FIN 410 FINAL EXAM

1. You have a portfolio with a beta of 3.1. What will be the new portfolio beta if you keep 85 percent of your money in the old portfolio and 15 percent in a stock with a beta of 4.5?

2. PNB Industries has 20 million shares of common stock outstanding with a market price of $18.00 per share. The company also has outstanding preferred stock with a market value of 50 million, and $500,000 bonds outstanding, each with face value $1,000 and selling at 97% of par value. The cost of equity is 15%, the cost of preferred is 12% and the cost of debt is 8.50%. If PNB’s tax rate is 40%, what is the WACC?

3. A 2 – year Treasury security currently earns 5.13%. Over the next 2 years, the real interest rate is expected to be 2.15% per year and the inflation premium is expected to be 1.75% per year. Calculate the maturity risk premium on the 2 year Treasury Security.

4. Which of the following statements is correct?

5. Netflicks, Inc. has a beta of 3.61. If the market return is expected to be 13.2 percent and the risk free rate is 7%, what is Netflick’s risk premium?

6. Which of the following is incorrect?

7. Financial analysts forecast ABC Inc. growth for the future to be 12%. ABC’s recent dividend was $1.60. What is the value of ABC stock when the required return is 15%?

8. Which of the following is not correct with respect to derivative securities?

9. A firm reported a profit margin of 8.5%, total asset turnover of 0.85 times, debt to equity ratio of 0.90 times, net income of $550,000, and dividends paid to common stockholders of $100,000. The firm has no preferred stock outstanding. What is the firms internal growth rate?

10. A firm has an ROE of 14% and a debt ratio of 40%. If the total asset turnover is 3.4, what is the firm’s profit margin?

11. Consider the following bond quote, A municipal bond quoted at 101.25. If the municipal bond has a par value of $5,000, what is the price of the bond in dollars?

12. A firm has an ROA of 12% and an ROE of 52%. What is the firms equity multiplier?

13. Dividend yield is defined as

14. WC Inc. has a $10 million (face value), 10-year bond issue selling for 99 percent of par that pays an annual coupon of 9 percent. What would be WC’s before tax component cost of debt?

15. If the price of copper in Europe is €2.72 per ounce, what is the expected price of copper in the United States if the spot exchange rate is $1 = €0.8623?

16. Convert each of the following indirect quotes to dollar direct quotes:

* $1 = 3.05 Saudi Arabian Riyal

* $1 = 41.45 Phillipine Peso

* $1 = 0.52 Latvian Lat

17. Which of the following statements is correct?

18. A project has normal cash flows. Its IRR is 15% and its cost of capital is 10%. Which of the following statements is incorrect?

19. Compute the amount of each foreign currency that can be purchased for $5,000:

a. 1 Danish Krone = $0.18

b. 1 Indian Rupee = $0.15

c. 1 Israeli Shekel = $0.37

$5,000 equals:

20. Dakota Corporation 15-year bonds have an equilibrium rate of return of 9%. For all securities, the inflation risk premium is 1.95% and the real interest rate is 3.65%. The securities liquidty risk premium is 0.35% and maturity risk premium is 0.95%. The security has no special covenants. Calculate the bond’s default risk premium.

21. Universal Forests current stock price is $154.00 and it is likely to pay a $5.23 dividend next year. Since analysts estimate Universal Forest will have a 13.0% growth rate what is the required return?

22. Suppose that Hanna Nails, Inc capital structure features 45 percent equity, 55 percent debt, and that it’s before tax cost of debt is 5%, while its cost of equity is 9 percent. If the appropriate weighted average tax rate is 40 percent, What will be Hanna Nails’ WACC?

23. Ivy has preferred stock selling for 98 percent of par that pays a 7 percent annual coupon. What would Ivy’s component cost of preferred stock ?

24. What is the taxable equivalent yield on a municipal bond with a yield to maturity of 4% for an investor in the 28% tax bracket?

25. Which of the following is a poor justification for a merger?

26. A financial manager has detrermined that the appropriate rate discount for a foreign project is 17 percent. However, that discount rate applies in the United States using dollars. What discount rate should be used in the foreign country using the foreign currency? The inflation rate in the United States and in the foreign country is expected to be 3 percent and 8 percent, respectively.

27. Jane Adams invests all her money in the stock of one firm. Which of the following must be true?

28. Consider the risk return realtionship in T Bills during each decade since 1950. Given this data, which of the following statements is correct?

29. All of the following are strngths of NPV except___________________

30. ____________refers to a firm that is still allowed to continue to operate while the creditors’ claims are settled using a collective procedure.

31. Calculate the price of a 6.5% coupon bond with 17 years left to maturity and a market interest rate of 10.5% (Assume interest rates are semiannual and par value is $1,000) is this a discount or premium bond?

32. Which of the following is incorrect regarding the IRR statistic?

33. A corporation has a total asset turnover of 2 times, ROA of 12% and ROE of 14%. What is the firm’s profit margin and debt ratio?

34. A firm has a debt ratio of 45%, capital intensity ratio is 1.3 times, profit margin is 10%, and dividend payout is 30%. Calculate the sustainable growth rate for the firm.

35. Which of the following statements is correct?

36. A 7.5% coupon bond with 16 years left to maturity is offered for sale at $834.92. What yield to maturity is the bond offering? (Assume interest payments are paid semi-annually and par value is $1,000)

37. A merger between BankOne and Amcore is an example of a ______________________.

38. An 8% coupon bond with 15 years to maturity is priced to offer a 9% yield to maturity. You believe that in one year, the yield to maturity will be 6.5%. What is the change in price the bond will experience in dollars? (Assume annual interest payments and par value is $1,000)

39. CJ Co stock has a beta of 0.9, the current risk free rate is 5.6, and the expected return rate on the market is 13 percent. What is CJ Co’s cost of equity?

40. We can estimate a stock’s value by

41. Praxair’s up coming dividend is expected to be $2.25 and it’s stock is selling at $65. The firm has a beta of 0.8 and is expected to grow at 10% for the forseeable future. Compute praxair’s required return using both CAPM and the constant growth model. Assume that the market portfolio will earn 10 percent and the risk free rate is 3 percent.

42. A potential future negative impact to value and/or cash flows is often discussed in terms of probability of loss and the expected magnitude of the loss. This is called ___________________.

43. The size of the firm masured as the current stock price multilpied by the number of shares outstanding is referred to as the firms?

44. The real interest rate is ________________.

45. This should be the primary objective as a firm as it may actually be the most beneficial for society in the long run.

46. Projects A & B are mutually exclusive. Project A costs $10,000 and is expected to generate cash inflows of $4,000 for 4 years. Project B costs $10,000 and is expected to generate a single cash flow in year 4 of $20,000. The cost of capital is 12%. Which project would you accept and why?

47. An investor owns $8.000 of Adobe Systems stock, $5,000 of Dow Chemical, and $3,000 of Office Depot. What are the portfolio weights of each stock?

48. A firm is expected to pay a dividend of $2.00 next year and $3.75 the following year. Financial analysts believe the stock will be at their price target of $125.00 in two years. Compute the value of this stock with a required rate of return of 15%.

49. Rank the lowest credit risk to the highest credit risk, the following bonds, with the same time to maturity, by their yield to maturity: Treasury Bond with yield of 5.55%, IBM Bond with a yield of 7.95%, Trumop Casino bond with a yield of 9.15% and Banc Ono with a yield of 6.12%.

50. Which of the following is an example of aligning managers personal interests with those of the owners.

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FIN 410 FINAL EXAM

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FIN 410 FINAL EXAM