Finance 3010 Test 1 Version A Spring 2006
Finance 3010 Test 1 Version A Spring 2006
Finance 3010 Test 1 Version A Spring 2006
Dr. Michello
Finance 3010
Test 1
Maximize
Maximize
Minimize
Maximize
Maximize
Accounts payable.
Inventory.
Accounts receivable.
Statements b and c are correct.
All of the statements above are correct.
7. All else equal, which of the following actions will increase the
amount of cash on a companys balance sheet?
a.
b.
c.
d.
e.
The
The
The
The
All
10.
of
the
following
will
increase
A secondary market.
A physical location auction market.
An over-the-counter market.
Statements a and b are correct.
Statements b and c are correct.
Commercial paper.
Preferred stock.
U.S. Treasury bills.
Bankers acceptances.
Money market mutual funds
14. You recently sold 200 shares of Disney stock to your brother.
is an example of:
a.
b.
c.
d.
e.
This
15. Your uncle would like to limit his interest rate risk and his default
risk, but he would still like to invest in corporate bonds. Which
of the possible bonds listed below best satisfies your uncles
criteria?
a.
b.
c.
d.
e.
AAA
BBB
BBB
AAA
BBB
bond with
perpetual
bond with
bond with
bond with
10 years to maturity.
bond.
10 years to maturity.
5 years to maturity.
5 years to maturity.
$850
$650
$570
$450
$500
million
million
million
million
million
$0.80
$1.00
$1.80
$5.00
$6.00
27. New Mexico Lumber recently reported that its earnings per share were
$3.00. The company has 400,000 shares of common stock outstanding,
its interest expense is $500,000, and its corporate tax rate is 40
percent. What is the companys operating income (EBIT)?
a.
b.
c.
d.
e.
$ 980,000
$1,220,000
$2,000,000
$2,500,000
$3,500,000
Sales
Operating costs (excluding depreciation and amortization)
2,550.0
EBITDA
450.0
Depreciation and amortization
75.0
Earnings before interest and taxes
375.0
Interest
60.0
Earnings before taxes
315.0
Taxes (40%)
126.0
Net income available to common stockholders
189.0
Common dividends
13.2
SEBRING CORPORATION:
2002
2001
$3,600.0
$3,000.0
3,060.0
$
540.0
90.0
450.0
65.0
385.0
154.0
231.0
181.5
Assets:
Cash and marketable securities
30.0
Accounts receivable
450.0
Inventories
600.0
36.0
540.0
540.0
$1,116.0
$1,080.0
900.0
28.
324.0
201.0
216.0
741.0
450.0
$1,191.0
$1,055.0
150.0
675.0
$
825.0
$2,016.0
$1,830.0
$100,000,000
$150,000,000
$225,000,000
$270,000,000
$375,000,000
30.
29.
$2,016.0
$1,830.0
$ 540,000,000
$ 576,000,000
$ 750,000,000
$ 985,000,000
$1,116,000,000
576,000,000
888,000,000
900,000,000
d. $1,275,000,000
e. $1,476,000,000
31.
$ 85,000,000
$146,000,000
$174,000,000
$255,000,000
$366,000,000
8.4%
10.9%
12.0%
13.3%
15.1%
2.0
4.0%
6.0%
2%;
4%;
4%;
2%;
4%;
0.33
0.33
0.67
0.67
0.50
a.
b.
c.
d.
e.
4.00
3.00
1.00
0.75
0.25
14.29%
28.00%
28.57%
55.56%
71.43%
2.00%
4.00%
4.33%
5.33%
6.00%
A
= 9.64%
BBB = 10.18%
Tax effects.
Default risk differences.
Maturity risk differences.
Inflation differences.
Statements b and d are correct.
39. One-year government bonds yield 6 percent and 2-year government bonds
yield 5.5 percent. Assume that the expectations theory holds. What
does the market believe the rate on 1-year government bonds will be
one year from today?
a.
b.
c.
d.
e.
5.00%
5.50%
5.75%
6.00%
7.00%
40. You observe the following yield curve for Treasury securities:
Maturity
1 year
2 years
3 years
4 years
5 years
Yield
5.5%
5.8
6.0
6.3
6.5
Assume that the pure expectations hypothesis holds. What does the
market expect will be the yield on 4-year securities, 1 year from
today?
a.
b.
c.
d.
e.
6.00%
6.30%
6.40%
6.75%
7.30%
41. Suppose that the annual expected rates of inflation over each of the
next five years are 5 percent, 6 percent, 9 percent, 13 percent,
and 12 percent, respectively.
What is the average expected
inflation rate over the 5-year period?
a. 6%
b. 7%
c. 8%
d. 9%
e. 10%
(The following information applies to the next two problems.)
42. A 5-year Treasury bond has a 5 percent yield.
A 10-year Treasury
bond
has
a
6 percent yield. A 10-year corporate bond has an 8 percent yield. The
market expects that inflation will average 2.5 percent over the next 10
years (IP10 = 2.5%). Assume that there is no maturity risk premium (MRP =
0), and that the annual real risk-free rate of interest, k*, will remain
constant over the next 10 years. (Hint: Remember that the default risk
premium and the liquidity premium are zero for Treasury securities: DRP
= LP = 0).
What does the market expect that inflation will average over the next
five years?
a. 1.0%
b.
c.
d.
e.
43.
1.5%
2.0%
2.5%
3.5%
5-year corporate bond has the same default risk premium and
liquidity premium as the 10-year corporate bond described above.
What is the yield on this 5-year corporate bond?
a.
b.
c.
d.
e.
6.0%
6.5%
7.0%
7.5%
8.0%
44. The interest rate on Treasury securities that mature in four years
is 8 percent. What is expected inflation in Year 4?
a. 3.0%
b. 5.0%
c. 6.0%
d. 7.0%
e. 8.0%
45. What is the interest rate on Treasury securities that mature in three
years?
a.
b.
c.
d.
e.
6.0%
6.5%
7.0%
7.5%
8.0%
46. The Merriam Company has determined that its return on equity is 15
percent. Management is interested in the various components that
went into this calculation.
You are given the following
information: total debt/total assets = 0.35 and total assets
turnover = 2.8. What is the profit margin?
a. 3.48%
b. 5.42%
c. 6.96%
d. 2.45%
e. 12.82%
47. Cleveland Corporation has 100,000 shares of common stock outstanding,
its net income is $750,000, and its P/E is 8.
What is the
companys stock price?
a. $20.00
b.
c.
d.
e.
$30.00
$40.00
$50.00
$60.00
48. Culver Inc. has earnings after interest but before taxes of $300.
The companys times interest earned ratio is 7.00. Calculate the
companys interest charges.
a.
b.
c.
d.
e.
$42.86
$50.00
$40.00
$60.00
$57.93
3.46%
4.80%
6.14%
6.58%
17.14%