FIN 410 Exam 1

You purchase 450 shares of 2nd Chance Co. stock on margin at a price of $60. Your broker requires you to deposit $17,000. What is the margin loan?

$10,000

Precision Engineering recently announced that its next annual dividend will be $1.20 per share with later dividends increasing by 2.5 percent annually. What is the current value of this stock to you if you require a 12 percent rate of return?

$12.63

You have $82,000 and decide to invest on margin. If the initial margin requirement is 60 percent, what is the maximum dollar purchase you can make?

$136,667

Joker stock has a sustainable growth rate of 9 percent, ROE of 15 percent, and dividends per share of $3.15. If the P/E ratio is 19.7, what is the value of a share of stock?

$155.14

Could I Industries just paid a dividend of $1.25 per share. The dividends are expected to grow at a 16 percent rate for the next 5 years and then level off to a 5 percent growth rate indefinitely. If the required return is 17 percent, what is the value of the stock today? What is the price?

$16.57

Bill's Bakery has current earnings per share of $2.5. Current book value is $4.3 per share. The appropriate discount rate for Bill's Bakery is 17 percent. Calculate the share price for Bill's Bakery if earnings grow at 3.4 percent forever.

$17.93

You are going to value Lauryn's Doll Co. using the FCF model. After consulting various sources, you find that Lauryn has a reported equity beta of 1.7, a debt-to-equity ratio of .5, and a tax rate of 40 percent. Assume a risk-free rate of 6 percent and a market risk premium of 12 percent. Lauryn's Doll Co. had EBIT last year of $57 million, which is net of a depreciation expense of $5.7 million. In addition, Lauryn made $4.3 million in capital expenditures and increased net working capital by $2.6 million. Assume her FCF is expected to grow at a rate of 2 percent into perpetuity. What is the value of the firm?

$170.69 Million

Suppose you take out a margin loan for $47,000. The rate you pay is an 9.1 percent effective rate. If you repay the loan in six months, how much interest will you pay?

$2091.94

The dividend for Should I, Inc., is currently $1.45 per share. It is expected to grow at 16 percent next year and then decline linearly to a 4 percent perpetual rate beginning in four years. If you require a 11 percent return on the stock, what is the most you would pay per share?

$26.63

Lauryn's Doll Co. had EBIT last year of $49 million, which is net of a depreciation expense of $4.9 million. In addition, Lauryn made $4.50 million in capital expenditures and increased net working capital by $2.2 million. Assume that Lauryn has a reported equity beta of 1.7, a debt-to-equity ratio of .7, and a tax rate of 40 percent. What is Lauryn's FCF for the year?

$27.60 Million

You are going to value Lauryn's Doll Co. using the FCF model. After consulting various sources, you find that Lauryn has a reported equity beta of 1.6, a debt-to-equity ratio of .7, and a tax rate of 30 percent. Assume a risk-free rate of 6 percent and a market risk premium of 9 percent. Lauryn's Doll Co. had EBIT last year of $54 million, which is net of a depreciation expense of $5.4 million. In addition, Lauryn made $6.75 million in capital expenditures and increased net working capital by $2.9 million. Assume her FCF is expected to grow at a rate of 3 percent into perpetuity. What is the value of the firm?

$273.61 Million

Suppose you take out a margin loan for $70,000. The rate you pay is an 8.8 percent effective rate. If you repay the loan in six months, how much interest will you pay?

$3015

Bill's Bakery expects earnings per share of $2.66 next year. Current book value is $4.5 per share. The appropriate discount rate for Bill's Bakery is 12 percent. Calculate the share price for Bill's Bakery if earnings grow at 4.4 percent forever.

$32.39

Netscrape Communications does not currently pay a dividend. You expect the company to begin paying a $4.6 per share dividend in 8 years, and you expect dividends to grow perpetually at 6.1 percent per year thereafter. If the discount rate is 12 percent, how much is the stock currently worth?

$35.27

You buy 700 shares of stock at a price of $88 and an initial margin of 70 percent. If the maintenance margin is 30 percent, at what price will you receive a margin call?

$37.71

You short sold 250 shares of stock at a price of $60 and an initial margin of 55 percent. If the maintenance margin is 25 percent, at what share price will you receive a margin call? What is your account equity at this stock price? What is the Account Equity?

$4,650

Leisure Lodge Corporation is expected to pay the following dividends over the next four years: $22, $10, $8.2 and $2.8. Afterwards, the company pledges to maintain a constant 5 percent growth rate in dividends forever. If the required return on the stock is 16 percent, what is the current share price?

$47.96

Star Light & Power increases its dividend 3.3 percent per year every year. This utility is valued using a discount rate of 13 percent, and the stock currently sells for $56 per share. If you buy a share of stock today and hold on to it for at least three years, what do you expect the value of your dividend check to be three years from today?

$5.8

Joker stock has a sustainable growth rate of 10 percent, ROE of 19 percent, and dividends per share of $1.60. If the P/E ratio is 16.5, what is the value of a share of stock?

$56.17

You buy 400 shares of stock at a price of $74 and an initial margin of 50 percent. If the maintenance margin is 40 percent, at what price will you receive a margin call?

$61.67

Long Life Floors just paid an annual dividend of $0.82 a share and plans on increasing future dividends by 2 percent annually. The discount rate is 15 percent. What will the value of this stock be 5 years from today?

$7.10

You short sold 250 shares of stock at a price of $60 and an initial margin of 55 percent. If the maintenance margin is 25 percent, at what share price will you receive a margin call? What is your account equity at this stock price? What is the Margin Call Loan?

$74.4

Suppose you bought 350 shares of stock at an initial price of $56 per share. The stock paid a dividend of $.34 per share during the following year, and the share price at the end of the year was $58. Compute your total dollar return on this investment.

$819

Wilson's Furniture is experiencing good growth so has decided to commence paying dividends starting next year. The first dividend will be $0.50 a share with annual increases of 4 percent in the dividend amount. The discount rate is 10 percent. What will the value of this stock be four years from now?

$9.75

You have $74,000 and decide to invest on margin. If the initial margin requirement is 80 percent, what is the maximum dollar purchase you can make?

$92,500

Suppose you bought 1,000 shares of stock at an initial price of $45 per share. The stock paid a dividend of $.44 per share during the following year, and the share price at the end of the year was $40. What is the Total Rate of Return?

-10.13%

Suppose you bought 1,000 shares of stock at an initial price of $45 per share. The stock paid a dividend of $.44 per share during the following year, and the share price at the end of the year was $40. What is the Capital Gains Yield?

-11.11%

A particular stock has a dividend yield of 1.3 percent. Last year, the stock price fell from $80 to $65. What was the return for the year?

-17.45%

You purchase 900 shares of 2nd Chance Co. stock on margin at a price of $41. Your broker requires you to deposit $19,000. What is your return if the stock price is $40 when you sell the stock? Without Margin?

-2.43%

Suppose you bought 1,000 shares of stock at an initial price of $45 per share. The stock paid a dividend of $.44 per share during the following year, and the share price at the end of the year was $40. What is the Dollar Return?

-4,560

You purchase 900 shares of 2nd Chance Co. stock on margin at a price of $41. Your broker requires you to deposit $19,000. What is your return if the stock price is $40 when you sell the stock? With Margin?

-4.73%

Today, you sold 800 shares of Sky High Inc., for $57.60 a share. You bought the shares one year ago at a price of $61.20 a share. Over the year, you received a total of $500 in dividends. What is your capital gains yield on this investment?

-5.88%

Roy's Markets has net income of $164,000. The firm has 200,000 shares of common stock outstanding. The dividend for this year is $0.61 per share. What is the retention ratio?

0.256

Suppose you bought 1,000 shares of stock at an initial price of $45 per share. The stock paid a dividend of $.44 per share during the following year, and the share price at the end of the year was $40. What is the Dividends Yield?

0.98%

Carson Corporation stock sells for $74 per share and you've decided to purchase as many shares as you possibly can. You have $48,000 available to invest. What is the maximum number of shares you can buy if the initial margin is 50 percent?

1,297

You are going to value Lauryn's Doll Co. using the FCF model. After consulting various sources, you find that Lauryn has a reported equity beta of 1.7, a debt-to-equity ratio of .4, and a tax rate of 30 percent. Based on this information, what is Lauryn's asset beta?

1.33

You are going to value Lauryn's Doll Co. using the FCF model. After consulting various sources, you find that Lauryn has a reported equity beta of 1.9, a debt-to-equity ratio of .6, and a tax rate of 30 percent. Based on this information, what is Lauryn's asset beta?

1.34

Assume that on a particular day, the DJIA opened at 10,097.90. The divisor at that time was .132269967. What would the new index level be if all stocks on the DJIA increased by $1.00 per share on the next day? What is the index level?

10,324.71

On May 9, 2012, the DJIA opened at 13,363.61. The divisor at that time was .132597739. Suppose on this day the prices for 29 of the stocks remained unchanged and one stock increased $5.00. What would the DJIA level be at the end of the day?

13,401.32

You have found an asset with a 14.20 percent arithmetic average return and a 10.56 percent geometric return. Your observation period is 50 years. What is your best estimate of the return of the asset over the next 5 years?

13.90%

You purchase 900 shares of 2nd Chance Co. stock on margin at a price of $41. Your broker requires you to deposit $19,000. Suppose you sell the stock at a price of $48. What is your return? What would your return have been had you purchased the stock without margin? Without Margin?

17.07%

Art Supplies has a net income of $138,600. The firm has $1.25 million in assets and $500,000 in liabilities. What is the return on equity?

18.48%

Your grandfather invested $1,000 in a stock 32 years ago. Currently the value of his account is $321,000. What is his geometric return over this period?

19.76%

A stock has returns of −14 percent, 13 percent, 8 percent, 13 percent, and −6 percent. What are the arithmetic and geometric returns? What is the geometric return?

2.2%

A stock has returns of −14 percent, 13 percent, 8 percent, 13 percent, and −6 percent. What are the arithmetic and geometric returns? What is the arithmetic return?

2.8%

Suppose you buy stock at a price of $79 per share. Four months later, you sell it for $84. You also received a dividend of $.40 per share. What is your annualized return on this investment? What is the annualized return?

21.96%

Eight months ago, you purchased 300 shares of a non-dividend paying stock for $27 a share. Today, you sold those shares for $31.59 a share. What was your annualized rate of return on this investment?

26.55%

You just sold short 1,000 shares of Wetscope, Inc., a fledgling software firm, at $58 per share. You cover your short when the price hits $48.50 per share one year later. If the company paid $.63 per share in dividends over this period, what is your rate of return on the investment? Assume an initial margin of 55 percent What is rate of return?

27.81%

You purchase 900 shares of 2nd Chance Co. stock on margin at a price of $41. Your broker requires you to deposit $19,000. Suppose you sell the stock at a price of $48. What is your return? What would your return have been had you purchased the stock without margin? With Margin?

33.16%

The rate of return on Cherry Jalopies, Inc., stock over the last five years was 10 percent, 11 percent,−8 percent, 4 percent, and 8 percent. Over the same period, the return on Straw Construction Company's stock was 16 percent, 18 percent, −3 percent, 1 percent, and 16 percent. What was the arithmetic average return on each stock over this period? What is the Cherry Average Return?

5.0%

Suppose the call money rate is 4.5 percent, and you pay a spread of 2.5 percent over that. You buy 1,200 shares of stock at $48 per share. You put up $23,000. One year later, the stock is selling for $60 per share, and you close out your position. What is your return assuming a dividend of $.24 per share is paid? What is the return?

53.33%

Johnson Products earned $3.00 per share last year and paid a $1.45 per share dividend. If ROE was 12 percent, what is the sustainable growth rate?

6.2%

Jonah's Fishery has EBITDA of $98 million. Jonah's market value of equity and debt is $632 million and $73 million, respectively. Jonah has cash on the balance sheet of $52 million. What is Jonah's EV ratio?

6.66

You purchase 450 shares of 2nd Chance Co. stock on margin at a price of $60. Your broker requires you to deposit $17,000. What is the initial margin requirement?

62.96%

The rate of return on Cherry Jalopies, Inc., stock over the last five years was 10 percent, 11 percent,−8 percent, 4 percent, and 8 percent. Over the same period, the return on Straw Construction Company's stock was 16 percent, 18 percent, −3 percent, 1 percent, and 16 percent. What was the arithmetic average return on each stock over this period What is the Straw Average Return?

9.6%

Limit Order

A request to buy or sell a stock at a set price

TO be considered liquid, a security must:

Be able to be sold quickly with little, if any price concession

Which one of the following is used as an indicator that a firm has good-quality earnings

Cash flow per share that exceeds earnings per share

The method of valuing a stock based on the present value of the future income derived from that stock is called:

Dividend Discount Model

A decrease in which one of the following will increase a firm's sustainable rate of growth?

Dividend Payout Ratio

The net income per share divided by the market price per share is called the:

Earnings Yield

Which one of the following is a research method used to study the effects news has on stock prices?

Event Study

When an underwriting syndicate purchases an entire issue of new securities and accepts the risk of unsold shares, the underwriting is known as a _____ underwriting.

Firm Commitment

You have owned a stock for seven years. The geometric average return on this investment for those seven years is positive even though the annual rates of return have varied significantly. Given this, you know the arithmetic average return for the period is:

Greater than the geometric average return

In an efficient market, stocks with similar risks will:

Have similar rates of return

The Free Cash Flow Model: I. can be used to value a company with negative earnings II. is based on a firm having positive cash flows III. requires that a firm pay a dividend IV. directly estimates a value for a firm's equity

I & II only

Which of the following have the same meaning as the term "economic value added"? I. abnormal earnings II. residual income III. value created by a firm in period t IV. EPSt - Bt-1 × k

I, II, III, & IV

Steve placed a limit order to sell 500 shares of stock at $14 a share. Which of the following does Steve know for sure? I. His order will execute but the time of execution is unknown. II. His order may never execute. III. He will receive exactly $7,000 if his order executes. IV. He could receive more, but not less, than $14 a share.

II & IV

An order to buy shares of stock at a stated price or less is called a ________ order

Limit

A brokerage account in which purchases can be made using credit is referred to as which type of account?

Margin

If you multiply the number of shares of outstanding stock for a firm by the price per share, you are computing the firm's:

Market Capitalization

What is Beta?

Measure of a stock's risk relative to the stock market average

An investment has an expected return of 11 percent per year with a standard deviation of 24 percent. How often do you expect to earn less than −13 percent?

One year out of six

A firm's current stock price divided by the firm's revenue per share is referred to as which one of the following ratios?

Price-sales

A preliminary document provided to investors who are interested in a stock offering is called a(n):

Red Herring

Which one of the following had the greatest volatility of returns for the period 1926-2012?

Small-company stocks

Which one of the following had the highest average return for the period 1926-2012?

Small-company stocks

Which one of the following had the highest risk premium for the period 1926-2012?

Small-company stocks

Which one of the following orders is frequently used as a means to limit losses resulting from a short sale

Stop-Buy

Which one of the following is correct concerning the two-stage dividend growth model?

The discount rate considers the risk-free rate of return.

An investment has an expected return of 11 percent per year with a standard deviation of 24 percent. Assuming that the returns on this investment are at least roughly normally distributed, how frequently do you expect to earn between −13 percent and 35 percent?

Two years out of three

The process of purchasing newly issued shares from the issuer and reselling those shares to the general public is called:

Underwriting