Exam: 081775RR - Capital Management
1. Suppose that shares in Tasty Bites Pizza, Inc., are trading for $46 per share, with 6 million shares outstanding. If the firm also has 12,000 bonds outstanding and they're selling at 97 percent of par, what are the firm's current capital structure weights?
A. Equity 4.05 percent; debt 95.95 percent
B. Equity 85.15 percent; debt 14.85 percent
C. Equity 95.95 percent; debt 4.05 percent
D. Equity 14.85 percent; debt 85.15 percent
2. A graph of a project's NPV as a function of possible capital costs is called the _______ profile.
A. beta
B. NPV
C. standard deviation
D. IRR
3. The portion of the necessary increase in assets to support an increase in sales that will need to be funded from external capital is called
A. capital deficit.
B. additional funds needed.
C. excess funding requirement.
D. funds from operations.
4. Your firm purchases a business copier that costs $14,000 and requires $3,000 in maintenance for each year of its four-year life. After four years, the copier will be replaced. The copier falls into the MACRS three-year class life category. Use Table 12.8 on page 415 in your textbook for DDB depreciation. Assuming a tax rate of 32 percent, what's the depreciation tax shield for this project in year 4?
A. $541.24
B. $421.45
C. $521.54
D. $331.97
5. What's the appropriate tax rate to be used in WACC?
A. The simple average of the tax rates that would have been paid on the taxable income shielded by the interest deduction
B. The highest applicable tax rate charged on the firm's income
C. The weighted average of the marginal tax rates that would have been paid on the taxable income shielded by the interest deduction
D. The weighted average of the firm's discounted current marginal tax rates
6. When analyzing the risk of a new project, what can be used to provide a fairly accurate estimate of the new project's beta?
A. Proxy betas
B. The separation principle
C. Flotation costs
D. The component cost of debt
7. Your company is thinking about a new project that will require $2.2 million of new equipment at the start of the project. The equipment will have a depreciable life of 12 years and will depreciate to a book value of $400,000 using the straight-line depreciation method. The cost of capital is 15 percent, and the firm's tax rate is 36 percent. What will the yearly after-tax depreciation benefit to the company be over the depreciable life of the
equipment?
A. $54,000
B. $64,000
C. $96,000
D. $128,000
8. The most common reason firms have unused fixed-asset capacity is that fixed assets
A. are subject to depreciation.
B. usually aren't infinitely divisible.
C. are tax deductible.
D. can't be purchased on credit.
9. In what way can a firm greatly reduce the problem associated with basing its decisions on inaccurate results from using firm-wide WACC for all projects?
A. Calculate WACCs for each division separately.
B. Calculate WACCs firm-wide using the objective approach.
C. Calculate WACCs using the separation principle.
D. Use proxy betas to calculate WACCs.
10. Venture Forth Enterprises estimates that it takes five days on average for customers' payments to arrive, two days for bookkeepers to process and deposit the payments, and three more days for the checks to clear after being deposited. What is Venture Forth's collection float?
A. 8 days
B. 5 days
C. 10 days
D. 7 days
11. Super Fun Toys, Inc., has the following balance sheet:
Suppose Super Fun Toys, Inc., has sales of $8.9 million for the year just ended, the profit margin of the firm is 16 percent with a retention rate of 28 percent, and the firm expects sales of $9.8 million next year. If all assets and current liabilities are expected to grow with sales, what amount of additional funds will Super Fun Toys need from external sources to fund the expected growth?
A. $187,925
B. $552,800
C. $368,484
D. $689,500
12. With the help of its investment bank, Terrestrial Travel Tours recently issued $314 million of new debt. The offer price on the debt was $1,000 per bond, and the underwriter's spread was 6 percent of the gross proceeds. What's the amount of capital funding Terrestrial Travel Tours raised through this bond issue?
A. $312,420,000
B. $287,469,000
C. $314,896,000
D. $295,160,000
13. What do financial managers use to help them plan for periods during the year in which their firm will either generate large cash surpluses or cash deficits?
A. The cash budget
B. The Miller-Orr model
C. The operating cycle
D. The Baumol model
14. The time necessary to acquire raw materials, turn them into finished goods, sell them, and receive payment for them is referred to as the _______ cycle.
A. manufacturing
B. cash
C. operating
D. sales
15. Your firm is considering a project with the following timeline and cash flows:
l Year 0: –$14,000
l Year 1: $2,880
l Year 2: $3,146
l Year 3: $2,548
l Year 4: $3,682
What's the IRR statistic for the project, and should the firm accept or reject the project if the appropriate cost of capital is 11 percent?
A. –5.2 percent; Reject
B. 14.2 percent; Accept
C. –2.8 percent; Reject
D. 11.4 percent; Accept
16. The Miller-Orr model is more realistic than the Baumol model because it
A. deals with both cash inflows and outflows.
B. includes compensation balances.
C. assumes cash starts from a replenishment level.
D. accounts for taxes.
17. A firm has the following sale figures:
l Year 2011: $4.6 million;
l Year 2012: $5.1 million
l Year 2013: $4.2 million
l Year 2014: $3.8 million
l Year 2015: $4.3 million
What would the forecast for the next year's sales be using the average approach?
A. $5.1 million
B. $5.4 million
C. $4.4 million
D. $3.2 million
18. What's declared about a dividend on a stock's declaration date?
A. Ex-dividend data and a record date
B. A closing date and an ex-dividend date
C. A record date and a payment date
D. Payment data and an ex-dividend date
19. Your firm is considering a project with the following timeline and cash flows:
l Year 0: –$1,800
l Year 1: $880
l Year 2: $948
l Year 3: $1,231
l Year 4: $845
l Year 5: $1,586
If the appropriate cost of capital is 7 percent, what's the PI statistic for the project, and should the firm accept or
reject the project?
A. 2.46; Reject
B. 0.54; Reject
C. 0.54; Accept
D. 2.46; Accept
20. Suppose that Fortunate Ventures, Inc.'s, common shares are currently selling for $23 a share with 7 million shares outstanding. The firm also has 12,000 bonds outstanding, which are selling at 96 percent of par. If Fortunate Ventures was considering an active change to its capital structure to have a D/E ratio of 0.5, which type of security (stock or bonds) would the firm need to sell to accomplish this, and how much would it have to sell?
A. Bonds; $68,980,000
B. Stock; $44,698,000
C. Stock; $38,460,000
D. Bonds; $54,325,000
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