Finance Questions
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Project M requires an initial investment of $25 million. The project is expected to generate $2.25 million in after-tax cash flow each year forever. If the weighted average cost of capital (WACC) is 9 percent, calculate the NPV of the project.A. +2.5 millionB. +2.1 millionC. ZeroD. −2.5 million
Commercial banks and several other financial institutions are not permitted to invest in bonds unless they are investment grade. What is the definition of an investment-grade bond?A. One with a rating of Baa or better.B. One with a triple-A rating.C. One with a rating of B or better.D. One with a rating of C or better.
Monte Carlo simulation involves the following steps:I) Step 1: Modeling the project;II) Step 2: Specifying probabilities;III) Step 3: Simulating cash flows;IV) Step 4: Calculating present valueA. I, II, III, and IVB. I and II onlyC. I, II, and III onlyD. II, III, and IV only
Efficiency ratios indicatewhether the firm is using its assets productively;whether the firm is liquid;whether the firm is profitable;how highly the firm is valued by investorsA. II onlyB. III onlyC. I onlyD. III and IV only
A firm finances itself with 30 percent debt, 60 percent common equity, and 10 percent preferred stock. The before-tax cost of debt is 5 percent, the firm's cost of common equity is 15 percent, and that of preferred stock is 10 percent. The marginal tax rate is 30 percent. What is the firm's weighted average cost of capital? (Assume that the dividends on preferred stock are not tax-deductible)A. 12.50 percentB. 10.75 percentC. 11.05 percentD. 10.05 percent
The pecking order theory of capital structure implies that:I) high-risk firms will end up borrowing more;II) firms prefer internal finance;III) firms prefer debt to equity when external financing is requiredA. II onlyB. I onlyC. III onlyD. II and III only
The recovery rate on defaulting debt is the highest for the following type of debt:A. senior subordinated bonds.B. junior subordinated bonds.C. bank debt.D. senior secured bonds.
In cash budgeting, which of the following is a cash outflow?A. Issuance of equityB. Collections on accounts receivableC. Payments on accounts payableD. Sales
The holders of ZZZ Corporation's bonds with a face value of $1,000 can exchange that bond for 35 shares of stock. The stock is selling for $25. What is the conversion value of the bond?A. $965B. $875C. $1,000D. $1,200
Capital structure is irrelevant ifI) capital markets are efficient;II) each investor can borrow/lend on the same terms as the firm;III) there are no tax benefits to debtA. III onlyB. I, II, and IIIC. I onlyD. II only
A corporate bond matures in one year. The bond promises a $50 coupon and a principal payment of $1,000 at maturity. If an investor buys the bond for $938.10, calculate the promised yield on the bond.A. 5.33 percentB. 5 percentC. 11.93 percentD. 6.60 percent
Arrange the following assets in decreasing order of liquidity, i.e., the most liquid should be listed first.I) equipment and machinery;II) inventories;III) accounts receivable;IV) marketable securitiesA. III, IV, II, and IB. IV, III, II, and IC. I, II, III, and IVD. II, III, IV, and I
A $1,000 face value bond can be exchanged any time for 25 shares of stock. Then the conversion price isA. $40.B. $25.C. $100.D. $975.
When a firm improves (lowers) its days of inventory, it generallyA. releases cash locked up in inventory.B. cannot reduce its inventories.C. requires additional cash investment in inventory.D. does not alter its cash position.
The PCG Corporation has 1,000,000 shares outstanding at $30/share. If the firm wishes to raise $13.5 million at a subscription price of $27/share, calculate the value of a right (assuming a European rights issue structure).
If a firm permanently borrows $100 million at an interest rate of 8 percent, what is the present value of the interest tax shield? (Assume that the marginal corporate tax rate is 21 percent.)A. $5.60 millionB. $26.67 millionC. $8.00 millionD. $21.00 million
When financial distress is a possibility, the value of a levered firm is a function of:I) value of the firm if all-equity-financed;II) present value of tax shield;III) present value of costs of financial distress;IV) present value of omitted dividend paymentsA. I + IIB. I + II − IIIC. I onlyD. I + II - III − IV
For a levered firm,A. as EBIT increases, EPS decreases by the same percentage.B. as EBIT increases, EPS decreases by a larger percentage.C. as earnings before interest and taxes (EBIT) increases, earnings per share (EPS) increases by the same percentage.D. as EBIT increases, EPS increases by a larger percentage.
The value of a corporate bond can be thought of asA. bond value without default - value of call.B. bond value without default + value of put.C. bond value without default - value of put.D. bond value without default + value of a stock.
In general, which of the following statements is (are) true?I) Bonds issued in the United States are registered.II) Bonds issued in the United States are bearer bonds.III) Eurobonds are normally issued in a major currency, e.g., $US, euro, or yen.IV) Eurobonds are normally issued in the local currency.A. III onlyB. II onlyC. II and IV onlyD. I and III only