Part 1
1. Another company plans to issue 20-year bonds with a face value of $1,000 and an annual coupon rate of 10%. The market price of similar bonds is $1,098. Flotation costs are estimated to be 5% for each bond. If interest payments are made annually, and the company's marginal tax rate is 34%, what is the after-tax cost of debt?
8.03%
5.89%
6.28%
9.51%
2. Cost of capital includes
the coupon payments to the bondholders.
the opportunity cost of the equity holders
all of the above
none of the above
3. (Cost of debt) AlterU has the option to issue 15-year bonds at $1,180 with a flotation cost of 7%, tax rate of 34%, and a coupon rate of 6% (paid annually). What is AlterU firm's cost of debt prior to tax?
5.06%
5.88%
4.34%
5.24%
4. Job Cart Inc. has a preferred stock paying a 7% dividend on a $180 par value. The company issues new preferred stock, and flotation cost will be 12% of the current price of $195.74. What is the cost of preferred stock?
7.00%
6.44%
7.31%
7.95%
5. For risk-specific projects, we typically analyze other firms that are already in the new market where we are moving to infer our WACC. This is called a
pure play.
free style.
comparable.
similitude.
6. YIPE Inc. is expecting to pay a dividend of $2.98 in the upcoming year and further anticipates growing the dividend at a constant rate of 5% per year, indefinitely. If the current share price is $39.87, then what is the cost of equity according to the Gordon growth model?
12.47%
13.84%
14.10%
14.85%
none of the above
7. A recent start-up technology company that has a very low market cap is looking to calculate the return required by shareholders using the build-up method. Historically long-term government bonds have been 5.8% and the equity risk premium is approximately 6%. Further, the start-up premium and the micro-cap premium are each 4%. Given this information, what is the return required by shareholders?
11.8%
15.8%
19.8%
24.1%
none of the above
8. NEXTOLL has a beta of 1.4. The expected return on the market is 15% while the risk free rate is 3.1%. Given this information, what is the return required by the shareholders?
24.10%
19.76%
17.41%
15.21%
none of the above
9. (Weighted average cost of capital) Great Minds Inc. has a target capital structure of 45% debt, 35% preferred stock, and 20% common stock. The before-tax costs of debt, preferred stock, and common stock are 7%, 9%, and 15%, respectively. What is Great Mind's after-tax WACC? Assume a 35% tax rate.
6.20%
8.20%
5.71%
5.58%
10. A company has a beta of 1.5. The expected return on the market is 15% and the risk free rate is 3.5%. Given this information, the company has a cost of equity that is
20.75%.
21.55%.
17.25%.
24.66%.
19.50%.
Part 2
1. Suppose you bought a stock for $45 on January 1. Thirty days later, you received a dividend of $2.20 and you sold the stock for $44.30. Given this information, annualized return is ________. (Assume 360 days in a year).
9%
59%
25%
12%
40%
2. Given the following information, this stock's expected return is
Economic State Probability Return
Recessionary 0.20 4.5%
Normal 0.45 13.4%
Expansionary 0.35 17.5%
13.06%.
9.54%.
14.41%.
16.44%.
12.59%.
3. (Measuring risk and rate return) Given the following holding-period returns, calculate the average return for the market.
Month Champ Inc. Market
1 2.8% 1.8%
2 3.2% 1.2%
3 9.0% 11.0%
4 -2.6% -1.0%
5 -2.9% -4.7%
6 12.0% 8.0%
5.80%
11.01%
3.58%
2.72%
4. Which type of risk can be diversified away?
systematic risk
the entire standard deviation
firm-specific risk
none of the above
5. What is beta in financial terms?
the market premium
a firm's expected return
the amount of systematic risk in an asset
the beginning of time (hint = not this one!)
6. Which of the following is not an example of factors that affect systematic risk?
a company's labor force goes on strike
an unexpected change in interest rates
an unexpected change in cash flows due to tax changes
business cycle changes
7. Suppose that Company XYZ has a beta of 1.4. The expected return on the market is 14% and the risk free rate is 3.5%. According to the CAPM, the expected return for XYZ is
18.2%.
12.7%.
16.5%.
15.2%.
19.6%.
8. (Built-up method) Assume a required rate of return of 23%, an equity risk premium of 8%, micro-cap premium of 5%, and a start-up risk premium of 6%. Use the build-up method to calculate the bond yield.
13%
42%
4%
12%
9. If a security's standard deviation is high this indicates all but the following:
a greater total risk of the security
a greater likelihood of obtaining expected returns
a higher volatility in the security's expected return
a greater uncertainty of the security's return
10. Firm A and Firm B are perfectly negatively correlated. If your portfolio contains an equal dollar amount of stock in firms A and B, what will be the risk of the portfolio?
Firm A's stock will influence it more because its standard deviation is greater.
It will be riskless.
Firm B's stock will influence it more because its variance is greater.
Firm A will influence it more because its variance is greater.
Part 3
1. Which of the following statements does not correctly define the replacement cost method for valuing a firm?
The replacement cost method attempts to determine the cost of replacing the company's capital structure
The replacement cost method attempts to determine the cost of replacing the company's liabilities.
The replacement cost method attempts to determine the cost of replacing inefficient capital budgeting methods with efficient capital budgeting methods.
The replacement cost method attempts to determine the cost of replacing the company's assets.
2. Which of the following is not considered a valuation caveat?
control premium
equity risk premium
unpaid salary issue
liquidity discount
3. The control premium is a premium that is obtained because
public firms have a more difficult time controlling future inflows.
public firms cannot control which investors purchase shares of their ownership.
private firms control more of the market share than public firms.
majority shareholders have more power to control the firm than minority shareholders.
4. The liquidity discount can best be described as a discount that is taken because
ownership in private companies is less liquid than ownership in public companies.
public companies have an easier ability turning assets into cash.
the share prices of public firms are more volatile than the variability of private firm's cash flows.
private companies have an easier ability turning assets into cash.
5. The unpaid salary issue is most likely to be an issue in
public companies.
large companies.
small companies.
a and b
6. Firm A has a price-to-sales ratio of 3.9 to 1. Firm B has recently reported sales of $56 million. Firm B also has shares outstanding of 2,500,000. (Use this information to answer the following two questions). What is the price per share of firm B according to the comparable multiples approach?
$61.88
$51.79
$91.79
$87.36
$102.54
7. Given this information, what is the free cash flow to the firm?
$2,132
$1,415
$2,088
$1,233
$2,765
8. Suppose you have estimated the free cash flows to equity holders over the next five years in the following way:
Year 1: $34.5M
Year 2: $38.1M
Year 3: $41.4M
Year 4: $39.5M
Year 5: $36.1M
You expect FCFE continue remain constant after year 5. If the company's cost of equity is 14%, then what is the value of the firm's equity (in millions)?
$251.53M
$244.83M
$270.28M
$263.59M
9. Assume you've forecasted and calculated the following free cash flows to the firm.
Year FCFF
1 $264.08
2 $271.54
3 $274.85
You have also made the assumption that after year 3, the cash flows will grow at a constant rate of 4% per year indefinitely. The company has a WACC of 9.5%. Given this information, what is the value of this firm?
$2,008.74
$1,587.68
$4,635.42
$1,744.09
$1,684.37
10. The current share price for Stock A Computers is $100 with earning per share of $5. Stock B recently reported earnings of $4. According to the comparables approach, what should the price per share of Stock B's be worth?
$78.55
$86.55
$90.66
$83.58
$80.00
Part 4
1. Articles of organization are used for which ownership structure?
partnership
limited liability
S-corporation
sole proprietorship
C-corporation
2. Which of the following is not an example of the "harvest" in entrepreneurial finance?
an initial public offering
the sale of the company to a private equity firm
the purchase of the company by a strategic buyer
issuing stock options to current employees
3. What is "bootstrapping" a business?
focusing on attaining short-term assets for accelerated growth
paying off interest and principal payments each month
self-funding a venture
layering on extra levels of debt
4. What is phantom income?
income not paid out to the partners
income that was never actually earned, but was received
income used in tax laundering
income that is invested in the stock market
5. What is the main difference between corporate and entrepreneurial finance?
the goals of each of these companies
the industries these companies work in
the size of the companies you are working with
the margins these companies can attain
6. Angel investors are typically
early-stage investors.
late-stage investors.
bankruptcy-stage investors.
salvage investors.
7. Which three of the five key ownership structures require the owners to register before they can begin the business? (Check all that apply.)
sole proprietorship
S-corporation
C-corporation
partnership
limited liability
8. Maximizing shareholder wealth and returns is the goal of what type of entrepreneurial-focused firm?
revenue focused
asset light
new venture
fast growth
9. Which of the five key ownership structures has the lightest filing requirements and is the cheapest and easiest to start?
sole proprietorship
C-corporation
limited liability
S-corporation
partnership
10. Sole proprietorships and partnerships offer liability protection.
true
false
Part 5
1. When considering life insurance, it is discussed that you buy which type of insurance virtually all of the time?
time life insurance
term life insurance
cash-value life insurance
long-term value life insurance
2. Which of following strategies for buying a car is not recommended in the chapter?
Look at cars at different geographical locations.
If possible, buy a used car rather than a new car.
Use a financial calculator in your negotiations.
If you have a trade-in, let them know before you start negotiations.
Have a copy of the dealer's invoice with you.
3. When typically is the best time to shop for a car?
on the first day of the year
on the first day of the month
on the last day of the quarter
4. What is the most important step to buying a house recommended in the chapter?
Drive through various neighborhoods and see which one seems the best fit.
Have a realtor show you various homes/properties that are for sale.
Buy a first-time homebuyers' guide.
Discuss with your loan officer what size of a mortgage you can afford.
5. Which of the following in not a reason to buy a 15-year mortgage as opposed to a 30-year mortgage?
It will offer you more flexibility.
You will be more likely to buy a house you can actually afford.
You will most likely get a lower interest rate on the mortgage.
The discipline of paying a 15-year mortgage will force you to invest in your future.
6. If you sell or buy via FSBO, you typically save how much in realtor fees?
4.5%-6.0%
6.0%-7.5%
1.5%-3.0%
3.0%-4.5%
7. On average, actively managed funds earn higher returns than index funds?
true
false
8. What is dollar-cost averaging?
The investor spreads their money throughout several companies or indices.
The investor invests a set dollar amount into some type of investment on a set schedule.
The investor invests in foreign currencies, thus eliminating their exposure to the dollar.
The investor changes the dollar amount invested dependent on the direction the market is moving.
9. What does FSBO stand for?
for sale before operation
foreclosure sale by owner
for sale by owner
foreclosure sale before operation
10. According to the chapter, what is the most risk-free investment you can make?
buying short-term treasury securities
setting up a college-savings account for your children
buying private corporate bonds
paying off personal debt
Part 6
1. A great place to start microfinance is by visiting www.kiva.org?
true
false
2. Most MFIs are structured as
nongovernment operations.
nonprofit organizations.
noncapital operations.
nongovernment organizations.
3. Which of the following is not one of the six main topics covered under the best practices of MFI management?
credit scoring
lending relationships
loan debentures
loan size and growth
MFI commercialization
optimal interest rates for microcredit
4. What does MFI stand for?
monetary fund institution
microfinance inventory
monetary fund inventory
microfinance institution
5. Some attribute the development of microfinance to Muhammad Yunus, who was awarded a Nobel Peace Prize.
true
false
6. Which of the following is not one of the six key areas of microfinance identified in the book?
microfinance beginnings and evolution
assessing the impact of microfinance
MFI products and services
self-sufficiency and sustainability of MFIs
borrow targeting
microfinance policy and regulation
7. Most MFIs have targeted which groups for their loans? (Check all that apply.)
not-so-poor
women
poorest of the poor
men
8. What is social capital collateral?
relying on a religious group to help obtain a loan
relying on a political group to help obtain a loan
using one's influence or position in the community to secure a loan
relying on lending groups that cosign each other's loans; relies on keeping one's good name
9. What is the main purpose of microfinance?
to help those who are poor to leave their countries and move to another
to help those who suffer from hunger to obtain food
to help the financially underprivileged pull themselves out of poverty
to help those with no education to become educated
10. The majority of microfinance aid comes in which form?
microcredit
business education
insurance
saving services