# Finc 332: Corporate Finance, Final Pt 1

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• 1.

### 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?

• A.

\$1,164,000

• B.

\$1,199,000

• C.

\$1,250,000

• D.

\$1,285,000

D. \$1,285,000
Explanation
= 825,000 + 425,000 + 35,000

Chapter 10, Question 1

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• 2.

### 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?

• A.

\$12,776

• B.

\$13,619

• C.

\$54,700

• D.

\$68,319

D. \$68,319
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

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• 3.

### 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?

• A.

\$7,128

• B.

\$14,256

• C.

\$18,709

• D.

\$20,963

A. \$7,128
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

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• 4.

### 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?

• A.

-\$9,000

• B.

-\$1,000

• C.

\$1,000

• D.

\$9,000

A. -\$9,000
Explanation
Initial net working capital= -12,000 + 7,000 - 4,000
Chapter 10, Question 4

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• 5.

### A cost-cutting project:

• A.

Reduces the total revenue

• B.

Can produce positive cash inflows

• C.

Always generates negative operating cash flows

• D.

Lovers the net income of a firm

B. Can produce positive cash inflows
Explanation
Chapter 10, Question 5

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• 6.

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

• A.

Depreciation expense increases

• B.

Rent expense increases

• C.

Payroll costs increase

• D.

Total sales decrease

A. Depreciation expense increases
Explanation
Chapter 10, Question 6

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• 7.

### Which one of the following is an example of erosion?

• A.

Losing sales due to an economic recession

• B.

Losing sales of one good because you start selling another good

• C.

Losing sales because of increased sales by your computer

• D.

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

B. Losing sales of one good because you start selling another good
Explanation
Chapter 10, Question 7

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• 8.

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

• A.

Only historical price information

• B.

All private information

• C.

All public information

• D.

All information of any kind

C. All public information
Explanation
Chapter 12, Question 1

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• 9.

### 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?

• A.

-11.28 percent

• B.

-11.37 percent

• C.

-12.76 percent

• D.

-12.83 percent

B. -11.37 percent
Explanation
(32.12-36.24)/36.24
Chapter 12, Question 2

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• 10.

### 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?

• A.

\$10.39

• B.

\$11.44

• C.

\$1,039

• D.

\$1,144

D. \$1,144
Explanation
(1.05*100) + (46.26-35.87)*100
Chapter 12, Question 3

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• 11.

### 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?

• A.

\$45.55

• B.

\$46.97

• C.

\$48.62

• D.

\$50.05

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

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• 12.

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

• A.

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

• B.

Bonds tend to have a higher risk premium than stocks.

• C.

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

• D.

US Treasury bills have a zero risk premium

D. US Treasury bills have a zero risk premium
Explanation
Chapter 12, Question 5

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• 13.

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

• A.

Weak-form efficient

• B.

Semi-strong form efficient

• C.

Strong form efficient

• D.

Either semi-strong or strong form efficient

C. Strong form efficient
Explanation
Chapter 12, Question 6

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• 14.

### 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?

• A.

\$2.32

• B.

\$3.67

• C.

\$34.80

• D.

\$50.05

D. \$50.05
Explanation
(1.35*15) + (50.19-47.87)*15
Chapter 12, Question 7

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• 15.

### 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?

• A.

\$16.24

• B.

\$17.85

• C.

\$18.64

• D.

\$19.25

C. \$18.64
Explanation
(.1165-.0355)*17.24 + 17.24
Chapter 12, Question 8

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• 16.

### 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?

• A.

-8.10 percent

• B.

-4.80 percent

• C.

3.69 percent

• D.

4.02 percent

C. 3.69 percent
Explanation
.72/19.51
Chapter 12, Question 9

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• 17.

### 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?

• A.

4.68 percent

• B.

4.79 percent

• C.

7.55 percent

• D.

7.68 percent

D. 7.68 percent
Explanation
Re = (D1/Po) + g
= ((1.20*1.03)/26.4) + .03
Chapter 14, Question 1

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• 18.

### 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?

• A.

8.91 percent

• B.

9.84 percent

• C.

14.12 percent

• D.

15.13 percent

C. 14.12 percent
Explanation
Re = Rf + BetaE (E(Rm)-Rf)
= .042 +1.24(.08)
Chapter 14, Question 2

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• 19.

### 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?

• A.

7.11 percent

• B.

9.00 percent

• C.

11.11 percent

• D.

14.06 percent

D. 14.06 percent
Explanation
Rp = D/Po
= (.09*100) / 64
Chapter 14, Question 3

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• 20.

### 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?

• A.

4.60 percent

• B.

4.72 percent

• C.

4.90 percent

• D.

5.40 percent

D. 5.40 percent
Explanation
Chapter 14, Question 4

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• 21.

### 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?

• A.

6.93 percent

• B.

7.41 percent

• C.

9.48 percent

• D.

10.50 percent

C. 9.48 percent
Explanation
[(1/1.6)*.12] + [(.6/1.6)*.08 * (1-.34)]
Chapter 14, Question 5

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• 22.

### 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.

• A.

I and II only

• B.

II and III only

• C.

I, II, and III only

• D.

I, II, III, and IV

D. I, II, III, and IV
Explanation
Chapter 14, Question 6

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• 23.

### An increase in a leveraged firm’s tax rate will:

• A.

Not affect their cost of capital

• B.

Increase their cost of capital

• C.

Decrease their cost of capital

• D.

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

C. Decrease their cost of capital
Explanation
Chapter 14, Question 7

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• 24.

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

• A.

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

• B.

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

• C.

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

• D.

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

C. The market value of a firm's debt and equity securities
Explanation
Chapter 14, Question 8

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• 25.

### Venture capital:

• A.

Is generally provided on a long-term basis

• B.

Is often provided in stages

• C.

Generally funds growth for mature firms

• D.

Is provided solely by individuals

B. Is often provided in stages
Explanation
Chapter 15, Question 1

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• 26.

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

• A.

Letter of comment

• B.

Registration statement

• C.

Prospectus

• D.

Tombstone

C. Prospectus
Explanation
Chapter 15, Question 2

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• 27.

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

• A.

Initial public

• B.

Seasoned

• C.

Dutch Auction

• D.

Green shoe

C. Dutch Auction
Explanation
Chapter 15, Question 3

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• 28.

### 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?

• A.

\$229,710

• B.

\$241,800

• C.

\$260,400

• D.

\$280,000

B. \$241,800
Explanation
Cash received = # of shares * offer price * (1 - spread)
= 10,000 *\$26*=(1-.7)
Chapter 15, Question 4

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• 29.

### 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?

• A.

4.0 percent

• B.

4.5 percent

• C.

5.0 percent

• D.

5.5 percent

C. 5.0 percent
Explanation
100,000*.06 = 6,000 shares
100,000 + 20,000 = 120,000 total shares
6,000/120,000 = .05
Chapter 15, Question 5

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• 30.

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

• A.

IPO

• B.

Term loan

• C.

Public offering

• D.

Private placement

D. Private placement
Explanation
Chapter 15, Question 6

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• 31.

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

• A.

1

• B.

2

• C.

3

• D.

5

B. 2
Explanation
Chapter 15, Question 7

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• Apr 11, 2023
Quiz Edited by
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• May 01, 2011
Quiz Created by
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