Global Business, Accounting, and Finance Final Exam | Quizlet

#1 Bond prices and interest rates:

A. Have an inverse relationship

#2 If stock A has a beta of 1.5 and stock B has a beta of 0.5, which of the following is true?

C. Stock A is riskier than Stock B

#3 For stocks to be in equilibrium (that is, for there to be no strong pressure for prices to depart from their current prices), then:

D. All three of the above statements must hold for equilibrium to exist

#4 What is the future value of a 5-year annuity due with annual payments of $200, using a 15% interest rate?

C. $1,550.75

- Look at Table A-4

- Use formula FV = PMT(FVIFA4,3); FV = 100(3.1216)

- Find FV = 312.16

- Now solve for future annuity using FVA(due) = FVA(ord) (1 + I)

- Solve FVA(due) = $312.16(1.04) = $324.65

#5 A $1000 face value bond with a coupon rate of 9% will mature in 10 years. The bond pays interest semi-annually. If investors require a nominal annual return of...

D

#6

B

#7 For the same issuing company, which bond would result in the lowest interest rate?

A. Mortgage bond

#8 Preferred stock is called "preferred" because:

D. Dividends have to be paid on it before common stock dividends.

#9 To find the value of a financial asset such as a bond or stock, we look at:

D. The present value of the future cash flows.

#10 Calculate the truck's payback period (not-discounted)

3.35

Payback = t + Cumulative / CF(t)

#11 Calculate the truck's net present value

408.81

NPV = PV of inflows - Cost = Net Gain in Wealth

#12 Which chapter of the US bankruptcy laws applies to a company that is is reorganization?

B. Chapter 11

#13 The optimal capital structure of a company is one that maximizes the firm's __________ and results in the lowest __________.

B. Stock price, weighted average cost of capital

#14 An operating lease

B. Does not give the lessor their total required return on the asset

#15 The yield-to-maturity of a bond:

B. Combines interest payments and amortization of a premium or discount

#16 When long-term debt is added to an all equity-financed company, the weighted average cost of capital:

A. First falls with moderate levels of debt, then increases

#17 Georgetown Inc.'s last dividend was $2.40 per share. It is expected to grow at a constant annual rate of 6%. The risk free rate is 5%, the market return rate is 9%, and the beta is 1.3. What is the expected price of...?

B.

Gordon: npo = D1 / (r - g) = [(dividends)(1 + growth rate)]/[(required rate of return) - (growth rate)]

CAPM: required rate of return = risk free rate + (market return - risk free rate)(beta)

#18 Firm U and Firm L have the same total assets and EBIT. Firm U is 100% equity financed, while firm L is 50% equity and 50% debt financed. Both have high positive net incomes. Which statement is true?

B. Firm L will have a higher ROE than firm U

#19 Which form of capital is the most expensive for a company to use?

C. Common stock

#20 If a bond is selling a premium then which is true?

B.

#21 What components make up the required rate of return for stocks?

A. The risk free rate, market rate, and beta

#22 What components make up the discount rate for evaluating projects?

D. The weighted average cost of debt and equity

#23 Which of the components make up the discount rate for evaluating projects?

C.

#24

A.

Hoya Company, a publicly-held company, wants to build and own a new factory. Describe each of its financing options, including the costs and the advantage/disadvantages of each option for financing the factory.

What capital budgeting evaluation methods could Hoya Company use to determine whether or not to make the investment in the factory? Describe them along with the advantages and disadvantages of each.

As a result of the factory purchase, Hoya Company will have a high level of fixed costs and several outstanding bond issues. Describe the risks and rewards faced by its common stockholders.

Explain the risks and rewards of investing in common equity.