Reference no: EM131240970

Part A -

1. In the steps a company takes to prepare for an IPO, the "road show" precedes the "bake-off".

True

False

2. The only reason why the price would fall on a corporate bond is if market interest rates increase.

True

False

3. MID- issue, the market price of a fixed-rate bond can differ substantially from its par value.

True

False

4. Bond investors should be more concerned with real returns than with nominal returns.

True

False

5. Investment-grade bonds are usually defined as bonds with ratings of BBB- or higher.

True

False

6. Private equity firms comprise a relatively insignificant portion of the American economy.

True

False

7. At the end of 2013, Crane Industries Inc.'s stock price was $30.75. A year later it was $34.88. Per share dividends over the year were $0.55, while earnings per share were $1.33. What was the dividend yield in fiscal year 2014?

A. 1.79%

B. 4.33%

C. 13.43%

D. 15.22%

E. 17.76%

F. None of the above.

8. At the end of 2013, Crane Industries Inc.'s stock price was $30.75. A year later it was $34.88. Per share dividends over the year were $0.55, while earnings per share were $1.33. What was the percentage change in the share price in fiscal year 2014?

A. 1.79%

B. 4.33%

C. 13.43%

D. 15.22%

E. 17.76%

F. None of the above.

Part B -

1. The evidence indicates that, on average, a company's stock price declines when it announces a new issue of equity.

True

False

2. Debt financing results in lower after-tax earnings relative to equity financing.

True

False

3. The M&M irrelevance proposition assures financial managers that their choice between equity or debt financing will ultimately have no impact on firm value.

True

False

4. In some instances, additional debt financing can encourage managers to act more in the interests of owners.

True

False

5. If the maturity of a company's liabilities is less than that of its assets, the company incurs a refinancing risk.

True

False

6. The basic lesson of the M&M theory is that the value of a firm is dependent upon:

A. the firm's capital structure,

B. the total cash flow of the firm.

C. minimizing the marketed claims.

D. the amount of marketed claims to that firm.

E. the size of the stockholders' claims.

F. None of the above.

7. The term "financial distress costs"' includes which of the following?

I. Direct bankruptcy costs

II. Indirect bankruptcy costs

III. Direct costs related to being financially distressed, but not bankrupt

IV. Indirect costs related to being financially distressed, but not bankrupt

A. I only

B. III only

C. I and II only

D. III and IV only

E. I, II, Ill, and IV

F. None of the above.

8. Which of the following is NOT an important step in the financial evaluation of an investment opportunity?

A. Calculate a figure of merit for the investment.

B. Estimate the accounting rate of return for the investment.

C. Estimate the relevant cash flows.

D. Compare the figure of merit to an acceptance criterion.

E. All of the above are important steps.

9. Which of the following figures of merit might not use all possible cash flows in its calculations?

I. Payback period

II. Internal rate of return

III. Net present value (NPV)

IV. Benefit-cost ratio

A. III only

B. I & III only

C. II & III only

D. I only

E. III & IV only

F. I, II, Ill, and IV

10. You plan to buy a new Mercedes four years from now. Today, a comparable car costs $82,500. You expect the price of the car to increase by an average of 4.8 percent per year over the next four years. How much will your dream car cost by the time you are ready to buy it?

A. $98,340.00

B. $98,666.67

C. $99,517.41

D. $99,818.02

E. $100,023.16

F. None of the above.

11. Your grandmother invested a lump sum 26 years ago at 4.25 percent interest. Today, she gave you the proceeds of that investment which totaled $51,480.79. How much did she originally invest?

A. $15,929.47

B. $16,500.00

C. $17,444.86

D. $17,500.00

E. $17,999.45

F. None of the above.

Part C -

1. An average-risk project that has an NPV of zero when its cash flows are discounted at the weighted-average cost of capital will provide sufficient returns to satisfy both stockholders and bondholders.

 True

False

2. A company is considering two alternative methods of producing a new product. The relevant data concerning the alternatives are presented below.

	Alternative I	Alternative II
Initial investment	$64,000	$120,000
Annual receipts	$50,000	$60,000
Annual disbursements	$20,000	$12,000
Annual depreciation	$16,000	$20,000
Expected life (years)	4	6
Salvage value	$0	$0

At the end of the useful life of whatever equipment is chosen the product will be discontinued. The company's tax rate is 50 percent and its cost of capital is 10 percent.

a. Calculate the net present value of each alternative.

b. Calculate the benefit-cost ratio for each alternative.

c. Calculate the internal rate of return for each alternative.

d. If the company is not under capital rationing, which alternative should be chosen? Why?

3. Key facts and assumptions concerning Costco Company, at December 31, 2011, appear below.

Facts and Assumptions
Yield to maturity on long-term government bonds	3.28%
Yield to maturity on company long-term bonds	4.62%
Coupon rate on company long-term bonds	5.50%
Historical excess return on common stocks	6.10%
Company equity beta	0.80%
Stock price	$75.08
Number of shares outstanding (millions)	449.5
Book value of equity (millions)	$11.585
Book value of interest-bearing debt (millions)	$2.524
Tax rate	35.00%

Use the above information to answer the following questions - Estimate Costco's cost of equity capital.