A. Multiple choice questions
Choose the best answer.

1. Which of the following is an advantage of ownership of a corporation compared to that of a sole proprietorship?
a. The owners of the corporation have unlimited liability for the firm's debts.
b. The corporation is the simplest type of business to start.
c. The corporation has an unlimited life.
d. Dividends received by the corporation's shareholders are tax-exempt.
e. It is more difficult to transfer ownership in a corporation.

2. Which of the following is false?
a. Common shareholders have voting rights.
b. Common shareholders have limited liability.
c. Common shareholders have residual ownership in the corporation.
d. Common shareholders have a legal right to dividends.
e. Common shareholders generally earn a higher return than debt holders or preferred shareholders since they generally bear higher risk.

3. Which of the following is an internal source of financing for the firm?
a. Current assets
b. Retained earnings
c. Depreciation
d. Common stock

4. What percent of the dividends received by one corporation from another is taxed at the ordinary tax rate according to the U.S. tax law?
a. 70 percent
b. 30 percent
c. The entire dividend
d. Only capital gain
e. Only ordinary gain

5. Which of the following items is deductible by corporations in computing their taxable income?
a. Interest paid
b. Dividends paid to common shareholders
c. Dividends paid to preferred shareholders
d. b and c only
e. a, b, and c are all deductible for corporations

6. Comparing the financial performance of Nestle Inc. to a group of firms in the same industry is one example of a(n):
a. Benchmarking analysis
b. Trend analysis
c. Capital budgeting analysis
d. Agency analysis

7. Beta is a measure of:
a. Firm-specific risk
b. Total risk
c. Market risk
d. Unsystematic risk
e. Diversifiable risk

8. If an investor holds only stock in Delta Corporation, the relevant measure of risk will be
a. Beta
b. Expected return
c. Standard deviation
d. Covariance
e. Correlation

9. The CAPM implicitly assumes that investors will not be compensated for ________ since it is diversifiable.
a. Systematic risk
b. Total risk
c. Market risk
d. Unsystematic risk

10. Which of the following best represents an example of systematic risk?
a. The risk that the CEO will leave the company
b. The risk that the company will win a lawsuit filed for patent infringement
c. The risk that the company will go bankrupt
d. The risk that the nation will enter war
e. a, b, and c all represent systematic riskB. Short answers
Bank America offers a stated annual interest of 4.1 percent, compounded quarterly, when Bank USA offers a stated annual interest rate of 4.05 percent, compounded monthly. In which bank should you deposit your money?

1.  A 5-year annuity pays $300 per year, with payments made at the end of each year. The first $300 payment will be paid a year from now. If the annual percentage rate (APR) is 12% and interest is compounded monthly, what is the present value of this annuity?

2. Your employer has agreed to make 80 quarterly payments of $400 each into a trust account to fund your early retirement. The first payment will be made 3 months from now. At the end of 20 years (80 payments), you will be paid 10 equal annual payments, with the first payment to be made at the end of Year 20. The funds will be invested at 8% quarterly compounding. This rate is not expected to change over time. How large will each of your 10 receipts be?

3.  You just purchased a bond which matures in 5 years. The bond has a face value of $1,000, and has an 8 percent annual coupon. The bond has a current yield of 8.21 percent. What is the bond's yield to maturity?

4. The current price of a 10-year, $1,000 par value bond is $1,158.91. Interest on this bond is paid every six months, and the nominal annual yield is 14 percent. Given these facts, what is the annual coupon payment on this bond?

5. You have just purchased a newly issued $1,000 five-year Vanguard Company bond at par. This five-year bond pays $60 in interest semiannually. You are also considering the purchase of another Vanguard Company bond that returns $30 in semiannual interest payments and has six years remaining before it matures. This bond has a face value of $1000. (a) What is the effective annual return on the five-year bond? Assume that the annual (coupon) rate you used in part (a) is the correct interest rate (YTM) for the bond with six years remaining before it matures. (b) What should you be willing to pay for that bond?

a) For the 5-year bond, since PV = FV, then coupon rate = yield. Coupon rate = (60 x 2) ? 1000 = 12% (annualized). Therefore, the annualized yield is 12%, but the question is about the effective yield. So, we use the EAR formula.

6. Kirkland Motors expects to pay a $2.00 a share dividend on its common stock at the end of the year (i.e., D1 = $2.00). The stock currently sells (Po) for $20.00 a share. The required rate of return on the company's stock is 12%. The dividend is expected to grow at a constant rate over time. What is the expected stock price five years from now?

7. A stock is trading at $80 per share. The stock is expected to have a year-end dividend of $4 per share which is expected to grow at some constant rate g throughout time. The stock's required rate of return is 14 percent. If you are an analyst who believes in efficient markets, what would be your forecast of g?

8. Your company paid a dividend of $2.00 last year. The growth rate is expected to be 4% for the first year, 5% the next year, 6% for the following year, and then the growth rate is expected to be a constant 7 percent thereafter. The required rate of return on equity is 10%. What is the current price of the stock?

9.  Suppose you have invested only in two stocks, A and B. You expect that returns on the following three states of the economy, which are equally likely to happen, to be as follows:

State of the economy Return on stock A (%) Return on stock B (%)
Bear 6.3% -3.7%
Normal 10.5 6.4
Bull 15.6 25.3

a. Calculate the expected return of each stock
b. Calculate the standard deviation of returns of each stock.
c. Calculate the covariance and correlation between the two stocks.

10. Security F has an expected return of 12 percent and a standard deviation of 9 percent per year. Security G has an expected return of 18 percent and a standard deviation of 25 percent per year.
a. What is the expected return on a portfolio composed of 30 percent of security F and 70 percent of security G?
b. If the correlation coefficient between the returns of F and G is 0.2, what is the standard deviation of the portfolio?

11.The market value of the shares of Microsoft Corporation is currently $24 million, and their beta is 1.4. Microsoft has a nominal (face value) $6 million of 8 percent coupon debt outstanding, which matures in 7 years (par is $1000). These bonds have a beta of 0.1, and they currently yield 10 percent market interest. The expected market return is 14% and the risk-free rate of return is 5%
a. What is the total market value of the firm? (Note: MV is the sum of the equity and debt market values).
b. What is the weighted average beta of Microsoft's assets? What is the required rate of return on Microsoft's assets? (Note: use CAPM equation with the computed average beta)

12.  Baxter Video Product's sales are expected to increase by 20% from $5 million in 2010 to $6 million in 2011. Its assets totaled $3 million at the end of 2010. Baxter is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2010, current liabilities were $1 million, consisting of $250,000 of accounts payable, $500,000 of notes payable, and $250,000 of accruals. The after tax profit margin is forecasted to be 5%, and the forecasted dividend payout ratio is 70%.Use the AFN equation to forecast Baxter's additional funds needed for the coming year.

D. Bonus questions :
1. Who is the interim dean of faculty this year?
a. Lucia Miree
b. David Hewhiler
c. Michael Easton
d. Alex Aleksandrov

2. Who will be teaching Advanced Corporate Finance class in Fall 2013 semester?
a. Prof. Steve Sullivan
b. Prof. Miroslav Mateev
c. Prof. Alf Eastergard
d. Visiting faculty