FC 667 | Course Paper

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1) Stock Market Bubble If the NASDAQ stock market bubble peaked at 3,750, and two

and a half years later it had fallen to 2,200, what would be the percentage decline?

A.-15.87%

B.-17.05%

C.-41.33%

D.-58.67%

2) If a firm has a cash cycle of 32 days and an operating cycle of 67 days, what is its

payables turnover?

A.5.45

B.10.43

C.11.41

D.35

3) Compute Bond Price Compute the price of a 4.75 percent coupon bond with 15 years

left to maturity and a market interest rate of 6.25 percent. (Assume interest payments

are semi-annual and par value is $1,000.) Is this a discount or premium bond?

A.discount

B.premium

N = 30, I = 3.125, PMT = 23.75, FV = 1000 CPT PV = -855.34

Since this is less than $1,000, it is a discount bond.

4) A potential future negative impact to value and/or cash flows is often discussed in

terms of probability of loss and the expected magnitude of the loss. This is called

_________.

A.options

B.standard deviation

C.coefficient of variation

D.risk

5) As new capital budgeting projects arise, we must estimate

A.the float costs for financing the project

B.when such projects will require cash flows

C.the cost of the loan for the specific project

D.the cost of the stock being sold for the specific project

6) CM Enterprises estimates that it takes, on average, 7 days for their customers’

payments to reach them, 1 day for the payments to be processed and deposited by their

bookkeeping department, and 3 more days for the checks to clear once they’re

deposited. What is their collection float?

A.7 days

B.8 days

C.10 days

D.11 days

7) For publicly traded firms, these ratios measure what investors think of the company’s

future performance and risk.

A.Liquidity ratios

B.Market value ratios

C.Price value ratios

D.Profitability ratios

8) Calculation of Altman’s Z-Score: Suppose that the financial ratios of a potential

borrowing firm took the following values: X1 = Net working capital/Total assets = .30,

X2 = Retained earnings/Total assets = .40, X3 = Earnings before interest and

taxes/Total assets = .43, X4 = Market value of equity/Book value of long-term debt = .

65, X5 = Sales/Total assets ratio = 0.95. Calculate the Altman’s Z-score for this firm.

A.3.679

B.2.73

C.10.23

D.2.046

9) Suppose your firm has decided to use a divisional WACC approach to analyze

projects. The firm currently has 4 divisions, A through D, with average betas for each

division of 0.5, 1.0, 1.3 and 1.6, respectively. If all current and future projects will be

financed with half debt and half equity, and if the current cost of equity (based on an

average firm beta of 1.0 and a current risk-free rate of 7%) is 14% and the after-tax

yield on the company’s bonds is 8%, what are the WACCs for divisions A through D?

A.9.00%; 10.25%; 12.95%; 13.15%

B.9.75%; 12.00%; 12.65%; 13.75%

C.9.25%; 11.00%; 12.05%; 13.10%

D.8.95%; 10.15%; 12.50%; 13.45%

10) You are deciding among several different bank accounts. Which of the following

will generate the highest effective annual rate (EAR)?

A.A 6% rate with monthly compounding

B.A 6% rate with annual compounding

C.A 6.08% rate with annual compounding

D.A 6% rate with quarterly compounding

11) TIPS Capital Return Consider a 3.75% TIPS with an issue CPI reference of 183.5.

At the beginning of this year, the CPI was 190.6 and was at 199.4 at the end of the year.

What was the capital gain of the TIPS in percentage terms? (Assume semi-annual

interest payments and $1,000 par value.)

A.3.75%

B.4.62%

C.7.10%

D.8.80%

12) This is the IRS convention that requires that all property placed in service during a

given period is assumed to be placed in service at the midpoint of that period.

A.mid-point convention

B.mid-month convention

C.mid-quarter convention

D.half-year convention

13) Would it be worth it to incur a compensating balance of $2,000 in order to get a

1.5-percent-lower interest rate on a 1-year, pure discount loan of $100,000?

A.yes

B.no

C.not enough information is given to determine

14) Future Value Given a 7 percent interest rate, compute the year 6 future value if

deposits of $2,500 and $1,500 are made in years 2 and 3, respectively, and a withdrawal

of $900 is made in year 4 .

A.$2,721.44

B.$4,084.15

C.$4,491.60

D.$7,059.04

15) Which of the following statements is correct?

A.If the market is strong-form efficient it must also be weak-form efficient and

semi-strong efficient

B.There is evidence to suggest that the market is strong-form efficient because

corporate insiders have made extraordinary profits by trading on inside information

C.The Efficient Market Hypothesis states that security prices will be based on their

expected return

D.None of these statements is correct

16) Which of the following is an example of an appropriate loan covenant?

A.The firm must not increase its debt ratio by more than 3%

B.The firm must keep its current ratio above 2.2

C.The firm must purchase an insurance policy on a key employee

D.All of these are examples of appropriate loan covenants

17) ABC Inc. has a dividend yield equal to 3% and is expected to grow at a 7% rate for

the next 7 years. What is ABC’s required return?

A.10%

B.11%

C.4%

D.5%

18) Regarding dividend payment procedures, this is the date the firm would look on its

books to find to whom they can start addressing payments.

A.declaration date

B.ex-dividend date

C.record date

D.payment date

19) Profitability Ratios DJ’s Soda Fountain has asked you to help piece together

financial information on the firm for the most current year. Managers give you the

following information: sales = $20 million, total debt = $3 million, debt ratio = 75%,

ROE = 27%. Using this information, what is DJ’s ROA?

A..0675%

B.6.75%

C.25.00%

D.27.00%

20) This measures the number of days that the firm holds accounts payable before it has

to extend cash to buy raw materials.

A.Accounts receivable turnover

B.Average collection period

C.Average payment period

D.Accounts payable turnover

21) This is the reward for taking systematic stock market risk.

A.required return

B.risk-free rate

C.risk premium

D.market risk premium

22) Which of the following statements is incorrect?

A.Standard & Poor’s rates commercial paper

B.Commercial paper issuers with lower than prime credit ratings are unable to sell

commercial paper

C.Commercial paper can be sold either directly or indirectly through brokers and

dealers

D.All of these statements are correct

23) Which of the following terms is the chance that the bond issuer will not be able to

make timely payments?

A.credit quality risk

B.interest rate risk

C.liquidity of interest rate risk

D.term structure of interest rates

24) Income Statement You have been given the following information for Ross’s Rocket

Corp.:

net sales = $1,000,000;

gross profit = $400,000;

addition to retained earnings = $60,000;

dividends paid to preferred and common stockholders = $90,000;

depreciation expense = $50,000.

The firm’s tax rate is 40 percent. What are the cost of goods sold and the interest

expense for Ross’s Rocket Corp.?

A.$100,000, and $600,000, respectively

B.$600,000, and $100,000, respectively

C.$600,000, and $200,000, respectively

D.$700,000, and $100,000, respectively

25) You have a portfolio consisting of 20% Boeing (beta = 1.3) and 40%

Hewlett-Packard (beta = 1.6) and 40% McDonald’s stock (beta = 0.7). How much

market risk does the portfolio have?

A.This portfolio has 18% less risk than the general market

B.This portfolio has 28% more risk than the general market

C.This portfolio has 18% more risk than the general market

D.This portfolio has 28% less risk than the general market

26) Interest-on-Interest Consider a $500 deposit earning 5 percent interest per year for 5

years. How much total interest is earned on the original deposit (excluding interest

earned on interest)?

A.$13.14

B.$25.00

C.$125.00

D.$138.14

27) Sally is choosing between two bonds both of which mature in 15 years and have the

same level of risk. Bond A is a municipal bond that yields 5.25%. Bond B is a corporate

bond that yields 7.75%. If Sally is in the 30% tax bracket, which bond should she select

and why?

A.Sally should select Bond A because its interest income is not taxable

B.Sally should select Bond B is better because it has lower risk

C.Sally should select Bond A because its taxable equivalent yield is greater than the

yield of Bond B

D.Sally should select Bond B because the taxable equivalent yield of Bond A is less

than the yield of Bond B

28) An all-equity financed firm has $350 in assets and the stock price is $10. If the firm

restructures with 20% debt which creates interest expense of $14 per year and the firm’s

tax rate is 40%, what is the break-even EBIT?

A.$70

B.$67

C.$74

D.$79

29) Modigliani and Miller disagreed with the proposal by Gordon and Lintner regarding

dividends. Why?

A.M&M claimed that many, if not most, investors will spend their dividends on

consumer goods

B.M&M claimed that many, if not most, investors will reinvest their dividends in the

same or similar manner that the firms would

C.M&M claimed that many, if not most, investors would prefer capital gains

D.M&M claimed that firms only attract investors who would prefer dividends

30) Rose has preferred stock selling for 99 percent of par that pays a 9 percent annual

coupon. What would be Rose’s component cost of preferred stock?

A.4.55%

B.8.91%

C.9.00%

D.9.09%

31) DuPont Analysis Last year Mocha Java, Inc. had an ROA of 10%, a profit margin of

5%, and sales of $25 million. What is Mocha Java’s total assets?

A.$0.125 m

B.$1.25 m

C.$12.5 m

D.$125 m

32) JAK Industries has 5 million shares of stock outstanding selling at $25 per share

and an issue of $40 million in 8 percent, annual coupon bonds with a maturity of 15

years, selling at 108 percent of par ($1000). If JAK’s weighted average tax rate is 34

percent and its cost of equity is 15 percent, what is JAK’s WACC?

A.9.19%

B.12.36%

C.12.50%

D.12.98%

33) On which of the four major financial statements would you find the common stock

and paid-in surplus?

A.Balance Sheet

B.Income Statement

C.Statement of Cash Flows

D.Statement of Retained Earnings

34) FDR Industries has 50 million shares of stock outstanding selling at $30 per share

and an issue of $200 million in 9.5 percent, annual coupon bonds with a maturity of 10

years, selling at 105 percent of par ($1000). If FDR’s weighted average tax rate is 28

percent and its cost of equity is 16 percent, what is FDR’s WACC?

A.12.75%

B.14.81%

C.14.88%

D.15.11%

35) People refinance their home mortgages

A.when rates fall

B.when rates rise

C.when rates fall and rise

D.whenever they need to, independent of rates

36) Which of the following is NOT a fundamental factor ignored by the target cash

balance models?

A.Firms have the option to borrow short-term to meet unexpected demands for cash

B.The costs and delays of trading securities have fallen dramatically since the advent of

the Internet

C.Many large firms habitually use all or the majority of their available cash to purchase

overnight securities

D.Models take into account that many firms must keep compensating balances in their

deposit accounts as part of borrowing agreements with their banks

37) Profitability Ratios PJ’s Ice Cream Parlor has asked you to help piece together

financial information on the firm for the most current year. Managers give you the

following information: sales = $50 million, total debt = $20 million, debt ratio = 50%,

and ROE = 12%. Using this information, what is PJ’s ROA?

A.4%

B.6%

C.10%

D.12%

38) Suppose that Papa Bell Inc.’s equity is currently selling for $30 per share, with 4

million shares outstanding. If the firm also has 70 thousand bonds outstanding, which

are selling at 95 percent of par ($1,000), what are the firm’s current capital structure

weights?

A.Weight of Equity = 74.11%; Weight of Debt = 25.89%

B.Weight of Equity = 64.34%; Weight of Debt = 35.66%

C.Weight of Equity = 67.80%; Weight of Debt = 32.20%

D.Weight of Equity = 65.19%; Weight of Debt = 34.81%

39) Which of these is defined as the price of one currency in terms of another?

A.exchange rate

B.spot transaction

C.indirect exchange quote

D.direct exchange quote

40) Your firm needs to buy additional physical therapy equipment that costs $35,000.

The equipment manufacturer will give you the equipment now if you will pay $8,000

per year for the next 5 years. Assume your firm can borrow at a 3% interest rate. You

need to analyze if your firm should pay the manufacturer the $35,000 now or accept the

five-year annuity offer of $8,000. Which of the following statements is correct?

A.You decide to pay $35,000 today because paying in cash is always cheaper

B.You decide to pay $35,000 today because paying for the equipment over time costs

$36,637.66

C.You decide to pay for the equipment over time because it only costs $39,112.86

D.Paying for the equipment over time costs $36,637.66 which is less than paying

$35,000 today

41) In M&M’s perfect world, will the debtholders ever bear any of the risk of the firm?

42) All else equal, which bond’s price is more affected by a change in interest rates, a

bond with a large coupon or a small coupon? Why?

43) Required Return Using the information in the table, compute the required return

for each company using both CAPM and the constant growth model. Compare and

discuss the results. Assume that the market portfolio will earn 11 percent and the

risk-free rate is 2.5 percent.

44) Reasons for holding cash: A firm may keep part of its capital tied up in cash for

three primary reasons. List the reasons and explain each.

45) Explain why utility firms tend to have fairly high debt ratios.