Unsystematic risk is not relevant, because (A+)

Unsystematic risk is not relevant, because

it does not change
it can be eliminated through diversification.
it cannot be estimated
it cannot be eliminated through diversification.

23.

A highly risk-averse investor is considering the addition of an asset to a 10-stock portfolio. The two securities under consideration both have an expected return, k, equal to 15 percent. However, the distribution of possible returns associated with Asset A has a standard deviation of 12 percent, while Asset B’s standard deviation is 8 percent. Both assets are correlated with the market with r = 0.75. Which asset should the risk-averse investor add to his/her protfolio?

Asset A.
Asset B.
Both A and B.
Neither A nor B.
Cannot tell without more information.

24.

Which of the following statements is false?

Systematic risk will increase during a recession.
Adding more unrelated securities to a portfolio reduces unsystematic risk.
Market risk may be reduced through diversification.
Changes in Federal Reserve policy have more effect on systematic risk than unsystematic risk.
Oil shocks affect market risk.

25.

All of the following statements are true except

The expected return on an asset held by it is the weighted average of the possible outcomes, where the weights reflect the probability of each outcome.
The risk of an asset held by it can be measured by the standard deviation of the expected returns.
The expected return on a portfolio of assets is the weighted average of the expected returns of the assets in the portfolio.
The standard deviation of a portfolio of assets is the weighted average of the standard deviations of the assets in the portfolio.
All of the above statements are true.

26.

You hold a diversified portfolio consisting of a $5,000 investment in each of 20 different common stocks. The portfolio beta is equal to 1.15. You have decided to sell one of your stocks, a lead mining stock whose b = 1.0, for $5,000 net and to use the proceeds to buy $5,000 of stock in a steel company whose b =2.0. What will be the new beta of the portfolio?

1.12
1.20
1.22
1.10
1.15

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A share of common stock has just paid a dividend of $2 (A+)

A share of common stock has just paid a dividend of $2. If the expected long-run growth rate for this stock is 15%, and if investors require a 19% rate of return, what is the price of the stock?

$57.50
$62.25
$71.86
$64.00
$44.92

12.

A common source of error in estimating dividend growth rates is

Mathematical errors committed by stock analysts.
The erratic earnings records of many firms.
The fact that growth rate predictions must be based on historical information.
Analysts’ lack of training in modern forecasting techniques.
The fact that the Gordon growth model cannot be applied to ‘real world’ situations.

14.

If the average PE ratio for the construction industry is 15 and earnings per share for Lincoln Builders is $2.35, what is the current price of Lincoln’s stock?

$17.35
$ 6.38
$35.25
$ 0.16
$17.63

15.

Preferred stock is valued as if it were

a fixed-income obligation.
a bond.
a perpetuity.
a common stock.

16.

As risk aversion increases

A firm’s beta will increase.
Investors’ required rate of return will increase.
A firm’s beta will decrease.
Investors’ required rate of return will decrease.

17.

The graph of the Capital Asset Pricing Model (CAPM) that relates the beta of a stock to its required return is called the

Characteristic line.
Capital market line.
Risk/return profile.
Line of least resistance.
Security market line.

.

18.

War, inflation, and the condition of the foreign markets are all examples of

Diversifiable risk.
Non-diversifiable risk.
Economic risk.
Unsystematic.

19.

The _________________ standardizes the standard deviation to make assets with different returns comparable.

standard deviation
variance
coefficient of determination
coefficient of variation
None of the above.

20.

Inflation, recession, and high interest rates are economic events which are characterized as

Company specific risk that can be diversified away.
Market risk.
Systematic risk that can be diversified away.
Diversifiable risk.
Unsystematic risk that can be diversified away.

21.

Which of the following statements is true?

Risk-averse investors prefer securities with high standard deviations.
If the returns from a security are normally distributed, 86% of the observations fall within one standard deviation of the expected value.
Standard deviations should not be used to compare the risk of two securities that have different expected returns.
Calculus of variations (CV) adjusts standard deviations to compare the risk of securities with different expected returns.
Standard deviations can be computed for stock returns, but not for bond yields.

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Puffy Comb Corp. bonds have been downgraded by Standard and Poors (A+)

Puffy Comb Corp. bonds have been downgraded by Standard and Poors because of a growing number of men shaving their heads for aerodynamic lift. Which of the following should result from this development?

The current yield should fall.
The coupon rate will rise.
The yield to maturity will be unchanged.
The maturity date will change.
The bond price should fall.

2.

Jerry just purchased a bond paying semiannual interest for $1,000. Yields on bonds of similar risk are 10%. The bond has a par value of $1,000. Based on this information, the coupon rate of the bond is

5%
10%
15%
20%
Cannot be determined without further information.

3.

You intend to purchase a 10-year, $1,000 face value bond that pays interest of $60 every six months. If your nominal required rate of return is 10% with semiannual compounding, how much should you be willing to pay for this bond?

$826.31
$1,086.15
$957.30
$1,431.49
$1,124.62

4.

You are willing to pay $15,625 to purchase a perpetuity which will pay you and your heirs $1,250 each year, forever. If your required rate of return does not change, how much would you be willing to pay if this were a 20 year, annual payment, ordinary annuity instead of a perpetuity?(Hint: Find the rate first, then use it in your calculation)

10,342
11,931
12,273
13,922
17,157

5.

You are in possession of a bond that has three years remaining to maturity. The original maturity on the bond was 30 years. The bond has a $1,000 par value and a 9% coupon rate. If interest is paid annually and bonds with similar risk currently have an interest rate of 10%, what is the current value of the bond?

$ 906
$ 975
$1,025
$1,000
$1,103

6.

What is the price of a four-year, 10% annual coupon bond if market interest rates are 5%? The bonds par value is $1,000.

$1,177.60
$1,000.00
$1,216.90
$ 896.47
$ 947.87

7.

What is the yield to maturity of a 10% annual coupon bond selling for $900 that matures in ten years?

12.50%
10.00%
5.86%
11.75%
12.00%

8.

The basic assumption of the Gordon growth model is that

Dividends will grow at a faster rate than the required return.
No earnings will be retained by the firm to finance growth prospects.
Bonds are perfect substitutes for common stock.
Dividend payments will grow at a constant rate.
The firm will never pay dividends.

9.

Rancid Fruit Co. just paid a dividend of $1.00 and expects to increase it at a rate of 5% annually. All else equal, under which of the following conditions would its stock price fall in one year?

If the dividend in one year exceeds $1.05.
If the required return falls.
If the growth rate increases.
If its PE ratio increases.
If its dividend in one year is less than $1.05.

10.

What is the maximum price Erica should pay for Rangoon Corp. common stock if her required return is 5% and she expects to sell the stock in one year for $50 per share, immediately after she receives a $.50 per share dividend?

$50.00
$48.10
$48.00
$45.00
$40.73

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The Sweetwater Candy Company would like to buy a new machine (A+)

The Sweetwater Candy Company would like to buy a new machine that would automatically “dip” chocolates. The dipping operation is currently done largely by hand. The machine the company is considering costs $85,000. The manufacturer estimates that the machine would be usable for five years but would require the replacement of several key parts at the end of the third year. These parts would cost $7,600, including installation. After five years, the machine could be sold for $6,600.

The company estimates that the cost to operate the machine will be $7,500 per year. The present method of dipping chocolates costs $36,000 per year. In addition to reducing costs, the new machine will increase production by 4,300 boxes of chocolates per year. The company realizes a contribution margin of $0.3 per box. A 20% rate of return is required on all investments. (Ignore income taxes.)

To determine the appropriate discount factor(s) using tables, click here to view Exhibit 14B-1 and Exhibit 14B-2. Alternatively, if you calculate the discount factor(s) using a formula, round to three (3) decimal places before using the factor in the problem.

Requirement 1:

What are the annual net cash inflows that will be provided by the new dipping machine? (Omit the “$” sign in your response.)

Requirement 2:

Compute the new machine’s net present value. Use the incremental cost approach.

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Kazaam Company, a merchandiser, recently completed its calendar-year 2011 operations (A+)

Kazaam Company, a merchandiser, recently completed its calendar-year 2011 operations. For the year, (1) all sales are credit sales, (2) all credits to Accounts Receivable reflect cash receipts from customers, (3) all purchases of inventory are on credit, (4) all debits to Accounts Payable reflect cash payments for inventory, and (5) Other Expenses are paid in advance and are initially debited to Prepaid Expenses. The company’s balance sheets and income statement follow.

KAZAAM COMPANY

Comparative Balance Sheets

December 31, 2011 and 2010

2011 2010

Assets

Cash $49,000 $73,000 Accounts receivable $65,900 $55,000 Merchandise inventory $278,000 $251,500 Prepaid expenses $1,500 $1,600 Equipment $157,500 $108,000 Accumulated depreciation—Equipment $(35,875) $(46,000) Total assets $516,025 $443,100 Liabilities and Equity

Accounts payable $62,400 $113,000

Short-term notes payable $9,000 $8,000

Long-term notes payable $65,000 $48,250

Common stock, $5 par value $162,000 $150,750

Paid-in capital in excess of par, common stock $33,750 0

Retained earnings $183,875 $123,100

Total liabilities and equity $516,025 $443,100

KAZAAM COMPANY

Income Statement

For Year Ended December 31, 2011

Sales $583,000

Cost of goods sold $282,000

Gross profit $301,000

Operating expenses

Depreciation expense $20,000

Other expenses $133,600 $153,600

Other gains (losses) $0

Loss on sale of equipment ($5,125)

Income before taxes $142,275

Income taxes expense $23,000

Net income $119,275

Additional Information on Year 2011 Transactions

a. The loss on the cash sale of equipment was $5,125 (details in b).

b. Sold equipment costing $46,875, with accumulated depreciation of $30,125, for $11,625 cash.

c. Purchased equipment costing $96,375 by paying $35,000 cash and signing a long-term note payable for the balance.

d. Borrowed $1,000 cash by signing a short-term note payable.

e. Paid $44,625 cash to reduce the long-term notes payable.

f. Issued 2,250 shares of common stock for $20 cash per share.

g. Declared and paid cash dividends of $58,500.

Required:

1. Prepare a complete statement of cash flows; report its operating activities using the indirect method.

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4. Seemore Company makes camping lanterns using a single production process (A+)

Seemore Company makes camping lanterns using a single production process. All direct materials are added at the beginning of the manufacturing process. Information for the month of March follows:

Beginning work in process (30% complete) 60,900 units

Direct materials $89,000

Conversion cost $177,000

Total cost of beginning work in process $266,000

Number of units started 127,500

Number of units completed and transferred to finished goods 165,400

Ending work in process (61% complete)

Direct materials cost incurred $255,700

Conversion cost applied $325,000

Total cost added $580,700

Required:

Using the weighted average method of process costing, complete each of the following steps:

(a) Reconcile the number of physical units worked on during the period.

(b) Calculate the number of equivalent units.

(c) Calculate the cost per equivalent unit.

(d) Reconcile the total cost of work in process.

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4. Forrest Co. makes wooden tables (A+)

Forrest Co. makes wooden tables.

(a) Purchased $20,400 of raw materials on credit.

(b) Issued $16,700 of direct materials into production.

(c) Applied $48,300 of conversion cost.

(d) Paid in full the raw materials purchased on credit.

(e) Completed tables costing $52,850.

(f) Recorded actual conversion costs of $41,600. (Credited to Miscellaneous account)

(g) Sold tables for $94,500 that cost $48,100 to produce.

(h) Disposed of any over- or under applied conversion cost.

Required:

Prepare the journal entries to record each of the above transactions

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4. Hanson Company manufactures handheld calculators and has the following information available for the month of July (A+)

Hanson Company manufactures handheld calculators and has the following information available for the month of July.

Work in process, July 1 71,000 units

(100% complete for materials, 23% for conversion)

Direct materials $120,000

Conversion $192,000

Number of units started 90,000 units

July costs

Direct materials $207,000

Conversion $237,000

Work in process, July 31 69,000 units

(100% complete for materials, 14% for conversion)

Required:

Using the weighted average method of process costing, complete each of the following steps:

(a) Reconcile the number of physical units worked on during the period.

(b) Calculate the number of equivalent units.

(c) Calculate cost per equivalent unit.

(d) Reconcile the total cost of work in process.

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4. Tien Company manufactures plastic storage crates and has the following information available for the month of April (A+)

Tien Company manufactures plastic storage crates and has the following information available for the month of April:

Work in process, April 1 24,600 units

(100% complete for materials, 43% for conversion)

Direct materials $29,000

Conversion $23,000

Number of units started 49,400 units

April costs

Direct materials $68,800

Conversion $107,800

Work in process, April 30 16,000 units

(100% complete for materials, 26% for conversion)

Required:

Using the weighted average method of process costing, complete each of the following steps:

(a) Reconcile the number of physical units worked on during the period.

(b) Calculate the number of equivalent units.

(c) Calculate the cost per equivalent unit.

(d) Reconcile the total cost of work in process.

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4. GoFly Company manufactures kites and has the following information available for the month of April (A+)

GoFly Company manufactures kites and has the following information available for the month of April:

Work in process, April 1

(100% complete for materials, 47% for conversion) 27,000 units

Direct materials $45,000

Conversion cost $49,000

Number of units started 89,000 units

April costs

Direct materials $111,000

Conversion cost $175,000

Work in process, April 30

(100% complete for materials, 23% for conversion) 36,000 units

Required:

Using the weighted average method, complete each of the following steps:

(a) Reconcile the number of physical units worked on during the period.

(b) Calculate the number of equivalent units.

(c) Calculate the cost per equivalent unit.

(d) Reconcile the total cost of work in process.

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