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Finance final exam 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#49943 | Written in 18-Jul-2015

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