Q&A Hero

Q: Warchester Inc. is considering the purchase of copying equipment that will require an initial investment of $15,000 and $4,000 per year in annual operating costs over the equipment's estimated useful life of 5 years. The company will use a discount rate of 8.5%. What is the equivalent annual cost? A) $4,000 B) $7,000 C) $6,152.51 D) $7,806.49

Q: The present value of the total costs over a five year period for Project April is $50,000. The net present value of total costs over a 4 year period for Project October is $40,000. The company uses a discount rate of 9%. Which project should it choose and why? A) April because it has a higher NPV. B) April because is has a higher EAC. C) October because it has a shorter life. D) October because it has a lower EAC.

Q: Project January has a NPV of $50,000, project December has a NPV of $40,000. Which of the following circumstances could make it possible to choose December over January? A) January has a shorter payback period. B) The projects are mutually exclusive. C) The projects have unequal lives. D) The projects are mandated.

Q: Suppose you determine that the NPV of a project is $1,525,855. What does that mean? A) In all cases, investing in this project would be better than investing in a project that has an NPV of $850,000. B) The project would add value to the firm. C) Under all conditions, the project's payback would be less than the profitability index. D) Other investment criteria might need to be considered.

Q: A machine costs $1,000, has a three-year life, and has an estimated salvage value of $100. It will generate after-tax annual cash flows (ACF) of $600 a year, starting next year. If your required rate of return for the project is 10%, what is the NPV of this investment? (Round your answer to the nearest $10.) A) $490 B) $570 C) $900 D) -$150

Q: Project H requires an initial investment of $100,000 and the produces annual cash flows of $45,000 per year for each of the next 3 years. Project T also requires an initial investment of $100,000 and produces cash flows of $30,000 in year 1, $40,000 in year 2, and $70,000 in year 3. If the discount rate increases from 10% to 16%: A) Project T should be chosen. B) Both projects should be rejected. C) H and T are equally attractive. D) The project rankings will change.

Q: Project H requires an initial investment of $100,000 and the produces annual cash flows of $45,000 per year for each of the next 3 years. Project T also requires an initial investment of $100,000 and produces cash flows of $30,000 in year 1, $40,000 in year 2, and $70,000 in year 3. If the discount rate is 10% and the projects are not mutually exclusive: A) Project H should be chosen. B) Project T should be chosen. C) H and T are equally attractive. D) Both projects should be accepted.

Q: Project H requires an initial investment of $100,000 and the produces annual cash flows of $45,000 per year for each of the next 3 years. Project T also requires an initial investment of $100,000 and produces cash flows of $30,000 in year 1, $40,000 in year 2, and $70,000 in year 3. If the discount rate is 10% and the projects are mutually exclusive: A) Project H should be chosen. B) Project T should be chosen. C) H and T are equally attractive. D) Both projects should be chosen.

Q: Project H requires an initial investment of $100,000 and the produces annual cash flows of $50,000, $40,000, and $30,000. Project T requires an initial investment of $100,000 and the produces annual cash flows of $30,000, $40,000, and $50,000. If the required rate of return is greater than 0% and the projects are mutually exclusive: A) H will always be preferable to T. B) T will always be preferable to H. C) H and T are equally attractive. D) The project rankings will change with different discount rates.

Q: Fitchminster Armored Car can purchase a new vehicle for $200,000 that will provide annual net cash flow over the next five years of $40,000, $45,000, $50,000, $55,000, $60,000. The salvage value of the vehicle will be $25,000. Assume that the vehicle is sold at the end of year 5. Calculate the NPV of the ambulance if the required rate of return is 9%. (Round your answer to the nearest $1.) A) $7,390 B) $6,048 C) $6,780 D) $19,483

Q: Central Mass Ambulance Service can purchase a new ambulance for $200,000 that will provide an annual net cash flow of $50,000 per year for five years. The salvage value of the ambulance will be $25,000. Assume the ambulance is sold at the end of year 5. Calculate the NPV of the ambulance if the required rate of return is 9%. (Round your answer to the nearest $1.) A) $(10,731) B) $10,731 C) $(5,517) D) $5,517

Q: Central Mass Ambulance Service can purchase a new ambulance for $200,000 that will provide an annual net cash flow of $50,000 per year for five years. Calculate the NPV of the ambulance if the required rate of return is 9%. (Round your answer to the nearest $1.) A) $50,000 B) $(5,061) C) $(5,517) D) $5,517

Q: ABC Service can purchase a new assembler for $15,052 that will provide an annual net cash flow of $6,000 per year for five years. Calculate the NPV of the assembler if the required rate of return is 12%. (Round your answer to the nearest $1.) A) $1,056 B) $4,568 C) $7,621 D) $6,577

Q: Project Sigma requires an investment of $1 million and has a NPV of $10. Project Delta requires an investment of $500,000 and has a NPV of $150,000. The projects involve unrelated new product lines. A) Both projects should be accepted because they have positive NPV's. B) Neither project should be accepted because they might compete with one another. C) Only project Delta should be accepted. Alpha's NPV is too low for the investment. D) The company should look at other investment criteria, not just NPV.

Q: Why is it so difficult for firms to find good investment ideas?

Q: Distinguish between revenue enhancement investments, cost-reduction investments, and mandated investments.

Q: Why are capital budgeting decisions among the most important decisions made by any company? Give a few examples from recent business developments.

Q: Capital budgeting is the decision-making process with respect to investment in working capital.

Q: The size of capital investments and the difficulty in reversing them once they are made make capital-budgeting decisions very important to the firm.

Q: Competitive market forces make it imperative for a firm to have a systematic strategy for generating capital-budgeting projects.

Q: Errors resulting from a capital budgeting decision are not considered major since the consequences of such errors average out over the life of the investment.

Q: Good capital investment opportunities are most likely to exist when: A) many firms compete to sell similar products. B) interest rates are high and rising. C) goods and services can be produced cheaply using readily available tools and technologies. D) a line of business is expensive to enter and uses proprietary technology.

Q: Which of the following is a typical capital budgeting decision? A) Purchase of office supplies B) Granting credit to a new customer C) Replacement of manufacturing equipment with more modern and efficient equipment D) Financing the firm with more long-term debt and less equity

Q: Which of the following would NOT be considered a capital budgeting decision? A) Walmart purchases inventory for resale to customers. B) Morgan Stanley installs elevators to comply with the Americans With Disabilities Act. C) Caterpillar replaces manufacturing equipment with more efficient new equipment. D) Pfizer develops a new therapy and brings it to market.

Q: Which of the following factors is least important to capital budgeting decisions.? A) The time value of money B) The risk-return tradeoff C) Net income based on accrual accounting principles D) Cash flows directly resulting from the decision

Q: Errors in capital budgeting decisions: A) tend to average out over time. B) decrease the firm's value. C) are diminished because the time value of money makes future cash flows less important. D) are easily reversed.

Q: Which of the following are typical consequences of good capital budgeting decisions? A) The firm increases in value. B) The firm gains knowledge and experience that may be useful in future decisions. C) Good capital budgeting decisions help a company define its core competencies. D) All of the above.

Q: Murky Pharmaceuticals has issued preferred stock with a par value of $100 and a 5% dividend. The investors' required yield is 10%. What is the value of a share of Murky preferred? A) $100 B) $75 C) $50 D) $25

Q: Davis Gas & Electric issued preferred stock in 1985 that had a par value of $50. The stock pays a dividend of 7.875%. Assume that shares are currently selling for $62.50. What is the preferred stockholder's expected rate of return? Round to the nearest 0.01%. A) 6.30% B) 7.88% C) 10.25% D) 5.02%

Q: World Wide Interlink Corp. has decided to undertake a large project. Consequently, there is a need for additional funds. The financial manager plans to issue preferred stock with an annual dividend of $5 per share. The stock will have a par value of $30. If investors' required rate of return on this investment is currently 20%, what should the preferred stock's market value be? A) $10 B) $15 C) $20 D) $25

Q: Which of the following statements concerning preferred stock is correct? A) Preferred stock generally is more costly to the firm than common stock. B) Most issues of preferred stock have a cumulative feature. C) Preferred dividend payments are tax-deductible. D) Preferred stock is a riskier form of capital to the firm than bonds.

Q: Which of the following statements is true? A) Preferred stockholders are entitled to dividends before common stockholders can receive dividends. B) Preferred stock, like common stock, usually has no maturity; i.e., the corporation does not pay back the investment. C) The market value of preferred stock, like bonds, will usually fluctuate in value primarily as the result of market rates of interest. D) All of the above.

Q: Sacramento Light & Power issued preferred stock in 1998 that had a par value of $85. The preferred stock pays a dividend of 5.75%. Investors require a rate of return of 6.50% today on this stock. What is the value of the preferred stock today? Round to the nearest $1. A) $100 B) $85 C) $75 D) $16

Q: Green Corp.'s preferred stock is selling for $20.83. If the company pays $2.50 annual dividends, what is the expected rate of return on its stock? A) 8.33% B) 12.00% C) 2.50% D) 20.00%

Q: UVP preferred stock pays $5.00 in annual dividends. If your required rate of return is 13%, how much will you be willing to pay for one share? A) $38.46 B) $26.26 C) $65.46 D) $46.38

Q: RAH Inc. is not publicly traded, but the P/E ratios of it's 4 closest competitors are 15, 15.3, 15.7, and 16.5. RAH's current earnings per share are $1.50. They are expected to grow at 6% for the next few years. What is a reasonable price for a share of RAH stock?

Q: Walmart's current earnings per share of $4.39 are expected to grow at a rate of 12% per year for the next few years. Using a P/E ratio fo 12.5, what is a reasonable value for a share of Walmart Stock.

Q: The higher the investor's required rate of return, the higher the P/E ratio will be.

Q: P/E ratios found in published sources or on the internet are always computed by dividing the next period's expected earnings into the current price of the stock.

Q: The higher a firm's P/E ratio, the more optimistic investors' feel about the firm's growth prospects.

Q: The P/E ratio is the market price of a share of stock divided by book equity per share.

Q: Apple stock is now selling for $315.32 per share. The P/E ratio based on current earnings is 23.72 and the P/E ratio based on expected earnings is 17.48. The expected growth rate in Apples earnings must be: A) -26%. B) 36%. C) 7.6%. D) 5.5%.

Q: Zorba's is a small chain of of restaurants whose stock is not publicly traded. The average P/E ratio for similar restaurant chains is 16.5; the P/E ratio for the S&P 500 Index is 15.2. This year's earnings were $1.10 per share; next's earnings are expected to be $1.21 per share. A reasonable price for a share of Zorba's stock is: A) $19.97. B) $18.15. C) $20.23. D) $16.72.

Q: If the ROE on a new investment is less than the firm's required rate of return: A) the investment increases the firm's value. B) the investment leaves the firm's value unchanged. C) the effect on the firm's value is unpredictable. D) the investment reduces the firm's value.

Q: McDonald's stock currently sells for $77.50. It's expected earnings per share are $4.50. The average P/E ratio for the industry is 23.3. If investors expected the same growth rate and risk for McDonald's as for an average firm in the same industry, it's stock price would: A) stay about the same. B) rise. C) fall. D) there is not enough information.

Q: Home Depot stock is currently selling for $30 per share. Next year's dividend is expected to be $1.00; next year's earnings per share are expected to be $2.14. Home Depot's P/E ratio is: A) .07. B) 14. C) 2.14. D) 30.

Q: The retail analyst at Morgan-Sachs values stock of the GAP at $28.00 per share. They are using the average industry P/E ratio of 15. Their forecasted earnings per share for next year is: A) $0.54. B) $1.50. C) $1.87. D) There is not enough information calculate earnings per share.

Q: The GAP's most recent earnings per share were $1.75. Analysts forecast next year's earnings per share at $1.88. If the appropriate P/E ratio is 15, a share of GAP stock should be valued at: A) $28.20. B) $26.25. C) $27.23. D) $8.57.

Q: The P/E ratio is calculated by dividing: A) the current stock price by stockholders' equity. B) total assets by net income. C) the current stock price by earnings per share. D) the current stock price by operating cash flow per share.

Q: Which of the following factors will influence a firm's P/E ratio? A) The investors' required rate of return B) Firm investment opportunities C) General market conditions D) All of the above

Q: If a stock has a much higher than normal P/E ratio, investors probably expect: A) slow growth in earnings. B) rapid growth in earnings. C) large increases in the price of the stock. D) a declining stock price

Q: You can purchase one share of Sumter Company common stock for $80 today. You expect the price of the common stock to increase to $85 per share in one year. The company pays an annual dividend of $3.00 per share. What is your expected rate of return for Sumter stock?

Q: You are considering the purchase of AMDEX Company stock. You anticipate that the company will pay dividends of $2.00 per share next year and $2.25 per share the following year. You believe that you can sell the stock for $17.50 per share two years from now. If your required rate of return is 12%, what is the maximum price that you would pay for a share of AMDEX Company stock?

Q: Determine the rate of return on a $25 common stock that pays a dividend of $2.50 in year 1 and grows at a rate of 5%.

Q: Draper Company's common stock paid a dividend last year of $3.70. You believe that the long-term growth in the dividends of the firm will be 8% per year. If your required return for Draper is 14%, how much are you willing to pay for the stock?

Q: Tannerly Worldwide's common stock is currently selling for $48 a share. If the expected dividend at the end of the year is $2.40 and last year's dividend was $2.00, what is the rate of return implicit in the current stock price?

Q: The common stock of Cranberry, Inc. is selling for $26.75 on the open market. A dividend of $3.68 is expected to be distributed, and the growth rate of this company is estimated to be 5.5%. If Richard Dean, an average investor, is considering purchasing this stock at the market price, what is his expected rate of return?

Q: Is the following common stock priced correctly? If no, what is the correct price? Price = $26.25 Required rate of return =13% Dividend year 0 = $2.00 Dividend year 1 = $2.10

Q: The stock valuation model D1/(Rc - g) requires Rc > G.

Q: Stock valuation is more precise than bond valuation as stock cash flows are more certain.

Q: The expected rate of return implied by a given market price equals the required rate of return for investors at the margin.

Q: Cumulative voting gives each share of stock a number of votes equal to the number of directors being elected to the board.

Q: When bankruptcy occurs, the claims of the common shareholders may go unsatisfied.

Q: The stockholder's expected rate of return consists of a dividend yield and interest.

Q: The growth rate of future earnings is determined by return on equity and the profit-retention rate.

Q: Common stock represents a claim on residual income.

Q: Common stockholders are essentially creditors of the firm.

Q: WSU Inc. is a young company that does not yet pay a dividend. You believe that the company will begin to pay dividends 5 years from now, and that the company will then be worth $50 per share. If your required rate of return on this risky stock is 20%, what is the stock worth today? A) $40 B) $10 C) $20.09 D) $0.00

Q: Common stockholders expect greater returns than bondholders because: A) they have no legal right to receive dividends. B) they bear greater risk. C) in the event of liquidation, they are only entitled to receive any cash that is left after all creditors are paid. D) all of the above.

Q: A share of common stock just paid a dividend of $3.25 per share. The expected long-run growth rate for this stock is 18%. If investors require a rate of return of 24%, what should the price of the stock be? A) $57.51 B) $62.25 C) $71.86 D) $63.92 E) $44.94

Q: You are considering the purchase of Wahoo, Inc. The firm just paid a dividend of $4.20 per share. The stock is selling for $115 per share. Security analysts agree with top management in projecting steady growth of 12% in dividends and earnings over the foreseeable future. Your required rate of return for stocks of this type is 17.5%. If you were to purchase and hold the stock for three years, what would the expected dividends be worth today? A) $12.60 B) $9.21 C) $17.12 D) $15.55 E) $11.46

Q: You are considering the purchase of common stock that just paid a dividend of $6.50 per share. Security analysts agree with top management in projecting steady growth of 12% in dividends and earnings over the foreseeable future. Your required rate of return for stocks of this type is 18%. How much should you expect to pay for this stock? A) $86 B) $94 C) $108 D) $121 E) $242

Q: The shareholder can cast all votes for a single candidate or split them among various candidates through: A) proxy fights. B) cumulative voting. C) call provisions. D) majority voting.

Q: What allows common stockholders the right to cast a number of votes equal to the number of directors being elected? A) The majority voting provision B) The casting feature C) The cumulative voting provision D) The proxy method

Q: Which investor incurs the greatest risk? A) Mortgage bondholder B) Preferred stockholder C) Common stockholder D) Debenture bondholder

Q: Marjen, Inc. just paid a dividend of $5. Marjen stock currently sells for $73.57. The return on stocks like Marjen, Inc. is around 10%. What is the implied growth rate of dividends. A) 1% B) 3% C) 5% D) 7%

Q: ABC, Inc. just paid a dividend of $2. ABC expects dividends to grow at 10%. The return on stocks like ABC, Inc. is typically around 12%. What is the most you would pay for a share of ABC stock? A) $100 B) $110 C) $120 D) $130

Q: You are considering the purchase of Miller Manufacturing, Inc.'s common stock. The stock is selling for $21.00 per share. The next dividend is expected to be $2.10, and you expect the dividend to keep growing at a constant rate. If the stock is returning 15%, calculate the growth rate of dividends. A) 3% B) 5% C) 8% D) 10%

Q: An issue of common stock currently sells for $50.00 per share, has an expected dividend to be paid at the end of the year of $2.50 per share, and has an expected growth rate to infinity of 5% per year. If investors' required rate of return for this particular security is 12% per year, then this security is: A) overvalued and offering an expected return higher than the required return. B) undervalued and offering an expected return higher than the required return. C) overvalued and offering an expected return lower than the required return. D) undervalued and offering an expected return lower than the required return.

Q: KDP's most recent dividend was $2.00 per share and is selling today in the market for $70. The dividend is expected to grow at a rate of 7% per year for the foreseeable future. If the market return is 10% on investments with comparable risk, should you purchase the stock? A) No, because the stock is overpriced $1.33. B) No, because the stock is overpriced $3.33. C) Yes, because the stock is underpriced $1.33. D) Yes, because the stock is underpriced $3.33.