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Finance Multiple Choice Questions




Question;2. If D1 = $2.00, g (which is constant) =;6%, and P0 = $40, what is the stock?s expected capital gains yield for the;coming year?;a. 5.2%;b. 5.4%;c. 5.6%;d. 6.0%;3. The Lashgari Company is expected to pay a;dividend of $1 per share at the end of the year, and that dividend is expected;to grow at a constant rate of 5% per year in the future. The company's beta is;1.2, the market risk premium is 5%, and the risk-free rate is 3%. What is the;company's current stock price?;a. $15.00;b. $20.00;c. $25.00;d. $30.00;4. McKenna Motors is expected to pay a $1.00;per-share dividend at the end of the year (D1 = $1.00). The stock sells for $20;per share and its required rate of return is 11 percent. The dividend is;expected to grow at a constant rate, g, forever. What is the growth rate, g;for this stock?;a. 5%;b. 6%;c. 7%;d. 8%;5. The last dividend paid by Klein Company was;$1.00. Klein?s growth rate is expected to be a constant 5 percent for 2 years;after which dividends are expected to grow at a rate of 10 percent forever.;Klein?s required rate of return on equity (ks) is 12 percent. What is the;current price of Klein?s common stock?;a. $21.00;b. $33.33;c. $42.25;d. $50.16;6. You must estimate the intrinsic value of;Gallovits Technologies? stock. Gallovits?s end-of-year free cash flow (FCF) is;expected to be $25 million, and it is expected to grow at a constant rate of;8.5% a year thereafter. The company?s WACC is 11%. Gallovits has $200 million;of long-term debt plus preferred stock, and there are 30 million shares of;common stock outstanding. What is Gallovits' estimated intrinsic value per;share of common stock?;a. $22.67;b. $24.00;c. $25.33;d. $26.67;12. Dick Boe Enterprises, an all-equity firm, has;a corporate beta coefficient of 1.5. The financial manager is evaluating a;project with an expected return of 21 percent, before any risk adjustment. The;risk-free rate is 10 percent, and the required rate of return on the market is;16 percent. The project being evaluated is riskier than Boe?s average project;in terms of both beta risk and total risk. Which of the following statements is;most correct?;a. The project should be accepted since its expected;return (before risk adjustment) is greater than its required return.;b. The project should be rejected since its;expected return (before risk adjustment) is less than its required return.;c. The accept/reject decision depends on the;risk-adjustment policy of the firm. If the firm?s policy were to reduce a;riskier-than-average project?s expected return by 1 percentage point, then the;project should be accepted.;d. Riskier-than-average projects should have their;expected returns increased to reflect their added riskiness. Clearly, this;would make the project acceptable regardless of the amount of the adjustment.;13. Conglomerate Inc. consists of 2 divisions of;equal size, and Conglomerate is 100 percent equity financed. Division A?s cost;of equity capital is 9.8 percent, while Division B?s cost of equity capital is;14 percent. Conglomerate?s composite WACC is 11.9 percent. Assume that all;Division A projects have the same risk and that all Division B projects have;the same risk. However, the projects in Division A are not the same risk as;those in Division B. Which of the following projects should Conglomerate accept?;a. Division A project with an 11 percent return.;b. Division B project with a 12 percent return.;c. Division B project with a 13 percent return.;d. Statements a and c are correct.;15. 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 12.75%. The firm will not be;issuing any new stock. What is its WACC?;a. 8.98%;b. 9.26%;c. 9.54%;d. 9.83%;16. Flaherty Electric has a capital structure that;consists of 70 percent equity and 30 percent debt. The company?s long-term;bonds have a before-tax yield to maturity of 8.4 percent. The company uses the;DCF approach to determine the cost of equity. Flaherty?s common stock currently;trades at $40.5 per share. The year-end dividend (D1) is expected to be $2.50 per;share, and the dividend is expected to grow forever at a constant rate of 7;percent a year. The company estimates that it will have to issue new common;stock to help fund this year?s projects. The company?s tax rate is 40 percent.;What is the company?s weighted average cost of capital, WACC?;a. 10.73%;b. 10.30%;c. 11.31%;d. 7.48%;17. Hamilton Company?s 8 percent coupon rate;quarterly payment, $1,000 par value bond, which matures in 20 years, currently;sells at a price of $686.86. The company?s tax rate is 40 percent. What is the;firm?s component cost of debt for purposes of calculating the WACC?;a. 3.05%;b. 7.32%;c. 7.36%;d. 12.20%;22. The Seattle Corporation has been presented;with an investment opportunity that will yield cash flows of $30,000 per year;in Years 1 through 4, $35,000 per year in Years 5 through 9, and $40,000 in;Year 10. This investment will cost the firm $150,000 today, and the firm?s cost;of capital is 10 percent. Assume cash flows occur evenly during the year;1/365th each day. What is the payback period for this investment?;a. 5.23 years;b. 4.86 years;c. 4.00 years;d. 6.12 years;22. Coughlin Motors is considering a project with;the following expected cash flows;Project;Year Cash Flow;0 -$700 million;1 200 million;2 370 million;3 225 million;4 700 million;The project?s WACC is 10 percent. What is the;project?s discounted payback?;a. 3.15 years;b. 4.09 years;c. 1.62 years;d. 3.09 years;The PV of the outflows is -$700 million. To find;the discounted payback you need to keep adding cash flows until the cumulative;PVs of the cash inflows equal the PV of the outflow;Discounted;Year Cash Flow Cash Flow @ 10% Cumulative PV;0 -$700 million -$700.0000 -$700.0000;1 200 million 181.8182 -518.1818;2 370 million 305.7851 -212.3967;3 225 million 169.0458 -43.3509;4 700 million 478.1094 434.7585;The payback occurs somewhere in Year 4. To find;out exactly where, we calculate $43.3509/$478.1094 = 0.0907 through the year.;Therefore, the discounted payback is 3.091 years.;23. As the director of capital budgeting for;Denver Corporation, you are evaluating two mutually exclusive projects with the;following net cash flows;Project X Project Z;Year Cash Flow Cash Flow;0 -$100,000 -$100,000;1 50,000 10,000;2 40,000 30,000;3 30,000 40,000;4 10,000 60,000;If Denver?s cost of capital is 15 percent, which;project would you choose?;a. Neither project.;b. Project X, since it has the higher IRR.;c. Project Z, since it has the higher NPV.;d. Project X, since it has the higher NPV.;24. Your company is choosing between the following;non-repeatable, equally risky, mutually exclusive projects with the cash flows;shown below. Your cost of capital is 10 percent. How much value will your firm;sacrifice if it selects the project with the higher IRR?;k = 10%;k = 10%;-1,000 500 500 500;k = 10%;k = 10%;-2,000 668.76 668.76 668.76 668.76 668.76;a. $243.43;b. $291.70;c. $332.50;d. $481.15


Paper#49632 | Written in 18-Jul-2015

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