17

1. Match the yield to maturity to the terms of the bond. All of these bonds pay interest twice a year.

   - A. B. C. D. E.	"A $1,000 par value bond that matures in 20 years is currently selling for $1,141.46. The bond pays $31.00 of interest every six months."
   - A. B. C. D. E.	"A $1,000 par value bond that matures in 12 years is currently selling for $1,144.84. The bond pays $39.00 every six months."
   - A. B. C. D. E.	"A $1,000 par value bond that matures in 14 years is currently selling for $993.37. The bond pays $36.00 of interest every six months."
   - A. B. C. D. E.	"A $1,000 par value bond that matures in 20 years is currently selling for $958.88. The bond pays $44.00 of interest every six months."
   - A. B. C. D. E.	"A $1,000 par value bond that matures in 8 years is currently selling for $1,092.22. The bond pays $52.00 of interest every six months."

   A.	8.77%
   B.	5.07%
   C.	6.08%
   D.	9.26%
   E.	7.28%

QUESTION 18

1. XYZ common stock is expected to pay a dividend of $1.27 next year, and that dividend grows at a constant rate of 9.2 percent. If the current price of XYZ common stock is $76.16, then what is the expected rate of return for this stock, based on the Discounted Cash Flow model? (Show your answer in DECIMAL FORM to three decimals, e.g., 12.3% would be entered as 0.123).

QUESTION 19

1. Match the appropriate Internal Rate of Return (IRR) to each set of cash flows.

   - A. B. C. D. E.	CF0: -269 CF1: 12 CF2: 35 CF3: 29 CF4: 132 CF5: 149
   - A. B. C. D. E.	CF0: -242 CF1: 37 CF2: 31 CF3: 27 CF4: 137 CF5: 164
   - A. B. C. D. E.	CF0: -347 CF1: 36 CF2: 32 CF3: 40 CF4: 161 CF5: 222
   - A. B. C. D. E.	CF0: -248 CF1: 38 CF2: 32 CF3: 20 CF4: 197 CF5: 141
   - A. B. C. D. E.	CF0: -294 CF1: 27 CF2: 28 CF3: 12 CF4: 153 CF5: 154

   A.	9.18%
   B.	7.34%
   C.	15.65%
   D.	6.25%
   E.	13.85%

QUESTION 20

1. The total expected return on the entire stock market is 15.1 percent and U.S. Treasuries are yielding 1.6 percent. What is the expected return on a stock with a beta of 2.6? (show your answer in decimal form to four places, i.e., 12.34% would be entered as0.1234)

QUESTION 21

1. Match the Weighted Average Cost of Capital to each of the scenarios given for ABC Corporation.

   - A. B. C. D. E.	Target capital structure: 38% debt, 5% preferred stock and 57% common equity. Yield to maturity on bonds: 8.6%; Preferred stock dividend: $6.69 per year; current market price of preferred stock is $69.19. CAPM data for common equity: risk-free rate is 4.7%; market risk premium for the average stock is 3.4%; ABC has a beta of 2.33. ABC's marginal tax rate is 40%.
   - A. B. C. D. E.	Target capital structure: 30% debt, 15% preferred stock and 55% common equity. Yield to maturity on bonds: 4.6%; Preferred stock dividend: $7.48 per year; current market price of preferred stock is $69.98. CAPM data for common equity: risk-free rate is 4.3%; market risk premium for the average stock is 4.7%; ABC has a beta of 2.06. ABC's marginal tax rate is 40%.
   - A. B. C. D. E.	Target capital structure: 34% debt, 11% preferred stock and 55% common equity. Yield to maturity on bonds: 6.8%; Preferred stock dividend: $7.20 per year; current market price of preferred stock is $69.70. CAPM data for common equity: risk-free rate is 4.8%; market risk premium for the average stock is 5.8%; ABC has a beta of 1.50. ABC's marginal tax rate is 40%.
   - A. B. C. D. E.	Target capital structure: 37% debt, 14% preferred stock and 49% common equity. Yield to maturity on bonds: 8.0%; Preferred stock dividend: $7.40 per year; current market price of preferred stock is $69.90. CAPM data for common equity: risk-free rate is 4.1%; market risk premium for the average stock is 5.2%; ABC has a beta of 1.87. ABC's marginal tax rate is 40%.
   - A. B. C. D. E.	Target capital structure: 39% debt, 5% preferred stock and 56% common equity. Yield to maturity on bonds: 6.0%; Preferred stock dividend: $7.59 per year; current market price of preferred stock is $70.09. CAPM data for common equity: risk-free rate is 3.3%; market risk premium for the average stock is 4.6%; ABC has a beta of 2.36. ABC's marginal tax rate is 40%.

   A.	10.03%
   B.	9.95%
   C.	10.12%
   D.	9.87%
   E.	9.64%

QUESTION 22

1. Project X has an expected cash outflow at time zero of 1,772 and has the following projected cash inflows over the next six years:

   Year	Amount
   1	149
   2	235
   3	310
   4	451
   5	509
   6	688

   The company's weighted average cost of capital is 7.8%. What is the net present value of this project? (Show your answer to the nearest dollar, and if negative, include a minus sign, e.g. -123 or 123)

QUESTION 23

1. Match up the payback period with the cash flows.

   - A. B. C. D. E.	CF0: -1370 CF1: 950 CF2: 200 CF3: 990 CF4: 180
   - A. B. C. D. E.	CF0: -1080 CF1: 1000 CF2: 310 CF3: 720 CF4: 170
   - A. B. C. D. E.	CF0: -1140 CF1: 860 CF2: 210 CF3: 940 CF4: 200
   - A. B. C. D. E.	CF0: -1050 CF1: 970 CF2: 230 CF3: 870 CF4: 470
   - A. B. C. D. E.	CF0: -975 CF1: 970 CF2: 290 CF3: 530 CF4: 280

   A.	About 1.35 years
   B.	About 1.26 years
   C.	About 2.07 years
   D.	About 2.22 years
   E.	About 1.02 years

QUESTION 24

1. Project A would requirean initial outlay of $61,000 and is expected to generate positive cash flows in yearsone through six of $17,344; $11,232; $14,985; $14,007; $11,336; and $18,899. Using a discount rate of 11.2%, what is the NPV of this project?If the answer is negative, include the negative sign, and show the answer to the nearest dollar.

QUESTION 25

1. You are purchasing a used car. You are getting a loan of $14,000 to buy the car. The salesman tells you the monthly payments will be $315 for the next 5 years. What is the annual interest rate on this loan?

   a.	5.21%
   b.	12.50%
   c.	10.92%
   d.	10.42%

QUESTION 26

1. Susmel Inc. is considering a project that has the following cash flow data. What is the project's payback?

   Year	0	1	2	3
   Cash flows	-$475	$150	$200	$300

   a.	2.85 years
   b.	2.42 years
   c.	2.47 years
   d.	1.96 years
   e.	2.88 years

QUESTION 27

1. Assume a project has normal cash flows. All else equal, which of the following statements is CORRECT?

   a.	A projects discounted payback increases as the WACC declines.
   b.	A projects regular payback increases as the WACC declines.
   c.	A projects NPV increases as the WACC declines.
   d.	A projects IRR increases as the WACC declines.
   e.	A projects MIRR is unaffected by changes in the WACC.

QUESTION 28

1. A sudden unanticipated decrease in the market rate of interest triggered by unexpected inflation

   Would have no effect on the price of, but would alter the cash flows from those bonds.

   Would lower the coupon rate on outstanding bonds.

   Would decrease the price of bonds in the secondary markets.

   Would increase the price of bonds in the secondary market.

QUESTION 29

1. You are evaluating two annuities that pay $1,000 per year. Annuity A is an "ordinary annuity" and Annuity B is an "annuity due." The difference between an "ordinary annuity" and an "annuity due" is that

   a.	The payments on the annuity due will begin immediately while the payments on the ordinary annuity begin a year from now.
   b.	The annuity payments on the ordinary annuity are guaranteed but the annuity payments for the annuity due may be different each year, depending on the market rate of interest.
   c.	The payments on the orindary annuity will begin immediately while the payments on the annuity due begin a month from now.
   d.	The payments on the orindary annuity will begin immediately while the payments on the annuity due begin a year from now.
   e.	The payments on the annuity due will begin immediately while the payments on the "ordinary annuity" begin a month from now.

QUESTION 30

1. You are analyzing the value of an investment by calculating the present value of its expected cash flows. Which of the following would cause the investment to look more valuable?

   a.	The interest rate you are using to discount the cash flows increases.
   b.	The cash flows are extended over a longer period of time, although the total amount of the cash flows remains the same.
   c.	The total amount of cash flows remains the same, but more of the cash flows are received in the later years and less are received in the earlier years.
   d.	The interest rate that you are using to discount the cash flows decreases.
   e.	The default risk on the investment increases.

QUESTION 31

1. ABC recently issued new common stock and used the proceeds to pay off some of its short-term notes payable. This action had no effect on the companys total assets or operating income. Which of the following effects would occur as a result of this action?

   a.	The companys equity multiplier increased.
   b.	The companys debt ratio increased.
   c.	The companys current ratio increased.
   d.	The companys basic earning power ratio increased.
   e.	The companys times interest earned ratio decreased.

QUESTION 32

1. XYZ Corp. has current assets of $12 million, current liabilities of $4 million, cash of $9 million, accounts receivable of $2 million, and inventory of $1 million. XYZ has decided to use $2 million of its cash to buy additional inventory. What is the company's new quick ratio following this move?

   3.75

   2.25

   3.25

   2.75

QUESTION 33

1. Diversification is important in stock and bond investments because

   Is the only way to ensure a profit in the long run.

   Allows you to profit in both bull and bear markets.

   It reduces the variability of the investment return while maintaining an acceptable level of return.

   Achieving sufficient diversification requires investing in hundreds of different companies.

QUESTION 34

1. Southwest U's campus book store sells course packs for $18 each, the variable cost per pack is $8, fixed costs to produce the packs are $200,000, and expected annual sales are 51,000 packs. What are the pre-tax profits from sales of course packs?

   a.	$372,000
   b.	$285,200
   c.	$310,000
   d.	$306,900
   e.	$248,000