**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 |
||

The company’s dividend yield 5 |
||

The company’s expected stock price |
||

The company’s expected capital |
||

The company’s current stock price |

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 |

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 |
||

A project’s discounted payback |
||

A project’s MIRR is unaffected by |
||

A project’s IRR increases as the |
||

A project’s regular payback |

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 |
||

The net present value is a linear combination |
||

The net present value will be |
||

The project has no cash inflows. |
||

The net present value will be |

1 points

**Question
7 **

- When hard rationing exists,

projects may be evaluated by the use of ?

Payback period. |
||

borrowing rather than lending |
||

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. $55,000 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?

1.18 |
||

0.79 |
||

1.05 |
||

1.31 |
||

0.99 |

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 1.60, the risk-free rate is 2.25%, and the market risk premium is

5.50%. What is the firm’s required rate of return?

9.83% |
||

10.39% |
||

11.05% |
||

9.28% |
||

13.81% |

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 |
0.11 |
25% |

Normal |
0.50 |
15% |

Recession |
0.39 |
5% |

0.6121 |
||

0.3992 |
||

0.6653 |
||

0.5322 |
||

0.6387 |

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 |
15.00% |

14.47% |
||

15.54% |
||

17.15% |
||

20.36% |
||

17.86% |

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 = 2.8%. What is the

stock’s current price?

$11.20 |
||

$11.88 |
||

$11.10 |
||

$12.08 |
||

$9.74 |

1 points

**Question
17 **

- If D = $2.25, g (which is

constant) = 3.5%, and P = $40, what is the stock’s expected dividend yield

for the coming year?

6.81% |
||

5.82% |
||

5.53% |
||

5.47% |
||

5.59% |

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 $34.50 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?

5.78% |
||

8.39% |
||

7.08% |
||

6.88% |
||

8.46% |

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 1.35, the market risk premium is 5.50%, and

the risk-free rate is 4.00%. What is the company’s current stock price?

$18.20 |
||

$28.80 |
||

$19.82 |
||

$20.97 |
||

$23.04 |

1 points

**Question
21 **

- Nachman Industries just paid a

dividend of D0 = $2.75. 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?

$93.47 |
||

$78.52 |
||

$108.43 |
||

$111.23 |
||

$97.21 |

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 16.50%.

The firm will not be issuing any new stock. What is its WACC?

8.87% |
||

12.15% |
||

13.25% |
||

8.32% |
||

10.95% |

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: |
11.75% |
|||

Year |
0 |
1 |
2 |
3 |

Cash flows |
-$1,000 |
$500 |
$500 |
$500 |

$206.09 |
||

$216.40 |
||

$179.30 |
||

$199.91 |
||

$204.03 |

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 $1,125.00. (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?

9.60% |
||

10.21% |
||

7.35% |
||

8.65% |
||

8.30% |

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 |
-$825 |
$400 |
$400 |
$400 |
$400 |

35.95% |
||

32.98% |
||

39.91% |
||

24.74% |
||

28.69% |

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 |
-$1,300 |
$500 |
$500 |
$500 |

2.60 years |
||

1.98 years |
||

2.76 years |
||

3.09 years |
||

2.73years |

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: |
13.50% |
|||

Year |
0 |
1 |
2 |
3 |

Cash flows |
-$1,000 |
$450 |
$450 |
$450 |

15.65% |
||

12.08% |
||

17.35% |
||

16.89% |
||

15.49% |

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 |
-$625 |
$500 |
$500 |
$500 |

1.30years |
||

1.41 years |
||

1.58years |
||

1.09years |
||

1.07years |

1 points

**Question
30 **

- Francis Inc.’s stock has a

required rate of return of 10.25%, and it sells for $70.00 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 ?

$3.12 |
||

$2.98 |
||

$2.23 |
||

$3.42 |
||

$2.83 |