Mid-Term Tutorial

March 7, 2018
 Question #1
In the production of paper, fixed cost of
$14,000 , variable cost of $3 and selling price is
$10. Given that the number of units produced is
4,000, what is the generated profit?
Question #1
 Question #2
ABAC is an all equity firm that has 400,000
shares of stock outstanding and is borrowing $6
million at 10% interest to repurchase 300,000
shares of the outstanding stock. Ignoring taxes,
what is the value of this firm?
Question #2
 Question #3
An unlevered firm has a cost of capital of 14% and
earnings before interest and taxes of $150,000. A
levered firm with the same operations and assets
has
both a book value and a face value of debt of
$700,000
with a 7% annual coupon. The applicable tax rate is
35%. What is the value of the levered firm?
 Question #3
Solution
 Value of unlevered = [$150,000 × (1 − .35)] ÷ .14
= $696,428.57;
 Value of Levered = $696,428.57 + (.35 × $700k)
= $941,428.57 = $941,429
 Question #4
Barbell has sales of $50,000 for the year with
inventory of $9,000. The cost of goods sold is
measured at 50% of sales and the profit margin
is 4 percent. How many days on average does it
take the Barbell to sell an inventory item?
 Question #4
Solution
 COGS=0.5 * $50,000 = $25,000

 Inventory Period = $9,000/$25,000 *365 =131days

 Question #5
The Bakery has annual sales of $800,000 with
COGS equaling 60% percent of sales. If the
Bakery has an average accounts payable balance
of $80,000. How many days on average does it
take to pay suppliers?
 Question #5
 Solution
 COGS= 0.6* $800,000 = $480,000
 The required number of days
 = 80,000/480,000 *365
 = 60.83days
 Question #6
Tastees has a receivables turnover rate of 11 with
payables turnover rate of 10, and an inventory turnover
rate of 14. What is the length of the firm's operating
cycle?
 Question #6
Solution
 days turnover = 365/11 = 33.18days
 days inventory = 365/14 = 26.07days
 days payable = 365/10 = 36.50days
 Operating cycle = 33.18 - (36.5-26.07)
 = 22.75days
 Question #7
Which of the following is an alternative method to
cash dividends which is used to pay out a firm’s
earnings to shareholders.
 Question #7

A. merger
B. tender offer
C. share repurchase
D. stock split
E. payment-in-kind
* A share repurchase is also called a stock buy-back, and
is the repurchase of common stock by the issuing firm for
any of a variety of reasons, resulting in a reduction in
the number of shares outstanding.
 Question #8
On May 7, MSBM declared a $.50-per-share quarterly dividend
payable June 28 to stockholders of record on Monday, June 10.
What is the latest date by which you could purchase the stock
and still get the recently declared dividend?
 Question #8
Solution
A. June 3
B. June 4
C. June 5
D. June 6
E. June 7
Declaration Date: The date upon which a dividend is formally declared by the Board of Directors.
Date of Record: Designates when the stock transfer books are closed. Investors who own the stock on this date
receive the dividend.
Ex-Dividend Date: In the past it was difficult to record stock sales on a timely basis, stock brokerage companies
decided to terminate the right of ownership to the dividend two working days before the date of record.
In this case you need to make allowance for the week-end – June 8th & 9th. Two working days before the date
of record are June 6th and 7th for a record date of June 5th.
 Question #9
The return that lenders require on their loaned funds to the firm is
called the:

A) Coupon rate.
B) Current yield.
C) Cost of debt.
D) Capital gains yield.
E) Cost of capital.
 Question #9

A) Coupon rate.
B) Current yield.
C) Cost of debt.
D) Capital gains yield.
E) Cost of capital.
 Question # 10
The equity risk derived from the firm's capital structure policy is
called ___________ risk.

A) market
B) systematic
C) extrinsic
D) business
E) financial
 Question #10

A) market
B) systematic
C) extrinsic
D) business
E) financial
 Question #11
ABC wishes to do something to acknowledge the loyalty of
its shareholders but needs all of its available cash to fund its
rapid growth. The market price of its stock is currently
trading in the middle of its preferred trading range. Taylor Hall
could consider:

A. issuing a liquidating dividend.

B. a stock split.
C. a reverse stock split.
D. a special cash dividend.
E. issuing a stock dividend.
 Question #11

A. issuing a liquidating dividend.

B. a stock split.
C. a reverse stock split.
D. a special cash dividend.
E. issuing a stock dividend.
 Question # 12
MSBM is paying a $1.25 per share dividend today. There are
120,000 shares outstanding with a par value of $1.00 per share. As a
result of this dividend, the:
A. retained earnings will decrease by $150,000.
B. retained earnings will decrease by $120,000.
C. common stock account will decrease by $150,000.
D. common stock account will decrease by $120,000.
E. capital in excess of par value account will decrease by $120,000
 Question #12
A. retained earnings will decrease by $150,000.
B. retained earnings will decrease by $120,000.
C. common stock account will decrease by $150,000.
D. common stock account will decrease by $120,000.
E. capital in excess of par value account will decrease by $120,000
 Question # 13
A firm has a market value equal to its book value. Currently, the firm has
excess cash of $600 and other assets of $5,400. Equity is worth $6,000.
The firm has 500 shares of stock outstanding and net income of $900. What
will the new earnings per share be if the firm uses its excess cash to
complete a stock repurchase?

A. $1.20
B. $1.50
C. $1.80
D. $1.90
E. $2.00
 Question # 13
Solution
Price per share = $6,000÷500 = $12; Number of shares repurchased =
$600÷$12 = 50shares; New EPS = $900÷(500 - 50) = $2.00
 Question # 14
The financial leverage of a firm will ______________________ .

I. decrease as the debt/equity ratio increases

II. decrease as the firm's retained earnings account grows
III. decrease if the firm has negative net income

A) I only
B) II only
C) III only
D) I and II only
E) II and III only
 Question #14

A) I only
B) II only
C) III only
D) I and II only
E) II and III only
 Question # 15
The optimal capital structure is the mixture of debt and equity which:

I. Maximizes the value of the firm.

II. Maximizes the firm's weighted average cost of capital.
III. Maximizes the market price of the firm's bonds.

A) I only
B) III only
C) I and II only
D) I and III only
E) I, II and III
 Question # 15

A) I only
B) III only
C) I and II only
D) I and III only
E) I, II and III
 Question #16
The equity risk derived from the firm's capital structure
policy is called ___________ risk.
A) market
B) systematic
C) extrinsic
D) business
E) financial
 Question # 16
A) market
B) systematic
C) extrinsic
D) business
E) financial
 Question #17
XYZ is considering a project worth $24 million today without an
abandonment options. Suppose the value of the project is $36 million one
year from today with high demand and $16 million with low demand. It is
possible to abondon the project for $20 million if the demand is low. Calculate
the value of the abandonment option if the discount rate is 5% per year.

A. $1.03 million.
B. $2 million
C. $1.9 million.
D. $2.8 million
E. None of the above.
 Question #17
Solution (Establish probability of low demand)
Response: 24 = [(36)(X) + (16)(1-X)]/1.05; X = 0.46; (1-X) = 0.54
P = (4)(0.54)/1.05= 1.03
 Question #18
 The current sales price is $25 per unit and the current
variable cost is $17 per unit. Fixed costs are $40,000.
If the sales price is increased by $2, and all other
costs remain unchanged, the break-even point in units
will:
 A. increase by 1,000 units
B. decrease by 1,000 units
C. decrease by 2,000 units
D. decrease by 119 units (rounded to nearest unit)
 E. increase by2,000
 Question #18
 The current contribution margin per unit
= $25 - $17 = $8.
 The current break-even point in units
= $40,000 / $8 = 5,000.

 The new contribution margin will =

$27 - $17 = $10.
 The new break-even point in units will

= $40,000 / $10 = 4,000;

 a decrease of 1,000 units.
 Question #19
The option to wait before investing is equivalent
to?

A. Selling a put option

B. Selling a call option
C. Owning a put option
D. Owning a call option
E. Both A and C
 Question #19

A. Selling a put option

B. Selling a call option
C. Owning a put option
D. Owning a call option
E. Both A and C
 Question #20
Your company's scientists have developed an exciting new
product that is unlike anything presently available to
consumers. The net present value of bringing this product
to market is positive, yet you are uncertain about the sales
projections. The best way for you to test the impact of the
sales forecast on the project is to conduct _____ analysis.
 Question #20
A. sensitivity and payback
B. break-even and sensitivity
C. payback and break-even
D. operating leverage
E. cost