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Davenport FIN510 final exam (both parts)




Question;Part 1;Companies;E and P each reported the same earnings per share (EPS), but Company E's stock;trades at a higher price. Which of the following statements is CORRECT?;a.;Company E trades at a higher P/E ratio.;b.;Company E probably has fewer growth opportunities.;c.;Company E must pay a lower dividend.;d.;Company E must have a higher market-to-book ratio.;e.;Company E is probably judged by investors to be riskier.;Hide Feedback;Other;things held constant, the value of an option depends on the stock's price, the;risk-free rate, and the;a.;Strike price.;b.;Variability of the stock price.;c.;Option's time to maturity.;d.;All of these.;e.;None of these.;Hide Feedback;Which of;the following statements is CORRECT?;a.;Typically, a firm's EBIT should exceed its EBITDA.;b.;If a firm is more profitable than most other firms, we would normally;expect to see its book value per share exceed its stock price, especially;after several years of high inflation.;c.;Typically, a firm's DPS should exceed its EPS.;d.;If a firm is more profitable than average (e.g., Google), we would normally;expect to see its stock price exceed its book value per share.;e.;The more depreciation a firm has in a given year, the higher its EPS, other;things held constant.;Hide Feedback;A firm;wants to strengthen its financial position. Which of the following actions;would increase its current ratio?;a.;Borrow using short-term debt and use the proceeds to repay debt that has a;maturity of more than one year.;b.;Issue new stock and then use some of the proceeds to purchase additional;inventory and hold the remainder as cash.;c.;Use cash to repurchase some of the company's own stock.;d.;Reduce the company's days' sales outstanding to the industry average and;use the resulting cash savings to purchase plant and equipment.;e.;Use cash to increase inventory holdings.;Hide Feedback;Which of;the following statements is CORRECT?;a.;Only institutions, and not individuals, can participate in derivatives;market transactions.;b.;The IPO market is a subset of the secondary market.;c.;As they are generally defined, money market transactions involve debt;securities with maturities of less than one year.;d.;If you purchased 100 shares of Disney stock from your brother-in-law, this;would be an example of a primary market transaction.;e.;s;Hide Feedback;Which of;the following statements is CORRECT?;a.;If interest rates increase, all bond prices will increase, but the increase;will be greater for bonds that have less interest rate risk.;b.;One advantage of a zero coupon Treasury bond is that no one who owns the;bond has to pay any taxes on it until it matures or is sold.;c.;Long-term bonds have less interest rate price risk but more reinvestment;rate risk than short-term bonds.;d.;Long-term bonds have less interest rate price risk and also less;reinvestment rate risk than short-term bonds.;e.;Relative to a coupon-bearing bond with the same maturity, a zero coupon;bond has more interest rate price risk but less reinvestment rate risk.;Hide Feedback;Which of;the following statements is CORRECT?;a.;Call options generally sell at a price below their exercise value, and the;greater the exercise value, the lower the premium on the option is likely;to be.;b.;Call options generally sell at a price below their exercise value, and the;lower the exercise value, the lower the premium on the option is likely to;be.;c.;Call options generally sell at a price greater than their exercise value;and the greater the exercise value, the higher the premium on the option is;likely to be.;d.;If the underlying stock does not pay a dividend, it does not make good;economic sense to exercise a call option prior to its expiration date, even;if this would yield an immediate profit.;e.;Because of the put-call parity relationship, under equilibrium conditions a;put option on a stock must sell at exactly the same price as a call option;on the stock.;Hide Feedback;Which of;the following statements best describes what you should expect if you randomly;select stocks and add them to your portfolio?;a.;Adding more such stocks will increase the portfolio's expected rate of;return.;b.;Adding more such stocks will reduce the portfolio's market risk but not its;unsystematic risk.;c.;Adding more such stocks will reduce the portfolio's beta coefficient and;thus its systematic risk.;d.;Adding more such stocks will have no effect on the portfolio's risk.;e.;Adding more such stocks will reduce the portfolio's unsystematic, or;diversifiable, risk.;Hide Feedback;Under;normal conditions, which of the following would be most likely to increase;the coupon rate required to enable a bond to be issued at par?;a.;Making the bond a first mortgage bond rather than a debenture.;b.;Adding additional restrictive covenants that limit management's actions.;c.;The rating agencies change the bond's rating from Baa to Aaa.;d.;Adding a call provision.;e.;Adding a sinking fund.;Hide Feedback;Which of;the following statements is CORRECT?;a.;The yield to maturity on a coupon bond that sells at its par value consists;entirely of a current interest yield, it has a zero expected capital gains;yield.;b.;The yield to maturity for a coupon bond that sells at a premium consists;entirely of a positive capital gains yield, it has a zero current interest;yield.;c.;On an expected yield basis, the expected capital gains yield will always be;positive because an investor would not purchase a bond with an expected;capital loss.;d.;Rising inflation makes the actual yield to maturity on a bond greater than;a quoted yield to maturity that is based on market prices.;e.;The market value of a bond will always approach its par value as its;maturity date approaches. This holds true even if the firm has filed for;bankruptcy.;Hide Feedback;Which of;the following statements regarding a 15-year (180-month) $125,000, fixed-rate;mortgage is CORRECT? (Ignore taxes and transactions costs.);a.;The remaining balance after three years will be $125,000 less one third of;the interest paid during the first three years.;b.;Because it is a fixed-rate mortgage, the monthly loan payments (which;include both interest and principal payments) are constant.;c.;Interest payments on the mortgage will increase steadily over time, but the;total amount of each payment will remain constant.;d.;The proportion of the monthly payment that goes towards repayment of;principal will be lower 10 years from now than it will be the first year.;e.;The outstanding balance declines at a slower rate in the later years of the;loan's life.;Hide Feedback;Which of;the following statements is CORRECT?;a.;Corporations cannot buy the preferred stocks of other corporations.;b.;Preferred dividends are not generally cumulative.;c.;A big advantage of preferred stock is that dividends on preferred stocks;are tax deductible by the issuing corporation.;d.;Preferred stockholders have a priority over bondholders in the event of;bankruptcy to the income, but not to the proceeds in a liquidation.;e.;The preferred stock of a given firm is generally less risky to investors;than the same firm's common stock.;Hide Feedback;Other;things held constant, which of the following actions would increase the;amount of cash on a company's balance sheet?;a.;The company issues new common stock.;b.;The company pays a dividend.;c.;The company gives customers more time to pay their bills.;d.;The company purchases a new piece of equipment.;e.;The company repurchases common stock.;Hide Feedback;Which of;the following statements is CORRECT?;a.;Hedge funds have more in common with commercial banks than with any other;type of financial institution.;b.;Hedge funds are legal in the United States, but they are not permitted to;operate in Europe or Asia.;c.;The justification for the "light" regulation of hedge funds is;that only "sophisticated" investors with high net worths and high;incomes are permitted to invest in these funds, and such investors;supposedly can do the necessary "due diligence" on their own;rather than have it done by the SEC or some other regulator.;d.;Hedge funds have more in common with investment banks than with any other;type of financial institution.;e.;Hedge funds are legal in Europe and Asia, but they are not permitted to;operate in the United States.;Hide Feedback;Part II;Problem 4-25;Repaying a Loan;?;eBook;?;While Mary Corens was a student at the University of Tennessee, she;borrowed $12,000 in student loans at an annual interest rate of 7.10%. If Mary;repays $1,500 per year, how long (to the nearest year) will it take her to;repay the loan?;year(s);Problem 4-22;Expected Rate of return;?;eBook;?;Washington-Pacific invests $5 million;to buy a tract of land and plant some young pine trees. The trees can be;harvested in 13 years, at which time W-P plans to sell the forest at an;expected price of $10 million. What is W-P's expected rate of return? Round;your answer to two decimal places.;%;Problem 4-17;Present Value for Various Compounding Periods;?;eBook;?;Find the present value of $350 due in;the future under each of the following conditions. Round your answers to the;nearest cent.;a.;6% nominal rate, semiannual;compounding, discounted back 5 years;$;b.;6% nominal rate, quarterly compounding;discounted back 5 years;$;c. 6% nominal rate, monthly compounding, discounted;back 5 years;$;Problem 3-8;Profit Margin and Debt Ratio;?;eBook;?;?;Assume you are given the following;relationships for the Clayton Corporation;Sales/total assets;1.9;Return on assets (ROA);4%;Return on equity (ROE);5%;1. Calculate Clayton's profit margin. Round your;answer to two decimal places. %;2. Calculate Clayton's debt ratio. Round your answer;to two decimal places. %;Problem 5-5;Default Risk Premium;?;eBook;?;?;A Treasury bond that matures in 10;years has a yield of 6%. A 10-year corporate bond has a yield of 8%. Assume;that the liquidity premium on the corporate bond is 0.6%. What is the default;risk premium on the corporate bond? Round your answer to two decimal places.;%;Problem 7-11;Nonconstant Growth Stock Valuation;?;eBook;?;Assume that the average firm in your;company's industry is expected to grow at a constant rate of 6% and that its;dividend yield is 8%. Your company is about as risky as the average firm in the;industry, but it has just successfully completed some R&D work that leads;you to expect that its earnings and dividends will grow at a rate of 50% [D1 =;D0(1 + g) = D0(1.50)] this year and 25% the following;year, after which growth should return to the 6% industry average. If the last;dividend paid (D0) was $2.75, what is the value per share of your;firm's stock? Round your answer to the nearest cent. Do not round your;intermediate computations.;$;1219.5122;Problem 6-10;Portfolio Beta;?;eBook;?;You have a $2 million portfolio;consisting of a $100,000 investment in each of 20 different stocks. The portfolio;has a beta of 0.75. You are considering selling $100,000 worth of one stock;with a beta of 1.05 and using the proceeds to purchase another stock with a;beta of 1.30. What will the portfolio's new beta be after these transactions?;Round your answer to two decimal places.;Problem 6-8;Portfolio Beta;?;eBook;?;Suppose you hold a diversified;portfolio consisting of a $7,500 investment in each of 20 different common;stocks. The portfolio's beta is 1.35. Now, suppose you sell one of the stocks;with a beta of 1.0 for $7,500 and use the proceeds to buy another stock whose;beta is 1.45. Calculate your portfolio's new beta. Round your answer to two;decimal places.


Paper#50939 | Written in 18-Jul-2015

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