Corporate Finance Case Solution
Section 1: Multiple Choice (30 questions)
Select the best alternative for each of the multiple choice questions, and fill in your choice in the following table.
Note: 5 marks will be deducted if your answers are not filled in the table below. You do not need to include the questions in your submitted assignment (we’d rather you didn’t, actually), but you must include this table, completed with your answers, in your submitted assignment.
- Which of the following statements regarding limited partnerships is true?
- A) There is no limit on a limited partner's liability.
- B) A limited partner's liability is limited by the amount of his investment.
- C) A limited partner is not liable until all of the assets of the general partners have been exhausted.
- D) A general partner's liability is limited by the amount of his investment.
- If shareholders are unhappy with a CEO's performance, they are most likely to
- A) buy more shares in an effort to gain control of the firm.
- B) file a shareholder resolution.
- C) replace the CEO through a grassroots shareholder uprising.
- D) sell their shares.
- By comparing a firm's current assets and current liabilities, one can assess whether the firm has sufficient ________ to meet its ________ needs.
- A) long-term capital; short-term
- B) working capital; short-term
- C) working capital; long-term
- D) marketable securities; long-term
- Management is also required to disclose any ________, which are transactions or arrangements that can have a material impact on the firms future performance yet to do not appear on the ________.
- A) earnings per share; income statement
- B) investment decision; statement of cash flows
- C) financing decision; statement of cash flows
- D) off-balance sheet transactions; balance sheet
- Consider the following oil prices.
Alaska North Slope Crude Oil (ANS)
West Texas Intermediate Crude Oil (WTI)
As an oil refiner, you are able to produce $76 worth of unleaded gasoline from one barrel of Alaska North Slope (ANS) crude oil. Because of its lower sulfur content, you can produce $77 worth of unleaded gasoline from one barrel of West Texas Intermediate (WTI) crude.
Assuming you currently have 10,000 Bbls of WTI crude, the added benefit (cost) to you if you were to sell the 10,000 Bbls of WTI crude and use the proceeds to purchase and refine ANS crude is closest to:
- A) ($1,400)
- B) $1,400
- C) ($3,908)
- D) $3,908
- Consider the following cash flows:
If the risk-free interest rate is 10%, then of the four projects listed, if could only invest in two of these projects, which two projects would you select?
- A) Minie & Eenie
- B) Minie & Meenie
- C) Eenie & Moe
- D) Eenie & Meenie
- Consider the following timeline detailing a stream of cash flows:
If the current market rate of interest is 10%, then the present value of this stream of cash flows is closest to:
- A) $674
- B) $600
- C) $460
- D) $287
- Since your first birthday, your grandparents have been depositing $1,000 into a savings account on every one of your birthdays. The account pays 4% interest annually. Immediately after your grandparents make the deposit on your 18th birthday, the amount of money in your savings account will be closest to:
- A) $25,645
- B) $36,465
- C) $12,659
- D) $18,000
- Consider the following investment alternatives:
Which alternative offers you the lowest effective rate of return?
- A) Investment A
- B) Investment B
- C) Investment C
- D) Investment D
- The term structure of interest rates predicts that long-term interest rates will exceed short-term interest rates, resulting in an upward sloping yield curve. If Central Banks were to intervene in the financial market to "flatten" the shape of the yield curve, they would attempt this by
- A) purchasing long-term bonds.
- B) selling long-term bonds.
- C) purchasing short-term bonds.
- D) selling short-term bonds.
- The Sisyphean Company has a bond outstanding with a face value of $1,000 that reaches maturity in 15 years. The bond certificate indicates that the stated coupon rate for this bond is 8% and that the coupon payments are to be made semi-annually.
Assuming the appropriate YTM on the Sisyphean bond is 9%, then this bond will trade at
- A) a premium.
- B) a discount.
- C) par.
- D) none of the above
- Consider the following four bonds that pay annual coupons:
he percentage change in the price of the bond "C" if its yield to maturity increases from 9% to 10% is closest to:
- A) -17%
- B) -6%
- C) -4%
- D) 4%
13. JRN Enterprises just announced that it plans to cut its dividend from $2.50 to $1.50 per share and use the extra funds to expand its operations. Prior to this announcement, JRN's dividends were expected to grow at 4% per year and JRN's stock was trading at $25.00 per share.......................................