公司理财(英文版)题库15
(完整word版)公司理财(英文版)题库8
CHAPTER 8Making Capital Investment Decisions I. DEFINITIONSINCREMENTAL CASH FLOWSa 1. The changes in a firm’s future cash flows that are a direct consequence of accepting aproject are called _____ cash flows.a. incrementalb. stand-alonec. after-taxd. net present valuee. erosionDifficulty level: EasyEQUIVALENT ANNUAL COSTe 2. The annual annuity stream of payments with the same present value as a project’s costsis called the project’s _____ cost.a. incrementalb. sunkc. opportunityd. erosione. equivalent annualDifficulty level: EasySUNK COSTSc 3. A cost that has already been paid, or the liability to pay has already been incurred, isa(n):a. salvage value expense.b. net working capital expense.c. sunk cost.d. opportunity cost.e. erosion cost.Difficulty level: EasyOPPORTUNITY COSTSd 4. The most valuable investment given up if an alternative investment is chosen is a(n):a. salvage value expense.b. net working capital expense.c. sunk cost.d. opportunity cost.e. erosion cost.Difficulty level: EasyEROSION COSTSe 5. The cash flows of a new project that come at the expense of a firm’s existing projectsare called:a. salvage value expenses.b. net working capital expenses.c. sunk costs.d. opportunity costs.e. erosion costs.Difficulty level: EasyPRO FORMA FINANCIAL STATEMENTSa 6. A pro forma financial statement is one that:a. projects future years’ operations.b. is expressed as a percentage of the total assets of the firm.c. is expressed as a percentage of the total sales of the firm.d. is expressed relative to a chosen base year’s financial statement.e. reflects the past and current operations of the firm.Difficulty level: EasyMACRS DEPRECIATIONb 7. The depreciation method currently allowed under US tax law governing the acceleratedwrite-off of property under various lifetime classifications is called _____ depreciation.a. FIFOb. MACRSc. straight-lined. sum-of-years digitse. curvilinearDifficulty level: EasyDEPRECIATION TAX SHIELDc 8. The cash flow tax savings generated as a result of a firm’s tax-deductible depreciationexpense is called the:a. after-tax depreciation savings.b. depreciable basis.c. depreciation tax shield.d. operating cash flow.e. after-tax salvage value.Difficulty level: EasyCASH FLOWd 9. The cash flow from projects for a company is computed as the:a. net operating cash flow generated by the project, less any sunk costs and erosion costs.b. sum of the incremental operating cash flow and after-tax salvage value of the project.c. net income generated by the project, plus the annual depreciation expense.d. sum of the incremental operating cash flow, capital spending, and net working capitalexpenses incurred by the project.e. sum of the sunk costs, opportunity costs, and erosion costs of the project.Difficulty level: MediumII. CONCEPTSPRO FORMA INCOME STATEMENTb 10. The pro forma income statement for a cost reduction project:a. will reflect a reduction in the sales of the firm.b. will generally reflect no incremental sales.c. has to be prepared reflecting the total sales and expenses of a firm.d. cannot be prepared due to the lack of any project related sales.e. will always reflect a negative project operating cash flow.Difficulty level: EasyINCREMENTAL CASH FLOWb 11. One purpose of identifying all of the incremental cash flows related to a proposedproject is to:a. isolate the total sunk costs so they can be evaluated to determine if the project willadd value to the firm.b. eliminate any cost which has previously been incurred so that it can be omitted fromthe analysis of the project.c. make each project appear as profitable as possible for the firm.d. include both the proposed and the current operations of a firm in the analysis of theproject.e. identify any and all changes in the cash flows of the firm for the past year so they canbe included in the analysis.Difficulty level: MediumINCREMENTAL CASH FLOWe 12. Which of the following are examples of an incremental cash flow?I. an increase in accounts receivableII. a decrease in net working capitalIII. an increase in taxesIV. a decrease in the cost of goods solda. I and III onlyb. III and IV onlyc. I and IV onlyd. I, III, and IV onlye. I, II, III, and IVDifficulty level: MediumINCREMENTAL CASH FLOWc 13. Which one of the following is an example of an incremental cash flow?a. the annual salary of the company president which is a contractual obligationb. the rent on a warehouse which is currently being utilizedc. the rent on some new machinery that is required for an upcoming projectd. the property taxes on the currently owned warehouse which has been sitting idle butis going to be utilized for a new projecte. the insurance on a company-owned building which will be utilized for a new projectDifficulty level: MediumINCREMENTAL COSTSd 14. Project analysis is focused on _____ costs.a. sunkb. totalc. variabled. incrementale. fixedDifficulty level: MediumSUNK COSTc 15. Sunk costs include any cost that:a. will change if a project is undertaken.b. will be incurred if a project is accepted.c. has previously been incurred and cannot be changed.d. is paid to a third party and cannot be refunded for any reason whatsoever.e. will occur if a project is accepted and once incurred, cannot be recouped.Difficulty level: EasySUNK COSTd 16. You spent $500 last week fixing the transmission in your car. Now, the brakes areacting up and you are trying to decide whether to fix them or trade the car in for anewer model. In analyzing the brake situation, the $500 you spent fixing thetransmission is a(n) _____ cost.a. opportunityb. fixedc. incrementald. sunke. relevantDifficulty level: EasyEROSIONb 17. Erosion can be explained as the:a. additional income generated from the sales of a newly added product.b. loss of current sales due to a new project being implemented.c. loss of revenue due to employee theft.d. loss of revenue due to customer theft.e. loss of cash due to the expenses required to fix a parking lot after a heavy rain storm.Difficulty level: EasyEROSIONa 18. Which of the following are examples of erosion?I. the loss of sales due to increased competition in the product marketII. the loss of sales because your chief competitor just opened a store across the street from your storeIII. the loss of sales due to a new product which you recently introducedIV. the loss of sales due to a new product recently introduced by your competitora. III onlyb. III and IV onlyc. I, III and IV onlyd. II and IV onlye. I, II, III, and IVDifficulty level: MediumTYPES OF COSTSd 19. Which of the following should be included in the analysis of a project?I. sunk costsII. opportunity costsIII. erosion costsIV. incremental costsa. I and II onlyb. III and IV onlyc. II and IV onlyd. II, III, and IV onlye. I, II, and IV onlyDifficulty level: MediumNET WORKING CAPITALd 20. All of the following are anticipated effects of a proposed project. Which of theseshould be included in the initial project cash flow related to net working capital?I. an inventory decrease of $5,000II. an increase in accounts receivable of $1,500III. an increase in fixed assets of $7,600IV. a decrease in accounts payable of $2,100a. I and II onlyb. I and III onlyc. II and IV onlyd. I, II, and IV onlye. I, II, III, and IVDifficulty level: MediumNET WORKING CAPITALa 21. Changes in the net working capital:a. can affect the cash flows of a project every year of the project’s life.b. only affect the initial cash flows of a project.c. are included in project analysis only if they represent cash outflows.d. are generally excluded from project analysis due to their irrelevance to the totalproject.e. affect the initial and the final cash flows of a project but not the cash flows of themiddle years.Difficulty level: MediumNET WORKING CAPITALc 22. Which one of the following will decrease net working capital of a firm?a. a decrease in accounts payableb. an increase in inventoryc. a decrease in accounts receivabled. an increase in the firm’s checking account balancee. a decrease in fixed assetsDifficulty level: EasyNET WORKING CAPITALd 23. Net working capital:a. can be ignored in project analysis because any expenditure is normally recouped by theend of the project.b. requirements generally, but not always, create a cash inflow at the beginning of aproject.c. expenditures commonly occur at the end of a project.d. is frequently affected by the additional sales generated by a new project.e. is the only expenditure where at least a partial recovery can be made at the end of aproject.Difficulty level: EasyMACRSd 24. A company which uses the MACRS system of depreciation:a. will have equal depreciation costs each year of an asset’s life.b. will expense the cost of nonresidential real estate over a period of 7 years.c. can depreciate the cost of land, if they so desire.d. will write off the entire cost of an asset over the asset’s class life.e. cannot expense any of the cost of a new asset during the first year of the asset’s life.Difficulty level: EasyMACRSa 25. Bet ‘r Bilt Toys just purchased some MACRS 5-year property at a cost of $230,000.Which of the following will correctly give you the book value of this equipment at theend of year 2?MACRS 5-year propertyYear Rate1 20.00%2 32.00%3 19.20%4 11.52%5 11.52%6 5.76%I. 52% of the asset costII. 48% of the asset costIII. 68% of 80% of the asset costIV. the asset cost, minus 20% of the asset cost, minus 32% of 80% of the asset costa. II onlyb. III and IV onlyc. I and III onlyd. II and IV onlye. I, II, III, and IVDifficulty level: EasyMACRSe 26. Will Do, Inc. just purchased some equipment at a cost of $650,000. What is theproper methodology for computing the depreciation expense for year 3 if theequipment is classified as 5-year property for MACRS?MACRS 5-year propertyYear Rate1 20.00%2 32.00%3 19.20%4 11.52%5 11.52%6 5.76%a. $650,000 ⨯ (1-.20) ⨯ (1-.32) ⨯ (1-.192)b. $650,000 ⨯ (1-.20) ⨯ (1-.32)c. $650,000 ⨯ (1+.20) ⨯ (1+.32) ⨯ (1+.192)d. $650,000 ⨯ (1-.192)e. $650,000 ⨯ .192Difficulty level: MediumBOOK VALUEd 27. The book value of an asset is primarily used to compute the:a. annual depreciation tax shield.b. amount of cash received from the sale of an asset.c. amount of tax saved annually due to the depreciation expense.d. amount of tax due on the sale of an asset.e. change in depreciation needed to reflect the market value of the asset.Difficulty level: EasySALVAGE VALUEc 28. The salvage value of an asset creates an after-tax cash inflow to the firm in an amountequal to the:a. sales price of the asset.b. sales price minus the book value.c. sales price minus the tax due based on the sales price minus the book value.d. sales price plus the tax due based on the sales price minus the book value.e. sales price plus the tax due based on the book value minus the sales price.Difficulty level: EasySALVAGE VALUEe 29. The pre-tax salvage value of an asset is equal to the:a. book value if straight-line depreciation is used.b. book value if MACRS depreciation is used.c. market value minus the book value.d. book value minus the market value.e. market value.Difficulty level: EasyPROJECT OCFa 30. A project’s operating cash flow will increase when:a. the depreciation expense increases.b. the sales projections are lowered.c. the interest expense is lowered.d. the net working capital requirement increases.e. the earnings before interest and taxes decreases.Difficulty level: EasyPROJECT CASH FLOWSc 31. The cash flows of a project should:a. be computed on a pre-tax basis.b. include all sunk costs and opportunity costs.c. include all incremental costs, including opportunity costs.d. be applied to the year when the related expense or income is recognized by GAAP.e. include all financing costs related to new debt acquired to finance the project.Difficulty level: EasyPROJECT OCFa 32. Which of the following are correct methods for computing the operating cash flow ofa project assuming that the interest expense is equal to zero?I. EBIT + Depreciation - TaxesII. EBIT + Depreciation + TaxesIII. Net Income + DepreciationIV. (Sales – Costs) ⨯ (Taxes + Depreciation) ⨯ (1-Taxes)a. I and III onlyb. II and IV onlyc. II and III onlyd. I, III, and IV onlye. II, III, and IV onlyDifficulty level: MediumBOTTOM-UP OCFb 33. The bottom-up approach to computing the operating cash flow applies only when:a. both the depreciation expense and the interest expense are equal to zero.b. the interest expense is equal to zero.c. the project is a cost-cutting project.d. no fixed assets are required for the project.e. taxes are ignored and the interest expense is equal to zero.Difficulty level: MediumTOP-DOWN OCFa 34. The top-down approach to computing the operating cash flow:a. ignores all noncash items.b. applies only if a project produces sales.c. can only be used if the entire cash flows of a firm are included.d. is equal to sales - costs - taxes + depreciation.e. includes the interest expense related to a project.Difficulty level: MediumTAX SHIELDd 35. An increase in which one of the following will increase the operating cash flow?a. employee salariesb. office rentc. building maintenanced. equipment depreciatione. equipment rentalDifficulty level: EasyTAX SHIELDc 36. Tax shield refers to a reduction in taxes created by:a. a reduction in sales.b. an increase in interest expense.c. noncash expenses.d. a project’s incremental expenses.e. opportunity costs.Difficulty level: EasyCOST-CUTTINGc 37. A project which is designed to improve the manufacturing efficiency of a firm but willgenerate no additional sales is referred to as a(n) _____ project.a. sunk costb. opportunityc. cost-cuttingd. revenue-cuttinge. revenue-generatingDifficulty level: EasyEQUIVALENT ANNUAL COSTc 38. Toni’s Tools is comparing machines to determine which one to purchase. Themachines sell for differing prices, have differing operating costs, differing machinelives, and will be replaced when worn out. These machines should be compared using:a. net present value only.b. both net present value and the internal rate of return.c. their effective annual costs.d. the depreciation tax shield approach.e. the replacement parts approach.Difficulty level: MediumEQUIVALENT ANNUAL COSTe 39. The equivalent annual cost method is useful in determining:a. the annual operating cost of a machine if the annual maintenance is performed versuswhen the maintenance is not performed as recommended.b. the tax shield benefits of depreciation given the purchase of new assets for a project.c. operating cash flows for cost-cutting projects of equal duration.d. which one of two machines to acquire given equal machine lives but unequal machinecosts.e. which one of two machines to purchase when the machines are mutually exclusive,have different machine lives, and will be replaced once they are worn out.Difficulty level: MediumIII. PROBLEMSRELEVANT CASH FLOWSd 40. Marshall’s & Co. purchased a corner lot in Eglon City five y ears ago at a cost of$640,000. The lot was recently appraised at $810,000. At the time of the purchase, thecompany spent $50,000 to grade the lot and another $4,000 to build a small buildingon the lot to house a parking lot attendant who has overseen the use of the lot for dailycommuter parking. The company now wants to build a new retail store on the site. Thebuilding cost is estimated at $1.2 million. What amount should be used as the initialcash flow for this building project?a. $1,200,000b. $1,840,000c. $1,890,000d. $2,010,000e. $2,060,000Difficulty level: MediumRELEVANT CASH FLOWSe 41. Jamestown Ltd. currently produces boat sails and is considering expanding itsoperations to include awnings for homes and travel trailers. The company owns landbeside its current manufacturing facility that could be used for the expansion. Thecompany bought this land ten years ago at a cost of $250,000. Today, the land isvalued at $425,000. The grading and excavation work necessary to build on the landwill cost $15,000. The company currently has some unused equipment which itcurrently owns valued at $60,000. This equipment could be used for producingawnings if $5,000 is spent for equipment modifications. Other equipment costing$780,000 will also be required. What is the amount of the initial cash flow for thisexpansion project?a. $800,000b. $1,050,000c. $1,110,000d. $1,225,000e. $1,285,000Difficulty level: MediumRELEVANT CASH FLOWSb 42. Wilbert’s, Inc. paid $90,000, in cash, for a piece of equipment three years ago. Lastyear, the company spent $10,000 to update the equipment with the latest technology.The company no longer uses this equipment in their current operations and hasreceived an offer of $50,000 from a firm who would like to purchase it. Wilbert’s isdebating whether to sell the equipment or to expand their operations such that theequipment can be used. When evaluating the expansion option, what value, if any,should Wilbert’s assign to this equipment as an initial cost of the project?a. $40,000b. $50,000c. $60,000d. $80,000e. $90,000Difficulty level: EasyRELEVANT CASH FLOWSa 43. Walks Softly, Inc. sells customized shoes. Currently, they sell 10,000 pairs of shoesannually at an average price of $68 a pair. They are considering adding a lower-pricedline of shoes which sell for $49 a pair. Walks Softly estimates they can sell 5,000 pairsof the lower-priced shoes but will sell 1,000 less pairs of the higher-priced shoes bydoing so. What is the amount of the sales that should be used when evaluating theaddition of the lower-priced shoes?a. $177,000b. $245,000c. $313,000d. $789,000e. $857,000Difficulty level: MediumOPPORTUNITY COSTc 44. Your firm purchased a warehouse for $335,000 six years ago. Four years ago, repairswere made to the building which cost $60,000. The annual taxes on the property are$20,000. The warehouse has a current book value of $268,000 and a market value of$295,000. The warehouse is totally paid for and solely owned by your firm. If thecompany decides to assign this warehouse to a new project, what value, if any, shouldbe included in the initial cash flow of the project for this building?a. $0b. $268,000c. $295,000d. $395,000e. $515,000Difficulty level: EasyOPPORTUNITY COSTd 45. You own a house that you rent for $1,200 a month. The maintenance expenses onthe house average $200 a month. The house cost $89,000 when you purchased itseveral years ago. A recent appraisal on the house valued it at $210,000. The annualproperty taxes are $5,000. If you sell the house you will incur $20,000 in expenses.You are deciding whether to sell the house or convert it for your own use as aprofessional office. What value should you place on this house when analyzing theoption of using it as a professional office?a. $89,000b. $120,000c. $185,000d. $190,000e. $210,000Difficulty level: MediumOPPORTUNITY COSTc 46. Big Joe’s owns a manufacturing facility that is currently sitting idle. The facility islocated on a piece of land that originally cost $129,000. The facility itself cost$650,000 to build. As of now, the book value of the land and the facility are $129,000and $186,500, respectively. Big Joe’s received an offer of $590,000 for the land andfacility last week. They rejected this offer even though they were told that it is areasonable offer in today’s market. If Big Joe’s were to consider using this land andfacility in a new project, what cost, if any, should they include in the project analysis?a. $0b. $315,500c. $590,000d. $650,000e. $779,000Difficulty level: EasyEROSION COSTb 47. Jamie’s Motor Home Sales currently sells 1,000 Class A motor homes, 2,500 Class Cmotor homes, and 4,000 pop-up trailers each year. Jamie is considering adding a mid-range camper and expects that if she does so she can sell 1,500 of them. However, ifthe new camper is added, Jamie expects that her Class A sales will decline to 950 unitswhile the Class C campers decline to 2,200. The sales of pop-ups will not be affected.Class A motor homes sell for an average of $125,000 each. Class C homes are pricedat $39,500 and the pop-ups sell for $5,000 each. The new mid-range camper will sellfor $47,900. What is the erosion cost?a. $6,250,000b. $18,100,000c. $53,750,000d. $93,150,000e. $118,789,500Difficulty level: MediumOCFe 48. Ernie’s E lectrical is evaluating a project which will increase sales by $50,000 andcosts by $30,000. The project will cost $150,000 and be depreciated straight-line to azero book value over the 10 year life of the project. The applicable tax rate is 34%.What is the operating cash flow for this project?a. $3,300b. $5,000c. $8,300d. $13,300e. $18,300Difficulty level: MediumOCFd 49. Kurt’s Kabinets is looking at a project that will require $80,000 in fixed assets andanother $20,000 in net working capital. The project is expected to produce sales of$110,000 with associated costs of $70,000. The project has a 4-year life. The companyuses straight-line depreciation to a zero book value over the life of the project. The taxrate is 35%. What is the operating cash flow for this project?a. $7,000b. $13,000c. $27,000d. $33,000e. $40,000Difficulty level: MediumBOTTOM-UP OCFc 50. Peter’s Boats has sales of $760,000 and a profit margin of 5%. The annualdepreciation expense is $80,000. What is the amount of the operating cash flow if thecompany has no long-term debt?a. $34,000b. $86,400c. $118,000d. $120,400e. $123,900Difficulty level: MediumBOTTOM-UP OCFd 51. Le Place has sales of $439,000, depreciation of $32,000, and net working capital of$56,000. The firm has a tax rate of 34% and a profit margin of 6%. Thefirm has no interest expense. What is the amount of the operating cash flow?a. $49,384b. $52,616c. $54,980d. $58,340e. $114,340Difficulty level: MediumTOP-DOWN OCFb 52. Ben’s Border Café is considering a project which will produce sales of $16,000 andincrease cash expenses by $10,000. If the project is implemented, taxes will increasefrom $23,000 to $24,500 and depreciation will increase from $4,000 to $5,500. Whatis the amount of the operating cash flow using the top-down approach?a. $4,000b. $4,500c. $6,000d. $7,500e. $8,500Difficulty level: MediumTOP-DOWN OCFc 53. Ronnie’s Coffee House i s considering a project which will produce sales of $6,000and increase cash expenses by $2,500. If the project is implemented, taxes willincrease by $1,300. The additional depreciation expense will be $1,000. An initial cashoutlay of $2,000 is required for net working capital. What is the amount of theoperating cash flow using the top-down approach?a. $200b. $1,500c. $2,200d. $3,500e. $4,200Difficulty level: MediumTAX SHIELD OCFc 54. A project will increase sales by $60,000 and cash expenses by $51,000. The projectwill cost $40,000 and be depreciated using straight-line depreciation to a zero bookvalue over the 4-year life of the project. The company has a marginal tax rate of 35%.What is the operating cash flow of the project using the tax shield approach?a. $5,850b. $8,650c. $9,350d. $9,700e. $10,350Difficulty level: MediumDEPRECIATION TAX SHIELDa 55. A project will increase sales by $140,000 and cash expenses by $95,000. The projectwill cost $100,000 and be depreciated using the straight-line method to a zero bookvalue over the 4-year life of the project. The company has a marginal tax rate of 34%.What is the value of the depreciation tax shield?a. $8,500b. $17,000c. $22,500d. $25,000e. $37,750Difficulty level: MediumMACRS DEPRECIATIONd 56. Sun Lee’s Furniture just purchased some fixed assets classified as 5-year property forMACRS. The assets cost $24,000. What is the amount of the depreciation expense forthe third year?MACRS 5-year propertyYear Rate1 20.00%2 32.00%3 19.20%4 11.52%5 11.52%6 5.76%a. $2,304b. $2,507c. $2,765d. $4,608e. $4,800Difficulty level: EasyMACRS DEPRECIATIONa 57. You just purchased some equipment that is classified as 5-year property for MACRS.The equipment cost $67,600. What will the book value of this equipment be at the endof three years should you decide to resell the equipment at that point in time?MACRS 5-year propertyYear Rate1 20.00%2 32.00%3 19.20%4 11.52%5 11.52%6 5.76%a. $19,468.80b. $20,280.20c. $27,040.00d. $48,131.20e. $48,672.00Difficulty level: MediumMACRS DEPRECIATIONd 58. LiCheng’s Enterprises just purchased some fixed assets that are classified as 3-yearproperty for MACRS. The assets cost $1,900. What is the amount of thedepreciation expense for year 2?MACRS 3-year propertyYear Rate1 33.33%2 44.44%3 14.82%4 7.41%a. $562.93b. $633.27c. $719.67d. $844.36e. $1,477.63Difficulty level: MediumMACRS DEPRECIATIONb 59. RP&A, Inc. purchased some fixed assets four years ago at a cost of $19,800. They nolonger need these assets so are going to sell them today at a price of $3,500. The assetsare classified as 5-year property for MACRS. What is the current book value of theseassets?MACRS 5-year propertyYear Rate1 20.00%2 32.00%3 19.20%4 11.52%5 11.52%6 5.76%a. $1,140.48b. $3,421.44c. $3,500.00d. $4,016.67e. $5,702.40Difficulty level: MediumSALVAGE VALUEa 60. You own some equipment which you purchased three years ago at a cost of $135,000.The equipment is 5-year property for MACRS. You are considering selling theequipment today for $82,500. Which one of the following statements is correct if yourtax rate is 34%?MACRS 5-year propertyYear Rate1 20.00%2 32.00%3 19.20%4 11.52%5 11.52%6 5.76%a. The tax due on the sale is $14,830.80.b. The book value today is $8,478.c. The book value today is $64,320.d. The taxable amount on the sale is $38,880.e. You will receive a tax refund of $13,219.20 as a result of this sale.。
公司理财实务英文版(ppt 16)
Current Assets
(Financial Decision)
Net Working Capital
Current Liabilitiesssets 1 Tangible 2 Intangible
How much shortterm cash flow does a company need to pay its bills?
Corporate Finance
Shareholders’ Equity
1-1
The Balance-Sheet Model of the Firm
The Capital Budgeting Decision
Current Assets
(Investment Decision)
Current Liabilities
Shareholders’ Equity
© Professor Ho-Mou Wu
Corporate Finance
1-4
Capital Structure
The value of the firm can be thought of as a pie.
The goal of the manager is to increase the size of the pie.
1-6
Financial Markets
• Primary Market
– When a corporation issues securities, cash flows from investors to the firm.
– Usually an underwriter is involved
Invests in assets
罗斯公司理财题库全集
Chapter 30Financial Distress Multiple Choice Questions1. Financial distress can be best described by which of the following situations in which the firm is forced to take corrective action?A. Cash payments are delayed to creditors.B. The market value of the stock declines by 10%.C. The firm's operating cash flow is insufficient to pay current obligations.D. Cash distributions are eliminated because the board of directors considers the surplus account to be low.E. None of the above.2. Insolvency can be defined as:A. not having cash.B. being illiquid.C. an inability to pay one's debts.D. an inability to increase one's debts.E. the present value of payments being less than assets.3. Stock-based insolvency is a:A. income statement measurement.B. balance sheet measurement.C. a book value measurement only.D. Both A and C.E. Both B and C.4. Flow-based insolvency is:A. a balance sheet measurement.B. a negative equity position.C. when operating cash flow is insufficient to meet current obligations.D. inability to pay one's debts.E. Both C and D.5. Financial restructuring can occur as:A. a private workout.B. an employee buy-out.C. a bankruptcy reorganization.D. Both A and C.E. Both B and C.6. Financial distress can involve which of the following:A. asset restructuring.B. financial restructuring.C. liquidation.D. All of the above.E. None of the above.7. APR, as it relates to financial distress, means the rules of:A. absolute profitability.B. arbitration priority.C. absolute priority.D. arbitration profitability.E. automatic profitability.8. The difference between liquidation and reorganization is:A. reorganization terminates all operations of the firm and liquidation only terminatesnon-profitable operations.B. liquidation terminates only profitable operations and reorganization terminates onlynon-profitable operations.C. liquidation terminates all operations and reorganization maintains the option of the firm as a going concern.D. liquidation only deals with current assets and reorganization only consolidates debt.E. None of the above.9. A firm that has a series of negative earnings, sales declines and workforce reductions is likely headed to:A. acquisition of another firm.B. a merger.C. financial distress.D. new financing.E. None of the above.10. Some of the various events which typically occur around the period of financial distress fora firm are:A. continued increase in earnings.B. steady growth.C. dividend reductions.D. Both A and B.E. Both A and C.11. Bankruptcy reorganizations are used by management to:A. forestall the inevitable liquidation in all cases.B. provide time to turn the business around.C. allow the courts time to set up an administrative structure.D. All of the above.E. None of the above.12. A firm has several options available to it in times of financial distress. The firm may:A. reduce capital and R & D spending.B. raise new funds by selling securities or major assets.C. file for bankruptcy.D. negotiate with lenders.E. All of the above statements are true.13. Most firms in financial distress do not fail and cease to exist. Many firms can actually benefit from distress by:A. forcing a firm to reevaluate their core operations.B. realigning their capital structure to reduce interest costs.C. entering Chapter 11 and liquidating the firm.D. Both A and B.E. Both A and C.14. Whether bankruptcy is entered voluntarily or involuntarily the major difference between Chapter 7 and Chapter 11 is:A. that liquidation occurs in Chapter 11 but reorganization is the objective under Chapter 7.B. that there is no priority of claims under Chapter 11.C. that liquidation occurs in Chapter 7 but reorganization is the objective under chapter 11.D. no lawyers fees are necessary under Chapter 7.E. None of the above.15. If a firm has a stock based insolvency in both book and market value terms and liquidates:A. the payoff will not be 100% to all investors.B. the unsecured creditors are likely to get less than full value.C. the equityholders typically should receive nothing.D. All of the above.E. None of the above.16. A firm in financial distress that reorganizes:A. continues to run the business as a going concern.B. must have acceptance of the plan by the creditors.C. may distribute new securities to creditors and shareholders.D. All of the above.E. None of the above.17. A corporation is adjudged bankrupt under Chapter 7. When do the shareholders receive any payment?A. After the trustee liquidates the assets and pays the administrative expenses, the shareholders are paid before the creditors.B. After the trustee liquidates the assets, the administrative expenses and secured creditors are paid, then the unsecured creditors, and then the shareholders divide any remainder.C. After the trustee liquidates the assets, the shareholders are paid, next the administrative expenses, the secured creditors, and then the unsecured creditors divide any remainder.D. After the trustee liquidates the assets the shareholders are paid first because they are the owners of the firm and have the principal stake.E. None of the above.18. What is the absolute priority rule of the following claims once a corporation is determined to be bankrupt?A. administrative expenses, wages claims, government tax claims, debtholder and then equityholder claimsB. administrative expenses, wages claims, government tax claims, equityholder and then debtholder claimsC. wage claims, administrative expenses, debtholder claims, government tax claims and equityholder claimsD. wage claims, administrative expenses, debtholder claims, equityholder claims and government tax claimsE. None of the above19. The absolute priority rule:A. is set to ensure senior claims are paid first.B. is the priority rule in liquidations.C. distributes proceeds of secured assets sales to the secured creditors first and the remainder to the unsecured.D. All of the above.E. None of the above.20. Many corporations choose Chapter 11 bankruptcy proceedings voluntarily because the management can:A. take up to 120 days to file a reorganization plan.B. continue to run the business.C. reorganize if the required fractions of creditors approve of the plan and it is confirmed when the reorganization takes place.D. All of the above.E. None of the above.21. Which of the following statements about private workouts of financial distress is NOT true?A. Senior debt is usually replaced with junior debt.B. Debt is usually replaced with equity.C. Private workouts account for about three quarters of all reorganizations.D. Top management is often dismissed or takes pay reductions.E. None of the above.22. Successful private workouts are better for firms than formal bankruptcy because:A. direct costs are considerably lower in private workouts.B. private workout firms can issue new debt senior to all prior debt.C. stock price increases are greater for private workouts than for firms emerging from formal bankruptcy.D. Both A and B.E. Both A and C.23. Equityholders may prefer a formal bankruptcy filing because:A. the firm can issue debtor in possession debt.B. the firm can delay pre-bankruptcy interest payments.C. the lack of information about the length and magnitude of the cash flow problem favors equityholders.D. All of the above.E. None of the above.24. Prepackaged bankruptcies are:A. described as a combination of a private workout and a liquidation.B. the easiest way to transfer wealth to the shareholders.C. described as a combination of a completed private workout and the formal bankruptcy filing.D. All of the above.E. None of the above.25. In a prepackaged bankruptcy the firm:A. and creditors agree to a private reorganization outside formal bankruptcy.B. must reach agreement privately with most of the creditors.C. will have difficulty when there are thousands of reluctant trade creditors.D. All of the above.E. None of the above.26. Financial distress may be more expensive if the:A. information about the permanency of the shortfall is limited.B. firm has many different types of creditors and other investors.C. firm has never entered into bankruptcy before.D. Both A and B.E. Both B and C.27. The net payoff to creditors in formal bankruptcy may be low in present value terms because:A. the financial structure may be complicated with several groups and types of creditors.B. indirect costs of bankruptcy may have been costly in lost revenues and poor maintenance.C. administrative costs are high and increase with the complexity and length of time in the formal bankruptcy process.D. All of the above.E. None of the above.28. Firms deal with financial distress by:A. selling major assets.B. merging with another firm.C. issuing new securities.D. exchanging debt for equity.E. All of the above.29. Perhaps equally, if not more damaging are the indirect costs of financial distress. Some examples of indirect costs are:A. loss of current customers.B. loss of business reputation.C. management consumed in survival and not on a strategic direction.D. All of the above.E. Both A and B.30. Credit scoring models are used by lenders to:A. determine the borrowers capacity to pay.B. aid in the prediction of default or bankruptcy.C. determine the optimal debt equity ratio.D. Both A and B.E. Both A and C.31. Altman develop the Z-score model for publicly traded manufacturing firms. Using financial statement data and multiple discriminant analysis, he found that:A. in actual use, a Z-score greater than 2.99 meant bankruptcy within one year.B. in actual use, a Z-score greater than 1.81 implied a 90% chance of bankruptcy within one year.C. in actual use, a Z-score of less than 1.81 would predict bankruptcy within one year.D. in actual use, a Z-score less than 2.99 meant non-bankruptcy within one year.E. None of the above.32. The key intuition of a Z-score model like Altman's is that:A. only publicly traded firms can be evaluated.B. one will be just as well off by guessing on default rates.C. all corporations will default at least once.D. financial profiles of bankrupt and non-bankrupt firms are very different one year before bankruptcy.E. privately traded firms have better financial information which are disclosed to lenders and need not rely on any efficient market notions.33. Approximately ____ of all firms going through a Chapter 11 bankruptcy successfully reorganize.A. 0%B. 15%C. 25%D. 50%E. 85%34. Altman's Z-score predicts the:A. percentage of payout to equityholders in liquidations.B. percentage of payout to equityholders in reorganization.C. likelihood of a private workout.D. likelihood of bankruptcy of a firm within one year.E. None of the above.35. Very small firms (i.e. firms with assets less than $100,000) are more likely to:A. file for strategic bankruptcy.B. file for bankruptcy protection earlier than large firms.C. reorganize than liquidate compared to large firms.D. liquidate than reorganize compared to large firms.E. None of the above.36. A large negative equity position will lead a firm to be more likely to try to:A. not file bankruptcy.B. liquidate.C. reorganize.D. consolidate.E. None of the above.Magic Mobile Homes is to be liquidated. All creditors, both secured and unsecured, are owed $2 million. Administrative costs of liquidation and wage payments are expected to be $500,000.A sale of assets is expected to bring $1.8 million after taxes. Secured creditors have a mortgage lien for $1,200,000 on the factory which will be liquidated for $900,000 out of the sale proceeds. The corporate tax rate is 34%.37. How much and what percentage of their claim will the unsecured creditors receive, in total?A. $100,000; 12.50%.B. $290,909; 36.36%.C. $300,000; 37.50%.D. $600,000; 75.00%.E. Not enough information to answer38. How much and what percentage of their claim will the secured creditors receive, in total?A. $900,000; 75%B. $981,818; 81.82%C. $1,009,091; 84.1%D. $1,200,000; 100%E. Not enough information to answer.The management of Magic Mobile Homes has proposed to reorganize the firm. The proposal is based on a going-concern value of $2 million. The proposed financial structure is $750,000 in new mortgage debt, $250,000 in subordinated debt and $1,000,000 in new equity. All creditors, both secured and unsecured, are owed $2.5 million dollars. Secured creditors have a mortgage lien for $1,500,000 on the factory. The corporate tax rate is 34%.39. How much should the secured creditors receive?A. $1,000,000B. $1,250,000C. $1,333,333D. $1,500,000E. None of the above.40. How much should the unsecured creditors receive?A. $500,000B. $667,000C. $750,000D. $1,000,000E. None of the above.41. What will the equityholders receive if they had 5 million shares with a par value of $0.50 each?A. $0B. $35,714C. $583,333D. $1,000,000E. None of the above.The management of Schroeder Books has proposed to reorganize the company. The proposal is based on a going-concern value of $2.3 million. The proposed financial structure is $500,000 in new mortgage debt, $300,000 in subordinated debt and $1,500,000 in new equity. All creditors, both secured and unsecured, are owed $3 million dollars. Secured creditors have a mortgage lien for $2,000,000 on the book bindery. The corporate tax rate is 34%.42. How much should the secured creditors receive?A. $1,500,000B. $2,000,000C. $2,300,000D. $3,000,000E. None of the above.43. How much should the unsecured creditors receive?A. $300,000B. $500,000C. $1,000,000D. $2,300,000E. None of the above.44. What will the equityholders receive if they had 5 million shares with a par value of $0.50 each?A. $0B. $35,714C. $583,333D. $1,000,000E. None of the above.Essay Questions45. The Steel Pony Company, a maker of all-terrain recreational vehicles, is having financial difficulties due to high interest payments. The estimated "going concern" value of Steel Pony is $4.0 million. The senior debt claim is on all fixed assets. The balance sheet of the firm is as shown:If Steel Pony decides to file for formal bankruptcy and expects to sell the firm for the "going concern" value and pay administrative fees which amount to 5% of the total going concern value, determine the distribution of the proceeds under the rules of absolute priority.46. The Here Today Corporation has applied to your bank for a loan. You have their financial statements and the revised Z-score model of:Z = 6.56 (Net Working Capital/Total Assets) + 3.26 (Accumulated Retained Earnings/Total Assets) + 1.05 (EBIT/Total Assets) + 6.72 (Book Value of Equity/Total Liabilities) where:Z < 1.23 predicts bankruptcy. A Z score between 1.23 and 2.90 indicates gray area. A Z score greater than 2.90 indicates no bankruptcy. From the financial statements you gathered net working capital of $237,500; accumulated retained earnings of $120,000; book value of equity of $950,000; total assets of $4,750,000; EBIT of $261,250; and total liabilities of $3,800,000. Should the bank lend to Here Today?47. When choosing between liquidation and reorganization, what are some of the empirical factors that lead a firm toward one choice or the other?Chapter 30 Financial Distress Answer KeyMultiple Choice Questions1. Financial distress can be best described by which of the following situations in which the firm is forced to take corrective action?A. Cash payments are delayed to creditors.B. The market value of the stock declines by 10%.C. The firm's operating cash flow is insufficient to pay current obligations.D. Cash distributions are eliminated because the board of directors considers the surplus account to be low.E. None of the above.Difficulty level: EasyTopic: FINANCIAL DISTRESSType: DEFINITIONS2. Insolvency can be defined as:A. not having cash.B. being illiquid.C. an inability to pay one's debts.D. an inability to increase one's debts.E. the present value of payments being less than assets.Difficulty level: EasyTopic: INSOLVENCYType: DEFINITIONS3. Stock-based insolvency is a:A. income statement measurement.B. balance sheet measurement.C. a book value measurement only.D. Both A and C.E. Both B and C.Difficulty level: EasyTopic: STOCK-BASED INSOLVENCYType: DEFINITIONS4. Flow-based insolvency is:A. a balance sheet measurement.B. a negative equity position.C. when operating cash flow is insufficient to meet current obligations.D. inability to pay one's debts.E. Both C and D.Difficulty level: EasyTopic: FLOW-BASED INSOLVENCYType: DEFINITIONS5. Financial restructuring can occur as:A. a private workout.B. an employee buy-out.C. a bankruptcy reorganization.D. Both A and C.E. Both B and C.Difficulty level: MediumTopic: FINANCIAL RESTRUCTURINGType: DEFINITIONS6. Financial distress can involve which of the following:A. asset restructuring.B. financial restructuring.C. liquidation.D. All of the above.E. None of the above.Difficulty level: EasyTopic: FINANCIAL DISTRESSType: DEFINITIONS7. APR, as it relates to financial distress, means the rules of:A. absolute profitability.B. arbitration priority.C. absolute priority.D. arbitration profitability.E. automatic profitability.Difficulty level: MediumTopic: RULES OF ABSOLUTE PRIORITYType: DEFINITIONS8. The difference between liquidation and reorganization is:A. reorganization terminates all operations of the firm and liquidation only terminatesnon-profitable operations.B. liquidation terminates only profitable operations and reorganization terminates onlynon-profitable operations.C. liquidation terminates all operations and reorganization maintains the option of the firm as a going concern.D. liquidation only deals with current assets and reorganization only consolidates debt.E. None of the above.Difficulty level: MediumTopic: REORGANIZATION AND LIQUIDATIONType: DEFINITIONS9. A firm that has a series of negative earnings, sales declines and workforce reductions is likely headed to:A. acquisition of another firm.B. a merger.C. financial distress.D. new financing.E. None of the above.Difficulty level: MediumTopic: FINANCIAL DISTRESSType: CONCEPTS10. Some of the various events which typically occur around the period of financial distress fora firm are:A. continued increase in earnings.B. steady growth.C. dividend reductions.D. Both A and B.E. Both A and C.Difficulty level: EasyTopic: FINANCIAL DISTRESSType: CONCEPTS11. Bankruptcy reorganizations are used by management to:A. forestall the inevitable liquidation in all cases.B. provide time to turn the business around.C. allow the courts time to set up an administrative structure.D. All of the above.E. None of the above.Difficulty level: EasyTopic: REORGANIZATIONType: CONCEPTS12. A firm has several options available to it in times of financial distress. The firm may:A. reduce capital and R & D spending.B. raise new funds by selling securities or major assets.C. file for bankruptcy.D. negotiate with lenders.E. All of the above statements are true.Difficulty level: MediumTopic: FINANCIAL DISTRESSType: CONCEPTS13. Most firms in financial distress do not fail and cease to exist. Many firms can actually benefit from distress by:A. forcing a firm to reevaluate their core operations.B. realigning their capital structure to reduce interest costs.C. entering Chapter 11 and liquidating the firm.D. Both A and B.E. Both A and C.Difficulty level: EasyTopic: FINANCIAL DISTRESSType: CONCEPTS14. Whether bankruptcy is entered voluntarily or involuntarily the major difference between Chapter 7 and Chapter 11 is:A. that liquidation occurs in Chapter 11 but reorganization is the objective under Chapter 7.B. that there is no priority of claims under Chapter 11.C. that liquidation occurs in Chapter 7 but reorganization is the objective under chapter 11.D. no lawyers fees are necessary under Chapter 7.E. None of the above.Difficulty level: EasyTopic: LIQUIDATION OR REORGANIZATIONType: CONCEPTS15. If a firm has a stock based insolvency in both book and market value terms and liquidates:A. the payoff will not be 100% to all investors.B. the unsecured creditors are likely to get less than full value.C. the equityholders typically should receive nothing.D. All of the above.E. None of the above.Difficulty level: EasyTopic: STOCK BASED INSOLENCYType: CONCEPTS16. A firm in financial distress that reorganizes:A. continues to run the business as a going concern.B. must have acceptance of the plan by the creditors.C. may distribute new securities to creditors and shareholders.D. All of the above.E. None of the above.Difficulty level: EasyTopic: REORGANIZATIONType: CONCEPTS17. A corporation is adjudged bankrupt under Chapter 7. When do the shareholders receive any payment?A. After the trustee liquidates the assets and pays the administrative expenses, the shareholders are paid before the creditors.B. After the trustee liquidates the assets, the administrative expenses and secured creditors are paid, then the unsecured creditors, and then the shareholders divide any remainder.C. After the trustee liquidates the assets, the shareholders are paid, next the administrative expenses, the secured creditors, and then the unsecured creditors divide any remainder.D. After the trustee liquidates the assets the shareholders are paid first because they are the owners of the firm and have the principal stake.E. None of the above.Difficulty level: EasyTopic: LIQUIDATIONType: CONCEPTS18. What is the absolute priority rule of the following claims once a corporation is determined to be bankrupt?A. administrative expenses, wages claims, government tax claims, debtholder and then equityholder claimsB. administrative expenses, wages claims, government tax claims, equityholder and then debtholder claimsC. wage claims, administrative expenses, debtholder claims, government tax claims and equityholder claimsD. wage claims, administrative expenses, debtholder claims, equityholder claims and government tax claimsE. None of the aboveDifficulty level: MediumTopic: RULES OF ABSOLUTE PRIORITYType: CONCEPTS19. The absolute priority rule:A. is set to ensure senior claims are paid first.B. is the priority rule in liquidations.C. distributes proceeds of secured assets sales to the secured creditors first and the remainder to the unsecured.D. All of the above.E. None of the above.Difficulty level: EasyTopic: RULES OF ABSOLUTE PRIORITYType: CONCEPTS20. Many corporations choose Chapter 11 bankruptcy proceedings voluntarily because the management can:A. take up to 120 days to file a reorganization plan.B. continue to run the business.C. reorganize if the required fractions of creditors approve of the plan and it is confirmed when the reorganization takes place.D. All of the above.E. None of the above.Difficulty level: EasyTopic: REORGANIZATIONType: CONCEPTS21. Which of the following statements about private workouts of financial distress is NOT true?A. Senior debt is usually replaced with junior debt.B. Debt is usually replaced with equity.C. Private workouts account for about three quarters of all reorganizations.D. Top management is often dismissed or takes pay reductions.E. None of the above.Difficulty level: MediumTopic: PRIVATE WORKOUTSType: CONCEPTS22. Successful private workouts are better for firms than formal bankruptcy because:A. direct costs are considerably lower in private workouts.B. private workout firms can issue new debt senior to all prior debt.C. stock price increases are greater for private workouts than for firms emerging from formal bankruptcy.D. Both A and B.E. Both A and C.Difficulty level: MediumTopic: PRIVATE WORKOUTSType: CONCEPTS23. Equityholders may prefer a formal bankruptcy filing because:A. the firm can issue debtor in possession debt.B. the firm can delay pre-bankruptcy interest payments.C. the lack of information about the length and magnitude of the cash flow problem favors equityholders.D. All of the above.E. None of the above.Difficulty level: MediumTopic: FINANCIAL DISTRESS- EQUITY HOLDER PREFERENCESType: CONCEPTS24. Prepackaged bankruptcies are:A. described as a combination of a private workout and a liquidation.B. the easiest way to transfer wealth to the shareholders.C. described as a combination of a completed private workout and the formal bankruptcy filing.D. All of the above.E. None of the above.Difficulty level: EasyTopic: PREPACKAGED BANKRUPTCIESType: CONCEPTS25. In a prepackaged bankruptcy the firm:A. and creditors agree to a private reorganization outside formal bankruptcy.B. must reach agreement privately with most of the creditors.C. will have difficulty when there are thousands of reluctant trade creditors.D. All of the above.E. None of the above.Difficulty level: MediumTopic: PREPACKAGED BANKRUPTCIESType: CONCEPTS26. Financial distress may be more expensive if the:A. information about the permanency of the shortfall is limited.B. firm has many different types of creditors and other investors.C. firm has never entered into bankruptcy before.D. Both A and B.E. Both B and C.Difficulty level: MediumTopic: COSTS OF FINANCIAL DISTRESSType: CONCEPTS27. The net payoff to creditors in formal bankruptcy may be low in present value terms because:A. the financial structure may be complicated with several groups and types of creditors.B. indirect costs of bankruptcy may have been costly in lost revenues and poor maintenance.C. administrative costs are high and increase with the complexity and length of time in the formal bankruptcy process.D. All of the above.E. None of the above.Difficulty level: MediumTopic: PAYOFF TO CREDITORSType: CONCEPTS28. Firms deal with financial distress by:A. selling major assets.B. merging with another firm.C. issuing new securities.D. exchanging debt for equity.E. All of the above.Difficulty level: MediumTopic: FINANCIAL DISTRESSType: CONCEPTS29. Perhaps equally, if not more damaging are the indirect costs of financial distress. Some examples of indirect costs are:A. loss of current customers.B. loss of business reputation.C. management consumed in survival and not on a strategic direction.D. All of the above.E. Both A and B.Difficulty level: EasyTopic: INDIRECT COSTS FO FINANCIAL DISTRESSType: CONCEPTS。
《公司理财》课后答案(英文版,第六版).doc
Chapter 2: Accounting Statements and Cash Flow2.10AssetsCurrent assetsCash $ 4,000Accounts receivable 8,000Total current assets $ 12,000Fixed assetsMachinery $ 34,000Patents 82,000Total fixed assets $116,000Total assets $128,000Liabilities and equityCurrent liabilitiesAccounts payable $ 6,000Taxes payable 2,000Total current liabilities $ 8,000Long-term liabilitiesBonds payable $7,000Stockholders equityCommon stock ($100 par) $ 88,000Capital surplus 19,000Retained earnings 6,000Total stockholders equity $113,000Total liabilities and equity $128,0002.11One year ago TodayLong-term debt $50,000,000 $50,000,000Preferred stock 30,000,000 30,000,000Common stock 100,000,000 110,000,000Retained earnings 20,000,000 22,000,000Total $200,000,000 $212,000,0002.12Total Cash Flow ofthe Stancil CompanyCash flows from the firmCapital spending $(1,000)Additions to working capital (4,000)Total $(5,000)Cash flows to investors of the firmShort-term debt $(6,000)Long-term debt (20,000)Equity (Dividend - Financing) 21,000Total $(5,000)[Note: This table isn’t the Statement of Cash Flows, which is only covered in Appendix 2B, since the latter has th e change in cash (on the balance sheet) as a final entry.]2.13 a. The changes in net working capital can be computed from:Sources of net working capitalNet income $100Depreciation 50Increases in long-term debt 75Total sources $225Uses of net working capitalDividends $50Increases in fixed assets* 150Total uses $200Additions to net working capital $25*Includes $50 of depreciation.b.Cash flow from the firmOperating cash flow $150Capital spending (150)Additions to net working capital (25)Total $(25)Cash flow to the investorsDebt $(75)Equity 50Total $(25)Chapter 3: Financial Markets and Net Present Value: First Principles of Finance (Advanced)3.14 $120,000 - ($150,000 - $100,000) (1.1) = $65,0003.15 $40,000 + ($50,000 - $20,000) (1.12) = $73,6003.16 a. ($7 million + $3 million) (1.10) = $11.0 millionb.i. They could spend $10 million by borrowing $5 million today.ii. They will have to spend $5.5 million [= $11 million - ($5 million x 1.1)] at t=1.Chapter 4: Net Present Valuea. $1,000 ⨯ 1.0510 = $1,628.89b. $1,000 ⨯ 1.0710 = $1,967.15c. $1,000 ⨯ 1.0520 = $2,653.30d. Interest compounds on the interest already earned. Therefore, the interest earned inSince this bond has no interim coupon payments, its present value is simply the present value of the $1,000 that will be received in 25 years. Note: As will be discussed in the next chapter, the present value of the payments associated with a bond is the price of that bond.PV = $1,000 /1.125 = $92.30PV = $1,500,000 / 1.0827 = $187,780.23a. At a discount rate of zero, the future value and present value are always the same. Remember, FV =PV (1 + r) t. If r = 0, then the formula reduces to FV = PV. Therefore, the values of the options are $10,000 and $20,000, respectively. You should choose the second option.b. Option one: $10,000 / 1.1 = $9,090.91Option two: $20,000 / 1.15 = $12,418.43Choose the second option.c. Option one: $10,000 / 1.2 = $8,333.33Option two: $20,000 / 1.25 = $8,037.55Choose the first option.d. You are indifferent at the rate that equates the PVs of the two alternatives. You know that rate mustfall between 10% and 20% because the option you would choose differs at these rates. Let r be thediscount rate that makes you indifferent between the options.$10,000 / (1 + r) = $20,000 / (1 + r)5(1 + r)4 = $20,000 / $10,000 = 21 + r = 1.18921r = 0.18921 = 18.921%The $1,000 that you place in the account at the end of the first year will earn interest for six years. The $1,000 that you place in the account at the end of the second year will earn interest for five years, etc. Thus, the account will have a balance of$1,000 (1.12)6 + $1,000 (1.12)5 + $1,000 (1.12)4 + $1,000 (1.12)3= $6,714.61PV = $5,000,000 / 1.1210 = $1,609,866.18a. $1.000 (1.08)3 = $1,259.71b. $1,000 [1 + (0.08 / 2)]2 ⨯ 3 = $1,000 (1.04)6 = $1,265.32c. $1,000 [1 + (0.08 / 12)]12 ⨯ 3 = $1,000 (1.00667)36 = $1,270.24d. $1,000 e0.08 ⨯ 3 = $1,271.25e. The future value increases because of the compounding. The account is earning interest on interest. Essentially, the interest is added to the account balance at the e nd of every compounding period. During the next period, the account earns interest on the new balance. When the compounding period shortens, the balance that earns interest is rising faster.The price of the consol bond is the present value of the coupon payments. Apply the perpetuity formula to find the present value. PV = $120 / 0.15 = $800a. $1,000 / 0.1 = $10,000b. $500 / 0.1 = $5,000 is the value one year from now of the perpetual stream. Thus, the value of theperpetuity is $5,000 / 1.1 = $4,545.45.c. $2,420 / 0.1 = $24,200 is the value two years from now of the perpetual stream. Thus, the value of the perpetuity is $24,200 / 1.12 = $20,000.pply the NPV technique. Since the inflows are an annuity you can use the present value of an annuity factor.ANPV = -$6,200 + $1,200 81.0= -$6,200 + $1,200 (5.3349)= $201.88Yes, you should buy the asset.Use an annuity factor to compute the value two years from today of the twenty payments. Remember, the annuity formula gives you the value of the stream one year before the first payment. Hence, the annuity factor will give you the value at the end of year two of the stream of payments.A= $2,000 (9.8181)Value at the end of year two = $2,000 20.008= $19,636.20The present value is simply that amount discounted back two years.PV = $19,636.20 / 1.082 = $16,834.88The easiest way to do this problem is to use the annuity factor. The annuity factor must be equal to $12,800 / $2,000 = 6.4; remember PV =C A T r. The annuity factors are in the appendix to the text. To use the factor table to solve this problem, scan across the row labeled 10 years until you find 6.4. It is close to the factor for 9%, 6.4177. Thus, the rate you will receive on this note is slightly more than 9%.You can find a more precise answer by interpolating between nine and ten percent.[ 10% ⎤[6.1446 ⎤a ⎡r ⎥bc ⎡6.4 ⎪ d⎣9%⎦⎣6.4177 ⎦By interpolating, you are presuming that the ratio of a to b is equal to the ratio of c to d.(9 - r ) / (9 - 10) = (6.4177 - 6.4 ) / (6.4177 - 6.1446)r = 9.0648%The exact value could be obtained by solving the annuity formula for the interest rate. Sophisticated calculators can compute the rate directly as 9.0626%.[Note: A standard financial calculator’s TVM keys can solve for this rate. With annuity flows, the IRR key on “advanced” financial c alculators is unnecessary.]a. The annuity amount can be computed by first calculating the PV of the $25,000 which youThat amount is $17,824.65 [= $25,000 / 1.075]. Next compute the annuity which has the same present value.A$17,824.65 = C 507.0$17,824.65 = C (4.1002)C = $4,347.26Thus, putting $4,347.26 into the 7% account each year will provide $25,000 five years from today.b. The lump sum payment must be the present value of the $25,000, i.e., $25,000 / 1.075 =$17,824.65The formula for future value of any annuity can be used to solve the problem (see footnote 11 of the text).Option one: This cash flow is an annuity due. To value it, you must use the after-tax amounts. Theafter-tax payment is $160,000 (1 - 0.28) = $115,200. Value all except the first payment using the standard annuity formula, then add back the first payment of $115,200 to obtain the value of this option.AValue = $115,200 + $115,200 30.010= $115,200 + $115,200 (9.4269)= $1,201,178.88Option two: This option is valued similarly. You are able to have $446,000 now; this is already on an after-tax basis. You will receive an annuity of $101,055 for each of the next thirty years. Those payments are taxable when you receive them, so your after-tax payment is $72,759.60 [= $101,055 (1 - 0.28)].AValue = $446,000 + $72,759.60 30.010= $446,000 + $72,759.60 (9.4269)= $1,131,897.47Since option one has a higher PV, you should choose it.et r be the rate of interest you must earn.$10,000(1 + r)12 = $80,000(1 + r)12= 8r = 0.18921 = 18.921%First compute the present value of all the payments you must make for your children’s educati on. The value as of one year before matriculation of one child’s education isA= $21,000 (2.8550) = $59,955.$21,000 415.0This is the value of the elder child’s education fourteen years from now. It is the value of the younger child’s education sixteen years from today. The present value of these isPV = $59,955 / 1.1514 + $59,955 / 1.1516= $14,880.44You want to make fifteen equal payments into an account that yields 15% so that the present value of the equal payments is $14,880.44.A= $14,880.44 / 5.8474 = $2,544.80Payment = $14,880.44 / 15.015This problem applies the growing annuity formula. The first payment is$50,000(1.04)2(0.02) = $1,081.60.PV = $1,081.60 [1 / (0.08 - 0.04) - {1 / (0.08 - 0.04)}{1.04 / 1.08}40]= $21,064.28This is the present value of the payments, so the value forty years from today is$21,064.28 (1.0840) = $457,611.46se the discount factors to discount the individual cash flows. Then compute the NPV of the project. NoticeYou can still use the factor tables to compute their PV. Essentially, they form cash flows that are a six year annuity less a two year annuity. Thus, the appropriate annuity factor to use with them is 2.6198 (= 4.3553 - 1.7355).Year Cash Flow Factor PV0.9091 $636.371$70020.8264 743.769003 1,000 ⎤4 1,000 ⎥ 2.6198 2,619.805 1,000 ⎥6 1,000 ⎦7 1,250 0.5132 641.508 1,375 0.4665 641.44Total $5,282.87NPV = -$5,000 + $5,282.87= $282.87Purchase the machine.Chapter 5: How to Value Bonds and StocksThe amount of the semi-annual interest payment is $40 (=$1,000 ⨯ 0.08 / 2). There are a total of 40 periods;i.e., two half years in each of the twenty years in the term to maturity. The annuity factor tables can be usedto price these bonds. The appropriate discount rate to use is the semi-annual rate. That rate is simply the annual rate divided by two. Thus, for part b the rate to be used is 5% and for part c is it 3%.A+F/(1+r)40PV=C Tra. $40 (19.7928) + $1,000 / 1.0440 = $1,000Notice that whenever the coupon rate and the market rate are the same, the bond is priced at par.b. $40 (17.1591) + $1,000 / 1.0540 = $828.41Notice that whenever the coupon rate is below the market rate, the bond is priced below par.c. $40 (23.1148) + $1,000 / 1.0340 = $1,231.15Notice that whenever the coupon rate is above the market rate, the bond is priced above par.a. The semi-annual interest rate is $60 / $1,000 = 0.06. Thus, the effective annual rate is 1.062 - 1 =0.1236 = 12.36%.A+ $1,000 / 1.0612b. Price = $30 12.006= $748.48A+ $1,000 / 1.0412c. Price = $30 1204.0= $906.15Note: In parts b and c we are implicitly assuming that the yield curve is flat. That is, the yield in year 5applies for year 6 as well.rice = $2 (0.72) / 1.15 + $4 (0.72) / 1.152 + $50 / 1.153= $36.31The number of shares you own = $100,000 / $36.31 = 2,754 sharesPrice = $1.15 (1.18) / 1.12 + $1.15 (1.182) / 1.122 + $1.152 (1.182) / 1.123+ {$1.152 (1.182)(1.06) / (0.12 - 0.06)} / 1.123= $26.95[Insert before last sentence of question: Assume that dividends are a fixed proportion of earnings.] Dividend one year from now = $5 (1 - 0.10) = $4.50Price = $5 + $4.50 / {0.14 - (-0.10)}= $23.75Since the current $5 dividend has not yet been paid, it is still included in the stock price.Chapter 6: Some Alternative Investment Rulesa. Payback period of Project A = 1 + ($7,500 - $4,000) / $3,500 = 2 yearsPayback period of Project B = 2 + ($5,000 - $2,500 -$1,200) / $3,000 = 2.43 yearsProject A should be chosen.b. NPV A = -$7,500 + $4,000 / 1.15 + $3,500 / 1.152 + $1,500 / 1.153 = -$388.96NPV B = -$5,000 + $2,500 / 1.15 + $1,200 / 1.152 + $3,000 / 1.153 = $53.83Project B should be chosen.a. Average Investment:($16,000 + $12,000 + $8,000 + $4,000 + 0) / 5 = $8,000Average accounting return:$4,500 / $8,000 = 0.5625 = 56.25%b. 1. AAR does not consider the timing of the cash flows, hence it does not consider the timevalue of money.2. AAR uses an arbitrary firm standard as the decision rule.3. AAR uses accounting data rather than net cash flows.aAverage Investment = (8000 + 4000 + 1500 + 0)/4 = 3375.00Average Net Income = 2000(1-0.75) = 1500=> AAR = 1500/3375=44.44%a. Solve x by trial and error:-$8,000 + $4,000 / (1 + x) + $3000 / (1 + x)2 + $2,000 / (1 + x)3 = 0x = 6.93%b. No, since the IRR (6.93%) is less than the discount rate of 8%.Alternatively, the NPV @ a discount rate of 0.08 = -$136.62.a. Solve r in the equation:$5,000 - $2,500 / (1 + r) - $2,000 / (1 + r)2 - $1,000 / (1 + r)3- $1,000 / (1 + r)4 = 0By trial and error,IRR = r = 13.99%b. Since this problem is the case of financing, accept the project if the IRR is less than the required rate of return.IRR = 13.99% > 10%Reject the offer.c. IRR = 13.99% < 20%Accept the offer.d. When r = 10%:NPV = $5,000 - $2,500 / 1.1 - $2,000 / 1.12 - $1,000 / 1.13 - $1,000 / 1.14When r = 20%:NPV = $5,000 - $2,500 / 1.2 - $2,000 / 1.22 - $1,000 / 1.23 - $1,000 / 1.24= $466.82Yes, they are consistent with the choices of the IRR rule since the signs of the cash flows change only once.A/ $160,000 = 1.04PI = $40,000 715.0Since the PI exceeds one accept the project.Chapter 7: Net Present Value and Capital BudgetingSince there is uncertainty surrounding the bonus payments, which McRae might receive, you must use the expected value of McRae’s bonuses in the computation of the PV of his contract. McRae’s salary plus the expected value of his bonuses in years one through three is$250,000 + 0.6 ⨯ $75,000 + 0.4 ⨯ $0 = $295,000.Thus the total PV of his three-year contract isPV = $400,000 + $295,000 [(1 - 1 / 1.12363) / 0.1236]+ {$125,000 / 1.12363} [(1 - 1 / 1.123610 / 0.1236]= $1,594,825.68EPS = $800,000 / 200,000 = $4NPVGO = (-$400,000 + $1,000,000) / 200,000 = $3Price = EPS / r + NPVGO= $4 / 0.12 + $3=$36.33Year 0 Year 1 Year 2 Year 3 Year 4 Year 51. Annual Salary$120,000 $120,000 $120,000 $120,000 $120,000 Savings2. Depreciation 100,000 160,000 96,000 57,600 57,6003. Taxable Income 20,000 -40,000 24,000 62,400 62,4004. Taxes 6,800 -13,600 8,160 21,216 21,2165. Operating Cash Flow113,200 133,600 111,840 98,784 98,784 (line 1-4)$100,000 -100,0006. ∆ Net workingcapital7. Investment $500,000 75,792*8. Total Cash Flow -$400,000 $113,200 $133,600 $111,840 $98,784 $74,576*75,792 = $100,000 - 0.34 ($100,000 - $28,800)NPV = -$400,000+ $113,200 / 1.12 + $133,600 / 1.122 + $111,840 / 1.123+ $98,784 / 1.124 + $74,576 / 1.125= -$7,722.52Real interest rate = (1.15 / 1.04) - 1 = 10.58%NPV A = -$40,000+ $20,000 / 1.1058 + $15,000 / 1.10582 + $15,000 / 1.10583= $1,446.76NPV B = -$50,000+ $10,000 / 1.15 + $20,000 / 1.152 + $40,000 / 1.153= $119.17Choose project A.PV = $120,000 / {0.11 - (-0.06)}t = 0 t = 1 t = 2 t = 3 t = 4 t = 5 t = 6 ...$12,000 $6,000 $6,000 $6,000$4,000$12,000 $6,000 $6,000 ...The present value of one cycle is:A+ $4,000 / 1.064PV = $12,000 + $6,000 306.0= $12,000 + $6,000 (2.6730) + $4,000 / 1.064= $31,206.37The cycle is four years long, so use a four year annuity factor to compute the equivalent annual cost (EAC).AEAC = $31,206.37 / 406.0= $31,206.37 / 3.4651= $9,006The present value of such a stream in perpetuity is$9,006 / 0.06 = $150,100o evaluate the word processors, compute their equivalent annual costs (EAC).BangAPV(costs) = (10 ⨯ $8,000) + (10 ⨯ $2,000) 414.0= $80,000 + $20,000 (2.9137)= $138,274EAC = $138,274 / 2.9137= $47,456IOUAPV(costs) = (11 ⨯ $5,000) + (11 ⨯ $2,500) 3.014- (11 ⨯ $500) / 1.143= $55,000 + $27,500 (2.3216) - $5,500 / 1.143= $115,132EAC = $115,132 / 2.3216= $49,592BYO should purchase the Bang word processors.Chapter 8: Strategy and Analysis in Using Net Present ValueThe accounting break-even= (120,000 + 20,000) / (1,500 - 1,100)= 350 units. The accounting break-even= 340,000 / (2.00 - 0.72)= 265,625 abalonesb. [($2.00 ⨯ 300,000) - (340,000 + 0.72 ⨯ 300,000)] (0.65)= $28,600This is the after tax profit.Chapter 9: Capital Market Theory: An Overviewa. Capital gains = $38 - $37 = $1 per shareb. Total dollar returns = Dividends + Capital Gains = $1,000 + ($1*500) = $1,500 On a per share basis, this calculation is $2 + $1 = $3 per sharec. On a per share basis, $3/$37 = 0.0811 = 8.11% On a total dollar basis, $1,500/(500*$37) = 0.0811 = 8.11%d. No, you do not need to sell the shares to include the capital gains in the computation of the returns. The capital gain is included whether or not you realize the gain. Since you could realize the gain if you choose, you should include it.The expected holding period return is:()[]%865.1515865.052$/52$75.54$50.5$==-+There appears to be a lack of clarity about the meaning of holding period returns. The method used in the answer to this question is the one used in Section 9.1. However, the correspondence is not exact, because in this question, unlike Section 9.1, there are cash flows within the holding period. The answer above ignores the dividend paid in the first year. Although the answer above technically conforms to the eqn at the bottom of Fig. 9.2, the presence of intermediate cash flows that aren’t accounted for renders th is measure questionable, at best. There is no similar example in the body of the text, and I have never seen holding period returns calculated in this way before.Although not discussed in this book, there are two generally accepted methods of computing holding period returns in the presence of intermediate cash flows. First, the time weighted return calculates averages (geometric or arithmetic) of returns between cash flows. Unfortunately, that method can’t be used here, because we are not given the va lue of the stock at the end of year one. Second, the dollar weighted measure calculates the internal rate of return over the entire holding period. Theoretically, that method can be applied here, as follows: 0 = -52 + 5.50/(1+r) + 60.25/(1+r)2 => r = 0.1306.This produces a two year holding period return of (1.1306)2 – 1 = 0.2782. Unfortunately, this book does not teach the dollar weighted method.In order to salvage this question in a financially meaningful way, you would need the value of the stock at the end of one year. Then an illustration of the correct use of the time-weighted return would be appropriate. A complicating factor is that, while Section 9.2 illustrates the holding period return using the geometric return for historical data, the arithmetic return is more appropriate for expected future returns.E(R) = T-Bill rate + Average Excess Return = 6.2% + (13.0% -3.8%) = 15.4%. Common Treasury Realized Stocks Bills Risk Premium -7 32.4% 11.2% 21.2%-6 -4.9 14.7 -19.6-5 21.4 10.5 10.9 -4 22.5 8.8 13.7 -3 6.3 9.9 -3.6 -2 32.2 7.7 24.5 Last 18.5 6.2 12.3 b. The average risk premium is 8.49%.49.873.125.246.37.139.106.192.21=++-++- c. Yes, it is possible for the observed risk premium to be negative. This can happen in any single year. The.b.Standard deviation = 03311.0001096.0=.b.Standard deviation = = 0.03137 = 3.137%.b.Chapter 10: Return and Risk: The Capital-Asset-Pricing Model (CAPM)a. = 0.1 (– 4.5%) + 0.2 (4.4%) + 0.5 (12.0%) + 0.2 (20.7%) = 10.57%b.σ2 = 0.1 (–0.045 – 0.1057)2 + 0.2 (0.044 – 0.1057)2 + 0.5 (0.12 – 0.1057)2+ 0.2 (0.207 – 0.1057)2 = 0.0052σ = (0.0052)1/2 = 0.072 = 7.20%Holdings of Atlas stock = 120 ⨯ $50 = $6,000 ⨯ $20 = $3,000Weight of Atlas stock = $6,000 / $9,000 = 2 / 3Weight of Babcock stock = $3,000 / $9,000 = 1 / 3a. = 0.3 (0.12) + 0.7 (0.18) = 0.162 = 16.2%σP 2= 0.32 (0.09)2 + 0.72 (0.25)2 + 2 (0.3) (0.7) (0.09) (0.25) (0.2)= 0.033244σP= (0.033244)1/2 = 0.1823 = 18.23%a.State Return on A Return on B Probability1 15% 35% 0.4 ⨯ 0.5 = 0.22 15% -5% 0.4 ⨯ 0.5 = 0.23 10% 35% 0.6 ⨯ 0.5 = 0.34 10% -5% 0.6 ⨯ 0.5 = 0.3b. = 0.2 [0.5 (0.15) + 0.5 (0.35)] + 0.2[0.5 (0.15) + 0.5 (-0.05)]+ 0.3 [0.5 (0.10) + 0.5 (0.35)] + 0.3 [0.5 (0.10) + 0.5 (-0.05)]= 0.135= 13.5%Note: The solution to this problem requires calculus.Specifically, the solution is found by minimizing a function subject to a constraint. Calculus ability is not necessary to understand the principles behind a minimum variance portfolio.Min { X A2 σA2 + X B2σB2+ 2 X A X B Cov(R A , R B)}subject to X A + X B = 1Let X A = 1 - X B. Then,Min {(1 - X B)2σA2 + X B2σB2+ 2(1 - X B) X B Cov (R A, R B)}Take a derivative with respect to X B.d{∙} / dX B = (2 X B - 2) σA2+ 2 X B σB2 + 2 Cov(R A, R B) - 4 X B Cov(R A, R B)Set the derivative equal to zero, cancel the common 2 and solve for X B.X BσA2- σA2+ X B σB2 + Cov(R A, R B) - 2 X B Cov(R A, R B) = 0X B = {σA2 - Cov(R A, R B)} / {σA2+ σB2 - 2 Cov(R A, R B)}andX A = {σB2 - Cov(R A, R B)} / {σA2+ σB2 - 2 Cov(R A, R B)}Using the data from the problem yields,X A = 0.8125 andX B = 0.1875.a. Using the weights calculated above, the expected return on the minimum variance portfolio isE(R P) = 0.8125 E(R A) + 0.1875 E(R B)= 0.8125 (5%) + 0.1875 (10%)= 5.9375%b. Using the formula derived above, the weights areX A = 2 / 3 andX B = 1 / 3c. The variance of this portfolio is zero.σP 2= X A2 σA2 + X B2σB2+ 2 X A X B Cov(R A , R B)= (4 / 9) (0.01) + (1 / 9) (0.04) + 2 (2 / 3) (1 / 3) (-0.02)= 0This demonstrates that assets can be combined to form a risk-free portfolio.14.2%= 3.7%+β(7.5%) ⇒β = 1.40.25 = R f + 1.4 [R M– R f] (I)0.14 = R f + 0.7 [R M– R f] (II)(I) – (II)=0.11 = 0.7 [R M– R f] (III)[R M– R f ]= 0.1571Put (III) into (I) 0.25 = R f + 1.4[0.1571]R f = 3%[R M– R f ]= 0.1571R M = 0.1571 + 0.03= 18.71%a. = 4.9% + βi (9.4%)βD= Cov(R D, R M) / σM 2 = 0.0635 / 0.04326 = 1.468= 4.9 + 1.468 (9.4) = 18.70%Weights:X A = 5 / 30 = 0.1667X B = 10 / 30 = 0.3333X C = 8 / 30 = 0.2667X D = 1 - X A - X B - X C = 0.2333Beta of portfolio= 0.1667 (0.75) + 0.3333 (1.10) + 0.2667 (1.36) + 0.2333 (1.88)= 1.293= 4 + 1.293 (15 - 4) = 18.22%a. (i) βA= ρA,MσA / σMρA,M= βA σM / σA= (0.9) (0.10) / 0.12= 0.75(ii) σB= βB σM / ρB,M= (1.10) (0.10) / 0.40= 0.275(iii) βC= ρC,MσC / σM= (0.75) (0.24) / 0.10= 1.80(iv) ρM,M= 1(v) βM= 1(vi) σf= 0(vii) ρf,M= 0(viii) βf= 0b. SML:E(R i) = R f + βi {E(R M) - R f}= 0.05 + (0.10) βiSecurity βi E(R i)A 0.13 0.90 0.14B 0.16 1.10 0.16C 0.25 1.80 0.23Security A performed worse than the market, while security C performed better than the market.Security B is fairly priced.c. According to the SML, security A is overpriced while security C is under-priced. Thus, you could invest in security C while sell security A (if you currently hold it).a. The typical risk-averse investor seeks high returns and low risks. To assess thetwo stocks, find theReturns:State of economy ProbabilityReturn on A*Recession 0.1 -0.20 Normal 0.8 0.10 Expansion0.10.20* Since security A pays no dividend, the return on A is simply (P 1 / P 0) - 1. = 0.1 (-0.20) + 0.8 (0.10) + 0.1 (0.20) = 0.08 = 0.09 This was given in the problem.Risk:R A - (R A -)2 P ⨯ (R A -)2 -0.28 0.0784 0.00784 0.02 0.0004 0.00032 0.12 0.0144 0.00144 Variance 0.00960Standard deviation (R A ) = 0.0980βA = {Corr(R A , R M ) σ(R A )} / σ(R M ) = 0.8 (0.0980) / 0.10= 0.784βB = {Corr(R B , R M ) σ(R B )} / σ(R M ) = 0.2 (0.12) / 0.10= 0.24The return on stock B is higher than the return on stock A. The risk of stock B, as measured by itsbeta, is lower than the risk of A. Thus, a typical risk-averse investor will prefer stock B.b. = (0.7) + (0.3) = (0.7) (0.8) + (0.3) (0.09) = 0.083σP 2= 0.72 σA 2 + 0.32 σB 2 + 2 (0.7) (0.3) Corr (R A , R B ) σA σB = (0.49) (0.0096) + (0.09) (0.0144) + (0.42) (0.6) (0.0980) (0.12) = 0.0089635 σP = = 0.0947 c. The beta of a portfolio is the weighted average of the betas of the components of the portfolio. βP = (0.7) βA + (0.3) βB = (0.7) (0.784) + (0.3) (0.240) = 0.621Chapter 11:An Alternative View of Risk and Return: The Arbitrage Pricing Theorya. Stock A:()()R R R R R A A A m m Am A=+-+=+-+βεε105%12142%...Stock B:()()R R R R R B B m m Bm B=+-+=+-+βεε130%098142%...Stock C:()R R R R R C C C m m Cm C=+-+=+-+βεε157%137142%)..(.b.()[]()[]()[]()()()()()()[]()()CB A m cB A m c m B m A m CB A P 25.045.030.0%2.14R 1435.1%925.1225.045.030.0%2.14R 37.125.098.045.02.130.0%7.1525.0%1345.0%5.1030.0%2.14R 37.1%7.1525.0%2.14R 98.0%0.1345.0%2.14R 2.1%5.1030.0R 25.0R 45.0R 30.0R ε+ε+ε+-+=ε+ε+ε+-+++++=ε+-++ε+-++ε+-+=++= c.i.()R R R A B C =+-==+-==+-=105%1215%142%)1113%09815%142%)137%157%13715%142%168%..(..46%.(......ii.R P =+-=12925%1143515%142%)138398%..(..To determine which investment investor would prefer, you must compute the variance of portfolios created bymany stocks from either market. Note, because you know that diversification is good, it is reasonable to assume that once an investor chose the market in which he or she will invest, he or she will buy many stocks in that market.Known:E EF ====001002 and and for all i.i σσεε..Assume: The weight of each stock is 1/N; that is, X N i =1/for all i.If a portfolio is composed of N stocks each forming 1/N proportion of the portfolio, the return on the portfolio is 1/N times the sum of the returns on the N stocks. Recall that the return on each stock is 0.1+βF+ε.()()()()()()[]()()()()()()()[]()[]()[]()()[]()()()()()j i 2j i 22j i i 2222222222P P P P iP ,0.04Corr 0.01,Cov s =isvariance the ,N as limit In the ,Cov 1/N 1s 1/N s )(1/N 1/N F 2F E 1/N F E 0.10.1/N F 0.1E R E R E R Var 0.101/N 00.1E 1/N F E 0.11/N F 0.1E R E 1/N F 0.1F 0.1(1/N)R 1/N R εε+β=εε+β∞⇒εε-+ε+β=ε∑+εβ+β=ε+β=-ε+β+=-==+β+=ε+β+=ε∑+β+=ε+β+=ε+β+==∑∑∑∑∑∑∑∑()()()()()()Thus,F R f E R E R Var R Corr Var R Corr ii ip P p i j PijR 1i =++=++===+=+010*********002250040002500412212111222.........,,εεεεεεa.()()()()Corr Corr Var R Var R i j i j p pεεεε112212000225000225,,..====Since Var ()()R p 1 Var R 2p 〉, a risk averse investor will prefer to invest in the second market.b. Corr ()()εεεε112090i j j ,.,== and Corr 2i()()Var R Var R pp120058500025==..。
公司理财(英文版)题库
..word教育资料CHAPTER 2 Financial Statements & Cash FlowMultiple Choice Questions:I. DEFINITIONSBALANCE SHEETb 1. The financial statement showing a firm’s accounting value on aparticular date is the:a. income statement.b. balance sheet.c. statement of cash flows.d. tax reconciliation statement.e. shareholders’ equity sheet.Difficulty level: EasyCURRENT ASSETSc 2. A current asset is:a. an item currently owned by the firm.b. an item that the firm expects to own within the next year.c. an item currently owned by the firm that will convert to cash withinthe next 12 months.d. the amount of cash on hand the firm currently shows on its balancesheet.e. the market value of all items currently owned by the firm.Difficulty level: EasyLONG-TERM DEBTb 3. The long-term debts of a firm are liabilities:a. that come due within the next 12 months.b. that do not come due for at least 12 months.c. owed to the firm’s suppliers.d. owed to the firm’s shareholders.e. the firm expects to incur within the next 12 months.Difficulty level: EasyNET WORKING CAPITALe 4. Net working capital is defined as:a. total liabilities minus shareholders’ equity.b. current liabilities minus shareholders’ equity.c. fixed assets minus long-term liabilities.d. total assets minus total liabilities.e. current assets minus current liabilities.Difficulty level: EasyLIQUID ASSETSd 5. A(n) ____ asset is one which can be quickly converted into cashwithout significant loss in value.a. currentb. fixedc. intangibled. liquide. long-termDifficulty level: EasyINCOME STATEMENTa 6. The financial statement summarizing a firm’s performance over a periodof time is the:a. income statement.b. balance sheet.c. statement of cash flows.d. tax reconciliation statement.e. shareholders’ equity sheet.Difficulty level: EasyNONCASH ITEMSd 7. Noncash items refer to:a. the credit sales of a firm.b. the accounts payable of a firm.c. the costs incurred for the purchase of intangible fixed assets.d. expenses charged against revenues that do not directly affect cashflow.e. all accounts on the balance sheet other than cash on hand.Difficulty level: EasyMARGINAL TAX RATESe 8. Your _____ tax rate is the amount of tax payable on the next taxabledollar you earn.a. deductibleb. residualc. totald. averagee. marginalDifficulty level: EasyAVERAGE TAX RATESd 9. Your _____ tax rate measures the total taxes you pay divided by yourtaxable income.a. deductibleb. residualc. totald. averagee. marginalDifficulty level: EasyCASH FLOW FROM OPERATING ACTIVITIESa 10. _____ refers to the cash flow that results from the firm’s ongoing,normal business activities.a. Cash flow from operating activitiesb. Capital spendingc. Net working capitald. Cash flow from assetse. Cash flow to creditorsDifficulty level: MediumCASH FLOW FROM INVESTINGb 11. _____ refers to the changes in net capital assets.a. Operating cash flowb. Cash flow from investingc. Net working capitald. Cash flow from assetse. Cash flow to creditorsDifficulty level: MediumNET WORKING CAPITALc 12. _____ refers to the difference between a firm’s current assets and itscurrent liabilities.a. Operating cash flowb. Capital spendingc. Net working capitald. Cash flow from assetse. Cash flow to creditorsDifficulty level: EasyCASH FLOW OF OPERATIONSd 13. _____ refers to the net total cash flow of the firm available fordistribution to its creditors and stockholders.a. Operating cash flowb. Capital spendingc. Net working capitald. Cash flow from operationse. Cash flow to creditorsCASH FLOW TO CREDITORSe 14. _____ refers to the firm’s interest payments less any net newborrowing.a. Operating cash flowb. Capital spendingc. Net working capitald. Cash flow from shareholderse. Cash flow to creditorsCASH FLOW TO STOCKHOLDERSe 15. _____ refers to the firm’s dividend payments less any net new equityraised.a. Operating cash flowb. Capital spendingc. Net working capitald. Cash flow from creditorse. Cash flow to stockholdersEARNINGS PER SHAREa 16. Earnings per share is equal to:a. net income divided by the total number of shares outstanding.b. net income divided by the par value of the common stock.c. gross income multiplied by the par value of the common stock.d. operating income divided by the par value of the common stock.e. net income divided by total shareholders’ equity.DIVIDENDS PER SHAREb 17. Dividends per share is equal to dividends paid:a. divided by the par value of common stock.b. divided by the total number of shares outstanding.c. divided by total shareholders’ equity.d. multiplied by the par value of the common stock.e. multiplied by the total number of shares outstanding.II. CONCEPTSCURRENT ASSETSa 18. Which of the following are included in current assets?I. equipmentII. inventoryIII. a ccounts payableIV. casha. II and IV onlyb. I and III onlyc. I, II, and IV onlyd. III and IV onlye. II, III, and IV onlyCURRENT LIABILITIESb 19. Which of the following are included in current liabilities?I. note payable to a supplier in eighteen monthsII. debt payable to a mortgage company in nine monthsIII. a ccounts payable to suppliersIV. loan payable to the bank in fourteen monthsa. I and III onlyb. II and III onlyc. III and IV onlyd. II, III, and IV onlye. I, II, and III onlyBALANCE SHEETd 20. An increase in total assets:a.means that net working capital is also increasing.b.requires an investment in fixed assets.c.means that shareholders’ equity must also increase.d.must be offset by an equal increase in liabilities and shareholders’equity.e.can only occur when a firm has positive net income.LIQUIDITYc 21. Which one of the following accounts is generally the most liquid?a. inventoryb.buildingc.accounts receivabled.equipmente.patentLIQUIDITYe 22. Which one of the following statements concerning liquidity is correct?a.If you sold an asset today, it is a liquid asset.b.If you can sell an asset next year at a price equal to its actualvalue, the asset is highly liquid.c.Trademarks and patents are highly liquid.d.The less liquidity a firm has, the lower the probability the firm willencounter financialdifficulties.e.Balance sheet accounts are listed in order of decreasing liquidity.LIQUIDITYd 23. Liquidity is:a. a measure of the use of debt in a firm’s capital structure.b.equal to current assets minus current liabilities.c.equal to the market value of a firm’s total assets minus its currentliabilities.d.valuable to a firm even though liquid assets tend to be lessprofitable to own.e.generally associated with intangible assets.SHAREHOLDERS’ EQUITYd 24. Which of the following accounts are included in shareholders’ equity?I. interest paidII. retained earningsIII. c apital surplusIV. long-term debta. I and II onlyb. II and IV onlyc. I and IV onlyd. II and III onlye. I and III onlyBOOK VALUEb 25. Book value:a. is equivalent to market value for firms with fixed assets.b.is based on historical cost.c.generally tends to exceed market value when fixed assets are included.d.is more of a financial than an accounting valuation.e.is adjusted to market value whenever the market value exceeds thestated book value.MARKET VALUEa 26. When making financial decisions related to assets, you should:a.always consider market values.b.place more emphasis on book values than on market values.c.rely primarily on the value of assets as shown on the balance sheet.d.place primary emphasis on historical costs.e.only consider market values if they are less than book values.INCOME STATEMENTd 27. As seen on an income statement:a.interest is deducted from income and increases the total taxesincurred.b.the tax rate is applied to the earnings before interest and taxes whenthe firm has both depreciation and interest expenses.c.depreciation is shown as an expense but does not affect the taxespayable.d.depreciation reduces both the pretax income and the net income.e.interest expense is added to earnings before interest and taxes to getpretax income.EARNINGS PER SHAREa 28. The earnings per share will:a. increase as net income increases.b.increase as the number of shares outstanding increase.c.decrease as the total revenue of the firm increases.d.increase as the tax rate increases.e.decrease as the costs decrease.DIVIDENDS PER SHAREe 29. Dividends per share:a. increase as the net income increases as long as the number of sharesoutstanding remains constant.b.decrease as the number of shares outstanding decrease, all elseconstant.c.are inversely related to the earnings per share.d.are based upon the dividend requirements established by GenerallyAccepted Accounting Procedures.e.are equal to the amount of net income distributed to shareholdersdivided by the number of shares outstanding.REALIZATION PRINCIPLEb 30. According to Generally Accepted Accounting Principles,a.income is recorded based on the matching principle.b.income is recorded based on the realization principle.c.costs are recorded based on the liquidity principle. income is recorded based on the realization principle.e.depreciation is recorded as it affects the cash flows of a firm.MATCHING PRINCIPLEc 31. According to Generally Accepted Accounting Principles, costs are:a. recorded as incurred.b. recorded when paid.c. matched with revenues.d. matched with production levels.e. expensed as management desires.NONCASH ITEMSa 32. Depreciation:a. is a noncash expense that is recorded on the income statement.b.increases the net fixed assets as shown on the balance sheet.c.reduces both the net fixed assets and the costs of a firm.d.is a non-cash expense which increases the net operating income.e.decreases net fixed assets, net income, and operating cash flows.MARGINAL TAX RATEc 33. When you are making a financial decision, the most relevant tax rateis the _____ rate.a. averageb.fixedc.marginald.totale.variableOPERATING CASH FLOWa 34. An increase in which one of the following will cause the operatingcash flow to increase?a. depreciationb.change in net working capital working capitald.taxese.costsCHANGE IN NET WORKING CAPITALe 35. A firm starts its year with a positive net working capital. During theyear, the firm acquires more short-term debt than it does short-termassets. This means that:a. the ending net working capital will be negative.b. both accounts receivable and inventory decreased during the year.c. the beginning current assets were less than the beginning current liabilities.d. accounts payable increased and inventory decreased during the year.e. the ending net working capital can be positive, negative, or equal to zero.CASH FLOW TO CREDITORSc 36. The cash flow to creditors includes the cash:a.received by the firm when payments are paid to suppliers.b.outflow of the firm when new debt is acquired.c. outflow when interest is paid on outstanding debt.d. inflow when accounts payable decreases.e. received when long-term debt is paid off.CASH FLOW TO STOCKHOLDERSa 37. Cash flow to stockholders must be positive when:a.the dividends paid exceed the net new equity raised.b.the net sale of common stock exceeds the amount of dividends paid.c.no income is distributed but new shares of stock are sold.d.both the cash flow to assets and the cash flow to creditors arenegative.e.both the cash flow to assets and the cash flow to creditors arepositive.BALANCE SHEETb 38. Which equality is the basis for the balance sheet?a. Fixed Assets = Stockholder's Equity + Current Assetsb. Assets = Liabilities + Stockholder's Equityc. Assets = Current Long-Term Debt + Retained Earningsd. Fixed Assets = Liabilities + Stockholder's Equitye. None of the above.BALANCE SHEETa 39. Assets are listed on the balance sheet in order of:a. decreasing liquidity.b. decreasing size.c. increasing size.d. relative life.e. None of the above.DEBTe 40. Debt is a contractual obligation that:a. requires the payout of residual flows to the holders of theseinstruments.b. requires a repayment of a stated amount and interest over the period.c. allows the bondholders to sue the firm if it defaults.d. Both A and B.e. Both B and C.CARRYING VALUEa 41. The carrying value or book value of assets:a. is determined under GAAP and is based on the cost of the asset.b. represents the true market value according to GAAP.c. is always the best measure of the company's value to an investor.d. is always higher than the replacement cost of the assets.e. None of the above.GAAPd 42. Under GAAP, the value of all the firm's assets are reported at:a. market value.b. liquidation value.c. intrinsic value.d. cost.e. None of the above.INCOME STATEMENTe 43. Which of the following statements concerning the income statement istrue?a. It measures performance over a specific period of time.b. It determines after-tax income of the firm.c. It includes deferred taxes.d. It treats interest as an expense.e. All of the above.GAAP INCOME RECOGNITIONb 44. According generally accepted accounting principles (GAAP), revenue isrecognized as income when:a. a contract is signed to perform a service or deliver a good.b. the transaction is complete and the goods or services are delivered.c. payment is requested.d. income taxes are paid.e. All of the above.OPERATING CASH FLOWb 45. Which of the following is not included in the computation ofoperating cash flow?a. Earnings before interest and taxesb. Interest paidc. Depreciationd. Current taxese. All of the above are included.NET CAPITAL SPENDINGb 46. Net capital spending is equal to:a. net additions to net working capital.b. the net change in fixed assets.c. net income plus depreciation.d. total cash flow to stockholders less interest and dividends paid.e. the change in total assets.CASH FLOW TO STOCKHOLDERSd 47. Cash flow to stockholders is defined as:a. interest payments.b. repurchases of equity less cash dividends paid plus new equity sold.c. cash flow from financing less cash flow to creditors.d. cash dividends plus repurchases of equity minus new equity financing.e. None of the above.FREE CASH FLOWd 48. Free cash flow is:a. without cost to the firm.b. net income plus taxes.c. an increase in net working capital.d. cash flow in excess of that required to fund profitable capitalprojects.e. None of the above.CASH FLOWd 49. The cash flow of the firm must be equal to:a. cash flow to equity minus cash flow to debtholders.b. cash flow to debtholders minus cash flow to equity.c. cash flow to governments plus cash flow to equity.d. cash flow to equity plus cash flow to debtholders.e. None of the above.STATEMENT OF CASH FLOWSa 50. Which of the following are all components of the statement of cashflows?a. Cash flow from operating activities, cash flow from investingactivities, and cash flow from financing activitiesb. Cash flow from operating activities, cash flow from investingactivities, and cashflow from divesting activitiesc. Cash flow from internal activities, cash flow from externalactivities, and cash flow from financing activitiesd. Cash flow from brokering activities, cash flow from profitableactivities, and cash flow from non-profitable activitiese. None of the above.III. P ROBLEMSCURRENT ASSETSb 51. A firm has $300 in inventory, $600 in fixed assets, $200 in accountsreceivables, $100 in accounts payable, and $50 in cash. What is theamount of the current assets?a. $500b. $550c. $600d. $1,150e. $1,200NET WORKING CAPITALb 52. The total assets are $900, the fixed assets are $600, long-term debtis $500, and short-term debt is $200. What is the amount of networking capital?a. $0b. $100c. $200d. $300e. $400LIQUIDITYd 53. Brad’s Company has equipment with a book value of $500 that could besold today at a 50 percent discount. Their inventory is valued at $400and could be sold to a competitor for that amount. The firm has $50 incash and customers owe them $300. What is the accounting value oftheir liquid assets?a. $50b. $350c. $700d. $750e. $1,000BOOK VALUEc 54. Martha’s Enterprises spent $2,400 to purchase equipment three yearsago. This equipment is currently valued at $1,800 on today’s balancesheet but could actually be sold for $2,000. Net working capital is$200 and long-term debt is $800. What is the book value ofshareholders’ equity?a.$200b.$800c.$1,200d.$1,400e. The answer cannot be determined from the information provided.NET INCOMEb 55. Art’s Boutique has sales of $640,000 and costs of $480,000. Interestexpense is $40,000 and depreciation is $60,000. The tax rate is 34%.What is the net income?a. $20,400b. $39,600c. $50,400d. $79,600e. $99,600MARGINAL TAX RATEc 56. Given the tax rates as shown, what is the average tax rate for a firmwith taxable income of $126,500?Taxable Income Tax Rate$ 0 - 50,000 15%50,001 - 75,000 25%75,001 - 100,000 34%100,001 - 335,000 39%a.21.38 percentb.23.88 percentc.25.76 percentd.34.64 percente. 39.00 percentTAXESd 57. The tax rates are as shown. Your firm currently has taxable income of$79,400. How much additional tax will you owe if you increase yourtaxable income by $21,000?Taxable Income Tax Rate$ 0 - 50,000 15%50,001 - 75,000 25%75,001 - 100,000 34%100,001 - 335,000 39%a.$7,004b.$7,014c.$7,140d.$7,160e.$7,174OPERATING CASH FLOWd 58. Your firm has net income of $198 on total sales of $1,200. Costs are$715 and depreciation is $145. The tax rate is 34 percent. The firmdoes not have interest expenses. What is the operating cash flow?a.$93b.$241c.$340d.$383e. $485NET CAPITAL SPENDINGc. 59. Teddy’s Pillows has beginning net fixed assets of $480 and ending netfixed assets of $530. Assets valued at $300 were sold during the year.Depreciation was $40. What is the amount of capital spending?a.$10b.$50c.$90d.$260e.$390CHANGE IN NET WORKING CAPITALb 60. At the beginning of the year, a firm has current assets of $380 andcurrent liabilities of $210. At the end of the year, the currentassets are $410 and the current liabilities are $250. What is thechange in net working capital?a.-$30b.-$10c.$0d.$10e. $30CASH FLOW TO CREDITORSe 61. At the beginning of the year, long-term debt of a firm is $280 andtotal debt is $340. At the end of the year, long-term debt is $260 andtotal debt is $350. The interest paid is $30. What is the amount ofthe cash flow to creditors?a.-$50b.-$20c.$20d.$30e. $50CASH FLOW TO CREDITORSa 62. Pete’s Boats has beginning long-term debt of $180 and ending long-termdebt of $210. The beginning and ending total debt balances are $340and $360, respectively. The interest paid is $20. What is the amountof the cash flow to creditors?a.-$10b.$0c.$10d.$40e. $50CASH FLOW TO STOCKHOLDERSa 63. Peggy Grey’s Cookies has net income of $360. The firm pays out 40percent of the net income to its shareholders as dividends. During theyear, the company sold $80 worth of common stock. What is the cashflow to stockholders?a.$64b.$136c.$144d.$224e. $296CASH FLOW TO STOCKHOLDERSa 64. Thompson’s Jet Skis has operating cash flow of $218. Depreciation is$45 and interest paid is $35. A net total of $69 was paid on long-termdebt. The firm spent $180 on fixed assets and increased net workingcapital by $38. What is the amount of the cash flow to stockholders?a.-$104b.-$28c.$28d.$114e. $142The following balance sheet and income statement should be used for questions#65 through #71:Nabors, Inc.2005 Income Statement($ in millions)Net sales $9,610Less: Cost of goods sold 6,310Less: Depreciation 1,370Earnings before interest and taxes 1,930Less: Interest paid 630Taxable Income $1,300Less: Taxes 455Net income $ 845Nabors, Inc.2004 and 2005 Balance Sheets($ in millions)2004 2005 20042005Cash $ 310 $ 405 Accounts payable $ 2,720$ 2,570Accounts rec. 2,640 3,055 Notes payable 100 0Inventory 3,275 3,850 Total $ 2,820$ 2,570Total $ 6,225 $ 7,310 Long-term debt 7,8758,100Net fixed assets 10,960 10,670 Common stock 5,0005,250Retained earnings 1,4902,060Total assets $17,185 $17,980 Total liab.& equity $17,185 $17,980CHANGE IN NET WORKING CAPITALc 65. What is the change in the net working capital from 2004 to 2005?a.$1,235b.$1,035c.$1,335d.$3,405e.$4,740NONCASH EXPENSESd 66. What is the amount of the non-cash expenses for 2005?a.$570b.$630c.$845d.$1,370e. $2,000NET CAPITAL SPENDINGc 67. What is the amount of the net capital spending for 2005?a.-$290b.$795c.$1,080d.$1,660e.$2,165OPERATING CASH FLOWd 68. What is the operating cash flow for 2005?a.$845b.$1,930c.$2,215d.$2,845e.$3,060CASH FLOW OF THE FIRMa 69. What is the cash flow of the firm for 2005?a.$430b.$485c.$1,340d.$2,590e.$3,100NET NEW BORROWINGe 70. What is the amount of net new borrowing for 2005?a.-$225b.-$25c.$0d.$25e.$225CASH FLOW TO CREDITORSd 71. What is the cash flow to creditors for 2005?a.-$405b.-$225c.$225d.$405e.$630The following information should be used for questions #72 through #79:Knickerdoodles, Inc.2004 2005Sales $ 740 $ 785COGS 430 460Interest 33 35Dividends 16 17Depreciation 250 210Cash 70 75Accounts receivables 563 502Current liabilities 390 405Inventory 662 640Long-term debt 340 410Net fixed assets 1,680 1,413Common stock 700 235Tax rate 35% 35%NET WORKING CAPITALd 72. What is the net working capital for 2005?a.$345b.$405c.$805d.$812e.$1,005CHANGE IN NET WORKING CAPITALa 73. What is the change in net working capital from 2004 to 2005?a.-$93b.-$7c.$7d.$85e.$97NET CAPITAL SPENDINGb 74. What is net capital spending for 2005?a.-$250b.-$57c.$0d.$57e.$477OPERATING CASH FLOWb 75. What is the operating cash flow for 2005?a.$143b.$297c.$325d.$353e.$367CASH FLOW OF THE FIRMd 76. What is the cash flow of the firm for 2005?a.$50b.$247c.$297d.$447e.$517NET NEW BORROWINGd 77. What is net new borrowing for 2005?a.-$70b.-$35c.$35d.$70e.$105CASH FLOW TO CREDITORSb 78. What is the cash flow to creditors for 2005?a.-$170b.-$35c.$135d.$170e.$205CASH FLOW TO STOCKHOLDERSd 79. What is the cash flow to stockholders for 2005?a.$408b.$417c.$452d.$482e.$503The following information should be used for questions #80 through #82:2005Cost of goods sold $3,210Interest $215Dividends $160Depreciation $375Change in retained earnings $360Tax rate 35%TAXABLE INCOMEe 80. What is the taxable income for 2005?a.$360b.$520c.$640d.$780e.$800OPERATING CASH FLOWd 81. What is the operating cash flow for 2005?a.$520b.$800c.$1,015d.$1,110e.$1,390SALESc 82. What are the sales for 2005?a.$4,225b.$4,385c.$4,600d.$4,815e. $5,000NET INCOMEb 83. Calculate net income based on the following information. Sales are$250; Cost of goods sold is $160; Depreciation expense is $35;Interest paid is $20; and the tax rate is 34%.a. $11.90b. $23.10c. $35.00d. $36.30e. $46.20IV. ESSAYSLIQUID ASSETS84. What is a liquid asset and why is it necessary for a firm to maintain areasonable level of liquid assets?Liquid assets are those that can be sold quickly with little or no loss in value. A firm that has sufficient liquidity will be less likely to experience financial distress.OPERATING CASH FLOW85. Why is interest expense excluded from the operating cash flow calculation?Operating cash flow is designed to represent the cash flow a firm generates from its day-to-day operating activities. Interest expense arises out of a financing choice and thus should be considered as a cash flow to creditors.CASH FLOW AND ACCOUNTING STATEMENTS86. E xplain why the income statement is not a good representation of cash flow.Most income statements contain some noncash items, so these must be accounted for when calculating cash flows. More importantly, however, since GAAP is used to create income statements, revenues and expenses are booked when they accrue, not when their corresponding cash flows occur.BOOK VALUE AND MARKET VALUE87. Discuss the difference between book values and market values on thebalance sheet and explain which is more important to the financial manager and why.The accounts on the balance sheet are generally carried at historical cost, not market values. Although the book value of current assets and current liabilities may closely approximate market values, the same cannot be said for the rest of the balance sheet accounts. Ultimately, the financial manager should focus on the firm’s stock price, which is a market value measure. Hence, market values are more meaningful than book values. ADDITION TO RETAINED EARNINGS88. Note that in all of our cash flow computations to determine cash flow ofthe firm, we never include the addition to retained earnings. Why not? Is this an oversight?The addition to retained earnings is not a cash flow. It is simply an accounting entry that reconciles the balance sheet. Any additions to retained earnings will show up as cash flow changes in other balance sheet accounts.DEPRECIATION AND CASH FLOW89. Note that we added depreciation back to operating cash flow and toadditions to fixed assets. Why add it back twice? Isn’t this double-counting?In both cases, depreciation is added back because it was previously subtracted when obtaining ending balances of net income and fixed assets.Also, since depreciation is a noncash expense, we need to add it back in both instances, so there is no double counting.TAX LIABILITIES AND CASH FLOW90. Sometimes when businesses are critically delinquent on their taxliabilities, the tax authority comes in and literally seizes the business by chasing all of the employees out of the building and changing the locks.What does this tell you about the importance of taxes relative to our discussion of cash flow? Why might a business owner want to avoid such an occurrence?Taxes must be paid in cash, and in this case, they are one of the most important components of cash flow. The reputation of a business can undergo irreparable harm if word gets out that the tax authorities have confiscated the business, even if only for a couple of hours until the business owner can come up with the money to clear up the tax problem. The bottom line is if the owner can’t come up with the cash, the tax authority has effectively put them out of business.CASH FLOW OF THE FIRM94. Interpret, in words, what cash flow of the firm represents by discussingoperating cash flow, changes in net working capital, and additions to fixed assets.Operating cash flow is the cash flow a firm generates from its day-to-day operations. In other words, it is the cash inflow generated as a result of putting the firm’s assets to work. Changes in net working capital and fixed assets represent investments a firm makes in these assets. That is,a firm typically takes some of the cash flow it generates from usingassets and reinvests it in new assets. Cash flow of the firm, then, is the cash flow a firm generates by employing its assets, net of any acquisitions.。
公司理财(英文版)试题库7
CHAPTER 7Net Present Value and Other Investment Rules Multiple Choice Questions:I. DEFINITIONSNET PRESENT VALUEa 1. The difference between the present value of an investment and its cost is the:a. net present value.b. internal rate of return.c. payback period.d. profitability index.e. discounted payback period.Difficulty level: EasyNET PRESENT VALUE RULEc 2. Which one of the following statements concerning net present value (NPV) is correct?a. An investment should be accepted if, and only if, the NPV is exactlyequal to zero.b. An investment should be accepted only if the NPV is equal to the initialcash flow.c. An investment should be accepted if the NPV is positive and rejected ifit is negative.d. An investment with greater cash inflows than cash outflows, regardlessof when the cash flows occur, will always have a positive NPV andtherefore should always be accepted.e. Any project that has positive cash flows for every time period after theinitial investment should be accepted.Difficulty level: EasyPAYBACKc 3. The length of time required for an investment to generate cash flowssufficient to recover the initial cost of the investment is called the:a. net present value.b. internal rate of return.c. payback period.d. profitability index.e. discounted cash period.Difficulty level: EasyPAYBACK RULEa 4. Which one of the following statements is correct concerning thepayback period?a. An investment is acceptable if its calculated payback period is less thansome pre-specified period of time.b. An investment should be accepted if the payback is positive andrejected if it is negative.c. An investment should be rejected if the payback is positive andaccepted if it is negative.d. An investment is acceptable if its calculated payback period is greaterthan some pre-specified period of time.e. An investment should be accepted any time the payback period is lessthan the discounted payback period, given a positive discount rate.Difficulty level: EasyDISCOUNTED PAYBACKe 5. The length of time required for a project’s discounted cash flows toequal the initial cost of the project is called the:a. net present value.b. internal rate of return.c. payback period.d. discounted profitability index.e. discounted payback period.Difficulty level: EasyDISCOUNTED PAYBACK RULEd 6. The discounted payback rule states that you should accept projects:a. which have a discounted payback period that is greater than some pre-specified period of time.b. if the discounted payback is positive and rejected if it is negative.c. only if the discounted payback period equals some pre-specified periodof time.d. if the discounted payback period is less than some pre-specified periodof time.e. only if the discounted payback period is equal to zero.Difficulty level: EasyAVERAGE ACCOUNTING RETURNc 7. An investment’s average net income divided by its average book valuedefines the average:a. net present value.b. internal rate of return.c. accounting return.d. profitability index.e. payback period.Difficulty level: EasyAVERAGE ACCOUNTING RETURN RULEb 8. An investment is acceptable if its average accounting return (AAR):a. is less than a target AAR.b. exceeds a target AAR.c. exceeds the firm’s return on equity (ROE).d. is less than the firm’s return on assets (ROA).e. is equal to zero and only when it is equal to zero.Difficulty level: EasyINTERNAL RATE OF RETURNb. 9. The discount rate that makes the net present value of an investmentexactly equal tozero is called the:a. external rate of return.b. internal rate of return.c. average accounting return.d. profitability index.e. equalizer.Difficulty level: EasyINTERNAL RATE OF RETURN RULEd 10. An investment is acceptable if its IRR:a. is exactly equal to its net present value (NPV).b. is exactly equal to zero.c. is less than the required return.d. exceeds the required return.e. is exactly equal to 100 percent.Difficulty level: EasyMULTIPLE RATES OF RETURNe 11. The possibility that more than one discount rate will make the NPV ofan investment equal to zero is called the _____ problem.a. net present value profilingb. operational ambiguityc. mutually exclusive investment decisiond. issues of scalee. multiple rates of returnDifficulty level: MediumMUTUALLY EXCLUSIVE PROJECTSc 12. A situation in which accepting one investment prevents the acceptanceof another investment is called the:a. net present value profile.b. operational ambiguity decision.c. mutually exclusive investment decision.d. issues of scale problem.e. multiple choices of operations decision.Difficulty level: EasyPROFITABILITY INDEXd. 13. The present value of an investment’s future cash flows divided by theinitial cost of the investment is called the:a. net present value.b. internal rate of return.c. average accounting return.d. profitability index.e. profile period.Difficulty level: EasyPROFITABILITY INDEX RULEa 14. An investment is acceptable if the profitability index (PI) of theinvestment is:a. greater than one.b. less than one.c. greater than the internal rate of return (IRR).d. less than the net present value (NPV).e. greater than a pre-specified rate of return.Difficulty level: EasyII. CONCEPTSNET PRESENT VALUEd 15. All else constant, the net present value of a project increases when:a. the discount rate increases.b. each cash inflow is delayed by one year.c. the initial cost of a project increases.d. the rate of return decreases.e. all cash inflows occur during the last year of a project’s life instead ofperiodically throughout the life of the project.Difficulty level: EasyNET PRESENT VALUEa 16. The primary reason that company projects with positive net present values areconsidered acceptable is that:a. they create value for the owners of the firm.b. the project’s rate of return exceeds the rate of inflation.c. they return the initial cash outlay within three years or less.d. the required cash inflows exceed the actual cash inflows.e. the investment’s cost exceeds the present value of the cash inflows.Difficulty level: EasyNET PRESENT VALUEd 17. If a project has a net present value equal to zero, then:I. the present value of the cash inflows exceeds the initial cost of the project.II. the project produces a rate of return that just equals the rate required to accept theproject.III. the project is expected to produce only the minimally required cash inflows.IV. any delay in receiving the projected cash inflows will cause the project to have a negative net present value.a. II and III onlyb. II and IV onlyc. I, II, and IV onlyd. II, III, and IV onlye. I, II, and III onlyDifficulty level: MediumNET PRESENT VALUEb 18. Net present value:a. cannot be used when deciding between two mutually exclusive projects.b. is more useful to decision makers than the internal rate of return when comparingdifferent sized projects.c. is easy to explain to non-financial managers and thus is the primary method of analysisused by the lowest levels of management.d. is not an as widely used tool as payback and discounted paybacke. is very similar in its methodology to the average accounting return.Difficulty level: EasyPAYBACKc 19. Payback is frequently used to analyze independent projects because:a. it considers the time value of money.b. all relevant cash flows are included in the analysis.c. it is easy and quick to calculate.d. it is the most desirable of all the available analytical methods from a financialperspective.e. it produces better decisions than those made using either NPV or IRR.Difficulty level: EasyPAYBACKc 20. The advantages of the payback method of project analysis include the:I. application of a discount rate to each separate cash flow.II. bias towards liquidity.III. ease of use.IV. arbitrary cutoff point.a. I and II onlyb. I and III onlyc. II and III onlyd. II and IV onlye. II, III, and IV onlyDifficulty level: MediumPAYBACKd 21. All else equal, the payback period for a project will decrease whenever the:a. initial cost increases.b. required return for a project increases.c. assigned discount rate decreases.d. cash inflows are moved forward in time.e. duration of a project is lengthened.Difficulty level: MediumDISCOUNTED PAYBACKd 22. The discounted payback period of a project will decrease whenever the:a. discount rate applied to the project is increased.b. initial cash outlay of the project is increased.c. time period of the project is increased.d. amount of each project cash flow is increased.e. costs of the fixed assets utilized in the project increase.Difficulty level: MediumDISCOUNTED PAYBACKa 23. The discounted payback rule may cause:a. some positive net present value projects to be rejected.b. the most liquid projects to be rejected in favor of less liquid projects.c. projects to be incorrectly accepted due to ignoring the time value of money.d. projects with negative net present values to be accepted.e. some projects to be accepted which would otherwise be rejected under the paybackrule.Difficulty level: EasyINTERNAL RATE OF RETURNb 24. The internal rate of return (IRR):I. rule states that a project with an IRR that is less than the required rate should beaccepted.II. is the rate generated solely by the cash flows of an investment.III. is the rate that causes the net present value of a project to exactly equal zero.IV. can effectively be used to analyze all investment scenarios.a. I and IV onlyb. II and III onlyc. I, II, and III onlyd. II, III, and IV onlye. I, II, III, and IVDifficulty level: MediumINTERNAL RATE OF RETURNa 25. The internal rate of return for a project will increase if:a. the initial cost of the project can be reduced.b. the total amount of the cash inflows is reduced.c. each cash inflow is moved such that it occurs one year later than originally projected.d. the required rate of return is reduced.e. the salvage value of the project is omitted from the analysis.Difficulty level: MediumINTERNAL RATE OF RETURNc 26. The internal rate of return is:a. more reliable as a decision making tool than net present value whenever you areconsidering mutually exclusive projects.b. equivalent to the discount rate that makes the net present value equal to one.c. difficult to compute without the use of either a financial calculator or a computer.d. dependent upon the interest rates offered in the marketplace.e. a better methodology than net present value when dealing with unconventional cashflows.Difficulty level: MediumINTERNAL RATE OF RETURNa 27. The internal rate of return tends to be:a. easier for managers to comprehend than the net present value.b. extremely accurate even when cash flow estimates are faulty.c. ignored by most financial analysts.d. used primarily to differentiate between mutually exclusive projects.e. utilized in project analysis only when multiple net present values apply.Difficulty level: EasyINCREMENTAL INTERNAL RATE OF RETURNe 28. You are trying to determine whether to accept project A or project B. These projectsare mutually exclusive. As part of your analysis, you should computethe incremented IRR by determining:a. the internal rate of return for the cash flows of each project.b. the net present value of each project using the internal rate of return as the discountrate.c. the discount rate that equates the discounted payback periods for each project.d. the discount rate that makes the net present value of each project equal to 1.e. the internal rate of return for the differences in the cash flows of the two projects.Difficulty level: MediumINCREMENTAL INTERNAL RATE OF RETURNb 29. Graphing the incremental IRR helps explain:a. why one project is always superior to another project.b. how decisions concerning mutually exclusive projects are derived.c. how the duration of a project affects the decision as to which project to accept.d. how the net present value and the initial cash outflow of a project are related.e. how the profitability index and the net present value are related.Difficulty level: MediumPROFITABILITY INDEXd 30. The profitability index is closely related to:a. payback.b. discounted payback.c. the average accounting return.d. net present value.e. mutually exclusive projects.Difficulty level: EasyPROFITABILITY INDEXb 31. Analysis using the profitability index:a. frequently conflicts with the accept and reject decisions generated bythe application ofthe net present value rule.b. is useful as a decision tool when investment funds are limited.c. is useful when trying to determine which one of two mutually exclusive projectsshould be accepted.d. utilizes the same basic variables as those used in the average accounting return.e. produces results which typically are difficult to comprehend or apply.Difficulty level: MediumPROFITABILITY INDEXe 32. If you want to review a project from a benefit-cost perspective, you should use the_____ method of analysis.a. net present valueb. paybackc. internal rate of returnd. average accounting returne. profitability indexDifficulty level: EasyPROFITABILITY INDEXb 33. When the present value of the cash inflows exceeds the initial cost of a project, thenthe project should be:a. accepted because the internal rate of return is positive.b. accepted because the profitability index is greater than 1.c. accepted because the profitability index is negative.d. rejected because the internal rate of return is negative.e. rejected because the net present value is negative.Difficulty level: EasyMUTUALLY EXCLUSIVE PROJECTSc 34. Which one of the following is the best example of two mutually exclusive projects?a. planning to build a warehouse and a retail outlet side by sideb. buying sufficient equipment to manufacture both desks and chairs simultaneouslyc. using an empty warehouse for storage or renting it entirely out to another firmd. using the company sales force to promote sales of both shoes and sockse. buying both inventory and fixed assets using funds from the same bond issueDifficulty level: MediumMUTUALLY EXCLUSIVE PROJECTSd 35. The Liberty Co. is considering two projects. Project A consists of building a wholesalebook outlet on lot #169 of the Englewood Retail Center. Project B consists of buildinga sit-down restaurant on lot #169 of the Englewood Retail Center. When trying todecide whether or build the book outlet or the restaurant, management should relymost heavily on the analysis results from the _____ method of analysis.a. profitability indexb. internal rate of returnc. paybackd. net present valuee. accounting rate of returnDifficulty level: MediumMUTUALLY EXCLUSIVE PROJECTSc 36. When two projects both require the total use of the same limited economic resource,the projects are generally considered to be:a. independent.b. marginally profitable.c. mutually exclusive.d. acceptable.e. internally profitable.Difficulty level: EasyMUTUALLY EXCLUSIVE PROJECTSc 37. Matt is analyzing two mutually exclusive projects of similar size and has prepared thefollowing data. Both projects have 5 year lives.Project A Project B Net present value $15,090$14,693Payback period 2.76 years 2.51 yearsAverage accounting return 9.3 percent 9.6 percent Required return 8.3 percent8.0 percentRequired AAR 9.0 percent 9.0 percentMatt has been asked for his best recommendation given thisinformation. His recommendation should be to accept:a. project B because it has the shortest payback period.b. both projects as they both have positive net present values.c. project A and reject project B based on their net present values.d. project B and reject project A based on their average accounting returns.e. project B and reject project A based on both the payback period andthe averageaccounting return.Difficulty level: MediumINVESTMENT ANALYSISa 38. Given that the net present value (NPV) is generally considered to be the best methodof analysis, why should you still use the other methods?a. The other methods help validate whether or not the results from the net present value analysis are reliable.b. You need to use the other methods since conventional practice dictates that you onlyaccept projects after you have generated three accept indicators.c. You need to use other methods because the net present value method is unreliable when a project has unconventional cash flows.d. The average accounting return must always indicate acceptance since this is the bestmethod from a financial perspective.e. The discounted payback method must always be computed to determine if a projectreturns a positive cash flow since NPV does not measure this aspect of a project.Difficulty level: MediumINVESTMENT ANALYSISe 39. In actual practice, managers frequently use the:I. AAR because the information is so readily available.II. IRR because the results are easy to communicate and understand.III. payback because of its simplicity.IV. net present value because it is considered by many to be the best method of analysis.a. I and III onlyb. II and III onlyc. I, III, and IV onlyd. II, III, and IV onlye. I, II, III, and IVDifficulty level: MediumINVESTMENT ANALYSISa 40. No matter how many forms of investment analysis you do:a. the actual results from a project may vary significantly from the expected results.b. the internal rate of return will always produce the most reliable results.c. a project will never be accepted unless the payback period is met.d. the initial costs will generally vary considerably from the estimated costs.e. only the first three years of a project ever affect its final outcome.Difficulty level: EasyINVESTMENT ANALYSISb 41. Which of the following methods of project analysis are biased towards short-termprojects?I. internal rate of returnII. accounting rate of returnIII. paybackIV. discounted paybacka. I and II onlyb. III and IV onlyc. II and III onlyd. I and IV onlye. II and IV onlyDifficulty level: MediumINVESTMENT ANALYSISa 42. If a project is assigned a required rate of return equal to zero, then:a. the timing of the project’s cash flows has no bearing on the value of the project.b. the project will always be accepted.c. the project will always be rejected.d. whether the project is accepted or rejected will depend on the timing of the cash flows.e. the project can never add value for the shareholders.Difficulty level: MediumDECISION RULESe 43. You are considering a project with the following data:Internal rate of return 8.7 percentProfitability ratio .98Net present value -$393Payback period 2.44 yearsRequired return 9.5 percentWhich one of the following is correct given this information?a. The discount rate used in computing the net present value must have been less than 8.7percent.b. The discounted payback period will have to be less than 2.44 years.c. The discount rate used to compute the profitability ratio was equal to the internal rate of return.d. This project should be accepted based on the profitability ratio.e. This project should be rejected based on the internal rate of return.Difficulty level: MediumNET PRESENT VALUEc 44. A ccepting positive NPV projects benefits the stockholders because:a. it is the most easily understood valuation process.b. the present value of the expected cash flows are equal to the cost.c. the present value of the expected cash flows are greater than the cost.d. it is the most easily calculated.e. None of the above.Difficulty level: EasyNET PRESENT VALUEa 45. W hich of the following does not characterize NPV?a. NPV does not incorporate risk into the analysis.b. NPV incorporates all relevant information.c. NPV uses all of the project's cash flows.d. NPV discounts all future cash flows.e. Using NPV will lead to decisions that maximize shareholder wealth.Difficulty level: EasyPAYBACKe 46. T he payback period rule:a. discounts cash flows.b. ignores initial cost.c. always uses all possible cash flows in its calculation.d. Both A and C.e. None of the above.Difficulty level: EasyPAYBACKc 47. T he payback period rule accepts all investment projects in which thepayback period for the cash flows is:a. equal to the cutoff point.b. greater than the cutoff point.c. less than the cutoff point.d. positive.e. None of the above.Difficulty level: EasyPAYBACKd 48. T he payback period rule is a convenient and useful tool because:a. it provides a quick estimate of how rapidly the initial investment will berecouped.b. results of a short payback rule decision will be quickly seen.c. it does not take into account time value of money.d. All of the above.e. None of the above.Difficulty level: EasyDISCOUNTED PAYBACKa 49. T he discounted payback period rule:a. considers the time value of money.b. discounts the cutoff point.c. ignores uncertain cash flows.d. is preferred to the NPV rule.e. None of the above.Difficulty level: EasyPAYBACKc 50. T he payback period rule:a. determines a cutoff point so that all projects accepted by the NPV rulewill be accepted by the payback period rule.b. determines a cutoff point so that depreciation is just equal to positivecash flows in the payback year.c. requires an arbitrary choice of a cutoff point.d. varies the cutoff point with the interest rate.e. Both A and D.Difficulty level: EasyAVERAGE ACCOUNTING RETURNc 51. T he average accounting return is determined by:a. dividing the yearly cash flows by the investment.b. dividing the average cash flows by the investment.c. dividing the average net income by the average investment.d. dividing the average net income by the initial investment.e. dividing the net income by the cash flow.Difficulty level: EasyAVERAGE ACCOUNTING RETURNb 52. T he investment decision rule that relates average net income to averageinvestment is the:a. discounted cash flow method.b. average accounting return method.c. average payback method.d. average profitability index.e. None of the above.Difficulty level: EasyMODIFIED INTERNAL RATE OF RETURNd 53. M odified internal rate of return:a. handles the multiple IRR problem by combining cash flows until onlyone change in sign change remains.b. requires the use of a discount rate.c. does not require the use of a discount rate.d. Both A and B.e. Both A and C.Difficulty level: MediumAVERAGE ACCOUNTING RETURNd 54. T he shortcoming(s) of the average accounting return (AAR) method is(are):a. the use of net income instead of cash flows.b. the pattern of income flows has no impact on the AAR.c. there is no clear-cut decision rule.d. All of the above.e. None of the above.Difficulty level: MediumINTERNAL RATE OF RETURNe 55. T he two fatal flaws of the internal rate of return rule are:a. arbitrary determination of a discount rate and failure to consider initialexpenditures.b. arbitrary determination of a discount rate and failure to correctlyanalyze mutually exclusive investment projects.c. arbitrary determination of a discount rate and the multiple rate ofreturn problem.d. failure to consider initial expenditures and failure to correctly analyzemutually exclusive investment projects.e. failure to correctly analyze mutually exclusive investment projects andthe multiple rate of return problem.Difficulty level: MediumMUTUALLY EXCLUSIVE PROJECTSd 56. A mutually exclusive project is a project whose:a. acceptance or rejection has no effect on other projects.b. NPV is always negative.c. IRR is always negative.d. acceptance or rejection affects other projects.e. cash flow pattern exhibits more than one sign change.Difficulty level: EasyINTERNAL RATE OF RETURNd 57. A project will have more than one IRR if:a. the IRR is positive.b. the IRR is negative.c. the NPV is zero.d. the cash flow pattern exhibits more than one sign change.e. the cash flow pattern exhibits exactly one sign change.Difficulty level: EasyINTERNAL RATE OF RETURN RULESb 58. U sing internal rate of return, a conventional project should be acceptedif the internal rate of return is:a. equal to the discount rate.b. greater than the discount rate.c. less than the discount rate.d. negative.e. positive.Difficulty level: EasyINTERNAL RATE OF RETURNa 59. The internal rate of return may be defined as:a. the discount rate that makes the NPV cash flows equal to zero.b. the difference between the market rate of interest and the NPV.c. the market rate of interest less the risk-free rate.d. the project acceptance rate set by management.e. None of the above.Difficulty level: MediumMULTIPLE INTERNAL RATE OF RETURNSd 60. The problem of multiple IRRs can occur when:a. there is only one sign change in the cash flows.b. the first cash flow is always positive.c. the cash flows decline over the life of the project.d. there is more than one sign change in the cash flows.e. None of the above.Difficulty level: EasyTIMING AND SCALE ISSUES WITH INTERNAL RATE OF RETURNb 61. T he elements that cause problems with the use of the IRR in projectsthat are mutually exclusive are:a. the discount rate and scale problems.b. timing and scale problems.c. the discount rate and timing problems.d. scale and reversing flow problems.e. timing and reversing flow problems.Difficulty level: MediumNET PRESENT VALUE DECISIONc 62. If there is a conflict between mutually exclusive projects due to the IRR,one should:a. drop the two projects immediately.b. spend more money on gathering information.c. depend on the NPV as it will always provide the most value.d. depend on the AAR because it does not suffer from these sameproblems.e. None of the above.Difficulty level: MediumPROFITABILITY INDEXe 63. The profitability index is the ratio of:a. average net income to average investment.b. internal rate of return to current market interest rate.c. net present value of cash flows to internal rate of return.d. net present value of cash flows to average accounting return.e. present value of cash flows to initial investment cost.Difficulty level: EasyINVESTMENT DECISION RULESa 64. Which of the following statement is true?a. One must know the discount rate to compute the NPV of a project butone can compute the IRR without referring to the discount rate.b. One must know the discount rate to compute the IRR of a project butone can compute the NPV without referring to the discount rate.c. Payback accounts for time value of money.d. There will always be one IRR regardless of cash flows.e. Average accounting return is the ratio of total assets to total net income.Difficulty level: MediumCAPITAL BUDGETING PRACTICEb 65. Graham and Harvey (2001) found that ___ and ___ were the two mostpopular capital budgeting methods.a. Internal Rate of Return; Payback Periodb. Internal Rate of Return; Net Present Valuec. Net Present Value; Payback Periodd. Modified Internal Rate of Return; Internal Rate of Returne. Modified Internal Rate of Return; Net Present Value。
公司理财(英文版)题库7
e5.The length of time required for a project’s discounted cash flows to equal the initial cost of the project is called the:
present value.
e.only if the discounted payback period is equal to zero.
Difficulty level: Easy
AVERAGE ACCOUNTING RETURN
c7.An investment’s average net income divided by its average book value defines the average:
present value.
b.internal rate of return.
c.payback period.
d.profitability index.
e.discounted cash period.
Difficulty level: Easy
PAYBACK RULE
a4.Which one of the following statements is correct concerning the payback period?
b.An investment should be accepted only if the NPV is equal to the initial cash flow.
c.An investment should be accepted if the NPV is positive and rejected if it is negative.
罗斯《公司理财》英文习题答案DOCchap
30.1 The new corporation issues $300,000 in new debt. The merger creates $100,000 ofgoodwill because the merger is a purchase.Balance SheetLager Brewing(in $ thousands)Current assets $480 Current liabilities $200Other assets 140 Long-term debt 400Net fixed assets 580 Equity 700Goodwill 100Total assets $1,300 Total liabilities $1,300 30.2 If the balance sheet for Philadelphia Pretzel shows assets at book value instead of marketvalue, the goodwill will be only $60,000 (=$300,000 - $240,000). Thus, the net fixed assetsare $620,000 (=$1,300,000 - $480,000 - $140,000 - $60,000).Balance SheetLager Brewing(in $ thousands)Current assets $480 Current liabilities $200Other assets 140 Long-term debt 400Net fixed assets 620 Equity 700Goodwill 60Total assets $1,300 Total liabilities $1,300 30.3Balance SheetLager Brewing(in $ thousands)Current assets $480 Current liabilities $280Other assets 140 Long-term debt 100Net fixed assets 580 Equity 820Total assets $1,200 Total liabilities $1,200 30.4 a. False. Although the reasoning seems correct, the Stillman-Eckbo data do not supportthe monopoly power theory.b. True. When managers act in their own interest, acquisitions are an important controldevice for shareholders. It appears that some acquisitions and takeovers are theconsequence of underlying conflicts between managers and shareholders.c. False. Even if markets are efficient, the presence of synergy will make the value ofthe combined firm different from the sum of the values of the separate firms.Incremental cash flows provide the positive NPV of the transaction.d. False. In an efficient market, traders will value takeovers based on “Fundamentalfactors” regardless of the time horizon. Recall that the evidence as a whole suggestsefficiency in the markets. Mergers should be no different.e. False. The tax effect of an acquisition depends on whether the merger is taxable ornon-taxable. In a taxable merger, there are two opposing factors to consider, thecapital gains effect and the write-up effect. The net effect is the sum of these twoeffects.f. True. Because of the coinsurance effect, wealth might be transferred from thestockholders to the bondholders. Acquisition analysis usually disregards this effectand considers only the total value.30.530.6 a. The weather conditions are independent. Thus, the joint probabilities are theproducts of the individual probabilities.Possible states Joint probabilityRain Rain 0.1 x 0.1=0.01Rain Warm 0.1 x 0.4=0.04Rain Hot 0.1 x 0.5=0.05Warm Rain 0.4 x 0.1=0.04Warm Warm 0.4 x 0.4=0.16Warm Hot 0.4 x 0.5=0.20Hot Rain 0.5 x 0.1=0.05Hot Warm 0.5 x 0.4=0.20Hot Hot 0.5 x 0.5=0.25Since the state Rain Warm has the same outcome (revenue) as Warm Rain, theirprobabilities can be added. The same is true of Rain Hot, Hot Rain and Warm Hot,Hot Warm. Thus the joint probabilities arePossibleJoint probabilitystatesRain Rain 0.01Rain Warm 0.08Rain Hot 0.10Warm Warm 0.16Warm Hot 0.40Hot Hot 0.25The joint values are the sums of the values of the two companies for the particularstate.Possible states Joint valueRain Rain $200,000Rain Warm 300,000Warm Warm 400,000Rain Hot 500,000Warm Hot 600,000Hot Hot 800,000b. Recall, if a firm cannot service its debt, the bondholders receive the value of the assets.Thus, the value of the debt is the value of the company if the face value of the debt isgreater than the value of the company. If the value of the company is greater than the value of the debt, the value of the debt is its face value. Here the value of the common stock is always the residual value of the firm over the value of the debt.Joint Prob. Joint Value Debt Value Stock Value0.01 $200,000 $200,000 $00.08 300,000 300,000 00.16 400,000 400,000 00.10 500,000 400,000 100,0000.40 600,000 400,000 200,0000.25 800,000 400,000 400,000c. To show that the value of the combined firm is the sum of the individual values, youmust show that the expected joint value is equal to the sum of the separate expected values.Expected joint value= 0.01($200,000) + 0.08($300,000) + 0.16($400,000) + 0.10($500,000) +0.40($600,000) + 0.25($800,000)= $580,000Since the firms are identical, the sum of the expected values is twice the expectedvalue of either.Expected individual value = 0.1($100,000) + 0.4($200,000) + 0.5($400,000) = $290,000 Expected combined value = 2($290,000) = $580,000d. The bondholders are better off if the value of the debt after the merger is greater thanthe value of the debt before the merger.Value of the debt before the merger:The value of debt for either company= 0.1($100,000) + 0.4($200,000) + 0.5($200,000) = $190,000Total value of debt before the merger = 2($190,000) = $380,000Value of debt after the merger= 0.01($200,000) + 0.08($300,000) + 0.16($400,000) + 0.10($400,000) +0.40($400,000) +0.25($400,000)= $390,000The bondholders are $10,000 better off after the merger.30.7 The decision hinges upon the risk of surviving. The final decision should hinge on thewealth transfer from bondholders to stockholders when risky projects are undertaken.High-risk projects will reduce the expected value of the bondholders’ claims on the firm.The telecommunications business is riskier than the utilities business. If the total value of the firm does not change, the increase in risk should favor the stockholder. Hence,management should approve this transaction. Note, if the total value of the firm dropsbecause of the transaction and the wealth effect is lower than the reduction in total value, management should reject the project.30.8 If the market is “smart,” the P/E ratio will not be constant.a. Value = $2,500 + $1,000 = $3,500b. EPS = Post-merger earnings / Total number of shares=($100 + $100)/200 =$1c. Price per share = Value/Total number of shares=$3,500/200 =$17.50d. If the market is “fooled,” the P/E ratio will be constant at $25.Value = P/E * Total number of shares= 25 * 200 = $5,000EPS = Post-merger earnings / Total number of shares=$5,000/200 = $25.0030.9 a. After the merger, Arcadia Financial will have 130,000 [=10,000 + (50,000)(6/10)]shares outstanding. The earnings of the combined firm will be $325,000. The earningsper share of the combined firm will be $2.50 (=$325,000/130,000). The acquisition will increase the EPS for the stockholders from $2.25 to $2.50.b. There will be no effect on the original Arcadia stockholders. No synergies exist in thismerger since Arcadia is buying Coldran at its market price. Examining the relativevalues of the two firms sees the latter point.Share price of Arcadia = (16 * $225,000) / 100,000=$36Share price of Coldran = (10.8 * $100,000) / 50,000=$21.60The relative value of these prices is $21.6/$36 = 0.6. Since Coldran’s shareholdersreceive 0.6 shares of Arcadia for every share of Coldran, no synergies exist.30.10 a. The synergy will be the discounted incremental cash flows. Since the cash flows areperpetual, this amount isb. The value of Flash-in-the-Pan to Fly-by-Night is the synergy plus the current marketvalue of Flash-in-the-Pan.V = $7,500,000 + $20,000,000= $27,500,000c. Cash alternative = $15,000,000Stock alternative = 0.25($27,500,000 + $35,000,000)= $15,625,000d. NPV of cash alternative = V - Cost=$27,500,000 - $15,000,000=$12,500,000NPV of stock alternative = V - Cost=$27,500,000 - $15,625,000=$11,875,000e. Use the cash alternative, its NPV is greater.30.11 a. The value of Portland Industries before the merger is $9,000,000 (=750,000x12). Thisvalue is also the discounted value of the expected future dividends.$9,000,000 =r = 0.1025 = 10.25%r is the risk-adjusted discount rate for Portland’s expected future dividends.the value of Portland Industries after the merger isThis is the value of Portland Industries to Freeport.b. NPV = Gain - Cost= $14,815,385 - ($40x250, 000)= $4,815,385c. If Freeport offers stock, the value of Portland Industries to Freeport is the same, but thecost differs.Cost = (Fraction of combined firm owned by Portland’s stockholders)x(Value of the combined firm)Value of the combined firm = (Value of Freeport before merger)+ (Value of Portland to Freeport)= $15x1,000,000 + $14,815,385= $29,815,385Cost = 0.375x$29,815,385= $11,180,769NPV= $14,815,385 - $11,180,769=$3,634,616d. The acquisition should be attempted with a cash offer since it provides a higher NPV.e. The value of Portland Industries after the merger isThis is the value of Portland Industries to Freeport.NPV = Gain-Cost=$11,223,529 - ($40x250,000)=$1,223,529If Freeport offers stock, the value of Portland Industries to Freeport is the same, but the cost differs.Cost = (Fraction of combined firm owned by Portland’s stockholders)x(Value of the combined firm)Value of the combined firm = (Value of Freeport before merger)+ (Value of Portland to Freeport)= $15x1,000,000 + $11,223,529= $26,223,529Cost = 0.375 * $26,223,529=$9,833,823NPV = $11,223,529 - $9,833,823=$1,389,706The acquisition should be attempted with a stock offer since it provides a higher NPV.30.12 a. Number of shares after acquisition=30 + 15 = 45 milStock price of Harrods after acquisition = 1,000/45=22.22 poundsb. Value of Selfridge stockholders after merger:α * 1,000 = 300α = 30%New shares issued = 12.86 mil12.86:20 = 0.643:1The proper exchange ratio should be 0.643 to make the stock offer’s value to Selfridgeequivalent to the cash offer.30.13 To evaluate this proposal, look at the present value of the incremental cash flows.Cash Flows to Company A(in $ million)Year 0 1 2 3 4 5Acquisition of B -550Dividends from B 150 32 5 20 30 45Tax-loss carryforwards 25 25Terminal value 600Total -400 32 30 45 30 645 The additional cash flows from the tax-loss carry forwards and the proposed level of debt should be discounted at the cost of debt because they are determined with very littleuncertainty.The after-tax cash flows are subject to normal business risk and must be discounted at anormal rate.Beta coefficient for the bond = 0.25 = [(8%-6%)/8%].Beta coefficient for the company = 1 = [(0.25)2 + (1.25)(0.75)]Discount rate for normal operations:r = 6% + 8% (1) = 14%Discount rate for dividends:The new beta coefficient for the company, 1, must be the weighted average of the debtbeta and the stock beta.1 = 0.5(0.25) + 0.5(βs)βs = 1.75r = 6% + 8%(1.75) = 20%Because the NPV of the acquisition is negative, Company A should not acquireCompany B.30.14 The commonly used defensive tactics by target-firm managers include:i. corporate charter amendments like super-majority amendment or staggering theelection of board members.ii. repurchase standstill agreements.iii. exclusionary self-tenders.iv. going private and leveraged buyouts.v. other devices like golden parachutes, scorched earth strategy, poison pill, ..., etc.Mini Case: U.S.Steel’s case.You have 3 choices: tender, or do not tender or sell in the market. If you do sell your shares in the market, at some point, somebody else would need to make a decision in “tender” or “not tender” as well.It is important to recognize that the firm has about 60 million shares outstanding (since 30 million shares will give US Steel 50.1% of Marathon shares). Let’s consider the possible sellingthe market price.If you choose not to tender, and 30 million shares were tendered US Steel succeeds to gain50.1% control, you will only receive $85 a share. If you do tender, the price you will receive will be no worse than $85 a share and can be as high as $125 a share. Depending on the number of shares tendered, you will receive one of the following prices.If only 50.1% tendered, you will get $125 per share.If the shares tendered exceed 50.1% but less than 100%, you will get more than $105 ashare.If all 60 million shares were tendered, you will get $105 per share. (which is )It is clear that, in the above 3 cases, when you are not sure about whether US Steel will succeed or not, you will be better off to tender your shares than not tender. This is because at best, you will only receive $85 per share if you choose not to tender.版权申明本文部分内容，包括文字、图片、以及设计等在网上搜集整理。
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CHAPTER 15Capital Structure: Basic Concepts Multiple Choice Questions:I. DEFINITIONSHOMEMADE LEVERAGEa 1. The use of personal borrowing to change the overall amount of financial leverage to which anindividual is exposed is called:leverage.a. homemaderecapture.b. dividendc. the weighted average cost of capital.d. privateplacement.debtoffset.e. personalDifficulty level: EasyMM PROPOSITION Ib 2. The proposition that the value of the firm is independent of its capital structure is called:a. the capital asset pricing model.b. MM Proposition I.c. MM Proposition II.d. the law of one price.e. the efficient markets hypothesis.Difficulty level: EasyMM PROPOSITION IIc 3. The proposition that the cost of equity is a positive linear function of capital structure is called:a. the capital asset pricing model.b. MM Proposition I.c. MM Proposition II.d. the law of one price.e. the efficient markets hypothesis.Difficulty level: MediumINTEREST TAX SHIELDa 4. The tax savings of the firm derived from the deductibility of interest expense is called the:a. interestshield.taxbasis.b. depreciableumbrella.c. financingd. currentyield.e. tax-loss carryforward savings.Difficulty level: EasyUNLEVERED COST OF CAPITALb 5. The unlevered cost of capital is:a. the cost of capital for a firm with no equity in its capital structure.b. the cost of capital for a firm with no debt in its capital structure.c. the interest tax shield times pretax net income.d. the cost of preferred stock for a firm with equal parts debt and common stock in its capitalstructure.e. equal to the profit margin for a firm with some debt in its capital structure.Difficulty level: EasyWEIGHTED AVERAGE COST OF CAPITALe 6. The cost of capital for a firm, rWACC, in a zero tax environment is:a. equal to the expected earnings divided by market value of the unlevered firm.b. equal to the rate of return for that business risk class.c. equal to the overall rate of return required on the levered firm.d. is constant regardless of the amount of leverage.e. All of the above.Difficulty level: MediumBALANCE SHEETd 7. The difference between a market value balance sheet and a book value balance sheet is that amarket value balance sheet:a. places assets on the right hand side.b. places liabilities on the left hand side.c. does not equate the right hand with the left hand side.d. lists items in terms of market values, not historical costs.e. uses the market rate of return.Difficulty level: EasyCAPITAL STRUCTURE DEFINITIONd 8. The firm's capital structure refers to:a. the way a firm invests its assets.b. the amount of capital in the firm.c. the amount of dividends a firm pays.d. the mix of debt and equity used to finance the firm's assets.e. how much cash the firm holds.Difficulty level: EasyII. CONCEPTSMAXIMIZATION OF FIRM VALUEb 9. A general rule for managers to follow is to set the firm's capital structure such that:a. the firm's value is minimized.b. the firm's value is maximized.c. the firm's bondholders are made well off.d. the firms suppliers of raw materials are satisfied.e. the firms dividend payout is maximized.Difficulty level: EasyTHE LEVERED FIRMb 10. A levered firm is a company that has:a. Accounts Payable as the only liability on the balance sheet.b. has some debt in the capital structure.c. has all equity in the capital structure.d. All of the above.e. None of the above.Difficulty level: EasyCAPITAL STRUCTURE AND THE MANAGERa 11. A manager should attempt to maximize the value of the firm by:a. changing the capital structure if and only if the value of the firm increases.b. changing the capital structure if and only if the value of the firm increases to the benefits toinside management.c. changing the capital structure if and only if the value of the firm increases only to the benefitsthe debtholders.d. changing the capital structure if and only if the value of the firm increases although itdecreases the stockholders' value.e. changing the capital structure if and only if the value of the firm increases and stockholderwealth is constant.Difficulty level: EasyEPS-EBI ANALYSISd 12. The effect of financial leverage depends on the operating earnings of the company. Which ofthe following is not true?a. Below the indifference or break-even point in EBIT the non-levered structure is superior.b. Financial leverage increases the slope of the EPS line.c. Above the indifference or break-even point the increase in EPS for all equity plans is less thandebt-equity plans.d. Above the indifference or break-even point the increase in EPS for all equity plans is greaterthan debt-equity plans.e. The rate of return on operating assets is unaffected by leverage.Difficulty level: MediumMM PROPOSITION Ia 13. The Modigliani-Miller Proposition I without taxes states:a. a firm cannot change the total value of its outstanding securities by changing its capitalstructure proportions.b. when new projects are added to the firm the firm value is the sum of the old value plus the new.c. managers can make correct corporate decisions that will satisfy all shareholders if they selectprojects that maximize value.d. the determination of value must consider the timing and risk of the cash flows.e. None of the above.Difficulty level: MediumMM PROPOSITION Ie 14. MM Proposition I without taxes is used to illustrate:a. the value of an unlevered firm equals that of a levered firm.b. that one capital structure is as good as another.c. leverage does not affect the value of the firm.d. capital structure changes have no effect stockholder's welfare.e. All of the above.Difficulty level: MediumMM PROPOSITION Ic 15. A key assumption of MM's Proposition I without taxes is:a. that financial leverage increases risk.b. that individuals can borrow on their own account at rates less than the firm.c. that individuals must be able to borrow on their own account at rates equal to the firm.d. managers are acting to maximize the value of the firm.e. All of the above.Difficulty level: MediumEPS-EBI ANALYSISc 16. In an EPS-EBI graphical relationship, the slope of the debt ray is steeper than the equity ray.The debt ray has a lower intercept because:a. more shares are outstanding for the same level of EBI.b. the break-even point is higher with debt.c. a fixed interest charge must be paid even at low earnings.d. the amount of interest per share has only a positive effect on the intercept.e. the higher the interest rate the greater the slope.Difficulty level: MediumEPS-EBI ANALYSISb 17. In an EPS-EBI graphical relationship, the debt ray and equity ray cross. At this point theequity and debt are:a. equivalent with respect to EPS but above and below this point equity is always superior.b. at breakeven in EPS but above this point debt increases EPS via leverage and decreases EPSbelow this point.c. equal but away from breakeven equity is better as fewer shares are outstanding.d. at breakeven and MM Proposition II states that debt is the better choice.e. at breakeven and debt is the better choice below breakeven because small payments can bemade.Difficulty level: MediumEPS-EBI ANALYSISc 18. When comparing levered vs. unlevered capital structures, leverage works to increase EPS forhigh levels of EBIT because:a. interest payments on the debt vary with EBIT levels.b. interest payments on the debt stay fixed, leaving less income to be distributed over less shares.c. interest payments on the debt stay fixed, leaving more income to be distributed over lessshares.d. interest payments on the debt stay fixed, leaving less income to be distributed over moreshares.e. interest payments on the debt stay fixed, leaving more income to be distributed over moreshares.Difficulty level: MediumFINANCIAL LEVERAGEd 19. Financial leverage impacts the performance of the firm by:a. increasing the volatility of the firm's EBIT.b. decreasing the volatility of the firm's EBIT.c. decreasing the volatility of the firm's net income.d. increasing the volatility of the firm's net incomee. None of the above.Difficulty level: MediumEPS AND RISK TO EQUITYHOLDERSb 20. The increase in risk to equityholders when financial leverage is introduced is evidenced by:a. higher EPS as EBIT increases.b. a higher variability of EPS with debt than all equity.c. increased use of homemade leverage.d. equivalence value between levered and unlevered firms in the presence of taxes.e. None of the above.Difficulty level: MediumMM PROPOSITION Ia 21. The reason that MM Proposition I does not hold in the presence of corporate taxation isbecause:a. levered firms pay less taxes compared with identical unlevered firms.b. bondholders require higher rates of return compared with stockholders.c. earnings per share are no longer relevant with taxes.d. dividends are no longer relevant with taxes.e. All of the above.Difficulty level: MediumMM PROPOSITION Id 22. MM Proposition I with corporate taxes states that:a. capital structure can affect firm value.b. by raising the debt-to-equity ratio, the firm can lower its taxes and thereby increase its totalvalue.c. firm value is maximized at an all debt capital structure.d. All of the above.e. None of the above.Difficulty level: MediumFIRM VARIATION WITH CORPORATE TAXESb 23. The change in firm value in the presence of corporate taxes only is:a. positive as equityholders face a lower effective tax rate.b. positive as equityholders gain the tax shield on the debt interest.c. negative because of the increased risk of default and fewer shares outstanding.d. negative because of a reduction of equity outstanding.e. None of the above.Difficulty level: MediumCAPITAL STRUCTUREb 24. A firm should select the capital structure which:a. produces the highest cost of capital.b. maximizes the value of the firm.c. minimizestaxes.fullyunlevered.d. isdebt.noe. hasDifficulty level: MediumMM WITHOUT TAXESd 25. In a world of no corporate taxes if the use of leverage does not change the value of the leveredfirm relative to the unlevered firm this is known as:a. MM Proposition III that the cost of stock is less than the cost of debt.b. MM Proposition I that leverage is invariant to market value.c. MM Proposition II that the cost of equity is always constant.d. MM Proposition I that the market value of the firm is invariant to the capital structure.e. MM Proposition III that there is no risk associated with leverage in a no tax world.Difficulty level: MediumHOMEMADE LEVERAGEd 26. Bryan invested in Bryco, Inc. stock when the firm was financed solely with equity. The firm isnow utilizing debt in its capital structure. To unlever his position, Bryan needs to:a. borrow some money and purchase additional shares of Bryco stock.b. maintain his current position as the debt of the firm did not affect his personal leverageposition.c. sell some shares of Bryco stock and hold the proceeds in cash.d. s ell some shares of Bryco stock and loan it out such that he creates a personal debt-equity ratioequal to that of the firm.e. create a personal debt-equity ratio that is equal to exactly 50% of the debt-equityratio of the firm.Difficulty level: MediumHOMEMADE LEVERAGEe 27. The capital structure chosen by a firm doesn’t really matter because of:a. taxes.b. the interest tax shield.c. the relationship between dividends and earnings per share.d. the effects of leverage on the cost of equity.leverage.e. homemadeDifficulty level: MediumMM PROPOSITION I, NO TAXc 28. MM Proposition I with no tax supports the argument that:a. business risk determines the return on assets.b. the cost of equity rises as leverage rises.c. it is completely irrelevant how a firm arranges its finances.d. a firm should borrow money to the point where the tax benefit from debt is equal to thecost of the increased probability of financial distress.e. financial risk is determined by the debt-equity ratio.Difficulty level: MediumMM PROPOSITION I, NO TAXa 29. The proposition that the value of a levered firm is equal to the value of an unleveredfirm is known as:a. MM Proposition I with no tax.b. MM Proposition II with no tax.c. MM Proposition I with tax.d. MM Proposition II with tax.proposition.theorye. staticDifficulty level: MediumMM PROPOSITION I, NO TAXa 30. The concept of homemade leverage is most associated with:a. MM Proposition I with no tax.b. MM Proposition II with no tax.c. MM Proposition I with tax.d. MM Proposition II with tax.proposition.e. statictheoryDifficulty level: MediumMM PROPOSITION II, NO TAXc 31. Which of the following statements are correct in relation to MM Proposition II withtaxes?noI. The return on assets is equal to the weighted average cost of capital.II. Financial risk is determined by the debt-equity ratio.III. Financial risk determines the return on assets.IV. The cost of equity declines when the amount of leverage used by a firm rises.a. I and III onlyb. II and IV onlyc. I and II onlyd. III and IV onlye. I and IV onlyDifficulty level: MediumMM PROPOSITION I, WITH TAXa 32. MM Proposition I with taxes supports the theory that:a. there is a positive linear relationship between the amount of debt in a levered firm andvalue.itsb. the value of a firm is inversely related to the amount of leverage used by the firm.c. t he value of an unlevered firm is equal to the value of a levered firm plus the value of theinterest tax shield.d. a firm’s cost of capital is the same regardless of the mix of debt and equity used by the firm.e. a firm’s weighted average cost of capital increases as the debt-equity ratio of the firm rises.Difficulty level: MediumMM PROPOSITION I, WITH TAXd 33. MM Proposition I with taxes is based on the concept that:a. the optimal capital structure is the one that is totally financed with equity.b. the capital structure of the firm does not matter because investors can use homemade leverage.c. the firm is better off with debt based on the weighted average cost of capital.d. the value of the firm increases as total debt increases because of the interest tax shield.e. the cost of equity increases as the debt-equity ratio of a firm increases.Difficulty level: MediumMM PROPOSITION II, WITH TAXa 34. MM Proposition II with taxes:a. has the same general implications as MM Proposition II without taxes.b. reveals how the interest tax shield relates to the value of a firm.c. supports the argument that business risk is determined by the capital structureemployed by a firm.d. supports the argument that the cost of equity decreases as the debt-equity ratioincreases.e. reaches the final conclusion that the capital structure decision is irrelevant to the valueof a firm.Difficulty level: MediumMM PROPOSITION IIc 35. MM Proposition II is the proposition that:a. supports the argument that the capital structure of a firm is irrelevant to the value offirm.theb. the cost of equity depends on the return on debt, the debt-equity ratio and the taxrate.c. a firm’s cost of equity capital is a positive linear function of the firm’s capitalstructure.d. the cost of equity is equivalent to the required return on the total assets of a firm.e. supports the argument that the size of the pie does not depend on how the pie is sliced.Difficulty level: MediumINTEREST TAX SHIELDc 36. The interest tax shield has no value for a firm when:I. the tax rate is equal to zero.II. the debt-equity ratio is exactly equal to 1.III. the firm is unlevered.IV. a firm elects 100% equity as its capital structure.a. I and III onlyb. II and IV onlyc. I, III, and IV onlyd. II, III, and IV onlye. I, II, and IV onlyDifficulty level: MediumINTEREST TAX SHIELDc 37. The interest tax shield is a key reason why:a. the required rate of return on assets rises when debt is added to the capital structure.b. the value of an unlevered firm is equal to the value of a levered firm.c. the net cost of debt to a firm is generally less than the cost of equity.d. the cost of debt is equal to the cost of equity for a levered firm.e. firms prefer equity financing over debt financing.Difficulty level: MediumINTEREST TAX SHIELDd 38. Which of the following will tend to diminish the benefit of the interest tax shield givena progressive tax rate structure?I. a reduction in tax ratesII. a large tax loss carryforwardIII. a large depreciation tax deductionIV. a sizeable increase in taxable incomea. I and II onlyb. I and III onlyc. II and III onlyd. I, II, and III onlye. I, II, III, and IVDifficulty level: MediumIII. PROBLEMSMM PROPOSITION I, NO TAXa 39. Thompson & Thomson is an all equity firm that has 500,000 shares of stock outstanding. Thecompany is in the process of borrowing $8 million at 9% interest to repurchase 200,000 sharesof the outstanding stock. What is the value of this firm if you ignore taxes?a. $20.0millionmillionb. $20.8millionc. $21.0milliond. $21.2millione. $21.3Difficulty level: MediumMM PROPOSITION I, NO TAXc 40. Uptown Interior Designs is an all equity firm that has 40,000 shares of stock outstanding. Thecompany has decided to borrow $1 million to buy out the shares of a deceased stockholder who holds 2,500 shares. What is the total value of this firm if you ignore taxes?milliona. $15.5millionb. $15.6millionc. $16.0d. $16.8millionmillione. $17.2Difficulty level: MediumMM PROPOSITION I, NO TAXe 41. You own 25% of Unique Vacations, Inc. You have decided to retire and want to sell yourshares in this closely held, all equity firm. The other shareholders have agreed to have the firm borrow $1.5 million to purchase your 1,000 shares of stock. What is the total value of this firm today if you ignore taxes?a. $4.8millionmillionb. $5.1millionc. $5.4milliond. $5.7millione. $6.0Difficulty level: MediumMM PROPOSITION II, NO TAXd 42. Your firm has a debt-equity ratio of .75. Your pre-tax cost of debt is 8.5% and your requiredreturn on assets is 15%. What is your cost of equity if you ignore taxes?a. 11.25%b. 12.21%c. 16.67%d. 19.88%e. 21.38%Difficulty level: MediumMM PROPOSITION II, NO TAXb 43. Bigelow, Inc. has a cost of equity of 13.56% and a pre-tax cost of debt of 7%. The requiredreturn on the assets is 11%. What is the firm’s debt-equity ratio based on MM Proposition IIwith no taxes?a. .60b. .64c. .72d. .75e. .80Difficulty level: MediumMM PROPOSITION II, NO TAXd 44. The Backwoods Lumber Co. has a debt-equity ratio of .80. The firm’s required return onassets is 12% and its cost of equity is 15.68%. What is the pre-tax cost of debt based on MMProposition II with no taxes?a. 6.76%b. 7.00%c. 7.25%d. 7.40%e. 7.50%Difficulty level: MediumMM PROPOSITION I, WITH TAXb 45. The Winter Wear Company has expected earnings before interest and taxes of $2,100, anunlevered cost of capital of 14% and a tax rate of 34%. The company also has $2,800 of debtthat carries a 7% coupon. The debt is selling at par value. What is the value of this firm?a. $9,900b. $10,852c. $11,748d. $12,054e. $12,700Difficulty level: MediumMM PROPOSITION I, WITH TAXb 46. Gail’s Dance Studio is currently an all equity firm that has 80,000 shares of stock outstandingwith a market price of $42 a share. The current cost of equity is 12% and the tax rate is 34%.Gail is considering adding $1 million of debt with a coupon rate of 8% to her capital structure.The debt will be sold at par value. What is the levered value of the equity?milliona. $2.4b. $2.7millionmillionc. $3.3milliond. $3.7millione. $3.9Difficulty level: MediumMM PROPOSITION I, WITH TAXc 47. The Montana Hills Co. has expected earnings before interest and taxes of $8,100, an unleveredcost of capital of 11%, and debt with both a book and face value of $12,000. The debt has anannual 8% coupon. The tax rate is 34%. What is the value of the firm?a. $48,600b. $50,000c. $52,680d. $56,667e. $60,600Difficulty level: MediumMM PROPOSITION I, WITH TAXc 48. Scott’s Leisure Time Sports is an unlevered firm with an after-tax net income of $86,000. Theunlevered cost of capital is 10% and the tax rate is 34%. What is the value of this firm?a. $567,600b. $781,818c. $860,000d. $946,000e. $1,152,400Difficulty level: EasyMM PROPOSITION I, WITH TAXc 49. An unlevered firm has a cost of capital of 14% and earnings before interest and taxes of$150,000. A levered firm with the same operations and assets has both a book value and a facevalue of debt of $700,000 with a 7% annual coupon. The applicable tax rate is 35%. What is thevalue of the levered firm?a. $696,429b. $907,679c. $941,429d. $1,184,929e. $1,396,429Difficulty level: MediumMM PROPOSITION II, WITH TAXc 50. The Spartan Co. has an unlevered cost of capital of 11%, a cost of debt of 8%,and a tax rate of 35%. What is the target debt-equity ratio if the targeted costof equity is 12%?a. .44b. .49c. .51d. .56e. .62Difficulty level: MediumMM PROPOSITION II, WITH TAXd 51. Hey Guys!, Inc. has debt with both a face and a market value of $3,000. This debt has a couponrate of 7% and pays interest annually. The expected earnings before interest and taxes is $1,200, the tax rate is 34%, and the unlevered cost of capital is 12%. What is the firm’s cost of equity?a. 13.25%b. 13.89%c. 13.92%d. 14.14%e. 14.25%Difficulty level: ChallengeMM PROPOSITION II, WITH TAXe 52. Anderson’s Furniture Outlet has an unlevered cost of capital of 10%, a tax rate of 34%, andexpected earnings before interest and taxes of $1,600. The company has $3,000 in bondsoutstanding that have an 8% coupon and pay interest annually. The bonds are selling at parvalue. What is the cost of equity?a. 8.67%b. 9.34%c. 9.72%d. 9.99%e. 10.46%Difficulty level: ChallengeMM PROPOSITION II, WITH TAXb 53. Walter’s Distributors have a cost of equity of 13.84% and an unlevered cost of capital of 12%.The company has $5,000 in debt that is selling at par value. The levered value of the firm is$12,000 and the tax rate is 34%. What is the pre-tax cost of debt?a. 7.92%b. 8.10%c. 8.16%d. 8.84%e. 9.00%Difficulty level: MediumMM PROPOSITION II, WITH TAXb 54. Rosita’s has a cost of equity of 13.8% and a pre-tax cost of debt of 8.5%. The debt-equity ratiois .60 and the tax rate is .34. What is Rosita’s unlevered cost of capital?a. 8.83%b. 12.30%c. 13.97%d. 14.08%e. 14.60%Difficulty level: MediumMM PROPOSITION II, WITH TAXe 55. Your firm has a pre-tax cost of debt of 7% and an unlevered cost of capital of 13%.Your tax rate is 35% and your cost of equity is 15.26%. What is your debt-equity ratio?a. .43b. .49c. .51d. .54e. .58Difficulty level: MediumMM PROPOSITION II, WITH TAXc 56. Wild Flowers Express has a debt-equity ratio of .60. The pre-tax cost of debt is 9% while theunlevered cost of capital is 14%. What is the cost of equity if the tax rate is 34%?a. 7.52%b. 8.78%c. 15.98%d. 16.83%e. 17.30%Difficulty level: MediumINTEREST TAX SHIELDa 57. Your firm has a $250,000 bond issue outstanding. These bonds have a 7% coupon, pay interestsemiannually, and have a current market price equal to 103% of face value. What is the amount of the annual interest tax shield given a tax rate of 35%?a. $6,125b. $6,309c. $9,500d. $17,500e. $18,025Difficulty level: EasyINTEREST TAX SHIELDd 58. Bertha’s Boutique has 2,000 bonds outstanding with a face value of $1,000 each and a couponrate of 9%. The interest is paid semi-annually. What is the amount of the annual interest taxshield if the tax rate is 34%?a. $58,500b. $60,100c. $60,750d. $61,200e. $62,250Difficulty level: EasyINTEREST TAX SHIELDc 59. Juanita’s Steak House has $12,000 of debt outstanding that is selling at par and has a couponrate of 8%. The tax rate is 34%. What is the present value of the tax shield?a. $2,823b. $2,887c. $4,080d. $4,500e. $4,633Difficulty level: MediumWEIGHTED AVERAGE COST OF CAPITALd 60. A firm has debt of $5,000, equity of $16,000, a leveraged value of $8,900, a cost of debt of 8%,a cost of equity of 12%, and a tax rate of 34%. What is the firm’s weighted average cost ofcapital?a. 7.29%b. 7.94%c. 8.87%d. 10.40%e. 11.05%Difficulty level: MediumCOST OF EQUITYc 61. A firm has zero debt in its capital structure. Its overall cost of capital is 10%. The firm isconsidering a new capital structure with 60% debt. The interest rate on the debt would be 8%.Assuming there are no taxes or other imperfections, its cost of equity capital with the newcapital structure would be ______ .a. 9%b. 10%c. 13%d. 14%e. None of the above.Difficulty level: MediumCOST OF EQUITYc 62. A firm has a debt-to-equity ratio of .60. Its cost of debt is 8%. Its overall cost of capital is 12%.What is its cost of equity if there are no taxes or other imperfections?a. 10.0%b. 13.5%c. 14.4%d. 18.0%e. None of the above.Difficulty level: MediumCOST OF EQUITYc 63. A firm has a debt-to-equity ratio of 1. Its cost of equity is 16%, and its cost of debt is 8%. Ifthere are no taxes or other imperfections, what would be its cost of equity if the debt-to-equityratio were 0?a. 8%b. 10%c. 12%d. 14%e. 16%Difficulty level: ChallengeCOST OF EQUITYd 64. A firm has a debt-to-equity ratio of 1.20. If it had no debt, its cost of equity would be 15%. Itscost of debt is 10%. What is its cost of equity if there are no taxes or other imperfections?a. 10%b. 15%c. 18%d. 21%e. None of the above.Difficulty level: EasyCOST OF EQUITYd 65. If a firm is unlevered and has a cost of equity capital 12%, what would its cost of equity be ifits debt-equity ratio became 2? The expected cost of debt is 8%.a. 14.0%b. 14.67%c. 16.0%d. 20.0%e. None of the above.Difficulty level: MediumCOST OF EQUITY WITH DEBTc 66. A firm has zero debt in its capital structure. Its overall cost of capital is 9%. The firm isconsidering a new capital structure with 40% debt. The interest rate on the debt would be 4%.Assuming that the corporate tax rate is 34%, what would its cost of equity capital with the newcapital structure be?a. 10.3%b. 11.0%c. 11.2%d. 13.9%e. None of the above.Difficulty level: ChallengeCOST OF EQUITY WITH DEBTb 67. A firm has a debt-to-equity ratio of 1. Its cost of equity is 16%, and its cost of debt is 8%. Ifthe corporate tax rate is 25%, what would its cost of equity be if the debt-to-equity ratio were 0?a. 11.11%b. 12.57%c. 13.33%d. 16.00%e. None of the above.Difficulty level: ChallengeCOST OF EQUITYb 68. A firm has a debt-to-equity ratio of .5. Its cost of equity is 22%, and its cost of debt is 16%. Ifthe corporate tax rate is .40, what would its cost of equity be if the debt-to-equity ratio were 0?a. 14.00%b. 20.61%c. 21.07%d. 22.00%e. None of the above.Difficulty level: Challenge。