study+guide 16-19

8/8/2014 study guide 9-17-2014

https://www.eztestonline.com/331569/14075085738350100.tp4 1/39

study guide 9-17-2014Student: _______________________________________________________________________________________

1. Your forecast shows $500,000 annually in sales for each of the next 3 years. If your second and third year predictions have failed toincorporate 2.5% expected annual inflation, how far off in total dollars is your 3-year forecast?

A. $37,813B. $50,000

C. $52,550D. $76,250

2. What is the amount of the operating cash flow for a firm with $500,000 profit before tax, $100,000 depreciation expense, and a 35%marginal tax rate?

A. $260,000

B. $325,000C. $360,000D. $425,000

3. A project anticipates net cash flows of $10,000 at the end of year 1, with such amount growing at the expected 5% rate of inflation overthe subsequent 4 years. Calculate the real present value of this 5-year cash stream if the firm employs a nominal discount rate of 15%.

A. $33,522B. $38,377C. $43,294

D. $55,000

4. What is the undiscounted cash flow in the final year of an investment, assuming $10,000 after-tax cash flows from operations, $1,000

from the sale of a fully depreciated machine, $2,000 required in additional working capital, and a 35% tax rate?

A. $8,450B. $12,600

C. $12,650D. $14,000

5. For a profitable firm in the 30% marginal tax bracket with $100,000 of annual depreciation expense, the depreciation tax shield would

be:

A. $10,500

B. $30,000C. $35,000D. $65,000

6. What is the present value at a 10% discount rate of the depreciation tax shield for a firm in the 35% tax bracket that purchases a$50,000 asset being depreciated straight-line over a 5-year life to a zero salvage value?

A. $10,866B. $13,268C. $17,500D. $37,908

8/8/2014 study guide 9-17-2014


7. A firm generates sales of $250,000, depreciation expense of $50,000, taxable income of $50,000, and has a 35% tax rate. By howmuch does net cash flow deviate from net income?

A. $17,500B. $50,000

C. $67,500D. $82,500

8. A new, more efficient machine will last 4 years and allow inventory levels to decrease by $100,000 during its life. At a cost of capital of13%, how does the net working capital change affect the project's NPV?

A. NPV increases by $38,668.B. NPV increases by $61,330.

C. NPV increases by $100,000.D. NPV increases by $138,668.

9. What is the maximum percentage of variable costs in relation to sales that a firm could experience and still break even with $5 millionrevenue, $1 million fixed costs, and $500,000 depreciation?

A. 30%B. 70%

C. 80%D. 90%

10. If a firm's DOL is 4.0 with a profit of $2,000,000 and depreciation of $500,000, what are its fixed costs?

A. $5,000,000B. $5,500,000C. $6,000,000D. $7,500,000

11. What percentage change in sales occurs if profits increase by 3% when the firm's degree of operating leverage is 4.5?

A. 0.33%

B. 0.67%C. 1.5%D. 3.33%

12. Calculate the break-even level of sales, assuming $1.4 million fixed costs, $400,000 depreciation expense, and variable costs-to-salesratio of 65%.

A. $2,769,231B. $2,857,143C. $4,000,000D. $5,142,857

13. What is the accounting break-even level of revenues for a firm with $6 million in sales, variable costs of $3.9 million, fixed costs of $1.2million, and depreciation of $1 million?

A. $3,428,571B. $6,100,000C. $6,285,714D. $6,557,377

8/8/2014 study guide 9-17-2014


14. A project that has zero EVA:

A. has a positive NPV.B. has an NPV of zero.

C. has a negative NPV.D. all of these.

15. What happens to the NPV of a one-year project if fixed costs are increased from $400 to $600, the firm is profitable, has a 35% taxrate, and employs a 12% cost of capital?

A. NPV decreases by $200.00.B. NPV decreases by $173.91.C. NPV decreases by $130.00.D. NPV decreases by $113.04.

16. If a stock is purchased for $25 per share and held one year, during which time a $1.75 dividend is paid and the price climbs to $29.5,the nominal rate of return is:

A. 13.00%.B. 14.00%.

C. 20.00%.D. 25.00%.

17. What is the percentage return on a stock that was purchased for $40.00, paid no dividend after one year, and was then sold for$39.00?

A. -2.50%B. 2.50%C. 5.00%D. 7.50%

18. From a historical perspective (1900-2007), what would you expect to be the approximate return on a diversified portfolio of commonstocks in a year that Treasury bills offered 7.5%?

A. 8.3%

B. 12.3%C. 14.9%D. 19.3%

19. What is the standard deviation of return of a four-stock portfolio (each stock being equally weighted) that produced returns of 20%,20%, 25%, and 30%?

A. 2.15%B. 3.15%C. 4.15%D. 5.15%

20. What is the expected return on a portfolio that will decline in value by 13% in a recession, will increase by 16% in normal times, and willincrease by 23% during boom times if each scenario has equal likelihood?

A. 8.67%B. 13.00%C. 13.43%D. 17.33%

8/8/2014 study guide 9-17-2014


21. What percentage return is achieved by an investor who purchases a stock for $30, receives a $1.50 dividend, and sells the share oneyear later for $28.50?

A. -5%B. 0%C. 5%D. 10%

22. What is the beta of a three-stock portfolio including 25% of stock A with a beta of .90, 40% of stock B with a beta of 1.05, and 35%of stock C with a beta of 1.73?

A. 1.0B. 1.17C. 1.22

D. 1.25

23. What should be the beta of a replacement stock if an investor wishes to achieve a portfolio beta of 1.0 by replacing stock C in thefollowing equally weighted portfolio: stock A = .9 beta; stock B = 1.1 beta; stock C = 1.35 beta?

A. .93 betaB. 1.00 betaC. 1.08 betaD. 1.15 beta

24. Calculate the risk premium on stock C given the following information: risk-free rate = 5%, market return = 13%, stock C beta = 1.3.

A. 8.0%B. 10.4%C. 15.4%D. 16.9%

25. What rate of return should an investor expect for a stock that has a beta of 0.8 when the market is expected to yield 14% and Treasurybills offer 6%?

A. 9.2%B. 11.2%C. 12.4%D. 12.8%

26. What return would be expected by an investor whose portfolio was 25% market portfolio and 75% Treasury bills if the risk-free ratewas 7% and the market risk premium was 8%?

A. 8.00%B. 9.00%C. 10.75%

D. 13.00%

27. What is the standard deviation of the market portfolio if the standard deviation of a fully diversified portfolio with a beta of 1.25 equals20%?

A. 16.00%B. 18.75%C. 25.00%D. 32.50%

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28. The capital structure for the CR Corporation includes: bonds $5,500 and common stock $11,000. If CR has an after-tax cost of debtof 6%, and a 16% cost of common stock, what is its WACC?

A. 9.33%B. 12.67%C. 13.33%D. 14.67%

29. XYZ Company issues common stock that is expected to pay a dividend over the next year of $4 at a price of $25 per share. If itsexpected growth rate is 5%, what is XYZ's cost of common equity?

A. 9.0%B. 11.0%C. 16.0%D. 21.0%

30. What return on equity do investors seem to expect for a firm with a $55 share price, an expected dividend of $5.50, a beta of .9, and aconstant growth rate of 5.5%?

A. 9.00%B. 10.00%C. 13.95%D. 15.50%

31. What percentage of value should be allocated to equity in WACC computations for a firm with $50 million in debt selling at 85% of par,

$50 million in book value of equity, and $65 million in market value of equity?

A. 50.0%B. 54.1%C. 56.5%D. 60.5%

32. A project will generate $1 million net cash flow annually in perpetuity. If the project costs $7 million, what is the lowest WACC shownbelow that will make the NPV negative?

A. 10%B. 12%C. 14%D. 16%

33. What is the WACC for a firm with 40% debt, 20% preferred stock, and 40% equity if the respective costs for these components are6% after tax, 12% after tax, and 18% before tax? The firm's tax rate is 35%.

A. 9.48%B. 11.16%C. 12.00%

D. 15.60%

34. What is the WACC for a firm with equal amounts of debt and equity financing, a 16% before-tax company cost of capital, a 35% taxrate, and a 10% coupon rate on its debt that is selling at par value?

A. 10.40%B. 14.25%C. 15.13%D. 16.00%

8/8/2014 study guide 9-17-2014


35. What proportion of a firm is equity financed if the WACC is 14%, the after-tax cost of debt is 7.0%, the tax rate is 35%, and therequired return on equity is 18%?

A. 54.00%

B. 63.64%C. 70.26%D. 77.78%

36. What is the company cost of capital for a firm financed with 30% debt if the debt requires a 10% return and equity requires a 16%return?

A. 11.8%B. 13.3%C. 14.2%D. 14.8%

37. If a firm has three times as much equity as debt in its capital structure, then the firm has:

A. 25.0% debt.B. 66.7% equity.C. 40.0% debt.D. 33.3% equity.

38. A company's CFO wants to maintain a target debt-to-equity ratio of 1/4. If the WACC is 18.6%, and the pretax cost of debt is 9.4%,what is the cost of common equity assuming a tax rate of 34%?

A. 19.90%B. 20.90%C. 21.70%D. 22.73%

39. What will be the effect on retained earnings if a firm with 5,000 shares outstanding earns $10 per share and has a 30% plowback ratio?It will increase by:

A. $15,000.B. $30,000.C. $35,000.D. $50,000.

40. Jay's Jams Inc. was just established with an investment of $5 million in stereo equipment. Jay expects his company to generate$800,000 a year for the next 10 years, followed by $1 million a year for the following 10 years. If Jay's cost of capital is 15%, find themarket value and book value of his company.

A. market value = $9.0 million; book value = $5.0 millionB. market value = $5.0 million; book value = $5.3 millionC. market value = $5.3 million; book value = $5.0 millionD. market value = $18.0 million; book value = $5.0 million

41. Which of the following statements is correct about a corporation in the 35% tax bracket that can invest either in a bond paying 8%interest or in the preferred stock of another corporation that pays a 6% dividend?

A. The stock is preferred by approximately .17%.B. The stock is preferred by approximately .80%.C. The bond is preferred by approximately 1.30%.D. The after-tax yields are identical on each.

8/8/2014 study guide 9-17-2014


42. What is the net value of common equity for a firm with 3 million shares issued, 1 million shares outstanding, $4 million of retainedearnings, $2 million of treasury stock at cost, $1 million in additional paid-in capital, and a $1 par value per share?

A. $4 millionB. $6 millionC. $8 millionD. $10 million

43. Earnings this year for Plasti-tech Inc. were $200,000. It decided to plow back $60,000 and recorded $20,000 of depreciation. Plasti-tech's internally generated funds are:

A. $40,000.B. $60,000.C. $80,000.D. $140,000.

44. If the Beta company issues $100 million worth of preferred stock, what will happen to its net worth if book value of common equity is$500 million?

A. It will increase by $400 million.B. It will decrease by $100 million.C. It will increase to $600 million.D. It will decrease to $400 million.

45. A firm has just issued $250 million of equity which caused its stock price to drop by 3%. Calculate the loss in value of the firm's equitygiven that its market value of equity was $1 billion before the new issue:

A. $7.5 millionB. $30.0 millionC. $33.3 millionD. $37.5 million

46. What is the market value placed on a firm in which an entrepreneur invests $1 million and a venture capitalist invests $3 million in first-stage financing for a 50% interest in the firm?


47. Assume the issuer incurs $1 million in other expenses to sell 3 million shares at $40 each to an underwriter and the underwriter sells theshares at $43 each. By the end of the first day's trading, the issuing company's stock price had risen to $70. What is the cost ofunderpricing?


48. Assume the issuer incurs $1 million in other expenses to sell 3 million shares at $40 each to an underwriter and the underwriter sells theshares at $43 each. By the end of the first day's trading, the issuing company's stock price had risen to $70. In percentage terms, howmuch market value is absorbed by the total cost (direct expenses plus underpricing cost)?

A. 13.33%B. 23.33%C. 33.33%D. 43.33%

8/8/2014 study guide 9-17-2014


49. If an investor can earn 20% on underpriced IPOs, but will lose 10% on overpriced IPOs in which he was awarded $2,000 worth of the

overpriced issue, how much of the underpriced issue must he be awarded in order to gain $500?

A. $1,500B. $2,500C. $3,500D. $10,000

50. Plasti-tech Inc. has decided to go public and has sold 2 million of its shares to its underwriter for $20 per share. The underwriter thensold them to the public for $22 each. Plasti-tech also encountered $0.5 million in administrative fees. Soon after the issue, the stockprice rose to $25. Find Plasti-tech Inc.'s total cost of this issue.

A. $4.5 millionB. $9.5 millionC. $10.5 millionD. $14.5 million

51. An underwriter issues a firm commitment to sell 1 million shares at $20 each, including a $2 spread. How much does the issuing firmreceive if only 500,000 shares are sold?


52. A rights issue offers the firm's shareholders one new share of stock at $40 for every three shares of stock they currently own. Whatshould be the stock price after the rights issue if the stock sells for $80 per share before the issue?

A. $56.67B. $60.00C. $70.00D. $71.33

53. A firm is expected to generate $1.5 million in operating income and pay $250,000 in interest. Ignoring taxes, this will generate $12.50earnings per share. What will happen to EPS if operating income increases to $2.0 million?

A. EPS increase to $15.63.B. EPS increase to $16.67.C. EPS increase to $17.50.D. EPS increase to $20.00.

54. A firm issues 100,000 equity shares with a total market value of $5,000,000. The firm's market value of debt is also of equal amount(i.e., $5,000,000). The firm is expected to generate $1.5 million in operating income and pay $250,000 in interest. Ignoring taxes, thiswill generate $12.50 earnings per share. What will happen to EPS if the firm's borrowing and interest expense increases by 75% and thenumber of shares in circulation is cut by 75% (assuming that the share price remains unchanged with this change in capital structure)?

A. EPS decrease to $10.00.B. EPS stay at $12.50.C. EPS increase to $30.00.D. EPS increase to $42.50.

55. What is the proportion of debt financing for a firm that expects a 24% return on equity, a 16% return on assets, and a 12% return ondebt? Ignore taxes.

A. 54.0%B. 60.0%C. 66.7%D. 75.0%

8/8/2014 study guide 9-17-2014


56. What is the expected return on equity for a firm with a 14% expected return on assets that pays 9% on its debt, which totals 70% ofassets?

A. 16.14%B. 17.00%C. 19.00%D. 25.67%

57. What happens to an all-equity firm's EPS when $1 million of 20% debt is issued and proceeds used to repurchase two-thirds of thestock if operating income equals $1.5 million and EPS were $2 when the firm was all-equity-financed? Ignore taxes.

A. EPS increase to $2.60.

B. EPS increase to $3.00.C. EPS increase to $4.80.D. EPS increase to $5.20.

58. What is the expected rate of return to equityholders if the firm has a 35% tax rate, a 10% rate of interest paid on debt, a 15% WACC,and a 60% debt-asset ratio?

A. 12.50%B. 21.25%C. 22.50%D. 27.75%

59. Stockholders' expected return on a stock priced at $25 per share with zero-growth dividends of $4.00 is:

A. 6.25%.B. 13.64%.C. 16.00%.D. 21.00%.

60. If the value of a levered firm is $4,000,000, then the value of the same firm all-equity-financed is:

A. $3,000,000.B. $4,500,000.C. $5,500,000.D. $6,000,000.

61. What is the amount of the annual interest tax shield for a firm with $3 million in debt that pays 12% interest if the firm is in the 35% taxbracket?

A. $126,000B. $234,000C. $360,000D. $1,050,000

62. What is the change in value for a firm with $1 million in equity, $1 million in permanent debt at a 10% interest rate, and a 35% tax rate ifMM I is modified to recognize corporate taxes?

A. Value increases by $35,000.B. Value increases by $100,000.C. Value increases by $350,000.D. Value increases by $700,000.

8/8/2014 study guide 9-17-2014


63. XYZ Corp. has 1,000 shares outstanding and retained earnings of $25,000. Theoretically, what would you expect to happen to theprice of their stock, currently selling for $30 per share, if a 25% stock dividend is declared?

A. Price should increase to $44.00 per share.B. Price should increase to $37.50 per share.C. Price should decrease to $24.00 per share.D. Nothing; price should remain at $30.00.

64. How much should an investor pay now for a stock expected to sell for $30 one year from now if the stock offers a $2 dividend,dividends are taxed at 40%, capital gains are taxed at 20%, and a 15% after-tax return is expected on the investment?

A. $25.04B. $26.53C. $27.09

D. $27.50

65. Which statement is true concerning the one-year after-tax return on the following stocks, assuming a 40% tax rate on dividends and a20% tax rate on capital gains: Stock A is purchased for $50, offers a 5% dividend yield, and is sold for $56; stock B is purchased for$60, offers no dividend yield, but is sold after one year for $70.

A. Stock A's after-tax return is higher by 1.27%.B. Stock B's after-tax return is higher by .73%.C. Stock A's after-tax return is higher by .27%.D. Stock B's after-tax return is higher by .58%.

66. Compare the after-tax returns for a corporation that invests in preferred stock with a 12% dividend versus a common stock with nodividend but a 16% capital gain. The corporation's tax rate is 35%. The:

A. common stock returns 2.60% more than preferred.B. preferred stock returns 0.34% more than common.C. common stock returns 2.32% more than preferred.D. returns are equal on an after-tax basis.

67. A stock is currently priced at $65 per share and will pay a $4 dividend in one year. What must the stock sell for in one year to meetinvestors' expectations of a 15% after-tax yield if dividends are taxed at 28%? Ignore capital gains taxes due to investor timing.

A. $70.75B. $71.87C. $73.63D. $76.00

68. What capital gain must a non-dividend-paying stock attain in order for a corporate investor in the 35% tax bracket to be indifferent to astock paying an 8% dividend but having no capital gain?

A. 8.00%B. 9.29%C. 11.02%D. 12.31%

69. The Beta corporation had 1,000 shares outstanding and a market value of $90,000 prior to the declaration of a $5 per share dividend.To finance a new project they will issue equity and the end result will be that the market value of the firm:

A. drops by $1,000.B. drops to $85,000.C. increases by $1,000.D. increases to $95,000.

8/8/2014 study guide 9-17-2014


study guide 9-17-2014 KEY1. Your forecast shows $500,000 annually in sales for each of the next 3 years. If your second and third year predictions have failed to

incorporate 2.5% expected annual inflation, how far off in total dollars is your 3-year forecast?

A. $37,813B. $50,000C. $52,550D. $76,250

AACSB: Analytic

Blooms: Analyze

Brealey - Chapter 09 #39

Difficulty: 2 Medium

Learning Objective: 09-01 Identify the cash flows properly attributable to a proposed new project.

Topic: Calculating Cash Flows

2. What is the amount of the operating cash flow for a firm with $500,000 profit before tax, $100,000 depreciation expense, and a 35%marginal tax rate?

A. $260,000B. $325,000C. $360,000D. $425,000

AACSB: Analytic

Blooms: Analyze





8/8/2014 study guide 9-17-2014


3. A project anticipates net cash flows of $10,000 at the end of year 1, with such amount growing at the expected 5% rate of inflation overthe subsequent 4 years. Calculate the real present value of this 5-year cash stream if the firm employs a nominal discount rate of 15%.

A. $33,522B. $38,377C. $43,294D. $55,000

AACSB: Analytic

Blooms: Analyze


Difficulty: 3 Hard


Topic: Understanding Real and Nominal Rates

4. What is the undiscounted cash flow in the final year of an investment, assuming $10,000 after-tax cash flows from operations, $1,000from the sale of a fully depreciated machine, $2,000 required in additional working capital, and a 35% tax rate?

A. $8,450B. $12,600

C. $12,650D. $14,000

Cash flows = after-tax cash flow from operations + recovery of additional working capital + after-tax salvage value= $10,000 + $2,000 + ($1,000 .65)

= $12,650

AACSB: Analytic

Blooms: Analyze



Learning Objective: 09-02 Calculate the cash flows of a project from standard financial statements.


5. For a profitable firm in the 30% marginal tax bracket with $100,000 of annual depreciation expense, the depreciation tax shield wouldbe:

A. $10,500

B. $30,000C. $35,000

D. $65,000

Depreciation tax shield = depreciation tax rate

= $100,000 .30= $30,000

AACSB: Ethics

AACSB: Reflective Thinking

Blooms: Apply



Learning Objective: 09-03 Understand how the companys tax bill is affected by depreciation and how this affects project value.

Topic: Understanding Depreciation

8/8/2014 study guide 9-17-2014


6. What is the present value at a 10% discount rate of the depreciation tax shield for a firm in the 35% tax bracket that purchases a

$50,000 asset being depreciated straight-line over a 5-year life to a zero salvage value?

A. $10,866B. $13,268

C. $17,500

D. $37,908

AACSB: Analytic

Blooms: Analyze




Topic: Understanding Depreciation

7. A firm generates sales of $250,000, depreciation expense of $50,000, taxable income of $50,000, and has a 35% tax rate. By how

much does net cash flow deviate from net income?

A. $17,500B. $50,000

C. $67,500D. $82,500

AACSB: Ethics


Blooms: Apply





8. A new, more efficient machine will last 4 years and allow inventory levels to decrease by $100,000 during its life. At a cost of capital of

13%, how does the net working capital change affect the project's NPV?

A. NPV increases by $38,668.

B. NPV increases by $61,330.C. NPV increases by $100,000.

D. NPV increases by $138,668.

AACSB: Analytic

Blooms: Analyze



Learning Objective: 09-04 Understand how changes in working capital affect project cash flows.

Topic: Changes in Working Capital

8/8/2014 study guide 9-17-2014


9. What is the maximum percentage of variable costs in relation to sales that a firm could experience and still break even with $5 millionrevenue, $1 million fixed costs, and $500,000 depreciation?

A. 30%

B. 70%C. 80%

D. 90%

Therefore, variable costs cannot exceed $3.5 million, or 70% of sales.

AACSB: Analytic

Blooms: Analyze


Difficulty: 3 Hard

Learning Objective: 10-01 Appreciate the practical problems of capital budgeting in large corporations.

Topic: Break-Even Analysis

10. If a firm's DOL is 4.0 with a profit of $2,000,000 and depreciation of $500,000, what are its fixed costs?

A. $5,000,000

B. $5,500,000C. $6,000,000

D. $7,500,000

AACSB: Analytic

Blooms: Analyze



Learning Objective: 10-03 Understand why an overestimate of sales is more serious for projects with high operating leverage.

Topic: Understanding Leverage

8/8/2014 study guide 9-17-2014


11. What percentage change in sales occurs if profits increase by 3% when the firm's degree of operating leverage is 4.5?

A. 0.33%

B. 0.67%C. 1.5%

D. 3.33%

AACSB: Analytic

Blooms: Analyze



Learning Objective: 10-03 Understand why an overestimate of sales is more serious for projects with high operating leverage.

Topic: Understanding Leverage

12. Calculate the break-even level of sales, assuming $1.4 million fixed costs, $400,000 depreciation expense, and variable costs-to-sales

ratio of 65%.

A. $2,769,231B. $2,857,143

C. $4,000,000D. $5,142,857

AACSB: Analytic

Blooms: Analyze



Learning Objective: 10-02 Use sensitivity; scenario; and break-even analyses to see how project profitability would be affected by an error in your forecasts.


13. What is the accounting break-even level of revenues for a firm with $6 million in sales, variable costs of $3.9 million, fixed costs of $1.2

million, and depreciation of $1 million?

A. $3,428,571B. $6,100,000

C. $6,285,714D. $6,557,377

AACSB: Analytic

Blooms: Analyze





8/8/2014 study guide 9-17-2014


14. A project that has zero EVA:

A. has a positive NPV.B. has an NPV of zero.

C. has a negative NPV.D. all of these.

AACSB: Ethics


Blooms: Apply





15. What happens to the NPV of a one-year project if fixed costs are increased from $400 to $600, the firm is profitable, has a 35% tax

rate, and employs a 12% cost of capital?

A. NPV decreases by $200.00.

B. NPV decreases by $173.91.C. NPV decreases by $130.00.

D. NPV decreases by $113.04.

Change in cash flow = (200) + 70 = (130),

which discounts to $113.04

AACSB: Analytic

Blooms: Analyze




Topic: Project Analysis

16. If a stock is purchased for $25 per share and held one year, during which time a $1.75 dividend is paid and the price climbs to $29.5,

the nominal rate of return is:

A. 13.00%.B. 14.00%.

C. 20.00%.D. 25.00%.

AACSB: Analytic

Blooms: Analyze



Learning Objective: 11-02 Calculate returns and standard deviation of returns for individual common stocks or for a stock portfolio.

Topic: Rates of Return

8/8/2014 study guide 9-17-2014


17. What is the percentage return on a stock that was purchased for $40.00, paid no dividend after one year, and was then sold for

$39.00?

A. -2.50%B. 2.50%

C. 5.00%D. 7.50%

AACSB: Analytic

Blooms: Analyze





18. From a historical perspective (1900-2007), what would you expect to be the approximate return on a diversified portfolio of common

stocks in a year that Treasury bills offered 7.5%?

A. 8.3%

B. 12.3%C. 14.9%

D. 19.3%


Blooms: Apply



Learning Objective: 11-03 Understand why diversification reduces risk.


19. What is the standard deviation of return of a four-stock portfolio (each stock being equally weighted) that produced returns of 20%,20%, 25%, and 30%?

A. 2.15%B. 3.15%

C. 4.15%D. 5.15%

AACSB: Ethics


Blooms: Analyze


Difficulty: 3 Hard



8/8/2014 study guide 9-17-2014


20. What is the expected return on a portfolio that will decline in value by 13% in a recession, will increase by 16% in normal times, and willincrease by 23% during boom times if each scenario has equal likelihood?

A. 8.67%

B. 13.00%C. 13.43%

D. 17.33%


Blooms: Understand


Difficulty: 1 Easy



21. What percentage return is achieved by an investor who purchases a stock for $30, receives a $1.50 dividend, and sells the share oneyear later for $28.50?

A. -5%B. 0%

C. 5%D. 10%

Percentage return = capital gain + dividend/initial price

0% = (-1.50 + 1.50)/30

AACSB: Ethics


Blooms: Apply



Learning Objective: 11-04 Distinguish between specific risk; which can be diversified away; and market risk; which cannot.


22. What is the beta of a three-stock portfolio including 25% of stock A with a beta of .90, 40% of stock B with a beta of 1.05, and 35%of stock C with a beta of 1.73?

A. 1.0B. 1.17

C. 1.22D. 1.25

Portfolio beta = (.25 0.9) + (.4 1.05) + (.35 1.73)= .225 + .42 + .606 = 1.25

AACSB: Analytic

Blooms: Analyze



Learning Objective: 12-02 Relate the market risk of a security to the rate of return that investors demand.

Topic: Measuring Market Risk

8/8/2014 study guide 9-17-2014


23. What should be the beta of a replacement stock if an investor wishes to achieve a portfolio beta of 1.0 by replacing stock C in the

following equally weighted portfolio: stock A = .9 beta; stock B = 1.1 beta; stock C = 1.35 beta?

A. .93 betaB. 1.00 beta

C. 1.08 betaD. 1.15 beta

New portfolio beta = (.333 .9) + (.333 1.1) + (.333 Beta C)1.0 = .3 + .366 +.333 beta C

.334 = .333 beta C1.00 = beta C

AACSB: Analytic

Blooms: Analyze


Difficulty: 3 Hard



24. Calculate the risk premium on stock C given the following information: risk-free rate = 5%, market return = 13%, stock C beta = 1.3.

A. 8.0%B. 10.4%

C. 15.4%D. 16.9%

Stock C risk premium = beta market risk premium

= 1.3 (13% - 5%) = 10.4%

AACSB: Analytic

Blooms: Analyze




Topic: Capital Asset Pricing Model

25. What rate of return should an investor expect for a stock that has a beta of 0.8 when the market is expected to yield 14% and Treasury

bills offer 6%?

A. 9.2%B. 11.2%

C. 12.4%D. 12.8%

r = rf + (rm - rf) = 6% + .8(14% - 6%) = 6% + 6.4% = 12.4%

AACSB: Analytic

Blooms: Analyze




Topic: Capital Asset Pricing Model

8/8/2014 study guide 9-17-2014


26. What return would be expected by an investor whose portfolio was 25% market portfolio and 75% Treasury bills if the risk-free rate

was 7% and the market risk premium was 8%?

A. 8.00%

B. 9.00%C. 10.75%

D. 13.00%

Expected return on market = rf + market risk premium = 15.00%

Expected return on portfolio = (.75 7%) + (.25 15%) = 5.25% + 3.75% = 9.00%

AACSB: Analytic

Blooms: Analyze





27. What is the standard deviation of the market portfolio if the standard deviation of a fully diversified portfolio with a beta of 1.25 equals

20%?

A. 16.00%B. 18.75%

C. 25.00%D. 32.50%

Portfolio = beta market portfolio 20% = 1.25 m16% = m

AACSB: Analytic

Blooms: Analyze



Learning Objective: 12-03 Calculate the opportunity cost of capital for a project.


28. The capital structure for the CR Corporation includes: bonds $5,500 and common stock $11,000. If CR has an after-tax cost of debt

of 6%, and a 16% cost of common stock, what is its WACC?

A. 9.33%

B. 12.67%C. 13.33%

D. 14.67%

WACC = [($5,500/$16,500) (0.06)] + [($11,000/$16,500) (0.16)]

= .02 + .10667= 12.67%

AACSB: Analytic

Blooms: Analyze



Learning Objective: 13-03 Calculate the weighted-average cost of capital.

Topic: Weighted-Average Cost of Capital

8/8/2014 study guide 9-17-2014


29. XYZ Company issues common stock that is expected to pay a dividend over the next year of $4 at a price of $25 per share. If itsexpected growth rate is 5%, what is XYZ's cost of common equity?

A. 9.0%B. 11.0%

C. 16.0%D. 21.0%

re = 4/25 + 0.05 = 21.00%

AACSB: Analytic

Blooms: Analyze




Topic: Company Cost of Capital

30. What return on equity do investors seem to expect for a firm with a $55 share price, an expected dividend of $5.50, a beta of .9, and aconstant growth rate of 5.5%?

A. 9.00%B. 10.00%

C. 13.95%D. 15.50%

AACSB: Analytic

Blooms: Analyze





31. What percentage of value should be allocated to equity in WACC computations for a firm with $50 million in debt selling at 85% of par,

$50 million in book value of equity, and $65 million in market value of equity?

A. 50.0%

B. 54.1%C. 56.5%

D. 60.5%

AACSB: Analytic

Blooms: Analyze





8/8/2014 study guide 9-17-2014


32. A project will generate $1 million net cash flow annually in perpetuity. If the project costs $7 million, what is the lowest WACC shown

below that will make the NPV negative?

A. 10%

B. 12%C. 14%

D. 16%

$1 million/.16 = $6.25 million < $7 million

Therefore, NPV < $0At 14%, the NPV is still positive by $142,857.

AACSB: Analytic

Blooms: Analyze





33. What is the WACC for a firm with 40% debt, 20% preferred stock, and 40% equity if the respective costs for these components are

6% after tax, 12% after tax, and 18% before tax? The firm's tax rate is 35%.

A. 9.48%

B. 11.16%C. 12.00%

D. 15.60%

WACC = (.4 .06) + (.2 .12) + (.4 .18)= .024 + .024 + .072

= 12.0%

AACSB: Analytic

Blooms: Analyze





34. What is the WACC for a firm with equal amounts of debt and equity financing, a 16% before-tax company cost of capital, a 35% taxrate, and a 10% coupon rate on its debt that is selling at par value?

A. 10.40%B. 14.25%

C. 15.13%D. 16.00%

WACC = company cost of capital - adjustment for tax shield on debt

WACC = 16% - 1.75%= 14.25%

AACSB: Analytic

Blooms: Analyze


Difficulty: 3 Hard



8/8/2014 study guide 9-17-2014


35. What proportion of a firm is equity financed if the WACC is 14%, the after-tax cost of debt is 7.0%, the tax rate is 35%, and therequired return on equity is 18%?

A. 54.00%B. 63.64%

C. 70.26%D. 77.78%

14% = (1 - x)(7%) + (x)18%14% = 7% - (x)7% + (x)18%

7% = (x)11%63.64% = x

AACSB: Analytic

Blooms: Analyze


Difficulty: 3 Hard



36. What is the company cost of capital for a firm financed with 30% debt if the debt requires a 10% return and equity requires a 16%return?

A. 11.8%B. 13.3%

C. 14.2%D. 14.8%

rassets = (.3 .10) + (.7 .16)

= .03 + .112

= 14.2%

AACSB: Analytic

Blooms: Analyze




Topic: Company Cost of Capital

37. If a firm has three times as much equity as debt in its capital structure, then the firm has:

A. 25.0% debt.B. 66.7% equity.C. 40.0% debt.

D. 33.3% equity.

Let x = % of debtThen 3x = % of equity

And 4x = 100% x = 25.0%Equity = 75.0%

AACSB: Analytic

Blooms: Analyze




Topic: Understanding Capital Structure

8/8/2014 study guide 9-17-2014


38. A company's CFO wants to maintain a target debt-to-equity ratio of 1/4. If the WACC is 18.6%, and the pretax cost of debt is 9.4%,what is the cost of common equity assuming a tax rate of 34%?

A. 19.90%B. 20.90%

C. 21.70%D. 22.73%

Therefore, D/V = 1/5 and E/V = 4/50.186 = 1/5(0.094)(1 -0.34) + 4/5(re)

0.186 = .0124 + 4/5(re)

re = 21.70%

AACSB: Analytic

Blooms: Analyze


Difficulty: 3 Hard



39. What will be the effect on retained earnings if a firm with 5,000 shares outstanding earns $10 per share and has a 30% plowback ratio?It will increase by:

A. $15,000.B. $30,000.C. $35,000.D. $50,000.

AACSB: Analytic

Blooms: Analyze



Learning Objective: 14-04 Describe voting procedures for the election of a firms board of directors and other matters.

Topic: Corporate Financing

40. Jay's Jams Inc. was just established with an investment of $5 million in stereo equipment. Jay expects his company to generate$800,000 a year for the next 10 years, followed by $1 million a year for the following 10 years. If Jay's cost of capital is 15%, find themarket value and book value of his company.

A. market value = $9.0 million; book value = $5.0 millionB. market value = $5.0 million; book value = $5.3 millionC. market value = $5.3 million; book value = $5.0 millionD. market value = $18.0 million; book value = $5.0 million

Book value = $5 million

Market value = $800,000(10-year annuity factor) + (1/1.1510) $1 million(10-year annuity factor)

= $800,000(5.02) + (1/1.1510) $1 million(5.02)= $4,016,000 + $5,020,00/4.05= $5.3 million

AACSB: Analytic

Blooms: Analyze


Difficulty: 3 Hard



8/8/2014 study guide 9-17-2014


41. Which of the following statements is correct about a corporation in the 35% tax bracket that can invest either in a bond paying 8%interest or in the preferred stock of another corporation that pays a 6% dividend?

A. The stock is preferred by approximately .17%.B. The stock is preferred by approximately .80%.C. The bond is preferred by approximately 1.30%.

D. The after-tax yields are identical on each.

After-tax yield (bond) = 8%(1 - tax rate)

= 8% (1 - .35)= 8% .65= 5.2%After-tax yield (stock) = 6% - (6% taxable portion tax rate)

= 6% - (6% .3 .35)= 5.37%The bond is preferred by .17%.

AACSB: Analytic

Blooms: Analyze





42. What is the net value of common equity for a firm with 3 million shares issued, 1 million shares outstanding, $4 million of retainedearnings, $2 million of treasury stock at cost, $1 million in additional paid-in capital, and a $1 par value per share?


AACSB: Analytic

Blooms: Analyze



Learning Objective: 14-05 Describe the major classes of securities sold by the firm.


43. Earnings this year for Plasti-tech Inc. were $200,000. It decided to plow back $60,000 and recorded $20,000 of depreciation. Plasti-tech's internally generated funds are:

A. $40,000.B. $60,000.C. $80,000.

D. $140,000.

Internally generated funds:= $20,000 + $60,000 = $80,000

AACSB: Ethics


Blooms: Apply





8/8/2014 study guide 9-17-2014


44. If the Beta company issues $100 million worth of preferred stock, what will happen to its net worth if book value of common equity is$500 million?

A. It will increase by $400 million.B. It will decrease by $100 million.C. It will increase to $600 million.D. It will decrease to $400 million.

AACSB: Ethics


Blooms: Apply




Topic: Equity

45. A firm has just issued $250 million of equity which caused its stock price to drop by 3%. Calculate the loss in value of the firm's equitygiven that its market value of equity was $1 billion before the new issue:

A. $7.5 millionB. $30.0 millionC. $33.3 million

D. $37.5 million

Loss in value = .03 $1 billion = $30 billion

AACSB: Analytic

Blooms: Analyze



Learning Objective: 15-01 Understand how venture capital firms design successful deals.

Topic: General Security Offers

46. What is the market value placed on a firm in which an entrepreneur invests $1 million and a venture capitalist invests $3 million in first-stage financing for a 50% interest in the firm?


AACSB: Ethics


Blooms: Analyze



Learning Objective: 15-01 Understand how venture capital firms design successful deals.

Topic: Venture Capital

8/8/2014 study guide 9-17-2014


47. Assume the issuer incurs $1 million in other expenses to sell 3 million shares at $40 each to an underwriter and the underwriter sells the

shares at $43 each. By the end of the first day's trading, the issuing company's stock price had risen to $70. What is the cost ofunderpricing?


AACSB: Analytic

Blooms: Analyze



Learning Objective: 15-02 Understand how firms make initial public offerings and the costs of such offerings.

Topic: Initial Public Offerings

8/8/2014 study guide 9-17-2014


48. Assume the issuer incurs $1 million in other expenses to sell 3 million shares at $40 each to an underwriter and the underwriter sells theshares at $43 each. By the end of the first day's trading, the issuing company's stock price had risen to $70. In percentage terms, how

much market value is absorbed by the total cost (direct expenses plus underpricing cost)?

A. 13.33%

B. 23.33%C. 33.33%D. 43.33%

AACSB: Analytic

Blooms: Analyze





49. If an investor can earn 20% on underpriced IPOs, but will lose 10% on overpriced IPOs in which he was awarded $2,000 worth of theoverpriced issue, how much of the underpriced issue must he be awarded in order to gain $500?

A. $1,500B. $2,500C. $3,500D. $10,000

$500 = (0.20 value of shares) - (0.10 $2,000)Value of shares = $3,500

AACSB: Ethics


Blooms: Analyze


Difficulty: 3 Hard



8/8/2014 study guide 9-17-2014


50. Plasti-tech Inc. has decided to go public and has sold 2 million of its shares to its underwriter for $20 per share. The underwriter thensold them to the public for $22 each. Plasti-tech also encountered $0.5 million in administrative fees. Soon after the issue, the stockprice rose to $25. Find Plasti-tech Inc.'s total cost of this issue.

A. $4.5 millionB. $9.5 million

C. $10.5 millionD. $14.5 million

AACSB: Ethics


Blooms: Analyze


Difficulty: 3 Hard



51. An underwriter issues a firm commitment to sell 1 million shares at $20 each, including a $2 spread. How much does the issuing firmreceive if only 500,000 shares are sold?

A. $9 millionB. $10 million

C. $18 millionD. $20 million

Proceeds to firm = (price to public - underwriting spread) number of shares committed= ($20 - $2) 1 million= $18 million

AACSB: Ethics


Blooms: Analyze


Difficulty: 3 Hard

Learning Objective: 15-04 Explain the role of the underwriter in an issue of securities.


52. A rights issue offers the firm's shareholders one new share of stock at $40 for every three shares of stock they currently own. Whatshould be the stock price after the rights issue if the stock sells for $80 per share before the issue?

A. $56.67

B. $60.00C. $70.00D. $71.33

AACSB: Analytic

Blooms: Analyze



Learning Objective: 15-05 Describe the terms of a rights issue.

Topic: General Security Offers

8/8/2014 study guide 9-17-2014


53. A firm is expected to generate $1.5 million in operating income and pay $250,000 in interest. Ignoring taxes, this will generate $12.50earnings per share. What will happen to EPS if operating income increases to $2.0 million?

A. EPS increase to $15.63.B. EPS increase to $16.67.C. EPS increase to $17.50.D. EPS increase to $20.00.

AACSB: Analytic

Blooms: Analyze



Learning Objective: 16-01 Show why capital structure does not affect firm value in perfect capital markets.

Topic: Capital Structure and Corporate Taxes

54. A firm issues 100,000 equity shares with a total market value of $5,000,000. The firm's market value of debt is also of equal amount(i.e., $5,000,000). The firm is expected to generate $1.5 million in operating income and pay $250,000 in interest. Ignoring taxes, thiswill generate $12.50 earnings per share. What will happen to EPS if the firm's borrowing and interest expense increases by 75% and the

number of shares in circulation is cut by 75% (assuming that the share price remains unchanged with this change in capital structure)?

A. EPS decrease to $10.00.

B. EPS stay at $12.50.C. EPS increase to $30.00.D. EPS increase to $42.50.

AACSB: Analytic

Blooms: Analyze





8/8/2014 study guide 9-17-2014


55. What is the proportion of debt financing for a firm that expects a 24% return on equity, a 16% return on assets, and a 12% return on

debt? Ignore taxes.

A. 54.0%

B. 60.0%C. 66.7%D. 75.0%

AACSB: Analytic

Blooms: Analyze





56. What is the expected return on equity for a firm with a 14% expected return on assets that pays 9% on its debt, which totals 70% ofassets?

A. 16.14%B. 17.00%C. 19.00%

D. 25.67%

AACSB: Analytic

Blooms: Analyze


Difficulty: 3 Hard



8/8/2014 study guide 9-17-2014


57. What happens to an all-equity firm's EPS when $1 million of 20% debt is issued and proceeds used to repurchase two-thirds of thestock if operating income equals $1.5 million and EPS were $2 when the firm was all-equity-financed? Ignore taxes.

A. EPS increase to $2.60.B. EPS increase to $3.00.

C. EPS increase to $4.80.D. EPS increase to $5.20.

AACSB: Analytic

Blooms: Analyze


Difficulty: 3 Hard



58. What is the expected rate of return to equityholders if the firm has a 35% tax rate, a 10% rate of interest paid on debt, a 15% WACC,and a 60% debt-asset ratio?

A. 12.50%B. 21.25%C. 22.50%D. 27.75%

AACSB: Analytic

Blooms: Analyze





59. Stockholders' expected return on a stock priced at $25 per share with zero-growth dividends of $4.00 is:

A. 6.25%.

B. 13.64%.C. 16.00%.D. 21.00%.

Expected return = ($4/$25) = 16%

AACSB: Ethics


Blooms: Apply





8/8/2014 study guide 9-17-2014


60. If the value of a levered firm is $4,000,000, then the value of the same firm all-equity-financed is:

A. $3,000,000.B. $4,500,000.C. $5,500,000.D. $6,000,000.

No calculations are necessary because the value of a levered firm will always be greater than the value of the same firm with all-equityfinancing.

AACSB: Ethics


Blooms: Apply


Difficulty: 3 Hard



61. What is the amount of the annual interest tax shield for a firm with $3 million in debt that pays 12% interest if the firm is in the 35% taxbracket?

A. $126,000B. $234,000C. $360,000D. $1,050,000

Interest tax shield = interest expense tax rate= $360,000 .35

= $126,000

AACSB: Analytic

Blooms: Analyze



Learning Objective: 16-02 Show why the tax system encourages debt finance and calculate the value of interest tax shields.


62. What is the change in value for a firm with $1 million in equity, $1 million in permanent debt at a 10% interest rate, and a 35% tax rate ifMM I is modified to recognize corporate taxes?

A. Value increases by $35,000.B. Value increases by $100,000.

C. Value increases by $350,000.D. Value increases by $700,000.

PV of interest tax shield = (Tc rdebt D)/rdebt = Tc D

= .35 $1,000,000 = $350,000

Note that the risk of the tax shields can be reasonably assumed to be the same as that of the interest payments generating them. Hence weuse rdebt for discounting purposes.

Value of levered firm = value if all-equity-financed + present value of tax shield= $1,000,000 + $350,000 = $1,350,000Which is an increase of $350,000

AACSB: Analytic

Blooms: Analyze



Learning Objective: 16-02 Show why the tax system encourages debt finance and calculate the value of interest tax shields.

Topic: Understanding MM

8/8/2014 study guide 9-17-2014


63. XYZ Corp. has 1,000 shares outstanding and retained earnings of $25,000. Theoretically, what would you expect to happen to theprice of their stock, currently selling for $30 per share, if a 25% stock dividend is declared?

A. Price should increase to $44.00 per share.B. Price should increase to $37.50 per share.C. Price should decrease to $24.00 per share.D. Nothing; price should remain at $30.00.

AACSB: Analytic

Blooms: Analyze



Learning Objective: 17-01 Describe how dividends are paid and how corporations decide how much to pay.

Topic: Dividend Policy

64. How much should an investor pay now for a stock expected to sell for $30 one year from now if the stock offers a $2 dividend,dividends are taxed at 40%, capital gains are taxed at 20%, and a 15% after-tax return is expected on the investment?

A. $25.04B. $26.53C. $27.09D. $27.50

AACSB: Analytic

Blooms: Analyze


Difficulty: 3 Hard


Topic: The Effect of Taxes

8/8/2014 study guide 9-17-2014


65. Which statement is true concerning the one-year after-tax return on the following stocks, assuming a 40% tax rate on dividends and a

20% tax rate on capital gains: Stock A is purchased for $50, offers a 5% dividend yield, and is sold for $56; stock B is purchased for$60, offers no dividend yield, but is sold after one year for $70.

A. Stock A's after-tax return is higher by 1.27%.B. Stock B's after-tax return is higher by .73%.C. Stock A's after-tax return is higher by .27%.D. Stock B's after-tax return is higher by .58%.

AACSB: Analytic

Blooms: Analyze



Learning Objective: 17-05 Show how market imperfections; especially the different tax treatment of dividends and capital gains; can affect payout policy.


66. Compare the after-tax returns for a corporation that invests in preferred stock with a 12% dividend versus a common stock with nodividend but a 16% capital gain. The corporation's tax rate is 35%. The:

A. common stock returns 2.60% more than preferred.B. preferred stock returns 0.34% more than common.

C. common stock returns 2.32% more than preferred.D. returns are equal on an after-tax basis.

After-tax returns:

Preferred Stock: 12% -(12% 35% 30%) = 10.74%Common Stock: 16% -(16% 35%) = 10.40%The preferred stock's after-tax return is 34 basis points higher, although it returned 400 basis points less on a before-tax basis.


Blooms: Understand



Learning Objective: 17-05 Show how market imperfections; especially the different tax treatment of dividends and capital gains; can affect payout policy.


8/8/2014 study guide 9-17-2014


67. A stock is currently priced at $65 per share and will pay a $4 dividend in one year. What must the stock sell for in one year to meetinvestors' expectations of a 15% after-tax yield if dividends are taxed at 28%? Ignore capital gains taxes due to investor timing.

A. $70.75B. $71.87

C. $73.63D. $76.00

AACSB: Analytic

Blooms: Analyze


Difficulty: 3 Hard



68. What capital gain must a non-dividend-paying stock attain in order for a corporate investor in the 35% tax bracket to be indifferent to a

stock paying an 8% dividend but having no capital gain?

A. 8.00%

B. 9.29%C. 11.02%D. 12.31%

AACSB: Analytic

Blooms: Analyze


Difficulty: 3 Hard



8/8/2014 study guide 9-17-2014


69. The Beta corporation had 1,000 shares outstanding and a market value of $90,000 prior to the declaration of a $5 per share dividend.To finance a new project they will issue equity and the end result will be that the market value of the firm:

A. drops by $1,000.B. drops to $85,000.C. increases by $1,000.

D. increases to $95,000.

Share price prior to declaration:= ($90,000/1,000) = $90

Share price after declaration:= $90 - $5 = $85Market value of firm = $85 (1,000) = $85,000

AACSB: Ethics


Blooms: Analyze




Topic: Payout Policy

8/8/2014 study guide 9-17-2014


study guide 9-17-2014 SummaryCategory # of Questions

AACSB: Analytic 52

AACSB: Ethics 14

AACSB: Reflective Thinking 17

Blooms: Analyze 58

Blooms: Apply 9

Blooms: Understand 2

Brealey - Chapter 09 8









Difficulty: 1 Easy 1

Difficulty: 2 Medium 51

Difficulty: 3 Hard 17

Learning Objective: 09-01 Identify the cash flows properly attributable to a proposed new project. 3

Learning Objective: 09-02 Calculate the cash flows of a project from standard financial statements. 1

Learning Objective: 09-03 Understand how the companys tax bill is affected by depreciation and how this affects project value. 1

Learning Objective: 09-03 Understand how the companys tax bill is affected by depreciation and how this affects project value. 2

Learning Objective: 09-04 Understand how changes in working capital affect project cash flows. 1

Learning Objective: 10-01 Appreciate the practical problems of capital budgeting in large corporations. 3


2

Learning Objective: 10-03 Understand why an overestimate of sales is more serious for projects with high operating leverage. 2


2

Learning Objective: 11-03 Understand why diversification reduces risk. 3

Learning Objective: 11-04 Distinguish between specific risk; which can be diversified away; and market risk; which cannot. 1

Learning Objective: 12-02 Relate the market risk of a security to the rate of return that investors demand. 5

Learning Objective: 12-03 Calculate the opportunity cost of capital for a project. 1

Learning Objective: 13-03 Calculate the weighted-average cost of capital. 11

Learning Objective: 14-04 Describe voting procedures for the election of a firms board of directors and other matters. 1



Learning Objective: 14-05 Describe the major classes of securities sold by the firm. 3

Learning Objective: 15-01 Understand how venture capital firms design successful deals. 2

Learning Objective: 15-02 Understand how firms make initial public offerings and the costs of such offerings. 4

Learning Objective: 15-04 Explain the role of the underwriter in an issue of securities. 1

Learning Objective: 15-05 Describe the terms of a rights issue. 1

Learning Objective: 16-01 Show why capital structure does not affect firm value in perfect capital markets. 8

Learning Objective: 16-02 Show why the tax system encourages debt finance and calculate the value of interest tax shields. 2

8/8/2014 study guide 9-17-2014


Learning Objective: 17-01 Describe how dividends are paid and how corporations decide how much to pay. 5

Learning Objective: 17-

05 Show how market imperfections; especially the different tax treatment of dividends and capital gains; can affect payout policy.2

Topic: Break-Even Analysis 4

Topic: Calculating Cash Flows 4

Topic: Capital Asset Pricing Model 2

Topic: Capital Structure and Corporate Taxes 9

Topic: Changes in Working Capital 1

Topic: Company Cost of Capital 2

Topic: Corporate Financing 5

Topic: Dividend Policy 1

Topic: Equity 1

Topic: General Security Offers 2

Topic: Initial Public Offerings 5

Topic: Measuring Market Risk 4

Topic: Payout Policy 1

Topic: Project Analysis 1

Topic: Rates of Return 7

Topic: The Effect of Taxes 5

Topic: Understanding Capital Structure 1

Topic: Understanding Depreciation 2

Topic: Understanding Leverage 2

Topic: Understanding MM 1

Topic: Understanding Real and Nominal Rates 1

Topic: Venture Capital 1

Topic: Weighted-Average Cost of Capital 7

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