FIN- MULTIPLE CHOICE QUESTIONS.

1.If D1 = $1.25, g (which is constant) = 5.5%, and P0 = $44, what is the stock’s expected total return for the coming year?

a. 7.54%

b. 7.73%

c. 7.93%

d. 8.13%

e. 8.34%

2. Sorenson Corp.’s expected year-end dividend is D1 = $1.60, its required return is rs = 11.00%, its dividend yield is 6.00%, and its growth rate is expected to be constant in the future. What is Sorenson’s expected stock price in 7 years?

a. $37.52

b. $39.40

c. $41.37

d. $43.44

e. $45.61

3. In order for the Constant Growth Model works, the required rate of return (R) has to be less than dividend growth rate (g)

a. True

b. False

4. The possibility that more than one discount rate can cause the net present value of an investment to equal zero is referred to as:

A. duplication.

B. the net present value profile.

C. multiple rates of return.

D. the AAR problem.

E. the dual dilemma

5. Which one of the following is generally considered to be the best form of analysis if you have to select a single method to analyze a variety of investment opportunities?

A. Payback

B. Profitability index

C. Accounting rate of return

D. Internal rate of return

E. Net present value

6. What is the net present value of the following set of cash flows at a discount rate of 7 percent? At 20 percent?

Time period Cash Flow

0 -$17,000

1 $4,500

2 $8,700

3 $11,900

A. $4,518.47; $628.30

B. $4,518.47; -$321.76

C. $4,518.47; -$525.13

D. $4,722.09; $504.21

E. $4,722.09; -$418.05

7. You are considering an equipment purchase costing $177,000. This equipment will be depreciated straight line to zero over its 3-year life. What is the average accounting return if this equipment produces the following net income?

Year Net income

1 $16,300

2 $17,800

3 $12,200

A. 12.29 percent

B. 14.38 percent

C. 16.56 percent

D. 17.44 percent

E. 21.00 percent

8. Which of the following should be included in the analysis of a proposed investment?

I. erosion effects

II. opportunity costs

III. sunk costs

IV. side effects

A. I only

B. II only

C. I and IV only

D. I, II, and IV only

E. I, II, III, and IV

9. A project requires $336,000 of equipment that is classified as 7-year property. What is the depreciation expense in year 3 given the following MACRS depreciation allowances, starting with year one: 14.29, 24.49, 17.49, 12.49, 8.93, 8.92, 8.93, and 4.46 percent?

A. $38,033

B. $41,267

C. $48,509

D. $58,766

E. $61,322

10. A project has sales of $462,000, costs of $274,000, depreciation of $28,000, interest expense of $3,400, and a tax rate of 35 percent. What is the value of the depreciation tax shield?

A. $9,800

B. $10,300

C. $10,650

D. $10,800

E. $11,350

1. A stock is expected to pay a dividend of $0.75 at the end of the year. The required rate of return is rs = 10.5%, and the expected constant growth rate is g = 6.4%. What is the stock’s current price?

a. $17.39

b. $17.84

c. $18.29

d. $18.75

e. $19.22

2. Reddick Enterprises’ stock currently sells for $35.50 per share. The dividend is projected to increase at a constant rate of 5.50% per year. The required rate of return on the stock, rs, is 9.00%. What is the stock’s expected price 3 years from today?

3. The Zero Growth model used to evaluate the prices of common stocks is conceptually similar to the model used to find the price of perpetual preferred stock or other perpetuities.

a. True

b. False

4. Both Projects A and B are acceptable as independent projects. However, the selection of either one of these projects eliminates the option of selecting the other project. Which one of the following terms best describes the relationship between Project A and Project B?

A. Mutually exclusive

B. Conventional

C. Multiple choice

D. Dual return

E. Crosswise

5. Which one of the following indicates that a project is expected to create value for its owners?

A. Profitability index less than 1.0

B. Payback period greater than the requirement

C. Positive net present value

D. Positive average accounting rate of return

E. Internal rate of return that is less than the requirement

6. A project has the following cash flows. What is the payback period?

Year Cash flow

0 -$29,000

1 $14,600

2 $9,200

3 $8,700

4 $7,100

7. A 9-year project is expected to generate annual revenues of $114,500, variable costs of $73,600, and fixed costs of $14,000. The annual depreciation is $3,500 and the tax rate is 34 percent. What is the annual operating cash flow?

a. 7.54%

b. 7.73%

c. 7.93%

d. 8.13%

e. 8.34%

2. Sorenson Corp.’s expected year-end dividend is D1 = $1.60, its required return is rs = 11.00%, its dividend yield is 6.00%, and its growth rate is expected to be constant in the future. What is Sorenson’s expected stock price in 7 years?

a. $37.52

b. $39.40

c. $41.37

d. $43.44

e. $45.61

3. In order for the Constant Growth Model works, the required rate of return (R) has to be less than dividend growth rate (g)

a. True

b. False

4. The possibility that more than one discount rate can cause the net present value of an investment to equal zero is referred to as:

A. duplication.

B. the net present value profile.

C. multiple rates of return.

D. the AAR problem.

E. the dual dilemma

5. Which one of the following is generally considered to be the best form of analysis if you have to select a single method to analyze a variety of investment opportunities?

A. Payback

B. Profitability index

C. Accounting rate of return

D. Internal rate of return

E. Net present value

6. What is the net present value of the following set of cash flows at a discount rate of 7 percent? At 20 percent?

Time period Cash Flow

0 -$17,000

1 $4,500

2 $8,700

3 $11,900

A. $4,518.47; $628.30

B. $4,518.47; -$321.76

C. $4,518.47; -$525.13

D. $4,722.09; $504.21

E. $4,722.09; -$418.05

7. You are considering an equipment purchase costing $177,000. This equipment will be depreciated straight line to zero over its 3-year life. What is the average accounting return if this equipment produces the following net income?

Year Net income

1 $16,300

2 $17,800

3 $12,200

A. 12.29 percent

B. 14.38 percent

C. 16.56 percent

D. 17.44 percent

E. 21.00 percent

8. Which of the following should be included in the analysis of a proposed investment?

I. erosion effects

II. opportunity costs

III. sunk costs

IV. side effects

A. I only

B. II only

C. I and IV only

D. I, II, and IV only

E. I, II, III, and IV

9. A project requires $336,000 of equipment that is classified as 7-year property. What is the depreciation expense in year 3 given the following MACRS depreciation allowances, starting with year one: 14.29, 24.49, 17.49, 12.49, 8.93, 8.92, 8.93, and 4.46 percent?

A. $38,033

B. $41,267

C. $48,509

D. $58,766

E. $61,322

10. A project has sales of $462,000, costs of $274,000, depreciation of $28,000, interest expense of $3,400, and a tax rate of 35 percent. What is the value of the depreciation tax shield?

A. $9,800

B. $10,300

C. $10,650

D. $10,800

E. $11,350

1. A stock is expected to pay a dividend of $0.75 at the end of the year. The required rate of return is rs = 10.5%, and the expected constant growth rate is g = 6.4%. What is the stock’s current price?

a. $17.39

b. $17.84

c. $18.29

d. $18.75

e. $19.22

2. Reddick Enterprises’ stock currently sells for $35.50 per share. The dividend is projected to increase at a constant rate of 5.50% per year. The required rate of return on the stock, rs, is 9.00%. What is the stock’s expected price 3 years from today?

3. The Zero Growth model used to evaluate the prices of common stocks is conceptually similar to the model used to find the price of perpetual preferred stock or other perpetuities.

a. True

b. False

4. Both Projects A and B are acceptable as independent projects. However, the selection of either one of these projects eliminates the option of selecting the other project. Which one of the following terms best describes the relationship between Project A and Project B?

A. Mutually exclusive

B. Conventional

C. Multiple choice

D. Dual return

E. Crosswise

5. Which one of the following indicates that a project is expected to create value for its owners?

A. Profitability index less than 1.0

B. Payback period greater than the requirement

C. Positive net present value

D. Positive average accounting rate of return

E. Internal rate of return that is less than the requirement

6. A project has the following cash flows. What is the payback period?

Year Cash flow

0 -$29,000

1 $14,600

2 $9,200

3 $8,700

4 $7,100

7. A 9-year project is expected to generate annual revenues of $114,500, variable costs of $73,600, and fixed costs of $14,000. The annual depreciation is $3,500 and the tax rate is 34 percent. What is the annual operating cash flow?