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Which of the following is TRUE about preferred stock?

A	Most preferred dividends are cumulative, so missed preferred dividends must be paid before common dividends can be paid.
B	Preferred stockholders generally have the same voting rights as common stockholders.
C	A missed preferred dividend is a liability that lets holders force the firm into bankruptcy.
D	Preferred dividends are a tax-deductible business expense for the firm.
E	Dividends received by a corporation on preferred stock are fully taxable.

Most preferred dividends are cumulative, so missed preferred dividends must be paid before common dividends can be paid.

Which of the following is NOT true about common stock?

A	Common stockholders share proportionally in the remaining assets if the firm is liquidated.
B	Common stockholders must be paid their dividends before preferred stockholders receive theirs.
C	Common stockholders have a preemptive right to a first shot at new stock issues.
D	Dividends on common stock are not a liability of the firm until declared by the Board.
E	Dividends paid on common stock are not tax deductible for the firm.

Common stockholders must be paid their dividends before preferred stockholders receive theirs.

Which of the following is NOT true about bonds?

A	As interest rates increase, bond prices decrease.
B	Short-term bonds have more reinvestment rate risk than long-term bonds.
C	Long-term bonds have more price risk than short-term bonds.
D	If the YTM is less than the coupon rate, the bond sells at a discount.
E	Bonds of similar risk and maturity are priced to yield about the same return, regardless of the coupon rate.

If the YTM is less than the coupon rate, the bond sells at a discount.

Pinecrest Energy paid a quarterly dividend of $1.60 last quarter. Dividends are expected to grow 1.2% per quarter, and the required return is 6.4% annual. What will you pay for one share today?

A	$400.00
B	$31.14
C	$57.83
D	$404.80
E	$101.20

404.80

Maple Grove Inc. just paid a $7.25 dividend and will pay the same dividend at the end of each of the next 8 years, then never again. The discount rate is 7%. What is the value of the stock?

A	$103.57
B	$43.29
C	$46.32
D	$39.07
E	$58.00

43.29

Stonebridge Corp. will pay a $0.90 dividend at the end of each quarter for the next 2 years, then never again. The required return is 12% annual, compounded quarterly. What is one share worth today?

A	$30.00
B	$4.47
C	$1.52
D	$6.51
E	$6.32

6.32

Alder Creek Corp. may cut next year's dividend from $9 to $6. Without the cut, growth is 4% and the price is $120. With the cut, growth is 6%. The required return is unchanged. What is the new price, and should the company cut its dividend?

A	$109.09; Should cut its dividend
B	$163.64; Should cut its dividend
C	$109.09; Should not cut its dividend
D	$80.00; Should not cut its dividend
E	$163.64; Should not cut its dividend

$109.09; Should not cut its dividend 

Granite Peak Co. may cut next year's dividend from $5 to $3. Without the cut, growth is 3% and the price is $62.50. With the cut, growth is 7%. The required return is unchanged. What is the new price, and should the company cut its dividend?

A	$75.00; Should cut its dividend
B	$75.00; Should not cut its dividend
C	$125.00; Should cut its dividend
D	$37.50; Should not cut its dividend
E	$27.27; Should not cut its dividend

$75.00; Should cut its dividend 

Harlow Rail has bonds with an 8.5% coupon paid semiannually, 9 years to maturity, a $1,000 face value, and a price of $968. What is the yield to maturity?

A	4.51%
B	18.05%
C	8.78%
D	9.03%
E	8.50%

9.03%

Oakline Foods has $1,000 face value bonds with a 5.0% annual coupon, currently selling for $925. What is the current yield?

A	5.00%
B	4.63%
C	5.41%
D	8.11%
E	2.70%

5.41%

Westfield Corp. bonds have a $1,000 face value, an 8% coupon, 10 years to maturity, semiannual payments, and a current YTM of 6%. What happens to the bond price if market rates rise to 10%?

A	The bond price will decrease but still trade at a premium.
B	The bond price will increase and trade at a premium.
C	The bond price will increase but still trade at a discount.
D	The bond price will remain unchanged.
E	The bond price will decrease and trade at a discount.

The bond price will decrease and trade at a discount.

Which of the following is NOT a question you would ask to decide whether a cash flow is an annuity, a perpetuity, or an irregular stream?

A	"Are the payments of equal amount (or equally growing)?"
B	"Are the payments equally distributed across time?"
C	"Is the present value larger than the future value?"
D	"Are the payments made at the beginning of each period?"
E	"Are the payments growing at a constant rate?"

"Is the present value larger than the future value?"

A bond with a 7% coupon paid semiannually, a $1,000 par value, and 6 years to maturity has a yield to maturity of 8%. What is the price of the bond, and is it a premium or a discount bond?

A	$953.07; Premium bond
B	$953.07; Discount bond
C	$953.77; Discount bond
D	$660.88; Discount bond
E	$1,048.32; Premium bond

$953.07; Discount bond 

A bond with a 12% coupon paid semiannually, a $1,000 par value, and 15 years to maturity has a yield to maturity of 9%. What is the price of the bond, and is it a premium or a discount bond?

A	$1,244.33; Discount bond
B	$1,241.82; Premium bond
C	$691.79; Premium bond
D	$793.53; Discount bond
E	$1,244.33; Premium bond

$1,244.33; Premium bond

A bond with a 6% semiannual coupon, 20 years to maturity, and a $1,000 par value is selling for $1,180. What is the yield to maturity?

A	4.61%
B	2.31%
C	9.22%
D	5.08%
E	6.00%

4.61%

A bond with an 8% coupon paid semiannually, 10 years to maturity, and a $1,000 face value is selling for $934.96. What are the yield to maturity (YTM), the current yield (CY), and the capital gains yield (CGY)? Use the bond's price one year from now.

A	YTM 9.00%; CY 8.56%; CGY -0.45%
B	YTM 9.00%; CY 4.28%; CGY 4.72%
C	YTM 9.00%; CY 8.00%; CGY 1.00%
D	YTM 9.00%; CY 8.56%; CGY 0.45%
E	YTM 4.50%; CY 8.56%; CGY -4.06%

YTM 9.00%; CY 8.56%; CGY 0.45%

A $1,000 par value bond has a 6% coupon paid semiannually and 10 years to maturity. (a) What is the price if the bond is priced to yield 5%? (b) What is the current yield if the YTM rises to 8%?

A	(a) $1,077.95; (b) 5.57%
B	(a) $1,077.95; (b) 3.47%
C	(a) $1,077.95; (b) 6.94%
D	(a) $1,077.22; (b) 6.93%
E	(a) $864.10; (b) 6.94%

(a) $1,077.95; (b) 6.94%

You expect a stock to pay a $2.50 dividend in one year, and you believe you can sell it for $60 at that time. You require a 12% return on investments of this risk. What is the most you would be willing to pay today?

A	$62.50
B	$55.80
C	$53.57
D	$56.07
E	$520.83

$55.80

A stock is expected to pay a $1.10 dividend every quarter forever. The required return is 10% APR with quarterly compounding. What is the price of the stock?

A	$11.00
B	$176.00
C	$22.00
D	$45.10
E	$44.00

$44.00

Cobalt Systems just paid a dividend of $2.40 per share. Dividends are expected to grow 4% per year, and the market requires a 12% return on assets of this risk. How much should the stock be selling for?

A	$31.20
B	$30.00
C	$15.60
D	$20.80
E	$32.45

$31.20

Tidewater Corp. is expected to pay a $4.10 dividend in one year. The dividend is expected to grow 5% per year, and the required return is 14%. What is the price of the stock?

A	$47.83
B	$29.29
C	$21.58
D	$45.56
E	$82.00

$45.56 

A firm's stock is selling for $55.00. It just paid a $3.00 dividend, and dividends are expected to grow at 5% per year. What is the required return on the stock?

A	10.45%
B	10.73%
C	5.73%
D	0.73%
E	5.45%

10.73%

ABC stock currently sells for $40 per share. The next expected annual dividend is $2.40, and the growth rate is 6%. (a) What is the expected rate of return on this stock? (b) If the required rate of return were 10%, what would the stock price and the dividend yield be?

A	(a) 6.00%; (b) $60.00, 4.00%
B	(a) 12.00%; (b) $24.00, 10.00%
C	(a) 12.00%; (b) $60.00, 4.00%
D	(a) 12.00%; (b) $60.00, 6.00%
E	(a) 12.00%; (b) $60.00, 10.00%

(a) 12.00%; (b) $60.00, 4.00%

A company just paid a $1.50 dividend. Dividends are expected to increase 20% in one year and 12% in two years. After that, dividends will grow 5% per year forever. If the required return is 11%, what is the price of the stock?

A	$38.54
B	$35.04
C	$30.53
D	$30.00
E	$31.89

$31.89 

Using the project cash flows and the 13% required return at the top of this sheet, what is the project's net present value?

A	$104,281.02
B	$49,190.00
C	$11,881.02
D	-$69,244.87
E	-$13,817.03

$11,881.02

Using the same project, what is the internal rate of return (IRR)?

A	18.86%
B	13.00%
C	-30.80%
D	53.24%
E	3.93%

18.86% 

What is the payback period for the project?

A	2.58
B	3.00
C	3.54
D	2.53
E	2.75

2.75 

What is the discounted payback period for the project, using the 13% required return?

A	2.75
B	3.54
C	3.33
D	4.00
E	3.45

3.54

Using the net income row and the average book value of $23,100, what is the project's average accounting return (AAR)?

A	27.49%
B	8.59%
C	137.45%
D	34.36%
E	153.24%

34.36% 

Two mutually exclusive projects have the following cash flows. Project X: Year 0 = −45,000; Year 1 = 21,000; Year 2 = 24,500; Year 3 = 15,000. Project Y: Year 0 = −80,000; Year 1 = 24,000; Year 2 = 36,000; Year 3 = 52,000. The required return for both is 11%. Which project should be accepted, and what is its NPV?

A	Project X; $4,771.54
B	Project Y; $8,861.98
C	Project Y; $4,771.54
D	Project X; $8,861.98
E	Both projects; $13,633.52

Project Y; $8,861.98 

An investment costs $80,000 today and has the following cash flows: Year 1 = 118,000; Year 2 = 92,000; Year 3 = −140,000 (a cleanup cost at the end of the project). The required return is 20%. What is the NPV, and what decision does the NPV rule give?

A	$1,203.70; Reject
B	$82,222.22; Accept
C	-$1,203.70; Reject
D	$163,240.74; Accept
E	$1,203.70; Accept

$1,203.70; Accept 

A project costs $2,000,000 today and will produce cash flows of $360,000 at the end of each year for 8 years. The required return is 11%. What is the NPV, and what decision does the NPV rule give?

A	-$147,395.81; Reject
B	$147,395.81; Accept
C	$880,000.00; Accept
D	$1,852,604.19; Reject
E	$56,390.66; Accept

-$147,395.81; Reject 

A project has an initial outlay of $12,800. It has a single payoff of $61,000 at the end of Year 6 and nothing in between. What is the IRR of the project?

A	36.65%
B	24.99%
C	29.72%
D	62.76%
E	376.56%

29.72% 

Riverbend Delivery can buy a new truck for $210,000. It will provide net cash flows over the next five years of $40,000, $65,000, $80,000, $90,000, and $110,000. The truck will be sold at the end of Year 5 for a salvage value of $12,000. The required return is 9%. What is the NPV of buying the truck?

A	$78,431.85
B	$86,932.95
C	$296,231.02
D	$86,231.02
E	$90,431.85

$86,231.02 

A project costs $185,000 today and will produce cash flows of $74,000, $86,000, and $80,000 in Years 1 through 3. The required return is 12%. Using the profitability index as defined on the course slides, what is the project's profitability index?

A	0.036
B	1.036
C	0.034
D	0.027
E	0.073

0.036 

Harlow Fabrication buys a machine for $340,000. It costs another $22,500 to have it shipped and installed. The company expects to sell the machine for $41,000 when it is done with it in 7 years. Using straight-line depreciation, what is the annual depreciation expense?

A	$42,714.29
B	$51,785.71
C	$45,928.57
D	$57,642.86
E	$36,283.57

$45,928.57 

Pinecrest Co. buys equipment with a total installed cost of $150,000. For tax purposes it is depreciated using 3-year MACRS, with percentages of 0.3333 (Year 1), 0.4445 (Year 2), 0.1481 (Year 3), and 0.0741 (Year 4). The company sells the equipment for $48,000 at the end of Year 3. The tax rate is 21%. What is the after-tax salvage value?

$40,254.15 

Meridian Outdoor Gear is considering a new line of camping equipment. The project requires a $18,400,000 capital investment, depreciated straight-line to zero over its 4-year life. At the end of the project the equipment can be sold for $3,200,000. Incremental sales are $12,600,000 per year for 4 years, with costs (excluding depreciation) equal to 55% of sales. The project also requires the company to increase inventory by $1,350,000 at the start; the inventory is recovered at the end of the project. The tax rate is 21% and the required return is 10%.

Using the project description at the top of this sheet, what is the project cash flow (cash flow from assets) for Year 0?

A	-$18,400,000.00
B	-$19,750,000.00
C	-$17,050,000.00
D	-$22,950,000.00
E	-$15,200,000.00

-$19,750,000.00 

Meridian Outdoor Gear is considering a new line of camping equipment. The project requires a $18,400,000 capital investment, depreciated straight-line to zero over its 4-year life. At the end of the project the equipment can be sold for $3,200,000. Incremental sales are $12,600,000 per year for 4 years, with costs (excluding depreciation) equal to 55% of sales. The project also requires the company to increase inventory by $1,350,000 at the start; the inventory is recovered at the end of the project. The tax rate is 21% and the required return is 10%.

What is the project cash flow (cash flow from assets) for Year 2?

A	$1,070,000.00
B	$5,670,000.00
C	$845,300.00
D	$5,445,300.00
E	$6,795,300.00

$5,445,300.00 

Meridian Outdoor Gear is considering a new line of camping equipment. The project requires a $18,400,000 capital investment, depreciated straight-line to zero over its 4-year life. At the end of the project the equipment can be sold for $3,200,000. Incremental sales are $12,600,000 per year for 4 years, with costs (excluding depreciation) equal to 55% of sales. The project also requires the company to increase inventory by $1,350,000 at the start; the inventory is recovered at the end of the project. The tax rate is 21% and the required return is 10%.

What is the project cash flow (cash flow from assets) for Year 4?

A	$9,323,300.00
B	$6,795,300.00
C	$7,973,300.00
D	$9,995,300.00
E	$8,645,300.00

$9,323,300.00 

Meridian Outdoor Gear is considering a new line of camping equipment. The project requires a $18,400,000 capital investment, depreciated straight-line to zero over its 4-year life. At the end of the project the equipment can be sold for $3,200,000. Incremental sales are $12,600,000 per year for 4 years, with costs (excluding depreciation) equal to 55% of sales. The project also requires the company to increase inventory by $1,350,000 at the start; the inventory is recovered at the end of the project. The tax rate is 21% and the required return is 10%.

What is the project's NPV at the 10% required return?

A	$19,909,594.49
B	$5,909,200.00
C	-$1,139,131.68
D	$638,519.62
E	$159,594.49

$159,594.49 

Meridian Outdoor Gear is considering a new line of camping equipment. The project requires a $18,400,000 capital investment, depreciated straight-line to zero over its 4-year life. At the end of the project the equipment can be sold for $3,200,000. Incremental sales are $12,600,000 per year for 4 years, with costs (excluding depreciation) equal to 55% of sales. The project also requires the company to increase inventory by $1,350,000 at the start; the inventory is recovered at the end of the project. The tax rate is 21% and the required return is 10%.

What is the project's IRR?

A	10.00%
B	7.11%
C	10.34%
D	11.30%
E	13.42%

10.34% 

A project is expected to produce sales of $2,840,000 and costs (excluding depreciation) of $1,615,000. Depreciation is $410,000 per year and the tax rate is 21%. Using the tax shield approach, what is the project's operating cash flow (OCF)?

A	$967,750.00
B	$1,053,850.00
C	$643,850.00
D	$1,377,750.00
E	$1,225,000.00

$1,053,850.00 

Cedar Ridge Foods is evaluating a new product line. Last year it paid $75,000 for a market study. The project needs new equipment costing $540,000 and a $65,000 increase in net working capital. It would also be built on land the company already owns, which could be sold today for $210,000. What is the relevant Year 0 cash flow for the project?

A	-$890,000.00
B	-$605,000.00
C	-$750,000.00
D	-$815,000.00
E	-$540,000.00

-$815,000.00 

A new project will let you sell a product for $64 each. Variable costs are $29.50 per unit and fixed operating costs (excluding depreciation) are $186,500 per year. The project requires a $438,000 equipment purchase with a 5-year life, depreciated straight-line to zero. How many units must you sell annually to break even in an accounting sense? (Round to the nearest whole unit.)

A	5,406 units
B	18,101 units
C	7,945 units
D	4,283 units
E	9,292 units

7,945 units 

A new project will let you sell a product for $58 each. Variable costs are $26 per unit and total fixed costs (including depreciation) are $298,400 per year. The initial investment is a $196,000 equipment purchase with a 4-year life, depreciated straight-line to zero. How many units must you sell annually for operating cash flow to equal zero (the cash break-even quantity)? (Round to the nearest whole unit.)

A	7,794 units
B	9,325 units
C	6,125 units
D	15,450 units
E	10,856 units

7,794 units 

A project sells 9,200 units per year at $85 each. Variable costs are $41 per unit and fixed costs are $256,000 per year. Ignoring taxes, what is the project's degree of operating leverage (DOL) at this sales level?

A	1.720
B	0.581
C	1.581
D	1.632
E	2.720

2.720 

A project requires a $600,000 investment in equipment that is depreciated straight-line to zero over its 5-year life (no salvage value). The price is $50 per unit and fixed costs (excluding depreciation) are $140,000 per year. The base case is 12,000 units per year at $22 variable cost per unit. In the worst case, sales fall to 9,500 units per year and variable cost rises to $24 per unit. The tax rate is 21% and the required return is 12%. What is the project's NPV in the worst case?

A	$49,003.91
B	-$204,447.91
C	-$295,288.27
D	-$214,288.95
E	$395,552.09

-$204,447.91 

A firm has a $500,000 capital budget this year (soft rationing) and cannot split projects. Project A costs $200,000 and has an NPV of $38,000. Project B costs $150,000 with an NPV of $33,000. Project C costs $250,000 with an NPV of $40,000. Project D costs $120,000 with an NPV of $21,000. Using the profitability index, which projects should the firm accept, and what is the total NPV?

A	Projects A and C; $78,000.00
B	Projects B and C; $73,000.00
C	Projects B, A, and D; $470,000.00
D	Projects B, A, and D; $92,000.00
E	Projects A, B, and C; $111,000.00

Projects B, A, and D; $92,000.00