Pilgan UAS

Chapter 11
ABC Service can purchase a new assembler for $15,052 that will provide an annual net cash
flow of $6,000 per year for five years. Calculate the NPV of the assembler if the required rate of
return is 12%. (Round your answer to the nearest $1.)
A) $1,056
B) $4,568
C) $7,621
D) $6,577

Project H requires an initial investment of $100,000 and the produces annual cash flows of
$50,000, $40,000, and $30,000. Project T requires an initial investment of $100,000 and the
produces annual cash flows of $30,000, $40,000, and $50,000. If the required rate of return is
greater than 0% and the projects are mutually exclusive
A) H will always be preferable to T.
B) T will always be preferable to H.
C) H and T are equally attractive.
D) The project rankings will change with different discount rates.

Project EH! requires an initial investment of $50,000, and has a net present value of $12,000.
Project BE requires an initial investment of $100,000, and has a net present value of $13,000.
The projects are mutually exclusive. The firm should accept
A) project EH.
B) project BE.
C) both projects.
D) neither project.

What is the payback period for a $20,000 project that is expected to return $6,000 for the first
two years and $3,000 for Years 3 through 5?
A) 3 1/2
B) 4 1/2
C) 4 2/3
D) 5

Central Mass Ambulance Service can purchase a new ambulance for $200,000 that will provide
an annual net cash flow of $50,000 per year for five years. The salvage value of the ambulance
will be $25,000. Assume the ambulance is sold at the end of year 5. Calculate the NPV of the
ambulance if the required rate of return is 9%. (Round your answer to the nearest $1.)
A) $(10,731)
B) $10,731
C) $(5,517)
D) $5,517
Chapter 12
Which of the following is NOT part of a project's initial cash outflow?
A) The asset's purchase price
B) Funds committed to support increased inventory levels due to expected increased sales if the
firm adopts the project
C) A marketing survey completed last year to determine the project's feasibility
D) Expenses incurred to install the asset

Which of the following is NOT considered in the calculation of incremental cash flows?
A) Depreciation tax shield
B) Sunk costs
C) Opportunity costs
D) Both A and B

Which of the following overhead expenses is a relevant, incremental cash flow?

A) The project will represent 10% of the firm's revenues, so 10% of the CEO's compensation is
allocated to the project.
B) The project will occupy 10% of the firm's available space, so 10% of the firm's property
insurance is allocated to the project.
C) The project will increase the number of employees by 10%, so an additional human resources
assistant must be hired to handle personnel issues directly related to the project.
D) None of the expenses above should be allocated to the project.

Schiller Construction Inc. has estimated the following revenues and expenses related to phase I
of a proposed new housing development. Incremental sales= $5,000,000, total cash operating
expenses $3,500,000, depreciation $500,000, taxes 35%, interest expense, $200,000. Operating
cash flow equals
A) $650,000.
B) $1,000,000.
C) $1,150,000.
D) $975,000.

Diamond Inc. has estimated that a new building will cost $2,500,000 to construct. Land was
purchased a year ago for $500,000 and could be sold today for $550,000. An environmental
impact study required by the state was performed at a cost of $48,000. For capital budgeting
purposes, what is the relevant cost of the new building?
A) $2,500,000
B) $3,048,000
C) $3,050,000
D) $3,098,000
Chapter 13
The form of risk analysis which examines the effect of various combinations of value drivers is
known as
A) scenario analysis.
B) sensitivity analysis.
C) value driver analysis.
D) expected value analysis.

Economists at PHE Llc estimate a 20% probability of a recession next year, a 50% probability of
an average economy, and a 30% probability of a rapid expansion. If there is a recession, the
NPV of project O will be $20 million; if the economy is average, it will be $45 million and in
case of a rapid expansion, it will be $75 million. What is the expected NPV of the project?
A) $57.5 million
B) $49 million
C) $46.67 million
D) $45 million

The Oviedo Thespians are planning to present performances of their Florida Revue on 2
consecutive nights in January. It will cost them $5,000 per night for theater rental, event
insurance and professional musicians. The theater will also take 10% of gross ticket sales. How
many tickets must they sell at $10.00 per ticket to break even?
A) 1000 tickets
B) 1,112 tickets
C) 1,223 tickets
D) There is not enough information

An important value driver for an automobile dealership would be

A) depreciation.
B) inventory turnover.
C) tax rates.
D) debt to equity ratios.

Which of the following events might negatively affect a project's net present value?
A) Rules change to allow for faster depreciation of plant and equipment.
B) Tax rates go down, which lowers the value of the tax shelter from depreciation.
C) Projected sales over the life of the project remain the same, but they are higher in the early
years and lower in the later years.
D) Interest rates go up requiring an increase in the required rate of return.
Chapter 14
PVE, Inc. has $15 million of debt outstanding with a coupon rate of 9%. Currently, the yield to
maturity on these bonds is 7%. If the firm's tax rate is 35%, what is the after-tax cost of debt to
PVE?
A) 10.76%
B) 5.85%
C) 4.55%
D) 5.4%

The expected dividend is $2.50 for a share of stock priced at $25. What is the cost of common
equity if the long-term growth in dividends is projected to be 4%?
A) 10%
B) 8%
C) 14%
D) 18%

Sonderson Corporation is undertaking a capital budgeting analysis. The firm's beta is 1.5. The
rate on 10 year T-Bonds is 1.6% and the return on the S&P 500 index is 8%. What is the
appropriate cost of common equity in determining the firm's cost of capital?
A) 12.0%
B) 11.2%
C) 13.6%
D) 9.6%

Walker & Son is issuing a 10-year, $1,000 par value bond that pays 9% interest annually. The
bond is expected to sell for $885. What is Walker & Son's after-tax cost of debt if the firm is in
the 34% tax bracket?
A) 7.23%
B) 8.01%
C) 9.15%
D) 10.35%

The opportunity cost of securities issued by a firm is determined by

A) the rate of return investors could earn on riskless securities.
B) the rate of return on the firm's next best investment opportunity.
C) the rate of return investors could obtain on similar securities.
D) the weighted average rate of return on all securities issued by the firm.
Chapter 15
Merrimac Brewing company's total assets equal $18 million. The book value of Merrimac's
equity is $6 million. Excess cash is $200,000. The market value of Merrimac's equity is $10
million. It's Debt to Enterprise Value ratio is .5. What is Merrimac's Debt Ratio?
A) .75
B) .67
C) .33
D) .25

Optimal capital structure is

A) the funding mix that will maximize the company's common stock price.
B) the mix of all items that appear on the right-hand side of the company's balance sheet.
C) the mix of funds that will minimize the firm's beta.
D) the mix of securities that will maximize EPS.

Assume that the tax rate is 34% and bankruptcy costs are negligible until a firm's debt to equity
ratio is greater than one. If Madison Co. increases debt from 10% of its capital structure to 40%,
cash flows to investors will
A) decrease.
B) remain the same.
C) increase.
D) A firm's cash flows are independent of it's capital structure.

Chelsea Corporation's cost of equity is 16% and it is 100% equity financed. If it can borrow
enough money at 10% to buy back half of its stock, what would would happen to the cost of
equity be under the original assumptions of the Modigliani and Miller Capital Structure
Theorem.
A) It would remain at 16%.
B) t would rise to 22%.
C) It would fall to 11%.
D) It would fall to 13%.

Abbot Corp has a debt ratio (debt to assets) of 20%. Management is wondering if its current
capital structure is too conservative. Abbot Corp's present EBIT is $4.5 million, and profits
available to common shareholders are $2,910,600, with 600,000 shares of common stock
outstanding. If the firm were to instead have a debt ratio of 40%, additional interest expense
would cause profits available to stockholders to decline to $2,851,200, but only 480,000
common shares would be outstanding. What is the difference in EPS at a debt ratio of 40%
versus 20%?
A) $4.85
B) $6.34
C) $1.09
D) $-0.10
Chapter 16
Which of the following motivates corporations to split their common stock?
A) To keep the price of the firm's common stock within an optimum price range
B) To increase retained earnings
C) To reallocate capital to shareholders
D) To narrow ownership of the firm.

If a firm's EPS are $8.33, and the firm is paying a dividend of $1.25 per share, what is the firm's
dividend payout ratio?
A) 33%
B) 6%
C) 15%
D) 25%
E) 66%

Which of the following is most likely to increase EPS?

A) a 6 for 5 stock split
B) a 20% stock dividend
C) The company repurchases 20% of outstanding shares.
D) a 20% cash dividend

What might an investor reasonably expect from a company with excess cash and few internal
investment growth opportunities?
A) The company will buy Treasury bills with all the excess cash.
B) The company will split its stock.
C) The company will declare a stock dividend.
D) The company will pay a cash dividend or repurchase some of its own shares.

ZZZ Corporation had net income of $100 million last year and 50 million common shares
outstanding. They declared an 8% stock dividend. Calculate EPS before and after the stock
dividend.
A) EPS before would be $2; after the dividend, EPS would be $1.85.
B) EPS before would be $0.50; after the dividend, EPS would be $0.46.
C) Since they made $100 million in net income, the EPS cannot change.
D) There is not enough information to make this calculation.
Chapter 18
Which of the following is most likely to occur if a firm over-invests in net working capital?
A) The current ratio will be lower than it should be.
B) The quick ratio will be lower than it should be.
C) The return on investment will be lower than it should be.
D) The times interest earned ratio will be lower than it should be.

Which of the following is most likely to occur if a firm under-invests in net working capital?
A) The firm might not have sufficient cash to pay its bill in a timely manner.
B) The firm might not have adequate inventory to meet the needs of its customers.
C) The firm could be losing sales because its terms of sale are too strict.
D) All of the above.

Which of the following is NOT considered a permanent source of financing?

A) Corporate bonds
B) Common stock
C) Preferred stock
D) Commercial paper

A quite risky working capital management policy would have a high ratio of
A) short-term debt to bonds and equity.
B) short-term debt to total debt.
C) bonds to property, plant, and equipment.
D) short-term debt to equity.

Becker.com has an inventory turnover ratio of 52, an accounts receivable balance of $365,000,
average daily credit sales of $36,500, accounts payable of $182,500 and cost of goods sold of
$7,993,500. What is Becker's cash conversion cycle to the nearest day?
A) 17 days
B) 9 days
C) 27 days
D) -27 days
Chapter 19
Suppose International Trading Enterprises purchased 25,000 kilograms of Belgian chocolate for
a price of 100,000 euros. If the current exchange rate is 0.95 euro to the U.S. dollar, what is the
purchase price of the chocolate in dollars?
A) $57,895
B) $26,316
C) $95,000
D) $105,263

An investor purchased 20,000,000 Japanese yen at an exchange rate of 113.25. yen to the dollar.
the yen cost her ________. Round answer to the nearest dollar.
A) $2,265,000,000
B) $17,660,044
C) $197,414
D) $176,600

The following are the prices in the foreign exchange market between the U.S. dollar and a
foreign currency (fc). Spot 0.6335US$/fc; three-month forward 0.6375US$/fc. What was the
discount or premium on three-month forward for the foreign currency?
A) 0.63% premium
B) 0.40% premium
C) 0.63% discount
D) 0.40% discount

A dealer in New York offers to buy U.K. pounds for $1.4500 and sell them for $1.4522. The
different prices are due to
A) arbitrage.
B) a tax on currency transactions.
C) the bid-ask spread.
D) supply and demand.

The 6 month interest rate in the U.S. is 2%. The spot exchange rate for Australian dollars is
1.4063 to the U.S.dollar. The 6 months forward rate is 1.4259 to the U.S. dollar. These prices
indicate that the 6 month risk-free rate in Australia is
A) 6.00%.
B) 0.34%.
C) 0.60%.
D) 3.42%.
Chapter 20
The optimal corporate risk management strategy is to
A) avoid or transfer every possible risk.
B) do nothing to transfer risk.
C) transfer about half the risk.
D) there is no strategy that is optimal for all firms.

A maker of breakfast cereals has contracted to buy 100,000 bushels of wheat for $4.50 a bushel
at the end of October. On the delivery date, the spot price of wheat is $4.70 per bushel. Which of
the following is true?
A) The seller of the contract has $20,000 profit.
B) The buyer of the contract has a $20,000 loss.
C) The buyer of the contract has a $20,000 profit
D) Both A and B are true

The party that agrees to sell a commodity or currency in the forward market is said to have a
A) long position.
B) short position
C) protected position.
D) split position.

Ahmad bought put options on Home Depot with a strike price of $130. The option premium was
$2.83. Just before the contract expired, Home Depot stock was at $132.83 per share. Ahmad
A) made a profit of $2.83 per share.
B) lost $2.83 per share because the option would not be exercised.
C) lost $1.5.66 per share.
D) made a profit of $5.66 per share.

Assume that the current price of DEY stock is $25, that a 6 month call option on the stock has a
strike or exercise price of $27.50, the risk free rate is 4%, and that you have calculated N(d1) as
.5476 and N(d2) as .4432. Use the Black-Scholes model to calculate the price of the option.
A) $1.74
B) $4.20
C) 1.98
D) $2.50