FIN 331 Exam 3 Review
"Has a par, or face, value." Is it consistent with debt or equity? A. Debt B. Equity
A
An environmental externality is caused by a new project that has a negative impact on its surrounding environment A. True B. False
A
Black Sheep Broadcasting Company's decision to accept or reject project Beta is independent of its decisions on other projects. If the firm follows the NPV method, it should _______ project Beta. A. Reject B. Accept
A
Consider this case: Ford has a dual-class stock structure. The Ford family controls 40% of voting power with around 4% of total equity in the firm. Based on this example, which of the following statements is true? A. Classified shares have super voting rights, which give more control to a certain class of investors. B. Classified shares are not issued with the purpose of providing super voting rights to a certain class of investors.
A
Goodwin has been very successful, but it hasn't paid a dividend yet. It circulates a report to its key investors containing the following statement: Goodwin has yet to record a profit (positive net income). Is this statement a possible explanation for why the firm hasn't paid a dividend yet? A. Yes B. No
A
Input the YTM in the I/Y slot in the financial calculator to find what you need. A. Yes B. No, input the coupon rate
A
Input the face value in the future value slot in the financial calculator to find what you need. A. Yes B. No, input the current market price
A
Is this the correct Corporate Valuation Model Horizon Value formula?: V = (FCF{N+1})/(WACC-g{FCF}) A. Yes B. No, its: (TFV)/(WACC-g{FCF})
A
Is this the correct Cost of Equity from New Stock formula?: r{e} = (D{1} / P{0} x (1-F)) + g A. Yes B. No, its: (D{1} / P{0} x (1-F)) - g
A
Is this the correct FCF formula?: FCF1 = EBIT(1 - T) + Depreciation - [Gross capital expenditures + ΔNet operating working capital] A. Yes B. No, its: FCF1 = EBIT(1 - T) - Depreciation - [Gross capital expenditures + ΔNet operating working capital]
A
Is this the correct Intrinsic Value of Common Equity formula?: IV of C/E = TFV - MV of Debt + MV of P/S A. No, its: TFV - MV of Debt - MV of P/S B. Yes
A
Is this the correct New Market Value formula?: New MV = (Existing Price x Existing Shares) + (New Price x New Shares) A. Yes B. No, its: (Existing Price x Existing Shares) - (New Price x New Shares)
A
Is this the correct equation for determining WACC?: WACC = w{d}r{d}(1-T) + w{e}r{e} + w{p}r{p} A. Yes B. No, its not even close
A
Is this the correct growth rate formula?: g = (1 - Payout ratio) x ROE A. Yes B. No, its: (1 + Payout Ratio) x ROE
A
Is this the equation for expected rate of return?: r{r} = ((cash inflow)/(initial investment - flotation cost)) - 1 A. No, its: ((cash inflow)/(initial investment + flotation cost)) - 1 B. Yes
A
The cost of preferred stock is NOT tax deductible and has no tax savings associated with it. A. True B. False
A
True or False: The following statement accurately describes how firms make decisions related to issuing new common stock. Taking flotation costs into account will reduce the cost of new common stock. A. False: Flotation costs are additional costs associated with raising new common stock. B. True: Taking flotation costs into account will reduce the cost of new common stock, because you will multiply the cost of new common stock by 1 minus the flotation cost—similar to how the after-tax cost of debt is calculated.
A
True or False: The following statement accurately describes how firms make decisions related to issuing new common stock. The cost of issuing new common stock is calculated the same way as the cost of raising equity capital from retained earnings. A. False: Flotation costs need to be taken into account when calculating the cost of issuing new common stock, but they do not need to be taken into account when raising capital from retained earnings. B. True: The cost of retained earnings and the cost of new common stock are calculated in the same manner, except that the cost of retained earnings is based on the firm's existing common equity, while the cost of new common stock is based on the value of the firm's share price net of its flotation cost.
A
What is corporate (within-firm) risk? A. A measure of the project's effect on the firm's earnings variability B. The most likely scenario in a capital budgeting analysis C. A method to determine market risk by using the betas of single-product companies in a given industry D. None of the above
A
What is pure-play method? A. A method to determine market risk by using the betas of single-product companies in a given industry B. A measure of the project's effect on the firm's earnings variability C. The risk that is measured by the project's beta coefficient D. None of the above
A
Which of the following statements best describes the difference between the IRR method and the MIRR method? A. The IRR method assumes that cash flows are reinvested at a rate of return equal to the IRR. The MIRR method assumes that cash flows are reinvested at a rate of return equal to the cost of capital. B. The IRR method uses the present value of the initial investment to calculate the IRR. The MIRR method uses the terminal value of the initial investment to calculate the MIRR. C. The IRR method uses only cash inflows to calculate the IRR. The MIRR method uses both cash inflows and cash outflows to calculate the MIRR.
A
Which of the following statements is true about the constant growth model? A. The constant growth model implies that dividend growth remains constant from now to infinity. B. The constant growth model implies that dividends remain constant from now to a certain terminal year.
A
Which of the following statements is true? A. Increasing dividends may not always increase the stock price, because less earnings may be invested back into the firm and that impedes growth. B. Increasing dividends will always decrease the stock price, because the firm is depleting internal funding resources. C. Increasing dividends will always increase the stock price.
A
Which of the following would be included in the calculation of total invested capital? Choose the response that is most correct. A. Notes payable B. Taxes payable C. Accounts payable D. Responses a and c would be included in the calculation of total invested capital. E. None of the above would be included in the calculation of total invested capital.
A
r{p} is the symbol that represents the cost of preferred stock in the weighted average cost of capital (WACC) equation A. True B. False, its r{s}
A
r{s} is the symbol that represents the cost of common equity by retaining earnings in the weighted average cost of capital (WACC) equation A. True B. False, its r{d}
A
"No tax adjustments are made when calculating the cost of preferred stock." Is it consistent with debt or equity? A. Debt B. Equity
B
A negative within-firm externality occurs when the cash flows of an existing operation are increased when a new operation is introduced. A. True B. False
B
A positive within-firm externality occurs when the cash flows of an existing operation are decreased when a new operation is introduced A. True B. False
B
According to the valuation models developed in this chapter, the value that an investor assigns to a share of stock is dependent on the length of time the investor plans to hold the stock. A. True B. False
B
Goodwin has been very successful, but it hasn't paid a dividend yet. It circulates a report to its key investors containing the following statement: Investors prefer the deferred tax liability that capital gains offer over dividends. Is this statement a possible explanation for why the firm hasn't paid a dividend yet? A. No B. Yes
B
IA project's IRR will _______ if the project's cash inflows decrease, and everything else is unaffected. A. Increase B. Decrease C. Not Change
B
In November 2006, Citigroup's stock (NYSE: C) was trading at $49.59. Following the credit crisis of 2007-2008 and by the end of October 2009, Citigroup's stock price had plummeted to $4.27. Several banks went under, and others saw their stock prices lose more than 60% of their value. Based on your understanding of stock prices and intrinsic values, which of the following statements is true? A. The intrinsic value of a stock is based only on perceived investor returns. B. A stock's market price is often based on investors' perceived risk in the company.
B
Input face value x YTM in the payment slot in the financial calculator to find what you need. A. Yes B. No, input face value x coupon rate
B
Input the face value in the present value slot in the financial calculator to find what you need. A. Yes B. No, input the current market price
B
Is this a correct return on risk formula?: r{rf} + (MRP x Beta) A. No, its not a correct formula at all B. Yes, it is a correct formula
B
Is this the correct NPV equation?: NPV = CF{0} + ((CF{1})/(1 + r{s})^1) + ((CF{2})/(1 + r{s})^2)n + . . . ((CF{N})/(1 + r{s})^N) A. No, its: CF{0} - ((CF{1})/(1 + r{s})^1) - ((CF{2})/(1 + r{s})^2) - . . . ((CF{N})/(1 + r{s})^N) B. Yes
B
Is this the correct ROE formula?: ROE = Net income / Payout Ratio A. Yes B. No, its: Net Income / Book Value of C/E
B
Is this the correct Total Firm Value formula?: TFV = FCF/(WACC + g) A. Yes B. No, its: FCF/(WACC - g)
B
The actions of the marginal investor determine the equilibrium stock price. A. False B. True
B
The cost of raising capital through retained earnings is _____ the cost of raising capital through issuing new common stock. A. greater than B. less than
B
True or False: It is free for a company to raise money through retained earnings, because retained earnings represent money that is left over after dividends are paid out to shareholders. A. True B. False
B
Walter's dividend is expected to grow at a constant growth rate of 6.50% per year. What do you expect to happen to Walter's expected dividend yield in the future? A.It will increase. B. It will stay the same. C. It will decrease.
B
What is scenario analysis? A. None of these B. Determines the impact on NPV of a set of events relating to a specific scenario C. A computer-generated probability simulation of the most likely outcome, given a set of probable future events D. A measure of the project's effect on the firm's earnings variability
B
When a return is greater than the risk-based cost of capital for the division, you accept the project. A. No B. Yes
B
You can estimate the value of a company's stock using models such as the corporate valuation model and the dividend discount model. Which of the following companies would you choose to evaluate if you were using the discounted dividend model to estimate the value of the company's stock? A. A company that is in a high-growth stage and plans to retain all its earnings for the next few years to support its growth. B. A company that has been distributing a portion of their earnings every quarter for the past six years.
B
r{s} is the symbol that represents the Before-Tax Cost of Debt in the weighted average cost of capital (WACC) equation A. True B. False, its r{d}
B
Are these equations to find r{s} (cost of internal equity)? r{s} = Bond Yield + Risk Premium r{s} = D{1}/P{0} + g A. Just the first one B. Just the second one C. Both D. Neither
C
Suppose your boss has asked you to analyze two mutually exclusive projects—project A and project B. Both projects require the same investment amount, and the sum of cash inflows of Project A is larger than the sum of cash inflows of project B. A coworker told you that you don't need to do an NPV analysis of the projects because you already know that project A will have a larger NPV than project B. Do you agree with your coworker's statement? A. No, the NPV calculation is based on percentage returns, so the size of a project's cash flows does not affect a project's NPV. B. Yes, project A will always have the largest NPV, because its cash inflows are greater than project B's cash inflows. C. No, the NPV calculation will take into account not only the projects' cash inflows but also the timing of cash inflows and outflows. Consequently, project B could have a larger NPV than project A, even though project A has larger cash inflows.
C
What is market risk? A. A measure of the project's effect on the firm's earnings variability B. None of these C. The risk that is measured by the project's beta coefficient D. The most likely scenario in a capital budgeting analysis
C
Which of the following statements accurately describes the relationship between earnings and dividends when all other factors are held constant? A. Dividend growth and earnings growth are unrelated. B. Paying a higher percentage of earnings as dividends will result in a higher growth rate. C. Long-run earnings growth occurs primarily because firms retain earnings and reinvest them in the business.
C
What is a Monte Carlo simulation? A. Determines the impact on NPV of a set of events relating to a specific scenario B. A method to determine market risk by using the betas of single-product companies in a given industry C. None of these D. A computer-generated probability simulation of the most likely outcome, given a set of probable future events
D
Which of the following statements is correct? A. The only difference between the discounted dividend and corporate valuation models is the expected cash flow stream. Expected future dividends are the cash flow stream in the discounted dividend model and expected free cash flows are the cash flow stream in the corporate valuation model. Both models use the same discount rate to calculate the present value of the cash flow stream. B. The discounted dividend model is especially suited for valuing companies that are privately held. C. The only difference between the discounted dividend and corporate valuation models is the discount rate used to calculate the present value of the cash flow stream. The discount rate used in the discounted dividend model is the firm's required rate of return on equity, while the discount rate used in the corporate valuation model is the firm's weighted average cost of capital. Both models use the same expected cash flow stream in the discounting process. D. There are actually two differences between the discounted dividend and corporate valuation models: the expected cash flow stream and the discount rate used in the models are different. The discounted dividend model calculates the firm's stock price as the present value of the expected future dividends at the firm's required rate of return on equity, while the corporate valuation model calculates the firm's stock price as the present value of the expected free cash flows at the firm's weighted average cost of equity.
D
Which of the following assumptions would cause the constant growth stock valuation model to be invalid? A. The growth rate is zero. B. The growth rate is negative. C. The required rate of return is greater than the growth rate. D. The required rate of return is more than 50%. E. None of the above assumptions would invalidate the model.
E
Common stock represents the __A__ position in a firm, and is valued as the present value of its expected future __B__ stream. Common stock dividends __C__ specified by contract—they depend on the firm's earnings. Two models are used to estimate a stock's intrinsic value: the discounted dividend model and the corporate valuation model. What is NOT B?
FCF
Each of the following factors affects the weighted average cost of capital (WACC) equation. Which of the following factors are outside a firm's control? Choose all that apply. I. The general level of stock prices II. The effect of the tax rate on the cost of debt in the weighted average cost of capital equation III. The firm's dividend payout ratio
I, II
Which of the following describe the reason(s) why maximization of intrinsic stock value benefits society? Check all that apply. I. Most investors appreciate the risk companies take to maximize their stocks. II. People like to work for companies that minimize operating costs. III. Most people have an important stake in the stock market. IV. Successful companies benefit consumers.
III, IV
True or False: In some cases, individuals who start a business have special voting rights that help them exercise more control over the firm. They own a special class of stock called founders' shares.
True
True or False: The preemptive right allows Larry to purchase any additional shares sold by the company. This right will protect Larry from dilution in the value of the stocks he holds
True
Common stock represents the __A__ position in a firm, and is valued as the present value of its expected future __B__ stream. Common stock dividends __C__ specified by contract—they depend on the firm's earnings. Two models are used to estimate a stock's intrinsic value: the discounted dividend model and the corporate valuation model. What is NOT C?
are always
Common stock represents the __A__ position in a firm, and is valued as the present value of its expected future __B__ stream. Common stock dividends __C__ specified by contract—they depend on the firm's earnings. Two models are used to estimate a stock's intrinsic value: the discounted dividend model and the corporate valuation model. What is C?
are not
Common stock represents the __A__ position in a firm, and is valued as the present value of its expected future __B__ stream. Common stock dividends __C__ specified by contract—they depend on the firm's earnings. Two models are used to estimate a stock's intrinsic value: the discounted dividend model and the corporate valuation model. What is NOT A?
creditor
Common stock represents the __A__ position in a firm, and is valued as the present value of its expected future __B__ stream. Common stock dividends __C__ specified by contract—they depend on the firm's earnings. Two models are used to estimate a stock's intrinsic value: the discounted dividend model and the corporate valuation model. What is B?
dividend
Common stock represents the __A__ position in a firm, and is valued as the present value of its expected future __B__ stream. Common stock dividends __C__ specified by contract—they depend on the firm's earnings. Two models are used to estimate a stock's intrinsic value: the discounted dividend model and the corporate valuation model. What is A?
ownership
