Multiple choice

1. Summer Co. is expected to pay a dividend or $4.00 per share out of earnings of $7.50 per share. If the required rate of return on the stock is 15% and dividends are growing at a 

current rate of 10% per year, calculate the present value of the growth opportunity for the 

stock (PVGO).  

a. $80 

b. $30 

c. $50 

d. $26 

2. Parcel Corporation is expected to pay a dividend of $5 per share next year, and the dividends pay out ratio is 50%. If the dividends are expected to grow at a constant rate of 8% forever and the required rate of return on the stock is 13%, calculate the present value of the growth opportunity.  

a. $100 

b. $76.92 

c. $23.08 

d. None of the above 

3. Universal Air is a no growth firm and has two million shares outstanding. It is expected to earn a constant 20 million per year on its assets. If all earnings are paid out as dividends and the cost of capital is 10%, calculate the current price per share for the stock.  

a. $200 

b. $150 

c. $100 

d. $50 

4  Which of the following investment rules does not use the time value of the money concept?  

a. Net present value 

b. Internal rate of return 

c. The payback period 

d. All of the above use the time value concept

5.  Suppose a firm has a $100 million in excess cash. It could:  

a. Invest the funds in projects with positive NPVs 

b. Pay high dividends to the shareholders 

c. Buy another firm 

d. All of the above 

6.  The following are measures used by firms when making capital budgeting decisions except:  

a. Payback period 

b. Internal rate of return 

c. P/E ratio 

d. Net present value 

7.  The survey of CFOs indicates that NPV method is always, or almost always, used for 

evaluating investment projects by:  

a. 12% of firms 

b. 20% of firms 

c. 57% of firms 

d. 75% of firms 

8.  The survey of CFOs indicates that IRR method is used for evaluating investment projects 

by:  

a. 12% of firms 

b. 20% of firms 

c. 76% of firms 

d. 57% of firms 

9.  Which of the following investment rules has value adding-up property?  

a. The payback period method 

b. Net present value method 

c. The book rate of return method 

d. The internal rate of return method 

10.  If the net present value (NPV) of project A is +$100, and that of project B is +$60, then the 

net present value of the combined project is:  

a. +$100 

b. +$60 

c. +$160 

d. None of the above