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In recent years there has been a decreased emphasis on corporate ethics and governmental oversight. This is because, after the Enron and WorldCom debacles, stockholders are sure that the managers of publicly-owned companies will always be scrupulously honest in their dealings with their stockholders. True or false?, , ,True, ,False,, , Is it true or false that the following equation can be used to find the price of a stock that is expected to grow at a constant rate? P0 = D1/(rs ? g ). , , ,True, ,False, , , To do a sensitivity analysis, one would set up a spreadsheet model that calculates a project’s NPV, using as inputs unit sales, sale prices, fixed and variable costs, the tax rate, and the cost of capital. Input variables are then changed one at a time to determine their effects on the NPV. If small changes in the variables could result in a large decline in the NPV, then the project is judged to be relatively risky. True or false?, ,True, ,False, , , , , The opportunity to expand if a project is successful is a real option. This particular type of option is called an expansion (or growth) option. True or false? , , ,True, ,False, , , Financial statement analysis helps management and investors identify a firm’s strengths and weaknesses. Managers can then take actions to exploit the strengths and improve the weaknesses, and investors can analyze the data and make estimates regarding the firm’s future performance. True or False? , , ,True, ,False, , , A U.S. investor recently purchased a Japanese bond that pays interest and principal in yen. The investor plans to convert the yen-denominated payments into U.S. dollars and then spend the money in the United States. If the yen strengthens relative to the dollar, this would increase the bond’s effective return. True or False? , , ,True, ,False, , , Since betas are determined by market forces, a firm can do nothing to influence the size of its beta. True or false? , , ,True, ,False, , , Although cash flows rather than accounting income are useful for some purposes, in a capital budgeting analysis it is accounting income that should be discounted to find the NPV. True or false? , , ,True, ,False, , , Operating conditions can cause the actual capital structure to vary from the target. True or false? , , ,True, ,False, , , If a firm accepts all independent projects that have positive NPVs when evaluated at the projects’ own risk-adjusted costs of capital, then it is said to be subject to capital rationing. True or false? , , ,True, ,False, , , Which of the following statements is CORRECT? , , ,a. Only institutions, and not individuals, can engage in derivative market transactions. , ,b. If you purchase 100 shares of Disney stock from your brother-in-law, this is an example of a primary market transaction. , ,c. As they are generally defined, money market transactions involve debt securities with maturities of less than one year. , ,d. If Disney issues additional shares of common stock through an investment banker, this would be a secondary market transaction. , ,e. The NYSE is an example of an over-the-counter market. , , , Your bank account pays a 6% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT? , , ,a. The periodic rate of interest is 6% and the effective rate of interest is also 6%. , ,b. The periodic rate of interest is 3% and the effective rate of interest is 6%. , ,c. The periodic rate of interest is 1.5% and the effective rate of interest is 3%. , ,d. The periodic rate of interest is 1.5% and the effective rate of interest is greater than 6%. , ,e. The periodic rate of interest is 6% and the effective rate of interest is greater than 6%. , , , Which of the following statements is CORRECT? , , ,a. A sinking fund provision makes a bond more risky to investors at the time of issuance. , ,b. Sinking fund provisions sometimes turn out to adversely affect bondholders, and this is most likely to occur if interest rates decline after the bond was issued. , ,c. Sinking fund provisions never require companies to retire their debt; they only establish “targets” for the company to reduce its debt over time. , ,d. Most sinking funds require the issuer to provide funds to a trustee, who holds the money so that it will be available to pay off bondholders when the bonds mature. , ,e. If interest rates increase after a company has issued bonds with a sinking fund, the company will be less likely to buy bonds on the open market to meet its sinking fund obligation and more likely to call them in at the sinking fund call price. , , , Which of the following statements are CORRECT? , , ,a. The WACC as used in capital budgeting is an estimate of the cost of all the capital a company has raised to acquire its assets. , ,b. The percentage flotation cost associated with issuing new common equity is typically smaller than the flotation cost for new debt. , ,c. The WACC as used in capital budgeting would be simply the after-tax cost of debt if the firm plans to use only debt to finance its capital budget during the coming year. , ,d. The WACC as used in capital budgeting is an estimate of a company’s before-tax cost of capital. , ,e. There is an “opportunity cost” associated with using retained earnings, hence they are not “free.” , , , Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows. , , ,a. The NPVs of relatively risky projects should be found using relatively low WACCs. , ,b. A project’s NPV is generally found by compounding the cash inflows at the WACC to find the terminal value (TV), then discounting the TV at the IRR to find its PV. , ,c. If a project’s NPV is greater than zero, then its IRR must be less than the WACC. , ,d. The higher the WACC used to calculate the NPV, the lower the calculated NPV will be. , ,e. If a project’s NPV is greater than zero, then its IRR must be less than zero. , , , Nucor Corporation, a leading steel company, earned $8.26 per share in the year ending December 31, 2005, up from $0.73 in the year ending December 31, 2001. What was Nucor’s annual EPS growth rate from 2001 through 2005? (Hint: Note that growth is over 4 years. To see this, draw a time line and note that there are 4 intervals (years) between the two dates.) , , ,a. 67.94% , ,b. 71.51% , ,c. 75.28% , ,d. 79.24% , ,e. 83.41% , , , Suppose you just purchased 10 shares of GE stock in the open market. Would this be an example of a primary market or secondary market transaction? , , , , If inflation during the last 12 months was 3% and the interest rate during that period was 5%, what was the real rate of interest? , , ,a. 1% , ,b. 2% , ,c. 3% , ,d. 4% , ,e. 5% , , , Kholdy Enterprises’ outstanding bonds mature in 6 years, have a par value of $1,000, and make an annual coupon payment of $60. The market yield on the bond is currently 10%. What is the bond’s price? , , ,a. $825.79 , ,b. $908.37 , ,c. $967.55 , ,d. $1,000.00 , ,e. $1,089.93 , , , Suppose a 2-stock portfolio contains $40,000 of GE stock with a beta of 0.95 and $60,000 of GM stock with a beta of 1.65. What is the portfolio’s beta? , , ,a. 1.23 , ,b. 1.37 , ,c. 1.46 , ,d. 1.54 , ,e. 1.68 , , , Which of the following issues arise when the decision to distribute income is being made? , , ,a. How much should be distributed to stockholders? , ,b. Should the distribution be made as cash dividends or share repurchases? , ,c. Should the funds paid out from year to year be stable and dependable, or be allowed to vary with the firm’s cash flows and investment requirements? , ,d. All of these choices are issues that need to be considered when a firm is making its dividend policy decision. , ,e. None of these choices—these are all extraneous to the decision. , , , A convertible bond has a par value of $1,000 and a conversion price of $25. The stock currently trades for $20 a share. What is the bond’s conversion ratio t = 0? , , ,a. 25 , ,b. 33 , ,c. 40 , ,d. 50 , ,e. 75 , , , You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows. Which of the following would lower the calculated value of the investment? , , ,a. The cash flows are in the form of a deferred annuity, and they total to $100,000. You learn that the annuity lasts for only 5 rather than 10 years, hence that each payment is for $20,000 rather than for $10,000. , ,b. The discount rate increases. , ,c. The riskiness of the investment’s cash flows decreases., ,d. The total amount of cash flows remains the same, but more of the cash flows are received in the earlier years and less are received in the later years. , ,e. The discount rate decreases. , , , Which of the following statements is CORRECT? , , ,a. The present value of a 3-year, $150 annuity due will exceed the present value of a 3-year, $150 ordinary annuity. , ,b. If a loan has a nominal annual rate of 8%, then the effective rate can never be greater than 8%. , ,c. If a loan or investment has annual payments, then the effective, periodic, and nominal rates of interest will all be different. , ,d. The proportion of the payment that goes toward interest on a fully amortized loan increases over time. , ,e. An investment that has a nominal rate of 6% with semiannual payments will have an effective rate that is smaller than 6%. , , , Assume a project has normal cash flows. All else equal, which of the following statements is CORRECT? , , ,a. The present value of a 3-year, $150 annuity due will exceed the present value of a 3-year, $150 ordinary annuity. , ,b. If a loan has a nominal annual rate of 8%, then the effective rate can never be greater than 8%. , ,c. If a loan or investment has annual payments, then the effective, periodic, and nominal rates of interest will all be different. , ,d. The proportion of the payment that goes toward interest on a fully amortized loan increases over time. , ,e. An investment that has a nominal rate of 6% with semiannual payments will have an effective rate that is smaller than 6%., , , Zorn Corporation is deciding whether to pursue a restricted or relaxed working capital investment policy. The firm’s annual sales are expected to total $3,600,000, its fixed assets turnover ratio equals 4.0, and its debt and common equity are each 50% of total assets. EBIT is $150,000, the interest rate on the firm’s debt is 10%, and the tax rate is 40%. If the company follows a restricted policy, its total assets turnover will be 2.5. Under a relaxed policy its total assets turnover will be 2.2.,If the firm adopts a restricted policy, how much lower would its interest expense be than under the relaxed policy? , , ,a. $8,418 , ,b. $8,861 , ,c. $9,327 , ,d. $9,818 , ,e. $10,309 , , , Zorn Corporation is deciding whether to pursue a restricted or relaxed working capital investment policy. The firm’s annual sales are expected to total $3,600,000, its fixed assets turnover ratio equals 4.0, and its debt and common equity are each 50% of total assets. EBIT is $150,000, the interest rate on the firm’s debt is 10%, and the tax rate is 40%. If the company follows a restricted policy, its total assets turnover will be 2.5. Under a relaxed policy its total assets turnover will be 2.2.,What’s the difference in the projected ROEs under the restricted and relaxed policies? , , ,a. 1.2% , ,b. 1.5% , ,c. 1.8% , ,d. 2.16% , ,e. 2.59% , , , Zorn Corporation is deciding whether to pursue a restricted or relaxed working capital investment policy. The firm’s annual sales are expected to total $3,600,000, its fixed assets turnover ratio equals 4.0, and its debt and common equity are each 50% of total assets. EBIT is $150,000, the interest rate on the firm’s debt is 10%, and the tax rate is 40%. If the company follows a restricted policy, its total assets turnover will be 2.5. Under a relaxed policy its total assets turnover will be 2.2.,Assume now that the company believes that if it adopts a restricted policy, its sales will fall by 15% and EBIT will fall by 10%, but its total assets turnover, debt ratio, interest rate, and tax rate will all remain the same. In this situation, what’s the difference between the projected ROEs under the restricted and relaxed policies? , , ,a. 2.24% , ,b. 2.46% , ,c. 2.7% , ,d. 2.98% , ,e. 3.27% , , , Taggart Inc.’s stock has a 50% chance of producing a 25% return, a 30% chance of producing a10% return, and a 20% chance of producing a -28% return. What is the firm’s expected rate of return? , , , , Francis Inc.’s stock has a required rate of return of 10.25%, and it sells for $57.50 per share. The dividend is expected to grow at a constant rate of 6.00% per year. What is the expected year-end dividend, D1? , , ,a. $2.20 , ,b. $2.44 , ,c. $2.69, ,d. $2.96 , ,e. $3.25 , , , You were hired as a consultant to Quigley Company, whose target capital structure is 35% debt, 10% preferred, and 55% common equity. The interest rate on new debt is 6.50%, the yield on the preferred is 6.00%, the cost of retained earnings is 11.25%, and the tax rate is 40%. The firm will not be issuing any new stock. What is Quigley’s WACC? , , ,a. 8.15% , ,b. 8.48% , ,c. 8.82% , ,d. 9.17% , ,e. 9.54% , , , Assume that Kish Inc. hired you as a consultant to help estimate its cost of capital. You have obtained the following data: D0 = $0.90; P0 = $27.50; and g = 7.00% (constant). Based on the DCF approach, what is the cost of equity from retained earnings? , , ,a. 9.29% , ,b. 9.68% , ,c. 10.08% , ,d. 10.50% , ,e. 10.92% , , , Taggart Inc. is considering a project that has the following cash flow data. What is the project’s payback?, ,Year 0 1 2 3 ,Cash flows -$1,150 $500 $500 $500 , , ,a. 1.86 years , ,b. 2.07 years , ,c. 2.30 years , ,d. 2.53 years , ,e. 2.78 years , , , Suppose an Exxon Corporation bond will pay $4,500 ten years from now. If the going interest rate on safe 10-year bonds is 4.25%, how much is the bond worth today? , , , , Jazz World Inc. is considering a project that has the following cash flow and WACC data. What is the project’s NPV? Note that a project’s projected NPV can be negative, in which case it will be rejected., ,WACC: 14.00%,Year 0 1 2 3 4 ,Cash flows -$1,200 $400 $425 $450 $475 , , ,a. $41.25 , ,b. $45.84 , ,c. $50.93 , ,d. $56.59 , ,e. $62.88 , , , You plan to invest in securities that pay 8.0%, compounded annually. If you invest $5,000 today, how many years will it take for your investment to grow to $9,140.20? , , , , Which of the following assumptions is embodied in the AFN formula? , , ,a. All balance sheet accounts are tied directly to sales., ,b. Accounts payable and accruals are tied directly to sales. , ,c. Common stock and long-term debt are tied directly to sales., ,d. Fixed assets, but not current assets, are tied directly to sales., , , The Francis Company is expected to pay a dividend of D1 = $1.25 per share at the end of the year, and that dividend is expected to grow at a constant rate of 6.00% per year in the future. The company’s beta is 1.15, the market risk premium is 5.50%, and the risk-free rate is 4.00%. What is the company’s current stock price? , , , , Which of the following is NOT one of the steps taken in the financial planning process? , , ,a. Assumptions are made about future levels of sales, costs, and interest rates for use in the forecast. , ,b. The entire financial plan is reexamined, assumptions are reviewed, and the management team considers how additional changes in operations might improve results. , ,c. Projected ratios are calculated and analyzed. , ,d. Develop a set of projected financial statements., ,e. Consult with key competitors about the optimal set of prices to charge, i.e., the prices that will maximize profits for our firm and its competitors. , , , Mike Flannery holds the following portfolio:, Stock Investment Beta, A $150,000 1.40, B 50,000 0.80, C 100,000 1.00, D 75,000 1.20, Total $375,000,What is the portfolio’s beta? , , ,,

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