Question 11

The acceptance of a capital budgeting project is usually evaluated on its own merits.That is, capital budgeting decisions are treated separately from capital structure decisions.In reality, these decisions may be highly interwoven.This may result in:

A. firms rejecting positive NPV, all equity projects because changing to a capital structure with debt will always create negative NPV.

B. never considering capital budgeting projects on their own merits.

C. corporate financial managers first checking with their investment bankers to determine the best type of capital to raise before valuing the project.

D. firms accepting some negative NPV all equity projects because changing capital structure adds enough positive leverage tax shield value E. to create positive NPV.

firms never changing the capital structure because all capital budgeting decisions will be subsumed by capital structure decisions.

Question 21

Although the three capital budgeting methods are equivalent, they all can have difficulties making computation impossible at times. The most useful methods or tools from a practical standpoint are:

A. APV because debt levels are unknown in future years.

B. WACC because projects have constant risk and target debt to value ratios.

C. Flow-to-equity, because of constant risk and the knowledge that managers think in terms of optimal debt to equity ratios.

D. Both APV because debt levels are unknown in future years; and WACC because projects have constant risk and target debt to value ratios.

E. Both WACC because projects have constant risk and target debt to value ratios; and Flow-to-equity, because of constant risk and the knowledge that managers think in terms of optimal debt to equity ratios.

Question 31

The flow-to-equity approach has been used by the firm to value their capital budgeting projects. The total investment cost at time 0 is $640,000. The company uses the flow-to-equity approach because they maintain a target debt to value ratio over project lives. The company has a debt to equity ratio of 0.5. The present value of the project including debt financing is $810,994. What is the relevant initial investment cost to use in determining the value of the project?

A. $170,994

B. $267,628

C. $372,372

D. $543,366

E. $640,000

Question 41

The Webster Corp. is planning construction of a new shipping depot for its single manufacturing plant. The initial cost of the investment is $1 million. Efficiencies from the new depot are expected to reduce costs by $100,000 forever. The corporation has a total value of $60 million and has outstanding debt of $40 million. What is the NPV of the project if the firm has an after tax cost of debt of 6% and a cost equity of 9%?

A. $428,571

B. $444,459

C. $565,547

D. $1,000,000

E. None of these is the correct NPV.

Question 51

The Tip-Top Paving Co. has an equity cost of capital of 16.97%.The debt to value ratio is .6, the tax rate is 34%, and the cost of debt is 11%. What is the cost of equity if Tip-Top was unlevered?

A. 0.08%

B. 13.67%

C. 14.00%

D. 14.14%

E. None of the above.

Question 61

The BIM Corporation has decided to build a new facility for its R&D department. The cost of the facility is estimated to be $125 million. BIM wishes to finance this project using its traditional debt-equity ratio of 1.5. The issue cost of equity is 6% and the issue cost of debt is 1%. What is the total flotation cost?

A. $0.75 million

B. $1.29 million

C. $3.19 million

D. $3.75 million

E. $4.50 million

Question 71

Brad's Boat Company, a company in the 40% tax bracket, has riskless debt in its capital structure which makes up 30% of the total capital structure, and equity is the other 70%. The beta of the assets for this business is .9 and the equity beta is:

A. 0.54

B. 0.90

C. 1.13

D. 1.20

E. 1.49

Question 81

A 35 put option on ABC stock expires today. The current price of ABC stock is $36. The put is:

A. funded

B. unfunded

C. at the money

D. in the money

E. out of the money

Question 91

Assume that you own both a May 40 put and a May 40 call on ABC stock. Which one of the following statements is correct concerning your option positions? Ignore taxes and transaction costs.

A. An increase in the stock price will increase the value of your put and decrease the value of your call.

B. Both a May 45 put and a May 45 call will have higher values than your May 40 options.

C. The time premiums on both your put and call are less than the time premiums on equivalent June options.

D. A decrease in the stock price will decrease the value of both of your options.

E. You cannot profit on your position as your profits on one option will be offset by losses on the other option.

Question 101

You sold (wrote) ten put option contracts on PLT stock with an exercise price of $32.50 and an option price of $1.10. Today, the option expires and the underlying stock is selling for $34.30 a share. Ignoring trading costs and taxes, what is your total profit or loss on this investment?

A. -$2,900

B. -$1,100

C. $700

D. $1,100

E. $2,900

Question 111pts

GS, Inc. stock is selling for $28 a share. A 3-month call on GS stock with a strike price of $30 is priced at $1.50. Risk-free assets are currently returning 0.3% per month. What is the price of a 3-month put on GS stock with a strike price of $30?

A. $0.50

B. $2.02

C. $2.73

D. $3.23

E. $4.02

Question 121pts

Given the following information, what is the value of d2 as it is used in the Black-Scholes Option Pricing Model?

• Stock price $42
• Time to expiration .25
• Risk-free rate .055
• Standard deviation .50
• d1.375161

A. .021608

B. .125161

C. .175608

D. .200161

E. .250161

Question 131pts

What is the value of a 9-month call with a strike price of $45 given the Black-Scholes Option Pricing Model and the following information?

• Stock price $48
• Exercise price $45
• Time to expiration .75
• Risk-free rate .05
• N(d1) .718891
• N(d2) .641713

A. $2.03

B. $4.86

C. $6.69

D. $8.81

E. $9.27

Question 141pts

Last week, you purchased a call option on Denver, Inc. stock at an option price of $1.05. The stock price last week was $28.10. The strike price is $27.50. What is the intrinsic value per share if Denver, Inc. stock is currently priced at $29.03?

A. -$1.05

B. $0

C. $.48

D. $.93

E. $1.53

Question 151pts

An out-of-the-money put option is one that:

A. has an exercise price greater than the underlying stock price.

B. has an exercise price less than the underlying stock price.

C. has an exercise price equal to the underlying stock price.

D. should not be exercised at expiration.

E. should not be exercised at any time.