Question: The current book value of a fixed asset that was purchased two years ago is used in the computation of which one of the following?
Answer Choices:
Depreciation tax shield
Tax due on the current salvage value of that asset
Current year’s operating cash flow
Change in net working capital
MACRS depreciation for the current year
Answer: B — Tax due on the current salvage value of that asset
Question: Ignoring bonus depreciation, the net book value of equipment will:
Answer Choices:
remain constant over the life of the equipment.
vary in response to changes in the market value of that equipment.
decrease at a constant rate when MACRS depreciation is used.
increase over the taxable life of an asset.
decrease slower under straight-line depreciation than under MACRS.
Answer: E — decrease slower under straight-line depreciation than under MACRS.
Question: A firm wants to raise $11.3 million through a rights offering with a subscription price of $15 per share. The firm has 1.24 million shares outstanding and a market price of $17.50 per share. Each shareholder will receive one right for each share of stock owned. How many rights will be needed to purchase one new share of stock in this offering?
Answer Choices:
1.42
1.75
1.65
1.82
1.55
Answer: C — 1.65
Question: A firm is granting one right for each share of stock outstanding for its new rights offering. The new shares in this offering are priced at $16 plus four rights. The current market price of the stock is $20 per share. What is the value of one right?
Answer Choices:
$1.05
$.80
$1.00
$1.50
$4.00
Answer: B — $.80
Question: A firm has announced a rights offer to raise $2.19 million. The firm’s stock currently sells for $77 per share, there are 165,000 shares outstanding, and one right will be granted for each outstanding share. The subscription price is set at $73 per share. What is the ex-rights price per share?
Answer Choices:
$77.00
$73.62
$90.27
$76.38
$65.15
Answer: D — $76.38
Question: A firm wants to raise $2.6 million via a rights offering. The firm currently has 450,000 shares of common stock outstanding that sell for $26 per share. Its underwriter has set a subscription price of $22 per share and will charge the company a spread of 7 percent. Assume you currently own 1,200 shares of this stock and decide not to participate in the rights offering. How much money should you receive for selling all of your rights?
Answer Choices:
$911
$1,302
$799
$1,095
$1,057
Answer: E — $1,057
Question: A firm has 12,500 shares outstanding with a market value of $288,625. The firm is considering a project with a net present value of $5,300 that would require the purchase of $69,000 of fixed assets. The project would be financed through the sale of equity shares. The price-earnings ratio of the project equals that of the existing firm. What will the new market value per share be after the project is implemented?
Answer Choices:
$23.51
$22.72
$23.80
$23.43
$24.10
Answer: D — $23.43
Question: A firm is considering an expansion costing $5.7 million that will increase net income by $452,000. The firm currently has 2.3 million shares outstanding and no debt. The stock sells for $38 per share and the book value per share is $27. The current net income is $1.02 million. Assume the firm issues new equity to fund this expansion while maintaining a constant price-earnings ratio. What will the EPS be after the new equity issue?
Answer Choices:
$.60
$.52
$.44
$.67
$.55
Answer: A — $.60
Question: Two firms, Firm X and Firm Y, have both announced IPOs at $32 per share. One of these is undervalued by $9, and the other is overvalued by $4, but you have no way of knowing which is which. You plan on buying 1,000 shares of each issue. If an issue is underpriced, it will be rationed, and only half your order will be filled. What is the amount of the difference between your expected profit and the amount of profit you could earn if you could get 1,000 shares of both IPO offerings?
Answer Choices:
$4,500
$5,000
$4,000
$5,500
$6,000
Answer: A — $4,500