Homework answers / question archive / Question 1 (3 points)     A firm has assets valued at $550M, liabilities properly valued at $450M

Question 1 (3 points)     A firm has assets valued at $550M, liabilities properly valued at $450M

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Question 1 (3 points)

 

 

A firm has assets valued at $550M, liabilities properly valued at $450M.  What is the maximum percentage drop in asset prices a firm can withstand before becoming insolvent?

Question 1 options:

	22.2%
	18.2%
	55.0%
	81.8%

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Question 2 (3 points)

 

 

Which of the following is not true of WACC?

Question 2 options:

	Firms attempt to earn returns on capital greater than WACC
	The optimal WACC maximizes firm value
	WACC costs are not always shown on the financial statements
	Higher tax rates increase WACC

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Question 3 (3 points)

 

 

Which statement is correct regarding illiquidity and/or insolvency?

Question 3 options:

	Illiquidity can cause a solvent company to become insolvent, but insolvency cannot cause a liquid firm to become illiquid
	Higher leverage increases the risk of becoming insolvent
	Bankruptcy occurs when you are deemed illiquid or insolvent
	The most liquid and solvent firms are always the best investments

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Question 4 (3 points)

 

 

In which scenario should a company be most inclined to issue additional debt?

Question 4 options:

	The company is illiquid with an overvalued stock price and high leverage
	The company has many investment opportunities, little debt, and an undervalued stock price
	Interest rates have tripled in the last 3 months to a 20-year high
	The company’s stock price has just doubled as they completed a 2-1 stock split

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Question 5 (3 points)

 

 

Assume a business can receive a guaranteed annual payment of $5M forever.  If the appropriate discount rate 10.0%, how much should the business be willing to pay today for these future payments (hint: is this an annuity, annuity due, or perpetuity)?

Question 5 options:

	$25.0M
	$50.0M
	$10.0M
	$100.0M

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Question 6 (3 points)

 

 

If you were using the Gordon Growth Model to value a company, which of the following variables would not help you value the company?

Question 6 options:

	Next Year’s Net Income and Retention Rate
	Dividend Growth Rate
	Required Return on the Stock
	Debt/Equity Ratio and ROE

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Question 7 (3 points)

 

 

Cash Conversion Cycle is influenced by how well a company does the following:

Question 7 options:

	Rolls over its short-term debt to stay liquid
	Marks up the price it charges customers from the price it pays suppliers
	Converts inventory into sales into cash
	Gets paid in cash on its stock investments

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Question 8 (3 points)

 

 

Which of the following is a key assumption of the Internal Growth Rate?

Question 8 options:

	The company’s net income is constant over time
	The company’s leverage is constant over time
	Return on assets changes with leverage
	The company’s retention rate is constant over time

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Question 9 (3 points)

 

 

Which of the following can be found if you know a company’s most recent year’s dividend, retention rate, dividend growth rate and stock price?

Question 9 options:

	Profit margin
	Most recent year’s profit
	Return on equity
	Sustainable growth rate

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Question 10 (3 points)

 

 

A company’s bond is most likely said to be trading at a premium in which scenario?

Question 10 options:

	The bond is undervalued
	The bond is overvalued
	The bond’s yield to maturity is higher than its coupon rate
	The bond’s yield to maturity is lower than its coupon rate

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Question 11 (3 points)

 

 

Which of the following is a benefit of the Sharpe ratio?

Question 11 options:

	The Sharpe ratio is a way of hedging different risks
	The Sharpe ratio tells you how efficient the market is
	The Sharpe ratio enables a comparison of investments of different risk levels
	The Sharpe ratio tells you the return an investment will earn

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Question 12 (6 points)

 

 

Calculate the Days Sales Outstanding in 2014 for a company with the following financial measures:

YE 2012 Accounts Receivable = $585M   

YE 2013 AR = $530M        YE 2014 AR = $615M

2013 Credit Sales = $1.3B             

2014 Credit Sales = $1.6B    

Question 12 options:

	155 days
	140 days
	131 days
	144 days

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Question 13 (3 points)

 

 

Which describes the results of a company with the following ratios regarding its Cash Conversion Cycle?

2014 DIO = 15                    2014 DSO = 19            

2014 DPO = 27                   2015 DIO = 15

2015 DSO = 22                   2015 DPO = 27 

Question 13 options:

	The company increased its CCC by 3 days because it held its inventory longer
	The company increased its CCC by 3 days because it collected its receivables more quickly
	The company increased its CCC by 3 days because it sold its inventory more quickly
	The company increased its CCC by 3 days because it took longer to collect its receivables

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Question 14 (3 points)

 

 

Which of the following describes a common feature of ordinary annuities and annuities due?

Question 14 options:

	The value of the remaining cash flows remains constant over time
	The amount paid for given payments over time implies a rate of interest
	Cash flows occur at the same dates
	Constant payments are made indefinitely

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Question 15 (6 points)

 

 

Calculate the sustainable AND internal growth rate for a company with the following financial information.  Assume all ratios are constant.

2014 Company Data

Sales = $200M                       

Average Assets = $270M

Dividends Paid = $15M          Net Income = $20M

Average Equity = $220M

Question 15 options:

	SGR = 1.9% and IGR = 2.3%
	SGR = 2.3% and IGR = 1.9%
	SGR = 7.3% and IGR = 5.9%
	SGR = 5.9% and IGR = 7.3%

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Question 16 (6 points)

 

 

Calculate the value of the following bond that was just issued, rounded to the nearest dollar (no payments made yet):

A 10-year bond has an 8% coupon rate, with payments made semi-annually and a par value of $1,000.  Similar bonds have a YTM of 10%.

Question 16 options:

	$1,135
	$900
	$875
	$1,000

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Question 17 (6 points)

 

 

Calculate the Cost of Common Equity for a company with the following data and estimates:

Today’s stock price:        $17.00                  

Constant Retention Rate = 60%                

Estimated T+1 Earnings = $2.00/share    

Estimated Earnings Growth Rate = 10%

Question 17 options:

	16.0%
	10.7%
	14.7%
	17.1%

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Question 18 (6 points)

 

 

A money manager requires all stocks in his or her portfolio to have, at worst, a Sharpe Ratio of 2.0.  Currently, the market risk premium is estimated to be 6.5%.  If a stock has a standard deviation of 7% and a Beta of 1.25, will it meet this criteria? (Hint: will require algebra to combine the Sharpe Ratio formula and the CAPM formula)

Question 18 options:

	This stock meets the criteria because the Sharpe Ratio is less than 2.0
	This stock doesn’t meet the criteria because the Sharpe Ratio is less than 2.0
	This stock doesn’t meet the criteria because the Sharpe Ratio is greater than 2.0
	This stock meets the criteria because the Sharpe Ratio is greater than 2.0

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Question 19 (6 points)

 

 

Calculate the WACC of the company with the characteristics below:

Common Equity:              $275M in common equity trading at $35/share with most recent year’s dividend of $1.50/share and a dividend growth rate of 7% per year

Preferred Equity:             $75M in preferred equity trading at $40/share with a constant $3.60/share dividend

Debt:                                     $100M in bonds with a YTM and coupon rate of 7.5%

Marginal Tax Rate = 25%              

Risk-Free Rate = 3%                       

Market Risk Premium = 7%

Question 19 options:

	9.83%
	9.52%
	9.65%
	9.00%

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Question 20 (3 points)

 

 

Which of the following is a true statement about diversification?

Question 20 options:

	The diversification benefits of adding a stock to your portfolio are the same if you own 2 stocks or 100 stocks
	The more correlated the stocks in your portfolio are, the less diversified you are
	The more correlated the stocks in your portfolio are, the more diversified you are
	Diversification allows you to eliminate all risks when investing in stocks