FINA 6320.794 Final Exam Review

• FINA
• Year 4

FINA 6320.794 Final Exam Review

Welcome to Final Exam Review for FINA 6320.794

Let's finish this semester out with bang!!

- Prof Lizzy

Which one of the following statements concerning interest rates is correct?

1. The effective annual rate decreases as the number of compounding periods per year increases.
2. The effective annual rate equals the annual percentage rate when interest is compounded annually.
3. Savers would prefer annual compounding over monthly compounding given the same annual percentage rate.
4. Borrowers would prefer monthly compounding over annual compounding given the same annual percentage rate.

Which one of the following statements concerning interest rates is correct?

B: The effective annual rate equals the annual percentage rate when interest is compounded annually because EAR equals the APR when compounding is annual. 

A stock is expected to maintain a constant dividend growth rate of 4.6 percent indefinitely. If the stock has a dividend yield of 6.4 percent, what is the required return on the stock?

RR = Expected Dividend Payment / Stock Price + Forecasted Dividend Growth Rate

1. 11
2. 11.2
3. 10.4
4. 10

A stock is expected to maintain a constant dividend growth rate of 4.6 percent indefinitely. If the stock has a dividend yield of 6.4 percent, what is the required return on the stock?

- The formula for the required rate of return using the dividend discount model (DDM) is:

RRR = Expected Dividend Payment Stock Price + Forecasted Dividend Growth Rate

- Given that the dividend growth rate (g) is 4.8% and the dividend yield (DY) is 6.1%, we can calculate the RRR:

RRR=6.1% / 100% + 4.8% 

= 0.061 + 0.048

=0.109

- Converting to a percentage: 10.9%

- Therefore, the required return on the stock is approximately 10.9%.

A firm's mixture of debt and equity financing is the result of its ____ decisions

1. Cash Management
2. Working Capital Management
3. Capital Budgeting
4. Capital structure

A firm's mixture of debt and equity financing is the result of its

Capital Structure: The mixture of debt and equity maintained by a firm.

Olive Garden has $10,400 in sales. The profit margin is 4 percent. There are 4,600 shares of stock outstanding. The market price per share is $1.80. What is the price-earnings ratio?

Earnings per share = (Sales x Profit Margin) / Num of Shares
PE Ratio = Market Price Per Share / Earning Per Share

1. 12.24
2. 19.90
3. 9.95
4. 16.28

The _____ tax rate is the percentage of the last dollar you earned that must be paid in taxes.

1. Average
2. Total
3. Marginal
4. Residual

The ____ tax rate is the percentage of the last dollar you earned that must be paid in taxes.

Marginal tax rate refers to the tax rate applied to the last dollar earned. It represents the tax impact on additional income.

The risk-free rate of return is 6.0 percent and the market risk premium is 14 percent. What is the expected rate of return on a stock with a beta of 1.9?

Expected Rate of Return = risk free rate + beta x risk premium

1. 32.60
2. 26.6
3. 30.4
4. 25.4

The risk-free rate of return is 6.0 percent and the market risk premium is 14 percent. What is the expected rate of return on a stock with a beta of 1.9?

Expected Rate of Return = risk free rate + beta x risk premium 

= 6% + 1.9 * 14%

= 6% + 26.6%

= 32.6%

Assume a firm has a debt-equity ratio of .62. The firm's weighted average cost of capital is the:

1. coupon rate that the firm should expect to pay on its next bond issue
2. minimum discount rate the firm should require on any new project
3. rate of return a company must earn on its existing assets to maintain the current value of its stock
4. rate of return debt holders should expect to earn on their investment in this firm

Assume a firm has a debt-equity ratio of .62. The firm's weighted average cost of capital is the:

rate of return a company must earn on its existing assets to maintain the current value of its stock correct because the weighted average cost of capital of the company is reflective of the minimum rate of return which will be maintained by the company in order to maintain the current value of the stock, so the company at least needs to earn with the weighted average cost of capital in order to maintain the current valuation of the company.

The stock in Bowie Enterprises has a beta of 1.14. The expected return on the market is 12.20 percent and the risk-free rate is 3.33 percent. What is the required return on the company's stock?

Required Rate of Return = Risk free rate + Beta x (Market rate of return - Risk free rate)

1. 13.07
2. 12.70
3. 13.44
4. 15.34

The stock in Bowie Enterprises has a beta of 1.14. The expected return on the market is 12.20 percent and the risk-free rate is 3.33 percent. What is the required return on the company's stock?

Required Rate of Return = Risk free rate + Beta x (Market rate of return - Risk free rate)

= 3.33% + 1.14 x (12.20 - 3.33) %

= 3.33% + 1.14 x 8.87%

= 3.33% + 10.1118%

= 13.44 % 

_____ risk is measured using the standard deviation.

1. Unsystematic
2. Economic
3. Systematic
4. Total

_____ risk is measured using the standard deviation.

Total risk is correctly measured using standard deviation because it quantifies the volatility of an investment’s returns relative to its mean or expected value. Standard deviation is a statistical measure that calculates the dispersion of a dataset relative to its mean. In finance, this translates to how much the returns of an investment deviate from the expected return.

Asonia Co. will pay a dividend of $4.90, $9.05, $11.90, and $13.65 per share for each of the next four years, respectively. The company will then close its doors. If investors require a return of 11.7 percent on the company's stock, what is the stock price?

Current stock price = Future dividends * Present value of discounting factor (11.70%, time period)

1. 28.95
2. 23.75
3. 29.75
4. 26.95

Asonia Co. will pay a dividend of $4.90, $9.05, $11.90, and $13.65 per share for each of the next four years, respectively. The company will then close its doors. If investors require a return of 11.7 percent on the company's stock, what is the stock price?

Current stock price = Future dividends * Present value of discounting factor (11.70%, time period)

= 4.90 / 1.117 + 9.05 / (1.117)2 + 11.90 / (1.117)3 + 13.65 / (1.117)4

= $28.9472

= $28.95

Therefore, Stock price is $28.95

A project that costs $19,500 today will generate cash flows of $6,100 per year for seven years. What is the project's payback period?

Payback Period = the initial outlay / Cash inflow

1. 4.40 years
2. 6.40 years
3. 3.20 years
4. 8.80 years

A project that costs $19,500 today will generate cash flows of $6,100 per year for seven years. What is the project's payback period?

 

Payback Period = the initial outlay/ Cash inflow

The initial cost = 19,500 

Cash flows = 6,100

Payback Period =  19500  / 6100 

Payback Period = 3.20 years 

To calculate the expected risk premium on a stock, one must subtract the
from the stock's expected return.

1. Risk-Free Rate
2. Inflation Rate
3. Expected Market Rate of Return
4. Standard Deviation

To calculate the expected risk premium on a stock, one must subtract the

from the stock's expected return.

Expected Risk Premium = Expected Return - Risk Free rate 

Judy's Boutique just paid an annual dividend of $2.29 on its common stock. The firm increases its dividend by 3.10 percent annually. What is the company's cost of equity if the current stock price is $38.20 per share?

Cost of Equity = (D1/Current price)+Growth rate

1. 9.09%
2. 9.75%
3. 9.28%
4. 9.65%

Judy's Boutique just paid an annual dividend of $2.29 on its common stock. The firm increases its dividend by 3.10 percent annually. What is the company's cost of equity if the current stock price is $38.20 per share?

Cost of Equity =(D1/Current price)+Growth rate

=(2.29 x 1.031) / 38.2 + 0.031

Which is equal to

=9.28%

Applying the discounted payback decision rule to all projects may cause:

1. the most liquid projects to be rejected in favor of the less liquid projects.
2. some positive net present value projects to be rejected.
3. projects to be incorrectly accepted due to ignoring the time value of money.
4. some projects to be accepted which would otherwise be rejected under the payback rule.

Applying the discounted payback decision rule to all projects may cause:

The discounted payback period rule can lead to rejecting some projects with a positive NPV. This is because the rule focuses on how quickly the initial investment can be recovered, not on the total value created over the project's lifetime. Therefore, a project could generate a positive NPV (indicating it is value-adding over its entire life) but have a long payback period that exceeds the firm’s threshold for recovery time. This mismatch can cause potentially profitable projects to be rejected simply because they do not meet the arbitrary payback period criterion.

You have a portfolio that is 32 percent invested in stock R, 16 percent invested in stock S, with the remainder in stock T. The expected return on the stock is 9.5 percent, 10.9 percent, and 13.2 percent, respectively. What is the expected return on the portfolio?

Portfolio return=Respective return x Respective weight

1. 11.65%
2. 12.75
3. 11.29%
4. 12.09

You have a portfolio that is 32 percent invested in stock R, 16 percent invested in stock S, with the remainder in stock T. The expected return on the stock is 9.5 percent, 10.9 percent, and 13.2 percent, respectively. What is the expected return on the portfolio?

Remainder in stock T = 100 - (32+16) = 52%

Portfolio return = Respective return x Respective weight

= (0.32 x 9.5) + (0.16 x 10.9) + (0.52 x 13.2)

which is equal to

=11.648% or rounded 11.65%

If a firm has a debt-equity ratio of 1.0, then its total debt ratio must be which one of the following?

Total debt ratio = 1 / (1 + debt equity ratio)

1. 2
2. 1.5
3. 1
4. .5

If a firm has a debt-equity ratio of 1.0, then its total debt ratio must be which one of the following?

Debt-equity ratio is 1. It means Debt and equity both have 1 each.

Total debt ratio = 1 / (1 + debt equity ratio)

= 1 / (1 +1)

= 1 / 2

= 0.5

Total debt ratio = 0.5

Given a well-diversified stock portfolio, the variance of the portfolio:

1. will equal the variance of the most volatile stock in the portfolio.
2. will be a weighted average of the variances of the individual securities in the portfolio.
3. will be an arithmetic average of the variances of the individual securities in the portfolio.
4. may be less than the variance of the least risky stock in the portfolio.

Given a well-diversified stock portfolio, the variance of the portfolio:

May be less than the variance of the least risky stock in the portfolio.

If the Portfolio is well diversified, then the Portfolio variance may be less than the variance of the least risky stock in the Portfolio.

An investment had a nominal return of 9.9 percent last year. The inflation rate was 3.1 percent. What was the real return on the investment?

Real Return = [(1+ Nominal Return) / ( 1+ Inflation ) ]-1

1. 6.60%
2. 6.19%
3. 7.33%
4. 9.75%

An investment had a nominal return of 9.9 percent last year. The inflation rate was 3.1 percent. What was the real return on the investment?

Real Return = [(1+ Nominal Return) / ( 1+ Inflation ) ]-1

= [ (1+9.9%)/( 1+3.1%)]-1

= [1.099/ 1.031]-1

= 6.595538312%

= 6.60%

Answer : 6.60%

When evaluating two mutually exclusive projects, the final decision on which project to accept ultimately depends upon which one of the following?

1. Initial cost of each project
2. Timing of the cash inflows
3. NPV
4. Total cash inflows of each project

When evaluating two mutually exclusive projects, the final decision on which project to accept ultimately depends upon which one of the following?

Net present value is the difference between the cash inflow less cash outflow. Hence, the project which has a higher net present value is selected.

Managers of CVS Pharmacy are considering a new project. This project would be a new store in Odessa, Texas. They estimate the following expected net cash flows if the project is adopted.
• Year 1: $200,000
• Year 2: $500,000
• Year 3: $400,000
• Year 4: $300,000
• Year 5: $200,000
If the project is adopted today, assume an initial capital outlay today of $1,250,000. Suppose that the appropriate discount rate for this project is 8%, compounded annually. Calculate the net present value for this proposed project.

1. 322,000
2. 38,013
3. 222,000
4. -38,013

An unexpected post on social media caused the prices of 22 different companies' stocks to immediately increase by 10 to 15 percent. This occurrence is best described as an example of … risk.

1. portfolio
2. expected
3. unsystematic
4. nondiversifiable

An unexpected post on social media caused the prices of 22 different companies' stocks to immediately increase by 10 to 15 percent. This occurrence is best described as an example of … risk.

This is a type of unsystematic risk because the stock of a particular sector or industry got affected. Unsystematic risk is a company-specific risk or industry-specific risk, which can be diversified. This is a risk that is related to a particular sector or industry, and a limited number of companies affected.

A bond has a par value of $1,000, a current yield of 8.21 percent, and semiannual coupon payments. The bond is quoted at 103.57. What is the coupon rate of the bond?

Quoted price of bond = par value x bond quoted (as %)
Coupon rate of bond = (quoted price of bond x current percent) / par value

1. 8.55%
2. 8.50%
3. 8.05%
4. 8.0%

A bond has a par value of $1,000, a current yield of 8.21 percent, and semiannual coupon payments. The bond is quoted at 103.57. What is the coupon rate of the bond?

Quoted price of bond = par value x bond quoted (as %)

Coupon rate of bond = (quoted price of bond x current percent) / par value

Quoted price of bond = 1,000 x 193.57% 

= 1035.7

Coupon Rate of Bond = (1035.7 x 8.21%) / 1000 

= .0850

Converting to percentage 

= 8.50% 

The Two Dollar Store has a cost of equity of 10.7 percent, the YTM on the company's bonds is 5.3 percent, and the tax rate is 40 percent. If the company's debt–equity ratio is .42, what is the weighted average cost of capital?

WACC = (Weight of debt x after tax cost of debt) + ( weight of equity x cost of equity)

1. 8.84%
2. 8.4%
3. 8.48 %
4. 8.8%

The Two Dollar Store has a cost of equity of 10.7 percent, the YTM on the company's bonds is 5.3 percent, and the tax rate is 40 percent. If the company's debt–equity ratio is .42, what is the weighted average cost of capital?

WACC = (Weight of debt x after tax cost of debt) + ( weight of equity x cost of equity)

Weigh of debt = debt equity ratio / 1 + debt equity ratio 

= .42 / 1.42 = .2958

Weight of equity = 1 - weight of debt 

= 1 - .2958 = .7042

After tax cost of debt = ytm on the bond x (1- tax rate) 

= .053 x ( 1 - .40) = .0318

WACC =  (Weight of debt x after tax cost of debt) + ( weight of equity x cost of equity)

WACC = (.2958 x 0.0318) + (.7042 x .107) 

= .08476 

Converted to a percentage = 8.48 %

Stoneheart Group is expected to pay a dividend of $3.19 next year. The company's dividend growth rate is expected to be 3.8 percent indefinitely and investors require a return of 11.8 percent on the company's stock. What is the stock price?

Stock Price = Dividend / (Required Rate of Return - Dividend Growth Rate)

1. 39.88%
2. 38.98%
3. 39%
4. 38%

Stoneheart Group is expected to pay a dividend of $3.19 next year. The company's dividend growth rate is expected to be 3.8 percent indefinitely and investors require a return of 11.8 percent on the company's stock. What is the stock price?

Stock Price = Dividend / (Required Rate of Return - Dividend Growth Rate) 

Stock Price = 3.19 / (0.118 - .038) 

= 3.19 / .08

Stock Price = 39.875 (rounded 39.88%)

You have a portfolio that is invested 21 percent in Stock R, 36 percent in Stock S, and the remainder in Stock T. The beta of Stock R is.74, and the beta of Stock S is 1.29. The beta of your portfolio is 1.17. What is the beta of the Stock T?

1. 1.10
2. 1.45
3. 1.17
4. 1.28

You have a portfolio that is invested 21 percent in Stock R, 36 percent in Stock S, and the remainder in Stock T. The beta of Stock R is.74, and the beta of Stock S is 1.29. The beta of your portfolio is 1.17. What is the beta of Stock T?

Weight of stock T = 100% - 21% -36% = 43%

Let bets of stock T be X

1.17 = .21 x .74 + .36 x 1.29 + .43 x X

1.17 = .1554 + .4644 + .43 x X

0.5502 = .43 x X 

X = 1.28

Wine and Roses, Incorporated, offers a bond with a coupon of 7.0 percent with semiannual payments and a yield to maturity of 7.75 percent. The bonds mature in 14 years. What is the market price of a $1,000 face value bond?

Market Price of Bond = C x ( 1 - ( 1 + r) ^ -n / r ) + z x ( 1 + r) ^ -n

1. $693.39
2. $606.93
3. $900.36
4. $936.60

A bond that pays interest semiannually has a coupon rate of 5.29 percent and a current yield of 5.65 percent. The par value is $1,000. What is the bond's price?

1. $829.36
2. $968.23
3. $898.92
4. $936.28

A bond that pays interest semiannually has a coupon rate of 5.29 percent and a current yield of 5.65 percent. The par value is $1,000. What is the bond's price?

Face Value = $1,000

Current Yield = 5.65%

Annual Coupon Rate = 5.29%

Annual Coupon = 5.29% * $1,000

Annual Coupon = $52.90

Current Yield = Annual Coupon / Current Price

5.65% = $52.90 / Current Price

Current Price = $936.28

Blinding Light Company has a project available with the following cash flows:
Year Cash Flow
0: $-34.750
1: $8,030
2: $9.650
3: $13,700
4: $15,690
5: $10,460
What is the project's IRR?

1. 17.99%
2. 17.97%
3. 18.01%
4. 18%

A stock has a beta of .85 and a reward-to-risk ratio of 6.45 percent. If the risk-free rate is 2.1 percent, what is the stock's expected return?

The reward-to-risk ratios = (Expected Return - Risk Free Rate ) / Beta

1. 7.85%
2. 7.55%
3. 7.58%
4. 7.8%

A stock has a beta of .85 and a reward-to-risk ratio of 6.45 percent. If the risk-free rate is 2.1 percent, what is the stock's expected return?

The reward-to-risk ratios = (Expected Return - Risk Free Rate ) / Beta

6.45 % = ( Expected Return - 2.1% ) / 0.85

(6.45% * 0.85 ) + 2.1 % = Expected Return

Expected Return= 7.5825%

To achieve your goal of putting a $50,000 down payment on a house at the end of next 5 years, how much money should you have in the account right now to achieve that goal if the bank is paying 6% interest compounded annually? Assume you make no deposits or withdrawals from the account in the meantime.

Future Value = Present Value * ( 1 + rate) ^ number if years

1. 37,363.62
2. 37,328.33
3. 36,457.83
4. 36,598.99

To achieve your goal of putting a $50,000 down payment on a house at the end of next 5 years, how much money should you have in the account right now to achieve that goal if the bank is paying 6% interest compounded annually? Assume you make no deposits or withdrawals from the account in the meantime.

Future Value = Present Value * ( 1 + rate) ^ number if years

50000 = Present value * ( 1 + 6%)^5

50000 = Present Value * 1.3382

Present Vale = 50000 / 1.3382

Present  Value = 37, 363.62

THE END!!!!

GOOD LUCK ON FINALSSSS!!!!!