45. Luther Industries has a dividend yield of 4.5% and a cost of equity capital of 12%. Luther Industries' dividends are expected to grow at a constant rate indefinitely. The growth rate of Luther's dividends are closest to:

A. 5.5% B. 16.5% C. 7.5% D. 12%

Exam Name___________________________________ MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) In which of the following ways is a limited liability company like a corporation? A) It is directly managed by the owners of the firm. B) All of its owners' liability is restricted to their investment in the firm. C) Both can choose to be considered a partnership for tax purposes. D) Both types of firm were created and developed first in the United States. 1) 2) ValiantCorp is a C corporation that earned $3 per share before it paid any taxes. ValiantCorp retained $1 of after tax earnings for reinvestment, and distributed what remained in dividend payments. If the corporate tax rate was 30% and dividend earnings were taxed at 12.5%, what was the value of the dividend earnings received after tax by a holder of 100,000 shares of ValiantCorp? A) $96,250 B) $112,500 C) $110,000 D) $104,750 2) 3) Whose interests should a financial manager consider paramount when making a decision? A) the senior management and associated colleagues at the executive level within the company B) the stockholders who have risked their money to become owners of the company C) the employees and associated stakeholders who are employed by the company D) the public who consume the company's goods and services 3) TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. 4) Raising new capital by issuing bonds is an example of a commercial banking activity. 4) MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 5) Which of the following best describes why firms produce financial statements? A) to use as a tool when planning future investments within the firm B) to show what activities the company has undertaken in the previous financial year, and what activities are planned for the near future C) to provide a means of enticing new investors to a firm D) to provide interested parties, both inside and outside the company, with an overview of the short and long term financial condition of a business 5) 6) A delivery company is creating a balance sheet. Which of the following would most likely be considered a short-term liability on this balance sheet? A) a loan which must paid back in two years' time B) prepaid rent on the offices occupied by the company C) revenue received for the delivery of items that have not yet been delivered D) the depreciation over the last year in the value of the vehicles owned by the company 6) 1 Use the table for the question(s) below. Balance Sheet Assets Current Assets Cash Accounts receivable Inventories Total current assets 50 22 17 89 Long-Term Assets Net property, plant, and equipment Total long-term assets 121 121 Total Assets 210 Liabilities Current Liabilities Accounts payable Notes payable/short-term debt 42 7 Total current liabilities 49 Long-Term Liabilities Long-term debt Total long-term liabilities Total Liabilities Stockholders' Equity Total Liabilities and Stockholders' Equity 128 128 177 33 210 7) The above diagram shows a balance sheet for a certain company. All quantities shown are in millions of dollars. What is the company's net working capital? A) $40 million B) $7 million C) $33 million D) $32 million 7) 8) Which of the following balance sheet equations is INCORRECT? A) Assets - Liabilities = Shareholders' Equity B) Assets - Current Liabilities = Long Term Liabilities C) Assets = Liabilities + Shareholders' Equity D) Assets - Current Liabilities = Long Term Liabilities + Shareholders' Equity 8) 2 Use the table for the question(s) below. Luther Corporation Consolidated Balance Sheet December 31, 2006 and 2005 (in $ millions) Liabilities and Assets 2006 2005 Stockholders' Equity Current Assets Current Liabilities Cash 63.6 58.5 Accounts payable Notes payable / Accounts receivable 55.5 39.6 short-term debt Current maturities of Inventories 45.9 42.9 long-term debt Other current assets 6.0 3.0 Other current liabilities Total current assets 171.0 144.0 Total current liabilities Long-Term Liabilities Long-term debt Capital lease obligations Total Debt 2006 2005 87.6 73.5 10.5 9.6 39.9 36.9 6.0 12.0 144.0 132.0 Long-Term Assets Land Buildings Equipment Less accumulated depreciation Net property, plant, and equipment Goodwill Other long-term assets Total long-term assets 66.6 109.5 119.1 62.1 91.5 99.6 (56.1) (52.5) Deferred taxes 239.1 60.0 63.0 362.1 200.7 -42.0 242.7 Other long-term liabilities Total long-term liabilities Total liabilities Stockholders' Equity --262.5 406.5 126.6 Total Assets 533.1 386.7 Total liabilities and Stockholders' Equity 533.1 386.7 239.7 168.9 --- --239.7 168.9 22.8 22.2 --191.1 323.1 63.6 9) Refer to the balance sheet above. If in 2006 Luther has 10.2 million shares outstanding and these shares are trading at $16 per share, then using the market value of equity, the debt-equity ratio for Luther in 2006 is closest to: A) 1.71 B) 1.78 C) 2.31 D) 2.35 10) Refer to the balance sheet above. Luther's quick ratio for 2005 is closest to: A) 0.77 B) 1.31 C) 0.92 D) 1.09 11) What is a firm's net income? A) a measure of the firm's profitability over a given period B) the difference between the sales and other income generated by the firm, and all costs, taxes, and expenses incurred by the firm in a given period C) the last or \"bottom\" line of the income statement D) all of the above 3 9) 10) 11) Use the table for the question(s) below. Income Statement for Xenon Manufacturing: 2008 202 -148 54 Total sales Cost of sales Gross Profit Selling, general, and administrative expenses -22 -8 Research and development Depreciation and amortization -4 Other income 4 Earnings before interest and taxes (EBIT) 24 Interest income (expense) -7 Pretax income 14 Taxes -4 Net Income 10 2009 212 -172 40 -20 -7 -3 6 16 -4 12 -3 9 12) Consider the above Income Statement for Xenon Manufacturing. All values are in millions of dollars. If Xenon Manufacturing has 25 million shares outstanding, what is its EPS in 2009? A) $0.40 B) $0.36 C) $0.84 D) $0.63 4 12) Use the table for the question(s) below. Luther Corporation Consolidated Income Statement Year ended December 31 (in $ millions) 2006 Total sales 610.1 Cost of sales (500.2) Gross profit 109.9 Selling, general, and administrative expenses (40.5) Research and development (24.6) Depreciation and amortization (3.6) Operating income 41.2 Other income --Earnings before interest and taxes (EBIT) 41.2 Interest income (expense) (25.1) Pretax income 16.1 Taxes (5.5) Net income 10.6 Price per share Shares outstanding (millions) Stock options outstanding (millions) 2005 578.3 (481.9) 96.4 (39.0) (22.8) (3.3) 31.3 --31.3 (15.8) 15.5 (5.3) 10.2 $16 10.2 0.3 126.6 533.1 Stockholders' Equity Total Liabilities and Stockholders' Equity $15 8.0 0.2 63.6 386.7 13) Refer to the income statement above. Luther's earnings before interest, taxes, depreciation, and amortization (EBITDA) for the year ending December 31, 2006 is closest to: A) $19.7 million B) $37.6 million C) $41.2 million D) $44.8 million 13) 14) Balance Sheet Assets Current Assets Cash Accounts receivable Inventories Total current assets 14) 50 22 17 89 Long-Term Assets Net property, plant, and equipment Total long-term assets 121 121 Total Assets 210 Income Statement Total sales Cost of sales Liabilities Current Liabilities Accounts payable Notes payable/short-term debt 42 7 Total current liabilities 49 Long-Term Liabilities Long-term debt Total long-term liabilities 128 Total Liabilities Stockholders' Equity Total Liabilities and Stockholders' Equity 312 -210 5 128 177 33 210 Gross Profit Selling, general, and administrative expenses Research and development Depreciation and amortization Operating Income Other income Earnings before interest and taxes (EBIT) Interest income (expense) Pretax income Taxes Net Income 102 -34 -10 -5 53 53 -20 33 -8 25 The balance sheet and income statement of a particular firm are shown above. What does the account receivable days ratio tell you about this company? A) It takes on average about 6 weeks to collect payment from its customers. B) It takes on average about 4 weeks to collect payment from its customers. C) It takes on average about 7 weeks to collect payment from its customers. D) It takes on average about 11 weeks to collect payment from its customers. 15) Manufacturer A has a profit margin of 2.0%, an asset turnover of 1.7 and an equity multiplier of 4.9. Manufacturer B has a profit margin of 2.3%, an asset turnover of 1.1 and an equity multiplier of 4.7. How much asset turnover should manufacturer B have to match manufacturer A's ROE? A) 4.77% B) 1.54% C) 3.09% D) 3.00% 15) 16) An elderly relative offers to sell you their used 1958 Cadillac Eldorado for $50,000. You note that very similar cars are selling on the open market for $90,000. You don't care for classic cars and would rather buy a new Ford Explorer for $35,000. What is the net value of buying the Cadillac? A) $40,000, since this is the difference between purchase and resale price of the Cadillac. B) $50,000, since the Cadillac could be bought for this price. C) $35,000, since this is the value of the car that you really want to buy. D) $90,000, since the Cadillac could be sold for this price. 16) Use the table for the question(s) below. Consider the following prices from a McDonald's Restaurant: Big Mac Sandwich Large Coke Large Fry $2.99 $1.39 $1.09 17) A McDonald's Big Mac value meal consists of a Big Mac sandwich, large Coke, and a large fry. Assume that there is a competitive market for McDonald's food items and that McDonald's sells the Big Mac value meal for $4.79. Does an arbitrage opportunity exists and if so how would you exploit it and how much would you make on one value meal? A) Yes, buy a Big Mac, Coke, and fries, then sell a value meal to make arbitrage profit of $1.09. B) Yes, buy a Big Mac, Coke, and fries, then sell a value meal to make arbitrage profit of $0.68. C) No, no arbitrage opportunity exists. D) Yes, buy a value meal and then sell the Big Mac, Coke, and fries to make arbitrage profit of $0.68. 6 17) TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. 18) Costs and benefits must be put in common terms if they are to be compared. 18) MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 19) The timeline shown below best describes the cash flow of which of the following people? Date (years) Cash Flows 0 1 2 3 4 -$3500 $1000 $1000 $1000 19) $1000 A) Karen, who loans a friend $3500, which friend then pays back the loan in four annual installments of $1000 B) Leo, who borrows $3500, and then pays back the loan in four annual payments of $1000 C) Joe, who puts down $3500 to buy a car, and then makes annual payments of $1000 D) Harry, who borrows $3500, and then receives an annual payment of $1000 20) An investment will pay $205,000 at the end of next year for an investment of $183,000 at the start of the year. If the market interest rate is 8% over the same period, should this investment be made? A) Yes, because the investment will yield $7360 more than putting the money in a bank. B) Yes, because the investment will yield $4280 more than putting the money in a bank. C) No, because the investment will yield $6240 less than putting the money in a bank. D) Yes, because the investment will yield $2360 more than putting the money in a bank. 20) 21) If the one-year discount factor is equal to 0.90909, the interest must be equal to: A) 5.0% B) 9.5% C) 9.1% D) 10.0% 21) TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. 22) To calculate a cash flow's present value (PV), you must compound it. 22) MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 23) If money is invested at 8% per year, after approximately how many years will the interest earned be equal to the original investment? A) 12 years B) 5 years C) 9 years D) 6 years 23) 24) Consider the following timeline: 24) If the current market rate of interest is 9%, then the present value (PV) of this timeline as of year 0 is closest to: A) $600 B) $492 C) $400 D) $637 7 25) A perpetuity will pay $1000 per year, starting five years after the perpetuity is purchased. What is the present value (PV) of this perpetuity on the date that it is purchased, given that the interest rate is 4%? A) $20,582 B) $34,604 C) $21,370 D) $1410 25) 26) Since your first birthday, your grandparents have been depositing $1000 into a savings account on every one of your birthdays. The account pays 4% interest annually. Immediately after your grandparents make the deposit on your 18th birthday, the amount of money in your savings account will be closest to: A) $25,645 B) $36,465 C) $18,000 D) $12,659 26) 27) You are thinking about investing in a mine that will produce $10,000 worth of ore in the first year. As the ore closest to the surface is removed it will become more difficult to extract the ore. Therefore, the value of the ore that you mine will decline at a rate of 8% per year forever. If the appropriate interest rate is 6%, then the value of this mining operation is closest to: A) $500,000 B) $71,429 C) $166,667 D) This problem cannot be solved. 27) 28) A bank is negotiating a loan. The loan can either be paid off as a lump sum of $100,000 at the end of five years, or as equal annual payments at the end of each of the next five years. If the interest rate on the loan is 10%, what annual payments should be made so that both forms of payment are equivalent? A) $12,000 B) $20,000 C) $19,588 D) $16,380 28) 29) You are considering purchasing a new home. You will need to borrow $250,000 to purchase the home. A mortgage company offers you a 15-year fixed rate mortgage (180 months) at 9% APR (0.75% month). If you borrow the money from this mortgage company, your monthly mortgage payment will be closest to: A) $2585 B) $1390 C) $2535 D) $660 29) TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. 30) When there are large numbers of people looking to save their money and there is little demand for loans, one would expect interest rates to be high. 30) MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 31) A graphic designer needs a laptop for audio/video editing, and notices that they can elect to pay $2900 for a Dell XPS laptop, or lease from the manufacturer for monthly payments of $79 each for four years. The designer can borrow at an interest rate of 7% APR compounded monthly. What is the cost of leasing the laptop over buying it outright? A) Leasing costs $399 more than buying. B) Leasing costs $311 more than buying. C) Leasing costs $384 more than buying. D) Leasing costs $892 more than buying. 31) 32) Ursula wants to buy a $18,999 used car. She has savings of $2,000 plus an $800 trade-in. She wants her monthly payments to be about $272. Which of the following loans offers monthly payments closest to $270? A) 6.5% APR for 48 months B) 6.5% APR for 36 months C) 6.5% APR for 60 months D) 6.5% APR for 72 months 32) 8 33) A homeowner has five years of monthly payments of $1400 before she has paid off her house. If the interest rate is 7% APR, what is the remaining balance on her loan? A) $70,703 B) $64,918 C) $84,000 D) $59,890 33) 34) In 2007, interest rates were about 4.5% and inflation was about 2.8%. What was the real interest rate in 2007? A) 1.62% B) 1.61% C) 1.58% D) 1.65% 34) 35) Term in years: 35) Rate: 2 5 2.25% 3.125% 10 30 3.5% 4.375% The table above shows the interest rates available from investing in risk-free U.S. Treasury securities with different investment terms. If an investment offers a risk-free cash flow of $100,000 in ten years' time, what is the present value (PV) of that cash flow? A) $73,512 B) $78,320 C) $70,892 D) $80,051 36) Which of the following yield curves would most likely predict a downturn in the economy? A) B) C) 36) D) 37) What must be the price of a $1000 bond with a 5.8% coupon rate, annual coupons, and 30 years to maturity if YTM is 7.5% APR? A) $1005.26 B) $685.00 C) $799.22 D) $114.22 9 37) 38) What is the coupon rate of a two-year, $10,000 bond with semiannual coupons and a price of $9543.45, if it has a yield to maturity of 6.8%? A) 4.32% B) 8.44% C) 6.25% D) 5.60% 38) 39) Which of the following best describes a bond rated by Standard and Poor's and Moody as B? A) generally lacks the characteristics of a desirable investment B) neither highly protected nor poorly secured C) possessing many favorable characteristics D) judged to be high quality by all standards 39) Use the information for the question(s) below. Security: Yield (%): Treasury 5.2 AAA Corporate 5.4 BBB Corporate 6.2 B Corporate 6.9 40) The above table shows the yields to maturity on a number of one-year, zero-coupon securities. What is the price per $100 of the face value of a one-year, zero-coupon corporate bond with a BBB rating? A) $94.87 B) $92.21 C) $94.16 D) $93.54 40) 41) Security: Corporate Yield (%): 41) AAA Corporate AA Corporate A Corporate BBB Corporate BB 5.7 5.8 6.0 6.6 6.9 Lloyd Industries raised $28 million in order to upgrade its roller kiln furnace for the production of ceramic tile. The company funded this by issuing 15-year bonds with a face value of $1000 and a coupon rating of 6.2%, paid annually. The above table shows the yield to maturity for similar 15-year corporate bonds of different ratings issued at the same time. When Lloyd Industries issued their bonds, they received a price of $962.63. Which of the following is most likely to be the rating these bonds received? A) BBB B) AA C) A D) BB 42) Jumbuck Exploration has a current stock price of $2.00 and is expected to sell for $2.10 in one year's time, immediately after it pays a dividend of $0.26. Which of the following is closest to Jumbuck Exploration's equity cost of capital? A) 18% B) 22% C) 9% D) 12% 42) 43) Which of the following statements is FALSE? A) A common approximation is to assume that in the long run, dividends will grow at a constant rate. B) There is a tremendous amount of uncertainty associated with any forecast of a firm's future dividends. C) During periods of high growth, it is not unusual for firms to pay out 100% of their earnings to shareholders in the form of dividends. D) The dividend each year is the firm's earnings per share (EPS) multiplied by its dividend payout rate. 43) 10 44) Which of the following formulas is INCORRECT? Div1 Div2 DivN DivN + 1 1 + + ... + + A) P0 = 1 + rE (1 + rE)2 rE - g (1 + rE)N (1 + rE)N 44) B) earnings growth rate = retention rate x return on new investment DivN C) PN = rE - g earningst Dividend Payout Rate D) Divt = shares outstandingt 45) Luther Industries has a dividend yield of 4.5% and a cost of equity capital of 12%. Luther Industries' dividends are expected to grow at a constant rate indefinitely. The growth rate of Luther's dividends are closest to: A) 5.5% B) 16.5% C) 7.5% D) 12% 45) 46) You expect KT industries (KTI) will have earnings per share of $3 this year and expect that they will pay out $1.50 of these earnings to shareholders in the form of a dividend. KTI's return on new investments is 15% and their equity cost of capital is 12%. The value of a share of KTI's stock is closest to: A) $20.00 B) $12.50 C) $33.35 D) $39.25 46) 47) Which of the following situations can lead to IRR giving a different decision than NPV? A) Differences in project scale B) Delayed investment C) Multiple IRRs D) All of the above can lead to IRR giving a different decision than NPV 47) 48) Investment A: Year: 0 1 Cash flow: -$14,000 $6,000 2 $6,000 3 $6,000 4 $6,000 5 $6,000 48) Investment B: Year: 0 1 -$15,000 $7,000 Cash flow: 2 $7,000 3 $7,000 4 $7,000 5 $7,000 Investment C: Year: 0 1 2 -$18,000 $12,000 $4,000 Cash flow: 3 $4,000 4 $4,000 5 $4,000 The cash flows for three projects are shown above. The cost of capital is 7.5%. If an investor decided to take projects with a payback period two years or less, which of these projects would he take? A) Investment A B) Investment B C) Investment C D) none of these investments 11 Use the table for the question(s) below. Consider the following two projects: Year 0 Year 1 Year 2 Year 3 Year 4 Discount Project Cash Flow Cash Flow Cash Flow Cash Flow Cash Flow Rate -100 A 40 50 60 N/A 0.15 -73 B 30 30 30 30 0.15 49) The net present value (NPV) of project A is closest to: A) 12.0 B) 42.9 C) 15.0 D) 12.6 50) Which of the following formulas will correctly calculate Net Working Capital? A) Cash + Inventory - Receivables + Payables B) Cash + Inventory + Receivables - Payables C) Cash - Inventory + Receivables + Payables D) Cash + Inventory + Receivables + Payables 49) 50) TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. 51) Interest and other financing-related expenses are excluded when determining a project's unlevered net income. 51) MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 52) A decrease in the sales of a current project because of the launching of a new project is A) irrelevant to the investment decision. B) a sunk cost. C) cannibalization. D) an overhead expense. 52) Use the information for the question(s) below. Ford Motor Company is considering launching a new line of hybrid diesel-electric SUVs. The heavy advertising expenses associated with the new SUV launch would generate operating losses of $35 million next year. Without the new SUV, Ford expects to earn pretax income of $80 million from operations next year. Ford pays a 30% tax rate on its pretax income. 53) The amount that Ford Motor Company owes in taxes next year with the launch of the new SUV is closest to: A) $56.0 million B) $31.5 million C) $13.5 million D) $24.0 million 53) 54) The manufacturer of a brand of kitchen knives is investigating the likely effects that an increase in the cost of the raw materials required to make these knives will have on thecost of manufacturing the knives, the selling price of the knives, the number of knives that will then be sold, and the project's net present value (NPV). Which of the following best describes what type of analysis the manager is performing? A) scenario analysis B) sensitivity analysis C) EBIT-break even analysis D) break-even analysis 54) TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. 55) There is a clear link between the volatility of returns for individual stocks and the returns for individual stocks. 12 55) MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Use the table for the question(s) below. Consider the following average annual returns: Investment Average Return Small Stocks 23.2% S&P 500 13.2% Corporate Bonds 7.5% Treasury Bonds 6.2% Treasury Bills 4.8% 56) What is the excess return for the portfolio of small stocks? A) 18.4% B) 15.7% C) 10.0% D) 17.0% 57) Suppose you invested $75 in the Ishares Dividend Stock Fund (DVY) a month ago. It paid a dividend of $0.50 today and then you sold it for $70. What was your return on the investment? A) -6.99% B) -7.00% C) -8.00% D) -6.00% 56) 57) TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. 58) Investors should earn a risk premium for bearing unsystematic risk. 58) MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 59) The risk premium of a security is determined by its ________ risk and does not depend on its ________ risk. A) diversifiable, diversifiable B) systematic, unsystematic C) systematic, undiversifiable D) all of the above 59) TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. 60) The Capital Asset Pricing Model (CAPM) says that the excess return on a stock is equal to its beta times the market risk premium. 60) MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 61) A portfolio comprises Coke (beta of 1.2) and Wal-Mart (beta of 0.9). The amount invested in Coke is $20,000 and in Wal-Mart is $30,000. What is the beta of the portfolio? A) 1.02 B) 1.19 C) 1.26 D) 1.15 61) 62) Which of the following statements is FALSE? A) Graphically, the line through the risk-free investment and the market portfolio is called the capital market line (CML). B) The expected return of a portfolio should correspond to the portfolio's beta. C) The beta of a portfolio is the weighted average beta of the securities in the portfolio. D) By holding a negative-beta security, an investor can reduce the overall market risk of her portfolio. 62) 13 63) GM has a book value of $8 billion of equity and a face value of $12 billion of debt. What are the weights in debt and equity that are used for calculating the WACC? A) 0.5, 0.5 B) 0.6, 0.4 C) 0.4, 0.6 D) cannot be determined 63) 64) When corporate tax rates decline, the net cost of debt financing A) is unchanged. B) decreases. C) increases. D) none of the above 64) 14