Mark the correct answers only need 100% Question 1 (3 points) A firm has assets valued at $950M, liabilities properly valued at $760M. What is the maximum percentage drop in asset prices a firm can withstand before becoming insolvent? Question 1 options
Fin-Acc-BossMark the correct answers only need 100%
Question 1 (3 points)
A firm has assets valued at $950M, liabilities properly valued at $760M. What is the maximum percentage drop in asset prices a firm can withstand before becoming insolvent?
Question 1 options:
20.0% | |
80.0% | |
25.0% | |
44.4% |
Question 2 (3 points)
Which of the following is not true of WACC?
a.) WACC costs are not always shown on the financial statements | |
b.) The optimal WACC maximizes firm value | |
c.) Higher tax rates increase WACC | |
d.) Firms attempt to earn returns on capital greater than WACC |
Question 3 (3 points)
Which statement is incorrect regarding illiquidity and/or insolvency?
a. The further a company is from being insolvent, the better able it is to handle declines in asset values | |
b. Different industries have different norms regarding liquidity and leverage | |
c. Bankruptcy occurs when you are deemed illiquid or insolvent | |
d. Illiquidity can cause a solvent company to become insolvent |
Question 4 (3 points)
In which scenario should a company be most inclined to issue additional debt?
a. The company has many investment opportunities, little debt, and an undervalued stock price | |
b. Interest rates have tripled in the last 3 months to a 20-year high | |
c. The company is illiquid with an overvalued stock price and high leverage | |
d. The company’s stock price has just doubled as they completed a 2-1 stock split |
Question 5 (3 points)
Assume a business can receive a guaranteed annual payment of $5M forever. If the appropriate discount rate 10.0%, how much should the business be willing to pay today for these future payments (hint: is this an annuity, annuity due, or perpetuity)?
a. $25.0M | |
b. $100.0M | |
c. $10.0M | |
d. $50.0M |
Question 6 (3 points)
If you were using the Gordon Growth Model to value a company, which of the following variables would not help you value the company?
a. Dividend Growth Rate | |
b. Debt/Equity Ratio and ROE | |
c. Next Year’s Net Income and Retention Rate | |
d. Required Return on the Stock |
Question 7 (3 points)
Cash Conversion Cycle is influenced by how well a company does the following:
a. Marks up the price it charges customers from the price it pays suppliers | |
b. Rolls over its short-term debt to stay liquid | |
c. Converts inventory into sales into cash | |
d. Gets paid in cash on its stock investments |
Question 8 (3 points)
Which of the following is a key assumption of the Internal Growth Rate?
a. Return on assets changes with leverage | |
b. The company’s retention rate is constant over time | |
c. The company’s net income is constant over time | |
d. The company’s leverage is constant over time |
Question 9 (3 points)
Which of the following cannot be found if you know a company’s most recent year’s dividend, retention rate, dividend growth rate and stock price?
a. Dividend yield | |
b. Sustainable growth rate | |
c. Dividend paid two years from now | |
Required return on the stock |
Question 10 (3 points)
A company’s bond is most likely said to be trading at a discount in which scenario?
a. The bond is overvalued | |
b. The bond is undervalued | |
c. The bond’s yield to maturity is lower than its coupon rate | |
d. The bond’s yield to maturity is higher than its coupon rate |
Question 11 (3 points)
Which of the following is a benefit of the Sharpe ratio?
a. The Sharpe ratio enables a comparison of investments of different risk levels | |
b. The Sharpe ratio tells you the return an investment will earn | |
c. The Sharpe ratio tells you how efficient the market is | |
d. The Sharpe ratio is a way of hedging different risks |
Question 12 (6 points)
Calculate the Days Payables Outstanding in 2014 for a company with the following financial measures:
YE 2012 Accounts Payable = $375M
YE 2013 AP = $385M YE 2014 AP = $345M
2013 Sales = $1.3B
2013 Gross Margin % = 60.0%
2014 Sales = $1.6B 2014 GM % = 55%
a. 185 days | |
b. 175 days | |
c. 215 days | |
d. 150 days |
Question 13 (3 points)
Which describes the results of a company with the following ratios regarding its Cash Conversion Cycle?
2014 DIO = 15 2014 DSO = 19
2014 DPO = 27 2015 DIO = 15
2015 = 22 2015 DPO = 27
a. The company increased its CCC by 3 days because it sold its inventory more quickly | |
b. The company increased its CCC by 3 days because it held its inventory longer | |
c. The company increased its CCC by 3 days because it collected its receivables more quickly | |
d. The company increased its CCC by 3 days because it took longer to collect its receivables |
Question 14 (3 points)
Which of the following describes a common feature of ordinary annuities and annuities due?
a. Cash flows occur at the same dates | |
b. Constant payments are made indefinitely | |
c. The amount paid for given payments over time implies a rate of interest | |
d. The value of the remaining cash flows remains constant over time |
Question 15 (6 points)
Calculate the sustainable AND internal growth rate for a company with the following financial information. Assume all ratios are constant.
2014 Company Data
Sales = $200M
Average Assets = $270M
Dividends Paid = $15M Net Income = $20M
Average Equity = $220M
a. SGR = 1.9% and IGR = 2.3% | |
b. SGR = 5.9% and IGR = 7.3% | |
c. SGR = 7.3% and IGR = 5.9% | |
d. SGR = 2.3% and IGR = 1.9% |
Question 16 (6 points)
Calculate the value of the following bond that was just issued, rounded to the nearest dollar (no payments made yet):
A 30-year bond has an 6% coupon rate, with payments made semi-annually and a par value of $1,000. Similar bonds have a YTM of 8%.
a. $1,000 | |
b. $1,277 | |
c. $900 | |
d. $774 |
Question 17 (6 points)
Calculate the Cost of Common Equity for a company with the following data and estimates:
Today’s stock price: $73.00
Constant Retention Rate = 40%
Estimated T+1 Earnings = $5.00/share
Estimated Earnings Growth Rate = 8%
a. 13.0% | |
b. 12.1% | |
c. 10.7% | |
d. 14.8% |
Question 18 (6 points)
A money manager requires all stocks in his or her portfolio to have, at worst, a Sharpe Ratio of 2.0. Currently, the market risk premium is estimated to be 6.5%. If a stock has a standard deviation of 7% and a Beta of 1.25, will it meet this criteria? (Hint: will require algebra to combine the Sharpe Ratio formula and the CAPM formula)
a. This stock meets the criteria because the Sharpe Ratio is greater than 2.0 | |
b. This stock doesn’t meet the criteria because the Sharpe Ratio is less than 2.0 | |
c. This stock meets the criteria because the Sharpe Ratio is less than 2.0 | |
d. This stock doesn’t meet the criteria because the Sharpe Ratio is greater than 2.0 |
Question 19 (6 points)
Calculate the WACC of the company with the characteristics below:
Common Equity: $125M in common equity trading at $15/share with most recent year’s dividend of $0.75/share and a dividend growth rate of 10% per year
Preferred Equity: $25M in preferred equity trading at $25/share with a constant $2.75/share dividend
Debt: $100M in bonds with a YTM and coupon rate of 7.5%
Marginal Tax Rate = 25%
Risk-Free Rate = 3%
Market Risk Premium = 7%
a. 10.9% | |
b. 11.1% | |
c. 10.5% | |
d. 9.6% |
Question 20 (3 points
Which of the following is a true statement about diversification?
a. The more correlated the stocks in your portfolio are, the less diversified you are | |
b. The diversification benefits of adding a stock to your portfolio are the same if you own 2 stocks or 100 stocks | |
c. The more correlated the stocks in your portfolio are, the more diversified you are | |
d. Diversification allows you to eliminate all risks when investing in stocks |
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