Braun industries is considering an investment project

Goldey-Beacom College Corporate Finance

Assessment Tool Page 1 of 6

Goldey-Beacom College Assessment Survey

Corporate Finance (FIN623) Time: 50 minutes Choose the alternative the best answers the question.

Du Pont equation 1. The Wilson Corporation has the following relationships:

Sales/Total assets 2.0 Return on assets (ROA) 4% Return on equity (ROE) 6%

What is Wilson’s profit margin and debt ratio?

a. 2% and 0.33 b. 4% and 0.33 c. 4% and 0.67 d. 2% and 0.67 e. 4% and 0.50

P/E ratio and stock price 2. Cleveland Corporation has 100,000 shares of common stock outstanding. The company’s net

income is $750,000 and its P/E is 8. What is the company’s stock price?

a. $20.00 b. $30.00 c. $40.00 d. $50.00 e. $60.00

ROA 3. The Meryl Corporation's common stock is currently selling at $100 per share, which represents a

P/E ratio of 10. If the firm has 100 shares of common stock outstanding, a return on equity of 20 percent, and a debt ratio of 60 percent, what is its return on total assets (ROA)?

a. 8.0% b. 10.0% c. 12.0% d. 16.7% e. 20.0%

Equity multiplier 4. A firm which has an equity multiplier of 4.0 will have a debt ratio of

a. 4.00 b. 3.00 c. 1.00 d. 0.75 e. 0.25

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Liquidity ratios 5. Oliver Incorporated has a current ratio = 1.6, and a quick ratio equal to 1.2. The company has $2

million in sales and its current liabilities are $1 million. What is the company’s inventory turnover ratio?

a. 5.0 b. 5.2 c. 5.5 d. 6.0 e. 6.3

Profit margin 6. The Merriam Company has determined that its return on equity is 15 percent. Management is

interested in the various components that went into this calculation. You are given the following information: total debt/total assets = 0.35 and total assets turnover = 2.8. What is the profit margin?

a. 3.48% b. 5.42% c. 6.96% d. 2.45% e. 12.82%

PV of an annuity 7. What is the present value of a 5-year ordinary annuity with annual payments of $200, evaluated at

a 15 percent interest rate?

a. $ 670.43 b. $ 842.91 c. $1,169.56 d. $1,348.48 e. $1,522.64

Interest rate of an annuity 8. South Penn Trucking is financing a new truck with a loan of $10,000 to be repaid in 5 annual end-

of-year installments of $2,504.56. What annual interest rate is the company paying?

a. 7% b. 8% c. 9% d. 10% e. 11%

Number of periods for an annuity 9. Your subscription to Jogger's World Monthly is about to run out and you have the choice of

renewing it by sending in the $10 a year regular rate or of getting a lifetime subscription to the magazine by paying $100. Your cost of capital is 7 percent. How many years would you have to live to make the lifetime subscription the better buy? Payments for the regular subscription are made at the beginning of each year. (Round up if necessary to obtain a whole number of years.)

a. 15 years b. 10 years c. 18 years d. 7 years e. 8 years

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Amortization 10. You have just bought a house and have a $125,000, 25-year mortgage with a fixed interest rate of

8.5 percent with monthly payments. Over the next five years, what percentage of your mortgage payments will go toward the repayment of principal?

a. 8.50% b. 10.67% c. 12.88% d. 14.93% e. 17.55%

Bond value - semiannual payment 11. You intend to purchase a 10-year, $1,000 face value bond that pays interest of $60 every 6

months. If your nominal annual required rate of return is 10 percent with semiannual compounding, how much should you be willing to pay for this bond?

a. $ 826.31 b. $1,086.15 c. $ 957.50 d. $1,431.49 e. $1,124.62

YTM and YTC 12. A corporate bond matures in 14 years. The bond has an 8 percent semiannual coupon and a par

value of $1,000. The bond is callable in five years at a call price of $1,050. The price of the bond today is $1,075. What are the bond’s yield to maturity and yield to call?

a. YTM = 14.29%; YTC = 14.09% b. YTM = 3.57%; YTC = 3.52% c. YTM = 7.14%; YTC = 7.34% d. YTM = 6.64%; YTC = 4.78% e. YTM = 7.14%; YTC = 7.05%

Yield to call 13. McGriff Motors has bonds outstanding which will mature in 12 years. The bonds pay a 12 percent

semiannual coupon and have a face value of $1,000 (i.e., the bonds pay a $60 coupon every six months). The bonds currently have a yield to maturity of 10 percent. The bonds are callable in 8 years and have a call price of $1,050. What are the bonds' yield to call?

a. 8.89% b. 9.89% c. 9.94% d. 10.00% e. 12.00%

Preferred stock value 14. The Jones Company has decided to undertake a large project. Consequently, there is a need for

additional funds. The financial manager plans to issue preferred stock with a perpetual annual dividend of $5 per share and a par value of $30. If the required return on this stock is currently 20 percent, what should be the stock's market value?

a. $150 b. $100 c. $ 50 d. $ 25 e. $ 10

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Preferred stock yield 15. A share of preferred stock pays a quarterly dividend of $2.50. If the price of this preferred stock is

currently $50, what is the nominal annual rate of return?

a. 12% b. 18% c. 20% d. 23% e. 28%

Stock price 16. Assume that you plan to buy a share of XYZ stock today and to hold it for 2 years. Your

expectations are that you will not receive a dividend at the end of Year 1, but you will receive a dividend of $9.25 at the end of Year 2. In addition, you expect to sell the stock for $150 at the end of Year 2. If your expected rate of return is 16 percent, how much should you be willing to pay for this stock today?

a. $164.19 b. $ 75.29 c. $107.53 d. $118.35 e. $131.74

Constant growth stock 17. A share of common stock has just paid a dividend of $2.00. If the expected long-run growth rate

for this stock is 15 percent, and if investors require a 19 percent rate of return, what is the price of the stock?

a. $57.50 b. $62.25 c. $71.86 d. $64.00 e. $44.92

Non-constant growth stock 18. Klein Company just paid a dividend of $1.00. Klein's growth rate is expected to be a constant 5

percent for the next 2 years, after which dividends are expected to grow at a rate of 10 percent forever. Klein's required rate of return on equity (ks) is 12 percent. What is the current price of Klein's common stock?

a. $21.00 b. $33.33 c. $42.25 d. $50.16 e. $53.34

Beta coefficient 19. Assume that the risk-free rate is 5 percent, and that the market risk premium is 7 percent. If a

stock has a required rate of return of 13.75 percent, what is its beta?

a. 1.25 b. 1.35 c. 1.37 d. 1.60 e. 1.96

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Portfolio beta 20. You hold a diversified portfolio consisting of a $10,000 investment in each of 20 different

common stocks (i.e., your total investment is $200,000). The portfolio beta is equal to 1.2. You have decided to sell one of your stocks which has a beta equal to 0.7 for $10,000. You plan to use the proceeds to purchase another stock which has a beta equal to 1.4. What will be the beta of the new portfolio?

a. 1.165 b. 1.235 c. 1.250 d. 1.284 e. 1.333

Portfolio return 21. You are an investor in common stock, and you currently hold a well-diversified portfolio which

has an expected return of 12 percent, a beta of 1.2, and a total value of $9,000. You plan to increase your portfolio by buying 100 shares of AT&E at $10 a share. AT&E has an expected return of 20 percent with a beta of 2.0. What will be the expected return and the beta of your portfolio after you purchase the new stock?

a. pk = 20.0%; bp = 2.00 b. pk = 12.8%; bp = 1.28 c. pk = 12.0%; bp = 1.20 d. pk = 13.2%; bp = 1.40 e. pk = 14.0%; bp = 1.32

CAPM and required return 22. Your portfolio consists of $100,000 invested in a stock which has a beta = 0.8, $150,000 invested

in a stock which has a beta = 1.2, and $50,000 invested in a stock which has a beta = 1.8. The risk-free rate is 7 percent. Last year this portfolio had a required rate of return of 13 percent. This year nothing has changed except for the fact that the market risk premium has increased by 2 percent (two percentage points). What is the portfolio's current required rate of return?

a. 5.14% b. 7.14% c. 11.45% d. 15.33% e. 16.25%

IRR 23. The capital budgeting director of Sparrow Corporation is evaluating a project which costs

$200,000, is expected to last for 10 years and produce after-tax cash flows, including depreciation, of $44,503 per year. If the firm's cost of capital is 14 percent and its tax rate is 40 percent, what is the project's IRR?

a. 8% b. 14% c. 18% d. -5% e. 12%

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NPV, IRR, and payback 24. Braun Industries is considering an investment project which has the following cash flows:

Year Cash Flow 0 -$1,000 1 400 2 300 3 500 4 400

The company’s WACC is 10 percent. What is the project’s payback, internal rate of return, and net present value?

a. Payback = 2.4, IRR = 10.00%, NPV = $600. b. Payback = 2.4, IRR = 21.22%, NPV = $260. c. Payback = 2.6, IRR = 21.22%, NPV = $300. d. Payback = 2.6, IRR = 21.22%, NPV = $260. e. Payback = 2.6, IRR = 24.12%, NPV = $300.

IRR 25. Genuine Products Inc. requires a new machine. Two companies have submitted bids, and you

have been assigned the task of choosing one of the machines. Cash flow analysis indicates the following:

Machine A Machine B Year Cash Flow Cash Flow 0 -$2,000 -$2,000 1 0 832 2 0 832 3 0 832 4 3,877 832

What is the internal rate of return for each machine?

a. IRRA = 16%; IRRB = 20% b. IRRA = 24%; IRRB = 20% c. IRRA = 18%; IRRB = 16% d. IRRA = 18%; IRRB = 24% e. IRRA = 24%; IRRB = 26%