Answer the following 21 problems (the problems highlighted in red have already been answered).Indicate you understand by checking one of the answers below. Good luck. 2. From a finance perspective, what is the primary goal of the corporation? Question 2 options: a. Maximize the pay and compensation of employees and managers of the firm. b. Maximize the value to the stockholders because they are the owners of the corporation. c. Maximize the wealth of all stakeholders if the firm wants to continue to exist. d. Maximize the societal value to minimize governmental interference. e. Satisfy the customers. 3. You have developed the following data on three stocks: Stock A has a standard deviation of .15 and a Beta of .79. Stock B has a standard deviation of .25 and a Beta of .61. Stock C has a standard deviation of .20 and a Beta of 1.29. If you are a risk minimizer, you should choose Stock _____ if it is to be held in isolation and Stock _____ if it is to be held as part of a well-diversified portfolio. a. A, A b. A, B c. B, B d. C, A e. C, B 4. A fixed coupon bond with par value of $1,000 has a coupon of 8%, semiannually payable. The current annual nominal market interest rate (i.e., yield to maturity) for this bond is 6%. Therefore the bond is selling_________and the bond’s current yield is ______ a. at par value; at 8% b. at a discount; less than 8% c. at a premium; less than 8% d. at a premium; greater than 8% e. at a discount; greater than 8% 5. You have determined the profitability of a planned project by finding the present value of all the cash flows from that project. Which of the following would cause the project to look more appealing in terms of the present value of those cash flows? a. The discount rate decreases. b. The cash flows are extended over a longer period of time, but the total amount of the cash flows remains the same. c. The discount rate increases. d. Answers b and c above. e. Answers a and b above. 6 Two years ago an investor purchased a 4% semi-annual compounding coupon bond with a remaining maturity of 20 years at a price of (at that time) 90% of par. Today, i.e. two years after the purchase, the investor realizes that the bond has exactly the same price like it had two years ago (i.e. 90%). Based on this information, which of the following answers is correct: a. The YTM of the 4% Bond today is the same like two years ago. b. Overall, the profit for the investor from this investment over the two years is Zero. c. Over the remaining life of the bond, the value of the principal exceeds the value of the coupons. d. If the investor held the 4% coupon bond until maturity, the overall return from this investment over the 18 years would be 100% minus 90%, i.e. 10%. e. None of the above answers is correct. 7. The CFO of Mulroney Brothers has suggested that the company should issue $300 million worth of common stock and use the proceeds to reduce some of the companys outstanding debt. Assume that the company adopts this policy, and that total assets and operating income (EBIT) remain the same. The companys tax rate will also remain the same. Which of the following will occur: a. The company’s net income will increase. b. The company’s taxable income will fall. c. The company will pay less in taxes. d. The firm’s sales will increase e. All of the above are correct. 8. You just graduated, and you plan to work for 10 years and then to leave for the Australian “Outback” bush country. You figure you can save $2,000 a year for the first 5 years and $3,000 a year for the next 5 years. These savings cash flows will start one year from now. In addition, your family has just given you a $5,000 graduation gift. If you put the gift now, and your future savings when they start, into an account which pays 8 percent compounded annually, what will your financial “stake” be when you leave for Australia 10 years from now? a. $21,137 b. $20,000 c. $45,634 d. $30,000 e. $16,651 9. The RRR Company has a target current ratio of 3.2. Presently, the current ratio is 4.1 based on current assets of $12,956,000. If RRR expands its fixed assets using short-term liabilities (maturities less than one year), how much additional funding can it obtain before its target current ratio is reached? (Round your answer to the nearest dollar.) a.$1,453.41 b. $1,059.63 c. $1,292.73 d. $8,887.50 10. The risk-free rate, kRF, is 6.4 percent and the market risk premium, (kM – kRF), is 5 percent. Assume that required returns are based on the CAPM. Your $1 million portfolio consists of $ 611 ,000 invested in a stock that has a beta of 1.1 and the remainder invested in a stock that has a beta of 1.1 . What is the required return on this portfolio? Enter your answer to the nearest .1%. Do not use the % sign in your answer, thus 12.1% is 12. 1 rather than 12.1 or .121. Your Answer: ??? 11. Calculate the nominal required rate of return for Mercury, Inc., assuming that investors expect a 0.5 percent rate of inflation in the future. The real risk-free rate is equal to 1.4 percent and the market risk premium is 7.7 percent. Mercury has a beta of 1.7. Mercury’s realized rate of return has averaged 8.5 percent over the last 5 years. Show your answer, as a whole number, to the nearest .1%. Do not use , or % in your answer. An answer of .0922 would be entered as 9.2 rather than 9.2% or .0922. Your Answer: ??? 12. You have just taken out a 10-year, $12,075 loan to purchase a new car. This loan is to be repaid in 120 equal end-of-month installments. If each of the monthly installments is $150, what is the effective annual interest rate on this car loan? a. 6.5431% b. 7.8942% c. 8.544% d. 8.8871% e. 9.0438% 13. Roadside Markets has a 6.75 percent coupon bond outstanding that matures in 10.5 years. The bond pays interest semiannually. What is the market price per bond if the face value is $1,000 and the yield to maturity is 7.2 percent? a. $899.85 b. $1,007.52 c. $899.80 d. $967.24 e. $903.42 14. If a firms debt-to-equity ratio is 2.2 , what is its total debt to total asset ratio? Show your answer to the nearest .1%. If your answer is 45.6%, enter your answer as 45.6 rather than 45.6% or .456. Your Answer: ??? 15. You hold a diversified portfolio consisting of a $10,000 investment in each of 15 different common stocks (i.e., your total investment is $150,000). The portfolio beta is equal to 1.1 . You have decided to sell one of your stocks which has a beta equal to 1.9 for $10,000. You plan to use the proceeds to purchase another stock which has a beta equal to 1.6 . What will be the beta of the new portfolio? Show your answer to 2 decimal places. Your Answer: ??? 16. Shield Inc. had total operating revenues of $ 751 , all of which were credit sales, over the past year. During that time, average receivables were $ 170 . What was the average collection period (ACP) given a 365-day year? Show your answer to the nearest .1 days. Your Answer: ??? 17. A bond’s coupon rate is equal to the annual interest divided by which one of the following? a. face value b. call price c. dirty price d. clean price e. current price 18. You plan to buy a $220,000 house with a 20 year mortgage with a 4.8% nominal annual rate (=A.P.R.) Payments are monthly, interest is monthly compounded, and you did not make a down payment. Assume you make all payments on time, at the end of the month. Answer the following questions.a) How much is each monthly payment? [2 decimal places]b) How much interest will you pay with (=in) your 75th payment? [2 decimal places]c) Now assume you have made payments such that you only owe $150,000 on the mortgage. You decide to increase your payments by $100 per month. How many payments will it take to pay off your mortgage?Show your inputs for credit. 19. Solve for the missing numbers in the below scambled Income Statement and Balance Sheet. If you see a category in (), such as Deferred income taxes (current asset) , then that classification of the account is correct. Use Column A and B below. Net sales _______ , Capital Lease Obligations _________, Restructuring expenses ________ , Inventories, net ________, Common stock ________, Income taxes _______ , Additions to Retained Earnings ________ , Total Assets ________, Interest expense _______ , Note payable __________ , Cost of products sold 1,344, Retained Earnings 368, Total Equity 430, Total Liabilities and Equity 1134, Selling and administrative expenses 606, Operating income 101, Interest income 6, Total Current Liabilities 417, Long-Term Debt 150, Other Long-Term Liabilities 62, Income before income taxes 97, Net income 64, Gross profit 715, Additional paid-in capital 16, Dividends 24, Cash 65, Short-term investments 7, Accounts payable and accrued expenses 408, Current maturities of other long-term obligations 4, Deferred income taxes (current asset) 18, Deferred Income Taxes (Long Term Liability) 68, Receivables, net 228, Other Long Term Assets 147, Total Liabilities 704, Preferred stock 12, Prepaid expenses 26, Total Current Assets 433, Property, Plant, and Equipment 268, Goodwill 286. Column A 1.Net sales _________ 2.Capital Lease Obligations ____________3.Restructuring expenses ________4.Inventories, net ________5.Common stock ___________6.Income taxes _______7.Additions to Retained Earnings ________8.Total Assets ____________9.Interest expense ________10.Note payable __________ Column B _________ 2 _________34 ________2,059 ________1,134 ________8 ________89 _________10 _________33 _________5 __________40 20. Calculate the return and standard deviation for the following stock, in an economy with five possible states. If a Boom (Probability=25%) economy occurs, then the expected return is 50%. If a Good (Probability=25%) economy occurs, then the expected return is 25%. If a Normal (Probability=20%) economy occurs, then the expected return is 15%. If a Bad (Probability=20%) economy occurs, then the expected return is 0%. If a Recession (Probability=10%) economy occurs, then the expected return is -18%. Show your work. 21. You are an investor in common stock, and you currently hold a well-diversified portfolio which has an expected return of 10 percent, a beta of 1.2, and a total value of $ 14 ,000. You plan to increase your portfolio by buying 100 shares of AT&E at $ 33 a share. AT&E has an expected return of 11 percent with a beta of 1.7. What will be the expected return of your portfolio after you purchase the new stock? Enter your answer to the nearest .1%.Show your answer as a whole number, thus 12.4% would be 12.4 rather than .124. Show your work. 22. Calculate the required rate of return for Mercury Inc. to the nearest .1 Assume that investors expect a 4.0 percent rate of inflation in the future. The real risk-free rate is equal to 1.6 percent and the market risk premium is 8.9 percent. Mercury has a beta of 0.7 , and its realized rate of return has averaged 14.5 percent over the last 5 years. Show your work.
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