FINS1612 Study Guide - Final Guide: Tax Rate, Quick Ratio, Stock Market Index
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19. Which of the following best defines the term âdividend record dateâ?
A. The date that the dividend is paid to the shareholders.
B. The date that shareholders listed on the corporate books will receive the dividend.
C. The date that the stock trades without the dividend.
D. The date that the highest dividend in the company history has been announced.
20. Which of the following best describes the risk measure known as beta?
A. | A measure of efficient frontier. | |
B. | A measure of state dependent returns. | |
C. | A measure of risk that cannot be diversified away by conforming portfolios. | |
D. | A measure of the expected return of the market. |
21. Western Electric has 23,000 shares of common stock outstanding at a price per share of $57 and a rate of return of 14.2 percent. The firm has 6,000 shares of 7 percent preferred stock outstanding at a price of $48 a share. The preferred stock has a par value of $100. The company also has 350 corporate bonds, each with $1000 par value, and the bond currently sells for 102 percent of face. The yield-to-maturity on the debt is 8.49 percent.
What is the firm's weighted average cost of capital if the tax rate is 34 percent?
A. | 14.19% | |
B. | 13.44% | |
C. | 12.69% | |
D. | 14.47% |
PLEASE ANSWER ALL QUESTIONS
Which of the following risks cannot be diversified away?
A. | risk of a local natural disaster affecting company production | |
B. | risk created by world political happenings | |
C. | risk of losing a major contract | |
E. | risk of a failed marketing campaign |
Magee Company's stock has a beta of 1.20, the risk-free rate is 4.50%, and the market risk premium is 5.00%. What is Magee's required return?
A. | 10.25% | |
B. | 10.50% | |
D. | 11.00% | |
E. | 11.25% |
Stock A has a beta of 1.5 and Stock B has a beta of 0.5. Which of the following statements must be true about these securities? (Assume the market is in equilibrium.)
A. | When held in isolation, Stock A has more risk than Stock B. | |
C. | Stock A would be a more desirable addition to a portfolio than Stock B. | |
D. | The required return on Stock A will be greater than that on Stock B. | |
E. | The required return on Stock B will be greater than that on Stock A. |
Which of the following statements is CORRECT?
B. | Portfolio diversification reduces the variability of returns on an individual stock. | |
C. | The smaller standard deviation is, the less likely that actual returns will be closer to expected returns, the lower the investment risk. | |
D. | A stock with a beta of 1 is more risky than an average stock on the market. | |
E. | A well-diversified investor will require to earn higher return on stocks with higher beta. |
Assume a project has normal cash flows. All else equal, which of the following statements is CORRECT? (WACC is the weighted average cost of capital, the financing rate, or discount rate)
A. | The projectâs IRR increases as the WACC declines. | |
B. | The projectâs NPV increases as the WACC declines. | |
D. | The projectâs IRR decreases as the WACC declines. | |
E. | none of the above is correct. |
Burlees Inc.âs CFO has collected the following information to calculate its WACC:
⢠The companyâs capital structure consists of 60% debt and 40% common stock.
The company has 20-year, 12% annual coupon bonds that have a face value of $1,000 and sell for $1,200.
The company uses the CAPM to calculate the cost of common stock. Currently, the risk-free rate is 3% and the market risk premium is 5%. The companyâs common stock has a beta of 2.
The companyâs tax rate is 40%.
What is the companyâs cost of common equity?
A. | 9.65% | |
B. | 13.00% | |
D. | 17.60% | |
E. | 18.91% |
Burlees Inc.âs CFO has collected the following information to calculate its WACC:
⢠The companyâs capital structure consists of 60% debt and 40% common stock.
The company has 20-year, 12% annual coupon bonds that have a face value of $1,000 and sell for $1,200.
The company uses the CAPM to calculate the cost of common stock. Currently, the risk-free rate is 3% and the market risk premium is 5%. The companyâs common stock has a beta of 2.
The companyâs tax rate is 40%.
What is the companyâs weighted average cost of capital (WACC)?
A. | 8.69% | |
B. | 9.21% | |
D. | 11.04% | |
E. | 12.51% | |
Which of the following statement is correct?
A. | Higher flotation costs tend to reduce the cost of equity capital. | |
C. | The component cost of preferred stock is expressed as rp(1 - T), because preferred stock dividends are treated as fixed charges, similar to the treatment of debt interest. | |
D. | A higher risk projectâs WACC should be adjusted higher. | |
E. | Retained earnings bear no capital cost at all. |