Q 1.
You are a shareholder in a C corporation. The corporation
earns $ 1.72$1.72 per share before taxes. Once it has paid? taxes, it will
distribute the rest of its earnings to you as a dividend. The corporate tax
rate is 35 %35%?, and your personal tax rate on? (both dividend and?
non-dividend) income is 30 %30%. How much is left for you after all taxes are?
paid?
Q 2
You are a shareholder in an S corporation. The corporation
earns $ 2.06$2.06 per share before taxes.
As a pass through? entity, you will receive $ 2.06$2.06 for each share
that you own. Your marginal tax rate is 30 %30%. How much per share is left for
you after all taxes are? paid?
Q 3
You are the CEO of a company
and you are considering entering into an agreement to have your company buy
another company. You think the price might be too?high, but you will be the CEO of the?combined, much larger company. You know that when the
company gets?bigger, your pay and prestige will increase. What is the nature of
the agency conflict here and how is it related to ethical?considerations?
Q 4
What
four financial statements can be found in a? firm’s 10-K? filing?
What checks are there on the accuracy of these? statements?
What
four financial statements can be found in a? firm’s 10-K? filing? ? (Select the
best choice? below.)
A.
Balance?
sheet, income? statement, statement of cash? flows, and Statement of income and
expenses
B.
Balance?
sheet, cash? budget, earnings? statement, and statement of? stockholders’
equity
C.
Balance?
sheet, income? statement, statement of cash? flows, and statement of?
stockholders’ equity
D.Balance?
sheet, asset and liability? statement, statement of cash? flows, and statement
of? stockholders’ equity
What checks are there on the accuracy of these? statements? ?
(Select the best choice? below.)
A.Financial statements in form? 10-K are required to be
audited by a neutral third? party, who checks them and ensures that the
financial statements are prepared according to GAAP and that the information
contained is reliable.
B. The accuracy of the? firm’s financial statements is
certified by the? firm’s board of? directors, which is the only required check.
C.It is up to each investor to certify the accuracy of the
financial statements.
D.Financial statements are always sufficiently accurate so no
checks are needed.
Q 5
Consider a project that requires an initial investment of $
100 comma 000$100,000 and will produce a single cash flow of $ 153 comma
000$153,000 in 44 years.
a. What is the NPV of this project if the 44?-year interest
rate is 5.1 %5.1% ?(EAR)?
b. What is the NPV of this project if the 44?-year interest
rate is 9.9 %9.9% ?(EAR)?
c. What is the highest 44?-year interest rate such that this
project is still? profitable?
Q 6
?CBS’s five-year borrowing rate is 1.73 %1.73% and JPMorgan?
Chases’ is 2.83 %2.83%. Which would you? prefer? $ 500$500 from CBS paid today
or a promise that the firm will pay you $ 550$550 in five? years? Which would
you choose if JPMorgan Chase offered you the same? alternative?
You would? prefer:
?(Select the best choice? below.)
A.
$ 550$550 from JPMorgan Chase 55 years and $ 500$500 from CBS
today.
B.
$ 550$550 from JPMorgan Chase 55 years and $ 550$550 from CBS
in 55 years.
C.
$ 500$500 from JPMorgan Chase today and $ 500$500 from CBS
today.
D.
$ 500$500 from JPMorgan Chase today and $ 550$550 from CBS in
55 years.
Q 7
Your best taxable investment opportunity has an EAR of 6.3
%6.3%. Your best? tax-free investment opportunity has an EAR of 2.7 %2.7%. If
your tax rate is 25 %25%?, which opportunity provides the higher? after-tax
interest? rate?
Q 8
Consider the price paths of the following two stocks over six time? periods:
|
1 |
2 |
3 |
4 |
5 |
6 |
|
|
Stock |
$ 7$7 |
$ 9$9 |
$ 11$11 |
$ 9$9 |
$ 10$10 |
$ 13$13 |
|
Stock |
$ 14$14 |
$ 10$10 |
$ 7$7 |
$ 15$15 |
$ 14$14 |
$ 17$17 |
Neither stock pays dividends. Assume you are an investor with the
disposition effect and you bought at time 1 and right now it is time 3. Assume
throughout this question that you do no trading? (other than what is? specified)
in these stocks.
a. Which? stock(s) would you be inclined to? sell? Which
would you be inclined to hold? onto?
b. How would your answer change if right now is time? 6?
c. What if you bought at time 3 instead of 1 and today is time? 6?
d. What if you bought at time 3 instead of 1 and today is time? 5?
Q 9
Each of the six firms in the table below is expected to pay the
listed dividend payment every year in perpetuity.
|
Firm |
Dividend? ($ million) |
Cost of Capital? (%/year) |
|
S1 |
10.210.2 |
8.38.3 |
|
S2 |
10.210.2 |
12.412.4 |
|
S3 |
10.210.2 |
14.814.8 |
|
B1 |
102.0102.0 |
8.38.3 |
|
B2 |
102.0102.0 |
12.412.4 |
|
B3 |
102.0102.0 |
14.814.8 |
a.Using the cost of capital in the? table, calculate the market
value of each firm.
b. Rank the three S firms by their market values and look at how
their cost of capital is ordered. What would be the expected return for a? self-financing
portfolio that went long on the firm with the largest market value and shorted
the firm with the lowest market? value? Repeat using the B firms.
c. Rank all six firms by their market values. How does this ranking
order the cost of? capital? What would be the expected return for a? self-financing
portfolio that went long on the firm with the largest market value and shorted
the firm with the lowest market? value?
d. Repeat part
?(c?)
but rank the firms by the dividend yield instead of the market
value. What can you conclude about the dividend yield ranking compared to the
market value? ranking?
Q 10
Consider the following? stocks, all of which will pay a
liquidating dividend one year from now and nothing in the? interim:
|
Market Capitalization ?($ million) |
Expected Liquidating Dividend? ($ million) |
Beta |
|
|
Stock A |
807807 |
1 comma 0001,000 |
0.670.67 |
|
Stock B |
801801 |
1 comma 0001,000 |
1.411.41 |
|
Stock C |
898898 |
1 comma 0001,000 |
1.311.31 |
|
Stock D |
888888 |
1 comma 0001,000 |
1.071.07 |
a.Calculate the expected return of each stock.
b. What is the correlation between the expected return and market
capitalization of the? stocks?
