FIN 351 Chapter 8 and 9

Home Products common stock sells for $18.31 a share and has a market rate of return of 12.8 percent. The company just paid an annual dividend of $1.42 per share. What is the dividend growth rate? 5.27 percent 4.45 percent 5.01 percent 4.29 percent 4.68 percent

$18.31 = [$1.42 ×(1 + g) / (.128 - g) g = .0468, or 4.68 percent

Which one of the following methods of analysis provides the best information on the cost-benefit aspects of a project? Net present value. Payback. Internal rate of return. Average accounting return. Profitability index.

Profitability index.

A preferred stock pays an annual dividend of $6.75 and sells for $58.60 a share. What is the rate of return on this security? 9.38 percent 9.63 percent 11.52 percent 10.72 percent 11.84 percent

R = $6.75 / $58.60 = 11.52 percent

Dixie South currently pays an annual dividend of $1.46 a share and plans on increasing that amount by 2.75 percent annually. Northern Culture currently pays an annual dividend of $1.42 a share and plans on increasing its dividend by 3.1 percent annually. Given this information, you know for certain that the stock of Northern Culture has a higher ______ than the stock of Dixie South. Market price. Dividend yield. Capital gains yield. Total return. Real return.

Capital gains yield.

Which one of following is the rate at which a stock's price is expected to appreciate? Current yield. Total return. Dividend yield. Capital gains yield. Coupon rate.

Capital gains yield.

Rossiter Restaurants is analyzing a project that requires $180,000 of fixed assets. When the project ends, those assets are expected to have an aftertax salvage value of $45,000. How is the $45,000 salvage value handled when computing the net present value of the project? Reduction in the cash outflow at time zero. Cash inflow in the final year of the project. Cash inflow for the year following the final year of the project. Cash inflow prorated over the life of the project. Not included in the net present value.

Cash inflow in the final year of the project.

The Blue Marlin is owned by a group of five shareholders who all vote independently and who all want personal control over the firm. What is the minimum percentage of the outstanding shares one of these shareholders must own if he or she is to gain personal control over this firm given that the firm uses straight voting? 17 percent 20 percent plus one vote 25 percent plus one vote 50 percent plus one vote 51 percent

50 percent plus one vote

Isaac has analyzed two mutually exclusive projects that have 3-year lives. Project A has an NPV of $81,406, a payback period of 2.48 years, and an AAR of 9.31 percent. Project B has an NPV of $82,909, a payback period of 2.57 years, and an AAR of 9.22 percent. The required return for Project A is 11.5 percent while it is 12 percent for Project B. Both projects have a required AAR of 9.25 percent. Isaac must make a recommendation and justify it in 15 words or less. What should his recommendation be? Accept both projects because both NPVs are positive. Accept Project A because it has the shortest payback period. Accept Project B and reject Project A based on the NPVs. Accept Project A and reject Project B based on their AARs. Accept Project A because it has the lower required return.

Accept Project B and reject Project A based on the NPVs.

A company has four open seats on its board of directors. There are seven candidates vying for these four positions. There will be a single election to determine the winners. As the owner of 100 shares of stock, you will receive one vote per share for each open seat. You decide to cast all 400 of your votes for a single candidate. What is this type of voting called? Democratic. Cumulative. Straight. Deferred. Proxy.

Cumulative.

Which one of the following rights is never directly granted to all shareholders of a publicly held corporation? Electing the board of directors. Receiving a distribution of company profits. Voting either for or against a proposed merger or acquisition. Determining the amount of the dividend to be paid per share. Having first chance to purchase any new equity shares that may be offered.

Determining the amount of the dividend to be paid per share.

The internal rate of return is defined as the: Maximum rate of return a firm expects to earn on a project. Rate of return a project will generate if the project in financed solely with internal funds. Discount rate that equates the net cash inflows of a project to zero. Discount rate which causes the net present value of a project to equal zero. Discount rate that causes the profitability index for a project to equal zero.

Discount rate which causes the net present value of a project to equal zero.

The next dividend payment by HG Enterprises will be $2.35 per share. The dividends are anticipated to maintain a 2.5 percent growth rate forever. The stock currently sells for $54.60 per share. What is the dividend yield? 4.20 percent 4.30 percent 4.81 percent 4.50 percent 4.41 percent

Dividend yield = $2.35 / $54.60 = .0430, or 4.30 percent

Home Services common stock offers an expected total return of 14.56 percent. The last annual dividend was $2.27 a share. Dividends increase at a constant 2.1 percent per year. What is the dividend yield? 16.66 percent 16.48 percent 13.35 percent 14.20 percent 12.46 percent

Dividend yield = .1456 - .021 = .1246, or 12.46 percent

Which one of the following is computed by dividing next year's annual dividend by the current stock price? Yield to maturity. Total yield. Dividend yield. Capital gains yield. Growth rate.

Dividend yield.

Net present value: Is the best method of analyzing mutually exclusive projects. Is less useful than the internal rate of return when comparing different sized projects. Is the easiest method of evaluation for nonfinancial managers to use. Cannot be applied when comparing mutually exclusive projects. Is very similar in its methodology to the average accounting return.

Is the best method of analyzing mutually exclusive projects.

The secondary market is best defined by which one of the following? Market in which subordinated shares are issued and resold. Market conducted solely by brokers. Market dominated by dealers. Market where outstanding shares of stock are resold. Market where warrants are offered and sold.

Market where outstanding shares of stock are resold.

If a firm accepts Project A it will not be feasible to also accept Project B because both projects would require the simultaneous and exclusive use of the same piece of machinery. These projects are considered to be: Independent. Interdependent. Mutually exclusive. Economically scaled. Operationally distinct.

Mutually exclusive.

A project has an initial cash outflow of $39,800 and produces cash inflows of $18,304, $19,516, and $14,280 for years 1 through 3, respectively. What is the NPV at a discount rate of 11 percent? $7,675.95 -$1,208.19 $2,971.13 $2,029.09 $1,311.16

NPV = -$39,800 + $18,304 / 1.11 + $19,516 / 1.112 + $14,280 / 1.113 NPV = $2,971.13

The common stock of Dayton Repair sells for $43.19 a share. The stock is expected to pay $2.28 per share next year when the annual dividend is distributed. The firm has established a pattern of increasing its dividends by 2.15 percent annually and expects to continue doing so. What is the market rate of return on this stock? 7.59 percent 7.43 percent 7.67 percent 7.14 percent 7.28 percent

R = $2.28 / $43.19 + .0215 = .0743, or 7.43 percent

A project has an initial cost of $27,400 and a market value of $32,600. What is the difference between these two values called? Net present value. Internal return. Payback value. Profitability index. Discounted payback.

Net present value.

A project has an initial cost of $18,400 and is expected to produce cash inflows of $7,200, $8,900, and $7,500 over the next three years, respectively. What is the discounted payback period if the required rate of return is 12 percent? 2.31 years 2.45 years 2.55 years 2.91 years Never

DPB = 2 + [$18,400 - ($7,200 / 1.12) - ($8,900 / 1.122)] / ($7,500 / 1.123) DPB = 2.91 years

Southern Chicken is considering two projects. Project A consists of creating an outdoor eating area on the unused portion of the restaurant's property. Project B would use that outdoor space for creating a drive-thru service window. When trying to decide which project to accept, the firm should rely most heavily on which one of the following analytical methods? Profitability index. Internal rate of return. Payback. Net present value. Accounting rate of return.

Net present value.

Answer this question based on the dividend growth model. If you expect the market rate of return to increase across the board on all equity securities, then you should also expect: An increase in all stock values. All stock values to remain constant. A decrease in all stock values. Dividend-paying stocks to maintain a constant price while non-dividend paying stocks decrease in value. Dividend-paying stocks to increase in price while non-dividend paying stocks remain constant in value.

A decrease in all stock values.

Which one of the following will decrease the net present value of a project? Increasing the value of each of the project's discounted cash inflows. Moving each of the cash inflows forward to a sooner time period. Decreasing the required discount rate. Increasing the project's initial cost at time zero. Increasing the amount of the final cash inflow.

Increasing the project's initial cost at time zero.

A project has cash flows of -$119,000, $52,800, $60,200, and $33,100 for years 0 to 3, respectively. The required rate of return is 12 percent. Based on the net present value of _____, you should _____ the project. $230.75; accept -$1,995.84; reject $283.60; accept -$147.60; accept -$306.15; reject

NPV = -$119,000 + $52,800 / 1.12 + $60,200 / 1.122 + $33,100 / 1.123 NPV = -$306.15 Because the NPV is negative, the project should be rejected.

The Dry Dock is considering a project with an initial cost of $118,400. The project's cash inflows for years 1 through 3 are $37,200, $54,600, and $46,900, respectively. What is the IRR of this project? 8.42 percent 8.04 percent 7.48 percent 8.22 percent 8.56 percent

NPV = 0 = -$118,400 + $37,200 / (1 + IRR) + $54,600 / (1 + IRR)2 + $46,900 / (1 + IRR)3 IRR = 8.04 percent

A project has cash flows of -$152,000, $60,800, $62,300, and $75,000 for years 0 to 3, respectively. The required rate of return is 13 percent. Based on the internal rate of return of _____ percent for this project, you should _____ the project. 14.67; accept 13.96; accept 14.67; reject 17.91; reject 18.46; reject

NPV = 0 = -$152,000 + $60,800 / (1 + IRR) + $62,300 / (1 + IRR)2 + $75,000 / (1 + IRR)3 IRR = 13.96 percent Since the IRR exceeds the required return, you should accept the project.

Drinkable Water Systems is analyzing a project with projected cash inflows of $137,400, $189,300, and -$25,000 for years 1 to 3, respectively. The project costs $236,000 and has been assigned a discount rate of 14 percent. Should this project be accepted based on the discounting approach to the modified internal rate of return? Why or why not? Yes; The MIRR is 13.48 percent. Yes; The MIRR is 17.85 percent. Yes; The MIRR is 11.23 percent. No; The MIRR is 13.48 percent. No; The MIRR is 17.85 percent.

NPV = 0 = [-$236,000 - $25,000 / 1.143] + $137,400 / (1 + MIRR) + $189,300 / (1 + MIRR)2 MIRR = 17.85 percent Since the MIRR exceeds the required return and this is an investment project, the project should be accepted.

Which one of the following methods determines the amount of the change a proposed project will have on the value of a firm? Net present value. Discounted payback. Internal rate of return. Profitability index. Payback.

Net present value.

The common stock of Water Town Mills pays an annual dividend of $1.84 a share. The company has promised to maintain a constant dividend even though economic times are tough. How much are you willing to pay for one share of this stock if you want to earn a 13.6 percent annual return? $13.53 $14.01 $14.56 $13.79 $13.28

P0 = $1.84 / .136 = $13.53

Dee's made two announcements concerning its common stock today. First, the company announced that the next annual dividend will be $1.94 a share. Secondly, all dividends after that will decrease by 1.25 percent annually. What is the value of this stock at a discount rate of 14.5 percent? $12.32 $12.10 $14.82 $14.51 $14.21

P0 = $1.94 / [.145 − (−.0125)] = $12.32

Three Corners Markets paid an annual dividend of $1.37 a share last month. Today, the company announced that future dividends will be increasing by 2.8 percent annually. If you require a return of 11.6 percent, how much are you willing to pay to purchase one share of this stock today? $18.23 $16.00 $16.67 $17.68 $15.57

P0 = [$1.37 ×(1 + .028)] / (.116 - .028) = $16.00

Yummy Bakery just paid an annual dividend of $2.20 a share and is expected to increase that amount by 2.2 percent per year. If you are planning to buy 1,000 shares of this stock next year, how much should you expect to pay per share if the market rate of return for this type of security is 14 percent at the time of your purchase? $19.89 $18.16 $18.83 $19.47 $20.20

P1 = [$2.20 × (1 + .0222)] / (.14 - .022) = $19.47

Assume a project has cash flows of -$51,300, $18,200, $37,300, and $14,300 for years 0 to 3, respectively. What is the profitability index given a required return of 12.5 percent? .94 .98 1.09 1.06 1.11

PVInflows= $18,200 / 1.125 + $37,300 / 1.1252 + $14,300 / 1.1253 = $55,692.73 PI = $55,692.73 / $51,300 = 1.09

You are considering a project with an initial cost of $8,600. What is the payback period for this project if the cash inflows are $2,100, $3,140, $3,800, and $4,500 a year over the next four years, respectively? 2.88 years 3.28 years 3.36 years 4.21 years 2.29 years

Payback = 2 + ($8,600 - 2,100 - 3,140) / $3,800 = 2.88 years

It will cost $6,000 to acquire an ice cream cart. Cart sales are expected to be $3,600 a year for three years. After the three years, the cart is expected to be worthless as the expected life of the refrigeration unit is only three years. What is the payback period? 1.48 years 1.67 years 1.82 years 1.95 years 2.00 years

Payback period = $6,000 / $3,600 = 1.67 years

Emst & Frank stock is listed on NASDAQ. The firm is planning to issue some new equity shares for sale to the general public. This sale will definitely occur in which one of the following markets? Private. Auction. Tertiary. Secondary. Primary.

Primary.

Which one of the following statements related to the internal rate of return (IRR) is correct? The IRR yields the same accept and reject decisions as the net present value method given mutually exclusive projects. A project with an IRR equal to the required return would reduce the value of a firm if accepted. The IRR is equal to the required return when the net present value is equal to zero. Financing type projects should be accepted if the IRR exceeds the required return. The average accounting return is a better method of analysis than the IRR from a financial point of view.

The IRR is equal to the required return when the net present value is equal to zero.

Winston Co. has a dividend-paying stock with a total return for the year of -6.5 percent. Which one of the following must be true? The dividend must be constant. The stock has a negative capital gains yield. The dividend yield must be zero. The required rate of return for this stock increased over the year. The firm is experiencing supernormal growth.

The stock has a negative capital gains yield.

Gee-Gee's is going to pay an annual dividend of $2.05 a share on its common stock next year. This year, the company paid a dividend of $2 a share. The company adheres to a constant rate of growth dividend policy. What will one share of this common stock be worth five years from now if the applicable discount rate is 10.9 percent? $26.94 $28.30 $26.28 $27.61 $27.00

g = ($2.05 - 2) / $2 = .025 P5 = [$2.05 ×(1 + .025)5] / (.109 - .025) = $27.61