Question 1

Which of the following assets belongs to the operating assets?

Accounts receivables
Marketable securities
Accounts payables
Both A and C



Question 2

According to the nonconstant dividend growth model discussed in the textbook, the expected dividend growth rate during the initial growth period is different from the expected dividend growth rate during the subsequent constant growth period.


Question 3

An increase in a firm’s expected growth rate would normally cause its required rate of return to

Stay constant.
Possibly increase, possibly decrease, or possibly have no effect.

Question 4

Which of the following is NOT a capital component when calculating the weighted average cost of capital (WACC)?

Newly-issued common equity
Preferred stock
Long-term debt
Accounts Payable

Question 5

HSM Energy estimates that its average-risk projects have a WACC of 10%, its below-average risk projects have a WACC of 9%, and its above-average risk projects have a WACC of 12%.  Which of the following projects (A, B, and C) should the company accept?

Project B is of below-average risk and has a return of 8.5%.
Project C is of above-average risk and has a return of 11%.
Project A is of average risk and has a return of 9%.
None of the projects should be accepted.


Question 6

What’s value of a preferred stock if we assume it has an annual dividend $2.5 per share and the required rate of return is 10%?

$ 5
$ 25
$ 50
$ 100

Question 7

Other than dividend growth model, we can employ Market Multiple Analysis method for stock valuation. We suppose a firm’s estimated earnings per share is $2.25. The average price to earnings (P/E) ratio for similarly publicly traded firms is 10. What’s the firm’s expected stock price?


Question 8

A stock is selling for $50 in the market. The required rate of return is 9%. The most recent dividend paid is D0 = $2.0 and dividends are expected to grow at a constant rate g. What’s the expected dividend yield for this stock?


Question 9

To help finance a major expansion, a company sold a noncallable bond several years ago that now has 15 years to maturity.  This bond has a 10.25% annual coupon, paid semiannually, it sells at a price of $1,025, and it has a par value of $1,000.  If the company’s tax rate is 30%, what component cost of debt should be used in the WACC calculation?


Question 10

You were hired as a consultant to a company, whose target capital structure is 40% debt, 10% preferred, and 50% common equity.  The before-tax cost of debt is 6.0%, the cost of preferred is 8.0%, and the cost of retained earnings is 13.0%.  The corporate tax rate is 28%. The firm will not be issuing any new stock.  What is its WACC?



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