Final Exam
What is the future value of a 6-year ordinary annuity with annual payments of $200 evaluated at an 8 percent interest rate?
$1,173.32
Texas Products Inc. has a division which makes burlap bags for the citrus industry. The unit has operating fixed costs of $10000 per month and it expects to sell 42000 bags per month. If the variable cost per bag is $1.50 what price must the division charge in order to break even?
$1.74
Consider the following information for Ball Corp. What is the Operating Profit for Call Corp.Selling and Administrative Expensive $34500 Depreciation expensive $70000 Sales $350000 Interest expense $30000 Cost of goods sold $110000 Taxes $17500
$129,500
You are trying to determine the appropriate price to pay for a share of common stock. If you purchase this stock you plan to hold it for 1 year. At the end of the year you expect to receive a dividend of $5.50 and to sell the stock for $154. The appropriate rate of return for this stock is 16 percent. What should be the current price of this stock?
$137.50
If a 5-year regular annuity has a present value of $1000 and if the interest rate is 15 percent what is the amount of each annuity payment?
$298.32
Mr. Nailor invests $5000 in a money market account at his local bank. He receives annual interest of 10% for 6 years. How much total return will his investment earn during this time period?
$3,857.81
A share of common stock has a current price of $117.975 and is expected to grow at a constant rate of 10 percent. If you require a 14 percent rate of return what is the current dividend on this stock?
$3.81
Suppose the Federal Reserve increases deposits at financial institutions by $40 billion through its open market operations. If the reserve requirement for all deposits is 10% what is the maximum impact the Fed's actions can have on total deposits?
$360 Billion increase
A firm has beginning inventory of 450 units at a cost of $10 each. Production during the period was 500 units at $12 each. If sales were 700 units what is the cost of goods sold (assume FIFO)?
$7,500
The Charleston Company is relatively small privately owned firm. Last year the company had after-tax income of $15000 and 10000 shares were outstanding. The owners were trying to determine the market value for the stock prior to taking the company public. A similar firm which is publicly traded had a price/earnings ratio of 5.0. Using only the information given estimate the market value of one share of Charleston's stock
$7.50
What is the present value of an 8-year annuity due with annual payments of $200 evaluated at a 6 percent interest rate?
$798.54
You have just purchased a 5-year $1000 par value bond. The coupon rate on this bond is 10 percent annually with interest being paid each 6 months. If you expect to earn a 14 percent annual simple rate of return on this bond how much did you pay for it?
$859.53
Your corporation has the following cash flows: Operating Income-$250000 Interest Received-12000 Interest Paid-45000 Dividends Received-40000 Dividends Paid 60000. If the applicable income tax rate is 40 percent and if 70 percent of dividends received are exempt from taxes what is the corporation's tax liability?
$96,800
If a firm has a break-even point of 40000units and fixed costs are $60000 the variable cost per unit is $1.00. What will the firm's operating profit be at sales of 30000 units?
($15,000)
Refer to the figure below: Sales = $1000000 Fixed costs = $200000 variable cost per unit = $3.00 price = $10.00 interest expense is $75000 and the corporate tax rate is 30%. The Degree of Total Leverage (DTL) is
1.65x
U.S. Steal has the following income statement data: Units Sold Costs 40000 Total Variable Costs Total Costs $80000 120000 Fixed $50000 $130000 60000 50000 170000. Given the above data what is the degree of operating leverage at Q = 40000?
1.71x
A firm has a profit margin of 15 percent on sales of $20000000. If the firm has debt of $7500000 total assets of $22500000 and an after-tax interest cost on total debt of 5 percent what is the firm's ROA?
13.3%
Given the following probability distribution what is the expected return and the standard rate of returns for stock M?
15.5%; 3.5%
Assume the securities are all issued by the same firm. From the investor's standpoint rank the following securities in order of increasing risk (the number of the least risky security is placed first or to the left in the answer set). (1) Preferred stock (2) Debenture (3) Common stock (4) Mortgage bonds.
4, 2, 1, 3
Given the following data find the expected rate of inflation during the next year. Maturity risk premium on 10-year T-bonds = 1.5%. It is zero on 1-year bonds and a linear relationship exists. Default risk premium on 10-year AAA-rated bonds = 2%. r* = real risk-free rate = 3% Liquidity premium = 3%.Going nominal interest rate on 1-year T-bonds= 16%
5.5%
Which of the following statements is correct?
A "prospectus" is a document which describes a company and the securities it plans to offer, and the prospectus generally must be approved by the SEC before a public offering of new securities can be made.
Limited Liability Company (LLC)
A business structure that offers the limited personal liability associated with a corporation but the company's income is taxed like a partnership.
FALSE
A capital budgeting project is acceptable if the rate of return required for such a project is greater than the project's internal rate of return.
Unwritten arrangement
A contract for the sale of securities in which the investment bank guarantees the sale by purchasing the securities from the issuer, thus agreeing to bear any risks involved in the transaction.
Prospectus
A document describing a new security issue and the issuing company.
Commercial paper
A financial instrument served as a type of promissory note or legal I owe you (IOU) issued by large financially sound firms.
Which of the following statements is correct?
A good example of an agency relationship is the one between stockholders and managers
Free Cash Flow (FCF)
A measure of the cash flow that the firm is free to pay to investors after considering cash investments that are needed to continue operations.
Beta Coefficient
A measure of the extent to which the returns on a given stock move with the stock market.
Open market operations
A practice in which the federal reserve buys or sells Treasury securities to expand or contract the U.S. money supply.
Times Interest Earned (TIE)
A ratio calculated by dividing earnings before interest and taxes (EBIT) by interest charge measures the ability of the firm to meet its annual interest payments.
Profit Margin
A ratio calculated by dividing net income by sales; it measures a firm's profitability proxied by net income per dollar of sales.
Which of the following statements is most correct?
A security's beta measures its non-diversifiable (systematic, or market) risk relative that of most other securities.
Which of the following statements is correct?
A security's beta measures its non-diversifiable (systematic, or market) risk relative to that of an average stock.
Annuity Due
A series of payments of equal amounts at fixed equal intervals that occur at the beginning of each period.
Coefficient of Variation (CV)
A standardized measure of the risk per unit of return. It is calculated by dividing the standard deviation by the expected return.
TRUE
A stock with above-average market risk will tend to be more volatile than an average stock, and it will have a beta coefficient which is greater than 1.0.
Fractional reserve system
A system in which the amount of reserves maintained by a financial institution to satisfy requests for withdrawals is less than 100 percent of total deposits.
General Obligation bond (GO)
A type of municipal bond backed by the local government's ability to impose taxes
A fractional reserve banking system might be in trouble if
All deposit customers wanted to withdraw their money
FALSE
All else equal, a higher required rate of return on a firm's stock will result in a higher market price for that firm's stock
TRUE
All else equal, a risk averse investor choosing between two individual stocks to be held in isolation would prefer the stock with lower coefficient of variation.
FALSE
All else equal, the maturity risk premium tends to decline when interest rate volatility increases.
TRUE
All else equal, the nation's money supply increases when the Federal Reserve purchases U.S. Treasury securities.
Which of the following statements is correct?
Both answers b and d are correct - bond covenants, or restrictions on debt, are an important device to reduce agency conflicts between stockholders and bondholders , compensation packages are designed, in part, to reduce agency conflicts between stockholders and managers
FALSE
Credit unions were originally organized with the idea that consumers could pool their funds together and thereby make low-cost consumer loans to any members of the local community.
TRUE
Debentures typically have higher interest rates than mortgage bonds primarily because mortgage bonds are backed by assets while debentures are unsecured.
Which of the following is NOT a concept that you need to understand to make rational financial decisions?
Discount rate is a decreasing function of risk.
The financial breakeven point for a firm is defined as the level of _______ that produces _______equal to zero
EBIT; EPS
Which of the following is not one of the things that could cause a corporation to have a significant advantage over a partnership or a proprietorship?
Elimination of double taxation
All else equal a decrease in reserve requirements will cause
Excess reserves to increase
FALSE
Financial intermediaries generally take deposits from many savers and loan all their funds to a single firm.
TRUE
Fractional reserves mean that banks maintain less than 100 percent of customer deposits in liquid assets or reserves.
Which of the following statements is most correct?
High inflation can seriously distort firms' balance sheets, and since inflation also affects depreciation and inventory costs, profits can also be affected.
Which of the following statements is correct?
If a 10-year, $1,000 par, zero coupon bond were issued at a price which gave investors a 10 percent rate of return, and if interest rates then dropped to the point where rd = YTM.
Which of the following statements is FALSE?
If the price of money increases due to greater anticipated inflation, the risk-free rate will reflect this fact. Although rRF will increase, it is possible that the SML required rate of return for a stock will decrease because the market risk premium (rM - rRF) will decrease. (Assume that beta remains constant)
TRUE
If two bonds have the same maturity and the same expected rate of return, but one has a higher coupon, the price of the low coupon bond will be more affected by a given chance in interest rates.
Which of the following statements is correct?
If two firms pay the same interest rate on their debt and have the same rate of return on assets, and if that ROA is positive, the firm with the higher debt ratio will also have a higher rate of return on common equity.
FALSE
In order to avoid double taxation and tax on capital gains, stockholders generally prefer to have corporations pay dividends rather than to retain their earnings and reinvest the money in the business.
FALSE
In order to reduce risk, one should diversify into areas that are positively correlated with current areas of involvement.
Which of the following statements is correct?
In part due to limited liability and ease of ownership transfer, corporation have less trouble raising money in financial markets than other organizational forms.
FALSE
Interest and dividends paid by a corporation are considered to be deductible operating expenses, hence they decrease the firm's tax liability.
TRUE
Investment bankers are not really like commercial "bankers" in the sense of taking deposits and issuing loans; rather they help firms issue securities in the secondary market and their activities are limited to raising new equity capital.
Term structure of interest rates
It describes the relationship between yields and maturities of securities.
Money on the table
It is defined as the difference between the closing price on the first day of trading and the offering price multiplied by the number of shares sold.
Which of the following statements is correct?
It is possible for a firm to go public and yet not raise any additional capital.
Default Risk Premium (DRP)
It is the difference between the interest rate on a U.S. long- term Treasury bond and a AAA corporate bond of equal maturity and marketability that compensates for the risk that a corporation will not meet its debt obligations.
Capital Asset Pricing Model (CAPM)
It is used to determine the required return on an asset, which is based on the proposition that any asset's return should be equal to the risk-free return plus a market risk premium that reflects the asset's non- diversifiable risk.
Maturity Risk Premium (MRP)
It reflects the interest rate price risk stating that bonds with longer maturities have greater interest rate price risk.
Security Market Line (SML)
It shows the relationship between risk as measured by beta and the required rate of return for individual securities.
Liquidity Preference Theory
It states that all else being equal lenders prefer to make short-term loans rather than long-term loans and hence they will lend short-term funds at lower rates than they lend long-term funds.
TRUE
LIFO inventory pricing does a better job than FIFO in equating current costs with current revenue, because it is least likely to lead to inflation- induced profits relative to FIFO pricing.
Which of the following is not one of the fundamental factors that affect the cost of money?
Liquidity premium
TRUE
NPV and IRR will not always lead to the same accept/reject decision for mutually exclusive projects, the conclusions might be conflicted even for the same project.
Which of the following assets are traded in the derivative markets?
Options, futures, and forwards
TRUE
Other things held constant, a high degree of total leverage will mean that a relatively small change in sales will result in a large change in EPS.
TRUE
Preferred stockholders have priority over common stockholders with respect to earnings. Dividends must be paid on preferred stock before they can be paid on common stock.
FALSE
Regardless of the size of the coupon payment, the price of a bond moves in the same direction from interest rate movements. For example, if interest rates rise, bond prices increase.
Which of the following statements is correct?
Reinvestment rate risk is lower, other things held constant, on long-term than on short-term bonds.
_____ efficiency states that all publicly available information is reflected in current market prices
Semi Strong-form
The degree of operating leverage has which of the following characteristics?
The DOL is not a fixed number for a given firm, but will depend upon the time zero values of the economic variables Q (Quantity), P (Price), and V (Volume).
6. Which of the following statements is correct?
The New York Stock Exchange (NYSE) allows firms with dual class stock to be listed on the exchange.
FALSE
The OTC market is a physical exchange, much like the New York Stock Exchange, where securities dealers provide trading in unlisted securities.
Future Value
The amount of which a cash flow or series of cash flows will grow over a given period of time when compounded at a given interest rate.
Annual Percentage Rate (APR)
The annual rate that is charged for borrowing (or investing), expressed as a single percentage number that represents that actual yearly cost of funds over the term of a loan.
Yield to Maturity (YTM)
The average rate of return earned on a bond if it is held to maturity.
Which of the following statements concerning measures of risk is correct?
The coefficient of variation, calculated as the expected return divided by the standard deviation, is a standardized measure of the correlation of risk and return.
Which of the following statements is correct?
The constant growth DCF model can be used to value a stock only if the stock's dividends are expected to grow forever at a constant rate which is less than the required rate of return on the stock.
Net asset value (NAV)
The difference between the current market value of an entity's (such as a mutual fund) assets and the value of its liabilities.
FALSE
The fact that a percentage of the interest income received by one corporation is excluded from taxable income has encouraged firms to use more debt financing relative to equity financing.
Assume a portion of a firm's long-term funds includes either debt or preferred stock. Which of the following statements is correct?
The firm has financial leverage, which means that a change in EBIT will result in a greater percentage change in earnings per share (EPS).
FALSE
The future of cash flow is positively related to interest rate and negatively related to the amount of time until maturity.
FALSE
The greater the number of compounding periods within a year, the greater the future value of a lump sum invested initially, and the greater the present value of a given lump sum to be received at maturity.
FALSE
The higher the percentage of a firm's total costs that are fixed, the higher the degree of operating leverage and the lower the operating breakeven point.
Which of the following statements is correct?
The key importance of annual report information is that it is used by investors when they form their expectations about the firm's future earnings and dividends and the riskiness of those cash flows.
FALSE
The major advantage of a regular partnership or a corporation as a form of business is the fact that both offer their owners limited liability, whereas proprietorships do not.
Initial public offering (IPO) market
The market consisting of stocks of companies that have just gone public.
TRUE
The nominal interest rate is defined as being equal to the real risk-free rate, plus an inflation premium, plus a default risk premium, plus a liquidity premium, plus a maturity risk premium.
FALSE
The par value of a share of common stock represents the minimum price at which new shares can be sold.
Degree of Total Leverage
The percent change in EPS that results from a one percent change in sales.
Degree of financial leverage (DFL)
The percentage change in EPS that results from a given percentage change in EBIT.
Degree of Operating Leverage (DOL)
The percentage change in NOI (or EBIT) associated with a given percentage change in sales.
Which of the following statements is false?
The present value of a cash flow is positively related to interest rate and negatively related to the amount of time until maturity.
Which of the following statements is correct?
The present value of a future sum decreases as either the simple interest rate or the number of discount periods per year increases.
Time Value of Money (TVM)
The principles that money available at the present time is worth more than the same amount in the future due to its potential earning capacity; it is used to convert dollars from one time period to those of another time period.
Expected Rate of Return
The return expected to be realized from an investment; it is the mean value of the probability distribution of possible results.
Which of the following statements are TRUE?
The value of any investment is based on the cash flows it is expected to generate in the future.
Which of the following statements is correct?
The yield to maturity for a coupon bond that sells at its par value consists entirely of an interest yield; it has a zero expected capital gains yield.
TRUE
There is an inverse relationship between bond ratings and the required return on a bond and required returns increase as the ratings get lower.
Which of the following is not a task that investment bankers perform?
They take deposits from investors and make loans to corporations
All of the following may serve to reduce the coupon rate that would otherwise be required on a bond issued at par
except a, Call provision
Other things held constant
if a bond indenture contains a call provision, the yield to maturity that would exist without such a call provision will generally be ____ the YTM with it.,Lower than
TRUE
if a firm operates at a profit and sales increase, the degree of financial leverage will decline.
Which of the following powers or tools of Federal Reserve monetary policy has the greatest impact on the money supply?
open market operations
One of the basic relationships in interest rate theory is that other things held constant for a given change in the required rate of return the ____ the time to maturity the ____ the change in price
shorter; larger
Alisha Mark purchased a call option a few months ago. Today is the expiration date
so she has to decide whether to exercise the option. Which of the following statements is correct? Do not consider the brokers' commissions in your answer, She should exercise the option if the price of the stock is greater than the exercise, or strike, price
All else equal the money supply should decrease when
the Fed sells securities on the open market
Of the following provisions that might be found in a bond indenture
which would tend to reduce the coupon interest rate on the bond in question?, A convertible feature
Which of the following statements is most correct?
An increase in a firm's debt ratio, with no changes in its sales and operating costs could be expected to lower its profit margin on sales.
Which of the following statements is correct?
Partnerships have difficulties attracting capital in part because of the other disadvantages of the partnership form of business, including impermanence of the organization.