1-The three major methods for raising capital in an organization are selling stock, borrowing and what?

a-Selling Bonds

b-Credit Default Swaps

c-Producing an operating profit

d-Seeking grants from the federal government

2-The three methods of raising capital fit into one of two general captions; debt financing or equity financing. The decision as to how to deploy that capital (debt or equity or a combination thereof) is referred to as the:

a-The investment decision

b-The capital structure decision

c-The Dred Scott decision

d-The working capital decision

3-Which of the following are DISADVANTAGES of forming a corporation? (circle all that apply)

a-Cost of legal and governance compliance.

b-Double taxation

c-Limited liability

d-Separation of ownership and control

e-Ease of raising capital

4-The number one goal of a corporation should be to:

a-Always have enough capital and thereby eliminate the need to borrow

b-Be as conservative as possible with the use of stockholder funds

c-Manipulate the accounting results to reflect ever increasing profitability

d-Increase shareholder wealth

5-What is another name for the interest rate that relates to additional investment opportunities available to investors in the financial market?

a-Burn rate

b-Prime rate

c-Federal Funds Rate

d-Opportunity cost of capital

6-Note the responsibilities of the Treasurer.

a-Monitoring cash levels and cultivating relationships with banks

b-Developing new business opportunities

c-Organizing company functions

d-Preparing financial statements and corporate budgets.

e-Determining the appropriate level of insurance

Which of the following actions might increase short-term profits but give rise to more serious problems in the future? Circle all that apply.

Issuance of a Christmas bonus to all employees

Taking out a Line of Credit

Moving to alternative, less expensive, raw materials.

Substantial cuts in the workforce.

Chapter Two (How to calculate Present Value)

A dollar today is worth more than a dollar tomorrow.

True

False

What is the term given to the concept of earning interest upon interest?

Predatory Lending

Simple Interest

Plausible deniability

Compound Interest

How much would you have to invest today to earn $1,000 at the end of ten years assuming a 7% rate of return?

$408.35

$508.35

$750.00

Not enough information is provided

In present value calculations, what is the term given to the rate of return embedded in the calculation?

LIBOR

Prime rate

Discount Rate

Compound interest Rate

Assume you invest $700,000 in an office building that you expect to be able to sell in one year for $800,000. Assuming a 7% discount rate, what is the Net Present Value (NPV) of the building?

$55,662.33

$48,665,12

$47,334.28

$47,663.55

If you invested $1,000 (Year 0), then added $1,000 per year for 20 years at a 5% interest rate, how much money would you have at the end of Year 20?

$35,719.25

$45,821.32

$48.300.00

$51.322.44

Congratulations you have won the lottery! However, before you get the money you must work through a PV/FV calculation. You have two options. One, you can take a lump sum payment of $50Million or, two, opt for an annual payment of $1Million for 30 years. Assuming a 5% rate of return which of the two choices will yield the greater NPV?

Lump Sum Payment because the lump sum payment is greater than the NPV of the payment stream

Annuity because the NPV is greater than $50Millon but less than $60Million

Annuity because the NPV is greater than $60 Million but less than $70Million

Annuity because the NPV is greater than $70Milion

Assume the following cash flows;

Year 1 - $100,000

Year 2 - $150,000

Year 3 - $200,000

Assuming a discount rate of 9%, what is the NPV of this cash stream?

$372,431.81

$323,482.11

$402,112.90

$327.431.81

Assume you are presented with the opportunity to invest in the construction of a nuclear power plant. You will need to pay $50,000,000 for the construction but it is anticipated that you will enjoy a savings of $5Million for each of the next 20 years. In the 20^th year the plant will be de-commissioned at a cost of $7Million. What is the NPV of this project assuming a discount rate of 8%?

$2,411,100

($2,411,100)

$1,412,511

($1,812,300)

The rate of return is also called the

Discount rate only

Discount rate and hurdle rate only

Discount rate, hurdle rate, and opportunity cost of capital

Discount rate, and opportunity cost

Chapter 3 (Valuing Bonds)

As interest rates rise, bond prices decline.

True

False

Purchasing a bond for something greater than face value is referred to as a:

Discount

Premium

Classic

Sub-prime

If a bond is purchased for an amount different than the face value what is the term given to real rate of return on the bond?

Dividend Yield

Bond Amortization

Yield to Maturity

Redemption option

If the Yield to Maturity (YTM) is greater than the coupon rate, then the bond was purchased at a discount.

True

False

The term used to quantify the impact of interest rate changes on bond prices is called:

Volatility

Trickle-down economics

Keynesian Theory

Duration

A three-year bond with a 10% coupon rate and a $1,000 face has a yield to maturity of 8%. Assuming annual coupon payments what would be the price of the bond?

$857.96

$951.96

$1,000.00

$1,051.54

A four-year bond has an 8% coupon rate and a face value of $1,000. If the bond is currently selling for $878.31 calculate the yield to maturity of the bond (assume annual interest payments). HINT: Use YIELD command in Excel and remember face value and redemption amount should be expressed as per $100.

8.00%

9.00%

10.00%

11.00%

12.00%

When you purchase a bond, you are expecting that you will receive a specified interest payment each year (or possibly semi-annually) and you will receive the face value at the end of the term. However, there are no guarantees. Accordingly, there are three major companies that offer credit ratings on bonds. What are the names of these companies?

Moodys, Standard & Poors, and Fitch.

Morgan Stanley, Goldman Sachs, and JP Morgan Chase

LIBOR, Eurozone, and Autozone

Dow Jones, Nasdaq and American

The best rating a bond can receive is AAA. Obtaining this rating is very important to the issuing company because it sends a message to the public that they can be counted on to make the promised payments. However, there is one other very significant advantage to obtaining the AAA rating. What is that advantage?

The issuing company can sell bonds with a longer redemption period

The issuing company does not have to pay back the redemption amount

The issuing company does not have to pay dividends

The issuing company can save money on interest costs because the AAA rating can justify a lower coupon rate.

In February 2016, the US Treasury issued bonds with a 4.75% coupon, scheduled to mature in 2041. Interest was to be paid semi-annually and the YTM was 2.7%. What would have been the price of the bonds?

$1,000

$518.26

$1,381.20

$1,782.50

A 10-Year US Treasury bond with a face value of $1,000 pays a coupon of 5.5%. The reported YTM is 5.2%. What is the price of the bond?

$1,023.16

$1,341.22

$1,000.00

$982.70

Chapter 4 (The value of common stocks)

The logic of discounted cash flow suggests that the value of a share of stock is equal to the expected future dividends per share.

True

False

Most public companies pay dividends to their shareholders. One of the measurements that investors pay very close attention to is the dividend yield. This number is determined as follows:

Earnings per share divided by the price of the stock

Dividends divided by the book value of the company

Dividends divided by beta

Dividend per share divided by price of a share of stock

Sales of shares of stock to raise new capital, often referred to as an initial public offering (IPO,) are said to occur in the primary market. The day to day exchange of shares in the public market is said to occur in the secondary market.

True

False

The book value of a company can be defined by:

The difference between assets and liabilities

Net working capital

The debt/equity ratio

The stock price per share

Book value is not considered a very good indicator of the value of a company because:

Fixed assets are expressed at historical costs less depreciation

Intangible costs may not be recorded at all

Land is expressed at historical cost

Inventory is expressed at lower of cost or market

All the above

None of the above

The Price/Earnings ratio is a very important measurement to investors. What two factors are considered in its calculation?

Total inventory and Earnings per share

Book value and Market Value

Earnings per share and stock price

Beta and dividend yield

Assume the price of a share of stock at the beginning of the year to be $49.43. At the end of the year a dividend of $2.00/share is paid. What is the dividend yield?

4.1%

.7%

1.4%

5.2%

The payout ratio is the portion of earnings that are paid out to shareholders. What is the term given for the inverse of the payout ratio?

Current ratio

Earnings per share

Dividend Yield

Plowback ratio

Assume that the Return on Equity (earnings/total stockholders equity) in your company is .25. Also, assume that during this past year your company enjoyed a $100,000 net profit of which $60,000 was paid out to shareholders as a dividend. Given the preceding, what is the dividend growth rate of your company?

5%

7.5%

10.0%

15.0%

All stocks in an equivalent risk class are priced to offer the same expected rate of return.

True

False

Company X is expected to pay an end-of-year dividend of $5 per share. After the dividend its stock is expected to sell at $110/share. If the market capitalization at rate is 8%, what is the current stock price?

$100.00

$106.48

$96.48

$102.00

Assume that the dividend growth rate of your company is 8% and your required rate of return is 5%. If dividends per share was $10, what would be the share price.

$300.00

$333.33

$363.33

$500.00

Chapter 5 (Net Present Value and Other Investment Criteria)

The author of our textbook considers NPV over Internal Rate of Return as more effective method for measuring the financial feasibility of a project

True

False

When companies choose to utilize the payback method when evaluating projects, they run the risk of excluding cash flows that occur AFTER the payback goal (i.e. three years) has been met

True

False

The definition of Internal Rate of Return is the discount rate at which the NPV of a series of cash flows is greater than zero

True

False

What is the Internal Rate of Return for the series of cash flows noted below?

Year #0 ($200,000)

Year #1 - $300,000

Year #2 - $100,000

Year #3 0 ($150,000)

15%

25%

45%

50%

The Internal Rate of Return rule is to accept an investment project if the opportunity cost of capital is less than the internal rate of return.

True

False

The NPV of a project depends on the:

The companys choice of accounting method

Managers tastes and preferences

The projects cash flows and the opportunity cost of capital

The profitability index

Driscoll Company is considering investing in a new project. The project will need an initial investment of $2.4Million (Year 0) and generate $1.2Million (after-tax) for three years. What is the Internal Rate of Return?

14.5%

18.6%

20.3%

23.4%

Assume the same facts as in #47, and further assume an 8% discount rate, what would be the NPV to the cash flows?

$3,092,516

$2,956,456

$692,516

($692,516)

$0

Chapter 7 (Introduction to Risk and Return)

Investments are generally divided into three distinct groupstreasury bills, bonds, and equities (stocks). Which of the three has experienced the greatest volatility over the past 100 years yet has provided the highest returns?

Treasury Bills

Bonds

Equities

Which of the following is considered the most secure investment but has traditionally yielded a relatively small return?

Equities of Blue Chip Companies

AAA rated corporate bonds

Long Term Government Bonds

Short term treasury bills

Over the last 100 years, dividend yields have continually declined. What might be a reason for the decline?

The intervention by the US Govt in setting interest rates

The general decline of stock prices

The general increase in stock prices

Dividend yields have not been adjusted for inflation

The two terms most often used when attempting to measure volatility and risk are:

Beta and the Sharpe ratio

Beta and Gamma

Standard Deviation and Beta

Dividend Yields and Earnings per Share

What is the relationship between variance and standard deviation?

Standard deviation is the square root of the variance

Variance is the square root of the standard deviation

Standard deviation plus the variance equals beta

They have no direct relationship

Investors prefer diversified companies because they are less risky

True

False

If stocks were perfectly positively correlated, diversification would not reduce risk

True

False

Diversification over many stocks will eventually completely eliminate risk

True

False

A well-diversified portfolio with a beta of 2.0 is twice as risky as the market portfolio

True

False

In which of the following situations would you get the largest reduction in risk by spreading your investment across two stocks?

The two shares are perfectly correlated

There is no correlation

There is modest negative correlation

There is perfect negative correlation

There are two major types or risk associated with investing. They are:

Financing risk and environmental risks

Insurance risk and interest rate risk

Unique/specific risk and market risk

Market risk and global warming

Generally, as you add more stocks to your portfolio you will enjoy a rapid increase in diversification early on followed by a relatively flat pattern.

True

False

Assume you own two stocks, Apple and Microsoft. 70% of your portfolio is in Apple stock and the balance is in Microsoft. Assume further that Apple has a standard deviation of 21.1% and Microsoft has a standard deviation of 32.3%. If we consider the two stocks to be perfectly positively correlated what is the standard deviation of the combined portfolio?

21.34%

22.18%

24.46%

28.27%

If two stocks have a correlation coefficient of .95 this would indicate that the stock prices have historically had very similar movements. In other words when one increased in value, the other did as well, and generally by similar percentages.

True

False

Chapter 8 (Portfolio Theory and the Capital Asset Pricing Model)

A stocks contribution to the risk of a fully diversified portfolio depends on its sensitivity to market changes. This sensitivity is generally known as beta.

True

False

The Sharpe ratio is used by investors to measure the risk-adjusted performance of investment managers. Assume that the historical return on a specific stock is 10%. Also assume that the standard deviation of that stock is 25% and beta is 1.75. Finally assume that the risk-free rate of return in 1.5%. Based on these factors, calculate the Sharpe Ratio.

Cannot calculate without knowledge of dividend yield

.34

.40

1.0

Since 1900 the market risk premium has averaged:

Between 0 and 5.0%

Between 5.0% and 10%

Between 10% and 15%

Less than 0

The Capital Asset Pricing Model has proven that, in a competitive market, the expected risk premium varies in direct proportion to:

Dividend yield

Price/Earnings Ratio

Earnings per Share

Beta

In well-functioning markets, nobody should acquire/hold a stock that offers a return less than the market risk premium.

True

False

The starting point of the graph (y axis) of the Security Market Line would be:

Market Risk Premium

Beta

Risk free rate of return

Standard Deviation

A portfolio that offers the highest expected return for any level of risk is deemed to be:

Efficient

Diversified

Conservative

Specialized

Assume the historical return for ABC Company is 11.5% and its beta is .5. Further assume that the risk-free rate of return is 3% and the standard deviation is 30%. Based on these factors (using the Capital Asset Pricing Model) calculate the cost of equity.

8.5%

4.25%

6.25%

7.30%