1. The fact that no investor can expect to earn excess returns based on an inves
ID: 2636246 • Letter: 1
Question
1. The fact that no investor can expect to earn excess returns based on an investment strategy using only historical stock price or return information is an example of________ market efficiency.
Answer
strong form
weak form
semi-weak form
semi-strong form
Question 2
1.
Assume that the dividend on Central Power Company's $3.25 preferred stock issue is paid annually at the end of the year. Determine the value of this preferred stock to an investor who requires a 12 percent rate of return.
Answer
$3.25
$39
$12
$27.08
Question 3
1.
Pro forma financial statements show the results of some __________ event rather than a (an) __________ event.
Answer
actual; assumed
assumed; actual
deterministic; probabilistic
none of the above
Question 4
1.
What is the NPV of a project that required a net investment of $500,000 and produced net cash flows of $150,000 per year for the next 5 years and $110,000 for the sixth year? Assume the cost of capital is 14%.
Answer
$65,077
$392,580
$588,710
$60,920
Question 5
1.
Alpha Products intends to maintain its capital structure of 40 percent debt and 60 percent common equity in it new capital budget. To finance its capital budget for next year, the firm will sell $50 million of 11 percent debentures at par and finance the balance of its $125 million capital budget with a new seasoned offering of equity. Next year Alpha expects net income to grow 7 percent to $140 million, and dividends also are expected to increase 7 percent to $1.40 per share (next year) and to continue growing at that rate for the foreseeable future. The current market value of Alpha's stock is $30. If the firm has a marginal tax rate of 40 percent, what is its weighted cost of capital for the coming year?
Answer
9.64%
8.63%
9.84%
11.67%
Question 6
1.
Ajax Powder Company has purchased a piece of equipment costing $100,000. It is expected to generate a ten-year stream of benefits amounting to $16,273 per year. Determine the rate of return Ajax expects to earn from this equipment.
Answer
16.3%
62.7%
10%
20%
Question 7
1.
In six years, your daughter will be going to college. You wish to have a fund that will provide her $10,000 per year (end of year) for each of her four years in college. How much must you put into that fund today if the fund will earn 10 percent in each of the 10 years?
Answer
$29,744.65
$29,783.76
$17,893
$21,651.10
Question 8
1.
IOU, a technology firm, issued a 10% coupon, 20 year to maturity first mortgage bond five years ago. If the current market rate of debt for IOU is 6%, at what price should this bond sell, to the nearest dollar? Assume a par value of $1,000, and pays interest semi-annually.
Answer
$852
$1000
$1392
$1388
Question 9
1.
The net present value method assumes that the cash flows over the life of the project are reinvested at
Answer
the computed internal rate of return
the risk-free rate
the market capitalization rate
the firm's cost of capital
Question 10
1.
Which of the following is a basic principle when estimating a project's cash flows?
Answer
cash flows should be measured on a pretax basis
cash flows should ignore depreciation because it is a non-cash charge
only direct effects of a project should be included in cash flow calculations
cash flows should be measured on an incremental basis
Question 11
1.
Money markets deal in securities having maturities of ________; capital market securities have maturities ________.
Answer
less than 18 months, greater than 18 months
one year or less, greater than one year
less than 9 months, greater than 9 months
less than 6 months, greater than 6 months
The required rate of return on any security consists of a
Answer
risk premium plus an expected inflation rate
risk free rate plus a risk premium
inflation rate plus a marketability premium
risk free rate plus an inflation premium
Question 13
1.
The disadvantages of the payback approach include:
Answer
cash flows after the payback period are ignored in the calculation
payback ignores the time value of money
payback fails to provide an objective decision-making criterion
all of the above
Question 14
1.
Ajax Corp. common stock has a beta of 2. The risk-free rate is 4 percent and the expected market rate of return is 8 percent. Determine the required rate of return on the security.
Answer
8%
12%
14%
20%
Question 15
1.
New Age Genetics purchased lab equipment for $750,000 that will generate net cash flows of $150,000 per year for 8 years. What is the IRR for this project?
Answer
12.5%
11.8%
4.8%
10%
Question 16
1.
In the constant-growth dividend valuation model, the required rate of return on a common stock can be shown to be equal to the sum of the dividend yield plus:
Answer
Yield-to-maturity.
Cost of Capital
Present Value Yield
Price appreciation yield.
Question 17
1.
The ______ the risk of receiving future cash flows, the ______ will be the present value of those cash flows.
Answer
greater, greater
greater, lower
lower, lower
lower, greater
Question 18
1.
If the stock of Sun Computers is selling for $34 and the current dividend is $0.48, what is the implied constant growth rate of dividends to an investor who requires a 14% rate of return?
Answer
12.54%
12.41%
14.00%
15.41%
Question 19
1.
The net present value method assumes that the cash flows over the life of the project are reinvested at
Answer
the computed internal rate of return
the risk-free rate
the market capitalization rate
the firm's cost of capital
1.
The risk-adjusted discount rate approach is preferable to the weighted cost of capital approach when
Answer
all projects have the same risk characteristics
the risk-free rate is known with certainty
the projects under consideration have different risk characteristics
the firm is unlevered
Question 21
1.
The primary objective of the firm is:
Answer
Shareholder wealth maximization
Social responsibility
Long run survival.
Profit maximization.
1.
Which of the following financial ratios are market-based ratios?
Answer
debt-to-equity
price-to-earnings
return on investment
gross profit margin
1.
A common-size balance sheet shows the firm's assets and liabilities as a percentage of :
Answer
stockholder's equity
industry avergares
total assets
net sales
Question 24
1.
When comparing two equal-sized investments, the _______ is an appropriate measure of total risk.
Answer
standard deviation
coefficient of variation
correlation
covariance
Question 25
1.
Beta is defined as:
Answer
a measure of volatility of a security's returns relative to the returns of a broad-based market portfolio of securities.
the ratio of the variance of market returns to the covariance of returns on a security with the market
the inverse of the slope of the security regression line
all of the above
Question 26
1.
What is the net present value of a project that requires a net investment of $176,000 and produces net cash flows of $62,000 per year for 7 years? Assume the cost of capital is 12 percent.
Answer
$86,975
$42,950
$160,000
$106,953
Question 27
1.
_____ arise from the divergent objectives between owners and managers.
Answer
Shareholder relationships
Stakeholder problems
Agency conflicts
Creditor problems
Question 28
1.
Decode Genetics purchased lab equipment for $600,000 that will generate net cash flows of $130,000 per year for next 10 years. What is the IRR for this project?
Answer
16.76%
17.26%
18.13%
17.76%
Question 29
1.
A firm's return on equity is a function of its net profit margin, ______ and equity multiplier. (Hint: Dupont Model)
Answer
current ratio
cost of goods
total asset turnover
fixed asset turnover
Question 30
1.
Wilshire Company's earnings and common stock dividends have been growing at an annual rate of 4 percent over the past several years. The firm currently (t = 0) pays an annual dividend of $4.00. Assuming that Wilshire's common stock dividends continue growing at the past rate for the foreseeable future, determine the value of the company's common stock to an investor who requires a 13 percent rate of return on these securities.
Answer
$44.44
$36.81
$46.22
$48.62
1.
What would be the weighted average cost of capital for Limp Linguini Noodle Makers, Inc. under the following conditions:
*The capital structure is 40% debt and 60% equity
*The before-tax cost of debt is 20% and the firm is in the 40% tax bracket.
*The firm
strong form
weak form
semi-weak form
semi-strong form
Explanation / Answer
1. weak form
2. P0 = $3.25/0.12 = $27.08
3. assumed; actual
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