1. Assume that you have compiled the following information regarding a stock:

Last dividend paid $0.75 per share Expected constant dividend growth rate 8%

Current actual stock price $14.57 per share

Beta coefficient 0.88

Risk-free rate of return 5% Required rate of return on the market portfolio 15%

What is the expected current value of the stock?

a.$5.43b.$7.94c.$11.57d.$13.97e.$14.57

Answer:

2. Which of the following would increase the expected current value of a stock valued using the dividend valuation model?

a. An increase in the expected dividend growth rate

b. A decrease in the expected dividend growth rate

c. A decrease in the requiredrate of return

d. Answers a. and c. are both correct

e. Answers b. and c. are both correct Answer:

3. Which of the following is not part of the theory of informational efficiency and the efficient markets hypothesis?

a. All information relevant to the values of traded securities can be obtained easily and at low cost.

b. Buyers and sellers do not act rationally.

c. Current market prices reflect all publicly available information.

d. The market contains many buyers and sellers.

e. All information contained in past price movements is fully reflected in current prices.

Answer:

4. Which of the following is not a source of equity capital in not-for-profit corporations?

a. Charitable donations

b. Government grants

c. Retained earnings

d. Bond issues

e. Start-up capital from religious, educational, or governmental entities

Answer:

5. Which of the following statements about the use of debt financing (financial leverage) is incorrect?

a. In most situations, the use of debt financing increases the return to owners (say, as measured by ROE).

b. In all situations, the use of debt financing increases the riskiness to owners.

c. Capital structure theory allows managers to precisely determine the optimal capitalstructure for any for-profit business.

d. Debt financingallows more of a businesss operating income to flow through to investors.

e. Because debt financing leversup (increases) owners returns, its use is called financial leverage.

Answer:

6. Which of the following factors influence the estimate of a businesss optimal capital structure?

a. The amount of business(inherent) risk

b. Lender/rating agency attitudes

c. Industry averages

d. The need to maintain financial flexibility (reserve borrowing capacity)

e. All of these factors influence the estimate

Answer:

7. Which of the following statements about cost of capital estimation is most correct?

a. In general, at least five methods will be used to estimate the cost of debt.

b. The corporate cost of capital is the higher of either the cost of equity or the cost of debt.

c. The corporate cost of capital is used as the hurdle (discount) rate for all projects being evaluated in the organization.

d. Because there is no tax savings associated with debt issued by notforprofit organizations, it is theoretically wrong to recognize the tax savings for investor-owned businesses.

e. None of these statements are correct.

Answer:

8. Which of the following statements regarding the cost of equity is most correct?

a. The cost of debt is the interest rate set on debt financing, while the cost of equity is defined similarly: it is the rate of return required by equity investors.

b. The debt cost plus risk premium method is one way to estimate the cost of equity.

c. The cost of equity for a not-for-profit hospital is zero.

d. Statements a. and b. are both correct.

e. Statements a., b., and c. are all correct.

Answer:

9. Generic HealthServices has a target capital structure of 30 percent debt and 70 percent equity.Its cost of debt estimate is

10 percent, and its cost of equity estimate is 16 percent.It pays federal, state, and local taxes at a 40 percent marginal rate. What is the firms corporate cost of capital?

a. 12.1 percent

b. 12.5 percent

c. 13.0 percent

d. 13.8 percent

e. 14.0 percent

Answer:

10. If debt financing is used in a for-profit corporation, more of a firms operating income is available for distribution to investors (owners and creditors). The additional available operating income arises as a result of:

a. Greater operating expenses

b. Greater operating revenue

c. Reduced operating expenses

d. Lower dividends

e. Tax savings

Answer:

11. Assume a for-profit skilled nursing facility chain has a target capital structure that is 40 percent debt and 60 percent equity. Assume the chain plans to finance a new project with 50 percent debt and 50 percent equity. The marginal before-tax cost of debt is 8 percent, the tax rate is 35 percent, and the marginal cost of equity is estimated to be 14 percent. What is the organizations corporate cost of capital (rounded to the nearest tenth of a percent)?

a. 11.6 percent

b. 10.5 percent

c. 9.6 percent

d. 11.0 percent

e. 22.0 percent

Answer:

12. Which of the following methods is not typically used to develop the cost of equity for a large, publicly traded company?

a. The capital asset pricingmodel method

b. The discounted cash flow method

c. The build-up method

d. The debt cost plus risk premiummethod

e. All of these methodsare typically used to developthe cost of equity for a large, publicly traded company

Answer:

13. True or False: The corporate cost of capital weights should reflect the businesss target capital structure regardless of how a particular project under consideration is being financed.

1. True
2. False

Answer:

14. Which of the following are steps in a capital investment financial analysis?

a. Estimate the projects cash flows

b. Assess the projectsriskiness

c. Estimate the projectcost of capital(discount rate)

d. Measure the financialimpact

e. All of the above

Answer:

15. Which of the followingstatements about payback(payback period) is most correct?

a. Payback is a measureof time breakeven.

b. Payback is a rough measureof risk.

c. Payback is a rough measureof liquidity.

d. Statements a. and b. are both correct.

e. Statements a., b., and c. are all correct.

Answer: