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Question(s) / Instruction(s):

1. The value of the stock:

a. Increases as the dividend growth rate increases

b. Increases as the required rate of return decreases

c. Increases as the required rate of return increases

d. Both A and B.

      

2. Companies with higher expected growth opportunities usually sell for:

a. Lower P/E ratio                                                                            

b. Higher P/E ratio

c. A price that is independent of P/E ratio                                        

d. A price that is dependent upon the payment ratio

 

3. Discounted cash flow formulas work for the valuation of:

a. Stocks with constant dividend growth                                          

b. Businesses

c. Stocks with super normal dividend growth                                     

d. All of the above

 

4. The method to determine the net present value for an all-equity firm

a. Discounts the cash flows after tax by the levered equity rate

b. Discounts the cash flows after tax by the WACC

c. Discounts the earnings after tax by the unlevered equity rate

d. Discounts the cash flows after tax by the unlevered equity rate

 

5. The after-tax weighted average cost of capital is determined by:

a. Multiplying the weighted average after-tax cost of debt by the weighted average cost of equity

b. Adding the weighted average before-tax cost of debt to the weighted average cost of equity

c. Adding the weighted average after-tax cost of debt to the weighted average cost of equity

d. Dividing the weighted average before-tax cost of debt to the weighted average cost of equity

 

6. A firm has a total value of $1 million and debt valued at $400,000. What is the after-tax weighted average cost of capital if the after-tax cost of debt is 12% and the cost of equity is 15%?         

a) 13.5%                             

b) 13.8%                                  

c) 27.00 %                    

d. Impossible to determine WACC

 

7. You would like to start saving for your daughter's college education. Eighteen years from now your daughter will embark on a four-year undergraduate program at a private university. At the beginning of each of the four years you expect to pay $25,000 up front in college related expenses. How much should you save each month for the next 18 years in order to have enough funds in the bank to pay all four years' expenses when they arise? Assume that the stated interest rate is 9% per year.

a) $163.80                          

b) $462.96                                 

c) $178.54                    

d) $201.77

 

8. An investment offers cash flows of $300, -$200, -$125 each year starting at time zero. What is the net present value of this investment if the market rate of interest is 15%?

a) $31.57                            

b) $25.00                                    

c) $25.00                       

d) $31.57

 

9. You have just joined a regional investment banking firm. They have offered you two different salary arrangements. You can have $81,000 per year for the next 3 years or $60,000 per year for the next 3 years, along with a $50,000 signing bonus today. If the market interest rate is 16%, what is the present value of the best salary arrangement?

a. $181,917                        

b) $243,000                                 

c) 230,000                     

d) $184,753

10. You just won $150,000 in the state lottery. Lottery rules do not allow a lump-sum payment. Instead, the lottery will pay you $5,000 per year for the next 10 years, followed by payments of $10,000 per year for the next ten years. How much are your winnings actually worth? The appropriate interest rate is 8% per year.

a) $150,000                         

b) $100,651                                 

c) $64,631                     

d) 32,182

 

 

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