Principles of Finance Unit 3

Using the following variables, calculate an organization's cost of debt on a $100,000 bond. Rf: 2% Credit-risk rate: 6% t: 20%

$6,400

Surprise news or announcements may affect the day to day variance of a stock's price, also known as its _____

beta

The risk that the person to whom you lent money will not be able to pay you back is known as ____.

credit risk

Paula purchased stock with an initial share price of $30, and sold it when the share price was $60. While she owned the stock, she earned $4 in dividends. What was her total percentage return on the investment?

113.33%

You own a small manufacturing business that produces widgets. You have spent $400,000 acquiring the fixed assets you need to produce widgets. Each widget costs you $3 to make and they sell for $25 each, so your variable cost is 12% of the overall revenue. At your current level of operating leverage, how many widgets must you sell to break even?

18,182

Calculate a company's total leverage given the following information: Change in sales = 3% Change in earnings = 9%

3

You invest $10,000 in a stock that has a 25% chance of a 10% return, a 50% chance of a 5% return, and a 25% chance of a 2% return. What is your expected return after one year?

5.5%

Which of the following is true of portfolio diversification?

A diversified portfolio is more sensitive to an investor's time frame and risk tolerance.

Company A Company B Market Value of Equity $200,000 $300,000 Market Value of Debt $150,000 $200,000 Cost of Equity 8% 5% Cost of Debt 3% 2% Tax Rate 30% 30% Based solely on their current weighted average cost of capital, which company should pursue an investment opportunity with an expected return of 6%?

Both Company A and Company B.

Which of the following is a tenet of strong-form efficiency?

No person can generate excess returns because all information, whether public or private, is accounted for in a stock's price.

A clothing company with a subscription business model is seeking to raise capital to expand its operation. They decide to issue a small number of shares to some high-net-worth individuals that have supported the company in the past. What type of market transaction is taking place?

Private placement

As CEO, Varina is responsible for personally verifying the accuracy of her company's financial statements by signing off on them. By doing so, which federal regulation is she complying with?

Sarbanes-Oxley Act of 2002

What is the weighted average cost of capital (WACC)?

The combination of interest rates being incurred from both debt and equity.

Which of the following steps happens last in a Chapter 11 bankruptcy?

The company's debtholders vote on a plan of debt reorganization.

Which of the following is true of unsystematic risk?

Which of the following is true of unsystematic risk?

A beta coefficient is best understood as ___

a measure of the volatility of a portfolio as compared to a benchmark

The capital asset pricing model is useful for _____.

determining whether an asset's expected return will offset its susceptibility to market risk

One reason a company's capital structure may include more equity than debt is that relying too heavily on debt could _____.

increase the company's risk of bankruptcy

A security that falls below the security market line is ___.

over-valued for its level of risk