1. The acceptance of a capital budgeting project is usually evaluated on its own merits. That is, capital budgeting decisions are treated separately from capital structure decisions. In reality, these decisions may be highly interwoven. This may result in:
A) firms rejecting positive NPV, all equity projects because changing to a capital structure with debt will always create negative NPV.
B) never considering capital budgeting projects on their own merits.
C) corporate financial managers first checking with their investment bankers to determine the best type of capital to raise before valuing the project.
D) firms accepting some negative NPV all equity projects because changing capital structure adds enough positive leverage tax shield value to create a positive NPV.
E) firms never changing the capital structure because all capital budgeting decisions will be subsumed by capital structure decisions.
2.A key difference between the APV, WACC, and FTE approaches to valuation is:
A) how the unlevered cash flows are calculated.
B) how the ratio of equity to debt is determined.
C) the costs initially required to fund the project.
D) whether terminal values are included or not.
E) how debt effects are considered; i.e. the target debt to value ratio and the level of debt.
3.The Felix Filter Corp. maintains a debt-equity ratio of .6. The cost of equity for Felix Filter Corp. is 16%, the cost of debt is 11% and the marginal tax rate is 40%. What is the weighted average cost of capital?
4.The Webster Corp. is planning construction of a new shipping depot for its single manufacturing plant. The initial cost of the investment is $1 million. Efficiencies from the new depot are expected to reduce costs by $109,588 forever. The corporation has a total value of $60 million and has outstanding debt of $40 million. What is the NPV of the project if the firm has an after tax cost of debt of 6% and a cost equity of 9%?
E) None of the above is the correct NPV.
5.The Tip-Top Paving Co. has an equity cost of capital of 16.97%. The debt to value ratio is .6, the tax rate is 40%, and the cost of debt is 11%. What is the cost of equity if Tip-Top was unlevered?
E) None of the above.
6.The BIM Corporation has decided to build a new facility for its R&D department. The cost of the facility is estimated to be $125 million. BIM wishes to finance this project using its traditional debt-equity ratio of 1.5. The issue cost of equity is 6% and the issue cost of debt is 2%. What is the total flotation cost?
A) $0.75 million
B) $1.29 million
C) $3.19 million
D) $3.75 million
E) $4.50 million.
7.The Free-Float Company, a company in the 36% tax bracket, has riskless debt in its capital structure which makes up 40% of the total capital structure, and equity is the other 60%. The beta of the assets for this business is .8 and the equity beta is:
8.A 35 put option on ABC stock expires today. The current price of ABC stock is $34. The put is:
C) at the money.
D) in the money.
E) out of the money.
9.Assume that you own both a May 40 put and a May 40 call on ABC stock. Which one of the following statements is correct concerning your option positions? Ignore taxes and transaction costs.
A) An increase in the stock price will increase the value of your put and decrease the value of your call.
B) Both a May 45 put and a May 45 call will have higher values than your May 40 options.
C) The time premiums on both your put and call are less than the time premiums on equivalent June options.
D) A decrease in the stock price will decrease the value of both of your options.
E) You cannot profit on your position as your profits on one option will be offset by losses on the other option.
10.You sold (wrote) ten put option contracts on PLT stock with an exercise price of $32.50 and an option price of $0.70. Today, the option expires and the underlying stock is selling for $34.30 a share. Ignoring trading costs and taxes, what is your total profit or loss on this investment?
11. GS, Inc. stock is selling for $28 a share. A 3-month call on GS stock with a strike price of 30 is priced at $1.00. Risk-free assets are currently returning 0.3% per month. What is the price of a 3-month put on GS stock with a strike price of $30?
12.What is the value of d2 given the following information on a stock?
Stock price $63
Exercise price $60
Time to expiration .50
Risk-free rate 6%
Standard deviation 20%
13. What is the value of a 9-month call with a strike price of $45 given the Black-Scholes Option Pricing Model and the following information?
Stock price $48
Exercise price $45
Time to expiration .75
Risk-free rate .05
14.Last week, you purchased a call option on Denver, Inc. stock at an option price of $1.05. The stock price last week was $28.10. The strike price is $27.50. What is the intrinsic value per share if Denver, Inc. stock is currently priced at $28.43?
15. A put option which is currently out-of-the-money is one that:
A) has an exercise price greater than the underlying stock price.
B) has an exercise price less than the underlying stock price.
C) has an exercise price equal to the underlying stock price.
D) should not be exercised at expiration.
E) should not be exercised at any time prior to expiration.