Managerial Finance Review for Final
Baxley Brothers has a DSO of 23 days, and its annual sales are $3,650,000. what is its accounts receivable balance? Assume that it uses a 365-day year. Write your answer upto two decimal places. If your answer is $367,890 write $367,890.00 If your answer is 367,890.658, write $367,890.66
$230,000.00 DSO = 23 day; S= $3,650,000; AR =? DSO = 23 = AR/$10000 AR = $230,000.00
Suppose 2-year Treasury bonds yield 5.5%, while 1-year bonds yield 6%. r* is 1.5%, and the maturity risk premium is zero. Using the expectations theory, what is the yield on a 1-year bond, one year from now?
(1.055)2 = (1.06)(1 + X) 1.113/1.06 = 1 + X X = 5%. Yield on a 1-year bond, one year from now: = (1+2-year rate)^2/(1+1-year rate)-1 = (1+5.5%)^2/(1+6%)-1 = 5.00%
PART A It is now January 1, 2012, and you are considering the purchase of an outstanding bond that was issued on January 1, 2010. It has a 9% annual coupon and had a 20-year original maturity. (It matures on December 31, 2029.) There is 5 years of call protection (until December 31, 2014), after which time it can be called at 109-that is, at 109% of par, or $1,090. Interest rates have declined since it was issued; and it is now selling at 114.12% of par, or $1,141.2. What is the yield to maturity? Calculate with at least four decimal places and round your answer to two decimal places.
7.54 Yield to maturity (YTM): With a financial calculator, input N = 18, PV = -1,141.2, PMT = 90, FV = 1,000, I/YR = ? I/YR = YTM = 7.54%.
Suppose you are the money manager of a $4.82 million investment fund. The fund consists of four stocks with the following investments and betas: stock Investment beta A $460,000 1.50 B $500,000 0.50 C $1,260,000 1.25 D $2,600,000 0.75 If the market's required rate of return is 8% and the risk-free rate is 4%, what is the fund's required rate of return?
7.71% Portfolio beta = (1.50) + (0.50) + (1.25) + (0.75) bp = (0.0954)(1.5) + (0.1037)(0.50) + (0.2614)(1.25) + (0.5394)(0.75) = 0.1431 + 0.0519 + 0.3268 + 0.4046 = 0.9264 rp = rRF + (rM - rRF)(bp) = 4% + (8% - 4%)(0.9264) = 7.71%.
The real risk-free rate is 3.25%, and inflation is expected to be 2.75% for the next 2 years. A 2-year Treasury security yields 8.25%. What is the maturity risk premium for the 2-year security?
8.25% - 3.25% - 2.75% = 0.0225 or 2.25% r* = 3.25%; IP2 = 2.75%; rT2 = 8.25%; MRP2 = ? rT2 = r* + IP2 + MRP2 = 8.25% rT2 = 3.25% + 2.75% + MRP2 = 8.25% MRP2 = 2.25%.
PART B Hooper Printing Inc. has bonds outstanding with 9 years left to maturity. The bonds have an 9% annual coupon rate and were issued 1 year ago at their par value of $1,000. However, due to changes in interest rates, the bond's market price has fallen to $905.35. The capital gains yield last year was - 9.465%. For the coming year, what is the expected current yield? (Hint: Refer to Footnote 7 for the definition of the current yield and to Table 7.1.) Calculate with at least four decimal places and round your answer to two decimal places.
9.94 The current yield is defined as the annual coupon payment divided by the current price. CY = $90.00/$905.35 = 9.941%.
You are considering a 10-year, $1,000 par value bond. Its coupon rate is 8%, and interest is paid semiannually. If you require an "effective" annual interest rate (not a nominal rate) of 9.05%, how much should you be willing to pay for the bond? Calculate with at least four decimal places and round your answer to two decimal places.
944.36 Before you can solve for the price, we must find the appropriate semiannual rate at which to evaluate this bond. EAR = (1 + INOM/2)^2 - 1 0.0905 = (1 + INOM/2)^2 - 1 INOM = 0.0885. Semiannual interest rate = 0.0885/2 = 0.0443 = 4.4%. Solving for price: N = 2 x 10 = 20, I/YR = 4.4, PMT = 0.08/2 x 1,000 = 40, FV = 1,000 PV = -$944.10. VB = $944.10.
DuPont Equation
A formula that sows that the rate of return on equity can be found as the product of profit margin, total assets, turnover, and the equity multiplier. It shows the relationships among asset management, debt management, and profitability ratios.
Profitability Ratios
A group of ratios that show the combined effects of liquidity, asset management, and debt on operating results.
Asset Management Ratios
A set of ratios that measure how effectively a firm is managing its assets.
Debt Management Ratios
A set of ratios that measure how effectively a firm manages its debt.
Suppose the inflation rate is expected to be 6.75% next year, 4.3% the following year, and 2.3% thereafter. Assume that the real risk-free rate, r*, will remain at 1.85% and that maturity risk premiums on Treasury securities rise from zero on very short-term bonds (those that mature in a few days) to 0.2% for 1-year securities. Furthermore, maturity risk premiums increase 0.2% for each year to maturity, up to a limit of 1.0% on 5-year or longer-term T-bonds. Calculate the interest rate on 3-year Treasury securities.
Years to Maturity Real Risk-Free Rate (r*) IPt** MRP rT = r* + IPt + MRPt 1 1.85% 6.75% 0.2% 8.80% 2 1.85 5.53 0.4 7.78 3 1.85 4.45 0.6 6.90 **The computation of the inflation premium is as follows: Year Expected Inflation IPt** 1 6.75 % 6.75 % 2 4.30 5.53 3 2.30 4.45 For example, the calculation for IP3 is as follows: IP3 = (6.75% + 4.30% + 2.30%)/3 = 4.45%.
A 7 % semiannual coupon bond matures in 4 years. The bond has a face value of $1,000 and a current yield of 7.5401%. What are the bond's price and YTM?
bond's price= $928.37 and YTM=9.18%
A stock's returns have the following distribution: Assume the risk-free rate is 2.8%. Calculate the stock's expected return, standard deviation, coefficient of variation, and Sharpe ratio.
exp return =13.90%, std dev=21.86%, CV=1.57, and sharpe ratio =0.51 = (0.1)(-30%) + (0.1)(-14%) + (0.3)(11%) + (0.3)(20%) + (0.2)(45%) = 13.90%. s2 = (-30% - 13.90%)2(0.1) + (-14% - 13.90%)2(0.1) + (11% - 13.90%)2(0.3) + (20% - 13.90%)2(0.3) + (45% - 13.90%)2(0.2) s2 = 477.69; s = 21.86%. CV = = 1.57. Sharpe ratio = (13.90% − 2.8%)/21.86% = 0.51.
Which of the following statements is CORRECT? A. If the maturity risk premium (MRP) is greater than zero, the Treasury bond yield curve must be upward sloping. B. Because long-term bonds are riskier than short-term bonds, yields on long-term Treasury bonds will always be higher than yields on short-term T-bonds. C. If the expectations theory holds, the Treasury bond yield curve will never be downward sloping. D. If inflation is expected to increase in the future and the maturity risk premium (MRP) is greater than zero, the Treasury bond yield curve must be upward sloping. E. If the maturity risk premium (MRP) equals zero, the Treasury bond yield curve must be flat.
D. If inflation is expected to increase in the future and the maturity risk premium (MRP) is greater than zero, the Treasury bond yield curve must be upward sloping.
Your bank account pays an 8% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT? A. The periodic rate of interest is 2% and the effective rate of interest is 4%. B. The periodic rate of interest is 8% and the effective rate of interest is greater than 8%. C. The periodic rate of interest is 4% and the effective rate of interest is less than 8%. D. The periodic rate of interest is 2% and the effective rate of interest is greater than 8%. E. The periodic rate of interest is 8% and the effective rate of interest is also 8%.
D. The periodic rate of interest is 2% and the effective rate of interest is greater than 8%.
Assume that interest rates on 20-year Treasury and corporate bonds are as follows: T-bond = 7.72% AAA = 8.72% A = 9.64% BBB = 10.18% The differences in these rates were probably caused primarily by:
Default and liquidity risk differences.
Suppose you borrowed $15,000 at a rate of 8.5% and must repay it in 5 equal installments at the end of each of the next 5 years. How much would you still owe at the end of the first year, after you have made the first payment? A. $10155.68 B. $10690.19 C. $11252.83 D. $11845.09 E. $12468.51
E. $12468.51
At a rate of 6.5%, what is the future value of the following cash flow stream? A. $526.01 B. $553.69 C. $582.83 D. $613.51 E. $645.80
E. $645.80
You have a chance to buy an annuity that pays $2,500 at the end of each year for 3 years. You could earn 5.5% on your money in other investments with equal risk. What is the most you should pay for the annuity? A. $5493.71 B. $5782.85 C. $6087.21 D. $6407.59 E. $6744.83
E. $6744.83
Kaye's Kitchenware has a market/book ratio equal to 1. Its stock price is $14 per share and it has 4.8million shares outstanding. The firm's total capital is $110million and it finances with only debt and common equity. What is its debt-to-capital ratio? A. 30.18% B. 95.82% C. 50.00% D. 47.64% E. 38.91%
E. 38.91%
In general, if investors regard a company as being relatively risky and/or having relatively poor growth prospects, then it will have relatively high P/E and M/B ratios.
False
In general, it's better to have a low inventory turnover ratio than a high one, as a low ratio indicates that the firm has an adequate stock of inventory relative to sales and thus will not lose sales as a result of running out of stock.
False
The NYSE is defined as a "primary" market because it is one of the largest and most important stock markets in the world.
False
Your bank account pays a 6% nominal rate of interest. The interest is compounded quarterly. then, periodic rate of interest is 1.5% and the effective rate of interest is smaller than 6%.
False
MPI Incorporated has $6 billion in assets, and its tax rate is 35%. Its basic earning power ( BEP) ratio is 11%, and its return on assets ( ROA) is 6%. What is MPI's times-interest-earned ( TIE) ratio?
First we will calculate the earnings before interest and taxes as per below: Basic earnings power ratio = Earnings before interest and taxes / Assets Rearranging the above formula, Earnings before interest and taxes = Basic earnings power ratio * Assets putting the given values in the above formula, EBIT = 11% * $6,000,000,000 = $660,000,000 Next we will calculate the net income as per below: Return on assets (ROA) = Net income / Assets Rearranging the above formula, Net income = Return on assets * Assets putting the given values in the above formula, Net Income = 6% * $6,000,000,000 =$360,000,000 Next, we will calculate the interest expense as per below: NI = (EBIT - N) * (1 - T) where, NI = Net income, EBIT = Earnings before interest and taxes, N = Interest expense, T = tax rate putting the values in the above formula, $360,000,000 = ($660,000,000 - N) * (1 - 35%) Rewrite the equation as ($660,000,000 - N) * .65 = $360,000,000 Divide each term by .65 Simplify by subtracting all terms not containing N to the right side of the equation. Divide each term in -N (-1) Interest Expense = $106153846.20 TIE = EBIT / Interest Expense = $660,000,000 / $106153846.20 = 6.2
Indicate whether each of the following actions will increase or decrease a bond's yield to maturity: a) Bond's price increases. b) The bond is downgraded by the rating agencies. c) A change in the bankruptcy code makes it more difficult for bondholders to receive payments in the event the firm declares bankruptcy. d) The economy seems to be shifting from a boom to a recession. I. a: YTM decreases, b:YTM increases, c: YTM increases, d: YTM increases II. a: YTM increases, b:YTM increases, c: YTM decreases, d: YTM increases III. a: YTM decreases, b:YTM increases, c: YTM increases, d: YTM increases IV. a: YTM decreases, b:YTM decreases, c: YTM increases, d: YTM decreases
I only
A 12-year bond has an annual coupon of 9%. The coupon rate will remain fixed until the bond matures. The bond has a yield to maturity of 7%. Which of the following statements is CORRECT?
If market interest rates remain unchanged, the bond's price one year from now will be lower than it is today.
Assume that inflation is expected to decline steadily in the future, but that the real risk-free rate, r*, will remain constant. Which of the following statements is CORRECT, other things held constant?
If the pure expectations theory holds, the Treasury yield curve must be downward sloping.
PART C If you bought this bond, which return would you actually earn? Explain your reasoning.
Investors would expect the bonds to be called and to earn the YTC because the YTC is less than the YTM. ***Knowledgeable investors would expect the return to be closer to 6.5% than to 7.5%. If interest rates remain substantially lower than 9.0%, the company can be expected to call the issue at the call date and to refund it with an issue having a coupon rate lower than 9.0%.
PART D Suppose the bond had been selling at a discount rather than a premium. Would the yield to maturity have been the most likely return, or would the yield to call have been most likely?
Investors would not expect the bonds to be called and to earn the YTM because the YTM is less than the YTC. ****If the bond had sold at a discount, this would imply that current interest rates are above the coupon rate (i.e., interest rates have risen). Therefore, the company would not call the bonds, so the YTM would be more relevant than the YTC.
The primary operating goal of a publicly-owned firm interested in serving its stockholders should be to
Maximize the stock price per share over the long run, which is the stock's intrinsic value.
A firm has a profit margin of 3% and an equity multiplier of 1.9. Its sales are $150 million, and it has total assets of $60 million. What is its ROE?
Net Income = Profit Margin * Sales = $150,000,000 * 3% = $4,500,000 Shareholders Equity = Total Assets / Equity Multiplier = $60,000,000 / 1.9 = $31,578,947.37 ROE = Net Income / Common Equity = $4,500,000 / $31,578,947.37 = 14.2%
Assume that the risk-free rate is 5.5% and the required return on the market is 12%. What is the required rate of return on a stock with a beta of 2?
Now by substituting, Required rate = 5.5%+2×(12%−5.5%)=0.1850 The required rate of return = 18.50% Explanation: The required return = risk-free rate + beta*(return on market-risk-free rate) rRF = 5.5%; rM = 12%; b = 2; r = ? r = rRF + (rM - rRF)b = 5.5% + (12% - 5.5%)2.0 = 18.50%.
What is the single most important ratio that management has control over?
ROE
Market Value Ratios
Ratios that relate the firm's stock price to its earnings and book value per share.
Liquidity Ratios
Ratios that show the relationship of a firm's cash and other current assets to its current liabilities.
"Window Dressing" Techniques
Techniques employed by firms to make their financial statements look better than they really are.
A 10-year corporate bond has an annual coupon of 9%. The bond is currently selling at par ($1,000). Which of the following statements is CORRECT?
The bond's expected capital gains yield is zero.
A 15-year bond with a face value of $1,000 currently sells for $850. Which of the following statements is CORRECT?
The bond's yield to maturity is greater than its coupon rate.
Benchmarking
The process of comparing a particular company with a subset of top competitors in its industry.
Enterprise Value/ EBITDA (EV/EBITDA) Ratio
The ratio of a firm's enterprise value relative to its EBITDA. EV = market Value of equity + market value of total debt + market value of other financial claims - (Cash and equivalents)
Market/Book (M/B) Ratios
The ratio of a stock's market price to its book value. M/B = Market Price per Share / Book Value per share
Return on Invested Capital (ROIC)
The ratio of after-tax operating income to total invested capital; it measures the total return that the company has provided or its investors. ROIC = EBIT (1-T) / Total invested capital = EBIT (1-T) / Debt + Equity
Times-Interest-Earned (TIE) Ratio
The ratio of earnings before interest and taxes (EBIT) to interest charges; a measure of the firm's ability to meet its annual interest payments. TIE Ratio = EBIT / Interest Charges
Return on Common Equity (ROE)
The ratio of net income to common equity; it measures the rate of return on common stockholders' investments. ROE = Net Income / Common Equity
Return on Total Assets (ROA)
The ratio of net income to total assets; it measures the rate of return on the firm's assets. ROA = Net Income / Total Assets
Fixed Assets Turnover ratio
The ratio of sales to net fixed assets. It measures how effectively the firm uses its plant and equipment.
Price/Earnings (P/E) Ratio
The ratio of the price per share to earnings per share; shows the dollar amount investors will pay for $1 of current earnings. P/E = Price Per Share / Earnings per share
Total Debt to Total Capital
The ratio of total debt to total capital; it measures the percentage of the firm's capital provided by debtholders. Total Debt / Total Capital = Total Debt / Total Debt + Equity
Basic Earning Power (BEP) Ratio
This ratio indicates the ability of the firm's assts to generate operating income; it is calculated by dividing EBIT by total assets. BEP = EBIT / Total Assets
Quick (Acid Test) Ratio
This ratio is calculated by deducting inventories from current assets and then dividing the remainder by current liabilities. Quick, or acid test, ratio = Current Assets - Inventories / Current liabilities
Days Sales Outstanding (DSO) Ratio
This ratio is calculated by dividing accounts receivable by average sales per day. It indicates the average length of time the firm must wait after making a sale before it receives cash. DSO = Receivables / Average sales per day = Receivables / Annual sales/365
Inventory Turnover Ratio
This ratio is calculated by dividing cost of goods sold by inventories. It indicates how many times inventory is turned over during the year. Inventory turnover ratio = Cost of goods sold / Inventories
Current Ratio
This ratio is calculated by dividing current assets by current liabilities. It indicates the extent to which current liabilities are covered by those assets expected to be converted to cash in the near future. Current Ratio = Current assets / Current Liabilities
Total Assets Turnover Ratio
This ratio is calculated by dividing sales by total assets. It measures how effectively the firm uses its total assets. Total assets turnover ratio = Sales / Total assets
Profit Margin
This ratio measures net income per dollar of sales and is calculated by dividing net income by sales. Profit Margin = Net Income / Sales
Operating Margin
This ratio measures operating income, or EBIT, per dollar of sales; it is calculated by dividing operating income by sales. Operating Margin = EBIT / Sales
A financial intermediary is a corporation that takes funds from investors and then provides those funds to those who need capital. A bank that takes in demand deposits and then uses that money to make long-term mortgage loans is one example of a financial intermediary.
True
All other things held constant, the present value of a given annual annuity decreases as the number of periods per year increases.
True
EBIT stands for earnings before interest and taxes, and it is often called "operating income."
True
If a firm's board of directors wants to maximize value for its stockholders in general (as opposed to some specific stockholders), it should design an executive compensation system whose focus is on the firm's long-term value.
True
In order to maximize its shareholders' value, a firm's management must attempt to maximize the stock price in the long run, or the stock's "intrinsic value."
True
It is generally harder to transfer one's ownership interest in a partnership than in a corporation.
True
Partnerships and proprietorships generally have a tax advantage over corporations.
True
The primary operating goal of a publicly-owned firm trying to best serve its stockholders should be to
Use a well-structured managerial compensation package to reduce conflicts that may exist between stockholders and managers.
Henderson's Hardware has an ROA of 11%, a 6% profit margin, and an ROE of 23%. What is its equity multiplier? A. 0.11 B. 0.06 C. 1.83 D. 2.09
D. 2.09
PART C Hooper Printing Inc. has bonds outstanding with 9 years left to maturity. The bonds have an 9% annual coupon rate and were issued 1 year ago at their par value of $1,000. However, due to changes in interest rates, the bond's market price has fallen to $905.35. The capital gains yield last year was - 9.465%. For the coming year, what is the expected capital gains yield? (Hint: Refer to Footnote 7 for the definition of the current yield and to Table 7.1.) Calculate with at least four decimal places and round your answer to two decimal places.
0.75 Expected capital gains yield can be found as the difference between YTM and the current yield. CGY = YTM - CY = 10.689% - 9.941% = 0.748%. Alternatively, you can solve for the capital gains yield by first finding the expected price next year. N = 8, I/YR = 10.689, PMT = 90.00, FV = 1,000 PV = -$912.12. VB = $912.12. Hence, the capital gains yield is the percentage price appreciation over the next year. CGY = (P1 - P0)/P0 = ($912.12 - $905.35)/$905.35 = 0.748%.
An individual has $20,000 invested in a stock with a beta of 2.5 and another $75,000 invested in a stock with a beta of 0.6. If these are the only two investments in her portfolio, what is her portfolio's beta?
1.0 Investment Beta $20,000 2.5 75,000 0.6 Total $95,000 bp = ($20,000/$95,000)(2.5) + ($75,000/$95,000)(0.6) = 1.0
PART A Hooper Printing Inc. has bonds outstanding with 9 years left to maturity. The bonds have an 9% annual coupon rate and were issued 1 year ago at their par value of $1,000. However, due to changes in interest rates, the bond's market price has fallen to $905.35. The capital gains yield last year was - 9.465%. What is the yield to maturity? Calculate with at least four decimal places and round your answer to two decimal places.
10.69 Solving for YTM: N = 9, PV = -905.35, PMT = 90.00, FV = 1,000 I/YR = YTM = 10.689%.
PART B Investors would not expect the bonds to be called and to earn the YTM because the YTM is less than the YTC. It is now January 1, 2012, and you are considering the purchase of an outstanding bond that was issued on January 1, 2010. It has a 9% annual coupon and had a 20-year original maturity. (It matures on December 31, 2029.) There is 5 years of call protection (until December 31, 2014), after which time it can be called at 109-that is, at 109% of par, or $1,090. Interest rates have declined since it was issued; and it is now selling at 114.12% of par, or $1,141.2. What is the yield to call? Calculate with at least four decimal places and round your answer to two decimal places.
6.48 Yield to call (YTC): With a calculator, input N = 3, PV = -1,141.2, PMT = 90, FV = 1,090, I/YR = ? I/YR = YTC = 6.48%.
Houston Pumps recently reported $185,250 of sales, $140,500 of operating costs other than depreciation, and $9,250 of depreciation. The company had $35,250 of outstanding bonds that carry a 6.75% interest rate, and its federal-plus-state income tax rate was 35%. In order to sustain its operations and thus generate future sales and cash flows, the firm was required to spend $15,250 to buy new fixed assets and to invest $6,850 in net operating working capital. What was the firm's free cash flow? A. $10225 B. $10736 C. $11273 D. $11837 E. $12429
A. $10225 Free cash flow to firm = NOPAT + Depreciation-change in working capital-capital expenditure 23075+9250-6850-15250 = $10225 Tax rate=35% Required addition to net operating working capital=$ 6,850 Required capital expenditures (fixed assets)=$ 15,250 Sales=$185,250 Operating costs excluding depreciation=140,500 Depreciation =9,250 Operating income (EBIT)=$ 35,500 FCF = EBIT(1 - T) + Deprec. - Capex - DNOWC FCF = $23,075.00 + $9,250 - $15,250 - $6,850 FCF = $10,225
A company has an EPS of $2.40, a book value per share of $21.84, and a market/book ratio of 2.7× . What is its P/E ratio? A. 24.57 B. 58.98 C. 141.53 D. 44.50
A. 24.57 market/book value = 2.7 market value = 2.7 * 21.84 = 58.968 P/E = price/earnings = 58.968/2.4 (EPS) = 24.57
Suppose Community Bank offers to lend you $10,000 for one year at a nominal annual rate of 8.00%, but you must make interest payments at the end of each quarter and then pay off the $10,000 principal amount at the end of the year. What is the effective annual rate on the loan? A. 8.24% B. 8.45% C. 8.66% D. 8.88% E. 9.10%
A. 8.24%
Your bank account pays an 8% nominal rate of interest. The interest is compounded quarterly. What is its effective annual rate? A. 8.24% B. 8.0% C. 8.16% D. 8.34%
A. 8.24%
Under normal conditions, which of the following would be most likely to increase the coupon rate required for a bond to be issued at par?
Adding a call provision
Trend Analysis
An analysis of a firm's financial ratios over time; used to estimate the likelihood of improvement or deterioration in its financial condition.
Liquid Asset
An asst that can be converted to cash quickly without having to reduce the asset's price very much.
Will the actual realized yields be equal to the expected yields if interest rates change? If not, how will they differ?
As rates change they will cause the end-of-year price to change and thus the realized capital gains yield to change. As a result, the realized return to investors will differ from the YTM.
Stocks A and B have the following probability distributions of expected future returns: Probability A B 0.1 -10% -35% 0.2 2% 0% 0.4 12% 20% 0.2 20% 25% 0.1 38% 45% Calculate the standard deviation of expected returns for stock A. A. 18% B. 14% C. 0% D. 55%
B 12.20% = (-10% - 12%)2(0.1) + (2% - 12%)2(0.2) + (12% - 12%)2(0.4) + (20% - 12%)2(0.2) + (38% - 12%)2(0.1) = 148.8. sA = 12.20% versus 20.35% for B.
Your bank offers to lend you $100,000 at an 8.5% annual interest rate to start your new business. The terms require you to amortize the loan with 10 equal end-of-year payments. How much interest would you be paying in Year 2? A. $7531 B. $7927 C. $8323 D. $8740 E. $9177
B. $7927
Stocks A and B have the following probability distributions of expected future returns: Probability A B 0.1 -10% -35% 0.2 2% 0% 0.4 12% 20% 0.2 20% 25% 0.1 38% 45% Calculate the expected rate of return, for stock B. A. 18% B. 14% C. 0% D. 55%
B. 14% = 0.1(-35%) + 0.2(0%) + 0.4(20%) + 0.2(25%) + 0.1(45%) = 14% versus 12% for A.
Your aunt has $500,000 invested at 5.5%, and she now wants to retire. She wants to withdraw $45,000 at the beginning of each year, beginning immediately. She also wants to have $50,000 left to give you when she ceases to withdraw funds from the account. For how many years can she make the $45,000 withdrawals? A. 15.54 B. 16.17 C. 17.22 D. 18.08 E. 18.99
B. 16.17 BEGIN Mode I/YR 5.5% PV -$500,000 PMT $45,000 FV $0 N 16.17
Which of the following statements is CORRECT? A. While the distinctions are becoming blurred, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise capital from other parties. B. The NYSE operates as an auction market, whereas Nasdaq is an example of a dealer market. C. Money market mutual funds usually invest their money in a well-diversified portfolio of liquid common stocks. D. Money markets are markets for long-term debt and common stocks. E. A liquid security is a security whose value is derived from the price of some other "underlying" asset.
B. The NYSE operates as an auction market, whereas Nasdaq is an example of a dealer market.
Analysts who follow Howe Industries recently noted that relative to the previous year, the company's net cash provided from operations increased, yet cash, as reported on the balance sheet, decreased. Which of the following factors could explain this situation? A. The company cut its dividend. B. The company made large investments in fixed assets. C. The company sold a division and received cash in return. D. The company issued new common stock. E. The company issued new long-term debt.
B. The company made large investments in fixed assets.
A corporation recently purchased some preferred stock that has a before-tax yield of 7%. The company has a tax rate of 38%. What is the after-tax return on the preferred stock? A. 5.32% B. 5.60% C. 5.89% D. 6.20% E. 6.51%
D. 6.20% Preferred dividend rate=7.00%, Tax rate=38% , Dividend exclusion %70%, After-tax dividend yield = Preferred dividend rate[1 - (1 - Div. exclusion %)(T)], After-tax dividend yield = 6.20%
Beale Manufacturing Company has a beta of 1.1, and Foley Industries has a beta of 0.30. The required return on an index fund that holds the entire stock market is 11%. The risk-free rate of interest is 4.5%. By how much does Beale's required return exceed Foley's required return?
Beale required return = 4.5%+1.1*(11%-4.5%)=11.65% Foley required returns= 4.5%+0.30*(11%-4.5%)=6.45% Beale's required return exceed Foley's required return=11.65%-6.45%=5.20% An index fund will have a beta of 1.0. If rM is 11.0% (given in the problem) and the risk-free rate is 4.5%, you can calculate the market risk premium (RPM) calculated as rM - rRF as follows: r = rRF + (RPM)b 11.0% = 4.5% + (RPM)1.0 6.50% = RPM. Now, you can use the RPM, the rRF, and the two stocks' betas to calculate their required returns. Beale: rB = rRF + (RPM)b = 4.5% + (6.5%)1.1 = 4.5% + 7.15% = 11.65%. Foley: rF = rRF + (RPM)b = 4.5% + (6.5%)0.30 = 4.5% + 1.95% = 6.45%. The difference in their required returns is: 11.65% - 6.45% = 5.20%.
What's the future value of $1,500 after 5 years if the appropriate interest rate is 6%, compounded semiannually? A. $1819 B. $1915 C. $2016 D. $2117 E. $2223
C. $2016
Your sister turned 35 today, and she is planning to save $7,000 per year for retirement, with the first deposit to be made one year from today. She will invest in a mutual fund that's expected to provide a return of 7.5% per year. She plans to retire 30 years from today, when she turns 65, and she expects to live for 25 years after retirement, to age 90. Under these assumptions, how much can she spend each year after she retires? Her first withdrawal will be made at the end of her first retirement year. A. $58601 B. $61686 C. $64932 D. $68179 E. $71588
C. $64932
Suppose you are buying your first condo for $145,000, and you will make a $15,000 down payment. You have arranged to finance the remainder with a 30-year, monthly payment, amortized mortgage at a 6.5% nominal interest rate, with the first payment due in one month. What will your monthly payments be? A. $741.57 B. $780.60 C. $821.69 D. $862.77 E. $905.91
C. $821.69
Which of the following statements is CORRECT? A. The NYSE does not exist as a physical location. Rather it represents a loose collection of dealers who trade stock electronically. B. An example of a primary market transaction would be your uncle transferring 100 shares of Walmart stock to you as a birthday gift. C. Capital market instruments include both long-term debt and common stocks. D. If your uncle in New York sold 100 shares of Microsoft through his broker to an investor in Los Angeles, this would be a primary market transaction. E. While the two frequently perform similar functions, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise large blocks of capital from investors.
C. Capital market instruments include both long-term debt and common stocks.
Other things held constant, which of the following actions would increase the amount of cash on a company's balance sheet? A. The company repurchases common stock. B. The company pays a dividend. C. The company issues new common stock. D. The company gives customers more time to pay their bills. E. The company purchases a new piece of equipment.
C. The company issues new common stock.
Which of the following would, generally, indicate an improvement in a company's financial position, holding other things constant? A. The TIE declines. B. The DSO increases. C. The quick ratio increases. D. The current ratio declines. E. The total assets turnover decreases.
C. The quick ratio increases.
What's the present value of $1,525 discounted back 5 years if the appropriate interest rate is 6%, compounded monthly? A. $969 B. $1020 C. $1074 D. $1131 E. $1187
D. $1131
Suppose you inherited $275,000 and invested it at 8.25% per year. How much could you withdraw at the beginning of each of the next 20 years? A. $22,598.63 B. $23,788.03 C. $25,040.03 D. $26,357.92 E. $27,675.82
D. $26,357.92
Electronics World Inc. paid out $22.4million in total common dividends and reported $144.2 million of retained earnings at year-end. The prior year's retained earnings were $94.5million. What was the net income? Assume that all dividends declared were actually paid. A. $261.10 million B. $49.70 million C. $71,600,000 D. $72,100,000
D. $72,100,000
What is the present value of the following cash flow stream at a rate of 8.0%? A. $7917 B. $8333 C. $8772 D. $9233 E. $9695
D. $9233
A 5-year Treasury bond has a 4.45% yield. A 10-year Treasury bond yields 6.4%, and a 10-year corporate bond yields 8.4%. The market expects that inflation will average 2.25% over the next 10 years (IP10 = 2.25%). Assume that there is no maturity risk premium (MRP = 0), and that the annual real risk-free rate, r*, will remain constant over the next 10 years. (Hint: Remember that the default risk premium and the liquidity premium are zero for Treasury securities: DRP = LP = 0). A 5-year corporate bond has the same default risk premium and liquidity premium as the 10-year corporate bond described above. What is the yield on this 5-year corporate bond?
rT5 = 4.45%; rT10 = 6.4%; rC10 = 8.4%; IP10 = 2.25%; MRP = 0. For Treasury securities, DRP = LP = 0. DRP5 + LP5 = DRP10 + LP10. rC5 = ? rT10 = r* + IP10 6.4% = r* + 2.25% r* = 4.15% rT5 = r* + IP5 4.45% = 4.15% + IP5 0.3 = IP5 rC10 = r* + IP10 + DRP10 + LP10 8.4% = 4.15% + 2.25% + DRP10 + LP10 2 = DRP10 + LP10 rC5 = 4.15% + 0.3% + DRP5 + LP5, but DRP5 + LP5 = DRP10 + LP10 = 2%. So, rC5 = 4.15% + 0.3% + 2% = 6.45%
