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Finance Assessment Study Questions

# Finance Assessment Study Questions - The formula sheet is...

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The formula sheet is the appendix copied out the back of the book. These might not be the exact problems, but they are pretty similar and I’d suggest knowing how to do them. Given the following information, what is the firm's weighted average cost of capital? Market value of equity = \$30 million; market value of debt = \$20 million; cost of equity = 15%; cost of debt = 9%; equity beta = 1.4; tax rate = 35%. A) 11.34% B) 12.60% C) 12.97% D) 13.32% E) 14.08% Answer: A Response: 15(\$30M/50M) + 9(20M/50M)(1-.35) = 11.34% A firm has current liabilities of \$700 and current liabilities of \$350. Calculate the current ratio. A) 0.5 B) 2.0 C) 0.75 D) 0.25 E) 1.5 Answer: B Response: \$700/\$350 = 2.0 If the total assets of a firm increase while all other components of ROE remain unchanged, you would expect the firm's: A) ROE to increase. B) ROE will remain unchanged. C) ROA to increase. D) Equity multiplier to decrease. E) Profit margin to decrease. Answer: B The following information is given: The risk-free rate is 7%, the beta of stock A is 1.2, the beta of stock B is 0.8, the expected return on stock A is 13.5%, and the expected return on stock B is 11.0%. Further, we know that stock A is fairly priced and that the betas of stocks A and B are correct. Which of the following regarding stock B must be true? A) Stock B is also fairly priced. B) The expected return on stock B is too high. C) The expected return on stock A is too high.

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