FINANCE FINAL TEST
Ninacent Corporation has a target capital structure of 70 percent common stock, 5 percent preferred stock, and 25 percent debt. Its costs of equit is 11 percent, the ost of preferred stock is 5 percent, and the pretax cost of debt is 6 percent. The relevant tax rate is 23 percent. What is the company's WACC?
10.25%
A bond has a quoted price of 106. If the par value of the bond is $10,000, how much is the market price of the bond?
10600 1.06% x 10,000 = 10600
What is the return on equity for 2008?
13.0
A debt-free firm has net income of $142,658, taxes of $37,921.75, and depreciation of $27,500. What is the operating cash flow?
142658 + 27500 = 170158
What is the cash coverage ratio for 2008?
17.3
An issue of preferred stock pays a constant dividend of $2.25 per share. If the preferred stock price is $87, what is the cost of preferred stock?
2.59% 2.25/87 = 0.0258
The financial statement showing a firm's accounting value on a particular date is the:
balance sheet
When you calculate the WACC of a company, why do you multiply the cost of debt by (1 - Tax rate) and not the cost of equity and the cost of preferred equity?
because the cod should be adjusted for actual cost of debt
The mixture of debt and equity used by a firm to finance its operations is called:
capital structure.
What is free cash flow?
cash available to shareholders/stockholders and bondholders after OCF is paid off
A business created as a distinct legal entity composed of one or more individuals or entities is called a:
corporation.
When interest rates increase, the price of a bond
decreases
The internal rate of return tends to be:
easier for managers to comprehend than the net present value
An investment is acceptable if its IRR:
exceeds the required return
The principal amount of a bond that is repaid at the end of the loan term is called the
face value
The analysis of a new project should exclude which of the following?
financing costs
Dividend and interest payments are cash flows ignored in the calculation of free cash flow because
financing expenses are accounted for in the discounting process.
An investment is acceptable if the profitability index (PI) of the investment is:
greater than one
Estimate IRR
irr(-51000,{4325,525,...)
A business entity operated and taxed like a partnership, but with limited liability for the owners, is called a:
limited liability company.
The primary goal of financial management is to:
maximize the current value per share of the existing stock.
Which of the following is exempt from federal income taxes?
municipal bonds
A situation in which accepting one investment prevents the acceptance of another investment is called the.
mutualv exclusive investment decision
You borrow $5,600 to buy a car. The terms of the loan call for monthly payments for four years at a 5.9% rate of interest. What is the amount of each payment?
n=48 I=5.9 pv=5600 pmt=? fv=0 $131.26
Estimate the NPV
npv(13,-4375,{23423,423432,...)
Annuities where the payments occur at the end of each time period are called ______ whereas _____ refer to annuity streams with payments occurring at the beginning of each
ordinary annuities; annuities due
A bond with a face value of $1,000 that sells for less than $1,000 in the market is called a bond.
par
A pro forma financial statement is a financial statement that:
projects future years' operating results.
Financial ratios that measure a firm's ability to pay its bills over the short run without undue stress are known as ____ ratios.
short-term solvency
A cost that should be ignored when evaluating a project because that cost has already been incurred and cannot be recouped is referred to as a(n):
sunk cost
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
A conflict of interest between the stockholders and management of a firm is called:
the agency problem.
Finance is
the management of assets under risk and uncertainty.
The intercept point of the security market line is the rate of return which corresponds to:
the risk-free rate of return
Standard deviation measures
total risk
In a general partnership, the general partners have
unlimited liability
Risk that affects at most a small number of assets is called
unsystematic risk
A bond that makes no coupon payments and is initially priced at a deep discount is called a bond.
zero coupon
You are considering a project with the following cash flows; Year 1 Year 2 Year 3 $5,600 $9,000 $2,000
D. $13,812.03
The stock valuation model that determines the current stock price by dividing the next annual dividend amount by the excess of the discount rate less the dividend growth rate is called the ___________ model.
Dividend Growth
Next year's annual dividend divided by the current stock price is called the:
Dividend Yield
Payments made by a corporation to its shareholders, in the form of either cash, stock or payments in kind, are called:
Dividends
The risk-free rate of return is 4% and the market risk premium is 8%. What is the expected rate of return on a stock with a beta of 1.28?
Expected Return = Risk Free Return + Beta x Market Risk Premium 4+1.28 x 8 = 14.24%
The capital gains yield plus the dividend yield on a security is called the:
Total Return
You borrow $149,000 to buy a house. The mortgage rate is 7.5% and the loan period is 30 years. Payments are made monthly. If you pay for the house according to the loan agreement, how much total interest will you pay?
$226.059 n=360 I=7.5 pv=149000 pmt=? fv=375059
You estimate that you will have $24,500 in student loans by the time you graduate. The interest rate is 6.5%. If you want to have this debt paid in full within five years, how much must you pay each month?
$479.37 n=5x12 =60 I=6.5 pv=0 24500 pmt=? fv=0
Consider a bond which pays 8% semiannually and has 8 years to maturity. The market requires an interest rate of 10% on bonds of this risk. What is this bond's price?
$891.62
You buy an annuity which will pay you $12,000 a year for ten years. The payments are paid on the first day of each year. What is the value of this annuity today at a 7% discount rate?
$90,182.79 n=10 I=-7 pv=? pmt+12000 fv=120000
Chocolate and Rum, Inc. offers a 7% coupon bond with semiannual payments and a vield to maturity of 7.73%. The bonds mature in 9 years. What is the market price of a $1.000 face value bond?
$953.28 n=18 I=3.865 pv= pmt=35 fv=1000
Your portfolio is comprised of 30% of stock X, 50% of stock Y, and 20% of stock Z. Stock X has a beta of .64, stock Y has a beta of 1.48, and stock Z has a beta of 1.04. What is the beta of your portfolio?
(.30)(.64)+(.50)(1.48)+(.20)(1.04) = 1.14
The Tribiani Co. just issued a dividend of $1.5 per share on its common stock. The company is expected to maintain a constant 4.5 percent growth rate in its dividend indefinitely. If the stock sells for $56 a share, what is the company's cost of equity?
(1.5(1+.045)/56)+0.045 = .07299 = 7.3%
What is the quick ratio for 2008? WRITE NEXT TO THE MULTIPLE CHOICE ANSWERS THE INTERPRETATION OF THE QUICK RATIO
(current assets - inventory) / current liabilities .82
Eight months ago, you purchased 400 shares of Winston, Inc. stock at a price of $54.90 a share. The company pays quarterly dividends of $.50 a share. Today, you sold all of your shares for $49.30 a share. What is your total percentage return on this investment?
(sale value of shares - purchase price + dividends received) / purchase price (49.30 - 54.90 + 0.50 + 0.50) / 54.90 = 8.38% loss
What is the cost of equity for a firm if the firm's equity has a beta of 1.2, the risk-free rate of return is 2%, the expected return on the market is 9%, and the return to the company's debt is 7%?
.02+1.20x.07 = .104 = 10.4%
Jimmy's Cricket Farm issued a 30 year, 4.5 percent semiannual bond four years ago. The bond currently sells for 107 percent of its face value. The company's tax rate is 25 what is the aftertax cost of debt
3.05%
A bond that pays interest annually yields a 7.25% rate of return. The inflation rate for the same period is 3.5%. What is the real rate of return on this bond?
3.75%
What is the days' sales in receivables in 2008?
33.7
Moonhigh, Inc. has a 5%, semiannual coupon bond with a current market price of $988.52. The bond has a par value of $1,000 and a yield to maturity of 5.29%. How many years is it until this bond matures?
4.5 years looking for N I=5.29 pv=988.52 pmt=50 fv=1000
Today, you signed loan papers agreeing to borrow $4,954.85 at 9% compounded monthly. The loan payment is $143.84 a month. How many loan payments must you make before the loan is paid in full?
40.00 n=? I=9 pv=4954.85 pmt=-143.84 fv=0
Your firm offers a 10-year, zero coupon bond. The yield to maturity is 8.2%. What is the current market price of a $1,000 face value bond?
454.70 n=10 I=8.2 pv=1 pmt fv=1000
Jimmy's Cricket Farm issued a 30-year, 4.5 percent semiannual bond four years ago. The bond currently sells for 107 percent of its face value. The company's tax rate is 25 percent What is the pretax cost of debt?
5.63%
What is the effective annual rate if a bank charges you 7.64% compounded quarterly?
7.86% (1+(APR/m)^m - 1
Systematic risk Is measured by:
Beta
A year ago, you purchased 300 shares of IXC Technologies, Inc. stock at a price of $9.03 per share. The stock pays an annual dividend of $.10 per share. Today, you sold all of your shares for $28.14 per share. What is your total dollar return on this investment?
Answer: (28.14-9.03) x 300 + (.10)(300) = 5763
You just sold 200 shares of Langley, Inc. stock at a price of $38.75 a share. Last year your paie $41.50 a share to buy this stock. Over the course of the year, you received dividends totaling $1.64 per share. What is your capital gain on this investment?
Answer: (38.75-41.50)x200 -550
Todd is able to pay $160 a month for five years for a car. If the interest rate is 4.9%, how much can Todd afford to borrow to buy a car?
B. $8,499.13
The bonds issued by Manson & Son bear a 6% coupon, payable semiannually. The bond matures in 8 years and has a $1,000 face value. Currently, the bond sells at par. What is the yield to maturity?
C) 6.00% n=16 I=? pv=1000 pmt=60 fv=1000
Which one of the following terms is most commonly used to describe the cash flows of a new project that are simply an offset of reduced cash flows for a current project?
Cannibalization or erosion
The rate at which a stock's price is expected to appreciate (or depreciate) is called the _____ yield
Capital Gains
A form of equity which receives no preferential treatment in either the payment of dividends or in bankruptcy distributions is called
Common
Angelina's made two announcements concerning its common stock today. First, the company announced that its next annual dividend has been set at $2.16 a share. Secondly, the company announced that all future dividends will increase by 4% annually. What is the maximum amount you should pay to purchase a share of Angelina's stock if your goal is to earn a 10% rate of return?
Formula Used: P0= D1/(r-g) Notes: D=2.16 G=.04 R=.10 Answer: 2.16/(.10-.04) = 36
How much are you willing to pay for one share of stock if the company just paid an $.80 annual dividend, the dividends increase by 4% annually and you require an 8% rate of return?
Formula Used: P1 - D(1+g)/(R-g) Notes: D=.80 G=.04 R=.08 Answer: (.80*(1+.04))/(.08-.04) = $20.80
Majestic Homes' stock traditionally provides an 8% rate of return. The company (ust paid a $2 a year dividend which is expected to increase by 5% per year. If you are planning on buying 1,000 shares of this stock next year, how much should you expect to pay per share if the market rate of return for this type of security is 9% at the time of your purchase?
Formula Used: P1: D(1+g)/(r-g) Answer: 2(1+.05)/(.09-.05) = 52.5
Last week, Railway Cabooses paid its annual dividend of $1.20 per share. The company has been reducing the dividends by 10% each year. How much are you willing to pay to purchase stock in this company if your required rate of return is 14%?
Formula: P0= D1/(r-g) Answer: The formula for current stock price here= Div1 / (r-g) = 1.08 / [14% -(-10%)]= 1.08 / (14% + 10%)= 1.08 / 24% = 4.5
Leslie's Unique Clothing Stores offers a common stock that pays an annual dividend of $2.00 a share. The company has promised to maintain a constant dividend. How much are you willing to pay for one share of this stock if you want to earn a 12% return on your equity investments?
Formula: value of perpetuity = cashflow/rate 2/0.12 = 16.67
The length of time required for an investment to generate cash flows sufficient to recover the initial cost of the investment is called the:
Payback period
Your credit card company charges you 1.5% per month. What is the annual percentage rate on your account?
Periodic rate x number of periods p/year D. 18.00%
Any changes to a firm's projected future cash flows that are caused by adding a new project are referred to as:
Incremental cashflows
The discount rate that makes the net present value of an investment exactly equal to zero is called the:
Internal rate of return
The Reading Co. has adopted a policy of increasing the annual dividend on its common stock at a constant rate of 3% annually The last dividend it paid was $0.90 a share. What will the company's dividend be in six years?
Multiply dividend for 6 years .90 x .03 = .027 .027 + .90 = .927 (First year) .927 x .03 = .02781 .02781 + .927 = 95481 (second year) SO ON... up to 6 Answer: 1.07
Bradley Snapp has deposited $6,000 in a guaranteed investment account with a promised rate of 6% compounded annually. He plans to leave it there for 4 full years when he will make a down payment on a car after graduation. How much of a down payment will he be able to make?
N= 4 I=60 P V= 6000 PMT = 0 FV=? 7574.86
The difference between the present value of an investment (benefits) and its cost is the:
Net present value
Which one of the following terms refers to the best option that was foregone when a particular investment is selected?
Opportunity cost
Profitability Index
PI = npv+51000 / 51000(original cash)
Matt is analyzing two mutually exclusive projects of similar size and has prepared the following data. Both projects have 5 year lives. Project A: Net present value: 15090 payback period: 2.76 years required return: 8.3% Project B 14693 2.51 years 8.0% Matt has been asked for his best recommendation given this information. His recommendation should be to accept:
Project A and reject project B based on their net present values
The excess return required from a risky asset over that required from a risk free asset is called the
Risk Premium
Windswept, Inc. has 90 million shares of stock outstanding. Its price-earnings ratio for 2008 is 12. What is the market price per share of stock?
Share outstanding = 90 million PE Ratio (2008) = 12 Market price per share of stock = ? Net income = $481 million PE Ratio = Market price per share/Earning per share Eraning Per Share = Net income of the company / Outstanding shares Eraning Per Share = 481/90 = $5.34 PE Ratio = Market price per share/Earning per share Market price per share = PE Ratio * Earning per share Market price per share = 12*5.34 = $64.08 Market price per share = $64.08 0r $64 (aprox) Answer: 64.13
Based on the period of 1926 through 2021 _______ have tended to outpertorm other securities over the long-term.
Small Company Stocks
What is more relevant, the pretax cost of debt or the after tax cost of debt?
The aftertax cost of debt is more relevant because that is the actual cost to the company.
Ratios that measure how efficiently a firm uses its assets to generate sales are known as _____ ratios.
asset management
Can free cash flow be negative? If so, why and who covers the deficit in free cash flow?
Yes, if the company is fairly new OCF will not be enough to cover NWC and FA. In an established company negative FCF is due to overspending and falling sales. investors bath bondholders and stock holders cover the cost.
All else constant, a bond will sell at ______ when the yield to maturity is ______ the coupon rate
a discount; higher than
A portfolio is:
a group of assets, such as stocks and bonds, held as a collective unit by an investor.
