What price would an investor be expected to pay per share

Reference no: EM131047971

Question 1: A corporate bond which receives a BBB rating from Standard and Poor''s is considered Select one:

A. a junk bond.
B. an investment grade bond.
C. a high-yield bond.
D. a defaulted bond.

Question 2:

A bond has a $1000 face value, ten years to maturity, and 7% semiannual coupon payments. What would be the expected difference in this bond''s price immediately before and immediately after the next coupon payment?
Select one:
A. $70
B. $84
C. $18
D. $35

Question 3:

Use the information for the question(s) below.

Security: Treasury AAA Corporate BBB Corporate B Corporate

Yield (%): 5.2 5.4 6.2 6.9

The above table shows the yields to maturity on a number of one-year, zero-coupon securities. What is the credit spread on a one-year, zero-coupon corporate bond with a B rating?
Select one:
A. 1.7%
B. 1.8%
C. 0.7%
D. 6.9%

Question 4

What are dividend payments?
Select one:
A. incremental increases in the value of the stock held by an investor due to rises in share price
B. payments made to a company by investors for a share of the ownership of that company
C. the difference between the original cost price of a share and the price an investor receives when that share is sold
D. a part share of the profits or earnings of a company paid to each shareholder on the basis of the number of shares they hold

Question 5

Google Finance screen shot

The above screen shot from Google Finance shows the basic stock information for the Commonwealth Bank of Australia after the close of business on 12 April 2010. How many shares of CBA had been traded on the ASX on this date?

Select one:
A. 89 billion
B. 1.4 million
C. 59 billion
D. 1.3 billion

Question 6

A company is expected to pay a dividend of $0.80 per share every year indefinitely. If the current price of the share is $18.90, and the equity cost of capital for the company is 6.4%, what price would an investor be expected to pay per share five years into the future?

Select one:
A. $22.65
B. $12.50
C. $20.43
D. $21.23

Question 7

What is the present value (PV) of an investment?

Select one:
A. the amount you need to invest at the current interest rate to re-create the cash flow from the investment
B. the difference between the cost of the investment and the benefit of the investment in dollars today
C. the amount that an investment would yield if the benefit were realised today
D. the amount by which the cash flow of an investment exceeds or falls short of the cash flow generated by the same amount of money invested at the market rate

Question 8

Which of the following statements is FALSE?

Select one:
A. If you are unsure of your cost of capital estimate, it is important to determine how sensitive your analysis is to errors in this estimate.
B. In general, the difference between the cost of capital and the internal rate of return (IRR) is the maximum amount of estimation error in the cost of capital estimate that can exist without altering the original decision.
C. If the cost of capital estimate is more than the internal rate of return (IRR), the net present value (NPV) will be positive.
D. The internal rate of return (IRR) can provide information on how sensitive your analysis is to errors in the estimate of your cost of capital.

Question 9

Mary is in contract negotiations with a publishing house for her new novel. She has two options. She may be paid $100,000 up front, and receive royalties that are expected to total $26,000 at the end of each of the next five years. Alternatively, she can receive $200,000 up front and no royalties. Which of the following investment rules would indicate that she should take the former deal, given a discount rate of 8%?

Rule I: The Net Present Value rule

Rule II: The Payback Rule with a payback period of two years

Rule III: The internal rate of return (IRR) Rule

Select one:

A. Rule I and II
B. Rule I only
C. Rule II and III
D. Rule III only

Question 10

Time: Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Discount
Rate
Investment A: -$1.5 million $300,000 $300,000 $300,000 $500,000 $500,000 8%
Investment B: -$1.3 million $500,000 $400,000 $300,000 $200,000 $100,000 7%

An investor is considering the two investments shown above. Which of the following statements about these investments is true?

Select one:
A. The investor should take investment A since it has a greater net present value (NPV).
B. The investor should take investment A since it has a greater internal rate of return (IRR).
C. The investor should take investment B since it has a greater net present value (NPV).
D. Neither investment should be taken since they both have a negative net present value (NPV).

Question 11

Which of the following best describes why the predicted incremental earnings arising from a given decision are not sufficient in and of themselves to determine whether that decision is worthwhile?
Select one:
A. These earnings are not actual cash flows.
B. They do not tell how the decision affects the firm''s reported profits from an accounting perspective.
C. They are not easily predicted from historical financial statements of a firm and its competitors.
D. They do not show how the firm''s earnings are expected to change as the result of a particular decision.

Question 12

Use the figure for the question(s) below.

A consumer good company is developing a new brand of organic toothpaste. Above is the sensitivity analysis for this product. If the best-case assumptions for Net Working Capital are met, what will the net present value (NPV) of this project be?

Select one:
A. $2 million
B. $1.7 million
C. $0.65 million
D. $3 million

Question 13

Use the information for the question(s) below.

Shepard Industries is evaluating a proposal to expand its current distribution facilities. Management has projected the project will produce the following cash flows for the first two years (in millions).

Year	1	2
Revenues	1200	1400
Operating expense	450	525
Depreciation	240	280
Increase in working capital	60	70
Capital expenditures	300	350
Marginal corporate tax rate	30%	30%

The depreciation tax shield for Shepard Industries project in year 2 is closest to:
Select one:
A. $72
B. $84
C. $96
D. $196

Question 14

Use the information for the question(s) below.

The Sisyphean Corporation is considering investing in a new cane manufacturing machine that has an estimated life of three years. The cost of the machine is $30,000 and the machine will be depreciated straight line over its three-year life to a residual value of $0.

The cane manufacturing machine will result in sales of 2000 canes in year 1. Sales are estimated to grow by 10% per year for each of the three years. The price per cane that Sisyphean will charge its customers is $18 each and is to remain constant. The canes have a cost per unit to manufacture of $9 each.

Installation of the machine and the resulting increase in manufacturing capacity will require an increase in various net working capital accounts. It is estimated that the Sisyphean Corporation needs to hold 2% of its annual sales in cash, 4% of its annual sales in accounts receivable, 9% of its annual sales in inventory, and 5% of its annual sales in accounts payable. The firm is in the 30% tax bracket and has a cost of capital of 10%.

The change in net working capital from year 1 to year 2 is closest to:

Select one:
A. a decrease of $396
B. an increase of $396
C. a decrease of $360
D. an increase of $360

Question 15

Use the information for the question(s) below.

Temporary Housing Services (THS) is considering a project that involves setting up a temporary housing facility in an area recently damaged by a cyclone. THS will lease space in this facility to various agencies and groups providing relief services to the area. THS estimates that this project will initially cost $5 million to set up and will generate $20 million in revenues during its first and only year in operation (paid in one year). Operating expenses are expected to total $12 million during this year and depreciation expense will be another $3 million. THS will require no working capital for this investment. THS''s marginal tax rate is 30%.

Assume that THS''s cost of capital for this project is 15%. The net present value (NPV) of this temporary housing project is closest to:
Select one:
A. -$435,000
B. $1,960,000
C. $650,000
D. -$650,000

Question 16
The risk premium of a security is determined by its ________ risk and does not depend on its ________ risk.
Select one:
A. systematic, undiversifiable
B. systematic, unsystematic
C. diversifiable, diversifiable
D. all of the above

Question 17
Which of the following is NOT a diversifiable risk?
Select one:
A. the risk that oil prices rise, increasing production costs
B. the risk that the CEO is killed in a plane crash
C. the risk of a product liability lawsuit
D. the risk of a key employee being hired away by a competitor

Question 18
Use the information for the question(s) below.

Consider an economy with two types of firms, S and U. S firms always move together, but U firms move independently of each other. For both types of firms there is a 70% probability that the firm will have a 20% return and a 30% probability that the firm will have a -30% return.

The standard deviation for the return on a portfolio of 20 type U firms is closest to:
Select one:
A. 5.10%
B. 23.0%
C. 15.0%
D. 5.25%

Question 19
Which of the following equations is INCORRECT?
Select one:
A. Corr(Ri,Rj) =
B. Cov(Ri,Rj) = E[(Ri - E[Ri])(Rj - E[Rj])]
C. Cov(Ri,Rj) = ?(Ri - Ri)(Rj - Rj)
D. Var(Rp) = x12Var(R1) + x22Var(R2) + 2X1X2Cov(R1,R2)

Question 20
Use the table for the question(s) below.

Consider the following expected returns, volatilities, and correlations:

Stock Expected Return Standard Deviation Correlation with Data#3 Correlation with Metcash Correlation with Webjet
Data#3 14% 6% 1.0 -1.0 0.0
Metcash 44% 24% -1.0 1.0 0.7
Webjet 23% 14% 0.0 0.7 1.0

The volatility of a portfolio that is equally invested in Data#3 and Metcash is closest to:
Select one:
A. 9%
B. 6%
C. 11%
D. 8%

Question 21

A share market comprises 1000 shares of company A and 3000 shares of company B. The share prices for companies A and B are $25 and $30, respectively. What is the capitalisation of the market portfolio?
Select one:
A. $100,000
B. $98,000
C. $125,000
D. $115,000

Reference no: EM131047971

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