FINC 315 FINAL EXAM

If the market is fully efficient, then an announcement by a firm of a new product with a high net present value will cause the market price of that firm's stock to:

Immediately increase to a new level equivalent to increased value of the firm

How can management best signal the market that a firm is doing well?

Increase the regular dividend amount

A $5,000 face value zero coupon bond is quoted at a price of 46.874. What is the amount you would pay to purchase this bond today?

Market price = 46.874% × $5,000 = $2,343.70

Gugenheim offers a 15-year coupon bond with semiannual payments. The yield to maturity is 5.85 percent and the bonds sell at 94 percent of par. What is the coupon rate?

.94 × $1,000 = C × ({1 - 1/[1 + (.0585/2)]15 × 2}/(.0585/2)) + {$1,000/[1 + (.0585/2)]15 × 2} C=$26.22

A corporate bond yields 7.3 percent. What municipal bond rate is equivalent to the corporate rate for an investor with a 25 percent marginal tax rate?

.073 × (1 - .25) = .0548, or 5.48%

Which one of these statements concerning different annuities applies to both anniuties that have $1,000 annual CF for 4 years

The annuity due is more valuable than the ordinary annuity

A stock report contains the following information: P/E 21.4, closing price 28.16, dividend 1.10, net chg .06, and an ask of 28.22 × 300. Which one of the following statements is correct given this information?

The closing price on the previous trading day was $28.10

A bond has a coupon rate of 6% and matures in ten years. The semiannual interest payment will be paid one month from now. Which of the following do you know with certainty concerning this bond?

The dirty price is higher than the clean price

One year ago, the Jenkins Center opened an investment account and deposited $4,600. Today, it is depositing another $6,000 and will make a final deposit of $8,500 one year from now. How much will the firm have saved four years from now if it earns an average annual return of 7.5 percent?

The firm have saved four years from now = 4600*1.075^5 + 6000*1.075^4 + 8500*1.075^3 $25,176.23

You own a fixed-rate bond that has a coupon rate of 6.5 percent and matures in 12 years. You purchased this bond at par value when it was originally issued. If the current market rate for this type and quality of bond is 6.8 percent, then you would expect:

To realize a capital loss if you sold the bond at the market price today.

Differential growth refers to a firm that increases its dividend by:

Varying rates over a period of time

Stock splits are often used to:

adjust the market price of a stock such that it falls within a preferred trading range

The observed empirical fact that stocks attract particular investors based on the firm's dividend policy and the resulting tax impact on investors is called the:

cliente effect

Stock prices fluctuate daily. In relation to the efficient market hypothesis, these fluctuations are:

consistent with the semistrong form because new information arrives daily

The date on which the firm mails out its declared dividends is called the:

date of payment

The date by which a stockholder must be registered on the firm's roll as having share ownership in order to receive a declared dividend is called the:

date of record

The date on which the board of directors passes a resolution authorizing payment of a dividend to the shareholders is the _____ date.

declaration

All else being constant, a bond will set a ________ when the yield to maturity is ________ the coupon rate

discount, higher than

The date before which a new purchaser of stock is entitled to receive a declared dividend, but on or after which she does not receive the dividend, is called the _____ date.

ex-dividend

All else equal, the market value of a stock will tend to decrease by roughly the amount of the dividend on the:

ex-dividend date

The cause of the October 19, 1987 stock market crash:

has yet to be determined

Weak form efficiency is best defined as a market where current prices are based on:

historical prices

In an efficient market, the price of a security will:

react immediately to new information with no further price adjustments related to that

Efficient markets require which one of these?

Countervailing irrationalities

The principle that investors might be too slow in adjusting their beliefs to new information is referred to as:

Conservatism

A 20-year zero coupon bond has a $1,000 face value, a required rate of return of 5 percent, and semiannually compounding. What is this bond worth today?

$1,000/[1 + (.05/2)]20 × 2 = $372.43

Westover Ridge has a management contract with its president that requires a lump sum payment of $20 million to be paid upon the completion of the president's first ten years of service. The company can earn 5.5 percent on its investments and wants to set aside an equal amount of money each year over the next ten years to fund this obligation. How much money must the firm save each year?

$1,553,355.37

A 10-year loan in the amount of $238,000 is to be repaid in equal annual payments. The interest rate is 7 percent, compounded annually. What is the amount of interest that is included in the loan payment for Year 3?

$14,163.97

What is the future value of the following cash flows at the end of year 7 if the interest rate is 6 percent, compounded annually? The cash flows occur at the end of each year. CF 2: $4,500 CF 3: $6,100 CF 6: $3,800

$17,751.12

Feltwater Furniture has 120,000 shares of stock outstanding. The firm expects to earn net income of $325,000 next year with annual increases of 3 percent per year thereafter. The firm also expects to pay out 75 percent of its net income in dividends and share repurchases. The required return is 14 percent. What is its share price?

$18.47

A project is expected to produce cash flows of $5,000, $8,000, and $16,000 over the next three years, respectively. After three years, the project will be discontinued. What is this project worth today at a discount rate of 15 percent?

$20,917.24

You are buying a previously owned car today at a price of $8,125. You are paying $600 down in cash and financing the balance for 36 months at 7.9 percent, compounded monthly. What is the amount of each loan payment?

$235.46

Angela expects to save $4,000 a year and earn an average annual return of 7.5%. How much will her savings be worth 25 years from now?

$271,911.45

Aeron Electrics borrowed $120,000 for five years at an interest rate of 8 percent, compounded annually. The loan requires repayment of the interest annually. In addition, the principal must be repaid in equal annual payments. What is the amount of the total loan payment in year three?

$29,760

Terrence has an investment that will pay $250 to him next year and increase that amount by 1.25 percent annually. The payments are expected to go on indefinitely and the discount rate is 6.5 percent, compounded annually. What is the value of this investment?

$4,761.90

You are the recipient of an inheritance that will pay you and your heirs $5,000 a year forever. What is this inheritance worth today at a discount rate of 7.85 percent?

$63,394.27

What is the effective annual rate of 16.5 percent, compounded continuously?

17.94%

An annuity costs $185,000 today and provides monthly payments of $650 for 40 years. The first payment occurs one month from today. What annual rate of return does this annuity offer?

2.88%

A $1,000 face value Treasury bond matures in 16 years, pays interest semiannually, and has a market quote of 101.021. The coupon rate is 3.5%, the current yield is _____ % the yield to maturity is _____ %.

3.46, 3.42

A General Co. bond has a coupon rate of 7 percent and pays interest annually. The face value is $1,000 and the current market price is $1,020.50. The bond matures in 20 years. What is the yield to maturity?

6.81%

Which one of the following statements concerning bond ratings is correct?

A bond ratings only assess the possibility of default

All else constant, a bond will sell at _____ when the yield to maturity is _____ the coupon rate.

A discount; higher than

Which one of the following statements is correct concerning ratio analysis?

A single ratio is often computed differently by different individuals

Delray bonds offer a coupon rate of 5 percent and currently sell at 96.5 percent of face value. What is the current yield on these bonds?

Assuming a $1,000 face value: (.05 × $1,000)/(.965 × $1,000) = .0518, or 5.18%

Which of the following statements concering bond ratings is correct?

Bond ratings only assesss the possibility of default

Westover Company needs $2.5 million to expand its business. To accomplish this, the firm plans to sell 30-year, $1,000 face value zero-coupon bonds. The bonds will be priced to yield 6.25 percent with interest compounded semiannually. What is the minimum number of bonds the company must sell? Ignore all issue costs.

Bond value = $1,000/[1 + .0625/2)]30 × 2 = $157.82 Number of bonds = $2,500,000/$157.82 = 15,841 bonds

A 12-year, 5 percent coupon bond with a face value of $1,000 pays interest semiannually. What is the percentage change in the price of this bond if the market yield rises to 6 percent from its current level of 4.5 percent?

Bond value = [(.05 × $1,000)/2] × ({1 - 1/[1 + (.045/2)]12 × 2}/(.045/2)) + {$1,000/[1 + (.045/2)]12 × 2} = $1,045.97 Bond value = [(.05 × $1,000)/2] × ({1 - 1/[1 + (.06/2)]12 × 2}/(.06/2)) + {$1,000/[1 + (.06/2)]12 × 2} = $915.32 Percentage change in price = ($915.32 - $1,045.97)/$1,045.97 = -.1249, or -12.49%

Toy World bonds have a face value of $1,000, mature in13 years, pay interest semiannually, and have a coupon rate of 6.5 percent. The next interest payment will be paid four months from today. What is the dirty price of this bond if the market rate of return is 6.3 percent?

Bond value = [(.065 × $1,000)/2] × ({1 - 1/[1 + (.063/2)]13 × 2}/(.063/2)) + {$1,000/[1 + (.063/2)]13 × 2} = $1,017.57 Dirty price = $1,017.57 + [(.065 × $1,000/2) × (2/6)] = $1,028.40

Cash flow to equity holders is defined as:

Cash dividends + repurchases of equity - new equity financing

_____ refers to the cash flow resulting from a firm's ongoing, normal business activities.

Cash flow from operating activities

Peggy Grey's Cookies has net income of $360. The firm pays out 50 percent of the net income to its shareholders as dividends. During the year, the company sold $44 worth of common stock. What is the cash flow to stockholders?

Cash flow to stockholders = .50($360) - $44 = $136

Free cash flow is:

Cash that is available to distribute to creditors and equity holders

A $1,000 face value corporate bond matures in 28 years, pays interest semiannually, and has a market quote of 98.625. The coupon rate is 7.25 percent, the current yield is ___ percent, and the yield to maturity is ____ percent.

Current yield = (7.25% × $1,000)/(98.625% × $1,000) = .0735, or 7.35% Yield to maturity = 3.68% × 2 = 7.37%

Lester's Diner just paid an annual dividend of $.24 a share and plans on increasing this amount by 2 percent annually. What is the expected dividend for Year 6?

D6 = $.24 (1.02)6 = $.27

What does the spread between the bid and asked bond prices represent?

Dealer's profit

Which one of these measures a firm's operating and asset use efficiency as well as its financial leverage?

DuPont Identity

Given: Total asset turnover: 2.9 Profit Margin: 6.9% Equity Multiplier: 2 Payout Ratio: 35% Find SGR

DuPont ratio: ROE =(PM)(TAT)(EM) ROE =(.069)(2.9)(2) ROE =.4002, or 40.02% b=1 - Payout ratio b= 1 - .35 b= .65 Sustainable growth rate = (ROE × b) / [1 - (ROE × b)] Sustainable growth rate = [.4002(.65)] / [1 - .4002(.65)] Sustainable growth rate = .3516 or 35.16%

What is the effective annual rate if a bank charges you 7.35 percent, compounded daily?

EAR = [1 + (.0735/365)]^365 - 1 = .0763, or 7.63%

Nel's Place has total sales of $1,200, costs are $715, and depreciation is $145. The tax rate is 34 percent. The firm does not have any interest expense. What is the operating cash flow?

EBIT=$1,200 - 715 - 145 = $340 Tax = .34($340) = $115.60 OCF= $340 + 145 - 115.60 = $369.40

The cash flow of a firm, also referred to as cash flow from assets, must be equal to the cash flow to:

Equity holders + CF to debt holders

When evaluating a balance sheet, a financial manager should consider which of the following? I. Value versus cost II. Debt versus equity III. Accounting liquidity

I, II and III

Which of the following represent problems encountered when comparing the financial statements of one firm with those of another firm? I. The firms may have unrelated lines of business. II. The operations of the two firms may vary geographically. III. The firms may use differing accounting methods. IV. The two firms may be regulated differently.

I, II, III and IV

Which of these are reasons why people do not accept the efficient market hypothesis? I. Optical illusions II. Normal profits III. Earnings surprises IV. Market bubbles

I, III, and IV only

Which of these help prevent arbitrage from totally correcting market mispricings? I. Trading costs II. Market domination by rational professionals III. Number of amateur investors IV. Near-term risk

I, III, and IV only

Greener Grass Co. pays a constant annual dividend of $1 a share and has 1,000 shares of common stock outstanding. The company:

Must still declare each dividend before it becomes an actual company liability

Greener Grass Co. pays a constant annual dividend of $1 a share and has 1,000 shares of common stock outstanding. The company:

Must still declare each dividend before it becomes an actual liability

Teddy's Pillows had beginning net fixed assets of $600 and ending net fixed assets of $730. Assets valued at $400 were sold during the year. Depreciation was $50. What is the amount of net capital spending?

Net capital spending = $730 - 600 + 50 = $180

Depreciation

Non-cash expense that reduces the pretax income

Which one of these is an indicator that a market is efficient?

Normal rates of return

You are comparing two options. The cost to invest in either option is the same today. Both options will provide $20,000 of income. Option A pays five annual payments starting with $8,000 in YR 1 followed by four annual payments of $3,000 each. Option B pays five annual payments of $4,000. Which of the following statements is corrent given these two investments?

Option A is the better choice of the two, given any positive rate of return

XanEx is a new firm that just paid an annual dividend of $1 a share. The firm plans to increase its dividend by 20 percent a year for the next four years and then decrease the growth rate to 5 percent annually. If the required rate of return is 10.25 percent, what is one share of this stock worth today?

P4 = ($1 × 1.24 × 1.05)/(.1025 - .05) = $41.47 P0 = ($1 × 1.2)/1.1025 + ($1 × 1.22)/1.10252] + ($1 × 1.23)/1.10253 + [($1 × 1.24) + $41.47]/1.10254 P0 = $33.04

The underlying assumption of the dividend growth model is that a stock is worth:

PV of the future income provided by that stock

What does weak form efficiency imply?

Past price movement is unrelated to the movement of future prices

Which one of these combinations will provide sufficient information to determine the sustainable growth rate of a firm?

Profit margin, dividend payout ratio, debt-equity ratio, and total asset turnover

Which type of bond grants its holder the right to force repayment of the bond at a stated price prior to maturity?

Put

How frequently do dividend-paying firms in the U.S. generally pay regular cash dividends?

Quaterly

The Purple Cove has a 5 percent profit margin and a 40 percent dividend payout ratio. The total asset turnover is 1.40 and the equity multiplier is 1.50. What is the sustainable rate of growth?

ROE = .05 × 1.40 × 1.50 = .105 Sustainable growth = [.105 × (1 - .40)]/{1 - [.105 × (1 - .40)]} = .0672, or 6.72%

Which one of these terms is used to describe a market where investors draw conclusions from insufficient data?

Representativeness

SGS Corp. has an ROE of 13 percent and a payout ratio of 30 percent. What is its sustainable growth rate?

Retention Ratio: b=1 − Payout ratio b=1 - .30 b= .70 Sustainable growth rate = (ROE × b) / [1 - (ROE × b)] Sustainable growth rate = [.13(.70)] / [1 - .13(.70)] Sustainable growth rate = .1001, or 10.01%

Your best friend works in the finance office of the Delta Corporation. You are aware that this friend trades Delta stock based on information he overhears in the office. You know that this information is not known to the general public. Your friend continually brags to you about the profits he earns trading Delta stock. Based on this information, you would tend to argue that the financial markets are at best _____ form efficient.

Semistrong

Which one of these increases a firm's number of shares outstanding without changing its owners' equity?

Stock split

Insider trading does not offer any advantages if the financial markets are:

Strong form efficient

Serial correlation:

involves only one security

The owner of preferred stock:

is entitled to a distribution of income prior to the common shareholders

From a tax-paying shareholder's point of view, a stock repurchase:

is more desireable than a cash dividend

Altso stock pays dividend of $1.10 a share and has done so for the past six years/ No changes in dividend amount are expected. The relevant market rate of return is 7.8%. Given this information, one share of this stock:

is valued as a perpetuity

Alto stock pays an annual dividend of $1.10 a share and has done so for the past six years. No changes in the dividend amount are expected. The relevant market rate of return is 7.8 percent. Given this, one share of this stock:

is valued as perpetuity

A cash payment made by a firm to its owners when some of the firm's assets are sold off is called a(n):

liquidating dividend

The information content of a regular dividend increase generally signals that:

management believes the future earnings of the firm will be strong

In respect to a balance sheet, a stock split will:

not affect the total value of any of the equity accounts

The efficient market hypothesis says that on average managers will:

not be able to earn an excess return

The yield to maturity on a bond is the rate:

of return currently required by market

The U.S. Securities and Exchange Commission periodically charges individuals for insider trading and claims those individuals have made unfair profits. Based on this fact, you would tend to argue that the financial markets are at best _____ form efficient.

semistrong

A _____ is an alternative method to cash dividends that is used to distribute a firm's earnings to shareholders.

share repurchase

A payment made by a firm to its owners in the form of new shares of stock is called a _____dividend

stock

The hypothesis that market prices reflect all available information of every kind is called _____ form efficiency.

strong

The total return on a stock is equal to:

the capital gains yield + the dividend yield

Today, July 15, you are buying a bond from a dealer with a quoted price of 100.023. The bond pays interest on February 1 and August 1. The invoice price you pay for this purchase will equal:

the dirty price

In a reverse stock split:

the number of shares outstanding decrease but owners' equity is unchanged

Given the vast resources available to mutual fund managers, these managers on average have generally:

underperformed the market on a risk-adjusted basis