FINC FINAL CH 10-16
Northern Wood Products is an all-equity firm with 24,300 shares of stock outstanding and a total market value of $374,000. Based on its current capital structure, the firm is expected to have earnings before interest and taxes of $37,000 if the economy is normal, $22,800 if the economy is in a recession, and $51,200 if the economy booms. Ignore taxes. Management is considering issuing $94,600 of debt with an interest rate of 8 percent. If the firm issues the debt, the proceeds will be used to repurchase stock. What will the earnings per share be if the debt is issued and the economy is in a recession?
$.84 Shares repurchased = $94,600/($374,000/24,300) Shares repurchased = 6,146.47 shares Shares outstanding = 24,300 shares − 6,146.47 shares Shares outstanding = 18,153.53 shares EPS = [$22,800 − 94,600(.08)]/18,153.53 EPS = $.84
Taunton's is an all-equity firm that has 151,500 shares of stock outstanding. The CFO is considering borrowing $239,000 at 8 percent interest to repurchase 20,500 shares. Ignoring taxes, what is the value of the firm?
$1,766,268 Value per share = $239,000/20,500 Value per share = $11.66 Firm value = 151,500($11.66) Firm value = $1,766,268
Summer Tan, Inc., is an all-equity firm with a total market value of $520,000 and 35,900 shares of stock outstanding. Management believes the earnings before interest and taxes (EBIT) will be $78,300 if the economy is normal. If there is a recession, EBIT will be 10 percent lower, and if there is a boom, EBIT will be 20 percent higher. The tax rate is 40 percent. What is the EPS in a boom?
$1.57 EPS = [$78,300(1 + .20) − $78,300(1 + .20)(.40)]/35,900 EPS = $1.57
You own a portfolio that has a total value of $250,000 and it is invested in Stock D with a beta of .79 and Stock E with a beta of 1.46. The beta of your portfolio is equal to the market beta. What is the dollar amount of your investment in Stock D?
$171,641.79 βPortfolio = 1.0 = .79wD + (1 − wD)(1.46) wD = .687 Dollar investment in Stock D = .686567($250,000) Dollar investment in Stock D = $171,641.79
Southern Wind is an all-equity firm with 20,100 shares of stock outstanding and a total market value of $360,000. Based on its current capital structure, the firm is expected to have earnings before interest and taxes of $30,000 if the economy is normal, $17,200 if the economy is in a recession, and $42,800 if the economy booms. Ignore taxes. Management is considering issuing $90,400 of debt with an interest rate of 6 percent. If the firm issues the debt, the proceeds will be used to repurchase stock. What will the earnings per share be if the debt is issued and the economy booms?
$2.48 Shares repurchased = $90,400/($360,000/20,100) Shares repurchased = 5,047.33 shares Shares outstanding = 20,100 shares − 5,047.33 shares Shares outstanding = 15,052.67 shares EPS = [$42,800 − 90,400(.06)]/15,052.67 EPS = $2.48
Dyrdek Enterprises has equity with a market value of $11.6 million and the market value of debt is $3.95 million. The company is evaluating a new project that has more risk than the firm. As a result, the company will apply a risk adjustment factor of 2.2 percent. The new project will cost $2.36 million today and provide annual cash flows of $616,000 for the next 6 years. The company's cost of equity is 11.39 percent and the pretax cost of debt is 4.96 percent. The tax rate is 39 percent. What is the project's NPV?
$211,451 WACC = 11.39%($11,600,000/$15,550,000) + 4.96%($3,950,000/$15,550,000)(1 − 0.39) WACC = 9.27% Project return = 9.27% + 2.2% Project return = 11.47% NPV = −$2,360,000 + $616,000(PVIFA11.47%,6) NPV = $211,451
Gulf Shores Inn is comparing two separate capital structures. The first structure consists of 290,000 shares of stock and no debt. The second structure consists of 240,000 shares of stock and $1.70 million of debt. What is the price per share of equity?
$34.00 290,000X = 240,000X + $1,700,000 X = $34.00
Alpha Industries is considering a project with an initial cost of $8.4 million. The project will produce cash inflows of $1.56 million per year for 8 years. The project has the same risk as the firm. The firm has a pretax cost of debt of 5.49 percent and a cost of equity of 11.19 percent. The debt-equity ratio is .56 and the tax rate is 40 percent. What is the net present value of the project?
$445,055 WACC = (1/1.56)(11.19) + (.56/1.56)(5.49%)(1 − .40) WACC = 8.36% NPV = −$8,400,000 + $1,560,000(PVIFA8.36%,8) NPV = $445,055
A company has 370,000 shares outstanding that sell for $87.88 per share. The company plans a 3-for-2 stock split. Assuming no market imperfections or tax effects, what will the stock price be after the split?
$58.59 New share price = $87.88(2/3) New share price = $58.59
You purchased Butterfly Wing Corp. stock exactly one year ago at a price of $77.95 per share. Over the past year, the stock paid dividends of $2.98 per share. Today, you sold your stock and earned a total return of 15.95 percent. What was the price at which you sold the stock?
$87.40 Dividend yield = $2.98/$77.95 Dividend yield = .0382, or 3.82% Capital gains yield = 15.95% − 3.82% Capital gains yield = 12.13% Ending price = $77.95(1 + .1213) Ending price = $87.40
A company has declared a dividend of $6.65 per share on its stock. Capital gains are not taxed. Suppose the IRS has issued a new regulation that requires taxes of 20 percent be withheld at the time the dividend is paid. The stock currently sells for $103.85 per share. What will the ex-dividend price be?
$98.53 Aftertax dividend = $6.65(1 − .20) Aftertax dividend = $5.32 Ex-dividend price = $103.85 − 5.32 Ex-dividend price = $98.53
If the economy booms, RTF, Inc., stock is expected to return 10 percent. If the economy goes into a recessionary period, then RTF is expected to only return 3 percent. The probability of a boom is 65 percent while the probability of a recession is 35 percent. What is the variance of the returns on RTF, Inc., stock?
.001115 E(R) = .65(.10) + .35(.03) E(R) = .0755 σ2 = .65(.10 - .0755)^2 + .35(.03 - .0755)^2 σ2 = .000390 + .000725 σ2 = .001115
Based on the following information, what is the variance? Recession: Probability of state of economy .21, Rate of return -8.90% Normal: Probability of state of economy .48, Rate of return 10.40% Boom: Probability of state of economy .31, Rate of return 21.40%
.01153 E(R) = .21(−.089) + .48(.104) + .31(.214) E(R) = .0976, or 9.76% σ2 = .21(−.089 − .0976)^2 + .48(.104 − .0976)^2 + .31(.214 − .0976)^2 σ2 = .01153
Based on the following information, what is the variance? Recession: Probability of state of economy .22, Rate of return -9.00% Normal: Probability of state of economy .47, Rate of return 10.50% Boom: Probability of state of economy .31, Rate of return 21.50%
.01204 E(R) = .22(−.090) + .47(.105) + .31(.215) E(R) = .0962, or 9.62% σ2 = .22(−.090 − .0962)^2 + .47(.105 − .0962)^2 + .31(.215 − .0962)^2 σ2 = .01204
Given a normal distribution, assume you want to earn a rate of return that plots more than three standard deviations above the mean. What is your probability of earning such a return in any one year?
.14 percent or less
You own 430 shares of Stock X at a price of $43 per share, 300 shares of Stock Y at a price of $66 per share, and 365 shares of Stock Z at a price of $89 per share. What is the portfolio weight of Stock Y?
.2798 Weight of Y = 300($66)/[430($43) + 300($66) + 365($89)] Weight of Y = .2798
Kim's Bridal Shoppe has 11,600 shares of common stock outstanding at a price of $50 per share. It also has 285 shares of preferred stock outstanding at a price of $92 per share. There are 320 bonds outstanding that have a coupon rate of 6.9 percent paid semiannually. The bonds mature in 31 years, have a face value of $2,000, and sell at 109 percent of par. What is the capital structure weight of the common stock?
.4448 Common stock: 11,600 × $50 = $580,000 Preferred stock: 285 × $92 = 26,220 Debt: 320 × $2,000 × 1.09 = 697,600 Total value: $1,303,820 XE = $580,000/$1,303,820 XE = .4448
Kountry Kitchen has a cost of equity of 11.3 percent, a pretax cost of debt of 5.9 percent, and the tax rate is 40 percent. If the company's WACC is 8.80 percent, what is its debt-equity ratio?
.48 WACC = .0880 = (1 − XD)(.113) + (XD)(.059)(1 − .40) XD = .3222 D/E = .3222/(1 − .3222) D/E = .48
Here I Sit Sofas has 7,000 shares of common stock outstanding at a price of $93 per share. There are 560 bonds that mature in 29 years with a coupon rate of 6.7 percent paid semiannually. The bonds have a par value of $2,000 each and sell at 108 percent of par. The company also has 5,900 shares of preferred stock outstanding at a price of $46 per share. What is the capital structure weight of the debt?
.5674 Common stock: 7,000 × $93 = $651,000 Preferred stock: 5,900 × $46 = $271,400 Debt: 560 × $2,000 × 1.08 = $1,209,600 Total value: $2,132,000 XD = $1,209,600/$2,132,000 XD = .5674
What is the beta of a portfolio comprised of the following securities? Stock A: Amount Invested $5,000, Security Beta 1.64 Stock B: Amount Invested $6,000, Security Beta 1.75 Stock C: Amount Invested $8,500, Security Beta 1.00
1.395 Portfolio value = $5,000 + 6,000 + 8,500 Portfolio value = $19,500 βPortfolio = 1.64($5,000/$19,500) + 1.75($6,000/$19,500) + 1.00($8,500/$19,500) βPortfolio = 1.395
The stock of Big Joe's has a beta of 1.64 and an expected return of 13.30 percent. The risk-free rate of return is 5.8 percent. What is the expected return on the market?
10.37% E(R) = .133 = .058 + 1.64[E(RM) − .058] .075 = 1.64[E(RM) − .058] E(RM) = .1037, or 10.37%
You have a portfolio that is 34 percent invested in Stock R, 20 percent invested in Stock S, with the remainder in Stock T. The expected return on these stocks is 9.3 percent, 10.7 percent, and 13.0 percent, respectively. What is the expected return on the portfolio?
11.28% Portfolio expected return = .34(9.3%) + .20(10.7%) + (1 - .34 − .20)(13%) Portfolio expected return = 11.28%
Judy's Boutique just paid an annual dividend of $3.25 on its common stock. The firm increases its dividend by 3.80 percent annually. What is the company's cost of equity if the current stock price is $42.04 per share?
11.82% RE = [($3.25(1.0380)/$42.04] + .0380 RE = .1182, or 11.82%
Southwest Sands currently has 20,000 shares of stock outstanding. It is considering issuing $116,000 of debt at an interest rate of 7.1 percent. The break-even level of EBIT between these two capital structure options is $70,000. How many shares of stock will be repurchased if the company undergoes the recapitalization? Ignore taxes.
2,353.14 shares $70,000/20,000 = [$70,000 − 116,000(.071)]/X X = 17,646.86 shares Shares repurchased = 20,000 − 17,646.86 Shares repurchased = 2,353.14 shares
You purchased 470 shares of Barden Enterprises stock for $53.57 per share at the beginning of the year. The stock is currently priced at $55.62 per share. What is your dividend yield if you received total dividends of $717 over the year?
2.85% Dividend yield = ($717.00/470)/$53.57 Dividend yield = .0285, or 2.85%
Great Lakes Packing has two bond issues outstanding. The first issue has a coupon rate of 3.86 percent, a par value of $2,000 per bond, matures in 6 years, has a total face value of $5.4 million, and is quoted at 103 percent of face value. The second issue has a coupon rate of 6.63 percent, a par value of $1,000 per bond, matures in 18 years, has a total face value of $9.7 million, and is quoted at 106 percent of face value. Both bonds pay interest semiannually. The company's tax rate is 40 percent. What is the firm's weighted average aftertax cost of debt?
3.06% Market value of debt = 1.03($5,400,000) + 1.06($9,700,000) Market value of debt = $5,562,000 + 10,282,000 Market value of debt = $15,844,000 YTM Bond 1 $(expression error) = $38.60{1 − [1/(1 + R)^12]} / R + $2,000 / R^12 R = .0165 YTM = 3.30% YTM Bond 2 $(expression error) = $33.15{1 − [1/(1 + R)^36]} / R + $1,000 / R^36 R = .0304 YTM = 6.08% Aftertax cost of debt = [3.30%($5,562,000/$15,844,000) + 6.08%($10,282,000/$15,844,000)](1 − .40) Aftertax cost of debt = 3.06%
Mojo Mining has a bond outstanding that sells for $1,061 and matures in 25 years. The bond pays semiannual coupons and has a coupon rate of 6.1 percent. The par value is $1,000. If the company's tax rate is 39 percent, what is the aftertax cost of debt?
3.44% $1,061 = $30.50{1 − [1/(1 + R)^50]}/R + $1,000/R^50 R = .0282, or 2.82% YTM = 2.82% × 2 YTM = 5.64% RD = 5.64%(1 − .39) RD = 3.44%
You purchased a stock at a price of $41.44. The stock paid a dividend of $1.51 per share and the stock price at the end of the year is $46.99. What was the dividend yield?
3.64% Dividend yield = $1.51/$41.44 Dividend yield = .0364, or 3.64%
Timothy owns 620 shares of Countess Corp., which is priced at $13.69 per share. The company plans a 3-for-5 reverse stock split. How many shares will Timothy own and what will the share price be after the reverse stock split?
372; $22.82 New shares = 620(3/5) New shares = 372 shares New price = $13.69(5/3) New price = $22.82
The Greenbriar is an all-equity firm with a total market value of $557,000 and 21,900 shares of stock outstanding. Management is considering issuing $161,000 of debt at an interest rate of 6 percent and using the proceeds on a stock repurchase. Ignore taxes. How many shares will the firm repurchase if it issues the debt securities?
6,330 shares Shares repurchased = $161,000/($557,000/21,900) Shares repurchased = 6,330 shares
The expected return on HiLo stock is 15.35 percent while the expected return on the market is 12.4 percent. The beta of HiLo is 1.49. What is the risk-free rate of return?
6.38% E(R) = .1535 = Rf + 1.49[.124 − Rf] .1535 = Rf + .1848 − 1.49Rf .49Rf = .0313 Rf = .0638, or 6.38%
Robinson's has 24,000 shares of stock outstanding with a par value of $1 per share and a market price of $40 a share. The balance sheet shows $24,000 in the common stock account, $430,000 in the paid in surplus account, and $360,000 in the retained earnings account. The firm just announced a 3-for-1 stock split. How many shares of stock will be outstanding after the split?
72,000 shares New number of shares outstanding = 24,000(3/1) New number of shares outstanding = 72,000 shares
A firm has a market value equal to its book value. Currently, the firm has excess cash of $600 and other assets of $5,800. Equity is worth $6,400. The firm has 800 shares of stock outstanding and net income of $1,550. The firm has decided to spend all of its excess cash on a share repurchase program. How many shares of stock will be outstanding after the stock repurchase is completed?
725 shares Market value per share = Book value per share = $6,400/800 shares Market value per share = $8 Number of shares repurchased = $600/$8 per share Number of shares repurchased = 75 shares Number of shares outstanding after the repurchase = 800 − 75 Number of shares outstanding after the repurchase = 725 shares
Weiland, Inc., has 250,000 shares outstanding that sell for $75 per share. The company plans a 3-for-1 stock split. How many shares will be outstanding after the split?
750,000 shares New shares outstanding = 250,000(3/1) New shares outstanding = 750,000 shares
A firm has a cost of debt of 5.5 percent and a cost of equity of 14.7 percent. The debt-equity ratio is 1.17. There are no taxes. What is the firm's weighted average cost of capital?
9.74% WACC = .147(1/2.17) + .055(1.17/2.17) WACC = .0974, or 9.74%
What value should you assign as the flotation cost of internally generated equity financing?
A cost of zero
Which one of the following would tend to indicate that a portfolio is being effectively diversified?
A decrease in the portfolio standard deviation
Which one of the following statements is correct concerning market efficiency?
A firm will generally receive a fair price when it sells shares of stock in an efficient market
Which one of the following represents an indirect cost of financial distress?
A firm's supplier requiring payment in cash rather than offering its normal credit terms
Which one of the following statements concerning bankruptcy is correct?
An indirect cost of bankruptcy is the loss of key employees
The return earned in a typical year during a multiyear period is called the __________ average return.
Arithmetic
The fact that interest payments on debt are tax deductible is a key factor in which of the following propositions?
Both MM Proposition I and II with taxes
Which one of the following statements is correct regarding various types of investors?
Corporations can exclude at least 70 percent of their dividend income from taxes
Which one of the following measures will produce an acceptable estimate of the value of the market risk premium?
Dividend yield of the S&P 500 plus Consensus forecast of future dividend growth minus U.S. Treasury bill rate
Which one of these statements is correct?
Financial leverage refers to a firm's use of debt and its related fixed costs of finance
The average annual compound return earned per year over a multiyear period is called the __________ average return.
Geometric
The beta of a firm is more likely to be high under which two conditions?
High cyclical business activity and high operating leverage
The portfolio expected return considers which of the following factors? I. The amount of money currently invested in each individual security II. Various levels of economic activity III. The performance of each stock given various economic scenarios IV. The probability of various states of the economy occurring
I, II, III, and IV only
Which of the following tend to keep dividends low? I. Potential for companies to use excess cash on negative NPV projects II. Restrictive terms contained in bond indenture agreements III. Manager's desire to maintain constant dividends over time IV. Flotation costs
II, III, and IV only
Which of the following are the two primary advantages of CAPM? I. Simplicity II. Absence of estimation error III. Applicability to both dividend and non-dividend paying firms IV. Explicit adjustment for risk
III and IV
Which one of the following statements is correct?
If individuals pay a higher cost to borrow than corporations do, then corporations can increase firm value by borrowing
Which one of the following is true?
Investors will generally view an increase in leverage as a positive sign of the firm's value
Which one of the following statements is correct?
Irrationality may be related across investors
Donald Keim's research presents evidence that the difference in performance between small capitalization stocks and large capitalization stocks is largest in the month of:
January
Which one of the following proposes that the value of a levered firm exceeds the value of an unlevered firm by the present value of the tax shield?
MM Proposition I with tax
Which one of the following presents the idea that the cost of equity is a positive linear function of capital structure?
MM Proposition II without taxes
A symmetric, bell-shaped frequency distribution that is completely defined by its mean and standard deviation is the __________ distribution.
Normal
The geometric average is probably best applied to __________ performance.
Past
How frequently do dividend-paying firms in the United States generally pay regular cash dividends?
Quarterly
The formula associated with MM Proposition II without taxes is:
RS = R0 + (B/S)(R0 − RB)
If R0 exceeds RB then:
RS increases with leverage
The hypothesis that market prices reflect all publicly available information is called __________ form efficiency.
Semistrong
Your friend works in the finance department at Sedum Corporation. You are aware that this friend trades Sedum stock based on information she overhears in the office. You also know that this information is not known to the general public. Your friend continually brags to you about the profits she earns trading Sedum stock. Based on this information, you would tend to argue that the financial markets are at best __________ form efficient.
Semistrong
Assume Stocks A and B have had identical stock prices every day for the past three years. Stock A pays a dividend but Stock B does not. Which one of these statements applies to these stocks for the last three years?
Stock A's total return has been higher than Stock B's every year
Which one of the following stocks is correctly priced if the risk-free rate of return is 4.0 percent and the market risk premium is 8.5 percent? Stock A: Beta .79, Expected Return 12.30% Stock B: Beta 1.56, Expected Return 17.26% Stock C: Beta 1.37, Expected Return 11.34% Stock D: Beta 1.35, Expected Return 16.68% Stock E: Beta .95, Expected Return 8.65%
Stock B E(RA): = .040 + .79(.085) = .1071, or 10.71% Stock A is underpriced. E(RB): = .040 + 1.56(.085) = .1726, or 17.26% Stock B is correctly priced. E(RC): = .040 + 1.37(.085) = .1565, or 15.64% Stock C is overpriced. E(RD): = .040 + 1.35(.085) = .1547, or 15.47% Stock D is underpriced. E(RE): = .040 + .95(.085) = .1207, or 12.07% Stock E is overpriced.
Which one of the following actions increases a firm's number of shares outstanding without changing its owners' equity?
Stock split
Over the long-term, which one of the following is a correct statement concerning risk premium?
Stocks tend to have a higher risk premium than bonds
Consider the pie models of capital structure. For any given firm, in the presence of taxes, what is the difference between the all-equity pie and the levered pie?
Taxes eat a slice of both pies but take a larger slice of the all-equity pie
Which one of the following is a finding of Ritter's study of initial public offerings (IPOs)?
The annual returns for IPO firms during the 5-year period following an IPO are about two percent lower than their control group
The terminal value of a company is based on which one of these assumptions?
The cash flows will increase in the future at a constant perpetual rate
A portfolio consists of five securities that have individual betas of 1.72, .67, 1.37, 1.53, and .49. You do not know the portfolio weight of each security. What do you know with certainty?
The portfolio beta will be less than 1.72 and greater than .49.
The market price of The Harvind Company's stock is most apt to be affected by which one of these events?
The sudden death of Harvind's CEO
Which one of the following statements is correct?
The value of a firm's marketed claims can change with changes in the firm's capital structure
In an EPS-EBI graphical relationship, the debt line and the no debt line intersect. Which one of the following is true at the intersection point?
There is no advantage or disadvantage to debt
If you want to receive the recently declared dividend on Motiwala stock, you must purchase your shares __________ or more business day(s) prior to the date of record.
Three
Which one of the following types of securities has tended to produce the lowest real rate of return for the period 1926-2018?
U.S. Treasury bills
Which one of these statements correctly reflects historical history for the period 1926-2018?
U.S. Treasury bills have had a positive rate of return every single year
Which statement is true?
Unanticipated changes in dividends can affect stock prices
Which one of the following measures the squared deviations of actual returns from expected returns?
Variance
The optimal capital structure will tend to include more debt for firms with:
a lower probability of financial distress
In an event study, the abnormal return is described as the:
actual return on a security minus the market rate of return on the same date
Conflicts of interest between stockholders and bondholders are known as:
agency costs
The argument that selling stock involves too much leeway is the:
behavioral finance argument in favor of high dividends
Systematic risk is measured by:
beta
Unsystematic risk:
can be effectively eliminated through portfolio diversification
A fixed repurchase strategy:
can force firms into making negative NPV investments
If all clientele groups are currently satisfied, then:
changes in a single company's dividend policy will have no effect on the company's market value
The beta of a security provides an estimate of the:
characteristic line for the security
Litner's model supports the belief that:
corporations smooth dividends
To calculate beta, you divide the __________ of the stock with the market portfolio by the __________ of the market portfolio.
covariance; variance
The correlation between stocks A and B is equal to the:
covarianceAB divided by the product of the standard deviations of A and B
The date on which the firm mails out its declared dividends is called the:
date of payment
The optimal capital structure has been achieved when the:
debt-equity ratio selected results in the lowest possible weighted average cost of capital
If you examine the U.S. stock market risk premium by extending the 1926-2018 time period backwards in time to 1802 (given the available information), the risk premium:
decreases to 5.2 percent
Payments made by a firm to its owners from sources other than current or accumulated earnings are called:
distributions
The efficient market hypothesis says that, on average, professional investors will:
earn a normal rate of return
The research done by Ikenberry, Lakonishok, and Vermaelen supports the argument that managers:
effectively time stock repurchases
Hugo anticipates earning a rate of return of 13.2 percent on his portfolio next year. The 13.2 percent is referred to as the:
expected return
A firm that has a negative net worth is said to be:
experiencing accounting insolvency
The explicit and implicit costs associated with corporate default are referred to as the __________ costs of a firm.
financial distress
If markets are strong form efficient, event studies should show that new information affects a related stock's price:
for a single day
MM Proposition II with taxes:
has the same general implications as MM Proposition II without taxes
The cause of the October 19, 1987 stock market crash:
has yet to be determined
If the financial markets are efficient, then investors should expect their investments in those markets to:
have zero net present values
If the market is fully efficient, an announcement by a firm of a new product with a large positive net present value will cause the market price of that firm's stock to:
immediately increase to a new level equivalent to the increased value of the firm
The optimal debt-equity ratio tends to:
increase when agency costs of equity exist
The use of leverage by a firm:
increases shareholder risk
The free cash flow hypothesis supports:
increasing the debt portion of a firm's capital structure to increase firm value
The costs of avoiding a bankruptcy filing by a financially distressed firm are classified as __________ costs.
indirect bankruptcy
MM Proposition I, without taxes, assumes that:
individuals and corporations can borrow at the same rate
If an investor can earn above average returns based on historical information, the stock market is at best:
inefficient
The cost of preferred stock:
is equal to the annual dividend divided by the present value of all the future dividend payments
The expected return on a portfolio:
is limited by the returns on the individual securities within the portfolio
A valuable firm will tend to:
issue more debt than a less valuable firm of comparable size
In principle, a firm becomes bankrupt when:
its equity value falls to zero
A cash payment made by a firm to its owners when some of the firm's assets are sold off is called a(n):
liquidating dividend
Shareholders value firms based on their:
market values
The optimal capital structure of a firm __________ the marketed claims and __________ the nonmarketed claims against the cash flows of the firm.
maximizes; minimizes
If a stock portfolio is well diversified, then the portfolio variance:
may be less than the variance of the least risky stock in the portfolio
A firm's capital structure refers to the:
mix of debt and equity used to finance the firm's assets
Representativeness, according to financial economists, leads to:
overreactions in stock returns
If you have data for both the returns on a security and the returns on the market, you can estimate beta using:
regression analysis
A legal attempt to financially restructure a failing firm so that it can continue operating as a going concern is called a:
reorganization
The use of WACC as the discount rate when evaluating a project is acceptable when the:
risk of the project is equal to the company's overall level of risk
The histograms of the returns on large-company and small-company stocks for the period 1926-2018 show that:
small-company stocks are more volatile than large-company stocks
If behavioral finance holds, it implies:
some investors are irrational some of the time
The risk premium is computed by __________ the average rate of return for an investment.
subtracting the average return on U.S. Treasury bills from
The market risk premium is computed by:
subtracting the risk-free rate of return from the market rate of return
The weights used in the computation of a project's flotation costs should be based on the:
the company's target debt-to-equity ratio
The interest tax shield is a key reason why:
the net cost of debt to a firm is generally less than the cost of equity
In a reverse stock split:
the number of shares outstanding decreases but owners' equity is unchanged
The capital gains yield plus the dividend yield on a security is called the:
total return
Corporations in the U.S. tend to:
underutilize debt
Tires and More is a levered company providing automobile supplies through its retail outlets. The company is considering expanding into electric scooter sales. Since this is an entirely new venture, the company should:
use the pure play approach to assign a discount rate to the project
The average squared difference between the actual return and the average return is called the:
variance
The value of a firm is maximized when the:
weighted average cost of capital is minimized
Shareholders are more apt to prefer a high dividend payout if a firm:
will spend the funds on a high-premium acquisition if the dividend is not paid
The optimal capital structure of a firm:
will vary over time as taxes and market conditions change
An asset has an average return of 11.27 percent and a standard deviation of 22.95 percent. What is the most you should expect to lose in any given year with a probability of 16 percent?
−11.68% Maximum loss = 11.27% − 22.95% Maximum loss = −11.68%
An asset has an average return of 10.61 percent and a standard deviation of 22.62 percent. What is the most you should expect to lose in any given year with a probability of 16 percent?
−12.01% Maximum loss = 10.61% − 22.62% Maximum loss = −12.01%
An asset has an average return of 10.55 percent and a standard deviation of 23.01 percent. What is the most you should expect to lose in any given year with a probability of 2.5 percent?
−35.47% Maximum loss = 10.55% − (2 × 23.01%) Maximum loss = −35.47%