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Finance Quiz

1. (TCO D) A stock is expected to pay a dividend of =$0.75 at the end of the year. The required rate of return is r(s)=10.5%, and the expected constant growth rate is g=6.4%. What is thw stock’s current price?
a. $17.49
b. $17.84
c. $18.29
d. $18.75
e. $19.22

2. (TCO D) If D(o)=$2.25, g (which is constant)= 3.5%, and P(o)=$50, what is the stock’s expected dividend yield for the coming year?
a. 4.42%
b. 4.66%
c. 4.89%
d. 5.13%
e. 5.39%

3. (TCO D) Molen Inc. has an outstanding issue of perpetual preferred stock with an annual dividend of $7.50 per share. If the required return on this preferred stock is 6.5%, at what price should the preferred stock sell?
a. $104.27
b. $106.95
c. $109.69
d. $112.50
e. $115.38

4. (TCO E) which of the following is not a capital component when calculating the weighted average cost of capital (WACC) for use in capital budgeting?
a. Long-term dept
b. Accounts payable
c. Retained earnings
d. Common stock
e. Preferred stock

5. (TCO E) If a typical U.S. company correctly estimates its WACC at a given point in time and then uses that same cost of capital to evaluate all projects for the next 10 years, then the firm will most likely
a. Become riskier over time, but its intrinsic value will be maximized
b. Become less risky over time, and this will maximize its intrinsic value
c. Accept too many low risk projects and too few high risk projects
d. Become more risky and also have an increasing WACC. Its intrinsic value will not be maximized
e. Continue as before, because there is no reason to expect its risk position or value to change over time as a result of its use of a single cost of capital

6. (TCO D) Scanlon Inc’s CFO hired you as a consultant to help her estimate the cost of capital. You have been provided with the following data:r(RF)=4.10%; RP(M)=5.25%; and b=1.30. Based on the CAMO approach, what is the cost of common from retained earnings?

Answer: 10.93%

7. (TCO F) Warnock Inc. is considering a project that has the following cash flow and WACC data. What is the projects NPV? Note that a project’s expected NPV can be negative, in which case it will be rejected.
WACC: 10.00%
Cash flows Year 0 -$950
Year 1 $500
Year 2 $400
Year 3 $300

a. $54.62
b. $57.49
c. $60.52
d. $63.54
e. $66.72
8. (TCO F) Simkins Renovations Inc. is considering a project that has the following cash flow data. What is the project’s IRR? Note that a project’s IRR can be less than the WACC (and even negative), in which case it will be rejected.
Cash flows Year 0 -$850
Year 1 $300
Year 2 $290
Year 3 $280
Year 4 $270

a. 13.13%
b. 14.44%
c. 15.89%
d. 17.48%
e. 19.22%

9. (TCO F) Fernando Designs is considering a project that has the following cash flow and WACC data. What is the project’s discounted payback?
WACC: 10.00%

Cash flows Year 0 -$900
Year 1 $500
Year 2 $500
Year 3 $500

a. 1.88 years
b. 2.09 years
c. 2.29 years
d. 2.52 years
e. 2.78 years



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