Introduction to Corporate Finance

1 When evaluating a project in which a firm might invest, both the size and the timing of the cash flows are important.

A) B)

True False

2 ilo, !nc. spends appro"imatel# $% million annuall# to hire auditors to review the firm&s financial statements. 'his is an e"ample of an indirect agenc# cost.

() B)

'rue False

% 'he board of directors has the power to act on behalf of the shareholders to hire and fire the operating management of a firm. !n a legal sense, the directors are )principals) and the shareholders are )agents.)

() B)

'rue False

* 'he vice+president of finance generall# reports directl# to the chairman of the board.

() B)

'rue False

, ( manager in charge of wor-ing capital determines.

() B) 0) 1) 2)

how to raise the mone# re/uired to fund a project. how much inventory a firm should maintain. how man# additional shares of stoc- should be sold. which projects a firm should underta-e. which fi"ed assets a firm should purchase.

3 Which one of the following is the best description of the goal of a financial manager in a corporation where shares are publicl# traded4

() B) 0) 1) E)

ma"imize sales growth over the short+term ma"imize profits over the short+term avoid financial distress maintain stead# earnings growth maximize the current value per share of the existin stoc!

5 'he duties of a financial manager include determining.

!. !!. !!!. !6.

which mar-eting strateg# to use to promote a product. the most appropriate mi" of long+term debt and e/uit#. which projects a firm should underta-e. how much short+term debt to utilize.

() B) 0) ") 2)

! and !! onl# !, !!, and !!! onl# !! and !!! onl# II# III# and I$ only !, !!, !!!, and !6

7 (nn is interested in purchasing 'ed&s factor#. 8ince (nn is a poor negotiator, she hires ar# to negotiate a purchase price. !dentif# the parties to this transaction.

() B) 0) ") 2)

ar# is the principal and (nn is the agent. 'ed is the principal and (nn is the agent. 'ed is the agent and (nn is the principal. Ann is the principal and %ary is the a ent. (nn is the principal and 'ed is the agent.

9 ( financial manager is responsible for deciding whether or not new manufacturing e/uipment should be purchased to replace e"isting e/uipment. 'he firm has sufficient cash available to ma-e the purchase. 'he new e/uipment would reduce labor e"penses and would allow the firm to reduce its investment in inventor#. Which of the financial management areas would be involved in this decision4

!. capital budgeting !!. capital structure !!!. wor-ing capital

() B) 0)

! onl# ! and !! onl# !! and !!! onl#

") 2)

I and III only !, !!, and !!!

1: 0apital budgeting is the process of.

() B) 0) ") 2)

determining how to raise the mone# re/uired to fund a project. choosing how much cash to -eep on hand. deciding the amount of earnings that a firm should retain. plannin and mana in a firm&s lon 'term investments. deciding what mar-etable securities to purchase.

Financial (tatements# Taxes# and Cash Flow

1 (ccording to ;enerall# (ccepted (ccounting <rinciples =;((<), assets are generall# shown on the financial statements at the higher of current mar-et value or historical cost.

A) B)

True False

2 'here is a tradeoff between the advantages of li/uidit# and forgone potential profits.

A) B)

True False

Feedbac-. 'his statement is true.

% 8uppose >u+1rugs, !nc. just received a patent on a new drug for diabetes. 'his patent is considered an intangible fi"ed asset.

A) B)

True False

* ?ou are to determine the level of net capital spending b# a firm. !f #ou have the balance sheet and income statements, how would #ou go about #our tas-4

A) B) 0) 1) 2)

endin net fixed assets minus )e innin net fixed assets plus depreciation beginning net fi"ed assets plus ending net fi"ed assets minus depreciation ending net fi"ed assets minus beginning net fi"ed assets minus depreciation plus ta"es ending net fi"ed assets minus beginning net fi"ed assets plus depreciation minus ta"es beginning net fi"ed assets minus ending net fi"ed assets plus depreciation

, Balance sheet assets.

!. !!. !!!.

alwa#s have a value e/ual to total liabilities minus shareholders& e/uit#. are listed in order of increasing li/uidit#. represent items ac/uired with the use of liabilities and e/uit#.

() B) C) 1) 2)

! onl# !! and !!! onl# III only ! and !! onl# !, !!, and !!!

3 Which one of the following statements is true4

() B) C) 1) 2)

(ccounting income is generall# e/ual to cash flow. (ssets are usuall# listed on the balance sheet at mar-et value. Accountin statements are usually prepared to match the timin of income and expenses. 'he balance sheet e/uit# account represents the mar-et value of the firm to the stoc-holders. 'he balance sheet tells investors e"actl# what the firm is worth.

5 'he changes in current assets relative to current liabilities over a period of time are called the.

() B) 0) 1) 2)

net capital spending. chan e in net wor!in capital. operating cash flow. change in asset cash flow. cash flow from assets.

7 Which one of the following statements is generall# true regarding li/uidit#4

()

@i/uidit# is detrimental to a firm because it allows the firm to pa# its bills more easil#, thereb# avoiding financial distress.

B) 0) 1) 2)

*i+uidity is valua)le to a firm )ecause li+uid assets can )e sold +uic!ly without much loss in value. @i/uidit# is valuable to a firm because a firm can borrow mone# using its li/uid assets, such as a warehouse, as collateral. (ssets are generall# listed on a firm&s balance sheet in the order of increasing li/uidit#. @i/uid assets generall# earn a large return, especiall# in comparison to illi/uid assets.

9 (dditions to net wor-ing capital over the course of a #ear can be computed b#. () B) 0) 1) E) subtracting depreciation from the difference between ending >W0 and beginning >W0. adding depreciation to the difference between ending >W0 and beginning >W0. adding interest paid to the difference between ending >W0 and beginning >W0. subtracting interest paid from the difference between ending >W0 and beginning >W0. su)tractin )e innin ,-C from endin ,-C.

1: @ast #ear, A1 0orporation had $1 million in operating cash flow, $,::,::: in net capital spending, and a decrease in net wor-ing capital of $2,,:::. What was the firm&s cash flow from assets4

() B) 0) 1) 2)

$*5,,::: ./0/#111 $1,:::,::: $1,*5,,::: $1,,2,,:::

-or!in with Financial (tatements

1 Another name for return on equity is return on total capitalization. A) B) True False

2 Asset utilization ratios are intended to measure how efficiently or intensively a firm uses its assets to generate sales. A) B) True False

The profit margin appears on a common!size income statement. A) B) " True False

#hile financial statements have many uses outside of the company$ they are not useful internally. A) B) True False

% #hich one of the following correctly identifies the activity categories found on a statement of cash flows& A) B) ') D) () operating$ income statement$ financing investment$ purchasing$ operating financing$ operating$ income statement operating, financing, investment noncash$ financing$ investment

) ***** ratios are designed to determine a firm+s long!run a,ility to meet its o,ligations. A) B) ') D) () -iquidity Asset!utilization .rofita,ility Financial leverage /ar0et value

1 #hich of the following are directly incorporated into the calculation of the 2u .ont identity& 3. de,t!equity ratio 33. equity multiplier 333. total asset turnover 34. profit margin A) B) ') 2) E) 3 and 333 only 33 and 333 only 3$ 33$ and 333 only 3$ 333$ and 34 only II, III, and IV only

5 #hich one of the following is frequently used as a measure of the cash flow availa,le to meet the financial o,ligations of a firm& A) B) C) 2) () earnings ,efore ta6es earnings ,efore ta6es and depreciation earnings before interest, ta es, and depreciation net income ta6a,le income

7 #hich of the following formulas use sales as the numerator&

3. accounts receiva,le turnover 33. inventory turnover 333. fi6ed asset turnover 34. accounts paya,le turnover A) B) ') 2) () 3 and 33 only I and III only 33$ 333$ and 34 only 3$ 33$ and 333 only 3$ 333$ and 34 only

18 'atchaTan 'o. had net sales of 9788$888 and average accounts receiva,les of 9)8$888 last year. :ow long on average does it ta0e its credit customers to pay their ,ills& A) B) ') 2) E) ).8 days 1%.8 days 1%. days 2".8 days !"#$ days

*on 'Term Financial 2lannin and 3rowth

1 0onventional wisdom holds that financial plans don&t wor-, but financial planning does.

A) B)

True False

2 (ll else e/ual, a firm that utilizes assets efficientl# will have a higher sustainable growth rate than a firm that does not.

A) B)

True False

% 'o reduce the amount of e"ternal financing needed, a firm ma# need to lower its rate of growth.

A) B)

True False

(ctions that increase a firm&s abilit# to generate funds internall# decrease its abilit# to grow without obtaining e"ternal financing.

() B)

'rue False

, ( firm has a capital intensit# ratio of 2.:. 'otal assets are e"pected to increase b# the same percentage as sales. ;iven this, then.

!. assets and sales must increase b# identical dollar amounts. !!. there will be no need for e"ternal funding. !!!. the firm is probabl# operating at full capacit#.

() B) 0) 1) 2)

! onl# III only ! and !!! onl# !! and !!! onl# !, !!, and !!!

3 When doing financial planning, the BBBBB of a firm provide a guide for changes in liabilities and e/uit#.

() B) 0) 1) 2)

sales growth e"pectations financing and dividend policies sustainable growth rate e"pectations pro forma income statements wor-ing capital policies

5 Which of the following factors affect a firm&s abilit# to grow at its ma"imum sustainable rate of growth4

!. total asset turnover !!. financial polic# !!!. dividend polic# !6. profit margin

() B) 0) 1) E)

!! and !!! onl# ! and !! onl# !, !!!, and !6 onl# !, !!, and !!! onl# I# II# III# and I$

Wh# is it important to determine if a firm is operating at full capacit#4

() B) C) 1) are operating 2)

( firm that is operating at less than full capacit# will not need an# e"ternal financing. !f a firm is operating at less than full capacit#, fi"ed assets will t#picall# increase at the same percent as sales. A firm with excess capacity has some room to expand sales without increasin the investment in fixed assets. For a given increase in sales, firms operating at less than full capacit# will e"perience more rapid asset growth than that e"perienced b# firms that at full capacit#. Cnl# firms operating at full capacit# can grow rapidl#.

9 Which one of the following statements regarding financial planning is accurate4

() B) 0) ") 2)

Financial planning ensures a firm will not be surprised b# unforeseen future events. B# using financial planning, a firm can clearl# identif# its options for the coming 1, #ears. 'he use of financial planning allows a firm to eliminate the interactions between its operating policies and its financing policies. Financial plannin allows a firm to plan for the future in a systematic fashion. Financial planning ta-es the burden of managing the firm off of the financial manager and places it all on the operations manager.

1: 8uppose a firm is wor-ing at full capacit# and that assets and costs are tied directl# to the level of sales. (lso assume the firm pa#s out all its earnings as dividends. 'he sales are e"pected to increase b# 1: percent ne"t period. 'he e"ternal funding needed to support this level of growth.

() B) 0) 1) E)

is zero since no liabilities are tied directl# to the level of sales. depends on the profit margin. depends on the ratio of fi"ed assets to total sales. depends on the current debt+e/uit# ratio. is e+ual to the rowth rate times total assets.

Introduction to $aluation4 The Time $alue of %oney

1 !nterest on interest is interest earned on the reinvestment of previous interest pa#ments.

A) B)

True False

2 8imple interest is interest earned onl# in the first #ear of an investment.

()

'rue

B)

False

% !f a lump sum of $1:,::: is invested for three #ears at 1: percent compounded annuall#, it will earn a total of $%,%1: in interest over that period.

() B)

'rue False

* (ll else e/ual, the higher the interest rate, the higher the future value of an investment will be.

A) B)

True False

, 8uppose #ou are tr#ing to find the present value of two different cash flows using the same interest rate for each cash flow. 'he first cash flow is $1,::: ten #ears from now. 'he second is $7:: seven #ears from now. Which one of the following is true about the discount factors used to value the cash flows4

A) now. B) 0) $7::. 1) 2)

The factor for the cash flow 51 years away is always less than or e+ual to the factor for the cash flow that is received seven years from Both factors are greater than 1. Degardless of the interest rate, the discount factors are such that the present value of the $1,::: will alwa#s be higher than the present value of the 8ince the pa#ments are different, no statement can be made regarding the factors to be used. 'he astute investor will factor in the time differential and choose the pa#ment that arrives the soonest.

3 ?ou just won the lotter# and want to put some mone# awa# for #our child&s college education. When #our child goes to college 17 #ears from now, the cost will be $3,,:::. ?ou can earn 7 percent compounded annuall#. Aow much do #ou need to invest toda#4

() B) 0) 1) E)

$9,727.17 $11,53%.:5 $1%,39:.72 $1,,2,7.15 .56#066.57

5 ?ou need $2,::: to bu# a new stereo for #our car. !f #ou have $7:: to invest at , percent compounded annuall#, how long will #ou have to wait to bu# the stereo4

() B) 0) 1) E)

3.,7 #ears 7.*2 #ears 1*.,7 #ears 1,.5, #ears 58.98 years

?ou are going to receive $1:: four #ears from toda#. !f the discount rate is , percent compounded annuall#, what will be the present value of the $1:: two #ears from toda#4

() B) 0) 1) E)

$35.37 $37.%: $72.25 $72.3* .71.91

9 ?our best friend gave #ou $1:: as a present si" #ears ago. ?ou invested this mone# at a 5 percent rate of interest. Aow much will this mone# be worth 1: #ears from toda#4

() B) 0) ") 2)

$1,:.:5 $193.52 $2*7.:9 .07/.00 $%:%.:%

1: !n a growing idwestern town, the number of eating establishments at the end of each of the last five #ears are as follows. ?ear 1 E 1*%F ?ear 2 E 1*9F ?ear % E 132F ?ear * E 151F ?ear , E 157. !f the number of eating establishments is e"pected to grow in #ear 3 at the same rate as the percentage increase in #ear ,, how man# new eating establishments will be added in #ear 34

() B) C) 1) 2)

* 3 9 9 1:

"iscounted Cash Flow $aluation

1 (n annuit# is a level stream of cash flows for a fi"ed period of time.

A) B)

True False

2 ( perpetuit# is the same thing as an annuit# due.

() B)

'rue False

% 'he stated interest rate is the same thing as the effective annual rate.

() B)

'rue False

* (n interest rate /uoted as 3 percent compounded monthl# means interest is paid at a rate of 3 percent each month.

() B)

'rue False

, Which of the following can be computed4

!. present value of a perpetuit# !!. future value of a perpetuit# !!!. present value of an annuit# due !6. future value of an annuit# due

() B) 0) ") 2)

! and !!! onl# !! and !!! onl# !!, !!!, and !6 onl# I# III# and I$ only !, !!, !!!, and !6

3 ?ou have won a prize which will pa# #ou or #our heirs $2,,::: a #ear for ,: #ears. 'he first pa#ment is due immediatel#. What is the present value of this prize given an 7 percent discount rate4

() B) 0) 1) E)

$%::,::: $%:,,7%5 $%:9,3,: $%12,,:: .::1#:1;

5 Which of the following statements are true4

!. 'here is an inverse relationship between present values and interest rates. !!. 'he effective annual rate will be higher than the annual percentage rate for a loan that compounds interest monthl#. !!!. 'here is an inverse relationship between future values and periods of time.

!6. (ll else e/ual, the more fre/uentl# interest is compounded on a loan, the more interest #ou will have to pa#.

() B) 0) ") 2)

! and !! onl# !!! and !6 onl# !!, !!!, and !6 onl# I# II# and I$ only !, !!, !!!, and !6

7 8uppose #ou invest $1: for one #ear, and at the end of the #ear #ou receive bac- $12. Which of the following statements must be true concerning #our investment4

!. 'he /uoted rate must have been greater than 2: percent. !!. 'o figure the /uoted rate, #ou would need to -now how often the investment was compounded. !!!. 'he effective annual rate was 2: percent. !6. 'he continuousl# compounded effective annual rate has to be 2: percent.

() B) 0) 1) 2)

! and !!! onl#. II and III only ! and !6 onl# !!, !!!, and !6 onl# !, !!, and !!! onl#

9 Bernie just won a contest with a grand prize of $2,:,:::. 'he contest stipulates that the winner will receive $1::,::: immediatel# plus $1,,::: at the end of each of the ne"t 1: #ears. !f Bernie can earn , percent on his mone#, how much is this prize worth to him toda#4

() B) 0) ") 2)

$11*,27,.51 $133,15,.32 $179,%*,.*, .05/#806.10 $2,:,:::.::

1: ?ou obtain a $1::,:::, %:+#ear fi"ed+rate mortgage at 7.2, percent compounded monthl#. (lthough #ou get a %:+#ear mortgage, #ou plan to prepa# the loan b# ma-ing an additional pa#ment each month along with #our regular pa#ment. Aow much e"tra must #ou pa# each month if #ou wish to pa# off the loan in 2: #ears4

() B) C) 1) 2)

$2*.,3 $,*.77 .511.81 $1:%.27 $1:3.73

Interest <ates and Bond $aluation

1 0onsidering the time period since the ;reat 1epression, the real push to raise capital b# issuing jun- bonds reall# began in the late 195:s.

A) B)

True False

2 'he call premium t#picall# starts at 1: percent of par and decreases to zero with the passage of time.

() B)

'rue False

% ( call provision, but not a sin-ing fund, allows a compan# to retire its debt earl#.

() B)

'rue False

* (n upward sloping #ield curve reflects investors& desire for compensation for interest rate ris-.

A) B)

True False

, !f #ou multipl# a bond&s current #ield b# its mar-et price #ou get the.

() B) 0) 1) E)

#ield to maturit#. investors& re/uired rate of return. annual coupon rate. cost of capital. annual coupon payment.

3 ?ou want to own e/uit# in a foreign oil compan#, but no shares of stoc- are currentl# being offered for sale. !f there are BBBBB for sale, #ou could purchase these and then trade them in for shares of stoc-.

A) B) 0) 1) 2)

converti)le )onds put bonds debentures zero coupon bonds subordinated debentures

5 Which of the following bonds can be terminated prior to maturit# b# the issuer4

!. callable bond !!. bond with sin-ing fund provision !!!. convertible bond !6. put bond

A) B) 0) 1) 2)

I and II only !! and !!! onl# !!! and !6 onl# !, !!, and !6 onl# !, !!, and !!! onl#

7 Which one of the following items does >C' generall# appear in a Wall 8treet Gournal corporate bond /uote4

() B) C) 1) 2)

estimated spread over a 'reasur# securit# mar-et price yield'to'maturity coupon rate maturit# date

9 Which of the following factors affect the term structure of interest rates4

!. e"pected rate of inflation !!. interest rate ris- premium !!!. real rate of interest

() B) 0) 1) E)

! onl# !! onl# ! and !! onl# ! and !!! onl# I# II# and III

1: Aome8afe 0ab 0o. wants to issue new 1:+#ear bonds to finance its e"pansion plans. 0urrentl# the compan# has 9 percent semiannual bonds selling for $1,:35.9, that mature 1: #ears from now. What must the coupon rate of the new bonds be in order for the issue to sell at par if interest is paid semiannuall#4

() B) 0) 1)

*.:: percent *.21 percent 5.52 percent 5.99 percent

E)

8.11 percent

(toc! $aluation

1 ost preferred stoc- has dividends that are cumulative.

A) B)

True False

2 For income ta" purposes, preferred stoc- is more li-e debt than common stoc-.

() B)

'rue False

% !f #ou use the constant growth model to value stoc-, #ou assume that <1 E <: " =1 H g).

A) B)

True False

* 'he effect of cumulative voting is to permit minorit# participation.

A) B)

True False

, (s illustrated using the dividend growth model, the total return on a share of common stoc- is comprised of a.

() B) 0) 1) E)

capital gains #ield and a dividend growth rate. capital gains growth rate and a dividend growth rate. dividend #ield and a re/uired rate of return. dividend #ield and the e"pected price ne"t #ear. dividend yield and a capital ains yield.

3 Which one of the following terms is t#picall# associated with both preferred stoc- and common stoc-4

() B) C) 1) 2)

pro"# voting rights dividend yield arrearage cumulative voting

5 Which one of the following statements is true about the differences between debt and common stoc-4

() B) C) 1) 2)

1ebt is ownership in a firm but e/uit# is not. 0reditors have voting power while stoc-holders do not. 2eriodic payments made to either class of security are tax deducti)le for the issuer. !nterest pa#ments are promised while dividend pa#ments are not. Bondholders can also own e/uit#, but shareholders can not own bonds.

7 ( BBBBB is a >?82 member who is a dealer assigned as a mar-et ma-er for a particular securit#.

() B) 0) 1) E)

bro-er dealer member floor trader specialist

9 ( BBBBB maintains an inventor# and stands read# to bu# and sell at an# time.

!. dealer !!. specialist !!!. bro-er

() B) C) 1) 2)

! onl# !!! onl# I and II only ! and !!! onl# !! and !!! onl#

1: 'here is an election being held to fill two seats on the board of directors of a firm in which #ou hold stoc-. 'here is a total of *2: shares outstanding. !f the election is conducted under cumulative voting and #ou own 12: shares, how man# more shares must #ou bu# to be assured of earning a seat on the board4

() B) C) 1) 2)

: 2 05 91 1*1

,et 2resent $alue and =ther Investment Criteria

1 ( firm that onl# accepts projects for which the !DD is e/ual to the firm&s re/uired return will, on average, neither create nor destro# wealth for its shareholders.

A) B)

True False

2 'he profitabilit# inde" is computed using accounting income and accounting boo- 6alues.

() B)

'rue False

% (n advantage of the pa#bac- rule is that it is eas# to understand.

A) B)

True False

* For projects with conventional cash flows and positive discount rates, the pa#bac- period will be shorter than the discounted pa#bac- period.

A) B)

True False

, Which of the following consider the time value of mone# in their computation4

!. pa#bac!!. average accounting return !!!. profitabilit# inde"

() B) C) 1) 2)

! onl# !! onl# III only ! and !!! onl# !! and !!! onl#

3 'he average accounting return =((D) decision rule states that a project should be accepted whenever the ((D.

() B) 0) ") 2)

is positive. e"ceeds the internal rate of return =!DD). indicates that a project has more than recaptured its initial cost in terms of net income. exceeds the tar et AA<. is less than the !DD.

5 Which of the following /uestions are addressed in the capital budgeting process4

!. What products or services will we offer or sell4 !!. !n what mar-ets will we compete4 !!!. What new products will we introduce4

() B) 0) 1) E)

! onl# !!! onl# ! and !! onl# ! and !!! onl# I# II# and III

7 Which one of the following factors can cause a project to have multiple !DDs4

() B) 0) 1) 2)

a large initial cash outla# an initial cash investment followed )y positive cash flows for three years and a ne ative cash flow in the final year negative cash flows in the first three #ears of a project but positive cash flows thereafter conventional cash flows mutuall# e"clusive investments

9 ?ou run a small bagel shop and are considering replacing #our four sales cler-s with automated machines that allow customers to bu# their bagels without an# human interaction. Cf the following, the most difficult tas- #ou face in computing the net present value of this project is estimating the.

() B) 0) 1) E)

proposed reduction in wages. ta" shield of the new project. cost of the new e/uipment that will be re/uired. cost of installing the new e/uipment. total chan e in sales.

1: ?ou are going to choose one of two mutuall# e"clusive investments. !nvestment ( pa#s $%,,::: a #ear for four #ears and has an initial cost of $7:,:::. !nvestment B pa#s $3:,::: a #ear for five #ears and has an initial cost of $15:,:::. !f #our re/uired return is 1% percent, which investment should #ou choose and wh#4

() B) 0) 1) E)

(F because it costs less initiall# (F because its !DD e"ceeds 1% percent (F because it has a higher !DD BF because its !DD e"ceeds 1% percent B> )ecause it has a hi her ,2$

%a!in Capital Investment "ecisions

1 'o accuratel# reflect the costs associated with a project, #ou should e"clude interest e"penses in the computation of the operating cash flows.

A) B)

True False

2 8ide effects such as erosion should be considered in a capital budgeting decision.

A) B)

True False

% 'he idea behind setting a bid price is to determine the minimum price at which the net present value of a project will still be zero or positive.

A) B)

True False

* (n opportunit# cost is the most valuable alternative that is given up if a particular investment is underta-en.

A) B)

True False

, ( ta"able gain occurs when an asset is sold for more than its boo- value. For capital budgeting purposes, the ta"es on the sale are treated as a.

() B) 0)

reduction in cash and added to operating cash flow. noncash event similar to depreciation. reduction in cash and deducted from the boo- value of the asset.

1) E)

reduction in cash and deducted from the ta"able gain. reduction in cash and deducted from the sale price.

3 <ro forma statements.

() B) 0) 1) E)

are generall# created b# first estimating production costs. for a proposed project generall# consider onl# the first #ear of the project. recap a firm&s activities for the past #ear. should onl# be prepared when considering a capital budgeting project. should use realistic assumptions.

5 ?ou are advising a friend who is attempting to decide whether or not to drop one of the courses the# are currentl# enrolled in. !f the# do, the# will forfeit half of the mone# spent on tuition. Which of the following conclusions drawn b# #our friend is consistent with capital budgeting principles4

!. Demaining in the class incurs opportunit# cost because the# have to reduce the number of hours the# are gainfull# emplo#ed. !!. 'he tuition is irrelevant to the decision because it is a sun- cost. !!!. 'he time and energ# put into the course thus far is a sun- cost.

() B) C) 1) 2)

! onl# ! and !! onl# I and III only !! and !!! onl# !, !!, and !!!

7 ( firm moves into a higher ta" brac-et. (ll else e/ual, the depreciation ta" shield will.

A) B) 0) 1) 2)

)e more valua)le. be less valuable. remain unchanged since depreciation doesn&t change. remain unchanged because changes in ta" rates don&t matter once a project is in place. be either more valuable, less valuable, or unchanged, but it is impossible to tell which without more information.

9 ?our compan# ma# introduce a new line of tennis shoes. ?ou have been given the following projections. sales E %,,::: units at $*: per unitF variable costs E $2, per unitF fi"ed costs E $12,,::: per #earF initial investment E $1,:::,:::F project life E 1: #ears. What is the net income for this project if the corporate ta" rate is %* percent4 ?ou ma# assume straight+line depreciation to a zero boo- value and a discount rate of 12 percent.

() B) C) 1) 2)

$119,::: $13,,::: .578#111 $23*,::: $295,:::

1:

?ou are considering investing in a cost cutting proposal. >et income from the project is e"pected to e/ual $25.,: each of the three #ears of the project&s life. 'he process has an initial cost of $12, and will be depreciated straight+line over % #ears to a salvage value of $:. (ssume a %* percent ta" brac-et and a discount rate of 1, percent. 8uppose the e/uipment is sold at the end of #ear % for $2:, preta". What is the internal rate of return4

() B) C) 1) 2)

13.% percent 29., percent ::.6 percent *,.7 percent 32.5 percent

2ro?ect Analysis and Evaluation

1 'he degree of operating leverage is e/ual to the percentage change in the operating cash flow divided b# the percentage change in sales /uantit#.

A) B)

True False

2 ( project that just brea-s even on a cash basis must have a zero net present value.

() B)

'rue False

% ( project that just brea-s even on an accounting basis has a discounted pa#bac- period e/ual to its life.

() B)

'rue False

* !f a division of a firm finds an e"ceptionall# worthwhile positive net present value project the# still will not be able to obtain funding if the# are under hard rationing.

A) B)

True False

, Which of the following statements are true concerning scenario anal#sis4

!. ( positive net present value for a project&s worst case scenario guarantees #ou a positive return from the project.

!!. 'he base case scenario generall# represents an average estimate of the net present value. !!!. !f the net present value of the best case scenario is negative then it is probabl# unnecessar# to create base and worst case scenarios. !6. 8cenario anal#sis is less apt than sensitivit# anal#sis to determine which variable has the greatest impact on the projected net present value.

() B) 0) 1) E)

! and !! onl# !! and !6 onl# !!! and !6 onl# !, !!, and !!! onl# II# III# and I$ only

3 (n# time a manager replaces a variable cost with a fi"ed cost, the firm&s BBBBB effectivel# increases.

A) B) 0) 1) 2)

operatin levera e managerial options projected cash flow sensitivit# contribution total variable cost

5 Which of the following describe=s) variable costs4

!. costs that can be forecasted with a high degree of accurac# !!. costs that are e/ual to zero when production is zero !!!. costs that change with the /uantit# of output

() B) 0) ") 2)

!! onl# ! and !! onl# ! and !!! onl# II and III only !, !!, and !!! onl#

7 Which of the following re/uires finding the point at which the net present value of a project is e/ual to zero4

!. finding the project&s internal rate of return !!. finding the point at which the internal rate of return is e/ual to zero !!!. finding the point at which the project pa#s bac- on a discounted basis !6. finding the financial brea-+even point

() B) 0) ") 2)

! and !!! onl# !! and !6 onl# !, !!, and !!! onl# I# III# and I$ only !, !!, !!!, and !6

9 Which of the following is =are) true about a project that just brea-s even on an accounting basis4

!. 'he project has an internal rate of return that is e/ual to zero. !!. 'he project has an internal rate of return that is e/ual to 1:: percent. !!!. 'he project has a negative net present value. !6. 'he project has a zero net present value.

A) B) 0) 1) 2)

I and III only ! and !6 onl# !! and !!! onl# !! and !6 onl# !6 onl#

1: Which of the following is =are) true about a project that brea-s even on a financial basis4

!. 'he project has a zero internal rate of return. !!. 'he project has a negative net present value. !!!. 'he project has a zero net present value. !6. 'he project has an internal rate of return e/ual to the firm&s re/uired return.

() B) 0) 1) E)

! onl# !!! onl# !! and !6 onl# ! and !!! onl# III and I$ only

(ome *essons from Capital %ar!et @istory

1 0apital mar-et efficienc# is attributable largel# to the lac- of competition among mar-et participants for information.

() B)

'rue False

!nvestors should not count capital gains as part of total returns until the securit# is sold since the capital gain is reall# onl# a paper gain up to that point.

() B)

'rue False

% ?our classmate just made $1:,::: in a single da# b# trading in the stoc- mar-et. !t is reasonable to conclude, therefore, that the efficient mar-et h#pothesis cannot be true.

() B)

'rue False

* !n general, there is a reward for bearing ris-.

A) B)

True False

, 'he normal distribution is so useful in anal#zing securit# returns because.

() B) 0) 1) E)

we fre/uentl# deal with finite data sets. of its bell+shaped appearance. 9, percent of all observations fall within two standard deviations of the mean. the distribution of securit# returns varies so much from a normal distribution. it can )e completely descri)ed )y its mean and standard deviation.

3 Which one of the following investments was the least ris-# over the period 1923+2::%4

() B) C) 1) 2)

small+compan# stoc-s large+compan# stoc-s A.(. Treasury )ills long+term government bonds long+term corporate bonds

5 Which one of the following statements is accurate regarding mar-et efficienc#4

A) B) 0) 1) 2)

In an efficient mar!et# prices ad?ust +uic!ly and correctly to new information. (sset prices in an efficient mar-et are usuall# too high or too low. When stoc- prices move in an overreaction and correction pattern as a result of the release of new information, the mar-et for this stoc- is efficient. ( mar-et is wea- form efficient if all information of ever# -ind is reflected in the stoc- prices. ?ou cannot ma-e mone# b# trading on inside information in a mar-et that is semistrong form efficient.

7 Cver the 1923+2::% period, the standard deviation of the returns on long+term corporate bonds has averaged BBBBBB percent per #ear.

() B) 0) 1) 2)

%.1 8.6 9.* 2:.* %%.%

9 Cver the last three #ears #ou earned , percent, 5 percent, and 9 percent. What is the standard deviation of #our returns4

() B) C) 1) 2)

:.7 percent 1.3 percent 0.1 percent 2.% percent 2.9 percent

1: 0ompute the incremental reward for bearing the ris- of owning small+compan# stoc-s rather than large+compan# stoc-s given the following average returns from 1923+2::%. large+compan# stoc-s E 12.* percent, small+compan# stoc-s E 15., percent, long+term government bonds E ,.7 percent, and I.8. 'reasur# bills E %.7 percent.

() B) C) 1) 2)

1.% percent 1.9 percent /.5 percent 7.3 percent 1%.5 percent

<eturn# <is!# and the (ecurity %ar!et *ine

1 ( uni/ue ris- is a ris- that affects a relativel# large number of the assets in the mar-et.

() B)

'rue False

2 Both the variance and the standard deviation are e"pressed in percentage terms.

()

'rue

B)

False

% 'he projected ris- premium is defined as the sum of the e"pected return on a ris-# investment and the return on a ris-+free investment.

() B)

'rue False

* (n e"ample of s#stematic ris- would be an une"pected change in interest rates b# the Federal Deserve.

A) B)

True False

, Which one of the following statements is true regarding the beta coefficient4

() B) C) 1) 2)

Beta is a measure of uns#stematic ris-. ( beta greater than one represents less s#stematic ris- than the mar-et. 3enerally spea!in # the hi her the )eta the hi her the expected return. ( beta of one indicates an asset is totall# ris-+free. 'he ris- premium of an asset will increase if the beta of that asset decreases.

3 ;iven the following notation, what is the e/uation for the securit# mar-et line4

2=Di)E e"pected return on ris-# asset i DmE return on the mar-et portfolio 2=Dm)E e"pected return on the mar-et portfolio biE ris-# asset i&s beta JmE mar-et portfolio&s beta DfE ris-+free rate of return

() B) 0) 1) E)

2=Di) E Dm H K2=Dm) L DfM N Jm 2=Dm) E Df H K2=Dm) L DfM N Ji 2=Di) E Dm H K2=Dm) L DfM N Ji 2=Di) E Df H K2=Dm) L DfM N Jm EB<i) C <f D EEB<m) F <fG H Ii

5 Which of the following have been eliminated from a well+diversified portfolio4

!. mar-et ris!!. asset specific ris!!!. uns#stematic ris!6. s#stematic ris-

() B) 0) ") 2)

! onl# !! onl# ! and !6 onl# II and III only !, !! and !!! onl#

7 Which of the following pairs of terms are s#non#mous4

!. s#stematic ris- and uni/ue ris!!. mar-et ris- and s#stematic ris!!!. uns#stematic ris- and asset+specific ris-

() B) 0) ") 2)

! onl# !! onl# !!! onl# II and III only !, !!, and !!!

9 What is the ris- premium on the following stoc- if the ris-+free rate is , percent4 'he boom state has a probabilit# of occurring of 1, percent and an e"pected return of 3: percentF the good state has a ,: percent chance of occurring and an e"pected return of 2: percentF the recession state has a 2, percent chance of occurring and an e"pected loss of 1: percentF and the depression state has a 1: percent chance of occurring and an e"pected loss of %: percent.

A) B) 0) 1) 2)

1.18/ :.1:: :.12, :.1%, :.15,

1: 8ecurit# O has a standard deviation of returns of %, percent and a beta of 1.*,. 8ecurit# ? has a standard deviation of returns of 27 percent and a beta of 1.:3. 8ecurit# P has a standard deviation of returns of ** percent and a beta of 1.22.

;iven this, which one of the following statements is correct4

A) B) 0) 1) 2)

(ecurity J has the reatest total ris! )ecause it has the lar est standard deviation. 8ecurit# O has the greatest total ris- because it has the largest beta. 8ecurit# O has the greatest diversifiable ris- because it has the largest beta. 8ecurit# ? has the lowest total ris- because it has the lowest beta. (n e/uall# weighted portfolio of the three will have the same s#stematic ris- as the mar-et portfolio.

=ptions and Corporate Finance

1 Warrants are usuall# issued as sweeteners with public bond issues.

() B)

'rue False

2 'he higher the e"ercise price, the greater the value of a call option, all else e/ual.

() B)

'rue False

% ( call option can be worth more than its underl#ing asset.

() B)

'rue False

* 'he value of a call option is e/ual to the stoc- price minus the present value of the e"ercise price.

A) B)

True False

, (ll else e/ual, which of the following statements is =are) true for a firm with positive earnings4

!. 2arnings per share will increase when bonds are converted into shares of common stoc-. !!. 2arnings per share decrease when warrants are e"ercised. !!!. Full# diluted earnings per share will be less than the undiluted earnings per share if either convertible bonds or warrants are involved. !6. 2"ercising a warrant decreases the number of shares of common stoc- outstanding.

() B) 0)

! and !!! onl# !! and !6 onl# ! and !6 onl#

") 2)

II and III only ! and !! onl#

3 Which one of the following statements is true4

() B) 0) 1) E)

'he lower the underl#ing share price, the higher the value of a call option. 'he lower the e"ercise price, the lower the value of a call option. 'he longer the time to e"piration, the lower the value of a call option. 'he greater the interest rate, the lower the value of a call option. The lower the ris! of the underlyin security# the lower the value of a call option.

5 'he bonds of 12F are convertible into shares of the firm&s common stoc- at $,: per share. 'he current price of the common stoc- is $*, per share. 'he bonds have a $1,::: par value and currentl# sell for $9,: apiece. What is the conversion ratio of these bonds4

A) B) 0) 1) 2)

01 22 2, *, ,:

7 What is the time value per share of the arch put4

() B) 0) 1) E)

$:.:: $1.:: $1.,: $2.:: .;.11

9 What is the conversion ratio for this bond4

() B) C) 1) 2)

9.7 12.% 5/.; 13.5 22.2

1: What is the minimum value of this bond if the current stoc- price is $39.,: a share and the conversion ratio used is 1,.*4

() B) 0) 1) E)

$557.*% $735.%9 $9%9.:: $1,:%*.%2 .5#191.:1

Cost of Capital

1 For a profitable firm, an increase in its marginal ta" rate will increase its weighted average cost of capital if the firm has debt in its capital structure.

() B)

'rue False

2 For the purpose of estimating the firm&s cost of capital, one cannot loo- onl# at the coupon rate on the firm&s e"isting debt.

A) B)

True False

% 'he return on e/uit# is the return that e/uit# investors re/uire on their investment in the firm.

A) B)

True False

* Cne method of computing a divisional cost of capital is to use the pure+pla# approach.

A) B)

True False

, (ll else e/ual, a higher corporate ta" rate will.

() B) 0) 1) 2)

increase the W(00 of a firm with debt and e/uit# in its capital structure. decrease the -ACC of a firm with de)t in its capital structure. not affect the W(00 of a firm with debt in its capital structure. decrease the W(00 of a firm with onl# e/uit# in its capital structure. change the W(00 of a firm with debt in its capital structure, but the direction of the change cannot be determined without more information.

3 Which one of the following is a disadvantage of the dividend growth model presented in the te"t for estimating the cost of e/uit#4

() B) 0) ") 2)

'he dividend growth model onl# applies to firms whose dividend growth rate fluctuates widel#. 'he dividend growth model onl# applies to companies that are not currentl# pa#ing an# dividends. 'he dividend growth model e"plicitl# considers ris-. The estimated cost of e+uity computed usin the dividend rowth model is hi hly sensitive to the estimated rowth rate. Aistorical dividends can be used as a basis for future dividends unless the firm has undergone a major change or revised its dividend polic#.

5 !gnoring ta"es, if a firm issues debt at par, then the cost of debt.

!. is e/ual to its coupon rate. !!. is e/ual to its #ield+to+maturit#. !!!. differs from its current #ield.

() B) 0) 1) 2)

! onl# I and II only !! onl# ! and !!! onl# !, !!, and !!!

7 ( project has the same ris- as the firm&s overall operations and must be financed e"ternall#. 2/uit# costs 1, percent and debt costs * percent after+ta". 'he firm&s debtQe/uit# ratio is .7. 'he ta" rate is %* percent. What is the minimal internal rate of return the project must earn to be accepted4

() B) 0) 1) 2)

,1 percent 51.5 percent 3 percent 2 percent , percent

9 Aartle# <s#chiatric, !nc. needs to purchase office e/uipment for its 2,::: drive+in therap# centers nationwide. 'he total cost of the e/uipment is $2 million. !t is estimated that the after+ta" cash inflows from the project will be $21:,::: annuall# forever. Aartle# has a debt+to+value ratio of *: percent based on mar-et values. 'he firm&s cost of e/uit# is 1% percent and its pre+ta" cost of debt is 7 percent. 'he flotation costs of debt and e/uit# are 2 percent and 7 percent, respectivel#. (ssume the firm&s ta" rate is %, percent. !gnoring flotation costs, what is the ><6 of the proposed project4

() B) 0) ") 2)

$%%,933 $3,,99: $97,,*2 .50/#/16 $127,:%*

1: Aartle# <s#chiatric, !nc. needs to purchase office e/uipment for its 2::: drive+in therap# centers nationwide. 'he total cost of the e/uipment is $2 million. !t is estimated that the after+ta" cash inflows from the project will be $21:,::: annuall# forever. Aartle# has a debt+to+value ratio of *: percent based on mar-et values. 'he firm&s cost of e/uit# is 1% percent and its pre+ta" cost of debt is 7 percent. 'he flotation costs of debt and e/uit# are 2 percent and 7 percent, respectivel#. (ssume the firm&s ta" rate is %, percent. (fter considering flotation costs, what is the ><6 of the proposed project4

()

+$52,9,5

B) 0) ") 2)

$*27 $2,:91 .6#860 $157,35,

<aisin Capital

1 @arge rights offerings are more common in industrialized nations other than the Inited 8tates.

A) B)

True False

2 (ccording to the te"tboo-, the mar-et value of a firm&s outstanding shares will most li-el# fall upon the announcement of a new e/uit# offering.

A) B)

True False

% 2mpirical evidence suggests that, on average, the shares in initial public offerings have not been significantl# underpriced.

() B)

'rue False

* 0entral aine <ower 0ompan#, a regional electric utilit#, sells ,::,::: shares of common stoc- to investors at large. 'his is most li-el# to be a best efforts offering.

() B)

'rue False

, 'he option giving the underwriter the abilit# to purchase additional shares of stoc- at the offer price is called.

() B) 0) 1) 2)

a shelf registration. a 3reen (hoe provision. dilution. standb# underwriting. a firm commitment offering.

3 Which one of the following parties will probabl# benefit the most from the overpricing of a new !<C of common stoc- handled on a firm+commitment basis4

() B) 0) ") 2)

e"isting bondholders the underwriter new shareholders who purchase stoc- in the open mar-et during the aftermar-et the issuin firm new shareholders who purchase stoc- from the s#ndicate

5 !f the underwriter wishes to have the option to ma-e additional profits if an !<C is oversubscribed, the# ma# as- that the underwriting contract contain a.

() B) 0) 1) E)

protective covenant. tombstone clause. preemptive right provision. Degulation ( provision. 3reen (hoe provision.

7 (ccording to the figures in the te"t, on average, !<Cs.

A) B) 0) 1) 2)

are )rou ht to the mar!et in waves. are overpriced. have the same flotation costs as seasoned issues. produce negative first+da# returns. are a profitable investment and #ou should bu# shares in an# !<C that hits the mar-et.

9 Which of the following is =are) correct regarding flotation costs4

!. Cn average, there are substantial economies of scale in issuing securities. !!. 'he costs of issuing debt securities are greater than the costs of issuing e/uit# securities. !!!. Cn average, it costs more to float a seasoned offering than an !<C. !6. 0onvertible bonds are cheaper to issue than straight bonds.

A) B) 0) 1) 2)

I only !6 onl# ! and !6 onl# !, !!, and !6 onl# !! and !!! onl#

1: Ini/ue (uto <arts, !nc., a manufacturer of reproduction parts for classic automobiles, needs to raise $2 million via a rights offering. 'he subscription price is $* per share. 'he firm currentl# has 1,:::,::: shares outstanding with a current mar-et price per share of $,. What will the value of a right be4

() B) 0) 1) 2)

$.2, ..:: $.*: $.,: $1.2:

Financial *evera e and Capital (tructure 2olicy

1 !f the static theor# of capital structure is true, then the optimal level of debt for a given firm increases as its marginal ta" rate increases and decreases as the costs of financial distress increase.

A) B)

True False

2 1irect ban-ruptc# costs are those costs that are directl# associated with ban-ruptc#, such as legal and administrative e"penses.

A) B)

True False

% Business ris- is a positive function of the s#stematic ris- of a firm&s assets.

A) B)

True False

* Because investors can use homemade leverage to create an# level of financial leverage the# desire, the capital structure of a firm does not matter to them.

A) B)

True False

, (ll else e/ual, the financial leverage of a firm will.

() B)

decrease as the amount of debt increases relative to e/uit#. decrease as the firm&s retained earnin s account rows.

0) 1) 2)

increase b# the amount of e/uit# it issues in a given #ear. decrease if the firm has negative net income. decrease as the firm uses debt to fund e"pansion projects.

3 Which of the following is =are) true regarding observed capital structures4

!. 1rug companies appear to use less debt than electric utilit# companies do. !!. !t appears that man# firms choose to pa# substantial ta"es rather than increase debt to further benefit from the interest ta" shield. !!!. !t appears that, for whatever reason, capital structures var# /uite a bit across industr# groups.

() B) 0) 1) E)

! onl# !!! onl# ! and !!! onl# ! and !! onl# I# II# and III

5 Which of the following statements concerning leverage are correct4

!. 8hareholders can offset the financial leverage of a firm through the use of homemade leverage. !!. 'he effect of financial leverage depends on a compan#&s earnings before interest and ta"es. !!!. 'he use of leverage b# a firm does not affect the earnings per share. !6. Aomemade leverage involves the use of personal borrowing or personal lending.

() B) 0) ") 2)

! and !!! onl# !! and !6 onl# !, !!!, and !6 onl# I# II# and I$ only !, !!, !!!, and !6

7 ( firm with no debt has 2::,::: shares outstanding valued at $2: each. !ts cost of e/uit# is 12 percent. 'he firm is considering adding $1,:::,::: in debt to its capital structure. 'he coupon rate would be 7 percent and the firm&s ta" rate is %* percent. What would the firm be worth after adding the debt4

() B) C) 1) 2)

$*.:%% million $*.17: million .;.:;1 million $*.33: million $,.::: million

9 ( firm has an unlevered cost of capital of 1: percent, a cost of debt of 9 percent, and a ta" rate of %* percent. !f it desires a cost of e/uit# of 1* percent, what must its target debtQe/uit# ratio be4

() B) 0) 1) E)

2.*9 %.79 *.37 ,.1* 6.16

1: ;iven the following information, what is ;2 0orporation&s W(004 2B!' E $2 millionF ta" rate E %* percentF mar-et value and boo- value of debt E $* millionF unlevered cost of capital E 1* percentF cost of debt E 9 percent.

() B) C) 1) 2)

11.* percent 11.9 percent 50.0 percent 12.3 percent 1%.1 percent

"ividends and "ividend 2olicy

1 !f stoc- issuance costs are high, investors will prefer low+dividend stoc-s to high+dividend stoc-s, all else e/ual.

A) B)

True False

2 Cnce it is declared, a common stoc- dividend becomes a legal financial obligation of the firm.

A) B)

True False

% 8uppose a firm wishes to pa# cash to its shareholders. 'he onl# wa# to do so is to pa# a dividend.

() B)

'rue False

* ( reverse split is a stoc- split in which a firm&s number of shares outstanding is reduced.

A) B)

True False

, (ll else e/ual, which of the following are correct concerning stoc- splits and stoc- dividends4 (ll of the statements refer to boo- values, not mar-et values.

!. 'he par value of the stoc- will change onl# with the stoc- split. !!. 'otal owners& e/uit# will not change with either a stoc- split or a stoc- dividend. !!!. 'he primar# effect of either is to increase the number of shares outstanding. !6. 2arnings per share will li-el# decrease onl# with the stoc- dividend.

() B) 0) ") 2)

! and !!! onl# !! and !6 onl# ! and !! onl# I# II and III only !, !!, !!! and !6

3 Which of the following are accurate regarding share repurchases4

!. !n a world without imperfections, there is essentiall# no difference between a share repurchase and a cash dividend. !!. 8hare repurchases cannot be underta-en for the sole purpose of avoiding ta"es. !!!. Depurchasing shares is a useful method of stabilizing cash dividends. !6. 8hare repurchases result in an increase in earnings per share.

() B) 0) 1) E)

!6 onl# ! and !!! onl# !! and !6 onl# !, !!, and !6 onl# I# II# III# and I$

5 Which of the following are consistent with the e"istence of an information content effect of dividends4

!. !B &s share price rises upon the announcement of une"pectedl# high earnings and a larger than e"pected increase in its current /uarterl# dividend. !!. ; &s share price falls on the same da# the firm announces a stoc- dividend. !!!. 0on 2d&s share price drops b# %% percent after it announces it is omitting its regular /uarterl# dividend pa#ment.

() B) 0) 1) E)

! onl# !! onl# !!! onl# ! and !! onl# I and III only

7 8tansfield, !nc. currentl# has *::,::: shares of stoc- outstanding, each with a mar-et price of $2: and a par value of $2. 'he firm would prefer to have its stoctrade at a value of between $%: and $%, per share. Cf the following choices, which one would allow the firm to achieve its objective4

() B) C) 1) 2)

2+for+1 stoc- split ,: percent stoc- dividend 0'for': reverse stoc! split 1+for+2 reverse stoc- split $2 per share cash dividend

9 8esame 8weet, !nc. has 22:,::: shares outstanding with a par value of $1 per share and a mar-et price of $12.:: per share. 0apital in e"cess of par amounts to $,*:,:::, while retained earnings is $25,,:::. 'here is no treasur# stoc- and there are no transactions costs. 8uppose 8esame 8weet declares a 1: percent =small) stoc- dividend. What happens to total owners& e/uit# on the balance sheet4

A) B) 0) 1) 2)

It remains unchan ed. 'he account increases b# $22,:::. 'he account increases b# $**,:::. 'he account increases b# $2*2,:::. 'he account increases b# $23*,:::.

1: 8esame 8weet, !nc. has 22:,::: shares outstanding with a par value of $1 per share and a mar-et price of $12.:: per share. 0apital in e"cess of par amounts to $,*:,:::, while retained earnings is $25,,:::. 'here is no treasur# stoc- and there are no transactions costs. 8uppose 8esame 8weet declares a %+for+1 stocsplit. What is the mar-et price of a share of the compan#&s stoc- after the split4

A) B) 0) 1) 2)

.;.11 per share $,.5, per share $3.:: per share $7.:: per share $%3.:: per share

(hort'Term Finance and 2lannin

1 ( firm is not considered health# unless its accounts pa#able period e"ceeds its operating c#cle.

() B)

'rue False

(n increase in an asset account is an activit# that decreases cash.

A) B)

True False

% 0arr#ing costs are costs that rise with decreases in the level of investment in current assets.

() B)

'rue False

* ( firm that sets liberal credit terms for its customers is li-el# following a fle"ible short+term financial polic#.

A) B)

True False

, Which one of the following is true4

() B) 0) 1) 2)

'he inventor# period of the operating c#cle ends when the receivable it creates is actuall# paid b# the customer. The len th of the operatin cycle is always reater than or e+ual to the len th of the cash cycle. 'he accounts receivable period is alwa#s greater than or e/ual to the length of the cash c#cle. 'he inventor# period plus the accounts receivable period is e/ual in length to the operating c#cle plus the cash c#cle. 'he accounts pa#able period ends when the inventor# is sold.

3 Which of the following activities increase cash, all else e/ual4

!. reducing long+term debt !!. ac/uiring inventor# !!!. selling fi"ed assets !6. factoring accounts receivable

() B) 0) 1) E)

! onl# !! onl# ! and !6 onl# !, !!, and !!! onl# III and I$ only

5 (ccording to the te"t, which of the following managers have a direct influence on the firm&s accounts pa#able balance4

!. credit manager !!. production manager !!!. pa#ables manager !6. controller

() B) 0) ") 2)

! onl# !! onl# !, !!!, and !6 onl# II# III# and I$ only ! and !6 onl#

7 8uppose that the inventor# period is ,: da#s, the accounts receivable period is *: da#s, and the accounts pa#able period is %, da#s. What is the cash c#cle4

() B) C) 1) 2)

2, da#s *, da#s // days 9: da#s 1%, da#s

9 Cn a# 1,, #our firm receives 2: cases of designer pens. Cn Gune %:, #our firm pa#s $%,2,: for the pens. Cn Gul# 1,, the pens are sold on credit for $1:,,::. Cn 8eptember 1:, #our firm collects the receivable in full. !f each transaction occurs at the end of the business da#, how man# da#s are in the accounts receivable period4

() B) 0) 1) 2)

*3 da#s /9 days 31 da#s 52 da#s 117 da#s

1: Gumbo, !nc. had sales of $7,::: in >ovember, $1*,::: in 1ecember, and projects sales of $1:,::: in Ganuar#, $12,::: in Februar#, and $7,::: in arch. 'he firm&s 0C;8 in an# given month is e/ual to 5: percent of the ne"t month&s sales. 'he firm collects its receivables in 3: da#s and pa#s its pa#ables in %: da#s. 'he firm begins Ganuar# 1 with $1:,::: in cash. (ll sales and purchases are on credit. 'here are no other costs or revenues. What are Gumbo&s total cash collections in arch4 (ssume there are %: da#s in ever# month.

A) B) 0) 1) 2)

.51#111 $11,::: $11,3:: $12,1:: $1%,:::

Cash and *i+uidity %ana ement

1 'he B(' model is more useful than the iller+Crr model because the iller+Crr model is too comple" for most firms.

() B)

'rue False

2 'he opportunit# cost of holding cash is inversel# related to the level of mar-et interest rates.

() B)

'rue False

% 0ash and li/uidit# management are essentiall# the same thing.

() B)

'rue False

* ( loc-bo" s#stem is one method a firm can use to accelerate collections of cash.

A) B)

True False

, 'he difference between a firm&s available cash balance and its boo- cash balance is called.

() B) 0) 1) 2)

a firm&s compensating balance. float. the target cash level. the adjustment cost. the average cash balance.

3 !n an ideal world, all creditors would re/uire that #ou pa# them on e"actl# the same da# #ou get paid. !f this were true, then the level of cash #ou would need to hold to meet #our BBBBB needs would be relativel# low during the month.

() B) 0) 1) 2)

speculative transactions precautionar# Re#nesian float

5 (ccording to #our chec-boo-, #ou have a $%,::: balance in #our account. ?ou write chec-s totaling $*,,:: and ma-e a deposit of $%,,::. What is #our collection float4

() B) 0) 1) 2)

+$1,,:: '.:#/11 +$%,::: +$*,,:: +$7,:::

7 <icard !ndustries re/uires $2,:,::: a wee- to pa# bills. 'he fi"ed cost of transferring mone# is $3, per transfer. 'he standard deviation of the wee-l# cash flows is $2,,::: and the lower cash balance limit is $*:,:::. (ssume the applicable annual interest rate is ,S. Ising the B(' model, what is the total trading cost4

() B) 0) 1) 2)

$%,115 .;#/76 $,,,7: $5,33* $9,192

9 C&<inion anufacturing estimates that it disburses $9::,::: wee-l# in order to pa# bills. 'he fi"ed cost of transferring mone# is $5, per transfer. Based on historical data, the standard deviation of the wee-l# cash flows is $29,,::: and the lower cash balance limit is $%::,:::. Ising the iller+Crr model, and assuming the interest rate is :.:9*S per wee-, what is the optimum initial cash balance4

() B) 0) ") 2)

$15%,%%2 $2:%,7%, $*:,,,92 .;9:#::0 $*9%,7%,

1: C&<inion anufacturing estimates that it disburses $9::,::: wee-l# in order to pa# bills. 'he firm&s annual opportunit# rate is ,S. 'he fi"ed cost of transferring mone# is $5, per transfer. Based on historical data, the standard deviation of the wee-l# cash flows is $29,,::: and the lower cash balance limit is $%::,:::. Ising the iller+Crr model, and assuming the interest rate is :.:9*S per wee-, what is the average cash balance4

() B) C) 1) 2)

$*1%,2,: $,21,%%9 ./:5#517 $,97,512 $3%1,55%

Credit and Inventory %ana ement

1 'he fact that auto parts stores face shorter credit periods than florists is consistent with the factors listed as influences on credit period in the te"t.

() B)

'rue False

2 Cne of the most important factors influencing the length of the credit period offered b# the seller is the operating c#cle of the seller.

() B)

'rue False

% !n accounts receivable management, a firm&s collection polic# details the procedures it will follow in collecting accounts receivable.

A) B)

True False

* ost trade credit is offered on open account although, at times, a firm ma# re/uire the customer sign a promissor# note.

A) B)

True False

, 'here is a sa#ing in ban-ing that states when a business is e"periencing financial problems, trade creditors are the first to -now. Wh# would this be true4

() B) 0) 1) E)

'rade creditors perform credit chec-s less often than ban-s do. 'rade creditors get all of their information about credit ris-s from the ban-s. 'rade creditors can alwa#s ta-e bac- the merchandise the# sold the borrower if the# don&t get paid. 'rade creditors e"tend credit onl# to the most creditworth# businesses while ban-s e"tend short+term loans to almost an# borrower. Trade creditors typically extend credit more often and for a shorter maturity to a )usiness than other creditors such as )an!s.

3 !f #ou close #our dr# cleaning store to open a fruit stand, #ou will li-el# find the length of the credit period #ou get from #our suppliers to be relativel#.

() B) C) 1) 2)

long due to the ris-s involved. long if #our account is a small one for #our supplier. short )ecause fruit is hi hly perisha)le. short because fruit is a high cost item. short if there is a high degree of competition among #our suppliers.

5 ( firm was turned down for credit because it had demonstrated an unwillingness to ma-e pa#ments in a timel# fashion in the past despite its solid financial performance. 'his denial was based on credit.

() B) 0) 1) 2)

capacit#. character. capital. collateral. economic condition.

7 @aw &>& Crder !ndustries recentl# changed the terms offered its customers from 2Q1:, net %: to %Q1: net 21. 'he firm has changed its.

!. cash discount. !!. net credit period. !!!. cash discount period.

() B) 0) ") 2)

! onl# !! onl# !!! onl# I and II only !, !!, and !!!

9 ?our compan# is considering granting credit to a new customer. 'he price per unit is $13, and the variable cost per unit is $1,:. 'he monthl# interest rate is :.7 percent. 'he customer will pa# in %: da#s if the# do not default. !f the customer does not default, the# will bu# one unit ever# month forever. What is the brea-+ even default percent4

() B) 0) 1) E)

%.5 percent 3.1 percent 31., percent 77.: percent 70.1 percent

1: <roposed credit polic#, price E $,:, variable cost E $%,, /uantit# E 77, units per month, the monthl# interest rate is 1.: percent, and the terms of credit are net %:. What is the cost of switching4

() B) 0) ") 2)

$%,,12, $%7,22, $*1,12, .;:#90/ $,%,:::

International Corporate Finance

1 'he use of local financing for a project located in a foreign countr# increases the political ris- of that project.

() B)

'rue False

2 ?ou live in >ew ?or- 0it#. ?ou open the Wall 8treet Gournal and find a /uote of 1.%*37 0anadian dollars for one I.8. dollar. 'his is an e"ample of an indirect /uote.

A) B)

True False

% 'here is no mechanism that allows a foreign firm&s shares to be traded on an e"change in the Inited 8tates.

() B)

'rue False

* ( spot trade in the foreign currenc# mar-et is an agreement to trade currencies based on the e"change rate toda# for settlement within two business da#s.

A) B)

True False

, 'he rate that most international ban-s charge one another for loans of 2urodollars overnight in the @ondon mar-et is called the.

() B) 0) ") 2)

(merican 1epositor# rate. 8amurai rate. 2uropean 0urrenc# Init. *ondon Inter)an! =ffer <ate. 2urobond rate.

3 (ccording to toda#&s Wall 8treet Gournal, the direct /uote for the euro has gone from $1.2173 to $1.2191. !n other wordsF the value of the I.8. dollar has.

A) B) 0) 1) 2)

fallen a ainst the value of euro. risen against the value of the euro. remained unchanged relative to the value of the euro. changed but there is not enough information to ma-e a statement about the relative change of the I.8. dollar versus the euro. fallen against most of the world&s major currencies.

5 8uppose the nominal ris-+free rate of interest in the Inited 8tates is , percent. 'he nominal ris-+free rate in ;erman# is 7 percent with inflation of 3 percent. What is the appro"imate inflation rate in the Inited 8tates4

() B) 0) 1) 2)

2.: percent :.1 percent *.: percent ,.: percent 3.7 percent

7 8uppose absolute purchasing power parit# holds. 'he e"change rate between !ndian rupees and I.8. dollars is Ds .2%12 per $1.::. !f an automobile costs $%,,::: in theInited 8tates, how much should the same car cost in !ndia4

() B) 0) 1) E)

Ds131 Ds53% Ds13:3 Ds5,3%: <s5#61;#98/

9 ( I.8. firm is considering purchasing a subsidiar# in ;reat Britain. 'he subsidiar# will cost T13 million and will generate cash inflows of T5.3 million per #ear at the end of each of the ne"t three #ears. (fter that, the compan# will be worthless. 'he current e"change rate is T:.7% British pounds per $1.::. 'he I.8. inflation rate is e"pected to be * percent over this period. 'he current ris-+free rate of interest in the Inited 8tates is , percent and the ris-+free rate in ;reat Britain is 7 percent. (ssume the cost of capital for this project is 1, percent on dollar investments. What is the ><6 of this project using the foreign currenc# approach4

() B) 0) ") 2)

$29*,*:, $*79,239 $,2*,93% .6:5#876 $7%2,:9,

1: 'he following /uotes are given as the I.8. $ 2/uivalent. 0anada =1ollar) :.5193, Aong Rong =1ollar) :.1291, 8weden =Rrona) :.1*::. 'he following /uotes are given as 0urrenc# per $. 0anada =1ollar) 1.%795, Aong Rong =1ollar) 5.5*,9, 8weden =Rrona) 5.1*29. Aow man# Aong Rong dollars are there per 8wedish Rrona4

() B) 0) 1) 2)

AR$:.9222 @K.5.18;; AR$1.%2,3 AR$1.,3*9 AR$2.*971

<is! %ana ement4 An Introduction to Financial En ineerin

1
The main difference ,etween a futures contract and a forward contract is that with the former$ ,uyers and sellers realize gains or losses on the settlement date$ while the latter requires that gains or losses are realized daily. A) B) True False

2 The prices of goods and services have remained relatively sta,le over the last three decades$ ,ut the year!to!year rate of change in those prices has increased dramatically. A) B) True False

3mmunization is another term for hedging. A) B) True False

"
(conomic e6posure is the long!run financial ris0 arising from permanent changes in prices or other economic fundamentals. A) B) True False

%
A call option is; A) the right$ ,ut not the o,ligation$ to sell an asset for a specified price on or ,efore a specified date in the future. B) date. a legally ,inding agreement to sell an asset for a specified price on a specified

C) t%e rig%t, but not t%e obligation, to purc%ase an asset for a specified price by a specified date in t%e future#

D)

an agreement to e6change cash flows within the ne6t two days.

E) an agreement to sell an asset for a specified price on a specified date with gains and losses recognized daily.

)
#hich of the following are generally correct a,out financial engineering& 3. Financial engineering is frequently used to create financial hedges. 33. Financial engineering is using availa,le financial instruments to create new ones. 333. 3n a world where prices are very sta,le$ there would ,e very little demand for financial engineering. 34. Financial engineering is a growth industry ,ecause the world is ,ecoming less ris0y. A) B) C) D) E) 3 and 333 only 33 and 34 only I, II, and III only 33$ 333$ and 34 only 3$ 333$ and 34 only

1
<ou thin0 the price of =/ stoc0 is going to fall. 3n order to ma0e money$ you could ***** option on =/ stoc0. 3. ,uy a call 33. sell a call 333. ,uy a put 34. sell a put A) B) C) D) E) 3 and 34 only II and III only 3 and 333 only 3 and 34 only 333 only

5
Based on these quotes$ what is the lowest contract price at which 1%$888 l,s. of orange >uice for delivery in ?uly traded during the day& @range ?uice A'TB) 1%$888 l,s.C cents per l,. @pen :igh -ow Dettle 'hange ?uly Dept Bov ?an A) B) C) D) E) 1".78 11.%8 58.%8 5 .%8 52. 8 5 .88 5%.1% 55.88 1".78 11.%8 58.%8 5 .88 52.28 5 .88 5%.1% 55.%8 E).58 E%.88 E%.88 E%.88 -ifetime -ifetime @pen :igh -ow 3nterest 125.%8 121. 8 11 .2% 117.1% 1 .88 11.18 17.58 52.1% 11$5 2 )$ 17 $1"7 1$ 71

&'',!$( 911$)2% 912$ 8

912$81% 912$ "%

7
Based on the following quotes$ for the purposes of mar0ing to mar0et$ the current value of the ?une contract is; DF. %88 3B2(G A'/() H 9%88 times inde6 @pen :igh -ow Dettle 'hange ?une Dept 2ec A) B) C) D) E) 527.% 5 7. 5%1." 5"".2 5%2.5 5)2.2 525.) 5 7.8 5%1.8 5"1. % 5"7.78 5%7. % E11.18 E11.1% E11.18 -ifetime :igh 5"".28 5%2.58 5)2.28 -ifetime @pen -ow 3nterest )27.8% 181.%8 1% .88 15 $1%5 5$)21 $ 5

9 1"$%2%. 9"12$2 %. 9"1"$ 88. &"!),*+(# 9"2 $188.

18
Based on the following quotes$ which of the futures contracts set lifetime highs on this particular day& DF. %88 3B2(G A'/() H 9%88 times inde6 @pen :igh -ow Dettle 'hange ?une Dept 2ec 527.% 5 7. 5%1." 5"".2 5%2.5 5)2.2 525.) 5 7.8 5%1.8 5"1. % 5"7.78 5%7. % E11.18 E11.1% E11.18 -ifetime :igh 5"".28 5%2.51 5)2.28 -ifetime @pen -ow 3nterest )27.8% 181.%8 1% .88 15 $1%5 5$)21 $ 5

3. ?une 33. Deptem,er 333. 2ecem,er A) B) C) D) E) Bone of them did 3 only 33 only I and III only 3$ 33$ and 333

=ption $aluation

1 'he put+call parit# condition for options is onl# valid for (merican, and not 2uropean, option t#pes.

() B)

'rue False

2 (n (merican call option alwa#s has the same value as a 2uropean call option, assuming the underl#ing stoc- does not pa# dividends.

A) B)

True False

(ll else the same, as the volatilit# of the stoc- increases, both call and put options decrease in value.

() B)

'rue False

* 'he sensitivit# of an option&s price to a change in its time to e"piration is called the option&s )vega.)

() B)

'rue False

, 2uropean put+call parit# sa#s the difference in price for call options less put options, both with e"ercise price 2 and time to maturit# ', is e/ual to the stoc- price.

() B) C) 1) 2)

minus the future value of the e"ercise price. plus the future value of the e"ercise price. minus the present value of the exercise price. plus the present value of the e"ercise price. plus the e"ercise price.

3 'he sensitivit# of an option&s value to a change in the time to e"piration is called the option&s.

() B) 0) 1) 2)

delta. theta. vega. rho. gamma.

5 ( put option with a $%: e"ercise price and three months to e"piration sells for $1.,,. 'he continuousl# compounded ris-+free rate is 3 percent annuall#. 'he stocsells for $%,. Aow much must a call option sell for with the same e"ercise price and e"piration4

() B) C) 1) 2)

$%.*, $,.:: .9.11 $7.,, $9.2,

7 ;iven the following information, what is the price of a 2uropean put option4

8toc- price $,7 2"ercise price $,,

'ime to e"piration three months Dis-+free rate 7 percent per #ear, compounded continuousl# 8tandard deviation 2, percent annuall#

() B) 0) 1) 2)

$:.:: .5.05 $1.9: $2.,3 $%.,%

9 (B0 0ompan# has zero coupon bonds outstanding with a total face value of $2,: million. 'hese bonds mature in two #ears. 'he current mar-et value of the firm&s assets is $27, million with a standard deviation of %: percent per #ear. 'he ris-+free rate is 3 percent per #ear compounded continuousl#. What is the mar-et value of the firm&s debt4

() B) C) 1) 2)

$17.:13 million $71.273 million .01:.95; million $221.5%: million $2,:.::: million

1: (B0 0ompan# has zero coupon bonds outstanding with a total face value of $2,: million. 'hese bonds mature in two #ears. 'he current mar-et value of the firm&s assets is $27, million with a standard deviation of %: percent per #ear. 'he ris-+free rate is 3 percent per #ear compounded continuousl#. What is the firm&s continuousl# compounded cost of debt4

() B) 0) ") 2)

3.:: percent 5.*1 percent 7.,2 percent 51.0; percent 1,.35 percent

%er ers and Ac+uisitions

1 8toc-holders li-e mutual fundsF therefore, the# will pa# a premium for the shares of a firm that is a conglomerate because the firm is essentiall# a mutual fund.

() B)

'rue False

( spin+off involves the distribution of shares in a subsidiar# to e"isting parent compan# stoc-holders.

A) B)

True False

% 'he possible benefits of an ac/uisition include revenue enhancement and cost reductions.

A) B)

True False

* ( joint venture is a formal arrangement where two separate firms put up mone# to establish a new firm.

A) B)

True False

, Which of the following is =are) accurate with regards to advantages or disadvantages in using a merger as a method of ac/uisition4

!. (n advantage of a merger is that it is legall# comple". !!. ( disadvantage of a merger is that it re/uires the approval of the shareholders of each firm. !!!. (n advantage of a merger is that there is no need to transfer title to the individual assets of the ac/uired firm to the ac/uiring firm.

() B) 0) ") 2)

! onl# !!! onl# ! and !! onl# II and III only !, !!, and !!!

3 BBBBB it is impossible for a ta"+free ac/uisition to ta-e place.

() B) C) 1) 2)

!f an ac/uisition is for business purposes !f the purchasing firm e"changes its own stoc- for the selling firm&s e/uit# If an ac+uisition is )ein underta!en with the express purpose of avoidin taxes !f the stoc-holders in the target firm will retain an e/uit# interest in the bidder !f the selling shareholders will be considered to have e"changed their old shares for new ones of e/ual value

5 !n a=n) BBBBB, the managers of the firm purchase the outstanding shares and ta-e the firm private.

()

pro"# contest

B) 0) ") 2)

tender offer vertical ac/uisition mana ement )uyout asset ac/uisition

7 8uppose #ou have the following information concerning an ac/uiring firm =Firm () and a target firm =Firm B). >either firm has an# debt. 'he incremental value of the ac/uisition is estimated to be $2,:,:::. Firm B is willing to be ac/uired for $,*:,::: worth of Firm (&s stoc-. Firm ( has ,:,::: shares outstanding, Firm B has 17,:::. 'he price per share of Firm (&s stoc- is $,: and the price per share of Firm B&s stoc- is $22.,:. What is the value of Firm B to ( in this case4

() B) 0) ") 2)

$1%7,::: $2,:,::: $*:,,::: .6//#111 $92:,:::

9 Firm ( has 1:,::: shares of stoc- outstanding, each with a mar-et price of $2, per share. Firm B has 5,,:: shares of stoc- outstanding, each with a mar-et value of $1: per share. Firm ( can ac/uire Firm B for $72,,:: in either cash or stoc-. Both firms are totall# financed with e/uit#. 'otal s#nerg# from the ac/uisition is $12,,::. What is the merger premium over B&s stoc- price4

() B) C) 1) 2)

7.,: percent 9.2, percent 51.11 percent 1:.2, percent 11.,: percent

1: Firm ( has 1:,::: shares of stoc- outstanding, each with a mar-et price of $2, per share. Firm B has 5,,:: shares of stoc- outstanding, each with a mar-et value of $1: per share. Firm ( can ac/uire Firm B for $72,,:: in either cash or stoc-. Both firms are totall# financed with e/uit#. 'otal s#nerg# from the ac/uisition is $12,,::. What is the ><6 of ac/uiring Firm B with stoc-4

A) B) 0) 1) 2)

.:#9;6 $%,92, $*,122 $,,::: $,,,1:

E planation, To begin, you must first find t%e ne- price per s%are .it is &!(#$/) and t%e number of ne- s%ares t%at must be issued .$,$)))# 0se t%is information along -it% t%e value of Firm B to Firm A to compute t%e 12V#

*easin

(ccording to !D8 regulations, the e"istence of a bargain purchase option will not affect the abilit# of the lessee to deduct the lease pa#ments from ta"able income.

() B)

'rue False

2 Bondo anufacturing has just signed a lease agreement with !<8 0omputers. Bondo agreed to pa# $1,,::: per month for 12 months. 'he purchase price of the e/uipment is $*::,:::. (ccording to the lease agreement, !<8 will pa# propert# ta"es and insurance on the e/uipment. 'his lease is most li-el# a financial lease.

() B)

'rue False

% 'he decision to lease or purchase an asset is best characterized as a financing decision rather than an investment decision.

A) B)

True False

* ( ta"+oriented lease is a financial lease in which the lessor is the owner for ta" purposes.

A) B)

True False

, ( sale and leasebac- is a.

() B) 0) 1) 2)

lease in which the lessor borrows a large fraction of the cost of the leased asset. long+term, full# amortized lease in which the lessee is responsible for asset up-eep. lease in which a firm sells an asset to the lessor and then leases it bac-. short+term lease in which the lessor is responsible for the insurance, ta"es and up-eep. lease in which the lessee borrows a substantial portion of the lease pa#ments.

3 Which of the following statements are good reasons for leasing4

!. 'a"es ma# be reduced b# leasing. !!. @easing transfers uncertaint# about the future value of the leased asset to the lessor. !!!. @easing ma# encumber fewer assets than borrowing. !6. @easing ma# incur less transaction costs than bu#ing.

() B) 0) 1) E)

! and !! onl# !!! and !6 onl# !!, !!!, and !6 onl# !, !!, and !!! onl# I# II# III# and I$

5 <oncho <arts, !nc. manufactures reproduction parts for classic cars. 'he firm needs a computer+operated turret lathe that costs $**:,:::. !t can borrow at 9., percent. 'he lathe will be used for si" #ears, after which it will be worthless. 2nterprising @easing, !nc. will lease the e/uipment to the firm for $1::,::: per #ear. 'he firm&s ta" rate is %* percent. Ising straight+line depreciation, what is the net advantage to leasing =>(@)4

A) B) 0) 1) 2)

'.:#:97 +$1,1%: $5,2%: $7,,3% $11,2%,

7 1og 0hew <roducts needs to replace its rawhide tanning and molding e/uipment. !t can be used for four #ears and will have no salvage value. 'he e/uipment costs $9%:,:::. 'he firm can lease it for $2*,,::: a #ear, or it can borrow the mone# to purchase the e/uipment at 9 percent. 'he firm&s ta" rate is %9 percent. 'he three #ear (0D8 depreciation schedule is. #ear 1 E %%.%% percent, #ear 2 E **.** percent, #ear % E 1*.72 percent, and #ear * E 5.*1 percent. What is the depreciation ta" shield for #ear %4

() B) 0) 1) 2)

$23,753 ./:#9/0 $32,:2% $7*,:5* $12:,777

9 1og 0hew <roducts needs to replace its rawhide tanning and molding e/uipment. !t can be used for four #ears and will have no salvage value. 'he e/uipment costs $9%:,:::. 'he firm can lease it for $2*,,::: a #ear, or it can borrow the mone# to purchase the e/uipment at 9 percent. 'he three #ear (0D8 depreciation schedule is. #ear 1 E %%.%% percent, #ear 2 E **.** percent, #ear % E 1*.72 percent, and #ear * E 5.*1 percent. (ssume #our compan# will not pa# ta"es for the ne"t four #ears. >ow what is the net advantage to leasing4

() B) C) 1) 2)

$59,1:2 $77,1%2 .5:6#067 $1%7,5:3 $1,2,:32

1: 1og 0hew <roducts needs to replace its rawhide tanning and molding e/uipment. !t can be used for four #ears. 'he e/uipment costs $9%:,:::. 'he firm can lease it for $2*,,::: a #ear, or it can borrow the mone# to purchase the e/uipment at 9 percent. 'he firm&s ta" rate is %9 percent. 'he three #ear (0D8 depreciation schedule is. #ear 1 E %%.%% percent, #ear 2 E **.** percent, #ear % E 1*.72 percent, and #ear * E 5.*1 percent. 'he e/uipment will be worth $1::,::: in four #ears. What is the net advantage to leasing4

A) B) 0) 1) 2)

.07#8;: $%1,1%2 $%3,239 $1%7,5:3 $1,2,:32