is called a treasury bond.) 19) Risk that affects at most a small number of assets is called unsystematic risk) |(10) If the CAPM is used to estimate the cost of equity capital, the expected excess market retum is equal to the return on the stock minus the risk-free rate. 2. Multiple Choice (20 points) (1) Which one of these accounts is included in networking capital? A copyright B. manufacturing equipment C. common stock D. inventory (2) A business formed by two or more individuals who each have unlimited personal liability for all of the firm's debts is called a A. corporation. B. sole proprietorship C. general partnership D. limited partnership |(3) Which one of the following is a liquidity ratio? A quick ratio B. cash coverage ratio C. total debt ratio D. EV multiple |(4) Pully's Pastries generates five cents of net income for every Si in equity. Thus, Puffy's has of 5 percent. A. a return on assets B. a profit margin C. a return on equity D. an EV multiple |(5) Ted purchased an annuity today that will pay $1.000 a month for five years. He received his first monthly payment today. Allison purchased an annuity today that will pay $1,000 a month for five years. She will receive her first payment one month from today. Which one of the following statements is correct concerning these two annuities?) A. Both annuities are of equal value today. B. Ted's annuity has a higher present value than Allison's C. Allison's annuity has a higher present value than Ted's. D. Ted's annuity is an ordinary annuity. (6) Wilt has a consulting contract with a firm that states that he will receive annual payments of $50,000 a year for five years with the first payment due today. What is the current value of this contract if the discount rate is 8.4 percent? A. $214.142.50 B. $201.867.47 C. S195,618.19 D. $197.548.43 (7) The length of time required for a project's discounted cash flows to equal the initial cost of the project is called the A.net present value B.payback period c. profitability index D. discounted payback period. (8) Matt is analyzing two mutually exclusive projects of similar size. Both projects have 5-year lives. Project A has an NPV of $18,389, a payback period of 2.38 years an IRR of 15.9 percent, and a discount rate of 13.6 percent. Project B has an NPV of $19,748, a payback period of 2.69 years, an IRR of 13.4 percent, and a discount rate of 12.8 percent. He can afford to fund either project, but not both. Matt should accept() A. Project A because of its payback period. B. Project B based on its NPV. C. Both projects as they both have positive NPVS. D. Project A because of its IRR (9) You spent S500 last week fixing the transmission in your car. Now, the brakes are acting up and you are trying to decide whether to fix them or trade the car in for a newer model. In analyzing the brake situation, the $500 you spent fixing the transmission is an) cost. A. opportunity B. fixed C. sunk D. relevant |(10) Assume a firm has no interest expense or extraordinary items. Given this, the operating cash flow can be computed as A. EBIT - Taxes. B. EBIT (1 - Tax rate) + Depreciation Tax rate. C. EBIT - Depreciation Taxes. D. Net income Depreciation |(11) If a stock pays a constant annual dividend then the stock can be valued using the :) A. perpetuity present value formula B. present value of an annuity due formula C present value of an ordinary annuity formula. D. fixed coupon bond present value formula (12) Phillips Co. currently pays no dividend. The company is anticipating dividends of $.02, S.05, S.10, S.20, and S.30 over the next 5 years, respectively. After that, the company anticipates increasing the dividend by 35 percent annually. One step in computing the value of this stock today is to compute the value of AP C.P. |(13) A par value bond offers a coupon rate of 7 percent with semiannual interest payments. The effective annual rate provided by these bonds must be: A. equal to 3.5 percent B. greater than 3.5 percent but less than 4 percent C. equal to 7 percent D. greater than 7 percent but less than 8 percent. (14) The bonds issued by Manson amp: Son bear a coupon of 6 percent, payable Lulu B.P DP Ihr The hand 15 Su (1) Which one of these accounts is included in net working capital? ( ) A. copyright B. manufacturing equipment C. common stock D. inventory (2) A business formed by two or more individuals who each have unlimited persona liability for all of the firm's debts is called a: ( ) A. corporation. B. sole proprietorship. C. general partnership. D. limited partnership (3) Which one of the following is a liquidity ratio? ( ) A. quick ratio B. cash coverage ratio C. total debt ratio D. EV multiple (4) Puffy's Pastries generates five cents of net income for every $1 in equity. Thus, Puffy's has of 5 percent. ( ) A. a return on assets B. a profit margin C. a return on equity D. an EV multiple (5) Ted purchased an annuity today that will pay $1,000 a month for five years. He received his first monthly payment today. Allison purchased an annuity today that will pay $1,000 a month for five years. She will receive her first payment one month from today. Which one of the following statements is correct concerning these two annuities? ( A. Both annuities are of equal value today. B. Ted's annuity has a higher present value than Allison's. C. Allison's annuity has a higher present value than Ted's. D. Ted's annuity is an ordinary annuity. (6) Wilt has a consulting contract with a firm that states that he will receive annual payments of $50,000 a year for five years with the first payment due today. What is the current value of this contract if the discount rate is 8.4 percent? ( ) A. $214,142.50 B. $201,867.47 C. $195,618.19 D. $197,548.43 (7) The length of time required for a project's discounted cash flows to equal the initial cost of the project is called the: ( ) A. net present value. B. payback period. C. profitability index. D. discounted payback period. (8) Matt is analyzing two mutually exclusive projects of similar size. Both projects have 5-year lives. Project A has an NPV of $18,389, a payback period of 2.38 years, an IRR of 15.9 percent, and a discount rate of 13.6 percent. Project B has an NPV of $19,748, a payback period of 2.69 years, an IRR of 13.4 percent, and a discount rate of 12.8 percent. He can afford to fund either project, but not both. Matt should accept: () A. Project A because of its payback period. B. Project B based on its NPV. C. Both projects as they both have positive NPVs. D. Project A because of its IRR. (9) You spent $500 last week fixing the transmission in your car. Now, the brakes are acting up and you are trying to decide whether to fix them or trade the car in for a newer model. In analyzing the brake situation, the $500 you spent fixing the transmission is a(n) cost. ( ) A. opportunity B. fixed C. sunk D. relevant (10) Assume a firm has no interest expense or extraordinary items. Given this, the operating cash flow can be computed as: ( ) JA. EBIT - Taxes. B. EBIT * (1 - Tax rate) + Depreciation Tax rate. IC. EBIT - Depreciation + Taxes. D. Net income + Depreciation. the: A. perpetuity present value formula. B. present value of an annuity due formula. C. present value of an ordinary annuity formula. D. fixed coupon bond present value formula. (12) Phillips Co. currently pays no dividend. The company is anticipating dividends of $.02, $.05, $.10, $.20, and $.30 over the next 5 years, respectively. After that, the company anticipates increasing the dividend by 3.5 percent annually. One step in computing the value of this stock today is to compute the value of: ( ) A.P B. Ps. C.P. D. Pz. (13) A par value bond offers a coupon rate of 7 percent with semiannual interest payments. The effective annual rate provided by these bonds must be: ( ) A. equal to 3.5 percent. B. greater than 3.5 percent but less than 4 percent. C. equal to 7 percent. D. greater than 7 percent but less than 8 percent. (14) The bonds issued by Manson amp; Son bear a coupon of 6 percent, payable semiannually. The bond matures in 15 years and has a $1,000 face value. Currently, the bond sells at par. What is the yield to maturity? ( ) A. 5.87% B. 5.97% C. 6.00% D. 6.09% (15) The beta of a security is calculated by dividing the: ( ) A. covariance of the security return with the market return by the variance of the market. B. covariance of the security return with the market return by the correlation of the security and market returns. C. variance of the market by the covariance of the security return with the market return. D. variance of the market return by the correlation of the security return with the |market return. (16) Which one of the following would indicate a portfolio is being effectively diversified? ( ) A. an increase in the portfolio beta B. a decrease in the portfolio beta C. an increase in the portfolio rate of return D. a decrease in the portfolio standard deviation (17) When computing the weighted average cost of capital, which of these are adjusted for taxes? ( ) A. cost of equity B. cost of preferred stock C. cost of debt D. costs of all forms of financing (18) Companies will generally have a: ( ) A. low beta if their sales are directly related to the market cycle. B. high beta if their sales are highly dependent on the market cycle. C. low beta if their sales are highly cyclical. D. high beta if their sales are highly variable but unrelated to the market cycle. (19) Not paying dividends on a cumulative preferred issue may result in: ( ) A. voting rights being granted to preferred shareholders. B. increased taxes based on the amount of the dividend arrearage. C. the permanent forfeiture of all unpaid past dividends but the resumption of future dividends. D. the issuer being forced into repaying all preferred shareholders the stated value of their shares. (20) Which characteristic does not apply to Eurobonds? ( ) A. always denominated in a single currency B. always denominated in euros C. generally traded from London D. generally denominated in the issuer's home currency