Texas FABUS305 exam 2

Question 1

Which of the following terms is the chance that the bond issuer will not be able to make timely payments?

default risk

interest rate risk

liquidity of interest rate risk

term structure of interest rates

4.5 points

Question 2

Of the capital budgeting techniques discussed, which works equally well with conventional and non-conventional cash flows and with independent and mutually exclusive project?

payback period

discounted payback period

internal rate of return

net present value

4.5 points

Question 3

Rank order from highest credit risk to lowest risk the following bonds, with the same time to maturity, by their yield to maturity: JM Corporate bond with yield of 4.25 percent, IB Corporate bond with yield of 6.49 percent, TC Corporate bond with yield of 10.76 percent, and B&O Corporate bond with a yield of 9.99 percent.

JM bond, TC bond, B&O bond, IB bond

JM bond, IB bond, TC bond, B&O bond

TC bond, B&O bond, IB bond, JM bond

JM bond, IB bond, B&O bond, TC bond

4.5 points

Question 4

A 5.5 percent coupon bond with 18 years left to maturity is priced to offer a 6.25 percent yield to maturity. You believe that in one year, the yield to maturity will be 5.75 percent. What is the change in price the bond will experience in dollars assuming face value is $1000 and it pays semi-annual coupons?

$25.00

$26.89

$53.47

$80.37

4.5 points

Question 5

A 6.25 percent coupon bond with 20 years left to maturity is offered for sale at $1017.20. What yield to maturity is the bond offering? Assume interest payments are paid semi-annually and face value is $1000.

3.05%

6.00%

6.10%

6.25%

4.5 points

Question 6

Of the capital budgeting techniques discussed, which works equally well with conventional and non-conventional cash flows and with independent and mutually exclusive project?

payback period

discounted payback period

internal rate of return

net present value

4.5 points

Question 7

Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown below. The required rate of return on projects of both of their risk class is 10 percent. Project A s Cash flow from year 0 to year 3: -1000, 400, 400, 700. Project B s Cash flow from year 0 to year 3: -500, 200, 300, 300. Which statement is correct?

Accept A, reject B, because B has lower IRR

Reject A, accept B, because B has higher IRR

Accept A, reject B, because A has higher NPV

Reject A, accept B, because B has higher NPV

4.5 points

Question 8

Which statement is correct?

IRR will give you correct decision if it is applied to mutually exclusive projects.

If NPV and IRR give you contradictory decisions, you should follow NPV.

IRR rule is the best rule to apply when making capital budgeting decisions.

NPV will give you incorrect decision if it is applied to mutually exclusive projects.

4.5 points

Question 9

If a firm has already paid an expense or is obligated to pay one in the future, regardless of whether a particular project is undertaken, that expense is a

opportunity cost

relevant cost

incremental cost

sunk cost

4.5 points

Question 10

Which of the following is NOT included when calculating the depreciable basis for real property?

freight charges for item

sales tax paid for item

financing fees

installation and testing fees

4.5 points

Question 11

Suppose you sell a fixed asset for $125,000 when it's book value is $139,000. If your company's marginal tax rate is 30%, what will be the effect on cash flows of this sale (i.e., what will be the after-tax free cash flow of this sale)?

$9,800

$14,000

$111,300

$129,200

4.5 points

Question 12

Compute the price of a 5 percent coupon bond with 20 years left to maturity and a market interest rate of 6.25 percent. (Assume interest payments are semi-annual.) Which statement is correct?

The bond is a discount bond selling at $858.41

The bond is a discount bond selling at $922.34

The bond is a premium bond selling at $858.41.

The bond is a premium bond selling at $922.34.

4.5 points

Question 13

A decrease in net working capital (NWC) is treated as a

cash inflow

cash outflow

sunk cost

historical cost

4.5 points

Question 14

Accelerated depreciation allows firms to

depreciate less and receive less of the dollars of cash flows earlier in the asset's life.

depreciate more and receive more of the dollars of cash flows earlier in the asset's life.

not pay any taxes during an asset's life.

depreciate more and receive more of the dollars of cash flows later in the asset's life

4.5 points

Question 15

In year 2012, ABS Corp's depreciation expenses are $125,000 and its marginal tax rate is 30%. What is the amount of depreciation tax shield?

$125,000

$87,500

$62,500

$37,500

4.5 points

Question 16

What is the net effect on a firm's cash flow from changes in NET WORKING CAPITAL if a new project requires: $30,000 increase in inventory, $10,000 increase in accounts receivable, and a $20,000 increase in accounts payable?

cash inflow $5,000

cash outflow $10,000

cash outflow $20,000

cash inflow $55,000

4.5 points

Question 17

If project A has the cash flow timeline as: Year 0 $-1000, Year 1 $200, Year 2 $300, Year 3 $500, Year 4 $500. What is the payback period of this project?

1 year

2 years

3 years

4 years

4.5 points

Question 18

If project B has the cash flow timeline as: Year 0 $-100, Year 1 $75, Year 2 $100, Year 3 $300, Year 4 $75, Year 5 $200. Compute the NPV if the cost of capital is 11%.

$292.96

$392.96

$436.18

$466.78

5 points

Question 19

If project B has the cash flow timeline as: Year 0 $-100, Year 1 $75, Year 2 $100, Year 3 $300, Year 4 $75, Year 5 $200. Compute the IRR. If the cost of capital is 11%, should the firm accept or reject this project?

10.956%, reject

10.956%, accept

22%, accept

109.56%, accept

5 points

Question 20

Which of the following statements is true?

Interest payments paid to U.S. Treasury bond holders are not taxed at the federal level.

Interest payments paid to corporate bond holders are not taxed at the federal level.

Interest payments paid to corporate bond holders are not taxed at the state level.

Interest payments paid to municipal bond holders are not taxed at the federal level.

4.5 points

Question 21

ABC transportation has a depreciation expense of $300,000 and has a marginal tax rate of 30%. What is its depreciation tax shield?

30,000

60,000

90,000

300,000

4.5 points

Question 22

Currently XYC Corporation's 30 year bonds have a price of $980 and YTM of 6.5%. The bonds just got downgraded and YTM increased to 6.9%. How will the price change?

Decreases

Increases

Stays the same