Finance Questions

A project requires an initial investment of $200,000 and expects to produce a cash flow before taxes of $120,000 per year for two years (i.e., cash flows will occur at t = 1 and t = 2). The corporate tax rate is 21 percent. The assets will depreciate using the MACRS 3-year schedule: (t = 1, 33%); (t = 2: 45%); (t = 3: 15%); (t = 4: 7%). The company's tax situation is such that it can use all applicable tax shields. The opportunity cost of capital is 12 percent. Assume that the asset can sell for book value at the end of the project. Calculate the NPV of the project (answer in whole numbers).A: $5,721B: $22,463C: $19,315D: $22,735

GameStop's stock is selling for $100 per share today. It is expected that-at the end of one year-it will pay a dividend of $6 per share and then be sold for $114 per share. Calculate the expected rate of return for the shareholders.A: 25 percentB: 15 percentC: 10 percentD: 20 percent

If a bond is junior or subordinated, itA: has been issued because the company is in default.B: is secondary to equity.C: must give preference to senior creditors in the event of default.D: has a higher priority status than specified creditors.

In the Nike Cost of Capital Case, which of the following is a true statement.A: Joanna correctly calculated the WACC for Nike using market values.B: At the time of the Nike Case, the yield curve was inverted, leading to long-term bond yields lower than shorter-term bond yields and complicating the analysis.C: Based on information in the case, Nike's quoted bonds were trading at a premium to par.D: Based on a corrected calculation of WACC, the implied share price from Kimi Ford's DCF analysis would be greater than her initial estimate.

Generally, initial public offerings (IPOs) areA: correctly priced.B: underpriced.C: there is no general trend.D: overpriced.

True or False: In the epilogue to the Rosetta Stone case, the CEO of Rosetta Stone expresses regret that the IPO traded up 39% on the first day and that the company "clearly left money on the table." He then makes a series of suggestions on how the traditional IPO process could be improved.

Acacia Industries has just now paid a dividend of $2.83 per share (Div0); its dividends are expected to grow at a constant rate of 6 percent per year forever. If the required rate of return on the stock is 16 percent, what is the current value of the stock, after paying the dividend?A: $56B: $70C: $48D: $30

Two mutually exclusive projects have the following positive NPVs and project lives.Project NPV Life Project A $ 5,000 3 Years Project B $ 6,500 5 YearsIf the cost of capital were 15 percent, which project would you accept?A: Project A, because it has higher EACB: Project B, because it has higher NPVC: Project A, because its NPV can be earned more quicklyD: Project B, because it has higher EAC

Net working capital is best represented asA: short-term assets and short-term liabilities.B: long-term assets and long-term liabilities.C: short-term assets only.D: long-term assets and short-term assets.

The underwriter's spread is the highest forA: IPOs.B: convertible bonds.C: straight bonds.D: seasoned equity offerings.

Using a company's cost of capital to evaluate a project isI) always correct;II) always incorrect;III) correct for projects that have average risk compared to the firm's other assetsA: III onlyB: I onlyC: I and III onlyD: II only

One calculates the after-tax weighted average cost of capital (WACC) using which of the following formulas?A: WACC = (rD) (D/V) + (rE) (E/V), where V = D + E.B: WACC = (rD) (D/E) + (rE) (E/D).C: WACC = (rD) (1 − TC) (D/V) + (rE) (E/V), where V = D + E.D: WACC = (rD) (1 − TC) (D/V) + (rE) (1 − TC) (E/V), where V = D + E.

Which of the following are true?I) Firms have long-run target dividend payout ratios.II) Dividend changes follow shifts in long-term, sustainable earnings.III) Managers are reluctant to make dividend changes that might have to be reversed.A: III onlyB: I, II, and IIIC: II onlyD: I only

Consider the procedure such as the one announced by Washington Federal last week whereby the firm states a series of prices at which it is prepared to repurchase stock. Shareholders then submit offers indicating how many shares they wish to sell and at which price. The firm then calculates the lowest price at which it is able to buy the desired number of shares. This procedure is known as a(n)A: green mail.B: tender offer.C: open market repurchase.D: Dutch auction.

Firms can pay out cash to their shareholders in the following way(s):I) dividends;II) share repurchases;III) interest paymentsA: I and II onlyB: II onlyC: III onlyD: I only

Generally, firms engage in stock repurchases duringI) boom times as firms accumulate excess cash;II) recessions due to low stock prices;III) times when competitors' stock prices are droppingA: I onlyB: II and III onlyC: III onlyD: II only

Which of the following assets is tangible?A. Microsoft's technical expertiseB. Apple Inc.'s trademarkC. Hewlett-Packard's most recent printer patentD. ExxonMobil's corporate headquarters building

If the sign of the cash flows for a project changes two times, then the project likely hasA: two IRRs.B: one IRR.C: four IRRs.D: three IRRs.

One should consider net working capital (NWC) in project cash flows becauseA: NWC represents sunk costs.B: typically firms must invest cash in short-term assets to produce finished goods.C: inclusion of NWC typically increases calculated NPV.D: firms need positive NPV projects for investment.

The opportunity cost of capital for a risky project is:A: the expected rate of return on a security of similar risk as the project.B: the expected rate of return on a government security having the same maturity as the project.C: the expected rate of return on a typical bond portfolio.D: the expected rate of return on a well-diversified portfolio of common stocks.