Business finance

1. Rose has preferred stock selling for 98.1 percent of par that pays a 9.9 percent annual coupon. What would be Rose's component cost of preferred stock?

 

a. 10.09%

b. 9.71%

c. 9.90%

d. 5.05%

2. Ice Co stock has a beta of 1.86, the current risk-free rate is 5.11 percent, and the expected return on the market is 15.11 percent. What is Ice Co's cost of equity?

 

a. 42.72%

b. 23.71%

c. 22.08%

d. 33.21%

3. Your firm needs a machine which costs $100,000, and requires $31,000 in maintenance for each year of its 7 year life. After 5 years, this machine will be replaced. The machine falls into the MACRS 7-year class life category. Assume a tax rate of 30% and a discount rate of 12%. What is the depreciation tax shield for this project in year 7?

a. $6,251.00

b. $8,930

c. $2,679.00

d. $1,071.60

4. Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 14 percent, and that the maximum allowable payback and discounted payback statistic for the project are 2 and 3 years, respectively.

Time	0	1	2	3	4	5	6
Cash Flow	-1,170	10	590	790	790	390	790

Use the payback decision rule to evaluate this project; should it be accepted or rejected?

a. 0 years, accept

b. 1.01 years, accept

c. 2.72 years, reject

d. 4.00 years, reject

5. Suppose that Freddie's Fries has annual sales of $660,000; cost of goods sold of $535,000; average inventories of $25,000; average accounts receivable of $41,000, and an average accounts payable balance of $36,000. Assuming that all of Freddie's sales are on credit, what will be the firm's cash cycle? (Round your answer to 2 decimal places.)

a. 39.73

b. 1.89

c. 64.29

d. 15.17

6. Suppose a firm was planning to greatly reduce its raw materials inventory next year by introducing just-in-time inventory control procedures. Assuming no other changes to the firm's operations, what would this do to AFN?

a. It would not change the AFN.

b. The AFN would decrease.

c. The AFN would increase.

d. It cannot be determined without knowing the impact on the profit margin.

7. Suppose a firm has had the historical sales figures shown as follows. What would be the forecast for next year's sales using regression to estimate a trend?   

a. $2,140,000

b. $2,225,000

c. $2,300,000

d. $2,500,000

8. Your company doesn't face any taxes and has $267 million in assets, currently financed entirely with equity. Equity is worth $9.7 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below:

State	Pessimistic	Optimistic
Probability of State	.20	.80
Expect EBIT in State	$27 million	$67 million

The firm is considering switching to a 15-percent debt capital structure, and has determined that they would have to pay a 10 percent yield on perpetual debt in either event. What will be the level of expected EPS if they switch to the proposed capital structure? (Round your intermediate calculations and final answer to 2 decimal places except calculation of number of shares which should be rounded to nearest whole number.)

a. $1.84

b. $3.67

c. $2.35

d. $2.69

9. JEN Corp. is expected to pay a dividend of $2.00 per year indefinitely. If the appropriate rate of return on this stock is 12 percent per year, and the stock consistently goes ex-dividend 25 days before dividend payment date, what will be the expected maximum price in light of the dividend payment logistics?

a. $16.67

b. $16.54

c. $18.52

d. $14.54

10. Calculating Costs of Issuing Debt Home Improvement, Inc. needs to raise $3.20 million to finance plant expansion. In discussions with its investment bank, Home Improvement learns that the bankers recommend a debt issue with a gross proceeds of $1,000 per bond and they will charge an underwriter's spread of 8 percent of the gross proceeds. How many bonds will Home Improvement need to sell in order to receive the $3.20 million they need?

a. 3,479

b. 3,456,000

c. 3,456

d. 3,478,261

11. Under/Over Valued Stock A manager believes his firm will earn a 10.15 percent return next year. His firm has a beta of 1.31, the expected return on the market is 8.1 percent, and the risk-free rate is 3.1 percent. Compute the return the firm should earn given its level of risk and determine whether the manager is saying the firm is under-valued or over-valued.

a. 9.65%, over-valued

b. 9.65%, under-valued

c. 13.711%, under-valued

d. 13.711%, over-valued

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Portfolio Beta You own $1,800 of City Steel stock that has a beta of 1.66. You also own $6,600 of Rent-N-Co (beta = 1.96) and $5,600 of Lincoln Corporation (beta = 1.06). What is the beta of your portfolio (closest to)?

a. 3.45

b. 1.00

c. 4.68

d. 1.56

13. Portfolio Weights If you own 620 shares of Air Line Inc at $41.9, 240 shares of BuyRite at $55.15, and 340 shares of Motor City at $9.2, what are the portfolio weights of each stock?

a. Air Line = .6200, BuyRite = .2400, MotorCity = .3400

b. Air Line = .6138, BuyRite = .3127, MotorCity = .0735

c. Air Line = .5167, BuyRite = .2000, MotorCity = .2833

d. Air Line = .3333, BuyRite = .3333, MotorCity = .3333

14. Dividend Initiation and Stock Value A firm does not pay a dividend. It is expected to pay its first dividend of $1.40 per share in 3 years. This dividend will grow at 14 percent indefinitely. Using a 16 percent discount rate, compute the value of this stock.

a. $52.02

b. $79.80

c. $51.12

d. $109.26

15. TIPS Capital Return Consider a 4.00% TIPS with an issue CPI reference of 188.30. At the beginning of this year, the CPI was 199.10 and was at 205.60 at the end of the year. What was the capital gain of the TIPS in dollars? (Round your answer to 2 decimal places.)

a. $10.80

b. $6.50

c. $34.51

d. $17.30

16. Determinants of Interest Rate for Individual Securities The Wall Street Journal reports that the rate on 3-year Treasury securities is 8.00 percent, and the 6-year Treasury rate is 8.20 percent. From discussions with your broker, you have determined that expected inflation premium is 3.35 percent next year, 2.95 percent in Year 2, and 3.70 percent in Year 3 and beyond. Further, you expect that real interest rates will be 4.00 percent annually for the foreseeable future. What is the maturity risk premium on the 6-year Treasury security?

a. .50%

b. .85%

c. 1.25%

d. .30%

17. Future Value of Multiple Annuities Assume that you contribute $230 per month to a retirement plan for 20 years. Then you are able to increase the contribution to $330 per month for another 20 years. Given a 7.5 percent interest rate, what is the value of your retirement plan after 40 years?

a. $750,852

b. $695,479

c. $183,540

d. $182,400

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Moving Cash Flows What is the value in year 5 of a $2,000 cash flow made in year 9 when interest rates are 11.1 percent?

a. $775.54

b. $1,181.57

c. $1,312.73

d. $1,778.00

19. Interest-on-Interest Consider a $2,300 deposit earning 10 percent interest per year for 7 years. How much total interest is earned on interest (excluding interest earned on the original deposit)?

a. $1,610.00

b. $2,182.05

c. $572.05

d. $161.00

20. Profitability and Asset Management Ratios You are thinking of investing in Tikki's Torches, Inc. You have only the following information on the firm at year-end 2008: net income = $680,000, total debt = $13.8 million, debt ratio = 43%. What is Tikki's ROE for 2008?

a. 3.72%

b. 11.47%

c. 2.12%

d. 4.93%

21. Profitability Ratios PJ's Ice Cream Parlor has asked you to help piece together financial information on the firm for the most current year. Managers give you the following information: sales = $59 million, total debt = $29 million, debt ratio = 41%, ROE = 12.9%. Using this information, what is PJ's ROA? (Do not round intermediate steps.)

a. 7.61%

b. 4. 28%

c. 11.89%

d. 12.90%

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Income Statement Barnyard, Inc.'s 2008 income statement lists the following income and expenses: EBIT = $504,500, Interest expense = $41,000, and Taxes = $156,500. Barnyard's has no preferred stock outstanding and 100,000 shares of common stock outstanding. What are its the 2008 earnings per share? (Round your answer to 2 decimal places.)

a. $3.48

b. $3.07

c. $4.64

d. $5.05 Bottom of Form

23. Statement of Retained Earnings TriCycle, Corp. began the year 2008 with $26 million in retained earnings. The firm earned net income of $7.1 million in 2008 and paid $1.01 million to its preferred stockholders and $3.01 million to its common stockholders. What is the year-end 2008 balance in retained earnings for TriCycle?

a. $33.1 million

b. $29.08 million

c. $26 million

d. $37.12 million

24. Which of the following is legal duty between two parties where one party must act in the interest of the other party?

a. Agency theory

b. Angel investor

c. Fiduciary

d. Investment banker

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This should be the primary objective of a firm as it may actually be the most beneficial for society in the long run.

a. Minimizing layoffs

b. Maximizing market share

c. Minimizing costs

d. Maximizing shareholder value

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