Exam

Review Questions

Provide answers in Excel where applicable and please number the problem to correspond with the number in this document.

Do not re-number

1) A firm has the following accounts and financial data for 2007:

Sales Revenue $ 3,060 Cost of goods sold $1,800

Accounts Receivable 500 Preferred stock dividends 18

Interest expense 126 Tax rate 40%

Total operating expenses 600 Number of shares of common

Accounts payable 240 stocks outstanding 1,000

The firm's earnings available to common shareholders for 2007 are __________.

2) Asset P has a beta of .9. The risk-free rate of return is 8 percent, while the return on the market portfolio of assets is 14 percent. The asset's required rate of return is

6) Which of the following capital-budgeting decision criteria are correct?

A.) Accept projects that have a positive NPV.

B.) Accept projects that generate an IRR that is greater than the firm’s discount rate.

C.) Accept projects that have a profitability index of greater than 1.0.

D.) Accept projects that generate an MIRR that is greater than the firm’s discount rate.

E.) All of the above are correct.

7) Optimal capital structure is:

A.) The mix of permanent sources of funds used by the firm in a manner that will maximize the company’s common stock price.

B.) The mix of all items that appear on the right-hand side of the company’s balance sheet.

C.) The mix of funds that will minimize the firm’s beta.

D.) The mix of securities that will maximize EPS.

8) McMillen House of Books recently paid a $3 dividend on its preferred stock. Investors require a 6% return on the stock. The stock is currently selling for $45. Is the stock a good buy? Why?

A.) Yes, as it is undervalued $5.

B.) Yes, as it is undervalued $10.

C.) No, as it is...