**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 D_{1}

= $2.00, g (which is constant) = 6%, and P_{0} = $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 (D_{1}

= $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 (k_{s}) 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 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.

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 (D_{1}) 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. r_{d}

> r_{e} > WACC.

b. r_{e}

> r_{d} > WACC.

c. WACC

> r_{e} > r_{d}.

d. r_{e}

> WACC > r_{d}.

__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.