Reference no: EM131337719

Assignment

Part 1

1. Nominal interest rates and yield curves A recent study of inflationary expectations has revealed that the consensus among economic forecasters yields the following PART 3 Valuation of Securities average annual rates of inflation expected over the periods noted. (Note: Assume that the risk that future interest rate movements will affect longer maturities more than shorter maturities is zero; that is, assume that there is no maturity risk.)

Period

Average annual

rate of inflation

3 months 5%

2 years 6

5 years 8

10 years 8.5

20 years 9

a. If the real rate of interest is currently 2.5%, find the nominal rate of interest on each of the following U.S. Treasury issues: 20 year bond, 3 month bill, 2 year note, and 5 year bond.

b. If the real rate of interest suddenly dropped to 2% without any change in inflationary expectations, what effect, if any, would it have on your answers in part a? Explain.

c. Using your findings in part a, draw a yield curve for U.S. Treasury securities.

Describe the general shape and expectations reflected by the curve.

d. What would a follower of the liquidity preference theory say about how the preferences of lenders and borrowers tend to affect the shape of the yield curve drawn in part c? Illustrate that effect by placing on your graph a dotted line that approximates the yield curve without the effect of liquidity preference.

e. What would a follower of the market segmentation theory say about the supply and demand for long-term loans versus the supply and demand for short term loans given the yield curve constructed for part c of this problem?

2. Bond prices and yields Assume that the Financial Management Corporation's $1,000-par-value bond had a 5.700% coupon, matures on May 15, 2023, has a current price quote of 97.708, and has a yield to maturity (YTM) of 6.034%. Given this information, answer the following questions:

a. What was the dollar price of the bond?

b. What is the bond's current yield?

c. Is the bond selling at par, at a discount, or at a premium? Why?

d. Compare the bond's current yield calculated in part b to its YTM and explain why they differ.

3. Bond value and changing required returns Midland Utilities has outstanding a bond issue that will mature to its $1,000 par value in 12 years. The bond has a coupon interest rate of 11% and pays interest annually.

a. Find the value of the bond if the required return is (1) 11%, (2) 15%, and (3) 8%.

b. Plot your findings in part a on a set of "required return (x axis)-market value of bond (y axis)" axes.

c. Use your findings in parts a and b to discuss the relationship between the coupon interest rate on a bond and the required return and the market value of the bond relative to its par value.

d. What two possible reasons could cause the required return to differ from the coupon interest rate?

4. Bond value and time: Constant required returns Pecos Manufacturing has just issued a 15-year, 12% coupon interest rate, $1,000-par bond that pays interest annually.

The required return is currently 14%, and the company is certain it will remain at 14% until the bond matures in 15 years.

a. Assuming that the required return does remain at 14% until maturity, find the value of the bond with (1) 15 years, (2) 12 years, (3) 9 years, (4) 6 years, (5) 3 years, and (6) 1 year to maturity.

b. Plot your findings on a set of "time to maturity (x axis)-market value of bond (y axis)" axes constructed similarly to Figure 6.5 on page 252.

c. All else remaining the same, when the required return differs from the coupon interest rate and is assumed to be constant to maturity, what happens to the bond value as time moves toward maturity? Explain in light of the graph in part b.

5. Yield to maturity Each of the bonds shown in the following table pays interest annually

Bond Par value Coupon interest rate Years to maturity Current value

A $1,000 9% 8 $ 820

B 1,000 12 16 1,000

C 500 12 12 560

D 1,000 15 10 1,120

E 1,000 5 3 900

a. Calculate the yield to maturity (YTM) for each bond.

b. What relationship exists between the coupon interest rate and yield to maturity and the par value and market value of a bond? Explain

Part 2

1. Which of the following is true of a secondary market?

A. It is a market where securities are issued through private placement

B. It is a market in which short-term money market instruments such as Treasury bills are traded.

C. It is a market for an unlisted company to raise equity capital.

D. It is a market in which preowned securities are traded.

2. Pro forma financial statements are used for ________.

A. auditing

B. profit planning

C . cash budgeting

D. preparing financial statements

3. Which of the following represents a way of coping with uncertainty in a cash budget?

A. using scenario analysis, or "what if" approach, to analyze cash flows under a variety of circumstances

B. Always using the prior year's data for estimates of the future

C. developing a pro forma income statement to forecast sales and then express the various income statement items as percentage of projected sales

D.careful estimation of cash budgets outputs

4. Which of the following represents a way of coping with uncertainty in a cash budget?

A. using scenario analysis, or "what if" approach, to analyze cash flows under a variety of circumstances

B. always using the prior year's data for estimates of the future

C. developing a pro forma income statement to forecast sales and then express the various income statement items as percentage of projected sales

D. careful estimation of cash budgets outputs

5. Time-series analysis is often used to ________.

A. standardize results

B. evaluate the value of a firm or its assets

C. assess developing trends

D. correct errors of judgment

6. Corporation A owns 15 percent of the stock of corporation B. Corporation B pays corporation A $100,000 in dividends in 2002. Corporation A must pay tax on ________.

A. $ 30,000 of ordinary income

B $ 70,000 of ordinary income

C. $ 70,000 of capital gain

D.$100,000 of ordinary income

7. A ________ is responsible for the firm's accounting activities, such as corporate accounting, tax management, financial accounting, and cost accounting.

A. foreign exchange manager

B. treasurer

C. controller

D. pension fund manager

8. Ratios provide a ________ measure of a company's performance and condition.

A.relative

B. absolute

C. gross

D. definitive

9. An efficient market is one where ________.

A. prices of stocks move up and down widely without apparent reason

B.prices of stocks remain low for long periods of time

C. prices of stocks are unaffected by market news

D.the price of a security is an unbiased estimate of its true value

10. The key input to any cash budget is ________.

A. the sales forecast

B. the production plan

C. the pro forma balance sheet

D. the current tax laws

11. An ethics program is expected to have ________ impact on a firm's share price.

A. a positive

B. no impact

C. an unpredictable

D. . a negative

12. The primary risk of mortgage-backed securities is ________.

A. that the government will not be able to meet the guarantees on the cash flows

B. that the prices of have high volatality

C. that homeowners may not be able to, or choose not to, repay their loans

D. that the prices of housing will increase

13. The present value of a $25,000 perpetuity at a 14 percent discount rate is ________.

A.$285,000

B. $178,571

C. $350,000

D. $219,298

14. Which of the following is a source of cash flows?

A. decrease in notes payable

B. increase in accounts payable

C. increase in marketable securities

D. repurchase of stock

15. Firm ABC had operating profits of $100,000, taxes of $17,000, interest expense of $34,000, and preferred dividends of $5,000. What was the firm's net profit after taxes?

A. $83,000

B. $49,000

C. $66,000

D. $44,000

16. The tax deductibility of various expenses such as general and administrative expenses ________.

A. has an unpredictable effect on their after-tax cost

B. has no effect on their after-tax cost

C. reduces their after-tax cost

D. increases their pretax cost

17. During 2015, NICO Corporation had EBIT of $100,000, a change in net fixed assets of $400,000, an increase in net current assets of

18. $100,000, an increase in spontaneous current liabilities of $400,000, a depreciation expense of $50,000, and a tax rate of 30%. Based on this information, NICO's free cash flow is ________.

A -$630,000

B. $650,000

C. -$30,000

D. -$50,000

19. Which of the following is true of a primary market?

A. It is the only market in which the issuer is directly involved in the transaction.

B. It is an organized market in which all financial derivatives are traded.

C. It is a market where smaller, unlisted securities are traded.

D. It is regulated by The Sarbanes-Oxley Act.

20. In the DuPont system of analysis, the return on equity is equal to ________.

A. (return on total assets) × (total asset turnover)

B. (net profit margin) × (total asset turnover)

C. (return on total assets) × (financial leverage multiplier)

D. (stockholders' equity) × (financial leverage multiplier)

21. A firm's year-end retained earnings balances are $320,000 and $400,000, for 2014 and 2015 respectively. The firm reported net profits after taxes of $100,000 in 2015. The firm's dividend payment for 2015 is ________.

A. $20,000

B. $100,000

C. $80,000

D. $0

22. The future value of $200 received today and deposited at 8 percent for three years is ________.

A. $158

B. $248

C. $200

D. $252

23. If you expect to retire in 30 years, live on $50,000 per year and expect the inflation to average 3% over the next 30 years, what amount of annual income will you need to live at the same comfort level in 30 years?

A. $121,363

B . $95,000

C. $20,599

D. $51,500

24. Which of the following is a duty of a financial manager in a business firm?

A. developing marketing plans

B. raising financial resources

C. auditing financial records

D. controlling the stock price

25. Which of the following acts regulates the primary market in which securities are originally issued to the public?

A. The Securities Exchange Act of 1934

B. The Glass-Steagall Act

C The Gramm-Leach-Bliley Act

D. The Securities Act of 1933

26. Which of the following is the best measure to ensure that management decisions are in the best interest of the stockholders?

A. tie management compensation to the performance of the company's common stock price

B. remove management's perquisites

C. tie management compensation to the level of dividend per share

D. fire managers who are inefficient

27. Bill plans to fund his individual retirement account (IRA) with the maximum contribution of $2,000 at the end of each year for the next 20 years. If Bill can earn 12 percent on his contributions, how much will he have at the end of the twentieth year?

A. $19,292

B. $14,938

C. $144,104

D. $40,000

28. Corporate owners receive return ________.

A. by realizing gains through increases in share price and cash dividends

B. by realizing gains through increases in share price and interest earnings

C. through capital appreciation and retained earnings

D. through interest earnings and earnings per share

29. Finance is ________.

A. the art of merchandising products and services

B. the art and science of managing money

C. the system of verifying, analyzing, and recording business transactions

D. the science of the production, distribution, and consumption of goods and services

30. Given a financial manager's preference for faster receipt of cash flows, ________.

A. a shorter depreciable life is preferred to a longer one

B. the manager is not concerned with depreciable life, because once purchased, depreciation is considered a sunk cost

C. the manager is not concerned with depreciable life, because depreciation is a noncash expense

D. a longer depreciable life is preferred to a shorter one

31. As a key participant in financial transactions, individuals are ________.

A. net demanders of funds because they save more money than they borrow

B. net suppliers of funds because they save more money than they borrow

C. net purchasers of funds because they save more money than they borrow

D. net users of funds because they save less money than they borrow

32. In a period of rising sales, utilizing past cost and expense ratios (percent-of-sales method) when preparing pro forma financial statements will tend to ________.

A. overstate costs and understate profits

B. overstate costs and overstate profits

C. understate costs and overstate profits

D. understate costs and understate profits

33. The present value of $100 to be received 10 years from today, assuming an opportunity cost of 9 percent, is ________.

A. $236

B. $ 75

C. $699

D. $ 42

34. The key variables in the owner wealth maximization process are ________.

A. risk-free rate and share price

B. cash flows and risk

C. market risk premium and risk

D. total assets and risk

35. The present value of an ordinary annuity of $2,350 each year for eight years, assuming an opportunity cost of 11 percent, is ________.

A. $12,093

B. $18,800

C. $27,869

D. $ 1,020

36. Nico Corporation has cost of goods sold of $300,000 and inventory of $30,000, then the inventory turnover is ________ and the average age of inventory is ________.

A. 36.5; 10

B. 30; 36.0

C. 36.0; 10

D. 10; 36.5

37. Under the judgmental approach for developing a pro forma balance sheet, the "plug" figure required to bring the statement into balance may be called the ________.

A. accounts receivable

B. cash balance

C. retained earnings

D. external financing required

38. As the risk of a stock investment increases, investors' ________.

A. return will decrease

B. required rate of return will increase

C. return will increase

D. required rate of return will decrease

39. The 2002 Sarbanes-Oxley Act was designed to ________.

A. limit the compensation that could be paid to corporate CEOs

B. eliminate the many disclosure and conflict-of-interest problems of corporations

C. provide the guidelines to minimize the tax

D. provide uniform international accounting standards

40. the Federal Deposit Insurance Corporation (FDIC) ________.

A. is an agency, created by the Glass-Steagall Act, that monitors banks on a regular basis to ensure that they were safe and sound

B. guarantees individuals will not lose any money, up to a specified amount, held at any type of financial institution that fails

C. guarantees individuals will not lose any money held at any type of financial institution that fails

D. is an agency that monitors business combinations between commercial banks, investment banks, and insurance companies

41. ________ is a term used to describe the magnification of risk and return introduced through the use of fixed-cost financing, such as preferred stock and debt.

A. Fixed-payment coverage

B. Benchmarking

C. Financial leverage

D. Operating leverage

42. Which of the following is true?

A. The process of pooling mortgages or other types of loans and then selling claims or securities against that pool in a secondary market is called capitalization.

B. Corporations may pay taxes depending on their percentage of ownership.

C. Capital gains are treated separately from ordinary corporate income for tax purposes.

D. Corporations pay taxes on all dividends received from other corporations, no matter their share of ownership.