FIN 3310 Final Exam Quizzes Review

The App Store needs to raise $2.8 million for expansion. The firm wants to raise this money by selling 20-year, zero-coupon bonds with a par value of $1,000. The market yield on similar bonds is 6.49 percent. How many bonds must the company sell to raise the money it needs? Assume semiannual compounding.

# of bonds: $2,800,000/(1,000/(1+(.0649/2)^40)) =10,044

Carland, Inc. has a project available with the following cash flows. If the required return for the project is 7.6 percent, what is the project's NPV? Year - Cash Flow 0 - (-255,000) 1 - 62,700 2 - 87,100 3 - 116,300 4 - 69,700 5 - (-11,700)

$15,743.67

Which one of the following indicates that a project is expected to create value for its owners?

positive net present value

one example of a primary market transaction would be the

sale of 1,000 shares of newly issued stock by Alt Company to Miquel

Beatrice invests $1,370 in an account that pays 5 percent simple interest. How much more could she have earned over a 6-year period if the interest had been compounded annually?

simple: 1370(5%)(6)=411 + 1370 =1,781 compounded: 1370(1.05)^6 = 1,835 (by calculator): PV: $1370 i: 5% n:6 FV: $1,835 Answer: 1,835-1,781= $54.93

Margie opened a used bookstore and is both the 100 percent owner and the store's manager. Which type of business entity does Margie own if she is personally liable for all the store's debts?

sole proprietorship

Which one of the following is a correct statement, all else held constant?

the future value is directly related to the interest rate

the primary goal of financial management is to maximize

the market value of existing stock

Which one of the following will occur when the internal rate of return equals the required return?

the profitability index will equal 1.0

A portfolio consists of 200 shares of Stock C that sells for $37 and 165 shares of Stock D that sells for $38. What is the portfolio weight of Stock C?

200(37)/[200(37) +165(38)] = .5413

Which one of the following bonds is the most sensitive to changes in market interest rates?

10-year, zero coupon

If the risk premium on the stock market was 6.66 percent and the risk-free rate was 2.50 percent, what is the stock market return?

6.66% +2.50 = 9.16%

There is a project with the following cash flows: Year - Cash Flow 0 - (-23,900) 1 - 7,100 2 - 7,750 3 - 7,150 4 - 5,200 What is payback period?

Amount short after 3 years: 23,900 - 7,100 - 7,750 - 7,150 = 1,900 Payback period: 3 + (1,900/5,200) = 3.37 years

Kim's Bridal Shoppe has 10,600 shares of common stock outstanding at a price of $40 per share. It also has 235 shares of preferred stock outstanding at a price of $91 per share. There are 560 bonds outstanding that have a coupon rate of 5.9 percent paid semiannually. The bonds mature in 21 years, have a face value of $1,000, and sell at 95 percent of par (price equals to percent times face value). What is the capital structure weight of the common stock?

Common stock: 10,600x40 = 424,000 preferred stock: 235x91 = 21,385 debt: 560x1000x.95 =532,000 total value: 424,000+21,385+532,000=977,385 Xe= 424,000/977,385 = .4338

A project with an initial investment of $444,500 will generate equal annual cash flows over its 10-year life. The project has a required return of 8.5 percent. What is the minimum annual cash flow required to accept the project?

PV: 444,500 i: 8.5% n: 10 answer: PMT: $67,745.22

Which one of the following statements is accurate for a levered firm?

a reduction in the risk level of a firm will tend to decrease the firm's WACC

The variance is the average squared difference between which of the following?

actual return and average return

An efficient capital market is best defined as a market in which security prices reflect which one of the following?

all available information

A stock had returns of 18.74 percent, 22.23 percent, −15.53 percent, 9.23 percent, and 28.30 percent for the past five years. What is the standard deviation of the returns?

(.1874 + .2223 - .1553 + .0923 + .2830) / 5 = .1259 variance: (1/4)[(.1874-.1259)^2 + (.2223 - .1259)^2 + (-.1553 -.1259)^2 + (.0923 -.1259)^2 + (.2830 -.1259)^2] = .02949 standard deviation: .02949^2 = .1717

You have a portfolio that is 28 percent invested in Stock R, 19 percent invested in Stock S, with the remainder in Stock T. The expected return on these stocks is 7.9 percent, 9.3 percent, and 11.6 percent, respectively. What is the expected return on the portfolio?

.28(7.9%) + .19(9.3%) + (1-.28-.19)(11.6%) = 10.13%

You have a portfolio that is invested 21 percent in Stock R, 36 percent in Stock S, and the remainder in Stock T. The beta of Stock R is .74, and the beta of Stock S is 1.29. The beta of your portfolio is 1.17. What is the beta of the Stock T?

1.17 = .21(.74) + .36(1.29) + .43(Bt) => 1.28

Bermuda Cruises issues only common stock and coupon bonds. The firm has a debt-equity ratio of .83. The cost of equity is 12 percent and the pretax cost of debt is 6.8 percent. What is the capital structure weight of the firm's equity if the firm's tax rate is 35 percent?

1/(1+.83) = .5464

An asset has an average return of 11.15 percent and a standard deviation of 21.26 percent. What range of returns should you expect to see with a 95 percent probability?

11.15% +/- (21.26 x 2) = -31.37% - 53.67%

Wine and Roses, Inc. offers a 7% coupon bond with semiannual payments and a yield to maturity of 7.89%. The bonds mature in 9 years. What is the market price of a $1,000 face value bond?

Coupon (PMT) :1,000(7%/2) = 35 FV: $1,000 PMT: $35 I/Y: 7.89%/2 N: 9x2 PV: $943.41

A municipal bond has a YTM of 4.47 percent while the YTM of a comparable taxable bond is 7.42 percent. What is the tax rate that will make an investor indifferent between the municipal bond and the taxable bond?

Critical tax rate: 1 - (.0447/.0742) = .3976 or 39.67%

The risk-free rate of return is 4.4 percent and the market risk premium is 12 percent. What is the expected rate of return on a stock with a beta of 1.9?

E(R) = .044 +1.90(.12) = .2720

Based on the following information, what is the expected return? State of Econ- recession normal boom Probability State of Econ- .25 .28 .47 Rate of Return if State Occurs- -10.90% 12.40% 21.40%

E(R) = .25(-.109)+ .28(.124) + .47(.214) = .1081

Suppose you want to buy some new furniture for your family room. You currently have $500 and the furniture you want costs $600. If you can earn 6%, how long will you have to wait if you do not add any additional money?

FV = PV (1+r)^t t= [ln(fv/pv)]/[ln(1+r)] t= [ln (600/500)]/[ln(1+.06)] t=ln(1.2)/ln(1.06) t=.182322/.058269 t=3.1289 ~ 3.13

A 25-year, semiannual coupon bond sells for $975.11. The bond has a par value of $1,000 and a yield to maturity of 6.87 percent. What is the bond's coupon rate?

FV: 1,000 PV: -975.11 n: 25*2 i: 6.87%/2 PMT: 33.30 Coupon rate: (33.30*2)/1,000 = .0666 or 6.66%

You need to have $34,500 in 7 years. You can earn an annual interest rate of 5 percent for the first 4 years, and 5.6 percent for the next 3 years. How much do you have to deposit today?

PV = 34,500/1.05^4 = 28,383.2352 PV = 28,383/1.056^3 = 24,102.9469 Answer: $24,102.95

Old Town Industries has three divisions. Division X has been in existence the longest and has the most stable sales. Division Y has been in existence for five years and is slightly less risky than the overall firm. Division Z is the research and development side of the business. Given this, the firm should probably:

assign the highest cost of capital to Division Z because it is most likely the riskiest of the three divisions.

Travis invests $5,500 today into a retirement account. He expects to earn 9.2 percent, compounded annually, on his money for the next 13 years. After that, he wants to be more conservative, so only expects to earn 6 percent, compounded annually. How much money will he have in his account when he retires 25 years from now, assuming this is the only deposit he makes into the account.

by calculator: PV: $5,500 i: 9.2% n: 13 FV: $17,268.5943 PV: $17,268.5943 i: 6% n: 25-13 = 12 FV: $34,747.80467 by hand: $5,500(1.092)^13 = 17,268.59437 $17,268.59437(1.06)^12=34,747.804 Answer: $34,747.80

Which one of the following will affect the capital structure weights used to compute a firm's weighted average cost of capital?

increase in the market value of the firm's common stock

Jamie is employed as a currency trader in the Japanese yen market. Her job falls into which one of the following areas of finance?

international finance

The daily financial operations of a firm are primarily controlled by managing the:

working capital