FI 455 Lecture Notes - Lecture 32: Microcap Stock, Market Liquidity, Mutual Fund
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Question 5
The coefficient of variation is a better measure of risk than the standard deviation if the expected returns of the securities being compared differ significantly.
True |
False |
Question 6.
In portfolio analysis, we often use ex post (historical) returns and standard deviations, despite the fact that we are interested in ex ante (future) data.
True |
False |
Question 7
Typically, debentures have higher interest rates than mortgage bonds primarily because the mortgage bonds are backed by assets while debentures are unsecured.
True |
False |
Question 8
If two firms have the same current dividend and the same expected growth rate, their stocks must sell at the same current price or else the market will not be in equilibrium.
True |
False |
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Question 9
Which of the following is the best measure of the wealth of a firm's stockholders?
The firm's Net Income during the past year |
Expected Earnings per Share during the coming year |
Book Value (or Net Worth) as recorded on the balance sheet |
The price of the firm's stock on the open market |
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Question 10
Consider the following firms:
Net Income | Stock Price at | Stock Price at | |
this year | Beg of Year | End of Year | |
Firm A: | $10,000,000 | $20 | $10 |
Firm B: | $(10,000,000) | $10 | $20 |
The manager of Firm A is doing a better job than B |
The manager of Firm B is doing a better job than A |
Neither manager is doing a good job |
Both managers are doing a good job |
Question 11
A company has the following income statement. What is its net operating profit after taxes (NOPAT)?
Sales $1,000
Costs 700
Depreciation 100
EBIT $ 200
Interest expense 50
EBT $ 150
Taxes (40%) 60
Net income $ 90
$ 90 |
$120 |
$150 |
$180 |
$200 |
Question 12
Carter Corporation has some money to invest, and its treasurer is choosing between City of Chicago municipal bonds and U.S. Treasury bonds. Both have the same maturity, and they are equally risky and liquid. If Treasury bonds yield 6 percent, and Carter's marginal income tax rate is 40 percent, what yield on the Chicago municipal bonds would make Carter's treasurer indifferent between the two?
2.40% |
3.60% |
4.50% |
5.25% |
6.00% |
Question 13
If a firm's current ratio is less than 1.0, it indicates that:
The firm had negative net income for the year |
The firm will be unable to pay its shortterm loans which come due this year |
Current Assets are less than Current Liabilities |
The firm is insolvent |
Question 14
A firm which has a relatively large amount of cash and receivables in its current assets accounts and a relatively small amount of current liabilities would be considered:
liquid |
profitable |
risky |
nuts |
Question 15
In November 2011 you bought 100 shares of Microsoft stock for $35.375 a share. In November 2013 you sold your stock for $92.5625 a share. What was your average annual rate of return on your Microsoft investment? (disregard dividends and commissions)
262% |
62% |
585% |
1.6% |
Question 16
You deposit $2,000 in a savings account that pays 10 percent interest, compounded annually. How much will your account be worth in 15 years?
$2,030.21 |
$5,000.00 |
$8,091.12 |
$8,354.50 |
$9,020.10 |
Question 17
You can earn 8 percent interest, compounded annually. How much must you deposit today to withdraw $10,000 in 6 years?
$5,402.69 |
$6,301.70 |
$6,756.76 |
$8,432.10 |
$9,259.26 |
Question 18
Calculate the required rate of return for Mercury, Inc., assuming that the real rate of interest is 3 percent, investors expect a 5 percent rate of inflation in the future, and they expect the rate of return on the overall stock market to be 13 percent. Mercury has a beta of 2.0.
15% |
16% |
17% |
18% |
None of the above |
Question 19
Which is the best measure of risk for an asset held in isolation? Which is the best measure for an asset held in a diversified portfolio?
Variance; correlation coefficient |
Standard deviation; correlation coefficient |
Beta; variance |
Coefficient of variation; beta |
Beta; beta |
Question 20
You have three stocks in your portfolio. $10,000 is invested in a stock with a beta of 1.50 and $15,000 is invested in a stock with a beta of 1.00, and $25,000 is invested in a stock with a beta of 0.50. What is the beta of your portfolio?
0.28 |
0.85 |
1.00 |
3.00 |
Question 21
A corporate bond with a $1,000 face value pays a $50 coupon every six months. The bond will mature in ten years, and has a nominal yield to maturity of 9 percent. What is the price of the bond?
$ 634.86 |
$1,064.18 |
$1,065.04 |
$1,078.23 |
$1,094.56 |
Question 22
The Jones Company has decided to undertake a large project. Consequently, there is a need for additional funds. The financial manager plans to issue preferred stock with a perpetual annual dividend of $5 per share and a par value of $30. If the required return on this stock is currently 20 percent, what should be the stock's market value?
$150 |
$100 |
$ 50 |
$ 25 |
$ 10 |
Question 23
A share of common stock has just paid a dividend of $2.00. If the expected long-run growth rate for this stock is 15 percent, and if investors require a 19 percent rate of return, what is the price of the stock?
$57.50 |
$62.25 |
$71.86 |
$64.00 |
$44.92 |
Question 24
A stock is not expected to pay a dividend over the next four years. Five years from now, the company anticipates that it will establish a dividend of $1.00 per share (i.e., D5 = $1.00). Once the dividend is established, the market expects that the dividend will grow at a constant rate of 5 percent per year forever. The risk-free rate is 5 percent, the company's beta is 1.2, and the market risk premium is 5 percent. The required rate of return on the company’s stock is expected to remain constant. What is the current stock price?
$ 7.36 |
$ 8.62 |
$ 9.89 |
$10.98 |
$11.53 |
1. Use the attached balance sheet and income statement to compute the required financial ratios for 2012. Use 360 for the number of days in a year. The computations for 2011 are already done for you.
Current ratio_________________________
Quick ratio__________________________
Inventor turnover____________________
Average Collection Period_____________
Total asset turnover__________________
Net profit margin____________________
Operating profit margin_______________
Times Interest Earned_________________
Debt/Net Worth Ratio_________________
Return on Equity ratio__________________
2. Using the computed financial ratios from question 1, compare Grounds Keeper’s performance from 2011 to 2012. Address what areas the company has improved and what areas it has not
A.)Liquidity
B.) Activity / turnover / efficiency
C.) Profitability
D.) Leverage / use of debt / solvency
3. If you were the CEO of Grounds Keeper, what area(s) would you concentrate on to improve the performance of the company?
4. Define the terms capital structure, cost of capital, and working capital. Focus on how they are different from each other and impact both profitability and risk.
5. Determine Grounds Keeper’s capital structure and working capital.
6. If Grounds Keeper has a required rate of return on its long-term debt of 9% (before taxes) and a required rate of return on its common stock, a tax rate of 40%, what is its weighted average cost of capital (WACC) for 2012? How could Grounds Keeper lower its WACC? (HINT: you will need to look at the balance sheet to determine the weight of debt to equity.
7. What are the advantages to Grounds Keeper in using money market instruments as financing? How does this related to financing net working capital?
8. Explain what Grounds Keeper should consider when deciding whether to issue stocks or bonds? Answer using at least 3 different characteristics comparing and contrasting stocks and bonds.
9. Define money market instruments; list at least one type of security that would be considered a money market instrument. What are the advantages to Grounds Keeper in using money market instruments as financing? What are the disadvantages?
Grounds Keeper | ||
Consolidated Balance Sheets | ||
(Dollars in thousands) | ||
2012 | 2011 | |
Assets | ||
Current assets: | ||
Cash and cash equivalents | 78,240 | 44,395 |
Receivables | 399,891 | 340,062 |
Inventories | 844,737 | 736,677 |
Total current assets | 1,322,868 | 1,121,133 |
Fixed assets, net | 1,244,384 | 889,613 |
Other long-term assets | 1,048,537 | 1,187,141 |
Total assets | 3,615,789 | 3,197,887 |
Liabilities and Stockholders’ Equity | ||
Current liabilities: | ||
Accounts payable | 309,222 | 319,465 |
Accruals | 201,017 | 145,240 |
Notes payable | 9,748 | 6,669 |
Total current liabilities | 519987 | 471374 |
Long-term debt | 834574 | 814298 |
Total liabilities | 1,354,561 | 1,285,672 |
Stockholders’ equity: | ||
Common stock, $0.10 par value: | 15,268 | 15,447 |
Additional paid-in capital | 1,464,560 | 1,499,616 |
Retained earnings | 781400 | 397152 |
Total stockholders’ equity | 2,261,228 | 1,912,215 |
Total liabilities and stockholders’ equity | 3,615,789 | 3,197,887 |
Grounds Keeper | |||||
Consolidated Statements of Operations | |||||
(Dollars in thousands except per share data) | |||||
| 2011 | ||||
Net sales | 3,889,426 | 2,642,390 | |||
Cost of sales | 2,589,799 | 1,746,274 | |||
Gross profit | 1,299,627 | 896,116 | |||
Selling and operating expenses | 481,493 | 348,696 | |||
General and administrative expenses | 219,010 | 187,016 | |||
Operating income | 599,124 | 360,404 | |||
Interest expense | 22,983 | 57,657 | |||
Income before income taxes | 576,141 | 302,747 | |||
Income tax expense | 212,641 | 101,699 | |||
Net Income | 363,500 | 201,048 | |||
Basic income per share: | |||||
Average shares outstanding | 154,933,948 | 146,214,860 | |||
Earnings per common share | 2.35 | 1.38 |
Current Ratio | Current assets/ Current liabilities |
Quick Ratio | Current assets – inventory/ Current liabilities |
Inventory Turnover | Cost of goods sold/ Inventory |
Receivables Turnover | Sales/ Accounts receivables |
Average Collection Period | Receivables/ Sales per day |
Fixed Asset Turnover | Sales/ Fixed assets |
Total Asset Turnover | Sales/ Total Assets |
Gross Profit Margin | Revenues - Cost of goods sold/ Sales |
Operating Profit Margin | Earnings before interest and taxes/ Sales |
Net Profit Margin | Net income/ Sales |
Return on Total Assets | Net income/ Total assets |
Debt/Net Worth Ratio | Total Debt/ Total Equity |
Times-Interest-Earned | Operating Income/ Interest expense |
Return on Equity | Net income/ Total equity |