MBA 702 EXAM 3 QUESTIONS WITH 100%
ACCURATE SOLUTIONS /GUARANTEED
PASS
1. A firm has a debt-equity ratio of .64, a cost of equity of 13.04 percent, and a cost of
debt of 8 percent. The corporate tax rate is 35 percent. What would be the cost of
equity if the firm were all-equity financed? - ANSWER-11.56%
2. A firm has a market value equal to its book value, excess cash of $1,000, and equity
worth $17,800. The firm has 5,000 shares of stock outstanding and net income of
$31,200. What will the new earnings per share be if the firm uses its excess cash to
complete a stock repurchase? - ANSWER-$6.61
3. A firm has an equity beta of 1.2, the risk-free rate of return is 3.4 percent, the market
return is 15.7 percent, and the pretax cost of debt is 9.4 percent. The debt-equity ratio
is .47. If you apply the common beta assumptions, what is the firm's asset beta? -
ANSWER-.816
4. A payment made by the LSUS Corproation to its owners in the form of new shares of
stock is called a _____ dividend. - ANSWER-stock
5. A portfolio consists of Stocks A and B and has an expected return of 11.6 percent.
Stock A has an expected return of 17.8 percent while Stock B is expected to return 8.4
percent. What is the portfolio weight of Stock A? - ANSWER-34.04%
6. A stock had returns of 12 percent, 6 percent, 13 percent, -11 percent, and -2 percent
over the past five years. What is the geometric average return for this time period? -
ANSWER-3.19%
, 7. A stock with an actual return that lies above the security market line has: - ANSWER-
yielded a higher return than expected for the level of risk assumed.
8. A year ago, Han purchased 500 shares of LSUS Corporation's stock at a price of $49.03
per share. The stock pays an annual dividend of $.10 per share. Today, you sold all of
your shares for $58.14 per share. What is his total dollar return on this investment? -
ANSWER-$4,605
9. According to the clientele effect, firms can only boost their stock price: - ANSWER-if an
unsatisfied clientele group exists
10. According to the pecking-order theory, a firm's leverage ratio is determined by: -
ANSWER-the firm's financing needs.
11. All else held constant, which one of these is most apt to increase the WACC of a
leveraged firm? - ANSWER-a decrease in the tax rate
12. An unlevered firm has a cost of capital of 13.6 percent and earnings before interest
and taxes of $138,000. A levered firm with the same operations and assets has both a
book value and a face value of debt of $520,000 with an annual coupon of 7 percent.
The applicable tax rate is 34 percent. What is the value of the levered firm? - ANSWER-
$846,505.88
13. As we add more diverse securities to a portfolio, the ____ risk of the portfolio will
decrease while the _____ risk will not. - ANSWER-total; systematic
14. Assume a firm's debtholders are promised payments in one year of $35 if the firm
does well and $20 if the firm does poorly. There is a 50/50 chance of the firm doing
well or poorly. If bondholders are willing to pay $25.50, what is the promised return to
those bondholders? - ANSWER-7.84%
ACCURATE SOLUTIONS /GUARANTEED
PASS
1. A firm has a debt-equity ratio of .64, a cost of equity of 13.04 percent, and a cost of
debt of 8 percent. The corporate tax rate is 35 percent. What would be the cost of
equity if the firm were all-equity financed? - ANSWER-11.56%
2. A firm has a market value equal to its book value, excess cash of $1,000, and equity
worth $17,800. The firm has 5,000 shares of stock outstanding and net income of
$31,200. What will the new earnings per share be if the firm uses its excess cash to
complete a stock repurchase? - ANSWER-$6.61
3. A firm has an equity beta of 1.2, the risk-free rate of return is 3.4 percent, the market
return is 15.7 percent, and the pretax cost of debt is 9.4 percent. The debt-equity ratio
is .47. If you apply the common beta assumptions, what is the firm's asset beta? -
ANSWER-.816
4. A payment made by the LSUS Corproation to its owners in the form of new shares of
stock is called a _____ dividend. - ANSWER-stock
5. A portfolio consists of Stocks A and B and has an expected return of 11.6 percent.
Stock A has an expected return of 17.8 percent while Stock B is expected to return 8.4
percent. What is the portfolio weight of Stock A? - ANSWER-34.04%
6. A stock had returns of 12 percent, 6 percent, 13 percent, -11 percent, and -2 percent
over the past five years. What is the geometric average return for this time period? -
ANSWER-3.19%
, 7. A stock with an actual return that lies above the security market line has: - ANSWER-
yielded a higher return than expected for the level of risk assumed.
8. A year ago, Han purchased 500 shares of LSUS Corporation's stock at a price of $49.03
per share. The stock pays an annual dividend of $.10 per share. Today, you sold all of
your shares for $58.14 per share. What is his total dollar return on this investment? -
ANSWER-$4,605
9. According to the clientele effect, firms can only boost their stock price: - ANSWER-if an
unsatisfied clientele group exists
10. According to the pecking-order theory, a firm's leverage ratio is determined by: -
ANSWER-the firm's financing needs.
11. All else held constant, which one of these is most apt to increase the WACC of a
leveraged firm? - ANSWER-a decrease in the tax rate
12. An unlevered firm has a cost of capital of 13.6 percent and earnings before interest
and taxes of $138,000. A levered firm with the same operations and assets has both a
book value and a face value of debt of $520,000 with an annual coupon of 7 percent.
The applicable tax rate is 34 percent. What is the value of the levered firm? - ANSWER-
$846,505.88
13. As we add more diverse securities to a portfolio, the ____ risk of the portfolio will
decrease while the _____ risk will not. - ANSWER-total; systematic
14. Assume a firm's debtholders are promised payments in one year of $35 if the firm
does well and $20 if the firm does poorly. There is a 50/50 chance of the firm doing
well or poorly. If bondholders are willing to pay $25.50, what is the promised return to
those bondholders? - ANSWER-7.84%
