FIN 515Week 8 final exam 515 fall 2021

Question 1.1. (TCO A) Double taxation is a drawback for which of the following types of business organization except? (Points : 5) S corporation C corporation Limited partnership correct answer Limited liability com ...

Question 1.1. (TCO A) Double taxation is a drawback for which of the following types of business organization except? (Points : 5) S corporation C corporation Limited partnership correct answer Limited liability company Question 2.2. (TCO A) Sole proprietorships have all of the following advantages except (Points : 5) easy to set up. single taxation of income. limited liability. ownership and control are not separated. Correct answer Question 3.3. (TCO B) Which of the following would cause the present value of an annuity to decrease? (Points : 5) Reducing the number of payments. Increasing the number of payments. Correct answer Decreasing the interest rate. Decreasing the liquidity of the payments. Question 4.4. (TCO B) In a TVM calculation, if incoming cash flows are positive, outgoing cash flows This study source was downloaded by 100000823742721 from CourseHero.com on 08-09-2021 04:15:52 GMT -05:00 https://www.coursehero.com/file/12462178/Week-8-final-exam-515-fall-2015/ This study resource was shared via CourseHero.com must be (Points : 5) positive. negative. Correct answer either positive or negative. It really doesn’t matter. stated in time units that are different from the time units in which the interest rates are stated. Question 5.5. (TCO G) If net income, total assets, and book value of equity stayed the same, what would be the effect on the DuPont Identity of an increase in sales? (Points : 20) answer DuPont is just the extension of the formula of ROE(return on Equity). In normal terms ROE is calculated as follows: ROE = Net Income / Equity In DuPont Analysis we have ROE = (Net Income / Sales) x (Sales / Assets) x (Assets / Equity). If we cut Sales with Sales and Assets with Assets we have left with the same formula, i.e., ROE = Net Income / Equity. DuPont is not giving any new formula, it is just dividing the formula for analysis of ROE that if ROE is low where is the drawback in the 3 components. Thus, we can say that increase in sales will not affect the ROE in any way, given the net income, total assets, and book value of equity stayed the same. the financial result will be same. DuPont Identity will only be help in better decision making not improving any financial results. Question 6.6. (TCO D) A stock has just paid a dividend and will pay a dividend of $3.00 in a year. The dividend will stay constant for the rest of time. The return on equity for similar stocks is 14%. What is P0? (Points : 20) answer A stock has just paid a dividend and will pay a dividend of $3.00 in a year therefore we can say that that Dividend for Year 0 and coming years will be $3 Rate of Dividend growth will be zero as The dividend will stay constant for the rest of time NOw we need to use the below to calculate the P0 ( ie Price for Today or Price at year 0 ) P0 = D1 / (r-g) where P0 = today's price D1 = dividends in period 1 r = required rate of return (in decimals) g = dividend growth rate Just paid a dividend ( $)D0 3 Dividend next Year( $) D1 3 Return on equity for similar stocks is 14% r 14% Dividend will stay constant for the rest of time ( Growth Rate ) g 0 :- Todays Price P0 = D1 / ( r-g) P0 21.43 Question 7.7. (TCO D) A stock has just declared an annual dividend of $2.25 to be paid one year from today. The dividend is expected to grow at a 7% annual rate. The return on equity for similar stocks is This study source was downloaded by 100000823742721 from CourseHero.com on 08-09-2021 04:15:52 GMT -05:00 https://www.coursehero.com/file/12462178/Week-8-final-exam-515-fall-2015/ This study resource was shared via CourseHero.com 12%. What is P0? (Points : 20) Answer: According to Dividend Discount Model: Price= D1 / k-g D1 = Next Year Dividend = $2.25 k = Expected Return = 12% g = Growth Rate = 7% By putting Value: P0 = 2.25 / 0.12 - 0.07 P0 = 45 sO, P0 = $45 Question 8.8. (TCO D) A given bond has 5 years to maturity. It has a face value of $1,000. It has a YTM of 6% and the coupons are paid semiannually at a 10% annual rate. What does the bond currently sell for? (Points : 10) Answer: If we apply the bond valuation formula, for semi annual interest payment 2n V=\sumt=1 (I/2)/(1+kd/2)^{}^t+F/(1+kd/2)^2n which can be expressed as I/2(PVIFAkd/2,2n)+F(PVIFkd/2,2n) now either solving manually or using interest factor tables The value of bond=$1170.5 Question 9.9. (TCO D) A bond currently sells for $887 even though it has a par of $1,000. It was issued two years ago and had a maturity of 10 years. The coupon rate is 7% and the interest payments are made semiannually. What is its YTM? (Points : 10) Answer: current selling price =887 par value =100 maturity year=10 coupon rate =7% interst rate=semi annually =9(0.07+(100-887)/10)/(1000+887)/2) =0.13 13% Question 10.10. (TCO D) Using examples, explain the difference between systematic risk and nonsystematic risk. Explain why the distinction is important for both investors and issuers of stock. (Points : 30) Answer: Systematic risk Systematic risk is the risk given by the system where the firm is currently working. This risk is inherent to the entire market or economy. It is also known as market risk. This risk cannot be diversified. Examples are increase in interest rates, change in government, and change in monetary policy etc. Non-systematic risk Nonsystematic is a firm or industry specific risk and given by the industry the firm is working in. This risk can be diversified by efficient allocation of money to various assets. Examples are strike by employees, management conflicts etc. Since systematic risk is non diversifiable investors must be compensated by excess returns for those systematic risks. For investors measuring and understanding nonsystematic risk is vital as they will be exposed to systematic risk with all the companies they are investing in only nonsystematic risk will change. Question 11.11. (TCO E) A company has 100 million shares outstanding trading for $8 per share. It also has $900 million in outstanding debt. If its equity cost of capital is 15%, and its debt cost of capital is 12%, and its effective corporate tax rate is 40%, what is its weighted average cost of capital? (Points : 30) Answer: Weighted Average Cost of capital = [Equity/( Debt + Equity)] * Equity cost of capital + [ debt/ (Debt + equity)] * Debt Cost of capital * ( 1­ tax rate) =[($100 / $1000) * 0.15] +[ ($900/$1000) * 0.12 *(1­0.40) = 0.015 + 0.0648 = 0.0798 = 7.98% ( approx)