FINANCE EXAM 1 QUESTIONS & ANSWERS
Freedman Flowers' stock has a 50% chance of producing a 25% return, a 30% chance
of producing a 10% return, and a 20% chance of producing a −28% return. What is the
firm's expected rate of return?
E ( R ) = ∑ P i × R i - Answers :9.90%
Which of the following items is NOT included in current assets?
Cash.
-Accounts receivable.
-Bonds.
-Short-term, highly liquid, marketable securities.
-Inventory - Answers :Bonds
Martin Ortner holds a $200,000 portfolio consisting of the following stocks:
Stock A
Investment: $50,000
Beta: 0.95
Stock B
Investment: $50,000
Beta: 0.80
Stock C
Investment: $50,000
Beta: 1.00
Stock D
Investment: $50,000
Beta: 1.20
Total
Total Investment: $200,000
What is the portfolio's beta? - Answers :0.988
The cost of common equity obtained by retaining earnings is the rate of return the
marginal stockholder requires on the firm's common stock. T or F? - Answers :True
A stock with a beta equal to −1.0 has zero systematic (or market) risk. T or F? -
Answers :False
Assume that you are an intern with the Brayton Company, and you have collected the
following data: The yield on the company's outstanding bonds is 7.75%; its tax rate is
25%; the next expected dividend is $0.65 a share; the dividend is expected to grow at a
constant rate of 6.00% a year; the price of the stock is $15.00 per share; the flotation
cost for selling new shares is F = 10%; and the target capital structure is 45% debt and
55% common equity. What is the firm's WACC, assuming it must issue new stock to
finance its capital budget?
WACC=Wd⋅Rd⋅(1−T)+Wpf⋅Rpf+Ws⋅Rs
, re = D1/(P0 × (1 − F)) + g - Answers :8.56%
Pettijohn Inc.The balance sheet and income statement shown below are for Pettijohn
Inc. Note that the firm has no amortization charges, it does not lease any assets, none
of its debt must be retired during the next 5 years, and the notes payable will be rolled
over.
Refer to the data for Pettijohn Inc. What is the firm's equity multiplier?
Equity Multiplier = TA/CE
TA = $42,000
CE: $12,600 - Answers :3.33
On its 2019 balance sheet, Barngrover Books showed $510 million of retained earnings,
and exactly that same amount was shown the following year in 2020. Assuming that no
earnings restatements were issued, which of the following statements is CORRECT?
-The company must have paid no dividends in 2020.
-The company must have had zero net income in 2020.
-Dividends could have been paid in 2020, but they would have had to equal the
earnings for the year.
-If the company lost money in 2020, they must have paid dividends.
-The company must have paid out half of its earnings as dividends. - Answers
:Dividends could have been paid in 2020, but they would have had to equal the
earnings for the year.
To estimate the cash flow from operations, depreciation must be added back to net
income because it is a non-cash charge that has been deducted from revenue. T or F? -
Answers :True
To estimate the company's WACC, Marshall Inc. recently hired you as a consultant. You
have obtained the following information. (1) The firm's noncallable bonds mature in 20
years, have an 8.00% annual coupon, a par value of $1,000, and a market price of
$1,050.00. (2) The company's tax rate is 25%. (3) The risk-free rate is 4.50%, the
market risk premium is 5.50%, and the stock's beta is 1.20. (4) The target capital
structure consists of 35% debt and the balance is common equity. The firm uses the
CAPM to estimate the cost of common stock, and it does not expect to issue any new
shares. What is its WACC? - Answers :7.48%
Kenny Electric Company's noncallable bonds were issued several years ago and now
have 20 years to maturity. These bonds have a 9.25% annual coupon, paid
semiannually, sells at a price of $1,075, and has a par value of $1,000. If the firm's tax
rate is 25%, what is the component after-tax cost of debt for use in the WACC
calculation?
VB=∑INT(1+rd)t+Facevalue(1+rd)t
Note: This formula is for annual payments. If you are asked "paid semiannually", you
need to adjust appropriately! - Answers :6.35%
Freedman Flowers' stock has a 50% chance of producing a 25% return, a 30% chance
of producing a 10% return, and a 20% chance of producing a −28% return. What is the
firm's expected rate of return?
E ( R ) = ∑ P i × R i - Answers :9.90%
Which of the following items is NOT included in current assets?
Cash.
-Accounts receivable.
-Bonds.
-Short-term, highly liquid, marketable securities.
-Inventory - Answers :Bonds
Martin Ortner holds a $200,000 portfolio consisting of the following stocks:
Stock A
Investment: $50,000
Beta: 0.95
Stock B
Investment: $50,000
Beta: 0.80
Stock C
Investment: $50,000
Beta: 1.00
Stock D
Investment: $50,000
Beta: 1.20
Total
Total Investment: $200,000
What is the portfolio's beta? - Answers :0.988
The cost of common equity obtained by retaining earnings is the rate of return the
marginal stockholder requires on the firm's common stock. T or F? - Answers :True
A stock with a beta equal to −1.0 has zero systematic (or market) risk. T or F? -
Answers :False
Assume that you are an intern with the Brayton Company, and you have collected the
following data: The yield on the company's outstanding bonds is 7.75%; its tax rate is
25%; the next expected dividend is $0.65 a share; the dividend is expected to grow at a
constant rate of 6.00% a year; the price of the stock is $15.00 per share; the flotation
cost for selling new shares is F = 10%; and the target capital structure is 45% debt and
55% common equity. What is the firm's WACC, assuming it must issue new stock to
finance its capital budget?
WACC=Wd⋅Rd⋅(1−T)+Wpf⋅Rpf+Ws⋅Rs
, re = D1/(P0 × (1 − F)) + g - Answers :8.56%
Pettijohn Inc.The balance sheet and income statement shown below are for Pettijohn
Inc. Note that the firm has no amortization charges, it does not lease any assets, none
of its debt must be retired during the next 5 years, and the notes payable will be rolled
over.
Refer to the data for Pettijohn Inc. What is the firm's equity multiplier?
Equity Multiplier = TA/CE
TA = $42,000
CE: $12,600 - Answers :3.33
On its 2019 balance sheet, Barngrover Books showed $510 million of retained earnings,
and exactly that same amount was shown the following year in 2020. Assuming that no
earnings restatements were issued, which of the following statements is CORRECT?
-The company must have paid no dividends in 2020.
-The company must have had zero net income in 2020.
-Dividends could have been paid in 2020, but they would have had to equal the
earnings for the year.
-If the company lost money in 2020, they must have paid dividends.
-The company must have paid out half of its earnings as dividends. - Answers
:Dividends could have been paid in 2020, but they would have had to equal the
earnings for the year.
To estimate the cash flow from operations, depreciation must be added back to net
income because it is a non-cash charge that has been deducted from revenue. T or F? -
Answers :True
To estimate the company's WACC, Marshall Inc. recently hired you as a consultant. You
have obtained the following information. (1) The firm's noncallable bonds mature in 20
years, have an 8.00% annual coupon, a par value of $1,000, and a market price of
$1,050.00. (2) The company's tax rate is 25%. (3) The risk-free rate is 4.50%, the
market risk premium is 5.50%, and the stock's beta is 1.20. (4) The target capital
structure consists of 35% debt and the balance is common equity. The firm uses the
CAPM to estimate the cost of common stock, and it does not expect to issue any new
shares. What is its WACC? - Answers :7.48%
Kenny Electric Company's noncallable bonds were issued several years ago and now
have 20 years to maturity. These bonds have a 9.25% annual coupon, paid
semiannually, sells at a price of $1,075, and has a par value of $1,000. If the firm's tax
rate is 25%, what is the component after-tax cost of debt for use in the WACC
calculation?
VB=∑INT(1+rd)t+Facevalue(1+rd)t
Note: This formula is for annual payments. If you are asked "paid semiannually", you
need to adjust appropriately! - Answers :6.35%
