cf final 23
Why is the ask price higher than the bid price?
it represents the gain a market maker achieves.
When calculating the weighted average cost of capital, weights are based on
market values
Which of the following is the concept and procedure for combining securities into a portfolio to minimize risk?
modern portfolio theory
Which of these is the process of estimating expected future cash flows of a project using only the relevant parts of the balance sheet and income statements?
pro forma analysis
An average of which of the following will give a fairly accurate estimate of what a project's beta will be?
proxy beta
Which of the following will directly impact the cost of equity?
stock price
With regard to depreciation, the time value of money concept tells us that
taking the depreciation expense sooner is always better.
With regard to depreciation, the time value of money concept tells us thatWith regard to depreciation, the time value of money concept tells us that
taking the depreciation expense sooner is always better.
A new project would require an immediate increase in raw materials in the amount of $3,000. The firm expects that accounts payable will automatically increase $1500. How much must the firm expect its investment in net working capital to change if they accept this project?
−$1,500
If on November 26, 2020, The Dow Jones Industrial Average closed at 12,743.40, which was down 237.44 that day. What was the return (in percent) of the stock market that day?
−1.83 percent
If the Japanese stock market bubble peaked at 37,500, and two and a half years later it had fallen to 25,900, what was the percentage decline?
−30.93 percent
Which of the following statements is correct?
None of these choices are correct.
Which of the following statements is correct?
Penny stocks are the stocks of small companies that are priced below $1 per share.
The line on a graph of return and risk (standard deviation) from the risk-free rate through the market portfolio is
capital market line.
As residual claimants, which of these investors claim any cash flows to the firm that remain after the firm pays all other claims?
common stockholders
Which of the following will directly impact the cost of debt?
coupon rate
Which of the following makes this a true statement: The shape of the efficient frontier implies that
diminishing returns apply to risk-taking in the investment world.
Which of the following is defined as the portion of total risk that is attributable to firm or industry factors and can be reduced through diversification?
firm specific risk
Which of these is used as a measure of the total amount of available cash flow from a project?
free cash flow
Which of the following will impact the cost of equity component in the weighted average cost of capital?
all of these choices are correct.
Sampson has researched GLE and wants to pay no more than $45 for the stock. Currently, GLE is trading in the market for $50. Sampson would be best served to:
buy using a limit order
Sampson has researched GLE and wants to pay no more than $45 for the stock. Currently, GLE is trading in the market for $50. Sampson would be best served to
buy using a limit order.
A new project would require an immediate increase in raw materials in the amount $6,000. The firm expects that accounts payable will automatically increase $2,000. How much must the firm expect its investment in net working capital to increase if they accept this project?
+$4,000
On December 2, 2022, the Dow Jones Industrial Average closed at $34,438, which was down $21 that day. What was the return of the stock market that day?
-0.06
The past five monthly returns for Kohl's are 5.1 percent, 2.11 percent, -0.75 percent, 8.25 percent, and -3.08 percent. What is the average monthly return?
2.326 Average Return = (5.1% + 2.11% - 0.75% + 8.25% - 3.08%) / 5 = 2.326%
The average annual return on the S&P 500 Index from 1986 to 1995 was 12.5 percent. The average annual T-bill yield during the same period was 3.5 percent. What was the market risk premium during these ten years?
9 12.5-3.5=9
Hastings Entertainment has a beta of 0.80. If the market return is expected to be 10 percent and the risk-free rate is 5 percent, what is Hastings' required return?
9 Hastings' required return = 5% + 0.80 x (10% - 5%) = 9%
You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck for $70,000. The truck falls into the MACRS three-year class, and it will be sold after three years for $5,000. Use of the truck will require an increase in NWC (spare parts inventory) of $10,000. The truck will have no effect on revenues, but it is expected to save the firm $32,000 per year in before-tax operating costs, mainly labor. The firm's marginal tax rate is 21 percent. What will the operating cash flow for this project be during year 2?
$31,814
KADS, Incorporated has spent $400,000 on research to develop a new computer game. The firm is planning to spend $250,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total $50,000. The machine has an expected life of three years, a $75,000 estimated resale value, and falls under the MACRS seven-year class life. Revenue from the new game is expected to be $500,000 per year, with costs of $200,000 per year. The firm has a tax rate of 21 percent, an opportunity cost of capital of 15 percent, and it expects net working capital to increase by $100,000 at the beginning of the project. What will the year 1 operating cash flow for this project be?
$246,003
Ultra Petroleum (UPL) has earnings per share of $2.35 and PIE of 50.55. What is the stock price?
$118.79 $50.55x ＄2.35= $118.79
Your firm needs a machine which costs $125,000 and requires $5,000 in maintenance for each year of its three-year life. After three years, this machine will be replaced. The machine falls into the MACRS three-year class life category. Assume a tax rate of 21 percent and a discount rate of 10 percent. If this machine can be sold for $15,000 at the end of year 3, what is the after-tax salvage value?
$13,795.13
You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck for $60,000. The truck falls into the MACRS three-year class, and it will be sold after three years for $14,000. Use of the truck will require an increase in NWC (spare parts inventory) of $3,000. The truck will have no effect on revenues, but it is expected to save the firm $20,000 per year in before-tax operating costs, mainly labor. The firm's marginal tax rate is 21 percent. What will the operating cash flow for this project be during year 3?
$17,666
Your firm needs a machine which costs $90,000 and requires $30,000 in maintenance for each year of its five-year life. After five years, this machine will be replaced. The machine falls into the MACRS five-year class life category. Assume a tax rate of 21 percent and a discount rate of 13 percent. What is the depreciation tax shield for this project in year 5?
$2,177.28
You have a portfolio with a beta of 0.35. What will be the new portfolio beta if you keep 75 percent of your money in the old portfolio and 25 percent in a stock with a beta of 0.65
0,425 New portfolio beta = (0.75 x 0.35) + (0.25 x 0.65) = 0.425
Rank the following three stocks by their level of total risk, highest to lowest. Rail Haul has an average return of 10 percent and standard deviation of 25 percent. The average retu Us are 12 percent and 35 percent.
1 Idol Staff 2 Poker-R-Us 3 Rail Haul
At your discount brokerage firm, it costs $75 per stock trade. How much money do you receive after selling 150 shares of Nokia Corporation (NOK), which trades at $10.5?
1,500 0 (1500 - 1500 ) ($10,5 x $150) - $75 = 1500
At the beginning of the month, you owned $6,500 of General Dynamics, $8,500 of Starbucks, and $8,000 of Nike. The monthly returns for General Dynamics, Starbucks, and Nike were 8. 44 percent, -0.36 percent, and -1.54 percent. What is your portfolio return?
1.71558 Total portfolio = $6,500 + $8,500 + $8,000 = $23,000 General Dynamics weight = $6,500 / $23,000 = 0.2826 Starbucks weight = $8, 500 / $23,000 = 0.3695 Nike weight = $8,000 / $23,000 = 0.347826 Portfolio return = (0.2826 x 8.44%) + (0.3695 × -0.36%) + (0.347826 × -1.54%) = 1.26% = 2.3851 - 0.13302 - 0.5365 = 1.71558%
Apple paid a $0.56 dividend. The dividend is expected to grow at 17.5 percent rate. At a current stock price of $34.10, what is the return shareholders are expecting?
11.02 0.56 x (1 + 0.175) = 0.658 ($0.658 / $34.1) / 0.175 = 11.02%
You own $5,000 of Software Corporation's stock that has a beta of 3.75. You also own $10,000 of Home Improvement Corporation (beta = 1.5) and $15,000 of Publishing Corporation (beta = 0.35). Assume that the market return will be 13 percent and the risk-free rate is 4.5 percent. What is the risk premium of the portfolio?
11.05 percent
At your discount brokerage firm, it costs $10.5 per stock trade. How much do you need to buy 300 shares of Microsoft, which trades at $40?
12010,5 ($40 x $300) + $10.5 = $12, 010.5
A company's current stock price is $65.40 and it is likely to pay a $2.25 dividend next year. Since analysts estimate the company will have an 11.25 percent growth rate, what is its expected return?
14.69 percent
A company's current stock price is $22.00 and its most recent dividend was $0.75 per share. Since analysts estimate the company will have a 12 percent growth rate, what is its expected return?
15.82 percent
ABC Incorporated has a dividend yield equal to 5 percent and is expected to grow at a 12 percent rate for the next seven years. What is ABC's required return?
17.0 percent
Your company is considering a project that will cost $100. The project will generate after-tax cash flows of $37.50 per year for five years. The WACC is 10 percent and the firm's D/A ratio is 0.70. The flotation cost for equity is 6 percent, the flotation cost for debt is 3 percent, and your firm does not plan on issuing any preferred stock within its capital structure. If your firm follows the practice of incorporating flotation costs into the project's initial investment, what is the weighted average flotation cost for the firm?
3.90 percent
a preferred d stock from Microsoft pays $7.5 in annual dividends. If the required return on the preferred is 2.3% what is the value of the stock?
326.086 7.5/0.023 = 326.086
An investor owns $7,000 of Adobe Systems stock, $6,000 of Dow Chemical, and $5,000 of Office Depot. What are the Dow Chemical weight in the portfolio?
33.33 0.03 (33.30 - 33.36 ) Total portfolio = $7,000 + $6,000 + $5,000 = $18,000 Adobe System weight = $7.000 / $18,000 = 0.3888 Dow Chemical weight = S6,000 / $18,000 = 0.3333
investment Return FedEx Corp stock ended the previous year at $105 45 per share. It paid a $0.25 per share dividend last year. It ended last year at $110.50. If you owned 200 s
5.026 Dollar Return = (Ending Value - Beginning Value) + Income = ($110.50 x 200) - ($105.45 x 200) + ($0.25 × 200) = $1060 = 22.100 - 21 090 + 50 = 1.060 Percentage Return = $1060 / ($105.45 x200) = 5..026%
Compute the expected return given these three economic states, their likelihoods, and the potential returns:
5.8 Expected return = (0.2 × 35%) = (0.4 × 12%) + (0.4 x-15% = 5.8%
A firm is expected to pay a dividend of $2.25 next year and $2.5 the following year. Financial analysts believe the stock will be at their target of $75 in two years. Compute the va
68.527 0.06 (68.467 - 68.587 ) 2.25 / (1+0.08) + ($2.5 + $75) / (1 + 0.08)2- 2.0833 + 66.4437 = $68.5270
You own $7,000 of Diner's Corporation stock that has a beta of 1.75. You also own $13,000 of Comm Corporation (beta = 1.15) and $20,000 of Airlines Corporation (beta = 0.7). Assume that the market return will be 12 percent and the risk-free rate is 3.5 percent. What is the total risk premium of the portfolio?
8.76 percent
Paccar's current stock price is $55.55 and it is likely to pay a $0.75 dividend next year. Since analysts estimate Paccar will have an 7.5% growth rate, what is its required return?
8.85 0 (8.85 - 8.85) (0.75 / 55.55 ) + 0.075 = 0.0885 or 8.85%
Which of the following is correct regarding the total risk of a company?
A company can change its risk level over time.
Which of the following statements is correct?
A decrease in NWC involves either a reduction in current assets, which generates cash, or an increase in current liabilities, thereby freeing up the shareholder's cash for other things.
Which of the following is correct?
All of these choices are correct.
Which of the following statements is correct with respect to Section 179 deductions?
All of these choices are correct.
It is understood that firms use varied sources of funding. However, what if a firm funds a project by issuing externally generated new capital, additional stock, bonds, etc. Which of the following costs does the firm incur?
All of these choices are costs incurred by the firm.
Which of the following statements regarding equivalent annual cost (EAC) approach is not true?
All of these choices are true.
The level of total return needed to be compensated for the risk taken is
Both choices are correct.
At any given time, the market value of a firm's common stock depends upon
Both of the choices are correct.
For which situation below would one need to "smooth out" the variation in each set of cash flows so that each becomes a perpetuity?
Choosing between alternative assets with differing lives
When calculating operating cash flow for a project, one would calculate it as being mathematically equal to which of the following?
EBIT − Taxes + Depreciation
Which of the following statements is true?
If the new project is riskier than the firm's existing projects, then it should be charged a higher cost of capital.
Which of the following statements regarding NASDAQ is not true?
Instead of using an electronic trading system, the NASDAQ has a trading floor.
Which of the following is correct regarding the coefficient of variation?
It measures the amount of risk taken for each one percent of return achieved.
Why is the ask price higher than the bid price?
It represents the gain a market maker achieves.
When firms use multiple sources of capital, they need to calculate the appropriate discount rate for valuing their firm's cash flows as
a weighted average of the capital components costs.
Which of the following will increase the cost of equity?
The firm's share price falls 10 percent.
Which statement is true regarding cost-cutting proposals?
The main benefits come only from changes in costs.
Expected return is calculated by:
multiplying each possible return by the probability, p. of the return occurring.
The total risk of the S&P 500 Index is equal to
nondiversifiable risk.
Which of the following is defined as the volatility of an investment, which includes firm specific risk as well as market risk?
total risk
Which of these makes this a true statement? The WACC formula
uses the after-tax costs of capital to compute the firm's weighted average cost of debt financing.
Many companies grow very fast at first, but slower future growth can be expected. Such companies are called
variable growth rate firms.
As new capital budgeting projects arise, we must estimate
when such projects will require cash flows.
As new capital budgeting projects arise, we must estimate:
when such projects will require cash flows.
Which of the following is a situation in which you would want to use the constant-growth model approach for estimating the component cost of equity?
when the firm's stock is expected to experience constant dividend growth
Which of the following is a situation in which you would want to use the CAPM approach for estimating the component cost of equity?
when you are able to estimate the firm's beta with certainty