I. Multiple Choices1. Which of the following statements is CORRECT?a. One of the disadvantages of a sole proprietorship is that the proprietor is exposed to unlimitedliability.b. It is generally easier to transfer ones ownership interest in a partnership than in a corporation.c. One of the advantages of the corporate form of organization is that it avoids double taxation.d. One of the advantages of a corporation from a social standpoint is that every stockholder has equalvoting rights, i.e., one person, one vote.e. Corporations of all types are subject to the corporate income tax.2. Money markets are markets fora. Foreign stocks.b. Consumer automobile loans.c. U.S. stocks.d. Short-term debt securities.e. Long-term bonds.3.Which of the following is a primary market transaction?a. You sell 200 shares of IBM stock on the NYSE through your broker.b. IBM issues 2,000,000 shares of new stock and sells them to the public through an investmentbanker.c. You buy 200 shares of IBM stock from your brother. The trade is not made through a broker-you just give him cash and he gives you the stock.d. One financial institution buys 200,000 shares of IBM stock from another institution. Aninvestment banker arranges the transaction.e. You invest $10,000 in a mutual fund, which then uses the money to buy $10,000 of IBMshares on the NYSE.4.You recently sold to your brother 200 shares of Disney stock, and the transfer was madethrough a broker, and the trade occurred on the NYSE. This is an example of:a. A futures market transaction.b. A primary market transaction.c. A secondary market transaction.d. A money market transaction.e. An over-the-counter market transaction.5. The primary operating goal of a publicly-owned firm interested in serving its stockholders should betoa.Maximize the stock price per share over the long run, which is the stocks intrinsic value.b.c.d.e.Maximize the firm’s expected EPS.Minimize the chances of losses.Maximize the firm’s expected total income.Maximize the stock price on a specific target date.16. Which of the following statements is CORRECT?a. Important financial statements provided in the annual report are the balance sheet, incomestatement, cash budget, and the statement of stockholders equity.b. The balance sheet gives us a picture of the firms financial position at a point in time.c. The income statement gives us a picture of the firms financial position at a point in time.d.d. The statement of cash flows tells us how much cash the firm has in the form of currencyand demand deposits.e.e. The statement of cash needs tells us how much cash the firm will require during somefuture period, generally a month or a year.7. Other things held constant, which of the following actions would increase the amount of cash on acompanys balance sheet?a. The company repurchases common stock.b. The company pays a dividend.c. The company issues new common stock.d. The company gives customers more time to pay their bills.e. The company purchases a new piece of equipment.8. Which of the following items cannot be found on a firms balance sheet under current liabilities?a.b.c.d.e.Accounts payable.Short-term notes payable to the bank.Accrued wages.Cost of goods sold.Accrued payroll taxes.9. Which of the following statements is CORRECT?a. In the statement of cash flows, a decrease in accounts receivable is reported as a use of cash.b. Dividends do not show up in the statement of cash flows because dividends are considered to be afinancing activity, not an operating activity.c. In the statement of cash flows, a decrease in accounts payable is reported as a use of cash.d. In the statement of cash flows, depreciation charges are reported as a use of cash.e. In the statement of cash flows, a decrease in inventories is reported as a use of cash.10. Frederickson Office Supplies recently reported $12,500 of sales, $7,250 of operating costs other thandepreciation, and $1,250 of depreciation. The company had no amortization charges and no nonoperating income. It had $8,000 of bonds outstanding that carry a 7.5% interest rate, and its federalplus-state income tax rate was 40%. How much was the firm’s taxable income, or earnings beforetaxes (EBT)?a. $3,230.00b. $3,400.00c. $3,570.00d. $3,748.50e. $3,935.9311. JBS Inc. recently reported net income of $4,750 and depreciation of $885. How much was itsnet cash flow, assuming it had no amortization expense and sold none of its fixed assets.a. $4,831.31b. $5,085.59c. $5,353.25d. $5,635.00e. $5,916.75212. Considered alone, which of the following would increase a companys current ratio?a. An increase in net fixed assets.b. An increase in accrued liabilities.c. An increase in notes payable.d. An increase in accounts receivable.e. An increase in accounts payable.13. Companies E and P each reported the same earnings per share (EPS), but Company Es stocktrades at a higher price. Which of the following statements is CORRECT?a. Company E probably has fewer growth opportunities.b. Company E is probably judged by investors to be riskier.c. Company E must have a higher market-to-book ratio.d. Company E must pay a lower dividend.e. Company E trades at a higher P/E ratio.14. A corporate bond currently yields 8.5 percent. Municipal bonds with the same risk, maturity, andliquidity currently yield 5.5 percent. At what tax rate would investors be indifferent betweenthe two bonds?a. 35.29%b. 40.00%c. 24.67%d. 64.71%e. 30.04%15. Calculate the required rate of return for Mercury Inc., assuming that investors expect a 5 percentrate of inflation in the future. The real risk-free rate is equal to 3 percent and the market riskpremium is 5 percent. Mercury has a beta of 2.0, and its realized rate of return has averaged 15percent over the last 5 years.a. 15%b. 16%c. 17%d. 18%e. 20%16. Assume that the risk-free rate is 5 percent, and that the market risk premium is 7 percent. If a stockhas a required rate of return of 13.75 percent, what is its beta?a. 1.25b. 1.35c. 1.37d. 1.60e. 1.9617. You hold a diversified portfolio consisting of a $5,000 investment in each of 20 different commonstocks. The portfolio beta is equal to 1.15. You have decided to sell one of your stocks, a leadmining stock whose b is equal to 1.0, for $5,000 net and to use the proceeds to buy $5,000 ofstock in a steel company whose b is equal to 2.0. What will be the new beta of the portfolio?a. 1.12b. 1.20c. 1.22d. 1.10e. 1.15318. Consider the following information and then calculate the required rate of return for the ScientificInvestment Fund. The funds assets are as follows:StockABCDInvestment$ 200,000300,000500,0001,000,000Beta1.50-0.501.250.75The market required rate of return is 15 percent and the risk-free rate is 7 percent.a. 14.3%b. 15.0%c. 13.1%d. 12.7%e. 10.3%19. Which of the following events would make it more likely that a company would choose to call itsoutstanding callable bonds?a. A reduction in market interest rates.b. The company’s bonds are downgraded.c. An increase in the call premium.d. Answers a and b are correct.e. Answers a, b, and c are correct.20. Assume that you wish to purchase a bond with a 30-year maturity, an annual coupon rate of 10percent, a face value of $1,000, and semiannual interest payments. If you require a 9 percentnominal yield to maturity on this investment, what is the maximum price you should be willingto pay for the bond?a. $905.35b. $1,102.74c. $1,103.19d. $1,106.76e. $1,149.6321. A bond has an annual 8 percent coupon rate, a maturity of 10 years, a face value of $1,000, andmakes semiannual payments. If the price is $934.96, what is the annual nominal yield tomaturity on the bond?a. 8%b. 9%c. 10%d. 11%e. 12%22. A corporate bond matures in 14 years. The bond has an 8 percent semiannual coupon and a parvalue of $1,000. The bond is callable in five years at a call price of $1,050. The price of thebond today is $1,075. What are the bonds yield to maturity and yield to call?a. YTM = 14.29%;YTC = 14.09%b. YTM = 3.57%;YTC = 3.52%c. YTM = 7.14%;YTC = 7.34%d. YTM = 6.64%;YTC = 4.78%e. YTM = 7.14%;YTC = 7.05%423. Which of the following statements is most correct?a. Semistrong-form market efficiency implies that al
l private and public information israpidly incorporated into stock prices.b. Market efficiency implies that all stocks should have the same expected return.c. Weak-form market efficiency implies that recent trends in stock prices would be of no usein selecting stocks.d. All of the answers above are correct.e. None of the answers above is correct.24. A share of common stock has just paid a dividend of $3.00. If the expected long-run growth ratefor this stock is 5 percent, and if investors require an 11 percent rate of return, what is the priceof the stock?a. $50.00b. $50.50c. $52.50d. $53.00e. $63.0025. A share of preferred stock pays a quarterly dividend of $2.50. If the price of this preferred stock iscurrently $50, what is the nominal annual rate of return?a. 12%b. 18%c. 20%d. 23%e. 28%26. A firm has a profit margin of 15 percent on sales of $20,000,000. If the firm has debt of$7,500,000, total assets of $22,500,000, and an after-tax interest cost on total debt of 5 percent,what is the firm’s ROA?a. 8.4%b. 10.9%c. 12.0%d. 13.3%e. 15.1%27. The Wilson Corporation has the following relationships:Sales/Total assets2.0Return on assets (ROA)4%Return on equity (ROE)6%What is Wilsons profit margin and debt ratio?a. 2% and 0.33b. 4% and 0.33c. 4% and 0.67d. 2% and 0.67e. 4% and 0.5028. Cleveland Corporation has 100,000 shares of common stock outstanding. The companys netincome is $750,000 and its P/E is 8. What is the companys stock price?a. $20.00b. $30.00c. $40.00d. $50.00e. $60.00529. A firm which has an equity multiplier of 4.0 will have a debt ratio ofa. 4.00b. 3.00c. 1.00d. 0.75e. 0.2530. A firm has total interest charges of $10,000 per year, sales of $1 million, a tax rate of 40 percent,and a net profit margin of 6 percent. What is the firm’s times-interest-earned ratio?a. 16b. 10c. 7d. 11e. 2031. Oliver Incorporated has a current ratio = 1.6, and a quick ratio equal to 1.2. The company has $2million in sales and its current liabilities are $1 million. What is the companys inventoryturnover ratio?a. 5.0b. 5.2c. 5.5d. 6.0e. 6.332. Considering each action independently and holding other things constant, which of the followingactions would reduce a firm’s need for additional capital?a. An increase in the dividend payout ratio.b. A decrease in the profit margin.c. A decrease in the days sales outstanding.d. An increase in expected sales growth.e. A decrease in the accrual accounts (accrued wages and taxes).33. Call options on XYZ Corporations common stock trade in the market. Which of the followingstatements is most correct, holding other things constant?a. The price of these call options is likely to rise if XYZs stock price rises.b. The higher the strike price on XYZs options, the higher the options price will be.c. Assuming the same strike price, an XYZ call option that expires in one month will sell at ahigher price than one that expires in three months.d. If XYZs stock price stabilizes (becomes less volatile), then the price of its options willincrease.e. If XYZ pays a dividend, then its option holders will not receive a cash payment, but thestrike price of the option will be reduced by the amount of the dividend.34. Suppose you believe that Johnson Company’s stock price is going to increase from its current level of$22.50 sometime during the next 5 months. For $310.25 you can buy a 5-month call option giving youthe right to buy 100 shares at a price of $25 per share. If you buy this option for $310.25 and Johnson’sstock price actually rises to $45, what would your pre-tax net profit be?a. -$310.25b. $1,689.75c. $1,774.24d. $1,862.95e. $1,956.1035. Other things held constant, the value of an option depends on the stock’s price, the risk-free rate, and thea. Strike price.b. Variability of the stock price.c. Option’s time to maturity.d. All of the above.e. None of the above.36. An option that gives the holder the right to sell a stock at a specified price at some future time isa. a call option.b. a put option.c. an out-of-the-money option.d. a naked option.e. a covered optionII. Problem Solving Questions: Show all your works.1. If you want to take out a 30 year, $250,000.00 mortgage at 5.5% with 2 points (5 points):a. Calculate your monthly principal and interest payment?b. What is the APR(actual/true/effective rate of interest) on the loan?2.If you are 35, want to retire in 30 years and be able to withdraw $50,000.00 for each year inretirement, and expect to live to age 85, how much do you need to invest at 9.5% each year(to thenearest dollar)(5 points)?3.The High Growth Companys last dividend was $1.50. The dividend growth rate isexpected to be constant at 30% for 3 years, after which dividends are expected to grow ata rate of 6% forever. If High Growths required return is 13%, what is the companyscurrent stock price(5 points)?4.Pep Bottle’s December 31st balance sheet is given below:Cash$ 10 Accounts payable$ 15Accounts receivable 25 Notes payable20Inventory40 Accrued wages and taxes 15Net fixed assets75 Long-term debt30Common equity70Total liabilitiesTotal assets$150and equity$150Sales during the past year were $100, and they are expected to rise by 50 percent to $150 duringnext year. Also, during last year fixed assets were being utilized to only 85 percent of capacity, socompany could have supported $100 of sales with fixed assets that were only 85 percent of lastyear’s actual fixed assets. Assume that Pep Bottle’s profit margin will remain constant at 5 percentand that the company will continue to pay out 60 percent of its earnings as dividends. To the nearest whole dollar, what amount of nonspontaneous, additional funds (AFN) will be needed during the next year (8points)?a. Calculate AFN, when the company utilizes 100 % of capacity.b. Calculate AFN, when the company utilizes 85% of capacity.5. Suppose you believe that Delva Corporation’s stock price is going to decline from its current levelof $82.50 sometime during the next 5 months. For $510.25 you could buy a 5-month put optiongiving you the right to sell 100 shares at a price of $85 per share. If you bought this option for$510.25 and Delva’s stock price actually dropped to $60, what would your pre-tax net profit be (5
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