Question: Assume that you hold a well-diversified portfolio that has an expected return of 12.0% and a beta of 1.20. You are in the process of buying 100 shares of Alpha Corp at $10 a share and adding it to your portfolio. Alpha has an expected return of 15.0% and a beta of 2.00. The total value of your current portfolio is $9,000. What will the expected return and beta on the portfolio be after the purchase of the Alpha stock?

A 11.69%; 1.22
B 12.30%; 1.28
C 12.92%; 1.34
D 13.56%; 1.41
E 14.24%; 1.48
Question 2

Question: TSW Inc. had the following data for last year: Net income = $800; Net operating profit after taxes (NOPAT) = $700; Total assets = $3,000; and Total operating capital = $2,000. Information for the just-completed year is as follows: Net income = $1,000; Net operating profit after taxes (NOPAT) = $925; Total assets = $2,600; and Total operating capital = $2,500. How much free cash flow did the firm generate during the just-completed year?

A $383
B $425
C $468
D $514
E $566

Question 3

Question: Analysts who follow Howe Industries recently noted that, relative to the previous year, the company’s operating net cash flow increased, yet cash as reported on the balance sheet decreased. Which of the following factors could explain this situation?

A The company cut its dividend.
B The company made a large investment in a profitable new plant.
C The company sold a division and received cash in return.
D The company issued new common stock.
Question 4

Question: Amram Company’s current ratio is 1.9. Considered alone, which of the following actions would reduce the company’s current ratio?

A Borrow using short-term notes payable and use the proceeds to reduce accruals.
B Borrow using short-term notes payable and use the proceeds to reduce long-term debt.
C Use cash to reduce accruals.
D Use cash to reduce short-term notes payable.
E Use cash to reduce accounts payable.
Question 5

Question: Which of the following statements is CORRECT?

A The Capital Market Line (CML) is a curved line that connects the risk-free rate and the market portfolio.
B The slope of the CML is
C All portfolios that lie on the CML to the right of sM are inefficient.
D All portfolios that lie on the CML to the left of sM are inefficient.
E None of the above statements is correct.

Question 6

Question: Yonan Corporation’s stock had a required return of 11.50% last year, when the risk-free rate was 5.50% and the market risk premium was 4.75%. Now suppose there is a shift in investor risk aversion, and the market risk premium increases by 2%. The risk-free rate and Yonan’s beta remain unchanged. What is Yonan’s new required return? (Hint: First calculate the beta, then find the required return.)

A 14.03%
B 14.38%
C 14.74%
D 15.10%
E 15.48%
Question 7

Question: Zumbahlen Inc. has the following balance sheet. How much total operating capital does the firm have?

A $114.00
B $120.00
C $126.00
D $132.30
E $138.92
Question 8

Question: Stocks A and B each have an expected return of 15%, a standard deviation of 20%, and a beta of 1.2. The returns on the two stocks have a correlation coefficient of +0.6. You have a portfolio that consists of 50% A and 50% B. Which of the following statements is CORRECT?

A The portfolio’s beta is less than 1.2.
B The portfolio’s expected return is 15%.
C The portfolio’s standard deviation is greater than 20%.
D The portfolio’s beta is greater than 1.2.
E The portfolio’s standard deviation is 20%.

Question 9

Question: For managerial purposes, i.e., making decisions regarding the firm’s operations, the standard financial statements as prepared by accountants under Generally Accepted Accounting Principles (GAAP) are often modified and used to create alternative data and metrics that provide a somewhat different picture of a firm’s operations. Related to these modifications, which of the following statements is CORRECT?

A The standard statements make adjustments to reflect the effects of inflation on asset values, and these adjustments are normally carried into any adjustment that managers make to the standard statements.
B The standard statements focus on accounting income for the entire corporation, not cash flows, and the two can be quite different during any given accounting period. However, for valuation purposes we need to discount cash flows, not accounting income. Moreover, since many firms have a number of separate divisions, and since division managers should be compensated on their divisions’ performance, not that of the entire firm, information that focuses on the divisions is needed. These factors have led to the development of information that is focused on cash flows and the operations of individual units.
C The standard statements provide useful information on the firm’s individual operating units, but management needs more information on the firm’s overall operations than the standard statements provide.
D The standard statements focus on cash flows, but managers are less concerned with cash flows than with accounting income as defined by GAAP.
E The best feature of standard statements is that, if they are prepared under GAAP, the data are always consistent from firm to firm. Thus, under GAAP, there is no room for accountants to “adjust” the results to make earnings look better.

Question 11

Question: Hocking Manufacturing Company has a beta of 0.65, while Levine Industries has a beta of 1.40. The required return on the stock market is 11.00%, and the risk-free rate is 4.25%. What is the difference between Hocking’s and Levine’s required rates of return? (Hint: First find the market risk premium, then find the required returns on the stocks.)

A 4.12%
B 4.34%
C 4.57%
D 4.81%
E 5.06%
Question 12

Question: You observe the following information regarding Companies X and Y:

Company X has a higher expected return than Company Y.
Company X has a lower standard deviation of returns than Company Y.
Company X has a higher beta than Company Y.

Given this information, which of the following statements is CORRECT?

A Company X has more company-specific risk than Company Y.
B Company X has a lower coefficient of variation than Company Y.
C Company X has less market risk than Company Y.
D Company X’s returns will be negative when Y’s returns are positive.
E Company X’s stock is a better buy than Company Y’s stock.

Question 13

Question: Stock A has a beta of 0.8, Stock B has a beta of 1.0, and Stock C has a beta of 1.2. Portfolio P has equal amounts invested in each of the three stocks. Each of the stocks has a standard deviation of 25%. The returns on the three stocks are independent of one another (i.e., the correlation coefficients all equal zero). Assume that there is an increase in the market risk premium, but the risk-free rate remains unchanged. Which of the following statements is CORRECT?

A The required return of all stocks will remain unchanged since there was no change in their betas.
B The required return on Stock A will increase by less than the increase in the market risk premium, while the required return on Stock C will increase by more than the increase in the market risk premium.
C The required return on the average stock will remain unchanged, but the returns of riskier stocks (such as Stock C) will increase while the returns of safer stocks (such as Stock A) will decrease.
D The required returns on all three stocks will increase by the amount of the increase in the market risk premium.
E The required return on the average stock will remain unchanged, but the returns of riskier stocks (such as Stock C) will decrease while the returns on safer stocks (such as Stock A) will increase.

Question 14

Question: Companies HD and LD have the same tax rate, sales, total assets, and basic earning power. Both companies have positive net incomes. Company HD has a higher debt ratio and, therefore, a higher interest expense. Which of the following statements is CORRECT?

A Company HD has a lower equity multiplier.
B Company HD has more net income.
C Company HD pays more in taxes.
D Company HD has a lower ROE.
E Company HD has a lower times interest earned (TIE) ratio.

Question 15

Question: Aziz Industries has sales of $100,000 and accounts receivable of $11,500, and it gives its customers 30 days to pay. The industry average DSO is 27 days, based on a 365-day year. If the company changes its credit and collection policy sufficiently to cause its DSO to fall to the industry average, and if it earns 8.0% on any cash freed-up by this change, how would that affect its net income, assuming other things are held constant?

A $267.34
B $281.41
C $296.22
D $311.81
E $328.22
Question 16

Question: Helmuth Inc.’s latest net income was $1,250,000, and it had 225,000 shares outstanding. The company wants to pay out 45% of its income. What dividend per share should it declare?

A $2.14
B $2.26
C $2.38
D $2.50
E $2.63

Question 17

Question: Last year Vaughn Corp. had sales of $315,000 and a net income of $17,832, and its year-end assets were $210,000. The firm’s total-debt-to-total-assets ratio was 42.5%. Based on the Du Pont equation, what was Vaughn’s ROE?

A 14.77%
B 15.51%
C 16.28%
D 17.10%
E 17.95%

Question 18

Question: Suppose you hold a diversified portfolio consisting of a $10,000 investment in each of 12 different common stocks. The portfolio’s beta is 1.25. Now suppose you decided to sell one of your stocks that has a beta of 1.00 and to use the proceeds to buy a replacement stock with a beta of 1.34. What would the portfolio’s new beta be?

A 1.15
B 1.21
C 1.28
D 1.34
E 1.41

Question 19

Question: Which of the following statements is CORRECT?

A Suppose a firm’s total assets turnover ratio falls from 1.0 to 0.9, but at the same time its profit margin rises from 9% to 10% and its debt increases from 40% of total assets to 60%. Under these conditions, the ROE will increase.
B Suppose a firm’s total assets turnover ratio falls from 1.0 to 0.9, but at the same time its profit margin rises from 9% to 10% and its debt increases from 40% of total assets to 60%. Without additional information, we cannot tell what will happen to the ROE.
C The modified Du Pont equation provides information about how operations affect the ROE, but the equation does not include the effects of debt on the ROE.
D Other things held constant, an increase in the debt ratio will result in an increase in the profit margin on sales.
E Suppose a firm’s total assets turnover ratio falls from 1.0 to 0.9, but at the same time its profit margin rises from 9% to 10%, and its debt increases from 40% of total assets to 60%. Under these conditions, the ROE will decrease.

Question 20

Question: Rodriguez Roofing’s stock has a beta of 1.23, its required return is 11.25%, and the risk-free rate is 4.30%. What is the required rate of return on the stock market? (Hint: First find the market risk premium.)

A 9.95%
B 10.20%
C 10.45%
D 10.72%
E 10.98%