TRIAL QUESTION
The most likely cause for a shift in the supply curve for coee is a change in the: a. b. c. d.
Price rice of coe coee e Wages ages of coee coee harv harvest esters ers Pric rice of tea Price rice of crea cream m
Answer:
B
The supply curve shifts in response to a change in the cost of inputs, such as the the wage wages s for for coe coee e harv harves este ters rs.. A chan change ge in the the pric price e of the the prod produc uctt is a movement along the supply curve, not a shift in the curve. A change in the price of a substitute would more likely inuence the demand curve, not the supply curve.
EASY QUESTIONS E-1 When modeling consumer decision making, indierence curves:
A. rep eprres esen entt the the se sett of of ao aord rdab able le co cons nsum umpt ptio ion n bund bundle les. s. B. re eec ectt an an incr increa easi sing ng mar margi gina nall rat rate e of of sub subst stit itut utio ion. n. !. repr re pres esent ent co cons nsump umpti tion on bund bundles les tha thatt have have e"ua e"uall tota totall utili utility ty to to th the e cons consum umer er.. #. repr pre esent consum ump ptio ion n bund ndlles that have greater total utilit lity to the customer. Answer:
C
Indierence curves reect consumption bundles that have the same total utility to the consumer, whether or not they are aordable. Indierence curves reect a diminishing marginal rate of substitution. substitution.
E-2 $eyes %otors signs a contract to sell a P&'',''' lu(ury )edan to be delivered
ne(t month, and receives a P*',''' cash do+n payment from the buyer. o+ +ill the transaction most likely li kely aect Washburn-s Washburn-s assets and liabilities Assets
/iabilities
A.
0nchanged
0nchanged
B.
1ncrease
1ncrease
!.
1ncrease
0nchanged
#.
#ecrease
#ecrease
Answer:
B
The down payment will increase cash (an asset and unearned revenue (a liabi liabilit lity. y. !evenu !evenues es (and (and thus thus retain retained ed earnin earnings gs and owner" owner"s s e#uity e#uity will will not not increase because the car has not been delivered.
p robability of 3acht !o. E-3 The probability of a boom economy is 2' percent. The probability having a 4' percent return given a boom economy is 5' percent. 6ind the 7oint probability of a boom economy and a 4' percent pe rcent return for 3acht 3acht !o. A . '.*' B . '.2'
! . '.8* # . '.4' Answer:
C
The $oint probability of a boom economy and an %& percent return for 'acht o. is &.)& * &.%& + &.-.
E-4 Which of the follo+ing is9are true
1. A pro7ects sunk costs are irrelevant to the decision of accepting or re7ecting it. 11. A pro7ects incremental cash o+s are not aected by interest e(penses. 111. Pro7ect rankings using incremental net income and incremental net cash o+s can be dierent. a; 111 only b; 1, 11 < 111 c; 1 < 11 d; 1 only
Answer:
B
Incremental cash ows of a pro$ect are the cash ows that occur if and only if the pro$ect is undertaken. ince the eects of debt /nancing are taken into account through the discount rate used to discount the pro$ect cash ows, interest payments are ignored while estimating the pro$ect0s cash ows. Therefore, a pro$ect0s incremental cash ows are not aected by interest e1penses.
E-5 When a mature =rm raises the dividend, signaling theory implies that its stock
price >>>>>>>>. When a gro+th =rm cuts the dividend, signaling theory implies that its stock price >>>>>>>>. a; +ill rise? may rise or fall b; +ill fall? +ill rise c; +ill fall? may rise or fall d; +ill rise? +ill fall Answer:
A
The signaling theory is properly applicable only to mature /rms that have had stable dividend policies because in its pure form, the theory regards dividend changes as signals of management0s forecasts of future earnings. uch an assumption is not fully $usti/able for young, growth /rms, which may cut dividends simply to supply retained earnings capital for e1pansion pro$ects, without any signaling about the /rm0s future earnings prospects. Indeed, many growth /rms pay no dividend at all for #uite some time without an adverse eect on their stock prices. 2ence, the increase in the dividend of a mature /rm is taken as a signal by investors 3 under the signaling hypothesis 3 that the management0s forecasts of future earnings are #uite favorable, leading to a rise in the stock price. 4n the other hand, for a growth /rm, such a signaling conclusion does not necessarily hold.
The divisor for the #o+ @ones 1ndustrial Average #@1A; is most likely to decrease +hen a stock in the #@1A: E-6
A . is removed and replaced. B . pays a cash dividend. ! . has a reverse split. # . has a stock split.
Answer:
D
E-7 1n the calculation of the arithmetic mean for grouped data, +hich value is used
to represent all the values in a particular class a. The lo+er limit of the class b. The cumulative fre"uency of the preceding class c. The midpoint of the class d. The fre"uency of the class
Answer:
C
The value that you would use is the midpoint of a particular class. This will be the average of the upper and lower limits of the class.
E-8 Arellano !orp.-s =nancial accounts for the year ended #ecember 8& included
the follo+ing information: et 1ncome:
P&**,'''
Preferred )tock #ividends Paid:
P84,'''
!ommon )tock #ividends Paid:
P2*,'''
!ommon )hares outstanding at @anuary &:
4','''
&'C preferred P&'' par value shares outstanding at @anuary &: 8,4'' o stock transactions occurred during the year and all preferred stock dividends +ere paid. Basic earnings per share for )avannah are closest to: A; P'.D'. B; P&.4'. !; P*.22. #; P&.E2.
Answer:
D
Arellano orp."s basic 56 ((net income 7 preferred dividends 8 weighted average number of common shares outstanding was ((69--,&&& : 6;,&&& 8 6;&,&&& + 69.<).
E-9 Which of the follo+ing statements is FALSE
A. )unk costs are developmental costs that should be considered in the capital budgeting decision. B. )hipping and installation costs are part of the depreciable basis of a pro7ect. !. F(ternalities refer to the cannibaliGation of sales that occurs +hen a ne+ pro7ect is initiated. #. Hpportunity costs are cash o+s that a =rm passes up by taking a pro7ect. Answer:
A
unk costs are not considered.
E-10 onIcallable bond prices go up faster than they go do+n. This is referred to
as: A. inverse features. B. negative conve(ity !. embedded bene=ts #. positive conve(ity
Answer:
D
=hen bond prices go up faster than they go down, it is called positive conve1ity. E-11 An investment of J&'' generates afterIta( cash o+s of J2' in 3ear &, J5' in
3ear , and J&*' in 3ear 8. The re"uired rate of return is *' percent. The net present value is closest to : a. J 2*.** b. J 45.88 c. J K5.4* d. J 2E.42 Answer: B ! 5833
E-12 @adine !orporation is considering an investment of J*',''' +ill create a
perpetual afterIta( cash o+ of J*,'''. The re"uired rate of return is 5 percent. What is the investment-s pro=tability inde( a. &.'5 b. &.&K c. &.4 d. &.*4 Answer: " 125
)olution: The PL of 6uture !ash 6lo+s M *,''' M *4,''' '.'5 The pro=tability inde( M *4,'''9*','''M &.*4
E-13 adG/ustre !orporation is considering an investment of E4' million +on +ith
e(pected afterIta( cash ino+s of &E4 million per year for seven years. The re"uired rate of return is &' percent. F(pressed in years, the pro7ect-s payback period and discounted payback period, respectively, are closest to : a. 2.8 years and 4.2 years b. 2.5 years and 4.D years c. 2.8 years and 4.D years d. 2.5 years and K.8 years Answer: C
E-14 1f the ending inventory is understated , then
a. !urrent ratio is overstated and FP) is understated b. !urrent ratio is understated and FP) is overstated c. !urrent ratio is overstated and FP) is overstated d. !urrent ratio is understated and FP) is understated Answer: D
>urrent !atio+ urrent Assets8urrent ?iabilities + @A 56 + et Income 8 4utstanding ordinary shares + @I
+ lower urrent !atio + lower 56>
E-15 The dierence bet+een nominal N#P and real N#P is that real N#P
a. %easures the level of output including price changes, +hile nominal N#P hold prices constant b. %easures the price level and nominal N#P measures the level of output c. %easures the level of output in constant prices , +hile nominal N#P includes price changes d. %easures the level of output and nominal N#P measure the price level Answer: C
E-16 According to 6A)B, timeliness is a characteristic of >>>>>.
a. reliability b. relevance c. Both relevance and reliability d. faithful representation ANSWER: B
E-17 1n calculating the +eighted average cost of capital WA!!; , +hich of the
follo+ing statements is least accurate a. #ierent methods for estimating the cost of common e"uity might produce dierent results b. The cost of preferred e"uity capital is the preferred dividend divided by the price of preferred shares. c. The cost of debt is e"ual to one minus the marginal ta( rate multiplied by the coupon rate on outstanding debt. d. one of the above Answer: C
E-18 Which of the follo+ing statements about the discounted payback period is
least accurate The discounted payback: a. fre"uently ignores terminal values b. method can give conicting results +ith the PL c. period is generally shorter than the regular payback d. none of the above Answer: C
E-19 %aine is the supervisor of her =rm-s research department. er =rm has been
seeking the mandate to under+rite Alden 1ndustries- proposed secondary stock oering. Without mentioning that the =rm is seeking the mandate, she asks /ola idora to analyGe Alden common stock and prepare research report. After reasonable eort, /ola idora produces a favourable report on Alden stocks. %aine then adds a footnote describing the under+riting relationship +ith Alden and disseminates the report to =rm clients. According to !6A 1nstitute )tandards of Professional !onduct, these actions are: a. not a violation of any standard b. a violation of )tandard L A;, #iligence and $easonable Basis c. a violation of )tandard L1 A;, #isclosure of !onicts d. a violation of )tandard L11 A;, )tandard Performance Answer: A
E-20 1nformation on Arellano$eid !ompany Os direct labor cost for the month of
@anuary is as follo+s: Actual direct labor hours 82,4'' )tandard direct labor hours 84,4'' Total direct labor payroll P *2&,4'' #irect labor eciency varianceI 6avorable P 8,*'' What is Arellano-s direct labor rate variance a. &E, *4' 0 b. *',E'' 0 c. *&,''' 6 d. *&,''' 0 Answer : B 20#700 U
The direct labor rate variance is determined by multiplying the dierence between actual and standard rate times the actual hoursB A2 (A!3!. To determine the standard rate divided the direct labor eCciency variance by the dierence between the actual standard hours. To determine the actual rate, divide the total direct labor payroll by the actual hours.
AVERAGE QUESTIONS A-1 Which of the is9are FALSE
1. A high pIvalue is necessary to re7ect a null hypothesis. 11 The higher the signi=cance level, the greater is the chance that the null +ill be re7ected +hen it is false. 111. The higher the probability of Type 11 error, the higher is the chance of re7ecting the null +hen it is false. a; 11 only b; 1, 11 < 111 c; 1 only d; 11 < 111
Answer:
B
'ou can think of the p3value as the ma1imum probability that the null hypothesis is true despite observing the value of the test statistic that you have in the sample at hand. Thus, the lower the p3value, the greater is your con/dence in re$ecting the null hypothesis. The signi/cance level represents an upper bound on the probability that the null hypothesis is true given the observed sample and the testing procedure. 2ence, if you re$ect the null at the ;D signi/cance level, for e.g., then the probability that the null is true despite your statistical evidence to the contrary could be as high as ;D (but no more, under the assumptions of the test. A Type II error refers to the event that we will fail to re$ect the null when it is false. The higher the probability of a Type II error, the lower the chance of re$ecting the null when it is false.
A-2 Pevidal, 1nc. is considering the issuance of some 7unior subordinated debt. The
!ompanys combined state9federal corporate ta( rate is 8'C, and the coupon on its outstanding senior debt is E.44C. The proposed debt +ould pay an annual coupon. Lery recently, Pevidal has met +ith a corporate =nance =rm, +ho advised the !ompany that the preIta( cost of a debt issuance +ould be E.E'C? Pevidal-s =nance division mirrored these =ndings. A month earlier, a study in a popular =nancial magaGine found that shareholders re"uire a E.D4C rate of return on similar investments. Which of the follo+ing represents the best ans+er for Pevidal-s estimated afterIta( cost of debt for this proposed debt issuance
a; 4.8DC b; 4.4K4C c; 4.2*4C d; 4.*54C
Answer:
A
!emember that in calculating the after3ta1 cost of debt for new debt issues, the EA!FIA? cost of issuing new debt is the most relevant measure. In this e1ample, the marginal cost of debt is given as <.<&D, and the after3ta1 cost of debt capital is found by multiplying (9 3 corporate ta1 rate by this /gure. peci/cally, the calculation of the after3ta1 cost of debt for 6evidal is as followsB Gpre3ta1 cost of issuing new debt <.<&D * H93combined state8federal ta1 rate &DJ + ;.KD.
A-3 Assume that a =rm used PK' million in labor and materials to generate P&''
million in total revenues. Hther costs included P*'',''' in foregone interest, economic depreciation of P2',''', and normal pro=t of P&8','''. The economic pro=t to this =rm is closest to: a. P8D,E&*,'''. B. P2',''','''. !. P8D,K8','''. #. P8D,''','''.
Answer:
C
5conomic pro/t + total revenue 7 opportunity costs + total revenue 7 (e1plicit L implicit costs. In this case, the labor and material cost of 6M& million is the e1plicit cost. Implicit costs include the 6-&&,&&& in foregone interest, economic depreciation of 6)&,&&&, and normal pro/t of 69&,&&&. o, total implicit costs e#ual 6<&,&&& + 6-&&,&&& L 6)&,&&& L 69&,&&&. Thus, economic pro/t is 69&&,&&&,&&& 3 6M&,&&&,&&& 3 6<&,&&& + 6K,M&,&&&.
A-4 $aGel, a portfolio manager for 6A$ 1nvestment %anagement !ompany, a
registered investment organiGation that advises investment companies and private accounts, +as promoted to that position three years ago. AlyGa, her supervisor, is responsible for revie+ing $aGels portfolio account transactions and her re"uired monthly reports of personal stock transactions. $aGel has been using Aprilyn, a broker, almost e(clusively for portfolio account brokerage transactions. 6or securities in +hich Aprilyns =rm makes a market, Aprilyn has been giving $aGel lo+er prices for personal purchases and higher prices for personal sales than Aprilyn gives to $aGels portfolio accounts and other investors. $aGel has been =ling monthly reports +ith AlyGa only for those months in +hich she has no personal transactions, +hich is about every fourth month. Which of the follo+ing applies9apply 1. $aGel violated the !ode and )tandards in that she failed to disclose to her employer her personal transactions. 11. $aGel violated the !ode and )tandards by breaching her =duciary duty to her clients. 111. AlyGa violated the !ode and )tandards by failing to enforce reasonable procedures for supervising and monitoring $aGel in $aGels trading for her o+n account. a; 1, 11 and 111 b; 1 and 111 only c; 11 and 111 only
d; 1 and 11 only
Answer:
A
This #uestion involves three tandards. !aNel, the portfolio manager, has been obtaining lower prices for her personal securities transactions than she gets for her clients, which is a violation of tandard IO (P.9, Qiduciary Ruties. In addition, she violated tandard II (P, 6rofessional Eisconduct, by failing to adhere to company policy and hiding her personal transactions from her /rm. !aNel0s supervisor, AlyNa, violated tandard III (5, !esponsibilities of upervisors, by failing to enforce the procedures for reporting personal trading. Therefore, tatements I, II and III are all correct.
A-5 1f $heden )ki !ompany issues common stock, and uses the proceeds to
purchase =(ed assets such as e"uipment: A; Both cash o+ from operations and cash o+ from =nancing +ould increase. B; !ash o+ from =nancing +ould decrease and cash o+ from investing +ould increase. !; !ash o+ from =nancing +ould increase and cash o+ from investing +ould decrease. #; Both cash o+ from operations and cash o+ from =nancing +ould decrease.
Answer:
C
ash ow from /nancing increases when stock is issued, while cash ow from investing decreases when spending for purchases of /1ed assets.
A-6 A mutual fund announces it is an aggressive fund +ith a beta of &.*. The fund is
fully diversi=ed, so its correlation to the inde( is &. #uring the period the inde( returns &*C and the risk free rate +as 4C. What is the e(pected return on this fund a; 5.2'C b; &8.2'C c; &*.'C d; &2.*'C
Answer:
B
ince the fund is fully diversi/ed that means its correlation to the Inde1 is 9, thus the fund should fall on the E?. 'ou can use the A6E to pro$ect the fund0s performance. S + .&; L 9.-(.9- 3 .&; S + 9.)
A-7 Which of the follo+ing statements about capital is FALSE
a; 1f the =rm needs more funding than can be supported by retained earnings the =rms +eighted average cost of capital WA!!; +ill increase.
b; As the =rm raises more and more capital, market eciency +ould indicate that the =rms marginal +eighted average cost of capital should fall. c; Assuming constant risk, the correct discount rate to use in its capital budgeting decision is the =rms marginal +eighted average cost of capital. d; 1f a =rm earns e(actly the marginal cost of capital on its ne+ investment pro7ects it +ill satisfy the return re"uirements of its creditors and e"uity investors.
Answer:
B
=A should rise.
A-8 Which of the follo+ing statements best describes the fundIofIfunds 6H6; class
of hedge funds A fund of funds: a. allo+s smaller investors to access the hedge funds market. b. is an openIend mutual fund that primarily invests in other openIend funds. c. is open to institutional investors for the purpose of seeking arbitrage situations in hedge fund pricing. d. one of the above.
Answer:
A
A fund3of3funds (Q4Q is a fund that invests in hedge funds. They are open to both individual and institutional investors.
A-9 6aith, 1nc. sells &',''' units at a price of P4 per unit. 6aith-s =(ed costs are
P5,''', interest e(pense is P*,''', variable costs are P8 per unit, and earnings before interest and ta(es FB1T; is P&*,'''. What is 6aith-s degree of =nancial leverage #6/; and total leverage #T/; #6/
#T/
A.
&.88
&.E4
B.
&.88
*.''
!.
&.*'
*.''
#.
&.88
&.E4
Answer:
C
R4? + Huantity(63O8Huantity(63O3Q + H9&,&&&(;3 8 H9&,&&&(;33%,&&& + 9.M< RQ? + 5PIT8(5PIT39 + 9-,&&& 8 (9-,&&& 7 -,&&& + 1.2 RT? + R4? *RQ? + 9.M< * 9.- + 2.0
A-10 The N#P deator is used to:
a. reduce the gross N#P to allo+ for net income earned abroad. b. ad7ust the gross N#P for net e(ports and depreciation. c. calculate the N#P in terms of base year currency value. d. calculate net N#P given gross N#P. Answer:
C
The FR6 deator is used to calculate real FR6 from nominal FR6 by ad$usting appropriately for ination. Qor this, a base year is arbitrarily selected and all values are e1pressed in terms of the base year currency value (e.g. 9KK& U.. dollars. This is done by dividing the nominal FR6 by the FR6 deator. The result indicates the FR6 in terms of the purchasing power which prevailed in the base year. A-11 1f everything else remains constant and a =rm increases its cash conversion
cycle, its pro=tability +ill likely a. 1ncrease b. 1ncrease if earnings are positive c. #ecrease d. ot be aected Answer: C
!ash conversion cycle is the period from +hich inventory is received and processed age of inventory, sold to outside party age of receivable; and eventually paid age of accounts payable;. Ans+er c; is correct because the longer the cash conversion cycle the greater the amount of time from +hen a =rm pays its suppliers to the time it ultimately collects receivables. The greater the time frame the more likely the =rm +ill have to borro+ funds and incur interest e(pense +hich reduces pro=tability. Ans+ers a;, b;, and d; are incorrect because the incurrence of interest +ill reduce pro=tability. A-12 Namitin !ompany purchases merchandise from its supplier on credit terms of 89&', net 8' . What is the e"uivalent annual interest rate use 8K'Iday year; if the company foregoes the discount and pays on the 8' th day a. 44.KEC b. 8C c. K'C d. 8.'DC Answer: A
Annual 1nterest $ate M 89&''I8;;(8K'days98'daysI&'days;; M 89DE;(8K'9*'; M 44.KEC A-13 Hne key dierence bet+een the dividend discount and o+s to e"uity models
is a. the o+s to e"uity model looks at the cash o+s that +ould be available to fund the dividend stream b. the dividend discount model looks at the cash o+s that +ould be available to fund the dividend stream c. the o+s to e"uity model looks at the dividend stream itself d. the dividend discount model discounts the free cash ino+ into the e"uity component of the =rm Answer: A
A-14 3ou are considering the purchase of a threeIyear annual coupon bond +ith a
par value of P&,''' and a coupon rate of 4.4C. 3ou have determined that the spot rate for year & is 4.*C, the spot rate for year t+o is 4.4C, and the spot rate for year three is 4.EC. What +ould you be +illing to pay for the bond no+ a. D8E.KK b. &,''' c. DD4.'K d. DD5.E5 Answer: C
A-15 1n order to test if the mean 1Q of employees in an organiGation is greater than
&'', a sample of 8' employees is taken. The sample value of the computed GI statistic is 8.2. The appropriate decision at 4C signi=cance level is to >>>> . a. re7ect the null hypothesis and conclude that the population mean is greater than &'' b. re7ect the null hypothesis and conclude that the population mean is not e"ual to &'' c. re7ect the null hypothesis and conclude that the population mean is e"ual to &'' d. accept the null hypothesis and conclude that the population mean is e"ual to &'' Answer: A
DIFFICULT QUESTIONS "-1 The management of $eyes 1ndustries have adhered to the follo+ing capital
structure: 2'C debt, 24C common e"uity, and &4C perpetual preferred e"uity. The follo+ing information applies to the =rm: 3ield to maturity of outstanding longIterm debt M D.4C F(pected return on the market M &2.4C Annual riskIfree rate of return M K.*4C istorical Beta coecient of $eyes 1ndustries !ommon )tock M &.*2 Annual preferred dividend M P&.E4 Preferred stock net oering price M P*5.4' !ombined state9federal corporate ta( rate M 84C Niven this information, and using the !apital Asset Pricing %odel to calculate the component cost of common e"uity, +hat is the Weighted Average !ost of !apital for $eyes 1ndustries a; The WA!! for $eyes 1ndustries cannot be determined from the information provided. b; 5.42C c; &2.24C d; &'.5&C Answer:
D
The calculation of the =eighted Average ost of apital is as followsB Gfraction of debt * Hyield to maturity on outstanding long3term debt H93combined state8federal income ta1 rateJ L Gfraction of preferred stock * Hannual dividend8net oering priceJ L Gfraction of common stock * cost of e#uityJ. The cost of common e#uity can be calculated using three methods, the apital Asset 6ricing Eodel (A6E, the Rividend3'ield3plus3Frowth3!ate (or Riscounted ash Qlow approach, and the Pond3'ield3plus3!isk36remium approach. In this e1ample, you are re#uired to calculate the cost of e#uity using the apital Asset 6ricing Eodel (A6E, which is illustrated as followsB Grisk3free rate L beta (e1pected return on the market risk3 free rateJ. Using this model, the cost of common e#uity can be found as 9M.)%D. The cost of perpetual preferred stock can be found by dividing the annual dividend by the net oering price, which is illustrated in this case as followsB G69.<;8-%.;&J + M.9)D. The after3ta1 cost of debt can be found by taking the yield to maturity on the /rm"s outstanding long3term debt (K.;D, and multiplying this /gure by (9 annual ta1 rate ;D + M.9<;D. Incorporating all of these /gures into the =A e#uation gives a =eighted Average ost of apital of 9&.%&
"-2 %ichael Bello+, !6A, !A1A, is an investment banker +ho is involved +ith an
initial public oering 1PH; of e+!o. Because this is Bello+-s =rst involvement in an 1PH, he reports to an e(perienced supervisor. While revie+ing past =nancial statements provided by e+!o, Bello+ suspects that e+!o deliberately overstated its earnings for the past several "uarters. Bello+ seeks the advice of his =rm-s highly competent general counsel and follo+s the advice given +ithout deviation. Based on the general counsel-s advice, Bello+ consults his immediate supervisor about the suspected overstatement of earnings. After revie+ing the situation, Bello+-s supervisor e(plains +hy e+!o-s calculations of its earnings are correct. Bello+ realiGes that his ine(perience and e(uberance initially led him to an incorrect conclusion about e+!o-s earnings. Which of the follo+ing statements about Bello+-s actions involving )tandard 1A;, Rno+ledge of the la+, and )tandard 1!;, %isrepresentation, is !H$$F!T Bello+: A; #id not violate either )tandard 1 A; or )tandard 1!;. B; Liolated both )tandard 1 A; and )tandard 1!;. !; Liolated )tandard 1 A; but did not violate )tandard 1!;. #; Liolated )tandard 1 !; but did not violate )tandard 1A;.
Answer:
A
Pellow did not violate tandard I(A, Vnowledge of the law, because he sought advice of counsel and followed that advice. Pellow did not violate tandard I(, Eisrepresentation, because he made reasonable and diligent eorts to ensure the accuracy of the information and to avoid any material representation.
"-3 Niven a population of &', 4, and &4, the coecient of variation +ould be:
A; 8'C. B; 2'C. !; K'C. #; &''C.
Answer:
B
!L M S9mean;&''; S M 4* U 4* 98; M &K.KE M 2 plus a bit 29&';&''; M 2'C
"-4 At a recent aggerty )emiconductors Board of #irectors meeting, %erle
aggerty +as asked to discuss the topic of the company-s +eighted average cost of capital WA!!;. At the meeting aggerty made the follo+ing statements about the company-s WA!!: S$%$e&en$ 1: A company creates value by producing a higher return on its assets
than the cost of =nancing: those assets. As such, the WA!! is the cost of =nancing a =rm-s assets and can be vie+ed as the =rm-s opportunity cost of =nancing its assets. S$%$e&en$ 2: )ince a =rm-s WA!! reects the average risk of the pro7ects that
make up the =rm, it is not appropriate for evaluating all ne+ pro7ects. 1t should be ad7usted up+ard for pro7ects +ith greaterIthanIaverage risk and do+n+ard for pro7ects lessIthanIaverage risk. Are )tatement & and )tatement *, as made by aggerty !H$$F!T )tatement & )tatement * A;
!orrect
B;
1ncorrect
!;
!orrect
#;
1ncorrect
Answer:
1ncorrect !orrect !orrect 1ncorrect
C
5ach statement that 2aggerty has made to the board of Rirectors regarding the weighted average cost of capital is correct. ew pro$ects should have a return that is higher than the cost to /nance those pro$ects.
"-5 The correlation coecient bet+een stocks A and B is '.E4. The standard
deviation of stock A-s returns is &KC and the standard deviation of stock B-s returns is **C. What is the covariance bet+een stock A and B A; '.8E4'. B; '.'*K2. !; '.'84*. #; '.&*''.
Answer:
B
ov9,- + &.<; 1 &.9M 1 &.-- + &&.&-M) + covariance between A and P.
"-6 Assume a =rm uses a constant WA!! to select investment pro7ects rather than
ad7usting the pro7ects for risk. 1f so, the =rm +ill tend to:
A; re7ect pro=table, lo+Irisk pro7ects and accept unpro=table, highIrisk pro7ects. B; accept pro=table, lo+Irisk pro7ects and accept unpro=table, highIrisk pro7ects. !; accept pro=table, lo+Irisk pro7ects and re7ect unpro=table, highIrisk pro7ects. #; re7ect pro=table, lo+Irisk pro7ects and re7ect unpro=table, highIrisk pro7ects.
Answer:
A
The /rm will re$ect pro/table, low3risk pro$ects because it will use a hurdle rate that is too high. The /rm should lower the re#uired rate of return for lower risk pro$ects. The /rm will accept unpro/table, high3risk pro$ects because the hurdle rate of return used will be too low relative to the risk of the pro$ect. The /rm should increase the re#uired rate of return for high3risk pro$ects.
"-7 Fvangelista 1nc., is in a 2'C marginal ta( bracket. The =rm can raise as much
capital as needed in the bond market at a cost of &'C. The preferred stock has a =(ed dividend of J2.''. The price of preferred stock is J8&.4'. The afterIta( costs of debt and preferred stock are closest to: #ebt
Preferred )tock
A;
&'.'C
E.KC
B;
K.'C
&*.EC
!;
K.'C
E.KC
#;
&'.'C
2'.'C
Answer:
B
After3ta1 cost of debt + 9&D 1 (93&.) + MD. ost of preferred stock + W) 8 W9.;& + 9-.<&D
"-8 %ega )ecurities, a multinational investment advisor based in the 0nited )tates,
employs the follo+ing analysts +ho practice in multiple 7urisdictions. %elissa Black, !6A, resides in !ountry , +hich has no securities la+s or regulations, but does business in !ountry /, +hich has securities la+s and regulations that are less strict than the !ode and )tandards. Tom White, a !6A 1nstitute member, resides in !ountry /, but does business in !ountry ), +hich has securities la+s and regulations that are stricter than the !ode and )tandards. According to the !6A 1nstitute !ode and )tandards, +hich of the follo+ing statements about Black and White is !H$$F!T Black must adhere to the White must adhere to the A;
/a+ of !ountry /
la+ of !ountry )
B;
!ode and )tandards
!;
/a+ of !ountry
la+ of !ountry /
#;
/a+ of !ountry
la+ of !ountry )
la+ of !ountry )
Answer:
B
Pecause the applicable law in ountry ? is less strict than the ode and tandards, Plack must adhere to the ode and tandards. Pecause the applicable law is stricter than the ode and tandards, =hite must adhere to the stricter applicable law of ountry .
"-9 A =rm is planning a J*4 million e(pansion pro7ect. The pro7ect +ill be =nanced
+ith J&' million debt and J&4 million in e"uity stock e"ual to the company-s current capital structure;. The beforeIta( re"uired return on debt is &'C and &4C for e"uity. 1f the company is in the 84C ta( bracket, +hat cost of capital should the =rm use to determine the pro7ect-s net present value PL; A;
&*.4C
B;
D.KC
!;
&&.KC
#;
&4C
Answer:
C
=A + (5 8 O (!5 L (R 8 O (!R (9 7 T =A + (9; 8 -; (&.9; L (9& 8 -; (&&.9& (9 7 &.; + &.&K L &.&-M + &.99M or 99.MD
"-10 The capital budgeting director of Aprilyn %anufacturing is evaluating a laser
imaging pro7ect +ith the follo+ing characteristics: !ost: J&4',''' F(pected /ife: 8 years AfterIta( cash o+s: J8', 8&E per year )alvage Lalue: J' 16 Aprilyn %anufacturing-s cost of capital is &&.4'C, +hat is the pro7ect-s minimal internal rate of return 1$$; A;
&8.KC
B;
&&.4C
!;
&'.'C
#;
*E.*C
Answer:
C
ince we are seeking the I!!, the answer has to be in terms of a rate of return, this eliminates the option not written in a percentage. ince the payments (cash ows are e#uals, we can calculate the I!! asB + 6O + 9;&,&&&
6ET + M&, 9< 6T X I8' + K.KKKK
"-11 #ale 6errarin , !6A, gathered the follo+ing information about a company:
The stock is currently trading a P8&.'' per share Fstimated gro+th rate for the ne(t three years is *4C Beginning in the year 2, the gro+th rate is e(pected to decline and stabiliGe at 5C The re"uired return for this type of company is estimated at &4C The dividend in year & is estimated at P*.'' The stock is undervalued by appro(imately: a. &4.E' b.' c. K.2' d. 4.4' Answer: C
"-12 Assume the current price of a bond is &'*.4'. 1f interest rates increase by
'.4C the value of the bond decreases to &'' and if interest rates decrease by '.4C the price of the bond increases to &'4.4' . What is the eective duration of the bond a. 4.8E b. 4.4' c. 4.25 d. 4.*5 Answer: A
"-13 The Asian )pec 6und, managed by !harlie Puth, !6A, engages in currency
speculation for its clients. Based in Paris, 3co believes that there is an opportunity to speculate on the %alaysian $inggit. The current spot e(change rate is 2.2&E %alaysian $inggit per euro. Assuming the oneIyear riskIfree rate for the Furopean Fconomic !ommunity is &&.EKC and the %alaysian oneIyear riskIfree interest rate is E.KC, +hat should the oneIyear for+ard rate be for the %alaysian $inggit a. 2.*2K %$.9 F0$. b. 2.45K %$.9 F0$. c. 2.*48 %$.9 F0$. d. 2.22& %$.9 F0$. Answer: C
"-14 Assume that Adelanda-s income increased from P*',''' per year to P8','''
per year, and his demand for VstoreIbrand bread decreased from 5' loaves to 2' loaves per year. Which of the follo+ing most accurately describes Adelanda-s income elasticity for storeIbrand bread a. 1ncome elasticity is I'.K' and storeIbrand bread is an inferior good
b. 1ncome elasticity is I&.KE and storeIbrand bread is an inferior good c. 1ncome elasticity is U& and storeIbrand bread is a complimentary good d. 1ncome elasticity is U'.K' and storeIbrand bread is a complimentary good Answer: B
"-15 @onas Products has 7ust developed a ne+ product +ith a manufacturing cost of
P8' . The marketing director has identi=ed three marketing approaches for this ne+ product. Approach X : )et a selling price of P8K and have the =rm-s sales sta sell the product at a &'C commission +ith no advertising program. Fstimated annual sales +ould be &',''' units. Approach 3 : )et a selling price of P85,have the =rm-s sales sta sell the product at a &'C commission, and back them up +ith a P8',''' advertising program. Fstimated annual sales +ould be &*,''' units. Approach Y : $ely on +holesalers to handle the product. @onas +ould sell the ne+ product to the +holesalers at P8* per unit and incur no selling e(penses. Fstimated annual sales +ould be &2,''' units. $ank the three alternatives in order of net pro=t from highest net pro=t to lo+est. a. X,3,Y b. 3,Y,X c.Y,X,3 d. Y,3,X Answer: C
CLINCHER QUESTIONS
'-1 What +ould be the marginal ta( rate for an investor to be indierent bet+een a
KC yield on ta( e(empt municipal bonds and a &'C corporate bond a. 2'C b. K'C c. *'C d. 5'C Answer: A. 40%
'-2 An analyst gathered the follo+ing information about an industry. The industry
beta is '.D. The industry pro=t margin is 5C, the total asset turnover ratio is &.4 and the leverage multiplier is **. The dividend payout ratio of the industry is 4'C. The riskIfree rate is EC and the e(pected market return is &4C. The industry P9F is closest to: a. &*.'' b. **.E8 c. &2.*'
d. &5.*& Answer: B
'-3 6ind the future value of the follo+ing uneven cash o+ stream. Assume end of
the year payments. The discount rate is &*C. 3ear 3ear 3ear 3ear 3ear a. K4, &22.88 b. 88,''2.&4 c. 45,&K2.45 d. K',*E8.&* Answer: C
& * 8 2 4
I*''' I8,''' K,''' *4,''' 8','''
