FIN 321 calculation
70. Which of the following transactions will result in a decrease in cash flow from operations? A) Increase in accounts receivable B) Decrease in inventories C) Increase in taxes payable D) Decrease in bonds outstanding
Increase in accounts receivable. Accounts receivable increases when the company sells merchandise or does a service on credit, and decreases when the customer pays its bill. Accounts receivable is associated with the income statement account Sales or Revenue. The change in accounts receivable or the cash collected from customers is classified as an operating activity.
15.A stock quote indicates a stock price of $60 and a dividend yield of 3%. The latest quarterly dividend received by stock investors must have been ______ per share. A) $0.55 B) $1.80 C) $0.45 D) $1.25
Latest quarterly dividend =Dividend Yield*Stock Price/4 =3%*60/4 =0.45
24.You sold short 300 shares of common stock at $30 per share. The initial margin is 50%. You must put up _________. A) $4,500 B) $6,000 C) $9,000 D) $10,000
(# of shares x Price) x margin 300 x 30 = 9,000 x .50 = 4,500
31. An investor puts up $5,000 but borrows an equal amount of money from his broker to double the amount invested to $10,000. The broker charges 7% on the loan. The stock was originally purchased at $25 per share, and in 1 year the investor sells the stock for $28. The investor's rate of return was _______. A) 17% B) 12% C) 14% D) 19%
-no of shares =10000/25=400 -loan interest= 5000*7% final value=(28*400)-(5000*7%)=10850 Initial value=5000 rate of return=(final-initial)/initial =(10850-10000)/5000 =17%
26.You purchased 250 shares of common stock on margin for $25 per share. The initial margin is 65%, and the stock pays no dividend. Your rate of return would be _______ if you sell the stock at $32 per share. Ignore interest on margin. A) 35% B) 39% C) 43% D) 28%
1. Make sure for margin you subtract it (1-.65) = .35 2. Find Initial Investment # of shares x Price of Shares on margin x New Margin =250($25)(.065) = $4062.5 3.Now find initial investment Loan= # of shares x Price of Shares on margin x New Margin =250 x 25 x .35 = $2,187.50 Loan Now you are selling stock, then repaying loan Find Proceed after selling stock 4.Find Sale Price= # of shares x New Sell Price 250 x $32 = $8,000 5. Now pay loan $8,000 - $2,1875 = 5812.5 6. Now find rate of return = (Proceeds - Initial Investment) /initial investment Return = (5812.5 - 4062.50) / 4062.5 = 43.08%
40. You are considering investing in a no-load mutual fund with an annual expense ratio of 0.60% and an annual 12b-1 fee of 0.75%. You could also invest in a bank CD paying 6.50% per year. What minimum annual rate of return must the fund earn to make you better off in the fund than in the CD? A) 7.10% B) 7.45% C) 7.25% D) 7.85%
7.85 fees are expenses associated with distribution and marketing for a mutual fund. These fees, together with management fees, represent the annual expenses of managing the funds that will be deducted from gross returns. The minimum rate of return is such that the return after expense and 12b-1 fees is at least as high as the return you can earn from the CD, i.e., annual return - 0.6% - 0.75% = 6.5% (annual return)- 1.35% = 6.5% annual return = 7.85%That is, the annual return should be at least 7.85%
48.Consider a Treasury bill with a rate of return of 5% and the following risky securities: Security A: E(r) = 0.15; variance = 0.0400 Security B: E(r) = 0.10; variance = 0.0225 Security C: E(r) = 0.12; variance = 0.1000 Security D: E(r) = 0.13; variance = 0.0625 The investor must develop a complete portfolio by combining the risk-free asset with one of the securities mentioned above. The security the investor should choose as part of her complete portfolio to achieve the best CAL would be __________. What formula does CAL connect with? A) security A B) security B C) security C D) security D
A.) Find/Calculate Coefficient of variation (CV) CV= Standard Deviation/ Expected return St. D = Squareroot(variance) Looking for lowest CV because that is the lowest volatility Sec A: 1.33 Sec B: 1.5 Sec C: 2.64 Sec D: 1.92
42.An investment earns 10% the first year, earns 15% the second year, and loses 12% the third year. The total compound return over the 3 years was __________. A) 41.68% B) 11.32% C) 3.64% D) 13.00%
B)11.32 Total compound return = [(1+I year return) * (1+I year return) * (1+I year return)] - 1 Calculation = [1.10 * 1.15 *0.88] - 1 = 0.1132 = 11.32%
47.A portfolio with a 25% standard deviation generated a return of 15% last year when T-bills were paying 4.5%. This portfolio had a Sharpe ratio of __________. A) 0.22 B) 0.60 C) 0.42 D) 0.25
C) .42 St.d = 25 Return of Port. (RP) = 15% T bill rate (Rf) = 4.5% Sharpe Ratio = (RP-RF)/ St. D
53. The buyer of a new home is quoted a mortgage rate of 0.5% per month. What is the APR on the loan? A) 0.50% B) 5.00% C) 6.00% D) 6.17%
C). APR = APR rate x Months Annual Percentage Rate (APR) = Monthly interest rate x 12 Months Annual Percentage Rate (APR) = 0.50% per month x 12 MonthsAnnual Percentage Rate (APR) = 6.00%
59.Cache Creek Manufacturing Company is expected to pay a dividend of $4.20 in the upcoming year. Dividends are expected to grow at the rate of 8% per year. The risk-free rate of return is 4%, and the expected return on the market portfolio is 14%. Investors use the CAPM to compute the market capitalization rate on the stock and use the constant-growth DDM to determine the intrinsic value of the stock. The stock is trading in the market today at $84. Using the constant-growth DDM and the CAPM, the beta of the stock is __________. A) 1.4 B) 0.9 C) 0.8 D) 0.5
Capital Asset Pricing Model = ke=(Rm-Rf)B + Rf First find Ke (cost of equity) using Po = (Div / k - g) 84 = (4.20 / k - .08) = 84(k-.08) = 4.2 -> k-.08 = .05 -> ke=.13 With Ke (cost of equity) use it in CAPM with the other variables Risk Free (rf) = .04 Expected return on market port = .14 .13 = (.14-.04)B + .04 =.9
69. Note: The common shares are trading in the stock market for $27 each. Refer to the financial statements of Burnaby Mountain Trading Company. The firm's returnon-sales ratio for 2020 is __________. A) 0.0409 B) 0.0429 C) 0.0475 D) 0.0753
Correct option is "B"-.0429 Return on sales = EBIT / Sales = 300000 / 7000000 = .0429
50.Consider the following two investment alternatives: First, a risky portfolio that pays a 15% rate of return with a probability of 40% or a 5% rate of return with a probability of 60%. Second, a Treasury bill that pays 6%. The risk premium on the risky investment is __________. What do you do? A) 1% B) 3% C) 6% D) 9%
D) Rate of return, R1 = 15% Probability of R1, P1 = 40% Rate of return, R2 = 5% Probability of R2, P2 = 60% Risk Premium = (Rate of Return x Probability of Rate) + (Rate of Return2 x Prob. of Rate2) (.15 x .40) + (.05 x .60) = .09
54.If you believe you have a 60% chance of doubling your money, a 30% chance of gaining 15%, and a 10% chance of losing your entire investment, what is your expected return? A) 5.00% B) 15.00% C) 54.50% D) 114.50%
Expected Return = sum of (probability x return) =(60% x 100%) + (30% x 15%) + (10% x -100%) = =54.50
58.Firms with higher expected growth rates tend to have P/E ratios that are __________ the P/E ratios of firms with lower expected growth rates. A) higher than B) equal to C) lower than D) There is not necessarily any linkage between risk and P/E ratios.
Firms with higher expected growth rates tend to have P/E ratios that are higher than the P/E ratios of firms with lower expected growth rates if everything else is equal and the price is correctly valued. b) higher than
LONG 18.The margin requirement on a stock purchase is 25%. You fully use the margin allowed to purchase 100 shares of MSFT at $25. If the price drops to $22, what is your percentage loss? A) 9% B) 15% C) 48% D) 57%
First Find Stock Price Drop Then find Total Capital Then Find % Loss Stock Price Drop= ($25 - $22)100 = 300 Total Capital = (((Shares x initial price)100) x Margin) (((100 x 25)100 x .25)) = 62,500 % Loss = (SPD/Total Capital) x 100 (300/62,500) x 100 = 48%
20.On a given day a stock dealer maintains a bid price of $1,000.50 for a bond and an ask price of $1003.25. The dealer made 10 trades that totaled 500 bonds traded that day. What was the dealer's gross trading profit for this security? A) $1,375 B) $500 C) $275 D) $1,450
Gross Trading Profit = (Ask - bid) x # of securities (1,003.25 - 1000.50) x 500 = 1,375
64.ART has come out with a new and improved product. As a result, the firm projects an ROE of 25%, and it will maintain a plowback ratio of 0.20. Its earnings this coming year will be $3 per share. Investors expect a 12% rate of return on the stock. At what P/E ratio would you expect ART to sell? A) 8.33 B) 11.43 C) 14.29 D) 15.25
Growth rate = roe x plow ratio Stock Price = ((Earnings x (1 - plowback ratios)) / (rate of return - growth rate) P/E ratio = Stock Price / Earnings
56. Stockholders of Dogs R Us Pet Supply expect a 12% rate of return on their stock. Management has consistently been generating an ROE of 15% over the last 5 years but now believes that ROE will be 12% for the next 5 years. Given this, the firm's optimal dividend payout ratio is now __________. A) 0% B) 100% C) between 0% and 50% D) between 50% and 100%
Observe that dividend payout ratio is the amount of dividends that the company pays out of its profits. Observe that the supply rate is 12% and ROE changed from 15% to 13%. Since the ROE is still greater than the supply rate therefore the company still is generating profits. Therefore the company will pay 100% dividends. B) is correct
LONG QUESTION 25.You short-sell 200 shares of Tuckerton Trading Company, now selling for $50 per share. What is your maximum possible loss? A) $50 B) $150 C) $10,000 D) Unlimited
Rule: When you short sell, the higher the share price goes more loss for you. As explained above, Answer is Unlimited Lowest possible share price is Zero but Highest possible share price is infinity (we just dont know how high it might go, it can keep on rising if the company is performing good)
46. 46) The formula is used to calculate the ... (expected d return - rate) / standard deviation A) Sharpe ratio B) Treynor measure C) coefficient of variation D) real rate of return
Sharpe Ratio
63.A firm has an earnings retention ratio of 40%. The stock has a market capitalization rate of 15% and an ROE of 18%. What is the stock's P/E ratio? A) 12.82 B) 7.69 C) 8.33 D) 9.46
Stock P/E ratio = (1 - retention ratio) / ((market capitalization rate) - (roe x retention ratio)) =(1-40) / (.15 - (.18 x .40)) stock p/e ratio = 7.69
68. Note: The common shares are trading in the stock market for $27 each. Refer to the financial statements of Burnaby Mountain Trading Company. The firm's times interest-earned ratio for 2020 is __________. A) 2.85 B) 6.00 C) 9.00 D) 11.11
Times Interest Earned = EBIT / Interest Expense 300,000 / 50,000 B) 6.0
57.You want to earn a return of 11% on each ofterm-20 two stocks, A and B. Stock A is expected to pay a dividend of $3 in the upcoming year, while stock B is expected to pay a dividend of $2 in the upcoming year. The expected growth rate of dividends for both stocks is 4%. Using the constant-growth DDM, the intrinsic value of stock A __________. A) will be higher than the intrinsic value of stock B B) will be the same as the intrinsic value of stock B C) will be less than the intrinsic value of stock B D) The answer cannot be determined from the information given.
To calculate the intrinsic value of a stock using the constant growth Dividend Discount Model (DDM), we can use the formula: Intrinsic Value = Dividend / (Required Rate of Return - Dividend Growth Rate) Let's calculate the intrinsic values for both stocks A and B For stock A: Dividend (D) = $3 Required Rate of Return (R) = 11% = 0.11 Dividend Growth Rate (G) = 4% = 0.04 -Intrinsic Value of stock A = $3 / (0.11 - 0.04) = $3 / 0.07 = $42.86 For stock B: Dividend (D) = $2 Required Rate of Return (R) = 11% = 0.11 Dividend Growth Rate (G) = 4% = 0.04 -Intrinsic Value of stock B = $2 / (0.11 - 0.04) = $2 / 0.07 = $28.57
66.If a firm expects free cash flow equal to $50 million (at time t + 1) and that cash flow is expected to grow at 3% forever, what is the firm's terminal ( value given a WACC of 9.5%? A) $679.81 million B) $715.54 million C) $769.23 million D) $803.03 million
Total Firm Value = FCF / (R-G) 50 milly / (.095 - .03) =769.23 million
51.You invest $1,000 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 16% and a standard deviation of 20% and a Treasury bill with a rate of return of 6%. A portfolio that has an expected value in 1 year of $1,100 could be formed if you __________. What are 2 ways you can tackle this? A) place 40% of your money in the risky portfolio and the rest in the risk-free asset B) place 55% of your money in the risky portfolio and the rest in the risk-free asset C) place 60% of your money in the risky portfolio and the rest in the risk-free asset D) place 75% of your money in the risky portfolio and the rest in the risk-free asset
a) $1,100 = y × (1,000)(1.16) + (1 - y)1,000(1.06) or 16y + 6(1 - y) = (1100-1000)/1000 16y + 6 - 6y = 10 10y = 4 y = 0.40, or 40% y =.4
17. Explicit costs of a stock IPO tend to be around _______ of the funds raised. A) 1% B) 7% C) 15% D) 25%
b) 7%
52.What is the geometric average return of the following quarterly returns: 3%, 5%, 4%, and 7%? A) 3.72% B) 4.23% C) 4.74% D) 4.90%
c) Gemetric Average Returns= Multicates of ((1+each percentage return))Raised to the power of n -1 = ((1+3%) x (1+5%)x(1+4%)x(1+7%)) raised to the power of 1/4 =1.047396 - 1 = .0474 = 4.74%
49. You purchased a share of stock for $29. One year later you received $2.25 as dividend and sold the share for $28. Your holding-period return was __________. What's the Process for Holding Period Return as well? A) − 3.57% B) − 3.45% C) 4.31% D) 8.03%
c). Holding Period Return = Dividend Yield + Capital Gain/Loss Find Dividend Yield = Dividend/initial stock price 2.25/29 = .0776 Find Capital Gain/Loss = (Final Stock Price - Inital Stock Price) / Initial Stock Price (28-29)/20 = -0.0345 Find Holding Period Return = Dividend Yield + Capital Gain/Loss =.0776 + (-0.0345) = .0431
32.Assume that you have just purchased some shares in an investment company reporting $500 million in assets, $50 million in liabilities, and 50 million shares outstanding. What is the net asset value (NAV) of these shares? A) $5 B) $9 C) $10 D) $11
Net asset = asset - liability = 500-50=450 milly NAV = net asset / no of shares = 450/50 = $9
65.A firm has an earnings retention ratio of 40%. The stock has a market capitalization rate of 15% and an ROE of 18%. What is the stock's P/E ratio? A) 12.82 B) 7.69 C) 8.33 D) 9.46
Stock P/E ratio = (1 - retention ratio) / ((Market Cap rate - (ROE x Retention Ratio)) (1 - .40) / ( .15- (.18 x .40)) = 7.69 is the P/E ratio
22.You find that the bid and ask prices for a stock are $10.25 and $10.30, respectively. If you purchase or sell the stock, you must pay a flat commission of $25. If you buy 100 shares of the stock and immediately sell them, what is your total implied and actual transaction cost in dollars? A) $50 B) $25 C) $30 D) $55
Total Implied & Actual Transaction Cost = (Bid Ask Spread x # of shares) + (2 x Commission) (.05 x 100) + 50 = $55
60.Westsyde Tool Company is expected to pay a dividend of $1.50 in the upcoming year. The risk-free rate of return is 6%, and the expected return on the market portfolio is 14%. Analysts expect the price of Westsyde Tool Company shares to be $29 a year from now. The beta of Westsyde Tool Company's stock is 1.2. Using the CAPM, an appropriate required return on Westsyde Tool Company's stock is _________. A) 8.00% B) 10.80% C) 15.60% D) 16.85%
Use CAPM = Capital Asset Pricing Model = ke=(Rm-Rf)B + Rf k = (.14 - .06)1.2 + .06 = 15.60
61. Interior Airline is expected to pay a dividend of $3 in the upcoming year. Dividends are expected to grow at the rate of 10% per year. The risk-free rate of return is 4%, and the expected return on the market portfolio is 13%. The stock of Interior Airline has a beta of 1.4. Using the constant-growth DDM, the intrinsic value of the stock is __________. A) $45.45 B) $22.73 C) $27.78 D) $41.67
Use CAPM again Capital Asset Pricing Model = ke=(Rm-Rf)B + Rf k= (.13-.04)1.4 + .04 k=16.6 then use the value formula invovled with constant growth DDM Vo = Dividend / (Ke - g) Vo = $3 / (.166-.10) = 45.45
62.A company with an expected earnings growth rate which is greater than that of the typical company in the same industry most likely has __________. A) a dividend yield which is greater than that of the typical company B) a dividend yield which is less than that of the typical company C) less risk than the typical company D) less sensitivity to market trends than the typical company
YOUR REQUIRED ANSWER IS OPTION C : a lower dividend yield than that of a typical company We know that: Expected Earnings Growth Rate = Return on Investment * (1 - Dividend Payout Ratio) Hence, higher the dividend payout, lower will be the Expected Earnings Growth Rate and lower the dividend payout, higher will be the Expected Earnings Growth Rate.
