Finance Practice Test Final Questions

1. You purchased 200 shares of stock at a
price of $36.72 per share. Over the last year, you have received total dividend
income of $322. What is the dividend yield?

2.You
bought 100 shares of stock at $20 each. At the end of the year, you received a
total of $400 in dividends, and your stock was worth $2,500 total. What was total dollar capital gain and total
dollar return?

3.
You want your portfolio beta to be 1.20. You have $800 to invest and want to
divide it between an asset with a beta of 1.6 and a risk-free asset. How much
should you invest in the risk-free asset?

4.
What is the expected return on a portfolio which is invested 20% in stock A and
80% in stock B?

State of Probability of Returns if
State Occurs
Economy State of Economy
Stock A Stock B
Boom 20% 18% 9%
Normal
70% 11% 7%
Recession
10% -10%
4%

5. Which one of the following stocks is
correctly priced if the risk-free rate of return is
2.5% and the market risk premium is 8%?

Stock Beta Expected
Return
A .68 8.2%
B 1.42
13.9%
C 1.23
11.8%

6.You are comparing
stock A to stock B. Given the following information, which one of these two
stocks should you prefer and why?

Rate of Return if
State of Probability of State Occurs__
Economy State of Economy Stock A Stock B
Boom 60%
9% 15%
Recession 40%
4% -6%
a. Stock
A; because it has an expected return of 7% and appears to be more risky.
b. Stock
A; because it has a higher expected return and appears to be less risky than
stock B.
c. Stock
A; because it has a slightly lower expected return but appears to be
significantly less risky than stock B.
d. Stock
B; because it has a higher expected return and appears to be just slightly more
risky than stock A.
e. Stock
B; because it has a higher expected return and appears to be less risky than
stock A.

7. The Basket Weavers
Company has 100,000 bonds outstanding that are selling at par value. Bonds with
similar characteristics are yielding 7.5 percent. The company also has 1
million shares of 10.5 percent preferred stock outstanding and 5 million shares
of common stock outstanding. The preferred stock sells for $56 per share. The
common stock has a beta of 1.2 and sells for $38 a share. The U.S. Treasury
bill is yielding 3 percent and the return on the market is 12 percent. The
corporate tax rate is 34 percent. What is Basket Weaver’s weighted average cost
of capital?

8. Blue Ribbon, Inc. wants
to have a weighted average cost of capital of 10 percent. The firm has an
aftertax cost of debt of 4 percent and a cost of equity of 12 percent. What
debt-equity ratio is needed for the firm to achieve their targeted weighted
average cost of capital?

9. Bertelli’s is analyzing a
project with an initial cost of $55,000 and cash inflows of $33,000 a year for
two years. This project is an extension of the firm’s current operations and
thus is equally as risky as the current firm. The firm uses only debt and
common stock to finance their operations and maintains a debt-equity ratio of
.35. The aftertax cost of debt is 6 percent and the cost of equity is 11
percent. The tax rate is 34 percent. What is the projected net present value of
this project?

10. Choice Golf Equipment has
a beta of 1.2 and a cost of equity of 13 percent. The risk-free rate of return
is 4 percent. Choice is considering a project with a beta of .8. What is the
appropriate discount rate for the project?

11. Extra Co. maintains a debt-equity
ratio of 1 and has a tax rate of 40 percent. The firm does not issue preferred
stock. The cost of equity is 12 percent and the before tax cost of debt is 15
percent. What is Abco’s weighted average cost of capital?

12. The Quilt Shoppe is an all equity
firm that has 2,500 shares of stock outstanding at a market price of $20 a
share. Company management has decided to issue $10,000 worth of debt and use
the funds to repurchase shares of the outstanding stock. The interest rate on
the debt will be 8.5 percent. What are the earnings per share at the break-even
level of earnings before interest and taxes? Ignore taxes.

13. Denver Dry Goods has
expected earnings before interest and taxes of $14,600, an unlevered cost of
capital of 15 percent, and a tax rate of 35 percent. The company also has
$3,500 of debt that carries a 6 percent coupon. The debt is selling at par
value. What is the value of this firm?

14. Thompson & Jones has
earnings before interest and taxes of $149,000. Both the book and the market
value of debt is $265,000. The unlevered cost of equity is 13.5 percent while
the pre-tax cost of debt is 9 percent. The tax rate is 34 percent. What is
Thompson & Jones’ weighted average cost of capital?

15. Thompson & Thomson is an
all equity firm that has 500,000 shares of stock outstanding. The company is in
the process of borrowing $8 million at 9 percent interest to repurchase 200,000
shares of the outstanding stock. What is the value of this firm if you ignore
taxes? (hint: with no taxes you are in case I of MM, so the value of the firm
doesn’t change with capital structure changes!)

16. Your firm has a debt-equity
ratio of .75. Your pre-tax cost of debt is 8.5 percent and your required return
on assets is 15 percent. What is your cost of equity if you ignore taxes?

17. An
unlevered firm has a cost of capital of 16 percent and earnings before interest
and taxes of $225,000. A levered firm with the same operations and assets has
both a book value and a face value of debt of $850,000 with an 8 percent annual
coupon. The applicable tax rate is 34 percent. What is the value of the levered
firm?

18. A firm has a market value
equal to its book value. Currently, the firm has excess cash of $1,360 and
other assets of $6,640. Equity is worth $8,000. The firm has 500 shares of
stock outstanding and net income of $600. The firm has decided to spend all of
its excess cash on a share repurchase program. How many shares of stock will be
outstanding after the stock repurchase is completed?

19. A firm has a market value
equal to its book value. Currently, the firm has excess cash of $2,000 and
other assets of $13,000. Equity is worth $15,000. The firm has 1,000 shares of
stock outstanding and net income of $2,500. By what percent does the stock
price per share change if the firm pays out its excess cash as a cash
dividend? (ignore taxes)

20. Prezario’s has 225,000
shares of stock outstanding with a par value of $1.00 per share. The current
market value of the firm is $1,690,000. The company just announced a 2-for-1
stock split. By how much does the common stock account balance change after the
split?

 

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