Question 1

The cost of equity capital for a new common stock issuance can best be described as:

Accepted Answer

A)  kn = [D1/(Po -F) ] + g 
B)  kn = [D1/(Po +F) ] + g 
C)  kn = [D1/(Po +F) ] - g 
D)  kn = (D1 +g)/(Po +F)

Question 2

Cost of capital can best be defined as:

Accepted Answer

A)  compensation demanded by the investor of a firm before taxes and transaction costs. 
B)  compensation demanded by the investor of a firm before taxes, transaction costs, and interest expense. 
C)  compensation demanded by the investor of a firm after taxes and transaction costs. 
D)  compensation demanded by the investor of a firm before taxes only.

Question 3

If the dividends paid on a preferred stock issue are $5 per share and the price of the stock after subtracting flotation costs is $25, calculate cost of preferred stock.

Accepted Answer

A)  20% 
B)  6% 
C)  0.2% 
D)  5%

Question 4

Discuss the seven steps for determining the optimal capital budget.

Accepted Answer

The answer of Discuss the seven steps for determining the...

Question 5

A company might choose to use the CAPM instead of the dividend growth model if:

Accepted Answer

A)  they plan major changes in the company's capital structure 
B)  they pay dividends that grow at a changing rate. 
C)  they plan to issue preferred shares. 
D)  they believe that diversifiable risk is the relevant risk.

Question 6

You take out a 25- year loan of $150,000 with a 8% annual interest rate. What are the annual payments?

Accepted Answer

A)  $13,965 
B)  $13,427 
C)  $ 2,052 
D)  $14,052

Question 7

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.
-Based on your calculations in the three questions above, should you buy this stock? Why or why not?

Accepted Answer

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

Question 8

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 required return for XYZ according to the CAPM?

Accepted Answer

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

Question 9

If the dividends currently paid on a share of common stock are $3.00 per share, the price of the stock is $50, and the growth rate is 10%, calculate the cost of retained earnings.

Accepted Answer

A)  6.6% 
B)  6% 
C)  16% 
D)  16.6%

Question 10

Treasury bills are currently yielding 3%, the expected market return is 15%, the bank rate is 4%, and the firm's beta is 0.9. Calculate the cost of capital for this firm.

Accepted Answer

A)  13.8% 
B)  13.9% 
C)  13.6% 
D)  12%

Question 11

To settle a debt you have agreed to make payments of $200, $500, $700, $900, and $1,200 at the end of years 1- 5 respectively. The appropriate discount rate is 8%. What is the present value of your debt?

Accepted Answer

A)  $2,427 
B)  $3,500 
C)  $2,100 
D)  $2,648

Question 12

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 expected return for XYZ?

Accepted Answer

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

Question 13

You are negotiating for the terms of a legal settlement, and your opponent's attorney has presented you with the following alternative settlement offers:
a. $38,000 today in one lump sum.
b. $50,000 to be paid to you in five equal payments of $10,000 at the end of each of the next five years.
c. Five equal annual installments of $9,100 each, beginning today.
If your discount rate is 10%, what is the present value of each of the alternatives and which alternative would you choose?

Accepted Answer

The answer of You are negotiating for the terms of...

Question 14

The coefficient of variation is best represented by:

Accepted Answer

A)  mean/standard deviation. 
B)  the square root of P(V- u)2. 
C)  standard deviation/mean. 
D)  - 1 to +1

Question 15

The cost of common stock equity can best be described as:

Accepted Answer

A)  Po = D1/(ks -g) 
B)  ks = (D1/Po) + g 
C)  Po = D1/(ks +g) 
D)  ks = (D1/Po) - g

Question 16

All else equal, an increase in fixed operating expenses:

Accepted Answer

A)  increases financial risk. 
B)  increases business risk. 
C)  decreases business risk. 
D)  decreases operating leverage.

Question 17

How long it will take for $2,500 to become $8,865 if it is deposited and earns 5% per year compounded annually? (Calculate to the closest year.

Accepted Answer

The answer of How long it will take for $2,500...

Question 18

You are trying to diversify your portfolio and reduce risk. Which of the following correlations between the returns of your portfolio and those of a proposed addition would give the most diversification benefit (other things equal)?

Accepted Answer

A)  - .5 
B)  +1 
C)  0 
D)  - 1

Question 19

Which of the following methods would NOT result in a reduction of business risk?

Accepted Answer

A)  increase fixed operating costs 
B)  diversification 
C)  reduce operating leverage 
D)  reduce sales volatility

Question 20

Company XYZ purchased some machinery and gave a five-year note with a maturity value of $20,000. The discount rate is 8% annually and the interest is discounted monthly. How much did the company borrow?

Accepted Answer

A)  $13,612 
B)  $12,000 
C)  $19,346 
D)  $13,424

Exam 3: Essential Concepts in Finance: Part B

The cost of equity capital for a new common stock issuance can best be described as:

Cost of capital can best be defined as:

If the dividends paid on a preferred stock issue are $5 per share and the price of the stock after subtracting flotation costs is $25, calculate cost of preferred stock.

Discuss the seven steps for determining the optimal capital budget.

A company might choose to use the CAPM instead of the dividend growth model if:

You take out a 25- year loan of $150,000 with a 8% annual interest rate. What are the annual payments?

If the dividends currently paid on a share of common stock are $3.00 per share, the price of the stock is $50, and the growth rate is 10%, calculate the cost of retained earnings.

Treasury bills are currently yielding 3%, the expected market return is 15%, the bank rate is 4%, and the firm's beta is 0.9. Calculate the cost of capital for this firm.

To settle a debt you have agreed to make payments of $200, $500, $700, $900, and $1,200 at the end of years 1- 5 respectively. The appropriate discount rate is 8%. What is the present value of your debt?

The coefficient of variation is best represented by:

The cost of common stock equity can best be described as:

All else equal, an increase in fixed operating expenses:

How long it will take for $2,500 to become $8,865 if it is deposited and earns 5% per year compounded annually? (Calculate to the closest year.

You are trying to diversify your portfolio and reduce risk. Which of the following correlations between the returns of your portfolio and those of a proposed addition would give the most diversification benefit (other things equal) ?

Which of the following methods would NOT result in a reduction of business risk?

Company XYZ purchased some machinery and gave a five-year note with a maturity value of $20,000. The discount rate is 8% annually and the interest is discounted monthly. How much did the company borrow?