Chapter 9:

1) Expected dividend yield

If D1 = $2.00, g (which is constant) = 6%, and P0 = $40, what is the stock’s expected dividend yield for the coming year?

a) 5.0%

b) 6.0%

c) 7.0%

d) 8.0%

e) 9.0%

2) Expected total return

If D1 = $2.00, g (which is constant) = 6%, and P0 = $40, what is the stock’s expected total return for the coming year?

a) 10.8%

b) 11.0%

c) 11.2%

d) 11.4%

e) 11.6%

3) Constant growth valuation; CAPM

The Lashgari Company is expected to pay a dividend of $1 per share at the end of the year, and that dividend is expected to grow at a constant rate of 5% per year in the future. The company's beta is 1.2, the market risk premium is 5%, and the risk-free rate is 3%. What is the company's current stock price?

a) $15.00

b) $20.00

c) $25.00

d) $30.00

e) $35.00

4. Preferred required return

A share of preferred stock pays a quarterly dividend of $1.00. If the price of the stock is $50, what is the effective annual (not nominal) rate of return on the preferred stock?

a) 7.88%

b) 8.01%

c) 8.24%

d) 8.47%

e) 8.70%

5. Preemptive right

The preemptive right is important to shareholders because it:

a) Allows managers to buy additional shares below the current market price.

b) Protects the current shareholders against a dilution of their ownership interests.

c) Is included in every corporate charter.

d) Will result in higher dividends per share.

e) Protects bondholders, and thus enables the firm to issue debt with a relatively low interest rate.

Chapter 10:

6. Component cost of preferred stock

A company’s perpetual preferred stock currently trades at $80 per share and pays a $6.00 annual dividend per share. If the company were to sell a new preferred issue, it would incur a flotation cost of 4%. What would the cost of that capital be?

a) 7.51%

b) 7.81%

c) 7.99%

d) 8.36%

e) 8.62%

7. Component cost of retained earnings: CAPM

Heino Inc. hired you as a consultant to help them estimate their cost of capital. You have been provided with the following data: rRF = 5.0%; RPM = 5.0%; and b = 1.1. Based on the CAPM approach, what is the cost of equity from retained earnings?

a) 10.50%

b) 10.71%

c) 10.88%

d) 11.03%

e) 11.14%

8. Component cost of debt

To help finance a major expansion, Dimkoff Development Company sold a bond several years ago that now has 20 years to maturity. This bond has a 7% annual coupon, paid quarterly, and it now sells at a price of $1,103.58. The bond cannot be called and has a par value of $1,000. If Dimkoff’s tax rate is 40%, what component cost of debt should be used in the WACC calculation?

a) 3.03%

b) 3.28%

c) 3.66%

d) 3.85%

e) 4.04%

9. Component cost of debt

You were hired as a consultant to Locke Company, and you were provided with the following data: Target capital structure: 40% debt, 10% preferred, and 50% common equity. The interest rate on new debt is 7.5%, the yield on the preferred is 7.0%, the cost of retained earnings is 11.50%, and the tax rate is 40%. The firm will not be issuing any new stock. What is the firm’s WACC?

a) 8.25%

b) 8.38%

c) 8.49%

d) 8.61%

e) 8.76%

10. Component cost of retained earnings: DCF, D1

Rhino Inc. hired you as a consultant to help them estimate their cost of capital. You have been provided with the following data: D1 = $1.30; P0 = $40.00; and g = 7% (constant). Based on the DCF approach, what is the cost of equity from retained earnings?

a) 9.66%

b) 9.84%

c) 9.97%

d) 10.08%

e) 10.25%

Chapter 11

11. NPV (constant cash flows; 3 years)

Thomson Electric Systems is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that a project's projected NPV can be negative, in which case it will be rejected.

WACC = 10%

Year: 0 1 2 3

Cash flows: -$1,000 $500 $500 $500

a) $243.43

b) $251.23

c) $268.91

d) $272.46

e) $289.53

12. IRR (constant cash flows; 4 years)

Blanchford Enterprises is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's projected IRR can be less than the WACC (and even negative), in which case it will be rejected.

Year: 0 1 2 3 4

Cash flows: -$1,000 $400 $400 $400 $400

a) 17.76%

b) 19.17%

c) 20.56%

d) 21.86%

e) 23.01%

13. Payback (constant cash flows; 3 years)

Blanchford Enterprises is considering a project that has the following cash flow data. What is the project's payback?

Year: 0 1 2 3

Cash flows: -$1,000 $500 $500 $500

a) 1.50 years

b) 1.75 years

c) 2.00 years

d) 2.25 years

e) 2.50 years

14. NPV (uneven cash flows; 3 years)

Edison Electric Systems is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that a project's projected NPV can be negative, in which case it will be rejected.

WACC = 10%

Year: 0 1 2 3

Cash flows: -$1,000 $450 $460 $470

a) $142.37

b) $151.59

c) $166.51

d) $173.26

e) $189.94

15. NPV vs IRR (constant cash flows; 3 years)

Last month, Wong Systems Inc. decided to accept the project whose cash flows are shown below. However, before actually starting the project, the Federal Reserve took actions that changed interest rates and Wong's WACC. By how much did the change in the WACC affect the project's forecasted NPV? Assume that the Fed action will not affect the cash flows, and note that a project's projected NPV can be negative, in which case it should be rejected.

Old WACC = 10% New WACC = 5%

Year: 0 1 2 3

Cash flows: -$1,000 $500 $500 $500

a) $ 88.67

b) $ 92.16

c) $104.93

d) $118.19

e) $124.18

Chapter 12

16. Annual operating cash flows, depr'n given

You work for Alpha Inc., and you must estimate the Year 1 operating net cash flow for a proposed project with the following data. What is the Year 1 operating cash flow?

Sales $11,000

Depreciation $4,000

Other operating costs $6,000

Tax rate 35%

a) $4,650

b) $4,800

c) $4,950

d) $5,100

e) $5,250

17. Annual operating cash flows: straight line depreciation

Delta Software is considering a new project whose data are shown below. The equipment that would be used has a 3-year tax life, after which it will be worthless, and it will be depreciated by the straight line method over 3 years. Revenues and other operating costs are expected to be constant over the project's 3-year life. What is the project's operating cash flow during Year 1?

Equipment cost (depreciable basis) $75,000

Straight line depreciation rate 33.33%

Sales $60,000

Operating costs excl. depr’n $25,000

Tax rate 35%

a) $27,000

b) $28,500

c) $30,000

d) $31,500

e) $33,000

18 Risk and project selection

A company uses a WACC of 8% for below-average risk projects, 10% for average-risk projects, and 12% for above-average risk projects. Which of the following independent projects should the company accept?

a) Project A has average risk and an IRR = 9%.

b) Project B has below-average risk and an IRR = 8.5%.

c) Project C has above-average risk and an IRR = 11%.

d) All of the projects should be accepted.

e) None of the projects should be accepted.

19. Which of the following is NOT a cash flow that should be included in the analysis of a project?

a) Changes in net operating working capital.

b) Shipping and installation costs.

c) Cannibalization effects.

d) Opportunity costs.

e) Sunk costs that have been expensed for tax purposes.

Chapter 13

20. Replacement chain approach

Mulroney Corp. is considering two mutually exclusive projects. Both require an initial investment of $10,000 at t = 0. Project X has an expected life of 2 years with after-tax cash inflows of $6,000 and $8,000 at the end of Years 1 and 2, respectively. Project Y has an expected life of 4 years with after-tax cash inflows of $4,000 at the end of each of the next 4 years. Each project has a WACC of 8%. Use the replacement chain approach to determine the NPV of the most profitable project.

a) $4,484

b. $4,734

c. $5,120

d. $5,897

e. $5,456

21. Abandonment option

Which of the following statements best describes the likely impact that an abandonment option will have on a project’s expected cash flow and risk?

a) No impact on expected cash flow, but risk will increase.

b) Expected cash flow increases and risk decreases.

c) Expected cash flow increases and risk increases.

d) Expected cash flow decreases and risk decreases.

e) Expected cash flow decreases and risk increases.

22. Real options

Which of the following statements is CORRECT?

a) In general, the more uncertainty there is about market conditions, the more attractive it may be to wait before making an investment.

b) In general, the greater the strategic advantages of being the first competitor to enter a given market, the more attractive it may be to wait before making an investment.

c) In general, the higher the discount rate, the more attractive it may be to wait before making an investment.

d) In general, investment timing options are more valuable than abandonment options.

In general, abandonment options are rarely seen in the real world.

23. Real options

Which of the following are not real options?

a) The option to expand production if the product is successful.

b) The option to buy additional shares of stock if the stock price goes up.

c) The option to expand into a new geographic region.

d) The option to abandon a project.

e) The option to switch sources of fuel used in an industrial furnace.

24. Vanderheiden Inc. is considering two average-risk alternative ways of producing its patented polo shirts. Process S has a cost of $8,000 and will produce net cash flows of $5,000 per year for 2 years. Process L will cost $11,500 and will produce cash flows of $4,000 per year for 4 years. The company has a contract that requires it to produce the shirts for 4 years, but the patent will expire after 4 years, so the shirts will not be produced after 4 years. No inflation is expected over the next 4 years. If cash inflows occur at the end of each year, and if Vanderheiden’s WACC is 10%, by what amount will the better project increase Vanderheiden’s value?

a) $ 677.69

b) $1,098.89

c) $1,179.46

d) $1,237.76

e) $1,312.31

Chapter 14

25. Breakeven Analysis

A company’s fixed operating costs are $500,000, its variable costs are $3.00 per unit, and the product’s sales price is $4.00. What is the company’s breakeven point, i.e., at what unit sales volume would its income equal its costs?

a. 500,000

b. 600,000

c. 700,000

d. 800,000

e. 900,000

26. Setting the Price

Millman Electronics will produce 60,000 stereos next year. Variable costs will equal 50% of sales, while fixed costs will total $120,000. At what price must each stereo be sold for the company to achieve an EBIT of $95,000?

a.  $6.57

b.  $6.87

c.  $7.17

d.  $7.47

e.  $7.77