1.
The IF for the future value of an annuity is 4.5 at 10% for 4 years. If we wish to accumulate $8,000 by the end of 4 years, how much should the annual payments be?
(Points: 2)
$2,500
$2,000
$1,778
None of the above
2.
As the time period until receipt increases, the present value of an amount at a fixed interest rate
(Points: 2)
decreases.
remains the same.
increases.
Not enough information to tell.
3.
After 20 years, 100 shares of stock originally purchased for $1000 was sold for $5,000. What was the yield on the investment? Choose the closest answer.
(Points: 2)
19%
5%
12.7%
8%
4.
Mr. Nailor invests $5,000 in a certificate of deposit at his local bank. He receives annual interest of 8% for seven years. How much interest will his investment earn during this time period?
(Points: 2)
$2,915
$3,570
$6,254
$8,570
5.
Lou Lewis borrows $10,000 to be repaid over 10 years at 9%. Repayment of principal in the first year is:
(Points: 2)
$1,558
$658
$742
$885
6.
The future value of a $1,000 investment today at 8% annual interest compounded semiannually for five years is:
(Points: 2)
$1,469
$1,480
$1,520
$1,555
7.
You have an opportunity to buy a $1,000 bond which matures in 10 years. The bond pays $30 every six months. The current market interest rate is 8%. What is the most you would be willing to pay for this bond?
(Points: 2)
$407.70
$456.00
$788.60
$863.70
8.
Which of the following is not one of the components that make up the required rate of return on a bond?
(Points: 2)
risk premium
real rate of return
inflation premium
maturity payment
9.
A 14-year zero-coupon bond was issued with a $1000 par value to yield 12%. What is the approximate market value of the bond?
(Points: 2)
$597
$205
$275
$482
10.
A ten-year bond pays 11% interest on a $1000 face value annually. If it currently sells for $1,195, what is its approximate yield to maturity?
(Points: 2)
9.33%
7.94%
12.66%
8.10%
11.
Valuation of financial assets requires knowledge of
(Points: 2)
future cash flows.
appropriate discount rate.
past asset performance.
a and b
12.
An issue of common stock is expected to pay a dividend of $4.80 at the end of the year. Its growth rate is equal to 8%. If the required rate of return is 13%, what is its current price?
(Points: 2)
$103.68
$36.92
$96.00
none of the above
13.
A higher interest rate (discount rate) would
(Points: 2)
reduce the price of corporate bonds.
reduce the price of preferred stock.
reduce the price of common stock.
all of the above.
14.
A common stock which pays a constant dividend can be valued as if it were a
(Points: 2)
corporate bond.
stock paying a growing dividend.
preferred stock.
discount bond.
15.
The preferred stock of Gapers Inc. pays an annual dividend of $6.50. If the required return is 8%, the price of the preferred stock is:
(Points: 2)
$12.50
$52.00
$65.00
$81.25
16.
Perot Marketing is expected to pay $2.40 per share in dividends at the end of the next 12 months. The growth rate in dividends is expected to be constant at 9% per year. If the stock is selling for $51.30 per share, what is the required rate of return?
(Points: 2)
4.6%
5.1%
9.0%
13.7%
17.
The weighted average cost of capital is used as a discount rate because
(Points: 2)
it is an indication of how much the firm is earning overall.
as long as the cost of capital is earned, the common stock value of the firm will be maintained.
it is comparable to the prevailing market interest rates.
returns below the cost of capital will cover all fixed costs associated with capital and provide an excess return to stockholders.
18.
Using the constant dividend growth model for common stock, if Po goes up
(Points: 2)
the assumed cost goes up.
the assumed cost goes down.
the assumed cost remains unchanged.
Need further information.
19.
Expected cash dividends are $2.50, the dividend yield is 6%, flotation costs are 4%, and the growth rate is 3%. Compute cost of new common stock.
(Points: 2)
9.00%
9.25%
9.18%
9.44%
20.
The pre-tax cost of debt for a new issue of debt is determined by
(Points: 2)
the investor's required rate of return on issued stock.
the coupon rate of existing debt.
the yield to maturity of outstanding bonds.
all of the above.
21.
A firm is paying an annual dividend of $3.63 for its preferred stock which is selling for $62.70. There is a selling cost of $3.30. What is the cost of preferred stock?
(Points: 2)
2.02%
4.09%
5.79%
6.11%
22.
The coupon rate on a debt issue is 12%. If the yield to maturity on the debt is 9.33%, what is the after-tax cost of existing debt if the firm's tax rate is 34%?
(Points: 2)
3.17%
4.08%
6.16%
7.92%
23.
A firm's stock is selling for $85. The dividend yield is 5%. A 7% growth rate is expected for the common stock. The firm's tax rate is 32%. What is the firm's cost of common equity?
(Points: 2)
8.16%
12.00%
12.35%
can not be determined.
24.
Firm X has a tax rate of 30%. The price of its new preferred stock is $63 and its flotation cost is $3.15. The cost of new preferred stock is 12%. What is the firm's dividend?
(Points: 2)
$7.18
$5.03
$7.56
none of the above.
25.
A firm can issue $1,000 par value bond that pays $100 per year in interest at a price of $980. The bond will have a five-year life. The firm is in a 35% tax bracket. What is the after-tax cost of debt?
(Points: 2)
10.33%
10.20%
6.63%
6.84%
26.
Please answer questions 26-29 based on the following information:
Zinger Corporation manufactures industrial type sewing machines. Zinger Corp. received a very large order from a few European countries. In order to be able to supply these countries with its products, Zinger will have to expand its facilities. Of the required expansion, Zinger feels it can raise $75 million internally, through retained earnings. The firm's optimum capital structure has been 45% debt, 10% preferred stock and 45% equity. The company will try to maintain this capital structure in financing this expansion plan. Currently Zinger's common stock is traded at a price of $20 per share. Last year's dividend was $1.50 per share. The growth rate is 8%. The company's preferred stock is selling at $50 and has been yielding 6% in the current market. Flotation costs have been estimated at 8% of common stock and 3% of preferred stock. Zinger Corp. has bonds outstanding at 10%, but its investment banker has informed the company that interest rates for bonds of equal risk are currently yielding 9%. Zinger's tax rate is 46%.
Ke =
(Points: 2)
6.19%
8.1%
14.19%
16.1%
27.
Kn =
(Points: 2)
14.19%
16.1%
16.8%
26.85%
28.
The weighted average cost of capital, using Ke, is:
(Points: 2)
6.78%
10.051%
10.4%
27.15%
29.
The firm can support a capital structure of ___________ with retained earnings financing.
(Points: 2)
$ 41.25 million
$136.36 million
$116.25 million
$166.67 million
30.
If an investment project has a positive net present value, then the internal rate of return is
(Points: 2)
less than the cost of capital.
greater than the cost of capital.
equal to the cost of capital.
indeterminate; it depends on the length of the project.
31.
Capital rationing
(Points: 2)
is a way of preserving the assets of the firm over the long term.
is a less than optimal way to arrive at capital budgeting decisions.
assures stockholder wealth maximization.
assures maximum potential profitability.
32.
For acceptable investments, the reinvestment assumption under the internal rate of return is generally
(Points: 2)
higher than under the net present-value method.
lower than under the net present-value method.
at the cost of capital.
below the cost of capital.
33.
Firm X is considering the replacement of an old machine with one that has a purchase price of $70,000. The current market value of the old machine is $25,000 but the book value is $32,000. The firm's tax rate for ordinary income is 30%. What is the net cash outflow for the new machine after considering the sale of the old machine?
(Points: 2)
$42,900
$38,000
$45,000
$40,100
34.
The reason cash flow is used in capital budgeting is because
(Points: 2)
cash rather than income is used to purchase new machines.
cash outlays need to be evaluated in terms of the present value of the resultant cash inflows.
to ignore the tax shield provided from depreciation ignores the cash flow provided by the machine which should be reinvested to replace old worn out machines.
all of the above.
35.
The Wet Corp. has an investment project that will reduce expenses by $15,000 per year for three years. The project's cost is $20,000. If the asset is part of the three-year MACRS category (33% first year depreciation) and the company's tax rate is 34%, what is the cash flow in year one?
(Points: 2)
$6,800
$5,100
$12,144
$16,667
36.
Project A has a $5,000 net present value at a zero discount rate and an internal rate of return of 12%. Project B has an $8,000 net present value at a zero percent discount rate and an IRR of return of 10%. If the projects are mutually exclusive, which one should be chosen?
(Points: 2)
Project A because it has a higher internal rate of return
Project B if the cost of capital is less than the crossover point
Both projects if the net present value is positive
Not enough information
37.
With the exception of real estate investments, MACRS depreciation is beneficial to corporations because it
(Points: 2)
increases total depreciation.
lengthens the lives of assets for depreciation purposes.
shortens the lives of assets for depreciation purposes.
classifies assets into specific, well-understood groups for depreciation purposes.
38.
With non-mutually exclusive projects
(Points: 2)
the payback method will select the best project.
the net present value method will always select the best project.
the internal rate of return method will always select the best project.
the net present value and the internal rate of return methods will always accept or reject the same project.
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