The Kumar Corp. is planning on using bonds that
pay no interest but can be converted into $4,000 at maturity, 8 years from
their purchase. To price these bonds competitively with other bonds of equal
risk, it is determined that they should yield 7%, compound. At what price
should they Kumar sell the bond?
Mr Bill S Preston Esq purchased a new house from
$110,000. He paid $20,000 down and agreed to pay the rest over the next 20
years in 20 equal end of the year payments plus 8% compound interest on the
unpaid balance. What will equal payments be?
Levine Manufacturing is considering several
investments. The rate on treasury bills is currently 8% and the expected return
for the market is 13%. What should be required rate of return for each
investment (using the Capm)
a. Required rate of return for
security A is __%
b. Required rate of return for
security B is __%
c. Required rate of return for
security C is __%
d. Required rate of return for
security D is __%
4. The market price is $1,150 for a 14 year bond ($1,000 per
value) that pays 8% interest (4%semiannually). What is the bond’s expect rate
of return? Expect annual rate of return is____%
5. Shelly inc. bonds have a coupon rate of 11%. The interest
paid semiannually, and the bonds nature in 8 years. Their par value is $1,000.
If your required rate of return is 12%, what is the value of the bond? What is
the value if the interest is paid annually?
the interest is paid semiannually, the value of the bond is $____
the interest is paid annually, the value of the bond is $_____
6. You are planning to purchase 200 shares of preferred
stock and must choose between stock A and B.
Stock A pays an annual dividend of $3.75 and is currently selling for
$38. Stock B pays an annual dividend of $3.55 and is selling for $40. If your
required return is 9.38% which should you choose?
a. What is the expected return on stock A?
b. What is the expect return on stock B?
c. If your required return is 9.38% you should
choose ( none; Stock A; Stock B)
7. Dalton Inc. has a return of 12.1% and retains 52% for
reinvestments purposes. It recently paid a dividend of $3.75 and the stock is
currently selling for $38.
is the growth rate for Dalton?____%
expected return for Dalton stock?____%
c. If you required a 13% return should you
invest in the firm? Yes/No
8. You intend to purchase Margio common stock at$1.00 per
share, hold it one year and then resell it after a dividend of $5.50 is paid.
How much will the stock price have appreciate for you to satisfy your required
rate of return of 15%??
stock appreciate ___%
9. Which of the following forms of business organizations
limits liability of owners?
10. The recent finical crisis was exacerbated by?
a. a lack if finical leverage that made US firms
less competitive in world markets
extremely high interest rate in the US that stifled investments
managers who underestimated the real risk of their decisions and borrowed
managers who overestimated risk and hence
did not invest sufficient funds
11. Sandersen Inc. sells minicomputers. During the past
year, the company sales were $3.00 million. The cost of its merchandise sold
came to $2.00milion and cash operating expense were $400,000, depreciation
expense was $100,000 and the firm paid
$150,000 in interest on its bank loans. Also, the corporation paid $25,000 in
the form of dividends to its common stockholders. Calculate the corporations
tax liability by using the corporate tax rate structures..
corporation tax liability is $____
12.Rogue Industries reported the following items for the
current year, Sales=$3,000,000; Cost of Goods=$1,500,000; Deprecation expense=
$170,000; administrative expense= $150,000; interest expense=$30,000; Marketing
expense=$80,000; taxes=$300,000. Rogue gross profit Is equal to
13.Use the following
info to calculate the company’s accounting net income for the year.
expense on credit=$20,000
operating expense= $700,000
receivable (beg year) =$50,000
receivable (end of year)= $80,000
payable (beg of year) =$50,000
payable(end of year) = $100,000
Is it? A. $300,00
14. A corporation has annual sales of $18 million total
assets of $4million, a depreciation expense $200,000 and a tax rate of 40% .
The corporation’s total stockholders’ equity is equal to
15. Generally accepted accounting principle (GAAP) requires
finance statements prepared on cash basis because these statements are most
useful for investors and managers. True or false
16. Financial ratios are used by managers inside the company
and by lenders, credit-rating agencies and investors outside of the company.
True or false
17. Benkart Corp. has sales of $5,000,000, net income
$800,000, total assets of $2,00,000 and 100,000 shares of common stock
outstanding. If Benkraft P/E ratio is 12, what is the company’s current stock
18. Given an account turnover of 10 and annual credit sales
of $900,000, the average collection period is:
19. RBW Corp. has
cash of $48,000, short-term note payables of $35,000, accounts receivable of
$100,000, accounts payable of $120,000, inventories of $200,000, and accruals
of $90,000. What is RWB’s current ratio?
20. The present value of $1,000 to be received in 5 years
is_____ if the discount rate is 12.78%.
21. You have been depositing money at the end of each year
into an account drawing 8% interest.
What is the balance in the account at the end of year four if you
deposited the following amounts:
22. Last National Bank is offering you a loan at 10% ,
payments on the loan are made monthly. Credit union is offering you a loan
where payments are to be made semi-annually the rate of 10%. Local Bank down
the street is offering a loan at 10% where payments are made quarterly. Which loan has the lowest annual cost?
23. You are ready to retire. A glance at your 401k statement
indicates that you have $750,000. If the funds remain in an account earning 9%
how much could you withdraw at the begging of each year for the next 25 years?
24. How can investors reduce the risk associated with an
investment portfolio without having to accept a lower expected return?
until the stock market rises
purchase stocks that have exceptionally high standard deviations
the amount of money in the portfolio
Purchase of a variety of securities i.e. diversify
25. An example of a Eurobond is a bond issued an Asia by a US Corporation with interest and
principle payments made in US dollar? True or False
26. If market interest rates rise
long-term bonds will rise in value more than short term bonds
b. short term bonds will rise in value more than
long term bonds
short term bonds will decline in value more than long term bonds
term bonds will decline in value more than short term bonds
27. Preferred stock is similar to a bond in the following
stock always contains a maturity date
contain a growth factor similar to common stock
provide interest payments
investments provide a stated income stream
28. Lithium Lakes
Industries preferred stock has a par value of $100 and pays a dividend of $6.00
per share. It presently sells for $87 per share. What do investors require as a
rate of return on this stock? Round off to the nearest .10%
29. What provision entitles the common shareholder to
maintain a proportionate share of ownership in a firm?
a. the proportionality
b. the convertible
d. the preemptive
30. DYI construction
Co. is considering a new inventory system that will cost $750,000. The system it expected to generate positive cash
flows over the next four years in the amounts of $350,000 in one year, $325,000
in year two, $150,000 in year three, $180,000 in year four. DYI’s required rate
of return is 8%. What is the payback period of this project?
31. Your firm is considering an investment that will cost
$920,000 TODAY. The investment will produce cash flow of $450,000 in year 1,
$270,000 in years 2 through 4, and $200,000 in year 5. The discount rate that
your firm uses for projects of this type is 11.25%. What is the investment’s
net present value?
32. All of the
following are criticisms of the payback period criterion except:
deals with accounting profits as opposed to cash flow
value money is not accounted for
flows occurring after the payback are ignored
of the above, they are all criticisms of the payback period criteria
33. Stock W has the following returns for various state of
of Economy Probability Stock W’s Return
Stock W’s standard deviation of returns is
34. Of the following different types of securities which is
typically considered most risky?
common stocks of small companies
term government bonds
common stocks if large companies
term corporate bonds
35. Stock A has the following returns for various states of
The Economy Probability Stock A’s Return
Recession 10% -30%
Average 20% -2%
Average 40% 10%
Average 20% 18%
Boom 10% 40%
expected return is: