Other things held constant, the lower a firm’s tax rate, the more logical it is for the firm
to use debt.
a.True
b.False
The distributions of rates of return for Companies AA and BB are given below:
We can conclude from the above information that any rational, risk-averse investor
would be better off adding Security AA to a well-diversified portfolio over Security BB.
a.True
b.False
Which of the following statements best describes what you should expect if you
randomly select stocks and add them to your portfolio?
a.Adding more such stocks will reduce the portfolio’s unsystematic, or diversifiable,
risk.
b.Adding more such stocks will increase the portfolio’s expected rate of return.
c.Adding more such stocks will reduce the portfolio’s beta coefficient and thus its
systematic risk.
d.Adding more such stocks will have no effect on the portfolio’s risk.
e.Adding more such stocks will reduce the portfolio’s market risk but not its
unsystematic risk.
Jordan Inc has the following balance sheet and income statement data:
The new CFO thinks that inventories are excessive and could be lowered sufficiently to
cause the current ratio to equal the industry average, 2.75, without affecting either sales
or net income. Assuming that inventories are sold off and not replaced to get the current
ratio to the target level, and that the funds generated are used to buy back common
stock at book value, by how much would the ROE change?
a.11.26%
b.11.85%
c.12.45%
d.13.07%
e.13.72%
Your boss, Sally Maloney, treasurer of Fred Clark Enterprises (FCE), asked you to help
her estimate the intrinsic value of thecompany’s stock. FCE just paid a dividend of
$1.00, and the stock now sells for $15.00 per share. Sally asked a number of security
analysts what they believe FCE’s future dividends will be, based on their analysis of the
company. The consensus is that the dividend will be increased by 10% during Years 1 to
3, and it will be increased at a rate of 5% per year in Year 4 and thereafter. Sally asked
you to use that information to estimate the required rate of return on the stock, rs, and
she provided you with the following template for use in the analysis.
The Calculated Price will equal the Actual Market
Price once the correct rshas been found.
Sally told you that the growth rates in the template were just put in as a trial, and that
you must replace them with the analysts’forecasted rates to get the
correctforecasteddividends and then the estimated HV. She also notes that the estimated
value for rs, at the top of the template, is also just a guess, and you must replace it with
a value that will cause the Calculated Price shown at the bottom to equal the Actual
Market Price. She suggests that, after you have put in the correct dividends, you can
manually calculate the price, using a series of guesses as to the Estimated rs. The value
of rs that causes the calculated price to equal the actual price is the correct one. She
notes, though, that this trial-and-error process would be quite tedious, and that the
correct rs could be found much faster with a simple Excel model, especially if you use
Goal Seek. What is the value of rs?
a.11.84%
b.12.21%
c.12.58%
d.12.97%
e.13.36%
Other things held constant, which of the following would tend to reduce the cash
conversion cycle?
a.Carry a constant amount of receivables as sales decline.
b.Place larger orders for raw materials to take advantage of price breaks.
c.Take all discounts that are offered.
d.Continue to take all discounts that are offered and pay on the net date.
e.Offer longer payment terms to customers.
Garner Grocers began operations in 2011. Garner has reported the following levels of
taxable income (EBT) over the past several years. The corporate tax rate was 34% each
year. Assume that the company has taken full advantage of the Tax Code’s carry-back,
carry-forward provisions, and assume that the current provisions were applicable in
2011. What is the amount of taxes the company paid in 2014?
a.$ 92,055
b.$ 96,900
c.$102,000
d.$107,100
e.$112,455
Other things held constant, the higher a firm’s total debt to total capital ratio [measured
as (Short-term debt + Long-term debt)/(Debt + Preferred stock + common equity)], the
higher its TIE ratio will be.
a.True
b.False
If the inflation rate in the United States is greater than the inflation rate in Britain, other
things held constant, the British pound will
a.appreciate against the U.S. dollar.
b.depreciate against the U.S. dollar.
c.remain unchanged against the U.S. dollar.
d.appreciate against other major currencies.
e.appreciate against the dollar and other major currencies.
Which of the following statements is CORRECT?
a.Generally, debt ratios do not vary much among different industries, although they do
vary among firms within a given industry.
b.Electric utilities generally have very high common equity ratios because their
revenues are more volatile than those of firms in most other industries.
c.Airline companies tend to have very volatile earnings, and as a result they generally
have high target debt-to-equity ratios.
d.Wide variations in capital structures exist both between industries and among
individual firms within given industries. These differences are caused by differing
business risks and also managerial attitudes.
e.Since most stocks sell at or very close to their book values, book value capital
structures are typically adequate for use in estimating firms’ weighted average costs of
capital.
Which of the following statements is CORRECT?
a.Collections Inc. is in the business of collecting past-due accounts for other companies,
i.e., it is a collection agency. Collections’ revenues, profits, and stock price tend to rise
during recessions. This suggests that Collections Inc.’s beta should be quite high, say
2.0, because it does so much better than most other companies when the economy is
weak.
b.Suppose the returns on two stocks are negatively correlated. One has a beta of 1.2 as
determined in a regression analysis using data for the last 5 years, while the other has a
beta of -0.6. The returns on the stock with the negative beta must have been negatively
correlated with returns on most other stocks during that 5-year period.
c.Suppose you are managing a stock portfolio, and you have information that leads you
to believe the stock market is likely to be very strong in the immediate future. That is,
you are convinced that the market is about to rise sharply. You should sell your
high-beta stocks and buy low-beta stocks in order to take advantage of the expected
market move.
d.You think that investor sentiment is about to change, and investors are about to
become more risk averse. This suggests that you should rebalance your portfolio to
include more high-beta stocks.
e.If the market risk premium remains constant, but the risk-free rate declines, then the
required returns on low-beta stocks will rise while those on high-beta stocks will
decline.
Kwok Enterprises has the following income statement. How much after-tax operating
income does the firm have?
a.$325
b.$342
c.$360
d.$378
e.$397
A firm’s treasurer likes to be in a position to raise funds to support operations whenever
such funds are needed, even in “bad times.” This is called “financial flexibility,” and the
lower the firm’s debt ratio, the greater its financial flexibility, other things held constant.
a.True
b.False
Which of the following statements is NOT CORRECT?
a.Commercial paper can be issued by virtually any firm so long as it is willing to pay
the going interest rate.
b.Accruals are “free” in the sense that no explicit interest is paid on these funds.
c.A conservative approach to working capital management will result in most if not all
permanent assets being financed with long-term capital.
d.The risk to a firm that borrows with short-term credit is usually greater than if it
borrowed using long-term debt. This added risk stems from the greater variability of
interest costs on short-term debt and possible difficulties with rolling over short-term
debt.
e.Bank loans generally carry a higher interest rate than commercial paper.
Kulwicki Corporation wants to determine the effect of an expansion of its sales on its
operating income (EBIT). The firm’s current degree of operating leverage is 2.50. It
projects new unit sales to be 170,000, an increase of 45,000 over last year’s level of
125,000 units. Last year’s EBIT was $60,000. Based on a degree of operating leverage
of 2.5, what is this year’s expected EBIT with the increase in sales?
a.$ 92,854
b.$ 97,741
c.$102,885
d.$108,300
e.$114,000
Jane has a portfolio of 20 average stocks, and Dick has a portfolio of 2 average stocks.
Assuming the market is in equilibrium, which of the following statements is
CORRECT?
a.Jane’s portfolio will have less diversifiable risk and also less market risk than Dick’s
portfolio.
b.The required return on Jane’s portfolio will be lower than that on Dick’s portfolio
because Jane’s portfolio will have less total risk.
c.Dick’s portfolio will have more diversifiable risk, the same market risk, and thus more
total risk than Jane’s portfolio, but the required (and expected) returns will be the same
on both portfolios.
d.If the two portfolios have the same beta, their required returns will be the same, but
Jane’s portfolio will have less market risk than Dick’s.
e.The expected return on Jane’s portfolio must be lower than the expected return on
Dick’s portfolio because Jane is more diversified.
Schiffauer Electronics plans to issue 10-year, zero coupon bonds with a par value of
$1,000 and a yield to maturity of 9.5%. The company has a tax rate of 30%. How much
extra in taxes would the company pay (or save) the second year (at t = 2) if it goes
ahead and issues the bonds?
a.$12.59
b.$12.91
c.$13.23
d.$13.56
e.$13.90
An investor who “writes” a call option without the stock in his or her portfolio to back it
up is selling a(n)
a.Call option.
b.Put option.
c.Out-of-the-money option.
d.Naked option.
e.Covered option.
Leasing is typically a financing decision and not a capital budgeting decision. The
decision to acquire the asset is a “done deal” before the lease analysis begins. Therefore,
in a lease analysis, we are concerned simply with whether to finance the asset with a
lease or with a loan.
a.True
b.False