1. What price must a company typically pay to buy another company? The price will:
include some premium over the current market value of the target's equity.
include some discount relative to the current market value of the target's equity.
be the book value of the target's equity.
be the market value of the target's equity.
2. The firm is considering an investment in a project that is similar in risk to its existing projects. The firm makes no use of debt and is entirely financed by common stock with a beta of 1.4. The expected return on the market portfolio is 12 percent and the risk-free rate is 3 percent. The required rate of return on this project is:
16.8%
9%
15.6%
12%
none of the above
3. Your firm has issued 15,000 bonds with a market price of $105 per bond. The firm also has 25,000 common shares outstanding at a price of $75 per share. If the common shares will pay a dividend of $3.50 at the end of the year and thereafter dividends will grow at a rate of 3 percent. If the after-tax yield on the firm's bonds is 7%, what is the firm's weighted average cost of capital?
7.30%
7.67%
10.00%
7.36%
none of the above
4. When measuring the inflows and outflows of a firm's operations for capital budgeting decisions, accountants and financial analysts differ in their focus because:
accountants want to reflect the state of the firm at a given point in time and therefore concentrate only on inflows and outflows in the current period
financial analysts are concerned with tax implications whereas accountants only evaluate pretax book values on an accrual basis
financial analysts measure all cash flows for the firm whereas accountants measure only the flows which will be recorded on financial statements
financial analysts are concerned with incremental after-tax cash flows, whereas accountants measure cash flows on an accrual basis
accountants focus on the change in net income from undertaking a particular investment, whereas financial analysts measure incremental changes in profit
5. Given the following information with regard to a proposed project:
Inventory increase of $30,000
Cash falls by $4,000
Depreciation increases by $3,000
Accounts payable increase by $11,000
Accounts receivable increase by $11,000
The working capital investment required for this project is:
$26,000
$23,000
$15,000
$37,000
none of the above
6. Which of the following would increase the likelihood that a company would increase its debt ratio, other things held constant?
An increase in the corporate tax rate.
An increase in the personal tax rate.
The Federal Reserve tightens interest rates in an effort to fight inflation.
The company's stock price hits a new low.
An increase in costs incurred when filing for bankruptcy.
7. The world-famous discounter, Fernwood Booksellers, specializes in selling paperbacks for $7 each. The variable cost per book is $5. At current annual sales of 200,000 books, the publisher is just breaking even. It is estimated that if the authors' royalties are reduced, the variable cost per book will drop by $1. Assume authors' royalties are reduced and sales remain constant; how much more money can the publisher put into advertising (a fixed cost) and still break even?
$600,000
$466,667
$333,333
$200,000
None of the above