Question 1

Which of the following is the best definition of operating leverage?

Accepted Answer

A)  The effect that volatility has on a company's sales. 
B)  The risk of incorporating fixed income expense. 
C)  The uncertainty that a company has with regard to its operating income. 
D)  The tendency of fixed expenses to magnify risk. 
A)  The effect that volatility has on a company's sales. 
B)  The risk of incorporating fixed income expense. 
C)  The uncertainty that a company has with regard to its operating income. 
D)  The tendency of fixed expenses to magnify risk.

Question 2

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.
-What is the standard deviation for XYZ?

Accepted Answer

The answer of Use the following information to answer the...

Question 3

In ten years time you'd like to quit your high pressure job and backpack around the world for two years. Since you plan to pick up odd jobs as you travel, you think you'll be able to manage on $1,500 per month,payable at the beginning of each month. How much must you save at the end of each month to pay for your trip if interest rates are 8% compounded monthly?

Accepted Answer

PV of the travel funds needed

Question 4

Assume your existing portfolio is valued at $9,000 and its beta is 1.0. You plan to buy an additional $3,000 of a particular stock that has a beta of 1.8 (without selling any other stock). What is the beta of the new portfolio?

Accepted Answer

(9/12 x 1)

Question 5

You deposit $10,000 in a bank and plan to keep it there for five years. The bank pays 8% annual interest compounded continuously. Calculate the future value at the end of five years.

Accepted Answer

A)  $15,000 
B)  $14,918 
C)  $14,500 
D)  $14,693 
A)  $15,000 
B)  $14,918 
C)  $14,500 
D)  $14,693

Question 6

What are breakpoints of financing in marginal cost of capital determination?

Accepted Answer

The breakpoint is where the co

Question 7

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 preferred stock?

Accepted Answer

A)  8.0% 
B)  12.5% 
C)  20.0% 
D)  8.5% 
A)  8.0% 
B)  12.5% 
C)  20.0% 
D)  8.5%

Question 8

You would like to have $500,000 put away in 20 years for your retirement. You plan to put away $14,000 each year (end of year). What is the minimum interest rate that you would need to receive $500,000?

Accepted Answer

A)  4.5% 
B)  5.72% 
C)  6.5% 
D)  5% 
A)  4.5% 
B)  5.72% 
C)  6.5% 
D)  5%

Question 9

The after tax cost of debt on a 6% $50,000 loan given a 35% tax bracket would be:

Accepted Answer

A)  0.039% 
B)  6% 
C)  3.9% 
D)  4% 
A)  0.039% 
B)  6% 
C)  3.9% 
D)  4%

Question 10

Your firm is in the 30% tax bracket with a before-tax required rate of return on its equity of 13% and on its debt of 10%. If the firm uses 60% equity and 40% debt financing, calculate its after-tax WACC.

Accepted Answer

.1(1- .3)

Question 11

If $43,000,000 of projects have already been financed, what is the marginal cost of capital of a $4,000,000 project?

Accepted Answer

A)  7.92% 
B)  7.24% 
C)  8.28% 
D)  8.83% 
A)  7.92% 
B)  7.24% 
C)  8.28% 
D)  8.83%

Question 12

You want to start saving for retirement. If you deposit $2000 each year at the end of the next 60 years and earn 11% on the investment, how much will you have when you retire?

Accepted Answer

A)  $9,510,132 
B)  $10,556,246 
C)  $1,048,114 
D)  $792,000 
A)  $9,510,132 
B)  $10,556,246 
C)  $1,048,114 
D)  $792,000

Question 13

Treasury bills are currently yielding 3.5%, the expected market return is 10%, and the firm's beta is 1.50. Calculate the cost of capital for this firm.

Accepted Answer

A)  9.75% 
B)  0.0625% 
C)  13.25% 
D)  6.25% 
A)  9.75% 
B)  0.0625% 
C)  13.25% 
D)  6.25%

Question 14

A bank agrees to give you a loan of $12,000,000 and you have to pay $1,309,908 per year for 26 years. What is your rate of interest? What would the payments be if this were a monthly payment loan?

Accepted Answer

a. Interes

Question 15

What is risk aversion? How does the assumption of risk aversion affect the risk/return tradeoff?

Accepted Answer

Risk aversion is the tendency to avoid a

Question 16

What is the coefficient of variation of the following income statement sales projection given the following information?

Accepted Answer

A)  18.2x 
B)  0.22 
C)  1.41 
D)  12% 
A)  18.2x 
B)  0.22 
C)  1.41 
D)  12%

Question 17

If a firm has a $1,500,000 debt limit before AT kd will change and if taxes are 40% and total debt is 60% of the capital structure, calculate the debt break point in the MCC schedule.

Accepted Answer

A)  $7,500,000 
B)  $1,000,000 
C)  $3,750,000 
D)  $2,500,000 
A)  $7,500,000 
B)  $1,000,000 
C)  $3,750,000 
D)  $2,500,000

Question 18

The marginal cost of capital can best be defined as:

Accepted Answer

A)  BP = WACC/limit 
B)  BP = Proportion of total capital/limit 
C)  BP = Limit/proportion of total capital 
D)  BP = Limit/WACC 
A)  BP = WACC/limit 
B)  BP = Proportion of total capital/limit 
C)  BP = Limit/proportion of total capital 
D)  BP = Limit/WACC

Question 19

If the dividends to be paid on a common stock issue are $3.50 per share, the price of the stock is $50, and the growth rate is 6%, calculate the cost of common stock.

Accepted Answer

A)  4.6% 
B)  13% 
C)  0.13% 
D)  10% 
A)  4.6% 
B)  13% 
C)  0.13% 
D)  10%

Question 20

As the discount rate increases, the present value of a positive cash flow to be received at a particular time in the future:

Accepted Answer

A)  gets smaller without limit. 
B)  gets larger without limit. 
C)  becomes smaller 
D)  stays unchanged. 
A)  gets smaller without limit. 
B)  gets larger without limit. 
C)  becomes smaller 
D)  stays unchanged.

Which of the following is the best definition of operating leverage?

Assume your existing portfolio is valued at $9,000 and its beta is 1.0. You plan to buy an additional $3,000 of a particular stock that has a beta of 1.8 (without selling any other stock). What is the beta of the new portfolio?

You deposit $10,000 in a bank and plan to keep it there for five years. The bank pays 8% annual interest compounded continuously. Calculate the future value at the end of five years.

What are breakpoints of financing in marginal cost of capital determination?

You would like to have $500,000 put away in 20 years for your retirement. You plan to put away $14,000 each year (end of year). What is the minimum interest rate that you would need to receive $500,000?

The after tax cost of debt on a 6% $50,000 loan given a 35% tax bracket would be:

Your firm is in the 30% tax bracket with a before-tax required rate of return on its equity of 13% and on its debt of 10%. If the firm uses 60% equity and 40% debt financing, calculate its after-tax WACC.

If $43,000,000 of projects have already been financed, what is the marginal cost of capital of a $4,000,000 project?

You want to start saving for retirement. If you deposit $2000 each year at the end of the next 60 years and earn 11% on the investment, how much will you have when you retire?

Treasury bills are currently yielding 3.5%, the expected market return is 10%, and the firm's beta is 1.50. Calculate the cost of capital for this firm.

A bank agrees to give you a loan of $12,000,000 and you have to pay $1,309,908 per year for 26 years. What is your rate of interest? What would the payments be if this were a monthly payment loan?

What is risk aversion? How does the assumption of risk aversion affect the risk/return tradeoff?

What is the coefficient of variation of the following income statement sales projection given the following information?

If a firm has a $1,500,000 debt limit before AT k_dwill change and if taxes are 40% and total debt is 60% of the capital structure, calculate the debt break point in the MCC schedule.

The marginal cost of capital can best be defined as:

If the dividends to be paid on a common stock issue are $3.50 per share, the price of the stock is $50, and the growth rate is 6%, calculate the cost of common stock.

As the discount rate increases, the present value of a positive cash flow to be received at a particular time in the future:

The World of Finance

Essential Concepts in Finance: Part A

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Exam 3: Essential Concepts in Finance: Part B

Which of the following is the best definition of operating leverage?

Assume your existing portfolio is valued at $9,000 and its beta is 1.0. You plan to buy an additional $3,000 of a particular stock that has a beta of 1.8 (without selling any other stock). What is the beta of the new portfolio?

You deposit $10,000 in a bank and plan to keep it there for five years. The bank pays 8% annual interest compounded continuously. Calculate the future value at the end of five years.

What are breakpoints of financing in marginal cost of capital determination?

You would like to have $500,000 put away in 20 years for your retirement. You plan to put away $14,000 each year (end of year). What is the minimum interest rate that you would need to receive $500,000?

The after tax cost of debt on a 6% $50,000 loan given a 35% tax bracket would be:

Your firm is in the 30% tax bracket with a before-tax required rate of return on its equity of 13% and on its debt of 10%. If the firm uses 60% equity and 40% debt financing, calculate its after-tax WACC.

If $43,000,000 of projects have already been financed, what is the marginal cost of capital of a $4,000,000 project?

You want to start saving for retirement. If you deposit $2000 each year at the end of the next 60 years and earn 11% on the investment, how much will you have when you retire?

Treasury bills are currently yielding 3.5%, the expected market return is 10%, and the firm's beta is 1.50. Calculate the cost of capital for this firm.

A bank agrees to give you a loan of $12,000,000 and you have to pay $1,309,908 per year for 26 years. What is your rate of interest? What would the payments be if this were a monthly payment loan?

What is risk aversion? How does the assumption of risk aversion affect the risk/return tradeoff?

What is the coefficient of variation of the following income statement sales projection given the following information?

If a firm has a $1,500,000 debt limit before AT kd will change and if taxes are 40% and total debt is 60% of the capital structure, calculate the debt break point in the MCC schedule.

The marginal cost of capital can best be defined as:

If the dividends to be paid on a common stock issue are $3.50 per share, the price of the stock is $50, and the growth rate is 6%, calculate the cost of common stock.

As the discount rate increases, the present value of a positive cash flow to be received at a particular time in the future:

The World of Finance

Essential Concepts in Finance: Part A

Capital Budgeting and Business Valuation

Long-Term Financing Decisions

Short-Term Financing Decisions

Filters

If a firm has a $1,500,000 debt limit before AT k_dwill change and if taxes are 40% and total debt is 60% of the capital structure, calculate the debt break point in the MCC schedule.