Fin 798 Quiz 1 | Course Paper

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Which of the following will increase the cost of equity for a firm with a beta of 1.1?I.

Decrease in the securitys betaII. Decrease in the market risk premiumIII. Decrease in

the risk-free rateIV. Increase in the risk-free rate

A. II only

B. III only

C. I and II only

D. II and III only

E. I and IV only

A firm has a cost of debt of 7.5 percent and a cost of equity of 16.2 percent. The

debt-equity ratio is 0.45. There are no taxes. What is the firms weighted average cost of

capital?

A. 11.75 percent

B. 12.29 percent

C. 13.50 percent

D. 14.47 percent

E. 16.20 percent

The term structure of interest rates is affected by which of the following?I. Interest rate

risk premiumII. Real rate of interestIII. Default risk premiumIV. Inflation premium

A. I and II only

B. II and III only

C. I, III, and IV only

D. I, II, and IV only

E. I, II, III, and IV

Erins purchases from suppliers in a quarter are equal to 67 percent of the next quarters

forecast sales. The payables period is 60 days. Wages, taxes, and other expenses are 30

percent of sales, and interest and dividends are $90 per quarter. No capital expenditures

are planned. Projected quarterly sales are:

Sales for the first quarter of the following year are projected at $1,510. What is the

amount of the firms total cash outlay for the third quarter?

A. $1,990

B. $1,420

C. $1,480

D. $1,530

E. $1,550

Cookies and Cream has 9,000 shares of stock outstanding at a market price of $14.65

per share. What will the price per share be after the firm declares a 12 percent stock

dividend? Ignore taxes and market imperfections.

A. $12.24

B. $13.08

C. $14.65

D. $14.96

E. $15.00

Venture capital is most apt to be the source of funding for which one of the following?

A. Bankruptcy reorganization

B. Global expansion for an established firm

C. New, high-risk venture

D. Seasonal production

E. Daily operations for an established, profitable firm

Katies Dinor spent $84,000 to refurbish its current facility. The firm borrowed 80

percent of the refurbishment cost at 9.2 percent interest for five years. What is the

amount of each monthly payment?

A. $1,108.91

B. $1,282.16

C. $1,333.33

D. $1,401.49

E. $1,487.06

You live in the U.S. and want to invest in a Chinese company, which will be referred to

as “CC,” because you believe its stock is uniquely positioned to be unusually profitable

over the next five years. However, you do not have direct access to the Chinese

financial markets. You may be able to indirectly invest in CC by purchasing which one

of the following?

A. Swap

B. ADR

C. Gilt

D. Bulldog bond

E. Samurai bond

Valerie bought 200 shares of Able stock today. Able stock has been trading for some

time on the NYSE. Valeries purchase occurred in which market?

A. Dealer market

B. Over-the-counter market

C. Secondary market

D. Primary market

E. Tertiary market

You and your sister are planning a large anniversary party 3 years from today for your

parents 50th wedding anniversary. You have estimated that you will need $4,500 for this

party. You can earn 2.5 percent compounded annually on your savings. How much

would you and your sister have to deposit today in one lump sum to pay for the entire

party?

A. $4,076.55

B. $4,178.70

C. $4,308.16

D. $4,334.90

E. $4,368.81

The net present value profile illustrates how the net present value of an investment is

affected by which one of the following?

A. Projects initial cost

B. Discount rate

C. Timing of the projects cash inflows

D. Inflation rate

E. Real rate of return

Professional Properties is considering remodeling the office building it leases to

Heartland Insurance. The remodeling costs are estimated at $3.4 million. If the building

is remodeled, Heartland Insurance has agreed to pay an additional $820,000 a year in

rent for the next five years. The discount rate is 15 percent. What is the benefit of the

remodeling project to Professional Properties?

A. -$651,233

B. -$489,072

C. $5,214

D. $128,399

E. $311,417

Over the past four years, large-company stocks and U.S. Treasury bills have produced

the returns stated below. During this period, inflation averaged 2.8 percent. Given this

information, the average real rate of return on large-company stocks was ___ percent as

compared to _____ percent for Treasury bills.

A. 6.47; 0.92

B. 6.47; 1.08

C. 7.98; 0.92

D. 7.98; 1.08

E. 7.98; 1.22

Which of the following duties belong to the underwriters of a firm commitment

securities offer?I. Duty to offer the Green Shoe provision to all investors who buy at the

offer priceII. Duty to set the offer priceIII. Duty to distribute the offered sharesIV. Duty

to purchase any unsold shares

A. I and III only

B. II and IV only

C. II, III, and IV only

D. I, II, and III only

E. I, II, III, and IV

Piedmont Hotels is an all-equity firm with 60,000 shares of stock outstanding. The

stock has a beta of 1.27 and a standard deviation of 13.8 percent. The market risk

premium is 9.1 percent and the risk-free rate of return is 4.5 percent. The company is

considering a project that it considers riskier than its current operations so it wants to

apply an adjustment of 1 percent to the projects discount rate. What should the firm set

as the required rate of return for the project?

A. 12.54 percent

B. 13.92 percent

C. 15.39 percent

D. 17.06 percent

E. 17.33 percent

Jensen Shipping has four open seats on its board of directors. How many shares will a

shareholder need to control to ensure that his or her candidate is elected to the board

given the fact that the firm uses straight voting? Assume one share equals one vote.

A. 20 percent of the shares plus one vote

B. 25 percent of the shares plus one vote

C. one-third of the shares plus one vote

D. 50 percent of the shares plus one vote

E. 51 percent of the shares plus one vote

A prepack:

A. guarantees full payment to all creditors but lengthens the time span of the debt.

B. is the joint filing of both a bankruptcy filing and a creditor-approved reorganization

plan.

C. protects the interests of both the current creditors and the existing shareholders.

D. applies only if a firm files under Chapter 7 of the bankruptcy code.

E. extends the time that a firm is protected by the bankruptcy process.

How is the stated value of a preferred stock utilized?

Ed has to choose between Project A and Project B, which are mutually exclusive.

Project A has an initial cost of $28,000 and an internal rate of return of 16 percent.

Project B has an initial cost of $47,000 and an internal rate of return of 12 percent.

Explain why the selection of the project with the higher internal rate of return could be

a faulty decision.

Assume a firm has both a controller and a treasurer. Identify the types of responsibilities

each should have and explain why their duties should be separated as you suggest.

Explain the difference between computing the value of a zero growth dividend-paying

stock and computing the value of a constant growth dividend-paying stock.

What is the difference between a tender offer and a targeted repurchase?

Identify one primary strength and one primary weakness for each of the following

methods of investment analysis:Net present value:Strength:Weakness:Internal rate of

return:Strength:Weakness:Profitability

index:Strength:Weakness:Payback:Strength:Weakness:Average accounting

return:Strength:Weakness:

Identify the cash flows that occur between a firm and its shareholders and explain how

each of these cash flows affects the cash flow to stockholders.

Explain the time value of money principle and also identify the underlying assumption

of that principle.