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The following questions are worth 3 points each. Provide the single best response. 1. The primary goal of a publicly-owned firm interested in serving its stockholders should be to a. Maximize expected total corporate profit. b. Maximize expected EPS. c. Minimize the chances of losses. d. Maximize the stock price per share. e. Maximize expected net income. 2. Which of the following actions are likely to reduce agency conflicts between stockholders and managers? a. Paying managers a large fixed salary. b. Increasing the threat of corporate takeover. c. Placing restrictive covenants in debt agreements. d. All of the statements above are correct. e. Statements b and c are correct. 3. In recent years, both expected inflation and the market risk premium (k M - kRF) have declined. Assume that all stocks have positive betas. Which of the following is likely to have occurred as a result of these changes? a. The average required return on the market, kM, has remained constant, but the required returns have fallen for stocks that have betas greater than 1.0. b. The required returns on all stocks have fallen by the same amount. c. The required returns on all stocks have fallen, but the decline has been greater for stocks with higher betas. d. The required returns on all stocks have fallen, but the decline has been greater for stocks with lower betas. e. The required returns have increased for stocks with betas greater than 1.0 but have declined for stocks with betas less than 1.0. 4. The risk-free rate is 5 percent. Stock A has a beta = 1.0 and Stock B has a beta = 1.4. Stock A has a required return of 11 percent. What is Stock B's required return? a. 12.4% b. 13.4% c. 14.4% d. 15.4% e. 16.4% 5. 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

$ 842. b. Each investment should have the same expected return. b.920. Your family recently obtained a 30-year (360-month) $100.169.21 d. Statements b and c are correct. evaluated at a 15 percent interest rate? a.56 d. c.6. but the total amount of the cash flows remains the same.You have determined the profitability of a planned project by finding the present value of all the cash flows from that project.71 b. If you can negotiate a nominal annual interest rate of 10 percent and you wish to pay for the car over a 5-year period. $124. $318.) a. After 36 payments (3 years) what will be the remaining balance on your mortgage? a. $252.12 e. Each investment's expected return should equal its required return.565. All of the statements above are correct. Which of the following would cause the project to look more appealing in terms of the present value of those cash flows? a.48 e. Each investment should have the same realized return. what are your monthly car payments? a.86 d. which of the following will occur: a. $1. The discount rate decreases.376. If markets are in equilibrium. What is the present value of a 5-year ordinary annuity with annual payments of $200. d. The cash flows are extended over a longer period of time. $144.000 less the total amount of interest paid during the first 36 months.67 b. The monthly payment on the mortgage will steadily decline over time. e.522. 8. $145. $148. None of the statements above is correct.000 fixed-rate mortgage. Each investment's expected return should equal its realized return.64 9.000 to put toward a down payment. $285. $ 670. The mortgage is for 30 years and has a nominal rate of 8 percent (compounded monthly). $110.348. d. c. Which of the following statements is most correct? (Ignore all taxes and transactions costs.000 and you have $2. $276. Statements a and b are correct.953.71 10. d.43 b.82 c.78 e.95 11. . The remaining balance after three years will be $100. The proportion of the monthly payment that goes towards repayment of principal will be higher 10 years from now than it will be this year. The sticker price is $15. $216. e.746. $1. b. All of the statements above are correct. $1.34 c.91 c. e. The discount rate increases. You are considering buying a new car. 7. c.000 mortgage. You just bought a house and have a $150.

$120 c.00 d. 1/365th each day. 1.000 per year in Years 1 through 4.000 in Year 10.12. and the stock has a stated dividend of 10 percent of par. $64. and the firm's cost of capital is 10 percent. d.25 c.000 today. A share of common stock has just paid a dividend of $2. $35.00 years d.08 15. $62. Which of the following statements is most correct? a. c.00 c.86 years c. Cartwright Brothers' stock is currently selling for $40 a share. and if investors require a 19 percent rate of return. If the expected long-run growth rate for this stock is 15 percent. What is the stock's beta? a. The par value of the preferred stock is $120.50 b. 4. 1.00. what is the price of the stock? a.000. The project's internal rate of return is greater than 12 percent. 6. What is the payback period for this investment? a. All of the statements above are correct. 4. The project's modified internal rate of return is less than 12 percent. It has both common stock and nonparticipating preferred stock outstanding. The project's WACC is 12 percent and its net present value is $10. $71. This investment will cost the firm $150.kRF) is also 6 percent. 4. 0. 16. 5. A project has an up-front cost of $100. The stock's dividend is expected to grow at a constant rate of 7 percent a year forever. Assume cash flows occur evenly during the year. The project should be rejected since its return is less than the WACC.92 14.00 e. $200 13. $44. The cost of preferred stock (k p) is 8 percent. What is the market value of the preferred stock? a. and $40. Johnston Corporation is growing at a constant rate of 6 percent per year.23 years b. $175 d. e.000.35 years . None of the statements above is correct. $150 e.000 per year in Years 5 through 9. The risk-free rate (kRF) is 6 percent and the market risk premium (kM .06 b.83 e. The Seattle Corporation has been presented with an investment opportunity that will yield cash flows of $30. $125 b. The stock is expected to pay a $2 dividend at the end of the year.86 d. $57. 1. 2. b.12 years e.

c. Market risk. Payback = 2. Equity = 60%. e.12%. Payback = 2. Payback = 2.22%. IRR = 21.6. A decrease in the debt ratio will generally have no effect on __________.62% e. d. Business risk.22%. 12. internal rate of return (IRR). EPS = $2.90. . IRR = 10. b. 10. Equity = 50%. e. Debt = 40%. NPV = $260. c. NPV = $260. NPV = $300. NPV = $600.18.78. IRR = 24. 18.17. EPS = $3.42. IRR = 21. d.50. (It will affect each type of risk above. EPS = $3. Stock price = $31. Debt = 80%. Total risk.6. Stock price = $26. Payback = 2. b.00% b. A project has the following net cash flows: Year 0 1 2 3 4 5 Project Cash Flow -$ X 150 200 250 400 100 At the project's WACC of 10 percent. What is the project's internal rate of return? a. IRR = 21.00%. 16. a.31. Payback = 2. a.40. select the optimal capital structure for Minnow Entertainment Company.22%. Equity = 20%. Equity = 30%. Equity = 40%.4. NPV = $300. EPS = $3. Stock price = $28. Debt = 60%.49% d. d. 15. the project has an NPV of $124. Debt = 70%. What is the project's payback. b. Financial risk.05. c. Debt = 50%.38% 19. Stock price = $30. From the information below.) 20. Stock price = $30.6.00.62% c. Braun Industries is considering an investment project that has the following cash flows: Year 0 1 2 3 4 Cash Flow -$1. and net present value (NPV)? a.000 400 300 500 400 The company's WACC is 10 percent.95. EPS = $3. e.20.4. 13. None of the above is correct.

and it expects to sell 42. Which of the following statements best describes the theories of investors' preferences for dividends? a. Statements a and b are correct. Modigliani and Miller argue that investors prefer dividends to capital gains. $5. c.00 b.82 d. what price must the division charge in order to break even? a. e. has a division that makes burlap bags for the citrus industry. 23. $2. One key advantage of a residual dividend policy is that it enables a company to follow a stable dividend policy. b. b.00 d. $3. . e. The bird-in-hand theory suggests that a company can reduce its cost of equity capital by reducing its dividend payout ratio.21. equity. An increase in the company's degree of operating leverage. The clientele effect suggests that companies should follow a stable dividend policy. b.00 25. 22. d.000 bags per month. while fixed costs will total $110.21 24. $5. $2. $2. Statements b and c are correct. $2.000. e. $4. c. $6. The optimal capital structure is the mix of debt. The tax preference theory suggests that a company can increase its stock price by increasing its dividend payout ratio.000 per month. Variable costs will equal 40 percent of sales.00. c.45 c. d. An increase in the corporate tax rate.47 c. equity. An increase in the personal tax rate.24 b.Which of the following statements best describes the optimal capital structure? a. The company's assets become less liquid. and preferred stock that minimizes the company's weighted average cost of capital (WACC). The division has fixed costs of $10.15 e. $2. The Price Company will produce 55. and preferred stock that maximizes the company's stock price. An increase in expected bankruptcy costs. The optimal capital structure is the mix of debt. Texas Products Inc. The optimal capital structure is the mix of debt. At what price must each widget be sold for the company to achieve an EBIT of $95.000? a. d. Which of the following factors is likely to encourage a corporation to increase the proportion of debt in its capital structure? a.000 widgets next year.37 e. equity. If the variable cost per bag is $2. and preferred stock that maximizes the company's earnings per share (EPS).

the total market value of the company's stock equaled $1.4 million shares at the expected equilibrium price after repurchase. $1. Prior to the split. Makeover plans to repurchase 2.000.26. What is the size of the company's capital budget? a.40 . $ 45 c.000 30.62 d.143 c. The company forecasts that its net income this year will be $1.000 d. The 3-for-1 split led to a 5 percent increase in Tarheel's market capitalization. $18. $ 47. $2.Trenton Publishing follows a strict residual dividend policy.00 c. $17. The firm's managers expect that they can repurchase the entire 2. $1.4 million of its 20 million shares outstanding.00 b. e.50 b. $24.26 c. what is the expected per-share market price after repurchase? a.000. $150 e. c. $ 52.18 d. believes that at its current stock price of $16. What was the price of the company's stock following the stock split? a. The firm's current earnings are $44 million. (Market capitalization equals the stock price times the number of shares. If management's assumptions hold.000. The company increases the proportion of equity financing in its target capital structure. An increase in the number of profitable projects that it wants to fund this year. $428. All of the statements above are correct. All else being equal. $20. $16. After the split.) What was Tarheel's price after the stock split? a.5 billion.50 29. $ 857.00 the firm is undervalued in the market. The company follows a residual dividend policy and anticipates a dividend payout ratio of 40 percent.000 b. $450 28. Albany Motors recently completed a 3-for-1 stock split. Brock Brothers wants to maintain its capital structure that consists of 30 percent debt and 70 percent equity. Makeover Inc.57 e. $ 50. $ 50 d. 27.00 e. An increase in its net income. $ 15 b.000.428. Tarheel Computing's stock was trading at $150 per share before its recent 3-for-1 stock split.571 e. which of the following factors are likely to cause an increase in the firm's per-share dividend? a. $ 600. $472. b. d. Statements a and b are correct. the company had 10 million shares outstanding and its stock price was $150 per share.

00 = 152.71 b.47 b. = 1.1073 Mexican peso e.50 d. and 1 euro = 9.50 34.24 36. what should the textbook sell for in Britain? a. What is the exchange rate between the U.81 e.S. 0. The effects of changing currency values be included in financial analyses. how many Swiss francs can one U.S.3171 Mexican pesos c. Currently.00 = 9. e.0556 Mexican peso d. To better serve their primary customers. $1 U. = 0. $1. 0. 2.41 c.00 c. d. dollar.S. Multinational financial management requires that a. 1 U.9685 euro b. 33. $1.035 euros. 1. £ 61.0475 euros .00 = 2.00 = 0. dollars. $1 U. e. securities have an annualized return of 6. If one Swiss franc can purchase $0. c.6 Mexican pesos 35. = 0.222 Mexican pesos b. 1 Japanese yen = 0. $ 47. £118. $1 U. To develop new markets for their finished products.S.S. £ 47. To take advantage of lower production costs in regions of inexpensive labor. in the spot market $1 = 106. = 1.9593 euro c. what is the dollar to euro exchange rate in the 180-day forward market? a. In the spot market.00 = 0. = 1.Which of the following are reasons why companies move into international operations? a. Assume that purchasing power parity holds. All of the statements above are correct.S.S. e. 1. £ 75.71 U. A textbook sells for $75 in the U. Statements a and b are correct. 6-month German securities have an annualized return of 6 percent (and therefore have a 6-month periodic return equal to 3 percent).31. Legal and economic differences be considered in financial decisions. All of the statements above are correct. $1 U. 32.5 percent and a periodic return of 3. market.25 percent. dollar equals 1. Political risk be excluded from multinational corporate financial analyses.58 U.47 U. $1.0000 euro d. Because important raw materials are located abroad.0325 euros e. b. $1.00 d.S. c. 6-month U. dollar and the Mexican peso? a. If interest rate parity holds. b.S.45 Japanese yen.S.S. $1 U.S.S. $1. d. dollar buy? a.0606 Mexican pesos.00966 euro. Exchange rates are such that 1 British pound (£) equals $1.

11. 36. 21. 14. 12. 22. 5. 29. 13. 26. 18. 10. 34. 2. 3. 17. 30. 8. 31. 9. 24.Answers to the questions above: MULTIPLE CHOICE 1. 33. 23. 35. 6. D B C B A A B A C D B D A B B B D E C C E A E A E A C E B C E D B B A D . 28. 27. 4. 16. 25. 7. 20. 32. 19. 15.

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