Level I Corporate Finance Quiz 1 Irfanullah.

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1. An investor is looking to invest in Silver Appliances. It has a beta of 1.2 and is funded 60% with
debt. The company recently announced that it would retire all of its debt and become debt-free.
The investor is interested in calculating the beta of the firm, assuming that the firm has no debt.
If the marginal tax rate is 40%, the beta of the company without any debt is closest to:
A. 0.44
B. 0.63
C. 0.74

2. A 30-day $10,000 U.S. Treasury bill sells for $9,850. The discount-basis yield (%) is closest to:
A. 17.50%
B. 18.00%
C. 18.25%

3. Which of the following capital budgeting techniques is most directly related to the stock price?
A. Payback Period
B. Discounted Payback Period
C. Net Present Value

4. For a company, the fixed costs are $15,000, interest costs are $5,000 and taxes are $4,000. If the
price per unit is $15 and the variable cost per unit is $7, the operating breakeven (in units) is
closest to:
A. 1,000
B. 1,875
C. 2,500

5. The following information is available for a company:
Bonds are priced at par and they have an annual coupon rate of 7%.
Preferred stock is priced at $15 and it pays an annual dividend of $2.25.
Common equity has a beta of 1.5.
The risk-free rate is 5% and the market risk premium is 12%.
Capital structure: Debt = 35%; Preferred stock = 10%; Common equity = 55%
The tax rate is 35%.
The weighted average cost of capital (WACC) for the company is closest to:
A. 15.00%
B. 15.74%
C. 16.60%

6. Using the income statement below, the degree of financial leverage is closest to:

Income Statement $ millions
Revenues 17
Variable Operating Costs 4.5
Fixed Operating Costs 3.5
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Operating Income 9
Interest 3
Taxable Income 6
Tax 2
Net Income 4
A. 0.80
B. 1.50
C. 2.25

7. Which of the following is most likely not considered in the capital budgeting process?
A. Externalities
B. Timing of cash flows
C. Sunk costs

8. Which of the following approaches is least likely to be used to estimate the cost of debt:
A. Debt-Rating Approach Only
B. Yield to Maturity Approach Only
C. Discounted Free Cash Flow Approach

9. A companys $100 par value preferred stock with a dividend rate of 15% annually is currently
priced at $112. The companys growth rate is expected to be 5% annually for the next 7 years.
The companys cost of preferred stock is closest to:
A. 13.4%
B. 14.1%
C. 15%

10. A companys taxable income is 20% of sales. Assuming taxes of 35% and a retention ratio of
70%, the net profit margin is closest to:
A. 7%
B. 13%
C. 30%

11. A 30-day $10,000 U.S. Treasury bill sells for $9,950. The money-market yield (%) is closest to:
A. 6.0%
B. 6.5%
C. 7.0%

12. A 10-year $1,000 fixed rate non-callable bond with 7% annual coupons currently sells for $1,154.
Assuming an additional risk premium for equity relative to debt of 7% and a 35% marginal tax
rate, the cost of equity using the bond-yield-plus-risk-premium approach is closest to:
A. 9.5%
B. 12.0%
C. 14.0%

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13. A company buys items from its suppliers on credit, with trade credit terms of 3/10 net 40. The
company is evaluating the different costs of trade credit for paying the supplier on different days.
If the company pays the supplier on the 30th day, the annualized cost of trade credit (%) closest
to:
A. 74%
B. 85%
C. 91%

14. Which is least likely to be a component of a developing countrys equity premium:
A. Annualized standard deviation of developed market equity index
B. Sovereign yield spread
C. Annualized standard deviation of the sovereign bond market in terms of the developed
market currency

15. A project has the following annual cash flows:
Year 0 1 2 3
Cash Flow ($) -23,000 15,000 8,000 7,000
Using a discount rate of 5%, the discounted payback, in years, is closest to:
A. 2.0 years
B. 2.2 years
C. 2.5 years

16. If a companys stock trades at relatively high prices, the company would least likely consider the
use of:
A. Stock Dividend
B. Reverse Stock Split
C. Stock Split

17. Based on best practices in corporate governance procedures, which of the following is least likely
considered a best practice in corporate governance procedures:
A. Have independent board members comprise a minority proportion on the board
B. Have separation of the CEO position from the chair position on the board
C. Link compensation to long term objectives of the company

18. Which of the following is most likely considered a secondary source of liquidity:
A. Working Capital Loans
B. Trade Credit from Suppliers
C. Liquidation of Assets

19. Business risk of a company most likely incorporates sales risk and
A. Financial Risk
B. Foreign Exchange Risk
C. Operating Risk

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20. A project has the following annual cash flows:
Year 0 1 2 3
Cash Flow ($) -800 200 550 300
Which discount rate most likely gives a negative net present value?
A. 11%
B. 13%
C. 15%

21. A companys information is provided below:
Current Price Per Share $30
Total Shares Outstanding 20,000
Book Value Per Share $20
If the company decides to repurchase $90,000 worth of shares using cash, the book value per share
most likely will:
A. Decrease
B. Increase
C. Remain unchanged

22. The following information is available for a firm:
Number of shares outstanding 7 million
Tax rate 35%
Cost of debt (pretax) 8%
Current stock price $10.00
Net income $14 million
If the company buys back $21 million worth of shares using debt, the earning per share most likely
will:
A. Decrease
B. Increase
C. Remain Unchanged

23. The following cash flows are determined for a project:
Year 0 1 2 3 4 5
Cash Flow -500 50 90 150 350 400
If the required rate of return for the project is 10%, the NPV of the project is closest to:
A. S181
B. $220
C. $540
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24. An analyst gathers the following information about a company and the market
Current market price per share of
common stock
$79
Most recent dividend per share
paid on common stock
$11
Expected dividend payout rate 40%
Expected return on equity (ROE) 20%
Beta for the common stock 1.8
Expected return on the market
portfolio
10%
Risk-free rate of return 6%

The cost of common equity for the company, according to the dividend-discount model approach
would be closest to:
A. 25.9%
B. 23.0%
C. 27.6%

25. Given the following financial statement data,
$ millions
Credit Sales 50,000
Cost of Goods Sold 35,000
Average A/R 7,000
Inventory Beginning
Balance
4,000
Inventory Ending Balance 7,000
Average Accounts Payable 3,000
Using average balances for A/R, inventory and A/P, the net operating cycle is closest to:
A. 79.6 Days
B. 137.3 Days
C. 108.5 Days