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Risk & Return
Cost of Capital
Leverage
CapBudg Decisions
CapBudg/Misc.
100
A measurement of market risk for a firm (aka - compared to the market, how volatile is this firm's stock?)
What is beta?
100
The mixture of debt and equity a firm has.
What is capital structure?
100
This increases as a firm chooses to use more fixed financing costs such as loans or bonds.
What is degree of financial leverage? (another possible answer: financial risk increases as the DFL increases)
100
This is the "i" in the equation that will make the NPV equal to zero for a project.
What is the IRR of the project?
100
This is an accelerated way to account for depreciation of an object over its useful life.
What is MACRS? Answer: Modified Accelerated Cost Recovery System
200
Dividing the expected return by the standard deviation will give us this to help us determine the amount of return we are getting for the risk involved.
What is the simplified Sharpe ratio?
200
This type of risk increases as a firm increases its amount of debt.
What is bankruptcy risk?
200
This happens to the required breakeven point as a firm increases its amount of fixed operating costs.
What is "that it increases"? Answer: As fixed operating assets are added, the DOL increases giving the firm a higher potential EBIT with changes in sales, but has a higher amount of required sales needed to breakeven.
200
When deciding between two mutually exclusive projects, this is how we can determine which project to invest in based on the NPV.
What is the higher NPV?
200
This is increases in inventory, AP, AR associated with a new project that are recognized by a cash outflow at the beginning of the project (time period 0), and the costs are recouped at the end of the project.
What is net working capital?
300
This is the holding period return for the following: On May 31, 2013, Apple's stock was priced at $449.73. Five years before, on May 30, 2008, the stock was at $188.75.
What is a 138% return? (over the last 5 years.) (449.73 - 188.75)/188.75
300
This is the percent of the capital structure that consists of common equity based on the following information: Company has issued 1,000 bonds priced at $950 with $50 flotation costs; 10,000 shares of preferred stock priced at $50, and 20,000 shares of common stock priced at $15 with 3% flotation costs.
What is 17%? Answer: Debt market value = (950-50)*1000 = 900,000 Preferred market value = 10000*50 = 500,000 Common market value = 15(1-.03)*20000 = 291,000 291000/(900000+500000+291000) = 17%
300
This is the required number of muffins that Mallory needs to sell each year to break even given the following information: Mallory has just opened a gourmet bakery and needs to determine the breakeven for her muffin sales. Total fixed costs for the bakery are $150,000 per year. Mallory’s variable cost per muffin is $0.35 and she sells each muffin for $2.50.
What is 69,767 muffins? Answer: A1: Contribution Margin: $2.50-0.35 = $2.15 or 2.15/2.50 = 86% A2: Breakeven per Year: $150,000/$2.15 = 69,767.44 muffins
300
This is the project Company XYZ would choose assuming they are mutually exclusive and given the following information: Project A: IO -$50,000, CF Yrs 1-5: $20,000 Project B:IO: -$25,000 CF Yrs 1-5: $15,000
What is Project B? Answer: Project A 28.6%? Project B: 52.8%
300
If a firm sells a depreciable asset for more than its book value, what are the tax consequences of this sale/gain?
What is a tax liability?
400
This is the price of equity for XYZ Co. given the following CAPM information: The current treasury rate is 3%, the beta of XYZ is 2.1 and the market risk premium is 5%.
What is 13.5%? Answer: kj = krf + j*(km- krf) kj = 3%+2.1*5% = 13.5%
400
RacePro is issuing semiannual bonds that are currently priced at $1075, with a flotation cost of 5%, and a coupon rate of 8% to be repaid in 10 years. This is the bond's yield to maturity (aka required rate of return).
What is 7.69%? Answer: PV = 1075*(1-.05) =$1021.25 FV = 1000 N = 10 years * 2 = 20 semiannual periods PMT = 8%*1000/2 = $40 semiannual payments Solve for I = 7.69%
400
This is Elder Eyring's middle name.
What is Bennion?
400
A firm is deciding which project to take. Project 1: IO of $100,000 and CFs of $75,000 for 5 years : Project 2: IO of $75,000 and CFs of $105,00 for 3 years Which project should the firm choose with a interest rate of 11% for both projects?
What is Project 2? Project 1: $177,192 Project 2: $181,590
400
XYZ company is considering selling one of its machines. The machine was purchased 3 years ago and has an expected life of 10 years. The machine was purchased for $90,000 and has a salvage value of $15,000. The machine can be sold today for $65,000 dollars. With a tax rate of 40% what is the tax result of the sale?
What is a tax shield of $1000?
500
This is the expected return for the following two stock portfolio assuming that 40% is invested in Stock A and 60% is invested in Stock B. There is a 20% chance of a recession, 60% chance of normal economic times, and a 20% chance of a boom. Stock A: If a recession occurs it will have a 10% return, if there is a normal economy it will have a 12% return, and if a boom occurs it will have a 14% return. Stock B: If a recession occurs it will have a -5% return, Normal occurs: 15% return, Boom occurs: 30% return .
What is 13.2%? Expected return of stock A is 12%, expected return of stock B is 14% (calculated). Thus .12*.40+.14*.6 = 13.2%.
500
This is the weighted average cost of capital for the Pear Co. given the following information and a marginal tax rate of 35%: Company is financed with 60% debt, 25% common equity, and 15% preferred equity. Debt consists of a loan to the company at an interest rate of 8%. Preferred stock is priced at $45 after flotation costs and pays a $4.50 dividend. Common stock is currently being sold for $25, the last dividend was $1.75 and dividends are expected to grow at a rate of 3% forever. There is a 5% flotation cost on common stock.
What is 7.27%? Answer: Debt required return = 8% After tax = 8%*(1-.35) = 5.2% Preferred stock required return 4.5/45 = 10% Common Stock required return D1 = 1.75*(1.03) = $1.8025 Price (money to company) =25*(1-.05) = $23.75 1.8025/23.75+3% = 10.5895% 5.2%*60%+15%*10%+25%*10.5895% =7.27%
500
This is the effect on EPS (% increase)if sales were to increase by 10% and given the following information: Sales (100,000 units) $1,400,000 Variable Costs $800,000 Fixed Costs $250,000 Interest paid $125,000 Tax rate 34% Common shares outstanding 100,000
What is 26.7%? Answer: DOL 1.714285714 DFL 1.555555556 DCL 2.666666667 Sales increase 10% EPS increase 10%*2.667 = 0.266666667
500
A company is thinking of taking on a project that will initially cost them $15,000. Cash flows are expected to be $5,000 in year 1 and increase each year by $500 up until year 4. What is the PI for this project assuming a rate of 7%?
What is $1.29? NPV: $4,333.42 PI: $19,333.42 / $15,000
500
Misc. who is the dean of the Marriott School?
Who is Gary Cornia?