Subject: Business / Finance
1. Which of the following statements is CORRECT?a. One of the disadvantages of incorporating a business is that the owners then become subject to liabilities in the event the firm goes bankrupt.
b. Sole proprietorships are subject to more regulations than corporations.
c. In any type of partnership, every partner has the same rights, privileges, and liability exposure as every other partner.
d. Sole proprietorships and partnerships generally have a tax advantage over many corporations, especially large ones.
e. Corporations of all types are subject to the corporate income tax.2. The primary operating goal of a publicly-owned firm interested in serving its stockholders should be toa. Maximize the stock price per share over the long run, which is the stock’s intrinsic value.
b. Maximize the firm’s expected EPS.
c. Minimize the chances of losses.
d. Maximize the firm’s expected total income.
e. Maximize the stock price on a specific target date.3. How many years would it take $50 to triple if you invested it in a bank that pays 5.75% per year?4. You want to buy a new sports car 5 years from now, and you plan to save $6,700 per year, beginning immediately. You will make 5 deposits in an account that pays 6.50% interest. Under these assumptions, how much will you have 5 years from today?5. What’s the present value of a 4-year ordinary annuity of $4,275 per year plus an additional $3,500 at the end of Year 4 if the interest rate is 8%?6. What’s the future value of $3,500 after 10 years if the appropriate interest rate is 7.25%, compounded semiannually?7. An investment promises the following cash flow stream: $3,500 at Time 0; $1,750 at the end of Year 1 (or at t = 1); $3,450 at the end of Year 2; and $5,200 at the end of Year 3. At a discount rate of 7.0%, what is the present value of the cash flow stream?8. Suppose you are buying your first house for $300,000, and are making a $60,000 down payment. You have arranged to finance the remaining amount with a 30-year, monthly payment, amortized mortgage at a 3.15% nominal interest rate. What will your equal monthly payments be?9. You plan to borrow $75,000 at a 7% annual interest rate. The terms require you to amortize the loan with 10 equal end-of-year payments. How much interest would you be paying in Year 5?10. You just deposited $4,000 in a bank account that pays a 5.50% nominal interest rate, compounded quarterly. If you also add another $10,000 to the account one year (12 months) from now and another $7,500 to the account two years from now, how much will be in the account three years (12 quarters) from now?11. Your sister turned 35 today, and she is planning to save $8,000 per year for retirement, with the first deposit to be made one year from today. She will invest in a mutual fund that will provide a return of 7.0% per year. She plans to retire 30 years from today, when she turns 65, and she expects to live for 25 years after retirement, to age 90. Under these assumptions, how much can she spend in each year after she retires? Her first withdrawal will be made at the beginning of her first retirement year.12. You anticipate that you will need $3,000,000 when you retire 40 years from now. You plan to make 40 deposits, beginning today, in a bank account that will pay 8% interest, compounded annually. You expect to receive annual raises of 4%, so you will increase the amount you deposit each year by 4%. (That is, your 2nd deposit will be 4% greater than your first, the 3rd will be 4% greater than the 2nd, etc.) How much must your 1st deposit be if you are to meet your goal?13. Which of the following factors could explain why Dellva Energy had a negative net cash flow last year, even though the cash on its balance sheet increased?a. The company sold a new issue of bonds.
b. The company made a large investment in new plant and equipment.
c. The company paid a large dividend.
d. The company had high amortization expenses.
e. The company repurchased 20% of its common stock.14. Medium Size Retailers, Inc. (MSR) has EBIT of $245,000, interest expense of $25,000, dividend income of $20,000, short term capital gains of $12,000, and long term capital losses of $16,000. What is MSR’s income tax liability?15. Frederickson Office Supplies recently reported $16,500 of sales, $7,750 of operating costs other than depreciation, and $1,525 of depreciation. The company had no amortization charges and no non-operating income. It had $10,000 of bonds outstanding that carry a 9.0% interest rate, and its federal-plus-state income tax rate was 40%. How much was the firm’s taxable income, or earnings before taxes (EBT)?16. Over the years, Janjigian Corporation’s stockholders have provided $36,750 of capital, partly when they purchased new issues of stock and partly when they allowed management to retain some of the firm’s earnings. The firm now has 2,250 shares of common stock outstanding, and it sells at a price of $40.00 per share. How much value has Janjigian’s management added to stockholder wealth over the years, i.e., what is Janjigian’s MVA?17. Zumbahlen Inc. has the following balance sheet. How much total net operating capital does the firm have?Cash $ 20.00 Accounts payable $ 40.00
Short-term investments 65.00 Accruals 30.00
Accounts receivable 40.00 Notes payable 50.00
Inventory 60.00 Current liabilities $120.00
Current assets $185.00 Long-term debt 140.00
Gross fixed assets $225.00 Common stock 30.00
Accumulated deprec. 60.00 Retained earnings 60.00
Net fixed assets $165.00 Total common equity $ 90.00
Total assets $350.00 Total liab. & equity $350.0018. HHH Inc. reported $17,500 of sales and $7,025 of operating costs (including depreciation). The company had $18,750 of investor-supplied operating capital, the weighted average cost of that capital (the WACC) was 12.5%, and the federal-plus-state income tax rate was 25%. What was HHH’s Economic Value Added (EVA), i.e., how much value did management add to stockholders’ wealth during the year?19. Wells Water Systems recently reported $10,550 of sales, $4,250 of operating costs other than depreciation, and $1,300 of depreciation. The company had no amortization charges, it had $3,250 of outstanding bonds that carry a 6.75% interest rate, and its federal-plus-state income tax rate was 28%. In order to sustain its operations and thus generate sales and cash flows in the future, the firm was required to spend $975 to buy new fixed assets and to invest $350 in net operating working capital. How much free cash flow did Wells generate?20. Amram Company’s current ratio is 1.9. Considered alone, which of the following actions would reduce the company’s current ratio?a. Borrow using short-term notes payable and use the proceeds to reduce accruals.
b. Borrow using short-term notes payable and use the proceeds to reduce long-term debt.
c. Use cash to reduce accruals.
d. Use cash to reduce short-term notes payable.
e. Use cash to reduce accounts payable.21. Northwest Lumber had a net profit margin of 4.75%, a total assets turnover of 2.7, and an equity multiplier of 1.55. What was the firm’s ROE?22. An investor is considering starting a new business. The company would require $775,000 of assets, and it would be financed entirely with common stock. The investor will go forward only if she thinks the firm can provide a 21.5% return on the invested capital, which means that the firm must have an ROE of 22.5%. How much net income must be expected to warrant starting the business?23. Helmuth Inc.’s latest net income was $1,450,000, and it had 235,000 shares outstanding. The company wants to pay out 55% of its income as dividends. What dividend per share should it declare?24. Heaton Corp. sells on terms that allow customers 45 days to pay for merchandise. Its sales last year were $675,000, and its year-end receivables were $110,000. If its DSO is less than the 45-day credit period, then customers are paying on time. Otherwise, they are paying late. By how much are customers paying early or late? Base your answer on this equation: DSO – Credit period = days early or late, and use a 365-day year when calculating the DSO. A positive answer indicates late payments, while a negative answer indicates early payments.25. Last year Mason Inc. had a total assets turnover of 2.55 and an equity multiplier of 1.95. Its sales were $235,000 and its net income was $9,549. The CFO believes that the company could have operated more efficiently, lowered its costs, and increased its net income by $6,100 without changing its sales, assets, or capital structure. Had it cut costs and increased its net income in this amount, by how much would the ROE have changed?26. Muscarella Inc. has the following balance sheet and income statement data:Cash $ 14,000 Accounts payable $ 47,000
Receivables 60,000 Other current liabilities 28,000
Inventories 220,000 Total CL $ 75,000
Total CA $294,000 Long-term debt 70,000
Net fixed assets 126,000 Common equity 275,000
Total assets $420,000 Total liab. and equity $420,000
Net income $ 14,000The new CFO thinks that inventories are excessive and could be lowered sufficiently to cause the current ratio to equal the industry average, 2.95, without affecting either sales or net income. Assuming that inventories are sold off and not replaced to get the current ratio to the target level, and that the funds generated are used to buy back common stock at book value, by how much would the ROE change?27. Stock X has a beta of 0.5 and Stock Y has a beta of 1.5. Which of the following statements must be true, according to the CAPM?a. If you invest $50,000 in Stock X and $50,000 in Stock Y, your 2-stock portfolio will have a beta significantly lower than 1.0, provided the returns on the two stocks are not perfectly correlated.
b. Stock Y’s return during the coming year will be higher than Stock X’s return.
c. If expected inflation increases but the market risk premium is unchanged, the required returns on the two stocks will increase by the same amount.
d. Stock Y’s return has a higher standard deviation than Stock X.
e. If the market risk premium declines, but the risk-free rate is unchanged, Stock X will have a larger decline in its required return than will Stock Y.28. Rick Kish has a $120,000 stock portfolio. $45,000 is invested in a stock with a beta of 0.95 and the remainder is invested in a stock with a beta of 2.45. These are the only two investments in his portfolio. What is his portfolio’s beta?29. ABC Company’s stock has a beta of 1.75, the risk-free rate is 2.25%, and the market risk premium is 6.50%. What is ABC’s required rate of return using CAPM?30. Ripken Iron Works believes the following probability distribution exists for its stock. What is the standard deviation of return on the company’s stock?State of the Economy Probability of State Occurring Stock’s Expected Return
Boom 0.30 32%
Normal 0.50 12%
Recession 0.20 -9%31. Joel Foster is the portfolio manager of the Go Anywhere Fund, a $3 million hedge fund that contains the following stocks. The required rate of return on the market is 9.00% and the risk-free rate is 3.00%. What rate of return should investors expect (and require) on this fund?Stock Amount Beta
A $1,075,000 1.20
B 675,000 1.50
C 750,000 3.00
D 500,000 0.75
$3,000,00032. Hazel Morrison, a mutual fund manager, has a $60 million portfolio with a beta of 1.00. The risk-free rate is 3.25%, and the market risk premium is 6.00%. Hazel expects to receive an additional $40 million, which she plans to invest in additional stocks. After investing the additional funds, she wants the fund’s required and expected return to be 15.00%. What must the average beta of the new stocks be to achieve the target required rate of return?33. Campbell’s father holds just one stock, East Coast Bank (ECB), which he thinks is a very low-risk security. Campbell agrees that the stock is relatively safe, but he wants to demonstrate that his father’s risk would be even lower if he were more diversified. Campbell obtained the following returns data shown for West Coast Bank (WCB). Both have had less variability than most other stocks over the past 5 years. Measured by the standard deviation of returns, by how much would his father’s historical risk have been reduced if he had held a portfolio consisting of 55% ECB and the remainder in WCB?Year ECB WCB
2010 20.00% 25.00%
2011 -10.00% 15.00%
2012 35.00% -5.00%
2013 -5.00% -10.00%
2014 15.00% 35.00%
34. Which of the following statements is CORRECT?a. If a coupon bond is selling at par, its current yield equals its yield to maturity.
b. If a coupon bond is selling at a discount, its price will continue to decline until it reaches its par value at maturity.
c. If interest rates increase, the price of a 10-year coupon bond will decline by a greater percentage than the price of a 10-year zero coupon bond.
d. If a bond’s yield to maturity exceeds its annual coupon, then the bond will trade at a premium.
e. If a coupon bond is selling at a premium, its current yield equals its yield to maturity.35. Garvin Enterprises’ bonds currently sell for $900. They have a 6-year maturity, an annual coupon of $70, and a par value of $1,000. What is their current yield?36. Sadik Inc.’s bonds currently sell for $1,250 and have a par value of $1,000. They pay a $115 annual coupon and have a 15-year maturity, but they can be called in 7 years at $1,115. What is their yield to call (YTC)?37. Moerdyk Corporation’s bonds have a 10-year maturity, a 5.50% coupon rate with interest paid semiannually, and a par value of $1,000. The nominal required rate of return on these bonds is 6.50%. What is the bond’s intrinsic value?38. Niendorf Corporation’s 5-year bonds yield 8.25%, and 5-year T-bonds yield 4.50%. The real risk-free rate is r* = 2.45%, the inflation premium for 5-year bonds is IP = 1.65%, the default risk premium for Niendorf’s bonds is DRP = 2.15% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t – 1) x 0.1%, where t = number of years to maturity. What is the liquidity premium (LP) on Niendorf’s bonds?39. A 25-year, $1,000 par value bond has a 7.75% coupon rate with interest paid semiannually. The bond currently sells for $900. What is the capital gains yield on these bonds?40. O’Brien Ltd.’s outstanding bonds have a $1,000 par value, and they mature in 20 years. Their nominal yield to maturity is 8.50%, they pay interest semiannually, and they sell at a price of $900. What is the bond’s nominal (annual) coupon interest rate?