Finance Multiple Choice Questions

1.(TCO D) A stock just paid a
dividend of D0 = $1.50. The required rate of return is rs
= 10.1%, and the constant growth rate is g = 4.0%. What is the current
stock price? (Points : 10)

$23.11
$23.70
$24.31
$24.93
$25.57

2.(TCO D) If D1 = $1.25, g
(which is constant) = 5.5%, and P0 = $44, what is the stock’s
expected total return for the coming year? (Points : 10)

7.54%
7.73%
7.93%
8.13%
8.34%

3.(TCO D) Molen Inc. has an
outstanding issue of perpetual preferred stock with an annual dividend of
$7.50 per share. If the required return on this preferred stock is 6.5%, at
what price should the preferred stock sell? (Points : 10)

$104.27
$106.95
$109.69
$112.50
$115.38

4.(TCO E) Which of the following is NOT
a capital component when calculating the weighted average cost of capital
(WACC) for use in capital budgeting? (Points : 10)

Long-term
debt
Accounts payable
Retained earnings
Common stock
Preferred stock

5.(TCO E) The MacMillen Company has
equal amounts of low-risk, average-risk, and high-risk projects. The firm’s
overall WACC is 12%. The CFO believes that this is the correct WACC for the
company’s average-risk projects, but that a lower rate should be used for
lower-risk projects and a higher rate for higher-risk projects. The CEO
disagrees, on the grounds that even though projects have different risks,
the WACC used to evaluate each project should be the same because the
company obtains capital for all projects from the same sources. If the
CEO’s position is accepted, what is likely to happen over time?(Points :
10)

The
company will take on too many high-risk projects and reject too many low-risk
projects.
The company will take on too many low-risk projects and reject too many high-risk
projects.
Things will generally even out over time, and, therefore, the firm’s risk
should remain constant over time.
The company’s overall WACC should decrease over time because its stock price
should be increasing.
The CEO’s recommendation would maximize the firm’s intrinsic value.

6.(TCO D) Scanlon Inc.’s CFO hired
you as a consultant to help her estimate the cost of capital. You have been
provided with the following data: rRF = 4.10%; RPM =
5.25%; and b = 1.30. Based on the CAPM approach, what is the cost of common
from retained earnings? (Points : 10)

9.67%
9.97%
10.28%
10.60%
10.93%

7.(TCO F) Cornell Enterprises is
considering a project that has the following cash flow and WACC data. What
is the project’s NPV? Note that a project’s expected NPV can be negative,
in which case it will be rejected.

WACC: 10.00%
Year 0 1 2 3
———————————————–
Cash flows -$1,050 $450 $460 $470 (Points : 10)

$
92.37
$ 96.99
$101.84
$106.93
$112.28

8.(TCO F) Maxwell Feed & Seed is
considering a project that has the following cash flow data. What is the
project’s IRR? Note that a project’s IRR can be less than the WACC (and
even negative), in which case it will be rejected.

Year 0 1 2 3 4 5
————————————————————————————-
Cash flows -$9,500 $2,000 $2,025 $2,050 $2,075 $2,100 (Points : 10)

2.08%
2.31%
2.57%
2.82%
3.10%

9.(TCO F) Fernando Designs is
considering a project that has the following cash flow and WACC data. What
is the project’s discounted payback?

WACC: 10.00%
Year 0 1 2 3
———————————————
Cash flows -$900 $500 $500 $500 (Points : 10)

1.88
years
2.09 years
2.29 years
2.52 years
2.78 years

10.(TCO H) TexMex Food Company is
considering a new salsa whose data are shown below. The equipment to be used
would be depreciated by the straight-line method over its three-year life and
would have a zero salvage value, and no new working capital would be
required. Revenues and other operating costs are expected to be constant over
the project’s three-year life. However, this project would compete with other
TexMex products and would reduce their pre-tax annual cash flows. What is the
project’s NPV? (Hint: Cash flows are constant in years 1-3.)

WACC
Pre-tax cash flow reduction for other products (cannibalization)
Investment cost (depreciable basis)
Straight-line deprec. rate
Sales revenues, each year for three years
Annual operating costs (excl. deprec.)
Tax rate

10.0%
$5,000
$80,000
33.333%
$67,500
$25,000
35.0%

a. $3,636
b. $3,828
c. $4,019
d. $4,220
e. $4,431