FIN 534 Final Exam 1. An investor who writes standard call options against stock held in his or her portfolio is said to be selling what type of options? 2. 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? 3. An option that gives the holder the right to sell a stock at a specified price at some future time is 4. Other things held constant, the value of an option depends on the stock’s price, the risk-free rate, and the 7. Which of the following statements is CORRECT? Assume a company’s target capital structure is 50% debt and 50% common equity. 8. To help them estimate the company’s cost of capital, Smithco has hired you as a consultant. You have been provided with the following data: D1 = $1.45; P0 = $22.50; and g = 6.50% (constant). Based on the DCF approach, what is the cost of common from reinvested earnings? 9. Which of the following is NOT a capital component when calculating the weighted average cost of capital (WACC) for use in capital budgeting? 10. As a consultant to Basso Inc., you have been provided with the following data: D1 = $0.67; P0 = $27.50; and g = 8.00% (constant). What is the cost of common from reinvested earnings based on the DCF approach? 11. Adams Inc. has the following data: rRF = 5.00%; RPM = 6.00%; and b = 1.05. What is the firm’s cost of common from reinvested earnings based on the CAPM? 12. Burnham Brothers Inc. has no retained earnings since it has always paid out all of its earnings as dividends. This same situation is expected to persist in the future. The company uses the CAPM to calculate its cost of equity, and its target capital structure consists of common stock, preferred stock, and debt. Which of the following events would REDUCE its WACC? 16. Assume a project has normal cash flows. All else equal, which of the following statements is CORRECT? 17. Which of the following statements is CORRECT? 18. Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows. 19. Which of the following should be considered when a company estimates the cash flows used to analyze a proposed project? 21. Which of the following procedures does the text say is used most frequently by businesses when they do capital budgeting analyses? 24. Puckett Inc. risk-adjusts its WACC to account for project risk. It uses a WACC of 8% for below-average risk projects, 10% for average-risk projects, and 12% for above-average risk projects. Which of the following independent projects should Puckett accept, assuming that the company uses the NPV method when choosing projects ? 25. 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? 26. Which of the following statements is CORRECT? 27. The term “additional funds needed (AFN)” is generally defined as follows: 28. Which of the following statements is CORRECT? 29. The capital intensity ratio is generally defined as follows: 30. The Besnier Company had $250 million of sales last year, and it had $75 million of fixed assets that were being operated at 80% of capacity. In millions, how large could sales have been if the company had operated at full capacity? Part 2 4. Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows. 5. Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows 6. Which of the fol…
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