# Finance Multiple Choice Questions

**KnowledgeCats**

2. If D1 = $2.00, g (which is constant) = 6%, and P0 = $40, what is the stock’s expected capital gains yield for the coming year?

a. 5.2%

b. 5.4%

c. 5.6%

d. 6.0%

3. The Lashgari Company is expected to pay a dividend of $1 per share at the end of the year, and that dividend is expected to grow at a constant rate of 5% per year in the future. The company's beta is 1.2, the market risk premium is 5%, and the risk-free rate is 3%. What is the company's current stock price?

a. $15.00

b. $20.00

c. $25.00

d. $30.00

4. McKenna Motors is expected to pay a $1.00 per-share dividend at the end of the year (D1 = $1.00). The stock sells for $20 per share and its required rate of return is 11 percent. The dividend is expected to grow at a constant rate, g, forever. What is the growth rate, g, for this stock?

a. 5%

b. 6%

c. 7%

d. 8%

5. The last dividend paid by Klein Company was $1.00. Klein’s growth rate is expected to be a constant 5 percent for 2 years, after which dividends are expected to grow at a rate of 10 percent forever. Klein’s required rate of return on equity (ks) is 12 percent. What is the current price of Klein’s common stock?

a. $21.00

b. $33.33

c. $42.25

d. $50.16

6. You must estimate the intrinsic value of Gallovits Technologies’ stock. Gallovits’s end-of-year free cash flow (FCF) is expected to be $25 million, and it is expected to grow at a constant rate of 8.5% a year thereafter. The company’s WACC is 11%. Gallovits has $200 million of long-term debt plus preferred stock, and there are 30 million shares of common stock outstanding. What is Gallovits' estimated intrinsic value per share of common stock?

a. $22.67

b. $24.00

c. $25.33

d. $26.67

12. Dick Boe Enterprises, an all-equity firm, has a corporate beta coefficient of 1.5. The financial manager is evaluating a project with an expected return of 21 percent, before any risk adjustment. The risk-free rate is 10 percent, and the required rate of return on the market is 16 percent. The project being evaluated is riskier than Boe’s average project, in terms of both beta risk and total risk. Which of the following statements is most correct?

a. The project should be accepted since its expected return (before risk adjustment) is greater than its required return.

b. The project should be rejected since its expected return (before risk adjustment) is less than its required return.

c. The accept/reject decision depends on the risk-adjustment policy of the firm. If the firm’s policy were to reduce a riskier-than-average project’s expected return by 1 percentage point, then the project should be accepted.

d. Riskier-than-average projects should have their expected returns increased to reflect their added riskiness. Clearly, this would make the project acceptable regardless of the amount of the adjustment.

13. Conglomerate Inc. consists of 2 divisions of equal size, and Conglomerate is 100 percent equity financed. Division A’s cost of equity capital is 9.8 percent, while Division B’s cost of equity capital is 14 percent. Conglomerate’s composite WACC is 11.9 percent. Assume that all Division A projects have the same risk and that all Division B projects have the same risk. However, the projects in Division A are not the same risk as those in Division B. Which of the following projects should Conglomerate accept?

a. Division A project with an 11 percent return.

b. Division B project with a 12 percent return.

c. Division B project with a 13 percent return.

d. Statements a and c are correct.

15. You were hired as a consultant to Giambono Company, whose target capital structure is 40% debt, 15% preferred, and 45% common equity. The after-tax cost of debt is 6.00%, the cost of preferred is 7.50%, and the cost of retained earnings is 12.75%. The firm will not be issuing any new stock. What is its WACC?

a. 8.98%

b. 9.26%

c. 9.54%

d. 9.83%

16. Flaherty Electric has a capital structure that consists of 70 percent equity and 30 percent debt. The company’s long-term bonds have a before-tax yield to maturity of 8.4 percent. The company uses the DCF approach to determine the cost of equity. Flaherty’s common stock currently trades at $40.5 per share. The year-end dividend (D1) is expected to be $2.50 per share, and the dividend is expected to grow forever at a constant rate of 7 percent a year. The company estimates that it will have to issue new common stock to help fund this year’s projects. The company’s tax rate is 40 percent. What is the company’s weighted average cost of capital, WACC?

a. 10.73%

b. 10.30%

c. 11.31%

d. 7.48%

17. Hamilton Company’s 8 percent coupon rate, quarterly payment, $1,000 par value bond, which matures in 20 years, currently sells at a price of $686.86. The company’s tax rate is 40 percent. What is the firm’s component cost of debt for purposes of calculating the WACC?

a. 3.05%

b. 7.32%

c. 7.36%

d. 12.20%

22. The Seattle Corporation has been presented with an investment opportunity that will yield cash flows of $30,000 per year in Years 1 through 4, $35,000 per year in Years 5 through 9, and $40,000 in Year 10. This investment will cost the firm $150,000 today, and the firm’s cost of capital is 10 percent. Assume cash flows occur evenly during the year, 1/365th each day. What is the payback period for this investment?

a. 5.23 years

b. 4.86 years

c. 4.00 years

d. 6.12 years

22. Coughlin Motors is considering a project with the following expected cash flows:

Project

Year Cash Flow

0 -$700 million

1 200 million

2 370 million

3 225 million

4 700 million

The project’s WACC is 10 percent. What is the project’s discounted payback?

a. 3.15 years

b. 4.09 years

c. 1.62 years

d. 3.09 years

The PV of the outflows is -$700 million. To find the discounted payback you need to keep adding cash flows until the cumulative PVs of the cash inflows equal the PV of the outflow:

Discounted

Year Cash Flow Cash Flow @ 10% Cumulative PV

0 -$700 million -$700.0000 -$700.0000

1 200 million 181.8182 -518.1818

2 370 million 305.7851 -212.3967

3 225 million 169.0458 -43.3509

4 700 million 478.1094 434.7585

The payback occurs somewhere in Year 4. To find out exactly where, we calculate $43.3509/$478.1094 = 0.0907 through the year. Therefore, the discounted payback is 3.091 years.

23. As the director of capital budgeting for Denver Corporation, you are evaluating two mutually exclusive projects with the following net cash flows:

Project X Project Z

Year Cash Flow Cash Flow

0 -$100,000 -$100,000

1 50,000 10,000

2 40,000 30,000

3 30,000 40,000

4 10,000 60,000

If Denver’s cost of capital is 15 percent, which project would you choose?

a. Neither project.

b. Project X, since it has the higher IRR.

c. Project Z, since it has the higher NPV.

d. Project X, since it has the higher NPV.

24. Your company is choosing between the following non-repeatable, equally risky, mutually exclusive projects with the cash flows shown below. Your cost of capital is 10 percent. How much value will your firm sacrifice if it selects the project with the higher IRR?

k = 10%

k = 10%

| | | |

-1,000 500 500 500

k = 10%

k = 10%

| | | | | |

-2,000 668.76 668.76 668.76 668.76 668.76

a. $243.43

b. $291.70

c. $332.50

d. $481.15

- 10 years ago

**Finance Multiple Choice Questions with Answers & Explanation**

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