FC 303 Quiz 3 | Course Paper

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1) The market rewards firms that adopt a fixed or increasing level of dividends rather

than a fixed dividend payout policy through higher share prices.

2) In theory, the rate of return on U.S. Treasury bills should always exceed the rate of

inflation as measured by the consumer price index.

3) Technical insolvency occurs when a firm’s liabilities exceed the book value of its

assets.

4) Recaptured depreciation is the portion of the sale price that is below the book value.

5) The effective interest rate on a bank loan depends on whether interest is paid when

the loan matures or in advance.

6) All items on the right-hand side of a firm’s balance sheet, excluding current liabilities

are sources of capital.

7) Which of the following is a major external source of credit information?

A) suppliers

B) bank checking

C) customers

D) distributors

8) Candy Corporation had pretax profits of $1.2 million, an average tax rate of 34

percent, and it paid preferred stock dividends of $50,000. There were 100,000 shares

outstanding and no interest expense. What was Candy Corporation’s earnings per share?

A) $3.91

B) $4.52

C) $7.42

D) $7.59

9) Which of the following represents a disadvantage for holding companies?

A) relatively high dollar investment associated with it

B) increased risk resulting from the leverage effect

C) control of lesser amounts of assets than they could acquire through mergers

D) failure of one of the companies results in the failure of the entire holding company

10) As debt is substituted for equity in the capital structure and the debt ratio increases,

the behavior of the overall cost of capital is partially explained by ________.

A) the tax-deductibility of interest payments

B) the increase in the number of common shares outstanding

C) the reduction in risk as perceived by the common shareholders

D) the decrease in the cost of equity

11) Most firms seeking merger partners will hire the services of a(n) ________.

A) commercial banker

B) investment broker

C) private contractor

D) investment banker

12) A firm’s annual stockholders’ report ________.

A) is only accessible to the shareholders of the firm

B) summarizes and documents the firm’s financial activities during the past year

C) documents the list of all investors who bought the firm’s shares during the past year

D) summarizes and documents the firm’s financial plan and budgets during the past year

13) A U.S.-based company that exports goods and has accounts receivable denominated

in a foreign currency ________.

A) faces no risk if the relations between the countries get rough

B) faces the risk that the U.S. dollar will depreciate in value relative to the foreign

currency

C) faces the risk that the U.S. dollar will appreciate in value relative to the foreign

currency

D) faces the risk that the foreign currency would appreciate in value relative to the U.S

dollar

14) Which of the following is true of risk?

A) Risk and return are inversely proportionate to each other

B) Higher the risk associated with a security the lower is its return

C) Risk is a measure of the uncertainty surrounding the return that an investment will

earn

D) Riskier investments tend to have lower returns as compared to T-bills which are risk

free

15) A firm has an outstanding 15-year convertible bond issue with a $1,000 par value

and a stated annual interest rate of 7 percent. The bond is convertible into 50 shares of

common stock which has a current market price of $25. A straight bond could have

been sold with a 10 percent stated interest rate. The conversion value of the bond is

________.

A) $1,328

B) $1,250

C) $1,000

D) $771

16) A firm has an outstanding bond with a $1,000 par value that is convertible at $40

per share of common stock. If the current market value of common stock per share is

$45, the conversion value of the bond is ________.

A) $880

B) $1,000

C) $1,125

D) $1,200

17) A firm has a year-end retained earnings balance of $220,000 for 2014. The firm

reported net profits after taxes of $50,000 and paid dividends of $30,000 in 2015. The

firm’s retained earnings balance at 2015 year end is ________.

A) $240,000

B) $250,000

C) $270,000

D) $300,000

18) Nico wants to invest all of his money in just two assets: the risk-free asset and the

market portfolio. What is Nico’s portfolio beta if he invests a quarter of his money in

the market portfolio and the rest in the risk free asset?

A) 0.00

B) 0.25

C) 0.75

D) 1.00

19) A firm’s ________ is the level of sales necessary to cover all operating costs, i.e.,

the point at which EBIT equals zero.

A) cash breakeven point

B) financial breakeven point

C) operating breakeven point

D) total breakeven point

20) An 8 percent preferred stock with a market price of $110 per share and a $100 par

value pays a cash dividend of ________.

A) $4.00

B) $8.00

C) $8.80

D) $80.00

21) Tangshan Coal Inc. just issued a 10 percent, 25-year bond with a $1,000 par value

that pays interest semiannually.

(a)How much can the investor expect in annual interest (in dollars)?

(b)How much can the investor expect in interest every six months (in dollars)?

(c)How much can the investor expect in par value at the end of the 25th year?

22) The reduction of risk resulting from combining firms with differing seasonal or

cyclical patterns of sales or earnings is a key benefit of ________.

A) congeneric merger

B) conglomerate merger

C) horizontal merger

D) vertical merger

23) Table 6.2

Calculate the current value of Bond M. (See Table 6.2)

24) Nico bought 100 shares of a company’s stock for $22.00 per share on January 1,

2013. He received a dividend of $2.00 per share at the end of 2013 and $3.00 per share

at the end of 2014. At the end of 2015, Nico collected a dividend of $4.00 per share and

sold his stock for $18.00 per share. What was Nico’s realized holding period return?

What was Nico’s compound annual rate of return? Explain the difference?

25) In response to the stock market’s reaction to its dividend policy, the Nico’s Toy

Company has decided to increase its dividend payment at a rate of 4 percent per year.

The firm’s most recent dividend is $3.25 and the required rate of interest is 9 percent.

What is the maximum you would be willing to pay for a share of the stock?

26) Nico is 30 years old and will retire at age 65. He will receive retirement benefits,

but the benefits are not going to be enough to make a comfortable retirement life for

him. Nico has estimated that an additional $25,000 a year over his retirement benefits

will allow him to have a satisfactory life. How much should Nico deposit today in an

account paying 6 percent interest to meet his goal? Assume Nico will have 15 years of

retirement.

27) The board of directors of Ride World, Inc. has declared $5.00 common stock

dividend and accepted a plan to freeze the dividend at $5 per year indefinitely. What is

the value of the Ride World’s common stock if the required rate of interest is 15

percent?

28) Nancy would like to accumulate $10,000 by the end of 3 years from now to buy a

sports car from her friend, Jim. She has $2,500 now and would like to save equal annual

end-of-year deposits to pay for the car. How much should she deposit at the end of each

year in an account paying 8 percent interest to buy the car?

29) China America Manufacturing is evaluating two different operating structures

which are described below. The firm has annual interest expense of $250, common

shares outstanding of 1,000, and a tax rate of 40 percent.

(a) For each operating structure, calculate

(a1) EBIT and EPS at 10,000, 20,000, and 30,000 units.

(a2) the degree of operating leverage (DOL) and degree of total leverage (DTL)

using 20,000 units as a base sales level.

(a3) the operating breakeven point in units.

(b) Which operating structure has greater operating leverage and business risk?

recommended?

China America Manufacturing is evaluating two different operating structures which are

described below. The firm has annual interest expense of $250, common shares

outstanding of 1,000, and a tax rate of 40 percent.