FNAN 522 Midterm

John and Peggy would like to buy a house. They have looked at their budget and determined that they can afford a maximum monthly mortgage payment of $1,100. Interest rates on 30-year, fixed-rate mortgages current a nominal annual interest rate of 7 percent with monthly compounding (payments due at the end of each month). Given these loan terms, what is the maximum amount John and Peggy borrow today to purchase a house and not exceed a monthly payment of $1,100 on the loan? Round to the nearest dollar.

$165,338

A company makes an initial $100,000 investment in a project. This project is projected to earn $80,000 in year one, $100,000 in year 2, $120,000 in year 3, and $200,000 in year 4. If the WACC is 10%, what is the project's present value? Round to the nearest dollar.

$282,132

An investment portfolio has a 20% chance of earning $125,000 in a year, a 50% chance of earning $50,000, a 15% chance of earning nothing and a 15% chance of losing $20,000. What is the expected return?

$47,000

What will $250,000 grow to be in 11 years if it is invested today in an account with an annual interest rate of 6%?

$474,574.64

Under the capital asset pricing model (CAPM), which of the following beta values is considered the most risky?

a. A beta between 0 and 1 b. A beta between 0 and 1 c. A beta above 1 d. A beta equal to 0 ANSWER: C. A beta above 1

A company has retained earnings of $2 million and net income of $10 million. What is the retention ratio (expressed as a decimal)?

.20

You are offered a loan with a quoted annual interest rate of 13% with monthly compounding of interest. What is your effective annual interest rate?

13.80%

Suppose the current risk free rate is 2%. The market rate of return is 10% and the company has a beta of 1.5. What is the company's expected rate of return?

14%

Over a period of three days, a company stock increased by 6%, decreased by 3%, then increased by 9%. During that same period, the Dow Jones increased by 2%, decreased by 1%, and then increased by 3%. What is the company's beta?

3

A company is thinking of issuing more common stock. Its stock's current market price is $100 a share with an expected annual dividend one year from today of $3 a share. Dividends are expected to grow 2% per year and there are no flotation costs. What is the company cost of new common stock?

5.00%

A portfolio is composed of 40% stock, 20% bonds, and 40% mutual funds. The stock is expected to have a 8% return, the bonds a 4% return and the mutual funds a 6% return. What is the expected return of the portfolio?

6.4%

Approximately how many years will it take for $36,000 to grow to be $68,000 if it is invested in an account interest rate of 8%? Choose the closest answer.

8 years.

Suppose that a company has total financing where 30% comes from bonds, 10% comes from a loan, and 60% from shareholder equity. The bonds pay on average a 7% after-tax interest rate, the loan has a 6% after-tax interest rate, and shareholders require a 12% return. What is the weighted average cost of capital equal to?

9.90%

A portfolio is composed of 60% stock and 40% bonds. The variance of stock is 160 and the variance of the bonds is 120. The covariance is 40. What is the portfolio's variance?

96

A company needs to raise cash to cover its operating expenses. The company will only need the funds for a short period of time. What financial market is the most appropriate for the company to use to raise money (that is, likely the lowest cost and best-matched maturity)?

A. Money market. B. Capital Market C. Derivative market D. All of the above Answer: A MONEY MARKET

A company's security is priced above the security market line. Which of the following statements regarding that security is true?

a. All of these answers. b. This isn't an attractive market situation for a potential investor looking to purchase the security. c. This is not an attractive market situation for the company issuing the security. d. The security is fairly priced for the amount of expected return. ANSWER: C. This is not an attractive market situation for the COMPANY issuing the security.

Which of the following occurred during the financial crisis of 2007-2008?

a. All of these answers. b. Several major institutions failed or were subject to government takeover. c. A currency crisis, with investors transferring their wealth to countries with stronger currencies. d. Significant declines in consumer wealth and prolonged unemployment. ANSWER: A. All of these answers.

A relatively new tech company issues a bond that is publicly traded. The company is based in the US and pays interest in dollars. The potential investor lives in the UK. Which of the following risks does the investor face if he buys the bond?

a. Market risk. b. All of these answers. c. Foreign investment risk. d. Credit risk. ANSWERS: b. All of these answers.

Which of the following is a source of agency costs in an organization?

a. Parties associates with the organization have different risk preferences. b. The people who make the day-to-day decisions are not the owners. c. All of these answers. d. The managers of the organization have different objectives than the other shareholders. ANSWER: c. All of these answers.

Which of the following explains the differences between a company's required return and its cost of capital?

a. Required return is from the company's perspective; cost of capital from the investor's. b. Required return measures business risk; cost of capital measures financial risk. c. Required return measures financial risk; cost of capital measures business risk. d. Required return is from the investor's perspective; cost of capital from the company's. ANSWER: d. Required return is from the investor's perspective; cost of capital from the company's.

The most common measure of risk in finance is the:

a. Standard Outcome b. Standard Deviation c. Expected Deviation d. Expected Outcome ANSWER: b. Standard Deviation

Which of the following statements regarding the Security Market Line (SML) is true?

a. The SML graphs unsystematic risk b. The slope of the SML is equal to the market risk premium and reflects the risk-return trade off. c. All of these answers. d. The x-intercept of the SML is equal to the risk-free interest rate. ANSWER. B. The slode of the SML is equal to the market risk premium and reflects the risk-return trade off.

Which of the following is NOT an element in the bond yield plus risk premium approach?

a. The benchmark bond's internal rate of return. b. The future cash flows from the benchmark bond. c. The company's CAPM. d. The current yield on U.S. Treasury Bond. ANSWER. c. The company's CAPM.

Which of the following is a problem associated with using the weighted average cost of capital?

a. The calculation is not exact as at least one component is an estimate. b. All of these answers. c. It may be difficult to find a risk-free rate that corresponds to the investment being analyzed. d. WACC will vary for the same business based on which method you use. ANSWER: b. All of these answers.

Which of the following is an accurate characteristic of a sole proprietorship?

a. The owner is personally liable for the business's debt and obligations. b. There is more than one answer. c. A sole proprietorship typically elects board members for staggered terms. d. The owner must file for a separate tax return for the business. ANSWER: a. The owner is personally liable for the business's debt and obligations.

The average cost of capital is:

a. The same for all companies. b. fixed through time c. a benchmark for accepting or rejecting projects. d. all of these. ANSWER: C. a benchmark for accepting or rejecting projects.

What is the primary goal of the Sarbanes-Oxley act according to the Module 1 video-"The Goal of Financial Management"?

a. To protect investors from corporate abuse. b. To help maintain a primary bull market. c. To protect corporate executives from frivolous shareholder lawsuits. d. To prevent a secular bear market. ANSWER: a. To protect investors from corporate abuse.

Which of the following accurately describes unsystemic risk?

a. Unsystemic risk is correlated to investing in only one company or security. b. A company losing a lawsuit which creates a massive legal liability is an example of unsystemic risk. c. Unsystemic risk can be diversified away. D. All of these answers. ANSWER: D. All of these answers.

In order to compute the statistical values in the capital asset pricing model (CAPM), you need information over time about:

a. an overall stock market rate of return. b. a companyf??s rate of return. c. a rate of return from a risk-free rate asset (like the 90-day U.S. Treasury bill rate). d. The rate of return of a risk-free asset, the overall stock market return, and a company's rate of return. ANSWER: d. The rate of return of a risk-free asset, the overall stock market return, and a company's rate of return.

Which of the following terms describes the protection of personal assets stemming from the corporate structure?

a. simple transference b. double taxation c. articles of incorporation d. limited liability ANSWER: D. Limited Liability