1. One way to understand the total risk for a company is to divide it into two parts: diversifiable risk and undiversifiable risk. Which of the following choices is/are example(s) of diversifiable risk for Toyota Motors ("TM"), the auto/truck manufacturer
A) (i) only.
2. The appropriate measure of risk according to the capital asset pricing model ("CAPM") is:
A) The variation squared statistic.
B) The standard deviation.
C) The beta statistic.
D) The coefficient of variation.
C) The beta statistic.
3. Marquis Aircraft Corp. ("MAC") manufactures aircraft. Two years ago it sold an initial offering of $50 million of common stock in order to finance the expansion of its production plants. For the past year, its common stock has had an average beta of 2.
E) 26.47 percent.
4. Calculate the Total Expected Return for an investment in Movie Productions LLC which has four possible outcomes.
Probability Return Expected Return
.30 12 % 3.60 %
.35 15 % 5.25 %
.20 23 % 4.60 %
.15 55 % 8.25 %
21.70%
A) 35.90 %
B) 23.90 %
C) 40.20 %
D) 21.70 %
5. What is the standard deviation for the expected return for the investment in Movie Productions LLC in the previous problem? (Note: Make sure you have the correct answer for the expected return).
A) 14.51%
B) 34.76%
C) 13.69%
D) 9.22%
A) 14.51%
6. One way to understand the total risk for a company is to divide it into two parts: diversifiable risk and undiversifiable risk. Which of the following choices is/are example(s) of diversifiable risk for Toyota Motors ("TM"), the auto/truck manufacturer
B) (i) and (ii) only.
7. Petromark Solutions, Inc. ("PSI") manufactures petrochemicals. Two years ago it sold an initial offering of $400 million of common stock in order to finance the expansion of its production plants. For the past year, its common stock has had an average
D) 18.22 percent.
8. Calculate the Total Expected Return for an investment in Huffman Homes Corp. which has four possible outcomes.
Probability Return Expected Return
.23 18 % 4.14 %
.28 12 % 3.36 %
.29 9 % 2.61 %
.20 ( 5)% ( 1.00)%
9.11%
A) 15.90 %
B) 29.21 %
C) 9.11 %
D)
C) 9.11 %
1. Which if the following bond provisions will make a bond more desirable to investors, other things being equal?
A) The bond is callable.
B) The bond is convertible.
C) The bond is subordinated.
D) The coupon rate is lower
E) A and B
B) The bond is convertible.
2. Which of the following is NOT a definition of yield to maturity?
A) discount rate that equates the present value of future cash flows with a bond's face value.
B) investors' required rate of return on a bond investment.
C) return that an investor will
A) discount rate that equates the present value of future cash flows with a bond's face value.
3. If the market price of a bond increases, then ______.
A) the yield to maturity decreases.
B) the coupon rate increases.
C) the yield to maturity increases.
D) Both b and c.
A) the yield to maturity decreases.
4. A bond has a coupon rate of 7.50 percent, has a $1,000 face value and has 11 years to maturity. The yield to maturity on this bond is 9.50 percent. What is the price of this bond in the market? Assume semi-annual interest payments and round to the clos
D) $ 865.32 FV = 1,000
5. The market price is $923.98 for a bond which matures in 21 years and which has a par value of $1,000 and which has a coupon rate of interest of 9.75 percent paid annually. What is the bond's expected rate of return for an investor who buys the bond?
A)
B) 10.67 % PV = -923.98
6. Which if the following bond provisions will make a bond less desirable to investors, other things being equal?
A) The bond is callable.
B) The bond is convertible.
C) The bond is subordinated.
D) The coupon rate is lower
E) A, C and D
E) A, C and D
7. If the market price of a bond decreases, then ______.
A) the yield to maturity decreases.
B) the coupon rate increases.
C) the yield to maturity increases.
D) Both b and c
C) the yield to maturity increases.
1. A preferred pays a fixed dividend of $4.75. If investors in the market required this preferred stock to earn a 5.50% rate of return, what would be its market price?
A) $86.36
B) $56.47
C) $77.37 Price = $4.75 = $86.3636
D) $68.18 0.0550
A) $86.36
2. Preferred stock differs from common stock in that ____.
A) Preferred stock dividends cannot be paid before common stock dividends are paid.
B) Preferred stock is never called for redemption according to its terms.
C) Preferred stock dividends are usual
C) Preferred stock dividends are usually set at a fixed or constant rate or fixed dollar amount.
3. One of the main axioms of Finance is that _____.
A) We won't take on additional return unless we expect to be compensated by additional risk; or, investors will not be compensated by additional risk unless they take on additional return.
B) We won't ta
E) We cannot expect to be compensated by additional return unless we are willing to take on additional risk; or, investors will not take on additional risk unless they expect to be compensated fairly for that additional risk.
4. Kutrate Retailers Inc. just paid an annual dividend last year of $3.25 per share on its common stock. The dividends for this company are expected to grow at a constant rate of 4% indefinitely. If the required return on this stock is 17%, what is the es
C) $26.00
5. The stock price for a company's common stock is $32.00 per share. Investors expect a dividend of $3.50 per share to be paid at the end of the upcoming year, and they also expect management to grow the dividend by 6% per year. What total return (in perc
C) 16.94 %
6. Jacksonville Machinery Corp. has $50 million of preferred stock in its capital structure with a par value of $25.00 per share. It's preferred stock has a stated dividend rate of $2.25 per share. What is the total annualized return to a preferred stockh
B) 9.00%; 10.47%
7. Which of the following changes will make the value of a stock go up, other things being held constant?
A) In general, investors become more risk averse.
B) The required return decreases.
C) The required return increases.
D) The growth rate of dividends
B) The required return decreases.
8. Preferred stock is similar to a bond in the following way:____.
A) Both contain a growth factor similar to common stock.
B) Both investments provide a stated income stream.
C) Preferred stock always contains a maturity date.
D) Both provide interest pa
B) Both investments provide a stated income stream.
9. Which of the following features, or benefits, belong to a company's common stockholders?
A) Ownership of the firm.
B) Voting rights
C) Limited liability
D) All of the above
D) All of the above
10. Preferred stock is similar to common stock in the following way:___.
A) Both preferred stock and common stock provide equal periodic dividends.
B) Both contain a dividend growth factor.
C) Both investments have a final maturity value set by the issuin
D) As equity, both are subordinate to bondholders in the event of bankruptcy.
11. Assume that a firm had such serious financial problems that it was about to be liquidated after a bankruptcy. All of the firm's assets are about to be sold in order to pay the following claims against the firm: bondholders; preferred stockholders; com
D) Fourth
12. What provision entitles a common stockholder to maintain a proportional share ownership in the firm?
A) The cumulative feature
B) The preemptive right
C) The proportionality clause
D) The convertible feature
B) The preemptive right
13. Most preferred stocks have a feature that requires all past unpaid preferred dividends to be paid before any common stock dividends can be paid. What is the name of this feature?
A) Provisional
B) Participating
C) Convertible
D) Cumulative
D) Cumulative
14. Which of the following is NOT a feature of common stock?
A) Stockholders are entitled to vote for the board of directors
B) Stockholders are the owners of the corporation.
C) Stockholders have the right to vote on whether corporate bonds are issued.
D
C) Stockholders have the right to vote on whether corporate bonds are issued.
15. Which of the following statements about the constant growth rate dividend valuation model is true?
A) The required rate of return must be greater than the growth rate.
B) The dividend growth rate must be bigger than 10%.
C) The required rate of return
A) The required rate of return must be greater than the growth rate.
1. Carolina Corp. paid a dividend last year of $1.80 per share, and its common stock is currently priced at $73.00. If the company sells new stock, the flotation costs would be $5.50 per share. What is the cost of equity (after giving effect to the flotat
C) 6.77 percent = ($1.80 x 1.04)/($73.00 - $5.50) + 0.04
2. Mercer Sheetmetal Inc.'s capital structure is briefly described below. Compute the company's weighted average cost of capital ("WACC"). The company's marginal income tax rate is 35%.
Capital Percent of Capital Structure Pre-Tax Cost After-Tax Cost WACC
C) 14.69%
3. Gilman McCaleb Corp. has bonds outstanding with a face value of $1,000, a coupon interest rate of 8.00%, with interest paid annually, and it matures in 9 years. The current market price of each bond is $954. If the company sells more bonds the investme
E) 6.08% FV = $1,000
4. One way to describe the cost of capital is to define it as ____.
A) the rate of return that must be earned on additional investments if the firm's value is to increase.
B) a hurdle rate set by the board of directors.
C) the rate of return that must be
C) the rate of return that must be earned on additional investments if the firm's value is to remain unchanged.
5. A company's "capital structure" refers to _______ .
A) the proportion of current assets owned by the company financed by common stock.
B) the mix of all assets owned by the company.
C) the proportion of fixed assets owned by the firm.
D) the mix of deb
D) the mix of debt, preferred stock and common stock capital issued by the company to finance its assets.
6. The optimal capital structure is the funds mix that will____.
A) achieve an equal proportion of debt, preferred stock, and common stockholders' equity.
B) maximize total leverage.
C) minimize the use of debt.
D) minimize the firm's composite cost of ca
D) minimize the firm's composite cost of capital.
7. The cost of retained earnings is less than the cost of new common stock because ___.
A) dividends are not tax deductible.
B) marginal income tax rates increase.
C) flotation costs are incurred when new stock is issued.
D) accounting rules allow a deduc
C) flotation costs are incurred when new stock is issued.
8. In general, the least expensive source of capital is ___.
A) debt
B) preferred stock
C) retained earnings
D) new common stock
A) debt
9. Which of the following would not be a part of a company's capital structure?
A) Long-term debt
B) Common stock
C) Short-term notes payable
D) new common stock
E) retained earnings
C) Short-term notes payable
1. Chapter 10 covered Capital Budgeting Evaluation Techniques. Which evaluation technique(s) does(do) not explicitly consider the Time Value of Money investment principles?
A) Net Present Value
B) Payback Period and Internal Rate of Return
C) Internal Rat
D) Payback Period
2. Cory is a real estate developer who bought an old city residential block which has ten houses on it which have deteriorated over the years. Because this city block is close to a new office building complex that is being developed, Cory would like to te
C) mutually exclusive projects; Internal Rate of Return
3. What is the Net Present Value of a capital investment project that has the following total after-tax cash flows for a company that requires a 14% rate of return on the project? Would it be a good investment?
Year 0 1 2 3 4
Cash Flow ($360,000) $228,000
A) $129,705.35; yes
4. Professional Presentation Technology, Inc. is considering the manufacture of a new multi-functional projector for use in school classrooms as well as for salespersons in business. The proposed project to develop this new system has the following estima
B) 23.37% CF0 = -2,500,000 CF1 = 700,000 CF2 = 1,900,000
5. Two investment projects were evaluated by the management of your company as to their respective value as an investment.
Project X Project Y
Initial Cash Outlay $8,500,000 $10,400,000
New Jobs 379 226
Net Present Value $4,150,000 $5,160,000
IRR 33.00% 2
B) Project Y because its Net Present Value is greater than Project X.
6. A significant disadvantage of the internal rate of return is that it ___.
A) it is expressed as a percentage.
B) can result in multiple rates of return (more than one IRR).
C) does not fully consider the time value of money.
D) it does not give proper
B) can result in multiple rates of return (more than one IRR).
7. Mutually exclusive projects occur when ___.
A) projects have uneven cash flows.
B) a set of investment proposals perform essentially the same task.
C) projects are independent.
D) more than one firm can use the projects
C) projects are independent.
8. Your company is considering a project with the following cash flows:
Initial Outlay: $2,134
Cash Flows Years 1-7: $560/year.
Compute the internal rate of return on the project.
A) 9%
B) 18%
C) 24%
D) 11%
B) 18%
9. Rent-To-Own Equipment Co. is considering a new inventory system that will cost $450,000. The system is expected to generate cash flows over the next four years in the amounts of $250,000 in year one, $125,000 in year two, $110,000 in year three, and $8
D) 2.68 years Begin Balance CF End Balance Year
10. All of the following are sufficient indications to accept a project except (assume that there is no capital rationing constraint, and no consideration is given to payback as a decision tool):
A) The profitability index of an independent project exceed
D) The IRR of a mutually exclusive project exceeds the required rate of return.
11. We compute the profitability index of a capital budgeting proposal by ___.
A) dividing the present value of the annual after tax cash inflows by the cost of capital.
B) multiplying the cash inflow by the internal rate of return.
C) multiplying the int
D) dividing the present value of the annual after tax cash flows by the cash investment in the project
12. When reviewing the net present value profile for a project ____.
A) the IRR will always be a point on the horizontal axis equal to the required return.
B) the higher the discount rate, the higher the IRR.
C) the IRR will always be a point on the horiz
C) the IRR will always be a point on the horizontal axis line where NPV = 0.
13. The internal rate of return is _____.
A) the rate of return that makes the NPV positive.
B) the discount rate that equates the present value of the cash inflows with the present value
of the cash outflows.
C) the discount rate that makes the NPV posit
B) the discount rate that equates the present value of the cash inflows with the present value
14. If the income tax rate is increased, then the result would be to ___.
A) decrease the NPV.
B) increase the NPV.
C) increase the payback period.
D) A and C
A) decrease the NPV
15. Capital rationing is ____.
A) limiting the amount of debt capital a company will use.
B) limiting the amount of equity capital a company will use.
C) placing a limit on the dollar size of the capital budget.
D) investing only in projects that make sen
C) placing a limit on the dollar size of the capital budget.