FINA 3770 Final Exam

Which of the following investments will have the highest future value? $1,000 invested at an quarterly interest rate of 2.25% for 10 years $1,300 invested at an annual interest rate of 10% for 5 years $1,000 invested at an annual interest rate of 10% for 10 years $1,300 invested at an quarterly interest rate of 2.25% for 5 years

$1,000 invested at an annual interest rate of 10% for 10 years

Which of the following is a basic source of funds for a firm? Debt Equity Asset liquidations Both Debt and Equity

Both Debt and Equity

Which of the following does NOT belong to an income statement? Goodwill Amortization expense Depreciation expense Extraordinary items

Goodwill

When the discount rate estimated is too low, firms run the risk of accepting a negative NPV project.

True

A corporate bond's coupon rate is the annual coupon payment divided by: the bond's current price. the bond's maturity period. $100. the bond's face value.

the bond's face value.

A situation where a firm would not want to use its own WACC to evaluate a risky project would be when:

the cost of capital of a pure-play comparable that is similar to the project can be found.

The internal rate of return is

the discount rate that makes the NPV equal to zero.

Financial markets and financial institutions are both part of: none of the above. the U.S. Treasury. the financial system. the SEC.

the financial system

Quipe Industries provided the following information for the year ending June 30, 2014. Increase in inventories $ 42 Purchased treasury stock 25 Purchased property and equipment 27 Net income 495 Decrease in accrued income taxes 63 Depreciation and amortization 168 Decrease in accounts payable 15 Increase in accounts receivable 39 Increase in long-term debt 150 What was Quipe Industries' cash flow from financing for the year ending June 30, 2014? $125 $63 −$202 −$27

$125 Cash flow from financing - Increase in long-term debt - Purchased treasury stock = $150 - $25 = $125

If Kalium Motors has an EBIT of $28 million, interest of $8 million and is taxed at an average rate of 32%, what is its net income? $6.4 million $20 million $13.6 million $19 million

$13.6 million

Steve Fisher is saving for a new car. He needs to have $ 21,000 for the car in three years. How much will he have to invest today in an account paying 8 percent annually to achieve his target? (Round to nearest dollar.) $19,444 $26,454 $22,680 $16,670

$16,670

Chandler Sporting Goods produces baseball and football equipment and lines of clothing. This year the company had cash and marketable securities worth $335,485, accounts payables worth $1,159,357, inventory of $1,651,599, accounts receivables of $1,488,121, short-term notes payable worth $313,663, and other current assets of $121,427. What is the company's net working capital? $1,673,421 $2,123,612 $3,596,632 $1,801,784

$2,123,612

Trident Manufacturing Company's treasurer identified the following cash flows during this year as significant. The company repaid existing debt of $425,110, while raising additional debt capital of $750,000. It also repurchased stock in the open markets for a total of $63,250 and paid $233,144 in dividends to its shareholders. What is the net cash provided by (used in) financing activities? -$91,746 -$28,496 $28,496 $91,746

$28,496

Security Analysts that have evaluated Concordia Corporation, have determined that there is a 15% chance that the firm will generate earnings per share of $2.40; a 60% probability that the firm will generate earnings per share of $3.10; and a 25% probability that the firm will generate earnings per share of $3.80. What are the expected earnings per share for Concordia Corporation? (Round off to the nearest $0.01)

$3.17

Sunland Insurance Ltd. issued a fixed-rate perpetual preferred stock three years ago and placed it privately with institutional investors. The stock was issued at $25 per share with a $1.94 dividend. If the company were to issue preferred stock today, the yield would be 6.4 percent. The stock's current value is:

$30.31

Barbra purchased a piece of real estate last year for $85,000. The real estate is now worth $102,000. If Barbra needs to have a total return of 25 percent during the year, then what is the dollar amount of income that she needs to have to reach her objective?

$4,250

If Norman invested $100,000 for 3 years at 12%, how much interest on interest will he earn? (Do not round intermediate calculations. Round the final answer to two decimal places.) $4,303.36 $4,492.80 $4,585.32 $4,856.32

$4,492.80

Zephyr Electricals is a company with no growth potential. Its last dividend payment was $4.50, and it expects no change in future dividends. What is the current price of the company's stock given a discount rate of 9 percent? $40.50 $50.00 $45.00 $500.00

$50.00

The following financial data of Covise Corp. for the past fiscal year is given. Net income $34,000 Increase in accounts payable 14,000 Increase in accrued income taxes 14,000 Increase in accounts receivable 16,000 Depreciation 22,000 Calculate company's cash flow to investors from operating activities? $68,000 $46,000 $56,000 $44,000

$68,000 Cash from from operating activities = Net income + Sources of cash - uses of cash = $34,000 + ($14,000 + $14,000 + $22,000) - $16,000 = $68,000

Celesta Frank wants to go on a cruise in three years. She could earn 8.2 percent compounded monthly in an account if she deposits the money today. She needs to have $10,000 in three years. How much will she have to deposit today? (Round to the nearest dollar.) $8,148 $7,826 $7,763 $6,432

$7,826 N = 3 x 12 --> 36 FV = 10,000 I/Y = 8.2/12 --> .68333 PMT= $0

Shane, Inc., has completed its fiscal year and reported Total Assets of $1,000,000 and Total Liabilities of $300,000. Calculate the value of common equity. $700,000 $1,300,000 $800,000 $600,000

$700,000

Contrary Computer Corp. has reported that its net income for 2010 is $2,700,000. The firm has 600,000 shares outstanding and a price-earnings ratio of 15.8 times. What is the firm's share price? $49.50 $4.50 $22.68 $71.10

$71.10 2,700,000 / 600,000 * 15.8

Stryder, Inc. has 3 million shares outstanding at a current price of $15 per share. The book value of the shares is $10 per share. The firm also has $30 million (based on par value) in bonds outstanding. The bonds are selling at a price equal to 101 percent of par. What is the market value of the firm?

$75.3 million

Jack Palomo has deposited $2,500 today in an account paying 6 percent interest annually. What would be the simple interest earned on this investment in five years? If the account pays compound interest, what will be the interest on interest in five years? $95.56; $845.56 $150; $845.56 $750; $95.56 $150; $95.56

$750; $95.56

Assume that you are considering the purchase of a stock which will pay dividends of $4.50 during the next year. Further assume that you will be able to sell the stock for $85.00 one year from today and that your required rate of return is 15 percent. How much would you be willing to pay for the stock today? (Round off to the nearest $0.01) $65.37 $89.50 $94.10 $77.83

$77.83

Jamaica Corp. is adding a new assembly line at a cost of $8.5 million. The firm expects the project to generate cash flows of $2 million, $3 million, $4 million, and $5 million over the next four years. Its cost of capital is 16 percent. What is the net present value of this project? (Do not round intermediate computations. Round final answer to nearest dollar.)

$777,713

Centennial Brewery produced revenues of $1,145,227 in 2008. It has expenses (excluding depreciation) of $812,640, depreciation of $131,335, and interest expense of $81,112. It pays an average tax rate of 34 percent. What is the firm's net income after taxes? Round your final answer to the nearest dollar. $120,140 $79,292 $248,475 $40,848

$79,292

Gunther earned a 62.5 percent return on a stock that he purchased one year ago. The stock is now worth $12, and he received a dividend of $1 during the year. How much did Gunther originally pay for the stock?

$8.00

Tumbling Haven, a gymnastic equipment manufacturer, provided the following information to its accountant. The company had current assets of $145,332, net fixed assets of $356,190, and other assets of $4,176. The firm had long-term debt of $76,445, common stock of $200,000, and retained earnings of $134,461. What amount of current liabilities did this firm have? $94,792 $505,678 $171,217 None of these

$94,792

Which one of the following statements is NOT true?

Accepting a negative-NPV project has no impact on shareholder wealth.

During 2008, Towson Recording Company increased its investment in marketable securities by $36,845, funded fixed assets acquisition by $109,455, and had marketable securities of $14,215 mature. What is the net cash provided by (used in) investing activities? -$132,085 -$145,940 $132,085 $145,940

-$132,085

Tommie has made an investment that will generate returns that are based on the state of the economy during the year. Use the following information to calculate the standard deviation of the return distribution for Tommie's investment. (Do not round intermediate computations. Round your final answer to four decimal places.) State. Return. Probability Weak .13 .30 OK .20 .40 Great .25 .30

0.0467

The covariance of the returns between Stock A and Stock B is 0.0087. The standard deviation of Stock A is 0.26, and the standard deviation of Stock B is 0.37. What is the correlation coefficient between the returns of the two stocks?

0.090437

Stock A 's returns have a standard deviation of 0.5, and stock B's returns have standard deviation of 0.6.The correlation coefficient between A and B equals 0.5. What is the variance of a portfolio composed of 70 percent Stock A and 30 percent Stock B?

0.2179

Braniff Ground Services stock has an expected return of 9 percent and a variance of 0.25 percent. What is the coefficient of variation for Braniff? (Round your final answer to four decimal places.)

0.5556

Aquaman's stock returns have a standard deviation of 0.7, and Green Lantern's stock returns have standard deviation of 0.8 The correlation coefficient is 0.1. What is the standard deviation of a portfolio composed of 70 percent Aquaman and 30 percent Green Lantern? (Round the answer to five decimal points.)

0.56676

The covariance of the returns between Wildcat Stock and Sun Devil Stock is 0.09875. The variance of Wildcat is 0.2116, and the variance of Sun Devil is 0.1369. What is the correlation coefficient between the returns of the two stocks?

0.580199

Keys Corporation's 5-year bonds yield 7.00%, and 5-year T-bonds yield 5.95%. The only difference between the two bonds, which are both extremely marketable and liquid is the chance of bankruptcy. . What is the default risk premium (DRP) on Keys' bonds? 1.05%. 2.00%. 1.00%. 5.95%.

1.05%

Suppose Stan holds a portfolio consisting of a $10,000 investment in each of 8 different common stocks. The portfolio's beta is 1.25. Now suppose Stan decided to sell one of his stocks that has a beta of 1.00 and to use the proceeds to buy a replacement stock with a beta of 1.35. What would the portfolio's new beta be?

1.29

If the return distribution for the asset is described as below, what is the standard deviation for the asset's returns? (Do not round your intermediate calculations. Round your percentage answers to two decimal places.) Return Probability 12% 15% 10% 50% 7% 35%

1.79%

If inflation is anticipated to be 5 percent during the next year, while the real rate of interest for a one-year loan is 5 percent, then what should the nominal rate of interest be for a risk-free one-year loan? 25 percent. 15 percent. 5 percent. 10 percent.

10 percent.

Patrick Smith has $5,000 to invest in a small business venture. His partner has promised to pay him back $8,200 in five years. What is the return that this investment earns? 10.4% 8.7% 11.1% 9.3%

10.4%

View Point Industries has forecasted a rate of return of 20.00% if the economy booms (25.00% probability); a rate of return of 15.00% if the economy is in a growth phase (45.00% probability); a rate of return of 2.50% if the economy is in decline (20.00% probability); and a rate of return of -15.00% if the economy is in a depression (10.00% probability). What is View Point's standard deviation of returns? Do not round intermediate computations. Round your final answer to two decimal points.

10.46%

The Classic Car Co. has a before-tax cost of debt capital of 9%, a cost of preferred stock of 10%, a cost of equity capital of 14%, and a marginal tax rate of 40%. The market values of its debt, preferred stock and common stock are $40 million, $20 million, and $60 million respectively. Therefore, for evaluating average risk projects, the manager should use a discount rate of _____. (Do not round intermediate calculations. Round final answer to two decimal places.)

10.47%

Cortez, Inc., is expecting to pay out a dividend of $2.50 next year. After that it expects its dividend to grow at 7 percent for the next four years. What is the present value of dividends over the next five-year period if the required rate of return is 10 percent? (Do not round intermediate calculations. Round final answer to two decimal places.) $9.80 $10.76 $11.88 $11.50

10.76

Cortez, Inc., is expecting to pay out a dividend of $2.50 next year. After that it expects its dividend to grow at 7 percent for the next four years. What is the present value of dividends over the next five-year period if the required rate of return is 10 percent? (Do not round intermediate calculations. Round final answer to two decimal places.) $9.80 $11.50 $11.88 $10.76

10.76

You have won the lottery and will receive 20 annual payments of $10,000 starting today. If you can invest these payments at 8.5%, what is the present value of your winnings? (Round the final answer to the nearest dollar.) $200,000 $94,633 $524,891 $102,677

102677

Kevin Rogers is interested in buying a five-year bond that pays a coupon of 10 percent on a semiannual basis. The current market rate for similar bonds is 8.8 percent. What should be the current price of this bond? (Do not round intermediate computations. Round your final answer to the nearest dollar.) $965 $1,099 $1,048 $982

1048

Regatta, Inc., has six-year bonds outstanding that pay an 8.25 percent coupon rate. Investors buying the bond today can expect to earn a yield to maturity of 6.875 percent. How much will you be willing to pay for Regatta's bond today? Assume annual coupon payments. (Do not round intermediate computations. Round your final answer to the nearest dollar.) $1,014 $923 $972 $1,066

1066

Giant Electronics is issuing 20-year bonds that will pay coupons semiannually. The coupon rate on this bond is 7.8 percent. If the market rate for such bonds is 7 percent, what will the bonds sell for today? (Do not round intermediate computations. Round your final answer to the nearest dollar.) $923 $861 $1,085 $1,037

1085

The Smart Start Corporation recently paid a dividend of $3.00 per share. Management expects dividends to grow at a constant rate of 10% per year. If the required rate of return on the company's stock is 14%, how much would the stock be worth at the end of three years from today? (Do not round intermediate calculations. Round final answer to two decimal places) $109.81 $99.82 $82.50 $21.42

109.81

Jorge Cabrera paid $980 for a 15-year bond 10 years ago. The bond pays a coupon of 10 percent semiannually. Today, the bond is priced at $1,054.36. If he sells the bond today, what will be his realized yield? (Round to the nearest percent.) 12% 11% 9% 8%

11%

Maloney's, Inc. has found that its cost of common equity capital is 17 percent and its cost of debt capital is 6 percent. The firm is financed with $3,000,000 of common shares (market value) and $2,000,000 of debt. What is the after-tax weighted average cost of capital for Maloney's, if it is subject to a 40 percent marginal tax rate?

11.64%

Melba's Toast has a preferred share issue outstanding with a current price of $19.50. The firm is expected to pay a dividend of $2.34 per share a year from today. What is the firm's cost of preferred equity? (Round your final answer to two decimal places.)

12.00%

The cost of capital of a company that uses 45 percent debt that has an after-tax cost of debt of 10 percent and 55 percent equity that has a cost of 15 percent is:

12.75%

Ransport Company has made an investment in another company that will guarantee it a cash flow of $37,250 each year for the next five years. If the company uses a discount rate of 15 percent on its investments, what is the present value of this investment? (Round to the nearest dollar.) $124,868 $101,766 $251,154 $186,250

124868

Alice Trang is planning to buy a six-year bond that pays a coupon of 10 percent semiannually. Given the current price of $878.21, what is the yield to maturity on these bonds? (Round to the closest answer.) 12% 14% 13% 11%

13%

James Perkins wants to have a million dollars at retirement, which is 15 years away. He already has $200,000 in an IRA earning 8 percent annually. How much does he need to save each year, beginning at the end of this year, to reach his target? Assume he could earn 8 percent annually on any investment he makes. (Round to the nearest dollar.) $10,900 $13,464 $14,273 $16,110

13464

You are purchasing a used car and will make 5 annual payments of $3,500 starting one year from today. If your funds could be invested at 9%, what is the present value of the car? (Round the final answer to the nearest dollar. $13,614 $14,839 $20,946 $17,500

13614 5 9% -3500 ? N i PMT PV

A communications company pays annual dividends of $8.50 with no possibility of it changing in the next several years. If the firm's stock is currently selling at $60.71, what is the required rate of return? (Round to nearest whole number.) 14% 16% 13% 15%

14%

Gangland Water Guns, Inc. is expected to pay a dividend of $2.10 one year from today. If the firm's growth in dividends is expected to remain at a flat 3 percent forever, what is the cost of equity capital for Gangland if the price of its common shares is currently $17.50?

15.00%

You are analyzing the cost of capital for a firm that is financed with 65 percent equity and 35 percent debt. The cost of debt capital is 8 percent, while the cost of equity capital is 20 percent for the firm. What is the overall cost of capital for the firm?

15.8%

Robert White will receive cash flows of $4,450, $4,775, and $5,125from his investment. If he can earn 7 percent on any investment that he makes, what is the future value of his investment cash flows at the end of three years? (Round to the nearest dollar.) $16,427 $15,427 $15,329 $14,427

15327

Joseph Harris is considering an investment that pays 6.5 percent annually. How much does he need to invest today so that he will have $25,000 in seven years? (Round to the nearest dollar.) $16,088 $17,474 $16,625 $18,850

16,088

Steve Fisher is saving for a new car. He needs to have $ 21,000 for the car in three years. How much will he have to invest today in an account paying 8 percent annually to achieve his target? (Round to nearest dollar.) $22,680 $16,670 $26,454 $19,444

16,670

If the market risk premium is currently 6 percent and the risk-free rate of return is 4 percent, then what is the expected return on a common share with a beta equal to 2?

16.0%

George Wilson purchased Bright Light Industries common stock for $47.50 on January 31, 2016. The firm paid dividends of $1.10 during the last 12 months. George sold the stock today (January 30, 2017) for $54.00. What is George's holding period return?

16.00%

At what rate must $4,000 be compounded annually for it to increase to $40,000 in 15 years? (Do not round the intermediate calculations. Round the final answer to the nearest two decimals.) 14.98% 16.59% 35.82% 25.82%

16.59%

Castelda company issues zero coupon bonds which mature in 30 years. These bonds can be bought for $999.38 and then pay no annual interest payments, only $100,000 at maturity. What is the annual percentage cost of these bonds to the issuing company? (Do not round intermediate calculations. Round your final answer to two decimal places of percentage.) 16.59% 12.65% 13.28% 11.36%

16.59% FV = PV (1 + rate) ^n FV:100,000 PV:999.38 n:30 100,000 = 999.38 (1 + rate) ^ 30 (1 + rate) ^ 30 = 100.062 1 + rate = (30 root 100.062) rate = 0.1659

Suppose the weighted average cost of capital of the Blossom Company is 10 percent. If Blossom has a capital structure that is 50 percent debt and 50 percent equity, its before-tax cost of debt is 4 percent, and its marginal tax rate is 20 percent, then its cost of equity capital is closest to:

16.80%

Boretti has $400,000 in a stock fund. The fund pays a 10% return, compounded annually. If he does not make another deposit into the account, how long will it take for the account to increase to $2 million? (Do not round intermediate calculations. Round the final answer to two decimal places.) 16.89 years 12.63 years 33.33 years 23.33 years

16.89 years

Stuart Weddle's father is 55 years old and wants to set up a cash flow stream that would be forever. He would like to receive $15,000 every year, beginning at the end of this year. If he could invest in account earning 9 percent annually, how much would he have to invest today to receive his perpetual cash flow? (Round to the nearest dollar.) $200,000 $166,667 $222,222 $135,200

1666677

Sid Phillips has funded a retirement investment with $250,000 earning a return of 6.75 percent annually. What is the value of the payment that he can receive in perpetuity? (Round to the nearest dollar.) $14,900 $12,150 $16,875 $15,250

16875

Rachel McGovern bought a 10-year bond for $921.77 seven years ago. The bond pays a coupon of 15 percent semiannually. Today, the bond is priced at $961.22. If she sold the bond today, what would be her realized yield? (Round to the nearest percent.) 10% 18% 9% 17%

17%

The beta of Elsenore, Inc., stock is 1.6, whereas the risk-free rate of return is 8 percent. If the expected return on the market is 15 percent, then what should investors expect as a return on Elsenore?

19.20%

Which of the following rates should be used to calculate a project's net present value?

Cost of capital

An investment pays 18 percent interest compounded quarterly. What is the effective annual interest rate? (Do not round intermediate calculations. Round the final answer to the nearest one decimal.) 19.9% 18.3% 18.9% 19.3%

19.3%

What is the future value of $1,500 after 5 years if the annual return is 6%, compounded semiannually? $1,819 $2,117 $2,016 $1,915

2,016

The expected return on Kiwi Computers stock is 16.6 percent. If the risk-free rate is 4 percent and the expected return on the market is 10 percent, then what is Kiwi's beta?

2.10

The Easton manufacturing Company is looking to replace its conveyor belt system. A new system will cost $345,000, and will result in cost savings of $220,000 in the first year, followed by savings of $100,000 per year over the following 3 years. The payback period for this project is closest to: Round your answer to two decimal places.

2.25 years

The CEO of Coral Gables Corp. was reviewing the returns of the company's sizeable investment portfolio in the last five years during a period of extreme volatility. He noted the 5 year sequence of investment returns as follows: +30%, -20%, +30%, -20%, +30%. He then calculated the arithmetic average return, but his CFO noted that since he had ignored the compounding effect he was wrong. By how much was he wrong? (Hint: Calculate the annual arithmetic average return over the five years less the average geometric (compounded) return.)

2.95%

Francis purchased a stock one year ago for $20, and it is now worth $24. The stock paid a dividend of $3 during the year. What was the stock's rate of return from capital appreciation during the year?

20%

Jamaica Corp. is adding a new assembly line at a cost of $8.5 million. The firm expects the project to generate cash flows of $2 million, $3 million, $4 million, and $5 million over the next four years. Its cost of capital is 16 percent. What is the internal rate of return that Jamaica can earn on this project? (Do not round intermediate computations. Round final answer to the nearest percent.)

20%

Winston Baker will invest $25,000 in a spa that his sister is starting. He will triple his investment in six years. What is the rate of return that Winston is being promised? (Rounded to the nearest percent.) 20% 18% 12% 25%

20%

You are interested in investing $15,000, a gift from your grandparents, for the next four years in a mutual fund that will earn an annual return of 8 percent. What will your investment be worth at the end of four years? (Round to the nearest dollar.) $18,816 $18,089 $20,221 $20,407

20,407

Correct answer iconYour answer is correct. The Stagnant Growth Corporation has paid a constant dividend of $2.50 per year for the past 3 years and is expected to continue paying the same dividend per share for the foreseeable future. If the required rate of return on its common stock is 12%, the most an investor should pay per share is _____. (Round to two decimal places.) $2.50 $40.80 $7.50 $20.83

20.83

Juan and Rachel Burpo plan to buy a time-share in six years of $16,860. In order to have adequate funds to do so, the Burpo want to make a deposit to their money market fund today. Assume that they will be able to earn an investment rate of 5.75%, compounded annually. How much will Juan and Rachel need to deposit today to achieve their goal? (Round off to the nearest dollar.) $8,885 $12,055 $14,243 $11,138

21,055

The Conservative Corporation has determined its weighted average cost of capital to be 13%. It has a capital structure of 60% debt, and 40% equity, with the before-tax cost of debt estimated at 10%. If the firm's marginal tax rate is 30%, its cost of equity capital is closest to _____. (Do not round intermediate calculations.)

22%

What is the value of this 20 year lease? The first payment, due one year from today is $2,000 and each annual payment will increase by 4%. The discount rate used to evaluate similar leases is 9%. (Round final answer to the nearest whole dollar.) $68,000 $40,000 $24,361 $39,856

24361 PVAn = (CF1 / (i - g)) × [1 - ((1+g) / (1+i))n] = ($2,000 / (9% - 4%)) × [1 - ((1 + 4%) / (1+9%))20] = $40,000 × 0.60903 = $24,361

Tim Dodson has borrowed $8,600 to pay for his new car. The annual interest rate on the loan is 9.4 percent, and the loan needs to be repaid in four payments. What will be his annual payment if he begins his payment beginning now? (Round to the nearest dollar.) $2,304 $2,850 $2,448 $2,229

2448

Xinhua Manufacturing Company has been generating stable revenues that are not expected to grow in the foreseeable future. The company's last dividend was $3.25, and it is unlikely to change the amount paid out. If the required rate of return is 12 percent, what is the stock worth today? (Round the final answer to two decimal places.) $21.23 $39.00 $3.69 $27.08

27.08

Newship Inc. has borrowed from its bank at a rate of 8 percent and will repay the loan with interest over the next five years. Its scheduled payments, starting at the end of the year are as follows—$450,000, $560,000, $750,000, $875,000, and $1,000,000. What is the present value of these payments? (Round to the nearest dollar.) $2,989,351 $2,815,885 $2,431,224 $2,735,200

2815885 PV =($450,000/1.08)+($560,000/(1.08)^2)+....$750,000+$875,000+$1,000,000.... =$416,666.67 + $480,109.74 + $595,374.18 + $643,151.12 + $680,583.20=$2,815,884.91

Foodelicious Corp. is evaluating whether it should take over the lease of an ethnic restaurant in Manhattan. The current owner had originally signed a 25-year lease, of which 16 years still remain. The restaurant has been growing steadily at a 7 percent growth for the last several years. Foodelicious Corp. expects the restaurant to continue to grow at the same rate for the remaining lease term. Last year, the restaurant brought in net cash flows of $310,000. If the firm evaluates similar investments using a15 percent discount rate, what is the present value of this investment? (Round to the nearest dollar.) $2,709,124 $2,966,350 $2,838,182 $3,109,460

2838182

Company A has a beta of 0.70, while Company B's beta is 1.20. The required return on the stock market is 11.00%, and the risk-free rate is 4.25%. What is the difference between A's and B's required rates of return?

3.38%

Three years ago, Joe bought a 5-year, 10% coupon paid semiannually bond for $1000. Currently, with interest rates having risen sharply, the bond is selling for $800 and you decide to sell it off. If you had re-invested the semi-annual coupons as you received them, what would your realized yield be over the 3-year holding period? Round to two decimal places. 10%. 12%. 6%. 3.63%.

3.63%

Your mother is trying to choose one of the following bank CDs to deposit $10,000. Which will have the highest future value if she plans to invest for three years? 3.50% compounded daily 3.25% compounded monthly 3.40% compounded quarterly 3.75% compounded annually

3.75% compounded annually

Metasteel Limited Co. has a stable track record with sales that are not expected to grow in the next several years. Its last annual dividend was $5.75. If the required rate of return on similar investments is 18 percent, what is the current stock price? (Round the answer to two decimal places.) $31.94 $39.30 $103.50 $13.50

31.94

Brandon Ramirez wants to set up a scholarship at his alma mater. He is willing to invest $320,000 in an account earning 11 percent annually. What will be the annual scholarship that can be given from this investment? (Round to the nearest dollar.) $32,600 $50,000 $40,300 $35,200

35200

You are evaluating a growing perpetuity investment from a large financial services firm. The investment promises an initial payment of $20,000 at the end of this year and subsequent payments that will grow at a rate of 3.4 percent annually. If you use a 9 percent discount rate for investments like this, what is the present value of this growing perpetuity? $357,143 $378,130 $372,925 $365,632

357143

The beta of Ricci Co.'s stock is 3.2, whereas the risk-free rate of return is 9 percent. If the expected return on the market is 18 percent, then what should investors expect as a return on on Ricci Co.?

37.80%

Jacob Suppliers has not paid out any dividend in the last three years. It does not expect to pay dividends in the next two years either as it recovers from an economic slowdown. Three years from now it expects to pay a dividend of $2.50 and then $3.00 in the following two years. What is the present value of the dividends to be received over the next five years if the discount rate is 15 percent? (Do not round intermediate calculations. Round final answer to two decimal places.) $5.50 $6.14 $4.85 $5.37

4.85

You are considering purchasing a share of preferred stock that pays an annual dividend of $4.50. If you require an 11% rate of return on your investment, what is the maximum price you will pay for the stock? $45.00 $51.57 $5.00 $40.91

40.91

The Pineapple Company's last dividend was $1.75. Its dividend growth rate is expected to be constant at 25% for 2 years, after which dividends are expected to grow at a rate of 6% forever. Its required return is 12%. What is the best estimate of the current stock price? $42.64 $32.76 $29.17 $63.28

42.64

You are starting college this month, and your favorite aunt has agreed to give you $4,000 at the end of each of your four years and you can save $8,000 at the end of each year for the first two years after you graduate. If all of these amounts are invested at 14%, how much will you have to start graduate school, six years from now? (Round the final answer to the nearest dollar.) $42,702 $42,160 $42,167 $42,927

42702

You have received a share of preferred stock that pays an annual dividend of $10. Similar preferred stock issues are yielding 22.5%. What is the value of this share of preferred stock? (Round answer to two decimal places.) $45.67 $44.44 $46.67 $41.50

44.44 PVP = CF / i; $10 / 22.5% = $44.44

Krysel Inc. is expecting a new project to begin producing cash flows at the end of this year. They expect cash flows to be as follows: 12345$663,547$698,214$795,908$798,326$755,444 If they can reinvest these cash flows to earn a return of 9.2 percent, what is the future value of this cash flow stream at the end of five years? (Round to the nearest dollar.) $4,368,692 $4,468,692 $4,429,046 $4,529,046

4429046

The XYZ Corporation is expected to grow at a rate of 30% for the next two years and then settle at the industry median constant growth rate of 10%. If the company's last paid dividend was $1.50 per share, and the required rate of return is 15%, how much is the stock worth today? (Round your intermediate calculations and final answer to two decimal places.) $65.91 $45.81 $55.77 $13.00

45.81

Nick invested $2,000 in a bank savings account today and another $2000 a year from now. If the bank pays interest of 10 percent per year, how much money will Nick have at the end of two years? $4,210 $4,620 $4,000 $4,200

4620 Future value of two cash flows= [PV × (1 + i)2]+ [PV × (1 + i)]= [$2,000 × (1 + 0.10)2] + [$2,000 × (1 + 0.10)]= [$2,000 × (1.10)2] + [$2,000 × (1.10)]= [$2,000 × 1.21]+ [$2,000 × 1.10]= $2,420 + $2,200= $4,620

Dawson Electricals has borrowed $27,850 from its bank at an annual rate of 8.5 percent. It plans to repay the loan in eight equal installments, beginning in a year. What is its annual loan payment? (Round to the nearest dollar.) $4,708 $5,134 $4,748 $4,939

4939

Your tuition for the coming year is due today. You borrow $8,000 from your uncle and agree to repay in the three years an amount of $9,250. What is the interest rate on this loan? Round to the nearest percent. 6% 5% 8% 7%

5% Amount to be borrowed = PV = $8000 Amount to be paid back after 3 years - FV3 = $9250 Interest rate on investment Duration of investment = n = 3 years Present value of investment = PV

The expected return on Karol Co. stock is 16.5 percent. If the risk-free rate is 5 percent and the beta of Karol Co is 2.3, then what is the risk premium on the market portfolio?

5.0%

John Wong purchased a five-year bond today at $1,034.66. The bond pays 6.5 percent semiannually. What will be his yield to maturity? (Round to the closest answer.) 6.7% 3.25% 6.2% 5.7%

5.7%

The U.S. Treasury has issued 10-year zero coupon bonds with a face value of $1,000. Assume that the bond compounds interest semiannually. What will be the current market price of these bonds if the yield to maturity for similar investments in the market is 6.75 percent? (Round your answer to the nearest dollar.)$860$515$604$684

515

If inflation is anticipated to be 6 percent during the next year, while the real rate of interest for a one-year loan is 5 percent, then what should the nominal rate of interest be for a risk-free one-year loan? 12%. 5%. 6%. 11%.

6% + 5% = 11%

The risk-free rate of return is 2.5% and the expected return on the market is 8%. If the Beta on Ridgeway Co. stock is 0.8, then what is Ridgeway's expected return?

6.9%

The Buckeye Corporation expects to pay a dividend of $3.15 per share at the end of next year. The firm expects the dividend to continue growing at the rate of 8% per year for the foreseeable future. If you require a return of 13% per year, the most you should pay for this stock is ______. $26.17 $68.04 $63.00 $24.23

63

Tre-Bien Bakeries generated net income of $233,412 this year. At year end, the company had accounts receivables of $47,199, inventory of $63,781, and cash of $21,461. It also had accounts payables of $51,369, short-term notes payables of $11,417, and accrued taxes of $6,145. The net working capital of the firm is $68,931. $63,510. $69,655. None of these.

63,510

Shana Norris wants to buy five-year zero coupon bonds with a face value of $1,000. Her yield to maturity is 8.5 percent. Assuming annual compounding, what would be the current market price of these bonds? (Round your answer to the nearest dollar.) $1,023 $890 $1,113 $665

665

The Carla Vista Company has an after-tax cost of debt capital of 3 percent, a cost of preferred stock of 8 percent, a cost of equity capital of 10 percent, and a weighted average cost of capital of 7 percent. Carla Vista intends to maintain its current capital structure as it raises additional capital. In making its capital-budgeting decisions for the average-risk project, the relevant cost of capital is:

7 percent

Wally's War Duds has a preferred share issue outstanding with a current price of $26.57. The firm is expected to pay a dividend of $1.86 per share a year from today. What is the firm's cost of preferred equity? Round your final answer to two decimal places.

7.00%

Ambassador Corp. sells household cleaners producing a revenue stream that has remained unchanged in the last few years. The firm does not expect any change in its earnings or dividends for the next several years. The stock is currently selling at $46.88. If the required rate of return is 16 percent, what is the dividend paid by this company? (Round the answer to two decimal places.) $2.93 $6.89 $7.50 $4.65

7.50

Mary just bought a 20-year bond with an 8% coupon rate (paid semi-annually) and $1000 par value for $1050. She is expecting an effective annual yield (EAY) of: (Round to two decimal places.) 10%. 7.65% 9.5%. 8.51%

7.65%

The WACC for a firm is 13.00 percent. You know that the firm's cost of debt capital is 10 percent and the cost of equity capital is 20%. What proportion of the firm is financed with debt? Assume the firm pays no tax.

70%

Assume that you are considering the purchase of a stock which will pay dividends of $4.50 during the next year. Further assume that you will be able to sell the stock for $85.00 one year from today and that your required rate of return is 15 percent. How much would you be willing to pay for the stock today? (Round off to the nearest $0.01) $65.37 $89.50 $77.83 $94.10

77.83

Milner is saving for her retirement. She will make a deposit into her IRA account at the end of each quarter for the next 36 years. The expected return on the account is 8%. How much will she have to deposit each quarter to have $650,000 in the account when she retires 36 years from today? (Round the final answer to the nearest two decimals.) $4,513.89 $796.81 $260.34 $2702.61

796.81

Carlos Lopes is looking to invest for the next three years. He is looking to invest $7,500 today in a bank CD that will earn interest at 5.75 percent annually. How much will he have at the end of three years? (Round to the nearest dollar.) $8,575 $8,990 $8,870 $8,681

8,870

If your investment increased 12% this year and inflation for that period was 4%, what was your real rate of return? Please use the simplified (or approximate) Fisher equation for this question. 7.7% 8.0% 9.3% 12.0%

8.0% Real rate of return= nominal rate of return - inflation rate = 12% - 4% = 8%

Turquoise Electronics, Inc. paid a dividend of $1.87 last year. If the firm's growth in dividends is expected to be 10 percent next year and then zero thereafter, what is its cost of equity capital if the price of its common shares is currently $25.71?

8.00%

You have invested 20 percent of your portfolio in Homer, Inc., 40 percent in Marge Co., and 20 percent in Bart Resources. What is the expected return of your portfolio if Homer, Marge, and Bart have expected returns of 2 percent, 18 percent, and 3 percent, respectively?

8.2%

Generic Inc. issued bonds in 1988 that will mature 16 years from the date of issue. The bond pays a 14.375 percent coupon and the interest is paid semiannually. Its current price is $1,508.72. What is the effective annual yield on the bonds? (Round your answer to two decimal places.) 8.68% 7.67% 14.40% 16.92%

8.68%

Surreal Corp. has borrowed to invest in a project. The loan calls for a payment of $17,500 every month for three years. The lender quoted Surreal a rate of 8.40 percent with monthly compounding. At what rate would you discount the payments to find the amount borrowed by Surreal Corp.? (Round to two decimal places.) 8.73% 8.40% 8.95% 8.44%

8.73%

Surreal Corp. has borrowed to invest in a project. The loan calls for a payment of $17,500 every month for three years. The lender quoted Surreal a rate of 8.40 percent with monthly compounding. At what rate would you discount the payments to find the amount borrowed by Surreal Corp.? (Round to two decimal places.) 8.95% 8.40% 8.73% 8.44%

8.73%

Briar Corp is issuing a 10-year bond with a coupon rate of 7 percent. The interest rate for similar bonds is currently 9 percent. Assuming annual payments, what is the present value of the bond? (Do not round intermediate computations. Round your final answer to the nearest dollar.) $872 $945 $1,066 $990

872

Bellamee, Inc. has semiannual bonds outstanding with five years to maturity, and the bonds are priced at $920.87. If the bonds have a coupon rate of 7 percent, then what is the YTM for the bonds? Round your final percentage answer to one decimal place.

9.0%

Next year Jenkins Traders will pay a dividend of $3.00. It expects to increase its dividend by $0.25 in each of the following three years. If their required rate of return is 14 percent, what is the present value of their dividends over the next four years? (Do not round intermediate calculations. Round final answer to two decimal places.) $13.50 $11.63 $9.72 $12.50

9.72

Kevin Oh is planning to sell a bond that he owns. This bond has four years to maturity and pays a coupon of 10 percent on a semiannual basis. Similar bonds in the current market have a yield to maturity of 12 percent. What will be the price that he will get for his bond? (Do not round intermediate computations. Round your final answer to the nearest dollar.)$970$1,102$938$1,044

938

Transent Foods announced that its current sales is $1,233,450 this year. The company forecasts a growth rate of 16 percent for the foreseeable future. How long will it take the firm to produce earnings of $3 million? (Round off to the nearest year.) 10 years 7 years 6 years 8 years

A = P (1+r/100)^n 6 years

Which of the following forms of business organization is subject to double taxation? A limited partnership. A sole proprietorship. A C-corporation. A limited liability partnership (LLP).

A C-corporation

Which of the following is the best example of how a market-value balance sheet item differs from the firm's book-value balance sheet item? A firm sold common stock twenty-years ago for $20.00 a share. The firm's common stock is currently selling for $96.50 per share. A firm issued preferred stock ten-years ago. These shares of preferred stock currently are selling for par value. A firm issued long-term bonds five-years ago that currently sell for par value. A firm has $5 million of accrued liabilities on the books.

A firm sold common stock twenty-years ago for $20.00 a share. The firm's common stock is currently selling for $96.50 per share.

The constant growth dividend model would be useful to determine the value of all, but which of the following firms? A firm whose sales, profits, and dividends are growing at an annual average compound rate of 5 percent. A firm whose expected sales, profits, and dividends are fluctuating. A firm whose earnings and dividends are growing at a fairly steady rate. A firm whose earnings and dividends are declining at a fairly steady rate.

A firm whose expected sales, profits, and dividends are fluctuating.

Which of the following is true of the cost of debt?

A firm's interest payments are tax-deductible.

Which of the following types of owners cannot be engaged in managing the business? A sole proprietor A general partner A limited partner None of the above

A limited partner

Who among the following is the "principal" in the agency relationship of a corporation? The board of directors A stockholder holding 10% or more of any class of voting stock A company engineer The CEO of the firm

A stockholder holding 10% or more of any class of voting stock

Which of the following classes of securities is likely to have the lowest corporate borrowing cost? AAA rated bonds. A rated bonds. BB rated bonds. C rated bonds. All of the above will have the same corporate borrowing cost.

AAA rated bonds

Which of the following is a stakeholder? An employee A lender The IRS All of the above

All of the above

Which of the following mechanisms can help align the behavior of managers with the goals of stockholders? Well-designed management compensation Managerial labor market An independent board of directors All of the above

All of the above

Which of the following statements is true? The largest investors in corporate bonds are institutional investors such as life insurance companies and pension funds. The market for corporate bonds is thin compared to the market for corporate stocks. Prices in the corporate bond market tend to be more volatile than prices of securities sold in markets with greater trading volumes. All of the above are true.

All of the above are true.

Which of the following statements is true? The lower the transaction costs are, the greater a security's marketability. The interest rate, or yield, on a security varies with its degree of marketability. U.S. Treasury bills have the largest and most active secondary market and are considered to be the most marketable of all debt securities. All of the above are true.

All of the above are true.

Which one of the following statements is true of a bond's yield to maturity? The yield to maturity of a bond is the discount rate that makes the present value of the coupon and principal payments equal to the price of the bond. It is the annual yield that the investor earns if the bond is held to maturity, and all the coupon and principal payments are made as promised. A bond's yield to maturity changes daily as interest rates increase or decrease. All of the above are true.

All of the above are true.

Accounting standards prescribed by generally accepted accounting principles (GAAP) are important because they: make the financial statements of all firms standardized. allow one to examine a firm's performance with ease over a period of time. make it possible for management or analysts to compare a firm's performance with that of other competitors. All of these.

All of these.

Which of the following sections do annual reports typically contain? Financial summary related to the past year's performance. Information about the company, its products, and its activities. Audited financial statements, including limited historical financial data. All three of the above sections are included in the annual report.

All three of the above sections are included in the annual report.

Which of the following situations will result in an increase in the future value of an investment? An increase in the rate of interest A decrease in the frequency with which interest is compounded An increase in the duration between compounding periods A decrease in the length of the holding period

An increase in the rate of interest

Which of the following investors should be willing to pay the highest price for an asset?

An investor with a diversified portfolio.

Which of the following statements is true? Long-term bonds have lower price volatility than short-term bonds of similar risk. Interest rate risk decreases as maturity increases. As interest rates decline, the prices of bonds rise and as interest rates rise, the prices of bonds decline. All other things being equal, short-term bonds are riskier than long-term bonds.

As interest rates decline, the prices of bonds rise and as interest rates rise, the prices of bonds decline.

Which one of the following statements is NOT true? Interest rate risk is the risk that bond prices will change as interest rates change. Long-term bonds have more price volatility than short-term bonds of similar risk. As interest rates increase, bond prices increase. Interest rate changes and bond prices are inversely related.

As interest rates increase, bond prices increase.

Which of the following statements is true? Federal laws typically allow insurance companies and pension funds to purchase non-investment grade bonds. Investment grade bonds are those rated single B and higher. All else equal, the higher a bond's rating the higher the coupon rate. Because investors are risk averse, they require a premium to purchase a security that exposes them to default risk.

Because investors are risk averse, they require a premium to purchase a security that exposes them to default risk.

Which of the following business organizational forms create(s) a tax liability on income at the personal income tax rate? Sole proprietorship Partnership Corporation Both Sole proprietorship and Partnership

Both Sole proprietorship and Partnership

Which of the following statements is NOT true about broker markets? Brokers' extensive contacts provide them with a pool of price information that individual investors could not economically duplicate themselves. Brokers can guarantee an order because they have an inventory of securities. Brokers bring buyers and sellers together to earn a fee, called a commission. Investors have an incentive to hire a broker because what they charge as a commission is less than the cost of direct search.

Brokers can guarantee an order because they have an inventory of securities.

Which of the following is primarily responsible for managing all financial aspects of a firm? CFO CEO Audit committee Board of directors

CFO

Which of the following factors or activities can be controlled by a firm's managers? The level of market interest rates The level of economic activity Capital budgeting Stock market conditions

Capital budgeting

Which of the following statements is CORRECT? Money market instruments are illiquid and have high default risk. If your uncle in New York sold 100 shares of Apple through his broker to an investor in New York, this would be a primary market transaction. An example of a primary market transaction would be inheriting 1000 shares of GE from your grandfather. Capital market instruments include both long-term debt and common stocks.

Capital market instruments include both long-term debt and common stocks.

Which of the following is a financial institution involved in indirect financing in a financial system? Commercial banks Futures and options markets Capital markets Investment banks

Commercial banks

What financial instruments comprise a firm's capital structure?

Common stock Preferred stock Bonds ---All of the above

Which one of the following statements is NOT true? The market for corporate bonds is thin compared to the market for corporate stocks. Corporate bonds are more marketable than the securities that have higher daily trading volumes. The largest investors in corporate bonds are life insurance companies and pension funds. Prices in the corporate bond market tend to be more volatile than the markets for stocks or money market securities.

Corporate bonds are more marketable than the securities that have higher daily trading volumes.

Which form(s) of business organization generate(s) the majority of business revenues and profits in the United States? Sole proprietorship Partnership Corporation Both Sole proprietorship and Partnership

Corporation

Which of the following capital component costs must be adjusted for taxes?

Cost of Debt

Which one of the following statements about vanilla bonds is NOT true? The bond's coupon rate is calculated as the annual coupon payment divided by the bond's face value. Coupon payments are usually made quarterly. They have fixed coupon payments. The face value, or par value, for most corporate bonds is $1,000.

Coupon payments are usually made quarterly.

Petra, Inc., has $400,000 as current assets, $1.225 million as plant and equipment, and $250,000 as goodwill. In preparing the balance sheet, these assets should be listed in which of the following orders? Current assets, goodwill, and plant and equipment. Current assets, plant and equipment, and goodwill. Goodwill is not an asset and is not listed here. None of these.

Current assets, plant and equipment, and goodwill.

Which of the following are the three simplifying assumptions that cover most stock growth patterns? Dividends remain constant over time, dividends grow at a constant rate, and dividends are equal to zero. Dividends have a zero-growth rate, dividends grow at a varying rate, and dividends are equal to zero. Dividends remain constant over time, dividends grow at a constant rate, and dividends have a mixed growth pattern. None of the above.

Dividends remain constant over time, dividends grow at a constant rate, and dividends have a mixed growth pattern.

What is the difference between FIFO (first in, first out) and LIFO (last in, first out) accounting? FIFO refers to the practice of firms, when making sales, assuming that the inventory that came in first (at a higher price) is being sold first. During a period of rising prices, LIFO implies that a firm is selling the higher cost, newer inventory first, leaving the lower cost, older inventory on the balance sheet. During a period of falling prices, LIFO implies that a firm is selling the higher cost, newer inventory first, leaving the lower cost, older inventory on the balance sheet. LIFO refers to the practice of firms, when making sales, assuming that the inventory that came in last is being sold first (at a higher price).

During a period of rising prices, LIFO implies that a firm is selling the higher cost, newer inventory first, leaving the lower cost, older inventory on the balance sheet.

The future value of $200,000 invested at a 7% annual rate, compounded quarterly for 3 years is _____. (Do not round your intermediate calculations. Round the final answer to the nearest two decimal places.) $109,287.87 $246,287.86 $222,252.19 $111,365.78

FV= 200,000 x (1+0.07/4)^(3x4) =200,000 x 1.2314393 FV= 246,287.86 Formula: FV = PV x (1+r/m) ^(n x m)

The accounting rate of return is better than the payback period since it does not ignore the time value of money.

False

Total holding period return is the dollar gain (or loss) from purchasing an asset and selling it later.

False

Which of the following theorems explains the relationship between interest rates and bond prices? For a given change in interest rates, the prices of short-term bonds will change more drastically than the prices of long-term bonds. For a given change in interest rates, the prices of higher-coupon bonds will change more drastically than the prices of lower-coupon bonds. For a given change in interest rates, the prices of long-term bonds will change more drastically than the prices of short-term bonds. Bond prices are directly related to interest rate movements.

For a given change in interest rates, the prices of long-term bonds will change more drastically than the prices of short-term bonds.

Which of the following is/are advantages of the corporate form of organization? Reduced start-up costs. Greater access to capital markets. Unlimited liability. Single taxation.

Greater access to capital market Shares in a corporation can be sold to raise capital from investors who are not involved in the business. This greatly increases the amount of capital that can be raised to fund the business.

Which of the following is true of risk and expected returns?

Higher the risk, higher the expected returns on an investment.

Which of the following statements is true? If market interest rates rise, a 10-year bond will fall in value more than a 1-year bond. If market interest rates rise, a 1-year bond will fall in value more than a 10-year bond. If market interest rates rise, bond prices will rise. For a given change in market interest rates, the prices of higher-coupon bonds change more than the prices of lower-coupon bonds.

If market interest rates rise, a 10-year bond will fall in value more than a 1-year bond.

Which of the following statements about the time value of money concept is true? It means a dollar received today is worth more than a dollar received tomorrow. It assumes that inflation rate remains constant for the foreseeable future. It refers to the fact that higher cash flows in earlier years are less desirable. It assumes that people prefer to consume things at some time in the future rather than today.

It means a dollar received today is worth more than a dollar received tomorrow.

Which one of the following is an advantage of the NPV method of analyzing capital projects?

It uses a discounted cash flow technique to adjust for the time value of money.

Which of the following transactions is a secondary market transaction? IBM issuing 100,000 shares on the NYSE for the first time Johnny Appleseed buying 1,000 shares of Dell through NYSE MicroChip Computers selling $1,000,000 worth of bonds directly to AIG Corp. Mary receiving dividends from IBM

Johnny Appleseed buying 1,000 shares of Dell through NYSE

On June 23, 2008, Mikhal Cosmetics sold $250,000 worth of its products to Rynex Corporation, with the payment to be made in 90 days on September 20. The goods were shipped to Rynex on July 2. The firm's accountants should recognize the sale on: June 23, 2008. July 2, 2008. September 20, 2008. None of these.

June 23, 2008.

Depreciation and amortization expenses are: Noncash expenses that cause a firm's after-tax cash flows to exceed its net income. Long-term liabilities that reduce a firm's net worth. After-tax expenses that reduce a firm's cash flows. Part of current assets on the balance sheet.

Noncash expenses that cause a firm's after-tax cash flows to exceed its net income.

Which of the following statements is NOT true about common stock? Owners of common stock are guaranteed dividend payments by the firm. Common-stock holders have the right to vote on the election of the board of directors of their company. Common-stock holders have limited liability toward the obligations of the corporation. Common stock is considered to have no fixed maturity.

Owners of common stock are guaranteed dividend payments by the firm.

Which of the following assets is an intangible asset? Patents and copyrights Plant and equipment Land and buildings Delivery truck

Patents and copyrights

Trident Corporation had the following cash flows in the current year. Which of the following will be categorized under the financing activities section of the statement of cash flows? Lease income received on a piece of land. Rent on a warehouse amounting to $1.1 million. Preferred dividends of $330,000 paid to shareholders. Purchase of $125,000 worth of five-year bonds issued by Towson Utilities.

Preferred dividends of $330,000 paid to shareholders.

Which of the following statements is NOT true about preferred stock? Preferred stock holders have limited voting privileges relative to common-stock owners. Preferred stockholders are not guaranteed dividend payments by the firm. Preferred stock represents ownership in the firm. Preferred stock dividends are paid by the issuer with after-tax dollars.

Preferred stockholders are not guaranteed dividend payments by the firm.

Which of the following organizational forms is subject to the Securities and Exchange Commission (SEC) regulations? Public corporation Sole proprietorship Private corporation Partnership

Public corporation

Which of the following is a cash flow from investing activities? Cash from sale of products. Purchase of plant and equipment. Cash payment of dividends to shareholders. Rent received from industrial property owned.

Purchase of plant and equipment.

The cost of equity is equal to the:

Rate of return required by stockholders

You loaned $100 to a friend for one year at a nominal rate of interest of 3 percent. Inflation during that year was 2 percent. How much did the purchasing power of your money change (an increase is positive and a decrease is negative)? decreased by 5 percent. increased by 1 percent. decreased by 1 percent. increased by 5 percent.

Real rate of return= nominal rate of return - inflation rate increased by 1 percent.

Which of the following represents an example of key reasons for making capital expenditures?

Replacing production equipment

Celesta Frank wants to go on a cruise in three years. She could earn 8 percent compounded daily in an account if she deposits the money today. She needs to have $10,000 in three years. How much will she have to deposit today? (Round to the nearest dollar.) $7,763 $7,826 $6,432 $7,866

Return expected from investment = i = 8%; .08/365 daily = 0.00021918Duration of investment = n = 3 years; 3*365 = 1095Frequency of compounding = m = 365Target investment proceeds in 3 years = FV = $10,000Present value of amount = PV = 10,000/(1+.00021919)^1095 = 7866.49

The CEO and CFO of Coral Gables Corp were having a discussion about which stock to buy with the company's surplus cash. The CFO noted that it was important that the company incurs less risk for a given level of return and suggested using the Sharpe Ratio to choose between AMD and Intel. They both noted that the expected return on AMD in the next year is 12% and the average return on INTC is 9%, however the standard deviation on AMD is 0.13164 and on INTC is 0.11140. Assuming the risk-free rate Rrf is expected to be 3% what are the Sharpe Ratios of AMD and INTC, and which is the better investment based on these ratios?

S AMD = 0.68; S INTC = 0.54; AMD

Anne Morgan wants to borrow $6,000 for a period of four years. She has two choices. Her bank will lend her the amount at 7.25 percent compounded annually. She can also borrow from her firm and will have to repay a total of $8,130.93 at the end of four years. Should Anne choose her bank or the firm, and what is the interest rate if she borrows from her firm? (Round to the nearest percent.) She should borrow from her firm as it is charging a lower interest of 7%. She should borrow from the bank as the bank is charging a higher interest of 9%. She should borrow from her firm as it is charging a lower interest of 6%. She should borrow from the bank as the firm is charging a higher interest of 8%.

She should borrow from the bank as the firm is charging a higher interest of 8%.

From the owner's perspective, which of the following should be the goal of a firm? Stockholders' wealth maximization Profit maximization Revenue maximization Tax minimization

Stockholders' wealth maximization

Which of the following statements is true of annual percentage rate (APR)? The APR is similar to the quoted interest rate, which is a simple annual rate. The APR calculation adjusts for the effects of compounding and, hence, the time value of money. The APR takes compounding into account. The APR is the true cost of borrowing and lending.

The APR is similar to the quoted interest rate, which is a simple annual rate.

Which of the following methods is typically used to estimate a firm's cost of equity?

The CAPM

The generally accepted accounting principles (GAAP) are set by: The United States Congress. Securities Exchange Commission (SEC). The Federal Reserve Board (FRB). The Financial Accounting Standards Board (FASB).

The Financial Accounting Standards Board (FASB).

Which of the following statements about IRR is false?

The IRR is the discount rate that makes the NPV greater than zero.

Which of the following is NOT a widely-known stock market index? The Standard and Poor's 500 Index The Dow Jones Industrial Average The New York Stock Exchange Index The OTQ Composite Index

The OTQ Composite Index

Which of the following statements is true of amortization? The amortization schedule represents only the interest portion of the loan. The computation of loan amortization is wholly based on the computation of simple interest. The amortization schedule provides principal, interest, and unpaid principal balance for each month. Amortization solely refers to the total value to be paid by the borrower at the end of maturity.

The amortization schedule provides principal, interest, and unpaid principal balance for each month.

Which of the following statements is NOT true about constant-growth stocks? The cash dividend remains constant over time. Mature companies with a history of stable growth show this pattern. The dividends grow at a constant rate from one period to the next forever. Far distant-dividends have a very small present value and add little to the stock's price.

The cash dividend remains constant over time.

Which of the following is a characteristic of independent projects?

The cash flows are unrelated.

Which of the following statements is NOT true about zero-growth stocks? The dividend payment pattern remains constant over time. The dividend pattern grows over time. There is no growth in dividends over time. The cash flow pattern resembles a perpetuity with a constant cash flow.

The dividend pattern grows over time.

Which of the following statements about the time value of money is true? A dollar in hand today is worth less than a dollar to be received in the future. The further in the future you receive a dollar, the less it is worth today. The value of a dollar invested at a positive interest rate decreases over time. The higher the rate of interest, the more likely an investor will elect to consume at present and forgo invest his funds.

The further in the future you receive a dollar, the less it is worth today.

Which of the following is the most typical example of a zero-growth dividend stock? The preferred stock of a utility company. The common stock of a firm in the information technology industry. The common stock of a firm in the biotechnology industry. The common stock of a firm in the health care industry.

The preferred stock of a utility company.

Raymond Bartz is trying to choose between two equally risky annuities, each paying $5,000 per year for five years. One is an ordinary annuity, the other is an annuity due. Which of the following statements is most correct? The present value of the annuity due exceeds the present value of the ordinary annuity, while the future value of the annuity due is less than the future value of the ordinary annuity. The present value of the annuity due exceeds the present value of the ordinary annuity, and the future value of the annuity due also exceeds the future value of the ordinary annuity. The present value of the ordinary annuity must exceed the present value of the annuity due, but the future value of an ordinary annuity may be less than the future value of the annuity due. If interest rates increase, the difference between the present value of the ordinary annuity and the present value of the annuity due remains the same.

The present value of the annuity due exceeds the present value of the ordinary annuity, and the future value of the annuity due also exceeds the future value of the ordinary annuity.

Which of the following statements about the payback method is true?

There is no economic rational that links the payback method to shareholder wealth maximization.

Which of the following statements is most true about zero coupon bonds? They typically sell at a premium over par when they are first issued. They typically sell at a deep discount below par when they are first issued. They are always convertible to common stock. They typically sell for a higher price than similar coupon bonds.

They typically sell at a deep discount below par when they are first issued.

In a world that is not ideal, capital rationing occurs, therefore a manager may be able to use the profitability index to rank projects and choose the ones with the largest PI's until the available money is exhausted.

True

The Capital Asset Pricing Model is an appropriate method of calculating a firm's cost of equity when no dividends are being paid.

True

The cost of equity for a firm is a weighted average of the costs of the different types of stock that the firm has outstanding at a particular point in time.

True

The statement of cash flows can be described as: representing only the company's financing activities. having a value equal to the sum of the long-term liabilities and notes plus the depreciation expense. measuring only the company's operating activities. Tying together the income statement with the balance sheets from the beginning of the period and the end.

Tying together the income statement with the balance sheets from the beginning of the period and the end.

Which of the following statements is correct?

When choosing between two investments that have the same level of risk, investors prefer the investment with the higher return.

Choose the answer below that does NOT describe the circumstances where IRR conflicts with NPV in the decision to accept a project.

When two or more projects are independent.

Direct financing occurs when: a borrower-spender borrows directly from a lender-savers. a borrower-spender borrows from the federal government. a lender-saver borrows from the federal government. a lender-saver borrows directly from a borrower-spenders.

a borrower-spender borrows directly from a lender-savers.

Capital rationing implies that

a firm has constraints to fund all of the available projects.

The appropriate risk-free rate to use when calculating the cost of equity for a firm is

a long-term Treasury rate.

An example of an agency cost is: a manager turning down a value-contributing project because of its risks. a manager expensing a lavish dinner on the company expense report. a manager using too little debt within the firm's capital structure because of the additional risk associated with debt. all of the above.

a manager expensing a lavish dinner on the company expense report

The financial market where a new security is sold for the first time is: none of these. a secondary market. a primary market. an indirect financial market.

a primary market

Corruption in business creates inefficiencies in an economy. inhibits growth in an economy. slows the rate of economic growth in a country. all of the above.

all of the above

When analysts and investors determine the value of a firm's stock, they should consider: the size of the expected cash flows associated with owning the stock. the timing of the cash flows. the riskiness of the cash flows. all of the above.

all of the above

Which of the following is a major participant in the direct financial market? Large corporations. Investment banks. All of the above. Wealthy individuals.

all of the above

In calculating the current price of a bond paying semiannual coupons, one needs to use double the number of years for the number of payments made. use the semiannual coupon. use the semiannual rate as the discount rate. all of the above need to be done.

all of the above need to be done.

Owners of preferred stock: have limited voting rights. usually receive fixed dividend payments. are given priority treatment over common stock with respect to dividends payments, and the claims against the firm's assets in the event of bankruptcy or liquidation. all of the above statements are true.

all of the above statements are true.

The Truth-in-Lending Act requires borrowers to disclose the: effective annual interest rate (EAR). annual percentage rate (APR). discount interest rate. margin interest rate.

annual percentage rate (APR).

If a bond's coupon rate is equal to the market rate of interest, then the bond will sell: at a price equal to its face value. at a price greater than its face value. at a price less than its face value. none of the above is true.

at a price equal to its face value.

Contingent projects would imply that

both the acceptance of one project is dependent on the acceptance of the other and the projects can be either mandatory or optional.

When evaluating capital projects, the decisions using the NPV method and the IRR method will agree if

both the projects are independent and the cash flow pattern is conventional.

The nominal rate of interest is comprised of: both the real rate of interest and compensation for inflation. a commodity cross-index return. compensation for inflation. the real rate of interest.

both the real rate of interest and compensation for inflation

The going concern assumption implies that a firm will: continue to be in business for the foreseeable future. be going out of business in the near future. continue to operate in the near future, but only after being acquired by another firm. none of these.

continue to be in business for the foreseeable future.

You loaned $100 to a friend for one year at a nominal rate of interest of 5 percent. Inflation during that year was 8 percent. How much did the purchasing power of your money change (an increase is positive and a decrease is negative)? Decrease by approximately 13 percent. Increase by approximately 13 percent. Decrease by approximately 3 percent. Increase by approximately 3 percent.

decrease by approximately 3 percent

When the discount rate: decreases, the present value of any future cash flow increases. decreases, the present value of the future cash flow does not change. increases, the present value of any future cash flow increases. increases, the present value of any future cash flow does not change.

decreases, the present value of any future cash flow increases.

Income taxes have the effect of

decreasing the cost of debt for a firm.

Capital budgeting is the process of:

determining which capital investments a firm should make.

The two methods by which funds are transferred from savers to borrowers within an economy's financial system include short-term and long-term transfers. wholesale and retail transfers. primary and secondary transfers. direct and indirect transfers.

direct and indirect transfers

Which of the following is NOT a typical way in which interest rates are quoted in the marketplace? Discounted interest rate Interest rate per period Quoted interest rate Effective annual interest rate (EAR)

discounted interest rate

The true cost of borrowing is the: annual percentage rate. effective annual rate. quoted interest rate. periodic rate.

effective annual rate.

A society's ideas about what actions are right and wrong are termed as: unwritten laws. rules and policies. ethics. laws.

ethics

If the interest rate per year and the number of years involved remain the same, the total amount of interest earned on an investment will remain the same irrespective of the frequency of compounding. True False

false

Starting to invest early for retirement reduces the benefits of compound interest. True False

false

The constant growth dividend model cannot be applied to value the stock of a company whose dividends are declining at a constant rate. True False

false

The present value of an annuity due is less than the present value of an ordinary annuity. True False

false

The value of a dollar invested at a positive interest rate grows over time but at a slower rate further into the future. True False

false

To calculate the future value of a series of cash flows, we can add up all the cash flows and then calculate their compounded value at the given rate of interest. True False

false

The process of converting financial securities with one set of characteristics into securities with another set of characteristics is called: financial disintermediation. financial bundling. none of the above. financial intermediation.

financial intermediation.

Anna will receive $15,000 from a bank deposit in 2 years which has an interest rate of 3.5%. The amount of $15,000 represents the: future value. present value of an annuity. future value of an annuity. present value.

future value

The critical role of the financial system in an economy is to regulate the operations of the commercial banks. provide managers with incentives to increase capital spending. provide the President with information regarding the debt level in the country. gather money from savers and channel it to borrowers.

gather money from savers and channel it to borrowers.

If a company's weighted average cost of capital is less than the required return on equity, then the firm

has debt in its capital structure.

In regard to interest rate risk, short-term bonds: and longer-term bonds have the same amount of interest rate risk because their coupon interest rates are fixed. have more interest rate risk than longer-term bonds. and longer-term bonds have no interest rate risk because their coupon interest rates are fixed. have less interest rate risk than longer-term bonds.

have less interest rate risk than longer-term bonds.

Underwriting is the process by which an investment banker helps a company sell its new security issue. lends funds to new companies. markets and resells a company's securities to investors. provides seed capital to new start-ups.

helps a company sell its new security issue

When prices are falling, the value of inventory using the LIFO method rather than FIFO gives inventory a: lower value and net income a higher value. higher value and net income a higher value. lower value and also lowers net income. higher value but lowers net income.

higher value and net income a higher value.

The cost principle states that an asset should be recognized on the balance sheet at the: historical cost plus the accumulated depreciation on the asset. market value of the asset. historical cost. market value less the accumulated depreciation on the asset.

historical cost.

Savings by _____ in small dollar amounts is the origin of much of the money that funds business loans in an economy. small businesses the U.S. government none of the above households

households

The stocks owned by ___ represent about 35 percent of the total value of all corporate equity. households pension funds foreign investors mutual funds

households

_____ are the principal lender-savers in the economy. Businesses Households State governments Investment banks

households

Working capital management decisions help to determine: how a firm's day-to-day financial matters should be managed. how a firm should finance its assets. which productive assets a firm should purchase. all of the above.

how a firm's day-to-day financial matters should be managed

When the discount rate: increases, the present value of a future cash flow decreases. increases, the present value of a future cash flow increases. decreases, the present value of a future cash flow decreases. decreases, the present value of a future cash flow will remain the same.

increases, the present value of a future cash flow decreases.

f your firm obtains most of its financing from commercial banks, then it primarily accesses the capital markets through: indirect financing. a legal loophole that allows all commercial banks the ability to underwrite securities. direct financing. none of the above.

indirect financing

The cost of borrowing money is called: inflation. return. all of these. interest.

interest

Which of the following is a tax-deductible expense for a corporation? Interest paid Common stock dividends paid Loan principal paid Preferred stock dividends paid

interest paid

Which of the following balance sheet items generally takes the longest time to convert to cash? Treasury bills Inventory Accounts receivable Accounts payable

inventory

Net cash flow: is the difference between a firm's operating cash flow and its financing cash flow. is the difference between a firm's total expenses and total revenues. is equal to a firm's net income. is the difference between a firm's actual cash receipts and cash payments in a given period.

is the difference between a firm's actual cash receipts and cash payments in a given period.

One of the main reasons why the discounted payback period is not widely used by managers is that:

it ignores all cash flows that occur after the arbitrary cutoff period.

The systematic risk of an investment is measured by _____.

its beta

The present value of multiple cash flows is: higher or lower than the cash flows depending on the interest rate. less than the sum of the cash flows. greater than the sum of the cash flows. equal to the sum of all the cash flows.

less than the sum of the cash flows.

The income statement is: like a snapshot of a firm's financial position at a particular point in time. a summary of a firm's cash receipts and cash payments and investments for a period of time. like a video recording of a firm's revenues and expenses during a period of time. a statement which identifies the changes in the retained earnings account from one accounting period to the next.

like a video recording of a firm's revenues and expenses during a period of time.

Managers should make fairly accurate estimates of their cost of capital so as to_____.

make correct investment decisions.

When a firm estimates future taxes, it should consider the: historic tax rate. marginal tax rate. average tax rate. combined tax rate.

marginal tax rate.

The main objective of a firm's management should be to maximize its profits. reduce its debt level. minimize its risk exposure. maximize its stock value.

maximize its stock value

The reason we cannot apply the constant growth dividend model in the case where the growth rate, g, is greater than or equal to the required rate, R, is because it would result in the value of the stock becoming: infinite zero negative or infinite above negative

negative

Money has time value because: people do not require compensation for deferring consumption people prefer to sell things later rather than today people can earn interest on money that is received people prefer to receive money tomorrow rather than today because it is worth more

people can earn interest on money that is received

A consol, issued by the British government to finance the Napoleonic Wars is an example of: growing annuity. perpetuity. annuity due. an ordinary annuity.

perpetuity

A preferred stock would be an example of: an ordinary annuity. an annuity due. a growing annuity. a perpetuity.

perpetuity

Preferred stock is sometimes considered to be a special type of debt rather than equity because preferred stocks often have maturity. preferred stockholders receive a fixed dividend. if preferred stock dividends are not paid it would be legally viewed as a default. regular preferred stock confers voting rights.

preferred stockholders receive a fixed dividend.

Direct search markets are characterized by: private placement transactions and sale of common stock of small private companies. complete price information. extensive broker and dealer participation. a high level of efficiency.

private placement transactions and sale of common stock of small private companies.

The presence of a financial market increases the marketability of a financial security by: insuring the price of the security. none of the above. reducing the transaction costs for selling the security. guaranteeing the accuracy of information produced by the issuer of the security.

reducing the transaction costs for selling the security.

Growth stocks usually do not pay dividends. Therefore the stock value increases because the firms: reinvests earnings to provide dividends in the future. pay interest to bondholders. holds large amounts of cash. increase market share.

reinvests earnings to provide dividends in the future.

According to the realization principle, revenue from a sale of a firm's products are recognized when the: sale occurs whether or not cash is actually received. cash is collected from the sale of the products. products are shipped to the buyer. buyer orders the goods.

sale occurs whether or not cash is actually received.

The constant-growth dividend model will provide invalid solutions when: the growth rate of the stock exceeds the required rate of return for the stock. the growth rate of the stock is less than the required rate of return for the stock. the growth rate of the stock is equal to the risk-free rate. none of the above.

the growth rate of the stock exceeds the required rate of return for the stock.

Tyson Corporation bought raw materials on April 23, 2008 and also on July 2, 2008. Products produced during the months of May were sold in July. The firm uses FIFO to value its inventory. According to the matching principle, the firm's accountant should associate: the inventory acquired on July 2 with the products sold. the inventory acquired on April 23 with the products sold. neither of these dates is valid because the products were sold in July. none of these.

the inventory acquired on April 23 with the products sold.

According to the finance balance sheet equation:

the market value of a firm's assets must equal the market value of its liabilities and the market value of its equity.

A highly liquid financial instrument with a maturity of 90 days would be traded in: none of the above. the money market. the bond market. the stock market.

the money market

The market value of a firm's assets must equal

the present value of the cash flows that these assets are expected to generate.

Bond contracts include specific terms, including all of the following EXCEPT the price at which the bond will be sold in the bond market. the amount of interest (or coupon) payments received each period. the date on which the bond principal will be repaid. the time period during which the bond will be making interest payments.

the price at which the bond will be sold in the bond market.

To calculate an expected return, each scenario return is weighted by _____.

the probability of its occurrence

The cost of capital is:

the required rate of return for new projects that have risk that is similar to that of the overall firm. the rate of return a firm earns on its investments to satisfy the required rate of return for the firm's investors. the opportunity cost of using funds on projects. ----all of the above.

Which of the following statements is incorrect? Life insurance companies are major buyers of securities in the direct financial markets Hedge funds are major buyers and sellers of securities in the direct financial markets Direct transactions in wholesale markets have a typical minimum transaction size of $1 million The retail individual investor is a common direct participant in the direct financial markets

the retail individual investor is a common direct participant in the direct financial markets

The value of the cash flows that the assets of a firm are expected to generate must equal

the value of the cash flows claimed by both the equity and debt investors.

For firms that issue several types of debt, the correct cost to use when estimating its WACC is _____.

the weighted average after-tax cost of all the debt types

Large firms are most likely to use money markets for the following reason: to make long term investments. to buy commercial paper at lower interest rates than it could sell through a bank. to finance long term investments. to adjust their liquidity position.

to adjust their liquidity position

An important function of the financial system is: to direct money to the best investment opportunities in the economy. to help state governments to coordinate state tax levies. to direct the money from borrower-lenders to lender-savers. to allow the federal government to view all financial transactions.

to direct money to the best investment opportunities in the economy

Marketability is the ability of an investor to sell a security quickly, at a low transaction cost, and at a price close to its fair market value. to sell at a profit under all circumstances. to sell the security above its par value. None of the above.

to sell a security quickly, at a low transaction cost, and at a price close to its fair market value.

According to the balance sheet identity, total assets must equal: total liabilities plus owners' equity. total shareholders' equity less current assets. current assets plus current liabilities. fixed assets plus total debt.

total liabilities plus owners' equity.

If the discount rate increases, then the present value of a potential investment would fall. True False

true

In a typical loan amortization schedule involving a consumer loan, the amount of each loan payment is fixed. True False

true

The time value of money concept recognizes that people require additional compensation for deferring consumption. True False

true

The value of a firm's equity is calculated as the sum of the present value of all expected future cash flows. True False

true

If the expected return on an asset is greater than its required return given on the Security Market Line, the stock is _____.

underpriced

Investment banking firms provide underwriting services. auditing services. insurance. overdraft facility.

underwriting services

The best method to use when estimating a firm's discount rate is the _____.

weighted average cost of capital approach

Future value measures: what one or more cash flows are worth at the end of a specified period. the value of an investment in today's terms. the value of an investment after subtracting interest earned on it for one or more periods. what one or more cash flows that is to be received in the future will be worth today.

what one or more cash flows are worth at the end of a specified period.

The capital budgeting decision process can be described as how a firm's day-to-day financial matters should be managed. how a firm should finance its assets. which productive assets a firm should purchase. all of the above.

which productive assets a firm should purchase

The net present value

will provide a direct measure of how much a firm's value will change because of the capital project. all of these. uses the discounted cash flow valuation technique. is consistent with the shareholder wealth maximization goal. ALL OF THESE

Under which of the following discounting methods will the present value of an investment be the highest, assuming the same annual interest rate? Quarterly Monthly Yearly Semi-annually

yearly

The bonds that has no coupon payments but promise a single payment at maturity is: callable bonds. vanilla bonds. convertible bonds. zerocoupon bonds.

zerocoupon bonds.