Final Exam Practice

Mackenzie is the CEO of Donihoo Corporation, a privately held corporation. If she wants to take Donihoo public, what must be her first step?

Gain board approval

Existing shareholders:

may or may not have a pre-emptive right to newly issued shares.

The rate of return on the common stock of Kang Distribution is expected to be 13.5 percent in a boom economy, 8 percent in a normal economy, and only 2.5 percent in a recessionary economy. The probabilities of these economic states are 11 percent for a boom and 26 percent for a recession. What is the variance of the returns on this common stock?

.001051

What is the standard deviation of the returns on a stock given the following information?

3.82%

It is common for venture capitalists to receive at least ___ percent of a start-up company's equity in exchange for the venture capital.

40%

You own a portfolio that has $1,720 invested in Stock A and $3,470 invested in Stock B. The expected returns on these stocks are 13.7 percent and 8.0 percent, respectively. What is the expected return on the portfolio?

9.89%

Assume a firm utilizes the security market line approach to determine the cost of equity. If the firm currently pays an annual dividend of $2.40 per share and has a beta of 1.42, all else constant, which of the following actions will decrease the firm's cost of equity?

A decrease in the firm's beta

Poindexter is funded by a group of wealthy investors for the sole purpose of providing funding for individuals and small firms that are trying to convert their new ideas into viable products. What is this type of funding called?

Venture capital

Wright Market Research is able to borrow money at a rate of 6.8 percent per year. This interest rate is called the:

cost of debt.

When evaluating any capital project proposal, the cost of capital:

depends upon how the funds raised for that project are going to be spent.

While evaluating a stock, you estimate that it will earn a return of 11 percent if economic conditions are favorable, and 3 percent if economic conditions are unfavorable. Given the probabilities of favorable versus unfavorable economic conditions, you conclude that the stock will earn 7.2 percent next year. The 7.2 percent figure is called the:

expected return.

Rafia owns stocks of 15 different companies. Together, the stocks have a value of $78,640. Twelve percent of that total value is from one company, Gambrell & Valdez. The twelve percent figure is called a(n):

portfolio weight.

Financing of new, nonpublic companies is broadly referred to as ________ financing.

private equity

Assume a firm has a debt-equity ratio of .62. The firm's weighted average cost of capital is the:

rate of return a company must earn on its existing assets to maintain the current value of its stock.

The cost of preferred stock is equivalent to the:

rate of return on a perpetuity.

A rights offering in which an underwriting syndicate agrees to purchase the unsubscribed portion of an issue is called a(n) _____ underwriting.

standby

Which one of the following statements is correct concerning the issuance of long-term debt?

Direct placement debt tends to have more restrictive covenants than publicly issued debt.

Which one of the following statements concerning venture capitalists is correct?

Exit strategy is a key consideration when selecting a venture capitalist.

Assume a portfolio contains stocks of 25 different companies, and the weights of each are unequal. Also assume the various potential economic states have unequal likelihoods of occurring. Which one of the following statements is accurate?

Given both the unequal weights of the securities and the economic states, an investor might be able to create a portfolio that has an expected standard deviation of zero.

Direct business loans typically ranging from one to five years are called:

term loans.