45 Questions
| Total Attempts: 19

Dance!

Questions and Answers

- 1.The stock of Alpha Company has an expected return of 15.5% and a beta of 1.5, and Gamma Company stock has an expected return of 13.4% and a beta of 1.2. Assume the CAPM holds. What's the expected return on the market?
- A.
12%

- B.
7%

- C.
10.3%

- D.
11.2%

- 2.The stock of Alpha Company has an expected return of 18% and a beta of 1.5, and Gamma Company stock has an expected return of 15.6% and a beta of 1.2. Assume the CAPM holds. What's the risk-free rate?
- A.
8.0%

- B.
6.0%

- C.
0%

- D.
4.7%

- 3.If the risk-free rate last year was 3%, and the return on the market was 11%, which firm had the best performance on a risk-adjusted basis?
- A.
Firm A

- B.
Firm B

- C.
Firm C

- D.
There is no difference in performance on a risk-adjusted basis

- 4.Refer to Gamma Electronics. What's the payback period for the investment?
- A.
1.8 years

- B.
2.0 years

- C.
2.5 years

- D.
2.8 years

- 5.Refer to Gamma Electronics. If the firm has a 15% cost of capital, what's the discount payback period of the investment?
- A.
1.5 years

- B.
2.0 years

- C.
2.4 years

- D.
2.6 years

- 6.Refer to Exhibit 8-3. If the two projects are independent, which project should the firm choose based on the IRR rule?
- A.
Project 1

- B.
Project 2

- C.
Both projects

- D.
cannot decide because the hurdle rate is unknown

- 7.Refer to Exhibit 8-3. If the two projects are mutually exclusive, which project should the firm choose? What is the problem that the firm should be concerned with in making this decision?
- A.
Project 1; discount rate

- B.
Project 2; discount rate

- C.
Project 1; project scale

- D.
Project 2; project scale

- 8.If the two projects are mutually exclusive, and the firm's hurdle rate is 18%, which project should the firm choose?
- A.
Project 1

- B.
Project 2

- C.
The incremental project

- D.
Both projects

- 9.Which project should you accept? What is the problem that you should be concerned with in making this decision?
- A.
Project 1; the timing of cash flows

- B.
Project 2; the timing of cash flows

- C.
Project 1; project scale

- D.
Project 2; project scale

- 10.Refer to NPV Profile. What's the IRR for project 1?
- A.
12%

- B.
14%

- C.
18%

- D.
Cannot tell from the given information

- 11.Refer to NPV Profile. What's the IRR for project 2?
- A.
12%

- B.
14%

- C.
18%

- D.
Cannot tell from the given information

- 12.Refer to NPV Profile. If Gamma Company has a hurdle rate of 11%, and the two projects are independent, which project should Gamma Company invest?
- A.
Project 1

- B.
Project 2

- C.
Both project 1 and project 2

- D.
Neither project

- 13.Refer to NPV Profile. If the hurdle rate is 11%, and the two projects are mutually exclusive, which project should be accepted?
- A.
Project 1

- B.
Project 2

- C.
Both projects

- D.
Neither project

- 14.Refer to NPV Profile. If the hurdle rate is 13%, and the two projects are mutually exclusive, which project should be accepted?
- A.
Project 1

- B.
Project 2

- C.
Both projects

- D.
Neither projects

- 15.Refer to NPV Profile. If the hurdle rate is 19%, and the two projects are independent, which project should be accepted?
- A.
Project 1

- B.
Project 2

- C.
Both projects

- D.
Neither project

- 16.When the IRR is equal to the discount rate, the NPV is:
- A.
Positive

- B.
Equal to zero

- C.
Negative

- D.
Cannot be determined without knowing the discount rate

- 17.When the IRR is equal to the discount rate, the NPV is:
- A.
Positive

- B.
Equal to zero

- C.
Negative

- D.
Cannot be determined without knowing the discount rate

- 18.Capital budgeting must be placed on an incremental basis. This means that ______ must be ignored and _______ must be considered.
- A.
Sunk cost; opportunity cost

- B.
Sunk cost; financing cost

- C.
Cannibalization; opportunity cost

- D.
Opportunity cost; net working capital

- 19.Roger is considering the expansion of his business into a property he purchased two years ago. Which of the following items should not be included in the analysis of this expansion?
- A.
Roger can lease the property to another company for $12,000 per year.

- B.
Costs of hiring additional staff

- C.
The property was extensively renovated last year at a cost of $15,000.

- D.
The expansion will result in a slight increase of inventory carried.

- 20.Alpha Car Rental purchased 5 cars for a total of $100,000 three years ago. Now it is replacing the cars with newer vehicles. The company has depreciated 92.59% of the old cars, and sold these cars for a total of $ 25,000. Assume a tax rate of 40%. What is the cash inflow from the sale of these vehicles?
- A.
$25,000

- B.
$15,000

- C.
$17,964

- D.
$16,500

- 21.Sam's Insurance must choose between two types of printers. Both printers meet the firm's quality standard. Printer A costs $3,500 and is expected to last 3 years with operating costs of $380 per year. Printer B costs $2,500 and is expected to last 2 years with operating costs of $400 per year. Assume a discount rate of 10%. Which printer should Sam's Insurance purchase? What is the equivalent annual cost of this machine?
- A.
Printer B; $3,194

- B.
Printer A; $1,625

- C.
Printer B; $2,904

- D.
Printer A; $1,787

- 22.When a firm introduces a new product and some of the new product's sales come at the expense of the firm's existing products, this is known as:
- A.
Sunk costs.

- B.
Incremental costs.

- C.
Marginal costs.

- D.
Cannibalization.

- 23.Financial analysts focus on _______ when evaluating potential investments.
- A.
Cash

- B.
Profit

- C.
Accruals

- D.
Expenses

- 24.Opportunity costs:
- A.
Are irrelevant.

- B.
Should be considered when determining an investment's relevant cash flows.

- C.
Are equal to the firm's sunk costs.

- D.
All of the above.

- 25.The following data have been computed for a firm: when sales are $20,000, EBIT is $5,000 and operating leverage is 2.5. Suppose sales increase to $23,000; what is the new level of EBIT?
- A.
$1,875

- B.
$6,875

- C.
$3,000

- D.
$8,435

- 26.What is Never-crash Airline's WACC, if their marginal tax rate equals 34%?
- A.
19.22%

- B.
24.45%

- C.
18.50%

- D.
4.62%

- 27.Find the break even point given the following information: sale price per unit = $50, variable cost per unit = $35; fixed costs = $50,000.
- A.
2,298

- B.
3,000

- C.
3,333

- D.
4,000

- 28.Find the break even point given the following information: total costs: $135,000; variable costs per unit = $10; sale price per unit = $25; sales = 10,000 units.
- A.
3,000

- B.
2,333

- C.
1,667

- D.
1,886

- 29.What is Bavarian Sausage's breakeven point in the worst case scenario?
- A.
572

- B.
1,125

- C.
5,000

- D.
2,526

- 30.By how much would Bavarian Sausage's breakeven point change in the best case scenario if variable cost increase by $2?
- A.
Increase by 228

- B.
Decrease by 228

- C.
Remain unchanged

- D.
Increase by 95

- 31.By how much would Bavarian Sausage's breakeven point change in the most likely scenario if the price/unit turns out to be only $6?
- A.
Decrease by 375

- B.
Remain unchanged

- C.
Increase by 375

- D.
Decrease by 228

- 32.Hollywood Productions has a $4 contribution margin for the new DVD they are releasing to the general public. The DVD sells for $20. If the fixed costs to produce the DVD were $500,000, how many units must be sold for Hollywood Productions to break even?
- A.
25,000 units

- B.
31,250 units

- C.
75,000 units

- D.
125,000 units

- 33.Bavarian Brewhouse is planning on going public. Under the underwriting agreement the underwriting discount is $1.25 per share. If the offering price of the stock is set at $12.50 per share, what is the percentage underwriting discount??
- A.
8%

- B.
9%

- C.
10%

- D.
11%

- 34.Bavarian Brewhouse is planning on going public. Under the underwriting agreement the underwriting discount is $1.30. Legal and other expenses amount to $1,350,000. If the offering price of the stock is set at $12.50 per share, how many shares does the company have to issue to raise $75 million?
- A.
6,696,429

- B.
6,816,964

- C.
6,000,000

- D.
5,769,345

- 35.Refer to Smith Enterprises. What is the underwriter's discount?
- A.
14.3%

- B.
12.5%

- C.
16.3%

- D.
10.2%

- 36.Refer to Smith Enterprises. What is the total percentage costs of the IPO (underwriting and underpricing)?
- A.
35.7%

- B.
14.3%

- C.
18.8%

- D.
21.4%

- 37.A non-U.S. based company would like to issue a form of its common equity in the U.S. A current method for doing so would be
- A.
To contract for a U.S. investment back to issue a sponsored ADR.

- B.
To let a U.S. investment bank issue an unsponsored ADR.

- C.
To sell put options on its own stock to U.S. investors.

- D.
None of the above.

- 38.If ABC's stock price closes at $39.00 the day before the offering, what will be the net proceeds for ABC from this offering?
- A.
$109.55 million

- B.
$110.88 million

- C.
$112.32 million

- D.
$117.00 million

- 39.If ABC's stock price closes at $39.00 the day before the offering, calculate the total cost of the seasoned equity offering to ABC's existing stockholders as a percentage of the offering proceeds.
- A.
16.23%

- B.
18.51%

- C.
20.10%

- D.
20.40%

- 40.What is Bavarian Brew's required return on equity before the restructuring. Assume no corporate taxes.
- A.
10%

- B.
6%

- C.
11%

- D.
12%

- 41.Refer to Bavarian Brew. If the corporate tax rate equals 34% and dividend income is tax free, at which personal tax rate on interest income is there no gain from leverage?
- A.
34%

- B.
40%

- C.
15%

- D.
0%

- 42.Refer to Bavarian Brew. If the corporate tax rate equals 34% and the personal tax rate on interest income equals 40%, for which tax rate on dividend income is the gain from leverage equal to zero?
- A.
15.2%

- B.
9.1%

- C.
12.6%

- D.
6.6%

- 43.Assuming a corporate tax rate of 35%, what is Miller's Drugstore's value?
- A.
$125,000

- B.
$25,000

- C.
$133,750

- D.
$75,000

- 44.Roy's Toy, Inc. currently has no debt outstanding. Its current cost of equity is 12% and the current value of the company is $20,000,000. Roy is proposing to finance 1/4 of its assets with debt at a cost of 8% per annum. What will be Roy's cost of levered equity if things go as planned? Ignore any tax effects.
- A.
12.00%

- B.
13.00%

- C.
13.33%

- D.
None of the above

- 45.Refer to Kennesaw Steel Corporation. The tax rate is 40%. What level of EBIT will earnings per share equal zero for shareholders under the new capital structure? (assume that the stock can be repurchased at $50 per share)
- A.
$0

- B.
$60,000

- C.
$120,000

- D.
$160,000