Fin 541 Quiz 3 1 Suppose you could

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1) Suppose you could buy 1,320 South Korea won or 78 Pakistan rupees last year for

$1. Today, $1 will buy you 1,318 won or 80 rupees. Which one of the following

occurred over the past year?

A.The dollar appreciated against the won

B.The dollar depreciated against the rupee

C.The dollar appreciated against both the won and the rupee

D.The won depreciated against the dollar

E.The rupee depreciated against the dollar

2) The Auto Shop is buying some new equipment at a cost of $218,900. This equipment

will be depreciated on a straight line basis to a zero book value its 8-year life. The

equipment is expected to generate net income of $36,000 a year for the first four years

and $22,000 a year for the last four years. What is the average accounting rate of

return?

A.15.48 percent

B.17.76 percent

C.18.09 percent

D.23.72 percent

E.26.50 percent

3) The Pancake House pays a constant annual dividend of $1.25 per share. How much

are you willing to pay for one share if you require a 15 percent rate of return?

A.$7.86

B.$8.33

C.$10.87

D.$11.04

E.$11.38

4) Weston Mines has a cost of equity of 19.8 percent, a pre-tax cost of debt of 9.4

percent, and a return on assets of 17.1 percent. Ignore taxes. What is the debt-equity

ratio?

A.0.35

B.0.41

C.0.47

D.0.56

E.0.62

5) Which one of the following dates is the date on which the board of directors votes to

pay a dividend?

A.Record date

B.Declaration date

C.Ex-dividend date

D.Payment date

E.Settlement date

6) The December 31, 2009 balance sheet of Suzette’s Market showed long-term debt of

$638,100 and the December 31, 2010 balance sheet showed long-term debt of

$574,600. The 2010 income statement showed an interest expense of $42,300. What

was the firm’s cash flow to creditors during 2010?

A.$21,200

B.$26,700

C.$54,900

D.$102,400

E.$105,800

7) Friendly Finance is offering a special on one-year loans. The company will loan you

$5,000 today in exchange for one payment of $5,700 one year from now. What is the

APR on this loan?

A.13.67 percent

B.14.00 percent

C.14.40 percent

D.14.93 percent

E.15.04 percent

8) The next dividend payment by Swenson, Inc., will be $1.80 per share. The dividends

are anticipated to maintain a 5.5 percent growth rate, forever. If the stock currently sells

for $48.50 per share, what is the required return?

A.8.20 percent

B.8.88 percent

C.9.21 percent

D.9.74 percent

E.10.02 percent

9) Which one of the following is the primary determinant of an investment’s cost of

capital?

A.Life of investment

B.Initial cash outlay

10) Blackwell Ink is losing significant market share and thus its managers have decided

to decrease the firm’s annual dividend. The last annual dividend was $0.90 a share but

all future dividends will be decreased by 5 percent annually. What is a share of this

stock worth today at a required return of 15 percent?

A.$4.07

B.$4.28

C.$4.49

D.$4.72

E.$4.95

11) The call premium is the amount by which the:

A.market price exceeds the par value

B.market price exceeds the call price

C.face value exceeds the market price

D.call price exceeds the par value

E.call price exceeds the market price

12) Last year, Thomas invested $38,000 in Oil Town stock, $11,000 in long-term

government bonds, and $8,000 in U.S. Treasury bills. Over the course of the year, he

earned returns of 12.1 percent, 6.3 percent, and 3.9 percent, respectively. What was the

nominal risk premium on Oil Town’s stock for the year?

A.1.9 percent

B.4.7 percent

C.5.8 percent

D.7.6 percent

E.8.2 percent

13) The computation of which one of the following requires assigning every proposed

investment to a particular risk class?

A.Pure play cost of capital

B.Cost of equity

C.Aftertax cost of debt

D.WACC

E.Subjective cost of capital

14) Given the following information, what is the standard deviation of the returns on a

portfolio that is invested 35 percent in both stocks A and C, and 30 percent in stock B?

A.2.77 percent

B.4.13 percent

C.6.67 percent

D.8.91 percent

E.9.36 percent

15) Which one of the following has the narrowest distribution of returns for the period

1926-2008?

A.Long-term corporate bonds

B.Long-term government bonds

C.Intermediate-terms government bonds

D.Large-company stocks

E.Small-company stocks

16) Selected financial data for Link, Inc. follows: ($ in thousands)

Assume a 365-day year for your calculations. The days’ sales in cash at the end of 2012

is:

A.24.3

B.28.8

C.35.7

D.219.6

E.None of the above

17) Which one of the following reduces the number of shares outstanding but does not

change a firm’s total equity?

A.Stock split

B.Distribution

C.Reverse split

D.Liquidation

E.Redemption

18) Currently, you owe the bank $9,800 for a car loan. The loan has an interest rate of

7.75 percent and monthly payments of $310. Your financial situation recently changed

such that you can no longer afford these payments. After talking with your banker and

explaining the situation, he has agreed to lower the monthly payments to $225 while

keeping the interest rate at 7.75 percent. How much longer will it take you to repay this

loan than you had originally planned?

A.12.29 months

B.14.47 months

C.15.84 months

D.17.19 months

E.19.90 months

19) If shareholders are granted a preemptive right they will:

A.be given the choice of receiving dividends either in cash or in additional shares of

stock

B.be paid dividends prior to the preferred shareholders during the preemptive period

C.be entitled to two votes per share of stock

D.be able to choose the timing and amount of any future dividends

E.have priority in the purchase of any newly issued shares

20) Western States Life Insurance offers a perpetuity that pays annual payments of

$10,000. This contract sells for $275,000 today. What is the interest rate?

A.3.64 percent

B.3.87 percent

C.4.10 percent

D.4.21 percent

E.4.39 percent

21) If you accept a job as a domestic security analyst for a brokerage firm, you are most

likely working in which one of the following financial areas?

A.international finance

B.private placements

C.corporate finance

D.capital management

E.investments

22) Kelsey International declared a dividend on Friday, November 13, that is payable

on Friday, December 4, to holders of record on Monday, November 30. What is the

latest date that you can purchase this stock if you wish to receive this dividend? Assume

there are no banking holidays within this period of time.

A.Tuesday, November 24

B.Wednesday, November 25

C.Thursday, November 26

D.Friday, November 27

E.Monday, November 30

23) Suppose your company needs to raise $28 million and you want to issue 15-year

bonds for this purpose. Assume the required return on your bond issue will be 8 percent,

and you’re evaluating two issue alternatives: an 8 percent annual coupon and a zero

coupon bond. Your company’s tax rate is 35 percent. In 15 years, what will your

company’s repayment be if you issue the coupon bonds? What if you issue the zeroes?

(Assume annual compounding on the zero coupon bond).

A.$28.00 million; $122.12 million

B.$28.00 million; $88.82 million

C.$30.00 million; $122.12 million

D.$30.24 million; $88.82 million

E.$30.24 million; $122.12 million

24) Which one of the following must be significantly eliminated if interest rate parity is

to exist?

A.Absolute purchasing power parity

B.Short-run exposure to exchange rate risk

C.Covered interest arbitrage opportunities

D.Relative purchasing power parity

E.Translation exposure

25) Which of the following characteristics are most commonly associated with

corporate bonds issued in the U.S.?

I. registered form

II. bearer form

III. quarterly coupon payments

IV. semiannual coupon payments

A.I and III only

B.I and IV only

C.II and III only

D.II and IV only

E.III only