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A firm has assets valued at $950M, liabilities properly valued at $760M. What is the maximum percentage drop in asset prices a firm can withstand before becoming insolvent?Question 1 options:20.0%80.0%25.0%44.4%SaveQuestion 2 (3 points) Which of the following is not true of WACC?Question 2 options:WACC costs are not always shown on the financial statementsThe optimal WACC maximizes firm valueHigher tax rates increase WACCFirms attempt to earn returns on capital greater than WACCSaveQuestion 3 (3 points) Which statement is incorrect regarding illiquidity and/or insolvency?Question 3 options:The further a company is from being insolvent, the better able it is to handle declines in asset valuesDifferent industries have different norms regarding liquidity and leverageBankruptcy occurs when you are deemed illiquid or insolventIlliquidity can cause a solvent company to become insolventSaveQuestion 4 (3 points) In which scenario should a company be most inclined to issue additional debt?Question 4 options:The company has many investment opportunities, little debt, and an undervalued stock priceInterest rates have tripled in the last 3 months to a 20-year highThe company is illiquid with an overvalued stock price and high leverageThe company’s stock price has just doubled as they completed a 2-1 stock splitSaveQuestion 5 (3 points) Assume a business can receive a guaranteed annual payment of $5M forever. If the appropriate discount rate 10.0%, how much should the business be willing to pay today for these future payments (hint: is this an annuity, annuity due, or perpetuity)?Question 5 options:$25.0M$100.0M$10.0M$50.0MSaveQuestion 6 (3 points) If you were using the Gordon Growth Model to value a company, which of the following variables would not help you value the company?Question 6 options:Dividend Growth RateDebt/Equity Ratio and ROENext Year’s Net Income and Retention RateRequired Return on the Stock SaveQuestion 7 (3 points) Cash Conversion Cycle is influenced by how well a company does the following:Question 7 options:Marks up the price it charges customers from the price it pays suppliersRolls over its short-term debt to stay liquidConverts inventory into sales into cashGets paid in cash on its stock investmentsSaveQuestion 8 (3 points) Which of the following is a key assumption of the Internal Growth Rate?Question 8 options:Return on assets changes with leverageThe company’s retention rate is constant over timeThe company’s net income is constant over timeThe company’s leverage is constant over timeSaveQuestion 9 (3 points) Which of the following cannot be found if you know a company’s most recent year’s dividend, retention rate, dividend growth rate and stock price?Question 9 options:Dividend yieldSustainable growth rateDividend paid two years from nowRequired return on the stockSaveQuestion 10 (3 points) A company’s bond is most likely said to be trading at a discount in which scenario?Question 10 options:The bond is overvaluedThe bond is undervaluedThe bond’s yield to maturity is lower than its coupon rateThe bond’s yield to maturity is higher than its coupon rateSaveQuestion 11 (3 points) Which of the following is a benefit of the Sharpe ratio?Question 11 options:The Sharpe ratio enables a comparison of investments of different risk levelsThe Sharpe ratio tells you the return an investment will earnThe Sharpe ratio tells you how efficient the market isThe Sharpe ratio is a way of hedging different risksSaveQuestion 12 (6 points) Calculate the Days Payables Outstanding in 2014 for a company with the following financial measures:YE 2012 Accounts Payable = $375M YE 2013 AP = $385M YE 2014 AP = $345M2013 Sales = $1.3B 2013 Gross Margin % = 60.0% 2014 Sales = $1.6B 2014 GM % = 55%Question 12 options:185 days175 days215 days150 daysSaveQuestion 13 (3 points) Which describes the results of a company with the following ratios regarding its Cash Conversion Cycle?2014 DIO = 15 2014 DSO = 19 2014 DPO = 27 2015 DIO = 152015 DSO = 22 2015 DPO = 27 Question 13 options:The company increased its CCC by 3 days because it sold its inventory more quicklyThe company increased its CCC by 3 days because it held its inventory longerThe company increased its CCC by 3 days because it collected its receivables more quicklyThe company increased its CCC by 3 days because it took longer to collect its receivablesSaveQuestion 14 (3 points) Which of the following describes a common feature of ordinary annuities and annuities due?Question 14 options:Cash flows occur at the same datesConstant payments are made indefinitelyThe amount paid for given payments over time implies a rate of interestThe value of the remaining cash flows remains constant over timeSaveQuestion 15 (6 points) Calculate the sustainable AND internal growth rate for a company with the following financial information. Assume all ratios are constant.2014 Company DataSales = $200M Average Assets = $270MDividends Paid = $15M Net Income = $20MAverage Equity = $220MQuestion 15 options:SGR = 1.9% and IGR = 2.3%SGR = 5.9% and IGR = 7.3%SGR = 7.3% and IGR = 5.9%SGR = 2.3% and IGR = 1.9%SaveQuestion 16 (6 points) Calculate the value of the following bond that was just issued, rounded to the nearest dollar (no payments made yet):A 30-year bond has an 6% coupon rate, with payments made semi-annually and a par value of $1,000. Similar bonds have a YTM of 8%.Question 16 options:$1,000$1,277$900$774SaveQuestion 17 (6 points) Calculate the Cost of Common Equity for a company with the following data and estimates:Today’s stock price: $73.00 Constant Retention Rate = 40% Estimated T+1 Earnings = $5.00/share Estimated Earnings Growth Rate = 8%Question 17 options:13.0%12.1%10.7%14.8%SaveQuestion 18 (6 points) A money manager requires all stocks in his or her portfolio to have, at worst, a Sharpe Ratio of 2.0. Currently, the market risk premium is estimated to be 6.5%. If a stock has a standard deviation of 7% and a Beta of 1.25, will it meet this criteria? (Hint: will require algebra to combine the Sharpe Ratio formula and the CAPM formula)Question 18 options:This stock meets the criteria because the Sharpe Ratio is greater than 2.0This stock doesn’t meet the criteria because the Sharpe Ratio is less than 2.0This stock meets the criteria because the Sharpe Ratio is less than 2.0This stock doesn’t meet the criteria because the Sharpe Ratio is greater than 2.0SaveQuestion 19 (6 points) Calculate the WACC of the company with the characteristics below:Common Equity: $125M in common equity trading at $15/share with most recent year’s dividend of $0.75/share and a dividend growth rate of 10% per yearPreferred Equity: $25M in preferred equity trading at $25/share with a constant $2.75/share dividendDebt: $100M in bonds with a YTM and coupon rate of 7.5%Marginal Tax Rate = 25% Risk-Free Rate = 3%Market Risk Premium = 7%Question 19 options:10.9%11.1%10.5%9.6%SaveQuestion 20 (3 points) Which of the following is a true statement about diversification?Question 20 options:The more correlated the stocks in your portfolio are, the less diversified you areThe diversification benefits of adding a stock to your portfolio are the same if you own 2 stocks or 100 stocks The more correlated the stocks in your portfolio are, the more diversified you areDiversification allows you to eliminate all risks when investing in stocks
