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Finance Questions




Question;Use the;following information for ECE Incorporated to answer questions 1 - 3;Assets $200;million;Shareholder;Equity $100 million;Sales $300;million;1. If ECE's;stock is currently trading at $24.00 and ECE has 25 million shares outstanding;then ECE's market-to-book ratio is closest to;a..24;b. 4;c. 6;d. 30;2. If ECE's;return on assets (ROA) is 12%, the ECE's net income is;a. $6 million;b. $12 million;c. $24 million;d. $36 million;3. If ECE's net;profit margin is 8%, then ECE's return on equity (ROE) is;a. 10%;b. 12%;c. 24%;d. 30%;4. If Firm A and;Firm B are in the same industry and use the same production method, and Firm;A's asset turnover is higher than that of Firm B, then all else equal we can;conclude;a. Firm A is more efficient than;Firm;b. Firm A has a;lower dollar amount of assets than Firm B;c. Firm A has;higher sales than Firm B;d. Firm A has a;lower ROE than Firm B;5. If Moon;Corporation's gross margin declined, which of the following is true?;a. It's cost of;goods sold increased.;b. It's cost of goods sold as a;percent of sales increased.;c. Its sales;increased;d. Its net;profit margin was unaffected by the decline.;6. Which of the;following statements is false?;a. The main;components of net working capital are cash, inventory, receivables, and;payables.;b. The firm's;cash cycle is the average length of time between when a firm originally;purchases its inventory and when it receives the cash back from selling its;product.;c. Working capital includes the;cash that is needed to run the firm on a day-to-day basis. It does not include;excess cash, which is cash that is not required to run the business and can be;invested at a market rate.;d. If the firm;pays cash for its inventory, the firm's operating cycle is identical to the;firm's cash cycle.;7. Please use;the following information to answer questions 7 - 8.;Reardon Metal;(RM) had $120 million is sales in 2009. Its cost of goods sold was $85, and its;average inventory balance was $15 million.;The average;number of inventory days outstanding for Rearden is closest to;a. 6 days;b. 8 days;c. 37 days;d. 64 days;8. The industry;average days of inventory is 75 days. The amount that Rearden would have to;increase/decrease its inventory in order to match the industry average is;closest to;a. decrease;inventory by 2.2 million;b. increase;inventory by 2.2 million;c. increase inventory by 2.5;million;d. increase;inventory by 4.2 million;9. Rearden Metal;needs to order a new blast furnace that will be delivered in one year. The;$1,000,000 price for the blast furnace is due in one year when the new furnace;is installed. The blast furnace manufacturer offers Rearden Metal a discount of;$50,000 if they pay for the furnace now. If the interest rate is 7%, then the;NPV of paying for the furnace now is closest to;a. ($15,421);b. $15,421;c. ($46,729);d. $46,729;10. Which of the;following statements is false?;a. The interest;rates that banks offer on investments or charge on loans depends on the horizon;of the investment or loan.;b. The Federal;Reserve determines very short-term interest rates through its influence on the;federal funds rate.;c. The interest;rates that are quoted by banks and other financial institutions are nominal;interest rates.;d. Fundamentally, interest rates;are determined by the Federal Reserve.;11. Suppose a;ten-year bond with semiannual coupons has a price of $1,071.06 and a yield to;maturity of 7%. This bond's coupon rate is closest to;a. 3.5%;b. 6.0%;c. 7.0%;d. 8.0%;Use the;following information to answer questions 12-14;The Sisyphean;Company has a bond outstanding with a face value of $1,000 that reaches;maturity in 15 years. The bond certificate indicates that the stated coupon;rate for this bond is 8% and that the coupon payments are to be made;semiannually.;12. How much;will each semiannual coupon payment be?;a. $60;b. $40;c. $120;d. $80;13. Assuming the;appropriate YTM on the Sisyphean bond is 7.5%, then the price that this bond;trades for will be closest to;a. $1,045;b. $691;c. $1,000;d. $957;14. Assuming the;appropriate YTM on the Sisyphean bond is 9%, then this bond will trade at;a. A premium;b. A discount;c. Par;d. Not enough;information to determine;15. Which of the;following statements is false?;a. Prices of bonds with lower;durations are more sensitive to interest rate changes;b. When a bond;is trading at a discount, the price increase between coupons will exceed the;drop when a coupon is paid, so the bond's price will rise and its discount will;decline as time passes.;c. Coupon bonds;may trade at a discount, at a premium, or at par.;d. The;sensitivity of a bond's price changes in interest rates is the bond's duration.;16. Which of the;following is not a way a firm can increase its dividend?;a. By increasing its retention;rate;b. By decreasing;its shares outstanding;c. By increasing;its earnings (net income);d. By increasing;its dividend payout rate;17.Use the;following to answer questions 17-19;Rearden Metals;has a current stock price of $30 share, is expected to pay a dividend of $1.20;in one year, and its expected price right after paying that dividend is $33.;Rearden?s;expected dividend yield is closest to;a. 3.40%;b. 3.65%;c. 4.00%;d. 4.20%;18. Rearden?s;expected capital gains yield is closest to;a. 4.0%;b. 6.4%;c. 8.2%;d. 10.0%;19. Rearden's;equity cost of capital is closest to;a. 4.0%;b. 6.4%;c. 8.2%;d. 10.0% Option should be 14%;20. NoGrowth;Industries presently pays an annual dividend of $1.50 per share and it is;expected that these dividend payments will continue indefinitely. If NoGrowth's;equity cost of capital is 12%, then the value of a share of NoGrowth's stock is;closest to;a. $10;b. $15;c. $14;d. $12.50;21. Von Bora;Corporation (VBC) is expected to pay a $2.00 dividend at the end of this year.;If you expect VBC's dividend to grow by 5% per year forever and VBC's equity;cost of capital is 13%, then the value of a share of BBC stock is closest to;a. 25;b. $40;c. $15.40;d. $11.10;22. Which of the;following statements is false?;a. The total;payout model allows us to ignore the firm's choice between dividends and share;repurchases;b. By repurchasing shares, the;firm increases its share count, which decreases its earning and dividends on a;per-share basis.;c. The total;payout model discounts the total payouts that the firm makes to shareholders;which is the total amount spent on both dividends and share repurchases;d. In the;dividend discount model we implicitly assume that any cash paid out to the;shareholders takes the form of a dividend.;23. Suppose that;KAN's beta is 1.5. If the market risk premium is 8% and the risk-free interest;rate is 4%, then the expected return for KAN stock is?;a. 8.0%;b. 16.0%;c. 13.5%;d. 10.0%;24. Use the;following information to answer questions 24-25;Food For Less;(FFL), a grocery store, is considering offering one hour photo developing in;their store. The firm expects that sales from the new one hour machine will be;$150,000 per year. FFL currently offers overnight film processing with annual;sales of $100,000. While many of the one hour photo sales will be new;customers, FFL estimates that 60% of their current overnight photo customers;will switch and use the one hour service.;24. The level of;incremental sales associated with introducing the new one hour photo service is;closest to;a. $90,000;b. 150,000;c. 60,000;d. 120,000;25. Suppose that;of the 60% of FFL's current overnight photo customers, half would start taking;their film to a competitor that offers one hour photo processing if FFL fails;to offer the one hour service. The level of incremental sales in this case is;closest to;a. $60,000;b. $150,000;c. $90,000;d. $120,000;26. You are;considering adding a microbrewery on to one of your firm's existing;restaurants. This will entail an increase in inventory of $8,000, an increase;in accounts payable of $2,500, and an increase in property, plant and equipment;of $40,000. All other accounts will remain unchanged. The change in net working;capital resulting form the addition of the microbrewery is;a. $45,500;b. $10,500;c. $6,500;d. $5,500;27. Bubba Company;reported net income of $300 million for the most recent fiscal year. The firm;had depreciation expenses of $125 million and capital expenditures of $150;million. Although they had no interest expense, the firm did have an increase;in net working capital of $20 million. What is Bubba's free cash flow?;a. $170 million;b. $255 million;c. $150 million;d. $5 million;28. Consider a;project with free cash flows in one year of $90,000 in a weak economy or;$117,000 in a strong economy, with each outcome being equally likely. The;initial investment required for the project is $80,000, and the project's cost;of capital is 15%. The risk-free interest rate is 5%.;The NPV for this;project is closest to;a. $6,250;b. $14,100;c. $10,000;d. $18,600;29. Suppose that;Taggart Transcontinental currently has no debt and has an equity cost of;capital of 10%. Taggart is considering borrowing funds at a cost of 6% and;using these funds to repurchase existing shares of stock. Assume perfect;capital markets. If Taggart borrows until they achieve a debt-to-equity ratio;of 20%, then Taggart's levered cost of equity would be closest to;a. 8.0%;b. 9.2%;c. 10.0%;d. 11.0%;30. Which of the;following statements is false?;a. In perfect;capital markets, buying and selling securities is a zero-NPV transaction, so it;should not affect firm value.;b. Making;positive NPV investments will create value for the firm's investors, whereas;saving the cash or paying it out will not.;c. In perfect;capital markets, if a firm invests excess cash flows in financial securities;the firm's choice of payout versus retention is irrelevant and does not affect;the initial share price.;d. After adjusting for investor;taxes, there remains a substantial tax advantage for the firm to retain excess;cash.;31. Which of the;following statements is false?;a. A call option;gives the owner the right to buy the asset.;b. A put option;gives the owner the right to sell the asset.;c. A financial option contract;gives the writer the right (but not the obligation) to purchase or sell an;asset at a fixed price at some future date.;d. A stock;option gives the holder the option to buy or sell a share of stock on or before;a given date for a given price.;32. Wyatt Oil;has 8 million shares outstanding and is about to issue 10 million new shares in;an IPO. The IPO price has been set at $15 per share, and the underwriting;spread is 6%. the IPO is a big success with investors, and the share price;rises to $35 the first day of trading.;The amount that;Wyatt Oil raised during the IPO is closest to;a. $113 million;b. $141 million;c. $150 million;d. $329 million


Paper#49284 | Written in 18-Jul-2015

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