Introduction to Finance - Milestone 3 2021/2022

What is the effect on the stock price of a company that announces it earned higher- than-expected quarterly profits? Correct answer- The effect depends on what generated the profits and how analysts forecast this information. Using the following variables, calculate an organization's cost of debt on a $500,000 bond. Rf: 1% Credit-risk rate: 5% t: 15% Correct answer- $25,500 Company A: Market Value of Equity: $250,000 Market Value of Debt: $600,000 Cost of Equity: 8% Cost of Debt: 2% Tax Rate: 35% Company B: Market Value of Equity: $200,000 Market Value of Debt: $500,000 Cost of Equity: 10% Cost of Debt: 2% Tax Rate: 30% Based solely on their current weighted average cost of capital, which company should pursue an investment opportunity with an expected return of 5%? Correct answer- Both Anais purchased stock with an initial share price of $52, and sold it when the share price was $60. While she owned the stock, she earned $7 in dividends. What was her total percentage return on the investment? Correct answer- 28.85% You own a small manufacturing business that produces widgets. You have spent $150,000 acquiring the fixed assets you need to produce widgets. Each widget costs you $2 to make and they sell for $15 each, so your variable cost is 13.3% of the overall revenue. At your current level of operating leverage, how many widgets must you sell to break even? Correct answer- 11,539 Which of the following portfolios theoretically diversifies away the most risk? Correct answer- One whose investments have a negative covariance What is the combination of debt and equity used by a company to finance its activities known as? Correct answer- Capital structure Calculate a company''s total leverage given the following information: - Change in sales = 7% - Change in earnings = 10% Correct answer- 1.43 A security that falls above the security market line has __________. Correct answer- a high expected return and a low price Why is an investment portfolio containing a mix of stocks and bonds less risky than one containing a single asset class? Correct answer- Because stocks and bonds are negatively correlated The risk that your investment will lose value because your return is dependent on the stability of a secondary investment is known as __________. Correct answer- Asset-based risk Which of the following is a tenet of semi-strong-form efficiency? Correct answer- Share prices respond immediately to new information that is made public. You invest $3,000 in a stock that has a 10% chance of a 2% return, a 70% chance of a 6% return and a 20% chance of a 15% return. What is your expected return after one year? Correct answer- 7.4% Select the true statement about the bankruptcy process. Correct answer- A company receives a stay from any collections activity after filing a bankruptcy petition. Which of the following is true of unsystematic risk? Correct answer- It can be diversified away by relying on the lack of a tight positive relationship among the returns of a set of individual assets. Like the capital asset pricing model, the bond yield plus risk premium (BYPRP) approach is useful for _________. Correct answer- Estimating the required return on a company's equity A social media start-up wants to raise funds to support growth by offering shares to a select group of investors. What type of market transaction should they pursue? Correct answer- Private placement One reason a company may choose to issue additional debt instead of equity when raising capital is that __________. Correct answer- Debt interest payments are tax-deductible Before selling bonds to investors, Matteo's company must provide audited financial statements and a detailed description of the terms of the bonds. By doing so, which federal regulation is he complying with? Correct answer- Securities Act of 1933