Practice Questions for Chapter 9, 10, 11 & 12

Chapter 9
1. A pro forma financial statement is a financial statement that: a. expresses all values as a percentage of either total assets or total sales. b. compares actual results to the budgeted amounts. c. compares the performance of a firm to its industry. D. projects future years' operations.

2. A U.S. depreciation system that allows for more rapid depreciation under various classifications is called:

a. the rapid recovery period. b. straight-line depreciation. c. marginal depreciation. D. the accelerated cost recovery system.

3. A project requires $280,000 of equipment that is classified as 7-year property. What is the depreciation expense in year 4 given the following MACRS depreciation allowance percentages?

a. $25,004 b. $32,582 C. $34,972 d. $40,012

4. United Stores purchased some 7-year MACRS property 3 years ago. What is the current book value of this equipment if the original cost was $229,000? The MACRS allowance percentages are as follows:

A. $100,141.70 b. $118,407.20 c. $140,193.80 d. $164,007.50

Chapter 10
1. You purchase a 6% semiannual coupon bond for 1085 and sell it after one year for 1150. What is your dollar return? A $ 30.00

B $ 60.00
C $ 95.00 D* $125.00

2. You purchase a 7% semiannual coupon bond for 1185 and sell it after one year for 1150. What is your percentage return?

A* 2.95% B 3.04% C 3.50% D 7.00%

3. 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.

4. If the financial markets are strong form efficient, then:

a. only the most talented analysts can determine the true value of a security. b. only company insiders have a marketplace advantage. c. technical analysis provides the best tool to use to gain a marketplace advantage. D. no one person has an advantage in the marketplace.

5. 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 should only respond to unexpected news and events.

Chapter 11
1. 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. 2. The amount of systematic risk present in a particular risky asset relative to that in an average risky asset is called the: a. risk premium. B. beta coefficient. c. standard deviation. d. mean. e. variance. 3. Which one of the following is the best example of systematic risk? A. inflation exceeding market expectations b. a fire destroying an industrial plant c. a firm's CEO suddenly resigning d. growth in the plastics industry slowing e. individuals spending less on footwear 4. Which one of the following best exemplifies unsystematic risk? a. an unexpected economic boom b. an unexpected decrease in interest rates C. an unexpected increase in the sales of a firm d. a sudden increase in the inflation rate e. an expected increase in tax rates

5. 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. 6. The Capital Asset Pricing Model: a. assumes the market has a beta of zero. b. computes the compensation an investor should receive based on the total risk of an individual security. c. has limited use because it ignores the pure time value of money. D. is applicable to both individual securities and security portfolios. e. assumes the market risk premium is constant over time. 7. The stock of Jensen Shipping has a risk premium of 8.4 percent while the inflation rate is 2.6 percent and the risk-free rate is 4.2 percent. What is the expected return on this stock? a. 6.8 percent b. 8.4 percent c. 11.0 percent D. 12.6 percent e. 15.2 percent 8. You own a portfolio that consists of $8,000 in stock A, $4,600 in stock B, $13,000 in stock C, and $5,500 in stock D. What is the portfolio weight of stock D? A. 17.68 percent b. 17.91 percent c. 18.42 percent d. 19.07 percent e. 19.46 percent

9. You have a portfolio comprised of the following. What is your portfolio beta?

A. 1.07 b. 1.12 c. 1.18 d. 1.23 e. 1.26 10. The common stock of New Air has an expected return of 16.74 percent. The risk-free rate is 4.2 percent and the market risk premium is 9.5 percent. What is the beta of New Air stock? a. 1.19 b. 1.23 C. 1.32 d. 1.59 e. 1.76

Chapter 12
1. Last week, Lester's Electronics paid an annual dividend of $2.10 on its common stock. The company has a longstanding policy of increasing its dividend by 3 percent annually. This policy is expected to continue. What is the firm's cost of equity if the stock is currently selling for $44.60 a share? a. 7.66 percent b. 7.71 percent c. 7.79 percent D. 7.85 percent e. 7.90 percent 2. Uptown Office Furniture has 15-year bonds outstanding that carry an annual coupon of 7.5 percent. The bonds mature in 8 years and are currently priced at $870. What is the firm's pre-tax cost of debt?

a. 9.12 percent b. 9.16 percent c. 9.89 percent D. 9.93 percent e. 10.47 percent 3. Brown Street Grocers has a cost of equity of 14.4 percent, a pre-tax cost of debt of 8.7 percent, and a tax rate of 34 percent. What is the firm's weighted average cost of capital if the debt-equity ratio is .55? a. 9.64 percent b. 10.28 percent c. 10.65 percent D. 11.33 percent e. 12.38 percent

4. A company has the following capital structure weights: Debt: Equity: 25% 75%

This companys stocks have a beta value of 1.9; the expected return on the market is 8%; and the risk free rate is 3.2%. The bonds issued by this company have a maturity of 9 years. They are currently priced at $950 and make semi-annual payments at a coupon rate of 8%. The tax rate for this company is 35%. What is the Weighted Average Cost of Capital for this firm? Solution: WACC = wdkd(1 T) + weke kd : I/Y (PV = -$950; PMT = $40; N= 18; FV = $1,000) = 8.82% ke : E(R) = ke = rf + [ E(Rm) + rf ] = 0.032 + 1.9 ( 0.08 0.032) = 0.1232 or 12.32% WACC = 0.25(0.0882)( 1 0.35) + 0.75(0.1232)

= 0.0143 + 0.0924 = 0.1067 or 10.67%