FIN 534 Final Exam Week 11 2016
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FIN 534 Final Exam Week 11 2016 1. BLW Corporation is considering the terms to be set on the options it plans to issue to its executives. Which of the following actions would decrease the value of the options, other things held constant? 2. Which of the following statements is most correct, holding other things constant, for XYZ Corporation's traded call options? 3. Suppose you believe that Basso Inc.'s stock price is going to increase from its current level of $22.50 sometime during the next 5 months. For $3.10 you can buy a 5-month call option giving you the right to buy 1 share at a price of $25 per share. If you buy this option for $3.10 and Basso's stock price actually rises to $45, what would your pre-tax net profit be? 4. Other things held constant, the value of an option depends on the stock's price, the risk-free rate, and the 5. Braddock Construction Co.'s stock is trading at $20 a share. Call options that expire in three months with a strike price of $20 sell for $1.50. Which of the following will occur if the stock price increases 10%, to $22 a share? 6. An option that gives the holder the right to sell a stock at a specified price at some future time is 7. Which of the following statements is CORRECT? 8. Which of the following statements is CORRECT? 9. With its current financial policies, Flagstaff Inc. will have to issue new common stock to fund its capital budget. Since new stock has a higher cost than reinvested earnings, Flagstaff would like to avoid issuing new stock. Which of the following actions would REDUCE its need to issue new common stock? 10. For a typical firm, which of the following sequences is CORRECT? All rates are after taxes, and assume that the firm operates at its target capital structure. 11. You have been hired as a consultant by Feludi Inc.'s CFO, who wants you to help her estimate the cost of capital. You have been provided with the following data: rRF = 4.10%; RPM = 5.25%; and b = 1.30. Based on the CAPM approach, what is the cost of common from reinvested earnings? 12. Perpetual preferred stock from Franklin Inc. sells for $97.50 per share, and it pays an $8.50 annual dividend. If the company were to sell a new preferred issue, it would incur a flotation cost of 4.00% of the price paid by investors. What is the company's cost of preferred stock for use in calculating the WACC? 13. Projects C and D both have normal cash flows and are mutually exclusive. Project C has a higher NPV if the WACC is less than 12%, whereas Project D has a higher NPV if the WACC exceeds 12%. Which of the following statements is CORRECT? 14. Which of the following statements is CORRECT? 15. Suppose a firm relies exclusively on the payback method when making capital budgeting decisions, and it sets a 4year payback regardless of economic conditions. Other things held constant, which of the following statements is most likely to be true? 16. Which of the following statements is CORRECT? 17. Which of the following statements is CORRECT? 18. Which of the following is NOT a relevant cash flow and thus should not be reflected in the analysis of a capital budgeting project? 19. Which of the following is NOT a relevant cash flow and thus should not be reflected in the analysis of a capital budgeting project? 20. Which of the following statements is CORRECT? 21. Which of the following factors should be included in the cash flows used to estimate a project's NPV? 22. Which of the following rules is CORRECT for capital budgeting analysis? 23. Which one of the following would NOT result in incremental cash flows and thus should NOT be included in the capital budgeting analysis for a new product? 24. Which of the following statements is CORRECT? 25. Which of the following assumptions is embodied in the AFN equation? 26. Which of the following statements is CORRECT? 27. Which of the following statements is CORRECT? 28. The capital intensity ratio is generally defined as follows: 29. The term additional funds needed (AFN) is generally defined as follows: 30. A company expects sales to increase during the coming year, and it is using the AFN equation to forecast the additional capital that it must raise. Which of the following conditions would cause the AFN to increase?