FIN Final

B. $25.51

(Bonus) Atlas Home supply has paid a constant annual dividend of $2.40 a share for the past 15 years. Yesterday, the firm announced the dividend will increase next year by 10 percent and will stay at that level through Year 3, after which time the dividends will increase by 2 percent annually. The required return on this stock is 12 percent. What is the current value per share? A. $24.57 B. $25.51 C. $26.02 D. $26.84 E. $26. 08

managerial options implicit in a project

(Bonus) Contingency planning focuses on the:

A. -$7,632.77

(Bonus) Lakeside Winery is considering expanding its winemaking operations. The expansion will require new equipment costing $708,000 that would be depreciated on a straight-line basis to a zero balance over the four-year life of the project. The equipment can be sold for $220,000 after the four years. The project requires $46,000 initially for net working capital, all of which will be recouped at the end of the project. The projected operating cash flow is $211,500 a year. What is the net present value of this project if the relevant discount rate is 13 percent and the tax rate is 34 percent? A. -$7,632.77 B. -$8,309.18 C. $7,008.14 D. $1,309.54 E. -$10,747.11

E. $19,776.80

(Bonus) Phil's Diner purchased some new equipment two years ago for $32,600. Today, it is selling the equipment for $22,000. What is the aftertax cash flow from this sale if the tax rate is 35 percent? The applicable MACRS allowance percentages are as follows: commencing with Year 1: 20.00, 32.00, 19.20, 11.52, 11.52, and 5.76 percent. A. $24,223.20 B. $25,153.33 C. $18,846.67 D. $20,408.20 E. $19,776.80

No

(Bonus) The Shoe Box is considering adding a new line of winter footwear to its product lineup. When analyzing the viability of this addition, should the company include the R&D costs to produce the current winter footwear samples? Yes or no.

B. Increase in the capital gains yield

(Bonus) Which of the following will increase the current value of a stock? A. Decrease in the dividend growth rate B. Increase in the capital gains rate C. Increase in the required return D. Decrease in the expected dividend for next year E. Increase in the market rate of return

C. 10-year, zero coupon

(Bonus) Which one of the following bonds is the most sensitive to changes in the market interest rate? A. 5-year, five percent coupon B. 10-year, five percent coupon C. 10-year, zero coupon D. 5 year, zero coupon E. 10-year, 10 percent coupon

E. 11.75 percent

(Ch. 10) A stock produced returns of 16 percent, 9 percent, and 21 percent over three of the past four years. The arithmetic average for the past four years is 10 percent. What is the standard deviation of the stock's returns for the 4-year period? A. 6.82 percent B. 8.54 percent C. 9.09 percent D. 10.83 percent E. 11.75 percent

C. Available information

(Ch. 10) An efficient capital market is best defined as a market in which security prices reflect which one of the following? A. Current inflation B. A risk premium C. Available information D. The historical arithmetic rate of return E. The historical geometric rate of return

E. sum of the dividend yield and the capital gains yield is 8.2 percent.

(Ch. 10) One year ago, you purchased 100 shares of a stock .This morning you sold those shares and realized a total return of 8.2 percent. Given this information, you know for sure the: A. stock price increased by 8.2 percent over the last year. B. stock increased in value over the past year. C. stock paid a dividend. D. dividend yield is greater than zero. E. sum of the dividend yield and the capital gains yield is 8.2 percent.

C. Small-company stocks

(Ch. 10) Over the period of 1926-2008, which one of the following investment classes had the highest volatility of returns? A. Large-company stocks B. U.S. Treasury bills C. Small-company stocks D. Long-term corporate bonds E. Long-term government bonds

D. the risk premium on stocks exceeded the risk premium on bonds

(Ch. 10) Over the period of 1926-2008: A. the risk premium on large-company stocks was greater than the risk premium on small- company stocks. B. U.S. Treasury bills had a risk premium that was just slightly over 2 percent. C. the risk premium on long-term government bonds was zero percent. D. the risk premium on stocks exceeded the risk premium on bonds. E. U. S. Treasury bills had a negative risk premium.

E. I, II, III, and IV

(Ch. 10) Percentage returns: I. are easy to understand. II. relay information about a security more easily than dollar returns do. III. are not affected by the amount of the investment. IV. can be easily separated into dividend yield and capital gain yield. A. II and III only B. I and III only C. I, II, and III only D. I, II, and IV only E. I, II, III, and IV

E. stocks of the 500 companies included in the S&P 500 index

(Ch. 10) The historical returns on large-company stocks, as reported by Ibbotson and Sinquefield and reported in your textbook, are based on the: A. largest 20 percent of the stocks traded on the NYSE. B. stock returns for the largest 10 percent of the publicly traded firms in the U.S. C. returns of the 100 largest firms in the U.S. D. returns of all of the stocks listed on the NYSE. E. stocks of the 500 companies included in the S&P 500 index.

D. Return earned in an average year over a multiyear period

(Ch. 10) Which one of the following best describes an arithmetic average return? A. Total return divided by N - 1, where N equals the number of individual returns B. Average compound return earned per year over a multiyear period C. Total compound return divided by the number of individual returns D. Return earned in an average year over a multiyear period E. Positive square root of the average compound return

C. Intermediate-terms government bonds

(Ch. 10) Which one of the following has the narrowest distribution of returns for the period 1926-2008? A. Long-term corporate bonds B. Long-term government bonds C. Intermediate-terms government bonds D. Large-company stocks E. Small-company stocks

A. Geometric average return

(Ch. 10) Which one of the following is defined as the average compound return earned per year over a multiyear period? A. Geometric average return B. Variance of returns C. Standard deviation of returns D. Arithmetic average return E. Normal distribution of returns

E. 20.59 percent

(Ch. 10) You find a certain stock that had returns of 14 percent, -27 percent, 19 percent, and 21 percent for four of the last five years. The average return of the stock over this period was 9.5 percent. What is the standard deviation of the stock's returns? A. 11.67 percent B. 12.90 percent C. 14.14 percent D. 18.47 percent E. 20.59 percent

A. 1.56 percent

(Ch. 11) Stock A has an expected return of 15.6 percent and a beta of 1.27. Stock B has an expected return of 11.4 percent and a beta of 0.89. Both stocks have the same reward-to-risk ratio. What is the risk-free rate? A. 1.56 percent B. 2.28 percent C. 2.79 percent D. 3.35 percent E. 3.92 percent

C. I, II, and IV only

(Ch. 11) Which of the following terms can be used to describe unsystematic risk? I. asset-specific risk II. diversifiable risk III. market risk IV. unique risk A. I and IV only B. II and III only C. I, II, and IV only D. II, III, and IV only E. I, II, III, and IV

B. Beta coefficient

(Ch. 11) Which one of the following measures the amount of systematic risk present in a particular risky asset relative to that in an average risky asset? A. Squared deviation B. Beta coefficient C. Standard deviation D. Mean E. Variance

C. A portfolio comprised solely of U.S. Treasury bills

(Ch. 11) Which one of the following portfolios will have a beta of zero? A. A portfolio that is equally as risky as the overall market. B. A portfolio that consists of a single stock. C. A portfolio comprised solely of U. S. Treasury bills. D. A portfolio with a zero variance of returns. E. No portfolio can have a beta of zero.

D. 17.89 percent

(Ch. 11) Worth While Entertainment has common stock with a beta of 1.46. The market risk premium is 9.1 percent and the risk-free rate is 4.6 percent. What is the expected return on this stock? A. 16.31 percent B. 16.67 percent C. 17.40 percent D. 17.89 percent E. 18.23 percent

D. $46,667

(Ch. 11) You own a $210,000 portfolio that is invested in stock A and B. The portfolio beta is equal to the market beta. Stock A has an expected return of 18.7 percent and has a beta of 1.42. Stock B has a beta of 0.88. What is the value of your investment in stock A? A. $38,600 B. $42,333 C. $44,500 D. $46,667 E. $47,200

C. 1.96

(Ch. 11) You own a portfolio equally invested in a risk-free asset and two stocks. If one of the stocks has a beta of 1.04 and the total portfolio is equally as risky as the market, what must the beta be for the other stock in your portfolio? A. 1.37 B. 1.54 C. 1.96 D. 2.30 E. 2.97

D. 12.42 percent

(Ch. 11) You own a portfolio that is invested 38 percent in stock A, 43 percent in stock B, and the remainder in stock C. The expected returns on these stocks are 10.7 percent, 15.4 percent, and 9.1 percent, respectively. What is the expected return on the portfolio? A. 10.55 percent B. 11.02 percent C. 11.67 percent D. 12.42 percent E. 13.01 percent

C. $15,266

(Ch. 11) You want to create a $65,000 portfolio comprised of two stocks plus a risk-free security. Stock A has an expected return of 14.2 percent and stock B has an expected return of 17.8 percent. You want to own $20,000 of stock B. The risk-free rate is 4.8 percent and the expected return on the market is 13.1 percent. If you want the portfolio to have an expected return equal to that of the market, how much should you invest in the risk-free security? A. $11,921 B. $13,509 C. $15,266 D. $17,315 E. $18,775

B. $6,792

(Ch. 11) You would like to invest $18,000 and have a portfolio expected return of 12.3 percent. You are considering two securities, A and B. Stock A has an expected return of 15.6 percent and B has an expected return of 10.3 percent. How much should you invest in stock A if you invest the balance in stock B? A. $5,807 B. $6,792 C. $7,411 D. $7,937 E. $8,626

B. $10

(Ch. 12) Farm Equipment, Inc. announced this morning that its next annual dividend will be decreased to $1.80 a share and that all future dividends will be decreased by an additional 1.5 percent annually. What is the current value per share of this stock if the required return is 16.5 percent? A. $8 B. $10 C. $12 D. $14 E. $16

C. 9.43 percent

(Ch. 12) Global Exchange has three divisions: A, B, and C. Division A has the least risk and division C has the most risk. The firm has an aftertax cost of debt of 6.1 percent and a cost of equity of 14.3 percent. The firm is financed with 35 percent debt and 65 percent equity. Division A's projects are assigned a discount rate that is 2 percent less than the firm's weighted average cost of capital. What is the discount rate applicable to division A? A. 7.98 percent B. 8.27 percent C. 9.43 percent D. 11.48 percent E. 13.43 percent

E. 11.76 percent

(Ch. 12) Precision Engineering has a target debt-equity ratio of 0.55. Its cost of equity is 15.4 percent, and its pretax cost of debt is 7.8 percent. If the tax rate is 34 percent, what is the company's WACC? A. 10.20 percent B. 10.72 percent C. 10.91 percent D. 11.48 percent E. 11.76 percent

E. 14.14 percent

(Ch. 12) Southwest Tours currently has a weighted average cost of capital of 11.3 percent based on a combination of debt and equity financing. The firm has no preferred stock. The current debt-equity ratio is 0.58 and the aftertax cost of debt is 6.4 percent. The company just hired a new president who is considering eliminating all debt financing. All else constant, what will the firm's cost of capital be if the firm switches to an all-equity firm? A. 11.45 percent B. 12.62 percent C. 12.89 percent D. 13.37 percent E. 14.14 percent

B. cost of equity and its aftertax cost of debt

(Ch. 12) The weighted average cost of capital is defined as the weighted average of a firm's: A. return on its investments. B. cost of equity and its aftertax cost of debt. C. pretax cost of debt and equity securities. D. bond coupon rates. E. dividend and capital gains yields.

A. 12.69 percent

(Ch. 12) Western Electric has 23,000 shares of common stock outstanding at a price per share of $57 and a rate of return of 14.2 percent. The firm has 6,000 shares of 7 percent preferred stock outstanding at a price of $48 a share. The preferred stock has a par value of $100. The outstanding debt has a total face value of $350,000 and currently sells for 102 percent of face. The yield-to-maturity on the debt is 8.49 percent. What is the firm's weighted average cost of capital if the tax rate is 34 percent? A. 12.69 percent B. 13.44 percent C. 14.19 percent D. 14.47 percent E. 14.92 percent

B. III only

(Ch. 12) Which of the following will increase the cost of equity for a firm with a beta of 1.1? I. decrease in the security's beta II. decrease in the market risk premium III. decrease in the risk-free rate IV. increase in the risk-free rate A. II only B. III only C. I and II only D. II and III only E. I and IV only

D. Weighted average cost of capital

(Ch. 12) Which one of the following represents the rate of return a firm must earn on its assets if it is to maintain the current value of its securities? A. Cost of equity B. Internal rate of return C. Aftertax cost of debt D. Weighted average cost of capital E. Debt-equity ratio

D. The repurchase of preferred stock will increase the weight of debt

(Ch. 12) Which one of the following statements is correct concerning capital structure weights? A. Target rates are less relevant to a project than are historical rates. B. The weights are unaffected when a bond issue matures. C. An increase in the debt-equity ratio will increase the weight of the common stock. D. The repurchase of preferred stock will increase the weight of debt. E. The issuance of additional shares of common stock will increase the weight of the preferred stock.

B. 6.08 percent

(Ch. 12) Winter Wear, Inc. has 6 percent bonds outstanding that mature in 13 years. The bonds pay interest semiannually and have a face value of $1,000. Currently, the bonds are selling for $993 each. What is the firm's pre-tax cost of debt? A. 5.97 percent B. 6.08 percent C. 6.14 percent D. 6.31 percent E. 6.40 percen

A. 5.80

(Ch. 13) A firm has a weighted average cost of capital of 11.68 percent and a cost of equity of 15.5 percent. The debt-equity ratio is 0.65. There are no taxes. What is the firm's cost of debt? A. 5.80 percent B. 6.27 percent C. 6.44 percent D. 7.23 percent E. 7.81 percent

E. $3,499

(Ch. 13) Bruno's is considering a change from its current capital structure. Bruno's currently has an all-equity capital structure and is considering a capital structure with 30 percent debt. There are currently 6,500 shares outstanding at a price per share of $46. EBIT is expected to remain constant at $43,000. The interest rate on new debt is 8.5 percent and there are no taxes. Tracie owns $20,700 worth of stock in the company. The firm has a 100 percent payout. What would Tracie's cash flow be under the new capital structure assuming that she keeps all of her shares? A. $1,998 B. $2,227 C. $2,815 D. $3,027 E. $3,499

A. 1,810 shares

(Ch. 13) Charleston Mills is an all-equity firm with a total market value of $221,000. The firm has 8,000 shares of stock outstanding. Management is considering issuing $50,000 of debt at an interest rate of 7 percent and using the proceeds on a stock repurchase. Ignore taxes. How many shares can the firm repurchase if it issues the debt securities? A. 1,810 shares B. 1,818 shares C. 1,847 shares D. 1,856 shares E. 1,899 shares

A. 7.99 percent

(Ch. 13) Glass Growers has no debt. Its cost of capital is 8.7 percent. Suppose the firm converts to a debt-equity ratio of 0.65. The interest rate on the debt is 6.9 percent. What is its new WACC? A. 7.99 percent B. 8.13 percent C. 8.36 percent D. 8.44 percent E. 8.61 percent

B. Absolute priority rule

(Ch. 13) In the process of liquidation, some types of claims receive preference over other claims. Which one of the following determines which type of claim is paid first? A. Technical insolvency definition B. Absolute priority rule C. Accounting insolvency definition D. Chapter 7 of the Federal Bankruptcy Reform Act of 1978 E. Securities and Exchange Commission

E. 12.86 percent

(Ch. 13) Room and Board has determined that $36,000 is the break-even level of earnings before interest and taxes for the two capital structures it is considering. The one structure consists of all equity with 14,000 shares of stock. The second structure consists of 10,000 shares of stock and $80,000 of debt. What is the interest rate on the debt? A. 7.72 percent B. 8.19 percent C. 9.97 percent D. 11.43 percent E. 12.86 percent

E.

(Ch. 13) Southern Fried Foods has a $12 million bond issue outstanding with a coupon rate of 6.75 percent and a yield-to-maturity of 7.27 percent. What is the present value of the tax shield if the tax rate is 35 percent? A. $283,500 B. $305,340 C. $3,053,400 D. $3,560,000 E. $4,200,000

E. 13.41 percent

(Ch. 13) The Doll House has a pre-tax cost of debt of 7.9 percent and a return on assets of 11.7 percent. The debtequity ratio 0.45. Ignore taxes. What is the cost of equity? A. 11.87 percent B. 12.03 percent C. 12.47 percent D. 12.98 percent E. 13.41 percent

E. 5,742 shares

(Ch. 13) The Green Briar is an all-equity firm with a total market value of $418,000 and 20,000 shares of stock outstanding. Management is considering issuing $120,000 of debt at an interest rate of 9 percent and using the proceeds on a stock repurchase. Ignore taxes. How many shares will the firm repurchase if it issues the debt securities? A. 2,871 shares B. 3,516 shares C. 3,921 shares D. 4,607 shares E. 5,742 shares

B. Financial risk

(Ch. 13) Which one of the following is the equity risk arising from the capital structure selected by a firm? A. Strategic risk B. Financial risk C. Liquidity risk D. Industry risk E. Business risk

C. Extra dividend

(Ch. 14) Downtown Merchants has paid a quarterly dividend of $0.60 per share for the past two years. This quarter, the firm plans to pay $0.60 plus an additional $0.05. The firm has stated that it uncertain whether it will pay $0.60 or $0.65 per share next quarter. Which one of the following is the best description of the additional $0.05 that is being paid this quarter? A. Liquidating dividend B. Special dividend C. Extra dividend D. Stock dividend E. Normal dividend

A. 24.87; 24.87

(Ch. 14) Flemington Farms is evaluating an extra dividend versus a share repurchase. In either case, $15,000 would be spent. Current earnings are $2.80 per share, and the stock currently sells for $75 per share. There are 2,800 shares outstanding. Ignore taxes and other imperfections. The PE ratio will be ____ if the firm issues the dividend as compared to ____ if the firm does the share repurchase. A. 24.87; 24.87 B. 24.87; 26.79 C. 26.79; 24.87 D. 26.79; 26.79 E. 26.79; 27.13

D. $19.00

(Ch. 14) Gloria's Boutique has 4,000 shares of stock outstanding at a price per share of $19. The firm has decided to repurchase 500 of those shares in the open market. What will the price per share be after the share repurchase is completed? Ignore taxes and market imperfections. A. $17.80 B. $18.40 C. $18.80 D. $19.00 E. $20.20

D. Price-earnings ratio

(Ch. 14) Kelso's is considering spending $80,000 on either a stock repurchase or an extra cash dividend. Which one of the following values will be the same whether the firm pays a dividend or repurchases stock? Assume there are no taxes or market imperfections. A. Number of shares outstanding B. Price per share C. Earnings per share D. Price-earnings ratio E. Market value of equity per share

A. $43.80

(Ch. 14) LOG, Inc. currently has 300,000 shares of stock outstanding that sell for $73 per share. Assuming no market imperfections or tax effects exist, what will the share price be after LOG has a five-for-three stock split? A. $43.80 B. $45.60 C. $73.00 D. $109.18 E. $121.67

D. Cash payment by a firm to its owners as part of a firm's normal operations

(Ch. 14) Which one of the following best defines a regular cash dividend? A. Distribution by a firm to its shareholders B. Payment from any source by a firm to its owners C. One-time payment of cash by a firm to its shareholders D. Cash payment by a firm to its owners as part of a firm's normal operations E. Distribution of the proceeds from the sale of a portion of a firm's operations

E. A non-dividend paying firm is more apt to do a stock repurchase than to commence paying dividends.

(Ch. 14) Which one of the following statements is correct? A. Generally speaking, the size of a firm has no effect on its tendency to pay dividends. B. The market crash and the accounting scandals in the early 2000's tended to cause financially- stable firms to cease paying cash dividends. C. The majority of firms either started paying or increased their dividends per share in response to the May 2003 change in dividend taxation. D. Firms tend to prefer cash dividends over share repurchases for their flexibility and tax benefits. E. A non-dividend paying firm is more apt to do a stock repurchase than to commence paying dividends.

E. III and IV only

(Ch. 14) Which two of the following tend to limit the amount of dividends that can be paid by a leveraged corporation? I. current tax laws II. corporate tax exclusion III. bond indenture covenant IV. state laws pertaining to retained earnings A. I and II only B. I and III only C. II and III only D. II and IV only E. III and IV only

B. $14,880

(Ch. 14) Your portfolio is 240 shares of Rising Sun Co. The stock currently sells for $62 a share. The company has announced a dividend of $1.10 per share with an ex-dividend date of May 6. Assume there are no taxes. What will your portfolio value be on May 7? A. $14,616 B. $14,880 C. $15,026 D. $15,144 E. $15,210

A. .85

(Ch. 8) The Black Horse is currently considering a project that will produce cash inflows of $11,000 a year for 3 years followed by $6,500 in Year 4. The cost of the project is $38,000. What is the profitability index if the discount rate is 9 percent? A. .85 B. .80 C. .83 D. .75 E. .70