FINANCE : 19 QUESTIONS MOSTLY ASKED IN EXAMINATIONS.

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QUESTIONS :

 

21.A bicycle manufacturer currently produces 356,000 units a year and expects output levels to remain steady in the future. It buys chains from an outside supplier at a price of $2.10 a chain. The plant manager believes that it would be cheaper to make these chains rather than buy them. Direct in-house production costs are estimated to be only $1.50 per chain. The necessary machinery would cost $290,000 and would be obsolete after 10 years. This investment could be depreciated to zero for tax purposed using a 10-year straight-line depreciation schedule. The plant manager estimates that the operation would require additional working capital of $40,000, but argues that this sum can be ignored since it is recoverable at the end of the 10 years. Expected proceeds from scrapping the machinery after 10 years are $21,750. If the company pays tax at a rate of 35% and the opportunity cost of capital is 15%, what is the net present value of the decision to produce the chains in-house instead of purchasing them from the supplier?

Project the annual free cash flows (FCF) of buying the chains.

The annual free cash flows for years 1 to 10 of buying the chains is $-482,940.

The annual free cash flows for years 1 to 10 of buying the chains is $-485,940.

The annual free cash flows for years 1 to 10 of buying the chains is $-486,940.

The annual free cash flows for years 1 to 10 of buying the chains is $-489,940.

22.The last four years of returns for a stock are as follows:

 

Year 1 Year 2 Year 3 Year 4
-3.9% +27.6% +11.5% +3.8%

 

Note: Notice that the average return and standard deviation must be entered in percentage format. The variance must be entered in decimal format. What is the standard deviation of the stock’s returns? (Round to two decimal places.)

The standard deviation is 13.99%.

The standard deviation is 14.79%.

The standard deviation is 14.99%.

The standard deviation is 13.79%.

23.You are considering a safe investment opportunity that requires a $920 investment today, and will pay $690 two years from now and another $640 five years from now. If you are choosing between this investment and putting your money in a safe bank account that pays an EAR of 5% per year for any horizon, can you make the decision by simply comparing this EAR with the IRR of the investment? Explain.

No, because the timing of the cashflows are different.

Yes, you can always compare IRRs of riskless projects, and an investment in the back is riskless.

No, this is like comparing the IRR of two projects.

Yes, because the EAR is the same at all horizons, so the two “projects” have the same riskiness, scale, and timing.

24.You are considering a safe investment opportunity that requires a $920 investment today, and will pay $690 two years from now and another $640 five years from now. What is the IRR of this investment?

The IRR of this investment is 8.65%.

The IRR of this investment is 6.92%.

The IRR of this investment is 22.29%.

The IRR of this investment is 11.74%.

25.A bicycle manufacturer currently produces 356,000 units a year and expects output levels to remain steady in the future. It buys chains from an outside supplier at a price of $2.10 a chain. The plant manager believes that it would be cheaper to make these chains rather than buy them. Direct in-house production costs are estimated to be only $1.50 per chain. The necessary machinery would cost $290,000 and would be obsolete after 10 years. This investment could be depreciated to zero for tax purposed using a 10-year straight-line depreciation schedule. The plant manager estimates that the operation would require additional working capital of $40,000 but argues that this sum can be ignored since it is recoverable at the end of the 10 years. Expected proceeds from scrapping the machinery after 10 years are $21,750. If the company pays tax at a rate of 35% and the opportunity cost of capital is 15%, what is the net present value of the decision to produce the chains in-house instead of purchasing them from the supplier?

Compute the FCF in years 1 through 9 of producing the chains.

The FCF in years 1 through 9 of producing the chains is $-338,950.

The FCF in years 1 through 9 of producing the chains is $-336,950.

The FCF in years 1 through 9 of producing the chains is $-342,950.

The FCF in years 1 through 9 of producing the chains is $-339,950.

26.A bicycle manufacturer currently produces 356,000 units a year and expects output levels to remain steady in the future. It buys chains from an outside supplier at a price of $2.10 a chain. The plant manager believes that it would be cheaper to make these chains rather than buy them. Direct in-house production costs are estimated to be only $1.50 per chain. The necessary machinery would cost $290,000 and would be obsolete after 10 years. This investment could be depreciated to zero for tax purposed using a 10-year straight-line depreciation schedule. The plant manager estimates that the operation would require additional working capital of $40,000 but argues that this sum can be ignored since it is recoverable at the end of the 10 years. Expected proceeds from scrapping the machinery after 10 years are $21,750. If the company pays tax at a rate of 35% and the opportunity cost of capital is 15%, what is the net present value of the decision to produce the chains in-house instead of purchasing them from the supplier?

Compute the NVP of producing the chains from the FCF.

The NVP of producing the chains from the FCF is $-3,007,692.

The NVP of producing the chains from the FCF is $-2,007,692.

The NVP of producing the chains from the FCF is $-4,007,692.

The NVP of producing the chains from the FCF is $-1,007,692.

27.IDX Tech is looking to expand its investment in advanced security systems. The project will be financed with equity. You are trying to assess the value of the investment, and must estimate its cost of capital. You find the following data for a publicly traded firm in the same line of business:

 

Debt outstanding (book value, AA-rated) $392.4 million
Number of shares of common stock 77.2 million
Stock price per share $14.67
Book value of equity per share $5.55
Beta of equity 1.32

 

What assumptions do you need to make? (Select all the choices that apply.)

Assume comparable assets have same risk as project.

Assume debt is risk-free and market value = book value.

Assume comparable assets have same cost.

Assume debt is risk-free and market value > book value.

28.IDX Tech is looking to expand its investment in advanced security systems. The project will be financed with equity. You are trying to assess the value of the investment, and must estimate its cost of capital. You find the following data for a publicly traded firm in the same line of business:

 

Debt outstanding (book value, AA-rated) $392.4 million
Number of shares of common stock 77.2 million
Stock price per share $14.67
Book value of equity per share $5.55
Beta of equity 1.32

 

What is your estimate of the project’s beta?

The project beta is 1.98.

The project beta is 0.98.

The project beta is 2.98.

The project beta is 1.48.

29.Your firm spends $473,000 per year in regular maintenance of its equipment. Due to the economic downturn, the firm considers forgoing these maintenance expenses for the next 3 years. If it does so, it expects it will need to spend $1.9 million in year 4 replacing failed equipment. For what costs of capital (COC) is forgoing maintenance a good idea?

For costs of capital that are less than the replacement costs.

For costs of capital that are greater than the NPV.

For costs of capital that are less than the IRR.

For costs of capital that are greater than the IRR.

30.In mid-2009, Rite Ad had CCC-rated, 20-year bonds outstanding with a yield to maturity of 17.3%. At the time, similar maturity Treasuries had a yield of 3%. Suppose the mark risk premium is 5% and you believe Rite Aid’s bonds have a beta of 0.38. If the expected loss rate of these bonds in the event of default is 58%. In mid-2012, Rite Aid’s bonds a had a yield of 8.2%, while similar maturity Treasuries had a yield of 0.8%. What probability of default would you estimate now?

The probability of default will be 10.48%.

The probability of default will be 8.48%.

The probability of default will be 11.48%.

The probability of default will be 9.48%.

31.Bay Properties is considering starting a commercial real estate division. It has prepared the following four-year forecast of free cash flows for this division:

 

Year 1 Year 2 Year 3 Year 4
Free cash flow $-122,000 $-9,000 $100,000 $219,000

 

Assume cash flows after year 4 will grow at 3% per year, forever. If the cost of capital for this division is 17%, what is the continuation value in year 4 for cash flows after year 4?

The continuation value is $1,611,214.

The continuation value is $1,601,214.

The continuation value is $611,214.

The continuation value is $1,621,214.

32.A bicycle manufacturer currently produces 356,000 units a year and expects output levels to remain steady in the future. It buys chains from an outside supplier at a price of $2.10 a chain. The plant manager believes that it would be cheaper to make these chains rather than buy them. Direct in-house production costs are estimated to be only $1.50 per chain. The necessary machinery would cost $290,000 and would be obsolete after 10 years. This investment could be depreciated to zero for tax purposed using a 10-year straight-line depreciation schedule. The plant manager estimates that the operation would require additional working capital of $40,000 but argues that this sum can be ignored since it is recoverable at the end of the 10 years. Expected proceeds from scrapping the machinery after 10 years are $21,750. If the company pays tax at a rate of 35% and the opportunity cost of capital is 15%, what is the net present value of the decision to produce the chains in-house instead of purchasing them from the supplier?

Compute the difference between the net present values of buying the chains and producing the chains.

The net present value of producing the chains in-house instead of purchasing them from the supplier is $431,128.

The net present value of producing the chains in-house instead of purchasing them from the supplier is $331,128.

The net present value of producing the chains in-house instead of purchasing them from the supplier is $131,128.

The net present value of producing the chains in-house instead of purchasing them from the supplier is $231,128.

33.You are considering opening a new plant. The plant will cost $100.3 million upfront. After that, it is expected to produce profits of $31.9 million at the end of every year. The cash flows are expected to last forever. Should you make the investment?

Yes, because the project will generate cash flows forever.

No, because the NVP is not greater than the initial costs.

Yes, because the NVP is positive.

No, because the NVP is less than zero.

34.A bicycle manufacturer currently produces 356,000 units a year and expects output levels to remain steady in the future. It buys chains from an outside supplier at a price of $2.10 a chain. The plant manager believes that it would be cheaper to make these chains rather than buy them. Direct in-house production costs are estimated to be only $1.50 per chain. The necessary machinery would cost $290,000 and would be obsolete after 10 years. This investment could be depreciated to zero for tax purposed using a 10-year straight-line depreciation schedule. The plant manager estimates that the operation would require additional working capital of $40,000, but argues that this sum can be ignored since it is recoverable at the end of the 10 years. Expected proceeds from scrapping the machinery after 10 years are $21,750. If the company pays tax at a rate of 35% and the opportunity cost of capital is 15%, what is the net present value of the decision to produce the chains in-house instead of purchasing them from the supplier?

Compute the FCF in year 10 of producing the chains.

The FCF in year 10 of producing the chains is $-182,613.

The FCF in year 10 of producing the chains is $-282,813.

The FCF in year 10 of producing the chains is $-182,813.

The FCF in year 10 of producing the chains is $-282,613.

35.A bicycle manufacturer currently produces 356,000 units a year and expects output levels to remain steady in the future. It buys chains from an outside supplier at a price of $2.10 a chain. The plant manager believes that it would be cheaper to make these chains rather than buy them. Direct in-house production costs are estimated to be only $1.50 per chain. The necessary machinery would cost $290,000 and would be obsolete after 10 years. This investment could be depreciated to zero for tax purposed using a 10-year straight-line depreciation schedule. The plant manager estimates that the operation would require additional working capital of $40,000, but argues that this sum can be ignored since it is recoverable at the end of the 10 years. Expected proceeds from scrapping the machinery after 10 years are $21,750. If the company pays tax at a rate of 35% and the opportunity cost of capital is 15%, what is the net present value of the decision to produce the chains in-house instead of purchasing them from the supplier?

Compute the initial FCF of producing the chains.

The initial FCF of producing the chains is $-335,000.

The initial FCF of producing the chains is $-339,000.

The initial FCF of producing the chains is $-340,000.

The initial FCF of producing the chains is $-330,000.

36.You are considering opening a new plant. The plant will cost $100.3 million upfront. After that, it is expected to produce profits of $31.9 million at the end of every year. The cash flows are expected to last forever. Use the IRR to determine the maximum deviation allowable in the cost of capital estimate to make the investment.

The maximum deviation allowable in the cost of capital is 28.65%.

The maximum deviation allowable in the cost of capital is 21.60%.

The maximum deviation allowable in the cost of capital is 24.70%.

The maximum deviation allowable in the cost of capital is 18.45%.

37.The figure below shows the one-year return distribution of Startup, Inc.

 

Probability 40% 20% 20% 10% 10%
Return -100% -75% -50% -30% 1,000%

 

Calculate the expected return.

The expected return is 30.0%.

The expected return is 31.2%.

The expected return is 32.0%.

The expected return is 30.7%.

38.You are considering opening a new plant. The plant will cost $100.3 million upfront. After that, it is expected to produce profits of $31.9 million at the end of every year. The cash flows are expected to last forever. Calculate the IRR.

The IRR of the project is 30.60%.

The IRR of the project is 28.80%.

The IRR of the project is 33.70%.

The IRR of the project is 31.80%.

39.Pisa Pizza, a seller of frozen pizza, is considering introducing a healthier version of its pizza that will be low in cholesterol and contain no trans fats. The firm expects that sales of the new pizza will be $15 million per year. While many of these sales will be to new customers, Pisa Pizza estimates that 27% will come from customers who switch to the new, healthier pizza instead of buying the original version. Suppose that 39% of customers who switch from Pisa Pizza to its healthier pizza will switch to another brand if Pisa Pizza does not introduce a healthier pizza. What level of incremental sales is associated with introducing the new pizza in this case?

The incremental sales are $11 million.

The incremental sales are $8 million.

The incremental sales are $6 million.

The incremental sales are $13 million

FINCE620 – Quiz – WEEK – 6

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1.     Penn Corp. is analyzing the possible acquisition of Teller Company. Both firms have no debt. Penn believes the acquisition will increase its total after tax annual cash flow by $4 million indefinitely. The current market value of Teller is $43 million, and that of Penn is $88 million. The appropriate discount rate for the incremental cash flows is 10 percent. Penn is trying to decide whether it should offer 40 percent of its stock or $69 million in cash to Teller’s shareholders.

 

a. What is the cost of each alternative? (Do not round intermediate calculations. Enter your answers in dollars, not millions of dollars, i.e. 1,234,567.)

 

  Cash cost $
  Equity cost $

 

b. What is the NPV of each alternative? (Do not round intermediate calculations. Enter your answers in dollars, not millions of dollars, i.e. 1,234,567.)

 

  NPV cash $
  NPV stock $

 

c. Which alternative should Penn choose?
Stock

 

Cash

 

2.     Plant, Inc., is considering making an offer to purchase Palmer Corp. Plant’s vice president of finance has collected the following information:

 

Plant Palmer
  Price-earnings ratio 15.7 11.3
  Shares outstanding 1,620,000 870,000
  Earnings $ 4,390,200 $ 1,044,000
  Dividends $ 1,062,000 $ 482,000

 

Plant also knows that securities analysts expect the earnings and dividends of Palmer to grow at a constant rate of 4 percent each year. Plant management believes that the acquisition of Palmer will provide the firm with some economies of scale that will increase this growth rate to 6 percent per year.

 

a. What is the value of Palmer to Plant? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

 

  Value of Palmer $

 

b. What would Plant’s gain be from this acquisition? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

 

  Gain $

 

c. If Plant were to offer $24 in cash for each share of Palmer, what would the NPV of the acquisition be?(Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

 

  NPV $

 

d. What is the most Plant should be willing to pay in cash per share for the stock of Palmer? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

 

  Maximum bid price $

 

e. If Plant were to offer 237,000 of its shares in exchange for the outstanding stock of Palmer, what would the NPV be. (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

 

  NPV $

 

Plant’s outside financial consultants think that the 6 percent growth rate is too optimistic and a 5 percent rate is more realistic.
f-1. If Plant still offers $24 per share, what is the NPV with this new growth rate? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

 

  NPV $

 

f-2. If Plant still offers 237,000 shares, what is the NPV with this new growth rate? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

 

  NPV $

 

f-3. Should the acquisition be attempted?
Yes

 

No

 
3.     Consider the following premerger information about a bidding firm (Firm B) and a target firm (Firm T). Assume that both firms have no debt outstanding.

 

Firm B Firm T
  Shares outstanding 6,000 1,200
  Price per share $ 47 $ 17

 

Firm B has estimated that the value of the synergistic benefits from acquiring Firm T is $9,500.

 

a. If Firm T is willing to be acquired for $19 per share in cash, what is the NPV of the merger? (Do not round intermediate calculations.)

 

  NPV $

 

b. What will the price per share of the merged firm be assuming the conditions in (a)? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

 

  Share price $

 

c. If Firm T is willing to be acquired for $19 per share in cash, what is the merger premium? (Do not round intermediate calculations.)

 

  Merger premium $

 

d. Suppose Firm T is agreeable to a merger by an exchange of stock. If B offers one of its share for every two of T ‘s shares, what will the price per share of the merged firm be? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

 

  Price per share $

 

e. What is the NPV of the merger assuming the conditions in (d)? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

 

  NPV $

 

4.     Fair-to-Midland Manufacturing, Inc., (FMM) has applied for a loan at True Credit Bank. Jon Fulkerson, the credit analyst at the bank, has gathered the following information from the company’s financial statements:

 

  Total assets $77,000
  EBIT 7,000
  Net working capital 3,500
  Book value of equity 20,000
  Accumulated retained earnings 16,900
  Sales 93,000

 

The stock price of FMM is $22 per share and there are 5,100 shares outstanding. What is the Z-score for this company? (Do not round intermediate calculations and round your final answer to 3 decimal places. (e.g., 32.161))

 

  Z-score

 

5.     Consider the following premerger information about Firm A and Firm B:

 

Firm A Firm B
  Total earnings $ 2,100 $ 800
  Shares outstanding 900 200
  Price per share $ 27 $ 31

 

Assume that Firm A acquires Firm B via an exchange of stock at a price of $33 for each share of B‘s stock. Both A and B have no debt outstanding.

 

a. What will the earnings per share, EPS, of Firm A be after the merger? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

 

  EPS $

 

b. What will Firm A‘s price per share be after the merger if the market incorrectly analyzes this reported earnings growth (that is, the price–earnings ratio does not change)? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

 

  Price per share $

 

c. What will the price–earnings ratio of the post-merger firm be if the market correctly analyzes the transaction? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

 

  Price-earnings times

 

d-1. If there are no synergy gains, what will the share price of A be after the merger? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

 

  Price per share $

 

d-2. What will the price–earnings ratio be? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

 

  Price-earnings times

 

d-3. What does your answer for the share price tell you about the amount A bid for B? Was it too high? too low?
Too high

Too Low
Assume that the following balance sheets are stated at book value. The fair market value of James’ fixed assets is equal to the book value. Jurion pays $19,000 for James and raises the needed funds through an issue of long-term debt.

 

Jurion Co.
  Current assets $ 20,100   Current liabilities $ 6,850
  Net fixed assets 36,850   Long-term debt 11,260
  Equity 38,840
     Total $ 56,950     Total $ 56,950

 

James, Inc.
  Current assets $ 4,060   Current liabilities $ 2,800
  Net fixed assets 9,880   Long-term debt 1,820
  Equity 9,320
     Total $ 13,940     Total $ 13,940

 

Construct a postmerger balance sheet assuming that Jurion Co. purchases James, Inc., and the purchase method of accounting is used. (Do not round intermediate calculations.)

 

Jurion Co., post-merger
  Current assets $   Current liabilities $
  Fixed assets   Long-term debt
  Goodwill   Equity
     Total $      Total $

Help On Finance!

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A company has net income of $20,000 and a tax rate of 35%.  Its total debt is $25,000 with principal payments of $5,000 due at the end of each year and an annual interest rate of 8%.  What will be the company’s interest tax shield in the upcoming year?

 

a. $8,750

b. $700

c. $9,450

d. $2,450

 

Which of the following is correct?

 

1.Tax shields make debt more attractive, all else equal

2. A firm’s debt ratio falls when it uses excess cash to pay dividends.

3. The cost of equity is low for firms that pay no dividens, all else equal.

4. Bankruptcy costs decrease the benefits of debt financing all else equal.

 

a) 1 and 4

b)1, 2 and 4

c) 1, 3 and 4

d) 1, 2, 3 and 4

 

Which of the following ratios appears on a common-size balance sheet?

I. Debt to asset ratio

II. Net working capital to total assets

III. Net profit margin

 

a. I, II, III

b. I only

c. I and II

d. III only

 

Share repurchases and dividend payouts are most likely to differ in their

 

a. effects on a firm’s capital structure

b. effects on corporate taxes

c. effects on corporate cash flow

d. effects on shareholders’ personal taxes

 

Enterprise Free Cash Flows should include

I. Capital Expenditures

II. Financing Costs

III. Taxes

IV. Working capital requirements

 

a. I and IV

b. I, II, and IV

c. I, III, and IV

d. I, II, III, IV

 

Which of the following are sources of cash in a statement of sources and uses?

I. Reduction in the cash account

II. Reduction of long-term debt

III. Payment of dividends

IV. Collection of accounts receivable

 

a. IV only

b. II and III

c. I and III

d. I and IV

FIN 6404 -Corporate Finance Final Exam

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Question 1
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 be used because the growth rate is negative.

The company’s dividend yield 5 years from now is expected to be 10%.

The company’s expected stock price at the beginning of next year is $9.50.

The company’s expected capital gains yield is 5%.

The company’s current stock price is $20.
1 points
Question 2
1. 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 coefficient.
1 points
Question 3
1. Assume a project has normal cash flows. All else equal, which of the following statements is CORRECT?

A project’s NPV increases as the WACC declines.

A project’s discounted payback increases as the WACC declines.

A project’s MIRR is unaffected by changes in the WACC.

A project’s IRR increases as the WACC declines.

A project’s regular payback increases as the WACC declines.
1 points
Question 4
1. 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
1. 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
1. When a project’s internal rate of return equals its opportunity cost of capital, then:

The net present value will be negative.

The net present value is a linear combination of MIRR and IRR.

The net present value will be positive.

The project has no cash inflows.

The net present value will be zero.
1 points
Question 7
1. When hard rationing exists, projects may be evaluated by the use of ?

Payback period.

borrowing rather than lending projects.

Modified payback period.

A profitability index.

MIRR.
1 points
Question 8
1. 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
1. 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
1. Tom O’Brien has a 2-stock portfolio with a total value of $100,000. $35,000 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?

0.89

1.19

1.41

1.29

1.45
1 points
Question 11
1. 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
1. Cooley Company’s stock has a beta of 1.20, the risk-free rate is 2.25%, and the market risk premium is 5.50%. What is the firm’s required rate of return?

9.38%

7.35%

6.73%

7.88%

8.85%
1 points
Question 13
1. 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 0.29 25%
Normal 0.50 15%
Recession 0.21 5%
2.

0.4447

0.5114

0.4891

0.4002

0.3335
1 points
Question 14
1. 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
1. 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 17.50%
2.

14.18%

18.41%

17.49%

20.99%

17.31%
1 points
Question 16
1. 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 = 7.2%. What is the stock’s current price?

$25.68

$22.73

$27.50

$17.95

$22.05
1 points
Question 17
1. If D = $2.25, g (which is constant) = 3.5%, and P = $60, what is the stock’s expected dividend yield for the coming year?

3.80%

4.08%

4.58%

4.50%

3.88%
1 points
Question 18
1. 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 $21.50 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?

5.34%

4.69%

5.44%

5.86%

5.01%
1 points
Question 19
1. 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
1. 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 1.15, the market risk premium is 5.50%, and the risk-free rate is 4.00%. What is the company’s current stock price?

$24.86

$30.35

$28.90

$32.95

$28.61
1 points
Question 21
1. Nachman Industries just paid a dividend of D0 = $1.25. 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?

$34.84

$35.69

$51.41

$37.81

$42.49
1 points
Question 22
1. 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
1. 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 16.75%. The firm will not be issuing any new stock. What is its WACC?

10.84%

11.73%

13.72%

11.06%

13.61%
1 points
Question 24
1. 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: 8.50%
Year 0 1 2 3
Cash flows -$1,000 $500 $500 $500
2.

$337.95

$277.01

$324.10

$335.18

$243.77
1 points
Question 25
1. 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 $1,250.00. (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?

8.27%

9.46%

8.44%

8.19%

7.94%
1 points
Question 26
1. 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 -$1,150 $400 $400 $400 $400
2.

14.66%

15.09%

15.83%

12.90%

12.31%
1 points
Question 27
1. 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 -$800 $500 $500 $500

1.26years

1.63years

1.22years

1.70years

1.60 years
1 points
Question 28
1. 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: 10.75%
Year 0 1 2 3
Cash flows -$1,000 $450 $450 $450
2.

10.86%

14.48%

15.49%

15.20%

12.45%
1 points
Question 29
1. 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 -$650 $500 $500 $500
2.

1.80years

1.47 years

1.69years

1.22years

1.52years
1 points
Question 30
1. Francis Inc.’s stock has a required rate of return of 10.25%, and it sells for $35.00 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 ?

$1.49

$1.12

$1.26

$1.71

$1.41