1. A company sells used equipment with a book value of $100,000 for $250,000 cash. How would this transaction affect the company’s balance sheet?   Cash rises $250,000; net plant and equipment falls$100,000; equity rises $150,000
2. A project will produce after-tax operating cash inflows of $3,200 a year for 5 years. The after-tax salvage value of the project is expected to be $2,500 in year 5. The project’s initial cost is $9,500. What is the net present value of this project if the required rate of return is 16 percent   $2,168.02
3. According to the pecking order theory of capital structure, why do firms avoid issuing equity?  Because equity issuance signals that managers believe their stock is overvalued, which causes the price of the stock to fall
4. All else equal, a terminal value based on a no-growth perpetuity would be higher than a terminal value based on a perpetuity with 2 percent growth   False
5. An acquirer should be willing to pay a higher control premium for a poorly managed company than for a well-managed company.   True
6. An acquirer should never consider a target that would reduce the acquirer’s earnings per share.   False
7. An annual financial forecast for 2017 showing no external funding required assures a company that no cash shortfalls are likely to occur during 2017.  False
8. Aspenn Dental expects sales of $560, $650, $670, and $610 for the months of May through August, respectively. The firm collects 20 percent of sales in the month of sale, 70 percent in the month following the month of sale, and 8 percent in the second month following the month of sale. The remaining 2 percent of sales is never collected. How much money does the firm expect to collect in the month of August?   $643
9. Assume each month has 30 days and AmDent has a 60-day accounts receivable period. During the second calendar quarter of the year (April, May, and June), AmDent will collect payment for the sales it made during which of the months listed below?   February, march, April
10. At the end of 2014, Stacky Corp. had $500,000 in liabilities and a debt-to-assets ratio of 0.5. For 2014 Stacky had an asset turnover of 3.0. What were annual sales for Stacky in 2014?  $3,000,000
11. Atmosphere, Inc. has offered $860 million cash for all of the common stock in ACE Corporation. Based on recent market information, ACE is worth $710 million as an independent operation. For the merger to make economic sense for Atmosphere, what would the minimum estimated present value of the enhancements from the merger have to be   $150 million
12. Because control is valuable, trades of controlling interest shares are typically priced differently from shares of minority interest shares   True
13. Breakers Bay Inc. has succeeded in increasing the amount of goods it sells while holding the amount of inventory on hand at a constant level. Assume that both the cost per unit and the selling price per unit also remained constant. All else held constant, how will this accomplishment be reflected in the firm’s financial ratios?   Increase in the inventory turnover rate
14. Carbon8 Corporation wants to raise $120 million in a seasoned equity offering, net of all fees. Carbon8 stock currently sells for $28.00 per share. The underwriters will require a fee of $1.25 per share, and indicate that the issue must be underpriced by 7.5%. In addition to the underwriter’s fee, the firm will incur $785,000 in legal, administrative, and other costs. How many shares must Carbon8 sell in order to raise the desired amount of capital   4.9 million
15. Comparable trades valuation infers value from the prices at which comparable public firms trade  True
16. Dental Corporation’s income statement shows a provision for income taxes of $65 million in 2014. At the end of 2013, Dental Co’s balance sheet reported income taxes payable of $12 million and deferred taxes of $18 million. At the end of 2014 their balance sheet shows income taxes payable of $15 million and deferred taxes of $17 million. What were Dental Corp’s taxes paid in 2014?   $63 million
17. Empirical evidence suggests that leveraged buyouts create value.   True
18. Ginormous Oil entered into an agreement to purchase all of the outstanding shares of Slick Company for $60 per share. The number of outstanding shares at the time of the announcement was 82 million. The book value of liabilities on the balance sheet of Slick Co. was $1.46 billion. What was the cost of this acquisition to the shareholders of Ginormous Oil?   $6.38 billion
19. Ginormous Oil entered into an agreement to purchase all of the outstanding shares of Slick Company for $60 per share. The number of outstanding shares at the time of the announcement was 82 million. The book value of liabilities on the balance sheet of Slick Co. was $1.46 billion. Immediately prior to the Ginormous Oil bid, the shares of Slick Co. traded at $33 per share. What value did Ginormous Oil place on the control of Slick Co.?    $2.21 billion
20. Gujarat Corporation doubled its shareholders’ equity during the year 2014. Gujarat did not issue any new equity, repurchase any equity, or pay out any dividends during the year. What is Gujarat’s sustainable growth rate for 2014?   100%
21. Ian is going to receive $20,000 six years from now. Sunny is going to receive $20,000 nine years from now. Which one of the following statements is correct if both Ian and Sunny apply a 7 percent discount rate to these amounts?    In today’s dollars, Ian’s money is worth more than Sunny’s.
22. In a strong-form efficient market, insider trading is not profitable   True
23. In business valuation, a typical discount for lack of marketability is about 10 percent.   False
24. In comparison to industry averages, Okra Corp. has a low inventory turnover, a high current ratio, and an average quick ratio. Which of the following would be the most reasonable inference about Okra Corp.?   Inventory level is too high
25. In general, the capital structures used by non-financial U.S. firms:   Vary significantly across industries
26. In venture capital valuation, the post-money valuation is equal to the pre-money valuation plus the amount of the venture capitalist’s investment.   True
27. Incentive effects argue that debt disciplines a firm to generate healthy cash flows or face bankruptcy    True
28. Individuals who continually monitor the financial markets seeking mispriced securities:  Make the markets increasingly more efficient
29. JM Case Inc. has a market value of $5 million with 500,000 shares outstanding. The book value of its equity is $1,750,000. If the company repurchases 20 percent of its shares in the stock market, what will be the book value of equity if all else remains the same?   $750,000
30. Leveraged buyouts are the only means to capture tax shields   False
31. On a common-size balance sheet, all accounts are expressed as a percentage of:   Total assets
32. Premiums paid by acquirers indicate that the shareholders of target firms benefit   True
33. Private equity firms comprise a relatively insignificant portion of the American economy.   False
34. Ptarmigan Travelers had sales of $420,000 in 2013 and $480,000 in 2014. The firm’s current asset accounts remained constant. Given this information, which one of the following statements must be true?  Collection period decreased
35. Ratios that measure how efficiently a firm manages its assets and operations to generate net income are referred to as _____ ratios.   Asset turnover and control
36. Salinas Corporation has net income of $15 million per year on net sales of $90 million per year. It currently has no long-term debt, but is considering a debt issue of $20 million. The interest rate on the debt would be 7%. Salinas Corp. currently faces an effective tax rate of 40%. What would be the annual interest tax shield to Salinas Corp. if it goes through with the debt issuance   $560,000
37. Shelf registration is possible for both debt and equity issues   True
38. Steve has estimated the cash inflows and outflows for his dental firm for next year. The report that he has prepared summarizing these cash flows is called a:  Cash budget
39. STU Corporation has $3 million in earnings on $20 million in sales and has 1 million shares outstanding. Earnings per share of comparable firm 1 is $5, and earnings per share of comparable firm 2 is $2. Comparable firm 1’s stock is trading for $50, and comparable firm 2’s stock is trading for $28. What is the estimated stock price of STU using the method of comparables? (Use average multiples of the comparable firms when doing the calculations.)   $36.00
40. Suppose an acquiring firm pays $100 million for a target firm and the target’s assets have a book value of $70 million and an estimated replacement value of $80 million. What amount would be allocated to the acquiring firm’s goodwill account?        $20 Million
41. The accounting rate of return is deficient as a figure of merit because it is insensitive to the timing of cash flows.   True
42. The basic lesson of the M&M theory is that the value of a firm is dependent upon:   Total cash flow of the firm
43. The book value of a firm is:  based on historical cost
44. The cost of equity for a firm:   Equals the risk-free rate plus the market risk premium
45. The excess return earned by a risky asset, for example with a beta of 1.4, over that earned by a risk-free asset is referred to as a:   Risk premium
46. The following information is available about Chiantivino Corp. (CC):   $155 million
47. The most common approach to developing pro forma financial statements is called the:              Percent-of-sales method
48. The pre-tax cost of debt:   Is based on the current yield to maturity of the firm’s outstanding bonds
49. The retention ratio is:   The percentage of net income available to the firm to fund future growth
50. The sustainable growth rate of a firm is best described as the:   maximum growth rate achievable excluding any external equity financing while maintaining a constant debt-equity ratio.
51. Total risk is measured by _____ and systematic risk is measured by ____.   Total risk – standard deviation
    Systematic risk – beta
52. Tutter Corporation is being valued using discounted cash flow methodology with terminal value calculated as a growing perpetuity. Not including the terminal value, the present value of projected free cash flows for years 1 through 5 is $200 million (total). In year 5, projections show free cash flow of $60 million. What is the estimated fair market value of Tutter Corporation? Assume a WACC of 10% and a growth rate of 2%   $675 million
53. Under the simplifying assumptions of Modigliani and Miller, an increase in a firm’s financial leverage will:    Increase the variability in earnings per share
54. Unsystematic risk:    Can be effectively eliminated by portfolio diversification
55. What is the benefit-cost ratio for an investment with the following cash flows at a 14.5 percent required return?   1.02
56. What is true?    The movement of cash to inventory, to accounts receivable and back to cash is known as the firm’s working capital cycle.
57. What would be the carried interest (at 20%) on a private equity portfolio with an initial value of $500 million that was subsequently liquidated for $750 million?   $50 Million
58. When investment returns are less than perfectly positively correlated, the resulting diversification effect means that:   Spreading and investment across many diverse assets will eliminate all of the systematic risk
59. Which of the following are the most likely reasons for why a stock price might not react at all on the day that new information related to the stock issuer is released?                                                                The information has no bearing on the value of the firm.
    The information was anticipated
60. Which of the following are viable techniques to cope with the uncertainty inherent in realistic financial projections?    Simulation
    Scenario analysis
    Sensitivity analysis
61. Which of the following is NOT a reason why a dollar today is worth more than a dollar in the future?    The value of a dollar in the future will be compounded more than the value of a dollar today.
62. Which of the following is NOT an important step in the financial evaluation of an investment opportunity   Estimate the accounting rate of return for the investment
63. Which of the following questions are appropriate to address upon conducting sustainable growth analysis and the financial planning process?   All of them
64. Which of the following statements concerning a firm’s cash flows and profits is false?  A company that sells merchandise at a profit will generate cash soon enough to replenish cash flows required for continued production.
65. Which of the following statements is correct if a firm’s pro forma financial statements project net income of $12,000 and external financing required of $5,000?   Retained earnings cannot grow by more than $12,000. (Homework 3)
66. Which of the following statements is true?  Due to required cash investments in current assets, fast-growing and profitable companies can literally “grow broke”.
67. Which of the following statements is/are correct?   The liquidation value estimate of the terminal value usually vastly understates a healthy company’s terminal value
68. Which of the following would increase a company’s need for external finance, all else equal?   An increase in the dividend payout ratio
69. Which of these ratios, or levers of performance, are the determinants of ROE?  Profit margin, financial leverage and asset turnover
70. Which one of the following is an example of systematic risk?   The federal reserve unexpectedly announces an increase in target interest rates.
71. Which one of the following is the financial statement that shows a financial snapshot, taken at a point in time, of all the assets the company owns and all the claims against those assets?  Balance sheet
72. Which one of the following is the financial statement that summarizes a firm’s revenue and expenses over a period of time?  Income statement
73. Which one of the following is the financial statement that summarizes changes in the company’s cash balance over a period of time?  Cash flow statement
74. Which one of the following ratios identifies the amount of sales a firm generates for every $1 in assets?   Asset turnover
75. Which one of the following statements does NOT describe a problem with using ROE as a performance measure?   ROE is a forward-looking, one-period measure, while business decisions span the past and present.
76. Which one of the following statements is correct concerning the cash balance of a firm?   A cumulative cash deficit on a cash budget indicates the need to acquire additional funds.        
77. Which one of the following will increase the sustainable rate of growth a corporation can achieve?   Decrease in the dividend payout ratio
78. You are estimating your firm’s external financing needs for the next year. At the end of the year you expect that owners’ equity will be $80 million, total assets will amount to $170 million, and total liabilities will be $70 million. How much will your firm need to borrow, or otherwise acquire, from outside sources during the year?  $20 Million
79. You are the beneficiary of a life insurance policy. The insurance company informs you that you have two options for receiving the insurance proceeds. You can receive a lump sum of $200,000 today or receive payments of $1,400 a month for 20 years. You can earn a 6 percent annual rate on your money, compounded monthly. Which option should you take and why?   You should accept the $200,000 lump sum because the monthly payments are only worth $195,413 to you today
80. You constructed a pro forma balance sheet for next year and found that external financing required was negative (i.e., the company projected a financing surplus). Which of the following options, all else equal, would NOT correct the projected imbalance?   An increase in the retention ratio
81. 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?   $99,517.41
82. You plan to pay $50 for a share of preferred stock that pays a $2.40 dividend per year forever. What annual rate of return will you realize?   4.8%
83. 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?    $17,444.86

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