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Finance
Q:
Which of the following is an aspect of independent projects?
A) The cash flows are related.
B) The cash flows are unrelated.
C) Selecting one would automatically eliminate accepting the other.
D) None of the above
Q:
Which of the following is NOT true about capital budgeting?
A) It involves identifying projects that will add to a firm's value.
B) It involves investing large capital.
C) It allows a firm to reverse the decision of large capital investments at any time.
D) It allows a firm's management to analyze potential business opportunities and decide on which ones to undertake.
Q:
When evaluating two projects that require different outlays, the IRR does not recognize the difference in the size of the investments.
A) True
B) False
Q:
When mutually exclusive projects are considered, both NPV and IRR will always produce the same acceptance decision.
A) True
B) False
Q:
Unconventional cash flow patterns could lead to conflicting decisions by NPV and IRR.
A) True
B) False
Q:
The IRR and NPV decisions are consistent with each other when a project's cash flows follow a conventional pattern.
A) True
B) False
Q:
The decision criterion for the accounting rate of return is consistent with the goal of shareholder wealth maximization.
A) True
B) False
Q:
The accounting rate of return is not a true return because it simply utilizes some average figures from a firm's balance sheet and income statement.
A) True
B) False
Q:
Unlike the regular payback method, the discounted payback method does not ignore cash flows beyond a firm's threshold period.
A) True
B) False
Q:
The discounted payback period calculation calls for the future cash flows to be discounted by a firm's cost of capital.
A) True
B) False
Q:
The payback method is consistent with the goal of shareholder wealth maximization.
A) True
B) False
Q:
If the payback period for a project exceeds the firm's threshold period, then the project is accepted.
A) True
B) False
Q:
The payback method is a discounted cash flow technique.
A) True
B) False
Q:
The discount rate used to determine the present value of future cash flows is the cost of capital.
A) True
B) False
Q:
Accepting a negative-NPV project increases shareholder wealth.
A) True
B) False
Q:
Accepting a positive-NPV project increases shareholder wealth.
A) True
B) False
Q:
Accepting a positive-NPV project decreases shareholder wealth.
A) True
B) False
Q:
The NPV method determines how much the present value of cash inflows exceeds the present value of costs.
A) True
B) False
Q:
The net present value technique is an approach that goes against the goal of shareholder wealth maximization.
A) True
B) False
Q:
Capital rationing refers to the limiting of capital resources to underperforming divisions.
A) True
B) False
Q:
The cost of capital is the maximum return a project can earn.
A) True
B) False
Q:
All contingent projects are mandatory projects.
A) True
B) False
Q:
Projects that are classified as contingent could be mandatory or optional projects.
A) True
B) False
Q:
When two projects are mutually exclusive, accepting one project implicitly eliminates the other.
A) True
B) False
Q:
When two projects are independent, accepting one project implicitly eliminates the other.
A) True
B) False
Q:
Projects are classified as independent when their cash flows are unrelated.
A) True
B) False
Q:
When two projects have cash flows that are tied to each other, the projects may be classified as independent.
A) True
B) False
Q:
All capital budgeting projects are independent projects.
A) True
B) False
Q:
Most of the information required to make capital budgeting decisions are internally generated, beginning with the sales force.
A) True
B) False
Q:
The basis on which capital budgeting plans are made is a firm's three- to five-year strategic plan.
A) True
B) False
Q:
Capital budgeting decisions, once made, are not easy to reverse because of the huge investments involved.
A) True
B) False
Q:
The goal of the capital budgeting decisions is to select capital projects that will decrease the value of the firm.
A) True
B) False
Q:
The New York Stock Exchange is the best-known example of an auction market.
A) True
B) False
Q:
In an auction market, buyers and sellers confront each other directly and bargain over price.
A) True
B) False
Q:
NASDAQ is the best-known example of a direct market.
A) True
B) False
Q:
A broker market eliminates the need for time-consuming search for a fair deal by buying and selling immediately from its inventory of securities.
A) True
B) False
Q:
For a commission fee less than the cost of direct search, brokers give investors an incentive to make use of the information by hiring them.
A) True
B) False
Q:
Direct search is the least efficient type of secondary market.
A) True
B) False
Q:
Direct search markets provide the best price information.
A) True
B) False
Q:
In terms of market capitalization (total stock value) of the firms listed, the NYSE is the largest in the world and NASDAQ is the second largest.
A) True
B) False
Q:
Secondary market transactions in the United States mostly take place over the counter and not in exchanges.
A) True
B) False
Q:
For investors, the function of secondary markets is to provide marketability for the securities they own at a fair price.
A) True
B) False
Q:
An active secondary market for debt or equity securities makes raising new capital less expensive for firms.
A) True
B) False
Q:
Companies raise capital in secondary markets by issuing new securities.
A) True
B) False
Q:
A large number of investors in equities actually own through pension or retirement funds.
A) True
B) False
Q:
The stocks owned by households represent about 35% of the total value of all corporate equity.
A) True
B) False
Q:
Equity securities are certificates of ownership of a corporation.
A) True
B) False
Q:
Differentiate the characteristics of common and preferred stocks.
Q:
How do the secondary markets for securities differ across the four types of markets?
Q:
Discuss the significance of an active secondary market to both issuers of securities and to investors.
Q:
Durango Water Works has an outstanding issue of preferred stock that has a par (maturity value) of $75.00. The stock, which pays a quarterly dividend of $1.10, will be retired by the firm in 20 years. If the preferred stock is currently selling for $68.00, what is the preferred stock's yield-to-maturity? (Round off to the nearest 0.01%)
A) 6.72%
B) 5.64%
C) 4.28%
D) 7.73%
Q:
Which of the following statements about preferred stock is FALSE?
A) Preferred stock has a higher-priority claim on the firm's assets than the common stock.
B) Failure to pay dividends on preferred stocks will result in a default.
C) Preferred stock has a lower-priority claim on the firm's assets than the firm's creditors in the event of default.
D) Preferred stock typically pays a fixed dividend.
Q:
The Columbia Consumer Products Co. has issued perpetual preferred stock with a $100 par value. The firm pays a quarterly dividend of $2.60 on this stock. What is the current price of this preferred stock given a required rate of return of 12.5 percent?A) $47.25B) $80.00C) $20.80D) $83.20
Q:
Each quarter, Transam, Inc., pays a dividend on its perpetual preferred stock. Today, the stock is selling at $83.45. If the required rate of return for such stocks is 10.5 percent, what is the quarterly dividend paid by the firm? (Do not round intermediate calculations. Round final answer to two decimal places.)A) $8.76B) $10.50C) $2.19D) $2.63
Q:
The preferred stock of Acme International is selling currently at $110.35. If your required rate of return is 9.75 percent, what is the dividend paid by this stock? (Round off to the two decimal places.)A) $9.75B) $11.32C) $10.76D) $8.53
Q:
The National Bank of Columbia has issued perpetual preferred stock with a $100 par value. The bank pays a quarterly dividend of $1.40 on this stock. What is the current price of this preferred stock given a required rate of return of 8.5 percent? (Round off to two decimal places.)A) $23.06B) $65.88C) $37.57D) $43.25
Q:
Ajax Company has issued perpetual preferred stock with a par of $100 and a dividend of 5.5 percent. If the required rate of return is 7.75 percent, what is the stock's current market price? (Round off to the two decimal places.)A) $12.90B) $70.97C) $53.27D) $62.14
Q:
Which of the following statements is true?
A) In order for the constant growth dividend model to properly value a firm's common stock, R must be greater than g.
B) From a practical perspective, the growth rate in the constant growth dividend model must be greater than the sum of the long-term rate of inflation and the long-term real growth rate of the economy.
C) In order for the constant growth dividend model to properly value a firm's common stock, g must be greater than R.
D) The constant growth dividend model can be used effectively to value the common shares of a mixed growth stock.
Q:
Suppose a firm's expected dividends for the next three years are as follows: D1 = $1.10, D2 = $1.20, and D3 = $1.30. After three years, the firm's dividends are expected to grow at 5.00 percent per year. What should the current price of the firm's stock (P0) be today if investors require a rate of return of 12.00 percent on the stock? (Do not round intermediate calculations. Round off final answer to the nearest $0.01)A) $61.30B) $10.10C) $16.74D) $24.12
Q:
Lincoln, Inc. expects to pay no dividends for the next four years. It has projected a growth rate of 35 percent for the next four years. After four years, the firm will grow at a constant rate of 6 percent. Its first dividend to be paid in year 5 will be worth $4.25. If your required rate of return is 20 percent, what is the stock worth today? (Do not round intermediate calculations. Round final answer to two decimal places.)A) $14.64B) $32.18C) $36.43D) $21.82
Q:
Stag Corp. will pay dividends of $4.75, $5.25, $5.75, and $7 for the next four years. Thereafter, the company expects its growth rate to be at a constant rate of 7 percent. If the required rate of return is 15 percent, what is the current market price of the stock? (Do not round intermediate calculations. Round final answer to two decimal places.)A) $69.41B) $93.63C) $57.54D) $80.29
Q:
Grant, Inc., is a fast growth stock and expects to grow at a rate of 25 percent for the next four years. It will then settle to a constant-growth rate of 10 percent. The first dividend will be paid out in year 3 and will be equal to $5.00. If the required rate of return is 18 percent, what is the current price of the stock? (Do not round intermediate calculations. Round final answer to two decimal places.)A) $85.94B) $97.19C) $50.59D) $65.68
Q:
BioSci, Inc., a biotech firm has forecast the following growth rates for the next three years: 30 percent, 25 percent, and 20 percent. The company then expects to grow at a constant rate of 7 percent for the next several years. The company paid a dividend of $2.00 last week. If the required rate of return is 16 percent, what is the market value of this stock? (Do not round intermediate calculations. Round final answer to two decimal places.)A) $51.03B) $36.86C) $56.12D) $46.37
Q:
Starskeep, Inc., is a fast growing technology company. The firm projects a rapid growth of 40 percent for the next two years and then a growth rate of 20 percent for the following two years. After that, the firm expects a constant-growth rate of 8 percent. The firm expects to pay its first dividend of $1.25 a year from now. If your required rate of return on such stocks is 20 percent, what is the current price of the stock? (Do not round intermediate calculations. Round final answer to two decimal places.)A) $15.63B) $4.70C) $30.30D) $22.68
Q:
The constant growth dividend model would be useful to determine the value of all, but which of the following firms?
A) A firm whose earnings and dividends are declining at a fairly steady rate.
B) A firm whose sales, profits, and dividends are growing at an annual average compound rate of 5 percent.
C) A firm whose earnings and dividends are growing at a fairly steady rate.
D) A firm whose expected sales, profits, and dividends are flat.
Q:
Which of the following is the most typical example of a zero-growth dividend stock?
A) The common stock of a firm in the biotechnology industry.
B) The preferred stock of a utility company.
C) The common stock of a firm in the health care industry.
D) The common stock of a firm in the information technology industry.
Q:
A company is growing at a constant rate of 8 percent. Last week it paid a dividend of $3.00. If the required rate of return is 15 percent, what is the price of the stock three years from now? (Do not round intermediate calculations. Round final answer to two decimal places.)A) $58.31B) $46.29C) $51.02D) $42.83
Q:
Prior, Inc., is expected to grow at a constant rate of 9 percent. If the company's next dividend is $2.75 and its current price is $37.35, what is the required rate of return on this stock? (Do not round intermediate calculations. Round final answer to the nearest percent.)A) 13%B) 16%C) 20%D) 21%
Q:
Ryder Supplies has its stock currently selling at $63.25. The company is expected to grow at a constant rate of 7 percent. If the appropriate discount rate is 17 percent, what is the expected dividend, a year from now? (Round the answer to two decimal places.)A) $4.43B) $3.25C) $10.75D) $6.33
Q:
Johnson Corporation has just paid a dividend of $4.45. The company has forecasted a growth rate of 8 percent for the next several years. If the appropriate discount rate is 14 percent, what is the current price of this stock? (Round to the nearest dollar.)A) $74B) $32C) $80D) $60
Q:
You are interested in investing in a company that expects to grow steadily at an annual rate of 6 percent for the foreseeable future. The firm paid a dividend of $2.30 last year. If your required rate of return is 10 percent, what is the most you would be willing to pay for this stock? (Round to the nearest dollar.)A) $58B) $61C) $23D) $24
Q:
A communications company pays annual dividends of $8.50 with no possibility of it changing in the next several years. If the firm's stock is currently selling at $60.71, what is the required rate of return? (Round to nearest whole number.)A) 14%B) 16%C) 13%D) 15%
Q:
Ambassador Corp. sells household cleaners producing a revenue stream that has remained unchanged in the last few years. The firm does not expect any change in its sales or earnings in the next several years. The stock is currently selling at $46.88. If the required rate of return is 16 percent, what is the dividend paid by this company? (Round the answer to two decimal places.)A) $2.93B) $4.65C) $6.89D) $7.50
Q:
Metasteel Limited Co. has a stable sales track record, but does not expect to grow in the next several years. Its last annual dividend was $5.75. If the required rate of return on similar investments is 18 percent, what is the current stock price? (Round the answer to two decimal places.)A) $103.50B) $13.50C) $39.30D) $31.94
Q:
Zephyr Electricals is a company with no growth potential. Its last dividend payment was $4.50, and it expects no change in future dividends. What is the current price of the company's stock given a discount rate of 9 percent?A) $40.50B) $50.00C) $45.00D) $500.00
Q:
XinhuaManufacturing Company has been generating stable revenues but sees no growth in it for the foreseeable future. The company's last dividend was $3.25, and it is unlikely to change the amount paid out. If the required rate of return is 12 percent, what is the stock worth today? (Round the final answer to two decimal places.)A) $39.00B) $3.69C) $27.08D) $21.23
Q:
Jacob Suppliers has not paid out any dividend in the last three years. It does not expect to pay dividends in the next two years either as it recovers from an economic slowdown. Three years from now it expects to pay a dividend of $2.50 and then $3.00 in the following two years. What is the present value of the dividends to be received over the next five years if the discount rate is 15 percent?( Do not round intermediate calculations. Round final answer to two decimal places.)A) $4.85B) $5.37C) $5.50D) $6.14
Q:
Givens, Inc., is a fast growing technology company that paid a $1.25 dividend last week. The company's expected dividend growth rates over the next four years are as follows: 25 percent, 30 percent 35 percent, and 30 percent. The company then expects to settle down to a constant-growth rate of 8 percent annually. If the required rate of return is 12 percent, what is the present value of the dividends over the fast growth phase? (Do not round intermediate calculations. Round final answer to two decimal places.)A) $1.25B) $6.46C) $8.37D) $7.23
Q:
Kleine Toymakers is introducing a new line of robotic toys, which it expects to grow their earnings at a much faster rate than normal over the next three years. After paying a dividend of $2.00 last year, it does not expect to pay a dividend for the next three years. After that Kleine plans to pay a dividend of $4.00 in year 4 and then increase the dividend at a rate of 10 percent in years 5 and 6. What is the present value of the dividends to be paid out over the next six years if the required rate of return is 15 percent?(Do not round intermediate calculations. Round final answer to two decimal places.)A) $13.24B) $12.00C) $6.57D) $10.24
Q:
Next year Jenkins Traders will pay a dividend of $3.00. It expects to increase its dividend by $0.25 in each of the following three years. If their required rate of return is 14 percent, what is the present value of their dividends over the next four years? (Do not round intermediate calculations. Round final answer to two decimal places)A) $13.50B) $9.72C) $12.50D) $11.63