FIN 548 Test 1 | Course Paper

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Assume that long-term corporate bonds had an average return of 5.3 percent and a

standard deviation of 9.3 percent for a 30-year period. What range of returns would you

expect to see on these bonds 68 percent of the time?

A. -4.0 percent to 14.6 percent

B. -4.0 percent to 22.9 percent

C. -11.3 percent to 14.6 percent

D. -11.3 percent to 17.4 percent

E. -11.3 percent to 22.9 percent

Which of the following practices will reduce a firms collection float?I. Installing a

lockbox systemII. Utilizing zero-balance accountsIII. Depositing checks daily rather

than weeklyIV. Reducing the processing delay by one day

A. I and III only

B. II and IV only

C. I, II, and III only

D. I, III, and IV only

E. I, II, III, and IV

Which one of the following is an intended result of a lockup agreement?

A. Temporarily supporting the market price of IPO shares

B. Maximizing the return to a firms original owners from an initial spike in the market

price of IPO shares

C. Increasing the volume of trading for shares of a recent IPO

D. Limiting the price volatility of recent IPO shares caused by day trading

E. Guaranteeing a minimum number of sold shares for an IPO

Which one of the following terms denotes for certain that a bond is unsecured?

A. Debenture

B. Bearer form

C. Call provision

D. Sinking fund

E. Blanket mortgage

Christmas Ornaments, Inc. is an all-equity firm with a total market value of $386,000

and 15,000 shares of stock outstanding. Management is considering issuing $75,000 of

debt at an interest rate of 8 percent and using the proceeds on a stock repurchase. As an

all-equity firm, management believes the earnings before interest and taxes (EBIT) will

be $31,000 if the economy is normal, $12,000 if it is in a recession, and $37,000 if the

economy booms. Ignore taxes. What will the EPS be if the economy falls into a

recession and the firm maintains its all-equity status?

A. $0.78

B. $0.80

C. $1.21

D. $1.67

E. $2.07

Scott placed an order with his broker to purchase 1,000 shares of each of three IPOs

that are being released this month. Each IPO has an offer price of $24 a share. The

number of shares allocated to Scott along with the closing stock price at the end of the

first day of trading for each stock, are as follows:

What is Scotts total profit or loss on these three stocks as of the end of the first day of

trading for each stock?

A. -$380

B. -$240

C. -$10

D. $220

E. $450

Which one of the following statements is correct?

A. NASDAQ has more listed stocks than does the NYSE.

B. The NYSE is a dealer market.

C. NASDAQ is an auction market.

D. NASDAQ has the most stringent listing requirements of any U.S. exchange.

E. The trading floor for NASDAQ is located in Chicago.

Which one of the following characteristics applies to commercial paper?

A. Maturities of 270 days or more

B. Offerings registered with the SEC

C. Interest rates higher than comparable bank loans

D. Issued directly by large-sized firms

E. Issued primarily by low-rated firms

Which one of the following reports will tell me the percentage of accounts receivable

that are delinquent by 90 days or more?

A. Cash budget

B. 5Cs of credit

C. Credit analysis

D. Aging schedule

E. Credit scoring report

Woodcrafters requires an average accounting return (AAR) of at least 17 percent on all

fixed asset purchases. Currently, it is considering some new equipment costing

$178,000. This equipment will have a four-year life over which time it will be

depreciated on a straight-line basis to a zero book value. The annual net income from

this equipment is estimated at $10,100, $10,300, $17,900, and $19,600 for the four

years. Should this purchase occur based on the accounting rate of return? Why or why

not?

A. Yes, because the AAR is less than 17 percent

B. Yes, because the AAR is equal to 17 percent

C. Yes, because the AAR is greater than 17 percent

D. No, because the AAR is less than 17 percent

E. No, because the AAR is greater than 17 percent

A firm has a return on equity of 12.4 percent according to the dividend growth model

and a return of 18.7 percent according to the capital asset pricing model. The market

rate of return is 13.5 percent. What rate should the firm use as the cost of equity when

computing the firms weighted average cost of capital (WACC)?

A. 12.4 percent because it is lower than 18.7 percent

B. 18.7 percent because it is higher than 12.4 percent

C. The arithmetic average of 12.4 percent and 18.7 percent

D. The arithmetic average of 12.4 percent, 13.5 percent, and 18.7 percent

E. 13.5 percent

A firm uses its weighted average cost of capital to evaluate the proposed projects for all

of its varying divisions. By doing so, the firm:

A. automatically gives preferential treatment in the allocation of funds to its riskiest

division.

B. encourages the division managers to recommend only their most conservative

projects.

C. maintains the current risk level and capital structure of the firm.

D. automatically maximizes the total value created for its shareholders.

E. allocates capital funds evenly among its divisions.

Given the following partial stock quote, what is the expected annual dividend?

A. $0.99

B. $1.08

C. $1.13

D. $1.28

E. $1.33

Mercier United has net income of $128,470. There are currently 32.67 days sales in

receivables. Total assets are $1,419,415, total receivables are $122,306, and the

debt-equity ratio is 0.40. What is the return on equity?

A. 11.42 percent

B. 12.67 percent

C. 13.09 percent

D. 13.48 percent

E. 15.03 percent

The variance is the average squared difference between which of the following?

A. Actual return and average return

B. Actual return and (average return/N – 1)

C. Actual return and the real return

D. Average return and the standard deviation

E. Actual return and the risk-free rate

Which one of the following terms refers to the termination of a firm as a going

concern?

A. Insolvency

B. Reorganization

C. Chapter 11 bankruptcy

D. Prepack

E. Liquidation

Bama Entertainment has common stock with a beta of 1.46. The market risk premium is

9.3 percent and the risk-free rate is 4.6 percent. What is the expected return on this

stock?

A. 16.31 percent

B. 16.67 percent

C. 17.40 percent

D. 18.03 percent

E. 18.13 percent

Explain what is meant when a news broadcaster states “the value of the dollar fell today

relative to all currencies.” How will this change in value affect U.S. imports and

exports?

Assume a firm follows a policy of using its weighted average cost of capital as the

required return for all of its proposed projects. Evaluate this policy. How will this policy

affect the overall risk level of the firm over time?

You are trying to compare the financial performance of your firm to that of similar

firms. What are some of the key problems you might encounter in doing this

comparison?

What is the significance of the slope of the security market line? Should investors

prefer a steeper slope or a flatter slope?

Explain the primary difference between a Chapter 7 bankruptcy and a Chapter 11

bankruptcy.

Assume a fellow student made these statements during a class discussion: “Bankruptcy

costs affect a firm only if the firm files a bankruptcy petition with the court. Therefore,

the static theory of capital structure only applies to bankrupt firms.” Write a response to

your fellow student that either supports or contradicts that students statements.

Identify and briefly explain three ways in which a firm can finance its short-term assets.

Explain the Rule of 72