Connect Questions for Finance Final

The amount by which a firm's tax bill is reduced as a result of the depreciation expense is referred to as the depreciation: tax shield. credit. erosion. opportunity cost. adjustment.

tax shield

The ex-dividend date is defined as _____ day(s) before the date of record. three business three two business two one

two business

Which one of the following increases the number of shares outstanding but does not increase the value of owners' equity? Stock repurchase Reverse stock split Stock split Cash distribution Liquidating dividend

stock split

The SGS Co. had $215,000 in taxable income. Calculate the company's income taxes. $0-50,000 15% $50,001-75,000 25 $75001-100,000 34 $100,001-335,000 39 $335,001-10,000,000 34 $10,000,001-15,000,000 35 $15,000,001-18,333,334 38 $18,333,334+ 35

$67,100

Semi-strong from efficiency

1) Use public information - no superior returns 2) Inside info: superior returns; public info: normal return 3) Company official beats the market 4) Public information not usable to beat the market

1. Tristan just deposited $3,500 in an account that will earn 7.0 percent per year in compound interest for 8 years. If Jose deposits $3,500 in an account at the same time that earns simple interest, then what interest rate per year must Jose earn to have the same amount of money in 8 years from today as Tristan will have in 8 years from today? 2. Kramer just invested $7,200 for 7 years and will earn compound interest of 8.5 percent per year. Justin also just invested $7,500 for 7 years and will earn simple interest of 9.5 percent per year. In 7 years, who will have more money and by how much? 3. In 2 years from today, Judy plans to invest $12,000 in an investment that has a return of 7.5 percent per year. How much will Judy's investment be worth in 9 years from today? (Hint: Draw a timeline to determine the number of compounding periods from the investment.) 4. Jacob has $11,000 to invest and is looking at two different investment alternatives. Investment A pays 5.5%, compounded annually. Investment B pays 6.3%, compounded annually. Assuming that Jacob chooses investment B, how much more money will Jacob have after investing his $11,000 for 7 years than if he chooses investment A?

1. 8.98% Tristan will have $6,013.65 in 8 years by investing $3,500 at 7.0% (3,500 x (1.07)8). If Jose wants the same amount, he will have to earn an amount of interest equal to Tristan ($6,013.65 - 3,500 = $2,513.65) over the same period. In order to determine the simple interest rate needed to earn the same amount of interest as Tristan, one would divide the interest by the number of years and then divide it into the initial amount invested: ($2,513.65 / 8) / $3,500 = $314.21 / $3,500 = 8.977% = 8.98% 2. Kramer will have $257.52 more than Justin in 7 years Kramer will have $7,200 x (1.085)7 = $12,745.02; Justin will have $7,500 + ($7,500 x .095 x 7) = $12,487.50. $12,745.02 - $12,487.50 = $257.02. Kramer will have $257.02 more than Justin in 7 years. 3. $19,908.59 Drawing a timeline helps you understand how to determine the future value of an investment when the investment is not made today. 4. Jacob will have $868.94 more by investing in investment B after 7 years than if he invested in investment A Investment B - Investment A = $11,000 x (1.063)7 - $11,000 x (1.055)7 = $868.94. Jacob will have $868.94 more by investing in investment B at 6.3% than investment A at 5.5%.

1. Another name for cash flow from assets is: 2. An issue of new stock would: 3. An increase in operating cash flow will: 4. A purchase of new fixed assets will: 5. An increase in current assets will: 6. Retiring (paying off) debt will:

1. Free cash flow 2. Increase net new equity raised and decrease cash flow to stockholders. Cash flow to stockholders equals dividends paid minus net new equity raised. An increase in net new equity raised (stock issued minus stock repurchased) will decrease cash flow to stockholders. 3. Increase cash flow from assets. Cash flow from assets equals operating cash flow minus net capital spending minus change in net working capital. 4. Decrease cash flow from assets. Cash flow from assets equals operating cash flow minus net capital spending (fixed assets purchased minus fixed assets sold) minus change in net working capital, thus purchasing new fixed assets will decrease cash flow from assets. 5. Decrease cash flow from assets. Cash flow from assets equals operating cash flow minus net capital spending minus change in net working capital (change in current assets minus change in current liabilities). 6. Increase cash flow to creditors. Cash flow to creditors equals interest paid minus net new borrowing (new debt issued minus debt paid off).

Remi, Inc., has sales of $18.7 million, total assets of $13.7 million, and total debt of $4.5 million. If the profit margin is 10 percent. Requirement 1: What is net income?

1. To find the return on assets and return on equity, we need net income. We can calculate the net income using the profit margin. Doing so, we find the net income is: Profit margin = Net income / Sales 0.10 = Net income / $18,700,000 Net income = $1,870,000

1. Which one of the following activities would increase cash? 2. Which one of the following activities would decrease cash? 3. Which one of the following statements concerning a firm's sources and uses of cash is correct given the following account values? Account Beg Balance End Balance Accounts receivable $ 750 $ 890 Inventory 3,700 2,540 Net fixed assets 9,800 8,850 Accounts payable 525 675 Long-term debt 4,700 4,300 Common stock 9,025 7,305 4. Which one of the following statements concerning a firm's sources and uses of cash is correct given the following account values? Account Beg Balance End Balance Accounts receivable $ 750 $ 890 Inventory 3,700 2,540 Net fixed assets 9,800 8,850 Accounts payable 525 675 Long-term debt 4,700 4,300 Common stock 9,025 7,305 5. Which one of the following statements concerning a firm's sources and uses of cash is correct given the following account values? Account Beg Balance End Balance Accounts receivable $ 750 $ 890 Inventory 3,700 2,540 Net fixed assets 9,800 8,850 Accounts payable 525 675 Long-term debt 4,700 4,300 Common stock 9,025 7,305 6. Which one of the following statements concerning a firm's sources and uses of cash is correct given the following account values? Account Beg Balance End Balance Accounts receivable $ 750 $ 890 Inventory 3,700 2,540 Net fixed assets 9,800 8,850 Accounts payable 525 675 Long-term debt 4,700 4,300 Common stock 9,025 7,305

1. decreasing current assets other than cash Sources of cash involve increasing a liability (or equity) account or decreasing an asset account. 2. increasing fixed assets Uses of cash involve decreasing a liability (or equity) account or increasing an asset account. 3. The inventory is a source of cash in the amount of $1,160. Sources of cash involve increasing a liability (or equity) account or decreasing an asset account. ($3,700 - 2,540 = $1,160). 4. The long-term debt is a use of cash in the amount of $400. Uses of cash involve decreasing a liability (or equity) account or increasing an asset account. ($4,700 - 4,300 = $400). 5. The accounts payable are a source of cash in the amount of $150. Sources of cash involve increasing a liability (or equity) account or decreasing an asset account ($675 - 525 = $150). 6. The common stock is a use of cash in the amount of $1,720. Uses of cash involve decreasing a liability (or equity) account or increasing an asset account. ($9,025 - 7,305 = $1,720).

It will cost $4,200 to acquire a small ice cream cart. Cart sales are expected to be $3,400 a year for five years. After the five years, the cart is expected to be worthless as that is the expected remaining life of the cooling system. What is the payback period of the ice cream cart? 4.05 years 0.25 years 6.18 years 0.81 years 1.24 years

1.24 years Payback period = $4,200 / $3,400 = 1.24 years

Your portfolio has a beta of 1.36. The portfolio consists of 14 percent U.S. Treasury bills, 24 percent stock A, and 62 percent stock B. Stock A has a risk level equivalent to that of the overall market. What is the beta of stock B? 5.67 0.88 1.81 1.52 0.55

1.81 βPortfolio = 1.36 = (0.14 × 0) + (0.24 × 1.0) + (0.62 × βB) 1.36 = 0.24 + 0.62 βB βB = 1.81 The beta of a risk-free asset, i.e., a U. S. Treasury bill, is zero. The beta of the market is 1.0.

Over the past six years, a stock had annual returns of 14 percent, -3 percent, 8 percent, 21 percent, -16 percent, and 4 percent, respectively. What is the standard deviation of these returns? 11.27 percent 13.05 percent 13.59 percent 15.08 percent 14.40 percent

13.05 percent Average return = (0.14 - 0.03 + 0.08 + 0.21 - 0.16 + 0.04)/6 = 0.046667 σ2 = [(0.14 - 0.046667)2 + (-0.03 - 0.046667)2 + (0.08 - 0.046667)2 + (0.21 - 00.046667)2 + (-0.16 - 0.046667)2 + (0.04 - 0.046667)2]/(6 - 1) = 0.017027 σ = √0.017027 = 13.05 percent

A firm is reviewing a project with labor cost of $8.60 per unit, raw materials cost of $24.85 a unit, and fixed costs of $11,000 a month. Sales are projected at 10,600 units over the 3-month life of the project. What are the total variable costs of the project? $343,570 $263,410 $354,570 $365,570 $182,785

$354,570 Total variable costs = 10,600 × ($8.60 + $24.85) = $354,570

Suppose the spot and three-month forward rates for the yen are ¥101.14 and ¥102.25, respectively. Required: (a) Is the yen expected to get stronger or weaker? (b) What would you estimate is the difference between the inflation rates of the United States and Japan?

(a) The yen is expected to get weaker, since it will take more yen to buy one dollar in the future than it does today. (b) hUS - hJAP ≈ (¥102.25 - ¥101.14) / ¥101.14 hUS - hJAP = .0110, or 1.10% (1 + ( 0.0110))4 - 1 = .0446, or 4.46% The approximate inflation differential between the U.S. and Japan is 4.46% annually.

Weiland Co. shows the following information on its 2014 income statement: sales = $167,000; costs = $88,600; other expenses = $4,900; depreciation expense = $11,600; interest expense = $8,700; taxes = $18,620; dividends = $9,700. In addition, you're told that the firm issued $2,900 in new equity during 2014, and redeemed $4,000 in outstanding long-term debt. (Enter your answer as directed, but do not round intermediate calculations.) Required: a) What is the operating cash flow during 2014? b) What is the cash flow to creditors during 2014? c) What is the cash flow to stockholders during 2014? d) Assuming net fixed assets increased by $23,140 during the year, what was the addition to NWC?

(a) To calculate the OCF, we first need to construct an income statement. The income statement starts with revenues and subtracts costs to arrive at EBIT. We then subtract out interest to get taxable income, and then subtract taxes to arrive at net income. Doing so, we get: Income Statement Sales $ 167,000 Costs 88,600 Other Expenses 4,900 Depreciation 11,600 EBIT $ 61,900 Interest 8,700 Taxable income $ 53,200 Taxes 18,620 Net income $ 34,580 Dividends $ 9,700 Addition to retained earnings 24,880 Dividends paid plus addition to retained earnings must equal net income, so: Net income = Dividends + Addition to retained earnings Addition to retained earnings = $34,580 - 9,700 Addition to retained earnings = $24,880 So, the operating cash flow is: OCF = EBIT + Depreciation - Taxes OCF = $61,900 + 11,600 - 18,620 OCF = $54,880 (b) The cash flow to creditors is the interest paid, minus any new borrowing. Since the company redeemed long-term debt, the net new borrowing is negative. So, the cash flow to creditors is: Cash flow to creditors = Interest paid - Net new borrowing Cash flow to creditors = $8,700 - (-$4,000) Cash flow to creditors = $12,700 (c) The cash flow to stockholders is the dividends paid minus any new equity. So, the cash flow to stockholders is: Cash flow to stockholders = Dividends paid - Net new equity Cash flow to stockholders = $9,700 - 2,900 Cash flow to stockholders = $6,800 (d) In this case, to find the addition to NWC, we need to find the cash flow from assets. We can then use the cash flow from assets equation to find the change in NWC. We know that cash flow from assets is equal to cash flow to creditors plus cash flow to stockholders. So, cash flow from assets is: Cash flow from assets = Cash flow to creditors + Cash flow to stockholders Cash flow from assets = $12,700 + 6,800 Cash flow from assets = $19,500 Net capital spending is equal to depreciation plus the increase in fixed assets, so: Net capital spending = Depreciation + Increase in fixed assets Net capital spending = $11,600 + 23,140 Net capital spending = $34,740 Now we can use the cash flow from assets equation to find the change in NWC. Doing so, we find: Cash flow from assets = OCF - Change in NWC - Net capital spending $19,500 = $54,880 - Change in NWC - 34,740 Change in NWC = $640

In March 2012, Daniela Motor Financing (DMF), offered some securities for sale to the public. Under the terms of the deal, DMF promised to repay the owner of one of these securities $800 in March 2042, but investors would receive nothing until then. Investors paid DMF $400 for each of these securities; so they gave up $400 in March 2012, for the promise of a $800 payment 30 years later. Required: (a) Assuming that you purchased the bond for $400, what rate of return would you earn if you held the bond for 30 years until it matured with a value $800? (b) Suppose under the terms of the bond you could redeem the bond in 2022. DMF agreed to pay an annual interest rate of 1.4 percent until that date. How much would the bond be worth at that time? (c) In 2022, instead of cashing in the bond for its then current value, you decide to hold the bond until it matures in 2042. What annual rate of return will you earn over the last 20 years?

(a) To answer this question, we can use either the FV or the PV formula. Both will give the same answer since they are the inverse of each other. We will use the FV formula, that is: FV = PV(1 + r)t r = (FV / PV)1/t - 1 r = (FV / PV)1/t - 1 r = ($800 / $400)1/30 - 1 r = .0234, or 2.34% (b) FV = PV(1 +r)t FV = $400(1 + .014)10 FV = $459.66 (c) r = (FV / PV)1/t - 1 r = ($800 / $459.66)1/20 - 1 r = .0281, or 2.81%

The sustainable growth rate is defined as the maximum rate at which a firm can grow given which of the following conditions? -No new external financing of any kind -No new debt but additional external equity equal to the increase in retained earnings -New debt and external equity in equal proportions -New debt and external equity, provided the debt-equity ratio remains constant -No new equity and a constant debt-equity ratio

-No new equity and a constant debt-equity ratio

Which one of the following defines the cash cycle? -Inventory period plus the accounts receivable period -Inventory period plus the accounts payable period -Operating cycle minus the inventory period -Operating cycle minus the accounts payable period -Operating cycle minus the accounts receivable period

-Operating cycle minus the accounts payable period

Davidson Interiors declared a dividend to holders of record on Thursday, October 15, that is payable on Monday, November 2. Suenette purchased 200 shares of Davidson Interiors stock on Monday, October 12, and Jake purchased 100 shares of this stock on the following day. Which one of the following statements is correct given this information? -Both Suenette and Jake will receive this dividend. -Suenette will receive the dividend but Jake will not. -Jake will receive the dividend but Suenette will not. -Neither Suenette nor Jake will receive this dividend. -You cannot determine who will or will not receive this dividend based on the information provided.

-Suenette will receive the dividend but Jake will not.

-The cash coverage ratio is used to evaluate the: liquidity of a firm. -speed at which a firm generates cash. -length of time that a firm can pay its bills if no additional cash becomes available. -ability of a firm to pay the interest on its debt. -relationship between the firm's cash balance and its current liabilities.

-ability of a firm to pay the interest on its debt.

The cash coverage ratio is used to evaluate the: -liquidity of a firm. -speed at which a firm generates cash. -length of time that a firm can pay its bills if no -additional cash becomes available. -ability of a firm to pay the interest on its debt. -relationship between the firm's cash balance and its current liabilities.

-ability of a firm to pay the interest on its debt.

The accounts receivable period is the time that elapses between the _____ and the ____. -purchase of inventory; payment to the supplier -purchase of inventory; collection of the receivable -sale of inventory; payment to supplier -sale of inventory; collection of the receivable -sale of inventory: billing to customer

-sale of inventory; collection of the receivable

Blooming Gardens has an inventory turnover of 16. This means the firm: -sells its entire inventory every 16 days. -stocks its inventory only every 16 days. -buys 16 days of inventory with each order. -sells its inventory by granting customers 16 days' credit. -sells its inventory an average of 16 times each year.

-sells its inventory an average of 16 times each year.

Strong form efficiency

1) Use inside information - no superior returns 2) Inside information would not be valuable

Weak From Efficiency

1) Use past prices- no superior returns 2) Semi-strong also implies this level

Suppose your company needs to raise $36 million and you want to issue 20-year bonds for this purpose. Assume the required return on your bond issue will be 8.5 percent, and you're evaluating two issue alternatives: a 8.5 percent semiannual coupon bond and a zero coupon bond. Your company's tax rate is 35 percent. Requirement 1: (a) How many of the coupon bonds would you need to issue to raise the $36 million? (b) How many of the zeroes would you need to issue? Requirement 2: (a) In 20 years, what will your company's repayment be if you issue the coupon bonds? (b) What if you issue the zeroes? Requirement 3: Assume that the IRS amortization rules apply for the zero coupon bonds. Calculate the firm's aftertax cash outflows for the first year under the two different scenarios.

1: (a) The coupon bonds have a 8.5 percent coupon which matches the 8.5 percent required return, so they will sell at par. The number of bonds that must be sold is the amount needed divided by the bond price, so: Number of coupon bonds to sell = $36,000,000 / $1,000 = 36,000 (b) The number of zero coupon bonds to sell would be: Price of zero coupon bonds = $1,000/1.042540 = $189.22 Number of zero coupon bonds to sell = $36,000,000 / $189.22 = 190,258.93 2: (a) The repayment of the coupon bond will be the par value plus the last coupon payment times the number of bonds issued. So: Coupon bonds repayment = 36,000($1,000) + 36,000($1,000)(.085/2) = $37,530,000 1: (a) The coupon bonds have a 8.5 percent coupon which matches the 8.5 percent required return, so they will sell at par. The number of bonds that must be sold is the amount needed divided by the bond price, so: Number of coupon bonds to sell = $36,000,000 / $1,000 = 36,000 (b) The number of zero coupon bonds to sell would be: Price of zero coupon bonds = $1,000/1.042540 = $189.22 Number of zero coupon bonds to sell = $36,000,000 / $189.22 = 190,258.93 2: (a) The repayment of the coupon bond will be the par value plus the last coupon payment times the number of bonds issued. So: Coupon bonds repayment = 36,000($1,000) + 36,000($1,000)(.085/2) = $37,530,000 (b) The repayment of the zero coupon bond will be the par value times the number of bonds issued, so: Zeroes repayment = 190,258.93($1,000) = $190,258,929 3: The total coupon payment for the coupon bonds will be the number bonds times the coupon payment. For the cash flow of the coupon bonds, we need to account for the tax deductibility of the interest payments. To do this, we will multiply the total coupon payment times one minus the tax rate. So: Coupon bonds: (36,000)($85)(1 - .35) = $1,989,000 cash outflow Note that this is cash outflow since the company is making the interest payment. For the zero coupon bonds, the first year interest payment is the difference in the price of the zero at the end of the year and the beginning of the year. The price of the zeroes in one year will be: P1 = $1,000/1.042538 = $205.64 The Year 1 interest deduction per bond will be this price minus the price at the beginning of the year, which we found in part b, so: Year 1 interest deduction per bond = $205.64 - 189.22 = $16.43 The total cash flow for the zeroes will be the interest deduction for the year times the number of zeroes sold, times the tax rate. The cash flow for the zeroes in year 1 will be: Cash flows for zeroes in Year 1 = (190,258.93)($16.43)(.35) = $1,093,758.75 Notice the cash flow for the zeroes is a cash inflow. This is because of the tax deductibility of the imputed interest expense. That is, the company gets to write off the interest expense for the year, even though the company did not have a cash flow for the interest expense. This reduces the company's tax liability, which is a cash inflow. During the life of the bond, the zero generates cash inflows to the firm in the form of the interest tax shield of debt. We should note an important point here: If you find the PV of the cash flows from the coupon bond and the zero coupon bond, they will be the same. This is because of the much larger repayment amount for the zeroes. or find answer with Calculator

A project that provides annual cash flows of $2,550 for nine years costs $10,500 today. Requirement 1: At a required return of 11 percent, what is the NPV of the project? Requirement 2: At a required return of 27 percent, what is the NPV of the project? Requirement 3: At what discount rate would you be indifferent between accepting the project and rejecting it?

1: The NPV of a project is the PV of the outflows plus the PV of the inflows. Since the cash inflows are an annuity, the equation for the NPV of this project at an 11 percent required return is: NPV = - $10,500 + $2,550(PVIFA11%, 9) NPV = $3,619.47 At an 11 percent required return, the NPV is positive, so we would accept the project. 2: The equation for the NPV of the project at a 27 percent required return is: NPV = - $10,500 + $2,550(PVIFA27%, 9) NPV = -$2,154.42 At a 27 percent required return, the NPV is negative, so we would reject the project. 3: We would be indifferent to the project if the required return was equal to the IRR of the project, since at that required return the NPV is zero. The IRR of the project is: 0 = - $10,500 + $2,550(PVIFAIRR, 9) IRR = .1934, or 19.34% or solve in Calculator

For the given cash flows, suppose the firm uses the NPV decision rule. Year Cash Flow 0 -$ 159,000 1 57,000 2 82,000 3 66,000 Requirement 1: At a required return of 8 percent, what is the NPV of the project? Requirement 2: At a required return of 19 percent, what is the NPV of the project?

1: The NPV of a project is the PV of the outflows plus the PV of the inflows. The equation for the NPV of this project at a 8 percent required return is: NPV = - $159,000 + $57,000/1.08 + $82,000/1.082 + $66,000/1.083 NPV = $16,472.49 At a 8 percent required return, the NPV is positive, so we would accept the project. 2: The equation for the NPV of the project at a 19 percent required return is: NPV = - $159,000 + $57,000/1.19 + $82,000/1.192 + $66,000/1.193 NPV = - $14,029.88 At a 19 percent required return, the NPV is negative, so we would reject the project. Or solve in Calculator

The next dividend payment by Wyatt, Inc., will be $2.30 per share. The dividends are anticipated to maintain a growth rate of 4.5 percent forever. Assume the stock currently sells for $39.85 per share. Requirement 1: What is the dividend yield? Requirement 2: What is the expected capital gains yield?

1: The dividend yield is the dividend next year divided by the current price, so the dividend yield is: Dividend yield = D1 / P0 Dividend yield = $2.30 / $39.85 Dividend yield = .0577, or 5.77% 2: The capital gains yield, or percentage increase in the stock price, is the same as the dividend growth rate, so: Capital gains yield = 4.5%

Consider the following cash flows: Year Cash Flow 0 $-28,400 1 15,300 2 13,600 3 10,000 Requirement 1: What is the profitability index for the above set of cash flows if the relevant discount rate is 8 percent? Requirement 2: What is the profitability index if the discount rate is 13 percent? Requirement 3: What is the profitability index if the discount rate is 22 percent?

1: The profitability index is defined as the PV of the cash inflows divided by the PV of the cash outflows. The equation for the profitability index at a required return of 8 percent is: PI = ($15,300 / 1.08 + $13,600 / 1.082 + $10,000 / 1.083) / $28,400 PI = 1.189 2: The equation for the profitability index at a required return of 13 percent is: PI = ($15,300 / 1.13 + $13,600 / 1.132 + $10,000 / 1.133) / $28,400 PI = 1.096 3: The equation for the profitability index at a required return of 22 percent is: PI = ($15,300 / 1.22 + $13,600 / 1.222 + $10,000 / 1.223) / $28,400 PI = .957 We would accept the project if the required return were 8 percent or 13 percent since the PI is greater than one. We would reject the project if the required return were 22 percent since the PI is less than one. Or solve in Calculator

Use the information below to answer the questions that follow. U.S. $ EQUIVALENT CURRENCY PER U.S. $ U.K. Pound (£) 1.5689 .6374 Canada dollar 1.0191 .9813 Requirement 1: Which would you rather have, $100 or £100? Requirement 2: Which would you rather have, $100 Canadian or £100? Requirement 3: (a) What is the cross-rate for Canadian dollars in terms of British pounds? (b) What is the cross-rate for British pounds in terms of Canadian dollars?

1: You would prefer £100, since: (£100)($1.5689/£1) = $156.89 2: You would still prefer £100. Using the $/£ exchange rate and the C$/$ exchange rate to find the amount of Canadian dollars £100 will buy, we get: (£100)($1.5689/£1)(C$.9813/$1) = C$153.96 3: (a) Using the C$/$ and the $/£ quotes to find the C$/£ cross rate, we find: (C$.9813/$1)($1.5689/£1) = C$1.5396/£ (b) The £/C$ exchange rate is the inverse of the C$/£ exchange rate, so: £1/C$1.5396 = £.6495/C$

Series Average return Large stocks 11.82 % Small stocks 16.52 Long-term corporate bonds 6.26 Long-term government bonds 6.1 U.S. Treasury bills 3.86 Inflation 3.1 Requirement 1: Determine the return on a portfolio that was equally invested in large-company stocks and long-term corporate bonds. Requirement 2: What was the return on a portfolio that was equally invested in small stocks and Treasury bills?

1: For a portfolio that is equally invested in large-company stocks and long-term corporate bonds: R = (11.82% + 6.26%) / 2 R = 9.04% 2: For a portfolio that is equally invested in small stocks and Treasury bills: R = (16.52% + 3.86%) / 2 R = 10.19%

PK Software has 9.4 percent coupon bonds on the market with 25 years to maturity. The bonds make semiannual payments and currently sell for 112.75 percent of par. Requirement 1: What is the current yield on PK's bonds? Requirement 2: What is the YTM? Requirement 3: What is the effective annual yield?

1: The current yield is: Current yield = Annual coupon payment / Price Current yield = $94 / $1,127.50 Current yield = .0834, or 8.34% 2:The bond price equation for this bond is: P0 = $1,127.50 = $47.00(PVIFAR%,50) + $1,000(PVIFR%,50) Using a spreadsheet, financial calculator, or trial and error we find: R = 4.097% This is the semiannual interest rate, so the YTM is: YTM = 2 × 4.097% YTM = 8.19% 3: The effective annual yield is the same as the EAR, so using the EAR equation from the previous chapter: Effective annual yield = (1 + .04097)2- 1 Effective annual yield = .0836, or 8.36% Or plug into Calculator

Suppose a stock had an initial price of $119 per share, paid a dividend of $3.20 per share during the year, and had an ending share price of $150. Requirement 1: Compute the percentage total return. Requirement 2: What was the dividend yield? Requirement 3: What was the capital gains yield?

1: The return of any asset is the increase in price, plus any dividends or cash flows, all divided by the initial price. The return of this stock is: R = [($150 - 119) + 3.20] / $119 R = .2874, or 28.74% 2: The dividend yield is the dividend divided by price at the intitial period price, so: Dividend yield = $3.20 / $119 Dividend yield = .0269, or 2.69% 3: And the capital gains yield is the increase in price divided by the initial price, so: Capital gains yield = ($150 - 119) / $119 Capital gains yield = .2605, or 26.05%

An investment project provides cash inflows of $1,300 per year for eight years. Requirement 1: What is the project payback period if the initial cost is $4,150? Requirement 2: What is the project payback period if the initial cost is $5,200? Requirement 3: What is the project payback period if the initial cost is $11,400?

1: To calculate the payback period, we need to find the time the project needs to recover its initial investment. The cash flows in this problem are an annuity, so the calculation is simpler. If the initial cost is $4,150, the payback period is: Payback = 3 + $250 / $1,300 Payback = 3.19 years There is a shortcut to calculate payback period when the future cash flows are an annuity. Just divide the initial cost by the annual cash flow. For the $4,150 cost, the payback period is: Payback = $4,150 / $1,300 Payback = 3.19 years 2: For an initial cost of $5,200, the payback period is: Payback = $5,200 / $1,300 Payback = 4.00 years 3: The payback period for an initial cost of $11,400 is a little trickier. Notice that the total cash inflows after eight years will be: Total cash inflows = 8($1,300) Total cash inflows = $10,400 If the initial cost is $11,400, the project never pays back. Notice that if you use the shortcut for annuity cash flows, you get: Payback = $11,400 / $1,300 Payback = 8.77 years This answer does not make sense since the cash flows stop after eight years, so again, we must conclude the payback period is never.

A firm evaluates all of its projects by applying the IRR rule. Year Cash Flow 0 -$ 157,000 1 59,000 2 80,000 3 64,000 Requirement 1: What is the project's IRR? Requirement 2: If the required return is 15 percent, should the firm accept the project?

1:The IRR is the interest rate that makes the NPV of the project equal to zero. So, the equation that defines the IRR for this project is: 0 = - $157,000 + $59,000 / (1 + IRR) + $80,000 / (1 + IRR)2 + $64,000 / (1 + IRR)3 Using a spreadsheet, financial calculator, or trial and error to find the root of the equation, we find that: IRR = 13.82% 2:Since the cash flows are conventional and the IRR is lower than the required return, we would not accept the project. or solve in Calculator

Kaylor's Tool Shoppe has 16,000 shares of stock outstanding at a market price of $2 a share. Which one of the following stock splits should the firm declare if it wants to increase the stock price to exactly $15 a share? Ignore any taxes or market imperfections. 15-for-2 stock split 8-for-1 stock split 1-for-7 reverse stock split 2-for-15 reverse stock split 1-for-8 reverse stock split

2-for-15 reverse stock split Price ratio = $15/$2 = 15/2. The firm needs to declare a 2-for-15 reverse stock split.

The risk-free rate of return is 5.4 percent and the market risk premium is 13 percent. What is the expected rate of return on a stock with a beta of 1.6? 26.20 percent 13.10 percent 21.64 percent 20.80 percent 10.82 percent

26.20 percent E(R) = 0.054 + 1.60 × 0.13 = 0.2620 = 26.20 percent

Suppose a stock had an initial price of $74 per share, paid a dividend of $0.80 per share during the year, and had an ending share price of $77. What was the capital gains yield? 2.70 percent 3.29 percent 3.78 percent 4.05 percent 4.94 percent

4.05 percent Capital gains yield = ($77 - $74)/$74 = 4.05 percent

Which one of the following statements is correct? -Firms should generally finance all of their assets with long-term debt. -Firms that follow restrictive financial policies can generally avoid short-term debt financing. -Short-term borrowing is generally more expensive than long-term borrowing. -Long-term interest rates tend to be more volatile than short-term rates. -A firm is less apt to face financial distress if it adopts a flexible financial policy rather than a restrictive policy.

A firm is less apt to face financial distress if it adopts a flexible financial policy rather than a restrictive policy.

CONCEPT REVIEW: Cash flow from assets (CFFA) reflects

A firm's ability to pay cash to investors. CFFA equals OCF - net capital spending - increase in NWC. By the cash flow identity, it is also equal to the sum of cash flow to stockholders (CFS) and cash flow to creditors (CFC)....

Which one of the following is the length of time that a retailer owes its supplier for an inventory purchase? -Inventory period -Accounts receivable period -Accounts payable period -Operating cycle -Cash cycle

Accounts payable period

A market in which security prices reflect available information is said to be:

An efficient market is one in which security prices reflect available information. Efficient

What are the arithmetic and geometric average returns for a stock with annual returns of 11 percent, 9 percent, -5 percent, and 15 percent? List the arithmetic answer first. 9.94 percent; 7.22 percent 9.94 percent; 7.50 percent 7.22 percent; 7.50 percent 7.50 percent; 7.22 percent 7.50 percent; 9.94 percent

Arithmetic average = (0.11 + 0.09 - 0.05 + 0.15) / 4 = 0.0750 = 7.50 percent Geometric average = [(1 + 0.11) × (1 + 0.09) × (1 - 0.05) × (1 + 0.15)] ¼ - 1 = 0.07224 = 7.22 percent

Assume you deposit $4,800 at the end of each year into an account paying 11.5 percent interest. Requirement 1: How much money will you have in the account in 25 years? Annuity future value= Requirement 2: How much will you have if you make deposits for 50 years? Annuity future value=

Assume you deposit $4,800 at the end of each year into an account paying 11.5 percent interest. Requirement 1: Annuity future value= $592,736.70 Requirement 2: Annuity future value= $9,602,917.41 Here we need to find the FVA. The equation to find the FVA is: FVA = C{[(1 + r)t - 1] / r} FVA for 25 years = $4,800[(1.115025 - 1) / .1150] FVA for 25 years = $592,736.70 FVA for 50 years = $4,800[(1.115050 - 1) / .1150] FVA for 50 years = $9,602,917.41 Notice that doubling the number of periods more than doubles the FVA.

On average your firm sells $33,300 of items on credit each day. Your average inventory period is 37 days and your operating cycle is 57 days. What is your average accounts receivable balance? $1,232,100 $1,265,400 $666,000 $1,332,000 $1,898,100

Average A/R balance = $33,300 × (57 - 37) = $666,000

Currently, $1 will buy C$1.36 while $1.19 will buy €1. What is the exchange rate between the Canadian dollar and the euro? C$1 = €0.735 C$1.36 = €1.19 C$1 = €1.19 C$1.36 = €0.6179 C$1 = €0.6179

C$1 = €0.6179 C$1 = C$1 ($1/C$1.36)(€1/$1.19) = €0.6179

Marshall's & Co. purchased a corner lot in Eglon City five years ago at a cost of $690,000. The lot was recently appraised at $747,000. At the time of the purchase, the company spent $35,000 to grade the lot and another $4,700 to build a small building on the lot to house a parking lot attendant who has overseen the use of the lot for daily commuter parking. The company now wants to build a new retail store on the site. The building cost is estimated at $1,260,000. What amount should be used as the initial cash flow for this building project? $1,950,000 $1,958,200 $2,015,200 $2,007,000 $2,010,500

CF0 = $747,000 + $1,260,000 = $2,007,000 $2,007,000

The annual interest divided by the face value of a bond is referred to as the: market rate. call rate. coupon rate. current yield. yield-to-maturity.

Coupon Rate

Net working capital is:

Current Assets - Current Liabilities

Which one of the following represents additional compensation provided to bondholders to offset the possibility that the bond issuer might not pay the interest and/or principal payments as expected? Interest rate risk premium Inflation premium Liquidity premium Taxability premium Default risk premium

Default risk premium

The required return on a stock is equal to which one of the following if the dividend on the stock decreases by 1 percent per year? (P0/D1) - g (D1/P0)/g Dividend yield + capital gains yield Dividend yield - capital gains yield Dividend yield × capital gains yield

Dividend yield + capital gains yield

The common stock of Flavorful Teas has an expected return of 13.37 percent. The return on the market is 12.5 percent and the risk-free rate of return is 3.8 percent. What is the beta of this stock? 2.50 0.55 0.91 0.98 1.10

E(R) = 0.1337 = 0.038 + β × (0.125 − 0.038) 0.0957 = 0.087β β = 1.10

Jupiter Explorers has $8,200 in sales. The profit margin is 5 percent. There are 5,200 shares of stock outstanding. The market price per share is $1.70. What is the price-earnings ratio? 10.78 21.56 37.10 14.45 13.40

Earnings per share = ($8,200 × 0.05) / 5,200 = $0.07885 Price-earnings ratio = $1.70 / $0.07885 = 21.56

Jupiter Explorers has $8,200 in sales. The profit margin is 5 percent. There are 5,200 shares of stock outstanding. The market price per share is $1.70. What is the price-earnings ratio? 13.40 10.78 37.10 21.56 14.45

Earnings per share = ($8,200 × 0.05) / 5,200 = $0.07885 Price-earnings ratio = $1.70 / $0.07885 = 21.56

Delectable Turnip, Inc.'s, net income for the most recent year was $9,212. The tax rate was 40 percent. The firm paid $3,912 in total interest expense and deducted $5,023 in depreciation expense. Required : What was the company's cash coverage ratio for the year?

Explanation: Here, we need to work the income statement backward to find the EBIT. Starting at the bottom of the income statement, we know that the taxes are the taxable income times the tax rate. The net income is the taxable income minus taxes. Rearranging this equation, we get: Net income = Taxable income - (TC)(Taxable income) Net income = (1 - TC)(Taxable income) Using this relationship we find the taxable income is: Net income = (1 - TC)(Taxable income) $9,212 = (1 - .40)(Taxable income) Taxable income = $15,353.33 Now, we can calculate the EBIT as: Taxable income = EBIT - Interest $15,353.33 = EBIT - $3,912 EBIT = $19,265.33 So, the cash coverage ratio is: Cash coverage ratio = (EBIT + Depreciation expense) / Interest Cash coverage ratio = ($19,265.33 + 5,023) / $3,912 Cash coverage ratio = 6.21 times

Rotweiler Obedience School's December 31, 2013, balance sheet showed net fixed assets of $1,795,000, and the December 31, 2014, balance sheet showed net fixed assets of $2,180,000. The company's 2014 income statement showed a depreciation expense of $335,000. (Enter your answer as directed, but do not round intermediate calculations.) Required: What was Rotweiler's net capital spending for 2014? (Enter your answer in dollars, not millions of dollars (e.g., 1,234,567).)

Explanation: Net capital spending is the increase in fixed assets, plus depreciation. Using this relationship, we find: Net capital spending = NFAend - NFAbeg + Depreciation Net capital spending = $2,180,000 - 1,795,000 + 335,000 Net capital spending = $720,000

The December 31, 2013, balance sheet of Schism, Inc., showed long-term debt of $1,395,000, $139,000 in the common stock account and $2,640,000 in the additional paid-in surplus account. The December 31, 2014, balance sheet showed long-term debt of $1,570,000, $149,000 in the common stock account and $2,940,000 in the additional paid-in surplus account. The 2014 income statement showed an interest expense of $93,500 and the company paid out $144,000 in cash dividends during 2014. The firm's net capital spending for 2014 was $950,000, and the firm reduced its net working capital investment by $124,000. (Enter your answer as directed, but do not round intermediate calculations.) Required: What was the cash flow to creditors during 2014? Required: What was the firm's cash flow to stockholders during 2014? Required: What was the firm's cash flow from assets during 2014? Required: What was the firm's operating cash flow during 2014?

Explanation: The cash flow to creditors is the interest paid, minus any net new borrowing, so: Cash flow to creditors = Interest paid - Net new borrowing Cash flow to creditors = Interest paid - (LTDend - LTDbeg) Cash flow to creditors = $93,500 - ($1,570,000 - 1,395,000) Cash flow to creditors = -$81,500 The cash flow to stockholders is the dividends paid minus any new equity raised. So, the cash flow to stockholders is: (Note that APIS is the additional paid-in surplus.) Cash flow to stockholders = Dividends paid - Net new equity Cash flow to stockholders = Dividends paid - (Commonend + APISend) - (Commonbeg + APISbeg) Cash flow to stockholders = $144,000 - [($149,000 + 2,940,000) - ($139,000 + 2,640,000)] Cash flow to stockholders = -$166,000 We know that cash flow from assets is equal to cash flow to creditors plus cash flow to stockholders. So, cash flow from assets is: Cash flow from assets = Cash flow to creditors + Cash flow to stockholders Cash flow from assets = -$81,500 - 166,000 Cash flow from assets = -$247,500 We also know that cash flow from assets is equal to the operating cash flow minus the change in net working capital and the net capital spending. We can use this relationship to find the operating cash flow. Doing so, we find: Cash flow from assets = OCF - Change in NWC - Net capital spending -$247,500 = OCF - (-$124,000) - (950,000) OCF = -$247,500 - 124,000 + 950,000 OCF = $578,500

If a market is efficient, then

In an efficient market, securities are fairly priced, thus their price equals the market value of the investment, which results in an investment with a zero NPV. All investments are zero NPV investments.

The December 31, 2013, balance sheet of Schism, Inc., showed long-term debt of $1,425,000, and the December 31, 2014, balance sheet showed long-term debt of $1,630,000. The 2014 income statement showed an interest expense of $96,500. (Enter your answer as directed, but do not round intermediate calculations.) Required: What was the firm's cash flow to creditors during 2014?

Explanation: The cash flow to creditors is the interest paid, minus any net new borrowing, so: Cash flow to creditors = Interest paid - Net new borrowing Cash flow to creditors = Interest paid - (LTDend - LTDbeg) Cash flow to creditors = $96,500 - ($1,630,000 - 1,425,000) Cash flow to creditors = -$108,500

The December 31, 2013, balance sheet of Schism, Inc., showed $149,000 in the common stock account and $2,740,000 in the additional paid-in surplus account. The December 31, 2014, balance sheet showed $159,000 and $3,040,000 in the same two accounts, respectively. If the company paid out $154,000 in cash dividends during 2014. (Enter your answer as directed, but do not round intermediate calculations.) Required: What was the cash flow to stockholders for the year?

Explanation: The cash flow to stockholders is the dividends paid minus any new equity raised. So, the cash flow to stockholders is: (Note that APIS is the additional paid-in surplus.) Cash flow to stockholders = Dividends paid - Net new equity Cash flow to stockholders = Dividends paid - [(Commonend + APISend) - (Commonbeg + APISbeg)] Cash flow to stockholders = $154,000 - [($159,000 + 3,040,000) - ($149,000 + 2,740,000)] Cash flow to stockholders = -$156,000

Y3K, Inc., has sales of $7,555, total assets of $3,565, and a debt-equity ratio of .42. Assume the return on equity is 14 percent. Required: What is its equity multiplier? What is its total asset turnover? What is its profit margin? What is its net income?

Explanation: We can rearrange the Du Pont identity to calculate the profit margin. So, we need the equity multiplier and the total asset turnover. The equity multiplier is: Equity multiplier = 1 + Debt-equity ratio Equity multiplier = 1 + .42 Equity multiplier = 1.42 And the total asset turnover is: Total asset turnover = Sales / Total assets Total asset turnover = $7,555 / $3,565 Total asset turnover = 2.12 times Now, we can use the Du Pont identity to find total sales as: ROE = (Profit margin)(Total asset turnover)(Equity multiplier) .14 = (PM)(2.12)(1.42) Profit margin = .0465, or 4.65% Rearranging the profit margin ratio, we can find the net income which is: Profit margin = Net income / Sales .0465 = Net income / $7,555 Net income = $351.48

Mansfield and Jones generally pay a quarterly dividend of $1.10 per share. Occasionally, after a financially good year, the firm will increase the dividend by $1 for one year. What type of dividend is this additional $1?

Extra An extra dividend may or may not be repeated and is in addition to the regular dividend.

What is the principal amount of a bond that is repaid at the end of the loan term called? Coupon Market price Accrued price Dirty price Face value

Face Value

Interest rate parity defines the relationships among which of the following? Spot exchange rates, future exchange rates, interest rates, and inflation rates Real and nominal interest rates across countries Real interest and inflation rates Forward exchange rates, relative interest rates, and spot exchange rates Spot exchange rates, forward exchange rates, nominal interest rates, and real interest rates

Forward exchange rates, relative interest rates, and spot exchange rates

Suppose the spot exchange rate for the Hungarian forint is HUF 238. Interest rates in the United States are 4.1 percent per year. They are 3.6 percent in Hungary. What do you predict the exchange rate will be in three years? HUF 234.45 HUF 236.90 HUF 241.59 HUF 236.81 HUF 239.19

HUF 234.45 F3 = HUF 238 × [1 + (0.036 - 0.041)]3 = HUF 234.45

The Timberlake-Jackson Wardrobe Co. has 10.3 percent coupon bonds on the market with eight years left to maturity. The bonds make annual payments. Required: If the bond currently sells for $1,132.17, what is its YTM?

Here, we need to find the YTM of a bond. The equation for the bond price is: P = $1,132.17 = $103(PVIFAR%,8) + $1,000(PVIFR%,8) Notice the equation cannot be solved directly for R. Using a spreadsheet, a financial calculator, or trial and error, we find: R = YTM = 8.00% Or plug into Calculator

GAAP dictate that assets should be placed on the balance sheet as:

Historical cost

Cash dividends send which two of the following signals to the market? I. Agency costs will be lowered since less cash will be held by the firm. II. The firm is planning on downsizing. III. The firm is currently, and expects to continue to be, profitable. IV. The firm will no longer conduct stock repurchases. I and II only II and III only III and IV only II and IV only I and III only

I and III only

Lake City Plastics currently produces plastic plates and silverware. The company is considering expanding its product offerings to include plastic serving trays. Which of the following are cash flows relevant to the new product? I. Molds needed to form the serving trays II. Projected increase in plate and silverware sales if the trays are produced III. A portion of the production manager's current annual salary of $75,000 IV. Raw materials used in the production of the serving trays I and IV only III and IV only I, II, and IV only I, III, and IV only I, II, III, and IV

I, II, and IV only

The Shoe Box is considering adding a new line of winter footwear to its product lineup. Which of the following are relevant cash flows for this project? I. Decreased revenue from products currently being offered if this new footwear is added to the lineup II. Revenue from the new line of footwear III. Money spent to date looking for a new product line to add to the store's offerings IV. Cost of new counters to display the new line of footwear I and IV only II and IV only II and III only I, II, and IV only II, III, and IV only

I, II, and IV only

If inside information may be used to earn abnormal returns, then the highest level of efficiency that market can be operating with is:

If inside information may NOT be used to earn abnormal returns, then the market is strong form efficient; if inside information may be used to earn abnormal returns, then the market is semistrong form efficient, at best. Semistrong

If public information may be used to earn abnormal returns, then the market is operating with at least this level of efficiency:

If public information may be used to earn abnormal returns, then the market is NOT exhibiting semistrong form efficiency, so it must be exhibiting the weak form of market efficiency, at best. Weak

You receive a credit card application from Shady Banks Savings and Loan offering an introductory rate of 3.9 percent per year, compounded monthly for the first six months, increasing thereafter to 18.8 percent compounded monthly. Required: Assuming you transfer the $19,000 balance from your existing credit card and make no subsequent payments, how much interest will you owe at the end of the first year? Interest owed=

Interest owed= $2,267.47 Here we need to find the FV of a lump sum, with a changing interest rate. We must do this problem in two parts. After the first six months, the balance will be: FV = $19,000[1 + (.039 / 12)]6 FV = $19,373.52 This is the balance in six months. The FV in another six months will be: FV = $19,373.52[1 + (.188 / 12)]6 FV = $21,267.47 The problem asks for the interest accrued, so, to find the interest, we subtract the beginning balance from the ending balance. The interest accrued is: Interest = $21,267.47 - 19,000 Interest = $2,267.47 Interest = $21,267.47 - 19,000 Interest = $2,267.47

The amount of time that a firm holds inventory in stock is referred to as which one of the following? -Inventory period -Accounts receivable period -Accounts payable period -Operating cycle -Cash cycle

Inventory period

Stoney Brooke, Inc. has sales of $1,030,000 and cost of goods sold of $811,800. The firm had a beginning inventory of $42,000 and an ending inventory of $57,000. What is the length of the inventory period? 21.95 days 22.26 days 18.63 days 17.54 days 18.88 days

Inventory turnover = $811,800 / [($42,000 + $57,000) / 2] = $811,800 / $49,500 = 16.40 Inventory period = 365 days / 16.40 = 22.26 days

You purchase a bond with a coupon rate of 8.5 percent, semiannual coupons, and a clean price of $865. Required: If the next coupon payment is due in four months, what is the invoice price?

Invoice price $ 879.17 ± 1% Explanation: Accrued interest is the coupon payment for the period times the fraction of the period that has passed since the last coupon payment. Since we have a semiannual coupon bond, the coupon payment per six months is one-half of the annual coupon payment. There are four months until the next coupon payment, so two months have passed since the last coupon payment. The accrued interest for the bond is: Accrued interest = $85/2 × 2/6 Accrued interest = $14.17 And we calculate the dirty price as: Dirty price = Clean price + Accrued interest Dirty price = $865 + 14.17 Dirty price = $879.17

Which one of the following dividends requires a firm to sell at least a portion of itself?

Liquidating A liquidating dividend is paid from the proceeds of a sale of a portion, or all, of a firm.

Xona, Inc., recently sold its plastics division to New Products Co. As a result of this sale, Xona is paying a one-time dividend of $12.80 per share. What type of dividend is this?

Liquidating A liquidating dividend is the result of a sale of part, or all, of a firm.

On which one of the following dates is the principal amount of a bond repaid? Coupon date Issue date Discount date Maturity date Face date

Maturity Date

Which one of the following commences on the day inventory is purchased and ends on the day the payment for that inventory is collected? Assume all sales and purchases are on credit. -Inventory period -Accounts receivable period -Accounts payable period -Operating cycle -Cash cycle

Operating cycle

Which one of the following terms refers to the best option that was foregone when a particular investment is selected? Side effect Erosion Sunk cost Opportunity cost Marginal cost

Opportunity cost

A firm expects to increase its annual dividend by 20 percent per year for the next two years and by 15 percent per year for the following two years. After that, the company plans to pay a constant annual dividend of $3 a share. The last dividend paid was $1 a share. What is the current value of this stock if the required rate of return is 12 percent? $17.71 $18.97 $20.50 $21.08 $21.69

P0 = [(1 × 1.2)/1.12] + [(1 × 1.22)/1.122] + [(1 × 1.22 × 1.15)/1.123] + [(1 × 1.22 × 1.152)/1.124] + [($3/0.12)/1.124 = $20.50

If past prices may not be used to earn abnormal returns, then the market is operating with at least this level of efficiency:

Past prices may not be used to earn abnormal returns when the market is weak form efficient. Weak

You have your choice of two investment accounts. Investment A is a 6-year annuity that features end-of-month $2,600 payments and has an interest rate of 9 percent compounded monthly. Investment B is an annually compounded lump-sum investment with an interest rate of 11 percent, also good for 6 years. Required: How much money would you need to invest in B today for it to be worth as much as Investment A 6 years from now?

Present value $132,066.06 To answer this question we need to find the future value of the annuity, and then find the present value that makes the lump sum investment equivalent. We also need to make sure to use the number of months as the number of periods. So, the future value of the annuity is: FVA = C{[(1 + r)t - 1] / r} FVA = $2,600{[(1 + .09 / 12)72 - 1] / (.09 / 12)} FVA = $247,018.27 Now we can find the present value that would permit the lump sum investment to be equal to this future value. This investment has annual compounding, so the number of periods is the number of years. So, the present value we would need to deposit is: PV = FV / (1 + r)t PV = $247,018.27 / (1 + .11)6 PV = $132,066.06

If public information is reflected in current stock prices, then the market is operating with at least this level of efficiency:

Publicly available information is reflected in security prices when the market is semistrong form efficient. Semistrong

You're trying to choose between two different investments, both of which have up-front costs of $103,000. Investment G returns $168,000 in 8 years. Investment H returns $288,000 in 15 years. Required: Calculate the rate of return for each these investments.

Rate of return Investment G 6.31% Investment H 7.10% The investment we should choose is the investment with the higher rate of return. We will use the future value equation to find the interest rate for each option. Doing so, we find the return for Investment G is: FV = PV(1 + r)t $168,000 = $103,000(1 + r)8 r = ($168,000 / $103,000)1/8 - 1 r = .0631, or 6.31% And, the return for Investment H is: FV = PV(1 + r)t $288,000 = $103,000(1 + r)15 r = ($288,000 / $103,000)1/15 - 1 r = .0710, or 7.10% We should choose Investment H since it has a higher return.

All else the same, an increase in the dividend growth rate on a stock will cause a(n) _______ in the stock price.

increase An increase in the dividend growth rate means that the future dividends will be greater, which will result in a higher present value.

Ilene is retired and is invested in dividend-paying stocks, such as ABC Co. ABC pays quarterly dividends of $1.30 per share which provides a steady income stream to Ilene. What type of dividends is ABC paying?

Regular Regular dividends are paid as a normal course of business. The payments are generally made on a quarterly basis.

Investment X offers to pay you $5,100 per year for 9 years, whereas Investment Y offers to pay you $6,800 per year for 5 years. Requirement 1: (a) If the discount rate is 6 percent, what is the present value of these cash flows? (Investment x and investment y) (b) Which of these cash flow streams has the higher present value at 6 percent? Requirement 2: (a) If the discount rate is 22 percent, what is the present value of these cash flows? (b) Which of these cash flow streams has the higher present value at 22 percent?

Requirement 1: Investment x: $34,688.63 Investment y:b$28,644.07 (b) Investment X Requirement 2: Investment x: $19,310.05 Investment y: $19,472.75 (b) Investment Y ************************************ To find the PVA, we use the equation: PVA = C({1 - [1 / (1 + rt)]} / r ) At an interest rate of 6 percent: X@6%: PVA = $5,100{[1 - (1 / 1.069) ] / .06 } = $34,688.63 Y@6%: PVA = $6,800{[1 - (1 / 1.065) ] / .06 } = $28,644.07 And at an interest rate of 22 percent: X@22%: PVA = $5,100{[1 - (1 / 1.229) ] / .22 } = $19,310.05 Y@22%: PVA = $6,800{[1 - (1 / 1.225) ] / .22 } = $19,472.75 Notice that the PV of Investment X has a greater PV at an interest rate of 6 percent, but a lower PV at an interest rate of 22 percent. The reason is that X has greater total cash flows. At a lower interest rate, the total cash flow is more important since the cost of waiting (the interest rate) is not as great. At a higher interest rate, Y is more valuable since it has larger annual payments. At a higher interest rate, getting these payments early is more important since the cost of waiting (the interest rate) is so much greater.

Which one of the following reduces the number of shares outstanding but does not change a firm's total equity? Stock split Distribution Reverse split Liquidation Redemption

Reverse split

Which one of the following stocks is correctly priced if the risk-free rate of return is 2.7 percent and the market risk premium is 7.2 percent? Stock Beta Expected Return A 0.71 7.90% B 1.43 12.41% C 1.24 11.16% D 1.38 11.56% E 0.95 9.54% Stock D Stock C Stock B Stock E Stock A

STOCK E E(RA) = 0.027 + 0.71 × 0.072 = 7.8120 percent Stock A is underpriced. E(RB) = 0.027 + 1.43 × 0.072 = 12.9960 percent Stock B is overpriced. E(RC) = 0.027 + 1.24 × 0.072 = 11.6280 percent Stock C is overpriced. E(RD) = 0.027 + 1.38 × 0.072 = 12.6360 percent Stock D is overpriced. E(RE) = 0.027 + 0.95 × 0.072 = 9.5400 percent Stock E is correctly priced.

Winnebagel Corp. currently sells 28,100 motor homes per year at $73,500 each and 7,100 luxury motor coaches per year at $115,500 each. The company wants to introduce a new portable camper to fill out its product line; it hopes to sell 23,100 of these campers per year at $19,500 each. An independent consultant has determined that if Winnebagel introduces the new campers, it should boost the sales of its existing motor homes by 2,700 units per year and reduce the sales of its motor coaches by 860 units per year. Required: What is the amount to use as the annual sales figure when evaluating this project?

Sales due solely to the new product line are: 23,100($19,500) = $450,450,000 Increased sales of the motor home line occur because of the new product line introduction; thus: 2,700($73,500) = $198,450,000 in new sales is relevant. Erosion of luxury motor coach sales is also due to the new mid-size campers; thus: 860($115,500) = $99,330,000 loss in sales is relevant. The net sales figure to use in evaluating the new line is thus: Net sales = $450,450,000 + 198,450,000 - 99,330,000 Net sales = $549,570,000

Mark is analyzing a proposed project to determine how changes in the variable costs per unit would affect the project's net present value. What type of analysis is Mark conducting? Sensitivity analysis Erosion planning Scenario analysis Benefit-cost analysis Opportunity cost analysis

Sensitivity analysis

ABC, Inc. has a beginning receivables balance on January 1st of $590. Sales for January through April are $350, $380, $460 and $480, respectively. The accounts receivable period is 60 days. How much did the firm collect in the month of March? Assume that a year has 360 days. $460 $350 $590 $480 $380

Since the A/R period is 60 days, March collections will equal January sales. March collections = $350

Gladstone Industries pays a quarterly dividend of $0.50 per share. Over the past 30 years, the firm's cash balance has steadily increased to the point where the firm now feels that it should make a one-time distribution of a portion of these excess funds. If the firm pays an additional $3 per share to lower its cash reserves, the dividend will be classified as which type of dividend?

Special A special dividend is unusual and a one-time event which is not expected to be repeated.

Portersfield Products just announced that it will pay a total dividend of $4.20 this year and that all future dividends will return to the normal $2.20 per share. The additional $2 per share is classified as which type of dividend?

Special One-time payments that will not be repeated are referred to as special dividends.

Which one of the following principles refers to the assumption that a project will be evaluated based on its incremental cash flows? Forecast assumption principle Base assumption principle Fallacy principle Erosion principle Stand-alone principle

Stand-alone principle

The SGS Co. had $167000 in taxable income. What is the average tax rate? What is the marginal tax rate? $0-50,000 15% $50,001-75,000 25 $75001-100,000 34 $100,001-335,000 39 $335,001-10,000,000 34 $10,000,001-15,000,000 35 $15,000,001-18,333,334 38 $18,333,334+ 35

Taxes = .15(50,000) + .25(25,000) + .34(25,000) + .39(167,000-100,000) = $48,380. Average tax rate = total tax / taxable income Average tax rate = 48,380/167,000 = .2897 or 28.97% Marginal tax rate = the tax rate on the next dollar of income. The company has net income of $167,000 and the 39% tax bracket is applicable to a net income up to $335,000, so the marginal tax rate is 39%. ****taxes = income taxes

A stock has a beta of 1.08, the expected return on the market is 10.2 percent, and the risk-free rate is 4.85 percent. Required: What must the expected return on this stock be?

The CAPM states the relationship between the risk of an asset and its expected return. The CAPM is: E(Ri) = Rf + [E(RM) - Rf] × βi Substituting the values we are given, we find: E(Ri) = .0485 + (.1020 - .0485)(1.08) E(Ri) = .1063, or 10.63%

The written agreement that contains the specific details related to a bond issue is called the bond: indenture. debenture. document. registration statement. issue paper.

indenture

Consider the following cash flows: Year Cash Flow 0 -$ 33,000 1 13,400 2 18,300 3 10,800 Required: What is the IRR of the above set of cash flows?

The IRR is the interest rate that makes the NPV of the project equal to zero. So, the equation that defines the IRR for this project is: 0 = - $33,000 + $13,400 / (1 + IRR) + $18,300 / (1 + IRR)2 + $10,800 / (1 + IRR)3 Using a spreadsheet, financial calculator, or trial and error to find the root of the equation, we find that: IRR = 14.23% or solve in Calculator

If Treasury bills are currently paying 6.55 percent and the inflation rate is 1.2 percent, what is the approximate and the exact real rate of interest?

The approximate relationship between nominal interest rates (R), real interest rates (r), and inflation (h), is: R = r + h Approximate r = .0655 - .012 Approximate r = .0535, or 5.35% The Fisher equation, which shows the exact relationship between nominal interest rates, real interest rates, and inflation, is: (1 + R) = (1 + r)(1 + h) (1 + .0655) = (1 + r)(1 + .012) Exact r = [(1 + .0655) / (1 + .012)] - 1 Exact r = .0529, or 5.29%

A stock has had returns of −19.4 percent, 29.4 percent, 28.8 percent, −10.5 percent, 35.2 percent, and 27.4 percent over the last six years. Required: What are the arithmetic and geometric returns for the stock?

The arithmetic average return is the sum of the known returns divided by the number of returns, so: Arithmetic average return = (-.194 + .294 + .288 -.105 + .352 +.274) / 6 Arithmetic average return = .1515, or 15.15% Using the equation for the geometric return, we find: Geometric average return = [(1 + R1) × (1 + R2) × ... × (1 + RT)]1/T - 1 Geometric average return = [(1 - .194)(1 + .294)(1 + .288)(1 - .105)(1 + .352)(1 + .274)](1/6) - 1 Geometric average return = .1290, or 12.90% Remember, the geometric average return will always be less than the arithmetic average return if the returns have any variation.

Consider an asset that costs $981,000 and is depreciated straight-line to zero over its ten-year tax life. The asset is to be used in a seven-year project; at the end of the project, the asset can be sold for $135,600. Required: If the relevant tax rate is 35 percent, what is the aftertax cash flow from the sale of this asset?

The asset has a useful life of 10 years and we want to find the book value of the asset after 7 years. With straight-line depreciation, the depreciation each year will be: Annual depreciation = $981,000 / 10 Annual depreciation = $98,100 So, after seven years, the accumulated depreciation will be: Accumulated depreciation = 7($98,100) Accumulated depreciation = $686,700 The book value at the end of Year 7 is thus: BV7 = $981,000 - 686,700 BV7 = $294,300 The asset is sold at a loss to book value, so the depreciation tax shield of the loss is recaptured. Aftertax salvage value = $135,600 + ($294,300 - 135,600)(.35) Aftertax salvage value = $191,145 To find the taxes on salvage value, remember to use the equation: Taxes on salvage value = (BV - MV)TC This equation will always give the correct sign for a tax inflow (refund) or outflow (payment).

You own a stock portfolio invested 27 percent in Stock Q, 17 percent in Stock R, 43 percent in Stock S, and 13 percent in Stock T. The betas for these four stocks are .96, 1.02, 1.42, and 1.87, respectively. Required: What is the portfolio beta?

The beta of a portfolio is the sum of the weight of each asset times the beta of each asset. So, the beta of the portfolio is: βp = .27(.96) + .17(1.02) + .43(1.42) + .13(1.87) βp = 1.29

You own a portfolio that has $2,800 invested in Stock A and $3,900 invested in Stock B. Assume the expected returns on these stocks are 9 percent and 15 percent, respectively. Required: What is the expected return on the portfolio?

The expected return of a portfolio is the sum of the weight of each asset times the expected return of each asset. The total value of the portfolio is: Total value = $2,800 + 3,900 Total value = $6,700 So, the expected return of this portfolio is: E(Rp) = ($2,800 / $6,700)(.09) + ($3,900 / $6,700)(.15) E(Rp) = .1249, or 12.49%

Consider the following information: State of Probability of Rate of Return Economy state of economy If state occurs Recession .27 −.11 Boom .73 .23 Required: Calculate the expected return.

The expected return of an asset is the sum of the probability of each state occurring times the rate of return if that state occurs. So, the expected return of each asset is: E(R) = .27(-.11) + .73(.23) E(R) = .1382, or 13.82%

Consider the following financial statement information for the Amaryllis Corporation: Item Beginning Ending Inventory $8,732 $9,418 Accounts receivable 3,721 4,162 Accounts payable 4,384 4,791 Net sales $138,503 Cost of goods sold 86,313 Required: Assume all sales are on credit. Calculate the operating and cash cycles

The operating cycle is the inventory period plus the receivables period. The inventory turnover and inventory period are: Inventory turnover = COGS / Average inventory Inventory turnover = $86,313 / [($8,732 + 9,418)/2] Inventory turnover = 9.5111 times Inventory period = 365 days / Inventory turnover Inventory period = 365 days / 9.5111 Inventory period = 38.38 days And the receivables turnover and receivables period are: Receivables turnover = Credit sales / Average receivables Receivables turnover = $138,503 / [($3,721 + 4,162)/2] Receivables turnover = 35.1397 times Receivables period = 365 days / Receivables turnover Receivables period = 365 days/35.1397 Receivables period = 10.39 days So, the operating cycle is: Operating cycle = 38.38 days + 10.39 days Operating cycle = 48.76 days The cash cycle is the operating cycle minus the payables period. The payables turnover and payables period are: Payables turnover = COGS / Average payables Payables turnover = $86,313 / [($4,384 + 4,791)/2] Payables turnover = 18.8148 times Payables period = 365 days / Payables turnover Payables period = 365 days / 18.8148 Payables period = 19.40 days So, the cash cycle is: Cash cycle = 48.76 days - 19.40 days Cash cycle = 29.36 days The firm is receiving cash on average 29.36 days after it pays its bills.

The treasurer of a major U.S. firm has $12 million to invest for three months. The interest rate in the U.S. is 0.42 percent per month. The interest rate in the UK is 0.52 percent per month. The spot exchange rate is £0.70, and the three-month forward rate is £0.71. Ignoring transaction costs, in which country would the treasurer want to invest the company's funds? Why? U.S.; earn an additional $47,211.16 U.S.; earn an additional $135,325.24 UK; earn an additional $9,418.02 UK; earn an additional $38,522.47 UK; earn an additional $121,510.67

U.S.; earn an additional $135,325.24 Earnings in U.S. $ from U.S. investment: [$12m (1.0042)3] - $12m = $151,835.93; Earnings in U.S. $ from UK investment: [$12m (£0.70/$1)(1.0052)3 ($1/£0.71)] - $12m = $16,510.69; Difference in earnings = $135,325.24

Consider the following financial statement information for the Amaryliss Corporation: Item Beginning Ending Inventory $11,282 $12,080 Accounts receivable 6,551 7,081 Accounts payable 6,852 7,193 Net sales $140,203 Cost of goods sold 88,013 Required: Assume all sales are on credit. Calculate the operating and cash cycles

The operating cycle is the inventory period plus the receivables period. The inventory turnover and inventory period are: Inventory turnover = COGS / Average inventory Inventory turnover = $88,013 / {[$11,282 + 12,080]/2} Inventory turnover = 7.5347 times Inventory period = 365 days / Inventory turnover Inventory period = 365 days / 7.5347 Inventory period = 48.44 days And the receivables turnover and receivables period are: Receivables turnover = Credit sales / Average receivables Receivables turnover = $140,203 / {[$6,551 + 7,081]/2} Receivables turnover = 20.5697 times Receivables period = 365 days/Receivables turnover Receivables period = 365 days/20.5697 Receivables period = 17.74 days So, the operating cycle is: Operating cycle = 48.44 days + 17.74 days Operating cycle = 66.19 days The cash cycle is the operating cycle minus the payables period. The payables turnover and payables period are: Payables turnover = COGS/Average payables Payables turnover = $88,013 / {[$6,852 + 7,193]/2} Payables turnover = 12.5330 times Payables period = 365 days / Payables turnover Payables period = 365 days / 12.5330 Payables period = 29.12 days So, the cash cycle is: Cash cycle = 66.19 days - 29.12 days Cash cycle = 37.06 days The firm is receiving cash on average 37.06 days after it pays its bills.

What are the portfolio weights for a portfolio that has 150 shares of Stock A that sell for $87 per share and 125 shares of Stock B that sell for $94 per share?

The portfolio weight of an asset is the total investment in that asset divided by the total portfolio value. First, we will find the portfolio value, which is: Total value = 150($87) + 125($94) Total value = $24,800 The portfolio weight for each stock is: xA = 150($87) / $24,800 xA = .5262 xB = 125($94) / $24,800 xB = .4738

Lycan, Inc., has 8.9 percent coupon bonds on the market that have 6 years left to maturity. The bonds make annual payments. Required: If the YTM on these bonds is 10.9 percent, what is the current bond price?

The price of any bond is the PV of the interest payments, plus the PV of the par value. Notice this problem assumes an annual coupon. The price of the bond will be: P = $89({1 - [1/(1 + .109)]6} / .109) + $1,000[1 / (1 + .109)6] P = $915.14 Or plug in to Calculator

Bui Corp. pays a constant $12 dividend on its stock. The company will maintain this dividend for the next nine years and will then cease paying dividends forever. Required: If the required return on this stock is 10 percent, what is the current share price?

The price of any financial instrument is the present value of the future cash flows. The future dividends of this stock are an annuity for 9 years, so the price of the stock is the present value of an annuity, which will be: P0 = $12.00(PVIFA10%,9) P0 = $69.11

Raffalovich, Inc., is expected to maintain a constant 4.9 percent growth rate in its dividends, indefinitely. Required: If the company has a dividend yield of 5.7 percent, what is the required return on the company's stock?

The required return of a stock is made up of two parts: The dividend yield and the capital gains yield. So, the required return of this stock is: R = Dividend yield + Capital gains yield R = .057 + .049 R = .1060, or 10.60%

Which of the following is generally not a right granted common stock shareholders?

The right to directly elect the CEO of the company. Shareholders do not directly vote on the CEO, but rather elect the board of directors, who in turn hire the CEO.

Friendly Skies Airline has earnings before interest and taxes of $21,680 and net income of $12,542. The tax rate is 35 percent. What is the times interest earned ratio? 0.88 1.73 3.09 5.59 9.09

Times interest earned ratio = $21,680/{$21,680 - [$12,542/(1 - 0.35)]} = 9.09

You can earn .37 percent per month at your bank. Required: If you deposit $2,000, how long must you wait until your account has grown to $3,700? (Number of months)

To answer this question, we can use either the FV or the PV formula. Both will give the same answer since they are the inverse of each other. We will use the FV formula, that is: FV = PV(1 + r)t $3,700 = $2,000(1.0037)t t = ln($3,700 / $2,000) / ln 1.0037 t = 166.57 months or do it on the calculator

Hammett, Inc., has sales of $19,760, costs of $9,270, depreciation expense of $1,940, and interest expense of $1,430. Assume the tax rate is 35 percent. (Enter your answer as directed, but do not round intermediate calculations.) Required: What is the operating cash flow?

To calculate the OCF, we first need to construct an income statement. The income statement starts with revenues and subtracts costs to arrive at EBIT. We then subtract out interest to get taxable income, and then subtract taxes to arrive at net income. Doing so, we get: Income statement Sales $ 19,760 Costs 9,270 Depreciation 1,940 EBIT $ 8,550 Interest 1,430 Taxable income $ 7,120 Taxes (35%) 2,492 Net income $ 4,628 Now we can calculate the OCF, which is: OCF = EBIT + Depreciation - Taxes OCF = $8,550 + 1,940 - 2,492 OCF = $7,998

You purchased 300 shares of a particular stock at the beginning of the year at a price of $76.63. The stock paid a dividend of $1.60 per share, and the stock price at the end of the year was $83.14. Required: What was your dollar return on this investment?

To calculate the dollar return, we multiply the number of shares owned by the change in price per share and the dividend per share received. The total dollar return is: Dollar return = 300($83.14 - 76.63 + 1.60) Dollar return = $2,433.00

If Nuber, Inc., has an ROA of 9.3 percent and a payout ratio of 35 percent. Required: What is its internal growth rate?

To find the internal growth rate, we need the plowback, or retention, ratio. The plowback ratio is: b = 1 - Payout ratio b = 1 - .35 b = .65 Now, we can use the internal growth rate equation to find: Internal growth rate = [(ROA)(b)] / [1 - (ROA)(b)] Internal growth rate = [.093(.65)] / [1 - .093(.65)] Internal growth rate = .0643, or 6.43%

Nofal Corporation will pay a $3.65 per share dividend next year. The company pledges to increase its dividend by 5.1 percent per year, indefinitely. Required: If you require a return of 12 percent on your investment, how much will you pay for the company's stock today?

Using the constant growth model, we find the price of the stock today is: P0 = D1 / (R - g) P0 = $3.65 / (.12 - .051) P0 = $52.90

Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,430,000. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $2,260,000 in annual sales, with costs of $1,250,000. Assume the tax rate is 40 percent and the required return on the project is 8 percent. Required: What is the project's NPV?

Using the tax shield approach to calculating OCF (Remember the approach is irrelevant; the final answer will be the same no matter which of the four methods you use.), we get: OCF = (Sales - Costs)(1 - TC) + Depreciation(TC) OCF = ($2,260,000 - 1,250,000)(1 - .40) + .40($2,430,000 / 3) OCF = $930,000 Since we have the OCF, we can find the NPV as the initial cash outlay, plus the PV of the OCFs, which are an annuity, so the NPV is: NPV = -$2,430,000 + $930,000(PVIFA8%,3) NPV = -$33,299.80

Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,550,000. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $2,300,000 in annual sales, with costs of $1,290,000. Required: If the tax rate is 35 percent, what is the OCF for this project?

Using the tax shield approach to calculating OCF (Remember the approach is irrelevant; the final answer will be the same no matter which of the four methods you use.), we get: OCF = (Sales - Costs)(1 - TC) + Depreciation(TC) OCF = ($2,300,000 - 1,290,000)(1 - .35) + .35($2,550,000 / 3) OCF = $954,000

Suppose you know that a company's stock currently sells for $58 per share and the required return on the stock is 12 percent. You also know that the total return on the stock is evenly divided between capital gains yield and dividend yield. Required: If it's the company's policy to always maintain a constant growth rate in its dividends, what is the current dividend per share?

We know the stock has a required return of 12 percent, and the dividend and capital gains yield are equal, so: Dividend yield = 1/2(.12) Dividend yield = .06 = Capital gains yield Now we know both the dividend yield and capital gains yield. The dividend is simply the stock price times the dividend yield, so: D1 = .06($58) D1 = $3.48 This is the dividend next year. The question asks for the dividend this year. Using the relationship between the dividend this year and the dividend next year: D1 = D0(1 + g) We can solve for the dividend that was just paid: $3.48 = D0(1 + .06) D0 = $3.48 / 1.06 D0 = $3.28

Suppose the spot exchange rate for the Hungarian forint is HUF 215. Interest rates in the United States are 4.7 percent per year. They are 6.6 percent in Hungary. Required: What do you predict the exchange rate will be in one year? In two years? In five years?

We need to find the change in the exchange rate over time, so we need to use the interest rate parity relationship: Ft = S0 × [1 + (RFC - RUS)]t Using this relationship, we find the exchange rate in one year should be: F1 = 215[1 + (.066 - .047)]1 F1 = HUF 219.09 The exchange rate in two years should be: F2 = 215[1 + (.066 - .047)]2 F2 = HUF 223.25 And the exchange rate in five years should be: F5 = 215[1 + (.066 - .047)]5 F5 = HUF 236.22

The stock price of Webber Co. is $68. Investors require an 11 percent rate of return on similar stocks. Required: If the company plans to pay a dividend of $3.85 next year, what growth rate is expected for the company's stock price?

We need to find the growth rate of dividends. Using the constant growth model, we can solve the equation for g. Doing so, we find: g = R - (D1 / P0) g = .11 - ($3.85 / $68) g = .0534, or 5.34%

The next dividend payment by Wyatt, Inc., will be $2.30 per share. The dividends are anticipated to maintain a growth rate of 4.5 percent forever. Required: If the stock currently sells for $39.85 per share, what is the required return?

We need to find the required return of the stock. Using the constant growth model, we can solve the equation for R. Doing so, we find: R = (D1 / P0) + g R = ($2.30 / $39.85) + .045 R = .1027, or 10.27%

Your portfolio is 330 shares of Davis, Inc. The stock currently sells for $103 per share. The company has announced a dividend of $3.40 per share with an ex-dividend date of April 19. Required: Assuming no taxes, how much will your stock be worth on April 19?

With no taxes we would expect the stock price to drop by exactly the amount of the dividend, so the new stock price will be: New stock price = $103.00 - 3.40 New stock price = $99.60 Your total stock investment will be worth: Stock value = 330 × $99.60 Stock value = $32,868

Which one of the following terms refers to a bond's rate of return that is required by the marketplace? Coupon rate Yield to maturity Dirty yield Call yield Discount rate

Yield to maturity

Semistrong form market efficiency states that the value of a security is based on: all public and private information. historical information only. all publicly available information. all publicly available information plus any data that can be gathered from insider trading. random information with no clear distinction as to the source of that information.

all publicly available information.

Dividends are best defined as: cash payments to shareholders. cash payments to either bondholders or shareholders. cash or stock payments to shareholders. cash or stock payments to either bondholders or shareholders. distributions of stock to current shareholders.

cash or stock payments to shareholders.

average collection period is the same as

days' sales in receivables

An individual who maintains an inventory in a security and stands ready to buy and sell at any time is a ______.

dealer A dealer maintains an inventory and stands ready to buy and sell at any time. A commission broker executes customer orders to buy and sell stock transmitted to the exchange floor. A floor broker executes orders for commission brokers on a fee basis; sometimes called $2 brokers. A floor trader trades for their own accounts, trying to anticipate temporary price fluctuations. A member is the holder of a trading license on the NYSE.

Miller Farm Products is issuing a 15-year, unsecured bond. Based on this information, you know that this debt can be described as a: note. bearer form bond. debenture. registered form bond. call protected bond.

debenture

All else the same, an increase in the required return on a stock will cause a(n) _______ in the stock price.

decrease An increase in the required return will decrease the stock price. Intuitively, we are discounting the dividends at a higher interest rate, which results in a lower present value.

A call provision grants the bond issuer the: right to contact each bondholder to determine if he or she would like to extend the term of his or her bonds. option to exchange the bonds for equity securities. right to automatically extend the bond's maturity date. right to repurchase the bonds on the open market prior to maturity. option of repurchasing the bonds prior to maturity at a prespecified price.

option of repurchasing the bonds prior to maturity at a prespecified price.

A pro forma financial statement is a financial statement that: expresses all values as a percentage of either total assets or total sales. compares actual results to the budgeted amounts. compares the performance of a firm to its industry. projects future years' operations. values all assets based on their current market values.

projects future years' operations.

Dan is a chemist for ABC, a major drug manufacturer. Dan cannot earn excess profits on ABC stock based on the knowledge he has related to his experiments if the financial markets are: weak form efficient. strong form efficient. semistrong form efficient. efficient at any level. aware that the trader is an insider.

strong form efficient.