3/27/23, 11:12 AM
Quiz: FINMNN2/3 Mid-term Exam
FINMNN2/3 Mid-term
Exam
You started this quiz
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Started: Mar 27 at 10:03am
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Quiz Instructions
Exam is composed of 60 items.
You are given two hours to finish the exam.
Question 1
1 pts
A 20-year bond pays 6% on a face value of $1,000. If similar bonds are currently
yielding 5%, what is the market value of the bond? Use annual analysis.
Equal to $1,000
Less than $1,000
Over $1,000
Can not be determined.
Question 2
1 pts
If the yield to maturity on a bond is greater than the coupon rate, you can assume:
risk premiums have decreased
interest rates have decreased
the price is below the par
the price is above the par
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Question 3You started this quiz near when it was due, so you won't
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1 pts
have the full amount of time to take the quiz.
Preferred stock has all but which of the following characteristics?
no stated maturity
a fixed dividend payment that carries a higher precedence than common stock dividends
preferred lacks the ownership privilege of common stock
the same binding contractual obligation as debt
Question 4
1 pts
The dividend valuation model stresses the
importance of dividends and legal rules for maximum payment.
importance of earnings per share.
relationship of dividends to earnings per share.
relationship of dividends to market prices.
Question 5
1 pts
The dividend on preferred stock is most similar to:
certificate of Deposit.
common stock with constant growth in dividends.
common stock with variable growth in dividends.
common stock with no growth in dividends.
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Question
 6
have the full amount of time to take the quiz.
1 pts
A common stock which pays a constant dividend can be valued as if it were
discount bond.
preferred stock.
corporate bond.
stock paying a growing dividend.
Question 7
1 pts
Stock valuation models are dependent upon
expected dividends, future dividend growth and an appropriate discount rate.
past dividends, flotation costs and bond yields.
historical dividends, historical growth and an appropriate discount rate.
all of these.
Question 8
1 pts
If a company's stock price (Po) goes up, and nothing else changes, Ke (the required
rate of return) should
need more information.
go down.
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Quiz: FINMNN2/3 Mid-term Exam
remain unchanged.

go up.
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Question 9
1 pts
The cost of capital for common stock is ke = (D1/Po) + g. What are the assumptions of
the model?
The firm must pay a dividend to use this model.
All of these are assumptions of the model.
The price earnings ratio stays the same.
Growth (g) is constant to infinity.
Question 10
1 pts
Which of the following regarding preferred stock is true?
If the price decreases, required rate of return has decreased
The price in the market remains at par
If the required rate of return increases, the price increases
If the required rate of return increases, the price decreases
Question 11
1 pts
"Preemptive rights" means that
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existing shareholders can prevent management from issuing additional common stock.
You started this quiz near when it was due, so you won't
have the full
ofpreferred
time to take
the quiz.for dividends.
common shareholders
canamount
"preempt"
shareholders

existing shareholders are guaranteed an opportunity to retain their proportional share of
ownership of the firm.
management can preempt the right of shareholders to receive dividends if earnings are
down.
Question 12
1 pts
Which of the following is not true about preferred stock?
Preferred stocks can be cumulative in respect to dividends.
Dividends are legal obligations of the firm.
Preferred stock dividends are taxable
The after-tax cost is higher than debt with the same yield.
Question 13
1 pts
Which of the following is not a very common feature of preferred stock?
Conversion feature
Call feature
Cumulative dividends
Voting rights
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Question 14
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1 pts
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Common stockholders’ rights include all of the following except:
fixed dividend yield
residual claim to income
first option to purchase new shares
voting
Question 15
1 pts
Which of the following financial assets is likely to have the highest required rate of
return based on risk?
Corporate bond.
Common stock.
Certificate of Deposit.
Treasury bill.
Question 16
1 pts
A bond which has a yield to maturity greater than its coupon interest rate will sell for a
price
what is equal to the face value of the bond plus the value of all interest payments.
at par.
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above par.
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below par. have the full amount of time to take the quiz.
Question 17
1 pts
Which of the following statements differentiates debt capital from equity capital?
Debt capital is derived from retained earnings; equity capital is derived from the issuance of
notes, bonds, or loans.
Debt capital is a function of receivables, inventories, and payables; equity capital is a
function of stock issues.
Debt capital is derived from the issuance of interest-bearing instruments; equity capital is
derived from permanent investments by shareholders.
Debt capital is a function of stock issues; equity capital is a function of receivables,
inventories, and payables.
Question 18
1 pts
To use a firm's WACC to evaluate its future project's flows, which of the following
must hold?
The systematic risk of the project is less than the overall systematic risk of the firm.
The project will be financed with the same proportion of debt and equity as the firm.
The systematic risk of the project is greater than the overall systematic risk of the firm.
The project should have conventional cash flows.
Question 19
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Quiz: FINMNN2/3 Mid-term Exam
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Joint Products Inc., a corporation with a 40% marginal tax rate, plans to issue
$1,000,000 of 8% preferred stock in exchange for $1,000,000 of its 8% bonds
currently outstanding. The firm's total liabilities and equity are equal to $10,000,000.
The effect of this exchange on the firm's weighted average cost of capital is likely to
be:
no change, since it involves equal amounts of capital in the exchange and both instruments
have the same rate.
an increase, since a portion of the debt payments are tax deductible.
a decrease, since preferred stock payments do not need to be made each year, whereas
debt payments must be made.
a decrease, since a portion of the debt payments are tax deductible.
Question 20
1 pts
Capital structure is the:
mix of debt and equity the firm uses to finance operations and asset purchases.
terms a firm has on its equity, such as dividend payment schedules, stock repurchase
agreements, etc.
mix of equity, such as common stock, preferred stock, paid-in capital, and retained earnings.
mix of current and long-term assets, such as cash and fixed assets (plants and equipment).
Question 21
1 pts
National Auto uses debt, preferred stock, and common stock to finance operations.
Calculating the cost of capital requires identifying the:
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net present value of the project to be financed.
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risk-free rate.

company's product.
percentage of financing coming from each financing source.
Question 22
1 pts
American Outlook, Inc. will issue bonds to fund the acquisition of a major competitor.
American Outlook has previously issued preferred and common stock. Which
component cost(s) should American Outlook use in evaluating the financial cost of
acquiring the new firm?
Only the cost of the new debt issue alone
Shareholders’ equity (both preferred and common)
The weighted-average component cost of common stock, preferred stock, and debt
The coupon rate on the bonds and the dividend yield on the preferred and common stock
Question 23
1 pts
A firm plans to use the historical rate of return to determine the cost of equity capital.
In order to use the historical rate, all of the following conditions should exist except
which of the following?
Expected future cash flows will be discounted to present values.
Interest rates will not significantly change.
Investor attitude toward risk will not change.
The firm's performance will hold steady.
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
Question
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24
1 pts
Osgood Products has announced that it plans to finance future investments so that
the firm will achieve an optimum capital structure. Which one of the following
corporate objectives is consistent with this announcement?
Maximize earnings per share
Maximize the net value of the firm
Minimize the cost of debt
Minimize the cost of equity
Question 25
1 pts
When calculating the weighted-average cost of capital (WACC), an adjustment is
made for taxes because:
the interest on debt is tax deductible.
preferred stock is used.
equity is risky.
equity earns higher return than debt.
Question 26
1 pts
If Brewer Corporation's bonds are currently yielding 8% in the marketplace, why
would the firm's cost of debt be lower?
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Quiz: FINMNN2/3 Mid-term Exam
Additional debt can be issued more cheaply than the original debt.
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full amount
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Market interest
rates
increased.

Interest is deductible for tax purposes.
There should be no difference; cost of debt is the same as the bonds’ market yield.
Question 27
1 pts
In calculating the component costs of long-term funds, the appropriate cost of
retained earnings, ignoring flotation costs, is equal to:
the cost of common stock.
the same as the cost of preferred stock.
zero, or no cost.
the weighted average cost of capital for the firm.
Question 28
1 pts
When estimating the cost of borrowing for a firm, we are primarily interested in which
of the following?
The cost of long-term debt
The coupon rate of the debt
The cost of equity financing
The weighted average cost of capital
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Question 29
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1 pts
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The overall cost of capital is the:
minimum rate a firm must earn on high-risk projects.
rate of return on assets that covers the costs associated with the funds employed.
average rate of return a firm earns on its assets.
cost of the firm's equity capital at which the market value of the firm will remain unchanged.
Question 30
1 pts
Which of the following influence(s) the cost of capital?
General economic conditions
Marketability of securities, general economic conditions, and amount of financing the firm
requires
Amount of financing the firm requires
Marketability of securities
Question 31
3 pts
What is the approximate yield to maturity for a five-year bond that pays 4% interest
on a P1000 face value annually if the bond sells for P952
4.3%
6.5%
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5.1%
5.4% 
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Question 32
3 pts
An issue of preferred stock is paying an annual dividend of P1.50. The growth rate for
the firm's common stock is 5%. What is the preferred stock price if the required rate
of return is 7%?
P25.00
P30.00
P21.43
P22.50
Question 33
3 pts
The growth rate for the firm's common stock is 7%. The firm’s preferred stock is
paying an annual dividend of P3. What is the preferred stock price if the required rate
of return is 8%?
P37.50
P42.86
P50.00
P3.00
Question 34
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An issue of common stock’s most recent dividend is P1.75. Its growth rate is 5.7%.
What is its price if the market's rate of return is 7.7%?
P87.50
P24.63
P92.50
P22.73
Question 35
3 pts
An issue of common stock is selling for P57.20. The year end dividend is expected to
be P2.32 assuming a constant growth rate of 4%. What is the required rate of return?
10.1%
8.1%
10.3%
8.22%
Question 36
3 pts
An issue of common stock is expected to pay a dividend of P5.15 at the end of the
year. Its growth rate is equal to 6%. If the required rate of return is 10%, what is its
current price?
P51.50
P36.92
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P96.00

P128.75
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Question 37
3 pts
If expected dividends grow at 7% and the appropriate discount rate is 9%, what is the
value of a stock with an expected dividend of P1.00?
P62.88
P50.00
P29.12
P19.41
Question 38
3 pts
An issue of common stock has just paid a dividend of P2.00. Its growth rate is equal
to 4%. If the required rate of return is 7%, what is its current price?
P19.04
P80.00
P69.33
P28.57
Question 39
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An issue of common stock is expected to pay a dividend of P3 at the end of the year.
Its growth rate is equal to 3%, and the current share price is P40. What is the
required rate of return on the stock?
between 10% and 12%
between 14% and 17%
between 12% and 14%
between 7% and 10%
Question 40
3 pts
Market Enterprises would like to issue bonds and needs to determine the
approximate rate they would need to pay investors. A firm with similar risk recently
issued bonds with the following current features a 5% coupon rate, 10 years until
maturity, and a current price of P1,150. At what rate would Market Enterprises expect
to issue their bonds, assuming annual interest payments?
5.9%
3.2%
4.8%
5%
Question 41
3 pts
The Pepperpot Company's stock is selling for P52. Its last dividend was P4.50, and
the firm is expected to grow at 7% indefinitely. Flotation costs associated with the
sale of common stock are 10% of the proceeds raised. Estimate Pepperpot's cost
of retained earnings.
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16.3%

14.3%
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12.5%
17.5%
Question 42
3 pts
The Pepperpot Company's stock is selling for P52. Its last dividend was P4.50, and
the firm is expected to grow at 7% indefinitely. Flotation costs associated with the
sale of common stock are 10% of the proceeds raised. Estimate Pepperpot's cost of
equity from the sale of new stock.
12.1%
16.3%
14.2%
17.3%
Question 43
3 pts
Calculate the after-tax cost of preferred stock for Bozeman-Western Airlines, Inc.,
which is planning to sell P10 million of P6.50 cumulative preferred stock to the public
at a price of P50 a share. Issuance costs are estimated to be P2 a share. The
company has a marginal tax rate of 40%.
11.15%
15%
13.54%
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12.74%

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Question 44
3 pts
Jacobs Corporation earned P2 million after taxes. The firm has 1.6 million shares of
common stock outstanding. Compute the earnings per share of Jacobs. If Jacobs'
dividend policy calls for a 40% payout ratio, what are the dividends per share?
EPS = P1.40; DPS = P0.50
EPS = P1.60; DPS = P0.40
EPS = P1.25; DPS = P0.50
EPS = P1.10; DPS = P0.60
Question 45
3 pts
Wolverine Corporation plans to pay a P3 dividend per share on each of its 300,000
shares next year. Wolverine anticipates earnings of P6.25 per share over the year. If
the company has a capital budget requiring an investment of P4 million over the year
and it desires to maintain its present debt to total assets (debt ratio) of 0.40, how
much external equity must it raise? Assume Wolverine's capital structure includes
only common equity and debt, and that debt and equity will be the only sources of
funds to finance capital projects over the year.
P975,000
P1,275,000
P2,400,000
P1,425,000
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Question 46
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3 pts
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Clynne Resources expects earnings this year to be P2 per share, and plans to pay a
dividend of P0.70 for the year. During the year Clynne expects to borrow P10 million
in addition to its already outstanding loan balances. Clynne has 10 million shares of
common stock outstanding. If all capital outlays are funded from retained earnings
and new borrowings and if Clynne follows a residual dividend policy, what capital
outlays are planned for the coming year?
P23,000,000
P1,300,000
P13,000,000
P27,000,000
Question 47
3 pts
Strategic Systems Inc. expects to have net income of P800,000 during the next year.
Its target, and current, capital structure is 40 percent debt and 60 percent common
equity. The Director of Capital Budgeting has determined that the optimal capital
budget for next year is P1.2 million. If Strategic uses the residual dividend model to
determine next year’s dividend payout, what is the expected dividend payout ratio?
0%
10%
28%
42%
Question 48
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Quiz: FINMNN2/3 Mid-term Exam
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Bettis Bus Co. uses the residual dividend model to determine its common dividend
payout. This year the company expects its net income to be P2 million, and it
expects to have a 25 percent common dividend payout ratio. The company’s target
common equity ratio is 40 percent, and the firm is financed with only common equity
and debt. What is the company’s forecasted total capital budget for the year?
P1.25 million
P2.50 million
P2.25 million
P3.75 million
Question 49
3 pts
Allensworth Motors forecasts that its earnings per share will be P3.00 this year. The
company has 500 million shares of stock outstanding. Allensworth estimates that its
capital budget for the upcoming year will be P800 million, and it is committed to
funding the entire capital budget. The company is also committed to maintaining its
dividend of P2.00 per share, and it wants to avoid issuing new common stock. The
company’s capital structure consists of debt and common stock. Given the above
constraints, what portion of the P800 million capital budget will be funded with debt?
46.02%
40.00%
53.13%
37.50%
Question 50
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Albany Motors recently completed a 3-for-1 stock split. Prior to the split, the company
had 10 million shares outstanding and its stock price was P150 per share. After the
split, the total market value of the company’s stock equaled P1.5 billion. What was
the price of the company’s stock following the stock split?
P 45
P150
P 15
P 50
Question 51
3 pts
Makeover Inc. believes that at its current stock price of P16.00 the firm is
undervalued in the market. Makeover plans to repurchase 2.4 million of its 20 million
shares outstanding. The firm’s managers expect that they can repurchase the entire
2.4 million shares at the expected equilibrium price after repurchase. The firm’s
current earnings are P44 million. If management’s assumptions hold, what is the
expected per-share market price after repurchase?
P18.18
P16.00
P20.00
P17.26
Question 52
3 pts
Melba's Toast has a capital structure with 30% debt and 70% equity. Its pretax cost of
debt is 6%, and its cost of equity is 10%. The firm's marginal corporate income tax
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rate is 35%. What is the appropriate WACC?
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8.80%
8.17%
7.20%
5.73%
Question 53
3 pts
A company's current dividend is P2 for a share of stock currently selling at P50. If the
company issues new common stock, it expects to pay flotation costs of 10%. The
company's marginal tax rate is 40%. If the company projects a long-term growth in
dividends of 8%, its after-tax cost of new equity is closest to:
12.8%.
12%
12.32%.
12.44%.
Question 54
3 pts
What is the weighted average cost of capital (WACC) for a firm given after tax cost of
Debt 5%, Preferred stock 9%, Common equity 15%. Capital structure is 35%, 25%,
and 40% respectively?
29%
9.7%
9%
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10%

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Question 55
3 pts
Thomas Company's capital structure consists of 30% long-term debt, 25% preferred
stock, and 45% common equity. The cost of capital for each component are 8%
before-tax Long-term debt, 11% Preferred stock, and 15% Common equity.
If Thomas pays taxes at the rate of 40%, what is the company's after-tax weighted
average cost of capital (WACC)?
10.94%
11.3%
9.5%
11.9%
Question 56
3 pts
Williams Inc. is interested in measuring its overall cost of capital and has gathered
the following data. Under the terms described below, the company can sell unlimited
amounts of all instruments.
Williams can raise cash by selling P1,000, 8%, 20-year bonds with annual interest
payments. In selling the issue, an average premium of P30 per bond would be
received, and the firm must pay flotation costs of P30 per bond. The after-tax cost
of funds is estimated to be 8%.
Williams can sell 8% preferred stock at par value, P105 per share. The cost of
issuing and selling the preferred stock is expected to be P5 per
Williams' common stock is currently selling for P100 per share. The firm expects
to pay cash dividends of P7 per share next year, and the dividends are expected
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Quiz: FINMNN2/3 Mid-term Exam
to remain constant. The stock will have to be underpriced by P3 per share, and
You are
started
this quiz
near when
it was
flotation
expected
to amount
to P5
per due, so you won't
 costs
have the full amount of time to take the quiz.
Williams expects to have available P100,000 of retained earnings in the coming
year; once these retained earnings are exhausted, the firm will use new common
stock as the form of common stock equity
Williams preferred capital structure is
The cost of funds from the sale of common stock for Williams Inc. is:
7.6%.
7%.
7.2%.
7.4%.
Question 57
3 pts
Turquoise Electronics Inc. paid a dividend of P1.87 last year. If the firm's growth in
dividends is expected to be 10% next year and then zero thereafter, then what is its
cost of equity capital if the price of its common shares is currently P25.71?
8.00%
6.6%
18.00%
7.27%
Question 58
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The WACC for a firm is 13.00%. You know that the firm's cost of debt capital is 10%
and the cost of equity capital is 20%. What proportion of the firm is financed with
debt?
Assume there are no taxes.
30%
50%
70%
100%
Question 59
3 pts
Stryder Inc. has 3 million shares outstanding at a current price of P15 per share. The
book value of the shares is P10 per share. The firm also has P30 million in par value
of bonds outstanding. The bonds are selling at a price equal to 101% of par. What is
the market value of the firm?
P45.0 million
P75.3 million
P60.0 million
P30.0 million
Question 60
3 pts
DQZ Telecom is considering a project for the coming year that will cost P50 million.
DQZ plans to use the following combination of debt and equity to finance the
investment.
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Quiz: FINMNN2/3 Mid-term Exam
Issue P15 million of 20-year bonds at a price of P101, with a coupon rate of 8%,
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Use P35 million of funds generated from
The equity market is expected to earn 12%. U.S. Treasury bonds are currently
yielding 5%. The beta coefficient for DQZ is estimated to be 0.60. DQZ is subject to
an effective corporate income tax rate of 40%.
The Capital Asset Pricing Model (CAPM) computes the expected return on a security
by adding the risk-free rate of return to the incremental yield of the expected market
return, which is adjusted by the company's beta. Compute DQZ's expected cost of
equity capital.
9.2%
12%
10%
12.2%
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