Choose The Correct Answer

1 If a stock has a higher than average expected return, you would logically expect it is

a well-managed company

Riskier than average

In an industry with good prospects

Widely held by investors

2 Which of the following is not considered a capital component for the purpose of calculating the weighted average cost of capital (WACC) as it applies to capital budgeting?

Common stock

Long-term debt

Retained Earnings

Accounts payable and accruals

3 The one-year discount factor, at a discount rate of 25% per year, is:

1

1.25

0.75

0.8

4 Conduct an efficient capital budgeting lead to:

Undefine companys strategic direction

The capital to be not locked into the project

Be able to find capital required to finance investments

Insufficient production facilities

5 World-Tour Co. has just now paid a dividend of $2.83 per share (D0); its dividends are expected to grow at a constant rate of 6% per year forever. If the required rate of return on the stock is 16%, what is the current value of the stock, after paying the dividend?

$ 70

$ 30

$ 56

$ 48

6- Deluxe Company expects to pay a dividend of $2 per share at the end of year 1, $3 per share at the end of year 2, and then be sold for $32 per share at the end of year 2. If the required rate of return on the stock is 15%, what is the current value of the stock?

$29.18

$32.17

$28.20

$32

7- Suppose you want to buy a bond that has a face value of $ 1,000 with a maturity period of five years. The coupon rate is 8%. Discount factor: year 1 = 0.917, year 2 = 0.842, year 3 = 0.772, year 4 = 0.708, year 5 = 0.650. What is the maximum price you should be willing to pay for the bond?

$ 961.12

$ 1042.32

$ 1,000

$ 1,080

8- A company has a capital structure that consists of 50 percent debt and 50 percent equity. Which of the following statements is most correct?

The WACC is calculated on a before-tax basis.

The cost of retained earnings exceeds the cost of issuing new common stock.

The WACC exceeds the cost of equity financing.

The cost of equity financing is greater than or equal to the cost of debt financing.

9- Risk must involve

an unknown probability distribution

a chance of loss

negative expected returns

actual dollars

10- If the one-year discount factor is 0.90, what is the present value of $120 expected one year from today?

$ 108

$ 96

$ 100

$ 133

11 The discount rate that will result in NPV of zero is:

Average Rate of Return

Interest Rate

Internal Rate of Return

Expected rate of return