If you perform a ratio analysis of different divisions within your company over time, you are performing which of the following types of analysis?

According to the CAPM, investors receive a higher rate of return for taking on additional diversifiable risk.

 

Question 1 options:

True

False

Question 2 (3 points)

As part of a capital budgeting analysis, the net cash flow from the sale of a piece of equipment at the end of its planned use is being evaluated. The expected salvage value is $20 million, and the book value of the equipment at the time of sale will be $22 million. The company’s marginal tax rate is 25% and the company is profitable. What is the net cash flow from the sale of the equipment for capital budgeting purposes?

 

Question 2 options:

 

$20.5 million

 

 

-$2.5 million

 

 

-$2 million

 

 

$20 million

 

 

$19.5 million

 

Question 3 (3 points)

A publicly traded company which issues additional shares of common stock is engaging in a secondary market transaction.

 

Question 3 options:

True

False

Question 4 (3 points)

Your mortgage banker tells you that you can borrow at a lower interest rate if you borrow for 15 years instead of borrowing for 30 years. This is an example of an inverted yield curve.

 

Question 4 options:

True

False

Question 5 (3 points)

If you perform a ratio analysis of different divisions within your company over time, you are performing which of the following types of analysis?

 

Question 5 options:

 

Ratio trend analysis

 

 

Cross-sectional ratio trend analysis

 

 

Intra-company ratio trend analysis

 

 

Intra-company analysis

 

 

Cross-sectional analysis

 

Question 6 (3 points)

What effect on returns would the Fama-French 3-factor model predict for shifting a portfolio of stocks towards companies with a high ratio of book value per share relative to market value per share?

 

Question 6 options:

 

higher return with higher risk

 

 

lower return with higher risk

 

 

higher return with lower risk

 

 

no effect on returns and no effect on risk

 

 

lower return with lower risk

 

Question 7 (3 points)

Changes in the value of a firm’s common equity would be expected to change the value of the firm’s convertible bonds.

 

Question 7 options:

True

False

Question 8 (3 points)

The goal of dividend polity is to maximize long-term shareholder wealth.

 

Question 8 options:

True

False

Question 9 (3 points)

The discount rate is the most important of the Federal Reserve’s monetary policy tools.

 

Question 9 options:

True

False

Question 10 (3 points)

Which of the following are legal for a firm to do?

1. Classification shifting
2. Real earnings management

III. Accruals management

 

Question 10 options:

 

I only

 

 

II only

 

 

III only

 

 

I and II only

 

 

I, II, and III

 

Question 11 (3 points)

As flotation costs for common equity increase,

 

Question 11 options:

 

the required rate of return on common equity for the company rises for newly issued shares.

 

 

issuing common equity looks relatively more favorable than utilizing retained earnings.

 

 

the required rate of return on common equity for the company falls for newly issued shares.

 

 

companies can raise equity capital less expensively.

 

Question 12 (3 points)

What is the annual yield to maturity on a 20 year bond with a $1,000 par value, a coupon rate of 7%, semi-annual payments, and a current price of $1,109?

 

Question 12 options:

 

3.03%

 

 

6.25%

 

 

6.68%

 

 

3.13%

 

 

None of the above

 

Question 13 (3 points)

Suppose the Wiley Company had $2,000,000 in total assets last year, $100,000 in accounts payable, $50,000 in wages payable, and $200,000 in bonds payable (and no other liabilities). Further suppose that the Wiley Company had $1,500,000 in sales, a net profit margin of 13%, and a payout ratio of 75% last year. If the Wiley Company is running at full capacity, expects sales growth of 10%, plans to maintain last year’s payout ratio, and expects its profit margin for next year to be 15%, what is the Wiley Company’s AFN for this next year?

 

Question 13 options:

 

$234,375

 

 

$103,125

 

 

$204,375

 

 

$(625)

 

 

$123,125

 

Question 14 (3 points)

Income Statement      2019    2018

 

Revenue         $  220.00        $  200.00

Variable costs $(110.00)        $(100.00)

Fixed costs      $   (75.00)       $   (75.00)

EBIT    $   35.00         $   25.00

 

Interest Charges         $     (8.00)      $     (8.00)

EBT     $   27.00         $   17.00

 

Taxes  $    (5.40)        $    (3.40)

Net Income     $   21.60         $   13.60

 

Refer to the above income statement. Calculate the firm’s DFL.

 

Question 14 options:

 

2.00

 

 

1.47

 

 

5.88

 

 

4.00

 

Question 15 (3 points)

According to the constant growth stock model (Gordon’s model), decreasing the expected growth rate would cause the stock price to rise.

 

Question 15 options:

True

False

Question 16 (3 points)

If the depreciation expense for X Company was $844 in 2020, net fixed assets in 2019 were $7,331, and net fixed assets were $6,312 in 2020, which of the following is true?

 

Question 16 options:

 

Net fixed assets was a $175 source of funds.

 

 

Net fixed assets was a $175 use of funds.

 

 

Net fixed assets was a $1,019 source of funds.

 

 

Net fixed assets was a $1,019 use of funds.

 

Question 17 (3 points)

Suppose you take out a 30 year, $300,000 mortgage from the bank with an annual interest rate of 5.7% and monthly payments. What is the principal balance at the end of the 20th period?

 

Question 17 options:

 

$295,008.70

 

 

$293,382.30

 

 

$293,554.57

 

 

$293,209.21

 

 

$164,839.03

 

Question 18 (3 points)

A capital budgeting project has expected cash flows for years zero through six of -100, 50, 30, 15, 15, 10, 70. The risk adjusted cost of capital is 12%. What is the BCR for this project?

 

Question 18 options:

 

1.90

 

 

0.90

 

 

1.60

 

 

0.30

 

 

1.30

 

Question 19 (3 points)

A business seeking to manage itself properly according to the business cycle would do which of the following?

 

Question 19 options:

 

Increase liquidity at the top of the economy.

 

 

Repurchase stock at the top of the economy.

 

 

Expand production facilities at the top of the economy.

 

 

Shrink investment at the bottom of the economy.

 

 

Engage in layoffs at the bottom of the economy.

 

Question 20 (3 points)

The Wiley Company is planning to do a two for one reverse stock split. The current stock price is $120 per share. If you own 50 shares of stock before the reverse split, what will the price per share be after the reverse split?

 

Question 20 options:

 

60

 

 

25

 

 

100

 

 

240

 

Question 21 (3 points)

Suppose you take out a 30 year, $300,000 mortgage from the bank with an annual interest rate of 5.7% and monthly payments. What is the monthly payment?

 

Question 21 options:

 

$1,663.49

 

 

$1,425.00

 

 

$1,741.20

 

 

$1,732.97

 

Question 22 (3 points)

Which of the following would be a reason for a stock repurchase?

 

Question 22 options:

 

The stock price is too high.

 

 

The company does not have enough cash to pay dividends.

 

 

The company wants to increase its equity.

 

 

The company wants to avoid dilution of ownership.

 

Question 23 (3 points)

According to the trade-off theory of capital structure, firms must balance the benefits from the tax deductibility of interest with the risk of bankruptcy and bankruptcy related costs in order to determine the optimal level of debt.

 

Question 23 options:

True

False

Question 24 (3 points)

If you run a shipping company, which phase of the business cycle as discussed in class is likely to be most conducive to positive outcomes for your firm?

 

Question 24 options:

 

I

 

 

II

 

 

III

 

 

IV

 

 

V

 

Question 25 (3 points)

Suppose a call option on a share of stock is selling for $3. The option has a strike price of $70, and the stock is selling for $68 today. What is the intrinsic value of the call option today?

 

Question 25 options:

 

$0

 

 

$3

 

 

$2

 

 

-$2

 

Question 26 (3 points)

Income Statement      2019    2018

 

Revenue         $  220.00        $  200.00

Variable costs $(110.00)        $(100.00)

Fixed costs      $   (75.00)       $   (75.00)

EBIT    $   35.00         $   25.00

 

Interest Charges         $     (8.00)      $     (8.00)

EBT     $   27.00         $   17.00

 

Taxes  $    (5.40)        $    (3.40)

Net Income     $   21.60         $   13.60

 

Refer to the above income statement. Calculate the firm’s DCL.

 

Question 26 options:

 

4.00

 

 

5.88

 

 

2.00

 

 

1.47

 

Question 27 (3 points)

Suppose there is a European call option on a share of stock with a strike price of $28 and an expiration date of one year. Further suppose that the underlying stock is selling for $33 and the  corresponding European put option with the same strike price and expiration date is selling for $2. If the riskless rate is 5%, what should the call option price be?

 

Question 27 options:

 

$8.37

 

 

$9.66

 

 

$9.37

 

 

$1.39

 

Question 28 (3 points)

Suppose a firm has a WACC of 10% after accounting for all relevant risks and is earning 12% across all of its investments. Which of the following is true?

 

Question 28 options:

 

The firm will decrease shareholder wealth.

 

 

The firm will increase shareholder wealth.

 

 

The firm will not change shareholder wealth.

 

Question 29 (3 points)

Cutting the dividend for a profitable firm would reduce the firm’s AFN.

 

Question 29 options:

True

False

Question 30 (3 points)

If a firm purchased much of its property, plant, and equipment many years ago, what impact would inflation have upon its fixed asset turnover?

 

Question 30 options:

 

Inflation would make NFA understated relative to sales, inflating fixed asset turnover.

 

 

Inflation would make NFA understated relative to sales, deflating fixed asset turnover.

 

 

Inflation would make NFA overstated relative to sales, inflating fixed asset turnover.

 

 

Inflation would make NFA overstated relative to sales, deflating fixed asset turnover.

 

Question 31 (3 points)

The Wiley Company is planning to do a two for one stock split. The current stock price is $120 per share. If you own 50 shares of stock before the split, how many shares will you own after the split?

 

Question 31 options:

 

25

 

 

100

 

 

60

 

 

240

 

Question 32 (3 points)

Which of the following is true?

 

Question 32 options:

 

Both monetary policy and fiscal policy produce impacts in similar lengths of time.

 

 

The Federal Reserve controls fiscal policy.

 

 

Fiscal policy normally has a faster impact than monetary policy.

 

 

Monetary policy normally has a faster impact than fiscal policy.

 

Question 33 (3 points)

Which of the following are internal factors upon which the price of a stock is dependent?

1. Market psychology
2. Dividend policy

III. Riskiness of projected earnings

 

Question 33 options:

 

I only

 

 

II only

 

 

I and II only

 

 

II and III only

 

 

None of the above

 

Question 34 (3 points)

If the government raised taxes on dividends and capital gains earned on common stock while lowering taxes on interest earned on bonds, which of the following would be true?

 

Question 34 options:

 

The cost of common equity for the company would fall

 

 

No effect on capital structure would occur

 

 

Investor preferences would shift towards bonds

 

 

Investor preferences would shift towards common equity

 

Question 35 (3 points)

A large company such as Exxon will generally utilize a constant payout ratio.

 

Question 35 options:

True

False

Question 36 (3 points)

Financial risk is the risk inherent in the firm if it has no debt.

 

Question 36 options:

True

False

Question 37 (3 points)

A firm cancels its R&D efforts during the month of December in order to improve earnings for the fiscal year ending December 31. This would be an example of

 

Question 37 options:

 

real earnings management.

 

 

fixed assets management.

 

 

accruals management.

 

 

classification shifting.

 

Question 38 (3 points)

Which of the following was given in class as a possible choice if the sustainable growth rate exceeds the projected growth rate?

 

Question 38 options:

 

Borrow more money

 

 

Decrease the dividend

 

 

Repurchase stock

 

 

Sell assets

 

Question 39 (3 points)

The cash for X Company was $532 in 2019 and $409 in 2020. Which of the following is true?

 

Question 39 options:

 

It was a $123 source of funds.

 

 

It was a $123 use of funds.

 

Question 40 (3 points)

A firm announces a 1% stock dividend. At the moment of the stock dividend, what is the expected impact upon shareholder wealth?

 

Question 40 options:

 

Shareholder wealth will remain the same.

 

 

The impact on shareholder wealth cannot be determined.

 

 

Shareholder wealth will increase.

 

 

Shareholder wealth will decrease.

 

Question 41 (3 points)

Which of the following would give you the right, but not the obligation, to purchase the stock at the specified strike price prior to the expiration of the option?

 

Question 41 options:

 

selling a put option

 

 

buying a call option

 

 

buying a call option or selling a put option

 

 

selling a call option

 

 

buying a put option

 

Question 42 (3 points)

If you run a traditional bank, which of the following would be true?

 

Question 42 options:

 

A normal yield curve is preferable.

 

 

The bank pays depositors long-term interest rates on their checking account deposits.

 

 

An inverted yield curve is preferable.

 

 

The yield curve does not affect the bank.

 

Question 43 (3 points)

According to the constant growth stock model (Gordan’s model), an unexpected increase in the next dividend would cause the stock price to rise.

 

Question 43 options:

True

False

Question 44 (3 points)

Which of the following is true about the yield curve?

 

Question 44 options:

 

For a normal yield curve inflation is typically high now but is not expected to remain so.

 

 

For a normal yield curve, long-term inflation is expected to be lower

 

 

For an inverted yield curve, inflation is typically high now but is not expected to remain so.

 

 

For an inverted yield curve, inflation is typically low now and is expected to remain so.

 

Question 45 (3 points)

Suppose a firm has a capital structure of 25% debt and no preferred stock. Suppose the tax rate is 20%, the YTM on the company’s bonds is 6%, and the cost of common equity is 13%. Calculate the firm’s after-tax cost of debt.

 

Question 45 options:

 

4.50%

 

 

5.22%

 

 

10.40%

 

 

4.80%

 

Question 46 (3 points)

Suppose a firm has embraced a dividend policy of paying a low regular dividend while also paying extra profits to shareholders in the form of extra dividends. If the firm has consistently paid extra dividends for the past decade, what is likely to happen to the firm’s stock price if the firm decides to eliminate the extra dividends this year?

 

Question 46 options:

 

The effect on the firm’s stock price cannot be determined.

 

 

The firm’s stock price will increase.

 

 

The firm’s stock price will remain the same.

 

 

The firm’s stock price will decrease.

 

Question 47 (3 points)

As the corporate tax rate increases, debt looks like a relatively more attractive source of financing.

 

Question 47 options:

True

False

Question 48 (3 points)

The accounts payable for X Company was $5,489 in 2019 and $3,216 in 2020. Which of the following is true?

 

Question 48 options:

 

Accounts payable was a $2,273 source of funds.

 

 

Accounts payable was a $2,273 use of funds.

 

Question 49 (3 points)

Suppose a stock paid a dividend of $2.00 per share yesterday, has expected growth of 3% per year for the next two years and 5% growth per year after that, and has a required rate of return of 9%. What is the expected stock price today?

 

Question 49 options:

 

$45.87

 

 

$46.68

 

 

$50.56

 

 

$49.66

 

Question 50 (3 points)

Suppose you have accumulated $2,000,000 at the time of retirement 45 years from now. How much is that worth in terms of money today if the annual inflation rate over the 45 years is 2.2%?

 

Question 50 options:

 

$785,003.52

 

 

$718,830.47

 

 

$751,172.51

 

 

$820,393.61

 

Question 51 (3 points)

Which of the following statements about convertible bonds is true?

 

Question 51 options:

 

Convertible bonds may only be converted into shares of stock if the company wants to issue the equity.

 

 

Exercising a convertible bond will lower a firm’s debt ratio.

 

 

Exercising a convertible bond will decrease the number of shares outstanding.

 

 

Convertible bonds may be valued like regular bonds.

 

Question 52 (3 points)

A leveraged buyout increases financial risk by financing the buyout through the issuance of common equity.

 

Question 52 options:

True

False

Question 53 (3 points)

Which of the following is a reason why a firm might issue a bond with attached warrants?

 

Question 53 options:

 

The firm has too much equity capital.

 

 

The firm will be able to borrow at a lower cost.

 

 

The warrant gives the company the option to issue equity if it wishes to do so at a specified price in the future.

 

 

The firm will not have to pay cash when the bond comes due.

 

Question 54 (3 points)

Which of the following would increase a firm’s business risk?

 

Question 54 options:

 

Lower sales variability

 

 

Higher levels of fixed costs

 

 

Lower input price variability

 

 

Higher levels of preferred stock

 

 

Higher levels of debt

 

Question 55 (3 points)

Suppose you can invest $400 at the end of every month for the next 40 years at an annual interest rate of 9%. How much money would you have at the end of 40 years if you start with no money today?

 

Question 55 options:

 

$1,621,835.74

 

 

$1,872,528.11

 

 

$1,886,572.07

 

 

$1,767,800.95

 

Question 56 (3 points)

Companies that pay dividends will often maintain constant or steadily increasing dividends despite fluctuations in earnings in order to demonstrate the stability of the firm to investors.

 

Question 56 options:

True

False

Question 57 (3 points)

Suppose investors in the stock market become more risk-averse. Which of the following would be true?

 

Question 57 options:

 

The slope of the security market line would remain the same.

 

 

The market risk premium would decrease.

 

 

The slope of the security market line would increase.

 

 

The diversifiable risk component of beta would increase.

 

 

The slope of the security market line would decrease.

 

Question 58 (3 points)

A capital budgeting project has expected cash flows for years zero through six of -100, 50, 30, 15, 15, 10, 70. The risk adjusted cost of capital is 12%. What is the discounted payback period for this project?

 

Question 58 options:

 

3.33 years

 

 

5.16 years

 

 

6.16 years

 

 

4.67 years

 

 

4.33 years

 

Question 59 (3 points)

A machine costs $160,000 and is expected to last for four years. The machine is expected to have no salvage value at the end of four years. The machine is expected to produce new revenues for the firm of $60,000 per year over the next four years. If the tax rate is 20% and the straight line form of depreciation is used, what is the net present value of the project? Assume the risk-adjusted cost of capital is 15%.

 

Question 59 options:

 

-$121.21

 

 

-$105.40

 

 

$11,298.70

 

 

$64,000.87

 

 

-$114,320.35

 

Question 60 (3 points)

If the Federal Reserve wanted to stimulate the economy, which of the following would be consistent with that policy?

 

Question 60 options:

 

Sell Treasury bonds it previously purchased

 

 

Lower reserve requirements

 

 

Raise the margin requirement on investments

 

 

Increase the discount rate

 

Question 61 (3 points)

Suppose a firm has found a way to shift the future positive cash flows associated with a project with a positive NPV to be earlier in the project’s life. Which of the following is true?

 

Question 61 options:

 

This will have no effect on the attractiveness of the project.

 

 

This will increase shareholder wealth.

 

 

This will lengthen the discounted payback period.

 

 

This will decrease the IRR.

 

Question 62 (3 points)

Suppose the Wiley Company had $2,000,000 in total assets last year, $100,000 in accounts payable, $50,000 in wages payable, and $200,000 in bonds payable (and no other liabilities). Further suppose that the Wiley Company had $1,500,000 in sales, a net profit margin of 13%, and a payout ratio of 75% last year. If the Wiley Company is running at full capacity, expects sales growth of 10%, plans to maintain last year’s payout ratio, and expects its profit margin for next year to be 15%, what is the Wiley Company’s sustainable growth rate for the next year?

 

Question 62 options:

 

2.07%

 

 

3.14%

 

 

10.04%

 

 

3.53%

 

Question 63 (3 points)

If a firm’s ROE declined while its ROA remained constant, which of the following would explain what happened?

 

Question 63 options:

 

The firm’s debt ratio increased and total asset turnover increased

 

 

The firm’s debt ratio decreased and equity multiplier decreased

 

 

The firm’s total asset turnover increased and profit margin decreased

 

 

The firm’s total asset turnover and profit margin decreased

 

 

The firm’s debt ratio increased and equity multiplier increased

 

Question 64 (3 points)

Suppose a call option on a share of stock is selling for $3. The option has a strike price of $70, and the stock is selling for $68 today. What is the time premium of the call option today?

 

Question 64 options:

 

$0

 

 

$2

 

 

-$2

 

 

$3

 

Question 65 (3 points)

Which of the following are external factors upon which the price of a stock is dependent?

1. Fear
2. Greed

III. Level of the economy

1. Level of interest rates

 

Question 65 options:

 

I only

 

 

I and II only

 

 

III and IV only

 

 

I, II, III, and IV

 

 

None of the above

 

Question 66 (3 points)

Income Statement      2019    2018

 

Revenue         $  220.00        $  200.00

Variable costs $(110.00)        $(100.00)

Fixed costs      $   (75.00)       $   (75.00)

EBIT    $   35.00         $   25.00

 

Interest Charges         $     (8.00)      $     (8.00)

EBT     $   27.00         $   17.00

 

Taxes  $    (5.40)        $    (3.40)

Net Income     $   21.60         $   13.60

 

Refer to the above income statement. Calculate the firm’s DOL.

 

Question 66 options:

 

1.47

 

 

2.00

 

 

5.88

 

 

4.00

 

Question 67 (1 point)

According to time value of money principles, it is important for your personal finances for you to save early, save often, and save a lot.

 

Question 67 options:

True

False