VEE Finance CA

Determine which of the following statements regarding venture capital financing terms is TRUE.

A. When a company founder decides to sell equity to outside investors for the first time, it is common practice for private companies to issue common stock to raise capital.

B. The preferred stock issued by young companies typically pay regular cash dividends to the owner.

C. If the company runs into financial difficulties, the common stockholders have a senior claim on the assets of the firm relative to any preferred stockholder.

D. It is uncommon for investors in later rounds to demand seniority over investors in earlier rounds.

E. If things are not going well and the firm raises new funding at a lower price than in a prior round, it is referred to as a "down round."

E. If things are not going well and the firm raises new funding at a lower price than in a prior round, it is referred to as a "down round."

Which of the following statements is/are true?

I. The shares sold in a primary offering are existing shares that are sold by current shareholders.

II. For smaller IPOs, the underwriter commonly accepts the deal on a firm commitment IPO basis.

III. In a best-efforts IPO, the underwriter guarantees that it will sell all of the stock at the offer price.

A. I only

B. II only

C. III only

D. II and III only

E. None of (A), (B), (C), and (D) are correct

E. None of (A), (B), (C), and (D) are correct

Company XYZ recently raised $4 million with a pre-money valuation of $10 million.

If the company is looking to raise another $7 million and avoid a down round, determine the largest fraction of the firm the company can offer investors.

A. 1/6

B. 1/5

C. 1/4

D. 1/3

E. 1/2

D. 1/3

POST1=4m+10m=14m

POST2=7+14=21m

7/21=1/3

Which of the following outlines the correct sequence of a traditional IPO process?

A. Formation of underwriters and syndicates, SEC filings, Valuation

B. Formation of underwriters and syndicates, Valuation, SEC filings

C. SEC filings, Formation of underwriters and syndicates, Valuation

D. SEC filings, Valuation, Formation of underwriters and syndicates

E. Valuation, SEC filings, Formation of underwriters and syndicates

A. Formation of underwriters and syndicates, SEC filings, Valuation

Determine which of the following statements regarding equity financing for private companies is TRUE.

A. Angel financing often occurs at such an early stage in the business that it is difficult to assess a value for the firm. Angel investors often circumvent this problem by holding equity.

B. A venture capital firm is a general partnership that specializes in raising money to invest in the private equity of young firms.

C. A venture capital firm is run by the limited partners.

D. Private equity firms often initiate their investment by finding a publicly traded firm and purchasing the outstanding equity, thereby taking the company private in a transaction called a leveraged buyout.

E. Corporate investors will only invest ​in companies for the financial return that they will earn on their investments.

D. Private equity firms often initiate their investment by finding a publicly traded firm and purchasing the outstanding equity, thereby taking the company private in a transaction called a leveraged buyout.

To estimate its company's value, Silveroar's investment bankers use data they have collected on comparable companies that have recently gone public:

CompanyCompanyPrice/EarningsPrice/EarningsPrice/RevenuesPrice/Revenues

Paddlemore20.0x1.3x

Titanark19.7x1.2x

IceNavigation20.6x0.7x

Rushcorp23.7x0.8x

Mean21.0x1.0x

Silveroar had earnings of $16 million and revenues of $350 million during the most recent fiscal year.

Assume that Silveroar will have 15 million outstanding shares after the IPO.

Estimate the IPO price for Silveroar using the price/earnings ratio and price/revenues ratio.

A. Between $21.01 to $30.33 per share

B. Between $21.33 to $30.33 per share

C. Between $22.40 to $23.33 per share

D. Between $23.40 to $23.33 per share

E. Between $25.28 to $30.33 per share

C. Between $22.40 to $23.33 per share

Determine which of the following statements regarding the mechanics of an IPO is TRUE.

A. When underwriters provide a firm commitment, they often intentionally overprice the IPO.

B. The over-allotment allocation is also known as red herring.

C. If the issue is a success and the price rises above the IPO offer price, the underwriters will exercise the greenshoe provision.

D. During a lock-up period following an IPO, the new shareholders cannot sell their shares.

E. In an IPO, the service fee charged by underwriters is known as the management fee.

C. If the issue is a success and the price rises above the IPO offer price, the underwriters will exercise the greenshoe provision.

Which of the following statements regarding equity financing is/are TRUE?

I. Angel investors typically invest in convertible notes.

II. Venture capitalists invest in more mature firms than private equity investors.

III. Private equity firms use more debt to finance purchases than other investors.

A. I Only

B. I and II Only

C. I and III Only

D. II and III Only

E. I, II, and III

C. I and III Only

Which of the following is/are advantages of going public?

I. Greater liquidity

II. Less regulations

III. Better access to capital

A. I and II only

B. I and III only

C. II and III only

D. I, II, and III

E. None of (A), (B), (C), and (D) are correct

B. I and III only

Determine which of the following statements about equity financing is FALSE.

A. Convertible notes allow angel investors to convert into equity at a discount when the company finances with equity for the first time.

B. Venture capital firms are run by their general partners.

C. General partners in venture capital firms are also called venture capitalists.

D. The annual management fee that venture capital firms typically charge is known as carried interest.

E. A leveraged buyout is a transaction in which private equity firms initiate their investment by finding a publicly traded firm and purchasing the outstanding equity, thereby taking the company private. In most cases, the private equity firms use debt as well as equity to finance the purchase.

D. The annual management fee that venture capital firms typically charge is known as carried interest.

Parker had a brilliant idea and started a firm. The firm is in its earliest stages of the lifecycle. Parker then decides to raise capital from external sources.

Which source of funding will Parker most likely rely on?

A. Angel investors

B. Venture capital firms

C. Private equity firms

D. Institutional investors

E. Corporate investors

A. Angel investors

Over the years, a firm has raised money through the following rounds of financing:

SeriesSeriesMultiplier for Liquidation PreferenceMultiplier for Liquidation PreferenceNumber of SharesNumber of SharesPrice per SharePrice per ShareA500,000$0.50B1.5x300,000$1.00C3x200,000$1.75

Each series has a higher seniority over the earlier series.

Suppose the firm liquidates after the Series C financing.

Determine how the proceeds will be divided if the firm is sold at $2,000,000.

A. Series A gets $1.05million$1.05million; Series B gets $0.45million$0.45million; Series C gets $0.50million$0.50million

B. Series A gets $1.05million$1.05million; Series B gets $0.50million$0.50million; Series C gets $0.45million$0.45million

C. Series A gets $0.45million$0.45million; Series B gets $0.50million$0.50million; Series C gets $1.05million$1.05million

D. Series A gets $0.50million$0.50million; Series B gets $1.05million$1.05million; Series C

E. Series A gets $0.50million$0.50million; Series B gets $0.45million$0.45million; Series C gets $1.05million

Which of the following statements regarding SEC filings is/are true?

I. The SEC requires companies to prepare a registration statement that provides its financial and other information to investors prior to an IPO.

II. The red herring circulates to investors before the stock is offered.

III. The red herring contains all the details of the IPO, including the number of shares offered and the offer price.

A. I only

B. I and II only

C. I and III only

D. II and III only

E. None of (A), (B), (C), and (D) are correct

B. I and II only

You are given:

Company DOTA has 10 million shares outstanding, and the company is about to issue 5 million new shares in an IPO.

The IPO price has been set at $12 per share. The underwriting spread is 7%.

The IPO is a success, and the share price rises to $25 the first day of trading.

Let XX be the amount that the company raised from the IPO and YY be the market value of the company after the IPO.

A. X=$55.8million;Y=$125million

B. X=$55.8million;Y=$250million

C. X=$55.8million;Y=$375million

D. X=$60million;Y=$250million

E. X=$60million;Y=$375million

C. X=$55.8million;Y=$375million

Dan invested $100,000 to start a company and received 1,000,000 shares of Series A common stock. Since then, the company has been through three additional funding rounds of financing:

Round/Price Per Share/Number of Shares

Series B$0.75 500,000

Series C$1.25 300,000

Series D$3.50 200,000

Let X be the pre-money valuation for the Series D funding round, Y be the post-money valuation for the Series D funding round, and Z be the percentage of the firm that Dan owns after the last funding round.

Determine X, Y, and Z.

A. X=$2.25million;Y=$2.50million;Z=50%

B. X=$2.25million;Y=$7.00million;Z=50%

C. X=$2.80million;Y=$3.50million;Z=40%

D. X=$6.30million;Y=$7.00million;Z=40%

E. X=$6.30million;Y=$7.00million;Z=50%

E. X=$6.30million;Y=$7.00million;Z=50%

Christian invested $50,000 to start a company and received 3,000,000 shares of Series A common stock. Since then, the company has been through 3 additional funding rounds of financing:

Round/Amount of Money Raised/Price per Share

Series B$2,000,000 $1.00

Series C$1,125,000 $1.50

Series D$1,200,000 $4.00

If the company is now worth $39,325,000 determine the value of the Series C shares now.

A. Less than $4.4million

B. At least $4.4million, but less than $4.6million

C. At least $4.6million, but less than $4.8million

D. At least $4.8million, but less than $5.0million

E. At least $5.0million

D. At least $4.8million, but less than $5.0million

# of new shares for

Series B=2,000,000/1.00=2,000,000 Series C=1,125,000/1.50=750,000 Series D=1,200,000/4.00=300,000

TOTAL#:3,000,000+2,000,000+750,000+300,000=6,050,000

PRICE:39,325,000/6,050,000=6.50

6.50(750,000)=4,875,000

Which of the following statements regarding the valuation in a traditional IPO process is/are true?

I. The only way to set the initial price range for the offer price is by estimating the present value of future cash flows.

II. Once an initial price range is set, the underwriters try to determine what the market thinks of the valuation by using a greenshoe provision.

III. The underwriters undergo a process called book building where they adjust the share price to customer demand so that the IPO is most likely to succeed.

A. I only

B. II only

C. III only

D. I, II, and III

E. None of (A), (B), (C), and (D) are correct

C. III only

Taner invested $750,000 to start a company and received 1,000,000 shares of Series A common stock. Since then, the company has been through one additional funding round of financing:

Round/Price Per Share/Number of Shares

Series B $1.25 1,000,000

Taner is considering raising even more capital from a venture capitalist. The venture capitalist has agreed to invest $4 million in exchange for 40% ownership of the company.

Let X be the post-money valuation for the venture capitalist's funding round, and Y be the price per share for the venture capitalist's funding round.

Determine X and Y.

A. X=$6million;Y=$2.80

B. X=$6million;Y=$3.00

C. X=$10million;Y=$2.80

D. X=$10million;Y=$3.00

E. X=$10million;Y=$3.20

D. X=$10million;Y=$3.00

0.40=4m/X

X=10m

1,000,000+1,000,000=2,000,000

0.40= N/(2,000,000+N)=800,000+0.40N=N

N= 1,333,333

4m=1,333,333*Y

Y= 3.00

Determine which of the following statements regarding IPO puzzles is TRUE.

A. The average IPO seems to be priced too high.

B. The number of IPOs is solely driven by the demand for capital.

C. The cost of an IPO is typically lower compared to the cost of other security issues such as bonds.

D. The fees for IPOs seem to be sensitive to the difference in issue sizes.

E. In the subsequent 3-5 years after their IPOs, newly listed firms appear to underperform.

E. In the subsequent 3-5 years after their IPOs, newly listed firms appear to underperform.

Coaching Actuaries is going public using an auction IPO. The following are the bids:

Price ($)/Number of Shares

10.00 200,000

9.75 100,000

9.50 275,000

9.25 30,000

9.00 150,000

8.75 200,000

8.50 50,000

8.25 30,000

Assume Coaching Actuaries would like to sell 1 million shares in its IPO.

Let X be the amount of capital raised and Y be the number of shares sold to those who bid 8.50.

Determine X and Y.

A. X=$8,500,000;Y=5,000

B. X=$8,500,000;Y=45,000

C. X=$8,750,000;Y=5,000

D. X=$8,750,000;Y=45,000

E. X=$10,000,000;Y=50,000

B. X=$8,500,000;Y=45,000

Determine which of the following statements regarding private debt is FALSE.

A. Compared to public debt, it is cheaper to issue private debt.

B. The private debt market is smaller than the public debt market.

C. The private debt market is illiquid.

D. If a group of banks funds a single loan, the loan is called a syndicated bank loan.

E. A private placement does not need to be registered.

B. The private debt market is smaller than the public debt market.

Determine which of the following statements regarding private debt is FALSE:

A. Private debt is cheaper to issue than public debt.

B. The private debt market is larger than the public debt market.

C. The private debt market is more liquid than the public debt market.

D. A private placement is a bond issue that is sold privately to a small group of investors.

E. A revolving line of credit is a credit commitment for a specific time period up to some limit.

C. The private debt market is more liquid than the public debt market.

Determine which of the following statements regarding U.S. corporate bonds is FALSE.

A. Most corporate bonds have maturities of 30 years or less.

B. Most corporate bonds pay quarterly coupons.

C. The face amount or principal amount of the bond is denominated in standard increments, most often $1,000.

D. To receive a coupon payment, the holder of a bearer bond must provide explicit proof of ownership.

E. The issuer of registered bonds maintains a list of all holders of its bonds.

B. Most corporate bonds pay quarterly coupons.

Determine which of the following statements regarding public debt is TRUE.

A. Notes and debentures are secured debts.

B. In the event of bankruptcy, bondholders for mortgage bonds and asset-backed bonds have a direct claim to specific assets which have been pledged as collateral.

C. Notes and debentures have higher seniority than mortgage bonds and asset-backed bonds.

D. The new debt that has higher seniority than existing debenture issues is called a subordinated debenture.

E. Notes typically have longer maturities than debentures.

B. In the event of bankruptcy, bondholders for mortgage bonds and asset-backed bonds have a direct claim to specific assets which have been pledged as collateral.

Determine which of the following statements regarding public debt is FALSE:

A. Corporate bonds always pay coupons semiannually.

B. Bearer bonds are like currency.

C. Almost all bonds that are issued today are registered bonds.

D. Debentures and notes are unsecured debt.

E. For asset-backed bonds and mortgage bonds, specific assets are pledged as collateral that bondholders have a direct claim to in the event of bankruptcy.

A. Corporate bonds always pay coupons semiannually.

Which of the following statements is/are TRUE?

I. GNMA-issued mortgage-backed securities are risk-free.

II. Revenue bonds are municipal bonds that are backed by the full faith and credit of a local government.

III. Noncompetitive bidders in a Treasury auction are guaranteed to have their orders filled at the auction.

A. III only

B. I and II only

C. I and III only

D. II and III only

E. I, II, and III

A. III only

Determine which of the following statements regarding sovereign debt is TRUE.

A. Sovereign debt is issued by state and local governments.

B. Treasury securities that do not pay any coupons and have an original maturity of 26 weeks are called STRIPS.

C. Treasury securities that pay semiannual coupons and have an original maturity of 7 years are called Treasury bonds.

D. Treasury securities that pay semiannual coupons and have an original maturity of 15 years are called Treasury bonds.

E. The dollar coupon of TIPS is fixed.

D. Treasury securities that pay semiannual coupons and have an original maturity of 15 years are called Treasury bonds.

Determine which of the following statements regarding municipal bonds is TRUE.

A. Municipal bonds are issued by the national government.

B. Income on municipal bonds is taxable at the federal level.

C. Revenue bonds pledge specific revenues generated by projects that were initially financed by the bond issue.

D. General obligation bonds are bonds that are backed by the full faith and credit of the federal government.

E. Municipal bonds are default-free.

C. Revenue bonds pledge specific revenues generated by projects that were initially financed by the bond issue.

Determine which of the following statements regarding bond markets is FALSE.

A. Domestic bonds are bonds purchased by foreign investors.

B. Foreign bonds are bonds issued by a foreign entity and traded in a foreign market.

C. Eurobonds are not denominated in the local currency of the country in which they are issued.

D. Global bonds are offered for sale in several different markets simultaneously.

E. Yankee bonds are foreign bonds in the United States

B. Foreign bonds are bonds issued by a foreign entity and traded in a foreign market.

Determine which of the following statements regarding asset-backed securities (ABS) is TRUE.

A. An ABS is a security that is made up of home mortgages.

B. The largest sector of the ABS market is the mortgage-backed security market.

C. Fannie Mae is explicitly backed by the full faith and credit of the U.S. government.

D. Freddie Mac is the largest issuer of mortgage-backed securities in the U.S.

E. When banks re-securitize asset-backed and other fixed income securities, the new asset-backed security is known as asset securitization.

B. The largest sector of the ABS market is the mortgage-backed security market.

Determine which of the following statements regarding international bonds is FALSE:

A. Domestic bonds are bonds issued by a local entity and traded in a local market, but purchased by foreigners, and are denominated in the local currency.

B. Foreign bonds are bonds issued by a foreign company in a local market and are intended for local investors, and are denominated in the foreign currency.

C. Foreign bonds in the United States are known as Yankee bonds.

D. Eurobonds are international bonds that are not denominated in the local currency of the country in which they are issued.

E. Global bonds combine the features of domestic, foreign, and Eurobonds, and are offered for sale in several different markets simultaneously.

B. Foreign bonds are bonds issued by a foreign company in a local market and are intended for local investors, and are denominated in the foreign currency.

You are given:

In January 2011, the U.S. Treasury issued a $1,000 par, 10-year, inflation-indexed note with a coupon of 2%.

The note pays coupon semiannually.

On the date of issue, the consumer price index (CPI) was 200.

By January 2018, the CPI had increased to 240.

Calculate the coupon payment that was made in January 2018.

A. 10.00

B. 12.00

C. 24.00

D. 25.46

E. 50.93

B. 12.00

You are given the following information on five companies:

Company/Number of days of receivables/Number of days of inventory/Number of days of payables

A/35/50/30

B/38/45/27

C/41/48/28

D/42/52/31

E/40/44/25

Which company has the shortest operating cycle?

A. Company A

B. Company B

C. Company C

D. Company D

E. Company E

B. Company B

OC= Number of days of receivables+Number of days of inventory

Liquidity can best be described as:

A. A company's ability to pay its short-term obligations

B. A company's ability to meet its long-term obligations

C. A company's total assets covering total liabilities

D. A company's ability to adapt to changing market conditions

E. A company's ability to negotiate for better deals

A. A company's ability to pay its short-term obligations

Bacorp offers a trade credit with terms of 1.5/10, net 30. If the customer pays on the 20th day, the cost of the trade credit is closest to:

A. 35%

B. 45%

C. 55%

D. 65%

E. 75%

E. 75%

(1+(D/1-D))^(365/AD)-1

Liquidity ratios are useful for performance evaluation, monitoring, and credit-worthiness, but only when they can be compared. Methods of comparing ratios are least likely appropriate when comparing with:

A. the company's historical results

B. the industry average.

C. other companies from different industries.

D. other companies from the same industry.

E. other companies with similar size and financial situations.

C. other companies from different industries.

Which of the following would most accurately be considered a primary source of liquidity?

A. Bank lines of credit

B. Bankruptcy filing

C. Debt obligations restructuring

D. Sales of equipment

E. Refinancing loans

A. Bank lines of credit

Which of the following examples would best be described as a pull on liquidity?

A. a delinquent account receivable

B. a reduced short-term line of credit

C. a short-term obligation coming due

D. an uncollectible account receivable

E. an obsolete inventory

B. a reduced short-term line of credit

You are given the following information on five companies:

Company/Number of days of receivables/Number of days of inventory/Number of days of payables

A/35/50/30

B/38/45/27

C/41/48/28

D/42/52/31

E/40/44/25

Which company has the shortest NET operating cycle?

A. Company A

B. Company B

C. Company C

D. Company D

E. Company E

A. Company A

OC - #DAYS PAYABLES

Catastence has an accounts payable of $560,000 and has made $1.36 million in purchases throughout the year. The number of days payable for Catastence is closest to:

A. 2.43

B. 125

C. 150

D. 200

E. 1534

C. 150

560K/(1.36M/365)

TEC Capital has 40 days of receivables, 42 days of inventory, and 38 days of payables. The net operating cycle (in days) for TEC Capital is closest to:

A. 2

B. 44

C. 80

D. 82

E. 120

B. 44

R+I-P

Which of the following short-term borrowing options offers the most attractive rate for borrowing $2 million for 3 months?

Note that all fees will be pro-rated for the 3 months.

A. A line of credit at 4%, with a commitment fee of 30 basis points

B. A line of credit at 5%, with commitment fee of 45 basis points

C. A banker's acceptance, at an all inclusive rate of 4.5%

D. Commercial paper, at 4% (all-inclusive), with 30 basis points of commission and 20 basis points of backup fees

E. Commercial paper, at 5% (all-inclusive), with 25 basis point of commission and 20 basis points of backup fees

A. A line of credit at 4%, with a commitment fee of 30 basis points

((0.04+0.003)/4)*100=1.075%

Which of the following is least central to a well-run accounts receivable management

system?

A. Accurate projecting cash inflows

B. Processing and maintaining correct records

C. Preparing periodic reports

D. Coordinating with credit managers

E. Controlling records from unauthorized entries

A. Accurate projecting cash inflows

Your manager made the following comments on managing cash positions.

Comment 1: Cash flow forecasts can be made for the short term, medium term, or long term. Longer-term forecasts are generally more accurate than shorter-term.

Comment 2: Cash flow projections are easier for established companies. The elements are usually arranged by inflows and outflows.

Are your manager's comments correct?

A. Comment 1 is incorrect because shorter-term forecasts are generally more accurate.

B. Comment 1 is incorrect because cash flow forecasts can only be made for the long term.

C. Comment 2 is incorrect because those projections are not easier for established companies.

D. Comment 2 is incorrect because the elements are arranged by operations, financing activities, and investing activities.

E. Both Comment 1 and Comment 2 are correct.

A. Comment 1 is incorrect because shorter-term forecasts are generally more accurate.

The differences between the money market yield and bond equivalent yield on short-term securities can most accurately be described as follows:

A. The bond equivalent yield is based on 365 days and the money market yield is based on 360 days

B. The money market yield is based on 365 days and the bond equivalent yield is based on 360 days

C. They are two names for the same thing

D. The bond equivalent yield uses the face value as a basis, but the money market yield uses the purchase price

E. The money market yield uses the face value as a basis, but the bond equivalent yield uses the purchase price

A. The bond equivalent yield is based on 365 days and the money market yield is based on 360 days

In your lesson, you've been told that there are two main short-term investment strategies:

Passive strategy: This strategy is less aggressive and focuses on safety and liquidity. However, this strategy might settle for a lower yield.

Active strategy: This strategy takes on more risk than passive strategy. The focus is on matching the timing of cash flows.

Are the descriptions for both strategies accurate?

A. Inaccurate for passive strategy because this strategy only focuses on safety.

B. Inaccurate for passive strategy because this strategy does not settle for a lower yield.

C. Inaccurate for active strategy because this strategy is less risky than passive strategy.

D. Inaccurate for active strategy because this strategy also allows mismatching the timing of cash flows.

E. Both descriptions are accurate.

D. Inaccurate for active strategy because this strategy also allows mismatching the timing of cash flows.

Cash before delivery - Cash must be paid before any delivery is made

Cash on delivery - Cash must be paid upon delivery

Bill-to-bill - The bills must be paid when they accumulate to a certain amount

Monthly billing-The customer is billed in a monthly cycle

Are the above descriptions for the credit terms accurate?

A. Inaccurate for cash before delivery

B. Inaccurate for cash on delivery

C. Inaccurate for bill-to-bill

D. Inaccurate for monthly billing

E. All descriptions are accurate

C. Inaccurate for bill-to-bill

You are given the following inventory turnover by year for Spectorarth, a light bulb manufacturer.

Year/Inventory turnover

2011/5.6

2012/5.4

2013/5.1

Which of the following is the least likely explanation for this pattern?

A. Changes in Spectorarth's product mix

B. Spectorarth decided to reduce its risk of running out of inventory

C. Spectorarth expects the suppliers to increase their price

D. Spectorarth has introduced more products

E. Operations are becoming more efficient

E. Operations are becoming more efficient

A 91-day U.S. Treasury bill with a face value of $1,000 is currently selling at $988.

What is the bond equivalent yield for the Treasury bill?

A. 1.21%

B. 4.75%

C. 4.80%

D. 4.87%

E. 4.96%

D. 4.87%

BEY=((F-P)/P)*(365/M)

Tempima made $1,875,000 in deposits this past September (30 days). The average daily float for Tempima is $76,500. Tempima's float factor is closest to:

A. 0.04

B. 0.82

C. 1.00

D. 1.22

E. 24.51

D. 1.22

FF = AVG DAILY FLOAT/AVG DAILY DEPOSIT

A U.S. Treasury bill, priced at 97.15 and having a face value of $100, has a money market yield of 5.80%.

What is the U.S. Treasury bill's discount basis yield?

A. 2.87%

B. 2.93%

C. 5.63%

D. 5.80%

E. 5.88%

C. 5.63%

MM=0.058=((F-P)/P)*(365/M)

DB=((F-P)/F)*(MM/((F-P)/P))

When analyzing companies, two common metrics people use are the quick ratio and the current ratio. Which of the following statements regarding these ratios are inaccurate?

The quick ratio and the current ratio are common measures of liquidity

The quick ratio tends to be greater than the current ratio

A. Statement (I). The current ratio is a common measure of solvency.

B. Statement (I). The quick ratio is a common measure of solvency.

C. Statement (II). The current ratio tends to be greater than the quick ratio.

D. Statement (II). You cannot determine whether one ratio tends to be greater than the other.

E. Both statements are accurate.

C. Statement (II). The current ratio tends to be greater than the quick ratio.

An optimal capital budget can be best defined as

A. Capital budget at which the marginal cost of capital equals the marginal return from investing.

B. Capital budget at which the weighted average cost of capital equals the marginal return from investing.

C. Capital budget at which the weighted average cost of capital equals the return from investing.

D. Capital budget at which the marginal return from investing is maximum

E. Capital budget at which the marginal cost of capital is minimum

A. Capital budget at which the marginal cost of capital equals the marginal return from investing.

INC Investments pays out 20% of their earnings in dividends and has an ROE of 8%. The sustainable growth rate for INC is closest to:

A. 1.6%

B. 6.4%

C. 8.0%

D. 12.0%

E. 20.0%

B. 6.4%

G=(1-0.2)*0.08

You are performing market research on Macroup Partners. For part of your analysis, you will need to know the company's weighted average cost of capital. Since the company doesn't disclose its target allocation, you use an unweighted arithmetic average of its competitors' capital structure. The current capital structures of Macroup's competitors are (in $million):

Competitor/Equity market value/Debt market value

I/50/30

II/30/50

III/800/400

The debt weight (w) is closest to

A. 0.35

B. 0.45

C. 0.50

D. 0.55

E. 0.65

B. 0.45

1. D/E+D=30/80

2. D/E+D=50/80

3. D/E+D =400/1200

1+2+3/3

Cisk Devices is issuing preferred stock which is priced at $200/share and scheduled to pay dividends of $20 per share per year. With a marginal tax rate of 50%, the cost of this preferred stock is closest to:

A. 0.00

B. 0.05

C. 0.10

D. 0.20

E. 0.25

C. 0.10

20/200

Ated Technology plans to borrow $20 million from the bank. The new loan is borrowed with a 4% after-tax cost of debt, which is the same rate as Ated's prior loans. The addition of the new loan changes Ated's debt/equity ratio from 50% to 70%.

Assuming Ated's weighted cost of capital stays the same at 10% before and after the loan, determine the change in Ated's cost of equity after the new loan.

A. 0.0%

B. 1.2%

C. 2.6%

D. 14.2%

E. Not enough information to determine the change in cost of equit

B. 1.2%

0.1=(0.5/1.5)0.04+(1/1.5)RE =>13%

0.1=(0.7/1.7)0.04+(1/1.7)RE =>14.2%

14.2%-13%=1.2%

Komelech Design is an advertising agency, with 40% debt, 40% equity, and 20% preferred stock. Komelech's cost of preferred stock is 5%, cost of equity is 9%, and before-tax cost of debt is 4%. Komelech's has a marginal tax rate of 40% in 20X1 and expects the rate to be 35% in the next year.

Let XX be Komelech's weighted average cost of capital in 20X1 and YY be Komelech's weighted average cost of capital in 20X2, it is most accurate to say that Y−XY−X is:

A. positive 0.08%

B. negative 0.08%

C. 0

D. positive 0.16%

E. negative 0.16%

A. positive 0.08%

WACC(X) = 0.40.04(1-.4)+0.20.05+0.4*0.09 = 0.0556

WACC(Y) = 0.40.04(1-.35)+0.20.05+0.4*0.09 = 0.0564

Y-X=0.08%

Etwaress is issuing a 12-year, 7% semi-annual coupon bond, selling for 95 with face value 100. If Etwaress's marginal tax rate is 35%, then Etwaress's after-tax cost of debt is closest to:

A. 5.0%

B. 6.4%

C. 7.6%

D. 2.5%

E. 3.8%

A. 5.0%

RATE=TVM=SEMI-ANNUAL RATE 3.82%

ANNUAL RATE 3.82%*2

RD(AFTER T)=0.03822(1-.35)=5%

Douglas Jardine, a financial analyst, is estimating the cost of capital for a company. The information that he has collected is presented below:

Capital component/Cost of capital component/Book value weight/Market value weight/Target value weight

Equity/12.5%/50%/70%/60%

Debt/8.5%/50%/30%/40%

Given a marginal tax rate of 30%, the weighted average cost of capital (WACC) that Douglas Jardine shall use in his analysis is closest to

A. 9.20%

B. 9.90%

C. 10.50%

D. 10.90%

E. 11.30%

B. 9.90%

USE TARGET WEIGHT

You are looking to calculate the cost of equity for Micor. The following information has been provided to you:

Micor's marginal tax rate is 35%

The market equity risk premium is 4%

The risk-free rate is 3%

Micor's beta is 0.75.

Micor's cost of equity using CAPM is closest to:

A. 0.03

B. 0.04

C. 0.05

D. 0.06

E. 0.07

D. 0.06

CAPM = RF+B*RP

When calculating the weights to use for the weighted average cost of capital, your first preference should be to use:

A. The company's current capital structure

B. The company's target capital structure

C. The company's inferred target capital structure

D. An average of the company's competitors' capital structures

E. The company's current capital structure, adjusted for trends

B. The company's target capital structure

Joel Sartore, a financial analyst, is calculating the weighted average cost of capital for a company. He intends to use target capital structure in assigning weights to various components of capital. The approach to estimating target capital structure that is the least appropriate is

A. Examining the company's target capital structure.

B. Examining the management statement regarding capital structure policy.

C. Examining the company's current capital structure at book value weights.

D. Examining the average of comparable companies' capital structure.

E. Examining the inferred target capital structure

C. Examining the company's current capital structure at book value weights.

New Horizon Construction Ltd. has obtained a loan for $100 million at an interest rate of 8.25%. Let X% be the after-tax cost of debt when the marginal tax rate is 25%, and let Y% be the after-tax cost of debt when the marginal tax rate is 20%.

Calculate Y%−X%

A. −5%

B. −0.4%

C. 0

D. +0.4%

E. +5%

D. +0.4%

Rainforest Products Ltd. has issued a bond to finance its expansion. The bond offers a 6% semi-annual coupon and has a maturity of 6 years. Upon issue, the bond sells at 98.5% of face value. The marginal tax rate for Rainforest is 30%. The before-tax cost of debt for the company shall be closest to

A. 2.21%

B. 3.15%

C. 4.40%

D. 6.00%

E. 6.30%

E. 6.30%

DO NOT USE TAX

The cost of debt can be determined using the yield-to-maturity and the debt rating approaches. If the debt rating approach is used:

A. the coupon is the yield.

B. the yield is based on the interest coverage ratio.

C. the yield equates the present value of the cash flows to the market price of the bond.

D. the company is rated and the rating can be used to assess the credit default spread of the company's debt.

E. the yield can easily calculate option-like features.

D. the company is rated and the rating can be used to assess the credit default spread of the company's debt.

Borp Incorporated has stock worth $60 per share. The dividends on Borp are currently at $4 per year and expected to grow by 5% per year. Borp's cost of equity is closest to:

A. 5%

B. 7%

C. 9%

D. 12%

E. 15%

D. 12%

CE=D/P +G

Komelech Design is an advertising agency with 40% debt, 40% equity, and 20% preferred stock. Komelech's cost of preferred stock is 5%, cost of equity is 9%, and before-tax cost of debt is 4%. At a tax rate of 40%, Komelech's weighted average cost of capital is closest to:

A. 0.0375

B. 0.0450

C. 0.0525

D. 0.0560

E. 0.0620

D. 0.0560

Your boss hands you the following information on Aspects Group:

Dividend next year: $10

Share price: $80

Earnings per share: $15

Return on equity (ROE): 10%

The cost of equity for Aspects is closest to:

A. 4%

B. 8%

C. 12%

D. 16%

E. 20%

D. 16%

G=(1-D/EPS)*ROE

RE=D/P+G

CRE Technology has a weighted average cost of capital of 7.80%. This most accuratelymeans that:

A. CRE's future investments should return at least 7.80% to provide value.

B. CRE's future investments will return exactly 7.80%.

C. It costs CRE 7.80% to borrow money.

D. CRE's shareholders expect a 7.80% return.

E. CRE will have an accounting net loss on investments with less than 7.80% return.

A. CRE's future investments should return at least 7.80% to provide value.

Vedanta Resources has a non-convertible, non-callable preferred stock, for which there are 900,000 shares outstanding. The price of a share is $84 and the company is expected to pay a dividend of $4.50 per share. The marginal tax rate for the company is 30%.

Estimate Vedanta's cost of preferred equity.

A. 3.50%

B. 3.75%

C. 4.50%

D. 5.36%

E. 7.65%

D. 5.36%

RP=D/P

Unitel is a consulting firm, with the following capital structure and costs:

Capital structure consists of 50% equity, 45% debt, and 5% preferred stock.

Cost of equity = 8.5%

After-tax cost of debt = 5.5%

Cost of preferred stock = 10%

At a tax rate of 35%, Unitel's cost of capital is closest to:

A. 6.359%

B. 6.725%

C. 7.079%

D. 7.225%

E. 8.500%

D. 7.225%

DO NOT USE TAX

Beaufort, Inc. is planning to purchase new machinery for its plant. The machine costs $5 million to purchase and install. The machine is expected to generate $800,000 of cash inflows at the end of each year for the next ten years. The machine will be sold at an estimated $500,000 at the end of the tenth year. At a discount rate of 10 percent per annum, the net present value of this project is closest to:

A. -$84,300

B. $90,900

C. $108,400

D. $371,300

E. $5,108,

C. $108,400

TVM = CF

CF0=-5M

CF1=800K

F1=9

CF2=800K+500K

F2=1

I=10

CPT NPV = 108425

Dallas Co. is a car manufacturer.You have gathered the following information about Dallas:

Year/0/1/2/3/4

Net income/-/8,000/6,000/18,500/16,000

Book Value/90,000/100,000/120,000/120,000/110,000

Market Value/90,000/110,000/150,000/140,000/130,000

Forecasted Value/90,000/120,000/130,000/125,000/120,000

Calculate the average accounting rate of return (AAR) for Dallas:

A. 9.62%

B. 10.36%

C. 11.23%

D. 14.55%

E. 15.00%

C. 11.23%

AAR=AVG NET INCOME (4)/AVG BOOK VALUE (5)

An investment of $20,000 will create a perpetual after-tax cash flow of $2,000. The required rate of return is 8%.

Determine the investment's profitability index.

A. 0.08

B. 1.08

C. 1.10

D. 1.16

E. 1.25

E. 1.25

PI=(2000/0.08)/20000

Your company has been considering adding another product line to its offerings. It would cost $25M to develop the product, and the expected NPV of adding the project is a net $4.5M. The profitability index (PI) of this opportunity is closest to:

A. 0.20

B. 0.45

C. 0.70

D. 0.95

E. 1.20

E. 1.20

PI=4.5/25+1

You are given the cash flows of a project as follows:

Year/0/1/2/3

Cash flows/−60/20/40/60

Using an annual 10% required rate of return, calculate the difference between the discounted payback period and the payback period.

A. 0.00

B. 0.19

C. 0.49

D. 0.81

E. 1.00

B. 0.19

PB = 2

DPB = 2+(8.76/45.08)=2.19

DIFF= 0.19

You are considering a project with the following expected cash flows:

Year/Cash Flow

0/-100

1/50

2/50

3/50

The discounted payback period at 8% is closest to:

A. 2.00 years

B. 2.25 years

C. 2.75 years

D. 3.00 years

E. There is no discounted payback period

B. 2.25 years

You are given the following information on two projects.

Project/A/B

NPV/$150,000/$100,000

IRR/6%/7%

Since the company is fairly young, it does not have the resources to invest in both and must choose one. Which project should you pursue (assuming capital can be re-invested at cost)?

A. Project A, because the NPV is higher.

B. Project A, because the IRR is lower.

C. Project B, because the IRR is higher.

D. Project B, because A will require more resources.

E. Either one, because NPV is higher for A but IRR is higher for B.

A. Project A, because the NPV is higher.

Two mutually exclusive projects can best be evaluated by considering their

A. Ranking based on NPV

B. Ranking based on IRR

C. Ranking based on payback period

D. Ranking based on discounted payback period

E. Ranking based on average accounting rate of return

A. Ranking based on NPV

The following excerpt is taken from a talk on capital budgeting:

"All capital budgeting decisions are based on cash flows. Also, we need to analyze them on an after-tax basis. The timing of the cash flows are also crucial as this will affect our decisions. Financing costs are often ignored in the analysis as they are incorporated in the discount rates. Costs from past decisions must be included as they can be considered as the amount you've prepaid."

Determine whether the excerpt is correct.

A. Incorrect regarding the after-tax basis

B. Incorrect regarding the timing of cash flows

C. Incorrect regarding the financing costs

D. Incorrect regarding costs from past decisions

E. The speech is accurate

D. Incorrect regarding costs from past decisions

Company S is considering the following mutually exclusive projects:

Year/Project A/Project B

0/-250/-600

1/75/125

2/100/210

3/75/250

4/120/230

If the required rate of return is 8%, which of the following should Company S most likely invest in?

A. Project A because the IRR is higher

B. Project B because the IRR is lower

C. Project B because the NPV is higher

D. Neither project

E. Both projects

C. Project B because the NPV is higher

David Davis is reviewing a capital budgeting proposal from TA, Inc. TA is considering investing in a new machine. The details of the proposal are as follows:

The machine costs $500,000.

The machine will be depreciated using the straight-line method to zero over a five-year life.

During the life of the machine, an inventory investment of $80,000 is required.

The machine is expected to generate additional revenues of $350,000 per year.

The machine is expected to reduce TA's cash operating expenses by $20,000 per year.

After five years, the machine will be sold for $90,000.

TA is in the 35% tax bracket and its cost of capital is 12%.

TA's incremental annual after-tax operating cash flow is closest to:

A. $175,500

B. $272,700

C. $275,500

D. $287,200

E. $379,500

C. $275,500

CF(O)=C-E-D*(1-T)+D

Greene Co. has $630,000 to invest in capital projects. The company is considering three different projects, each with a positive NPV. The combined cost of the three projects would be $840,000.

Which of the following project interactions will Greene Co. most likely have to take into account in order to make a capital budgeting decision?

A. Project sequencing

B. Mutually exclusive projects

C. Capital rationing

D. Real options

E. Sunk costs

C. Capital rationing

TA, Inc. is considering replacing a piece of old equipment with a piece of new equipment. Details for both are given below:

OE NE

The new equipment will require an additional investment of $250,000 in working capital.

The tax rate is 35%.

TA's terminal year incremental after-tax non-operating cash flow is closest to:

A. $245,000

B. $331,500

C. $581,500

D. $737,500

E. $941,500

C. $581,500

250,000+(750,000−240,000)−0.35*((750,000−240,000)−(0−0))=581,500

TA is evaluating several projects for investment. Information on these projects is given below:

Investment Outlay

NPV

Project I

$600

$300

Project II

$500

$270

Project III

$100

$80

Project IV

$400

$100

Given that TA has a $1,000 capital budget to invest in several projects, and it cannot invest in fractional projects, which of the following is most likely the optimal combination of projects?

A. Project I and Project III only

B. Project I and Project IV only

C. Project II and Project III only

D. Project II and Project IV only

E. Project II, Project III, and Project IV only

E. Project II, Project III, and Project IV only

Naomi Brown is reviewing a capital budgeting proposal from AVA, Inc. AVA is considering investing in new equipment. The details of the proposal are as follows:

The net investment outlay is $580,000.

The investment will generate $275,500 in after-tax incremental cash flow at the end of each of the next 5 years.

At the end of the fifth year, there will be an after-tax terminal cash flow of $138,500.

The weighted average cost of capital for this project is 12%.

The net present value of the investment is closest to:

A. $335,378

B. $483,284

C. $491,704

D. $936,000

E. $1,651,704

C. $491,704

TA is considering investing in one of the following two projects, where the chosen project will be replicated repeatedly in the future:

B/X/Y

Initial investment/$100,000/$125,000

Life of project/3 years/4 years

Annual after-tax cash flows/Year 1: $45,000/Year 1: $47,000

Year 2: $45,000/Year 2: $47,000

Year 3: $70,000/Year 3: $47,000

Year 4: -/Year 4: $67,000

Required rate of return/10%/10%

Which project is most beneficial for TA, and what is its EAA?

A. Project X; EAA = $12,341

B. Project X; EAA = $30,691

C. Project Y; EAA = $11,876

D. Project Y; EAA = $37,644

E. Neither Project X nor Project Y

A. Project X; EAA = $12,341

The five-year projected income statement information is as follows:

Exhibit 1

This project will require investment of $2,500,000 in machinery that will be fully depreciated. Investment of $600,000 in working capital will be recovered when the project is completed. Salvage value of project machinery after 5 years will be $60,000.

The terminal year non-operating cash flow after tax will be closest to:

A. $45,000

B. $600,000

C. $645,000

D. $660,000

E. $1,445,000

C. $645,000

60,000 + 600,000 - 0.25(60,000-0) = 645,000

TA, Inc. is considering replacing a piece of old equipment with a piece of new equipment. Details for both are given below:

OE NE

The new equipment will require an additional investment of $250,000 in working capital.

The tax rate is 35%.

TA's terminal year incremental after-tax non-operating cash flow is closest to:

A. -$195,000

B. $82,500

C. $199,500

D. $245,000

E. $444,500

D. $245,000

[(850,000−350,000)−(500,000−140,000)−(620,000−180,000)](1−0.35)+440,000 =245,000

David Davis is reviewing a capital budgeting proposal from TA, Inc. TA is considering investing in a new machine. The details of the proposal are as follows:

The machine costs $460,000 and installation costs $40,000.

The machine will be depreciated using the straight-line method to zero over a five-year life.

During the life of the machine, an inventory investment of $80,000 is required.

The machine is expected to generate additional revenues of $350,000 per year.

The machine is expected to reduce TA's cash operating expenses by $20,000 per year.

After five years, the machine will be sold for $90,000.

TA is in the 35% tax bracket and its cost of capital is 12%.

TA's terminal year after-tax non-operating cash flow at the end of year five closest to:

A. $80,000

B. $111,500

C. $138,500

D. $170,000

E. $414,000

C. $138,500

90,000+80,000−0.35(90,000−0)= 138,500

TA, Inc. is considering replacing a piece of old equipment with a piece of new equipment. Details for both are given below:

Old EquipmentNew EquipmentCurrent book value$1,500,000Current market value$2,500,000Acquisition cost$6,200,000Remaining life10 yearsLife10 yearsAnnual sales$350,000Annual sales$850,000Cash operating expenses$140,000Cash operating expenses$500,000Annual depreciation$180,000Annual depreciation$620,000Accounting salvage value$0Accounting salvage value$0Expected salvage value after 10 years$240,000Expected salvage value after 10 years$750,000

The new equipment will require an additional investment of $250,000 in working capital.

The tax rate is 35%.

TA's net investment outlay to replace the old equipment is closest to:

A. $3,300,000

B. $3,950,000

C. $4,300,000

D. $5,200,000

E. $6,450,000

C. $4,300,000

6,200,000 + 250,000−2,500,000+0.35(2,500,000−1,500,000) =4,300,000

San Andrias Mineral Resources Ltd has raised $10 million of capital in equal proportions of debt and equity. Before-tax cost of debt and equity are 7.5% and 11%, respectively. The marginal tax rate for the company is 28%. The company's after-tax cost of debt and equity shall be

A. Debt = 5.4% Equity = 11%

B. Debt = 5.4% Equity = 7.92%

C. Debt = 7.5% Equity = 11%

D. Debt = 9.6% Equity = 11%

E. Debt = 9.6% Equity = 14.08%

A. Debt = 5.4% Equity = 11%

TAX ON DEBT ONLY