ACF103 2014 Week 2 Quiz Solns

ACF103 2014 – Week 2 Quiz Solns Chapter 5 1. For Stock A, Std Dev (A) = 0.10 and CV = 0.44; for Stock B, Std Dev (B) = 0.15 and CV = 0.19. Therefore, Stock B has higher relative risk than Stock A. True? * False?

2. If a stock has a beta of 1.2, its excess return varies less than proportionally to the excess return of the market portfolio. True? * False?

3. An investor is considering investing in only one of the following securities:

A B C Expected Return 0.10 0.10 0.15 Standard Deviation 0.05 0.06 0.09

Which of the following statements is true? A. Securities A and B are equally desirable if the investor is risk-averse. * B. Securities B and C are of equal relative risk. C. Security B is relatively less risky than Security C. D. Security C is more desirable than Security A if the investor is very risk-averse.

4. In the Capital Asset Pricing Model, the term (Rm - Rf) represents ______. A. the unsystematic risk premium for a security * B. the market risk premium C. the expected return of a security D. the security market line

5. If the expected return on Treasury securities is 7%, the expected return on the market portfolio is 10%, and the beta of the Tolliman Lighting Corp. is 1.25, then the required return on TLC stock is ______. A. 3% B. 3.75% C. 7% * D. 10.75%

6. The Wilde Wood Willow's common stock is currently selling at $3 per share, its quarterly dividend is 7 cents, and the stock is expected to rise to $3.30 in a year. What is its expected rate of return? A. 9.3% B 10.0% C. 11.0% * D 19.3% [($0.07 x 4) + (3.30 – 3.00)]/3.00 = 19.3% 7. The risk-free rate is 5% and the expected return on the market portfolio is 9%. If a company has a beta of 0.90, what is the stock's expected rate of return according to CAPM? Answer: It is the weighted average of the individual betas: Portfolio Beta = (.40)(1.2)+(.30)(1.4)+(.20)(.8)+(.10)(1.1) = .48 + .42 + .16 + .11 = 1.17

8. At present, the risk-free rate is 5% and the expected return on the market portfolio is 11%. The expected returns for four stocks are given below. On the basis of these expectations, which stock(s) is(are) overvalued and which undervalued? Why? ______Stock Expected Return Expected Beta ______1. Dong Peng 0.200 1.2 2. Hua Wei 0.125 1.4 3. Bei Nan 0.100 0.8 4. Dong Xi 0.116 1.1

Answer: Required returns according to CAPM: Dong Peng: .05+(.11-.05)(1.2) = .122 This is less than the expected return of .20 so the stock is undervalued. Hua Wei .05+(.06)(1.4) = .134,>the expected return, so overvalued. Bei Nan .05+(.06)(0.8) = .098,

Chapter 8 1. Which of the following statements is true? A. Liquid assets yield a return higher than the return on other assets. B. A greater margin of safety would be provided by having more current liabilities and fewer current assets. * C. Over an extended period of time, interest on long-term debt costs more than interest on short-term debt for the same amount of money borrowed. D. For current assets, the higher the proportion of liquid assets to total assets, the greater the return on investment. 2. Financial data for three firms is presented below. Each differs only with respect to philosophy on an aggressive vs. a conservative approach to current asset management.

FIRM A FIRM B FIRM C Sales $2,000,000 $2,000,000 $2,000,000 EBIT 200,000 200,000 200,000 Current Assets 600,000 500,000 400,000 Fixed Assets 500,000 500,000 500,000 Total Assets 1,100,000 1,000,000 900,000

The firm with the most aggressive philosophy has an asset turnover of ______.

A. 1.82:1 * B. 2.22:1 C. 3.33:1 D. 5.00:1

3. A firm adopting a conservative financing policy ______. A. would have higher financial risk than if it adopted an aggressive financing policy B. would be more profitable than a firm adopting an aggressive financing policy * C. may have to pay interest on debt at times when the funds are not needed D. would have to be a public utility

Chapter 9 1. The two most likely motives in explaining why firms hold cash are the ______. A. transactions motive and the speculative motive B. speculative motive and the precautionary motive * C. transactions motive and the precautionary motive D. precautionary motive and the managerial entrenchment motive

2. A good cash management system involves properly managing ______. * A. collections, disbursements, cash balances, and marketable securities investment B. only collections and disbursements C. only collections, disbursements, and cash balances D. collections, disbursements, cash balances, and capital investment 3. Wisconsin Cheesecurd Brewery has a weekly payroll of $250,000 and paychecks are issued every Friday. On the average, Cheesecurd's employees cash their checks according to the following pattern:

Day Checks Clear Percent of Payroll Account Checks Cleared Friday 20 Monday 30 Tuesday 40 Wednesday 10

Assuming the company maintains a minimum balance in the account so as not to break any banking laws, how much should be in the payroll account on Tuesday morning? A. $250,000 B. $1125,000 * C. $100,000 D. $0

4. Goodmonth Enterprises expects credit sales of $800 million next year. If the firm can invest funds at the rate of 8% a year, what is the value of collecting payment one day earlier (use a 365-day year)?

Answer: Sales per day = $800,000,000/365 = $2,191,781 Benefit = ($2,191,781)(0.08) = $175,342

Chapter 10 1. The expression 2/10, net 45 means that customers receive a 10 percent discount if they pay within 2 days; otherwise they must pay in full in 45 days. True? * False?

2. An important part of the decision regarding a firm's credit and collection policies is the impact of alternative policies on the level of accounts receivable. * True? False?

3. The economic order quantity (EOQ) is the lot size which minimizes total carrying costs. True? * False? Minimises total inventory costs 4. The Florenza Furniture Company has credit sales of $600,000 and an average collection period of 45 days. The firm's level of accounts receivable (using a 360 day year) is ______. A. $50,000 B. $60,000 * C. $75,000 D. $90,000

(600,000/360)45 = $75,000

5. Mary's Auto Parts has annual credit sales of $6 million. Mary is considering offering a cash discount of 2% for payment within 10 days. If 60% of her customers (in dollar volume) take advantage of the discount, the cost of the discount would be ______. A. $120,000 *B. $72,000 C. $60,000 D. $12,000

0.6 x 6,000,000 x 0.02 = $72,000

6. An increase in the firm's receivable turnover ratio means that ______. * A. it is collecting credit sales more quickly than before B. cash sales have decreased C. it has initiated more liberal credit terms with no increase in sales D. inventories have increased

7. The ABC Company wishes to establish an EOQ for a particular item. The annual usage is 12,000 units, order costs are $20, and the annual carrying cost is $0.48 per unit. The EOQ equals ______. (EOQ = √2(O)(S)/C ) A. 10 units B. 100 units * C. 1,000 units D. 10,000 units EOQ = √2(O)(S)/C = √(2 x 20 x 12,000)/0.48 = 1,000