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Question
The text identifies three methods for estimating the cost of common stock from reinvested earnings (not newly issued stock): the CAPM method, the dividend growthmethod, and the bond-yield-plus-risk-premium method. However, only the dividend growth method is widely used in practice.a. True
b. False
Answer
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Related questions
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The collection process, although sometimes difficult, is also expensive in terms of out-of-pocket expenses.
a. True
b. False
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Real options are options to buy real assets, like stocks, rather than interest-bearing assets, like bonds.
a. True
b. False
Q:
The CAPM is a multi-period model which takes account of differences in securities' maturities, and it can be used to determine the required rate of return for any given level of systematic risk.
a. True
b. False
Q:
Security A has an expected return of 12.4% with a standard deviation of 15%, and a correlation with the market of 0.85. Security B has an expected return of −0.73% with a standard deviation of 20%, and a correlation with the market of −0.67. The standard deviation of rM is 12%.a. To someone who acts in accordance with the CAPM, which security is more risky, A or B? Why? (Hint: No calculations are necessary to answer this question; it is easy.)b. What are the beta coefficients of A and B? Calculations are necessary.c. If the risk-free rate is 6%, what is the value of rM?
Q:
You are given the following returns on "the market" and Stock F during the last three years. We could calculate beta using data for Years 1 and 2 and then, after Year 3, calculate a new beta for Years 2 and 3. How different are those two betas, i.e., what's the value of beta 2 - beta 1? (Hint: You can find betas using the Rise-Over-Run method, or using your calculator's regression function.) Year Market Stock F1 6.10% 6.50%2 12.90% -3.70%3 16.20% 21.71%a. 7.89b. 8.30c. 8.74d. 9.20e. 9.66
Q:
In a portfolio of three different stocks, which of the following could NOT be true?
a. The riskiness of the portfolio is greater than the riskiness of one or two of the stocks.
b. The beta of the portfolio is less than the betas of each of the individual stocks.
c. The beta of the portfolio is greater than the beta of one or two of the individual stocks' betas.
d. The beta of the portfolio cannot be equal to 1.
e. The riskiness of the portfolio is less than the riskiness of each of the stocks if they were held in isolation.
Q:
Stock A has an expected return rA = 10% and σA = 10%. Stock B has rB = 14% and σB = 15%. rAB = 0. The rate of return on riskless assets is 6%.a. Construct a graph that shows the feasible and efficient sets, giving consideration to the existence of the riskless asset.b. Explain what would happen to the CML if the two stocks had (a) a positive correlation coefficient or (b) a negative correlation coefficient.c. Suppose these were the only three securities (A, B, and riskless) in the economy, and everyone's indifference curves were such that they were tangent to the CML to the right of the point where the CML was tangent to the efficient set of risky assets. Would this represent a stable equilibrium? If not, how would an equilibrium be produced?
Q:
Bankruptcy laws have been used to help reach settlements in major product liability lawsuits. By using financial projections to show that contingent claims against the company jeopardize its existence, agreements are reached, partially satisfying claimants, and allowing the firm to continue operating.
a. True
b. False
Q:
In the event of bankruptcy under the federal bankruptcy laws, debtholders have a prior claim to a firm's income and assets before both common and preferred stockholders. Moreover, in a bankruptcy all debtholders are treated equally as a single class of claimants.
a. True
b. False
Q:
A convertible debenture can never sell for more than its conversion value or less than its bond value.
a. True
b. False
Q:
The problem of dilution of stockholders' earnings never results from the sale of call options, but it can arise if warrants are used.
a. True
b. False
Q:
If a leased asset has a negative residual value, for example, as a result of a statutory requirement to dispose of an asset in an environmentally sound manner, the lessee of the asset could reasonably expect to pay a lower lease rate because the asset does not have a positive residual value.
a. True
b. False
Q:
A leveraged lease is more risky from the lessee's standpoint than an unleveraged lease.
a. True
b. False
Q:
From the lessee viewpoint, the riskiness of the cash flows, with the possible exception of the residual value, is about the same as the riskiness of the lessee's
a. capital budgeting project cash flows.
b. debt cash flows.
c. pension fund cash flows.
d. sales.
e. equity cash flows.
Q:
Operating leases help to shift the risk of obsolescence from the user to the lessor.
a. True
b. False
Q:
Which of the following factors would increase the likelihood that a company would call its outstanding bonds at this time?
a. A provision in the bond indenture lowers the call price on specific dates, and yesterday was one of those dates.
b. The flotation costs associated with issuing new bonds rise.
c. The firm's CFO believes that interest rates are likely to decline in the future.
d. The firm's CFO believes that corporate tax rates are likely to be increased in the future.
e. The yield to maturity on the company's outstanding bonds increases due to a weakening of the firm's financial situation.
Q:
Which of the following statements is NOT CORRECT?
a. "Going public" establishes a firm's true intrinsic value and ensures that a liquid market will always exist for the firm's shares.
b. Publicly owned companies have sold shares to investors who are not associated with management, and they must register with and report to a regulatory agency such as the SEC.
c. When stock in a closely held corporation is offered to the public for the first time, the transaction is called "going public," and the market for such stock is called the new issue market.
d. It is possible for a firm to go public and yet not raise any additional new capital.
e. When a corporation's shares are owned by a few individuals who own most of the stock or are part of the firm's management, we say that the firm is "closely, or privately, held."
Q:
If its managers make a tender offer and buy all shares that were not held by the management team, this is called a private placement.
a. True
b. False
Q:
Suppose a carton of hockey pucks sell in Canada for 105 Canadian dollars, and 1 Canadian dollar equals 0.71 U.S. dollars. If purchasing power parity (PPP) holds, what is the price of hockey pucks in the United States?
a. $14.79
b. $63.00
c. $74.55
d. $85.88
e. $147.88
Q:
Suppose 6 months ago a Swiss investor bought a 6-month U.S. Treasury bill at a price of $9,708.74, with a maturity value of $10,000. The exchange rate at that time was 1.420 Swiss francs per dollar. Today, at maturity, the exchange rate is 1.324 Swiss francs per dollar. What is the annualized rate of return to the Swiss investor?
a. −7.92%
b. −4.13%
c. 6.00%
d. 8.25%
e. 12.00%
Q:
Arnold Rossiter is a 40-year-old employee of the Barrington Company who will retire at age 60 and expects to live to age 75. The firm has promised a retirement income of $20,000 at the end of each year following retirement until death. The firm's pension fund is expected to earn 7 percent annually on its assets and the firm uses 7% to discount pension benefits. What is Barrington's annual pension contribution to the nearest dollar for Mr. Rossiter? (Assume certainty and end-of-year cash flows.)
a. $2,756
b. $3,642
c. $4,443
d. $4,967
e. $5,491
Q:
Exhibit 28.3Assume that Palmer Executive Pens uses 1,440,000 gallons of ink each year. Further, assume that Palmer can order the ink at a cost of $2 per gallon plus fixed ordering costs of $100 per order. The firm's carrying cost is 20 percent of the inventory value, at cost.Refer to Exhibit 28.3. Now, suppose the manufacturer offers a discount of 0.5 percent for orders of a least 40,000 gallons. Should Palmer increase its ordering quantity to take the discount?a. Yes; it will save $827 if it takes the discount.b. No; it will lose $827 if it takes the discount.c. Yes; it will save $14,400 if it takes the discount.d. Yes; it will save $13,573 if it takes the discount.e. No; it will lose $13,573 if it takes the discount.
Q:
If a company increases its safety stock, then its EOQ will go up.
a. True
b. False
Q:
Halliday Inc. receives a $2 million payment once a year. Of this amount, $700,000 is needed for cash payments made during the next year. Each time Halliday deposits money in its account, a charge of $2.00 is assessed to cover clerical costs. If Halliday can hold marketable securities that yield 5 percent, and then convert these securities to cash at a cost of only the $2 deposit charge, what is the total cost for one year of holding the minimum cost cash balance according to the Baumol model?a. $7,483b. $187c. $3,741d. $374e. $748
Q:
Danby Design Inc. has approached the bank with its plan to borrow $12,000. The bank offers the choice of a 12 percent discount interest loan or a 10.19 percent add-on, one-year installment loan, payable in 4 equal quarterly payments. What is the approximate (nominal) rate of interest on the 10.19 percent add-on loan?a. 5.10%b. 10.19%c. 12.00%d. 20.38%e. 30.57%
Q:
Sunnydale Organics, Inc. harvests crops in roughly 90-day cycles based on a 360-day year. The firm receives payment from its harvests sometime after shipment. Due in part to the firm's rapid growth, it has been borrowing to finance its harvests using 90-day bank notes on which the firm pays 12 percent discount interest. If the firm requires $60,000 in proceeds from each note, what must be the face value of each note?
a. $61,856
b. $67,531
c. $60,000
d. $68,182
e. $67,423
Q:
Maxwell Gardens requires a $100,000 annual loan in order to pay laborers to tend and harvest its organic vegetable crop. Maxwell borrows on a discount interest basis at a nominal annual rate of 11 percent. If Maxwell must actually receive $100,000 net proceeds to finance its crop, then what must be the face value of the note?
a. $111,000
b. $100,000
c. $112,360
d. $89,000
e. $108,840
Q:
Suppose that you're planning a vacation and borrow $2,000 from a bank for one year at a stated annual interest rate of 14 percent, with interest prepaid (a discounted loan). Also, assume that the bank requires you to maintain a compensating balance equal to 20 percent of the initial loan value. What effective annual interest rate are you being charged?a. 14.00%b. 8.57%c. 16.28%d. 21.21%e. 28.00%
Q:
Which of the following is not correct for a firm with seasonal sales and customers who all pay promptly at the end of 30 days?
a. The quarterly uncollected balances schedule will be the same in each quarter.
b. The level of accounts receivable will be constant from month to month.
c. The ratio of accounts receivable to sales will vary from month to month.
d. The level of accounts receivable at the end of each quarter will be the same.
e. DSO will vary from month to month.
Q:
DSO analysis of accounts receivable is the most robust way to see if customers are, on average, paying more slowly, because it is unaffected by seasonal changes in sales.
a. True
b. False