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Q: 10 Multiple Choice to be done within the next hour. Doesnt need to be all right ( Answered 5 out of 5 stars,   0 Comments )
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Subject: 10 Multiple Choice to be done within the next hour. Doesnt need to be all right
Category: Business and Money > Finance
Asked by: alwaysrelaxed-ga
List Price: $101.00
Posted: 04 Oct 2005 15:49 PDT
Expires: 03 Nov 2005 14:49 PST
Question ID: 576388
1) Assume that the current yield curve is upward sloping, or normal.
This implies that
        a. Short-term interest rates are more volatile than long term rates. 
        b. Inflation is expected to subside in the future. 
        c. The economy is at the peak of a business cycle. 
        d. Long term bonds are offering a higher interest rate than
short term bonds.
        e. None of the statements above is necessarily implied by the
yield curve given.


2) Given the following information, determine which beta coefficient
for stock A is consistent with equilibrium:
            kA = 11.3%; kRF = 5%; kM = 10%
        a. 0.86 
        b. 1.26 
        c. 1.10 
        d. 0.80 
        e. 1.35 

3) You are holding a stock that has a beta of 2.0 and is currently in
equilibrium. The required return on the stock is 15 percent, and the
return on an average stock is 10 percent. What would be the percentage
change in the return of the stock, if the return on an average stock
increased by 30 percent while the risk-free rate remained unchanged?
        a. +20% 
        b. +30% 
        c. +40% 
        d. +50% 
        e. +60%

4) You have been managing a $1 million portfolio. The portfolio has a
beta of 1.6 and a required rate of return of 14 percent. The current
risk free rate is 6 percent. Assume that you receive another $200,000.
If you invest the money in a stock that has a beta of 0.6, what will
be the required return on your $1.2 million portfolio?
        a. 12.00% 
        b. 12.25% 
        c. 13.17% 
        d. 14.12% 
        e. 13.67% 

5) John currently manages a $500,000 portfolio. He is expecting to
receive an additional $250,000 from a new client. The existing
portfolio has a required return of 10.75 percent. The risk free rate
is 4 percent and the return on the market is 9 percent. If Johnr wants
the required return on the new portfolio to be 11.5 percent, what
should be the average beta for the new stocks added to the portfolio?
        a. 1.50 
        b. 2.00 
        c. 1.67 
        d. 1.35 
        e. 1.80 

6) caster Co. and York Co. both have the same return on assets (ROA).
However, caster has a higher total assets turnover and a higher equity
multiplier than York. Which of the following statements is most
correct?

        a. caster has a lower profit margin than York. 
        b. caster has a lower debt ratio than York. 
        c. caster has a higher return on equity (ROE) than York. 
        d. Statements a and c are correct. 
        e. All the statements above are correct. 

7) Division A had a higher ROE than division B, yet division B creates
more value for shareholders and has a higher EVA than division A. Both
divisions, however, have positive ROEs and EVAs. What could explain
these performance measures?
        a. Division A is riskier than division B. 
        b. Division A is much larger (in terms of equity capital
employed) than division B.
        c. Division A has less debt than division B. 
        d. Statements a and b are correct. 
        e. All the statements above are correct. 

8)Which of the following statements is most correct?

        a. If a firm?s ROE and ROA are the same, this implies that the
firm is financed entirely with common equity. ( that is, common equity
= total assets).
        b. All else equal, a firm with a higher debt ratio will have a
lower basic earning power ratio.
        c. If firm A has a higher market to book ratio than firm B,
then firm A must also have a higher price earnings ratio (P/E).
        d. All the statements above are correct. 
        e. Statements a and b are correct. 

9) Simon Lawn's CFO recently estimated that the company?s EVA for the
past year was zero. The company?s cost of equity capital is 14
percent, its cost of debt is 8 percent, and its debt ratio is 40
percent. Which of the following statements is most correct?

        a. The company?s net income was zero. 
        b. The company?s net income was negative. 
        c. The company?s ROA was 14 percent. 
        d. The company?s ROE was 14 percent. 
        e. The company?s after-tax operating income was less than the
total dollar cost of capital.

10)A 5-year corporate bond yields 9 percent. A 5-year municipal bond
of equal risk yields 6.5 percent. Assume that the state tax is zero.
What federal tax rate are you indifferent between the two bonds?
        a. 27.78% 
        b. 38.46% 
        c. 41.22% 
        d. 54.33% 
        e. 72.22%

Clarification of Question by alwaysrelaxed-ga on 04 Oct 2005 16:32 PDT
I am doing these questions in effort to teach myself and it is not
part of an assignment.  I simply need the answers and nothing more so
I can back track myself with my own work.  In the case I need to see
work for any of the questions I will put up the given question again
and offer another fee for the work.  Hopefully this amount is good
enough to just get some answers within the next hour or so. Cheers!
Answer  
Subject: Re: 10 Multiple Choice to be done within the next hour. Doesnt need to be all right
Answered By: omnivorous-ga on 04 Oct 2005 17:40 PDT
Rated:5 out of 5 stars
 
Alwaysrelaxed --

Here goes:

1.  D -- that's actually the definition of an upward-sloping yield
curve, that LT rates are higher than ST rates.

2.  An application of the Capital-Asset Pricing Model (CAPM), which predicts:

Ka = Krf + ▀c(Km - Krf)

11.3% = 5% + ▀c (5%); ▀c = 1.26 -- which would be B

3.  Step 1: Average stock = 10% = Krf + 1.0(Km - Krf) ==> thus for a
beta of 1, the return is Km = 10%

Step 2: Increase Km by 30% ==> average stock = 13% = 1.3Km
 
Step 3: Your stock 15% = Krf + 2.0 (Km - Krf) ==> 15% = (2.0 * Km) - Krf
Since we already know Km = 10%, Krf = 5%

Step 4: new return = 5% + 2.0 (1.3 * 10% - 5%) ==> 21%, an increase of
2.0 * 30% or E

4.  In a mixed portfolio, all you need to do is adjust the beta for
the weights of the assets.  But first you have to use the CAPM (noted
above) to calculate Km, which is 11%.  Then Knew = 6% + 0.6 (11% - 6%)
= 9%

Portfolio = .8333 * 14% + .167 * 9% = 11.67% + 1.50% = 13.17% or C

5.  ▀old = 1.35
    ▀mixed = 1.50

    ▀mixed = 1.50 = .667 * 1.35 + .333 * ▀new

    ▀new = (1.50 - .901)/.333 = 1.80 or E

6.  Only C is certainly true.

7.  Only A is true.  B is not and C is not in any situation where cost
of debt is lower than cost-of-equity (which is virtually always the
case).

8.  A is correct; B is not correct and C is not always correct.  Choose A.

9.  Investopedia.com
    "Economic Value-Added"
    http://www.investopedia.com/terms/e/eva.asp

So, cash flow was matching the Ka or equity cost to the firm.  It was
profitable but only at the expected rate. Answer: D

10.  You use (1-Tax rate) to figure out when a tax-free 6.5% = taxable 9% --

6.5%/9% = (1- Tc) ==> so the Tc = 27.78% or A

Google search strategy:
EVA "cost of capital"

Best regards,

Omnivorous-GA
alwaysrelaxed-ga rated this answer:5 out of 5 stars
Very quick. Was there the minute I needed him. Thanks

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