Security and investment analysis exam 4

  

A firm has an ROA of 19%, a debt/equity ratio of 1.8, and a tax rate of 30%, and the interest rate on its debt is 7%. Its ROE is _________. 

  

a.

   

15.12%

 

b.

   

40.6%

 

c.

   

37.24%

 

d.

   

28.42%

 
 

2.5 points   

Citadel Realty Shares has an ROE of 20% and a market-to-book ratio of 2.38.  Based on this information, Citadel’s P/E ratio is _________. 

  

a.

   

47.6

 

b.

   

8.4

 

c.

   

17.62

 

d.

   

11.9

 
 

2.5 points   

Income Statement for XTC Industries, Inc:

2015        2016

Total sales                            202          212

Cost of sales                      -148         -172

Gross Profit                          54            40

Selling, general,

and administrative expenses -22   -20

Research and development     -8   -7

Depreciation and amortization -4          -3

Other income   4              6

Earnings before interest

and taxes (EBIT)   24            16    

Interest income (expense)      -7            -4

Pretax income                       14            12

Taxes                                       -4             -3

Net Income  10              9

All values are in millions of dollars. If XTC Industries has 25 million shares outstanding, what is its EPS in 2016?

  

a.

$0.36

 

b.

$0.40

 

c.

$0.84

 

d.

$0.63

A firm’s gross profit measures the difference between the sales and other income generated by the firm, and all costs, taxes, and expenses incurred by the firm in a given period.

True

False

The firm’s statement of cash flows uses the balance sheet and the income statement to determine the amount of cash a firm has generated and how it has used that cash during a given period.

True

False

An underpriced stock provides an expected return that is ____________ the required return based on the capital asset pricing model (CAPM).
 

  

a.

   

equal to

 

b.

   

greater than or equal to

 

c.

   

greater than

 

d.

   

less than

 
 

2.5 points   

The intrinsic value of a stock is equal to the present value (PV) of both the dividends MINUS the future  (or expected)sale price of that stock which the investor will receive.

True

False

The only cash payment that investors in a zero-coupon bond receives is the par value of the bond on its maturity date.

True

False

The price of a bond (with par value of $1,000) at the beginning of a period is $980 and at the end of the period is $975. What is the holding-period return if the annual coupon rate is 4.5%?
 

  

a.

   

5.6%

 

b.

   

4.5

 

c.

   

5.1%

 

d.

   

4.08%

 
 

2.5 points   

ATL Resources’ common stock pays an annual dividend per share of $1.80. The risk-free rate of return is 5%, and the risk premium for the company’s common stock is 4%.  The firm’s  annual dividend is expected to remain at $1.80 per share.  Based on this information, what is the value of the stock?
 

  

a.

   

$17.78

 

b.

   

None of these options

 

c.

   

$40

 

d.

   

$20

 
 

2.5 points   

The yield to maturity of a 10-year zero-coupon bond with a par value of $1,000 and a market price of $625 is _____. 

  

a.

   

4.8%

 

b.

   

10.4%

 

c.

   

7.7%

 

d.

   

6.1%

 
 

2.5 points   

· Question 11 of 45 Next Question

Firm X acquires firmZ when firm Z has a book value of assets of $155 million and a book value of liabilities of $35 million. Firm X actually pays $175 million for firm Z. This purchase would result in goodwill for firm Xequal to _____. 

  

a.

   

$175 million

 

b.

   

$155 million

 

c.

   

$120 million

 

d.

   

$55 million

 
 

2.5 points   

· Question 12 of 45 Next Question

GHI Industries will pay a dividend of $1.80 per share this year. This dividend is expected grow by 4% per year each year in the future. The current price of GHI’s stock is $22.40 per share.  Based on this information, what is the firm’s cost of equity capital?

Notes:

– Do not use the % sign.

– Use 1 decimal space to round your answer.  For example, 6.28123% should be entered as 6.3

 
 

3 points   

· Question 13 of 45 Next Question

· New Century Shipping issued a coupon bond that pays interest of $60 annually.  The bond has a par face value of $1,000, and  matures in 5 years. It is selling today at a $75.25 discount from par value.

· Based on this information, what is the current yield on this bond?
 

  

a.

   

7%

 

b.

   

6%

 

c.

   

6.49%

 

d.

   

6.73%

·

 

· 2.5 points   

Atlantic REIT Shares, Inc. is expected to produce earnings next year of $3 per share. The firm plans to reinvest 25% of its earnings at 20%. 

Assuming that the firm’s cost of  equity is 11%,  the value (per share) of the stock should be?
 

  

a.

   

$37.50

 

b.

   

$27.27

 

c.

   

$66.67

 

d.

   

$70

 
 

2.5 points   

· Question 15 of 45 Next Question

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GMT Resources, Ltd. is expected to generate earnings per share (EPS) of $3 this year.   Investors expect the firm to pay out $1.50 of these earnings to shareholders in the form of a dividend.  GMT’s expected return on new capital investment projects is 15% and the firm’s equity cost of capital is 12%.

Based on this information, what is the (estimated) value (per share) of the firm’s common stock?

Notes:

· Do not use the $ to enter your answer.

· Round using 2 decimal spaces.  For example, $12.28231 should be entered as 12.28

 
 

3 points   

· Question 16 of 45 Next Question

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You buy an 8-year $1,000 par value, Retail Ventures REIT bond today.  The bond has a 6% yield and a 6% annual payment coupon. In 1 year promised yields have increased to 7%. Your 1-year holding-period return was ___. 

  

a.

   

1.28%

 

b.

   

0.61%

 

c.

   

-3.25%

 

d.

   

-5.39%

 
 

2.5 points   

The preferred stock of TRN Railways, Inc. will pay a dividend of $8 in the upcoming year and every year thereafter. The firm’s dividends are not expected to grow.

If the investor’s required rate of return is 7%, what is the stock’s intrinsic value?
 

  

a.

   

$114.29

 

b.

   

$91

 

c.

   

$45.50

 

d.

   

$13.50

For the dividend-discount model (DDM) equation to be viable, the growth rate should be smaller than the cost of equity because it does not have any economic intuition if the growth rate is equal or greater than the cost of equity.

True

False

 
 

1 points   

From a valuation perspective, a successful firm will have a market-to-book ratio that is substantially greater than 1.0.

True

False

JBT Transocean, Inc. is expected to pay a dividend of $3 in the upcoming year.   The firm’s dividends are expected to grow at a constant  rate of 10% per year forever. The expected return on the market portfolio is 13%, and the risk-free rate of return is 4%.  The company’s common stock has a beta coefficient of 0.40.

According to the Constant-Growth DDM, the intrinsic value of the stock is _________.
 

  

a.

   

$10

 

b.

   

$27.78

 

c.

   

$41.67

 

d.

   

$22.73

 
 

2.5 points   

A firm increases its dividend plowback ratio. All else equal, you know that _____________. 

  

a.

   

earnings growth will increase and     the stock’s P/E will decrease

 

b.

   

earnings growth will increase and     the stock’s P/E will increase

 

c.

   

earnings growth will decrease and     the stock’s P/E will increase

 

d.

   

earnings growth will increase and the stock’s P/E may or may not       increase

 
 

2.5 points   

· Question 22 of 45 Next Question

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An investor pays $989.40 for a bond. The bond has an annual coupon rate of 4.8%. What is the current yield on this bond?
 

  

a.

   

3.5%

 

b.

   

9.6%

 

c.

   

4.85%

 

d.

   

9.7%

Heartland Energy Shares, Inc. issues  a coupon bond that pays interest semiannually. The bond  has a face value of $1,000, a coupon rate of 7%, and it matures in 8 years, and has a yield to maturity of 6%. Based on this information, what is the the intrinsic value of the bond today?
 

  

a.

   

$1,062.81

 

b.

   

$1,000

 

c.

   

$1,081.82

 

d.

   

$1,100.03

 
 

2.5 points   

The only cash payments the investor will receive from a zero-coupon bond are the interest payments that are paid up until the maturity date.

True

False

CVML, Inc. will pay an annual dividend of $0.65 one year from now.  Analysts expect this dividend to grow at 12% per year for the next five (5) years. After that, the company’s dividends are expected to grow at a constant (annual) rate of 2% forever.  If the company’s cost of equity capital is 8%, the value of a share of CVML’s stock is closest to:

  

a.

$11.83

 

b.

$15.00

 

c.

$17.40

 

d.

$3.24

A firm can either pay its earnings out to its investors in the form of dividend distibutions or it can retain them for reinvestment.

True

False

Trans-Caribbean Shipping, Ltd. has a total debt of $140 million and stockholders’ equity of $50 million. The company has 25 million shares outstanding, which are currently trading at market price of $3.50 per share.

Based on this information, what is the firm’s market debt-equity ratio?

  

1.

1.02

 

2.

0.63

 

3.

1.60

 

4.

0.36

A __________ bond gives the issuer an option to retire the bond before maturity at a specific price after a specific date.
 

  

a.

   

coupon

 

b.

   

puttable

 

c.

   

callable

 

d.

   

Treasury

South Seas Hospitality Group Inc., paid a $4 dividend per share last year.  The firm is expected to continue to pay out 60% of its earnings as dividends for the foreseeable future. The firm is expected to generate a 13% return on equity in the future.

Assuming that the investor’s required rate of return is 15%, what is the the value of the stock?
 

  

a.

   

$59.89

 

b.

   

$26.67

 

c.

   

$35.19

 

d.

   

$42.94

 
 

2.5 points   

A debenture is _________. 

  

a.

   

unsecured

 

b.

   

secured by property owned by the     firm

 

c.

   

secured by other securities held by     the firm

 

d.

   

secured by equipment owned by the     firm

 
 

2.5 points   

· Question 31 of 45 Next Question

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A zero-coupon bond has a yield to maturity of 5% and a par value of $1,000. If the bond matures in 16 years, it should sell for a price of __________ today.
 

  

a.

   

$641.11

 

b.

   

$458.11

 

c.

   

$789.11

 

d.

   

$1,100.11

 

LTL  Corporation

Consolidated   Income Statement

Year   ended December 31 (in $ millions)

 

2016

2015

 

Total   sales

610.1

578.3

 

Cost   of sales

(500.2)

(481.9)

 

Gross   profit

109.9

96.4

 

Selling,   general, and

administrative   expenses

(40.5)

(39.0)

 

Research   and development

(24.6)

(22.8)

 

Depreciation   and amortization

(3.6)

(3.3)

 

Operating   income

41.2

31.3

 

Other   income

 

Earnings   before interest and taxes (EBIT)

41.2

31.3

 

Interest   income (expense)

(25.1)

(15.8)

 

Pretax   income

16.1

15.5

 

Taxes

(5.5)

(5.3)

 

Net   income

10.6

10.2

 

 

Price   per share

$16

$15

 

Shares   outstanding (millions)

10.2

8.0

 

Stock   options outstanding (millions)

0.3

0.2

 

 

Stockholders’   Equity

126.6

63.6

 

Total   Liabilities and Stockholders’ Equity

533.1

386.7

         

Refer to the income statement above. Based on this information, LTL’s return on equity (ROE) for the year ending December 31, 2016 is_________?

Note: Do not use the % sign; use one decimal space to round your answer.  For example, 12.4296% should be entered as 12.4

 
 

3 points   

· Question 33 of 45 

· New Century Mining, Inc. is expected to pay a dividend of $4 in the upcoming year. Dividends are expected to decline at the rate of 3% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 13%. The company’s common stock has a beta coefficient of  0.50.

· According to the CAPM,  the stock’s required (or expected) return should be _________.
 

  

a.

   

2%

 

b.

   

9%

 

c.

   

5%

 

d.

   

8%

 

Assets

2016

2015

Liabilities   and Stockholders’ Equity

2016

2015

 

Current   Assets

Current   Liabilities

 

Cash

63.6

58.5

Accounts   payable

87.6

73.5

 

Accounts   receivable

55.5

39.6

Notes   payable /

short-term   debt

10.5

9.6

 

Inventories

45.9

42.9

Current   maturities of long-term debt

39.9

36.9

 

Other   current assets

6.0

3.0

Other   current liabilities

6.0

12.0

 

  Total current assets

171.0

144.0

  Total current liabilities

144.0

132.0

 

 

Long-Term   Assets

Long-Term   Liabilities

 

Land

66.6

62.1

Long-term   debt

239.7

168.9

 

Buildings

109.5

91.5

Capital   lease   obligations

 

Equipment

119.1

99.6

Total   Debt

239.7

168.9

 

Less   accumulated

depreciation

(56.1)

(52.5)

Deferred   taxes

22.8

22.2

 

Net   property, plant, and equipment

239.1

200.7

Other   long-term liabilities

 

Goodwill

60.0

Total   long-term liabilities

262.5

191.1

 

Other   long-term assets

63.0

42.0

Total   liabilities

406.5

323.1

 

    Total long-term assets

362.1

242.7

Stockholders’   Equity

126.6

63.6

 

 

Total   Assets

533.1

386.7

Total   liabilities and Stockholders’ Equity

533.1

386.7

             

 
 

Refer to the Balance Sheet for TRL Ventures, Inc. above.  (All figures are in $ millions).

 In 2016 the company has 10.2 million shares outstanding and these shares are trading at $16 per share.

Based on this information, what is the firm’s enterprise value?

Notes:

· Do not use  the $ sign.

· Use one decimal space to enter your answer.   For example, $75,920,000 should be entered s 75.9

 
 

3 points   

· Question 35 of 45 

· The balance sheet of OMD Industries, Inc. shows the following:

· Assets: $70 million

· Liabilities: $45 million

· Common Equity: $25 million

· Shares Outstanding: 1 million

· The replacement cost of the firm’s Assets is $85 million, and its market price per share is $49.

· Based on this information, the firm’s  book value per share is _________.
 

  

a.

   

$16.67

 

b.

   

$37.50

 

c.

   

$40.83

 

d.

   

$25.00

Consider two bonds, A and B. Both bonds presently are selling at their par value of $1,000. Each pays interest of $120 annually. Bond A will mature in 5 years, while bond B will mature in 6 years. If the yields to maturity on the two bonds change from 12% to 14%, _________. 

  

a.

   

both bonds will decrease in value     but bond A will decrease more   than bond B

 

b.

   

both bonds will increase in value     but bond A will increase more   than bond B

 

c.

   

both bonds will decrease in value but bond B will decrease more       than bond A

 

d.

   

both bonds will increase in value     but bond B will increase more   than bond A

The __________ of a bond is computed as the ratio of the annual coupon payment to the market price.
 

  

a.

   

yield to call

 

b.

   

current yield

 

c.

   

yield to maturity

 

d.

   

nominal yield

 
 

2.5 points   

According to the Gordon Constant Growth DDM, the intrinsic value of the firm depends on the current dividend level, divided by the equity cost of capital plus the grow rate

True

False

HTL Hospitality Services, Inc. issues aA coupon bond that pays interest annually. The bond has a par value of $1,000, matures in 5 years, and has a yield to maturity of 12%. If the bond offers a coupon rate of 9%,  its intrinsic value  today is _________.
 

  

a.

   

$926.47

 

b.

   

$1,000

 

c.

   

$856.04

 

d.

   

$891.86

BNP Financial Bancshares issues a coupon bond that pays interest of $60 annually has a face value of $1,000. The bond matures in 5 years, and is selling today at an $84.52 discount from par value.  Based on this information, what is the yield to maturity on this bond?
 

  

a.

   

9.45%

 

b.

   

7.23%

 

c.

   

6%

 

d.

   

8.12%

 
 

2.5 points   

VNZ Corporation will pay a dividend of $1.80 per share at this year’s end and a dividend of $2.40 per share at the end of next year.

Investors believe (or expect) that after 2 years the company’s stock will have a price of $44 per share. If the firm’s cost of equity capital is 8%, what is the maximum price that a rational, risk-averse, investor would be willing to pay for the company’s stock today? 

Notes:

· Do not use the $ sign.

· Round your answer using 2 decimal spaces.  For example, $17.75231 should be entered as 17.75

 
 

3 points   

· Question 42 of 45 Next Question

· Unsaved change Moving to the next question prevents changes to this answer.

· The balance sheet presents a firm’s assets, liabilities, and stockholders’ equity of a firm over a given length of time.

·  True

·  False

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