FIN 301 EXAM 2 QUESTIONS & DETAILED
ANSWERS RATED 100% CORRECT
1. True or False: A sale and
True
leaseback arrangement is a
type of financial, or capital,
lease.
2. T/F: The "preferred" feature of
preferred False
stock means that it normally will provide
a higher expected return than will
com- mon stock. (Preferred stock provides guaranteed
dividends as opposed to no guaranteed
dividends in case of common equity.)
3. Moniker Manufacturing's bonds 25.00
were
recently issued at their $1,000 par value. (CONVERSION RATE = PAR
VALUE/CONVERSION
At any time prior to maturity (20 PRICE
years from now), a bondholder =1000/40)
can exchange a bond for a share
of common stock at a conversion
price of $40. What is the
conversion ratio?
4. Upstate Water Company just sold a bond $3.76
with 50 warrants attached. The bonds
have a 20-year maturity and an (N=20
annual coupon of 12%, and they I=15pmt= -120 (-
were issued at their $1,000 par 1000*12%) fv=-1000
value. The current yield
on similar straight bonds is 15%. What is cpt Pv= 812.22
the implied value of each warrant?
,FIN 301 EXAM 2 QUESTIONS & DETAILED
ANSWERS RATED 100% CORRECT
What is the implied value of each
war-
5. Chocolate Factory's convertible rant=(1000-812.22)/50=$3.76)
deben-
$40.00
tures were issued at their $1,000 par val- (CONVERSION PRICE =
1000/25)
ue in 2011. At any time prior to
maturity on February 1, 2031, a
debenture holder
,FIN 301 EXAM 2 QUESTIONS & DETAILED
ANSWERS RATED 100% CORRECT
can exchange a bond for 25 shares -One defect of the IRR
of common stock. What is the method versus the NPV
conversion price, Pc? is that the IRR does not
take proper account of
6. Which of the following statements differences in the
is CORRECT? Assume that the sizes of projects.
project be- ing considered has
normal cash flows, with one
outflow followed by a series of
inflows.
7. Which of the following
statements is CORRECT?
- One defect of the IRR method
versus the NPV is that the IRR does
not take account of cash flows over
a project's full life.
-One defect of the IRR method
versus the NPV is that the IRR does
not take account of the time value
of money.
-One defect of the IRR method
versus the NPV is that the IRR does
not take account of the cost of
capital.
-One defect of the IRR method
versus the NPV is that the IRR
values a dollar received today the
same as a dollar that will not be
received until sometime in the
future.
, FIN 301 EXAM 2 QUESTIONS & DETAILED
ANSWERS RATED 100% CORRECT
If a project's NPV is less than zero, then its IRR must be less
than the WACC.
One defect of the IRR method versus the NPV is that the
IRR does not take proper account of ditterences in the sizes
of projects.
ANSWERS RATED 100% CORRECT
1. True or False: A sale and
True
leaseback arrangement is a
type of financial, or capital,
lease.
2. T/F: The "preferred" feature of
preferred False
stock means that it normally will provide
a higher expected return than will
com- mon stock. (Preferred stock provides guaranteed
dividends as opposed to no guaranteed
dividends in case of common equity.)
3. Moniker Manufacturing's bonds 25.00
were
recently issued at their $1,000 par value. (CONVERSION RATE = PAR
VALUE/CONVERSION
At any time prior to maturity (20 PRICE
years from now), a bondholder =1000/40)
can exchange a bond for a share
of common stock at a conversion
price of $40. What is the
conversion ratio?
4. Upstate Water Company just sold a bond $3.76
with 50 warrants attached. The bonds
have a 20-year maturity and an (N=20
annual coupon of 12%, and they I=15pmt= -120 (-
were issued at their $1,000 par 1000*12%) fv=-1000
value. The current yield
on similar straight bonds is 15%. What is cpt Pv= 812.22
the implied value of each warrant?
,FIN 301 EXAM 2 QUESTIONS & DETAILED
ANSWERS RATED 100% CORRECT
What is the implied value of each
war-
5. Chocolate Factory's convertible rant=(1000-812.22)/50=$3.76)
deben-
$40.00
tures were issued at their $1,000 par val- (CONVERSION PRICE =
1000/25)
ue in 2011. At any time prior to
maturity on February 1, 2031, a
debenture holder
,FIN 301 EXAM 2 QUESTIONS & DETAILED
ANSWERS RATED 100% CORRECT
can exchange a bond for 25 shares -One defect of the IRR
of common stock. What is the method versus the NPV
conversion price, Pc? is that the IRR does not
take proper account of
6. Which of the following statements differences in the
is CORRECT? Assume that the sizes of projects.
project be- ing considered has
normal cash flows, with one
outflow followed by a series of
inflows.
7. Which of the following
statements is CORRECT?
- One defect of the IRR method
versus the NPV is that the IRR does
not take account of cash flows over
a project's full life.
-One defect of the IRR method
versus the NPV is that the IRR does
not take account of the time value
of money.
-One defect of the IRR method
versus the NPV is that the IRR does
not take account of the cost of
capital.
-One defect of the IRR method
versus the NPV is that the IRR
values a dollar received today the
same as a dollar that will not be
received until sometime in the
future.
, FIN 301 EXAM 2 QUESTIONS & DETAILED
ANSWERS RATED 100% CORRECT
If a project's NPV is less than zero, then its IRR must be less
than the WACC.
One defect of the IRR method versus the NPV is that the
IRR does not take proper account of ditterences in the sizes
of projects.
