FINANCE

1. The risk-free rate of return is 4% and the market risk premium is 8%. What is the expected rate of return on a stock with a beta of 1.28?

A. 9.12%

B. 10.24%

C. 13.12%

D. 14.24%

E. 15.36%

 

Solution:  Calculation of Expected rate of return of Common equity (Using CAPM)

 

Formula

r = Rf + β (Rm- Rf)

Where as

Rf = 0.04

Rm – Rf =0.08

β = 1.28

r = 0.04+ 1.28 (0.08)

r = 0.1424

Hence the Expected rate of return is 14.24%

2. The stock of Big Joe’s has a beta of 1.14 and an expected return of 11.6%. The risk-free rate of return is 4%. What is the expected return on the market?

A. 7.60%

B. 8.04%

C. 9.33%

D. 10.67%

E. 12.16%

 

Solution:  Calculation of expected return on the market (Using CAPM)

 

Formula

r = Rf + β (Rm- Rf)

Where as

Rf = 0.04

Rm =

β = 1.14

r = 0.116

0.116 = 0.04+ 1.14 (Rm-0.04)

0.116 = 0.04+ 1.14Rm-0.0456

0.1216 = 1.14Rm

Rm = 0.1216/1.14

Rm = 0.10667

Hence the expected return on the market is 0.10667 or 10.67%

3. You have a $1,000 portfolio, which is invested in stocks A and B plus a risk-free asset. $400 is invested in stock A. Stock A has a beta of 1.3 and stock B has a beta of .7. How much needs to be invested in stock B if you want a portfolio beta of .90?

A. $0

B. $268

C. $482

D. $543

E. $600

 

Solution: – Computation of the Beta of B stock

Given information

Total investment = $1000

Stock A = $400

Beta A = 1.3

Beta B = 0.7

Port folio Beta = 0.90

Port folio Beta = (400/1000)*1.30 + (x/1000)*0.7

0.90 = (400/1000)*1.30 + (x/1000)*0.7

0.90 = (0.40)*1.30 + (x/1000)*0.7

0.90 = 0.52 + (x/1000)*0.7

0.542857 = (x/1000)

 

x = 0.542857*1000

 

x = 543

 

Hence B Stock total investment is $543

 

Starr Knight Corporation’s Balance Sheet and Income Statement as shown below:

 

 

4. StarrKnight Corporation’s accounts payable turnover for 2008 is (use average payables)

______.

A. 7.75

B. 7.96

C. 8.94

D. 9.02

E. 10.39

 

Solution: Computation of the Account payable turnover for 2008

Account payable RatioCost of Goods Sold

Avg Account Payable

Where as

Cost of Goods Sold $                     75,586

Avg Account Payable $                       8,383

 

Account payable Ratio $                     75,586

$                       8,383

 

Account payable Ratio                             9.02

 

Hence the Account payable turnover for 2008

 

5. StarrKnight Corporation’s accounts receivable turnover ratio for 2008 is (use average accounts receivable) _______.

A. 2.88

B. 15.43

C. 21.35

D. 29.53

E. 34.58

 

Solution: Computation of the Account Receivable turnover for 2008

 

Account Receivable RatioSales

Avg Account Receivable

Where as

Sales $                  113,260

Avg Account Receivable $                       5,306

 

Account Receivable Ratio $                  113,260

$                       5,306

 

Account Receivable Ratio                          21.35

 

 

Hence the Account Receivable turnover for 2008

 

6. The inventory turnover for the Lambkin Company was 8 times and its days’ sales in receivables were 55. The average payables deferral period (or turnover) was 7.5. What is the cash cycle for Lambkin given a 365-day year?

A. 51.96 days

B. 58.04 days

C. 115.00 days

D. 149.29 days

E. 164.37 days

 

Solution: Computation of the Cash Cycle

 

Formula as:

 

Cash Conversion Cycle = Days inventory outstanding + Days Sales outstanding – Days Payable outstanding

 

Cash Conversion Cycle = 365/8+ 55- 365/7.5

 

Cash Conversion Cycle = 45.625+ 55- 48.66667

Cash Conversion Cycle = 51.96

Hence the Cash Conversion Cycle is 51.96 Days

 

7. In a typical month, the Jeremy Corporation receives 80 checks totaling $156,000. There are delayed four days on average. What is the average daily float?

A. $22,286

B. $20,800

C. $18,000

D. $20,129

E. 19,899

 

Solution: Computation of the Average Daily Float

 

If total collection for a month is 156000, then it will be 156000/30*4 =20800

 

 

 

 

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