11. Jeremy Kohn may invest in a 10-year bond that pays a 12 percent coupon semiannually. The current market rate for similar bonds is 8 percent. Jeremy can buy this bond from his uncle for $1,200. Should Jeremy buy the bond from his uncle?

*a. Yes, because he would be paying $71.81 less than the market price of the bond

b. No, because he would be paying $71.81 more than the market price of the bond

c. No, because he would be paying $4.88 more than the market price of the bond

d. Yes, because he would be paying $4.88 less than the market price of the bon

e. No, because he would be paying $396.36 less than the market price of the bond

1. I am taking Form ___ of the exam. *a. A (You are Taking this Form!) b. B 2. My instructor's name is a. Basma Bekdache b. Trang Doan c. Matthew Roling d. John Wagster e. Ali Hammoud *f. Chris Sullivan (This is Your Instructor!) 3. I am taking a(n) _________ exam. *a. individual (You are taking this as an individual!) b. group 4. The financial system's primary concern is funneling money from ________ to _________ a. wealthy individuals, individuals. *b. Lender-savers, borrower-spenders c. borrower-spenders, Lender-savers d. the government, wealthy individuals 5. If your firm primarily borrows from commercial banks, then it primarily accesses the capital markets through a. direct financing. *b. indirect financing. c. a legal loophole that allows all commercial banks the ability to underwrite securities. d. none of the above 6. If inflation is anticipated to be 5 percent during the next year, while the nominal rate of interest for a risk-free one-year loan is 10 percent, what is the approximate real rate of interest? a. 0 percent *b. 5 percent c. 10 percent d. 15 percent 7. Lorraine Jackson won a lottery. She will have a choice of receiving an annuity of $25,000 at the end of each year for the next 30 years, or a lump sum of $240,400 today. If she can earn a return of 9 percent on any investment she makes, what should she do? (Round to the nearest hundred dollars). *a. Take the annuity because its value is more than $240,400. b. Take the annuity because its value is less than $240,400. c. Take the lump sum because its value is more than the annuity's value. d. Take the lump sum because its value is less than the annuity's value 8. Trevor Smith wants to have a million dollars at retirement, which is 15 years away. He already has $200,000 in an IRA earning 9 percent annually. How much does he need to save each year, beginning at the end of this year to reach his target? Assume he could earn 9 percent on any investment he makes. (Round to the nearest dollar). a. $13,464 b. $14,273 *c. $9,247 d. $16,110 9. Jenny Abel is investing $2,500 today and will do so at the beginning of each of the next six years for a total of seven payments. If her investment can earn 10 percent, how much will she have at the end of seven years? (Round to the nearest dollar.. *a. $26,090 b. $28,249 c. $31,127 d. $23,718 10. Which one of the following statements is NOT true about amortization? a. Amortization refers to the way the borrowed amount (principal. is paid down over the life of the loan. b. With an amortized loan, each loan payment contains some payment of principal and an interest payment. *c. With an amortized loan, a smaller proportion of each month's payment goes toward interest in the early periods. d. A loan amortization schedule is just a table that shows the loan balance at the beginning and end of each period, the payment made during that period, and how much of that payment represents interest and how much represents repayment of principal 11. Jeremy Kohn may invest in a 10-year bond that pays a 12 percent coupon semiannually. The current market rate for similar bonds is 8 percent. Jeremy can buy this bond from his uncle for $1,200. Should Jeremy buy the bond from his uncle? *a. Yes, because he would be paying $71.81 less than the market price of the bond b. No, because he would be paying $71.81 more than the market price of the bond c. No, because he would be paying $4.88 more than the market price of the bond d. Yes, because he would be paying $4.88 less than the market price of the bon e. No, because he would be paying $396.36 less than the market price of the bond 12. Jorge Cabrera paid $1,054.36 for a 15-year bond 10 years ago. The bond pays a coupon of 10 percent semiannually. Today, the bond is priced at $980. If he sold the bond today, what would be his realized yield? (Round to the nearest percent.. a. 12% b. 8% c. 11% *d. 9% 13. Your uncle will sell you 100 shares of stock for $62.50 per shar E. You expect the company to grow steadily at an annual rate of 6 percent for the foreseeable futur E. The firm paid a dividend of $2.30 last year. If you require a rate of return of 10 percent, should you buy the stock from your uncle? (Round to the nearest dollar.. a. No, because the current price should be $64 per share b. Yes, because the current price should be $64 per share *c. No, because the current price should be $61 per share d. Yes, because the current price should be $61 per share 14. Cortez, Inc., is expecting to pay out a dividend of $2.50 next year. After that it expects its dividend to grow at 7 percent for the next four years. What is the present value of dividends over the fiveyear period if the required rate of return is 7.5 percent? (Do not round intermediate calculations. Round final answer to two decimal places.. a. $10.76 b. $9.80 c. $11.88 *d. $11.52 15. Elmer Sporting Goods is getting ready to produce a new line of golf clubs by investing $1.65 million. The investment will result in additional cash flows of $625,000, $812,500, and 1,000,000 over the next three years. a. After 3 years, the initial investment has not been paid back. *b. The project should be accepted if the required payback period is 2.4 years. c. The project should be rejected if the required payback period is 2.4 years. d. The project should be rejected if the required payback period is 2.6 years. 16. Jamaica Corp. is adding a new assembly line at a cost of $8.0 million. The firm expects the project to generate cash flows of $2 million, $3 million, $4 million, and $5 million over the next four years. Its cost of capital is 16 percent. What is the project's Modified Internal Rate of return (MIRR. and should the company add the new assembly line? a. 18.00 percent, no b. 18.57 percent, yes c. 18.57 percent, no d. 20.38 percent, no *e. 20.38 percent, yes Chapter 11 17. Miles Cyprus Corp. purchased a truck that currently has a book value of $2,000. If the firm sells the truck for $4,000 today, then what is the amount of cash that it will net after taxes if the firm is subject to a 40 percent marginal tax rate? *a. $3,200 b. $3,800 c. $4,000 d. $2,000 18. Use Exhibit 11.6 to calculate the total taxes paid by Lansing, Inc., this year. Lansing's pretax income was $375,000. Exhibit 11.6 U.S. Corporate Tax Rate Schedule in 2007 Taxable Income: More Than-----But Not More Than-----Tax Owed $0-------------------$50,000----------15% of amount beyond $0 $50,000------------$75,000----------$7,500 + 25% of amount beyond $50,000 $75,000------------$100,000--------$13,750 + 34% of amount beyond $75,000 $100,000----------$335,000--------$22,250 + 39% of amount beyond $100,000 $335,000---------$10,000,000-----$113,900 + 34% of amount beyond $335,000 $10,000,000-----$15,000,000-----$3,400,000 + 35% of amount beyond $10,000,000 $15,000,000-----$18,333,333-----$5,150,000 + 38% of amount beyond $15,000,000 $18,333,333 -------------- --------------35% on all income above $18,333,333 a. $90,500 b. $113,900 c. $157,400 *d. $127,500 19. Which of the following is the best example of a sunk cost? a. Future payments on a leased building. b. Future research and development costs. *c. Historical research and development costs. d. Historical noncash expenses. 20. A firm is considering taking a project that will produce $12 million of revenue per year. Cash expenses will be $5 million, and depreciation expenses will be $1 million per year. If the firm takes that project, then it will reduce the cash revenues of an existing project by $3 million. What is the free cash flow on the project, per year, if the firm is in the 40 percent marginal tax rate? a. $2.4 million *b. $2.8 million c. $3.4 million d. $4.6 million 21. Simco had annual sales of $180,000 with associated costs of $120,000 during 2012. The project increased net working capital $80,000 and fixed assets by $200,000 during the year. The project has a 10-year life. The company uses straight-line depreciation to a zero book value over the life of the project. The tax rate is 35 percent. What is Simco's cash flow from operations for 2012? a. -$34,000 b. $26,000 *c. $46,000 d. $66,000 e. $180,000 22. Assume Simco's cash flow from operations in the problem above is $52,000. What is Simco's free cash flow for 2012? *a. -$228,000 b. -$148,000 c. -$68,000 d. $52,000 e. $132,000 23. A project is expected to create operating cash flows of $35,000 a year for four years. The initial cost of the fixed assets is $100,000. These assets will be worthless at the end of the project. An additional $5,000 of net working capital will be required at time 0 and this will be released at the end of the project. What is the project's net present value if the required rate of return is 11 percent? a. $1,879.25 b. $3,585.60 *c. $6,879.25 d. $8,585.60 e. $11,879.25 24. You just purchased some equipment that is classified as 5-year property for MACRS. The equipment cost $79,000. What will the book value of this equipment be at the end of two years should you decide to resell the equipment at that point in time? MACRS 5-year Property Year-----Rate 1----------20.00% 2----------32.00% 3----------19.20% 4----------11.52% 5----------11.52% 6----------5.76% a. $5,056 b. $22,752 *c. $37,920 d. $41,080 e. $56,248 Chapter 7 25. Which of the following investors should be willing to pay the highest price for an asset? a. An investor with a single-asset portfolio. *b. An investor with a diversified portfolio. c. An investor who is not completely diversified. d. An investor who is so risk-averse that he does not recognize the benefits of diversification. 26. The expected return on Karol Co. stock is 16.5 percent. If the risk-free rate is 5 percent and the beta of Karol Co is 1.15, then what is the risk premium on the market? a. 2.5% b. 5.0% c. 7.5% *d. 10.0% 27. Ronald's Fast Food just paid their annual dividend of $1.05 a share. The stock has a beta of 1.6. The return on the U.S. Treasury bill (risk-free rate. is 8 percent and the expected return on the market is 15 percent. What is the cost of equity? a. 11.05% b. 11.50% c. 15.00% d. 32.00% *e. 19.20% 28. Which of the following is the best measure of the systematic risk in a portfolio? *a. beta b. variance c. standard deviation d. covariance e. market greed 29. Which of the following represents a plot of the relation between expected return and systemic risk? a. The beta coefficient b. The covariance of returns line *c. The security market line d. The variance Chapter 13 30. Ronnie's Comics has found that its cost of common equity capital is 15 percent and its cost of debt capital is 12 percent. If the firm is financed with $250,000,000 of common shares (market value. and $750,000,000 of debt, then what is the after-tax weighted average cost of capital for Ronnie's if it is subject to a 35 percent marginal tax rate? a. 6.05% *b. 9.6% c. 8.75% d. 13.65% 31. You with 65 capital for the are analyzing the cost of capital for a firm that percent equity and 35 percent debt. The after-tax is 8 percent, while the cost of equity capital is firm. What is the overall cost of capital for the a. 12.2% b. 14.0% *c. 15.8% d. 20.0% is financed cost of debt 20 percent firm? 32. Beckham Corporation has semiannual bonds outstanding with nine years to maturity that are currently priced at $754.08. If the bonds have a coupon rate of 7.25 percent, then what is the after-tax cost of debt for Beckham if its marginal tax rate is 30 percent? Complete the calculation as is done on Wall Street. *a. 8.225% b. 8.467% c. 11.750% d. 12.095% 33. Beckham Corporation has semiannual bonds outstanding with nine years to maturity that are currently priced at $754.08. If the bonds have a coupon rate of 7.25 percent, then what is the after-tax cost of debt for Beckham if its marginal tax rate is 30 percent? Complete the calculation using the effective annual interest rate (EAR. for the bond. a. 8.225% *b. 8.467% c. 11.750% d. 12.095% 34. Jacque Ewing Drilling, Inc., has a beta of 0.8 and is trying to calculate its cost of equity capital. If the risk-free rate of return is 6 percent and the expected return on the market is 13 percent, then what is the firm's after-tax cost of equity capital if the firm's marginal tax rate is 35 percent? *a. 11.60% b. 13.20% c. 16.40% d. 19.00% 35. UltraFlex Diving Boards, Inc., just paid a dividend of $2.25. If the firm's growth in dividends is expected to remain at a flat 5 percent forever, then what is the cost of equity capital for Ultra Flex Diving Boards if the price of its common shares is currently $36.00? a. 5.95% b. 6.25% c. 11.25% *d. 11.56% 36. Wally's War Duds has a preferred share issue outstanding with a current price of $26.55. The firm is expected to pay a dividend of $1.99 per share a year from today. What is the firm's cost of preferred equity? a. 6.50% b. 7.00% *c. 7.50% d. 8.00% 37. Glitter Inc. uses one-quarter common stock and three-quarters debt to finance their operations. The after-tax cost of debt is 7 percent and the cost of equity is 13 percent. The management of Glitter Inc. is considering an expansion project that costs $1.2 million. The project will produce a cash inflow of $45,000 in the first year and 150,000 in each of the following 10 years (i.e., $150,000 in years 2 through 11.. What is the WACC and should Glitter Inc. invest in this project? a. 10 percent, no because the NPV is negative b. 10 percent, yes because the NPV is positive *c. 8.5 percent, no because the NPV is negative d. 8.5 percent, yes because the NPV is positive 38. The finance balance sheet is *a. the same as the accounting balance sheet, but it is based on market values. b. the same as the accounting balance sheet, but it does not have to balance. c. based on cash rather than accrual accounting. d. the same as the accounting balance sheet, but it is based on historical values