FIn 315 final exam

project cost of capital

Not necessarily related to the company cost of capital

3.275%

A stock has a beta of 1.4 and an expected return of 13.53%. What is the risk-free rate if the market rate of return is 10.6%?

security plots below secuity market line

offers too little return to justify its risk when:

Beta, specific risk

A stock’s total risk depends on the stock's _________ and _________.

positive portfolio with return less then 10%

When the overall market is up by 10%, investors with portfolios of defensive stocks will probably have:

10.50%

A project has a beta of 1.24, the risk-free rate is 3.8%, and the market rate of return is 9.2%. What is the project's expected rate of return?

16%

What is the standard deviation of the market portfolio if the standard deviation of a well-diversified portfolio with a beta of 1.25 equals 20%?

beta

sensitivity of the stock's returns to those of the market portfolio.

12%

If the tax rate is 21%, what is the cost of preferred stock that sells for $10 per share and pays a $1.20 dividend?

66.7% equity

If a firm has twice as much equity as debt in its capital structure, then the firm is financed with:

decrease firms cost of common equity

Increasing debt financing will do all of the following except:

use higher discount rate than WACC and accept NPV

What decision should be made on a project with above-average market risk?

market value of equity should be used

For purposes of computing the WACC, if the book value of equity exceeds the market value of equity, then:

Taxable income reduced by amount of interest

Why is debt financing said to include a tax shield for the company?

yes, using debt increases NPV

A proposed project has a positive NPV if it is financed entirely by equity. If the project can sensibly be financed partly by debt and the firm pays tax, will the project remain acceptable?

57.86%

What proportion of a firm is equity financed if the WACC is 14%, the before-tax cost of debt is 10.77%, the tax rate is 21%, and the required return on equity is 18%?

financial markets face fast moving competition

Which one of the following statements is true with respect to financial and product markets?

oversubscribed

If the demand for a newly issued stock exceeds the number of shares available the issue is said to be

best efforts

In a ________ agreement, the investment banker makes no guarantee regarding the price the issuing firm will receive but agrees to sell the securities on a commission basis.

Brokers

Pure Middlemen

Dealers

make markets by standing ready to buy and sell at given prices

venture capital firm

A ________ is a specialized firm that finances young, start-up companies.

how funds used, financial conmdition, risk assesment

The registration statement the securities underwriter files with the SEC contains information about

small, large

A typical venture capital firm has a ________ number of investors who each contribute a ________ amount of money to the fund.

investment banks, brokers/dealers

________ perform their main function in the primary market for securities and ________ perform their main function in the secondary market.

5.10%

a slight decrease

stock investor owns a diversified portfolio of 15 stock. what will be the most likley effect on the portfoloio’s standard deviation if one more stock is added

False, measure of volatility

Beta measures the total risk of an iduvidual security(T/F)

812500

You are considering the purchase of real estate that will
provide perpetual income that should average $65,000 per
year. How much will you pay for the property if you believe
its market risk is the same as the market portfolio’s? The T-
bill rate is 5%, and the expected market return is 8.0%.

2600000

Common Products has just made its first issue of stock. It
raised $1.7 million by selling 200,000 shares of stock to the
public. These are the only shares outstanding. The par value
of each share was $3. Suppose Common Products has
retained earnings of $900,000, what is its net common
equity?

False, this bond flucuates interest rates which adjusts coupon payments reducing risk

Floating-rate bonds are less appealing to investors
who are worried about fluctuations in interest rates. (T/F)

17.7%

XYZ Company issues common stock at a price of $25
a share. The firm expects to pay a dividend of $3.80 a
share next year. If the dividend is expected to grow at
2.5% annually, what is XYZ's cost of common equity?

95, 60

You currently own 380 shares of stock valued at $15 per share.
If the firm declares a 1-for-4 reverse stock dividend you will
own _____________blank shares valued at _____________blank per
share.