Question

1. Last year, Logistics paid an annual dividend of $2.20 and announced that all future dividends would be $2.25 a share indefinitely. What is your required rate of return if you are willing to pay $15.25 a share for this stock?

14.50%

14.75%

16.07%

13.67%

13.88%

2. Which one of these factors generally has the greatest impact on a firm’s PE ratio?

depreciation method used by the firm

required rate of return

current dividends

the overall risk level of the current firm

future opportunities

3. When calculating the weighted average flotation cost, the weights should be based on the:

average amounts of external capital raised during the past twelve months.

firm’s target capital structure.

percentages of internal and external financing that will be used for the project.

firm’s current mix of debt and equity.

mix of debt and equity that will be used to finance the specific project.

4. The beta of a security is calculated as: (_____ of a security’s return with the return on the market portfolio / _______).

Variance; Covariance of the security return

Covariance; Standard deviation of the market return

Covariance; Variance of the security return

Variance; Covariance of the market return

Covariance; Variance of the market return

5. A bond with a coupon rate of 6 percent that pays interest semiannually and is priced at par will have a market price of _____ and interest payments in the amount of _____ each.

$1,060; $30

$1,000; $60

$1,060; $60

$1,000; $30

$1,006; $60

6. The weighted average cost of capital for a firm is the:

maximum rate which the firm should require on any projects it undertakes.

overall rate which the firm must earn on its existing assets to maintain its value.

rate of return that the firm's preferred stockholders should expect to earn over the long term.

discount rate which the firm should apply to all of the projects it undertakes.

rate the firm should expect to pay on its next bond issue.

7. Jack's Construction Co. has 80,000 bonds outstanding that are selling at par value. Bonds with similar characteristics are yielding 8.6 percent. The company also has 4 million shares of common stock outstanding. The stock has a beta of 1.1 and sells for $40 a share. The U.S. Treasury bill is yielding 4 percent and the market risk premium is 8 percent. Jack's tax rate is 34 percent. What is Jack's weighted average cost of capital?

11.39%

10.65%

11.47%

10.43%

10.10%

8. Martin's Yachts is expected to pay annual dividends of $1.40, $1.75, and $2.00 a share over the next three years, respectively. After that, the dividend is expected to remain constant. What is the current value per share at a discount rate of 14 percent?

$13.39

$12.82

$12.22

$13.08

$13.57