MGF 301 Final Exam
A company has 330,000 shares outstanding that sell for $83.36 per share. The company plans a 6-for-1 stock split. Assuming no market imperfections or tax effects, what will the stock price be after the split? $16.28 $13.89 $500.16 $16.67 $15.88
$13.89
Orchard Farms has a pretax cost of debt of 7.29 percent and a cost of equity of 16.3 percent. The firm uses the subjective approach to determine project discount rates. Currently, the firm is considering a project to which it has assigned an adjustment factor of 1.25 percent. The firm's tax rate is 21 percent, and its debt-equity ratio is .48. The project has an initial cost of $3.9 million and produces cash inflows of $1.26 million a year for 5 years. What is the net present value of the project? $412,063 $446,556 $514,370 $561,027 $478,721
$412,063
Shelton Company purchased a parcel of land six years ago for $874,500. At that time, the firm invested $146,000 in grading the site so that it would be usable. Since the firm wasn't ready to use the site itself at that time, it decided to lease the land for $54,500 a year. The company is now considering building a warehouse on the site as the rental lease is expiring. The current value of the land is $926,000. What value should be included in the initial cost of the warehouse project for the use of this land? $926,000 $1,020,500 $1,072,000 $0 $874,500
$926,000
A project has the following cash flows YearCash Flows0−$ 129,800159,000263,800351,600428,100 The required return is 8.8 percent. What is the profitability index for this project? .772 .964 1.188 1.296 1.080
1.296
A new project has an initial cost of $275,000. The equipment will be depreciated on a straight-line basis to a zero book value over the five-year life of the project. The projected net income each year is $13,500, $18,500, $20,840, $15,400, and $12,400, respectively. What is the average accounting return? 4.96% 8.35% 12.57% 11.73% 10.75%
11.73%
Yellow Day has a project with the following cash flows: YearCash Flows0−$ 27,300110,700221,50039,9004−3,750 What is the MIRR for this project using the reinvestment approach? The interest rate is 10 percent. 19.41% 16.64% 21.17% 12.32% 14.79%
14.79%
Of the following, which two are the best reasons for doing a reverse stock split? Return a stock to its normal trading range Eliminate small shareholders Reduce shareholder costs Avoid delisting 1 and 2 1 and 3 2 and 3 2 and 4 3 and 4
2 and 4
The Cincinnati Chili Kitchen has just announced the repurchase of $130,000 of its stock. The company has 40,000 shares outstanding and earnings per share of $3.31. The company stock is currently selling for $76.22 per share. What is the price-earnings ratio after the repurchase? 23.03 times 21.42 times 24.01 times 22.05 times 23.52 times
22.05 times
Flemington Farms is evaluating an extra dividend versus a share repurchase. In either case, $10,000 would be spent. Current earnings are $2.10 per share, and the stock currently sells for $52 per share. There are 2,000 shares outstanding. Ignore taxes and other imperfections. The PE ratio will be _________blank if the firm issues the dividend as compared to _________blank if the firm does the share repurchase. 22.38; 22.38 24.87; 22.38 20.23; 24.87 22.38; 20.23 20.23; 22.38
22.38; 22.38
Innovative Technologies has 46,000 shares of stock outstanding at a market price of $6 a share. Which one of the following stock splits should the firm declare if it wants to increase the stock price to exactly $16 a share? Ignore any taxes or market imperfections. 5-for-2 stock split 3-for-1 stock split 1-for-3-reverse stock split 2-for-5 reverse stock split 3-for-8 reverse stock split
3-for-8 reverse stock split
Weiland, Incorporated, has 390,000 shares outstanding that sell for $89 per share. The company plans a 4-for-3 stock split. How many shares will be outstanding after the split? 292,500 shares 2,730,000 shares 1,625,000 shares 130,000 shares 520,000 shares
520,000 shares
Which one of these favors a high-dividend payout? Low transaction costs on stock trades Lower taxes on capital gains than on dividends Tax deferment on capital gains, but not on dividend income Flotation costs Corporate shareholders
Corporate shareholders
Which one of the following methods of analysis is most appropriate to use when two investments are mutually exclusive? Internal rate of return Profitability index Net present value Modified internal rate of return Average accounting return
Net present value
Which one of the following is used as the pretax cost of debt? Average coupon rate on the firm's outstanding bonds Coupon rate on the firm's latest bond issue Weighted average yield to maturity on the firm's outstanding debt Average current yield on the firm's outstanding debt Annual interest divided by the market price per bond for the latest bond issue
Weighted average yield to maturity on the firm's outstanding debt
Kate is the CFO of a major firm and has the job of assigning discount rates to each project under consideration. Kate's method of doing this is to assign an incrementally higher rate as the risk level of the project increases and a lower rate as the risk level declines. Kate is applying the _____________blank approach. pure play divisional rating subjective straight WACC equity rating
subjective
You own 290 shares of stock in Green Mild Chili Peppers, Incorporated, that currently sell for $52.20 per share. The company has announced a dividend of $2.95 per share with an ex-dividend date of May 3. Assuming no taxes, what is the value of your portfolio on May 3? $14,813.00 $15,138.00 $14,282.50 $14,557.50 $855.50
$15,138.00
Kim's Bridal Shoppe has 11,300 shares of common stock outstanding at a price of $47 per share. It also has 270 shares of preferred stock outstanding at a price of $89 per share. There are 290 bonds outstanding that have a coupon rate of 6.6 percent paid semiannually. The bonds mature in 28 years, have a face value of $2,000, and sell at 107.5 percent of par. What is the capital structure weight of the common stock? .4679 .4809 .5290 .4506 .4010
.4506
Piedmont Hotels is an all-equity company. Its stock has a beta of 1.16. The market risk premium is 6.7 percent and the risk-free rate is 4.7 percent. The company is considering a project that it considers riskier than its current operations so it wants to apply an adjustment of 1.5 percent to the project's discount rate. What should the firm set as the required rate of return for the project? 13.97% 8.52% 12.47% 10.97% 7.02%
13.97%
There is a project with the following cash flows : YearCash Flow0−$ 29,00018,40029,50037,80048,40058,000 What is the payback period? 4.00 years 3.39 years 2.58 years 3.67 years 3.73 years
3.39 years
Boone Brothers remodels homes and replaces windows. Ace Builders constructs new homes. If Boone Brothers considers expanding into new home construction, it should evaluate the expansion project using which one of the following as the required return for the project? Boone Brothers' cost of capital Ace Builders' cost of capital Average of Boone Brothers' and Ace Builders' cost of capital Lower of Boone Brothers' or Ace Builders' cost of capital Higher of Boone Brothers' or Ace Builders' cost of capital
Ace Builders' cost of capital
Joe and Rich are both considering investing in a project that costs $25,500 and is expected to produce cash inflows of $15,800 in Year 1 and $15,300 in Year 2. Joe has a required return of 8.5 percent, but Rich demands a return of 12.5 percent. Who, if either, should accept this project? Joe, but not Rich Rich, but not Joe Neither Joe nor Rich Both Joe and Rich Joe, and possibly Rich, who will be neutral on this decision as his net present value will equal zero
Both Joe and Rich
Assume that satisfied clienteles exist. Given this assumption, which one of these statements is correct? A firm can increase its share price by increasing its dividend payout. Dividend policy is irrelevant if each clientele group remains satisfied. All firms will adopt a high-dividend-payout policy. All dividends become irrelevant. All firms should adopt a low-dividend-payout policy.
Dividend policy is irrelevant if each clientele group remains satisfied.
KL Electronics has paid a quarterly dividend of $.42 per share for the past two years. This quarter, the firm plans to pay $.42 plus an additional $.05 per share. The firm has stated that it is uncertain whether it will pay $.42 or $.47 per share next quarter. Which one of the following is the best description of the additional $.05 that is being paid this quarter? Liquidating dividend Special dividend Extra dividend Stock dividend Normal dividend
Extra dividend
Which one of the following would tend to favor a low-dividend payout? Higher tax rates on capital gains than on dividend income High flotation cost for equity issues Endowment fund investors who cannot spend principal Investors' desire for a high-dividend yield Elimination of the tax deferral on capital gains
High flotation cost for equity issues
The cost of capital for a project depends primarily on which one of the following? Source of funds used for the project Division within the firm that undertakes the project Project's modified internal rate of return How the project uses its funds Project's fixed costs
How the project uses its funds
Which one of the following statements is correct? The net present value is a measure of profits expressed in today's dollars. The net present value is positive when the required return exceeds the internal rate of return. If the initial cost of a project is increased, the net present value of that project will also increase. If the internal rate of return equals the required return, the net present value will equal zero. Net present value is equal to an investment's cash inflows discounted to today's dollars.
If the internal rate of return equals the required return, the net present value will equal zero.
Which of the following create cash inflows from net working capital? Decrease in accounts payable and increase in accounts receivable Decrease in both accounts receivable and accounts payable Increase in accounts payable and decrease in inventory Increase in both accounts receivable and inventory Increase in inventory and decrease in cash
Increase in accounts payable and decrease in inventory
Based on the most recent survey information presented in your textbook, CFOs tend to use which two methods of investment analysis the most frequently? Payback and net present value Payback and internal rate of return Internal rate of return and net present value Net present value and profitability index Profitability index and internal rate of return
Internal rate of return and net present value
In which one of the following situations would the payback method be the preferred method of analysis? A long-term capital-intensive project Two mutually exclusive projects A proposed expansion of a firm's current operations Different-sized projects Investment funds available only for a limited period of time
Investment funds available only for a limited period of time
Generally speaking, payback is best used to evaluate which type of projects? Low-cost, short-term High-cost, short-term Low-cost, long-term High-cost, long-term Any size of long-term project
Low-cost, short-term
Which one of the following is a correct value to use if you are conducting a best-case scenario analysis? Sales price that is most likely to occur Lowest expected level of sales quantity Lowest expected salvage value Highest expected need for net working capital Lowest expected value for fixed costs
Lowest expected value for fixed costs
Which one of the following is specifically designed to compute the rate of return on a project that has a multiple negative cash flows that are interrupted by one or more positive cash flows? Average accounting return Profitability index Internal rate of return Indexed rate of return Modified internal rate of return
Modified internal rate of return
Valley Forge and Metal purchased a truck five years ago for local deliveries. Which one of the following costs related to this truck is the best example of a sunk cost? Assume the truck has a usable life of five years. New tires that will be purchased this winter Costs of repairs needed so the truck can pass inspection next month Money spent last month repairing a damaged front fender Engine tune-up that is scheduled for this afternoon Cost for a truck driver for the remainder of the truck's useful life
Money spent last month repairing a damaged front fender
Both Projects A and B are acceptable as independent projects. However, the selection of either one of these projects eliminates the option of selecting the other project. Which one of the following terms best describes the relationship between Project A and Project B? Mutually exclusive Conventional Dual return Crosswise
Mutually exclusive
M&N stock is currently selling for $22 per share. The firm just made an offer to one of its major shareholders to repurchase all the shares owned by that shareholder for $26 per share. What type of offer is being made? Rights offer Secondary issue Targeted repurchase Tender offer Private issue
Targeted repurchase
JTL has 148,000 shares of stock outstanding. The firm has extra cash, so it announced this morning that it is willing to repurchase 18,000 of its shares. What type of offer is the firm making? Rights offer Secondary issue Targeted repurchase Tender Offer Private issue
Tender Offer
What is crossover rate? The discount rate at which the project will become profitable. The discount rate at which we are indifferent between two investments.T he discount rate that is higher than the Net Present Value. The discount rate that ensures there will be payback for the project . The discount rate that represents the highest possible project potential.
The discount rate at which we are indifferent between two investments.
Which one of the following statements is correct? A longer payback period is preferred over a shorter payback period. The payback rule states that you should accept a project if the payback period is less than one year. The payback period ignores the time value of money. The payback rule is biased in favor of long-term projects. The payback period considers the timing and amount of all a project's cash flows.
The payback period ignores the time value of money.
Kelsey International declared a dividend on Friday, November 13, that is payable on Friday, December 11, to holders of record on Monday, November 30. What is the latest date that you can purchase this stock if you wish to receive this dividend? Assume there are no banking holidays within this period of time. Tuesday, November 24 Wednesday, November 25 Thursday, November 26 Friday, November 27 Monday, November 30
Thursday, November 26
What is the first step when calculating the crossover rate? To calculate the IRR of the cash flow differences.To compare the crossover rate to the Net Present Value. To compare the crossover rate to the Internal Rate of Return. To calculate the cash flow differences between each project. To verify that you have at least five years of data for the calculation.
To calculate the cash flow differences between each project.
Which one of the following is an example of a liquidating dividend? Valley Feed Mills recently sold its grain storage facility and is distributing the proceeds of that sale to its shareholders. Kate's Winery has excess cash that it wishes to distribute to its shareholders in addition to its normal cash dividend. This extra distribution usually occurs about once every year. Kurt's Music is planning to increase its quarterly dividend by 3 percent. The Dried Florist is preparing to pay its first annual dividend of $.08 per share. Hi Tek had an extraordinarily profitable year and has decided to do a one-time only $10 per share cash dividend.
Valley Feed Mills recently sold its grain storage facility and is distributing the proceeds of that sale to its shareholders.
Scenario analysis asks questions such as: How will changing the number of units sold affect the outcome of this project? What is the best outcome that should reasonably be expected? How much will a $1 increase in the variable cost per unit change the net present value? Will the net present value increase or decrease if the quantity sold increases by 100 units? How will the operating cash flow change if the depreciation method is changed?
What is the best outcome that should reasonably be expected?
Which one of the following statements is correct? Assume cash flows are conventional. If the IRR exceeds the required return, the profitability index will be less than 1.0. The profitability index will be greater than 1.0 when the net present value is negative. When the internal rate of return is greater than the required return, the net present value is positive. Projects with conventional cash flows have multiple internal rates of return. If two projects are mutually exclusive, you should select the project with the shortest payback period.
When the internal rate of return is greater than the required return, the net present value is positive.
A proposed project will increase a firm's accounts payable. This increase is generally: treated as an erosion cost. treated as an opportunity cost. a sunk cost and should be ignored. a cash outflow at Time zero and a cash inflow at the end of the project. a cash inflow at Time zero and a cash outflow at the end of the project.
a cash inflow at Time zero and a cash outflow at the end of the project.
When using the pure play approach for a proposed investment, a firm is primarily seeking a rate of return that: is based on the actual source of funds that will be used to fund the project. creates a positive net present value for the project. reflects the size and life of the project. most closely correlates with the proposed investment's internal rate of return. best matches the risk level of the proposed investment.
best matches the risk level of the proposed investment.
Sensitivity analysis: looks at the most reasonably optimistic and pessimistic results for a project. helps identify the variable within a project that presents the greatest forecasting risk. is used for projects that cannot be analyzed by scenario analysis because the cash flows are unconventional. is generally conducted prior to scenario analysis just to determine if the range of potential outcomes is acceptable. illustrates how an increase in operating cash flow caused by changing both the revenue and the costs simultaneously will change the net present value for a project.
helps identify the variable within a project that presents the greatest forecasting risk.
A firm that uses its weighted average cost of capital as the required return for all of its investments will: maintain a constant value for its shareholders. increase the risk level of the firm over time. make the best possible accept and reject decisions related to those investments. find that its cost of capital declines over time. accept only the projects that add value to the firm's shareholders.
increase the risk level of the firm over time.
When evaluating a project, the dividend growth model: can only be used by firms that pay increasing dividends. must be used by all dividend-paying firms. is only applicable when the growth rate of the project exceeds the dividend growth rate. is relatively simple to use. must use the growth rate of the project as the rate of growth in the formula.
is relatively simple to use.
Most company managers overwhelming feel that: dividends should be increased annually no matter what. dividends should be flexible and adjusted annually in response to changes in the firm's earnings. the personal taxes of their shareholders must be their primary consideration when setting dividend policy. once a dividend is increased, it should not be decreased. dividend smoothing is talked about but rarely affects dividend decisions.
once a dividend is increased, it should not be decreased.
The Shoe Box is considering adding a new line of winter footwear to its product lineup. When analyzing the viability of this addition, the company should include all the following in its analysis with the exception of: any expected changes in the sales levels of current products caused by adding the new product line. the cost of new display counters for the additional winter footwear. increased taxes from winter footwear profits. the research and development costs to produce the current winter footwear samples. the expected revenue from winter footwear sales.
the research and development costs to produce the current winter footwear samples.
Jim's Hardware is adding a new product to its sales lineup. Initially, the firm will stock $36,000 of the new inventory, which will be purchased on 30 days' credit from a supplier. The firm will also invest $24,000 in accounts receivable and $11,000 in equipment. What amount should be included in the initial project costs for net working capital? −$49,000 −$47,000 −$3,000 −$13,000 −$24,000
−$24,000
Shannon's Irish Cookware is implementing a project that will initially increase accounts payable by $5,000, increase inventory by $3,200, and decrease accounts receivable by $1,800. All net working capital will be recouped when the project terminates. What is the cash flow related to the net working capital for the last year of the project? $500,00 $600 −$3,600 $2,500 $5,600
−$3,600
McCanless Company recently purchased an asset for $2,400,000 that will be used in a 3-year project. The asset is in the 3-year MACRS class. The depreciation percentage each year is 33.33 percent, 44.45 percent, 14.81 percent, and 7.41 percent, respectively. What is the amount of depreciation in Year 2? $355,440 $799,920 $1,066,800 $800,000 $177,840
$1,066,800
Murphy's, Incorporated, has 31,900 shares of stock outstanding with a par value of $1 per share. The market value is $14 per share. The balance sheet shows $87,750 in the capital in excess of par account, $31,900 in the common stock account, and $146,950 in the retained earnings account. The firm just announced a stock dividend of 12 percent. What will the market price per share be after the dividend? $14.39 $13.39 $12.50 $13.50 $14.00
$12.50
Sherpa Outfitters sells specialty equipment for mountain climbers. Its sales for last year included $488,500 of tents and $800,000 of climbing gear. For next year, management has decided to sell specialty sleeping bags also. As a result of this change, sales projections for next year are $537,350 of tents, $880,000 of climbing gear, and $150,000 of sleeping bags. How much of next year's sales are derived from the side effects of adding the new product to its sales offerings? $0 $145,650 $128,850 $278,850 $256,850
$128,850
Cori's Dog House is considering the installation of a new computerized pressure cooker for hot dogs. The cooker will increase sales by $8,500 per year and will cut annual operating costs by $12,800. The system will cost $44,700 to purchase and install. This system is expected to have a 4-year life and will be depreciated to zero using straight-line depreciation and have no salvage value. The tax rate is 24 percent and the required return is 10.3 percent. What is the NPV of purchasing the pressure cooker? $33,030 $-1,853 −$20,154 −$25,961 $14,729
$14,729
A project is expected to generate annual revenues of $131,300, with variable costs of $79,900, and fixed costs of $20,400. The annual depreciation is $4,700 and the tax rate is 22 percent. What is the annual operating cash flow? $52,434 $72,834 $35,700 $25,214 $31,000
$25,214
Northern Lighting purchased some three-year MACRS property three years ago. What is the current book value of this equipment if the original cost was $385,000? The MACRS allowance percentages are as follows, commencing with Year 1: 33.33, 44.45, 14.81, and 7.41 percent. $0 $57,037.75 $28,528.50 $85,547.00 $96,250.00
$28,528.50
Go Fly A Kite is considering making and selling custom kites in two sizes. The small kites would be priced at $12.90 and the large kites would be $25.90. The variable cost per unit is $6.25 and $13.50, respectively. Jill, the owner, feels that she can sell 3,800 of the small kites and 2,060 of the large kites each year. The fixed costs would be $2,120 a year and the depreciation expense is $2,100. The tax rate is 25 percent. What is the annual operating cash flow? $38,635 $40,181 $36,520 $12,699 $37,045
$37,045
Blink of an Eye Company is evaluating a 5-year project that will provide cash flows of $42,100, $94,710, $63,730, $62,020, and $45,380, respectively. The project has an initial cost of $201,600 and the required return is 8.1 percent. What is the project's NPV $11,814.39 $16,300.09 $8,554.20 $9,409.62 $45,004.86
$45,004.86
Bo's Home Manufacturing has 340,000 shares outstanding that sell for $45.25 per share. The company has announced that it will repurchase $54,000 of its stock. What will the share price be after the repurchase? $45.09 $42.43 $39.45 $45.25 $45.41
$45.25
LTE stock sells for $28.11 per share and there are 350,000 shares outstanding. The company plans a 2-for-1 reverse stock split. Assuming no market imperfections or tax effects, what will the stock price be after the split? $14.06 $56.22 $49.97 $28.11 $28.11
$56.22
The Lumber Yard is considering adding a new product line that is expected to increase annual sales by $377,000 and expenses by $264,000. The project will require $173,000 in fixed assets that will be depreciated using the straight-line method to a zero book value over the 6-year life of the project. The company has a marginal tax rate of 21 percent. What is the depreciation tax shield? $22,778 $13,195 $23,730 $6,055 $9,240
$6,055
Consider an asset that costs $311,000 and is depreciated straight-line to zero over its six-year tax life. The asset is to be used in a four-year project; at the end of the project, the asset can be sold for $58,000. If the relevant tax rate is 21 percent, what is the aftertax cash flow from the sale of this asset? $67,590.00 $68,411.19 $70,103.33 $40,466.67 $42,473.33
$67,590.00
Left Eye Promotions is a specialty retailer offering T-shirts, sweatshirts, and caps. Its most recent annual sales consisted of $27,000 of T-shirts, $21,000 of sweatshirts, and $3,500 of caps. The company is adding polo shirts to the lineup and projects that this addition will result in sales next year of $25,000 of T-shirts, $17,000 of sweatshirts, $14,000 of Polo shirts, and $3,000 of caps. What sales amount should be used when evaluating the Polo shirt project? $13,300 $7,500 $6,700 $6,800 $7,900
$7,500
Alpha Industries is considering a project with an initial cost of $9.3 million. The project will produce cash inflows of $1.64 million per year for 9 years. The project has the same risk as the firm. The firm has a pretax cost of debt of 6.00 percent and a cost of equity of 11.53 percent. The debt-equity ratio is .73 and the tax rate is 25 percent. What is the net present value of the project? $454,134 $638,173 $709,081 $737,444 $607,784
$709,081
You own 280 shares of stock in Halestorm, Incorporated, that currently sells for $83.95 per share. The company has announced a dividend of $3.55 per share with an ex-dividend date of February 4. Assuming no taxes, what is the value of the stock on February 4? $82.17 $79.35 $80.40 $87.50 $83.95
$80.40
Sandy Bottom, Incorporated, purchased some seven-year MACRS welding equipment six years ago at a cost of $60,000. Today, the company is selling this equipment for $10,000. The tax rate is 21 percent. What is the after-tax cash flow from this sale? The MACRS allowance percentages are as follows, commencing with Year 1: 14.29, 24.49, 17.49, 12.49, 8.93, 8.92, 8.93, and 4.46 percent. $6,212.86 $8.461.96 $9,587.14 $10,711.06 $11,824.41
$9,587.14
Saint Nick Enterprises has 16,100 shares of common stock outstanding at a price of $62 per share. The company has two bond issues outstanding. The first issue has 10 years to maturity, a par value of $1,000 per bond, and sells for 95.5 percent of par. The second issue matures in 24 years, has a par value of $2,000 per bond, and sells for 103 percent of par. The total face value of the first issue is $180,000, while the total face value of the second issue is $280,000. What is the capital structure weight of debt? .3609 .1977 .3156 .3874 .2878
.3156
Bermuda Cruises issues only common stock and coupon bonds. The firm has a debt-equity ratio of 1.39. The cost of equity is 13.4 percent and the pretax cost of debt is 7.5 percent. What is the capital structure weight of the firm's equity if the firm's tax rate is 24 percent? .4184 .4637 .4902 .5816 .3906
.4184
Modern Homes just declared a 4-for-3 stock split. Which of the following occurred as a result of this split? Number of shares outstanding increased by one-third Number of shares outstanding decreased by one-fourth Price per share increased by one-third Price per share decreased by one-fourth 1 only 1 and 3 only 1 and 4 only 2 and 3 only 2 and 4 only
1 and 4 only
The Down Towner has a market value balance sheet as shown below. The firm currently has 12,000 shares of stock outstanding and net income of $17,500. Market Value Balance SheetExcess cash$ 14,300Debt$ 77,960Other assets215,460Equity151,800Total$ 229,760Total$ 229,760 The firm has decided to repurchase 10 percent of its outstanding stock at the current market price and fund that purchase with new debt. After the repurchase there will be _________blank shares outstanding at a price per share of _________blank. 10,200; $11.50 10,200; $12.65 10,800; $12.65 10,800; $11.50 10,800; $14.05
10,800; $12.65
Skolits Corporation has a cost of equity of 11.3 percent and an aftertax cost of debt of 4.59 percent. The company's balance sheet lists long-term debt of $365,000 and equity of $625,000. The company's bonds sell for 105.1 percent of par and the market-to-book ratio is 2.95 times. If the company's tax rate is 24 percent, what is the WACC? 8.83% 9.95% 10.78% 9.39% 10.14%
10.14%
Rossdale Company stock currently sells for $70.23 per share and has a beta of 1.10. The market risk premium is 7.70 percent and the risk-free rate is 3.21 percent annually. The company just paid a dividend of $3.81 per share, which it has pledged to increase at an annual rate of 3.55 percent indefinitely. What is your best estimate of the company's cost of equity? 8.15% 9.29% 10.42% 9.69% 11.23%
10.42%
Judy's Boutique just paid an annual dividend of $2.77 on its common stock. The firm increases its dividend by 3.50 percent annually. What is the company's cost of equity if the current stock price is $40.12 per share? 10.12% 9.83% 10.40% 11.03% 10.65%
10.65%
The stock in Bowie Enterprises has a beta of 1.22. The expected return on the market is 11.40 percent and the risk-free rate is 2.90 percent. What is the required return on the company's stock? 16.81% 13.27% 12.90% 12.53% 15.04%
13.27%
Bethesda Water has an issue of preferred stock outstanding with a coupon rate of 4.60 percent that sells for $92.14 per share. If the par value is $100, what is the cost of the company's preferred stock? 4.69% 5.41% 4.78% 4.60% 4.99%
4.99%
City Rentals has 44,000 shares of common stock outstanding at a market price of $32 a share. The common stock just paid a $1.50 annual dividend and has a dividend growth rate of 2.5 percent. There are 7,500 shares of $9 preferred stock outstanding at a market price of $72 a share. The outstanding bonds mature in 11 years, have a total face value of $825,000, a face value per bond of $1,000, a market price of $989 each, and a pretax yield to maturity of 8.3 percent. The tax rate is 21 percent. What is the firm's weighted average cost of capital? 7.76% 8.10% 9.29% 9.97% 10.30%
8.10%
Davidson Interiors declared a dividend to holders of record on Thursday, October 15, that is payable on Monday, November 2. Suenette purchased 200 shares of Davidson Interiors stock on Monday, October 12, and Jake purchased 100 shares of this stock on the following day. Which one of the following statements is correct given this information? Both Suenette and Jake will receive this dividend. Suenette will receive the dividend but Jake will not. Jake will receive the dividend but Suenette will not. Neither Suenette nor Jake will receive this dividend. You cannot determine who will or will not receive this dividend based on the information provided.
Both Suenette and Jake will receive this dividend.
Kyle Electric has three positive net present value opportunities. Unfortunately, the firm has not been able to find financing for any of these projects. Which one of the following terms best fits the situation facing the firm? Sensitivity analysis Capital rationing Soft rationing Contingency planning Sunk cost
Capital rationing
Which one of the following best defines a regular cash dividend? Distribution by a firm to its shareholders Payment from any source by a firm to its owners One-time payment of cash by a firm to its shareholders Cash payment by a firm to its owners as part of a firm's normal operations Distribution of the proceeds from the sale of a portion of a firm's operations
Cash payment by a firm to its owners as part of a firm's normal operations
Which one of the following is the primary advantage of payback analysis? Incorporation of the time value of money concept Ease of use Research and development bias Arbitrary cutoff point Long-term bias
Ease of use
Research conducted on firms' dividend policies over time support which one of the following conclusions? Aggregate dividends and stock repurchases have steadily declined in real terms. Dividends are required to be paid by all public corporations in existence for ten years or more. Managers tend to smooth dividends. Stock prices react quickly whenever an anticipated dividend amount is paid. Firms generally commence paying dividends prior to doing any stock repurchases.
Managers tend to smooth dividends.
Miller's Hardware recently paid $1.21 per share in dividends. The company currently has excess cash and would like to distribute an additional $.35 a share to its shareholders. However, the company is concerned about increasing the dividend by that amount as it will not be able to afford a similar increase in the future and doesn't want to lower the dividend once it has been raised. Which one of the following is probably the best suggestion for distributing the $.35 per share? Pay a special dividend of $.35 per share Pay an extra cash dividend of $.35 per share Pay a liquidating dividend of $.35 per share Increase the regular dividend by $.12 and pay a special dividend of $.23 Increase the regular dividend by $.12 and pay an extra cash dividend of $23
Pay a special dividend of $.35 per share
Which one of the following methods of analysis has the greatest bias toward short-term projects? Net present value Internal rate of return Average accounting return Profitability index Payback
Payback
You were recently hired by a firm as a project analyst. The owner of the firm is unfamiliar with financial analysis and wants to know only what the expected dollar return is per dollar spent on a given project. Which financial method of analysis will provide the information that the owner requests? Internal rate of return Modified internal rate of return Net present value Profitability index Payback
Profitability index
Farmer's Supply is considering opening a clothing store, which would be a new line of business for the firm. Management has decided to use the cost of capital of a similar clothing store as the discount rate to evaluate this proposed expansion. Which one of the following terms describes this evaluation approach? Equity approach Aftertax approach Subjective approach Market play Pure play approach
Pure play approach
Which statement is true? An increase in the market value of preferred stock will increase a firm's weighted average cost of capital. The cost of preferred stock is unaffected by the issuer's tax rate. Preferred stock is generally the cheapest source of capital for a firm. The cost of preferred stock remains constant from year to year. Preferred stock is valued using the capital asset pricing model.
The cost of preferred stock is unaffected by the issuer's tax rate.
The Corner Market has decided to expand its retail store by building on a vacant lot it currently owns. This lot was purchased four years ago at a cost of $299,000, which the firm paid in cash. To date, the firm has spent another $38,000 on land improvements, all of which was also paid in cash. Today, the lot has a market value of $329,000. What value should be included in the analysis of the expansion project for the cost of the land? The sum of the cash paid to date for both the lot and the improvements The original purchase price only The current market value of the land plus the cash paid for the improvements The current market value of the land Zero because the land and the improvements were previously purchased with cash
The current market value of the land
The internal rate of return is unreliable as an indicator of whether an investment should be accepted given which one of the following? One of the time periods within the investment period has a cash flow equal to zero. The initial cash flow is negative. The investment has cash inflows that occur after the required payback period. The investment is mutually exclusive with another investment of a different size. The cash flows are conventional.
The investment is mutually exclusive with another investment of a different size.
An investment has conventional cash flows and a profitability index of 1.0. Given this, which one of the following must be true? The internal rate of return exceeds the required rate of return. The investment never pays back. The net present value is equal to zero. The average accounting return is 1.0. The net present value is greater than 1.0.
The net present value is equal to zero.
You are using a net present value profile to compare Projects A and B, which are mutually exclusive. Which one of the following statements correctly applies to the crossover point between these two? The internal rate of return for Project A equals that of Project B, but generally does not equal zero. The internal rate of return of each project is equal to zero. The net present value of each project is equal to zero. The net present value of Project A equals that of Project B, but generally does not equal zero. The net present value of each project is equal to the respective project's initial cost.
The net present value of Project A equals that of Project B, but generally does not equal zero.
Which one of the following statements is correct? The internal rate of return is the most reliable method of analysis for any type of investment decision. The payback method is biased toward short-term projects. The modified internal rate of return is most useful when projects are mutually exclusive. The average accounting return is the most difficult method of analysis to compute. The net present value method is applicable only if a project has conventional cash flows.
The payback method is biased toward short-term projects.
A new project is expected to generate an operating cash flow of $75,560 and will initially free up $12,250 in net working capital. Purchases of fixed assets costing $75,000 will be required to start up the project. What is the total cash flow for this project at Time zero? −$64,410 −$62,750 −$75,000 −$87,250 $62,250
−$62,750
Lakeside Winery is considering expanding its winemaking operations. The expansion will require new equipment costing $708,000 that would be depreciated on a straight-line basis to a zero balance over the four-year life of the project. The equipment can be sold for $220,000 after the four years. The project requires $46,000 initially for net working capital, all of which will be recouped at the end of the project. The projected operating cash flow is $211,500 a year. What is the net present value of this project if the relevant discount rate is 13 percent and the tax rate is 21 percent? −$9,908.14 −$8,309.18 −$10,747.11 $7,008.14 $1,309.54
−$9,908.14
