FIN 534 Complete Course,STRAYER FIN 534 Entire Course,STR FIN 534 Complete Course Assignment

Question 1

FIN 534 Week 10 Chapter 17 Solution
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Answer 1

FIN 534 Week 10 Chapter 17 Solution

1. In Japan, 90-day securities have a 4% annualized return and 180-day securities have a 5% annualized return. In the United States, 90-day securities have a 4% annualized return and 180-day securities have an annualized return of 4.5%. All securities are of equal risk, and Japanese securities are denominated in terms of the Japanese yen. Assuming that interest rate parity holds in all markets, which of the following statements is most CORRECT?
   a. The yen-dollar spot exchange rate equals the yen-dollar exchange rate in the 90-day forward market.
   b. The yen-dollar spot exchange rate equals the yen-dollar exchange rate in the 180-day forward market.
   c. The yen-dollar exchange rate in the 90-day forward market equals the yen-dollar exchange rate in the 180-day forward market.
   d. The spot rate equals the 90-day forward rate.
   e. The spot rate equals the 180-day forward rate.
2. If the spot rate of the Israeli shekel is 5.51 shekels per dollar and the 180-day forward rate is 5.97 shekels per dollar, then the forward rate for the Israeli shekel is selling at a ________________ to the spot rate.
   a. premium of 8%
   b. premium of 18%
   c. discount of 18%
   d. discount of 8%
   e. premium of 16%
3. Stover Corporation, a U.S. based importer, makes a purchase of crystal glassware from a firm in Switzerland for 39,960 Swiss francs, or $24,000, at the spot rate of 1.665 francs per dollar. The terms of the purchase are net 90 days, and the U.S. firm wants to cover this trade payable with a forward market hedge to eliminate its exchange rate risk. Suppose the firm completes a forward hedge at the 90-day forward rate of 1.682 francs. If the spot rate in 90 days is actually 1.638 francs, how much will the U.S. firm have saved or lost in U.S. dollars by hedging its exchange rate exposure?
   a. -$396
   b. -$243
   c. $0
   d. $243
   e. $638
4. A product sells for $750 in the United States. The exchange rate is $1 to 1.65 Swiss francs. If purchasing power parity (PPP) holds, what is the price of the product in Switzerland?
   a. 123.75 Swiss francs
   b. 454.55 Swiss francs
   c. 750.00 Swiss francs
   d. 1,237.50 Swiss francs
5. Chen Transport, a U.S. based company, is considering expanding its operations into a foreign country. The required investment at is $10 million. The firm forecasts total cash inflows of $4 million per year for 2 years, $6 million for the next 2 years, and then a possible terminal value of $8 million. In addition, due to political risk factors, Chen believes that there is a 50% chance that the gross terminal value will be only $2 million and a 50% chance that it will be $8 million. However, the government of the host country will block 20% of all cash flows. Thus, cash flows that can be repatriated are 80% of those projected. Chen’s cost of capital is 15%, but it adds one percentage point to all foreign projects to account for exchange rate risk. Under these conditions, what is the project’s NPV?
   a. $1.01 million
   b. $2.77 million
   c. $3.09 million
   d. $5.96 million
   e. $7.39 million

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Question 2

Finance 534 week 10 quiz 9
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Answer 2

Finance 534 week 10 quiz 9

Inflation, recession, and high interest rates are economic events that are best characterized as being

Answer

systematic risk factors that can be diversified away.

company-specific risk factors that can be diversified away.

among the factors that are responsible for market risk.

risks that are beyond the control of investors and thus should not be considered by security analysts or portfolio managers.

irrelevant except to governmental authorities like the Federal Reserve.

2 points

Question 2

Which of the following statements is CORRECT? (Assume that the risk-free rate is a constant.)

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Question 3

FIN 534 Week 10 DQ 1
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Answer 3

FIN 534 Week 10 DQ 1

Based on what you uncovered in the e-Activity, determine the most significant risk factors associated with investing in the company you selected when compared with investing in a domestic company. Provide specific examples to support your response.

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Question 4

FIN 534 Week 10 DQ 2
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Answer 4

FIN 534 Week 10 DQ 2

Recommend three policy changes that would make the Federal Reserve’s job of controlling U.S. interest rates easier. Explain your reasoning.

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Question 5

FIN 534 Week 11 DQ 1
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Answer 5

FIN 534 Week 11 DQ 1

Reflect on the lessons learned during this class and discuss the most interesting or surprising thing you learned. Explain what made it so.

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Question 6

FIN 534 Week 11 DQ 2
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Answer 6

FIN 534 Week 11 DQ 2
Discuss how you plan on using what you learned in this course in your current or future position. What will prove to be the most valuable?

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Question 7

Finance 534 week 11 quiz 10
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Answer 7

Finance 534 week 11 quiz 10

Which of the following statements is CORRECT?

Answer

If the underlying stock does not pay a dividend, it makes good economic sense to exercise a call option as soon as the stock’s price exceeds the strike price by about 10%, because this permits the option holder to lock in an immediate profit.

Call options generally sell at a price less than their exercise value.

If a stock becomes riskier (more volatile), call options on the stock are likely to decline in value.

Call options generally sell at prices above their exercise value, but for an in-the-money option, the greater the exercise value in relation to the strike price, the lower the premium on the option is likely to be.

Because of the put-call parity relationship, under equilibrium conditions a put option on a stock must sell at exactly the same price as a call option on the stock.

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Question 8

Finance 534 Complete Course
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Answer 8

Finance 534 Complete Course

FIN 534 Week 1 Chapter 1 Solution

FIN 534 Week 1 Chapter 2 Solution

FIN 534 Week 1 DQ 1

FIN 534 Week 1 DQ 2

FIN 534 Week 1 Quiz 1

FIN 534 Week 2 Chapter 3 Solution

FIN 534 Week 2 DQ 1

FIN 534 Week 2 DQ 2

FIN 534 Week 3 Chapter 4 Solution

FIN 534 Week 3 Chapter 5 Solution

FIN 534 Week 3 DQ 1

FIN 534 Week 3 DQ 2

FIN 534 Week 3 Quiz 2

FIN 534 Week 4 Chapter 6 Solution

FIN 534 Week 4 Chapter 7 Solution

FIN 534 Week 4 DQ 1

FIN 534 Week 4 DQ 2

FIN 534 Week 4 quiz 3

FIN 534 Week 5 Chapter 8 Solution

FIN 534 Week 5 Chapter 9 Solution

FIN 534 Week 5 DQ 1

Finance 534 week 5 quiz 4

FIN 534 Week 6 Chapter 10 Solution

FIN 534 Week 6 Chapter 11 Solution

FIN 534 Week 6 DQ 1

FIN 534 Week 6 Quiz 5

FIN 534 Week 7 Chapter 12 Solution

FIN 534 Week 7 Chapter 13 Solution

FIN 534 Week 7 DQ 1

FIN 534 Week 7 DQ 2

FIN 534 Week 7 Quiz 6

FIN 534 Week 8 Chapter 14 Solution

FIN 534 Week 8 Chapter 15 Solution

FIN 534 Week 8 DQ 1

FIN 534 Week 8 DQ 2

Finance 534 Week 8 quiz 7

FIN 534 Week 9 Chapter 16 Solution

FIN 534 Week 9 DQ 1

FIN 534 Week 9 DQ 2

FIN 534 Week 9 Quiz 8

FIN 534 Week 10 Chapter 17 Solution

FIN 534 Week 10 DQ 1

FIN 534 Week 10 DQ 2

Fin 534 week 10 quiz 9

FIN 534 Week 11 DQ 1

FIN 534 Week 11 DQ 2

Fin 534 Week 11 quiz 10

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Question 9

FIN 534 Week 9 Chapter 16 Solution
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Answer 9

FIN 534 Week 9 Chapter 16 Solution

1. Swim Suits Unlimited is in a highly seasonal business, and the following summary balance sheet data show its assets and liabilities at peak and off-peak seasons (in thousands of dollars):

Peak Off-Peak

Cash $ 50 $ 30

Marketable securities 0 20

Accounts receivable 40 20

Inventories 100 50

Net fixed assets 500 500

Total assets $690 $620

Payables and accruals $ 30 $ 10

Short-term bank debt 50 0

Long-term debt 300 300

Common equity 310 310

Total claims $690 $620

From this data we may conclude that

a. Swim Suits’ current asset financing policy calls for exactly matching asset and liability maturities.
b. Swim Suits’ current asset financing policy is relatively aggressive; that is, the company finances some of its permanent assets with short-term discretionary debt.
c. Swim Suits follows a relatively conservative approach to current asset financing; that is, some of its short-term needs are met by permanent capital.
d. Without income statement data, we cannot determine the aggressiveness or conservatism of the company’s current asset financing policy.
e. Without cash flow data, we cannot determine the aggressiveness or conservatism of the company’s current asset financing policy.
2. Which of the following statements is CORRECT?
a. A firm that makes 90% of its sales on credit and 10% for cash is growing at a constant rate of 10% annually. Such a firm will be able to keep its accounts receivable at the current level, since the 10% cash sales can be used to finance the 10% growth rate.
b. In managing a firm’s accounts receivable, it is possible to increase credit sales per day yet still keep accounts receivable fairly steady, provided the firm can shorten the length of its collection period (its DSO) sufficiently.
c. Because of the costs of granting credit, it is not possible for credit sales to be more profitable than cash sales.
d. Since receivables and payables both result from sales transactions, a firm with a high receivables-to-sales ratio must also have a high payables-to-sales ratio.
e. Other things held constant, if a firm can shorten its DSO, this will lead to a higher current ratio.
3. Halka Company is a no-growth firm. Its sales fluctuate seasonally, causing total assets to vary from $320,000 to $410,000, but fixed assets remain constant at $260,000. If the firm follows a maturity matching (or moderate) working capital financing policy, what is the most likely total of long-term debt plus equity capital?
a. $260,642
b. $274,360
c. $288,800
d. $304,000
e. ) $320,000

Lower total asset range $320,000

Upper total asset range $410,000

Minimum total + Min. CA = $320,000 = LT Debt + Equity

A maturity matching policy implies that fixed assets and permanent current assets are financed with long-term sources. This is its most likely level of long-term financing.

4. Your consulting firm was recently hired to improve the performance of Shin-Soenen Inc, which is highly profitable but has been experiencing cash shortages due to its high growth rate. As one part of your analysis, you want to determine the firm’s cash conversion cycle. Using the following information and a 365-day year, what is the firm’s present cash conversion cycle?

Average inventory = $75,000

Annual sales = $600,000

Annual cost of goods sold = $360,000

Average accounts receivable = $160,000

Average accounts payable = $25,000

a. 120.6 days
b. 126.9 days
c. 133.6 days
d. 140.6 days
e. 148.0 days

Avg. inventory = $75,000 Annual sales = $600,000

Avg. receivables = $160,000 Annual COGS = $360,000

Avg. payables = $25,000 Days in year = 365

Inv. conv. /(COGS/365) 76.0

+ /(Sales/365) 97.3

– Payables /(COGS/365) -25.3

Cash conversion cycle (CCC) 148.0

5. Affleck Inc.’s business is booming, and it needs to raise more capital. The company purchases supplies on terms of 1/10 net 20, and it currently takes the discount. One way of getting the needed funds would be to forgo the discount, and the firm’s owner believes she could delay payment to 40 days without adverse effects. What would be the effective annual percentage cost of funds raised by this action? (Assume a 365-day year.)
   a. 10.59%
   b. 11.15%
   c. 11.74%
   d. 12.36%
   e. 13.01%

Discount % 1% Net days 20

Discount days 10 Actual days to payment 40

EAR = [1 + Disc. %/(100 – Disc. %)][365/(Actual days – Disc. Period)] – %

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Question 10

FIN 534 Week 9 Quiz 8
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Answer 10

FIN 534 Week 9 Quiz 8

Stock A’s beta is 1.5 and Stock B’s beta is 0.5. Which of the following statements must be true about these securities? (Assume market equilibrium.)

Answer

When held in isolation, Stock A has more risk than Stock B.

Stock B must be a more desirable addition to a portfolio than A.

Stock A must be a more desirable addition to a portfolio than B.

The expected return on Stock A should be greater than that on B.

The expected return on Stock B should be greater than that on A.

2 points

Question 2

Which of the following statements is CORRECT?

Answer

A two-stock portfolio will always have a lower standard deviation than a one-stock portfolio.

A portfolio that consists of 40 stocks that are not highly correlated with “the market” will probably be less risky than a portfolio of 40 stocks that are highly correlated with the market, assuming the stocks all have the same standard deviations.

A two-stock portfolio will always have a lower beta than a one-stock portfolio.

If portfolios are formed by randomly selecting stocks, a 10-stock portfolio will always have a lower beta than a one-stock portfolio.

A stock with an above-average standard deviation must also have an above-average beta.

2 points

Question 3

Which of the following statements is CORRECT?

Answer

The beta of a portfolio of stocks is always smaller than the betas of any of the individual stocks.

If you found a stock with a zero historical beta and held it as the only stock in your portfolio, you would by definition have a riskless portfolio.

The beta coefficient of a stock is normally found by regressing past returns on a stock against past market returns. One could also construct a scatter diagram of returns on the stock versus those on the market, estimate the slope of the line of best fit, and use it as beta. However, this historical beta may differ from the beta that exists in the future.

The beta of a portfolio of stocks is always larger than the betas of any of the individual stocks.

It is theoretically possible for a stock to have a beta of 1.0. If a stock did have a beta of 1.0, then, at least in theory, its required rate of return would be equal to the risk-free (default-free) rate of return, rRF.

2 points

Question 4

The risk-free rate is 6%; Stock A has a beta of 1.0; Stock B has a beta of 2.0; and the market risk premium, rM − rRF, is positive. Which of the following statements is CORRECT?

Answer

If the risk-free rate increases but the
market risk premium stays unchanged, Stock B’s required return will increase by more than Stock A’s.

Stock B’s required rate of return is twice
that of Stock A.

If Stock A’s required return is 11%, then the market risk premium is 5%.

If Stock B’s required return is 11%, then
the market risk premium is 5%.

If the risk-free rate remains constant but the market risk premium increases, Stock A’s required return will increase by more than Stock B’s.

2 points

Question 5

Which of the following is most likely to occur as you add randomly selected stocks to your portfolio, which currently consists of 3 average stocks?

Answer

The diversifiable risk of your portfolio will
likely decline, but the expected market risk should not change.

The expected return of your portfolio is likely
to decline.

The diversifiable risk will remain the same, but the market risk will likely decline.

Both the diversifiable risk and the market risk
of your portfolio are likely to decline.

The total risk of your portfolio should decline, and as a result, the expected rate of return on the portfolio should also decline.

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Question 11

FIN 534 Week 9 DQ 1
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Answer 11

FIN 534 Week 9 DQ 1

Based on the content of this chapter and what you discovered in the e-Activity, analyze cash management technology and make at least one recommendation for another technique that would enhance working capital management. Explain the reasoning behind your recommendation.

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Question 12

FIN 534 Week 9 DQ 2
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Answer 12

FIN 534 Week 9 DQ 2

Create an idea for a startup venture and discuss the most viable way to raise the working capital to get the startup running. Explain your rationale.

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Question 13

FIN 534 Week 8 Chapter 14 Solution
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Answer 13

FIN 534 Week 8 Chapter 14 Solution

1. Which of the following statements about dividend policies is CORRECT?
   a. Modigliani and Miller argue that investors prefer dividends to capital gains because dividends are more certain than capital gains. They call this the ―bird-in-the hand‖ effect.
   b. One reason that companies tend to avoid stock repurchases is that dividend payments are taxed at a lower rate than gains on stock repurchases.
   c. One advantage of dividend reinvestment plans is that they allow shareholders to avoid paying taxes on the dividends that they choose to reinvest.
   d. One key advantage of a residual dividend policy is that it enables a company to follow a stable dividend policy.
   e. The clientele effect suggests that companies should follow a stable dividend policy.
2. Which of the following statements is CORRECT?
   a. One disadvantage of dividend reinvestment plans is that they increase transactions costs for investors who want to increase their ownership in the company.
   b. One advantage of dividend reinvestment plans is that they enable investors to postpone paying taxes on the dividends credited to their account.
   c. Stock repurchases can be used by a firm that wants to increase its debt ratio.
   d. Stock repurchases make sense if a company expects to have a lot of profitable new projects to fund over the next few years, provided investors are aware of these investment opportunities.
   e. One advantage of an open market dividend reinvestment plan is that it provides new equity capital and increases the shares outstanding.
3. Which of the following statements is CORRECT?
   a. When firms are deciding on the size of stock splits—say whether to declare a 2-for-1 split or a 3-for-1 split, it is best to declare the smaller one, in this case the 2-for-1 split, because then the after-split price will be higher than if the 3-for-1 split had been used.
   b. Back before the SEC was created in the 1930s, companies would declare reverse splits in order to boost their stock prices. However, this was determined to be a deceptive practice, and it is illegal today.
   c. Stock splits create more administrative problems for investors than stock dividends, especially determining the tax basis of their shares when they decide to sell them, so today stock dividends are used far more often than stock splits.
   d. When a company declares a stock split, the price of the stock typically declines—by about 50% after a 2-for-1 split—and this necessarily reduces the total market value of the equity.
   e. If a firm’s stock price is quite high relative to most stocks—say $500 per share—then it can declare a stock split of say 10-for-1 so as to bring the price down to something close to $50. Moreover, if the price is relatively low—say $2 per share—then it can declare a ―reverse split‖ of say 1-for-25 so as to bring the price up to somewhere around $50 per share.
4. Which of the following statements is CORRECT?
   a. If a firm follows the residual dividend policy, then a sudden increase in the number of profitable projects is likely to reduce the firm’s dividend payout.
   b. The clientele effect can explain why so many firms change their dividend policies so often.
   c. One advantage of adopting the residual dividend policy is that this policy makes it easier for corporations to develop a specific and well-identified dividend clientele.
   d. New-stock dividend reinvestment plans are similar to stock dividends because they both increase the number of shares outstanding but don’t change the firm’s total amount of book equity.
   e. Investors who receive stock dividends must pay taxes on the value of the new shares in the year the stock dividends are received.
5. DeAngelo Corp.’s projected net income is $150.0 million, its target capital structure is 25% debt and 75% equity, and its target payout ratio is 65%. DeAngelo has more positive NPV projects than it can finance without issuing new stock, but its board of directors had decreed that it cannot issue any new shares in the foreseeable future. The CFO now wants to determine how the maximum capital budget would be affected by changes in capital structure policy and/or the target dividend payout policy. Versus the current policy, how much larger could the capital budget be if (1) the target debt ratio were raised to 75%, other things held constant, (2) the target payout ratio were lowered to 20%, other things held constant, and (3) the debt ratio and payout were both changed by the indicated amounts.

Increase in Capital Budget

Increase Debt Lower Payout Do Both to 75% to 20%___________________

a. $114.0 $73.3 $333.9
b. $120.0 $77.2 $351.5
c. $126.4 $81.2 $370.0
d. $133.0 $85.5 $389.5
e. $140.0 $90.0 $410.0

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Question 14

FIN 534 Week 8 Chapter 15 Solution
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Answer 14

FIN 534 Week 8 Chapter 15 Solution

1. Which of the following statements best describes the optimal capital structure?
   a. The optimal capital structure is the mix of debt, equity, and preferred stock that maximizes the company’s earnings per share (EPS).
   b. The optimal capital structure is the mix of debt, equity, and preferred stock that maximizes the company’s stock price.
   c. The optimal capital structure is the mix of debt, equity, and preferred stock that minimizes the company’s cost of equity.
   d. The optimal capital structure is the mix of debt, equity, and preferred stock that minimizes the company’s cost of debt.
   e. The optimal capital structure is the mix of debt, equity, and preferred stock that minimizes the company’s cost of preferred stock.
2. Which of the following statements is CORRECT?
   a. A firm can use retained earnings without paying a flotation cost. Therefore, while the cost of retained earnings is not zero, its cost is generally lower than the after-tax cost of debt.
   b. The capital structure that minimizes a firm’s weighted average cost of capital is also the capital structure that maximizes its stock price.
   c. The capital structure that minimizes the firm’s weighted average cost of capital is also the capital structure that maximizes its earnings per share.
   d. If a firm finds that the cost of debt is less than the cost of equity, increasing its debt ratio must reduce its WACC.
   e. Other things held constant, if corporate tax rates declined, then the Modigliani-Miller tax-adjusted tradeoff theory would suggest that firms should increase their use of debt.
3. Which of the following statements is CORRECT?
   a. In general, a firm with low operating leverage also has a small proportion of its total costs in the form of fixed costs.
   b. There is no reason to think that changes in the personal tax rate would affect firms’ capital structure decisions.
   c. A firm with high business risk is more likely to increase its use of financial leverage than a firm with low business risk, assuming all else equal.
   d. If a firm’s after-tax cost of equity exceeds its after-tax cost of debt, it can always reduce its WACC by increasing its use of debt.
   e. Suppose a firm has less than its optimal amount of debt. Increasing its use of debt to the point where it is at its optimal capital structure will decrease the costs of both debt and equity financing.
4. Companies HD and LD have identical amounts of assets, operating income (EBIT), tax rates, and business risk. Company HD, however, has a much higher debt ratio than LD. Company HD’s basic earning power ratio (BEP) exceeds its cost of debt (rd). Which of the following statements is CORRECT?
   a. Company HD has a higher return on assets (ROA) than Company LD.
   b. Company HD has a higher times interest earned (TIE) ratio than Company LD.
   c. Company HD has a higher return on equity (ROE) than Company LD, and its risk, as measured by the standard deviation of ROE, is also higher than LD’s.
   d. The two companies have the same ROE.
   e. Company HD’s ROE would be higher if it had no debt.
5. Which of the following statements is CORRECT?
   a. Generally, debt-to-total-assets ratios do not vary much among different industries, although they do vary among firms within a given industry.
   b. Electric utilities generally have very high common equity ratios because their revenues are more volatile than those of firms in most other industries.
   c. Drug companies (prescription, not illegal!) generally have high debt-to-equity ratios because their earnings are very stable and, thus, they can cover the high interest costs associated with high debt levels.
   d. Wide variations in capital structures exist both between industries and among individual firms within given industries. These differences are caused by differing business risks and also managerial attitudes.
   e. Since most stocks sell at or very close to their book values, book value capital structures are almost always adequate for use in estimating firms’ costs of capital.

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Question 15

FIN 534 Week 8 DQ 1
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Answer 15

FIN 534 Week 8 DQ 1

I examined PepsiCo to determine how it should address its free cash flow, either through distributions to shareholders or repurchasing of stock.,

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Question 16

FIN 534 Week 8 DQ 2
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Answer 16

FIN 534 Week 8 DQ 2

Capital structure is the manner in which a firm’s assets are financed; that is, the right-hand side of the balance sheet. Capital structure is normally expressed as the percentage of each type of capital used by the firm–debt, preferred stock, and common equity.

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Question 17

Finance 534 week 8 quiz 7
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Answer 17

Finance 534 week 8 quiz 7

Question 1

Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds?

Answer

The company’s bonds are downgraded.

Market interest rates rise sharply.

Market interest rates decline sharply.

The company’s financial situation deteriorates significantly.

Inflation increases significantly.
2 points

Question 2

Which of the following statements is CORRECT?

Answer

You hold two bonds. One is a 10-year, zero coupon, issue and the other is a 10-year bond that pays a 6% annual coupon. The same market rate, 6%, applies to both bonds. If the market rate rises from the current level, the zero coupon bond will experience the larger percentage decline.

The time to maturity does not affect the change in the value of a bond in response to a given change in interest rates.

You hold two bonds. One is a 10-year, zero coupon, bond and the other is a 10-year bond that pays a 6% annual coupon. The same market rate, 6%, applies to both bonds. If the market rate rises from the current level, the zero coupon bond will experience the smaller percentage decline.

The shorter the time to maturity, the greater the change in the value of a bond in response to a given change in interest rates.

The longer the time to maturity, the smaller the change in the value of a bond in response to a given change in interest rates.
2 points

Question 3

A 10-year Treasury bond has an 8% coupon, and an 8-year Treasury bond has a 10% coupon. Both bonds have the same yield to maturity. If the yield to maturity of both bonds increases by the same amount, which of the following statements would be CORRECT?

Answer

The prices of both bonds will decrease by the same amount.

Both bonds would decline in price, but the 10-year bond would have the greater percentage decline in price.

The prices of both bonds would increase by the same amount.

One bond’s price would increase, while the other bond’s price would decrease.

The prices of the two bonds would remain constant.
2 points

Question 4

Which of the following statements is CORRECT?

Answer

If the maturity risk premium were zero and interest rates were expected to decrease
in the future, then the yield curve for U.S. Treasury securities would, other things held constant, have an upward slope.

Liquidity premiums are generally higher on Treasury than corporate bonds.

The maturity premiums embedded in the interest rates on U.S. Treasury securities are due primarily to the fact that the probability of default is higher on long-term bonds than on short-term bonds.

Default risk premiums are generally lower on corporate than on Treasury bonds.

Reinvestment rate risk is lower, other things held constant, on long-term than on short-term bonds.
2 points

Question 5

A 10-year bond with a 9% annual coupon has a yield to maturity of 8%. Which of the following statements is CORRECT?

Answer

If the yield to maturity remains constant, the bond’s price one year from now will be higher than its current price.

The bond is selling below its par value.

The bond is selling at a discount.

If the yield to maturity remains constant, the bond’s price one year from now will be lower than its current price.

The bond’s current yield is greater than 9%.

2 points

Question 6

Which of the following statements is CORRECT?

Answer

If the Federal Reserve unexpectedly announces that it expects inflation to increase, then we would probably observe an immediate increase in bond prices.

The total yield on a bond is derived from dividends plus changes in the price of the bond.

Bonds are riskier than common stocks and therefore have higher required returns.

Bonds issued by larger companies always have lower yields to maturity (less risk) than bonds issued by smaller companies.

The market value of a bond will always approach its par value as its maturity date approaches, provided the bond’s required return remains constant.

2 points

Question 7

Which of the following bonds would have the greatest percentage increase in value if all interest rates fall by 1%?

Answer

10-year, zero coupon bond.

20-year, 10% coupon bond.

20-year, 5% coupon bond.

1-year, 10% coupon bond.

20-year, zero coupon bond.
2 points

Question 8

Which of the following statements is CORRECT?

Answer

If a bond is selling at a discount, the yield to call is a better measure of return than the yield to maturity.

On an expected yield basis, the expected capital gains yield will always be positive because an investor would not purchase a bond with an expected capital loss.

On an expected yield basis, the expected current yield will always be positive because an investor would not purchase a bond that is not expected to pay any cash coupon interest.

If a coupon bond is selling at par, its current yield equals its yield to maturity.

The current yield on Bond A exceeds the current yield on Bond B; therefore, Bond A must have a higher yield to maturity than Bond B.

2 points

Question 9

An investor is considering buying one of two 10-year, $1,000 face value bonds: Bond A has a 7% annual coupon, while Bond B has a 9% annual coupon. Both bonds have a yield to maturity of 8%, which is expected to remain constant for the next 10 years. Which of the following statements is CORRECT?

Answer

Bond B has a higher price than Bond A today, but one year from now the bonds will have the same price.

One year from now, Bond A’s price will be higher than it is today.

Bond A’s current yield is greater than 8%.

Bond A has a higher price than Bond B today, but one year from now the bonds will have the same price.

Both bonds have the same price today, and the price of each bond is expected to remain constant until the bonds mature.
2 points

Question 10

A 12-year bond has an annual coupon rate of 9%. The coupon rate will remain fixed until the bond matures. The bond has a yield to maturity of 7%. Which of the following statements is CORRECT?

Answer

If market interest rates decline, the price of the bond will also decline.

The bond is currently selling at a price below its par value.

If market interest rates remain unchanged, the bond’s price one year from now will be lower than it is today.

The bond should currently be selling at its par value.

If market interest rates remain unchanged, the bond’s price one year from now will be higher than it is today.
2 points

Question 11

A 10-year bond pays an annual coupon, its YTM is 8%, and it currently trades at a premium. Which of the following statements is CORRECT?

Answer

The bond’s current yield is less than 8%.

If the yield to maturity remains at 8%, then the bond’s price will decline over the next year.

The bond’s coupon rate is less than 8%.

If the yield to maturity increases, then the bond’s price will increase.

If the yield to maturity remains at 8%, then the bond’s price will remain constant over the next year.
2 points

Question 12

Assume that all interest rates in the economy decline from 10% to 9%. Which of the following bonds would have the largest percentage increase in price?

Answer

An 8-year bond with a 9% coupon.

A 1-year bond with a 15% coupon.

A 3-year bond with a 10% coupon.

A 10-year zero coupon bond.

A 10-year bond with a 10% coupon.
2 points

Question 13

Which of the following statements is CORRECT?

Answer

If a coupon bond is selling at par, its current yield equals its yield to maturity.

If a coupon bond is selling at a discount, its price will continue to decline until it reaches its par value at maturity.

If interest rates increase, the price of a 10-year coupon bond will decline by a greater percentage than the price of a 10-year zero coupon bond.

If a bond’s yield to maturity exceeds its annual coupon, then the bond will trade at a premium.

If a coupon bond is selling at a premium, its current yield equals its yield to maturity.

2 points

Question 14

Which of the following statements is CORRECT?

Answer

All else equal, high-coupon bonds have less reinvestment rate risk than low-coupon bonds.

All else equal, long-term bonds have less interest rate price risk than short-term bonds.

All else equal, low-coupon bonds have less interest rate price risk than high-coupon bonds.

All else equal, short-term bonds have less reinvestment rate risk than long-term bonds.

All else equal, long-term bonds have less reinvestment rate risk than short-term bonds.

2 points

Question 15

Amram Inc. can issue a 20-year bond with a 6% annual coupon. This bond is not convertible, is not callable, and has no sinking fund. Alternatively, Amram could issue a 20-year bond that is convertible into common equity, may be called, and has a sinking fund. Which of the following most accurately describes the coupon rate that Amram would have to pay on the convertible, callable bond?

Answer

Exactly equal to 6%.

It could be less than, equal to, or greater than 6%.

Greater than 6%.

Exactly equal to 8%.

Less than 6%.

2 points

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Question 18

FIN 534 Week 7 Chapter 12 Solution
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Answer 18

FIN 534 Week 7 Chapter 12 Solution

1. Which of the following statements is CORRECT?
   a. Perhaps the most important step when developing forecasted financial statements is to determine the breakdown of common equity between common stock and retained earnings.
   b. The first, and perhaps the most critical, step in forecasting financial requirements is to forecast future sales.
   c. Forecasted financial statements, as discussed in the text, are used primarily as a part of the managerial compensation program, where management’s historical performance is evaluated.
   d. The capital intensity ratio gives us an idea of the physical condition of the firm’s fixed assets.
   e. The AFN equation produces more accurate forecasts than the forecasted financial statement method, especially if fixed assets are lumpy, economies of scale exist, or if excess capacity exists.
2. Which of the following statements is CORRECT?
   a. The sustainable growth rate is the maximum achievable growth rate without the firm having to raise external funds. In other words, it is the growth rate at which the firm’s AFN equals zero.
   b. If a firm’s assets are growing at a positive rate, but its retained earnings are not increasing, then it would be impossible for the firm’s AFN to be negative.
   c. If a firm increases its dividend payout ratio in anticipation of higher earnings, but sales and earnings actually decrease, then the firm’s actual AFN must, mathematically, exceed the previously calculated AFN.
   d. Higher sales usually require higher asset levels, and this leads to what we call AFN. However, the AFN will be zero if the firm chooses to retain all of its profits, i.e., to have a zero dividend payout ratio.
   e. Dividend policy does not affect the requirement for external funds based on the AFN equation.
3. Which of the following statements is CORRECT?
   a. When we use the AFN equation, we assume that the ratios of assets and liabilities to sales (A0/S0 and L0/S0) vary from year to year in a stable, predictable manner.
   b. When fixed assets are added in large, discrete units as a company grows, the assumption of constant ratios is more appropriate than if assets are relatively small and can be added in small increments as sales grow.
   c. Firms whose fixed assets are “lumpy” frequently have excess capacity, and this should be accounted for in the financial forecasting process.
   d. For a firm that uses lumpy assets, it is impossible to have small increases in sales without expanding fixed assets.
   e. There are economies of scale in the use of many kinds of assets. When economies occur the ratios are likely to remain constant over time as the size of the firm increases.

Economic Ordering Quantity model for establishing inventory levels demonstrates this relationship.

4. Last year Jain Technologies had $250 million of sales and $100 million of fixed assets, so its FA/Sales ratio was 40%. However, its fixed assets were used at only 75% of capacity. Now the company is developing its financial forecast for the coming year. As part of that process, the company wants to set its target Fixed Assets/Sales ratio at the level it would have had had it been operating at full capacity. What target FA/Sales ratio should the company set?
   a. 28.5%
   b. 30.0%
   c. 31.5%
   d. 33.1%
   e. 34.7%
5. Howton & Howton Worldwide (HHW) is planning its operations for the coming year, and the CEO wants you to forecast the firm’s additional funds needed (AFN). The firm is operating at full capacity. Data for use in the forecast are shown below. However, the CEO is concerned about the impact of a change in the payout ratio from the 10% that was used in the past to 50%, which the firm’s investment bankers have recommended. Based on the AFN equation, by how much would the AFN for the coming year change if HHW increased the payout from 10% to the new and higher level? All dollars are in millions.

Last year’s $300.0 Last year’s accounts payable $50.0

Sales growth 40% Last year’s notes payable $15.0

Last year’s total * $500.0 Last year’s accruals $20.0

Last year’s profit 20.0% Initial payout ratio 10.0%

a. $31.9
b. $33.6
c. $35.3
d. $37.0
e. $38.9

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Question 19

FIN 534 Week 7 Chapter 13 Solution
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Answer 19

FIN 534 Week 7 Chapter 13 Solution

1. Suppose Leonard, Nixon, & Shull Corporation’s projected free cash flow for next year is $100,000, and FCF is expected to grow at a constant rate of 6%. If the company’s weighted average cost of capital is 11%, what is the value of its operations?
   a. $1,714,750
   b. $1,805,000
   c. $1,900,000
   d. $2,000,000
   e. $2,100,000
2. Leak Inc. forecasts the free cash flows (in millions) shown below. If the weighted average cost of capital is 11% and FCF is expected to grow at a rate of 5% after Year 2, what is the Year 0 value of operations, in millions? Assume that the ROIC is expected to remain constant in Year 2 and beyond (and do not make any half-year adjustments).

Year: 1 2

Free cash flow: -$50 $100

a. $1,456
b. $1,529
c. $1,606
d. $1,686
e. $1,770
3. Based on the corporate valuation model, the value of a company’s operations is $1,200 million. The company’s balance sheet shows $80 million in accounts receivable, $60 million in inventory, and $100 million in short-term investments that are unrelated to operations. The balance sheet also shows $90 million in accounts payable, $120 million in notes payable, $300 million in long-term debt, $50 million in preferred stock, $180 million in retained earnings, and $800 million in total common equity. If the company has 30 million shares of stock outstanding, what is the best estimate of the stock’s price per share?
a. $24.90
b. $27.67
c. $30.43
d. $33.48
e. $36.82

Market Value of +
MV of of debt + MV of preferred + MV of + 50M + MV Equity
=> MV – 420M – (assume book value of debt debt)
=> share /30 = $27.67(d)

4. Based on the corporate valuation model, the value of a company’s operations is $900 million. Its balance sheet shows $70 million in accounts receivable, $50 million in inventory, $30 million in short-term investments that are unrelated to operations, $20 million in accounts payable, $110 million in notes payable, $90 million in long-term debt, $20 million in preferred stock, $140 million in retained earnings, and $280 million in total common equity. If the company has 25 million shares of stock outstanding, what is the best estimate of the stock’s price per share?
   a. $23.00
   b. $25.56
   c. $28.40
   d. $31.24
   e. $34.36
5. Vasudevan Inc. forecasts the free cash flows (in millions) shown below. If the weighted average cost of capital is 13% and the free cash flows are expected to continue growing at the same rate after Year 3 as from Year 2 to Year 3, what is the Year 0 value of operations, in millions?

Year: 1 2 3

Free cash flow: -$20 $42 $45

a. $586
b. $617
c. $648
d. $680
e. $714

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Question 20

FIN 534 Week 7 DQ 1
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Answer 20

FIN 534 Week 7 DQ 1

Analyze the process of forecasting financial statements and make at least one recommendation for improving the accuracy of forecasts. Provide specific examples to support your response.

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Question 21

FIN 534 Week 7 DQ 2
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Answer 21

FIN 534 Week 7 DQ 2

Drawing on what you discovered in the e-Activity, determine what additional steps can be taken in the valuation of a corporation to avoid instances like the one you researched from occurring in the future. Provide specific examples to support your response.

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Question 22

FIN 534 Week 7 Quiz 6
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Answer 22

FIN 534 Week 7 Quiz 6

Which of the following statements is CORRECT, assuming positive interest rates and holding other things constant?Answer

The present value of a 5-year, $250 annuity due will be lower than the PV of a similar ordinary annuity.

A 30-year, $150,000 amortized mortgage will have larger monthly payments than an otherwise similar 20-year mortgage.

A bank loan’s nominal interest rate will always be equal to or greater than its effective annual rate.

If an investment pays 10% interest, compounded quarterly, its effective annual rate will be greater than 10%.

Banks A and B offer the same nominal annual rate of interest, but A pays interest quarterly and B pays semiannually. Deposits in Bank B will provide the higher future value if you leave your funds on deposit.

A U.S. Treasury bond will pay a lump sum of $1,000 exactly 3 years from today. The nominal interest rate is 6%, semiannual compounding. Which of the following statements is CORRECT?Answer

The periodic interest rate is greater than 3%.

The periodic rate is less than 3%.

The present value would be greater if the lump sum were discounted back for more periods.

The present value of the $1,000 would be smaller if interest were compounded monthly rather than semiannually.

The PV of the $1,000 lump sum has a higher present value than the PV of a 3-year, $333.33 ordinary annuity.

Which of the following statements is CORRECT, assuming positive interest rates and holding other things constant?Answer

The present value of a 5-year, $250 annuity due will be lower than the PV of a similar ordinary annuity.

A 30-year, $150,000 amortized mortgage will have larger monthly payments than an otherwise similar 20-year mortgage.

A bank loan’s nominal interest rate will always be equal to or less than its effective annual rate.

If an investment pays 10% interest, compounded annually, its effective annual rate will be less than 10%.

Banks A and B offer the same nominal annual rate of interest, but A pays interest quarterly and B pays semiannually. Deposits in Bank B will provide the higher future value if you leave your funds on deposit.

Which of the following investments would have the lowest present value? Assume that the effective annual rate for all investments is the same and is greater than zero.Answer

Investment A pays $250 at the end of every year for the next 10 years (a total of 10 payments).

Investment B pays $125 at the end of every 6-month period for the next 10 years (a total of 20 payments).

Investment C pays $125 at the beginning of every 6-month period for the next 10 years (a total of 20 payments).

Investment D pays $2,500 at the end of 10 years (just one payment).

Investment E pays $250 at the beginning of every year for the next 10 years (a total of 10 payments).

Which of the following statements regarding a 15-year (180-month) $125,000, fixed-rate mortgage is CORRECT? (Ignore taxes and transactions costs.)Answer

The remaining balance after three years will be $125,000 less one third of the interest paid during the first three years.

Because it is a fixed-rate mortgage, the monthly loan payments (which include both interest and principal payments) are constant.

Interest payments on the mortgage will increase steadily over time, but the total amount of each payment will remain constant.

The proportion of the monthly payment that goes towards repayment of principal will be lower 10 years from now than it will be the first year.

The outstanding balance declines at a slower rate in the later years of the loan’s life.

Which of the following statements is CORRECT?Answer

A time line is not meaningful unless all cash flows occur annually.

Time lines are not useful for visualizing complex problems prior to doing actual calculations.

Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly.

Time lines can be constructed for annuities where the payments occur at either the beginning or the end of the periods.

Some of the cash flows shown on a time line can be in the form of annuity payments, but none can be uneven amounts.

Your bank account pays an 8% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT?Answer

The periodic rate of interest is 2% and the effective
rate of interest is 4%.

The periodic rate of interest is 8% and the effective
rate of interest is greater than 8%.

The periodic rate of interest is 4% and the effective
rate of interest is less than 8%.

The periodic rate of interest is 2% and the effective
rate of interest is greater than 8%.

The periodic rate of interest is 8% and the effective
rate of interest is also 8%

Under normal conditions, which of the following would be most likely to increase
the coupon rate required to enable a bond to be issued at par?Answer

Adding additional restrictive covenants that limit management’s actions.

Adding a call provision.

The rating agencies change the bond’s rating from Baa to Aaa.

Making the bond a first mortgage bond rather than a debenture.

Adding a sinking fund.
An investor is considering buying one of two 10-year, $1,000 face value bonds: Bond A has a 7% annual coupon, while Bond B has a 9% annual coupon. Both bonds have a yield to maturity of 8%, which is expected to remain constant for the next 10 years. Which of the following statements is CORRECT?Answer

Bond B has a higher price than Bond A today, but one year from now the bonds will have the same price.

One year from now, Bond A’s price will be higher than it is today.

Bond A’s current yield is greater than 8%.

Bond A has a higher price than Bond B today, but one year from now the bonds will have the same price.

Both bonds have the same price today, and the price of each bond is expected to remain constant until the bonds mature.
You are considering two bonds. Bond A has a 9% annual coupon while Bond B has a 6% annual coupon. Both bonds have a 7% yield to maturity, and the YTM is expected to remain constant. Which of the following statements is CORRECT?Answer

The price of Bond B will decrease over time, but the price of Bond A will increase over time.

The prices of both bonds will remain unchanged.

The price of Bond A will decrease over time, but the price of Bond B will increase over time.

The prices of both bonds will increase by 7% per year.

The prices of both bonds will increase over time, but the price of Bond A will increase by more.
Which of the following statements is CORRECT?Answer

You hold two bonds. One is a 10-year, zero coupon, issue and the other is a 10-year bond that pays a 6% annual coupon. The same market rate, 6%, applies to both bonds. If the market rate rises from the current level, the zero coupon bond will experience the larger percentage decline.

The time to maturity does not affect the change in the value of a bond in response to a given change in interest rates.

You hold two bonds. One is a 10-year, zero coupon, bond and the other is a 10-year bond that pays a 6% annual coupon. The same market rate, 6%, applies to both bonds. If the market rate rises from the current level, the zero coupon bond will experience the smaller percentage decline.

The shorter the time to maturity, the greater the change in the value of a bond in response to a given change in interest rates.

The longer the time to maturity, the smaller the change in the value of a bond in response to a given change in interest rates.
A 10-year Treasury bond has an 8% coupon, and an 8-year Treasury bond has a 10% coupon. Both bonds have the same yield to maturity. If the yield to maturity of both bonds increases by the same amount, which of the following statements would be CORRECT?Answer

The prices of both bonds will decrease by the same amount.

Both bonds would decline in price, but the 10-year bond would have the greater percentage decline in price.

The prices of both bonds would increase by the same amount.

One bond’s price would increase, while the other bond’s price would decrease.

The prices of the two bonds would remain constant.
Which of the following statements is CORRECT?Answer

If the Federal Reserve unexpectedly announces that it expects inflation to increase, then we would probably observe an immediate increase in bond prices.

The total yield on a bond is derived from dividends plus changes in the price of the bond.

Bonds are riskier than common stocks and therefore have higher required returns.

Bonds issued by larger companies always have lower yields to maturity (less risk) than bonds issued by smaller companies.

The market value of a bond will always approach its par value as its maturity date approaches, provided the bond’s required return remains constant.

Which of the following statements is CORRECT?Answer

If the Federal Reserve unexpectedly announces that it expects inflation to increase, then we would probably observe an immediate increase in bond prices.

The total yield on a bond is derived from dividends plus changes in the price of the bond.

Bonds are riskier than common stocks and therefore have higher required returns.

Bonds issued by larger companies always have lower yields to maturity (less risk) than bonds issued by smaller companies.

The market value of a bond will always approach its par value as its maturity date approaches, provided the bond’s required return remains constant.

Which of the following bonds would have the greatest percentage increase in value if all interest rates fall by 1%?Answer

10-year, zero coupon bond.

20-year, 10% coupon bond.

20-year, 5% coupon bond.

1-year, 10% coupon bond.

20-year, zero coupon bond.
If its yield to maturity declined by 1%, which of the following bonds would have the largest percentage increase in value?Answer

A 1-year zero coupon bond.

A 1-year bond with an 8% coupon.

A 10-year bond with an 8% coupon.

A 10-year bond with a 12% coupon.

A 10-year zero coupon bond.

Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds?Answer

The company’s bonds are downgraded.

Market interest rates rise sharply.

Market interest rates decline sharply.

The company’s financial situation deteriorates significantly.

Inflation increases significantly.

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Question 23

FIN 534 Week 6 Chapter 10 Solution
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Answer 23

FIN 534 Week 6 Chapter 10 Solution

1. Which of the following statements is CORRECT?
   a. The internal rate of return method (IRR) is generally regarded by academics as being the best single method for evaluating capital budgeting projects.
   b. The payback method is generally regarded by academics as being the best single method for evaluating capital budgeting projects.
   c. The discounted payback method is generally regarded by academics as being the best single method for evaluating capital budgeting projects.
   d. The net present value method (NPV) is generally regarded by academics as being the best single method for evaluating capital budgeting projects.
   e. The modified internal rate of return method (MIRR) is generally regarded by academics as being the best single method for evaluating capital budgeting projects.
2. Projects A and B have identical expected lives and identical initial cash outflows (costs). However, most of one project’s cash flows come in the early years, while most of the other project’s cash flows occur in the later years. The two NPV profiles are given below:

Which of the following statements is CORRECT?

a. More of Project A’s cash flows occur in the later years.
b. More of Project B’s cash flows occur in the later years.
c. We must have information on the cost of capital in order to determine which project has the larger early cash flows.
d. The NPV profile graph is inconsistent with the statement made in the problem.
e. The crossover rate, i.e., the rate at which Projects A and B have the same NPV
3. Suppose a firm relies exclusively on the payback method when making capital budgeting decisions, and it sets a 4-year payback regardless of economic conditions. Other things held constant, which of the following statements is most likely to be true?
a. It will accept too many short-term projects and reject too many long-term projects (as judged by the NPV).
b. It will accept too many long-term projects and reject too many short-term projects (as judged by the NPV).
c. The firm will accept too many projects in all economic states because a 4-year payback is too low.
d. The firm will accept too few projects in all economic states because a 4-year payback is too high.
e. If the 4-year payback results in accepting just the right set of projects under average economic conditions, then this payback will result in too few long-term projects when the economy is weak.
4. You are on the staff of Camden Inc. The CFO believes project acceptance should be based on the NPV, but Steve Camden, the president, insists that no project should be accepted unless its IRR exceeds the project’s risk-adjusted WACC. Now you must make a recommendation on a project that has a cost of $15,000 and two cash flows: $110,000 at the end of Year 1 and – $100,000 at the end of Year 2. The president and the CFO both agree that the appropriate WACC for this project is 10%. At 10%, the NPV is $2,355.37, but you find two IRRs, one at 6.33% and one at 527%, and a MIRR of 11.32%. Which of the following statements best describes your optimal recommendation, i.e., the analysis and recommendation that is best for the company and least likely to get you in trouble with either the CFO or the president?
a. You should recommend that the project be rejected because its NPV is negative and its IRR is less than the WACC.
b. You should recommend that the project be rejected because, although its NPV is positive, it has an IRR that is less than the WACC.
c. You should recommend that the project be accepted because (1) its NPV is positive and (2) although it has two IRRs, in this case it would be better to focus on the MIRR, which exceeds the WACC. You should explain this to the president and tell him that the firm’s value will increase if the project is accepted.
d. You should recommend that the project be rejected. Although its NPV is positive it has two IRRs, one of which is less than the WACC, which indicates that the firm’s value will decline if the project is accepted.
e. You should recommend that the project be rejected because, although its NPV is positive, its MIRR is less than the WACC, and that indicates that the firm’s value will decline if it is accepted.
5. A firm is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. The CEO wants to use the IRR criterion, while the CFO favors the NPV method. You were hired to advise the firm on the best procedure. If the wrong decision criterion is used, how much potential value would the firm lose?

WACC: 6.00%

Year 0 1 2 3 4

CFS -$1,025 $380 $380 $380 $380

CFL -$2,150 $765 $765 $765 $765

a. $188.68
b. $198.61
c. $209.07
d. $219.52
e. $230.49

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Question 24

FIN 534 Week 6 Chapter 11 Solution
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Answer 24

FIN 534 Week 6 Chapter 11 Solution

1. Which of the following statements is CORRECT?
   a. An externality is a situation where a project would have an adverse effect on some other part of the firm’s overall operations. If the project would have a favorable effect on other operations, then this is not an externality.
   b. An example of an externality is a situation where a bank opens a new office, and that new office causes deposits in the bank’s other offices to decline.
   c. The NPV method automatically deals correctly with externalities, even if the externalities are not specifically identified, but the IRR method does not. This is another reason to favor the NPV.
   d. Both the NPV and IRR methods deal correctly with externalities, even if the externalities are not specifically identified. However, the payback method does not.
   e. Identifying an externality can never lead to an increase in the calculated NPV.
2. Taussig Technologies is considering two potential projects, X and Y. In assessing the projects’ risks, the company estimated the beta of each project versus both the company’s other assets and the stock market, and it also conducted thorough scenario and simulation analyses. This research produced the following data:

Project X Project Y

Expected NPV $350,000 $350,000

Standard deviation (σ

NPV) $100,000 $150,000

Project beta (vs. market) 1.4 0.8

Correlation of the project cash flows with cash flows from currently existing projects. Cash flows are not correlated with the cash flows from existing projects. Cash flows are highly correlated with the cash flows from existing projects.

Which of the following statements is CORRECT?

a. Project X has more stand-alone risk than Project Y.
b. Project X has more corporate (or within-firm) risk than Project Y.
c. Project X has more market risk than Project Y.
d. Project X has the same level of corporate risk as Project Y.
e. Project X has less market risk than Project Y.
3. Which of the following statements is CORRECT?
a. If an asset is sold for less than its book value at the end of a project’s life, it will generate a loss for the firm, hence its terminal cash flow will be negative.
b. Only incremental cash flows are relevant in project analysis, the proper incremental cash flows are the reported accounting profits, and thus reported accounting income should be used as the basis for investor and managerial decisions.
c. It is unrealistic to believe that any increases in net working capital required at the start of an expansion project can be recovered at the project’s completion. Working capital like inventory is almost always used up in operations. Thus, cash flows associated with working capital should be included only at the start of a project’s life.
d. If equipment is expected to be sold for more than its book value at the end of a project’s life, this will result in a profit. In this case, despite taxes on the profit, the end-of-project cash flow will be greater than if the asset had been sold at book value, other things held constant.
e. Changes in net working capital refer to changes in current assets and current liabilities, not to changes in long-term assets and liabilities. Therefore, changes in net working capital should not be considered in a capital budgeting analysis.
4. Temple Corp. is considering a new project whose data are shown below. The equipment that would be used has a 3-year tax life, would be depreciated by the straight-line method over its 3- year life, and would have a zero salvage value. No new working capital would be required. Revenues and other operating costs are expected to be constant over the project’s 3-year life. What is the project’s NPV?

Risk-adjusted WACC 10.0%

Net investment cost (depreciable basis) $65,000

Straight-line deprec. rate 33.3333%

Sales revenues, each year $65,500

Operating costs (excl. deprec.), each year $25,000

Tax rate 35.0%

a. $15,740
b. $16,569
c. $17,441
d. $18,359
e. $19,325
5. Florida Car Wash is considering a new project whose data are shown below. The equipment to be used has a 3-year tax life, would be depreciated on a straight-line basis over the project’s 3- year life, and would have a zero salvage value after Year 3. No new working capital would be required. Revenues and other operating costs will be constant over the project’s life, and this is just one of the firm’s many projects, so any losses on it can be used to offset profits in other units. If the number of cars washed declined by 40% from the expected level, by how much would the project’s NPV decline? (Hint: Note that cash flows are constant at the Year 1 level, whatever that level is.)

WACC 10.0%

Net investment cost (depreciable basis) $60,000

Number of cars washed 2,800

Average price per car $25.00

Fixed op. cost (excl. deprec.) $10,000

Variable op. cost/unit (i.e., VC per car washed) $5.375

Annual depreciation $20,000

Tax rate 35.0%

a. $28,939
b. $30,462
c. $32,066
d. $33,753
e. $35,530

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Question 25

FIN 534 Week 6 DQ 1
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Answer 25

FIN 534 Week 6 DQ 1

Analyze the concept of “stress test” as applied to financial institutions and create a better alternative for assessing the viability of a financial institution.

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Question 26

FIN 534 Week 6 Quiz 5
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Answer 26

FIN 534 Week 6 Quiz 5

Which of the following items cannot be found on a firm’s balance sheet under current liabilities?

Answer

Accounts payable.

Short-term notes payable to the bank.

Accrued wages.

Cost of goods sold.

Accrued payroll taxes.
2 points

Question 2

Other things held constant, which of the following actions would increase the amount of cash on a company’s balance sheet?

Answer

The company repurchases common stock.

The company pays a dividend.

The company issues new common stock.

The company gives customers more time to pay their bills.

The company purchases a new piece of equipment.
2 points

Question 3

Aubey Aircraft recently announced that its net income increased sharply from the previous year, yet its net cash flow from operations declined. Which of the following could explain this performance?

Answer

The company’s operating income declined.

The company’s expenditures on fixed assets declined.

The company’s cost of goods sold increased.

The company’s depreciation and amortization expenses declined.

The company’s interest expense increased.

2 points

Question 4

Which of the following statements is CORRECT?

Answer

Since companies can deduct dividends paid but not interest paid, our tax system favors the use of equity financing over debt financing, and this causes companies’ debt ratios to be lower than they would be if interest and dividends were both deductible.

Interest paid to an individual is counted as income for tax purposes and taxed at the individual’s regular tax rate, which in 2008 could go up to 35%, but dividends received were taxed at a maximum rate of 15%.

The maximum federal tax rate on corporate income in 2008 was 50%.

Corporations obtain capital for use in their operations by borrowing and by raising equity capital, either by selling new common stock or by retaining earnings. The cost of debt capital is the interest paid on the debt, and the cost of the equity is the dividends paid on the stock. Both of these costs are deductible from income when calculating income for tax purposes.

The maximum federal tax rate on personal income in 2008 was 50%.
2 points

Question 5

Assume that Pappas Company commenced operations on January 1, 2010, and it was granted permission to use the same depreciation calculations for shareholder reporting and income tax purposes. The company planned to depreciate its fixed assets over 15 years, but in December 2010 management realized that the assets would last for only 10 years. The firm’s accountants plan to report the 2010 financial statements based on this new information. How would the new depreciation assumption affect the company’s financial statements?

Answer

The firm’s reported net fixed assets would increase.

The firm’s EBIT would increase.

The firm’s reported 2010 earnings per share would increase.

The firm’s cash position in 2010 and 2011 would increase.

The firm’s net liabilities would increase.
2 points

Question 6

Which of the following would be most likely to occur in the year after Congress, in an effort to increase tax revenue, passed legislation that forced companies to depreciate equipment over longer lives? Assume that sales, other operating costs, and tax rates are not affected, and assume that the same depreciation method is used for tax and stockholder reporting purposes.

Answer

Companies’ net operating profits after taxes (NOPAT) would decline.

Companies’ physical stocks of fixed assets would increase.

Companies’ net cash flows would increase.

Companies’ cash positions would decline.

Companies’ reported net incomes would decline.
2 points

Question 7

Which of the following statements is CORRECT?

Answer

One way to increase EVA is to achieve the same level of operating income but with more investor-supplied capital.

If a firm reports positive net income, its EVA must also be positive.

One drawback of EVA as a performance measure is that it mistakenly assumes that equity capital is free.

One way to increase EVA is to generate the same level of operating income but with less investor-supplied capital.

Actions that increase reported net income will always increase net cash flow.
2 points

Question 8

The CFO of Shalit Industries plans to have the company issue $300 million of new common stock and use the proceeds to pay off some of its outstanding bonds. Assume that the company, which does not pay any dividends, takes this action, and that total assets, operating income (EBIT), and its tax rate all remain constant. Which of the following would occur?

Answer

The company’s taxable income would fall.

The company’s interest expense would remain constant.

The company would have less common equity than before.

The company’s net income would increase.

The company would have to pay less taxes.

2 points

Question 9

Which of the following statements is CORRECT?

Answer

Since depreciation is a source of funds, the more depreciation a company has, the larger its retained earnings will be, other things held constant.

A firm can show a large amount of retained earnings on its balance sheet yet need to borrow cash to make required payments.

Common equity includes common stock and retained earnings, less accumulated depreciation.

The retained earnings account as shown on the balance sheet shows the amount of cash that is available for paying dividends.

If a firm reports a loss on its income statement, then the retained earnings account as shown on the balance sheet will be negative.
2 points

Question 10

Which of the following statements is CORRECT?

Answer

The primary difference between EVA and accounting net income is that when net income is calculated, a deduction is made to account for the cost of common equity, whereas EVA represents net income before deducting the cost of the equity capital the firm uses.

MVA gives us an idea about how much value a firm’s management has added during the last year.

MVA stands for market value added, and it is defined as follows:
MVA = (Shares outstanding)(Stock price) + Book value of common equity.

EVA stands for economic value added, and it is defined as follows:
(1-T) – (Investor-supplied op. capital) x (A-T cost of capital).

EVA gives us an idea about how much value a firm’s management has added over the firm’s life.
2 points

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Question 27

FIN 534 Week 5 Chapter 8 Solution
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Answer 27

FIN 534 Week 5 Chapter 8 Solution

1. Which of the following statements is CORRECT?
   a. Put options give investors the right to buy a stock at a certain strike price before a specified date.
   b. Call options give investors the right to sell a stock at a certain strike price before a specified date.
   c. Options typically sell for less than their exercise value.
   d. LEAPS are very short-term options that were created relatively recently and now trade in the market.
   e. An option holder is not entitled to receive dividends unless he or she exercises their option before the stock goes ex dividend.
2. Which of the following statements is CORRECT?
   a. If the underlying stock does not pay a dividend, it makes good economic sense to exercise a call option as soon as the stock’s price exceeds the strike price by about 10%, because this permits the option holder to lock in an immediate profit.
   b. Call options generally sell at a price less than their exercise value.
   c. If a stock becomes riskier (more volatile), call options on the stock are likely to decline in value.
   d. Call options generally sell at prices above their exercise value, but for an in-the-money option, the greater the exercise value in relation to the strike price, the lower the premium on the option is likely to be.
   e. Because of the put-call parity relationship, under equilibrium conditions a put option on a stock must sell at exactly the same price as a call option on the stock.
3. Which of the following statements is CORRECT?
   a. An option’s value is determined by its exercise value, which is the market price of the stock less its striking price. Thus, an option can’t sell for more than its exercise value.
   b. As the stock’s price rises, the time value portion of an option on a stock increases because the difference between the price of the stock and the fixed strike price increases.
   c. Issuing options provides companies with a low cost method of raising capital.
   d. The market value of an option depends in part on the option’s time to maturity and also on the variability of the underlying stock’s price.
   e. The potential loss on an option decreases as the option sells at higher and higher prices because the profit margin gets bigger.
4. The current price of a stock is $22, and at the end of one year its price will be either $27 or $17. The annual risk-free rate is 6.0%, based on daily compounding. A 1-year call option on the stock, with an exercise price of $22, is available. Based on the binominal model, what is the option’s value?
   a. $2.43
   b. $2.70
   c. $2.99
   d. $3.29
   e. $3.62
5. An analyst wants to use the Black-Scholes model to value call options on the stock of Ledbetter Inc. based on the following data:

The price of the stock is $40.

The strike price of the option is $40.

The option matures in 3 months ().

The standard deviation of the stock’s returns is 0.40, and the variance is 0.16.

The risk-free rate is 6%.

Given this information, the analyst then calculated the following necessary components of the Black-Scholes model:

d

d

N(d

1) = 0.56946

N(d

2) = 0.49003

N(d

1) and N(d2) represent areas under a standard normal distribution function. Using the Black-Scholes model, what is the value of the call option?
a. $2.81
b. $3.12
c. $3.47
d. $3.82
e. $4.20

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Question 28

FIN 534 Week 5 Chapter 9 Solution
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Answer 28

FIN 534 Week 5 Chapter 9 Solution

1. Bankston Corporation forecasts that if all of its existing financial policies are followed, its proposed capital budget would be so large that it would have to issue new common stock. Since new stock has a higher cost than retained earnings, Bankston would like to avoid issuing new stock. Which of the following actions would REDUCE its need to issue new common stock?
   a. Increase the dividend payout ratio for the upcoming year.
   b. Increase the percentage of debt in the target capital structure.
   c. Increase the proposed capital budget.
   d. Reduce the amount of short-term bank debt in order to increase the current ratio.
   e. Reduce the percentage of debt in the target capital structure.
2. LaPango Inc. estimates that its average-risk projects have a WACC of 10%, its below-average risk projects have a WACC of 8%, and its above-average risk projects have a WACC of 12%. Which of the following projects (A, B, and C) should the company accept?
   a. Project B, which is of below-average risk and has a return of 8.5%.
   b. Project C, which is of above-average risk and has a return of 11%.
   c. Project A, which is of average risk and has a return of 9%.
   d. None of the projects should be accepted.
   e. All of the projects should be accepted.
3. Which of the following statements is CORRECT?
   a. When calculating the cost of preferred stock, a company needs to adjust for taxes, because preferred stock dividends are deductible by the paying corporation.
   b. All else equal, an increase in a company’s stock price will increase its marginal cost of retained earnings, rs.
   c. All else equal, an increase in a company’s stock price will increase its marginal cost of new common equity, re.
   d. Since the money is readily available, the after-tax cost of retained earnings is usually much lower than the after-tax cost of debt.
   e. If a company’s tax rate increases but the YTM on its noncallable bonds remains the same, the after-tax cost of its debt will fall.
4. Which of the following statements is CORRECT?
   a. Since debt capital can cause a company to go bankrupt but equity capital cannot, debt is riskier than equity, and thus the after-tax cost of debt is always greater than the cost of equity.
   b. The tax-adjusted cost of debt is always greater than the interest rate on debt, provided the company does in fact pay taxes.
   c. If a company assigns the same cost of capital to all of its projects regardless of each project’s risk, then the company is likely to reject some safe projects that it actually should accept and to accept some risky projects that it should reject.
   d. Because no flotation costs are required to obtain capital as retained earnings, the cost of retained earnings is generally lower than the after-tax cost of debt.
   e. Higher flotation costs tend to reduce the cost of equity capital.
5. Cranberry Corp. has two divisions of equal size: a computer manufacturing division and a data processing division. Its CFO believes that stand-alone data processor companies typically have a WACC of 8%, while stand-alone computer manufacturers typically have a 12% WACC. He also believes that the data processing and manufacturing divisions have the same risk as their typical peers. Consequently, he estimates that the composite, or corporate, WACC is 10%. A consultant has suggested using an 8% hurdle rate for the data processing division and a 12% hurdle rate for the manufacturing division. However, the CFO disagrees, and he has assigned a 10% WACC to all projects in both divisions. Which of the following statements is CORRECT?
   a. While the decision to use just one WACC will result in its accepting more projects in the manufacturing division and fewer projects in its data processing division than if it followed the consultant’s recommendation, this should not affect the firm’s intrinsic value.
   b. The decision not to adjust for risk means, in effect, that it is favoring the data processing division. Therefore, that division is likely to become a larger part of the consolidated company over time.
   c. The decision not to adjust for risk means that the company will accept too many projects in the manufacturing division and too few in the data processing division. This will lead to a reduction in the firm’s intrinsic value over time.
   d. The decision not to risk-adjust means that the company will accept too many projects in the data processing business and too few projects in the manufacturing business. This will lead to a reduction in its intrinsic value over time.
   e. The decision not to risk adjust means that the company will accept too many projects in the manufacturing business and too few projects in the data processing business. This may affect the firm’s capital structure but it will not affect its intrinsic value.

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Question 29

FIN 534 Week 5 DQ 1
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Answer 29

FIN 534 Week 5 DQ 1

Based on what you discovered in the e-Activity, make at least two recommendations for regarding how your selected company should approach its capital budgeting. Explain the reasoning behind your recommendations.

A capital budgeting analysis conducts a test to see if the benefits (i.e., cash inflows) are large enough to repay the company for three things: (1) the cost of the asset, (2) the cost of financing the asset (e.g., interest, etc.), and (3) a rate of return (called a risk premium) that compensates the company for potential errors made when estimating cash flows that will occur in the distant future.

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Question 30

FIN 534 week 5 quiz 4
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Answer 30

FIN 534 week 5 quiz 4

Question 1

The Nantell Corporation just purchased an expensive piece of equipment. Assume that the firm planned to depreciate the equipment over 5 years on a straight-line basis, but Congress then passed a provision that requires the company to depreciate the equipment on a straight-line basis over 7 years. Other things held constant, which of the following will occur as a result of this Congressional action? Assume that the company uses the same depreciation method for tax and stockholder reporting purposes.

Question 2

On its 2010 balance sheet, Barngrover Books showed $510 million of retained earnings, and exactly that same amount was shown the following year. Assuming that no earnings restatements were issued, which of the following statements is CORRECT?

Question 3

Which of the following statements is CORRECT?

Question 4

Which of the following statements is CORRECT?

Question 5

Which of the following statements is CORRECT?

Answer

Selected Answer:

A firm can show a large amount of retained earnings on its balance sheet yet need to borrow cash to make required payments.

Question 6

Below is the common equity section (in millions) of Teweles Technology’s last two year-end balance sheets:

2009 2008

Common stock $2,000 $1,000

Retained earnings 2,000 2,340

Total common equity $4,000 $3,340

Teweles has never paid a dividend to its common stockholders. Which of the following statements is CORRECT?

Question 7

Which of the following statements is CORRECT?

For most companies, the market value of the stock equals the book value of the stock as reported on the balance sheet.

A typical industrial company’s balance sheet lists the firm’s assets that will be converted to cash first, and then goes on down to list the firm’s longest lived assets last.

Question 8

Which of the following statements is CORRECT?

Question 9

Aubey Aircraft recently announced that its net income increased sharply from the previous year, yet its net cash flow from operations declined. Which of the following could explain this performance?

Question 10

Which of the following statements is CORRECT?

Question 11

A security analyst obtained the following information from Prestopino Products’ financial statements:

On the basis of this information, which of the following statements is CORRECT?

Question 12

Other things held constant, which of the following actions would increase the amount of cash on a company’s balance sheet?

Question 13

Which of the following statements is CORRECT?

Question 14

Which of the following items is NOT included in current assets?

Question 15

Which of the following statements is CORRECT?

Question 16

Taggart Technologies is considering issuing new common stock and using the proceeds to reduce its outstanding debt. The stock issue would have no effect on total assets, the interest rate Taggart pays, EBIT, or the tax rate. Which of the following is likely to occur if the company goes ahead with the stock issue?

Question 17

Amram Company’s current ratio is 1.9. Considered alone, which of the following actions would reduce the company’s current ratio?

Question 18

Other things held constant, which of the following alternatives would increase a company’s cash flow for the current year?

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Question 31

FIN 534 Week 4 Chapter 6 Solution
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Answer 31

FIN 534 Week 4 Chapter 6 Solution

1. Which of the following statements is CORRECT?
   a. If you add enough randomly selected stocks to a portfolio, you can completely eliminate all of the market risk from the portfolio.
   b. If you were restricted to investing in publicly traded common stocks, yet you wanted to minimize the riskiness of your portfolio as measured by its beta, then according to the CAPM theory you should invest an equal amount of money in each stock in the market. That is, if there were 10,000 traded stocks in the world, the least risky possible portfolio would include some shares of each one.
   c. If you formed a portfolio that consisted of all stocks with betas less than 1.0, which is about half of all stocks, the portfolio would itself have a beta coefficient that is equal to the weighted average beta of the stocks in the portfolio, and that portfolio would have less risk than a portfolio that consisted of all stocks in the market.
   d. Market risk can be eliminated by forming a large portfolio, and if some Treasury bonds are held in the portfolio, the portfolio can be made to be completely riskless.
   e. A portfolio that consists of all stocks in the market would have a required return that is equal to the riskless rate.
2. Jane has a portfolio of 20 average stocks, and Dick has a portfolio of 2 average stocks. Assuming the market is in equilibrium, which of the following statements is CORRECT?
   a. Jane’s portfolio will have less diversifiable risk and also less market risk than Dick’s portfolio.
   b. The required return on Jane’s portfolio will be lower than that on Dick’s portfolio because Jane’s portfolio will have less total risk.
   c. Dick’s portfolio will have more diversifiable risk, the same market risk, and thus more total risk than Jane’s portfolio, but the required (and expected) returns will be the same on both portfolios.
   d. If the two portfolios have the same beta, their required returns will be the same, but Jane’s portfolio will have less market risk than Dick’s.
   e. The expected return on Jane’s portfolio must be lower than the expected return on Dick’s portfolio because Jane is more diversified.
3. Stock X has a beta of 0.7 and Stock Y has a beta of 1.3. The standard deviation of each stock’s returns is 20%. The stocks’ returns are independent of each other, i.e., the correlation coefficient, r, between them is zero. Portfolio P consists of 50% X and 50% Y. Given this information, which of the following statements is CORRECT?
   a. Portfolio P has a standard deviation of 20%.
   b. The required return on Portfolio P is equal to the market risk premium (rM − rRF).
   c. Portfolio P has a beta of 0.7.
   d. Portfolio P has a beta of 1.0 and a required return that is equal to the riskless rate, rRF.
   e. Portfolio P has the same required return as the market (rM).
4. Which of the following statements is CORRECT?
   a. When diversifiable risk has been diversified away, the inherent risk that remains is market risk, which is constant for all stocks in the market.
   b. Portfolio diversification reduces the variability of returns on an individual stock.
   c. Risk refers to the chance that some unfavorable event will occur, and a probability distribution is completely described by a listing of the likelihoods of unfavorable events.
   d. The SML relates a stock’s required return to its market risk. The slope and intercept of this line cannot be controlled by the firms’ managers, but managers can influence their firms’ positions on the line by such actions as changing the firm’s capital structure or the type of assets it employs.
   e. A stock with a beta of -1.0 has zero market risk if held in a 1-stock portfolio.
5. Which of the following statements is CORRECT?
   a. If Mutual Fund A held equal amounts of 100 stocks, each of which had a beta of 1.0, and Mutual Fund B held equal amounts of 10 stocks with betas of 1.0, then the two mutual funds would both have betas of 1.0. Thus, they would be equally risky from an investor’s standpoint, assuming the investor’s only asset is one or the other of the mutual funds.
   b. If investors become more risk averse but r

RF does not change, then the required rate of return on high-beta stocks will rise and the required return on low-beta stocks will decline, but the required return on an average-risk stock will not change.

c. An investor who holds just one stock will generally be exposed to more risk than an investor who holds a portfolio of stocks, assuming the stocks are all equally risky. Since the holder of the 1-stock portfolio is exposed to more risk, he or she can expect to earn a higher rate of return to compensate for the greater risk.
d. There is no reason to think that the slope of the yield curve would have any effect on the slope of the SML.
e. Assume that the required rate of return on the market, r

M, is given and fixed at 10%. If the yield curve were upward sloping, then the Security Market Line (SML) would have a steeper slope if 1-year Treasury securities were used as the risk-free rate than if 30-year Treasury bonds were used for rRF.

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Question 32

FIN 534 Week 4 Chapter 7 Solution
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Answer 32

FIN 534 Week 4 Chapter 7 Solution

1. Which of the following statements is CORRECT?
   a. The constant growth model takes into consideration the capital gains investors expect to earn on a stock.
   b. Two firms with the same expected dividend and growth rates must also have the same stock price.
   c. It is appropriate to use the constant growth model to estimate a stock’s value even if its growth rate is never expected to become constant.
   d. If a stock has a required rate of return %, and if its dividend is expected to grow at a constant rate of 5%, this implies that the stock’s dividend yield is also 5%.
   e. The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate.
2. Stocks A and B have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?

A B

Price $25 $25

Expected growth (constant) 10% 5%

Required return 15% 15%

a. Stock A’s expected dividend at is only half that of Stock B.
b. Stock A has a higher dividend yield than Stock B.
c. Currently the two stocks have the same price, but over time Stock B’s price will pass that of A.
d. Since Stock A’s growth rate is twice that of Stock B, Stock A’s future dividends will always be twice as high as Stock B’s.
e. The two stocks should not sell at the same price. If their prices are equal, then a disequilibrium must exist.
3. Which of the following statements is CORRECT?
a. A major disadvantage of financing with preferred stock is that preferred stockholders typically have supernormal voting rights.
b. Preferred stock is normally expected to provide steadier, more reliable income to investors than the same firm’s common stock, and, as a result, the expected after-tax yield on the preferred is lower than the after-tax expected return on the common stock.
c. The preemptive right is a provision in all corporate charters that gives preferred stockholders the right to purchase (on a pro rata basis) new issues of preferred stock.
d. One of the disadvantages to a corporation of owning preferred stock is that 70% of the dividends received represent taxable income to the corporate recipient, whereas interest income earned on bonds would be tax free.

Estimated %(must be changed to force Calculated Price to equal the Actual Market Price)$15.00Year012345Dividend growth rate (insert correct values)10%10%10%5%5%Calculated dividends (D0 has been paid)$1.00????? = D4/(rs − g4). Find using Estimated rs. ?Total CFs???PVs of CFs when discounted at Estimated rs???Calculated = Sum of PVs =$0.00 A positive number will be here when dividends are estimated. The Calculated Price will equal the Actual Market Price once the correct rs has been found.Rapid growthActual Market Price, P0:Normal growth

e. One of the advantages to financing with preferred stock is that 70% of the dividends paid out are tax deductible to the issuer.
4. Church Inc. is presently enjoying relatively high growth because of a surge in the demand for its new product. Management expects earnings and dividends to grow at a rate of 25% for the next 4 years, after which competition will probably reduce the growth rate in earnings and dividends to zero, i.e., The company’s last dividend, D, was $1.25, its beta is 1.20, the market risk premium is 5.50%, and the risk-free rate is 3.00%. What is the current price of the common stock?
a. $26.77
b. $27.89
c. $29.05
d. $30.21
e. $31.42
5. Your boss, Sally Maloney, treasurer of Fred Clark Enterprises (FCE), asked you to help her estimate the intrinsic value of the company’s stock. FCE just paid a dividend of $1.00, and the stock now sells for $15.00 per share. Sally asked a number of security analysts what they believe FCE’s future dividends will be, based on their analysis of the company. The consensus is that the dividend will be increased by 10% during Years 1 to 3, and it will be increased at a rate of 5% per year in Year 4 and thereafter. Sally asked you to use that information to estimate the required rate of return on the stock, rs, and she provided you with the following template for use in the analysis.

Sally told you that the growth rates in the template were just put in as a trial, and that you must replace them with the analysts’ forecasted rates to get the correct forecasted dividends and then the estimated TV. She also notes that the estimated value for rs, at the top of the template, is also just a guess, and you must replace it with a value that will cause the Calculated Price shown at the bottom to equal the Actual Market Price. She suggests that, after you have put in the correct dividends, you can manually calculate the price, using a series of guesses as to the Estimated rs. The value of rs that causes the calculated price to equal the actual price is the correct one. She notes, though, that this trial-and-error process would be quite tedious, and that the correct rs could be found much faster with a simple Excel model, especially if you use Goal Seek. What is the value of rs?

a. 11.84%
b. 12.21%
c. 12.58%
d. 12.97%
e. 13.36%

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Question 33

FIN 534 Week 4 DQ 1
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Answer 33

FIN 534 Week 4 DQ 1

Drawing on what you discovered in the e-Activity, discuss how instances of corporate mismanagement or fraud should be taken into account when assessing the risks associated with certain types of investments.

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Question 34

FIN 534 Week 4 DQ 2
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Answer 34

FIN 534 Week 4 DQ 2

Discuss the non-rational factors that may have a role in the valuation of stocks and stock market equilibrium. Provide specific examples to support your response.

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Question 35

FIN 534 Week 4 quiz 3
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Answer 35

FIN 534 Week 4 quiz 3

Which of the following factors could explain why Dellva Energy had a negative net cash flow last year, even though the cash on its balance sheet increased?

Answer

The company sold a new issue of bonds.

The company made a large investment in new plant and equipment.

The company paid a large dividend.

The company had high amortization expenses.

The company repurchased 20% of its common stock.
2 points

Question 2

Which of the following items is NOT included in current assets?

Answer

Accounts receivable.

Inventory.

Bonds.

Cash.

Short-term, highly liquid, marketable securities.
2 points

Question 3

Other things held constant, which of the following actions would increase the amount of cash on a company’s balance sheet?

Answer

The company repurchases common stock.

The company pays a dividend.

The company issues new common stock.

The company gives customers more time to pay their bills.

The company purchases a new piece of equipment.
2 points

Question 4

Analysts who follow Howe Industries recently noted that, relative to the previous year, the company’s operating net cash flow increased, yet cash as reported on the balance sheet decreased. Which of the following factors could explain this situation?

Answer

The company cut its dividend.

The company made a large investment in a profitable new plant.

The company sold a division and received cash in return.

The company issued new common stock.

The company issued new long-term debt.
2 points

Question 5

Below are the 2008 and 2009 year-end balance sheets for Wolken Enterprises:

Assets: 2009 2008
Cash $ 200,000 $ 170,000
Accounts receivable 864,000 700,000
Inventories 2,000,000 1,400,000
Total current assets $ 3,064,000 $2,270,000
Net fixed assets 6,000,000 5,600,000
Total assets $ 9,064,000 $7,870,000

Liabilities and equity:
Accounts payable $ 1,400,000 $1,090,000
Notes payable 1,600,000 1,800,000
Total current liabilities $ 3,000,000 $2,890,000
Long-term debt 2,400,000 2,400,000
Common stock 3,000,000 2,000,000
Retained earnings 664,000 580,000
Total common equity $ 3,664,000 $2,580,000
Total liabilities and equity $ 9,064,000 $7,870,000

Wolken has never paid a dividend on its common stock, and it issued $2,400,000 of 10-year non-callable, long-term debt in 2008. As of the end of 2009, none of the principal on this debt had been repaid. Assume that the company’s sales in 2008 and 2009 were the same. Which of the following statements must be CORRECT?

Answer

Wolken increased its short-term bank debt in 2009.

Wolken issued long-term debt in 2009.

Wolken issued new common stock in 2009.

Wolken repurchased some common stock in 2009.

Wolken had negative net income in 2009.

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Question 36

FIN 534 Week 3 Chapter 4 Solution
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Answer 36

FIN 534 Week 3 Chapter 4 Solution

1. A $50,000 loan is to be amortized over 7 years, with annual end-of-year payments. Which of these statements is CORRECT?
   a. The annual payments would be larger if the interest rate were lower.
   b. If the loan were amortized over 10 years rather than 7 years, and if the interest rate were the same in either case, the first payment would include more dollars of interest under the 7-year amortization plan.
   c. The proportion of each payment that represents interest as opposed to repayment of principal would be lower if the interest rate were lower.
   d. The last payment would have a higher proportion of interest than the first payment.
   e. The proportion of interest versus principal repayment would be the same for each of the 7 payments.
2. Which of the following statements is CORRECT?
   a. If you have a series of cash flows, each of which is positive, you can solve for I, where the solution value of I causes the PV of the cash flows to equal the cash flow at Time 0.
   b. If you have a series of cash flows, and CF0 is negative but each of the following CFs is positive, you can solve for I, but only if the sum of the undiscounted cash flows exceeds the cost.
   c. To solve for I, one must identify the value of I that causes the PV of the positive CFs to equal the absolute value of the PV of the negative CFs. This is, essentially, a trial-and-error procedure that is easy with a computer or financial calculator but quite difficult otherwise.
   d. If you solve for I and get a negative number, then you must have made a mistake.
   e. If CF0 is positive and all the other CFs are negative, then you cannot solve for I.
3. Riverside Bank offers to lend you $50,000 at a nominal rate of 6.5%, compounded monthly. The loan (principal plus interest) must be repaid at the end of the year. Midwest Bank also offers to lend you the $50,000, but it will charge an annual rate of 7.0%, with no interest due until the end of the year. How much higher or lower is the effective annual rate charged by Midwest versus the rate charged by Riverside?
   a. 0.52%
   b. 0.44%
   c. 0.36%
   d. 0.30%
   e. 0.24%
4. Steve and Ed are cousins who were both born on the same day, and both turned 25 today. Their grandfather began putting $2,500 per year into a trust fund for Steve on his 20th birthday, and he just made a 6th payment into the fund. The grandfather (or his estate’s trustee) will make 40 more $2,500 payments until a 46th and final payment is made on Steve’s 65th birthday. The grandfather set things up this way because he wants Steve to work, not be a “trust fund baby,” but he also wants to ensure that Steve is provided for in his old age.

Until now, the grandfather has been disappointed with Ed, hence has not given him anything. However, they recently reconciled, and the grandfather decided to make an equivalent provision for Ed. He will make the first payment to a trust for Ed today, and he has instructed his trustee to make 40 additional equal annual payments until Ed turns 65, when the 41st and final payment will be made. If both trusts earn an annual return of 8%, how much must the grandfather put into Ed’s trust today and each subsequent year to enable him to have the same retirement nest egg as Steve after the last payment is made on their 65th birthday?

a. $3,726
b. $3,912
c. $4,107
d. $4,313
e. $4,528
5. John and Daphne are saving for their daughter Ellen’s college education. Ellen just turned 10 at (), and she will be entering college 8 years from now (at ).College tuition and expenses at State U. are currently $14,500 a year, but they are expected to increase at a rate of 3.5% a year. Ellen should graduate in 4 years–if she takes longer or wants to go to graduate school, she will be on her own. Tuition and other costs will be due at the beginning of each school year (at , 9, 10, and 11).So far, John and Daphne have accumulated $15,000 in their college savings account (at ). Their long-run financial plan is to add an additional $5,000 in each of the next 4 years (at , 2, 3, and 4). Then they plan to make 3 equal annual contributions in each of the following years, , 6, and 7. They expect their investment account to earn 9%. How large must the annual payments at , 6, and 7 be to cover Ellen’s anticipated college costs?
a. $1,965.21
b. $2,068.64
c. $2,177.51
d. $2,292.12
e. $2,412.76

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Question 37

FIN 534 Week 3 Chapter 5 Solution
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Answer 37

FIN 534 Week 3 Chapter 5 Solution

1. Three $1,000 face value bonds that mature in 10 years have the same level of risk, hence their YTMs are equal. Bond A has an 8% annual coupon, Bond B has a 10% annual coupon, and Bond C has a 12% annual coupon. Bond B sells at par. Assuming interest rates remain constant for the next 10 years, which of the following statements is CORRECT?
   a. Bond A’s current yield will increase each year.
   b. Since the bonds have the same YTM, they should all have the same price, and since interest rates are not expected to change, their prices should all remain at their current levels until maturity.
   c. Bond C sells at a premium (its price is greater than par), and its price is expected to increase over the next year.
   d. Bond A sells at a discount (its price is less than par), and its price is expected to increase over the next year.
   e. Over the next year, Bond A’s price is expected to decrease, Bond B’s price is expected to stay the same, and Bond C’s price is expected to increase.
2. Which of the following statements is CORRECT?
   a. Two bonds have the same maturity and the same coupon rate. However, one is callable and the other is not. The difference in prices between the bonds will be greater if the current market interest rate is below the coupon rate than if it is above the coupon rate.
   b. A callable 10-year, 10% bond should sell at a higher price than an otherwise similar noncallable bond.
   c. Corporate treasurers dislike issuing callable bonds because these bonds may require the company to raise additional funds earlier than would be true if noncallable bonds with the same maturity were used.
   d. Two bonds have the same maturity and the same coupon rate. However, one is callable and the other is not. The difference in prices between the bonds will be greater if the current market interest rate is above the coupon rate than if it is below the coupon rate.
   e. The actual life of a callable bond will always be equal to or less than the actual life of a noncallable bond with the same maturity. Therefore, if the yield curve is upward sloping, the required rate of return will be lower on the callable bond.
3. Which of the following statements is CORRECT?
   a. Assume that two bonds have equal maturities and are of equal risk, but one bond sells at par while the other sells at a premium above par. The premium bond must have a lower current yield and a higher capital gains yield than the par bond.
   b. A bond’s current yield must always be either equal to its yield to maturity or between its yield to maturity and its coupon rate.
   c. If a bond sells at par, then its current yield will be less than its yield to maturity.
   d. If a bond sells for less than par, then its yield to maturity is less than its coupon rate.
   e. A discount bond’s price declines each year until it matures, when its value equals its par value.
4. Suppose a new company decides to raise a total of $200 million, with $100 million as common equity and $100 million as long-term debt. The debt can be mortgage bonds or debentures, but by an iron-clad provision in its charter, the company can never raise any additional debt beyond the original $100 million. Given these conditions, which of the following statements is CORRECT?
   a. The higher the percentage of debt represented by mortgage bonds, the riskier both types of bonds will be and, consequently, the higher the firm’s total dollar interest charges will be.
   b. If the debt were raised by issuing $50 million of debentures and $50 million of first mortgage bonds, we could be certain that the firm’s total interest expense would be lower than if the debt were raised by issuing $100 million of debentures.
   c. In this situation, we cannot tell for sure how, or whether, the firm’s total interest expense on the $100 million of debt would be affected by the mix of debentures versus first mortgage bonds. The interest rate on each of the two types of bonds would increase as the percentage of mortgage bonds used was increased, but the result might well be such that the firm’s total interest charges would not be affected materially by the mix between the two.
   d. The higher the percentage of debentures, the greater the risk borne by each debenture, and thus the higher the required rate of return on the debentures.
   e. If the debt were raised by issuing $50 million of debentures and $50 million of first mortgage bonds, we could be certain that the firm’s total interest expense would be lower than if the debt were raised by issuing $100 million of first mortgage bonds.
5. Cosmic Communications Inc. is planning two new issues of 25-year bonds. Bond Par will be sold at its $1,000 par value, and it will have a 10% semiannual coupon. Bond OID will be an Original Issue Discount bond, and it will also have a 25-year maturity and a $1,000 par value, but its semiannual coupon will be only 6.25%. If both bonds are to provide investors with the same effective yield, how many of the OID bonds must Cosmic issue to raise $3,000,000? Disregard flotation costs, and round your final answer up to a whole number of bonds.
   a. 4,228
   b. 4,337
   c. 4,448
   d. 4,562
   e. 4,676

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Question 38

FIN 534 Week 3 DQ 1
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Answer 38

FIN 534 Week 3 DQ 1

Starting with your current situation, describe what you must do to ensure an annual retirement income of $60,000 starting at age 65.

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Question 39

FIN 534 Week 3 DQ 2
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Answer 39

FIN 534 Week 3 DQ 2

Discuss the impact of Standard & Poor’s downgrading the U.S. credit rating in 2011. Address current and likely future impact on U.S. business, individuals, the global economy and current financial practices. Provide specific examples to support your response.

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Question 40

FIN 534 Week 3 Quiz
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Answer 40

FIN 534 Week 3 Quiz

Question 1

Which of the following statements is CORRECT?

Answer

The cash flows for an ordinary (or deferred) annuity all occur at the beginning of the periods.

If a series of unequal cash flows occurs at regular intervals, such as once a year, then the series is by definition an annuity.

The cash flows for an annuity due must all occur at the ends of the periods.

The cash flows for an annuity must all be equal, and they must occur at regular intervals, such as once a year or once a month.

If some cash flows occur at the beginning
of the periods while others occur at the ends, then we have what the textbook defines as a variable annuity.

2 points

Question 2

Which of the following statements is CORRECT?

Answer

A time line is not meaningful unless all cash flows occur annually.

Time lines are not useful for visualizing complex problems prior to doing actual calculations.

Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly.

Time lines can be constructed for annuities where the payments occur at either the beginning or the end of the periods.

Some of the cash flows shown on a time line can be in the form of annuity payments, but none can be uneven amounts.

2 points

Question 3

A U.S. Treasury bond will pay a lump sum of $1,000 exactly 3 years from today. The nominal interest rate is 6%, semiannual compounding. Which of the following statements is CORRECT?

Answer

The periodic interest rate is greater than 3%.

The periodic rate is less than 3%.

The present value would be greater if the lump sum were discounted back for more periods.

The present value of the $1,000 would be larger if interest were compounded monthly rather than semiannually.

The PV of the $1,000 lump sum has a smaller present value than the PV of a 3-year, $333.33 ordinary annuity.

2 points

Question 4

Which of the following statements is CORRECT?

Answer

The present value of a 3-year, $150 ordinary annuity will exceed the present value of a 3-year, $150 annuity due.

If a loan has a nominal annual rate of 8%, then the effective rate will never be less than 8%.

If a loan or investment has annual payments, then the effective, periodic, and nominal rates of interest will all be different.

The proportion of the payment that goes toward interest on a fully amortized loan increases over time.

An investment that has a nominal rate of 6% with semiannual payments will have an effective rate that is smaller than 6%.

2 points

Question 5

You are considering two equally risky annuities, each of which pays $5,000 per year for 10 years. Investment ORD is an ordinary (or deferred) annuity, while Investment DUE is an annuity due. Which of the following statements is CORRECT?

Answer

The present value of ORD must exceed the present value of DUE, but the future value of ORD may be less than the future value of DUE.

The present value of DUE exceeds the present value of ORD, while the future value of DUE is less than the future value of ORD.

The present value of ORD exceeds the present value of DUE, and the future value of ORD also exceeds the future value of DUE.

The present value of DUE exceeds the present value of ORD, and the future value of DUE also exceeds the future value of ORD.

If the going rate of interest decreases from 10% to 0%, the difference between the present value of ORD and the present value of DUE would remain constant.

2 points

Question 6

A U.S. Treasury bond will pay a lump sum of $1,000 exactly 3 years from today. The nominal interest rate is 6%, semiannual compounding. Which of the following statements is CORRECT?

Answer

The periodic interest rate is greater than 3%.

The periodic rate is less than 3%.

The present value would be greater if the lump sum were discounted back for more periods.

The present value of the $1,000 would be smaller if interest were compounded monthly rather than semiannually.

The PV of the $1,000 lump sum has a higher present value than the PV of a 3-year, $333.33 ordinary annuity.

2 points

Question 7

You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows. Which of the following would lower the calculated value of the investment?

Answer

The cash flows are in the form of a deferred annuity, and they total to $100,000. You learn that the annuity lasts for only 5 rather than 10 years, hence that each payment is for $20,000 rather than for $10,000.

The discount rate increases.

The riskiness of the investment’s cash flows decreases.

The total amount of cash flows remains the same, but more of the cash flows are received in the earlier years and less are received in the later years.

The discount rate decreases.

2 points

Question 8

Which of the following statements is CORRECT?

Answer

If you have a series of cash flows, each of which is positive, you can solve for I, where the solution value of I causes the PV of the cash flows to equal the cash flow at Time 0.

If you have a series of cash flows, and CF0 is negative but each of the following CFs is positive, you can solve for I, but only if the sum of the undiscounted cash flows exceeds the cost.

To solve for I, one must identify the value of I that causes the PV of the positive CFs to equal the absolute value of the FV of the negative CFs. It is impossible to find the value of I without a computer or financial calculator.

If you solve for I and get a negative number, then you must have made a mistake.

If CF0
is positive and all the other CFs are negative, then you can still solve for I.

2 points

Question 9

You are considering two equally risky annuities, each of which pays $5,000 per year for 10 years. Investment ORD is an ordinary (or deferred) annuity, while Investment DUE is an annuity due. Which of the following statements is CORRECT?

Answer

A rational investor would be willing to pay more for DUE than for ORD, so their market prices should differ.

The present value of DUE exceeds the present value of ORD, while the future value of DUE is less than the future value of ORD.

The present value of ORD exceeds the present value of DUE, and the future value of ORD also exceeds the future value of DUE.

The present value of ORD exceeds the present value of DUE, while the future value of DUE exceeds the future value of ORD.

If the going rate of interest decreases from 10% to 0%, the difference between the present value of ORD and the present value of DUE would remain constant.

2 points

Question 10

Which of the following bank accounts has the lowest effective annual return?

Answer

An account that pays 8% nominal interest with monthly compounding.

An account that pays 8% nominal interest with annual compounding.

An account that pays 7% nominal interest with daily (365-day) compounding.

An account that pays 7% nominal interest with monthly compounding.

An account that pays 8% nominal interest with daily (365-day) compounding.

2 points

Question 11

Which of the following statements regarding a 30-year monthly payment amortized mortgage with a nominal interest rate of 10% is CORRECT?

Answer

The monthly payments will decline over time.

A smaller proportion of the last monthly payment will be interest, and a larger proportion will be principal, than for the first monthly payment.

The total dollar amount of principal being paid off each month gets smaller as the loan approaches maturity.

The amount representing interest in the first payment would be higher if the nominal interest rate were 7% rather than 10%.

Exactly 10% of the first monthly payment represents interest.

2 points

Question 12

Which of the following investments would have the highest future value at the end of 10 years? Assume that the effective annual rate for all investments is the same and is greater than zero.

Answer

Investment A pays $250 at the beginning of every year for the next 10 years (a total of 10 payments).

Investment B pays $125 at the end of every 6-month period for the next 10 years (a total of 20 payments).

Investment C pays $125 at the beginning of every 6-month period for the next 10 years (a total of 20 payments).

Investment D pays $2,500 at the end of 10 years (just one payment).

Investment E pays $250 at the end of every year for the next 10 years (a total of 10 payments).

2 points

Question 13

Which of the following investments would have the lowest present value? Assume that the effective annual rate for all investments is the same and is greater than zero.

Answer

Investment A pays $250 at the end of every year for the next 10 years (a total of 10 payments).

Investment B pays $125 at the end of every 6-month period for the next 10 years (a total of 20 payments).

Investment C pays $125 at the beginning of every 6-month period for the next 10 years (a total of 20 payments).

Investment D pays $2,500 at the end of 10 years (just one payment).

Investment E pays $250 at the beginning of every year for the next 10 years (a total of 10 payments).

2 points

Question 14

Which of the following bank accounts has the highest effective annual return?

Answer

An account that pays 8% nominal interest with monthly compounding.

An account that pays 8% nominal interest with annual compounding.

An account that pays 7% nominal interest with daily (365-day) compounding.

An account that pays 7% nominal interest with monthly compounding.

An account that pays 8% nominal interest with daily (365-day) compounding.

2 points

Question 15

Which of the following statements regarding a 15-year (180-month) $125,000, fixed-rate mortgage is CORRECT? (Ignore taxes and transactions costs.)

Answer

The remaining balance after three years will be $125,000 less one third of the interest paid during the first three years.

Because it is a fixed-rate mortgage, the monthly loan payments (which include both interest and principal payments) are constant.

Interest payments on the mortgage will increase steadily over time, but the total amount of each payment will remain constant.

The proportion of the monthly payment that goes towards repayment of principal will be lower 10 years from now than it will be the first year.

The outstanding balance declines at a slower rate in the later years of the loan’s life.

2 points

Question 16

Which of the following statements is CORRECT?

Answer

If a bond is selling at a discount, the yield to call is a better measure of return than the yield to maturity.

On an expected yield basis, the expected capital gains yield will always be positive because an investor would not purchase a bond with an expected capital loss.

On an expected yield basis, the expected current yield will always be positive because an investor would not purchase a bond that is not expected to pay any cash coupon interest.

If a coupon bond is selling at par, its current yield equals its yield to maturity.

The current yield on Bond A exceeds the current yield on Bond B; therefore, Bond A must have a higher yield to maturity than Bond B.

2 points

Question 17

Amram Inc. can issue a 20-year bond with a 6% annual coupon. This bond is not convertible, is not callable, and has no sinking fund. Alternatively, Amram could issue a 20-year bond that is convertible into common equity, may be called, and has a sinking fund. Which of the following most accurately describes the coupon rate that Amram would have to pay on the convertible, callable bond?

Answer

Exactly equal to 6%.

It could be less than, equal to, or greater than 6%.

Greater than 6%.

Exactly equal to 8%.

Less than 6%.

2 points

Question 18

Assume that interest rates on 20-year Treasury and corporate bonds with different ratings, all of which are noncallable, are as follows:

% %
% %

The differences in rates among these issues were most probably caused primarily by:

Answer

Real risk-free rate differences.

Tax effects.

Default risk differences.

Maturity risk differences.

Inflation differences.
2 points

Question 19

Which of the following statements is CORRECT?

Answer

If a 10-year, $1,000 par, zero coupon bond were issued at a price that gave investors a 10% yield to maturity, and if interest rates then dropped to the point where = 5%, the bond would sell at a premium over its $1,000 par value.

If a 10-year, $1,000 par, 10% coupon bond were issued at par, and if interest rates then dropped to the point where rd
= %, we could be sure that the bond would sell at a premium above its $1,000 par value.

Other things held constant, a corporation would rather issue noncallable bonds than callable bonds.

Other things held constant, a callable bond would have a lower required rate of return than a noncallable bond.

Reinvestment rate risk is worse from an investor’s standpoint than interest rate price risk if the investor has a short investment time horizon.
2 points

Question 20

A Treasury bond has an 8% annual coupon and a 7.5% yield to maturity. Which of the following statements is CORRECT?

Answer

The bond sells at a price below par.

The bond has a current yield greater than 8%.

The bond sells at a discount.

The bond’s required rate of return is less than 7.5%.

If the yield to maturity remains constant, the price of the bond will decline over time.
2 points

Question 21

Under normal conditions, which of the following would be most likely to increase
the coupon rate required to enable a bond to be issued at par?

Answer

Adding additional restrictive covenants that limit management’s actions.

Adding a call provision.

The rating agencies change the bond’s rating from Baa to Aaa.

Making the bond a first mortgage bond rather than a debenture.

Adding a sinking fund.
2 points

Question 22

A 12-year bond has an annual coupon rate of 9%. The coupon rate will remain fixed until the bond matures. The bond has a yield to maturity of 7%. Which of the following statements is CORRECT?

Answer

If market interest rates decline, the price of the bond will also decline.

The bond is currently selling at a price below its par value.

If market interest rates remain unchanged, the bond’s price one year from now will be lower than it is today.

The bond should currently be selling at its par value.

If market interest rates remain unchanged, the bond’s price one year from now will be higher than it is today.
2 points

Question 23

Which of the following statements is CORRECT?

Answer

All else equal, senior debt generally has a lower yield to maturity than subordinated debt.

An indenture is a bond that is less risky than a mortgage bond.

The expected return on a corporate bond will generally exceed the bond’s yield to maturity.

If a bond’s coupon rate exceeds its yield to maturity, then its expected return to investors exceeds the yield to maturity.

Under our bankruptcy laws, any firm that is in financial distress will be forced to declare bankruptcy and then be liquidated.

2 points

Question 24

An investor is considering buying one of two 10-year, $1,000 face value bonds: Bond A has a 7% annual coupon, while Bond B has a 9% annual coupon. Both bonds have a yield to maturity of 8%, which is expected to remain constant for the next 10 years. Which of the following statements is CORRECT?

Answer

Bond B has a higher price than Bond A today, but one year from now the bonds will have the same price.

One year from now, Bond A’s price will be higher than it is today.

Bond A’s current yield is greater than 8%.

Bond A has a higher price than Bond B today, but one year from now the bonds will have the same price.

Both bonds have the same price today, and the price of each bond is expected to remain constant until the bonds mature.
2 points

Question 25

Which of the following statements is CORRECT?

Answer

You hold two bonds. One is a 10-year, zero coupon, issue and the other is a 10-year bond that pays a 6% annual coupon. The same market rate, 6%, applies to both bonds. If the market rate rises from the current level, the zero coupon bond will experience the larger percentage decline.

The time to maturity does not affect the change in the value of a bond in response to a given change in interest rates.

You hold two bonds. One is a 10-year, zero coupon, bond and the other is a 10-year bond that pays a 6% annual coupon. The same market rate, 6%, applies to both bonds. If the market rate rises from the current level, the zero coupon bond will experience the smaller percentage decline.

The shorter the time to maturity, the greater the change in the value of a bond in response to a given change in interest rates.

The longer the time to maturity, the smaller the change in the value of a bond in response to a given change in interest rates.
2 points

Question 26

Which of the following statements is CORRECT?

Answer

If the maturity risk premium were zero and interest rates were expected to decrease
in the future, then the yield curve for U.S. Treasury securities would, other things held constant, have an upward slope.

Liquidity premiums are generally higher on Treasury than corporate bonds.

The maturity premiums embedded in the interest rates on U.S. Treasury securities are due primarily to the fact that the probability of default is higher on long-term bonds than on short-term bonds.

Default risk premiums are generally lower on corporate than on Treasury bonds.

Reinvestment rate risk is lower, other things held constant, on long-term than on short-term bonds.
2 points

Question 27

Tucker Corporation is planning to issue new 20-year bonds. Initially, the plan was to make the bonds non-callable. If the bonds were made callable after 5 years at a 5% call premium, how would this affect their required rate of return?

Answer

Because of the call premium, the required rate of return would decline.

There is no reason to expect a change in the required rate of return.

The required rate of return would decline because the bond would then be less risky to a bondholder.

The required rate of return would increase because the bond would then be more risky to a bondholder.

It is impossible to say without more information.
2 points

Question 28

Which of the following bonds would have the greatest percentage increase in value if all interest rates fall by 1%?

Answer

10-year, zero coupon bond.

20-year, 10% coupon bond.

20-year, 5% coupon bond.

1-year, 10% coupon bond.

20-year, zero coupon bond.
2 points

Question 29

A 15-year bond with a face value of $1,000 currently sells for $850. Which of the following statements is CORRECT?

Answer

The bond’s coupon rate exceeds its current yield.

The bond’s current yield exceeds its yield to maturity.

The bond’s yield to maturity is greater than its coupon rate.

The bond’s current yield is equal to its coupon rate.

If the yield to maturity stays constant until the bond matures, the bond’s price will remain at $850.
2 points

Question 30

A 10-year corporate bond has an annual coupon of 9%. The bond is currently selling at par ($1,000). Which of the following statements is NOT
CORRECT?

Answer

The bond’s expected capital gains yield is positive.

The bond’s yield to maturity is 9%.

The bond’s current yield is 9%.

If the bond’s yield to maturity remains constant, the bond will continue to sell at par.

The bond’s current yield exceeds its capital gains yield.

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Question 41

FIN 534 Week 2 Chapter 3 Solution
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Answer 41

FIN 534 Week 2 Chapter 3 Solution

1. Which of the following statements is CORRECT?
   a. The ratio of long-term debt to total capital is more likely to experience seasonal

fluctuations than is either the DSO or the inventory turnover ratio.

b. If two firms have the same ROA, the firm with the most debt can be expected to have the

lower ROE.

c. An increase in the DSO, other things held constant, could be expected to increase the

total assets turnover ratio.

d. An increase in the DSO, other things held constant, could be expected to increase the

ROE.

e. An increase in a firm’s debt ratio, with no changes in its sales or operating costs, could be

expected to lower the profit margin.

2. Companies HD and LD have the same tax rate, sales, total assets, and basic earning power.

Both companies have positive net incomes. Company HD has a higher debt ratio and, therefore, a higher interest expense. Which of the following statements is CORRECT?

a. Company HD has a lower equity multiplier.
b. Company HD has more net income.
c. Company HD pays more in taxes.
d. Company HD has a lower ROE.
e. Company HD has a lower times interest earned (TIE) ratio.
3. Companies HD and LD have the same total assets, sales, operating costs, and tax rates, and they pay the same interest rate on their debt. However, company HD has a higher debt ratio. Which of the following statements is CORRECT?
a. Given this information, LD must have the higher ROE.
b. Company LD has a higher basic earning power ratio (BEP).
c. Company HD has a higher basic earning power ratio (BEP).
d. If the interest rate the companies pay on their debt is more than their basic earning power

(BEP), then Company HD will have the higher ROE.

e. If the interest rate the companies pay on their debt is less than their basic earning power

(BEP), then Company HD will have the higher ROE.

4. Muscarella Inc. has the following balance sheet and income statement data:

Cash $ 14,000 Accounts payable $ 42,000

Receivables 70,000 Other current liabilities 28,000

Inventories 210,000 Total CL $ 70,000

Total CA $294,000 Long-term debt 70,000

Net fixed assets 126,000 Common equity 280,000

Total assets $420,000 Total liab. and equity $420,000

Sales $280,000

Net income $ 21,000

The new CFO thinks that inventories are excessive and could be lowered sufficiently to cause the

current ratio to equal the industry average, 2.70, without affecting either sales or net income.

Assuming that inventories are sold off and not replaced to get the current ratio to the target level,

and that the funds generated are used to buy back common stock at book value, by how much

would the ROE change?

a. 4.28%
b. 4.50%
c. 4.73%
d. 4.96%
e. 5.21%
5. Quigley Inc. is considering two financial plans for the coming year. Management expects sales to be $301,770, operating costs to be $266,545, assets to be $200,000, and its tax rate to be 35%. Under Plan A it would use 25% debt and 75% common equity. The interest rate on the debt would be 8.8%, but the TIE ratio would have to be kept at 4.00 or more. Under Plan B the maximum debt that met the TIE constraint would be employed. Assuming that sales, operating costs, assets, the interest rate, and the tax rate would all remain constant, by how much would the ROE change in response to the change in the capital structure?
a. 3.83%
b. 4.02%
c. 4.22%
d. 4.43%
e. 4.65%

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Question 42

FIN 534 Week 2 DQ 1
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Answer 42

FIN 534 Week 2 DQ 1

Assume you are deciding whether or not to invest in a particular company. Discuss which elements of which financial statements you would want to carefully examine. Explain your rationale.

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Question 43

FIN 534 Week 2 DQ 2
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Answer 43

FIN 534 Week 2 DQ 2

From the e-Activity, determine if the company you analyzed would be a good investment for you or not. Provide specific examples to support your response.

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Question 44

FIN 534 Week 1 Chapter 1 Solution
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Answer 44

FIN 534 Week 1 Chapter 1 Solution

1. Which of the following statements is CORRECT?
   a. One of the disadvantages of a sole proprietorship is that the proprietor is exposed to unlimited liability.
   b. It is generally easier to transfer one’s ownership interest in a partnership than in a corporation.
   c. One of the advantages of the corporate form of organization is that it avoids double taxation.
   d. One of the advantages of a corporation from a social standpoint is that every stockholder has equal voting rights, i.e., “one person, one vote.”
   e. Corporations of all types are subject to the corporate and personal income tax.
2. Which of the following would be most likely to lead to higher interest rates on all debt securities in the economy?
   a. Households start saving a larger percentage of their income.
   b. Households start saving a larger percentage of their income.
   c. The level of inflation begins to decline.
   d. Corporations step up their expansion plans and thus increase their demand for capital.
   e. The Federal Reserve uses monetary policy in an attempt to stimulate the economy.
3. Which of the following statements is CORRECT?
   a. If General Electric were to issue new stock this year it would be considered a secondary market transaction since the company already has stock outstanding.
   b. Capital market transactions only include preferred stock and common stock transactions.
   c. The distinguishing feature between spot markets versus futures markets transactions is the maturity of the investments. That is, spot market transactions involve securities that have maturities of less than one year, whereas futures markets transactions involve securities with maturities greater than one year.
   d. Both NASDAQ “dealers” and NYSE “specialists” hold inventories of stocks.
   e. An electronic communications network (ECN) is a physical location exchange.
4. Which of the following statements is CORRECT?
   a. A good goal for a firm’s management is maximization of expected EPS.
   b. Most business in the U.S. is conducted by corporations, and corporations’ popularity results primarily from their favorable tax treatment.
   c. Because most stock ownership is concentrated in the hands of a relatively small segment of society, firms’ actions to maximize their stock prices have little benefit to society.
   d. Corporations and partnerships have an advantage over proprietorships because a sole proprietor is exposed to unlimited liability, but the liability of all investors in the other types of businesses is more limited.
   e. The potential exists for agency conflicts between stockholders and managers.
5. Which of the following statements is NOT CORRECT?
   a. When a corporation’s shares are owned by a few individuals and are not traded on public markets, we say that the firm is “closely, or privately, held.”
   b. “Going public” establishes a firm’s true intrinsic value, and it also insures that a highly liquid market will always exist for the firm’s shares.
   c. When stock in a closely held corporation is offered to the public for the first time, the transaction is called “going public,” and the market for such stock is called the new issue market.
   d. Publicly owned companies have shares owned by investors who are not associated with management, and public companies must register with and report to a regulatory agency such as the SEC.
   e. It is possible for a firm to go public and yet not raise any additional new capital at the time.

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Question 45

FIN 534 Week 1 Chapter 2 Solution
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Answer 45

FIN 534 Week 1 Chapter 2 Solution

1. Which of the following statements is CORRECT?
   a. Typically, a firm’s DPS should exceed its EPS.
   b. Typically, a firm’s EBIT should exceed its EBITDA.
   c. If a firm is more profitable than average (e.g., Google), we would normally expect to see its stock price exceed its book value per share.
   d. If a firm is more profitable than most other firms, we would normally expect to see its book value per share exceed its stock price, especially after several years of high inflation.
   e. The more depreciation a firm has in a given year, the higher its EPS, other things held constant.
2. Which of the following statements is CORRECT?
   a. The statement of cash flows reflects cash flows from operations, but it does not reflect the effects of buying or selling fixed assets.
   b. The statement of cash flows shows where the firm’s cash is located; indeed, it provides a listing of all banks and brokerage houses where cash is on deposit.
   c. The statement of cash flows reflects cash flows from continuing operations, but it does not reflect the effects of changes in working capital.
   d. The statement of cash flows reflects cash flows from operations and from borrowings, but it does not reflect cash obtained by selling new common stock.
   e. The statement of cash flows shows how much the firm’s cash–the total of currency, bank deposits, and short-term liquid securities (or cash equivalents)–increased or decreased during a given year.
3. Which of the following statements is CORRECT?
   a. Dividends paid reduce the net income that is reported on a company’s income statement.
   b. If a company uses some of its bank deposits to buy short-term, highly liquid marketable securities, this will cause a decline in its current assets as shown on the balance sheet.
   c. If a company issues new long-term bonds during the current year, this will increase its reported current liabilities at the end of the year.
   d. Accounts receivable are reported as a current liability on the balance sheet.
   e. If a company pays more in dividends than it generates in net income, its retained. earnings as reported on the balance sheet will decline from the previous year’s balance.
4. Last year Roussakis Company’s operations provided a negative net cash flow, yet the cash shown on its balance sheet increased. Which of the following statements could explain the increase in cash, assuming the company’s financial statements were prepared under generally accepted accounting principles?
   a. The company repurchased some of its common stock.
   b. The company dramatically increased its capital expenditures.
   c. The company retired a large amount of its long-term debt.
   d. The company sold some of its fixed assets.
   e. The company had high depreciation expenses.
5. Bartling Energy Systems recently reported $9,250 of sales, $5,750 of operating costs other than depreciation, and $700 of depreciation. The company had no amortization charges, it had $3,200 of outstanding bonds that carry a 5% interest rate, and its federal-plus-state income tax rate was 35%. In order to sustain its operations and thus generate sales and cash flows in the future, 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?
   a. $673.27
   b. $708.70
   c. $746.00
   d. $783.30
   e. $822.47

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Question 46

FIN 534 Week 1 DQ 1
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Answer 46

FIN 534 Week 1 DQ 1

Imagine a startup company of your own and briefly trace its development from a sole proprietorship to a major corporation with a focus on how that development would be financed.

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Question 47

FIN 534 Week 1 DQ 2
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Answer 47

FIN 534 Week 1 DQ 2

Discuss ways that the basic concepts we have discussed in this chapter directly impact your life. Provide specific examples to support your response.

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Question 48

FIN 534 Week 1 Quiz 1
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Answer 48

FIN 534 Week 1 Quiz 1

Question 1

Which of the following statements is CORRECT?

Answer

A hostile takeover is the main method of transferring ownership interest in a corporation.

Unlimited liability and limited life are two key advantages of the corporate form over other forms of business organization.

A corporation is a legal entity that is generally created by a state, and it has a life and existence that is separate from the lives of its individual owners and managers.

Limited liability of its stockholders is an advantage of the corporate form of organization, but corporations have more trouble raising money in financial markets because of the complexity of this form of organization.

Although its stockholders are insulated by limited legal liability, the legal status of the corporation does not protect the firm’s managers in the same way, i.e., bondholders can sue its managers if the firm defaults on its debt, even if the default is the result of poor economic conditions.

2 points

Question 2

Which of the following statements is CORRECT?

Answer

The New York Stock Exchange is an auction market with a physical location.

Capital market transactions involve only the purchase and sale of equity securities, i.e., common stocks.

If an investor sells shares of stock through a broker, then this would be a primary market transaction.

Consumer automobile loans are evidenced by legal documents called “promissory notes,” and these individual notes are traded in the money market.

While the distinctions are blurring as investment banks are today buying commercial banks, and vice versa, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise capital from other parties.
2 points

Question 3

Which of the following factors would be most likely to lead to an increase in interest rates in the economy?

Answer

Households reduce their consumption and increase their savings.

The Federal Reserve decides to try to stimulate the economy.

There is a decrease in expected inflation.

The economy falls into a recession.

Most businesses decide to modernize and expand their manufacturing capacity, and to install new equipment to reduce labor costs.

2 points

Question 4

Which of the following statements is CORRECT?

Answer

It is usually easier to transfer ownership in a corporation than it is to transfer ownership in a sole proprietorship.

Corporate shareholders are exposed to unlimited liability.

Corporations generally face fewer regulations than sole proprietorships.

Corporate shareholders are exposed to unlimited liability, and this factor may be compounded by the tax disadvantages of incorporation.

Shareholders in a regular corporation (not an S corporation) pay higher taxes than owners of an otherwise identical proprietorship.

2 points

Question 5

Which of the following statements is CORRECT?

Answer

One of the disadvantages of incorporating a business is that the owners then become subject to liabilities in the event the firm goes bankrupt.

Sole proprietorships are subject to more regulations than corporations.

In any type of partnership, every partner has the same rights, privileges, and liability exposure as every other partner.

Sole proprietorships and partnerships generally have a tax advantage over many corporations, especially large ones.

Corporations of all types are subject to the corporate income tax.

2 points

Question 6

Which of the following statements is CORRECT?

Answer

While the distinctions are blurring, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise capital from other parties.

A liquid security is a security whose value is derived from the price of some other “underlying” asset.

Money market mutual funds usually invest most of their money in a well-diversified portfolio of liquid common stocks.

Money markets are markets for long-term debt and common stocks.

The NYSE operates as an auction market, whereas the Nasdaq is a dealer market.
2 points

Question 7

Which of the following statements is CORRECT?

Answer

If expected inflation increases, interest rates are likely to increase.

If individuals in general increase the percentage of their income that they save, interest rates are likely to increase.

If companies have fewer good investment opportunities, interest rates are likely to increase.

Interest rates on all debt securities tend to rise during recessions because recessions increase the possibility of bankruptcy, hence the riskiness of all debt securities.

Interest rates on long-term bonds are more volatile than rates on short-term debt securities like T-bills.
2 points

Question 8

Money markets are markets for

Answer

Foreign stocks.

Consumer automobile loans.

U.S. stocks.

Short-term debt securities.

Long-term bonds.
2 points

Question 9

Which of the following statements is CORRECT?

Answer

The corporate bylaws are a standard set of rules established by the state of incorporation. These rules are identical for all corporations in the state, and their purpose is to ensure that the firm’s managers run the firm in accordance with state laws.

The corporate charter is a standard document prescribed by the state of incorporation, and its purpose is to ensure that the firm’s managers run the firm in accordance with state laws. Procedures for electing corporate directors are contained in bylaws, while the declaration of the activities that the firm will pursue and the number of directors are included in the corporate charter.

Companies must establish a home office, or domicile, in a particular state, and that state must be the one in which most of their business (sales, manufacturing, and so forth) is conducted.

Attorney fees are generally involved when a company develops its charter and bylaws, but since these documents are voluntary, a new corporation can avoid these costs by deciding not to have either a charter or bylaws.

The corporate charter is concerned with things like what business the company will engage in, whereas the bylaws are concerned with things like procedures for electing the board of directors.
2 points

Question 10

Which of the following statements is CORRECT?

Answer

In a regular partnership, liability for other partners’ misdeeds is limited to the amount of a particular partner’s investment in the business.

Partnerships have more difficulty attracting large amounts of capital than corporations because of such factors as unlimited liability, the need to reorganize when a partner dies, and the illiquidity (difficulty buying and selling) of partnership interests.

A slow-growth company, with little need for new capital, would be more likely to organize as a corporation than would a faster growing company.

In a limited partnership, the limited partners have voting control, while the general partner has operating control over the business. Also, the limited partners are individually responsible, on a pro rata basis, for the firm’s debts in the event of bankruptcy.

A major disadvantage of all partnerships relative to all corporations is the fact that federal income taxes must be paid by the partners rather than by the firm itself.
2 points

Question 11

Which of the following is a primary market transaction?

Answer

You sell 200 shares of IBM stock on the NYSE through your broker.

IBM issues 2,000,000 shares of new stock and sells them to the public through an investment banker.

You buy 200 shares of IBM stock from your brother. The trade is not made through a broker–you just give him cash and he gives you the stock.

One financial institution buys 200,000 shares of IBM stock from another institution. An investment banker arranges the transaction.

You invest $10,000 in a mutual fund, which then uses the money to buy $10,000 of IBM shares on the NYSE.
2 points

Question 12

Which of the following statements is CORRECT?

Answer

Capital market instruments include both long-term debt and common stocks.

An example of a primary market transaction would be your uncle transferring 100 shares of Wal-Mart stock to you as a birthday gift.

The NYSE does not exist as a physical location; rather, it represents a loose collection of dealers who trade stocks electronically.

If your uncle in New York sold 100 shares of Microsoft through his broker to an investor in Los Angeles, this would be a primary market transaction.

While the two frequently perform similar functions, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise large blocks of capital from investors.
2 points

Question 13

With which of the following statements would most people in business agree?

Answer

A corporation’s short-run profits will almost always increase if the firm takes actions that the government has determined are in the best interests of the nation.

Firms and government agencies almost always agree with one another regarding the restrictions that should be placed on hiring and firing employees.

Although people’s moral characters are probably developed before they get into a business school, it is still useful for business schools to cover ethics, including giving students an idea about the adverse consequences of unethical behavior to themselves, their firms, and the nation.

It is not useful for a large corporation to develop a formal set of rules defining ethical and unethical behavior. Such rules generally can’t be applied in many specific instances, so it is better to deal with ethical issues on a case-by-case basis.

“Whistle blowers,” because of the courage it takes to blow the whistle, are generally promoted more rapidly than other employees.
2 points

Question 14

Jane Doe, who has substantial personal wealth and income, is considering the possibility of starting a new business in the chemical waste management field. She will be the sole owner, and she has enough funds to finance the operation. The business will have a relatively high degree of risk, and it is expected that the firm will incur losses for the first few years. However, the prospects for growth and positive future income look good, and Jane plans to have the firm pay out all of its income as dividends to her once it is well established. Which of the legal forms of business organization would probably best suit her needs?

Answer

Proprietorship, because of ease of entry.

S corporation, to gain some tax advantages and also to obtain limited liability.

Partnership, but only if she needs additional capital.

Regular corporation, because of the limited liability.

In this situation, the various forms of organization seem equally desirable.
2 points

Question 15

Cheers Inc. operates as a partnership. Now the partners have decided to convert the business into a regular corporation. Which of the following statements is CORRECT?

Answer

Assuming Cheers is profitable, less of its income will be subject to federal income taxes.

Cheers will now be subject to fewer regulations.

Cheers’ shareholders (the ex-partners) will now be exposed to less liability.

Cheers’ investors will be exposed to less liability, but they will find it more difficult to transfer their ownership.

Cheers will find it more difficult to raise additional capital.

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