FINA 320 Final

You are given cash flows listed below at years 3, 5, and 6

$375.00

Which of the following statements is true for a stock that sells now for $60, pays an annual dividend of $4,000, and expected a 20% return on investment over the past year? It's price one year ago was

$53.33

Refer to the Balance Sheet Accounts of Greek Corporation. The value of net working capital at the year-end is ________.

$6,450

What should be the beta of a replacement stock if an investor wishes to achieve a portfolio beta of 1.0 by replacing stock C in the following equally weighted portfolio: stock A = .9 beta, stock B = 1.1 beta, stock C = 1.35 beta?

1.00

What is the value of systematic risk (as measured by beta) for a portfolio with 2/3 of the funds invested in A and 1/3 of the funds invested in B?

1.067

You own a stock portfolio invested 25 percent

1.39

Your grandfather placed $5,000 in a trust fund for you.

5.9%

Your grandfather placed $5,000 in a trust fund for you. In 12 years the fund will be worth $10,000. What is the rate of return on the trust fund? (round to the nearest one hundredth of 1%)

5.95%

Buying your own home is often mentioned as "the best investment you can make." In 1930, the average home sale price was $3,845. By 1990, the average home sale price had risen to $123,000. What was the average annual rate of return of investing in house over this time period?

5.95% per year

You are interest in a corporate bond with the current market price of $973.36 and yield to maturity of 7%. The bond carries a coupon rate of 6%, paid semi annually. If you buy the bond today , how many semi-annual coupon payments will you receive until the final maturity?

6

The relevant risk for the fair market pricing of financial securities is the ______.

Systematic risk

What will happen to the expected return on a stock with a beta of 1.5 and a market risk premium of 9% if the Treasury Bill yield increases from 3 to 5%? (assuming the change in T-Bill yield does not affect the market risk premium)

The Expected return will increase by 2.0%

A bond sold five weeks ago for $1,100. The bond is worth $1,150 in today's market. Assuming no changes in risk, which of the following is false

The coupon payment of the bond must have decreased

A bond sold five weeks ago for $1,100. The bond is worth $1,150 in today's market. Assuming no changes in risk, which of the following is false?

The coupon payment of the bond must have decreased.

What happens to the coupon rate of a bond that pays $80 annually in interest if yield to maturity changes from 9% to 10%?

The coupon rate remains at 8%

A stock's risk premium is equal to :

The expected market risk premium times the Beta

Which of the following describes a stock that plots above the security market line?

The expected return of the stock is too high

Which of the following is not a capital budgeting question?

The proper mix of stocks and bonds to hold for financing assets

If treasury bills are yielding 10% at a time when the market risk premium is 6%, then the

market portfolio should yield 16%

The slope of an asset's security market line is the __________.

market risk premium

The constant-growth dividend discount model would typically be most appropriate in valuing a stock of a:

moderate growth, "mature" company

Regarding diversification, _____________________________.

most of the benefits are realized with about 20 to 30 stocks

The relevant risk for the fair market pricing of financial securities is the ______

systematic risk

The current yield on a bond is equal to:

the annual coupon payment divided by the current market price

Periodic receipts of interest by bondholders are knows as:

the coupon rates

As the rating of a bond increases (for example, from A, to AA, to AAA), it generally means that

the default risk decreases and the required rate of return decreases

The value of a common stock will likely decrease if

the discount rate increases

A real estate investment has the following expected cash flows: The discount rate is 8 percent. What is the investment's present value? (round to the nearest dollar)

$ 96,110

Biogenetics, Inc. plans to retain and reinvest all of their earnings for the next 30 years. Beginning in year 31, the firm will begin to pay a $30 per share dividend. The dividend will not subsequently change. Given a required return of 18%, what should the stock sell for today?

$1.16

Refer to the Balance Sheet Accounts of Greek Corporation. The value of equity for the year-end is ________.

$11,090

Given the following balance sheet data, calculate net working capital

$120

Imprudential, Inc., had an unfunded pension liability of $650 million that must be paid in 20 years. To assets the value of the firm's stock, financial analysts want to discount this liability back to the present. If the relevant discount rate is 8.5%, what is the present value of this liability?

$127.15 million

The monthly mortgage payment on your house is $821.69. It is a 30-year mortgage at 6.5% annual interest rate, compounded monthly. How much did you borrow?

$130,00

The savoy corporation income statement accounts for the year ending december 31, 2014 COGS $345,000 IE $79,000 T $57,100 R $836,000 S,G,AE $93,000 D $126,000 What is the net income for the Savoy corporation for 2014?

$135,900

An investment promises a payoff of $195 two and half years from today. At a discount rate of 7.5% per year, what is the present value of this investment?

$162.75

You are evaluating a project for the ultimate recreational tennis racket

$20,000

Refer to the Balance Sheet Accounts of Greek Corporation. The value of total assets for the year-end is ________.

$20,940

An investment opportunity, in year 3, is forecast to create revenue of $120k and COGS 40% revenue... what is net cash flow projected for year 3?

$21,200

Boomer Products, Inc

$22.86

Boomer Products, Inc. manufactures "no-inhale" cigarettes. As their target customers age and pass on, sales of the product are expected to decline. Thus, demographics suggest that earnings and dividends will decline at a rate of 5% annually forever. The firm just paid a dividend of $4; given a required rate of return is 10%, the price of the stock in 2 years will be:

$22.86

Suppose you purchase a zero coupon bond with par value of $1000, maturing in 25 years, for $180. If the yield to maturity on the bond remains unchanged, what will the price of the bond be 5 years from now?

$253.64

You are interested in saving money for your first house. Your plan is to make regular deposits into a brokerage account that will earn 14 percent. Your first deposit of $5,000 will be made today. You also plan to make four additional deposits at the beginning of each of the next four years. Your plan is to increase your deposits by 10 percent a year. (That is, you plan to deposit $5,500 at t = 1, and $6,050 at t = 2, etc.) How much money will be in your account right after the last deposit is made?

$39,363

An investor receives a 15% total return by purchasing a stock for $40 and selling it after one year with a 5% capital gain. How much was received in dividend income during the year?

$4.00

What is the current price of a share of stock for a firm with $5 million in balance sheet shares of stock outstanding, and a price/book value ratio of 4?

$40 (BV per share = 5,000,000/500,000= $10 Price/10=4 Price= $40)

Sedgwick, Inc. has 12%

$42.80

A firm expects to pay a dividend over each of the next for years of $2.00, $1.50, $2.50, and $3.50. if growth is then expected to level at 8% per year, and if you require a 14% rate of return, then how much should you be willing to pay for this stock?

$43.97

A firm that expects to pay a dividend over each of the next four years of $2.00, $1.50, $2.50, and $3.50. If growth is then expected to level off at 8% per year, and if you require a 14% rate of return, then how much should you be willing to pay for this stock?

$43.97

Cash and equivalents are $1561; short-term investments are $1052; accounts receivable are $3616; accounts payable are $5173; short-term debt (due in six months) is $288; inventories are $1816; other current liabilities are $1401; and other current assets are $707. What is the amount of total current liabilities?

$6862

Assume you are to receive a 20-year annuity with annual payments of $50. The first payment will be received at the end of Year 1, and the last payment will be received at the end of Year 20. You will invest each payment in an account that pays 10 percent. What will be the value in your account at the end of Year 30? (round to the nearest dollar)

$7,428

You plan to save $650 per year for the next 8 years. If your bank offers you an annual interest rate of 10%, how much money (round to the nearest dollar) will you have at the end of year 8? Assume each cash flow is deposited into your account at the end of the year.

$7433

How much interest is earned in just the third year on a $1,000 deposit that earns 7% interest compounded annually?

$80.14

Five years ago Thompson Tarps, Inc. issued twenty-five-year 10% annual coupon bonds with a $1,000 face value. Since then, interest rates in general have risen, and the yield to maturity on the Thompson Tarps bond is now 12%. Given the information, what is the price today for Thompson Tarps bond?

$850.61

For the next 8 years, an investor will deposit $$1,000 every year

$9,750.12

If a 4-year bond with a 7% coupon (paid annually) and a 10% yield to maturity is currently worth $904.90, how much will it be worth 1 year from now if interest rates are constant.

$925.39

The beta of an investment in U.S. Treasury bills is

0.0

What is the approximate variance of returns if over the past 3 years an investment returned 8.0%, -12%, and 15%?

0.0196

What is the approximate variance of returns if over the past 3 years an investment returned 8.0%, -12.0% and15%?

0.0196

The profitability index for a project costing $40,000 and returning $15,000 annually for 4 years at an opportunity cost of capital is?

0.139

A company's zero coupon bond issue matures in 16 years and has a yield to maturity of 10.60%. Each zero has a face value of $1,000 and there are 4,000 of the bonds outstanding. If the market values the equity at $1,800,000, what capital structure weight for debt would you use in calculating the WACC, assuming the firm's only debt consists of the zeros?

0.299

An investor divides her portfolio equally into 3 parts, with one part in treasury bills, one part in market index, and one part in a diversified portfolio with beta of 1.50. What is the beta of the investor's overall portfolio?

0.83 Since equal allocations, the weight is ⅓. T-bill have beta of 0, market index has beta of 1 by definition, so portfolio beta = ⅓*0+⅓*1+⅓*1.5= 0.83

What is the beta for a portfolio equally weighted in four assets: A, the market portfolio; B, which has half the risk of A; C, which has twice the risk of A; and D, which is risk-free?

0.875

Assume a portfolio is made up of the following 3 stocks: Stock X - Expected Return 9%, Required Return 12%, Invested amount 20k, Beta 1.40; Stock Y - ER 6%, RR 5%, IA 40k, Beta 1.10; Stock Z - ER 2%, RR 6%, IA 140k, Beta 0.80. Selecting the closest answer, the Beta for the portfolio is?

0.92

Assume a portfolio is made up of the following three stocks, select the closest answer to the portfolio beta Stock X 9 12 20,000 1.40 Stock Y 6 5 40,000 1.10 Stock Z 2 6 140,000 0.80

0.92

Assume a portfolio is made up of the following three stocks:

0.92

What should be the beta of a replacement stock if an investor wishes to achieve a portfolio beta of 1.0 by replacing stock C in the following equally weighted portfolio: A = .9 beta; stock B = 1.1 beta; stock C =1.35 beta?

1.00

Assume that stock ABC will pay a dividend of $1.25 next year (or year 1), which will then grow at a constant rate of 6 percent every year after that. The stock is currently selling at $31.25. Given the information, what is the required rate of return on the stock?

10%

Assume that the stock ABC will pay a dividend of $1.25 next year

10%

Given the following information for Dunhill Power Co.

10.25

Calculate the risk premium on stock C given the following information: risk-free rate =5%, market return = 13%, stock C beta = 1.3. ( PST. NOT MARKET RISK PREMIUM)

10.4%

A stock has an expected return of 10 percent, its beta is .9 and the risk-free rate is 6 percent. What must the expected return on the market be? Round your answer to the nearest basis point, or hundredth of percent.

10.45

An investor purchased a 6 year 10% coupon bond one year ago. The coupons were paid annually and the par value was $1,000. At the time she purchased the bond, the yield to maturity was 8 percent. The amount paid for this bond one year ago was.

1092.46

An investor purchased a 6-yera 10% coupon bond one year ago. The coupons were paid annually and the par value was $1,000. At the time she purchased the bond, the yield to maturity was 8 percent. The amount paid for this bond one year ago was:

1092.46

In a year in which common stocks offered an average return of 18%, treasury bonds offered 10% and treasury bills offered 7%, the risk premium for common stock was;

11%

In a year in which commons stocks offered an average return of 18%, Treasury bonds offered 10%, and Treasury bills offered 7%, the risk premium for common stocks was:

11%

In a year in which common stocks offered an average return of 18%, treasury bonds offered 10% and treasury bills offered 7%, the risk premium for common stocks was?

11% - risk premium=return risk -risk free rate= 18%- 7%=11%

Assume that a corporate bond has a par value of $1,000 and 15 years until it matures. Also assume that investors require an annual rate of return of 12% (compounded semi-annually), that coupon interest is paid semi-annually, that the current price for this bond is $931.18. What is the annual coupon rate on this bond?

11.0%

What is the after-tax cost of preferred stock that sells for $10.00 per share and offers a $1.20 annual dividend when the tax rate is 35%

12.00%

what is the after-tax cost of preferred stock that sells for $10.00 per share and offers a $1.20 annual dividend when the 35%

12.00%

Treasury bills currently have a return of 2.5% and a market risk premium is 7%. If a firm has a beta of 1.4, what is its cost of equity?

12.3%

Suppose that you have just purchased a share stock for $40. The most recent dividend was $2 and dividends are expected to grow at a rate of 7% indefinitely. what must your required return be on the stock?

12.35

Massey Co. has 12 percent coupon bonds making annual payments with YTM of 9 percent. The current yield on these bonds is 9.80 percent. How many years do these bonds have left until they mature?

13

Capital Structure Required Rate of Return 30% debt 10% for debt 20% preferred stock 11% for preferred stock 50% common stock 18% for common stock Assuming a 40% tax rate, what after-tax rate of return must the company earn on its investments?

13.0%

Given the following, what is the WACC? Common stock: 1 million share outstanding, $40 per share, $1 par value, beta = 1.3 Bonds: 10,000 bonds outstanding, $1,000 face value each, 8% annual coupon (paid annually), 22 years to maturity, market price = $1,101.23 per bond Market risk premium = 8.6% risk-free rate = 4.5%, marginal tax rate= 34%

13.30%

If you can earn 5.25% per year on your investments, how long, exactly, will it take to double your money? (hint: do not use the Rule of 72)

13.55 years

What is the standard deviation of a portfolio's returns if the mean return is 15%

13.56%

Approximately how long must one wait (to the nearest year) for an initial investment of $1,000 to triple in value (increase to $3000) if the investment earns 8% compounded annually?

14 years (PV=-1000 FV=3000 I/Y= 8 PMT= 0 N=14.27)

What is the appropriate standard deviation of return if over the past 4 years an investment returned 8%,-12.0%, -12.0% and 16.0%

14%

What is the approximate standard deviation of returns if over the past 4 years an investment returned 8.0%, -12.0%, -12.0%, and 16.0%?

14%

What is the approximate standard deviation of returns if over the past 4 years an investment returned 8.0%, 12.0%, -12.0%, and 16.0%

14%

What is the required return for a stock that has a 6% constant-growth rate, a price of $25, an expected dividend of $2 next year, and a P/E ratio of 10?

14%

Dizzy Corp. bonds with a coupon rate of 12% paid semiannually, have 3 years remaining to maturity, and are priced currently at 939.97 per bond. what is the yield to maturity?

14.45%

You have been offered a $1000 par value bond for $846.88. The coupon rate is 8%, payable annually, and annual interest rates on new issues of the same degree of risk are 10%. You want to know how many more interest payments you will receive, but the party selling the bond cannot remember. Determine how many interest payments remain.

15 years

if a firm generates $2000 in sales and has a $500 increases in AR during an accounting period, then, based on these two categories, cash flow will increase by: a. $2500 b. $2000 c. $1500 d. $500

1500

What rate of return should an investor expect for a stock that has a beta of 1.25

16.0%

What rate of return should an investor expect for a stock that has a beta of 1.25 when a market is expected to yield 14% and Treasury bills offer 6%?

16.0%

What rate of return should an investor expect for a stock that has a beta of 1.25 when the market is expected to yield a 14% and Treasury bills offer 6%

16.0%

Out of desperation, you got a $1000 loan from a loan shark, who charges you a daily interest rate of 1%. You have not made any repayment or borrowed additional money. The loan shark called you today and demanded a repayment of $5,000 immediately. How long ago did you get the loan( round to the nearest dollar)

162 days (PV= 1000 FV= 5000 I/Y= 1 PMT=0 N= 161.75 or 162 days)

You bought a 30-year bond many years ago. the bond has a par value of $1000 and a coupon rate of 12% paid semiannually. the current price of the bond is 1137.99 and the yield to maturity is 10%. How many years ago did you buy the bond?

18 years ago

What is the quick ratio?

2.67

An investor purchased a 10-year coupon bond with a YTM of 10%

20.15%

Suppose Massey LTD. just issues a dividends of $.68 per share on its common stock. The company paid dividends of $.40, $.45, $.52, and $.60 per share in the last four years. If the stock currently sells for $12, what is your best estimate of the company's cost of equity capital? Round your answer to the nearest basis point, or hundredth of percent.

20.65

Listed below are the financial statement numbers for Shick, Inc., for the year 2016. They are listed in alphabetical order, NOT in the order they appear on the statements themselves the applicable tax rate is 40% what is profit margin in 2016 is that good or poor performance given their peer group average is 11.0?

22.5%; good performance Net income = Sales - CGOS - SGA - Depreciation - interest - tax = 8,000 - 3200 - 1100 - 500 - 200 - 1200 = 1800 Profit margin = 1900/ 8000 = 22.5%

Company X has 2 million shares of common stock outstanding at a book value of $2 per share. The stock trades for $3 per share. It also has $2 million in face value of debt that trades at 90% of par. What is the weight of debt for WACC purposes?

23.1%

Company X has 2 million shares of common stock outstanding at a book value of $2 per share. The stock trades for $3 per share. It also has $2 million in face value of debt that trades at 90% of par. What is the weight on debt for WACC purposes?

23.1%

Given the following information, what is your best estimate for the firm's cost of equity on January 2, 2003, if the stock sells for $42 on that day? Date 12/31/97 12/31/98 12/31/99 12/31/00 12/31/01 12/31/02 Dividend $1.50 $1.73 $2.01 $2.34 $2.71 3.17

24.91%

Most of the beneficial effects of diversification will have been received by the time a portfolio of common stock contains ____ stocks

25

Most of the beneficial effects of diversification will have been recieved by the time a porfolio of common stocks contains

25

Your credit has a balance of $1,000 and the bank requires a minimum monthly payment of $51.22. The annual interest rate on the credit card is 24%. If you only make minimum payment every month and do not make additional charges on the card, how long will it take to pay off the balance?

25 months

Your company recently issued 10-year bonds at a market price of $1000 (that is, they were issued at face value). These bonds pay an annual coupon of $120. Due to additonal financing needs, the fimr wishes to issue new bonds which now have a maturity of 10 years and which would pay $40 in interest every 6 months. assume that both bonds are of the same risk class. how many bonds should the firm issue to rasie 2,000,000 in cash?

2595

An investor is considering investing in Tawari Company for one year. He expected to receive $2 in dividends over the year and feels he can sell the stock for $30 at the end of the year. To realize a return on the investment over the year of 14%, the price the investor would pay for the stock today is closest to

28

Sam Hinds, a local dentist, is going to remodel the dental ption area and add two new workstations. He has contracted A-Dec, and the new equipment and cabinetry will cost $18,000. A-Dec will finance the equipment purchase at 7.5% over a six year period. What will Hinds have to pay annual payments for this equipment?

3,834.5

Given the following income statement and balance sheet for a company What is the current ratio for 2004?

3.018

What is the payback period for an investment with these cash flows: YR 0, -60,000; YR 1, 10,000; YR 2, 20,000; YR 3, 15,000; YR 4, 20,000; YR 5, 15,000?

3.75 years

Your company is considering two mutually exclusive projects. If the cost of the capital for both of these projects is 10%, then what is the IRR for the project that has the higher NPV? Project A Project B Year Cash flows Cashflows 0 - 1,200 - 1,000 1 200 800 2 300 400 3 600 300 4900100

31.92%

By how much must a firm reduce its assets in order to improve ROA from 10% to 12% if the firms profit margin is 5% on sales of 4 million?

333,333

You want to create a portfolio equally as risky as the market (i.e, a portfolio with beta equal to 1) and you have $1,000,000 to invest. The portfolio contains stocks A, B, Cand a risk free asset. Given this information, find how much you invest in stock C. Round your answers to the nearest dollar.

365,625

Antiques R Us is a mature manufacturing firm. The company just paid a $9 dividend, but management expects to reduce the payout by 8 percent per year, indefinitely. If you require a 14 percent return on stock, what will you pay for a share today?

37.5

What is the percentage return on a stock that was purchased for $50.00, paid a $3 dividend after one year, and was sold for $49?

4%

The revenue is $24,000, the cost of goods sold is $12,000, other expenses (from selling and administration) are $6,000, and depreciation is $2,000. What is the EBIT?

4000

You want to invest on a stock that pays $6 annual cash to dividends for the next five years. at the end of the 5 years, you will sell the stock for $30.00 if you want to earn 10% on the investment, what is a fair price for this stock if you buy it today?

41.37

Cannons Corporation will pay a $4.00 per share dividend next year. The company pledges to increase its dividend by 4 percent per year, indefinitely. If you require a 13 percent return on your investment, how much will you pay for the company's stock today?

44.5

How much should you pay for a share of stock that offers a constant growth rate of 10%, requires a 16% rate of return, and is expected to sell for $50 one year from now?

45.45

Kiessling Corp. pays a constant $9 dividend on its stock. the company will maintain this dividend for the next eight years and will then cease paying dividends forever. if the required return on this stock is 11 percent, what is the current share price?

46.5

A local government is about to run a lottery, but does not want to be involved in the payoff if a winner picks an annuity payoff. The government contracts with a trust to pay the lump-sum payout to the trust and have the trust pay the annual payments. The first winner of the lottery chooses the annuity and will receive $150,000 a year for the next twenty five years. The local government will give the trust $2,000,000 to pay for this annuity. What investment rate must this trust earn to break even on this arrangement?

5.56

What is the total return return to an investor who buys a bond for $1,100 when the bond has a 9% coupon rate and maturity, then sells the bond after 1 year for $1085?

6.82%

What is the total return to an investor who buys a bond for $1,100 when the bond has a 9% coupon rate and 5 years remaining until maturity, then sells the bond after 1 year for $1,085?

6.82%

What is the value of a preferred stock that is expected to pay a $5.00 annual dividend per year forever if similar risk securities are now yielding 8%?

62.50

Standard Insurance is developing long-life

64,604.5

On, January 1, 2002, HomeSafe Cab Co. will issue new bonds to finance its expansion plan. Currently outstanding 8%, January 1, 2017 HomeSafe bonds are selling for 1,091.96. If interest is paid semiannually for both bonds, what must the coupon rate of the new bonds be in order for the issue to sell at par?

7.00%

Barely Heroes Corporation has bonds on the market with 14,5 years to maturity. YTM of 9 percent, and a current price of 850, the bonds make semiannual payments. what must coupon rate be ?

7.13

Roxie Inc has just paid a dividend of $4.00

7.4%

Roxie Inc has just paid a dividend of $4.00. Its stock is now selling for $65 per share, and the required rate of return on a stock like Roxie Inc, is 14%. Assuming Roxie is a constant growth stock, determine the implied growth rate for Roxie's dividends.

7.4%

Roxie Inc has just paid a dividend of $4.00. Its stock is now selling for $65 per share, and the required rate of return on a stock like Roxie Inc. is 14%. Assuming Roxie is a constant growth stock. determine the implied growth rate for Roxie's dividends

7.4%

The Canadian government decided to issue a consol ( a bond with a never ending interest payment and no maturity date). The bond will pay $50 in interest each year (at the end of the year), but it will never return the principal. The current discount rate for Canadian government bonds is 6.5%. What should this consol bond sell for in the market?

769.5

What is a coupon rate of a bond with 3 years until maturity, a price of $1,053.46, and yield to maturity of 6% (assume that the bond makes coupon payment annually).

8%

What is the coupon rate for a bond with 3 years until maturity, a price of $1,053,46, and a yield to maturity of 6%

8%

What is the current yield of a bond with a 6% coupon, 4 years until maturity, and a price of $750?

8.0%

South Penn Trucking is financing a new truck with a loan of $10,000 to be repaid in 5 annual end-of-year installments of $2,504.56. What annual interest rate is the company paying? (round to the nearest one hundredth of 1%)

8.00%

An analyst has gathered the following information about a company

9.26%

What is the yield to maturity of a bond with the following characteristics?

9.60%

What is the yield to maturity of a bond with the following characteristics? 8% coupon rate is with annual payments, $ 1,000 par value and current price of $960, 3 years until maturity.

9.60%

What is the yield to maturity of a bond with the following characteristics? 8% coupon rate is with anuual payments, $1000 par value and current price of $960, 3 years until maturity. Round your answer to the nearest hundredth percent.

9.60%

Lifehouse software has 10 percent coupon bonds on the market with 7 years to maturity. The bonds make semiannual payments and currently sell for 104 percent of par. What is the current yield on Lifehouse's bonds?

9.62

Which of the following bonds would be considered to be investment garde

A Baa-rated bond

Which of the following would likely have the greatest amount of systematic risk?

A portfolio half invested in the market portfolio and half invested in stocks with betas = 1.50.

Which of the following would most likely be considered the most liquid asset?

A share of IBM common stock

Last year, ABC and XYZ both had the same level of cost of goods sold, but ABC turned its inventory over 8 times during the year while XYZ turned its inventory over every 55 days. If the objective is to keep inventory as low as possible on average, which of the following is true

ABC did a better job since its inventory turnover was higher.

Sarah Kelley, CFA

Accept project 2 only

Marie is 65 years old and ready to retire.

Around 84 years old

Which of the following is false concerning diversification? Assume that the securities being considered for a selection into a portfolio are not perfectly correlated.

As more securities are added to the portfolio, the systematic risk of the portfolio declines

Calculate the risk premium on stock C given the following information: risk-free rate = 5%, market return = 13%. Stock C beta = 1.3.

B. 10.4% Feedback: Stock C risk premium = beta x market risk premium = 1.3 x (13% - 5%) = 10.4%

An investor reviews a 15% total return by purchasing a stock for $40 and selling it after one year with a 5% capital gain. How much was received in dividend income during the year?

C. 4.00 Feedback: Stock Return = dividend yield + capital gain 15% = DIC1/p0 + 5% 10% = DiC1/40 DiV1 = 4

A company has a target capital structure of 40% debt and 60% equity. The company is a constant growth firm that just paid a dividend of $2.00 sells for $27 per share and has a growth rate of 8%. The company's bonds pay 10% coupon (semi-annual payment), mature in 20 years, and sell for $849.54. The company's stock beta is 1.2. The company's marginal tax rate is 40%. The risk-free rate is 4%. The market risk premium is 10%.

CAPM: 16.0%, CGM: 15.4%

Which of the following choices best describes the role of taxes on the after-tax cost of capital in the U.S. from the different capital sources?

Common Equity: no effect: preferred equity: no effect: debt: decrease

Which of the following choices best describes the role of taxes on the after-tax cost of capital in the US from the different capital sources?

Common equity: no effect; Preferred equity: no effect; Debt: decrease

Which of the following would decrease a portfolio's systematic risk?

Common stock with positive beta is sold and replaced with treasury bills

Preferred stocks are different from common stocks in that

Common stockholders have voting rights while preferred stockholders do not

Companies A and B have the same tax rate, total assets, and EBIT. both companies have positive net incomes. Company A has a higher debt ratio, and therefore, higher interest expense than company B. Which of the following statements is most correct?

Company A has a lower times interest earned (TIE) ratio than Company B

-------- is the area of finance concerned with activities such as borrowing funds to finance projects such as plant expansions or new product launches

Corporate Finance

Why does the double taxation problem exist for corporations?

Corporations earn a taxable income, pays taxes on that income, and the pay dividends to the stockholders, who also have net taxable income

Periodic receipts of interest by bondholders are known as:

Coupon payments

The quick ratio is measured as:

Current assets minus inventory divided by current liabilities

The ________ is the annual coupon payment divided by the current price of the bond, and is not always an accurate indicator

Current yield

If $120,000 is borrowed for a home mortgage, to be repaid at 9% interest over 30 years with monthly payments of $965.55, how much interest is paid over the life of the loan? A. $120,000 B. $162,000 C. $181,458 D. $227,598

D

Two mutual fund managers, Martha and David, have been discussing whose fund is the top performer. Martha states that investors bought shares in her mutual fund ten years ago for $21 and those shares are now worth $65. David states that investors bought shares in his mutual fund for only $3 six years ago and they are now worth $7.30 which mutual fund manager had the higher growth rate for the management period?

David's fund

Julius Inc is in a 40% marginal tax bracket. The firm can raise as much capital as needed in the bond market at a cost of 10% yield to maturity. The preferred stock has a fixed dividend of $4.00. The price of preferred stock is $31.50. The after-tax costs of debt and preferred stock are closest to:

Debt: 6.0%; preferred stock 12.7%

Which of the following would be considered a ca[ota; budgeting decision ?

Deciding to expand into a new line of product, at a cost of $5 million

Holding all else equal, if the beta of a stock increases, the stock's price will:

Decrease

Which of the following actions will INCREASE the present value of an investment?

Decrease the interest rate.

The future value of one dollar today in five years ___ as the interest rate increases.

Decreases

Bond rating from AAA to C, measures a bond's ______

Default risk

Which of the following expense categories is subrated from total revenues to help arrive at a firms EBIT?

Depreciation expense

To determine the present value of a future amount, one should ______ the future cash flows.

Discount

Present value calculations do which of the following?

Discount all future cash flows back to the present

The cost of preferred stock is equal to the preferred stock dividend:

Divided by the market price

The present value of a perpetuity can be determined by

Dividing the payment by the interest rate

Drysdale Financial Company and Commerce financial Company have the same total assets turnover, and the same return on equity. However, Drysdale has a higher return on assets than commerce. Which of the following can explain these ratios?

Drysdale has a higher profit margin and a lower debt ratio than commerce.

Dweller, Inc. is considering a four-year project that has an initial after-tax outlay or after-tax cost of $80,000. The future after-tax cash inflows from its project are $40,000, $40,000, $30,000, and $30,000 for years one, two, three, and four, respectively. Dweller uses the NPV method and has a discount rate of 12%. Will Dweller accept the project?

Dweller accepts the project because the NPV is greater than $28,000.

The ____ the beta coefficient the ____ the expected return, on average.

Higher; higher

A chief financial officer (CFO) is the top finance officer in a firm. Which function is CFO involved with?

I, II and III

A bond sold five weeks ago for $1,100. The bond is worth $1,150 in todays market. Assuming no changes in risk, which of the following is true?

Interest rate must be lower now than they were five weeks ago

If Treasury bills are yielding 10% at a time when the market risk premium is 6%, then the

Market portfolio should yield 16%

A new, more effective machine will last 4 years

NPV will increase

If a security plots below the security market line, it is;

Offering too little return to justify its risk

The question "what is the current value of an amount of cash flow that will be received at a specific time in the future?" is best answered by which form of the TVM equation?

PV=FV(1+r)^n

Assume a firm's current ratio equals 3.5. Which of the following actions would increase it?

Paying off a short-term bank loan with the proceeds from new long-term debt.

The_is the market of first sale in which companies first sell their authorized shares to the public.

Primary market

Allied, Inc. is considering Project A and Project B, which are mutually exclusive. Project A is an eight year project that has an initial outcome or cost of $180,000. Its future cash inflows for years 1 through 8 are $38,000. Project B is also an eight year project that has an initial outlay or cost of $160,000. Its future cash inflows for years 1 through 8 are the same at $34,500. The appropriate discount rate for both project is 7.5%. Which project should Allied accept.

Project A because it has a higher NPV

Apple industries, a firm with unlimited funds, is evaluating five projects. Projects A and B are independent and Project C, D, and E are mutually exclusive. The projects are listed with their rate of return and NPV. Assume that the applicable discount rate is 10%. Which projects should the firm select?

Project A, Project B, Project C

Project selection ambiguity can arise if one relies on IRR instead of NPV when

Project cash flows are not conventional

Datem Corp. has an expected return of 11%. With a risk-free rate of 3%, a market risk premium and a beta of 0.8, you can estimate its required return. What is the required return, and would Datem plot above or below the market line for (SML)?

Required return = 8.6%, plots above the SML

You own a portfolio that is 50 percent invested in Stock X, 30 percent in Stock Y, and 20 percent in Stock Z. The returns on these three stocks are 10 percent, 18 percent, and 13 percent respectively. What is the return on the portfolio?

Rp = .50(.10) + .30(.18) + .20(.13) = .1300

New projects or products can have a side effect on the firm as well as a direct effect.

Sales of a similar product of your firms will decline

which of the following items would not be included in cash flow from investing?

Selling stock of the company

Most U.S. corporate and government bonds choose to make ____ coupon payments.

Semiannual

Which of the following statements about depreciation is false?

Since depreciation is a non-cash expense, the firm does not need to know the rate of depreciation when calculating operating cash flows.

Over the past 75 years, which of following investments has provided the largest average return?

Small company stocks

Which of the following is false regarding risk and return?

The reward for bearing risk is known as the standard deviation.

Which of the following statements about equity beta is true?

The slope of the security market line measures a security's beta (non-diversifiable risk) and beta can change whenever there is a change in investors' expectations of inflation and/or their degree of risk aversion

The standard deviation for historical stock returns can be calculated as

The square root of the variance

The type of risk that we can diversify away is _______

Unsystematic risk

The type of risk that we can diversify away is ___________?

Unsystematic risk

The type of risk that we can diversify away is ____________

Unsystematic risk

The variance of an investment's returns is a measure of the

Volatility of the rates of return

You want to create a portfolio equally as risky as the market (i.e, a portfolio with beta equal to 1), and you have $1,000,000 to invest. Given this information, fill in the rest of the following table: Asset Investment Beta Stock A $200,000 .70 Stock B $250,000 1.10 Stock C 1.60 Risk-free asset

WA = $200,000 / $1,000,000 = .20; WB = $250,000/$1,000,000 = .25 ; WC + WRf = 1 - WA - WB = .55 bp = 1.0 = WA(.7) + WB(1.1) + WC(1.6) + WRf(0); Hence, WC = .365625, and invest .365625($1,000,000) = $365,625 in C. WRf = 1 - .20 - .25 - .365625 = .184375 and invest .184375($1,000,000) = $184,375 in the risk-free asset

Which of the statements below is TRUE?

a. DuPont analysis shows that ROE is NE/S×S/TA × .TA/TE

You have $10,000 to invest in a stock portfolio. Your choices are Stock X with a return of 15 percent and Stock Y with a return of 10 percent. If your goal is to create a portfolio with a return of 13.5 percent, how much money will you invest in Stock X? In Stock Y?

bp = .25(.9) + .20(1.4) + .15(1.1) + .40(1.8) = 1.39

Bond rating, ranging from AAA to C, measures a bond's ________

default risk

The relevant risk for the fair market pricing of financial securities is the

systematic risk

Which of the following actions are likely to reduce agency conflicts between stockholders and managers?

Increasing the threat of corporate takeover

You receive a credit card application from Shady Banks Savings and Loan offering an introductory rate of 2.90 percent per year, compounded monthly for the first six months, increasing thereafter to 15 percent compounded monthly. Assuming you transfer the $3,000 balance from our existing credit card and make no subsequent payments, how much interest will you owe at the end of the first year? (round to the nearest cent)

$ 279.30

Calculate the EBIT for a firm with $4 million total revenues, $3.5 million cost of goods sold, $500,000 depreciation expense, and $120,000 interest expense.

$0

J&J manufacturing just issued a bond with a $1,000 par value and a coupon rate of 8%. If the bond has a life of 20 years, pays coupon annually; and the yield to maturity is 7.5%, what will the bond sell for?

$1,050.97

J&J manufacturing just issued a bond with a $1000 par value and a coupon rate of 8%. if the bond has a life of 20 years, pays coupon annually, and the yield to maturity is 7.5%. what will the bond sell for?

$1,050.97

You deposited $1,000 in a savings account that pays 8 percent annual interest compounded quarterly, planning to use it to finish your last year in college. Eighteen months later, you decide to go to the Rocky Mountains to become a ski instructor rather than continue in school, so you close out your account. How much money will you receive? (round to the nearest dollar)

$1,126

Braxton Ltd issued a 30-year 10% coupon bond ten years ago. Braxton bonds have a maturity (face) value of $1,000and make semiannual interest payments. If investors require an 8% nominal annual return (i.e yield to maturity) on bonds with the same risk rating as Braxyon, at what price should the bonds be selling for currently?

$1,197.93

What is the total future value, to the nearest dollar, six years from now of $80 received in one year, $300 received in two years, and $700 received in six years if the discount rate is 7%?

$1,205

What is the future value of a 5-year ordinary annuity with annual payments of $200, evaluated at a 15 percent interest rate? (round to the nearest cent)

$1,348.48

Your parents plan to spend $20,000 on a car for you upon graduation from college. If you will graduate in three years and your parents can earn 4.125% annually on their investment, how much money must they set aside today for your car?

$17,716

Your uncle has agreed to deposit $3,000 in your brokerage account at the beginning of each of the next five years (t = 0, 1, 2, 3, and 4). You estimate that you can earn 9 percent a year on your investments. How much will you have in your account right after the last deposit is made? (Assume that no money is withdrawn from the account)

$17,954.13

Mack industries just paid a dividend of $1.00 per share. Analysts expect the company's dividend to grow 20 percent this year and 15 percent next year. after two years the dividend is expected to grow at a constant rate of 5 percent. The required rate of return on the company's stock is 12 percent. What should the companys current stock price be?

$18.67

Suppose that sales and profits of Oly Enterprises are growing at a rate of 30% per year. At the end of the four years, the growth rate will drop to a steady 6%. At the end of year 5, Oly will issue its first dividend in the amount of $3 per share. If the required return is 15%, what is the value of a share stock?

$19.06

The furniture store offers you no-money-down

$2,673.01

The furniture store offers you no-money-down on a set of living room furniture. Further, you may pay for the furniture in three equal annual end-of-the-year payments of $1,000 each with the first payment to be made on year from today. If the discount rate is 6% what is the present value of the furniture payments?

$2,673.01

If a 5-year ordinary annuity has a present value of $1,000, and if the interest rate is 10 percent, what is the amount of each annuity payment? (round to the nearest cent)

$263.80

An investor is considering investing in Tawari Company for one year. He expects to receive $2 in dividends over the year and feels he can sell the stock for $30 at the end of the year. To realize a return on the investment over the year of 14%, the price the investor would pay for the stock today is closest to:

$28

Your company is considering investing in a new system that will cost $160,000. In addition, it costs $40,000 to adapt the system to be compatible with existing IT infrastructure and operational. It is estimated that the system will increases sales/revenues by $150,000 annually for Years 1-6. Operating expenses, other than depreciation, are expected to be equal to 60 percent of sales in each year. The system will be depreciated on a MACRS basis over 6 years to a zero book value. The system will be terminated at the end of year 5 and the expected salvage value of the system at Year 5 is $40,000. The firm will also be required to invest $25,000 in net working capital at year 0, but will recapture this amount at year 5. Your company's tax rate on is 40 percent. What is the after-tax salvage value at the end of year 5?

$28,608

What would you pay today for a stock that is expected to make a $2 dividend in one year if the expected dividend growth rate is 5% forever and you require a 12% return on your investment?

$28.57

Your company is faced with an investment project. The following information is associated with this project:

$295,574.29

How much must be saved annually, beginning 1 year from now, in order to accumulate $50,000 over the next 10 years

$3,291

AFB Power Company has preffered shares originally issued for $80 a share, with a dividend per share of $3.60. The original dividend yield at issuance 6 years ago was 4.5%. If investors currently require a return of 12% on stocks of comparable risk to AFB, what should its shares be selling for in today's market?

$30

Assume that a share of common stock has just paid a dividend (D0) of $2.00. Also assume that investors expect this stock to have a long-run sustainable growth rate of 5% and that they require an annual rate of return of 12%. Determine the current price of this stock.

$30.00

Approximately how much should be accumulated by the beginning of retirement to provide a $2,500 monthly check that will last for 25 years, during which time the fund will warm 8% interest with monthly compounding?(round to nearest hundred dollar)

$323,900.00 (PMT=2500 N=25*12 I/Y= 8/12 FV=0 PV = 323911)

By how much must a firm reduce its assets in order to improve ROA from 10% to 12% if the firm's operating profit margin is 5% on sales of $4 million?

$333,333

Depreciable assets were purchased for $70,000 five years ago. Accumulated depreciation is $37,000. The asset is sold for $40,000. If the company faces a 40% tax rate, how much total net after tax cash will the sale of these assets generate?

$37,200

Edwin Inc's most recent annual dividend paid to shareholders was $2 per share. The dividend to grow at a rate of 4% per year indefinitely. If the market requires a 9.6% return on investments of this type, what is the intrinsic value of Edwin's stock today?

$37.14

ABC common stock is expected to have an extrodinary growth of 20% per year for 2 years, at which time the growth rate will settle into a constant 6%. if the discount rate is 15% and the most recent dividend was $2.50, what should be the approximate current share price?

$37.39

ABC common stock is expected to have extraordinary growth of 20% per year for two years, at which time the growth rate will settle into a constant 6%. If the discount rate is 15% and the most recent dividend was $2.50, what should be the current share price?

$37.39

Your firm intends to finance the purchase of a new construction crane. The cost is $1,500,000. The loan has an annual interest rate of 8.5% and requires annual installment payment. If the loan is to be completely paid off by the end of year five, what should be the annual payment?

$380,649

Cannons Corporation will pay a $4 per share dividend next year. the company pledges to increase its dividend by 4 percent per year. if you require a 13 percent return on your investment, how much will you pay for the companys stock today?

$44.5

You need to borrow $23,000 to buy a truck. The current loan rate is 7.9% compounded monthly and you want to pay the loan off in equal monthly payments over 5 years. What is the size of your monthly payment?

$465.26

Tradeau Technologies common stock currently trades at $40 per share. The stock is expected to pay a year-end dividend, DIV1, of $2 per share. The stock's dividend is expected to grow at a constant rate g, and its required rate of return is 9 percent. What is the expected price of the stock five years from today (that is, P5)?

$48.67

You just won the lottery. You and your heirs will receive $40,000 per year forever, with the first payment received immediately. What is the present value at a 9% discount rate?

$484,444

You just won the lottery. You and your heirs will receive $40,000 per year forever, with the first payment received immediately. what is the present value at a 9% discount rate?

$484,444

A firm generates sales of $250,000, depreciation expense of $50,000, taxable income of $50,000, and has a 35% tax rate. By how much does net cash flow deviate from net income? (assume the firm does not have any interest expenses.)

$50,000

You are evaluating whether to retire your current computer modem product andreplace it with a new modem that incorporates new features. Which of the followingwould not be relevant to your decision-making process?

$50,000 spent on research and development costs over time on the older modem.

A firm reports a net profit margin of 10% on sales of $3 million when ignoring the effects of financing. If taxes are $200,000, how much is EBIT?

$500,000

Your company is considering investing in a new system that will cost $160,000. In addition, it costs $40,000 to adapt the system to be compatible with existing IT infrastructure and operational. It is estimated that the system will increase sales/revenues by $150,000 annually for years 1-6. Operating expenses, other than depreciation, are expected to be equal to 60% of sales in each year. The system will be depreciated on a MACRS basis over 6 years (20%in year 1, 32% in year 2, 19.20% in year 3, 11.52% in year 4, 11.52% year 5, and 5.76% in year 6) to a zero book value. The system will be terminated at the end of year 5 and the expected salvage value at year 5 is $40,000. The firm will also be required to invest $25,000 in net working capital at year 0, but will recapture the amount at year 5. Your company's tax rate on is 40% What is the operation cash flow in year 3?

$51,360

As a financial analyst, you are estimating the value of a stock, ABC. You expect the stock do not pay any dividend for the next five years, and then start to pay $10 dividend per year for the next 20 years. After that, the stock is expected to stop paying dividend forever and the company's assets will be worth nothing. If the required rate of return of the stock is 10%, what is your best estimate of the value of the stock today?

$52.86

As a financial analyst, you are estimating the value of a stock, ABC. You expect the stock do not pay any dividend for the next five years, and then start to pay $10 dividend per year for the next 20 years. After that, the stock is expected to stop paying dividends forever and the company's assets will be worth nothing. If the required rate of return of the stock is 10%, what is your best estimate of the value of the stock today.

$52.86

Which of the following statements is true for a stock that sells now for $60, pays an annual dividend of $4.00, and experiences a 20% return on investment over the past year? Its price one year ago was?

$53.33

You finance your college education with student loans. Every month, you borrow $1000 to pay for living expenses. While in college. You do not have to pay interest on the loan, nor do you need to pay back any loan principal. However, the interest accrues to your loan balance. Assume an annual interest rate of 6% on your student loan, what will be your loan balance when you graduate in four years(round you answer to the nearest dollar)

$54,098 (N=4*12 I/Y= 6/12 PMT= 1000 PV= 0 FV= 54,0097.83)

The last dividend paid by the Brim Company was $3.50. Brim's dividend growth rate is expected to be a constant 20% for two years, after which dividends are expected to grow at a rate of 5% forever. Brim's required rate of return on common stock is 13%. At what price should Brim shares sell for currently?

$59.47

Your car loan requires payments of $200 per month for the first year and payments of $400 per month during the second year. The annual interest rate is 12% and payments begin in one month. What is the present value of this 2-year loan?

$6,246.34

Your car loan requires payment of $200 per month for the first year and payments of $400 per month during the second year. THe annual interest rate is 12% and payments begin in one month. What is the present value of this 2 year loan? (Round to the nearest cent)

$6,246.34 (CF1=200 F1= 12 CF2= 400 F2= 12 I/Y= 12/12 NPV=6246.34

Use the following information below for the Greek Corporation to answer the following question.

$6,450

You have the opportunity to buy a perpetuity that pays $1,000 annually. Your required rate of return on this investment is 15 percent. You should be essentially indifferent to buying or not buying the investment if it were offered at a price of

$6,666.67

Determine the value of Coldron shares.

$62.79

A firm has sales of $800, total assets of $500, and a debt ratio of 0.30. If its return on equity is 18%, what is its net income?

$63

Randy Harris is contemplating whether to add a bond to his portfolio. It is a semi annual, 6.5% bond with 7 years to maturity. He is concerned about the change in value due to interest rate fluctuations and would like to know the bond's value given various scenarios. At a yield to maturity of 7.5% or 5.0%, the bond's fair value is closest to

$946.30 at 7.5% or $1,087.68 at 5%

The stock of MTY Golf World currently sells for $89.92 per share. The firm has a constant dividend growth rate of 6% and just paid a dividend of $5.09. If the required rate of return is 12%, what will the stock sell for one year from now?

$95.32

A real estate investment has the following expected cash flows: Year 1 Cash flows $10,000 Year 2 Cash flows $25,000 Year 3 Cash flows $50,000 Year 4 Cash flows $35,000

$96,110

Which of the following changes would be likely to increase the NPV of a project?

None of the above

A coupon bond pays coupon annually, has a par value of $1,000, matures in 4 years, has a coupon rate of 10%, and a yield to maturity of 12%. The current yield on this bond is:

10.65

A coupon bond pays coupon annually, has a par value of $1,000, matures in 4 years, has a coupon rate of 10%, and a yield maturity of 12%. The current yield on this bond is:

10.65%

What is the WACC for a firm using 55% equity with a required return of 15%, 35% debt with a required return of 8%, 10% preferred stock with a required return of 10%, and a tax rate of 35%?

11.07%

What is the expected return on asset A if it has a beta of 0.0, the expected market return is 15%, and the risk-free rate is 6%?

11.4%

What is the expected return on asset A if it has a beta of 0.6, the expected market return is 15%, and the risk-free rate is 6%?

11.4%

What is the portfolio expected return and the portfolio beta if you invest 35% in A, 45% in B, and 20% in the risk-free asset?

11.8%; 0.78

Suppose that you have just purchased a share of stock for $40. The most recent dividend was $2 and dividends are expected to grow at a rate of 7% indefinitely. What must your required return be on the stock?

12.35%

What is the standard deviation of a portfolio's returns if the mean return is 15%, the variance of returns is 0.0184, and there are three stocks in the portfolio?

13.56%

You have a balance of $2,000 on your credit card and your monthly minimum payment is $35. The credit card company charges an APR of 18%, compounded monthly. If you just make the minimum payment and do not add additional charges on the card, how long does it take you to pay the balance off? (round to the nearest month)

131 months

Which of the following statements below is true?

None of the above

You bought a 30-year bonds many years ago. The bond has a par value of %1,000 and coupon rate of 12%, paid semi-annually. The current price of the bond is $1,137.99 and the yield to maturity is 10%. How many years ago did you buy the bond?

18 years ago

Listen below are the financial statement numbers for Shick, inc, for the year 1026. They are listed in alphabetical order, NOT in the order they appear in a statement. The applicable tax rate is 40%. What is Shick's cash coverage rate in 2016, and is in Shick better able or less able to cover its interest charges than its peer groups, which has a cash coverage of 21 times?

18.5; peer group better able to cover interest expense

Company X has 2 million shares of common stock outstanding at a book value of $2.00 per share. The stock trades for $3.00 per share. It also has $2 million in face value of debt that trades at 90% of par. What is the weight on debt for WACC purposes?

23.1%

your company is considering an expansion into a new product area. The company has collected the following information about the proposed product. The project has an anticipated economic life of 5 years. The company will have to purchase a new machine to produce the product. The machine has an up-front cost (T = 0) of $750,000. The machine will be depreciated on a straight-line basis over 5 years (that is, the company's depreciation expense will be $150,000 in each of the first five years (T = 1, 2, 3, 4, and 5). The company anticipates that the machine will last for at least five years, and that after five years, its before-tax salvage value will equal $100,000. If the company goes ahead with the project, it will have an effect on the company's net working capital. At the outset, T = 0, inventory will increase by $50,000 and accounts payable will increase by $30,000. At T = 5, the net working capital will be recovered after the project is completed. The project is expected to produce EBIT of $200,000 the first year (T = 1), $300,000 the second and third years (T = 2 and 3), $200,000 the fourth year (T = 4), and $150,000 the final year (T = 5). These values already include operating costs that are expected to equal 50 percent of sales revenue and depreciation expense. The company's tax rate is 40 percent. What is the operating cash flow in year 2 (T=2)?

330,000

Antiques R Us is a mature manufacturing firm. The company just paid a $9 dividend, but management expects to reduce the payout by 8 percent per year, indefinitely. If you require a 14 percent return on this stock, what will you pay for a share today?

37.5

Suppose you know that a company's stock currently sells for $60 per share and the required return on the stocks is 14 percent. you also know that the total return on the stock is evenly divided between a capital gain yield and a dividend yield. if its the companys policy to always maintain a constant growth rate in its dividends, what is the current divided per share?

4

What is the percentage return on a stock that was purchased for $50.00, paid a $3.00 dividend after one year, and was then sold for $49.00?

4%

What percentage return on a stock that was purchased for $50.00, paid a $3.00 dividend after one year, and was then sold for $49.00?

4%

Widgets just paid a $4.00 dividend, and its stock trades at $41.60 per share. if investors require a total return of 14%, what is the anticipated rate of constant growth, g?

4%

Which of the statements below is True?

None of the above

Assume that a share of stock, priced at $52.5 per share, just paid a dividend of $2. The dividend is expected to grow at a long-run constant rate. The required rate of return is 4% higher than the dividend growth rate (or R-g= 4%). Given this information, determine the dividend yield of the stock.

4.00%

Ferryville Radar Technologies has 5-year, 7.5% bonds outstanding that trade at a YTM of 6.8%. The company's marginal tax rate is 35%. Ferryville plans to issue new 5-year notes to finance an expansion. Their after-tax cost of debt capital is closest to:

4.4%

Ferryville Radar technologies has five-year, 7.5% bonds outstanding that trade at a yield to maturity of 6.8%. The company's marginal tax rate is 35%. Ferryville plans to issue new five-year notes to finance an expansion.

4.4%

A firm sold a 10-year bond issue 3 years ago. The bond has a 6.45% annual coupon and a $1000 face value. The coupons are paid semi-annually. If the current market price is $951.64 and the tax rate is 35%, what is the after-tax cost?

4.77% N=(10-3)*7*2=14, PMT=64.5/2, FV=1000, PV=-951.64, => I/Y=3.673*2=7.35% After tax cost =7.35%*(1-35%)= 4.77%

A company has a bond issue outstanding that has an 8% coupon, pays semiannual interest, matures in 7 years at a face value of $1,000. The bonds currently trade at a price of $940. The company's tax rate is 40% and its stock beta is 1.3. The risk free rate is 3% and the risk premium is 7%. For purposes of estimating its weighted average cost of capital, what after-tax cost of debt should the company use?

5.51%

Jiminy's Cricket Farm issued a 30-year, 9 percent annual coupon bond 8 years ago. The bond makes coupon payments semiannually. The par value of the bond is $1,000. The bond currently sells for 105 percent of its face value. The company's tax rate is 35 percent. What is the after-tax cost of debt?

5.55

a local government is about to run a lottery,

5.56

What is the inventory turnover ratio for ABC corp. If cost of goods sold equals $5,000, current ratio equals 3.0, quick ratio equals 1.5 and the firm has $1,800 in current assets?

5.56 times

Super Growth Co. is growing quickly. Dividends are expected to grow at a 32 percent rate for the next three years, with the growth rate falling off a constant 7 percent thereafter. If the required return is 15 percent and the company just paid a $2.25 dividend, what is the current share price?

54.5

You are interested in a corporate bond with the current marekt price of $973.36

6

You are interested in a corporate bond with the current market price of $973.36 and yield to maturity of 7%. the bond carries a coupon rate of 6%, paid semi-annually. If you buy the bond today, how many semi annually coupon payments will you receive until the final maturity?

6

Kelvin has $2,500 but needs $5,000 to purchase a new golf cart. If he can invest his money at a rate of 12% per year, approximately how many years will it take the money in Kelvin's account to grow to $5,000? Use the Rule of 72 to determine your answer.

6 years

Albright Motors is expected to pay a year-end dividend of $3.00 a share. the stock currently sells for $30 a share. the required rate of return on the stock is 16 percent. if the dividend is expected to grow at a constant rate, g, what is g?

6.00%

Albright Motors is expected to pay a year-end dividend pf $3.00 a share (DIV1-$3.00). The stock currently sells for $30 a share. The required (and expected) rate of return on the stock is 16 percent. If the dividend is expected to grow at a constant rate, g, what is g?

6.00%

Both assets A and B plot on the SML. Asset A has an expected return of 15% and a beta of 1.7, and asset B has an expected return of 12% and a beta of 1.1. What is the risk-free rate of return?

6.5%

The market price of a bond is $1,119.90; it has 4 years to maturity, a $1,000 par value, and pays a coupon of $100 every year. what is the yield to maturity?

6.50%

Benson Biometrics Inc. has outstanding $1000 face value 8% coupon bonds that make semiannual payments and have 14 years remaining to maturity. If the current price for these bonds is $1118.74, what is the annualized yield to maturity?

6.68%

Clapper Corp. issued 12-year bonds 2 years ago at a coupon rate of 7.8 percent. The bonds make semiannual payment. If these bonds currently sell for 108 percent of par value, what is the YTM?

6.69

The market price of a bond is $1,236.94, it has 14 years to maturity, a $1,000 face value, and pays an annual coupon of $100 in semiannual installments. What is the yield to maturity?

7.27%

Roxie Inc has just paid a dividend of $4.00. its stock is now selling for 65$ per share, and the required rate of return on a stock like Roxie inc is 14%. Assuming Roxie isa constant growth stock, determine the implied growth rate for Roxie's dividends.

7.4%

Your firm has preferred stock outstanding that pays a current dividend of $3.00 per year and has a current price of $39.50. You anticipate the economy will grow steadily at a rate of 3.00% per year for the foreseeable future. What is the market required rate of return on your firm's preferred stock?

7.60%

A firm has $100 million in equity and $300 million in debt. The firm recently issued bonds at the market required rate of return of 9%. The firm's beta is 1.125, the risk-free rate is 6%, and the expected return in the market is 14%. Assume the firm is at their optimal capital structure and the firm's tax rate is 40%. What is the firm's weighted average cost of capital (WACC)?

7.80%

A firm has $100 million in equity and $300 million in debt. The firm recently issued bonds at the market required rate of return of 9%. The firm's beta is 1.125, the risk-free rate is 6%, and the expected return in the market is 14%. Assume the firm is at their optimal capital structure and the firm's tax rate is 40%. What is the firm's weighted average cost of capital?

7.80%

A firm has $100 million in equity and &300 million debt.The firm recently issued bonds at the market required rate of return of 9% The firm's beta is 1.125, the risk-free rate is 6% and the expected return in the market is 14% assuming the firm is at their optimal capital structure and the firm's tax rate is 40% what is the firm's weighted average cost of capital (WACC)?

7.80%

You have $10k to invest in a stock portfolio. Your choices are Stock X with a 15% return, and Stock Y with a 10% return. If your goal is to create a portfolio with a 13.5% return, how much money will you invest in Stock X?

7000

Asset A has an expected return of 14.5% and a beta of 1.15. The risk-free rate is 5%. What is the market risk premium?

8.26%

A company has the following data associated with it: · A target capital structure of 10% preferred stock, 50% common equity and 40% debt. · Outstanding 20-year bond with 6% coupon, paid annually. The bond is selling for $894. · Common stock selling for $45 per share that is expected to grow at 8% and expected to pay a $2 dividend one year from today. · The preferred stock pays a $5 annual dividend and currently sells for $90. · The company's tax rate is 40%. What is the weighted average cost of capital (WACC)?

8.46%

Cost of debt= 5%, Cost of preferred= 8%, Cost of equity= 10%, What is the weighted average cost of capital?(assume the tax rate is 0%) Debt $10 million Preferred $3 m no illion Equity $27 million

8.6%

What is the expected yield on the market portfolio at a time when Treasury bills yield 6% and a stock with a beta of 1.4% is expected to yield 18%

8.6% 10.8% 12.9% 17.1% a- None of the above

The weighted-average cost of capital, after tax, for a firm with a 65/35 debt/ equity split, 8% cost of debt , 15% cost of equity, and a 35% tax rate would be:

8.63%

Weighted Average Cost of Capital, after tax, for a firm with a 65/35 debt/equity split, 8% cost of debt, 15%cost of equity, and a 35% tax rate would be

8.63%

ABC Corporation's common stock dividend yield is 3.61%, it just paid a dividend of $2.75, and is expected to pay a dividend of $2.89 one year from now. Dividends are expected to grow at a constant rate indefinitely. What is the required rate of return on ABC stock?

8.7%

ABC Corporation's common stock dividened yield is 3.61%

8.7%

Mr. Malone wants to change the overall risk of his portfolio. Currently, his portfolio is a combination of risky assets with a beta of 1.25 and expected return of 14% He will add a risk free asset to his portfolio if he wants a beta 1.0, what percent of his wealth should be in the risky portfolio?

80

You have the following data for a company. What is the return on assets (ROA)? Return on equity = 15%; Earnings before taxes = $50,000; Total asset turnover = 1.2; Profit margin = 7.5%; Tax rate = 35%.

9%

You have the following data for a company. What is the return on assets? Return equity= 15%. Earnings before taxes= $50,000; Total assets turnover= 1.2; Profit margin= 7.5%; Tax rate= 35%.

9%

Billick Brothers is estimating its WACC. The company has collected the following information: What is the company's WACC?

9.66%

Assume that a corporate bond has a par value of $1,000 and 8 years until it matures. This bond also has an annual coupon rate of 7.5% but pays interest every 6 months. If investors require an annual rate of 8.6% (compounded semi-annually), then what should be the current price for this bond?

937.31

Calculate the risk premium on stock C given the following information: risk-free rate= 5%, market return= 13%, beta= 1.3

=1.3 x (13%-5%)= 10.4%

Suppose Massey Ltd. just issued a dividend of $.68 per share on its common stock. The company paid dividends of $.40, $.45, $.52 and $.60 per share in the last four years. If the stock currently sells for $12, what is your best estimate of the company's cost of equity capital?

=[$0.68(1.1419)/$12.00] + .1419 = 20.66%

Which of the following events will Reduce a company's weighted average cost of capital(WACC)?

A reduction in the market risk premium

A stock investor owns a diversified portfolio of 15 stocks. What will be the likely effect on portfolio return standard deviation from adding one more stock?

A slight decrease will occur

Which of the following statements about zero-coupon bonds is FALSE?

A zero coupon bond may sell at a premium to par when interest rates decline

The managers of Kenforest

A, B, C, F

1. Takelmer Industries has a different WACC for each of three types of projects. Low-risk projects have an 8% WACC, average-risk projects a 10% WACC, and high-risk projects a 12% WACC. Which of the following projects do you recommend that the firm accept? Project Level of Risk IRR A Low 9.50% B Average 8.50% C Average 7.50% D Low 9.50% E High 14.50% F High 17.50% G Average 11.50%

A, D, E, F, and G

Takelmer Industries has a different WACC for each of three types of projects. Low-risk projects have an 8% WACC, average-risk projects a 10% WACC, and high-risk projects a 12% WACC. Which of the following projects do you recommend that the firm accept? Project Level of Risk IRR WACC% A Low 9.50% 8 B Average 8.50% 10 C Average 7.50% 10 D Low 9.50% 8 E High 14.50% 12 F High 17.50% 12 G Average 11.50% 10

A, D, E, F, and G

Lena invested $1,000 in each of several alternative investments. In fifty years, which investment would you expect to have the highest value?

A. A portfolio in common stocks

Use the following information to answer the next three questions Security Return Standard Deviation Beta A 16% 20% 1.2 B 12% 25% 0.8 Risk-free asset 4% ??? ??? Which of A and B has the least total risk? The least systematic risk?

A; B

How much would an investor lose if she purchased a 30-year zero coupon bond with a $1000 par value and 10% YTM, only to see market interest rates increase to 12% 1 year later?

About $19.48

By how much will a bond increase in price over the next year if it currently sells for $925, has 5 years until maturity, and an annual coupon rate of 7%?

About 12.53

Given the following info, what is your best estimate for the firm's cost of equity on 1/2/2012, if the stock sells for $42 on that day? 12/31/07 - $1.45; 12/31/08 - $1.68; 12/31/09 - $1.95; 12/31/10 - $2.27; 12/31/11 - $2.63

About 23%

Given the following information, what is your best estimate for the firm's cost of equity on Jan 2, 2012, if the stock sells for $42 that day?

About 25%

Sarah Kelly, CFA, is analyzing two mutually exclusive investment projects. Kellyey has calculated the net present value (NPV) and internal rate return (IRR) for each project: Project 1: NPV= $230; IRR = 15% Project 2: NPV= $4,000; IRR= 9% Kelly should make which of the following recommendations concerning the two projects?

Accept Project 2 Only

When a company is evaluating two mutually exclusive projects that both have positive NPV but have conflicting NPV and IRR project rankings, the company should:

Accept the project with the higher net present value

Assume a project has normal cash flows (that is the initial cash flow is negative, and all other cash flows are positive). Which of the following statements is most correct?

All else equal, a project's NPV increases as the cost of capital declines.

A bond is trading at a premium if its: A.) price is grater than its par value B.) yield to maturity is lower than its coupon rate C.) current yield is lower than its coupon rate

All of the above

Which of the following is NOT a component of the Du Pont identity?

All of the above are component of the Du Pont identity

Normal projects C and D are mutually exclusive. Project C has a higher net present value if the WACC is less than 12 percent, whereas Project D has a higher net present value if the WACC exceeds 12 percent. Both projects have a positive NPV if the WACC is 12 percent. Which of the following statements is most correct?

All of the statements above are correct

Which of the following statements is most correct?

All of the statements above are correct.

Which of the following statements below is true?

An increase in working capital can be brought about by an increase in inventory or accounts receivable

The discounted payback rule can be best stated as:

An investment is acceptable if its discounted payback period is less than some prespecified number of years.

An all-equity firm is considering the following projects: The T-bill rate is 5 percent, and the expected return on the market is 12 percent. Assume the company's overall WACC is 12%. Which projects would be incorrectly accepted if overall costs of capital were used as a hurdle rate?

Answer: (D): Z

he managers of Kenforest Grocers are trying to determine the companys optimal capital budget for the upcoming year. Kenforest is considering the following projects:

Answer: (E): A, B, C, F

Given the following information, what is your best estimate for the firm's cost of equity on January 2, 2012, if the stock sells for $42 on that day?

Answer: About 23%

A stock has been held for one year, during which time its dividend yield was greater than its capital gains yield. For this stock, the percentage return:

Answer: cannot be determined

A company is considering a new project. The company CFO plans to calculate the project NPV by discounting the relevant cash flows (Which include the initial investment, the operating cash flows, and the salvage values) at the company's cost of capital. Which of the following factors should the CFO include when estimating the relevant cash flows?

Any opportunity cost associate with the project

A company is considering a new project. The company CFO plans to calculate the project's NPV by discounting the relevant cash flows at the company's cost of capital. Which of the following factors should the CFO include when estimating the relevant cash flows?

Any opportunity costs associated with the project

Which of the following is false concerning diversification? Assume that the securities being considered for selection into a portfolio are not perfectly correlated.

As more securities are added to the portfolio, the systematic risk of the portfolio declines.

You deposited $1,000 in a savings account that pays 8 percent interest, compounded quarterly, planning to use it to finish your last year in college. Eighteen months later, you decide to go to the Rocky Mountains to become a ski instructor rather than continue in school, so you close out your account. How much money will you receive? a. $1,171 b. $1,126 c. $1,082 d. $1,163 e. $1,008

B

The highest s&p bond rating category considered to be of junk quality grade is

BB+

The financial statement that shows that a company owns and owes is called the

Balance Sheet

the financial statement that shows what a company owns and what is owes is called the

Balance Sheet

1. The betas of four stocks - G, H, I, and J - are .45, 0.8, 1.15, and 1.6 respectively. What is the beta of a portfolio with the following weights in each asset? Weight in Stock G Weight in Stock H Weight in Stock I Weight in Stock J Portfolio 1 25% 25% 25% 25% Portfolio 2 30% 40% 20% 10% Portfolio 3 10% 20% 40% 30%

Beta of Portfolio 1 = 0.25 × 0.45 + 0.25 × 0.8 + 0.25 × 1.15 + 0.25 × 1.6 βportfolio - 1 = 0.1125 + 0.2 + 0.2875 + 0.4 = 1.0 Beta of Portfolio 2 = 0.30 × 0.45 + 0.40 × 0.8 + 0.20 × 1.15 + 0.10 × 1.6 βportfolio - 2 = 0.135 + 0.32 + 0.23 + 0.16 = 0.845 Beta of Portfolio 3 = 0.10 × 0.45 + 0.20 × 0.8 + 0.40 × 1.15 + 0.30 × 1.6 βportfolio - 3 = 0.045 + 0.16 + 0.46 + 0.48 = 1.145

Which of the following would most likely decrease a firm's current ratio if that ratio is currently 2.0?

Both A and D

Firms that make investment decisions based on the payback rule may be biased toward rejecting projects:

Both B and C

Which of the following statements regarding the internal rate of rate of return (IRR) is most accurate?

Both statements B and C are correct

Which of the following statements regarding the internal rate of return is MOST accurate?

Both statements B and C are correct

In the previous problem, suppose the most recent dividend was $4 and the dividend growth rate is 6 percent. Assume that the overall cost of debt is the weighted average of that implied by the two outstanding debt issues. Both bonds make semiannual payments. The tax rate is 35 percent. What is the company's WACC?

By the dividend growth model, we can find the cost of equity as follows: RE = [$4.00(1.06)/$52] + .06 = .1415 As to the cost of debt, it is more complicated. Since we have two outstanding bonds, we will take the weighted average of the YTM of the two bonds as the pretax cost of debt. Given the information on the price, coupon rate and maturity of the two bonds, we can easily find the YTMs of the two bonds. YTM1 = 7.426% and YTM2 = 8.142% Total market value of the first bonds = 1.04($70M) + 0.97($50M) = $121.3M Hence, the weight of the first bond = 1.04($70M)/121.3 = 0.6002 and the weight of the second bond = 0.97($50M)/$121.3M = 0.3998 Therefore, the weighted average cost of debt can be found as follows: RD = (1 - .35)[(.6002)(.07426) + (.3998)(.08142)] = .05013 Given the weights of equity and debt found in problem 12, we can find the WACC as follows: WACC = .7785(.1415) + .2215(.05013) = 12.13%

Bradshaw Steel has a capital structure with 30 percent debt (all long-term bonds) and 70 percent common equity. The coupon rate on the company's long-term bonds is 8 percent and the bond is selling at a premium. The firm estimates that its overall composite WACC is 10 percent. The risk-free rate of interest is 5.5 percent, the market risk premium is 5 percent, and the company's tax rate is 40 percent. Bradshaw uses the CAPM to determine its cost of equity. What is the beta on Bradshaw's stock?

Cannot be solved because not enough information is provided

You believe that the required return on Dynegy stock is 16% and that the expected dividend growth rate is 12%, which is expected to remain constant for the foreseeable future. Is the stock currently overvalued, undervalued, or fairly priced.

Cannot tell without more information

________ is at the heart of corporate finance because it is concerned with making the best choices about project selection

Capital Budgeting

The means by which a company is financed refers to the firm's _________.

Capital structure

___________ refers to the way a company finances itself through some combination of loans, bond sales, preferred stock sales, common stock sales, and retention of earnings

Capital structure

___________ refers to the way a company finances itself through some combination of loans, bond sales, preferred stock sales, common stock sales, and retention of earnings.

Capital structure

Which of the following statements below is FALSE?

Cash flow is an accounting measure of performance during a specific period of time

1) The December 31, 2001, balance sheet of Venus's Tennis Shop, Inc., showed current assets of $1,200 and current liabilities of $720. The December 31, 2002, balance sheet showed current assets of $1,440 and current liabilities of $525. What was the company's 2002 change in net working capital, or NWC?

Change in NWC = NWCend - NWCbeg = (CAend - CLend) - (CAbeg - CLbeg) = ($1,440 - 525) - ($1,200 - 720) = $915 - 480 = $435 Hence, there is an increase in NWC of $435.

The income statement begins with revenue and subtracts various operating expenses until arriving at the intermediate point of ________.

EBIT

The income stmt begins with revenue and subtract various operating expenses until arriving at the intermediate point of.....?

EBIT

The income statement begins with revenue and subtracts various operating expenses until arriving at earnings before interest and taxes. next, interest expense is subtracted to find the

EBIT or taxable income

A stock has an expected return of 10 percent, its beta is .9 and the risk-free rate is 6 percent. What must the expected return on the market be?

E[Ri] = .10 = .06 + (E[RM] - .06)(.9) ; E[RM] = .1044

Which of the following is the correct bond priced at $1,100 that has 10 years remaining until maturity, and a 10% coupon rate, with semiannual payments?

Each payment of interest equals $50

The income statement begins with revenue and subtracts various operating expenses until arriving at __________.

Earnings before interest and taxes (EBIT)

Ed Lawrrence invested $100,000. Of that $30,000 is invested in IBM stock, $25,000 is invested in T-bills, the remainder is invested in corporate bonds. Which of the following is true regarding his portfolio?

Ed has 30% of his portfolio invested in stocks

Ed Lawrence has $100,000 invested. Of that, $30,000 is invested in IBM stock, $25,000 is invested in T-bills, and the remainder is invested in corporate bonds. Which of the following is true regarding his portfolio?

Ed has 30% of his portfolio invested in stocks.

If a stock consistently goes down (up) by 1.6% when the market portfolio goes down (up) by 1.2%, then its beta

Equals 1.33

The weighted average of betas o all individual asset is:

Exactly 1

Use the four assets from the previous problem in the same three portfolios. What are the expected returns of each of the four individual assets and the three portfolios if the current SML is plotting with an intercept of 4% (risk-free rate) and a market premium of 10% (slope of the line)?

Expected Return of Asset G = 4% + 0.45 (10%) = 8.5% Expected Return of Asset H = 4% + 0.8 (10%) = 12% Expected Return of Asset I = 4% + 1.15 (10%) = 15.5% Expected Return of Asset J = 4% + 1.6 (10%) = 20% Expected Return of Portfolio 1 = 4% + 1.0 (10%) = 14% Expected Return of Portfolio 2 = 4% + 0.845 (10%) = 12.45% Expected Return of Portfolio 3 = 4% + 1.145 (10%) = 15.45%

A stock's risk premium is equal to the:

Expected market risk premium time beta

A stock's risk premium is equal to the

Expected market risk premium times beta

Although non-systematic risk is present in differing amounts, individual stocks are:

Exposed to differing amounts of systematic risk also

Although non-systematic risks present in differing amounts, individual stocks are:

Exposed to differing amounts of systematic risk also

Which of the following is a correct interpretation of a total asset turnover of 3.0?

For each $1 of assets owned by the firm it generates $3 in sales

Which of the following statements about the constant growth dividend model is FALSE?

For the constant growth dividend model to work, the growth rate must exceed the required return on equity

Which of the following would correctly differentiate general partners from limited partners in a partnership

General partners have unlimited personal liability

Which of the following would correctly differentiate general partners from limited partners in a partnership?

General partners have unlimited personal liability

Which of the following would be considered an example of systematic risk?

Greater new jobless claims than expected.

If the calculated net present value is negative, which of the following must be CORRECT. The discount rate used is:

Greater than the internal rate of return (IRR)

Which of the following would be considered an example of systematic risk?

Greater unemployment rate than expected

If dividends on a common stock are expected to grow at a constant rate forever, and if you are told the most recent dividend paid, the dividend growth rate, and the appropriate discount rate today, you can calculate ______________.

I, II, and III

Which of the following calculations ignores the impact of the time value of money?

I. only (playback)

Which of the following is/are false regarding the balance sheet and income statement?

II and III only

Which of the following statements is true?

II. only: An increase in the dividend growth rate will increase a stocks market value, all else the same.

Consider a project with an initial investment and positive future cash flows. As the discount rate is decreased the ___

IRR remains constant while NPV increases

Which of the following statements is true?

If the NPV of a project is positive, it should be accepted.

Sunk costs are _ in estimating an investment cash flow, since sunk cost are_

Ignored, not recoverable

If a firm sells inventory for cash at a profit, then the current ratio will always:

Increase

Which of the following changes in working capital will result in an increase in cash flows?

Increase in accounts payable

A firm is considering an investment in a project whose risk is greater than the current risk of the firm, based on any method for assessing risk, in evaluating this asset, the decision maker should:

Increase the cost of capital used to evaluate the project to reflect the project's higher risk

A firm is considering an investment in a project whose risk is greater than the current risk of the firm, based on any method for assessing risk. In evaluating this asset, the decision maker should:

Increase the cost of capital used to evaluate the project to reflect the project's higher risk

The overall goal of capital budgeting projects should be to:

Increase the wealth of the firm's shareholders

In a firm with both a treasurer and a controller, which of the following would most likely be handled by the controller.

Internal auditing

In a firm with both a treasurer and a controller, which of the following would most likely be handled by the controller?

Internal auditing

What would you recommend to an investor who is considering an investment that, according to beta, plots above the security market line?

Invest; return is high relative to risk

What would you recommend to an investor who is considering an investment that, according to its beta, plots above the security market line (SML)?

Invest; return is high relative to risk

Which of the following statements regarding investment in working capital is incorrect?

Investment in working capital, unlike investment in plant and equipment, represents a positive cash flow.

________________ is the area of finance concerned with the activities of buying and selling financial assets such as stocks and bonds

Investments

Which of the following statements about IPO is false?

Investors trade a company's stocks among themselves during an IPO

What happens to expected portfolio return if the portfolio beta increases from 1.0 to 1.5, the risk-free rate decreases from 5%to 4%, and the market risk premium increases from 8%to 9%

It increases from 13 to 17.5%

What happens to expected portfolio return if the return if the portfolio beta increases from 1.0 to 1.5, the risk-free rate decreases from 5% to 4%, and the market risk premium increases from 8% to 9%

It increases from 13 to 17.5%

Consider a 10%, 10 year bond sold to yield 8%. One year passes and interest rate remained unchanged at 8%. What will have happened to the bond's price during this period? Assume the bond pays coupons semi-annually

It will have decreased

Which of the following is correct for a bond currently selling at a premium to par?

Its current yield is lower than its coupon rate

What will happen to a stock that offers a lower risk premium than predicted CAPM?

Its price will decrease until the expected return is increased

What will happen to a stock that offers a lower risk premium than predicted by the CAPM?

Its price will decrease until the expected return is increased

Which of the following statements is false about junk bonds?

Junk bonds must be bad investment and should be avoided

If a firm suffers reduced profits to the point of moving into a lower tax bracket, onewould expect the depreciation tax shield, all else the same, to become .

Less valuable

A firm that uses its WACC as a cutoff without consideration of project risk:

Likely will see its WACC rise over time

Which of the following is not an advantage of a sole proprietorship?

Limited liability

If the balance sheet of a firm indicates that total assets exceed current liabilities plus shareholder's equity, then the firm must have;

Long-term debt

Given the following information for Dunhill Power Co. find the WACC. Assume the company's tax rate is 35 percent. Debt: 3,000 8 percent coupon bonds outstanding, $1,000 par value, 20 years to maturity, selling for 103 percent of par; the bonds make semiannual payments. Common Stock: 90,000 shares outstanding, selling for $45 per share; the beta is 1.20. Preferred Stock: 13,000 shares of 7 percent preferred stock outstanding, currently selling for $108 per share. The preferred stock has a par value of $100. Market: 8 percent market risk premium and 6 percent risk-free rate.

MVD = 3,000($1,000)(1.03) = $3.09M; MVE = 90,000($45) = $4.05M MVP = 13,000($108) = $1.404M; V = $3.09M + 4.05M + 1.404M = $8.544M RE = .06 + 1.20(.08) = 15.60% YTM of the bond = 7.703% RD = (1 - .35)(.07703) = 5.007% RP = $7/$108 = 6.481% WACC = .05007(3.09/8.544) + .1560(4.05/8.544) + .06481(1.404/8.544) = 10.27%

The slope of an asset's security market line is the

Market risk premium

In which of the following organization would agency problems be least likely to occur?

a sole proprietorship

The fundamental goal of financial management should be:

Maximize the current value per share of the existing stock.

Which of the following is a major credit rating agency in the US?

Moody's

If a project has some negative cash flow during its life or at the end of its life, the project most likely has:

More than one internal rate of return

Regarding diversification _______

Most of the benefits are realized with about 20-30 stocks

1) Bethesda Co. had additions to retained earnings for the year just ended of $275,000. The firm paid out $150,000 in cash dividends, and it has ending total equity of $6 million. If Bethesda currently has 125,000 shares of common stock outstanding, what are earnings per share? Dividends per share? Book value per share? If the stock currently sells for $95 per share, what is the market to book ratio? The price earnings ratio?

NI = addition to retained earnings + dividends = $275K + 150K = $425K EPS = NI / shares = $425K / 125K = $3.40 per share DPS = dividends / shares = $150K / 125K = $1.20 per share BVPS = TE / shares = $6M / 125K = $48.00 per share Market-to-book ratio = share price / BVPS = $95 / $48 = 1.98 times P/E ratio = share price / EPS = $95 / $3.40 = 27.9 times

A proposed new investment has projected sales of $700,000. Variable costs are 60 percent of sales, and fixed costs are $175,000; depreciation is $75,000. Prepare a pro forma income statement assuming a tax rate of 35 percent. What is the projected net income?

NI: 19,500

Edelman Engineering is considering including an overhead pulley system in this year's capital budget. The cash outlay for the pulley system is $22,430. The firm's cost of capital is 14%. After-tax cash flows are $7,500 for each of the next 5 years. Calculate the internal rate of return and the net present value for the project, and indicate the correct accept/reject decision.

NPV= $3,318; IRR= 20%; Accept

Dog Up! Franks is looking at a new sausage system with an installed cost of $410,000. This cost will be depreciated straight-line to zero over the project's five-year life, at the end of which the sausage system can be scrapped for $70,000. The sausage system will save the firm $115,000 per year in pretax operating costs, and the system requires an initial investment in new working capital of $15,000. If the tax rate is 34% and the discount rate is 10%, what is the NPV of this project?

NPV= 6408

SDJ, Inc., has net working capital of $1,050, current liabilities of $4,300, and inventory of $1,300. What is the current ratio? What is the quick ratio?

NWC = $1,050 = CA - CL; CA = $1,050 + 4,300 = $5,350 Current ratio = CA / CL = $5,350/$4,300 = 1.24 times Quick ratio = (CA - inventory) / CL = ($5,350 - 1,300) / $4,300 = 0.94 times

A firm is considering a project which would increase accounts receivable by $10,000, accounts payable by $55,000, and inventory by $30,000. Which of the following is true?

Net working capital has decreased .

A firm has $600,000 in current assets and $150,000 in current liabilities. Which of the following is correct if it uses cash to pay off $50,000 in accounts payable?

Net working capital will not change

In a firm's cash flow statement shows that cash was used for investments, which of the following would seem most likely?

New machines were acquired

A firm has a total book value of equity of $300,000, a market to book ratio of 3, and a book value per share of $8. What is the total market value of the firm's equity?

None of the above

A project will generate $1 million net cash flow annually in perpetuity. If the project costs $7 million, what is the lowest wacc shown below that will make the NPV?

None of the above

An investment earned the following returns for the returns 1998 through 2001: 30%, 40%, 15%, and 7%. What is the variance of returns for this investment?

None of the above

Given no change in required returns, preferred stock prices will:

None of the above

Your subscription to Jogger's World Monthly is about to run out and you have the choice of renewing it by sending in the $10 a year regular rate or of getting a lifetime subscription to the magazine by paying $100. Your cost of capital is 7 percent. How many years would you have to live to make the lifetime subscription the better buy? Payments for the regular subscription are made at the beginning of each year. (Round up if necessary to obtain a whole number of years.)

None of the above

what is the expected yield on the market porfolio at a time when Treasury bills yield 6%

None of the above

Stocks A and B have the same required return of 15% and the same price, $25. Stock A's dividend is expected to grow at a constant rate of 10% per year, while Stock B's dividend is expected to grow at a constant rate of 5% per year. Which of the following statements is most correct?

None of the statements above are true

Stocks A and B have the same required rate of return and the same expected year-end dividend (D1). Stock A's dividend is expected to grow at a constant rate of 10 percent per year, while Stock B's dividend is expected to grow at a constant rate of 5 percent per year. Which of the following statements is most correct?

None of the statements above is correct

Bush Boomerang, Inc., is considering a new three year expansion project that requires an initial fixed asset investment of $2.1 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $1,900,000 in annual sales, with costs of $850,000. If the tax rate is 35%, what is the OCF for this project?

OCF: 0.9275m

Grady Precision Measurement has forecasted the following sales and costs for a new GPS system: annual sales of 48,000 units at $18 a unit, production costs at 37% of sales price, annual fixed costs for production at $180,000, and straight-line depreciation expense of $240,000 per year. The company tax rate is 35%. What is the annual operating cash flow of the new GPS system?

OCF= per year 320,808

The standard deviation of individual stocks are generally higher than the standard deviation of the market portfolio because individual stocks

Offer higher returns Have more systematic risk Have more diversifiable risk Do no have unique risk answer- None of the above

The standard deviations of individual stocks are generally higher than the standard deviation of the market portfolio because individual stocks:

Offer higher returns Have more systematic risk Have more diversifiable risk Do not have unique risk answer-None of the above

_______ involve(s) a cash flow that never occurs, but we need to add it as a cost or outflow of a new project.

Opportunity costs

Stock in Parrothead Industries has a beta of 1.10. The market risk premium is 8 percent, and T-bills are currently yielding 5.5 percent. Parrothead's most recent dividend was $2.20 per share, and dividends are expected to grow at a 5 percent annual rate indefinitely. If the stock sells for $32 per share, what is your best estimate of Parrothead's cost of equity?

Our best estimate of the cost of equity would be the average of the two estimates: RE = (.1430 + .1222)/2 = 13.26%

In agency theory, the owners of the business are _______ and the managers are _______

Principals, agents

Which of the following could be calculated with only the use of an income statement?

Profit margin

Music Row, Inc. has sales of $32 million, total assets of $43 million, and total debt of $9 million. If the profit margin is 7%, what is net income? What is ROA? What is ROE?

Profit margin = net income / sales; net income = ($32M)*(0.07) = $2,240,000 ROA = net income / TA = $2.24M / $43M = 5.21% ROE = net income / TE = net income / (TA - TD) = $2.24M / ($43M - 9M) = 6.59%

Project selection ambiguity can arise if one relies on IRR instead of NPV when:

Project cash flows are not conventional

When firms develop a WACC for individual projects based on the cost of capital for other firms in similar lines of business as the project, the firm is utilizing a:

Pure play approach

If the total assets of a firm increase while all other components of ROE remain unchanged, you would expect the firm's:

ROE to remain unchanged.

A bond with 10 years until maturity, an 8% coupon rate traded at its par value of $1000 yesterday. its price jumps to $1,109.05 today. What apparently happens to the yield to maturity of the bond?

Rates decreased by about 1.5%

The major benefit of diversification is to:

Reduce the expected risk

Assume a firm uses WACC to select investment projects rather than adjusting the projects for risk. If so, the firm will tend to:

Reject profitable, low-risk projects and accept unprofitable, high-risk projects

Which of the following would decrease a portfolio's systematic risk?

Reject profitable, low-risk projects and accept unprofitable, high-risk projects

Hanson Aluminum, Inc. is considering whether to build a mil based around a new rolling technology the company has been developing. Management views this project as being riskier than the average project the company undertakes. Based on their analysis of the projected cash flows, management determines that the project's internal rate of return is equal to the company's cost of capital. If the project goes forward, the company will finance it with newly issued debt with an after-tax cost less than the project's IRR. Should management accept or reject this project?

Reject, because the project reduces the value of the company when its risk is taken into account

Hanson Aluminum, Inc. is considering whether to build a mill based around a new rolling technology the company has been developing. Management views this project as being riskier than the average project the company undertakes. Based on their analysis of the projected cash flows, management determines that the project's internal rate of return is equal to the company 's cost of capital. If the project goes forward, the company will finance it with newly issued debt with an after-tax cost less than the projects IRR. Should management accept or reject this project?

Reject, because the project reduces the value of the company when its risk is taken into account

The balance sheet is most likely to provide an analyst with information about firm's:

Solvency

Ashlyn Lutz makes the following statement to her supervisor, paul Ulring, regarding the basic principles of capital budgeting: Statement 1: The timing of expected cash flows is crucial for determining the profitability of a capital budgeting project. Statement 2: Capital budgeting decisions should be based on the after-tax net income produced by the capital project. Which of the following regarding Lutiz's statement is most accurate?

Statement 1 is Correct and Statement 2 is Incorrect.

Ashlyn Lutz makes the following statements to her supervisor.

Statement 1 is correct and statement 2 is incorrect

Which of the following risks would be classified as a non-systematic risk for an auto manufacturer?

Steel Prices

Which of the following risk would be classified as a non-systematic risk for an auto manufacturer?

Steel prices

Which of the following statements about the call provision of a bond is most accurate? A call provision

Stipulates whether and under what circumstances the issuer can redeem or repay the bond prior to maturity

Which of the following statements is more likely to be correct concerning the statement, "Stock A has a higher expected return than stock B".

Stock A has a higher beta

Which of the following statements is more likely to be correct concerning the statement, "Stock A has a higher expected return than stock B"?

Stock A has a higher beta

Stock A has a beta coefficient of 0.9, and stock B has a beta coefficient of 1.2. Which of the following statements is false regarding these two stocks?

Stock A necessarily must have a lower standard deviation of returns than stock B

Bud is an undiversified investor and is considering two alternative stocks for purchase. Stock A has a beta of 0.85 and stock B has a beta of 1.6. If Bud expects the stock market to boom next year (strong bull market), which stock should be purchased?

Stock B

Bud is an undiversified investor and is considering two alternative stocks for purchase. Stock A has a beta of 0.85 and stock B has a beta of 1.6. If Bud expects the stock market to boom next year, which stock should he purchase?

Stock B

Bud is an undiversified investor and is considering two alternative stocks for purchase. Stock A has a beta of 0.85, and stock B has a Beta of 1.6. If Bud expects the stock market to boom next year (strong bull market), which stock should he purchase?

Stock B

Stock A has a beta coefficient of 0.9, and stock b has a beta coefficient of 1.2. Which of the following is false regarding these two stocks.

Stock a necessarily must have a lower standard deviation of returns than stock B

Stock are different from bonds because ________

Stocks, unlike bonds, represent ownership

A chief financial officer would typically

Supervise both the treasurer and controller

Flynn, Inc. is considering a four-year project that has an initial after-tax outlay or after-tax cost of $80,000. The future after-tax cash inflows from its project for years one, two, three, and four are $40,000, $40,000, $30,000, and $30,000, respectively. Flynn uses the internal rate of return method to evaluate projects. What is the approximate IRR for this project?

The IRR is about 28.89%

For a project with conventional cash flows, if pl (profitability index) is grater than 1, then:

The NPV is greater than zero

Assume that the Security Market Line (SML) is based on a risk free rate of 5%, and a market return of 11%. What will happen to the SML if the forecast of rate increases and investors become more risk averse?

The SML will shift up and have a steeper slope

Which of the following is true regarding the WACC?

The WACC is the required return on any investment a firm makes that has a level of risk equal to operations

Which of the following statements is correct for a 10% coupon bond that has a current yield of 7%

The bond's yield to maturity is less than 10%

Last year, your firm had a positive net cash flow, yet cash on the balance sheet decreased. Which of the following could explain the firm's financial performance?

The company purchased a lot of new fixed assets

Double taxation refers to which of the following scenarios?

The corporation pays taxes on its earnings, and shareholders pay taxes on dividends received.

In calculating the weighted average cost of capital (WACC), which of the following statements is least accurate?

The cost of debt is equal to one minus the marginal tax rate multiplied by the coupon rate on outstanding debt

In calculating the weighted average cost of capital (WACC, which of the following statements is least accurate?

The cost of debt is equal to one minus the marginal tax rate multiplied by the coupon rate on outstanding debt

Which of the following is false regarding the estimation of a firm's cost of equity?

The cost of equity is equal to the weighted average cost of capital

Which of the following is false regarding the estimation of a firm's cost of equity capital?

The cost of equity is equal to the weighted average cost of capital.

Which of the following statements is TRUE?

The current ratio is current assets divided by current liabilities

Which of the follwing statements below is TRUE?

The current ratio is current assets divided by current liabilities

Which of the following statements about the discounted payback period is least accurate?

The discounted payback period is generally shorter than the regular payback.

Which of the following statements below is false?

The discounted payback period method is the time it takes to recover the initial investment in future dollars

Which of the following statements about preferred stock is false?

The dividends on a preferred stocks could be increased or decreased

Which of the following describes a stock that plots above the security market line

The expected return of the stock is too high

A firm has a times interest earned ratio of 4.5 times. This means:

The firm has sufficient EBIT to cover its interest expense 4.5 times over.

How would you interpret an inventory turnover ratio of 10.7

The firm has sufficient inventories to maintain sales for 34.1 days

How would you interpret an inventory turnover ratio of 10.7?

The frim has sufficient inventories to maintain sales for 34.1 days

What is the typical relationship between the return standard deviation of an individual common stock and the return standard deviation of a diversified portfolio of common stocks?

The individual stock's return standard deviation is higher

Which of the following statements regarding bond pricing is true?

The lower the yeild to maturity, the more valuable the bond is.

In a partnership form of organization, income tax liability, if any, is incurred by:

The partners individually

If the market portfolio is expected to offer returns of 16%, then what can be said about a portfolio expected to return 13%?

The portfolio's beta is less than 1.0

What happens when a bond's expected cash flows are discounted at a rate lower than the bond's coupon rate?

The price of the bond is higher than the par value

Which of the following statement about equity beta is true?

The slope of the security market line measures a security's beta and beta can change whenever there is change in investors' expectations of inflation and/or their degree of risk aversion

The standard deviation for historical stock returns can be calculated as:

The square root of the variance.

If two constant growth stocks have the same required rate of return and the same price , which of the following statements is most correct?

The stock with the higher dividend yield will have a lower dividend growth rate

If two constant growth stocks have the same required rate of return and the same price, which of the following statements is most correct?

The stock with the higher dividend yield will have a lower dividend growth rate

Your firm disposes of an asset which is worthless in the open market, but still hasremaining undepreciated book value. The tax benefit to the firm from the writeoff ofthis asset is equal to

The tax rate multiplied by the remaining book value

Which of the following statements below is FALSE?

The times interest earned ratio tells us the number of times a company has resorted to debt financing over the year

Mr. Malone wants to change the overall risk of his portfolio. Currently, his portfolio is a combination of risky assets with a beta of 1.25 and an expected return of 14%. He will add a risk-free asset (U.S. Treasury bill) to his portfolio. If he wants a beta of 1.0, what percent of his wealth should be in the risky portfolio and what percentage should be in the risk-free asset? If he wants a beta of 0.75? If he wants a beta of 0.50? If he wants a beta of 0.25? Is there a pattern here?

The weight in the risk-free asset is 1- w, and the weight in the risky portfolio is w and the total of the two reflects 1 or 100% of his wealth. Beta of 1.0 = (1-w) × (0) + (w) × (1.25) 1.0 = w (1.25) w = 1 / 1.25 = 0.80 Thus, 80% of wealth in the risky portfolio and 20% of wealth in risk-free asset. Beta of 0.75 = (1-w) × (0) + (w) × (1.25) 0.75 = w (1.25) w = 0.75 / 1.25 = 0.60 Thus, 60% of wealth is in the risky portfolio and 40% of wealth in risk-free asset. Beta of 0.50 = (1-w) × (0) + (w) × (1.25) 0.50 = w (1.25) w = 0.50 / 1.25 = 0.40 Thus, 40% of wealth in risky portfolio and 60% of wealth in risk-free asset. Beta of 0.25 = (1-w) × (0) + (w) × (1.25) 0.25 = w (1.25) w = 0.25 / 1.25 = 0.20 Thus, 20% of wealth in risky portfolio and 80% of wealth in risk-free asset.

Company XYZ is evaluating a project and here is some information for the project. The unit sales price is projected to be $40 and sales volume to be 1,000 units in year 1, 250 units in year 2, and 1,325 units in year 3. The project has a 3 year life. Variable costs amount to $22.5 per unit and fixed costs are $10,000 per year. The project requires an initial investment of $16,500, which is depreciated straight-line to zero over the 3 year project life. The actual market value of the initial investment at the end of year 3 is $3,500. Initial net working capital investment of $7,500 and NWC will maintain a level equal to 20% of sales each year thereafter. The tax rate is 34% and the required return on the project is 10%. Given the $7,500 initial investment in NWC, what change occurs for NWC during year 1?

There is a $500 increase in NWC

Which of the following portfolios might be expected to exhibit less unsystematic risk?

Thirty random stocks, portfolio beta unknown

Under which of the following conditions will a future value calculated with simple interest exceed a future value calculated with compound interest at the same rate?

This is not possible with positive interest rate

The accelerated depreciation of capital investments in MACRS depreciation provides a taxable expense that reduces taxes at a faster rate than with straight-line depreciation. Therefore, according to ____ concepts, we can surmise that lower tax expenses in the earlier years and higher tax expenses in the later years are better than a steady tax expense each year.

Time-value of money

Levenworth Industries has the following capital structure on December 31, 2006. What are the weights on debt and preferred stock in the firm's capital structure? Debt Outstanding $8 Million $10.5 Million Preferred Stock Outstanding $2 Million $1.5 Million Common Stock Outstanding $10 Million $13.7 Million Total Capital $20 Million $25.7 Million

Weight on Debt: 0.41, Weight on Preferred Stock: 0.06

Deighton Industries has 200,000 bonds outstanding. The par value of each corporate bond is $1,000, and the current market price of the bonds is $965. Deighton also has 6 million common shares outstanding, with a market price of $28 per share. At a recent board of directors meeting. Deighton board members decided not to change the company's capital structure in a material way for the future. To calculate to weighted average cost of Deighton's capital, what weighs should be assigned to debt and to equity?

Weight on debt: 53.46%, weight on equity: 46.54%

Deighton Industries has 200,000 bonds outstanding. The par value of each corporate bond is $1000, and the current market price of the bonds is $965. Deighton also has 6 million common shares outstanding, with a market price of $28 per share. At a recent board of directors meeting, Deighton board members decided not to change the company's capital structure in a material way for the future. To calculate the weighted average cost of Deighton's capital, what weights should be assigned to debt and to equity?

Weight on debt: 53.46%, weight on equity: 46.54% Feedback: MVe - 6 million * $28 = $168 million MVd = 200000 * $965 = $193 million We = MVe / (MVe + MVd) = $168 million / (168 million + 193 million) = 46.54% Wd = MVd / (MVe + MVd) = $193 million / (168 million + 193 million) = 53.46%

Select the statement that is most correct

When calculating the cost of debt, a company needs to adjust for taxes, because interest payments are tax deductible

Select the statement that is most correct.

When calculating the cost of debt, a company needs to adjust for taxes, because interest payments are tax deductible

All else the same, a higher corporate tax rate ________

Will decrease the WACC of a firm with some debt in its capital structure

The discount rate that makes the present value of a bond's payments equal to its price is termed the

YTM

Simpson, Inc. is considering a five-year project that has an initial after-tax outlay or after-tax cost of $48,00. The representative future cash inflows from its project for years 1,2,3,4 and 5 are $15,000, $25,000, $35,000, $45,000, and -$70,000. The appropriate discount rate for this project is $9. Should Simpson accept the project?

Yes because the NPV is positive

The rate of return required by investors in the market for owning a bond is called the:

Yield to maturity

The coupon rate of a bond equals:

a percentage of its face value

A stock investor owns a diversified portfolio of 15 stocks. What will be the likely effect on portfolio return standard deviation adding one more stock is added?

a slight decrease will occur

Filer Manufacturing has 8.2 million shares of common stock outstanding. The current share price is $52, and the book value per share is $5. Filer Manufacturing also has two bond issues outstanding. The first bond issue has a face value of $70 million, an 8 percent coupon, and sells for 104 percent of par. The second issue has a face value $50 million, a 7.5 percent coupon, and sells for 97 percent of par. The first issue matures in 10 years, the second in 6 years.(assume each unit of bond has a face value of $1,000) a. What are Filer's capital structure weights on book value basis? b. What are Filer's capital structure weights on a market value basis? c. Which are more relevant, the book or market value weights? Why?

a. BVE = number of share * BV per share = 8.2M*($5) = $41M; BVD = $70M + $50M = $120M; BVA = BVE + BVD = $41M + 120M = $161M; E/V = 41/161 = 0.2547; D/V = 1 - E/V = 0.7453 In terms of book value, 25.47% of the capital is composed of equity and the remaining 74.53% is composed of debt. b. MVE = number of share * per share price = 8.2M* ($52) = $426.4M; MVD = 1.04($70M) + 0.97($50M) = $121.3M; MVA = MVE + MVD = $426.4 + 121.3M = $547.7; E/V = 426.4/547.7 = 0.7785; D/V = 1 - E/V = 0.2215 In terms of market value, 77.85% of the capital is composed of equity and the remaining 22.15% is composed of debt. c. The market value weights are more relevant.

Jiminy's Cricket Farm issued a 30-year, 9 percent annual coupon bond 8 years ago. The bond makes coupon payments semiannually. The par value of the bond is $1,000. The bond currently sells for 105 percent of its face value. The company's tax rate is 35 percent. a. What is the pretax cost of debt? b. What is the after-tax cost of debt? c. Which is more relevant, the pretax or the after-tax cost of debt? Why?

a. Cost of debt is the yield to maturity (YTM) of the outstanding bonds of the company. Given the price, maturity and coupon rate of the bond, we can use the financial calculator to find the YTM = 8.49%. Hence, the pretax cost of debt is 8.49%. b. RD = .0849(1 - .35) = 5.52% c. The after-tax rate is more relevant because that is the actual cost to the company.

Titan Mining Corporation has 8 million shares of common stock outstanding, 5 million shares of preferred stock outstanding, and 100,000 units of 9 percent semiannual bonds outstanding, par value $1,000 each. The preferred stock pays a dividend of $6 per share. The common stock currently sells for $32 per share and has a beta of 1.15, the preferred stock currently sells for $67 per share, and the bonds have 15 years to maturity and sell for 91 percent of par. The market risk premium is 10 percent, T-bills are yielding 5 percent, and Titan Mining's tax rate is 35 percent. a. What is the firm's market value capital structure? b. If Titan Mining is evaluating a new investment project that has the same risk as the firm's typical project, what rate should the firm use to discount the project's cash flows?

a. MVD = 100,000($1,000)(0.91) = $91M; MVE = 8M($32) = $256M MVP = 5 million*($67) = $335M; V = $91M + 256M + 335M = $682M D/V = 91/682 = .1334; P/V = 335/682 = .4912; E/V = 256/682 = .3754 b. For projects equally as risky as the firm itself, the WACC should be used as the discount rate. RE = .05 + 1.15(.10) = 16.50% RD = 10.18% (by calculator) RP = $6/$67 = 8.96% WACC = .3754(16.50%) + .4912(8.96%) + 0.1334(1-0.35)(10.18%) = 11.48%

An all-equity firm is considering the following projects: Project Beta Expected Return W .70 11% X .95 13 Y 1.05 14 Z 1.60 16 The T-bill rate is 5 percent, and the expected return on the market is 12 percent. Assume the company's overall WACC is 12%. a. Which projects have a higher expected return than the firm's 12 percent cost of capital? b. Which projects should be accepted? c. Which projects would be incorrectly accepted or rejected if the firm's overall cost of capital were used as a hurdle rate

a. Projects X, Y and Z. b. Using the firm's overall cost of capital as a hurdle rate, projects Y and Z. However, after considering risk via the SML: E[W] = .05 + .70(.12 - .05) = .0990 < .11, so accept W. E[X] = .05 + .95(.12 - .05) = .1165 < .13, so accept X. E[Y] = .05 + 1.05(.12 - .05) = .1235 < .14, so accept Y. E[Z] = .05 + 1.60(.12 - .05) = .1620 > .16, so reject Z. c. Project W would be incorrectly rejected; project Z would be incorrectly accepted

Assume that a company has equal amounts of debt, common stock, and preferred stock. An increase in the corporate tax rate of a firm will cause its weighted average cost of capital (WACC) to

a. fall

A firm pays annual dividend of $1.15 today. The risk-free rate (Rf) is 2.5% and the risk premium for the stock is 7%. What is the value of the stock, if the dividend is expected to remain constant?

about $12.11

How much would an investor lose if she purchased a 30

about $19.48

The present value of an annuity stream of $100 per year is $614

an increase of $61

The present value of an annuity system of $100 per year is $614 when valued at a 10% rate. By approx how much would the value change if these were annuities due?

an increase of $61

In capital budgeting analysis, an increase in working capital can be shown as:

an outflow at the beginning and an equal inflow at the end of the project

A year ago a company issued a bond with a face value of $1,000 with an 8% coupon. Now the prevailing market yield is 10% What happens to the bond? The:

bond is traded at a market price of less than $1,000

a year ago a company issued a bond with a face value of $1000 with a 8% coupon. now the prevailing market yeild is 10%. what happened to the bond?

bond is traded at a market price of less than 1000

You own a stock portfolio invested 25 percent in Stock Q, 20 percent in Stock R, 15 percent in Stock S, and 40 percent in Stock T. The betas for these four stocks are .9, 1.4, 1.1 and 1.8, respectively. What is the portfolio beta?

bp = .25(.9) + .20(1.4) + .15(1.1) + .40(1.8) = 1.39

The cost of debt capital for a firm _____

can be estimated even if the firm's bonds are not publicly traded, by looking at the yield to maturity on bonds outstanding from peer group firms with similar ratings and maturity

The cost of debt capital for a firm

can be estimated even if the firm's bonds are not publicly traded, by looking at the yield to maturity on bonds outstanding from peer group firms with similar ratings and maturity.

Which of the following statements is correct for a firm in which depreciation expense exceeds EBIT? The firm:

can still have a positive net income

The net income figure on an income statement is calculated before deducting:

cash dividends

Skippy had been offered two alternatives payment options to pay for his new speed boat.

cheaper by about $83

You are attempting to value a stock in a mature industry that is steadily shrinking in size. of the stock valuation models studied, the most appropriate is the ___.

constant growth model

Julius, Inc. is in a 40% marginal tax bracket. The firm can raise as much capital as needed in the bond market at a cost of 10% yield to maturity. The preferred stock has a fixed dividend of $4.00. The price of preferred stock is$31.50. The after-tax costs of debt and preferred stock are closest to:

debt: 6.0%; preferred stock: 12.7%

holding all else equal, if the beta of a stock increases, the stock's price will

decrease

Suppose that the Federal Reserve takes actions that cause the risk-free rate to fall. All else the same, we would expect a firm's cost of equity to .

decrease if we are using the SML

Bond rating, raning from AAA to C

default risk

The NPV profile is a graphical representation of the change in net present value relative to a change in the:

discount rate

The cost of preferred stock is equal to the preferred stock dividend: r

divided by the market price.

Suppose a stock had an initial price of $69 per share, paid a dividend of $1.95 per share during the year, and had an ending share price of $53. a) What was the dividend yield for the year? b) What was the capital gain yield for the year? c) What is the percentage total return for the year?

dividend yield = 1.95/69 = 2.83% capital gain yield = (53 - 69)/69 = -23.19% total return = 2.83% + (-23.19%) = -20.35

As illustrated using the dividend growth model, the total return on a share of common stock is comprised of a ____

dividend yield and a capital gains yield

As illustrated using the dividend growth model, the total return on a share of common stock is comprised of a _____________.

dividend yield and a capital gains yield

If a stock consistently goes down (up) by 1.6% when the market portfolio goes down (up) by 1.2%, then its beta equals:

equals 1.33

When calculating the weighted average cost of capital (WACC) an adjustment is made for taxes because:

equity is risky

when calculating the weighted average cost of capital (WACC) an adjustment is made for taxes because

equity is risky

What is the present value of a stream of annual end of the year annuity cash flows if the discount rate is 0

exactly $1,000

Although non-systematic risk is present in differing amounts, individuals stocks are:

exposed to differing amounts of systematic risk also.

A bond's par value can also be called its:

face value

A bond's par value can also be called its;

face value

A project whose NPV equals zero

has a discounted payback period that exactly moder

A firm with negative net working capital .

has more current liabilities than current assets

Investors who own bonds with lower credit ratings should expect

higher default possibilities

Which of the following statements is not true?

if a stock has a required rate of return R=12%

The value of a proposed capital budgeting project depends upon the:

incremental cash flows produced

If a bond is priced at par value, then:

its coupon rate equals its yield to maturity.

Which of the following is false about junk bonds?

junk bonds must be bad investment and should be avoided

Dividends that are expected to be paid far into the future have:

lesser impact on current stock price due to discounting

Net income is ________.

not cash flow

If a security plots below the security market line, it is:

offering too little return to justify its risk

A bond with an annual coupon of $100 originally sold at par for $1000. the current market interst rate on this bond is 9%. assuming no change in risk, this bond will sell at a _____ and present the seller of the bond today with a capital _____

premium; gain

The _______ is the market of first sale in which companies first sell their authorized shares to the public

primary market

The problem of motivating one party to act in the best interest of another party is known as the _

principal-agent problem

Restrictions on asset sales and borrowing in bond indenture are often known as?

protective covenants

The SEC has a site named EDGAR that ________.

provides an on-line platform that will help investors find a company and its financial statements

When firms develop a WACC for individual projects based on the cost of capital for other firms in similar lines of business as the project, the firm is utilizing a

pure play approach

The major benefit of diversification is to

reduce the expected risk.

Standard deviation is one of the most common measures of

return volatility

Standard deviation is one of the most common measures of _____

return volatility

Investors buy and sell stocks in ________markets.

secondary

Which of the following does NOT offer the protection of limited liability?

sole proprietorship

A bonds indenture least likely specifies the

source of founds for repayment

A bond's indenture least likely specifies the

source of funds for repayment

The principle of diversification tells us that:

spreading an investment across many diverse assets will eliminate some of the total risk

Which of the following risks would be classified as a non-systematic risk for an auto manufacturer ?

steel prices

Stocks are different from bonds because

stocks, unlike bonds, represent residual ownership

The financial data of company ABC on Yahoo! Finance's includes cost of revenue. You would like to break the cost of revenue into its two major components: cost of goods sold and depreciation. To do so, we would need to look at _________ for the cost of goods sold.

the income statement

In a partnership form of organization, income tax liability, if any, is incurred by:

the partners individually

To convert a balance sheet into a common-size balance sheet statement, we restate all the numbers as percentages of

total assets

The type of risk that we can diversify away is ___

unsystematic risk

All else the same, a higher corporate tax rate _____

will decrease the WACC of a firm with some debt in its capital structure

All else the same, a higher corporate tax rate _____________________.

will decrease the WACC of a firm with some debt in its capital structure