· If a corporation elects to be taxed as an S corporation, then it can avoid the corporate tax. However, its stockholders will have to pay personal taxes on the firm's net income.
True
False
· Which of the following is an example of a capital market instrument?
Commercial Paper
Money market mutual funds
Bankers acceptances
Preffered Stock
US Treasury Bills
· Watson Oil recently reported (in millions) $8,250 of sales, $5,750 of operating costs other than depreciation, and $650 of depreciation. The company had $3,200 of outstanding bonds that carry a 5% interest rate, and its federal-plus-state income tax rate was 35%. In order to sustain its operations and thus generate future sales and cash flows, the firm was required to make $1,250 of capital expenditures on new fixed assets and to invest $300 in net operating working capital. By how much did the firm's net income exceed its free cash flow?
$756.00
$836.00
$796.00
$718.00
$878.00
· Ajax Corp's sales last year were $435,000, its operating costs were $362,500, and its interest charges were $12,500. What was the firm's times-interest-earned (TIE) ratio?
4.72
5.23
5.51
5.80
4.97
· You sold a car and accepted a note with the following cash flow stream as your payment. What was the effective price you received for the car assuming an interest rate of 6.0%?
![http://sjc.cengagenow.com/ilrn/books/bhffm13t/bhffm13t.05.127.1.png]()
$6600
$6930
$7277
$5987
$6286
· If investors expect the rate of inflation to increase sharply in the future, then we should not be surprised to see an upward-sloping yield curve.
True
False
· Suppose 1-year T-bills currently yield 7.00% and the future inflation rate is expected to be constant at 3.20% per year. What is the real risk-free rate of return, r*? The cross-product term should be considered, i.e., if averaging is required, use the geometric average.
4.06%
3.68%
3.87%
4.48%
4.26%
· Which of the following statements is CORRECT?
|
a. If interest rates increase, a 10-year zero coupon bond's price will drop by a greater percentage than will a 10-year, 8% coupon bond.
|
|
|
|
b. One nice thing about zero coupon bonds is that individual investors do not have to pay any taxes on a zero coupon bond until it matures, even if they are not holding the bonds as part of a tax-deferred account.
|
|
|
|
c. If a bond with a sinking fund provision has a yield to maturity greater than its coupon rate, the issuing company would prefer to comply with the sinking fund by calling the bonds in at par rather than buying the bonds back in the open market.
|
|
|
|
d. Because of the IRS's tax treatment of zero coupon bonds, pension funds and other tax-exempt entities rarely, if ever, invest in zero coupon bonds.
|
|
|
|
e. Interest must be paid on a zero coupon bond's accrued value, but while the first year's interest is taxable at the ordinary income tax rate, subsequent years are taxed at the long-term capital gains rate (since they are received after more than a year).
|
|
· Which of the following statements is CORRECT?
|
a. The price of a discount bond will increase over time, assuming that the bond's yield to maturity remains constant.
|
|
|
|
b. The total return on a bond during a given year is based only on the coupon interest payments received.
|
|
|
|
c. All else equal, a bond that has a coupon rate of 10% will sell at a discount if the required return for bonds of similar risk is 8%.
|
|
|
|
d. For a given firm, its debentures are likely to have a lower yield to maturity than its mortgage bonds.
|
|
|
|
e. When large firms are in financial distress, they are almost always liquidated, whereas smaller firms are generally reorganized.
|
|
|
· Which of the following statements is CORRECT?
|
a. Suppose the returns on two stocks are negatively correlated. One has a beta of 1.2 as determined in a regression analysis using data for the last 5 years, while the other has a beta of −0.6. The returns on the stock with the negative beta must have been negatively correlated with returns on most other stocks during that 5-year period.
|
|
|
|
b. If the market risk premium remains constant, but the risk-free rate declines, then the required returns on low-beta stocks will rise while those on high-beta stocks will decline.
|
|
|
|
c. Collections Inc. is in the business of collecting past-due accounts for other companies, i.e., it is a collection agency. Collections' revenues, profits, and stock price tend to rise during recessions. This suggests that Collections Inc.'s beta should be quite high, say 2.0, because it does so much better than most other companies when the economy is weak.
|
|
|
|
d. Suppose you are managing a stock portfolio, and you have information that leads you to believe the stock market is likely to be very strong in the immediate future. That is, you are convinced that the market is about to rise sharply. You should sell your high-beta stocks and buy low-beta stocks in order to take advantage of the expected market move.
|
|
|
|
e. You think that investor sentiment is about to change, and investors are about to become more risk averse. This suggests that you should rebalance your portfolio to include more high-beta stocks.
|
|
|
· Which of the following statements is CORRECT?
|
a. Assume that the required rate of return on the market, rM, is given and fixed at 10%. If the yield curve were upward sloping, then the Security Market Line (SML) would have a steeper slope if 1-year Treasury securities were used as the risk-free rate than if 30-year Treasury bonds were used for rRF.
|
|
|
|
b. If investors become more risk averse but rRF does not change, then the required rate of return on high-beta stocks will rise and the required return on low-beta stocks will decline, but the required return on an average-risk stock will not change.
|
|
|
|
c. An investor who holds just one stock will generally be exposed to more risk than an investor who holds a portfolio of stocks, assuming the stocks are all equally risky. Since the holder of the 1-stock portfolio is exposed to more risk, he or she can expect to earn a higher rate of return to compensate for the greater risk.
|
|
|
|
d. There is no reason to think that the slope of the yield curve would have any effect on the slope of the SML.
|
|
|
|
e. If Mutual Fund A held equal amounts of 100 stocks, each of which had a beta of 1.0, and Mutual Fund B held equal amounts of 10 stocks with betas of 1.0, then the two mutual funds would both have betas of 1.0. Thus, they would be equally risky from an investor's standpoint, assuming the investor's only asset is one or the other of the mutual funds.
|
|
|
· Companies can issue different classes of common stock. Which of the following statements concerning stock classes is CORRECT?
|
a. All common stocks fall into one of three classes: A, B, and C.
|
|
|
|
b. All common stocks, regardless of class, must have the same voting rights.
|
|
|
|
c. All common stock, regardless of class, must pay the same dividend.
|
|
|
|
d. Some class or classes of common stock are entitled to more votes per share than other classes.
|
|
|
|
e. All firms have several classes of common stock.
|
|
· Which of the following statements is CORRECT?
|
a. To implement the corporate valuation model, we discount projected net income at the weighted average cost of capital.
|
|
|
|
b. The corporate valuation model requires the assumption of a constant growth rate in all years.
|
|
|
|
c. To implement the corporate valuation model, we discount projected free cash flows at the weighted average cost of capital.
|
|
|
|
d. To implement the corporate valuation model, we discount net operating profit after taxes (NOPAT) at the weighted average cost of capital.
|
|
|
|
e. To implement the corporate valuation model, we discount projected free cash flows at the cost of equity capital.
|
|
|
· Schalheim Sisters Inc. has always paid out all of its earnings as dividends, hence the firm has no retained earnings. This same situation is expected to persist in the future. The company uses the CAPM to calculate its cost of equity, its target capital structure consists of common stock, preferred stock, and debt. Which of the following events would REDUCE its WACC?
|
a. Expected inflation increases.
|
|
|
|
b. The company's beta increases.
|
|
|
|
c. The flotation costs associated with issuing preferred stock increase.
|
|
|
|
d. The flotation costs associated with issuing new common stock increase.
|
|
|
|
e. The market risk premium declines.
|
|
|
· Eakins Inc.'s common stock currently sells for $45.00 per share, the company expects to earn $2.75 per share during the current year, its expected payout ratio is 70%, and its expected constant growth rate is 6.00%. New stock can be sold to the public at the current price, but a flotation cost of 8% would be incurred. By how much would the cost of new stock exceed the cost of retained earnings?
· An increase in the firm's WACC will decrease projects' NPVs, which could change the accept/reject decision for any potential project. However, such a change would have no impact on projects' IRRs. Therefore, the accept/reject decision under the IRR method is independent of the cost of capital.
· Clemson Software is considering a new project whose data are shown below. The required equipment has a 3-year tax life, after which it will be worthless, and it will be depreciated by the straight-line method over 3 years. Revenues and other operating costs are expected to be constant over the project's 3-year life. What is the project's Year 1 cash flow?
|
Equipment cost (depreciable basis)
|
$65,000
|
|
Straight-line depreciation rate
|
33.333%
|
|
Sales revenues, each year
|
$60,000
|
|
Operating costs (excl. depreciation)
|
$25,000
|
|
Tax rate
|
35.0%
|
|
|
|
|
|
|
|
|
|
|
· Atlas Anglers Inc. is considering issuing a 15-year convertible bond that will be priced at its $1,000 par value. The bonds have a 6.5% annual coupon rate, and each bond can be converted into 20 shares of common stock. The stock currently sells at $30 a share, has an expected dividend in the coming year of $3, and has an expected constant growth rate of 5.5%. What is the estimated floor price of the convertible at the end of Year 3 if the required rate of return on a similar straight-debt issue is 9.5%?
· Corporations that invest surplus funds in floating-rate preferred stock benefit from getting a relatively stable price, and they also benefit from the 70% tax exemption on preferred dividends received.
· Carolina Trucking Company (CTC) is evaluating a potential lease for a truck with a 4-year life that costs $40,000 and falls into the MACRS 3-year class. If the firm borrows and buys the truck, the loan rate would be 9%, and the loan would be amortized over the truck's 4-year life. The loan payments would be made at the end of each year. The truck will be used for 4 years, at the end of which time it will be sold at an estimated residual value of $12,000. If CTC buys the truck, it would purchase a maintenance contract that costs $1,500 per year, payable at the end of each year. The lease terms, which include maintenance, call for a $10,000 lease payment (4 payments total) at the beginning of each year. CTC's tax rate is 35%. What is the net advantage to leasing? (Note: MACRS rates for Years 1 to 4 are 0.33, 0.45, 0.15, and 0.07.)
|
|
|
|
|
|
|
|
|
e. $642
|
|
· Heavy use of off-balance-sheet lease financing will tend to
|
a. have no effect on either cash flows or risk because the cash flows are already reflected in the income statement.
|
|
|
|
b. affect the lessee's cash flows but only due to tax effects.
|
|
|
|
c. make a company appear more risky than it actually is because its stated debt ratio will be increased.
|
|
|
|
d. affect a company's cash flows but not its degree of risk.
|
|
|
|
e. make a company appear less risky than it actually is because its stated debt ratio will appear lower.
· Gekko Properties is considering purchasing Teldar Properties. Gekko's analysts project that the merger will result in incremental after-tax cash flows of $2 million, $4 million, $5 million, and $10 million over the next four years. The horizon value of the firm's operations, as of Year 4, is expected to be $107 million. Assume all cash flows occur at the end of the year. The acquisition would be made immediately, if it is undertaken. Teldar's post-merger beta is estimated to be 2.0, and its post-merger tax rate would be 35%. The risk-free rate is 6%, and the market risk premium is 5.5%. What is the value of Teldar to Gekko Properties?
|
|
|
|
|
|
|
|
|
e. $81,254,121
|
|
· If a petrochemical firm that used oil as feedstock merged with an oil producer that had large oil reserves and a drilling subsidiary, this would be a vertical merger.
|
a. true
|
|
|
b. false
|
|
|
· The rate used to discount projected merger cash flows should be the overall cost of capital of the new consolidated firm because it incorporates the actual capital structure of the new firm.
|
|
|
|
|
|
|
|
|
murtaz
finance-_quiz.docx
