Subject | Business |

Due By (Pacific Time) | 12/09/2016 12:00 am |

Question #1

A company has just paid an annual dividend of $0.75 per share and has an expected dividend growth rate of 4.90%. The stock is currently selling for $26 a share. What is this firm's cost of equity?

7.56%

7.93%

10.38%

10.53%

11.79%

Question #2

A company has a bond issue outstanding that matures in seven years. The bonds pay interest semi-annually. Currently, the bonds are priced with a yield-to-maturity of 8.73% and carry a 9% coupon. What is the firm's after-tax cost of debt on this bond issue if the tax rate is 30%?

4.88%

5.36%

6.11%

6.30%

8.73%

Question #3

A company has 950,000 shares of common stock outstanding at a market price of $38 a share. The company also has 40,000 bonds outstanding that are trading at 106% of face value. The face value on these bonds is $1,000. What weight should be given to the debt when the firm computes its weighted average cost of capital?

42%

46%

50%

54%

58%

Question #4

Using the dividend growth models to estimate a firm’s cost of equity:

is sensitive to the estimated rate of dividend growth.

can only be used if historical dividend information is available.

considers the risk that future dividends may vary from their estimated values.

applies only when a firm is currently paying dividends.

uses beta to measure the systemic risk of a firm.

Question #5

A company’s common stock has a market price of $13 and a beta of 1.12. The return on the U.S. Treasury bill is 2.5% and the market risk premium is 6.8%. What is this company’s cost of equity?

9.98%

10.04%

10.12%

10.37%

10.45%

Question #6

Which one of the following statements related to the CAPM approach to equity valuation is correct?

This model explicitly considers a firm's rate of growth.

The model applies only to non-dividend paying firms.

The model's validity is dependent upon a reliable estimate of the market risk premium.

The model generally produces the same cost of equity as the dividend growth model.

This approach generally produces a cost of equity that equals the firm's overall cost of capital.

Question #7

A particular company has a target capital structure of 60% common stock and 40% debt. Its cost of equity is 12%, the pre-tax cost of debt is 7%, and the relevant tax base is 35%. What is this company's WACC?

7.48%

7.53%

8.18%

9.02%

10.00%

Question #8

For questions eight through eleven, consider the following two projects. Assume they are independent projects. Regardless of the decision rule used, your cost of capital for both of these projects is 15%.

Year |
Project A Cash Flows |
Project B Cash Flows |

0 |
-$350,000 |
-$50,000 |

1 |
45,000 |
24,000 |

2 |
65,000 |
22,000 |

3 |
65,000 |
19,500 |

4 |
440,000 |
14,600 |

If you have a payback cutoff date of three years, then which of these projects, if any, would you accept?

Project A only

Project B only

both Project A and Project B

neither Project A nor Project B

Question #9

For questions eight through eleven, consider the following two projects. Assume they are independent projects. Regardless of the decision rule used, your cost of capital for both of these projects is 15%.

Year |
Project A Cash Flows |
Project B Cash Flows |

0 |
-$350,000 |
-$50,000 |

1 |
45,000 |
24,000 |

2 |
65,000 |
22,000 |

3 |
65,000 |
19,500 |

4 |
440,000 |
14,600 |

If you have a discounted payback cutoff date of three and a half years, then which of these projects, if any, would you accept?

Project A only

Project B only

both Project A and Project B

neither Project A nor Project B

Question #10

For questions eight through eleven, consider the following two projects. Assume they are independent projects. Regardless of the decision rule used, your cost of capital for both of these projects is 15%.

Year |
Project A Cash Flows |
Project B Cash Flows |

0 |
-$350,000 |
-$50,000 |

1 |
45,000 |
24,000 |

2 |
65,000 |
22,000 |

3 |
65,000 |
19,500 |

4 |
440,000 |
14,600 |

Based on the net present value decision rule, which of these projects, if any, would you accept?

Project A only

Project B only

both Project A and Project B

neither Project A nor Project B

Question #11

Year |
Project A Cash Flows |
Project B Cash Flows |

0 |
-$350,000 |
-$50,000 |

1 |
45,000 |
24,000 |

2 |
65,000 |
22,000 |

3 |
65,000 |
19,500 |

4 |
440,000 |
14,600 |

What is the profitability index for each project?

PIA is 1.09, PIB is 1.17

PIA is 0.91, PIB is 0.85

PIA is 1.76, PIB is 1.60

PIA is 0.57, PIB is 0.62

Question #12

The internal rate of return rule is unreliable for which of the following situations?

I. multiple rates of return

II. independent projects

III. mutually exclusive projects

IV. net present value is negative

I only

II and IV only

I and II only

I and III only

I, II, III, and IV

Question #13

Consider the cash flows of two mutually exclusive projects given below. The internal rate of return of Project A is 15.54% and the internal rate of return of Project B is 14.20%. If the cost of capital for both projects is 10.00% compounded annually, then which of these projects, if any, should be accepted?

Year |
Project A Cash Flows |
Project B Cash Flows |

0 |
-$50,000 |
-$100,000 |

1 |
20,000 |
60,000 |

2 |
22,000 |
40,000 |

3 |
25,000 |
25,000 |

Project A based on the internal rate of return

Project B based on the internal rate of return

Project A based on the net present value

Project B based on the net present value

neither Project A nor Project B

Question #14

Which two methods of project analysis are the most biased towards short-term projects?

net present value and internal rate of return

internal rate of return and profitability index

payback and discounted payback

net present value and discounted payback

payback and profitability index

Question #15

Based on the profitability index rule, should a project with the following cash flows be accepted if the discount rate is 14% compounded annually? Why or why not?

Year |
Cash Flows |

0 |
-$32,100 |

1 |
11,800 |

2 |
0 |

3 |
22,600 |

Yes, the profitability index is 0.96.

Yes, the profitability index is 0.80.

Yes, the profitability index is 1.08.

No, the profitability index is 0.96.

No, the profitability index is 0.80.

Question #16

Which one of the following analytical methods most directly measures the increase in the value of the company due to a potential project?

profitability index

internal rate of return

payback

net present value

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