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CLASS / COURSE: Financial Analysis

QUESTION DESCRIPTION:

**HOMEWORK**

1. Which of the following need to be considered when assessing the impact of a financial decision?

a. projected earnings.

b. financial market conditions.

c. timing of cash flows.

d. riskiness to the firm.

e. all of the above must be considered.

2. Until this year, Cheers Inc. was organized as a partnership. This year, the partners have decided to organize the business as a corporation. As a result of this change in organizational form, which of the following statements is most correct?

a. Cheers shareholders (the ex-partners) will now have limited liability.

b. Cheers will now be subject to fewer regulations.

c. Cheers will now pay less in taxes.

d. Cheers investors will now find it more difficult to transfer ownership.

e. Cheers will now find it more difficult to raise additional capital.

3. One drawback of switching from a partnership to the corporate form of organization is the following:

a. It subjects the firm to additional regulations.

b. It cannot affect the amount of the firm's operating income that goes to taxes.

c. It makes it more difficult for the firm to raise additional capital.

d. It makes the firm s investors subject to greater potential personal liabilities.

4. You observe that a firm's profit margin is below the industry average, its debt ratio is below the industry average, and its return on equity exceeds the industry average. What can you conclude?

a. Return on assets is above the industry average.

b. Total assets turnover is above the industry average.

c. Total assets turnover is below the industry average.

d. Both statements a and b are correct.

5. Pepsi Corporation's current ratio is 0.5, while Coke Company's current ratio is 1.5. Both firms want to "window dress" their coming end-of-year financial statements. As part of their window dressing strategy, each firm will double its current liabilities by adding short-term debt and placing the funds obtained in the cash account. Which of the statements below best describes the actual results of these transactions?

a. The transactions will have no effect on the current ratios.

b. The current ratios of both firms will be increased.

c. The current ratios of both firms will be decreased.

d. Only Pepsi Corporation's current ratio will be increased.

6. Stennett Corp.'s CFO has proposed that the company issue new debt and use the proceeds to buy back common stock. Which of the following are likely to occur if this proposal is adopted? (Assume that the proposal would have no effect on the company's operating earnings.)

a. Return on assets (ROA) will decline.

b. The times interest earned ratio (TIE) will increase.

c. Taxes paid will decline.

d. None of the statements above is correct.

e. Statements a and c are correct.

7. You observe the following information regarding Company X and Company Y:

Company X has a higher expected mean return than Company Y.

Company X has a lower standard deviation than Company Y.

Company X has a higher beta than Company Y.

Given this information, which of the following statements is most correct?

a. Company X has a lower coefficient of variation.

b. Company X has more company-specific risk.

c. Company X is a better stock to buy.

d. Statements a and b are correct.

8. Stock A has a beta of 1.2 and a standard deviation of 20 percent. Stock B has a beta of 0.8 and a standard deviation of 25 percent. Portfolio P is a $200,000 portfolio consisting of $100,000 invested in Stock A and $100,000 invested in Stock B. Which of the following statements is most correct? (Assume that the required return is determined by the Security Market Line.)

a. Stock B has a higher required rate of return than stock A.

b. Portfolio P has a standard deviation of 22.5 percent.

c. Portfolio P has a beta equal to 1.0.

d. Statements a and b are correct.

9. The risk-free rate, r(rf), is 6 percent and the market risk premium, (r(m) - r(rf)), is 5 percent. Assume that required returns are based on the CAPM. Your $1 million portfolio consists of $700,000 invested in a stock that has a beta of 1.2 and $300,000 invested in a stock that has a beta of 0.8. Which of the following statements is most correct?

a. The portfolio s required return is less than 11 percent.

b. If the risk-free rate remains unchanged but the market risk premium increases by 2 percentage points, the required return on your portfolio will increase by more than 2 percentage points.

c. If the market risk premium remains unchanged but expected inflation increases by 2 percentage points, the required return on your portfolio will increase by more than 2 percentage points.

d. If the stock market is efficient, your portfolio s expected return should equal the expected return on the market, which is 11 percent.

10. The future value of a lump sum at the end of five years is $1,000. The nominal interest rate is 10 percent and interest is compounded semiannually. Which of the following statements is most correct?

a. The present value of the $1,000 is greater if interest is compounded monthly rather than semiannually.

b. The effective annual rate is greater than 10 percent.

c. The periodic interest rate is 5 percent.

d. Both statements b and c are correct.

e. All of the statements above are correct.

11. A $10,000 loan is to be amortized over 5 years, with annual end-of-year payments. Given the following facts, which of these statements is most correct?

a. The annual payments would be larger if the interest rate were lower.

b. If the loan were amortized over 10 years rather than 5 years, and if the interest rate were the same in either case, the first payment would include more dollars of interest under the 5-year amortization plan.

c. The last payment would have a higher proportion of interest than the first payment.

d. The proportion of interest versus principal repayment would be the same for each of the 5 payments.

e. The proportion of each payment that represents interest as opposed to repayment of principal would be higher if the interest rate were higher.

13. Which of the following statements is NOT CORRECT?

a. A time line is meaningful only if all cash flows occur annually.

b. Time lines are useful for visualizing complex problems prior to doing actual calculations.

c. Time lines can be constructed even in situations where some of the cash flows occur annually but others occur quarterly.

d. Time lines can be constructed for annuities where the payments occur at either the beginning or the end of periods.

e. The cash flows shown on a time line can be in the form of annuity payments, but they can also be uneven amounts.

14. Common Size Financial Statements and Percent Change Analysis (First define the concept of financial leverage and also explain how an increase in leverage will affect a firm's equity multiplier (i.e., will EM rise or fall), and also affect a firm's return on equity (ROE). Next, define the concept of a common size balance sheet and a common size income statement. Finally, define the concept of benchmarking and why it is used as well as the concept of percent change analysis).

15. Annuities, Perpetuities, and the Effective Rate of Interest (First define the concept of the time vlaue of money and why it is an important concept to financial managers when comparing inter-temporal cash flows. Next, define the concept of an annuity and distinguish between an ordinary annuity versus an annuity due. Finally, distinguish between perpetuities and the effective rate of inetrest and also explain the instance (or case) in which the effective annual rate of interest is identical to the nominal annual rate of interest).

16. Money versus Capital Markets and Primary versus Secondary Markets (First define the basic function (or role) of financial markets in the economy. Next, distinguish between money versus capital markets and also distinguish between primary versus capital markets. Finally, explain which market (primary or secondary) a corporation use if it needed to raise financial capital).

SOLUTION DESCRIPTION:
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SUBJECTS / CATEGORIES:

1. Finance

2. Financial Management

3. Investment and Portfolio Management

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