1.What is the fundamental goal of a firm?

Profit maximization

Maximizing shareholder wealth

Maximizing management wealth

Corporate social responsibility

2.What problem arises as a result of the separation of ownership and management of a firm?

Advocacy problem

Agency problem

Self-interest problem

Subordination problem

3.How is the nominal rate of return for long-term Treasury bonds computed?

Nominal rate of return = real-risk free rate of interest + inflation premium

Nominal rate of return = real-risk free rate of interest + inflation premium + maturity risk premium

Nominal rate of return = real-risk free rate of interest + inflation premium + maturity risk premium + default-risk premium

Nominal rate of return = real-risk free rate of interest + inflation premium + maturity risk premium + default-risk premium + liquidity risk premium

4.What is the nominal rate of return of a 10-year Treasury bond if the prevailing risk premiums are as follows: real-risk free rate is 2.0%; inflation premium is 5.0%; maturity risk premium is 0.3%; and default risk premium is 0.2%.

2.00%

7.00%

7.30%

7.50%

5.Calculate the degree of financial leverage for a firm with EBIT of $6,000,000, fixed cost of $3,000,000, interest expense of $1,000,000, preferred stock dividends of 800,000, and a 40 percent tax rate

6.00

9.00

1.43

1.20

6.The market value of Company T's equity is $15.0 million, and the market value of its risk-free debt is $5.0 million. If the required rate of return on the equity is 20.0% and on the debt is 8.0%, calculate the company's cost of capital. (Assume no taxes)

17.00%

20.00%

8.10%

9.30%

7.A firm has 60% of debt and 40% of equity as its capital. The cost of debt is 8%, the cost of equity is 15%, and the tax rate is 35%. Determine the firm's cost of capital.

7.02%

9.12%

10.80%

13.80%

8.A firm is considering a project requiring an investment of $27,000. The project would generate an annual cash flow of $6,296 for the next seven years. The company uses the straight-line method of depreciation. The approximate internal rate of return for the project is

6.00%

8.00%

12.00%

14.00%

9.You are planning to invest in common stock of Company B. Lately, the firm paid a dividend of $7.80. You have projected that the dividends will grow at a rate of 9.00% per year indefinitely. If you want an annual return of 24.00%, what is the most you should pay for a stock now?

$52.00

$56.68

$32.50

$35.43

10.Determine the value of a put option using the following information:

Risk free rate = 6%

Time to maturity = 3 months

Call price = $5

Stock price = $30

Strike price = $28

Values are discounted at the continuously compounded risk-free rate.

$7.42

$4.55

$2.58

$6.55

Answer rating: 100% (QA)

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