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**Unformatted text preview: **2012/2013 Semester 1 Midterm Questions 1. Which of the following statements is NOT correct? A. One of the disadvantages of the sole proprietorship organizational form is the exposure to unlimited liability. B. The corporate form of organization establishes a company as a legal entity with many of the rights and obligations of a person. C. The separation of ownership and control in corporations is effected through the election of a Board of Directors which is responsible for hiring management and is elected directly by shareholders and debt holders. D. Under a partnership, a partner’s income is taxed once as personal income. E. The three primary areas of corporate finance are: capital budgeting, capital structure and net working capital. 2. According to finance theory, shareholder wealth maximization is the same as all of the following EXCEPT? A. Maximizing the value of the firm. B. Maximizing the wealth of its owners. C. Maximizing the price of its stock. D. Maximizing shareholder book value. E. All of the above choices are correct. 3. Which one of the following can help to reduce corporate agency problems? A. Compensation plans tied to share value B. Auditing of the firm’s financial accounting statements C. Monitoring by lenders D. Only A and C E. A, B and C above 4. You work for a bank interested in providing Company Z with a 15 year long-‐term loan. Although you are interested in all of the firms operating results, you will be LEAST interested in the following financial ratio: A. debt/equity ratio B. equity multiplier C. interval measure D. times interest earned E. total debt ratio 5. A firm has the following financial statement results: EBIT = 600, Beginning Net Fixed Assets = 300, Ending Net Fixed Assets = 400, Relevant Taxes = 50, Beginning Net Working Capital = 200, Ending Net Working Capital = 250, Depreciation = 50. What is the firm’s CFFA for the period in question? A. 600 B. 500 C. 400 D. 150 E. None of the above 6. We keep everything within a particular firm the same, except for increasing the firm’s long term debt by the exactly the same amount as we decrease its equity. This will necessarily do which of the following? I. decrease net income II. increase the equity multiplier III. increase the return on equity IV. decrease the debt ratio A. I only B. I and II only C. I, II and III only D. I, II and IV only E. I, II, III and IV only 7. Which of the following is a source of positive cash flow? A. A decrease in Accounts Payable B. An increase in Accounts Receivable C. The repurchase of outstanding common stock D. A decrease in inventory E. A decrease in long-‐term debt outstanding 8. Tino Inc.’s equity has a beta of 0.95 and an actual expected return of 10 percent. The risk-‐free rate of return is 3 percent and the market risk premium is 6%. Which one of the following statements is true given this information? A. The actual expected stock return will graph below the Security Market Line. B. The stock is overpriced. C. To be correctly priced according to CAPM, the stock should have an expected return of 9 percent. D. The stock has less systematic risk than the overall market. E. None of the above statements are true. 9. A firm generated net income of $878. The depreciation expense was $47 and dividends were paid in the amount of $25. Accounts payables decreased by $13, accounts receivables increased by $22, inventory decreased by $14, and net fixed assets decreased by $8. There was no interest expense. What was the net cash flow from assets (CFFA as defined in class)? A. $865 B. $876 C. $904 D. $912 E. $943 10. Roberto Inc. has sales of $2,200, total assets of $1,400, and a debt-‐equity ratio of 0.3. Its return on equity is 15 percent. What is the net income? A. $138.16 B. $141.41 C. $152.09 D. $156.67 E. $161.54 11. What is the future value of $7,189 invested for 23 years at 9.25% compounded annually? A. $22,483.60 B. $27,890.87 C. $38,991.07 D. $51,009.13 E. $54,999.88 12. Fourteen years ago, your parents set aside $7,500 to help fund your college education. Today, that fund is valued at $26,180. What rate of interest is being earned on this account? A. 7.99 percent B. 8.36 percent C. 8.51 percent D. 9.34 percent E. 10.06 percent 13. On your ninth birthday, you received $300 which you invested at 4.5 percent interest, compounded annually. Your investment is now worth $756. How old are you today? A. age 28 B. age 30 C. age 32 D. age 34 E. age 36 14. In 1895, the winner of a competition was paid $110. In 2006, the winner's prize was $70,000. What will the winner's prize be in 2040 if the prize continues increasing at the same rate? A. $389,400 B. $421,122 C. $479,311 D. $505,697 E. $548,121 15. Your grandmother is gifting you $100 at the end of each month for four years while you attend college to earn your bachelor's degree. At a 5.5 APR discount rate, what are these payments worth to you on the day you enter college? A. $4,201.16 B. $4,299.88 C. $4,509.19 D. $4,608.87 E. $4,800.00 16. Jeikun Tours (JT) has an employment contract with its newly hired CEO. The contract requires a lump sum payment of $10.4 million be paid to the CEO upon the successful completion of her first three years of service. JT wants to set aside an equal amount of money at the end of each year to cover this anticipated cash outflow and will earn 5.65 percent on the funds. How much must JT set aside each year for this purpose? A. $3,184,467 B. $3,277,973 C. $3,006,409 D. $3,318,190 E. $3,466,667 17. Ziah Insurance wants to sell you an annuity which will pay you $3,400 per quarter for 25 years. Given such a pattern of payments, you want to earn a minimum APR rate of return of 6.5 percent. What is the most you are willing to pay as a lump sum today to buy this annuity? A. $151,008.24 B. $154,208.16 C. $167,489.11 D. $173,008.80 E. $178,927.59 18. The primary purpose of portfolio diversification is to: A. Increase returns and risks. B. Eliminate all risks. C. Eliminate asset-‐specific risk. D. Eliminate systematic risk. E. Lower both returns and risks. 19. Which one of the following indicates 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. An increase in the portfolio standard deviation E. A decrease in the portfolio standard deviation 20. Your insurance agent is trying to sell you an annuity that costs $200,000 today. By buying this annuity, your agent promises that you will receive payments of $1,225 a month for the next 30 years. What is the rate of return on this investment, stated on an APR basis? A. 5.75 percent B. 5.97 percent C. 6.20 percent D. 6.45 percent E. 6.67 percent 21. To convince investors to accept greater exposure to volatility, you must: A. Decrease the risk premium. B. Increase the risk premium. C. Decrease the real return. D. Decrease the risk-‐free rate. E. Increase the risk-‐free rate. 22. There are two assets: Asset A and Asset B. βA is half the value of βB. The return on Asset A, rA is a little more than half of the return on Asset B, rB. σA is double that of σB. From this information we can be sure that I. Asset B has more systematic risk than Asset A. II. Asset B has a higher return to total risk ratio. III. Asset B has a higher required rate of return. IV. Asset B is underpriced in the market. A. I only B. I and II only C. I, II and III only D. I, II, III and IV E. I and III only 23. A stock had returns of 11 percent, -‐18 percent, -‐21 percent, 5 percent, and 34 percent over the past five years. Estimate the standard deviation of the firm’s returns? A. 18.74 percent B. 20.21 percent C. 20.68 percent D. 22.60 percent E. 23.49 percent 24. Suppose a stock had an initial price of $80 per share, paid a dividend of $1.35 per share during the year, and had an ending share price of $87. What was the capital gains yield? A. 1.55 percent B. 1.69 percent C. 8.05 percent D. 8.75 percent E. 10.44 percent 25. You have a $12,000 portfolio which is invested in stocks A and B, and a risk-‐free asset. $5,000 is invested in stock A. Stock A has a beta of 1.76 and stock B has a beta of 0.89. How much needs to be invested in stock B if you want a portfolio beta of 1.10? A. $3,750.00 B. $4,333.33 C. $4,706.20 D. $4,943.82 E. $5,419.27 26. You grandfather won a lottery years ago. The value of his winnings at the time was $50,000. He invested this money such that it will provide annual payments of $2,400 a year to his heirs forever. What is the rate of return? A. 4.75 percent B. 4.80 percent C. 5.00 percent D. 5.10 percent E. 5.15 percent 27. The rate of return on the common stock of Qian Inc. is expected to be 21 percent in a boom economy, 11 percent in a normal economy, and only 3 percent in a recessionary economy. The probabilities of these economic states are 10 percent for a boom, 70 percent for a normal economy, and 20 percent for a recession. What is the variance of the returns on this common stock? A. 0.002150 B. 0.002606 C. 0.002244 D. 0.002359 E. 0.002421 28. You have a portfolio consisting solely of stock A and stock B. The portfolio has an expected return of 8.7 percent. Stock A has an expected return of 11.4 percent while stock B is expected to return 6.4 percent. What is the portfolio weight of stock A? A. 39 percent B. 46 percent C. 54 percent D. 61 percent E. 67 percent 29. Asset Z has a β of 1.7 and its correlation coefficient with the market portfolio ρz,m is 0.7. Asset Y has a β of 1, a correlation coefficient with the market, ρy,m of 1 and a standard deviation of 20%. What is Asset Z’s standard deviation? A. 27 percent B. 32 percent C. 48 percent D. 61 percent E. 70 percent 30. Asset W has a Beta of 1.2. Given current price levels, Asset W has an expected risk premium of 11%. The market risk premium is 10%. Asset W is: A. underpriced B. fairly priced C. overpriced D. accurately priced E. More information is needed to answer the question ...

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- Winter '14
- d., common stock