Finance mcqs quiz | Business & Finance homework help
1. During 2012, FedCom was affected by a strike that caused a disruption in operations and the subsequent suspension of dividends to stockholders. The company doesn’t plan on paying dividends until the year 2016, at which time an annual dividend of $3.50 will be declared. For 2017 and 2018, the dividend is expected to increase by 10%. For the years 2019 and beyond, the dividend growth rate is expected to be a constant 5%. The required rate of return for FedCom is 11%.
Find the value of FedCom common shares today (2013).
2. Had FedCom not suffered financially during the last 2 years, last year’s 2012 dividend of $3.50 would have been paid, with an assumed constant growth rate of 6% annually and a rate of return of 11%. If there were no strike, what would today’s (2013) price be?
3. A bond has a call provision. The call provision allows the _____ to _____ the bonds before maturity.
trustee; buy back
investor; sell back
investor; call in
issuer; call in
4. Debt ratings issued by companies such as Moody’s and Standard and Poor’s depend on:
the probability of default and protection given in indenture is case of default.
how large the company is and the number of restrictive covenants.
the size of the fee paid by the issuer and their industry.
none of the above.
5. You bought Northeast Utilities last year at $32.87 per share. This year, the company paid dividends of $2.41 per share, and the price at the end of the year was $29.09. What is the rate of return on this investment?
6. If a bond has a price of $1100 and a yield to maturity of 10%, then _______.
its current yield must be less than 10%
its coupon rate must be greater than 10%
its capital gains yield must be greater than zero
a and b
none of the above
7. A security ___.
is undervalued in the opinion of an investor if the intrinsic value is greater than the current price
is undervalued in the opinion of an investor if the intrinsic value is less than the current price
will have the same intrinsic value and market price even if markets are inefficient
will provide the opportunity for excess profits if markets are efficient
8. Target-Mart is planning a new store in Greenwich. The company will lease the needed space for 9 years. Equipment and fixtures for the store will cost $500,000 and will be depreciated totally using the straight-line depreciation method. In addition, inventories valued at $50,000 will also be needed to stock the store at the current time (before opening). Sales are expected to be $1.5 million each year. Operating expenses, ignoring depreciation, will be $750,000 each year. The firm will liquidate the inventory at the end of the 9-year period. The corporate tax rate is 34%. The WACC for Target-Mart is 13.75%.
What is the IRR of this project?
9. Target-Mart is planning a new store in Greenwich. The company will lease the needed space for 9 years. Equipment and fixtures for the store will cost $500,000 and will be depreciated totally using the straight-line depreciation method. In addition, inventories valued at $50,000 will also be needed to stock the store at the current time (before opening). Sales are expected to be $1.5 million each year. Operating expenses, ignoring depreciation, will be $750,000 each year. The firm will liquidate the inventory at the end of the 9-year period. The corporate tax rate is 34%. The WACC for Target-Mart is 13.75%.
What is the NPV of this project?
10. You are considering two bonds. Bond A has a 9% annual coupon while Bond B has a 6% annual coupon. Both bonds have a 7% yield to maturity, and the YTM is expected to remain constant. Which of the following statements is CORRECT?
The price of Bond A will decrease over time, but the price of Bond B will increase over time.
The price of Bond B will decrease over time, but the price of Bond A will increase over time.
The prices of both bonds will remain unchanged.
The prices of both bonds will increase over time, but the price of Bond A will increase by more.
11. Thompson Hauling Co. anticipates dividend growth rates of 25%, 15% and 10% over the next three years, and a 6% long-term growth rate beyond that. Its current dividend is $1.80 per share. Thompson has a beta of 1.1, the market risk premium is 7 percent and the risk-free rate is 4.5 percent. What is the current price of Thompson?
12. Cape Cod Canning Co. has a new automated production line it is considering. The project has a cost of $675,000 and is expected to provide after-tax cash flows of $126,250 for 9 years. Management has found that the cost of capital is 9.5 percent. What is the project’s IRR?
13. ABC, Inc. bonds have a par value of $1,000 and will mature in 13 years. The bonds have an 8% coupon and interest is paid semi-annually. The current price of the bonds is $938.47. What is the yield to maturity on each bond?
14. Which of the following items should be included with estimating cash flows for projects?
principal payment on debt
15. The Federal Reserve recently shifted its monetary policy, causing Lasik Vision’s WACC to change. Lasik had recently analyzed the project whose cash flows are shown below. However, the CFO wants to reconsider this and all other proposed projects in view of the Fed action. How much did the changed WACC cause the forecasted NPV to change? Assume that the Fed action does not affect the cash flows, and note that a project’s projected NPV can be negative, in which case it should be rejected.
New WACC: 7.00%
Old WACC: 10.00%
16. A firm is considering the purchase of an asset whose risk is greater than the current risk of the firm, based on any method for assessing risk. In evaluating this asset, the decision maker should
Increase the NPV of the asset to reflect the greater risk
Reject the asset, since its acceptance would increase the risk of the firm
Ignore the risk differential if the asset to be accepted would comprise only a small fraction of the total assets of the firm
Increase the cost of capital used to evaluate the project to reflect the higher risk of the project
17. Which of the following statements is CORRECT?
The internal rate of return method (IRR) is generally regarded by academics as being the best single method for evaluating capital budgeting projects.
The discounted payback method is generally regarded by academics as being the best single method for evaluating capital budgeting projects.
The net present value method (NPV) is generally regarded by academics as being the best single method for evaluating capital budgeting projects.
The modified internal rate of return method (MIRR) is generally regarded by academics as being the best single method for evaluating capital budgeting projects.
18. The basic characteristics of relevant project flows include all of the following except ________.
19. Project EXPAND will result in an increase of 5,000 units per year at a sale price of $10 each (assume 0% inflation). The additional sales will generate additional operating expenditures of $7 per unit plus $3,000 in fixed operating costs. In addition, the firm will see an increase in depreciation expense of $12,000 per year. The firm anticipates it will remain at the current marginal rate of 40%. What is the incremental net cash flow?
none of the above
20. Under which of the following conditions will the IRR of a project be equal to the WACC?
when the payback is equal to the MIRR
when the profitability index is equal to the WACC
when the NPV is equal to zero
when the payback is equal to the IRR
21. O’Brien Ltd.’s outstanding bonds have a $1,000 par value, and they mature in 25 years. Their nominal yield to maturity is 9.25%, they pay interest semiannually, and they sell at a price of $850. What is the bond’s nominal (annual) coupon interest rate?
22. Wachowicz Corporation issued 15-year, noncallable, 7.5% annual coupon bonds at their par value of $1,000 one year ago. Today, the market interest rate on these bonds is 5.5%. What is the current price of the bonds, given that they now have 14 years to maturity?
0 1 2 3
-$1,000 $500 $520 $540
23. The preemptive right is important to shareholders because it ___
Allows managers to buy additional shares below the current market price.
Will result in higher dividends per share.
Protects bondholders, and thus enables the firm to issue debt with a relatively low interest rate.
Protects the current shareholders against a dilution of their ownership interests.
24. If D0 = $2.25, g (which is constant) = 3.5%, and P0 = $50, what is the stock’s expected dividend yield for the coming year?
25. The Wei Company’s last dividend was $1.75. The dividend growth rate is expected to be constant at 1.50% for 2 years, after which dividends are expected to grow at a rate of 8.00% forever. Wei’s required return (rs) is 12.00%. What is Wei’s current stock price?
26. Mihov Inc. hired you as a consultant to help estimate its cost of capital. You have been provided with the following data. (1): rd = yield on the firm’s bonds = 7.00% and the risk premium over its own debt cost = 4.00%. (2) rRF = 5.00%, RPM = 6.00%, and b = 1.25. (3) D1 = $1.20; P0 = $35.00 and g = 8.00% (constant). You were asked to estimate the cost of equity based on the three most commonly used methods and then to indicate the difference between the highest and lowest of these estimates. What is that difference?
27. Roxie Epoxy’s balance sheet shows a total of $50 million long-term debt with a coupon rate of 8.00% and a yield to maturity of 7.00%. This debt currently has a market value of $55 million. The balance sheet also shows that that the company has 20 million shares of common stock, and the book value of the common equity (common stock plus retained earnings) is $65 million. The current stock price is $8.25 per share; stockholders’ required return, rs, is 10.00%; and the firm’s tax rate is 40%. Based on market value weights, and assuming the firm is currently at its target capital structure, what WACC should Roxie use to evaluate capital budgeting projects?
28. You were hired as a consultant to Kroncke Company, whose target capital structure is 40% debt, 10% preferred, and 50% common equity. The after-tax cost of debt is 6.00%, the cost of preferred is 7.50%, and the cost of retained earnings is 13.25%. The firm will not be issuing any new stock. What is its WACC?