Unit: Corporate Valuation and Capital Structure-
1. How much would $5,000 due in 25 years be worth today if the discount rate were 5.5%?
$1,067.95
$1,124.16
$1,183.33
$1,311.17
2. Chuck has $2,500 invested in a bank that pays 4% annually. How long will it take for his funds to double?
14.39
15.15
15.95
17.67
3. If a firm's goal is to maximize its earnings per share, this is the best way to maximize the price of the common stock and thus shareholders' wealth.
True
False
4. Which of the following statements is CORRECT?
A time line is not meaningful unless all cash flows occur annually.
Time lines are not useful for visualizing complex problems prior to doing actual calculations.
Time lines cannot be constructed to deal with situations where some of the cash flows occur annually but others occur quarterly.
Time lines can be constructed where some of the payments constitute an annuity but others are unequal and thus are not part of the annuity.
5. Which of the following could explain why a business might choose to operate as a corporation rather than as a sole proprietorship or a partnership?
Corporations generally find it relatively difficult to raise large amounts of capital.
Less of a corporation's income is generally subjected to taxes than would be true if the firm were a partnership.
Corporate shareholders escape liability for the firm's debts, but this factor may be offset by the tax disadvantages of the corporate form of organization.
Corporate investors are exposed to unlimited liability.
6. Branch Corp.'s total assets at the end of last year were $315,000 and its net income after taxes was $22,750. What was its return on total assets?
7.22%
7.58%
7.96%
8.36%
7. Northwest Lumber had a profit margin of 5.25%, a total assets turnover of 1.5, and an equity multiplier of 1.8. What was the firm's ROE?
12.79%
13.47%
14.18%
14.88%
8. Which of the following would indicate an improvement in a company's financial position, holding other things constant?
The inventory and total assets turnover ratios both decline.
The debt ratio increases.
The profit margin declines.
The current and quick ratios both increase.
9. Which of the following items is NOT included in current assets?
Accounts receivable.
Inventory.
Bonds.
Cash.
10. Which of the following statements is CORRECT?
The four most important financial statements provided in the annual report are the balance sheet, income statement, cash budget, and the statement of stockholders' equity.
The balance sheet gives us a picture of the firm's financial position at a point in time.
The income statement gives us a picture of the firm's financial position at a point in time.
The statement of cash flows tells us how much cash the firm has in the form of currency and demand deposits.
11. Maxwell Inc.'s stock has a 50% chance of producing a 25% return, a 30% chance of producing a 10% return, and a 20% chance of producing a -28% return. What is the firm's expected rate of return?
9.41%
9.65%
9.90%
10.15%
12. Preston Inc.'s stock has a 25% chance of producing a 30% return, a 50% chance of producing a 12% return, and a 25% chance of producing a -18% return. What is the firm's expected rate of return?
7.72%
8.12%
8.55%
9.00%
13. Managers should under no conditions take actions that increase their firm's risk relative to the market, regardless of how much those actions would increase the firm's expected rate of return.
True
False
14. Under normal conditions, which of the following would be most likely to increase the coupon rate required to enable a bond to be issued at par?
Adding additional restrictive covenants that limit management's actions.
Adding a call provision.
The rating agencies change the bond's rating from Baa to Aaa.
Making the bond a first mortgage bond rather than a debenture.
15. If a firm raises capital by selling new bonds, it is called the "issuing firm," and the coupon rate is generally set equal to the required rate on bonds of equal risk.
True
False
16. You are holding a stock with a beta of 2.0 that is currently in equilibrium. The required rate of return on the stock is 15% versus a required return on an average stock of 10%. Now the required return on an average stock increases by 30.0% (not percentage points). The risk-free rate is unchanged. By what percentage (not percentage points) would the required return on your stock increase as a result of this event?
36.10%
38.00%
40.00%
42.00%
17. You hold a diversified portfolio consisting of a $5,000 investment in each of 20 different common stocks. The portfolio beta is equal to 1.12. You have decided to sell a lead mining stock (b = 1.00) at $5,000 net and use the proceeds to buy a like amount of a steel company stock (b = 2.00). What is the new beta of the portfolio?
1.1139
1.1700
1.2311
1.2927
18. If the returns of two firms are negatively correlated, then one of them must have a negative beta.
True
False
19. Stock A's beta is 1.5 and Stock B's beta is 0.5. Which of the following statements must be true about these securities? (Assume market equilibrium.)
When held in isolation, Stock A has greater risk than Stock B.
Stock B must be a more desirable addition to a portfolio than Stock A.
Stock A must be a more desirable addition to a portfolio than Stock B.
The expected return on Stock A should be greater than that on Stock B.
20. The SML relates required returns to firms' systematic (or market) risk. The slope and intercept of this line can be influenced by managerial actions.
True
False
21. Scanlon Inc.'s CFO hired you as a consultant to help her estimate the cost of capital. You have been provided with the following data: rRF = 4.10%; RPM = 5.25%; and b = 1.30. Based on the CAPM approach, what is the cost of common from retained earnings?
9.67%
9.97%
10.28%
10.93%
22. Tuttle Enterprises is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that if a project's expected NPV is negative, it should be rejected.
WACC: 11.00%
Year 0 1 2 3 4
Cash flows -$1,000 $350 $350 $350 $350
$77.49
$81.56
$85.86
$90.15
23. 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 project's NPV is found by compounding the cash inflows at the IRR to find the terminal value (TV), then discounting the TV at the WACC.
The lower the WACC used to calculate a project's NPV, the lower the calculated NPV will be.
If a project's NPV is less than zero, then its IRR must be less than the WACC.
If a project's NPV is greater than zero, then its IRR must be less than zero.
24. Assume a project has normal cash flows. All else equal, which of the following statements is CORRECT?
A project's IRR increases as the WACC declines.
A project's NPV increases as the WACC declines.
A project's MIRR is unaffected by changes in the WACC.
A project's regular payback increases as the WACC declines.
25. No conflict will exist between the NPV and IRR methods, when used to evaluate two equally risky but mutually exclusive projects, if the projects' cost of capital exceeds the rate at which the projects' NPV profiles cross.
True
False