Future Price Practice Questions with Answers
ABC stock has a current price of $60. You expect that one year from now the price will be one
of three outcomes: $30, $65 or $90. If each price is equally likely to occur (probability = 1/3
or .333), what is th
Beta Practice Questions with Answers
Mark each statement about capital budgeting as true or false. (2 points each)
a._T_In sensitivity analysis, one assumption at a time is changed to see the effect on NPV
b._F_The NPV and IRR always give the same answer
Capital Budgeting Practice Questions with Answers
Jon is conducting a capital budgeting analysis using NPV for a major expansion of his company.
He wants to increase the chances on having his project accepted because it will likely mean a
promotion for hi
Break Even Analysis
Given the forecasted data on the next slide, determine the number of planes that the
company must produce in order to break even, on an NPV basis. The companys cost of
capital is 10%.
Yea r 0
Yea rs1 - 6
Actual Return Practice Questions with Answers
YT Inc. is considering implementing a new project. Which of the following is a cash flow that
should be taken into account for capital budgeting purposes?
(a) The annual bonus paid to the YT Inc. President bas
If the company above is considering expanding into a foreign country to produce its current
product, is the WACC appropriate as the discount rate for its NPV calculation? Explain. (6
The WACC is appropriate only if (1) the expansi
Working Capital Practice Questions with Answers
The working capital requirements for a new project are due to the required inventory levels. The
firm requires an inventory valued at $20,000 in time period 0, $30,000 in time 1 and 0 in time 2.
If these are
Value of Dollar
On January 6, 2002, Argentina changed its 10-year policy of pegging its peso to the U.S. dollar.
Overnight, the value of the peso changed from 1 peso per dollar to 1.55 pesos per dollar. Which
of the following is true?
(a) the Argentinian
Stock Practice Questions with Answers
1. Which of the following statements about the constant growth stock pricing model is false?
(a) a higher discount rate will result in a lower estimated stock price
(b) a higher growth rate will result in a lower esti
Market Efficiency Practice Questions with Answers
Manila Inc. announced last night while markets were closed that its new product was proven in
clinical trials to cure cancer. Draw a graph indicating the market reaction to the announcement
by the company
Equity Practice Questions with Answers
Xtra Corp. issued its $.005 par value stock in two separate financing transactions. First, ten
years ago, the founder of the company purchased 800,000 shares of stock for $50,000. Second, a
venture capitalist bought
Bond Practice Questions with Answers
When, if ever, would this bond sell for a discount? Explain. (6 points)
For this bond to sell for a discount, the average coupon rate must be less than the
yield to maturity.
Currently, the average coupon rate if you c
Bond Pricing Practice Questions with Answers
A 10 year bond with a coupon rate of 8% was issued 4 years ago. It has a $1,000 face value and
pays a quarterly coupon. If the yield to maturity is 6%, which of the following gives the bond
Estimated Annual Revenue Practice Questions with Answers
Bond A has a 5% coupon and Bond B has a 8% coupon. If both bonds are 5 year bonds, both
have the same yield to maturity and you buy both bonds today and hold them until maturity, on
which bond will
Dividend Practice Questions with Answers
As an analyst, you are trying to estimate a fair price for stock XYZ. You tried the constant
growth dividend discount model but this did not work because the company does not pay a
dividend. Which of the following
Perpetuity Practice Questions with Answers
A company is offering a perpetuity you can purchase for retirement. If the perpetuity starts 40
years from today and pays $50,000 per year, which formula correctly gives the PV if r = 4%?
(a) PV = 50,000 x [(1/.0
Present Value Practice Questions with Answers
A company has a 10 year 8% bond that pays interest quarterly, has a face value of $1,000 and has
YTM = 6%. Which of the following is the correct method for finding the price?
(a) Price = 20/(1.06) + 20/(1.062)
Price Practice Questions with Answers
BP Inc. is expected to have earnings per share (EPS) of $3 in time 1, $4 in time 2 and EPS that
grows at 6% for every period after that. The company has a policy of paying 50% of its EPS as a
dividend and the discount
Face Value Practice Questions with Answers
Which of the following is true about a 10 year 8% bond with a face value of $1,000 that is
selling for $1,050?
(a) if the yield to maturity remains constant over the next year, the price will be
lower next year
Expected Earnings Practice Questions with Answers
BC Inc. has 5,000,000 shares of stock outstanding. The expected earnings of the company are $2
million next year. The discount rate is 9%.
(a) If BC retains 30% of its earnings (i.e., BC pays out 70% as di
What is a Corporation?
Types of Corporations
Public Corporation: stock is publicly traded on stock exchange NYSE,
Private Corporation: stock is held by limited number of stockholders
and is not actively traded on stock exch
Expected Return and Actual Return
Expected Return - The percentage yield that an investor forecasts from a specific
investment over a set period of time.
Actual Return The percentage yield that an investor actually earns (also called the
Holding Period Re
Cash Flow Forecasts
Example - A company has sales outcomes that range from $16mil to $19 mil, Depending on the
economy. The same conditions can produce profits in the range from $550,000 to $1,112,000.
What is the DOL?
% chang ein profits
% chang ein
What is the Source of Funds or Capital
Long Term? (Issue stock or bonds)
Short Term? (Money Markets)
Primary v. Secondary Market
Primary Market (Company sells to investor)
Secondary Market (Company not involved)
Preferred Stock - Stock that takes priority over common stock in regards to
dividends and liquidation.
Dividends - Can be skipped at boards discretion. Not a legal obligation that can
lead to bankruptcy.
Cumulative v. Noncumulative
Organizing a Business
Goals of the Business
Who Is the Financial Manager?
Investment and Financing Decisions
Types of Business Organizations
Limited Liability Companies (LLC)
Goals of The Corporation
Total U.S. Financing
% Holdings of Corporate and Foreign Bonds (Qtr 1, 2005)
Rest of world
Total U.S. Financing
% Holdings of Corporate Equities (Qtr 1, 2005)
The Role of The Financial Manager
Capital Budgeting Decision
Decision to invest in tangible or intangible assets.
also called the Investment Decision
The Role of The Financial Manager
Tangible Assets - Toyota in Texas @ $800 million
Types of Securities
o Common stock
o Preferred stock
o Commercial paper
o Debentures (bonds)
o Notes (loans)
o Bank financing (line of credit; term loan)
o Convertible Debt
o Number of shares of common stoc
Secured Debt - Debt that has first claim on specified collateral (i.e., assets) in the event of
Investment Grade - Bonds rated Baa or above by Moodys or BBB or above by
Junk Bond - Bond with a rating below Baa or BBB.
Eurodollars - Dollars h