quiz 2 BCOR 370

When calculating CAPM, what do we use in place of the risk-free rate?

. 10-year Treasury Bond Return

Price-to-Earnings ratio is often used to gauge the relative cost of one stock to another with respect to earnings. The average P-to-E (or P/E) is 15 to 25 for most companies in the market. If a company is trading with a P/E of 85, should you buy the stock?

. Provided other shares in the market are still trading at the average P/E, this company's stock is relatively expensive and should not be bought at this time unless there is some reason to rationalize such a price multiple (such as large expected sales growth in the future)

A(n)________would be an example of a principal, while a(n)__________would be an example of an agent.

. shareholder; manager

If over the past few years, the price of houses has been increasing at an annual rate of 7 percent nationally, how many years will it take for costs to double at this rate?

10.286 72/7=10.286

Avril Giangrosso's grandmother will cut a check worth $11,920.00 every quarter for 12 years. How much is this cash flow worth to them today if the payments begin today? Assume a discount rate of 5.00%.

11,920.00[1−(1+ 0.054)^(−(12)(4))/ 0.05/4]×(1+0.05/4)=433,657.04

Hilde Sprouls will receive an annuity of $13,270.00 every quarter for 10 years. How much is this cash flow worth to them today? Assume a discount rate of 2.00%.

13270(1-(1+.02/4)^(-10 X 4)/ 0.02/4=480005.46 rate= 2/4 NPER= 10 X 4

A share of stock just recently released a dividend for $0.71 per share, given an expected dividend growth rate of 1.20%, and a discount rate of 19.60%, what is the price per share of the stock?

$3.90 0.71 X (1+.012)/ (.196-.012)

Dina Panchana has a portfolio of 5 stocks. Xhe currently has 14.00% of ihr portfolio invested in (Duke Energy) in the Electric Utilities sector, 16.40% in (Capital One Financial) in the Consumer Finance sector, 14.90% in (DTE Energy Co.) in the Multi-Utilities sector, 14.80% in (Macy's Inc.) in the Department Stores sector, 39.90% in (Welltower Inc.) in the Health Care REITs sector. They have expected returns of: 17.50%, 16.45%, 5.05%, 15.33%, 10.98% respectively—what is the expected return on the portfolio?

(14.00%)(17.50%)+(16.40%)(16.45\%)+(14.90\%)(5.05\%)+\\(14.80\%)(15.33\%)+\\(39.90\%)(10.98\%)\\=12.55\%$$

What is the difference between (i) APR and (ii) EAR?

(i)based on simple interest; (ii) takes compound interest into account

in an account Sophia Pellon currently has $38,580.00. At a rate of 2.00% how long will it take for them to have $90,270.00 assuming semi-annually compounding? (Hint: compute the exact years, do not use rule of 70/72)

(ln(90270/38580)/ (ln (1+0.02/2)) (1/2)= 47.72 years

It is often the case that the yield curve inverts and portends a recession in the United States of America: however, which of the following is not true with respect to the yield curve? (Select all that are true, could be more than one)

-The yield curve always correctly predicts a recession in the case of inversion—it has never been wrong. -The yield curve shows the real-rate of interest in the US across various maturities

You are comparing two savings accounts. Account A has an APR of 4.65 percent and an EAR of 4.75 percent. Account B has an APR of 4.70 percent and an EAR of 4.70 percent. Given this, you should invest in account:

A because it has the higher EAR.

Which of the following enjoys limited liability? (check all that apply)

A limited partnership d. A C-Corporation

A mortgage is:

A type of loan from a bank or another institution that helps a borrower purchase a real estate asset, usually a home.

paying accounts payable with cash will result in:

All of above

What is incorrect about the capital markets?

All securities earn the same amount of return.

paying accounts payable with cash will result in: a. Decrease in current asset b. Decrease in current liability c. Increase in equity-to-assets ratio d. All of above

All the above

Calculating net worth of a person requires:

Assets and Liabilities

You are eyeing an investment in a corporate bond which has a YTM of 10.43%, and a stated rate of interest of 13.66% with a maturity of 20 years. What is the price of this bond?

Bond price=

What is the order of who gets paid first during a corporate liquidation?

Bondholders, preferred stockholders, common stockholders

Ehiginator Inc., 's current balance sheet shows total common equity of $4,090,344.00. The company has 390,000.00 shares of stock outstanding, and they sell at a price of $12.80 per share. By how much do the firm's book value and market value per share differ? (Round your intermediate and final answer to two decimal places.)

Book Value per share = total common equity / shares outstanding books value- price 4090344/390000=10.48 10.48-12.80= -2.31

Which of the following would NOT improve the current ratio (CA/CL)?

Borrow short term to finance additional fixed assets.

Estimates of a firm's returns revealed that β of the firm was 1.4, and the historical average market return over the past 5 years has been 11.4%, and the current risk-free rate is 1.18%. What is the expected return of this stock based on the Capital Asset Pricing Model (CAPM).

CAPM= rf+B(rm-rf) 1.18%+1.4(11.4%-1.18%)

A corporation has preferred shares which pay a dividend of $0.96 per share every year, given an expected common stock dividend growth rate of 2.30%, and a discount rate of 24.80%, what is the price per share of the stock preferred stock?

D1/r .96/.2480= 3.87

Which of the following is NOT a cash outflow for the firm?

Depreciation

When using the Gordon Growth Model, we assume that:

Dividends grow constantly over time

A credit card has a rate of 7.00%. What is the Effective Annual Rate (EAR) given quarterly compounding?

EAR=(1+rm)^m −1= (1+0.074)^4−1=7.19%

Stocks A and B have the same price and are in equilibrium, but Stock A has the higher required rate of return. Which of the following statements is CORRECT?

If Stock A has a lower dividend yield than Stock B, then its expected capital gains yield must be higher than Stock B's.

When interest rates increase, the future value of $100 would: ?

Increase

Why is a dollar today worth more than a dollar in the future?

Inflation rates increase prices over time, which means that each dollar you own today will buy more in the present time than it will in the future.

Which of the following statements is CORRECT?

Operating income is derived from the firm's regular core business. Operating income is calculated as Revenues less Operating costs. Operating costs do not include interest or taxes.

Kala Gelston has a mortgage of $266,000.00 after making a down payment. The mortgage is for 30 years, assuming an interest rate of 7.00% and monthly compounding what is the payment (PMT) they will make each month?

PMT= 266000/1-(1+.07/12)^(-30 X 12)/ 0.07/12 1769.70

Which of the following has a secondary claim on profits, (usually) no voting rights, and is considered a 'hybrid' security due to its reasonably consistent payment of cash-flows in the form of a dividend?

Preferred Stock

A dividend is a form of cash flow for a?

Share of Common Stock

What is the major difference between compound and simple interest?

Simple interest is calculated on the principal amount of a loan while compound inter- est is computed on the principal amount and on the accumulated interest of previous periods.

What does the Efficient Market Hypothesis state?

Stock prices reflect all information, and the stock price is roughly equivalent to its fundamental value.

Amortizing a loan means:

To periodically pay off interest and outstanding principal through maturity.

What is the role of a Board of Directors in corporate management, and from where do directors obtain their power to make these decisions?

To provide oversight and, if necessary, termination of CEOs and other top-level manage- ment at corporations. They obtain their authority through ownership of shares which grants voting power to the directors through a process known as proxy.

A common valuation report investors use to make at-hand investment decisions in equities is the:

Value-Line Report

Retained earnings for the "base year" equals 100.0 percent. You must be looking at:

a common-size balance sheet.

Which of the following will increase a bond's yield to maturity (YTM)?

a. Higher inflation rate b. Higher likelihood of bond issuer's bankruptcy c. Lower bond liquidity All of the above

According to the Financial Accounting Standards Board (FASB), which of the following is a cash flow from a "financing" activity?

cash outflow to shareholders as dividends.

What is the most widespread type of credit that many consumers use in order to pay for everyday expenditures?

credit cards

Owners of common stock are eligible to receive regular distributions from the company's earnings. These dispensations, determined by the Board of Directors, are referred to as:

dividends.

Rent and vehicle insurance payments are examples of

fixed expenses

The pricing of stocks is heavily reliant on the relationship between risk and return. If Stock A's perceived level of risk increases, then we can assume that investors will expect to be compensated with:

higher returns.

A major advantage of the corporate form of organization is:

limited owner liability.

The long-run objective of financial management is to:

maximize the value of the firm's common stock in the long-run.

A stock that has a negative beta tends to:

move up when the market as a whole moves down.

The focal point of financial management in a firm is:

the creation of value for shareholders.

Market Risk Premium (or MRP) can be calculated as:

the difference between the expected market return and the risk-free rate.