Questions 1 to 20: Select the best answer to each question. Note that a question and its answers may be split across a page
break, so be sure that you have seen the entire question and all the answers before choosing an answer.
1. 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. 10 days
B. 8 days
C. 5 days
D. 7 days
2. 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. Use proxy betas to calculate WACCs.
D. Calculate WACCs using the separation principle.
3. The hypothesis that, with a well-functioning capital market, a firm's capital budgeting decisions are separate from its capital structure decisions is called the
A. efficient market hypothesis.
B. Baumol theorem.
C. separation principle.
D. Modigliani-Miller theorem.
4. Two or more projects are mutually exclusive if management
A. must accept one or both projects.
B. must accept one or the other but not both projects.
C. can accept one, the other, or neither, but not both projects.
D. can accept both projects or neither, but not one or the other.
5. What type of bond offering involves a bidding process in which an investment bank purchases the bond either by outbidding other banks or directly negotiating with the issuer?
A. Competitive sale
B. Negotiated sale
C. Best efforts underwriting
D. Firm commitment underwriting
6. A graph of a project's NPV as a function of possible capital costs is called the _______ profile.
A. NPV
B. beta
C. IRR
D. standard deviation
7. Sterling Candy Shops, Inc., has a net income of $840,000 and retained earnings necessary to fund positive NPV projects of $500,000. If the company has 2,000,000 shares outstanding, how much in dividends per share should the company pay out according to the residual dividend model?
A. $0.24
B. $0.27
C. $0.17
D. $0.15
8. 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. $521.54
B. $331.97
C. $541.24
D. $421.45
9. Super Duper Auto Stores, Inc., needs to raise $144 million to finance its expansion. Its investment bank recommends a debt issue with an offer price of $1,000 a bond and an underwriter's fee of 4 percent of the gross proceeds. How many bonds will the company need to sell to receive the $144 million it needs?
A. 150,000
B. 125,000
C. 145,000
D. 130,000
10. 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. $96,000
B. $64,000
C. $128,000
D. $54,000
11. 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. –2.8 percent; Reject
B. –5.2 percent; Reject
C. 14.2 percent; Accept
D. 11.4 percent; Accept
12. What total in fees would a firm have to pay on a loan offered by its bank with a loan commitment of $6.4 million with an up-front fee of 80 basis points and a back-end fee of 20 basis points? (The take down on the loan is 60 percent.)
A. $5,360
B. $61,230
C. $56,320
D. $51,320
13. Which one of the following is not a capital-budgeting technique?
A. Net present value (NPV)
B. Payback (PB)
C. Modified internal rate of return (MIRR)
D. Modified payback (MPB)
14. Suppose that the common shares of Oceanic Luxury Vessels, Inc., is trading for $38 a share and that 5 million shares are outstanding. The company also has 75,000 bonds outstanding, which are selling at 102 percent of par. If Oceanic Luxury Vessels, Inc., was considering an active change to its capital structure so that the firm would have a D/E ratio of 1.6, which type of security (stocks or bonds) would it need to sell
to accomplish this, and how much would it have to sell?
A. Stock; $289.4 million
B. Debt; $248.5 million
C. Debt; $349.9 million
D. Stock: $445.2 million
15. Gross fixed assets change in almost every project at the
A. beginning and middle.
B. beginning and end.
C. beginning.
D. end.
16. The net cash flow from a firm in February, March, and April is $4.6 million, –$1.7 million, and $1.9 End of exam million, respectively. What's the cumulative cash flow for April?
A. $3.9 million
B. $5.1 million
C. $4.8 million
D. $6.9 million
17. A common criticism of the payback (PB) benchmark is that it doesn't
A. account for the time value of money (TVM).
B. take into account NPV.
C. receive complementing information from discount payback (DPB).
D. consider a project's IRR.
18. The JOBS Act of 2012 enabled what type of offerings?
A. Rewards-based crowdfunding offerings conducted over the Internet
B. OPOs consisting of equity crowdfunding offerings conducted over the Internet
C. Equity crowdfunding offerings conducted on the NYSE
D. IPOs conducted on regional exchanges
19. In Baumol's model, what's the assumed starting level for cash?
A. Compensating balance
B. Safety stock
C. Replenishment
D. Net present value
20. Up & Down Industries doesn't have any taxes to pay and has $348 million in assets, currently financed only with equity. The equity is worth $11 per share with 8 million shares outstanding, and book value of equity is equal to market value of equity. Assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as follows:
l State: Pessimistic; Probability = 45 percent; Expected EBIT in state = $15 million
l State: Optimistic; Probability = 55 percent; Expected EBIT in state = $19 million
The company is considering switching to a 60 percent debt capital structure and has determined that it would have to pay a 10-percent yield on perpetual debt in either event. What would the level of expected EPS in either scenario be if the firm switches to the proposed capital structure as compared to its current structure?
A. Pessimistic state: $0.35 EPS; Optimistic state: $0.88 EPS
B. Pessimistic state: $0.23 EPS; Optimistic state: $0.73 EPS
C. Pessimistic state: $0.32 EPS; Optimistic state $0.82 EPS
D. Pessimistic state: $0.27 EPS; Optimistic state: $0.77 EPS
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