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Mid Term Spring 04 05 Solution

Mid Term Spring 04 05 Solution

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11/13/2012

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MULTIPLE CHOICE QUESTIONSAgencyAnswer: d Diff: M
1
.Which of the following statements is most correct?a.One of the ways in which firms can mitigate or reduce agency problems between bondholders and stockholders is by increasing the amount of debt inthe capital structure. b.The threat of takeover is one way in which the agency problem betweenstockholders and managers can be alleviated.c.Managerial compensation can be structured to reduce agency problems betweenstockholders and managers.d.Statements b and c are correct.e.All of the statements above are correct
Firm organizationAnswer: a Diff: E N
2.Until this year, Cheers Inc. was organized as a partnership.This year, the partners have decided to organize the business asa corporation. As a result of this change in organizationalform, which of the following statements is most correct?a.Cheers’ shareholders (the ex-partners) will now have limitedliability.b.Cheers will now be subject to fewer regulations.c.Cheers will now pay less in taxes.d.Cheers’ investors will now find it more difficult to transferownership.e.Cheers will now find it more difficult to raise additionalcapital.
Net cash flow, free cash flow, and cashAnswer: c Diff: E N
3.Last year, Owen Technologies reported negative net cash flow and negative freecash flow. However, its cash on the balance sheet increased. Which of thefollowing could explain these changes in its cash position?a.The company had a sharp increase in its depreciation and amortizationexpenses. b.The company had a sharp increase in its inventories.c.The company issued new common stock.d.Statements a and b are correct.e.Statements a and c are correct.
Income statementAnswer: b Diff: E N
4
.
Cox Corporation recently reported an EBITDA of $22.5 million and $5.4 millionof net income. The company has $6 million interest expense and the corporatetax rate is 35 percent. What was the company’s depreciation and amortizationexpense?
a.$ 4,333,6501
 
b.$ 8,192,308c.$ 9,427,973d.$11,567,981e.$14,307,692
Financial statement analysisAnswer: e Diff: E
5.Company A and Company B have the same total assets, return onassets (ROA), and profit margin. However, Company A has a higherdebt ratio and interest expense than Company B. Which of thefollowing statements is most correct?a.Company A has a higher ROE (return on equity) than Company B.b.Company A has a higher total assets turnover than Company B.c.Company A has a higher operating income (EBIT) than Company B.d.Statements a and b are correct.e.Statements a and c are correct.
Du Pont equationAnswer: a Diff: E
6.The Wilson Corporation has the following relationships:Sales/Total assets2.0
×
Return on assets (ROA)4.0%Return on equity (ROE)6.0%What is Wilson’s profit margin and debt ratio?a.2%; 0.33 b.4%; 0.33c.4%; 0.67d.2%; 0.67e.4%; 0.50
Liquidity ratiosAnswer: a Diff: M
7.Oliver Incorporated has a current ratio equal to 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.5.2c.5.5d.6.0e.6.3
CAPMAnswer: b Diff: E N
8.The risk-free rate is 6 percent. Stock A has a beta of 1.0, while Stock B has a betaof 2.0. The market risk premium (k 
M
RF
) is positive. Which of the followingstatements is most correct?
2
 
a.Stock B’s required rate of return is twice that of Stock A. b.If Stock A’s required return is 11 percent, the market risk premium is 5 percent.c.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.d.Statements b and c are correct.e.All of the statements above are correct.
CAPM and required returnAnswer: a Diff:
9.Bradley Hotels has a beta of 1.3, while Douglas Farms has a betaof 0.7. The market return is 12 percent. The risk-free rate ofinterest is 7 percent. By how much does Bradley’s requiredreturn exceed Douglas’ required return?a.3.0%b.6.5%c.5.0%d.6.0%e.7.0%
Portfolio returnAnswer: a Diff: E
10.An investor is forming a portfolio by investing $50,000 in stock A that has a betaof 1.50, and $25,000 in stock B that has a beta of 0.90. The return on the market isequal to 6 percent and Treasury bonds have a yield of 4 percent. What is therequired rate of return on the investor’s portfolio?a.6.6% b.6.8%c.5.8%d.7.0%e.7.5%
Portfolio betaAnswer: e Diff: M
11.Walter Jasper currently manages a $500,000 portfolio. He is expecting to receive anadditional $250,000 from a new client. The existing portfolio has a required return of 10.75 percent. The risk-free rate is 4 percent and the return on the market is 9 percent. If Walter wants the required return on the new portfolio to be 11.5 percent,what should be the average beta for the new stocks added to the portfolio?a.1.50 b.2.00c.1.67d.1.35e.1.80
Required returnAnswer: c Diff:
12.You are holding a stock that has a beta of 2.0 and is currently in equilibrium. Therequired return on the stock is 15 percent, and the market return is 10 percent.What would be the
 percentage change in the return
on the stock, if the marketreturn increased by 30 percent while the risk-free rate remained unchanged?
3

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