Category Archives: FIN 534 STRAYER

FIN 534 Financial Management

FIN 534 Week 10 Chapter 17 Solution

To Buy This Tutorial Click Below

http://www.homeworkbag.com/STRAYER-COURSE/FIN-534-STR/FIN-534-Week-10-Chapter-17-Solution

FIN 534 Week 10 Chapter 17 Solution

 

1. In Japan, 90-day securities have a 4% annualized return and 180-day securities have a 5% annualized return. In the United States, 90-day securities have a 4% annualized return and 180-day securities have an annualized return of 4.5%. All securities are of equal risk, and Japanese securities are denominated in terms of the Japanese yen. Assuming that interest rate parity holds in all markets, which of the following statements is most CORRECT?

a. The yen-dollar spot exchange rate equals the yen-dollar exchange rate in the 90-day forward market.

b. The yen-dollar spot exchange rate equals the yen-dollar exchange rate in the 180-day forward market.

c. The yen-dollar exchange rate in the 90-day forward market equals the yen-dollar exchange rate in the 180-day forward market.

d. The spot rate equals the 90-day forward rate.

e. The spot rate equals the 180-day forward rate.

2. If the spot rate of the Israeli shekel is 5.51 shekels per dollar and the 180-day forward rate is 5.97 shekels per dollar, then the forward rate for the Israeli shekel is selling at a ________________ to the spot rate.

a. premium of 8%

b. premium of 18%

c. discount of 18%

d. discount of 8%

e. premium of 16%

3. Stover Corporation, a U.S. based importer, makes a purchase of crystal glassware from a firm in Switzerland for 39,960 Swiss francs, or $24,000, at the spot rate of 1.665 francs per dollar. The terms of the purchase are net 90 days, and the U.S. firm wants to cover this trade payable with a forward market hedge to eliminate its exchange rate risk. Suppose the firm completes a forward hedge at the 90-day forward rate of 1.682 francs. If the spot rate in 90 days is actually 1.638 francs, how much will the U.S. firm have saved or lost in U.S. dollars by hedging its exchange rate exposure?

a. -$396

b. -$243

c. $0

d. $243

e. $638

4. A product sells for $750 in the United States. The exchange rate is $1 to 1.65 Swiss francs. If purchasing power parity (PPP) holds, what is the price of the product in Switzerland?

a. 123.75 Swiss francs

b. 454.55 Swiss francs

c. 750.00 Swiss francs

d. 1,237.50 Swiss francs

5. Chen Transport, a U.S. based company, is considering expanding its operations into a foreign country. The required investment at is $10 million. The firm forecasts total cash inflows of $4 million per year for 2 years, $6 million for the next 2 years, and then a possible terminal value of $8 million. In addition, due to political risk factors, Chen believes that there is a 50% chance that the gross terminal value will be only $2 million and a 50% chance that it will be $8 million. However, the government of the host country will block 20% of all cash flows. Thus, cash flows that can be repatriated are 80% of those projected. Chen’s cost of capital is 15%, but it adds one percentage point to all foreign projects to account for exchange rate risk. Under these conditions, what is the project’s NPV?

a. $1.01 million

b. $2.77 million

c. $3.09 million

d. $5.96 million

e. $7.39 million

For More Tutorial Visit: http://www.homeworkbag.com

Finance 534 week 10 quiz 9

To Buy This Tutorial Click Below

http://www.homeworkbag.com/STRAYER-COURSE/FIN-534-STR/Finance-534-week-10-quiz-9

Finance 534 week 10 quiz 9

Inflation, recession, and high interest rates are economic events that are best characterized as being

Answer

systematic risk factors that can be diversified away.

company-specific risk factors that can be diversified away.

among the factors that are responsible for market risk.

risks that are beyond the control of investors and thus should not be considered by security analysts or portfolio managers.

irrelevant except to governmental authorities like the Federal Reserve.

2 points

Question 2

Which of the following statements is CORRECT? (Assume that the risk-free rate is a constant.)

For More Tutorial Visit: http://www.homeworkbag.com

FIN 534 Week 10 DQ 1

To Buy This Tutorial Click Below

http://www.homeworkbag.com/STRAYER-COURSE/FIN-534-STR/FIN-534-Week-10-DQ-1

FIN 534 Week 10 DQ 1

Based on what you uncovered in the e-Activity, determine the most significant risk factors associated with investing in the company you selected when compared with investing in a domestic company. Provide specific examples to support your response.

For More Tutorial Visit: http://www.homeworkbag.com

Finance 534 week 11 quiz 10

To Buy This Tutorial Click Below

http://www.homeworkbag.com/STRAYER-COURSE/FIN-534-STR/Finance-534-week-11-quiz-10

Finance 534 week 11 quiz 10

 

Which of the following statements is CORRECT?

Answer

If the underlying stock does not pay a dividend, it makes good economic sense to exercise a call option as soon as the stock’s price exceeds the strike price by about 10%, because this permits the option holder to lock in an immediate profit.

Call options generally sell at a price less than their exercise value.

If a stock becomes riskier (more volatile), call options on the stock are likely to decline in value.

Call options generally sell at prices above their exercise value, but for an in-the-money option, the greater the exercise value in relation to the strike price, the lower the premium on the option is likely to be.

Because of the put-call parity relationship, under equilibrium conditions a put option on a stock must sell at exactly the same price as a call option on the stock.

For More Tutorial Visit: http://www.homeworkbag.com

Finance 534 Complete Course

To Buy This Tutorial Click Below

http://www.homeworkbag.com/STRAYER-COURSE/FIN-534-STR/FIN-534-Complete-Course

Finance 534 Complete Course

FIN 534 Week 1 Chapter 1 Solution

FIN 534 Week 1 Chapter 2 Solution

FIN 534 Week 1 DQ 1

FIN 534 Week 1 DQ 2

FIN 534 Week 1 Quiz 1

FIN 534 Week 2 Chapter 3 Solution

FIN 534 Week 2 DQ 1

FIN 534 Week 2 DQ 2

FIN 534 Week 3 Chapter 4 Solution

FIN 534 Week 3 Chapter 5 Solution

FIN 534 Week 3 DQ 1

FIN 534 Week 3 DQ 2

FIN 534 Week 3 Quiz 2

FIN 534 Week 4 Chapter 6 Solution

FIN 534 Week 4 Chapter 7 Solution

FIN 534 Week 4 DQ 1

FIN 534 Week 4 DQ 2

FIN 534 Week 4 quiz 3

FIN 534 Week 5 Chapter 8 Solution

FIN 534 Week 5 Chapter 9 Solution

FIN 534 Week 5 DQ 1

Finance 534 week 5 quiz 4

FIN 534 Week 6 Chapter 10 Solution

FIN 534 Week 6 Chapter 11 Solution

FIN 534 Week 6 DQ 1

FIN 534 Week 6 Quiz 5

FIN 534 Week 7 Chapter 12 Solution

FIN 534 Week 7 Chapter 13 Solution

FIN 534 Week 7 DQ 1

FIN 534 Week 7 DQ 2

FIN 534 Week 7 Quiz 6

FIN 534 Week 8 Chapter 14 Solution

FIN 534 Week 8 Chapter 15 Solution

FIN 534 Week 8 DQ 1

FIN 534 Week 8 DQ 2

Finance 534 Week 8 quiz 7

FIN 534 Week 9 Chapter 16 Solution

FIN 534 Week 9 DQ 1

FIN 534 Week 9 DQ 2

FIN 534 Week 9 Quiz 8

FIN 534 Week 10 Chapter 17 Solution

FIN 534 Week 10 DQ 1

FIN 534 Week 10 DQ 2

Fin 534 week 10 quiz 9

FIN 534 Week 11 DQ 1

FIN 534 Week 11 DQ 2

Fin 534 Week 11 quiz 10

 

For More Tutorial Visit: http://www.homeworkbag.com

FIN 534 Week 9 Chapter 16 Solution

To Buy This Tutorial Click Below

http://www.homeworkbag.com/STRAYER-COURSE/FIN-534-STR/FIN-534-Week-9-Chapter-16-Solution

FIN 534 Week 9 Chapter 16 Solution

 

1. Swim Suits Unlimited is in a highly seasonal business, and the following summary balance sheet data show its assets and liabilities at peak and off-peak seasons (in thousands of dollars):

Peak Off-Peak

Cash $ 50 $ 30

Marketable securities 0 20

Accounts receivable 40 20

Inventories 100 50

Net fixed assets 500 500

Total assets $690 $620

Payables and accruals $ 30 $ 10

Short-term bank debt 50 0

Long-term debt 300 300

Common equity 310 310

Total claims $690 $620

From this data we may conclude that

a. Swim Suits’ current asset financing policy calls for exactly matching asset and liability maturities.

b. Swim Suits’ current asset financing policy is relatively aggressive; that is, the company finances some of its permanent assets with short-term discretionary debt.

c. Swim Suits follows a relatively conservative approach to current asset financing; that is, some of its short-term needs are met by permanent capital.

d. Without income statement data, we cannot determine the aggressiveness or conservatism of the company’s current asset financing policy.

e. Without cash flow data, we cannot determine the aggressiveness or conservatism of the company’s current asset financing policy.

2. Which of the following statements is CORRECT?

a. A firm that makes 90% of its sales on credit and 10% for cash is growing at a constant rate of 10% annually. Such a firm will be able to keep its accounts receivable at the current level, since the 10% cash sales can be used to finance the 10% growth rate.

b. In managing a firm’s accounts receivable, it is possible to increase credit sales per day yet still keep accounts receivable fairly steady, provided the firm can shorten the length of its collection period (its DSO) sufficiently.

c. Because of the costs of granting credit, it is not possible for credit sales to be more profitable than cash sales.

d. Since receivables and payables both result from sales transactions, a firm with a high receivables-to-sales ratio must also have a high payables-to-sales ratio.

e. Other things held constant, if a firm can shorten its DSO, this will lead to a higher current ratio.

3. Halka Company is a no-growth firm. Its sales fluctuate seasonally, causing total assets to vary from $320,000 to $410,000, but fixed assets remain constant at $260,000. If the firm follows a maturity matching (or moderate) working capital financing policy, what is the most likely total of long-term debt plus equity capital?

a. $260,642

b. $274,360

c. $288,800

d. $304,000

e. ) $320,000

Lower total asset range $320,000

Upper total asset range $410,000

Minimum total + Min. CA = $320,000  = LT Debt + Equity

A maturity matching policy implies that fixed assets and permanent current assets are financed with long-term sources.  This is its most likely level of long-term financing.

4. Your consulting firm was recently hired to improve the performance of Shin-Soenen Inc, which is highly profitable but has been experiencing cash shortages due to its high growth rate. As one part of your analysis, you want to determine the firm’s cash conversion cycle. Using the following information and a 365-day year, what is the firm’s present cash conversion cycle?

Average inventory = $75,000

Annual sales = $600,000

Annual cost of goods sold = $360,000

Average accounts receivable = $160,000

Average accounts payable = $25,000

a. 120.6 days

b. 126.9 days

c. 133.6 days

d. 140.6 days

e. 148.0 days

Avg. inventory =  $75,000  Annual sales =  $600,000

Avg. receivables =  $160,000  Annual COGS =  $360,000

Avg. payables =  $25,000  Days in year =  365

Inv. conv. /(COGS/365)  76.0

+ /(Sales/365)  97.3

– Payables /(COGS/365)  -25.3

Cash conversion cycle (CCC)  148.0

5. Affleck Inc.’s business is booming, and it needs to raise more capital. The company purchases supplies on terms of 1/10 net 20, and it currently takes the discount. One way of getting the needed funds would be to forgo the discount, and the firm’s owner believes she could delay payment to 40 days without adverse effects. What would be the effective annual percentage cost of funds raised by this action? (Assume a 365-day year.)

a. 10.59%

b. 11.15%

c. 11.74%

d. 12.36%

e. 13.01%

Discount %  1%  Net days  20

Discount days  10  Actual days to payment  40

EAR = [1 + Disc. %/(100 – Disc. %)][365/(Actual days – Disc. Period)] – %

For More Tutorial Visit: http://www.homeworkbag.com

FIN 534 Week 9 Quiz 8

To Buy This Tutorial Click Below

http://www.homeworkbag.com/STRAYER-COURSE/FIN-534-STR/FIN-534-Week-9-Quiz-8

FIN 534 Week 9 Quiz 8

 

Stock A’s beta is 1.5 and Stock B’s beta is 0.5. Which of the following statements must be true about these securities? (Assume market equilibrium.)

Answer

When held in isolation, Stock A has more risk than Stock B.

Stock B must be a more desirable addition to a portfolio than A.

Stock A must be a more desirable addition to a portfolio than B.

The expected return on Stock A should be greater than that on B.

The expected return on Stock B should be greater than that on A.

2 points

Question 2

Which of the following statements is CORRECT?

Answer

A two-stock portfolio will always have a lower standard deviation than a one-stock portfolio.

A portfolio that consists of 40 stocks that are not highly correlated with “the market” will probably be less risky than a portfolio of 40 stocks that are highly correlated with the market, assuming the stocks all have the same standard deviations.

A two-stock portfolio will always have a lower beta than a one-stock portfolio.

If portfolios are formed by randomly selecting stocks, a 10-stock portfolio will always have a lower beta than a one-stock portfolio.

A stock with an above-average standard deviation must also have an above-average beta.

2 points

Question 3

Which of the following statements is CORRECT?

Answer

The beta of a portfolio of stocks is always smaller than the betas of any of the individual stocks.

If you found a stock with a zero historical beta and held it as the only stock in your portfolio, you would by definition have a riskless portfolio.

The beta coefficient of a stock is normally found by regressing past returns on a stock against past market returns. One could also construct a scatter diagram of returns on the stock versus those on the market, estimate the slope of the line of best fit, and use it as beta. However, this historical beta may differ from the beta that exists in the future.

The beta of a portfolio of stocks is always larger than the betas of any of the individual stocks.

It is theoretically possible for a stock to have a beta of 1.0. If a stock did have a beta of 1.0, then, at least in theory, its required rate of return would be equal to the risk-free (default-free) rate of return, rRF.

2 points

Question 4

The risk-free rate is 6%; Stock A has a beta of 1.0; Stock B has a beta of 2.0; and the market risk premium, rM − rRF, is positive. Which of the following statements is CORRECT?

Answer

If the risk-free rate increases but the
market risk premium stays unchanged, Stock B’s required return will increase by more than Stock A’s.

Stock B’s required rate of return is twice
that of Stock A.

If Stock A’s required return is 11%, then the market risk premium is 5%.

If Stock B’s required return is 11%, then
the market risk premium is 5%.

If the risk-free rate remains constant but the market risk premium increases, Stock A’s required return will increase by more than Stock B’s.

2 points

Question 5

Which of the following is most likely to occur as you add randomly selected stocks to your portfolio, which currently consists of 3 average stocks?

Answer

The diversifiable risk of your portfolio will
likely decline, but the expected market risk should not change.

The expected return of your portfolio is likely
to decline.

The diversifiable risk will remain the same, but the market risk will likely decline.

Both the diversifiable risk and the market risk
of your portfolio are likely to decline.

The total risk of your portfolio should decline, and as a result, the expected rate of return on the portfolio should also decline.

For More Tutorial Visit: http://www.homeworkbag.com

FIN 534 Week 9 DQ 1

To Buy This Tutorial Click Below

http://www.homeworkbag.com/STRAYER-COURSE/FIN-534-STR/FIN-534-Week-9-DQ-1

FIN 534 Week 9 DQ 1

Based on the content of this chapter and what you discovered in the e-Activity, analyze cash management technology and make at least one recommendation for another technique that would enhance working capital management. Explain the reasoning behind your recommendation.

For More Tutorial Visit: http://www.homeworkbag.com

FIN 534 Week 8 Chapter 14 Solution

To Buy This Tutorial Click Below

http://www.homeworkbag.com/STRAYER-COURSE/FIN-534-STR/FIN-534-Week-8-Chapter-14-Solution

FIN 534 Week 8 Chapter 14 Solution

 

1. Which of the following statements about dividend policies is CORRECT?

a. Modigliani and Miller argue that investors prefer dividends to capital gains because dividends are more certain than capital gains. They call this the ―bird-in-the hand‖ effect.

b. One reason that companies tend to avoid stock repurchases is that dividend payments are taxed at a lower rate than gains on stock repurchases.

c. One advantage of dividend reinvestment plans is that they allow shareholders to avoid paying taxes on the dividends that they choose to reinvest.

d. One key advantage of a residual dividend policy is that it enables a company to follow a stable dividend policy.

e. The clientele effect suggests that companies should follow a stable dividend policy.

2. Which of the following statements is CORRECT?

a. One disadvantage of dividend reinvestment plans is that they increase transactions costs for investors who want to increase their ownership in the company.

b. One advantage of dividend reinvestment plans is that they enable investors to postpone paying taxes on the dividends credited to their account.

c. Stock repurchases can be used by a firm that wants to increase its debt ratio.

d. Stock repurchases make sense if a company expects to have a lot of profitable new projects to fund over the next few years, provided investors are aware of these investment opportunities.

e. One advantage of an open market dividend reinvestment plan is that it provides new equity capital and increases the shares outstanding.

3. Which of the following statements is CORRECT?

a. When firms are deciding on the size of stock splits—say whether to declare a 2-for-1 split or a 3-for-1 split, it is best to declare the smaller one, in this case the 2-for-1 split, because then the after-split price will be higher than if the 3-for-1 split had been used.

b. Back before the SEC was created in the 1930s, companies would declare reverse splits in order to boost their stock prices. However, this was determined to be a deceptive practice, and it is illegal today.

c. Stock splits create more administrative problems for investors than stock dividends, especially determining the tax basis of their shares when they decide to sell them, so today stock dividends are used far more often than stock splits.

d. When a company declares a stock split, the price of the stock typically declines—by about 50% after a 2-for-1 split—and this necessarily reduces the total market value of the equity.

e. If a firm’s stock price is quite high relative to most stocks—say $500 per share—then it can declare a stock split of say 10-for-1 so as to bring the price down to something close to $50. Moreover, if the price is relatively low—say $2 per share—then it can declare a ―reverse split‖ of say 1-for-25 so as to bring the price up to somewhere around $50 per share.

4. Which of the following statements is CORRECT?

a. If a firm follows the residual dividend policy, then a sudden increase in the number of profitable projects is likely to reduce the firm’s dividend payout.

b. The clientele effect can explain why so many firms change their dividend policies so often.

c. One advantage of adopting the residual dividend policy is that this policy makes it easier for corporations to develop a specific and well-identified dividend clientele.

d. New-stock dividend reinvestment plans are similar to stock dividends because they both increase the number of shares outstanding but don’t change the firm’s total amount of book equity.

e. Investors who receive stock dividends must pay taxes on the value of the new shares in the year the stock dividends are received.

5. DeAngelo Corp.’s projected net income is $150.0 million, its target capital structure is 25% debt and 75% equity, and its target payout ratio is 65%. DeAngelo has more positive NPV projects than it can finance without issuing new stock, but its board of directors had decreed that it cannot issue any new shares in the foreseeable future. The CFO now wants to determine how the maximum capital budget would be affected by changes in capital structure policy and/or the target dividend payout policy. Versus the current policy, how much larger could the capital budget be if (1) the target debt ratio were raised to 75%, other things held constant, (2) the target payout ratio were lowered to 20%, other things held constant, and (3) the debt ratio and payout were both changed by the indicated amounts.

Increase in Capital Budget

Increase Debt Lower Payout Do Both to 75% to 20%___________________

a. $114.0 $73.3 $333.9

b. $120.0 $77.2 $351.5

c. $126.4 $81.2 $370.0

d. $133.0 $85.5 $389.5

e. $140.0 $90.0 $410.0

For More Tutorial Visit: http://www.homeworkbag.com

FIN 534 Week 8 Chapter 15 Solution

To Buy This Tutorial Click Below

http://www.homeworkbag.com/STRAYER-COURSE/FIN-534-STR/FIN-534-Week-8-Chapter-15-Solution

FIN 534 Week 8 Chapter 15 Solution

 

1. Which of the following statements best describes the optimal capital structure?

a. The optimal capital structure is the mix of debt, equity, and preferred stock that maximizes the company’s earnings per share (EPS).

b. The optimal capital structure is the mix of debt, equity, and preferred stock that maximizes the company’s stock price.

c. The optimal capital structure is the mix of debt, equity, and preferred stock that minimizes the company’s cost of equity.

d. The optimal capital structure is the mix of debt, equity, and preferred stock that minimizes the company’s cost of debt.

e. The optimal capital structure is the mix of debt, equity, and preferred stock that minimizes the company’s cost of preferred stock.

2. Which of the following statements is CORRECT?

a. A firm can use retained earnings without paying a flotation cost. Therefore, while the cost of retained earnings is not zero, its cost is generally lower than the after-tax cost of debt.

b. The capital structure that minimizes a firm’s weighted average cost of capital is also the capital structure that maximizes its stock price.

c. The capital structure that minimizes the firm’s weighted average cost of capital is also the capital structure that maximizes its earnings per share.

d. If a firm finds that the cost of debt is less than the cost of equity, increasing its debt ratio must reduce its WACC.

e. Other things held constant, if corporate tax rates declined, then the Modigliani-Miller tax-adjusted tradeoff theory would suggest that firms should increase their use of debt.

3. Which of the following statements is CORRECT?

a. In general, a firm with low operating leverage also has a small proportion of its total costs in the form of fixed costs.

b. There is no reason to think that changes in the personal tax rate would affect firms’ capital structure decisions.

c. A firm with high business risk is more likely to increase its use of financial leverage than a firm with low business risk, assuming all else equal.

d. If a firm’s after-tax cost of equity exceeds its after-tax cost of debt, it can always reduce its WACC by increasing its use of debt.

e. Suppose a firm has less than its optimal amount of debt. Increasing its use of debt to the point where it is at its optimal capital structure will decrease the costs of both debt and equity financing.

4. Companies HD and LD have identical amounts of assets, operating income (EBIT), tax rates, and business risk. Company HD, however, has a much higher debt ratio than LD. Company HD’s basic earning power ratio (BEP) exceeds its cost of debt (rd). Which of the following statements is CORRECT?

a. Company HD has a higher return on assets (ROA) than Company LD.

b. Company HD has a higher times interest earned (TIE) ratio than Company LD.

c. Company HD has a higher return on equity (ROE) than Company LD, and its risk, as measured by the standard deviation of ROE, is also higher than LD’s.

d. The two companies have the same ROE.

e. Company HD’s ROE would be higher if it had no debt.

5. Which of the following statements is CORRECT?

a. Generally, debt-to-total-assets ratios do not vary much among different industries, although they do vary among firms within a given industry.

b. Electric utilities generally have very high common equity ratios because their revenues are more volatile than those of firms in most other industries.

c. Drug companies (prescription, not illegal!) generally have high debt-to-equity ratios because their earnings are very stable and, thus, they can cover the high interest costs associated with high debt levels.

d. Wide variations in capital structures exist both between industries and among individual firms within given industries. These differences are caused by differing business risks and also managerial attitudes.

e. Since most stocks sell at or very close to their book values, book value capital structures are almost always adequate for use in estimating firms’ costs of capital.

For More Tutorial Visit: http://www.homeworkbag.com

FIN 534 Week 8 DQ 2

To Buy This Tutorial Click Below

http://www.homeworkbag.com/STRAYER-COURSE/FIN-534-STR/FIN-534-Week-8-DQ-2

FIN 534 Week 8 DQ 2

Capital structure is the manner in which a firm’s assets are financed; that is, the right-hand side of the balance sheet. Capital structure is normally expressed as the percentage of each type of capital used by the firm–debt, preferred stock, and common equity.

 

For More Tutorial Visit: http://www.homeworkbag.com

Finance 534 week 8 quiz 7

To Buy This Tutorial Click Below

http://www.homeworkbag.com/STRAYER-COURSE/FIN-534-STR/Finance-534-week-8-quiz-7

Finance 534 week 8 quiz 7

 

Question 1

Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds?

Answer

The company’s bonds are downgraded.

Market interest rates rise sharply.

Market interest rates decline sharply.

The company’s financial situation deteriorates significantly.

Inflation increases significantly.
2 points

Question 2

Which of the following statements is CORRECT?

Answer

You hold two bonds.  One is a 10-year, zero coupon, issue and the other is a 10-year bond that pays a 6% annual coupon.  The same market rate, 6%, applies to both bonds.  If the market rate rises from the current level, the zero coupon bond will experience the larger percentage decline.

The time to maturity does not affect the change in the value of a bond in response to a given change in interest rates.

You hold two bonds.  One is a 10-year, zero coupon, bond and the other is a 10-year bond that pays a 6% annual coupon.  The same market rate, 6%, applies to both bonds.  If the market rate rises from the current level, the zero coupon bond will experience the smaller percentage decline.

The shorter the time to maturity, the greater the change in the value of a bond in response to a given change in interest rates.

The longer the time to maturity, the smaller the change in the value of a bond in response to a given change in interest rates.
2 points

Question 3

A 10-year Treasury bond has an 8% coupon, and an 8-year Treasury bond has a 10% coupon.  Both bonds have the same yield to maturity.  If the yield to maturity of both bonds increases by the same amount, which of the following statements would be CORRECT?

Answer

The prices of both bonds will decrease by the same amount.

Both bonds would decline in price, but the 10-year bond would have the greater percentage decline in price.

The prices of both bonds would increase by the same amount.

One bond’s price would increase, while the other bond’s price would decrease.

The prices of the two bonds would remain constant.
2 points

Question 4

Which of the following statements is CORRECT?

Answer

If the maturity risk premium were zero and interest rates were expected to decrease
in the future, then the yield curve for U.S. Treasury securities would, other things held constant, have an upward slope.

Liquidity premiums are generally higher on Treasury than corporate bonds.

The maturity premiums embedded in the interest rates on U.S. Treasury securities are due primarily to the fact that the probability of default is higher on long-term bonds than on short-term bonds.

Default risk premiums are generally lower on corporate than on Treasury bonds.

Reinvestment rate risk is lower, other things held constant, on long-term than on short-term bonds.
2 points

Question 5

A 10-year bond with a 9% annual coupon has a yield to maturity of 8%.  Which of the following statements is CORRECT?

Answer

If the yield to maturity remains constant, the bond’s price one year from now will be higher than its current price.

The bond is selling below its par value.

The bond is selling at a discount.

If the yield to maturity remains constant, the bond’s price one year from now will be lower than its current price.

The bond’s current yield is greater than 9%.

2 points

Question 6

Which of the following statements is CORRECT?

Answer

If the Federal Reserve unexpectedly announces that it expects inflation to increase, then we would probably observe an immediate increase in bond prices.

The total yield on a bond is derived from dividends plus changes in the price of the bond.

Bonds are riskier than common stocks and therefore have higher required returns.

Bonds issued by larger companies always have lower yields to maturity (less risk) than bonds issued by smaller companies.

The market value of a bond will always approach its par value as its maturity date approaches, provided the bond’s required return remains constant.

2 points

Question 7

Which of the following bonds would have the greatest percentage increase in value if all interest rates fall by 1%?

Answer

10-year, zero coupon bond.

20-year, 10% coupon bond.

20-year, 5% coupon bond.

1-year, 10% coupon bond.

20-year, zero coupon bond.
2 points

Question 8

Which of the following statements is CORRECT?

Answer

If a bond is selling at a discount, the yield to call is a better measure of return than the yield to maturity.

On an expected yield basis, the expected capital gains yield will always be positive because an investor would not purchase a bond with an expected capital loss.

On an expected yield basis, the expected current yield will always be positive because an investor would not purchase a bond that is not expected to pay any cash coupon interest.

If a coupon bond is selling at par, its current yield equals its yield to maturity.

The current yield on Bond A exceeds the current yield on Bond B; therefore, Bond A must have a higher yield to maturity than Bond B.

2 points

Question 9

An investor is considering buying one of two 10-year, $1,000 face value bonds: Bond A has a 7% annual coupon, while Bond B has a 9% annual coupon.  Both bonds have a yield to maturity of 8%, which is expected to remain constant for the next 10 years.  Which of the following statements is CORRECT?

Answer

Bond B has a higher price than Bond A today, but one year from now the bonds will have the same price.

One year from now, Bond A’s price will be higher than it is today.

Bond A’s current yield is greater than 8%.

Bond A has a higher price than Bond B today, but one year from now the bonds will have the same price.

Both bonds have the same price today, and the price of each bond is expected to remain constant until the bonds mature.
2 points

Question 10

A 12-year bond has an annual coupon rate of 9%.  The coupon rate will remain fixed until the bond matures.  The bond has a yield to maturity of 7%.  Which of the following statements is CORRECT?

Answer

If market interest rates decline, the price of the bond will also decline.

The bond is currently selling at a price below its par value.

If market interest rates remain unchanged, the bond’s price one year from now will be lower than it is today.

The bond should currently be selling at its par value.

If market interest rates remain unchanged, the bond’s price one year from now will be higher than it is today.
2 points

Question 11

A 10-year bond pays an annual coupon, its YTM is 8%, and it currently trades at a premium. Which of the following statements is CORRECT?

Answer

The bond’s current yield is less than 8%.

If the yield to maturity remains at 8%, then the bond’s price will decline over the next year.

The bond’s coupon rate is less than 8%.

If the yield to maturity increases, then the bond’s price will increase.

If the yield to maturity remains at 8%, then the bond’s price will remain constant over the next year.
2 points

Question 12

Assume that all interest rates in the economy decline from 10% to 9%.  Which of the following bonds would have the largest percentage increase in price?

Answer

An 8-year bond with a 9% coupon.

A 1-year bond with a 15% coupon.

A 3-year bond with a 10% coupon.

A 10-year zero coupon bond.

A 10-year bond with a 10% coupon.
2 points

Question 13

Which of the following statements is CORRECT?

Answer

If a coupon bond is selling at par, its current yield equals its yield to maturity.

If a coupon bond is selling at a discount, its price will continue to decline until it reaches its par value at maturity.

If interest rates increase, the price of a 10-year coupon bond will decline by a greater percentage than the price of a 10-year zero coupon bond.

If a bond’s yield to maturity exceeds its annual coupon, then the bond will trade at a premium.

If a coupon bond is selling at a premium, its current yield equals its yield to maturity.

2 points

Question 14

Which of the following statements is CORRECT?

Answer

All else equal, high-coupon bonds have less reinvestment rate risk than low-coupon bonds.

All else equal, long-term bonds have less interest rate price risk than short-term bonds.

All else equal, low-coupon bonds have less interest rate price risk than high-coupon bonds.

All else equal, short-term bonds have less reinvestment rate risk than long-term bonds.

All else equal, long-term bonds have less reinvestment rate risk than short-term bonds.

2 points

Question 15

Amram Inc. can issue a 20-year bond with a 6% annual coupon.  This bond is not convertible, is not callable, and has no sinking fund.  Alternatively, Amram could issue a 20-year bond that is convertible into common equity, may be called, and has a sinking fund.  Which of the following most accurately describes the coupon rate that Amram would have to pay on the convertible, callable bond?

Answer

Exactly equal to 6%.

It could be less than, equal to, or greater than 6%.

Greater than 6%.

Exactly equal to 8%.

Less than 6%.

2 points

For More Tutorial Visit: http://www.homeworkbag.com

FIN 534 Week 7 Chapter 12 Solution

To Buy This Tutorial Click Below

http://www.homeworkbag.com/STRAYER-COURSE/FIN-534-STR/FIN-534-Week-7-Chapter-12-Solution

FIN 534 Week 7 Chapter 12 Solution

1. Which of the following statements is CORRECT?

a. Perhaps the most important step when developing forecasted financial statements is to determine the breakdown of common equity between common stock and retained earnings.

b. The first, and perhaps the most critical, step in forecasting financial requirements is to forecast future sales.

c. Forecasted financial statements, as discussed in the text, are used primarily as a part of the managerial compensation program, where management’s historical performance is evaluated.

d. The capital intensity ratio gives us an idea of the physical condition of the firm’s fixed assets.

e. The AFN equation produces more accurate forecasts than the forecasted financial statement method, especially if fixed assets are lumpy, economies of scale exist, or if excess capacity exists.

2. Which of the following statements is CORRECT?

a. The sustainable growth rate is the maximum achievable growth rate without the firm having to raise external funds. In other words, it is the growth rate at which the firm’s AFN equals zero.

b. If a firm’s assets are growing at a positive rate, but its retained earnings are not increasing, then it would be impossible for the firm’s AFN to be negative.

c. If a firm increases its dividend payout ratio in anticipation of higher earnings, but sales and earnings actually decrease, then the firm’s actual AFN must, mathematically, exceed the previously calculated AFN.

d. Higher sales usually require higher asset levels, and this leads to what we call AFN. However, the AFN will be zero if the firm chooses to retain all of its profits, i.e., to have a zero dividend payout ratio.

e. Dividend policy does not affect the requirement for external funds based on the AFN equation.

3. Which of the following statements is CORRECT?

a. When we use the AFN equation, we assume that the ratios of assets and liabilities to sales (A0*/S0 and L0*/S0) vary from year to year in a stable, predictable manner.

b. When fixed assets are added in large, discrete units as a company grows, the assumption of constant ratios is more appropriate than if assets are relatively small and can be added in small increments as sales grow.

c. Firms whose fixed assets are “lumpy” frequently have excess capacity, and this should be accounted for in the financial forecasting process.

d. For a firm that uses lumpy assets, it is impossible to have small increases in sales without expanding fixed assets.

e. There are economies of scale in the use of many kinds of assets. When economies occur the ratios are likely to remain constant over time as the size of the firm increases.

Economic Ordering Quantity model for establishing inventory levels demonstrates this relationship.

4. Last year Jain Technologies had $250 million of sales and $100 million of fixed assets, so its FA/Sales ratio was 40%. However, its fixed assets were used at only 75% of capacity. Now the company is developing its financial forecast for the coming year. As part of that process, the company wants to set its target Fixed Assets/Sales ratio at the level it would have had had it been operating at full capacity. What target FA/Sales ratio should the company set?

a. 28.5%

b. 30.0%

c. 31.5%

d. 33.1%

e. 34.7%

5. Howton & Howton Worldwide (HHW) is planning its operations for the coming year, and the CEO wants you to forecast the firm’s additional funds needed (AFN). The firm is operating at full capacity. Data for use in the forecast are shown below. However, the CEO is concerned about the impact of a change in the payout ratio from the 10% that was used in the past to 50%, which the firm’s investment bankers have recommended. Based on the AFN equation, by how much would the AFN for the coming year change if HHW increased the payout from 10% to the new and higher level? All dollars are in millions.

Last year’s $300.0 Last year’s accounts payable $50.0

Sales growth 40% Last year’s notes payable $15.0

Last year’s total * $500.0 Last year’s accruals $20.0

Last year’s profit 20.0% Initial payout ratio 10.0%

a. $31.9

b. $33.6

c. $35.3

d. $37.0

e. $38.9

For More Tutorial Visit: http://www.homeworkbag.com

FIN 534 Week 7 Chapter 13 Solution

To Buy This Tutorial Click Below

http://www.homeworkbag.com/STRAYER-COURSE/FIN-534-STR/FIN-534-Week-7-Chapter-13-Solution

FIN 534 Week 7 Chapter 13 Solution

1. Suppose Leonard, Nixon, & Shull Corporation’s projected free cash flow for next year is $100,000, and FCF is expected to grow at a constant rate of 6%. If the company’s weighted average cost of capital is 11%, what is the value of its operations?

a. $1,714,750

b. $1,805,000

c. $1,900,000

d. $2,000,000

e. $2,100,000

2. Leak Inc. forecasts the free cash flows (in millions) shown below. If the weighted average cost of capital is 11% and FCF is expected to grow at a rate of 5% after Year 2, what is the Year 0 value of operations, in millions? Assume that the ROIC is expected to remain constant in Year 2 and beyond (and do not make any half-year adjustments).

Year: 1 2

Free cash flow: -$50 $100

a. $1,456

b. $1,529

c. $1,606

d. $1,686

e. $1,770

3. Based on the corporate valuation model, the value of a company’s operations is $1,200 million. The company’s balance sheet shows $80 million in accounts receivable, $60 million in inventory, and $100 million in short-term investments that are unrelated to operations. The balance sheet also shows $90 million in accounts payable, $120 million in notes payable, $300 million in long-term debt, $50 million in preferred stock, $180 million in retained earnings, and $800 million in total common equity. If the company has 30 million shares of stock outstanding, what is the best estimate of the stock’s price per share?

a. $24.90

b. $27.67

c. $30.43

d. $33.48

e. $36.82

Market Value of +
MV of of debt + MV of preferred + MV of + 50M + MV Equity
=> MV – 420M – (assume book value of debt debt)
=> share /30 = $27.67(d)

4. Based on the corporate valuation model, the value of a company’s operations is $900 million. Its balance sheet shows $70 million in accounts receivable, $50 million in inventory, $30 million in short-term investments that are unrelated to operations, $20 million in accounts payable, $110 million in notes payable, $90 million in long-term debt, $20 million in preferred stock, $140 million in retained earnings, and $280 million in total common equity. If the company has 25 million shares of stock outstanding, what is the best estimate of the stock’s price per share?

a. $23.00

b. $25.56

c. $28.40

d. $31.24

e. $34.36

5. Vasudevan Inc. forecasts the free cash flows (in millions) shown below. If the weighted average cost of capital is 13% and the free cash flows are expected to continue growing at the same rate after Year 3 as from Year 2 to Year 3, what is the Year 0 value of operations, in millions?

Year: 1 2 3

Free cash flow: -$20 $42 $45

a. $586

b. $617

c. $648

d. $680

e. $714

For More Tutorial Visit: http://www.homeworkbag.com