It is generally harder to transfer one’s ownership interest in a partnership than in a
corporation.
a.True
b.False
You just purchased a 12-year, $1,000 face value, zero coupon bond with a yield to
maturity of 9%. If your tax rate is 25%, how much in taxes will you have to pay at the
end of the first year of holding the bond?
a.$6.86
b.$7.22
c.$7.60
d.$8.00
e.$8.40
Scranton Shipyards has $20 million in total invested operating capital, and its WACC is
10%. Scranton has the following income statement:
What is Scranton’s EVA?
a.$400,000
b.$420,000
c.$441,000
d.$463,050
e.$486,203
A foreign currency will, on average, depreciate against the U.S. dollar at a percentage
rate approximately equal to the amount by which its inflation rate exceeds that of the
United States.
a.True
b.False
Exhibit 10.1
Assume that you have been hired as a consultant by CGT, a major producer of
chemicals and plastics, including plastic grocery bags, styrofoam cups, and fertilizers,
to estimate the firm’s weighted average cost of capital. The balance sheet and some
other information are provided below.
The stock is currently selling for $15.25 per share, and its noncallable $1,000 par value,
20-year, 7.25% bonds with semiannual payments are selling for $875.00. The beta is
1.25, the yield on a 6-month Treasury bill is 3.50%, and the yield on a 20-year Treasury
bond is 5.50%. The required return on the stock market is 11.50%, but the market has
had an average annual return of 14.50% during the past 5 years. The firm’s tax rate is
40%.
Refer to Exhibit 10.1. Which of the following is the best estimate for the weight of debt
for use in calculating the WACC?
a.18.67%
b.19.60%
c.20.58%
d.21.61%
e.22.69%
Which of the following statements is CORRECT?
a.A two-stock portfolio will always have a lower standard deviation than a one-stock
portfolio.
b.A portfolio that consists of 40 stocks that are not highly correlated with “the market”
will probably be less risky than a portfolio of 40 stocks that are highly correlated with
the market, assuming the stocks all have the same standard deviations.
c.A two-stock portfolio will always have a lower beta than a one-stock portfolio.
d.If portfolios are formed by randomly selecting stocks, a 10-stock portfolio will always
have a lower beta than a one-stock portfolio.
e.A stock with an above-average standard deviation must also have an above-average
beta.
For a 10-year deposit, what annual rate payable semiannually will produce the same
effective rate as 4% compounded continuously?
a.3.46%
b.3.65%
c.3.84%
d.4.04%
e.4.24%
Which of the following is a key benefit of using the degree of leverage concept in
financial analysis?
a.It allows decision makers a relatively clear assessment of the consequences of
alternative actions.
b.It establishes the optimal capital structure for the firm.
c.It shows how a given change in leverage will affect sales.
d.It identifies, with certainty, the future net income based upon sales projections about
the future.
e.None of the above statements is correct.
Companies HD and LD have the same total assets, sales, operating costs, and tax rates,
and they pay the same interest rate on their debt. Both firms finance using only debt and
common equity and total assets equal total invested capital. However, company HD has
a higher total debt to total capital ratio. Which of the following statements is
CORRECT?
a.Given this information, LD must have the higher ROE.
b.Company LD has a higher basic earning power ratio (BEP).
c.Company HD has a higher basic earning power ratio (BEP).
d.If the interest rate the companies pay on their debt is more than their basic earning
power (BEP), then Company HD will have the higher ROE.
e.If the interest rate the companies pay on their debt is less than their basic earning
power (BEP), then Company HD will have the higher ROE.
. What is the minimum price (or “floor” price) at which the Saunders’ bonds should sell?
a.$698.15
b.$734.89
c.$773.57
d.$814.29
e.$857.14
The annual rate of return on any given stock can be found as the stock’s dividend for the
year plus the change in the stock’s price during the year, divided by its
beginning-of-year price.
a.True
b.False
Carlyle Inc. is considering two mutually exclusive projects. Both require an initial
investment of $15,000 at t = 0. Project S has an expected life of 2 years with after-tax
cash inflows of $7,000 and $12,000 at the end of Years 1 and 2, respectively€. In
addition, Project S can be repeated at the end of Year 2 with no changes in its cash
flows. Project L has an expected life of 4 years. Each project has a WACC of 9%. What
is the equivalent annual annuity of the most profitable project?
a.$569.67
b.$792.34
c.$865.31
d.$1,522.18
e.$1,846.54
If a leased asset has a negative residual value, for example, as a result of a statutory
requirement to dispose of an asset in an environmentally sound manner, the lessee of
the asset could reasonably expect to pay a lower lease rate because the asset does not
have a positive residual value.
a.True
b.False
Which of the following statements is CORRECT?
a.If a stock has a beta of to 1.0, its required rate of return will be unaffected by changes
in the market risk premium.
b.The slope of the Security Market Line is beta.
c.Any stock with a negative beta must in theory have a negative required rate of return,
provided rRF is positive.
d.If a stock’s beta doubles, its required rate of return must also double.
e.If a stock’s returns are negatively correlated with returns on most other stocks, the
stock’s beta will be negative.
Given the following returns on Stock Q and “the market” during the last three years,
what is the difference in the calculated beta coefficient of Stock Q when Year 1 and
Year 2 data are used as compared to Year 2 and Year 3 data? (Hint: Think rise over run.)
a.9.17
b.9.63
c.10.11
d.10.62
e.11.15