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##### Texas FABUS305 exam 2

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Question;Question 1;Which of the following terms is the chance that the bond;issuer will not be able to make timely payments?;default risk;interest rate risk;liquidity of interest rate risk;term structure of interest rates;4.5 points;Question 2;Of the capital budgeting techniques discussed, which works;equally well with conventional and non-conventional cash flows and with;independent and mutually exclusive project?;payback period;discounted payback period;internal rate of return;net present value;4.5 points;Question 3;Rank order from highest credit risk to lowest risk the;following bonds, with the same time to maturity, by their yield to maturity: JM;Corporate bond with yield of 4.25 percent, IB Corporate bond with yield of 6.49;percent, TC Corporate bond with yield of 10.76 percent, and B&O Corporate;bond with a yield of 9.99 percent.;JM bond, TC bond, B&O bond, IB bond;JM bond, IB bond, TC bond, B&O bond;TC bond, B&O bond, IB bond, JM bond;JM bond, IB bond, B&O bond, TC bond;4.5 points;Question 4;A 5.5 percent coupon bond with 18 years left to maturity is;priced to offer a 6.25 percent yield to maturity. You believe that in one year;the yield to maturity will be 5.75 percent. What is the change in price the;bond will experience in dollars assuming face value is $1000 and it pays;semi-annual coupons?;$25.00;$26.89;$53.47;$80.37;4.5 points;Question 5;A 6.25 percent coupon bond with 20 years left to maturity is;offered for sale at $1017.20. What yield to maturity is the bond offering?;Assume interest payments are paid semi-annually and face value is $1000.;3.05%;6.00%;6.10%;6.25%;4.5 points;Question 6;Of the capital budgeting techniques discussed, which works;equally well with conventional and non-conventional cash flows and with;independent and mutually exclusive project?;payback period;discounted payback period;internal rate of return;net present value;4.5 points;Question 7;Suppose your firm is considering two mutually exclusive;required projects with the cash flows shown below. The required rate of return;on projects of both of their risk class is 10 percent. Project A s Cash flow;from year 0 to year 3: -1000, 400, 400, 700. Project B s Cash flow from year 0;to year 3: -500, 200, 300, 300. Which statement is correct?;Accept A, reject B, because B has lower IRR;Reject A, accept B, because B has higher IRR;Accept A, reject B, because A has higher NPV;Reject A, accept B, because B has higher NPV;4.5 points;Question 8;Which statement is correct?;IRR will give you correct decision if it is applied to;mutually exclusive projects.;If NPV and IRR give you contradictory decisions, you should;follow NPV.;IRR rule is the best rule to apply when making capital;budgeting decisions.;NPV will give you incorrect decision if it is applied to;mutually exclusive projects.;4.5 points;Question 9;If a firm has already paid an expense or is obligated to pay;one in the future, regardless of whether a particular project is undertaken;that expense is a;opportunity cost;relevant cost;incremental cost;sunk cost;4.5 points;Question 10;Which of the following is NOT included when calculating the;depreciable basis for real property?;freight charges for item;sales tax paid for item;financing fees;installation and testing fees;4.5 points;Question 11;Suppose you sell a fixed asset for $125,000 when it's book;value is $139,000. If your company's marginal tax rate is 30%, what will be the;effect on cash flows of this sale (i.e., what will be the after-tax free cash;flow of this sale)?;$9,800;$14,000;$111,300;$129,200;4.5 points;Question 12;Compute the price of a 5 percent coupon bond with 20 years;left to maturity and a market interest rate of 6.25 percent. (Assume interest;payments are semi-annual.) Which statement is correct?;The bond is a discount bond selling at $858.41;The bond is a discount bond selling at $922.34;The bond is a premium bond selling at $858.41.;The bond is a premium bond selling at $922.34.;4.5 points;Question 13;A decrease in net working capital (NWC) is treated as a;cash inflow;cash outflow;sunk cost;historical cost;4.5 points;Question 14;Accelerated depreciation allows firms to;depreciate less and receive less of the dollars of cash;flows earlier in the asset's life.;depreciate more and receive more of the dollars of cash;flows earlier in the asset's life.;not pay any taxes during an asset's life.;depreciate more and receive more of the dollars of cash;flows later in the asset's life;4.5 points;Question 15;In year 2012, ABS Corp's depreciation expenses are $125,000;and its marginal tax rate is 30%. What is the amount of depreciation tax;shield?;$125,000;$87,500;$62,500;$37,500;4.5 points;Question 16;What is the net effect on a firm's cash flow from changes in;NET WORKING CAPITAL if a new project requires: $30,000 increase in inventory;$10,000 increase in accounts receivable, and a $20,000 increase in accounts;payable?;cash inflow $5,000;cash outflow $10,000;cash outflow $20,000;cash inflow $55,000;4.5 points;Question 17;If project A has the cash flow timeline as: Year 0 $-1000;Year 1 $200, Year 2 $300, Year 3 $500, Year 4 $500. What is the payback period;of this project?;1 year;2 years;3 years;4 years;4.5 points;Question 18;If project B has the cash flow timeline as: Year 0 $-100;Year 1 $75, Year 2 $100, Year 3 $300, Year 4 $75, Year 5 $200. Compute the NPV;if the cost of capital is 11%.;$292.96;$392.96;$436.18;$466.78;5 points;Question 19;If project B has the cash flow timeline as: Year 0 $-100;Year 1 $75, Year 2 $100, Year 3 $300, Year 4 $75, Year 5 $200. Compute the IRR.;If the cost of capital is 11%, should the firm accept or reject this project?;10.956%, reject;10.956%, accept;22%, accept;109.56%, accept;5 points;Question 20;Which of the following statements is true?;Interest payments paid to U.S. Treasury bond holders are not;taxed at the federal level.;Interest payments paid to corporate bond holders are not;taxed at the federal level.;Interest payments paid to corporate bond holders are not;taxed at the state level.;Interest payments paid to municipal bond holders are not;taxed at the federal level.;4.5 points;Question 21;ABC transportation;has a depreciation expense of $300,000 and has a marginal tax rate of 30%. What;is its depreciation tax shield?;30,000;60,000;90,000;300,000;4.5 points;Question 22;Currently XYC Corporation's;30 year bonds have a price of $980 and YTM of 6.5%. The bonds just got;downgraded and YTM increased to 6.9%. How will the price change?;Decreases;Increases;Stays the same

Paper#48173 | Written in 18-Jul-2015

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