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FIN303 Exam-type questions For Final exam

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Question;FIN303;Exam-type questions;For Final exam;Chapter 9;1. Stock A has a required return of 10;percent. Its dividend is expected to;grow at a constant rate of 7 percent per year.;Stock B has a required return of 12 percent. Its dividend is expected to grow at a;constant rate of 9 percent per year.;Stock A has a price of $25 per share, while Stock B has a price of $40;per share. Which of the following;statements is most correct?;a. The two;stocks have the same dividend yield.;b. If the;stock market were efficient, these two stocks should have the same price.;c. If the;stock market were efficient, these two stocks should have the same expected;return.;d. Statements;a and c are correct.;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 paya 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;Chapter 10;7. Campbell Co. is trying to;estimate its weighted average cost of capital (WACC). Which of the following statements is most;correct?;a. The;after-tax cost of debt is generally cheaper than the after-tax cost of equity.;b. Since;retained earnings are readily available, the cost of retained earnings is;generally lower than the cost of debt.;c. The;after-tax cost of debt is generally more expensive than the before-tax cost of;debt.;d. Statements;a and c are correct.;8. Wyden;Brothers has no retained earnings. The;company uses the CAPM to calculate the cost of equity capital. The company?s capital structure consists of;common stock, preferred stock, and debt.;Which of the following events will reduce the company?s WACC?;a. A;reduction in the market risk premium.;b. An;increase in the flotation costs associated with issuing new common stock.;c. An;increase in the company?s beta.;d. An;increase in expected inflation.;9. Dick;Boe Enterprises, an all-equity firm, has a corpor?ate beta coefficient of;1.5. The financial manager is evaluating;a proj?ect 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 risk?ier 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 re?quired 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.;10. 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.;11. Billick Brothers is estimating its WACC. The company has collected the following;information;?;Its capital;structure consists of 40 percent debt and 60 percent common equity.;?;The company;has 20-year bonds outstanding with a 9 percent annual coupon that are trading;at par.;?;The company?s;tax rate is 40 percent.;?;The risk-free;rate is 5.5 percent.;?;The market;risk premium is 5 percent.;?;The stock?s;beta is 1.4.;What is the company?s WACC?;a. 9.71%;b. 9.66%;c. 8.31%;d. 11.18%;12. 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?;13. 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%;14. For a;typical firm, which of the following is correct? All rates are after taxes, and assume the;firm operates at its target capital structure. Note. d is for debt, e is for;equity;a. rd;re > WACC.;b. re;rd > WACC.;c. WACC;re > rd.;d. re;WACC > rd.;Chapter 11;15. Which;of the following statements is most correct?;a. The NPV;method assumes that cash flows will be reinvested at the cost of capital, while;the IRR method assumes reinvestment at the IRR.;b. The NPV;method assumes that cash flows will be reinvested at the risk-free rate, while;the IRR method assumes reinvestment at the IRR.;c. The NPV;method assumes that cash flows will be reinvested at the cost of capital, while;the IRR method assumes reinvestment at the risk-free rate.;d. The NPV;method does not consider the inflation premium.;16. A;major disadvantage of the payback period is that it;a. Is;useless as a risk indicator.;b. Ignores;cash flows beyond the payback period.;c. Does not;directly account for the time value of money.;d. Statements;b and c are correct.;17. Which;of the following statements is most correct?;a. If a;project?s internal rate of return (IRR) exceeds the cost of capital, then the;project?s net present value (NPV) must be positive.;b. If;Project A has a higher IRR than Project B, then Project A must also have a;higher NPV.;c. The IRR;calculation implicitly assumes that all cash flows are reinvested at a rate of;return equal to the cost of capital.;d. Statements;a and c are correct.;18. 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;19. 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;20. 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.;21. 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?;22. Assume;a project has normal cash flows. All;else equal, which of the following statements is CORRECT?;a. The;project?s IRR increases as the WACC declines.;b. The;project?s NPV increases as the WACC declines.;c. The;project?s MIRR is unaffected by changes in the WACC.;d. The;project?s regular payback increases as the WACC declines.;23. Which;of the following statements is CORRECT?;a. One;defect of the IRR method is that it does not take account of cash flows over a;project?s full life.;b. One;defect of the IRR method is that it does not take account of the time value of;money.;c. One;defect of the IRR method is that it does consider the time value of money.;d. One;defect of the IRR method is that it assumes that the cash flows to be received;from a project can be reinvested at the IRR itself, and that assumption is;often not valid.

 

Paper#51365 | Written in 18-Jul-2015

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