FIN3403 Final Guide
T/F: Capital Components are the investors supplied items ex. Debt, preferred stock, and common equity, used to raise funds to finance projects.
True
T/F: Inflation is the amount by which prices increase over time
True
T/F: The two types of investment risk are stand-alone risk and portfolio risk
True
If a preferred stock with an annual dividend of $3 sells for $30, what is the preferred stock's expected return?
preferred stock's expected return=Annual dividend/current price 3/30 = 10%
Cash flows that will occur if and only if the firm takes on a project. This definition corresponds to which of the following: A. Sunk Cost B. Opportunity Cost C. Incremental Cash Flow D. Differential Cash Flow
C. Incremental Cash Flow
The corporate valuation model is also called? a. After-tax b. Free cash flow Method. c. Operating Income
b. Free cash flow Method.
T/F: The NPV tells us how much a project contributes to shareholder wealth. The larger the NPV, the more value the project adds.
True
T/F: The term "working capital" originated with the old Yankee peddler who would load up his wagon and go off to peddle his wares.
True
T/F: The higher the firm's flotation cost for new common equity, the more likely the firm is to use preferred stock, which has no flotation cost and retained earnings, whose cost is the average return on the assets that are acquired.
False
T/F: The higher the risk, the lower yield a company has to pay to the bondholders.
False
T/F: The international monetary system handles inflation in the United States.
False
T/F: The pure expectation theory states that the shape of the yield curve depends on investor's experiences with past interest rates.
False
Isabella's Beauty Supplies Inc has an office in France where they made $65 million in revenues during the year 2018. The manager would like to know how much it is in U.S currency if $1 dollar is equivalent to 0.8569 euros.
$1/0.8569 euros =1.167 65 million euros x 1.167 rate = $75. 85 million OR 65 million euros / 0.8569 =$75.85 million
T/F: No investment should be undertaken unless the expected rate of return is high enough to compensate for the perceived risk
True
T/F: Preemptive rights protect a shareholder from losing voting power as more shares are issued and the company's ownership becomes diluted.
True
T/F: Sensitivity analysis measures the effect of changes in a variable on the project's NPV.
True
T/F: Simulation analysis is a computerized version of scenario analysis where input variables are selected randomly based on their probability distributions?
True
T/F: Stock Dividends is a dividend which is pain in the form of additional shares of stock rather than in cash.
True
T/F: Stock that has been repurchased by a firm is called treasury stock
True
T/F: Sustainable Growth Rate is defined as the maximum achievable growth rate without the firm having to raise external funds.
True
T/F: The Capital Asset Pricing Model is the most widely used method for estimating required rates of return on stocks
True
T/F: The NPV is the method used to accept or reject projects because it addresses directly the central goal of financial management- maximizing shareholder wealth.
True
T/F: The clientele effect suggests that companies should follow a stable dividend policy.
True
T/F: The dividend irrelevance theory states that a firm's dividend policy has no effect on either its value or its cost of capital
True
T/F: The length of time between the day a firm purchases an item from its supplier until the day that supplier is paid for that purchase is called the Accounts payable period
True
T/F: The most widely used method for estimating the cost of common equity is the capital asset pricing model (CAPM)
True
Define, explain and give examples of the 7 C of credit?
1. Character - your reputation and credit history. 2. Capital - Indicates your level of seriousness what your personally invested in money into the project. 3. Capacity - To repay the loan. 4. Collateral - What security of repayment do you guarantee to the lender. 5. Condition - Details of your loan include just about anything that a lender needs to be confident that you can repay your loan. 6. Currency risk - Involve in international loans the exchange rate between currency and inflation of the currency. 7. Country risk - Involve the economic, social, and political conditions of a foreign country that may adversely affect the ability to repay a foreign loan and the ability of a nation to pay its bondholders. A current example is Russia. The 7 C of credit is used as a guideline for a financial institution to provide a loan. An example of when the 7 C of credit is used is when a business applies to get a loan.
Explain the steps for setting dividend policy.
1.Forecast capital needs over a planning horizon, often 5 years. 2.Set a target capital structure. 3.Estimate annual equity needs. 4.Set target payout based on the residual model. 5.Generally, some dividend growth rate emerges. Maintain target growth rate if 6.possible, varying capital structure somewhat if necessary.
Group 4 Inc's stock trades at $120 a share. The company is considering a 2-1 stock split. Assuming the stock split will have no effect on the market value of its equity, what will be the company's stock price after the split occurs? Show your calculations.
120/2 = 60 per share
Define, explain, give examples of a multinational corporation
A multinational corporation (MNC) is a corporation that operates in two or more countries. Decision making within the corporation may be centralized in the home country, or decentralized across the countries in which the corporation operates in. An example would be Coca-Cola
Define, explain, and give examples of a risk premium
A risk premium is the difference between the return on a risky asset and a riskless asset, which serves as compensation for investors to hold riskier securities. For example, if the estimated return on an investment is 6% and the risk-free rate is 2%, then the risk premium is 4%
Define, explain, and give examples of Stock Repurchase.
A stock repurchase is when a company purchases their own common stock back from the market. Stock repurchases decrease the shares outstanding which increases EPS and stock price. A company whose share price has been trending downward after bad publicity that is still growing might repurchase some of their stock to leave less stock on the market artificially starting an upward trend signaling for investors to buy in pumping the price further upward.
ARTICLE URL: https://www.wsj.com/articles/judge-approves-18-million-activision-settlement-with-eeoc-11648644667?st=y4c8l7354imlytt&reflink=desktopwebshare_permalink Between the two companies Activision Blizzard Inc and the Equal Employment Opportunity Commission, How much did the judge granted in settlement? A. 18 Million B. 30 Million C. 40 Million D. 34, Million
A. 18 Million
Adams Enterprises' noncallable bonds currently sell for $1,470. They have a 15-year maturity, an annual coupon of $85, and a par value of $1,000. What is their yield to maturity? A. 4.21% B. 4.35% C. 5.01% D. 3.37%
A. 4.21% = Annual coupon payment +( Face value-market value)/years to maturity)/Face value + market value/2) (85+(1000-1470)/15)/(2470/2) Total= 4.21%
XYZ corporation does $100,000 in sales daily over 12 days. Find the amount of accounts receivable outstanding.
Accounts Receivable = Sales per Day X Length of Collection Period 100,000 * 12 = $1,200,000
Which of the following is NOT a corporate bond. Mortgage Bond B. Insubordinate Bond C. Debentures D. Subordinated Debentures
B. Insubordinate Bond
1What is the best return that could be earned on assets the firm already owns if those assets are not used for the new project? A. Sunk cost B. Opportunity cost C. Incremental cash flows D. Monte Carlo Simulation
B. Opportunity cost
How many months/years does a strategic business plan outline for? A. The next 1 to 2 years B. The next 5 to 10 years C. The next 1 to 12 months D. The next 1 to 6 months
B. The next 5 to 10 years
The single most important issue in the stock valuation process is a company's A) past earnings record. B) historic dividend growth rate. C) expected future returns. D) capital structure.
C) expected future returns.
Which term defines the lines of business a firm plan to pursue and geographic areas in which it will operate? A. Desired land B. Financial plan C. Corporate scope D. Operating plan
C. Corporate scope
Cash Flows that occur, or don't, because a project is undertaken. A. Principle Rule B. Opportunity Cost C. Relevant Cash Flow D. Allocated Cost
C. Relevant Cash Flow
What type of account is commercial paper: A. Accounts Receivables B. Long term promissory note C. Short Term promissory notes D. Cash
C. Short Term promissory notes
Stock Repurchased by a company is called: A. Common Stock B. Preferred Stock C. Treasury Stock D. Reserve Stock
C. Treasury Stock
What would be the NPV for Projects X? WACC= r = 10% 0 1 2 -500 $400 $300
CF0 = -500 N = 2 r= 0.10 (Cost of Capital) t= 1,2 NPV= -500 + 400/(1+0.10)^1 + 300/(1+0.10)^2 = 111.57024793
Firms generally choose to finance temporary current assets with short -term debt because A. short-term debt has a higher cost than equity capital. B. short-term interest rates have traditionally been more stable than long-term interest rates C. The yield curve is normally downward sloping D. matching the maturities of assets and liabilities reduces risk under some circumstances, and also because short-term debt is often less expensive than long-term capital
D. matching the maturities of assets and liabilities reduces risk under some circumstances, and also because short-term debt is often less expensive than long-term capital
You were recently hired by Miller Technologies to estimate its cost of capital. You obtained the following information: D1+ $1.75; P0= $95.00; g=7.00%(constant); and F= 5.00%. What is the cost of equity raised by selling new common stock?
Dividend at the end of the year, D1 = 1.75 Price, P0 = 95.00 Flotation cost = 5% Net Proceeds= 95.00 - 5.00% * 95.00 = 90.25 Growth, g = 7.00% Ke= D1/Net Proceeds + g Ke= 1.75/ 90.25 + 7.00% Ke= 1.94% + 7.00% *Ke= 8.94%
T/F: A basic rule in capital budgeting is that if a project's NPV exceeds its IRR, then the project should be accepted
False
T/F: A basic rule in capital budgeting is that if a project's NPV exceeds its IRR, then the project should be accepted.
False
T/F: Companies raise capital in two main forms: assets and equity
False
T/F: In the NPV formula, Cash flow will be addressed CFn which includes fixed assets & any necessary investments in working capital, and cash flows coming in at the end of the year.
False
T/F: Sunk Costs are costs that can be recovered regardless whether a project has been accepted or rejected
False
T/F: The IRR is better than the MIRR as an indicator of a project's true profitability.
False
T/F: The MIRR method is based on the assumption that the cash flow are reinvested at at the IRR
False
T/F: The average collection period is the average time required to convert raw materials into finished goods and then to sell them.
False
T/F: The maturity matching, or self-liquidating approach is when long term capital is used to finance permanent assets.
False
T/F: The preemptive right is when stockholders have the right to sell shares they hold in firms.
False
If a man wishes to trade $2000 U.S. dollars into Mexican pesos, how many pesos would the man have at an exchange rate of one U.S. dollar for every 2000 pesos?
Formula: (Amount of Dollars) * (Exchange Rate of Pesos per Dollar) 2000 * 2000 = $4000000
Determine the amount of accounts receivable outstanding if a volume in credit sales is $24,000 and the average length of time between sales and collections is 31 days.
Formula: Accounts receivable= sales per day X length of collection period $24,000 in sales X 31days= $744,000 needed to finance *$744,000
If Michael borrowed at an interest rate of 7%, and its marginal federal plus state tax rate is 30%. What is the after-tax cost of debit?
Formula: After-tax cost of debit: =rd(1-T) =0.07(1.0-0.30) =0.07(0.70) =0.049 -> 4.9% after-tax cost of debit
What is the after-tax cost of debt for Finance Enterprises if they can currently borrow at an interest rate of 8.9%, and its marginal federal-plus-state tax rate is 24.5%?
Formula: After-tax cost of debt = Interest Rate on New Debt - Tax Savings After-tax cost of debt = rd(1-T) After-Tax cost of debt = .089(1.0-.245) After-Tax cost of debt = .089(0.755) After-Tax cost of debt = 6.72%
Calculated the BETA of amazon to the S&P 500. The covariance of the S&P 500's return to Amazon returns is 0.032 and the variance is 0.0235.
Formula: Beta coefficient(β) = Covariance / Variance 0.032 / 0.0235 Answer: BETA Coefficient = 1.36
Find the current yield and the capital gains yield for a 10-year, 5% annual coupon bond that sells for $800, and has a face value of $1,000.
Formula: Current Yield = Annual Coupon Payment/Current Price (1,000*5%) / 800 = 0.0625 = 6.25%
Miller Plumbing Company has hired you to help estimate its cost of capital. You obtained the following data: D = $1.75; P = $32.25; g = 6.00% (constant); and F = 8.50%. What is the cost of equity raised by selling new common stock?
Formula: D / [P(1-F)] + g 1.75 / [32.25(1-8.5%)] + 6% = 11.96
Michelle's company has businesses in Australia, she would like to buy some inventories from France but does not know the conversion rate from Australian currency to euro. If she knows that $1= 1.3972 Australian dollars and that 1$=0.8484 euros, how much is 1 Australian dollar equivalent in euros.
Formula: Euro/Australian dollar = Euro/ 1 Australian dollar 0.8484/1.3972 = 0.6072 0.6072 euros = 1 Australian dollar
Dinoco's stock is currently selling at $32 a share. It's stock price is expected to rise to $34 by the end of next year. What is the expected capital gains yield?
Formula: Expected Capital Gains Yield=(P1-P0)/P0 ($34-$32)/$32 = 6.25%
Calculated the intrinsic value of the following company whose stock is trading at $110 per share. This company requires an 8% minimum rate of return and will pay a $3 dividend per share next year which is expected to increase by 5% annually.
Formula: P = D1/ r- g (D1) = 3 (r) = 8 (g)= 5 P= $3/ 0.08− 0.05 =$100 Answer: 100
A stock has a beta of 1.3, the risk-free rate is 6.0%, and the market risk premium is 4.5%. What is the stock's required rate of return?
Formula: Risk free rate + Beta x Market risk premium 6% + 1.3 * 4.5% = 11.85%
Let's say your market weight of debt is 0.24685315 and the weight of equity is 0.74589613 and your companies cost of equity is 16% and its cost of debt is 12%. The rate of tax is 35%. Calculate the WACC of your company.
Formula: WACC = WE x RE + WD x RD X (1-T) = (0.74589613 x 16%) + (0.24685315 x 12% x (1-35%)) = 0.11934343 + 0.01925455 = 0.13859798 or 13.86%
Mitchell Inc.'s CFO hired you as a consultant to help her estimate the cost of capital. You have been provided with the following data: r = 8.23%; RP = 10.57%; and b = 1.95. Based on the CAPM approach, what is the cost of equity from retained earnings?
Formula: r + b * RP 8.23% + 1.95 * 10.57% = 28.83%
An investor has a three-stock portfolio with $25,000 invested in Dell, $50,000 invested in Ford, and$25,000 invested in Wal-Mart. Dell's beta is estimated to be 1.20, Ford's beta is estimated to be 0.80,and Wal-Mart's beta is estimated to be 1.0. What is the estimated beta of the investor's portfolio?
Formula: βportfolio = βasset 1 * ωasset 1 + βasset 2 * ωasset 2 + ... + βasset n * ωasset n .25(1.2) + .50(.8) + .25 (1) = .95
Lawny & Co. is expected to earn $6.0 million in 2022 and it plans on using 50% to repurchase shares of its common stock. With this amount they can purchase 100000 shares. With 2.1 million shares outstanding and the market price valued at $30 a share, how much would the price per share increase after the purchase?
Formulas: Current EPS = Total Earnings / Number of Shares EPS after Purchase = Total Earnings / (Number of Shares - Purchased Shares) EPS after Purchase - Current EPS = Difference in price per share 6000000 / 2100000 = 2.86 6000000 / (2100000 - 100000) = 3.00 3.00 - 2.86 = $0.14
Define, explain, and give examples of independent and mutually exclusive projects?
Independent projects are projects with cash flows that are not affected by the acceptance or rejection of other projects. Mutually exclusive projects are a set of projects where only one can be accepted because the projects would fulfill the same purpose. An independent project would be one that solves Firm A's issue of computer efficiency while the rest of the projects cannot, and mutually exclusive projects would be able to solve the problem no matter which project Firm A chooses.
Define, explain, and give examples of capital budgeting?
Looking at Capital Budget (Summary of planned investments in long-term assets) and analyzing which projects to include. First, stocks and bonds exist in the security markets, and investors select from the available set; firms, however, create capital budgeting projects. Second, for most securities, investors have no influence on cash flows produced by their investments, whereas corporations have a major influence on projects' results. Some Examples are Planning the eventual returns on investments in machinery, real estate and new technology
Define, explain and provide examples of marketable securities.
Marketable securities are assets than can be liquidated into cash quickly, they can be easily be bought, sold or traded. Stocks, bonds, preferred shares and ETFs are examples of marketable Securities, these are some of the most
You have just purchased an outstanding 15-year bond with a par value of $1,500 for $1,645.75. Its annual coupon payment is $75. What is the bond's yield to maturity?
N= 15 PV= -16445.75 PMT= 75 FV= 1500 Find for I/YR *YTM is 4.12%
Motta company reports a net income of $200,000 and issues $20,000 in dividends, what would the payout ratio be?
Payout ratio = Total dividends/Net Income Payout ratio = $20,000/$200,000 = 10% Payout ratio = 10%
Define, explain, and give examples of price risk and reinvestment risk.
Price risk, or interest rate risk, is the risk of a decline in bond values due to an increase in interest rates, while reinvestment risk is the risk that a decline in interest rates will lead to a decline in income from a bond portfolio. For example, a company issues callable bonds with an 8% interest rate. Interest rates subsequently drop to 4% this is a price risk scenario.
Define, explain, and give example of stand-alone risk.
Stand-alone risk is the risk an investor would gave if he or she held only one asset. If an investor buys $100,000 of short-term Treasury bills with an expected return of 5%. The investments return 5%, can be estimated precisely, and the investment is defined as being essentially risk-free. But if the Treasury bills fail and do not return 5%, the investor can face low returns or potentially lose investment because of the lack of diversification.
Define, explain, and give examples of the preemptive right.
The preemptive right is the right that common stockholders have to purchase additional shares sold by the firm on a pro rata basis. This prevents firms from releasing a large amount of shares and then management purchasing them themselves. More importantly this prevents stockholders from a dilution of value. If 1000 shares of common stock were $100 dollars each the firm would be worth $100,000. Then, if the firm releases 1,000 more shares at $50 the firms total value would be $150,000. With 2,000 total shares the they would each be worth $75, which is far less than the original $100. The preemptive right helps stop old stockholders from losing value as such.
Define, explain, and give examples of Weighted Average Cost of Capital (WACC)
The weighted average cost of capital is a weighted average of the component costs of debt, preferred stock, and common equity. The WACC uses these components to find the average weighted cost of capital. An example would be identifying these components with the WACC formula to understand where the company stands.
T/F: During periods when inflation is increasing, interest rates tend to increase, while interest rates to fall when inflation is declining?
True
T/F: If Mexico was running a deficit trade balance with Britain, then we could reasonably infer that the value of the British pound would appreciate against the Mexican peso.
True
T/F: Professors Merton Miller and Franco Modigliani developed the dividend irrelevance theory and proved that a firm's value is determined only by its basic earning power and its business risk.
True
T/F: The Target Capital Structure is the mix of debt, preferred stock, and common equity that the firm plans to raise to fund its future projects.
True
T/F: The four most fundamental factors affecting the cost of money are (1) production opportunities, (2) time preferences for consumption, (3) risk, and (4) inflation.
True
T/F: The optimal dividend policy maximizes a firm's stock price
True
T/F: The pure expectations theory contends that the shape of the yield curve depends on investors' expectations about future interest rates.
True
The relationship between risk and required return is classified as a. Security market line b. Required return line c. Market risk line d. Riskier return line
a. Security market line
Who is being sued for their delayed disclosure of their 9.2% stake of twitter? a. Steve Jobs b. Bill Gates c. Elon Musk d. Mark Zuckerberg
c. Elon Musk
Timothy would like to find the required rate of return of Stock L. Suppose rRF = 3.5% , rM = 12%, and bL = 1.7. What is rL , the required rate of return on Stock L?
rL = rRF+(rM-rRF)*bL rL = Required Rate of Return on Stock L rRF = Risk-Free Rate rM = Required Rate of Return on Market Portfolio bL = Beta Coefficient of Stock L rRF = 3.5% rM = 12% bL = 1.7 rL = 3.5% + (12%-3.5%)*1.7 = 3.5% + (8.5%)*1.7 = 3.5% + 14.45% = 17.95%
As a member of UA Corporation's financial staff, you must estimate the Year 1 cash flow for a proposed project with the following data. Under the new tax law, the equipment used in the project is eligible for 100% bonus depreciation, so it will be fully depreciated at t = 0. What is the Year 1 cash flow? Do not round the intermediate calculations and round the final answer to the nearest whole number. Sales revenues, each year $45,500 Other operating costs $17,000 Interest expense $4,000 Tax rate 25.0%
$21,375
Define, Explain, and give an example of a Proxy Fight.
A Proxy Fight occurs when a group of shareholders join forces and attempt to gather enough shareholder proxy votes to win a corporate vote. The voting bids in a proxy vote could include replacing corporate management or the board of directors. An example would be when the Microsoft corporation made an offer to buy Yahoo for $31 per share. Since the board of directors at Yahoo believed the offer by Microsoft under-valued the company, they stalled any negotiations between Microsoft and Yahoo executives. Then a few weeks later when Microsoft withdrew its offer, billionaire Carl Icahn launched an effort to replace Yahoo's board of directors through a proxy contest.
Define, Explain, and give an example of Beta Coefficient.
A beta coefficient measures how likely the price of a stock will change to a movement in the market price; Beta represents the slope of the line through a regression of data points, each of these data points represents an individual stock's returns against those of the market as a whole. An example of a Beta Coefficient could be the following: Apple Inc's beta is 1.44, meaning its stocks are more volatile and are 44% more likely to respond to a movement in the market. The Coca Cola Company has a beta coefficient of 0.74, meaning its stocks are less volatile and are 26% less likely to respond to a movement in the market.
Define, explain and give an example of a diversified portfolio
A diversified portfolio is an investment strategy based on the premise that a portfolio with different asset types will perform better than one with few. It is when you buy domestic stocks, international stocks, bonds etc. instead of just having one type of asset.
Define, Explain and give an example of yield curve.
A graph that shows the relationship between bond yields and maturities. For example, assume a two-year bond offers a yield of 1%, a five-year bond offers a yield of 1.8%, a 10-year bond offers a yield of 2.5%, a 15-year bond offers a yield of 3.0%, and a 20-year bond offers a yield of 3.5%. When these points are connected on a graph, they exhibit a shape of a normal yield curve.
Define, explain, give examples of Permanent Current Assets
A permanent current asset is like a current asset except it is replaced by a similar current asset within a one year period. Inventory, cash, and accounts receivable are examples of current assets. The balance sheet and financial statements will not differentiate between permanent current assets and current assets but instead this is used as a measurement for management to track their assets. Companies will typically finance the permanent current assets with long term debt because this category would affect all of the companies finances if financed in a given one year period.
Define, explain and give examples of a sunk cost.
A sunk cost is a cost that has already been spent and can not be recovered. An example of sunk costs in a manufacturing company would be the cost of machinery, equipment or the lease of the factory.
Define, explain and give an example of Pure Expectations Theory:
A theory that states that the shape of the yield curve depends on investors' expectations about future interest rates. For example, the yield to maturity on a five-year bond is the average of the current and expected future short-term rate for the next five years.
Define and explain a treasury bond.
A treasury bond is a government issued bond issued by the U.S. Treasury. These bonds are a low risk investment since you are dealing with the federal government, they are long term maturities.
What does the Weighted Average Cost of Capital measure? A. Debt B. Preferred Stock C. Common Equity D. All the statements mentioned
D. All the statements mentioned
T/F: A Marginal Investor is an investor whose actions reflect the beliefs of those currently trading a stock
True
T/F: A Strategic Business Plan is a long-run plan in broad terms the firm's basic strategy for the next 5 to 10
True
T/F: A bond is a long-term contract under which a borrower agrees to make payments of interest and principal on specific dates to the holders of the bond
True
T/F: A bond is a long-term contract under which the borrower agrees to make payments of interest and principals on specific dates to the holders of the bond
True
T/F: A measure of stand-alone risk that compares the asset's realized excess return to its standard deviation over a specified period is a Sharpe Ratio.
True
T/F: A preemptive Right is defined as the corporate charter or bylaws that gives common stockholders the right to purchase on a pro rata basis new issues of common stock.
True
T/F: A stock will likely split when the common share price deters ordinary investors from buying shares.
True
T/F: A stock's risk can be considered in two ways: stand-alone basis and portfolio basis
True
T/F: A vertically integrated investment occurs when a firm undertakes an investment to secure its input supply at stable prices
True
T/F: According to the valuation model developed in this chapter, the value that an investor assigns to a share of stock is independent of the length of time the investor plans to hold the stock.
True
T/F: Accounts payable and accruals are not included as part of investor-supplied capital because they do not come directly from investors.
True
T/F: An exchange rate is the price of one country's currency in terms of another country's currency.
True
T/F: An incremental cash flow is one that will occur if and only if the firm takes on a project.
True
T/F: An upward-sloping yield curve is often call a "normal" yield curve, while a downward-sloping yield curve is called "abnormal."
True
T/F: Cannibalization is a type of externality that involves a new product taking positive cash flows away from an older product
True
T/F: Capital components include debt, preferred stock, and common equity.
True
T/F: Corporate bonds are traded primarily in the over-the-counter (OTC) market.
True
T/F: Credit periods are the length of time buyers have to pay for purchases.
True
T/F: Discount Bond is a bond that sells below its par value. This occurs whenever the going rate of interest is above the coupon rate.
True
T/F: If a U.S. investor purchases a Japanese bond, interests will probably be paid in yen. The yen will be converted into dollars before the investor can spend his or her money in the U.S. If the yen weakens or strengthens relative to the dollar there could be fewer or more dollars. Is this an example of exchange rate risk?
True
T/F: Investment risk is related to the probability of earning a low or negative actual return.
True
T/F: Is the following statement true or false? There is a fundamental trade-off between risk and return: to entice investors to take on more risk, you have to provide them with higher expected returns.
True
T/F: Market equilibrium occurs when the stock price and the intrinsic value equal each other.
True
T/F: Marketable securities held for operations are managed in conjunction with demand deposits—the management of one requires coordination with the other.
True
T/F: Monthly cash budget are good for annual planning, while daily budgets give a more precise picture of the actual cash flows, and it is good for scheduling actual payments on a da-by-day basis
True
T/F: Most firms have a target capital structure that calls for at least some debt, so new financing is done partly with debt and partly with equity.
True
T/F: NPV is the best method for companies to screen projects and determine whether to accept or reject
True
T/F: Price risk and interest rate risk mean the same.
True
T/F: The total amount of capital that can be raised before new stock must be issued is the retained earnings breakpoint
True
T/F: The weighted average cost of capital (WACC) is the weighted average of the component cost of debt, preferred stock, and common equity.
True
T/F: The weighted average of the component costs of debt, preferred stock, and common equity is called the weighted average cost of capital or WACC.
True
An analysis in which all of the input variables are set at their best reasonably forecasted values. a. Best-case scenario b. Base-case scenario c. Worst-case scenario d. Middle-case scenario
a. Best-case scenario
What is stock price? a. Current market price b. "True" value of company stock c. Difference in purchase price and market price d. The first price the stock was ever sold at
a. Current market price
What company did Elon Musk make a bid for? a. Twitter b. Meta c. Microsoft d. Amazon
a. Twitter
Which of the following are political risks included in international capital budgeting a. taxes, regulations, labor laws, and business environment b. efficiency, currency, culture, production c. demographics, market, prospects d. reporting, macroeconomy, exportation, expropriation.
a. taxes, regulations, labor laws, and business environment
What is a stock dividend? a. Dividend paid in cash b. Dividend pain in the form of additional shares of stock c. Dividend paid in the form of assets d. Dividend paid in gold
b. Dividend pain in the form of additional shares of stock
The current exchange rate between the US dollar and the Canadian dollar is 1 USD to $1.26. If 1 USD equals 1.26 CAD how many U.S dollars can you purchase for 1 Canadian dollar?
$1 USD / $1.26 CAD = $0.7936 *$0.7936
How much of the forecasted net income should be paid out as dividends? Capital budget: $800,000 Target capital structure (40% debt, 60% equity) Forecasted net income: $600,000
20%
How much is the total amount of the accounts receivable based on the information given below? $17,000 sales Amount of days = 18
306,000
T/F: Cash Budgets are Prepared Monthly.
False
The following are examples of marketable securities EXCEPT? A. Stocks B. Bonds C. SLGS D. ETF
C. SLGS
May wants to find the value of a bond. She knows that the market rate of interest is 12%. She knows that $150 of interest is paid each year and the par value of the bond is $1,500. The bond will mature in 5 years. What is the price of the bond, given that t = 1?
Σ INT/(1 + rd)t + M/(1 + rd)N INT = Dollars of Interest Paid per Year rd = Bond's Market Rate of Interest M = Par, or Maturity, Value of the Bond N = Number of Years Before Bond Matures INT = $150 rd = 12% M = $1,500 N = 5 = $150/(1 + 0.12)1 + $1,500/(1 + 0.12)5 = $150/(1.12)1 + $1500/(1.12)5 = $150/1.12 + $1500/1.7623416832 = $133.928571 + $851.140284 = $985.07
face amount of the bond, which is paid at maturity a. Coupon interest rate b. Par value c. Maturity rate d. Issue date
b. Par value
Which of the following is correct? a. Longer maturity bonds have low price risk. b. Longer maturity bonds have high reinvestment risk. c. Longer maturity bonds have low reinvestment risk. d. Shorter maturity bonds have high price risk.
c. Longer maturity bonds have low reinvestment risk.
Which of the following is a approach for Estimating the Intrinsic Value of a Common Stock? a. Discounted dividend model b. Corporate valuation model. c. Models based on market multiples d. All of the statements mentioned
d. All of the statements mentioned
Which type of companies like cash income? a. Pension funds b. Retired Individuals c. University endowment funds d. All of the statements mentioned
d. All of the statements mentioned
Which one of these is NOT a form of project risk? a. Stand-alone risk b. Corporate risk c. Market risk d. Independent risk
d. Independent risk
Purple Feet Wine, Inc., receives an average of $218,400 in checks per day. The delay in clearing is typically 2.6 days. The current interest rate is .0085 percent per day. Assume each month has 30 days. What is the highest daily fee the company should be willing to pay today to eliminate its float entirely?
*48.27 Maximum daily fee = ($218,400 x 2.6) x 0.0000855 = $48.27
Why is a call provision advantageous to a bond issuer? When would the issuer be likely to initiate a refund call?
A call provision is a provision in a bond contract that gives the issuing corporation the right to redeem the bonds under specified terms prior to the normal maturity date. The call provision generally states that the company must pay the bondholders an amount greater than the par value if they are called. If a company sold bonds when interest rates are relatively high and the issue is callable, then the company could sell a new issue of low-yielding securities if and when interest rates drop. The proceeds of the new issue would be used to retire the high-rate issue, and thus reduce its interest expense. The call privilege is valuable to the firm but detrimental to long-term investors, who will be forced to reinvest the amount they receive at the new and lower rates
Define, explain, and give examples of cross-rates and how it is used.
A cross-rate is the exchange rate between any two currencies. An example of how the cross-rate is used would be when determining how much American dollars can be purchased with yen. The cross-rate provides a way to determine the difference between currencies.
Define, explain and give examples of mutually exclusive projects?
A mutually exclusive project is two or more projects where only one project can be selected. The project that is selected is the one that provides the highest net present value. An example of a mutually exclusive project will be the government considering building a bridge or a tunnel in the same location. After calculating the project's net present value the government will choose the one with the highest net present value.
Which of these is a normal cash flow? A) - + + + + + + B) - - + - + - - C) - + + + + + - D) + - - - + - - -
A) - + + + + + +
T/F: The target cash balance is typically (and logically) set so that it does not need to be adjusted for either seasonal patterns or unanticipated random fluctuations
False
T/F: The three types of externalities include negative within-firm externalities, positive within-firm externalities, and social externalities.
False
T/F: There is no risk involved in investing in a particular country
False
A stock has a beta of 2.3, the risk-free rate is 7.0%, and the market risk premium is 5.5%. What is the stock's required rate of return?
Formula: (Risk free rate + Beta x Market risk premium) 7% + 2.3 x 5.5% = 19.65%
Toyota reports a net income of $900,000 and issues $90,000 in dividends. Calculate the payout ratio for the given information.
Formula: Payout ratio= Total dividends / Net Income PR= $90,000 / $900,000 = 10% PR= 10%
An investor currently holds a bond whose par value is $100. The bond is currently priced at a discount of $95.92, matures in 30 months, and pays a semi-annual coupon of 5%. Calculated the current yield of the bond.
Formula: Yield = Coupon x par value divided by market price (5% coupon x $100 par value) / $95.92 market price = 5.21%
The risk-free rate is 3%, and the market risk premium (rM - rRF) is 4%. Stock A has a beta of 1.2, and Stock B has a beta of 0.8. What is the required rate of return on each stock?
RPm = rM - rRF = 4% rA = rRF + RPm(bA) = 3% + 4%(1.2) = 7.8% rB = rRF + RPm(bB) = 3% + 4%(0.8) = 6.2%
Firm A's addition to retained earnings is expected to be $50 million. It's target capital structure consists of 30% debt, 3% preferred stock, and 63% equity
Retained earnings Breakpoint= Addition to retained earnings for the year/ Equity Fraction $50 million /0.63 *$79.4 million
Define, explain, give examples of what are the three different types of risk analysis in capital budgeting
Stand-Alone Risk: the risk an asset would have if it were a firm's only asset and if investors owned only one stock. Corporate, or within-firm, risk: risk considering the firm's diversification, but not stockholder diversification. Market, or beta, risk: considers both firm and stockholder diversification
Define and provide examples of Stock Splits and Stock Dividends.
Stock Split is when a firm takes action to increase the number of shares outstanding by providing each stockholder two new shares for each one previously held. For example, if you own one share of a company, you will receive an additional stock. Stock Dividends are dividends pain in the form of additional shares of stock rather than in cash. An example would be if a company wants to pay dividends in the form of more ownership rather than in cash.
Define, explain, and give examples of term structure of interest rates
Term structure of interest rates is described as the relationship between long- and short-term rates. The term structure of interest rates is important to corporate treasures deciding whether to borrow by issuing long or short-term debt and to investors who are deciding whether to buy long or short term bonds. An example is The U.S. Treasury Yield Curve
Define, Explain, and give an example of the Capital Asset Pricing Model.
The Capital Asset Pricing Model is what describes the relationship between systematic risk and expected return for assets, particularly stocks. This model is widely used throughout finance for pricing risky securities and generating expected returns for assets given the risk of those assets and cost of capital. An example of this could be the following: imagine an investor is contemplating a stock worth $100 per share today that pays a 3% annual dividend. The stock has a beta compared to the market of 1.3, which means it is riskier than a market portfolio. Also, assume that the risk-free rate is 3% and this investor expects the market to rise in value by 8% per year. The expected return of the stock based on the CAPM formula is 9.5%: 9.5% = 3% + 1.3 X ( 8% - 3% )
T/F: The four factors that affect the cost of money are production opportunities, time preferences for consumption, risk, and inflation
True
An average-risk stock has a beta of what? a. 3 b. 5 c. 1 d. 0
c. 1
what the stock price in 3 years should be (^P3 )? Given D1 = $2.00, beta = 0.9, risk-free rate = 5.6%, market risk premium = 6%, current stock price = $25, and the market is in equilibrium
required return = expected return = 5.6% + 6%*0.9 = 11% Expected dividend yield = D1/P0 = 2/25 = 8% Expected capital gains yield = g = 11% - 8% = 3% Expected stock price after 3 years ^P3 = 25*(1+3%)3 = $27.32
Alex expects her stock portfolio to return 12% next year. If returns on risk-free Treasury notes are, say, 5%, and your portfolio carries a 0.06 standard deviation, Sharpe ratio formula
(0.12 - 0.05)/0.06 = 1.17
What are the advantages of repurchases?
- Stockholders can tender or not. - Helps avoid setting a high dividend that cannot be maintained. - Repurchased stock can be used in takeovers or resold to raise cash as needed. - Remove a large block of stock "overhanging" the market and depressing the stock price. - Stockholders may take this as a positive signal; management thinks stock is undervalued.
Kerbel Enterprises has a beta of 1.75, the real risk-free rate is 2.50%. Investors expect a 3.00% future inflation rate and the market rate of return is 8.00%. What is Kerbel's required rate of return?
2.50+1.75 * (8.00-2.50) = 12.125
Name three factors that affect the cost of capital and are the firm's control.
A firm can directly affect its cost of capital by (1) changing its capital structure, (2) by changing its dividend payout ratio, and (3) by altering its capital budgeting decision rules to accept projects with more or less risk than other previous projects
What is the YTM on the following bond? 30-year; 10% annual coupon; $1,000 par value; selling for $950.
Annual coupon=1000*10%=100 Approx Yield to maturity=[Annual coupon+(Face value-Present value)/time to maturity]/(Face value+Present value)/2 =[100+(1000-950)/30]/(1000+950)/2 which is equal to 2.6
ARTICLE URL: https://www.wsj.com/articles/fed-minutes-flag-value-of-liquidity-tools-sketch-balance-sheet-plans-11649277584 How many Treasury securities is the Federal reserve planning to sell? A. 9 trillion dollars B. 60 billion dollars C. 10 trillion dollars D. 100 million dollars
B. 60 billion dollars
Which of the following is NOT a capital component when calculating the weighted average cost of capital (WACC) for use in capital budgeting? A. Long-term debt B. Preferred Stock C. Accounts Payable D. Retained earnings E. Common stock
C. Accounts Payable
In what country are workers asking for a 4 day work week? A. China B. Cuba C. Belgium D. Ukraine
C. Belgium
Which form of exchange rate is not regulated by the government, so supply and demand in the market determine the currency's value? A. Fixed exchange rate B. Forward exchange rate C. Floating exchange rate D. Spot exchange rate
C. Floating exchange rate
The price paid for the rental of borrowed funds (usually expressed as a percentage of the rental of $100 per year) is commonly referred to as the A. Inflation Rate B. Exchange Rate C. Interest Rate D. Aggregate Price Level
C. Interest Rate
Which bonds pay no annual interest but are sold at a discount below par? A. Premium Bonds B. Fixed Rate Bonds C. Discount bonds D. Zero coupon bonds
D. Zero coupon bonds
Rock Window Company have a sale of $16 million per year, all on credit terms calling payment within 60 days, and its accounts receivable are $3.5 million. What is Rock's DSO, what would it be if all customers paid on time, and how much capital released if Rock could take action that led on-time payments?
Days of Sales Outstanding= accounts receivable/ average sale\ times 365 days DSO= $ 3, 500, 000/ $16, 000, 000 DSO= 0.22 x 365 DSO= 80.30 days Accounts receivable= Payment Period x sales/365 A/R= 60 x $16, 000, 000/365 A/R= $2, 630, 136.99 Capital Released= Total Account Receivable - Account Receivable if all customers paid on time. Cap. Released= $3, 500, 000 - $ 2, 630, 136.99 Cap. Released= $869, 863.01
Define, explain, and give examples of debentures
Debenture is an unsecured bond, and as such it provides no specific collateral as security for the obligation. Therefore, debenture holders are general creditors whose claims are protected by property not otherwise pledged. Examples are Treasury bonds and Treasury bills.
Fernando Designs is considering a project that has the following cash flow and WACC data. What is the project's discounted payback? WACC: 10% Year 0 1 2 3 Cash Flows -900 600 600 600
Discounted cash flow Y1 = 600 / (1+10%) = $545.45 Discounted cash flow Y2 = 600 / (1+10%)^2 = $495.87 Discounted cash flow Y3 = 600 / (1+10%)^3 = $450.79 Amount recovered in Y1 = -$900 + $545.45 = -354.55 Discounted payback = 1 + (354.55 / 495.87) = 1.715 years
T/F: A stand-alone risk is measured by the firm's expected future returns
False
T/F: Capital gains yield is the capital gain during a given year divided by the ending price.
False
A cut of sirloin costs 36.75 pound in Britain and costs 25.65 dollars in the United States. With this information, how many British pounds are required to purchase one U.S. dollar, assuming that purchasing power parity (PPP) holds? (round to the nearest hundredth)
Formula: Cost of sirloin in pounds / Cost of sirloin in dollars = Pounds required 36.75 / 25.65 = 1.433
Find the current yield and the capital gains yield for a 10-year, 7% annual coupon bond that sells for $550, and has a face value of $1,000.
Formula: Yield = Coupon x par value divided by market price Current Yield = $70/$550 = 0.1273 = 12.73%
In your own words define and explain what a global or multinational corporation is. Provide three examples of why a company would like to become global.
Global or multinational corporations are companies that operate in an integrated fashion in a number of countries. In other words, is when a firm operates in at least one more country besides the one where the company originated, meaning if I am a US company, in order to be considered a global company I would need to have another firm in another country plus the domestic one. Three examples of why companies would like to become global is to gain more production efficiency, seek new markets, to seek new raw materials, technologies, and labor at lower costs, to avoid political regulations in their current country, etc.
Define, explain, and give examples of the difference between Market Risk and Diversifiable Risk?
Market Risk and Diversifiable Risk are parts of a portfolio's total risk. Diversifiable risk is the risk that is eliminated by adding stocks; while market risk is the risk that remains even if the portfolio holds every stock in the market. Diversifiable risk is caused by random, unsystematic events like lawsuits, strikes and winning/losing of a contract. Market risk is caused by events that affect all firms like war, inflation, recessions.
Define explain and give an example of opportunity cost?
Opportunity cost is the value of the next-best alternative when a decision is made; it's what is given up. For example, If I have the opportunity to go to a party OR a concert, the option that I don't choose would be the opportunity cost of my decision.
Define, explain and give examples of Opportunity Costs.
Opportunity costs represent the potential benefit that an investor, individual or organization misses out on when choosing one alternative over another. An example would be a farmer who decided to plant wheat, the opportunity cost would be the difference between what he could reap given that he plants orange trees, which would be a different use of the resources and land.
Tresnan Brothers is expected to pay a $1.80 per share dividend at the end of the year (i.e., D1=$1.80). The dividend is expected to grow at a constant rate of 4% a year. The required rate of return on the stock, r , is 10%. What is the stock's current value per share?
P = D/(k-g) P= stock price D= dividend k= required rate of return g= growth rate (g < k) P = 1.80/(10% - 4%) P = 1.80/(0.10 - 0.04) P = 1.80/0.06 P = $30
In the market, 18.99 Mexican pesos can be exchanged for 1 U.S dollar. A regular brand wallet cost around $12 in the United States. If purchasing power parity (PPP) holds, what should be the price of the same wallet in Mexico?
Price of Wallet in Mexico= Amount of Mexican Pesos (in the spot market) x The cost in the U.S. = 18.99 Pesos x $12 = 227. 88 Mexican Pesos
A U.S. Consumer observes that a phone costs $700. Currently, 1 euro can be exchanged for $1.1788. How many euros you expect to pay for the same phone in Europe?
Purchasing power parity formula Ph= (Pf)(Spot rate) $700= Pf(1.1788) Pf= $700/$1.1788 Pf= 593.82 euros.
Define, explain, and give examples of Secured loans and Unsecured loans.
Secured loans are loans that are backed by collateral such as Accounts Receivable. Unsecured loans are loans that do not have any collateral supporting them. Examples of secured loans are Vehicle loans, Mortgage loans, Share-secured or savings-secured Loans, Secured credit cards, and Secured lines of credit. Examples of unsecured loans are personal loans and student loans
Define, explain and give examples of sensitivity analysis.
Sensitivity analysis measures the effect of changes in a variable on the project's NPV. To perform a sensitivity analysis, all variables are fixed at their expected values, except for the variable in question which is allowed to fluctuate. One example of sensitivity analysis is an analysis of the effect of including a certain piece of information in a company's advertising, comparing sales results from ads that differ only in whether or not they include the specific piece of information.
SpaceX Corp. is considering investing in two projects: Solar Energy and Wind Energy. Solar Energy has a 7-year term and a net present value of $100,000. Wind Energy has a 9-year term and a net present value of $120,000. Both projects are discounted at a 6 percent rate. Which of the two projects will have a higher equivalent annual annuity?
Solar Formula: C= (r x NPV) / (1- (1+ r) ^-n) Solar= (0.06 x $100,000) / (1+ 0.06)-7)= $17,914 Wind= (0.06 x $120,000) / (1+ 0.06)-9)= $17,643
Define, explain, and give examples of sunk costs
Sunk costs is cash that has been spent and cannot be recovered whether or not the project has been accepted. Because sunk costs have been incurred in the past and cannot be recovered in the future, they are not applied to the capital budgeting analysis. An example of a sunk cost is the production costs for Tessera Inc.'s pens. The cost for renting the factory to manufacture the pens is not relevant to future business decisions. However, the factory rent and cost of machines becomes relevant in capital budget analysis when Tessera Inc. needs to decide whether to stop manufacturing pens in that specific factory. They would have to take into account the revenue they would no longer have when they stop utilizing the factory and machines
You read in The Wall Street Journal that 30-day T-bills are currently yielding 5.8%. Your brother-in-law, a broker at Safe and Sound Securities, has given you the following estimates of current interest rate premiums: Inflation premium=3.25% Liquidity premium=0.6% Maturity risk premium=1.85% Default risk premium=2.15% Based on this data, what is the real risk-free rate of return?
T-bills= rRF=r*+Inflation Premium 5.8%=r*+3.25% r*=5.8%-3.25% r*=2.55%
Define, Explain and give an example of Yield to Maturity.
The promised rate of return earned on a bond if it is held to maturity. Suppose you were offered a 14-year, 8% annual coupon, $100 par value bond at a price of $1,422.52. What interest rate would you earn on your investment if you bought the bond, held it to maturity, and received the promised interest payments and maturity value; In other words, the Yield to Maturity.
Consider a business with a capital budget of $10,000,000, It has an equity capital ratio of 40%. The company makes a net income forecast of $4,000,000. Also, the business reports total equity of $3,200,000. Find total equity, residual dividend paid, and payout ratio.
Total Equity = Total Assets - Total Liabilities Dividends = Net income - (Target equity ratio x total capital budget) Dividend Payout Ratio Formula = (Total Dividends/Net income) x 100 Total Equity = 40% x $10,000,000 = $4,000,000 Residual dividend paid = ($4,000,000 - $3,200,000) = $800,000 Payout ratio = ($800,000/$5,000,000) = 16% *$4,000,000 & $800,000 & 16%
T/F: A firm's primary objective is to maximize its shareholder's value
True
T/F: Diversification will normally reduce the riskiness of a portfolio of stocks.
True
T/F: The three techniques used to assess stand-alone risk are: sensitivity analysis, scenario analysis, and Monte Carlo simulations.
True
T/F: The three types of project risks are stand-alone risk, corporate risk, and market risk.
True
T/F: U.S. firms also invest and raise capital throughout the world besides just in the U.S.
True
ARTICLE URL: https://www.fool.com/the-ascent/personal-finance/articles/are-financial-literacy-classes-coming-to-high-schools-around-the-country/ According to the Council for Economic Education how many states require high schoolers to take personal finance courses to graduate? a. 14 b. 16 c. 21 d. 50
c. 21
What type of note is a Commercial Paper? a. Treasury Note b. Convertible Note c. Promissory Note d. Structured Note
c. Promissory Note
Which of the following are principal types of stock repurchases? a. Situation where a firm has cash available to distribute to its stockholders, but repurchases shares to distribute to its stockholders rather than paying cash dividend. b. Situation where the firm concludes that its capital structure is heavily weighted with equity, so it sells debt to use the proceeds to repurchase its stock. c. Situation where the firm has issued options to employees, and it uses open market repurchases to obtain stock for use when the options are exercised. d. All of the statements mentioned
d. All of the statements mentioned
Define, explain, and give examples of the effect of a call provision.
gives the issuer the right to call the bonds for redemption (helps the issuer, but hurts the investor).states the issuer must pay the bondholder an amount greater than the par value; this extra amount is called the "call premium". final amount paid = par value + call premium. For example, let's consider an XYZ bond issued in 2005 and maturing in 2023. The indenture might stipulate that XYZ Company may call the bond in the second, fourth, and tenth year.
Ryan is currently working on a project. For his project he needs to find the interest rate on a short-term, default-free U.S. Treasury bill given that the real risk-free rate is 1.8% and inflation is expected to be 1.3% during the next year. Given that information, what is the interest rate on the U.S. Treasury Bill?
rT-bill = rRF = r* + IP rRF = Risk-Free Rate r* = Real Risk-Free Rate IP = Inflation Premium r* = 1.8% IP = 1.3% rT-bill = 1.8% + 1.3% rT-bill = 3.1%
What is the risk premium on a firm's stock over its own bond range? A) 3%-5% B) 2%-4% C) 1%-3% D) 5%-7%
A) 3%-5%
T/F: The corporate valuation model can be used only when a company doesn't pay dividends
False
T/F: A company has to pay taxes on an asset if its salvage value is greater than the book value.
True
T/F: A discount bond is a bond issued for less than its par face value.
True
T/F: Dividend policy is the decision to pay out earnings versus retaining and reinvesting them?
True
T/F: Outside investors, corporate insiders, and analysts usually do not use a variety of approaches to estimate a stock's intrinsic value.
False
T/F: Risk-averse investors like risk and require low rates of return as inducement to buy riskier securities.
False
ARTICLE URL: https://fortune.com/2022/03/29/president-biden-billionaire-minimum-income-tax-would-raise-360-billion-how-does-it-work/ Define, explain, and give examples of this tax being implemented?
"The budget proposes that households worth more than $100 million pay at least 20% in taxes on both income and "unrealized gains"— the increase in an unsold investment's value. For many wealthy individuals, the administration says, that "true income" never gets taxed since it can be held onto for decades and sometimes generations." For example, investments passed down by a person's grandparents would now be taxed at 20%.
Assume that a firm owns a building and equipment with a market (resale) value of $10 million. The property is not being used, and the firm is considering using it for a new project. The only required additional investment would be $100,000 for working capital, and the new project would produce a cash inflow of $50,000 forever. If the firm has a WACC of 10% and evaluates the project using only $100,00 of working capital as the required investment, what would the NPV be? Should it embark on the project?
$50,000/0.10 - $100,000 = $500,000 - $100,000 = *$400,000. No, they should not embark on the project because the property can be sold for $10 million, which is much more than $400,000
Find the expected rate of return of the following investment. You invest $1 million into N&N research. If the research is successful your stock will go up to $2.1 million. However if the research fails the value of your stock goes to $0. You regard N&N's chances of success or failure as 50-50.
0.5($0) + 0.5($2,100,000) = $1,050,000. Expected rate of return = (expected ending value - cost) / cost = ($1,050,000 - $1,000,000) / $1,000,000 = 5%
You can purchase a building for $375,000. The investment will generate $25,000 in cash flows during the first three years. At the end of three years you will sell the building for $450,000. What is the IRR on this investment?
0= - 375,000 + 25,000/ (1 + IRR)1 + 25,000/ (1 + IRR)2 + 475,000/ (1 + IRR)3 *IRR = 12.56%
Define, explain, and give examples of the 5 key concepts to consider for both individual and corporate investors?
1. Trade off between risk and reward. Average investor dislikes risk but likes reward. High risk = high reward. 2. Diversification is crucial 3. Real Returns are what matter 4. Risk of an investment often depends on how long one plans on holding the investment 5. Past gives insight on future, but no guarantee on past repeating itself.
Assume that the rate on a 1-year bond is now 6%, but all investors expect 1-year rates to be 7% one year from now and then to rise to 8% two years from now. Assume also that the pure expectations theory holds, hence the maturity risk premium equals zero. What should the interest rate be today?
6% + 7% + 8 % = 7%
Group 4 Corporation has an inventory conversion period of 64 days, an average collection period of 28 days, and a payable deferral period of 41 days. What is the length of the Cash Conversion Cycle(CCC)? Show your calculations.
64+28-41 = 51
Define, explain, and give examples of call provisions and sinking fund provisions
A call provision is a provision in many corporate and municipal bonds that gives the issuer the right to call the bonds of redemption. It generally states that the issuer must pay the bondholders an amount greater than the par value if they are called. The additional sum is called a bond premium. Borrowers like this provision because it allows for refunding operations where debt is paid off and borrowed at a cheaper rate. Issuers face increased risk with call provisions. An example of a call provision is a bond provision that states that the borrowing company can call for the redemption of the bond five years after issuance and pay the issuer the par value plus one year's interest (call premium). Sinking fund provisions are bond provisions that facilitate the orderly retirement of the bond issue. They require the issuer to buy back a percentage of the issue each year. A failure to meet this provision is considered a default and can lead to bankruptcy. This means that a sinking fund is a mandatory payment that can be made by calling bonds for redemption at par value or buying bonds on the open market. An example of a sinking fund provision is an issuance of $150,000 of 10-year bonds with the requirement that it must call 5% of the issue ($7500 of bonds) each year.
Define, Explain, and give an example of a Common Stockholder.
A common stockholder is someone who has purchased at least one common share of a company. Common stockholders have a right to vote on corporate issues and are entitled to declared common dividends. An example would be, if a company had 100 shares outstanding, one share would be equal to one percent ownership of the company.
Define, explain, and give examples of the ways that a firm can affect its cost of capital.
A firm can directly affect its cost of capital in three primary ways: by changing its capital structure, by changing Its dividend payout ratio, and by altering its capital budgeting decision rules to accept projects with more or less risk than projects previously undertaken. Capital structure impacts firms' costs of capital and if the firm changes its structure, the weights used to calculate the WACC will change. Dividend policy affects the amount of retained earnings available to the firm; The higher the dividend payout ratio, the smaller the addition to retained earnings, the higher the cost of equity, and therefore the higher the firm's WACC will be. The firm's capital budgeting decisions can also affect its costs of capital, These cost rates reflect the riskiness of the firm's existing assets.
Define, explain, and give examples of the different ways a firm will categorize their projects.
A firm will categorize their projects in seven different ways: 1. Replacement: needed to continue current operations. One category consists of expenditures to replace worn out or damaged equipment required in the production of profitable products 2. Replacement: cost reduction. This category includes expenditures to replace serviceable but obsolete equipment and thereby to lower costs 3. Expansion of existing products or markets. These are expenditures to increase output of existing products or to expand retail outlets or distribution facilities and markets now being served 4. Expansion into new products or markets. These investments relate to new products or geographic areas, and they involve strategic decisions that could change the fundamental nature of the business 5. Safety and/or environmental projects. Expenditures necessary to comply with government orders, labor agreements, or insurance policy terms fall into this category 6. Other projects. This catchall includes items such as office buildings, parking lots, and executive aircraft 7. Mergers. In a merger, one firm buys another one
Define, explain, and give examples of a foreign trade deficit and how that can influence interest rate levels.
A foreign trade deficit is when a country imports more goods than they do with exports. This means that a country is buying more goods than they are selling to others around the world. Due to the excess of imports, a country would need to be financed which means that they need to borrow money from countries that have surpluses in exports since they are not making enough money for all that they are buying. An example of a foreign trade deficit would be if a country is going through some sort of crisis that has led them to be unable to produce goods that they can export and instead they are buying from other countries which leads to having more imports than exports. This affects interest rates because if a country has a trade deficit, they would likely need to borrow more money from other countries and interest rates depend on other countries. Therefore, if interest rates are increasing in other countries, then that means it would increase in the home country as well for both the debtor and creditor countries.
Define and explain what a line of credit is in your own words, and how it is different from a bank loan. Provide an example that shows how a line of credit would work on a daily basis.
A line of credit is a type of debt where the bank agrees to lend a person a specific maximum amount of money during a designated period of time. Unlike a bank loan where the person gets all the money at the beginning and at the end pays back the full amount plus interest, with a credit loan the person can get a certain amount whenever they need to, which creates the advantage of only having to pay interest on that money. Lines of credit are similar to credit cards. An example of a line of credit is if I want to buy furniture for my house and I were to open a line of credit of $10,000. This month I could use $500 to buy my sofa, three months from now $1000 and so for instead of getting all the $10,000 at once.
Starbucks recent CEO has returned and is prioritizing matters that are unusual for a typical CEO. What is he prioritizing? A. Employees over Stock Price B. Adding new items to the menu C. Increasing sales to minority groups D. Decreasing the number of customer feedback
A. Employees over Stock Price
Define, explain, and give an example of the similarities and differences between a line of credit and revolving credit.
A line of credit is an agreement between bank and borrower that states the maximum amount the bank extends to the borrower. Revolving Credit is a formal line of credit. The difference between the two is that the bank has a legal obligation to honor the line of credit and receives a commitment fee in a revolving credit agreement. The similarity is that both are lines of credit available to customers.
Define, explain, and give examples of a mortgage bond.
A mortgage bond is when specific assets such as property are used as a security for the bond instead of just money. Therefore, if a company or person happens to default on the bonds which means you are unable to make any payments, then the assets would be used as payment. If it was a piece of property then the bondholders could foreclose on it and then sell it to make up for the rest of the payments. An example of a mortgage bond is if a company needs 4 million dollars, and $2 million in bonds were issued with a mortgage on a property. If the company defaults on those bonds, then the property is foreclosed and sold. A mortgage bond also comes with an indenture which is a document that explains the rights of the bondholder and corporation.
Define, explain, and give an example of the similarities and differences between a multinational corporation and a global corporation.
A multinational corporation or company (MNC) is an enterprise or corporation which is involved in the manufacture of goods and services in two or more countries. A global corporation, on the other hand, is an enterprise or company which is also involved in trade relations with other countries. Unlike MNCs, global companies do not have official headquarters, and they are composed of autonomous units which are parts of one parent or global company. Both are similar in working with other countries yet different in how they operate.
Define, Explain, and give an example of a promissory note.
A promissory note is a signed document containing a written promise to pay a stated sum to a specified person or the bearer at a specified date or on demand. For example, you lend your friend $3,000 and he agrees to repay you by December 1. The full amount is due on that date, and there is no payment schedule involved.
Define, give advantages and disadvantages of, and an example of a stock repurchase by a company.
A stock repurchase is a transaction when a firm buys back shares of its own stock. This is done to decrease the shares outstanding, increase earnings per share, and increase the stock price. This can be positive also by creating positive signals by investors that the company believes its shares are undervalued, produce large-scale changes in capital structure, and remove stock that is "overhanging" and keeping the market share down. However, repurchasing stock may be negative as companies could pay too high for a repurchased stock and the selling stockholders may not be fully aware of all implications of the repurchase. An example would be Apple repurchasing its stock to combat "overhanging" stock lowering the market share.
Define, explain, and give examples of Stock Split and Stock Dividend.
A stock split is a measure taken by a firm to increase the number of shares outstanding by issuing additional shares to its stockholders. When a company undergoes a stock split, it uses a certain ratio to designate the number of new shares each outstanding share will be divided into. There are ratios like two-for-one, three-for-one, one-and-a-half-for-one, etc. For example, in August 2020, Apple used the 4-for-1 stock split ratio where each share was trading for about $540. After the split, the price per share was $135. A stock dividend is a dividend payment to stockholders in the form of additional shares rather than using cash. A company often issues a stock dividend when it has a limited supply of liquid cash reserves. For example, if a company wants to compensate its investors but doesn't have spare cash to use to compensate, then it can use stock dividends.
Define, explain and give an example of what a Stock Split is
A stock split is an action by a company that increases the number of shares outstanding by giving stockholders 2 new shares for each one formerly held. A stock split is when the stock price of a company gets too high, so the company splits the stock in order to make it appealing to a wider range of investors. An example of a stock split would be when TESLA did a 2-1 stock split in 2020, another example would be AMAZON announcing the 20-1 stock split in 2022.
Define, explain, and give examples of a sunk cost
A sunk cost is a cash outlay that has already been incurred and that cannot be recovered regardless of whether the project is accepted or rejected. An example of a sunk cost is if Home Depot spent $2 million to investigate a potential new store and obtain the permits required to build it. The $2 million spent would be a sunk cost because the money is gone and will never come back regardless of whether the new store is built or not.
Define, explain and give an example of a sunk cost and an opportunity cost.
A sunk cost is a cost that a company has incurred that cannot be salvaged or other wise recovered regardless of a project's outcome or if the project is accepted or not. An opportunity cost is the cost of a missed opportunity for a company. It is basically the money that a company could have earned if they went with an alternative project. Since sunk costs are past costs, they have no weight on decision making but opportunity costs are very important when it comes to decision making since they are used in capital budgeting for cost comparisons. An example of a sunk cost would be the money a company spent on finding a new location for a store and the cost of obtaining the permits to build it. An opportunity cost would be the money that the company could've gained from selling a piece of land compared to the cost and revenue from using the land to build a new store.
Define, explain and give an example of a takeover and a proxy fight.
A takeover is when another company decides to try and take over the company by buying a majority of outstanding shares in order to have a controlling share in the company. A proxy fight is when a company is not performing very well, a person or a group can contract another company, known as a proxy, to gain control of the company and vote to replace the current management. A proxy is when shareholders give their voting rights to a specific company or person to act in their interest. An example of a proxy fight is when Third Point wrote a letter to the shareholders at Campbell's soup to express their dissatisfaction with the company leadership. A popular example of a takeover would be Kraft Foods hostile takeover of Cadbury Chocolate.
How many waivers did the Biden administration renewed from tariffs imposed on goods coming from China? A. 352 B. 200 C. 300 D. 400
A. 352
What is a stock's beta meaning? A. A way of measuring a stock's volatility compared with the overall market's volatility. B. A stock about to be released C. Measurement of its IPO price D.A metaverse stock
A. A way of measuring a stock's volatility compared with the overall market's volatility.
Lenders that ask for collateral on their short-term loans typically use: A. Accounts Receivable B. Equipment C. Land D. Stake in the company
A. Accounts Receivable
When there is a decrease in cash flows that a company would normally have due to a new project, this is called A. Cannibalization B. Sunk cost C. Positive within-firm externality D. Opportunity cost
A. Cannibalization
ARTICLE URL: Starbucks Wants to Ditch Those Disposable Cups for Good - WSJ Starbucks is looking to become more environmentally conscious within the next three years by ________. A. Eliminating single use cups B. Using locally sourced coffee beans C. Donating leftover food to food banks D. Switching to paper straws
A. Eliminating single use cups
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? A. If market interest rates remain unchanged, the bond's price one year from now will be lower than it is today. B. The bond is currently selling at a price below its par value. C. The bond should currently be selling at its par value D. If market interest rates decline, the price of the bond will also decline
A. If market interest rates remain unchanged, the bond's price one year from now will be lower than it is today.
When investors are looking for a stock to invest then, they should focus on its: A. Intrinsic value B. Stock Price C. The company's capital structure D. Dividend rate
A. Intrinsic value
A sunk cost is an outlay that was incurred in the past and can be recovered A. Never B. After 24 hours C. As long as it is recorded in the balance sheet D. If the project under consideration was accepted
A. Never
The total amount of capital that can be raised before new stock must be issued is defined as the A. Retained earnings breakpoint B. Capital gains C. Minimum stock level D. Equity equilibrium point
A. Retained earnings breakpoint
Which of the following best describes the Payables Deferral Period? A. The average length of time between the purchase of materials and labor and the payment of cash for them. B. The average length of time required to convert the firm's receivables into cash, that is, to collect cash following a sale. C. The average time required to convert raw materials into finished goods and then to sell them. D. The length of time funds are tied up in working capital, or the length of time between paying for working capital and collecting cash from the sale of the working capital.
A. The average length of time between the purchase of materials and labor and the payment of cash for them.
What is one of the primary reasons why companies become "global" A. To seek production efficiency B. To stop paying taxes C. To take away jobs from other countries and hurt their economy D. To provide jobs in your own country
A. To seek production efficiency
Why would a firm want to expand into another country? A. To seek raw materials and new technology B. It just received a loan from the local commercial bank C. It recently went public and raised $500m D. The firm was on the front page of the local newspaper
A. To seek raw materials and new technology
ARTICLE URL: https://www.wsj.com/articles/us-inflation-consumer-price-index-march-2022-11649725215 What is causing inflation to hit a four-decade high? A. War Tensions between Russia and Ukraine B. Covid-19 C. Paused student loans D. Stock Market Crash
A. War Tensions between Russia and Ukraine
If Box Co. can borrow at an interest rate of 8%, and its marginal federal-plus-state tax rate is 25%, its after tax cost of debt will be...?
After-tax cost of debt = Interest rate on new debt - tax savings After-tax cost of debt = rd - rdT After-tax cost of debt = rd(1-T) After-tax cost of debt = 8%(1.0 - 0.25) After-tax cost of debt = 8%(.75) After-tax cost of debt = 6%
Doug's Pet Supply can currently borrow at an interest rate of 7%. The CEO, Doug, would like to know what the after-tax cost of debt would be if his company decided to borrow at this rate. The federal-plus-state tax rate is set at 25%. He knows that interest is tax deductible, and he would be willing to borrow if the after-tax cost of debt was equal to or less than 5%. What is the after-tax cost of debt if Doug's Pet Supply were to borrow at 7%? Following Doug's criteria, should his company borrow?
After-tax cost of debt = rd *(1 - T) rd = Interest rate on new debt T = Tax Rate rd = 7% T = 25% After tax-cost of debt = 7%*(1.0 - 0.25) = 7%*(0.75) = 5.25%
The Everdeen Company's currently outstanding bonds have a 4% coupon and a 17% yield to maturity. Everdeen believes it could issue new bonds at par that would provide a similar yield to maturity. If its marginal tax rate is 30%, what is Everdeen's after-tax cost of debt?
After-tax cost of debt= 𝑟 𝑑 (1 − 𝑇) After-tax cost of debt= 17%(1 − 30%) After-tax cost of debt= 17%(1 − 0. 3) After-tax cost of debt= 17%(0. 7) After-tax cost of debt= 17%(0. 7) After-tax cost of debt= 11.9%
Define, explain, and give examples of an Operating Plan, a Financial Plan, and explain why they are important
An operating plan provides management detailed implementation guidance, based on the corporate strategy, to help meet the corporate objectives. A financial plan is a document that includes assumptions, projected financial statements, and projected ratios and ties the entire planning process together. Operation planning is important because it ensures that you can identify areas that aren't generating enough revenue as they should. Financial planning is important because it allows you to be in control of your income, expenses, and investments so that you can better manage your money. An example of an operating plan would include a strategy, action, target, responsibility, and date. Let's say a company wants to reduce costs, they would make an operating plan how they will go about this goal and find its pros/cons along with how long the project may take. An example of a financial plan would be if someone is opening a new business, they would keep track of all money coming in and out of their business and how to manage all their expenses.
What is the Gordon growth model? A. A model that determined the future growth of a company. B. A model that determines the intrinsic value of a stock based on a future series of dividends. C. A model that predicted the dividends of a company. D. A model that determines a company's growth alongside the overall market.
B. A model that determines the intrinsic value of a stock based on a future series of dividends.
What is the definition of Maturity Risk Premium? A. A premium that waits for maturity risk B. A premium that reflects interest rate risk C. A premium that has no interest rate D. The risk that a decline in interest rates will lead to lower income when bonds mature and funds are reinvested
B. A premium that reflects interest rate risk
What is a Marginal Investor? A. People who may have capital that they are willing to invest in your business but are new to investing. B. An investor who owns a significant amount of shares of one company and has an influence over its share price. C. Investors that limit the amount of hands-on management they personally provide to assets they own, adopting a buy-and-hold mentality that they expect to pay off in the long run. D. These are high net-worth individuals looking for brand-new businesses and startups that they believe will perform well in the long run.
B. An investor who owns a significant amount of shares of one company and has an influence over its share price.
Which of the following would be most likely to lead to a higher level of interest rates in the economy? A. The level of inflation begins to decline. B. Corporations step up their expansion plans and thus increase their demand for capital. C. The economy moves from a boom to a recession. D. Households start saving a large percentage of their income.
B. Corporations step up their expansion plans and thus increase their demand for capital.
Identify the firm's three major capital structure components. A. Percentages of Debt, Weighted Average Cost of Capital, Cost of Retained Earnings B. Debt, Preferred Stock, and Common Equity C. Cost of Preferred Stock, Cost of Retained Earnings, Cost of Capital D. None of the Above
B. Debt, Preferred Stock, and Common Equity
Which of the following is not considered to be a capital component? A. Preferred Stock B. Market risk C. Common equity D. Debt
B. Market risk
What is sunk costs? A. Money that is returned to the company. B. Money that a firm spends and cannot be recovered. C. Money that was stolen from the company. D. Money use to buy assets only.
B. Money that a firm spends and cannot be recovered.
Companies will use the following processes to screen projects and determine whether to accept or reject. Which is the best method? A. Bonds B. NPV C. stocks D. MIRR
B. NPV
What is the best method for deciding to accept or reject projects? A. Internal Rate of Return (IRR) B. Net Present Value (NPV) C. Modified Internal Rate of Return (MIRR) D. Regular Payback
B. Net Present Value (NPV)
In order to find net present value (NPV), the first step you must find is? A. Future value of cash flow B. Present value cash flow C. Future value of equity D. Present value of equity
B. Present value cash flow
What is a Collection Policy? A. The strength required of a customer's credit. For businesses, credit history, debt, and interest coverage and for individuals their credit score B. Procedure used to collect past due accounts. Can range between reminders by mail or being sent to collection agency C. Length of time buyers have to pay for purchases. D. Reduction in price given for early payments. Includes percentage of reduction and how rapid payment must be for to get discount
B. Procedure used to collect past due accounts. Can range between reminders by mail or being sent to collection agency
Project S and L both have an initial cost $10,000 followed by a series of positive cash inflows. Project S's undiscounted cash flow total $20,000 while L totals $30,000. With a WACC of 10%, the projects have identical NPVs. Which project is more sensitive to changes in the WACC. A. Project S B. Project L C. Both projects D. Neither project
B. Project L
Which risk would an asset have if it were a firm's only asset and if the investors only owned one stock? A. Corporate Risk B. Stand-Alone Risk C. Market Risk D. Common Risk
B. Stand-Alone Risk
The risk an investor would face if he or she held only one asset is called A. Portfolio risk B. Stand-alone risk C. Market risk D. Asset risk
B. Stand-alone risk
What is a Treasury Stock? A. Stock purchased in cash B. Stock repurchased by a firm C. Stock sold by a firm D. Stock purchased in crypto
B. Stock repurchased by a firm
What is the difference between devaluation/revaluation of a currency and depreciation/appreciation of a currency? A. The devaluation/revaluation of a currency refers to a decrease or increase in the foreign exchange value of floating currency. Depreciation/appreciation of a currency refers to the decrease or increase in the stated par value of a currency whose value is fixed. B. The devaluation/revaluation of a currency refers to the decrease or increase in the stated par value of a currency whose value is fixed. Depreciation/appreciation of a currency refers to a decrease or increase in the foreign exchange value of floating currency. C. The devaluation/revaluation of a currency refers to the speed in which currency can be converted. Depreciation/appreciation refers to how consumers spend their funds D. None of the ideas described.
B. The devaluation/revaluation of a currency refers to the decrease or increase in the stated par value of a currency whose value is fixed. Depreciation/appreciation of a currency refers to a decrease or increase in the foreign exchange value of floating currency.
What is Market Risk Premium? A. The minimum amount of profit (return) an investor will seek or receive for assuming the risk of investing in a stock or another type of security. B. The difference between the expected return on a market portfolio and the risk-free rate. C. The theoretical rate of return of an investment with zero risk. D. The return an investor receives after the rate of inflation is taken into account
B. The difference between the expected return on a market portfolio and the risk-free rate.
What is a forward exchange rate? A. The price of one country's currency in terms of another country's currency. B. The quoted price of a currency to be delivered at a specific date in the future. C. The quoted price of a currency to be delivered "on the spot" or within a very short period of time. D. Set by the government and is allowed to fluctuate slightly around the desired rate, which is called the par value.
B. The quoted price of a currency to be delivered at a specific date in the future.
Which of the following is a purpose for Preemptive Rights to be issued to stockholders? A. To ensure stockholders don't hold their stock for too long B. To protect stockholders from a dilution of their stocks value. C. To ensure companies are not overvaluing their stocks D. To avoid stockholder fraud.
B. To protect stockholders from a dilution of their stocks value.
Which one is NOT a mistake when filing your taxes? A. Report all your income B. Use round-number deductions that are estimates C. Do not claim 100% use of a business vehicle
B. Use round-number deductions that are estimates
Define, explain and give examples of base-case scenario, worst-case scenario, and best-case scenario.
Base-case scenario is an analysis in which all the input variables are set at their most likely values. These are essentially the most common assumptions. An example of base-case would be when small businesses use this to evaluate plans for expansions and future operations. Worst-case scenario is an analysis in which all the input variables are set at their worst reasonably forecasted values. Basically, these are the most negative assumptions. An example of worst-case is when a small business plans for disasters that are unexpected. Best-case scenario is an analysis in which all the input variables are set at their best reasonably forecasted values. This is the ideal assumption and goal that is wanted. An example of a best-case scenario is obtaining the lowest possible rate with the highest growth.
Define, Explain and give an example of Bond Yields.
Bond Yields are the most useful when they give an estimate of the rate of return that a purchaser would earn if they were to buy the bond that same day and hold it over its remaining life. For example, if a bond is sold at $100 and pays $5 per year, its yield is 5%. When the price of a bond goes up, its yield goes down - if that same bond is now being sold for $105, its yield would be 4.76% (5/105).
Define, explain, and give examples of using Cash Budgeting as a forecasting tool
By firms forecasting their cash flows, they can easily see and better manage their own inflows and outflows of cash. If they are likely to need additional cash, they should line up funds well in advance. On the other hand, if they are likely to generate surplus cash, they should plan for its productive use. Although cash budgets can be of any length, an example of using cash budgeting as a forecasting tool is setting the budget to see the daily cash transactions in the firm. Daily cash budgets help clarify the picture of the actual cash flows and is good for scheduling payments on a day-to-day basis.
ARTICLE URL: https://www.wsj.com/articles/new-york-fed-public-expectations-for-march-2023-inflation-hit-6-6-record-11649689597?st=45nt6h1usbjn7xd&reflink=desktopwebshare_permalink Based on the New York Fed's survey, the expected rate of increase for rent and medical costs hold steady at ____ and _____. A. 8.2% , 4.5% B. 9.6% , 7.9% C. 10.2% , 9.6% D. 2.8% , 3.4%
C. 10.2% , 9.6%
Which of the following is the correct description for DRIPs? A. Direct return on investment plans B. Dividend return on investment plans C. Dividend Reinvestment Plans D. Direct reinvestment plans
C. Dividend Reinvestment Plans
A variable rate bond allows A. Investors to benefit from declining rates over time B. Issuers to benefit from rising market interest rates over time C. Investors to benefit from rising markets interest rates over time D. None of the ideas described
C. Investors to benefit from rising markets interest rates over time
Which of the following factors can a firm control? A. Interest Rates in the Economy B. The General Level of Stock Prices C. It's Capital Structure D. Tax Rates
C. It's Capital Structure
1Bonds generally have a specified __________ on which the par value must be repaid. A. Sinking Fund B. Warrant C. Maturity Date D. Yield
C. Maturity Date
Why investors might prefer capital gains? (which one is wrong) A. May want to avoid transaction costs. B. Maximum tax rate is the same as on dividends C. Pay out any leftover earnings
C. Pay out any leftover earnings
When would it be typical for a company to pay dividends? A. Semiannually B. Annually C. Quarterly D. Monthly
C. Quarterly
Which of the three project risks is the easiest to measure? A. Corporate Risk B. Market Risk C. Stand-alone Risk D. None of the above
C. Stand-alone Risk
1.Which of the following is (are) condition(s) required for the constant growth model? A. The required return must be greater than the long-run growth rate. B. The company's growth rate is expected to remain constant in the future. C. The required return must be greater than the long-run growth rate, and the company's growth rate is expected to remain constant in the future. D. The required return must be greater than the short-run growth rate.
C. The required return must be greater than the long-run growth rate, and the company's growth rate is expected to remain constant in the future.
The length of time between the sale of inventory and the collection of the payment for that sale is called the: A. operating cycle. B. inventory period. C. accounts receivable period. D. accounts payable period. E. cash cycle.
C. accounts receivable period.
Define, explain, give examples of what the Capital Asset Pricing Model (CAPM) is and its potential problems.
CAPM stands for Capital Asset Pricing model, and it is the most used method for estimating the cost of common equity. The CAPM can estimate the cost of common equity by using the risk-free rate, the stock's beta coefficient and the market risk premium. Using the CAPM for calculating common equity provides a strong estimate but ultimately it is an estimate and can be subject to change which is one of its disadvantages.
Define, explain, and give examples of Capital Components
Capital components are one of the types of capital used by a firm to raise capital. Each component has a cost which is called component cost. An example is a company issuing new common stock to raise capital.
Define, explain, and give examples of capital components
Capital components are one of the types of capital used by firms to raise funds. These components, supplied by investors, include debt, preferred stock, and common equity. When there is an increase in assets, there must be an increase in at least one of these capital components. The component cost is used to form a WACC, the weighted average cost of capital. An example of a component cost is if a company borrows cash at 5%, which would mean that their component cost of debt is also 5%. Then, the percentage would be used to find the WACC for the firm's capital budgeting analysis
Define, explain, and give examples of sunk cost.
Cash expenses that were incurred in the past and are unable to be recovered despite whether the project was accepted or rejected. This is because sunk costs are not applicable in the capital budgeting analysis, which is concerned with future incremental cash flows. Sunk costs involve money that had been used which cannot be recovered. For example, Target spent $5 million on marketing and advertising to catch customers' attention. As a result, Target's $5 million cannot be recovered whether the advertising was effective or not.
Apple stock trades at $175 a share. The company is contemplating a 3-for-2 stock split. Assuming that the stock split will have no effect on the market value of its equity, what will be the company's stock price following the stock split? Round your answer to the nearest cent.
Company's Stock Price After Stock Split = Previous Stock Price / Split Ratio Previous Stock Price = $175 Split Ratio = 3/2 = $175 / (3/2) = $175/ 1.5 = $116.67
Explain credit policy and the four variables of which it consists of.
Credit policy is a set of rules that include the firm's credit period, discounts, credit standards, and collection policy. Credit period is the length of time customers have to pay for purchases. Discounts are price reductions given for early payment. Credit standards is the financial strength customers must exhibit to qualify for credit. The collection policy refers to the degree of toughness in enforcing the credit terms.
A currency trader observes that in the spot exchange market, 1 US Dollar can be exchanged for 3.7 Israeli Shekels or for 105.00 Japanese yen. What is the cross- exchange rate between the yen and the shekel; that is how many yen would you recieve for every shekel exchange
Cross-exchange rate = (Yen/$)/(Shekel/$) There are 1 / 3.7 dollars in a shekel There are 105 / 3.7 = 28.37 yen in a shekel
Busa Enterprises just paid a dividend of $1.00 a share. The dividend is expected to grow 15% a year for the next 3 years and then at 4% for the following 2 years. What is the expected dividend per share for each of the next five years?
Current Divided = D0 = $1.00 Year 1 = 1.00 * 1.15 = 1.15 Year 2 = 1.15 * 1.15 = 1.32 Year 3 = 1.32 * 1.15 = 1.52 Year 4 = 1.52 * 1.04 = 1.58 Year 5 = 1.58 * 1.04 = 1.64 To calculate the after-tax bond that is currently priced to yield 7% and if you are in the 25% tax bracket you follow this formula. You get the yield and multiply it by one minus the tax rate. So the yield is .07 multiplied by one minus .25. Once the formula is solved the answer for the after tax would be 5.25.
A company expects to earn $4.8 million in 2023 and plans to use 40% of this amount to repurchase shares of its common stock. There are 2 million shares outstanding, and the market price is $30 per share. Calculate the current EPS
Current EPS= Total earnings/ Number of shares =$4.8 million/ $2 million = $2.4 per share
What is working capital? A. The difference between cash flows a company will produce and its initial investment. B. Cash outflow needed to pay off liabilities. C. The amount of risk that contributes to the project as a whole D. A firm's investment in current assets.
D. A firm's investment in current assets.
ARTICLE URL: https://www.wsj.com/articles/pepsico-explores-options-for-russian-business-as-ukraine-crisis-deepens-11646767277 Which western companies have decided to pull back their business in Russia due to the ongoing Russia-Ukraine war? A. Boeing Co. B. Coca-Cola Co. C. American Express Co. D. All of the statements mentioned
D. All of the statements mentioned
Many platforms are or already have been working on subscription plans for the future. Recently, one of these four companies have announced they plan to have subscriptions. Which one is it? A. GOAT B. Headspace C. Spotify D. Apple
D. Apple
Which of the following would be most likely to lead to a higher level of interest rates in the economy? A. The president implementing taxes on the rich B. Taxation C. Corruption D. Corporations step up their expansion plans and thus increase their demand for capital.
D. Corporations step up their expansion plans and thus increase their demand for capital.
What is the quoted rate on a risk-free security composed of(rRF)? A. Real risk-free interest rate(r*) + Liquidity premium (LP) B. Liquidity premium (LP) + Inflation Premium (IP) C. Real risk-free interest rate(r*) + Default Risk Premium (DRP) D. Real risk-free interest rate(r*) + Inflation Premium (IP)
D. Real risk-free interest rate(r*) + Inflation Premium (IP)
Which of the following general statements about risks is INCORRECT? A. Most stocks are positively (though not perfectly) correlated with the market B. Combining stocks in a portfolio generally lowers risk C. Stand-alone risk is not important to a well-diversified investor D. Risk aversion assumes investors like risk
D. Risk aversion assumes investors like risk
Diversification is a fundamental investment tool. Which of the following is a key to diversification? A. Variety—Invest in a wide range of financial products. B. Correlation—Look at investments that are not closely correlated, meaning that their values don't tend to move in the same direction at the same time. C. Quantity—There's no such thing as a diminishing return to diversification, so you should invest in the maximum number of investments as possible. If you can invest in thousands of different investments within your portfolio, you should. D. Statements a and b are correct.
D. Statements a and b are correct.
Which of these is NOT a reason firms expand into other countries? A. To seek new markets B. To diversify C. To retain customers D. To seek licensing properties
D. To seek licensing properties
Your portfolio consists of $50,000 invested in Stock X and $50,000 invested in Stock Y. Both stocks have an expected return of 12%, betas of 1.4, and standard deviations of 25%. The returns of the two stocks are independent, so the correlation coefficient between them, rXY, is zero. Which of the following statements best describes the characteristics of your 2-stock portfolio? A. Your portfolio has a beta greater than 1.4, and its expected return is greater than 12%. B. Your portfolio has a standard deviation of 25%, and its expected return is 12%. C. Your portfolio has a standard deviation greater than 25% and a beta equal to 1.4. D. Your portfolio has a beta equal to 1.4, and its expected return is 12%.
D. Your portfolio has a beta equal to 1.4, and its expected return is 12%.
Vilchez Company has sales of $12 million per year, all on credit terms calling for payment within 30 days, and its accounts receivable are $1.5 million. What is Vilchez's DSO, what would it be if all customers paid on time, and how much capital would be released if Vilchez could take action that led to on-time payments?
Days sales outstanding = (Accounts receivable/Sales) x 365 Days sales outstanding = ($1.5 Million/12 Million) x 365 Days sales outstanding = 45.625 Days
East Blue Services is now in the final year of a project. The equipment originally cost $19 million, of which 85% has been depreciated. East Blue can sell the used equipment today for $6 million, and its tax rate is 30%. What is the equipment's after-tax salvage value?
Depreciation= Cost of equipment × Depreciation rate. Gain on sale= Cost of equipment - Depreciation. Increase in income taxes paid = Gain on sale × Tax rate. After-tax salvage value = salvage value - increase in income taxes paid. Salvage value= $6 million. Cost of equipment= $19 million. Tax rate= 30% Depreciation= ($19, 000, 000 × 85%)= $16,150,000 Gain on sale= $19, 000, 000 − $16, 150, 000= $2,850,000 Increase in income taxes paid= $2, 850, 000 × 0. 3= $855,000 After-tax salvage value= $6, 000, 000 − $855, 000 = $5, 145, 000
Define, explain, and give examples of diversification
Diversification is a technique that reduces risk by allocating investments across various financial instruments, industries, and other categories. It aims to maximize returns by investing in different areas that would each react differently to the same event. An example is having more than one type of investments or owning more than one stock in your portfolio. Apple. One of the most famous companies in the world, Apple Inc. is perhaps the greatest example of a "related diversification" model. Related diversification means there are notable commonalities between the existing products and services, and the new ones being developed. As far as investing goes you buy shares, you buy across a range of different sectors such as financials, resources, healthcare and energy
Describe, explain, and give an example of a fixed-peg arrangement.
During a fixed-peg arrangement, the country locks its currency to another currency or basket of currencies at a fixed exchange rate. This is beneficial as it allows the currency to vary only slightly from its desired rate and if the currency moves outside the specific limits, its central bank will intervene to force the currency back within the limits. An example would be China, whose currency (the yuan) is no longer pegged to the U.S. dollar but rather to a basket of trade-weighted international currencies.
Which of the following is not a criteria for deciding whether to accept or reject a project? A. Net present value (NPV) B. Regular payback C. Internal rate of return (IRR) D. Discounted payback E. None of the above
E. None of the above
Define, Explain, and give an example of the international monetary system.
Every nation has a monetary system and a monetary authority. For example, The Federal Reserve is the monetary authority in the United States. When countries trade with one another, they facilitate payments through the international monetary system. The international monetary system is the framework within which exchange rates are determined and it is essentially the blueprint for international trade and capital flows. Global currency, money, capital, real estate, commodity, and real asset markets are tied into a network of institutions regulated by intergovernmental agreements and driven by each country's unique political and economic objectives.
T/F: A call provision gives bondholders the right to demand, or "call for" repayment of a bond. Typically, companies call bonds if interest rates rise and do not call them if interest rates decline.
False
T/F: A global corporation is a is an enterprise or corporation which is involved in the manufacture of goods and services in two or more countries with official headquarters in the certain country.
False
T/F: At the most basic level, we can divide currency regimes into three broad groups: floating rates, fixed rates, and fluctuating rates.
False
T/F: Catering theory states that investor's preferences for dividends vary overtime and that corporations do not change their policies to cater to the current desires of investors.
False
T/F: Exchange rate risk refers to the decrease in value of one currency exchanged for another due to international taxation laws
False
T/F: Goal Cash Balance is the ideal level of cash that a company seeks to hold in reserve at any given point in time.
False
T/F: In equilibrium we assume that a stock's price equals its intrinsic value.
False
T/F: Inflation is the chance that an investment will provide a low or negative return.
False
T/F: Internal rate of return (IRR) Is a method of ranking investment proposals using the NPV, which is equal to the present value of the projects free cash flows discounted at the cost of capital
False
Define, explain, and give examples of floating-rate bonds and how they work.
Floating-rate bonds are bonds that have a variable interest rate. Floating-rate bonds are unlike fixed-rate bonds because they pay the same level of interest over its entire term. An example of how floating-rate bonds work would be a coupon rate being adjusted to equal a 10-year Treasury bond rate plus percentage points.
Sirfa Marine Services is in the final year of their last project. The equipment originally cost $24 million, of which 100% has been depreciated. Sirfa can sell the used equipment today for $7 million, and the tax rate is 24%. What is the equipment's after-tax salvage value?
Formula After-tax salvage value = Sale price-(Tax rate * sale price) Because the equipment has been 100% depreciated;there is no book value Sale price= $7,000,000 =7,000,000-(0.24 * 7,000,000) =$5,320,000
Data on sick Inc. for last year are shown below, along with the day's sales outstanding of the firms against which it benchmarks. The firms' new CFO believes that the company could reduce its receivables enough to reduce its DSO to the benchmarks' average if this were done, by how much would receivables decline? Use a 365-day year. Sales $111,000 Accounts receivable $16000 Days sales outstanding 52.61 Benchmarks' days sales outstanding 20
Formula = (BDSO*Sales)/365 = Derive Debtors Accounts receivable - Derive Debtors (20*111000) / 365 = 6082.19 16000 - 6082.19 = 9917.81 *$9,917. 81 = $9,918 To Calculate the answer you multiply the Benchmarks' days sales outstanding (20) by the sales ($111,000) then you divide by 365 that will give you the derive debtors. Next you need to subtract accounts receivable ($16,000) from the derive debtors (6082.19). Rounding the answer you will have receivables decline to $9,918.
What will your after-tax be on a corporation bond that is currently priced to yield 7% if you are in the 25% tax bracket?
Formula = (Yield) x (1 - Tax Rate) .07 x (1 - .25) .07 x .75 = 5.25 To calculate the after-tax bond that is currently priced to yield 7% and if you are in the 25% tax bracket you follow this formula. You get the yield and multiply it by one minus the tax rate. So the yield is .07 multiplied by one minus .25. Once the formula is solved the answer for the after tax would be 5.25.
consider a company whose stock is trading at $110 per share. This company requires an 8% minimum rate of return and will pay a $3 dividend per share next year, which is expected to increase by 5% annually. What is the intrinsic value of the stock based on the Gordon growth model?
Formula: P=(D1)/(r-g) P=(3)/(.08-.05) P=100
Chris is a supplier who lets their clients pay on credit. Chris is doing his cash budget and would like to know what is the balance of the outstanding accounts receivables. This month he had sales of $2,000 per day, which require payment after 15 days.
Formula: Accounts Receivables = Sales per day x Length of collection period = $2,000 x 15 = $30,000
Which of the two projects has the highest equivalent annual annuity? Project 1: has a 7-year term and a net present value of $100,000 Project 2: has a 9-year term and a net present value of $120,000 Both projects are discounted at a 6
Formula: C = (r x NPV) / (1 - (1 + r)-n ) Project 1: (0.06 x $100,000) / (1 - (1 + 0.06)-7) = $17,914 Project 2: (0.06 x $120,000) / (1 - (1 + 0.06)-9) = $17,643 Answer: project 1
Acme Corporation wants to estimate their first-year cash flows (year 1) for a new project. The project has: Sales revenues $22 million Operating Costs (not including depreciation) 10 million Depreciation 4 million Interest expense 2 million The tax rate is 40% and its WACC is 8%. What is the project's first year cash flow (t=1)?
Formula: Cash flow= EBIT*(1-T) + depreciation =($22-10-2)*(1-0.40)+4 =($10)*(0.60)+4 = $10 mil
The following company has a $100,000 net income and pays a dividend of $25,000. What is the Payout Ratio?
Formula: DPR= Net income/ Total dividends $25,000 / $100,000 = 25% Answer: 25%
Suppose the exchange rate between the U.S. dollar and the EMU euro is 0.65=$1.00 and the exchange rate between the U.S. dollar and the Canadian dollar is $1.00=C$1.86. What is the cross-rate of euros to Canadian dollars?
Formula: Euros/C$ = Euros/US$ * US$/C$ =0.65/$1.00 x $1.00/C$1.86 *0.34946 per Canadian dollar
Tyrell Corp's stock is currently selling at $60 per share. Their dividends are expected to grow at a constant rate of 4% a year. What is the expected stock price in a year from now?
Formula: Expected price= current price(1+growth rate) Expected price= $60(1+0.04) = $62.40
You want to a buy a car. You have $10,000 currently, but decide to invest in a Treasury Bond, ROR=1%. The inflation rate is 3%.
Formula: FV of TB=10,000(1.01) FV of similar car=10,000(1.03) FV of TB=10,100 FV of similar car= $10,300
Carlos wants to take a trip to Europe and wants to exchange his U.S. dollars for Euros. When he lands in Europe, he exchanges his dollars for Euros at an exchange rate of $1 = €0.91. If Carlos exchanged $648, how many Euros should he have received?
Formula: Money before exchange x Exchange Rate = Money after exchange $648 x 0.92 = €596.16
Warnock Inc. is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that a project's projected NPV can be negative, in which case it will be rejected. WACC: 10% Year 0 1 2 3 Cash Flows -1250 600 500 400
Formula: NPV = CF0 + CF1/(1+r)^1 + CF2/(1+r)^2 + .... NPV = -1250 + 600/(1+10%)^1 + 500/(1+10%)^2 + 400/(1+10%)^3 = $9.20
Mario recently purchased $5000 worth of inventory for his business. He is trying to decide whether or not to pay back his suppliers at the end of the month or in the next week. The supplier offered Mario a deal, if he pays the full amount within the next 10 days he can get a 5% off, otherwise he has 25 days to pay the full amount. What is Mario's nominal annual cost of trade credit?
Formula: Nominal Annual Cost of Trade Credit =( Discount %/100-discount %) x (365/ Days credit is outstanding - Discount period) Discount % - 5% Days credit is outstanding = 25 days Discount period = 10 days =(5/100-5) x (365/25 - 10) =(5/95) x (365/ 15) =5.26% x 24.33 =128.05%
Carlos' Corporation just recently opened a workshop in Miami. He is trying to decide whether to take the discount offered from his suppliers or whether to pay at the end of the month. Carlos' suppliers are offering him a 4% discount if he pays within 15 days; otherwise, the balance is due 30 days after purchase. What is Carlos' nominal cost of trade credit?
Formula: Nominal annual cost of trade credit: (Discount % / 100 - Discount %) (365 / Days credit is outstanding - discount period) = (4 / 96) (365 / 30 - 15) = 4.167% x 24.333 = 101.40%
Determine the real interest rate of a bond with a current interest rate of 8%, and an inflation rate of 3.4%.
Formula: Real Rate = Current Interest Rate - Current Inflation Rate Real rate = 8-3.4 Answer = 4.7%
Chevrolet Automobile company has a beta of 1.14, the real risk-free rate is 3.00%, investors expect a 5.00% future inflation rate, and the market risk premium is 3.70%. What is Chevrolet's required rate of return? Do not round your intermediate calculations.
Formula: Required rate of return = Risk free rate + Future Inflation rate + beta(market risk premium) Beta: 1.14 Risk free rate: 3% or 0.03 Future inflation rate: 5% or 0.05 Market risk premium: 3.70% or 0.037 Required rate of return = 0.03 + 0.05 + 1.14(0.037) *12.22%
Whited Inc.'s stock currently sells for $35.25 per share. The dividend is projected to increase at a constant rate of 4.50% per year. The required rate of return on the stock, rs, is 11.50%. What is the stock's expected price 5 years from now?
Formula: Stock's Current Price X (1 + growth rate)^5 35.25 X (1 + 4.5%)^5 = $43.93
5-year Treasury bonds yield 4.0%. The inflation premium (IP) is 1.9%, and the maturity risk premium (MRP) on 5-year T-bonds is 0.4%. There is no liquidity premium on these bonds. What is the real risk-free rate, r*?
Formula: Treasury bonds yield - The inflation premium (IP) - The maturity risk premium (MRP) 4% - 1.9% - .4% = 1.7%
The Holmes Company's currently outstanding bonds have an 8% coupon and a 10% yield to maturity. Holmes believes it could issue new bonds at par that would provide similar yield to maturity. If its marginal tax rate is 25%, what is Holmes after-tax cost of debt?
Formula: YTM X (1-T) [10% * (1-0.25) = 7.50%
An index fund will have a beta of 1.0. If rM is 11.0% (given in the problem) and the risk-free rate is4%, you can calculate the market risk premium (RPM) calculated as rM - rRF as follows:
Formula: r = rRF + (RPM)b 11.0% = 4% + (RPM)1.0 RPM= 7.0%.
If 10-year T-bonds have a yield of 6.2%, 10-year corporate bonds yield 8.5%, the maturity risk premium on all 10-year bonds is 1.3%, and corporate bonds have a 0.4% liquidity premium versus a zero liquidity premium for T-bonds, what is the default risk premium on the corporate bond?
Formula: rcorp - rT-bond - LP 8.5% - 6.2% - .4% = 1.9%
An analyst evaluating securities has obtained the following information. The real rate of interest is 3% and is expected to remain constant for the next 4 years. Inflation is expected to be 5% next year, 5.5% the following year, and 6% the third year. The maturity risk premium is estimated to be 0.2 * (t - 1)%, where t = number of years to maturity. The liquidity premium on relevant 4-year securities is 0.50%, and the default risk premium on relevant 4-year securities is 0.75% What is the yield on a 1-year T-bill?
Formula: rt1 = r* +IP1 +MRP1 rt1 = 3% + 5% + 0.2(1-1)% rt1 = 8%
Amazon paid $500 in taxes on a salvaged asset. If the tax rate is at 5% and the salvage price was $25,000, what was the book value of the asset?
Formula: taxes paid on salvaged assets= tax rate*(salvage value-book value) 500=0.05(25,000-x) 500=1250-0.05x -750=-0.05x x = $15,000
Walmart paid $1000 in taxes on a salvaged asset. If the tax rate is at 10% and the salvage price was $50,000, what was the book value of the asset?
Formula: taxes paid on salvaged assets= tax rate*(salvage value-book value) 1000=0.10(50,000-x) 1000=5000-0.10x -4000=-0.10x *ANS= $40,000
Amaco Incorporated has $57500 in its capital budget and a net income of $63200. With a debt percentage of 20%, what would be the company's dividend payout ratio, assuming they follow the residual dividend model?
Formulas: Dividends = Net Income - (Equity * Capital Budget) Payout Ratio = Dividends / Net Income 63200 - (80% * 57500) = 17200 17200 / 63200 = 0.2722 = 27.22%
Assume that you are considering the purchase of a 20-year, noncallable bond with an annual coupon rate of 9.5%. The bond has a face value of $1,000, and it makes semiannual interest payments. If you require an 8.4% nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond?
Future Value = $1,000 Payment = $47.50 ($1,000 x 9.5% / 2) Number of Periods = 40 (20x2) Rate = 4.2% (8.4% / 2 ) Results equal to $1,105.69
Define, explain, and give examples of a project's payback period and the flaws associated with this selection criterion.
Historically, for capital budgeting decisions, the first selection criterion used was the payback period, which is defined as the length of time required for an investment's cash flows to cover its cost. For example, if Project A requires a one-time initial cost of $1,000 and its future cash flows were forecasted, the payback period formula could be used to determine how long it would take until the $1,000 was recouped. The payback period can be calculated as follows: Number of Years Prior to Full Recovery + (Uncovered Cost at Start of Year/Cash Flow During the Full Recovery Year). However, the payback period formula as a sole selection criteria for a project has three significant flaws: the time value of money is ignored, cash flows beyond the payback period are given no consideration, and the formula solely indicates when an investment will be recovered rather than how much wealth the project may add. For example, if Project A was selected over Project B simply on the basis of its payback period, the decision maker may have ignored the larger cash flows Project B will generate after its payback period and the added value it will provide, which may be far greater than that of Project A.
Define, explain, and give examples of the difference between Horizon Date and Horizon Value?
Horizon Date also known as the Terminal date is the date when the growth rate becomes constant. At this point it is no longer necessary to forecast the individual dividends. Meanwhile Horizon Value also known as the continuing value is the value at the horizon date of all dividends expected thereafter. To find this value the constant growth formula could be used.
Define, explain, and give examples of an IRR.
IRR (Internal Rate of Return) is the discount rate that forces the PV of its inflows to equal its cost, equivalent to forcing the NPV to equal zero. An example would be mortgage payments.
Define, Explain and give an example of Federal Deficits.
If the government spends more than it takes in taxes, they are running a deficit. The higher the federal deficit, the higher the interest rates will get. As a simple example, if a government takes in $10 billion in revenue in a particular year, and its expenditures for the same year are $12 billion, it is running a deficit of $2 billion.
Define, explain, and give examples of the market price vs. intrinsic value
Intrinsic value is a calculation of a stock's "fair" value (the amount it should be worth).The actual price of a stock is decided by the stock's demand and supply in the market. The "real" or accurate risk and return statistics should be used to assess intrinsic value. The intrinsic worth, however, cannot be exactly assessed because "real" or accurate data is not always directly observable. The perceived risk and return metrics are used to determine market value. The market value can be mispriced because the perceived risk and return may not be equivalent to the "actual" risk and return. An example of intrinsic value is Let's say a call option's strike price is $15, and the underlying stock's market price is $25 per share. The intrinsic value of the call option is $10 or the $25 stock price minus the $15 strike price. For market value If XYZ Company trades at $25 per share and has 1 million shares outstanding, its market value is $25 million.
Define, explain, and give examples of investment risk
Investment risk is related to the probability of actually earning a low or negative return: The greater the chance of a low or negative return, the riskier the investment. The concept of investment risk describes the likelihood of potential losses when you're making an investment. Risk is the general likelihood of losing the original investment, and investments are exposed to various types of risks throughout the lifecycle of the investment. Some of the most common types of investment risks are market risk, liquidity risk, credit risk, and inflation risk.
Define, explain, and give examples of which fluctuate more long-term or short-term interest rates?
Long term bonds are most sensitive to interest rate changes. The reason lies in the fixed-income nature of bonds: when an investor purchases a corporate bond, for instance, they are actually purchasing a portion of a company's debt. This debt is issued with specific details regarding periodic coupon payments, the principal amount of the debt, and the time period until the bond's maturity. short-term bonds are both excellent savings vehicles. Both are liquid, easily accessible, and relatively safe securities. However, these investments can involve fees, may lose value, and might decrease a person's purchasing power. Although money market funds and short-term bonds have many similarities, they also differ in several ways.
Define, Explain, and give an example of the differences between multinational and global corporation
Multinational corporations (MNC) is an enterprise or corporation which is involved in the manufacture of goods and services in two or more countries. Its headquarters is located in a certain country which is called its home country, and it has offices in several other countries called the host countries where it also operates. It must adhere to the policies of the host countries and adapt its products to cater to the needs of the host countries. Examples include Amazon, Apple, and Facebook. On the other side, a global corporation is an enterprise or company which is also involved in trade relations with other countries. Unlike MNCs, global companies do not have official headquarters, and they are composed of autonomous units which are parts of one parent or global company. Each unit in a certain area or country handles their individual concerns, and the parent company handles concerns which involve the overall global company. For example, Hilton Hotels and Walmart.
Define, explain, and give examples of a multinational corporation.
Multinational corporations describe a firm operating in a multitude of countries. As an example, multinational firms make direct investments in fully integrated operations from extraction of raw materials through the manufacturing process and finally to the distribution of products to consumers throughout the world. In the present day, multinational corporate networks control a large and growing share of the world's technological, marketing, and productive resources.
Warnock inc. is considering a project that has the following cash flow and WACC data. What's the projects' NVP. WACC: 10% Year 0 1 2 3 Cash flows -$1000 $500 $400 $300
NPV = CF0 + CF1/(1+r)^1 + CF2/(1+r)^2 + ... + CFN/(1+r)^N = -1000 + 500/(1+.10)^1 + 400/(1+.10)^2 + 300/(1+.10)^3 = -1000 + 454.56 + 330.58 + 225.39 = 10.53
Why is the Net Present Value (NPV) the primary capital budgeting decision criterion?
NPV is one of many capital budgeting methods used to evaluate physical asset investment projects in which a business might want to INVEST. Net present value uses discounted cash flows in the analysis which makes net present value the most correct of any of the capital budgeting method as it considers both the risk and time variables. This means that a net present value analysis evaluates the cash flows forecasted to be delivered by a project by discounting them back to the present using the time span of the project (t) and the firm's weighted average cost of capital (i). If the result is positive, then the firm should invest in the project. If negative, the firm should not invest in the project. Thus NPV is the primary capital budgeting decision criteria since it uses discounting approach and give the advantage and disadvantages of a new project in real terms after taking into account inflation and desired return.
The projects are equally risky and their WACC IS 11%. What is the MIRR of the project that maximizes shareholder value?
NPV of Project X = -1000 + 110 / 1.11 + 300 / 1.11^2 + 430 / 1.11^3 + 700 / 1.11^4 = 118.1098 NPV of Project Y = -1000 + 1100 / 1.11 + 90 / 1.11^2 + 55 / 1.11^3 + 50 / 1.11^4 = 137.1891 As NPV of Project Y is higher, Project Y maximizes shareholder value MIRR of Project Y = ((1100 * 1.11^3 + 90 * 1.11^2 + 55 * 1.11^ + 50) / (1000))^(1/4) - 1 = 85.2083%
Define, explain, give examples of why Net Present Value (NPV) is the most commonly used method for capital budgeting?
NPV represents the value of the project's free cash flow discounted at the cost of capital. NPV is the most commonly used as it essentially tells you how much a project contributes to a shareholders wealth rather than just time or rates of return
Happy Days Inc. is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that a project's projected NPV can be negative, in which case it will be rejected. WACC: 10.00% Year: 0 1 2 3 Cash Flows: -$825 $500 $400 $300
NPV: -825+ (500/1.1) + (400/1.1^2) + (300/1.1^3) NPV: -825+454.5454+330.5785+225.3944 NPV: 185.5183= $185.52
If a 10% cost of capital is appropriate for both projects, what are their NPV. Round to the nearest cent. 1 2 3 X -600 450 200 Y -600 50 200
NPVX = -600 + 450/(1.10)1 + 200/(1.10)2 NPVX = -600 + 409.09 + 165.29 NPVX = -$25.62 NPVY = -600 + 50/(1.10)1 + 200/(1.10)2 NPVY = -600 + 45.45 + 165.29 NPVY = -$389.26
Sarah's Superstore (SS) is considering undertaking a project, Project A, which would entail construction of a new SS store in Austin, Texas. Project A has the following End-of-Year Cash Flows (in thousands): Year 0: -$600, Year 1: $200, Year 2: $400, Year 3: $200. The project's risk-adjusted cost of capital is 11%. What is Project A's Net Present Value (NPV)? Based on the NPV, should SS decide to undertake Project A?
Net Present Value (NPV) = CF0 + CF1/(1+r)1 + CF2/(1+r)2 + ... + CFN/(1+r)N CF = Cash Flow N = The Specified Year r = Risk-Adjusted Cost of Capital If NPV>0, then the project should be accepted. CF0 = -$600 CF1 = $200 CF2 = $400 CF3 = $200 r = 11% NPV = -$600 + $200/(1+0.11)1 + $400/(1+0.11)2 + $200/(1+0.11)3 = -$600 + $200/(1.11)1 + $400/(1.11)2 + $200/(1.11)3 = -$600 + $180.18 + $325.20 + $145.99 = $51.37 $51.37>0
Define, explain, and give examples of the difference between the net present value (NPV) and the internal rate of return (IRR).
Net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a period of time and the IRR is the discount rate that forces the PV of its inflows to equal its cost. In other words, the NPV is the dollar amount difference between the present value of discounted cash inflow less outflows over a specific period of time, and the IRR estimates the profitability of potential investments using a percentage value rather than a dollar amount. Both IRR and NPV can be used to determine how desirable a project will be and whether it will add value to the company. While one uses a percentage, the other is expressed as a dollar figure. An example of NPV is a company that has -700y0, 500y1, 300y2, 100y3 as cash flows and a 10% cost of capital and you want to know how much money it would be worth the project, it would be $77.61. And the IRR would predict whether the project would be efficient or not.
Diana's Designs just recently opened as an upscale dress shop in northeast Florida. The owner is trying to decide whether to take the discount offered from her suppliers, or whether to pay at the end of the month. Diana's suppliers are offering her a 3% discount if she pays within 15 days; otherwise, the balance is due 30 days after purchase. What are Diana's nominal and effective annual costs of trade credit?
Nominal annual cost of trade credit = discount % / 100 - discount % * 365 / days credit is outstanding - discount period = 3 / 97 * 365 / 30 - 15 = 3.093% * 24.333 = 75.26% Effective annual cost of trade credit = (1.03093)^24.333 - 1.0 = 109.84%
ABC Company is expected to pay a $1.80 per share dividend at the end of the year (i.e., D1=$1.80). The dividend is expected to grow at a constant rate of 4% a year. The required rate of return on the stock, rs, is 10%. What is the stock's current value per share?
P0= D1/(rs-g) P0=1.80/(0.10-0.04) P0=1.80/0.06 *P0=$30.00
Hurley Brothers is expected to pay a $2.20 per share dividend at the end of the year (i.e, D1=$2.20). The dividend is expected to grow at a constant rate of 6% a year. The required rate of return on the stock, rs, is 12% . What is the stock's current value per share?
PN = DN+1/rs-g PN = Current Value Per Share N = Specified Year DN+1 = Dividend Per Share in the Year Following the Specified Year rs = Required Rate of Return g = Expected Growth Rate N = 0 DN+1 = $2.20 rs = 12% g = 6% PN = $2.20/(0.12-0.06) = $2.20/(0.06) = $36.67
Sally's Cookie Company is a large corporation that issued 3-year noncallable $1000 par bonds with annual payments that will later be traded on an active secondary market. After a year, you buy the bond. What is the yield to maturity given the following information. Number of years (N) = 2. Coupon payments (INT) = $20. Future value (M) = 1000. Present value (PV) = $800.
PV = (INT)/(1+rd)^1 + ... + (INT)/(1+rd)^N + (M)/(1+rd)^N $800 = ($20)/(1+rd)^1 +($20)/(1+rd)^2 + ($1000)/(1+rd)^2 = 14.17% Using a financial calculator: N = 2 I% = ? PV = -800 PMT = 20 FV = 1000 YTM = I% = 14.17%
Calculate the payback period with $4,500 uncovered costs at the start of the year, $6,450 cash flow during the full recovery year, and it has been 7 years prior to the full recovery. Round to the nearest thousandth
Payback= Number of years prior to full recover + uncovered cost at start of year / cash flow during full recovery year Payback = 7 + 4,500/6450 Payback= 7+ 0.698 Payback= 7.698
Sally's Cookie Company is a large corporation and issued 3-year bonds that will later be traded on an active secondary market. What is the quoted rate of interest on the 3-year bond given the following? Quoted interest rate (r) = r* + IP + DRP + LP + MRP. The real risk-free rate is 2% (r*). The inflation premium (IP) is 3%. The default risk premium (DRP) is 1%, and the liquidity premium (LP) is 1.5%. Finally, the maturity risk premium (MRP) is 2%.
Quoted interest rate (r) = r* + IP + DRP + LP + MRP r = 2% + 3% + 1% + 1.5% + 2% = 9.5%
Suppose that the real risk-free rate is 3.50% and the future rate of inflation is expected to be constant at 2.20%. What rate of return would you expect on a 1-year treasury security, assuming the pure expectations theory is valid?
Risk free rate is 3.50% and Inflation is 2.20% 3.50% + 2.20% = 5.70% = Yield on 1-year T-bond To calculate the rate of return, on a 1-year treasury security, you get the risk-free rate which is 3.50% and the constant which is 2.20% and add those together. Adding these two give you the yield on the 1-year treasury bond, which comes out to 5.70%
Define, explain, and give examples of risk in investing
Risk is a chance of an unfavorable event occurring. Someone will take a risk when they expect a positive outcome but are aware of a potential loss. For example, investing in stocks has a high probability of risk occurring. Stocks have a higher chance of returns, yet they are riskier than bonds because of how quickly the market fluctuates
Define, explain and give examples of the three types of project risks.
Stand-alone risk is the project's total risk, if it were operated independently. It is usually measured by standard deviation. However, it ignores the firm's diversification among projects and investors' diversification among firms. Major corporations are exposed to stand-alone risks. Corporate risk is the project's risk when considering the firm's other projects, i.e., diversification within the firm. Corporate risk is a function of the project's NPV and standard deviation and its correlation with the returns on other firm projects. Market risk is The project's risk to a well-diversified investor. Theoretically, it is measured by the project's beta and it considers both corporate and stockholder diversification.
Define Stock Price and Intrinsic Value and explain the relationship between the two values.
Stock Price is the current market price of a stock and is easily observed for publicly traded companies. Intrinsic value on the other hand is "true" value of a company's stock and must be estimated. When the intrinsic value and the stock price are equal Market Equilibrium occurs. When Stock Price is higher than intrinsic value the stock is overvalued and if it is lower than intrinsic value it is undervalued.
Define, explain, and give examples of stock dividends and stock splits.
Stock dividends are dividends paid in the form of additional shares of stock rather than in cash. For example, if Apple was to pay dividends in the form of more ownership rather than in cash. Stock split is an action taken by a firm to increase the number of shares outstanding by giving each stockholder two new shares for each one held previously. For example, if you own 4 shares in a company, with a stock split it will double.
Define, explain and give examples of Sunk Cost
Sunk costs are the cost that has already been incurred and cannot be recouped and therefore should not be considered in an investment decision. Sunk costs are treated as bygone and are not taken into consideration when deciding whether to continue an investment project. A good example would be A manufacturing firm, for example, may have a number of sunk costs, such as the cost of machinery, equipment, and the lease expense on the factory.
Define, explain, and give examples of the theory of the capital asset pricing model (CAPM)
The CAPM is a model based on the proposition that any stock's required rate of return is equal to the risk-free rate of return plus a risk premium that reflects only the risk remaining after diversification. In other words is an idealized portrayal of how financial markets prices securities and thereby determines expected returns on capital investment. To illustrate, Pay Up Inc. is a collection agency that operates nationwide through 37 offices. The company is not well known; its stock is not very liquid, and its earnings have experienced sharp fluctuations in the past. This suggests that Pay Up is risky and that its required rate of return, r, should be relatively high. However, Pay Up's required return in 2021 was quite low in comparison to most other companies. This indicates that investors think Pay Up is a low-risk company in spite of its uncertain profits. This counterintuitive finding has to do with diversification and its effect on risk. Pay Up's earnings rise during recessions, whereas most other companies' earnings decline when the economy slumps. Thus, Pay Up's stock is like insurance—it pays off when other investments go bad—so adding Pay Up to a portfolio of "regular" stocks stabilizes the portfolio's returns and makes it less risky.
Define, explain, and give examples of the difference between the Eurodollar and Eurobond.
The Eurodollars are U.S. dollars held in time deposit accounts in banks outside the United States, which thus are not subject to the legal jurisdiction of the US Federal Reserve. Consequently such deposits are subject to much less regulation than deposits within the U.S. While the Eurobond is a debt instrument that's denominated in a currency other than the home currency of the country or market in which it is issued. An example of Eurodollar is going to another country and exchanging a dollar for the country currency (peso, yen, pound, etc). Assume a Mexican corporation wants to start a new business in Canada and needs a large sum of money in the local currency, (Canadian dollars). Because the firm does not have adequate funds in the requisite fiat money, it considers borrowing the funds from Canada. It realizes, however, that the cost of borrowing would be too high. And investors would need to invest in the eurobond in the market to buy bonds in exchange for those dollars.
ARTICLE URL: https://www.cnbc.com/2022/04/08/morgan-stanley-unveils-family-office-unit-looking-to-serve-richest-of-the-rich.html Define, explain, and give examples of the strategy being used to reach this goal?
The bank is beginning to develop a suite of products directly geared toward family offices. Morgan Stanley has determined that despite the complexities that could come with having a family office. Morgan Stanley's CEO, James Gorman, has helped the bank target a broad spectrum of clients through acquisitions.
Define, explain, and give examples of the fundamental factors affecting the cost of money.
The cost of money is the opportunity cost of holding money in hand instead of investing it. The fundamental factors affecting the cost of money is production opportunities, time preferences for consumption, risk, and inflation. Production opportunities are the investment opportunism in heavy cash flow assets. Time preferences for consumption risk is the preferences of consumers for current consumption as opposed for saving for future consumption. Risk is the chance that an investment will provide low or negative return. Inflation is the amount by which prices increase over time.
Define, explain, and give an example of the discounted dividend model.
The discounted dividend model or DDM is a quantitative method used for predicting the price of a company's stock based on the theory that its present-day price is worth the sum of all of its future dividend payments when discounted back to their present value. It attempts to calculate the fair value of a stock irrespective of the prevailing market conditions and takes into consideration the dividend payout factors and the market expected returns. If the value obtained from the DDM is higher than the current trading price of shares, then the stock is undervalued and qualifies for a buy, and vice versa. Assume Company X paid a dividend of $1.80 per share this year. The company expects dividends to grow in perpetuity at 5% per year, and the company's cost of equity capital is 7%. The $1.80 dividend is the dividend for this year and needs to be adjusted by the growth rate to find D1, the estimated dividend for next year. This calculation is: D1 = D0 x (1 + g) = $1.80 x (1 + 5%) = $1.89. Next, using the GGM, Company X's price per share is found to be D(1) / (r - g) = $1.89 / ( 7% - 5%) = $94.50. P=D1 / (r-g) P= stock price D1 = value of next year dividend r = constant cost of equity capital g = constant growth rate in perpetuity
Explain and describe the difference between Dividends V. Growth
The excess return on dividend investments is declared and shared with investors, whereas the profit excess is withdrawn as dividends. The excess return in a growth model investment is reinvested in the company, and profits are only realized when the stock is redeemed or sold.
Define, explain, and give examples of the assumptions of pure expectations.
The expectations theory attempts to predict what short-term interest rates will be in the future based on current long-term interest rates. This theory also explains why longer-term bonds pay higher interest than short-term bonds this is because the longer you hold a long-term bond the more risk you will experiences as the future could be unpredictable. For example, investors that bought a 30-year Russian bond in 2000 will now face default in their bonds 22 years later and might never see their bonds to maturity.
ARTICLE URL: https://www.wsj.com/articles/global-stocks-markets-dow-update-03-15-2022-11647419653 Define, explain and give examples of why the Federal Reserve increased interest rates to reduce inflation?
The federal reserve is an independent institution within the United States government in charge of the monetary policy of the US economy. One of their duties is to control inflation and one option to control inflation from being too high is by increasing intreats rates. The way that higher interest rates work is that it will make it more expensive to borrow money. An example would be that a business wants a loan but as the interest rates increase it will make it harder for him to afford that loan, so the business might not take the loan, in that case, less money will be loaned out. Meaning that less money being lent out is less money circulating in the US economy so, in theory, it should stabilize prices and maintain inflation under control.
T/F: A long-term debt instrument in which a borrower agrees to make payments of principal and interest, on specific dates, to the holders of the bond is known as a bond.
True
What are the two approaches that can be used to adjust for flotation costs?
The first approach posits that flotation costs should be incorporated into the cost of capital. According to this viewpoint, in monetary terms, flotation costs can be specified as an amount per share or as a percentage of the share price. The second approach is the recommended approach which adjusts cash flows in the valuation computation. In other words, instead of including flotation costs in the cost of capital, they should be incorporated into any valuation analysis as additional costs of a project.
Define, explain, and give examples of the three different basic types of interest rate yield curves.
The first type of yield curve is a normal yield curve. The definition of a normal yield curve is a yield curve of interest rates that is upward sloping. A good way to explain this phenomenon is when short-term interest rates drop below long-term interest rates. This can occur when inflation is expected in the future to go up. This is the normal situation. The curve of a 3% 1-year bond, 4% 3-year bond, 5% 5-year bond, and 7% 10-year bond is an example of a normal yield curve. The second type of yield curve is an abnormal or inverted yield curve. An inverted yield curve is a yield curve of interest rates that slopes downward. An easy way to explain this phenomenon is when short-term interest rates drop below long-term interest rates. This can occur when inflation is expected to go down in the future. An example of an abnormal yield curve is the curve of a 7% 1-year bond, 6% 3-year bond, 5% 5-year bond, and 3% 10-year bond. The third type of yield curve is a humped yield curve. The definition of a humped yield curve is an interest rate yield curve where the interest rates of intermediate maturities are higher than those on short term and long term maturities. This means that short-term rates are low and long-term rates are low at the same time. This can happen when inflation is currently low (causing lower short-term rates) and is expected to go lower in the future (causing lower long-term rates). However, intermediate rates stay higher than these two because inflation may be expected to go higher in the intermediate-term. The curve of 3% a 1-year bond, 5% 3-year bond, 5% 5-year bond, and 4% 10-year bond is an example of a humped yield curve.
Define, explain, and give examples of what the four factors affecting the cost of money are
The four factors affecting the cost of money are (1) production opportunities, (2) time preference for consumption, (3) risk, and (4) inflation. Production opportunities are the investment opportunities in productive (cash generating) assets. Time preference is the preference of consumers for current consumption as opposed to saving for future consumption. Risk is the chance that an investment will provide a low or negative return. Inflation is the amount by which prices increase over time.
Define, explain, give examples of what the four main issuers of bonds are
The four issues of bonds are treasury, corporate, municipal, and foreign bonds. Treasury bonds are issued by the federal government. Corporate bonds are issued by corporations. Municipal bonds are issued by state and local governments. Foreign bonds are issued by foreign government's or by foreign corporations.
Define, explain, and give examples of the Horizon (Terminal) Date and the Horizon (Continuing) Date why they are important.
The horizon terminal date is the date when the growth rate becomes constant. At this date, it is no longer necessary to forecast the individual dividends whereas the horizon continuing value is the value at the horizon date of all the expected thereafter. They are important because it allows companies to gauge financial performance for the future in an accurate manner.
Define and explain the importance of the International Monetary System.
The international monetary system is the framework within which exchange rates are determined and it is essentially the blueprint for international trade and capital flows. It ties global currency, money, capital, real estate, commodity, and real asset markets into a network of institutions regulated by intergovernmental agreements and driven by each country's unique political and economic objectives.
What is the relationship between intrinsic value and market price? And what does it means if the intrinsic value is higher or lower than the market price?
The intrinsic value is the estimate of the actual true value of a company's stock which is the sum of all the company's assets minus its liabilities, and the Market value is the current value of a company as reflected by the company's stock price. And in general, the market value could be higher or lower than the intrinsic value. If the intrinsic value is higher, it means that stocks are undervalued, and if it's less the stock is considered overpriced.
What is investment risk? And what are the types?
The investment risk is related to the probability of earning a low or negative actual return, in other words, the probability or likelihood of occurrence of losses relative to the expected return on any particular investment, and there are two types: Stand-alone Risk and the Portfolio Risk.
Define, explain, and give examples of a Credit Period.
The length of time granted to buyers to pay for their purchases is referred to as a credit period. The credit period, for example, could be 30 days. Longer credit terms are preferred by customers, therefore shortening the length will simulate sales. A longer credit period, on the other hand, lengthens the cash conversion cycle, tying up more capital in receivables, which is costly. Furthermore, the longer a receivable is outstanding, the more likely it is that the customer will default and the account will become a bad debt.
Define, explain, and give examples of the Target Capital Structure.
The mix of debt, preferred stock, and common equity the firm plans to raise to fund its projects. An example would be the opening of a new franchise location for a corporation.
Define, explain, and give examples of the most widely used approach for estimating the cost of common equity?
The most used approach for estimating the cost of common equity is the capital asset pricing model (CAPM). First step, estimate risk-free rate. Second step, estimate the stock's beta and use it as an index for the stock's risk. Third step, estimate the market risk premium. Finally, plug into the formula to find the required rate of return. An example would be finding Firm A's CAPM using today's risk-free rate of 4.5%, a market risk premium of 5%, and Firm A's beta of 1.50. This would equal to rs=4.5%+(5.0%)(1.50) = 12.0%
Define and explain the term structures of interest rates. Give an example for the conditions as to when the yield curve is "abnormal".
The term structure of interest rates describes the relationship between long- and short-term rates. The term structure is important to corporate treasurers deciding whether to borrow by issuing long- or short-term debt and to investors who are deciding whether to buy long- or short-term bonds. An abnormal yield curve is upward sloping. This usually happens when the interest rates are high, but inflation is expected to decline. Thus, short term interest rates are higher than long term interest rates.
Define, explain, and give examples of the two types of DRIPs
The two types of DRIPs are plans that involve only old, outstanding stocks. The company gives money to a bank and the bank uses this money to purchase this corporation's stock on the open market and these shares are allocated to the stockholder on a pro rata basis. These costs of the transactions are typically low because of the amount that is purchased. Then, there are the plans that involve stocks that are newly issued, these invest the dividends in newly issued stocks so the plans raise a lot of new capital for the company. No extra fees are charged to the stockholders and some companies offer discounts between 1-10%. Consider the case of an investor who receives a cash dividend on his stock. The investor takes part in a DRIP in full and reinvests the cash dividends in more shares. Due to the additional shares purchased through the DRIP, the investor will receive greater cash dividends during the next dividend payout.
Define, explain, and give examples of factors that affect the weighted average cost of capital (WACC).
The weighted average cost of capital (WACC) essentially measures a company's cost to borrow money. It is an essential element in a firm's capital budgeting process. Capital is typically obtained through debt, preferred stock, and common equity. The required rate of return of investors represents the firm's cost of capital, and a variety of factors may play a role in influencing this cost. The three most important factors that shape WACC but cannot be directly controlled by a firm include interest rates in the economy, the general level of stock prices, and tax rates. For example, if interest rates in the overall economy rise, the cost of debt increases because firms must now pay bondholders more to borrow their funds. However, a firm can directly affect its cost of capital by changing its capital structure, changing its dividend payout ratio, and altering its capital budgeting decision rules. For example, if a firm changes its target capital structure, the weights used in calculating the WACC will change as well.
Define, explain, and give an examples of the dividend irrelevance theory.
This theory states that a firm's dividend policy has no effect on either its value or its cost of capital. Professors Miller and Modigliani (MM) advanced the theory and proved that a firm's value depends only on the income produced by its assets, not on how that income is split between dividends and retained earnings. For example, if a firm does not pay dividends, a shareholder who wants a 5% dividend can "create" it by selling 5% of his or her stock. However, for tax-paying investors, the taxes and transaction costs depend on what the individual investor's income is and how long he or she plans to hold the stock, as a result, when it comes to investor's preferences for dividends, one size does not fit all.
5-year Treasury bonds yield 4.0%. The inflation premium (IP) is 1.9%, and the maturity risk premium (MRP) on 5-year T-bonds is 0.4%. There is no liquidity premium on these bonds. What is the real risk-free rate, r*?
Treasury bond yield= Real risk free rate+Inflation premium + Maturity risk premium 4.0% = rea risk free rate + 1.9% + 0.4% 1.9+0.4=2.3 4.0-2.3= 1.7%
T/F: A bond is a long-term contract where the borrower agrees to make payments that include the principal and the interest to the holders of the bond.
True
T/F: A bond is a short-term contract under which a borrower agrees to make payments of interest and principal on specific dates to the holders of the bond.
True
A friend of yours just invested in an outstanding bond with a 5% annual coupon and a remaining maturity of 10 years. The bond has a par value of $1,000, and the market interest rate is currently 7%. How much did your friend pay for the bond? Is it a par, premium, or discount bond?
Using a financial calculator: N=10, I/YR=7, PMT=50, FV=1,000 The bond's value is equal to: *$859.53, because the coupon rate is less than the current market interest rate, the bond is a discount bond
Company A has preferred stocks that pay $100 per year and its required return is 13.2%. What is the value of the preferred stock?
Vp = $100/.132 Vp = $757.58
You hold a diversified $100,000 portfolio consisting of 20 stocks with $5,000 invested in each. The portfolio's beta is 1.12. You plan to sell a stock with b = 0.90 and use the proceeds to buy a new stock with b = 1.75. What will the portfolio's new beta be? Do not round your intermediate calculations. a. 2.0 b. 1.40 c. 1.60 d. 1.16
Weighted Beta of stock in the portfolio that is being sold: =0.90*(5'000/100'000) = 0.045 Weighted Beta of stock is to be bought: =1.75*(5'000/100'000) = 0.0875 New Portfolio Beta: =1.12 - 0.045 + 0.0875 = 1.1625
What is the difference between Within-Firm and Beta Risk?
Within-Firm risk measures how the project contributes to the overall riskiness of the firm. It is also related to the correlation of the new project's returns with the returns of the existing assets of the firm. Finally, it also measures the return comparison between two projects that the firm is considering. Beta Risk is a measure of the systematic risk of a security or portfolio compared to the market as a whole. It is used to help investors understand whether a stock moves in the same direction as the rest of the market. Finally, it also provides insights about how volatile or how risky a stock is relative to the rest of the market.
Define, explain, and give examples of working capital, net working capital, net operating working capital.
Working capital is the money available to meet short-term current obligations. Current assets are often called working capital because they are turnovers and can be used and then replaced during the year. Net Working capital is the difference between the current assets of a company (cash, accounts receivable, inventories of raw materials) and current liabilities (accounts payable and debt). Net operating working capital is the capital a company uses in order to fulfill operating purposes. The difference between Net operating working capital and net working capital is that notes payable are deducted from the current liabilities of the business when you are calculating the net operating working capital.
As a member of IU Corporation's financial staff, you must estimate the Year 1 cash flow for a proposed project with the following data. The new tax law enables that the equipment used in the project is eligible for 100% bonus depreciation, so it will be fully depreciated at t=0. What is the cash flow for Year 1? Round your answer to the nearest whole number.
Year 1 Cash Flow = (Revenue - Costs) x (1- Tax Rate) Sales revenues, each year $65,500 Other operating costs $18,000 Interest expense $6,000 Tax Rate 25.0% = ($65,500-$18,000) x (1-25%) = $47,500 x 0.75 = $35,625
Between Project A and Project B, which project has the best payback period and therefore should be picked? Project A Years 1 2 3 4 5 Cash Flow -1,000 550 400 300 200 Cumulative Cash Flow Project B Years 1 2 3 4 5 Cash Flow -1,000 100 300 400 690 Cumulative Cash Flow
Years 1 2 3 4 5 Cash Flow -1,000 550 400 300 200 Cumulative Cash Flow -1,000 -450 -50 250 450 * Payback A = 3 + 50/300 = 3.2 Years 1 2 3 4 5 Cash Flow -1,000 100 300 400 690 Cumulative Cash Flow -1,000 -900 -600 -200 490 Cumulative Cash Flow = cash flow + cumulative cash flow Payback B = 4 + 200/690 = 4.2
ARTICLE URL: https://www.cnbc.com/2022/04/12/apple-ceo-tim-cook-says-some-new-policies-would-hurt-iphone-security.html What would NOT result from this antitrust legislation (circumventing apples 15%-30% fees on all apple store transactions) being passed a. A safer environment for apple software would arise b. Apple will gain many more applications on their devices c. Apple will lose a lot of power in the app market d. All of the above are true
a. A safer environment for apple software would arise
ARTICLE URL: https://www.globalbankingandfinance.com/a-guide-to-flexible-scheduling-for-banking-management/ What is Intelligent Automation? a. It is enabling banking leaders to improve net staffing through proactive b. The producer-price report generally captures pressure on input costs. c. The overall trend in producer prices signals that supply-chain problems continued to push up prices d. Expected Market Price.
a. It is enabling banking leaders to improve net staffing through proactive
Which of the following risks is measured by the variability of the project's expected returns? a. Stand-alone risk b. Corporate (Within-firm) risk c. Market (Beta) risk d. None of the risks described
a. Stand-alone risk
What is the formula for the Coefficient of Variation (CV)? a. Standard deviation / Expected Return b. Expected Return + Rate of Return c. Rate of Return + Standard Deviation d. Expected Return / Rate of Return
a. Standard deviation/ Expected Return
Which government agency is suing TurboTax's parent company, Intuit? a. The Federal Trade Commission b. The SEC c. The WHO d. The UN
a. The Federal Trade Commission
ARTICLE URL: https://www.wsj.com/articles/tencent-faces-possible-record-fine-for-anti-money-laundering-violations-11647242561?mod=tech_lead_pos3Links to an external site. What is happening in China with Fintech companies like WeChat pay? a. They are being audited for money laundering schemes B. they are being audited for fraud c. their practices are being outlawed d. none of the above
a. They are being audited for money laundering schemes
When the slope of a risk-return line are steeper it indicates that? a. investor is more risk adverse b. investor is more comfortable bearing risk c. investor likes to diversify capital d. investor is more likely to hold longer than 5 years
a. investor is more risk adverse
Which are the four types of bonds? a. treasury, corporate, municipal, and foreign b. corporate, office, security, foreign c. corporate, treasury, principal, interest d. municipal, treasury, security, principal
a. treasury, corporate, municipal, and foreign
Which of the following sets of interest rates would be a normal yield curve if drawn out? a. 3% 1-year bond, 2% 3-year bond, 4% 5-year bond, 6% 10-year bond b. 3% 1-year bond, 4% 3-year bond, 5% 5-year bond, 7% 10-year bond c. 3% 1-year bond, 5% 3-year bond, 5% 5-year bond, 4% 10-year bond d. 7% 1-year bond, 6% 3-year bond, 5% 5-year bond, 3% 10-year bond
b. 3% 1-year bond, 4% 3-year bond, 5% 5-year bond, 7% 10-year bond
Corporate bonds are: a. Bonds issued by the federal government, sometimes referred to as government bonds b. Bonds that are issued by corporations c. Bonds issued by state and local government d. Bonds issued by foreign governments or by foreign corporations
b. Bonds that are issued by corporations
What does The CAPM: stand for? a. Cost Appreciation Plan b. Capital Asset Pricing Model c. Correct At Pricing Model d. Cost Asset planning model
b. Capital Asset Pricing Model
Market forces determine whether a currency sells at a forward premium or discount, and the general relationship between spot and forward exchange is specified by a concept called a. Interest rates b. Interest Rate Parity c. Cross rate d. Purchasing power parity
b. Interest Rate Parity
What type of bond holds company/individual assets as security for the bond? a. Savings Bonds b. Mortgage Bonds c. Treasury Securities d. Agency Securities
b. Mortgage Bonds
What factors should investors consider when investing overseas? a. Population b. Risk Factors c. Food Quality d. Altitude above Sea Level
b. Risk Factors
Time preferences for consumption is: a. The investment opportunities in productive (cash generating) asset b. The preferences of consumers for current consumption as opposed to saving for future consumption c. In a financial market context, the chance that an investment will provide a low or negative return d. The amount by which prices increase over time
b. The preferences of consumers for current consumption as opposed to saving for future consumption
What is the term structure of interest rates used for? a. To determine the level of risk that a decline in interest rates will lead to lower income when bonds mature and funds are reinvested b. To show the relationship between bond yields and maturities c. To determine the premium that reflects interest rate risk d. To show the yield curve that's dependent on investors' expectations about future interest rates
b. To show the relationship between bond yields and maturities
What is the real risk-free rate of interest? a. an interest rate that considers inflation on long-term securities b. interest rate that is on a riskless security if there was no inflation to be expected, and is considered to be the rate of interest on short-term treasury securities if there was no inflation c. an interest rate with premium for expected inflation d. interest rate for different debt securities
b. interest rate that is on a riskless security if there was no inflation to be expected, and is considered to be the rate of interest on short-term treasury securities if there was no inflation
Which of the following terms is used to describe a set of projects where only one can be accepted? a. attached b. mutually exclusive c. inclusive d. choice abandonment
b. mutually exclusive
ARTICLE URL: https://www.fa-mag.com/news/there-s-nothing--virtual--about-taxes-in-the-metaverse-67269.html In what emerging virtual space, often termed the next global marketplace, are income taxes, sales taxes and other levies a bold new topic largely devoid of official guidance? a. the frontier b. the metaverse c. the space new d. the automated globe
b. the metaverse
Casablanca Inc.'s stock currently sells for $35.25 per share. The dividend is projected to increase at a constant rate of 4.50% per year. The required rate of return on the stock, r is 11.50%. What is the stock's expected price 5 years from now? a. 46.0 b. 50.1 c. 43.93 d. 42.70
c. 43.93 Current market price (Po) = $35.25 Growth rate (g) = 4.5% 0.045 Market price 5 years from now P5 = Po (1 +g) n P5 = $35.25(1 + 0.045)5 P5 = $43.93
ARTICLE URL: https://www.wsj.com/articles/judge-approves-18-million-activision-settlement-with-eeoc-11648644667?st=y4c8l7354imlytt&reflink=desktopwebshare_permalink What video game company was recently involved in an $18 million settlement with the Equal Employment Opportunity Commission? a. Nintendo b. Rockstar c. Activision Blizzard d. Sega
c. Activision Blizzard
If a company has involvement with buying or selling of goods with Russia, how will they report their losses due to the sanctions? a. Put losses in financial statement b. Attempt to minimize losses in the income statement c. Attempt to maximize losses in the income statement d. Hide losses
c. Attempt to maximize losses in the income statement
Which of the following is correct regarding the MIRR a. The IRR method can never be subject to the multiple IRR problem, while the MIRR method can be. b. The MIRR and NVP decision criteria can never conflict c. One reason some people prefer the MIRR to the regular IRR is that the MIRR is based on a generally more reasonable reinvestment rate assumption d. MIRR is better than the IRR and NPV when choosing among competing projects
c. One reason some people prefer the MIRR to the regular IRR is that the MIRR is based on a generally more reasonable reinvestment rate assumption
What kind of document gives one person the authority to act for another, typically the power to vote shares of common stock? a. Classified Stock b. Founder Shares c. Proxy d. Preemptive Right
c. Proxy
Which principle involves "dividing the pie into smaller pieces" without affecting current stockholder position? a. Stock splits b. Dividend reinvestment plans (DRIPs) c. Stock dividends d. Residual dividend model
c. Stock dividends
If a stock's dividend is expected to grow at a constant rate of 5% a year, then which of the following statements is correct? Note that the stock is in equilibrium. a. The stock's dividend yield is 5% b. The stock's required return must be equal to or less than 5%. c. The stock's price one year from now is expected to be 5% above the current price. d. The expected return on the stock is 5% a year.
c. The stock's price one year from now is expected to be 5% above the current price.
Which of the following terms refers to the fees charged by investment bankers when assisting companies in issuing new common stock? a. new costs b. return costs c. flotation costs d. settlement costs
c. flotation costs
Which is the appropriate term for the investment policies that are between the relaxed and restricted policies? a. average investment policies b. medium investment policies c. moderate investment policies d. modest investment policies
c. moderate investment policies
Tresnan Brothers is expected to pay a $1.80 per share dividend at the end of the year (i.e., D1 5 $1.80). The dividend is expected to grow at a constant rate of 4% a year. The required rate of return on the stock, Rs, is 10%. What is the stock's current value per share?
current stock value = dividend / (required rate of return - dividend growth rate) current stock value = $1.80 / (10% - 4%) = $1.80 / 6% = $30
Inventories can include which of the following? a. Raw Materials b. Work in Process c. Finished Goods d. All of the Above
d. All of the Above
What factor(s) affect the level of interest rates? a. Production opportunities b. Risk c. Expected inflation d. All of the above
d. All of the above
What banking company is trying to re-enter the Saudi Arabian market after abruptly leaving due to 9/11? a. Morgan Stanley b. Wells Fargo c. Bank of America d. Citigroup
d. Citigroup
The percentage cost of issuing new common stock. a. Bond yield b. Risk premium c. Capital components d. Flotation costs
d. Flotation costs
An analyst evaluating securities has obtained the following information. The real rate of interest is 6% and is expected to remain constant for the next 3 years. Inflation is expected to be 8% next year, 9% the following year, and 9.5% the third year. The maturity risk premium is estimated to be 0.1 x (t-1)%, where t = number of years to maturity. What is the yield on a 1-year T-bill?
rT1 = r + IP1 + MRP1 r = 6% IP = 8% rT1 = 6% + 8% + 0.1(1-1)% rT1 = 12%
Let's say the covariance of the S&P 500's return to AAPL's return is 0.051 and the average market return variance is 0.0362. Calculate BETA of Apple.
β = (0.051) / (0.0362) *β = 1.41
Suppose the exchange rate between the U.S dollar and Euro was €0.93= $1, and the British Pound £ 0.77 = $1. What would be the exchange rate between Euros and Pounds?
€0.93 Euro = $1 USD £0.77 GBP= $1 USD 0.93/0.77 = 1.20 Euro/GBP 0.77/0.93= 0.82 GBP/Euro