Two businesses are identical except for their business organization. The first company is organized as a partnership with one general and nine limited partners. The second is organized as a corporation with many widely distributed share holders. The corpo
c. The corporation has better access to capital markets.
The value of a business is a function of size, timing and certainty of
a. trailing 12-month earnings.
b. future earnings.
c. future cash flows.
d. future inventories.
c. future cash flows.
A main disadvantage of a sole proprietorship compared to a corporation is ___________.
a. unlimited liability
b. limited liability
c. limited access to capital
d. double taxation
e. both a and c
e. both a and c
] The primary objective of the firm is __________________________________________.
a. maximize profit
b. minimize costs
c. maximize shareholder wealth
d. maximize market share
c. maximize shareholder wealth
TRUE/FALSE: Shareholder wealth is measured by the market value of the shareholders' common stock holdings.
TRUE
TRUE/FALSE: Agency problems arise from the divergent objectives between owners and managers.
TRUE
Double taxation is a disadvantage of the ____________ form of business that both the ______________ and the _____________ forms do not suffer.
CORPORATION, SOLE PROPRIETORSHIP, PARTNERSHIP
Which of the following characterizes a primary market transaction?
I. Joe selling his shares of Boeing (BA) to Sara.
II. A privately held company (PriceWaterhouseCoopers) making an initial public offering (IPO).
III. Apple (AAPL) privately placing a new d
c. II and III only
TRUE/FALSE: Giving managers employee stock options is one method of aligning management goals with shareholder interests
TRUE
Which of the following is an advantage to the corporate form of business organization?
a. Unlimited liability
b. Limited liability
c. Limited access to capital
d. Double taxation
e. both a and c
b. Limited liability
List the Major components of a firm's balance sheet:
Assets, liabilities, shareholders' equity
List the major components of assets
CURRENT: CASH, MARKETABLE SECURITIES/ST INV, A/R, INVENTORY
FIXED: PROPERTY, PLANT, & EQUIPMENT
List the major components of liabilities
CURRENT: A/P, ACCRUALS
LONG: TERM DEBT, NOTES PAYABLE
List the major components of shareholders' equity
PREFERRED STOCK; COMMON STOCK RETAINED EARNINGS,
CAPITAL CONTRIBUTED IN EXCESS OF PAR/ADDITIONAL PAID-IN CAPITAL
] Which of the following is NOT part of current assets on the balance sheet?
a. Inventory
b. Receivables
c. Depreciation
d. Accounts Payable
d. Accounts Payable
List two noncash expenses that firms may report in their income statement
DEPRECIATION & AMORTIZATION
The systematic allocation of the cost of an asset over more than one time period is called ____________.
a. depreciation
c. IPO
b. bid-ask spread d. costing
a. depreciation
A big company had an operating income (EBIT) of $260,000 last year. The firm had $48,000 in depreciation expenses, $15,000 in interest expenses, and $40,000 in selling, general, and administrative expenses. If the company has a marginal tax rate of 40%, w
NI = 147,000
Another company has the following income statement information.
Revenue $42 000
Cost of Goods Sold $ 9 600
Wages $10 000
Supplies Expense $ 7 000
Insurance Expense $ 400
Depreciation Expense $ 2 000
Interest Expense $ 7 000
The company is in the 40% tax b
TAX LIABILITY = 2400
Advocate Agency has $10,000 in debt, $35,000 in preferred stock, $10,000 in common stock, $25,000 of capital in excess of par, and $55,000 in retained earnings. They have 1,400 shares of preferred stock outstanding (par value of $25). They also have 10,00
Total Equity attributable to Common Shareholders = $90,000
What does a negative cash flow to stockholders indicate?
a. The firm had a negative cash flow from assets.
b. The firm paid dividends that exceeded the amount of the net new equity.
c. The firm received more from selling stock than it paid out to sharehol
c. The firm received more from selling stock than it paid out to shareholders.
How do you determine a firm's operating cash flow (OCF)?
...
How do you determine a firm's net capital spending (NCS)?
...
How do you calculate a firm's change in net working capital (change in NWC)
...
How do you calculate a firm's cash flow to stockholders?
...
How do you calculate a firm's cash flow to bondholders?
...
What is the firm free cash flow or cash flow from assets (CFFA)?
...
The Ragin Cajun had an operating income (EBIT) of $260,000 last year. The firm had $18,000 in depreciation expenses, $15,000 in interest expenses, and $60,000 in selling, general, and administrative expenses. If the Cajun has a marginal tax rate of 40%, w
NI: $147,000
OCF: $180,000
Assume your firm, Eagle Enterprises, had $16,250,000 in taxable income last year. (a) What is your firm's tax liability for the year? (b) What is Eagle's average tax rate for the year? (c) What is the firm's marginal tax rate?
(a) $5,625,000
(b) 34.62%
(c) 38%
A firm has a debt ratio of 0.75. What will its equity multiplier be?
4
What is the return on assets (ROA) for a firm that has a debt ratio of 0.65, a net profit margin of 6.5%, sales of $740,000, and a total asset turnover of 4?
26%
TRUE/FALSE? The primary weakness of the current ratio is that it includes inventory.
TRUE
Thompson Corp has a NPM of 11.5%. They reported earnings after tax of $632,500. If they had net fixed assets of $1,500,000 and current assets of $750,000, what are their fixed asset turnover and total asset turnover ratios?
TAT = 2.44 times FAT = 3.667 times
] ___________________ indicate(s) the firm's capacity to meet its debt obligations, both short-term and long-term.
a. Liquidity ratios
b. Asset management
c. Financial leverage
d. Profitability
e. Market value
c. Financial leverage
What impact does an increase in leverage have on the firm, all else equal?
a. Increasing leverage increases risk.
b. Increasing leverage decreases risk.
c. Increasing leverage affects the amount of inventory the firm holds.
d. Increasing leverage decrease
a. Increasing leverage increases risk.
According to the Dupont Identity, a firm's return on equity is a function of its:_________.
...
Paying off some current liabilities with cash, and selling bonds and investing the proceeds in marketable securities would cause the current ratio to increase, or decrease.
increase
A produce market would normally be expected to have a _________, profit margin, and a ________, asset turnover ratio.
low
high
If a company has a debt ratio of 50%, and an equity multiplier of 2. What is its stockholders' equity if total debt is $200,000?
SE = 200,000
Calculate the inventory for a company whose Quick ratio = 1.2; whose Current assets = $20,000; and whose Current ratio = 2.5
INVENTORY = 10,400
What is the return on stockholders' equity for a firm with a net profit margin 8.0%, sales of $750,000, an equity multiplier of 2, and total assets of $375,000?
ROE = 32%
If a firm has a total asset turnover of 2.0, a fixed asset turnover of 3.0, a debt ratio of 0.5 and a total debt of $500,000, then its fixed assets are:
FIXED ASSETS = 666,667
Someone is interested in investing in a small company, thinks it might be a good investment, but would like to know the return on stockholder's equity.
Assume a marginal tax rate is 40% and determine the ROE based on the following:
Earning before taxes $5
ROE = 30%
The P/E ratio indicates how much investors are willing to pay for
a. each share of the company's common stock.
b. every dollar of sales (revenue).
c. every dollar of net income.
d. every dollar of earnings per share (EPS).
d. every dollar of earnings per share (EPS).
What factors (changes to balance sheet and/or income statement accounts) might result in a higher return on equity (ROE)?
...
If a firm's current ratio is 1.5,
a. its current liabilities exceed its current assets
b. it is possible for its quick ratio to be 2.0
c. it is possible for its quick ratio to be 1.0
d. its current assets equal its current liabilities
it is possible for its quick ratio to be 1.0
Which of the following will change if a firm experiences an increase or decrease in its net income?
I. MTB Ratio
II. ROE
III. PM
IV. PE Ratio
V. Equity Multiplier
a. I and V only b. II, III, and IV only
c. II and III only d. None of the above
b. II, III, and IV only
If a firm generates ten cents for every dollar of equity, then the firm has a 10%
a. ROE
d. EM
b. PM
e. PE Ratio
c. Profitability ratio
a. ROE
If you invest $10,000 in a 4 year CD which pays an APR of 10%, compounded annually, how much will the CD be worth at the end of 4 years?
$14,641
Baggos has seen their EPS increase from $0.30 to $3.16 in seven years. What has been the growth rate of Baggos' EPS?
39.98%
Your grandparents deposited $12,000 into an account for you 15 years ago for college expenses. The account balance grew to $24,000. What rate of return was their deposit earning, annually?
4.73%
You are offered an investment which pays you $3,000 in 6 years. You require a return of 12% on investments of this type. How much should you be willing to pay for it?
$1,519.89
If you deposit $2,000 into an account earning 6% annually, how long until you have $10,000 for a down payment on a new house?
27.62 years
$10,000 deposited today in a savings account paying 10% (compounded annually) will be worth _______ after 5 years.
16,105.10
The process of finding present values is referred to as _________ whereas finding future values is called ___________.
discounting
compounding
What deposit is needed today to have $5000 in a savings account 4 years from now if you're earning 5% interest, compounded annually?
$4,113.51
LMN Corp's dividends have grown from $1.85 to $2.15 over the last 5 years. What is the growth rate in dividends?
3.05%
If your monthly statement from your bank credit card shows that the monthly rate of interest is 1.2%, the annual effective rate of interest you are being charged on your credit card is
15.39%
Francis deposits $100 into a savings account each week when she gets paid. The account has an APR of 1.5%, compounded quarterly. If Francis makes these deposits every week for the next 20 years, how much will she have in the account at that time?
$121,231.21
Your Aeropostale credit card bill states that your APR is 18%. You are paying monthly at a rate of 1.5% on your balances, so interest is compounding monthly. What is the effective annual interest rate? (Set your calculator to 4 decimals).
19.56%
You want to save $300 every quarter for the next 10 years. You hope to earn an average return of 8%, compounded quarterly. How much more will you have in your account at the end of 10 years if you invest your money at the beginning of each quarter instead
$362.42
Eagle Motors sold you a new car for $10,000. You have to make monthly payments of $278 to them for 4 years. At that time, you will have paid off the balance on the car. What interest rate (APR) are they charging you?
14.94%
You bought a house for $175,000. You financed it for 30 years at 6.5% interest, compounded monthly. What are your monthly payments? What if you financed it for 20 years? How much in interest will you pay over the life of the 30 year loan? 20 year loan?
30 years: $1106.12 20 years: $1304.75
30 Years: total interest paid = $223,203.20
20 Years: total interest paid = $138,140
17. How much in interest will you save by financing the loan for 20 years instead of 30 years?
$85,063.20
Upon retirement, your goal is to spend 5 years traveling around the world. To travel in the style to which you are accustomed will require $250,000 per year at the beginning of each year. If you plan to retire in 30 years, what are the equal, annual end-o
$6,337.41
You want to buy a new car in 5 years. If you deposit $1,250 into an account earning 8% annually, how much will you have as a down payment? How much would you have if the account earned 11%?
@ 8% = $1,836.66 @ 11% = $2,106.32
Designs Now is opening a showcase office to display and sell its computer designed poster art. Designs expects cash flows to be $120,000 in the first year, $180,000 in the second year, $240,000 in the third year. If Designs uses 11% as its discount rate,
$429,686.08
You are a successful graduate of GSU and want to set up a scholarship in your name for business students. You have $10,000 to donate to the GSU Foundation. They have told you that they can invest it and earn an 8% annualy from which annual scholarships wi
$800
If the APR on a loan is 6%, compounded quarterly, what effective annual rate (EAR) is the borrower paying? What if it is compounded monthly? Compounded annually? Continuously compounded?
EAR (Quarterly) = 6.136%
EAR (Monthly) = 6.168%
EAR (Annually) = 6%
EAR (Continuously) = 6.184%
Air Atlantic (AA) has been offered a 3-year old jet airliner under a 12-year lease arrangement. The lease requires AA to make annual lease payments of $500,000 at the beginning of each of the next 12 years. Determine the present value of the lease payment
$3,226,366.51
A perpetuity is like an annuity that goes on forever. I want to have $10,000 a year in investment income for the rest of my life, and to be passed on to my heirs in perpetuity. I expect a 5% rate of return. How much money do I need to put into my perpetui
$200,000
The more frequent the compounding, the (greater/lesser) the present value and the (greater/lesser) the future value.
lesser
great
The effective rate of interest will always be ______ the nominal rate.
greater than
less than
less than or equal to
equal to greater than or equal to
greater than or equal to
Which of the following is (are) true regarding the APR (annual percentage rate) and EAR (effective annual rate)?
I. The EAR is always greater than the APR.
II. The EAR increases as the number of compounding periods per year increases.
III. The EAR, not th
a. II and III only
In loan amortization with the passage of time, the amount of each successive payment applied to interest (increases/decreases/says the same) and the amount applied to principal (increases/ decreases/stays the same) so that the remaining balance is always
decreases
increase
decreasing
Which of the following are true regarding annuities?
I. For an ordinary annuity, cash flows occur at the end of the period.
II. For an annuity due, cash flows occur at the end of the period.
III. For an ordinary annuity, cash flows occur at the beginning
I, IV, and VI
Calculate the present value of the following cash flows: $100 in year 1, $200 in year 2, and $150 in years 3 and 4. Use a discount rate of 5%.
$529.63
What is the present value of an annuity due which pays $50 annually for 5 years using a discount rate of 6%.
$223.26
You have an investment that pays you $5000 annually forever. If the initial deposit earns 8%, what was the initial deposit?
$62,500
You just purchased a boat for $22,500. You financed it for 6 years at a 9% interest rate. The loan requires you to make annual payments. What is the year 2 principal reduction amount? What is the year 2 ending balance?
PMT = $5,015.70 Year 2 Ending Balance = $16,249.45
Year 2 Princ Reduction Amt = $3,259.86 Year 2 Int Payment = $1,755.84
You deposited $100 into an account earning 6% annual interest. What will be the balance after 3 years if the interest is compounded quarterly?
$119.56
] Letter Inc has zero-coupon bonds. If you require a 6% return on investments of similar interest, what is the value of this bond if it matures in 5 years?
$744.09
What is the value today of a bond maturing in 20 years that has a coupon rate of 9.375%? It pays annual coupon payments and you require a rate of return on investments of similar risk of 9%.
$1,034.23
A bond issued by XYZ Company is quoted in the financial press as selling at 98.75, currently. It has a face value of $1,000 and it matures in 3 years. If the bond is yielding 8%, what is the coupon rate? Assume coupons are paid on an annual basis.
$75.15
Coupon Rate = 7.515%
If the real risk-free rate of return is 2.5% and the expected inflation rate is 4%, what is the exact nominal rate of return? What is the approximate nominal rate of return?
Exact: 6.6% Approximate: 6.5%
If the nominal rate of return is 7% and the real risk-free rate of return is 4%, what is the expected inflation rate (approximate and exact)?
Exact: 2.88% Approximate: 3%
If the expected inflation rate is 5% and the nominal rate of return is 9%, what is the real risk-free rate of return (approximate and exact)?
Exact: 3.81% Approximate: 4%
How much you would be willing to pay for a $1,000 par value bond paying $40 interest every six months and maturing in 20 years, assuming you wanted to earn a 9% rate of return?
$907.99 (or, $908)
Hudson International wants to retire bonds they issued early (prior to maturity). Under what circumstances could the firm do this?
a. The bonds are callable.
b. The bonds are putable.
c. The bonds are convertible.
d. The bonds are worth more than $1000 ea
a. The bonds are callable.
Cowboy Coolers issued bonds which mature in 40 years. The coupon rate is 8.50% and is paid semiannually. If the yield on similar bonds is currently 9%, what is the price of the bond?
$946.09
A bond rated AA is classified as
investment grade noninvestment grade
noninvestment grade junk grade
investment grade
Which one of the following might be included in a bond's list of negative covenants?
a. Maintaining a current ratio of 1.2 or more
b. Maintaining a minimum cash balance of $1.2 million
c. Limiting cash dividends to $1 per share or less
d. Maintaining a ti
. Limiting cash dividends to $1 per share or less
] Which of the following is (are) true?
I. A bond for which no specific property has been pledged as security is classified as a debenture.
II. The amount of profit earned by a bond trader from buying and selling a bond is called the bond premium.
III. A
e. I, III, IV, and V only
Calculate the yield-to-maturity of a bond maturing in 10 years that pays interest semiannually. The bond is currently trading at $958.73. The coupon rate is 8%.
8.62%
You own a zero-coupon bond that is currently trading at $678.12. The bond will mature in 7 years. What is the yield-to-maturity of this bond?
5.63%
ABC Corp has bonds currently selling for $1,025.89 and matures in 5 years. It has a face value of $1,000. It has a coupon of 6 �%, paid annually, what is the yield-to-maturity?
6.13%
LMN Corp's dividends have grown from $1.85 to $2.15 over the last 5 years. What is the growth rate in dividends?
3.05%
What is the value of a stock today if it just paid a dividend of $1.05? The required rate of return is 15% and the stock is growing at a rate of 4%.
$9.93
If a stock is currently trading for $25, and next year's dividend is expected to be $0.55, what is the implied required rate of return? Assume the dividends are growing at a rate of 2.5% for the foreseeable future.
4.70%
Over the past 15 years, Maverick has increased their annual dividend from $0.10 to $0.75. If the required rate of return on the stock is 17%, what is this stock worth today if they just paid the $0.75 dividend?
$32.70
Alex Inc has common stock currently trading at $15. The required rate of return is 13% and the dividends have been growing at 4% and are expected to continue growing at that rate. What is the current dividend?
$1.30
L&O CI's paid a dividend today of $1.50. The stock is currently trading at $35. If the required rate of return is 12%, what is the implied growth rate?
7.39%
Alex Inc has 250,000 shares of preferred stock outstanding. It is currently trading for $58 and the required rate of return is 8%. What is the dividend on this stock?
$4.64
Kellerman has $75 par value preferred stock. It pays a dividend of $1.25 and the required rate of return is 7.5%. What is the value of this stock today?
$16.67
MENSA Int'l just paid a dividend of $1.25. Their growth rate in dividends is 10% and you require a rate of return of 10%, what is the value of this stock today?
Cannot use Constant Growth Dividend Model. g > R. Must use another valuation model.
Which of the following are NOT rights belonging to holders of common stock?
Right to share proportionally in dividends distributed.
Right to assets in the event of liquidation.
Right to purchase new shares when issued.
Right to force the firm to repurchas
Right to force the firm to repurchase their shares.
Right to preferred dividends
The returns investors receive from holding common stock may be in two forms:
cash dividends and capital gains.
You require a 12% return on your investments. Southern Sweets will pay a $2.50 dividend next year. Dividends are projected to grow at 3% per year, indefinitely. What is the price of a share of Southern Sweets?
$27.78
Many preferred stocks are treated as _______________ in determining their values.
perpetuities annuities due
annuities certificates of deposit
perpetuities
OK Fencing Co. is experiencing a high growth period. As such, they expect dividends to grow at 12% per year for the next 3 years. After that the dividend growth rate should slow to about 3%. The required rate of return is 15% and they just paid a dividend
$19.40
What if the firm decided to pay a fixed dividend of $2.60 forever after the initial period of high growth? What is the value of the stock?
$16.52
The right of stockholders to share equally on a per share basis in any distributions of corporate earnings is known as
_dividend right___________.
One of the assumptions of the constant growth dividend valuation model is that:
the required rate of return is greater than the dividend growth rate OR the firm must be a dividend paying firm, OR the growth rate in dividends must be constant for the foreseeable future.
Rank in ascending order (lowest to highest) the relative risk associated with holding the preferred stock, common stock and bonds of a firm:
bonds, preferred stock, common stock
All else equal, as the required return decreases (nears the growth rate), the price of a stock __________.
a. increases. d. converges to the dividend value.
b. decreases. e. cannot be determined.
c. does not change.
a. increases.
MartinCrane expects cash flows from a new project of $25,000 per year for the next 5 years. The project will require an investment of $70,000. Determine the NPV of the project if the required rate of return on such projects is 10%. Calculate the IRR.
NPV = $24,769.67 Accept NPV > 0 IRR = 23.06% Accept IRR > R = 10%
Calculate the NPV of a project that has an initial investment of $65,000 and has one cash flow occurring 8 years from now of $250,000. Use a discount rate of 15%. Should you invest in the project? Calculate the PI.
NPV = $16,725 Accept NPV > 0 PI = 1.257 Accept PI > 1
A new project requires an initial investment of $45,000. Annual net cash flows of $15,000 are expected. Calculate the payback period.
3 years
Calculate the NPV of a project that requires an initial cash outlay of $500,000 and generates annual cash flows of $102,500 for 7 years. Use a discount rate of 12%. Calculate the IRR.
NPV = $-32,214.95 Reject NPV < 0 IRR = 9.94% Reject IRR < R
Clark Coop just spent $250,000 on a project generating the following cash flows: $75,000 in year 1, $50,000 in years 2 - 4, and $140,000 in year 5. Use a discount rate of 8% and compute the project NPV. Compute the IRR for the project.
NPV = $34,036 Accept NPV > 0 IRR = 12.53% Accept IRR > R = 8%
Now assume that Clark Coop projects the cash flows will occur in the reverse: $140,000 in year 1, $50,000 in years 2-4, and $75,000 in year 5. Use a discount rate of 8% and compute the project NPV. Compute the IRR for the project as well.
NPV = $49,983.42 Accept NPV > 0 IRR = 16.65% Accept IRR > R = 8%
Designs Now is opening a showcase office to display and sell its computer designed poster art. Designs expects cash flows to be $120,000 in the first year, $180,000 in the second year, $240,000 in the third year. If Designs uses 11% as its discount rate,
$429,686.08
Brian Industries has a project expecting to generate the following cash flows: $15,000 in the first 3 years of the project and $20,000 in the fourth year. Additionally, the project requires land reclamation at end of the project in year 5 of $25,000 (cash
NPV = $26,342.47 Accept NPV > 0 PI = 3.63 Accept PI > 1
Calculate the IRR of a project generating the following cash flows: $40,000 in years 2-4 and $50,000 in years 6-7. The project requires an initial investment of $175,000. Should they invest in the project if they require a return of 10%.
IRR = 5.21% Reject IRR < R = 10%
Projects that have cash flow patterns with more than one sign change are considered to have _____ cash flows.
normal nonconventional superior insignificant
nonconventional
If a NPV analysis for a normal project gives an NPV greater than zero, an internal rate of return calculation on the same project would yield an internal rate of return ___________ the required rate of return for the firm.
less than greater than equal to
greater than
Generally, the __________ is considered to have a more realistic reinvestment rate than the ___________.
NPV; IRR IRR; NPV PB; IRR PI; NPV
NPV; IRR
If the net present value of an investment project is positive then the:
a. project would be unacceptable under the internal rate of return method
b. project would be acceptable under the payback method
c. project's rate of return is greater than the firm'
c. project's rate of return is greater than the firm's cost of capital
The _____ is interpreted as the present value return for each dollar of initial investment or "bang for your buck".
IRR PB NPV PI MIRR
PI
Which of the following are advantages to the payback method?
The calculation is easy.
It ignores the TVM.
It incorporates all project CF's.
It has an arbitrary accept/reject criterion.
It is easy to understand.
It is biased toward liquidity.
The calculation is easy.
It is easy to understand.
It is biased toward liquidity.
The ________ is the rate at which an investor/firm would be indifferent between two projects.
IRR
crossover rate
cost of capital
PI
crossover rate
When two or more normal (independent/mutually exclusive/expansion) projects are under consideration, the profitability index, the net present value, and the internal rate of return methods will yield identical accept/reject signals.
independent
Which of the following is true with respect to IRR?
IRR is the discount rate at which NPV is greater than zero.
IRR has a more realistic reinvestment rate assumption than NPV.
IRR is not appropriate for projects with nonconventional cash flows.
Projects w
IRR is not appropriate for projects with nonconventional cash flows.
Accept/Reject: Projects with a payback period less than the period set by management.
Accept
Accept/Reject: Projects with a PI less than one.
Reject
Accept/Reject: Projects with an IRR less than the required rate of return.
Reject
Accept/Reject: Projects with an NPV greater than zero.
Accept
Which investment decision rules (if any) assumes that the cash flows generated are reinvested over the life of the project at the firm's cost of capital?
DPB
IRR
PI
PB
NPV
no decision rules assume this
NPV
____________ projects automatically preclude the acceptance of any other project.
Independent
Mutually exclusive
Expansion
Capital rationing
Mutually Exclusive
The relationship between NPV and IRR is such that:
the IRR of a project is equal to the firm's cost of capital if the NPV of a project is $0.
One weakness of the internal rate of return approach is that:
it is possible to have multiple internal rates of return.
Doogie's Pools and Spas is considering opening a new location. They recently prepared a project proposal that resulting in a NPV of $125,000. However, they have already paid $15,000 for a feasibility study that was conducted before the proposal was create
no effect
John Wolf wants to purchase a new generator. It is expected to cost $50,000. The marginal tax rate is 40%. It will replace an existing generator. The old generator has been fully depreciated. However, they think it can be sold for $5,000. What is the NINV
$47,000
Twin Cities wants to expand their production facility. The expansion is expected to generate revenues of $150,000 per year. Its marginal tax rate is 40%. The additional equipment needed will cost $110,000 installed. Additionally, an investment in NWC will
$135,000
The value of resources used in an investment project should be measured in terms of their ______________ cost.
opportunity
sunk
erosive
depreciated
opportunity
_______________ is added back because it is a noncash expense that only serves to calculate taxes appropriately.
depreciation
Polo is considering an investment project that will generate $150,000 in annual earnings before taxes. Depreciation is expected to be $75,000 annually. Their marginal tax rate is 35%. What is the project's annual OCF?
$172,500
A project's cash flows (before or after tax) should always be measured on an _______ basis.
after tax
incremental
The determination of net operating cash flows (OCF) should never include __________.
interest charges
Calculate the NINV of a project Naj is considering investing in where the generator costs $25,000. Installation is expected to costs $2,500 and shipping costs are expected to be $5,000. Naj projects that an initial investment in net working capital will b
NINV = $42,500
You purchased a forklift 6 years ago. It was being depreciated straight line over 10 years to a zero salvage value. The forklift initially cost $200,000. What is the book value of the asset today? If you sold the forklift today for $95,000, what (if any)
Book Value = $80,000
Tax Liability = $6,000
Depreciation __________ reported profits and it __________ taxes paid by a firm.
reduces; reduces
You want to sell your dubber/mixer. You think it will sell for $15,000. It has a book value of $5,000. Your marginal tax rate is 25%. What is the ATSV?
$12,500
Carson Inc is purchasing a new delivery truck to replace their existing one. The new truck will cost $225,000. This truck will replace their old truck. The old truck has a book value of $10,000 and they think they can sell their old truck for $5,000. No a
$218,000
Grace Inc is purchasing a new punching machine. This machine is not going to increase revenues, but will save the company about $15,000 in operating expenses. The old punching machine has a $0 book value. The new machine will cost $100,000 and be deprecia
$13,250
Frasier Financial has a project that will increase their revenues by $75,000 annually. This project will increase their operating costs by $10,000, however. The new project requires a new piece of equipment. The equipment will cost $20,000 and will be dep
$40,440
A (n) ________________ is a cash outlay that is expected to generate a flow of future cash benefits lasting longer than 1 year, whereas a(n) ________________ lasts less than 1 year.
capital expenditure
operating expenditure
There is only a tax effect when the sale of an asset is __________ its book value.
greater than
less than
equal to
not equal to
not equal to
Determining the net investment (NINV) of a project includes explicit consideration of all of the following except:
estimated the net cash flow
project cost plus installation and shipping costs
increases in net working capital
taxes associated with the sal
estimated the net cash flow
When calculating the net cash flow in a project's expected final year,
a. recovery of any working capital invested is disregarded
b. the after-tax salvage value of any project equipment is considered
c. the remaining principal on any borrowed funds is con
b. the after-tax salvage value of any project equipment is considered
Generally, the existence of a(n) _______________ option reduces the downside risk of a project and should be considered in project analysis.
abandonment
Which costs should be included in the calculation of net cash flows (CFFA's) for a project?
financing costs
erosion
sunk costs
interest costs
opportunity costs
taxes
additional NWC
changes in depreciation
changes in sales
changes in operating costs
total
opportunity costs
additional NWC
changes in sales
additional A/P
increase in sales to other projects resulting from the acceptance of the current project under consideration
erosion
taxes
changes in depreciation
changes in operating costs
the potential sa
Doogie's Pools and Spas just purchased a new piece of equipment that cost $15,000. They had to pay an additional $3,000 for shipping. They are depreciating the equipment over three years to an estimated salvage value of zero. What is the amount of the ann
$6,000
When conducting ___(b)_____, one input at a time is changed to determine the impact on the project.
When conducting___(c)_____, multiple inputs are changed simultaneously to determine the impact on the project.
a. Monte Carlo analysis
b. Sensitivity analy
b.
c.
Capital rationing implies that:
the firm has more than enough funds to select any and all acceptable projects.
the firm has limited funds available for investment.
the firm has no acceptable projects available.
the CEO is a penny-pincher.
the firm has limited funds available for investment
If the PI < 1, then NPV must be _________.
greater than 0
greater than 1
less than 0
positive
less than 0
An investment had an initial cost of $75. One year later the investment has produced an income of $1.50 and is sold for a price of $85. What is the percentage holding period return from this investment?
15.33%
On January 1, 2006 you purchased $10,000 face value amount of the 6.125% coupon Citigroup bond maturing on August of 2025. The purchase price was 103.95%. On December 31, 2006 you sell your holding of this bond for a price of 103.85%. What is the percenta
5.80%
When no investor can expect to earn excess returns based on an investment strategy using any publicly available information then __________ form market efficiency is said to prevail.
weak-form semistrong-form weak strong-form
strong-form super strong-form
semistrong-form
If a treasury bond can be purchased for $9,000 today and the bond holder will receive $800 in interest as well as the $10,000 face value at maturity, what is the percentage holding period return if the bond is held to maturity?
20%
Assume long-term corporate bonds have an average return of 6.2% and the risk-free rate is 3.2%. What is the amount of the risk premium for long-term corporate bonds?
3%
Based on information calculated for Doogie's Pools & Spas in the previous question, what range of returns can we expect to see 68% of the time, and 99% of the time?
68%: -9.36%, 15.76%
99%: -34.48%, 40.88%
Generally, the geometric average return is ______ the arithmetic average return.
greater than
less than
equal to
cannot be determined
less than
True/False: Efficient markets imply that all relevant information relevant to determining an asset's value is quickly and completely incorporated.
TRUE
Percentage returns are preferable to dollar returns because ________.
they address risk they address scale
they address gains/losses they are not preferable
they address scale
The mean is a statistical description of the ________ .
spread of a sample location of a sample degree of symmetry of a sample
height of a sample skewness of a sample peakedness of a sample
location of a sample
Under a normal distribution, 95% of all observations fall within _____ standard deviation(s) of the mean.
one
two
three
four
zero
two
The standard deviation describes the ___________.
spread of a sample location of a sample degree of symmetry of a sample
height of a sample skewness of a sample peakedness of a sample
spread of a sample
When the standard deviation is larger, the return on an investment will be ___________.
riskier
no different than a project with a lower standard deviation
less risky
riskier
Which of the following is true regarding the risk premium?
It is the amount over and above the risk-free rate.
It is the excess return (reward) earned for bearing risk.
It is less than the risk-free rate.
It is calculated as the average return (required r
It is the amount over and above the risk-free rate.
It is the excess return (reward) earned for bearing risk.
It is calculated as the average return (required return) less the risk-free rate.
Which of the following is true regarding the risk-free rate?
It is the return of a risk less investment.
It is usually proxied by the US Treasury bill rate.
It is less than the risk premium.
It is not observable in the marketplace and is just "assumed".
It is the return of a risk less investment.
It is usually proxied by the US Treasury bill rate.
It is less than the risk premium.
You have a portfolio equally invested in Butterfly Hubcaps, Addi Corp and Brian's Auto. The expected returns are 5%, 12%, and 17.5%. What is the expected return of the portfolio?
Rp = 11.50%
Slider has an expected return of 8.5%, Viper has an expected return of 10.75%. If you want an overall portfolio return of 9%, how much must you have invested in each security?
Slider: 77.78% Viper: 22.22%
If the expected return from a portfolio is 15%, and 40% of the securities in the portfolio have an expected return of 15.75% and 20% have an expected return of 12%, the expected return of the remaining portion of the portfolio would have to be
15.75%.
The mean or average value of the possible outcomes is a statistical measurement known as
expected value.
To construct a portfolio with a 15% return, you would have include ___% of a stock returning 12% and ____% of a stock returning 18%.
50
50
What is the beta of a portfolio comprised of 25% XYZ Company, 45% of ABC Corp, and 30% LMN Inc? They have betas of 1.5, .67, and 1.00, respectively.
?p = 0.9765
this portfolio would be less risky than the market portfolio (? < 1 = beta of the market portfolio)
Rick's Inc has a beta of 2.0. If the return on the market is 9% and 2morrow's return is 12.5%, what is the risk-free rate of return?
Rf = 5.5%
The return for Selleck Int'l is 5.6%. The risk free rate of return is 4.5% and Selleck beta is 1.1. What is the return on the market?
E(Rm) = 5.5%
Hillerman Corp has a return of 7.6%. The risk-free rate of return is 4.5% and the market risk premium is 6.5%, what is the beta of Hillerman Corp?
? = 0.47692
Use the capital asset pricing model equation to determine the return for TC Corp. TC Corp has a beta of 1.5. The risk-free rate of return is 4.5% and the market risk premium is 6.5%.
E(RA) = 14.25%
If a stock has a beta of 1.2, the risk-free rate is 8% and the expected market rate of return is 12%, the required rate of return on the stock is
12.80%
If the risk-free rate is 2.5%, beta of the asset is 1.57, and the expected return of the asset is 13.25%, what is the market risk premium? What is the risk premium? What is the expected return on the market?
MRP = 6.8471%
RP = 10.75% E(Rm) = 9.3471%
The risk premium for a stock with a Beta of .75 of a company when the risk-free rate is 6% and the expected market return is 12% would be ____% and the required return for the stock would be ___%.
4.5%
10.5%
True/False: The dividend discount model and/or capital asset pricing model may be used to calculate the cost of equity capital.
TRUE
______________________ is the primary risk remaining after extensive diversification of one's portfolio.
Systematic risk
You have a stock portfolio with $5000 of GM, $2000 of Toyota and 10,000 of Caterpillar stock. The first two stocks have a beta of .5, and the Caterpillar stock has a beta of 1.3. What is the beta of the portfolio?
a. 1.5
b. 0.75
c. 1.2
d. 0.97
d. 0.97
You are considering investing in a stock that has a beta value of 0.5. This means:
a. you can get a .5 or 50% return most years
b. the stock has above-average systematic risk
c. the stock has above average unsystematic risk
d. the stock has below-average
d. the stock has below-average systematic risk
What is the beta of a portfolio consisting of equal investments in common stocks with beta's of 1.2, 1.5, 1.6?
1.525
A security has an expected return of 15% and a standard deviation of 5% while the expected return of another security is 13% and its standard deviation is 9%. If equal amounts are invested in each the expected return will be ____% and the ________ the cor
14%
higher
] If an investor wishes to reduce to 1.4 the beta of a portfolio that currently contains 10 securities, each with a market value of $5,000 and has a current beta of 1.5, the beta of a security replacing the riskiest security, which has a Beta of 1.7, woul
0.7
The CAPM utilizes only _____________ risk in estimating the cost of equity capital.
systematic total
unsystematic unique
systematic
The returns from most common stocks are _________ correlated with each other.
positively
the ______ estimates the ___________ risk
beta
systematic or non-diversifiable
A measure of volatility of a security's returns relative to the returns of a broad-based market portfolio of securities is called the ______ for that that security.
BETA
The WACC can be used to evaluate projects when:
a. the risk of the project is equal to that of firm.
b. IRR is greater than 0.
c. firm is a conglomerate and well diversified across different industries.
d. firm has a positive return on equity.
a. the risk of the project is equal to that of firm.
A firm is financed with 70% equity and 30% debt. If the cost of equity capital is 12% and the cost of debt is 10%, what is the weighted average cost of capital (WACC) for the firm? Assume a tax rate of 40%.
10.20%
A firm has 4 million common shares outstanding which are currently trading at $15 per share. The firm also has $40 million in outstanding debt. What are the percentage weights for each source of capital for the firm?
Equity: 60% Debt: 40%
Maverick's Toys recently issued preferred stock at $50 per share. The stock pays a $2.50 dividend annually. What is the firm's cost of preferred stock? What is the after-tax cost of preferred stock if the firm is in the 40% tax bracket?
5%
There is not an after-tax cost of debt for preferred stock (or common stock) because there is no tax deduction for the firm on these sources of funds. Only debt (interest payments) receive a tax deduction.
Emmy's Communications has bonds currently trading at $950 each. The bonds pay coupons semiannually and mature in 10 years. The coupon rate on the bonds is 4% and the firm is in the 35% tax bracket. What is the firm's cost of debt? What is the after-tax co
Cost of debt: 4.63% After-tax Cost of debt: 3.01%
Southern Co. has $100 million in equity capital and $50 million each of debt and preferred stock in its capital structure. If the cost of equity is 15%, the cost of debt is 9%, and the cost of preferred stock is 11%, what is the firm's cost of capital? Th
11.60%