Question 1

A perpetuity can be described as:

Accepted Answer

A)  an annuity that lasts longer than 25 years. 
B)  an annuity that goes on forever. 
C)  an amount of interest that is annually adjusted and is paid forever. 
D)  paid until the principal has been repaid. 
A)  an annuity that lasts longer than 25 years. 
B)  an annuity that goes on forever. 
C)  an amount of interest that is annually adjusted and is paid forever. 
D)  paid until the principal has been repaid. B

Question 2

What is the beta for an investment given the following information? Investment's required return is 9.5%; market return is 13%; and the risk free rate is 6%.

Accepted Answer

A)  0.50 
B)  1.5 
C)  0.75 
D)  1.0 
A)  0.50 
B)  1.5 
C)  0.75 
D)  1.0 A

Question 3

When we consider the time value of money, a dollar received in the future:

Accepted Answer

A)  is worth less than a dollar received today. 
B)  is worth the same as a dollar received today. 
C)  is worth more than a dollar received today. 
D)  depends on the compounding used to determine the relationship to a dollar received today. 
A)  is worth less than a dollar received today. 
B)  is worth the same as a dollar received today. 
C)  is worth more than a dollar received today. 
D)  depends on the compounding used to determine the relationship to a dollar received today. A

Question 4

You require an 8% annual return on all investments. You have been offered an investment which will pay you $1,000 in one years time, $2,000 in two years time, and $3,000 in three years time. What is the most you would be willing to pay for this investment?

Accepted Answer

A)  $6,000 
B)  $2,577 
C)  $5,022 
D)  $4,763 
A)  $6,000 
B)  $2,577 
C)  $5,022 
D)  $4,763

Question 5

Calculate the present value of $100,000 received in six months. Use an annual discount rate of 10%. Do not adjust the discount rate to a semi-annual rate. Keep it annual and adjust "n" to the appropriate value.

Accepted Answer

A)  $ 56,447 
B)  $ 90,909 
C)  $100,000 
D)  $ 95,346 
A)  $ 56,447 
B)  $ 90,909 
C)  $100,000 
D)  $ 95,346

Question 6

What is the market return given the following information? The investment's required return is 12%; the risk free rate is 7% and the investment's beta is 1.

Accepted Answer

A)  5% 
B)  10% 
C)  19% 
D)  12% 
A)  5% 
B)  10% 
C)  19% 
D)  12%

Question 7

What determines whether to use the dividend growth approach or the CAPM approach to calculate the cost of equity?

Accepted Answer

The choice depends on the firm's dividen

Question 8

The cost of preferred shares is

Accepted Answer

A)  the rate of return investors require on a company's existing preferred shares. 
B)  the rate of return investors require on a company's new preferred shares. 
C)  calculated on an after tax basis. 
D)  the rate of return investors require on new preferred shares plus the cost of issuing the shares. 
A)  the rate of return investors require on a company's existing preferred shares. 
B)  the rate of return investors require on a company's new preferred shares. 
C)  calculated on an after tax basis. 
D)  the rate of return investors require on new preferred shares plus the cost of issuing the shares.

Question 9

Use the following information to answer the question below.
CDE Inc.'s current (and optimal) capital structure is 40% debt, 10% preferred stock, and 50% common equity. CDE is in the 40% tax bracket. The company can issue up to $20,000,000 in new bonds at par with a 7% coupon; any subsequent amount must carry a 2% premium to compensate investors for added risk. A new issue of preferred stock would pay an annual dividend of $4.00 and be priced to net the company $50.00 per share after the $3.00 per share floatation cost. The firm has $21,000,000 in retained earnings. CDE's common stock trades at $40.00 per share and the expected dividend on the common stock is 2.00. Floatation costs on common equity issues is $5.00 per share. The company is growing at 7% per year.
-What is the marginal cost of capital (MCC) break point for debt?

Accepted Answer

A)  $20,000,000 
B)  $42,000,000 
C)  $50,000,000 
D)  $12,000,000 
A)  $20,000,000 
B)  $42,000,000 
C)  $50,000,000 
D)  $12,000,000

Question 10

If a firm has a $500,000 debt limit before AT kd will change if taxes are 30% and total debt is 50% of the capital structure, calculate the debt break point in the MCC schedule.

Accepted Answer

A)  $500,000 
B)  $300,000 
C)  $2,500,000 
D)  $1,000,000 
A)  $500,000 
B)  $300,000 
C)  $2,500,000 
D)  $1,000,000

Question 11

Calculate the AT kd, ks, kn for the following information:

Accepted Answer

k_n= 4/(35- 2.10) + .0

Question 12

What is the expected return given the following information?

Accepted Answer

A)  0.12% 
B)  12% 
C)  18.2% 
D)  12.2% 
A)  0.12% 
B)  12% 
C)  18.2% 
D)  12.2%

Question 13

The future value of an investment is:

Accepted Answer

A)  1/(1 + i)n 
B)  discount rate used in future value cash flow calculations. 
C)  (1 + i)n times the present value. 
D)  (1 + i)n 
A)  1/(1 + i)n 
B)  discount rate used in future value cash flow calculations. 
C)  (1 + i)n times the present value. 
D)  (1 + i)n

Question 14

What is the standard deviation of the following income statement sales projection given the following information?

Accepted Answer

A)  $400 
B)  $340 
C)  $169.26 
D)  $387.50 
A)  $400 
B)  $340 
C)  $169.26 
D)  $387.50

Question 15

If common equity financing is 60% of the optimal capital structure and the existing limit of internal equity is $500,000. Solve for the equity break poin.

Accepted Answer

A)  $1,000,000 
B)  $600,000 
C)  $833,333 
D)  $666,667 
A)  $1,000,000 
B)  $600,000 
C)  $833,333 
D)  $666,667

Question 16

The after tax cost of debt on a 9% $200,000 loan given a 30% tax bracket would be:

Accepted Answer

A)  5% 
B)  9% 
C)  4% 
D)  6.3% 
A)  5% 
B)  9% 
C)  4% 
D)  6.3%

Question 17

An annuity is best defined as:

Accepted Answer

A)  a series of payments for a specified period of time. 
B)  a series of equal payments for a specified number of years. 
C)  a series of equal payments occurring at equal intervals for a specified number of periods. 
D)  any series of payments. 
A)  a series of payments for a specified period of time. 
B)  a series of equal payments for a specified number of years. 
C)  a series of equal payments occurring at equal intervals for a specified number of periods. 
D)  any series of payments.

Question 18

If two investments are perfectly positively correlated, it means:

Accepted Answer

A)  they have a correlation coefficient of zero. 
B)  they have a correlation coefficient of - 1. 
C)  they change values proportionately in the same direction at the same time. 
D)  their values will change inversely to each other. 
A)  they have a correlation coefficient of zero. 
B)  they have a correlation coefficient of - 1. 
C)  they change values proportionately in the same direction at the same time. 
D)  their values will change inversely to each other.

Question 19

The cost of internal common equity is equal to:

Accepted Answer

A)  the cost of debt before taxes. 
B)  the cost of retained earnings. 
C)  the cost of preferred stock. 
D)  the cost of new common stock. 
A)  the cost of debt before taxes. 
B)  the cost of retained earnings. 
C)  the cost of preferred stock. 
D)  the cost of new common stock.

Question 20

If you deposit a lump sum of $1,200 today in a savings account offering annual interest of 5% compounded monthly, how much will you have in the account at the end of three years?

Accepted Answer

The answer of If you deposit a lump sum of...

A perpetuity can be described as:

What is the beta for an investment given the following information? Investment's required return is 9.5%; market return is 13%; and the risk free rate is 6%.

When we consider the time value of money, a dollar received in the future:

You require an 8% annual return on all investments. You have been offered an investment which will pay you $1,000 in one years time, $2,000 in two years time, and $3,000 in three years time. What is the most you would be willing to pay for this investment?

Calculate the present value of $100,000 received in six months. Use an annual discount rate of 10%. Do not adjust the discount rate to a semi-annual rate. Keep it annual and adjust "n" to the appropriate value.

What is the market return given the following information? The investment's required return is 12%; the risk free rate is 7% and the investment's beta is 1.

What determines whether to use the dividend growth approach or the CAPM approach to calculate the cost of equity?

The cost of preferred shares is

If a firm has a $500,000 debt limit before AT k_dwill change if taxes are 30% and total debt is 50% of the capital structure, calculate the debt break point in the MCC schedule.

Calculate the AT kd, ks, kn for the following information:

What is the expected return given the following information?

The future value of an investment is:

What is the standard deviation of the following income statement sales projection given the following information?

If common equity financing is 60% of the optimal capital structure and the existing limit of internal equity is $500,000. Solve for the equity break poin.

The after tax cost of debt on a 9% $200,000 loan given a 30% tax bracket would be:

An annuity is best defined as:

If two investments are perfectly positively correlated, it means:

The cost of internal common equity is equal to:

If you deposit a lump sum of $1,200 today in a savings account offering annual interest of 5% compounded monthly, how much will you have in the account at the end of three years?

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Essential Concepts in Finance: Part A

Capital Budgeting and Business Valuation

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Exam 3: Essential Concepts in Finance: Part B

A perpetuity can be described as:

What is the beta for an investment given the following information? Investment's required return is 9.5%; market return is 13%; and the risk free rate is 6%.

When we consider the time value of money, a dollar received in the future:

You require an 8% annual return on all investments. You have been offered an investment which will pay you $1,000 in one years time, $2,000 in two years time, and $3,000 in three years time. What is the most you would be willing to pay for this investment?

Calculate the present value of $100,000 received in six months. Use an annual discount rate of 10%. Do not adjust the discount rate to a semi-annual rate. Keep it annual and adjust "n" to the appropriate value.

What is the market return given the following information? The investment's required return is 12%; the risk free rate is 7% and the investment's beta is 1.

What determines whether to use the dividend growth approach or the CAPM approach to calculate the cost of equity?

The cost of preferred shares is

If a firm has a $500,000 debt limit before AT kd will change if taxes are 30% and total debt is 50% of the capital structure, calculate the debt break point in the MCC schedule.

Calculate the AT kd, ks, kn for the following information:

What is the expected return given the following information?

The future value of an investment is:

What is the standard deviation of the following income statement sales projection given the following information?

If common equity financing is 60% of the optimal capital structure and the existing limit of internal equity is $500,000. Solve for the equity break poin.

The after tax cost of debt on a 9% $200,000 loan given a 30% tax bracket would be:

An annuity is best defined as:

If two investments are perfectly positively correlated, it means:

The cost of internal common equity is equal to:

If you deposit a lump sum of $1,200 today in a savings account offering annual interest of 5% compounded monthly, how much will you have in the account at the end of three years?

The World of Finance

Essential Concepts in Finance: Part A

Capital Budgeting and Business Valuation

Long-Term Financing Decisions

Short-Term Financing Decisions

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If a firm has a $500,000 debt limit before AT k_dwill change if taxes are 30% and total debt is 50% of the capital structure, calculate the debt break point in the MCC schedule.