FINA 5311 Final (quizzes)

Fama's Llamas has a weighted average cost of capital of 9.3 percent. The company's cost of equity is 12 percent, and its pretax cost of debt is 6.6 percent. The tax rate is 21 percent. What is the company's target debt-equity ratio?

0.6608

Which one of the following is an example of a sunk cost?

$2,000 paid last year to rent equipment

Stock Y has a beta of 1.0 and an expected return of 13 percent. Stock Z has a beta of .5 and an expected return of 7.8 percent. What would the risk-free rate have to be for the two stocks to be correctly priced?

2.60

A stock has had returns of 12 percent, 30 percent, 17 percent, −18 percent, 30 percent, and −7 percent over the last six years. What are the arithmetic and geometric average returns for the stock?

AAR = 10.67 GAR = 9.13

Which one of the following will decrease the net present value of a project?

Increasing the project's initial cost at Time 0

Which of the following statements regarding unsystematic risk is accurate?

It can be effectively eliminated by portfolio diversification.

Which one of the following correctly describes the dividend yield?

Next year's annual dividend divided by today's stock price

Standard deviation is a measure of which one of the following?

Volatility

You cannot attend the shareholder's meeting for Alpha United so you authorize another shareholder to vote on your behalf. What is the granting of this authority called?

Voting by proxy

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:

a decrease in all stock values.

A firm's aftertax cost of debt will increase if there is a(n):

decrease in the company's tax rate.

To convince investors to accept greater volatility, you must:

increase the risk premium.

The difference between a company's future cash flows if it accepts a project and the company's future cash flows if it does not accept the project is referred to as the project's:

incremental cash flows.

Net present value:

is the best method of analyzing mutually exclusive projects.

Assume the market rate of return is 10.1 percent and the risk-free rate of return is 3.2 percent. Lexant stock has 2 percent less systematic risk than the market and has an actual return of 10.2 percent. This stock:

is underpriced.

Which one of the following methods predicts the amount by which the value of a firm will change if a project is accepted?

Net present value

The average compound return earned per year over a multiyear period is called the _____ average return.

geometric

The length of time a firm must wait to recoup the money it has invested in a project is called the:

payback period.

The dividend growth model:

requires the growth rate to be less than the required return.

The excess return is computed as the:

return on a risky security minus the risk-free rate.

The Jackson-Timberlake Wardrobe Company just paid a dividend of $1.56 per share on its stock. The dividends are expected to grow at a constant rate of 6 percent per year indefinitely. a. If investors require a return of 12 percent on the company's stock, what is the current price? b. What will the price be in 17 years?

$27.56 $74.21

You have $10,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 15 percent and Stock Y with an expected return of 8 percent. If your goal is to create a portfolio with an expected return of 10.5 percent, how much money will you invest in Stock X? If your goal is to create a portfolio with an expected return of 10.5 percent, how much money will you invest in Stock Y?

$3,571 $6,429

A project will reduce costs by $41,500 but increase depreciation by $20,300. What is the operating cash flow if the tax rate is 21 percent?

$37,048

An asset used in a 4-year project falls in the 5-year MACRS class (MACRS Table) for tax purposes. The asset has an acquisition cost of $19,080,000 and will be sold for $4,240,000 at the end of the project. If the tax rate is 24 percent, what is the aftertax salvage value of the asset?

$4,013,686

Metallica Bearings, Incorporated, is a young start-up company. No dividends will be paid on the stock over the next 9 years because the firm needs to plow back its earnings to fuel growth. The company will pay a dividend of $9 per share 10 years from today and will increase the dividend by 7 percent per year thereafter. If the required return on this stock is 13 percent, what is the current share price?

$49.93

Lohn Corporation is expected to pay the following dividends over the next four years: $11, $9, $7, and $4. Afterward, the company pledges to maintain a constant 3 percent growth rate in dividends forever. If the required return on the stock is 12 percent, what is the current share price?

$53.61

Antiques R Us is a mature manufacturing firm. The company just paid a dividend of $9, but management expects to reduce the payout by 4 percent per year indefinitely. If you require a return of 11 percent on this stock, what will you pay for a share today?

$57.60

A portfolio has 70 shares of Stock A that sell for $36 per share and 115 shares of Stock B that sell for $30 per share. What is the portfolio weight of Stock A? What is the portfolio weight of Stock B?

0.4221 0.5779

You own a stock portfolio invested 40 percent in Stock Q, 30 percent in Stock R, 20 percent in Stock S, and 10 percent in Stock T. The betas for these four stocks are .87, 1.20, 1.04, and 1.22, respectively. What is the portfolio beta?

1.04

You own a portfolio equally invested in a risk-free asset and two stocks. If one of the stocks has a beta of 1.8 and the total portfolio is equally as risky as the market, what must the beta be for the other stock in your portfolio?

1.20

You own a portfolio equally invested in a risk-free asset and two stocks. If one of the stocks has a beta of 1.53 and the total portfolio is equally as risky as the market, what must the beta be for the other stock in your portfolio

1.47

Fama's Llamas has a weighted average cost of capital of 10 percent. The company's cost of equity is 17.5 percent, and its pretax cost of debt is 7.5 percent. The tax rate is 34 percent. What is the company's target debt-equity ratio?

1.4851

The Rhaegel Corporation's common stock has a beta of 1. If the risk-free rate is 5.5 percent and the expected return on the market is 11 percent, what is the company's cost of equity capital?

11%

Suppose a stock had an initial price of $86 per share, paid a dividend of $1.80 per share during the year, and had an ending share price of $94. Compute the percentage total return

11.40

Stock in Jansen Industries has a beta of 1.1. The market risk premium is 7 percent, and T-bills are currently yielding 5 percent. The company's most recent dividend was $1.40 per share, and dividends are expected to grow at an annual rate of 7 percent indefinitely. If the stock sells for $35 per share, what is your best estimate of the company's cost of equity

11.99

The Tribiani Company just issued a dividend of $3.35 per share on its common stock. The company is expected to maintain a constant 6.9 percent growth rate in its dividends indefinitely. If the stock sells for $67 a share, what is the company's cost of equity?

12.20

Lannister Manufacturing has a target debt-equity ratio of 0.65. Its cost of equity is 17 percent, and its cost of debt is 11 percent. If the tax rate is 34 percent, what is the company's WACC?

13.16%

Stock in Daenerys Industries has a beta of 1.18. The market risk premium is 8.5 percent, and T-bills are currently yielding 4.5 percent. The company's most recent dividend was $1.8 per share, and dividends are expected to grow at a 7.5 percent annual rate indefinitely. If the stock sells for $32 per share, what is your best estimate of the company's cost of equity?

13.55%

Suppose a stock had an initial price of $54 per share, paid a dividend of $1.30 per share during the year, and had an ending share price of $64. Compute the percentage total return.

20.93

What is the payback period for the following set of cash flows? Year Cash Flow 0 -5600 1 2700 2 1100 3 1500 4 1400

3.23 years

Savers has an issue of preferred stock with a $5.05 stated dividend that just sold for $87 per share. What is the bank's cost of preferred stock?

5.80

Hailey Corporation pays a constant $8.90 dividend on its stock. The company will maintain this dividend for the next 12 years and will then cease paying dividends forever. If the required return on this stock is 11 percent, what is the current share price?

57.78

A stock has an expected return of 15 percent, its beta is 1.50, and the expected return on the market is 12 percent. What must the risk-free rate be?

6.00

Assume a firm utilizes the security market line approach to determine the cost of equity. If the firm currently pays an annual dividend of $2.40 per share and has a beta of 1.42, all else constant, which of the following actions will decrease the firm's cost of equity?

A decrease in the firm's beta

Assume a firm utilizes the security market line approach to determine the cost of equity. If the firm currently pays an annual dividend of $3.36 per share and has a beta of 1.38, all else constant, which of the following actions will increase the firm's cost of equity?

A decrease in the risk-free rate

Which one of the following types of stock is defined by the fact that it receives no preferential treatment in respect to either dividends or bankruptcy proceedings?

Common

Which one of these statements related to preferred stock is correct?

Cumulative preferred shares are more valuable than comparable noncumulative shares.

A decrease in which of the following will increase the current value of a stock according to the dividend growth model?

Discount rate

Bybee Printing makes custom posters and is currently considering making large-scale outdoor banners as well. Which one of the following is the best example of an incremental operating cash flow related to the banner project?

Hiring additional employees to handle the increased workload should the firm accept the banner project

Which of the following items are included when calculating the expected return on a portfolio? I. Percentage of the portfolio invested in each individual security II. Projected states of the economy III. The performance of each security given various economic states IV. Probability of occurrence for each state of the economy

I, II, III, and IV

The stand-alone principle advocates that project analysis should be based solely on which one of the following costs?

Incremental

Of the options listed below, which is the best example of systematic risk?

Investors panic causing security prices around the globe to fall precipitously.

Which of the following are advantages of the payback method of project analysis?

Liquidity bias; ease of use

Which one of the following is a correct ranking of securities based on the volatility of their annual returns over the period of 1926-2019? Rank from highest to lowest.

Long-term government bonds, long-term corporate bonds, intermediate-term government bonds

Two mutually exclusive projects have an initial cost of $47,500 each. Project A produces cash inflows of $25,300, $37,100, and $22,000 for Years 1 through 3, respectively. Project B produces cash inflows of $43,600, $19,800 and $10,400 for Years 1 through 3, respectively. The required rate of return is 14.7 percent for Project A and 14.9 percent for Project B. Which project(s) should be accepted and why?

Project A, because it has the larger NPV.

Assume that last year T-bills returned 2.2 percent while your investment in large-company stocks earned an average of 8.1 percent. Which one of the following terms refers to the difference between these two rates of return?

Risk premium

Which one of the following best illustrates erosion as it relates to a snack stand located on the beach?

Selling fewer cookies because ice cream was added to the menu

Which of the following statements best describes the principle of diversification?

Spreading an investment across many diverse assets will eliminate some of the total risk.

The fact that a proposed project is analyzed based on the project's incremental cash flows is the assumption behind which one of the following principles?

Stand-alone principle

Which one of the following statements is correct?

Stocks can have negative growth rates.

Cerda Diagnostics spent $5,000 last week repairing equipment. This week the company is trying to decide whether the equipment could be better utilized by assigning it to a proposed project. When analyzing the proposed project, the $5,000 should be treated as which type of cost?

Sunk

Which one of the following types of costs was incurred in the past and cannot be recouped?

Sunk

Which one of the following statements related to the internal rate of return (IRR) is correct?

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

Which one of the following best describes the concept of erosion?

The cash flows of a new project that come at the expense of a firm's existing cash flows

Suppose a stock had an initial price of $82 per share, paid a dividend of $1.20 per share during the year, and had an ending share price of $74. Compute the percentage total return, dividend yield, and capital gains yield

Total return -8.29 Dividend yield 1.46 Capital gains yield -9.76

When using the subjective approach to project analysis, a firm:

assigns discount rates to projects based on the discretion of the senior managers of a firm.

The length of time a firm must wait to recoup, in present value terms, the money it has invested in a project is referred to as the:

discounted payback period.

Estimates of the rate of return on a security based on the historical arithmetic average will probably tend to _____ the expected return for the long-term and estimates using the historical geometric average will probably tend to _____ the expected return for the short-term.

overestimate; underestimate

Rafia owns stocks of 15 different companies. Together, the stocks have a value of $78,640. Twelve percent of that total value is from one company, Gambrell & Valdez. The twelve percent figure is called a(n):

portfolio weight.

Assume a manager determines the cost of capital for a specific project based on the cost of capital at another firm with a line of business that is similar to the project. Accordingly, the manager is using the ________ approach.

pure play

Assume a firm has a debt-equity ratio of .62. The firm's weighted average cost of capital is the:

rate of return a company must earn on its existing assets to maintain the current value of its stock.

The cost of preferred stock is equivalent to the:

rate of return on a perpetuity.

To calculate the expected risk premium on a stock, one must subtract the ________ from the stock's expected return.

risk-free rate

A project has a net present value of zero. Given this information:

the project's cash inflows equal its cash outflows in current dollar terms.

An investor who owns a well-diversified portfolio would consider ________ to be irrelevant.

unsystematic risk