Finc 332: Corporate Finance, Final Pt 1

1. A cost-cutting project:

Reduces the total revenue

Can produce positive cash inflows

Always generates negative operating cash flows

Lovers the net income of a firm

Chapter 10, Question 5

Explanation

Chapter 10, Question 5

2. The operating cash flow of a project will increase when the:

Depreciation expense increases

Rent expense increases

Payroll costs increase

Total sales decrease

Chapter 10, Question 6

Explanation

Chapter 10, Question 6

3. You currently own 6 percent of the 100,000 shares of outstanding stock in Mytle, Inc. The firm has announced that it is offering an additional 20,000 shares to the public. What will your new ownership position be if you decide not to participate in this offering?

4.0 percent

4.5 percent

5.0 percent

5.5 percent

100,000*.06 = 6,000 shares
100,000 + 20,000 = 120,000 total shares
6,000/120,000 = .05
Chapter 15, Question 5

Explanation

100,000*.06 = 6,000 shares
100,000 + 20,000 = 120,000 total shares
6,000/120,000 = .05
Chapter 15, Question 5

4. You are considering the purchase of a building that you plan to depreciate using straight-line depreciation over 30 years. The cost will be $628,900. what is the value of the annual depreciation tax shield if the tax rate is 34 percent?

$7,128

$14,256

$18,709

$20,963

Depreciation expense = 628,900/30
= 20,963.33
Tax Shield = Depreciation expense*Tax rate
= 20,963.33*.34
= $7,127.53
Chapter 10, Question 3

Explanation

Depreciation expense = 628,900/30
= 20,963.33
Tax Shield = Depreciation expense*Tax rate
= 20,963.33*.34
= $7,127.53
Chapter 10, Question 3

5. No one could benefit from inside information if the financial markets are:

Weak-form efficient

Semi-strong form efficient

Strong form efficient

Either semi-strong or strong form efficient

Chapter 12, Question 6

Explanation

Chapter 12, Question 6

6. Ernie and Bert's has a beta of 1.24. The risk-free rate of return is 4.2 percent and the market risk premium is 8 percent. What is the cost of equity?

8.91 percent

9.84 percent

14.12 percent

15.13 percent

Re = Rf + BetaE (E(Rm)-Rf)
= .042 +1.24(.08)
Chapter 14, Question 2

Explanation

Re = Rf + BetaE (E(Rm)-Rf)
= .042 +1.24(.08)
Chapter 14, Question 2

7. The document provided to potential investors which provides information on a security issue is called the:

Letter of comment

Registration statement

Prospectus

Tombstone

Chapter 15, Question 2

Explanation

Chapter 15, Question 2

8. One year ago, you purchased a stock at a price of $19.51 a share. You recently received an annual dividend of $.72 a share. Today, you sold the stock for $17.93 a share. What is your dividend yield on this investment?

-8.10 percent

-4.80 percent

3.69 percent

4.02 percent

.72/19.51
Chapter 12, Question 9

Explanation

.72/19.51
Chapter 12, Question 9

9. An increase in a leveraged firm's tax rate will:

Not affect their cost of capital

Increase their cost of capital

Decrease their cost of capital

Have an effect on the firm cost of capital but the direction of that effect is unknown

Chapter 14, Question 7

Explanation

Chapter 14, Question 7

10. Which one of the following is an example of erosion?

Losing sales due to an economic recession

Losing sales of one good because you start selling another good

Losing sales because of increased sales by your computer

Losing sales because you increase the selling price per unit sold.

Chapter 10, Question 7

Explanation

Chapter 10, Question 7

11. You previously owned 100 shares of Reynolds Co. stock. This stock earned a dividend yield of 3.55 percent and a total return of 11.65 percent. If you purchased the stock at $17.24, what price did you receive when you sold it one year later?

$16.24

$17.85

$18.64

$19.25

(.1165-.0355)*17.24 + 17.24
Chapter 12, Question 8

Explanation

(.1165-.0355)*17.24 + 17.24
Chapter 12, Question 8

12. Which one of the following best describes the information reflected in market prices if the financial markets are semistrong form efficient?

Only historical price information

All private information

All public information

All information of any kind

Chapter 12, Question 1

Explanation

Chapter 12, Question 1

13. One year ago, you purchased a stock at a price of $36.24 a share. You received an annual dividend of $1.80 a share and you sold the stock today for $32.12 a share. What was your capital gains rate of return?

-11.28 percent

-11.37 percent

-12.76 percent

-12.83 percent

(32.12-36.24)/36.24
Chapter 12, Question 2

Explanation

(32.12-36.24)/36.24
Chapter 12, Question 2

14. The 9 percent preferred stock of Flintstone & Son is currently selling for $64 a share. The par value per share is $100. What is the cost of preferred stock for this firm?

7.11 percent

9.00 percent

11.11 percent

14.06 percent

Rp = D/Po
= (.09*100) / 64
Chapter 14, Question 3

Explanation

Rp = D/Po
= (.09*100) / 64
Chapter 14, Question 3

15. You previously owned 200 shares of Reynolds Co. stock. This stock earned a dividend yield of 3.75 percent and a total return of 10.74 percent. If you purchased the stock at $43.90, approximately what price did you receive when you sold it on year later?

$45.55

$46.97

$48.62

$50.05

Capital gains yield = .1075 - .0375 = .07; P2 = $43.90 (1.07) = $46.97
Chapter 12, Question 4

Explanation

Capital gains yield = .1075 - .0375 = .07; P2 = $43.90 (1.07) = $46.97
Chapter 12, Question 4

16. Your firm is offering 10,000 shares of stock in an initial public offering. The underwriters have agreed to a firm commitment offering with a 7 percent spread and a $26 offering price. When the offering was complete, the underwriters sold a total of 9,500 shares to the general public. The stock opened on the first day of trading at $28 a share. How much did your firm receive from this offering?

$229,710

$241,800

$260,400

$280,000

Cash received = # of shares * offer price * (1 - spread)
= 10,000 *$26*=(1-.7)
Chapter 15, Question 4

Explanation

Cash received = # of shares * offer price * (1 - spread)
= 10,000 *$26*=(1-.7)
Chapter 15, Question 4

17. Four years ago, Cheese Snacks, Inc. purchased land located beside their factory at a price os $739,000. The land is currently valued at $825,000. The company is now considering building a new warehouse on that land. The construction cost of the warehouse is estimated at $425,000. In addition, $35,000 worth of grading will be required to prepare the construction site. What is the initial cash outflow that should be used when analyzing this project?

$1,164,000

$1,199,000

$1,250,000

$1,285,000

= 825,000 + 425,000 + 35,000

Chapter 10, Question 1

Explanation

= 825,000 + 425,000 + 35,000

Chapter 10, Question 1

18. A proposed project is expected to increase accounts receivable by $12,000, decrease inventory by $7,000, and decrease accounts payable by $4,000. What is the amount of the initial cash flow for this project?

-$9,000

-$1,000

$1,000

$9,000

Initial net working capital= -12,000 + 7,000 - 4,000
Chapter 10, Question 4

Explanation

Initial net working capital= -12,000 + 7,000 - 4,000
Chapter 10, Question 4

19. Your firm has a cost of equity of 12 percent and a pre-tax cost of debt of 8 percent. You maintain a debt-equity ratio of .60 and have a tax rate of 34 percent. What is your firm's weighted average cost of capital?

6.93 percent

7.41 percent

9.48 percent

10.50 percent

[(1/1.6)*.12] + [(.6/1.6)*.08 * (1-.34)]
Chapter 14, Question 5

Explanation

[(1/1.6)*.12] + [(.6/1.6)*.08 * (1-.34)]
Chapter 14, Question 5

20. Which one of the following statements is true regarding risk premiums?

The higher the risk premium, the lower the standard deviation of the returns.

Bonds tend to have a higher risk premium than stocks.

Short-term bonds tend to have a higher risk premium than long-term bonds

US Treasury bills have a zero risk premium

Chapter 12, Question 5

Explanation

Chapter 12, Question 5

21. You purchased 100 shares of Resorts, Inc. stock at a price of $35.87 a share exactly one year ago. You have received dividends totaling $1.05 a share. Today, you sold your shares at a price of $46. 26 a share. What is your total dollar return on this investment?

$10.39

$11.44

$1,039

$1,144

(1.05*100) + (46.26-35.87)*100
Chapter 12, Question 3

Explanation

(1.05*100) + (46.26-35.87)*100
Chapter 12, Question 3

22. You purchased 15 shares of Resorts, Inc. stock at a price of $47.87 a share exactly one year ago. You have earned dividends totaling $1.35 a share. Today, you sold your shares at a price of $50.19 a share. What is your total dollar return on this investment?

$2.32

$3.67

$34.80

$50.05

(1.35*15) + (50.19-47.87)*15
Chapter 12, Question 7

Explanation

(1.35*15) + (50.19-47.87)*15
Chapter 12, Question 7

23. A(n) _____offering is a securities offering wherein the investors determine the security price.

Initial public

Seasoned

Dutch Auction

Green shoe

Chapter 15, Question 3

Explanation

Chapter 15, Question 3

24. Venture capital:

Is generally provided on a long-term basis

Is often provided in stages

Generally funds growth for mature firms

Is provided solely by individuals

Chapter 15, Question 1

Explanation

Chapter 15, Question 1

25. A 10-year loan that does NOT have to be registered with the SEC is called a(n):

IPO

Term loan

Public offering

Private placement

Chapter 15, Question 6

Explanation

Chapter 15, Question 6

26. A shelf registration permits a firm to register securities and then sell them over a _____ year period.

1

2

3

5

Chapter 15, Question 7

Explanation

Chapter 15, Question 7

27. You purchased some fixed assets four years ago at a cost of $129,600. You have been depreciating these assets using straight-line depreciation to a zero book value over 7 years. Today, you are selling these assets for $74,900. What is the after-tax cash flow from this sale if the applicable tax rate is 34 percent?

$12,776

$13,619

$54,700

$68,319

Tax on sale = (74,900 - (3/7)*129,600) * .34
= $6,581
After-Tax Cash Flow = 74,900 - 6,581
= $68,318.57
Chapter 10, Question 2

Explanation

Tax on sale = (74,900 - (3/7)*129,600) * .34
= $6,581
After-Tax Cash Flow = 74,900 - 6,581
= $68,318.57
Chapter 10, Question 2

28. If a firm uses their overall weighted average cost of capital as the discount rate for all of their proposed projects, then the firm will tend to: I. become riskier over time. II. accept projects which should be rejected. III. reject projects which should be accepted. IV. see their managers propose more high risk projects and less low risk projects.

I and II only

II and III only

I, II, and III only

I, II, III, and IV

Chapter 14, Question 6

Explanation

Chapter 14, Question 6

29. The Road Runner Co. has a bond outstanding that matures in 6 years and carries a 5 percent coupon. Interest is paid annually. The bond is currently priced at 98 percent of its face value. What is the pre-tax cost of debt?

4.60 percent

4.72 percent

4.90 percent

5.40 percent

Chapter 14, Question 4

Explanation

Chapter 14, Question 4

30. The capital structure weights used in the computation of the weighted average cost of capital are based on:

The most recent book value of a firm's long-term debt and equity securities

The face value of its debt and the market value of the equity securities

The market value of a firm's debt and equity securities

The debt-equity ratio of a firm, excluding and preferred stock, which might by outstanding

Chapter 14, Question 8

Explanation

Chapter 14, Question 8

31. Big Bird & Company just paid their annual dividend in the amount of $1.20 a share. This dividend is expected to increase by 3 percent annually. The company's stock is currently selling for $26.40 per share. What is the cost of equity?

4.68 percent

4.79 percent

7.55 percent

7.68 percent

Re = (D1/Po) + g
= ((1.20*1.03)/26.4) + .03
Chapter 14, Question 1

Explanation

Re = (D1/Po) + g
= ((1.20*1.03)/26.4) + .03
Chapter 14, Question 1