Question 1

Business risk is best measured after the fact as:

Accepted Answer

A)  volatility added by interest expense. 
B)  volatility of operating income. 
C)  the operating leverage of the firm. 
D)  the systematic risk of the firm. 
A)  volatility added by interest expense. 
B)  volatility of operating income. 
C)  the operating leverage of the firm. 
D)  the systematic risk of the firm.

Question 2

Your grandmother wishes to have a steady source of income for the first ten years of her retirement. She can buy an annuity which will pay her $6,000 per year at the end of each year for ten years. She will receive her first payment one year from today. Similar risk investments are yielding 7%. What should she pay for the investment?

Accepted Answer

A)  $30,501 
B)  $42,141 
C)  $45,091 
D)  $60,000 
A)  $30,501 
B)  $42,141 
C)  $45,091 
D)  $60,000

Question 3

After tax cost of debt can best be described as:

Accepted Answer

A)  AT kd = kd(T- 1) 
B)  AT kd = (1- kd) 
C)  AT kd = kd(l- T) 
D)  AT kd = kd(l+T) 
A)  AT kd = kd(T- 1) 
B)  AT kd = (1- kd) 
C)  AT kd = kd(l- T) 
D)  AT kd = kd(l+T)

Question 4

If the company plans to pay a dividend of $4 per share next year, and the price of the stock is $45, the growth rate is projected as 7%, and the flotation costs are 6% of the issue price. Calculate the cost of new equity.

Accepted Answer

A)  1.65% 
B)  0.165% 
C)  16% 
D)  16.5% 
A)  1.65% 
B)  0.165% 
C)  16% 
D)  16.5%

Question 5

Use the following information to answer the question below.
You hold a diversified portfolio of stocks and are considering investing in the XYZ Company. The firm's prospects look good and you estimate the following probability distribution of possible returns:
   The return on the market is 13.5% and the risk free rate is 7%. You have calculated XYZ's beta from past returns as 1.3 and you believe this will be the future beta.
-Why is the standard deviation of possible returns for XYZ not an important statistic in this situation?

Accepted Answer

Standard deviation measures to

Question 6

Use the following information to answer the question below.
As an investor, you are considering investing in the Locke Corporation (LC). According to your estimation there is a 75% probability that the return will be 17%, a 15% probability that the return will be 20%, and a 10% probability that the return will be 8%. You have also estimated LC's beta as 1.7.The market required rate of return is 15% and the risk free rate is 9%.
-Based on the calculations in the three questions above, should you buy the stocks of LC? Why?

Accepted Answer

No; the expected ret

Question 7

When we compare the risk of two investments that have the same expected return, the coefficient of variation:

Accepted Answer

A)  always gives us a value between 0 and 1. 
B)  adjusts for the correlation between the two instruments. 
C)  gives conflicting results compared to the standard deviation. 
D)  provides no additional information when compared with the standard deviation. 
A)  always gives us a value between 0 and 1. 
B)  adjusts for the correlation between the two instruments. 
C)  gives conflicting results compared to the standard deviation. 
D)  provides no additional information when compared with the standard deviation.

Question 8

What is the present value of an annual annuity payment of $7,000 made for 12 years with a required return of 5% per year with the first payment starting today?

Accepted Answer

A)  $65,145 
B)  $ 3,898 
C)  $62,043 
D)  $11,200 
A)  $65,145 
B)  $ 3,898 
C)  $62,043 
D)  $11,200

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 cost of equity from new common stock?

Accepted Answer

A)  13.3% 
B)  11.4% 
C)  12.0% 
D)  12.7% 
A)  13.3% 
B)  11.4% 
C)  12.0% 
D)  12.7%

Question 10

You are saving for your retirement. At the end of each month you will put $300 into your retirement account. You plan to do this for the next 30 years. If you want to take out $3,000 at the end of each month starting at the end of the first month of your retirement, how long will the money last if interest rates during the time period of the problem average 6% per annum compounded monthly?

Accepted Answer

You will have saved $301,354.4

Question 11

The dividends paid on a preferred stock issue are $4 per share, the tax rate is 40%, the price is $32 and there will be $2/share in flotation costs. Calculate the cost of the preferred stock.

Accepted Answer

A)  13.3% 
B)  12.33% 
C)  12% 
D)  7.98% 
A)  13.3% 
B)  12.33% 
C)  12% 
D)  7.98%

Question 12

Why is the cost of preferred shares the rate of return investors require on a company's new preferred shares PLUS the cost of issuing the shares when the cost of equity can be either the cost of current equity OR the cost of equity plus the cost of issuing the shares?

Accepted Answer

Common equity shareholders can contribut

Question 13

The cost of retained earnings is:

Accepted Answer

A)  ks= Ps/D1 
B)  the cost of paying dividends. 
C)  rate of return necessary to justify not making dividend payments. 
D)  There is no cost of retained earnings; they are residual earnings of the firm. 
A)  ks= Ps/D1 
B)  the cost of paying dividends. 
C)  rate of return necessary to justify not making dividend payments. 
D)  There is no cost of retained earnings; they are residual earnings of the firm.

Question 14

Which of the following best describes what the financial managers must do to estimate the MCC schedule?

Accepted Answer

A)  calculate the cost of capital after the points of change in cost 
B)  assess at what point a firm's kd or ke will change the firm's MCC 
C)  calculate the cost of capital up to the points of change in cost 
D)  calculate the cost of capital up to and after the points of change in cost 
A)  calculate the cost of capital after the points of change in cost 
B)  assess at what point a firm's kd or ke will change the firm's MCC 
C)  calculate the cost of capital up to the points of change in cost 
D)  calculate the cost of capital up to and after the points of change in cost

Question 15

Use the following information to answer the question below.
As an investor, you are considering investing in the Locke Corporation (LC). According to your estimation there is a 75% probability that the return will be 17%, a 15% probability that the return will be 20%, and a 10% probability that the return will be 8%. You have also estimated LC's beta as 1.7.The market required rate of return is 15% and the risk free rate is 9%.
-What is the required rate of return for LC?

Accepted Answer

9% + (15%

Question 16

Use the following information to answer the question below.
  
-What are the expected returns for BIF Corporation and Norwood, Inc.?

Accepted Answer

A)  26%, 26% 
B)  26%, 20% 
C)  20%, 20% 
D)  20%, 26% 
A)  26%, 26% 
B)  26%, 20% 
C)  20%, 20% 
D)  20%, 26%

Question 17

If you deposit $100 in the bank today at a rate of 5.5% compounded annually, how long will it take to double in value?

Accepted Answer

The answer of If you deposit $100 in the bank...

Question 18

Four liters of milk cost $3.59 today. How much will it cost you to buy four liters of milk for your grandchildren in 35 years if inflation averages 5% per year?

Accepted Answer

A)  $19.80 
B)  $12.34 
C)  $3.77 
D)  $6.28 
A)  $19.80 
B)  $12.34 
C)  $3.77 
D)  $6.28

Question 19

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 cost of internal common equity?

Accepted Answer

A)  5.0% 
B)  9.0% 
C)  12.0% 
D)  7.0% 
A)  5.0% 
B)  9.0% 
C)  12.0% 
D)  7.0%

Question 20

How much would you be willing to pay for a preferred share that pays a yearly dividend of $2.80? Current yields on similar preferreds are 6%

Accepted Answer

A)  $46.67 
B)  $28.00 
C)  $59.09 
D)  $29.68 
A)  $46.67 
B)  $28.00 
C)  $59.09 
D)  $29.68

Business risk is best measured after the fact as:

After tax cost of debt can best be described as:

If the company plans to pay a dividend of $4 per share next year, and the price of the stock is $45, the growth rate is projected as 7%, and the flotation costs are 6% of the issue price. Calculate the cost of new equity.

When we compare the risk of two investments that have the same expected return, the coefficient of variation:

What is the present value of an annual annuity payment of $7,000 made for 12 years with a required return of 5% per year with the first payment starting today?

The dividends paid on a preferred stock issue are $4 per share, the tax rate is 40%, the price is $32 and there will be $2/share in flotation costs. Calculate the cost of the preferred stock.

Why is the cost of preferred shares the rate of return investors require on a company's new preferred shares PLUS the cost of issuing the shares when the cost of equity can be either the cost of current equity OR the cost of equity plus the cost of issuing the shares?

The cost of retained earnings is:

Which of the following best describes what the financial managers must do to estimate the MCC schedule?

Use the following information to answer the question below. -What are the expected returns for BIF Corporation and Norwood, Inc.?

If you deposit $100 in the bank today at a rate of 5.5% compounded annually, how long will it take to double in value?

Four liters of milk cost $3.59 today. How much will it cost you to buy four liters of milk for your grandchildren in 35 years if inflation averages 5% per year?

How much would you be willing to pay for a preferred share that pays a yearly dividend of $2.80? Current yields on similar preferreds are 6%

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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Exam 3: Essential Concepts in Finance: Part B

Business risk is best measured after the fact as:

After tax cost of debt can best be described as:

If the company plans to pay a dividend of $4 per share next year, and the price of the stock is $45, the growth rate is projected as 7%, and the flotation costs are 6% of the issue price. Calculate the cost of new equity.

When we compare the risk of two investments that have the same expected return, the coefficient of variation:

What is the present value of an annual annuity payment of $7,000 made for 12 years with a required return of 5% per year with the first payment starting today?

The dividends paid on a preferred stock issue are $4 per share, the tax rate is 40%, the price is $32 and there will be $2/share in flotation costs. Calculate the cost of the preferred stock.

Why is the cost of preferred shares the rate of return investors require on a company's new preferred shares PLUS the cost of issuing the shares when the cost of equity can be either the cost of current equity OR the cost of equity plus the cost of issuing the shares?

The cost of retained earnings is:

Which of the following best describes what the financial managers must do to estimate the MCC schedule?

Use the following information to answer the question below. -What are the expected returns for BIF Corporation and Norwood, Inc.?

If you deposit $100 in the bank today at a rate of 5.5% compounded annually, how long will it take to double in value?

Four liters of milk cost $3.59 today. How much will it cost you to buy four liters of milk for your grandchildren in 35 years if inflation averages 5% per year?

How much would you be willing to pay for a preferred share that pays a yearly dividend of $2.80? Current yields on similar preferreds are 6%

The World of Finance

Essential Concepts in Finance: Part A

Capital Budgeting and Business Valuation

Long-Term Financing Decisions

Short-Term Financing Decisions

Filters