Final Exam 4

Based on the following information, what is the expected return? Recession .32 −10.20% Normal .35 11.70% Boom .33 21.40%

7.89

The balance sheet of Perez Printing shows $680 in inventory, $2,140 in fixed assets, $210 in accounts receivables, $250 in accounts payable, and $80 in cash. How much net working capital does the company have?

720

Take It All Away has a cost of equity of 10.51 percent, a pretax cost of debt of 5.25 percent, and a tax rate of 21 percent. The company's capital structure consists of 67 percent debt on a book value basis, but debt is 27 percent of the company's value on a market value basis. What is the company's WACC?

8.79

Fifteen years ago, you invested $5,000. Today, it is worth $18,250. What annually compounded rate of interest did you earn?

9.01

Charlotte's Crochet Shoppe has 15,200 shares of common stock outstanding at a price per share of $78 and a rate of return of 11.73 percent. The company also has 310 bonds outstanding, with a par value of $2,000 per bond. The pretax cost of debt is 6.19 percent and the bonds sell for 98.1 percent of par. What is the firm's WACC if the tax rate is 21 percent?

9.41

What is the future value of $1,575 deposited at the end of each year for 25 years? Assume an interest rate of 6.3 percent compounded annually.

90,152.04

Eduardo sold 500 share of Northcutt Corporation stock in the New York Stock exchange. This transation:

occurred in the secondary market

The cash flow that results from a company's ongoing, normal business activities is called:

operating cash flow

The items in an indenture that limit actions of the issuer in order to protect a bondholder's interests are referred to as the:

protective covenants

Which one of the following earned the highest risk premium over the period 1926-2019?

small company stocks

The rate of return on which type of security is normally used as the risk-free rate of return?

treasury bills

A perpetuity is defined as:

unending equal payments paid at equal time intervals

Summer Tan, Incorporated, is an all-equity firm with a total market value of $685,000 and 44,900 shares of stock outstanding. Management believes the earnings before interest and taxes (EBIT) will be $91,800 if the economy is normal. If there is a recession, EBIT will be 10 percent lower, and if there is a boom, EBIT will be 20 percent higher. The tax rate is 21 percent. What is the EPS in a boom?

$1.94

A scholarship will pay you $150 at the end of each month for four years while you attend college. At a discount rate of 3.7 percent, what are these payments worth to you on the day you enter college?

6,682.99

A 19-year, semiannual coupon bond sells for $1,031.92. The bond has a par value of $1,000 and a yield to maturity of 6.69 percent. What is the bond's coupon rate?

6.99

The existence of ________ makes the capital structure of a company irrelevant.

homemade leverage

Your aunt has promised to give you $5,000 when you graduate from college. You expect to graduate three years from now. If you speed up your plans to enable you to graduate two years from now, the present value of the promised gift will:

increase

The operating cash flow for a project should exclude which one of the following?

interest expense

Rafia owns stocks of 15 different companies. Together, the stocks have a value of $78,640. Twelve percent of that total value is from one company, Gambrell & Valdez. The twelve percent figure is called a(n):

portfolio weight

Wine and Roses, Incorporated, offers a bond with a coupon of 8.0 percent with semiannual payments and a yield to maturity of 8.66 percent. The bonds mature in 16 years. What is the market price of a $1,000 face value bond?

943.42

Filter Corporation has a project available with the following cash flows: Year Cash Flow 0 -$14,300 1 7,200 2 8,500 3 2,900 4 2,500 What is the project's IRR?

22.17

Which of the following statements regarding a firm's pretax cost of debt is accurate?

It is based on the current yield to maturity of the company's outstanding bonds.

You have a portfolio that is invested 12 percent in Stock R, 54 percent in Stock S, and the remainder in Stock T. The beta of Stock R is .83, and the beta of Stock S is 1.38. The beta of your portfolio is 1.09. What is the beta of the Stock T?

.72

POD has a project with the following cash flows: Year Cash Flows 0 -$247,000 1 147,200 2 164,700 3 129,800 The required return is 8.5 percent. What is the profitability index for this project?

1.527

A stock is expected to maintain a constant dividend growth rate of 4.5 percent indefinitely. If the stock has a dividend yield of 5.8 percent, what is the required return on the stock?

10.3

Shares of common stock of the Samson Company offer an expected total return of 15.80 percent. The dividend is increasing at a constant 5.00 percent per year. The dividend yield must be:

10.80

At the beginning of the year, the long-term debt of a firm was $72,918 and total debt was $138,407. At the end of the year, long-term debt was $68,219 and total debt was $145,838. The interest paid was $6,430. What is the amount of the cash flow to creditors?

11,129

You have gathered the following information on your investments. What is the expected return on the portfolio? StockNumber of SharesPrice per ShareExpected Return F 290$ 38 13.24% G 305$ 249.9 5% H 245$ 50 10.53%

11.37

Smathers Corporation stock has a beta of 1.13. The market risk premium is 8.00 percent and the risk-free rate is 3.30 percent annually. What is the company's cost of equity?

12.34

Bubbly Waters currently sells 470 Class A spas, 620 Class C spas, and 370 deluxe model spas each year. The firm is considering adding a mid-class spa and expects that if it does, it can sell 545 units per year. However, if the new spa is added, Class A sales are expected to decline to 310 units while the Class C sales are expected to increase to 645. The sales of the deluxe model will not be affected. Class A spas sell for an average of $15,300 each. Class C spas are priced at $7,700 and the deluxe models sell for $18,700 each. The new mid-range spa will sell for $9,700. What annual sales figure should you use in your analysis?

3,031,000

You are depositing $4,500 today at an annual interest rate of 7.2 percent, compounded annually. How much additional interest will you earn if you leave the money invested for 45 years instead of 40 years?

30,185.14

A bond that can be paid off early at the issuer's discretion is referred to as being which type of bond?

Callable

Chavez & Hwang just issued 15-year, 6.4 percent, unsecured bonds at par. These bonds fit the definition of which one of the following terms?

Debenture

Which one of the following will decrease the value of a firm's net working capital? Donating inventory to charity Depreciating an asset Collecting an accounts receivable Purchasing inventory on credit Using cash to pay a supplier

Donating inventory to charity

According to ________, the value of a company is unrelated to its capital structure.

M&M Proposition I, no tax

Which one of the following methods predicts the amount by which the value of a firm will change if a project is accepted?

Net present value

During the year, Manbeck Gardens decreased its accounts receivable by $160, increased its inventory by $115, and decreased its accounts payable by $70. How did these three accounts affect the sources or uses of cash by the firm?

Net use of cash of $25

Which of the following actions would be most likely to decrease agency costs for the firm? Increase employees' salaries to exceed the salaries paid by competitors Pay all employees based on the amount of revenue generated by the firm Prohibit employees from becoming shareholders of the firm Pay bonuses to employees only if profits increase from one year to the next Reward high performing employees with shares of stock

Reward high performing employees with shares of stock

Which one of the following best illustrates erosion as it relates to a snack stand located on the beach?

Selling fewer cookies because ice cream was added to the menu

Based on the capital asset pricing model (CAPM), which of the following should earn the highest risk premium?

Stock with a beta of 1.24

Which one of the following statements is accurate? Capital structure has no effect on shareholder value. The optimal capital structure occurs when the cost of equity is minimized. The optimal capital structure maximizes shareholder value. Shareholder value is maximized when WACC is also maximized. Unlevered firms have more value than levered firms when firms are profitable.

The optimal capital structure maximizes shareholder value.

According to M&M Proposition II, without taxes, which of the following statements is accurate?

The required return on assets is equal to the weighted average cost of capital.

Which one of the following best illustrates that the management of a firm is adhering to the goal of financial management?

an increase in the market value per share

A ________ is the market's measure of systematic risk.

beta of 1

The cash flow that is available for distribution to a corporation's creditors and stockholders is called the:

cash flow from assets

Andrew just calculated the present value of a $15,000 bonus he will receive next year. The interest rate he used in his calculation is referred to as the:

discount rate

The internal rate of return is defined as the:

discount rate which causes the net present value of a project to equal zero.

The length of time a firm must wait to recoup, in present value terms, the money it has invested in a project is referred to as the:

discounted payback period.

Humphries has cash of $10,000, accounts receivable of $2,500, accounts payable of $900, and inventory of $1,200. What is the value of the quick ratio?

13.89

Hotel Cortez is an all-equity firm that has 9,100 shares of stock outstanding at a market price of $28 per share. The firm's management has decided to issue $54,000 worth of debt and use the funds to repurchase shares of the outstanding stock. The interest rate on the debt will be 6 percent. What is the break-even EBIT?

15,288

Assume your mother invested a lump sum 28 years ago at 4.05 percent interest, compounded annually. Today, she gave you the proceeds of that investment, totaling $48,613.24. How much did your mother originally invest?

15,994.70

Bohensky's has net income of $73,402, a price-earnings ratio of 13.7, and earnings per share of $.43. How many shares of stock are outstanding?

170,702

An annuity that pays $12,500 a year at an annual interest rate of 5.45 percent costs $150,000 today. What is the length of the annuity time period?

20 years

Based on the tax table below, what is the average tax rate for a sole proprietor with taxable income of $155,000? Ignore any standard or itemized deductions. Taxable Income Tax Rate $ 0 − 9,875 10% 9,875 − 40,125 12 40,125 − 85,525 22 85,525 − 163,300 24

20.18

A project is expected to generate annual revenues of $117,700, with variable costs of $74,800, and fixed costs of $15,300. The annual depreciation is $3,850 and the tax rate is 21 percent. What is the annual operating cash flow?

22,612

The risk-free rate is 4.4 percent and the market expected return is 10.9 percent. What is the expected return of a stock that has a beta of 1.29?

12.79

NU YU announced today that it will begin paying annual dividends. The first dividend will be paid next year in the amount of $.53 a share. The following dividends will be $.58, $.73, and $1.03 a share annually for the following three years, respectively. After that, dividends are projected to increase by 3.6 percent per year. How much are you willing to pay today to buy one share of this stock if your desired rate of return is 10 percent?

13.60

You purchased a stock at a price of $48.98. The stock paid a dividend of $1.63 per share and the stock price at the end of the year was $54.12. What was the total return for the year?

13.82

Cori's Dog House is considering the installation of a new computerized pressure cooker for hot dogs. The cooker will increase sales by $7,900 per year and will cut annual operating costs by $14,000. The system will cost $48,300 to purchase and install. This system is expected to have a 6-year life and will be depreciated to zero using straight-line depreciation and have no salvage value. The tax rate is 21 percent and the required return is 11.5 percent. What is the NPV of purchasing the pressure cooker?

30,900

Herrera Corporation has total sales of $3,110,400 and costs of $2,776,000. Depreciation is $258,000 and the tax rate is 21 percent. The firm is all-equity financed. What is the operating cash flow?

318,356

Kindzi Company has preferred stock outstanding that is expected to pay an annual dividend of $3.27 every year in perpetuity. If the required return is 3.54 percent, what is the current stock price?

92.37

Footsteps Company has a bond outstanding with a coupon rate of 5.1 percent and annual payments. The bond currently sells for $1,016.53, matures in 15 years, and has a par value of $1,000. What is the YTM of the bond?

4.94

Six months ago, you purchased 2,100 shares of ABC stock for $40.31 a share. You have received dividend payments equal to $.60 a share. Today, you sold all of your shares for $42.30 a share. What is your total dollar return on this investment?

5,439

A bond that pays interest semiannually has a price of $1,031.92 and a semiannual coupon payment of $26.75. If the par value is $1,000, what is the current yield?

5.18

Bethesda Water has an issue of preferred stock outstanding with a coupon rate of 5.50 percent that sells for $95.02 per share. If the par value is $100, what is the cost of the company's preferred stock?

5.79

You just obtained a loan of $17,200 with monthly payments for three years at 5.5 percent interest compounded monthly. What is the amount of each payment?

519.37

The relationship between the return on assets and the return on equity is identified by the:

Dupoint Identity

Which of the following statements are accurate? I. Diversifiable risks can be essentially eliminated by investing in 30 unrelated securities. II. There is no reward for accepting diversifiable risks. III. Diversifiable risks are generally associated with an individual firm or industry. IV. Beta measures diversifiable risk.

I, II, and III only

Which of the following statements regarding unsystematic risk is accurate?

It can be effectively eliminated by portfolio diversification.

Which of the following statements regarding the cost of preferred stock is accurate?

It equals the dividend yield.

ordinary annuity

equal payments paid at the end of regular intervals over a stated time period

Olivares, Incorporated, bonds mature in 17 years and have a coupon rate of 5.4 percent. If the market rate of interest increases, then the:

market price of the bond will decrease

The slope of the security market line is the:

market risk premium.

A common-size income statement is an accounting statement that expresses all of a firm's expenses as a percentage of:

sales

inside information has the least value when financial markets are

semi strong efficient

________ measures total risk, and ________ measures systematic risk.

standard deviation; beta

Most financial securities have some level of ________ risk.

systematic

A positive cash flow to stockholders indicates which one of the following with certainty?

the dividends paid exceeded the net new equity raised

Efficient financial markets fluctuate continuously because:

the markets are continually reacting to new information

A project has a net present value of zero. Given this information:

the project's cash inflows equal its cash outflows in current dollar terms.

Michael's, Incorporated, just paid $2.20 to its shareholders as the annual dividend. Simultaneously, the company announced that future dividends will be increasing by 4.8 percent. If you require a rate of return of 9 percent, how much are you willing to pay today to purchase one share of the company's stock?

54.90