FIN 600 - Midterm Sample With Solutions

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Fin 600 - AY2021 Fall - mid-term exam - sample questions
Indicate the answer choice that best completes the statement or answers the question.
1. Suppose Acme Industries correctly estimates its WACC at a given point in time and then uses that same cost of
capital to evaluate all projects for the next 10 years, then the firm will most likely
a. become less risky over time, and this will maximize its intrinsic value.
b. accept too many low-risk projects and too few high-risk projects.
c. become more risky and also have an increasing WACC. Its intrinsic value will not be maximized.
d. continue as before, because there is no reason to expect its risk position or value to change over time as a
result of its use of a single cost of capital.
e. become riskier over time, but its intrinsic value will be maximized.
2. Analysts following Armstrong Products recently noted that the company's net cash flow from operations
increased over the prior year, yet cash as reported on the balance sheet decreased. Which of the following
factors could explain this situation?
a. The company issued new long-term debt.
b. The company cut its dividend.
c. The company made a large investment in a profitable new plant.
d. The company sold a division and received cash in return.
e. The company issued new common stock.
3. Aubey Aircraft recently announced that its net income increased sharply from the previous year, yet its net cash
flow from operations declined. Which of the following could explain this performance?
a. The company's operating income declined.
b. The company's expenditures on fixed assets declined.
c. The company's cost of goods sold increased.
d. The company's depreciation and amortization expenses declined.
e. The company's interest expense increased.
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4. Portfolio P has equal amounts invested in each of the three stocks, A, B, and C. Stock A has a beta of 0.8, Stock
B has a beta of 1.0, and Stock C has a beta of 1.2. Each of the stocks has a standard deviation of 25%. The
returns on the three stocks are independent of one another (i.e., the correlation coefficients all equal zero).
Assume that there is an increase in the market risk premium, but the risk-free rate remains unchanged. Which of
the following statements is CORRECT?
a. The required return on Stock A will increase by less than the increase in the market risk premium, while
the required return on Stock C will increase by more than the increase in the market risk premium.
b. The required return on the average stock will remain unchanged, but the returns of riskier stocks (such as
Stock C) will increase while the returns of safer stocks (such as Stock A) will decrease.
c. The required returns on all three stocks will increase by the amount of the increase in the market risk
premium.
d. The required return on the average stock will remain unchanged, but the returns on riskier stocks (such as
Stock C) will decrease while the returns on safer stocks (such as Stock A) will increase.
e. The required return of all stocks will remain unchanged since there was no change in their betas.
5. Heaton Corp. sells on terms that allow customers 45 days to pay for merchandise. Its sales last year were
$425,000, and its year-end receivables were $60,000. If its DSO is less than the 45-day credit period, then
customers are paying on time. Otherwise, they are paying late. By how much are customers paying early or late?
Base your answer on this equation: DSO − Credit period = days early or late, and use a 365-day year when
calculating the DSO. A positive answer indicates late payments, while a negative answer indicates early
payments.
a. 6.20
b. 6.53
c. 6.86
d. 7.20
e. 7.56
6. Which of the following statements is CORRECT?
a. Long-term bonds have less interest rate price risk but more reinvestment rate risk than short-term bonds.
b. If interest rates increase, all bond prices will increase, but the increase will be greater for bonds that have
less interest rate risk.
c. Relative to a coupon-bearing bond with the same maturity, a zero coupon bond has more interest rate price
risk but less reinvestment rate risk.
d. Long-term bonds have less interest rate price risk and also less reinvestment rate risk than short-term
bonds.
e. One advantage of a zero coupon Treasury bond is that no one who owns the bond has to pay any taxes on
it until it matures or is sold.

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7. Tucker Electronic System's current balance sheet shows total common equity of $3,125,000. The company has
125,000 shares of stock outstanding, and they sell at a price of $52.50 per share. By how much do the firm's
market and book values per share differ?
a. $27.50
b. $28.88
c. $30.32
d. $31.83
e. $33.43
8. A stock is expected to pay a year-end dividend of $2.00, i.e., D1 = $2.00. The dividend is expected to decline at a
rate of 5% a year forever (g = −5%). If the company is in equilibrium and its expected and required rate of
return is 15%, which of the following statements is CORRECT?
a. The company's dividend yield 5 years from now is expected to be 10%.
b. The constant growth model cannot be used because the growth rate is negative.
c. The company's expected capital gains yield is 5%.
d. The company's expected stock price at the beginning of next year is $9.50.
e. The company's current stock price is $20.
9. Gretta's portfolio consists of $700,000 invested in a stock that has a beta of 1.2 and $300,000 invested in a stock
that has a beta of 0.8. The risk-free rate is 6% and the market risk premium is 5%. Which of the following
statements is CORRECT?
a. The required return on the market is 10%.
b. The portfolio's required return is less than 11%.
c. If the risk-free rate remains unchanged but the market risk premium increases by 2%, Gretta's portfolio's
required return will increase by more than 2%.
d. If the market risk premium remains unchanged but expected inflation increases by 2%, Gretta's portfolio's
required return will increase by more than 2%.
e. If the stock market is efficient, Gretta's portfolio's expected return should equal the expected return on the
market, which is 11%.
Pettijohn Inc.
The balance sheet and income statement shown below are for Pettijohn Inc. Note that the firm has no
amortization charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and
the notes payable will be rolled over.
Balance Sheet (Millions of $)
Assets 2016
Cash and securities $ 1,554.0
Accounts receivable 9,660.0
Inventories 13,440.0
Total current assets $24,654.0
Net plant and equipment 17,346.0
Total assets $42,000.0
Name: Class: Date:
Liabilities and Equity
Accounts payable $ 7,980.0
Notes payable 5,880.0
Accruals 4,620.0
Total current liabilities $18,480.0
Long-term bonds 10,920.0
Total liabilities $29,400.0
Common stock 3,360.0
Retained earnings 9,240.0
Total common equity $12,600.0
Total liabilities and equity $42,000.0

Income Statement (Millions of $) 2016
Net sales $58,800.0
Operating costs except depr'n $55,274.0
Depreciation $ 1,029.0
Earnings bef int and taxes (EBIT) $ 2,497.0
Less interest 1,050.0
Earnings before taxes (EBT) $ 1,447.0
Taxes $ 314.0
Net income $ 1,133.0
Other data:
Shares outstanding (millions) 175.00
Common dividends $ 509.83
Int rate on notes payable & L-T bonds 6.25%
Federal plus state income tax rate 21.7%
Year-end stock price $77.69
10. Refer to the data for Pettijohn Inc. What is the firm's days sales outstanding? Assume a 360-day year for this
calculation.
a. 48.17
b. 50.71
c. 53.38
d. 56.19
e. 59.14

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11. Stuart Company's manager believes that economic conditions during the next year will be strong, normal, or
weak, and she thinks that the firm's returns will have the probability distribution shown below. What's the
standard deviation of the estimated returns? (Hint: Use the formula for the standard deviation of a population, not
a sample.)
Economic
Conditions Prob. Return
Strong 30% 32.0%
Normal 40% 10.0%
Weak 30% −16.0%
a. 17.69%
b. 18.62%
c. 19.55%
d. 20.52%
e. 21.55%
Pettijohn Inc.
Assets 2016
Accruals 4,620.0

Net sales $58,800.0
Name: Class: Date:
Taxes $ 314.0
Other data:
12. Refer to the data for Pettijohn Inc. What is the firm's market-to-book ratio?
a. 0.56
b. 0.66
c. 0.78
d. 0.92
e. 1.08
13. Curtis Corporation's noncallable bonds currently sell for $1,165. They have a 15-year maturity, an annual coupon
of $95, and a par value of $1,000. What is their yield to maturity?
a. 6.20%
b. 6.53%
c. 6.87%
d. 7.24%
e. 7.62%
14. You have been hired as a consultant by Feludi Inc.'s CFO, who wants you to help her estimate the cost of
capital. You have been provided with the following data: rRF = 4.10%; RPM = 5.25%; and b = 1.30. Based on
the CAPM approach, what is the cost of common from reinvested earnings?
a. 9.67%
b. 9.97%
c. 10.28%
d. 10.60%
e. 10.93%

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15. Dyer Furniture is expected to pay a dividend of D1 = $1.25 per share at the end of the year, and that dividend is
expected to grow at a constant rate of 6.00% per year in the future. The company's beta is 1.15, the market risk
premium is 5.50%, and the risk-free rate is 4.00%. What is Dyer's current stock price?
a. $28.90
b. $29.62
c. $30.36
d. $31.12
e. $31.90
16. Wells Water Systems recently reported $8,250 of sales, $4,500 of operating costs other than depreciation, and
$950 of depreciation. The company had no amortization charges, it had $3,250 of outstanding bonds that carry a
6.75% interest rate, and its federal-plus-state income tax rate was 25%. In order to sustain its operations and
thus generate sales and cash flows in the future, the firm was required to spend $750 to buy new fixed assets
and to invest $250 in net operating working capital. How much free cash flow did Wells generate?
a. $2,050.00
b. $2,152.50
c. $2,260.13
d. $2,373.13
e. $2,491.79
17. One year ago Lerner and Luckmann Co. issued 15-year, noncallable, 7.5% annual coupon bonds at their par
value of $1,000. Today, the market interest rate on these bonds is 5.5%. What is the current price of the bonds,
given that they now have 14 years to maturity?
a. $1,077.01
b. $1,104.62
c. $1,132.95
d. $1,162.00
e. $1,191.79
18. You are a finance intern at Chambers and Sons and they have asked you to help estimate the company's cost of
common equity. You obtained the following data: D1 = $1.25; P0 = $27.50; gL = 5.00% (constant); and F =
6.00%. What is the cost of equity raised by selling new common stock?
a. 9.06%
b. 9.44%
c. 9.84%
d. 10.23%
e. 10.64%

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19. One drawback of switching from a partnership to the corporate form of organization is the following:
a. It subjects the firm to additional regulations.
b. It cannot affect the amount of the firm's operating income that goes to taxes.
c. It makes it more difficult for the firm to raise additional capital.
d. It makes the firm's investors subject to greater potential personal liabilities.
e. It makes it more difficult for the firm's investors to transfer their ownership interests.
a. Corporations are at a disadvantage relative to partnerships because they have to file more reports to state
and federal agencies, including the Securities and Exchange Administration, even if they are not publicly
owned.
b. In a regular partnership, liability for the firm's debts is limited to the amount a particular partner has
invested in the business.
c. A fast-growth company would be more likely to set up as a partnership for its business organization than
would a slow-growth company.
d. Partnerships have difficulty attracting capital in part because of their unlimited liability, the lack of
impermanence of the organization, and difficulty in transferring ownership.
e. A major disadvantage of a partnership relative to a corporation as a form of business organization is the
high cost and practical difficulty of its formation.
21. Judd Corporation has a weighted average cost of capital of 10.25%, and its value of operations is $57.50 million.
Free cash flow is expected to grow at a constant rate of 6.00% per year. What is the expected year-end free
cash flow, FCF1 in millions?
a. $2.20
b. $2.44
c. $2.69
d. $2.96
e. $3.25

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a. A callable 10-year, 10% bond should sell at a higher price than an otherwise similar noncallable bond.
b. Corporate treasurers dislike issuing callable bonds because these bonds may require the company to raise
additional funds earlier than would be true if noncallable bonds with the same maturity were used.
c. Two bonds have the same maturity and the same coupon rate. However, one is callable and the other is
not. The difference in prices between the bonds will be greater if the current market interest rate is above
the coupon rate than if it is below the coupon rate.
d. The actual life of a callable bond will always be equal to or less than the actual life of a noncallable bond
with the same maturity. Therefore, if the yield curve is upward sloping, the required rate of return will be
lower on the callable bond.
e. Two bonds have the same maturity and the same coupon rate. However, one is callable and the other is
not. The difference in prices between the bonds will be greater if the current market interest rate is below
the coupon rate than if it is above the coupon rate.
23. Which of the following statements is CORRECT? (Assume that the risk-free rate is a constant.)
a. The effect of a change in the market risk premium depends on the slope of the yield curve.
b. If the market risk premium increases by 1%, then the required return on all stocks will rise by 1%.
c. If the market risk premium increases by 1%, then the required return will increase by 1% for a stock that
has a beta of 1.0.
d. The effect of a change in the market risk premium depends on the level of the risk-free rate.
e. If the market risk premium increases by 1%, then the required return will increase for stocks that have a
beta greater than 1.0, but it will decrease for stocks that have a beta less than 1.0.
24. Justus Motor Co.has a WACC of 11.50%, and its value of operations is $25.00 million. Justus's free cash flow is
expected to grow at a constant rate of 7.00%. What was the last free cash flow, FCF0 in millions?
a. $0.95
b. $1.05
c. $1.16
d. $1.27
e. $1.40

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25. Below is the common equity section (in millions) of Fethe Industries' last two year-end balance sheets:
2020 2019
Common stock $2,000 $1,000
Retained earnings 2,000 2,340
Total common equity $4,000 $3,340
The company has never paid a dividend to its common stockholders. Which of the following statements is
CORRECT?
a. The company's net income in 2019 was higher than in 2020.
b. The company issued common stock in 2020.
c. The market price of the company's stock doubled in 2020.
d. The company had positive net income in both 2019 and 2020, but the company's net income in 2019 was
lower than it was in 2020.
e. The company has more equity than debt on its balance sheet.
a. If two firms differ only in their use of debti.e., they have identical assets, sales, operating costs, and tax
ratesbut one firm has a higher debt ratio, the firm that uses more debt will have a higher profit margin on
sales.
b. If one firm has a higher debt ratio than another, we can be certain that the firm with the higher debt ratio
will have the lower TIE ratio, as that ratio depends entirely on the amount of debt a firm uses.
c. A firm's use of debt will have no effect on its profit margin on sales.
d. If two firms differ only in their use of debti.e., they have identical assets, sales, operating costs, interest
rates on their debt, and tax ratesbut one firm has a higher debt ratio, the firm that uses more debt will have
a lower profit margin on sales.
e. The debt ratio as it is generally calculated makes an adjustment for the use of assets leased under
operating leases, so the debt ratios of firms that lease different percentages of their assets are still
comparable.
27. Calculate the required rate of return for Everest Expeditions Inc., assuming that (1) investors expect a 4.0% rate
of inflation in the future, (2) the real risk-free rate is 3.0%, (3) the market risk premium is 5.0%, (4) the firm has
a beta of 1.00, and (5) its realized rate of return has averaged 15.0% over the last 5 years.
a. 10.29%
b. 10.83%
c. 11.40%
d. 12.00%
e. 12.60%

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a. One disadvantage of operating as a corporation rather than as a partnership is that corporate shareholders
are exposed to more personal liability than partners.
b. There is no good reason to expect a firm's bondholders and stockholders to react differently to the types of
new asset investments a firm makes.
c. Bondholders are generally more willing than stockholders to have managers invest in risky projects with
high potential returns as opposed to safer projects with lower expected returns.
d. Stockholders are generally more willing than bondholders to have managers invest in risky projects with
high potential returns as opposed to safer projects with lower expected returns.
e. Relative to sole proprietorships, corporations generally face fewer regulations, which makes raising capital
easier for corporations.
29. Which of the following could explain why a business might choose to operate as a corporation rather than as a
sole proprietorship or a partnership?
a. Corporations generally find it relatively difficult to raise large amounts of capital.
b. Less of a corporation's income is generally subjected to taxes than would be true if the firm were a
partnership.
c. Corporate shareholders escape liability for the firm's debts, but this factor may be offset by the tax
disadvantages of the corporate form of organization.
d. Corporate investors are exposed to unlimited liability.
e. Corporations generally face relatively few regulations.
30. The YTMs of three $1,000 face value bonds that mature in 10 years and have the same level of risk are equal.
Bond A has an 8% annual coupon, Bond B has a 10% annual coupon, and Bond C has a 12% annual coupon.
Bond B sells at par. Assuming interest rates remain constant for the next 10 years, which of the following
a. Since the bonds have the same YTM, they should all have the same price, and since interest rates are not
expected to change, their prices should all remain at their current levels until maturity.
b. Bond C sells at a premium (its price is greater than par), and its price is expected to increase over the next
year.
c. Bond A sells at a discount (its price is less than par), and its price is expected to increase over the next
year.
d. Over the next year, Bond A's price is expected to decrease, Bond B's price is expected to stay the same,
and Bond C's price is expected to increase.
e. Bond A's current yield will increase each year.

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a. The WACC is calculated using a before-tax cost for debt that is equal to the interest rate that must be paid
on new debt, along with the after-tax costs for common stock and for preferred stock if it is used.
b. An increase in the risk-free rate is likely to reduce the marginal costs of both debt and equity.
c. The WACC for a firm that pays dividends and regularly issues new equity will be greater than the WACC
for an otherwise identical company that pays lower dividends and that rarely issues new equity.
d. Beta measures market risk, which is generally the most relevant risk measure for a publicly-owned firm
that seeks to maximize its intrinsic value. However, this is not true unless all of the firm's stockholders are
well diversified.
e. The bond-yield-plus-risk-premium approach to estimating the cost of common equity involves adding a risk
premium to the interest rate on the company's own long-term bonds. The size of the risk premium for
bonds with different ratings is published daily in The Wall Street Journal.
32. How would the Security Market Line be affected, other things held constant, if the expected inflation rate
decreases and investors also become more risk averse?
a. The x-axis intercept would decline, and the slope would increase.
b. The y-axis intercept would increase, and the slope would decline.
c. The SML would be affected only if betas changed.
d. Both the y-axis intercept and the slope would increase, leading to higher required returns.
e. The y-axis intercept would decline, and the slope would increase.
a. The preemptive right gives stockholders the right to approve or disapprove of a merger between their
company and some other company.
b. The preemptive right is a provision in the corporate charter that gives common stockholders the right to
purchase (on a pro rata basis) new issues of the firm's common stock.
c. The stock valuation model, P0 = D1/(rs − g), cannot be used for firms that have negative growth rates.
d. The stock valuation model, P0 = D1/(rs − g), can be used only for firms whose growth rates exceed their
required returns.
e. If a company has two classes of common stock, Class A and Class B, the stocks may pay different
dividends, but under all state charters the two classes must have the same voting rights.
34. Ranger Inc. would like to issue new 20-year bonds. Initially, the plan was to make the bonds non-callable. If the
bonds were made callable after 5 years at a 5% call premium, how would this affect their required rate of
return?
a. There is no reason to expect a change in the required rate of return.
b. The required rate of return would decline because the bond would then be less risky to a bondholder.
c. The required rate of return would increase because the bond would then be more risky to a bondholder.
d. It is impossible to say without more information.
e. Because of the call premium, the required rate of return would decline.

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35. Kellner Motor Co.'s stock has a required rate of return of 11.50%, and it sells for $25.00 per share. Kellner's
dividend is expected to grow at a constant rate of 7.00%. What was the last dividend, D0?
a. $0.95
b. $1.05
c. $1.16
d. $1.27
e. $1.40
36. Bonds A and B are 15-year, $1,000 face value bonds. Bond A has a 7% annual coupon, while Bond B has a 9%
annual coupon. Both bonds have a yield to maturity of 8%, which is expected to remain constant for the next 15
years. Which of the following statements is CORRECT?
a. One year from now, Bond A's price will be higher than it is today.
b. Bond A's current yield is greater than 8%.
c. Bond A has a higher price than Bond B today, but one year from now the bonds will have the same price.
d. Both bonds have the same price today, and the price of each bond is expected to remain constant until the
bonds mature.
e. Bond B has a higher price than Bond A today, but one year from now the bonds will have the same price.
a. WACC calculations should be based on the before-tax costs of all the individual capital components.
b. Flotation costs associated with issuing new common stock normally reduce the WACC.
c. If a company's tax rate increases, then, all else equal, its weighted average cost of capital will decline.
d. An increase in the risk-free rate will normally lower the marginal costs of both debt and equity financing.
e. A change in a company's target capital structure cannot affect its WACC.
38. If D1 = $1.25, g (which is constant) = 5.5%, and P0 = $44, what is the stock's expected total return for the
coming year?
a. 7.54%
b. 7.73%
c. 7.93%
d. 8.13%
e. 8.34%
Pettijohn Inc.
Assets 2016

Name: Class: Date:
Accruals 4,620.0

Net sales $58,800.0
Taxes $ 314.0
Other data:
39. Refer to the data for Pettijohn Inc. What is the firm's P/E ratio?
a. 12.0
b. 12.6
c. 13.2
d. 13.9
e. 14.6

Name: Class: Date:
a. One of the disadvantages of a sole proprietorship is that the proprietor is exposed to unlimited liability.
b. It is generally easier to transfer one's ownership interest in a partnership than in a corporation.
c. One of the advantages of the corporate form of organization is that it avoids double taxation.
d. One of the advantages of a corporation from a social standpoint is that every stockholder has equal voting
rights, i.e., "one person, one vote."
e. Corporations of all types are subject to the corporate income tax.
41. Which of the following factors would be most likely to lead to an increase in interest rates in the economy?
a. Households reduce their consumption and increase their savings.
b. The Federal Reserve decides to try to stimulate the economy.
c. There is a decrease in expected inflation.
d. The economy falls into a recession.
e. Most businesses decide to modernize and expand their manufacturing capacity, and to install new
equipment to reduce labor costs.
42. As a consultant to Basso Inc., you have been provided with the following data: D1 = $0.67; P0 = $27.50; and gL
= 8.00% (constant). What is the cost of common from reinvested earnings based on the dividend
growth approach?
a. 9.42%
b. 9.91%
c. 10.44%
d. 10.96%
e. 11.51%
43. Stocks A, B, and C are similar in some respects: Each has an expected return of 10% and a standard deviation
of 25%. Stocks A and B have returns that are independent of one another; i.e., their correlation coefficient, r,
equals zero. Stocks A and C have returns that are negatively correlated with one another; i.e., r is less than 0.
Portfolio AB is a portfolio with half of its money invested in Stock A and half in Stock B. Portfolio AC is a
portfolio with half of its money invested in Stock A and half invested in Stock C. Which of the following
a. Portfolio AC has an expected return that is greater than 25%.
b. Portfolio AB has a standard deviation that is greater than 25%.
c. Portfolio AB has a standard deviation that is equal to 25%.
d. Portfolio AC has a standard deviation that is less than 25%.
e. Portfolio AC has an expected return that is less than 10%.

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44. Hutchinson Corporation has zero debtit is financed only with common equity. Its total assets are $410,000. The
new CFO wants to employ enough debt to bring the debt/assets ratio to 40%, using the proceeds from the
borrowing to buy back common stock at its book value. How much must the firm borrow to achieve the target
debt ratio?
a. $155,800
b. $164,000
c. $172,200
d. $180,810
e. $189,851
a. Since its stockholders are not directly responsible for paying a corporation's income taxes, corporations
should focus on before-tax cash flows when calculating the WACC.
b. An increase in a firm's tax rate will increase the component cost of debt, provided the YTM on the firm's
bonds is not affected by the change in the tax rate.
c. When the WACC is calculated, it should reflect the costs of new common stock, reinvested earnings,
preferred stock, long-term debt, short-term bank loans if the firm normally finances with bank debt, and
accounts payable if the firm normally has accounts payable on its balance sheet.
d. If a firm has been suffering accounting losses that are expected to continue into the foreseeable future,
and therefore its tax rate is zero, then it is possible for the after-tax cost of preferred stock to be less than
the after-tax cost of debt.
e. Since the costs of internal and external equity are related, an increase in the flotation cost required to sell a
new issue of stock will increase the cost of reinvested earnings.
a. "Window dressing" is any action that improves a firm's fundamental, long-run position and thus increases
its intrinsic value.
b. Borrowing by using short-term notes payable and then using the proceeds to retire long-term debt is an
example of "window dressing." Offering discounts to customers who pay with cash rather than buy on
credit and then using the funds that come in quicker to purchase additional inventories is another example
of "window dressing."
c. Borrowing on a long-term basis and using the proceeds to retire short-term debt would improve the current
ratio and thus could be considered to be an example of "window dressing."
d. Offering discounts to customers who pay with cash rather than buy on credit and then using the funds that
come in quicker to purchase additional inventories is an example of "window dressing."
e. Using some of the firm's cash to reduce long-term debt is an example of "window dressing."

Name: Class: Date:
a. If the risk-free rate rises, then the market risk premium must also rise.
b. If a company's beta is halved, then its required return will also be halved.
c. If a company's beta doubles, then its required return will also double.
d. The slope of the security market line is equal to the market risk premium, (rM − rRF).
e. Beta is measured by the slope of the security market line.
48. Which of the following events would make it more likely that a company would choose to call its outstanding
callable bonds?
a. Market interest rates rise sharply.
b. Market interest rates decline sharply.
c. The company's financial situation deteriorates significantly.
d. Inflation increases significantly.
e. The company's bonds are downgraded.
49. Other things held constant, which of the following alternatives would increase a company's cash flow for the
current year?
a. Increase the number of years over which fixed assets are depreciated for tax purposes.
b. Pay down the accounts payables.
c. Reduce the days' sales outstanding (DSO) without affecting sales or operating costs.
d. Pay workers more frequently to decrease the accrued wages balance.
e. Reduce the inventory turnover ratio without affecting sales or operating costs.
50. A 10-year bond pays an annual coupon, its YTM is 8%, and it currently trades at a premium. Which of the
following statements is CORRECT?
a. If the yield to maturity remains at 8%, then the bond's price will decline over the next year.
b. The bond's coupon rate is less than 8%.
c. If the yield to maturity increases, then the bond's price will increase.
d. If the yield to maturity remains at 8%, then the bond's price will remain constant over the next year.
e. The bond's current yield is less than 8%.
51. Zacher Co.'s stock has a beta of 1.40, the risk-free rate is 4.25%, and the market risk premium is 5.50%. What
is the firm's required rate of return?
a. 11.36%
b. 11.65%
c. 11.95%
d. 12.25%
e. 12.55%

Name: Class: Date:
52. The president and CFO of Spellman Transportation are having a disagreement about whether to use market
value or book value weights in calculating the WACC. Spellman's balance sheet shows a total of noncallable $45
million long-term debt with a coupon rate of 7.00% and a yield to maturity of 6.00%. This debt currently has a
market value of $50 million. The company has 10 million shares of common stock, and the book value of the
common equity (common stock plus retained earnings) is $65 million. The current stock price is $22.50 per share;
stockholders' required return, rs, is 14.00%; and the firm's tax rate is 25%. The CFO thinks the WACC should be
based on market value weights, but the president thinks book weights are more appropriate. What is the
difference between these two WACCs?
a. 1.42%
b. 1.57%
c. 1.75%
d. 1.94%
e. 2.16%
53. Stocks A and B are quite similar: Each has an expected return of 12%, a beta of 1.2, and a standard deviation of
25%. The returns on the two stocks have a correlation of 0.6. Portfolio P has 50% in Stock A and 50% in Stock
B. Which of the following statements is CORRECT?
a. Portfolio P has a standard deviation that is greater than 25%.
b. Portfolio P has an expected return that is less than 12%.
c. Portfolio P has a standard deviation that is less than 25%.
d. Portfolio P has a beta that is less than 1.2.
e. Portfolio P has a beta that is greater than 1.2.
a. An indenture is a bond that is less risky than a mortgage bond.
b. The expected return on a corporate bond will generally exceed the bond's yield to maturity.
c. If a bond's coupon rate exceeds its yield to maturity, then its expected return to investors exceeds the yield
to maturity.
d. Under our bankruptcy laws, any firm that is in financial distress will be forced to declare bankruptcy and
then be liquidated.
e. All else equal, senior debt generally has a lower yield to maturity than subordinated debt.
55. Arshadi Corp.'s sales last year were $52,000, and its total assets were $22,000. What was its total assets
turnover ratio (TATO)?
a. 2.03
b. 2.13
c. 2.25
d. 2.36
e. 2.48

Name: Class: Date:
56. The required returns of Stocks X and Y are rX = 10% and rY = 12%. Which of the following statements is
CORRECT?
a. If Stock Y and Stock X have the same dividend yield, then Stock Y must have a lower expected capital
gains yield than Stock X.
b. If Stock X and Stock Y have the same current dividend and the same expected dividend growth rate, then
Stock Y must sell for a higher price.
c. The stocks must sell for the same price.
d. Stock Y must have a higher dividend yield than Stock X.
e. If the market is in equilibrium, and if Stock Y has the lower expected dividend yield, then it must have the
higher expected growth rate.

Name: Class: Date:
Answer Key
1. c
2. c
3. d
4. a
5. b
6. c
7. a
8. d
9. c
10. e
11. b
12. e
13. e
14. e
15. a
16. a
17. e
18. c
19. a
20. d
21. b
22. e
23. c
24. b
25. b
26. d

Name: Class: Date:
27. d
28. d
29. c
30. c
31. c
32. e
33. b
34. c
35. b
36. a
37. c
38. e
39. a
40. a
41. e
42. c
43. d
44. b
45. d
46. c
47. d
48. b
49. c
50. a
51. c
52. e
53. c
54. e
Name: Class: Date:
55. d
56. e

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