TCA 420 EXAM 2
A corporate financial analyst must calculate the value of an asset which produces year-end annual cash flows of $0 the first year, $2,000 the second year, $3,000 the third year, and $2,500 the fourth year. Assuming a discount rate of 15 percent, what is the value of this asset?
$0/(1.15)1 + $2,000/(1.15)2 + $3,000/(1.15)3 + $2,500/(1.15)4 = $4,914
Five years ago, the City of Baltimore sold at par a $1,000 bond with a coupon rate of 8 percent and 20 years to maturity. If this bond pays interest semiannually, what is the value of this bond to an investor who requires an 8 percent rate of return?
$1,000
What is the current price of a $1,000 par value bond maturing in 12 years with a coupon rate of 14 percent, paid semiannually, that has a YTM of 13 percent?
$1,060
Hewitt Packing Company has an issue of $1,000 par value bonds with a 14 percent annual coupon interest rate. The issue has ten years remaining to the maturity date. Bonds of similar risk are currently selling to yield a 12 percent rate of return. The current value of each Hewitt bond is ________.
$1,113.00
Newfangled Dangle Systems had earnings after tax of $1,000,000 last year. Included in its expenses were $50,000 of interest, $100,000 of deferred taxes, and $150,000 of depreciation. In addition, the company paid dividends of $200,000 to its stockholders last year. What was Newfangled's after-tax cash flow last year?
$1,250,000
A firm has an issue of $1,000 par value bonds with a 12 percent stated interest rate outstanding. The issue pays interest annually and has 10 years remaining to its maturity date. If bonds of similar risk are currently earning 8 percent, the firm's bond will sell for ________ today.
$1,268.40
A firm issued 10,000 shares of $2 par-value common stock, receiving proceeds of $40 per share. The amount recorded for the paid-in capital in excess of par account is ________.
$380,000
Determine the beta of a portfolio consisting of the following common stocks: Security Market Value Beta Boeing $5,000 1.2 Exxon $4,000 0.8 Duke Power $2,500 0.6 Blockbuster $2,000 1.4 Coca-Cola $7,500 1.0
1.00
What is the profitability index of a project that has an initial cash outflow of $600, an inflow of $250 for the next 3 years and a cost of capital of 10 percent?
1.036
Harry Corporation's common stock currently sells for $180 per share. Harry just paid a dividend of $10.18 and dividends are expected to grow at a constant rate of 6 percent forever. If the required rate of return is 12 percent, what will Harry Corporation's stock sell for one year from now?
$190.64
Stepping Out Shoe Mfg. has inventory purchases of $2,200 during the month of June. If the June 1 accounts payables were $1,700 and June 30 accounts payables were $1,900, what was the cash payment?
$2,000
A firm has an outstanding issue of 1,000 shares of preferred stock with a $100 par value and an 8 percent annual dividend. The firm also has 5,000 shares of common stock outstanding. If the stock is cumulative and the board of directors has passed the preferred dividend for the prior two years, how much must the preferred stockholders be paid prior to paying dividends to common stockholders at the end of third year?
$24,000
Julian is considering purchasing the stock of Pepsi Cola because he really loves the taste of Pepsi. What should Julian be willing to pay for Pepsi today if it is expected to pay a $2 dividend in one year and he expects dividends to grow at 5 percent indefinitely? Julian requires a 12 percent return to make this investment.
$28.57
What would be the cost of new common stock equity for Tangshan Mining if the firm just paid a dividend of $4.25, the stock price is $55.00, dividends are expected to grow at 8.5 percent indefinitely, and flotation costs are $6.25 per share?
17.22%
Odarta can afford to pay 12,00 at the end of each of the next 30 years to repay a home loan. If the interest rate is 5.5% what is the most Odarta can borrow?
174,404.94
Greg is interested in investing in a small company, and he thinks Good Buy Co. might be a good investment. He has been given the following information and would like to know the return on stockholder's equity. Assume Good Buy's marginal tax rate is 40%. Earning before taxes = $3 million Net profit margin = 3.6% Total liabilities = $15.0 million Total stockholder's equity = $10.0 million
18%
You plan to invest 2,00 annually. The first 2,000 will be invested on your 22nd birthday and the last 2,00 will be invested on your 49th birthday. What is the value of this investment on your 50th birthday if all invested funds earn 8% annually?
205,931.87
A firm with a debt ratio of 0.75, will have an equity multiplier of
4.00
The approximate after-tax cost of debt for a 20-year, 7 percent, $1,000 par value bond selling at $960 (assume a marginal tax rate of 40 percent) is ________.
4.43 percent
Richtex Brick has a current dividend of $1.70 and the market value of its common stock is $28. The expected market return is 13 percent and the risk-free rate is 9 percent. If Richtex stock is half as volatile as the market, and the market is in equilibrium, what rate of growth is expected for Richtex's dividends assuming a constant growth valuation model is appropriate for Richtex?
4.65%
Determine the yield-to-call (to nearest 0.1 of a percent) of an LTV bond with a 14 percent coupon, that pays interest semiannually. The bond can be called in 7 years, has a call premium of $140, and is currently selling for $1154.
12.0%
An investment advisor has recommended a $50,000 portfolio containing assets R, J, and K; $25,000 will be invested in asset R, with an expected annual return of 12 percent; $10,000 will be invested in asset J, with an expected annual return of 18 percent; and $15,000 will be invested in asset K, with an expected annual return of 8 percent. The expected annual return of this portfolio is
12.00%
A firm has common stock with a market price of $55 per share and an expected dividend of $2.81 per share at the end of the coming year. The dividends paid on the outstanding stock over the past five years are as follows:The cost of the firm's common stock equity is ________.
12.1 percent
Nico Corp issued bonds bearing a coupon rate of 12 percent, pay coupons semiannually, have 3 years remaining to maturity, and are currently priced at $940 per bond. What is the yield to maturity?
14.54%
What is the expected market return if the expected return on Asset X is 20 percent, its beta is 1.5, and the risk free rate is 5 percent?
15.00%
A firm has a beta of 1.2. The market return equals 14 percent and the risk-free rate of return equals 6 percent. The estimated cost of common stock equity is ________.
15.6 percent
Last year, Mike bought 100 shares of Dallas Corporation common stock for $53 per share. During the year he received dividends of $1.45 per share. The stock is currently selling for $60 per share. What rate of return did Mike earn over the year?
15.9%
Given that the cost of common stock is 18 percent, dividends are $1.50 per share and the price of the stock is $12.50 per share, what is the annual growth rate of dividends?
6 percent
You have invested 5,000 into a certificate of deposit for 5 years. It ays a 6% annual nominal rate, compounded semiannually. What is the value of the certificate of deposit at the end of 5 years?
6,719.58
Asset Y has a beta of 1.2. The risk-free rate of return is 6 percent, while the return on the market portfolio of assets is 12 percent. The asset's market risk premium is ________.
6.0%
Zheng Corporation plans to issue new bonds to finance its expansion plans. In its efforts to price the issue, Zheng Corporation has identified a company of similar risk with an outstanding bond issue that has an 8 percent coupon rate having a maturity of ten years. This firm's bonds are currently selling for $1,091.96. If interest is paid annually for both bonds, what must the coupon rate of the new bonds be in order for the issue to sell at par?
6.71%
Nico Trading Corporation is considering issuing long-term debt. The debt would have a 30-year maturity and a 10 percent coupon rate. In order to sell the issue, the bonds must be underpriced at a discount of 5 percent of face value. In addition, the firm would have to pay flotation costs of 5 percent of face value. The firm's tax rate is 35 percent. Given this information, the after-tax cost of debt for Nico Trading would be ________.
7.26%
If a corporation has an average tax rate of 40 percent, the approximate, annual, after-tax cost of debt for a 15-year, 12 percent, $1,000 par value bond, selling at $950 is ________.
7.7 percent
A money multiplier certificate is selling for 8,00 today and promised to be worth 10,00 in 3 years. What is the rate of return on this investment?
7.72%
Suppose you are borrowing money at a 10% annual nominal rate. To pay as little as possible, which one of the following compounding periods should you prefer
Annually
The Oxford Heating Company has been very successful in the past four years. Over these years, it paid common stock dividend of $4 in the first year, $4.20 in the second year, $4.41 in the third year, and its most recent dividend was $4.63. The company wishes to continue this dividend growth indefinitely. What is the value of the company's stock if the required rate of return is 12 percent?
Answer: Constant growth rate, g = ($4.63 / $4.00) 1 / 3 - 1 = 0.04996, g = 5% P = D5 / (r - g) = 4.63 (1 + 0.05) / (0.12 - 0.05) = $69.45
Yantai Food, Inc. has issued a bond with par value of $1,000, a coupon rate of 9 percent that is paid semi-annually, and that matures in 10 years. What is the value of the bond if the required rate of return is 12 percent?
Answer: Coupon payment = 1,000 × 0.09 = $90 Semi-annual coupon payment = 90/2 = $45 Using financial calculator: PMT = 45, I = 6, N = 20, FV = 1000, CPT PV = $827.95
To expand its business, the Kingston Outlet factory would like to issue a bond with par value of $1,000, coupon rate of 10 percent, and maturity of 10 years from now. What is the value of the bond if the required rate of return is 1) 8 percent, 2) 10 percent, and 3) 12 percent?
Answer: Coupon payment = 1,000 × 0.10 = $100 1) Using Financial calculator: PMT = 100, N = 10, I = 8, FV = 1000, CPT PV = $1,134.20 2) $1,000 since coupon rate and required rate of return are equal. 3) Using Financial calculator: PMT = 100, N = 10, I = 12, FV = 1000, CPT PV = $887
The Bradshaw Company's most recent dividend was $6.75. The historical dividend payment by the company shows a constant growth rate of 5 percent per year. What is the maximum you would be willing to pay for a share of its common stock if your required rate of return is 8 percent?
Answer: D1 = $6.75 × (1 + 0.05) = $7.0875 P = D1 / (r - g) = $7.0875 / (0.08 - 0.05) = $236.25
Ted has 10 shares of Grand Company. Based on the company's dividend policy, Ted will receive a total of $450 a year in perpetuity. What is the value of each share if the rate of interest is 8 percent?
Answer: Dividend per share = $450 / 10 = $45 P = D / r = 45 / 0.08 = $562.50
The purpose of the debt covenant that requires maintaining a minimum level of net working capital is to ________.
ensure a cash shortage does not cause an inability to meet current obligations
If a corporate bond is issued with a coupon rate that varies directly with the required return, the price of the bond will ________.
equal the face value
The effective rate of interest will always be ____ the nominal rate.
equal to or greater than
The cost of retained earnings is ________.
equal to the cost of common stock equity
The constant-growth valuation model is based on the premise that the value of a share of common stock is ________.
equal to the present value of all expected future dividends
Users of the CAPM should be aware of some of the problems in its practical application.
estimating expected future market returns determining the most appropriate measure of the risk- free rate determining an asset's future beta
A violation of preferred stock restrictive covenants usually permits preferred shareholders to ________.
force the retirement of the preferred stock at or above its par value
Eurodollars are U.S. dollars that have been deposited in
foreign banks and foreign branches of U.S. banks
A foreign bond is issued by a(n) ________.
foreign corporation or government and is denominated in the investor's home currency and sold in the investor's home market
The net present value rule provides appropriate guidance for financial decision makers when costs are incurred immediately
future cash flows are not known with certainty marginal costs are equal to marginal revenue marginal costs are greater then marginal revenue
You plan to borrow 20,000 and repay the loan with 48 equal monthly payments. Which of the following best describes this?
future value of an annuity
A significant portion of the return on a zero coupon bond is in the form of ________.
gain in value
Because equityholders are the last to receive any distribution of assets as a result of bankruptcy proceedings, they expect ________.
greater returns from their investment in the firm's stock
The more frequent the compounding the
greater the effective interest rate
Lower (less positive and more negative) the correlation between asset returns
greater the potential diversification of risk
The ____ the risk of receiving future cash flows, the ____ will be the present value of those cash flows.
greater, lower
A beta coefficient of +1 represents an asset that ________.
has the same response as the market portfolio
A beta coefficient of -1 represents an asset that ________.
has the same response as the market portfolio but in opposite direction
Firms with a positive economic value added (EVA):
have a return on capital greater than their cost of capital
The cost of preferred stock is ________.
higher than the cost of long-term debt and lower than the cost of common stock.
Less certain a cash flow, the ________ the risk, and ________ the present value of the cash flow.
higher; lower
Asset management ratios indicate
how well a firm is using its assets to support sales
Which of the following steps in the capital budgeting process follows the decision making step?
implementation
Payment of interest required only when earnings are made available from which to make a payment is characteristic of a(n) ________.
income bond
________ bonds are characterized by interest payments that are required only when earnings , and commonly issued in the reorganization of a failed or failing firm
income bonds
Bond indentures include restrictive covenants.These provisions protect the bondholders against ________.
increase in borrower's risk
A corporation has concluded that its financial risk premium is too high. In order to decrease this, the firm can ________.
increase the proportion of common stock equity to decrease financial risk
As the need for capital increases beyond the optimum capital structure, the cost of debt financing will ________ the firm's weighted average cost of capital.
increase, raising
A(n) ________ in the beta coefficient normally causes ________ in the required return and therefore ________ in the price of the stock, everything else remaining the same.
increase; an increase; a decrease
An increase in the Treasury Bill rate ________.
increases the required rate of return of a common stock
The legal contract setting forth the terms and provisions of a corporate bond is a(n) ________.
indenture
The value of a bond is the present value of the ________.
interest payments and maturity value
The ________ is the compound annual rate of return that a firm will earn if it invests in the project and receives the given cash inflows.
internal rate of return
The ________ is the discount rate that equates the present value of the cash inflows with the initial investment.
internal rate of return
The quick ratio is the same as current ratio except it does not consider
inventories
The price of a bond with a fixed coupon rate and the required return have a relationship that is best described as ________.
inverse
The size of a loan and its issuance costs (as a percentage of the amount borrowed) are ________.
inversely related
A downward-sloping yield curve that indicates generally cheaper long-term borrowing costs than short-term borrowing costs is called ________.
inverted yield curve
A(n)________ is hired by a firm to find prospective buyers for its new stock or bond issue
investment banker
As risk aversion increases ________.
investors' required rate of return will increase
Which of the following is not an advantage of common stock financing?
involves relatively high flotation costs
The decision to refund a callable bond ________.
is a capital budgeting decision
The beta associated with a risk-free asset ________.
is equal to 0
The cost of a long-term debt generally ________ that of a short-term debt.
is greater than
The beta of a portfolio ________.
is the weighted average of the betas of the individual assets in the portfolio
A beta coefficient of 0 represents an asset that ________.
is unrelated to the market portfolio
Some firms use the payback period as a decision criterion or as a supplement to sophisticated decision techniques, because ________.
it can be viewed as a measure of risk exposure due to its focus on liquidity
What happens to the present value of an annuity as the interest rate increases
it decreases
Payback is considered an unsophisticated capital budgeting because it ________.
it does not explicitly consider the time value of money.
What happens to the future value of an annuity as the interest rate increases
it increases
If a firm's total asset turnover ratio is 2.0,
its annual sales are two times its total assets
________ are debt rated Ba or lower by Moody's or BB or lower by Standard & Poor's and are commonly used by rapidly growing firms to obtain growth capital, most often to finance mergers and takeovers.
junk bonds
________ are popular vehicle used to finance mergers and takeovers.
junk bonds
future value of an ordinary annuity
last payment is on the same date as the future value
When the net present value is negative, the internal rate of return is ________ the cost of capital
less than
Since retained earnings are viewed as a fully subscribed issue of additional common stock, the cost of retained earnings is ________.
less than the cost of new common stock equity
In a limited partnership, the limited partners may limit their:
liability
Combining two assets having perfectly positively correlated returns will result in the creation of a portfolio with an overall risk that ________.
lies between the asset with the higher risk and the asset with the lower risk
The purpose of the debt covenant that prohibits borrowers from entering into certain types of leases is to ________.
limit the amount of fixed-payment obligations
The purpose of the restrictive debt covenant that prohibits the sale of accounts receivable is to ________.
limit the realization of current assets to cash
The theory suggesting that for any given issuer, long-term interest rates tends to be higher than short-term rates is called ________.
liquidity preference theory
A tax adjustment must be made in determining the cost of ________.
long-term debt
Generally the least expensive source of long-term capital is ________.
long-term debt
Bonds are ________.
long-term debt instruments used to raise large sums of money
The four basic sources of long-term funds for a firm are ________.
long-term debt, common stock, preferred stock, and retained earnings
Generally, the order of cost, from the least expensive to the most expensive, for long-term capital of a corporation is ________.
long-term debt, preferred stock, retained earnings, new common stock
The basic relationship in bond valuation is for a given percentage point change in the required rate of return, the ____ the time to maturity, the ____ the change in value.
longer, greater
The ________ the coefficient of variation, the ________ the risk
lower; lower
The chief financial officer (CFO) normally has responsibility for all the
managing interest rate risk trading foreign currencies accounting functions
When discussing weighing schemes for calculating the weighted average cost of capital, ________.
market value weights are preferred over book value weights and target weights are preferred over historical weights
Which of the following affects the cost of a bond?
maturity of a bond
The term structure of interest rates is related to the ____.
maturity risk premium
The most widely accepted objective of the firm is to
maximize shareholder wealth
An efficient portfolio is one that ________.
maximizes return for a given level of risk
Comparing net present value and internal rate of return ________.
may give different accept-reject decisions
The goal of an efficient portfolio is to ________.
minimize risk for a given level of return
A(n) ________ is secured by real estate
mortgage bond
Arbitrage pricing theory is a model that relates expected returns on securities to
multiple risk factors
The values shown in ordinary annuity tables (either present value or compound value) can be adjusted to the annuity due form by ____ the ordinary annuity interest factor by ____.
multiplying, (1 + i)
Projects that compete with one another, so that the acceptance of one eliminates the others from further consideration are called ________.
mutually exclusive projects
The cost of capital reflects the cost of funds ________.
over a long-run time period
An investment that pays $1,000 in a year, $1,500 in two years, and $2,000 in three years can properly be described as an annuity.
False
Bonds and common stock are generally both classified as fixed income securities.
False
Common stock has seniority relative to preferred stock.
False
Conceptually, the value of any investment security is the future value of the security's expected future cash flows earnings the investor's required rate of return until termination.
False
Corporate bonds are generally considered perpetual.
False
If an interest rate is compounded monthly, the annual nominal rate is greater than the effective annual rate.
False
The cost of common stock equity may be estimated by using the ________.
Gordon model
Market based ratios can be which of the following: I. Price-to-earnings ratio II. Dividend yield
I only
F
Investors generally do not require a higher rate of return on common stock.
T
Investors require a higher rate of return on common stock.
Which of the following is true of the accept-reject approach?
It can be used for making capital budgeting decisions when there is capital rationing.
Which of the following is a reason for firms not using the payback method as a guideline in capital investment decisions?
It cannot be specified in light of the wealth maximization goal.
Which of the following is true of NPV profile?
It charts the net present value of a project as a function of the cost of capital
Which of the following is a disadvantage of payback period approach?
It does not explicitly consider the time value of money.
Which of the following is true of equity?
It does not mature, so repayment is not required
Which of the following is true of common stock ?
It gives the holder voting rights which permit selection of the firm's directors.
Which of the following is true of the issuance of nonvoting common stock?
It helps the corporation to raise capital through the sale of common stock, without giving up its voting control
Which of the following is true of par value of a common stock?
It is an arbitrary value established for legal purposes in a firm's corporate charter.
Which of the following is true of a capital expenditure?
It is commonly used to expand the level of operations.
Which of the following is an advantage of NPV?
It takes into account the time value of investors' money.
$41.05
Jasmine Hotels currently pays a $2.40 (d0) common stock dividend. Dividends have been recently growing at a 10% annual rate and are expected to continue growing at this rate for the next 3 years. Thereafter the growth rate is expected to be 5% for the foreseeable future. What is the current value of Casey's common stock to an investor requiring an 12% rate of return?
________ is the actual amount each common stockholder would expect to receive if a firm's assets are sold for their market value, creditors and preferred stockholders are repaid, and any remaining money is divided among the common stockholders
Liquidation value
Smith has current assets of $800,000, which can be liquidated at 90 percent of book value. Total liabilities, including preferred stock, equal $270,000. The firm has 15,000 shares of common stock outstanding. What is the liquidation value per share of common stock?
Liquidation value per share = ($800,000*90%-$270,000)/15,000 = $30 per share
________ mainly explains the tendency for the yield curve to be upward sloping.
Liquidity preference theory
Which of the following affects the slope of yield curve?
Liquidity preferences
____ indicate the ability of the firm to meet its short-term financial obligations
Liquidity ratios
40
Mater's Motor Restaurants Incorporated currently pays a $4.00 (d0) common stock dividend. The dividend is expected to remain at $4.00 and not expected to grow in the future. What is the current value of this restaurants common stock to an investor requiring an 10% rate of return?
65
Ms. Piggy's Hotels Incorporated currently pays a $5.00 (d0) common stock dividend. Dividends have been growing at a 4% annual rate and are expected to continue growing at this rate into the foreseeable future. What is the current value of Goofy Hotels common stock to an investor requiring a 12% rate of return?
________ projects have the same function; the acceptance of one ________ the others from consideration.
Mutually exclusive; eliminates
Total risk of a security can be viewed as consisting of two parts. Which of the following apply? I. verifiable risk II. non-verifiable risk
Neither I nor II
Which of the following statements is/are correct? I. Shareholders elect the Chairman of the Board II. The board of directors has no control over whether or not dividends will be paid.
Neither I nor II
Getrag expects its sales to increase 20% next year from its current level of $4.7 million. Getrag has current assets of $660,000, net fixed assets of $1.5 million, and current liabilities of $462,000. All assets are expected to grow proportionately with sales. If Getrag has a net profit margin of 10%, what additional financing will be needed to support the increase in sales? Getrag does not pay dividends.
No financing needed, surplus of $224,400
Should Tangshan Mining company accept a new project if its maximum payback is 3.25 years and its initial after-tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $700,000 in year 3, and $1,800,000 in year 4?
No, since the payback period of the project is more than the maximum acceptable payback period.
In response to the stock market's reaction to its dividend policy, the Nico's Toy Company has decided to increase its dividend payment at a rate of 4 percent per year. The firm's most recent dividend is $3.25 and the required rate of interest is 9 percent. What is the maximum you would be willing to pay for a share of the stock?
P = D1 / (r - g) = 3.25 × (1 + 0.04) / (0.09 - 0.04) = $67.60
The use of the ________ is especially helpful in valuing firms that are not publicly traded.
P/E multiple
Which of the following valuation methods is superior to others in the list since it considers expected earnings?
P/E multiple
Shareholder returns can take the form of
Periodic dividend payments and proceeds from the sale of the stock
33.24
Pocahontas Hotels currently pays a $1.80 (d0) common stock dividend. Dividends have been recently growing at a 7% annual rate and are expected to continue growing at this rate for the next 3 years. Thereafter the growth rate is expected to be 5% for the foreseeable future. What is the current value of Casey's common stock to an investor requiring an 11% rate of return?
Which of the following is true of preferred stocks?
Preferred stock with a conversion feature allows holders to change each share into a stated number of shares of common stock.
________ are promised a fixed periodic dividend that must be paid prior to paying any common stock dividends
Preferred stockholders
Evaluate the following projects using the payback method assuming a rule of 3 years for payback YEAR Project A Project B 0 -10,000 -10,000 1 4,000 4,000 2 4,000 3,000 3 4,000 2,000 4 0 1,000,000
Project A can be accepted because the payback period is 2.5 years but Project B cannot be accepted because its payback period is longer than 3 years.
Consider the following projects, X and Y, where the firm can only choose one. Project X costs $600 and has cash flows of $400 in each of the next 2 years. Project Y also costs $600, and generates cash flows of $500 and $275 for the next 2 years, respectively. Which investment should the firm choose if the cost of capital is 10 percent?
Project X, since it has a higher NPV than Project Y
________ is the extent of an asset's risk. It is found by subtracting the pessimistic outcome from the optimistic outcome.
Range
$38.21
Rapunzel Hotels currently pays a $2.60 (d0) common stock dividend. Dividends have been recently growing at a 10% annual rate and are expected to continue growing at this rate for the next 3 years. Thereafter the growth rate is expected to be 6% for the foreseeable future. What is the current value of Casey's common stock to an investor requiring an 14% rate of return?
Ride World has estimated the market value of its assets to be $1,250,000. What is the value of Ride World's common stock if it has $900,000 in liabilities, $50,000 in preferred stock, and 7,500 shares of common stock outstanding?
Stock price = ($1,250,000 - $900,000 - $50,000) / 7,500 = $40
Karina's Caribbean Foods had total assets as recorded on its balance sheet are $1,500,000. What is the value of the Karina's common stock if it has $950,000 in liabilities, and 7,500 shares of common stock outstanding?
Stock price = ($1,500,000 - $950,000) / 7,500 = $73.33
Due to growing demand for computer software, the Shine Company has had a very successful year and expects its earnings per share to grow by 25 percent to reach $5.50 for this year. Estimate the price of the company's common stock assuming the industry's price/earning ratio is 12.
Stock price = (P/E × E) = 12 × $5.50 = $66
________ are claims that are not satisfied until those of the creditors holding certain (senior) debts have been fully satisfied
Subordinated debentures
________ means that subsequent creditors agree to wait until all claims of the are senior debt satisfied before having their claims satisfied.
Subordination
________ is a guide to a firm's value if it is assumed that investors value the earnings of a given firm in the same way they do the average firm in the industry.
The P/E multiple
Which of the following is a marketable security?
Treasury bill
A call feature allows the issuing corporation to repay the bond prior to maturity if it so wishes.
True
A loan amortization schedule shows how much of the principal balance is paid off with each loan payment.
True
An infinite annuity is called a perpetuity.
True
If a bond is not secured by collateral, it is called a debenture.
True
Interest on a bond is a tax-deductible cost for the paying corporation.
True
The annual interest paid by a bond is equal to the bond's coupon rate times its par value.
True
The first payment of a deferred annuity is deferred more than one period into the future.
True
The interest paid on an amortized loan decreases with each payment.
True
The process of computing the present value of a future value is called discounting.
True
What is the value of an asset which pays $200 a year for the next 5 years and can be sold for $1,500 at the end of five years from now? Assume that the opportunity cost is 10 percent
Using Financial calculator: FV = 1500, PMT = 200, N = 5, I = 10, CPT PV = -1689.54 The value of the asset = $1,689.54.
Hewitt Packing Company has an issue of $1,000 par value bonds with a 14 percent coupon interest rate outstanding. The issue pays interest semiannually and has 10 years remaining to its maturity date. Bonds of similar risk are currently selling to yield a 12 percent rate of return. What is the value of these Hewitt Packing Company bonds?
Using financial calculator: PMT = $70, N = 20, FV = 1000, I = 6, CPT PV = $1,114.70
In an efficient capital market, all security investments will have:
a NPV of zero
AKA's stock is currently selling for $11.44. This year the firm had earnings per share of $2.80 and the current dividend is $0.68. Earnings are expected to grow 7% a year in the foreseeable future. The risk-free rate is 10 percent and the expected market return is 14.2 percent. What will be the effect on the price of AKAs' stock if systematic risk increases by 40 percent, all other factors remaining constant?
a decrease of $1.99
If the required return is greater than the coupon rate, a bond will sell at ________.
a discount
Using the capital asset pricing model, the cost of common stock equity is the return required by investors as compensation for ________.
a firm's nondiversifiable risk
On ________, the stated interest rate is adjusted periodically within stated limits in response to changes in specified money or capital market rates.
a floating rate bond
Generally, an increase in risk will result in ________.
a higher required return or interest rate
Which of the following is a strength of payback period?
a measure of risk exposure
A proxy battle is the attempt by ________.
a nonmanagement group to unseat the existing management and gain control of the firm
High-risk, high-yield junk bonds have declined in popularity over time due to ________.
a number of major defaults on these bonds
In the capital asset pricing model, an increase in inflationary expectations will be reflected by ________.
a parallel shift upward in the security market
If you expect the market to increase which of the following portfolios should you purchase?
a portfolio with a beta of 1.9
If the required return is less than the coupon rate, a bond will sell at ________.
a premium
A bond rated Aaa according to Moody's, is considered ________.
a prime quality bond
The risk-free rate of return can be thought of as consisting of the following two components:
a real rate of return, an inflation premium
An annuity is ________.
a series of equal annual cash flows
One of the circumstances in which the Gordon growth valuation model for estimating the value of a share of stock should be used is ________.
a steady growth rate in dividends
When the required return is constant but different from the coupon rate, the price of a bond as it approaches its maturity date will ________.
approach par
A bond will sell ________ when the stated rate of interest exceeds the required rate of return, ________ when the stated rate of interest is less than the required return, and ________ when the stated rate of interest is equal to the required return
at a premium; at a discount; equal to the par value
The purpose of the restrictive debt covenant that limits the distribution of profits to shareholders is to ________.
avoid default of payments to bondholders
The simplest type of probability distribution is a ________.
bar chart
The security market line can be thought of as expressing relationships between required rates of return and
beta
A firm is evaluating a proposal which has an initial investment of $35,000 and has cash flows of $10,000 in year 1, $20,000 in year 2, and $10,000 in year 3. The payback period of the project is ________.
between 2 and 3 years
ABC company has two bonds outstanding that are the same except for the maturity date. Bond D matures in 4 years, while Bond E matures in 7 years. If the required return changes by 5 percent, then ________.
bond E will have a greater change in price
A type of long-term financing used by both corporations and government entities is ________.
bonds
________ is the value of a firm's ownership in the event that all assets are sold for their exact accounting value and the proceeds remaining after paying all liabilities (including preferred stock) are divided among common stockholders
book value
A $60,000 outlay for a new machine with a usable life of 15 years is called ________.
capital expenditure
A firm with limited dollars available for capital expenditures is subject to ________.
capital rationing
The return expected from an asset is fully defined by its ________.
cash flow and timing
The key inputs to the valuation process include ________.
cash flow, cash flow timing, and risk
An increase in nondiversifiable risk would ________.
cause an increase in the beta and would increase the required return
To compensate for the uncertainty of future interest rates and the fact that the longer the term of a loan the higher the probability that the borrower will default, the lender typically ________.
charges a higher interest rate on long-term loans
A ________ is a measure of relative dispersion used in comparing the risk of assets with differing expected returns
coefficient of variation
Is a relative (rather than absolute) measure of risk?
coefficient of variation
The ____ is the ratio of ____ to the ____.
coefficient of variation, standard deviation, expected value
An efficient portfolio is defined as ________.
collection of assets with the aim of maximizing the return
All of the following are financial intermediaries
commercial banks investment companies thrift institutions
Regarding the tax treatment of payments to securities holders, it is true that ________.
common stock dividends and preferred stock dividends are not tax-deductible, while interest is tax-deductible
The ________ feature allows bondholders to change each bond into stated number of shares of stock
conversation
A debt instrument indicating that a corporation has borrowed a certain amount of money and promises to repay it in the future under clearly defined terms is called a(n) ________.
corporate bond
The ________ is a weighted average of the cost of funds which reflects the interrelationship of financing decisions
cost of capital
The ________ is the rate of return required by the market suppliers of capital in order to attract their funds to the firm.
cost of capital
The ________ is the rate of return that a firm must earn on its investments in order to maintain the market value of its stock.
cost of capital
The ________ in the capital market is the basis for determining a bond's coupon interest rate
cost of money
Dividends in arrears that must be paid to the preferred stockholders before payment of dividends to common stockholders are ________.
cumulative
All of the following are users of financial information
customers
Combining two assets having perfectly negatively correlated returns will result in the creation of a portfolio with an overall risk that ________.
decreases to a level below that of either asset
Interest rate risk and the time to maturity have a relationship that is best characterized as ________.
direct
In the basic valuation model, risk is generally incorporated into the ________.
discount rate
Bonds which sell at less than face value are priced at a ________, while bonds which sell at greater than face value sell at a ________.
discount; premium
Strikes, lawsuits, regulatory actions, or the loss of a key account are all examples of ________.
diversifiable risk
Combining two negatively correlated assets to reduce risk is known as
diversification
An investor, by investing in combinations of stocks, develops a ____ portfolio
diversified
For the financial manager, taxes have important implications for
dividend policy financial restructurings capital structure policy
Common stockholders expect to earn a return by receiving ________.
dividends
The total rate of return on an investment over a given period of time is calculated
dividing the asset's cash distributions during the period, plus change in value, by its beginning-of period investment value.
According to the efficient market hypothesis, prices of actively traded stocks ________.
do not differ from their true values in an efficient market
Preferred stockholders ________.
do not have preference over bondholders in the case of liquidation
A(n) ________ yield curve reflects lower expected future rates of interest
downward-sloping
Assume the following returns and yields: U.S. T-bill = 8%, 5-year U.S. T-note = 7%, IBM common stock = 15%, IBM AAA Corporate Bond = 12% and 10-year U.S. T-bond = 6%. Based on this information, the shape of the yield curve is ________.
downward-sloping
The yield curve in an economic period where lower future inflation is expected would be ________.
downward-sloping
Fixed assets that provide the basis for a firm's earning and value are often called ________.
earning assets
A(n) ________ portfolio maximizes return for a given level of risk, or minimizes risk for a given level of return.
efficient
Tangshan China's stock is currently selling for $160.00 per share and the firm's dividends are expected to grow at 5 percent indefinitely. In addition, Tangshan China's most recent dividend was $5.50. If the expected risk free rate of return is 3 percent, the expected market premium is 4 percent, and Tangshan has a beta of 1.2, Tangshan's stock would be ________.
undervalued because the market price is less than the resulting share value
A group formed by an investment banker to share the financial risk associated with underwriting new securities is called a(n) ________.
underwriting syndicate
When issuing a(n) ________ the issuer can annually deduct the current year's interest accrual without having to actually pay the interest until the bond matures.
zero coupon bond
A(n) ________ is issued with no or very low coupon and sells significantly below its par value.
zero or low coupon bond
The ________ is utilized to value preferred stock
zero-growth model
Tangshan China's stock is currently selling for $160.00 per share and the firm's dividends are expected to grow at 5 percent indefinitely. In addition, Tangshan China's most recent dividend was $5.50. If the expected risk free rate of return is 3 percent, the expected market return is 8 percent, and Tangshan has a beta of 1.2, Tangshan's stock would be ________.
overvalued because the market price is higher than the resulting share value
Holders of equity capital ________.
own the firm
A $1,000, 8% bond sells for 980. $1,000 is called the ________.
par value
Corporate bonds have a ________.
par value of $1,000
An example of a standard debt provision is to ________.
pay taxes and other liabilities when due
The ________ measures the amount of time it takes a firm to recover its initial investment.
payback period
Which of the following is an unsophisticated capital budgeting technique?
payback period
Which of the following capital budgeting techniques ignores the time value of money?
payback period approach
Preferred stock is valued as if it were a ________.
perpetuity
The present value of a(n) ____ is determined by dividing the annual cash flow by the interest rate.
perpetuity
Perfectly ________ correlated series move exactly together and have a correlation coefficient of ________, while perfectly ________ correlated series move exactly in opposite directions and have a correlation coefficient of ________.
positively; +1; negatively; -1
If a firm's return on investment, i.e., earnings after taxes divided by total assets, is 7%, and the firm has no preferred stock financing, it is
possible that its return on stockholders' equity is 10%.
The zero growth method is used to value
preferred stock
If the spot rate for the Japanese yen is $0.009204 and the 90-day forward rate is $0.009227, what is the annualized premium (discount)?
premium of 1.00%
If the spot rate (in U.S. dollars) for Japanese Yen is 0.00703 and the 180 day forward rate is 0.00717, then the Yen is trading at an annualized
premium of 3.98%
Adam wants to determine the required return on a stock portfolio with a beta coefficient of 0.5. Assuming the risk-free rate of 6 percent and the market return of 12 percent, compute the required rate of return.
r = RF + b(rm - RF) = 0.06 + 0.5(0.12 - 0.06) = 0.09 = 9%
Assuming a risk-free rate of 8 percent and a market return of 12 percent, would a wise investor acquire a security with a beta of 1.5 and a rate of return of 14 percent given the facts above?
r = RF + b(rm - RF) = 0.08 + 1.5(0.12 - 0.08) = 0.14 = 14%
Akai has a portfolio of three assets. Find the expected rate of return for the portfolio assuming he invests 50 percent of its money in asset A with 10 percent rate of return, 30 percent in asset B with a rate of return of 20 percent, and the rest in asset C with 30 percent rate of return.
r*W A= 10%*0.50 = 5.00 B= 20%*0.30 = 6.00 C= 30%*0.20 = 6.00 = 17.00 Expected rate of return = 17 percent
The purpose of nonvoting common stock is to ________.
raise capital without giving up any voting control
________ rate of interest creates equilibrium between the supply of savings and the demand for investment funds.
real
The purpose of adding an asset with a negative or low positive beta is to ________.
reduce risk
When the required return is constant and equal to the coupon rate, the price of a bond as it approaches its maturity date will ________.
remain at par
Treasury stock refers to the ________.
repurchase of outstanding stock
Common stockholders are sometimes referred to as ________.
residual owners
Which of the following is a source of long-term funds?
retained earnings
Which of the following is usually a right of a preferred stockholder?
right to receive dividend payments before any dividends are paid to common stockholders
In a ________, new shares are sold to the existing shareholders.
rights offering
________ are financial instruments that allow stockholders to purchase additional shares at a price below the market price, in direct proportion to their number of owned shares
rights offering
If a manager requires greater return when risk increases, then he is said to be
risk-averse
The ________ rate is typically the nominal rate of interest on a three-month U.S. Treasury bill.
risk-free
The CAPM can be divided into ________.
risk-free rate and risk premium
If a manager prefers a higher return investment regardless of its risk, then he is following a ________ strategy.
risk-neutral
If a manager prefers investments with greater risk even if they have lower expected returns, then he is following a ________ strategy.
risk-seeking
A common approach of estimating the variability of returns involving the forecast of pessimistic, most likely, and optimistic returns associated with an asset is called
scenario analysis
If bankruptcy were to occur, ________ would have the first claim on assets
secured creditors
Financial middlemen include
securities brokers securities dealers investment bankers
ADRs are ________.
securities, backed by American depositary shares (ADSs), that permit U.S. investors to hold shares of non-U.S. companies and trade them in U.S. markets
If expected return is less than required return on an asset, rational investors will ________.
sell the asset, which will drive the price down and cause the expected return to reach the level of the required return
The primary reason for the divergence between the shareholder wealth maximization goal and the actual goals pursued by management has been attributed to
separation of ownership and control
There is often a divergence between the shareholder wealth maximization goal and the actual goals pursued by management. The primary reason for this is ____.
separation of ownership and control
A ________ is a restrictive provision in a bond indenture, providing for the systematic retirement of the bonds prior to their maturity
sinking-fund requirement
A ________ measures the dispersion around the expected value.
standard deviation
The financial statement that shows the effects of a company's operating, investing, and financing activities on its cash balance is known as the:
statement of cash flows
________ allow bondholders to purchase a certain number of shares of the firm's common stock at a specified price over a certain period of time.
stock purchase warrants
The present value of an ordinary annuity is the
sum of the present value of a series of equal periodic payments
The value of any asset is the ________.
sum of the present values of all future cash flows it is expected to provide over the relevant time period
Relevant portion of an asset's risk attributable to market factors that affect all firms is called ________.
systematic risk
The ________ is the firm's desired optimal mix of debt and equity financing.
target capital structure
The preferred capital structure weights to be used in the weighted average cost of capital are ________.
target weights
The barriers to the free flow of capital among the major world capital markets include all of the following
taxation policies foreign exchange risks legal restrictions
From a corporation's point of view, a disadvantage of issuing preferred stock is ________.
that the dividends are not tax-deductible
In comparing the constant-growth model and the capital asset pricing model (CAPM) to calculate the cost of common stock equity, ________.
the CAPM directly considers risk as reflected in the beta, while the constant-growth model uses the market price as a reflection of the expected risk-return preference of investors
The current yield on a bond is measured by ________.
the annual interest payment divided by the current price
The annual effective rate of interest (ieff ) is a function of:
the annual nominal rate of interest (inom) the number of compounding intervals per year (m)
In calculating the cost of common stock equity, the model which describes the relationship between the required return and the nondiversifiable risk of the firm is ________.
the capital asset pricing model
The minimum return that must be earned on a project in order to leave the firm's value unchanged is ________.
the cost of capital
If the coupon rate of a bond is equal to its required rate of return, then ________.
the current value is equal to par value
With continuous compounding
the effective rate is higher than the nominal rate
When determining the after-tax cost of a bond, the face value of the issue must be adjusted to the net proceeds amounts by considering ________.
the flotation costs
Which of the following properly describes the future value of an annuity due?
the last payment os one period after the future value
Although a firm's existing mix of financing sources may reflect its target capital structure, it is ultimately ________.
the marginal cost of capital that is relevant for evaluating the firm's future investment opportunities
The term structure of interest rates is the relationship between ________.
the maturity and rate of return for bonds with similar level of risk
The higher an asset's beta, ________.
the more responsive it is to changing market returns
In a reverse stock split
the number of shares are decreased
A firm can accept a project with a net present value of zero because ________.
the project would maintain the wealth of the firm's owners
Unlike the net present value criteria, the internal rate of return approach assumes a reinvestment rate equal to ________.
the project's internal rate of return
The cost of common stock equity is ________.
the rate at which investors discount the expected dividends of the firm to determine its share value
The underlying cause of conflicts in ranking for projects by internal rate of return and net present value methods is ________.
the reinvestment rate assumption regarding intermediate cash flows
One of the assumptions of the constant growth dividend valuation model is that
the required rate of return is greater than the dividend growth rate
Stock purchase warrants are instruments that give their holders ________.
the right to purchase a certain number of shares of the issuer's common stock at a specified price over a certain period of time
Stock rights provide the stockholder with ________.
the right to purchase additional shares in direct proportion to their number of owned
A putable bond gives the bondholder ________.
the right to redeem the bond back to the corporation at par
The cost to a firm of each type of capital is dependent upon ________.
the risk-free rate of each type of capital plus the business risk and the financial risk of the firm
Nominal rate of interest is equal to ________.
the risk-free rate plus a risk premium
Combining negatively correlated assets having the same expected return results in a portfolio with ________ level of expected return and ________ level of risk.
the same; a lower
In the capital asset pricing model, the general risk preferences of investors in the marketplace are reflected by ________.
the slope of the security market line
Equity capital can be raised through ________.
the stock market
Debt is generally the least expensive source of capital. This is primarily due to ________.
the tax deductibility of interest payments
A major advantage of using the maximization of shareholder wealth as the primary goal of the firm is that this goal considers
the timing and the risk of the expected benefits to be received
In calculating the cost of common stock equity, ________.
the use of the constant-growth valuation model is often preferred, because the data required are more readily available
A proxy statement is a statement transferring ________.
the votes of a stockholder to another party
In order to recognize the interrelationship between financing and investments, a firm should use ________ when evaluating an investment.
the weighted average cost of all financing sources
Danno is trying to decide which of two bonds to buy. Bond H is a 10 percent coupon, 10-year maturity, $1,000 par, January 1, 2000 issue paying annual interest. Bond F is a 10 percent coupon, 10-year maturity, $1,000 par, January 1, 2000 issue paying semiannual interest. The market required return for each bond is 10 percent. When using present value to determine the prices of the bonds, Danno will find that ________.
there is no difference in price
The difference between an ordinary annuity and an annuity due is the
timing of the payments
A proxy statement gives shareholders the right ________.
to give up their vote to another party
Which of the following is a restrictive covenant?
to impose fixed asset restrictions
The preemptive right gives shareholders the right ________.
to maintain their proportionate ownership in the corporation when new common stock is issued
As randomly selected securities are combined to create a portfolio, the ________ risk of the portfolio decreases until 10 to 20 securities are included. The portion of the risk eliminated is ________ risk, while that remaining is ________ risk.
total; diversifiable; nondiversifiable
An example of an external factor that affects a corporation's risk or beta, is ________.
toxic spills used during takeovers
A(n) ________ is a paid individual, corporation, or a commercial bank trust department that acts as a third party to a bond indenture
trustee
Cash flow concepts are ____ but generally accepted accounting principles are ____ in the determination of a firm's net income.
unambiguous, ambiguous
One major expense associated with issuing new shares of common stock is ________.
underpricing
The final step in the capital budgeting process is ________.
follow-up
What is the yield to maturity, to the nearest percent, for the following bond: current price is $908, coupon rate is 11 percent, $1,000 par value, interest paid annually, eight years to maturity?
13%
A conventional cash flow pattern associated with capital investment projects consists of an initial ________.
outflow followed by a series of inflows
What is the NPV for a project if its cost of capital is 0 percent and its initial after-tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3, and $1,300,000 in year 4?
$1,700,000
A record collector has agreed to sell her entire collection to a historical museum in three years at a price of $100,000. The current risk-free rate is 7 percent. At what price should she value her collection today?
$100,000(1.07)-3 = $81,630
The earnings and dividends of MicroSun Computer Co. are expected to grow at an annual rate of 15 percent over the next 4 years and then slow to a constant growth rate of 8 percent per year. MicroSun currently pays a dividend of $0.50 per share. What is the value of MicroSun stock to an investor who requires a 14 percent rate of return?
$11.35
A firm has to pay a dividend of $1.20 per share till perpetuity, a zero growth rate of dividends, and a required return of 10 percent. The value of the firm's preferred stock is ________.
$12
The Florida lottery agrees to pay the winner $250,000 at the end of each year for the next 20 years. What is the future value of this lottery if you plan to put each payment in an account earning 9 percent?
$12.79 million
A firm has the balance sheet accounts, Common Stock and Paid-in Capital in Excess of Par, with values of $40,000 and $500,000, respectively. The firm has 40,000 common shares outstanding. If the firm had a par value of $1, the stock originally sold for ________.
$13.50/share
At year end, Tangshan China Company balance sheet showed total assets of $60 million, total liabilities (including preferred stock) of $45 million, and 1,000,000 shares of common stock outstanding. Based on this information, Tangshan's book value per share of common stock is ________.
$15
Jia Hua Enterprises wants to issue sixty 20-year, $1,000 par value, zero-coupon bonds. If each bond is priced to yield 7 percent, how much will Jia Hua receive (ignoring issuance costs) when the bonds are first sold?
$15,505
Over the past 5 years, NBA's common stock earnings per share have grown from $0.62 to $0.91. If an investor is NBA stock is assumed to have a required rate of return of 14%, what is the current value of NBA if its current dividend is 0.12? Assume EPS will continue to grow at a constant rate.
$2.16
Ted Corporation expects to generate free-cash flows of $200,000 per year for the next five years. Beyond that time, free cash flows are expected to grow at a constant rate of 5 percent per year forever. If the firm's average cost of capital is 15 percent, the market value of the firm's debt is $500,000, and Ted has a half million shares of stock outstanding, what is the value of Ted stock?
$2.43
Morton Industries' common stock sells for $54. Dividends are expected to continue to grow at a rate of 8% annually. If investors in Morton require a 13% rate of return, what is the current dividend?
$2.50
At year end, Tangshan China Company balance sheet showed total assets of $60 million, total liabilities (including preferred stock) of $45 million, and 1,000,000 shares of common stock outstanding. Next year, Tangshan is projecting that it will have net income of $1.5 million. If the average P/E multiple in Tangshan's industry is 15, what should be the price of Tangshan's stock?
$22.50
Daniel Custom Cycles' common stock currently pays no dividends. The company plans to begin paying dividends beginning 3 years from today. The first dividend will be $3.00 and dividends will grow at 5 percent per year thereafter. Given a required return of 15 percent, what would you pay for the stock today?
$22.68
Shares of stock currently owned by a firm's shareholders are called ________.
outstanding shares
A firm has an issue of preferred stock outstanding that has a stated annual dividend of $4. The required return on the preferred stock has been estimated to be 16 percent. The value of the preferred stock is ________.
$25
A firm has the balance sheet accounts, Common Stock and Paid-in Capital in Excess of Par, with values of $10,000 and $250,000, respectively. The firm has 10,000 common shares outstanding. If the firm had a par value of $1, the stock originally sold for ________.
$26/share
The before-tax cost of debt for a firm, which has a marginal tax rate of 40 percent, is 12 percent. The after-tax cost of debt is ________.
7.2 percent
The current price of DEF Corporation stock is $26.50 per share. Earnings next year should be $2 per share and it should pay a $1 dividend. The P/E multiple is 15 times on average. What price would you expect for DEF's stock in the future?
$30.00
Your local bank offers 4-year certificates of deposit (CD) at a 12 percent annual nominal interest rate compounded quarterly. Determine how much additional interest you will earn over 4 years on a $10,000 CD that is compounded quarterly compared with one that is compounded annually.
$310
What is the issue price of a zero coupon bond with 15 years to maturity if it is sold to yield 7.55%?
$335.62
A firm has issued cumulative preferred stock with a $100 par value and a 12 percent annual dividend. For the past two years, the board of directors has decided not to pay a dividend. At the end of the current year, the preferred stockholders must be paid ________ prior to paying the common stockholders
$36/share
You wish to save $500,000 in the next 25 years. You notice that a corporate bond fund earns about 11 percent per year and that is where you put your savings. How much must you save each year to obtain your goal?
$4,370.13
What is the dividend on an 8 percent preferred stock that currently sells for $45 and has a face value of $50 per share?
$4.00
A firm issued 10,000 shares of no par-value common stock, receiving proceeds of $40 per share. The amount recorded is ________.
$400,000 in the Common Stock account
Over the past 10 years the dividends of Allegro have grown from $0.45 to $1.82 per share. Determine the value of Allegro's common stock to an investor who requires a 20% rate of return, assuming that dividends continue growing at the same rate as they grew over the past 10 years.
$41.86
An insurance company offers you an end of year annuity of $48,000 per year for the next 20 years. They claim your return on the annuity is 9 percent. What should you be willing to pay today for this annuity?
$438,144
What is the current value of a share of Chyrox if its current dividend is $1.50 and dividends are expected to grow at an annual rate of 20 percent for the next 5 years? Assume the investor has a required rate of return of 15 percent and expects to sell the security in 5 years for $72.
$44.31
Columbia Bank & Trust has just given you a $20,000 term loan to pay for a new concrete mixer. The loan requires five equal annual end of the year payments. If the loan provides the bank with a 12 percent return, what will be your annual payments?
$5,548
The State of Adaven issued $50 million of perpetual bonds in 1990. The bonds were issued in $100 denominations with an annual coupon interest rate of 5%. Determine the value of these bonds today to an investor who requires a 10% return on his investment.
$50
Jones Company sales last year were $25 million and its total assets were $8 million. Accounts payable were $2 million and common stock and retained earnings were $5 million. Jones sales are forecasted to be $30 million this year, earnings after tax are expected to be 3% of sales, and dividends of $250,000 are expected to be paid. Assuming that the ratio of assets to sales and current liabilities to sales remain the same this year as last year, determine the amount of additional financing required.
$550,000
Emmy Lou, Inc. has an expected dividend next year of $5.60 per share, a growth rate of dividends of 10 percent, and a required return of 20 percent. The value of a share of Emmy Lou, Inc.'s common stock is ________.
$56.00
Jia's Fashions recently paid a $2 annual dividend. The company is projecting that its dividends will grow by 20 percent next year, 12 percent annually for the two years after that, and then at 6 percent annually thereafter. Based on this information, how much should Jia's Fashions common stock sell for today if her required return is 10.5%?
$59.16
Patrick Company expects to generate free-cash of $120,000 per year forever. If the firm's required return is 12 percent, the market value of debt is $300,000, the market value of preferred stock is $70,000, and the company has 100,000 shares of stock outstanding. What is the value of Patrick's stock?
$6.30
When you purchased a car, you borrowed $20,000 from the bank at 9.20% and agreed to make monthly payments for 3 years. What is your monthly payment?
$637.86
Calculate the value of a $1,000 bond which has 10 years until maturity and pays quarterly interest at an annual coupon rate of 12 percent. The required return on similar-risk bonds is 20 percent
$656.82
At year end, Tangshan China Company balance sheet showed total assets of $60 million, total liabilities (including preferred stock) of $45 million, and 1,000,000 shares of common stock outstanding. If Tangshan could sell its assets for $52.5 million, Tangshan's liquidation value per share of common stock is ________.
$7.50
Your current assets consist of cash, accounts receivable, and inventory. Total current liabilities equal $200,000. The average collection period is 20 days on average daily credit sales of $2,500. The current ratio is 1.3 and the quick ratio is 0.625. What is the balance in the cash account?
$75,000
Dippity Doo-Dah Party Dips has revenues of $50,000, general & administrative expenses of $35,000, interest expense of $4,000 and depreciation expense of $4200. The firm is in the 38% tax bracket. What would be the firm's cash flow from operations?
$8,416
An 8 percent preferred stock with a market price of $110 per share and a $100 par value pays a cash dividend of ________.
$8.00
You are planning to purchase the stock of Ted's Sheds Inc. and you expect it to pay a dividend of $3 in 1 year, $4.25 in 2 years, and $6.00 in 3 years. You expect to sell the stock for $100 in 3 years. If your required return for purchasing the stock is 12 percent, how much would you pay for the stock today?
$81.52
What is the value of a Northern Pacific bond with an 11 percent coupon, maturing in 15 years? Assume the market rate for this bond is 14 percent and that the interest is paid semiannually.
$813.50
A firm has an issue of $1,000 par value bonds with a 9 percent stated interest rate outstanding. The issue pays interest annually and has 20 years remaining to its maturity date. If bonds of similar risk are currently earning 11 percent, the firm's bond will sell for ________
$840.73
What is the value of an Orion bond that has a 10 percent coupon, pays interest semiannually, and has 10 years to maturity, if the required rate of return is 12 percent?
$885.50
A firm has experienced a constant annual rate of dividend growth of 9 percent on its common stock and expects the dividend per share in the coming year to be $2.70. The firm can earn 12 percent on similar risk involvements. The value of the firm's common stock is ________.
$90/share
If you invest the $10,000 you receive at graduation (age 22) in a mutual fund that averages a 12% annual return, how much will you have at retirement in 40 years?
$930,510
What is the current price of a $1,000 par value bond maturing in 9 years with a coupon rate of 8 percent, paid annually, that has a YTM of 9 percent?
$940
A firm issued 5,000 shares of $1 par-value common stock, receiving proceeds of $20 per share. The amount recorded for the paid-in capital in excess of par account is ________.
$95,000
Tangshan Coal Inc. just issued a 10 percent, 25-year bond with a $1,000 par value that pays interest semiannually. (a) How much can the investor expect in annual interest (in dollars)? (b) How much can the investor expect in interest every six months (in dollars)? (c) How much can the investor expect in par value at the end of the 25th year?
(a) $100 (b) $50 (c) $1,000
Smith, Inc. stock currently sells for $75 per share. The firm has total assets of $1,000,000 and total liabilities, including preferred stock, of $350,000. If the firm has 10,000 shares of common stock outstanding, (a) what is the book value of each share of common stock? (b) is the stock overvalued or undervalued in the marketplace? (c) what is the reason(s) for your answer in (b)?
(a) Book value per share = ($1,000,000-$350,000)/(10,000) = $65 per share (b) Overvalued (c) Market value of the assets is greater than the book value.
Ria's Doll Company has an outstanding preferred issue of stock with a par value of $100 and an annual dividend of 10 percent (of par). Similar risk preferred stocks are yielding an 11.5 percent annual rate of return. (a) What is the current value of the outstanding preferred stock? (b) What will happen to price as the risk-free rate increases? Explain.
(a) Current value of the outstanding preferred stock = $100 × 0.10 / 0.115 = $86.96 (b) As the risk-free rate increases, the required rate of return will increase and the price will drop
Tangshan China's stock is currently selling for $160.00 per share and the firm's dividends are expected to grow at 5 percent indefinitely. In addition, Tangshan China's most recent dividend was $5.50. The expected risk free rate of return is 3 percent, the expected market return is 8 percent, and Tangshan has a beta of 1.20. (a) What is the expected return based on the dividend valuation model? (b) What is the required return based on the CAPM? (c) Would Tangshan China be a good investment at this time? Explain
(a) rs = [$5.50(1.05)]/$160.00 + 0.05 = 8.6% (b) rs = 0.03 + 1.2(0.08 - 0.03) = 9% (c) The expected return is 8.6 percent but the required return is 9 percent. Based on this information, Tangshan is overvalued and would not be a good investment at this time
Nico bought 100 shares of Cisco Systems stock for $30.00 per share on January 1, 2013. He received a dividend of $2.00 per share at the end of 2013 and $3.00 per share at the end of 2014. At the end of 2015, Nico collected a dividend of $4.00 per share and sold his stock for $33.00 per share. What was Nico's realized holding period return?
+40%
A firm is evaluating an investment proposal which has an initial investment of $5,000 and cash flows presently valued at $4,000. The net present value of the investment is ________.
-$1,000
What is the NPV for a project if its cost of capital is 12 percent and its initial after-tax cost is $5,000,000 and it is expected to provide after-tax operating cash flows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3, and ($1,300,000) in year 4?
-$1,494,336
What is the NPV for a project whose cost of capital is 15 percent and initial after-tax cost is $5,000,000 and is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3, and $1,300,000 in year 4?
-$137,053
Nico Nelson, a management trainee at a large New York-based bank, is trying to estimate the real rate of return expected by investors. He notes that the 3-month T-bill currently yields 3 percent and has decided to use the consumer price index as a proxy for expected inflation. What is the estimated real rate of interest if the CPI is currently 2 percent?
1%
Nico wants to invest all of his money in just two assets: the risk-free asset and the market portfolio. What is Nico's portfolio beta if he invests a quarter of his money in the market portfolio and the rest in the risk free asset?
0.25
What is Nico's portfolio beta if he invests an equal amount in Asset X with a beta of 0.60, Asset Y with a beta of 1.60, and the risk-free asset?
0.73
A firm with an equity multiplier of 4.0, will have a debt ratio of
0.75
Nicole holds three stocks in her portfolio: A, B, and C. The portfolio beta is 1.40. Stock A comprises 15 percent of the dollar value of her holdings and has a beta of 1.0. If Nicole sells all of her investment in A and invests the proceeds in the risk-free asset, her new portfolio beta will be ________.
1.25
An investment banker has recommended a $100,000 portfolio containing assets B, D, and F. $20,000 will be invested in asset B, with a beta of 1.5; $50,000 will be invested in asset D, with a beta of 2.0; and $30,000 will be invested in asset F, with a beta of 0.5. The beta of the portfolio is ________.
1.45
Comet Powder Company has purchased a piece of equipment costing $100,000. It is expected to generate a ten-year stream of benefits amounting to $16,273 per year. Determine the rate of return Comet expects to earn from this equipment.
10%
A firm has issued 10 percent preferred stock, which sold for $100 per share par value. The cost of issuing and selling the stock was $2 per share. The firm's marginal tax rate is 40 percent. The cost of the preferred stock is ________.
10.2 percent
For an investor who plans to purchase a bond maturing in one year, the primary consideration should be ________.
yield to maturity
1st Bank offers you a car loan at an annual interest rate of 10% compounded monthly. What effective annual interest rate is the bank charging you?
10.47%
A firm has determined it can issue preferred stock at $115 per share par value. The stock will pay a $12 annual dividend. The cost of issuing and selling the stock is $3 per share. The cost of the preferred stock is ________.
10.7 percent
The approximate before-tax cost of debt for a 15-year, 10 percent, $1,000 par value bond selling at $950 is ________.
10.7 percent
Given the returns of two stocks J and K in the table below over the next 4 years. Find the expected return and standard deviation of holding a portfolio of 40% of stock J and 60% in stock K over the next 4 years: Stock J Stock K 2010 10% 9% 2011 12% 8% 2012 13% 10% 2013 15% 11%
10.7% and 1.34%
Tangshan Industries has issued a bond which has a $1,000 par value and a 15 percent annual coupon interest rate. The bond will mature in ten years and currently sells for $1,250. Using this information, the yield to maturity on the Tangshan Industries bond is ________.
10.79%
Source of capital Target Market Prop After-tax Long-term debt 40% 6% Preferred stock 10% 11% common stock equity 50% 15% The weighted average cost of capital is ________.
11 percent
A WPI 10s 08 bond closed at 89. What is the current yield on this bond?
11.24%
A firm has issued preferred stock at its $125 per share par value. The stock will pay a $15 annual dividend. The cost of issuing and selling the stock was $4 per share. The cost of the preferred stock is ________.
12.4 percent
Nico bought 500 shares of a stock for $24.00 per share on January 1, 2013. He received a dividend of $2.50 per share at the end of 2013 and $4.00 per share at the end of 2014. At the end of 2015, Nico collected a dividend of $3.00 per share and sold his stock for $20.00 per share. What is Nico's realized total rate of return?
12.5%
A firm has common stock with a market price of $100 per share and an expected dividend of $5.61 per share at the end of the coming year. A new issue of stock is expected to be sold for $98, with $2 per share representing the underpricing necessary in the competitive capital market. Flotation costs are expected to total $1 per share. The dividends paid on the outstanding stock over the past five years are as follows: The cost of this new issue of common stock is ________.
12.8 percent
You plan to invest 2,00 at the end of each of the next 25 years. If the investment earns 7% annually, what is the investment worth at the end of 25 years?
126,498.08
A firm has common stock with a market price of $25 per share and an expected dividend of $2 per share at the end of the coming year. The growth rate in dividends has been 5 percent. The cost of the firm's common stock equity is ________.
13 percent
The inflation risk premium on a bond is 2 percent, the U.S. T-bill rate is 5 percent, the maturity risk premium on the bond is 3 percent, the default risk premium on the bond is 2 percent, and the liquidity risk premium on the bond is 1 percent. Calculate its nominal rate of return.
13%
If an investor purchased 100 shares of Biggee stock for $30 per share, 6 months ago, and then sold the stock today for $33 per share, what was the investor's holding period return if a total of $1 per share in dividends was received over the 6 month period?
13.3%
Asset P has a beta of 0.9. The risk-free rate of return is 8 percent, while the return on the market portfolio of assets is 14 percent. The asset's required rate of return is ________.
13.4%
What is the IRR for the following project if its initial after-tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3, and $1,300,000 in year 4?
13.57%
Smith Corporation's common stock is expected to pay a dividend of $3.00 forever and currently sells for $21.42. What is the required rate of return?
14%
An investment promises to return 1,00 at the end of the next 5 years and then 2,00 at the end of the next 10 years, What is the value of this investment today at a 4% interest rate?
17,784.95
What would be the cost of retained earnings equity for Tangshan Mining if the expected return on U.S. Treasury Bills is 5.00%, the market risk premium is 10.00 percent, and the firm's beta is 1.3?
18.0%
Your monthly statement from your bank credit card shows that the monthly rate of interest is 1.5%. What is the annual effective rate of interest you are being charged on your credit card?
19.56%
What is the future value of 1,500 invested as a 5% rate for 7 years?
2,110.65
The ________ is the compound annual rate of interest earned on a debt security purchased on a given date and held to maturity.
yield to maturity
Christy purchased 100 shares of Good Idea stock for $48 last year. Yesterday she sold the stock for $45. If she received $4 in dividends during the time she held the security, what is her holding period return?
2.08%
Source of capital Target Market Prop After-tax Long-term debt 45% 5% Preferred stock 10% 14% common stock equity 45% 22% Other things remaining constant, if the firm were to shift toward a capital structure with ________ the weighted average cost of capital will be higher.
20% long-term debt, 60% common stock, and 20% preferred stock
What is the expected return for Asset X if it has a beta of 1.5, the expected market return is 15 percent, and the expected risk-free rate is 5 percent?
20.0%
A firm is evaluating a proposal which has an initial investment of $50,000 and has cash flows of $15,000 per year for five years. The payback period of the project is ________.
3.3 years
What is the payback period for Tangshan Mining company's new project if its initial after-tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $700,000 in year 3, and $1,800,000 in year 4?
3.33 years
If a corporation has an average tax rate of 40 percent, the approximate annual, after-tax cost of debt for a 10-year, 8 percent, $1,000 par value bond selling at $1,150 is ________.
3.6 percent
Deeply discounted bond that pays no coupon interest is a ________.
zero coupon bond
What is the present value of 7,500 to be received in 8 years if 6% is the proper discount rate?
4,705.59
Hyun just turned 25 today. By her 60th birthday she would like to have 1,000,000 saved. She plans to invest equal annual payments beginning with her 26th birthday and ending on her 60th birthday.If all invested funds earn 8% annually, how much does she need to invest each year to have exactly 1,000,000 by her 60th bday?
5,803.26
What is the expected risk-free rate of return if Asset X, with a beta of 1.5, has an expected return of 20 percent, and the expected market return is 15 percent?
5.0%
Tangshan Mining is considering issuing preferred stock. The preferred stock would have a par value of $75 and a 5.50 percent dividend. What is the cost of preferred stock for Tangshan if flotation costs would amount to 5.5 percent of par value?
5.82%
What is the IRR for the following project if its initial after-tax cost is $5,000,000 and it is expected to provide after-tax operating cash flows of ($1,800,000) in year 1, $2,900,000 in year 2, $2,700,000 in year 3, and $2,300,000 in year 4?
5.83%
The approximate before-tax cost of debt for a 10-year, 8 percent, $1,000 par value bond selling at $1,150 is ________.
5.97 percent
Jose is investing for his daughters college education. He expects to need 30,000 in 10 years, 31,000 in 11 years, 32,000 in 12 years, and 33,000 in 13 years. If Jose can earn 6% annually on his investment, what single amount does he need to invest today to provide for his daughters college education?
64,456.96
Nico owns 100 shares of Stock X which has a price of $12 per share and 200 shares of Stock Y which has a price of $3 per share. What is the proportion of Nico's portfolio invested in stock X?
67%
Tangshan China Company's stock is currently selling for $80.00 per share. The expected dividend one year from now is $4.00 and the required return is 13 percent. What is Tangshan's dividend growth rate assuming that dividends are expected to grow at a constant rate forever?
8%
A firm has an issue of preferred stock outstanding that has a par value of $100 and a 4% dividend. If the current market price of the preferred stock is $50, the yield on the preferred stock is ________.
8.00%
Tangshan China's stock is currently selling for $160.00 per share and the firm's dividends are expected to grow at 5 percent indefinitely. Assuming Tangshan China's most recent dividend was $5.50, what is the required rate of return on Tangshan's stock?
8.4%
Tangshan Mining is considering issuing long-term debt. The debt would have a 30 year maturity and a 12 percent coupon rate and make semiannual coupon payments. In order to sell the issue, the bonds must be underpriced at a discount of 2.5 percent of face value. In addition, the firm would have to pay flotation costs of 2.5 percent of face value. The firm's tax rate is 33 percent. Given this information, the after-tax cost of debt for Tangshan Mining would be ________.
8.48%
Determine the yield to maturity (to the nearest tenth of 1 percent) of an 8-year zero coupon bond ($1,000 par value) that is currently selling for $521.
8.5%
If a firm has interest expenses of $10,000 per year, sales of $700,000, a tax rate of 40%, and a net profit margin of 7%, what is the firm's times interest earned ratio?
9.17
What is the approximate yield to maturity for a $1,000 par value bond selling for $1,120 that matures in 6 years and pays 12 percent interest annually?
9.3%
Two years ago you bought 100 shares of Big Bubba convertible preferred stock at $25 per share. The preferred stock had an annual dividend of $2.125 per share, and a total of $3.19 in dividends per share have been paid so far. Today the company announced that the stock is redeemable for $26.70 plus accrued and unpaid dividends, for a total of $27.76. Alternatively, holders may convert their shares of preferred stock at a conversion rate of 1.6393 shares of Big Bubba common stock for each share of preferred stock. If the closing price of Big Bubba common stock is $27.50, what is your holding period return?
93.08%
Successful financial ratio analysis requires all of the following
A single ratio is all that is needed to indicate specific areas of weakness that must be addressed.
To finance a new line of product, the Tangshan Toys has issued a bond with a par value of $1,000, coupon rate of 8 percent, and maturity of 30 years. Compute the price of the bond if the opportunity cost is 11 percent.
ANSWER: Coupon payment = 1,000 × 0.08 = $80 Using financial calculator: PMT = 80, I = 11, N = 30, FV = 1000, CPT PV = $739.19
Zhen Yi Computers has an outstanding issue of bond with a par value of $1,000, paying 12 percent coupon rate semi-annually. The bond was issued 25 years ago and has 5 years to maturity. What is the value of the bond assuming 14 percent rate of interest?
ANSWER: Coupon payment = 1,000 × 0.12 = $120 Semi-annual coupon payment = 120 CPT PV = $929.76/2 = $60 Using financial calculator: PMT = 60, I = 7, N = 10, FV = 1000, CPT PV = $926.76
Which of the following is true of outstanding shares?
Authorized shares become outstanding shares when they are issued or sold to investors.
Which of the following is a difference between common stock and bonds?
Bondholders have a senior claim on assets and income relative to stockholders.
F (common stock is risker than bonds)
Bonds are considered a riskier investment than common stock for investors.
China Imports currently has 2,000 shares of common stock outstanding. The firm has assets of $200,000 and total liabilities including preferred stock of $75,000. Calculate the book value per share of China Imports common stock
Book value per share = (200,000-$75,000)/(2000) = $62.50 per share
Generally, which of the following non-cash charges is/are added to earnings after tax to calculate the after-tax cash flow?
Both I and II
Which of the following is correct regarding the forms of market efficiency? I. In an efficient capital market stock prices provide an unbiased estimate of the true value of an enterprise. II. In an efficient capital market, stock prices reflect the present value of the firm's expected cash flows.
Both I and II
________ is the process of evaluating and selecting long-term investments that are consistent with a firm's goal of maximizing owners' wealth.
Capital budgeting
There are three major factors that determine the market value of a company's share of stock. All of the following are factors
Cash flows Timing of cash flows Risk taken to generate cash flows
Which of the following is true of risk aversion?
Changes in risk aversion, and therefore shifts in the SML, result from changing preferences of investors
________ are secured by stock and/or bonds that are owned by the issuer.
Collateral trust bonds
F (it does provide)
Common stock does not provide the investors any residual claim on both the firm's assets and the firm's cash flow
F
Common stock financing is considered to be higher in risk for the corporation versus the use of bonds or preferred stock.
T
Common stock financing is considered to be lower in risk for the corporation versus the use of bonds or preferred stock.
T
Common stock financing provides the corporation greater flexibility versus the use of bonds or preferred stock.
F
Common stock is considered as a low risk investment than bonds or preferred stocks for investors.
T
Common stock provides the investor a residual claim on both the firm's assets and the firm's cash flow
Which of the following is typically a feature of common stock?
Common stocks may or may not pay dividends
________ is a statistical measure of the relationship between any two series of numbers.
Correlation
Which of the following is a reason that makes NPV a better approach to capital budgeting on a purely theoretical basis?
The reinvestment rate assumed by this method is reasonable.
________ risk represents the portion of an asset's risk that can be eliminated by combining assets with less than perfect positive correlation. A) Diversifiable
Diversifiable
$37.50
Dory's Blue Fin Restaurants Incorporated currently pays a $3.00 (d0) common stock dividend. The dividend is expected to remain at $3.00 and not expected to grow in the future. What is the current value of this restaurants common stock to an investor requiring an 8% rate of return?
________ is used to finance "rolling stock"—airplanes,trucks,boats,railroad cars.
Equipment trust certificates
Based on analysis of the company and expected industry and economic conditions, China Imports is expected to earn $4.60 per share of common stock next year. The average price/earnings ratio for firms in the same industry is 8. Calculate the estimated value of a share of China Imports common stock
Estimated value of share price = $4.60 × 8 = $36.80 per share
F (increases)
Expansion of a firm's equity generally decreases a firm's debt capacity.
F (it does)
Expansion of a firm's equity generally does not impact a firm's debt capacity.
T
Expansion of a firm's equity generally increases a firm's debt capacity.
Which of the following explains the general shape of the yield curve of a bond?
Expectations theory
________ have a short maturities, typically one to five years, and which can be renewed for a similar period at the option of their holders
Extendible notes
The consequences to a corporation for failure to pay preferred dividends are more serious than for failure to pay interest on a bond.
False
The cumulative feature on preferred stock allows investors to accumulate more preferred stock at reduced prices.
False
The future value of an annuity due is on the same date as the last payment.
False
The ____ has a goal of serving as a bridge between academic study of finance and the application of financial principles by financial managers.
Financial Management Association
____ indicate the firm's capacity to meet its debt obligations, both short-term and long-term.
Financial leverage ratios
A company that requires that its top officers own common stock in the company that is at least equal to their annual salary is:
Ford Motor Company
Which of the following statements is true of payback period?
If the payback period is less than the maximum acceptable payback period, accept the project.
________ bonds are characterized by interest payments that are required only when earnings are available.
Income
________ projects do not compete with each other; the acceptance of one ________ the others from consideration.
Independent; does not eliminate
Gong Li has recently inherited $10,000 and is considering purchasing 10 bonds of the Lucky Corporation. The bond has a par value of $1,000 with 10 percent coupon rate and will mature in 10 years. Does Gong Li have enough money to buy 10 bonds if the required rate of return is 9 percent?
No. Since the required rate of return (9%) is less than the bond's coupon rate (10%), the bond's price is greater than its par value ($1,000). Thus, the total price of 10 bonds is greater than $10,000.
Aunt Tilly's Fur Company has been experiencing several years of financial difficulty and, thus, has considered maintaining its dividend payment at $2.50 indefinitely. What is the value of its common stock if the required rate of return is 8.5 percent
P = D / r = $2.50 / 0.085 = $29.41
The board of directors of Ride World, Inc. has declared $5.00 common stock dividend and accepted a plan to freeze the dividend at $5 per year indefinitely. What is the value of the Ride World's common stock if the required rate of interest is 15 percent?
P = D / r = $5 / 0.15 = $33.33
Jia's Kitchen Stuff has recently sold 1,000 shares of preferred stock. What is the value of the stock assuming 10 percent required rate of return and a preferred dividend of $6.75
P = D / r = $6.75 / 0.10 = $67.50
Tina's Medical Equipment Company paid $2.25 common stock dividend last year. The company's policy is to allow its dividend to grow at 5 percent per year indefinitely. What is the value of the stock if the required rate of return is 8 percent?
P = D1 / (r - g) = $2.25 × (1 + 0.05) / (0.08 - 0.05) = $78.75
Nico bought 100 shares of a company's stock for $22.00 per share on January 1, 2013. He received a dividend of $2.00 per share at the end of 2013 and $3.00 per share at the end of 2014. At the end of 2015, Nico collected a dividend of $4.00 per share and sold his stock for $18.00 per share. What was Nico's realized holding period return? What was Nico's compound annual rate of return? Explain the difference?
Realized return = ($22-$18+$9)/$22 = 59.09% Compound Return: $22 = $2/(1+r)^2 + $3/(1+r)^2 + ($4 + 18)/ (1+r)^3 Solve for r either with a calculator or through trial and error. The calculator is approximately 7.8%. The reason the realized holding period return is so much larger than the compound rate of return is that the realized return does not account for the time value of money.
Asset A was purchased six months ago for $25,000 and has generated $1,500 cash flow during that period. What is the asset's rate of return if it can be sold for $26,750 today?
Realized return = ($26,750-$25,000+$1,500)/$25,000 = 13% Annual rate of return = 13% × 2 = 26%
Perry purchased 100 shares of Ferro, Inc. common stock for $25 per share one year ago. During the year, Ferro, Inc. paid cash dividends of $2 per share. The stock is currently selling for $30 per share. If Perry sells all of his shares of Ferro, Inc. today, what rate of return would he realize?
Realized return = ($30-$25+$2)/25 = 28%
Tim purchased a bounce house one year ago for $6,500. During the year it generated $4,000 in cash flow. If Time sells the bounce house today, he could receive $6,100 for it. What would be his rate of return under these conditions?
Realized return = ($6,100-$6,500+$4,000)/$6,500 = 55.38%
Which of the following is true of risk-return trade off?
Risk can be measured on the basis of variability of return
Which of the following is true of risk?
Risk is a measure of the uncertainty surrounding the return that an investment will earn.
The primary objective of the firm is:
Shareholder wealth maximization
Which of the following is true of efficient-market hypothesis?
Since stocks are fully and fairly priced, it follows that investors should not waste their time trying to find and capitalize on miss-priced (undervalued or overvalued) securities.
The valuation of common stock is considerably more complicated than the valuation of bonds or preferred stocks because:
The returns can be in annual cash payments or price appreciation, and they are normally expected to grow and not remain constant
Edward Accounting Services has an outstanding issue of 1,000 shares preferred stock with a $100 par value, an 9 percent annual dividend, and 5,000 shares of common stock outstanding. If the stock is cumulative and the board of directors has passed the preferred dividend for the last two years, how much must preferred stockholders be paid prior to paying dividends to common stockholders?
The amount to be paid to preferred stockholders prior to paying dividends to common stockholders = Cumulative preferred dividends + Current year preferred dividend = $9,000 × 2 + $9,000 = $27,000
Which of the following is true of common stocks?
The common stock of a corporation can be either privately or publicly owned.
T
The lack of a fixed common stock dividend provides the corporation greater flexibility versus the use of bonds or preferred stock.
Which of the following is true of risk premium?
The lower-rated corporate issues have a higher risk premium than that of the higher rated corporate issues.
Uncle Tim's Inventions has an expected dividend next year of $3.60 and a required return of 12 percent. Assuming the dividends will be paid indefinitely, calculate the value of a share of common stock assuming a zero growth rate of dividends.
The value of a share of common stock = ($3.60/0.12)= $30
Angel recently purchased a block of 100 shares of Hayley's Optical common stock for $6,000. The stock is expected to provide an annual cash flow of dividends of $400 indefinitely. Assuming a discount rate of 8 percent, how does the price Angel paid compare to the value of the stock?
The value of the stock is = ($400/0.08) = $5,000
Which of the following is a disadvantage of issuing preferred stock from the common stockholders' perspective?
There is a seniority of preferred stockholder's claim over common stockholders.
Which of the following is true of a common stock
There is no fixed dividend payment obligation for the company.
Which of the following is typically a feature of preferred stocks?
They are settled prior to common stocks during liquidation.
Which of the following is true of long-term funds?
They are the sources that supply the financing necessary to support a firm's capital budgeting activities.
Which of the following is an attribute of investment bankers?
They bear the risk of selling a security issue.
Which of the following is true of securities analysts?
They use a variety of models and techniques to value stocks
Rational buyers and sellers use their assessment of an asset's risk and return to determine its value. Relative to this concept, which of the following is true?
To a buyer the asset's value represents the maximum price that he or she would pay to acquire it.
Which of the following is a reason for a firm to underprice new issues?
When the market is in equilibrium, additional demand for shares can be achieved only at a lower price.
A fixed return
Which of the following is not a defining feature of common stock?
It is more difficult to forecast future common stock cash flows than bond cash flow.
Why is valuing common stock more difficult than valuing bonds?
Which of the following is an example of a nonconventional pattern of cash flows?
Year 0 1 2 3 4 cash flow 200 100 -100 200 -300
Milton Glasses recently paid a dividend of $1.70 per share, is currently expected to grow at a constant rate of 5%, and has a required return of 11%. Milton Glasses has been approached to buy a new company. Milton estimates if it buys the company, its constant growth rate would increase to 6.5%, but the firm would also be riskier, therefore increasing the required return of the company to 12%. Should Milton go ahead with the purchase of the new company?
Yes, because the value of the Milton Co. will increase by $3.17 per share
Should Tangshan Mining company accept a new project if its maximum payback is 3.5 years and its initial after-tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $700,000 in year 3, and $1,800,000 in year 4?
Yes, since the payback period of the project is less than the maximum acceptable payback period.
HDTV has planned on diversifying into the dual-VCR field. As a result, HDTV's beta would rise to 1.6 from 1.2 and the expected future long-term growth rate in the firm's earnings would increase from 12% to 16%. The expected market return, km, is 14%; the risk free rate, rf, is 7%; and the current dividend, Do, is $0.50. Should HDTV go into the dual-VCR field?
Yes-stock price increase $9.89
Insider trading is defined as
an individual buying or selling on the basis of material nonpublic information
A debenture is ________.
an unsecured bond that only creditworthy firms can issue
PROJECT Internal Rate Of Return 1 12% 2 15% 3 13% The firm should ________.
accept Project 2, and reject Projects 1 and 3
A firm is evaluating two independent projects utilizing the internal rate of return technique. Project X has an initial investment of $80,000 and cash inflows at the end of each of the next five years of $25,000. Project Z has an initial investment of $120,000 and cash inflows at the end of each of the next four years of $40,000. The firm should ________.
accept Project Y because its IRR is higher than Project Z
PROJECT NPV 1 $100 2 $10 3 -$100 The firm should ________.
accept Projects 1 and 2, and reject Project 3
The two most important disciplines on which financial management relies are
accounting and economics
The specific cost of each source of long-term financing is based on ________ and ________ costs.
after-tax; current
A component of earnings that recognizes the return that the firm is expected to earn on assets that have not been placed in services is called ____.
allowance for funds used during construction
Yield to maturity on a bond with price equal to its par value will ________.
always be equal to the coupon rate
Risk aversion is the behavior exhibited by managers who require
an increase in return, for a given increase in risk
An increase in the beta of a corporation, all else being the same, indicates ________.
an increase in risk, a higher required rate of return, and hence a lower share price
If the expected return is above the required return on an asset, rational investors will ________.
buy the asset, which will drive the price up and cause expected return to reach the level of the required return
The ________ feature permits the issuer to repurchase bonds at a stated price prior to maturity
call
Unsystematic risk
can be eliminated through diversification
The ________ describes the relationship between nondiversifiable risk and the required rate of return.
capital asset pricing model
The cost of new common stock financing is higher than the cost of retained earnings due to ________.
flotation costs and underpricing
Suppose you are investing money at a 10% annual nominal rate. To earn as much as possible, which one of the following compounding periods should you prefer?
daily
Which of the following is the highest risk debt issue?
debenture
Convertible bonds are normally ________.
debentures
The basic motive for capital expenditure is to ________.
expand operations
One of the primary motives for adding fixed assets to a firm is ________.
expansion
Agency costs include all of the following
expenditures to monitor management's actions providing stock as part of management's compensation bonding expenditures
You have just calculated the present value of the expected cash flows of a potential investment. Management thinks your figures are too low. Which of the following actions would improve the present value of your cash flows?
extend the cash flows over a longer period of time, and decrease the discount rate
Which of the following is not a characteristic of long- term debt?
firm is not legally required to pay interest to bond-holders
Financial leverage ratios measure the
firm's use of fixed-charge financing
Present value of an ordinary annuity
first payment is one period after the present value
Present value of an annuity due
first payment on the same date as the present value
The ____ ratio is a more severe measure of a firm's ability to meet fixed financial obligations than is the times interest earned ratio.
fixed charge coverage
A zero coupon bond is an example of a(n) ____.
fixed income security and an original issue deep discount bond
A yield curve that reflects relatively similar borrowing costs for both short-term and long-term loans is called as ________.
flat yielded curve
A(n) ________ gives purchasers inflation protection
floating rate bond
Stated interest rate under ________ is adjusted periodically within stated limits in response to changes in specified money market or capital market rates.
floating rate bonds
Consider the following projects, X and Y where the firm can only choose one. Project X costs $600 and has cash flows of $400 in each of the next 2 years. Project Y also costs $600, and generates cash flows of $500 and $275 for the next 2 years, respectively. Which investment should the firm choose if the cost of capital is 25 percent?
neither, since both the projects have negative NPV
Which capital budgeting method is most useful for evaluating a project that has an initial after-tax cost of $5,000,000 and is expected to provide after-tax operating cash flows of $1,800,000 in year 1, ($2,900,000) in year 2, $2,700,000 in year 3, and $2,300,000 in year 4?
net present value
In comparing the internal rate of return and net present value methods of evaluation, ________.
net present value is theoretically superior, but financial managers prefer to use internal rate of return
The ________ from the sale of a security are the funds actually received from the sale after ________.
net proceeds; reducing the flotation costs
Which of the following is an advantage for a firm to issue common stock over long-term debt?
no maturity date on which the par value of the issue must be repaid
________ rate of interest is the actual rate charged by the supplier and paid by the demander of funds.
nominal
Nico invested an amount a year ago and calculated his return on investment. He found that his purchasing power had increased by 15 percent as a result of his investment. If inflation during the year was 4 percent, then Nico's ________.
nominal return on investment is more than 15 percent
Which pattern of cash flow stream is the most difficult to use when evaluating projects?
nonconventional flow
Risk that affects all firms is called
nondiversifiable risk
Systematic risk is also referred to as ________.
nondiversifiable risk
War, inflation, and the condition of the foreign markets are all examples of ________.
nondiversifiable risk
In the capital asset pricing model, the beta coefficient is a measure of ________.
nondiversifiable risk and market risk
The weights used in weighted average cost of capital must be ________.
nonnegative
An upward-sloping yield curve that indicates cheaper short-term borrowing costs than long-term borrowing costs is called as ________.
normal yield curve
If a firm has class A and class B common stock outstanding, it means that ________.
one of the classes is probably nonvoting stock
A nonconventional cash flow pattern associated with capital investment projects consists of an initial ________.
outflow followed by a series of both cash inflows and outflows
In the Gordon model, the value of a common stock is the ________.
present value of a constant growing dividend stream
Finding the discounted current value of $1,000 to be received at the end of each of the next 5 years requires calculating the
present value of an annuity
The value of a bond is the present value of its interest payments plus ________.
present value of its par value
The purpose of the restrictive debt covenant that imposes fixed assets restrictions is to ________.
prevent the firm from liquidation and ensure its ability to repay the debt
The riskiness of publicly traded bond issues is rated by independent agencies. According to Moody's rating system, an Aaa bond and a Caa bond are ________ and ________ respectively
prime quality; speculative
A(n) ________ distribution shows all possible outcomes and associated probabilities for a given event
probability
The ________ of a given outcome is its chance of occurring
probability
When evaluating projects using NPV approach, ________.
projects having higher early-year cash flows tend to be preferred at higher discount rates
The first step in the capital budgeting process is ________.
proposal generation
The purpose of the restrictive debt covenant that requires that subsequent borrowing be subordinated to the original loan is to ________.
protect the original lender in the priority of claims during liquidation
The attempt by a nonmanagement group to gain control of the management of a firm by soliciting a sufficient number of proxy votes is called a ________.
proxy battle
A sinking fund allows the issuer to
purchase a portion of the debt each year in the open market or call a portion of the debt for mandatory redemption
Bonds that can be redeemed at par at the option of their holders either at specific date after the date of issue and every 1 to 5 years thereafter or when and if the firm takes specified actions such as being acquired, acquiring another company, or issuing a large amount of additional debt are called ________.
putable bonds
Preferred stock is characterized by ________.
quasi-debt nature
Dr. Dan is considering investment in a project with beta coefficient of 1.75. What would you recommend him to do if this investment has an 11.5 percent rate of return, risk-free rate is 5.5 percent, and the rate of return on the market portfolio of assets is 8.5 percent?
r = RF + b(rm - RF) = 0.055 + 1.75(0.085 - 0.055) = 0.108 = 10.75%
The portion of an asset's risk that is attributable to firm-specific, random causes is called ________.
unsystematic risk
A(n) ________ yield curve reflects higher expected future rates of interest.
upward-sloping
The yield curve in an economic period where higher future inflation is expected would be ________.
upward-sloping
The process that links risk and return in order to determine the worth of an asset is termed ________.
valuation
Which of the following typically applies to common stock but not to preferred stock?
voting rights
A(n) ________ is a graphic depiction between the maturity and rate of return for bonds with similar risks
yield curve
