***MUST SHOW ALL WORK AND ANY FORMULA\'S USED*** 1. Risk and return are key dete

Question

***MUST SHOW ALL WORK AND ANY FORMULA'S USED***

1. Risk and return are key determinants in share price. Increased risk, other things remaining constant, results in:


a. a lower share price

b. a higher share price

c. an unchanged share price

d. cannot be determined from the information given

Question 2 1 points Save
2. The longer the maturity of a Treasury security, the higher the risk.


True

False

Question 3 1 points Save
3. A(n) __________ yield curve reflects higher expected future rates of interest.


a. upward sloping

b. flat

c. downward sloping

d. linear

Question 4 1 points Save
4. Generally, an increase in risk will result in a(n) ________ required return or interest rate.


a. higher

b. lower

c. unchanged

d. reduction of the

Question 5 1 points Save
5. Common stock is generally:


a. more risky than treasury bonds

b. less risky than preferred stock

c. less risky than investment grade bonds

d. both b & c

Question 6 1 points Save
6. A "legal entity" which can sue, be sued, make and be party to contracts is:


a. sole proprietorship

b. partnership

c. receivership

d. corporation

Question 7 1 points Save
7. Managing the firm's assets includes all of the following except:


a. accounts receivable

b. cash

c. buildings

d. all of the above are assets

Question 8 1 points Save
8. Liabilities include all of the following except:


a. accounts payable

b. long-term debt

c. notes payable

d. all of the above are liabilities

Question 9 1 points Save
9. The primary goal of the financial manager is:


a. maximizing wealth

b. maximizing risk

c. maximizing profit

d. minimizing return

Question 10 1 points Save
10. Another name for corporate owners is:


a. stakeholder

b. agent

c. stockholder

d. customer

Question 11 1 points Save
11. If you were trying to determine the value of a stock in the secondary market using the Gordon, or Constant Growth, Model, all of the following would be needed except:


a. the last dividend paid

b. the net income for the year

c. the growth rate (for dividends or earnings)

d. all of the above are required for the model

Question 12 1 points Save
12. All of the following are examples of fixed assets except:


a. accounts receivable

b. land

c. a truck

d. an air conditioning system

Question 13 1 points Save
13. All of the following are measures of risk except:


a. beta

c. coefficient of variation

c. episilon

d. standard deviation

Question 14 1 points Save
14. If a firm's quick ratio is better than industry averages but its current ratio is worse, the probable problem is:


a. lack of cash flow

b. too much inventory

c. low return on equity

d. too many fixed assets

Question 15 1 points Save
15. Which of the following statements is NOT true about a normal probability distribution:


a. 95% of all outcomes lie within 2 standard deviations of the expected value

b. from the peak, the curves are mirror images of each other

c. greater risk is represented by a more peaked curve

d. half of the curves area lies to the right of the peak

Question 16 1 points Save
16. In theory, if one were to average the betas of all the stocks on the NYSE, the beta would be:


a. zero

b. 0.5

c. 1.0

d. in excess of 2,000

Question 17 1 points Save
17. If I were to use the Capital Asset Pricing Model to judge the required return on a stock, which piece of information would I find useful:


a. the current price of the stock

b. the stock's EPS

c. the prime interest rate

d. the yield on 90-day T-Bills

Question 18 1 points Save
18. Next month when the FED's Open Market Committee meets, some economists are predicting that they will raise interest rates because they fear inflation coming back into the U.S. economy. If the FED does this, the prices of existing bonds should:


a. go up

b. go down

c. stay the same

d. not be affected due to corporations "calling in" their lower interest rate bonds.

Question 19 1 points Save
19. The value of a bond is the present value of the


a. required rate of return

b. interest payments and maturity value

c. dividends paid

d. semi-annual interest payments made

Question 20 1 points Save
20. Another term for present value is discounting and for future value is compounding.


True

False

Question 21 1 points Save
21. The yield curve will be upward sloping if short term interest rates are higher than long term rates.


True

False

Question 22 1 points Save
22. All other things being equal, the higher a stock's growth rate


a. the higher the price

b. the lower the price

c. the higher the current ratio

d. the lower the current ratio

Question 23 1 points Save
23. Corporations are allowed to deduct all of the following expenses except


a. sales commissions

b. advertising expenses

c. interest

d. dividends

e. all of the above are deductible

Question 24 1 points Save
24. Everything else being equal, the longer the period of time, the lower the present value.


True

False

Question 25 1 points Save
25. Retained earnings on the balance sheet represent


a. net profit after tax

b. cash & marketable securities

c. net profits after tax minus preferred dividends (if any)

d. assets (buildings, trucks, etc) purchased with the excess cash

Question 26 1 points Save
26. "Common sized" financial statements can be useful when


a. industry ratios and reports are not available

b. comparing a small company with a larger one

c. you are limited with the amount of available space on a spreadsheet

d. controlling costs over time

e. both b & d

Question 27 1 points Save
27. The goal of the "DuPont System" of analysis is to


a. minimize costs

b. maximize return on equity

c. reduce excess inventory turnover

d. increase net profit margin (the "bottom line")

Question 28 1 points Save
28. MACRS is a form of depreciation used for


a. tax purposes

b. financial reports to shareholders

c. assets with a useful life of 10 years or more

d. non-profit organizations

Question 29 1 points Save
29. Publicly held corporations are those which are financed by the sale of treasury securities.


True

False

Question 30 1 points Save
30. The less fixed-cost debt or financial leverage a firm uses, the greater will be its risk and return.


True

False

Question 31 1 points Save
Questions 31-33 will refer to Figure 5.10 on page 256 of your text.
31. What would be the rate of return on the average stock?


a. 0%

b. 7%

c. 11%

d. 4%

Question 32 1 points Save
32. What would be the rate of return on 90-Day T-Bills?


a. 7%

b. 11%

c. 13%

d. Cannot be determined from the information given - you would require the beta.

Question 33 1 points Save
33. You are considering purchasing a stock with a beta of 0.5. All of the following returns would be possible except:


a. 9%

b. 3%

c. 10%

d. all of the returns would be possible

Question 34 1 points Save
34. For a given discount rate, the present value of a dollar increases with the passage of time.


True

False

Question 35 1 points Save
35. The future value of an initial deposit _______________________ both with increases in the interest rate and with the passage of time.


a. increases

b. decreases

c. first increases then decreases

d. first decreases then increases

Question 36 4 points Save
P 1. The year is 2009. Assuming your accountant actually knew what he/she was doing, how much depreciation would you take for forty thousand dollars of office furniture for the years in question. Use MACRS 7 year schedule and assume you bought the furniture January 22, 2007.



Question 37 5 points Save
p 2. What is the value of a corporate bond that has a par value of $1,000, an original maturity of 20 years, a coupon rate of 7% (pays interest annually), was issued two years ago, if bonds of similar characteristics are now being issued with 9% coupons?



Question 38 10 points Save
P 3.One of my favorite companies, Caskets-R-Us, famous for its line of "underground condos" had sales of $1,000,000 (it was a good year or a bad year depending on your point of view). The cost of the caskets (they import them from China) was $220,000 and the labor costs (they arrive in kit form) was $400,000. Sometime after July 1st, they purchased a machine to make simulated brass handles (I never said this was a class act) at a cost of $100,000. The equipment has a MACRS life expectancy (get it "life expectancy in a casket company!? oh, never mind) of 5 years. They revived $20,000 in dividends from stock it owns in Disney and paid out the following: common stock dividends: $35,000, preferred dividends: $10,000. They received $10,000 in interest from they invested in and lastly they needed to pay interest on their $500,000 of bonds they issued. Each bond has a par or maturity value and carries a 10% coupon. Boy, that's a lot of stuff in one problem!
OK, given the above :
a. what would be the depreciation expense for each of the first three years they own the new equipment?
b. How much will they pay in federal tax?



Question 39 6 points Save
p 4. You invest in a fast food restaurant on Rt. 13 in Dover, Delaware (Hey, it seemed like a good idea at the time). You were required to invest $300,000. One year passes. You decide to sell your business. During the year you were paid $25,000 as you % of the profits and you sell the business for $310,000. What was your return on your investment (note;: it would be a good idea to use a formula from chapter 5 to solve this!)



Question 40 10 points Save
p 5. For this problem turn to pp 98 & 99 in your text - the Chapter 2 Case - you'll be using the income statement and balance sheet for Martin Manufacturing to answer the following 5 part question.
a. what was the accumulated depreciation for 2009?
b. what was their inventory turnover ratio for 2009?
c. was their debt ratio for 2009 the same, better or worse than 2008? Show me your ratio calculations to support your position.
d. what was their "TIE" (times interest earned) for 2009?
e. how many shares of common stock did they sell in 2009?



Question 41 5 points Save
P 6. If I want to accumulate $15,000 in 6 years by making equal end-of-year deposits into an account paying 7% interest, how large should those deposits be?



Question 42 5 points Save
P 7. A friend promises to pay you $1,000 two years from now if you lend him $800 today. What annual rate of interest is your friend offering?


Question 43 10 points Save
P 8. Given the following: the Prime is 8%, the FED funds rate is 6%, 90 day T-Bills are yielding 5%, the average return on all stocks traded on the NYSE is 13%:
a. what would be the required rate of return (RRR) on a stock with a beta equal to the market?
b. what would be the RRR on a stock twice as volatile as the market?


Question 44 5 points Save
P 9. What would the approximate price of a stock be if an average investor requires a return of 14% for an average stock, junk bonds are yielding 22% and 3 month T-Bills are yielding just 4.5%. This stock just paid a dividend of $2.50 (annual basis). The growth rate associated with this stock is 4% and this rate is forecast to continue.


Question 45 5 points Save
P 10. You have invested in 4 stocks: X, Y, Z, and Fred. Each stock's beta and the dollars you invested in each are given below. What is the beta of this 4-stock portfolio?
Company Beta $ Invested
X 1.1 $10,000
Y 1.2 $30,000
Z 0.8 $20,000
Fred 0.9 $40,000



Question 46 5 points (Extra credit) Save
BONUS
You are planning to save for retirement. You estimate that you can save $5,000 at the end of each of the next 20 years and then you will retire. All the money will go into a money market that pays 6% interest. When you retire you will start drawing money out of this account and will do so for ten years. OK are you ready for this! How much will you be able to withdraw each year during the ten year retirement?




You get a hot tip on a new stock: XYZ Corp. (OK so it's not the most original name - what do you want for 1 AM as I'm typing this?) Here's some info you've uncovered: XYZ had net profit of $26.2 million, a AAA bond rating, a beta of 1.4, its earnings are expected to grow at 5% and it just paid a dividend of $2.00. Surfing the internet you also found that the unemployment rate for last month was 9%, McDonalds is selling for $72 a share, the 30-year T-Bond is yielding 6% but the 90 day T-bill only 5%. The return on the S&P 500 is 13%, and the finance text you paid $165 is going into a new edition so at best you can sell your book for $24.95!
OK, given all that, what should the price of a share of XYZ be? (Hint: the RRR needed for this formula to work is the rate of return one gets when considering the "risk & return" tradeoff).

Explanation / Answer

1. Option-A is correct.

An increase in the risk, increases the return for the shareholders, which inturn lowers the share price (because high dividends are paid to the shareholders).

Therefore, Increase risk, a lower share price.

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