**END OF CHAPTER QUESTIONS + Answers |Rated A+**

TVOM keystrokes? 40 PMT, 12 N, 1000 FV, -874.68 PV, CPT I/Y = 5.45 x 2 = YTM = 10.9%

39. The make-believe bonds of Facebook carry a 12% annual coupon, have a $1,000 face value, and mature in 5 years. Bonds of equivalent risk yield 9%. What is the market value of Facebook bonds?

A) $1,011.20

B) $1,087.25

C) $1,095.66

D) $1,116.69

E) $1,160.25

Answer:

Response: price = $120 [(1 - 1/1.095) / .09] + 1,000 / 1.095 = $1,116.69

1000 FV, 120 PMT, 5 N, 9 I/Y, CPT PV = -1,116.69

40. If the following bonds are identical except for coupon, what is the price of bond B?

A) $ 944.58

B) $ 975.31

C) $1,037.86

D) $1,150.00

E) $1,279.47

Answer:

Response:

Bond A: $1,150 = $50 {[1 - 1/(1 + R)50 ]/ R} + 1,000 / (1 + R)50; R = 4.27%;

Bond B: price = $40 [(1 - 1/1.042750) / .0427] + 1,000 / 1.042750 = $944.58

First, compute the YTM for bond A, thusly:

1000 FV, 25x2=N, 50 PMT, -1,150 PV, CPT I/Y = YTM = 4.27. Then compute PV of bond B:

1000 FV, 40 PMT, 25x2= N, 4.27 I/Y, CPT PV = -944.58

41. If corporate bond yields are at 8.4% and you are in the 34% federal marginal income tax bracket, at what level of municipal bond yields would you be indifferent between owning corporate bonds or muni bonds? Ignore the impact of state and local taxes.

A) 5.95%

B) 5.54%

C) 5.03%

D) 4.67%

E) 4.11%

Answer:

Response: 8.4(1 - .34) = 5.54%

**CHAPTER 6 QUESTIONS END HERE.**

**CHAPTER 7 QUESTIONS BEGIN HERE**

1. The stock valuation model that determines the current stock price as the next dividend divided by the (discount rate less the dividend growth rate) is called the:

A) Zero growth model.

B) Dividend growth model.

C) Capital Asset Pricing Model.

D) Earnings capitalization model.

Answer:

2. A stock's next expected dividend divided by the current stock price is the:

A) Current yield.

B) Total yield.

C) Dividend yield.

D) Capital gains yield.

E) Earnings yield.

Answer:

3. The rate at which the stock price is expected to appreciate (or depreciate) is the:

A) Current yield.

B) Total yield.

C) Dividend yield.

D) Capital gains yield.

E) Earnings yield.

Answer:

4. Payments made by a corporation to its shareholders, in the form of either cash, stock, or payments in kind, are called:

A) Retained earnings.

B) Net income.

C) Dividends.

D) Redistributions.

E) Infused equity.

Answer:

5. The market in which new securities are originally sold to investors is the ________ market.

A) dealer

B) auction

C) over-the-counter (OTC)

D) secondary

E) primary

Answer:

6. The market in which previously issued securities are traded among investors is the:

A) Dealer market.

B) Auction market.

C) Over-the-counter (OTC) market.

D) Secondary market.

E) Primary market.

Answer:

7. Common stock valuation requires, among other things, information regarding the:

I. Expected dividend growth rate.

II. Current dividend payment.

III. Par value of the common stock.

A) I only

B) I and II only

C) I and III only

D) II and III only

E) I, II, and III

Answer:

8. As illustrated using the dividend growth model, the total return on a share of common stock is comprised of a ___________.

A) capital gains yield and a dividend growth rate

B) capital gains growth rate and a dividend growth rate

C) dividend payout ratio and a required rate of return

D) dividend yield and the present dividend

E) dividend yield and a capital gains yield

Answer:

9. Which of the following items would usually appear for a stock quote in *The Wall Street Journal*?

A) Capital gains rate

B) Dividend yield

C) Number of shares outstanding

D) Par value of the stock

E) Dividend growth rate

Answer:

10. If dividends on a common stock are expected to grow at a constant rate forever, and if you are told the most recent dividend paid, the dividend growth rate, and the appropriate discount rate today, you can calculate ___________.

I. the price of the stock today

II. the dividend that is expected to be paid ten years from now

III. the appropriate discount rate ten years from now

A) I only

B) I and II only

C) I and III only

D) II and III only

E) I, II, and III

Answer:

11. Which of the following statements regarding dividend yields is true?

A) It measures how much the stock's price will increase in a year.

B) It incorporates the par value of the stock into the calculation.

C) It is analogous to the current yield for a bond.

D) It is always greater than the stock's capital gains yield.

E) It measures the total annual return an investor can expect to earn by owning the stock.

Answer:

12. Which of the following is (are) true?

I. The dividend yield on a stock is the annual dividend divided by the par value.

II. When the constant dividend growth model holds, g = capital gains yield.

III. The total return on a share of stock = dividend yield + capital gains yield.

A) I only

B) II only

C) I and II only

D) II and III only

E) I, II, and III

Answer:

13. If some shareholders have greater voting power than others, it must be that:

A) The company has both preferred stock and common stock outstanding.

B) The company has outstanding debentures.

C) The company is located outside the United States in a tax-haven locale.

D) The company has multiple classes of common stock.

E) The company is in bankruptcy proceedings.

Answer:

14. What would you pay for a share of ABC Corporation stock today if the next dividend will be $3 per share, your required return on equity investments is 15%, and the stock is expected to be worth $90 one year from now?

A) $78.26

B) $80.87

C) $82.56

D) $90.00

E) $98.12

Answer:

Response:

15. The dividend on Simple Motors common stock will be $3 in 1 year, $4.25 in 2 years, and $6.00 in 3 years. You can sell the stock for $100 in 3 years. If you require a 12% return on your investment, how much would you be willing to pay for a share of this stock today?

A) $75.45

B) $77.24

C) $81.52

D) $85.66

E) $91.30

Answer:

Response:

16. A stock that pays a constant dividend of $1.50 forever currently sells for $10.71. What is the required rate of return?

A) 10%

B) 12%

C) 13%

D) 14%

E) 15%

Answer:

Response:

17. ABC Company's preferred stock is selling for $30 a share. If the required return is 8%, what will the dividend be two years from now?

A) $2.00

B) $2.20

C) $2.40

D) $2.80

E) $3.25

Answer:

Response:

18. What would you pay today for a stock that is expected to make a $2 dividend in one year if the expected dividend growth rate is 5% and you require a 12% return on your investment?

A) $28.57

B) $29.33

C) $31.43

D) $43.14

E) $54.30

Answer:

Response:

19. The stock of MTY Golf World currently sells for $90 per share. The firm has a constant dividend growth rate of 6% and just paid a dividend of $5.09. If the required rate of return is 12%, what will the stock sell for one year from now?

A) $ 90.00

B) $ 93.52

C) $ 95.40

D) $ 99.80

E) $112.78

Answer:

Response:

20. Llano's stock is currently selling for $40.00. The expected dividend one year from now is $2 and the required return is 13%. What is this firm's dividend growth rate assuming the constant dividend growth model is appropriate?

A) 8%

B) 9%

C) 10%

D) 11%

Answer:

Response:

21. The current price of XYZ stock is $80.00. Dividends are expected to grow at 5% indefinitely and the most recent dividend was $2.75. What is the required rate of return on XYZ stock?

A) 7.3%

B) 8.7%

C) 9.5%

D) 10.6%

E) 11.2%

Answer:

Response:

22. ABC Corporation's common stock dividend yield is 3.61%, it just paid a dividend of $2.75, and is expected to pay a dividend of $2.89 one year from now. Dividends are expected to grow at a constant rate indefinitely. What is the required rate of return on ABC stock?

A) 7.3%

B) 8.7%

C) 9.5%

D) 10.6%

E) 11.2%

Answer:

Response:

23. If Big Amp, Inc. stock closed at $36 and the current quarterly dividend is $0.75 per share, what dividend yield would be reported for the stock in *The Wall Street Journal*?

A) 2.0%

B) 3.6%

C) 5.7%

D) 6.6%

E) 8.3%

Answer:

Response:

24. Suppose NoGro, Inc. has just issued a dividend of $3.25 per share. Subsequent dividends will remain at $3.25 indefinitely. Returns on the stock of firms like NoGro are currently running 10%. What is the value of one share of stock?

A) $22.50

B) $27.25

C) $32.50

D) $37.25

E) $39.75

Answer:

Response:

25. Suppose Pale Hose, Inc. has just paid a dividend of $1.80 per share. Sales and profits for Pale Hose are expected to grow at a rate of 8% per year. Its dividend is expected to grow by the same amount. If the required return is 14%, what is the value of a share of Pale Hose?

A) $18.00

B) $25.20

C) $27.80

D) $30.60

E) $32.40

Answer:

Response:

26. Suppose that you have just purchased a share of stock for $40. The most recent dividend was $2 and dividends are expected to grow at a rate of 7% indefinitely. What must your required return be on the stock?

A) 5.45%

B) 7.00%

C) 10.25%

D) 12.35%

E) 13.65%

Answer:

Response:

27. The preferred stock of the Limbaugh Institute pays a constant annual dividend of $4 and sells for $50. You believe the stock will sell for $32 in one year. You must, therefore, believe that the required return on the stock will be _____ percentage points ________ in one year.

A) 8; higher

B) 8; lower

C) 1.5; higher

D) 2.5; lower

E) 4.5; higher

Answer:

Response:

28. A firm's stock has a required return of 12%. The stock's dividend yield is 5%. What is the dividend the firm is expected to pay in one year if the current stock price is $50?

A) $2.00

B) $2.50

C) $3.00

D) $3.50

E) $4.00

Answer:

Response

29. A firm's stock has a required return of 12%. The stock's dividend yield is 5%. What dividend did the firm just pay if the current stock price is $50?

A) $2.18

B) $2.34

C) $2.50

D) $2.87

E) $3.60

Answer:

30. Duke stock must have closed at ___________ per share on the previous trading day.

A) $29.64

B) $30.76

C) $30.99

D) $31.55

E) $32.11

Answer:

Response:

31. For the current year, the expected dividend per share is:

A) $0.25

B) $1.00

C) $2.00

D) $3.30

E) $4.00

Answer:

32. Assume the expected growth rate in dividends is 10%. Then the constant growth model suggests that the required return on Duke stock is:

A) 7.4%

B) 8.9%

C) 11.0%

D) 13.6%

E) 15.8%

Answer:

Response:

33. Based on the quote, a good estimate of EPS over the last four quarters is:

A) $0.80

B) $1.21

C) $1.68

D) $1.91

E) $2.54

Answer:

34. On this trading day, the number of Duke shares which changed hands was:

A) 209

B) 2,092

C) 20,925

D) 209,250

E) 2,092,500

Answer:

35. Assume that Duke paid a $0.92 annual dividend in the previous period. What is the dividend growth rate based on this quote?

A) 4.8%

B) 6.0%

C) 7.2%

D) 8.7%

E) 9.9%

Answer: :

36. You believe that the required return on Duke stock is 16% and that the expected dividend growth rate is 12%, which is expected to remain constant for the foreseeable future. Is the stock currently overvalued, undervalued, or fairly priced?

A) Overvalued

B) Undervalued

C) Fairly priced

D) Cannot tell without more information

Answer:

Response:

**CHAPTER 7 QUESTIONS END HERE**

**CHAPTER 8 QUESTIONS BEGIN HERE**

1. The difference between the market value of an investment and its cost is the:

A) Net present value.

B) Internal rate of return.

C) Payback period.

D) Profitability index.

E) Discounted payback period.

Answer:

2. The net present value (NPV) rule can be best stated as:

A) An investment should be accepted if, and only if, the NPV is exactly equal to zero.

B) An investment should be rejected if the NPV is positive and accepted if it is negative.

C) An investment should be accepted if the NPV is positive and rejected if its is negative.

D) An investment with greater cash inflows than cash outflows, regardless of when the cash flows occur, will always have a positive NPV and therefore should always be accepted.

Answer:

3. The length of time required for an investment to generate cash flows sufficient to recover its initial cost is the:

A) Net present value.

B) Internal rate of return.

C) Payback period.

D) Profitability index.

E) Discounted payback period.

Answer:

4. The payback rule can be best stated as:

A) An investment is acceptable if its calculated payback period is less than some prespecified number of years.

B) An investment should be accepted if the payback is positive and rejected if it is negative.

C) An investment should be rejected if the payback is positive and accepted if it is negative.

D) An investment is acceptable if its calculated payback period is greater than some prespecified number of years.

Answer:

5. The discount rate that makes the net present value of an investment exactly equal to zero is the:

A) Payback period.

B) Internal rate of return.

C) Average accounting return.

D) Profitability index.

E) Discounted payback period.

Answer:

6. The internal rate of return (IRR) rule can be best stated as:

A) An investment is acceptable if its IRR is exactly equal to its net present value (NPV).

B) An investment is acceptable if its IRR is exactly equal to zero.

C) An investment is acceptable if its IRR is less than the required return, else it should be rejected.

D) An investment is acceptable if its IRR exceeds the required return, else it should be rejected.

Answer:

7. A situation in which taking one investment prevents the taking of another is called:

A) Net present value profiling.

B) Operational ambiguity.

C) Mutually exclusive investment decisions.

D) Issues of scale.

E) Multiple rates of return.

Answer:

8. The present value of an investment's future cash flows divided by its intial cost is the:

A) Net present value.

B) Internal rate of return.

C) Average accounting return.

D) Profitability index.

E) Payback period.

Answer:

9. The profitability index (PI) rule can be best stated as:

A) An investment is acceptable if its PI is greater than one.

B) An investment is acceptable if its PI is less than one.

C) An investment is acceptable if its PI is greater than the internal rate of return (IRR).

D) An investment is acceptable if its PI is less than the net present value

10. Which of the following statements is true?

A) NPV should never be used if the project under consideration has nonconventional cash flows.

B) NPV is similar to a cost/benefit ratio.

C) If the financial manager relies on NPV in making capital budgeting decisions, she acts in the shareholders' best interests.

D) NPV can normally be directly observed in the marketplace.

E) IRR is generally preferred to NPV in making correct capital budgeting acceptance decisions.

Answer:

11. Net present value _____________.

A) is equal to the initial investment in a project

B) is equal to the present value of the project benefits

C) is equal to zero when the discount rate used is equal to the IRR

D) is simplified by the fact that future cash flows are easy to estimate

E) requires the firm set an arbitrary cutoff point for determining whether an investment is acceptable

Answer:

12. The _______ decision rule is considered the "best" in principle.

A) internal rate of return

B) payback period

C) average accounting return

D) net present value

E) profitability index

Answer:

13. Which of the following decision rules is best for evaluating projects for which cash flows beyond a specified point in time, and the time value of money, can both be ignored?

A) Payback

B) Net present value

C) Average accounting return

D) Profitability index

E) Internal rate of return

Answer:

14. An investment generates $1.10 in present value benefits for each dollar of invested costs. This conclusion was most likely reached by calculating the project's:

A) Net present value

B) Profitability index

C) Internal rate of return

D) Payback period

E) Average accounting return

Answer:

15. The use of which of the following would lead to correct decisions when comparing mutually exclusive investments?

I. Profitability index

II. Net present value

III. Average accounting return

A) I only

B) II only

C) III only

D) I and II only

E) I and III only

Answer:

16. You own some manufacturing equipment that must be replaced. Two different suppliers present a purchase and installation plan for your consideration. This is an example of a business decision involving _____________ projects.

A) mutually exclusive

B) independent

C) working capital

D) positive NPV

E) crossover

Answer:

17. If a project with conventional cash flows has an IRR less than the required return, then:

A) The profitability index is less than one.

B) The IRR must be zero.

C) The AAR is greater than the required return.

D) The payback period is less than the maximum acceptable period.

E) The NPV is positive.

Answer:

18. Calculate the NPV of the following project using a discount rate of 10%:

Yr 0 = –$800; Yr 1 = –$80; Yr 2 = $100; Yr 3 = $300; Yr 4 = $500; Yr 5 = $500

A) $ 8.04

B) $ 87.28

C) $208.04

D) $459.17

E) $887.28

Answer:

Response:

19. You are considering a project that costs $600 and has expected cash flows of $224, $250.88 and $280.99 over the next three years. If the appropriate discount rate for the project's cash flows is 12%, what is the net present value of this project?

A) The NPV is negative

B) $ 0.00

C) $ 9.34

D) $49.34

E) $84.75

Answer:

20. A project costs $300 and has cash flows of $75 for the first three years and $50 in each of the project's last three years. What is the payback period of the project?

A) The project never pays back

B) 3.75 years

C) 4.50 years

D) 5.25 years

E) 5.50 years

Answer:

Response:

21. Suppose a project costs $2,500 and produces cash flows of $400 over each of the following 8 years. What is the IRR of the project?

A) There is not enough information; a discount rate is required

B) 3.27%

C) 5.84%

D) 9.61%

E) 12.06%

Answer:

Response

22. A project has an initial investment of $25,000, with $6,500 annual inflows for each of the subsequent 5 years. If the required return is 12%, what is the NPV?

A) –$6,500.00

B) –$2,447.02

C) –$1,568.95

D) $ 215.46

E) $1,763.81

Answer:

Response:

23. What is the NPV of the following set of cash flows if the required return is 15%?

A) The NPV is negative

B) $ 408.27

C) $ 950.44

D) $1,247.90

E) $4,656.12

Answer:

24. Would you accept a project which is expected to pay $2,500 a year for 6 years if the initial investment is $10,000 and your required return is 8%?

A) Yes; the NPV is $1,557

B) Yes; the NPV is $928

C) Yes; the NPV is $63

D) No; the NPV is –$346

E) No; the NPV is –$1,221

Answer:

Response:

25. What is the payback period of a $15,000 investment with the following cash flows?

A) 2.75 years

B) 3.50 years

C) 3.75 years

D) 4.50 years

E) 4.75 years

Answer:

Response:

26. You are considering an investment which has the following cash flows. If you require a 5 year payback period, should you take the investment?

A) Yes, the payback is 3.000 years.

B) Yes, the payback is 3.75 years.

C) Yes, the payback is 4.25 years.

D) No, the payback is 5.25 years.

E) No, the payback is 5.75 years.

Answer:

Response:

27. Your required return is 15%. Should you accept a project with the following cash flows?

A) No, because the IRR is 5%.

B) No, because the IRR is 10%.

C) Yes, because the IRR is 20%.

D) Yes, because the IRR is 30%.

E) Yes, because the IRR is 40%.

Answer:

Response:

28. You are going to choose between two investments. Both cost $50,000, but investment A pays $25,000 a year for 3 years while investment B pays $20,000 a year for 4 years. If your required return is 12%, which should you choose?

A) A because it pays back sooner.

B) A because its IRR exceeds 12%.

C) A because it has a higher IRR.

D) B because its IRR exceeds 12%.

E) B because it has a higher NPV.

Answer:

Response:

29. Using the profitability index, which of the following projects would you choose if you have limited funds?

Project |
Initial Investment |
NPV |

1 |
$50,000 |
$10,000 |

2 |
75,000 |
25,000 |

3 |
60,000 |
15,000 |

4 |
40,000 |
17,000 |

5 |
90,000 |
40,000 |

A) Project 1

B) Project 2

C) Project 3

D) Project 4

E) Project 5

Answer:

Response:

30. You have a choice between 2 mutually exclusive investments. If you require a 15% return, which investment should you choose?

A) Project A, because it has a smaller initial investment.

B) Project B, because it has a higher NPV.

C) Either one, because they have the same profitability indexes.

D) Project A, because it has the higher internal rate of return.

E) Project B, because it pays back faster.

Answer:

Response:

31. For a project with an initial investment of $8,000 and cash inflows of $2,000 each year for 6 years, calculate NPV given a required return of 13%.

A) –$846

B) –$263

C) $ 0

D) $149

E) $552

Answer:

Response:

32. What is the IRR of an investment that costs $18,500 and pays $5,250 a year for 5 years?

A) 13%

B) 15%

C) 19%

D) 25%

E) 28%

Answer:

Response:

33. What is the profitability index of the following investment if the required return = 10%?

A) 0.94

B) 1.09

C) 1.18

D) 1.27

E) 1.45

Answer:

Response:

34. What is the payback period for the following investment?

A) 4 years

B) 3 years

C) 2 years

D) 1 year

E) The investment doesn't payback

Answer:

Response:

*Use the following to answer questions 35-38:*

Bill plans to open a do-it-yourself dog bathing center in a storefront. The bathing equipment will cost $50,000. Bill expects the after-tax cash inflows to be $15,000 annually for 8 years, after which he plans to scrap the equipment and retire to the beaches of Jamaica.

35. What is the project's payback period?

A) 2.67 years

B) 3.33 years

C) 3.67 years

D) 4.33 years

E) 5.67 years

Answer:

Response:

36. Assume the required return is 10%. What is the project's NPV?

A) $ 887

B) $13,322

C) $22,759

D) $30,024

E) $45,001

Answer:

Response:

37. Assume the required return is 20%. What is the project's IRR? Should it be accepted?

A) 15%; yes

B) 15%; no

C) 25%; yes

D) 25%; no

E) 20%; indifferent

Answer:

Response:

38. Assume the required return is 20%. What is the project's PI? Should it be accepted?

A) 0.85; yes

B) 0.85; no

C) 1.00; indifferent

D) 1.15; yes

E) 1.15; no

Answer:

Response:

Result 100%

**END OF CHAPTER 8 QUESTIONS**

**Category:**Business, General Business

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