Question
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
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
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