FOR ALL QUESTIONS, PICK THE CLOSEST ANSWER.1. Which of the following properties will make a bond less like equity?a. The bond has a sinking fund.b. The bond has 100 years to maturity rather than 10.c. The bond is junior rather than senior debt.d. The bond is convertible.e. The bond has no debentures.2. As the CFO of BUAD Corp, you are considering two mutually exclusive bond issues thatwill be used to finance a stock repurchase. Bank A would be able to issue $140 millionworth of Ballerina bonds at a 7% coupon rate whereas Bank B could issue $81 millionworth in Ballerina bonds at a 4% coupon rate. Thinking back to your finance training,you realize that if M&M Proposition I with taxes holds, the following option wouldmaximize firm value?a. Bank Ab. Bank Bc. Neither option will have any effect on firm valued. Both options will have the same positive effect on firm valuee. None of the above3. You plan to build a $1 million dollar portfolio consisting of Stock A, Stock B and riskfree T-bills. Your goal is to generate a portfolio with a beta that matches the beta of themarket. Stock A has beta of 2, stock B has a beta of 0.5. If you have already(irreversibly) invested $200,000 in T-bills, how much did you invest in Stock A?a. $200,000b. $333,333c. $400,000d. $666,667e. Cannot be determine with the information given4. The current yield on a 10 year U.S. Treasury bond is 7%. Which of the following MUSTBE TRUE for any bond issued by BUAD Corp?a. It will have a rate of return of more than 7%a. It will have more interest rate risk than the 10 year U.S. Treasuryb. It will have more reinvestment risk than the 10 year U.S. Treasuryc. It will have more default risk than the 10 year U.S. Treasuryd. ALL OF THE ABOVE5. Ballerina Industries wants to raise $20 million by selling additional equity. Currentlythere are 5,000,000 shares of stock outstanding trading at $50 per share, and thesubscription price is set at $40. What is the value of a right?a. $0.91b. $1.00c. $9.10d. $10.00e. $40.006. Consider the following information:State Probability ABC, Inc. (%)Boom .25 15Normal .50 8Slowdown .15 4Recession .10 -3What is the standard deviation of returns for ABC, Inc.?a. 5.17%b. 8.05%c. 26.8%d. 64.08%e. Cannot calculate from the information given7. An all-equity firm with a beta of 1.21 is considering the following projectsI. ?=1.1, Expected Return = 13%II. ?=1.2, Expected Return = 14%III. ?=1.3, Expected Return = 15%The risk-free rate is 5% and the expected return on the market is 12%. Which projectswould be incorrectly accepted or incorrectly rejected if the firms overall cost of capitalwere used as a hurdle rate?a. Ib. I & IIc. I, II & IIId. II, IIIe. None of the above8. During the recent financial crisis, what was Treasury Secretary Henry Paulson mostworried about?a. Wall Street vs. Main Streetb. Too big to failc. Systemic risk vs. Idiosyncratic riskd. Systemic risk vs. Moral hazarde. Democrats vs. Republicans9. You are comparing the current income statement of a firm to the pro forma incomestatement for next year. The pro forma is based on a four percent increase in sales. Thefirm is currently operating at 95% capacity. Net working capital and all costs varydirectly with sales. The tax rate and the dividend payout ratio are fixed. Given thisinformation, which one of the following statements must be true?1. The projected net income is equal to the current years net income2. The tax rate will increase at the same rate as sales3. Retained earnings will increase by four percent over its current level4. Total assets will increase by less than four percent5. Total liabilities and owners equity will increase by four percent10. Marys Motors, which is currently operating at full capacity, has sales of $29,000, currentassets of $1,600, current liabilities of $1,200, net fixed assets of $27,500, and a 5% profitmargin. The firm has no long-term debt and does not plan on acquiring any. The firmdoes not pay any dividends. Sales are expected to increase by 4.5 percent next year. Ifall assets, short-term liabilities, and costs vary directly with sales, how much additionalequity financing is required for next year?a. -$259.75* ($181)b. -$967.30c. $967.30d. $1,099.08e. $1,515.2511. Babs Navigation Service is worth $250,000 as a whole. It has zero-coupon debt with aface value of $100,000 and a market value of $92,593 due in one year. If corporate taxesare 25% and the required return on the companys equity is 18%, what is the firmsWACC?a. 12.1%b. 13.6%c. 18%d. 25%e. Cannot be determined with the information provided12. Carls Cabinets wants to maintain a growth rate of 5% without incurring any additionalequity financing. The firm maintains a constant debt-to-equity ratio of 0.55, a total assetturnover ratio of 1.30, and a profit margin of 9.0%. What must the dividend payout ratiobe?a. 2.50%b. 26.26%c. 38.87%d. 61.13%e. 73.74%13. One commonly cited reason for the recent financial crisis is that traders on Wall Streetwere not doing what was in the best interest of the firms owners. This misalignment ofincentives between owners and managers is best described by which of the followingterms?a. Agency issuesb. Externalitiesc. Capitalismd. Paternalisme. Protectionism14. There is a 5-year (5 annual payments) regular annuity with the first payment occurringfive years from today. If each payment is $10,000 and the monthly discount rate is 1%,compounded monthly, how much is the value of the annuity?a. $19.223b. $21,913c. $22,908d. $50,000e. $117,10015. You want to serve on the board of directors of BUAD Corp. Unfortunately you areextremely unpopular and you will be only person voting for you. If BUAD Corp has20,000 shares outstanding, and the stock currently sells for $306 per share, how muchwill it cost you to buy a seat on the board if the company uses straight voting?a. Trick question: You cannot get a seat if you are the only one willing to vote foryou.b. Trick question: Depends on the number of seats on the boardc. $306d. $3,060,306e. $3,825,30616. Consider the following simplified financial statements for ABC, Inc. ABC Income StatementSales $900Costs $700Net Income $200ABC Balance SheetAssets $300 Debt $200Equity $100Total $300 Total $300ABC predicts sales and costs will increase by 50%. Assume ABC pays out half of netincome in the form of a cash dividend. Costs and assets vary with sales, but debt andequity DO NOT. What is the external financing need?a. -$100b. $0c. $100d. $175e. NONE OF THE ABOVE17. In their initial public offering (IPO) BUAD Corp issues 20,000 shares at an initial priceof $11 a share. The stock generates a lot of interest and closes at $14 a share. Assumingfirm commitment underwriting, how much cash did the IPO generate for BUAD?a. $155,000b. $190,000c. $200,000d. $210,000e. $280,00018. As the CFO of BUAD Corp, you figure out how to decrease the NWC required for apotential project. Previously the project required $150,000 in NWC for 10 years. Yourdiscovery now reduces the NWC required to $75,000 for the same 10 years. If thediscount factor is 10%, how much money (in todays dollars) did your discoverypotentially save the firm?a. $28,916b. $43,193c. $46,000d. $75,000e. $92,16919. For a certain stock, you expect to receive a per-share dividend of $1 one year from today,$2 in two years, $3 in three years, and $1 a year thereafter. If you require a return of 11%for investments of this risk class, what is the most you are willing to pay for a share ofthis stock?a. $10.71b. $11.36c. $12.91d. $13.81e. $14.4420. You are bidding on a project to supply bagel delivery services to GMI for one year. Tosupply the services, you must buy and outfit a number of trucks at a total cost of$500,000. The trucks will cost $250,000 a year to maintain and operate over the year(note that this is an expenses NOT a capital investment), and can be sold at the end of theyear for $250,000. The trucks can be straight line-depreciated over the year to $250,000.If your tax rate is 40% and you require a 10% return, what is the best bid price you canoffer for transportation services (assume that if you win, you get your bid priceIMMEDIATELY).a. $466,940b. $530,300c. $1,123,000d. $1,255,000e. $1,374,00021. You are considering a project that, starting in exactly one year, will pay $25,000 everyyear (forever). The payback period for this project is 5 full years. What is the projectsIRR?a. 14.55%b. 20.00%c. 20.89%d. 22.34%e. Cannot determine the answer from the information given22. An asset will return 20% if things go well, and 10% otherwise. The probability thatthings go well is 40%. What is standard deviation of this assets return?a. 3.87b. 4.90c. 5.29d. 6.32e. 28.0023. Which of the following statements is always true?I. Diversification reduces unsystematic riskII. A portfolio of 2 stocks is diversifiedIII. A portfolio of 1000 stocks is diversifieda. Statement Ib. Statement IIc. Statement IIId. Statements I, IIIe. NONE OF THE ABOVE24. The market risk premium is currently 8%. CBS stock has a beta of .5, while ABC stockhas a beta of 1.1. What is the expected return of CBS stock if ABC stock has an expectedreturn of 11%?a. 4.0%b. 5.0%c. 6.2%d. 8.8%e. 11.0%25. As CFO of BUAD Corp, you are considering two different capital structures: an allequity plan (Plan I) and a levered plan (Plan II). Under Plan I, GMI would have 200,000share of stock outstanding. Under Plan II, there would be only 100,000 outstandingshares of stock and $2 million in debt with an interest rate of 10%. If there are no taxes,what is the break even EBIT?a. $20,000b. $180,000c. $200,000d. $400,000e. $1,000,000*26. BUAD Corp is currently worth $2,500,000. It as zero-coupon debt with a face value of$1,000,000 and a market value of $900,000 due in exactly one year. BUAD faces acorporate tax rate of 25%, and the required return on BUAD equity is 20%. What is thefirms WACC?a. 5.0%b. 11.1%c. 15.8%d. 20.0%e. Cannot be determined with the information given27. You are considering a project with a cost of $100, and a payback period of exactly 5years. What is the highest possible IRR for this project?a. -49.13%b. 0.00%c. 20.00%d. 49.13%e. InfinityEXTRA CREDIT QUESTION:28. Consider a situation where sellers are informed but buyers are not (i.e. the seller knowsexactly how much the thing is worth, but buyers do not). There is a 90% chance that aninvestment is worth $100, and a 10% chance it is worth $50. If the seller does not have to sell, what is the highest price the uninformed buyer should offer for the asset? (Hint:How much would you personally offer?)a. $0b. $5c. $50d. $95e. $100
