FIN 300 Final Exam Review (Ch. 9, 12, 13, 14, 15)
Which one of the following statements is correct concerning market efficiency?
a firm will generally receive a fair price when it issues new shares of stock if the market is efficient
The IRR that causes the net present value of the differences between two project's cash flows to equal zero is called the
crossover rate
The primary purpose of portfolio diversification is to
eliminate asset-specific risk
Which one of the following will be constant for all securities if the market is efficient and securities are prices fairly?
reward-to-risk ratio
Which one of the following categories of securities has the most volatile annual returns over the period 1926-2016?
small-company stocks
The Boat Works decided to go public by offering a total of 135,000 shares of common stock to the public. The company hired an underwriter who arranged a firm commitment underwriting and an initial selling price of $24 a share with a spread of 8.3%. As it turned out, the underwriters only sold 122,400, shares to the public. What is the amount paid to the issuer?
$2,971,080 Total cash received= 135,000(24)(1-.083)
Southern Bakeries just paid its annual dividend of $.48 a share. The stock has a market price of $17.23 and a beta of .93. The return on the U.S. Treasury bill is 3.1% and the market risk premium is 7.6%. What is the cost of equity?
10.17% -.031 + .93(.076)
Dee's Fashions has a growth rate of 3.2% and is equally as risky as the market while its stock is currently selling for $32 a share. The overall stock market has a return of 10.9% and a risk premium of 6.8%. What is the expected rate of return on this stock?
10.9% - (.109 - .068) + 1(.068)
Kelso's has a debt-equity ratio of .62 and a tax rate of 21%. The firm does not issue preferred stock. The cost of equity is 16.3% and the aftertax cost of debt is 5.21%. What is the weighted average cost of capital?
12.06% WACC= (1/1.62)(.163) + (.62/1.62)(.0521)
Smathers Corp. stock has a beta of 1.15. The market risk premium is 7.80% and the risk free rate is 3.36% annually. What is the company's cost of equity?
12.33% -.0336 + 1.15(.0780)
Grill Works has 6 percent preferred stock outstanding that is currently selling for $49 a share. The market rate of return is 14% and the firm's tax rate is 21%. What is the firm's cost of preferred stock if its stated value is $100 per share?
12.4% - .06(100)/49
Shelf registration allows firms to register multiple issues at one time with the SEC and then sell those registered shares anytime during the subsequent
2 years
Galvatron Metals has a bond outstanding with a coupon rate of 6.5% and semiannual payments. The bond currently sells for $1,905 and matures in 15 years. The par value is $2,000 and the company's tax rate is 40%. What is the company's aftertax cost of debt?
4.21% N=30 I= PV=-1905 PMT=65 FV=2000
It's common for venture capitalists to receive at least _________ percent of a start-up company's equity in exchange for the venture capital
40
Chelsea Fashions is expected to pay an annual dividend of $1.26 a share next year. The market price of the stock is $24.09 and the growth rate is 2.6 percent. What is the firm's cost of equity?
7.83% -(1.26/24.09) + .026
Holdup Bank has an issue of preferred stock with a $7 stated dividend that just sold for $87 per share. What is the bank's cost of preferred?
8.05% -7/87
Judy's Boutique just paid an annual dividend of $2.29 on its common stock and increases its dividend by 3.10 percent annually. What is the rate of return on this stock if the current stock price is $38.20 a share?
9.28% [(2.29(1.0310)/38.20] + .0310
Mobile Units recently offered 75,000 new shares of stock for sale. The underwriters sold a total of 75,800 shares to the public at a price of $16 a share. The additional 3,500 shares were purchased in accordance with which one of the following?
Green Show Provision
Which one of the following statements concerning risk are correct? I) Non-diversifiable risk is measured by beta II) The risk premium increases as diversifiable risk increases III) Systematic risk is another name for non-diversifiable risk IV) Diversifiable risks are market risks you cannot avoid
I and III
You are viewing a graph that plots the NPVs of a project to various discount rates that could be applied to the project's cash flows. What is the name given to this graph?
NPV profile
What is a prospectus?
a document that describes the details of a proposed security offering along with relevant information about the issuer
Which one of the following is the best example of diversifiable risk?
a firm's sales decrease
Issac has analyzed two mutually exclusive projects that 3-year lives. Project A has an NPV of $81,406, a payback period of 2.48 years, and an AAR of 9.31 percent. Project B has an NPV $82,909, a payback period of 2.57 years, and an AAR of 9.22%. The required rate of return for Project A is 11.5% while it's 12% for Project B. Both projects have a required AAR of 9.25%. Issac must make a recommendation and justify it in 15 words or less. What should his recommendation be?
accept Project B and reject Project A based on the NPVs
Underwriters generally:
accept the risk of selling the new securities in exchange for the gross spread
With Dutch auction underwriting
all successful bidders pay the same price per share
Roger's Meat Market is considering two independent projects. The profitability index decision rule indicates that both projects should be accepted. This result most likely does which one of the following?
assumes the firm has sufficient funds to undertake both projects
The systematic risk of the market is measured by a
beta of 1
Treynor Industries is investing in a new project. The minimum rate of return the firm requires on this project is referred to as the:
cost of capital
The raising of small amounts of capital from a large number of people is known as
crowdfunding
When a firm announces an upcoming seasoned stock offering, the market price of the firm's existing shares tends to:
decrease
Roy owns 200 shares of RTF Inc. He has opted not to participate in the current rights offering by this company. As a result, Roy will most likely be subject to
dilution
Which one of the following statements is correct concerning the issuance of long-term debt?
direct placement debt tends to have more restrictive covenants than publicly issued debt
The internal rate of return is defined as the:
discount rate which causes the net present value of project to equal zero
Blue Stone Builders recently offered to sell 45,000 newly issued shares of stock to the public. The underwriters charged a fee of 8.2% and paid Blue Stone Builders the uniform auction price for each of those shares. Which one of the following terms best describes this underwriting?
dutch auction
Which one of the following statements concerning venture capitalists is correct?
exit strategy is a key consideration when selecting a venture capitalist
Jones & Co. recently went public and received $23.07 a share on their entire offer of 30,000 shares. Keeser & Co. served as the underwriter and sold 28,500 shares to the public at an offer price of $26.50 a share. What type of underwriting was this?
firm commitment
A syndicate can best be defined as a
group of underwriters sharing the risk of selling a new issue of securities
There are two distinct discount rates at which a particular project will have a zero net present value. In this situation, the project is said to:
have multiple rates of return
JLK is a partnership that was formed two years ago and has been extremely successful thus far. The owners have decided to incorporate and offer shares of stock to the general public. What is this type of an equity offering called?
initial public offering
The dividend growth model
is only as reliable as the estimated rate of growth
Net present value
is the best method of analyzing mutually exclusive projects
Assume the market rate of return is 10.1% and the risk-free rate of return is 3.2%. Lexant stock has 2% less systematic risk than the market and has an actual return of 10.2%. This stock:
is underpriced
With firm commitment underwriting, the issuing firm:
knows upfront the amount of money it will receive from the stock offering
Which of the following are advantages of the payback method of project analysis?
liquidity bias, ease of use
Which one of the following is an example of unsystematic risk?
national decrease in consumer spending on entertainment
Scott is considering a project that will produce cash inflows of $2,900 a year for 3 years. The project has a 15.4 percent required rate of return and an initial cost of $6,800. What is the discounted payback period?
never
Estimates of the rate of return on a security based on the historical arithmetic average will probably tend to _________ the expected return for the long-term and estimates using the historical geometric average will probably tent to _________ the expected return for the short-term
overestimate; underestimate
The weighted average cost of capital for a firm with debt is the
rate of return a company must earn on its existing assets to maintain the current value of its stock
The cost of preferred stock is computed the same as the
rate of return on a perpetuity
Which one of the following will be constant for all securities if the market is efficient and securities are priced fairly
reward-to-risk ratio
Which one of the following will be constant for all securities if the market is efficient and securities are priced fairly?
reward-to-risk-ratio
Alberto currently owns 2,500 shares of Southern Tools. He has just been notified that the firm is issuing additional shares and he is being given a chance to purchase some of these shares prior to the shares being offered to the general public. What is this type of an offer called?
rights offer
What is a seasoned equity offering?
sale of newly issued equity shares by a publicly owned company
Which one of the following earned the highest risk premium over the period 1926-2016?
small-company stocks
Small-company stocks, as the term is used in the textbook, are best defined as the
smallest 20% of the companies listed on the NYSE
The U.S. Securities and Exchange Commission periodically charges individuals with insider trading and claims those individuals have made unfair profits. Given this, you would be most apt to argue that the markets are less than __________ form efficient
strong
Direct business loans typically ranging from one to five years are called:
term loans
Efficient financial markets fluctuate continuously because
the markets are continually reacting to new information
A project has a net present value of zero. Which one of the following best describes this project?
the project's cash inflows equal its cash outflows in current dollar terms
The intercept point of the security market line is the rate of return which corresponds to
the risk-free rate
Executive Tours has decided to go public and has hired an investment firm to handle the offering. The investment is serving as an
underwriter
Which one of the following statements related to unexpected returns is correct?
unexpected returns can be either positive and negative in the short term but tend to be zero over the long-term
Which one of the following risks is irrelevant to a well-diversified investor?
unsystematic risk
Business Aid is funded by a group of wealthy investors for the sole purpose of providing funds for individuals and small firms that are trying to convert their new ideas into viable products. What is this type of funding called?
venture capital
Which one of the following statements concerning venture capital financing is correct?
venture capitalists should have key concepts and financials strength
Standard deviation is a measure of which of the following?
volatility
The equivalent annual cost method is useful in determining
which one of two machines should be purchased when the machines are mutually exclusive, have differing lives, and will be replaced at the end of their lives
Nelson Paints recently went public by offering 50,000 shares of common stock to the public. The underwriters provided their services in a best efforts underwriting. The offering price was set at $17.50 a share and the gross spread was $2.30. After completing their sales efforts, the underwriters determined that they sold a total of 47,500 shares. How much cash did Nelson Paints receive from its IPO?
$722,000 Total Cash Received= 47500(17.50-2.30)
A stock with an actual return that lies above the security market line has
a higher return than expected for the level of risk assumed
Which one of the following is a positively sloped linear function that is created when expected returns are graphed against security betas?
a security market line
The return earned in an average year over a multiyear period is called the ________ average return
arithmetic
Which of the following statements are true based on the historical record for 1926-2016?
bonds are generally a safer, or less risky, investment than are stocks
Unsystematic risk
can be effectively eliminated by portfolio diversification
The standard deviation of a portfolio
can be less than the standard deviation of the least risky security in the portfolio
Which one of the following is the formula that explains the relationship between the expected return on a security and the level of the security's systematic risk?
capital asset pricing model
Which of the following yields on a stock can be negative?
capital gains yield and total return
Assume all stock prices fairly reflect all of the available information on those stocks. Which one of the following terms best defines the stock market under these conditions?
efficient capital market
The reward-to-risk ratio for Stock A is less than the reward-to-risk ratio of Stock B. Stock A has a beta of .82 and Stock B has a beta of 1.29. This information implies that
either Stock A is overpriced or Stock B is underprices or both
Travis if the CEO of Harvest Foods, which is a privately held corporation. What is the first step he must take to take Harvest Foods public?
gain board approval
The average compound return earned per year over a multiyear period is called the _________ average return
geometric
The difference between the underwriters' cost of buying shares in a firm commitment and the offering price of those securities to the public is called the
gross spread
Generally speaking, which of the following best correspond to a wide frequency distribution?
high standard deviation, large risk premium
To convince investors to accept greater volatility, you must:
increase the risk premium
Which one of the following will decrease the net present value of project?
increasing the project's initial cost at time zero
In actual practice, managers most frequently use which two types of investment criteria?
internal rate of return and net present value
Which one of the following is an example of systematic risk?
investors panic causing security prices around the globe to fall precipitously
Which one of the following is represented by the slope of the security market line?
market-risk premium
Which one of the following statements related to market efficiency tends to be supported by current evidence?
markets tend to respond quickly to new information
Existing shareholders:
may or may not have pre-emptive right to newly issued shares
Which two methods of project analysis are the most biased towards short-term projects?
payback and discounted payback
Which one of the following characteristics is most associated with financing type projects?
prepaid services
Equity financing of new, non public companies is broadly referred to as
private security
Which one of the following is a preliminary prospectus?
red herring
What is the form called that is filed with the SEC and discloses the material information on a securities issuer when that issuer offers new securities to the general public?
registration statement
The Securities and Exchange Commission
reviews registration statements to ensure they comply with current laws and regulations
Assume that last year T-bills returned 2.8% while your investment in large-company stocks earned an average of 7.6%. Which one of the following terms refers to the difference between two rates of return?
risk premium
The _________ of a security divided by the beta of that security is equal to the slope of the security market line if the security is priced fairly
risk premium
The excess return earned by an asset that has a beta of 1.34 over that earned by a risk-free asset is referred to as the:
risk premium
Pearson Electric recently registered 180,000 shares of stock under SEC Rule 415. The company plans to sell 100,000 shares this year and the remaining 80,000 shares next year. What type of registration was this?
shelf registration
Inside information has the least value when financial markets are
strong form efficient
Which one of the following is a risk that applies to most securities?
systematic
Direct business loans typically ranging from one to five years are called
term loans
The common stock of Alpha Manufacturers has a beta of 1.24 and an actual expected return of 13.25 percent. The risk-free rate of return is 3.7 percent and the market rate of return is 11.78 percent. Which one of the following statements is true given this information?
the actual expected stock return indicates the stock is currently overpriced
You are considering a project with conventional cash flows, an IRR of 11.63%, a PI of 1.04, an NPV of $987, and a payback period of 2.98 years. Which one of the following statements is correct given this information?
the discount rate used in computing the net present value was less than 11.63 percent
Which one of the following is the most likely reason why a stock price might not react at all on the day that new information related to the stock's issuer is released? Assume the market is semistrong form efficient
the information was expected
If a project has a net present value equal to zero, then
the project earns a return exactly equal to the discount rate
Advertisements in a financial newspaper announcing a public offering of securities, along with a list of the investment banks handling the offering, are called
tombstones
The rate of return on which type of security is normally used as the risk-free rate of return?
treasury bills
