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# Answers to Finance Multiple Choice Questions Assignment (Multiple Choice Questions Sample)

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Answers to Finance multiple choice questions

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Town Crier has 10.0 million shares of common stock outstanding, 2.0 million shares of preferred stock outstanding, and 10.00 thousand bonds. If the common shares are selling for $28.00 per share, the preferred share are selling for $15.50 per share, and the bonds are selling for 97.00 percent of par, what would be the weight used for equity in the computation of Town Crier's WACC?

Â 83.26%

Â 66.67%

Â 33.33%

Â 87.31%

JackITs has 6.1 million shares of common stock outstanding, 2.1 million shares of preferred stock outstanding, and 31.00 thousand bonds. If the common shares are selling for $29.20 per share, the preferred share are selling for $14.60 per share, and the bonds are selling for 97.89 percent of par, what would be the weight used for equity in the computation of JackIT's WACC?

Â 74.49%

Â 33.33%

Â 74.11%

Â 66.67%

Your firm needs a machine which costs $160,000, and requires $37,000 in maintenance for each year of its 7 year life. After 5 years, this machine will be replaced. The machine falls into the MACRS 7-year class life category. Assume a tax rate of 30% and a discount rate of 14%. What is the depreciation tax shield for this project in year 7?

Â $4,286.40

Â $14,288

Â $2,000.32

Â $10,001.60

Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown below. The required rate of return on projects of both of their risk class is 8 percent, and that the maximum allowable payback and discounted payback statistic for the projects are 2 and 3 years, respectively.

Â Â Time:

0

1

2

3

Â Â Project A Cash Flow

-35,000

25,000

45,000

16,000

Â Â Project B Cash Flow

-45,000

25,000

5,000

65,000

Â Use the payback decision rule to evaluate these projects; which one(s) should it be accepted or rejected?

Â accept A, reject B

Â reject A, accept B

Â accept both A and B

Â accept neither A nor BÂ

Â Â Â Â Â Rose Resources faces a smooth annual demand for cash of $11.5 million; incurs transaction costs of $400 every time they sell marketable securities, and can earn 5.4 percent on their marketable securities. What will be their optimal cash replenishment level? (Round your answer to 2 decimal places.)

Â $29,186.50

Â $291,865.01

Â $412,759.46

Â $35,892.13

Â Â Â Â

Which of the following will increase a firm's need for additional funds?

An increase in the firm's average collection period

An increase in the retention ratio

A decrease in sales growth

An increase in accrued wages

Which of the following is likely to increase the firm's additional funds needed?

The firm cuts its dividend by 50 percent.

The firm reduces its usage of trade credit.

The firm has unused fixed assets.

All of these would increase the firm's additional funds needed.

Â Â Â Â Â Â

Your company doesn't face any taxes and has $503 million in assets, currently financed entirely with equity. Equity is worth $40.30 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below:

State

Recession

Average

Boom

Â Â Â Probability of State

.25

.50

.25

Â Â Â Expect EBIT in State

$53 million

$103 million

$173 million

The firm is considering switching to a 25-percent debt capital structure, and has determined that they would have to pay a 8 percent yield on perpetual debt in either event. What will be the level of expected EPS if they switch to the proposed capital structure? (Round your intermediate calculations and final answer to 2 decimal places except calculation of number of shares which should be rounded to nearest whole number.)

Â $31.93

Â $10.47

Â $17.41

Â $10.64

JEN Corp. is expected to pay a dividend of $5.50 per year indefinitely. If the appropriate rate of return on this stock is 11 percent per year, and the stock consistently goes ex-dividend 30 days before dividend payment date, what will be the expected minimum price in light of the dividend payment logistics?

Â $49.57

Â $55.03

Â $50.00

Â $44.07

Calculating Costs of Issuing DebtÂ Home Improvement, Inc. needs to raise $2.00 million to finance plant expansion. In discussions with its investment bank, Home Improvement learns that the bankers recommend a debt issue with a gross proceeds of $1,000 per bond and they will charge an underwriter's spread of 7 percent of the gross proceeds. How many bonds will Home Improvement need to sell in order to receive the $2.00 million they need?

Â 2,140,000

Â 2,150,538

Â 2,151

Â 2,140

Under/Over Valued StockÂ A manager believes his firm will earn a 16.8 percent return next year. His firm has a beta of 1.58, the expected return on the market is 14.8 percent, and the risk-free rate is 4.8 percent. Compute the return the firm should earn given its level of risk and determine whether the manager is saying the firm is under-valued or over-valued.

Â 20.6%, over-valued

Â 24.384%, under-valued

Â 20.6%, under-valued

Â 24.384%, over-valued

Portfolio BetaÂ You own $19,000 of City Steel stock that has a beta of 3.29. You also own $37,000 of Rent-N-Co (beta = 1.74) and $20,400 of Lincoln Corporation (beta = -.86). What is the beta of your portfolio?

Â 1.43

Â 4.17

Â 1.00

Â 4.92

xxPortfolio ReturnÂ At the beginning of the month, you owned $10,600 of Company G, $10,500 of Company S, and $16,000 of Company N. The monthly returns for Company G, Company S, and Company N were 9.8 percent, -1.30 percent, and 9.3 percent. What is your portfolio return? (Round intermediate calculations to 2 decimal places.)

Â 6.46%

Â 17.75%

Â 6.78%

Â 5.92%

xxValue a Constant Growth StockÂ Financial analysts forecast Best Buy Company (BBY) growth for the future to be 15.00 percent. Their recent dividend was $1.39. What is the value of their stock when the required rate of return is 16.23 percent?

Â $113.01

Â $129.96

Â $13.00

Â $9.91

TIPS Capital ReturnÂ Consider a 4.75% TIPS with an issue CPI reference of 185.00. At the beginning of this year, the CPI was 197.00 and was at 202.10 at the end of the year. What was the capital gain of the TIPS in dollars? (Round your answer to 2 decimal places.)

Â $5.10

Â $27.57

Â $17.10

Â $12.00

Forecasting Interest RatesÂ On May 23, 20XX, the existing or current (spot) one-year, two-year, three-year, and four-year zero-coupon Treasury security rates were as follows:

1R1Â = 6.15%,

Â Â 1R2Â = 6.65%, Â Â Â Â Â 1R3Â = 7.15%,

1R4Â = 7.35%

Using the unbiased expectations theory, what is the one-year forward rate on zero-coupon Treasury bonds for year four as of May 23, 20XX

Â 25.11%

Â 7.95%

Â 7.35%

Â 6.825%

Present Value of Multiple AnnuitiesÂ A small business owner visits his bank ...

Â 83.26%

Â 66.67%

Â 33.33%

Â 87.31%

JackITs has 6.1 million shares of common stock outstanding, 2.1 million shares of preferred stock outstanding, and 31.00 thousand bonds. If the common shares are selling for $29.20 per share, the preferred share are selling for $14.60 per share, and the bonds are selling for 97.89 percent of par, what would be the weight used for equity in the computation of JackIT's WACC?

Â 74.49%

Â 33.33%

Â 74.11%

Â 66.67%

Your firm needs a machine which costs $160,000, and requires $37,000 in maintenance for each year of its 7 year life. After 5 years, this machine will be replaced. The machine falls into the MACRS 7-year class life category. Assume a tax rate of 30% and a discount rate of 14%. What is the depreciation tax shield for this project in year 7?

Â $4,286.40

Â $14,288

Â $2,000.32

Â $10,001.60

Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown below. The required rate of return on projects of both of their risk class is 8 percent, and that the maximum allowable payback and discounted payback statistic for the projects are 2 and 3 years, respectively.

Â Â Time:

0

1

2

3

Â Â Project A Cash Flow

-35,000

25,000

45,000

16,000

Â Â Project B Cash Flow

-45,000

25,000

5,000

65,000

Â Use the payback decision rule to evaluate these projects; which one(s) should it be accepted or rejected?

Â accept A, reject B

Â reject A, accept B

Â accept both A and B

Â accept neither A nor BÂ

Â Â Â Â Â Rose Resources faces a smooth annual demand for cash of $11.5 million; incurs transaction costs of $400 every time they sell marketable securities, and can earn 5.4 percent on their marketable securities. What will be their optimal cash replenishment level? (Round your answer to 2 decimal places.)

Â $29,186.50

Â $291,865.01

Â $412,759.46

Â $35,892.13

Â Â Â Â

Which of the following will increase a firm's need for additional funds?

An increase in the firm's average collection period

An increase in the retention ratio

A decrease in sales growth

An increase in accrued wages

Which of the following is likely to increase the firm's additional funds needed?

The firm cuts its dividend by 50 percent.

The firm reduces its usage of trade credit.

The firm has unused fixed assets.

All of these would increase the firm's additional funds needed.

Â Â Â Â Â Â

Your company doesn't face any taxes and has $503 million in assets, currently financed entirely with equity. Equity is worth $40.30 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below:

State

Recession

Average

Boom

Â Â Â Probability of State

.25

.50

.25

Â Â Â Expect EBIT in State

$53 million

$103 million

$173 million

The firm is considering switching to a 25-percent debt capital structure, and has determined that they would have to pay a 8 percent yield on perpetual debt in either event. What will be the level of expected EPS if they switch to the proposed capital structure? (Round your intermediate calculations and final answer to 2 decimal places except calculation of number of shares which should be rounded to nearest whole number.)

Â $31.93

Â $10.47

Â $17.41

Â $10.64

JEN Corp. is expected to pay a dividend of $5.50 per year indefinitely. If the appropriate rate of return on this stock is 11 percent per year, and the stock consistently goes ex-dividend 30 days before dividend payment date, what will be the expected minimum price in light of the dividend payment logistics?

Â $49.57

Â $55.03

Â $50.00

Â $44.07

Calculating Costs of Issuing DebtÂ Home Improvement, Inc. needs to raise $2.00 million to finance plant expansion. In discussions with its investment bank, Home Improvement learns that the bankers recommend a debt issue with a gross proceeds of $1,000 per bond and they will charge an underwriter's spread of 7 percent of the gross proceeds. How many bonds will Home Improvement need to sell in order to receive the $2.00 million they need?

Â 2,140,000

Â 2,150,538

Â 2,151

Â 2,140

Under/Over Valued StockÂ A manager believes his firm will earn a 16.8 percent return next year. His firm has a beta of 1.58, the expected return on the market is 14.8 percent, and the risk-free rate is 4.8 percent. Compute the return the firm should earn given its level of risk and determine whether the manager is saying the firm is under-valued or over-valued.

Â 20.6%, over-valued

Â 24.384%, under-valued

Â 20.6%, under-valued

Â 24.384%, over-valued

Portfolio BetaÂ You own $19,000 of City Steel stock that has a beta of 3.29. You also own $37,000 of Rent-N-Co (beta = 1.74) and $20,400 of Lincoln Corporation (beta = -.86). What is the beta of your portfolio?

Â 1.43

Â 4.17

Â 1.00

Â 4.92

xxPortfolio ReturnÂ At the beginning of the month, you owned $10,600 of Company G, $10,500 of Company S, and $16,000 of Company N. The monthly returns for Company G, Company S, and Company N were 9.8 percent, -1.30 percent, and 9.3 percent. What is your portfolio return? (Round intermediate calculations to 2 decimal places.)

Â 6.46%

Â 17.75%

Â 6.78%

Â 5.92%

xxValue a Constant Growth StockÂ Financial analysts forecast Best Buy Company (BBY) growth for the future to be 15.00 percent. Their recent dividend was $1.39. What is the value of their stock when the required rate of return is 16.23 percent?

Â $113.01

Â $129.96

Â $13.00

Â $9.91

TIPS Capital ReturnÂ Consider a 4.75% TIPS with an issue CPI reference of 185.00. At the beginning of this year, the CPI was 197.00 and was at 202.10 at the end of the year. What was the capital gain of the TIPS in dollars? (Round your answer to 2 decimal places.)

Â $5.10

Â $27.57

Â $17.10

Â $12.00

Forecasting Interest RatesÂ On May 23, 20XX, the existing or current (spot) one-year, two-year, three-year, and four-year zero-coupon Treasury security rates were as follows:

1R1Â = 6.15%,

Â Â 1R2Â = 6.65%, Â Â Â Â Â 1R3Â = 7.15%,

1R4Â = 7.35%

Using the unbiased expectations theory, what is the one-year forward rate on zero-coupon Treasury bonds for year four as of May 23, 20XX

Â 25.11%

Â 7.95%

Â 7.35%

Â 6.825%

Present Value of Multiple AnnuitiesÂ A small business owner visits his bank ...

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