Problem 1: The capital budgeting director of Sparrow Corporation is evaluating a project which costs $200,000, is expected to last for 10 years and produce net after-tax cash flows of $44,503 per year. If the firm's cost of capital is 14 percent, what is the project's IRR?
(Hint: Is the firm's cost of capital relevant to an IRR calculation? )
a. 8%
b. 14%
c. 18%
d. -5%
e. 12%
Problem 2) Which of the following financial assets would be most susceptible (vulnerable) to a decline in value if interest rates increased?
a. a short term fixed income financial asset (ex. short term bond)
b. a long term fixed income financial asset (ex. long term bond)
c. a long term variable interest rate income financial asset
d. they would all be approximately equally susceptible to a decline in value.
e. None of the above or insufficient information
Problem 3) Assume that you can buy a bond for $555 today. The bond will pay you $75 in annual coupon payments (i.e. interest payments) at the end of each of the next 12 years, plus repay the original $1000 par value of the bond at the end of the 12th year. What annual rate of return would you expect to earn on the investment (i.e., what is the bond's YTM?)? (Hint: use your basic TVM keys)
a. 15.7 %
b. 16.1 %
c. 17.6 %
d. 16.5 %
e. None of the above or insufficient information
Problem 4) If a firm's current ratio is 4, the firm could liquidate its current assets at only ______ percent of their book value and just have enough (nothing extra from current assets) to still pay off the current liabilities in full.
a. insufficient information to answer; need the inventory amount
b. insufficient information to answer; need the dollar amounts of CA and CL
c. 40%
d. 25%
e. A current ratio has nothing to do with the question being asked
Problem 5) Which of the following would least likely be considered as signaling a potential problem regarding the "quality of earnings" for a firm?
a. the firm has experienced a significant increase in earnings relative to the industry overall
b. the firm's accounts receivable account is increasing at a rate faster than the firm's increase in sales.
c. the firm has announced a delay in their release of financial statements due to a change in auditors
d. the firm's accounts receivable account is increasing, but at a rate slower than the firm's increase in sales.
e. all of the above would be considered signals of potential problems regarding he firms' quality of earnings
Problem 6) Which of the following is most directly related to value creation?
a. sales
b. Cash inflow
c. Market share
d. Net income
Problem 7) Which of the following assets' book values would, in general, most accurately represent the assets' true market value?
a. Specialized inventory that can only be used for specific projects
b. Inventory that is widely used in many common manufacturing activities
c. real estate assets of the firm
d. equipment assets of the firm used in production activities.
Problem 8) The total economic (true, i.e. true financial value) value of the firm is (Please READ ALL alternatives before answering):
a. Found on the balance sheet
b. Equal to the total market value of the stockholders' equity
c. equal to the total market value of the all of the firm's assets
d. Equal to the total market value of the owners and creditors' claim on the firm, by the balance sheet equation( aka accounting equation)
e. both c and d are correct
Problem 9) Because of the limited diversification potential of human capital, managers have an incentive to seek:
a. Higher risk projects because they offer the potential for higher returns (payoffs) for the managers
b. higher return projects because they are less risky
c. lower risk projects, because these projects are in the best interest of all stakeholders
d. lower risk projects, because these projects are in the best interest of stockholders
e. lower risk projects, because these projects reduce the probability of the firm going bankrupt.
Problem 10) Managerial stock options are an incentive for managers to act in the best interest of:
a. stockholders
b. bondholders
c. employees
d. government leaders
e. the public
f. banker