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Grade for Arpit Shah: Week 4 Exam

Numeric grade:94/100 Letter grade:


Comments:
Very Nice work. Thank You.
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Autograde Summary
These are the automatically computed Date Taken:5/25/2010 4:35:29 PM
results of your exam. Grades for essay Time Spent:3:00:27 (3:15 allowed)
questions, and comments from your Points Received:94 / 100 (94%)
instructor, are in the "Details" section below.
Question Type: # Questions: # Correct:
Multiple choice 8 7
Short 2 N/A

Grade Details

1. Question:(TCO G) Which of the following statements is correct?

Your One way to increase EVA is to achieve the same


Answer: level of operating income but with more
investor-supplied capital.
If a firm reports positive net income, its EVA
must also be positive
One drawback of EVA as a performance measure
is that it mistakenly assumes that equity capital is
free.
One way to increase EVA is to generate the
CORREC
same level of operating income but with less
T
investor-supplied capital.
Actions that increase reported net income will
always increase net cash flow.

Points10 of 10
Received:
2. Question:(TCO D) Which one of the following statements is most correct?
Your a. If a bond''s yield to maturitiy exceeds its
Answer: annual coupon, then the bond will be trading at a
premium.
b. If interest rates increase, the reletive b. price
change of a 10-year coupon bond will be greater
than the relative price change of a 10-year zero
coupon bond.
c. If a coupon bond is selling at par, its current CORREC
yield equal its yield to maturity T
d. Both a and c are correct
e. None of the answers above is correct.
InstructorStatement c is correct; the other statements are false. If a bond’s YTM >
Explanation:annual coupon, then it will trade at a discount. If interest rates increase,
the 10-year zero coupon bond’s price change is greater than the 10-year
coupon bond’s.
Points10 of 10
Received:
3. Question:(TCO B) What's the future value of $1,500 after 5 years if the
appropriate interest rate is 12%, compounded monthly?
Your $1,922.11
Answer: CORREC
$2,725.05
T
$2,600.11
$2,230.66
$2,342.19
InstructorThis can be done with a calculator, table or excel.
Explanation:
$1,500 (1.8167) = $2,725.05

(this is 1% compounded over 60 periods)


Points10 of 10
Received:
4. Question:(TCO B) You deposit $1,000 today in a savings accunt that pays 4.0%
interest, compounded annually. How much will your account be worth
at the end of 25 years?
Your $2,245.08
Answer: CORREC
$2,665.80
T
$2,481.41
$2,605.48
$2,735.03
Instructor$1,000 (2.6658) = $2,665.80
Explanation:
This is the future value of $1,000 using the rate at 4% at 25 periods.
This problem can be completed with the use of calculators, tables or
excel. I demonstrated the number with the table.
Points10 of 10
Received:
5. Question:(TCO B) You are interested in saving money for your first house. Your
plan is to make regular deposits into a brokerage account which will
earn 14 percent. Your first deposit of $5,000 will be made today
(January 1st). You also plan to make four additional deposits at the
beginning of each of the next four years. Your plan is to increase your
deposits by 10 percent a year. (that is your plan is to deposit $5,500 at
t+1, and $6,050 at t+2, etc.) How much money will be in your account
after five years?
YourPUT IN FINANCIAL CALCULATOR Year 1) I = 14%, N = 1, PV =
Answer:-5000, FV = ? pmt = annuity due begin Year 2) I = 14%, N = 2, PV =
-5500, FV = ? pmt = annuity due begin Year 3) I = 14%, N = 3, PV =
-6050, FV = ? pmt = annuity due begin Year 4) I = 14%, N = 4, PV =
-6655, FV = ? pmt = annuity due begin Year 5) I = 14%, N = 5, PV =
-7320.50, FV = ? pmt = annuity due begin RESULT YEAR 1) FV =
$5,700 YEAR 2) FV = $7,147.80 YEAR 3) FV = $8,963.34 YEAR 4)
FV = $11,240.03 YEAR 5) FV = $14,095.00 TOTAL FV = $47,146.17
InstructorThe answer is $44,873.90. The student can use the numerical solution
Explanation:by multiplying the annual residual amount by 14% or by the use of a
calculator. The use of excel is probably the most efficient method that
they can use in this type of problem
Points10 of 10
Received:
6. Question:(TCO A) Which of the following statements is correct.

Your A good goal for a firm's management is


Answer: maximization of expected EPS.
Most business in the U.S. is conducted by
corporations, and corporations' popularity results
primarily from their favorable tax treatment.
Because most stock ownership is concentrated in
the hands of a relatively small segment of
society, firms' actions to maximize their stock
prices have little benefit to society.
Corporations and partnerships have an advantage
over proprietorships because a sole proprietor is
exposed to unlimited liablitiy, but the liability of
all investors in the other types of businesses is
more limited.
The potential exists for agency conflicts CORREC
between stockholders and managers. T

Points10 of 10
Received:
7. Question:(TCO A) Other things held constant, which of the following alternatives
would increase a company's cash flow for the current year?

Your Increase the number of years over which INCORRECT


Answer: fixed assets are depreciated for tax
purposes.
Pay down the accounts payables.
Reduce the days' sales outstanding
CORRECT
(DSO) without affecting sales or
ANSWER
operating costs.
Pay workers more frequently to decrease
the accrued wages balance.
Reduce the inventory turnover ratio
without affecting sales or operating costs.

Points4 of 10
Received:
8. Question:(TCO C) Which of the following statements is correct? (Assume that
the risk-free rate is a constant)

Your If the market risk premium increses by 1%, then


Answer: the required return will increase for stocks that
have a beta greater than 1.0.
The effect of a change in the market risk
premium depends on the slope of the yield curve.

If the market risk premium increases by 1%, then


the required return on all stock will rise by 1%.
If the market risk premium increases by 1%,
then the required return will increase by 1%, CORREC
then the required return will increse by 1% T
for a stock that has a beta of 1.0.
The effect of a change on the market risk
premium depends on the level of the risk-free
rate.

Points10 of 10
Received:
9. Question:(TCO C) JBS Inc. recently reported net income of $4,750 and
depreciation of $885. How much was its net cash flow, assuming it had
no amortization expense and sold none of its fixed assets?

Your $4,831.31
Answer:
$5,085.59
$5,353.25
CORREC
$5,635.00
T
$5,916.75
InstructorNet Income $4,750
Explanation:
Depreciation $ 885

Total Cash Flow $5,635


Points10 of 10
Received:
10 Question:(TCO C) You read in the Wall Street Journal that 30-day US Treasury
. Bills are currently yielding 8%. Your brother-in-law, a broker, a broker
at Kyoto Securities, has given you the following estimates of current
interest rate premiums:

Inflation
= 5.0%
premium
Liquidity
= 1.0%
premium
Maturity risk
= 2.0%
premium
Default risk
= 2.0%
premium

Based on this data, the real risk-free rate of return is:


Your1) rf = (1+r*)(1+IP)-1 = r* + IP + (r* x IP) = r* + IP 8% = r* + IP(5%)
Answer:r* = 3% (8%-5%)
InstructorIn question one we are given that the current effective interest rate on a
Explanation:short term Treasury Bill is 8%. That being the case we would not have
several of the premiums that would not be applicable to the Government
issued Treasury Bill. The first is the liquidity premium which is applied
to securities that are difficult to trade which the Treasury Bill would not
be. The second is the maturity risk premium which because this is a
short-term investment would not apply and finally the default risk
premium which the Federal government would not be subject to. The
only premium that would impact on the Treasury Bill would be the
inflation premium which provides inflation protection for the invested
dollars. Our answer would then be 8% - 5% = 3%.
Points10 of 10
Received:

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