Question: A stock has a beta of 1.

> A reconciliation schedules is a required disclosure in the government wide financial statements. What are the purpose and content of these reconciliation schedules?

> The following information relates to Dane City during its fiscal year ended December 31, 20X2: 1. On October 31, 20X2, to finance the construction of a city hall annex, Dane issued 8 percent, 10-year general obligation bonds at their face value of $60

> What are component units of a government, and how are they reported on the governmentwide financial statements?

> Donated medicines that a hospital normally would purchase should be recorded at fair value and should be credited directly to a. Unrestricted revenue. b. Expense of medicines. c. Fund balance. d. Deferred revenue

> The following information relates to Vane City during the year ended December 31, 20X8: 1. On October 31, 20X8, to finance the construction of a city hall annex, Vane issued 8 percent, 10-year general obligation bonds at their face value of $800,000.

> During the fiscal year ended June 30, 20X3, West City Council authorized construction of a new city hall building and the sale of serial bonds to finance the construction. The following transactions related to financing and constructing the city hall occ

> The town of Papillion has assigned you to examine its June 30, 20X1, balance sheet. You are the first CPA to be engaged by the town, and you find that acceptable methods of municipal accounting have not been employed. The town clerk stated that the books

> Olivia Village was recently incorporated and began financial operations on July 1, 20X2, the beginning of its fiscal year. The following transactions occurred during this first fiscal year, July 1, 20X2, to June 30, 20X3: 1. The village council adopted

> On June 30, 20X2, the end of the fiscal year, the Wadsworth Park District prepared the following trial balance for the general fund: An examination of the records disclosed the following information: 1. The recorded estimate of losses for the current

> Dawnes has just been elected treasurer of the local professional association of registered nurses. The association provides public health messages for the community as well as services for members. Dawnes is now preparing financial statements for the yea

> How are contributions to governmental funds as well as special or extraordinary items reported on the governmental funds’ statement of revenues, expenditures, and changes in fund balance?

> Bellevue City’s printing shop had the following trial balance on January 1, 20X2: Additional Information for 20X2: 1. During 20X2, the printing shop acquired supplies for $96,000, furniture for $1,500, and a copier for $3,200. 2. P

> Hospitals, voluntary health and welfare organizations, and other not-for-profit organizations often rely heavily on donations of volunteers’ time and equipment, supplies, or other assets. Required: a. Specify the criteria to be used to determine

> During 20X8, the following transfers and transactions between funds took place in the City of Matthew. 1. On March 1, a $12,000 transfer was made from the general fund to establish a building maintenance internal service fund. Matthew uses transfer acco

> The funds of Lake City include a debt service fund, a capital projects fund, and an internal service fund. Required: a. Explain the use of capital projects funds. Include what they account for, the basis of accounting used, unusual entries and acc

> The BBB Wise Giving Alliance is widely known for presenting profiles of nationally soliciting charitable organizations. The BBB Wise Giving Alliance website provides information to donors and to assist charities to operate responsibly. Required:

> Augusta has a municipal water and gas utility district (MUD). The trial balance on January 1, 20X1, follows: Additional Information for 20X1: 1. Charges to customers for water and gas were $420,000; collections were $432,000. 2. A loan of $30,000

> Answer the following questions by reading the most recent annual report of the University of Notre Dame that can be accessed by going to www.nd.edu. a. For the most recent year, how much cash did donors contribute for the acquisition of buildings an

> The City of Waterman established a debt service fund to account for the financial resources used to service the bonds issued to finance the ramp (see Exercise 18-6). The 10 percent, $150,000 bond issue was sold at 104.0 on January 1, 20X2. It is a 10-yea

> The Governmental Accounting Standards Board places exposure drafts (EDs) of proposed future standards on its website. These exposure drafts provide an early view of the GASB’s consensus viewpoints on a project. Accountants wishing to remain current in go

> The City of Waterman established a capital projects fund for the construction of an access ramp from the parking garage to the city’s office building to be used by individuals with disabilities. The estimated cost of the ramp is $200,000. On January 1, 2

> The Statements of Governmental Accounting Standards are the final step in the GASB’s decision making process. Standard setting has a number of specific steps with open and thorough study of the issues and public participation and input encouraged through

> At June 30, 20X7, what total assets amount would appear on the internal service fund balance sheet? a. $700,000 b. $710,000 c. $713,000 d. $708,000

> For the year ended June 30, 20X7, what was the income of Westbury’s internal service fund? a. $13,000 b. $6,000 c. $3,000 d. $10,000.

> For the year ended June 30, 20X7, the trust fund should report the $75,000 spent to support local artists as a a. Deduction. b. Contra contribution. c. Transfer out. d. Direct adjustment from fund balance.

> The accounting system of Barb City is organized and operated on a fund basis. Among the types of funds used are a general fund, a special revenue fund, and an enterprise fund. Required: a. The accounting system of Barb City is organized and operat

> Union Local School District has bonds outstanding with a coupon rate of 3.7 percent paid semiannually and 16 years to maturity. The yield to maturity on these bonds is 3.9 percent, and the bonds have a par value of $5,000. What is the dollar price of the

> A put option and a call option with an exercise price of $55 expire in two months and sell for $2.65 and $5.32, respectively. If the stock is currently priced at $57.30, what is the annual continuously compounded rate of interest?

> Yan Yan Corp. has a $2,000 par value bond outstanding with a coupon rate of 4.9 percent paid semiannually and 13 years to maturity. The yield to maturity of the bond is 3.8 percent. What is the dollar price of the bond?

> A put option and a call option with an exercise price of $85 and three months to expiration sell for $6.18 and $5.09, respectively. If the risk-free rate is 4.8 percent per year, compounded continuously, what is the current stock price?

> Gruber Corp. pays a constant $9 dividend on its stock. The company will maintain this dividend for the next 13 years and will then cease paying dividends forever. If the required return on this stock is 9.5 percent, what is the current share price?

> A put option that expires in six months with an exercise price of $75 sells for $4.89. The stock is currently priced at $72, and the risk-free rate is 3.6 percent per year, compounded continuously. What is the price of a call option with the same exercis

> Miller Manufacturing has a target debt–equity ratio of .55. Its cost of equity is 12.5 percent, and its cost of debt is 7 percent. If the tax rate is 35 percent, what is the company’s WACC?

> A stock is currently selling for $47 per share. A call option with an exercise price of $50 sells for $3.80 and expires in three months. If the risk-free rate of interest is 2.6 percent per year, compounded continuously, what is the price of a put option

> Siblings, Inc., is expected to maintain a constant 5.7 percent growth rate in its dividends, indefinitely. If the company has a dividend yield of 4.6 percent, what is the required return on the company’s stock?

> What was the arithmetic average annual return on large-company stocks from 1926 through 2014? a. In nominal terms? b. In real terms?

> Mullineaux Corporation has a target capital structure of 70 percent common stock and 30 percent debt. Its cost of equity is 11.5 percent, and the cost of debt is 5.9 percent. The relevant tax rate is 35 percent. What is the company’s WACC?

> Shiller Corporation will pay a $2.75 per share dividend next year. The company pledges to increase its dividend by 5 percent per year, indefinitely. If you require a return of 11 percent on your investment, how much will you pay for the company’s stock t

> You own a portfolio that is 20 percent invested in Stock X, 45 percent in Stock Y, and 35 percent in Stock Z. The expected returns on these three stocks are 11 percent, 17 percent, and 14 percent, respectively. What is the expected return on the portfoli

> A researcher has determined that a two-factor model is appropriate to determine the return on a stock. The factors are the percentage change in GNP and an interest rate. GNP is expected to grow by 3.6 percent, and the interest rate is expected to be 3.1

> Suppose the returns on large-company stocks are normally distributed. Based on the historical record, use the NORMDIST function in Excel ® to determine the probability that in any given year you will lose money by investing in common stock.

> Using information from the previous chapter about capital market history, determine the return on a portfolio that is equally invested in large-company stocks and long-term government bonds. What is the return on a portfolio that is equally invested in s

> What is the historical real return on long-term government bonds? On long-term corporate bonds?

> A call option has an exercise price of $80 and matures in six months. The current stock price is $84, and the risk-free rate is 5 percent per year, compounded continuously. What is the price of the call if the standard deviation of the stock is 0 percent

> A stock has an expected return of 11.2 percent, a beta of 1.15, and the expected return on the market is 10.4 percent. What must the risk-free rate be?

> A stock has an expected return of 13.4 percent, its beta is 1.20, and the risk-free rate is 4.4 percent. What must the expected return on the market be?

> Bruce & Co. expects its EBIT to be $145,000 every year forever. The company can borrow at 8 percent. The company currently has no debt, and its cost of equity is 14 percent. If the tax rate is 35 percent, what is the value of the company? What will the v

> Say you own an asset that had a total return last year of 11.6 percent. If the inflation rate last year was 5.3 percent, what was your real return?

> An investment offers a total return of 13 percent over the coming year. Alan Wingspan thinks the total real return on this investment will be only 8 percent. What does Alan believe the inflation rate will be over the next year?

> Lee Ann, Inc., has declared a $7.50 per-share dividend. Suppose capital gains are not taxed, but dividends are taxed at 15 percent. New IRS regulations require that taxes be withheld when the dividend is paid. The company’s stock sells for $93 per share,

> Suppose the real rate is 2.4 percent and the inflation rate is 3.7 percent. What rate would you expect to see on a Treasury bill?

> Scarlett Corp. uses no debt. The weighted average cost of capital is 8.4 percent. If the current market value of the equity is $43 million and there are no taxes, what is EBIT?

> The Dybvig Corporation’s common stock has a beta of 1.17. If the risk-free rate is 3.8 percent and the expected return on the market is 11 percent, what is Dybvig’s cost of equity capital?

> In March 2014, BMW announced plans to spend $1 billion to expand production at its South Carolina plant. The plant produced the second-generation BMW X3 as well as the company’s X5 and X6 models. The new investment would allow BMW to build the new, large

> Suppose a company has a preferred stock issue and a common stock issue. Both have just paid a $2 dividend. Which do you think will have a higher price, a share of the preferred or a share of the common?

> Look at Table 10.1 and Figure 10.7(Given Below) in the text. When were T-bill rates at their highest over the period from 1926 through 2014? Why do you think they were so high during this period? What relationship underlies your answer? Long-Term Go

> Your company owns a vacant lot in a suburban area. What is the advantage of waiting to develop the lot?

> You notice that shares of stock in the Patel Corporation are going for $50 per share. Call options with an exercise price of $35 per share are selling for $10. What’s wrong here? Describe how you can take advantage of this mispricing if the option expire

> Zipcar, the car sharing company, went public in April 2011. Assisted by the investment bank Goldman Sachs, Zipcar sold 9.68 million shares at $18 each, thereby raising a total of $174.24 million. By the end of the first day of trading, the stock had zipp

> Some corporations, like one British company that offers its large shareholders free crematorium use, pay dividends in kind (i.e., offer their services to shareholders at below-market cost). Should mutual funds invest in stocks that pay these dividends in

> A stock market analyst is able to identify mispriced stocks by comparing the average price for the last 10 days to the average price for the last 60 days. If this is true, what do you know about the market?

> What are the differences between a k-factor model and the market model?

> What are the portfolio weights for a portfolio that has 165 shares of Stock A that sell for $43 per share and 120 shares of Stock B that sell for $74 per share?

> We have seen that over long periods stock investments have tended to substantially outperform bond investments. However, it is not at all uncommon to observe investors with long horizons holding their investments entirely in bonds. Are such investors irr

> If a portfolio has a positive investment in every asset, can the standard deviation on the portfolio be less than that on every asset in the portfolio? What about the portfolio beta?

> Vital Silence, Inc., has a project with the following cash flows: The company evaluates all projects by applying the IRR rule. If the appropriate interest rate is 9 percent, should the company accept the project? Year Cash Flows ($) -$24,000 9,700

> The balance sheet for Levy Corp. is shown here in market value terms. There are 14,000 shares of stock outstanding. The company has declared a dividend of $1.60 per share. The stock goes ex dividend tomorrow. Ignoring any tax effects, what is the stock

> North Pole Fishing Equipment Corporation and South Pole Fishing Equipment Corporation would have identical equity betas of 1.10 if both were all equity financed. The market value information for each company is shown here: The expected return on the ma

> Edwards Construction currently has debt outstanding with a market value of $75,000 and a cost of 9 percent. The company has EBIT of $6,750 that is expected to continue in perpetuity. Assume there are no taxes. a. What is the value of the company’s equity

> In Problem 4, use MM Proposition I to find the price per share of equity under each of the two proposed plans. What is the value of the firm? Problem 4: Franklin Corporation is comparing two different capital structures, an all-equity plan (Plan I) and

> Kiedis, Corp., has interest-bearing debt with a market value of $65 million. The company also has 2 million shares that sell for $25 per share. What is the debt–equity ratio for this company based on market values?

> Suppose stock returns can be explained by a two-factor model. The firm-specific risks for all stocks are independent. The following table shows the information for two diversified portfolios: If the risk-free rate is 4 percent, what are the risk premiu

> Based on the following information, calculate the expected return and standard deviation for the two stocks: Probability of State of Economy State of Rate of Return if State Occurs Economy Stock A Stock B Recession .30 .06 -.20 Normal .55 .07 .13 Boo

> Even though most corporate bonds in the United States make coupon payments semiannually, bonds issued elsewhere often have annual coupon payments. Suppose a German company issues a bond with a par value of €1,000, 15 years to maturity, and a coupon rate

> With regard to bid and ask prices on a Treasury bond, is it possible for the bid price to be higher? Why or why not?

> Suppose a stock had an initial price of $64 per share, paid a dividend of $1.20 per share during the year, and had an ending share price of $73. Compute the percentage total return.

> Your company is deciding whether to invest in a new machine. The new machine will increase cash flow by $530,000 per year. You believe the technology used in the machine has a 10-year life; in other words, no matter when you purchase the machine, it will

> In the previous problem, suppose the fixed asset actually falls into the three-year MACRS class. All the other facts are the same. What is the project’s Year 1 net cash flow now? Year 2? Year 3? What is the new NPV?

> A warrant gives its owner the right to purchase three shares of common stock at an exercise price of $64 per share. The current market price of the stock is $68. What is the minimum value of the warrant?

> Jet Black is an international conglomerate with a petroleum division and is currently competing in an auction to win the right to drill for crude oil on a large piece of land in one year. The current market price of crude oil is $103 per barrel, and the

> The price of Tara, Inc., stock will be either $50 or $70 at the end of the year. Call options are available with one year to expiration. T-bills currently yield 5 percent. a. Suppose the current price of the stock is $62. What is the value of the call op

> You work for a nuclear research laboratory that is contemplating leasing a diagnostic scanner (leasing is a common practice with expensive, high-tech equipment). The scanner costs $5,800,000, and it would be depreciated straight-line to zero over four ye

> The St. Anger Corporation needs to raise $55 million to finance its expansion into new markets. The company will sell new shares of equity via a general cash offering to raise the needed funds. If the offer price is $32 per share and the company’s underw

> What is dilution, and why does it occur when warrants are exercised?

> Discuss the accounting criteria for determining whether a lease must be reported on the balance sheet. In each case give a rationale for the criterion.

> An investment project has annual cash inflows of $5,000, $5,500, $6,000, and $7,000, and a discount rate of 12 percent. What is the discounted payback period for these cash flows if the initial cost is $8,000? What if the initial cost is $12,000? What if

> What are the two types of risk that are measured by a levered beta?

> The following figures present the results of four cumulative abnormal returns (CAR) studies. Indicate whether the results of each study support, reject, or are inconclusive about the semistrong form of the efficient market hypothesis. In each figure, Tim

> Shanken Corp. issued a 30-year, 5.9 percent semiannual bond 6 years ago. The bond currently sells for 108 percent of its face value. The company’s tax rate is 35 percent. a. What is the pretax cost of debt? b. What is the aftertax cost of debt? c. Which

> Suppose a factor model is appropriate to describe the returns on a stock. The current expected return on the stock is 10.5 percent. Information about those factors is presented in the following chart: a. What is the systematic risk of the stock return?

> Rework Problems 1 and 2 assuming the ending share price is $57.

> Watters Umbrella Corp. issued 15-year bonds 2 years ago at a coupon rate of 5.9 percent. The bonds make semiannual payments. If these bonds currently sell for 105 percent of par value, what is the YTM?

> In each of the following cases, find the unknown variable. Ignore taxes. Accounting Break-Even Unit Variable Unit Price Cost Fixed Costs Depreciation 86,300 $ 42 $30 $ 820,000 143,806 81 2,750,000 $1,150,000 7,835 97 235,000 105,000

> Down Under Boomerang, Inc., is considering a new three- year expansion project that requires an initial fixed asset investment of $1.65 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which it will b

> Eckely, Inc., recently issued bonds with a conversion ratio of 14.5. If the stock price at the time of the bond issue was $53.16, what was the conversion premium?

> Gasworks, Inc., has been approached to sell up to 5 million gallons of gasoline in three months at a price of $2.65 per gallon. Gasoline is currently selling on the wholesale market at $2.34 per gallon and has a standard deviation of 62 percent. If the r

> Use the option quote information shown here to answer the questions that follow. The stock is currently selling for $114. a. Suppose you buy 10 contracts of the February 110 call option. How much will you pay, ignoring commissions? b. In part (a), supp

> What is the price of a 15-year, zero coupon bond paying $1,000 at maturity, assuming semiannual compounding, if the YTM is: a. 6 percent? b. 8 percent? c. 10 percent?

> What is a call option? A put option? Under what circumstances might you want to buy each? Which one has greater potential profit? Why?

> You work for a nuclear research laboratory that is contemplating leasing a diagnostic scanner (leasing is a common practice with expensive, high-tech equipment). The scanner costs $5,800,000, and it would be depreciated straight-line to zero over four ye