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Exam 2 Questions

# Exam 2 Questions - Exam 2 Form 1 Your Name 302 Exam II Dr...

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Exam 2 Form 1 Your Name:___________________________________________________________ 302 Exam II Dr. Brunarski Registered in Section (circle one): 3:30 5:00 6:30 Formulas: NWC =  Current Assets -  Current Liabilities After-tax proceeds from asset sale = Sale Price – [T c (Sale Price – Book Value)] Depreciation tax shield = T c (\$Depreciation) PV = FV/(1+i) n E[R i ] = R f + β i (R m – R f ) After-tax revenues or expense = (1- T c ) (\$revenues or expense) 1

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1) ______ An analyst is using Monte Carlo simulation modeling to perform risk-analysis for a capital budgeting problem. He obtains a random number in cell Q1 , using the EXCEL function “=rand()”. A Z-score is obtained in cell R1 using the formula “=normsinv(Q1)”. Revenues are normally distributed, with a mean of \$100,000 and a standard deviation of \$20,000. The correct formula to compute simulated revenues is: a) =(Q1*100000) + 20000 b) =(R1 * 100000) + 20000 c) =(100000*R1)+(20000*Q1) d) =100000 + (20000 * Q1) e) =100000 + (20000 * R1) Note: cell Q1 is the random number and cell R1 is the cell with the Z-score computed using the random number from cell Q1. 2)______ Which of the following changes would generally decrease a firm’s agency costs? a) Decrease in debt/asset ratio b) Decrease in the dividend payout ratio (dividends / net income) c) An increase in stockholdings by activist shareholders d) Two strict outside directors are replaced by two affiliated (grey) directors e) In fact, none of the above should decrease a firm’s agency costs 3)______ What is one benefit to non-manager stockholders when the firm awards long- term stock options to managers? a) Options encourage managers to seek lower risk, positive NPV projects b) Options make managers more willing to accept higher risk, positive NPV projects c) Managers delay the release of good news around their option award date. d) The firm is more likely to be the target of a successful takeover when managers have stock-options. e) The board is more willing to fire poorly-performing managers if they have long-term stock options. 4)_____ The Economic Value Added (EVA) for a project of average risk can best be defined as: a) The project’s internal rate of return b) The project’s internal rate of return less the firm’s WACC c) The stock price reaction to the official announcement of the project’s acceptance d) The PV of the project’s inflows less the PV of the compensation of the employees involved in the project. e) The NPV of the project, less the PV of the compensation of the top firm managers. 5)_____You wish to obtain data on the compensation of current executives and the ages of the Proctor and Gamble’s current board of directors. To find this information, you should obtain the firm’s: a) Annual report d) Proxy statement 2
b) Articles of Incorporation e) Defining 14 Articles c) Constitution I know some of you chose answer “e” because of the abbreviation used on Edgar. I generally would not have offered this answer choice that some have said was “tricky.” However, in class, we

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Exam 2 Questions - Exam 2 Form 1 Your Name 302 Exam II Dr...

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