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ID: 2698190 • Letter: #
Question
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1. Using lower discount rates
willÂ
 A. not affect the present value of the future cash
flow.
  B.  increase the present
value of any future cash flow.
   C.Â
 decrease the present value of any future cash
flow.
    D.Â
None of the above.
Â
2. Constant growth: You are interested in investing in a
company that expects to grow steadily at an annual rate of 6
percent for the foreseeable future. The firm paid a dividend of
$2.30 last year. If your required rate of return is 10 percent,
what is the most you would be willing to pay for this stock? (Round
to the nearest dollar
A. $58 B. $61, C. $23, D. $24
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3. Which ONE of the following statements is true about
secondary markets in the United States?
A. In terms of total volume of activity and total capitalization
of the firms listed, the NASDAQ is the largest in the world and the
NYSE is the second largest.
B. In terms of the number of companies listed and shares traded on
a daily basis, NASDAQ is larger than the NYSE.
C. Firms listed on the NASDAQ tend to be, on average, larger in
size, and their shares trade more frequently than firms whose
securities trade on NYSE.
D. In the United States, most secondary market transactions are
done over the counter
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4. Capital rationing. The profitability index
for a project is 1.18. If the project will produce cash inflows of
$60,000 for the next 12 years, what is the initial outlay for the
project if the appropriate discount rate is 5 percent? (Round to
the nearest $10.)
A. $450,670, B. $627,520, C. $1,016,950, D. None of the
above.
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5. The benefits of debt: Packman Corporation
has a reported EBIT of $500, which is expected to remain constant
in perpetuity. If the firm borrows $2,000, its YTM will be 6.5% and
its coupon rate will be 8%. If the company’s
marginal tax rate is 30% and its average tax rate is 20%, what are
its after-tax earnings
A. $238, B. $272, C. $259, D. None of the above
Â
6. Which of these is not an example of indirect
bankruptcy costs
A. A firm’s customers become concerned about
whether or not warranties will be honored.
B. Employees begin to leave the firm.
C. New accountants are brought in to help with the bankruptcy
process.
D. A bankruptcy judge orders new projects to be
halted.
Explanation / Answer
1. Using lower discount rates will
B. increase the present value of any future cash flow.
2. Constant growth: You are interested in investing in a
company that expects to grow steadily at an annual rate of 6percent for the foreseeable future. The firm paid a dividend of$2.30 last year. If your required rate of return is 10 percentwhat is the most you would be willing to pay for this stock?
B. $61
Po=D0*(1+g)/(Ks-g) = 2.30*(1+6%)/(10%-6%) = $61
3. Which ONE of the following statements is true about
secondary markets in the United States?
D. In the United States most secondary market transactions aredone over the counter
4. Capital rationing. The profitability index
for a project is 1.18. If the project will produce cash inflows of $60000 for the next 12 years what is the initial outlay for the project if the appropriate discount rate is 5 percent?
A. $450670
PI = PV of CFs/Initial Inv
So Initial Inv = PV of CFs/PI =60000*PVIFA(5%,12)/1.18
= 60000*8.8633/1.18 = 450670
5. The benefits of debt: Packman Corporation
has a reported EBIT of $500 which is expected to remain constant in perpetuity. If the firm borrows $2000 its YTM will be 6.5% and its coupon rate will be 8%. If the company marginal tax rate is 30% and its average tax rate is 20% what are its after-tax earnings
A. 238
PAT = EBIT-Int - Tax = (500-8%*2000)*(1-30%) = $238
6. Which of these is not an example of indirect
bankruptcy costs
A. A firm customers become concerned about
whether or not warranties will be honored.
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