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Question 1 1. Both New York Stock Exchange and NASDAQ are examples of primary markets. Answer True False 1 points Question 2 1. Free cash flow hypothesis states that an increase in dividend should benefit the shareholders by reducing the ability of managers to pursue wasteful activities. Dividends can serve as a way for the board of directors to reduce agency costs. Therefore, firms that pay dividends from free cash flows have higher values than firms that retain free cash flows. Answer True 1. During 2004, the Abel Co. had gross sales of $500,000. The firm's cost of goods sold and selling expenses were $150,000 and $50,000, respectively. These figures do not include depreciation. Abel also had notes payable of $1,000,000. These notes carried an interest rate of 10 percent. Depreciation was $100,000. Abel's tax rate in 2004 was 35%. What was Abel's net income? Answer $57,5 00 $62,5 00 $63,5 00 $65,0 00 $67,5 00 1 points Question 40 1. In the above question, what was Abel's operating cash flow? Answer $175,0 00 $200,5 00 $233,5 00 $265,0 00 33750 0 1. Tan Co. had total operating revenues of $1,000 over the past year. During that time, average receivables were $50. What was the average collection period (ACP) given a 365-day year? Answer 18.25 days 22.5 days 36.5 days 47.5 days 73 days 1 points Question 42 1. Aunt Clara has promised to leave you $200 a year starting next year and have it increase at 6% a year thereafter. The payments are expected to go on indefinitely. How much has Aunt Clara left you if your opportunity cost is 10 percent? Answer $2,5 00 $3,0 00 $4,0 00 $5,0 00 Question 43 1. In the above question, what is the present value of the cash flows if the first payment will be made in five years? Answer $2,6 67 $3,0 23 $3,4 15 $4,2 12 $4,7 34 1 points Question 44 1. You borrowed $200,000 to buy a house. The annual interest rate is 7%. You are going to make monthly payments starting 1 month from today for 30 years. What is the monthly payment? Answer $1,234 .2 $1,330 .6 $1,731 .7 $1,834 .4 $2,220 .5 1 points Question 45 1. In the above question, what is the remaining balance of the loan after 20 years' payments? Answer $114,6 00 $133,2 38 $151,1 95 $155,3 21 $165,9 83 Question 46 1. For the next 4 questions suppose the following data holds: In 2006, the RCB Co. has cash flow from operations of $1000, and had net capital spending of $600. In addition, the firm's net working capital increased by $250. Also, RCB paid $100 interest to the creditors and $80 dividends to the stockholders in 2006. RCB issued no new debts, and did not repurchase any of its common stock in 2006. What was RBC's total cash flow from assets in 2006? Answer 10 0 15 0 18 0 25 0 45 0 1 points Question 47 1. What was RBC's cash flow to creditors in 2006? Answer 50 80 10 0 15 0 Top of Form Question 48 What was RBC's cash flow to stockholders in 2006? Answer -100 50 80 100 120 1 points Question 49 How much new common stock did RBC issue in 2006? Answer 30 50 60 80 100 1 points Question 50 For the next 8 questions suppose the following data holds: IBC, Inc. is considering the purchase of a $300,000 computer that has an economic life of 5 years. The computer will be depreciated according to 5-year MACRS schedule (20%, 32%, 19.2%, 11.52%, 11.52%, and 5.76%). The market value of the computer will be $50,000 in 5 years. The use of computer will save annual costs of $100,000 for the next five years. For simplicity, these cost savings are assumed to occur at the end of these years. As a result of this project, the net working capital will increase by $40,000 immediately, and it will be recovered at the end of year 5. The firm's tax rate is 40% and its cost of capital is 12%. What is the initial investment requirement (t=0)? Answer $140,000 $200,000 $240,000 $260,000 $340,000 1 points Question 51 What is the operating cash flow one year from today (t=1)? Answer $73,824 $74,250 $83,040 $84,000 $98,400 1 points Question 52 What is the operating cash flow two years from today (t=2)? Answer $73,824 $74,250 $83,040 $84,000 $98,400 1 points Question 53 What is the operating cash flow three year from today (t=3)? Answer $73,824 $74,250 $83,040 $84,000 $98,400 1 points Question 54 What is the operating cash flow four years from today (t=4)? Answer $73,824 $74,250 $83,040 $84,000 $98,400 1 points Question 55 How much tax is the firm expected to pay when the asset is sold for $50,000 in year 5? Answer $8,543 $9,671 $10,127 $13,088 $15,233 1 points Question 56 What is the total cash flow five year from today (t=5)? Answer $97,431 $100,313 $112,452 $139,824 $150,736 1 points Question 57 What is the project's NPV? Answer $4,998 $10,616 $15,231 $21,267 $22,347 1 points Question 58 For the next 4 questions suppose the following data holds: Initial Investment $8,000 Fixed Costs $6,000/year Variable Costs $30/unit Depreciation $2,000/year Price $50/unit Discount Rate 12% Project Life 4 years Tax rate 40% How much is the contribution margin (after-tax)? Answer $6 $8 $10 $12 $20 1 points Question 59 What is the accounting break-even point? Answer 300 units 400 units 450 units 500 units 525 units 1 points Question 60 How much is the EAC of the initial investment? Answer $2,212 $2,356 $2,634 $2,856 $2,946 1 points Question 61 What is the PV break-even point? Answer 412 units 453 units 487 units 522 units 571 units 1 points Question 62 You invest $100 in the market portfolio with an expected return of 12% and a standard deviation of 15%, and a T-bill that pays 5%. If you desire to form a portfolio with an expected return of 10%, what percentages of your money must you invest in the market portfolio? Answer 45.3% 65.5% 71.4% 83.5% 85.24% 1 points Question 63 The market portfolio has an expected return of 12% and a standard deviation of 20 %. The standard deviation of ABC Company's stock is 40% and its correlation coefficient with the market portfolio is 0.6.What is the beta of ABC's stock? Answer 0.75 0.9 0.95 1.0 1.2 1 points Question 64 For the next 2 questions suppose the following holds: The risk-free rate is 6%, the market risk premium (=E(RM) - RF) is 9%. You invest $600 in Security A with a beta of 1.2 and $400 in Security B with beta of 1.5. What is the beta of this formed portfolio? Answer 1.15 1.3 1.32 1.41 1.52 1 points Question 65 Based on the CAPM, what is the required rate of return of your portfolio? Answer 14.37% 15.42% 16.68% 17.88% 18.25% 1 points Question 66 The following information applies to the next 10 problems. The Wallace Corporation is a zero growth firm with an expected EBIT of $800,000 on a permanent basis, and corporate tax rate of 40 percent. Wallace uses no debt, and the cost of equity to an unlevered firm in the same risk class is 12.0 percent. The firm has 100,000 shares outstanding. What is the value of the firm? Answer $2,500,000 $2,800,000 $3,800,00 $4,000,000 $4,400,000 1 points Question 67 What is the EPS (earnings per share) of the firm? Answer $4.0 $4.2 $4.4 $4.6 $4.8 1 points Question 68 What is the price per share of the firm's stock? Answer $34 $36 $38 $40 $44 1 points Question 69 The following information applies to the next 7 problems. Now, the Wallace Corporation decides to change its capital structure by borrowing $1.5 million at 8% interest on a permanent basis, and repurchasing some of its stocks. We still assume the same information from above. The Wallace Corporation is a zero growth firm with an expected EBIT of $800,000 on a permanent basis, and corporate tax rate of 40 percent. When Wallace used no debt, and the cost of equity to an unlevered firm in the same risk class is 12.0 percent. The firm had 100,000 shares outstanding before the repurchase. What is the value of the firm with $1.5 million debt, according to MM with corporate taxes? Answer $3,600,000 $3,800,000 $4,350,00 $4,600,000 $5,250,000 1 points Question 70 What is the value of equity? Answer $2,700,000 $3,100,000 $3,350,000 $3,450,000 $3,750,000 1 points Question 71 What is the firm's cost of equity when the firm uses $1,500,000 debt? Answer 12.5% 13.16% 13.54% 14.25% 15.16% 1 points Question 72 What is the stock price of the firm at which shares are repurchased? Answer $38 $40.33 $43 $44 $46 1 points Question 73 What is the number of shares the firm repurchases with $1,500,000? Answer 32,609 34,091 34,884 37,190 39,474 1 points Question 74 What is the EPS (earnings per share) of the firm, when the firm uses $1,500,000 debt? Answer $5.35 $5.53 $5.77 $6.05 $6.42 1 points Question 75 What is the firm's value when both corporate and personal taxes are considered. Assume that the personal tax rates of Wallace's investors are 30 percent on debt (interest) income and 20 percent (on average) on income from stocks. Answer $4,00,000 $4,211,333 $4,314,286 $4,471,429 $4,600,000 1 points Question 76 For the next 8 questions suppose the following data. The Also Horns Corp. is planning on introducing a new line of saxophones. They expect sales to be $400,000 with total fixed and variable costs representing 70% of sales. The discounted rate of the unlevered equity is 17%, but the firm plans to raise $144,385 of the initial $450,000 investment as 9% perpetual debt. The corporate tax rate is 40% and the target debt to asset (or value) ratio is 0.3. In addition to the information above, suppose the APV approach is used to evaluate the project for the next 4 questions. How much is the unlevered cash flow? Answer $72,000 $84,000 $100,000 $120,000 $144,000 1 points Question 77 What is the NPV of the project to an all-equity firm? Answer $-34,451 $-26,471 $-12,417 $25,376 $34,451 1 points Question 78 What is the NPV of the financing side effects (NPVF)? Answer $44,334 $57,754 $62,250 $65,000 $75,250 1 points Question 79 What is the APV of the project? Answer $12,341 $27,799 $31,283 $35,779 $45,337 1 points Question 80 Suppose the FTE approach is used to evaluate the project for the next 3 questions. Use the information in Problem 76, How much is the levered cash flow? Answer $42,250 $48,000 $55,236 $64,203 $70,520 1 points Question 81 What is the rS, discount rate for the equity of the levered firm? Answer 16.25% 18.14% 19.06% 19.67% 20.20% 1 points Question 82 What is the Initial Net Equity Investment? Answer $200,000 $225,500 $250,500 $275,500 $305,615 1 points Question 83 For the next question suppose the WACC approach is used to evaluate the project. Use the information in Problem 76, What is the rWACC of the project? Answer 12.48% 13.33% 14.96% 15.23% 18.34% 1 points Question 84 The following data apply to the next 2 problems. Suppose Mr.X wants to sell a share of ABD stock which he bought for $100 two years ago. The selling price today is $140. He pays 20% tax on capital gains and pays 30% tax on dividend income. Suppose further that tomorrow is the ex-dividend date, and the amount of dividend is $5 per share. If he sells the stock today, what would be the after-tax income from the sales? Answer $130 $131.5 $132 $133 $140 1 points Question 85 If he can sell the share for $135 tomorrow morning, what would be the after-tax income from the sales? Answer $130 $131.5 $132 $133 $140 1 points Question 86 The following data apply to the next 2 problems. Midwest Electric recently declared a 20 percent stock dividend. On the date of the stock dividend Midwest had 16 million shares outstanding priced at $46 per share in the market. An accounting entry was required on the balance sheet transferring some retained earnings to the common stock account. Retained earnings were $280 million prior to the transaction. (See the table below.) Stockholders' Equity Accounts (millions of dollars) (Before Stock Dividend) Common Stock (16 million shares outstanding, $2 par) $32 Additional Paid-in capital 88 Retained Earnings 280 Total common stockholders' equity 400 What was the dollar amount of retained earnings after the transfer? Answer $130m $131.25m $132.8m $134.4m $145m 1 points Question 87 What was the dollar amount of par value after the transfer? Answer $33.8m $36.8m $38.4m $44.8m $50.2m 1 points Question 88 Strategic Systems Inc. expects to have net income of $1,000,000 during the next year. Its target, and current, capital structure is 40 percent debt and 60 percent common equity. The Director of Capital Budgeting has determined that the optimal capital budget for next year is $1.2 million. If Strategic uses the residual dividend model to determine next year's dividend payout, what is the expected payout ratio? Answer 20% 24% 28% 30% 34% 1 points