Finance Exam 4

Alto stock pays an annual dividend of $1.10 a share and has done so for the past six years. No changes in the dividend amount are expected. The relevant market rate of return is 7.8 percent. Given this, one share of this stock:

Is valued as a perpetuity

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 0

You are considering a project with conventional cash flows, an IRR of 11.63 percent, a PI of 1.04, an NPV of $987, and a payback period of 2.98 years. Which one of the following statements is correct given this information?

The discount rate used in computing the net present value was less than 11.63 percent

A stock quote shows a last price of 32.13, a P/E of 17, and a net change of -.23. Based on this information, which one of the following statements is correct?

The earnings per share are equal to 1/17th of $32.13

If a project has a net present value equal to zero, then:

The project's internal rate of return is exactly equal to the discount rate

Corporate dividends:

are taxed at the personal level even though they are paid from after-tax income

The Olde Mill just paid an annual dividend of $.38 a share and plans on decreasing this amount by 1 percent annually. What is the expected dividend for Year 6?

$.3578 D6= .38(1-0.01)^6 D6= .3578

An investor wants to purchase shares in a firm that has no growth opportunities but pays an annual dividend of $2.35. The market rate of return on similar securities is 17.5 percent. What is the maximum price the investor should pay for this stock?

$13.43 2.35 / 0.175 = 13.43

The ELL common stock pays an annual dividend of $2.23 a share and is committed to maintaining a constant dividend. How much are you willing to pay for one share of this stock if your required return is 16 percent?

$13.94 P0= $2.23 / 0.16 = 13.94

Blasco just paid an annual dividend of $1.63 a share. What is one share of this stock worth to you if the dividends increase by 3 percent annually and you require a rate of return of 14 percent?

$15.26 P0= [1.63 x (1+0.03)] / (0.14-0.03)

Webster preferred stock pays an annual dividend of $6.20 a share. What is the maximum price you should pay today to purchase this stock if you desire a rate of return of 14.25 percent?

$43.51 P0= 6.20 / 0.1425 = 43.51

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?

1.67 years. Payback period = 6000/3600 = 1.67 years

Shares of ABT stock offer an expected total return of 14.6 percent. What is the dividend yield if the dividend increases by 2.8 percent annually?

11.80% Dividend yield = 14.6%-2.8%= 11.80%

Last year, Grenville common stock had a rate of return of 15.84 percent, a fixed annual dividend of $2.65 a share, and a dividend yield of 2.7 percent. What was the rate of price appreciation on the stock?

13.14% g = 15.84%-2.7% = 13.14%

The secondary market is best defined by which of the following?

A market where outstanding shares of stock are resold

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 project B and reject project A based on the NPVs

When the present value of the cash inflows exceeds the initial cost of the project, then the project should be:

Accepted because the profitability index is greater than 1

Which one of these represents the portion of a stock's rate of return that is attributable to the growth rate of the dividends?

Capital Gains Yield

The total return on a stock is equal to:

Capital gains yield PLUS dividend yield

Based on the dividend growth model, an increase in investors' overall level of required returns will:

Cause the market values of all stocks to decrease, all else held constant

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?

Cumulative

The voting procedure whereby shareholders may cast all of their votes for one candidate for the board of directors is called _____________ voting

Cumulative

What are the distributions of either cash or stock to shareholders by a corporation called?

Dividends

According to finance professionals, which one of these factors has the biggest impact on a firm's PE ratio?

Growth Opportunities

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:

Mutually Exclusive

The voting procedure where you must control 50 percent plus one of the outstanding shares of stock to guarantee that you will win a seat on the board of directors is called ___________ voting

Straight

The market in which new securities are originally sold to investors is called the ______ market

Primary

Samuelson Electronics has a required payback period of three years for all of its projects. Currently, the firm is analyzing two independent projects. Project A has an expected payback period of 2.8 years and a net present value of $6,800. Project B has an expected payback period of 3.1 years with a net present value of $28,400. Which projects should be accepted based on the payback decision rule?

Project A only

The voting procedure where a shareholder grants authority to another individual to vote his/her shares is called ________ voting

Proxy

Lew, an individual investor, sold 100 shares of Global Tech stock on Monday. Janice, another individual investor, purchased those shares but never met Lew. You know for certain that this trade occurred in which market?

Secondary Market

The owner of preferred stock:

is entitled to a distribution of income prior to the common shareholders