Chapters 1-3 1. [CH 1] Two businesses are identical except for their business organization. The first company is organized as a partnership with one general and nine limited partners. The second is organized as a corporation with many widely distributed share holders. The corporation regularly pays 100% of net income to shareholders as dividends. a. There will be fewer conflicts between owners and management. b. The total tax burden on the corporation’s income is smaller. c. The corporation has better access to capital markets. d. The corporation owners are exposed to unlimited liability. 2. [CH 1] The value of a business is a function of size, timing and certainty of a. trailing 12-month earnings. b. future earnings. c. future cash flows. d. future inventories. 3. [CH 1] A main disadvantage of a sole proprietorship compared to a corporation is ___________. a. unlimited liability b. limited liability c. limited access to capital d. double taxation e. both a and c 4. [CH 1] The primary objective of the firm is __________________________________________. a. maximize profit b. minimize costs c. maximize shareholder wealth d. maximize market share 5. [CH 1] TRUE/FALSE: Shareholder wealth is measured by the market value of the shareholders' common stock holdings. 6. [CH 1] TRUE/FALSE: Agency problems arise from the divergent objectives between owners and managers. 7. [CH 1] Double taxation is a disadvantage of the CORPORATION form of business that both the SOLE PROPRIETORSHIP and the PARTNERSHIP forms do not suffer. 8. [CH 1] Which of the following characterizes a primary market transaction? I. Joe selling his shares of Boeing (BA) to Sara. II. A privately held company (PriceWaterhouseCoopers) making an initial public offering (IPO). III. Apple (AAPL) privately placing a new debt issue with a pension fund. IV. Bank of America Corporation (BAC) purchasing corporate bonds issued by Toyota Motor Corporation (TM) from Morgan Stanley (MS). a. II, III, and IV only c. II and III only b. I only d. II only 9. [CH 1] TRUE/FALSE: Giving managers employee stock options is one method of aligning management goals with shareholder interests 10. [CH 1] Which of the following is an advantage to the corporate form of business organization? a. Unlimited liability b. Limited liability c. Limited access to capital d. Double taxation e. both a and cChapters 1-3 11. [CH 2] List the Major components of a firm’s balance sheet ASSETS CURRENT: CASH, MARKETABLE SECURITIES/ST INV, A/R, INVENTORY FIXED: PROPERTY, PLANT, & EQUIPMENT LIABILITIES CURRENT: A/P, ACCRUALS LONG: TERM DEBT, NOTES PAYABLE SHAREHOLDERS’ EQUITY PREFERRED STOCK; COMMON STOCK RETAINED EARNINGS, CAPITAL CONTRIBUTED IN EXCESS OF PAR/ADDITIONAL PAID-IN CAPITAL 12. [CH 2] Which of the following is NOT part of current assets on the balance sheet? a. Inventory c. Depreciation b. Receivables d. Accounts Payable 13. [CH 2] List two noncash expenses that firms may report in their income statement DEPRECIATION & AMORTIZATION 14. [CH 2] The systematic allocation of the cost of an asset over more than one time period is called ____________. a. depreciation c. IPO b. bid-ask spread d. costing 15. [CH 2] A big company had an operating income (EBIT) of $260,000 last year. The firm had $48,000 in depreciation expenses, $15,000 in interest expenses, and $40,000 in selling, general, and administrative expenses. If the company has a marginal tax rate of 40%, what was its net income for last year? NI = 147,000 16. [CH 2] Another company has the following income statement information.
Revenue
$42 000
Cost of Goods Sold
$ 9 600
Wages
$10 000
Supplies Expense
$ 7 000
Insurance Expense
$ 400
Depreciation Expense
$ 2 000
Interest Expense
$ 7 000

## If the company has a marginal tax rate of 40%, what was its net income for last year?

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The company is in the 40% tax bracket and paid preferred stock dividends of $3,000 and has 10,000 common stock shares outstanding. Based on this information, what is the company’s tax liability? TAX LIABILITY = 2400 17. [CH 2] Advocate Agency has $10,000 in debt, $35,000 in preferred stock, $10,000 in common stock, $25,000 of capital in excess of par, and $55,000 in retained earnings. They have 1,400 shares of preferred stock outstanding (par value of $25). They also have 10,000 shares of $1 par value common stock outstanding. What is the total equity attributable to common stockholders? Total Equity attributable to Common Shareholders = $90,000 18. [CH 2] What does a negative cash flow to stockholders indicate? a. The firm had a negative cash flow from assets. b. The firm paid dividends that exceeded the amount of the net new equity. c. The firm received more from selling stock than it paid out to shareholders. d. The firm had a positive cash flow to creditors. e. The firm repurchased more shares than it sold.Chapters 1-3 19. [CH 2] Use the financial statement information below to answer questions for Alexander Corp. ⮚ What is the firm’s operating cash flow (OCF)? $144 ⮚ What is the firm’s net capital spending (NCS)? $ 80 ⮚ What is the firm’s change in net working capital (ΔNWC)? $ 40 ⮚ What is the firm’s cash flow to stockholders? $ 29 ⮚ What is the firm’s cash flow to bondholders? -$ 5 ⮚ What is the firm free cash flow or cash flow from assets (CFFA)? $ 24 December 31 Balance Sheet 2012 2011 Assets Cash $ 15,000,000 $ 40,000,000 A/R $ 180,000,000 $ 160,000,000 Inventory $ 270,000,000 $ 200,000,000 Total CA $ 465,000,000 $ 400,000,000 NFA $ 380,000,000 $ 350,000,000 Total Assets $ 845,000,000 $ 750,000,000 Liabilities & Owners' Equity A/P $ 30,000,000 $ 15,000,000 Other Current Liabilities $ 100,000,000 $ 90,000,000 Total CL $ 130,000,000 $ 105,000,000 LT Debt $ 300,000,000 $ 255,000,000 Total Liabilities $ 430,000,000 $ 360,000,000 Common Stock $ 130,000,000 $ 130,000,000 Retained Earnings $ 285,000,000 $ 260,000,000 Owners' Equity $ 415,000,000 $ 390,000,000 Total Liabilities & Owners' Equity $ 845,000,000 $ 750,000,000 December 31, 2012 Year-End Income Statement Sales $ 1,500,000,000 Operating Costs Variable Costs $ 1,230,000,000 Fixed Costs $ 90,000,000 Depreciation $ 50,000,000 Earnings before Interest and Taxes (EBIT) $ 130,000,000 Interest Expense $ 40,000,000 Earnings before Taxes (EBT) $ 90,000,000 Taxes (40%) $ 36,000,000 Net Income (NI) $ 54,000,000 Common Dividends Paid $ 29,000,000 Common Shares Outstanding 25,000,000 Market Value per Common Share $ 23.00 20. [CH 2] The Ragin Cajun had an operating income (EBIT) of $260,000 last year. The firm had $18,000 in depreciation expenses, $15,000 in interest expenses, and $60,000 in selling, general, and administrative expenses. If the Cajun has a marginal tax rate of 40%, what was its net income for last year? What is the firm’s operating cash flow (OCF)? NI: $147,000 OCF: $180,000 21. [CH 2] Assume your firm, Eagle Enterprises, had $16,250,000 in taxable income last year. (a) What is your firm’s tax liability for the year? (b) What is Eagle’s average tax rate for the year? (c) What is the firm’s marginal tax rate? (a) $5,625,000 (b) 34.62% (c) 38%Chapters 1-3 22. [CH 2] Vroom Vroom Motors is in the 40% tax bracket and has 15,000 common stock shares outstanding and 25,000 common stock shares authorized. Based on this information, what is Vroom Vroom Motors’ earnings per share (EPS) applicable to common stock shareholders? Use the income statement information below in your calculations. Additionally, the firm is projecting to pay $1,500 in common stock dividends. What are dividends per share (DPS)?
Revenue
$52 000
Cost of Goods Sold
$ 9 600
Wages
$16 000
Supplies
$ 7 500
Insurance Expense
$ 400
Depreciation Expense
$ 2 000
Interest Expense
$ 7 330

## Based on this information, what is the company’s tax liability?

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EPS: $.3668 DPS: $.10 23. [CH 3] A firm has a debt ratio of 0.75. What will its equity multiplier be? 4.0 24. [CH 3] What is the return on assets (ROA) for a firm that has a debt ratio of 0.65, a net profit margin of 6.5%, sales of $740,000, and a total asset turnover of 4? 26% 25. [CH 3] TRUE/FALSE? The primary weakness of the current ratio is that it includes inventory. 26. [CH 3] Thompson Corp has a NPM of 11.5%. They reported earnings after tax of $632,500. If they had net fixed assets of $1,500,000 and current assets of $750,000, what are their fixed asset turnover and total asset turnover ratios? TAT = 2.44 times FAT = 3.667 times 27. [CH 3] ___________________ indicate(s) the firm's capacity to meet its debt obligations, both short-term and long-term. a. Liquidity ratios b. Asset management c. Financial leverage d. Profitability e. Market value 28. [CH 3] What impact does an increase in leverage have on the firm, all else equal? a. Increasing leverage increases risk. b. Increasing leverage decreases risk. c. Increasing leverage affects the amount of inventory the firm holds. d. Increasing leverage decreases the potential return to stockholders. 29. [CH 3] According to the Dupont Identity, a firm's return on equity is a function of its:_________. 30. [CH 3] Paying off some current liabilities with cash, and selling bonds and investing the proceeds in marketable securities would cause the current ratio to increase, or decrease. 31. [CH 3] A produce market would normally be expected to have a high, or low, profit margin, and a high, or low, asset turnover ratio. 32. [CH 3] If a company has a debt ratio of 50%, and an equity multiplier of 2. What is its stockholders' equity if total debt is $200,000? SE = 200,000Chapters 1-3 33. [CH 3] Calculate the inventory for a company whose Quick ratio = 1.2; whose Current assets = $20,000; and whose Current ratio = 2.5 INVENTORY = 10,400 34. [CH 3] What is the return on stockholders' equity for a firm with a net profit margin 8.0%, sales of $750,000, an equity multiplier of 2, and total assets of $375,000? ROE = 32% 35. [CH 3] If a firm has a total asset turnover of 2.0, a fixed asset turnover of 3.0, a debt ratio of 0.5 and a total debt of $500,000, then its fixed assets are: FIXED ASSETS = 666,667 36. [CH 3] Someone is interested in investing in a small company, thinks it might be a good investment, but would like to know the return on stockholder's equity. Assume a marginal tax rate is 40% and determine the ROE based on the following: Earning before taxes $5 million Net profit margin 4% Total liabilities $10.0 million Total stockholder's equity $10.0 million ROE = 30% 37. [CH 3] The P/E ratio indicates how much investors are willing to pay for a. each share of the company’s common stock. b. every dollar of sales (revenue). c. every dollar of net income. d. every dollar of earnings per share (EPS). 38. CH 3] What factors (changes to balance sheet and/or income statement accounts) might result in a higher return on equity (ROE)? 39. [CH 3] Ice Igloo’s currently pays out 35% of earnings as dividends annually. The firm reported net income of $380,000 on $1.2 million in sales. Their balance sheet shows total assets of 2.5 million and total current assets of $500,000. Additionally, the firm has total liabilities of $600,000 and shareholder’s equity of $1.9 million. Ice Igloo’s has 350,000 common shares outstanding and 550,000 shares authorized. Currently, the firm’s common shares are trading at $15.78 per share. ⮚ What is the firm’s payout ratio? 35% ⮚ What is the firm’s retention ratio? 65% ⮚ How much should the firm have reported in EPS? $1.09 ⮚ What is the firm’s ROA? 15.2% ⮚ What is the firm’s ROE? 20% ⮚ What is the firm’s internal growth rate? 10.96% ⮚ What is the firm’s sustainable growth rate? 14.94% ⮚ How much does the firm have in Net Fixed Assets? $2 million ⮚ What is the firm’s PE ratio? 14.47 40. [CH 3] What is the return on assets (ROA) for a firm that has a debt ratio of 0.65, a net profit margin of 6.5%, sales of $740,000, and a total asset turnover of 4? 26% 41. [CH 3] If a firm's current ratio is 1.5, a. its current liabilities exceed its current assets b. it is possible for its quick ratio to be 2.0 c. it is possible for its quick ratio to be 1.0 d. its current assets equal its current liabilitiesChapters 1-3 42. [CH 3] Which of the following will change if a firm experiences an increase or decrease in its net income? I. MTB Ratio II. ROE III. PM IV. PE Ratio V. Equity Multiplier a. I and V only b. II, III, and IV only c. II and III only d. None of the above 43. [CH 3] If a firm generates ten cents for every dollar of equity, then the firm has a 10% a. ROE d. EM b. PM e. PE Ratio c. Profitability ratio 44. [CH 3] A firm reported net income of $270,000. They pay out 40% of earnings to their shareholders as dividends. What is the firm’s payout ratio? 40% What is the firm’s retention ratio? 60% How much is the firm paying out as dividends? $108,000 How much is the firm adding to retained earnings? $162,000Chapters 4-6 1. [CH 4] If you invest $10,000 in a 4 year CD which pays an APR of 10%, compounded annually, how much will the CD be worth at the end of 4 years? $14,641 2. [CH 4] Baggos has seen their EPS increase from $0.30 to $3.16 in seven years. What has been the growth rate of Baggos’ EPS? 39.98% 3. [CH 4] Your grandparents deposited $12,000 into an account for you 15 years ago for college expenses. The account balance grew to $24,000. What rate of return was their deposit earning, annually? 4.729% 4. [CH 4] You are offered an investment which pays you $3,000 in 6 years. You require a return of 12% on investments of this type. How much should you be willing to pay for it? $1,519.89 5. [CH 4] If you deposit $2,000 into an account earning 6% annually, how long until you have $10,000 for a down payment on a new house? 27.62 years 6. [CH 4] $10,000 deposited today in a savings account paying 10% (compounded annually) will be worth after 5 years. 16,105.10

## What is the total equity attributable to common stockholders?

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7. [CH 4] The process of finding present values is referred to as discounting whereas finding future values is called compounding. 8. [CH 4] What deposit is needed today to have $5000 in a savings account 4 years from now if you’re earning 5% interest, compounded annually? $4,113.51 9. [CH 4] LMN Corp’s dividends have grown from $1.85 to $2.15 over the last 5 years. What is the growth rate in dividends? 3.05% 10. [CH 5] If your monthly statement from your bank credit card shows that the monthly rate of interest is 1.2%, the annual 15.3895%

effective rate of interest you are being charged on your credit card is 11. [CH 5] Francis deposits $100 into a savings account each week when she gets paid. The account has an APR of 1.5%, compounded quarterly. If Francis makes these deposits every week for the next 20 years, how much will she have in the account at that time? $121,231.21 12. [CH 5] Your Aeropostale credit card bill states that your APR is 18%. You are paying monthly at a rate of 1.5% on your balances, so interest is compounding monthly. What is the effective annual interest rate? (Set your calculator to 4 decimals). 19.56% 13. [CH 5] You want to save $300 every quarter for the next 10 years. You hope to earn an average return of 8%, compounded quarterly. How much more will you have in your account at the end of 10 years if you invest your money at the beginning of each quarter instead of at the end of each quarter? $362.42 14. [CH 5] Eagle Motors sold you a new car for $10,000. You have to make monthly payments of $278 to them for 4 years. At that time, you will have paid off the balance on the car. What interest rate (APR) are they charging you? 14.94%Chapters 4-6 15. [CH 5] You bought a house for $175,000. You financed it for 30 years at 6.5% interest, compounded monthly. What are your monthly payments? What if you financed it for 20 years? 30 years 20 years $1106.12 $1304.75 How much in interest will you pay over the life of the 30 year loan? 20 year loan? 30 Years: total interest paid = $223,203.20 20 Years: total interest paid = $138,140 How much in interest will you save by financing the loan for 20 years instead of 30 years? $85,063.20 16. [CH 5] Upon retirement, your goal is to spend 5 years traveling around the world. To travel in the style to which you are accustomed will require $250,000 per year at the beginning of each year. If you plan to retire in 30 years, what are the equal, annual end-of-the-year payments necessary to achieve this goal? The funds in the retirement account will compound at 10% annually. $6,337.41 17. [CH 5] You want to buy a new car in 5 years. If you deposit $1,250 into an account earning 8% annually, how much will you have as a down payment? How much would you have if the account earned 11%? @ 8% = $1,836.66 @ 11% = $2,106.32 18. [CH 5] Designs Now is opening a showcase office to display and sell its computer designed poster art. Designs expects cash flows to be $120,000 in the first year, $180,000 in the second year, $240,000 in the third year. If Designs uses 11% as its discount rate, what is the present value of the cash flows? $429,686.08 19. [CH 5] You are a successful graduate of GSU and want to set up a scholarship in your name for business students. You have $10,000 to donate to the GSU Foundation. They have told you that they can invest it and earn an 8% annualy from which annual scholarships will be awarded. How much in annual scholarship money does your donation provide? $800 20. [CH 5] If the APR on a loan is 6%, compounded quarterly, what effective annual rate (EAR) is the borrower paying? What if it is compounded monthly? Compounded annually? Continuously compounded? EAR (Quarterly) = 6.136% EAR (Monthly) = 6.168% EAR (Annually) = 6% EAR (Continuously) = 6.184% If the EAR on credit card balances is 25%, what is the APR, assuming monthly compounding? APR (Monthly) = 22.52% 21. [CH 5] Air Atlantic (AA) has been offered a 3-year old jet airliner under a 12-year lease arrangement. The lease requires AA to make annual lease payments of $500,000 at the beginning of each of the next 12 years. Determine the present value of the lease payments if the opportunity cost of funds is 14%. $3,226,366.51 22. [CH 5] A perpetuity is like an annuity that goes on forever. I want to have $10,000 a year in investment income for the rest of my life, and to be passed on to my heirs in perpetuity. I expect a 5% rate of return. How much money do I need to put into my perpetuity? $200,000 23. [CH 5] The more frequent the compounding, the (greater/lesser) the present value and the (greater/lesser) the future value. 24. [CH 5] The effective rate of interest will always be ______ the nominal rate. greater than less than less than or equal to equal to greater than or equal toChapters 4-6 25. [CH 5] Which of the following is (are) true regarding the APR (annual percentage rate) and EAR (effective annual rate)? I. The EAR is always greater than the APR. II. The EAR increases as the number of compounding periods per year increases. III. The EAR, not the APR, should be used for comparison purposes when choosing between investments and/or loans. IV. An investment with an APR of 6%, compounded monthly, will have a smaller EAR than one with quarterly compounding. V. The less frequent the compounding, the higher the FV and EAR, all else equal. a. II and III only d. I and III only b. I and IV only e. I, II, III, and IV c. I, II, III, and V only 26. [CH 5] In loan amortization with the passage of time, the amount of each successive payment applied to interest (increases/decreases/says the same) and the amount applied to principal (increases/ decreases/stays the same) so that the remaining balance is always (decreasing/ increasing/staying the same). 27. [CH 5] Which of the following are true regarding annuities? I. For an ordinary annuity, cash flows occur at the end of the period. II. For an annuity due, cash flows occur at the end of the period. III. For an ordinary annuity, cash flows occur at the beginning of the period. IV. For an annuity due, cash flows occur at the beginning of the period. V. The cash flows of annuities last forever. VI. The future value of an annuity due is greater than that of an ordinary annuity. I and IV only I, IV, and VI only II and III only V only 28. [CH 5] Calculate the present value of the following cash flows: $100 in year 1, $200 in year 2, and $150 in years 3 and 4. Use a discount rate of 5%. $529.625 29. [CH 5] What is the present value of an annuity due which pays $50 annually for 5 years using a discount rate of 6%. $223.26 30. [CH 5] You have an investment that pays you $5000 annually forever. If the initial deposit earns 8%, what was the initial deposit? $62,500 31. [CH 5] You just purchased a boat for $22,500. You financed it for 6 years at a 9% interest rate. The loan requires you to make annual payments. What is the year 2 principal reduction amount? What is the year 2 ending balance? PMT = $5,015.70 Year 2 Ending Balance = $16,249.45 Year 2 Princ Reduction Amt = $3,259.86 Year 2 Int Payment = $1,755.84 32. [CH 5] You deposited $100 into an account earning 6% annual interest. What will be the balance after 3 years if the interest is compounded quarterly? $119.56 33. [CH 6] Letter Inc has zero-coupon bonds. If you require a 6% return on investments of similar interest, what is the value of this bond if it matures in 5 years? $744.0939 34. [CH 6] What is the value today of a bond maturing in 20 years that has a coupon rate of 9.375%? It pays annual coupon payments and you require a rate of return on investments of similar risk of 9%. $1,034.23Chapters 4-6 35. [CH 6] A bond issued by XYZ Company is quoted in the financial press as selling at 98.75, currently. It has a face value of $1,000 and it matures in 3 years. If the bond is yielding 8%, what is the coupon rate? Assume coupons are paid on an annual basis. $75.15 Coupon Rate = 7.515% 36. [CH 6] If the real risk-free rate of return is 2.5% and the expected inflation rate is 4%, what is the exact nominal rate of return? What is the approximate nominal rate of return? Exact: 6.6% Approximate: 6.5% 37. [CH 6] If the nominal rate of return is 7% and the real risk-free rate of return is 4%, what is the expected inflation rate (approximate and exact)? Exact: 2.88% Approximate: 3% 38. [CH 6] If the expected inflation rate is 5% and the nominal rate of return is 9%, what is the real risk-free rate of return (approximate and exact)? Exact: 3.81% Approximate: 4% 39. [CH 6] How much you would be willing to pay for a $1,000 par value bond paying $40 interest every six months and maturing in 20 years, assuming you wanted to earn a 9% rate of return? $907.99 (or, $908).

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40. [CH 6] Hudson International wants to retire bonds they issued early (prior to maturity). Under what circumstances could the firm do this? a. The bonds are callable. b. The bonds are putable. c. The bonds are convertible. d. The bonds are worth more than $1000 each. 41. [CH 6] Cowboy Coolers issued bonds which mature in 40 years. The coupon rate is 8.50% and is paid semiannually. If the yield on similar bonds is currently 9%, what is the price of the bond? $946.09 42. [CH 6] A bond rated AA is classified as investment grade noninvestment grade noninvestment grade junk grade 43. [CH 6] Which one of the following might be included in a bond's list of negative covenants? a. Maintaining a current ratio of 1.2 or more b. Maintaining a minimum cash balance of $1.2 million c. Limiting cash dividends to $1 per share or less d. Maintaining a times interest earned ratio of 2 or more e. Providing audited financial statements in a timely manner 44. [CH 6] Answer the following questions related to bonds: ⮚ As the coupon rate on a bond increases, the price (PV) of the bond __________. increases cannot be determined decreases increases then decreases ⮚ As the YTM on a bond increases, the price (PV) of the bond _______________. increases cannot be determined decreases decreases then increases ⮚ When the coupon rate > YTM, the price of the bond will be _______________ the maturity value ($1,000). Greater than less than or equal to equal to Less than greater than or equal toChapters 4-6 45. [CH 6] Which of the following is (are) true? I. A bond for which no specific property has been pledged as security is classified as a debenture. II. The amount of profit earned by a bond trader from buying and selling a bond is called the bond premium. III. A bond that does not pay any interest payments and initially sells at a deep discount is called a zero coupon bond. IV. Generally, bonds issued in the US pay interest on a semiannual basis. V. A sinking fund is an account that is managed by a bond trustee for the sole purpose of redeeming bonds early. a. I and IV only d. II only b. III, IV, and V only e. I, III, IV, and V only c. IV and V only 46. [CH 6] A bond is quoted at 99.25% with a 5% coupon in the financial press: a. What is the current price of the bond? $992.50 b. What is the amount of coupons paid annually? Semiannually? $50; $25 c. Based on the given information, is the YTM greater than or less than 5%? Greater than 47. [CH 6] Suppose Eagle Endeavors needs to raise $20 million and they want to issue 15-year bonds to do so. The required return on the issue will be 6.75% and they are looking at two different alternatives: a 6.75% semiannual coupon bond and a zero coupon bond. The firm’s tax rate is 35%. How many coupon bonds will they need to issue to raise the $20 million? How many zeroes will they need to issue? Coupon Bonds: Need to issue 20,000 bonds Zero Coupon Bonds: Need to issue 54,137.19 bonds 48. [CH 6/CH 12] Calculate the yield-to-maturity of a bond maturing in 10 years that pays interest semiannually. The bond is currently trading at $958.73. The coupon rate is 8%. 8.62% 49. [CH 6/CH 12] You own a zero-coupon bond that is currently trading at $678.12. The bond will mature in 7 years. What is the yield-to-maturity of this bond? 5.6267% 50. [CH 6/CH 12] ABC Corp has bonds currently selling for $1,025.89 and matures in 5 years. It has a face value of $1,000. It has a coupon of 6 ¾%, paid annually, what is the yield-to-maturity? 6.13%Chapters 7-9 IRR: internal rate of return NPV: net present value PI: profitability index PB (DPB): payback period (discounted PB) NCF: Net Cash Flows = CFFA OCF: Operating Cash Flows NINV: net investment = initial investment = initial cost ATSV: after tax salvage value 1. [CH 7] LMN Corp’s dividends have grown from $1.85 to $2.15 over the last 5 years. What is the growth rate in dividends? 3.05% 2. [CH 7] What is the value of a stock today if it just paid a dividend of $1.05? The required rate of return is 15% and the stock is growing at a rate of 4%. $9.93 3. [CH 7/CH 12] If a stock is currently trading for $25, and next year’s dividend is expected to be $0.55, what is the implied required rate of return? Assume the dividends are growing at a rate of 2.5% for the foreseeable future. 4.7% 4. [CH 7] Over the past 15 years, Maverick has increased their annual dividend from $0.10 to $0.75. If the required rate of return on the stock is 17%, what is this stock worth today if they just paid the $0.75 dividend? $32.70 5. [CH 7] Alex Inc has common stock currently trading at $15. The required rate of return is 13% and the dividends have been growing at 4% and are expected to continue growing at that rate. What is the current dividend? $1.30 6. [CH 7] L&O CI’s paid a dividend today of $1.50. The stock is currently trading at $35. If the required rate of return is 12%, what is the implied growth rate? 7.39% 7. [CH 7] Alex Inc has 250,000 shares of preferred stock outstanding. It is currently trading for $58 and the required rate of return is 8%. What is the dividend on this stock? $4.64 8. [CH 7] Kellerman has $75 par value preferred stock. It pays a dividend of $1.25 and the required rate of return is 7.5%. What is the value of this stock today? $16.67 9. [CH 7] MENSA Int’l just paid a dividend of $1.25. Their growth rate in dividends is 10% and you require a rate of return of 10%, what is the value of this stock today? Cannot use Constant Growth Dividend Model. g > R. Must use another valuation model. 10. [CH 7] You require a 12% return on your investments. Southern Sweets will pay a $2.50 dividend next year. Dividends are projected to grow at 3% per year, indefinitely. What is the price of a share of Southern Sweets? $27.78 11. [CH 7] Which of the following are NOT rights belonging to holders of common stock? Right to share proportionally in dividends distributed. Right to assets in the event of liquidation. Right to purchase new shares when issued. Right to force the firm to repurchase their shares. Right to preferred dividends 12. [CH 7] The returns investors receive from holding common stock may be in two forms: cash dividends and capital gains.Chapters 7-9 13. [CH 7] Many preferred stocks are treated as _______________ in determining their values. perpetuities annuities due annuities certificates of deposit 14. [CH 7] OK Fencing Co. is experiencing a high growth period. As such, they expect dividends to grow at 12% per year for the next 3 years. After that the dividend growth rate should slow to about 3%. The required rate of return is 15% and they just paid a dividend of $1.80, what is the current share price? $��������. �������� What if the firm decided to pay a fixed dividend of $2.60 forever after the initial period of high growth? What is the value of the stock? $��������. �������� 15. [CH 7] 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, or firm must be a dividend paying firm, or the growth rate in dividends must be constant for the foreseeable future. 16. [CH 7] The right of stockholders to share equally on a per share basis in any distributions of corporate earnings is known as _dividend right___________. 17. [CH 7] Rank in ascending order (lowest to highest) the relative risk associated with holding the preferred stock, common stock and bonds of a firm: preferred stock, bonds, common stock bonds, common stock, preferred stock common stock, preferred stock, bonds bonds, preferred stock, common stock 18. [CH 7] All else equal, as the required return decreases (nears the growth rate), the price of a stock __________. a. increases. d. converges to the dividend value. b. decreases. e. cannot be determined. c. does not change. 19. [CH 8] MartinCrane expects cash flows from a new project of $25,000 per year for the next 5 years. The project will require an investment of $70,000. Determine the NPV of the project if the required rate of return on such projects is 10%. Calculate the IRR. NPV = $24,769.67 Accept NPV > 0 IRR = 23.06% Accept IRR > R = 10% 20. [CH 8] Calculate the NPV of a project that has an initial investment of $65,000 and has one cash flow occurring 8 years from now of $250,000. Use a discount rate of 15%. Should you invest in the project? Calculate the PI. NPV = $16,725 Accept NPV > 0 PI = 1.257 Accept PI > 1 21. [CH 8] A new project requires an initial investment of $45,000. Annual net cash flows of $15,000 are expected. Calculate the payback period. 3 years 22. [CH 8] Calculate the NPV of a project that requires an initial cash outlay of $500,000 and generates annual cash flows of $102,500 for 7 years. Use a discount rate of 12%. Calculate the IRR. NPV = $-32,214.95 Reject NPV < 0 IRR = 9.94% Reject IRR < R 23. [CH 8] Clark Coop just spent $250,000 on a project generating the following cash flows: $75,000 in year 1, $50,000 in years 2 – 4, and $140,000 in year 5. Use a discount rate of 8% and compute the project NPV. Compute the IRR for the project. NPV = $34,036 Accept NPV > 0 IRR = 12.53% Accept IRR > R = 8%Chapters 7-9 24. [CH 8] Now assume that Clark Coop projects the cash flows will occur in the reverse: $140,000 in year 1, $50,000 in years 2-4, and $75,000 in year 5. Use a discount rate of 8% and compute the project NPV. Compute the IRR for the project as well. NPV = $49,983.42 Accept NPV > 0 IRR = 16.65% Accept IRR > R = 8% 25. [CH 8] Designs Now is opening a showcase office to display and sell its computer designed poster art. Designs expects cash flows to be $120,000 in the first year, $180,000 in the second year, $240,000 in the third year. If Designs uses 11% as its discount rate, what is the present value of the cash flows? $429,686.08 26. [CH 8] Brian Industries has a project expecting to generate the following cash flows: $15,000 in the first 3 years of the project and $20,000 in the fourth year. Additionally, the project requires land reclamation at end of the project in year 5 of $25,000 (cash outlay). The project requires an initial investment of $10,000. Using a discount rate of 8%, what is the NPV of the project? Calculate the PI. NPV = $26,342.47 Accept NPV > 0 PI = 3.63 Accept PI > 1 27. [CH 8] Calculate the IRR of a project generating the following cash flows: $40,000 in years 2-4 and $50,000 in years 6- 7. The project requires an initial investment of $175,000. Should they invest in the project if they require a return of 10%. IRR = 5.21% Reject IRR < R = 10% 28. [CH 8] Projects that have cash flow patterns with more than one sign change are considered to have _____ cash flows. normal nonconventional superior insignificant 29. [CH 8] If a NPV analysis for a normal project gives an NPV greater than zero, an internal rate of return calculation on the same project would yield an internal rate of return ___________ the required rate of return for the firm. less than greater than equal to cannot be determined 30. [CH 8] Generally, the __________ is considered to have a more realistic reinvestment rate than the ___________. NPV; IRR IRR; NPV PB; IRR PI; NPV 31. [CH 8] If the net present value of an investment project is positive then the: project would be unacceptable under the internal rate of return method project would be acceptable under the payback method project's rate of return is greater than the firm's cost of capital all of these are correct 32. [CH 8] The _____ is interpreted as the present value return for each dollar of initial investment or “bang for your buck”. IRR PB NPV PI MIRR 33. [CH 8] Which of the following are advantages to the payback method? The calculation is easy. It ignores the TVM. It incorporates all project CF’s. It has an arbitrary accept/reject criterion. It is easy to understand. It is biased toward liquidity. 34. [CH 8] The ________ is the rate at which an investor/firm would be indifferent between two projects. IRR crossover rate cost of capital PI 35. [CH 8] If the PI < 1, then NPV must be _________. greater than 0 greater than 1 less than 0 positive 36. [CH 8] When two or more normal (independent/mutually exclusive/expansion) projects are under consideration, the profitability index, the net present value, and the internal rate of return methods will yield identical accept/reject signals.Chapters 7-9 37. [CH 8] Which of the following should be accepted if the projects are mutually exclusive? Independent? Project NPV IRR A $22,591 15.25% B $18,114 16.90% C $10,807 8.00% Mutually Exclusive: Project A – highest NPV. Independent: All Projects -- NPV > 0 38. [CH 8] Which of the following should be accepted if the projects are mutually exclusive based on the profitability index? What if the projects are Independent? Project NPV Initial Investment A $22,591 $120,000 B $18,114 $125,000 C $10,807 $50,000 Mutually Exclusive: Project C – highest PI Independent: All Projects -- PI > 1 (NPV > 0) 39. [CH 8] Which of the following is true with respect to IRR? IRR is the discount rate at which NPV is greater than zero. IRR has a more realistic reinvestment rate assumption than NPV. IRR is not appropriate for projects with nonconventional cash flows. Projects with an IRR greater than zero should be accepted. 40. [CH 8] Accept/Reject: Projects with a payback period less than the period set by management. Accept/Reject: Projects with a PI less than one. Accept/Reject: Projects with an IRR less than the required rate of return. Accept/Reject: Projects with an NPV greater than zero. 41. [CH 8] Which investment decision rules (if any) assumes that the cash flows generated are reinvested over the life of the project at the firm's cost of capital? DPB IRR PI PB NPV no decision rules assume this 42. [CH 8] ____________ projects automatically preclude the acceptance of any other project. Independent Mutually exclusive Expansion Capital rationing 43. [CH 8] The relationship between NPV and IRR is such that: both approaches always provide the same ranking of alternative investment projects the IRR of a project is equal to the firm's cost of capital if the NPV of a project is $0. if the NPV of a project is negative, the IRR must be greater than the cost of capital. 44. [CH 8] One weakness of the internal rate of return approach is that: it does not directly consider the timing of the cash flows from a project it fails to provide a straightforward decision-making criterion it implicitly assumes that the firm is able to reinvest the interim CFs from a project at the firm's cost of capital. it is possible to have multiple internal rates of return. 45. [CH 9] Doogie’s Pools and Spas is considering opening a new location. They recently prepared a project proposal that resulting in a NPV of $125,000. However, they have already paid $15,000 for a feasibility study that was conducted before the proposal was created. What affect will the study have on the project’s NPV? no effect increase the NPV decrease NPV cannot be determinedChapters 7-9 46. [CH 9] John Wolf wants to purchase a new generator. It is expected to cost $50,000. The marginal tax rate is 40%. It will replace an existing generator. The old generator has been fully depreciated. However, they think it can be sold for $5,000. What is the NINV for the new generator? $47,000 47. [CH 9] Twin Cities wants to expand their production facility. The expansion is expected to generate revenues of $150,000 per year. Its marginal tax rate is 40%. The additional equipment needed will cost $110,000 installed. Additionally, an investment in NWC will be required of $25,000. What is the NINV? $135,000 48. [CH 9] The value of resources used in an investment project should be measured in terms of their ______________ cost. opportunity sunk erosive depreciated 49. [CH 9] _______________ is added back because it is a noncash expense that only serves to calculate taxes appropriately. depreciation interest dividends sunk cost 50. [CH 9] Polo is considering an investment project that will generate $150,000 in annual earnings before taxes. Depreciation is expected to be $75,000 annually. Their marginal tax rate is 35%. What is the project’s annual OCF? $172,500 51. [CH 9] A project’s cash flows (before or after tax) should always be measured on an incremental basis. 52. [CH 9] The determination of net operating cash flows (OCF) should never include __________. negative side effects interest charges taxes opportunity costs 53. [CH 9] Calculate the NINV of a project Naj is considering investing in where the generator costs $25,000. Installation is expected to costs $2,500 and shipping costs are expected to be $5,000. Naj projects that an initial investment in net working capital will be required amounting to $10,000. The firm paid a consultant $5,000 to perform a feasibility study. NINV = $42,500 54. [CH 9] You purchased a forklift 6 years ago. It was being depreciated straight line over 10 years to a zero salvage value. The forklift initially cost $200,000. What is the book value of the asset today? If you sold the forklift today for $95,000, what (if any) tax would you have to pay on the sale? Use a marginal tax rate of 40%. Book Value = $80,000 Tax Liability = $6,000 55. [CH 9] Depreciation __________ reported profits and it __________ taxes paid by a firm. reduces; reduces increases; reduces has no effect; has no effect reduces; increases increases; increases 56. [CH 9] You want to sell your dubber/mixer. You think it will sell for $15,000. It has a book value of $5,000. Your marginal tax rate is 25%. What is the ATSV? $12,500 57. [CH 9] Carson Inc is purchasing a new delivery truck to replace their existing one. The new truck will cost $225,000. This truck will replace their old truck. The old truck has a book value of $10,000 and they think they can sell their old truck for $5,000. No additional NWC investment is required. What is the NINV? Use a marginal tax rate of 40% $218,000 58. [CH 9] Grace Inc is purchasing a new punching machine. This machine is not going to increase revenues, but will save the company about $15,000 in operating expenses. The old punching machine has a $0 book value. The new machine will cost $100,000 and be depreciated straight line over 10 years. The marginal tax rate is 35%. What is the annual operating cash flow of the project? $13,250Chapters 7-9 59. [CH 9] Frasier Financial has a project that will increase their revenues by $75,000 annually. This project will increase their operating costs by $10,000, however. The new project requires a new piece of equipment. The equipment will cost $20,000 and will be depreciated straight line for 5 years to an expected salvage value of $2,000. The firm’s marginal tax rate is 40%. What are the annual operating cash flows? $40,440 60. [CH 9] A (n) capital expenditure is a cash outlay that is expected to generate a flow of future cash benefits lasting longer than 1 year, whereas a(n) operating expenditure lasts less than 1 year. 61. [CH 9] There is only a tax effect when the sale of an asset is __________ its book value. greater than less than equal to not equal to 62. [CH 9] Determining the net investment (NINV) of a project includes explicit consideration of all of the following except: estimated net cash flow project cost plus installation and shipping costs increases in net working capital taxes associated with the sale of an existing asset and/or the purchase of a new one 63. [CH 9] When calculating the net cash flow in a project's expected final year, recovery of any working capital invested is disregarded the after-tax salvage value of any project equipment is considered the remaining principal on any borrowed funds is considered the sales proceeds from any land associated with the project is disregarded 64. [CH 9] Generally, the existence of a(n) _______________ option reduces the downside risk of a project and should be considered in project analysis. abandonment expansion sunk cost capital rationing 65. [CH 9] Which costs should be included in the calculation of net cash flows (CFFA’s) for a project? financing costs erosion sunk costs interest costs opportunity costs taxes additional NWC changes in depreciation changes in sales changes in operating costs total firm sales the potential sale of real estate owned additional A/P reduction in inventory increase in sales to other projects resulting from the acceptance of the current project under consideration feasibility study research and development costs 66. [CH 9] Doogie’s Pools and Spas just purchased a new piece of equipment that cost $15,000. They had to pay an additional $3,000 for shipping. They are depreciating the equipment over three years to an estimated salvage value of zero. What is the amount of the annual depreciation expense? $6,000 67. [CH 9] When conducting ___(b)_____, one input at a time is changed to determine the impact on the project. When conducting___(c)_____, multiple inputs are changed simultaneously to determine the impact on the project. a. Monte Carlo analysis c. scenario analysis b. Sensitivity analysis d. bandwidth analysis 68. [CH 9] Capital rationing implies that: the firm has more than enough funds to select any and all acceptable projects. the firm has limited funds available for investment. the firm has no acceptable projects available. the CEO is a penny-pincher. Practice Questions: Chapters 10 -12 1. [CH 10] An investment had an initial cost of $75. One year later the investment has produced an income of $1.50 and is sold for a price of $85. What is the percentage holding period return from this investment? 15.33% 2. [CH 10] On January 1, 2006 you purchased $10,000 face value amount of the 6.125% coupon Citigroup bond maturing on August of 2025. The purchase price was 103.95%. On December 31, 2006 you sell your holding of this bond for a price of 103.85%. What is the percentage holding period return? 5.796% 3. [CH 10] When no investor can expect to earn excess returns based on an investment strategy using any publicly available information then __________ form market efficiency is said to prevail. weak-form semistrong-form weak strong-form strong-form super strong-form 4. [CH 10] If a treasury bond can be purchased for $9,000 today and the bond holder will receive $800 in interest as well as the $10,000 face value at maturity, what is the percentage holding period return if the bond is held to maturity? 20% 5. [CH 10] Assume long-term corporate bonds have an average return of 6.2% and the risk-free rate is 3.2%. What is the amount of the risk premium for long-term corporate bonds? 3% 6. [CH 10] Doogie’s Pools and Spas produced the following returns:
Year
Return
2008
-15.2%
2009
12.9%
2010
6.4%
2011
8.7%

Don't forget about the age old question of nccu biology

a. Calculate the average return (arithmetic return) 3.20% b. Calculate the average compound return (geometric average return) 2.58% c. Calculate the variance 0.01577 d. Calculate the standard deviation 12.56% 7. [CH 10] Based on information calculated for Doogie’s Pools & Spas in the previous question, what range of returns can we expect to see 68% of the time, and 99% of the time? 68%: -9.36%, 15.76% 99%: -34.48%, 40.88% 8. [CH 10] Generally, the geometric average return is ______ the arithmetic average return. greater than less than equal to cannot be determined 9. [CH 10] True/False: Efficient markets imply that all relevant information relevant to determining an asset’s value is quickly and completely incorporated. 10. [CH 10] Percentage returns are preferable to dollar returns because ________. they address risk they address scale they address gains/losses they are not preferable 11. [CH 10] The mean is a statistical description of the ________ . spread of a sample location of a sample degree of symmetry of a sample height of a sample skewness of a sample peakedness of a sample 12. [CH 10] Under a normal distribution, 95% of all observations fall within _____ standard deviation(s) of the mean. one two three four zeroPractice Questions: Chapters 10 -12 13. [CH 10] You purchased shares of Emmy’s Explorations, Inc. for $50.25 per share two years ago. Since then you have received quarterly dividends in the amount of $.75 each. The stock is now trading at $62 per share. If you sell your shares now, a. what will be your total dollar return? $17.75 b. what will be your total percentage (holding period) return? 35.32% c. what is the dividend yield? 11.94% d. what is the capital gains yield? 23.38% 14. [CH 10] The standard deviation describes the ___________. spread of a sample location of a sample degree of symmetry of a sample height of a sample skewness of a sample peakedness of a sample 15. [CH 10/CH 11] When the standard deviation is larger, the return on an investment will be ___________. riskier no different than a project with a lower standard deviation less risky 16. [CH 10/CH 11/CH 12] Which of the following is true regarding the risk premium? It is the amount over and above the risk-free rate. It is the excess return (reward) earned for bearing risk. It is less than the risk-free rate. It is calculated as the average return (required return) less the risk-free rate. 17. [CH 10/CH 11/CH 12] Which of the following is true regarding the risk-free rate? It is the return of a risk less investment. It is usually proxied by the US Treasury bill rate. It is less than the risk premium. It is not observable in the marketplace and is just “assumed”. 18. [CH 11] You have a portfolio equally invested in Butterfly Hubcaps, Addi Corp and Brian’s Auto. The expected returns are 5%, 12%, and 17.5%. What is the expected return of the portfolio? Rp = 11.50% 19. [CH 11] Slider has an expected return of 8.5%, Viper has an expected return of 10.75%. If you want an overall portfolio return of 9%, how much must you have invested in each security? Slider: 77.78% Viper: 22.22% 20. [CH 11] The mean or average value of the possible outcomes is a statistical measurement known as expected value. 21. [CH 11] If the expected return from a portfolio is 15%, and 40% of the securities in the portfolio have an expected return of 15.75% and 20% have an expected return of 12%, the expected return of the remaining portion of the portfolio would have to be 15.75%. 22. [CH 11] To construct a portfolio with a 15% return, you would have include 50% of a stock returning 12% and 50% of a stock returning 18%. 23. [CH 11] What is the beta of a portfolio comprised of 25% XYZ Company, 45% of ABC Corp, and 30% LMN Inc? They have betas of 1.5, .67, and 1.00, respectively. βp = 0.9765 this portfolio would be less risky than the market portfolio (β < 1 = beta of the market portfolio) 24. [CH 11] Rick’s Inc has a beta of 2.0. If the return on the market is 9% and 2morrow’s return is 12.5%, what is the risk free rate of return? Rf = 5.5%Practice Questions: Chapters 10 -12 25. [CH 11] Using the information below, determine the expected return of the portfolio and the portfolio beta.
Company
Market Value
Expected Return
Beta
TC Corp
$75,000
4%
1.5
Magnum
$100,000
12%
.75
Rick’s Inc
$200,000
8%
2.0
Higgins
$50,000
17%
1.1

Rp = 9.298 βp = 1.51205 26. [CH 11] The return for Selleck Int’l is 5.6%. The risk free rate of return is 4.5% and Selleck beta is 1.1. What is the return on the market? E(Rm) = 5.5% 27. [CH 11] Hillerman Corp has a return of 7.6%. The risk-free rate of return is 4.5% and the market risk premium is 6.5%, what is the beta of Hillerman Corp? β = 0.47692 28. [CH 11/CH 12] Use the capital asset pricing model equation to determine the return for TC Corp. TC Corp has a beta of 1.5. The risk-free rate of return is 4.5% and the market risk premium is 6.5%. E(RA) = 14.25% 29. [CH 11/CH 12]If a stock has a beta of 1.2, the risk-free rate is 8% and the expected market rate of return is 12%, the required rate of return on the stock is 12.8%. 30. [CH 11/CH 12] If the risk-free rate is 2.5%, beta of the asset is 1.57, and the expected return of the asset is 13.25%, what is the market risk premium? What is the risk premium? What is the expected return on the market? MRP = 6.8471% RP = 10.75% E(Rm) = 9.3471% 31. [CH 11/CH 12]The risk premium for a stock with a Beta of .75 of a company when the risk-free rate is 6% and the expected market return is 12% would be 4.5% and the required return for the stock would be 10.5%. 32. [CH 11/CH 12] True/False: The dividend discount model and/or capital asset pricing model may be used to calculate the cost of equity capital. 33. [CH 11] ______________________ is the primary risk remaining after extensive diversification of one’s portfolio. Unsystematic risk Systematic risk Capital Asset Pricing Model Risk Standard deviation risk 34. [CH 11] You have a stock portfolio with $5000 of GM, $2000 of Toyota and 10,000 of Caterpillar stock. The first two stocks have a beta of .5, and the Caterpillar stock has a beta of 1.3. What is the beta of the portfolio? a. 1.5 b. 0.75 c. 1.2 d. 0.97 35. [CH 11] You are considering investing in a stock that has a beta value of 0.5. This means you can get a .5 or 50% return most years the stock has above-average systematic risk the stock has above average unsystematic risk the stock has below-average systematic risk 36. [CH 11] What is the beta of a portfolio consisting of equal investments in common stocks with beta’s of 1.2, 1.5, 1.6? 1.525Practice Questions: Chapters 10 -12 37. [CH 11] A security has an expected return of 15% and a standard deviation of 5% while the expected return of another security is 13% and its standard deviation is 9%. If equal amounts are invested in each the expected return will be 14% and the higher, lower the correlation between the two securities, the higher will be the riskiness of the portfolio. 38. [CH 11] Wilshire stock is currently selling for $23 per share. Security analysts at Kensington Ross have assigned the following probability distribution to the price of (and rate of return on) Wilshire stock one year from now. Wilshire is not expected to pay dividends in the coming year. Price Rate of Return Probability $15 -34% 0.25 23 0% 0.35 20 -13% 0.25 25 9% 0.15 What is the expected return on Wilshire stock? a. 8% b. 4.5% c. -10.4% d. -9.5% What is the standard deviation of possible rates of return on Wilshire stock? a. 456% b. 15.34% c. 18.57% d. 21.45% 39. [CH 11] If an investor wishes to reduce to 1.4 the beta of a portfolio that currently contains 10 securities, each with a market value of $5,000 and has a current beta of 1.5, the beta of a security replacing the riskiest security, which has a Beta of 1.7, would be 0.70. 40. [CH 11] The CAPM utilizes only _____________ risk in estimating the cost of equity capital. systematic total unsystematic unique 41. [CH 11] Your current portfolio is reflected below. What percentage of your portfolio is invested in each asset? Which asset is the most risky? Least risky? Why? Calculate the portfolio beta.
Security
Beta
Amount Invested
Pepsi (PEP)
0.35
$25,000
Toyota Motor (TM)
0.75
$12,000
Google (GOOG)
1.18
$38,000
Anadarko Petroleum Corp. (APC)
2.13
$25,000

Most Risky (highest beta): APC Least Risky (lowest beta): PEP Portfolio Beta = 1.1584 Total Invested: $100,000 % Invested: PEP -- .25 or 25% TM -- .12 or 12% GOOG -- .38 or 38% APC -- .25 or 25% 42. [CH 11] The returns from most common stocks are positively, or negatively correlated with each other. 43. [CH 11] The expected rate of return on a stock with the following probability distribution to the price of (and rate of return on) would be 12.5% and its standard deviation would be 21.65%. Price Rate of Return Probability $16 -10% 0.25 20 0% 0.30 24 +20% 0.25 28 +50% 0.20 44. [CH 11] The BETA estimates the SYSTEMATIC OR NON-DIVERSIFIABLE risk. 45. [CH 11] A measure of volatility of a security's returns relative to the returns of a broad-based market portfolio of securities is called the BETA for that that security.Practice Questions: Chapters 10 -12 46. [CH 12] The WACC can be used to evaluate projects when the risk of the project is equal to that of firm. IRR is greater than 0. firm is a conglomerate and well diversified across different industries. firm has a positive return on equity. 47. [CH 12] A firm is financed with 70% equity and 30% debt. If the cost of equity capital is 12% and the cost of debt is 10%, what is the weighted average cost of capital (WACC) for the firm? Assume a tax rate of 40%. 10.2% 48. [CH 12] A firm has 4 million common shares outstanding which are currently trading at $15 per share. The firm also has $40 million in outstanding debt. What are the percentage weights for each source of capital for the firm? Equity: 60% Debt: 40% 49. [CH 12] Maverick’s Toys recently issued preferred stock at $50 per share. The stock pays a $2.50 dividend annually. What is the firm’s cost of preferred stock? What is the after-tax cost of preferred stock if the firm is in the 40% tax bracket? 5% There is not an after-tax cost of debt for preferred stock (or common stock) because there is no tax deduction for the firm on these sources of funds. Only debt (interest payments) receive a tax deduction. 50. [CH 12] Emmy’s Communications has bonds currently trading at $950 each. The bonds pay coupons semiannually and mature in 10 years. The coupon rate on the bonds is 4% and the firm is in the 35% tax bracket. What is the firm’s cost of debt? What is the after-tax cost of debt? Cost of debt: 4.63% After-tax Cost of debt: 3.01% 51. [CH 12] Southern Co. has $100 million in equity capital and $50 million each of debt and preferred stock in its capital structure. If the cost of equity is 15%, the cost of debt is 9%, and the cost of preferred stock is 11%, what is the firm’s cost of capital? The firm is in the 40% tax bracket. 11.60%