fin man ch10 cheat sheet

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Apr 3, 2024

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Ch 10: Pro forma financial statements can best be described as financial statements: that state projected values for future time periods. | Currently, Rangel Accessories sells 42,600 handbags annually at an average price of $149 each. It is considering adding a lower-priced line of handbags that sell for $79 each. The firm estimates it can sell 21,000 of the lower-priced handbags but expects to sell 7,200 fewer of the higher-priced handbags by doing so. What is the amount of annual sales that should be used when evaluating the addition of the lower-priced handbags?- $586,200 ( Sales = 21,000($79) − 7,200($149) = $586,200 ) | A project will produce operating cash inflows of $61,000 per year for 10 years in a row. The initial fixed asset investment in the project will be $94,000. The net aftertax salvage value is estimated at $7,000 and will be received during the last year of the project's life. What is the net present value of the project if the required rate of return is 14.5 percent?- $219,878 ( NPV = −$94,000 + $61,000{[1 − (1/1.145 10 )]/.145} + $7,000/1.145 10 = $219,878) | The stand-alone principle advocates that project analysis should be based solely on which one of the following costs?: Incremental | Net working capital: can create either an initial cash inflow or outflow. Ch 13: The expected return of a stock , based on the likelihood of various economic outcomes, equals the: weighted average of the returns for each economic state. | To calculate the expected risk premium on a stock, one must subtract the risk-free rate from the stock’s expected return. | The following items are included when calculating the expected return on a portfolio : I. Percentage of the portfolio invested in each individual security, II. Projected states of the economy, III. The performance of each security given various economic states, IV. Probability of occurrence for each state of the economy. | The best measure of systematic risk: Beta | The capital asset pricing model explains the relationship between the expected return on a security and the level of that security's systematic risk. | The stock of Rullo Rigs has a beta of 1.34. The risk-free rate of return is 1.9 percent, the inflation rate is 2.2 percent, and the market risk premium is 6.9 percent. What is the expected rate of return on this stock?- 11.1% ( E( r ) = .019 + 1.34(.069)= .111, or 11.1% ) | If a security is fairly priced, its risk premium divided by its beta will equal the slope of the security market line. | Stock Alpha has a beta of .79 and a reward-to-risk ratio that is less than the reward-to-risk ratio of Stock Omega. Omega has a beta of 1.12. This information implies that: either Alpha is overpriced or Omega is underpriced or both . | Ch14: When utilizing the capital asset pricing model approach to value equity, the outcome: assumes the reward-to-risk ratio is constant. | The cost of preferred stock is equivalent to the: rate of return on a perpetuity . | When calculating a firm’s weighted average cost of capital , the capital structure weights: are based on the market values of the outstanding securities. | Statement regarding the weighted average cost of capital : It is the return investors require on the total assets of the firm. | Assume a firm employs debt in its capital structure. Which statement is accurate?: The WACC would most likely decrease if the firm replaced its preferred stock with debt. | Montez Supply is expected to pay an annual dividend of $.95 per share next year. The market price of the stock is $43.50 and the growth rate is 4.5 percent. What is the cost of equity ? - 6.68% ( R E = $.95/$43.50 + .045= .0668, or 6.68% ) | Kelley Couriers just paid its annual dividend of $5.25 per share. The stock has a market price of $58.25 and a beta of 1.2. The return on the U.S. Treasury bill is 1 percent and the market risk premium is 8.5 percent. What is the cost of equity ?- 11.2% ( R E = .01 + 1.2(.085= .112, or 11.2% ) | The Dry Well has 6.85 percent preferred stock outstanding with a market value per share of $79, a stated value of $100 per share, and a book value per share of $29. What is the cost of preferred stock ?- 8.67% ( R P = .0685($100)/$79= .0867, or 8.67% ) | The Downtowner has 168,000 shares of common stock outstanding valued at $53 per share along with 13,000 bonds selling for $1,008 each. What weight should be given to the debt when the company computes its weighted average cost of capital ?- 59.54% ( D = 13,000($1,008) = $13,104,000 | E = 168,000($53) = $8,904,000 | V = $13,104,000 + 8,904,000= $22,008,000 | W D = $13,104,000/$22,008,000= .5954, or 59.54%) | Mullineaux Corporation has a target capital structure of 46 percent common stock, 5 percent preferred stock, and the balance in debt. Its cost of equity is 15.8 percent, the cost of preferred stock is 8.3 percent, and the aftertax cost of debt is 6.8 percent. What is the WACC given a tax rate of 23 percent?- 11.02% ( WACC = .46(.158) + .05(.083) + .49(.068)= .1102, or 11.02% ) | Ch16: Ignoring taxes, at the break-even point between a levered and an unlevered capital structure , the: company is earning just enough to pay for the cost of the debt. | Financial risk is: dependent upon a company’s capital structure. | Financial risk is the type of equity risk related to a firm’s capital structure policy. | According to the static theory of capital structure , a company borrows up to the point where the marginal benefit of the interest tax shield derived from increased debt is just equal to the marginal expense of the resulting increase in financial distress costs. | The optimal capital structure : will vary over time as taxes and market conditions change. | Galaxy Products is comparing two different capital structures, an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the company would have 112,000 shares of stock outstanding. Under Plan II, there would be 75,000 shares of stock outstanding and $600,000 in debt. The interest rate on the debt is 6.7 percent and there are no taxes. What is the break-even EBIT ?- $121,686 ( EBIT/112,000 = [EBIT − .067($600,000)]/75,000 = $121,686 ) | Shin Cosmetics has a weighted average cost of capital of 11.30 percent. The company can borrow at 6.5 percent. What is the cost of equity if the debt-equity ratio is 1.2?- 17.06% ( R E = .113 + (.113 − .065)(1.2= .1706, or 17.06% ) | Japhet Events has a debt-equity ratio of 1.3. The pretax cost of debt is 8 percent and the required return on assets is 12.6 percent. Ignoring taxes, what is the company's cost of equity ?- 18.58% ( R E = .126 + (.126 − .08)(1.3= .1858, or 18.58% ) | In general, the capital structures of U.S. firms: vary significantly across industries. | The explicit costs, such as legal and administrative expenses, associated with corporate default are classified as direct bankruptcy costs. | Project X has cash flows of $8,500, $8,000, $7,500, and $7,000 for Years 1 to 4, respectively. Project Y has cash flows of $7,000, $7,500, $8,000, and $8,500 for Years 1 to 4, respectively. Which one of the following statements is true concerning these two projects given a positive discount rate ? (No calculations needed.): Project X has both a higher present and a higher future value than Project Y. | You are comparing two investment options that each pay 6 percent interest compounded annually. Both options will provide you with $12,000 of income. Option A pays $2,000 the first year followed by two annual payments of $5,000 each. Option B pays three annual payments of $4,000 each. Which one of the following statements is correct given these two investment options? Assume a positive discount rate . (No calculations needed.): Option B has a higher present value at Time 0. | Five years from today, you hope to donate $10,000 to the alumni association. Thereafter, you intend for your annual contributions to grow at a rate of 3 percent per year, forever. If you can earn 7 percent per year on your investments, how much must you invest today to fund this donation ?- $190,724 ( GPPV 4 = $10,000/(.07 − .03= $250,000|PV = $250,000/1.07 4 = $190,724 ) | Werden Drilling offers 5.5 percent coupon bonds with semiannual payments and a yield to maturity of 7 percent. The bonds mature in 10 years. What is the market price per bond if the face value is $1,000?- $893.41 ( Bond price = $27.50({1 − [1/(1 + .07/2) 10 × 2 ]}/(.07/2)) + $1,000/(1 + .07/2) 10 × 2 = $893.41 ) | Stoessel, Incorporated, issued 20-year bonds 3 years ago at a coupon rate of 8.5 percent. The bonds make semiannual payments. If these bonds currently sell for 91.4 percent of par value, what is the YTM ?- 9.53% ( $914 = $42.50({1 − [1/(1 + r ) 17 × 2 ]}/ r ) + $1,000/(1 + r ) 17 × 2 YTM = 2(4.766%)= 9.53% ) | When using the t wo-stage dividend growth model ,: g 1 can be greater than R . | An agent who maintains an inventory from which he or she buys and sells securities is called a: dealer . | The common stock of Shepard Auto sells for $47.92 per share. The stock is expected to pay $2.28 per share next year when the annual dividend is distributed. The company increases its dividends by 1.65 percent annually. What is the market rate of return on this stock?- 6.41% ( R = $2.28/$47.92 + .0165= .0641, or 6.41% ) | If a project has a net present value equal to zero, then: the project earn s a return exactly equal to the discount rate. | Statement related to the internal rate of return ( IRR ): The IRR is equal to the required return when the net present value is equal to zero. | Six months ago, you purchased 1,400 shares of ABC stock for $21.33 a share. You have received dividend payments equal to $.60 a share. Today, you sold all of your shares for $24.47 a share. What is your total dollar return on this investment?- $5,236 (Total dollar return = 1,400 × ($24.47 − 21.33 + .60) = $5,236 ) | A bond par value is $2,000 and the coupon rate is 6.2 percent. The bond price was $1,946.75 at the beginning of the year and $1,983.62 at the end of the year. The inflation rate for the year was 2.5 percent. What was the bond's real return for the year?- 5.62% (Bond return = ( $1,983.62 − 1,946.75 + 124)/$1,946.75= .0826, or 8.26% | r = [(1 + .0826)/(1 + .0250)] − 1= .0562, or 5.62% ) | One year ago, you purchased 140 shares of Titan Wood Products for $50.15 per share. The stock has paid dividends of $.57 per share over the past year and is currently priced at $55.06. What is your total dollar return on your investment?- $767.20 (Dollar return = ( $55.06 − 50.15 + .57) × 140= $767.20 ) | Last year, you purchased 660 shares of Forever, Incorporated, stock at a price of $48.74 per share. You received $990 in dividends and a total of $38,353 when you sold the stock. What was the capital gains yield on this stock?- 19.23% (Capital gains yield = [($38,353/660) − 48.74]/$48.74= .1923, or 19.23% ) | A stock had returns of 16.87 percent, −6.63 percent, and 23.63 percent for the past three years. What is the standard deviation of the returns ?- 15.88% ( Average return = (.1687 − .0663 + .2363)/3= .1129, or own 420 shares of Stock X at a price of $41 per share, 290 shares of Stock Y at a price of $64 per share, and 355 shares of Stock Z at a price of $87 per share. What is the portfolio weight of Stock Y?- .2784 (Weight of Y = 290($64)/[420($41) + 290($64) + 355($87)]= .2784 ) | A portfolio consists of $15,800 in Stock M and $24,900 invested in Stock N. The expected return on these stocks is 9.20 percent and 12.80 percent, respectively. What is the expected return on the portfolio ?- 11.40% (Weight of M = $15,800/($15,800 + 24,900)= .3882 | Portfolio expected return = . 3882(9.2%) + (1 – .3882)(12.8%) = 11.40%) | You recently purchased a stock that is expected to earn 11 percent in a booming economy, 5 percent in a normal economy, and lose 3 percent in a recessionary economy. There is 15 percent probability of a boom, 72 percent chance of a normal economy, and 13 percent chance of a recession. What is your expected rate of return on this stock?- 4.86% ( E( R ) = .15(.11) + .72(.05) + .13(–.03)= .0486, or 4.86% ) | A stock will have a loss of 11.4 percent in a bad economy, a return of 11.2 percent in a normal economy, and a return of 25.1 percent in a hot economy.

There is 30 percent probability of a bad economy, 33 percent probability of a normal economy, and 37 percent probability of a hot economy. What is the variance of the stock's returns ?- .02220 ( E( R ) = . 30(−0.114) + .33(0.112) + .37(0.251)= .0956, or 9.56% | σ 2 = .30(−0.114 − .0956) 2 + .33(0.112 − .0956) 2 + .37(0.251 − .0956) 2 = .02220) | You have a portfolio that is invested 25 percent in Stock A, 40 percent in Stock B, and 35 percent in Stock C. The betas of the stocks are .70, 1.25, and 1.54, respectively. What is the beta of the portfolio ?- 1.21 (β Portfolio = .25(.70) + .40(1.25) + .35(1.54)= 1.21 ) | Judy's Boutique just paid an annual dividend of $3.67 on its common stock. The firm increases its dividend by 3.45 percent annually. What is the company's cost of equity if the current stock price is $43.72 per share?- 12.13% ( R E = [($3.67(1.0345))/$43.72] + .0345= .1213, or 12.13% ) | Smathers Corporation stock has a beta of 1.11. The market risk premium is 7.80 percent and the risk-free rate is 3.24 percent annually. What is the company's cost of equity ?- 11.90% ( R E = .0324 + 1.11(.0780)= .1190, or 11.90% ) | 11.29% | Variance = 1/2[(.1687 − .1129) 2 + (−.0663 − .1129) 2 + (.2363 − .1129) 2 = .02523 | Standard deviation = .02523 1/2 = .1588, or 15.88% ) | You Bethesda Water has an issue of preferred stock outstanding with a coupon rate of 5.30 percent that sells for $94.38 per share. If the par value is $100, what is the cost of the company's preferred stock ?- 5.62% ( R P = $5.30/$94.38= .0562, or 5.62% ) | Bermuda Cruises issues only common stock and coupon bonds. The firm has a debt-equity ratio of .77. The cost of equity is 11.7 percent and the pretax cost of debt is 6.7 percent. What is the capital structure weight of the firm's equity if the firm's tax rate is 21 percent?- .5650 ( X E = 1/(1 + .77)= .5650 ) | Ornaments, Incorporated, is an all-equity firm with a total market value of $476,000 and 14,100 shares of stock outstanding. Management believes the earnings before interest and taxes (EBIT) will be $66,200 if the economy is normal. If there is a recession, EBIT will be 15 percent lower, and if there is a boom, EBIT will be 25 percent higher. The tax rate is 21 percent. What is the EPS in a recession ?- $3.15 (EPS = [$66,200(1 − .15) − $66,200(1 − .15)(.21)]/14,100]= $3.15) | Taunton's is an all-equity firm that has 155,500 shares of stock outstanding. The CFO is considering borrowing $287,000 at 7 percent interest to repurchase 24,500 shares. Ignoring taxes, what is the value of the firm ?- $1,821,571 (Value per share = $287,000/24,500= $11.71 | Firm value = 155,500($11.71)= $1,821,571 ) | Debbie's Cookies has a return on assets of 8.5 percent and a cost of equity of 11.6 percent. What is the pretax cost of debt if the debt–equity ratio is .84? Ignore taxes.- 4.81% ( .116 = .085 + [(.085 − R D ) × .84]= .0481, or 4.81% ) | The optimal capital structure maximizes shareholder value. | The value of a firm is maximized when the: weighted average cost of capital is minimized. | You just won the $89 million California State Lottery. The lottery offers you a choice of receiving a lump sum today or $89 million split into 26 equal annual installments at the end of each year (with the first amount paid a year from now). Assume the funds can be invested at an annual rate of 7.65%. What dollar amount of the lump sum would exactly equal the present value of the annual installments? Round off to the nearest $1: $38,163,612 | At an annual interest rate of 7% the future value of $5,000 in five years is closest to: $7,013 | ABC Corp has just paid its annual dividend of $1.50 per share, and it is expected that these dividend payments will continue indefinitely. If ABC’s equity cost of capital is 12%, then the value of a shar e of ABC’s stock is closest to: $12.50 | Consider a bond with a zero percent coupon rate with 20 years to maturity. With a face value of $1,000. The price will this bond trade if the YTM is 6% is closest to: $312 | GM is expected to pay a dividend of $2.00 in the coming year. Dividends are expected to grow at the rate of 2% per year. The risk-free rate is 4% and the market risk premium is 5%. GM has a beta of 1.2. The value of the stock should be: $25.00 | George Clooney has been offered $14 million (to be paid in 1 year from now) for starring in Batman 4, Batman 5, and Batman 6. If Clooney accepts this offer, he will have to forego acting in Ocean’s 14, Ocean’s 15, and Ocean’s 16 that would have paid him $5 million each (in 2, 3, and 4 years from now). Clooney assumes his personal cost of capital is 10%. Based on this information, the NPV today of Clooney’s decision to accept Batman films is: $1.42 million | You have $10,000 to invest. You invested $3,500 in Firm 1 and the remaining amount in Firm 2. The return on these firms is 20% and 15%, respectively. The return on your portfolio is: 16.75% | A firm is funded with $500 million in equity and $475 million in debt. The yield to maturity on bonds issued by the firm is 7.85%. The tax rate is 40%. The firm has a beta of 1.15. The risk-free rate is 5%, and the market risk premium is 9%. The weighted average cost of capital for this firm is: 10.17% | A stock had returns of 5, 14, 11, -8, and 6 percent over the past 5 years. The standard deviation for this stock is: 8.44% | The relative proportions of debt, equity, and other securities that a firm uses to finance itself is referred to as: Capital structure | Incremental cash flows are the difference between a firm’s future cash flows with a project and those without the project | Stand-alone principle is the assumption that evaluation of a project may be based on the project’s incremental cash flows | What is the standard deviation of the returns on a stock given the following information? - 3.82% (E( r ) = .08(.171) + .70(.076) + .22(.017)= .07062, or 7.062% | σ = [.08(.171 − .07062) 2 + .70(.076 − .07062) 2 + .22(.017 − .07062) 2 ] .5 = .0382, or 3.82%) | What is the expected return of an equally weighted portfolio comprised of the following three stocks?- 10.96% (E( R P ) Boom = (.19 + .13 + .07)/3= .13, or 13% | E( R P ) Normal = (.15 + .05 + .13)/3= .11, or 11%|E( R P ) Bust = (−.29 − .14 + .22)/3= −.07, or −7%|E( R P ) Boom = .25(.13) + .72(.11) + .03(−.07= .1096, or 10.96%) | Galvatron Metals has a bond outstanding with a coupon rate of 6.7 percent and semiannual payments. The bond currently sells for $1,891 and matures in 17 years. The par value is $2,000 and the company's tax rate is 21 percent. What is the company's aftertax cost of debt? - 5.74% ($1,891 = $67.00{1 − [1/(1 + R ) 34 ]}/ R + $2,000/ R 34 = .0363, or 3.63% | YTM = 3.630% × 2= 7.26% | R D = 7.26%(1 − .21)= 5.74%) | Stoessel, Incorporated, issued 20-year bonds 3 years ago at a coupon rate of 8.5 percent. The bonds make semiannual payments. If these bonds currently sell for 91.4 percent of par value, what is the YTM ?- 9.53% ($914 = $42.50({1 − [1/(1 + r ) 17 × 2 ]}/ r ) + $1,000/(1 + r ) 17 × 2 YTM = 2(4.766%)= 9.53%

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