B. Estimate the amounting rate of return for the investment.
C. Estimate the relevant cash flows.
D. Compare the figure of merit to an acceptance criterion.
E. All of the above are important steps.
8. Which of the following figures of merit might not use all possible cash flows in its calculations?
I. Payback period
II. Internal rate of return
III. Net present value (NPV)
IV. Benefit-cost ratio
A. III only
B. I & III only
C. II & III only
D. I only
E. III & IV only
F. I, II, III, and IV
9. Which of the following figures of merit does not directly take into consideration the time value of money?
I. Payback period
II. Internal rate of return
III. Net present value (NPV)
IV. Accounting rate of return
A. IV only
B. I & III only
C. II & III only
D. I & II only
E. I & IV only
F. I, II, III and IV
10. Ian is going to receive $20,000 six years from now. Sunny is going to receive $20,000 nine years from now. Which one of the following statements is correct if both Ian and Sunny apply a 7 percent discount rate to these amounts?
A. The present values of Ian and Sunny's monies are equal.
B. In future dollars, Sunny's money is worth more than Ian's money.
C. In today's dollars, Ian's money is worth more than Sunny's.
D. Twenty years from now, the value of Ian's money will be equal to the value of Sunny's money.
E. Sunny's money is worth more than Ian's money given the 7 percent discount rate.
F. None of the above.
11. Which of the following is NOT a reason why a dollar today is worth more than a dollar in the future?
A. Inflation reduces the purchasing power of future dollars.
B. The value of a dollar in the future will be compounded more than the value of a dollar today.
C. There is more uncertainty of receiving dollars further into the future.
D. A dollar today can be productively invested in the time before receiving a dollar in the future.
12. You plan to buy a new Mercedes four years from now. Today, a comparable car costs $82,500. You expect the price of the car to increase by an average of 4.8 percent per year over the next four years. How much will your dream car cost by the time you are ready to buy it?
A. $98,340.00
B. $98,666.67
C. $99,517.41
D. $99,818.02
E. $100,023.16
F. None of the above.
13. Your grandmother invested a lump sum 26 years ago at 4.25 percent interest. Today, she gave you the proceeds of that investment which totaled $51,480.79. How much did she originally invest?
A. $15,929.47
B. $16,500.00
C. $17,444.86 D_ $17,500.00
E. $17,999.45
F. None of the above.
Part IV -
A - True False Questions
1. An average-risk project that has an NPV of zero when its cash flows are discounted at the weighted-average cost of capital will provide sufficient returns to satisfy both stockholders and bondholders.
True
False
2. All else equal, if two competing firms in industry X are valuing the same plant in industry Y for a potential acquisition, the firm with the more volatile stock should arrive at a lower valuation for the plant.
True
False
3. A beta greater than 1 is indicative of an above-average level of diversifiable (unsystematic) risk.
True
False
4. Failing to include real options in a project valuation could cause the NPV of the project to be overestimated.
True
False
5. The adjusted present value (APV) method of valuation is superior to the standard WACC method of valuation because the WACC method makes no adjustment for interest tax shields.
True
False
6. In reality, the cost of equity is always less than the cost of debt because firms are not obligated to pay out cash to shareholders.
True
False
7. Asset betas measure financial risk and business risk.
True
False
8. When projected cash flows are in nominal dollars, they should be discounted with a nominal discount rate.
True
False
9. A company is considering two alternative methods of producing a new product. The relevant data concerning the alternatives are presented below.
|
|
Alternative I
|
Alternative II
|
|
Initial investment
|
$64,000
|
$120,000
|
|
Annual receipts
|
$50,000
|
$60,000
|
|
Annual disbursements
|
$20,000
|
$12,000
|
|
Annual depreciation
|
$16,000
|
$20,000
|
|
Expected life (years)
|
4
|
6
|
|
Salvage value
|
$0
|
$0
|
At the end of the useful life of whatever equipment is chosen the product will be discontinued. The company's tax rate is 50 percent and its cost of capital is 10 percent.
a. Calculate the net present value of each alternative.
b. Calculate the benefit-cost ratio for each alternative.
c. Calculate the internal rate of return for each alternative.
d. If the company is not under capital rationing, which alternative should be chosen? Why?
10. Key facts and assumptions concerning Costco Company, at December 31, 2011, appear below.
|
Facts and Assumptions
|
|
Yield to maturity on long-term government bonds
|
3.28%
|
|
Yield to maturity on company long-term bonds
|
4.62%
|
|
Coupon rate on company long-term bonds
|
5.50%
|
|
Historical excess return on common stocks
|
6.10%
|
|
Company equity beta
|
0.80
|
|
Stock price
|
$75.08
|
|
Number of shares outstanding (millions)
|
449.5
|
|
Book value of equity (millions)
|
$11,585
|
|
Book value of interest-bearing debt (millions)
|
$2,524
|
|
Tax rate
|
35.00%
|
Use the above information to answer the following questions.
a. Estimate Costco's cost of equity capital.
b. Estimate Costco's weighted-average cost of capital.
11. The following table presents forecasted financial and other information for Havasham Industries:
|
|
2012
|
2013
|
2014
|
|
Projected EBIT
|
$317
|
$339
|
$363
|
|
Earnings after tax
|
197
|
210
|
225
|
|
Free cash flow
|
135
|
144
|
155
|
|
|
|
|
|
|
Havasham's WACC
|
8.2%
|
|
|
|
Expected growth rate in FCFs after 2014
|
4.0%
|
|
|
|
Warranted MV firm FCF in 2014
|
19.4
|
|
|
|
Warranted P/E in 2014
|
18.7
|
|
|
What is an appropriate estimate of Havasham's terminal value as of the end of 2014, using the perpetual-growth equation as your estimate?
A. $161 million
B. $363 million
C. $3,690 million
D. $3,888 million
E. $5,357 million
F. None of the above.
I need the correct answers to true/false and multiple choice questions.