FIN 335 Final
Summer 2014
Clay M. Moffett
Name: _______________________________________
Fill in the correct answer on the scantron. If you fill in more than one, I won’t pick the correct one for you. You’ve all
been some terrific mullets and I’ve enjoyed getting to know each of you greatly. Thanks for a great month….
1. The excess return required on a risky investment over that of a risk-free investment is called the:
a. inflation premium.
b. required return.
c. real return.
d. average actual return.
e. risk premium.
2. Which one of the following had the lowest standard deviation?
a. U.S. Treasury bill
b. inflation
c. long-term corporate bonds
d. large-company stocks
e. long-term government bonds
3. Standard deviation measures the _____ of a security's returns over time.
a. average value
b. frequency
c. volatility
d. mean
e. arithmetic average
4. If the financial markets are efficient then:
a. stock prices should remain constant.
b. stock prices should increase or decrease slowly as new events are analyzed and the information is absorbed by the
markets.
c. an increase in the value of one security should be offset by a decrease in the value of another security.
d. stock prices will only change when an event actually occurs, not at the time the event is anticipated.
e. stock prices should only respond to unexpected news and events.
5. Weak form market efficiency states that the value of a security is based on:
a. all public and private information.
b. historical information only.
c. all publicly available information.
d. all publicly available information plus any data that can be gathered from insider trading.
e. random information with no clear distinction as to the source of that information.
6. Systematic risk is:
a. a risk that affects a large number of assets.
b. the total risk inherent in an individual security.
c. also called diversifiable risk.
d. also called asset-specific risk.
e. unique to an individual firm.
7. The slope of the security market line is referred to as the:
a. market alpha.
b. market risk premium.
c. diversification benefit.
d. systematic risk premium.
e. expected return.
8. The goal of diversification is to eliminate:
a. all investment risk.
b. the market risk premium.
c. systematic risk.
d. unsystematic risk.
e. the effects of beta.
9. A U.S. Treasury bill has a beta of _____ while the overall market has a beta of _____.
a. 0; 0
b. 0; 1
c. 1; 0
d. 1; 1
e. infinity; 1
10. If a security plots below the security market line, then the security:
a. is under-priced.
b. is overpriced.
c. is correctly priced.
d. has a beta greater than 1.0.
e. has a beta less than 1.0.
11. The stock of Uptown Men's Wear is expected to produce the following returns given the various states of the economy.
What is the expected return on this stock?
a. 9.6 percent
b. 10.4 percent
c. 12.8 percent
d. 13.6 percent
e. 15.3 percent
12. A $16,000 portfolio is invested in a risk-free security and two stocks. The beta of stock A is .74 while the beta of stock B
is 1.9. One-half of the portfolio is invested in the risk-free security. How much is invested in stock A if the beta of the
portfolio is .60?
a. $3,411.16
b. $4,141.41
c. $4,827.59
d. $5,258.25
e. $5,434.09
13. A firm's weighted average cost of capital:
a. decreases when the firm's tax rate decreases.
b. is another terms for the firm's return on equity.
c. varies inversely with the firm's pre-tax cost of debt.
d. is the required return on the existing assets of the firm.
e. is the required return for each of a firm's proposed projects.
14. Which one of the following represents the best estimate for a firm's pre-tax cost of debt?
a. average coupon rate on the firm's outstanding bonds
b. coupon rate on the firm's latest bond issue
c. weighted average yield-to-maturity on the firm's outstanding debt
d. current yield on the firm's outstanding debt
e. annual interest divided by the market price per bond for the latest bond issue
15. The cost of preferred stock:
a. decreases when a firm's tax rate increases.
b. is constant over time.
c. is unaffected by changes in the price of the stock.
d. is equal to the stock's dividend yield.
e. increases as the price of the stock increases.
16. Deltronics just paid its first annual dividend of $.20 a share. The firm plans to increase the dividend by 4 percent per year
indefinitely. What is the firm's cost of equity if the current stock price is $11 a share?
a. 5.82 percent
b. 5.89 percent
c. 6.33 percent
d. 6.48 percent
e. 6.54 percent
17. The Carriage House issued 10-year, 8 percent semiannual bonds 3 years ago. The bonds currently sell at 99.5 percent of
face value. What is the firm's aftertax cost of debt if the tax rate is 32 percent?
a. 4.13 percent
b. 4.68 percent
c. 5.50 percent
d. 6.42 percent
e. 8.09 percent
18. Repeattheproblem Inc. has just signed a $3 million contract. The contract calls for a payment of $500,000 today,
$900,000 one year from today, and $1.6 million two years from today. What is this contract really worth if
Repeattheproblem can earn 12 percent on its money?
a. $2.58 million
b. $2.30 million
c. $2.39 million
d. $2.89 million
e. $2.21 million
19. Liquidation is defined as the:
a. reorganization of a firm's capital structure.
b. infusion of capital into a firm by issuing new securities.
c. termination of a firm as a going concern.
d. legal proceeding for reorganizing or terminating a firm.
e. rule for prioritizing payments to creditors of a bankrupt firm.
20. Which one of the following statements concerning financial leverage is correct?
a. Financial leverage increases profits and decreases losses.
b. Financial leverage has no effect on a firm's return on equity.
c. Finan8cial leverage refers to the use of common stock.
d. Financial leverage magnifies both profits and losses.
e. Increasing financial leverage will always increase the earnings per share.
21. The geometric average return of 7, 11, -2, and 4 percent is computed as:
a. (1.07 + 1.11 + 1.02 + 1.04)1/4 - 1.
b. (1.07 + 1.11 + 1.02 + 1.04)1/4.
c. (1.07+1.11 +.98 +1.04) (4) + 1.
d. [(1.07 + 1.11 + .98 + 1.04) ¼] +1.
e. (1.07 *1.11*.98 *1.04)1/4 - 1.
22. Sunk costs:
A.Suck.
23. In Canada and the United Kingdom, a perpetuity is also called a(n):
a. consul.
b. infinite bond.
c. infinity flow.
d. dowry.
e. forever bond.
24. Which one of the following is a breakdown of the ROE into its three component parts?
a. Du Pont decomposition
b. efficiency breakout
c. equity analysis
d. sustainable growth
e. profitability ratios
25. Who is the lead guitarist for the Amboy Dukes?
a. Barak Obama
b. Pee Wee Herman
c. Jimmi Hendrix
d. Eric Clapton
e. Ted Nugent
26. You currently have $7,200 in your investment account. You can earn an average rate of return of 11.7 percent per year.
How long will you have to wait until your account is worth $50,000?
a. 9.47 years
b. 11.28 years
c. 14.67 years
d. 17.51 years
27. Use these financial statements to answer questions 9 through 13.
Cash
Accounts receivable
Inventory
Net fixed assets
Total assets
$
2007
1,700
14,300
22,500
82,900
$121,400
Balance Sheet
2008
$
1,600
17,400
23,700
81,600
$124,300
Accounts payable
Long-term debt
Common stock
Retained earnings
Total liabilities and equity
2007
$13,800
47,500
17,100
43,100
$121,400
2008
$ 12,900
48,600
22,000
40,800
$124,300
Income Statement
Net Sales
Costs
Depreciation
EBIT
Interest
Taxable income
Taxes
Net Income
$163,700
108,200
13,100
41,400
3,800
37,600
13,100
$ 24,400
28. What is the amount of the operating cash flow?
a. $24,400
b. $30,500
29
C $41,400
d. $42,300
What is the cash flow to creditors for 2008?
a. $2,700
b. -$1,100
c. $1,100
d. $2,500
30. The annual interest on a bond divided by the bond's market price is called the:
A. yield to maturity.
B. yield to call.
C. total yield.
D. current yield.
E. required yield.
31. A bond that pays no interest payments and sells at a deep discount is called a(n) _____ bond.
a. callable
b. income
c. zero coupon
d. convertible
e. tax-free
32. The Bailey Brothers want to issue 20-year, zero coupon bonds that yield 9 percent. What price should it charge for
these bonds if the face value is $1,000?
a. $157.25
b. $163.70
c. $178.43
d. $194.49
e. $202.64
33. The price of a stock at year 5 can be expressed as:
a. P0
g5.
b. D0
(1 + R)5.
c. D6 / (R
g)
d. P1
(1 + R)5.
e. D5 / (R
g).
34. Steven can afford car payments of $285 a month for 60 months. The bank will lend him this money at 6.2 percent
interest. How much can Steven borrow?
a. $12,568.63
b. $12,869.39
c. $13,672.38
d. $14,104.91
e. $14,671.11
35. A project has the following cash flows. What is the internal rate of return?
a. 12.46 percent
b. 13.97 percent
c. 14.08 percent
d. 15.39 percent
e. 16.20 percent
36. Hope you guys hava most great left of summer break‼
a. if we do, it will be due to all that we learned in FIN 335‼‼‼
Formula Sheet__________________________________________________________________________
Slope = (E(RA) – Rf) / ( A – 0)
WACC = wERE + wDRD(1-TC) + wpRp
E(RA) = Rf +  A(E(RM) – Rf)
E(R A )  R f E(R M  R f )

A
M
E(R) 
n

i1
E(R P ) 
piR i
m
w jE(R j )

j 1
Cash Flow From Assets = Operating Cash Flow – Net Capital Spending – Changes in NWC
P0 
D1
RE  g
RE 
D1
g
P0
ROE = PM * AT * EM
Internal Growth Rate 
ROA  b
1 - ROA  b
t = ln(FV / PV) / ln(1 + r)
(1 + R) = (1 + r)(1 + h)
Sustainabl e Growth Rate 
r = (FV / PV)1/t – 1
ROE  b
1 - ROE  b
1

1(1  r)t
B  C

r




 F
 (1  r)t


FIN 335Final
Name: _______________________________________
Summer 2014
Answer Sheet
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335 Summer 2010 Final Key
1. The excess return required on a risky investment over that of a risk-free investment is called the:
a. inflation premium.
b. required return.
c. real return.
d. average actual return.
E. risk premium.
2. Which one of the following had the lowest standard deviation?
A. U.S. Treasury bill
b. inflation
c. long-term corporate bonds
d. large-company stocks
e. long-term government bonds
3. Standard deviation measures the _____ of a security's returns over time.
a. average value
b. frequency
C. volatility
d. mean
e. arithmetic average
4. If the financial markets are efficient then:
a. stock prices should remain constant.
b. stock prices should increase or decrease slowly as new events are analyzed and the information is absorbed by the
markets.
c. an increase in the value of one security should be offset by a decrease in the value of another security.
d. stock prices will only change when an event actually occurs, not at the time the event is anticipated.
E. stock prices should only respond to unexpected news and events.
5. Weak form market efficiency states that the value of a security is based on:
a. all public and private information.
B. historical information only.
c. all publicly available information.
d. all publicly available information plus any data that can be gathered from insider trading.
e. random information with no clear distinction as to the source of that information.
6. Systematic risk is:
A. a risk that affects a large number of assets.
b. the total risk inherent in an individual security.
c. also called diversifiable risk.
d. also called asset-specific risk.
e. unique to an individual firm.
7. The slope of the security market line is referred to as the:
a. market alpha.
B. market risk premium.
c. diversification benefit.
d. systematic risk premium.
e. expected return.
8. The goal of diversification is to eliminate:
a. all investment risk.
b. the market risk premium.
c. systematic risk.
D. unsystematic risk.
e. the effects of beta.
9. A U.S. Treasury bill has a beta of _____ while the overall market has a beta of _____.
a. 0; 0
B. 0; 1
c. 1; 0
d. 1; 1
e. infinity; 1
10. If a security plots below the security market line, then the security:
a. is under-priced.
B. is overpriced.
c. is correctly priced.
d. has a beta greater than 1.0.
e. has a beta less than 1.0.
11. The stock of Uptown Men's Wear is expected to produce the following returns given the various states of the economy.
What is the expected return on this stock?
A. 9.6 percent
b. 10.4 percent
c. 12.8 percent
d. 13.6 percent
e. 15.3 percent
12. A $16,000 portfolio is invested in a risk-free security and two stocks. The beta of stock A is .74 while the beta of stock B
is 1.9. One-half of the portfolio is invested in the risk-free security. How much is invested in stock A if the beta of the
portfolio is .60?
a. $3,411.16
b. $4,141.41
C. $4,827.59
d. $5,258.25
e. $5,434.09
13. A firm's weighted average cost of capital:
a. decreases when the firm's tax rate decreases.
b. is another terms for the firm's return on equity.
c. varies inversely with the firm's pre-tax cost of debt.
D. is the required return on the existing assets of the firm.
e. is the required return for each of a firm's proposed projects.
14. Which one of the following represents the best estimate for a firm's pre-tax cost of debt?
a. average coupon rate on the firm's outstanding bonds
b. coupon rate on the firm's latest bond issue
C. weighted average yield-to-maturity on the firm's outstanding debt
d. current yield on the firm's outstanding debt
e. annual interest divided by the market price per bond for the latest bond issue
15. The cost of preferred stock:
a. decreases when a firm's tax rate increases.
b. is constant over time.
c. is unaffected by changes in the price of the stock.
D. is equal to the stock's dividend yield.
e. increases as the price of the stock increases.
16. Deltronics just paid its first annual dividend of $.20 a share. The firm plans to increase the dividend by 4 percent per year
indefinitely. What is the firm's cost of equity if the current stock price is $11 a share?
a. 5.82 percent
B. 5.89 percent
c. 6.33 percent
d. 6.48 percent
e. 6.54 percent
17. The Carriage House issued 10-year, 8 percent semiannual bonds 3 years ago. The bonds currently sell at 99.5 percent of
face value. What is the firm's aftertax cost of debt if the tax rate is 32 percent?
a. 4.13 percent
b. 4.68 percent
C. 5.50 percent
d. 6.42 percent
e. 8.09 percent
18. Repeattheproblem Inc. has just signed a $3 million contract. The contract calls for a payment of $500,000 today,
$900,000 one year from today, and $1.6 million two years from today. What is this contract really worth if
Repeattheproblem can earn 12 percent on its money?
a. $2.58 million
b. $2.30 million
c. $2.39 million
d. $2.89 million
e. $2.21 million
19. Liquidation is defined as the:
a. reorganization of a firm's capital structure.
b. infusion of capital into a firm by issuing new securities.
C. termination of a firm as a going concern.
d. legal proceeding for reorganizing or terminating a firm.
e. rule for prioritizing payments to creditors of a bankrupt firm
20. Which one of the following statements concerning financial leverage is correct?
a. Financial leverage increases profits and decreases losses.
b. Financial leverage has no effect on a firm's return on equity.
c. Finan8cial leverage refers to the use of common stock.
D. Financial leverage magnifies both profits and losses.
e. Increasing financial leverage will always increase the earnings per share.
21. The geometric average return of 7, 11, -2, and 4 percent is computed as:
a. (1.07 + 1.11 + 1.02 + 1.04)1/4 - 1.
b. (1.07 + 1.11 + 1.02 + 1.04)1/4.
c. (1.07+1.11 +.98 +1.04) (4) + 1.
d. [(1.07 + 1.11 + .98 + 1.04) ¼] +1.
e. (1.07 *1.11*.98 *1.04)1/4 - 1.
22. Sunk costs:
A.Suck.
23. In Canada and the United Kingdom, a perpetuity is also called a(n):
A. consul.
b. infinite bond.
c. infinity flow.
d. dowry.
e. forever bond.
24. Which one of the following is a breakdown of the ROE into its three component parts?
A. Du Pont decomposition
b. efficiency breakout
c. equity analysis
d. sustainable growth
e. profitability ratios
25. Who is the lead guitarist for the Amboy Dukes?
a. Barak Obama
b. Pee Wee Herman
c. Jimmi Hendrix
d. Eric Clapton
E. Ted Nugent
26. You currently have $7,200 in your investment account. You can earn an average rate of return of 11.7 percent per year.
How long will you have to wait until your account is worth $50,000?
a. 9.47 years
b. 11.28 years
c. 14.67 years
d. 17.51 years
27. Use these financial statements to answer questions 9 through 13.
Cash
Accounts receivable
Inventory
Net fixed assets
Total assets
2007
$
1,700
14,300
22,500
82,900
$121,400
Balance Sheet
2008
$
1,600
Accounts payable
17,400
Long-term debt
23,700
Common stock
81,600
Retained earnings
$124,300
Total liabilities and equity
2007
$13,800
47,500
17,100
43,100
$121,400
2008
$ 12,900
48,600
22,000
40,800
$124,300
Income Statement
Net Sales
$163,700
Costs
108,200
Depreciation
13,100
EBIT
41,400
Interest
3,800
Taxable income
37,600
Taxes
13,100
Net Income
$ 24,400
28. What is the amount of the operating cash flow?
a. $24,400
b. $30,500
29
C $41,400
What is the cash flow to creditors for 2008?
a. $2,700
b. -$1,100
c. $1,100
d. $42,300
d. $2,500
30. The annual interest on a bond divided by the bond's market price is called the:
A. yield to maturity.
B. yield to call.
C. total yield.
D. current yield.
E. required yield.
31. A bond that pays no interest payments and sells at a deep discount is called a(n) _____ bond.
a. callable
b. income
C. zero coupon
d. convertible
e. tax-free
32. The Bailey Brothers want to issue 20-year, zero coupon bonds that yield 9 percent. What price should it charge for
these bonds if the face value is $1,000?
a. $157.25
b. $163.70
C. $178.43
d. $194.49
e. $202.64
33. The price of a stock at year 5 can be expressed as:
a. P0
g5.
b. D0
(1 + R)5.
C. D6 / (R
g)
d. P1
(1 + R)5.
e. D5 / (R
g).
34. Steven can afford car payments of $285 a month for 60 months. The bank will lend him this money at 6.2 percent
interest. How much can Steven borrow?
a. $12,568.63
b. $12,869.39
c. $13,672.38
d. $14,104.91
E. $14,671.11
35. A project has the following cash flows. What is the internal rate of return?
a. 12.46 percent
B. 13.97 percent
c. 14.08 percent
d. 15.39 percent
e. 16.20 percent
36. Hope you guys hava most great left of summer break‼
a. if we do, it will be due to all that we learned in FIN 335‼‼‼