Part 1 a 623 ( *50% )

1. Stock A has a beta of 1.2, while Stock B has a beta of 1.6. Assume that the stock
market is efficient. The NPV of each stock should be (positive, negative,
or zero).

2. If a project's internal rate of return (IRR) exceeds the cost of capital, then the project's
net present value (NPV) must be (positive, negative, or zero).

3. Managerial compensation can be structured to reduce problems between

stockholders and managers.

4. McKenna Motors is expected to pay a $1.OO per-share dividend at the end of the year
(Dl = $1.00). Tlie stock sells for $20 per share and its required rate of return is 10
percent. The dividend is expected to grow at a constant rate, g, forever. What is the
growth rate, g, for this stock?

5. A textbook sells for $75 in the U. S. market. Exchange rates are such that 1 British
pound (E) equals $1.25 U. S. dollars. Assume that purchasing power parity holds, what
should the textbook sell for in Britain?

6. A stock with a required rate of return of 10 percent sells for $25 per share. The stock's
dividend is expected to grow at a constant rate of 7 percent per year. What is the
expected year-end dividend, Dl, on the stock?

7. You are given the following information: Stockholders' equity = $1,200;

pricelearnings ratio = 5; shares outstanding = 25; markethook ratio = 1.5. Calculate
the market price of a share of the company's stock?
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8. Meyersdale Office Supplies has common equity of $20 million. The company's stock
price is $60 per share and its market to book ratio is 6.0. How many shares of stock
does the company have outstanding?

9. A firm has a profit margin of 20 percent on sales of $15,000,000. If the firm has debt
of $7,500,000, total assets of $22,500,000, and an after-tax interest cost on total debt
of 5 percent, what is the firm's ROA?

10. A share of preferred stock pays a dividend of $0.40 each quarter. If you are willing to
pay $20.00 for this preferred stock, what is your nominal (not effective) annual rate of
return?

Part I1 qjgfa( $1 -6 * a 3 * $7-14 * a 4 * %50* )

1. According to the segmented-market hypothesis a rising yield curve indicates that
a) demand for long term bonds has fallen and demand for short term bonds has fallen.
b)demand for long term bonds has risen and demand for short tern1 bonds has fallen.
c)demand for long term bonds has fallen and demand for short term bonds has risen.
d)demand for long term bonds has risen and demand for short term bonds has risen.
e)none of the above.

2. When identifying undervalued and overvalued assets, which of the following statements is false?
a)An asset is properly valued if its estimated rate of return is equal to its required rate of return.
b)An asset is considered overvalued if its estimated rate of return is below its required rate of
return.
c)An asset is considered undervalued if its estimated rate of return is above its required rate of
return.
d)An asset is considered overvalued if its required rate of return is below its estimated rate of
return.
e)None of the above (that is, all are true statements)

3. The performance of four major groups of investors has been studied in connection with tests of
the strong-form of the efficient market hypothesis. These include all of the following except
a) Professional money managers.
b) Stock exchange specialists.
c) Securities Exchange officers.
d) Security analysts.
e) Corporate insiders.

4. Studies of the relationship between P E ratios and stock returns have found that
a) Low PIE stocks of large cap stocks outperformed low PIE stocks of small cap stocks.
b) Low P E stocks of small cap stocks outperformed high PIE stocks of large cap stocks.
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c) High P/E stocks of large cap stocks outperformed low P/E stocks of small cap stocks.
d) High P/E stocks of large cap stocks outperformed high P/E stocks of small cap stocks.
e) none of the above.

5. The the number of stocks in a portfolio and the the time period the
the portfolio beta.
a)Larger, longer, less stable
b)Larger, longer, more stable
c)Larger, shorter, less stable
d)Larger, shorter, more stable
e)Smaller, longer, more stable

6 . Which of the following is correct?

a)Generally, debt to total assets ratios do not vary much among different industries although
they do vary for firms within a particular industry.
b)Utilities generally have very high common equity ratios due to their need for vast amounts
of equity-supported capital.
c)The drug industry has a high debt to common equity ratio because their earnings are very
stable and thus, can support the large interest costs associated with higher debt levels.
d)Wide variations in capital structures exist between industries and also between individual
firms within industries and are influenced by unique firm factors including managerial
attitudes.
e)Since most stocks sell at or around their book values, using accounting values provides an
accurate picture of a firm's capital structure.

7. A one year call option has a strike price of 50, expires in 6 months, and has a price of $5.04. If
the risk free rate is 5%, and the current stock price is $50, what should the corresponding put be
worth?
a)$3.04
b)$4.64
c)$6.08
d)$3.83
e)$O

8. You decide to sell 100 shares of Topgun Enterprises Inc. short when it is selling at its yearly high
of $42.25. Your broker tells you that your margin requirement is 60 percent and that the
commission on the sale is $20. While you are short, Topgun pays a $0.85 per share dividend. At
the end of one year you buy your Topgun shares (cover your short sale) at $44 and are charged a
commission of $20 and a 5 percent interest rate. What is your dollar return on the investment?
a)$384.50
b)$432.88
c)-$432.88
9. Flaherty Electric has a capital structure that consists of 70 percent equity and 30 percent debt.
The company's long-term bonds have a before-tax yield to maturity of 8.4 percent. The company
uses the DCF approach to determine the cost of equity. Flaherty's common stock currently trades
at $45 per share. The year-end dividend (Dl) is expected to be $2.50 per share, and the dividend
is expected to grow forever at a constant rate of 7 percent a year. The company estimates that it
will have to issue new common stock to help fund this year's projects. The flotation cost on new
common stock issued is 10 percent, and the company's tax rate is 40 percent. What is the
company's weighted average cost of capital, WACC?
a) 10.73%
b) 10.30%
c) 11.31%
d) 7.48%
e) 9.89%

10. Given the following information, calculate the NPV of a proposed project: Cost = $4,000;
estimated life = 3 years; initial decrease in accounts receivable = $1,000, which must be restored
at the end of the project's life; estimated salvage value = $1,000; earnings before taxes and
depreciation = $2,000 per year; method of depreciation = MACRS; tax rate = 40 percent; and
cost of capital = 18 percent.
a) $1,137
b) -$ 151
c) $ 137
d) $ 804
e) $ 5 4 4

11. An all-equity firm is analyzing a potential project that will require an initial, after-tax cash outlay
of $50,000 and after-tax cash inflows of $6,000 per year for 10 years. In addition, this project
will have an after-tax salvage value of $10,000 at the end of Year 10. If the risk-free rate is 6
percent, the return on an average stock is 10 percent, and the beta of this project is 1.50, what is
the project's NPV?
a) $13,210
b) $ 4,905
c) $ 7,121
d) -$ 6,158
e) -$12,879
12. Assume that you purchase a 5-year $1,000 par value bond, with a 6% coupon, and a yield of 7%.
Immediately after you purchase the bond, yields rise to 8% and remain at that level to maturity.
Calculate the realized horizon yield if you hold the bond to maturity. Interest is paid annually.
a) 6.0%
b) 7.11%
13. Based on the information provided, calculate the intrinsic value in 2004 of a share of INV Corp.
using the Present Value of Earnings Model (infinite holding period). For 2004 Net Income was
$250,000, total debt was $50,000, and there were 206,263 shares outstanding. The required rate
of return is 12% and the estimated growth rate in earnings is 5.5%.
a) $19.43
b) $23.98
c) $28.52
d) $22.73
e) $15.50

14. Florida Enterprises is considering issuing a 10-year convertible bond that will be priced at its
$1,000 par value. The bonds have an 8 percent annual coupon rate, and each bond can be
converted into 20 shares of common stock. The stock currently sells at $40 a share, has an
expected dividend in the coming year of $5, and has an expected constant growth rate of 5
percent. What is the estimated floor price of the convertible at the end of Year 3 if the required
rate of return on a similar straight-debt issue is 10 percent?
a) $ 902.63
b) $ 926.10
c) $ 961.25
d) $ 988.47
e) $1,000.00