Description of this paper

FIN534 WEEK 11PART 1

Description

solution


Question

Question;Question 1;Which of the following statements is most;correct, holding other things constant, for XYZ Corporation's traded call;options?;The higher the strike price on XYZ's options, the;higher the option's price will be.;Assuming the same strike price, an XYZ call option;that expires in one month will sell at a higher price than one that expires in;three months.;If XYZ's stock price stabilizes (becomes less;volatile), then the price of its options will increase.;If XYZ pays a dividend, then its option holders will;not receive a cash payment, but the strike price of the option will be reduced;by the amount of the dividend;The price of these call options is likely to rise if;XYZ's stock price rises;Question 2;Suppose you believe that Florio Company's;stock price is going to decline from its current level of $82.50 sometime;during the next 5 months. For $5.10 you could buy a 5-month put option giving;you the right to sell 1 share at a price of $85 per share. If you bought this;option for $5.10 and Florio's stock price actually dropped to $60, what would;your pre-tax net profit be?;-$5.10;$19.90;$20.90;$22.50;$27.60;Question 3;Which of the following statements is CORRECT?;If the underlying stock does not pay a dividend, it;does not make good economic sense to exercise a call option prior to its;expiration date, even if this would yield an immediate profit.;Call options generally sell at a price greater than;their exercise value, and the greater the exercise value, the higher the premium;on the option is likely to be.;Call options generally sell at a price below their;exercise value, and the greater the exercise value, the lower the premium on;the option is likely to be.;Call options generally sell at a price below their;exercise value, and the lower the exercise value, the lower the premium on the;option is likely to be.;Because of the put-call parity relationship, under;equilibrium conditions a put option on a stock must sell at exactly the same;price as a call option on the stock.;Question 4;Which of the following statements is CORRECT?;An option's value is determined by its exercise;value, which is the market price of the stock less its striking price. Thus, an;option can't sell for more than its exercise value.;As the stock?s price rises, the time value portion;of an option on a stock increases because the difference between the price of;the stock and the fixed strike price increases.;Issuing options provides companies with a low cost;method of raising capital.;The market value of an option depends in part on the;option's time to maturity and also on the variability of the underlying stock's;price.;The potential loss on an option decreases as the;option sells at higher and higher prices because the profit margin gets bigger.;Question 5;An option that gives the holder the right to;sell a stock at a specified price at some future time is;a put option.;an out-of-the-money option.;a naked option.;a covered option.;a call option.;Question 6;Other things held constant, the value of an;option depends on the stock's price, the risk-free rate, and the;Variability of the stock price;Option's time to maturity;Strike price;Strike price;All of the above;None of the above;Question 7;As a consultant to Basso Inc., you have been;provided with the following data: D1 = $0.67, P0 = $27.50, and g = 8.00%;(constant). What is the cost of common from reinvested earnings based on the;DCF approach?;9.42%;9.91%;10.44%;10.96%;11.51%;Question 8;With its current financial policies, Flagstaff;Inc. will have to issue new common stock to fund its capital budget. Since new;stock has a higher cost than reinvested earnings, Flagstaff would like to avoid;issuing new stock. Which of the following actions would REDUCE its need to;issue new common stock?;Increase the percentage of debt in the target;capital structure.;Increase the proposed capital budget.;Reduce the amount of short-term bank debt in order;to increase the current ratio.;Reduce the percentage of debt in the target capital;structure.;Increase the dividend payout ratio for the upcoming;year.;Question 9;Which of the following statements is CORRECT?;The percentage flotation cost associated with;issuing new common equity is typically smaller than the flotation cost for new;debt.;The WACC as used in capital budgeting is an estimate;of the cost of all the capital a company has raised to acquire its assets.;There is an "opportunity cost" associated;with using reinvested earnings, hence they are not "free.;The WACC as used in capital budgeting would be;simply the after-tax cost of debt if the firm plans to use only debt to finance;its capital budget during the coming year.;The WACC as used in capital budgeting is an estimate;of a company's before-tax cost of capital.;Question 10;To help them estimate the company's cost of;capital, Smithco has hired you as a consultant. You have been provided with the;following data: D1 = $1.45, P0 = $22.50, and g = 6.50% (constant). Based on the;DCF approach, what is the cost of common from reinvested earnings?;11.10%;11.68%;12.30%;12.94%;13.59%;Question 11;Which of the following statements is CORRECT?;When calculating the cost of preferred stock;companies must adjust for taxes, because dividends paid on preferred stock are;deductible by the paying corporation.;Because of tax effects, an increase in the risk-free;rate will have a greater effect on the after-tax cost of debt than on the cost;of common stock as measured by the CAPM.;If a company's beta increases, this will increase;the cost of equity used to calculate the WACC, but only if the company does not;have enough reinvested earnings to take care of its equity financing and hence;must issue new stock.;Higher flotation costs reduce investors' expected;returns, and that leads to a reduction in a company's WACC.;When calculating the cost of debt, a company needs;to adjust for taxes, because interest payments are deductible by the paying;corporation.;Question 12;Suppose Acme Industries correctly estimates;its WACC at a given point in time and then uses that same cost of capital to;evaluate all projects for the next 10 years, then the firm will most likely;become less risky over time, and this will maximize;its intrinsic value.;accept too many low-risk projects and too few;high-risk projects.;become more risky and also have an increasing WACC.;Its intrinsic value will not be maximized.;continue as before, because there is no reason to;expect its risk position or value to change over time as a result of its use of;a single cost of capital.;become riskier over time, but its intrinsic value;will be maximized;Question 13;Which of the following statements is CORRECT?;Assume that the project being considered has normal cash flows, with one;outflow followed by a series of inflows;A project's regular IRR is found by compounding the;cash inflows at the WACC to find the present value (PV), then discounting the;TV to find the IRR.;If a project's IRR is smaller than the WACC, then;its NPV will be positive.;A project's IRR is the discount rate that causes the;PV of the inflows to equal the project's cost.;If a project's IRR is positive, then its NPV must;also be positive.;A project's regular IRR is found by compounding the;initial cost at the WACC to find the terminal value (TV), then discounting the;TV at the WACC.;Question 14;Assume a project has normal cash flows. All;else equal, which of the following statements is CORRECT?;A project's NPV increases as the WACC declines.;A project's MIRR is unaffected by changes in the;WACC.;A project's regular payback increases as the WACC;declines.;A project's discounted payback increases as the WACC;declines.;A project's IRR increases as the WACC declines.;Question 15;The WACC for two mutually exclusive projects;that are being considered is 12%. Project K has an IRR of 20% while Project R's;IRR is 15%. The projects have the same NPV at the 12% current WACC. Interest;rates are currently high. However, you believe that money costs and thus your;WACC will soon decline. You also think that the projects will not be funded;until the WACC has decreased, and their cash flows will not be affected by the;change in economic conditions. Under these conditions, which of the following;statements is CORRECT?;You should delay a decision until you have more;information on the projects, even if this means that a competitor might come in;and capture this market.;You should recommend Project R, because at the new;WACC it will have the higher NPV.;You should recommend Project K, because at the new;WACC it will have the higher NPV.;You should recommend Project R because it will have;both a higher IRR and a higher NPV under the new conditions.;You should reject both projects because they will;both have negative NPVs under the new;conditions.;Question 16;Which of the following statements is CORRECT?;The discounted payback method recognizes all cash;flows over a project's life, and it also adjusts these cash flows to account;for the time value of money.;The regular payback method was, years ago, widely;used, but virtually no companies even calculate the payback today.;The regular payback is useful as an indicator of a;project's liquidity because it gives managers an idea of how long it will take;to recover the funds invested in a project.;The regular payback does not consider cash flows;beyond the payback year, but the discounted payback overcomes this defect.;The regular payback method recognizes all cash flows;over a project's life.;Question 17;Which of the following statements is CORRECT?;If a project has "normal" cash flows, then;its MIRR must be positive.;If a project has "normal" cash flows, then;it will have exactly two real IRRs.;The definition of "normal" cash flows is;that the cash flow stream has one or more negative cash flows followed by a;stream of positive cash flows and then one negative cash flow at the end of the;project's life.;If a project has "normal" cash flows, then;it can have only one real IRR, whereas a project with "nonnormal;cash flows might have more than one real IRR.;If a project has "normal" cash flows, then;its IRR must be positive.;Question 18;Which of the following statements is CORRECT?;The NPV method assumes that cash flows will be;reinvested at the risk-free rate, while the IRR method assumes reinvestment at;the IRR.;The NPV method assumes that cash flows will be reinvested;at the WACC, while the IRR method assumes reinvestment at the risk-free rate.;The NPV method does not consider all relevant cash;flows, particularly cash flows beyond the payback period.;The IRR method does not consider all relevant cash;flows, particularly cash flows beyond the payback period.;The NPV method assumes that cash flows will be;reinvested at the WACC, while the IRR method assumes reinvestment at the IRR.;Question 19;Which of the following statements is CORRECT?;In a capital budgeting analysis where part of the;funds used to finance the project would be raised as debt, failure to include;interest expense as a cost when determining the project's cash flows will lead;to a downward bias in the NPV.;The existence of any type of "externality;will reduce the calculated NPV versus the NPV that would exist without the;externality.;If one of the assets to be used by a potential;project is already owned by the firm, and if that asset could be sold or leased;to another firm if the new project were not undertaken, then the net after-tax;proceeds that could be obtained should be charged as a cost to the project;under consideration.;If one of the assets to be used by a potential;project is already owned by the firm but is not being used, then any costs;associated with that asset is a sunk cost and should be ignored.;In a capital budgeting analysis where part of the;funds used to finance the project would be raised as debt, failure to include;interest expense as a cost when determining the project's cash flows will lead;to an upward bias in the NPV;Question 20;The CFO of Cicero Industries plans to;calculate a new project's NPV by estimating the relevant cash flows for each;year of the project's life (i.e., the initial investment cost, the annual;operating cash flows, and the terminal cash flow), then discounting those cash;flows at the company's overall WACC. Which one of the following factors should;the CFO be sure to INCLUDE in the cash flows when estimating the relevant cash;flows?;All sunk costs that have been incurred relating to;the project.;All interest expenses on debt used to help finance;the project.;The investment in working capital required to;operate the project, even if that investment will be recovered at the end of;the project's life.;Sunk costs that have been incurred relating to the;project, but only if those costs were incurred prior to the current year.;Effects of the project on other divisions of the;firm, but only if those effects lower the project's own direct cash flows.;Question 21;A firm is considering a new project whose risk;is greater than the risk of the firm's average project, based on all methods;for assessing risk. In evaluating this project, it would be reasonable for;management to do which of the following?;Increase the estimated NPV of the project to reflect;its greater risk.;Reject the project, since its acceptance would;increase the firm's risk.;Ignore the risk differential if the project would;amount to only a small fraction of the firm's total assets.;Increase the cost of capital used to evaluate the;project to reflect its higher-than-average risk.;Increase the estimated IRR of the project to reflect;its greater risk.;Question 22;Which of the following statements is CORRECT?;An example of an externality is a situation where a;bank opens a new office, and that new office causes deposits in the bank's;other offices to increase.;The NPV method automatically deals correctly with;externalities, even if the externalities are not specifically identified, but;the IRR method does not. This is another reason to favor the NPV.;Both the NPV and IRR methods deal correctly with;externalities, even if the externalities are not specifically identified.;However, the payback method does not.;Identifying an externality can never lead to an;increase in the calculated NPV.;An externality is a situation where a project would;have an adverse effect on some other part of the firm's overall operations. If;the project would have a favorable effect on other operations, then this is not;an externality.;Question 23;Which of the following statements is CORRECT?;A sunk cost is any cost that was expended in the;past but can be recovered if the firm decides not to go forward with the;project.;A sunk cost is a cost that was incurred and expensed;in the past and cannot be recovered if the firm decides not to go forward with;the project.;Sunk costs were formerly hard to deal with but now;that the NPV method is widely used, it is possible to simply include sunk costs;in the cash flows and then calculate the PV of the project.;A good example of a sunk cost is a situation where;Home Depot opens a new store, and that leads to a decline in sales of one of;the firm's existing stores.;A sunk cost is any cost that must be expended in;order to complete a project and bring it into operation.;Question 24;Which one of the following would NOT result in;incremental cash flows and thus should NOT be included in the capital budgeting;analysis for a new product?;Revenues from an existing product would be lost as a;result of customers switching to the new product.;Shipping and installation costs associated with a;machine that would be used to produce the new product.;The cost of a study relating to the market for the;new product that was completed last year. The results of this research were;positive, and they led to the tentative decision to go ahead with the new;product. The cost of the research was incurred and expensed for tax purposes;last year.;It is learned that land the company owns and would;use for the new project, if it is accepted, could be sold to another firm.;Using some of the firm's high-quality factory floor;space that is currently unused to produce the proposed new product. This space;could be used for other products if it is not used for the project under;consideration.;Question 25;Which of the following statements is CORRECT?;Suppose a firm is operating its fixed assets at;below 100% of capacity, but it has no excess current assets. Based on the AFN;equation, its AFN will be larger than if it had been operating with excess;capacity in both fixed and current assets.;If a firm retains all of its earnings, then it;cannot require any additional funds to support sales growth.;Additional funds needed (AFN) are typically raised;using a combination of notes payable, long-term debt, and common stock. Such;funds are non-spontaneous in the sense that they require explicit financing;decisions to obtain them.;If a firm has a positive free cash flow, then it;must have either a zero or a negative AFN.;Since accounts payable and accrued liabilities must;eventually be paid off, as these accounts increase, AFN as calculated by the;AFN equation must also increase.;Question 26;The term "additional funds needed;(AFN)" is generally defined as follows;Funds that a firm must raise externally from;non-spontaneous sources, i.e., by borrowing or by selling new stock to support;operations.;The amount of assets required per dollar of sales.;The amount of internally generated cash in a given;year minus the amount of cash needed to acquire the new assets needed to;support growth.;A forecasting approach in which the forecasted;percentage of sales for each balance sheet account is held constant.;Funds that are obtained automatically from routine;business transactions.;Question 27;Last year National Aeronautics had a FA/Sales;ratio of 40%, comprised of $250 million of sales and $100 million of fixed;assets. However, its fixed assets were used at only 75% of capacity. Now the;company is developing its financial forecast for the coming year. As part of;that process, the company wants to set its target Fixed Assets/Sales ratio at;the level it would have had had it been operating at full capacity. What target;FA/Sales ratio should the company set?;28.5%;30.0%;31.5%;33.1%;34.7%;Question 28;North Construction had $850 million of sales;last year, and it had $425 million of fixed assets that were used at only 60%;of capacity. What is the maximum sales growth rate North could achieve before;it had to increase its fixed assets?;54.30%;57.16%;60.17%;63.33%;66.67%;Question 29;Spontaneous funds are generally defined as;follows;A forecasting approach in which the forecasted;percentage of sales for each item is held constant.;Funds that a firm must raise externally through;short-term or long-term borrowing and/or by selling new common or preferred;stock.;Funds that arise out of normal business operations;from its suppliers, employees, and the government, and they include immediate;increases in accounts payable, accrued wages, and accrued taxes.;The amount of cash raised in a given year minus the;amount of cash needed to finance the additional capital expenditures and;working capital needed to support the firm's growth.;Assets required per dollar of sales.;Question 30;Last year Baron Enterprises had $350 million;of sales, and it had $270 million of fixed assets that were used at 65% of;capacity last year. In millions, by how much could Baron's sales increase;before it is required to increase its fixed assets?;$170.09;$179.04;$188.46;$197.88;$207.78

 

Paper#47454 | Written in 18-Jul-2015

Price : $20
SiteLock