Q&A Hero

Q: The MFC Corporation has decided to build a new facility. The cost of the facility is estimated to be $9.7 million. MFC wishes to finance this project using its traditional debt-to-equity ratio of 1.5. The issue cost of equity is 6% and the issue cost of debt is 1%. What is the total floatation cost of raising funds? A. $300,000 B. $100,000 C. $600,000 D. None of the above

Q: The _________________________ is a 14 day period stretching from a Thursday to a Wednesday. This is the period in which the bank has to keep their average daily level of required reserves for a particular computation period.

Q: The MFC corporation needs to raise $200 million for its mega project. The NPV of the project using all equity financing is $40 million. If the cost of raising funds for the project is $20 million, what is the APV of the project? A. $40 million. B. $240 million. C. $20 million. D. $160 million.

Q: A(n) _________________________ is a service developed by banks where the bank shifts money out of accounts with reserve requirements and into savings accounts overnight.

Q: Subsidized loans have the effect of: A. Increasing the NPV of the loan, thereby reducing the APV. B. Decreasing the NPV of the loan, thereby reducing the APV. C. Decreasing the NPV of the loan, thereby increasing the APV. D. Increasing the NPV of the loan, thereby increasing the APV.

Q: A(n) _________________________ is the account the bank must have at the Federal Reserve to cover any checks drawn against the bank.

Q: Floatation costs are incorporated into the APV framework by: A. Adding them into the all equity value of the project. B. Subtracting them from all equity value of the project. C. Incorporating them into the WACC. D. Disregarding them.

Q: _________________________ are the assets the bank must by law hold behind its deposits. In the U.S. only vault cash and deposits held with the Federal Reserves can be used to meet these requirements.

Q: Modigliani-Miller (MM) formula for after-tax discount rate is given by: A. rMM = r(1 - TCD/V) B. rMM = r(1 + TCD/V) C. rMM = r/(1 - TCD/V) D. None of the above

Q: The _________________________ is the idea that management should make all good loans and count on its ability to borrow funds if it does not have the liquidity to meet its cash needs.

Q: The Granite Paving Company has a debt to total value ratio of 0.5. The cost of debt is 8% and that of unlevered equity is 12%. Calculate the weighted average cost of capital if the tax rate is 30%. A. 14.8% B. 10.2% C. 12.0% D. None of the above

Q: _________________________ are the deposits and other borrowings of the bank which are very interest sensitive or where the bank is sure they will be withdrawn during the current period.

Q: The _________________________ is the total difference between its sources and uses of funds.

Q: The Granite Paving Co. wishes to have debt-to-equity ratio of 1.5. Currently it is an unlevered (all equity) firm with a beta of 1.1. What will be the beta of the firm if it goes through the capital restructuring process and attains the target debt-to-equity ratio? Assume a tax rate of 30%. A. 2.26 B. 1.65 C. 1.5 D. None of the above

Q: _________________________ is when the financial institution borrows money in the money market to meet their liquidity needs.

Q: The Granite Paving Company has a debt equity ratio of 1.5. The before-tax cost of debt is 11% and the unlevered equity is 14%. Calculate the weighted average cost of capital for the firm if the tax rate is 33%. A. 33% B. 7.37% C. 25.1% D. 11.22%

Q: The Granite Paving Co. wants to be levered at a debt equity ratio of 1.5. The before-tax cost of debt is 11% and the cost of equity for an all equity firm is 14%. What will be the firm's cost of levered equity? (Assume a tax rate of 33%.) A. 22% B. 16% C. 17% D. None of the above

Q: A(n) __________________ is an asset which can be converted into cash easily, which has a relatively stable price and is reversible so that the seller can recover their original investment with little risk of loss.

Q: A firm has a debt-to-equity ratio of 0.5. Its cost of equity is 22%, and its cost of debt is 16%. If the corporate tax rate is .40, what would its cost of equity be if the debt-to-equity ratio were 0? A. 20.62% B. 16.00% C. 26.8% D. None of the above

Q: Which of the following is true of Treasury bills? A) Interest on Treasury bills is exempt from state income taxes. B) Interest on Treasury bills is exempt from federal income taxes. C) Treasury bills pay a lower pretax yield than comparable corporate securities. D) All of the above are true. E) A and C only

Q: A firm has a debt-to-equity ratio of 1. Its cost of equity is 16%, and its cost of debt is 8%. If the corporate tax rate is 25%, what would its cost of equity be if the debt-to-equity-ratio were 0? A. 12.57% B. 13.83% C. 16.00% D. None of the above

Q: Which of the following is not one of the Capital Market instruments in which banks invest? A) U.S. Treasury notes B) Corporate notes and bonds C) U.S. Treasury bonds D) Municipal bonds E) Commercial paper

Q: The Marble Paving Co. has an equity cost of capital of 17%. The debt to equity ratio is 1.5 and a cost of debt is 11%. What is the cost of equity if the firm was unlevered? (Assume a tax rate of 33%) A. 14. 0% B. 11. 0% C. 16. 97% D. None of the above

Q: A firm has zero debt in its capital structure. Its overall cost of capital is 8%. The firm is considering a new capital structure with 50% debt. The interest rate on the debt would be 5%. Assuming that the corporate tax rate is 40%, its cost of equity capital with the new capital structure would be? A. 9.8% B. 9.2% C. 11% D. None of the above

Q: Which of the following statements is (are) correct regarding duration? A) In comparing two bonds with the same yield to maturity and the same maturity, a bond with a higher coupon rate will have a longer duration. B) In comparing two loans with the same maturity and the same interest rate, a fully amortized loan will have a shorter duration than a loan with a balloon payment. C) The duration will always be shorter than the maturity for all debt instruments. D) All of the above E) B and C

Q: The Miles-Ezzell formula for the adjusted cost of capital assumes that: A. the firm rebalances once a year and not rebalance continuously B. the project cash flow is a perpetuity C. the project is a carbon copy of the firm D. MM's Proposition I corrected for taxes holds (i.e., T = TC = 0.35)

Q: The most aggressive investment maturity strategy that calls for the bank to continually shift the maturities of its securities in response to changes in interest rates and other economic conditions is the A) Barbell strategy B) Rate expectations approach C) Front-end-loaded policy D) Ladder approach E) None of the above

Q: Lowering debt-equity ratio of a firm can change: I) financing proportions II) cost of equity III) cost of debt IV) effective tax rate A. II and III only B. I only C. I, II, and III only D. I, II, III and IV

Q: _____________ is the method by which banks can provide a safeguard for the deposits of governmental units. A) Hedging B) Collateralization C) Pledging D) Securitization E) Window dressing

Q: Principal roles that a financial institution's investment portfolio play include which of the following? A) Income stability B) Geographic diversification C) Hedging interest rate risk D) Backup liquidity E) All of the above

Q: Financial practitioners include short-term debt in WACC calculations: I) If the short-term debt is at least 10% of total liabilities II) If the short-term debt is at least 10% of the total assets III) If the net working capital is negative IV) If the net working capital is positive A. I and IV only B. I and III only C. II and IV only D. II and III only

Q: Fluctuations in the timing of cash payments flowing from an underlying pool of securitized assets is referred to as: A) Income risk B) Prepayment risk C) Liquidity risk D) Capital risk E) None of the above

Q: A firm is using $30 million in debt, $10 million in preferred stock and $60 million in common equity to finance its assets. If the before tax cost of debt is 8%, cost of preferred stock is 10%, and the cost of common equity is 15%; calculate the weighted average cost of capital for the firm assuming a tax rate of 35%. A. 12.4% B. 11.56% C. 10.84% D. None of the above

Q: Pools of mortgages put together either by a government agency or by a private investment banking corporation to raise more loanable funds for the issuer are known as a (or an): A) Accretion bond B) Participation certificate C) CMO D) Stripped security E) Commercial paper

Q: A firm is financed with 30% debt, 60% common equity and 10% preferred equity. The before-tax cost of debt is 5%, the firm's cost of common equity is 15%, and that of preferred equity is 10%. The marginal tax rate is 30%. What is the firm's weighted average cost of capital? A. 10.05% B. 11.05% C. 12.5% D. None of the above

Q: A bank's promise to pay the holder a designated amount of money on a designated future date and is often used in international trade is known as a (or an): A) Promissory guarantee B) Discount security C) Bankers' acceptance D) In the money option E) Accretion note

Q: When preferred stock financing is also used by the firm; the after-tax weighted average cost of capital (WACC) is calculated as follows, A. WACC = rD (D/V) + rP (P/V) + rE (E/V); (where V = D + P + E) B. WACC = rD (1 - TC)(D/V) + rP (P/V) + rE (E/V); (where V = D + P + E) C. WACC = rD (D/V) + (1 - TC)[rP (P/V) + rE (E/V)]; (where V = D + P + E) D. None of the above

Q: An important investment security popular with banks that must by law mature within one year from the date of issue and which has a high degree of safety and marketability is the: A) Treasury bill B) Treasury note C) FNMA note D) Bankers' acceptance E) Eurodollar CD

Q: The flow to equity method provides an accurate estimate of the value of a firm if: A. debt-equity ratio remains constant for the life of the firm B. amount of debt remains constant for the life of the firm C. free cash flows remain constant for the life of the firm D. the financial leverage changes significantly over the life of the firm

Q: A lending institution that sells lower-yielding securities at a loss in order to reduce current taxable income while simultaneously purchasing higher-yielding new securities in order to boost future returns is doing a(n) .

Q: The Flow-to-equity method: I) uses cash flows to equity, after interest and after taxes II) uses cost of equity capital as the discount rate III) uses weighted average cost of capital for discount rate IV) uses after-tax cash flows without considering interest and dividend payments A. I and II only B. II and III only C. I and III only D. II and IV only

Q: is the risk that loans will be terminated or paid off ahead of schedule. This is a particular problem with residential home mortgages and other consumer loans that are pooled and used as collateral in securitized assets.

Q: Value of the debt = $30 millions; Number of shares outstanding = 5 millions; Calculate the value per share for the firm. A. $20 B. $14 C. $13 D. none of the given values

Q: are closely related to CMOs and partition the cash flow from a pool of mortgage loans or mortgage backed securities into multiple maturity classes in order to reduce the cash-flow uncertainty of investors.

Q: Value of the debt = $30 millions; Calculate the total value of equity of the firm: A. $100 millions B. $70 millions C. $30 millions D. none of the given values

Q: are a type of municipal bond that are paid only from certain stipulated source of funds.

Q: Calculate the value of the firm: A. $100 millions B. $65 millions C. $30 millions D. none of the given values

Q: are a type of municipal bond that are backed by the full faith and credit of the issuing government.

Q: are time deposits of fixed maturity issued by the worlds larges banks headquartered in financial centers around the globe. The heart of this market is centered in London.

Q: Calculate the present value of the horizon value: A. $90.4 millions B. $104 millions C. $78.1 millions D. none of the above

Q: Calculate the value of the firm: A. $90.4 millions B. $104 millions C. $82.6 millions D. none of the above

Q: A security issued by the federal government with greater than 10 years to maturity when it is issued is called a(n) .

Q: Marketable notes and bonds sold by agencies owned by the government or sponsored by the government are known as .

Q: Given the following data: FCF1 = $7 million; FCF2 = $45 million; FCF3 = $55 million; free cash flow grows at a rate of 4% for year 4 and beyond. If the weighted average cost of capital is 10%, calculate the value of the firm. A. $953.33 million B. $801.12 million C. $716.25 million D. None of the above

Q: Given the following data for Year-1: Profit after taxes = $5 million; Depreciation = $2 million; Investment in fixed assets = $4 million; Investment net working capital = $1 million. Calculate the free cash flow (FCF) for Year-1: A. $7 million B. $3 million C. $11 million D. $2 million

Q: Financial Institutions may invest in municipal bonds issued by smaller local governments. These bonds are known as ____________ bonds.

Q: Given the following data for year-1: Profits after taxes = $14 millions; Depreciation = $6 millions; Interest expense = $6 millions; Investment in fixed assets = $12 millions; and Investment in working capital = $3 millions; Calculate the free cash flow (FCF) for year-1: A. $4 millions B. $5 millions C. $6 millions D. none of the above

Q: The investment maturity strategy which calls for the bank to have all of their investment assets in very long term maturities is known as the _________________________.

Q: Given the following data for year-1: Profits after taxes = $20 millions; Depreciation = $6 millions; Interest expense = $4 millions; Investment in fixed assets = $12 millions; and Investment in working capital = $4 millions; Calculate the free cash flow (FCF) for year-1: A. $4 millions B. $6 millions C. $10 millions D. none of the above

Q: The long term debt obligations of major corporations are known as ________________________.

Q: Free cash flow (FCF) and net income (NI) differ in the following ways: I) net income is the return to shareholders, calculated after interest expense; free cash flow is calculated before interest. II) net income is calculated after various non-cash expenses, including depreciation; we add back depreciation when we calculate free cash flow. III) capital expenditures and investments in working capital do not appear in net income calculations; they do reduce free cash flows. IV) net income is never negative; free cash flows can be negative for rapidly growing firms, even if the firm is profitable, because investments exceed cash flows from operations. A. I only B. I and II only C. I, II and III only D. I, II, III and IV

Q: Claims against the expected income and principal generated by a pool of similar-type loans are known as _________________________.

Q: When weighted average cost of capital (WACC) is used to value a levered firm, the interest tax shield is: A. ignored. B. considered by deducting the interest payment from the cash flows. C. automatically considered because the after-tax cost of debt is used in the WACC formula. D. none of the above

Q: Securities sold by Fannie Mae, Freddie Mac and others are known as _________________________.

Q: The following situations typically require that the financial manager value an entire business in order to make important decisions: I) If firm A is about make a takeover offer for firm B, then A's financial managers have to decide how much the combined business A + B is worth under A's management. II) If firm C is considering the sale of one of its divisions or a business line, it has to decide what the division or the business line is worth in order to negotiate with potential buyers. III) When a firm goes public, the investment bank must evaluate how much the firm is worth in order to set the price. A. I only B. I and II only C. III only D. I, II and III

Q: _________________________ are any securities whose original maturity exceeds one year.

Q: When using the weighted average cost of capital (WACC) to discount cash flows from a project we assume the following: I) the project's risk are the same as those of firm's other assets and remain so for the life of the project. II) the project supports the same fraction of debt to value as the firm's overall capital structure that remains constant for the life of the project. III) the cash flows from the project is always a perpetuity. A. I only B. II only C. I and II only D. I, II and III

Q: _________________________ are any securities which reach maturity in under one year.

Q: Calculate the IRR for the project. A. 10% B. 9% C. 8% D. none of the above

Q: A(n) _________________________ is an interest-bearing receipt for the deposit of funds in a bank for a stipulated time period. Ones that are oriented towards business customers or institutions are known as jumbos.

Q: If the weighted average cost of capital (WACC) is 9% calculate the NPV of the project. A. -2.5 million B. +2.5 million C. zero D. none of the above

Q: A money market security which represents a bank's commitment to pay a stipulated amount of money on a specific future date under specific conditions and which is often used in international trade is known as a(n) _________________________.

Q: A firm has a total market value of $10 million and debt has a market value of $4 million. What is the after-tax weighted average cost of capital if the before - tax cost of debt is 10%, the cost of equity is 15% and the tax rate is 35%? A. 13% B. 11.6% C. 8.75% D. None of the given answers

Q: Given the following data: Cost of debt = rD = 6%; Cost of equity = rE = 12.1%; Marginal tax rate = 35%; and the firm has 50% debt and 50% equity. Calculate the after-tax weighted average coat of capital (WACC): A. 8% B. 7.1% C. 9.05% D. None of the given values

Q: The investment maturity strategy which calls for the bank to have all of their investment assets in very short term maturities is called the _________________________.

Q: A short term debt security issued by major corporations is known as __________________.

Q: Given the following data for Golf Corporation: market price/share = $12; Book value/share = $10; Number of shares outstanding = 100 million; market price/bond = $800; Face value/bond = $1,000; Number of bonds outstanding = 1 million; Calculate the proportions of debt (D/V) and equity (E/V) for the firm that you would use for estimating the weighted average cost of capital (WACC): A. 40% debt and 60% equity B. 50% debt and 50% equity C. 45.5% debt and 54.5% equity D. none of the given values

Q: A security issued by the federal government with 1 to 10 years to maturity when it is issued is called a(n) _________________________ .

Q: Given the following data for Vinyard Corporation: Calculate the proportions of debt (D/V) and equity (E/V) for the firm that you would use for estimating the weighted average cost of capital (WACC): A. 40% debt and 60% equity B. 50% debt and 50% equity C. 25% debt and 75% equity D. none of the given values

Q: __________________ is the risk that the company whose bonds the financial institution owns may retire the entire issue of corporate bonds in advance of their maturity leaving the bank with the risk of earnings losses resulting from reinvesting the cash at lower interest rates.