CAPITAL INVESTMENT ANALYSIS
PRACTICE
EXAM 2
Name:
Section Time:
Multiple Choice
1. Since 9/11, companies have increased their focus on teleconferencing instead of air travel. Typically, companies pay a flat fee for satellite uplink time for a minimum usage each month, then an additional hourly rate for usage above that. This is an example of?
a. A nonlinear cost model.
b. A quadratic cost model
c. A linear cost model with intercept
d. A parabolic cost model with intercept
2. Which of the following creates the most volatile dividend stream?
a. A fixed growth rate policy
b. A constant dividend policy
c. A zero dividend policy
d. A fixed payout ratio policy
3. A company uses the Residual Dividend Policy when doing financial forecasting. The firm’s financials project more liabilities and owner’s equity than assets. What should be the firm’s response to this to balance its forecast?
a. Pay out any excess as dividends.
b. Sell off marketable securities, then pay out the excess as dividends.
c. Pay down short-term debt, then payout the excess in dividends.
d. Borrow short-term to fund the difference, but don’t payout dividends.
4. Which of the following is NOT true regarding how cash is distributed to shareholders?
a. The current intrinsic stock price isn’t influenced by either a dividend payout or a stock repurchase.
b. The future stock price will be higher with a repurchase relative to dividend payments since the number of shares of stock will also rise.
c. Stock repurchases and dividends both reduce the book value of owner’s equity.
d. The number of shares outstanding is not affected by a cash dividend.
5. Your company plans to increase its stockholders equity to $25,000,000. It will issue new shares of stock to raise an additional $5,000,000, at an issue price of $20 per share. How many shares will be outstanding after the issuance, assuming all shares are sold?
a. 50,000
b. 250,000
c. 1,000,000
d. 1,250,000
e. 1,500,000
6. Which of the following most closely approximates the cost of debt used to finance the business for projected 2004 for the attached financials?
a. 1.30%.
b. 4.00%
c. 4.25%.
d. 5.00%
e. 8.51%
7. Comprehensive Financial Statements show a greater level of detail than the standard financial statements. Which of the following non-operating and GAAP items is factored into the projected 2004 Free Cash Flow determination from the attached financials?
a. Tax difference between what’s paid to the IRS and what’s reflected under GAAP.
b. Extraordinary items.
c. Effects of discontinued operations.
d. A non-controlling interest in another company.
e. None of the statements above is correct.
8. Which of the following is NOT used to calculate WACC?
a. The cost of attracting long-term debtholders.
b. The return on preferred stock.
c. The yield on short-term debt.
d. The cost of retained earnings.
e. The interest rate on net current liabilities.
9. In determining the cost of debt, which is NOT accurate?
a. On publicly traded long-term bonds, the lower of the yield to maturity or the yield to call can be determined via bondsonline.com.
b. On non-publicly traded debt, a proxy of the interest rate on bonds of similar risk can be used to determine the cost of the non-publicly traded debt. .
c. In determining the spread on the Treasury + risk premium approach, the comparable bonds must be of the same maturity. This same maturity accounts for the risk factors of the two bonds being the same, allowing for the proxy to be accurate.
d. In determining the base level of interest on short-term debt, the prime rate is used, though Libor is often used by financial service companies.
10. In the attached Cost of Capital spread sheet, the rate of return on the Treasury Bond used in the projections is
a. 1.81%
b. 1.38%
c. 3.32%
d. 5.00%
e. 3.99%
f. 4.25%
11. The financials of the attached company shows the percent of the company financed by long-term debt to be less than 10%. Yet, the weight of debt used in the cost of capital calculation is 22%. Which of the following is NOT a sound argument for the use of the higher rate?
a. As a young company, the operating cash flows may not have yet grown enough to service a higher level of debt, but growth projections forecasts that to change positively.
b. Existing companies in the same industry all show a higher level of debt in its capital structure than the single digit level reflected in the attached financials.
c. The company no longer wishes to dilute shares outstanding, and thus stops raising external equity capital.
d. The lack of preferred stock and short term debt financing necessitates a higher percentage of long term financing.
12. Which of the following is NOT a relevant part of the Adjusted Present Value alternative to WACC?
a. It considers the business risk of the project by discounting the project’s cash flows by the all-equity cost of capital.
b. It considers the financing side effects caused by the project’s acceptance such as the NPV of the tax savings, where the tax savings is reflected by the tax rate times the cost of debt times the incremental debt from the new project, all discounted by the cost of debt.
c. It considers the NPV of the before tax $ value of project specific interest subsidies.
d. Because it looks at positive project CF’s before even factoring in the NPV of the projects side effects, APV will always produce a positive $ value, thus invalidating the results when projects are mutually exclusive.
13. Recently, several Big Board giants were mentioned as selling at bargains after long trading for steep valuations. Which of the following is NOT an explanation for why these companies (Wal-Mart, Yahoo, Time-Warner, Home Depot UPS, Heinz) are now called “fairly valued”, and viewed as bargains.
a. Operating cash flows increased dramatically for these companies while their stock prices lost ground over their last five years, thus bringing their business values more in line with their stock prices.
b. The companies’ stocks are trading at lower multiples, compared to where its traded at over the last five years.
c. Investors have invested their faith and money in shares of smaller companies like those in the Russell 2000 and not those listed on the NYSE, curbing the growth in value of the Big Board Equities such as Wal-Mart, Yahoo, and Time Warner.
d. Earning are not sugar-coated like they were by five year ago.
e. None are not true; all are accurate.
14. Which of the following is NOT true regarding Fade Functions as a way to forecast?
a. A fade rate of “(0)” (zero) implies a linear relationship.
b. Fade rates allow for more consistent forecasting with less forecasting inputs.
c. Fade projections require a starting spot. The best way to come up with the starting rate in fade analysis is the current (most recent) rate for that forecast.
d. The fade rate on Pharmaceutical companies are best reflected by a negative fade, which means gradual slowdown in the forecast followed by a steeper fall off at the end.
e. Fade projections only work on downward trends .
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