公司金融final模拟题和答案

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1、Final Practice for the courseGoal of firmAnswer: d MEDIUM.Goal of firmAnswer: d MEDIUMThe primary operating goal should be to maximize the long-run stock price, or the intrinsic value.The primary operating goal of a publicly-owned firm interested in serving its stockholders should be toa.Maximize it

2、s expected total corporate income.b.Maximize its expected EPS.c.Minimize the chances of losses.d.Maximize the stock price per share over the long run, which is the stocks intrinsic value.e.Maximize the stock price on a specific target date.Firm organizationAnswer: c EASY.Firm organizationAnswer: c E

3、ASY.Which of the following statements is CORRECT?a.One of the advantages of the corporate form of organization is that it avoids double taxation.b.It is easier to transfer ones ownership interest in a partnership than in a corporation.c.One of the disadvantages of a sole proprietorship is that the p

4、roprietor is exposed to unlimited liability.d.One of the advantages of a corporation from a social standpoint is that every stockholder has equal voting rights, i.e., “one person, one vote.”e.Corporations of all types are subject to the corporate income tax.Dividends, retained earningsAnswer: b EASY

5、/MEDIUM.Dividends, retained earningsAnswer: b EASY/MEDIUM.Fine Breads Inc. paid out $26,000 common dividends during 2005, and it ended the year with $150,000 of retained earnings. The prior years retained earnings were $145,000. What was the firms 2005 net income?a.$30,000b.$31,000c.$32,000d.$33,000

6、e.$34,000Statement of cash flowsAnswer: d MEDIUM.Statement of cash flowsAnswer: d MEDIUM.Which of the following statements is CORRECT?a.In the statement of cash flows, depreciation charges are reported as a use of cash. b.In the statement of cash flows, a decrease in accounts receivable is reported

7、as a use of cash. c.In the statement of cash flows, a decrease in inventories is reported as a use of cash.d.In the statement of cash flows, a decrease in accounts payable is reported as a use of cash.e.Dividends do not show up in the statement of cash flows because dividends are considered to be a

8、financing activity, not an operating activity.Effect of reducing costs on ROEAnswer: a MEDIUM.Effect of reducing costs on ROEAnswer: a MEDIUM.Last year, Candle Corp had $200,000 of assets, $300,000 of sales, $20,000 of net income, and a debt-to-total-assets ratio of 40%. The new CFO believes a new c

9、omputer program will enable it to reduce costs and thus raise net income to $30,000. Assets, sales, and the debt ratio would not be affected. By how much would the cost reduction improve the ROE?a.8.33%b.8.67%c.9.00%d.9.33%e.9.67%Du Pont equation: basic calculationAnswer: b EASY.Du Pont equation: ba

10、sic calculation Answer: b EASY.Midwest Lumber had a profit margin of 5.1%, a total assets turnover of 1.6, and an equity multiplier of 1.8. What was the firms ROE?a.14.39%b.14.69%c.14.99%d.15.29%e.15.59%Current ratioAnswer: e EASY.Current ratioAnswer: e EASY.A firm wants to strengthen its financial

11、position. Which of the following actions would INCREASE its current ratio?a.Borrow using short-term debt and use the proceeds to repay debt that has a maturity of more than one year.b.Reduce the companys days sales outstanding ratio to the industry average and use the resulting cash savings to purch

12、ase plant and equipment.c.Use cash to increase inventory holdings.d.Use cash to repurchase some of the companys own stock.e.Issue new stock and use some of the proceeds to purchase additional inventory and hold the remainder of the funds received as cash.Estimating the 1-year forward rateAnswer: e M

13、EDIUM.Estimating the 1-year forward rateAnswer: e MEDIUM.Suppose the interest rate on a 1-year T-bond is 5.0% and that on a 2-year T-bond is 6.0%. Assuming the pure expectations theory is correct, what is the markets forecast for 1-year rates 1 year from now?a.6.65%b.6.74%c.6.83%d.6.92%e.7.01%Defaul

14、t risk premiumAnswer: b EASY.Default risk premiumAnswer: b EASY.If 10-year T-bonds have a yield of 5.2%, 10-year corporate bonds yield 7.5%, the maturity risk premium on all 10-year bonds is 1.1%, and corporate bonds have a 0.2% liquidity premium versus a zero liquidity premium for T-bonds, what is

15、the default risk premium on the corporate bond?a.2.00%b.2.10%c.2.20%d.2.30%e.2.40%AmortizationAnswer: a MEDIUM.AmortizationAnswer: a MEDIUMStatement a is false, because monthly payments will not decline over time, they will stay the same. Statement b is true, because the percentage paid toward inter

16、est declines over time. Statement c is true, because interest due for every payment gets progressively smaller, which means that the portion toward principal gets larger. Statement d is true, because if the interest rate is lower, less is paid toward interest. Statement e is true. Therefore, answer

17、choice a is the correct answer.Which of the following statements regarding a 30-year, $100,000 mortgage with a nominal interest rate of 10%, compounded monthly, is NOT CORRECT?a.The monthly payments will decline over time.b.The proportion of the monthly payment that represents interest will be lower

18、 for the last payment than for the first payment on the loan.c.The total dollar amount of principal being paid off each month gets larger as the loan approaches maturity.d.The amount paid toward interest in the first payment would be lower if the nominal interest rate were 8%.e.Over 90% of the first

19、 payment goes toward interestPV of an annuity dueAnswer: a EASY.PV of an annuity dueAnswer: a EASYBGN mode.Your father is about to retire, and he wants to buy an annuity that will provide him with $50,000 of income a year for 20 years, with the first payment coming immediately. The going rate on suc

20、h annuities is 6%. How much would it cost him to buy the annuity today?a.$607,905.82b.$416,110.34c.$517,513.68d.$615,976.84e.$488,349.15Comparing the effective cost of two bank loansAnswer: e MEDIUM/HARD.Comparing the effective cost of two bank loansAnswer: e MEDIUM/HARD.Bank A offers to lend you $1

21、0,000 at a nominal rate of 6%, simple interest, with interest paid monthly. Bank B offers to lend you the $10,000, but it will charge 7%, simple interest, with interest paid at the end of the year. What is the difference in the effective annual rates charged by the two banks?a.1.17%b.1.12%c.0.91%d.1

22、.28%e.0.83%Interest rate price riskAnswer: b EASY/MEDIUM.Interest rate price riskAnswer: b EASY/MEDIUMStatement b is correct, because the longer-term, lowest coupon bond will have the greatest price effect due to interest rates.Assume that all interest rates in the economy decline from 10% to 9%. Wh

23、ich of the following bonds will have the largest percentage increase in price?a.A 10-year bond with a 10% coupon.b.A 10-year zero coupon bond.c.An 8-year bond with a 9% coupon.d.A 1-year bond with a 15% coupon.e.A 3-year bond with a 10% coupon.Determining the coupon rateAnswer: c MEDIUM/HARD.Determi

24、ning the coupon rateAnswer: c MEDIUM/HARD.Moussawi Ltds outstanding bonds have a $1,000 par value, and they mature in 5 years. Their yield to maturity is 9%, based on semiannual compounding, and the current market price is $853.61. What is the bonds annual coupon interest rate?a.5.10%b.5.20%c.5.30%d

25、.5.40%e.5.50%Constant growth rateAnswer: b EASY.Constant growth rateAnswer: b EASY.Hahn Manufacturing is expected to pay a dividend of $1.00 per share at the end of the year (D1 = $1.00). The stock sells for $40 per share, and its required rate of return is 11%. The dividend is expected to grow at a

26、 constant rate, g, forever. What is Hahns expected growth rate?a. 8.00%b. 8.50%c. 9.00%d. 9.50%e.10.00%Nonconstant growth stock priceAnswer: a HARD.Nonconstant growth stock priceAnswer: a HARD.The Ehrhardt Companys last dividend was $2.00. The dividend growth rate is expected to be constant at 3% fo

27、r 2 years, after which dividends are expected to grow at a rate of 8% forever. Erhardts required return (rs) is 12%. What is Erhardts current stock price?a.$49.20b.$51.40c.$53.80d.$55.10e.$57.30WACCAnswer: c MEDIUM.WACCAnswer: c MEDIUMStatement c is true, because if the tax rate increases the tax de

28、ductibility benefits of debt financing increase, resulting in a lower WACC. The other statements are false.Which of the following statements about the cost of capital is CORRECT?a.A change in a companys target capital structure cannot affect its WACC.b.WACC calculations should be based on the before

29、-tax costs of all the individual capital components.c.If a companys tax rate increases, then, all else equal, its weighted average cost of capital will decrease.d.Flotation costs associated with issuing new common stock normally lead to a decrease in the WACC.e.An increase in the risk-free rate will

30、 normally lower the marginal costs of both debt and equity financing.Risk and project selectionAnswer: b MEDIUM.Risk and project selectionAnswer: b MEDIUMThe project whose return is greater than its risk-adjusted cost of capital should be selected. Only Project B meets this criterion.Wagner Inc esti

31、mates that its average-risk projects have a WACC of 10%, its below-average risk projects have a WACC of 8%, and its above-average risk projects have a WACC of 12%. Which of the following projects (A, B, and C) should the company accept?a.Project A is of average risk and has a return of 9%.b.Project

32、B is of below-average risk and has a return of 8.5%.c.Project C is of above-average risk and has a return of 11%.d.None of the projects should be accepted.e.All of the projects should be accepted.WACCAnswer: a MEDIUM.WACCAnswer: a MEDIUM.You were hired as a consultant to Locke Company, and you were

33、provided with the following data: Target capital structure: 40% debt, 10% preferred, and 50% common equity. The interest rate on new debt is 7.5%, the yield on the preferred is 7.0%, the cost of retained earnings is 11.50%, and the tax rate is 40%. The firm will not be issuing any new stock. What is

34、 the firms WACC?a.8.25%b.8.38%c.8.49%d.8.61%e.8.76%Component cost of preferred stockAnswer: e EASY.Component cost of preferred stockAnswer: e EASY.Klieman Companys perpetual preferred stock sells for $90 per share and pays a $7.50 annual dividend per share. If the company were to sell a new preferre

35、d issue, it would incur a flotation cost of 5.00% of the price paid by investors. What is the companys cost of preferred stock? a.7.50%b.7.79%c.8.21%d.8.57%e.8.77%Component cost of debtAnswer: a MEDIUM.Component cost of debtAnswer: a MEDIUM.Several years ago the Haverford Company sold a $1,000 par v

36、alue bond that now has 25 years to maturity and an 8.00% annual coupon that is paid quarterly. The bond currently sells for $900.90, and the companys tax rate is 40%. What is the component cost of debt for use in the WACC calculation?a.5.40%b.5.73%c.5.98%d.6.09%e.6.24%Component cost of retained earn

37、ings: DCF, D0Answer: b MEDIUM.Component cost of retained earnings: DCF, D0Answer: b MEDIUM.Assume that Mary Brown Inc. hired you as a consultant to help it estimate the cost of capital. You have been provided with the following data: D0 = $1.20; P0 = $40.00; and g = 7% (constant). Based on the DCF a

38、pproach, what is Browns cost of equity from retained earnings?a.10.06%b.10.21%c.10.37%d.10.54%e.10.68%NPV, IRR, and MIRRAnswer: a MEDIUM.NPV, IRR, and MIRRAnswer: a MEDIUM.Which of the following statements is CORRECT?a.If a project with normal cash flows has an IRR greater than the WACC, the project

39、 must have a positive NPV.b.If Project As IRR exceeds Project Bs, then A must have the higher NPV.c.A projects MIRR can never exceed its IRR.d.If a project with normal cash flows has an IRR less than the WACC, the project must have a positive NPV.e.If the NPV is negative, the IRR must also be negati

40、ve.Discounted payback (nonconstant cash flows; 4 years)Answer: d MEDIUM.Discounted payback (nonconstant cash flows; 4 years)Answer: d MEDIUM.Reynolds Bikes is considering a project that has the following cash flow and WACC data. What is the projects discounted payback?WACC = 10%Year: 0 1 2 3 4Cash f

41、lows:-$1,000$525$485$445$405a.1.66 yearsb.1.82 yearsc.2.03 yearsd.2.36 yearse.2.41 yearsIRR (uneven cash flows; 4 years)Answer: a EASY/MEDIUM.IRR (uneven cash flows; 4 years)Answer: a EASY/MEDIUM.Rockmont Recreation Inc. is considering a project that has the following cash flow data. What is the pro

42、jects IRR? Note that a projects projected IRR can be less than the WACC (and even negative), in which case it will be rejected.Year: 0 1 2 3 4Cash flows:-$1,000$250$230$210$190a.-5.15%b.-3.44%c.-1.17%d. 2.25%e. 3.72%NPV vs IRR (size differences)Answer: c MEDIUM/HARD.NPV vs IRR (size differences)Answ

43、er: c MEDIUM/HARD.Pettway Inc. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the higher IRR, how much value will be forgone? Note that under some condit

44、ions choosing projects on the basis of the IRR will cause $0.00 value to be lost.WACC = 12%Year: 0 1 2 3 4CFS:-$1,025$375$380$385$390CFL:-$2,153$750$759$768$777a.$15.57b.$21.49c.$27.52d.$33.69e.$37.39Relevant cash flowsAnswer: e EASY.Relevant cash flowsAnswer: e EASY.Which of the following is NOT a

45、cash flow that should be included in the analysis of a project? a.Changes in net operating working capital.b.Shipping and installation costs.c.Cannibalization effects.d.Opportunity costs.e.Sunk costs that have been expensed for tax purposes.Sunk costsAnswer: d EASY/MEDIUM.Sunk costsAnswer: d EASY/ME

46、DIUM.Which of the following statements is CORRECT?a. An example of a sunk cost is the cost associated with restoring the site of a strip mine once the ore has been depleted.b. Sunk costs must be considered if the IRR method is used but not if the firm relies on the NPV method.c. A good example of a

47、sunk cost is a situation where a bank opens a new office, and that new office leads to a decline in deposits of the banks other offices.d. A good example of a sunk cost is money that a banking corporation spent last year to investigate the site for a new office, expensed those funds for tax purposes

48、, and now is deciding whether or not to go forward with the project.e. If sunk costs are considered and reflected in a projects cash flows, then the projects calculated NPV will be higher than it otherwise would be.Beta coefficientAnswer: d MEDIUM.Beta coefficientAnswer: d MEDIUM.Stock A has a beta

49、of 1.5 and Stock B has a beta of 0.5. Which of the following statements must be true about these securities? (Assume the market is in equilibrium.)a.When held in isolation, Stock A has more risk than Stock B.b.Stock B would be a more desirable addition to a portfolio than Stock A.c.Stock A would be

50、a more desirable addition to a portfolio than Stock B.d.In equilibrium, the expected return on Stock A will be greater than that on Stock B.e.In equilibrium, the expected return on Stock B will be greater than that on Stock A.Required returnAnswer: b MEDIUM.Required returnAnswer: b MEDIUMThe easiest

51、 way to see this is to write out the CAPM: rs = rRF + (rM rRF)b. Clearly, a change in the market risk premium is going to have the most effect on firms with high betas. Consequently, statement b is the correct choice.In the next year, the market risk premium, (rM - rRF), is expected to fall, while t

52、he risk-free rate, rRF, is expected to remain the same. Given this forecast, which of the following statements is CORRECT?a.The required return for all stocks will fall by the same amount.b.The required return will fall for all stocks, but it will fall more for stocks with higher betas.c.The require

53、d return will fall for all stocks, but it will fall less for stocks with higher betas.d.The required return will increase for stocks with a beta less than 1.0 and will decrease for stocks with a beta greater than 1.0.e.The required return on all stocks will remain unchanged.Portfolio betaAnswer: e E

54、ASY.Portfolio betaAnswer: e EASY.Tom Skinner has $45,000 invested in a stock with a beta of 0.8 and another $55,000 invested in a stock with a beta of 1.4. These are the only two investments in his portfolio. What is his portfolios beta?a.0.93b.0.98c.1.03d.1.08e.1.13Portfolio betaAnswer: c HARD.Port

55、folio betaAnswer: c HARD.Assume that you manage a $10.00 million mutual fund that has a beta of 1.05 and a 12.00% required return. The risk-free rate is 4.75%. You now receive another $10.00 million, which you invest in stocks with an average beta of 0.65. What is the required rate of return on the

56、new $20.00 million portfolio? (Hint: You must first find the market risk premium, then find the new portfolio beta.)a.10.02%b.10.54%c.10.62%d.11.31%e.12.62%Coefficient of variationAnswer: b .Coefficient of variationAnswer: b The expected rate of return will equal 0.25(25%) + 0.5(15%) + 0.25(5%) = 15

57、%. The variance of the expected return is:0.25(25% - 15%)2 + 0.5(15% -15%)2 + 0.25(5% - 15%)2 = 0.0050.The standard deviation is the square root of 0.0050 = 0.0707.And, CV = 0.0707/0.15 = 0.47.Ripken Iron Works faces the following probability distribution: Stocks Expected State of Probability of Ret

58、urn if thisthe Economy State Occurring State Occurs Boom 0.25 25%Normal 0.50 15Recession 0.25 5What is the coefficient of variation on the companys stock?a.0.06b.0.47c.0.54d.0.67e.0.71 CAPMAnswer: b MEDIUM.CAPMAnswer: b MEDIUM.Apex Roofings stock has a beta of 1.50, its required return is 14.00%, and the risk-free rate is 5.00%. What is the required rate of return on the stock market? (Hint: First find the market risk premium.)a.10.50%b.11.00%c.11.50%d.12.00%e.12.50%