Equity Quiz return to black board to record your answers.

1.

Which of the following statements is most correct?

a. Required rate of return is what investors demand based on the firms risk.
b. Expected rate of return is what investors believe will occur based on what
they currently know.
c. The realized rate of return is equal to what actually occurs.
d. Answers a and b are correct.
e. All of the above are correct.

2.
Two investors are considering purchasing Coca-Cola's stock. They agree on the
expected future dividends and the expected future growth rate. Further they are on
agreement on the riskiness of the stock and the associated required rate of return.
However Investor A plans to hold the stock only one year while Investor B plans to hold
the stock 10 years. On the basis of the type of analysis done in this chapter which
investor would be willing to pay the most for the stock?
a. Investor A
b. Investor B
c. Neither, they would pay the same amount.
d. Impossible to tell with out knowing the current stock price.
e. None of the above.
3.

Preferred stock can best be characterized as:

a. Equity
b. Debt
c. Retained Earnings
d. A hybrid security that is a mixture of debt and Equity.
e. None of the above.

4.
When we calculate the value of an asset or the intrinsic value, this number
reflects:
a. our best guess of the price based on last year's price.
b. the present value of all future expected cash flows discounted at the required
rate of return.
c. Initial Public Offering
d. the current Market Price
e. None of the above.
5.
Which of the following will cause the stock price to increase if you assume that
the constant growth pricing model [P(0) = D(1) / (r(s) g)] is correct:
a.
b.
c.
d.
e.

Decrease in dividends
Increase in the required rate of return
Increase in the growth rate
Both A and B.
All of the above.

QUESTION 6

2.
What is the current value of IBM preferred. Assume that the stock is paying a dividend
of $2.5 a year and stocks of comparable risk return 11.6%? 21.55

1.

1 poi nts

QUESTION 7

What price would you expect to pay for a stock with a 14% required rate of return, 4% rate of
dividend growth, and an annual dividend of $2.5 which will be paid next year? 25

1.

1 poi nts

QUESTION 8

What is the dividend next year for a stock that currently pays a $2 dividend which is growing at
54%? 3.08

1.

1 poi nts

QUESTION 9

What is the expected rate of return for a stock that is expected to pay $1 dividend next year
and is currently selling for $10. The price of the stock next year is expected to be $11.69 by
next year. Write your answer as a decimal (i.e. do not change to a percent). 0.25

1.

1 poi nts

QUESTION 10

1. IBM has just paid a dividend of $4 per share (this dividend is already paid sometimes called

Dividend 0). It is estimated that the companys dividend will grow at a rate of 35% in year 1
and 20% in year 2. The dividend is then expected to grow at a constant rate of 4%
thereafter. The companys opportunity cost of capital is 12% what is the current value of IBMs
stock? 77.14

1.

The cost of capital refers to:

The amount a company pays to purchase a building
The cost associated with financing the assets associated with the firm.
The amount it costs for human capital.
None of the above
1 points

QUESTION 2
1.

Compute the yield to maturity of a bond that sells for 1010 and matures is 5 years. The coupon rate is
5% paid annually and the bonds maturity value is 1000.

4%
4.77%
5%
5.23%
1 points

QUESTION 3

1. Compute the after tax cost of debt given that the firms current yield to maturity on
debt is 10% and the debt pays a 8% coupon. Let the current tax rate equal
14.8%. Write your answer as a decimal. 0.0852

1 points

QUESTION 4
1.

What is the cost of new equity assuming the firm's stock price is currently selling for $10 and will
pay a dividend of $2 next year. The firm expects constant growth of 3.9% and floatation costs
associated with the new equity issue of 20%. Write your answer as a decimal. 0.289

1 points

QUESTION 5
1.

What is the cost associated with preferred stock given that the preferred stock is paying a $8 dividend
can be sold for 60 dollars. 13.33%

1 points

QUESTION 6
1.

Compute the percentage of the firm that is financed by debt provided that the firms assets of $6 million
are financed by $3 million in Equity and the rest by long term debt. 50%

1 points

QUESTION 7
1.

Compute the Weighted average cost of capital (WACC) assuming the firms cost of debt is 7% and the
firms cost of equity is 19.01%. Assume the firm is equally financed by both debt and equity and the tax
rate is zero. Write the answer as a decimal. 13.01%

1 points

QUESTION 8

1. The Weighted Average Cost of Capital (WACC) represents the:

historical cost of capital of the firm
the marginal cost of capital for the firm - the cost that should be applied to new projects that are
similar risk.
the interest rate appropriate to apply to projects financed by 100% equity that are vastly different than
the average project of the firm.
the interest rate appropriate to apply to projects financed by 100% debt that are vastly different than
the average project of the firm.
1 points

QUESTION 9

1. Compute the required rate of return on a firm that has a Beta of 0.4. Assume the expected market
return is 12% and the risk free security returns 4%. Write the answer as a decimal. 7.20%

1 points

QUESTION 10
1.

Compute the WACC of a firm that currently has $2 million in debt and $3 million in equity and $1
million in preferred stock. The current yield to maturity on the firms debt is 6%. Equity holders
require a 9% return and preferred stock holders require a 7.354% return. The current tax rate that
applies to the firm is 30%. 7.13%