Subject Code : FNCE5014
Assignment Task:

1. Increasing debt financing will do all of the following except:

A. cause investors to demand a higher interest rate on debt.
B. increase the risk to the firm's common stockholders.
C. cause stockholders to demand a higher return.
D. decrease the firm's cost of common equity.

2. Changing the capital structure by adding debt will:

A. reduce the return that shareholders require.
B. reduce default risk.
C. increase debtholder risk.
D. reduce the cost of debt.

3. How much cash flow before tax and interest is necessary to support a project if $2 million is used to pay interest, the tax rate is 35%, and equity investors require an annual income of $4 million?

A. $7.40 million
B. $8.10 million
C. $8.15 million
D. $8.85 million

4. What decision should be made on a project with above-average market risk?

A. Accept if the cash flows discounted at the WACC have a positive NPV.
B. Discount the cash flows at the IRR and accept if NPV is positive.
C. Accept if the IRR is greater than the WACC.
D. Use a higher discount rate than the WACC to reflect the project’s risk and accept if NPV is positive at this higher discount rate.

5. The expected return on common stock is equal to:

A. [(1 + dividend yield) × (1 + capital appreciation rate)] − 1.
B. the capital appreciation rate + dividend yield.
C. (1 + capital appreciation rate)/(1 + dividend yield).
D. the capital appreciation rate − dividend yield.

6. What price would you pay today for a stock if you require a rate of return of 13%, the dividend growth rate is 3.6%, and the firm recently paid an annual dividend of $2.50?

A. $27.55
B. $30.28
C. $26.60
D. $31.37
Price = ($2.50 × 1.036)/(0.13 − 0.036) = $27.55

7. As long as the NPV of a project declines smoothly with increases in the discount rate, the project is acceptable if its:

A. internal rate of return is positive.
B. payback period is greater than one.
C. rate of return exceeds the cost of capital.
D. cash inflows equal the initial cost.

8. What is the typical relationship between the standard deviation of an individual common stock and the standard deviation of a diversified portfolio of common stocks?

A. The individual stock's standard deviation will be lower.
B. The individual stock's standard deviation will be higher.
C. The standard deviations should be equal.
D. There is no relationship.

9. The benefits of portfolio diversification are highest when the individual securities within the portfolio have returned that:

A. vary directly with the rest of the portfolio.
B. vary proportionally with the rest of the portfolio.
C. are largely uncorrelated with the rest of the portfolio.
D. are perfectly correlated with the market portfolio.

10. A firm plans to grow at 6% a year without increasing financial leverage. It expects to earn a 10% return on equity. What proportion of earnings should it plan to payout?

A. 0.40
B. 0.60
C. 0.67
D. 0.00
SG = 0.06 = 0.10 × (1 − payout ratio)

11. How much will a firm receive in net funding from a firm commitment underwriting of 250,000 shares priced to the public at $40 if a 10% underwriting spread has been added to the price paid by the underwriter? Additionally, the firm pays $600,000 in legal fees.

A. $8,400,000
B. $8,460,025
C. $8,490,909
D. $8,545,455
Net proceeds = [($40 / 1.10) × 250,000] − $600,000 = $8,490,909

12. A firm has current assets of $1.2 million, fixed assets of $3.6 million, and debt of $2.2 million. There are 250,000 shares of stock outstanding. What will be the book value of equity if the firm repurchases 10% of its outstanding shares for $10.40 a share?

A. $2,552,000
B. $2,600,000
C. $2,340,000
D. $2,574,000
Equity = $1.2m + 3.6m − 2.2m − (0.10 × 250,000 × $10.40) = $2,340,000


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  • Posted on : January 10th, 2019

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