Mid Term Exam

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FIN400
M1 – M5 Quiz

M1 - Quiz
1. A firm has an ROE of 14% and a debt ratio of 40%. If the total asset turnover is 3.4, what is the firms profit margin? Ans – 2.47%
2. Which of the following statements is incorret?
Ans – The over the counter market operates in a fixed location to conduct trades for local stocks. 3. All the following are are secondary market transactions except? Ans – GE sells $30 million of new preferred stock

4. Firm A and Firm B have the same total assets, ROA and profit margin. However, Firm B has a higher debt ratio and interest expense that Firm A. Which of the following statements is correct? Ans – Firm B must have a higher ROE than Firm A

5. The term “capital structure” refers to?
Ans – The amount of debt verses equity on the balance sheet 6. Which of the following statements is correct?
Ans – All of these are correct
7. All of the following are functions of the board expet?
Ans – Provide reports to the auditors
8. The over all goal of the financial manager is to?
Ans – Maximize shareholder wealth
9. The real interest rate is?
Ans – The rate that a security would pay if no inflation were expected over it’s holding period.

10. An employee stock option plan is?
Ans – A way to align the interests of employees with those of the owners. 11. The board of directors?
Ans – are elected by shareholders
12. Methods to minimize agency problem include all except?
Ans – Allow the CEO to purchase bonds via an employee bond option plan 13. You are considering a stock investment in one of town firms (A and B) both of which operate in the same industry. A finances it’s $20 million in assets with $18 million in debt and $2 million in equity. B finances it’s $20 million in debt and $18 million in equity. Calculate the debt to equity ratio for the two firms? Ans – Firm A: 9 times; Firm B: 11 times

14. One year treasury bill rates in 20XX averaged 5.15% and inflation for the year was 7.3%. If investors had expected the same inflation rate as that realized, calculate the real interest rate for 20XX according to the Fisher effect? Ans – It is -2.15% (negative)

15. A firms year end price on its common stock is $55. The firm has a profit margin of 6%, total assets of $75 million, a total asset turnover ratio of 0.9, no preferred stock and 2.5 million shares of common stock outstanding. Calculate the PE ratio for the firm. Ans – 33.95 times

M2 Quiz
1. This is typically considered the return on U.S. Government bonds and bills and equals the real interest plus the expected inflation premium. Ans – risk – free rate
2. Consider the characteristics of the following 3 stocks:
| Expected Return | Standard Deviation| Thumb Devices| 13%| 23%|
Air Comfort| 10%| 19%|
Sport Garb| 10%| 17%|
| | |
| | |
The correlation between thumb devices and air comfort is -0.12. The correlation between thumb devices and sport garb is 0.89. The correlation between air comfort and sport garb is -0.85. If you can pick two stocks for your portfolio which would you pick? Why? Ans – Combine Air Comfort & Sport Garb due to negative correlation – Combining those two because this combination has the most negative correlation which offers the lowest risk. 3. You have a portfolio with a beta of 3.1. What will be the new portfolio beta if you keep 85 percent of your money in the old portfolio and 15 percent in stock with a beta of 4.5? Ans – 3.31

4. A small business owner visits his bank to ask for a loan. The owner states that she can repay a loan at $2,500 per month for the next 2 years and then $3,000 per month for another 2 years after that. If the bank is charging customers 6.5% APR, how much would it be willing to lend the business owner? Ans - $115,278.17

5. Interest rates, inflation and economic growth are economic factors that are examples of? Ans – Market risk
6. The average annual return on the S & P 500 index from 1986 – 1995 was 17.6%. The average annual T bill yield...
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