Q&A Hero

Q: Linke Motors has a beta of 1.30, the T-bill rate is 3.00%, and the T-bond rate is 6.5%. The annual return on the stock market during the past 3 years was 15.00%, but investors expect the annual future stock market return to be 10.75%. Based on the SML, what is the firm's required return? Do not round your intermediate calculations. a. 12.03% b. 9.86% c. 14.43% d. 14.79% e. 14.31%

Q: Kollo Enterprises has a beta of 1.02, the real risk-free rate is 2.00%, investors expect a 3.00% future inflation rate, and the market risk premium is 4.70%. What is Kollo's required rate of return? Do not round your intermediate calculations. a. 9.11% b. 12.24% c. 8.91% d. 9.40% e. 9.79%

Q: Stock A's stock has a beta of 1.30, and its required return is 15.25%. Stock B's beta is 0.80. If the risk-free rate is 2.75%, what is the required rate of return on B's stock? (Hint: First find the market risk premium.) Do not round your intermediate calculations. a. 12.22% b. 10.44% c. 9.40% d. 11.38% e. 10.76%

Q: Company A has a beta of 0.70, while Company B's beta is 1.00. The required return on the stock market is 9.00%, and the risk-free rate is 2.25%. What is the difference between A's and B's required rates of return? (Hint: First find the market risk premium, then find the required returns on the stocks.) Do not round your intermediate calculations. a. 2.03% b. 2.13% c. 1.66% d. 1.64% e. 1.52%

Q: Mikkelson Corporation's stock had a required return of 12.00% last year, when the risk-free rate was 3% and the market risk premium was 4.75%. Then an increase in investor risk aversion caused the market risk premium to rise by 2%. The risk-free rate and the firm's beta remain unchanged. What is the company's new required rate of return? (Hint: First calculate the beta, then find the required return.) Do not round your intermediate calculations. a. 13.42% b. 15.79% c. 18.32% d. 16.26% e. 15.63%

Q: You hold a diversified $100,000 portfolio consisting of 20 stocks with $5,000 invested in each. The portfolio's beta is 1.12. You plan to sell a stock with b = 0.90 and use the proceeds to buy a new stock with b = 2.50. What will the portfolio's new beta be? Do not round your intermediate calculations. a. 1.032 b. 1.260 c. 1.476 d. 1.200 e. 1.236

Q: Tom Noel holds the following portfolio: Stock Investment Beta A $150,000 1.40 B $50,000 0.80 C $100,000 1.00 D $75,000 1.20 Total $375,000 Tom plans to sell Stock A and replace it with Stock E, which has a beta of 0.83. By how much will the portfolio beta change? Do not round your intermediate calculations. a. 0.228 b. 0.219 c. 0.251 d. 0.205 e. 0.280

Q: Mike Flannery holds the following portfolio: Stock Investment Beta A $150,000 1.40 B $60,000 0.80 C $90,000 1.00 D $75,000 1.20 Total $375,000 What is the portfolio's beta? Do not round your intermediate calculations. a. 1.17 b. 0.91 c. 1.27 d. 1.32 e. 1.09

Q: Jill Angel holds a $200,000 portfolio consisting of the following stocks. The portfolio's beta is 0.88. Stock Investment Beta A $50,000 0.50 B $50,000 0.80 C $50,000 1.00 D $50,000 1.20 Total $200,000 If Jill replaces Stock A with another stock, E, which has a beta of 1.30, what will the portfolio's new beta be? Do not round your intermediate calculations. a. 1.40 b. 0.97 c. 0.91 d. 1.24 e. 1.08

Q: Jim Angel holds a $200,000 portfolio consisting of the following stocks: Stock Investment Beta A $50,000 1.70 B $50,000 0.80 C $50,000 1.00 D $50,000 1.20 Total $200,000 What is the portfolio's beta? Do not round your intermediate calculations. a. 1.246 b. 1.434 c. 0.999 d. 1.210 e. 1.175

Q: 36 5.00% 7.80% 0.6084 0.219024 Expected return = 12.80% 0.451600 = Expected variance

Q: Stock A has a beta of 1.2 and a standard deviation of 25%. Stock B has a beta of 1.4 and a standard deviation of 20%. Portfolio AB was created by investing in a combination of Stocks A and B. Portfolio AB has a beta of 1.25 and a standard deviation of 18%. Which of the following statements is CORRECT? a. Stock A has more market risk than Portfolio AB. b. Stock A has more market risk than Stock B but less stand-alone risk. c. Portfolio AB has more money invested in Stock A than in Stock B. d. Portfolio AB has the same amount of money invested in each of the two stocks. e. Portfolio AB has more money invested in Stock B than in Stock A.

Q: Moon Software Inc. is planning to issue two types of 25-year, noncallable bonds to raise a total of $6 million, $3 million from each type of bond. First, 3,000 bonds with a 10% semiannual coupon will be sold at their $1,000 par value to raise $3,000,000. These are called "par" bonds. Second, Original Issue Discount (OID) bonds, also with a 25-year maturity and a $1,000 par value, will be sold, but these bonds will have a semiannual coupon of only 6.75%. The OID bonds must be offered at below par in order to provide investors with the same effective yield as the par bonds. How many OID bonds must the firm issue to raise $3,000,000? Disregard flotation costs, and round your final answer up to a whole number of bonds. a. 3,669 b. 3,327 c. 3,925 d. 4,821 e. 4,266

Q: O'Brien Ltd.'s outstanding bonds have a $1,000 par value, and they mature in 25 years. Their nominal annual, not semiannual yield to maturity is 9.25%, they pay interest semiannually, and they sell at a price of $700. What is the bond's nominal coupon interest rate? a. 4.86% b. 7.01% c. 6.15% d. 5.72% e. 6.58%

Q: In order to accurately assess the capital structure of a firm, it is necessary to convert its balance sheet figures from historical book values to market values. KJM Corporation's balance sheet (book values) as of today is as follows: Long-term debt (bonds, at par) $23,500,000 Preferred stock 2,000,000 Common stock ($10 par) 10,000,000 Retained earnings 4,000,000 Total debt and equity $39,500,000 u200b The bonds have a 8.4% coupon rate, payable semiannually, and a par value of $1,000. They mature exactly 10 years from today. The yield to maturity is 11%, so the bonds now sell below par. What is the current market value of the firm's debt? a. $19,849,158 b. $21,238,599 c. $15,085,360 d. $18,459,717 e. $22,231,057

Q: Moerdyk Corporation's bonds have a 15-year maturity, a 7.25% semiannual coupon, and a par value of $1,000. The going interest rate (rd) is 5.30%, based on semiannual compounding. What is the bonds price? a. $1,200.05 b. $1,164.05 c. $948.04 d. $1,224.05 e. $1,500.06

Q: Taussig Corp.'s bonds currently sell for $1,150. They have a 6.35% annual coupon rate and a 20-year maturity, but they can be called in 5 years at $1,067.50. Assume that no costs other than the call premium would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future. Under these conditions, what rate of return should an investor expect to earn if he or she purchases these bonds? a. 3.40% b. 4.20% c. 3.99% d. 3.57% e. 5.04%

Q: Assume that you are considering the purchase of a 20-year, noncallable bond with an annual coupon rate of 9.5%. The bond has a face value of $1,000, and it makes semiannual interest payments. If you require an 9.5% nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond? a. $1,140.00 b. $1,010.00 c. $1,000.00 d. $1,220.00 e. $980.00

Q: The real risk-free rate is 3.05%, inflation is expected to be 5.95% this year, and the maturity risk premium is zero. Ignoring any cross-product terms, i.e., if averaging is required, use the arithmetic average, what is the equilibrium rate of return on a 1-year Treasury bond? a. 8.37% b. 9.00% c. 8.82% d. 10.80% e. 9.09%

Q: Suppose Randy Jones plans to invest $1,000. He can earn an effective annual rate of 5% on Security A, while Security B has an effective annual rate of 12%. After 11 years, the compounded value of Security B should be somewhat less than twice the compounded value of Security A. (Ignore risk, and assume that compounding occurs annually.) a. True b. False

Q: Suppose Sally Smith plans to invest $1,000. She can earn an effective annual rate of 5% on Security A, while Security B has an effective annual rate of 12%. After 11 years, the compounded value of Security B should be more than twice the compounded value of Security A. (Ignore risk, and assume that compounding occurs annually.) a. True b. False

Q: Walter Industries current ratio is 0.5. Considered alone, which of the following actions would increase the companys current ratio? a. Borrow using short-term notes payable and use the cash to increase inventories. b. Use cash to reduce accruals. c. Use cash to reduce accounts payable. d. Use cash to reduce short-term notes payable. e. Use cash to reduce long-term bonds outstanding.

Q: Even though Firm A's current ratio exceeds that of Firm B, Firm B's quick ratio might exceed that of A. However, if A's quick ratio exceeds B's, then we can be certain that A's current ratio is also larger than B's. a. True b. False

Q: Arvo Corporation is trying to choose between three alternative investments. The three securities that the company is considering are as follows: u2219 Tax-free municipal bonds with a return of 8.80%. u2219 Wooli Corporation bonds with a return of 11.70%. u2219 CFI Corp. preferred stock with a return of 9.80%. u200b The companys tax rate is 25.00%. What is the after-tax return on the best investment alternative? Assume a 50.00% dividend exclusion for tax on dividends. (Round your final answer to 3 decimal places.) a. 8.800% b. 10.296% c. 9.944% d. 7.128% e. 8.888%

Q: West Corporation has $50,000 that it plans to invest in marketable securities. The corporation is choosing between the following three equally risky securities: Alachua County tax-free municipal bonds yielding 8.50%; Exxon Mobil bonds yielding 10.50%; and GM preferred stock with a dividend yield of 9.80%. Wests corporate tax rate is 25.00%. What is the after-tax return on the best investment alternative? Assume a 70.00% dividend exclusion for tax on dividends. (Assume the company chooses on the basis of after-tax returns. Round your final answer to 3 decimal places.) a. 7.252% b. 8.159% c. 7.705% d. 8.575% e. 8.249%

Q: Mantle Corporation is considering two equally risky investments: u2219 A $5,000 investment in preferred stock that yields 7.15%. u2219 A $5,000 investment in a corporate bond that yields 10.00%. What is the breakeven corporate tax rate that makes the company indifferent between the two investments? Assume a 50.00% dividend exclusion for tax on dividends. (Do not round your intermediate answer and round your final answer to two decimal places.) a. 39.48% b. 43.47% c. 42.58% d. 44.36% e. 33.27%

Q: Solarcell Corporation has $20,000 that it plans to invest in marketable securities. It is choosing between AT&T bonds that yield 11.50%, State of Florida municipal bonds that yield 11.00%, and AT&T preferred stock with a dividend yield of 9.00%. Solarcells corporate tax rate is 25%, and 70.00% of the preferred stock dividends it receives are tax exempt. Assuming that the investments are equally risky and that Solarcell chooses strictly on the basis of after-tax returns, which security should be selected? Answer by giving the after-tax rate of return on the highest yielding security. a. 8.63% b. 9.32% c. 10.52% d. 7.33% e. 9.23%

Q: Allen Corporation can (1) build a new plant that should generate a before-tax return of 10.00%, or (2) invest the same funds in the preferred stock of Florida Power & Light (FPL), which should provide Allen with a before-tax return of 9.00%, all in the form of dividends. Assume that Allens marginal tax rate is 25.00%, and that 50.00% of dividends received are excluded from taxable income. If the plant project is divisible into small increments, and if the two investments are equally risky, what combination of these two possibilities will maximize Allens effective return on the money invested? (Round your final answer to two decimal places.) a. All in FPL preferred stock. b. 60% in FPL; 40% in the project. c. All in the plant project. d. 60% in the project; 40% in FPL. e. 50% in each.

Q: For 2019, Bargain Basement Stores reported $11,500 of sales and $5,000 of operating costs (including depreciation). The company has $20,500 of total invested capital, the weighted average cost of that capital (the WACC) was 11%, and the federal-plus-state income tax rate was 25%. What was the firm's Economic Value Added (EVA), i.e., how much value did management add to stockholders' wealth during 2019? a. $1,727 b. $1,398 c. $3,256 d. $2,101 e. $2,620

Q: Watson Oil recently reported (in millions) $8,250 of sales, $5,750 of operating costs other than depreciation, and $850 of depreciation. The company had $3,200 of outstanding bonds that carry a 5% interest rate, and its federal-plus-state income tax rate was 25%. In order to sustain its operations and thus generate future sales and cash flows, the firm was required to make $1,250 of capital expenditures on new fixed assets and to invest $300 in net operating working capital. By how much did the firm's net income exceed its free cash flow? Do not round the intermediate calculations. a. $656 b. $745 c. $887 d. $834 e. $685

Q: Carter Corporation has some money to invest, and its treasurer is choosing between City of Chicago municipal bonds and U.S. Treasury bonds. Both have the same maturity, and they are equally risky and liquid. If Treasury bonds yield 6.00%, and Carters marginal income tax rate is 25.00%, what yield on the Chicago municipal bonds would make Carters treasurer indifferent between the two? a. 3.56% b. 3.69% c. 4.50% d. 5.45% e. 4.55%

Q: Your corporation has the following cash flows: Operating income $250,000 Interest received $10,000 Interest paid $45,000 Dividends received $22,000 Dividends paid $50,000 u200b If the applicable income tax rate is 25% (federal and state combined), and if 50% of dividends received are exempt from taxes, what is the corporation's tax liability? a. 106,368 b. $56,500 c. $84,208 d. $100,163 e. $105,482

Q: Casey Motors recently reported the following information: u2219 Net income = $475,000. u2219 Tax rate = 25%. u2219 Interest expense = $200,000. u2219 Total invested capital employed = $9 million. u2219 After-tax cost of capital = 10%. What is the companys EVA? a. -$277,750 b. -$209,000 c. -$291,500 d. -$275,000 e. -$305,250

Q: Scranton Shipyards has $8.5 million in total invested operating capital, and its WACC is 10%. Scranton has the following income statement: Sales $10.0 million Operating costs 6.0 million Operating income (EBIT) $ 4.0 million Interest expense 2.0 million Earnings before taxes (EBT) $ 2.0 million Taxes (25%) 0.5 million Net income $ 1.5 million What is Scrantons EVA? Answer options are provided in whole dollar. a. $1,937,500 b. $1,860,000 c. $2,150,000 d. $1,472,500 e. $2,956,500

Q: Byrd Lumber has 2 million shares of common stock outstanding that sell for $17 a share. If the company has $25 million of common equity on its balance sheet, what is the companys Market Value Added (MVA)? Answer options are provided in whole dollar. a. $9,000,000 b. $11,250,000 c. $7,200,000 d. $8,100,000 e. $10,800,000

Q: Hayes Corporation has $300 million of common equity, with 6 million shares of common stock outstanding. If Hayes Market Value Added (MVA) is $126 million, what is the companys stock price? (Round your final answer to two decimal places.) a. $71.00 b. $65.32 c. $66.74 d. $60.35 e. $80.23

Q: Houston Pumps recently reported $172,500 of sales, $140,500 of operating costs other than depreciation, and $9,250 of depreciation. The company had $35,250 of outstanding bonds that carry a 6.75% interest rate, and its federal-plus-state income tax rate was 25%. In order to sustain its operations and thus generate future sales and cash flows, the firm was required to spend $15,250 to buy new fixed assets and to invest $6,850 in net operating working capital. What was the firm's free cash flow? a. $4,213 b. $1,860 c. $5,354 d. $2,286 e. $1,978

Q: Shrives Publishing recently reported $11,500 of sales, $5,500 of operating costs other than depreciation, and $1,250 of depreciation. The company had $3,500 of bonds that carry a 6.25% interest rate, and its federal-plus-state income tax rate was 25%. During the year, the firm had expenditures on fixed assets and net operating working capital that totaled $1,550. These expenditures were necessary for it to sustain operations and generate future sales and cash flows. What was its free cash flow? (Round your intermediate and final answers to whole dollar amount.) a. $3,457 b. $2,593 c. $2,955 d. $3,263 e. $3,039

Q: Hartzell Inc. had the following data for 2018, in millions: Net income = $600; after-tax operating income [EBIT (1-T)] = $700; and Total assets = $2,000. Information for 2019is as follows: Net income = $825; after-tax operating income [EBIT (1-T)] = $1,450; and Total assets = $2,500. Assume the firm had no excess cash. How much free cash flow did the firm generate during 2019? a. $1159 b. $1,131 c. $884 d. $1,150 e. $950

Q: Wu Systems has the following balance sheet. Assume that all current assets are used in operations. How much net operating working capital does the firm have? Cash $ 100 Accounts payable $ 200 Accounts receivable 650 Accruals 155 Inventory 550 Notes payable 545 Current assets $ 1,300 Current liabilities $ 900 Net fixed assets $ 1,000 Long-term debt 600 Common equity 300 Retained earnings 500 Total assets $ 2,300 Total liab. & equity $ 2,300 u200b a. $945 b. $860 c. $983 d. $1,021 e. $1,143

Q: Over the years, O'Brien Corporation's stockholders have provided $20,000,000 of capital, when they purchased new issues of stock and allowed management to retain some of the firm's earnings. The firm now has 1,000,000 shares of common stock outstanding, and it sells at a price of $41.00 per share. How much value has O'Brien's management added to stockholder wealth over the years, i.e., what is O'Brien's MVA? a. $23,100,000 b. $19,950,000 c. $22,050,000 d. $24,150,000 e. $21,000,000

Q: Vasudevan Inc. recently reported operating income of $2.3 million, depreciation of $1.20 million, and had a tax rate of 25%. The firm's expenditures on fixed assets and net operating working capital totaled $0.60 million. How much was its free cash flow, in millions? a. $2.22 b. $2.06 c. $2.325 d. $2.44 e. $1.96

Q: Prezas Company's balance sheet showed total current assets of $3,500, all of which were required in operations. Its current liabilities consisted of $975 of accounts payable, $600 of 6% short-term notes payable to the bank, and $250 of accrued wages and taxes. What was its net operating working capital? a. $2,230 b. $2,207 c. $1,957 d. $2,639 e. $2,275

Q: The basic concept behind the economic value added (EVA) valuation method is that the firm's value is dependent on how well it can cover the costs of its existing capital. a. True b. False

Q: Using the dividend discount model (DDM) to value common stock is relatively easy because it entails simply computing the present value of the future cash flows, or dividends, generated by the firm. a. True b. False

Q: The dividend discount model (DDM) cannot be used to value the stock of a company that has never paid a dividend and does not expect to pay a dividend in the near term. a. True b. False

Q: If an investor wishes to better diversify her investment portfolio, which consists of the common stocks of many of the firms that are in the Dow Jones Industrial Average, she probably should invest in some companies that are in those industries that are classified as cyclical. a. True b. False

Q: If an investor wishes to better diversify her investment portfolio, which consists of the common stocks of many of the firms that are in the Dow Jones Industrial Average, she probably should invest in some companies that are in those industries that are classified as countercyclical, or defensive. a. True b. False

Q: Most investors would be wise to purchase the common stock of companies that are in the introductory stage of their industry life cycle because it is in this stage that firms offer high, safe returns to investors. a. True b. False

Q: The monetary policy of the United States relates to changes in the money supply, which are affected primarily by the ability of the U.S. Treasury to print and distribute currency. a. True b. False

Q: Technical analysts probably would agree that fundamental analysts can find the intrinsic value of a firm, but, by the time fundamentalists finish their analysis, it is too late to take advantage of the result. a. True b. False

Q: A mispriced stock exists when the market value and intrinsic value are not the same. a. True b. False

Q: If security markets were truly strong-form efficient, then there would be no need for investors to evaluate the value of stocks because they could never earn abnormal returns. a. True b. False

Q: If security markets were truly strong-form efficient, you would never be able to realize a rate of return on a security greater than the marginal investor's expected (or required) rate of return. a. True b. False

Q: Investments professionals agree that individuals should be disciplined with their investment strategy. Their advice would be: "don't change approaches just because results aren't immediate." a. True b. False

Q: The economic value added (EVA) valuation method might be the most attractive valuation method because it does not require estimation of unknown factors and it ties the value creation process to changes in a firm's capital structure and changes in a firm's efficiency. a. True b. False

Q: Investors who search for "value" stocks are trying to find stocks that are mispriced in the markets. a. True b. False

Q: Market breadth indicators used by technical analysts provide a good indication of the "mood," or psychology, of the market. a. True b. False

Q: Technical analysts essentially believe "history repeats itself" because investors behave in a predictable manner when faced with situations they have faced in the past. a. True b. False

Q: Because financial statement analysis is based on examination of accounting statements, which often do not represent economic earnings, they should not be included in investment analysis. a. True b. False

Q: From an investor's standpoint, the purpose of financial statement analysis is to determine the attractiveness of an investment by identifying the strengths and weaknesses of the firm and projecting how the firm will do in the future. a. True b. False

Q: According to the economic value added (EVA) method, a firm should be considered attractive only if it can generate sufficient income to pay for its existing capital. a. True b. False

Q: An investor who uses the P/E ratio approach to value a firm's common stock would simply multiply the most recently reported earnings per share (EPS) by the current dividend per share to determine the value. a. True b. False

Q: The dividend discount model (DDM) can only be used to value a company's stock if it is expected that the company will pay a dividend that grows at a constant rate in the future. a. True b. False

Q: Industries that are comprised of companies that tend to be directly related to business cycles are generally referred to as cyclical industries. a. True b. False

Q: Industries comprised of companies that tend to be directly related to business cycles are generally referred to as defensive industries. a. True b. False

Q: Even though industries might be at different stages in their industry life cycle and the progress of their paces vary, all industries will eventually reach the mature stage. a. True b. False

Q: The industry life cycle follows various stages of growth with respect to the product of competitive conditions within the industry. a. True b. False

Q: Individuals who prefer investments that offer current income (i.e., dividends) probably should purchase stocks that are in the mature stage of their industry life cycle. Such investors most likely would avoid companies that are in the introductory stage of their life cycle. a. True b. False

Q: Industries generally go through life cycles similar to the human life cycleu23afin the first years of an industry's life growth is substantial, yet operations are somewhat unstable, while in its later years, the industry has attained greater stability, but growth slows and perhaps even declines. a. True b. False

Q: Fiscal policy refers to government spending, which is supported by the government's ability to tax businesses and individuals. a. True b. False

Q: The fiscal policy of the United States is formulated and carried out by the Federal Reserve. a. True b. False

Q: The fiscal policy of the United States is dominated by deficit spending, which means the government spends more than it collects in taxes. a. True b. False

Q: When there is deficit spending in the United States, the amount of goods and services that is imported exceed the amount that is exported. a. True b. False

Q: Generally, composite indexes rather than individual indexes are used to indicate the general movement of the economy because combinations of multiple measures provide better gauges of the general pattern than individual measures that contain spurious movements that are difficult to interpret. a. True b. False

Q: When the economy is in a recession, the Federal Reserve generally attempts to increase business activity by easing credit via lower interest rates, which is accomplished by decreasing reserves (money supply). a. True b. False

Q: The monetary policy of the United States is formulated and carried out by the Federal Reserve. a. True b. False

Q: Economic measures that tend to mirror, or move concurrent with, business cycles are called coincident indicators. a. True b. False

Q: For the most part, lagging economic indicators are not very useful for investment analysis because they represent measures that tend to lag movements in the general economy. a. True b. False

Q: When economists measure the aggregate economy and say that it is either expanding or contracting, they are indicating the direction of the current business cycle. a. True b. False