Question;1.If a firm has a limited capital budget and too many good capital projects to fund them all, it is saidto be facing the problem of(a) constrained capital.(b) wealth optimization.(c) capital rationing.(d) profitability.Use the following information for Question 2. A company is assessing the risk of two capitalbudgeting proposals. The analysts have developed pessimistic, most likely, and optimisticestimates of the annual cash inflows which are given below. The firms cost of capital is 10%.Project AInitial Investment Annual Cash Inflow$20,000OutcomePessimistic10,000Most likely15,0002.$5,000OptimisticThe expected net present value of project A if the initial cost of the project is $19,994, given thatall outcomes are equally probable and the project has five-year life is(a) $1,045.(b) $17,910.(c) $36,865.(d) $93,730.3.A behavioral approach for dealing with project risk that uses several possible values for agiven variable such as cash inflows to assess that variables impact on NPV is called(a) sensitivity analysis.(b) scenario analysis.(c) simulation analysis.(d) none of the above.4.Tangshan Mining Company, with a cost of capital of 10% is considering investing inproject A, with an initial investment of $1,000,000. Project A is expected to provideequal cash inflows over its 15 year useful life. Based on this information, thebreakeven cash inflow for the project is(a)$1,000,000.(b)$131,474.(c)$100,000.(d)none of the above.Use the following information for Question 5. A firm is considering investment in acapital project which is described below. The firms cost of capital is 18% and the risk-freerate is 6%. The project has a risk index of 1.5. The firm uses the following equation todetermine the risk adjusted discount rate, RADR, for each project:RADR = Rf + + Risk Index (Cost of capital Rf)Initial InvestmentYear$1,000,000Cash Inflow1$500,0002500,0003500,0005.The discount rate that should be used in the net present value calculation to compensate for risk is(a) 6 percent.(b) 15 percent.(c) 18 percent.(d) 24 percent.6.A firm has a beta of 1.2. The market return equals 14 percent and the riskfree rate of return equals6 percent. The estimated cost of common stock equity is:A.6 percent.B.7.2 percent.C.14 percent.D.15.6 percentUse the following data for questions #7 through #12. A firm has the following optimal capital structure,composed of the following sources and target market value proportions.Source of capitalLongterm debtPreferred stockCommon stock equityTarget market proportions20%1070DEBT: The firm can sell a 12year, $1,000 par value, 7 percent bond for $960. A flotation cost of 2percent of the face value would be required in addition to the discount of $40.PREFERRED STOCK: The firm can issue preferred stock at $75 per share par value. The stock willpay a $10 annual dividend. The cost of issuing and selling the stock is $3 per share.COMMON STOCK: A firm's common stock is currently selling for $18 per share. The dividendexpected to be paid at the end of the coming year is $1.74. Its dividend payments have beengrowing at a constant rate of 3.01%. It is expected that to sell, a new common stock issue mustbe underpriced $1 per share in floatation costs. The firm's marginal tax rate is 40%.7.The firm's beforetax cost of debt is: (See above description for data)A.7.7 percent.B.10.6 percent.C.11.2 percent.D.12.7 percent.8.The firm's aftertax cost of debt is: (See above description for data)A.3.25 percent.B.4.6 percent.C.8 percent.D.8.13 percent.9.The firm's cost of preferred stock is: (See above description for data)A.7.2 percent.B.8.3 percent.C.13.3 percent.D.13.9 percent.10.The firm's cost of a new issue of common stock is: (See above description for data)A.7 percent.B.9.08 percent.C.13.2 percent.D.14.4 percent.11.The firm's cost of retained earnings is: (See above description for data)A.10.2 percent.B.13.9 percent.C.12.4 percent.D.12.7 percent.12.The weighted average cost of capital up to the point when retained earnings are exhausted is: (Seeabove description for data)A.7.5 percent.B.8.65 percent.C.10.4 percent.D.11.2 percent.13.A firm expects to have available $500,000 of earnings in the coming year, which it will retain forreinvestment purposes. Given the following target capital structure, at what level of total newfinancing will retained earnings be exhausted?Source of capitalTarget market proportionsLongterm debt40%Preferred stockCommon stock equityA.B.C.D.1050$500,000$800,000$1,000,000$1,500,00014.The ____ from the sale of a security are the funds actually received from the sale after ____, or thetotal costs of issuing and selling the security, which have been subtracted from the total proceeds.(a) gross proceeds, the after-tax costs(b) gross proceeds, the flotation costs(c) net proceeds, the flotation costs(d) net proceeds, the after-tax costs15.A firm has fixed operating costs of $10,000, unit sales price is $25, and its variable unit cost is $15.The firm's unit operating breakeven point ___ and its dollar breakeven point is ______.A.250, $ 6,250B.400, $10,000C.667, $16,675D.1,000, $25,00016.______ leverage deals with the relationship between sales revenue and earnings per share.A.FinancialB.OperatingC.VariableD.Total17.A firm has fixed operating costs of $175,000, total sales revenue of $3,000,000 and total variablecosts of $2,250,000. The firm's degree of operating leverage is ______.A.0.77B.1.30C.0.81D.4.2918.With the existence of fixed operating costs, a decrease in sales will result in ______ in EBIT.A.a proportional increaseB.an equal increaseC.a less than proportional decreaseD.a more than proportional decrease19.A firm has fixed operating costs of $25,000, a per unit sales price of $5, and a variable costper unit of $3. What is its operating breakeven point if it desires net operating income of$10,000, not $0 (zero)?A.12,500 unitsB.15,000 unitsC.17,500 unitsD.25,000 units20.At a base sales level of $400,000, a firm has a degree of operating leverage of 2 and adegree of financial leverage of 1.5. The firm's degree of total leverage is ______.A.3.5B.3.0C.0.5D.1.321.A firm is analyzing two possible capital structures30% and 50% debt ratios. The firm has totalassets of $5,000,000 and common stock valued at $50 per share. The firm has a marginal taxrate of 40% on ordinary income. The number of common shares outstanding for each of thecapital structures would be:A.30% debt ratio: 30,000 shares and 50% debt ratio: 50,000 shares.B.30 % debt ratio: 50,000 shares and 50% debt ratio: 70,000 shares.C.30 % debt ratio: 70,000 shares and 50% debt ratio: 100,000 shares.D.30 % debt ratio: 70,000 shares and 50% debt ratio: 50,000 shares.22.A firm has the following stockholders' equity balances:Common stock at parPaidin capital in excess of parRetained earnings$ 400,0001,200,0002,000,000In states where the firm's legal capital is defined as the par value of its common stock, themaximum cash dividend the firm could pay isA.$3,600,000.B.$400,000.C.$3,200,000.D.$1,600,000.23.Mr. R. owns 20,000 shares of ABC Corporation stock. The company will issue a stockdividend. Before the dividend Mr. R. owned 10% of the outstanding stock, which had amarket value of $200,000, or $10 per share. Upon receiving the 10% stock dividend the valueof his shares isA.$220,000.B.$210,000.C.$200,000.D.greater, but cannot be determined.24.At a firm's quarterly dividend meeting held December 5, the directors declared a $1.50 per share cashdividend to be paid to the holders of record on Monday, January 1. Before the dividend wasdeclared, the firm's accumulated retained earnings balance and cash balance were $1,280,000 and$30,000 respectively. The firm has 10,000 shares of common stock outstanding. On January 2, thecash, dividends payable, and retained earnings accounts had balances ofA.$15,000, $0, and $1,265,000, respectively.B.$30,000, $15,000, and $1,280,000, respectively.C.$30,000, $0, and $1,265,000, respectively.D.$15,000, $0, and $1,280,000, respectively.25.The accounting in a stock split will transfer fundsA.from the Common Stock and Paid-in-Capital accounts to the Retained Earningsaccount.B.from the Retained Earnings account to the Paid in Capital account.C.from the Retained Earnings account to the Paid in Capital account.D.from the Retained Earnings account to the Preferred Stock account.E.None of the above.26.A firm has had the following earnings history over the last five years:YearEarnings per share1999$ 2.5019982.0019971.7519961.2519951.00If the firm's dividend policy is based on a $0.50 payout per share, increasing by $0.05 per sharewhenever earnings exceed $1.50 per share, the annual 1996 and 1999 dividends were:A.$1.25 and $2.50, respectively.B.$0.50 and $0.50, respectively.C.$0 and $0.50, respectively.D.$0.50 and $0.55, respectively.27.At a firm's quarterly dividend meeting held December 5, the directors declared a $1.50 per share cashdividend to be paid to the holders of record on Monday, January 1. Before the dividend wasdeclared, the firm's cash balance and accumulated retained earnings balance and were $30,000 and$1,280,000 respectively. The firm has 10,000 shares of common stock outstanding. On January 2,the cash, dividends payable, and retained earnings accounts had balances ofA.$15,000, $0, and $1,265,000, respectively.B.$30,000, $15,000, and $1,280,000, respectively.C.$30,000, $0, and $1,265,000, respectively.D.$15,000, $0, and $1,280,000, respectively.28.A firm with a cash conversion cycle of 175 days can stretch its average payment periodfrom 30 days to 45 days. This will result in a/anA.decrease of 15 days in the cash conversion cycle.B.increase of 15 days in the cash conversion cycle.C.decrease of 30 days in the cash conversion cycle.D.increase of 30 days in the cash conversion cycle.29.The cost of giving up a cash discount under the terms of sale 2/10 net 90 (assume a 360dayyear) isA.9.2 percent.B.8.2 percent.C.10.7 percent.D.6.0 percent.30.A bank lends a firm $1,000,000 for one year at 12 percent on a discounted basis andrequires compensating balances of 10 percent of the face value of the loan. The effectiveannual interest rate associated with this loan isA.12 percent.B.13.3 percent.C.13.6 percent.D.15.4 percent.31.General Aviation has just sold an issue of 30day commercial paper with a face value of$5,000,000. The firm has just received $4,958,000. What is the effective annual interestrate on the commercial paper?An increase in the current liabilities to total assets ratio has the effects of ______ on profits and______ on risk.A.an increase, an increaseB.an increase, a decreaseC.a decrease, a decreaseD.a decrease, an increase32.33.A firm has an outstanding bond with a $1,000 par value that is convertible at $40 per shareof common stock. If the current market value of common stock per share is $45, theconversion value of the bond isA.$ 880.B.$1,000.C.$1,125.D.$1,200.34.A firm has an outstanding 15year convertible bond issue with a $1,000 par value and astated annual interest rate of seven percent. The bond is convertible into 50 shares ofcommon stock which has a current market price of $25. A straight bond could have beensold with a 10 percent stated interest rate. The straight value of the bond isA.$1,328.B.$1,250.C.$1,000.D.$ 771.35.Medarex is considering the lease of an electronic welder costing $210,000 from Key Leasing.The period of the lease will be 6 years. The welder will be depreciated under MACRS rules for a5-year class asset. Medarexs marginal tax rate is 40%. Annual lease payments will be $50,000.Estimated salvage value is zero. If Medarexs after-tax cost of borrowing is 15%, compute theafter tax cost of leasing.36.Medarex could also purchase the electronic welder for $210,000. The firm would finance thepurchase of the machine with a 9%, 6-year loan requiring end -of-year installment payments of$46,813. It would be depreciated under MACRS using a 5-year recovery period. The firmwould pay $1,500 per year for a service contract that covers all maintenance costs. There is nosalvage value. Compute the after-tax cost of purchasing.37.A combination of companies where the former corporations cease to exist isA.a congeneric formation.B.a consolidation.C.a merger.D.a holding company38.Smith Corporation is considering the lease of an automated production line costing $500,000from Ace Leasing. The period of the lease will be 4 years. The welder will be depreciated underMACRS rules for a 3-year class asset. Smiths marginal tax rate is 30%. Annual leasepayments will be $190,000. Estimated salvage value is zero. If Aces after-tax cost of borrowingis 16%, compute the after tax cost of leasing.Smith could also purchase the electronic welder for $500,000. The firm would finance thepurchase of the machine with a 16%, 4-year loan requiring end -of-year installment payments of$178,690. It would be depreciated under MACRS using a 5-year recovery period. The firmwould pay $5,000 per year for a service contract that covers all maintenance costs. There is nosalvage value. Compute the after-tax cost of purchasing39.40.Hittel, Inc. is considering leasing or purchasing a small aircraft to transport executives betweenmanufacturing facilities and the main administrative headquarters. The firm is in the 40 percenttax bracket and its aftertax cost of debt is seven percent. The estimated aftertax cash flows forthe lease and purchase alternatives are given below:End ofCash Flows (aftertax)YearLeasePurchase164,32968,454264,32959,110364,32963,596464,32966,6335-64,329- 30,056Given the above cash outflows for each alternative, calculate the present value ofthe aftertax cash flows using the aftertax cost of debt for each alternative.Use the following information for the next two problems. Eastern Digital Corp has a convertible bondoutstanding with a coupon rate of 9% and a maturity date of 20 years. The market rate of interest onbonds of the same risk class carry a 10% return. The conversion ratio is 40. The companys commonstock is selling for $18.25 per share. The bond is selling for $970.41.What is the conversion value42.What is the conversion premium?43.44.A______ results when a firm acquires a supplier or a customer.A.Congeneric mergerB.Conglomerate mergerC.Horizontal mergerD.Vertical mergerConcepts, Inc. will acquire Theories, Inc. at a cash price of $1.5 million. Theories, Inc. hasshortterm liabilities of $500,000. As a result of acquiring Theories, Inc., Marketing Concepts,Inc. would acquire an important copyright which would provide an estimated cash flow of$300,000 for the next five years. The firm has a cost of capital of 20 percent. The approximatenet present value of this acquisition isA.$500,000.B.$480,800.C.$102,700.D.$1,102,700.45.A _____ is undertaken with the goal of restructuring the acquired company in order to improve itscash flow and unlock its hidden value.A.an operating merger.B.a strategic merger.C.a financial merger.D.a hostile takeover.46.White and Wong, Inc. had financial difficulty and is being liquidated by the FederalBankruptcy Court. The firm has a liquidation value of $1,000,000 $400,000 from thefixed assets that served as collateral for the mortgage bonds and $600,000 from all otherassets (all prior claims have been satisfied). The firm's current capital structure is asfollows:Source of CapitalAmount________________________________________Unsecured bonds$500,000Mortgage bonds400,000Preferred stock100,000Common stock500,000The common stockholders will receive ______ in the liquidation.A.$500,000B.$333,333C.$198,000D.$047.A______ is an arrangement initiated by the debtor firm to negotiate with the creditors about aplan for sustaining or liquidating the firm.A.An involuntary reorganizationB.An involuntary liquidationC.A filing of Chapter Seven of the Bankruptcy Reform Act of 1978D.A voluntary settlement48.If the P/E paid is equal to the P/E of the acquiring company, the effect on the earnings per share ofthe acquired company will beA.positive.B.neutral.C.negative.D.uncorrelated.Use the following information for the next two problems. Tangshan Mining is attemptingto acquire Zhengsen Mining. Here is selected financial data:ItemTangshan Mining Zhengsen MiningEarnings available for common stockNumber of shares of stock outstanding$12,000,000$2,000,0001,500,00060,000Market price per share$100$120Tangshan Mining has sufficient authorized but unissued shares to do the proposed merger..49.17Calculate the EPS of Tangshan Mining and Zhengsen Mining before the merger.50.17If the ratio of exchange is 1.8, what will be the EPS of the merged company?Use the following information for the next three problems. Bakers Manufacturing is evaluating theacquisition of Cuisinaire Appliance. Cuisinaire has a loss carryforward of $1.5 million whichresulted from earlier operations. Bakers Oven can purchase Cuisinaire for $1.8 million and liquidatethe assets for $1.3 million. Bakers Oven expects earnings before taxes in the five years followingthe acquisition to be as follows:YearEarnings beforeTaxes1$108,0002288,0003324,0004425,0005425,000(These earnings are assumed to fall within the annual limit legally allowed for applicationof the tax loss carryforward resulting from the proposed acquisition.)Bakers Oven is in the 40 percent tax bracket and has a cost of capital of 17 percent.51.What is the tax advantage of the acquisition each year for Baker?52.What is the maximum cash price Bakers would be willing to pay for Cuisinaire?53.Do you recommend the acquisition? Why or why not?54.The _____ is the taxation technique that increases the U.S. income of an MNC by the amount of foreignincome (before foreign taxes). The U.S. tax calculation is then based on that higher level.A.unitary tax lawB.grossing up procedureC.GmbHD.nationalization procedure55.Laws in some U.S. states that tax multinationals (both American and foreign) on a percentage oftheir total worldwide income rather than the usual taxation of the MNCs' earnings arising withintheir jurisdiction is calledA.multinational tax laws.B.state corporate tax laws.C.unitary tax laws.D.universal tax laws.56.The allcurrentrate method dictated by the FASB No. 52 statement requires the translation of allbalance sheet accounts at the ______ rate and all income statement items at the _____ rates.A.closing, averageB.average, closingC.historical, currentD.average, historical57.All of the following are considered to be major or "hard" currencies EXCEPTA.the Japanese yen.B.the British pound.C.the Mexican peso.D.the U.S. dollar.58.When fewer units of a foreign currency are required to buy one dollar, the currency is said to have_____ with respect to the dollar.A.appreciatedB.depreciatedC.consolidatedD.remained fixed59.In the international context, the _____ interest rate involves only the MNC parent's currency,while the _____ interest rate includes any forecast appreciation or depreciation of a foreigncurrency relative to that of the MNC parent.A.effective, nominalB.macro, nominalC.nominal, effectiveD.nominal, micro60.A shortterm financial decision based on an MNC management's expectation that the local foreigncurrency will appreciate may beA.increasing local customers accounts receivable and increasing local notes payable.B.decreasing local notes receivable and decreasing accruals.C.increasing local inventories and increasing local notes payable.D.increasing local accounts receivable and decreasing local accounts payable.
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