BFIN 300 SP16 Final Guideline Answers PDF

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BFIN 300 Final Student Name:

Spring 2016 Version 1

1. Sherman Designs stock has a beta of .87, the risk free rate is 1.375%, and the expected return on the market is 10.95%. The expected return on the stock is closest to: A) 10.90% B) 9.71% = 1.375% + (.87)(10.96 – 1.375) C) 9.53% 2. The internal rate of return is: A) the rate an investment actually earns. B) the rate that makes the present value of an investment exactly equal to zero. C) always reliable in making investment decisions. 3. Longstreet Inc.'s price is $37.30 a share, their dividend for next year is expected to be $1.95, and the long term sustainable growth rate is 3.75%. The expected return on the stock is closest to: A) 5.23% B) 8.98% ≈ (1.95 + 37.3*.0375)/37.30 C) 9.17% 4. Hancock PLC projects the following cash flows for a potential investment. The firm's hurdle rate for the project is 10.30% Cash Flows (thousands): -$76.292; $17.9; $23.2; $26.0; $32.0 Assuming the firm expects to earn at least the hurdle rate for the project to be acceptable, Hughes should: The IRR is 10.3004% and both answers Accept and Be indifferent were given credit A) be indifferent about accepting or rejecting the project. B) accept the project. C) reject the project. 5. Nominal rates are defined as real rates plus a premium for expected: A) interest rate risk. B) default risk. C) inflation.

6. Beauregard Inc has just paid an annual dividend of $1.85. You expect dividends to grow at 17% for the next two years, then at a sustainable 4.75% after that. The expected return on the stock is 10.25%. The per share value of Beauregard is closest to: A) $52.28 B) $43.73 C) $40.04 1

Period

2

Div

1.85(1.17)

1.85(1.17)

PV @ 10.25%

1.9633

2.0835

3+ 2

PV of TV Total

1.85(1.17)2(1.0475) 48.2320 39.6805 43.73

7. A firm has a debt-equity ratio of .55. What is the equity multiplier? A) 1.55 D/E = .55, D = .55, E = 1, Total Assets = 1.55, EM = 1.55/1 = 1.55 B) .45 C) 1.82 8. You paid $17.38 a share for Sheridan Holdings a year ago. You've received total dividends of $0.92 and the stock returned 7.50% for the prior year. The stock's current value is closest to: A) $17.76 = (17.38 * 1.075) - .92 B) $18.68 C) $18.30 9.

Boom Bust

Stock PDX 12.65% -4.25%

Stock ORD 2.90% 7.00%

The expected return of the portfolio when is there is a 35% chance for the Boom scenario and a 65% chance for the Bust scenario and the portfolio is invested 55% in stock PDX and 45% in stock ORD is closest to: A) 3.42% =(.35)[(.55)(.1265) + (.45)(.029)] + (.65)[(.55)(-.0425) + (.45)(.07)] B) 3.62% C) 4.54%

10. The Grant Company is considering three possible independent projects to invest in. Rank the projects from highest to lowest in profitability.

PV of future cash flows Cost Discount Rate

A 27.5 22.2 8.60%

B 11.6 8.4 11.50%

C 62.0 55.0 9.40%

A) B, A, C A = 27.5/25 = 1.10; B = 11.6/8.4 = 1.3810; C = 62/55 = 1.1273 B) C, B, A C) A, B, C 11. An annuity stream where the payments occur forever is called a(n): A) annuity due. B) perpetuity. C) indemnity. 12. Overheated Booming Improving Stable Declining

Probability 9% 15% 40% 23% 13%

Omega Fund 26.00% 13.80% 9.80% 2.40% -9.10%

The expected return on the Omega Fund is closest to: A) 8.58% B) 7.70% (.09)(.26) + (.15)(.138) + (.4)(.098) + (.23)(.024) + (.13)(-.091) C) 10.73% 13. You are considering purchasing bonds issued by the Mosby Company. The issue matures in 12 years, has a 3 1/4% coupon. You want to earn at least 5.30% and the most you would be willing to pay for $30,000 face value would be closest to: A) $24,640. B) $24,590. C) $33,167. PV

$24,590

FV

30000

PMT

487.50

RATE or i/y NPER or n

5.30/2 12 x 2

14. The financial ratio measured as market price divided by total revenues is known as the firm's: A) price to sales ratio. B) price to earnings ratio. C) price to market ratio. 15. Meade Food Services has a beta of 0.48 and an expected return of 6.85%. The risk free rate is 1.20%. The return on the market is closest to: A) 15.47% B) 11.77% C) 12.97% x = ((6.85 – 1.20)/.48) + 1.20 16. The underlying assumption of the dividend growth model is that a stock is worth: A) an amount computed as the next annual dividend divided by the required rate of return. B) the present value of the future income which the stock generates. C) the same amount to every investor regardless of their desired rate of return. 17. Burnside Tours has an expected return of 11.75% and a beta of 1.54. The risk free rate is 1.80% and the market risk premium is 6.70%. According to the Capital Asset Pricing Model, Burnside is: A) overvalued. 1.80 + 1.54(6.70) = 12.118 > 11.75 (the stock will return less than the market predicts it should, therefore it is considered to be overvalued as the market price must be higher than what the market predicts) B) undervalued. C) fairly valued. 18. Nathaniel Banks is considering opening a brew pub near Lake George and may even take on a partner. To protect his primary residence, his best choice for the form of the business would be a: A) sole proprietorship. B) partnership. C) corporation. 19. Your portfolio is comprised of 30% of stock X, 50% of stock Y, and 20% of stock Z. Stock X has a beta of .64, stock Y has a beta of 1.48, and stock Z has a beta of 1.04. What is the beta of your portfolio? A) 1.14 = (.3)(.64) + (.5)(1.48) + (.2)(1.04) B) 1.18 C) 1.05 20. For 2015, McClellan Corp. had operating cash flow of $2,115,000, an increase in net working capital of $90,000, and cash flow from assets was $1,560,000. Net capital expenditures was closest to:

A) $465,000 = 2,115,000 – 1,560,000 – 90,000 B) $555,000 C) $645,000 21. Doubleday Ventures had cash flow from assets in 2014 of $1,975 (all values in thousands). The company paid interest expense of $245 and the cash flow to shareholders was $930. Doubleday: A) issued debt for $1,730. B) redeemed debt for $1,045. C) redeemed debt for $800. 1,975 – 245 - 930 22. If the discount rate increases, the net present value of a particular project should: A) decrease. B) increase. C) be unchanged. 23. What is the net present value of a project with an initial investment of $23,000, installation costs of $1,200, the following cash flows, and a required return of 12.80%?

Year 1 Year 2 Year 3

Cash Flows $8,950 $10,625 $11,875

A) $438.70 B) $358.69 CFs = -24,200; 8,950; 10,625; 11,875 C) $1,381.82 24. The slope of an asset's security market line is the: A) reward-to-risk ratio. B) market risk premium. C) beta coefficient. 25. When the expected future cash flows of an investment project increase, the net present value of the project: A) decreases. B) stays the same. C) increases. 26. A PE is based on: A) estimated future earnings.

B) the last four quarterly dividend payments. C) historical earnings. 27. The time value of money concept can be defined as: A) the relationship between the supply and demand of money. B) the relationship between the interest stated and the amount paid. C) the relationship between a dollar to be received in the future and a dollar today. 28. Ratios that measure how efficiently a firm's management manages its current asset and current liability accounts are known as _____________ ratios. A) leverage B) liquidity C) asset management 29. Cash flow to stockholders must be positive when: A) the net sale of common stock exceeds the amount of dividends paid. B) both the cash flow to assets and the cash flow to creditors are negative. C) the dividends paid exceed the net new equity raised. 30. Pickett PLC is considering expanding a production line. The new equipment for the line will cost $450,000. In addition, net working capital will increase by $15,000 and remain at that level for the life of the project. The new line is expected to generate cash flows for the next four years of $95,000, $135,000, $170,000, and $210,000. Pickett's discount rate for the project is10.75%. The net present value of the project is closest to: A) $5,547 CFs = -465,000; 95,000; 135,000; 170,000; 225,000 B) $10,576 C) -$4,424 31. Bedford-Forrest Consulting has a net income of $1.85 million and equity of $19.7 million. The debtasset ratio is 0.40. The return on assets is closest to: A) 5.61% ≈ 1.85/(19.7/(1-.4)) = 5.635 B) 3.74% C) 9.34% 32. The ________________ breaks down return on equity into three component parts. A) return on assets B) Du Pont identity C) cash flow from assets

33. Stonewall Group has assets of 9,650, sales of 7,340, and equity of 4,350. The company's return on equity is 9.80%. Frost's profit margin is approximately: A) 4.42% B) 7.45% C) 5.81% = (4350 x .098)/7340 34. Several years ago you purchased Custer Tech bonds. A recent price quote on the bonds is 93.00. The bonds have 3.5 years left to maturity and a coupon rate of 6 1/4%. The yield to maturity at this price is closest to: A) 8.65% B) 4.30% C) 8.61% PV

-93.00

FV

100

PMT RATE or i/y NPER or n

6.25/2 4.3044 x 2 3.5 x 2

35. You would like to combine a risky stock with a beta of 1.5 with U.S. Treasury bills in such a way that the risk level of the portfolio is equivalent to the risk level of the overall market. What percentage of the portfolio should be invested in Treasury bills? A) 25% B) 67% C) 33% = .5/1.5 (the beta, or risk of the market, is 1 and the beta of T-bills is equivalent to 0) 36. Chamberlain Inc has 105.4 million shares of stock outstanding, a P/E of 14.8, and a forward P/E of 12.75. At a market price of $98.80, next year's approximate estimated net income is closest to: A) $703.62 million B) $816.75 million = (98.80/12.25) x 105.4 C) $1,343.85 million 37. To convince investors to accept greater volatility, you must: A) decrease the real return. B) decrease the risk premium. C) increase the risk premium. 38. If a firm produces a twelve percent return on assets and a fifteen percent return on equity, then the firm: A) has a debt-equity ratio of .80. B) has an equity multiplier greater than 1.0.

C) may have short-term, but not long-term debt. 39. Porter Alexander has deposited $6,200 in an account with an annual return of 4.75% for 4 years, when he plans to use the funds for a down payment on a car. How much of a down payment will he be able to make? A) $7,845. B) $5,150. C) $7,465. PV

$6,200

FV

$7,465

PMT

0

RATE or i/y NPER or n

4.75 4

40. Incremental cash flows include any cost that: A) will change if a project is undertaken. B) was paid prior to a project being accepted. C) has previously been incurred and cannot be changed. 41. The default risk premium is the: A) difference between the market interest rate and the coupon. B) compensation investors demand for accepting credit risk. C) difference between the yield to maturity and the current yield. 42. Buford's has a profit margin of 7.30%, a return on assets of 6.90%, and an equity multiplier of 1.7. Buford's return on equity is closest to: A) 11.73% = (6.90)(1.70) B) 18.63% C) 8.56% 43. R.E. Lee & Sons has offered you a retirement package on your 65th birthday. The two options are to take a lump sum distribution of $685,000 today or receive an annuity of $55,000 per year in equal monthly installments for 20 years. The rate you believe you can earn on these funds is 4.90%. To maximize your value, you: A) take the lump sum distribution. B) are indifferent between the two choices. C) take the 20 year annuity. PV FV

$700,339,98 0

PMT

4,583.33

RATE or i/y NPER or n

4.90/12 20 x 12

44. Using a payback period of three years for projects is: A) standard across most industries. B) an arbitrary decision by management. C) used only for short-lived projects. 45. The cash flow tax savings generated as a result of a firm's tax-deductible depreciation expense is called the: A) after-tax depreciation savings. B) after-tax salvage value. C) depreciation tax shield. 46. One of the reasons why cash flow analysis is popular is because: A) it is easy to manipulate, or spin the cash flows. B) it is difficult to manipulate, or spin the cash flows. C) cash flows are more subjective than net income. 47. Braxton Bragg is considering purchasing a car. He can afford to pay $270 per month for car payments. He qualifies for the loans below. To get the largest loan possible he should choose: A) 48 months at 1.95% B) 36 months at 0.50% C) 60 months at 11.50% PV FV PMT RATE or i/y NPER or n

$9,645,47 0

$12,457.72 0

$12,276.85

$270

$270

0.5/12

1.95/12

36

48

$270 11.5/12 60

0

48. Which one of the following statements best defines the efficient market hypothesis? A) All securities in an efficient market are zero net present value investments. B) Mispriced securities are common in efficient markets. C) Efficient markets limit competition. 49. An increase in current assets: A) does not affect cash flow. B) is a cash flow out. C) is a cash flow in.

50. Given the following discounted cash flows and a discounted payback period maximum of 4 years, Kirby Industrials should: Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

-150 30 45 70 95 110

A) be indifferent to accepting or rejecting the project. B) reject the project. C) accept the project. 30 + 45 + 70 + 5 = 150, 5/95 = .0526, discounted payback period = 3.0526 years...