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EXAM 3 Name: _________________ BA 3341-4- Spring 2010 1 E The principle of diversification tells us that: concentrating an investment in two or three...

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EXAM 3 BA 3341-4- Spring 2010 Name: _________________ 1 E 2 _______ 3 ______ 4 ______ Two methods for calculating the cost of equity for a firm include the ___________. A. NPV and IRR B. Discounted payback analysis and a subjective estimate C. Dividend Growth Model and the CAPM D. Monte Carlo Simulation and Scenario Analysis 5 ______ 6 ______ 7 ______ 8 ______ 9 ______ 10 ______ Which of the fol owing should be considered when selecting a venture capitalist? I. level of involvement I . past experiences I I. termination of their funding 1 ______ 12 ______ 13 ______ 14 ______ 15 ______ 16 ______ 17 ______ 18 ______ 19 ______ 20 ______ 21 ______ 22 ______ 23 ______ 24 ______ 25 ______ 26 ______ 27 ______ 28 ______ 29 ______ 30 ______ 31 ______ 32 ______ 33 ______ 34 ______ 35 ______ 36 ______ 37 ______ 38 ______ 39 ______ 40 ______ The principle of diversification tel s us that: A. concentrating an investment in two or thre large stocks wil eliminate al of the systematic risk. B. concentrating an investment in thre companies al within the same industry wil greatly reduce the systematic risk. C. spreading an investment acros five diverse companies wil not lower the total risk. D. spreading an investment acros many diverse as ets wil eliminate al or most of the unsystematic risk. E. spreading an investment acros many diverse as ets wil eliminate al or most of the systematic risk. Wal y's Industries is expected to pay an annual dividend of $0.80 a share next year. The market price of the stock is $22.40 and the growth rate is 5 percent. What is the firm's cost of equity? A. 7.58 percent B. 7.91 percent C. 8.24 percent D. 8.57 percent E. 9.00 percent Wind Power Systems has 20-year, semi-annual bonds outstanding with a 5 percent coupon. The face amount of each bond is $1,000. These bonds are cur ently sel ing for 114 percent of face value. What is the company's pre-tax cost of debt? A. 3.98 percent B. 4.42 percent C. 4.71 percent D. 5.36 percent E. 5.55 percent Justice, Inc. has a capital structure which is based on 30 percent debt, 5 percent prefer ed stock, and 65 percent common stock. The flotation costs are 11 percent for common stock, 10 percent for prefer ed stock, and 7 percent for debt. What is the weighted average flotation cost? A. 8.97 percent B. 9.48 percent C. 9.62 percent D. 9.75 percent E. 10.00 percent What is the form cal ed that is filed with the SEC and discloses the material information on a securities is uer when that is uer of ers new securities to the general public? A. prospectus B. red her ing C. indenture D. public disclosure statement E. registration statement The dif erence betwe n the underwriters' cost of buying shares in a firm commitment and the of ering price of those securities to the public is cal ed the: A. gros spread. B. under price amount C. filing fe . D. new is ue premium. E. of er price. Roy owns 200 shares of R.T.F., Inc. He has opted not to participate in the cur ent rights of ering by this firm. As a result, Roy wil most likely be subject to: A. an oversubscription cost. B. underpricing. C. dilution. D. the Gre n Shoe provision. E. a locked in period. Which one of the fol owing is probably the most suc es ful means of finding venture capital? A. internet searches B. Dutch auctions C. newspaper advertisements D. personal contacts E. personal let ers to venture capital firms IV. financial strength of the VC A. I and I I only B. I and IV only C. I, I I, and IV only D. I, I , I I, and IV Trevor is the CEO of Harvest Foods, which is a privately-held corporation. What is the first step he must take if he wishes to take Harvest Foods public? A. select an underwriter B. obtain SEC approval C. gain board approval D. prepare a registration statement E. distribute a prospectus Al new interstate security is ues are regulated by the: A. registration statement. B. Gre n Shoe provision. C. Securities Exchange Act of 1912. D. Securities Act of 1933. E. Federal Reserve Act of 1931. With firm commitment underwriting, the is uing firm: A. is unsure of the total amount of funds it wil receive until after the of ering is completed. B. is unsure of the number of shares it wil actual y is ue until after the of ering is completed. C. knows how many shares wil be purchased by the general public during the of er period. D. retains the financial risk as ociated with unsold shares. E. knows up-front the amount An individual investor with a smal portfolio who wishes to purchase 100 shares of each IPO is more likely to receive an al ocation of shares when: A. an IPO is substantial y oversubscribed than when it is not. B. the knowledgeable investors fe l the is ue is underpriced. C. an IPO is severely underpriced. D. an IPO is undersubscribed. E. he or she has a standing order with the underwriter to purchase shares in every IPO handled by that underwriter. Which one of the fol owing statements is cor ect concerning the costs of is uing securities? A. Domestic bonds are general y more expensive to is ue than equity IPOs. B. Abnormal returns are rarely as ociated with seasoned is ues. C. A seasoned of ering is typical y more expensive on a percentage basis than an IPO. D. There tends to be substantial economies of scale when is uing securities. E. The costs of is uing convertible bonds tend to be les on a percentage basis than the costs of is uing straight debt. Aaron's Sailboats has decided to take the company public by of ering a total of 120,000 shares of common stock to the public. The firm has hired an underwriter who ar anges a ful commitment underwriting and suggests an initial sel ing price of $28 a share with an 8.5 percent spread. As it turns out, the underwriters only sel 97,400 shares. How much cash wil Aaron's Sailboats receive from its first public of ering? A. $2,727,200 B. $2,495,388 C. $3,074,400 D. $3,360,000 E. $3,645,600 Mil er Fruit wants to expand its citrus grove operations. The firm estimates that it ne ds $8.6 mil ion to buy land and establish its operations. Cur ently, the firm has 540,000 shares of stock outstanding at a market price per share of $34.80. If the firm decides to raise the ne ded capital through a rights of ering, one right wil be is ued for each share of stock. The subscription price wil be set at $33 a share. How many rights wil a shareholder ne d to purchase one new share of stock in this of ering? A. 2.07 rights B. 2.17 rights C. 2.22 rights D. 2.50 rights E. 2.67 rights Homemade leverage is: A. the incur ence of debt by a corporation in order to pay dividends to shareholders. B. the exclusive use of debt to fund a corporate expansion project. C. the bor owing or lending of money by individual shareholders as a means of adjusting their level of financial leverage. D. best defined as an increase in a firm's debt-equity ratio. E. the term used to describe the capital structure of a levered firm A firm should select the capital structure that: A. produces the highest cost of capital. B. maximizes the value of the firm. C. minimizes taxes. D. is ful y unlevered. E. equates the value of debt with the value of equity The value of a firm is maximized when the: A. cost of equity is maximized. B. tax rate is zero. C. levered cost of capital is maximized. D. weighted average cost of capital is minimized. E. debt-equity ratio is minimized Which one of the fol owing makes the capital structure of a firm ir elevant? A. taxes B. interest tax shield C. 100 percent dividend payout ratio D. debt-equity ratio that is greater than 0 but les than 1 E. homemade leverage M&M Proposition I with taxes is based on the concept that: A. the optimal capital structure is the one that is total y financed with equity. B. the capital structure of a firm does not mat er because investors can use homemade leverage. C. a firm's WACC is unaf ected by a change in the firm's capital structure. D. the value of a firm increases as the firm's debt increases because of the interest tax shield. E. the cost of equity increases as the debt-equity ratio of a firm increases. Gre n Roof Motels has more cash on hand than its operations require. Thus, the firm has decided to pay out some of its earnings in the form of cash to its shareholders. What are these payments to shareholders cal ed? A. dividends B. stock payments C. repurchases D. payments-in-kind E. stock splits The board of directors of Wilson Sporting Equipment met this afternoon and pas ed a resolution to pay a cash dividend of $0.42 a share next month. In relation to this dividend, today is refer ed to as which one of the fol owing dates? A. decision date B. date-of-record C. declaration date D. payment date E. ex-dividend date The common stock of Pierson Enterprises has historical y had a high dividend yield and is expected to continue to do so. As a result, the majority of its shareholders are individuals and entities that are se king a regular source of cash income. Most of these shareholders pay either no taxes or a relatively low amount of taxes. The fact that most of these shareholders have similar characteristics is refer ed to by which one of the fol owing terms? A. information content ef ect B. clientele ef ect C. ef icient markets hypothesis D. distribution ef ect E. market reaction ef ect Bel Weather Markets has recently sold for as lit le as $8 a share and as much as $15 a share. The dif erence betwe n these two prices is refer ed to as the: A. price variance. B. bid-ask spread. C. trading range. D. opening price. E. closing price. Which one of the fol owing does not af ect the total equity of a firm but does increase the number of shares outstanding? A. special dividend B. stock split C. share sale D. rights of er E. liquidating dividend Sligo Minerals stock is cur ently trading at $6 a share. The firm believes its primary clientele can af ord to spend betwe n $1,500 and $2,000 to purchase a round lot of 100 shares. The firm should consider a: A. reverse stock split. B. liquidating dividend. C. stock dividend. D. stock split. E. special dividend. On July 7, you purchased 500 shares of Wagone r, Inc. stock for $21 a share. On August 1, you sold 200 shares of this stock for $28 a share. You sold an additional 100 shares on August 17 at a price of $25 a share. The company declared a $0.95 per share dividend on August 4 to holders of record as of Wednesday, August 15. This dividend is payable on September 1. How much dividend income wil you receive on September 1 as a result of your ownership of Wagone r stock? A. $0 B. $190 C. $285 D. $360 E. $475 The _____ tel s us that the expected return on a risky as et depends only on that as et's nondiversifiable risk. A. ef icient markets hypothesis B. systematic risk principle C. open markets theorem D. law of one price Which one of the fol owing is a positively sloped linear function that is created when expected returns are graphed against security betas? A. reward-to-risk matrix B. portfolio weight graph C. normal distribution D. security market line E. market real returns The expected return on a stock given various states of the economy is equal to the: A. highest expected return given any economic state. B. arithmetic average of the returns for each economic state. C. summation of the individual expected rates of return. D. weighted average of the returns for each economic state. E. return for the economic state with the highest probability of oc ur ence. The expected risk premium on a stock is equal to the expected return on the stock minus the: A. expected market rate of return. B. risk-fre rate. C. inflation rate. D. standard deviation. E. variance. What is the expected return on a portfolio that is equal y weighted betwe n stocks K and L given the fol owing information? A. 11.13 percent B. 11.86 percent C. 12.25 percent D. 13.32 percent E. 14.40 percent You would like to combine a risky stock with a beta of 1.68 with U.S. Treasury bil s in such a way that the risk level of the portfolio is equivalent to the risk level of the overal market. What percentage of the portfolio should be invested in the risky stock? A. 32 percent B. 40 percent C. 54 percent D. 60 percent E. 68 percent The average of a firm's cost of equity and aftertax cost of debt that is weighted based on the firm's capital structure is cal ed the: A. reward to risk ratio. B. weighted capital gains rate. C. structured cost of capital. D. subjective cost of capital. E. weighted average cost of capital When a manager develops a cost of capital for a specific project based on the cost of capital for another firm which has a similar line of busines as the project, the manager is utilizing the _____ approach. A. subjective risk B. pure play C. capital adjustment D. security market line The cost of prefer ed stock is computed the same as the: A. pre-tax cost of debt. B. return on an an uity. C. aftertax cost of debt. D. return on a perpetuity. E. cost of an ir egular growth common stock. The weighted average cost of capital for a firm is the: A. discount rate which the firm should ap ly to al of the projects it undertakes. B. rate of return a firm must earn on its existing as ets to maintain the cur ent value of its stock. C. coupon rate the firm should expect to pay on its next bond is ue. D. minimum discount rate the firm should require on any new project. E. rate of return shareholders should expect to earn on their investment in this firm Henes ey Markets has a growth rate of 4.8 percent and is equal y as risky as the market. The stock is cur ently sel ing for $17 a share. The overal stock market has a 10.6 percent rate of return and a risk premium of 8.7 percent. What is the expected rate of return on this stock? A. 8.7 percent B. 9.2 percent C. 10.6 percent D. 11.3 percent E. 11.7 percent
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EXAM 3
BA 3341-4- Spring 2010 1 E 2 D Name: _________________ The principle of diversification tells us that:
A. concentrating an investment in two or three large stocks will eliminate all of the...

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