Question 1

If the cost of new common equity is higher than the cost of internal equity, why would a firm choose to issue new common stock?

Accepted Answer

The answer of If the cost of new common equity...

Question 2

If $52,000,000 of projects have already been financed, what is the marginal cost of capital of a $9,000,000 project?

Accepted Answer

A)  8.28% 
B)  8.60% 
C)  7.24% 
D)  9.31%

Question 3

What is the present value of $100,000 received in fifteen years with an annual discount rate of 5% compounded monthly?

Accepted Answer

A)  $ 48,102 
B)  $ 47,310 
C)  $207,893 
D)  $ 25,000

Question 4

Distinguish between business risk and financial risk.

Accepted Answer

The answer of Distinguish between business risk and financial risk....

Question 5

Sometimes adding more debt to the capital structure will provide no appreciable benefit to shareholders even if the company has a low level of debt and the perceived level of risk would not increase if even more debt was added. Why?

Accepted Answer

The answer of Sometimes adding more debt to the capital...

Question 6

Use the following information to answer the question below.
 
-If the firm decided to finance itself completely with debt, calculate the WACC from the above information.

Accepted Answer

A)  6% 
B)  7.8% 
C)  0.06% 
D)  cannot be determined given this information

Question 7

The beta of the market is:

Accepted Answer

A)  2 
B)  0 
C)  1 
D)  - 1

Question 8

How long will it take $10,000 to grow to $50,000 if it earns 10% interest compounded semiannually?

Accepted Answer

A)  17 years 
B)  8.5 years 
C)  33 years 
D)  16.5 year

Question 9

You borrow $95,000 for 12 years at an annual rate of 12%. What are the monthly payments required to amortize this loan?

Accepted Answer

A)  $ 1,248 
B)  $15,336 
C)  $ 3,936 
D)  $11,400

Question 10

The cost of preferred stock can best be described as:

Accepted Answer

A)  Dp = kp/Pp  
B)  kp = Pp/Dp  
C)  Pp = kp/Dp  
D)  kp = Dp/(Pp-f)

Question 11

The higher the coefficient of variation of possible operating income values:

Accepted Answer

A)  the lower the financial risk of the firm. 
B)  the greater the financial risk of the firm. 
C)  the greater the operating leverage of the firm. 
D)  the greater the business risk of the firm.

Question 12

Your parents have promised to give you $25,000 on your wedding day if you wait 10 years to get married. Your sister is getting married today. What amount should she receive in today's dollars to match your gift? The appropriate discount rate is 12%

Accepted Answer

A)  $10,000 
B)  $22,321 
C)  $8,049 
D)  $25,000

Question 13

To calculate the present value of an investment the following formula is used:

Accepted Answer

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

Question 14

Jason has just started his first job. His dream in life is to own a cherry red corvette ten years from today. He is prepared to save. If a Corvette costs $80,000 today and the price is expected to increase 4% per year over the next ten years, how much will he need to deposit at the beginning of each month for the next 10 years to buy the Corvette if he can earn 8% interest compounded monthly on his deposit?

Accepted Answer

The answer of Jason has just started his first job....

Question 15

To calculate the present value of an annuity due you would take the present value of an ordinary annuity answer and 	whereas to calculate the future value of an annuity due you would take the future value of an ordinary annuity answer and 	.

Accepted Answer

A)  divide by (1 + i); multiply by (1 + i) 
B)  multiply by (1 + i); multiply by (1 + i) 
C)  multiply by (1 + i); divide by (1 + i) 
D)  multiply by i; divide by i

Question 16

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 coefficient of variation for LC?

Accepted Answer

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

Question 17

Company XYZ purchased equipment and gave a three- year note with maturity value of $12,006. The interest rate on the note is 14% compounded semi- annually. Calculate how much they borrowed.

Accepted Answer

The answer of Company XYZ purchased equipment and gave a...

Question 18

You want to start saving for retirement. If you deposit $2,000 each year at the beginning 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)  $792,000 
D)  $1,048,114

Question 19

If you (1) decrease your required return and (2) decrease the number of compounding periods, what effect would this have on your present value?

Accepted Answer

A)  (1)decrease; (2)increase 
B)  (1)increase; (2)decrease 
C)  (1)increase; (2)increase 
D)  (1)decrease; (2)decrease

Question 20

Company ABC has just borrowed $10,000 to buy a new piece of equipment. They will repay the loan by making equal payments at the end of each quarter for three years. The interest rate on the loan is 12% per annum compounded quarterly.
a) What will be the size of their quarterly payment?
b) How much will they pay in interest over the life of the loan?

Accepted Answer

The answer of Company ABC has just borrowed $10,000 to...

Exam 3: Essential Concepts in Finance: Part B