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Kaplan GB550 quiz, 2, 4, 5 and final exam

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Question;Gb550 quiz 2;1.Rappaport;Corp.'s sales last year were $320,000, and its net income after taxes was;$23,000. What was its profit margin on sales? (Points: 2) 6.49%;6.83%;7.19%;7.55%;Question 2. 2.Arshadi Corp.'s sales;last year were $52,000, and its total assets were $22,000. What was its;total assets turnover ratio (TATO)? (Points: 2);2.03;2.13;2.25;2.36;Question 3. 3.Branch Corp.'s total;assets at the end of last year were $315,000 and its net income after taxes;was $22,750. What was its return on total assets? (Points: 2);7.22%;7.58%;7.96%;8.36%;Question 4. 4.Nikko Corp.'s total;common equity at the end of last year was $305,000 and its net income after;taxes was $60,000. What was its ROE?(Points: 2);16.87%;17.75%;18.69%;19.67%;Question 5. 5.Orono Corp.'s sales;last year were $435,000, its operating costs were $362,500, and its;interest charges were $12,500. What was the firm's times interest earned;(TIE) ratio? (Points: 2);4.72;4.97;5.23;5.80;Question 6. 6.Which of the;following statements is CORRECT? (Points: 2);The four most important financial;statements provided in the annual report are the balance sheet, income;statement, cash budget, and the statement of stockholders? equity.;The balance sheet gives us a picture of the firm?s financial position at a;point in time.;The income statement gives us a picture of the firm?s financial position at a;point in time.;The statement of cash flows tells us how much cash the firm has in the form;of currency and demand deposits.;Question 7. 7.Which of the;following statements is CORRECT? (Points: 2);The more depreciation a firm reports;the higher its tax bill, other things held constant.;People sometimes talk about the firm?s net cash flow, which is shown as the;lowest entry on the income statement, hence it is often called "the;bottom line.?;Depreciation reduces a firm?s cash balance, so an increase in depreciation;would normally lead to a reduction in the firm?s net cash flow.;Net cash flow (NCF) is often defined as follows;Net Cash Flow = Net Income + Depreciation and Amortization Charges.;Question 8. 8.Determining whether a;firm's financial position is improving or deteriorating requires analyzing;more than the ratios for a given year. Trend analysis is one method of;measuring changes in a firm's performance over time. (Points: 2);True;False;Question 9. 9.Which of the;following statements is CORRECT? (Points: 2);A reduction in inventories held would;have no effect on the current ratio.;An increase in inventories would have no effect on the current ratio.;If a firm increases its sales while holding its inventories constant, then;other things held constant, its inventory turnover ratio will increase.;A reduction in the inventory turnover ratio will generally lead to an;increase in the ROE.;Question 10. 10.Which of the;following items is NOT included in current assets? (Points: 2);Accounts receivable.;Inventory.;Bonds.;Cash.;Gb550 quiz 4;1.You hold a diversified portfolio;consisting of a $5,000 investment in each of 20 different common stocks. The;portfolio beta is equal to 1.12. You have decided to sell a lead mining stock;(b = 1.00) at $5,000 net and use the proceeds to buy a like amount of a steel;company stock (b = 2.00). What is the new beta of the portfolio?;(Points: 2) 1.1139;1.1700;1.2311;1.2927;Question 2. 2.Calculate the;required rate of return for Mercury, Inc., assuming that (1) investors;expect a 4.0% rate of inflation in the future, (2) the real risk-free rate;is 3.0%, (3) the market risk premium is 5.0%, (4) Mercury has a beta of;1.00, and (5) its realized rate of return has averaged 15.0% over the last;5 years.;(Points: 2);10.29%;10.83%;11.40%;12.00%;Question 3. 3.In a portfolio of;three different stocks, which of the following could NOT be true? (Points;2);The riskiness of the portfolio is less than the;riskiness of each of the stocks if they were held in isolation.;The riskiness of the portfolio is greater than the riskiness of one or two of;the stocks.;The beta of the portfolio is less than the betas of each of the individual;stocks.;The beta of the portfolio is greater than the beta of one or two of the;individual stocks? betas.;Question 4. 4.We will almost always;find that the beta of a diversified portfolio is less stable over time than;the beta of a single security. (Points: 2);True;False;Question 5. 5.Stock A?s beta is 1.5;and Stock B?s beta is 0.5. Which of the following statements must be true;about these securities? (Assume market equilibrium.) (Points: 2);When held in isolation, Stock A has greater risk;than Stock B.;Stock B must be a more desirable addition to a portfolio than Stock A.;Stock A must be a more desirable addition to a portfolio than Stock B.;The expected return on Stock A should be greater than that on Stock B.;Question 6. 6.Which of the;following statements is CORRECT? (Points: 2);?Characteristic line? is another name for the;Security Market Line.;The characteristic line is the regression line that results from plotting the;returns on a particular stock versus the returns on a stock from a different;industry.;The slope of the characteristic line is the stock?s standard deviation.;The distance of the plot points from the characteristic line is a measure of;the stock?s diversifiable risk.;Question 7. 7.Which of the;following is NOT a potential problem with beta and its estimation? (Points;2);Sometimes a security or project does not have a;past history which can be used as a basis for calculating beta.;Sometimes, during a period when the company is undergoing a change such as;toward more leverage, or riskier assets, the calculated beta will be drastically;different than the ?true? or ?expected future? beta.;The beta of ?the market,? can change over time, sometimes drastically.;Sometimes the past data used to calculate beta do not reflect the likely risk;of the firm for the future because conditions have changed.;Question 8. 8.If the returns of two;firms are negatively correlated, then one of them must have a negative;beta. (Points: 2);True;False;Question 9. 9.It is possible for a;firm to have a positive beta, even if the correlation between its returns;and those of another firm are negative. (Points: 2);True;False;Question 10. 10.Which is the best;measure of risk for an asset held in isolation, and which is the best measure;for an asset held in a diversified portfolio? (Points: 2);Variance;correlation coefficient.;Standard deviation, correlation coefficient.;Beta, variance.;Coefficient of variation, beta.;Gb550 quiz 5;1. Teall Development Company hired you as a;consultant to help them estimate its cost of capital. You have been provided;with the following data: D1 = $1.45, P0 = $22.50, and g = 6.50% (constant).;Based on the DCF approach, what is the cost of common from retained earnings?;(Points: 2)11.10%11.68%12.30%12.94%;Question 2. 2. Assume that you are a consultant to;Broske Inc., and you have been provided with the following data: D1 =;$0.67, P0 = $27.50, and g = 8.00% (constant). What is the cost of common;from retained earnings based on the DCF approach? (Points: 2);9.42% 9.91% 10.44% 10.96%;Question 3. 3. Anderson Systems is considering a;project that has the following cash flow and WACC data. What is the;project's NPV? Note that if a project's expected NPV is negative, it should;be rejected.;WACC: 9.00%;Year 0 1 2 3;Cash flows -$1,000 $500 $500 $500 (Points: 2);$265.65 $278.93 $292.88 $307.52;Question 4. 4. A company?s perpetual preferred;stock currently sells for $92.50 per share, and it pays an $8.00 annual;dividend. If the company were to sell a new preferred issue, it would incur;a flotation cost of 5.00% of the issue price. What is the firm's cost of preferred;stock? (Points: 2);7.81% 8.22% 8.65% 9.10%;Question 5. 5. DeLong Inc. has fixed operating;costs of $470,000, variable costs of $2.80 per unit produced, and its;products sell for $4.00 per unit. What is the company's breakeven point;i.e., at what unit sales volume would income equal costs? (Points: 2);391,667 411,250 431,813 453,403;Question 6. 6. Assume a project has normal cash;flows. All else equal, which of the following statements is CORRECT?;(Points: 2);A project?s IRR;increases as the WACC declines. A project?s NPV increases as the WACC declines. A project?s MIRR is unaffected by changes in the WACC. A project?s regular payback increases as the WACC;declines.;Question 7. 7. For capital budgeting and cost of;capital purposes, the firm should assume that each dollar of capital is;obtained in accordance with its target capital structure, which for many;firms means partly as debt, partly as preferred stock, and partly common equity.;(Points: 2);True False;Question 8. 8. Which of the following statements is;CORRECT? (Points: 2);The internal rate of;return method (IRR) is generally regarded by academics as being the best;single method for evaluating capital budgeting projects. The payback method is generally regarded by academics;as being the best single method for evaluating capital budgeting projects. The discounted payback method is generally regarded by;academics as being the best single method for evaluating capital budgeting;projects. The net present value method (NPV) is generally;regarded by academics as being the best single method for evaluating capital;budgeting projects.;Question 9. 9. The cost of equity raised by;retaining earnings can be less than, equal to, or greater than the cost of;external equity raised by selling new issues of common stock, depending on;tax rates, flotation costs, the attitude of investors, and other factors. (Points;2);True False;Question 10. 10. Which of the following statements;is CORRECT? (Points: 2);One defect of the IRR;method versus the NPV is that the IRR does not take account of cash flows;over a project?s full life. One defect of the IRR method versus the NPV is that;the IRR does not take account of the time value of money. One defect of the IRR method versus the NPV is that;the IRR does not take account of the cost of capital. One defect of the IRR method versus the NPV is that;the IRR does not take proper account of differences in the sizes of projects.;Final exam;Question 1.1.Last year Ellis Inc.'s earnings per share were;$3.50, and its growth rate during the prior 5 years was 9.0% per year. If;that growth rate were maintained, how many years would it take for Ellis?;EPS to triple? (Points: 4);9.2910.3311.4712.75;Question 2.2.Jose now has $500. How much would he have after;6 years if he leaves it invested at 5.5% with annual compounding? (Points;4);$591.09$622.20$654.95$689.42;Question 3.3.Which of the following statements is CORRECT?;(Points: 4);It is generally more expensive;to form a proprietorship than a corporation because, with a proprietorship;extensive legal documents are required.Corporations face fewer regulations than sole;proprietorships.One disadvantage of operating a business as a sole;proprietorship is that the firm is subject to double taxation, at both the;firm level and the owner level.One advantage of forming a corporation is that equity;investors are usually exposed to less liability than in a regular;partnership.If a regular partnership goes bankrupt, each partner is;exposed to liabilities only up to the amount of his or her investment in the;business.;Question 4.4.A $50,000 loan is to be amortized over 7 years;with annual end-of-year payments. Which of these statements is CORRECT?;(Points: 4);The annual payments would be;larger if the interest rate were lower.If the loan were amortized over 10 years rather than 7;years, and if the interest rate were the same in either case, the first;payment would include more dollars of interest under the 7-year amortization;plan.The proportion of each payment that represents interest as;opposed to repayment of principal would be lower if the interest rate were;lower.The last payment would have a higher proportion of interest;than the first payment.;Question 5.5.Which of the following could explain why a;business might choose to operate as a corporation rather than as a sole;proprietorship or a partnership? (Points: 4);Corporations generally find it;relatively difficult to raise large amounts of capital.Less of a corporation?s income is generally subjected to;taxes than would be true if the firm were a partnership.Corporate shareholders escape liability for the firm's;debts, but this factor may be offset by the tax disadvantages of the;corporate form of organization.Corporate investors are exposed to unlimited liability.;Question 6.6.An investor is considering starting a new;business. The company would require $475,000 of assets, and it would be;financed entirely with common stock. The investor will go forward only if;she thinks the firm can provide a 13.5% return on the invested capital;which means that the firm must have an ROI of 13.5%. How much net income;must be expected to warrant starting the business?;(Points: 4);$52,230$54,979$57,873$64,125;Question 7.7.Companies generate income from their;regular" operations and from other sources like interest earned;on the securities they hold, which is called non-operating income. Lindley;Textiles recently reported $12,500 of sales, $7,250 of operating costs;other than depreciation, and $1,000 of depreciation. The company had no;amortization charges and no non-operating income. It had $8,000 of bonds;outstanding that carry a 7.5% interest rate, and its federal-plus-state;income tax rate was 40%. How much was Lindley's operating income, or EBIT?;(Points: 4);$3,462$3,644$3,836$4,250;Question 8.8.Which of the following items cannot be found on;a firm?s balance sheet under current liabilities?;(Points: 4);Accounts payable.Short-term notes payable to the bank.Accrued wages.Cost of goods sold.;Question 9.9.High current and quick ratios always indicate;that a firm is managing its liquidity position well. (Points: 4);TrueFalse;Question 10.10.Other things held constant, which of the;following actions would increase the amount of cash on a company?s balance;sheet? (Points: 4);The company repurchases common;stock.The company pays a dividend.The company issues new common stock.The company gives customers more time to pay their bills.;Question 11.11.Quigley Inc.'s bonds currently sell for $1,080;and have a par value of $1,000. They pay a $100 annual coupon and have a;15-year maturity, but they can be called in 5 years at $1,125. What is;their yield to maturity (YTM)?;(Points: 4);8.56%9.01%9.46%9.93%;Question 12.12.Preston Inc.'s stock has a 25% chance of;producing a 30% return, a 50% chance of producing a 12% return, and a 25%;chance of producing a -18% return. What is the firm's expected rate of;return?;(Points: 4);7.72%8.12%8.55%9.00%;Question 13.13.Which of the following events would make it;more likely that a company would choose to call its outstanding callable;bonds? (Points: 4);The company?s bonds are;downgraded.Market interest rates rise sharply.Market interest rates decline sharply.The company's financial situation deteriorates;significantly.;Question 14.14.Inflation, recession, and high interest rates;are economic events that are best characterized as being: (Points: 4);systematic risk factors that;can be diversified away.company-specific risk factors that can be diversified away.among the factors that are responsible for market risk.risks that are beyond the control of investors and thus;should not be considered by security analysts or portfolio managers.;Question 15.15.Which is the best measure of risk for a single;asset held in isolation, and which is the best measure for an asset held in;a diversified portfolio? (Points: 4);Variance, correlation;coefficient.Standard deviation, correlation coefficient.Beta, variance.Coefficient of variation, beta.;Question 16.16.Consider the following information and then;calculate the required rate of return for the Scientific Investment Fund;which holds 4 stocks. The market?s required rate of return is 15.0%, the;risk-free rate is 7.0%, and the Fund's assets are as follows: 30;Stock Investment Beta;A $ 200,000 1.50;B 300,000 -0.50;C 500,000 1.25;D 1,000,000 0.75;(Points: 4);10.67%11.23%11.82%13.10%;Question 17.17.Calculate the required rate of return for;Mercury, Inc., assuming that (1) investors expect a 4.0% rate of inflation;in the future, (2) the real risk-free rate is 3.0%, (3) the market risk;premium is 5.0%, (4) Mercury has a beta of 1.00, and (5) its realized rate;of return has averaged 15.0% over the last 5 years.;(Points: 4);10.29%10.83%11.40%12.00%;Question 18.18.The CAPM is a multi-period model which takes;account of differences in securities? maturities, and it can be used to;determine the required rate of return for any given level of systematic;risk. (Points: 4);TrueFalse;Question 19.19.Which is the best measure of risk for an asset;held in isolation, and which is the best measure for an asset held in a;diversified portfolio? (Points: 4);Variance, correlation;coefficient.Standard deviation, correlation coefficient.Beta, variance.Coefficient of variation, beta.;Question 20.20.It is possible for a firm to have a positive;beta, even if the correlation between its returns and those of another firm;are negative. (Points: 4);TrueFalse;Question 21.21.Teall Development Company hired you as a;consultant to help them estimate its cost of capital. You have been;provided with the following data: D1 = $1.45, P0 = $22.50, and g = 6.50%;(constant). Based on the DCF approach, what is the cost of common from retained;earnings? 69(Points: 4);11.10%11.68%12.30%12.94%;Question 22.22.A company?s perpetual preferred stock;currently sells for $92.50 per share, and it pays an $8.00 annual dividend.;If the company were to sell a new preferred issue, it would incur a;flotation cost of 5.00% of the issue price. What is the firm's cost of;preferred stock? (Points: 4);7.81%8.22%8.65%9.10%;Question 23.23.Which of the following statements is CORRECT?;Assume that the project being considered has normal cash flows, with one;outflow followed by a series of inflows. (Points: 4);The longer a project?s payback;period, the more desirable the project is normally considered to be by this;criterion.One drawback of the regular payback for evaluating projects;is that this method does not properly account for the time value of money.If a project?s payback is positive, then the project should;be rejected because it must have a negative NPV.The regular payback ignores cash flows beyond the payback;period, but the discounted payback method overcomes this problem.;Question 24.24.No conflict will exist between the NPV and IRR;methods, when used to evaluate two equally risky but mutually exclusive;projects, if the projects' cost of capital exceeds the rate at which the;projects' NPV profiles cross. (Points: 4);TrueFalse;Question 25.25.When working with the CAPM, which of the;following factors can be determined with the most precision? (Points: 4);The market risk premium (RPM).The beta coefficient, bi, of a relatively safe stock.The most appropriate risk-free rate, rRF.The expected rate of return on the market, rM.

 

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