******For Better format look at attached word documents*******Question 1 of 25Which of the following statements regarding the efficient market hypothesis (EMH) is incorrect? A. An efficient market is a perfect market where you cannot make large profits. B. If the market is efficient in its strong form, it reflects all available, public and private, information. C. The semistrong form efficiency means that market prices reflect all publicly available information. D. A market that only reflects the past price and volume information is a weakform efficient market. Question 2 of 25Which of the following assets likely has the highest level of risk (therefore the highest expected return)? A. Longterm corporate bonds. B. Common stock of the small companies listed on NYSE. C. Treasury bills. D. Longterm government bonds. Question 3 of 25An investor earned the following returns for the last four years: –30%, 40%, 15%, and 7%. Which is incorrect? Remember, the historical variance is the sum of the squared deviations divided by (n1).A. The average return is 8%. B. The variance is 0.08393. C. The standard deviation is 28.97%. D. You can’t determine the variance since you have no probabilities. Question 4 of 25Which of the following statements regarding dollar returns and percentage returns is incorrect? A. If you purchased a 6% bond at par ($1,000) and one year later sold it for $1,050 after receiving the coupons, your dollar return is $110. B. Your percentage return in A) is 11%. C. If you purchased a stock for $50 and one year later sold it for $55 after receiving $5 of dividends, your dollar return is $10. D. Your percentage return in C) is 10%. Question 5 of 25Calculate the expected return for the following stock? E(R) = ∑ pi Ri State (i) Probability (pi) Return (Ri) ——————————————————————– Normal .50 .25 Recession .35 .05 Depression ?? –.35 A. 7% B. 8% C. 9% D. 10% Question 6 of 25Calculate the variance of the stock in Question 5 above. σ2 = ∑pi [Ri – E(Ri)]2 A. .0235 B. .0306 C. .0424 D. .0487 Question 7 of 25An asset’s risk (sensitivity) related to the overall economy and market movement is called its ________________ A. total risk. B. diversifiable risk. C. systematic risk. D. idiosyncratic risk. Question 8 of 25Regarding the riskandreturn discussion, find the correct statement below. A. The diversifiable risk of an asset is measured by its beta coefficient ( β). B. An asset’s risk premium divided by its β is called the rewardtorisk ratio. C. The Security Market Line (SML) shows the linear relation between an asset’s expected return and its variance (total risk). D. Market risk premium is the difference between the expected return on the market portfolio and the inflation rate. Question 9 of 25Asset A has an expected return of 10%, i.e., E(RA)=10%. The market premium is expected to be 9%. If the riskfree rate (Rf) is 5%, what is asset A’s beta? Hint: E(RA) = Rf + [E(RM)–Rf].βA A. 1.80 B. 1.25 C. 0.87 D. 0.56 Question 10 of 25You have $100,000 invested. Of that, $50,000 is invested in IVM stock which has a beta of 1.4, $30,000 is invested in UBM stock with a beta of 1.2, and the remainder is invested in TBills. Which of the following is true? (Hint: TBills are generally considered riskfree, therefore, their beta must be …) A. You have 30% of your portfolio invested in TBills. B. Your portfolio has no diversifiable risk since it has TBills in it. C. Your portfolio’s overall beta is 1.06. D. Your portfolio is less volatile than the overall market since it has TBills. Question 11 of 25Based on the SML graph shown in the attachment, select the incorrect statement.SMLE(Ri)   E(RM)= 13%————————M  *Q  Rf=5%   _________________________________ ( ? ) bM=1.0 A. The Xaxis ( ? ) of the graph should be labeled beta (βi). B. The slope of the SML is (135)/1 = 8. C. Stock Q is currently overvalued in the market. D. In equilibrium a stock with a beta of 0.5 should give a 10% expected return. Question 12 of 25Which of the following statements regarding cost of capital is incorrect? A. The overall cost of capital that covers the firm’s costs of equity, preferred stock, and aftertax debt is called the weighted average cost of capital (WACC). B. The return that lenders (bondholders) require on their loaned funds to the firm is the cost of debt. C. A firm’s capital structure weights are the proportions of the market value of its assets financed via debt, common stock, and preferred stock. D. The beta coefficient of the firm’s stock is its cost of equity. Question 13 of 25ZYX Corp.is expected to pay a dividend of $3.50 per share next period. The dividend will grow at a constant rate of 7% every period forever. If the current market price for a share is $67, what is the cost of equity? RE = (D1/P0) + g A. 7.00% B. 12.22% C. 14.00% D. 15.64% Question 14 of 25Given the following information, calculate the firm’s weighted average cost of capital (WACC). Market value of common stock=$60 million; market value of preferred stock=$10 million, market value of debt=$30 million; cost of common stock=15%; cost of debt=10%; tax rate=40%. The preferred stock pays a constant $4 dividend and is now selling for $50 a share. Hint: RP = D/P0, WACC = wERE + wPRP + wD RD(1TC) A. 10.60% B. 11.60% C. 12.60% D. 13.60% Question 15 of 25Which of the following is true regarding financial leverage? A. When a firm increases its equity and decreases its debt, its leverage declines. B. Leverage is most beneficial when EBIT is relatively low. C. Increasing financial leverage will always increase the EPS for stockholders. D. The level of financial leverage that produces the minimum firm value is the one most beneficial to stockholders. Question 16 of 25Select the incorrect statement below regarding bankruptcy costs. A. The explicit costs associated with corporate default, such as legal expenses, are the direct bankruptcy costs. B. The implicit costs associated with corporate default, such as lost sales, are the indirect bankruptcy costs. C. The explicit and implicit costs associated with corporate default are called the financial distress costs. D. The costs of uncertainty associated with corporate default are flotation costs. Question 17 of 25Which of the following statements regarding the M&M Propositions is true? A. Without taxes, the firm’s capital structure is relevant. B. With taxes, a firm can increase its value by reducing debt. C. Once the tax effect is considered, there is a strictly increasing linear relationship between the amount of debt and the firm value. D. Without taxes, the optimal amount of leverage for a firm is zero debt. Question 18 of 25Use the following to answer questions 1821 Current cap. structure Proposed cap. structure ———————————————————————————————— Assets $15 million $15 million Debt $0 $6 million Equity $15 million $9 million Share price $25.00 $22.50 Shares outstanding 600,000 ??? Bond coupon rate N/A 8%Assume that there are no taxes. EBIT is expected to be $2.5 million, but could be as high as $3.5 million if an economic expansion occurs, or as low as $2 million if a recession occurs. All values are market values. Ignore taxes.How many shares would be outstanding under the proposed capital structure? A. 100,000 B. 200,000 C. 300,000 D. 400,000 Question 19 of 25 (Refer to the above information) What is the expected EPS under the current capital structure if there is a recession? A. $3.33 B. $4.17 C. $5.00 D. $6.25 Question 20 of 25 (Refer to the above information) What is the return on equity for the proposed capital structure if the expected state occurs? A. 16.7% B. 18.5% C. 20.0% D. 22.4% Question 21 of 25 (Refer to the above information) Which of the following is the correct calculation to find EBIT*, the breakeven EBIT for these two capital structures? A. EBIT*/400,000 = [EBIT*($6,000,000x.08)]/600,000 B. EBIT*/600,000 = [EBIT*($6,000,000x.08)]/400,000 C. [EBIT*($6,000,000x.08)]/600,000 = EBIT*/400,000 D. [EBIT*($9,000,000x.08)]/600,000 = EBIT*/400,000 Question 22 of 25Which of the following statements regarding operating and cash cycles is true? A. Operating cycle is the length of time between the acquisition of inventory and the collection of cash from receivables. B. The length of time between the acquisition of inventory and its sale is called the days sales outstanding. C. Accounts payable period is the length of time between the sale of inventory and the collection of cash from receivables. D. The length of time between the payment for inventory and the sale of inventory is called the cash cycle. Question 23 of 25The opportunity costs the firm incurs by maintaining current assets are called ____________ and they usually rise with the level of investment in current assets. A. shortage costs B. order costs C. carrying costs D. safety costs Question 24 of 25Suppose that the inventory period is 40 days, the accounts payable period is 15 days, and the cash cycle is 35 days. What is the accounts receivable period? (Note: Operating Cycle = Inventory Period + Accounts Receivable Period) A. 10 days B. 25 days C. 35 days D. 50 days Question 25 of 25A firm has an inventory turnover of 8.11, an inventory period of 45 days, average inventory of $650,000, a receivables period of 32 days, and average payables of $750,000. What is its cash cycle? CC = Inventory Period + Receivables Period – Payables PeriodNote: Inv Turnover =COGS/Avg Inv, Inv Period=365/Inv Turnover, Payables Turnover=COGS/Avg Payables, Payables Period=365/Payables Turnover A. 40 days B. 34 days C. 25 days D. 18 days
question_1_of_25.docx
question_11_sml.docx
Unformatted Attachment Preview
Question 1 of 25
Which of the following statements regarding the efficient market hypothesis (EMH) is incorrect?
A. An efficient market is a perfect market where you cannot make large profits.
B. If the market is efficient in its strong form, it reflects all available, public and private, information.
C. The semistrong form efficiency means that market prices reflect all publicly available information.
D. A market that only reflects the past price and volume information is a weakform efficient market.
Question 2 of 25
Which of the following assets likely has the highest level of risk (therefore the highest expected return)?
A. Longterm corporate bonds.
B. Common stock of the small companies listed on NYSE.
C. Treasury bills.
D. Longterm government bonds.
Question 3 of 25
An investor earned the following returns for the last four years: –30%, 40%, 15%, and 7%. Which is
incorrect? Remember, the historical variance is the sum of the squared deviations divided by (n1).
A. The average return is 8%.
B. The variance is 0.08393.
C. The standard deviation is 28.97%.
D. You can’t determine the variance since you have no probabilities.
Question 4 of 25
Which of the following statements regarding dollar returns and percentage returns is incorrect?
A. If you purchased a 6% bond at par ($1,000) and one year later sold it for $1,050 after receiving the
coupons, your dollar return is $110.
B. Your percentage return in A) is 11%.
C. If you purchased a stock for $50 and one year later sold it for $55 after receiving $5 of dividends,
your dollar return is $10.
D. Your percentage return in C) is 10%.
Question 5 of 25
Calculate the expected return for the following stock? E(R) = ∑ pi Ri
State (i)
Probability (pi)
Return (Ri)
——————————————————————Normal
.50
.25
Recession
.35
.05
Depression
??
–.35
A. 7%
B. 8%
C. 9%
D. 10%
Question 6 of 25
Calculate the variance of the stock in Question 5 above. σ2 = ∑pi [Ri – E(Ri)]2
A. .0235
B. .0306
C. .0424
D. .0487
Question 7 of 25
An asset’s risk (sensitivity) related to the overall economy and market movement is called its
________________
A. total risk.
B. diversifiable risk.
C. systematic risk.
D. idiosyncratic risk.
Question 8 of 25
Regarding the riskandreturn discussion, find the correct statement below.
A. The diversifiable risk of an asset is measured by its beta coefficient ( β).
B. An asset’s risk premium divided by its β is called the rewardtorisk ratio.
C. The Security Market Line (SML) shows the linear relation between an asset’s expected return and its
variance (total risk).
D. Market risk premium is the difference between the expected return on the market portfolio and the
inflation rate.
Question 9 of 25
Asset A has an expected return of 10%, i.e., E(RA)=10%. The market premium is expected to be 9%. If
the riskfree rate (Rf) is 5%, what is asset A’s beta? Hint: E(RA) = Rf + [E(RM)–Rf].βA
A. 1.80
B. 1.25
C. 0.87
D. 0.56
Question 10 of 25
You have $100,000 invested. Of that, $50,000 is invested in IVM stock which has a beta of 1.4, $30,000 is
invested in UBM stock with a beta of 1.2, and the remainder is invested in TBills. Which of the following
is true? (Hint: TBills are generally considered riskfree, therefore, their beta must be …)
A. You have 30% of your portfolio invested in TBills.
B. Your portfolio has no diversifiable risk since it has TBills in it.
C. Your portfolio’s overall beta is 1.06.
D. Your portfolio is less volatile than the overall market since it has TBills.
Question 11 of 25
Based on the SML graph shown in the attachment, select the incorrect statement.
SML
E(Ri)


E(RM)= 13%————————M

 *Q


Rf=5%





_________________________________ ( ? )
M=1.0
A. The Xaxis ( ? ) of the graph should be labeled beta (βi).
B. The slope of the SML is (135)/1 = 8.
C. Stock Q is currently overvalued in the market.
D. In equilibrium a stock with a beta of 0.5 should give a 10% expected return.
Question 12 of 25
Which of the following statements regarding cost of capital is incorrect?
A. The overall cost of capital that covers the firm’s costs of equity, preferred stock, and aftertax debt is
called the weighted average cost of capital (WACC).
B. The return that lenders (bondholders) require on their loaned funds to the firm is the cost of debt.
C. A firm’s capital structure weights are the proportions of the market value of its assets financed via
debt, common stock, and preferred stock.
D. The beta coefficient of the firm’s stock is its cost of equity.
Question 13 of 25
ZYX Corp.is expected to pay a dividend of $3.50 per share next period. The dividend will grow at a
constant rate of 7% every period forever. If the current market price for a share is $67, what is the cost
of equity? RE = (D1/P0) + g
A. 7.00%
B. 12.22%
C. 14.00%
D. 15.64%
Question 14 of 25
Given the following information, calculate the firm’s weighted average cost of capital (WACC). Market
value of common stock=$60 million; market value of preferred stock=$10 million, market value of
debt=$30 million; cost of common stock=15%; cost of debt=10%; tax rate=40%. The preferred stock pays
a constant $4 dividend and is now selling for $50 a share. Hint: RP = D/P0, WACC = wERE + wPRP + wD RD(1T C)
A. 10.60%
B. 11.60%
C. 12.60%
D. 13.60%
Question 15 of 25
Which of the following is true regarding financial leverage?
A. When a firm increases its equity and decreases its debt, its leverage declines.
B. Leverage is most beneficial when EBIT is relatively low.
C. Increasing financial leverage will always increase the EPS for stockholders.
D. The level of financial leverage that produces the minimum firm value is the one most beneficial to
stockholders.
Question 16 of 25
Select the incorrect statement below regarding bankruptcy costs.
A. The explicit costs associated with corporate default, such as legal expenses, are the direct
bankruptcy costs.
B. The implicit costs associated with corporate default, such as lost sales, are the indirect bankruptcy
costs.
C. The explicit and implicit costs associated with corporate default are called the financial distress
costs.
D. The costs of uncertainty associated with corporate default are flotation costs.
Question 17 of 25
Which of the following statements regarding the M&M Propositions is true?
A. Without taxes, the firm’s capital structure is relevant.
B. With taxes, a firm can increase its value by reducing debt.
C. Once the tax effect is considered, there is a strictly increasing linear relationship between the
amount of debt and the firm value.
D. Without taxes, the optimal amount of leverage for a firm is zero debt.
Question 18 of 25
Use the following to answer questions 1821
Current cap. structure
Proposed cap. structure
————————————————————————————————Assets
Debt
Equity
$15 million
$0
$15 million
$15 million
$6 million
$9 million
Share price
$25.00
Shares outstanding
600,000
???
N/A
8%
Bond coupon rate
$22.50
Assume that there are no taxes. EBIT is expected to be $2.5 million, but could be as high as $3.5 million
if an economic expansion occurs, or as low as $2 million if a recession occurs. All values are market
values. Ignore taxes.
How many shares would be outstanding under the proposed capital structure?
A. 100,000
B. 200,000
C. 300,000
D. 400,000
Question 19 of 25
(Refer to the above information) What is the expected EPS under the current capital structure if there
is a recession?
A. $3.33
B. $4.17
C. $5.00
D. $6.25
Question 20 of 25
(Refer to the above information) What is the return on equity for the proposed capital structure if the
expected state occurs?
A. 16.7%
B. 18.5%
C. 20.0%
D. 22.4%
Question 21 of 25
(Refer to the above information) Which of the following is the correct calculation to find EBIT*, the
breakeven EBIT for these two capital structures?
A. EBIT*/400,000 = [EBIT*($6,000,000x.08)]/600,000
B. EBIT*/600,000 = [EBIT*($6,000,000x.08)]/400,000
C. [EBIT*($6,000,000x.08)]/600,000 = EBIT*/400,000
D. [EBIT*($9,000,000x.08)]/600,000 = EBIT*/400,000
Question 22 of 25
Which of the following statements regarding operating and cash cycles is true?
A. Operating cycle is the length of time between the acquisition of inventory and the collection of cash
from receivables.
B. The length of time between the acquisition of inventory and its sale is called the days sales
outstanding.
C. Accounts payable period is the length of time between the sale of inventory and the collection of
cash from receivables.
D. The length of time between the payment for inventory and the sale of inventory is called the cash
cycle.
Question 23 of 25
The opportunity costs the firm incurs by maintaining current assets are called ____________ and they
usually rise with the level of investment in current assets.
A. shortage costs
B. order costs
C. carrying costs
D. safety costs
Question 24 of 25
Suppose that the inventory period is 40 days, the accounts payable period is 15 days, and the cash cycle
is 35 days. What is the accounts receivable period? (Note: Operating Cycle = Inventory Period +
Accounts Receivable Period)
A. 10 days
B. 25 days
C. 35 days
D. 50 days
Question 25 of 25
A firm has an inventory turnover of 8.11, an inventory period of 45 days, average inventory of $650,000,
a receivables period of 32 days, and average payables of $750,000. What is its cash cycle? CC = Inventory
Period + Receivables Period – Payables Period
Note: Inv Turnover =COGS/Avg Inv, Inv Period=365/Inv Turnover, Payables Turnover=COGS/Avg
Payables, Payables Period=365/Payables Turnover
A. 40 days
B. 34 days
C. 25 days
D. 18 days
Question 11
SML
E(Ri)


E(RM)= 13%————————M


*Q


Rf=5%





_________________________________ ( ? )
M=1.0
…
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