1. Assume that markets are efficient and there are sufficient investors in high and low tax brackets. Under these assumptions, if a high dividend paying firm changes its dividend policy to a low dividend payout, the firm's stock price will decrease as a result of change in dividend policy.

True False

2. Total assets of ABC Inc is currently valued at $500,000. Expected values of these assets in one year are $550,000 or $470,000. The face value of the firm's outstanding bond that matures in one year is $480,000. Currently, interest rate of U.S. Treasury bills is 3% per year. What is the value of ABC Inc's equity?

0

$49,000

$38,228

$500,000

3. Stock of Travels Unilimited Inc is currently trading at $60. The stock is expected to sell for either $40 or $80 a share at the end of the year. T-bills currently yield 3.3%. Call options with a maturity of one year and strike price of $50 are trading in the market. What will be the per share value of one call option (that is, what will be call price)?

Multiple Choice

$45

$15.96

$9.97

$21.67

4. You are evaluating a project that requires an initial investment of $10,000. The annual expected cash flow of the project is $5,000 as perpetuity. Your colleague proposes an option of waiting for 2 years. If you wait for 2 years, the initial investment cost will increase by 10% and the annual expected cash flow of the project will increase by 5% forever. If the discount rate is 10%, what are the project NPVs in today's terms if you start the project today vs wait for 2 years?

Multiple Choice

NPV if start today=$40,000 vs NPV if wait for 2 years = $38,181

NPV if start today=$30,000 vs NPV if wait for 2 years = $38,181

NPV if start today=$40,000 vs NPV if wait for 2 years = $40,00

NPV if start today=$50,000 vs NPV if wait for 2 years = $40,000