FINANCE 405 - American River College. Midterm Exam. 50 MCQ + Worked Solutions.

FINANCE 405 - American River College. Midterm Exam. 50 MCQ + Worked Solutions. Midterm 1. Risk in a revenue-producing financing project can best be adjusted for by 2. A real estate investment has the following expected cash flows: $10,479 3. An analyst estimates the following return distribution for a stock: 4. Assuming error term is zero. Estimate the change in the return on the stock when the return on the S&P 500 index changes from 12% to 16%. 5. New Hampshire Services reported $2.3 million of retained earnings on its 2002 balance sheet. In 2003, the company lost money-—its net income was -$500,000 (negative $500,000). Despite the loss, the company still paid a $1.00 per share dividend. The company’s earnings per share for 2003 were -$2.50 (negative $2.50). What was the level of retained earnings on the company’s 2003 balance sheet? 6. Typically, the statement of stockholders' equity starts with retained earnings at the beginning of the year, adds net income, subtracts dividends paid, and ends up with retained earnings at the end of the year. 7. The firm has never paid a dividend to its common stockholders. Which of the following statements is CORRECT? 8. . When a loan is amortized, a relatively high percentage of the payment goes to reduce the outstanding principal in the early years, and the principal repayment's percentage declines in the loan's later years. 9. Your bank account pays a 6% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT? 10. Jose now has $500. How much would he have after 6 years if he leaves it invested at 5.5% with annual compounding? 11. How much would $5,000 due in 25 years be worth today if the discount rate were 5.5%? 12. Suppose the U.S. Treasury offers to sell you a bond for $747.25. No payments will be made until the bond matures 5 years from now, at which time it will be redeemed for $1,000. What interest rate would you earn if you bought this bond at the offer price? 13. You sold a car and accepted a note with the following cash flow stream as your payment. What was the effective price you received for the car assuming an interest rate of 6.0%? 14. At a rate of 6.5%, what is the future value of the following cash flow stream? 15. What’s the future value of $1,500 after 5 years if the appropriate interest rate is 6%, compounded semiannually? 16. Assume that you are considering the purchase of a 20-year, non-callable 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 8.4% nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond? 17. Stars Technologies is considering two potential projects, X and Y. In assessing the projects' risk, the company has estimated the beta of each project and has also conducted a simulation analysis. Which of the following statements is most correct? 18. Which of the following statements is CORRECT, other things held constant? 19. Morin Company's bonds mature in 8 years, have a par value of $1,000, and make an annual coupon interest payment of $65. The market requires an interest rate of 8.2% on these bonds. What is the bond's price? 20. ABC Inc.'s bonds currently sell for $1,180 and have a par value of $1,000. They pay a $105 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,100. What is their yield to call (YTC)? 21. Lucent Technology is considering seller-finance for an existing customer with the following information. The net income is $100MM. The depreciation cost is $15MM. What is the subject firm's cash flow from operations (CFO)? 22. What’s the yield to maturity (YTM)? 23. Briefly explain the business meaning of YTM, assuming that you are providing an investment seminar to an audience with little or no financial background. 24. Assuming that YTM is constant for the next 3 years, what will be the price three years from today? 25. Shell Corp’s 2008 sales were $12 millions ($MM). Its 2003 sales were $6MM. (3 points) At which rate have the sales been growing? 26. Suppose someone makes the following statement: “Sales doubled in 5 years. This represents a growth of 100% in 5 years; so dividing 100% by 5, we conclude the growth rate to be 20% per year”. Is this statement correct? 27. If a firm is reporting its income in accordance with generally accepted accounting principles, then its net income as reported on the income statement should be equal to its free cash flow 28. What level of sales would Swann have to obtain to generate $2,000,000 in net income? 29. A price-linked derivative security pays $300 if the oil price over the next year increases by more than 5%, an event that can happen with a 60% probability. Otherwise, it pays $50. If the expected return on the security is 15%, how much does the security cost? 29. Insight Corporation’s return on equity is 15% and its dividend payout ratio is 60%. The sustainable growth rate of the firm’s earning and dividends should be: 31. A stock has a required return of 14%, and a retention rate of 40%. The stock’s price-earnings multiple (P/E) is 14. What is the stock’s estimated growth rate? 32. Assuming the Prime rate = 8% each year. What will be the interest payment at year 2? 33. A stock has a required return of 12 percent. The beta of the stock is 1.2 and the risk-free rate is 5 percent. What is the market risk premium? 34.Using these data and CAPM, which of the following statements about stock X is true? 35. The correlation between the Freedom Equity Fund and the S&P 500 index is 1. The expected return on the S&P 500 index is 10%, and the required return on the Freedom Equity Fund is 8%. The risk free return in the U.S. is 3%. Based on this information, the implied beta of the Freedom Equity Fund is 36. Beta and standard deviation differ as risk measures in that beta measures: 37. Which of the following statements is most correct?