Question 1.1.Last year Ellis Inc.’s earnings per share were $3.50, and its growth rate during the prior 5 years was 9.0% per year. If that growth rate were maintained, how many years would it take for Ellis’ EPS to triple? (Points : 4)

Question 2.2.Jose now has $500. How much would he have after 6 years if he leaves it invested at 5.5% with annual compounding? (Points : 4)

Question 3.3.Which of the following statements is CORRECT? (Points : 4)

Question 4.4.A $50,000 loan is to be amortized over 7 years, with annual end-of-year payments. Which of these statements is CORRECT? (Points : 4)

Question 5.5.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? (Points : 4)

Question 6.6.An investor is considering starting a new business. The company would require $475,000 of assets, and it would be financed entirely with common stock. The investor will go forward only if she thinks the firm can provide a 13.5% return on the invested capital, which means that the firm must have an ROI of 13.5%. How much net income must be expected to warrant starting the business?
(Points : 4)

Question 7.7.Companies generate income from their “regular” operations and from other sources like interest earned on the securities they hold, which is called non-operating income. Lindley Textiles recently reported $12,500 of sales, $7,250 of operating costs other than depreciation, and $1,000 of depreciation. The company had no amortization charges and no non-operating income. It had $8,000 of bonds outstanding that carry a 7.5% interest rate, and its federal-plus-state income tax rate was 40%. How much was Lindley’s operating income, or EBIT? (Points : 4)

Question 8.8.Which of the following items cannot be found on a firm’s balance sheet under current liabilities?
(Points : 4)

Question 9.9.High current and quick ratios always indicate that a firm is managing its liquidity position well. (Points : 4)

Question 10.10.Other things held constant, which of the following actions would increase the amount of cash on a company’s balance sheet? (Points : 4)

Question 11.11.Quigley Inc.’s bonds currently sell for $1,080 and have a par value of $1,000. They pay a $100 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,125. What is their yield to maturity (YTM)?
(Points : 4)

Question 12.12.Preston Inc.’s stock has a 25% chance of producing a 30% return, a 50% chance of producing a 12% return, and a 25% chance of producing a -18% return. What is the firm’s expected rate of return?
(Points : 4)

Question 13.13.Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds? (Points : 4)

Question 14.14.Inflation, recession, and high interest rates are economic events that are best characterized as being: (Points : 4)

Question 15.15.Which is the best measure of risk for a single asset held in isolation, and which is the best measure for an asset held in a diversified portfolio? (Points : 4)

Question 16.16.Consider the following information and then calculate the required rate of return for the Scientific Investment Fund, which holds 4 stocks. The market’s required rate of return is 15.0%, the risk-free rate is 7.0%, and the Fund’s assets are as follows: 30

Stock Investment Beta
A $ 200,000 1.50
B 300,000 -0.50
C 500,000 1.25
D 1,000,000 0.75
(Points : 4)

Question 17.17.Calculate the required rate of return for Mercury, 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) Mercury has a beta of 1.00, and (5) its realized rate of return has averaged 15.0% over the last 5 years.

(Points : 4)

Question 18.18.The CAPM is a multi-period model which takes account of differences in securities’ maturities, and it can be used to determine the required rate of return for any given level of systematic risk. (Points : 4)

Question 19.19.Which is the best measure of risk for an asset held in isolation, and which is the best measure for an asset held in a diversified portfolio? (Points : 4)

Question 20.20.It is possible for a firm to have a positive beta, even if the correlation between its returns and those of another firm are negative. (Points : 4)

Question 21.21.Teall Development Company hired you as a consultant to help them estimate its cost of capital. You have been provided with the following data: D1 = $1.45; P0 = $22.50; and g = 6.50% (constant). Based on the DCF approach, what is the cost of common from retained earnings? 69(Points : 4)

Question 22.22.A company’s perpetual preferred stock currently sells for $92.50 per share, and it pays an $8.00 annual dividend. If the company were to sell a new preferred issue, it would incur a flotation cost of 5.00% of the issue price. What is the firm’s cost of preferred stock? (Points : 4)

Question 23.23.Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows. (Points : 4)

Question 24.24.No conflict will exist between the NPV and IRR methods, when used to evaluate two equally risky but mutually exclusive projects, if the projects’ cost of capital exceeds the rate at which the projects’ NPV profiles cross. (Points : 4)

Question 25.25.When working with the CAPM, which of the following factors can be determined with the most precision? (Points : 4)