FIN5200 Practice Midterm

Hutchinson Corporation has zero debt it is financed only with common equity. Its total assets are $410,000. The new CFO wants to employ enough debt to bring the debt/assets ratio to 40%, using the proceeds from the borrowing to buy back common stock at its book value. How much must the firm borrow to achieve the target debt ratio?

$164,000 because 0.4 = ?/410000 0.4*410000= 164000

Sommers Co.'s bonds currently sell for $1,080 and have a par value of $1,000. They pay a $100 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,125. What is their yield to maturity (YTM)?

(YTM) = [(Face value/Present value)1/Time period]-1. 9.01%

Arshadi Corp.'s sales last year were $74,000, and its total assets were $22,000. What was its total assets turnover ratio (TATO)?

3.36 because turnover ratio=net sales/total assets

Currently, Bruner Inc.'s bonds sell for $1,390. They pay a $120 annual coupon, have a 15-year maturity, and a $1,000 par value, but they can be called in 5 years at $1,050. Assume that no costs other than the call premium would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future. What is the difference between this bond's YTM and its YTC? (Subtract the YTC from the YTM.)

3.44% because par value=face value annual coupon=annual interest payment https://www.omnicalculator.com/finance/yield-to-maturity and https://www.omnicalculator.com/finance/yield-to-call

The balance sheet and income statement shown below are for Pettijohn Inc. Note that the firm has no amortization charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over. ... Refer to the data for Pettijohn Inc. What is the firm's debt ratio (i.e., debt-to-assets ratio)?

40.00% because Debt ratio = Total debt/Total assets = (Notes payable + Long-term bonds)/Total assets = ($5,880 + $10,920)/$42,000 = 40.0%

You are considering investing in a bank account that pays a nominal annual rate of 7%, compounded monthly. If you invest $3,000 at the end of each month, how many months will it take for your account to grow to $225,000? Note that if the final answer is not a whole number, be sure to round it up to the nearest whole number.

63 months because https://www.omnicalculator.com/finance/investment 5 years 2 months 21 days=59.99 months + 2 month & 21 days =63 months (rounded)

Branch Corp.'s total assets at the end of last year were $315,000 and its net income after taxes was $22,750. What was its return on total assets?

7.22% because Return on total assets=operating profit/average total assets

Stock A's stock has a beta of 1.30, and its required return is 12.00%. Stock B's beta is 0.80. If the risk-free rate is 4.75%, what is the required rate of return on B's stock? (Hint: First find the market risk premium.)

9.21% because https://www.omnicalculator.com/finance/capm

Your investment account pays 6.6%, compounded annually. If you invest $5,000 today, how many years will it take for your investment to grow to $9,140.20?

9.44 because https://www.omnicalculator.com/finance/investment Note: enter "Time Length" in "I Would like to know.."

Freedman Flowers' stock has a 50% chance of producing a 25% return, a 30% chance of producing a 10% return, and a 20% chance of producing a −28% return. What is the firm's expected rate of return?

9.90% because Conditions. Prob. Return. Prob. x Return Good. 0.50. 25%. 12.5% Average. 0.30. 10%. 3% Poor. 0.20. -28%. -5.60% =sum =sum =1.0 =9.90% = expected return

You have $5,000 invested in a bank that pays 3.8% annually. How long will it take for your funds to triple?

FV=PV(1+r)^n FV=future value PV=present value r=annual interest rate n=number of periods interest held 15000=5000(1+0.038)^n solve for n. =29.46

A bond that is callable has a chance of being retired earlier than its stated term to maturity. Therefore, if the yield curve is upward sloping, an outstanding callable bond should have a lower yield to maturity than an otherwise identical noncallable bond.

False

A zero coupon bond is a bond that pays no interest and is offered (and subsequently sells initially) at par. These bonds provide compensation to investors in the form of capital appreciation.

False

Time lines cannot be constructed for annuities unless all the payments occur at the end of the periods.

False

Income bonds pay interest only if the issuing company actually earns the indicated interest. Thus, these securities cannot bankrupt a company, and this makes them safer from an investor's perspective than regular bonds.

False An income bond is a type of debt security in which only the face value of the bond is promised to be paid to the investor, with any coupon payments paid only if the issuing company has enough earnings to pay for the coupon payment.

One problem with ratio analysis is that relationships can be manipulated. For example, we know that if our current ratio is less than 1.0, then using some of our cash to pay off some of our current liabilities would cause the current ratio to increase and thus make the firm look stronger.

False because the key here is to recognize that if the CR is less than 1.0, then a given reduction in both current assets and current liabilities would lead to a decrease in the CR. The reverse would hold if the initial CR were greater than 1.0. In the question, the initial CR is less than 1.0, so using cash to reduce current liabilities would lower the CR. If the CR were greater than 1.0, the statement would have been true.

Which of the following statements is CORRECT? a. If Apple issues additional shares of common stock through an investment banker, this would be a secondary market transaction. b. If you purchased 100 shares of Apple stock from your sister-in-law, this would be an example of a primary market transaction. c. Only institutions, and not individuals, can participate in derivatives market transactions. d. The IPO market is a subset of the secondary market. e. As they are generally defined, money market transactions involve debt securities with maturities of less than one year.

If Apple issues additional shares of common stock through an investment banker, this would be a secondary market transaction.

Which of the following statements is CORRECT? a. Corporate shareholders are exposed to unlimited liability. b. It is usually easier to transfer ownership in a corporation than it is to transfer ownership in a sole proprietorship. c. Corporate shareholders are exposed to unlimited liability, and this factor may be compounded by the tax disadvantages of incorporation. d. Shareholders in a regular corporation (not an S corporation) pay higher taxes than owners of an otherwise identical proprietorship. e. Corporations generally face fewer regulations than sole proprietorships

It is usually easier to transfer ownership in a corporation than it is to transfer ownership in a sole proprietorship because if ownership in a proprietorship or partnership is transferred, the basic documents under which the firm operates must be rewritten, whereas for a corporation the seller simply sells shares to a buyer, and the corporation records the transfer on its books.

Stocks A and B are quite similar: Each has an expected return of 12%, a beta of 1.2, and a standard deviation of 25%. The returns on the two stocks have a correlation of 0.6. Portfolio P has 50% in Stock A and 50% in Stock B. Which of the following statements is CORRECT?

Portfolio P has a standard deviation that is less than 25%

Nikko Corp.'s total common equity at the end of last year was $305,000 and its net income after taxes was $60,000. What was its ROE?

ROE=net income/shareholder's equity =$60,000/$305,000 =19.67%

debt to assets ratio

Total Debts/Total Assets

Assume that two investors each hold a portfolio, and that portfolio is their only asset. Investor A's portfolio has a beta of minus 2.0, while Investor B's portfolio has a beta of plus 2.0. Assuming that the unsystematic risks of the stocks in the two portfolios are the same, then the two investors face the same amount of risk. However, the holders of either portfolio could lower their risks, and by exactly the same amount, by adding some "normal" stocks with beta = 1.0.

True

Market value ratios provide management with an indication of how investors view the firm's past performance and especially its future prospects.

True

The facts that a proprietorship, as a business, pays no corporate income tax, and that it is easily and inexpensively formed, are two key advantages to that form of business.

True

Two disadvantages of a proprietorship are (1) the relative difficulty of raising new capital and (2) the owner's unlimited personal liability for the business' debts.

True

Other things equal, a firm will have to pay a higher coupon rate on its subordinated debentures than on its second mortgage bonds.

True Subordinated debt (also known as a subordinated debenture) is an unsecured loan or bond that ranks below other, more senior loans or securities with respect to claims on assets or earnings. Subordinated debentures are thus also known as junior securities.

Suppose Randy Jones plans to invest $1,000. He can earn an effective annual rate of 5% on Security A, while Security B has an effective annual rate of 12%. After 11 years, the compounded value of Security B should be somewhat less than twice the compounded value of Security A. (Ignore risk, and assume that compounding occurs annually.)

True because https://www.omnicalculator.com/finance/investment Security A's final balance=$1731.27 Security B's final balance=$3718.96

Recently, Hale Corporation announced the sale of 2.5 million newly issued shares of its stock at a price of $21 per share. Hale sold the stock to an investment banker, who in turn sold it to individual and institutional investors. This is a primary market transaction.

True because Primary Market Transaction means any transaction other than a secondary market transaction and refers to any transaction where a Person purchases securities in an offering.

Assume that the risk-free rate, rRF, increases but the market risk premium, (rM − rRF), declines, with the net effect being that the overall required return on the market, rM, remains constant. Which of the following statements is CORRECT? a. The required return will increase for stocks that have a beta less than 1.0 but decline for stocks that have a beta greater than 1.0. b. The required return will decline for stocks that have a beta less than 1.0 but will increase for stocks that have a beta greater than 1.0. c. Since the overall return on the market stays constant, the required return on each individual stock will also remain constant. d. The required return of all stocks will increase by the amount of the increase in the risk-free rate. e. The required return of all stocks will fall by the amount of the decline in the market risk premium

a. The required return will increase for stocks that have a beta less than 1.0 but decline for stocks that have a beta greater than 1.0

Because your mother is about to retire, she wants to buy an annuity that will provide her with $75,000 of income a year for 20 years, with the first payment coming immediately. The going rate on such annuities is 5.25%. How much would it cost her to buy the annuity today?

b. $963,213 because N=20 I/YR=5.25% PMT=75,000 FV=0 In Excel: = -PV(0.0525,20,75000,0,1) PV=$963,213

Which of the following statements is CORRECT? a. Subordinated debt has less default risk than senior debt. b. Convertible bonds have lower coupon rates than non-convertible bonds of similar default risk because they offer the possibility of capital gains. c. Junk bonds typically provide a lower yield to maturity than investment-grade bonds. d. Junior debt is debt that has been more recently issued, and in bankruptcy it is paid off after senior debt because the senior debt was issued first. e. A debenture is a secured bond that is backed by some or all of the firm's fixed assets.

b. Convertible bonds have lower coupon rates than non-convertible bonds of similar default risk because they offer the possibility of capital gains.

Which of the following statements is CORRECT? a. Other things held constant, if investors suddenly become convinced that there will be deflation in the economy, then the required returns on all stocks should increase. b. If the risk-free rate rises by 0.5% but the market risk premium declines by that same amount, then the required rates of return on stocks with betas less than 1.0 will decline while returns on stocks with betas above 1.0 will increase. c. If a company's beta doubles, then its required rate of return will also double. d. If a company's beta were cut in half, then its required rate of return would also be halved. e. If the risk-free rate rises by 0.5% but the market risk premium declines by that same amount, then the required rate of return on an average stock will remain unchanged, but required returns on stocks with betas less than 1.0 will rise.

e. If the risk-free rate rises by 0.5% but the market risk premium declines by that same amount, then the required rate of return on an average stock will remain unchanged, but required returns on stocks with betas less than 1.0 will rise.

Suppose your credit card issuer states that it charges a 15.00% nominal annual rate, but you must make monthly payments, which amounts to monthly compounding. What is the effective annual rate?

16.08% because https://www.omnicalculator.com/finance/effective-interest-rate

Stuart Company's manager believes that economic conditions during the next year will be strong, normal, or weak, and she thinks that the firm's returns will have the probability distribution shown below. What's the standard deviation of the estimated returns? (Hint: Use the formula for the standard deviation of a population, not a sample.)

18.62% because https://www.omnicalculator.com/statistics/standard-deviation

Which of the following statements is CORRECT? a. Companies must establish a home office, or domicile, in a particular state, and that state must be the one in which most of their business (sales, manufacturing, and so forth) is conducted. b. The corporate charter is concerned with things like what business the company will engage in, whereas the bylaws are concerned with things like procedures for electing the board of directors. c. The corporate charter is a standard document prescribed by the state of incorporation, and its purpose is to ensure that the firm's managers run the firm in accordance with state laws. Procedures for electing corporate directors are contained in bylaws, while the declaration of the activities that the firm will pursue and the number of directors are included in the corporate charter. d. The corporate bylaws are a standard set of rules established by the state of incorporation. These rules are identical for all corporations in the state, and their purpose is to ensure that the firm's managers run the firm in accordance with state laws. e. Attorney fees are generally involved when a company develops its charter and bylaws, but since these documents are voluntary, a new corporation can avoid these costs by deciding not to have either a charter or bylaws.

The corporate charter is concerned with things like what business the company will engage in, whereas the bylaws are concerned with things like procedures for electing the board of directors.

Assume that investors have recently become more risk averse, so the market risk premium has increased. Also, assume that the risk-free rate and expected inflation have not changed. Which of the following is most likely to occur?

The required rate of return for an average stock will increase by an amount equal to the increase in the market risk premium.

Which of the following statements is CORRECT? a. Two bonds have the same maturity and the same coupon rate. However, one is callable and the other is not. The difference in prices between the bonds will be greater if the current market interest rate is above the coupon rate than if it is below the coupon rate. b. Corporate treasurers dislike issuing callable bonds because these bonds may require the company to raise additional funds earlier than would be true if noncallable bonds with the same maturity were used. c. A callable 10-year, 10% bond should sell at a higher price than an otherwise similar noncallable bond. d. The actual life of a callable bond will always be equal to or less than the actual life of a noncallable bond with the same maturity. Therefore, if the yield curve is upward sloping, the required rate of return will be lower on the callable bond. e. Two bonds have the same maturity and the same coupon rate. However, one is callable and the other is not. The difference in prices between the bonds will be greater if the current market interest rate is below the coupon rate than if it is above the coupon rate.

Two bonds have the same maturity and the same coupon rate. However, one is callable and the other is not. The difference in prices between the bonds will be greater if the current market interest rate is below the coupon rate than if it is above the coupon rate.

Suppose that Federal Reserve actions have caused an increase in the risk-free rate, rRF. Meanwhile, investors are afraid of a recession, so the market risk premium, (rM − rRF), has increased. Under these conditions, with other things held constant, which of the following statements is most correct? a. The required return on all stocks would increase, but the increase would be greatest for stocks with betas of less than 1.0. b. The prices of all stocks would decline, but the decline would be greatest for high-beta stocks. c. The prices of all stocks would increase, but the increase would be greatest for high-beta stocks. d. The required return on all stocks would increase by the same amount. e. Stocks' required returns would change, but so would expected returns, and the result would be no change in stocks' prices.

b. The prices of all stocks would decline, but the decline would be greatest for high-beta stocks

Which of the following would be most likely to lead to higher interest rates on all debt securities in the economy? a. Households start saving a larger percentage of their income. b. The Federal Reserve uses monetary policy in an attempt to stimulate the economy. c. Corporations step up their expansion plans and thus increase their demand for capital. d. The economy moves from a boom to a recession. e. The level of inflation begins to decline

c. Corporations step up their expansion plans and thus increase their demand for capital

If markets are in equilibrium, which of the following conditions will exist? a. Each stock's expected return should equal its realized return as seen by the marginal investor. b. All stocks should have the same expected return as seen by the marginal investor. c. All stocks should have the same realized return during the coming year. d. The expected and required returns on stocks and bonds should be equal. e. Each stock's expected return should equal its required return as seen by the marginal investor

e. Each stock's expected return should equal its required return as seen by the marginal investor. Hide Feedback

You recently sold 100 shares of your new company, XYZ Corporation, to your brother at a family reunion. At the reunion your brother gave you a check for the stock and you gave your brother the stock certificates. Which of the following statements best describes this transaction?

d. This is an example of a direct transfer of capital. because a direct transfer is typically a transfer of assets from one type of retirement plan or account to another, which is facilitated by the two financial institutions involved in the transfer. ... A direct transfer can also mean any electronic transfer of money from one financial account to another, such as a wire transfer.

Hutchinson Corporation has zero debt - it is financed only with common equity. Its total assets are $475,000. The new CFO wants to employ enough debt to bring the debt/assets ratio to 40%, using the proceeds from the borrowing to buy back common stock at its book value. How much must the firm borrow to achieve the target debt ratio?

e. $190,000.00