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Devry FIN 515 Midterm Exam (Updated)

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Devry FIN 515 Midterm Exam (Updated)

 

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1. (TCO A) Which of the following is NOT an advantage of a sole proprietorship? (Points : 10)

Single taxation
Ease of setup
Limited liability
No separation of ownership and control

Question 2. 2. (TCO A) A _____ is when a rich individual or organization purchases a large fraction of the stock of a poorly performing firm, and in doing so, gets enough votes to replace the board of directors and the CEO. (Points : 10)

shareholder proposal
leveraged buyout
shareholder action
hostile takeover

Question 3. 3. (TCO A) The firm’s equity multiplier measures (Points : 10)

the value of assets held per dollar of shareholder equity.
the return that the firm has earned on its past investments.
the firm’s ability to sell a product for more than the cost of producing it.
how efficiently the firm is utilizing its assets to generate sales.

Question 4. 4. (TCO B) By evaluating cost and benefits using competitive market prices, we can determine whether a decision will make the firm and its investors wealthier. This central concept is called: (Points : 10)

the Law of One Price.
the Present Value.
the Valuation Principle.
the Internal Rate of Return.

Question 5. 5. (TCO D) Which of the following statements is FALSE? (Points : 10)

Bonds are securities sold by governments and corporations to raise money from investors today in exchange for promised future payments.
By convention, the coupon rate is expressed as an effective annual rate.
Bonds typically make two types of payments to their holders.
The time remaining until the repayment date is known as the term of the bond.

Question 6. 6. (TCO D) Which of the following statements is FALSE? (Points : 10)

We should use the general dividend discount model to value the stock of a firm with rapid or changing growth.
As firms mature, their growth slows to rates more typical of established companies.
The dividend discount model values the stock based on a forecast of the future dividends paid to shareholders.
The simplest forecast for the firm’s future dividends states that they will grow at a constant rate, g, forever.

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1. (TCO B) You plan on retiring in 20 years. You currently have $275,000 and think you will need $1,000,000 to retire. Assuming that you don’t deposit any additional money into the account, what annual return will you need to earn to meet this goal? Show your work. (Points : 20)

r= ((FV/PV)^(1/t))-1 r=(($1,000,000/275,000)^1/20) -1 r=(3.6364^0.05)-1 r=1.0667-1
r= 0.0667 or 6.67% For reaching the goal interest rate needed to be 6.67%.

2. (TCO B) You take out a 4-year car loan for $18,000. The loan has a 4% annual interest rate. The payments are made monthly. What are the monthly payments? Show your work. (Points : 20)

Monthly interest rate= 4/12=0 .3333% $18,000=C(1-1/1.0033^48)/.0033 or, $18,000= C (1-1/1.171)/.0033 or, C= $18,000/44.3240 or, C= $406.10

3. (TCO D) A bond has 5 years to maturity and has a YTM of 8%. Its par value is $1,000. Its semiannual coupons are $50. What is the bond’s current market price? Show your work. (Points : 20)

NPER 10 ← Number of Period 5 x 2 = 10 PMT
50 ← Payment per Period FV
FV $1000 Par Value ←
Rate 4.00% ← Semi-Annual Rate 8%/2 = 4%
Current Price $1,081.11

4. (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? Show your work. (Points : 20)

current selling price =887
par value =1000
maturity year=10
coupon rate =7%
interest rate=semi annually =9(0.07+(100-887)/10)/(1000+887)/2) =0.13 13%

5. (TCO D) A stock pays an annual dividend of $2.50 and that dividend is not expected to change. Similar stocks pay a return of 10%. What is P0? Show your work. (Points : 20)

P0 = D1 / ( r-g)
P0 = 2.50/0.1 =25.00

6. (TCO D) A stock has just paid a dividend and has declared an annual dividend of $2.00 to be paid one year from today. The dividend is expected to grow at a 5% annual rate. The return on equity for similar stocks is 12%. What is P0? Show your work
Ans) P0 = Stock Price = 2.0 /(0.12 -0.05) = 2.0 /(0.07) = 200/7 = $ 28.57

1. (TCO A) If Moon Corporation has an increase in sales, what would result in no change in its EBIT margin? Explain in details. (Points : 20)
There will be a proportional increase in its net income. This can be explained by the below example

Sales $10000
Less:Cost of sales ($5000)
Gross Income $5000
Less: Operating expense $(1000)
EBIT $4000

Increase in sales

Sales $20000
Less:Cost of sales ($5000)
Gross Income $15000
Less: Operating expense $(1000)
EBIT $14000

Since all the expenses remain unchanged the EBIT increases

 

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