1. The primary goal for a firm’s financial managers is to:
2. Maximize earnings per share.
3. Maximize long run profits.
4. Minimize firm risk.
5. Maximize shareholder wealth.
6. None of the above is the primary goal for a financial manager.

 

 

2. Given the following distribution of returns, compute Stock W’s standard deviation:

State of Economy                   Probability                        Stock W Return

Recession                                      .25                                       10%

Average growth                             .50                                       20%

Boom                                             .25                                       30%

 

2. 2.24% b. 3.54% c. 4.82%           d. 6.51%              e. 7.07%

 

 

3. The Security Market Line (SML) relates risk to return, for a given set of financial

market conditions. If the general level of risk aversion among investors suddenly

increases, which of the following changes would be most likely to occur?

1. The market risk premium would increase.
2. Beta would decrease.
3. The SML would shift upward, but the slope of the SML would remain unchanged.
4. The required return on the market portfolio (kM) would decrease.
5. None of the indicated changes would be likely to occur.

 

 

4. Edgler, Inc. has a beta of 1.20. The risk-free rate is 6 percent and the expected

rate of return on the market portfolio is 14.5 percent. Using the CAPM, Edgler’s

expected return on equity is:

6. 6.0 percent
7. 12.8 percent
8. 14.5 percent
9. 16.2 percent
10. 20.5 percent

 

 

5. Video Fair, Inc., an all-equity firm, is considering the formation of a new division

which will increase the assets of the firm by 50% (for example, from $1,000,000 to

$1,500,000). Video currently has a required rate of return of 18%, U.S. Treasury

bonds yield 5%, and the market risk premium is 10%. If Video wants to reduce its

required rate of return to 16%, what is the maximum beta coefficient the new division

could have?

1. 0.7
2. 0.9
3. 1.1
4. 1.3
5. 1.4

 

6. At a 7% annual rate of return, how long does it take money to triple?

 

16. 16.24 years
17. 10.24 years
18. 23.44 years
19. 20.49 years
20. none of the above are within 2 years of the correct answer

 

 

7. You want to accumulate $1,000,000 in retirement funds by your 65th birthday.

Today is your 30th birthday, and you plan on making annual investments into a mutual

fund that you project will earn a 10% annual rate of return. Your first payment will

take place one year from today, and your last payment will take place on your 65th

birthday. What is the amount of the annual payment you must make each year in

order to reach your goal?

703. $ 3,703.37
704. $ 4,073.71
705. $94,263.37
706. $ 3,354.28
707. $ 3,689.71

 

 

8. You are offered the choice between receiving two annuities. Each pays $200 per

year for 4 years (assume both are equally risky). The first is an annuity due. The

second is a regular annuity. If you are a rational investor, which would you chose

(assume that interest rates are greater than zero)?

1. The ordinary annuity.
2. The annuity due.
3. Either one, because as the problem is set up, they have the same present value.
4. Without information on the interest rate, we do not have enough information to decide.
5. The annuity due; however, if the payments on both annuities were doubled to $400

per year, the ordinary annuity would be preferable.

 

 

 

9. You have just borrowed $20,000 which you will repay in 10 equal annual payments.

The bank’s stated rate on its loans is 9%. Based on this information, how much

principal will you repay in the 9th (i.e. the next to last) year of the loan?

316. $1,316.40
317. $2,365.69
318. $2,859.08
319. $2,623.02
320. not enough information

 

 

 

 

10. Your bank offers 3 year certificates of deposit with a stated rate of interest of

12% p.a., compounded quarterly. Your cousin (who works at Acme Bank and Trust,

a competitor) wants to know what stated rate of interest you would require from them

in order to switch your business to their bank. Acme’s CD’s are compounded on a

monthly basis. What is the minimum stated interest rate you should ask for from

Acme in order to make you indifferent to switching?

12. 12.55%
13. 0.99%
14. 11.88%
15. 12.18%
16. not enough information to solve the problem

 

 

 

11. A twenty-five year, 12 percent coupon rate, fixed coupon bond was just sold for

$980 dollars. The bond makes coupon payments on an annual basis and has a face

value of $1,000. What is the expected yield to maturity for this bond ?

11. 11.43 percent
12. 11.99 percent
13. 12.26 percent
14. 12.53 percent
15. There is no solution to this problem. The calculator will display Error 5.

 

 

 

12. The constant dividend growth model may be used to find the price of a stock in all

of the following situations except:

1. when the expected dividend growth rate is less than the discount rate.
2. when the expected dividend growth rate is negative.
3. when the expected dividend growth rate is zero.
4. when the expected dividend growth rate is greater than the discount rate.
5. both b. and c. are correct.

 

 

 

13. Pern Corp. just paid an annual dividend of $2.00. Dividends are expected to grow

at a constant rate forever. The price of the stock is currently $28.40. The required

rate of return for this stock is 14 percent. What is the expected growth rate of Pern’s

dividend?

6. 6.50%
7. 6.96%
8. 7.48%
9. 8.37%
10. 19.66%

 

 

 

 

14. Five years ago Tosev Inc. issued 30-year, $1,000 par value, semi-annual coupon

bonds with a coupon rate of 9.10 percent. The bonds originally sold at a price of

$1,010.32 per bond. Currently, those bonds have a market price of $1,118.15 per

bond. The Chief Financial Officer of Tosev is currently considering issuing new

bonds. These bonds will have a par value of $1,000, semi-annual coupon payments, a

term of 25 years and a coupon rate of 8 percent. Due to differences in the legal

provisions of the bonds, the Chief Financial Officer estimates that the yield to maturity

on the new bonds will be one percent higher than the current yield to maturity on the

old bonds. Based on the Chief Financial Officer’s estimate, what would be the price

per bond of the new bonds today?

817. $ 817.44
818. $ 896.67
819. $ 901.19
820. $1,000.00
821. $1,118.15

 

 

15. Niven Rings Inc. just paid a regular dividend of $1.50 per share. The regular

dividend is expected to grow at a rate of 10 percent per year for the next three years,

at a rate of 7 percent per year for the next two years, and after that at a rate of 4

percent per year forever. In addition to the regular dividend, Niven Rings is expected

to pay a special dividend of $5.00 at the end of year 2.  (NOTE: A special dividend is

a one time only payment that will not recur. It is not considered in calculating the

amount of future dividends). The appropriate discount rate is 14 percent per year.

What is the price of the stock?

19. $19.02
20. $21.67
21. $22.43
22. $22.86
23. $24.36

 

 

16. The Jackson Company wants to purchase an asset costing $6 million. The firm

just reported a net income (NI0) of $10 million; its payout ratio is 10 percent; and the

firm has 1 million shares of stock outstanding. Jackson’s market value capital

structure, shown below, is considered to be optimal (assume that there is no

short-term debt):

Long-term Debt $18,900,000

Equity 12,600,000

Total Capital $31,500,000

Jackson expects its earnings (and therefore its dividends) to continue to grow at their

historical rate of 4 percent per year for the indefinite future. The current risk free rate

is 5 percent and the expected return on the market portfolio is 16 percent. Jackson’s

cost of debt (kd) is 8 percent and the firm’s tax rate is 40 percent. Calculate Jackson’s

weighted average cost of capital.

7. 7.78 percent.
8. 9.23 percent.
9. 12.15 percent.
10. 14.72 percent.
11. 18.99 percent.

 

18. A firm should accept an independent project if:

 

1. the payback is less than the life of the investment.
2. the NPV is greater than zero.
3. the internal rate of return is positive.
4. the MIRR is greater than the IRR.
5. all of the above.

 

 

 

19. You are evaluating two mutually exclusive projects for FinCo, with the following

net cash flows:

Year       Project X      Project Z

0             -$100,000     -$100,000

1               45,000          25,000

2               35,000          28,000

3               30,000          31,000

4               25,000          32,000

5               35,000

 

If FinCo’s cost of capital is 14%, you would choose,

 

1. Neither Project.
2. Project X.
3. Project Z.
4. Both projects.
5. Cannot tell since project Z has multiple IRRs.

 

 

 

 

21. A. P. Hill Corporation is considering a project that will pay $10,000 at the end of

the first year, $20,000 at the end of the second year, and $40,000 at the end of the

third year. The project’s appropriate discount rate is 8.8% and the project requires an

investment tomorrow of $50,000 if we accept the project. The NPV of this project is

closest to:

 

1. $ 145
2. $ 7,145
3. $ 10,145
4. $ 57,145
5. $107,145

 

22. You are analyzing a capital budgeting project. Someone spilled coffee on the page

and, as shown by the ???, several numbers are unreadable. You can read the

following information:

 

Cash Flows at the end of: Year 0 = ($24,300)

Year 1 = $10,800

Year 2 = $ 6,000

Year 3 = $ 2,600

Year 4 = $ ???

Year 5 = $ 9,300.

 

The Cost of Capital is 12%, the NPV = $???, the IRR = ???%, the PI = 1.14. Your

boss, ignoring the important (and true) fact that we should accept the project, is

demanding to know the Cash Flow in Year 4. The Cash Flow in Year 4 is closest to:

 

1. ($10,000)
2. ($ 5,000)
3. $ 0
4. $ 5,000
5. $10,000

 

 

 

USE THE FOLLOWING INFORMATION TO ANSWER QUESTIONS 23, 24 and

25

 

The H-Var Corp. is considering making the following capital investment in a new

machine which has an estimated useful life of 3 years. The machine will be

depreciated according to the MACRS recovery allowances for a 3-year class

investment, resulting in depreciation of 33%, 45%, 15%, and 7% respectively in years

1 through 4. The initial cost of the machine is $100,000 plus $20,000 shipping and

installation. The machine will result in an annual operating savings of $50,000 per

year, and will allow a reduction in inventory of $9,500 over the useful life of the

machine. After 3 years, inventory will return to its previous level. It is estimated that

the machine can be sold for its salvage value of $7,000 at the end of 3 years. The

firm’s marginal tax rate is 40%.

 

23. What is the net cash investment in Year 0 (CF0) for H-Var if H-Var purchases

the new machine?

 

1. -$129,500
2. -$160,500
3. -$ 60,500
4. -$110,500
5. -$103,500

 

 

 

24. What is the net operating cash inflow for H-Var in Year 2 if H-Var purchases the

new machine?

 

1. $37,200
2. $45,840
3. $62,400
4. $75,000
5. $51,600

 

 

 

25. What is the additional (non-operating) cash flow at the end of the project (i.e., in

Year 3)?

 

1. $6,440
2. ($1,940)
3. ($3,060)
4. $7,560
5. ($2,500)