Which Of The Following Statements Is Correct
Which of the following statements is correct?A) all else equal, senior debt generally has a lower yield to maturity than subordinatedb) an indenture is a bond that is less risky than a mortgage bondc) the expected return on a corporate bond will generally exceed the bonds yield to maturityd) if a bonds coupon rate exceeds its yield to maturity, then its expected return to investors exceeds the yield to maturitye) under our bankruptcy laws, any firm that is in financial distress will be forced to declare bankruptcy and then will be liqudated
Which Of The Following Statements Is Correct
Which of the following statements is correct?1. a Experimental data are accumulated through controlled experiments on individuals, firms, or. segments of the economy. b Nonexperimental data are not accumulated through controlled experiments on individuals,. firms, or segments of the economy. c Nonexperimental data are sometimes called observational data, or retrospective data, to. emphasize the fact that the researcher is a passive collector of data. d All of the above. . 10 pointsQUESTION 21. Which of the following statements is correct?a Econometrics is based upon the development of statistical methods for estimating economic. relationships. b Econometrics is based upon the development of statistical methods for testing economic. theories. c Econometrics is based upon the development of statistical methods for evaluating and. implementing government and business policy. d All of the above. . 10 pointsQUESTION 31. Which of the following statements is correct?a The first step of an empirical economic analysis is the careful formulation of the question of. interest. b In most cases, especially those that involve the testing of economic theories, the second step. of an empirical economic analysis is the construction of a formal economic model, whichconsists of mathematical equations that describe various relationships. c The third step of an empirical economic analysis is the construction of an econometric model,. which specifies the variables that will be used and functional forms of the economicrelationships that will be estimated. d All of the above. . 10 pointsQUESTION 41. Consider the following econometric model: wage = ?0 + ?1educ + ?2exper + u, where thevariables wage, educ and exper measure individuals’ hourly wage, years of formal education andyears of workforce experience, respectively. Which of the following statements is correct?a u is the error term or disturbance term, it contains unobserved factors that affect a person’s. wage, such as “innate ability”. b ?0, ?1 and ?2 are the unknown parameters of the econometric model, they describe the. directions and strengths of the relationship betweenwage and the factors used to determine aperson’s wage in the model. c If we are specifically concerned about the effects of years of workforce experience on a. person’s wage level, then ?2 is the parameter of interest. d All of the above. . 10 pointsQUESTION 51. Consider the following econometric model: wage = ?0 + ?1educ + ?2exper + u, where thevariables wage, educ and exper measure individuals’ hourly wage, years of formal education andyears of workforce experience, respectively. Which of the following statements is correct?a The final steps of an empirical economic analysis, after data on the relevant variables have. been collected, include using econometric methods to estimate the unknown parameters inthe econometric model. b The final steps of an empirical economic analysis, after data on the relevant variables have. been collected, include formally testing hypotheses of interest. c In the context of this econometric model, the hypothesis that years of education have no. effect on a person’s wage level is equivalent to ? = 0. 1d All of the above. . 10 pointsQUESTION 61. Which of the following statements is correct?a A cross-sectional data set consists of a sample of individuals, households, firms, cities, states,. countries, or a variety of other units, taken at a given point in time. b We can often assume that cross-sectional data have been obtained by random sampling of the. underlying population. c Sometimes, sample selection problem may lead to situations where random sampling is not. appropriate as an assumption for analyzing cross-sectional data. d All of the above. . 10 pointsQUESTION 71. Consider the variable married which specifies a person’s marital status. Which of thefollowing statements is correct?a Binary variables take only one of two values. b Binary variables are used to specify qualitative features of units of interest in our econometric. models. c. The binary variable married takes on the value one to indicate the person ismarried and it takes on the value zero to indicate it the person is notmarried. d All of the above. . QUESTION 81. 10 pointsAssume that the data used to estimate our econometric models areavailable on an annual basis. The variable year keeps track of the year all othervariables of interest in our econometric model were measured. Which of thefollowing statements is correct?a A time series data set consists of observations on a variable or several variables over time. . b Econometric models estimated using a time series data set, or a pooled cross section data set,. or a panel/longitudinal data set, must include a yearvariable. c A key feature of time series data is that economic observations can rarely, if ever, be assumed. to be independent across time. d All of the above. . 10 pointsQUESTION 91. Which of the following describe a panel or longitudinal data set?a Year 1 random sample from an underlying population of individuals, with observations on. individuals’ hourly wage, years of formal education and years of workforce experience. b Year 1 random sample and year 2 new random sample from an underlying population of. individuals, with observations on individuals’ hourly wage, years of formal education and yearsof workforce experience. c A random sample from an underlying population of individuals, with observations on. individuals’ hourly wage, years of formal education and years of workforce experiencecollected each year, for a 20-year period. d All of the above. . QUESTION 101. 10 pointsWhich of the following statements is correct?a Finding an association between two variables allow one to infer that one variable has a causal. effect on the other. b The problem of inferring causality disappears if an appropriate experiment can be carried out. . c Most available economic data have the important features of experimental data sets, which. allow enough other factors to be held constant, thus making uncovering casual relationshipsvery easy. d All of the above. . 10 points
Which Of The Following Statements Is Correct
1.Which of the following statements is correct?The income generated by a company as a result of profitable operations during a period is added to the Share Capital account in Owners’ Equity.The difference between sales and cost of sales is called Net Profit.The final line item in an income statement is called Net Income, Net Profit (or Net Loss).Operating Income is the same as Earnings Before Interest, Depreciation and Amortization (EBITDA).2.Which of the following statements is incorrect?Revenues in a period are not necessarily the same as customer cash receipts in that period.Expenses of a period are not necessarily the same as cash payments in that period.When an asset is consumed in the operations of the business, an expense is incurred.Revenues are decreases in owners’ equity as a result of operations.3.Which of the following statements is correct?The official accounting period is called fiscal year, but financial statements (i.e. balance sheet and income statement) can be prepared for shorter periods.If revenue is recognized before the cash receipt, an asset (Accounts Receivable) decreases.The cost of the products sold is not an expense.Accounts Payable increase when the company purchases goods and pays them cash.4.Understanding the difference between cash and profit (questions 4 – 5):The ABC Company recognizes credit sales of €100,000. The cost of the goods sold is €60,000. Answer the following two questions:What is the effect of the transaction described above on the cash account?Cash increases by €100,000.Cash decreases by €60,000.Cash increases by €40,000.Cash does not change.5.What is the effect of the transaction described above on the profit and loss account?The profit and loss account increases by €100,000.The profit and loss account decreases by €60,000.The profit and loss account increases by €40,000.The profit and loss account does not change.6.Depreciation and amortization (questions 6–10):Agrokinsey Inc. acquires a new piece of equipment in the beginning of 2016 at a cost of €20,000. The company estimates that the equipment’s useful life is 10 years and its salvage value €4,000. Agrokinsey follows the straight-line depreciation method. Answer the following five questions:What is the depreciable amount of the equipment (i.e. total value of the equipment to be depreciated)?€20,000€4,000€16,000€1,6007.What is the annual depreciation expense for the equipment?€20,000€4,000€16,000€1,6008.What is the net book value of the equipment after 2 years (end of 2017)?€20,000€16,000€16,800€3,2009.What is the accumulated depreciation at the end of the 10 years (i.e. end of useful life)?€20,000€16,000€0€4,00010.Assume now that Agrokinsey Inc. had estimated a useful life of 15 years instead of 10 years with the same salvage value. Ignore any tax effects of this change in accounting policy. Which of the following statements is correct?The net profit for 2016 would have been lower.The net profit for 2016 would have been higher.The total cash in 2016 would have been lower.The total cash in 2016 would have been higher.11.Bank loan and interest cost (questions 11 – 12):Irwin Company obtained a five-year, €100,000 bank loan at the end of year x0. The principal had to be repaid in equal installments every December 31st starting in x1. The yearly interest rate is 4% and is also paid every December 31st. Please answer the following two questions:What is the impact of this transaction on the profit and loss account of the year x1?There is no impact on the profit and loss account in x1.The profit and loss account decreases by €20,000.The profit and loss account decreases by €24,000.The profit and loss account decreases by €4,000.12.Which of the following statements regarding year x1 is correct?The company recorded €20,000 as interest expense.The change in cash due to this loan was -€24,000.The ending balance of the bank loan liability at the end of year x1 was €76,000.The effect on the liabilities part of the balance sheet due to this loan was -€24,000.13.Understanding the relationship between inventories and the income statement (question 13):For the commercial company XYZ in year x2 we know that: (1) gross profit = €50,000, (2) Change in inventories is €30,000, and (3) Purchases of inventory = €180,000. Which of the following statements is correct?Sales Revenues = €200,000Cost of Goods Sold = €130,000Accounts Payable = €180,000Accounts Receivable= 200,00014.Recognizing transactions (question 14 – 19):For the remaining questions, please consider the following transactions that happened in The Dorchester Company Ltd. in 2015 (amounts in £000):· Credit sales amounted to 5,000 (nothing was paid by year-end).· Cash sales amounted to 3,000.· Purchases of inventory (on account) amounted to 10,000 (7,000 were paid by year-end).· Cost of goods sold amounted to 6,000.· Sales and administration expenses (all paid in cash) were 1,450.· At the end of the year, the company paid 50 for the annual interest accrued on a loan.· Depreciation of 100 was recorded at the end of the year.What is the gross profit of the company?-1,000-2,0001,0002,00015.What is the Return on Sales (Net profit / Sales) of the company?5%6.25%8%13.3%1point16.What is the change in cash during the year?-5,500-3,500-5001,50017.What is the change in inventories during the year?3,0004,0006,00010,00018.What is the change in liabilities during the year?04003,0007,00019.What is the change in total assets during the year?-1,6003,4004,4008,400
Which Of The Following Statements Is Correct
1. Which of the following statements is CORRECT?a.One of the disadvantages of incorporating a business is that the owners then become subject to liabilities in the event the firm goes bankrupt.b.Sole proprietorships are subject to more regulations than corporations.c.In any type of partnership, every partner has the same rights, privileges, and liability exposure as every other partner.d.Sole proprietorships and partnerships generally have a tax advantage over many corporations, especially large ones.e.Corporations of all types are subject to the corporate income tax.2. The primary operating goal of a publicly-owned firm interested in serving its stockholders should be toa.Maximize the stock price per share over the long run, which is the stock’s intrinsic value.b.Maximize the firm’s expected EPS.c.Minimize the chances of losses.d.Maximize the firm’s expected total income.e.Maximize the stock price on a specific target date.3.How many years would it take $50 to triple if you invested it in a bank that pays 5.75% per year?4.You want to buy a new sports car 5 years from now, and you plan to save $6,700 per year, beginning immediately. You will make 5 deposits in an account that pays 6.50% interest. Under these assumptions, how much will you have 5 years from today?5.What’s the present value of a 4-year ordinary annuity of $4,275 per year plus an additional $3,500 at the end of Year 4 if the interest rate is 8%?6.What’s the future value of $3,500 after 10 years if the appropriate interest rate is 7.25%, compounded semiannually?7.An investment promises the following cash flow stream: $3,500 at Time 0, $1,750 at the end of Year 1 (or at t = 1), $3,450 at the end of Year 2, and $5,200 at the end of Year 3. At a discount rate of 7.0%, what is the present value of the cash flow stream?8.Suppose you are buying your first house for $300,000, and are making a $60,000 down payment. You have arranged to finance the remaining amount with a 30-year, monthly payment, amortized mortgage at a 3.15% nominal interest rate. What will your equal monthly payments be?9.You plan to borrow $75,000 at a 7% annual interest rate. The terms require you to amortize the loan with 10 equal end-of-year payments. How much interest would you be paying in Year 5?10.You just deposited $4,000 in a bank account that pays a 5.50% nominal interest rate, compounded quarterly. If you also add another $10,000 to the account one year (12 months) from now and another $7,500 to the account two years from now, how much will be in the account three years (12 quarters) from now?11.Your sister turned 35 today, and she is planning to save $8,000 per year for retirement, with the first deposit to be made one year from today. She will invest in a mutual fund that will provide a return of 7.0% per year. She plans to retire 30 years from today, when she turns 65, and she expects to live for 25 years after retirement, to age 90. Under these assumptions, how much can she spend in each year after she retires? Her first withdrawal will be made at the beginning of her first retirement year.12.You anticipate that you will need $3,000,000 when you retire 40 years from now. You plan to make 40 deposits, beginning today, in a bank account that will pay 8% interest, compounded annually. You expect to receive annual raises of 4%, so you will increase the amount you deposit each year by 4%. (That is, your 2nd deposit will be 4% greater than your first, the 3rd will be 4% greater than the 2nd, etc.) How much must your 1st deposit be if you are to meet your goal?13. Which of the following factors could explain why Dellva Energy had a negative net cash flow last year, even though the cash on its balance sheet increased?a.The company sold a new issue of bonds.b.The company made a large investment in new plant and equipment.c.The company paid a large dividend.d.The company had high amortization expenses.e.The company repurchased 20% of its common stock.14.Medium Size Retailers, Inc. (MSR) has EBIT of $245,000, interest expense of $25,000, dividend income of $20,000, short term capital gains of $12,000, and long term capital losses of $16,000. What is MSR’s income tax liability?15.Frederickson Office Supplies recently reported $16,500 of sales, $7,750 of operating costs other than depreciation, and $1,525 of depreciation. The company had no amortization charges and no non-operating income. It had $10,000 of bonds outstanding that carry a 9.0% interest rate, and its federal-plus-state income tax rate was 40%. How much was the firm’s taxable income, or earnings before taxes (EBT)?16.Over the years, Janjigian Corporation’s stockholders have provided $36,750 of capital, partly when they purchased new issues of stock and partly when they allowed management to retain some of the firm’s earnings. The firm now has 2,250 shares of common stock outstanding, and it sells at a price of $40.00 per share. How much value has Janjigian’s management added to stockholder wealth over the years, i.e., what is Janjigian’s MVA?17. Zumbahlen Inc. has the following balance sheet. How much total net operating capital does the firm have?Cash$ 20.00 Accounts payable$ 40.00Short-term investments65.00 Accruals30.00Accounts receivable40.00 Notes payable50.00Inventory60.00 Current liabilities$120.00Current assets$185.00 Long-term debt140.00Gross fixed assets$225.00 Common stock30.00Accumulated deprec.60.00 Retained earnings60.00Net fixed assets$165.00 Total common equity$ 90.00Total assets$350.00 Total liab. & equity$350.0018.HHH Inc. reported $17,500 of sales and $7,025 of operating costs (including depreciation). The company had $18,750 of investor-supplied operating capital, the weighted average cost of that capital (the WACC) was 12.5%, and the federal-plus-state income tax rate was 25%. What was HHH’s Economic Value Added (EVA), i.e., how much value did management add to stockholders’ wealth during the year?19.Wells Water Systems recently reported $10,550 of sales, $4,250 of operating costs other than depreciation, and $1,300 of depreciation. The company had no amortization charges, it had $3,250 of outstanding bonds that carry a 6.75% interest rate, and its federal-plus-state income tax rate was 28%. In order to sustain its operations and thus generate sales and cash flows in the future, the firm was required to spend $975 to buy new fixed assets and to invest $350 in net operating working capital. How much free cash flow did Wells generate?20. Amram Company’s current ratio is 1.9. Considered alone, which of the following actions would reduce the company’s current ratio?a.Borrow using short-term notes payable and use the proceeds to reduce accruals.b.Borrow using short-term notes payable and use the proceeds to reduce long-term debt.c.Use cash to reduce accruals.d.Use cash to reduce short-term notes payable.e.Use cash to reduce accounts payable.21.Northwest Lumber had a net profit margin of 4.75%, a total assets turnover of 2.7, and an equity multiplier of 1.55. What was the firm’s ROE?22.An investor is considering starting a new business. The company would require $775,000 of assets, and it would be financed entirely with common stock. The investor will go forward only if she thinks the firm can provide a 21.5% return on the invested capital, which means that the firm must have an ROE of 22.5%. How much net income must be expected to warrant starting the business?23.Helmuth Inc.’s latest net income was $1,450,000, and it had 235,000 shares outstanding. The company wants to pay out 55% of its income as dividends. What dividend per share should it declare?24.Heaton Corp. sells on terms that allow customers 45 days to pay for merchandise. Its sales last year were $675,000, and its year-end receivables were $110,000. If its DSO is less than the 45-day credit period, then customers are paying on time. Otherwise, they are paying late. By how much are customers paying early or late? Base your answer on this equation: DSO – Credit period = days early or late, and use a 365-day year when calculating the DSO. A positive answer indicates late payments, while a negative answer indicates early payments.25.Last year Mason Inc. had a total assets turnover of 2.55 and an equity multiplier of 1.95. Its sales were $235,000 and its net income was $9,549. The CFO believes that the company could have operated more efficiently, lowered its costs, and increased its net income by $6,100 without changing its sales, assets, or capital structure. Had it cut costs and increased its net income in this amount, by how much would the ROE have changed?26. Muscarella Inc. has the following balance sheet and income statement data:Cash$ 14,000Accounts payable$ 47,000Receivables60,000Other current liabilities28,000Inventories220,000Total CL$ 75,000Total CA$294,000Long-term debt70,000Net fixed assets126,000Common equity275,000Total assets$420,000Total liab. and equity$420,000Sales$250,000Net income$ 14,000The new CFO thinks that inventories are excessive and could be lowered sufficiently to cause the current ratio to equal the industry average, 2.95, without affecting either sales or net income. Assuming that inventories are sold off and not replaced to get the current ratio to the target level, and that the funds generated are used to buy back common stock at book value, by how much would the ROE change?27. Stock X has a beta of 0.5 and Stock Y has a beta of 1.5. Which of the following statements must be true, according to the CAPM?a.If you invest $50,000 in Stock X and $50,000 in Stock Y, your 2-stock portfolio will have a beta significantly lower than 1.0, provided the returns on the two stocks are not perfectly correlated.b.Stock Y’s return during the coming year will be higher than Stock X’s return.c.If expected inflation increases but the market risk premium is unchanged, the required returns on the two stocks will increase by the same amount.d.Stock Y’s return has a higher standard deviation than Stock X.e.If the market risk premium declines, but the risk-free rate is unchanged, Stock X will have a larger decline in its required return than will Stock Y.28.Rick Kish has a $120,000 stock portfolio. $45,000 is invested in a stock with a beta of 0.95 and the remainder is invested in a stock with a beta of 2.45. These are the only two investments in his portfolio. What is his portfolio’s beta?29.ABC Company’s stock has a beta of 1.75, the risk-free rate is 2.25%, and the market risk premium is 6.50%. What is ABC’s required rate of return using CAPM?30. Ripken Iron Works believes the following probability distribution exists for its stock. What is the standard deviation of return on the company’s stock?State of the EconomyProbability of State OccurringStock’s Expected ReturnBoom0.3032%Normal0.5012%Recession0.20-9%31.Joel Foster is the portfolio manager of the Go Anywhere Fund, a $3 million hedge fund that contains the following stocks. The required rate of return on the market is 9.00% and the risk-free rate is 3.00%. What rate of return should investors expect (and require) on this fund?StockAmountBetaA$1,075,0001.20B675,0001.50C750,0003.00D500,0000.75$3,000,00032.Hazel Morrison, a mutual fund manager, has a $60 million portfolio with a beta of 1.00. The risk-free rate is 3.25%, and the market risk premium is 6.00%. Hazel expects to receive an additional $40 million, which she plans to invest in additional stocks. After investing the additional funds, she wants the fund’s required and expected return to be 15.00%. What must the average beta of the new stocks be to achieve the target required rate of return?33. Campbell’s father holds just one stock, East Coast Bank (ECB), which he thinks is a very low-risk security. Campbell agrees that the stock is relatively safe, but he wants to demonstrate that his father’s risk would be even lower if he were more diversified. Campbell obtained the following returns data shown for West Coast Bank (WCB). Both have had less variability than most other stocks over the past 5 years. Measured by the standard deviation of returns, by how much would his father’s historical risk have been reduced if he had held a portfolio consisting of 55% ECB and the remainder in WCB?YearECBWCB201020.00%25.00%2011-10.00%15.00%201235.00%-5.00%2013-5.00%-10.00%201415.00%35.00%34.Which of the following statements is CORRECT?a.If a coupon bond is selling at par, its current yield equals its yield to maturity.b.If a coupon bond is selling at a discount, its price will continue to decline until it reaches its par value at maturity.c.If interest rates increase, the price of a 10-year coupon bond will decline by a greater percentage than the price of a 10-year zero coupon bond.d.If a bond’s yield to maturity exceeds its annual coupon, then the bond will trade at a premium.e.If a coupon bond is selling at a premium, its current yield equals its yield to maturity.35.Garvin Enterprises’ bonds currently sell for $900. They have a 6-year maturity, an annual coupon of $70, and a par value of $1,000. What is their current yield?36.Sadik Inc.’s bonds currently sell for $1,250 and have a par value of $1,000. They pay a $115 annual coupon and have a 15-year maturity, but they can be called in 7 years at $1,115. What is their yield to call (YTC)?37.Moerdyk Corporation’s bonds have a 10-year maturity, a 5.50% coupon rate with interest paid semiannually, and a par value of $1,000. The nominal required rate of return on these bonds is 6.50%. What is the bond’s intrinsic value?38.Niendorf Corporation’s 5-year bonds yield 8.25%, and 5-year T-bonds yield 4.50%. The real risk-free rate is r* = 2.45%, the inflation premium for 5-year bonds is IP = 1.65%, the default risk premium for Niendorf’s bonds is DRP = 2.15% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t – 1) x 0.1%, where t = number of years to maturity. What is the liquidity premium (LP) on Niendorf’s bonds?39.A 25-year, $1,000 par value bond has a 7.75% coupon rate with interest paid semiannually. The bond currently sells for $900. What is the capital gains yield on these bonds?40.O’Brien Ltd.’s outstanding bonds have a $1,000 par value, and they mature in 20 years. Their nominal yield to maturity is 8.50%, they pay interest semiannually, and they sell at a price of $900. What is the bond’s nominal (annual) coupon interest rate?
Which Of The Following Statements Is Correct
Which of the following statements is correct?A. Net Property Income = Dividends received plus the gross-up minus the dividend tax credit.B. Net Property Income = Dividends received minus the gross-up minus the dividend tax credit.C. Federal Tax Payable = Federal tax on grossed-up dividends minus the dividend tax credit.D. Federal Tax Payable = The gross up on dividends received minus the dividend tax credit.The federal dividend tax credit cannot be claimed if you receive: A. Eligible dividends.B. Non-eligible dividends.C. Stock dividends.D. Capital dividends.Fergus owns a rental property. Instead of hiring contractors he does all of the property maintenance and repairs himself, keeping careful records. Which one of the following amounts is not a deduction for tax purposes?A. $700 for shrubs and flowers.B. $150 for bookkeeping services.C. $400 for lumber, paint and hardware.D. $500 for his labour (50 hours @ minimum wage of $10 per hour).
Which Of The Following Statements Is Correct
Cash flow $3,000, $2000, $5000, $6000, $1000Which of the following statements is correct? A. The present value of these cash flows discounted at a positive discount rate is $17,000.B. The present value of $3,000 at a discount rate greater than 0% and at time zero is less than $3,000.C. The present value of all cash flows is greater if they occur at the beginning of the year rather than at the end of the year at a discount rate greater than 0%.D. The future value of all the cash flows at the end of year 4 with an interest rate greater than 0% is $17,000.
Which Of The Following Statements Is Correct
1. Which of the following statements is CORRECT?A) If inflation is expected to increase, then the yield on a 2-year bond should exceed that on a 3year bond. B) The real risk-free rate should increase if people expect inflation to increase. C) The yield on a 3-year Treasury bond should always exceed the yield on a 2-year Treasurybond. D) The yield on a 3-year corporate bond should always exceed the yield on a 2-year corporatebond. E) The yield on a 2-year corporate bond should always exceed the yield on a 2-year Treasurybond. 2. Since the market return represents the expected return on an average stock, the market returnreflects a certain amount of risk. As a result, there exists a market risk premium, which is theamount over and above the risk-free rate, that is required to compensate stock investors forassuming an average amount of risk. A) TrueB) False3. Cranberry Corp. has two divisions of equal size: a computer manufacturing division and a dataprocessing division. Its CFO believes that stand-alone data processor companies typically have aWACC of 8%, while stand-alone computer manufacturers typically have a 12% WACC. He alsobelieves that the data processing and manufacturing divisions have the same risk as their typicalpeers. Consequently, he estimates that the composite, or corporate, WACC is 10%. A consultanthas suggested using an 8% hurdle rate for the data processing division and a 12% hurdle rate forthe manufacturing division. However, the CFO disagrees, and he has assigned a 10% WACC toall projects in both divisions. Which of the following statements is CORRECT?A) While the decision to use just one WACC will result in its accepting more projects in themanufacturing division and fewer projects in its data processing division than if it followed theconsultant’s recommendation, this should not affect the firm’s intrinsic value. B) The decision not to adjust for risk means that the company will accept too many projects inthe manufacturing division and too few in the data processing division. This will lead to areduction in the firm’s intrinsic value over time. C) The decision not to risk-adjust means that the company will accept too many projects in thedata processing business and too few projects in the manufacturing business. This will lead to areduction in its intrinsic value over time. D) The decision not to adjust for risk means, in effect, that it is favoring the data processingdivision. Therefore, that division is likely to become a larger part of the consolidated companyover time. E) The decision not to risk adjust means that the company will accept too many projects in themanufacturing business and too few projects in the data processing business. This may affect thefirm’s capital structure but it will not affect its intrinsic value. 4. The four most fundamental factors that affect the cost of money are (1) production opportunities,(2) time preferences for consumption, (3) risk, and (4) the skill level of the economy’s laborforce. A) TrueB) False5. Which of the following statements is CORRECT?A) If a project has “normal” cash flows, then its MIRR must be positive. B) If a project has “normal” cash flows, then it can have only one real IRR, whereas a projectwith “nonnormal” cash flows might have more than one real IRR. C) If a project has “normal” cash flows, then it will have exactly two real IRRs. D) The definition of “normal” cash flows is that the cash flow stream has one or more negativecash flows followed by a stream of positive cash flows and then one negative cash flow at theend of the project’s life. E) If a project has “normal” cash flows, then its IRR must be positive. 6. Which of the following statements is CORRECT?A) A major disadvantage of financing with preferred stock is that preferred stockholderstypically have supernormal voting rights. B) One of the disadvantages to a corporation of owning preferred stock is that 70% of thedividends received represent taxable income to the corporate recipient, whereas interest incomeearned on bonds would be tax free. C) Preferred stock is normally expected to provide steadier, more reliable income to investorsthan the same firm’s common stock, and, as a result, the expected after-tax yield on the preferredis lower than the after-tax expected return on the common stock. D) The preemptive right is a provision in all corporate charters that gives preferred stockholdersthe right to purchase (on a pro rata basis) new issues of preferred stock. E) One of the advantages to financing with preferred stock is that 70% of the dividends paid outare tax deductible to the issuer. 7. A stock’s beta is more relevant as a measure of risk to an investor who holds only one stock thanto an investor who holds a well-diversified portfolio. A) TrueB) False8. Norris Enterprises, an all-equity firm, has a beta of 2. 0. The chief financial officer is evaluating aproject with an expected return of 14%, before any risk adjustment. The risk-free rate is 5%, andthe market risk premium is 4%. The project being evaluated is riskier than an average project, interms of both its beta risk and its total risk. Which of the following statements is CORRECT?A) Capital budgeting projects should be evaluated solely on the basis of their total risk. Thus,insufficient information has been provided to make the accept/reject decision. B) The project should definitely be rejected because its expected return (before risk adjustment)is less than its required return. C) The project should definitely be accepted because its expected return (before any riskadjustments) is greater than its required return. D) Riskier-than-average projects should have their expected returns increased to reflect theirhigher risk. Clearly, this would make the project acceptable regardless of the amount of theadjustment. E) The accept/reject decision depends on the firm’s risk-adjustment policy. If Norris’ policy is toincrease the required return on a riskier-than-average project to 3% over rS, then it should rejectthe project. 9. The cost of equity raised by retaining earnings can be less than, equal to, or greater than the costof external equity raised by selling new issues of common stock, depending on tax rates,flotation costs, the attitude of investors, and other factors. A) TrueB) False10. If the Treasury yield curve is downward sloping, how should the yield to maturity on a 10-yearTreasury coupon bond compare to that on a 1-year T-bill?A) It is impossible to tell without knowing the coupon rates of the bonds. B) The yield on a 10-year bond would have to be higher than that on a 1-year bill because of thematurity risk premium. C) The yields on the two securities would be equal. D) It is impossible to tell without knowing the relative risks of the two securities. E) The yield on a 10-year bond would be less than that on a 1-year bill. 11. Which of the following statements is CORRECT?A) An NPV profile graph shows how a project’s payback varies as the cost of capital changes. B) The NPV profile graph for a normal project will generally have a positive (upward) slope asthe life of the project increases. C) An NPV profile graph is designed to give decision makers an idea about how a project’s riskvaries with its life. D) We cannot draw a project’s NPV profile unless we know the appropriate WACC for use inevaluating the project’s NPV. E) An NPV profile graph is designed to give decision makers an idea about how a project’scontribution to the firm’s value varies with the cost of capital. 12. Stocks A and B have the same price and are in equilibrium, but Stock A has the higher requiredrate of return. Which of the following statements is CORRECT?A) Stock B must have a higher dividend yield than Stock A. B) If Stock A has a lower dividend yield than Stock B, its expected capital gains yield must behigher than Stock B’s. C) Stock A must have a higher dividend yield than Stock B. D) Stock A must have both a higher dividend yield and a higher capital gains yield than Stock B. E) If Stock A has a higher dividend yield than Stock B, its expected capital gains yield must belower than Stock B’s. 13. Which of the following statements is CORRECT?A) A sinking fund provision makes a bond more risky to investors at the time of issuance. B) Sinking fund provisions never require companies to retire their debt, they only establish“targets” for the company to reduce its debt over time. C) If interest rates increase after a company has issued bonds with a sinking fund, the companywill be less likely to buy bonds on the open market to meet its sinking fund obligation and morelikely to call them in at the sinking fund call price. D) Most sinking funds require the issuer to provide funds to a trustee, who holds the money sothat it will be available to pay off bondholders when the bonds mature. E) Sinking fund provisions sometimes turn out to adversely affect bondholders, and this is mostlikely to occur if interest rates decline after the bond was issued. 14. Which of the following events would make it more likely that a company would call itsoutstanding callable bonds?A) The company’s financial situation deteriorates significantly. B) Market interest rates decline sharply. C) Market interest rates rise sharply. D) The company’s bonds are downgraded. E) Inflation increases significantly. 15. Stock A has an expected return of 10% and a standard deviation of 20%. Stock B has an expectedreturn of 13% and a standard deviation of 30%. The risk-free rate is 5% and the market riskpremium, rM − rRF, is 6%. Assume that the market is in equilibrium. Portfolio AB has 50%invested in Stock A and 50% invested in Stock B. The returns of Stock A and Stock B areindependent of one another, i. e. , the correlation coefficient between them is zero. Which of thefollowing statements is CORRECT?A) Since the two stocks have zero correlation, Portfolio AB is riskless. B) Portfolio AB’s standard deviation is 25%. C) Portfolio AB’s required return is 11%. D) Stock B’s beta is 1. 0000. E) Stock A’s beta is 0. 8333. 16. Which of the following bonds has the greatest interest rate price risk?A) A 10-year, $1,000 face value, 10% coupon bond with annual interest payments. B) All 10-year bonds have the same price risk since they have the same maturity. C) A 10-year $100 annuity. D) A 10-year, $1,000 face value, 10% coupon bond with semiannual interest payments. E) A 10-year, $1,000 face value, zero coupon bond. 17. Which of the following factors would be most likely to lead to an increase in nominal interestrates?A) There is a decrease in expected inflation. B) The Federal Reserve decides to try to stimulate the economy. C) The economy falls into a recession. D) A new technology like the Internet has just been introduced, and it increases investmentopportunities. E) Households reduce their consumption and increase their savings. 18. A stock is expected to pay a dividend of $0. 75 at the end of the year. The required rate of returnis rs = 10. 5%, and the expected constant growth rate is g = 6. 4%. What is the stock’s currentprice?A) $18. 75B) $19. 22C) $17. 84D) $18. 29E) $17. 3919. Which of the following statements is CORRECT?A) The NPV, IRR, MIRR, and discounted payback (using a payback requirement of 3 years orless) methods always lead to the same accept/reject decisions for independent projects. B) If a firm uses the discounted payback method with a required payback of 4 years, then it willaccept more projects than if it used a regular payback of 4 years. C) Multiple IRRs can exist, but not multiple MIRRs. This is one reason some people favor theMIRR over the regular IRR. D) The percentage difference between the MIRR and the IRR is equal to the project’s WACC. E) For mutually exclusive projects with normal cash flows, the NPV and MIRR methods cannever conflict, but their results could conflict with the discounted payback and the regular IRRmethods. 20. The cost of debt, rd, is normally less than rs, so rd(1 – T) will normally be much less than rs. Therefore, as long as the firm is not completely debt financed, the weighted average cost ofcapital (WACC) will normally be greater than rd(1 – T). A) TrueB) False21. The preemptive right is important to shareholders because itA) is included in every corporate charter. B) protects bondholders, and thus enables the firm to issue debt with a relatively low interestrate. C) will result in higher dividends per share. D) protects the current shareholders against a dilution of their ownership interests. E) allows managers to buy additional shares below the current market price. 22. The NPV method’s assumption that cash inflows are reinvested at the cost of capital is generallymore reasonable than the IRR’s assumption that cash flows are reinvested at the IRR. This is animportant reason why the NPV method is generally preferred over the IRR method. A) TrueB) False23. Four of the following statements are truly disadvantages of the regular payback method, but oneis not a disadvantage of this method. Which one is NOT a disadvantage of the payback method?A) Ignores cash flows beyond the payback period. B) Does not directly account for the time value of money. C) Lacks an objective, market-determined benchmark for making decisions. D) Does not take account of differences in size among projects. E) Does not provide any indication regarding a project’s liquidity or risk. 24. Assume that you hold a well-diversified portfolio that has an expected return of 11. 0% and a betaof 1. 20. You are in the process of buying 1,000 shares of Alpha Corp at $10 a share and adding itto your portfolio. Alpha has an expected return of 13. 0% and a beta of 1. 50. The total value ofyour current portfolio is $90,000. What will the expected return and beta on the portfolio be afterthe purchase of the Alpha stock?A) 10. 64%, 1. 17B) 12. 97%, 1. 42C) 11. 76%, 1. 29D) 12. 35%, 1. 36E) 11. 20%, 1. 2325. Firms raise capital at the total corporate level by retaining earnings and by obtaining funds in thecapital markets. They then provide funds to their different divisions for investment in capitalprojects. The divisions may vary in risk, and the projects within the divisions may also vary inrisk. Therefore, it is conceptually correct to use different risk-adjusted costs of capital fordifferent capital budgeting projects. A) TrueB) False26. Suppose the real risk-free rate is 3. 00%, the average expected future inflation rate is 2. 25%, anda maturity risk premium of 0. 10% per year to maturity applies, i. e. , MRP = 0. 10%(t), where t isthe years to maturity. What rate of return would you expect on a 1-year Treasury security,assuming the pure expectations theory is NOT valid? Disregard cross-product terms, i. e. , ifaveraging is required, use the arithmetic average. A) 5. 62%B) 5. 08%C) 5. 90%D) 6. 19%E) 5. 35%27. Which of the following statements is CORRECT?A) Portfolio diversification reduces the variability of returns (as measured by the standarddeviation) of each individual stock held in a portfolio. B) A security’s beta measures its non-diversifiable, or market, risk relative to that of an averagestock. C) If an investor buys enough stocks, he or she can, through diversification, eliminate all of thediversifiable risk inherent in owning stocks. Therefore, if a portfolio contained all publicly tradedstocks, it would be essentially riskless. D) A stock’s beta is less relevant as a measure of risk to an investor with a well-diversifiedportfolio than to an investor who holds only that one stock. E) The required return on a firm’s common stock is, in theory, determined solely by its marketrisk. If the market risk is known, and if that risk is expected to remain constant, then no otherinformation is required to specify the firm’s required return. 28. Which of the following statements is CORRECT?A) The expected return on a corporate bond must be greater than its promised return if theprobability of default is greater than zero. B) A company’s bond rating is affected by its financial ratios but not by provisions in itsindenture. C) All else equal, senior debt has more default risk than subordinated debt. D) Under Chapter 11 of the Bankruptcy Act, the assets of a firm that declares bankruptcy mustbe liquidated, and the sale proceeds must be used to pay off claims against it according to thepriority of the claims as spelled out in the Act. E) All else equal, secured debt is more risky than unsecured debt. 29. Junk bonds are high-risk, high-yield debt instruments. They are often used to finance leveragedbuyouts and mergers, and to provide financing to companies of questionable financial strength. A) TrueB) False30. Stocks X and Y have the following data. Assuming the stock market is efficient and the stocksare in equilibrium, which of the following statements is CORRECT?XYPrice $30 $30Expected growth (constant) 6% 4%Required return 12% 10%A) Stock Y has a higher capital gains yield. B) One year from now, Stock X’s price is expected to be higher than Stock Y’s price. C) Stock X has a higher dividend yield than Stock Y. D) Stock Y has a higher dividend yield than Stock X. E) Stock X has the higher expected year-end dividend. 31. A 10-year corporate bond has an annual coupon of 9%. The bond is currently selling at par($1,000). Which of the following statements is CORRECT?Answera. If the bond’s yield to maturity declines, the bond will sell at a discount. b. The bond’s current yield is above 9%. c. The bond’s current yield is less than its expected capital gains yield. d. The bond’s yield to maturity is above 9%. e. The bond’s expected capital gains yield is zero. 32. A 10-year Treasury bond has an 8% coupon, and an 8-year Treasury bond has a 10% coupon. Neither is callable, and both have the same yield to maturity. If the yield to maturity of both bondsincreases by the same amount, which of the following statements would be CORRECTAnswera. One bond’s price would increase, while the other bond’s price would decrease. b. The prices of both bonds would increase by the same amount. c. The prices of both bonds will decrease by the same amount. d. The prices of the two bonds would remain constant. e. Both bonds would decline in price, but the 10-year bond would have the greater percentage decline inprice33. Which of the following statements is CORRECTAnswera. A debenture is a secured bond that is backed by some or all of the firm’s assets. b. Convertible bonds generally have lower coupon rates than non-convertible bonds of similar defaultrisk because they offer the possibility of capital gains. c. Senior debt is debt that has been more recently issued, and in bankruptcy it is paid off after juniordebt because the junior debt was issued first. d. A company’s subordinated debt has less default risk than its senior debt. e. Junk bonds typically provide a lower yield to maturity than investment-grade bonds. 34. Which of the following statements is CORRECT?Answera. Income bonds must pay interest only if the company earns the interest. Thus, these securities cannotbankrupt a company prior to their maturity, and this makes them safer to the issuing corporation than",regular", bonds. b. A firm with a sinking fund that gives it the choice of calling the required bonds at par or buying thebonds in the open market would generally choose the open market purchase if the coupon rateexceeded the going interest rate. c. Other things held constant, a callable bond should have a lower yield to maturity than a noncallablebond. d. One disadvantage of zero coupon bonds is that the issuing firm cannot realize any tax savings from theuse of debt until the bonds mature. e. Once a firm declares bankruptcy, it must be liquidated by the trustee, who uses the proceeds to paybondholders, unpaid wages, taxes, and legal fees35A company is planning to raise $1,000,000 to finance a new plant. Which of the followingstatements is CORRECTAnswera. If debt is used to raise the million dollars, the cost of the debt would be higher if the debt were in theform of a mortgage bond rather than an unsecured term loan. b. The company would be especially eager to have a call provision included in the indenture if itsmanagement thinks that interest rates are almost certain to rise in the foreseeable future. c. If debt is used to raise the million dollars, the cost of the debt would be lower if the debt were in theform of a fixed-rate bond rather than a floating-rate bond. d. If two classes of debt are used (with one senior and the other subordinated to all other debt), thesubordinated debt will carry a lower interest rate. e. If debt is used to raise the million dollars, but $500,000 is raised as first mortgage bonds on the newplant and $500,000 as debentures, the interest rate on the first mortgage bonds would be lower than itwould be if the entire $1 million were raised by selling first mortgage bonds. . 36. Taussig Corp. ‘s bonds currently sell for $840. They have a 6. 35% annual coupon rate and a 20year maturity, but they can be called in 5 years at $1,067. 50. Assume that no costs other than the callpremium would be incurred to call and refund the bonds, and also assume that the yield curve ishorizontal, with rates expected to remain at current levels on into the future. Under these conditions,what rate of return should an investor expect to earn if he or she purchases these bonds?Answera. 7. 98%b. 8. 69%c. 7. 74%d. 9. 81%e. 6. 94%1. Which of the following statements is CORRECT?A) If inflation is expected to increase, then the yield on a 2-year bond should exceed that on a 3-year bond. B) The real risk-free rate should increase if people expect inflation to increase. C) The yield on a 3-year Treasury bond should always exceed the yield on a 2-year Treasury bond. D) The yield on a 3-year corporate bond should always exceed the yield on a 2-year corporate bond. E) The yield on a 2-year corporate bond should always exceed the yield on a 2-year Treasury bond. 2. Since the market return represents the expected return on an average stock, the market return reflects a certain amount of risk. As a result, there exists a market risk premium, which is the amount over and above the risk-free rate, that is required to compensate stock investors for assuming an average amount of risk. A) TrueB) False
Which of the following statements is CORRECT
Midterm week 41. (TCO A) Which of the following statements is CORRECT? (Points : 10)It is generally more expensive to form a proprietorship than a corporation because, with a proprietorship, extensive legal documents are required. Corporations face fewer regulations than sole proprietorships. One disadvantage of operating a business as a sole proprietorship is that the firm is subject to double taxation, at both the firm level and the owner level. One advantage of forming a corporation is that equity investors are usually exposed to less liability than in a regular partnership. If a regular partnership goes bankrupt, each partner is exposed to liabilities only up to the amount of his or her investment in the business. 2. (TCO G) A security analyst obtained the following information from Prestopino Products’ financial statements:• Retained earnings at the end of 2009 were $700,000, but retained earnings at the end of 2010 had declined to $320,000. • The company does not pay dividends. • The company’s depreciation expense is its only non-cash expense, it has no amortization charges. • The company has no non-cash revenues. • The company’s net cash flow (NCF) for 2010 was $150,000. On the basis of this information, which of the following statements is CORRECT? (Points : 10)Prestopino had negative net income in 2010. Prestopino’s depreciation expense in 2010 was less than $150,000. Prestopino had positive net income in 2010, but its income was less than its 2009 income. Prestopino’s NCF in 2010 must be higher than its NCF in 2009. Prestopino’s cash on the balance sheet at the end of 2010 must be lower than the cash it had on the balance sheet at the end of 2009. 3. (TCO G) Beranek Corp. has $410,000 of assets, and it uses no debt—it is financed only with common equity. The new CFO wants to employ enough debt to bring the debt/assets ratio to 40%, using the proceeds from the borrowing to buy back common stock at its book value. How much must the firm borrow to achieve the target debt ratio? (Points : 10)$155,800$164,000$172,200$180,810$189,8514. (TCO B) You deposit $1,000 today in a savings account that pays 3. 5% interest, compounded annually. How much will your account be worth at the end of 25 years? (Points : 10)$2,245. 08$2,363. 24$2,481. 41$2,605. 48$2,735. 755. (TCO B) You sold a car and accepted a note with the following cash flow stream as your payment. What was the effective price you received for the car assuming an interest rate of 6. 0%?Years: 0 1 2 3 4|———–|————–|————–|————–|CFs: $0 $1,000 $2,000 $2,000 $2,000 (Points : 10)$5,987$6,286$6,600$6,930$7,2776. (TCO B) Suppose you borrowed $12,000 at a rate of 9. 0% and must repay it in four equal installments at the end of each of the next four years. How large would your payments be? (Points : 10)$3,704. 02$3,889. 23$4,083. 69$4,287. 87$4,502. 267. (TCO D) Which of the following statements is CORRECT? (Points : 10)If a bond is selling at a discount, the yield to call is a better measure of return than the yield to maturity. On an expected yield basis, the expected capital gains yield will always be positive because an investor would not purchase a bond with an expected capital loss. On an expected yield basis, the expected current yield will always be positive because an investor would not purchase a bond that is not expected to pay any cash coupon interest. If a coupon bond is selling at par, its current yield equals its yield to maturity. The current yield on Bond A exceeds the current yield on Bond B, therefore, Bond A must have a higher yield to maturity than Bond B. 8. (TCO D) Ezzell Enterprises’ noncallable bonds currently sell for $1,165. They have a 15-year maturity, an annual coupon of $95, and a par value of $1,000. What is their yield to maturity? (Points : 10)6. 20%6. 53%6. 87%7. 24%7. 62%9. (TCO C) Niendorf Corporation’s five-year bonds yield 6. 75%, and five-year T-bonds yield 4. 80%. The real risk-free rate is r* = 2. 75%, the inflation premium for five-year bonds is IP = 1. 65%, the default risk premium for Niendorf’s bonds is DRP = 1. 20% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t – 1) x 0. 1%, where t = number of years to maturity. What is the liquidity premium (LP) on Niendorf’s bonds? (Points : 10)0. 49%0. 55%0. 61%0. 68%0. 75%10. (TCO C) Assume that investors have recently become more risk averse, so the market risk premium has increased. Also, assume that the risk-free rate and expected inflation have not changed. Which of the following is most likely to occur? (Points : 10)The required rate of return for an average stock will increase by an amount equal to the increase in the market risk premium. The required rate of return will decline for stocks whose betas are less than 1. 0. The required rate of return on the market, rM, will not change as a result of these changes. The required rate of return for each individual stock in the market will increase by an amount equal to the increase in the market risk premium. The required rate of return on a riskless bond will decline.
Which of the following statements is CORRECT?
Which of the following statements is CORRECT?
Projects with “normal” cash flows can have only one real IRR.
Projects with “normal” cash flows can have two or more real IRRs.
Projects with “normal” cash flows must have two changes in the sign of the cash flows, e.g., from negative to positive to negative. If there are more than two sign changes, then the cash flow stream is “nonnormal.”
The “multiple IRR problem” can arise if a project’s cash flows are “normal.”
Projects with “nonnormal” cash flows are almost never encountered in the real world