Corporate Finance Quiz - 726 Words

IMBA -FIN 6425 – Quiz 1 Corporate Finance - Solution– Nimalendran This is an individual quiz and you should submit the answers on-line by the scheduled date. You are allowed to use any resources EXCEPT help from any other person. You are allowed to use EXCEL for the calculations. 1. Barkley Credit Union sets a low annual percentage rate (5%) for all its credit card customers instead of basing the interest rates on the customers’ credit scores. Consequently Barkley is exposed to ______________.? a. Moral Hazard b. Screening c. Adverse Selection d. Signaling Answe C 2. Bob, an environmental economist, has struggled for a year to write a paper that will be read by 50 people at most to show that, in case he must†¦show more content†¦$1,200,000 c. $339,870 d. $125,846 Response: NPV = -2,400,000 + [(1,200,000)/(1.15)] + [(1,200,000/(1.15)^2] + [1,200,000/(1.15)^3] = 339,870 Answer C 6. A capital equipment costing $300,000 today has no (zero) salvage value at the end of 5 years. If straight-line depreciation is used, what is the book value of the equipment at the end of three years? (Chapter 6) a. $120,000 b. $80,000 c. $60,000 d. $40,000 Annual depreciation = $300,000/5 = 60,000 Depreciation for 3 years = 180,000 Book value = 300,000 - 180,000 = 120,000 Answer A 7. The market value of Charcoal Corporation s common stock is $20 million, and the market value of its risk-free debt is $5 million. The beta of the company s common stock is 1.25, and the market risk premium is 8%. If the Treasury bill rate is 5%, what is the company s cost of capital? Ignore taxes. (CAPM, Chapter 8) a. 15% b. 14.6% c. 13% d. None of the above Response: rE = 5 + 1.25(8) = 15 ; rD = 5%; Company Cost of capital = 5 (5/25) + 15(20/25) = 1 + 12 = 13% Answer C Use this information to answer questions 8 and 9: AmTrade is a full service broker that is considering expanding into internet brokerage business. The project is expected to last 5 years. The firm has market capitalization (market value of assets) of $1billion and it has a market value of Debt/Equity ratio of 0.5. ETrade is a pure internet brokerage Company and it has an equity beta of 1.2 and a debt betaShow MoreRelatedCorporate Finance Quiz2459 Words   |  10 PagesCorporate Finance – Chapter 2 – Long Quiz 1 1) Marvelous Entertainment Group, Inc. had net income of $32.7 million in 2005. The firm paid no dividends. If there were no further changes to the stockholders equity accounts, then _____ by $32.7 million. 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