FINANCE

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 a. The two stocks have the same dividend yield.
Which of the following is correct?a. the constant growth model is often appropriate for evaluating start up companies that do not have a stable history of growth but are expected to reach stable growth within the next few years.b. if a stock has a required rate of return r=12% and its dividend is expected to grow at a constant rate of 5%, this implies that the stock’s dividend yield is also 5%.c. the stock valuation model, P0=D1/(rs – g), can be used to value firms whos dividends are expected to decline at a constant rate, i.e., to grow at a negative rate.d. the price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate. c. The stock valuation model, P0 = D1/(rs – g), can be used to value firms whose dividends are expected to decline at a constant rate, i.e., to grow at a negative rate.
Which of the following statements is CORRECT, assuming stocks are in equilibrium?a. The dividend yield on a constant growth stock must equal its expected total return minus its expected capital gains yield.b. Assume that the required return on a given stock is 13%. If the stock’s dividend is growing at a constant rate of 5%, its expected dividend yield is 5% as well. c. A stock’s dividend yield can never exceed its expected growth rate.d. A required condition for one to use the constant growth model is that the stock’s expected growth rate exceeds its required rate of return. a. the dividend yield on a constant growth stock must equal its expected total return minus its expected capital gains yield.
The required returns of Stocks X and Y are rX = 10% and rY = 12%. Which of the following statements is CORRECT?a. if the market is in equilibrium, and if Stock Y has the lower expected dividend yield, then it must have the higher expected growth rate.b. If Stock Y and Stock X have the same dividend yield, then Stock Y must have a lower expected capital gains yield than Stock X.c. If Stock X and Stock Y have the same current dividend and the same expected dividend growth rate, then Stock Y must sell for a higher price.d. The stocks must sell for the same price. a. if the market is in equilibrium, and if Stock Y has the lower expected dividend yield, then it must have the higher expected growth rate.
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. a. The after-tax cost of debt is generally cheaper than the after-tax cost of equity.
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 betad. and increase in expected inflation a. a reduction in the market risk premium
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 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. 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 selected.
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 returnb. division B project with a 12 percent returnc. division B project with a 13 percent returnd. Statements a and c are correct a. division A project with an 11 percent return
Schalheim Sisters Inc. has always paid out all of its earnings as dividends, hence the firm has no retained earnings. This same situation is expected to persist in the future. The company uses the CAPM to calculate its cost of equity, its target capital structure consists of common stock, preferred stock, and debt. Which of the following events would REDUCE its WACC?a. the market risk premium declines.b. the risk free increasesc. the company’s betad. expected inflation increases a. the market risk premium declines.
Which of the following 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 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.
A major disadvantage of the payback period is that it:a. is useless as a risk indicatorb. ignores cash flows beyond the payback periodc. does not directly account for the time value of moneyd. statements b and c are correct d. statements b and c are correct
Which of the following 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. 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.
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 WASS declines.b. The project’s NPV increases as the WACC declinesc. The project’s MIRR is unaffected by the changes in the WACCd. The project’s regular payback increases as the WACC declines. b. The projects NPV increases as the WACC declines.
Which of the following 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. a. One defect of the IRR method is that it does not take account of cash flows over a project’s full life.
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% d. 6.0%
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. $15.00b. $20.00c. $25.00 d. $30.00 c. $25.00
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% b. 6%
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. $21.00b. $33.33c. $42.25d. $50.16 d. $50.16
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. $22.67b. $24.00c. $25.33d. $26.67 d. $26.67
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% b. 9.26%
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% a. 10.73%
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% d. 12.2%
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 equitya. rd > re > WACC.b. re > rd > WACC.c. WACC > re > rd.d. re > WACC > rd D
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 yearsb. 4.86 years c. 4.00 yearsd. 6.12 years B. 4.86 years
Coughlin Motors is considering a project with the following expected cash flows: Project Year Cash Flow 0 -$700 million1 200 million2 370 million3 225 million4 700 millionThe project’s WACC is 10 percent. What is the project’s discounted payback?a. 3.15 yearsb. 4.09 yearsc. 1.62 yearsd. 3.09 years d. 3.09 years
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 60,000If 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. a. Neither project

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