Principals of Financial Management Spring 2017 Section 6, 2: 30. EXAM 2 Version A

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1 FIN 301 Prof. Thistle Principals of Financial Management Spring 2017 Section 6, 2: 30 EXAM 2 Version A MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Little Feet Shoe Co. just paid a dividend of $1.65 on its common stock. This companyʹs dividends are expected to grow at a constant rate of 3% indefinitely. If the required rate of return on this stock is 11%, compute the current value of per share of LFS stock. 1) A) $55.00 B) $21.24 C) $20.63 D) $ ) You hold a portfolio with the following securities: Percent Security of Portfolio Beta Return X Corporation 20% % Y Corporation 35%.95 10% Z Corporation 45%.75 8% Compute the expected return and beta for the portfolio. 2) A) 9.9%,.94 B) 10.67%, 1.02 C) 9.9%, 1.02 D) 34.4%,.94 3) The Blackburn Group has recently issued 20 year, unsecured bonds rated BB by Moodyʹs. These bonds yield 443 basis points above the U.S. Treasury yield of 2.76%. The yield to maturity on these bonds is 3) A) 12.23%. B) 7.19%. C) mortgage bonds. D) 4.43%. 4) Colby & Company bonds pay semiannual interest of $50. They mature in 15 years and have a par value of $1,000. The market rate of interest is 8%. The market value of Colby bonds is (round to the nearest dollar) 4) A) $1,000. B) $827. C) $743. D) $1,173. 5) The capital asset pricing model 5) A) provides a risk return trade off in which risk is measured in terms of the market returns. B) provides a risk return trade off in which risk is measured in terms of beta. C) depicts the total risk of a security. D) measures risk as the correlation coefficient between a security and market rates of return. 6) An example of a primary market transaction is 6) A) a sale of IBM stock on the NYSE. B) Target repurchasing some its own stock from an investor. C) a purchase of Microsoft stock on Nasdaq. D) a new issue of stock by Evergreen Solar. 7) Common stockholders are essentially 7) A) creditors of the firm. B) owners of the firm. C) managers of the firm. D) all of the above.

2 2 8) The Fisher effect can be expressed mathematically as 8) A) (1+ the nominal rate)= (1+the real rate of interest) (1 + the inflation rate). B) the nominal rate)= the real rate of interest + the inflation rate). C) the real rate of interest= the nominal rate the inflation rate). D) ( nominal rate)= (the real rate of interest) ( the inflation rate). 9) You are considering investing in U.S. Steel. Which of the following is an example of nondiversifiable risk? 9) A) Risk resulting from oil exploration by Marathon Oil (a U.S. Steel subsidy) B) Risk resulting from foreign expropriation of U.S. Steel property C) Risk resulting from a strike against U.S. Steel D) None of the above 10) Siebling Manufacturing Companyʹs common stock has a beta of.8. If the expected risk free return is 2% and the market offers a premium of 8% over the risk free rate, what is the expected return on Sieblingʹs common stock? 10) A) 14.4% B) 8.4% C) 7.8% D) 13.4% 11) Jayden spends a lot of time studying charts of stocks past performance, but his investment return are only average. This outcome supports 11) A) the weak form efficient market hypothesis. B) the semi strong form efficient market hypothesis. C) the strong form efficient market hypothesis. D) all of the above. 12) Investments that have earned the highest rates of return over time also have 12) A) the least sensitivity to inflation. B) the largest market capitalization. C) the highest standard deviation of returns. D) the lowest risk. 13) McDonaldʹs stock currently sells for $103. Itʹs expected earnings per share are $5.50. The average P/E ratio for the industry is 24. If investors expected the same growth rate and risk for McDonaldʹs as for an average firm in the same industry, itʹs stock price would 13) A) fall. B) stay about the same. C) rise. D) there is not enough information. Use the following to answer the following question(s). Roddy Richards invested $ in Wolverine Meat Distributors (W.M.D.) five years ago. The investment had yearly arithmetic returns of 9.7%, 8.1%, 15%, 7.2%, and 15.4%. 14) What is the arithmetic average return of Roddy Richardʹs investment? 14) A) 15.1% B) 2.42% C) 3.96% D) 5.18%

3 3 15) What is the geometric average return of Roddyʹs Richardʹs investment? 15) A) 4.63% B) 8.78% C) 3.38% D) 6.96% 16) The security market line (SML) relates risk to return, for a given set of market conditions. If expected inflation increases, which of the following would most likely occur? 16) A) The slope of the SML would increase. B) Beta would increase. C) The market risk premium would increase. D) The SML line would shift up. 17) Given the following annual net cash flows, determine the IRR to the nearest whole percent of a project with an initial outlay of $1,800. Year Net Cash Flow 1 $1,000 2 $750 3 $500 17) A) 14% B) 8% C) 25% D) 12% 18) Butler, Inc.ʹs return on equity is 17% and management retains 75% of earnings for investment purposes. Based on this information, what will be the firmʹs growth rate? 18) A) 12.75% B) 44.12% C) 22.67% D) 4.25% 19) ABC Service can purchase a new assembler for $15,052 that will provide an annual net cash flow of $6,000 per year for five years. Calculate the NPV of the assembler if the required rate of return is 12%. (Round your answer to the nearest $1.) 19) A) $6,577 B) $1,056 C) $4,568 D) $7,621 20) Which of the following are typical consequences of good capital budgeting decisions? 20) A) The firm increases in value. B) Good capital budgeting decisions help a company define its core competencies. C) The firm gains knowledge and experience that may be useful in future decisions. D) All of the above. 21) The issuance of bonds to raise capital for a corporation 21) A) is a cheaper form of capital than the issuance of common stock. B) increases risk to the stockholders. C) magnifies the returns to the stockholders. D) all of the above. 22) Given the capital asset pricing model, a security with a beta of 1.5 should return, if the risk free rate is 3% and the market return is 11%. 22) A) 16.5% B) 14.5% C) 14.0% D) 15.0%

4 4 23) You purchased the stock of Sargent Motors at a price of $75.75 one year ago today. If you sell the stock today for $89.00, what is your rate of return? 23) A) 12.50% B) 35.00% C) 17.50% D) 25.00% 24) The XYZ Company, whose common stock is currently selling for $40 per share, is expected to pay a $2.00 dividend in the coming year. If investors believe that the expected rate of return on XYZ is 14%, what growth rate in dividends must be expected? 24) A) 6% B) 14% C) 5% D) 9% 25) What is the expected rate of return on a bond that pays a coupon rate of 9% paid semi annually, has a par value of $1,000, matures in five years, and is currently selling for $1071? 25) A) 8.40% B) 7.28% C) 4.21% D) 3.64% 26) Which of the following sequences is arranged in the correct order, from highest long term returns to lowest? 26) A) Small stocks, large stocks, treasury bills B) Government bonds, large stocks, treasury bills C) Small stocks, government bonds, large stocks D) Large stocks, treasury bills, small stocks 27) The present value of the total costs over a five year period for Project April is $50,000. The net present value of total costs over a 4 year period for Project October is $40,000. The company uses a discount rate of 9%. Which project should it choose and why? 27) A) April because it has a higher net present value (NPV). B) April because is has a higher equivalent annual cost (EAC). C) October because it has a lower equivalent annual cost (EAC). D) October because it has a shorter life. 28) A $1,000 par value bonds has a 12% coupon rate (paid annually). It has 10 years remaining to maturity. If bonds of similar risk and maturity currently yield 8%, what should this bond s price be? A) $1,000 B) $ C) $ D) $1, ) Which of the following statements is most correct? A) Investors are able to eliminate virtually all market risk if they hold a large diversified portfolio of stocks. B) Investors are able to eliminate virtually all company specific (unique or diversifiable) risk if they hold a large diversified portfolio of stocks. C) Holding a large diversified portfolio of stocks will not impact investors risk D) Holding a large portfolio of similar stocks from the same industry will reduce risk more than a diversified portfolio of stocks.

5 5 30) Which of the following causes common stock prices to increase? A) lower required rate of return. B) A lower dividend growth rate. C) A higher required rate of return. D) A smaller current dividend 31) Refer to the data in the table. Which asset possesses the greatest amount of non diversifiable risk? Standard Asset Return Beta Deviation A 10% % B 12% % C 14% % A) A B) B C) C D) Both A and C E) Impossible to tell, given the above information

6 6 Test 2 Version A 1) B 2) A 3) B 4) D 5) B 6) D 7) B 8) A 9) D 10) B 11) D 12) C 13) C 14) C 15) C 16) D 17) A 18) A 19) A 20) D 21) D 22) D 23) C 24) D 25) B 26) A 27) C 28) D 29) B 30) A 31) C

Principals of Managerial Finance Spring 2017 FINAL EXAM VERSION B

FIN 301 Prof.Thistle Principals of Managerial Finance Spring 2017 FINAL EXAM VERSION B MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Schiller