P04 - Risks (Sol)

MANAGEMENT ADVISORY SERVICES

RISKS

Portfolio Beta 1 . You You invet !"## !"## in e$urit% e$urit% A &it' &it' a (eta of 1.) an* !+## !+## in e$urit% e$urit% B &it' &it' a (eta of ,#.)#. T'e (eta of t'e reultin- ortfolio i /M0 a. 1.+#. $. #.". (. 1.##. *. #."+. e. #.2# #.2#.. Bo*ie Bo* ie )

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A $o3an% $o3an% 'ol* 'ol* t'e t'e follo&infollo&in- to$4 to$4 ortfol ortfolio5 i o5 Sto$4 6 of Total Portfolio 7 )# 6 8 +# 6 Y # 6 9 1# 6 T'e (eta of t'e ortfolio i /M0 A. ).# C. .: B. 1.1 D. .2

Beta Coeffi$ient .2 ." 1 .# ) .#

T'e 3ar4et 3ar4et value of t'e 'are 'are of Atroiel* Atroiel* Cororation on i $urrentl% !)+ 3illion< ion< an* t'eir (eta i 1.+. Atroiel* 'a a no3inal !" 3illion of 26 $ouon *e(enture outtan*in- &'i$' 3ature in ? %ear. T'ee *e(enture 'ave a (eta of #.1< an* t'e% $urrentl% %iel* 1#6. 7'at i t'e (eta of Atroiel* aet> /VD0 A. #.2) C. ).= B. #.?= D. 1.1" Glei3

=

Co3uSolution Co3uSolution In$. In$. to$4 'ave 'ave a total 3ar4et 3ar4et value ue of !=# 3illion lion an* a *e(t *e(t of !# 3illion. llion. T'e $urrent Treaur% (ill rate i "6< an* t'e e@e$te* 3ar4et ri4 re3iu3 i :6. A lot of t'e return on t'e to$4 a-aint t'e 3ar4et return 'o& a $atter of oint t'rou-' &'i$' a line $an (e fitte* &it' a loe of +=. 7'at i t'e (eta of t'e $o3an% aet> /D0 A. 1.)= C. 1.?= B. #.")= D. 1.""? Glei3

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Ariona  ona Ro$4< Ro$4< an all,e;u all,e;uit% it% fir3< fir3< $urrent $urrentl% l% 'a a (eta of 1.)=< 1.)=< 4R F ? er$ent< er$ent< an* 4M F 1+ er$ent. Suoe t'e fir3 ell 1# er$ent of it aet &it' (eta F 1.)= an* ur$'ae t'e a3e roortion of ne& aet &it' a (eta of 1.1. 7'at &ill (e t'e fir3 ne& overall re;uire* rate of return< an* &'at rate of return 3ut t'e ne& aet ro*u$e in or*er to leave t'e to$4 ri$e un$'an-e*> /M0 a. 1=."+=6H 1=."+=6 *. 1=.?=#6H 1=."+=6 (. 1=.?=#6H 1+.?##6 e. 1+.?=#6H 1=.?=#6 $. 1= 1=."+=6H 1+.?##6 Bri-'a3

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Glei3

Beta of Ne& Sto$4 in t'e Portfolio . You You are 3ana-in- a ortfolio ortfolio of five five to$4 t'at are are 'el* in e;ual a3ount. a3ount. T'e $urrent $urrent (eta of t'e ortfolio i 1.+< an* t'e (eta of Sto$4 A i 1.=. If Sto$4 A i ol*< &'at &oul* t'e (eta of t'e rela$e3ent to$4 'ave to (e to ro*u$e a ne& ortfolio (eta of 1.)=> /D0 A. #.?= C. 1.)= B. #.:# D. 1.+# Glei3

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Aet Beta =. T'e (eta of *e(t *e(t i #.+ an* (eta (eta of e;uit% i 1.). T'e *e(t,e;uit% *e(t,e;uit% ratio i #.2. Cal$ulate Cal$ulate t'e (eta of t'e aet of t'e fir3. /Au3e no ta@e.0 A. #.: C. 1." B. #.+2 #.+2 D. None None of t'e t'e a(ov a(ovee BM ". A fir3 e;uit% (eta i #.2 an* an* t'e *e(t (eta i #.. If t'e 3ar4et 3ar4et value of *e(t i !+# 3illion lion an* t'at of e;uit% i !1"# 3illion< &'at i t'e (eta of t'e aet of t'e fir3> A. #.? C. 1.1 B. #.2 #.2 D. None None of t'e t'e a(ov a(ovee BM

RPCPA< AICPA< CMA  CIA E8AMINATION JESTIONS

+

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PORTF0LIO MANAGEMENT Beta

E;uit% Beta 2. A fir3 aet (eta i #.= an* *e(t (eta i ero. If t'e *e(te;uit% *e(te;uit% ratio i 1."< &'at i t'e e;uit% (eta of t'e -iven> A. #.2 C. 1.# B. 1. 1. D. None None of t'e t'e a(ov a(ovee BM ?. T'e ree,loat oat Co3an%< Co3an%< a $o3an% in t'e "6 ta@ (ra$4et< 'a ri4le *e(t in it $aital tru$ture &'i$' 3a4e u +#6 of t'e total $aital tru$ture< an* e;uit% i t'e ot'er "#6. T'e (eta of t'e aet for t'i (uine i #.2 an* t'e e;uit% (eta i5 A. #.2# C. #.= C. B. #.?  D. 1 .1 .1+ BM Diviion Beta ? . Sun State Mininnin- In$.< an all,e;uit% ,e;uit% fir3< r3< i $oni*erin*erin- t'e for3ation for3ation of a ne& *iviion ion t'at &ill in$reae t'e aet of t'e fir3 (% =# er$ent. Sun State $urrentl% 'a a re;uire* rate of return Pa-e 1 of ""

MANAGEMENT ADVISORY SERVICES of 12 er$ent< . S. Treaur% (on* %iel* ? er$ent< an* t'e 3ar4et ri4 re3iu3 i = er$ent. If Sun State &ant to re*u$e it re;uire* rate of return to 1" er$ent< &'at i t'e 3a@i3u3 (eta $oeffi$ient t'e ne& *iviion $oul* 'ave> /D0 a. ).) *. 1." (. 1.# e. ).# $. 1 .2 Bri-'a3 Given t'e Correlation Coeffi$ient (et&een t'e Sto$4 an* Mar4et Portfolio +1. T'e $orrelation on $oeffi$ient ent (et&een to$4 A an* t'e 3ar4et ortfolio io i L#.". T'e tan*ar* *eviation *eviation of return of t'e to$4 i #6 an* t'at of t'e 3ar4et ortfolio i )#6. Cal$ulate Cal$ulate t'e (eta of t'e to$4. A. #.: C. 1.1 B. 1.# D. #." BM +). T'e $orrelation $orrelation $oeffi$ient $ient (et&een (et&een to$4 B an* t'e 3ar4et ortfolio ortfolio i #.2. T'e tan*ar* tan*ar* *eviation of t'e to$4 B i =6 an* t'at of t'e 3ar4et i )#6. Cal$ulate t'e (eta of t'e to$4. A. 1.# C. #.2 B. 1.+ D. #.? BM Given t'e itori$al No3inal Return for t'e Sto$4  Mar4et Portfolio +. itori$al $al no3inal return return for to$4 A i 26< L1#6 an* L))6. L))6. T'e no3inal no3inal return for t'e 3ar4et ortfolio i L"6< L126 an* )+6. Cal$ulate t'e (eta for to$4 A. A. 1."+ C. 1.# C. B. #."1 #."1 D. None None of t'e t'e a(ov a(ovee BM ++. T'e t'ree %ear %ear annual return for to$4 to$4 B $o3e $o3e out to (e #6< 1#6 an* )"6. )"6. T'ree %ear annual return for t'e 3ar4et ortfolio are L"6< 126< )+6. Cal$ulate t'e (eta for t'e to$4. A. 1." C. # B. #.?+ #.?+ D. None None of t'e t'e a(ov a(ovee BM Required Return 2

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.G. Penn%a$4er Penn%a$4er i interete* interete* in fin*in- t'e t'e aroriate aroriate *i$ount rate rate for it ne& ne& roe$t for for 3a4in- (lue< in4< an* %ello& &i*-et. T'e avera-e (eta of a -rou of $olore* &i*-et 3anufa$turer i 1.+ an* t'eir avera-e *e(t,e;uit% ratio i #.#. Penn%a$4er lan to 'ave a *e(t,e;uit% ratio of #.)#. If t'e ri4,free rate i "6 an* t'e e@e$te* ri4 re3iu3 on t'e 3ar4et ortfolio i :6< &'at i t'e re;uire* return for t'e roe$t> /D0 A. :.?)6 C. 1".#26 B. ?.#26 D. 1=.?)6 Glei3


RISKS

Expected Return

)2. Sto$4 A 'a 'a an e@e$te* return of 1#6 er %ear an* to$4 B 'a an e@e$te* return of )#6. If ==6 of t'e fun* are invete* in to$4 B< &'at i t'e e@e$te* return on t'e ortfolio of to$4 A an* to$4 B> A. 1#6 C. 1+.=6 C. B. )#6 )#6 D. None None of t'e t'e a(ov a(ovee BM 12. lori*a Co3an% Co3an% /C0 an* Minneota Minneota Co3an% Co3an% /MC0 are (ot' ervi$e ervi$e $o3anie. $o3anie. T'eir 'itori$al return for t'e at t'ree %ear are5 C5 ,1#6<1=6< )=6H MC5 1#6< "6< )6. If C an* MC are $o3(ine* in a ortfolio &it' =#6 of t'e fun* invete* in ea$'< $al$ulate t'e e@e$te* return on t'e ortfolio. A. 1#6 C. 1"6 B. 16 16 D. None None of t'e t'e a(ov a(ove. e. BM 1". T'e 'itori$al $al return *ata for t'e at t'ree t'ree %ear for Sto$4 B an* t'e to$4 3ar4et ortfolio ortfolio are5 Sto$4 B5, )+6< #6< )+6< Mar4et Portfolio5, 1#6< 1)6< )#6. Cal$ulate Cal$ulate t'e e@e$te* return for Sto$4 B an* t'e 3ar4et ortfolio. A. Sto$4 Sto$4 B 1"6< 1"6< Mar4et Mar4et Portfol Portfolio5 i o5 1+6 C. Sto$4 Sto$4 B )+6< Mar4et Mar4et Portfoli Portfolio5 o 5 1)6 B. Sto$4 Sto$4 B 1+6< 1+6< Mar4et Mar4et Portfol Portfolio5 i o5 1"6 D. None of t'e a(ove a(ove BM :. T'e 'itori$al $al return *ata *ata for t'e at t'ree %ear %ear for Co3an% A A to$4 i ,".#6< ,".#6< 1=6< 1=6 an* t'at of t'e 3ar4et ortfolio i 1#6< 1#6 an* 1"6. Cal$ulate Cal$ulate t'e e@e$te* return for t'e to$4 an* t'e 3ar4et ortfolio. A. RAF26 RMF 1)6 C. RAF1#6 RMF1=6 B. RAF 1)6 RMF26 D. None of t'e a(ove a(ove BM :

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Mr. 7ilon 7ilon re$entl% re$entl% (ou-'t (ou-'t a $o3uter $o3uter an* *e$i*e* *e* to invet invet !1##<### !1##<### uinan online online tra*inna$$ount. e anal%e* t'e to$4 of five *ifferent $o3anie a follo&5 E@e $t $te* Re tu tur n Stan *a *ar * Devia tition R an* 8 P'ar3a$euti$al 1# 6 1) 6 7al*en Auto3otive 1" 6 1= 6 YMOC In*utrial 1? 6 1" 6 Trut'iel* Ban4 1 6 1 6 7atertone Tire )) 6 12 6

Pa-e ) of ""

MANAGEMENT ADVISORY SERVICES Mr. 7ilon *e$i*e to invet !=<### in R an* 8 P'ar3a$euti$al< !=<### in Trut'iel* Ban4< an* !1#<### in ea$' of t'e ot'er t'ree to$4. Bae* on t'i infor3ation< &'at 'oul* Mr. 7ilon au3e to (e 'i ortfolio e@e$te* return> A. 2.?6 C. 1+.2#6 B. 1.==6 D. 1=."#6 Glei3

RISKS

#. Sto$4 8 'a a tan*ar* *eviation *eviation of return of 1#6. Sto$4 Y 'a a tan*ar* *eviation *eviation of return of )#6. T'e $orrelation $orrelation $oeffi$ient $oeffi$ient (et&een to$4 i #.=. If %ou invet "#6 of t'e fun* in to$4 8 an* +#6 in to$4 Y< &'at i t'e tan*ar* *eviation of a ortfolio> A. 1#6 C. 1).)6 C. B. )#6 )#6 D. None None of t'e t'e a(ov a(ovee BM

Risk-Adjusted Rate ! Return 1#

. Dan*% Dan*% Pro*u$t Pro*u$t overall overall &ei-'te* &ei-'te* avera-e avera-e re;uire* re;uire* rate of return i 1# er$ent. er$ent. It %o-urt %o-urt *iviion i ri4ier t'an avera-e< it fre' ro*u$e *iviion 'a avera-e ri4< an* it intitutional foo* *iviion 'a (elo&,avera-e ri4. Dan*% a*ut for (ot' *iviional an* roe$t ri4 (% a**in- or u(tra$tin- ) er$enta-e oint. T'u< t'e 3a@i3u3 a*ut3ent i + er$enta-e oint. 7'at i t'e ri4,a*ute* re;uire* rate of return for a lo&,ri4 roe$t in t'e %o-urt *iviion> /E0 a. "6 *. 1)6 (. 26 e. 1+6 $. 1 # 6 Bri-'a3

Prt!"i #ariance

1?. T'e 'itori$al $al return *ata for t'e at t'ree %ear %ear for Sto$4 B an* t'e to$4 3ar4et ortfolio ortfolio are5 Sto$4 B5, )+6< #6< )+6< Mar4et Portfolio5, o5, 1#6< 1)6< )#6. Cal$ulate Cal$ulate t'e varian$e in t'e 3ar4et. A. 1:) C. 1)2 B. )2 D. None None of t'e t'e a(ov a(ovee BM 1:. lori*a Co3an% Co3an% /C0 an* Minneota Minneota Co3an% Co3an% /MC0 are (ot' ervi$e ervi$e $o3anie. $o3anie. T'eir 'itori$al return for t'e at t'ree %ear are5 C5 ,1#6<1=6< )=6H MC5 1#6< "6< )6. If C an* MC are $o3(ine* in a ortfolio &it' =#6 of t'e fun* invete* in ea$'< &'at i t'e varian$e of t'e ortfolio &it' =#6 of t'e fun* invete* in C an* =#6 in MC /aro@i3atel%0> A. )#2 C. 122 B. )= )= D. None None of t'e t'e a(ov a(ovee BM

)#. lori*a Co3an% Co3an% /C0 an* Minneota Minneota Co3an% Co3an% /MC0 are (ot' ervi$e ervi$e $o3anie. $o3anie. T'eir 'itori$al return for t'e at t'ree %ear are5 C5 ,1#6<1=6< )=6H MC5 1#6< "6< )6. If C an* MC are $o3(ine* in a ortfolio &it' =#6 of t'e fun* invete* in ea$'< &'at i t'e tan*ar* *eviation of t'e ortfolio &it' =#6 of t'e fun* invete* in C an* =#6 in MC> A. 1+.+6 C. 16 C. B. 126 126 D. None None of t'e t'e a(ov a(ovee BM Mini'u' Prt!"i Risk

Proortion of Invet3ent =. Sto$4 Sto$4 A 'a an e@e$t e@e$te* e* return return of )#6 an* Sto$4 Sto$4 B 'a an e@e$te* e@e$te* return return of 1)6. T'e ri4ine ri4ine of to$4 A a 3eaure* (% t'e varian$e i t'ree ti3e t'at of to$4 B. If t'e $orrelation $orrelation $oeffi$ient $oeffi$ient (et&een t'e t&o to$4 i ero< &'at roortion on of invet3ent invet3ent in ea$' to$4 -ive t'e 3ini3u3 ortfolio varian$e /3ini3u3 ri40> A. =#6 in Sto$4 Sto$4 A an* =#6 =#6 in Sto$4 Sto$4 B B. )=6 in Sto$4 Sto$4 A an* ?=6 ?=6 in Sto$4 Sto$4 B C. ?=6 in Sto$4 Sto$4 A an* )=6 )=6 in Sto$4 Sto$4 B D. None None of of t'e t'e a(ov a(ovee BM ?. Sto$4 Sto$4 8 'a an e@e$te* e@e$te* return return of )#6 an* Sto$4 Sto$4 Y 'a an e@e$te e@e$te** return return of 1#6. T'e ri4ine of Sto$4 8 a 3eaure* (% t'e tan*ar* *eviation of return i t&i$e t'at of Sto$4 Y. If t'e $orrelation $oeffi$ient (et&een t'e t&o to$4 i ero< &'at roortion of t'e invet3ent in ea$' to$4 -ive t'e leat ortfolio ri4 /3ini3u3 ortfolio ri40> A. =#6 =#6 in 8 an* =#6 in Y C. )#6 in 8 an* 2#6 2#6 in Y B. )=6 )=6 in 8 an* ?=6 in Y D. None None of t'e t'e a(ove a(ove BM

Prt!"i $tandard %e&iatin 11

. 7'at i t'e tan*ar* tan*ar* *eviation *eviation of t'e follo&infollo&in- t&o,to$4 t&o,to$4 ortfolio> ortfolio> /VD0 /VD0 7ei-'tinStan*ar* Deviation Correlation Sto$4 A "# 6 116 .? Sto$4 B +# 6 1+6 A. 11.)=6 C. 1).=#6 B. 1).)#6 D. 1)".""6 CM Sa3le J),: RPCPA< AICPA< CMA  CIA E8AMINATION JESTIONS

Mini'u' #ariance Prt!"i

Proortion of Invet3ent )1. lori*a Co3an% Co3an% /C0 an* Minneota Minneota Co3an% Co3an% /MC0 are (ot' ervi$e ervi$e $o3anie. $o3anie. T'eir 'itori$al return for t'e at t'ree %ear are5 C5 ,1#6<1=6< )=6H MC5 1#6< "6< )6. 7'at i t'e roortion of fun* to (e invete* in C an* MC to a$'ieve t'e 3ini3u3 varian$e ortfolio> Pa-e  of ""

MANAGEMENT ADVISORY SERVICES A. C5 C5 =#6 MC5 MC5 =#6 B. C5 C5 )=6 MC5 MC5 ?=6

RISKS C. C5 C5 )#6 MC5 MC5 2#6 D. None None of t'e a(ove a(ove

BM

Varian$e ). lori*a Co3an% Co3an% /C0 an* Minneota Minneota Co3an% Co3an% /MC0 are (ot' ervi$e ervi$e $o3anie. $o3anie. T'eir 'itori$al return for t'e at t'ree %ear are5 C5 ,1#6<1=6< )=6H MC5 1#6< "6< )6. 7'at i t'e varian$e of t'e 3ini3u3 varian$e ortfolio of C an* MC> A. 122 C. )#2 B. 1:" 1:" D. None None of t'e t'e a(ov a(ovee BM E@e$te* Return ". Sto$4 Sto$4 A 'a an e@e$t e@e$te* e* return return of )#6 an* Sto$4 Sto$4 B 'a an e@e$te* e@e$te* return return of 1)6. T'e ri4ine ri4ine of Sto$4 A a 3eaure* 3eaure* (% t'e varian$e i t'ree ti3e t'at of Sto$4 Sto$4 B. If t'e $orrelation $oeffi$ient (et&een t'e t&o to$4 i ero< &'at i t'e e@e$te* return on t'e 3ini3u3 varian$e ortfolio> A. 1"6 C. 1)6 B. 1+6 D. )#6 D. BM 2. Sto$4 Sto$4 8 'a an e@e$te* e@e$te* return return of )#6 an* an* to$4 Y 'a 'a 1#6. T'e ri4in ri4ine e of Sto$4 Sto$4 8 a 3eaure* (% t'e tan*ar* *eviation *eviation of t'e return i t&i$e t'at of Sto$4 Y. Y. If t'e $orrelation $oeffi$ient (et&een t'e t&o to$4 i ero< &'at i t'e e@e$te* return on t'e ortfolio &it' 3ini3u3 ri4 /3ini3u3 varian$e ortfolio0> A. )#6 C. 1)6 B. 1=6 D. 1#6 BM )). lori*a Co3an% Co3an% /C0 an* Minneota Minneota Co3an% Co3an% /MC0 are (ot' ervi$e ervi$e $o3anie. $o3anie. T'eir 'itori$al return for t'e at t'ree %ear are5 C5 ,1#6<1=6< )=6H MC5 1#6< "6< )6. 7'at i t'e e@e$te* return on t'e 3ini3u3 varian$e ortfolio> A. 1+.26 C. 1#6 C. B. 1"6 1"6 D. None None of t'e t'e a(ov a(ove. e. BM

Mar4et Varian$e 1#. T'e 'itori$al 'itori$al return *ata for t'e at t'ree %ear for Co3an% Co3an% A to$4 i ,".#6< 1=6< 1=6< 1=6 an* t'at of t'e 3ar4et ortfolio i 1#6< 1#6 an* 1"6. Cal$ulate t'e varian$e of t'e 3ar4et. A. 2 C. 1+? B. 1) D. None None of t'e t'e a(ov a(ove. e. BM Varian$e *ue to Mar4et Ri4 )=. Tele$o3ute ele$o3ute Co3an% varian$e an$e of return i +##. If t'e R,;uare* of t'e re-reion re-reion (et&een t'e $o3an% return an* t'e 3ar4et return i #."< $al$ulate t'e varian$e t'at i *ue to t'e 3ar4et ri4 for t'e $o3an%. A. )+# C. "## B. 1"# 1"# D. More More info infor3 r3ati ation o n i nee*e nee*e** BM Covarian$e 11. T'e 'itori$al 'itori$al return *ata for t'e at t'ree %ear for Co3an% Co3an% A to$4 i ,".#6< 1=6< 1=6< 1=6 an* t'at of t'e 3ar4et ortfolio i 1#6< 1#6 an* 1"6. Cal$ulate t'e $ovarian$e (et&een t'e to$4 return an* t'e 3ar4et return. A. )1 C. 1+ B. +) D. None None of t'e t'e a(ov a(ovee BM 12. T'e 'itori$al $al return *ata for t'e at t'ree t'ree %ear for Sto$4 B an* t'e to$4 3ar4et ortfolio ortfolio are5 Sto$4 B5, )+6< #6< )+6< Mar4et Portfolio5, 1#6< 1)6< )#6. Cal$ulate t'e $ovarian$e of return (et&een Sto$4 B an* t'e 3ar4et ortfolio. A. )+ C. ):) B. )2 D. No N one of t'e a(ove BM Sto$4 Beta 1). T'e 'itori$al 'itori$al return *ata for t'e at t'ree %ear for Co3an% Co3an% A to$4 i ,".#6< 1=6< 1=6< 1=6 an* t'at of t'e 3ar4et ortfolio i 1#6< 1#6 an* 1"6. Cal$ulate t'e (eta for Sto$4 A. A. 1.# C. #.=? C. B. 1.?= 1.?= D. None None of t'e t'e a(ov a(ovee BM

$tck ( Market Prt!"i

. Stan*ar* Stan*ar* an* an* Poor Poor =## In*e@ In*e@ i i a5 A. Portfol Portfolio i o of $o33on $o33on to$4 to$4 B. Portfol Portfolio i o of $ororat $ororatee (on* (on*

C. Portfoli Portfolio of -overn3 -overn3ent ent (on* (on* D. A an* B a(ove a(ove


BM

1:. T'e 'itori$al $al return *ata for t'e at t'ree t'ree %ear for Sto$4 B an* t'e to$4 3ar4et ortfolio ortfolio are5 Sto$4 B5, )+6< #6< )+6< Mar4et Portfolio5, io5, 1#6< 1)6< )#6. Cal$ulate Cal$ulate t'e (eta for Sto$4 B. A. 1.# C. #.1)= C. B. #.2" #.2" D. None None of t'e t'e a(ov a(ovee BM Pa-e + of ""

MANAGEMENT ADVISORY SERVICES )+. Co3uter Co3an% Co3an% varian$e varian$e of return i :##. If t'e R,;uare* of t'e re-reion re-reion (et&een (et&een t'e $o3an% return an* t'e 3ar4et return i #.+< $al$ulate t'e uni;ue ri4 for t'e $o3an%. A. =+# C. :## B. "# D. More More infor infor3a 3atition on i nee*e nee*e** BM Mar4et Ri4 Pre3iu3 )#. T'e 'itori$al $al return *ata for t'e at t'ree %ear %ear for Sto$4 B an* t'e to$4 3ar4et ortfolio ortfolio are5 Sto$4 B5, )+6< #6< )+6< Mar4et Portfolio5, 1#6< 1)6< )#6. If t'e ri4,free rate i +6< $al$ulate t'e 3ar4et ri4 re3iu3. A. 1#6 C. 12.16 B. 1+6 1+6 D. None None of t'e t'e a(ov a(ovee BM Re;uire* Rate of Return )1. T'e 'itori$al $al return *ata for t'e at t'ree %ear %ear for Sto$4 B an* t'e to$4 3ar4et ortfolio ortfolio are5 Sto$4 B5, )+6< #6< )+6< Mar4et Portfolio5, 1#6< 1)6< )#6. Cal$ulate t'e re;uire* rate of return /$ot of e;uit%0 for Sto$4 B uin- CAPM. A. 1).=6 C. 1+.6 C. B. 2."6 2."6 D. None None of t'e t'e a(ov a(ovee BM T)-$tck Prt!"i

Varian$e of Return 1+. lori*a Co3an% Co3an% /C0 an* Minneota Minneota Co3an% Co3an% /MC0 are (ot' ervi$e ervi$e $o3anie. $o3anie. T'eir 'itori$al return for t'e at t'ree %ear are5 C5 ,1#6<1=6< )=6H MC5 1#6< "6< )6. Cal$ulate t'e varian$e of return for C an* MC. A. C5 C5 1## MC5 MC5 )=" C. C5 C5 )1" MC5 MC5 1# 1# B. C5 C5 )= MC5 MC5 1:" D. None None of t'e a(ove a(ove BM Stan*ar* Deviation 1=. lori*a Co3an% Co3an% /C0 an* Minneota Minneota Co3an% Co3an% /MC0 are (ot' ervi$e ervi$e $o3anie. $o3anie. T'eir 'itori$al return for t'e at t'ree %ear are5 C5 ,1#6<1=6< )=6H MC5 1#6< "6< )6. Cal$ulate t'e tan*ar* *eviation of return for C an* MC. A. C51# C51#6 6 MC5 MC5 1"6 C. C5 C5 126 MC5 MC5 1+6 B. C5 C5 126 MC5 MC5 1"6 D. None None of t'e a(ove a(ove BM Covarian$e 1#. If t'e $ovarian$e $ovarian$e of Sto$4 A &it' &it' Sto$4 B i 1##< &'at i t'e $ovarian$e $ovarian$e of Sto$4 B &it' Sto$4 A> A. L1## C. 11## RPCPA< AICPA< CMA  CIA E8AMINATION JESTIONS

RISKS B. 1## 1##

D. Nee* Nee* a**it a**ition ional al infor infor3a 3atition on

BM

1". lori*a Co3an% Co3an% /C0 an* Minneota Minneota Co3an% Co3an% /MC0 are (ot' ervi$e ervi$e $o3anie. $o3anie. T'eir 'itori$al return for t'e at t'ree %ear are5 C5 ,1#6<1=6< )=6H MC5 1#6< "6< )6. Cal$ulate t'e $ovarian$e (et&een t'e return of C an* MC. A. 1== 1== /#.# /#.#1= 1=== ==00 C. )=) )=) /#.# /#.#)= )=)0 )0 B. 1# 1# /#.#1 /#.#1 00 D. None None of t'e t'e a(ove a(ove BM 1. Sto$4 M an* Sto$4 N 'ave 'a* return return for t'e at t'ree %ear of 1)6. 1)6. 1#6< ))6 an* "6< 1=6< )+6 ree$tivel%. Cal$u late t'e $ovarian$e (et&een t'e t&o e$uritie. A. L1:2 C. L1) C. B. 1:2 1:2 D. None None of t'e t'e a(ov a(ovee BM ). Sto$4 Sto$4 P an* to$4 to$4 J 'ave 'ave 'a* annual annual return return of ,1#6< 1)6< )26 an* 26< 16< )+6 ree$tivel%. Cal$ulate t'e $ovarian$e of return (et&een t'e e$uritie. A. 1+: C. 1## B. 1+: 1+: D. None None of t'e t'e a(ov a(ovee BM +. If t'e $orrelation $orrelation $oeffi$ient $oeffi$ient (et&een to$4 C an* to$4 D i L1.#6 an* t'e tan*ar* *eviation *eviation of return for to$4 C i 1=6 an* t'at for to$4 D i #6< $al$ulate t'e $ovarian$e (et&een to$4 C an* to$4 D. A. L+= C. += B. L+=# L+=# D. None None of t'e t'e a(ov a(ovee BM Correlation Coeffi$ient  Given Covarian$e an* Stan*ar* Deviation . If t'e $ovarian$e (et&een (et&een to$4 A an* to$4 B i 1##< t'e tan*ar* *eviation of to$4 A i i 1#6 an* t'at of to$4 B i )#6< $al$ulate t'e $orrelation $oeffi$ient (et&een t'e t&o e$uritie. A. L#.= C. #.= C. B. L1.# L1.# D. None None of t'e t'e a(ov a(ovee BM 1?. lori*a Co3an% Co3an% /C0 an* Minneota Minneota Co3an% Co3an% /MC0 are (ot' ervi$e ervi$e $o3anie. $o3anie. T'eir 'itori$al return for t'e at t'ree %ear are5 C5 ,1#6<1=6< )=6H MC5 1#6< "6< )6. Cal$ulate t'e $orrelation $oeffi$ient (et&een t'e return of C an* MC. A. #.# C. #."1= B. L#." L#."1= 1= D. None None of t'e t'e a(ov a(ovee BM

Pa-e = of ""

MANAGEMENT ADVISORY SERVICES Coeffi$ient of Variation , Given t'e E@e$te* NPV< Stan*ar* Deviation an* Correlation . Proe$t 1 'a an e@e$te* e@e$te* NPV of !1)#<### !1)#<### an* a tan*ar* tan*ar* *eviation on of !)##<###. Proe$t Proe$t ) 'a an e@e$te* NPV of !1##<### an* a tan*ar* *eviation of !1=#<###. T'e $orrelation (et&een t'ee t&o roe$t i #.2#. 7'at i t'e $oeffi$ient of variation for t'e ortfolio of roe$t> A. 1."? C. 1.=1 B. 1.=: D. #." Glei3

1)

$in*"e $tck

Avera-e Rate of Return 1". Sill Oil Co3an% Co3an% to$4 'a* ,26< 1)6 an* )"6 rate of return *urin- t'e lat t'ree %ear ree$tivel%H $al$ulate t'e avera-e rate of return for t'e to$4. A. 1#6 1#6 er er %ear %ear C. 1)6 1)6 er er %ear %ear B. 26 er er %ear %ear D. None None of t'e a(ove a(ove BM Mean of Return 1. lori*a Co3an% Co3an% /C0 an* Minneota Minneota Co3an% Co3an% /MC0 are (ot' ervi$e ervi$e $o3anie. $o3anie. T'eir 'itori$al return for t'e at t'ree %ear are5 C5 ,1#6<1=6< )=6H MC5 1#6< "6< )6. Cal$ulate t'e 3ean of return for ea$' $o3an%. A. C5 C5 1#6< 1#6< MC5 MC5 1"6 1"6 C. C5 C5 )#6< )#6< MC5) MC5)6 6 B. C5 C5 1)6< 1)6< MC5 MC5 "6 D. None None of t'e a(ove a(ove BM

RISKS

+O$T OF %EBT +APITAL ,ie"d-t-Maturit 1

. 7'at i t'e %iel* to 3aturit% 3aturit% on o@ In$. In$. (on* if it after,ta@ after,ta@ $ot of *e(t *e(t i :6 an* it ta@ rate i +6> /E0 A. =.:+6 C. 1."+6 B. :6 D. )".+?6 Glei3

Iue* at Par 1+ . A $ouon (on* t'at t'at a% interet interet annuall% i ellinin- at ar value of !1<###< !1<###< 3ature in = %ear< an* 'a a $ouon rate of :6. T'e %iel* to 3aturit% on t'i (on* i /E0 a. ".##6 $. :.##6 (. 2.6 *. +=.##6 Bo*ie Yiel* to Maturit%  Iue* at a Di$ount . T'e Me*iu3 Co3an% (on* 'ave 1# %ear re3ainin- to 3aturit%. Intere t i ai* annuall%H t'e (on* 'ave a P1<### fa$e valueH an* t'e $ouon interet rate i : er$ent. 7'at i t'e eti3ate* %iel* to 3aturit% of t'e (on* at t'eir $urrent 3ar4et ri$e of P:##> /M0 a. 1#."+ er$ent $. 2. 2 .= er$ent (. 1#.## er$ent *. ?. ?.=# er$ent Pol Bo(a*illa .

T'e Sa*e Sa*e Co3an% Co3an% (on* 'ave + %ear %ear re3aininre3ainin- to 3aturit% 3aturit%.. Interet i ai* annuall%H annuall%H t'e (on* 'ave a P1<###< fa$e fa$e valueH an* t'e $ouon interet interet rate i :6. 7'at i t'e eti3ate* %iel* to 3aturit% of t'e (on* at t'eir $urrent 3ar4et ri$e of P2):> /M0 A. 2.)#6 C. 1.1#6 B. 1# 1 #.2"6 D. 1+ 1+.2#6 Pol Bo(a*illa

1=

A $ouon (on* t'at a% interet of !1## annuall% 'a a ar value of !1<###< 3ature in = %ear< an* i ellin- to*a% at a !?) *i$ount $ount fro3 ar value. T'e %iel* to 3aturit% on t'i (on* i ./M0 a. ". ".##6 $. 1) 1).##6 (. 2.6 *. "#.##6 Bo*ie

1"

A (on* &it' a 1)6 $ouon< 1# %ear to 3aturit% an* ellinat 22 'a a %iel* to 3aturit% of /M0 a. over 1+6 *. (et&een 1#6 an* 1)6 (. (et&een 16 an* 1+6 e. le t'an 1)6 $. (et&ee (et&eenn 1)6 an* 16 Bo*ie Bo*ie

Stan*ar* Deviation )1. Ma$ro Cororation Cororation 'a 'a* t'e follo&inn- return for t'e at t'ree %ear< %ear< ,)#6< 1#6< +#6. Cal$ulate t'e tan*ar* *eviation of t'e return. A. 1#6 C. "#6 B. #6 #6 D. None None of t'e t'e a(ov a(ovee BM )). Mi$ro Cororation Cororation 'a 'a* return return of =6< 1=6 an* )#6 for t'e at t'ree %ear. %ear. Cal$ulate Cal$ulate t'e tan*ar* *eviation of t'e return. A. 1#6 C. #6 B. )).: )).:6 6 D. None None of t'e t'e a(ov a(ovee BM Varian$e  Stan*ar* Deviation )#. Me-a Cororation Cororation 'a t'e follo&infollo&in- return for t'e at t'ree %ear5 26< 1"6 an* )+6. )+6. Cal$ulate t'e varian$e of t'e return an* t'e tan*ar* *eviation of t'e return. A. "+ an* an* 226 6 C. + an* an* ".=6 ".=6 B. 1)2 an* an* 11.6 1.6 D. None None of t'e a(ove a(ove BM RPCPA< AICPA< CMA  CIA E8AMINATION JESTIONS

Pa-e " of ""

MANAGEMENT ADVISORY SERVICES ). A =,%ear =,%ear (on* &it' =6 $ouon rate rate an* !1### !1### fa$e value value i ellinin- for !2=).1#. !2=).1#. Cal$ulate Cal$ulate t'e %iel* to 3aturit% of t'e (on*. /Au3e annual interet a%3ent.0 A. :.)6 C. 2.?26 C. B. =6 D. None None of t'e t'e a(ov a(ovee BM 1?

. A 1#6 $ouon< $ouon< annual a%3ent< a%3ent< (on* 3aturin3aturin- in 1# %ear< i e@e$te* e@e$te* to 3a4e all $ouon $ouon a%3ent< a%3ent< (ut to a% onl% =#6 of ar value at 3aturit%. 3aturit%. 7'at i t'e e@e$te* %iel* on t'i (on* if t'e (on* i ur$'ae* for !:?=> /M0 a. 1#.##6. $. 11.##6. (. "."26. *. 2."26. Bo*ie

1#).7'at i t'e %iel* to 3aturit%< to t'e nearet er$ent< for t'e follo&in- (on*5 $urrent ri$e i !:#2< $ouon rate i 11 er$ent< !1<### ar value< interet ai* annuall%< ei-'t %ear to 3aturit%> /M0 A. 11 er$ent. C. 1 er$ent. B. 1) er$ent. D. 1+ er$ent. Git3an Yiel* to Maturit%  Iue* at a Pre3iu3 . A =,%ear =,%ear (on* &it' 1#6 1#6 $ouon rate an* !1### fa$e value value i ellinellin- for !1#=+.#. !1#=+.#. Cal$ulate Cal$ulate t'e %iel* to 3aturit% on t'e (on* au3in- annual interet a%3ent. A. 1#.=6 C. 1#6 B. 2.") 2.")6 6 D. None None of t'e t'e a(ov a(ovee BM 1##.7'at i t'e aro@i3ate %iel* to 3aturit% for a !1### ar value (on* ellin- for !11)# t'at 3ature in " %ear an* a% 1) er$ent interet annuall%> /M0 A. 2.= er$ent C. 1).# er$ent B. :.+ er$ent D. 1 .) er$ent Git3an 1#1.Mu-&u3 In*utrie 'a iue* a (on* &'i$' 'a a !1<### ar value an* a 1= er$ent annual $ouon interet rate. T'e (on* &ill 3ature in ten %ear an* $urrentl% ell for !1<)=#. in- t'e aro@i3ation for3ula to $al$ulate t'e %iel* to 3aturit% /YTM0 of t'i (on* reult in a YTM of /M0 A. 11.11 er$ent. C. )?.?2 er$ent. B. 1=.## er$ent. D. +).)) er$ent. Git3an Be!re-tax +st ! %e.t

). T'e aro@i3ate aro@i3ate (efore,ta@ $ot $ot of *e(t for a 1=,%ear< 1# er$ent< !1<### ar value (on* ellinat !:=# i /M0 RPCPA< AICPA< CMA  CIA E8AMINATION JESTIONS

RISKS A. 1# er$ent. B. 1#." er$ent.

C. 1) er$ent. D. 1=.+ er$ent.

Git3an

)". T'e aro@i3ate aro@i3ate (efore,ta@ $ot $ot of *e(t for a 1#,%ear< 2 er$ent< !1<### !1<### ar value (on* ellinat !1<1=# i /M0 A. " er$ent. C. 2.2 er$ent. B. 2. er$ent. D. : er$ent. Git3an A!ter-tax +st ! %e.t

Per$enta-e 12 . Ma%lar Cororation Cororation 'a ol* !=# 3illion 3illion of !1<### ar value< value< 1)6 $ouon (on*. T'e T'e (on* &ere ol* at a *i$ount an* t'e $ororation re$eive* !:2= er (on*. If t'e $ororate ta@ rate i +#6< t'e after,ta@ $ot of t'ee (on* for t'e firt %ear /roun*e* to t'e nearet 'un*re*t' er$ent0 i /M0 A. ?.16. C. 1).##6. B. +.2?6. D. ?.#:6. CMA #":# 1,11 .

T'e MNO MNO Co3an% Co3an% (elieve i eve t'at it $an ell ell lon-,te lon-,ter3 r3 (on* (on* &it' a "6 $ouon $ouon (ut at a ri$e ri$e t'at -ive a %iel*,to,3aturit% %iel*,to,3aturit% of :6. If u$' (on* are art of ne@t %ear finan$in- lan< lan< &'i$' of t'e follo&in- 'oul* (e ue* for (on* in t'eir after,ta@ /+#60 $ot,of,$aital $al$ulation> /E0 A. ."6 C. +.)6 B. =. =.+6 D. "6 RPCPA 1##1< 1##

". A ver% lar-e lar-e fir3 'a a *e(t (eta of ero. ero. If t'e $ot of e;uit% i 116 an* t'e ri4,free 4,free rate i =6< t'e $ot of *e(t i5 /E0 A. =6 C. 116 B. "6 D. 1=6 BM 12. T'e (efore,ta@ (efore,ta@ $ot of *e(t for a fir3 &'i$' &'i$' 'a a +# er$ent 3ar-inal ta@ ta@ rate i 1) er$ent. T'e after,ta@ $ot of *e(t i /E0 A. +.2 er$ent. C. ?.) er$ent. B. ".# er$ent. D. 1) er$ent. Git3an )+. If a $ororation 'a an avera-e avera-e ta@ rate of +# er$ent< t'e aro@i3ate< 3ate< annual< after,ta@ $ot of *e(t for a 1=,%ear< 1) er$ent< !1<### ar value (on*< ellinat !:=# i /M0 A. 1# er$ent. C. ?." er$ent. B. 1#." er$ent. D. ".# er$ent. Git3an Pa-e ? of ""


RISKS Bnd Price

)?. T'e aro@i3ate aro@i3ate after,ta@ $ot $ot of *e(t for a )#,%ear< ? er$ent< !1<### ar value (on* (on* ellinat !:"# /au3e a 3ar-inal ta@ rate of +# er$ent0 i /M0 A. +.+1 er$ent. C. ? er$ent. B. =.1= er$ent. D. ?.= er$ent. Git3an )=. If a $ororation 'a an avera-e ta@ rate of +# er$ent< t'e aro@i3ate aro@i3ate annual< after,ta@ $ot of *e(t for a 1#,%ear< 2 er$ent< !1<### ar value (on* ellinat !1<1=# i /M0 A. ." er$ent. C. " er$ent. B. +.2 er$ent. D. 2 er$ent. Git3an A3ount "?. A $ororation $ororation (orro& !1<###<### !1<###<### at 1# er$ent annual annual rate of interet. T'e fir3 'a a +# er$ent ta@ rate. T'e %earl%< after,ta@ $ot of t'i *e(t i A. ! +#<###. C. ! 1 # # <# # # . B. ! "#<###. D. !1""<""?. Git3an

1:

. A $ororation $ororation 'a ro3ie* e* to a% !1#<### )# %ear fro3 fro3 to*a% for ea$' (on* ol* no&. No interet &ill (e ai* on t'e (on* *urin- t'e t&ent% %ear< an* t'e (on* are ai* to offer a :6 interet rate. Aro@i3atel% 'o& 3u$' 'oul* an invetor a% for ea$' (on*> A. !1#<### C. !1
=?. A ,%ear (on* &it' &it' 1#6 $o3oun* rate an* !1### !1### fa$e value %iel* 26 APR. APR. Au3innannual $o3oun*in- a%3ent< $al$ulate t'e ri$e of t'e (on*. A. !1#= !1#=1. 1.=+ =+ C. !1## C. !1###. #.## ## B. !:=1 !:=1.: .:"" D. !2=? !2=?.: .:"" BM =2. A t'ree %ear %ear (on* 'a 2.16 $o3oun* $o3oun* rate an* fa$e fa$e value of !1###. If t'e %iel* to 3aturit% 3aturit% on t'e (on* i 1#6< $al$ulate t'e ri$e of t'e (on* au3in- t'at t'e (on* 3a4e e3i, annual $o3oun* interet a%3ent. A. !:+: !:+:.) .)++ C. !1#= C. !1#=?. ?.=+ =+ B. !2=? !2=?.: .:"" D. !1## !1###. #.## ## BM

Rate ! Return

.

7'at i t'e t'e rate of return return for an invetor nvetor &'o &'o a% !1<#=+.+? !1<#=+.+? for a t'ree,%ear t'ree,%ear (on* &it' a ?6 $ouon an* ell t'e (on* 1 %ear later for !1<#?.1:> A. =6 C. "."+6 B. =.#26 D. ?6 Glei3

=:. A four,%ear four,%ear (on* 'a an 26 $o3oun* rate an* a fa$e value ue of !1###. If t'e $urrent ri$e $e of t'e (on* i !2?#.=1< $al$ulate t'e %iel* to 3aturit% of t'e (on* /au3in- annual interet a%3ent0. A. 26 C. 1#6 B. 1)6 D. "6 BM

Present #a"ue ! Face #a"ue

.

In $al$ulat $al$ulatinin- t'e total total value value of a (on*< (on*< 'o& 3u$' *oe t'e t'e !1<### to (e re$eive re$eive** uon a (on* 3aturit% in + %ear a** to t'e (on* ri$e if t'e *i$ount rate i "6> A. !)#?.:1 C. !?").:# B. !?+?.)" D. !?:).#: Glei3

Annua" interest pa'ent

=". A =,%ear =,%ear treaur% (on* (on* &it' a $o3oun* $o3oun* rate of 26 'a a fa$e fa$e value of !1###. !1###. 7'at i t'e annual interet a%3ent> A. !2# C. !1## C. B. !+# !+# D. None None of t'e t'e a(ov a(ovee BM


+O$T OF PREFERRE% +APITAL Market #a"ue

+2. A fir3 'a an iue of referre* to$4 outtan*inouttan*in- t'at 'a a tate* annual *ivi*en* of !+. T'e re;uire* return on t'e referre* to$4 'a (een eti3ate* to (e 1" er$ent. T'e value of t'e referre* to$4 i QQQQQ. A. !"+ C. !)= B. !1" D. !=# Git3an %i&idend per $/are Gi&en

)1. A fir3 'a iue* ue* referre* referre* to$4 at it !1)= er 'are 'are ar value. T'e to$4 &illll a% a !1= annual *ivi*en*. *ivi*en*. T'e $ot of iuin- an* ellinlin- t'e to$4 &a !+ er 'are. T'e $ot of t'e referre* to$4 i /E0 A. ?.) er$ent. C. 1).+ er$ent. B. 1) er$ent. D. 1= er$ent. Git3an Pa-e 2 of ""


):. A fir3 'a *eter3ine* *eter3ine* it $an iue iue referre* to$4 to$4 at !11= er 'are ar value. ue. T'e to$4 &ill a% a !1) annual *ivi*en*. T'e $ot of iuin- an* ellin- t'e to$4 i ! er 'are. T'e $ot of t'e referre* to$4 i /E0 A. ".+ er$ent. C. 1#.? er$ent. B. 1#.+ er$ent. D. 1) er$ent. Git3an )#

. 7'at i t'e after,t after,ta@ a@ $ot of referre referre** to$4 t'at ell l  for != er 'are an* offer offer a !#.?= *ivi*en* &'en t'e ta@ rate i =6> /E0 A. =.)=6 C. 1#.=#6 B. :.?=6 D. 1=6 Glei3

)#. A fir3 'a 'a iue* 1# er$ent er$ent referre* to$4< to$4< &'i$' ol* for !1## er 'are ar value. ue. T'e $ot of iuin- an* ellin- t'e to$4 &a !) er 'are. T'e fir3 3ar-inal ta@ rate i +# er$ent. T'e $ot of t'e referre* to$4 i /E0 A. .: er$ent. C. :.2 er$ent. B. ".1 er$ent. D. 1#.) er$ent. Git3an )1

. A referre* referre* to$4 i ol* ol* for !1#1 er 'are< 'are< 'a a fa$e value value of !1## er 'are< un*er&riti un*er&ritinnfee of != er 'are< an* annual *ivi*en* of !1# er 'are. If t'e ta@ rate i +#6< t'e $ot of fun* /$aital0 for t'e referre* to$4 i /E0 A. ".)6 C. 1#.+6 B. 1#.#6 D. =.)6 CMA #":) 1,1+

))

. Glo(al Glo(al Co3an% Co3an% Pre 'a !1=# !1=# ar value referre* referre* to$4 to$4 &it' a 3ar4et ri$e ri$e of !1)# a 'are. T'e or-aniation a% a !1= er 'are annual *ivi*en*. Glo(al $urrent 3ar-inal 3ar-inal ta@ rate i +#6. oo4in- to t'e future< t'e $o3an% anti$iate 3aintainin- it $urrent $aital tru$ture. 7'at i t'e $o3onent $ot of referre* to$4 to Glo(al> /E0 a. +6 $. 1#6 (. =6 *. 1).=6 Glei3

)

. Malone% In$. In$. !1<### ar ar value referre* referre* to$4 ai* it it !1## er 'are annual annual *ivi*en* on Aril + of t'e $urrent %ear. %ear. T'e referre* to$4 $urrent 3ar4et ri$e ri$e i !:"# a 'are on t'e *ate of t'e *ivi*en* *itri(ution. *itri(ution. Malone% 3ar-inal ta@ rate /$o3(ine* /$o3(ine* fe*eral an* tate0 i +#6< an* t'e fir3 lan to 3aintain it $urrent $aital tru$ture tru$ture relation'i. T'e $o3onent $ot of referre* to$4 to Malone% &oul* (e $loet to /E0 A. "6 C. 1#6 B. ".)=6 D. 1#.+6 Glei3


RISKS )+

. A3(r% In$. In$. i -oin- to ue an un*er&rite un*er&riterr to ell it referre* referre* to$4. to$4. our un*er&riter un*er&riter 'ave 'ave -iven eti3ate /(elo&0 on t'eir fee an* t'e ellin- ri$e of t'e to$4< a &ell a t'e e@e$te* *ivi*en* for ea$'5 ee Sellin- Pri$e Divi*en* n*er&riter 1 != ! 1#1 !1 # n*er&riter ) ? 1 #) 11 n*er&riter   :? ? n*er&riter +  :2 2 7'i$' un*er&riter &ill ro*u$e t'e lo&et $ot of fun* for t'e referre* to$4> /E0 A. n*er&riter 1. C. n*er&riter . B. n*er&riter ). D. n*er&riter +. Glei3

%i&idend Rate Gi&en )=

. A$3e Cororation Cororation i ellinellin- !)= 3illion of $u3ulative< ative< non,arti$iat non,arti$iatinin- referre* to$4. to$4. T'e iue &ill 'ave a ar value of !"= er 'are &it' a *ivi*en* rate of "6. T'e iue &ill (e ol* to invetor for !"2 er 'are< an* iuan$e $ot &ill (e !+ er 'are. T'e $ot of referre* to$4 to A$3e i /E0 A. =.+)6. C. ".##6. B. =.?+6. D. ".#:6. CMA #":# 1,1)

11=.Mar Co3an% lan to iue o3e P1## referre* to$4 &it' an 116 *ivi*en*. T'e to$4 i ellin- on t'e 3ar4et for P:?< an* Mar 3ut a% flotation $ot of =6 of t'e 3ar4et ri$e. T'e $o3an% i un*er t'e +#6 $ororate $ororate ta@ rate. T'e $ot of referre* to$4 for Mar Mar Co3an% i A. ?.1"6 C. 11.+6 B. ". ".2#6 D. 11 11.:+6 Pol Bo(a*illa A'unt

"2. A $ororation $ororation 'a !=<###<### in 2 er$ent referre* to$4 to$4 outtan*inan* a +# er$ent ta@ rate. T'e after,ta@ $ot of t'e referre* to$4 i A. !+##<###. C. !"""<""?. B. !)+#<###. D. !1"#<###. Git3an EBIT Required

":. A $ororation $ororation 'a !1#<###<### !1#<###<### in 1# er$ent referre* to$4 outtan*inouttan*inan* a +# er$ent ta@ rate. T'e a3ount of earnin- (efore (efore interet an* ta@e /EBIT0 re;uire* re* to a% t'e referre* *ivi*en* i Pa-e : of ""

MANAGEMENT ADVISORY SERVICES A. B. ! +##<###.

RISKS !1<###<###. D. !1<"""<""?.

C.

! "##<###. Git3an

Financia" Breake&en

?#. A $ororation on 'a !=<###<### in 1# er$ent (on* an* !<###<### in 1) er$ent referre* to$4 outtan*in-. T'e fir3 finan$ial (rea4even /au3in- a +# er$ent ta@ rate0 i A. ! 2"#<###. C. !1<1##<###. B. ! ?1"<###. D. !1 ! 1<+##<### Git3an

)?

. Ste'enon Ste'enon  Son 'a a $aital tru$ture tru$ture t'at $onit $onit of )# er$ent er$ent e;uit% an* 2# er$ent er$ent *e(t. T'e $o3an% e@e$t to reort ! 3illion in net in$o3e t'i %ear< an* "# er$ent of t'e net in$o3e &ill (e ai* out a *ivi*en*. o& lar-e 3ut t'e fir3 $aital (u*-et (e t'i %ear &it'out it 'avin- to iue an% ne& $o33on to$4> /E0 a. ! 1.)# 3illion *. ! #.)+ 3illion (. !1.## 3illion e. ! ".## 3illion $. ! 1.=# 3illion Bri-'a3

. +O$T OF +OMMON E1IT, Retained Earnin*s Breakpint )"

. A $o3an% $o3an% 'a !1<=##<# !1<=##<### ## of outtan* outtan*inin- *e(t an* !1<###<# !1<###<### ## of outtan outtan*in*in- $o33on $o33on e;uit%. e;uit%. Mana-e3ent lan to 3aintain t'e a3e roortion of finan$in- fro3 ea$' our$e if a**itional roe$t are un*erta4en. If t'e $o3an% e@e$t to 'ave !"#<### of retaine* earnin- availa(le for reinvet3ent reinvet3ent in ne& roe$t in t'e $o3in- %ear< &'at *ollar a3ount of ne& invet3ent $an (e un*erta4en &it'out iuin- ne& e;uit%> /E0 A. !# C. !:#<### B. !)+<### D. !1=#<### CIA #=:+ IV,+?

.

Grav% Co3an% Co3an% e@e$t e@e$t earnin- earnin- of P# 3illion 3illion ne@t %ear. %ear. It *ivi*en* *ivi*en* a%out a%out ratio i +#6< an* it e;uit%aet ratio i +#6. Grav% ue no referre* to$4. At &'at a3ount of finan$in- &ill t'ere (e a (rea4 oint in Grav% 3ar-inal $ot of $aital> /E0 A. P+= 3illion. C. P)# 3illion. B. P# 3illion. D. P12 3illion. Pol Bo(a*illa

.

Grav% Co3an% Co3an% e@e$t e@e$t earnin- earnin- of P# 3illion 3illion ne@t %ear. %ear. It *ivi*en* *ivi*en* a%out a%out ratio i +#6< an* it *e(t ratio i "#6. Grav% ue no referre* to$4. At &'at a3ount of finan$in- &ill t'ere (e a (rea4 oint in Grav% 3ar-inal $ot of $aital> /E0 A. P+= 3illion. C. P)# 3illion. B. P# 3illion. D. P12 3illion. Pol Bo(a*illa

.

Grav% Co3an% Co3an% e@e$t e@e$t earnin- earnin- of P# 3illion 3illion ne@t %ear. %ear. It *ivi*en* *ivi*en* a%out a%out ratio i +#6< an* it *e(te;uit% ratio i 1.=#. Grav% ue no referre* to$4. At &'at a3ount of finan$in- &ill t'ere (e a (rea4 oint in Grav% 3ar-inal $ot of $aital> /E0 A. P+= 3illion. C. P)# 3illion. B. P# 3illion. D. P12 3illion. Pol Bo(a*illa


Durin- t'e at at five %ear< Alen Co3an% Co3an% 'a* $onitentl% $onitentl% ai* =#6 =#6 of earnin- availa(le availa(le to $o33on a *ivi*en*. Ne@t %ear< t'e Alen Co3an% roe$t it net in$o3e< (efore t'e P1.) 3illion referre* *ivi*en*< at P" 3illion. T'e $aital tru$ture for t'e $o3an% i 3aintaine* at5 De(t )=.#6 Preferre* Sto$4 1=.#6 Co33on E;uit% "#.#6 7'at i t'e retaine* earnin- (rea4oint ne@t %ear /M0 A. P=
?+. A fir3 e@e$t e@e$t to 'ave availa(le !=##<### of earnin- in t'e $o3in- %ear< %ear< &'i$' it &ill retain for reinvet3ent uroe. Given t'e follo&in- tar-et $aital tru$ture< at &'at level of total ne& finan$in- &ill retaine* earnin- (e e@'aute*> /E0 Sour$e of $aital Tar-et 3ar4et roortion on-,ter3 *e(t +#6 Preferre* to$4 1# Co33on to$4 e;uit% =# A. !=##<### C. !1<###<### B. !2##<### D. !1<=##<### Git3an ?=. A $ororation on e@e$t to 'ave earnin- availa(le to $o33on 'are'ol*er /net rofit t 3inu referre* *ivi*en*0 *en*0 of !1<###<### in t'e $o3in- %ear. T'e fir3 lan to a% +# er$ent of earnin- availa(le a(le in $a' *ivi*en*. If t'e fir3 'a a tar-et $aital tru$ture of +# er$ent lon-,ter3 *e(t< 1# er$ent referre* to$4< an* =# er$ent $o33on to$4 e;uit%< &'at $aital (u*-et $oul* t'e fir3 uort &it'out iuin- ne& $o33on to$4> /E0 A. !)<###<### C. !1<)##<### B. ! "##<### D. ! 2##<### Git3an

Pa-e 1# of ""

MANAGEMENT ADVISORY SERVICES Expected Rate ! Return

". Suer Co3uter Co3uter Co3an% Co3an% to$4 to$4 i ellinlin- for 1## 1## er 'are to*a%. to*a%. It i e@e$te* e@e$te* t'at t'i to$4 &ill a% a *ivi*en* of = *ollar er 'are< an* t'en (e ol* for !1)# er 'are at t'e en* of one %ear. Cal$u late t'e e@e$te* rate of return for t'e 'are'ol*er. A. )#6 C. 1#6 B. )=6 D. 1=6 BM

RISKS 'are. T'e to$4 'a a re;uire* return of 1# er$ent. 7'at ri$e earnin- ratio 3ut t'e to$4 'ave one %ear fro3 no& o t'at invetor realie t'eir e@e$te* return> /D0 a. ++.## *. +#.## (. ".)= e. "."? $. +.1? Bri-'a3 %i&idend Gr)t/ Mde" 2 Retained Earnin*s

%iscunted +as/ F") Met/d

Current Sto$4 Pri$e )2 . 7alla$e 7alla$e In$. i e@e$te* e@e$te* to a% out a *ivi*en* *ivi*en* of !) in t'e ne@t %ear< %ear< ! t'e %ear after t'at< t'at< an* != t'e %ear u(e;uent to t'at. T'ereafter< t'e *ivi*en* are e@e$te* to in$reae at a $ontant rate of 26. If t'e re;uire* rate of return i 1"6< &'at i t'e $urrent to$4 ri$e> /D0 A. !++.++ C. !"".21 B. !=#.+# D. !??.=# Glei3 ):

. O@for* O@for* Ea-le< Ea-le< In$. lan lan to retain retain an* reinvet reinvet all of it earnin- n - for t'e ne@t # %ear. %ear. Invetor (elieve t'at< (e-innin- on t'e lat *a% of %ear 1< t'e fir3 &ill (e-in to a% an annual *ivi*en* of !1) er 'are in eretuit%. If t'e re;uire* return i 1=6< &'at 'oul* (e t'e to$4 ellin- ri$e> /D0 A. !2#.## C. !).1= B. !+).## D. !1.)1 Glei3

Divi*en* Gro&t' Rate )#. a4e Co. 'a ai* a *ivi*en* vi*en* !) er 'are out out of earnin- of !+ er 'are. 'are. If t'e (oo4 value ue er 'are i !)=< &'at i t'e e@e$te* -ro&t' rate in *ivi*en* /-0> A. 1"6 C. 26 B. 1)6 D. +6 BM )). a4e Co. 'a ai* a *ivi*en* vi*en* ! er 'are out out of earnin- of != er 'are. 'are. If t'e (oo4 value ue er 'are i !+#< &'at i t'e e@e$te* -ro&t' rate in *ivi*en*> A. 1).=6 C. =6 C. B. 26 D. 6 BM 1=. M Co. a% out out "#6 of it earnin- earnin- a *ivi*en*. *en*. It return return on e;uit% i )#6. )#6. 7'at i t'e ta(le *ivi*en* -ro&t' rate for t'e fir3> A. 6 C. 26 B. =6 D. 1)6 BM

#

. 7'at &oul* (e t'e $urrent $urrent *eire* *eire* to$4 ri$e of of a 'are of Bo&*en Cororation Cororation to$4 to$4 t'at a% a !) *ivi*en* an* &ill (e &ort' !11# in 1 %ear> A 1)6 return on e;uit% i re;uire*. /M0 A. !:2.)1 C. !11# B. !1## D. !11) Glei3

=+. Invetor< Invetor< In$. to$4 i e@e$te* e@e$te* to -enerate a *ivi*en* an* ter3inal value one %ear fro3 no& of P=?.##. T'e to$4 'a a (eta of 1.< t'e ri4,free interet rate i "6< an* t'e e@e$te* 3ar4et return i 116. 7'at 'oul* (e t'e e;uili(riu3 ri$e of Invetor to$4 to$4 in t'e 3ar4et no&> A. P= P=#."?. C. P= P=.?? B. P+ P +.2=. D. P+ P+1.)) Pol Bo(a*illa Pri$e,Earnin- Ratio 1 . a3oni$a a3oni$a Motor ut reorte* reorte* earnin- earnin- er 'are of !).##. !).##. T'e to$4 'a 'a a ri$e earnin- earnin- ratio of +#< o t'e to$4 $urrent ri$e i !2# er 'are. Anal%t Anal%t e@e$t t'at one %ear fro3 no& t'e $o3an% &ill 'ave an EPS of !).+#< an* it &ill a% it firt *ivi*en* of !1.## er RPCPA< AICPA< CMA  CIA E8AMINATION JESTIONS

"=. C'arlene o&n to$4 to$4 in a $o3an% &'i$' 'a $onitentl% $onitentl% ai* a -ro&in- *ivi*en* *ivi*en* over t'e lat five %ear. T'e firt %ear C'arlene o&ne* t'e to$4< to$4< 'e re$eive* !1.?1 er 'are an* in t'e fift' %ear< 'e re$eive* !).2: er 'are. 7'at i t'e -ro&t' rate of t'e *ivi*en* over t'e lat five %ear> A. ? er$ent C. 1) er$ent B. 1+ 1+ er$ent D. = er$ent Git3an "?. YounYoun- Soo4 o&n to$4 in a $o3an% &'i$' 'a $onitentl% $onitentl% ai* a -ro&in- *ivi*en* *ivi*en* over t'e lat 1# %ear. T'e firt %ear YounYoun- Soo4 o&ne* t'e to$4< 'e re$eive* !+.=# er 'are an* in t'e 1#t' %ear< 'e re$eive* !+.:) er 'are. 7'at i t'e -ro&t' rate of t'e *ivi*en* over t'e lat 1# %ear> A. = er$ent C. ) er$ent B. + er$ent D. 1 er$ent Git3an

Pa-e 11 of ""

MANAGEMENT ADVISORY SERVICES Pat Divi*en* Given ) . Allion Allion En-ine Cororation Cororation 'a eta(li'e* eta(li'e* a tar-et tar-et $aital tru$ture tru$ture of +# er$ent er$ent *e(t an* "# er$ent $o33on e;uit%. T'e $urrent 3ar4et ri$e of t'e fir3 to$4 i P# F !)2H it lat *ivi*en* &a D# F !).)#< an* it e@e$te* e@e$te* *ivi*en* -ro&t' -ro&t' rate i " er$ent. 7'at &ill Allion 3ar-inal $ot of retaine* earnin-< 4< (e> /E0 a. 1=.26 *. 1+.6 (. 1.:6 e. :.?6 $. ?.:6 Bri-'a3 11+.T'e Tauru Co3an% lat *ivi*en* &a P.##< it -ro&t' rate i "6 an* t'e to$4 no& ell for P". Ne& to$4 $an (e ol* to net t'e fir3 P).+# er 'are. 7'at i Tauru Tauru Co3an% $ot of retaine* earnin-> A. 1+ 1+.26 C. 1=.216 B. 1= 1=.)"6 D. :. :.":6 Pol Bo(a*illa 11?.T'e earnin-< *ivi*en*< *ivi*en*< an* to$4 ri$e of arr% Te$'ni$< $< In$. are e@e$te* to -ro& at ?6 er %ear after t'i %ear. arr% $o33on $o33on to$4 ell for P) er 'are< it lat *ivi*en* &a P).## an* t'e $o3an% a% P).1+ at t'e en* of t'e $urrent %ear. arr% 'oul* a% P).=# flotation $ot. A. 1# 1#.++6 C. 1".#6 B. :. :.#6 D. 1? 1?.++6 Pol Bo(a*illa Pat  E@e$te* Divi*en* Given =). T'e *ivi*en* an* to$4 ri$e of Mi4e% Co3an% are e@e$te* to -ro& at ? er$ent er %ear after t'i %ear. Mi$4e% Mi$4e% $o33on to$4 ell for P)= er 'are< it lat *ivi*en* &a P).=# an* t'e $o3an% &ill a% P)."?= P)."?= at t'e en* of t'e $urrent %ear. Mi$4e% 'oul* 'oul* a% P).=# flotation $ot. 7'at i t'e e@e$te* return on retaine* earnin- for Mi$4e% Co3an%> /M0 a. 1?.?# er$ent $. 12 1 2.+= er$ent (. 12.2: er$ent *. 1:.?) er$ent Pol Bo(a*illa

RISKS %i&idend Gr)t/ Mde" 2 +''n $tck

9ero,-ro&t' Sto$4  Re;uire* Rate of Return . Dori Cororation Cororation to$4 'a a 3ar4et ri$e ri$e of !)#.## an* a% a% a $ontant *ivi*en* *en* of !).=#. 7'at i t'e re;uire* rate of return on it to$4> /E0 A. 1.#6 C. 1).#6 B. 1).=6 D. 11.=6 Glei3



9ero,-ro&t' Sto$4  Current Pri$e 2. niveral niveral Air i a no -ro&t' fir3 fir3 an* 'a t&o 3illion on 'are outtan*in-. outtan*in-. It i e@e$te* to earn a $ontant )# 3illion er %ear on it aet. If all earnin- are ai* out a *ivi*en* an* t'e $ot of $aital i 1#6< $al$ulate t'e $urrent ri$e er 'are for t'e to$4. A. !)## C. !1=# C. B. !1## D. !=# BM =#. A fir3 'a an e@e$te* e@e$te* *ivi*en* ne@t %ear of !1.)# !1.)# er 'are< a ero -ro&t' rate of *ivi*en*< *ivi*en*< an* a re;uire* return of 1# er$ent. T'e value of a 'are of t'e fir3 $o33on to$4 to$4 i QQQQQQ. A. !1)# C. !1) B. !1# D. !1## Git3an Current Deire* Pri$e + . rotfell rotfell Airline ne i e@e$te* to a% an u$o3inu$o3in- *ivi*en* of !.):. !.):. T'e $o3an% *ivi*en* i e@e$te* to -ro& at a tea*%< $ontant $ontant rate of =6 &ell into t'e future. rotfell rotfell $urrentl% 'a 1<"##<### 'are of $o33on to$4 outtan*in-. If t'e re;uire* rate of return for rotfell i 1)6< &'at i t'e (et eti3ate for t'e $urrent ri$e of rotfell $o33on to$4> /E0 A. !"=.2# C. !+?.## B. !").=1 D. !)?.+1 Glei3 1#. Caino Co. i e@e$te* e@e$te* to a% a *ivi*en* of !" er 'are 'are at t'e en* of %ear one an* t'ee *ivi*en* *ivi*en* are e@e$te* to -ro& at a $ontant rate of 26 er %ear forever. forever. If t'e re;uire* rate of return on t'e to$4 i )#6< &'at i $urrent value of t'e to$4 to*a%> A. !# C. !1## C. B. !=# D. !=+ BM =+. E33% E33% ou< In$. 'a an e@e$te* e@e$te* *ivi*en* *ivi*en* ne@t %ear of !=."# !=."# er 'are< 'are< a -ro&t' -ro&t' rate of *ivi*en* *ivi*en* of 1# er$ent< an* a re;uire* return of )# er$ent. T'e value of a 'are of E33% ou< In$. $o33on to$4 i QQQQQQ. A. !)2.## C. !)).+#


Pa-e 1) of ""

MANAGEMENT ADVISORY SERVICES B. !=".##

RISKS D. !12."?

Git3an

==. A fir3 'a e@erien$e* en$e* a $ontant annual annual rate of *ivi*en* -ro&t' of : er$ent on it $o33on $o33on to$4 an* e@e$t t'e *ivi*en* er 'are in t'e $o3in- %ear to (e !).?#. T'e fir3 $an earn 1) er$ent on i3ilar ri4 involve3ent. T'e value of t'e fir3 $o33on $o33on to$4 i QQQQQQ. A. !)).=#'are C. !:#'are B. !: !:'are D. ! !#'are Git3an B.

C.

Gro&t' Rate +2. Given t'at t'e $ot of $o33on $o33on to$4 i 12 er$ent< *ivi*en* *ivi*en* are !1.=# er 'are< an* t'e ri$e of t'e to$4 i !1).=# er 'are< &'at i t'e annual -ro&t' rate of *ivi*en*> /E0 A. + er$ent C. " er$ent B. = er$ent D. 2 er$ent Git3an

"

. A $o3an% $o3an% 'a 1#<### outtan*inouttan*in- 'are 'are &it' a 3ar4et 3ar4et value of !)= ea$'. ea$'. It ut ai* a !1 er 'are *ivi*en*. Divi*en* are e@e$te* to -ro& at a $ontant rate of 1#6. If flotation $ot are =6 of t'e ellin- ri$e< t'e $ot of ne& e;uit% finan$in- i $al$ulate* (% t'e follo&infor3ula5 /E0


dividend at time zero net proceeds

+ dividend growth rate


$1 + 10% F $23.75 4.21% + 10% = 14.21% epected dividend at end o! period market price F


$1.10 L .1# $25

F .#++ L .1# F 1+.+#6 D.

11.T'e eonar* Co3an% lat *ivi*en* &a P.##H it -ro&t' rate i "6 an* t'e to$4 no& ell for P". Ne& to$4 $an (e ol* to net t'e fir3 P).+# er 'are. 7'at i eonar* Co3an% $ot of ne& $o33on to$4> A. 1+ 1+.26 C. 1=.216 B. 1= 1=.)"6 D. :. :.":6 Pol Bo(a*illa

market price

$1 + 10% F $25 4% + 10% = 14%

11. 7orl*Tour 7orl*Tour Co. 'a ut no& ai* a *ivi*en* of !" er 'are /Do0< t'e *ivi*en* are e@e$te* to -ro& at a $ontant rate of =6 er %ear forever. If t'e re;uire* rate of return on t'e to$4 i 1=6< &'at i t'e $urrent value on to$4< after a%in- t'e *ivi*en*> A. !" C. !+# B. !=" D. !+2 BM

Pat Divi*en* Given = . Suoe t'at Nefertiti Nefertiti re$entl% re$entl% ur$'ae* ur$'ae* a 'are of to$4 to$4 for !+=. T'e 3ot 3ot re$ent *ivi*en* *ivi*en* &a !< an* *ivi*en* are e@e$te* to -ro& at a eretual rate of =6 in*efinitel%. 7'at 'oul* (e 'er re;uire* return on t'e to$4> /E0 A. 1)."?6 C. "."?6 B. 1).##6 D. =.##6 Glei3

dividend at time zero

A.

epected dividend at end o! period L *ivi*en* -ro&t' rate net proceeds iss"ing one share $1#1.1 + .10 F $23.75

F .#+" L .1# F 1+."6

CIA #=:+ IV,2#

=. T'e Mint Co3an% lat *ivi*en* *en* &a P+.=#H it -ro&t' rate i " er$ent an* t'e to$4 no& ell for P"#. lotation $ot i P=.## 7'at i Mint Co3an% $ot of ne& $o33on to$4> a. 2."? er$ent $. 1+ 1 +.12 er$ent (. 1+."? er$ent * . 1  .= #  e r $ e n t Pol Bo(a*illa ?

. A $o3an% $o3an% ut ai* a !).## !).## er 'are *ivi*en* *ivi*en* on it $o33on $o33on to$4 to$4 /D# F !).##0. T'e *ivi*en* i e@e$te* to -ro& at a $ontant rate of ? er$ent er %ear. T'e to$4 $urrentl% ell for !+) a 'are. If t'e $o3an% iue a**itional to$4< it 3ut a% it invet3ent (an4er a flotation $ot of !1.## er 'are. 7'at i t'e $ot of e@ternal e;uit%< 4e> /E0 a. 11 11.?"6 *. 1) 1).))6 (. 11 11.226 e. 1) 1).#6 $. 11.:26 Bri-'a3 Pa-e 1 of ""


RISKS 2

. Ne&3a< Ne&3a< In$. ai* a $a' *ivi*en* *ivi*en* to it $o33on $o33on 'are'ol*er 'are'ol*er over t'e at 1) 3ont' of !).)# er 'are. T'e $urrent 3ar4et value of t'e $o33on to$4 i !+# er 'are< an* invetor invetor are anti$iatinanti$iatin- t'e $o33on *ivi*en* to -ro& at a rate of "6 annuall%. annuall%. T'e $ot to iue ne& $o33on to$4 &ill (e =6 of t'e 3ar4et value. T'e $ot of a ne& $o33on to$4 iue &ill (e /E0 A. 11.=#6 C. 11.26 B. 11.?:6 D. 1).1+6 CMA #":# 1,1+

:

. Your Your $o3an% to$4 ell ell for !=# !=# er 'are< it t lat *ivi*en* vi*en* /D#0 &a !).##< it -ro&t' rate i a $ontant = er$ent< an* t'e $o3an% &ill in$ur a flotation $ot of 1= er$ent if it ell ne& $o33on to$4. 7'at i t'e fir3 $ot of ne& e;uit%< 4e> /E0 a. :. : .)#6 *. 11.?=6 (. :. :.:+6 e. 1).#6 $. 1#.=#6 Bri-'a3

1:. T'e follo&inn- *etail &ere u33arie* u33arie* for ar-a Cororation5 Cororation5 Year Per S'are Divi*en* 1 :: ? P).:: 1 :: 2 .)= 1 :: : .+= ) ## # .?# ) ## 1 +.## ) ## ) +.): ar-a Cororation i e@e$te* to a% *ivi*en* at t'e en* of )## (ae* on t'e avera-e *ivi*en* -ro&t'. -ro&t'. T'e $urrent 3ar4et 3ar4et ri$e of Buena $o33on $o33on 'are i P"). T'e iuan$e iuan$e e@ene er 'are i P).##. T'e 3ar-inal $ot of ne& $o33on 'are i A. 1+ 1+.:=6 C. 1:."#6 B. 1) 1 ).=#6 D. 1= 1=.)#6 Pol Bo(a*illa E@e$te* Divi*en* Given +# . A(er*een Cororation Cororation 'a a $urrent $urrent 3ar4et ri$e ri$e of !1## er 'are on it it $o33on to$4. to$4. It &ill a% a !+ *ivi*en* ne@t %ear on it $o33on to$4. 7'at i t'e 3ar4et re;uire* return on t'i invet3ent if t'e *ivi*en* i e@e$te* to eretuall% -ro& at =6> /E0 A. +6 C. ?6 B. =6 D. :6 Glei3


+1. A fir3 'a $o33on $o33on to$4 &it' &it' a 3ar4et ri$e of !)= er 'are an* an e@e$te* e@e$te* *ivi*en* of !) Pa-e 1+ of ""

MANAGEMENT ADVISORY SERVICES er 'are at t'e en* of t'e $o3in- %ear. %ear. T'e -ro&t' rate in *ivi*en* 'a (een = er$ent. T'e $ot of t'e fir3 $o33on to$4 e;uit% i /E0 A. = er$ent. C. 1# er$ent. B. 2 er$ent. D. 1 er$ent. Git3an +1

. T'e $o33on $o33on to$4 of t'e Ni$ola Ni$ola Corora Cororatio tionn i $urrentl $urrentl%% ellinellinat !2# er 'are. T'e lea*er'i of t'e $o3an% inten* to a% a !+ er 'are *ivi*en* ne@t %ear. 7it' t'e e@e$tation t'at t'e *ivi*en* &ill -ro& at =6 eretuall%< &'at &ill t'e 3ar4et re;uire* return on invet3ent (e for Ni$ola $o33on to$4> /E0 A. =6. C. ?.=6. B. =.)=6. D. 1#6. Glei3

+)

. B% uin- t'e *ivi*en* *en* -ro&t' 3o*el< 3o*el< eti3ate eti3ate t'e $ot of e;uit% $aital $aital for a fir3 &it' a to$4 ri$e of !#.##< an eti3ate* *ivi*en* *ivi*en* at t'e en* of t'e firt %ear of !.## er 'are< an* an e@e$te* -ro&t' rate of 1#6. /E0 A. )1.16 C. 1#.#6 B. 11.#6 D. )#.#6 CMA 1):+ 1,)2

+

. 7'at return return on e;uit% e;uit% *o invetor invetor ee3 to e@e$t e@e$t for a fir3 &it' &it' a !=# 'are 'are ri$e< an e@e$te* *ivi*en* of !=.=#< a (eta of .:< an* a $ontant -ro&t' rate of +.=6> /M0 A. 1=.#=6 C. 1=.:=6 B. 1=.=#6 D. 1".?)6 Glei3

1. M$o3 M$o3 Co. i e@e$te* e@e$te* to a% a *ivi*en *ivi*en** of !+ er 'are at t'e en* of %ear one an* t'e *ivi*en* *ivi*en* are e@e$te* to -ro& at a $ontant rate of +6 forever. forever. If t'e $urrent ri$e of t'e to$4 i !)= er 'are< $al$ulate t'e re;uire* rate of return on t'e 3ar4et $aitaliation rate for t'e fir3 to$4. A. +6 C. )#6 B. 1"6 1"6 D. None None of t'e t'e a(ov a(ove. e. BM

RISKS +=

. T'e DC Cororation Cororation i rearinrearin- to evaluate t'e $aital $aital e@en*iture e@en*iture rooal rooal for t'e $o3in%ear. Be$aue t'e fir3 e3lo% *i$ounte* $a' flo& 3et'o* of anal%e< t'e $ot of $aital for t'e fir3 3ut (e eti3ate*. T'e follo&in- infor3ation for DC Cororation i rovi*e*. Mar4et ri$e of $o33on to$4 i !=# er 'are.  T'e *ivi*en* ne@t %ear i e@e$te* to (e !).=# er 'are.  E@e$te* -ro&t' in *ivi*en* i a $ontant 1#6.  Ne& (on* $an (e iue* at fa$e value &it' a 16 $ouon rate.  T'e $urrent $aital tru$ture tru$ture of +#6 lon-,ter3 *e(t an* "#6 e;uit% i $oni*ere* $oni*ere* to  (e oti3al. Anti$iate* earnin- to (e retaine* in t'e $o3in- %ear are ! 3illion.  T'e fir3 'a a +#6 3ar-inal ta@ rate.  If t'e fir3 3ut au3e a 1#6 flotation on $ot on ne& to$4 iuan$e< iuan$e< &'at i t'e $ot of ne& $o33on to$4> /M0 A. 1+.=#6. C. 1=.)6. B. 1=.="6. D. 1=.=#6. CMA 1)2# 1,11

+). A fir3 'a $o33on $o33on to$4 &it' a 3ar4et ri$e of !== er 'are an* an e@e$te* e@e$te* *ivi*en* of !).21 er 'are at t'e en* of t'e $o3in- %ear. T'e *ivi*en* ai* on t'e outtan*in- to$4 over t'e at five %ear are a follo&5 Year Divi*en* 1 ! ) .# # ) ) .1 +  ).): + ) .+ = = ) ." ) T'e $ot of t'e fir3 $o33on to$4 e;uit% i /E0 A. +.1 er$ent. C. 1).1 er$ent. B. =.1 er$ent. D. 1=.+ er$ent. Git3an

++

. Blair Brot'er Brot'er to$4 to$4 $urrentl% 'a a ri$e of !=# er 'are 'are an* i e@e$te* e@e$te* to a% a %ear,en* *ivi*en* of !).=# er 'are /D1 F !).=#0. T'e *ivi*en* i e@e$te* to -ro& at a $ontant rate of + er$ent er %ear. T'e $o3an% 'a inuffi$ient $ient retaine* earnin- to fun* $aital roe$t roe$t an* 3ut< t'erefore< iue ne& $o33on to$4. T'e ne& to$4 'a an eti3ate* flotation $ot of ! er 'are. 7'at i t'e $o3an% $ot of e;uit% $aital> /E0 a. 1# 1#.1+6 *. :. :.)6 (. :.)16 e. :.##6 $. :.+=6 Bri-'a3


++. A fir3 'a $o33on $o33on to$4 &it' a 3ar4et 3ar4et ri$e of !1## er 'are an* an e@e$te* e@e$te* *ivi*en* of !=."1 er 'are at t'e en* of t'e $o3in- %ear. A ne& iue of to$4 i e@e$te* to (e ol* for !:2< &it' !) er 'are rereentin- t'e un*erri$in- ne$ear% in t'e $o3etitive $aital 3ar4et. lotation on $ot are e@e$te* e@e$te* to total !1 er 'are. 'are. T'e *ivi*en* *ivi*en* ai* on t'e outtan*in- to$4 over t'e at five %ear are a follo&5 Year Divi*en* 1 ! + .# # Pa-e 1= of ""

MANAGEMENT ADVISORY SERVICES )  + = T'e $ot of t'i ne& iue of $o33on to$4 i /E0 A. =.2 er$ent. C. 1#.2 er$ent. B. ?.? er$ent. D. 1).2 er$ent. .

RISKS + .) 2 + .= 2 + .: # = .) + Git3an

T'e ABC ABC Co3an% Co3an% i e@e$ e@e$te* te* to 'ave 'ave a $ontant $ontant annual annual -ro&t' -ro&t' rate of = er$en er$ent.t. It 'a a ri$e er 'are of P) an* a% an e@e$te* *ivi*en* of P).+#. It $o3etitor< tor< t'e DE Co3an% i e@e$te* to 'ave a -ro&t' rate of 1#6< 'a a ri$e er 'are of P?)< an* a% an e@e$te* P+.2#'are *ivi*en*. T'e re;uire* rate of return on e;uit% for t'e t&o $o3anie are5 RPCPA 1##1 A. B. C. D. AB C 1.26 :."6 1).=6 1".)6 DE 1=.+6 2."6 1".?6 12.)6

+"

. it-eral* it-eral* i interete* interete* in invetininvetin- in a $ororation &it' a lo& $ot $ot of e;uit% $aital. $aital. B% uint'e *ivi*en* -ro&t' 3o*el< &'i$' of t'e follo&in- $ororation on 'a t'e lo&et $ot of e;uit% $aital> Sto$4 Pri$e Divi*en* Gro&t' Rate C.S. In$. ! )= != 26 e&i Cor. #  1#6 S$re&tae In$. )# + "6 7or3&oo* Cor. )2 ? ?6 A. C.S. In$. C. S$re&tae In$. B. e&i Cor. D. 7or3&oo* Cor. Glei3

Current Sto$4 Pri$e )1. Re* Tur4e% Tur4e% Co3an% &ill a% a *ivi*en* *ivi*en* of P1.=# er 'are at t'e en* of ne@t 1) 3ont'. T'e re;uire* rate of return for Re* in 'are i 1#6 an* t'e $ontant -ro&t' rate i =6. T'e aro@i3ate $urrent 3ar4et ri$e er $o33on 'are of Re* Tur4e% to$4 i A. P P#.## C. P1=.## B. P1 P1#.## D. P) P)"." Pol Bo(a*illa Earnin- er S'are  Divi*en* er S'are Juetion 2" an* 2? are (ae* on t'e follo&in- infor3ation. RPCPA< AICPA< CMA  CIA E8AMINATION JESTIONS

Pol Bo(a*illa

Gar*ner Co3an% Co3an% to$4 i $urrentl% ellinellin- for P1)# a 'are. T'e fir3 i e@e$te* to earn P1#.2# er 'are an* to a% a %ear,en* *ivi*en* of P?.)#. Invetor re;uire a :6 return. 2". If Gar*ner reinvet retaine* ne* earnin- in roe$t &'oe a--re-ate a--re-ate return i e;ual to t'e to$4 e@e$te* rate of return< &'at &ill (e ne@t %ear Earnin- er S'are> A. P11.1) C. P?.+) B. P1 P1#.2# D. P11.?? 2?. If Gar*ner reinvet retaine* ne* earnin- in roe$t &'oe a--re-ate a--re-ate return i e;ual to t'e to$4 e@e$te* rate of return an* it &ill $ontinue t'e $ontant *ivi*en* -ro&t' rate< 'o& 3u$' i t'e %ear,en* *ivi*en* ne@t %ear> A. P?.+) C. P?.)# B. P?.= D. P:.## +apita" Asset Pricin* Mde"

Al'a +? . Se$urit% A 'a an e@e$te* rate rate of return of #.1# an* a (eta of 1.1. T'e 3ar4et e@e$te* e@e$te* rate of return i #.#2 an* t'e ri4,free rate i #.#=. T'e al'a of t'e to$4 i /M0 a. 1.?6. $. 2.6. (. ,1 ,1.?6. *. =. =.=6. Bo*ie Beta +2 . Bae* Bae* on t'e follo&infollo&in- infor3at infor3ation ion a(out to$4 to$4 ri$e ri$e in$rea in$reae e an* *e$rea *e$reae< e< 3a4e an eti3ate of t'e to$4 (eta5 Mont' 1 F Sto$4 L1.=6< Mar4et L1.16H Mont' ) F Sto$4 L).#6< Mar4et L1.+6H Mont'  F Sto$4 ,).=6< Mar4et ,).#6. /E0 A. Beta i -reater t'an 1.#. C. Beta e;ual 1.#. Glei3 B. Beta i le t'an 1.#. D. T'ere i no $onitent attern of return. )". T'e (eta of t'e $o3uter $o3uter $o3an% $o3an% i 1.? an* t'e tan*ar* tan*ar* error error of t'e eti3ate eti3ate i #.. 7'at i t'e ran-e of value for (eta< t'at 'a :=6 $'an$e of (ein- ri-'t> /D0 A. 1.+, 1.+,). ).## C. 1.=, 1.=,). ).## B. 1.1,) 1.1,). . D. None None of t'e t'e a(ove a(ove BM Re;uire* rate of return /Given  Ri4 Pre3iu30 . Ar&i$ Co3an% Co3an% 'a a (eta $oeffi$ient $oeffi$ient of #.2. T'e T'e 3ar4et ri4 ri4 re3iu3 i $urrentl% $urrentl% ?6< an* t'e t'e ri4,free rate i =6. 7'at i t'e re;uire* rate of return on t'e to$4 of Ar&i$ Co3an%> /E0 A. 1#."6 C. 1).#6 B. 11.#6 D. 1).26 Glei3

+:

Pa-e 1" of ""


RISKS B. 1=. "6 "6

D. 11 . D. .6

BM

=#

. in* t'e re;uire* re* rate of return return for e;uit% invetor invetor of a fir3 &it' &it' a (eta of 1.) &'en t'e t'e ri4, free rate i "6< t'e 3ar4et ri4 re3iu3 i +6< an* t'e return on t'e 3ar4et i 1#6. /E0 A. +.2#6 C. 1#6 B. "6 D. 1#.2#6 Glei3

11".If t'e fir3 (eta i 1.?=< t'e ri4,free rate i 26< an* t'e avera-e return on t'e 3ar4et i 1)6< &'at &ill (e t'e fir3 $ot of e;uit% uin- t'e CAPM aroa$'> A. 1" 1".#=6 C. 1=.##6 B. 1+ 1 +.)?6 D. 1+ 1+.##6 Pol Bo(a*illa

=1

. T'e $o33on $o33on to$4 of Ant'on% Ant'on% Steel Steel 'a a (eta of 1.)#. T'e T'e ri4,free ri4,free rate i = er$ent an* an* t'e 3ar4et ri4 re3iu3 /4M , 4R0 i " er$ent. Au3e t'e fir3 &ill (e a(le to ue retaine* earnin- to fun* t'e e;uit% ortion of it $aital (u*-et. 7'at i t'e $o3an% $ot of retaine* earnin-< 4> /M0 a. ?.#6 *. 1).)6 (. ?.)6 e. 1).+6 $. 11.#6 Bri-'a3

=. T'e (eta of a fir3 in S&iterlan* S&iterlan* i 1.)=. T'e ri4,free ri4,free rate i +6 an* 3ar4et ri4 re3iu3 re3iu3 i 2.+6. Cal$ulate t'e re;uire* rate of return for t'i fir3. A. 1+.=6 C. 1#.=6 C. B. 2.+6 2.+6 D. None None of t'e t'e a(ov a(ovee BM +1. If t'e (eta of Mi$rooft i 1.)"< ri4,free ri4,free rate i =.=6 an* t'e 3ar4et ri4 re3iu re3iu3 3 i 26< $al$ulate t'e e@e$te* return for Mi$rooft. /E0 A. 1)."6 C. 1.:6 C. B. 1=." 1=."6 6 D. 11.6 1. 6 BM +. If t'e (eta of General Ele$tri$ i 1.):< ri4,free rate rate i =.=6 an* t'e 3ar4et ri4 re3iu3 re3iu3 i 26< $al$ulate t'e e@e$te* rate of return for General Ele$tri$5 /E0 A. 1=.26 C. 1)."6 C. B. 1.: 1.:6 6 D. 11.6 1. 6 BM =)

. If Treaur% Treaur% (ill %iel* el* +.#6< an* t'e 3ar4et 3ar4et ri4 re3iu3 re3iu3 i :.#6< t'en t'en a ortfolio &it' &it' a (eta of 1.= &oul* (e e@e$te* to %iel* /E0 A. :.#6 C. 1?.=6 B. 1=.#6 D. 1:.=6 Glei3

Re;uire* rate of return /Given  Mar4et Return0 +). If t'e (eta of E@@on i #.?< ri4,free ri4,free rate i =.=6 an* t'e 3ar4et 3ar4et rate of return i 1.=6< 1.=6< $al$ulate t'e e@e$te* rate of return fro3 E@@on5 /E0 A. 1)."6 C. 1.:6 C. RPCPA< AICPA< CMA  CIA E8AMINATION JESTIONS

1)1.ABC Cor. to$4 (eta i #.=#. If t'e 3ar4et return i 1"6< an* t'e ri4,free rate i "6< &'at i t'e re;uire* rate of return on ABC to$4> /E0 A. 116 C. 1.##6 B. 1)6 D. 1+.##6 Pol Bo(a*illa =

. in- t'e Caital tal Aet Aet Pri$in- Mo*el Mo*el /CAPM0< /CAPM0< t'e re;uire* rate rate of return for a fir3 &it' &it' a (eta of 1.)= &'en t'e 3ar4et return i 1+6 an* t'e ri4,free rate i "6 i /E0 A. ".#6. C. 1?.=6. B. ?.=6. D. 1".#6. CMA #":) 1,=

?. A fir3 'a a (eta (eta of 1.). T'e 3ar4et 3ar4et return e;ual 1+ er$ent er$ent an* t'e ri4,free rate of return return e;ual " er$ent. T'e eti3ate* $ot of $o33on to$4 e;uit% i /E0 A. " er$ent. C. 1+ er$ent. B. ?.) er$ent. D. 1=." er$ent. Git3an =+

. T'e ri4,free ri4,free rate an* t'e e@e$te* e@e$te* 3ar4et 3ar4et rate of return return are #.#" an* #.1)< ree$ti ree$tivel% vel%.. A$$or*in- to t'e $aital aet ri$in- 3o*el /CAPM0< t'e e@e$te* rate of return on e$urit% 8 &it' a (eta of 1.) i e;ual to /E0 a. #.#". *. #.1) (. #.1++. e. #.12 $. #.1) #.1).. Bo*i Bo*ie

==

. Au3e t'at t'at t'e ri4,free ri4,free interet rate rate i 26< t'e re;uire* re;uire* rate of return return on t'e 3ar4et ortfolio ortfolio /$ontainin- all to$40 i 1=6< an* t'e (eta $oeffi$ient of a arti$ular to$4 i .:. A$$or*in- to t'e $aital aet ri$in- 3o*el< t'e re;uire* rate of return on t'at arti$ular to$4 i /E0 A. ".6 C. 1=.#6 B. 1+.6 D. )1.=6 CIA 11:1 IV,=)

="

. Colt< In$. i lanninannin- to ue retaine* retaine* earnin- earnin- to finan$e anti$iate* anti$iate* $aital $aital e@en*iture. e@en*iture. T'e (eta $oeffi$ient for Colt to$4 i 1.1=< t'e ri4,free rate of interet i 2.=6< an* t'e 3ar4et return i eti3ate* at 1).+6. If a ne& iue of $o33on to$4 &ere ue* in t'i 3o*el< t'e Pa-e 1? of ""

MANAGEMENT ADVISORY SERVICES flotation on $ot &oul* (e ?6. B% uin- t'e Caital Aet Aet Pri$in- Mo*el /CAPM0 e;uation R F R L U/RM , R0< t'e $ot of uin- retaine* earnin- to finan$e t'e $aital e@en*iture i /M0 A. 1.)16 C. 1).+#6 B. 1).::6 D. 1+.)"6 CMA #":# 1,1

RISKS Re;uire* Rate of Return  Given itori$al Return of Sto$4 an* Mar4et Portfolio 1. T'e 'itori$al 'itori$al return *ata for t'e at t'ree %ear for Co3an% Co3an% A to$4 i ,".#6< 1=6< 1=6< 1=6 an* t'at of t'e 3ar4et ortfolio ortfolio i 1#6< 1#6 an* 1"6. If t'e ri4,free rate rate of return i +6< &'at i t'e $ot of e;uit% $aital /re;uire* rate of return of $o3an% A $o33on to$40 uinCAPM> /D0 A. 1)6 C. 126 B. 1+6 1+6 D. None None of t'e t'e a(ov a(ovee BM Beta =? . If t'e ri4,free ri4,free rate i "6< "6< t'e e@e$te* e@e$te* return on t'e 3ar4et 3ar4et i 1)6< 1)6< an* t'e e@e$te* e@e$te* return on Poo4ie to$4 i 1)6< &'at i t'e (eta of Poo4ie to$4> /E0 A. 1.# C. ).# B. 1.= D. ).= Glei3 Mar4et Return 12. T'e follo&infollo&in- *ata are relate* relate* to ABC to$45 to$45 Re;uire* return on ABC $o33on Beta $oeffi$ient Ri4,free rate T'e re;uire* 3ar4et return i A. 1.#6 C. )=.#6 B. 12 12.#6 D. 1".#6

1=6 1.= :6

Pol Bo(a*illa

Ri4 Pre3iu3  Given Ri4 ree Rate an* Mar4et Return 1?. If t'e avera-e annual rate of return for $o33on to$4 to$4 i 16< an* treaur% (ill i .26< &'at i t'e avera-e 3ar4et ri4 re3iu3> A. 16 C. :.)6 C. B. .26 .26 D. None None of t'e t'e a(ov a(ovee BM Ri4 Pre3iu3  Given itori$al Return of Sto$4 an* Mar4et Portfolio 1+. T'e 'itori$al 'itori$al return *ata for t'e at t'ree %ear for Co3an% Co3an% A to$4 i ,".#6< 1=6< 1=6< 1=6 an* t'at of t'e 3ar4et ortfolio ortfolio i 1#6< 1#6 an* 1"6. If t'e ri4,free rate rate of return i +6< &'at i t'e 3ar4et ri4 re3iu3> /D0 A. 26 C. 1"6 B. +6 D. None None of t'e t'e a(ov a(ovee BM


Current Sto$4 Pri$e =". A $o33on $o33on to$4 $urrentl% 'a a (eta of 1.< t'e ri4,free rate i an annual rate of " er$ent< Pa-e 12 of ""

MANAGEMENT ADVISORY SERVICES an* t'e 3ar4et return i an annual rate of 1) er$ent. T'e to$4 i e@e$te* e@e$te* to -enerate er,'are (enefit t of !=.)# *urin- t'e $o3in- erio*. erio*. A to@i$ ill reult t in a la&uit an* otential fine< an* t'e (eta of t'e to$4 u3 to 1.". T'e ne& e;uili(riu3 ri$e of t'e to$4 A. &ill &ill (e !?."2 !?."2.. B. &ill &ill (e !+. !+... C. $annot (e *eter3ine* ne* fro3 t'e infor3ation infor3ation -iven. -iven. D. &ill (e !.. !.. Git3an Git3an =?. A $o33on to$4 $urrentl% $urrentl% 'a a (eta of 1.?< t'e ri4,free rate i ? er$ent annuall%< annuall%< an* t'e 3ar4et return i 1) er$ent annuall%. T'e to$4 i e@e$te* to -enerate er 'are (enefit of !".?# *urin- t'e $o3in- erio*. A en*in- la&uit 'a ut (een *i3ie* an* t'e (eta of t'e to$4 *ro to 1.+. T'e ne& e;uili(riu3 ri$e of t'e to$4 A. &ill &ill (e !==.2 !==.2.. B. &ill &ill (e !+.) !+.).. C. &ill &ill (e !+?.2" !+?.2".. D. $annot (e *eter3ine* ne* fro3 t'e infor3ation infor3ation -iven. Git3an Mar4et Return  Ri4,ree Rate =2 . Sto$4  'a a (eta of 1.) an* an* an e@e$te* e@e$te* return of 1=."6< 1=."6< an* to$4 to$4 K 'a a (eta (eta of #.2 an* an e@e$te* return of 1).+6. 7'at 3ut (e t'e e@e$te* return on t'e 3ar4et an* t'e ri4, free rate of return< to (e $onitent &it' t'e $aital aet ri$in- 3o*el> /D0 A. Mar4et i 1+6H ri4,free i "6. C. Mar4et i 1+6H ri4,free i +6. B. Mar4et i 1).+6H ri4,free i #6. D. Mar4et i 1+6H ri4,free i 1."6. Glei3 Effe$t of C'an-e in Beta on Rate of Return =: . If t'e return on t'e t'e 3ar4et ortfolio ortfolio i 1#6 1#6 an* t'e ri4,free ri4,free rate i =6< &'at i t'e t'e effe$t on a $o3an% re;uire* rate of return on it to$4 of an in$reae in t'e (eta $oeffi$ient fro3 1.) to 1.=> /M0 A. 6 in$reae C. No $'an-e B. 1.=6 in$reae D. 1.=6 *e$reae Glei3 Effe$t of C'an-e in Ri4 Pre3iu3 on Rate of Return . An invetor invetor &a e@e$tine@e$tin- a 1=6 return return on 'i ortfolio ortfolio &it' (eta (eta of 1.)= (efore (efore t'e 3ar4et ri4 re3iu3 in$reae* fro3 "6 to :6. Bae* on t'i $'an-e< &'at return &ill no& (e e@e$te* on t'e ortfolio> /M0 A. 1=.##6 C. 12.?=6 B. 12.##6 D. )).=#6 Glei3

"#


RISKS Effe$t of C'an-e in Beta an* Ri4,free Rate on Rate of Return . 7'at 'aen to e@e$te* e@e$te* ortfolio ortfolio return if t'e t'e ortfolio (eta in$reae in$reae fro3 1.# to ).#< t'e ri4,free rate *e$reae fro3 =6 to +6< an* t'e 3ar4et ri4 re3iu3 re3ain at 26> /M0 A. It in$reae fro3 1)6 to 1:6. C. It in$reae fro3 16 to )#6. B. It in$reae fro3 16 to 1"6. D. It re3ain un$'an-e*. Glei3

"1

Net Preent Value ") . Co3ute$' Co3ute$' i an all,e;uit% t% fir3 t'at i anal%inanal%in- a otential otential 3a $o33uni$a $o33uni$ation tion roe$t roe$t &'i$' &ill re;uire an initial< after,ta@ $a' outla% of !1##<###< an* &ill ro*u$e after,ta@ $a' inflo& of !1)<### er %ear for 1# %ear. In a**ition< t'i roe$t &ill 'ave an after,ta@ alva-e value of !)#<### at t'e en* of Year 1#. If t'e ri4,free rate i = er$ent< t'e return on an avera-e to$4 i 1# er$ent< an* t'e (eta of t'i roe$t i 1.2#< t'en &'at i t'e roe$t NPV> /D0 A. !1#<"== C. ,!?<+#? B. !<)+ D. ,!)<#1) Glei3 Certaint% E;uivalent Ca' lo& :. A roe$t roe$t 'a an e@e$te* $a' $a' flo& of !)##< in %ear 1. T'e ri4,free ri4,free rate i "6< t'e 3ar4et 3ar4et rate of return i 1"6< an* t'e roe$t (eta i 1.=6. Cal$ulate Cal$ulate t'e $ertaint% e;uivalent e;uivalent $a' flo& for %ear 1. A. !1?= !1?=.) .)11 C. !))2 !))2. .## B. !1"+ !1"+.) .):: D. None None of t'e t'e a(ov a(ovee BM +#. A roe$t roe$t 'a an e@e$te* e@e$te* $a' flo& of !## in %ear . T'e ri4,free ri4,free rate i =6< =6< t'e 3ar4et ri4 re3iu3 i 26 an* t'e roe$t (eta i 1.)=. Cal$ulate t'e $ertaint% e;uivalent $a' flo& for %ear . A. !)) 2. 2. = C. ! # ## B. !1:?. !1:?.)= )= D. None None of t'e t'e a(ove a(ove BM Co3re'enive " . T'e (eta an* e@e$te* e@e$te* return return for t'ree invet3ent invet3ent (ein(ein- $oni*ere* (% S4% S4% In$. are -iven -iven (elo&. Invet3ent Beta E@e$te* Return A 1.+ 1)6 B #.2 116 C 1 .= 16

Pa-e 1: of ""

MANAGEMENT ADVISORY SERVICES T'e return on t'e 3ar4et i 116 an* t'e ri4,free rate i "6. If t'e Caital Aet Pri$in- Mo*el /CAPM0 i ue* for $al$ulatin- t'e re;uire* rate of return< &'i$' invet3ent 'oul* t'e 3ana-e3ent of S4% 3a4e> /M0 A. B onl%. C. B an* C onl%. B. A an* C onl%. D. A< B< an* C. CMA Sa3 J),1# "+

. T'e e@e$te* e@e$te* return< return< tan*ar* tan*ar* *eviation< a tion< an* (eta $oeffi$ $oeffi$ient ient of four to$4 to$4 are -iven -iven (elo&5 E@e$te* Return Stan*ar* Deviation Beta Coeffi$ient M 12 6 ." = .: N )# 6 .: 1.) O )# 6 .+ 1.= J )1 6 1.) 1.? Given an e@e$te* return on t'e 3ar4et ortfolio of 126 an* a ri4,free rate of 1)6< &'i$' to$4/0 i/are0 overvalue* or un*ervalue*> A. M an* N are un*ervalue*H O an* J are overvalue*. B. M i un*ervalue*H N< O< an* J are overvalue*. C. M< N< O< an* J are overvalue*. D. M< N< O< an* J are un*ervalue*. Glei3

Juetion 1 an* ) are (ae* on t'e follo&in- infor3ation. Bri-'a3 T'e a$4on Co3an% 'a ut ai* a *ivi*en* of !.## er 'are on it $o33on to$4< an* it e@e$t t'i *ivi*en* *ivi*en* to -ro& (% 1# er$ent er %ear< in*efinitel%. tel%. T'e fir3 'a a (eta of 1.=#H t'e ri4,free rate i 1# er$entH an* t'e e@e$te* return on t'e 3ar4et i 1+ er$ent. T'e fir3 invet3ent (an4er (elieve t'at ne& iue of $o33on to$4 &oul* 'ave a flotation $ot e;ual to = er$ent of t'e $urrent 3ar4et ri$e. "=

. o& 3u$' 'oul* 'oul* an invetor invetor (e &illinllin- to a% a% for t'i to$4 to$4 to*a%> to*a%> /E0 a. !" !").21 *. != !==.## (. !? !?#.## e. ! !#.## $. !+.?=

""

. 7'at &ill (e a$4on a$4on $ot $ot of ne& $o33on $o33on to$4 if it iue iue ne& to$4 to$4 in t'e 3ar4etla$e 3ar4etla$e to*a%> /E0 a. 1= 1=.)=6 *. 1) 1).+?6 (. 1" 1".)6 e. :. :.2=6 $. 1 ? .# # 6


RISKS Ar.itra*e Pricin* T/er 3APT4 "?

. T'e ar(itra-e ar(itra-e ri$in- t'eor% t'eor% /APT0 e@lain n aet return in ter3 ter3 of 3ultile 3a$roe$ono3i$ 3a$roe$ono3i$ fa$tor. Au3e Au3e t'at t'e 3a$roe$ono3i$ 3a$roe$ono3i$ varia(le are t'e -ro *o3eti$ ro*u$t< inflation< real interet rate< *ifferen$e in %iel* of *ifferent -ra*e of $ororate (on*< an* *ifferen$e in %iel* on lon- veru 'ort,ter3 -overn3ent (on*. T'e fa$tor return or ri4 re3iu3 /4i 0 an* t'e fa$tor enitivit% or (eta $oeffi$ient /U 0 for ea$' varia(le are -iven (elo&5 Varia(le F 1 )  + = 4 i F . # .#+ .# ? .# = .#  UF .= . . .+ ." If t'e ri4,free interet rate i .#=< t'e e@e$te* rate of return a$$or*in- to t'e APT i A. 1."6 C. 2.6 B. 1#.6 D. =.#6 Glei3

Mar*ina" +st ! +apita"

Mar-inal Cot of De(t  Cot of E;uit% . A $o3an% $o3an% 'a !"=#<### !"=#<### of 1#6 *e(t outtan* outtan*inin- an* !=##<### !=##<### of e;uit% t % finan$in-. finan$in-. T'e re;uire* return of t'e e;uit% 'ol*er i 1=6< an* t'ere are no retaine* earnin- $urrentl% availa(le for invet3ent uroe. If ne& outi*e e;uit% i raie*< it &ill $ot t'e fir3 1"6. Ne& *e(t &oul* 'ave a (efore,ta@ $ot of :6< an* t'e $ororate ta@ rate i =#6. 7'en $al$ulatint'e 3ar-inal $ot of $aital< t'e $o3an% 'oul* ai-n a $ot of Wit AX to e;uit% $aital an* Wit BX to t'e after,ta@ $ot of *e(t finan$in-. CIA 11:+ IV,+< 11:" IV,+" A. B. C. D. it A 1= 6 1= 6 1"6 1"6 it B +.=6 =.#6 +.=6 =.#6

"2

Mar-inal Cot of Caital )). T'e Nunal Cororation Cororation fin* t'at it i ne$ear% to *eter3ine ne it 3ar-inal $ot of $aital. $aital. Nunal $urrent $aital tru$ture $all for +=6 *e(t< 1=6 referre* to$4 an* +#6 $o33on e;uit%. e;uit%. T'e $ot of t'e variou our$e our$e of finan$in- are a follo&5 *e(t< after,ta@ after,ta@ =."6H referre* to$4< to$4< :6H retaine* earnin-< earnin-< 1)6H an* ne& $o33on to$4< 1.)6. If t'e fir3 'a P1) 3illion retaine* retaine* earnin-< an* Nunal 'a an oortunit% to invet in an attra$tive attra$tive roe$t t'at $ot P+= 3illion< &'at i t'e 3ar-inal $ot of $aital of Nunal Cororation> /D0 A. 2.26 C. :.:=6 B. 2.:16 D. 1).+#6 Pol Bo(a*illa

Pa-e )# of ""


RISKS

=#. T'e Beta Cororation Cororation a4 %ou to *eter3ine ne it 3ar-inal $ot $ot of $aital. Beta $urrent $urrent $aital tru$ture tru$ture $onit of +=6 *e(t< 1=6 referre* to$4 an* +#6 $o33on e;uit%. T'e earate 3ar-inal $ot of t'e variou $o3onent $o3onent of t'e $aital tru$ture tru$ture are a follo&5 *e(t< after, ta@ =.# er$entH referre* to$4< : er$entH retaine* retaine* earnin-< 1) er$entH an* ne& $o33on to$4< 1.= er$ent. If Beta 'a P1= 3illion inveti(le retaine* earnin-< an* Beta 'a an oortunit% to invet in an attra$tive roe$t t'at $ot P"# 3illion< &'at i t'e 3ar-inal $ot of $aital of Beta Cororation> a. 2.+# er$ent $. P: P :.## er$ent (. 2." er$ent *. P: P :.22 er$ent Pol Bo(a*illa Invet3ent De$iion 22. A fir3 $urrent $urrent invet3ent oortunit% oortunit% $'e*ule an* t'e &ei-'te* 3ar-inal $ot of $aital $'e*ule are 'o&n (elo&. Inve Inv et t3e 3ent nt Oo Oort rtun uniitt%% S$'e S$'e*u *ule le IRR IRR Init Initia iall Inve Inv et t3e 3ent nt A 1= 6 ) # # <# # # B 1)  # # <# # # C 1: 1 # # <# # # D 1# + # # <# # # E 1"  # # <# # #

Git3an

. T'e 3ana-er of Kenforet Kenforet Gro$er Gro$er are tr%in- to *eter3ine *eter3ine t'e $o3an% $o3an% oti3al $aital $aital (u*-et for t'e u$o3in- %ear. Kenfore t i $oni*erin- t'e follo&in- roe$t5 Proe$t Sie Rate of Return Ri4 A ! ) # # <# # # 1"6 i-' B = # # <# # # 1+ Avera-e


?#

. If a 'are of to$4 rovi*e* rovi*e* an 12.#6 12.#6 no3inal rate rate of return over t'e reviou reviou %ear &'ile &'ile t'e real rate of return &a 1+.#6< t'en t'e inflation rate &a /D0 A. .=16 C. ?.??6 B. +.##6 D. 1).2"6 Glei3

Cot of Co33on Sto$4 1=. ealt' an* 7ealt' Co3an% Co3an% i finan$e* entirel% (% $o33on $o33on to$4 &'i$' i ri$e* to offer a 1=6 e@e$te* return. If t'e $o3an% reur$'ae )=6 of t'e $o33on to$4 an* u(titute an e;ual value of *e(t %iel*in- "6< &'at i t'e e@e$te* return on t'e $o33on to$4 after refinan$in-> /I-nore ta@e.0 A. )+6 C. 1=6 B. 126 126 D. None None of t'e t'e a(ov a(ovee BM

Opti'a" +apita" Bud*et ":

In!"atin Rate

5EIG6TE% A#ERAGE +O$T OF +APITAL Re!inancin*

7ei-'te* Mar-inal Cot of Caital Ran-e of total ne& finan$in7MCC !# , !)=#<### ?.=6 )=#<##1 , =##<### 2.: =##<##1 , 1<###<### 1#.# 1<###<##1 , 1<=##<### 1 ). # T'e invet3ent oortunitie &'i$' 'oul* (e ele$te* are /D0 A. A< B< C< an* D. C. A< B< D< an* E. B. A< B< C< an* E. D. B< C< D< an* E.

C +##<### 1) o & D ##<### 11 i-' E 1##<### 1# Avera-e  )##<### 1# o & G +##<### ? o& T'e $o3an% eti3ate t'at it 7ACC i 11 er$ent. All roe$t are in*een*ent. T'e $o3an% a*ut for ri4 (% a**in- ) er$enta-e oint to t'e 7ACC for 'i-',ri4 roe$t an* u(tra$tin- ) er$enta-e oint fro3 t'e 7ACC for lo&,ri4 roe$t. 7'i$' of t'e roe$t &ill t'e $o3an% a$$et> /M0 a. A< B< C< E<  *. A< B< C< D< E (. B< D< < G e. A< B< C<  $. A< B< C< E Bri-'a3

1?. Earn an* earn Co3an% i finan$e* entirel% rel% (% Co33on to$4 &'i$' i ri$e* ri$e* to offer a )#6 e@e$te* return. If t'e $o3an% reur$'ae =#6 of t'e to$4 an* u(titute an e;ual value of *e(t %iel*in- 26< &'at i t'e e@e$te* return on t'e $o33on to$4 after refinan$in-> A. )#6 C. )6 B. )26 )26 D. None None of t'e t'e a(ov a(ovee BM ). A fir3 'a a *e(t,to,e;uit% *e(t,to,e;uit% ratio ratio of 1.#. If it 'a* no *e(t< *e(t< it $ot $ot of e;uit% e;uit% &oul* (e 16. 16. It $ot of *e(t i 1#6. 7'at i it $ot of e;uit% if t'ere are no ta@e> A. )16 C. 1=6 Pa-e )1 of ""

MANAGEMENT ADVISORY SERVICES B. 126

RISKS D. 1"6

BM

)). A fir3 'a ero *e(t *e(t in it $aital $aital tru$ture. tru$ture. It overall overall $ot of $aital $aital i 1#6. T'e fir3 i $oni*erin- a ne& $aital tru$ture &it' "#6 *e(t. T'e interet rate on t'e *e(t &oul* (e 26. Au3in- t'ere are no ta@e it $ot of e;uit% $aital &it' t'e ne& $aital tru$ture &oul* (e5 A. 26 C. 16 B. 1"6 D. 1#6 BM )+. A fir3 'a 'a a *e(t,to,e;uit% *e(t,to,e;uit% ratio of #.=#. #.=#. It $ot of *e(t i 1)6. It overall $ot of $aital $aital i 1"6. 7'at i it $ot of e;uit% if t'ere are no ta@e> A. 16 C. 1=6 B. 1"6 D. 126 BM )". A fir3 'a 'a a *e(t,to,e;uit% *e(t,to,e;uit% ratio of 1. It $ot of e;uit% t% i 1"6< an* it it $ot of *e(t i 26. 26. If t'ere are no ta@e< &'at &oul* (e it $ot of e;uit% if t'e *e(t,to,e;uit% ratio &ere #> A. 26 C. 1)6 B. 1#6 D. 1+6 BM E. 1"6 Earnin- er S'are 1". ealt' an* 7ealt' Co3an% Co3an% i finan$e* entirel% (% $o33on $o33on to$4 &'i$' i ri$e* to offer a 1=6 e@e$te* e@e$te* return. T'e $o33on $o33on to$4 ri$e i !+#'are. !+#'are. T'e earnin- er 'are 'are i e@e$te* to (e !". If t'e $o3an% reur$'ae )=6 of t'e $o33on to$4 an* u(titute an e;ual value of *e(t %iel*in- "6< &'at i t'e e@e$te* value of earnin- er 'are after refinan$in-> /I-nore ta@e.0 A. !".## C. !?.=) C. B. !?.) !?.)## D. None None of t'e t'e a(ov a(ovee BM 12. Earn an* earn Co3an% i finan$e* finan$e* entirel% (% $o33on to$4< to$4< &'i$' i ri$e* to offer a )#6 e@e$te* rate of return. return. T'e to$4 ri$e ri$e i !"# an* t'e earnin- er 'are 'are i !1). If t'e $o3an% reur$'ae =#6 of t'e to$4 an* u(titute an e;ual value of *e(t %iel*in- 26< &'at i t'e e@e$te* earnin- er 'are value after refinan$in-> A. !1 ). ).# # C. ! 1: 1: .) .)# B. !)+. !)+.## ## D. None None of t'e t'e a(ov a(ovee BM


Ordinar 5A++ +'putatin

Cot of E;uit% Caital ?1 . A $o3an% $o3an% 'a !1 3illion in 'are'ol*er 'are'ol*er e;uit% e;uit% an* !) 3illion on in *e(t e;uit% /26 (on*0. (on*0. It after,ta@ &ei-'te*,avera-e $ot of $aital i 1)6< (ut it ue 1=6 a t'e 'ur*le rate in $aital (u*-etin- *e$iion. Durin- t'e at %ear< it oeratin- in$o3e (efore ta@ an* interet &a !=##<###. It ta@ rate i +#6. 7'at i t'e $o3an% $ot of e;uit% $aital> /D0 A. 226 6 C. 1=6 1=6 B. 1)6 D. )".+6 Glei3 Cot of Co33on E;uit%  7ACC Juetion 1+ an* 1= are (ae* on t'e follo&in- infor3ation5 RPCPA 1#2# T'e 3ar4et value of 8Y9 Co3an% $o33on to$4 i eti3ate* at P"# 3illion. T'e 3ar4et value of it interet,(earinn- *e(t i eti3ate* at P+# 3illion< on< an* t'e avera-e (efore ta@ %iel* on t'ee lia(ilitie i 1=6 er %ear. T'e $o3an% i u(e$t to an in$o3e ta@ rate of +#6 .

T'e avera-e avera-e $ot $ot of 8Y9 8Y9 $o33on $o33on to$4 to$4 e;uit% t % i a. 1).=6 *. 1?6 (. 1+.=6 e. An&er not -iven. />0 $. 1"6

.

T'e avera-e avera-e $ot of $aital $aital for 8Y9 8Y9 Co3an% Co3an% a a &'ole i eti3ate* eti3ate* to (e a. 1).:6 *. )=6 (. 11.16 e. An&er not -iven. />0 $. )1.=6

7ACC , De(t<  Co33on E;uit% 11. A fir3 i finan$e* finan$e* &it' =#6 ri4,free ri4,free *e(t an* =#6 e;uit%. e;uit%. T'e ri4,free ri4,free rate i 1#6< t'e fir3 $ot of e;uit% $aital i )#6< an* t'e fir3 3ar-inal nal ta@ rate i =6. 7'at i t'e fir3 &ei-'te* avera-e $ot of $aital> /E0 A. 1. )= )=6 C. ) #. C. #.# #6 #6 B. 1#.# 1#.##6 #6 D. None None of t'e t'e a(ov a(ovee BM 1). A fir3 i finan$e* finan$e* &it' #6 ri4,free *e(t an* ?#6 e;uit%. e;uit%. T'e ri4,free ri4,free rate i 26< t'e fir3 $ot of e;uit% $aital i 1=6< an* t'e fir3 3ar-inal nal ta@ rate i =6. 7'at i t'e fir3 &ei-'te* avera-e $ot of $aital> A. 2.# #6 #6 C. 1 =. =.# #6 #6 B. 1).# 1).#"6 "6 D. )1.+ )1.+6 6 BM Pa-e )) of ""

MANAGEMENT ADVISORY SERVICES 1. A fir3 i finan$e* finan$e* &it' +#6 ri4,free *e(t an* "#6 e;uit%. e;uit%. T'e ri4,free ri4,free rate i ?6< t'e fir3 $ot of e;uit% $aital i 126< an* t'e fir3 3ar-inal 3ar-inal ta@ rate i =6. 7'at i t'e fir3 &ei-'te* avera-e $ot of $aital> A. 12 .# .## 6 C. 1 . ." #6 #6 B. ?.## ?.##6 6 D. 1)." 1).")6 )6 BM 1=. A fir3 i finan$e* finan$e* &it' #6 ri4,free *e(t< "#6 $o33on $o33on e;uit% an* 1#6 referre* e;uit%. e;uit%. T'e ri4,free rate i =6< t'e fir3 $ot of $o33on e;uit% i 1=6< an* t'at of referre* e;uit% i 1#6. T'e 3ar-inal ta@ rate i #6. 7'at i t'e fir3 &ei-'te* avera-e $ot of $aital> A. 1# .# .#= 6 C. 1 ). ).= 6 B. 11.#=6 1.#=6 D. None None of t'e a(ove a(ove BM =. T'e M  N Co3an% i finan$e* finan$e* (% !) 3illion /3ar4et /3ar4et value0 in *e(t an* ! 3illion on /3ar4et value0 in e;uit%. t%. T'e $ot of *e(t i 1#6 an* t'e $ot of e;uit% e;uit% i 1=6. Cal$ulate Cal$ulate t'e &ei-'te* avera-e $ot of $aital. /Au3e no ta@e.0 /E0 A. 1#6 C. 16 B. 1=6 1=6 D. None None of t'e t'e a(ov a(ovee BM ". T'e M  N Co3an% i finan$e* (% !1# 3illion 3illion in *e(t /3ar4et value0 an* !# 3illion 3illion in e;uit% /3ar4et value0. T'e $ot of *e(t i 26 an* t'e $ot of e;uit% i 1"6. Cal$ulate* t'e &ei-'te* avera-e $ot of $aital au3in- no ta@e. /E0 A. 1+6 C. 1)6 B. 1"6 1"6 D. None None of t'e t'e a(ov a(ovee BM

RISKS ?)

. If a $o3an% $o3an% *eire* lon-,run lon-,run roortion roortion of fun* to (e rovi*e* rovi*e* $onit t of "#6 $o33on $o33on to$4 an* retaine* earnin- &it' an after,ta@ $ot of 1=6< an* +#6 (on* &it' an after,ta@ $ot of 26< it &ei-'te*,avera-e $ot of $aital &ill (e5 /E0 A. 1.?6 D. 1).)6 B. 1=6 E. 26 C. 1#.26 C

?

. 7'at i t'e &ei-'te* &ei-'te* avera-e $ot of $aital $aital for a fir3 &it' &it' e;ual a3ount a3ount of *e(t an* e;uit% finan$in-< a 1=6 (efore,ta@ $o3an% $ot of e;uit% $aital< a =6 ta@ rate< an* a 1)6 $ouon rate on it *e(t t'at i ellinat ar value> /E0 A. 2.??=6 C. 11.+#6 B. :."#6 D. 1.=#6 Glei3

#. T'e 3ar4et value of C'arter Cruie Cruie Co3an% e;uit% e;uit% i !1= 3illion< an* t'e 3ar4et value of it ri4,free *e(t i != 3illion. If t'e re;uire* rate of return on t'e e;u it% i )#6 an* t'at on t'e *e(t i 26< $al$ulate t'e $o3an% $ot of $aital. /Au3e no ta@e.0 A. 1?6 C. 2.16 C. B. )#6 )#6 D. None None of t'e t'e a(ov a(ovee BM .

2. A fir3 'a 'a a total value value of !1 3illio 3illionn an* *e(t value* u e* at !+##<### !+##<###.. 7'at i t'e t'e after,ta@ after,ta@ &ei-'te* avera-e $ot of $aital if t'e after ta@ $ot of *e(t i 1)6 an* t'e $ot of e;uit% i 1=6> A. 1 .= .=6 B. 1 .2 .26 C. )? .# .#6 D. It i3oi(le (le to *eter3ine ne t'e 7ACC &it'out *e(t an* e;uit% (eta BM :. T'e CR Cor. 3aintain 3aintain a *e(t,e;uit *e(t,e;uit%% ratio of #.=. T'e $ot of e;uit% for CR Cor. i 1=6 an* an* t'e after,ta@ $ot of *e(t i :6. 7'at i t'e after,ta@ &ei-'te* avera-e $ot of $aital> A. 11. 2" 2"6 C . 1 . .# #6 #6 B. 1).# 1).##6 #6 D. None None of t'e t'e a(ov a(ovee BM


ABC Co3an% Co3an% $ot $ot of e;uit% i 126< it (efore,ta@ $ot of *e(t i 26< an* it it $ororate $ororate ta@ rate i +#6. Given t'e follo&in- (alan$e 'eet< $al$ulate t'e after,ta@ &ei-'te*,avera-e $ot of $aital. Aet ia(ilitie Ca' P 1# # A$$ount a%a(le P ) ## A$$ount Re$eiva(le +# # A$$rue* ta@e *ue ) ## Inventorie )# # on-,ter3 *e(t +## Plant  e;ui3ent 1 < # # E;uit% 1<)## P)<### P)<### A. 1+.?6 C. :.?6 B. 1#.6 D. 1".26 RPCPA 1##1

7ACC , De(t< Preferre*  Co33on Sto$4 . 7'at i t'e &ei-'te* &ei-'te* avera-e avera-e $ot of $aital $aital for a fir3 r3 &it' +#6 *e(t< *e(t< )#6 referre* referre* to$4< to$4< an* +#6 $o33on e;uit% if t'e ree$tive $ot for t'ee $o3onent are 26 after,ta@< after,ta@< 16 after,ta@< an* 1?6 (efore,ta@> T'e fir3 ta@ rate i =6. /E0 A. 1#.))6 C. 11.+26 B. 1#.=)6 D. 1)."#6 Glei3

?+

Pa-e ) of ""


RISKS

?=

. 7'at i t'e &ei-'te* -'te* avera-e avera-e $ot of $aital tal for a fir3 uinuin- "=6 $o33on $o33on e;uit% &it' &it' a return of 1=6< )=6 *e(t &it' a return of "6< 1#6 referre* to$4 &it' a return of 1#6< an* a ta@ rate of =6> /E0 A. 1#.6 C. 11.?)=6 B. 11.)=6 D. 1).)=#6 Glei3

=+. A fir3 'a *eter3ine* ne* it $ot of ea$' our$e of $aital an* oti3al $aital tru$ture< tru$ture< &'i$' i $o3oe* of t'e follo&in- our$e an* tar-et 3ar4et value roortion5 Sour$e of of $a $aital Tar-et 3ar4et roortion After,ta@ $o $ot on-,ter3 *e(t +# 6 "6 Pr Preferre* to$4 1# 11 Co Co33on to$4 e;uit% =# 1= T'e &ei-'te* avera-e $ot of $aital i /E0 A. " er$ent. C. 11 er$ent. B. 1#.? er$ent. D. 1= er$ent. Git3an .

KCG< KCG< In$. 'a t'e t'e follo&in follo&in-- 3i@ of fun* fun* an* $ot $ot T%e A3ount De(t P 1 = # <# # # Preferre* to$4 = # # <# # # Co33on e;uit% ? # # <# # # Total fun* P1<=#<### 7'at i KCG $ot of $aital> /E0 a. 1+ 1+.))6 $. 1= 1=.))6 (. 1) 1 ) .) ) 6 *. 1 1 .??6

Cot 126 1=6 1)6

RPCPA 1#:?

Invet3ent De$iion ?2. A fir3 'a *eter3ine* ne* it $ot of ea$' our$e of $aital an* oti3al $aital $aital tru$ture &'i$' &'i$' i $o3oe* of t'e follo&in- our$e an* tar-et 3ar4et value roortion. Sour$ Sour$ee of Cai Caital tal Tar-et ar-et Mar4e Mar4ett roo roorti rtion o n Afte After,t r,ta@ a@ Cot Cot on-,ter3 De(t = 6 :6 Preferre* Sto$4 1# 1+ Co33on Sto$4 E;uit% == )# T'e fir3 i $oni*erin- an invet3ent oortunit%< &'i$' 'a an internal rate of return of 1# er$ent. T'e roe$t A. 'oul* 'oul* not (e $oni*er $oni*ere* e* (e$aue (e$aue it internal internal rate of return return i le t'an t'e $ot of lon-,ter3 *e(t. RPCPA< AICPA< CMA  CIA E8AMINATION JESTIONS

B. 'oul* (e $oni*ere* $oni*ere* (e$aue (e$aue it internal internal rate of return i -reater -reater t'an t'e $ot of *e(t. *e(t. C. 'oul* 'oul* not (e $oni*e $oni*ere* re* (e$aue (e$aue it internal internal rate of return return i le le t'an t'e &ei-'te &ei-'te** avera-e $ot of $aital. D. 'oul* 'oul* (e $oni*er $oni*ere* e* (e$aue (e$aue it internal internal rate of return i -reater -reater t'an t'e &ei-'te* &ei-'te* avera-e $ot of $aital. Git3an 1n"e&erin* and Re"e&erin* Beta

Aet Beta ):. T'e e;uit% (eta (eta of a levere* fir3 r3 i 1.). T'e (eta of *e(t i #.) T'e fir3 3ar4et value value *e(t to e;uit% ratio i #.". 7'at i t'e aet (eta if t'e ta@ rate i ero> A. 1.) C. #.2)= C. B. #.) #.) D. None None of t'e t'e a(ov a(ovee BM )+. T'e Granite Pavinn- Co. &i'e to 'ave *e(t,to,e;uit% *e(t,to,e;uit% ratio of 1.=. Currentl% it i an unlevere* /all e;uit%0 fir3 &it' a (eta of 1.1. 7'at &ill (e t'e (eta of t'e fir3 if it -oe t'rou-' t'e $aital retru$turin- ro$e an* attain t'e tar-et *e(t,to, e;uit% ratio> Au3e a ta@ rate of #6. A. ).)" C. 1.= C. B. 1."= 1."= D. None None of t'e t'e a(ov a(ovee BM De(t Beta )2. T'e (eta of an all e;uit% e;uit% fir3 i 1.) If t'e fir3 $'an-e $'an-e it $aital tru$ture tru$ture to =#6 *e(t an* =#6 e;uit% uin- 26 *e(t finan$in-< n-< &'at &ill (e t'e (eta of t'e levere* fir3> T'e (eta of *e(t i #.). /Au3e no ta@e.0 A. 1.) C. ).) B. ).+ ).+ D. None None of t'e t'e a(ov a(ovee BM E;uit% Beta #. T'e aet (eta (eta of a levere* levere* fir3 i 1.#=. 1.#=. T'e (eta of *e(t *e(t i #.=. If t'e *e(t e;uit% e;uit% ratio i #.=< &'at i t'e e;uit% (eta> /Au3e ero ta@e.0 A. 1.#= C. #.= C. B. 1.+# 1.+# D. None None of t'e t'e a(ov a(ovee BM +/an*e in +apita" $tructure

Cot of De(t )=. If a fir3 i unlevere* an* 'a a $ot of e;uit% $aital $aital :6< &'at &oul* t'e $ot of e;uit% (e if t'e fir3 (e$a3e (e$a3e levere* at a *e(t,e;uit% *e(t,e;uit% ratio of )> T'e e@e$te* e@e$te* $ot of *e(t i ?6. /Au3e no ta@e.0 A. 1=.##6 C. 16 Pa-e )+ of ""

MANAGEMENT ADVISORY SERVICES B. 1".# 1".#6 6

RISKS D. 1+.= 1+.=6 6

BM

Cot of E;uit% Caital , nlevere* 12. T'e Mar(le PavinPavin- Co. 'a an e;uit% t% $ot of $aital tal of 1?6. T'e *e(t to e;uit% e;uit% ratio i 1.= an* a $ot of *e(t i 116. 116. 7'at i t'e $ot of e;uit% if t'e fir3 &a unlevere*> /Au3e a ta@ rate of 60 A. .# "6 "6 C. 1 ". ".: ?6 ?6 B. 1+.# 1+.#6 6 D. None None of t'e t'e a(ov a(ovee BM 1:. A fir3 'a 'a a *e(t,to,e;uit% *e(t,to,e;uit% ratio of 1. It $ot of e;uit% t% i 1"6< an* it it $ot of *e(t i 26. 26. If t'e $ororate ta@ rate &a .)=< &'at &oul* it $ot of e;uit% (e if t'e *e(t,to,e;uit%,ra *e(t,to,e;uit%,ratio tio &ere #> A. 1) .= .=? 6 C. 1 ". ".# #6 #6 B. 1.2 1.26 6 D. None None of t'e t'e a(ov a(ovee BM )#. A fir3 'a a *e(t,to,e;uit *e(t,to,e;uit%% ratio of #.=. It $ot of e;uit% e;uit% i ))6< an* it $ot of *e(t i 1"6. 1"6. If t'e $ororate ta@ rate i .+#< &'at &oul* it $ot of e;uit% (e if t'e *e(t,to,e;uit% ratio &ere #> A. )1 .: .:? 6 C. ) #. #." )6 )6 B. 1".# 1".##6 #6 D. None None of t'e t'e a(ov a(ovee BM =. A fir3 i rooinrooin- to un*erta4e un*erta4e a $ale e@anion. e@anion. T'e fir3 i finan$e* nan$e* (% +#6 *e(t an* an* "#6 e;uit%. e;uit%. T'e e@e$te* return on t'e fir3 e;uit% e;uit% i )#6 an* t'e interet rate ion *e(t i 1)6. If t'e ta@ rate i =6< &'at i t'e re;uire* rate of return if t'e roe$t i all e;uit% finan$e*> A. 1 .1 .116 C . 1 =. =.2 ?6 ?6 B. 1?.= 1?.=26 26 D. None None of t'e t'e a(ov a(ovee BM Cot of E;uit% Caital , evere* )1. T'e Granite Pavinn- Co. &ant to (e levere* at a *e(t e;uit% ratio of 1.= T'e $ot of *e(t i 116 an* t'e $ot of e;uit% for an all e;uit% fir3 i 1+6. 7'at &ill (e t'e fir3 $ot of levere* e;uit%> Au3e a ta@ rate of 6. A. 1+6 C. 1?6 B. )16 D. )=6 D. BM Cot of E;uit% Caital , Ne& 1?. A fir3 'a ero *e(t *e(t in it $aital $aital tru$ture. tru$ture. It overall overall $ot of $aital $aital i 26. 26. T'e fir3 i $oni*erin- a ne& $aital tru$ture &it' =#6 *e(t. T'e interet rate on t'e *e(t &oul* (e =6. RPCPA< AICPA< CMA  CIA E8AMINATION JESTIONS

Au3in- t'at t'e $ororate ta@ rate i +#6< it $ot of e;uit% $aital &it' t'e ne& $aital tru$ture &oul* (e> A. :.)6 C. 116 B. :.26 :.26 D. None None of t'e t'e a(ov a(ovee BM Ne& 7ACC )). T'e Granite Granite Pavin- Co3an% Co3an% 'a a *e(t e;uit% ratio ratio of 1.=. T'e $ot of *e(t *e(t i 116 an* t'e unlevere* e;uit% e;uit% i 1+6. Cal$ulate Cal$ulate t'e &ei-'te* avera-e $ot of $aital for t'e fir3 if t'e ta@ rate i 6. /D0 A. ?. ?6 ?6 C. 11 .) C. .)) 6 B. )=.1 )=.16 6 D. None None of t'e t'e a(ov a(ovee BM ). T'e Granite Granite Pavin- Co3an% Co3an% 'a a *e(t total total value ratio of #.=. T'e $ot of *e(t *e(t i 26 an* t'at of unlevere* e;uit% i 1)6. Cal$ulate Cal$ulate t'e &ei-'te* avera-e $ot of $aital if t'e ratio i #6. A. 1+.26 C. 1).#6 C. B. 1#.) 1#.)6 6 D. None None of t'e t'e a(ov a(ovee BM ?"

. D i lanninn- to en* i-nifi$ant fi$ant a3ount a3ount of 3one% on Reear$' Reear$' an* Develo3ent Develo3ent over t'e ne@t fe& %ear an* feel t'at it 3a% not (e a(le to ue all t'e ta@ 'iel* -enerate* (% a +#6 *e(t ratio. T'e $o3an% i $oni*erin- lo&erin- t'eir *e(t ratio to )#6. T'e $o3an% $urrentl% 'a a (efore,ta@ $ot of *e(t of 26 an* a (efore,ta@ $ot of e;uit% of 16< an* i u(e$t to a ta@ rate of =6. 7'at &oul* (e t'e ne& 7ACC for D if t'e% lo&er t'e *e(t ratio to )#6< -iven t'at t'e lo&er *e(t ratio &ill re*u$e t'e (efore,ta@ $ot of *e(t to ?.26>/D0 7ron- an&er  ori-inal 7ACC &a (ae* on (efore,ta@ $ot of *e(t A. :.116 C. 116 B. 1#.+=6 D. 11.26 Glei3

De$iion Anal%i ?? . Data$o3 Data$o3 In*utrie< In*utrie< &'i$' &'i$' 'a no $urrent $urrent *e(t< 'a a (eta of .:= for it $o33on $o33on to$4. Mana-e3ent i $oni*erin- a $'an-e in t'e $aital tru$ture to #6 *e(t an* ?#6 e;uit%. T'i $'an-e &oul* in$reae t'e (eta on t'e to$4 to 1.#=< an* t'e after,ta@ $ot of *e(t &ill (e ?.=6. T'e e@e$te* return on e;uit% i 1"6< an* t'e ri4,free rate i "6. S'oul* Data$o3 3ana-e3ent ro$ee* &it' t'e $aital tru$ture $'an-e> /D0 A. No< (e$aue t'e $ot of e;uit% $aital &ill in$reae. B. Ye< (e$aue t'e $ot of e;uit% $aital &ill *e$reae. C. Ye< (e$aue t'e &ei-'te*,avera-e $ot of $aital &ill *e$reae. D. No< (e$aue t'e &ei-'te*,avera-e $ot of $aital &ill in$reae. CMA #":# 1,12 Pa-e )= of ""


%i&idend Gr)t/ Mde"

Gro&t' Rate ?2 . Grate&a% Grate&a% In$. 'a a &ei-'te &ei-'te** avera-e $ot of $aital $aital of 11.= 11.= er$ent. er$ent. It tar-et $aital $aital tru$ture i == er$ent e;uit% an* += er$ent *e(t. T'e $o3an% 'a uffi$ient retaine* earnin- to fun* t'e e;uit% ortion of it $aital (u*-et. T'e (efore,ta@ $ot of *e(t i : er$ent< an* t'e $o3an% ta@ rate i # er$ent. If t'e e@e$te* *ivi*en* ne@t erio* /D10 i != an* t'e $urrent to$4 ri$e i !+=< &'at i t'e $o3an% -ro&t' rate> /M0 a. )."26 *. ".?=6 (. .++6 e. 2.1"6 $. +."+6 Bri-'a3 Ta@ Rate ?: . eav% Metal Metal Cor. i a teel 3anufa$turer 3anufa$turer t'at t'at finan$e it oeration oeration &it' t' +# er$ent *e(t< 1# er$ent referre* to$4< an* =# er$ent e;uit%. T'e interet rate on t'e $o3an% *e(t i 11 er$ent. T'e referre* to$4 a% an annual *ivi*en* of !) an* ell for !)# a 'are. T'e $o3an% $o33on to$4 tra*e at !# a 'are< an* it $urrent *ivi*en* /D#0 of !) a 'are i e@e$te* to -ro& at a $ontant rate of 2 er$ent er %ear. T'e flotation $ot of e@ternal e;uit% i 1= er$ent of t'e *ollar a3ount iue*< &'ile t'e flotation $ot on referre* to$4 i 1# er$ent. T'e $o3an% eti3ate t'at it 7ACC i 1).# er$ent. Au3e t'at t'e fir3 &ill not 'ave enou-' retaine* retaine* earnin- to fun* t'e e;uit% ortion ortion of it $aital (u*-et. 7'at i t'e $o3an% ta@ rate> /D0 a. # #.6 *. 2 2.1)6 (. ) ).2?6 e. +# +#.:26 $.  = .? = 6 Bri-'a3

RISKS 7ACC , De(t  Co33on Sto$4 . A $o3an% $o3an% 'a *eter3ine* *eter3ine* t'at it oti3al oti3al $aital tru$ture tru$ture $onit $onit of +# er$ent *e(t an* "# er$ent e;uit%. e;uit%. Au3e t'e fir3 &ill not 'ave enou-' retaine* earnin- to fun* t'e e;uit% ortion of it $aital (u*-et. Alo< au3e t'e fir3 a$$ount for flotation $ot (% a*utin- t'e $ot of $aital. Given t'e follo&in- infor3ation< $al$ulate t'e fir3 &ei-'te* avera-e $ot of $aital. /M0 4* F 26 P# F !)= Net in$o3e F !+#<### Gro&t' F #6 Pa%out ratio F =#6 S'are outtan*in- F 1#<### Ta@ rate F +#6 lotation $ot on a**itional e;uit% F 1=6 a. ?. ?."#6 *. 1.":6 (. 2. 2.#=6 e. 1+.)26 $. 11.216 Bri-'a3

21

2)

. la'ert% la'ert% Ele$tri$ 'a 'a a $aital tru$ture tru$ture t'at $onit $onit of ?# er$ent er$ent e;uit% an* an* # er$ent *e(t. T'e $o3an% lon-,ter3 (on* 'ave a (efore,ta@ %iel* to 3aturit% of 2.+ er$ent. T'e $o3an% ue t'e DC aroa$' to *eter3ine t'e $ot of e;uit%. la'ert% $o33on to$4 $urrentl% tra*e at !+= er 'are. T'e %ear,en* *ivi*en* /D10 i e@e$te* to (e !).=# er 'are< an* t'e *ivi*en* i e@e$te* to -ro& forever at a $ontant rate of ? er$ent a %ear. T'e $o3an% eti3ate t'at it &ill 'ave to iue ne& $o33on to$4 to 'el fun* t'i %ear roe$t. T'e flotation $ot on ne& $o33on to$4 iue* i 1# er$ent< an* t'e $o3an% ta@ rate i +# er$ent. 7'at i t'e $o3an% &ei-'te* avera-e $ot of $aital< 7ACC> /E0 a. 1# 1#.?6 *. ?. ?.+26 (. 1# 1#.#6 e. :. :.2:6 $. 11.16 Bri-'a3

Sto$4 Pri$e 2# . ABC Co3an% Co3an% outtan*inn- $o33on to$4 to$4 ell for for P+) a 'are< earninn- P+.2# er 'are an* i e@e$te* to a% P).1# *ivi*en*. T'e fir3 earnin-< n-< *ivi*en*< *ivi*en*< an* to$4 ri$e 'ave (een -ro&inat 26 a %ear an* are e@e$te* to $ontinue to -ro& at t'i rate in*efinitel%. If t'e fir3 a**ition to retaine* earnin- &a re,invete* at an 26 rate rat'er t'an t'e $ot of $aital< &'at &oul* (e t'e ri$e of t'e to$4 at t'e en* of t'e %ear< au3in- t'at t'i ne& -ro&t' rate i t'e a3e rate a it 'a in reviou %ear on it ori-inal $aital> A. P P1.)# C. P)+.?1 B. P) P)).2# D. P.)# RPCPA 1##1


Pa-e )" of ""

MANAGEMENT ADVISORY SERVICES 2

. illiar* illiar* Cor. &ant &ant to $al$ulate ate it &ei-'te* -'te* avera-e avera-e $ot of $aital tal /7ACC0. /7ACC0. T'e $o3an% $o3an% CO 'a $olle$te* t'e follo&in- infor3ation5 • T'e $o3an% lon-,ter3 (on* $urrentl% offer a %iel* to 3aturit% of 2 er$ent. • T'e $o3an% to$4 ri$e i !) a 'are /P# F !)0. T'e $o3an% re$entl% ai* a *ivi*en* of !) a 'are /D# F !).##0. • T'e *ivi*en* i e@e$te* to -ro& at a $ontant rate of " er$ent a %ear /- F "60. • T'e $o3an% a% a 1# er$ent flotation $ot &'enever it iue ne& $o33on to$4 / F • 1# er$ent0. T'e $o3an% tar-et $aital tru$ture i ?= er$ent e;uit% an* )= er$ent *e(t. • T'e $o3an% ta@ rate i +# er$ent. • • T'e fir3 &ill (e a(le to ue retaine* earnin- to fun* t'e e;uit% ortion of it $aital (u*-et. 7'at i t'e $o3an% 7ACC> /M0 a. 1# 1#."?6 *. 1) 1).#)6 (. 11 11.))6 e. 1) 1).="6 $. 11.+?6 Bri-'a3

2+

. An anal%t 'a $olle$te* $olle$te* t'e t'e follo&in- infor3ati nfor3ation on re-ar*in- C'rito'er C'rito'er Co.5 Co.5 T'e $o3an% $aital tru$ture i ?# er$ent e;uit% an* # er$ent *e(t. • T'e %iel* to 3aturit% on t'e $o3an% (on* i : er$ent. • T'e $o3an% %ear,en* *ivi*en* i fore$ate* to (e !#.2# a 'are. • T'e $o3an% e@e$t t'at it *ivi*en* &ill -ro& at a $ontant rate of : er$ent a %ear. • T'e $o3an% to$4 ri$e i !)=. • T'e $o3an% ta@ rate i +# er$ent. • T'e $o3an% anti$iate t'at it &ill nee* to raie ne& $o33on to$4 t'i %ear. It invet3ent (an4er anti$iate t'at t'e total flotation $ot &ill e;ual 1# er$ent of t'e a3ount iue*. Au3e t'e $o3an% a$$ount for flotation $ot (% a*utin- t'e $ot of $aital. Given t'i infor3ation< $al$ulate t'e $o3an% 7ACC. /M0 a. 1# 1#.+16 *. 1 1.==6 (. 1) 1).="6 e. :. :.):6 $. 1 # .? 2 6 Bri-'a3

Juetion 1  ) are (ae* on t'e follo&in- infor3ation. Bri-'a3 B%ron Cororation reent $aital tru$ture< &'i$' i alo it tar-et $aital tru$ture< i +# er$ent *e(t an* "# er$ent $o33on $o33on e;uit%. e;uit%. Au3e t'at t'at t'e fir3 'a no retaine* retaine* earnin-. T'e $o3an% $o3an% earnin- an* *ivi*en* are -ro&inat a $ontant rate of = er$entH t'e lat *ivi*en* RPCPA< AICPA< CMA  CIA E8AMINATION JESTIONS

RISKS /D#0 &a !).##H an* t'e $urrent e;uili(riu3 (riu3 to$4 ri$e $e i !)1.22. B%ron $an raie all t'e *e(t finan$init nee* at 1+ er$ent. If B%ron iue ne& $o33on to$4< a )# er$ent flotation $ot &ill (e in$urre*. T'e fir3 3ar-inal ta@ rate i +# er$ent. 2=

. 7'at i t'e $o3onent $o3onent $ot of t'e e;uit% e;uit% raie* (% ellinellin- ne& $o33on $o33on to$4> /E0 /E0 a. 1?.#6 *. 1+."6 (. 1".+6 e. 1).#6 $. 1=.#6

2"

. 7'at i t'e fir3 fir3 &ei-'te* &ei-'te* avera-e avera-e $ot of $aital> $aital> /E0 a. 1#.26 *. 1".+6 (. 1."6 e. 12.#6 $. 1+.)6

Juetion 2 t'rou-' +1 are (ae* on t'e follo&in- infor3ation. CMA Sa3 J.? to 1# Ro-er In$. oerate a $'ain of retaurant lo$ate* in t'e Sout'eat. T'e firt retaurant &a oene* in 1:21< an* t'e $o3an% 'a tea*il% -ro&n to it reent ie of +2 retaurant. T'e (oar* of *ire$tor re$entl% arove* a lar-e,$ale re3o*elin- of t'e retaurant< an* t'e $o3an% i no& $oni*erin- t&o finan$in- alternative. T'e firt alternative &oul* $onit of  Bon* t'at &oul* 'ave a :6 $ouon rate an* &oul* net !1:.) 3illion after flotation $ot Preferre* to$4 &it' a tate* rate of "6 t'at &oul* %iel* !+.2 3illion after a +6 flotation  Preferre* $ot  Co33on to$4 t'at &oul* %iel* !)+ 3illion after a =6 flotation $ot T'e e$on* alternative &oul* $onit of a u(li$ offerin- of (on* t'at &oul* 'ave an 116 $ouon rate an* &oul* net !+2 3illion after flotation $ot. Ro-er reent $aital tru$ture< &'i$' i $oni*ere* oti3al< $onit of +#6 lon-,ter3 *e(t< 1#6 referre* to$4< an* =#6 $o33on to$4. T'e $urrent 3ar4et value of t'e $o33on to$4 i !# er 'are< an* t'e $o33on to$4 *ivi*en* *urin- t'e at 1) 3ont' &a ! er 'are. Invetor Invetor are e@e$tine@e$tin- t'e -ro&t' rate of *ivi*en* to e;ual t'e 'itori$al rate of "6. Ro-er i u(e$t to an effe$tive in$o3e ta@ rate of +#6. 2? . T'e after,ta@ after,ta@ $ot of t'e $o33on $o33on to$4 rooe* rooe* in Ro-er firt rt finan$infinan$in- alternative alternative &oul* (e A. 1".##6 C. 1"."#6 B. 1".=6 D. 1?.1"6 22

. Au3inn- t'e after,ta@ $ot $ot of $o33on to$4 to$4 i 1=6< t'e after,ta@ after,ta@ &ei-'te* 3ar-inal 3ar-inal $ot of $aital for Ro-er firt finan$in- alternative $onitin- of (on*< referre* to$4< an* $o33on to$4 &oul* (e Pa-e )? of ""

MANAGEMENT ADVISORY SERVICES A. ?.)2=6 B. 2.?)=6

RISKS C. 1#.)2=6 D. 11.?##6

Sto$4'ol*er e;uit% Co33on to$4/?<)## 'are outtan*in-0 Retaine* earnin- Total to$4'ol*er e;uit% Total lia(ilitie an* to$4'ol*er e;uit%

2:

. T'e after,ta@ after,ta@ &ei-'te* &ei-'te* 3ar-inal 3ar-inal $ot $ot of $aital for Ro-er Ro-er e$on* e$on* finan$infinan$in- alternati alternative ve $onitin- olel% of (on* &oul* (e A. =.16 C. ".)?6 B. =.+#6 D. "."#6

:#

. T'e interet interet rate on t'e (on* i -reater -reater for t'e e$on* alternative ternative $onitinn- of ure *e(t t'an it i for t'e firt alternative $onitin- of (ot' *e(t an* e;uit% (e$aue A. T'e *iverit% of t'e $o3(ination alternative $reate -reater ri4 for t'e invetor. B. T'e ure *e(t alternative &oul* floo* t'e 3ar4et an* (e 3ore *iffi$ult to ell. C. T'e ure *e(t alternative $arrie t'e ri4 of in$reain- t'e ro(a(ilit% of *efault. D. T'e $o3(ination alternative $arrie t'e ri4 of in$reain- *ivi*en* a%3ent.

Juetion ?#  ?1 are (ae* on t'e follo&in- infor3ation. Balan$e S'eet General Tal$ Mine De$e3(er 1< )##

Git3an

Aet Current aet Ca' A$$ount re$eiva(le Inventorie Total $urrent aet Net fi@e* aet Total aet

! )=<### 1)#<### ##<### ! ++=<### ! =##<### ! :+=<### ia(ilitie an* to$4'ol*er e;uit%

Current lia(ilitie A$$ount a%a(le Note a%a(le A$$rual Total $urrent lia(ilitie on-,ter3 *e(t/1=# (on* iue* at !1<### ar0 Total lia(ilitie RPCPA< AICPA< CMA  CIA E8AMINATION JESTIONS

! 2#<### =#<### =#<### ! +2#<### 1=#<### ! "#<###

! 12#<### 1=<### ! 1=<### ! :+=<###

?#. ?#.

Sour$ Sour$ee of $ait $aital al After After,ta@ ,ta@ $ot $ot on-,ter3 *e(t 26 Co33on to$4 e;uit% 1: Given t'i after,ta@ $ot of ea$' our$e of $aital< t'e &ei-'te* avera-e $ot of $aital uin- (oo4 &ei-'t for General Tal$ Mine i A. 11." er$ent. C. 1"." er$ent. B. 1=.= er$ent. D. 1?.= er$ent.

?1. General Tal$ Tal$ Mine 'a $o3ile* t'e follo&inn- *ata re-ar*in- t'e 3ar4et value an* $ot of t'e e$ifi$ our$e of $aital. Sour$e of $aital After,ta@ $ot on-,ter3 *e(t 26 Co33on to$4 e;uit% 1: Mar4et ri$e er 'are of $o33on to$4 !=# Mar4et value of lon-,ter3 *e(t !:2# er (on* T'e &ei-'te* avera-e $ot of $aital uin- 3ar4et value &ei-'t i A. 11.? er$ent. C. 1=.2 er$ent. B. 1.= er$ent. D. 1?.= er$ent. 7ACC , De(t< Preferre*  Co33on Sto$4 . on-tr on-treet eet Cororatio Cororationn 'a a tar-et tar-et $aital $aital tru$tu tru$ture re t'at $onit $onit of # er$ent er$ent *e(t< =# er$ent $o33on e;uit%< an* )# er$ent referre* to$4. T'e ta@ rate i # er$ent. T'e $o3an% 'a roe$t in &'i$' it &oul* li4e to invet &it' $ot t'at total !1<=##<###. on-treet on-treet &ill retain !=##<### of net in$o3e t'i %ear. T'e lat *ivi*en* &a !=< t'e $urrent to$4 ri$e i !?=< an* t'e -ro&t' rate of t'e $o3an% i 1# er$ent. If t'e $o3an% raie $aital t'rou-' a ne& e;uit% iuan$e< t'e flotation $ot are 1# er$ent. T'e $ot of referre* to$4 i : er$ent an* t'e $ot of *e(t i ? er$ent. /Au3e *e(t an* referre* to$4 'ave no flotation $ot.0 7'at i t'e &ei-'te* avera-e $ot of $aital at t'e fir3 oti3al $aital (u*-et> /M0 a. 1).=26 *. 1).+6 *. (. 12. 1= 1=6 e. 11 .: .:+ 6 $. 1).126 Bri-'a3

:1

Pa-e )2 of ""

MANAGEMENT ADVISORY SERVICES :)

. 7ile% ne& finan$in- &illll (e in roortion roortion to t'e 3ar4et value of it reent reent finan$in-< n-< 'o&n (elo&. Boo4 Value /!### O3itte*0 on-,ter3 *e(t ! ? <# # # Preferre* to$4 /1## 'are0 1 <# # # Co33on to$4 /)## 'are0 ? <# # # T'e fir3 (on* are $urrentl% ellinat 2#6 of ar< -eneratinn- a $urrent 3ar4et %iel* of :6< an* t'e $ororation $ororation 'a a +#6 ta@ rate. T'e referre* referre* to$4 i ellinat it ar value an* a% a "6 *ivi*en*. T'e $o33on to$4 'a a $urrent 3ar4et value of !+# an* i e@e$te* to a% a !1.)# er 'are *ivi*en* t'i fi$al fi$al %ear. Divi*en* Divi*en* -ro&t' i e@e$te* to (e 1#6 er %ear. 7ile% &ei-'te*,avera-e &ei-'te*,avera-e $ot of $aital i /roun* %our $al$ulation $al$ulation to tent' of a er$ent0 /M0 a. 1.#6 $. :."6 (. 2.6 *. :.#6 CMA 1)22 1,+

:

. at$' Cororation Cororation tar-et tar-et $aital tru$ture tru$ture i +# er$ent er$ent *e(t< =# er$ent $o33on $o33on to$4< to$4< an* 1# er$ent referre* to$4. Infor3ation re-ar*in- t'e $o3an% $ot of $aital $an (e u33arie* a follo&5 T'e $o3an% (on* 'ave a no3inal %iel* to 3aturit% of ? er$ent. • T'e $o3an% referre* to$4 ell for !+) a 'are an* a% an annual *ivi*en* of !+ a • 'are. T'e $o3an% $o33on to$4 ell for !)2 a 'are< an* i e@e$te* to a% a *ivi*en* of • !) a 'are at t'e en* of t'e %ear /i.e.< D1 F !).##0. T'e *ivi*en* i e@e$te* to -ro& at a $ontant rate of ? er$ent a %ear. T'e fir3 &ill (e a(le to ue retaine* earnin- to fun* t'e e;uit% ortion of it $aital • (u*-et. T'e $o3an% ta@ rate i +# er$ent. • 7'at i t'e $o3an% &ei-'te* avera-e $ot of $aital /7ACC0> /M0 a. :. :.)=6 *. 1#.=:6 (. :. :.?#6 e. 11.#6 $. 1 # .#  6 Bri-'a3

Jue Jue ti tion o n ?1 ?1 t'r t'rou ou-' -' ?+ are are (a (a e* e* on t'e t'e fol follo lo&i &inn - info infor3 r3at atio ion. n. CMA CMA #": #":)) 1,1 1,1 to + 7illia3< In$.< &'i$' i interete* in 3eaurin- it overall $ot of $aital 'a -at'ere* t'e follo&in*ata. n*er t'e ter3 *e$ri(e* (elo&< t'e $o3an% $an ell unli3ite* a3ount of all intru3ent. 7illia3 $an raie $a' (% ellin- !1<###< 26< )#,%ear (on* &it' annual interet  a%3ent. a%3ent. In ellin- t'e iue< an avera-e re3iu3 of !# er (on* &oul* (e re$eive*< re$eive*< an* RPCPA< AICPA< CMA  CIA E8AMINATION JESTIONS

RISKS t'e fir3 3ut a% flotation $ot of !# er (on*. T'e after,ta@ $ot of fun* i eti3ate* to (e +.26. 7illia3 a3 $an ell 26 referre* to$4 at !1#= er 'are. T'e $ot of iuin- an* ellin t'e referre* to$4 i e@e$te* to (e != er 'are. 7illia3 a3 $o33on to$4 i $urrentl% ellinn- for !1## er 'are. T'e fir3 e@e$t to a%  $a' *ivi*en* of !? er 'are ne@t %ear< an* t'e *ivi*en* are e@e$te* to re3ain $ontant. T'e to$4 &ill 'ave to (e un*erri$e* (% ! er 'are< an* flotation $ot are e@e$te* to a3ount to != er 'are. 7illia3 e@e$t to 'ave availa(le !1##<### of retaine* earnin- in t'e $o3in- %earH  on$e t'ee retaine* earnin- are e@'aute*< t'e fir3 &ill ue ne& $o33on to$4 a t'e for3 of $o33on to$4 e;uit% finan$in-. 7illia3 referre* $aital tru$ture i on-,ter3 *e(t #6 Preferre* to$4 )# Co33on to$4 =# :+

. T'e $ot of of fun* fro3 t'e ale of $o33on to$4 to$4 for 7illia3< llia3< In$. i A. ?.#6 C. ?.+6 B. ?."6 D. 2.16

:=

. T'e $ot of of fun* fro3 retaine* earnin- earnin- for 7illia3< 7illia3< In$. i A. ?.#6 C. ?.+6 B. ?."6 D. 2.16

:"

. If 7illia3< 7illia3< In$. nee* nee* a total of !)##<###< !)##<###< t'e fir3 &ei-'te*,av &ei-'te*,avera-e era-e $ot of $aital $aital &oul* (e A. 1:.26 C. ".=6 B. +.26 D. ".26

:?

. If 7illia3< 7illia3< In$. nee* nee* a total of !1<###<###< !1<###<###< t'e fir3 fir3 &ei-'te* avera-e avera-e $ot of $aital $aital &oul* (e A. ".26 C. ".=6 B. +.26 D. )?.+6

7ACC , De(t< Co33on  Retaine* Earnin- . Do(on Do(on Dairie Dairie 'a a $aital tru$t tru$ture ure t'at $onit $onit of "# er$ent er$ent lon-,ter3 lon-,ter3 *e(t *e(t an* +# er$ent $o33on to$4. T'e $o3an% CO 'a o(taine* t'e follo&in- infor3ation5 T'e (efore,ta@ %iel* to 3aturit% on t'e $o3an% (on* i 2 er$ent. •

:2

Pa-e ): of ""

MANAGEMENT ADVISORY SERVICES T'e $o3an% $o33on to$4 i e@e$te* to a% a !.## *ivi*en* at %ear en* /D1 F !.##0< an* t'e *ivi*en* i e@e$te* to -ro& at a $ontant rate of ? er$ent a %ear. T'e $o33on to$4 $urrentl% ell for !"# a 'are. • Au3e t'e fir3 &ill (e a(le to ue retaine* earnin- to fun* t'e e;uit% ortion of it $aital (u*-et. T'e $o3an% ta@ rate i +# er$ent. • 7'at i t'e $o3an% &ei-'te* avera-e $ot of $aital /7ACC0> /M0 a. 1) 1).##6 *. 2. 2.##6 (. 2.#6 e. ?."26 $. :.+6 Bri-'a3 •

RISKS Juetion 1 an* ) are (ae* on t'e follo&in- infor3ation. Bri-'a3 ) ) Be$4er Gla Cororation Cororation e@e$t to 'ave earnin- (efore interet an* ta@e *urin- t'e $o3in%ear of !1<###<###< an* it e@e$t it earnin- an* *ivi*en* to -ro& in*efinitel% at a $ontant annual rate of 1).= er$ent. T'e fir3 'a !=<###<### of *e(t outtan*in- (earin- a $ouon interet rate of 2 er$ent< an* it 'a 1##<### 'are of $o33on to$4 outtan*in-. itori$all%< Be$4er 'a ai* =# er$ent of net earnin- to $o33on 'are'ol*er in t'e for3 of *ivi*en*. T'e $urrent ri$e of Be$4er $o33on to$4 i !+#< (ut it &oul* in$ur a 1# er$ent flotation $ot if it &ere to ell ne& to$4. T'e fir3 ta@ rate i +# er$ent. ::

. 7'at i t'e fir3 fir3 $ot $ot of retaine* retaine* earnin-> earnin-> /M0 /M0 a. 1=.#6 *. 1".=6 (. 1=.=6 e. 1?.#6 $. 1".#6

1##

. 7'at i Be$4er Be$4er $ot $ot of ne&l% iue* ue* to$4> to$4> /E0 a. 1".#6 *. 1?.=6 (. 1".=6 e. 12.#6 $. 1?.#6

Juetion 1 t'ru  are (ae* on t'e follo&in- infor3ation. Bri-'a3 T'e Glo(al A*vertiin- Co3an% 'a a 3ar-inal ta@ rate of +# er$ent. T'e $o3an% $an raie *e(t at a 1) er$ent interet rate an* t'e lat *ivi*en* ai* (% Glo(al &a !#.:#. Glo(al $o33on to$4 i ellin- for !2.=: er 'are< an* it e@e$te* -ro&t' rate in earnin- an* *ivi*en* *ivi*en* i = er$ent. If Glo(al iue ne& $o33on to$4< t'e flotation $ot in$urre* &ill (e 1# er$ent. Glo(al lan to finan$e finan$e all $aital e@en*iture e@en*iture &it' # er$ent *e(t an* ?# er$ent e;uit%. 1#1

. 7'at i Glo(al  $ot of retaine* retaine* earnin- if it $an ue retaine* retaine* earnin- rat'er rat'er t'an iue ne& $o33on to$4> /E0 a. 1) 1).))6 *. :. :.""6 (. 1? 1?.))6 e. 1" 1".##6 $. 1#.6

1#)

. 7'at i t'e $ot of $o33on $o33on e;uit% t% raie* (% ellinin- ne& to$4> to$4> /E0 a. 1) 1).))6 *. :. :.""6 (. 1? 1?.))6 e. 1" 1".##6 $. 1#.6


Pa-e # of ""


RISKS

1#

. 7'at i t'e fir3 &ei-'te* -'te* avera-e $ot of $aital $aital if t'e fir3 'a uffi$ient uffi$ient retaine* earnin- to fun* t'e e;uit% ortion of it $aital (u*-et> /E0 a. 11 11.:=6 *. 1 1."6 (. 1) 1).))6 e. 1+ 1+.)16 $. 1 ) .2 2 6

D. Cannot *eter3ine fro3 t'e infor3ation -iven.

Juetion "" t'rou-' ": are (ae* on t'e follo&in- infor3ation. Glei3 T'e  Cororation i rearinrearin- to evaluate evaluate $aital e@en*iture rooal for t'e $o3in- %ear. Be$aue t'e fir3 e3lo% *i$ounte* *i$ounte* $a' flo& 3et'o*< t'e $ot of $aital for t'e fir3 3ut (e eti3ate*. T'e follo&in- infor3ation for   Cororation i rovi*e*5 T'e 3ar4et ri$e of $o33on to$4 i !"# er 'are.  T'e *ivi*en* ne@t %ear i e@e$te* to (e ! er 'are.  E@e$te* -ro&t' in *ivi*en* i a $ontant 1#6.  Ne& (on* $an (e iue* at fa$e value &it' a 1#6 $ouon rate.  T'e $urrent $aital tru$ture of +#6 lon-,ter3 *e(t an* "#6 e;uit% i $oni*ere* to (e  oti3al. Anti$iate* earnin- to (e retaine* in t'e $o3in- %ear are ! 3illion.  T'e fir3 'a a +#6 3ar-inal ta@ rate.  1#+

. T'e after,ta@ after,ta@ $ot of t'e ne& (on* iue ue i A. +6 B. "6

C. 1#6 D. 1+6

1#=

. T'e $ot of uin- retaine* retaine* earnin- n- for finan$infinan$in- i A. =6 C. 1#6 B. :6 D. 1=6

1#"

. If t'e $o3an% 3ut 3ut au3e a )#6 flotation flotation $ot on ne& to$4 iuan$e< iuan$e< &'at i t'e t'e $ot of ne& $o33on to$4> A. ".)=6 C. 1".)=6 B. 1=6 D. 1#6

1#?

. T'e 3a@i3u3 3a@i3u3 $aital e@anion e@anion t'at $an (e uorte* in t'e $o3in- %ear &it'out &it'out reortinn- to e@ternal e;uit% finan$in- i A. !) 3illion. B. ! 3illion. C. != 3illion.


Pa-e 1 of ""


RISKS

Juetion ?# an* ?1 are (ae* on t'e follo&in- a**itional infor3ation. 7it'out reu*i$e $e to %our an&er to t'e four re$e*in- ;uetion< ;uetion< au3e t'at t'e after,ta@ $ot of *e(t finan$in- i 1#6< t'e $ot of retaine* earnin- i 1+6< an* t'e $ot of ne& $o33on to$4 i 1"6. 1#2

. If $aital e@anion e@anion nee* to (e !? 3illion on for t'e $o3in- %ear< &'at i t'e after,ta@ &ei-'te*, -'te*, avera-e $ot of $aital> a. 11 11.1+6 $. 1 1."6 ( . 1 ) .? + 6 *. 1"6

A. +." er$ent. B. " er$ent.

C. ? er$ent. D. ?.? er$ent.

"". T'e fir3 $ot of a ne& iue of $o33on $o33on to$4 to$4 i A. 1#.) er$ent. C. 1".? er$ent. B. 1+. er$ent. D. 1?.# er$ent. "?. T'e fir3 $ot of retaine* ne* earnin- i A. 1#.) er$ent. B. 1+. er$ent.

C. 1".? er$ent. D. 1?.# er$ent.

1#:

. 7'at i t'e 3ar-inal $ot $ot of $aital for an% roe$te* roe$te* $aital e@anion on in e@$e of !? 3illion> a . 1# 6 $. 1  ." 6 ( . 1 ) .? + 6 *. 1"6

Juetion "+ t'ru ": are (ae* on t'e follo&in- infor3ation. Git3an A fir3 'a *eter3ine* it oti3al tru$ture &'i$' i $o3oe* $o3oe* of t'e follo&in- our$e an* tar-et 3ar4et value roortion. Sour$e of $aital Tar-et 3ar4et Proortion QQQQQQQQQQQQQQ QQQQQQQQQQQQQ QQQQQQQQQQQQQ QQ on-,ter3 *e(t "#6 Co33on to$4 e;uit% +# DEBT5 T'e fir3 $an ell a 1=,%ear< !1<### ar value< 2 er$en t (on* for !1<#=#. A flotation $ot of ) er$ent of t'e fa$e value &oul* (e re;uire* in a**ition to t'e re3iu3 of !=#. COMMON STOCK5 STOCK5 A fir3 $o33on to$4 i $urrentl% $urrentl% ellin- for !?= er 'are. T'e *ivi*en* e@e$te* to (e ai* at t'e en* of t'e $o3in- %ear i !=. It *ivi*en* a%3ent 'ave (een -ro&inat a $ontant rate for t'e lat lat five %ear. ive %ear a-o< t'e *ivi*en* vi*en* &a !.1#. !.1#. It i e@e$te* t'at to ell< a ne& $o33on to$4 iue 3ut (e un*erri$e* !) er 'are an* t'e fir3 3ut a% !1 er 'are in flotation $ot. A**itionall%< t'e fir3 'a a 3ar-inal ta@ rate of +# er$ent.

"2. T'e &ei-'te* avera-e avera-e $ot of $aital u to t'e oint &'en retaine* retaine* earnin- are e@'aute* e@'aute* i A. ".2 er$ent. C. :.++ er$ent. B. ?.? er$ent. D. 11.): er$ent. ":. Au3inn- t'e fir3 lan to a% out all of it earnin- a *ivi*en*< *ivi*en*< t'e &ei-'te* avera-e $ot of $aital i A. :." er$ent. C. 11." er$ent. B. 1#.: er$ent. D. 1).1 er$ent. 7ACC  De(t< Preferre*< Co33on Sto$4  Retaine* Earnin- Juetion 1 t'ru + are (ae* on t'e follo&in- infor3ation. Bri-'a3 . Ro an* Son In$. 'a a tar-et $aital tru$ture t'at $all for +# er$ent *e(t< 1# er$ent referre* to$4< an* =# er$ent $o33on e;uit%. T'e fir3 $urrent after,ta@ $ot of *e(t i " er$ent< an* it $an ell a 3u$' *e(t a it &i'e at t'i rate. T'e fir3 referre* to$4 $urrentl% ell for !:# a 'are an* a% a *ivi*en* of !1# er 'areH 'o&ever< t'e fir3 &ill net onl% !2# er 'are fro3 t'e ale of ne& referre* to$4. Ro $o33on to$4 $urrentl% ell for !+# er 'are< (ut t'e fir3 &ill net onl% !+ er 'are fro3 t'e ale of ne& $o33on to$4. T'e fir3 re$entl% ai* a *ivi*en* of !) er 'are on it $o33on to$4< an* invetor e@e$t t'e *ivi*en* to -ro& in*efinitel% in*efinitel% at a $ontant rate of 1# er$ent er %ear. Au3e t'e fir3 'a uffi$ient $ient retaine* earnin- to fun* t'e e;uit% ortion of it $aital (u*-et. 11#

"+. T'e fir3 fir3 (efore,ta@ (efore,ta@ $ot of *e(t *e(t i A. ?.? er$ent. B. 1#." er$ent.

C. 11.) er$ent. D. 1).? er$ent.

"=. T'e fir3 fir3 after,ta@ after,ta@ $ot of *e(t *e(t i RPCPA< AICPA< CMA  CIA E8AMINATION JESTIONS

. 7'at i t'e t'e fir3 $ot of retaine* retaine* earnin-> n-> /E0 a. 1#.#6 *. 1".=6 (. 1).=6 e. 12.#6 $. 1=.=6

111

. 7'at i t'e fir3 fir3 $ot of ne&l% ne&l% iue* $o33on $o33on to$4> to$4> /E0 Pa-e ) of ""

MANAGEMENT ADVISORY SERVICES a. 1#.#6 (. 1).=6 $. 1=.=6

RISKS *. 1".=6 e. 12.#6

=2. T'e fir3 fir3 after,ta@ after,ta@ $ot of *e(t *e(t i A. .)= er$ent. B. +." er$ent.

C. 2 er$ent. D. 2.1 er$ent.

=:. T'e fir3 fir3 $ot of referre* to$4 to$4 i A. ?.) er$ent. B. 2. er$ent.

C. 1. er$ent. D. 1.: er$ent.

11)

. 7'at i t'e fir3 fir3 $ot of ne&l% ne&l% iue* referre* referre* to$4> to$4> /E0 a. 1#.#6 *. 1".=6 (. 1).=6 e. 12.#6 $. 1=.=6

11

. 7'at i t'e fir3 fir3 &ei-'te* &ei-'te* avera-e $ot of $aital> $aital> /E0 a. :.=6 *. 11.+6 (. 1#.6 e. 11.:6 $. 1#.26

Juetion =? t'ru " are (ae* on t'e follo&in- infor3ation. Git3an A fir3 'a *eter3ine* it oti3al $aital tru$ture &'i$' i $o3oe* of t'e follo&in- our$e an* tar-et 3ar4et value roortion. Sour$e of $aital Tar-et 3ar4et roortion on-,ter3 *e(t )#6 Preferre* to$4 1# Co33on to$4 e;uit% ?# DEBT5 T'e fir3 $an ell a 1),%ear< !1<### ar value< ? er$ent (o n* for !:"#. A flotation $ot of ) er$ent of t'e fa$e value &oul* (e re;uire* in a**ition to t'e *i$ount of !+#. PREERRED STOCK5 T'e fir3 'a *eter3ine* it $an iue referre* to$4 at !?= er 'are ar value. T'e to$4 &ill a% a !1# annual *ivi*en*. T'e $ot of iuin- an* ellin- t'e to$4 i ! er 'are. COMMON STOCK5 STOCK5 A fir3 $o33on to$4 i $urrentl% $urrentl% ellin- for !12 er 'are. T'e *ivi*en* e@e$te* to (e ai* at t'e en* of t'e $o3in- %ear i !1.?+. It *ivi*en* *ivi*en* a%3ent 'ave (een -ro&inat a $ontant rate for t'e lat lat four %ear. our %ear a-o< t'e *ivi*en* *en* &a !1.=#. It i e@e$te* t'at to ell< a ne& $o33on to$4 iue 3ut (e un*erri$e* !1 er 'are in floatation $ot. A**itionall%< t'e fir3 3ar-inal ta@ rate i +# er$ent. =?. T'e fir3 fir3 (efore,ta@ (efore,ta@ $ot of *e(t *e(t i A. ?.? er$ent. B. 1#." er$ent.

C. 11.) er$ent. D. 1).? er$ent.


"#. T'e fir3 $ot of a ne& iue of $o33on $o33on to$4 to$4 i A. ? er$ent. C. 1.) er$ent. B. :.#2 er$ent. D. 1+.+ er$ent. "1. T'e fir3 $ot of retaine* ne* earnin- i A. 1#.) er$ent. B. 1.: er$ent.

C. 1).+ er$ent. D. 1." er$ent.

"). T'e &ei-'te* avera-e avera-e $ot of $aital u to t'e oint &'en retaine* retaine* earnin- are e@'aute* e@'aute* i A. ?.= er$ent. C. 1#.+ er$ent. B. 2."= er$ent. D. 11.# er$ent. ". T'e &ei-'te* avera-e avera-e $ot of $aital after all retaine* retaine* earnin- are e@'aute* e@'aute* i A. 1." er$ent. C. 11.== er$ent. B. 11.# er$ent. D. 1#.+ er$ent. 7ACC , Cot of Preferre* Sto$4 . An*eron Co3an% Co3an% 'a four invet3ent invet3ent oortunitie tie &it' t'e follo&infollo&in- $ot /ai* at t F #0 an* e@e$te* return5 Proe$t Cot E@e$te* Return A !)<### 1".#6 B <### 1 + .= C =< # # # 11.= D < # # # : .= T'e $o3an% 'a a tar-et $aital tru$ture t'at $onit of +# er$ent $o33on e;uit%< +# er$ent *e(t< an* )# er$ent referre* to$4. T'e $o3an% 'a !1<### in retaine* earnin-. T'e $o3an% e@e$t it %ear,en* *ivi*en* *ivi*en* to (e !.## er 'are /D1 F !.##0. T'e *ivi*en* i e@e$te* to -ro& at a $ontant rate of = er$ent a %ear. T'e $o3an% to$4 ri$e i

11+

Pa-e  of ""


RISKS

$urrentl% !+).?=. If t'e $o3an% iue ne& $o33on to$4< t'e $o3an% &ill a% it invet3ent (an4er a 1# er$ent flotation $ot. T'e $o3an% $an iue $ororate (on* &it' a %iel* to 3aturit% of 1# er$ent. T'e $o3an% i in t'e = er$ent ta@ (ra$4et. o& lar-e $an t'e $ot of referre* to$4 (e /in$lu*inflotation $ot0 an* it till (e rofita(le for t'e $o3an% to invet in all four roe$t> /D0 a. ?. ?.?=6 *. 11.=+6 (. 2.:#6 :.))6 e. 1)."26 $. 1#.+"6 1#.+"6 /7ron/7ron- an&e an&er< r< Retai Retaine* n e* earnin earnin- - i not not in$lu in$lu*e* *e* in t'e $o3u $o3utati tation0 o n0 Bri-'a3 - 'a3

T'e $o3an% 'a )#,%ear (on* outtan*in- &it' a : er$ent annual $ouon t'at are tra*inat ar. T'e $o3an% ta@ rate i +# er$ent. • T'e ri4,free rate i =.= er$ent. • • T'e 3ar4et ri4 re3iu3 i = er$ent. • T'e to$4 (eta i 1.+. 7'at i t'e $o3an% 7ACC> /E0 a. :. : .?16 *. 11.126 (. :. : .""6 e. 11.1#6 $. 2.16 Bri-'a3 •

+apita" Asset Pricin* Mde" 3+APM4

Beta Coeffi$ient 11= . Bra*'a& Bra*'a& Steel Steel 'a a $aital tru$tu tru$ture re &it' # er$ent er$ent *e(t /all lon-,ter3 lon-,ter3 (on*0 (on*0 an* ?# er$ent $o33on e;uit%. T'e %iel* to 3aturit% on t'e $o3an% lon-,ter3 (on* i 2 er$ent< an* t'e fir3 eti3ate t'at it overall $o3oite 7ACC i 1# er$ent. T'e ri4,free rate of interet i =.= er$ent< t'e 3ar4et ri4 re3iu3 i = er$ent< an* t'e $o3an% ta@ rate i +# er$ent. Bra*'a& ue t'e CAPM to *eter3ine it $ot of e;uit%. 7'at i t'e (eta on Bra*'a& to$4> /M0 a. 1.#? *. #.1# (. 1.+2 e. 1.= $. 1 . 1 Bri-'a3 7ACC , De(t  Co33on E;uit% 1. T'e 3ar4et value of C'ar$oal Cororation Cororation $o33on $o33on to$4 i !)# 3illion< an* t'e 3ar4et value of it ri4,free *e(t i != 3illion. T'e (eta of t'e $o3an% $o33on to$4 i 1.)=< an* t'e 3ar4et ri4 re3iu3 u3 i 26. If t'e treaur% (ill rate i =6< &'at i t'e $o3an% $ot of $aital. /Au3e no ta@e.0 /E0 A. 16 C. 1?6 B. 1+." 1+."6 6 D. None None of t'e t'e a(ov a(ovee BM ). T'e 3ar4et value of 8Y9 $ororation $ororation $o33on $o33on to$4 i +# 3illion an* t'e 3ar4et value value of t'e ri4,free *e(t i "# 3illion. T'e (eta of t'e $o3an% $o33on to$4 i #.2< an* t'e e@e$te* 3ar4et ri4 re3iu3 re3iu3 on t'e 3ar4et i 1#6. If t'e treaur% (ill rate i "6< &'at i t'e fir3 $ot of $aital> /Au3e no ta@e.0 /E0 A. :.)6 C. 1#6 C. B. 1+6 1+6 D. None None of t'e t'e a(ov a(ovee BM

11?

. el3 Air$raft Air$raft 'a a $aital $aital tru$ture t'at $onit $onit of "# er$ent *e(t an* +# er$ent $o33on $o33on to$4. T'e fir3 &ill (e a(le to ue retaine* earnin- to fun* t'e e;uit% ortion of it $aital (u*-et. T'e $o3an% re$entl% iue* (on* &it' a %iel* to 3aturit% of : er$ent. T'e ri4,free rate i " er$ent< t'e 3ar4et ri4 re3iu3 i " er$ent< an* el3 (eta i e;ual to 1.=. If t'e $o3an% ta@ rate i = er$ent< &'at i t'e $o3an% &ei-'te* avera-e $ot of $aital /7ACC0> /M0 a. 2. 2.6 *. 1#.:26 (. :. : .=16 e. 11.2+6 $. :.:=6 Bri-'a3

Jue t tion  + ) an * + a re re (a e e* on t 'e 'e follo& in - info r3 r3atio n. n. Martin Cororation State3ent of inan$ial Poition De$e3(er 1< )888 /Dollar in 3illion0 Aet Current aet Plant an* e;ui3ent

Total aet

CMA # ": ": = 1,?  2

ia(ilitie an* e;uit% ! ?= Current lia(ilitie )=# on-,ter3 *e(t /1)60 Co33on e;uit%5 Co33on to$4< !1 ar A**itional ai*,in $aital Retaine* earnin- !)= Total lia(ilitie  'are'ol*er e;uit%

! +" "+ 1# 1## 1#= ! )=

11"

. Billi$4 Billi$4 Brot'er i eti3atineti3atin- it 7ACC. 7ACC. T'e $o3an% 'a $olle$te* le$te* t'e follo&infollo&in- infor3ation5 infor3ation5 It $aital tru$ture $onit of +# er$ent *e(t an* "# er$ent $o33on e;uit%. •


A**itional Data Pa-e + of ""

MANAGEMENT ADVISORY SERVICES       

T'e lon-,ter3 *e(t &a ori-inall% iue* at ar /!1<### er (on*0 an* i $urrentl% tra*inat !1<)=# er (on*. Martin Cororation $an no& iue *e(t at 1=# (ai oint over .S. Treaur% (on*. T'e $urrent ri4,free rate /.S. Treaur% (on*0 i ?6. Martin $o33on to$4 i $urrentl% ellinat !) er 'are. T'e e@e$te* 3ar4et return i $urrentl% 1=6. T'e (eta value for Martin i 1.)=. Martin effe$tive $ororate in$o3e ta@ rate i +#6.

112

. Martin Cororation Cororation  $urrent net $ot of *e(t *e(t i A. =.=6 C. =.16 B. ?.#6 D. 2.=6

11:

. in- t'e Caital Aet Aet Pri$in- Mo*el /CAPM0< /CAPM0< Martin Cororation Cororation $urrent $urrent $ot of $o33on e;uit% i A. 2.?=6 C. 1=.##6 B. 1#.##6 D. 1?.##6

Jue Juetition o n ++ ++ t'r t'rou ou-' -' +" are are (a (ae* e* on t'e t'e fol follo lo&i &inn - info infor3 r3at atio ion. n. CMA CMA 1): 1):++ 1,) 1,)== to to )? )? DJ9 Tele$o3 i $oni*erin- a roe$t for t'e $o3in- %ear t'at &ill $ot !=#<###<###. DJ9 lan to ue t'e follo&in- $o3(ination of *e(t an* e;uit% to finan$e t'e invet3ent5 Iue !1=<###<### of )#,%ear (on* at a ri$e of 1#1< &it' a $ouon rate of 26< an*  flotation $ot of )6 of ar. e !=<###<### of fun* -enerate* fro3 earnin-.   T'e e;uit% 3ar4et i e@e$te* to earn 1)6. .S. Treaur% (on* are $urrentl% %iel*in- =6. T'e (eta $oeffi$ient for DJ9 i eti3ate* to (e ."#. DJ9 i u(e$t to an effe$tive $ororate in$o3e ta@ rate of +#6. 1)#

. T'e (efore,ta@ $ot $ot of DJ9 lanne* *e(t finan$in-< finan$in-< net of flotation flotation $ot< in t'e firt %ear i A. 2.#26 C. ?.:)6 B. 1#.##6 D. 2.##6

1)1

. Au3e t'at t'at t'e after,ta@ $ot $ot of *e(t i ?6 an* t'e $ot of e;uit% t% i 1)6. Deter3ine Deter3ine t'e &ei-'te*,avera-e $ot of $aital. A. 1#.=#6 C. :.=#6 B. 2.=#6 D. ".#6


RISKS 1))

. T'e Caital Caital Aet Pri$inPri$in- Mo*el /CAPM0 /CAPM0 $o3ute $o3ute t'e e@e$te* e@e$te* return return on a e$urit% e$urit% (% a**in- t'e ri4,free rate of return to t'e in$re3ental %iel* of t'e e@e$te* 3ar4et return< &'i$' i a*ute* (% t'e $o3an% (eta. Co3ute DJ9 e@e$te* rate of return. A. :.)#6 C. ?.)#6 B. 1).)#6 D. 1).##6

7ACC , De(t< Preferre*  Co33on Sto$4 . o'non In*utrie In*utrie finan$e finan$e it roe$t &it' +# er$ent *e(t< *e(t< 1# er$ent referre* to$4< to$4< an* =# er$ent $o33on to$4. • T'e $o3an% $an iue (on* at a %iel* to 3aturit% of 2.+ er$ent. T'e $ot of referre* to$4 i : er$ent. • T'e ri4,free rate i ".=? er$ent. • T'e 3ar4et ri4 re3iu3 i = er$ent. • o'non In*utrie (eta i e;ual to 1.. • Au3e t'at t'e fir3 &ill (e a(le to ue retaine* earnin- to fun* t'e e;uit% ortion of it • $aital (u*-et. • T'e $o3an% ta@ rate i # er$ent. 7'at i t'e $o3an% &ei-'te* avera-e $ot of $aital /7ACC0> /M0 a. 2. 2.6 *. 1#.:)6 (. 2. 2.:=6 e. 1.1=6 $. :.?:6 Bri-'a3

1)

1)+

. Co3an% 8 i interete* nterete* in $al$ulati $al$ulatinn- it &ei-'te*,avera-e &ei-'te*,avera-e $ot of of $aital. Co3an% 8 'a a $urrent finan$ial tru$ture t'at i $o3oe* of =#6 *e(t< +#6 $o33on to$4< an* 1#6 referre* to$4. I-nore t'e effe$t of $ot of retaine* earnin-. T'e (eta of Co3an% 8 to$4 i #.?< an* t'e $urrent $urrent ri4,free ri4,free rate of return i +6. T'e 3ar4et ri4 4 re3iu3 i "6. T'e referre* *ivi*en* *ivi*en* on Co3an% 8 referre* to$4 to$4 i et at !).)=< an* t'e net iuan$e ri$e er 'are /&'i$' 'aen to (e t'e a3e a t'e $urrent ri$e er 'are0 of referre* to$4 i !#. De(t iue* (% Co3an% 8 %iel* an 116 tate* interet rate to invetor. T'e 3ar-inal ta@ rate for Co3an% 8 i +#6. 7'at i t'e &ei-'te*,avera-e $ot of $aital for Co3an% 8> /D0 a. #. #.#?+ $. #. #. # " " # (. #.#2)# *. #.#? Glei3

Ne& 7ACC after C'an-e in Caital Stru$ture . Boton Cororation Cororation 'a a $o3an% $o3an% $ot of $aital tal of )#6. T'e $o3an% $o3an% i finan$e* &it' t' !1= 3illion ri4,free *e(t an* 1# 3illion of $o33on to$4< &'i$' 'a a (eta ).#. T'e ri4,free rate Pa-e = of ""


RISKS

i =6< an* t'e e@e$te* return on t'e 3ar4et ortfolio i 1=6. If t'e fir3 iue !1# 3illion 3illion 3ore $o33on to$4< t'e ne& $o3an% $ot of $aital &ill (e5 /Au3e no ta@e.0 /M0 A. )#6 C. )6 B. 1=. 1=.6 6 D. None None of t'e t'e a(ov a(ovee BM +. i;ui* Cororation Cororation i finan$e* &it' !)= 3illion on of ri4,free *e(t an* =# 3illion of $o33on to$4< &'i$' 'a a (eta of 1.". T'e ri4,free rate i +6< an* t'e e@e$te* return on t'e 3ar4et ortfolio i 16. If t'e $o3an% iue !)= 3illion llion 3ore $o33on $o33on to$4 an* ue t'e ro$ee* to (u% (a$4 all outtan*in- *e(t< t'e $o3an% $ot of $aital &ill (e5 /D0 A. +6 C. 1."6 C. B. 12.+ 12.+6 6 D. None None of t'e t'e a(ov a(ovee BM

$. 1".#6 1)2

. 7'at i t'e fir3 fir3 $ot of retaine* retaine* earnin- earnin- uin- t'e DC aroa$'> aroa$'> /E0 a. 1."6 *. 1"."6 (. 1+.16 e. 1".:6 $. 1".#6

1):

. 7'at i Rollin $ot of retaine* earnin- earnin- uin- t'e (on*,%iel*,lu,ri4,re (on*,%iel*,lu,ri4,re3iu3 3iu3 aroa$'> aroa$'> /E0 a. 1."6 *. 1"."6 (. 1+.16 e. 1".:6 $. 1".#6

+'pre/ensi&e

Juetion 1 t'ru " are (ae* on t'e follo&in- infor3ation. Bri-'a3 Rollin Cororation 'a a tar-et $aital tru$ture $onitin- of )# er$ent *e(t< )# er$ent referre* to$4< an* "# er$ent $o33on e;uit%. Au3e t'e fir3 'a inuffi$ient retaine* earnin- to fun* t'e e;uit% ortion of it $aital (u*-et. It (on* 'ave a 1) er$ent $ouon< ai* e3iannuall%< a $urrent 3aturit% of )# %ear< an* ell for !1<###. T'e fir3 $oul* ell< at ar< !1## referre* to$4 t'at a% a 1) er$ent annual *ivi*en*< (ut flotation $ot of = er$ent &oul* (e in$urre*. Rollin (eta i 1.)< t'e ri4,free rate i 1# er$ent< an* t'e 3ar4et ri4 re3iu3 i = er$ent. Rollin i a $ontant -ro&t' fir3 t'at ut ai* a *ivi*en* of !).##< ell for !)?.## er 'are< an* 'a a -ro&t' rate of 2 er$ent. T'e fir3 oli$% i to ue a ri4 re3iu3 of + er$enta-e er$enta-e oint &'en uin- t'e (on*,%iel*,lu,ri *,lu,ri4,re3iu3 4,re3iu3 3et'o* to fin* 4. lotation $ot on ne& $o33on to$4 total 1# er$ent< an* t'e fir3 3ar-inal ta@ rate i +# er$ent.

1#

. 7'at i Rollin 7ACC< 7ACC< if t'e fir3 'a inuffi$ient inuffi$ient retaine* retaine* earnin- to fun* t'e e;uit% ortion of it $aital (u*-et> /E0 a. 1."6 *. 1"."6 (. 1+.16 e. 1".:6 $. 1".#6

1)=

. 7'at i Rollin lin $o3onent $o3onent $ot $ot of *e(t> *e(t> /E0 a. 1#.#6 *. (. :.16 e. $. 2."6

2.#6 ? .) 6

1)"

. 7'at i Rollin lin $ot $ot of referre* referre* to$4> to$4> /E0 a. 1#.#6 (. 11.#6 $. 1).#6

*. 1)."6 e. 1.)6

1)?

. 7'at i Rollin Rollin $ot of retaine* earnin- earnin- uin- t'e CAPM aroa$'> aroa$'> /E0 a. 1."6 *. 1"."6 (. 1+.16 e. 1".:6


Pa-e " of ""


RISKS Inventorie Net i@e* Aet A$$ount Pa%a(le on-,Ter3 De(t Co33on Sto$4 Retaine* Earnin-

LE#ERAGE Financia" Le&era*e

In$o3e State3ent i-ure Given +=. A fir3 'a EBIT of !?=<###< !?=<###< interet e@ene e@ene of !?=<###< referre* *ivi*en* *ivi*en* of !"<### an* a ta@ rate of +# er$ent. T'e fir3 *e-ree of finan$ial levera-e at a (ae EBIT level of !?=<### i QQQQQQ. A. #.:? C. 1.)? B. 1.): D. 1.#: Git3an

Sale Cot of Goo* Sol* A*3initrative E@ene Dere$iation E@ene Interet E@ene In$o3e Ta@ E@ene Net In$o3e

Per$ent In$reae in EBIT an* NIAT Given . T'i %ear< %ear< Nelon In*utrie e in$reae* earnin- n- (efore interet an* ta@e ta@e /EBIT0 (% 1?6. Durin- t'e a3e erio*< net in$o3e after ta@ in$reae* (% +)6. T'e *e-ree of finan$ial levera-e t'at e@ite* *urin- t'e %ear i /E0 A. 1.?#. C. ).+?. B. +.)#. D. =.:#. CMA #":# 1,1"

11

Senitivit% Anal%i 1) . A $o3an% i $oni*erin*erin- t'e earl% retire3ent retire3ent of it 1#6< 1#,%ear (on* a%a(le. a%a(le. Before retirin- t'e (on*< t'e $o3an% $aital tru$ture &a Current lia(ilitie !1)=<### on-,ter3 lia(ilitie5 Note a%a(le /*ue in = %ear0 )##<### Bon* a%a(le ##<### Pre3iu3 on (on* a%a(le ) = <# # # O&ner e;uit%5 Co33on to$4 /!= ar value0 1=#<### Pai*,in $aital in e@$e of ar =#<### Retaine* earnin- + = # <# # # If t'e (on* $an (e retire* at 1#.=6< t'e /M0 CIA 11: IV,+2 A. De(t,e;u it% ratio &ill in$reae. C. Aet turnover ratio &ill *e$reae. B. inan$ial levera-e &ill *e$reae. D. Return on o&ner e;uit% &ill *e$reae. De-ree of inan$ial evera-e  Boo4 Value er S'are Juetion :" an* :? are (ae* on t'e follo&in- infor3ation. CIA #=:= IV,=  " Preente* (elo& are artial %ear,en* finan$ial tate3ent *ata for $o3anie A an* B. Co3an% A Co3an% B Ca' ! 1 ## ! ) ## A$$ount Re$eiva(le un4no&n 1 ## RPCPA< AICPA< CMA  CIA E8AMINATION JESTIONS

un4no&n )## 1## )## 1## 1=#

1# # 1# # =# =# )# # 1# #

Co3an% A !" ## ## 1## 1## )# +# +#

Co3an% B ! = <2 # # =<### =# # 1# # 1# := :=

1

. T'e *e-ree of finan$ial finan$ial levera-e levera-e of Co3an% Co3an% B< to t&o *e$i3al *e$i3al la$e< i /E0 /E0 A. 1.# C. 1.1) B. 1.#= D. 1.)=

1+

. If Co3an% A 'a "# $o33on 'are 'are outtan*in-< n-< t'en it 'a a (oo4 value er 'are< to t'e nearet $ent< of /E0 A. !1."? C. !+.1? B. !).=# D. !=.##

Tta" Le&era*e 1=

. A $o3an% $o3an% 'a unit ale of ##<###< t'e unit varia(le $ot i !1.=#< t'e unit ale ri$e i !).##< an* t'e annual fi@e* $ot are !=#<###. urt'er3ore< t'e annual interet e@ene i !)#<###< an* t'e $o3an% 'a no referre* to$4. A$$or*in-l%< t'e *e-ree of total levera-e i /E0 A. 1.2?= C. 1.)= B. 1.=# D. 1.)# Glei3

+'pre/ensi&e

Jue Juetition o n )" )" t'r t'rou ou-' -' )2 are are (a (ae* e* on t'e t'e fol follo lo&i &inn - info infor3 r3at atio ion. n.

CMA CMA #":) #":) 1,2 1,2 to to 1# 1#

Pa-e ? of ""

MANAGEMENT ADVISORY SERVICES Carlile Co3an% $urrentl% ell +##<### (ottle of erfu3e ea$' %ear. Ea$' (ottle $ot !.2+ to ro*u$e an* ell for !1.##. i@e* $ot are !)2<### er %ear. T'e fir3 'a annual interet e@ene of !"<###< referre* to$4 *ivi*en* of !)<### er %ear< an* a +#6 ta@ rate. Carlile ue t'e follo&in- for3ula to *eter3ine t'e $o3an% levera-e. #& ' () *perating everage = #& ' () ' ,) -/ ,inancia everage = -/ ' / ' # ÷ #1 ' t #& ' () ota everage = #& ' () ' ,) ' / '   ÷ #1 ' t If5 If5 J F Juan Juantitit% t% C F i@e* i@e* $ot $ot VC F Varia(le Varia(le $ot S F Sell Sellini n- ri$ ri$ee I F Inte Intere ret  t ee@@e en n ee P F Prefer Preferre* re* *ivi* *ivi*en* en* t F Ta Ta@ rate EBIT EBIT F EarninEarnin- (efore (efore interet interet an* ta@e ta@e 1"

. T'e *e-ree of oeratinoeratin- levera-e levera-e for Carlile Co3an% i /E0 /E0 A. ).+ C. ).1 B. 1.?2 D. 1.)

1?

. T'e *e-ree of finan$ial finan$ial levera-e levera-e for Carlile le Co3an% Co3an% i /E0 A. ).+ C. 1.= B. 1.?2 D. 1.)

12

. If Carlile Co3an% Co3an% *i* not 'ave referre* to$4< to$4< t'e *e-ree of total levera-e levera-e &oul* /M0 A. De$reae in roortion to a *e$reae in finan$ial levera-e. B. In$reae in roortion to an in$reae in finan$ial levera-e. C. Re3ain t'e a3e. D. De$reae (ut not (e roortional to t'e *e$reae in finan$ial levera-e.

RISKS Jue Juetition o n 22 22 t'r t'rou ou-' -' :1 :1 are are (a (ae* e* on on t'e t'e foll follo&in o &in-- inf infor or3a 3atition on.. CIA CIA 11: 11:++ IV IV,= ,= to to 2 2 A ne& $o3an% re;uire !1 3illion of finan$inan* i $oni*erin- t&o arran-e3ent a 'o&n in t'e ta(le (elo&5 A3ount of A3ount of De(t Before,Ta@ Arran-e3ent E;uit% Raie* inan$inCot of De(t Z1 !?##<### !##<### 26 er annu3 Z) !##<### !?##<### 1#6 er annu3 In t'e firt %ear of oeration< oeration< t'e $o3an% i e@e$te* to 'ave ale revenue of !=##<###< $ot of ale of !)##<###< an* -eneral an* a*3initrative a*3initrative e@ene of !1##<###. T'e ta@ rate i #6< an* t'ere are no ot'er ite3 on t'e in$o3e tate3ent. All earnin- are ai* out a *ivi*en* at %ear,en*. 1: . If t'e $ot of e;uit% i 1)6< t'e &ei-'te*,avera &ei-'te*,avera-e -e $ot of $aital un*er arran-e3ent arran-e3ent Z1< to t'e nearet full er$enta-e oint< &oul* (e A. 26 C. 116 B. 1#6 D. 1)6 1+#

. 7'i$' of t'e follo&inn- tate3ent tate3ent $o3arin- t'e t&o finan$infinan$inarran-e3ent arran-e3ent i true> A. T'e $o3an% &ill 'ave a 'i-'er e@e$te* -ro 3ar-in un*er arran-e3ent Z1. B. T'e $o3an% &ill 'ave a 'i-'er *e-ree of oeratin- levera-e un*er arran-e3ent Z). C. T'e $o3an% &ill 'ave 'i-'er interet e@ene un*er arran-e3ent Z1. D. T'e $o3an% &ill 'ave 'i-'er e@e$te* ta@ e@ene un*er arran-e3ent Z1.

1+1

. n*er n*er finan$i finan$inn - arran-e3 arran-e3ent ent Z)< t'e *e-ree of finan$ia finan$iall leveralevera-ee /D0< /D0< roun*e* roun*e* to t&o *e$i3al la$e< &oul* (e A. 1.#: C. 1.) B. 1.1+ D. 1.=+

1+)

. he ret"rn on e"it6 e"it6 wi e 8ist 9: and the det ratio ratio wi e 8ist : "nder arrangement ;2< as compared with arrangement ;1. A. B. C. D. it A i-'er i-'er o&er o&er it B i-'er o&er i-'er o&er

Juetion 1 t'ru = are (ae* on t'e follo&in- infor3ation. Pol Bo(a*illa Ga$o Co. i a ver% lar-e $o3an% &it' $o33on to$4 lite* on t'e P'iliine Sto$4 E@$'an-e an* (on* tra*e* over t'e $ounter. A of t'e $urrent (alan$e 'eet< it 'a t'ree (on* iue outtan*in-5 RPCPA< AICPA< CMA  CIA E8AMINATION JESTIONS

Pa-e 2 of ""


RISKS

P1=# 3illion of 1#6 erie ) #1  P=# 3illion of ?6 erie ) ## ? ) ## +  P?= 3illion of =6 erie T'e vi$e,rei*ent of finan$e i lannin- to ell P?= 3illion of (on* ne@t %ear to rela$e t'e *e(t *ue to e@ire in )##+. Preent 3ar4et 3ar4et %iel* on i3ilar lar Baa,rate* Baa,rate* (on* are 1).16. Ga$o alo 'a P:# 3illion of ?.=6 non$alla(le referre* to$4 outtan*in-< an* it 'a no intention of ellinan% referre* to$4 at an% ti3e in t'e future. T'e referre* to$4 to$4 i $urrentl% ri$e* at P2# er 'are< an* it *ivi*en* er 'are i P?.2#. T'e $o3an% 'a 'a* var% volatile earnin-< (ut it *ivi*en* er 'are 'ave 'a* a ver% ta(le -ro&t' rate of 26 an* t'i &ill $ontinue. $ontinue. T'e e@e$te* *ivi*en* *en* i P1.:# er 'are< an* t'e $o33on to$4 i ellin- for P+# er 'are. T'e $o3an% invet3ent (an4er 'a ;uote* t'e follo&inn- flotation $ot $ot to Ga$o5 P).=# er 'are for referre* to$4 an* P).)# er 'are for $o33on to$4. On t'e a*vi$e of it invet3ent (an4er< (an4er< Ga$o 'a 4et it *e(t at =#6 of aet an* it e;uit% at =#6. Ga$o ee no nee* to ell et'er $o33on $o33on or referre* to$4 in t'e foreeea(le foreeea(le future a it -enerate* enou-' internal fun* for it invet3ent nee* &'en t'ee fun* are $o3(ine* &it' *e(t finan$in-. Ga$o $ororate ta@ rate i +#6. Co3ute t'e $ot of $aital for t'e follo&in-5  

1. Bon* Bon * /*e /*e(t (t00 A. ?.)"6 B.

C. D.

). Prefe Preferre rre** to$ to$44 A. B.

C. D. 1#.#"6

. Co33on e;uit% in t'e for3 of of retaine* ne* earnin- n- A. C. B. 1).?=6 D. +. Ne& $o33o $o33onn to to$4 $4 A. B.

C. 1.#6 D.

=. 7ei-'te 7ei-'te*,av *,averaera-ee $ot of of $aital $aital A. C. B. D. 1#6 RPCPA< AICPA< CMA  CIA E8AMINATION JESTIONS

Pa-e : of ""

MANAGEMENT ADVISORY SERVICES PROBABILITIE$ ( $TATI$TI+$ $TATI$TI+$ 1+

. A .S. $o3an% $o3an% $urrentl% $urrentl% 'a *o3eti$ *o3eti$ oeration oeration onl%. onl%. It i $oni*er $oni*erinin- an e;ual,i e;ual,ie e invet3ent in eit'er Cana*a or Britain. T'e *ata on e@e$te* rate of return an* t'e ri4 ao$iate* &it' ea$' of t'ee rooe* invet3ent are -iven (elo&. Prooe* Invet3ent Mean Return Stan*ar* Deviation Briti' Invet3ent ))6 1# 6 Cana*ian Invet3ent )26 1= 6 T'e 3ean return on t'e $o3an% $urrent /*o3eti$ /*o3eti$ onl%0 (uine i )#6< &it' a tan*ar* *eviation of 1=6. in- t'e a(ove *ata an* t'e $orrelation $oeffi$ient< t'e $o3an% $al$ulate* t'e follo&in- ortfolio ri4 an* return /(ae* on a ratio of =#6 .S. *o3eti$ oeration an* =#6 international oeration0. Invet3ent Mean Return Stan*ar* Deviation .S. an* Britain )16 6 .S. an* Cana*a )+6 1= 6 T'e $o3an% lan to ele$t t'e oti3al $o3(ination of $ountrie (ae* on ri4 an* return for t'e *o3eti$ an* international onal invet3ent invet3ent ta4en to-et'er. to-et'er. Bae* on t'e a(ove *ata< &'i$' one of t'e follo&in- alternative rovi*e t'e (et ri4 a*ute* return to t'e fir3> A. n*erta4e t'e Briti' invet3ent. C. Do not un*erta4e eit'er invet3ent. B. n*erta4e t'e Cana*ian invet3ent. D. na(le to *eter3ine (ae* on *ata -iven. CMA Sa3 J1,

Juetion :" t'rou-' :2 are (ae* on t'e follo&in- infor3ation. Glei3 Te$'a$e 'a (een a u$$eful to$4 over t'e at fe& %ear *eite it ri4ine. T'e tate of t'e e$ono3% 'a a tre3en*ou effe$t on t'e e@e$te* return for Te$'a$e a 'o&n (elo&5 Pro(a(ilit% State of t'e E$ono3% Te$'a$e Return .# = Dereion ,+=6 .1 = Re$eion ,1#6 .) # Mini3al Slo&*o&n =6 .+ # Sta(le 1# 6 .1 = E@anion # 6 .# = Si-nifi$ant E@anion = 6

RISKS 1++

. 7'at i t'e e@e$te* e@e$te* rate of return on Te$'a$e Te$'a$e to$4> to$4> A. ?.=6 C. =6 B. 1=6 D. )=6

1+=

. T'e varian$e varian$e of Te$'a$e Te$'a$e return return i A. .1?= B. .##1

C. .#?= D. .)?2

1+"

. T'e tan*ar* tan*ar* *eviation of Te$'a$e Te$'a$e return return i A. ?.=6 C. .#16 B. 1?.=6 D. None of t'e an&er are $orre$t.

IN$1RAN+E 1+?

. art o&ne* a (uil*in*in- &it' a fair 3ar4et 3ar4et value of !+##<###. !+##<###. T'e (uil*in*in- &a $overe* $overe* (% a !##<### fire inuran$e oli$% $ontainin- an 2#6 $oinuran$e $laue. 7'at a3ount &oul* art re$over if a fire totall% *etro%e* t'e (uil*in->. A. !# C. !##<### B. !)+#<### D. !+##<### CPA 11:) ,="

1+2

. On Aril )< 1:::< Rit Rit Cor. ur$'ae* a &are'oue &are'oue t'at it inure* for !=##<###. !=##<###. T'e oli$% $ontaine* a ?=6 $oinuran$e $laue. On Aril )=< )###< a fire $aue* !:##<### *a3a-e to t'e &are'oue. T'e fair 3ar4et value of t'e &are'oue &a !2##<### on Aril )< 1::: an* !1 3illion on Aril )=< )###. Rit i entitle* to re$eive inuran$e ro$ee* of< at 3ot< A. !?=<### C. !"##<### B. !=##<### D. !?=#<### CPA #=22 ,=:

Jue Jue ti tion o n 12= 12= an* an* 12" 12" are are (a (a e* e* on t'e t'e fol follo lo&i &inn - info infor3 r3at atio ion. n. CPA CPA #=: #=: ,= ,=::  "# "# Po* (ou-'t a (uil*inin 1::" for !))#<###. At t'at ti3e< Po* ur$'ae* a !1=#<### fire inuran$e oli$% &it' O&ner Inuran$e Co. an* a !=#<### fire inuran$e oli$% &it' Grou Inuran$e Cor. Ea$' oli$% $ontaine* $ontaine* a tan*ar* 2#6 $oinuran$e $oinuran$e $laue. In )###< &'en t'e (uil*in- 'a* a fair 3ar4et value of !)=#<###< it &a *a3a-e* in a fire. 1+:

. o& 3u$' &oul* Po* re$over fro3 fro3 O&ner if t'e fire re $aue* !12#<### !12#<### in *a3a-e> A. !:#<### C. !1=<### B. !1)#<### D. !1=#<###


Pa-e +# of ""


RISKS

1=#

. o& 3u$' &oul* Po* re$over re$over fro3 O&ner an* Grou if t'e fire totall% l% *etro%e* t'e (uil*in-> *in-> A. !1"#<### C. !))#<### B. !)##<### D. !)=#<###

1=1

. Maon Co. 3aintaine* 3aintaine* t&o tan*ar* tan*ar* fire inuran$e oli$ie $ie on one of it &are'oue. Bot' Bot' oli$ie in$lu*e* an 2#6 $oinuran$e $laue an* a t%i$al [ot'er inuran$e[ $laue. One oli$% &a &it' A$e ire Inuran$e< In$.< for !)+<###< an* t'e ot'er &a &it' T'rift% Caualt% Inuran$e Co.< for !1"<###. At a ti3e &'en t'e &are'oue &a &ort' !1##<###< a fire in t'e &are'oue $aue* a !+#<### lo. 7'at a3ount $an Maon re$over fro3 A$e an* T'rift%< ree$tivel%> A. !# an* !#. C. !1)<### an* !2<###. B. !1#<### an* !1#<###. D. !)+<### an* !1"<###. AICPA 11:1 ,"#

1=)

. A (uil*in(uil*in- t'at ori-inall% $ot !"#<### !"#<### i no& &ort' !)##<###. T'e o&ner 'ol* a !1)#<### fire inuran$e oli$% &it' an 2#6 $o,inuran$e $laue. If a fire $aue !1=#<### of *a3a-e to t'e tru$ture< 'o& 3u$' &ill t'e o&ner (e a(le to $olle$t fro3 t'e inuran$e $o3an%> A. !11)<=## C. !1=#<### B. !1)#<### D. !1"#<### Glei3

1=

. On Aril )< 1:::< Rit Rit Cor. ur$'ae* a &are'oue &are'oue t'at it inure* for !=##<###. !=##<###. T'e oli$% $ontaine* a ?=6 $oinuran$e $laue. On Aril )=< )###< a fire $aue* !:##<### *a3a-e to t'e &are'oue. T'e fair 3ar4et value of t'e &are'oue &a !2##<### on Aril )< 1::: an* !1 3illion on Aril )=< )###. Rit i entitle* to re$eive inuran$e ro$ee* of< at 3ot< A. !?=<### C. !"##<### B. !=##<### D. !?=#<### AICPA #=22 ,=:


Pa-e +1 of ""


RISKS

AN$5ER E7PLANATION$


Pa-e +) of ""

1

.

2

. An&er An&er /C0 i $orre$t $orre$t.. Beta i t'e (et (et 3eaure 3eaure of t'e ri4 of an in*ivi*u in*ivi*ual al e$uri e$urit% t% 'el* in a *iverif *iverifie* ie* ortfo ortfolio lio (e$aue it *eter3ine 'o& t'e e$urit% affe$t t'e ri4 of t'e ortfolio. T'e (eta of a ortfolio i t'e &ei-'te* avera-e of t'e (eta of t'e in*ivi*ual e$uritie. or e@a3le< a**in- 'i-',(eta e$uritie to a ortfolio ten* to in$reae it ri4. en$e< t'e (eta of t'e ortfolio i .: /.2 @ .)0 L /." @ .+0 L /1.# @ .0 L /).# @ .10. An&er /A0 i in$orre$t (e$aue ).# i t'e 'i-'et (eta. An&er /B0 i in$orre$t (e$aue 1.1 i a i3le avera-e of t'e (eta. An&er /D0 i in$orre$t (e$aue .2 i t'e lo&et (eta.

3

. An&er An&er /A0 i $orre$t. $orre$t. IfIf five five to$4 to$4 'ave 'ave an avera-e avera-e (eta (eta of 1.+< 1.+< t'at t'at 3ean 3ean t'e total total of t'e in*ivi* in*ivi*ual ual (eta (eta i ?.# ?.# /= @ 1.+0. Su(tra$tinSu(tra$tin- t'e 1.= of Sto$4 Sto$4 A fro3 ?.# leave leave =.= for t'e re3aininre3ainin- four to$4. to$4. If an avera-e avera-e (eta of 1.)= i *eire*< t'at &oul* i3l% a total of ".)= for five to$4. Su(tra$tin- =.= /(eta of four to$40 fro3 ".)= /(eta of five to$40 leave .?= for t'e fift' /ne&0 to$4. An&er /B0 i in$orre$t (e$aue it *oe not ro*u$e a total of ".)= for t'e in*ivi*ual (eta. An&er /C0 i in$orre$t (e$aue it *oe not ro*u$e a total of ".)= for t'e in*ivi*ual (eta. An&er /D0 i in$orre$t (e$aue it *oe not ro*u$e a total of ".)= for t'e in*ivi*ual (eta.

4

. An&er An&er /D0 i $orre $orre$t $t.. T'e value value of *e(t i t'e t'e 3ar4et 3ar4et ri$e ri$e er (on* 3ulti 3ultilie lie** (% t'e nu3(er nu3(er of (on*< (on*< &'i$' &'i$' i !:#)." /!1<### @ .=11"0 L /!2# @ +.2"2+0 @ "<###< &'i$' e;ual !=.+) 3illion. T'e value of t'e e;uit% i !)+ 3illion< o t'e total 3ar4et value of t'e fir3 i e;ual to t'e u3 of t'e value of it *e(t an* e;uit%. T'u t'e fir3 i &ort' !=.+) 3illion L !)+ 3illion F !):.+) 3illion. T'e (eta of t'e aet $an t'en (e foun* a follo&5 aet F *e(t /*e(tV0 L e;uit%/e;uit%V0 e;uit%/e;uit%V0 F /#.10/#.120 L /1.+0/#.2)0 F 1.1". An&er /A0 i in$orre$t (e$aue #.2) i t'e value of t'e e;uit% *ivi*e* (% t'e value of t'e fir3 a a &'ole< &'i$' i not t'e a3e t'in- a (eta of t'e aet. An&er /B0 i in$orre$t (e$aue #.?= i an avera-e of t'e (eta of t'e $o3an% to$4 an* t'e (eta of t'e *e(enture of t'e fir3< not t'e (eta of t'e aet. An&er /C0 i in$orre$t (e$aue (eta of t'e aet i /#.10/#.120 L /1.+0/#.2)0< not #.1 L #.12 L 1.+ L #.2) F ).=.

5

. An&er An&er /B0 i $orre$ $orre$t.t. T'e finan$ finan$ial ial levera-e levera-e i a ratio of of *e(t to aet aet< < &'i$' &'i$' in t'i t'i $ae $ae i #.?= #.?= # \ /# L =#0. =#0. Beta of Co3uSolution i 1< (ae* on t'e loe of t'e line t'at &a lotte*< &'i$' in*i$ate fro3 it += loe t'at t'e return of t'e to$4 in ;uetion 3ove in *ire$t $orrelation &it' t'e return on t'e 3ar4et. T'e (eta of aet $an t'en (e $al$ulate* uin- t'e follo&in- relation'i5 aet F e;uit% @ /e;uit%V0 F 1/1 , #.?=0 F #.")=. /Note t'at t'i au3e t'e (eta of *e(t to (e e;ual to ero.0 An&er /A0 i in$orre$t (e$aue (eta of Co3uSolution i one< not t&o /an* t'u (eta of aet i 'alf of 1.)=0. An&er /C0 i in$orre$t (e$aue t'e (eta of t'e aet e;ual 1/1 , #.?=0< not 1/1 L #.?=0. An&er /D0 i in$orre$t (e$aue !=# 3illion \ !# 3illion i not t'e (eta of Co3uSolution aet.

.



#."/ #."/1. 1.)0 )0 L #. #.+/#. +/#.:# :#00 F 1. 1.#2. #2.

(Ol*< fir3 F 1.)=. 4Ol*< fir3 F #.#? L /1+ , ?01.)= F 1=.?=6. (Ne&< fir3 F #.:/1.)=0 L #.1/1.10 F 1.)=. 4Ne&< fir3 F #.#? L 1.)=/#.#?0 F 1=."+=6. 4Ne&< aet F #.#? L 1.1/#.#?0 F 1+.?6.

?

8

Ol* aet F 1.#. Ne& aet F #.=. Ol* re;uire* rate5 Ne& re;uire* rate5 126 F ?6 L /=60( 1"6 F ?6 L /=60( (eta F ).). (eta F 1.2. Ne& ( 3ut not (e -reater t'an 1.2< t'erefore 1 1.5

/).)0 L

0.5 1.5

#./(0 (

/(0

Total aet F 1.=.

F 1.2 F #. F 1.#.

T'erefore< (eta of t'e ne& *iviion $annot e@$ee* 1.#.

2

.

An&er An&er /D0 i $orre$ $orre$t.t. T'e averaavera-ee (eta of t'e t'e 'are 'are of t'e ot'er ot'er &i*-et &i*-et 3anufa$t 3anufa$turer urer i 1.+. De(t De(t to e;uit% e;uit% ratio ratio of #. 3ean *e(taet F #.1. F #.). E;uit%aet F 1 , #.) F #.??. Au3in- (eta for *e(t i ero< aet F (eta @ /e;uit%aet0 F 1.+ @ #.?? F 1.#2. T'e re;uire* rate of return for t'e roe$t i 1=.?)6 " L /1.#2 @ :0. An&er /A0 i in$orre$t (e$aue :.?) *oe not in$lu*e t'e ri4,free rate. An&er /B0 i in$orre$t (e$aue ?.#26 *oe not 3ultil% 1.#26 (% : (efore a**init to "6. An&er /C0 i in$orre$t (e$aue 1".#26 i t'e u3 of t'e ri4,free rate< (eta of t'e aet< an* t'e e@e$te* ri4 re3iu3 /t'e e@e$te* ri4 re3iu3 'oul* (e 3ultilie* (% (eta of t'e aet0.

>

. An&er An&er /B0 i $orre $orre$t $t.. T'e e@e$te e@e$te** return return on a ortfo ortfolio lio i t'e &ei-' &ei-'te* te* averaavera-ee of t'e e@e$ e@e$te* te* return return of t'e in*ivi*ual in*ivi*ual aet in t'e ortfolio. ortfolio. T'eir tan*ar* *eviation *eviation are irrelevant irrelevant.. T'u< t'e e@e$te* e@e$te* return on Mr. Mr. 7ilon 7ilon retire3ent ortfolio i 1.==6 /#.=0/1#60 L /#.=0/160 L /#.10/1"60 L /#.10/1?60 L /#.10/))60. An&er /A0 i in$orre$t (e$aue 2.?6 reult fro3 uin- t'e tan*ar* *eviation to &ei-'t t'e return. An&er /C0 i in$orre$t (e$aue 1+.2#6 reult fro3 a*utin- t'e return for tan*ar* *eviation. An&er /D0 i in$orre$t (e$aue 1=."#6 rereent an un&ei-'te* avera-e return.

10

8

k,% 9 :0; < =; 9 :=;8

o&ever< for a lo&,ri4 roe$t< Dan*% Pro*u$t u(tra$t ) er$enta-e oint. T'erefore< t'e re;uire* rate of return i 1# er$ent. 4YD<o& ri4 roe$t F 1#6 L )6 , )6 F 1#6. 11

.

An&er An&er /A0 i $orre$t $orre$t.. 8 i t'e roortio roortionn invete* invete* in A< A< 1,8 i t'e t'e roortion roortion invete* invete* in B< SA SA i t'e t'e tan*ar* tan*ar* *eviation *eviation of t'e return on A< SB i t'e tan*ar* *eviation of t'e return on B< an* rAB i t'e $orrelation $oeffi$ient. T'e tan*ar* *eviation of a t&o,to$4 ortfolio 3a% (e e@ree* a t'e ;uare root of t'e follo&in- e@reion5 t'e varian$e of t'e return return on A &ei-'te* &ei-'te* (% t'e ;uare of it roortion roortion L t'e varian$e varian$e of t'e return return on B &ei-'te* (% t'e ;uare of it roortion L t&i$e t'e ro*u$t of t'e roortion an* t'e $ovarian$e /ro*u$t of t'e tan*ar* *eviation of t'e return on A an* B an* t'e $orrelation $oeffi$ient0. T'e for3ula i  2& 92 + #1 '  2 & 2 + 2#1 ' r 9& 9 &  ) ) ) ) /." /." 0/.1 0/.111 0 L /1, ."0 ."0 /.1+ /.1+ 0 L )/. )/."0 "0/1 /1, ."0 ."0/. /.?0 ?0/. /.11 110/ 0/.1 .1+0 +0

F 11.)= An&er /B0 i in$orre$t (e$aue 1).)#6 i t'e &ei-'te* avera-e of t'e tan*ar* *eviation of t'e return on A an* B. An&er /C0 i in$orre$t (e$aue 1).=#6 i t'e i3le avera-e of t'e tan*ar* *eviation of t'e return on A an* B. An&er /D0 i in$orre$t (e$aue 1)".""6 i t'e ;uare of t'e tan*ar* *eviation of t'i t&o,to$4 ortfolio. 12=.==4

12

. An&er An&er /C0 i $orre$ $orre$t.t. T'e $oeff $oeffi$ien i$ientt of variation variation i i ueful ueful &'en t'e t'e rate rate of return return an* tan*ar* tan*ar* *eviat *eviation ion of t&o t&o invet3ent *iffer. *iffer. It 3eaure t'e ri4 er unit of return (% *ivi*in- t'e tan*ar* *eviation (% t'e e@e$te* return. T'u< for Proe$t 1< *ivi*in- !)##<### (% !1)#<### ro*u$e a $oeffi$ient of 1."?. or Proe$t )< t'e $al$ulation i to *ivi*e !1=#<### (% !1##<###< or 1.=#. If t'e t&o roe$t 'a* erfe$t $orrelation /F1.#0< t'en %ou $oul* $o3(ine t'e $al$ulation /!=#<### \ !))#<### F 1.=:0. o&ever< &it' a $orrelation of le t'an one< t'e ri4 &ill (e o3et'in- le t'an 1.=:. An&er /A0 i in$orre$t (e$aue 1."? i for Proe$t 1 onl%. onl%. An&er /B0 i in$orre$t (e$aue 1.=: au3e au3e a $orrelation of 1.#. An&er /D0 i in$orre$t (e$aue #." i t'e t'e invere of t'e una*ute* ortfolio $oeffi$ient. $oeffi$ient.

13

. An&er An&er /C0 i $orre$t. $orre$t. T'e T'e :6 rere rereent ent t'e t'e after,ta@ after,ta@ $ot< $ot< or ""6 /1##6 , +60 of t'e %iel*. %iel*. T'u< T'u< *ivi* *ivi*ee :6 (% ""6 to fin* t'e (efore,ta@ interet5 :6 \ ""6 F 1."+6 An&er An&er /A0 i in$orre$t in$orre$t (e$aue (e$aue =.:+6 au3e au3e t'at :6 i t'e (efore,ta@ (efore,ta@ $ot. $ot. An&er /B0 i in$orre$t in$orre$t (e$aue (e$aue :6 i-nore t'e i3a$t of t'e ta@ 'iel*. An&er /D0 i in$orre$t (e$aue )".+?6 ue ue t'e $o3le3ent of t'e ta@ 'iel* 'iel* rat'er t'an t'e ta@ 'iel*.

14

.

7'en a (on* ell ell at ar value< value< t'e t'e $ouon $ouon rate rate i i e;ual e;ual to t'e %iel* %iel* to to 3aturit% 3aturit%..

15

.

V F 1###< 1###< PMT PMT F 1##< 1##< n F =< =< PV PV F ,:)2< ,:)2< i F 11.: 11.::?6 :?6

1

.

YTM F 1+.6.

1?

.

V F =## =##<< PMT PMT F 1## 1##<< n F 1#< 1#< PV F ,:?= ,:?=<< i F "." "."26 26

1?

. An&er An&er /A0 i $orre$ $orre$t.t. Intere Interett i 1)6< an* t'e annual annual intere interet t a%3en a%3entt on one (on* (on* i !1)#. T'u< T'u< t'e effe$ effe$tiv tivee rate i 1).126 /!1)# \ !:2=0. Re*u$in- t'i rate (% t'e +#6 ta@ avin- lo&er t'e $ot to ?.16. An&er /B0 i in$orre$t (e$aue +.2?6 i $al$ulate* (% 3ultil%in- t'e reta@ effe$tive rate 1).126 /!1)# \ !:2=0 (% t'e ta@ rate of .+# intea* of (% /1 , .+#0. .+#0. An&er /C0 i in$orre$t (e$aue (e$aue 1)6 i t'e no3inal interet rate. An&er /D0 i in$orre$t (e$aue t'e after,ta@ $ot of t'e (on* e;ual t'e effe$tive rate 1).126 /!1)# \ !:2=0 ti3e t'e ta@ effe$t /1 , .+#0< or ?.16.

1>

. An&er An&er /C0 i $orre$ $orre$t.t. T'e T'e reent reent value value of !1#<### !1#<### to (e re$eive* re$eive* in )# %ear %ear i !1
20

. An&er An&er /D0 i $orre$t $orre$t.. Be$aue Be$aue t'ere t'ere i no ta@ ta@ 'iel* 'iel* ao$iat ao$iate* e* &it' referr referre* e* to$4< to$4< t'e after, after,ta@ ta@ $ot $ot i t'e t'e a3e a t'e (efore,ta@ $ot. T'u< !.?= \ !=.## F 1=6. Preferre* *ivi*en* are not *e*u$ti(le for ta@ uroe. An&er /A0 i in$orre$t (e$aue =.)=6 ue t'e $o3le3ent of t'e ta@ rate to re*u$e t'e effe$tive $ot. An&er /B0 i in$orre$t (e$aue :.?=6 re*u$e t'e $ot (% t'e ta@ rate< &'i$' i not aroriate in$e referre* *ivi*en* are not *e*u$ti(le for ta@ uroe. An&er /C0 i in$orre$t (e$aue 1#.=#6 au3e a #6 ta@ rate an* *e*u$ti(ilit% of *ivi*en*.

21

. An&er An&er /C0 i $orre$ $orre$t.t. Be$aue Be$aue t'e t'e *ivi*en* *ivi*en* on refer referre* re* to$4 to$4 are not not *e*u$ti(l *e*u$ti(lee for ta@ uro uroe< e< t'e effe effe$t $t of in$o3e ta@e i i-nore*. T'u< t'e relevant $al$ulation i to *ivi*e t'e !1# annual *ivi*en* (% t'e ;uantit% of fun* re$eive* at t'e ti3e t'e to$4 i iue*. In t'i $ae< t'e fun* re$eive* e;ual !:" /!1#1 ellin- ri$e , != un*er&ritinfee0. T'u< t'e $ot of $aital i 1#.+6 /!1# \ !:"0. An&er /A0 i in$orre$t (e$aue ".)6 au3e t'at t'e *ivi*en* are *e*u$ti(le. An&er /B0 i in$orre$t (e$aue 1#6 (ae t'e $al$ulation on ar value intea* of fun* re$eive*. An&er /D0 i in$orre$t (e$aue =.)6 au3e t'at t'e un*er&riter fee i t'e *ivi*en*.

22

. An&er An&er /D0 i $orre$t $orre$t.. T'e $ot $ot of referre* referre* to$4 to$4 i i t'e referre referre** *ivi*en* *ivi*en* *ivi*e* *ivi*e* (% t'e t'e ri$e. No No ta@ a*ut3 a*ut3ent ent i ne$ear% (e$aue *ivi*en* are not *e*u$ti(le. If t'e 3ar4et ri$e i !1)# &'en t'e *ivi*en* i !1=< t'e $ot of referre* $aital i 1).=6 /!1= \ !1)#0. An&er /A0 i in$orre$t (e$aue t'e referre* to$4 *ivi*en* *ivi*en* i not *e*u$ti(le for ta@ uroe. An&er /B0 i in$orre$t (e$au (e$auee t'e referre referre** to$4 to$4 *ivi*en* *ivi*en* i not *e*u$ti( *e*u$ti(le le for ta@ uro uroe. e. An&er An&er /C0 i in$orr in$orre$t e$t (e$aue (e$aue t'e *eno3inator i t'e 3ar4et ri$e< not t'e ar value.

23

. An&er An&er /D0 i $orre$ $orre$t.t. Divi*e Divi*en* n* on referr referre* e* to$4 to$4 are not *e*u$t *e*u$ti(l i(lee for ta@ uroe uroeH H t'eref t'erefore ore<< t'ere i no a*ut3ent for ta@ avin-. T'e annual *ivi*en* on referre* to$4 i !1## &'en t'e ri$e of t'e to$4 i !:"#. T'i reult in a $ot of a(out 1#.+6 /!1## \ !:"#0. An&er /A0 i in$orre$t (e$aue (e$aue t'ere i no ta@ *e*u$ti(ilit% of referre* *ivi*en*. An&er /B0 i in$orre$t (e$aue (e$aue t'ere i no ta@ *e*u$ti(ili *e*u$ti(ilit% t% of referre* referre* *ivi*en*. *ivi*en*. An&er An&er /C0 i in$orre$t in$orre$t (e$aue t'e *eno3inator *eno3inator i t'e $urrent 3ar4et ri$e< not t'e ar value.

24

. An&er An&er /C0 i $orre$ $orre$t.t. T'e releva relevant nt $al$ulati $al$ulation on i to *ivi*e *ivi*e t'e t'e annual annual *ivi*en* *ivi*en* (% t'e t'e ;uantit% ;uantit% of fun* fun* re$eiv re$eive* e* at t'e ti3e t'e to$4 i iue*. T'e fun* re$eive* fro3 un*er&riter  e;ual !:+ /!:? ellin- ri$e , ! un*er&ritin- fee0. T'u< t'e $ot of fun* i ?.+6 /!? \ !:+0. An&er /A0 i in$orre$t (e$aue un*er&riter 1 ro*u$e a $ot of fun* of 1#.+6. An&er /B0 i in$orre$t (e$aue un*er&riter ) ro*u$e a $ot of fun* of 11."6. 11."6. An&er /D0 i in$orre$t (e$aue un*er&riter + ro*u$e a $ot of fun*

of 2.+6. 25

. An&er An&er /D0 i i $orre$t $orre$t.. T'e $o3an% $o3an% &ill &ill re$eive re$eive t'e t'e ue of onl% onl% !"+ er 'are. 'are. T'e annual annual *ivi*e *ivi*en* n* An&er /A0 i in$orre$t (e$aue =.+)6 i $al$ulate* (% *ivi*in- t'e annual *ivi*en* of !.:# /"6 @ !"=0 (% !?) /!"2 iue ri$e L !+ iuan$e $ot0. An&er /B0 i in$orre$t (e$aue =.?+6 i $al$ulate* (% *ivi*in- t'e annual *ivi*en* of !.:# /"6 @ !"=0 (% t'e !"2 iue ri$e. An&er /C0 i in$orre$t (e$aue ".##6 ".##6 i $al$ulate* (% *ivi*in*ivi*in- t'e annual *ivi*en* of !.:# /"6 @ !"=0 !"=0 (% t'e !"= ar value. re;uire3ent i "6 of !"=< or !.:# !.:# er 'are. Divi*in- t'e !.:# (% t'e !"+ re$eive* reult in a finan$in- $ot of ".#:6.

2

. An&er An&er /D0 i $orre$ $orre$t.t. T'e roort roortion ion of e;uit% e;uit% in t'e t'e finan$ia finan$iall tru$ture tru$ture of t'e fir3 fir3 i t'e t'e value of of outtan*i outtan*inn- e;uit% e;uit% *ivi*e* (% t'e total value of all finan$in- our$e5 va"e o! e"it6 $1<000<000 F F .+# va"e o! det + va"e o! e"it6 $1<000<000 + 1<500<000

Given t'at t'e fir3 &ill 3aintain t'e a3e &ei-'t for ea$' finan$in- our$e< ea$' *ollar invete* 'oul* (e +#6 e;uit% an* "#6 *e(t. T'e firt !"#<### of e;uit% ue* in finan$in- ne& roe$t i rovi*e* (% retaine* earnin-. T'i our$e of e;uit% i e@'aute* &'en t'e fir3 rea$'e an invet3ent level of !1=#<### /!"#<### \ .+0. An&er /A0 i in$orre$t (e$aue t'e $o3an% 'a !"#<### retaine* earnin- to ue a one our$e of roe$t finan$in-. An&er /B0 i in$orre$t (e$aue !)+<### i +#6 of retaine* earnin-. An&er /C0 i in$orre$t (e$aue !:#<### i t'e a3ount of a**itional *e(t in$urre* if no ne& e;uit% i iue*. .

27

A**ition to retaine* earnin- &ill (e5 !.# 3illion × #.+ F !1.) 3illion. T'e retaine* earnin- (rea4oint i !1.) 3illion#.) F !" 3illion.

2?

. An&er An&er /B0 i $orre$ $orre$t.t. T'e $urrent $urrent to$4 to$4 ri$e ri$e i e;ual to t'e t'e u3 of all all future future *ivi*en* *ivi*en* t'at t'at 'ave 'ave (een *i$oun *i$ounte* te* (% t'e re;uire* rate of return. T'u< t'e *i$ountin- of t'e firt *ivi*en* a%out i 1 L t'e re;uire* rate of return< !) \ 1.1". T'e *i$ountin- of t'e e$on* *ivi*en* a%out i 1 L t'e re;uire* rate of return ;uare*< ! \ 1.+=". T'e *i$ountin- of t'e t'ir* *ivi*en* a%out i e;ual to 1 L t'e re;uire* rate of return $u(e*< != \ 1.="#:. T'e *i$ountinfor t'e future *ivi*en* t'at in$reae (% 26 i != ti3e 1 L t'e in$reae in *ivi*en*< /!= @ 1.#20< *ivi*e* (% t'e *ifferen$e (et&een t'e re;uire* rate of return an* t'e in$reae in *ivi*en*< /.1" , .#20. T'i a3ount< !"?.= /=.+ \ .#20< i t'en *ivi*e* (% 1 L t'e re;uire* rate of interet $u(e*< !"?.= \ 1.="#:. T'erefore< t'e u3 of t'ee nu3(er an* t'e $urrent to$4 ri$e i e;ual to !=#.+# /!1.?) L !).) L !.)# L !+.)=0. An&er /A0 i in$orre$t (e$aue !++.++ reult fro3 *i$ountin- t'e future *ivi*en* t'at in$reae (% 26 (% 1 L t'e re;uire* rate of return to t'e fourt' o&er< 1.21. An&er /C0 i in$orre$t (e$aue !"".21 reult fro3 *i$ountin*ivi*en* (% 1 L t'e re;uire* rate of return< 1.1". An&er /D0 i in$orre$t (e$aue !??.=# reult fro3 a failure to *i$ount t'e *ivi*en* at all.

2>

. An&er An&er /D0 i $orre$ $orre$t.t. T'i T'i i a t&o,t t&o,te e ro(le3. ro(le3. T'e T'e reent reent value value of a eretu eretual al annuit% annuit% of !1) !1) er %ear %ear e;ual e;ual t'e a%3ent *ivi*e* (% t'e interet rate< or !2# /!1) \ .1=0. T'i a3ount i t'e reent value at a *ate # %ear in t'e future of t'e annuit% to (e ai* in eretuit% (e-innin- in %ear 1. T'e reent value of !2# *i$ounte* at 1=6 for # %ear i t'e reultin- ri$e of t'e to$4< or aro@i3atel% !1.)1 /!2# @ .#1=1 reent value of !1 fa$tor0. An&er /A0 i in$orre$t (e$aue t'e future value of t'e annuit% 3ut (e *i$ounte* until t'e firt a%3ent /i.e.< for 1 %ear0. An&er /B0 i in$orre$t (e$aue t'e future value of t'e annuit% 3ut (e *i$ounte* until t'e firt a%3ent /i.e.< for 1 %ear0. An&er /C0 i in$orre$t (e$aue t'e *i$ountin- i for 1 %ear.

30

. An&er An&er /B0 i $orre$ $orre$t.t. T'e total total ro$ee* ro$ee* at t'e en* en* of t'e %ear %ear &ill (e (e !11) !11) /!11# /!11# L !)0. Divi*in Divi*in-- t'e !11) !11) (% 11)6 11)6 /ori-inal invet3ent lu 1)6 return0 reult in !1## a t'e *eire* to$4 ri$e. An&er /A0 i in$orre$t (e$aue !:2.)1 i-nore t'e !) *ivi*en*. An&er /C0 i in$orre$t (e$aue !11# *oe not $oni*er t'e *eire for a 1)6 return. An&er /D0 i in$orre$t (e$aue !11) &oul* reult in a ero return.

31

.

Data -iven5 EPS F !).##H PE F +#]H P # F !2#H D1 F !1.##H 4 F 1#6H EPS 1 F !).+#. Ste Ste 15 15 Cal$ Cal$ul ulat atee t'e t'e ri ri$e $e of t'e t'e to$ to$44 one one %ear %ear fro fro3 3 to* to*a% a%55 4F D1P# L /P1 , P#0P#

Ste Ste )5 32

.

#.1#F !1!2# L /P1 , !2#0!2# 2F !1 L P1 , !2# !2?F P1. Cal$ Cal$ul ulat atee t'e t'e PE PE rati ratioo one one %ear %ear fro3 fro3 to*a to*a%5 %5 PE F !2?!).+# F ".)=].

Use the dividend growth model to calculate k s: D0(1 + g) $2.20(1.06)

4 F

P0

L - F

$28

L #.#"

F #.#2 L #.#" F #.1+ F 1+.6. 33

. An&er An&er /B0 i $orre$t. $orre$t. 7it'ou 7it'outt an% *ivi*en *ivi*en** -ro&t'< -ro&t'< t'e re;uir re;uire* e* rate of of return return i e;ual e;ual to t'e t'e *ivi*en* *ivi*en* %iel*. %iel*. Divi* Divi*inin!).=# (% !)# reult in a 1).=6 %iel*. An&er /A0 i in$orre$t (e$aue t'e *ivi*en* %iel* i 1).=6. An&er /C0 i in$orre$t (e$aue t'e *ivi*en* %iel* i 1).=6. An&er /D0 i in$orre$t (e$aue t'e *ivi*en* %iel* i 1).=6.

34

. An&er An&er /C0 i $orre$t $orre$t.. T'i ;uetio ;uetionn involve involve eti3at eti3atinin- t'e $urrent $urrent ri$e ri$e of a $o3an% $o3an%  to$4 to$4 uin- t'e t'e *ivi*en* *ivi*en* -ro&t' 3o*el. T'e *ivi*en* -ro&t' 3o*el tate t'at t'e *ivi*en* %iel* lu t'e -ro&t' rate /=60 e;ual t'e re;uire* rate of return /1)60. T'u< t'e *ivi*en* %iel* 3ut (e ?6 /1)6 , =60. T'erefore< *ivi*in- t'e !.): *ivi*en* (% t'e ri$e e;ual .#?. Solvin- t'e e;uation reult in a ri$e of !+?. An&er /A0 i in$orre$t (e$aue !"=.2# au3e a =6 *ivi*en* %iel* intea* of ?6. An&er /B0 i in$orre$t (e$aue !").=1 reult fro3 u(tra$tin- t'e *ivi*en* fro3 &'at t'e ri$e &oul* (e at a =6 %iel*. An&er An&er /D0 i in$orre$t (e$aue !)?.+1 ue a 1)6 %iel*.

35

. An&er An&er /B0 i $orre$ $orre$t.t. T'e *ivi*en *ivi*en** -ro&t' 3o*el 3o*el eti3a eti3ate te t'e $ot $ot of retaine retaine** earnin- earnin- uinuin- t'e *ivi*en*< *ivi*en*< to$4 to$4 ri$e< an* -ro&t' rate. T'e $al$ulation involve a**in- t'e =6 -ro&t' rate to t'e *ivi*en* %iel* (ae* on t'e ne@t e@e$te* *ivi*en*. If t'e $urrent *ivi*en* i !< t'en t'e =6 -ro&t' rate 3ean t'e ne@t *ivi*en* &ill (e !.1=. T'u< t'e *ivi*en* %iel* (ae* on a !.1= *ivi*en* i ?6 /!.1= \ !+=0. A**in- ne@t %ear ?6 %iel* to t'e =6 -ro&t' fa$tor reult in a 1)6 re;uire* rate of return. An&er /A0 i in$orre$t (e$aue 1)."?6 i not (ae* on t'e ne@t %ear *ivi*en*. An&er /C0 i in$orre$t (e$aue "."?6 i-nore t'e i3a$t of t'e -ro&t' fa$tor. An&er /D0 i in$orre$t (e$aue =.##6 i-nore t'e *ivi*en* %iel* an* ue t'e =6 -ro&t' fa$tor. fa$tor.

"

. An&er An&er /D0 i $orre$ $orre$t.t. T'e T'e $ot of of ne& e;uit% e;uit% i i $al$ulate $al$ulate** (% a**ina**in- t'e e@e$ e@e$te* te* *ivi*en* *ivi*en* %iel*< %iel*< (ae* (ae* on t'e net ro$ee* of t'e ne& iue< to t'e e@e$te* *ivi*en* -ro&t' rate. T'e e@e$te* *ivi*en* at t'e en* of t'e erio* e;ual t'e *ivi*en* *ivi*en* at ti3e ero ti3e ti3e one lu t'e e@e$te* e@e$te* *ivi*en* -ro&t' rate. Net ro$ee* re$eive* re$eive* (% t'e fir3 &'en iuin- one $o33on 'are e;ual t'e 3ar4et ri$e of a 'are ti3e one 3inu t'e flotation $ot er$enta-e. lotation $ot in$lu*e ite3 u$' a un*er&ritinfee< rintin-< an* a*vertiin-. T'e $al$ulation of t'e $ot of ne& e;uit% i a follo&5 epected dividend at end o! period L *ivi*en* -ro&t' rate net proceeds iss"ing one share

F

$1#1 + .10 $25#1 ' .05

L 1#6

F1+."6An&er /A0 i in$orre$t (e$aue t'e en* of erio* e@e$te* *ivi*en* an* t'e net ro$ee* of t'e iue 'oul* (e in$lu*e* in $al$ulatin- t'e *ivi*en* %iel*. An&er /B0 i in$orre$t (e$aue t'e en* of erio* e@e$te* *ivi*en* 'oul* (e in$lu*e* in $al$ulatin- t'e *ivi*en* %iel*. An&er /C0 i in$orre$t (e$aue t'e net ro$ee*< not 3ar4et ri$e< 'oul* (e in$lu*e* in $al$ulatin- t'e *ivi*en* %iel*. ?

8

%0 9 >=? %: 9 >=3:80@4 9 >=8:8

4e

F D1P#/1 , 0 L F !).1+/!+) , !10 L ?6 F 1).))6.

3?

. An&er An&er /D0 i $orre $orre$t. $t. T'e T'e $ot $ot of e;uit% e;uit% uinuin- t'e Gor*on Gor*on -ro&t' -ro&t' 3o*el 3o*el e;ual e;ual t'e t'e ;uotien ;uotientt of t'e ne@t ne@t *ivi*en *ivi*en** *ivi*e* (% t'e to$4 ri$e< lu t'e -ro&t' rate in earnin- er 'are. To a$$ount for flotation $ot< t'e to$4 ri$e i 3ultilie* (% one 3inu t'e flotation $ot. Given t'at t'e ne@t *ivi*en* i !).) /1.#" @ !).)#0< t'e $ot of ne& $o33on to$4 i 1).1+6 ^!).) \ /!+# @ /1 , .#=00 L .#"_. An&er /A0 i in$orre$t (e$aue t'e e@e$te* future *ivi*en* of !).) /1.#" @ !).)#0 'oul* (e *ivi*e* (% t'e a*ute* to$4 ri$e /$urrent 3ar4et value , t'e $ot of iuin- t'e ne& $o33on to$40. An&er /B0 i in$orre$t (e$aue t'e e@e$te* future *ivi*en* of !).) /!).)# @ 1.#"0 'oul* (e ue* in $al$ulatin- t'e $ot of t'e ne& $o33on to$4 iue. An&er /C0 i in$orre$t (e$aue t'e $urrent to$4 ri$e 3ut (e a*ute* for t'e $ot of iuin- t'e ne& $o33on to$4.

3>

.

4e F

$2.00(1.05)

L =6 F :.:+6.

$50(1 - 0.15)

40

. An&er An&er /D0 i $orre$t $orre$t.. T'e *ivi*en* *ivi*en* -ro&t' -ro&t' 3o*el 3o*el eti3ate eti3ate t'e $ot $ot of retaine* retaine* earnin- earnin- uinuin- t'e t'e *ivi*en* *ivi*en* for t'e t'e $o3in- %ear< to$4 ri$e< an* -ro&t' rate. T'e =6 -ro&t' rate i a**e* to t'e *ivi*en* %iel*. T'u< a**in- t'e +6 *ivi*en* %iel* /!+ \ !1##0 to t'e =6 -ro&t' rate ro*u$e a :6 rate of return. An&er /A0 i in$orre$t (e$aue +6 i t'e *ivi*en* %iel*. An&er /B0 i in$orre$t (e$aue =6 i t'e -ro&t' rate. An&er /C0 i in$orre$t (e$aue ?6 i an avera-e (et&een t'e -ro&t' rate an* t'e total return.

41

. An&er An&er /D0 i $orre$ $orre$t.t. T'e T'e *ivi*en* *ivi*en* -ro&t' -ro&t' 3o*el 3o*el eti3ate eti3ate t'e $ot $ot of retaine* retaine* earnin- earnin- uinuin- t'e t'e *ivi*en* *ivi*en* er 'are< t'e e@e$te* -ro&t' rate< an* t'e 3ar4et ri$e. T'e $urrent *ivi*en* %iel* i =6 /!+ \ !2#0. A**in- t'e -ro&t' rate of =6 to t'e %iel* of =6 reult in a re;uire* return of 1#6. An&er /A0 i in$orre$t (e$aue =6 rereent onl% 'alf of t'e return ele3ent /eit'er %iel* or -ro&t'0. An&er /B0 i in$orre$t in$orre$t (e$aue (e$aue t'e -ro&t' rate i (ae* on 3ar4et 3ar4et value< value< not %iel*. An&er An&er /C0 i in$orre$t in$orre$t (e$aue (e$aue t'e %iel* an* -ro&t' rate are =6 ea$',,a total of 1#6.

42

. An&er An&er /D0 i $orre$ $orre$t.t. T'e *ivi*e *ivi*en* n* -ro&t' -ro&t' 3o*el *eter3 *eter3ine ine t'e t'e $ot $ot of e;uit% e;uit% (% a**ina**in- t'e t'e e@e$te* e@e$te* -ro&t' -ro&t' rate rate to t'e ;uotient of t'e ne@t *ivi*en* an* t'e $urrent 3ar4et ri$e. T'u< t'e $ot of e;uit% $aital i )#6 1#6 L /! \ !#0. T'i 3o*el au3e t'at t'e a%out ratio< t'e retention rate< an* t'e earnin- er 'are -ro&t' rate are all $ontant. An&er An&er /A0 i in$orre$t in$orre$t (e$aue (e$aue t'e -ro&t' rate /1#60 i a**e* to t'e *ivi*en* %iel* /1#60. An&er An&er /B0 i in$orre$t in$orre$t (e$aue 11.#6 e;ual t'e -ro&t' rate /1#60 lu 1#6 of t'e $urrent *ivi*en* %iel* /1#60. An&er /C0 i in$orre$t (e$aue 1#.#6 i t'e -ro&t' rate.

43

. An&er An&er /B0 i $orre$ $orre$t.t. Divi*inDivi*in- t'e t'e !=.=# *ivi*en *ivi*en** (% t'e !=# !=# 'are ri$e ri$e ro*u$e ro*u$e an 116 116 *ivi*en* *ivi*en* %iel*. %iel*. A**inA**int'e 116 %iel* to t'e +.=6 -ro&t' rate ro*u$e a total return of 1=.=6. An&er An&er /A0 i in$orre$t in$orre$t (e$aue (e$aue 1=.#=6 a*ute* a*ute* t'e -ro&t' rate (% t'e (eta< &'i$' i not re;uire*. An&er An&er /C0 i in$orre$t (e$aue 1=.:=6 a*ute* t'e -ro&t' rate u&ar* (% t'e (eta. An&er /D0 i in$orre$t (e$aue 1".?)6 a*ut t'e 'are ri$e (% t'e (eta.

44

.

45

. An&er An&er /B0 i $orre$t $orre$t.. T'e for3ula for3ula to *eter3in *eter3inee t'e $ot of retaine* retaine* earninearnin-< < &it' t'e a**iti a**itiona onall flotat flotation ion $ot $ot entere* into t'e $al$ulation< i

T'e fir3 fir3 3ut 3ut iue iue ne& e;uit% e;uit% to to fun* it it $aital $aital roe$ roe$t< t< o o &e nee* nee* to fin* fin* t'e $ot $ot of ne& ne& e;uit% e;uit% $aital $aital<< 4 e5 4e F D1/P# , 0 L F !).=#/!=# , !0 L +6 F !).=#!+? L +6 F =.)6 L +6 F :.)6.

B & =

A1 o #1 − ,otation cost$

+@

If5 KS F Cot of retaine* earnin-H PO F Current ri$e ri$e of t'e to$4H to$4H D F Ne@t *ivi*en*H G F Divi*en* -ro&t' rate. T'i %iel* a $ot of ne& $o33on to$4 of 1=.="6. B s

=

$2.50 $50.00  >0%

+

10% = 15.5=%

An&er /A0 i in$orre$t (e$aue t'e $ot of ne& $o33on to$4 i 1=.="6. T'e for3ula to $al$ulate t'i er$enta-e i5 ne@t *ivi*en* *ivi*e* (% /$urrent ri$e of t'e to$4 ti3e one 3inu t'e er$enta-e flotation $ot0< lu t'e *ivi*en* -ro&t' rate. An&er /C0 i in$orre$t (e$aue t'e $ot of ne& $o33on $o33on to$4 i 1=.="6. T'e for3ula for3ula to $al$ulate t'i er$enta-e i5 ne@t *ivi*en* *ivi*e* (% /$urrent ri$e of t'e to$4 ti3e one 3inu t'e er$enta-e flotation $ot0< lu t'e *ivi*en* *ivi*en* -ro&t' -ro&t' rate. An&er An&er /D0 i in$orre$t in$orre$t (e$aue t'e $ot of ne& $o33on $o33on to$4 i 1=.="6. T'e for3ula to $al$ulate t'i er$enta-e i5 ne@t *ivi*en* *ivi*e* (% /$urrent ri$e of t'e to$4 ti3e one 3inu t'e er$enta-e flotation $ot0< lu t'e *ivi*en* -ro&t' rate. 4

. An&er An&er /B0 i i $orre$t. $orre$t. T'e *ivi*en *ivi*en** -ro&t' -ro&t' 3o*el 3o*el *eter3ine *eter3ine t'e $ot $ot of e;uit% e;uit% (% a**ina**in- t'e e@e$te* e@e$te* -ro&t' -ro&t' rate rate to t'e ;uotient of t'e ne@t *ivi*en* an* t'e $urrent 3ar4et ri$e. In t'i $ae< t'e $ot of e;uit% $aital for e&i Cor. i )#6 1#6 L /! \ !#0. T'i 3o*el au3e t'at t'e a%out ratio< t'e retention rate< an* t'e earnin- er 'are -ro&t' rate are all $ontant. An&er /A0 i in$orre$t (e$aue C.S. In$. 'a a $ot of e;uit% $aital of )26. An&er /C0 i in$orre$t (e$aue S$re&tae S$re&tae In$. 'a a $ot of e;uit% $aital of )"6. An&er An&er /D0 i in$orre$t in$orre$t (e$aue (e$aue 7or3&oo* 7or3&oo* Cor. 'a a $ot of e;uit% $aital of )6.

47

.

4?

. An&er An&er /A0 i $orre $orre$t. $t. Beta Beta 3eaur 3eaure e t'e volati volatilit lit%% of t'e return return of a e$uri e$urit% t% relati relative ve to t'e return return on t'e 3ar4et 3ar4et ortfolio. In ea$' $ae< t'e to$4 ri$e in$reae or *e$reae &a a -reater er$enta-e t'an t'e 3ar4et $'an-e. T'u< t'e (eta /to$4 $'an-e over 3ar4et $'an-e0 i -reater t'an 1.#. An&er /B0 i in$orre$t (e$aue t'e (eta i -reater t'an one &'en t'e to$4 ri$e $'an-e at a -reater rate t'an t'e 3ar4et $'an-e. An&er /C0 i in$orre$t (e$aue t'e to$4 $'an-e i not t'e a3e a t'e 3ar4et $'an-e. An&er /D0 i in$orre$t (e$aue t'ere i a $onitent attern of t'e to$4 $'an-e (ein- -reater t'an t'e 3ar4et $'an-e.

4>

. An&er An&er /A0 i $orre$ $orre$t.t. inin- t'e CAPM CAPM relation relation'i 'i<< t'e re;uire* re;uire* rate rate of return return on Ar&i$ Co3an% Co3an% to$4 to$4 i i i3l% i3l% #.#= L #.2/#.#?0< or 1#."6. An&er /B0 i in$orre$t (e$aue 11.#6 fail to a*ut t'e ri4 re3iu3 for (eta. An&er /C0 i in$orre$t (e$aue 1).#6 i-nore (eta alto-et'er. An&er An&er /D0 i in$orre$t (e$aue 1).26 a**< not 3ultilie< t'e (eta an* t'e ri4 re3iu3.

50

. An&er An&er /D0 i $orre$ $orre$t.t. T'e $aita $aitall aet aet ri$inri$in- 3o*el 3o*el a** t'e t'e ri4,free ri4,free rate rate to t'e t'e ro*u$t ro*u$t of t'e (eta (eta $oeffi$ $oeffi$ient ient /a 3eaure of ri40 an* t'e *ifferen$e *ifferen$e (et&een t'e 3ar4et return an* t'e ri4,free rate. T'u< R F "6 L 1.) /+60 F 1#.26. An&er /A0 i in$orre$t (e$aue +.2#6 i t'e e@$e over t'e ri4,free rate< not t'e total re;uire* rate. An&er /B0 i in$orre$t (e$aue "6 i t'e ri4,free rate. An&er /C0 i in$orre$t (e$aue 1#6 i-nore t'e i3a$t of t'e (eta $oeffi$ient.

51

.

52

1#6 1#6 , =6 =6 L1.1 L1.1/2 /26 6 , =6 =60 F 1.? 1.?6. 6.

T'e $ot $ot of reta retaine ine** earni earnin- n- a $al$ $al$ula ulate* te* fro3 fro3 t'e t'e CAPM CAPM i i 4 F 4R L /4M , 4R0( F =6 L /"601.) F 1).)6. . An&er An&er /C0 i i $orre$t $orre$t.. T'e $aital $aital aet aet ri$inri$in- 3o*el $al$ulate $al$ulate t'e e@e$te* e@e$te* %iel* %iel* a follo& follo&55 R F +.#6 L 1.=/:60 R F 1?.=6 An&er /A0 i in$orre$t (e$aue :.#6 i t'e 3ar4et ri4 re3iu3 an* fail to a** t'e ri4,free rate. An&er /B0 i in$orre$t (e$aue 1=6 i t'e reult of 3ultil%in3ultil%in- t'e (eta ti3e t'e ri4,free rate intea* of t'e ri4 re3iu3. re3iu3. An&er /D0 i in$orre$t (e$aue 1:.=6 i t'e reult of 3ultil%in- t'e (eta ti3e (ot' rate< rat'er t'an ut t'e ri4 re3iu3.

53

. An&er An&er /D0 i $orre $orre$t. $t. T'e T'e CAPM a** a** t'e ri4,f ri4,free ree rate rate to t'e ro*u$t ro*u$t of t'e (eta (eta $oeffi$ $oeffi$ien ientt an* t'e *iffer *ifferen$ en$ee (et&een t'e 3ar4et return an* t'e ri4,free rate. T'e 3ar4et,ri4 re3iu3 i t'e a3ount a(ove t'e ri4,free rate for &'i$' invetor 3ut (e $o3enate* to in*u$e t'e3 to invet in t'e $o3an%. T'e (eta $oeffi$ient of an in*ivi*ual to$4 i t'e $orrelation (et&een volatilit% /ri$e variation0 of t'e to$4 3ar4et an* t'e volatilit% of t'e ri$e of t'e in*ivi*ual to$4. T'u< t'e re;uire* rate i 1"6 "6 L 1.)= /1+6 , "60. An&er /A0 i in$orre$t (e$aue "6 i t'e ri4,free rate (ae* on inure* -overn3ent e$uritie an* (ear no relation to t'e return of t'e to$4 3ar4et. An&er An&er /B0 i in$orre$t (e$aue ?.=6 i $al$ulate* (% 3ultil%in- t'e (eta ti3e t'e ri4, free rateH t'e (eta 'oul* (e 3ultilie* ti3e t'e ri4 re3iu3 t'at i re;uire* (% invetor. An&er /C0 i in$orre$t (e$aue 1?.=6 i $al$ulate* (% 3ultil%in- t'e 3ar4et rate ti3e (eta. T'i i-nore t'e ri4 re3iu3. T'e (eta 'oul* (e 3ultilie* ti3e t'e ri4 re3iu3 t'at i *eire* (% invetor.

54

.

55

. An&er An&er /B0 i i $orre$t. $orre$t. T'e re;uire* re;uire* rate rate of return on on e;uit% e;uit% $aital $aital in t'e $aita $aitall aet aet ri$inri$in- 3o*el 3o*el i t'e ri4,fre ri4,freee rate /*eter3ine* (% -overn3ent e$uritie0 lu t'e ro*u$t of t'e 3ar4et ri4 re3iu3 ti3e t'e (eta $oeffi$ient /(eta 3eaure t'e fir3 ri40. ri40. T'e 3ar4et ri4 re3iu3 i t'e a3ount a(ove a(ove t'e ri4,free rate t'at &ill in*u$e invet3ent in t'e 3ar4et. T'e (eta $oeffi$ient of an in*ivi*ual in*ivi*ual to$4 i t'e $orrelation (et&een t'e volatilit% volatilit% /ri$e variation0 of t'e to$4 3ar4et an* t'at of t'e ri$e of t'e in*ivi*ual to$4. to$4. or e@a3le< if an in*ivi*ual to$4 ri$e in$reae in$reae (% 1=6 an* t'e 3ar4et onl% 1#6< (eta i 1.=. A$$or*in-l%< A$$or*in-l%< t'e re;uire* rate of return i 1+.6 26 L :#6 /1=6 , 260. An&er /A0< /C0<  /D0 are in$orre$t (e$aue t'e re;uire* rate of return i 1+.6.

5

. An&er An&er /B0 i $orre $orre$t. $t. T'e T'e CAPM *eter3 *eter3ine ine t'e $ot of $ait $aital al (% a**ina**in- t'e ri4,f ri4,free ree rate rate to t'e ro*u$t ro*u$t of t'e 3ar4et ri4 re3iu3 an* t'e (eta $oeffi$ient /t'e (eta $oeffi$ient i a 3eaure of t'e fir3 ri40. T'e 3ar4et ri4 re3iu3 i t'e a3ount in e@$e of t'e ri4,free rate t'at invetor 3ut (e ai* to in*u$e t'e3 to enter t'e 3ar4et. T'e ?6 flotation $ot *o not enter into t'e $al$ulation (e$aue t'e $o3an% *oe not lan to iue $o33on to$4. en$e< t'e $ot of retaine* earnin- for Colt i 1).::6 2.=6 L 1.1= /1).+6 , 2.=60. An&er /A0 i in$orre$t (e$aue 1.)16 reult fro3 uin- ?6 intea* of 2.=6. An&er /C0 i in$orre$t (e$aue t'e eti3ate* 3ar4et return i 1).+6. An&er /D0 i in$orre$t (e$aue 1+.)"6 e;ual 1.1= ti3e 1).+6.

57

.

E/R0 E/R0 F "6 "6 L 1.)/ 1.)/1) 1) , "0 "0 F 1.) 1.)6. 6.

An&er An&er /A0 i $orre$t $orre$t.. T'e $aital $aital aet aet ri$inri$in- 3o*el 3o*el /CAPM0 /CAPM0 $al$ulate $al$ulate an in*ivi*ua in*ivi*uall to$4 to$4 return return a follo& follo&55 R F R L B/RM , R0< or 1)6 F "6 L B/1)6 , "60 Solvin- for (eta reult in a (eta of 1.#. An&er /B0 i in$orre$t (e$aue it *oe not fulfill t'e re;uire3ent of t'e CAPM. An&er /C0 i in$orre$t (e$aue it *oe not fulfill t'e re;uire3ent of t'e CAPM. An&er /D0 i in$orre$t (e$aue it *oe not fulfill t'e re;uire3ent of t'e CAPM.

=2

.

An&er An&er /A0 i $orre$ $orre$t.t. T'i T'i ro(le3 ro(le3 re;uire re;uire t'e ue ue of i3ultane i3ultaneou ou e;uation. e;uation. Set Set u a CAPM CAPM for3ula for3ula for ea$' ea$' to$45 to$45 1=." F R L 1.) /M , R0 1).+ F R L .2 /M , R0 Re3ovin- t'e arent'ee an* $o3(inin- ter3< %ou -et 1=." F 1.)M 1.)M , .)R 1).+ F .2M L .)R T'en olve for M. A** t'e t&o e;uation a(ove< M F 1+. Su(titute 1+ for M in t'e e$on* e;uation5 1).+ F R L .2/1+ , R0 1).+ F .) R L 11.) 11.) 1.) F .) R< or R F " An&er /B0 i in$orre$t (e$aue (ot' rate are &ron-. An&er /C0 i in$orre$t (e$aue t'e ri4,free rate are too lo&. An&er /D0 i in$orre$t (e$aue t'e ri4,free rate are too lo&.

5>

. An&er An&er /B0 i $orre$t $orre$t.. To To eti3ate eti3ate t'e re;uire* re;uire* rate rate of return return on e;uit% e;uit%< t'e $aital $aital aet aet ri$inri$in- 3o*el 3o*el /CAPM0 /CAPM0 a** t'e ri4,free rate /*eter3ine* (% -overn3ent e$uritie0 to t'e ro*u$t of t'e (eta $oeffi$ient /a 3eaure of t'e fir3 ri40 an* t'e *ifferen$e (et&een t'e 3ar4et return an* t'e ri4,free rate. Belo& i t'e (ai$ e;uili(riu3 e;uation for t'e

CAPM. R F R L U /RM , R 0 T'u< -iven a (eta of 1.)< R i 116 =6 L 1.) /1#6 , =60. At a (eta of 1.=< R i 1).=6 =6 L 1.= /1#6 , =60. An&er /A0 i in$orre$t (e$aue 6 e;ual t'e 3ar4et return ti3e t'e in$reae in t'e (eta. An&er /C0 i in$orre$t (e$aue t'e $o3an% re;uire* rate of return i affe$te* (% a $'an-e in t'e $o3an% (eta $oeffi$ient. An&er /D0 i in$orre$t (e$aue t'e $'an-e reult in an in$reae of t'e $o3an% re;uire* rate of return< not a *e$reae. 0

. An&er An&er /C0 i $orre$t $orre$t.. To To *eter3ine *eter3ine t'e t'e re;uire* re;uire* rate< t'e t'e ri4 re3iu re3iu3 3 i 3ultili 3ultilie* e* (% t'e (eta. (eta. T'u< T'u< an in$rea in$reae e of  er$enta-e oint in t'e ri4 re3iu3 'oul* (e 3ultilie* (% t'e (eta of 1.)=< to arrive at an in$reae of .?=6. A**in- .?=6 to t'e ori-inal 1=6 reult in a ne& re;uire* rate of 12.?=6. An&er /A0 i in$orre$t (e$aue 1=6 i t'e reult of i-norin- t'e $'an-e in t'e ri4 re3iu3. An&er /B0 i in$orre$t (e$aue 126 i t'e reult of failin- to 3ultil% t'e $'an-e in ri4 re3iu3 (% t'e (eta. An&er /D0 i in$orre$t (e$aue )).=#6 i t'e reult of a**in- t'e ri4,free rate to t'e reviou re;uire* rate.

1

. An&er An&er /C0 i i $orre$t $orre$t.. Initiall Initiall%%< t'e $al$u $al$ulatio lationn un*er un*er t'e CAPM CAPM i5 i5 R F =6 L 1.#/260 1.#/260 F 16 ollo&inollo&in- t'e t'e $'an-e< $'an-e< t'e ne& $al$ulation i5 R F +6 L ).#/260 F )#6 An&er /A0 i in$orre$t (e$aue (ot' rate are too lo&. An&er /B0 i in$orre$t (e$aue t'e ne& rate i )#6H t'i an&er i-nore i-nore t'e ri4,free ortion ortion of t'e ne& re;uire* rate. An&er An&er /D0 i in$orre$t in$orre$t (e$aue (e$aue t'e $'an-e $'an-e in (eta 3a4e 3a4e a i-nifi$ant $'an-e in t'e re;uire* return.

2

.

3

. An&er An&er /A0 /A0 i $orre$t $orre$t.. R i t'e re;ui re;uire* re* return return on e;uit% e;uit% $ait $aital< al< R i t'e t'e ri4,fr ri4,free ee rate rate of return< return< ( i t'e (eta (eta $oeffi$ient $oeffi$ient /a 3eaure of t'e fir3 ri40< an* RM i t'e 3ar4et return. T'e (ai$ e;uation for t'e CAPM i R F R L U /RM , R 0 T'u< t'e re;uire* rate of return for A< B< an* C are 16 "6 L /1.+ @ =60< 1#6 "6 L /.2 @ =60< an* 1.=6 "6 L /1.= @ =60< ree$tivel%. A 'oul* (e ree$te* /R i -reater t'an t'e 1)6 e@e$te* return0. B 'oul* (e a$$ete* /R i le t'an t'e 116 e@e$te* e@e$te* return0. C 'oul* (e ree$te* /R i -reater t'an t'e 16 e@e$te* return0. An&er /B0 i in$orre$t (e$aue t'e re;uire* rate of return for A an* C e@$ee* t'eir e@e$te* return. An&er /C0 i in$orre$t (e$aue R for C e@$ee* it e@e$te* return. An&er /D0 i in$orre$t (e$aue t'e re;uire* rate of return for A an* C e@$ee* t'eir e@e$te* return.

4

. An&er An&er /A0 i $orre$ $orre$t.t. T'e $aita $aitall aet aet ri$inri$in- 3o*el 3o*el $al$ula $al$ulate te t'e t'e re;uire* re;uire* return return on a to$4 to$4 a t'e u3 of t'e ri4,free rate an* t'e ro*u$t of t'e (eta $oeffi$ient an* t'e 3ar4et ri4 re3iu3. A$$or*inA$$or*in- to t'e CAPM< t'e e@e$te* return /R0 of ea$' of t'e four to$4 i $al$ulate* a 'o&n (elo&. T'u< M an* N are un*ervalue* (e$aue t'eir e@e$te* return e@$ee* t'eir re;uire* return< an* O an* J are overvalue* (e$aue t'eir e@e$te* return are le t'an t'eir re;uire* return. In e;uili(riu3< t'e e@e$te* an* re;uire* return are e;ual. A$$or*in-l%< invetor &ill ur$'ae 'are of M an* N< *rivin- u t'eir ri$e an* lo&erin- t'eir e@e$te* return until e;uili(riu3 i rea$'e*. Invetor &ill ell 'are of O an* J< re*u$in- t'eir ri$e an* in$reain- t'eir e@e$te* return until e;uili(riu3 i rea$'e*. RM F .1) L /.12 , .1)0.: F .1?+ F 1?.+6 RN F .1) L /.12 , .1)01.) .1)01.) F .1:) F 1:.)6 RO F .1) L /.12 , .1)01.= .1)01.= F .)1# F )1.#6 RJ F .1) L /.12 , .1)01.? .1)01.? F .))) F )).)6 An&er /B0 i in$orre$t (e$aue N i un*ervalue*. An&er /C0 i in$orre$t (e$aue M an* N are un*ervalue*. An&er /D0 i in$orre$t (e$aue O an* J are overvalue*.

An&er An&er /D0 i $orre$ $orre$t.t. T'e T'e $orre$ $orre$tt an&er an&er i i ,!)<#1) ,!)<#1)<< (ae* (ae* on a 1+6 $ot of $aita $aital.l. 4Proe$t F =6 L /1#6 , =60/1.20 F 1+6 NPV F ,!1##<### L !1)<###/PVIA1+6< !1)<###/PVIA1+6< 1#0 L !)#<### /PVI1+6< 1#0 F ,!1##<### L !1)<###/=.)1"10 L !)#<###/#.)":?0 F ,!)<#1).2# F aro@. ,!)<#1) /roun*e*0 An&er /A0 i in$orre$t (e$aue t'e% are not (ae* on a 1+6 $ot of $aital. An&er /B0 i in$orre$t (e$aue t'e% are not (ae* on a 1+6 $ot of $aital. An&er /C0 i in$orre$t (e$aue it reult fro3 a failure to $oni*er alva-e value.

5

4 F 1#6 L /+601.= F 1"6.

8

P# F

$3.00(1.10) 0.16 - 0.10

F !==.##.

""

Cot of ne& $o33on e;uit%5

8

4e F

$3.30 $55.00(0.9 5)

L #.1# F 1".)6. 1".)6.

7

. An&er An&er /A0 i $orre$ $orre$t.t. Ar(itr Ar(itra-e a-e ri$inri$in- t'eor% t'eor% /APT0 /APT0 i (ae* (ae* on t'e au3 au3tion tion t'at t'at an aet aet return return i (ae* (ae* on 3ultile %te3ati$ ri4 fa$tor. In $ontrat< t'e CAPM i a 3o*el t'at ue ut one %te3ati$ ri4 fa$tor to e@lain t'e aet return. T'at fa$tor i t'e e@e$te* return on t'e 3ar4et ortfolio< i.e.< t'e 3ar4et,value* &ei-'te* avera-e of all e$uritie availa(le in t'e 3ar4et. A$$or*in-l%< APT rovi*e for a earate (eta an* a earate ri4 re3iu3 for ea$' %te3ati$ ri4 fa$tor i*entifie* in t'e 3o*el. E@a3le of t'e 3an% otential %te3ati$ ri4 fa$tor are t'e -ro *o3eti$ ro*u$t /GDP0< inflation< an* real interet rate. T'e APT for a t'ree,fa$tor 3o*el 3a% (e for3ulate* a follo&5 R F R L U1 41 41 L U) U) 4) 4) L U 4 If5 R F e@e$te* rate of return RF ri4,free rate U1< )<  F in*ivi*ual fa$tor (eta $oeffi$ient $oeffi$ient 41< )<  F in*ivi*ual fa$tor ri4 re3iu3 T'u< t'e e@e$te* return un*er t'e APT i 1."6 .#= L /.= @ .#0 L /. @ .#+0 L /. @ .#?0 L /.+ / .+ @ .#=0 L /." L .#0. An&er An&er /B0 i in$orre$t in$orre$t (e$aue (e$aue 1#.6 i (ae* on t'e t'ree fa$tor &it' t'e 'i-'et 'i-'et (eta. An&er An&er /C0 i in$orre$t in$orre$t (e$aue 2.6 i (ae* on t'e t&o fa$tor &it' t'e 'i-'et (eta. An&er /D0 i in$orre$t (e$aue =.#6 i t'e ri4,free rate.

?

. An&er An&er /C0 i $orre$ $orre$t.t. T'e 3ar-in 3ar-inal al $ot $ot of ne& e;uit% e;uit% finan$i finan$inn- i -iven -iven a 1"6. T'e after after,ta ,ta@@ $ot of ne& *e(t *e(t finan$in- i +.=6 :6 @ /1 , .=0. An&er /A0 i in$orre$t (e$aue 1=6 i t'e $ot of e@itin- e;uit% finan$in-. An&er /B0 i in$orre$t (e$aue 1=6 i t'e $ot of e@itin- e;uit% finan$in-< an* =.#6 i t'e after,ta@ $ot of e@itin- *e(t finan$in-. An&er /D0 i in$orre$t (e$aue =.#6 i t'e after,ta@ $ot of e@itin- *e(t finan$in-.

69

. Proe$tRate Proe$tRa te of ReturnRi4,A*ut ReturnR i4,A*ute* e* Cot of CaitalA 1"616B1+11C1):D11 1"616B1+ 11C1):D111E1#111#:G? 1E1#111#:G?:: Proe$t A< B< an* C are rofita(le (e$aue t'eir return ura t'eir ri4,a*ute* $ot of $aital. D i not rofita(le (e$aue it return /1160 i le t'an it ri4,a*ute* $ot of $aital /160. E i not a$$eta(le for t'e a3e reaon5 It return /1#60 i le t'an it ri4,a*ute* $ot of $aital /1160.  i a$$ete* in$e it i lo& ri4 an* it return /1#60 urae t'e ri4,a*ute* $ot of $aital of :6. G i ree$te* (e$aue it return /?60 W ri4,a*ute* $ot of $aital /:60.

70

. An&er An&er /A0 i $orre$t. $orre$t. Au3e Au3e t'e 'are 'are of to$4 to$4 &a &ort' &ort' !1##. !1##. T'e T'e 126 no3inal no3inal rate of return return (rin- %our total total &ealt' to !112. o&ever< t'e 1+6 real return 3ean %our real &ealt' i onl% !11+. T'e ro(le3 i to *eter3ine &'at rate of inflation &ill e;uate t'e !112 !112 to t'e !11+ of real &ealt'. Au3in- t'at t'e ri$e level in*e@ &a 1##6 initiall%< initiall%< t'e olution aroa$' i a follo&5 $11? F !11+< or @ F 1.#=1 

T'u< t'e inflation rate i .=16. An&er An&er /B0 i in$orre$t in$orre$t (e$aue (e$aue +6 i t'e *ifferen$ *ifferen$ee in er$enta-e er$enta-e oint< oint< not t'e rate of inflation. inflation. An&er An&er /C0 i in$orre$t (e$aue it &ill not e;uate no3inal &ealt' to real &ealt'. An&er /D0 i in$orre$t (e$aue it &ill not e;uate no3inal &ealt' to real &ealt'. 71

. An&er An&er /D0 i $orre$ $orre$t.t. T'e after, after,ta@ ta@ &ei-'t &ei-'te*, e*,ave averara-ee $ot of $aital $aital i 1)6< 1)6< reulti reultinn- in a total total $aita $aitall $'ar-e $'ar-e of !"#<### on ! 3illion of total $aital. o&ever< t'e 7ACC i an after,ta@ rate< o t'e $ot of *e(t i +.26 26 @ /1.# , +#6 ta@ rate0. A$$or*in-l% A$$or*in-l%<< t'e *e(t $o3onent of t'e $aital $'ar-e i !:"<### /+.26 @ !)<###<###0. T'e $ot of e;uit%

3ut t'erefore (e )".+6 /!"#<### , !:"<###0 \ !1<###<###. An&er /A0 i in$orre$t (e$aue 26 i t'e re,ta@ $ot of *e(t $aital. An&er An&er /B0 i in$orre$t (e$aue 1)6 i t'e after, ta@ &ei-'te*,avera-e $ot of (ot' *e(t an* e;uit%. An&er An&er /C0 i in$orre$t (e$aue 1=6 i t'e 'ur*le rate. 72

Sour$eProortion of Tta" Funds

73

9!ter'ta )ost7ei-'te*, )ost7ei-'te*, Avera-e CotCo33on Sto$4."#.1=.#:#Bon*.+#.#2.#).1)) Sto$4."#.1=.#:#Bon*.+#.#2.#).1)) . An&er An&er /C0 i $orr $orre$t e$t.. T'e 1)6 *e(t *e(t $ouon $ouon rate rate i re*u$e* re*u$e* (% t'e t'e =6 ta@ 'iel 'iel*< *< reult reultinin- in a $ot $ot of *e(t of ?.26 1)6 @ /1 , .=0. T'e avera-e of t'e 1=6 e;uit% $aital an* ?.26 *e(t i 11.+6. An&er /D0 i in$orre$t (e$aue 1.=#6 overloo4e* t'e ta@ 'iel* on t'e *e(t $aital. An&er /A0 i in$orre$t (e$aue 2.??=6 au3e* t'at *ivi*en* on e;uit% $aital are ta@ *e*u$ti(le. An&er /B0 i in$orre$t (e$aue :."#6 ue* t'e $o3le3ent of t'e ta@ rate intea* of t'e ta@ rate.

74

. An&er An&er /D0 i $orre$ $orre$t.t. All All t'ree t'ree rate are are ;uote* ;uote* a after,ta after,ta@@ rate rate in$e in$e t'ere i no ta@ 'iel* 'iel* ao$i ao$iate ate** &it' $o33on e;uit% $aital. T'u< i3l% &ei-'t t'e t'ree rate to *eter3ine t'e &ei-'te* avera-e $ot. De(t 26 @ .+ F .) Preferre* 16 @ .) F )." Co33on 1?6 @ .+ F ".21)."6An&er /A0 i in$orre$t (e$aue 1#.))6 au3e* t'at *ivi*en* on $o33on e;uit% are ta@ *e*u$ti(le< &'i$' i in$orre$t. An&er /B0 i in$orre$t (e$aue 1#.=)6 ue t'e $o3le3ent of t'e ta@ rate< an* au3e* t'e *e(t rate &a (efore ta@ rat'er t'an after ta@. An&er /C0 i in$orre$t (e$aue 11.+26 11.+26 au3e* t'e rate -iven for *e(t &a (efore ta@ rat'er t'an after ta@.

75

. An&er An&er /C0 i $orre$ $orre$t.t. T'e T'e $ot for e;uit% e;uit% $aita $aitall i -iven -iven a 1=6< 1=6< an* an* referre* referre* to$4 to$4 i 1#6. T'e (efore,t (efore,ta@ a@ rate rate for *e(t i -iven a "6< &'i$' tranlate to an after,ta@ $ot of .:6 "6 @ /1 , .=0. T'e rate are &ei-'te* a follo&5 1=6 @ ."= F :.?=# 1#6 @ .1# F 1.### .:6 @ .)= F .:?= 11.?)=6An&er 11.?)=6An&er /A0 i in$orre$t (e$aue 1#.6 i an un&ei-'te* avera-e of t'e t'ree $ot< an* alo i-nore t'e ta@ 'iel*. An&er /B0 i in$orre$t (e$aue 11.)=6 ue* t'e $o3le3ent $o3le3ent of t'e ta@ rate intea* of t'e ta@ rate to $al$ulate $al$ulate t'e ta@ 'iel*. An&er An&er /D0 i in$orre$t in$orre$t (e$aue (e$aue 1).)=#6 i-nore t'e ta@ avin- on *e(t $aital.

7

. An&er An&er /B0 i $orre$ $orre$t.t. T'e T'e ro(le3 ro(le3 $an (e olve* olve* (% (% uinuin- t'e t'ree, t'ree,te te ro$e ro$e of of unleverinunleverin- an* an* releverinreleverin- t'e t'e 7ACC. irt< unlever t'e 7ACC to $al$ulate t'e oortunit% $ot of $aital< r5 r F r D/DV0 L rE/EV0 F #.#2/#.+0 L #.1/#."0 F #.11 F 116. Ne@t< t'e $ot of e;uit% at a )#6 *e(t ratio $an (e $al$ulate*5 r E F r L /r A , rD0DE F #.11 L /#.11 , #.#?20/#.)#.20 F #.112 F 11.26. inall%< inall%< t'e ne& 7ACC $an (e $al$ulate*5 7ACC F #.#?2/1 , #.=0/#.)0 L #.112/#.20 #.112/#.20 F 1#.+=6. An&er /A0 i in$orre$t (e$aue :.116 i t'e 7ACC if t'e )#6 i rela$e* (% t'e ori-inal +#6< an* t'e 2#6 i t'u *e$reae* to "#6 in t'e final 7ACC $al$ulation. An&er /C0 i in$orre$t (e$aue 116 i t'e oortunit% $ot of $aital. An&er /D0 i in$orre$t (e$aue 11.26 i t'e $ot of e;uit% at a )#6 *e(t ratio.

77

. An&er An&er /C0 i $orre$t $orre$t.. T'e i3orta i3ortant nt $oni*e $oni*erat ration ion i &'et'er &'et'er t'e overal overalll $ot of $aital $aital &ill &ill (e lo&er lo&er for a -iven -iven rooal. A$$or*in- to t'e Caital Aet Pri$in- Mo*el< t'e $'an-e &ill reult in a lo&er avera-e $ot of $aital. or t'e e@itin- tru$ture< t'e $ot of e;uit% $aital i 1=.=6 "6 L .:= /1"6 , "60. Be$aue t'e $o3an% 'a no *e(t< t'e avera-e $ot of $aital i alo 1=.=6. n*er t'e rooal< t'e $ot of e;uit% $aital i 1".=6 "6 L 1.#= /1"6 , "60< an* t'e &ei-'te* avera-e $ot of $aital i 1.26 ./.#?=0 L .?/.1"=0. en$e< t'e rooal of 1.26 'oul* (e a$$ete*. An&er /A0 i in$orre$t (e$aue t'e avera-e $ot of $aital nee* to (e $oni*ere*. An&er /B0 i in$orre$t (e$aue t'e avera-e avera-e $ot of $aital $aital nee* to (e $oni*ere*. $oni*ere*. An&er An&er /D0 i in$orre$t in$orre$t (e$aue t'e &ei-'te* &ei-'te* avera-e $ot of $aital &ill *e$reae.

7?

8

Solve for 45 7A 7ACC 11.=6 4

F 11.=6 F &*4*/1 , T0 L &$4 F #.+=/#.#:0/#.?#0 L #.==4 F 1=.?=6.

Solve for -5 1= 1=.?=6 1=.?=6 7>

.

F D1P# L F !=!+= L F +."+6.

Caital tru$ture5 +#6 D< 1#6 P< =#6 E. 7ACC F 1).#6 /-iven0. 4* F 116 /-iven0. 7ACC F #.+/4*0/1 , T0 L #.1/4 0 L #.=/4e0. Be$aue t'e fir3 'a inuffi$ient retaine* earnin- to fun* t'e e;uit% ortion of t'e fir3 $aital (u*-et< ue 4 e in t'e 7ACC $al$ulation. a. Calculate k e: 4e F

$2(1.08)

L 26 F 2.+?6 L 26 F 1".+?6.

$30(0.85)

(. Calculate k p: 4 F

Dp PN

F

$2

F 11.116.

$20(0.9)

$. Find T by substituting values for k d d, k p, and k e in the WCC e!uation: #.1)# F #.+/#.110/1 , T0 L #.1/#.11110 L #.=/#.1"+?0 #.1)# F #.#++/1 , T0 L #.#111 #.#111 L #.#2)+ #.#):= F #.#++/1 , T0 #."?1 F 1 , T #.)2? F T. L 26 F 16 +) Retention ratio F /P+.2#  P).1#0 ÷ P+.2# F =".)=6 Gro&t' rate F ROE @ Retention ratio F 26 @ =".)=6 F+.=6 P).1# F P)+.?1 Mar4et Pri$e Po F 16 , +.=6

?1

. in* t' t'e *i *ivi*en*< D# F /#.=0!+#<###Z of S'are F !)#<###1#<### F !).##. Sin$e t'e fir3 &ill not 'ave enou-' retaine* earnin- to fun* t'e e;uit% ortion of it $aital (u*-et< t'e fir3 &ill 'ave to iue ne& $o33on to$4. in* t'e $ot of ne& $o33on to$45 4 e F D1P#/1 , 0 L - F !).## !)=/1 , #.1=0 L #6 F #.#:+1 F :.+16. inall%< $al$ulate 7ACC< uin- 4 e F #.#:+1< an* 4* F #.#2< o 7ACC F /DA /DA0/1 0/1 , Ta@ Ta@ rate04 rate04* L /EA04e F #.+/#.#20/1 , #.+0 L #."/#.#:+10 F #.#?=? ≈ ?."6.

.

RF

).1#

?0

2)

.

7ACC F #. × #.#2+ × /1 , #.+0 L #.? × /!).=/!+= × /1 , #.100 L #.#?0 F 1#.?6.

?3

. AT $o $ott of *e(t *e(t F #.#2 #.#2/1 /1 , #.+# #.+#00 F #.# #.#+2 +2 F +.2# +.2#6. 6. Cot of retaine* earnin- F !).1)!) L #.#" F #.1)" F 1)."6. 7ACC F #.?=/#.1)"0 L #.)=/#.#+20 F 1#."?6.

2+

.

7ACC F &*4*/1 , T0 L &$4e. 4* i -iven -iven F :6. in* 4e5 4e F D1P#/1 , 0 L -

F !#.2!)=/1 , #.10 L #.#: F #.1)===". No& %ou $an $al$ulate 7ACC5 7ACC F /#.0/#.#:0/#."0 L /#.?0/#.1)==="0 F 1#.+16. ?5

Juetion 1 t'ru + are (ae* on t'e follo&in- infor3ation. Bri-'a3 . Ro an* Son In$. 'a a tar-et $aital tru$ture t'at $all for +# er$ent *e(t< 1# er$ent referre* to$4< an* =# er$ent $o33on e;uit%. T'e fir3 $urrent after,ta@ $ot of *e(t i " er$ent< an* it $an ell a 3u$' *e(t a it &i'e at t'i rate. T'e fir3 referre* to$4 $urrentl% ell for !:# a 'are an* a% a *ivi*en* of !1# er 'areH 'o&ever< t'e fir3 &ill net onl% !2# er 'are fro3 t'e ale of ne& referre* to$4. Ro $o33on to$4 $urrentl% ell for !+# er 'are< (ut t'e fir3 &ill net onl% !+ er 'are fro3 t'e ale of ne& $o33on to$4. T'e fir3 re$entl% ai* a *ivi*en* of !) er 'are on it $o33on to$4< an* invetor e@e$t t'e *ivi*en* to -ro& in*efinitel% at a $ontant rate of 1# er$ent er %ear. Au3e t'e fir3 'a uffi$ient retaine* earnin- to fun* t'e e;uit% ortion of it $aital (u*-et.

.

7'at 7'at i i t'e t'e fir3 fir3  $ot $ot of of reta retain ine* e* ear earni ninn-> > /E0 /E0 a. 1#.#6 *. 1".=6 (. 1).=6 e. 12.#6 $. 1=.=6

.

7'at 7'at i t'e fir3 fir3 $ot $ot of of ne&l% ne&l% iue* iue* $o33 $o33on on to$ to$4> 4> /E0 /E0 a. 1#.#6 *. 1".=6 (. 1).=6 e. 12.#6 $. 1=.=6

.

7'at 7'at i t'e fir3 fir3 $ot $ot of of ne&l% ne&l% iue* iue* ref referr erre* e* to$ to$4> 4> /E0 /E0 a. 1#.#6 *. 1".=6 (. 1).=6 e. 12.#6 $. 1=.=6

.

7'at 7'at i t'e fir3 fir3 &ei&ei-'te 'te** avera avera-e -e $ot $ot of $ai $aital tal>> /E0 /E0 a. :.=6 *. 11.+6 (. 1#.6 e. 11.:6 $. 1#.26 4e F

8 ?

$2.00(1.05)

L #.#= F 1?6.

$21.88(1 - 0.2)

7ACC F #.+/#.1+0/1 , #.+0 L #."/#.1?0 F #.1=" F 1.="6 ≈ 1."6.

8

?7

An&er An&er /D0 i $orre$ $orre$t.t. e e t'e t'e foll follo&i o&inn- $al$ $al$ula ulatio tion5 n5 A1 $3.1? RF LGF L .#" F 1?.1"6 $30.00#.>5 0 #1 ' ,otation$ An&er /A0 i in$orre$t (e$aue 1"6 i-nore t'e in$reae in *ivi*en* an* flotation $ot. An&er /B0 i in$orre$t (e$aue 1".=6 i-nore t'e ne@t *ivi*en* in$reain- to !.12. An&er /C0 i in$orre$t (e$aue 1"."6 i-nore t'e flotation $ot.

??

. An&er An&er /C0 i $orre$ $orre$t.t. In t'e t'e $al$ulati $al$ulation on (elo&< (elo&< t'e $ot $ot of referr referre* e* to$4 to$4 e;ual e;ual t'e referre* referre* *ivi*en* *ivi*en* *ivi*e *ivi*e** (% t'e net iuan$e ri$e. T'e referre* to$4 &ill %iel* !+<2##<### after u(tra$tin- t'e +6 flotation $ot< o it 3ut ell for !=<### !=<###<## <#### /!+<2# /!+<2##<# #<### ## \ .:"0. .:"0. T'e annual annual *ivi*e *ivi*en* n* on t'e refer referre* re* to$4 to$4 i !##<# !##<### ## /"6 @ !=<### !=<###<## <###0. #0. Cone;uentl%< t'e $ot of $aital raie* (% iuin- referre* to$4 i ".)=6 /!##<### *ivi*en* \ !+<2##<### net iuan$e ri$e0.

.

7ei-'tBon* +#6@ :6 @ /1,.+0 /1,.+0 F ).1" 6Preferre* 6Preferre* to$4 1#6@ ".)=6 F .")=Co33on to$4 =#6@ 1=6F ?.=# 1#.)2=6lotation $ot are i-nore* for t'e (on* (e$aue !)# 3illion 3ut (e reai* at 3aturit% *ate< &'i$' i not t'e $ae for referre* to$4. An&er /A0 i in$orre$t (e$aue t'e% *o not aear to (e t'e reult of a $o33on error. An&er /B0 i in$orre$t (e$aue t'e% *o not aear to (e t'e reult of a $o33on error. An&er /D0 i in$orre$t (e$aue t'e% *o not aear to (e t'e reult of a $o33on error. ?>

. An&er An&er /D0 i $orre$t. $orre$t. Multil Multil%% /1 , effe$tive effe$tive ta@ ta@ rate0 ti3e ti3e t'e effe$t effe$tive ive interet interet rate rate of 116< 116< &'i$' &'i$' i "."#6 1 116 @ /1 , .+0. An&er /A0 i in$orre$t (e$aue =.16 i =.+#6 re*u$e* (% t'e =6 to$4 flotation $ot. An&er /B0 i in$orre$t (e$aue =.+#6 i "#6 of :6. An&er /C0 i in$orre$t (e$aue ".)=6 i "."#6 re*u$e* (% t'e =6 to$4 flotation $ot.

>0

. An&er An&er /C0 i $orre$ $orre$t.t. A a lar-er lar-er roorti roortion on of an entit% entit%  $aital $aital i i rovi*e* rovi*e* (% *e(t< *e(t< t'e t'e *e(t (e$o3e (e$o3e ri4ier ri4ier an* 3ore e@enive. en$e< it re;uire a 'i-'er interet rate. An&er An&er /A0 i in$orre$t in$orre$t (e$aue t'e *iverit% *iverit% *e$reae< *e$reae< not in$reae< in$reae< ri4. An&er An&er /B0 i in$orre$t in$orre$t (e$aue !=#<###<### i 3inu$ule in t'e *e(t 3ar4et. 3ar4et. An&er /D0 i in$orre$t (e$aue t'e $o3(ination $o3(ination alternative 3aintain t'e a3e *e(t,e;uit% 3i@ture< &'i$' &oul* not &arrant a rate in$reae in t'e $ot of *e(t or e;uit%.

>1

. irt< irt< $al$ulat $al$ulatee t'e after,ta after,ta@@ $o3onent $o3onent $ot $ot of *e(t *e(t a ?6/1 ?6/1 , #.0 #.0 F +.:6. +.:6. Ne@t< Ne@t< $al$ula $al$ulate te t'e retaine retaine** earnin- earnin- (rea4oint a !=##<####.= F !1<###<###. T'u< to finan$e it oti3al $aital (u*-et< on-treet 3ut iue o3e ne& e;uit% an* flotation $ot of 1#6 &ill (e in$urre*. T'e $ot of ne& e;uit% i t'en !=/1.1#60!?=/1 , #.10 L 1#6 F 2.1=6 L 1#6 F 12.1=6. inall%< inall%< t'e 7ACC F +.:6/#.0 L :6/#.)0 L 12.1=6/#.=0 F 1).+6.

>2

. REJIR REJIRED5 ED5 T'e &ei-'t &ei-'te*, e*,ave averara-ee $ot $ot of $aita $aital.l. DISCSSION5 /C0T'e firt te te i to *eter3ine t'e after,ta@ $ot $ot of t'e lon-,ter3 *e(t. *e(t. Multil%in- t'e $urrent $urrent %iel* of :6 ti3e one 3inu t'e ta@ rate /1  #.+  #."0 reult in an after,ta@ $ot of *e(t of =.+6 /:6 @ #."0. T'e $ot of t'e referre* referre* to$4 i "6 /t'e annual *ivi*en* *ivi*en* rate0. T'e Gor*on -ro&t' 3o*el for 3eaurin3eaurin- t'e $ot of e;uit% $aital $aital $o3(ine $o3(ine t'e *ivi*en* *ivi*en* %iel* &it' t'e -ro&t' -ro&t' rate. Divi*inDivi*in- t'e !1.)# *ivi*en* (% t'e !+# 3ar4et 3ar4et ri$e ro*u$e ro*u$e a *ivi*en* %iel* of 6. A**in- t'e 6 *ivi*en* %iel* an* t'e 1#6 -ro&t' -ro&t' rate -ive a 16 *ivi*en* %iel* an* t'e 1#6 -ro&t' rate -ive a 16 $ot of $o33on e;uit% $aital. On$e t'e $ot of t'e of t'e t'ree t%e of $aital 'ave (een $o3ute*< t'e ne@t te i to &ei-'t t'e3 a$$or*in- to t'e 3ar4et value of t'e t'e ele3ent of t'e $urrent $aital tru$ture. T'e !1<###<### of referre* to$4 to$4 i ellinat ar. ar. T'e 3ar4et value of t'e lon-,ter3 *e(t i 2#6 of (oo4 value< or !=<"##<### /2#6 @ !?<###<###0. T'e $o33on to$4 'a a $urrent $urrent 3ar4et ri$e of !2<###<### !2<###<### /!+# @ )##<### 'are0. 'are0. T'u< t'e &ei-'te*,ave &ei-'te*,avera-e ra-e $ot of $aital $aital i :."6 /!1<+#)<### \ !1+<"##<###0 a 'o&n (elo&. De( De(t#. t#.=+ @ !=< !=<"# "###<### <###F! F! #)<+ #)<+## ##P Prefe referr rre* e*#. #.#" #" @ !1< !1<## ###< #<## ###F #F"# "#<<###C ###Co3 o33o 3onn #. #.1 @ !2<###<###F1<#+#<###Total!1+<"##<###F!1<+#)<+##An&er !2<###<###F1<#+#<###Total!1+<"##<###F!1<+#)<+##An&er /A0 i in$orre$t (e$aue 16 i t'e $ot of e;uit%. An&er /B0 i in$orre$t (e$aue 2.6 i t'e i3le avera-e. An&er /D0 i in$orre$t (e$aue :6 i (ae* on (oo4 value.

>3

.

>4

7ACC An&er5 ( Di Diff5 M R AT $ot of *e(t F #.#?/1 , #.+#0 F #.#+) F +.)6. Cot of referre* to$4 F !+!+) F #.#:=) F :.=)6. Cot of retaine* earnin- F !)!)2 L #.#? F #.1+1+ F 1+.1+6. 7ACC F #.+#/#.#+)0 L #.1#/#.#:=)0 L #.=#/#.1+1+0 F #.#:?# F :.?#6. . An&er An&er /B0 i $orre$ $orre$t.t. A$$or*inA$$or*in- to to t'e *ivi*en* *ivi*en* -ro&t' -ro&t' 3o*el< 3o*el< t'e t'e t'ree t'ree ele3ent ele3ent re;uire* re;uire* to to $al$ulate $al$ulate t'e t'e $ot $ot of e;uit% $aital are /10 t'e *ivi*en* er 'are< /)0 t'e e@e$te* -ro&t' rate< an* /0 t'e 3ar4et ri$e of t'e to$4. If flotation $ot are in$urre* &'en iuin- ne& to$4< t'e% are *e*u$te* fro3 t'e 3ar4et ri$e to arrive at t'e a3ount of $aital t'e $ororation &ill a$tuall% re$eive. A$$or*in-l%< A$$or*in-l%< t'e !1## ellin- ri$e i re*u$e* (% t'e ! *i$ount an* t'e != flotation $ot to arrive at t'e !:) to (e re$eive* for t'e to$4. Be$aue t'e *ivi*en* i not e@e$te* to in$reae in future %ear< no -ro&t' fa$tor i in$lu*e* in t'e $al$ulation. T'u< t'e $ot of t'e $o33on to$4 i ?."6 /!? *ivi*en* \ !:)0. An&er /A0 i in$orre$t (e$aue t'e ?.#6 fi-ure &oul* onl% (e $orre$t if !1## &ere re$eive* fro3 t'e ale of t'e to$4. An&er /C0 i in$orre$t (e$aue ?.+6 &oul* (e $orre$t onl% if t'e to$4 $oul* (e ol* &it'out -ivin- a ! *i$ount. An&er /D0 i in$orre$t (e$aue 2.16 &oul* (e $orre$t onl% if t'e a3ount re$eive* &ere a(out !2" or if o3e -ro&t'

fa$tor &ere au3e*. >5

. An&er An&er /A0 i $orre$ $orre$t.t. T'e t'ree t'ree ele3ent ele3ent re;uir re;uire* e* to $al$ulat $al$ulatee t'e $ot $ot of e;uit% e;uit% $aital $aital are are /10 t'e *ivi*e *ivi*en* n* er 'are< /)0 t'e e@e$te* -ro&t' rate< an* /0 t'e 3ar4et ri$e of t'e to$4. Be$aue -ro&t' i not e@e$te*< t'e $al$ulation i i3l% to *ivi*e t'e *ivi*en* of !? (% t'e !1## 3ar4et ri$e of t'e to$4 to arrive at a $ot of e;uit% $aital of ?6. An&er /B0 i in$orre$t (e$aue ?."6 &oul* (e t'e $ot of ne& e;uit% $aital fro3 ellin- to$4 if t'e to$4 reulte* in ro$ee* ro$ee* of !:) er 'are. 'are. An&er An&er /C0 i in$orre$t in$orre$t (e$aue (e$aue ?.+6 &oul* (e $orre$t $orre$t onl% if ne& to$4 &ere ol* an* reulte* in ro$ee* of !:= er 'are. An&er /D0 i in$orre$t (e$aue *ivi*in*ivi*in- t'e !? *ivi*en* (% t'e !1## 3ar4et ri$e of t'e to$4 ro*u$e a ratio of ?6< not 2.16.

>

. An&er An&er /C0 i $orre$t $orre$t.. 7illia3 7illia3 referr referre* e* $aital $aital tru$tu tru$ture re i =#6 $o33on $o33on to$4 to$4.. o&ever o&ever<< !1##<### !1##<### of retaine* retaine* earnin- /=#6 of t'e re;uire* !)##<### of $aital0 &ill (e ue* (efore an% $o33on to$4 i iue*. T'u< t'e &ei-'te*, avera-e $ot of $aital &ill (e *eter3ine* (ae* on t'e ree$tive $ot of t'e (on*< referre* to$4< an* retaine* earnin-. T'e $ot of t'e (on* i -iven a +.26< t'e $ot of t'e referre* to$4 i 26< an* t'e $ot of t'e retaine* earnin- i ?6 /!? *ivi*en* \ !1## 3ar4et ri$e of t'e $o33on to$40. T'ee t'ree $ot are t'en &ei-'te* (% t'e referre* $aital tru$ture ratio5 #6 @ +.26 F 1.++6)#6 1.++6)#6 @ 2.#6 2.#6 F 1."#6=#6 @ ?.#6 F .=#6Total .=#6Total ".=+6Roun*in- to t'e nearet tent' ro*u$e t'e $orre$t an&er of ".=6. An&er /A0 i in$orre$t (e$aue (e$aue 1:.26 rereent t'e un&ei-'te* u3 of ea$' of t'e t'ree ele3ent of $ot. An&er /B0 i in$orre$t (e$aue +.26 i t'e $ot of t'e lon-,ter3 *e(t. All fun*in- &ill not (e o(taine* fro3 *e(t (e$aue t'e fir3 &ant to 3aintain a $aital tru$ture in &'i$' *e(t rereent onl% #6 of t'e total $aital. $aital. An&er /D0 i in$orre$t (e$aue t'e ".26 fi-ure $an onl% (e o(taine* if ne& to$4 i ol*. Ne& to$4 &ill not (e ol* (e$aue t'e retaine* earnin- $an (e ue* at a lo&er $ot< an* t'ere i no nee* to ell to$4 &'en t'e total $aital re;uire* i onl% !)##<###.

>7

. An&er An&er /A0 i $orre$t. $orre$t. T'e T'e $ot $ot of t'e (on* i i -iven -iven a +.26. +.26. T'e T'e $ot $ot of t'e t'e referre* referre* to$4 to$4 i 26 /!2 *ivi* *ivi*en* en* \ !1##0< t'e $ot of ne& $o33on to$4 i ?."6 /!? *ivi*en* \ !:) ro$ee*0< an* t'e $ot of t'e retaine* earnin- i ?6 /!? *ivi*en* \ !1## 3ar4et ri$e0. T'ee four $ot are t'en &ei-'te* (% t'e referre* $aital tru$ture ratio< a ro$e t'at re;uire u(*ivi*in- t'e $o33on to$4 ortion into retaine* earnin- of !1##<### /1#6 of $aital0 an* ne& $o33on to$4 of !+##<### /+#6 of $aital05 #6 @ +.26 +.26 F 1.++6)# 1.++6)#6 6 @ 2.#6 2.#6 F 1."#6+# 1."#6+#6 6 @ ?."6 F .#+61# .#+61#6 6 @ ?.#6 ?.#6 F .?#6T .?#6Total".?26R otal".?26Roun*i oun*inn- to t'e nearet tent' reult in t'e $orre$t an&er of ".26. An&er /B0 i in$orre$t (e$aue +.26 i t'e $ot of t'e lon-,ter3 *e(t. An&er /C0 i in$orre$t (e$aue ".=6 &oul* (e $orre$t onl% if t'e e;uit% $aital &ere o(taine* totall% fro3 retaine* earnin-. Be$aue onl% !1##<### of retaine* earnin- i availa(le< t'e re3ain*er of e;uit% $aital 3ut $o3e fro3 ale of ne& to$4. An&er /D0 i in$orre$t (e$aue )?.+6 rereent t'e un&ei-'te* total of ea$' of t'e four ele3ent of $ot.

:2

.

T'e fir3 fir3 &ill &ill not (e iui iuinn- ne& e;uit% e;uit% (e$au (e$auee t'ere are are a*e;uate a*e;uate retaine* retaine* earnin- earnin- availa(le availa(le to to fun* availa( availa(le le roe$t. T'erefore< 7ACC 7ACC 'oul* (e $al$ulate* $al$ulate* uin- 4 rat'er t'an 4e. 4 F D1P# L F !.##!"#.## L #.#? F #.1) F 1)6. 7ACC F &*4*/1 , T0 L &$4 F /#."0/#.#20/1 , #.+0 L /#.+0/#.1)0 F #.#?"2 F ?."26.

>>

8

EBIT Interet EBT

!1<###<### +##<### ! "##<###

Ta@e /+#60 )+#<### Net in$o3e ! "#<### EPS1 F !"#<###1##<### F !."#. D1 F !."#/#.=0 F !1.2#. 4 F /!1.2#!+#.##0 L #.1)= F 1?.#6. 1##

Cot of ne& $o33on e;uit%5

8

4e F 8

4 F

8

4e F

101

102

8

103

104

$1.80 ($40)(0.90)

L #.1)= F 1?.=6.

$0.90(1.05) $8.59

L #.#= F #.1"## F 1".##6.

$0.90(1.05)

L #.#= F #.1?)) F 1?.))6.

$8.59(1 - 0.10)

Sin$e t'e fir3 $an fun* t'e e;uit% ortion of it $aital (u*-et &it' retaine* earnin-< ue 4  in 7ACC. 7ACC F &*4*/1 , T0 L &$4 F #./#.1)0/1 , #.+0 L #.?/#.1"0 F #.#)1" L #.11) #.11) F #.1" F 1."6. . An&er An&er /B0 i $orre$ $orre$t.t. Be$aue Be$aue t'e t'e (on* are are iue* iue* at t'eir t'eir fa$e value< value< t'e t'e reta@ reta@ effe$tiv effe$tivee rate i 1#6. 1#6. o&ever o&ever<< interet i *e*u$ti(le for ta@ uroe< o t'e -overn3ent a(or( +#6 of t'e $ot< leavin- a "6 after,ta@ $ot. An&er /A0 i in$orre$t (e$aue +6 au3e a "#6 ta@ rate. An&er /C0 i in$orre$t (e$aue 1#6 i t'e (efore,ta@ rate. An&er /D0 i in$orre$t (e$aue t'e after,ta@ $ot &ill (e le t'an t'e effe$tive (efore,ta@ rate.

105

. An&er An&er /D0 i $orre$t $orre$t.. T'e $ot of intern internal al e;uit% e;uit% $aita $aitall e;ual e;ual t'e *ivi*en* *ivi*en* %iel* %iel* /*ivi*e /*ivi*en* n* er 'are 'are \ 3ar4et 3ar4et ri$e0 lu t'e *ivi*en* -ro&t' rate. Divi*in- t'e ! *ivi*en* (% t'e !"# 3ar4et ri$e reult in a %iel* of =6. A**in- t'e 1#6 *ivi*en* -ro&t' rate ro*u$e a $ot of 1=6 for retaine* earnin-. No a*ut3ent i 3a*e for ta@e (e$aue *ivi*en* are not ta@ *e*u$ti(le. An&er /A0 i in$orre$t (e$aue =6 i t'e *ivi*en* %iel*H t'e -ro&t' rate i i-nore*. An&er /B0 i in$orre$t (e$aue :6 &oul* (e t'e after,ta@ $ot if *ivi*en* *ivi*en* &ere *e*u$ti(le. An&er /C0 i in$orre$t (e$aue 1#6 i t'e t'e *ivi*en* -ro&t' rateH it i-nore t'e *ivi*en* %iel*.

10

. An&er An&er /C0 i $orre$ $orre$t.t. T'e $o3a $o3an% n% &ill &ill re$eive re$eive onl% onl% 2#6 of t'e !"# 3ar4et 3ar4et ri$e ri$e<< or !+2. Cone;u Cone;uent entl% l%<< t'e *ivi*en* %iel* i ".)=6 /! \ !+20. A**in- t'e 1#6 -ro&t' rate ro*u$e a $ot of ne& e;uit% $aital of 1".)=6. An&er /A0 i in$orre$t (e$aue (e$aue ".)=6 i-nore t'e *ivi*en* -ro&t' rate. An&er /B0 i in$orre$t (e$aue (e$aue 1=6 i-nore t'e flotation $ot. An&er /D0 i in$orre$t (e$aue 1#6 i t'e t'e *ivi*en* -ro&t' rate.

107

. An&er An&er /C0 i $orre$ $orre$t.t. T'e $urre $urrent nt oti3al oti3al $aita $aitall tru$t tru$ture ure i +#6 *e(t *e(t an* "#6 e;uit% e;uit%.. T'e ! 3illion 3illion to (e retaine* fro3 earnin- in t'e $o3in- %ear rereent t'e e;uit% ortion of t'e 3a@i3u3 ne& $aital outla%. To To retain t'e oti3al $aital tru$ture< !) 3illion of *e(t 3ut (e a**e* to t'e ! 3illion of retaine* earnin-. en$e< t'e 3a@i3u3 $aital e@anion i != 3illion. An&er /A0 i in$orre$t (e$aue !) 3illion i t'e a3ount of *e(t t'at 3ut (e a**e* to 3aintain t'e oti3al tru$ture. An&er An&er /B0 i in$orre$t in$orre$t (e$aue ! 3illion i t'e a3ount of earnin- earnin- retaine*. retaine*. An&er An&er /D0 i in$orre$t in$orre$t (e$aue (e$aue t'e a3ount of != 3illion $an (e $al$ulate*.

10?

. REJIRED5 REJIRED5 T'e after,ta@ after,ta@ &ei-'te* &ei-'te* avera-e avera-e $ot of $aita $aitall -iven -iven t'e a3ount a3ount of t'e (u*-et. (u*-et. DISCSSION5 /B0 To 3aintain a $aital tru$ture of +#6 *e(t an* "#6 e;uit%< e;uit%< t'e !? 3illion total 3ut $onit of !).2 3illion of *e(t an* !+.) 3illion of e;uit%. e;uit%. T'e e;uit% &ill $onit of ! 3illion of retaine* retaine* earnin- an* !1.) 3illion of ne& to$4. T'e &ei-'te*,avera-e $ot of t'e t'ree our$e of ne& $aital $aital i *eter3ine* a follo&5 !<###<### ÷ !?<###<### @ 1+6 F ".##6

!1<)##<### ÷ !?<###<### @ 1"6 F ).?+6 !)<2##<### ÷ !?<###<### @ 1#6 F +.##6 1).?+6 An&er /A0 i in$orre$t (e$aue 111+6 au3e a ta@ a*ut3ent for t'e $ot of *e(t< (ut t'e 1#6 rate i an after,ta@ a3ount. An&er /C0 i in$orre$t (e$aue (e$aue 1."6 au3e t'e e;uit% $onit $onit olel% of ne& $o33on to$4. An&er /D0 i in$orre$t (e$aue 1"6 i t'e $ot of ne& $o33on to$4. 10>

. REJIRED5 REJIRED5 T'e 3ar-inal 3ar-inal $ot of $aital $aital after after roe$t roe$t e@$ee* e@$ee* t'e t'e $aita $aitall (u*-et (u*-et.. DISCSSION5 /C0 or t'i $al$ulation< $al$ulation< t'e &ei-'te*,avera-e &ei-'te*,avera-e $ot of $aital $aital i (ae* on t'e t'e 1"6 $ot of ne& $o33on to$4 to$4 an* t'e 1#6 $ot of *e(t. Retaine* Retaine* earnin- earnin- &ill not (e $oni*ere* $oni*ere* (e$aue (e$aue t'e a3ount availa(le availa(le 'a (een e@'aute*. T'u< t'e &ei-'te*,avera-e of an% a**itional $aital $aital re;uire* &ill (e 1."6 /"#6 @ 1"6 $ot of ne& e;uit%0 L /+#6 @ 1#6 $ot of ne& *e(t0. An&er An&er /A0 i in$orre$t in$orre$t (e$aue (e$aue 1#6 i t'e $ot of *e(t $aital. $aital. An&er An&er /B0 i in$orre$t in$orre$t (e$aue (e$aue 1).?+6 i t'e &ei-'te*,avera-e $ot of $aital $aital $al$ulate* for a !? 3illion (u*-et. An&er /D0 i in$orre$t (e$aue (e$aue 1"6 i t'e $ot of ne& $o33on to$4.

11#

.

Cot of retaine* earnin- An&er5 $ Diff5 E 4 F .

$2.00(1.10) $40.00

L #.1# F 1=.=6.

Cot of e@ternal e;uit% An&er5 * D ififf5 E Cot of ne& $o33on e;uit%5

111

4e F

$2.20 $34.00

L #.1# F #.1"+?



1".=6.

11)

.

Cot of referre* to$4 4 F

$10 $80

An&er5 ( Diff5 E

F 1).=6.

11

.

Sin$e Sin$e t'e fir3 fir3 'a uff uffi$ien i$ientt retaine* retaine* earnin- earnin- to fun* t'e e;uit% e;uit% ortio ortionn of it $aital $aital (u*-et< (u*-et< ue ue 4  in 7ACC e;uation. 7ACC F &*4*/1 , T0 L &4 L &$4 F #.+/"60 L #.1/1).=60 L #.=/1=.=60 F 11.+6.

114

8

7e nee* to fin* 4 at t'e oint &'ere all + roe$t are a$$ete*. In ot'er &or*< t'e $aital (u*-et F !)<### L !<### L !=<### L !<### F !1<###. T'e 7ACC at t'at oint i e;ual to IRRD F :.=6. Ste 15 Find the retained earnings break point to determine whether k s or k e is used in the WCC calculation: BPRE F

$1,000 0.4

F !)<=##.

Sin$e t'e $aital (u*-et X t'e retaine* earnin- (rea4 oint< 4e i ue* in t'e 7ACC $al$ulation. Ste )5 Calculate k e: 4e F

$3.00 $42.75(0.9)

L =6 F 1).2#6.

Ste 5 Find k p: :.=6 F #.+/1#60/#."=0 L #.)/4 0 L #.+/1).2#60 :.=6 F )."#6 L #.)/4 0 L =.1)6 1.?26 F #.)4 2.:#6 F 4.

115

11"

.

.

Data -iven5

&* F #.H &$ F #.?H 4 * F 26H T F #.+H 4 R F =.=6< 4 M , 4R F =6.

Ste Ste 15 15

Dete Deter3 r3in inee t'e t'e fir fir3 3 $o $ott of of e;ui e;uit% t% uin uin-- t'e t'e 7ACC ACC e;ua e;uatition on55 7ACC F &* × 4* × /1 , T0 L &$ × 4 1#6 1#6 F #. #. × 26 × /1 , #.+0 L #.? × 4 2.=" 2.="6 6 F #.? #.? × 4 4 F 1).))2"6.

Ste Ste )5 )5

Cal$ Cal$ul ulat atee t'e t'e fir fir3 3 (et (etaa ui uinn- t'e t'e CAPM CAPM e;ua e;uatition on55 4 F 4R L /4M , 4R0( 1).))2"6 1).))2"6 F =.=6 =.=6 L /=60( /=60( ".?) ".?)2" 2"6 6 F =6( =6( ( F 1. 1.+= +=?? ≈ 1.=.

7ACC F &*4*/1 , T0 L &$4. 4 F 4R L RPM/(0 4 F =.=6 L =6/1.+0 4 F =.=6 L ?6 F 1).=6.

7ACC F &*4*/1 , T0 L &$4 7ACC F #.+/:60/1 , #.+0 L /#."01).=6 7ACC F :.""6. 117

.

Cot Cot of *e(t *e(t F #.#: #.#:/1 /1 , #.= #.=00 F #.# #.#=2 =2== F =.2 =.2=6 =6..

Cot of retaine* earnin- F 4 R L /RPM0( F "6 L "6/1.=0 F 1=6. 7ACC F #."#/#.#=2=0 L #.+#/#.1=##0 F #.#:=1 F :.=16. 11?

. An&er An&er /C0 i $orre$ $orre$t.t. T'e $urrent $urrent rate rate for for Treaur Treaur%% (on* i ?6. IfIf t'e $o3an% $o3an% $an iue iue *e(t *e(t at 1=# (ai (ai oint oint /1.=60 over .S. Treaur% (on*< t'e 3ar4et rate of interet for Martin i 2.=6. Given a +#6 ta@ rate< t'e net $ot of *e(t i "#6 of t'e rate a$tuall% ai*< or =.16 /"#6 @ 2.=60. An&er /A0 i in$orre$t (e$aue =.=6 i t'e Treaur% rate 3inu 1=# (onu oint. An&er /B0 i in$orre$t (e$aue ?.#6 i t'e Treaur% rate. An&er /D0 i in$orre$t (e$aue 2.=6 i-nore t'e in$o3e ta@ effe$t.

11>

. An&er An&er /D0 i $orre$t. $orre$t. T'e T'e CAPM CAPM a** t'e ri4,fre ri4,freee rate /*eter /*eter3ine* 3ine* (% (% -overn3en -overn3entt e$uritie e$uritie0 0 to t'e t'e ro*u$t ro*u$t of t'e t'e (eta $oeffi$ient /a 3eaure of t'e fir3 ri40 an* t'e *ifferen$e (et&een t'e 3ar4et return an* t'e ri4,free rate. T'u< t'e $urrent $ot of e;uit% uin- t'e CAPM i 1?6 ?6 L 1.)= /1=6 , ?60. An&er /A0 i in$orre$t (e$aue 2.?=6 e;ual t'e ro*u$t of (eta an* t'e ri4,free rate. An&er An&er /B0 i in$orre$t (e$aue 1#.##6 fail to a** t'e ri4,free rate to t'e ri4 re3iu3. An&er /C0 i in$orre$t (e$aue 1=.##6 i t'e e@e$te* 3ar4et return.

120

. An&er An&er /A0 i $orre$ $orre$t.t. Pro$ee* Pro$ee* are !1+<2= !1+<2=#<### #<### /1.#1 /1.#1 @ !1=<## !1=<###<###0 #<###0 , /.#) /.#) @ !1=<###<# !1=<###<###0. ##0. T'e annual annual interet interet i !1<)##<### /.#2 $ouon rate @ !1=<###<###0. T'u< t'e $o3an% i a%in- !1<)##<### annuall% for t'e ue of !1+<2=#<###< a rate of 2.#26 /!1<)##<### \ !1+<2=#<###0. An&er An&er /B0 i in$orre$t in$orre$t (e$aue 1#.##6 i t'e u3 of t'e $ouon $ouon rate an* t'e flotation flotation rate. An&er /C0 i in$orre$t in$orre$t (e$aue ?.:)6 i-nore t'e )6 flotation $ot. An&er An&er /D0 i in$orre$t (e$aue 2.##6 i t'e $ouon rate.

121

. An&er An&er /A0 i i $orre$t. $orre$t. T'e ?6 *e(t $ot $ot an* an* t'e 1)6 1)6 e;uit% e;uit% $ot $ot 'oul* 'oul* (e &ei-'t &ei-'te* e* (% t'e t'e roortion roortion of t'e t'e total total invet3ent rereente* (% ea$' our$e of $aital. T'e total roe$t $ot !=# 3illion< of &'i$' *e(t i !1= 3illion< or #6 of t'e total. E;uit% $aital i t'e ot'er ?#6. Cone;uentl%< t'e &ei-'te*,avera-e $ot of $aital i 1#.=6 /?60

/#60 L /1)60/?#60. An&er /B0 i in$orre$t (e$aue 2.=#6 revere t'e &ei-'t. An&er /C0 i in$orre$t (e$aue :.=#6 au3e *e(t an* e;uit% are e;uall% &ei-'te*. An&er /D0 i in$orre$t (e$aue t'e &ei-'te*,avera-e $ot $annot (e le t'an an% of it $o3onent. 122

. An&er An&er /A0 i $orre $orre$t $t.. T'e 3ar4et 3ar4et return return /RM0< /RM0< -iven -iven a 1)6< 3inu 3inu t'e ri4,f ri4,free ree rate rate /R0< -iven -iven a =6< =6< i t'e 3ar4et ri4 re3iu3. It i t'e rate at &'i$' invetor 3ut (e $o3enate* to in*u$e t'e3 to invet in t'e 3ar4et. T'e (eta $oeffi$ient /U0 of an in*ivi*ual to$4< -iven a "#6< i t'e $orrelation (et&een volatilit% /ri$e variation0 of t'e to$4 3ar4et an* t'e volatilit% of t'e ri$e of t'e in*ivi*ual to$4. Cone;uentl%< t'e e@e$te* rate of return i :.)#6 R L U/RM , R0 F .#= L ."/.1) , .#=0. An&er /B0 i in$orre$t (e$aue 1).)#6 e;ual t'e ri4,free rate lu "#6 of t'e 3ar4et rate. An&er /C0 i in$orre$t (e$aue ?.)#6 reult fro3 3ultil%in- (ot' t'e 3ar4et rate re3iu3 an* t'e ri4,free rate (% "#6. An&er /D0 i in$orre$t (e$aue 1).##6 i t'e 3ar4et rate.

123

. Cot Cot of of *e( *e(tt F #.# #.#2+ 2+/1 /1 , #.# #.#00 F #.# #.#=2 =222 F =.2 =.226 26.. Cot of referre* to$4 F #.#: F :6. Cot of retaine* earnin- F 4 R L /RPM0( F ".=?6 L /=601. F 1.#?6. 7ACC F #.+/#.#=220 L #.1#/#.#:0 L #.=#/#.1#?0 F :.?:6.

124

. An&er An&er /D0 i $orre$t $orre$t.. A$$or*i A$$or*inn- to SMA +A< t'e $ot $ot of $aital $aital i i *efine* *efine* a t'e $o3o $o3oite ite $ot $ot of variou variou our$e our$e of fun* in$lu*e* in a fir3 $aital tru$ture. It i t'e 3ini3u3 rate of return t'at 3ut (e earne* on ne& invet3ent t'at &ill not *ilute t'e interet of t'e 'are'ol*er. In t'i ro(le3< Co3an% 8 'a t'ree our$e of fun*5 *e(t< $o33on to$4< an* referre* to$4. T'e $ot of *e(t $aital i t'e after,ta@ $ot of *e(t to t'e fir3. Given t'at t'e fir3 i ta@e* at +#6 an* interet i a ta@ *e*u$tion< t'e $ot to t'e fir3 i onl% #.#"" /1.# , #.+0 @ /.110. T'e $ot of referre* to$4 i t'e annual *ivi*en* re;uire3ent *ivi*e* (% t'e $urrent ri$e er 'are or t'e ro$ee* fro3 iuan$e er 'are. T'u< t'e $o3onent $ot of referre* to$4 for Co3an% 8 i #.#?= /!).)= \ #0. T'e $ot of $o33on to$4 i *iffi$ult to *eter3ine a$$uratel%< (ut one of t'e 3ot $o33on eti3ation involve uin- t'e $aital aet ri$in- 3o*el to *eter3ine t'e $ot. T'u< t'e $ot of $o33on to$4 e;ual t'e ri4,free rate lu t'e ro*u$t of (eta for Co3an% 8 an* t'e 3ar4et ri4 re3iu3. T'e $o3onent $ot of $o33on to$4 for Co3an% 8 i #.#2) .#+ L /.? @ .#"0. To *eter3ine t'e &ei-'te*,avera-e $ot of $aital< ea$' $o3onent $ot i 3ultilie* (% it ree$tive &ei-'t in t'e $o3an% $aital tru$ture< an* t'ee value are u33e* to arrive at #.#? /.#"" @ .=0 L /.#2) @ .+0 L /.#?= @ .10. An&er /A0 i in$orre$t (e$aue #.#?+ i t'e i3le avera-e. An&er /B0 i in$orre$t (e$aue #.#2)# i t'e $ot of $o33on to$4. An&er An&er /C0 i in$orre$t (e$aue #.#""# i t'e $ot of *e(t.

.

125

Time line: 0

1

2

3

4

"*2 % +

PT % 60

40 6-m ont • • •

60

60

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60

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60 & % 1,000

Sin$e t'e (on* ell at ar ar of !1<###< it YTM YTM an* $ouon rate /1) er$ent0 are e;ual. T'u< t'e before"ta# $ot $ot of *e(t to Rollin i 1).# er$ent. er$ent. T'e after"ta# $ot $ot of *e(t e;ual5 4*
.

12

1)?

Cot of referre* to$4 An&er5 * Diff5 E Cot of referre* to$45 to$45 4 F !1)!1##/#.:=0 F 1)."6.

.

Cot of e;uit%5 CAPM An&er5 $ Di D iff5 E Cot of retaine* earnin- /CAPM aroa$'05 4 F 1#6 L /=601.) F 1".#6. .

12?

Cot of e;uit%5 DC An&er5 $ Di Diff5 E Cot of retaine* earnin- /DC aroa$'05 4 F

$2.00(1.08) $27

L 26 F 1".#6.

1):

.

Cot of e;uit%5 ri4 re3iu3 An&er5 $ Di Diff5 E Cot of retaine* earnin- /(on* %iel*,lu,ri4,re3iu3 aroa$'05 4 F 1).#6 L +.#6 F 1".#6.

1#

.

7ACC An&er5 ( Diff5 E R Cal$ulate 4e5 4e F

$2.00(1.08) $27(1

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L 26 F 1".2:6.

7ACC F &*4*/1 , T0 L &4 L &$4e F #.)/1).#60/#."0 L #.)/1)."60 L #."/1".2:60 F 1+.#: 1+.16. . An&er An&er /C0 i $orre$ $orre$t.t. If earninearnin- (efore (efore interet interet an* an* ta@e ta@e in$reae* in$reae* (% (% 1?6< an* an* net in$o3e in$o3e &a &a u +)6< +)6< t'e fir3 fir3 i uin- levera-e effe$tivel%. T'e *e-ree of finan$ial levera-e i t'e er$enta-e $'an-e in net in$o3e *ivi*e* (% t'e er$enta-e $'an-e in EBIT. EBIT. A$$or*in-l%< A$$or*in-l%< Nelon *e-ree of finan$ial levera-e i ).+?. An&er /A0 i in$orre$t (e$aue t'e *e-ree of finan$ial levera-e i $al$ulate* (% *ivi*in- t'e er$enta-e $'an-e in net in$o3e in$o3e (% t'e er$enta-e er$enta-e $'an-e in EBIT. EBIT. An&er An&er /B0 i in$orre$t in$orre$t (e$aue (e$aue t'e *e-ree of finan$ial finan$ial levera-e levera-e i $al$ulate* (% *ivi*in- t'e er$enta-e $'an-e in net in$o3e (% t'e er$enta-e $'an-e in EBIT. EBIT. An&er /D0 i in$orre$t (e$aue t'e *e-ree of finan$ial levera-e i $al$ulate* (% *ivi*in- t'e er$enta-e $'an-e in net in$o3e (% t'e er$enta-e $'an-e in EBIT. EBIT. 

131

132

. An&er An&er /B0 i $orre$ $orre$t.t. inan$ia inan$iall levera-e levera-e i t'e t'e a3ount a3ount of t'e fi@e* fi@e* $ot $ot of $aital $aital<< rin$iall rin$iall%% *e(t< in in a fir3 fir3 $aital $aital tru$ture relative to it oeratin- in$o3e. evera-e $reate finan$ial ri4 an* i *ire$tl% relate* to t'e $ot of $aital. Be$aue t'e $o3an% i retirin- (on*< t'e total *e(t i *e$reae*. Given t'at t'e a3ount of *e(t an* levera-e are *ire$tl% relate*< a *e$reae in t'e a3ount of *e(t reult in a *e$reae in finan$ial levera-e. An&er /A0 i in$orre$t (e$aue (e$aue t'e (on* retire3ent *e$reae t'e *e(t e;uit% e;uit% ratio. An&er /C0 i in$orre$t (e$aue (e$aue t'e total aet &ill *e$reae /aet &ill (e ue* to retire t'e *e(t< reultinin an in$reae* aet turnover ratio /net ale \ avera-e total aet0. An&er /D0 i in$orre$t (e$aue t'e interet e@ene avoi*e* &ill in$reae net in$o3e an* t'e return on 'are'ol*er e;uit%.

133

. An&er An&er /B0 i $orre $orre$t. $t. T'e T'e *e-ree *e-ree of finan$ia finan$iall leveralevera-ee for Co3an% Co3an% B 3a% (e $al$ul $al$ulate ate** a earnin- earnin- (efore (efore interet an* ta@e< *ivi*e* (% EBIT 3inu interet. EBIT i !)## /!:= NI L !1# interet L !:= ta@ e@ene0. T'u< t'e D i 1.#= !)## \ /!)## , !1#0. An&er /A0 i in$orre$t (e$aue 1.# reult if *ere$iation e@ene i o3itte* fro3 t'e $al$ulation of EBIT. EBIT. An&er /C0 i in$orre$t (e$aue 1.1) reult if net in$o3e i ue* intea* intea* of EBIT. EBIT. An&er /D0 i in$orre$t (e$aue 1.)= i t'e *e-ree of finan$ial levera-e for Co3an% A.

134

. An&er An&er /C0 i $orre $orre$t $t.. T'e (oo4 (oo4 value value er 'are 'are for Co3an% Co3an% A e;ual e;ual t'e u3 of $o33o $o33onn to$4 to$4 an* retain retaine* e* earnin-< *ivi*e* (% t'e nu3(er of 'are< or +.1? /!1## L !1=#0 \ "#. An&er /A0 i in$orre$t (e$aue !1."? reult if retaine* earnin- i o3itte* fro3 t'e nu3erator. nu3erator. An&er /B0 i in$orre$t (e$aue !).=# reult if $o33on $o33on to$4 i o3itte* fro3 t'e nu3erator. nu3erator. An&er /D0 i in$orre$t (e$aue !=.## i t'e (oo4 value er 'are for Co3an% B.

1=

. An&er An&er /A0 i $orre$ $orre$t.t. T'e T'e *e-ree of of total total levera-e levera-e e;ual e;ual t'e *e-ree *e-ree of finan$ial finan$ial levera levera-e -e /D0 ti3e ti3e t'e t'e *e-ree *e-ree of oeratin- levera-e /DO0. T'e D 3a% (e tate* a earnin- (efore interet an* ta@e /EBIT0 *ivi*e* (% EBIT

3inu interet an* referre* *ivi*en* /(efore t'e ta@ effe$t0. If EBIT i !1##<### /!) @ ##<### unit0 ale , /!1.=# @ ##<### unit0 VC , !=#<### C< t'e D i 1.)= !1##<### \ /!1##<### , !)#<### , !#0. T'e DO 3a% (e tate* a $ontri(ution 3ar-in *ivi*e* (% t'e $ontri(ution 3ar-in 3inu fi@e* $ot. en$e< if t'e $ontri(ution 3ar-in i !1=#<### /!) unit ri$e , !1.=# unit VC0 @ ##<### unit< t'e DO i 1.= !1=#<### \ /!1=#<### , !=#<###0< an* t'e *e-ree of total levera-e i 1.2?= /1.)= @ 1.=#0. An&er /B0 i in$orre$t (e$aue 1.=# i t'e DO. An&er /C0 i in$orre$t (e$aue 1.)= i t'e D. An&er /D0 i in$orre$t (e$aue 1.)# e;ual t'e DO *ivi*e* (% t'e D. 13

. An& An&er er /B0 /B0 i $orre $orre$t $t.. Oer Oerat atin in-- leve levera ra-e -e i t'e t'e er$ er$en enta ta-e -e $'an $'an-e -e in oerat oeratin in-- in$o in$o3e 3e reult reultin in-- fro3 fro3 a er$enta-e $'an-e in ale. It 3eaure 'o& a $'an-e in volu3e affe$t rofit. Co3anie &it' lar-er invet3ent an* -reater fi@e* $ot or*inaril% 'ave 'i-'er $ontri(ution 3ar-in an* 3ore oeratin- levera-e. T'e *e-ree of oeratin- levera-e 3eaure t'e e@tent to &'i$' fi@e* aet are ue* in t'e ro*u$tion ro$e. A $o3an% &it' a 'i-' er$enta-e of fi@e* $ot i 3ore ri4% t'an a fir3 in t'e a3e in*utr% t'at relie 3ore on varia(le $ot to ro*u$e. Bae* on a $ontri(ution 3ar-in of !.1" er unit /!1 , !.2+ varia(le $ot0< t'e *e-ree of oeratin- levera-e i /+##<### @ !.1"0 \ /+##<### @ !.1"0 , )2<### F 1.?2. An&er /A0 i in$orre$t (e$aue ).+ i o(taine* (% overtatinovertatin- t'e $ontri(ution 3ar-in or t'e fi@e* $ot. An&er /C0 i in$orre$t (e$aue ).1 in$lu*e a nonoeratin- e@ene /interet0 a a fi@e* $ot. $ot. An&er /D0 i in$orre$t (e$aue 1.) i o(taine* (% un*ertatin- t'e !"+<### $ontri(ution 3ar-in or un*ertatin- t'e !)2<### of fi@e* $ot.

137

. An&er An&er /C0 i $orre$ $orre$t.t. T'e *e-ree *e-ree of finan$ finan$ial ial levera-e levera-e i t'e er$entaer$enta-ee $'an-e $'an-e in earnin- earnin- availa(le availa(le to to $o33on $o33on 'are'ol*er t'at i ao$iate* &it' a -iven er$enta-e $'an-e in net oeratin- in$o3e. Oeratin- in$o3e e;ual earnin- (efore interet an* ta@e. T'e 3ore finan$ial levera-e e3lo%e*< t'e -reater t'e *e-ree of finan$ial levera-e an* t'e ri4ier t'e fir3. Earnin- (efore interet an* ta@e e;ual !"<### !+##<### ale , /!.2+ @ +##<### unit0 VC , !)2<### C. in- t'e for3ula< t'e $al$ulation i a follo&5 !"<### F!"<### F 1.=!"<### , !"<### , /!)<### \ ."0!)"<""?An&er /A0 i in$orre$t (e$aue ).+ i o(taine* (% overtatin- t'e $ontri(ut $ontri(ution ion 3ar-in or t'e fi@e* $ot. An&er An&er /B0 i in$orre$t in$orre$t (e$aue (e$aue 1.?2 i t'e *e-ree of oeratinoeratin- levera-e< not finan$ial levera-e. An&er /D0 i in$orre$t (e$aue 1.) i o(taine* o(taine* (% un*ertatin- t'e !"+<### of $ontri(ution 3ar-in or un*ertatin- t'e !)2<### of fi@e* $ot.

13?

. An&er An&er /A0 i i $orre$t. $orre$t. T'e *e-ree *e-ree of total levera-e levera-e i e;ual to to t'e *e-ree *e-ree of oeratinoeratin- leveralevera-ee ti3e ti3e t'e *e-ree *e-ree of of finan$ial levera-e. T'u< a *e$reae in eit'er of t'ee ratio reult in a *e$reae in total levera-e. If t'e $o3an% 'a* no referre* to$4< t'e D an* t'e DT &oul* (e lo&er (e$aue t'e reta@ in$o3e ne$ear% to a% t'e referre* *ivi*en* P \ /1 , t0 i u(tra$te* fro3 t'e *eno3inator of t'e D. An&er /B0 i in$orre$t (e$aue t'e DT &oul* *e$reae< *e$reae< not in$reae. An&er /C0 i in$orre$t (e$aue t'e eli3ination of referre* to$4 &oul* $'an-e t'e e;uation. An&er /D0 i in$orre$t (e$aue t'e *e$reae *e$reae &oul* (e roortional.

13>

.

An&er An&er /B0 i $orre$ $orre$t.t. T'e T'e &ei-'te &ei-'te*,aver *,avera-e a-e $ot $ot of $aita $aitall i $al$ulate $al$ulate** a follo&5 follo&5 /7ei-'t of e;uit%0/Cot of e;uit%0 L /7ei-'t of *e(t0/Before,ta@ $ot of *e(t0/1 , Ta@ Ta@ rate0 F /.?0/.1)0 L /.0/.#20/1 , .0 F 1#6 An&er /A0 i in$orre$t (e$aue 26 i t'e (efore,ta@ $ot of *e(t. An&er /C0 i in$orre$t (e$aue 116 i $al$ulate* uin- t'e (efore,ta@ $ot of *e(t intea* of t'e after,ta@ $ot of *e(t. An&er /D0 i in$orre$t (e$aue 1)6 i t'e $ot of e;uit%.

1+#

. An&er An&er /D0 i $orre$ $orre$t.t. T'e $o3an $o3an%% &ill 'ave 'ave 'i-'er 'i-'er e@e$te* e@e$te* ta@ e@en e@ene e un*er un*er arran-e3e arran-e3ent nt Z1 (e$aue< (e$aue< &it' &it' lo&er interet e@ene< ta@a(le in$o3e &ill (e 'i-'er. Z1 Z)Sale revenue !=##<### !=##<### !=##<###Cot of ale ale /)##<###0 /)##<###0 /)##<###0GA e@ene/1##<###0 /1##<###0Interet e@ene /)+<###0 /?#<###0Ta@a(le /?#<###0Ta@a(le in$o3e!1?"<### !1#<###Ta@ a%a(le /#60 /=)<2##0 /:<###0Net in$o3e !1)<)## !1)<)## ! :1<###An&er :1<###An&er /A0 i in$orre$t in$orre$t (e$aue (e$aue e@e$te* e@e$te* -ro 3ar-in i unaffe$t unaffe$te* e* (% t'e $'oi$e $'oi$e of finan$infinan$inarran-e3ent. An&er An&er /B0 i in$orre$t (e$aue t'e *e-ree of oeratin- levera-e 3eaure t'e effe$t of a $'an-e in ale on oeratin- in$o3e /earnin- (efore interet an* ta@e0. en$e< t'e t&o arran-e3ent 'ave t'e a3e *e-ree of

oeratin- levera-e (e$aue t'e finan$inarran-e3ent *oe not affe$t ale an* $ot of ale. An&er /C0 i in$orre$t (e$aue interet e@ene &ill (e 'i-'er un*er arran-e3ent Z). 141

. An&er An&er /D0 i $orre$ $orre$t.t. T'e *e-ree *e-ree of finan$ finan$ial ial levera levera-e -e 3a% (e e@re e@ree* e* a earnin- earnin- (efore (efore intere interet t an* ta@e< ta@e< *ivi*e* (% earnin- (efore interet an* ta@e 3inu interet. or finan$ial arran-e3ent Z)< t'e D i 1.=+ ^/!=##<### ale , !)##<### CGS , !1##<### GA0 \ /!=##<### ale , !)##<### CGS , !1##<### GA0 , /1#6 @ !?##<### *e(t0_. An&er /A0 i in$orre$t (e$aue 1.#: ue t'e after,ta@ interet $ot for arran-e3ent Z1 in t'e *eno3inator. An&er An&er /B0 i in$orre$t (e$aue 1.1+ i t'e *e-ree of finan$ial levera-e for arran-e3ent Z1. An&er /C0 i in$orre$t (e$aue 1.) ue t'e after,ta@ interet $ot in t'e *eno3inator.

1+)

. An& An&er er /A0 /A0 i $orre $orre$t $t.. A $al$ $al$ul ulat ate* e* (elo& (elo&< net net rof rofitit a3ount a3ount for for Z1 an* Z) are !1) !1)<) <)## ## an* !:1< !:1<## ###< #< ree$tivel%. T'u< Z) 'a a #.6 return on e;uit% !:1<### \ /!1<###<### total aet , !?##<### *e(t0 $o3are* &it' a 1?."6 return on e;uit% for Z1 !1)<)## \ /!1<###<### total aet , !##<### *e(t0. Moreover< t'e *e(t ratio /*e(t finan$in- \ total aet0 i ?#6 /!?##<### \ !1<###<###0 for Z)< an* #6 /!##<### \ !1<###<###0 for Z1. Z1 Z)Sale revenue !=##<### !=##<### !=##<###Cot !=##<###Cot of ale /)##<###0/) /)##<###0/)##<## ##<###0Gene #0General ral  a*3in. a*3in. e@ene e@ene /1##<###0 /1##<###0 /1##<###0I /1##<###0Intere nterett e@ene e@ene /)+<###0 /)+<###0 /?#<###0T /?#<###0Ta@a( a@a(le le rofit!1?" rofit!1?"<### <### !1#<###T !1#<###Ta@ a@ a%a(le a%a(le /#60 /#60 /=)<2##0 /=)<2##0 /:<###0Net rofit !1)<)## ! :1<###An&er /B0 i in$orre$t (e$aue t'e return on e;uit% an* t'e *e(t ratio are 'i-'er for Z) t'an for Z1. An&er /C0 i in$orre$t (e$aue t'e return on e;uit% an* t'e *e(t ratio are 'i-'er for Z) t'an for Z1. An&er /D0 i in$orre$t (e$aue t'e return on e;uit% an* t'e *e(t ratio are 'i-'er for Z) t'an for Z1.

143

. An&er An&er /A0 i $orre$t. $orre$t. T'e $oeff $oeffi$ien i$ientt of variati variation on i ueful ueful &'en &'en t'e rate rate of return return an* tan*ar* tan*ar* *evia *eviation tion of of t&o σ invet3ent *iffer. *iffer. It 3eaure t'e ri4 er unit of return (e$aue it *ivi*e t'e tan*ar* *eviation *eviation / 0 (% t'e e@e$te* C return / k 0. Coeffi$ient of variation variation F

σ

C k T'e invet3ent in t'e .S. an* Britain 'a a $oeffi$ient of variation of .1+ /6 \ )160< &'erea t'e invet3ent in t'e .S. an* Cana*a 'a a $oeffi$ient of variation of .")= /1=6 \ )+60. A$$or*in-l%< t'e $o3an% 'oul* un*erta4e t'e Briti' invet3ent (e$aue it 'a u(tantiall% le ri4 er unit of return. An&er /B0 i in$orre$t (e$aue t'e Cana*ian invet3ent i i-nifi$antl% ri4ier er unit of return. An&er /C0 i in$orre$t (e$aue t'e $o3an% 'oul* un*erta4e t'e Briti' invet3ent. A a reult< it return &ill in$reae an* it ri4 &ill *e$reae. An&er /D0 i in$orre$t (e$aue t'e $o3an% 'oul* un*erta4e t'e Briti' invet3ent. A a reult< it return &ill in$reae an* it ri4 &ill *e$reae. 144

. An& An&er er /A0 /A0 i $orre $orre$t $t.. T'e T'e e@e e@e$t $te* e* rate of retu return rn on an invet invet3e 3ent nt i *ete *eter3 r3in ine* e* uinuinan e@e$ e@e$te te** valu valuee $al$ulation. It i an avera-e of t'e out$o3e &ei-'te* a$$or*in- to t'eir ro(a(ilitie. or Te$'a$e< t'e avera-e i a$$o3li'e* (% 3ultil%in- ea$' ro(a(ilit% (% t'e $orreon*in- return for ea$' tate of t'e e$ono3% an* t'en $al$ulatin- t'e u3 of t'e ro*u$t. Nu3eri$all%< t'e $al$ulation i erfor3e* a follo&5 .#=/,.+=0 L .1=/,.1#0 L .)/.#=0 L .+/.1#0 L .1=/.#0 L .#=/.=0 F .#?= F ?.=6. An&er /B0 i in$orre$t (e$aue 1=6 a** oitive ro*u$t intea* of ne-ative ro*u$t for t'e firt t&o tate. An&er An&er /C0 i in$orre$t (e$aue =6 i t'e u3 of t'e return /au3in- all are oitive0 3inu 1. An&er /D0 i in$orre$t (e$aue )=6 i t'e u3 of t'e return.

145

.

An& An&er er /B0 /B0 i i $or $orre re$t $t.. T'e T'e vari varian an$e $e σ 2 i $al$ulate* uin- t'e e;uation n

σ

2

F

∑(

)

2

C p k i − k i

i =1

If5 k i i t'e return fro3 t'e it' out$o3e<

k i t'e e@e$te* return< an* pi C

n

C = k ∑ k i p i or i =1

.#=/,.+=0 L .1=/,.1#0 L .)/.#=0 L .+/.1#0 L .1=/.#0 L .#=/.=0 F .#?=

i t'e ro(a(ilit% of t'e it' out$o3e.

F .#=/,.+=,.#?=0) L .1=/,.1,.#?=0 ) L .)/.#=,.#?=0 ) L .+/.1,.#?=0 ) L .1=/.#,.#?=0 ) L .#=/.=,.#?=0 ) F .##1 An&er /A0 i in$orre$t (e$aue .1?= i t'e ;uare root of .##1< &'i$' i t'e tan*ar* *eviation of Te$'a$e Te$'a$e return. An&er /C0 i in$orre$t (e$aue .#?= i t'e e@e$te* return. An&er /D0 i in$orre$t (e$aue .)?2 i t'e ;uare root of t'e e@e$te* return. σ

2

14

. An&er An&er /B0 i $orre$t. $orre$t. T'e T'e tan*ar* tan*ar* *eviat *eviation ion /`0 -ive -ive an an e@a$t e@a$t value value for t'e t'e ti-'tne ti-'tne of of t'e *itri( *itri(utio utionn an* t'e ri4ine of t'e invet3ent. It i $al$ulate* (% ta4in- t'e ;uare root of t'e varian$e. Given t'at t'e varian$e i .##1< t'e tan*ar* *eviation i .1?=< or 1?.=6. An&er /A0 i in$orre$t (e$aue ?.=6 i t'e e@e$te* return. An&er /C0 i in$orre$t (e$aue .#16 i t'e varian$e. An&er /D0 i in$orre$t (e$aue t'e tan*ar* *eviation i 1?.=6.

147

. An&er An&er /C0 i $orre$t $orre$t.. A $oinu $oinuran ran$e $e $laue $laue re;uire re;uire t'e inure* inure* to 3aintain 3aintain inura inuran$e n$e e;ual e;ual to or -reate -reaterr t'an a e$ifie* er$enta-e /uuall% 2#60 of t'e value of t'e inure* roert%. If t'e inure* 'a not $arrie* t'e e$ifie* er$enta-e an* a artial lo o$$ur< t'e inuran$e $o3an% i lia(le for onl% a roortionate art of t'e lo. T'i i to *eter eole fro3 a%infor inuran$e on onl% a 3all art of t'e roert% value. o&ever< t'e $oinuran$e $laue 'a no ali$ation &'en an inure* (uil*in- i totall% *etro%e*. T'u< art $an re$over t'e !##<### fa$e value of t'e oli$%. An&er /A0 i in$orre$t (e$aue artial re$over% i availa(le &'en a $oinuran$e re;uire3ent i not $o3lie* &it'. An&er /B0 i in$orre$t (e$aue a $oinuran$e $laue *oe not li3it re$over% &'en t'e inure* roert% i a total lo. An&er /D0 i in$orre$t (e$aue an inure* $annot $olle$t 3ore fro3 an inuran$e $o3an% t'an t'e fa$e value of t'e oli$%.

14?

. An&er An&er /B0 i $orre $orre$t. $t. n*er n*er a tan*ar tan*ar** $oinura $oinuran$e n$e $lau $laue< e< t'e inure inure** a-ree a-ree to 3aintain 3aintain inura inuran$e n$e e;ual e;ual to a e$ifie* er$enta-e of t'e value of t'e roert%. If t'e inure* 'a not $arrie* t'e e$ifie* er$enta-e an* a lo o$$ur< t'e inuran$e $o3an% a% onl% art of t'e lo. T'e $oinuran$e re;uire3ent i !?=#<### /?=6 @ !1<###<### MV at t'e ti3e of t'e lo0. n*er t'e for3ula (elo&< Rit 3i-'t re$over !"##<### of t'e !:##<### lo. 9mo"nt o! ins"rance  +oss = Decover6 )oins"ranc e re"irement $500<000  $>00<000 = $=00<000 $750<000

But Rit 3a% re$over no 3ore t'an t'e fa$e a3ount of t'e oli$%. oli$%. An&er /A0 i in$orre$t (e$aue t'e $oinuran$e er$enta-e i alie* to $o3ute t'e $oinuran$e re;uire3ent< &'i$' in turn i t'e *eno3inator of t'e fra$tion 3ultilie* (% t'e lo. An&er /C0 i in$orre$t (e$aue un*er no $ir$u3tan$e &oul* t'e inuran$e $o3an% a% 3ore t'an t'e fa$e value of t'e oli$%. An&er /D0 i in$orre$t (e$aue un*er no $ir$u3tan$e $ir$u3tan$e &oul* t'e inuran$e $o3an% a% 3ore t'an t'e fa$e value of t'e oli$%. oli$%. 14>

. An&er An&er /C0 i $orre$t $orre$t.. A $oinu $oinuran ran$e $e $laue $laue re;uire re;uire t'e inure* inure* to 3aintain 3aintain inura inuran$e n$e e;ual e;ual to or -reate -reaterr t'an a e$ifie* er$enta-e /uuall% 2#60 of t'e value of t'e inure* roert%. If t'e inure* 'a not $arrie* t'e e$ifie* er$enta-e an* a artial lo o$$ur< t'e inuran$e $o3an% i lia(le for onl% a roortionate art of t'e lo. A ro rata $laue -enerall% rovi*e t'at a eron &'o i inure* &it' 3ultile oli$ie $an $olle$t fro3 ea$' inuran$e $o3an% onl% a roortionate a3ount of t'e lo (ae* on t'e a3ount of inuran$e $arrie* &it' ea$' inurer. Po* &a in $o3lian$e &it' t'e $oinuran$e $laue /2#6 @ !)=#<### F !)##<###0. Po* &oul* re$over in full. T'e ro rata ortion Po* &oul* re$over fro3 O&ner i !1=<### /!1=#<### \ !)##<###0 @ !12#<###. An&er An&er /A0 i in$orre$t in$orre$t (e$aue< (e$aue< in$e Po* &a in $o3lian$e $o3lian$e &it' t'e $oinuran$ $oinuran$ee re;uire3ent re;uire3ent<< O&ner O&ner &ill a% a roortionate a3ount of t'e lo (ae* on t'e a3ount of inuran$e $arrie* &it' ea$' inurer. An&er /B0 i in$orre$t (e$aue< in$e Po* &a in $o3lian$e &it' t'e $oinuran$e re;uire3ent< O&ner &ill a% a roortionate a3ount of t'e lo (ae* on t'e a3ount of inuran$e $arrie* &it' ea$' inurer. inurer. An&er /D0 i in$orre$t (e$aue< in$e Po* &a in $o3lian$e &it' t'e $oinuran$e re;uire3ent< O&ner &ill a% a roortionate a3ount of t'e lo (ae* on t'e a3ount of inuran$e $arrie* &it' ea$' inurer.

150

. An&er An&er /B0 i $orre$t $orre$t.. A $oinu $oinuran ran$e $e $laue $laue *oe not al% al% &'en t'e roer roert% t% inure inure** i totall totall%% *etro% *etro%e*. e*. Po* &oul* re$over t'e fa$e a3ount of t'e oli$ie. An&er /A0 i in$orre$t (e$aue a $oinuran$e $laue *oe not al% &'en t'e roert% inure* i totall% *etro%e*. An&er /C0 i in$orre$t (e$aue re$over% i li3ite* to t'e fa$e a3ount of t'e oli$ie. An&er /D0 i in$orre$t (e$aue re$over% i li3ite* to t'e fa$e a3ount of t'e oli$ie.

151

. An& An&er er /C0 /C0 i $orre $orre$t $t.. n*e n*err a $oin $oinu ura ran$ n$ee $lau $laue e<< t'e t'e inu inure re** a-re a-ree e to 3ain 3ainta tain in t'e inu inura ran$ n$ee e;ua e;uall to a e$ifie* er$enta-e of t'e value of 'i'er roert%. If a lo o$$ur< t'e inurer a% onl% a roortionate 'are if t'e inure* 'a not $arrie* t'e e$ifie* er$enta-e. In t'i $ae< t'e inure* a-ree* to $arr% 2#6< (ut in fa$t $arrie* onl% +#6H t'u< it (e$a3e a =#6 inurer< an* t'e inuran$e $o3anie lia(ilit% &a re*u$e* to =#6 of an% lo. T'e total $o3(ine* lia(ilit% of t'e fire inuran$e $o3anie in t'e ro(le3 i !)#<###. n*er t'e tan*ar* ro rata $laue< a eron &'o i inure* &it' 3ultile oli$ie $an $olle$t fro3 ea$' inuran$e $o3an% onl% a roortionate a3ount of t'e lo. Even t'ou-' A$e iue* a oli$% for !)+<###< it i lia(le for onl% t'ree,fift' /)+<###+#<###0 of t'e re$overa(le lo after al%in- t'e $oinuran$e for3ula /= @ !)#<### F !1)<###0. i4e&ie< T'rift% i lia(le for )= of !)#<###. An&er /A0 i in$orre$t (e$aue art of t'e lo i re$overe* &'en a $oinuran$e $laue i not $o3lie* &it'. An&er /B0 i in$orre$t (e$aue ea$' a% t'e a3ount re$overa(le ti3e t'e er$enta-e of t'e total inuran$e it a-ree* to rovi*e. An&er /D0 i in$orre$t (e$aue (e$aue t'e inurer a% onl% a roortionate roortionate 'are if t'e inure* 'a not $arrie* t'e e$ifie* er$enta-e.

152

. An&er An&er /A0 /A0 i $orre$t $orre$t.. ollo&i ollo&inn- a lo< lo< t'e o&ner o&ner &ill (e a(le a(le to $olle$ $olle$tt t'e leer leer of /10 /10 t'e fa$e fa$e a3ount a3ount of t'e oli$%< /)0 t'e a3ount of t'e lo< or /0 t'e a3ount of t'e $o,inuran$e li3itation. T'e $o,inuran$e li3itation i $al$ulate* (% 3ultil%in- t'e lo ti3e t'e follo&in- $o,inuran$e for3ula5 a$e a3ount of oli$% /!1)#<###0 over Co, inuran$e re;uire3ent /2#6 @ !)##<### fair value0 F ?=6. T'u< ?=6 of an% lo &ill (e $overe*< u to t'e fa$e a3ount of t'e oli$%. T'e re$over% i !11)<=## /?=6 @ !1=#<### lo0. An&er /B0 i in$orre$t (e$aue (e$aue t'e re$over% i li3ite* to t'e a3ount a3ount $al$ulate* in t'e $o,inuran$e for3ula. for3ula. An&er /C0 i in$orre$t (e$aue t'e re$over% i li3ite* to t'e a3ount $al$ulate* $al$ulate* in t'e $o,inuran$e for3ula. An&er /D0 i in$orre$t (e$aue t'e re$over% i li3ite* to t'e a3ount $al$ulate* in t'e $o,inuran$e for3ula.

153

. An&er An&er /B0 i $orre $orre$t. $t. n*er n*er a tan*ar tan*ar** $oinura $oinuran$e n$e $lau $laue< e< t'e inure inure** a-ree a-ree to 3aintain 3aintain inura inuran$e n$e e;ual e;ual to a e$ifie* er$enta-e of t'e value of t'e roert%. If t'e inure* 'a not $arrie* t'e e$ifie* er$enta-e an* a lo o$$ur< t'e inuran$e $o3an% a% onl% art of t'e lo. T'e $oinuran$e re;uire3ent i !?=#<### /?=6 @ !1<###<### MV at t'e ti3e of t'e lo0. n*er t'e for3ula (elo&< Rit 3i-'t re$over !"##<### of t'e !:##<### lo. A3ount of inuran$e @ o F Re$over%Coinuran$e re;uire3ent!=##<### @ !:##<### F !"##<###!?=#<###But Rit 3a% re$over no 3ore t'an t'e fa$e a3ount of t'e oli$%. oli$%. An&er /A0 i in$orre$t (e$aue t'e $oinuran$e er$enta-e i alie* to $o3ute t'e $oinuran$e re;uire3ent< &'i$' in turn i t'e *eno3inator of t'e fra$tion 3ultilie* (% t'e lo. An&er /C0 i in$orre$t (e$aue un*er no $ir$u3tan$e &oul* t'e inuran$e $o3an% a% 3ore t'an t'e fa$e fa$e value of t'e oli$%. oli$%. An&er /D0 i in$orre$t (e$aue un*er no $ir$u3tan$e $ir$u3tan$e &oul* t'e inuran$e $o3an% a% 3ore t'an t'e fa$e value of t'e oli$%. oli$%.

P04 - Risks (Sol)

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