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University of Economics Ho Chi Minh City - FIN 201CF Final. Graded A

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1. The excess return required from a risky asset over that required from a risk-free asset is called the: 2. The average squared difference between the actual return and the average return is call... ed the: 3. The standard deviation for a set of stock returns can be calculated as the: 4. A symmetric, bell-shaped frequency distribution that is completely defined by its mean and standard deviation is the _____ distribution. 5. The average compound return earned per year over a multi-year period is called the _____ average return. 6. The return earned in an average year over a multi-year period is called the _____ average return. 7. The excess return you earn by moving from a relatively risk-free investment to a risky investment is called the: . 8. The capital gains yield plus the dividend yield on a security is called the: 9. A portfolio of large company stocks would contain which one of the following types of securities? 10. Based on the period of 1926 through 2008, _____ have tended to outperform other securities 11. Which one of the following types of securities has tended to produce the lowest real rate of return for the period 1926 through 2008? 12. On average, for the period 1926 through 2008: 13. Over the period of 1926 through 2008, the annual rate of return on _____ has been more volatile than the annual rate of return on _____. 14. Which one of the following is a correct ranking of securities based on their volatility over the period of 1926 to 2008? Rank from highest to lowest. 15. Over the period of 1926 to 2008, small company stocks had an average return of __%. 16. Over the period of 1926 to 2008, the average rate of inflation was _____%. 17. The average annual return on long-term corporate bonds for the period of 1926 to 2008 was _____%. 18. The average annual return on small company stocks was about _____ percentage points greater than the average annual return on large-company stocks over the period of 1926 to 2008. 19. The average risk premium on U.S. Treasury bills over the period of 1926 to 2008 was _____%. 20. Which one of the following is a correct statement concerning risk premium? 21. The risk premium is computed by ______ the average return for the investment. 22. The Zolo Co. just declared that it is increasing its annual dividend from $1.00 per share to $1.25 per share. If the stock price remains constant, then: 23. Which of the following statements are correct concerning the variance of the annual returns on an investment? I. The larger the variance, the more the actual returns tend to differ from the average return. II. The larger the variance, the larger the standard deviation. III. The larger the variance, the greater the risk of the investment. IV. The larger the variance, the higher the expected return. 24. The variance of returns is computed by dividing the sum of the: 25. Which of the following statements concerning the standard deviation are correct? I. The greater the standard deviation, the lower the risk. II. The standard deviation is a measure of volatility. III. The higher the standard deviation, the less certain the rate of return in any one given year. IV. The higher the standard deviation, the higher the expected return. 26. The standard deviation on small company stocks: I. is greater than the standard deviation on large company stocks. II. is less than the standard deviation on large company stocks. III. had an average value of about 33% for the period 1926 to 2008. IV. had an average value of about 20% for the period 1926 to 2008. 27. Estimates using the arithmetic average will probably tend to _____ values over the long-term while estimates using the geometric average will probably tend to _____ values over the short-term. 28. A capital gain occurs when: . 29. Capital market history shows us that the average return relationship from lowest to highest between securities is: stocks. 30. How much of total world stock market capitalization is from the United States in 2008? 31. In predicting the expected future return of the market, one of the dangers is that: 32. The dollar value of the world stock market capitalization, from largest to smallest is: 33. Which country has the lowest stock market risk premium? 34. In estimating the future equity risk premium, it is important to include assumptions about: 35. One year ago, you purchased a stock at a price of $32.50. The stock pays quarterly dividends of $.40 per share. Today, the stock is worth $34.60 per share. What is the total amount of your dividend income to date from this investment? Dividend income = $.40  4 = $1.60 36. Six months ago, you purchased 100 shares of stock in ABC Co. at a price of $43.89 a share. ABC stock pays a quarterly dividend of $.10 a share. Today, you sold all of your shares for $45.13 per share. What is the total amount of your capital gains on this investment? Capital gains = ($45.13 - $43.89)  100 = $124 37. A year ago, you purchased 300 shares of IXC Technologies, Inc. stock at a price of $9.03 per share. The stock pays an annual dividend of $.10 per share. Today, you sold all of your shares for $28.14 per share. What is your total dollar return on this investment? Total dollar return = ($28.14 - $9.03 + $.10)  300 = $5,763 38. You purchased 200 shares of stock at a price of $36.72 per share. Over the last year, you have received total dividend income of $322. What is the dividend yield? Dividend per share = $322  200 = $1.61; Dividend yield = $1.61  $36.72 = 4.4% 39. Winslow, Inc. stock is currently selling for $40 a share. The stock has a dividend yield of 3.8%. How much dividend income will you receive per year if you purchase 500 shares of this stock? Dividend income = $40  .038  500 = $760 40. One year ago, you purchased a stock at a price of $32 a share. Today, you sold the stock and realized a total return of 25%. Your capital gain was $6 a share. What was your dividend yield on this stock? Capital gains yield = $6  $32 = 18.75%; Dividend yield = 25% - 18.75% = 6.25% 41. You just sold 200 shares of Langley, Inc. stock at a price of $38.75 a share. Last year you paid $41.50 a share to buy this stock. Over the course of the year, you received dividends totaling $1.64 per share. What is your capital gain on this investment? Capital gain = ($38.75 - $41.50)  200 = -$550 (capital loss) 42. You purchased 300 shares of Deltona, Inc. stock for $44.90 a share. You have received a total of $630 in dividends and $14,040 in proceeds from selling the shares. What is your capital gains yield on this stock? Cost = 300  $44.90 = $13,470; Capital gains yield = ($14,040 - $13,470)  $13,470 = 4.23% 43. Today, you sold 200 shares of SLG, Inc. stock. Your total return on these shares is 12.5%. You purchased the shares one year ago at a price of $28.50 a share. You have received a total of $280 in dividends over the course of the year. What is your capital gains yield on this investment? Dividend yield = $280  (200  $28.50) = 4.91%; Capital gains yield = 12.5% - 4.91% = 7.59% 44. Six months ago, you purchased 1,200 shares of ABC stock for $21.20 a share. You have received dividend payments equal to $.60 a share. Today, you sold all of your shares for $22.20 a share. What is your total dollar return on this investment? Total dollar return = ($22.20 - $21.20 + $.60)  1,200 = $1,920 45. Eight months ago, you purchased 400 shares of Winston, Inc. stock at a price of $54.90 a share. The company pays quarterly dividends of $.50 a share. Today, you sold all of your shares for $49.30 a share. What is your total percentage return on this investment? Total percentage return = ($49.30 - $54.90 + $.50 + $.50)  $54.90 = -8.4% (loss) 46. A stock had returns of 8%, -2%, 4%, and 16% over the past four years. What is the standard deviation of this stock for the past four years? Average return = (.08 - .02 + .04 + .16)  4 = .065; Total squared deviation = (.08 - .065)2 + (-.02 - .065)2 + (.04 - .065)2 + (.16 - .065)2 = .000225 + .007225 + .000625 + .009025 = .0171; Standard deviation = (.0171  (4 - 1) = .0057 = .075498 = 7.5% 47. A stock has an expected rate of return of 8.3% and a standard deviation of 6.4%. Which one of the following best describes the probability that this stock will lose 11% or more in any one given year? Lower bound of 99% probability range = .083 - (3  .064) = -.109 = -10.9%; Probability of losing 11% or more is less than 0.5%. 48. A stock has returns of 3%, 18%, -24%, and 16% for the past four years. Based on this information, what is the 95% probability range for any one given year? Average return = (.03 + .18 - .24 + .16)  4 = .0325; Total squared deviation = (.03 - .0325)2 + (.18 - .0325)2 + (-.24 - .0325)2 + (.16 - .0325)2 = .00000625 + .02175625 + .07425625 + .01625625 = .112275; Standard deviation = (.112275  (4 - 1) = .037425 = .19346 = 19.346%; 95% probability range = 3.25%  (2  19.346%) = -35.4 to 41.9% 49. A stock had returns of 8%, 14%, and 2% for the past three years. Based on these returns, what is the probability that this stock will earn at least 20% in any one given year? Average return = (.08 + .14 + .02)  3 = 8%; Total squared deviation = (.08 - .08)2 + (.14 - .08)2 + (.02 - .08)2 = .00 + .0036 + .0036 = .0072; Standard deviation = (.0072  (3 - 1) = .06 = 6%; Upper end of the 95% probability range = 8% + (2  6%) = 20%; Probability of earning at least 20% in any one year is 2.5%. 50. A stock had returns of 11%, 1%, 9%, 15%, and -6% for the past five years. Based on these returns, what is the approximate probability that this stock will earn at least 23% in any one given year? Average return = (.11 + .01 + .09 + .15 - .06)  5 = 6%; Total squared deviation = (.11 - .06)2 + (.01 - .06)2 + (.09 - .06)2 + (.15 - .06)2 + (-.06 - .06)2 = .0025 + .0025 + .0009 + .0081 + .0144 = .0284; Standard deviation = (0.284  (5 - 1) = .0071 = .084; Upper end of the 95% probability range = .06 + (2  .084) = 22.8%; Probability of earning more than 23% in any one year is just slightly less than 2.5%. 51. A stock had returns of 8%, 39%, 11%, and -24% for the past four years. Which one of the following best describes the probability that this stock will NOT lose more than 43% in any one given year? Average return = (.08 + .39 + .11 - .24)  4 = 8.5%; Total squared deviation = (.08 - .085)2 + (.39 - .085)2 + (.11 - .085)2 + (-.24 - .085)2 = .000025 + .093025 + .000625 + .105625 = .1993; Standard deviation = .1993  (4 - 1) = .06643333 = 25.7747%; Lower bound of the 95% probability range = 8.5% - (2  25.7747%) = -43.05; Probability of NOT losing more than 43% in any given year is 97.5%. 52. Over the past five years, a stock produced returns of 14%, 22%, -16%, 2%, and 10%. What is the probability that an investor in this stock will NOT lose more than 8% nor earn more than 21% in any one given year? Average return = (.14 + .22 - .16 + .02 + .10)  5 = 6.4%; Total squared deviation = (.14 - .064)2 + (.22 - .064)2 + (-.16 - .064)2 + (.02 - 0.064)2 + (.10 - .064)2 = .005776 + .024336 + .050176 + .001936 + .001296 = .08352; Standard deviation = .08352  (5 - 1) = .02088 = 14.45%; 68% probability range = 6.4%  14.45% = -8.05% to 20.85%; Answer is 68%. 53. What are the arithmetic and geometric average returns for a stock with annual returns of 4%, 9%, -6%, and 18%? Arithmetic average = (.04 + .09 - .06 + .18)  4 = 6.25%; Geometric return = (1.04  1.09  .94  1.18).25 - 1 = 5.89% 54. What are the arithmetic and geometric average returns for a stock with annual returns of 21%, 8%, -32%, 41%, and 5%? Arithmetic average = (.21 + .08 - .32 + .41 + .05)  5 = 8.6%; Geometric return = (1.21  1.08  .68  1.41  1.05).20 - 1 = 5.6% 55. A stock had returns of 6%, 13%, -11%, and 17% over the past four years. What is the geometric average return for this time period? Geometric average = (1.06  1.13  .89  1.17).25 - 1 = 5.7% 56. A stock had the following prices and dividends. What is the geometric average return on this stock? Return for year 2 = ($24.90 - $23.19 + $.23)  $23.19 = 8.3657%; Return for year 3 = ($23.18 - $24.90 + $.24)  $24.90 = -5.9438%; Return for year 4 = ($24.86 - $23.18 + $.25)  $23.18 = 8.3261%; Geometric return = (1.083657  .940562  1.083261).3333 - 1 = 3.4% 57. You bought 100 shares of stock at $20 each. At the end of the year, you received a total of $Invest = $20(100) = $2,000 $Return = ($2,500 + $400 - $2,000)/$2,000 = .45 = 45% 58. You bought 100 shares of stock at $20 each. At the end of the year, you received a total of $400 in dividends, and your stock was worth $2,500 total. What was your total dollar capital gain and total dollar return? C. $500; $900 $CG = $2,500 - $2,000 = $500 $Total Return = CG + DIV = $500 + $400 = $900 59. Excelsior shares are currently selling for $25 each. You bought 200 shares one year ago at $24 and received dividend payments of $1.50 per share. What was your percentage capital gain this year? %CG = ($25 - $24)/$25 = .04167 = 4.17% 60. Excelsior share are currently selling for $25 each. You bought 200 shares one year ago at $24 and received dividend payments of $1.50 per share. What was your total rate of return? % Total Return = [($25 + $1.50)/ $24] - 1 = .1041667 = 10.42% 61. The prices for IMB over the last 3 years are given below. Assuming no dividends were paid, what was the 3-year holding period return? Given the following information: Year 1 return = 10%, Year 2 return = 15%, Year 3 return = 12%. HPR = (1.10) (1.15) (1.12) = 1.4168 - 1 = 41.68% 62. Kids Toy Co. has had total returns over the past five years of 0%, 7%, -2%, 10%, and 12%. What was the arithmetic average return on this stock? Arithmetic average = (0 + 7 - 2 + 10 + 12)/5 = 5.40% 63. The returns on your portfolio over the last 5 years were -5%, 20%, 0%, 10% and 5%. What is the arithmetic average return? Arithmetic average = (-5 + 20 + 0 + 10 + 5)/5 = 6% 64. If the expected return on the market is 16%, then using the historical risk premium on large stocks of 8.6%, the current risk-free rate is: Risk-free rate = 16% - 8.6% = 7.4% 65. The total annual returns on large company common stocks averaged 12.3% from 1926 to 2008, small company stocks averaged 17.4%, long-term government bonds averaged 5.8%, while Treasury Bills averaged 3.8%. What was the average risk premium earned by long-term government bonds, and small company stocks respectively? Long Term Government = 5.8% - 3.8% = 2.0% Small Stocks = 17.5% - 3.8% = 13.7% 66. The returns on your portfolio over the last 5 years were -5%, 20%, 0%, 10% and 5%. What is the standard deviation of your return? Standard Deviation =  [(-.05 - .06)2 + (.20 - .06)2 + (0 - .06)2 + (.10 - .06)2 + (.05 - .06)2]/4 = .0370/4 = .00925 = .09617 = 9.62% 67. Suppose you own a risky asset with an expected return of 12% and a standard deviation of 20%. If the returns are normally distributed, the approximate probability of receiving a return greater than 32% is approximately: Z = (32 - 12)/20 = 1; 32 is 1 standard deviation above the mean. The probability of being within 1 standard deviation is approximately 68%; therefore, probability above the mean is approximately 32%/2 = 16%. 68. The return pattern on your favorite stock has been 5%, 8%, -12%, 15%, 21% over the last five years. What has been your average return and holding period return over the last 5 years? Average return = (5 + 8 - 12 + 15 + 21)/5 = 37/5 = 7.4% HPR = [(1.05)(1.08)(.88)(1.15)(1.21)] - 1 = (1.3886) - 1 = .3886 = 38.9% 69. The long term inflation rate average was 3.2% and you invested in long term corporate bonds over the same period which earned 6.1%. What was the average risk premium you earned? Average risk premium = 6.1% - 3.2% = 2.9% 70. The market portfolio of common stocks earned 14.7% in one year. Treasury bills earned 5.7%. What was the real risk premium on equities? Risk premium = 14.7% - 5.7% = 9.0% 71. You have a sample of returns observations for the Malta Stock Fund. The 4 returns are 7.25%, 5.6%, 12.5%, 1.0%. What is the average return and variance of these returns? Average return = (.0725 + .056 + .125 + .01)/4 = .2635/4 = .065875 = 6.6% Variance = [(7.25 - 6.6)2 + (5.6 - 6.6)2 + (12.5 - 6.6)2 + (1 - 6.6)2]/3 = 67.5925/3 = 22.53 1. A portfolio is: 2. The percentage of a portfolio's total value invested in a particular asset is called that asset's: 3. Risk that affects a large number of assets, each to a greater or lesser degree, is called _____ risk. 4. Risk that affects at most a small number of assets is called _____ risk. 5. The principle of diversification tells us that: 6. The _____ tells us that the expected return on a risky asset depends only on that asset's nondiversifiable risk. 7. The amount of systematic risk present in a particular risky asset, relative to the systematic risk present in an average risky asset, is called the particular asset's: 8. The linear relation between an asset's expected return and its beta coefficient is the: 9. The slope of an asset's security market line is the: 10. You are considering purchasing stock S. This stock has an expected return of 8% if the economy booms and 3% if the economy goes into a recessionary period. The overall expected rate of return on this stock will: 11. Which one of the following statements is correct concerning the expected rate of return on an individual stock given various states of the economy? 12. The expected return on a stock that is computed using economic probabilities is: 13. The characteristic line is graphically depicted as: 14. The beta of a security is calculated by: 15. If investors possess homogeneous expectations over all assets in the market portfolio, when riskless lending and borrowing is allowed, the market portfolio is defined to: 16. Which one of the following is an example of a nondiversifiable risk? 17. The risk premium for an individual security is computed by: 18. Standard deviation measures _____ risk. 19. When computing the expected return on a portfolio of stocks the portfolio weights are based on the: 20. The portfolio expected return considers which of the following factors? I. the amount of money currently invested in each individual security II. various levels of economic activity III. the performance of each stock given various economic scenarios IV. the probability of various states of the economy 21. The expected return on a portfolio: 22. If a stock portfolio is well diversified, then the portfolio variance: 23. Which one of the following statements is correct concerning the standard deviation of a portfolio? 24. The standard deviation of a portfolio will tend to increase when: 25. Systematic risk is measured by: 26. Which one of the following is an example of systematic risk? 27. The systematic risk of the market is measured by: 28. Unsystematic risk: . 29. Which one of the following is an example of unsystematic risk? 30. The primary purpose of portfolio diversification is to: . 31. Which one of the following would indicate a portfolio is being effectively diversified? 32. The majority of the benefits from portfolio diversification can generally be achieved with just _____ diverse securities. 33. Which one of the following measures is relevant to the systematic risk principle? 34. A security that is fairly priced will have a return _____ the Security Market Line. 35. The intercept point of the security market line is the rate of return which corresponds to: 36. A stock with an actual return that lies above the security market line: 37. The market risk premium is computed by: 38. The excess return earned by an asset that has a beta of 1.0 over that earned by a risk-free asset is referred to as the: 39. The efficient set of portfolios: 40. Diversification can effectively reduce risk. Once a portfolio is diversified, the type of risk remaining is: 41. A well-diversified portfolio has negligible: 42. The Capital Market Line is the pricing relationship between: 43. Total risk can be divided into: 44. Beta measures: 45. The dominant portfolio with the lowest possible risk is: 46. The measure of beta associates most closely with: 47. An efficient set of portfolios is: 48. A stock with a beta of zero would be expected to have a rate of return equal to: 49. The combination of the efficient set of portfolios with a riskless lending and borrowing rate results in: riskless asset and the tangency portfolio. 50. According to the Capital Asset Pricing Model: 51. The diversification effect of a portfolio of two stocks: 52. The separation principle states that an investor will: individual risk tolerance. 53. When a security is added to a portfolio the appropriate return and risk contributions are: 54. When stocks with the same expected return are combined into a portfolio: 55. The correlation between stocks A and B is the: 56. You have plotted the data for two securities over time on the same graph, i.e., the monthly return of each security for the last 5 years. If the pattern of the movements of each of the two securities rose and fell as the other did, these two securities would have: 57. If the covariance of stock 1 with stock 2 is - .0065, then what is the covariance of stock 2 with stock 1? 58. You have a portfolio of two risky stocks which turns out to have no diversification benefit. The reason you have no diversification is the returns: 59. A portfolio will usually contain: 60. If the correlation between two stocks is +1, then a portfolio combining these two stocks will have a variance that is: 61. The opportunity set of portfolios is: 62. The correlation between two stocks: 63. If the correlation between two stocks is -1, the returns: 64. Diversification can effectively reduce risk. Once a portfolio is diversified the type of risk remaining is: 65. For a highly diversified equally weighted portfolio with a large number of securities, the portfolio variance is: 66. A well-diversified portfolio has eliminated most of the: 67. A typical investor is assumed to be: 68. The total number of variance and covariance terms in a portfolio is N2. How many of these would be (including non-unique) covariances? 69. The relationship between the covariance of the security with the market to the variance is called the: 70. According to the CAPM: 71. The elements along the diagonal of the variance/covariance matrix are: 72. The elements in the off-diagonal positions of the variance/covariance matrix are: 73. The beta of an individual security is calculated by: . 74. A risk that affects a large number of assets, each to a greater or lesser degree is called: 75. As we add more securities to a portfolio, the ____ will decrease: 76. Diversification will not lower the ____ risk: 77. You want your portfolio beta to be 1.20. Currently, your portfolio consists of $100 invested in stock A with a beta of 1.4 and $300 in stock B with a beta of .6. You have another $400 to invest and want to divide it between an asset with a beta of 1.6 and a risk-free asset. How much should you invest in the risk-free asset? BetaPortfolio = 1.20 = ($100  $800  1.4) + ($300  $800  .6) + (x  $800  1.6) + (($400 - x)  $800  0) = .175 + .225 + .002 + 0; .8 = .002x; x = $400; Risk - free asset = $400 - $400 = $0 78. You have a $1,000 portfolio which is invested in stocks A and B plus a risk-free asset. $400 is invested in stock A. Stock A has a beta of 1.3 and stock B has a beta of .7. How much needs to be invested in stock B if you want a portfolio beta of .90? BetaPortfolio = .90 = ($400  $1,000  1.3) + ($x  $1,000  .7) + (($600 - x)  $1,000  0) = .52 + .0007x + 0; .0007x = .38; x = $542.86 = $543 79. You recently purchased a stock that is expected to earn 12% in a booming economy, 8% in a normal economy and lose 5% in a recessionary economy. There is a 15% probability of a boom, a 75% chance of a normal economy, and a 10% chance of a recession. What is your expected rate of return on this stock? E(r) = (.15  .12) + (.75  .08) + (.10  -.05) = .018 + .06 - .005 = .073 = 7.3% 80. The Inferior Goods Co. stock is expected to earn 14% in a recession, 6% in a normal economy, and lose 4% in a booming economy. The probability of a boom is 20% while the probability of a normal economy is 55% and the chance of a recession is 25%. What is the expected rate of return on this stock? E(r) = (.20  -.04) + (.55  .06) + (.25  .14) = -.008 + .033 + .035 = .06 = 6.0% 81. You are comparing stock A to stock B. Given the following information, which one of these two stocks should you prefer and why? E(r)A = (.60  .09) + (.40  .04) = .054 + .016 = .07 = 7% E(r)B = (.60  .15) + (.40  -.06) = .09 - .024 = .066 = 6.6% You should select stock A because it has a higher expected return and also appears to be less risky. 82. Zelo, Inc. stock has a beta of 1.23. The risk-free rate of return is 4.5% and the market rate of return is 10%. What is the amount of the risk premium on Zelo stock? Risk premium = 1.23  (.10 - .045) = .06765 = 6.77% 83. If the economy booms, RTF, Inc. stock is expected to return 10%. If the economy goes into a recessionary period, then RTF is expected to only return 4%. The probability of a boom is 60% while the probability of a recession is 40%. What is the variance of the returns on RTF, Inc. stock? E(r) = (.60  .10) + (.40 .04) = .06 + .016 = .076 Var = .60  (.10 - .076)2 + .40  (.04 - .076)2 = .0003456 + .0005184 = .000864 84. The rate of return on the common stock of Flowers by Flo is expected to be 14% in a boom economy, 8% in a normal economy, and only 2% in a recessionary economy. The probabilities of these economic states are 20% for a boom, 70% for a normal economy, and 10% for a recession. What is the variance of the returns on the common stock of Flowers by Flo? E(r) = (.20  .14) + (.70  .08) + (.10  .02) = .028 + .056 + .002 = .086 Var = .20  (.14 - .086)2 + .70  (.08 - .086)2 + .10  (.02 - .086)2 = .0005832 + .0000252 + .0004356 = .001044 85. Kurt's Adventures, Inc. stock is quite cyclical. In a boom economy, the stock is expected to return 30% in comparison to 12% in a normal economy and a negative 20% in a recessionary period. The probability of a recession is 15%. There is a 30% chance of a boom economy. The remainder of the time, the economy will be at normal levels. What is the standard deviation of the returns on Kurt's Adventures, Inc. stock? E(r) = (.30  .30) + (.55  .12) + (.15  -.20) = .09 + .066 - .03 = .126 Var = .30  (.30 - .126)2 + .55  (.12 - .126)2 + .15  (-.20 - .126)2 = .0090828 + .0000198 + .0159414 = .025044 Std dev = .025044 = .15825 = 15.83% 86. What is the standard deviation of the returns on a stock given the following information? E(r) = (.10  .16) + (.60  .11) + (.30  -.08) = .016 + .066 - .024 = .058 Var = .10  (.16 - .058)2 + .60  (.11 - .058)2 + .30  (-.08 - .058)2 = .0010404 + .0016224 + .0057132 = .008376 Std dev = .008376 = .09152 = 9.15% 87. You have a portfolio consisting solely of stock A and stock B. The portfolio has an expected return of 10.2%. Stock A has an expected return of 12% while stock B is expected to return 7%. What is the portfolio weight of stock A? .102 = [.12  x] + [.07  (1 - x)] = .12x + .07 - .07x; .032 = .05x; x = 64% 88. You own the following portfolio of stocks. What is the portfolio weight of stock C? Portfolio weightC = (400  $46)  [(100  $22) + (600  $17) + (400  $46) + (200  $38)] = $18,400  $38,400 = 47.9% 89. You own a portfolio with the following expected returns given the various states of the economy. What is the overall portfolio expected return? E(r) = (.15  .18) + (.60  .11) + (.25  -.10) = .027 + .066 - .025 = .068 = 6.8% 90. What is the expected return on a portfolio which is invested 20% in stock A, 50% in stock B, E(r)Boom = (.20  .18) + (.50  .09) + (.30  .06) = .036 + .045 + .018 = .099 E(r)Normal = (.20  .11) + (.50  .07) + (.30  .09) = .022 + .035 + .027 = .084 E(r)Bust = (.20  -.10) + (.50  .04) + (.30  .13) = -.020 + .020 + .039 = .039 E(r)Portfolio = (.20  .099) + (.70  .084) + (.10  .039) = .02376 + .0588 + .0039 = .0825 = 8.25% 91. What is the expected return on this portfolio? Portfolio value = (520  $25) + (300  $48) + (250  $26) = $13,000 + $14,400 + $6,500 = $33,900; E(r) = ($13,000  $33,900  .08) + ($14,400  $33,900  .15) + ($6,500  $33,900  .06) = .03068 + .06372 + .01150 = .1059 = 10.59% 92. What is the expected return on a portfolio comprised of $3,000 in stock K and $5,000 in stock L if the economy is normal? E(r)Normal = [$3,000  ($3,000 + $5,000)  .05] + [$5,000  ($3,000 + $5,000)  .06) = .01875 + .0375 = .05625 = 5.63% 93. What is the expected return on a portfolio comprised of $4,000 in stock M and $6,000 in stock N if the economy enjoys a boom period? E(r)Boom = [($4,000  ($4,000 + $6,000)  .18] + [$6,000  ($4,000 + $6,000)  .10] = .072 + .06 = .132 = 13.2% 94. What is the portfolio variance if 30% is invested in stock S and 70% is invested in stock T? E(r)Boom = (.30  .12) + (.70  .20) = .036 + .14 = .176 E(r)Normal = (.30  .06) + (.70  .04) = .018 + .028 = .046 E(r)Portfolio = (.40  .176) + (.60  .046) = .0704 + .0276 = .098 VarPortfolio = [.40  (.176 - .098)2] + [.60  (.046 - .098)2] = .0024336 + .0016224 = .004056 95. What is the variance of a portfolio consisting of $3,500 in stock G and $6,500 in stock H? E(r)Boom = [$3,500  ($3,500 + $6,500)  .15)] + [$6,500  ($3,500 + $6,500)  .09) = .0525 + .0585 = .111 E(r)Normal = [$3,500  ($3,500 + $6,500)  .08)] + [$6,500  ($3,500 + $6,500)  .06) = .028 + .039 = .067 E(r)Portfolio = (.15  .111) + (.85  .067) = .01665 + .05695 = .0736 VarPortfolio = [.15  (.111 - .0736)2] + [.85  (.067 - .0736)2] = .000209814 + .000037026 = .00024684 = .000247 96. What is the standard deviation of a portfolio that is invested 40% in stock Q and 60% in stock R? E(r)Boom = (.40  .18) + (.60  .09) = .072 + .054 = .126 E(r)Normal = (.40  .09) + (.60  .05) = .036 + .03 = .066 E(r)Portfolio = (.25  .126) + (.75  .066) = .0315 + .0495 = .081 VarPortfolio = [.25  (.126 - .081)2] + [.75  (.066 - .081)2] = .00050625 + .00016875 = .000675 Std dev = .000675 = .02598 = 2.6% 97. What is the standard deviation of a portfolio which is comprised of $4,500 invested in stock S and $3,000 in stock T? E(r)Boom = [$4,500  ($4,500 + $3,000)  .12)] + [$3,000  ($4,500 + $3,000)  .04) = .072 + .016 = .088 E(r)Normal = [$4,500  ($4,500 + $3,000)  .09)] + [$3,000  ($4,500 + $3,000)  .06) = .054 + .024 = .078 E(r)Bust = [$4,500  ($4,500 + $3,000)  .02)] + [$3,000  ($4,500 + $3,000)  .09) = .012 + .036 = .048 E(r)Portfolio = (.10  .088) + (.65  .078) + (.25  .048) = .0088 + .0507 + .012 = .0715 VarPortfolio = [.10  (.088 - .0715)2] + [.65  (.078 - .0715)2] + [.25  (.048 - .0715)2] = .000027225 + .000027463 + .000138063 = .000192751 Std dev = .000192751 = .01388 = 1.4% 98. What is the standard deviation of a portfolio which is invested 20% in stock A, 30% in stock B and 50% in stock C? E(r)Boom = (.20  .15) + (.30  .10) + (.50  .05) = .03 + .03 + .025 = .085 E(r)Normal = (.20  .09) + (.30  .06) + (.50  .07) = .018 + .018 + .035 = .071 E(r)Bust = (.20  -.14) + (.30  .02) + (.50  .08) = -.028 + .006 + .04 = .018 E(r)Portfolio = (.10  .085) + (.70  .071) + (.20  .018) = .0085 + .0497 + .0036 = .0618 VarPortfolio = [.10  (.085 - .0618)2] + [.70  (.071 - .0618)2] + [.20  (.018 - .0618)2] = .000053824 + .000059248 + .000383688 = .00049676 Std dev = .00049676 = .022288 = 2.2% 99. What is the beta of a portfolio comprised of the following securities? ValuePortfolio = $2,000 + $3,000 + $5,000 = $10,000 BetaPortfolio = ($2,000  $10,000  1.20) + ($3,000  $10,000  1.46) + ($5,000  $10,000  .72) = .24 + .438 + .36 = 1.038 100. Your portfolio is comprised of 30% of stock X, 50% of stock Y, and 20% of stock Z. Stock X has a beta of .64, stock Y has a beta of 1.48, and stock Z has a beta of 1.04. What is the beta of your portfolio? BetaPortfolio = (.30  .64) + (.50  1.48) + (.20  1.04) = .192 + .74 + .208 = 1.14 101. Your portfolio has a beta of 1.18. The portfolio consists of 15% U.S. Treasury bills, 30% in stock A, and 55% in stock B. Stock A has a risk-level equivalent to that of the overall market. What is the beta of stock B? BetaPortfolio = 1.18 = (.15  0) + (.30  1.0) + (.55  B) = 0 + .3 + .55B; .88 = .55B; B = 1.6 The beta of a risk-free asset is zero. The beta of the market is 1.0. 102. You would like to combine a risky stock with a beta of 1.5 with U.S. Treasury bills in such a way that the risk level of the portfolio is equivalent to the risk level of the overall market. What percentage of the portfolio should be invested in Treasury bills? BetaPortfolio = 1.0 = [(1 - w)  1.5] + [w  0] = 1.5 - 1.5w; 1.5w = .5; w = .33 103. The market has an expected rate of return of 9.8%. The long-term government bond is expected to yield 4.5% and the U.S. Treasury bill is expected to yield 3.4%. The inflation rate is 3.1%. What is the market risk premium? Risk premium = 9.8% - 3.4% = 6.4% 104. The risk-free rate of return is 4% and the market risk premium is 8%. What is the expected rate of return on a stock with a beta of 1.28? E(r) = .04 + (1.28  .08) = .1424 = 14.24% 105. The common stock of Flavorful Teas has an expected return of 14.4%. The return on the market is 10% and the risk-free rate of return is 3.5%. What is the beta of this stock? E(r) = .144 = .035 +   (.10 - .035); .109 = .065;  = 1.68 106. The stock of Big Joe's has a beta of 1.14 and an expected return of 11.6%. The risk-free rate of return is 4%. What is the expected return on the market? E(r) = .116 = .04 + 1.14 (rm - .04); .1216 = 1.14rm; rm = .1067 = 10.67% 107. The expected return on HiLo stock is 13.69% while the expected return on the market is 11.5%. The beta of HiLo is 1.3. What is the risk-free rate of return? E(r) = .1369 = rf + 1.3  (.115 - rf); .3rf = .0126; rf = .042 = 4.2% 108. The stock of Martin Industries has a beta of 1.43. The risk-free rate of return is 3.6% and the market risk premium is 9%. What is the expected rate of return on Martin Industries stock? E(r) = .036 + (1.43  .09) = .1647 = 16.5% 109. Which one of the following stocks is correctly priced if the risk-free rate of return is 2.5% and the market risk premium is 8%? E(r)A = .025 + (.68  .08) = .079 E(r)B = .025 + (1.42  .08) = .139 Stock B is correctly priced. E(r)C = .025 + (1.23  .08) = .123 E(r)D = .025 + (1.31 .08) = .130 E(r)E = .025 + (.94  .08) = .100 110. Which one of the following stocks is correctly priced if the risk-free rate of return is 3.6% and the market rate of return is 10.5%? E(r)A = .036 + [.85  (.105 - .036)] = .095 E(r)B = .036 + [1.08  (.105 - .036)] = .111 E(r)C = .036 + [1.69  (.105 - .036)] = .153 Stock C is correctly priced. E(r)D = .036 + [.71  (.105 - .036)] = .085 E(r)E = .036 + [1.45  (.105 - .036)] = .136 111. The expected return on GenLabs is: E(r) = .05(-.5) + .10(-.15) + .2(.05) + .3(.15) + .2(.25) + .15(.40) = .125 = 12.5% 112. The variance of GenLabs returns is: .05(-.50 - .125)2 + .1(-.15 - .125)2 + .2(.05 - .125)2 + .3(.15 - .125)2 + .2(.25 - .125)2 + .15(.40 - .125)2 = .0428 113. The standard deviation of GenLabs returns is .05(-.50 - .125)2 + .1(-.15 - .125)2 + .2(.05 - .125)2 + .3(.15 - .125)2 + .2(.25 - .125)2 + .15(.40 - .125)2 = .0428 Square root of (.0428) = .2069 114. Stock A has an expected return of 20%, and stock B has an expected return of 4%. However, the risk of stock A as measured by its variance is 3 times that of stock B. If the two stocks are combined equally in a portfolio, what would be the portfolio's expected return? Rp = 20(.5) + .04(.5) = 12% 115. A portfolio is entirely invested into Buzz's Bauxite Boring equity, which is expected to return 16%, and Zum's Inc. bonds, which are expected to return 8%. 60% of the funds are invested in Buzz's and the rest in Zum's. What is the expected return on the portfolio? Rp = .60(R Buzz) + .40(R Zum) = .60(16%) + .40(8%) = 12.8% 116. The variance of Stock A is .004, the variance of the market is .007 and the covariance between the two is .0026. What is the correlation coefficient? Standard deviation of A = .06325, Standard deviation of the market = .08366 CORR = COV/(SDa.(SDm) = .0026/(.06325)(.08366) = .4913 117. A portfolio has 50% of its funds invested in Security One and 50% of its funds invested in Security Two. Security One has a standard deviation of 6%. Security Two has a standard deviation of 12%. The securities have a coefficient of correlation of 0.5. Which of the following values is closest to portfolio variance? Var. = .52(.06)2 + .52(.12)2 + 2(.5)(.5)(.5)(.06)(.12) = .0009 + .0036 + .0018 = .0063 118. A portfolio has 25% of its funds invested in Security C and 75% of its funds invested in Security D. Security C has an expected return of 8% and a standard deviation of 6%. Security D has an expected return of 10% and a standard deviation of 10%. The securities have a coefficient of correlation of 0.6. Which of the following values is closest to portfolio return and variance? E(R) = .25(.08) + .75(.10) = .095 = 9.5% Variance = .252(.06)2 + .752(.10)2 + 2(.25)(.75)(.06)(.60)(.10) = .0072 119. A portfolio contains two assets. The first asset comprises 40% of the portfolio and has a beta of 1.2. The other asset has a beta of 1.5. The portfolio beta is: p = .4(1.2) + .6(1.5) = 1.38 120. A portfolio contains four assets. Asset 1 has a beta of .8 and comprises 30% of the portfolio. Asset 2 has a beta of 1.1 and comprises 30% of the portfolio. Asset 3 has a beta of 1.5 and comprises 20% of the portfolio. Asset 4 has a beta of 1.6 and comprises the remaining 20% of the portfolio. If the riskless rate is expected to be 3% and the market risk premium is 6%, what is the beta of the portfolio? p = .3(.8) + .3(1.1) + .2(1.5) + .2(1.6) = 1.19 1. The weighted average of the firm's costs of equity, preferred stock, and after tax debt is the: 2. If the CAPM is used to estimate the cost of equity capital, the expected excess market return is equal to the: 3. The best fit line of a pairwise plot of the returns of the security against the market index returns is called the: 4. The use of debt is called: 5. The weighted average cost of capital for a firm is the: 6. The WACC is used to _______ the expected cash flows when the firm has ____________. 7. Using the CAPM to calculate the cost of capital for a risky project assumes that: 8. The use of WACC to select investments is acceptable when the: 9. If the risk of an investment project is different than the firm's risk then: 10. If the project beta and IRR coordinates plot above the SML the project should be: 11. The beta of a security provides an: 12. Regression analysis can be used to estimate: 13. Beta measures depend highly on the: 14. The formula for calculating beta is given by the dividing the ___________ of the stock with the market portfolio by the ___________ of the market portfolio. 15. The slope of the characteristic line is the estimated: 16. Companies that have highly cyclical sales will have a: 17. Betas may vary substantially across an industry. The decision to use the industry or firm beta to estimate the cost of capital depends on: 18. Beta is useful in the calculation of the: 19. For a multi-product firm, if a project's beta is different from that of the overall firm, then the: 20. The problem of using the overall firm's beta in discounting projects of different risk is the: 21. The asset beta of a levered firm is generally: 22. Comparing two otherwise equal firms, the beta of the common stock of a levered firm is ____________ than the beta of the common stock of an unlevered firm. 23. The beta of a firm is determined by which of the following firm characteristics? 24. The beta of a firm is more likely to be high under what two conditions? 25. A firm with cyclical earnings is characterized by: 26. A firm with high operating leverage has: 27. If a firm has low fixed costs relative to all other firms in the same industry, a large change in sales volume (either up or down) would have: 28. A firm with high operating leverage is characterized by __________ while one with high financial leverage is characterized by __________. 29. Firms whose revenues are strongly cyclical and whose operating leverage is high are likely to have: 30. An industry is likely to have a low beta if the: 31. For the levered firm the equity beta is __________ the asset beta. 32. All else equal, a more liquid stock will have a lower ________. 33. Two stock market based costs of liquidity that affects the cost of capital are the: 34. When a specialist is caught in the middle of a trade between informed and uniformed traders, which effectively eliminates the spread or causes a loss, is subject to: 35. All else equal, new shareholders will ____ the capital gains of existing shareholders. 36. The following are methods to estimate the market risk premium: 37. Beta is the slope of the: 38. Two stocks that have the same beta ____ have the same correlation because _______: 39. When using the cost of debt, the relevant number is the: 40. Jack's Construction Co. has 80,000 bonds outstanding that are selling at par value. Bonds with similar characteristics are yielding 8.5%. The company also has 4 million shares of common stock outstanding. The stock has a beta of 1.1 and sells for $40 a share. The U.S. Treasury bill is yielding 4% and the market risk premium is 8%. Jack's tax rate is 35%. What is Jack's weighted average cost of capital? Re = .04 + (1.1  .08) = .128 Debt: 80,000  $1,000 = $80m Common: 4m  $40 = $160m Total = $80m + $160m = $240m 41. Peter's Audio Shop has a cost of debt of 7%, a cost of equity of 11%, and a cost of preferred stock of 8%. The firm has 104,000 shares of common stock outstanding at a market price of $20 a share. There are 40,000 shares of preferred stock outstanding at a market price of $34 a share. The bond issue has a total face value of $500,000 and sells at 102% of face value. The tax rate is 34%. What is the weighted average cost of capital for Peter's Audio Shop? Debt: $500,000  1.02 = $.51m Preferred: 40,000  $34 = $1.36m Common: 104,000  $20 = $2.08m Total = $.51m + $1.36m + $2.08m = $3.95m 42. Phil's Carvings, Inc. wants to have a weighted average cost of capital of 9%. The firm has an after-tax cost of debt of 5% and a cost of equity of 11%. What debt-equity ratio is needed for the firm to achieve its targeted weighted average cost of capital? .09 = [We  .11] + [(1 - We)  .05) = .11We + .05 - .05We; .04 = .06We; We = 66.67%; Wd = 1 - We = 100% - 66.67% = 33.33%; Debt - equity ratio = 33.33%  66.67% = .50 43. Jake's Sound Systems has 210,000 shares of common stock outstanding at a market price of $36 a share. Last month, Jake's paid an annual dividend in the amount of $1.593 per share. The dividend growth rate is 4%. Jake's also has 6,000 bonds outstanding with a face value of $1,000 per bond. The bonds carry a 7% coupon, pay interest annually, and mature in 4.89 years. The bonds are selling at 99% of face value. The company's tax rate is 34%. What is Jake's weighted average cost of capital? Debt: 6,000  $1,000  .99 = $5.94m Common: 210,000  $36 = $7.56m Total = $5.94m + $7.56m = $13.50m Re = [($1.593  1.04)  $36] + .04 = .08602 44. The Consolidated Transfer Co. is an all-equity financed firm. The beta is .75, the market risk premium is 8% and the risk-free rate is 4%. What is the expected return of Consolidated? .04 + 0.75(.08) = .10 = 10% 45. Assuming the CAPM or one-factor model holds, what is the cost of equity for a firm if the firm's equity has a beta of 1.2, the risk-free rate of return is 2%, the expected return on the market is 9%, and the return to the company's debt is 7%? Rs = Rf + (Rm - Rf) = .02 + 1.2(.09 - .02) = .104 = 10.4% 46. The cost of equity for Ryan Corporation is 8.4%. If the expected return on the market is 10% and the risk-free rate is 5%, then the equity beta is ___. Rs = Rf +  (Rm - Rf); .084 = .05 +  (.10 - .05);  = .68 47. Suppose that the Simmons Corporation's common stock has a beta of 1.6. If the risk-free rate is 5% and the market risk premium is 4%, the expected return on Simmons' common stock is: Rs = Rf + (Rm - Rf) = .05 + 1.6(.04) = .114 = 11.4% 48. Suppose the Barges Corporation's common stock has an expected return of 12%. Assume that the risk-free rate is 5%, and the market risk premium is 6%. If no unsystematic influence affected Barges' return, the beta for Barges is ______. Rs = Rf + (Rm - Rf); .12 = .05 + (.06);  = .07/.06 = 1.17 49. Slippery Slope Roof Contracting has an equity beta of 1.2, capital structure with 2/3 debt, and a zero tax rate. What is its asset beta? A = (E/(D + E.) E = (1/3)(1.2) = .40 50. The Template Corporation has an equity beta of 1.2 and a debt beta of .8. The firm's market value debt to equity ratio is .6. Template has a zero tax rate. What is the asset beta? .8(.6/1.6) + 1.2(1/1.6) = 1.05 51. The NuPress Valet Co. has an improved version of its hotel stand. The investment cost is expected to be $72 million and will return $13.5 million for 5 years in net cash flows. The ratio of debt to equity is 1 to 1. The cost of equity is 13%, the cost of debt is 9%, and the tax rate is 34%. The appropriate discount rate, assuming average risk, is: WACC = .09(1 - .34)(.5) + .13(.5) = .0297 + .065 = .0947 = 9.47% 1. The book capital of a corporation is determined by: . 2. Retained earnings are: 3. The book value of the shareholders' ownership is represented by: 4. Shares of stock that have been repurchased by the corporation are called: . 5. The market value of the ownership of the firm equals: 6. A grant of authority allowing someone else to vote shares of stock that you own is called: 7. Unsecured corporate debt is called a(n): 8. A standard arrangement for the orderly retirement of long-term debt calls for the corporation to make regular payments into a(n): 9. Debt that may be extinguished before maturity is referred to as: 10. If a long-term debt instrument is perpetual, it is called a(n): 11. The amount of loan a person or firm borrows from a lender is the: 12. The written agreement between a corporation and its bondholders is called: 13. If cumulative voting is permitted: times the number of directors to be elected. 14. The market-to-book value ratio is implies growth and success when it is: . 15. There are 3 directors' seats up for election. If you own 1,000 shares of stock and you can cast 3,000 votes for a particular director, this is illustrative of: 16. If you own 1,000 shares of stock and you can cast only 1,000 votes for a particular director, then the stock features: 17. If a group other than management solicits the authority to vote shares to replace management, a _____ is said to occur. 18. Shareholders usually have which of the following right(s)? . 19. Different classes of stock usually are issued to: . 20. Which of the following statements is false? . 21. Corporations try to create hybrid securities that look like equity but are called debt because: 22. Technically speaking, a long-term corporate debt offering that features a specific attachment to corporate property is generally called: 23. If a firm retires or extinguishes a debt issue before maturity, the specific amount they pay is: 24. If a debenture is subordinated, it: 25. Not paying the dividends on a cumulative preferred issue may result in: 26. Preferred stock has both a tax advantage and a tax disadvantage. These two are: 27. Preferred stock may be desirable to issue for which of the following reason(s)? 28. Preferred stock may exist because: 29. The written agreement between a corporation and its bondholders might contain a prohibition against paying dividends in excess of current earnings. This prohibition is an example of a(n): 30. What percentage of the dividends received by one corporation from another is taxable? 31. Which of the following statements about preferred stock is true? 32. If a debt issue is callable, the call price is generally ____ par. 33. There was an upward trend in the ratio of the book value of debt to the book value of debt and equity throughout the 1990s. Some of this was due to the repurchasing of stock. The market value ratio of debt to debt and equity exhibited no upward trend. This can be explained by: 34. Based on historical experience, which of the following best describes the "pecking order" of long-term financing strategy in the U.S.? 35. Financial deficits are created when: 36. Financial economists prefer to use market values when measuring debt ratios because: 37. Corporate financial officers prefer to use book values when measuring debt ratios because: 38. Rockwell Corporation had net income of $150,000 for the year ending 2008. The company decided to payout 40% of earnings per share as a dividend. Rockwell has 120,000 shares issued and outstanding. What are the retained earnings for 2008? RE = NI (1 - payout ratio) = $150,000 (1 - .4) = $90,000. 39. Nelson Company had equity accounts in 2008 as follows: Projected income is $150,000 and 40% of this amount will be paid out immediately as dividends. What will the ending retained earnings account be? RE0 = NI (1 - payout ratio) = $150,000 (.6) = $90,000. RE1 = RE-1 + RE0 = $32,000 + $90,000 = $122,000. 40. Holden Bicycles has 1,000 shares outstanding each with a par value of $0.10. If they are sold to shareholders at $10 each, what would the capital surplus be? Capital Surplus: ($10.00 - $0.10) * 1,000 = $9,900. 41. The Lory Bookstore used internal financing as a source of long-term financing for 80% of its total needs in 2008. The company borrowed an additional 27% of its total needs in the long-term debt markets in 2008. What were Lory's net new stock issues in that year? Net new issues = - 7%, as more stock was repurchased than issued. (100% - (80 + 27)) = (100 - 107) = -7%. 42. David's Building Equipment (DBE) had net income of $200,000 for the year ending 2008. The company decided to payout 30% of earnings per share as a dividend. DBE has 50,000 shares issued and outstanding. What are the retained earnings for 2008? RE = NI (1 - payout ratio) = $200,000 (1 - .3) = $140,000. 43. Alexandra Investments had equity accounts in 2008 as follows: Projected income is $200,000 and 20% of this amount will be paid out immediately as dividends. What will the ending retained earnings account be? RE0 = NI (1 - payout ratio) = $200,000 (.8) = $160,000. RE1 = RE-1 + RE0 = $250,000 + $160,000 = $410,000. 44. Michael's Motor Scooters has 1,000 shares outstanding each with a par value of $0.05. If they are sold to shareholders at $5 each, what would the capital surplus be? Capital Surplus: ($5.00 - $0.05) * 1,000 = $4,950. 45. Calhoun Computech used internal financing as a source of long-term financing for 80% of its total needs in 2008. The company borrowed an additional 15% of its total needs in the long-term debt markets in 2008. What were Calhoun's net new stock issues, in percentage terms, for 2008? C. 5% Net new issues = 5%, as 100% - (80% + 15%) = 5%. 1. The use of personal borrowing to change the overall amount of financial leverage to which an individual is exposed is called: 2. The proposition that the value of the firm is independent of its capital structure is called: 3. The proposition that the cost of equity is a positive linear function of capital structure is called: 4. The tax savings of the firm derived from the deductibility of interest expense is called the: 5. The unlevered cost of capital is: 6. The cost of capital for a firm, rWACC, in a zero tax environment is: 7. The difference between a market value balance sheet and a book value balance sheet is that a market value balance sheet: 8. The firm's capital structure refers to: 9. A general rule for managers to follow is to set the firm's capital structure such that: 10. A levered firm is a company that has: 11. A manager should attempt to maximize the value of the firm by: 12. The effect of financial leverage depends on the operating earnings of the company. Which of the following is not true? . 13. The Modigliani-Miller Proposition I without taxes states: 14. MM Proposition I without taxes is used to illustrate: 15. A key assumption of MM's Proposition I without taxes is: . 16. In an EPS-EBI graphical relationship, the slope of the debt ray is steeper than the equity ray. The debt ray has a lower intercept because: 17. In an EPS-EBI graphical relationship, the debt ray and equity ray cross. At this point the equity and debt are: 18. When comparing levered vs. unlevered capital structures, leverage works to increase EPS for high levels of EBIT because: 19. Financial leverage impacts the performance of the firm by: 20. The increase in risk to equityholders when financial leverage is introduced is evidenced by: 21. The reason that MM Proposition I does not hold in the presence of corporate taxation is because: 22. MM Proposition I with corporate taxes states that: 23. The change in firm value in the presence of corporate taxes only is: 24. A firm should select the capital structure which: 25. In a world of no corporate taxes if the use of leverage does not change the value of the levered firm relative to the unlevered firm is known as: 26. Bryan invested in Bryco, Inc. stock when the firm was financed solely with equity. The firm is now utilizing debt in its capital structure. To unlever his position, Bryan needs to: 27. The capital structure chosen by a firm doesn't really matter because of: 28. MM Proposition I with no tax supports the argument that: . 29. The proposition that the value of a levered firm is equal to the value of an unlevered firm is known as: 30. The concept of homemade leverage is most associated with: 31. Which of the following statements are correct in relation to MM Proposition II with no taxes? I. The required return on assets is equal to the weighted average cost of capital. II. Financial risk is determined by the debt-equity ratio. III. Financial risk determines the return on assets. IV. The cost of equity declines when the amount of leverage used by a firm rises. 32. MM Proposition I with taxes supports the theory that: 33. MM Proposition I with taxes is based on the concept that: . 34. MM Proposition II with taxes: as MM Proposition II without taxes. 35. MM Proposition II is the proposition that: cost of equity capital is a positive linear function of the firm's capital structure. 36. The interest tax shield has no value for a firm when: I. the tax rate is equal to zero. II. the debt-equity ratio is exactly equal to 1. III. the firm is unlevered. IV. a firm elects 100% equity as its capital structure. IV only 37. The interest tax shield is a key reason why: debt to a firm is generally less than the cost of equity. 38. Which of the following will tend to diminish the benefit of the interest tax shield given a progressive tax rate structure? I. a reduction in tax rates II. a large tax loss carryforward III. a large depreciation tax deduction IV. a sizeable increase in taxable income 39. Thompson & Thomson is an all equity firm that has 500,000 shares of stock outstanding. The company is in the process of borrowing $8 million at 9% interest to repurchase 200,000 shares of the outstanding stock. What is the value of this firm if you ignore taxes? Price per share = $8m  200k = $40; [(500,000 - 200,000)  $40] + $8m = 500,000  $40 = $20m; Value of the firm is $20m 40. Uptown Interior Designs is an all equity firm that has 40,000 shares of stock outstanding. The company has decided to borrow $1 million to buy out the shares of a deceased stockholder who holds 2,500 shares. What is the total value of this firm if you ignore taxes? Price per share = $1m  2,500 = $400; [(40,000 - 2,500)  $400] + $1m = 40,000  $400 = $16m 41. You own 25% of Unique Vacations, Inc. You have decided to retire and want to sell your shares in this closely held, all equity firm. The other shareholders have agreed to have the firm borrow $1.5 million to purchase your 1,000 shares of stock. What is the total value of this firm today if you ignore taxes? Price per share = $1.5m  1,000 = $1,500; Current number of shares = 1,000  .25 = 4,000; [(4,000 -1,000)  $1,500] + $1.5m = 4,000  $1,500 = $6m 42. Your firm has a debt-equity ratio of .75. Your pre-tax cost of debt is 8.5% and your required return on assets is 15%. What is your cost of equity if you ignore taxes? Re = .15 + (.15 - .085)  .75 = .19875 = 19.88% 43. Bigelow, Inc. has a cost of equity of 13.56% and a pre-tax cost of debt of 7%. The required return on the assets is 11%. What is the firm's debt-equity ratio based on MM Proposition II with no taxes? .1356 = .11 + (.11 - .07)  D/E; D/E = .64 44. The Backwoods Lumber Co. has a debt-equity ratio of .80. The firm's required return on assets is 12% and its cost of equity is 15.68%. What is the pre-tax cost of debt based on MM Proposition II with no taxes? .1568 = .12 + (.12 - Rd)  .80; Rd = .074 = 7.40% 45. The Winter Wear Company has expected earnings before interest and taxes of $2,100, an unlevered cost of capital of 14% and a tax rate of 34%. The company also has $2,800 of debt that carries a 7% coupon. The debt is selling at par value. What is the value of this firm? VU = [$2,100  (1 - .34)]  .14 = $9,900; VL = $9,900 + (.34  $2,800) = $10,852 46. Gail's Dance Studio is currently an all equity firm that has 80,000 shares of stock outstanding with a market price of $42 a share. The current cost of equity is 12% and the tax rate is 34%. Gail is considering adding $1 million of debt with a coupon rate of 8% to her capital structure. The debt will be sold at par value. What is the levered value of the equity? VL = (80,000  $42) + (.34  $1m) = $3.36m + .34m = $3.7m; VE = $3.7m - $1m = $2.7m 47. The Montana Hills Co. has expected earnings before interest and taxes of $8,100, an unlevered cost of capital of 11%, and debt with both a book and face value of $12,000. The debt has an annual 8% coupon. The tax rate is 34%. What is the value of the firm? VU = [$8,100  (1 - .34) ]  .11 = $48,600; VL = $48,600 + (.34  $12,000) = $52,680 48. Scott's Leisure Time Sports is an unlevered firm with an after-tax net income of $86,000. The unlevered cost of capital is 10% and the tax rate is 34%. What is the value of this firm? VU = $86,000  .10 = $860,000 49. An unlevered firm has a cost of capital of 14% and earnings before interest and taxes of $150,000. A levered firm with the same operations and assets has both a book value and a face value of debt of $700,000 with a 7% annual coupon. The applicable tax rate is 35%. What is the value of the levered firm? VU = [$150,000  (1 - .35)]  .14 = $696,428.57; VL = $696,428.57 + (.35  $700k) = $941,428.57 = $941,429 50. The Spartan Co. has an unlevered cost of capital of 11%, a cost of debt of 8%, and a tax rate of 35%. What is the target debt-equity ratio if the targeted cost of equity is 12%? .12 = .11 + (.11 - .08)  D/E  (1 - .35); .01 = .0195D/E; D/E = .51 51. Hey Guys!, Inc. has debt with both a face and a market value of $3,000. This debt has a coupon rate of 7% and pays interest annually. The expected earnings before interest and taxes is $1,200, the tax rate is 34%, and the unlevered cost of capital is 12%. What is the firm's cost of % VU = [EBIT  (1 - Tc)]  RU = [$1,200  (1- .34)] .12 = $6,600 VL = VU + (Tc  D) = $6,600 + (.34  $3,000) = $7,620 VL - VD = VE = $7,620 - $3,000 = $4,620 RE = RU + (RU - RD)  D/E  (1 - TC) = .12 + [(.12 - .07)  ($3,000  $4,620)  (1 - .34)] = .12 + .02143 = .14143 = 14.14% 52. Anderson's Furniture Outlet has an unlevered cost of capital of 10%, a tax rate of 34%, and expected earnings before interest and taxes of $1,600. The company has $3,000 in bonds outstanding that have an 8% coupon and pay interest annually. The bonds are selling at par value. What is the cost of equity? VU = [EBIT  (1 - Tc)]  RU = [$1,600  (1- .34)]  .10 = $10,560 VL = VU + (Tc  D) = $10,560 + (.34  $3,000) = $11,580 VL - VD = VE = $11,580 - $3,000 = $8,580 RE = RU + (RU - RD)  D/E  (1 - TC) = .10 + [(.10 - .08)  ($3,000  $8,580)  (1 - .34)] = .10 + .00462 = .10462 = 10.46% 53. Walter's Distributors has a cost of equity of 13.84% and an unlevered cost of capital of 12%. The company has $5,000 in debt that is selling at par value. The levered value of the firm is $12,000 and the tax rate is 34%. What is the pre-tax cost of debt? VE = $12,000 - $5,000 = $7,000; .1384 = .12 + (.12 - RD)  ($5,000  $7,000)  (1 - .34); .0184 = .056571 - .471429RD; RD = .08097 = 8.10% 54. Rosita's has a cost of equity of 13.8% and a pre-tax cost of debt of 8.5%. The debt-equity ratio is .60 and the tax rate is .34. What is Rosita's unlevered cost of capital? .138 = RU + (RU - .085)  .60  (1 - .34); .17166 = 1.396RU; RU = .12297 = 12.30% 55. Your firm has a pre-tax cost of debt of 7% and an unlevered cost of capital of 13%. Your tax rate is 35% and your cost of equity is 15.26%. What is your debt-equity ratio? .1526 = .13 + (.13 - .07)  D/E  (1 - .35); .0226 = .039D/E; D/E = .579 = .58 56. Wild Flowers Express has a debt-equity ratio of .60. The pre-tax cost of debt is 9% while the unlevered cost of capital is 14%. What is the cost of equity if the tax rate is 34%? RE = .14 + (.14 - .09)  .60  (1 - .34) = .14 + .0198 = .1598 = 15.98% 57. Your firm has a $250,000 bond issue outstanding. These bonds have a 7% coupon, pay interest semiannually, and have a current market price equal to 103% of face value. What is the amount of Annual interest tax shield = $250,000  .07  .35 = $6,125 58. Bertha's Boutique has 2,000 bonds outstanding with a face value of $1,000 each and a coupon rate of 9%. The interest is paid semi-annually. What is the amount of the annual interest tax shield if the tax rate is 34%? Annual interest tax shield = 2,000  $1,000  .09  .34 = $61,200 59. Juanita's Steak House has $12,000 of debt outstanding that is selling at par and has a coupon rate of 8%. The tax rate is 34%. What is the present value of the tax shield? Present value of the tax shield = .34  $12,000 = $4,080 60. A firm has debt of $5,000, equity of $16,000, a leveraged value of $8,900, a cost of debt of 8%, a cost of equity of 12%, and a tax rate of 34%. What is the firm's weighted average cost of capital? WACC = [($16k  $21k)  .12] + [($5k  $21k)  .08  (1 - .34) = .091429 + .012571 = .1040 = 10.40% 61. A firm has zero debt in its capital structure. Its overall cost of capital is 10%. The firm is considering a new capital structure with 60% debt. The interest rate on the debt would be 8%. Assuming there are no taxes or other imperfections, its cost of equity capital with the new capital structure would be _____. Rs = .10 + .60/.40(.10 - .08) = .10 + .03 = .013 = 13% 62. A firm has a debt-to-equity ratio of .60. Its cost of debt is 8%. Its overall cost of capital is 12%. What is its cost of equity if there are no taxes or other imperfections? C. 14.4% Rwacc = .12 = (.6/1.6)(.08) + (1/1.6)X .12 = .375(.08) + .625(X) .09 = .625x X = .144 = 14.4% 63. A firm has a debt-to-equity ratio of 1. Its cost of equity is 16%, and its cost of debt is 8%. If there are no taxes or other imperfections, what would be its cost of equity if the debt-to-equity ratio were 0? Rs = 16 = r0 + 1(r0 -.08) .16 = 2r0 - .08 .24 = 2r0 r0 = .12 = 12% WACC = rd wd + rd we = .08(.5) + .16(.5) = .12 = 12% 64. A firm has a debt-to-equity ratio of 1.20. If it had no debt, its cost of equity would be 15%. Its cost of debt is 10%. What is its cost of equity if there are no taxes or other imperfections? Rs = .15 + 1.2.15 - .10) = 21% 65. If a firm is unlevered and has a cost of equity capital of 12%, what would its cost of equity be if its debt-equity ratio became 2? The expected cost of debt is 8%. Rs = Rsu + (B/S)(Rsu - Ru) Rs = .12 + 2(.12 - .08) = .0200 = 20% 66. A firm has zero debt in its capital structure. Its overall cost of capital is 9%. The firm is considering a new capital structure with 40% debt. The interest rate on the debt would be 4%. Assuming that the corporate tax rate is 34%, what would its cost of equity capital with the new capital structure be? Rs = Ro + (B/S)(1 - Tc)( Ro - rB ) Rs = .09 + (.4/.6) (1 - .34) (.09 - .04) = .09 + .022 = .112 = 11.2% 67. A firm has a debt-to-equity ratio of 1. Its cost of equity is 16%, and its cost of debt is 8%. If the corporate tax rate is 25%, what would its cost of equity be if the debt-to-equity ratio were 0? Rs = Ro + (B/S)(1 - Tc)( Ro - rB ) .16 = Ro + (1) (1 - .25) (Ro - .08) .16 = ro + .75ro - .06 .22 = 1.75Ro Ro = 12.57% 68. A firm has a debt-to-equity ratio of .5. Its cost of equity is 22%, and its cost of debt is 16%. If the corporate tax rate is .40, what would its cost of equity be if the debt-to-equity ratio were 0? Rs = Ro + (B/S)(1 - Tc)( Ro - rB ) .22 = ro + (.5) (1 - .40) (Ro - .16) .22 = ro + .3ro - .048 .268 = 1.3Ro Ro = 20.61% 69. A firm has a debt-to-equity ratio of 1.75. If it had no debt, its cost of equity would be 14%. Its cost of debt is 10%. What is its cost of equity if the corporate tax rate is 50%? Rs = Ro + (B/S)(1 - Tc)( Ro - rB ) Rs = .14 + 1.75(1 - .5)(.14 - .10) = .14 + .035 = .175 = 17.5% 70. What is the cost of equity for a firm if the corporate tax rate is 40%? The firm has a debt-to-equity ratio of 1.5. If it had no debt, its cost of equity would be 16%. Its current cost of debt is 10%. Rs = Ro + (B/S)(1 - Tc)( Ro - rB ) Rs = .16 + 1.5(1 - .4)(.16 - .10) = .214 = 21.4% 71. A firm has a debt-to-equity ratio of 1.75. If it had no debt, its cost of equity would be 9%. Its cost of debt is 7%. What is its cost of equity if the corporate tax rate is 50%? Rs = Ro + (B/S)(1 - Tc)( Ro - rB ) Rs = .09 + 1.75(1 - .5)(.09 - .07) = .09 + .0175 = .1075 = 10.75% 72. Batter's Home has 3,000 bonds outstanding with a face value of $1,000 each and a coupon rate of 8%. The interest is paid semi-annually. What is the amount of the annual interest tax shield if the tax rate is 30%? Annual interest tax shield = 3,000  $1,000  .08  .30 = $72,000 73. Reena Industries has $10,000 of debt outstanding that is selling at par and has a coupon rate of 7%. The tax rate is 34%. What is the present value of the tax shield? Present value of the tax shield = .34  $10,000 = $3,400 74. A firm has debt of $7,000, equity of $12,000, a leveraged value of $8,900, a cost of debt of 7%, a cost of equity of 14%, and a tax rate of 30%. What is the firm's weighted average cost of capital? WACC = [($12k  $19k)  .14] + [($7k  $19k)  .07  (1 - .30) = .088421 + .018053 = .1065 = 10.65% 1. The explicit costs, such as the legal expenses, associated with corporate default are classified as _____ costs. 2. The costs of avoiding a bankruptcy filing by a financially distressed firm are classified as _____ costs. 3. The explicit and implicit costs associated with corporate default are referred to as the _____ costs of a firm. 4. Indirect costs of financial distress: protection. 5. The legal proceeding for liquidating or reorganizing a firm operating in default is called a: 6. The value of a firm is maximized when the: . 7. The optimal capital structure has been achieved when the: results in the lowest possible weighed average cost of capital. 8. In a world with taxes and financial distress, when a firm is operating with the optimal capital structure: I. the debt-equity ratio will also be optimal. II. the weighted average cost of capital will be at its minimal point. III. the required return on assets will be at its maximum point. IV. the increased benefit from additional debt is equal to the increased bankruptcy costs of that debt. 9. The optimal capital structure will tend to include more debt for firms with: of financial distress. 10. The optimal capital structure of a firm _____ the marketed claims and _____ the nonmarketed claims against the cash flows of the firm. 11. The optimal capital structure: vary over time as taxes and market conditions change. 12. The basic lesson of MM theory is that the value of a firm is dependent upon the: flows of the firm. 13. Corporations in the U.S. tend to: 14. In general, the capital structures used by U.S. firms: 15. The MM theory with taxes implies that firms should issue maximum debt. In practice, this is not true because: to debt. 16. Although the use of debt provides tax benefits to the firm, debt also puts pressure on the firm to: 17. Given realistic estimates of the probability and cost of bankruptcy, the future costs of a possible bankruptcy are borne by: 18. Conflicts of interest between stockholders and bondholders are known as: 19. One of the indirect costs of bankruptcy is the incentive for managers to take large risks. When following this strategy: 20. One of the indirect costs to bankruptcy is the incentive toward underinvestment. Following this strategy may result in: 21. Which of the following is true? value. 22. Studies have found that firms with high proportions of intangible assets are likely to use ____________ debt compared with firms with low proportions of intangible assets. 23. What three factors are important to consider in determining a target debt to equity ratio? 24. An exchange may offer: . 25. Which of the following is not empirically true when formulating capital structure policy? . 26. When shareholders pursue selfish strategies such as taking large risks or paying excessive dividends, these will result in: 27. Indirect costs of bankruptcy are born principally by: 28. The value of a firm in financial distress is diminished if the firm: 29. Covenants restricting the use of leasing and additional borrowings primarily protect: 30. If a firm issues debt but writes protective and restrictive covenants into the loan contract, 31. When graphing firm value against debt levels, the debt level that maximizes the value of the firm is the level where: . 32. When firms issue more debt, the tax shield on debt _____, the agency costs on debt (i.e., costs of financial distress) _____, and the agency costs on equity _____. 33. The free cash flow hypothesis states: 34. Issuing debt instead of new equity in a closely held firm more likely: . 35. The pecking order states how financing should be raised. In order to avoid asymmetric information problems and misinterpretation of whether management is sending a signal on security overvaluation, the firm's first rule is to: 36. Growth opportunities _______ the _____ of debt financing. 37. Which of the following industries would tend to have the highest leverage? 38. The introduction of personal taxes may reveal a disadvantage to the use of debt if the: 39. In Miller's model, when the quantity [(1 - Tc)(1 - Ts) = (1 - Tb)], then: 40. In a Miller equilibrium, what type of investments do high tax bracket investors tend to hold? 41. The TrunkLine Company will earn $60 in one year if it does well. The debtholders are promised payments of $35 in one year if the firm does well. If the firm does poorly, expected earnings in one year will be $30 and the repayment will be $20 because of the dead weight cost of bankruptcy. The probability of the firm performing poorly or well is 50%. If bondholders are fully aware of these costs what will they pay for the debt? The interest rate on the bonds is 10%. [0.5($35) + 0.5 ($20)]/1.1 = $27.5/1.1 = $25 42. The TrunkLine Company debtholders are promised payments of $35 if the firm does well, but will receive only $20 if the firm does poorly. Bondholders are willing to pay $25. The promised return to the bondholders is approximately: ($35/$25) -1 = .40 = 40% 43. An investment is available that pays a tax-free 6%. The corporate tax rate is 30%. Ignoring risk, what is the pre-tax return on taxable bonds? Rb = .06/(1 - .3) = .06/.7 = .0857 = 8.57% 44. Your firm has a debt-equity ratio of .60. Your cost of equity is 11% and your after-tax cost of debt is 7%. What will your cost of equity be if the target capital structure becomes a 50/50 mix of debt and equity? WACC = [(1.0  1.6)  .11] + [(.6  1.6)  .07] = .095; .095 = .5RE + (.5  .07); RE = .12 = 12% 45. The Aggie Company has EBIT of $50,000 and market value debt of $100,000 outstanding with a 9% coupon rate. The cost of equity for an all equity firm would be 14%. Aggie has a 35% corporate tax rate. Investors face a 20% tax rate on debt receipts and a 15% rate on equity. Determine the value of Aggie. Unlevered firm = [$50,000 (.65)]/ .14 = $232,142.86 Miller leverage tax shield value = [1 - ((1 - Tc)(1 - Ts)/(1 - Tb))]B = [1 - ((1 - .35)(1 - .15)/1 - .20))]*$100,000 = $30,937.50 Total Value = $232,142.86 + $30,937.50 = $263,080.36 46. Given the following information, leverage will add how much value to the unlevered firm per dollar of debt? Corporate tax rate: 34% Personal tax rate on income from bonds: 30% Personal tax rate on income from stocks: 30% [1 - ((1 - Tc)(1 - Ts)/(1 - Tb))]B = [1 - ((.66)(.7)/.7)]B = .34B; $0.34 47. Given the following information, leverage will add how much value to the unlevered firm per dollar of debt? Corporate tax rate: 34% Personal tax rate on income from bonds: 20% Personal tax rate on income from stocks: 0% [1 - ((1 - Tc)(1 - Ts)/(1 - Tb))]B = [1 - ((.66)(1)/(1 - .2))]B = .175B ; $0.175 48. Given the following information, leverage will add how much value to the unlevered firm per dollar of debt? Corporate tax rate: 34% Personal tax rate on income from bonds: 50% Personal tax rate on income from stocks: 10% [1 - ((1 - .34)(1 - .1))/(1 - .5)] = 1 - (.66*.9)/.5 = 1 - 1.188 = -.188 49. Given the following information, leverage will add how much value to the unlevered firm per dollar of debt? Corporate tax rate: 34% Personal tax rate on income from bonds: 10% Personal tax rate on income from stocks: 50% [1 - ((1 - .34)(1 - .5))/(1 - .1)] = 1 - (.33/.9) = 1 - .3667 = .6333 50. The Aggie Company has EBIT of $70,000 and market value debt of $100,000 outstanding with a 9% coupon rate. The cost of equity for an all equity firm would be 14%. Aggie has a 35% corporate tax rate. Investors face a 20% tax rate on debt receipts and a 15% rate on equity. Determine the value of Aggie. Unlevered firm = [$70,000 (.65)]/ .14 = $325,000 Miller leverage tax shield value = $100,000 [1 - {(1 - .35)(1 - .15)}/(1 - .2)] = $30,937.50 Total Value = $325,000 + $30,937.50 = $355,937.50 51. Suppose a Miller equilibrium exists with a corporate tax rate of 30% and a personal tax rate on income from bonds of 35%. What is the personal tax rate on income from stocks? 0 = {1 - ((1 - .3)(1 - Ts))/(1 - .35)] = Ts = .071 = 7.1% 52. Given the following information, leverage will add how much value to the unlevered firm per dollar of debt? Corporate tax rate: 40% Personal tax rate on income from bonds: 20% Personal tax rate on income from stocks: 30% [1 - ((1 - .40)(1 - .3))/(1 - .2)] = 1 - .525 = $0.475 53. Given the following information, leverage will add how much value to the unlevered firm per dollar of debt? Corporate tax rate: 34% Personal tax rate on income from bonds: 20% Personal tax rate on income from stocks: 50% [1 - ((1 - .34)(1 - .5))/(1 - .2)] = 1 - .4125 = $0.5875 54. Given the following information, leverage will add how much value to the unlevered firm per dollar of debt? Corporate tax rate: 34% Personal tax rate on income from bonds: 20% Personal tax rate on income from stocks: 30% [1 - ((1 - Tc)(1 - Ts)/(1 - Tb))]B = [1 - ((.66)(.7)/.8)]B = $0.4225 55. Given the following information, leverage will add how much value to the unlevered firm per dollar of debt? Corporate tax rate: 30% Personal tax rate on income from bonds: 20% Personal tax rate on income from stocks: 0% [1 - ((1 - Tc)(1 - Ts)/(1 - Tb))]B = [1 - ((.70)(1)/(1 - .2)]B = .125B ; $0.125 56. Holly Berry Incorporated will earn $40 in one year if it does well. The debtholders are promised payments of $25 in one year if the firm does well. If the firm does poorly, expected earnings in one year will be $20 and the repayment will be $15 because of the dead weight cost of bankruptcy. The probability of the firm performing poorly or well is 50%. If bondholders are fully aware of these costs what will they pay for the debt? The interest rate on the bonds is 8%. [0.5($25) + 0.5 ($15)]/1.08 = $18.52 57. Holly Berry Incorporated debtholders are promised payments of $25 if the firm does well, but will receive only $20 if the firm does poorly. Bondholders are willing to pay $15. The promised return to the bondholders is approximately: ($25/$15) -1 = .6667 = 66.67% 58. An investment is available that pays a tax-free 7%. The corporate tax rate is 40%. Ignoring risk, what is the pre-tax return on taxable bonds? Rb = .07/(1 - .4) = .07/.6 = .1167 = 11.67% 1. An equity issue sold directly to the public is called: 2. An equity issue sold to the firm's existing stockholders is called: 3. Management's first step in any issue of securities to the public is: 4. A rights offering is: . 5. Companies use tombstone advertisements in the financial press to: 6. The first public equity issue made by a company is a(n): 7. The first public equity issue that is made by a company is referred to as: 8. A new public equity issue from a company with equity previously outstanding is called a(n): 9. The green shoe option is used to: 10. Dilution refers to: 11. During the SEC waiting period the potential issuing company can issue a preliminary prospectus which contains: . 12. A company must file a registration statement with the SEC providing various financial and company history information. The registration statement does not need to be filed if: 13. Regulation A security issues are exempt from full SEC registration filing and use only a brief offering statement if: 14. Potential investors learn of the information concerning the firm and its new issue from the: . 15. A registration statement is effective on the 20thday after filing unless: 16. Investment banks perform which of the following services for corporate issuers: . 17. A group of investment bankers who pool their efforts to underwrite a security are known as a(n): 18. A firm commitment arrangement with an investment banker occurs when: 19. Which of the following is not normally an example of the services offered by investment bankers? 20. In a best efforts offering the investment banker makes their money primarily by: 21. Under the _____ method, the underwriter buys the securities for less than the offering price and accepts the risk of not selling the issue, while under the _____ method, the underwriter does not purchase the shares but merely acts as an agent. 22. Professor Jay Ritter found best-efforts offerings are: 23. Empirical evidence suggests that new equity issues are generally: 24. The diagonal listing of investment bankers on tombstone advertisements reflects their ____ relative to the other investment bankers listed below. 25. The reputational capital of investment bankers is based on their roles as intermediaries with more in-depth knowledge of the issuer. Investment bankers maintain their reputation by: 26. The key difference between a negotiated offer and a competitive offer is that: negotiated bid only one investment banker is used. 27. The offering price is set to make an issue attractive to the market and provide a good price to the issuer. Which of the following is/are true? 28. Empirical evidence suggests that upon announcement of a new equity issue, current stock prices generally: . 29. Underpricing can possibly be explained by: 30. Debt capacity is often given as a reason for the value of the stock falling when equity is issued. The reason for this is: equity capital. 31. A study by Lee, Lockhead, Ritter, and Zhao that examined the underwriting discount and other direct costs of going public with a debt or equity offering, found: above. 32. The six components that make up the total costs of new issues are: 33. In comparison to debt issuance expenses, the total direct costs of equity issues are: . 34. To determine the value of a rights offering, the stockholder needs to know the following two pieces of information in addition to the current stock price: . 35. Assuming everything else is constant, when a stock goes ex-rights its price should: . 36. If a shareholder or investor wants to acquire new stock under a rights plant they must: 37. Which of the following statements is true? 38. A shareholder who has rights is: 39. A standby underwriting arrangement provides the: 40. Professor Clifford W. Smith, in evaluating issuance costs from underwritten issues, rights issues with standby underwriting, and a pure rights issues, found that 90% of the issues are underwritten, which was the most expensive method. This is done because: 41. Corporations use the shelf registration method of security sales because: 42. In terms of costs of issuing equity, Professor Clifford W. Smith finds that the ranking of methods, from cheapest to most expensive, is: 43. Arguments to explain why most equity issues are underwritten versus sold through a rights offering are: 44. Corporations are allowed to use the shelf registration method if they: 45. Arguments against the use of the shelf-registration are: 46. The market for venture capital refers to the: . 47. Rule 144A provides the framework for the issuance of private securities to qualified institutional investors. To buy private securities, institutional investors: 48. Venture capitalists provide financing for new firms from the seed and start-up stage all the way to mezzanine and bridge financing. In exchange for financing, entrepreneurs give: . 49. An IPO of a firm formerly financed by venture capital is carried out for what primary purposes? 50. Which of the following is not one of the four main functions that underwriters provide? 51. Types of dilution include: 52. The Wordsmith Corporation has 10,000 shares outstanding at $30 each. They expect to raise $150,000 by a rights offering with a subscription price of $25. How many rights must you turn in to get a new share? New shares = $150,000/25 = 6,000 Number of rights needed/share = 10,000/6,000 = 1.67 53. Assuming everything else is constant, if a stock's old price is $25 and the ex-rights or new stock price is $19, then the value of the right is: R = PO - PX = $25 - $19 = $6. 54. The LaPorte Corporation has a new rights offering that allows you to buy one share of stock with 3 rights and $20 per share. The stock is now selling ex-rights for $26. The price rights-on is: RX = (PX - S)/N = ($26 - $20)/3 = $6/3 = $2; Price = $26 + $2 = $28 55. Regional Power wants to raise $10 million in new equity. The subscription price is $20. There are currently 3 million shares outstanding, each with 1 right. How many rights are needed to purchase 1 share? Number of new shares = Funds to be raised/subscription price = $10,000,000/$20 = 500,000 Number of rights needed to buy 1 share = old shares/new shares = 3,000,000/500,000 = 6 56. The Overland Corporation intends to issue 50,000 new shares to raise funds for expansion of current plant facilities. The current share price is $40 and there are 500,000 shares outstanding. The number of rights needed to buy a share of stock should be: N = Old Shares/New Shares = 500,000/50,000 = 10 57. The Schroeder Corporation has 20,000 shares outstanding at $20 each. They expect to raise $200,000 by a rights offering with a subscription price of $25. How many rights must you turn in to get a new share? New shares = $200,000/25 = 8,000 Number of rights needed/share = 20,000/8,000 = 2.5 58. Assuming everything else is constant, if a stock's old price is $40 and the ex-rights or new stock price is $32, then the value of the right is: . R = PO - PX = $40 - $32 = $8. 59. The Holly Corporation has a new rights offering that allows you to buy one share of stock with 4 rights and $25 per share. The stock is now selling ex-rights for $30. The price rights-on is: RX = (PX - S)/N = ($30 - $25)/4 = $1.25; Price = $30 + $1.25 = $31.25 60. Bradley Power wants to raise $40 million in new equity. The subscription price is $25. There are currently 5 million shares outstanding, each with 1 right. How many rights are needed to purchase 1 share? Number of new shares = Funds to be raised/subscription price = $40,000,000/$25 = 1,600,000 Number of rights needed to buy 1 share = old shares/new shares = 5,000,000/1,600,000 = 3.125 61. The Shields Corporation intends to issue 100,000 new shares to raise funds for expansion of current plant facilities. The current share price is $20 and there are 500,000 shares outstanding. The number of rights needed to buy a share of stock should be: N = Old Shares/New Shares = 500,000/100,000 = 5 62. For a particular stock the old stock price is $20, the ex-rights price is $15, and the number of rights needed to buy a new share is 2. Assuming everything else constant, the subscription price is ______ . (PO - S)/(N + 1) = (PX - S)/N ($20 - S)/3 = ($15 - S)/2 $15/3 = $10/2 = $5 1. In a lease arrangement, the owner of the asset is: 2. In a lease arrangement, the user of the asset is: 3. Which of the following would not be a characteristic of a financial lease? 4. An independent leasing company supplies ___________ leases versus the manufacturer who supplies ________________ leases. 5. Which of the following is not a financial lease? 6. If the lessor borrows much of the purchase price of a leased asset, the lease is called: . 7. An operating lease's primary characteristics are: 9. The city of Oakland sold some buildings and used the proceeds to improve its financial position. The city then leased the buildings back in order to continue to use these facilities. This is an example of: . 10. A financial lease has the following as its primary characteristics: 11. An advantage of leasing is that the lessor does not own the asset and can cancel: 12. A leveraged lease typically involves a non-recourse loan in which: 13. For accounting purposes, which of the following conditions would automatically cause a lease to be a capital lease? 14. Capital leases would show up on the balance sheet of the firm in which manner for a six year machinery lease worth $700,000? 15. Prior to FASB 13, "Accounting for Leases", lease activity was only reported in financial footnotes. This off-balance-sheet-financing made firms with: 16. Which of the following is not an implication of FASB 13, Accounting for Leases? 18. A lease with high payments early in its life which then decline to termination would: . 19. In valuing the lease versus purchase option, the relevant cash flows are the: 20. The appropriate discount rate for valuing a financial lease is: 21. The WACC is not used in the lease versus purchase decision because: 22. Firms that use financial leases must consider their debt-to-equity ratios as inadequate measures of financial leverage because: 23. ______ would be evidence the lease is being used to avoid taxes and not a legitimate business purpose. 24. Debt displacement is associated with leases because: 25. A lease is likely to be most beneficial to both parties when: 26. The price or lease payment that the lessee sets as their bound is known as: 27. Which of the following is probably not a good reason for leasing instead of buying? 28. Which of the following is probably a good reason for leasing instead of buying? 29. Some assets are leased more than others because: 30. To meet IRS guidelines for leasing, the lease should: The lease lasts for 9 years. The lease calls for 10 payments of $1,000 per year with the first computer would cost $7,650 to buy and would be straight-line depreciated to a zero salvage value over 9 years. The actual salvage value is negligible because of technological obsolescence. The firm can borrow at a rate of 8%. The corporate tax rate is 30%. 31. What is the after-tax cash flow from leasing relative to the after-tax cash flow from purchasing in years 1-9? $-1,000(1 - .30) - ($7,650/9)(.30) = $-700 - $255 = $-955 32. What is the after-tax cash flow from leasing relative to the after-tax cash flow from purchasing in year 0? $-700 - $-7,650 = $6,950 33. What is the NPV of the lease relative to the purchase? NPV = $6,950 - $955PVIFA.056,9 = $6,950-$6,610.22 = $339.78 34. What would the after-tax cash flow in year 9 be if the asset had a residual value of $500 (ignoring any possible risk differences)? Residual + CF9 = CF9 - RV(1 - TC) = $-955 - $500(1 - .3) = $-955 - $350 = $-1,305 35. This lease would be classified as a(n): life. Your firm is considering leasing a new robotic milling control system. The lease lasts for 5 years. The lease calls for 6 payments of $300,000 per year with the first payment occurring at lease inception. The system would cost $1,050,000 to buy and would be straight-line depreciated to a zero salvage value. The actual salvage value is zero. The firm can borrow at 8%, and the corporate tax rate is 34%. 36. What is the appropriate discount rate for valuing the lease? After-tax discount rate = .08(1 - .34) = .0528 = 5.28% 37. What is the after-tax cash flow from leasing in year 0? $1,050,000 - $300,000(1 - .34) = $1,050,000 - $198,000 = $852,000 38. What is the after-tax cash flow in years 1 through 5? CF1 = $-300,000(1 - .34) - .34($1,050,000/5) = $-198,000 - $71,400 = $-269,400 39. What is the NPV of the lease? NPV = $852,000 - $269,400(PVIFA.0528,5 ) = $852,000 - $269,400(4.2962) = $852,000 - $1,157,388 = $-305,388 40. What is the maximum lease payment that you would be willing to make? LMAX = $1,050,000/PVIFAD.08,6 = $1,050,000/4.9927 = $210,307 41. What is the minimum lease payment that the lessor would be willing to accept? 0 = $-1,050,000 + (.34)($198,000)(4.2962) + .66(LMIN + 4.2962 LMIN) 0 = $-1,050,000 + $289,220 + 3.4955 L MIN LMIN = $760,780/3.4955 = $217,645 Your firm is considering leasing a new laser light. The lease lasts for 3 years. The lease calls for 4 payments of $10,000 per year with the first payment occurring immediately. The computer would cost $45,000 to buy and would be straight-line depreciated to a zero salvage value over 3 years. The actual salvage value is negligible because of technological obsolescence. The firm can borrow at a rate of 10%. The corporate tax rate is 35%. 42. What is the after-tax cash flow from leasing relative to the after-tax cash flow from purchasing in years 1-3? $-10,000(1 - .35) - ($45,000/3)(.35) = $-6,500 - $5,250 = $-11,750 43. What is the after-tax cash flow from leasing relative to the after-tax cash flow from purchasing in year 0? $-6,500 - $-45,000 = $38,500 44. What is the NPV of the lease relative to the purchase? NPV = $38,500 - $11,750PVIFA.085,3 = $38,500 - $31,120 = $7,380 45. What would the after-tax cash flow in year 3 be if the asset had a residual value of $1,000 (ignoring any possible risk differences)? Residual + CF3 = CF3 - RV(1 - TC) = $-11,750 - $1,000(1 - .35) = -12,400 46. This lease would be classified as a(n): 1. The length of time between the acquisition of inventory and the collection of cash from receivables is called the: 2. The length of time between the acquisition of inventory and its sale is called the: 3. The length of time between the sale of inventory and the collection of cash from receivables is called the: 4. The length of time between the acquisition of inventory by a firm and the payment by the firm for that inventory is called the: 5. The length of time between the payment for inventory and the collection of cash from receivables is called the: 6. Costs of the firm that rise with increased levels of investment in its current assets are called _____ costs. 7. Costs of the firm that fall with increased levels of investment in its current assets are called _____ costs. 8. The forecast of cash receipts and disbursements for the next planning period is called a: 9. A prearranged, short-term bank loan made on a formal or informal basis, and typically reviewed for renewal annually, is called a: 10. A prearranged credit agreement with a bank typically open for two or more years is called a: 11. A fraction of the available credit on a loan agreement deposited by the borrower with the bank in a low or non-interest-bearing account is called a: 12. A _____ issued by a bank is a promise by that bank to make a loan if certain conditions are met. 13. A short-term loan where the lender holds the borrower's receivables as security is called: 14. A type of short-term loan where the borrower sells its receivables to the lender up-front, but at a discount to face value, is called: 15. A short-term loan secured by the borrower's inventory, either directly or via an intermediary, is called a(n): 16. Net working capital is defined as: 17. Which one of the following is a source of cash? 18. Which of the following are uses of cash? I. marketable securities are sold II. the amount of inventory on hand is increased III. the firm takes out a long-term bank loan IV. payments are paid on accounts payable 19. Which one of the following will increase net working capital? Assume that the current ratio is greater than 1.0. 20. Which one of the following will decrease the net working capital of a firm? Assume that the current ratio is greater than 1.0. 21. Which one of the following will decrease the operating cycle? 22. Which one of the following will decrease the operating cycle? 23. The short-term financial policy that a firm adopts will be reflected in: 24. Which one of the following will not affect the operating cycle? 25. Which one of the following will increase the cash cycle? 26. An increase in which one of the following will decrease the cash cycle, all else equal? 27. ABC Manufacturing historically produced products that were held in inventory until they could be sold to a customer. The firm is now changing its policy and only producing a product when it receives an actual order from a customer. All else equal, this change will: 28. Which one of the following statements concerning the cash cycle is correct? 29. Which one of the following statements is correct concerning the cash cycle? 30. Which of the following actions will tend to decrease the inventory period? 31. Which of the following actions will tend to decrease the accounts receivable period? 32. An increase in which one of the following is most apt to be an indicator of an accounts receivable policy that is too restrictive? 33. If you delay paying your suppliers by an additional ten days, then: 34. Which one of the following will increase the accounts payable period, all else constant? 35. Which one of the following managers is most likely in charge of establishing the accounts receivable policy? 36. The manager responsible for the accounting information concerning cash flows is the: 37. Flexible short-term financial policies tend to: 38. A restrictive short-term financial policy tends to: 39. Which of the following are associated with a restrictive short-term financial policy? 40. A restrictive short-term financial policy, as compared to a more flexible policy, tends to: 41. A flexible short-term financial policy: 42. A flexible short-term financial policy: 43. If your accounts receivable period is 30 days, you will collect payment for your _____ sales during the second quarter of a calendar year. 44. Your firm collects 30% of sales in the month of sale, 55% of sales in the month following the month of sale and 13% of sales in the second month following the month of sale. Given this, you will collect _____ sales during the month of June. 45. A manufacturing firm has a 90 day collection period. The firm produces seasonal merchandise and thus has the least sales during the first quarter of a year and the highest level of sales during the third quarter of a year. The firm maintains a relatively steady level of production which means that its cash disbursements are fairly equal in all quarters. The firm is most apt to face a cash-out situation in: 46. The appropriate amount of short-term borrowing is determined by: . 47. Which two of the following four conditions are most apt to cause a quarterly cash shortfall for a firm which is financially sound? 48. Which of the following statements are correct concerning the cash balance of a firm? 49. A cumulative cash deficit indicates that a firm: 50. The most common means of financing a temporary cash deficit is a: 51. The primary difference between a line of credit and a revolving credit arrangement is the: 52. A compensating balance: 53. With a flexible policy with regard to short term financing, over a year a firm will have: 54. Which one of the following statements is correct? 55. Which of the following are benefits of compiling a short-term financial plan? 56. If the average accounts receivable that a firm holds decreases without any decrease in credit sales, the operating cycle will: 57. Which of the following is not included in current assets? 58. Which of the following is not included in current liabilities? 59. Assets presented on the balance sheet are in order of accounting liquidity. Accounting liquidity refers to: 60. Sources of cash do not include: 61. A use of cash can be determined by: 62. The cash cycle is defined as the time between: 63. Cash cycle equals: 64. Which of the following increases cash? 65. Which of the following changes cash? 66. Which of the following decreases cash? 67. Which of the following decreases cash? 68. Which of the following increases cash? 69. Stoney Brooke, Inc. has sales of $890,000 and cost of goods sold of $640,000. The firm had a beginning inventory of $36,000 and an ending inventory of $46,000. What is the length of the inventory period? 70. Your firm has sales of $628,000 and cost of goods sold of $402,000. At the beginning of the year, your inventory was $31,000. At the end of the year, the inventory balance was $33,000. What is the inventory turnover rate? 71. A firm has sales of $720,000. The cost of goods sold is equal to 70% of sales. The firm has an average inventory of $6,500. How many days on average does it take the firm to sell its inventory? 72. Bilt Rite, Inc. has sales of $610,000. The cost of goods sold is equal to 70% of sales. The beginning accounts receivable balance is $21,000 and the ending accounts receivable balance is $25,000. How long on average does it take the firm to collect its receivables? 73. Weson, Inc. has sales of $462,000, costs of goods sold of $308,000 and average accounts receivable of $48,900. How long does it take its credit customers to pay for their purchases? 74. LoDo, Inc. has sales of $642,000 and average accounts payable of $36,400. The cost of goods sold is equivalent to 65% of sales. How long does it take LoDo to pay its suppliers? 75. True Blue Stores had a beginning accounts payable balance of $56,900 and an ending accounts payable balance of $62,800. Sales for the period were $670,000 and costs of goods sold were $418,000. What is the payables turnover rate? 76. A firm has an inventory turnover rate of 16, a receivables turnover rate of 21 and a payables turnover rate of 11. How long is the operating cycle? 77. Your firm currently has an operating cycle of 64 days. You are analyzing some operational changes which are expected to decrease the accounts receivable period by 3 days and decrease the inventory period by 2 days. The accounts payable turnover rate is expected to increase from 7 to 9 times per year. If all of these changes are adopted, what will your firm's new operating cycle be? 78. Dallas and More (D&M) sells its inventory in 82 days on average. Its average customer charges his purchase on a credit card whereby payment is received in ten days. On the other hand, D&M takes 56 days on average to pay for its purchases. Given this information, what is the length of D&M's operating cycle? 79. Jaxson and Sons has an inventory period of 33 days, an accounts payable period of 41 days and an accounts receivable period of 27 days. Management is considering offering a 5% discount if its credit customers pay for their purchases within 10 days. If the new discount is offered the accounts receivable period is expected to decline by 13 days. If the new discount is offered, the operating cycle will decrease from _____ days to _____ days. 80. Wislon, Inc. has an inventory turnover rate of 15, an accounts payable period of 54 days and an accounts receivable period of 37 days. What is the length of the cash cycle? 81. Drefus, Inc. has an inventory turnover of 15 and an accounts receivable turnover of 9. The accounts payable period is 51 days. What is the length of the cash cycle? 82. A firm currently has a 36 day cash cycle. Assume that the firm changes its operations such that it decreases its receivables period by 4 days, increases its inventory period by 1 day and decreases its payables period by 2 days. What will the length of the cash cycle be after these changes? 83. A firm currently has a 43 day cash cycle. Assume that the firm changes its operations such that it increases its receivables period by 2 days, decreases its inventory period by 1 day and increases its payables period by 3 days. What will the length of the cash cycle be after these changes? 84. Martinque and Son have a 60 day collection period. Sales for the next calendar year are estimated at $1,200, $1,100, $2,300 and $1,800, respectively, by quarter starting with the first quarter of the year. Given this information, which one of the following statements is correct? Assume that a year has 360 days. 85. ABC, Inc. has a beginning receivables balance on January 1st of $430. Sales for January through April are $240, $250, $330 and $350, respectively. The accounts receivable period is 60 days. How much did the firm collect in the month of March? Assume that a year has 360 days. A. $240 86. Smith and Johnson have expected sales of $380, $340, $430 and $480 for the months of January through April, respectively. The accounts receivable period is 15 days. How much did the firm collect in the month of March? Assume that a year has 360 days. 87. Dokos, Inc. has a beginning receivables balance on January 1st of $560. Sales for January through April are $620, $680, $570 and $550, respectively. The accounts receivable period is 30 days. How much did the firm collect in the month of March? Assume that a year has 360 days. 88. Baker Industries has a 45 day accounts receivable period. The estimated quarterly sales for this year, starting with the first quarter, are $1,200, $1,400, $1,900 and $3,200, respectively. How much does the firm expect to collect in the third quarter? Assume that a year has 360 days. 89. D & F, Inc. expects sales of $620, $650, $730 and $780 for the months of April through July, respectively. The firm collects 20% of sales in the month of sale, 50% in the month following the month of sale and 28% in the second month following the month of sale. The remaining 2% of sales is never collected. How much money does the firm expect to collect in the month of July? 90. Weisbro and Sons purchases its inventory one quarter prior to the quarter of sale. The purchase price is 60% of the sales price. The accounts payable period is 60 days. The accounts payable balance at the beginning of quarter one is $27,500. What is the amount of the expected disbursements for quarter two given the following expected quarterly sales? Assume that a year has 360 days. 91. Birds Unlimited has a 45 day accounts payable period. The firm has expected sales of $1,800, $2,100, $2,400 and $2,800, respectively, by quarter for the next calendar year. The cost of goods sold for a quarter is equal to 65% of the next quarter sales. What is the amount of the projected cash disbursements for accounts payable for Quarter 2 of the next year? Assume that a year has 360 days. 92. Your firm sells $2,000 worth of goods in December, $1,700 worth in January, $1,500 in February and $1,600 in March. Your cost is 60% of the retail price. You have a receivables period of 30 days and a payables period of 45 days. You buy your products one month prior to selling them. Which one of the following statements is correct given this information? 93. As of the beginning of the quarter, you have a cash balance of $250. During the quarter you pay your suppliers $310. Your accounts receivable collections are $420. You also pay an interest payment of $30 and a tax bill of $180. In addition, you borrow $75. What is your cash balance at the end of the quarter? 94. On April 1st, your firm had a beginning cash balance of $280. Your sales for March were $460 and your April sales were $510. During April you had cash expenses of $130 and payments on your accounts payable of $210. Your accounts receivable period is 30 days. What is your firm's beginning cash balance on May 1st? 95. Pluto, Inc. has a beginning cash balance of $430 on February 1st. The firm has projected sales of $600 in January, $800 in February and $900 in March. The cost of goods sold is equal to 70% of sales. Goods are purchased one month prior to the month of sale. The accounts payable period is 30 days and the accounts receivable period is 15 days. The firm has monthly cash expenses of $180. What is the projected ending cash balance at the end of February? Assume that every month has 30 days. 96. Your firm has a line of credit with your local bank for $50,000. The loan agreement calls for interest of 9% with a 5% compensating balance requirement which is based on the total amount borrowed. What is the effective interest rate if you need $42,750 for one year to cover your operating expenses? 97. The Babco Co. has a $200,000 line of credit with an 8% interest rate and a 10% compensating balance requirement which is based on the total amount borrowed. What is the effective interest rate if the firm uses this source of funding to purchase a $117,000 piece of equipment? The company plans on repaying the loan in a lump sum at the end of one year. 98. The Jetson Co. has an $80,000 line of credit with a 12% interest rate and a 10% compensating balance requirement which is based on the total amount borrowed. What is the effective annual interest rate if the firm needs $45,000 of cash for one year? 99. Your firm factors its accounts receivable immediately at a 3% discount. The average collection period is 41.95 days. Assume that all accounts are collected in full. What is the effective annual interest rate on this arrangement? 100. Your bank offers you a $100,000 line of credit with an interest rate of 2.5% per quarter. The loan agreement also requires that 4% of the unused portion of the credit line be deposited in a non-interest bearing account as a compensating balance. Your short-term investments are paying 1.25% per quarter. What is your effective annual interest rate on this arrangement if you do not borrow any money on this credit line during the year? Assume that both the funds you borrow and the funds you invest use compound interest. 101. Your bank offers you a $100,000 line of credit with an interest rate of 2.5% per quarter. The loan agreement also requires that 4% of the unused portion of the credit line be deposited in a non-interest bearing account as a compensating balance. Your short-term investments are paying 1.25% per quarter. What is your effective annual interest rate if you borrow the whole $100,000 for the entire year? Assume that both the funds you borrow and the funds you invest use compound interest. 102. Your bank offers you a $70,000 line of credit with an interest rate of 2.75% per quarter. The loan agreement also requires that 5% of the unused portion of the credit line be deposited in a non-interest bearing account as a compensating balance. Your short-term investments are paying ½ of 1% per month. What is your effective annual interest rate on this arrangement if you do not borrow any money on this credit line during the year? Assume that both the funds you borrow and the funds you invest use compound interest. 103. Your bank offers you a $40,000 line of credit with an interest rate of 2.35% per quarter. The loan agreement also requires that 5% of the unused portion of the credit line be deposited in a non-interest bearing account as a compensating balance. Your short-term investments are paying 1.75% per quarter. What is your effective annual interest rate if you borrow the whole $40,000 for the entire year? Assume that both the funds you borrow and the funds you invest use compound interest. 104. Your firm has a net cash inflow for the quarter of -$30 (negative). The beginning cash balance is $15. Company policy is to maintain a minimum cash balance of $5 and borrow only the amount that is necessary to maintain that balance. How much does your firm need to borrow to have a zero cumulative surplus? 105. Your firm has a net cash inflow for the quarter of $60. The beginning cash balance is $35. Company policy is to maintain a minimum cash balance of $15 and borrow only the amount that is necessary to maintain that balance. How much does your firm need to borrow or how much can it repay on its loans to have a zero cumulative surplus? 106. At the beginning of the year, you have an outstanding short-term loan of $10 which was used to cover your cash needs for the previous year. During the current year, you expect to pay $2 interest and have an annual net cash inflow of -$10 (negative), excluding the interest payment. What is your anticipated loan balance at year end? 107. The inventory turnover for the Lambkin Company was 8 times and its days sales in receivables was 55. What is the operating cycle for Lambkin given a 365-day year? 108. The inventory turnover for the Lambkin Company was 8 times and its days' sales in receivables was 55. The average payables deferral period (or turnover) was 7.5. What is the cash cycle for Lambkin given a 365-day year? 109. The average inventory for the StarrKnight Corporation in 2008 is __________. 110. The inventory turnover ratio for 2008 for StarrKnight Corporation is (use average inventory) _______. 111. The inventory period for 2008 for StarrKnight Corporation is (use average inventory) _______. 112. StarrKnight Corporation's accounts receivable turnover ratio for 2008 is (use average accounts receivable) _______. 113. StarrKnight Corporation's days' sales in receivable for 2008 is (use average accounts receivable) ______. 114. StarrKnight Corporation's accounts payable turnover for 2008 is (use average payables) ______. 115. StarrKnight Corporation's payables period 2008 is (use average payables) _________. 116. The operating cycle for 2008 for StarrKnight Corporation is: 117. StarrKnight Corporation's cash cycle for 2008 is: [Show More]

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