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BUAD 3040 Final Exam

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BUAD 3040 Final Exam

BUAD 3040 Final Exam

BUAD3040

BUAD 3040 Final Exam

BUAD 3040 Final Exam Study Sheet (CH. 8, 9, 10, 11, 12, 13)

Question 1. The following information is available concerning a firm’s capital:

Debt: Bonds with a face value of $1,000 and an initial 20-year term were issued five years ago with a coupon rate of 8%. Today these bonds are selling for $846.30.

The combined federal and state tax rate is 40%. Calculate the firm’s cost of debt.

  1. 5%
  2. 6%
  3. 8%
  4. 10%

Question 2. Which one of the following statements concerning financial leverage is correct?

  1. The benefits of leverage are unaffected by the amount of a firm’s earnings.
  2. The use of leverage will always increase a firm’s earnings per share.
  3. The shareholders of a firm are exposed to less risk anytime a firm uses financial leverage.
  4. Changes in the capital structure of a firm will generally change the firm’s earnings per share.
  5. Financial leverage is beneficial to a firm only when the firm has negative earnings.

Question 3. Which one of the following is an example of a direct bankruptcy cost?

  1. Operating at a debt-equity ratio that is less than the optimal ratio
  2. Reducing the dividend payout ratio as a means of increasing a firm’s equity
  3. Forgoing a positive net present value project to conserve current cash
  4. Incurring legal fees for the preparation of bankruptcy filings
  5. Losing a key customer due to concerns over a firm’s financial viability

Question 4. The Greenbriar is an all-equity firm with a total market value of $520,000 and 20,000 shares of stock outstanding. Management is considering issuing $120,000 of debt at an interest rate of 10 percent and using the proceeds on a stock repurchase. Ignore taxes. How many shares will the firm repurchase if it issues the debt securities?

  1. 2,871 shares
  2. 3,516 shares
  3. 4,521 shares
  4. 4,607 shares
  5. 4,615 shares

Question 5. One year ago, Debra purchased 4,200 shares of KNF stock for $177,072. Today, she sold those shares for $48.10 a share. What is the capital gains yield on this investment if the dividend yield is 4.1 percent?

  1. A.10.79 percent
  2. 11.23 percent
  3. 13.07 percent
  4. 15.04 percent
  5. 14.53 percent

Question 6. The Bethlehem Inn is an all-equity firm with 18,000 shares outstanding at a value per share of $14.50. The firm is issuing $50,000 of debt and using the proceeds to reduce the number of outstanding shares. How many shares of stock will be outstanding once the debt is issued? Ignore taxes.

  1. 11,970 shares
  2. 14,552 shares
  3. 14,846 shares
  4. 15,030 shares
  5. 15,561 shares

Question 7. The stock of Southern United is priced at $40 a share and has a dividend yield of 2.1 percent. The firm pays constant annual dividends. What is the amount of the next dividend per share?

  1. $0.021
  2. $0.210
  3. $0.840
  4. $0.871
  5. $0.875

Question 8. Assume that long-term corporate bonds had an average return of 5.3 percent and a standard deviation of 9.3 percent for a 30-year period. What range of returns would you expect to see on these bonds 68 percent of the time?

  1. A.-4.0 percent to 14.6 percent
  2. -4.0 percent to 22.9 percent
  3. -11.3 percent to 14.6 percent
  4. -11.3 percent to 17.4 percent
  5. -11.3 percent to 22.9 percent

Question 9. One year ago, you purchased 100 shares of a stock .This morning you sold those shares and realized a total return of 8.2 percent. Given this information, you know for sure the:

  1. stock price increased by 8.2 percent over the last year.
  2. stock increased in value over the past year.
  3. stock paid a dividend.
  4. dividend yield is greater than zero.
  5. sum of the dividend yield and the capital gains yield is 8.2 percent.

Question 10. Over the period of 1926–2011, which one of the following investment classes had the highest volatility of returns?

  1. Large-company stocks
  2. U.S. Treasury bills
  3. Small-company stocks
  4. Long-term corporate bonds
  5. Long-term government bonds

Question 11. The standard deviation measures the _____ of a security’s returns over time.

  1. average value
  2. frequency
  3. volatility
  4. mean
  5. arithmetic average

Question 12. An investment project requires an initial outlay of $100,000, and is expected to generate annual cash inflows of $28,000 for the next 5 years. The cost of capital is 12 percent. Determine the internal rate of return for the project (to the nearest tenth of one percent).

  1. 12.0%
  2. 12.6%
  3. 3.6%
  4. 12.4%

Question 13. Calculate the NPV of a project requiring a $3,000 investment followed by an outflow of $500 in Year 1, and inflows of $1,000 in Year 2 and $4000 in Year 3. The cost of capital is 12%. (Round to nearest $)

  1. $52
  2. $198
  3. $257
  4. $486

Question 14. A stand-alone capital project has the following projected cash flows:

Year 0 1 2 3
Cash flow ($4,000) $1,500 $1,200 $2,395

If the firm’s cost of capital is 14%, which of the following statements is true?

  1. The IRR is greater than the cost of capital and the project should be undertaken.
  2. The project should be rejected because the IRR is 12%, which is less than the project’s cost of capital.
  3. The IRR is less than 12% and the project should be undertaken.
  4. The NPV of the project is positive and the project should be undertaken.

Question 15. What is the after-tax cash flow that results from the sale of a capital asset for $150,000? Assume that it has a book value of $100,000 and a 40% tax rate.

  1. $150,000
  2. $90,000
  3. $130,000
  4. $60,000
  5. $170,000

Question 16. Basin Manufacturing (40% marginal tax rate) is considering a plant expansion project. The equipment will cost $100,000 and will require an additional $10,000 for delivery and installation. The expansion also will require Basin to increase immediately its net working capital by $25,000. The expansion is expected to generate revenues of $150,000 per year. Calculate the project’s net investment.

  1. $81,000
  2. $125,000
  3. $131,000
  4. none of the above

Question 17. Dudek Manufacturing’s common stock is currently selling for $45/share. Their most recent dividend (annual) was $2.50, and is expected to grow at 5% per year indefinitely. What is Dudek’s cost of equity? (Use Gordon dividend growth model formula.)

  1. 10.56%
  2. 10.83%
  3. 12.14%
  4. 13.00%
  5. 17.14%

Question 18. Rent2U, Inc. is considering expanding their operations. The company owns a lot near the present facility on which a new building can be constructed. The land was purchased 10 years ago for $75,000 and now has a market value of $180,000. Assuming a tax rate of 20%, calculate the opportunity cost of the land.

  1. $84,000
  2. $105,000
  3. $159,000
  4. $180,000

Question 19. The following financial information is available on Simmons Inc.:

Current stock price $48.00
Beta 1.1
Expected rate of return on market 12.0%
Risk-free rate 6.0%

Determine the cost of equity using the capital asset pricing model (CAPM) approach. (Compute answer to the nearest 0.1%).

  1. 12.9%
  2. 12.6%
  3. 13.0%
  4. none of the above

Question 20. Hatter Inc. has the following capital components and costs. Calculate Hatter’s WACC.

Component Value Cost
Debt 15,500 10%
Preferred Stock 7,500 12%
Common Equity 10,000 14%
  1. 11.67%
  2. 12.41%
  3. 13.73%
  4. 14.55%

Question 21. Determine the (after-tax) cost of a $50 million debt issue that the Mattingly Corporation is planning to place with a large insurance company. Assume the company is subject to a 40% tax rate. This long-term debt issue will yield 12% to the insurance company.

  1. 4.8%
  2. 7.2%
  3. 12.0%
  4. none of the above

Question 22. A project requires an initial outlay of $100,000, and is expected to generate annual net cash inflows of $28,000 for the next 5 years. Determine the payback period for the project.

  1. .28 years
  2. 1.4 years
  3. 3.57 years
  4. 17.86 years