If the company is in equilibrium and its expected and required rate of return is 15%

Question 1

A stock is expected to pay a
year-end dividend of $2.00, i.e., D1 = $2.00. The dividend is expected to
decline at a rate of 5% a year forever (g = ?5%). If the company is in
equilibrium and its expected and required rate of return is 15%, which of
the following statements is CORRECT?

The constant growth model cannot
be used because the growth rate is negative.

The company’s dividend yield 5
years from now is expected to be 10%.

The company’s expected stock price
at the beginning of next year is $9.50.

The company’s expected capital
gains yield is 5%.

The company’s current stock price
is $20.

1 points
Question
2

Which is the best measure of
risk for a single asset held in isolation, and which is the best measure
for an asset held in a diversified portfolio?

Beta; beta.

Variance; correlation coefficient.

Beta; variance.

Coefficient of variation; beta.

Standard deviation; correlation
coefficient.

1 points
Question
3

Assume a project has normal
cash flows. All else equal, which of the following statements is CORRECT?

A project’s NPV increases as the
WACC declines.

A project’s discounted payback
increases as the WACC declines.

A project’s MIRR is unaffected by
changes in the WACC.

A project’s IRR increases as the
WACC declines.

A project’s regular payback
increases as the WACC declines.

1 points
Question
4

Which of the following risk
types can be diversified by adding stocks to a portfolio?

Systematic Risk.

Default risk.

Non diversifiable risks.

Unique risks.

Market Risk.

1 points
Question
5

Firms that make investment
decisions based upon the payback rule may be biased towards rejecting
projects:

with early cash inflows.

With short lives.

With long lives.

Those with negative NPVs.

None of above.

1 points
Question
6

When a project’s internal rate
of return equals its opportunity cost of capital, then:

The net present value will be
negative.

The net present value is a linear
combination of MIRR and IRR.

The net present value will be
positive.

The project has no cash inflows.

The net present value will be
zero.

1 points
Question
7

When hard rationing exists,
projects may be evaluated by the use of ?

Payback period.

borrowing rather than lending
projects.

Modified payback period.

A profitability index.

MIRR.

1 points
Question
8

Because of its age, your car
costs $3000 annually in maintenence expense. You could replace it with a newer
vehicle costing $6000. Both vehicles would be expected to last 4 more
years. If your opportunity cost is 10% what should be the maximum annual
maintenance expense be on the newer vehicle to justify the purchase ?
(Hint : EAC on the new vehicle should not exceed $3000)

$1250.34.

$1107.18.

$1893.88.

$3000.00.

$1415.51.

1 points
Question
9

Taggart Inc.’s stock has a 50%
chance of producing a 39% return, a 30% chance of producing a 10% return,
and a 20% chance of producing a -28% return. What is the firm’s expected
rate of return?

16.90%

15.55%

16.22%

16.06%

18.42%

1 points
Question
10

Tom O’Brien has a 2-stock
portfolio with a total value of $100,000. $35,000 is invested in Stock A
with a beta of 0.75 and the remainder is invested in Stock B with a beta
of 1.42. What is his portfolio’s beta?

0.89

1.19

1.41

1.29

1.45

1 points
Question
11

Assume that you hold a
well-diversified portfolio that has an expected return of 11.0% and a beta
of 1.20. You are in the process of buying 1,000 shares of Alpha Corp at
$10 a share and adding it to your portfolio. Alpha has an expected return
of 22.5% and a beta of 1.80. The total value of your current portfolio is
$90,000. What will the expected return and beta on the portfolio be after
the purchase of the Alpha stock?

14.82% and 1.25

12.15% and 1.26

13.49% and 1.11

11.18% and 1.06

10.69% and 1.03

1 points
Question
12

Cooley Company’s stock has a
beta of 1.20, the risk-free rate is 2.25%, and the market risk premium is
5.50%. What is the firm’s required rate of return?

9.38%

7.35%

6.73%

7.88%

8.85%

1 points
Question
13

Roenfeld Corp believes the
following probability distribution exists for its stock. What is the
coefficient of variation on the company’s stock?

State of the Economy

Probability of State Occurring

Stock’s Expected Return

Boom

0.29

25%

Normal

0.50

15%

Recession

0.21

5%

0.4447

0.5114

0.4891

0.4002

0.3335

1 points
Question
14

You hold a diversified $100,000
portfolio consisting of 20 stocks with $5,000 invested in each. The
portfolio’s beta is 1.12. You plan to sell a stock with b = 0.90 and use
the proceeds to buy a new stock with b = 1.25. What will the portfolio’s
new beta be?

0.978

1.160

1.172

1.138

1.194

1 points
Question
15

Returns for the Dayton Company
over the last 3 years are shown below. What’s the standard deviation of
the firm’s returns? (Hint: This is a sample, not a complete population, so
the sample standard deviation formula should be used.)

Year

Return

2011

21.00%

2010

-12.50%

2009

17.50%

14.18%

18.41%

17.49%

20.99%

17.31%

1 points
Question
16

A stock is expected to pay a
dividend of $0.75 at the end of the year. The required rate of return is r
= 10.5%, and the expected constant growth rate is g = 7.2%. What is the
stock’s current price?

$25.68

$22.73

$27.50

$17.95

$22.05

1 points
Question
17

If D = $2.25, g (which is
constant) = 3.5%, and P = $60, what is the stock’s expected dividend yield
for the coming year?

3.80%

4.08%

4.58%

4.50%

3.88%

1 points
Question
18

Bay Manufacturing is expected
to pay a dividend of $1.25 per share at the end of the year (D = $1.25).
The stock sells for $21.50 per share, and its required rate of return is
10.5%. The dividend is expected to grow at some constant rate, g, forever.
What is the equilibrium expected growth rate?

5.34%

4.69%

5.44%

5.86%

5.01%

1 points
Question
19

Molen Inc. has an outstanding
issue of perpetual preferred stock with an annual dividend of $8.00 per
share. If the required return on this preferred stock is 6.5%, at what
price should the stock sell?

$123.08

$99.69

$121.85

$148.92

$100.92

1 points
Question
20

The Francis Company is expected
to pay a dividend of D = $1.25 per share at the end of the year, and that dividend
is expected to grow at a constant rate of 6.00% per year in the future.
The company’s beta is 1.15, the market risk premium is 5.50%, and the
risk-free rate is 4.00%. What is the company’s current stock price?

$24.86

$30.35

$28.90

$32.95

$28.61

1 points
Question
21

Nachman Industries just paid a
dividend of D0 = $1.25. Analysts expect the company’s dividend to grow by
30% this year, by 10% in Year 2, and at a constant rate of 5% in Year 3
and thereafter. The required return on this low-risk stock is 9.00%. What
is the best estimate of the stock’s current market value?

$34.84

$35.69

$51.41

$37.81

$42.49

1 points
Question
22

A company’s perpetual preferred
stock currently sells for $125.00 per share, and it pays an $8.00 annual
dividend. If the company were to sell a new preferred issue, it would
incur a flotation cost of 5.00% of the issue price. What is the firm’s
cost of preferred stock?

5.12%

5.46%

7.28%

6.74%

7.61%

1 points
Question
23

You were hired as a consultant
to Giambono Company, whose target capital structure is 40% debt, 15%
preferred, and 45% common equity. The after-tax cost of debt is 6.00%, the
cost of preferred is 7.50%, and the cost of retained earnings is 16.75%.
The firm will not be issuing any new stock. What is its WACC?

10.84%

11.73%

13.72%

11.06%

13.61%

1 points
Question
24

Anderson Systems is considering
a project that has the following cash flow and WACC data. What is the
project’s NPV? Note that if a project’s projected NPV is negative, it
should be rejected.

WACC:

8.50%

Year

0

1

2

3

Cash flows

-$1,000

$500

$500

$500

$337.95

$277.01

$324.10

$335.18

$243.77

1 points
Question
25

Daves Inc. recently hired you
as a consultant to estimate the company’s WACC. You have obtained the
following information. (1) The firm’s noncallable bonds mature in 20
years, have an 8.00% annual coupon, a par value of $1,000, and a market
price of $1,250.00. (2) The company’s tax rate is 40%. (3) The risk-free
rate is 4.50%, the market risk premium is 5.50%, and the stock’s beta is
1.20. (4) The target capital structure consists of 35% debt and the
balance is common equity. The firm uses the CAPM to estimate the cost of
equity, and it does not expect to issue any new common stock. What is its
WACC?

8.27%

9.46%

8.44%

8.19%

7.94%

1 points
Question
26

Warr Company is considering a
project that has the following cash flow data. What is the project’s IRR?
Note that a project’s projected IRR can be less than the WACC or negative,
in both cases it will be rejected.

Year

0

1

2

3

4

Cash flows

-$1,150

$400

$400

$400

$400

14.66%

15.09%

15.83%

12.90%

12.31%

1 points
Question
27

Taggart Inc. is considering a
project that has the following cash flow data. What is the project’s
payback?

Year

0

1

2

3

Cash flows

-$800

$500

$500

$500

1.26years

1.63years

1.22years

1.70years

1.60 years

1 points
Question
28

Ehrmann Data Systems is
considering a project that has the following cash flow and WACC data. What
is the project’s MIRR? Note that a project’s projected MIRR can be less
than the WACC (and even negative), in which case it will be rejected.

WACC:

10.75%

Year

0

1

2

3

Cash flows

-$1,000

$450

$450

$450

10.86%

14.48%

15.49%

15.20%

12.45%

1 points
Question
29

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

-$650

$500

$500

$500

1.80years

1.47 years

1.69years

1.22years

1.52years

1 points
Question
30

Francis Inc.’s stock has a
required rate of return of 10.25%, and it sells for $35.00 per share. The
dividend is expected to grow at a constant rate of 6.00% per year. What is
the expected year-end dividend, D ?

$1.49

$1.12

$1.26

$1.71

$1.41