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2 out of 2 points
Suppose you believe that Basso Inc.'s stock price is going to increase from its
current level of $22.50 sometime during the next 5 months. For $3.10 you
can buy a 5-month call option giving you the right to buy 1 share at a price of
$25 per share. If you buy this option for $3.10 and Basso's stock price
actually rises to $45, what would your pre-tax net profit be?
Selected Answer:
Correct $16.90
Correct Answer:
Correct $16.90
Question 2
2 out of 2 points
Which of the following statements is CORRECT?
Selected Answer:
Correct Call options generally sell at prices above their exercise value, but for
an in-the-money option, the greater the exercise value in relation to the strike
price, the lower the premium on the option is likely to be.
Correct Answer:
Correct Call options generally sell at prices above their exercise value, but for
an in-the-money option, the greater the exercise value in relation to the strike
price, the lower the premium on the option is likely to be.
Question 3
2 out of 2 points
The current price of a stock is $22, and at the end of one year its price will be
either $27 or $17. The annual risk-free rate is 6.0%, based on daily
compounding. A 1-year call option on the stock, with an exercise price of $22,
is available. Based on the binomial model, what is the option's value? (Hint:
Use daily compounding.)
Selected Answer:
Correct $2.99
Correct Answer:
Correct $2.99
Question 4
2 out of 2 points
Which of the following statements is CORRECT?
Selected Answer:
Correct If the underlying stock does not pay a dividend, it does not make
good economic sense to exercise a call option prior to its expiration date,
even if this would yield an immediate profit.
Correct Answer:
Correct If the underlying stock does not pay a dividend, it does not make
good economic sense to exercise a call option prior to its expiration date,
even if this would yield an immediate profit.
Question 5
2 out of 2 points
An investor who writes standard call options against stock held in his or her
portfolio is said to be selling what type of options?
Selected Answer:
Correct Covered
Correct Answer:
Correct Covered
Question 6
2 out of 2 points
Which of the following statements is CORRECT?
Selected Answer:
Correct The market value of an option depends in part on the option's time to
maturity and also on the variability of the underlying stock's price.
Correct Answer:
Correct The market value of an option depends in part on the option's time to
Correct 10.44%
Question 10
2 out of 2 points
You have been hired as a consultant by Feludi Inc.'s CFO, who wants you to
help her estimate the cost of capital. You have been provided with the
following data: rRF = 4.10%; RPM = 5.25%; and b = 1.30. Based on the CAPM
approach, what is the cost of common from reinvested earnings?
Selected Answer:
Correct 10.93%
Correct Answer:
Correct 10.93%
Question 11
2 out of 2 points
Which of the following statements is CORRECT?
Selected Answer:
Correct There is an "opportunity cost" associated with using reinvested
earnings, hence they are not "free."
Correct Answer:
Correct There is an "opportunity cost" associated with using reinvested
earnings, hence they are not "free."
Question 12
2 out of 2 points
Which of the following statements is CORRECT?
Selected Answer:
Correct The WACC that should be used in capital budgeting is the firm's
marginal, after-tax cost of capital.
Correct Answer:
Correct The WACC that should be used in capital budgeting is the firm's
marginal, after-tax cost of capital.
Question 13
2 out of 2 points
Which of the following statements is CORRECT?
Selected Answer:
Correct One defect of the IRR method is that it assumes that the cash flows to
be received from a project can be reinvested at the IRR itself, and that
assumption is often not valid.
Correct Answer:
Correct One defect of the IRR method is that it assumes that the cash flows to
be received from a project can be reinvested at the IRR itself, and that
assumption is often not valid.
Question 14
2 out of 2 points
Suppose a firm relies exclusively on the payback method when making
capital budgeting decisions, and it sets a 4-year payback regardless of
economic conditions. Other things held constant, which of the following
statements is most likely to be true?
Selected Answer:
Correct If the 4-year payback results in accepting just the right set of projects
under average economic conditions, then this payback will result in too few
long-term projects when the economy is weak.
Correct Answer:
Correct If the 4-year payback results in accepting just the right set of projects
under average economic conditions, then this payback will result in too few
long-term projects when the economy is weak.
Question 15
2 out of 2 points
Which of the following statements is CORRECT?
Selected Answer:
Correct Multiple IRRs can exist, but not multiple MIRRs. This is one reason
some people favor the MIRR over the regular IRR.
Correct Answer:
Correct Multiple IRRs can exist, but not multiple MIRRs. This is one reason
some people favor the MIRR over the regular IRR.
Question 16
2 out of 2 points
Which of the following statements is CORRECT?
Selected Answer:
Correct The net present value method (NPV) is generally regarded by
academics as being the best single method for evaluating capital budgeting
projects.
Correct Answer:
Correct The net present value method (NPV) is generally regarded by
academics as being the best single method for evaluating capital budgeting
projects.
Question 17
2 out of 2 points
Which of the following statements is CORRECT?
Selected Answer:
Correct If two projects have the same cost, and if their NPV profiles cross in
the upper right quadrant, then the project with the lower IRR probably has
more of its cash flows coming in the later years.
Correct Answer:
Correct If two projects have the same cost, and if their NPV profiles cross in
the upper right quadrant, then the project with the lower IRR probably has
more of its cash flows coming in the later years.
Question 18
0 out of 2 points
Which of the following statements is CORRECT?
Selected Answer:
Incorrect If a project with normal cash flows has an IRR less than the WACC,
0 out of 2 points
Which of the following statements is CORRECT?
Selected Answer:
Incorrect Both the NPV and IRR methods deal correctly with externalities,
even if the externalities are not specifically identified. However, the payback
method does not.
Correct Answer:
Correct An example of an externality is a situation where a bank opens a new
office, and that new office causes deposits in the bank's other offices to
increase.
Question 22
2 out of 2 points
Which of the following should be considered when a company estimates the
cash flows used to analyze a proposed project?
Selected Answer:
Correct The new project is expected to reduce sales of one of the company's
existing products by 5%.
Correct Answer:
Correct The new project is expected to reduce sales of one of the company's
existing products by 5%.
Question 23
2 out of 2 points
Which of the following procedures does the text say is used most frequently
by businesses when they do capital budgeting analyses?
Selected Answer:
Correct DCF techniques were originally developed to value passive
investments (stocks and bonds). However, capital budgeting projects are not
passive investmentsmanagers can often take positive actions after the
investment has been made that alter the cash flow stream. Opportunities for
such actions are called real options. Real options are valuable, but this value
is not captured by conventional NPV analysis. Therefore, a project's real
options must be considered separately.
Correct Answer:
Correct DCF techniques were originally developed to value passive
investments (stocks and bonds). However, capital budgeting projects are not
passive investmentsmanagers can often take positive actions after the
investment has been made that alter the cash flow stream. Opportunities for
such actions are called real options. Real options are valuable, but this value
is not captured by conventional NPV analysis. Therefore, a project's real
options must be considered separately.
Question 24
0 out of 2 points
Which of the following statements is CORRECT?
Selected Answer:
Incorrect If one of the assets to be used by a potential project is already
owned by the firm but is not being used, then any costs associated with that
asset is a sunk cost and should be ignored.
Correct Answer:
Correct If one of the assets to be used by a potential project is already owned
by the firm, and if that asset could be sold or leased to another firm if the
new project were not undertaken, then the net after-tax proceeds that could
be obtained should be charged as a cost to the project under consideration.
Question 25
2 out of 2 points
Which of the following is NOT one of the steps taken in the financial planning
process?
Selected Answer:
Correct Consult with key competitors about the optimal set of prices to
charge, i.e., the prices that will maximize profits for our firm and its
competitors.
Correct Answer:
Correct Consult with key competitors about the optimal set of prices to
charge, i.e., the prices that will maximize profits for our firm and its
competitors.
Question 26
2 out of 2 points
North Construction had $850 million of sales last year, and it had $425 million
of fixed assets that were used at only 60% of capacity. What is the maximum
sales growth rate North could achieve before it had to increase its fixed
assets?
Selected Answer:
Correct 66.67%
Correct Answer:
Correct 66.67%
Question 27
2 out of 2 points
Spontaneous funds are generally defined as follows:
Selected Answer:
Correct Funds that arise out of normal business operations from its suppliers,
employees, and the government, and they include immediate increases in
accounts payable, accrued wages, and accrued taxes.
Correct Answer:
Correct Funds that arise out of normal business operations from its suppliers,
employees, and the government, and they include immediate increases in
accounts payable, accrued wages, and accrued taxes.
Question 28
2 out of 2 points
Last year National Aeronautics had a FA/Sales ratio of 40%, comprised of
$250 million of sales and $100 million of fixed assets. However, its fixed
assets were used at only 75% of capacity. Now the company is developing its
financial forecast for the coming year. As part of that process, the company
wants to set its target Fixed Assets/Sales ratio at the level it would have had
had it been operating at full capacity. What target FA/Sales ratio should the
company set?
Selected Answer:
Correct 30.0%
Correct Answer:
Correct 30.0%
Question 29
2 out of 2 points
Which of the following assumptions is embodied in the AFN equation?
Selected Answer:
Correct Accounts payable and accruals are tied directly to sales.
Correct Answer:
Correct Accounts payable and accruals are tied directly to sales.
Question 30
2 out of 2 points
Which of the following statements is CORRECT?
Selected Answer:
Correct Additional funds needed (AFN) are typically raised using a
combination of notes payable, long-term debt, and common stock. Such
funds are non-spontaneous in the sense that they require explicit financing
decisions to obtain them.
Correct Answer:
Correct Additional funds needed (AFN) are typically raised using a
combination of notes payable, long-term debt, and common stock. Such
funds are non-spontaneous in the sense that they require explicit financing
decisions to obtain them.
Sunday, June 19, 2016 11:32:44 AM EDT
Combine all of the sections stated below and revise your initial business plan
draft, which you submitted in Week 8, based on feedback you have received.
Executive Summary
For year one, submit a revised Income Statement, Cash Flow Projection, and
Balance Sheet from the Business Plan Financials Excel template based on
your feedback from Project Deliverable 4: Business Plan Draft .
The specific course learning outcomes associated with this assignment are: