LSUS MBA 702 Final Exam Questions and
Correct Answers
Question 1
There is a 25 percent probability the economy will boom; otherwise, it will be normal.
Stock Q is expected to return 18 percent in a boom and 9 percent otherwise. Stock R
is expected to return 9 percent in a boom and 5 percent otherwise. What is the
standard deviation of a portfolio that is invested 40 percent in Stock Q and 60 percent
in Stock R?
Correct Answer
2.6%
Question 2
The problem that results from using the overall firm's beta in discounting projects of
differing risk levels is the:
Correct Answer
acceptance of too many high-risk projects and rejection of too many low risk
projects
Question 3
Which one of these is most related to a positive covenant?
Correct Answer
furnishing financial statements to the firm's lenders
Question 4
Which one of the following is a correct ranking of securities based on their volatility
over the period of 1926 to 2014? Rank from highest to lowest.
Correct Answer
small-company stocks, large-company stocks, long-term corporate bonds
Page 1 of 20
,Question 5
Peter's Audio has a yield to maturity on its debt of 7.8 percent, a cost of equity of 12.4
percent, and a cost of preferred stock of 8 percent. The firm has 105,000 shares of
common stock outstanding at a market price of $22 a share. There are 25,000 shares
of preferred stock outstanding at a market price of $45 a share. The bond issue has a
total face value of $1.5 million and sells at 98 percent of face value. If the tax rate is 34
percent, what is the weighted average cost of capital?
Correct Answer
9.22%
Question 6
The LSUS Corproation has a levered cost of equity of 14.29 percent and a pretax cost
of debt of 7.23 percent. The required return on the assets is 11 percent. What is the its
debt-equity ratio based on MM Proposition II with no taxes?
Correct Answer
0.87
Question 7
Which one of the following is an argument in favor of a low dividend policy for the
LSUS Corporation?
Correct Answer
The tax on capital gains is deferred until the gain is realized.
Question 8
The optimal capital structure has been achieved when the:
Correct Answer
debt-equity ratio selected results in the lowest possible weighed average cost of
capital
Page 2 of 20
, Question 9
Samuel's has shares of stock outstanding with a par value of $1 per share and a
market-to-book ratio of 2.1. The balance sheet shows $5,000 in the common stock
account, $58,000 in the capital in excess of par account, and $32,500 in the retained
earnings account. The firm just announced a 50 percent stock dividend. What is the
value of the common stock account after the dividend?
Correct Answer
$7,500
Question 10
You have a portfolio comprised of two risky securities. This combination produces no
diversification benefit. The lack of diversification benefits indicates the returns on the
two securities:
Correct Answer
move perfectly in sync with one another.
Question 11
Which one of these best exemplifies "milking the property"?
Correct Answer
a firm with high financial distress paying additional dividends
Question 12
Star, Inc., a prominent consumer products firm, is debating whether or not to convert
its all-equity capital structure to one that is 35 percent debt. Currently there are 6,000
shares outstanding and the price per share is $58. EBIT is expected to remain at
$39,600 per year forever. The interest rate on new debt is 7 percent, and there are no
taxes.
a. Ms. Brown, a shareholder of the firm, owns 100 shares of stock. What is her cash
flow under the current capital structure, assuming the firm has a dividend payout rate
of 100 percent?
Correct Answer
Page 3 of 20
Correct Answers
Question 1
There is a 25 percent probability the economy will boom; otherwise, it will be normal.
Stock Q is expected to return 18 percent in a boom and 9 percent otherwise. Stock R
is expected to return 9 percent in a boom and 5 percent otherwise. What is the
standard deviation of a portfolio that is invested 40 percent in Stock Q and 60 percent
in Stock R?
Correct Answer
2.6%
Question 2
The problem that results from using the overall firm's beta in discounting projects of
differing risk levels is the:
Correct Answer
acceptance of too many high-risk projects and rejection of too many low risk
projects
Question 3
Which one of these is most related to a positive covenant?
Correct Answer
furnishing financial statements to the firm's lenders
Question 4
Which one of the following is a correct ranking of securities based on their volatility
over the period of 1926 to 2014? Rank from highest to lowest.
Correct Answer
small-company stocks, large-company stocks, long-term corporate bonds
Page 1 of 20
,Question 5
Peter's Audio has a yield to maturity on its debt of 7.8 percent, a cost of equity of 12.4
percent, and a cost of preferred stock of 8 percent. The firm has 105,000 shares of
common stock outstanding at a market price of $22 a share. There are 25,000 shares
of preferred stock outstanding at a market price of $45 a share. The bond issue has a
total face value of $1.5 million and sells at 98 percent of face value. If the tax rate is 34
percent, what is the weighted average cost of capital?
Correct Answer
9.22%
Question 6
The LSUS Corproation has a levered cost of equity of 14.29 percent and a pretax cost
of debt of 7.23 percent. The required return on the assets is 11 percent. What is the its
debt-equity ratio based on MM Proposition II with no taxes?
Correct Answer
0.87
Question 7
Which one of the following is an argument in favor of a low dividend policy for the
LSUS Corporation?
Correct Answer
The tax on capital gains is deferred until the gain is realized.
Question 8
The optimal capital structure has been achieved when the:
Correct Answer
debt-equity ratio selected results in the lowest possible weighed average cost of
capital
Page 2 of 20
, Question 9
Samuel's has shares of stock outstanding with a par value of $1 per share and a
market-to-book ratio of 2.1. The balance sheet shows $5,000 in the common stock
account, $58,000 in the capital in excess of par account, and $32,500 in the retained
earnings account. The firm just announced a 50 percent stock dividend. What is the
value of the common stock account after the dividend?
Correct Answer
$7,500
Question 10
You have a portfolio comprised of two risky securities. This combination produces no
diversification benefit. The lack of diversification benefits indicates the returns on the
two securities:
Correct Answer
move perfectly in sync with one another.
Question 11
Which one of these best exemplifies "milking the property"?
Correct Answer
a firm with high financial distress paying additional dividends
Question 12
Star, Inc., a prominent consumer products firm, is debating whether or not to convert
its all-equity capital structure to one that is 35 percent debt. Currently there are 6,000
shares outstanding and the price per share is $58. EBIT is expected to remain at
$39,600 per year forever. The interest rate on new debt is 7 percent, and there are no
taxes.
a. Ms. Brown, a shareholder of the firm, owns 100 shares of stock. What is her cash
flow under the current capital structure, assuming the firm has a dividend payout rate
of 100 percent?
Correct Answer
Page 3 of 20
