Fin 384 Quiz 1
ISC 388 Investments Quiz 1
Name:______________________________
1) A firm has a higher quick (or acid test) ratio than the industry average, which implies A. the firm has a higher P/E ratio than other firms in the industry.
B.
the firm is more likely to avoid insolvency in the short run than other firms in the industry.
C.
the firm may be less profitable than other firms in the industry.
D.
the firm has a higher P/E ratio than other firms in the industry and the firm is more likely to avoid insolvency in the short run than other firms in the industry.
E.
the firm is more likely to avoid insolvency in the short run than other firms in the industry and the firm may be less profitable than other firms in the industry. …show more content…
Utica Manufacturing Company is expected to have before-tax cash flow from operations of $500,000 in the coming year. The firm's corporate tax rate is 30%. It is expected that $200,000 of operating cash flow will be invested in new fixed assets. Depreciation for the year will be $100,000. After the coming year, cash flows are expected to grow at 6% per year. The appropriate market capitalization rate for unleveraged cash flow is 15% per year. The firm has no outstanding debt. The total value of the equity of Utica Manufacturing Company should be A.
$1,000,000.
B.
$2,000,000.
C.
$3,000,000.
D.
$4,000,000.
Projected free cash flow = $180,000; V0 = 180,000/(.15 - .06) = $2,000,000.
21) The growth in dividends of Music Doctors, Inc. is expected to be 8% per year for the next two years, followed by a growth rate of 4% per year for three years; after this five-year period, the growth in dividends is expected to be 3% per year, indefinitely. The required rate of return on Music Doctors, Inc. is 11%. Last year's dividends per share were $2.75. What should the stock sell for today? A.
$8.99
B.
$25.21
C.
$39.71
D.
$110.00
E.
None of the options
Calculations are shown …show more content…
the firm can increase market price and P/E by retaining more earnings.
B.
the firm can increase market price and P/E by increasing the growth rate.
C.
the amount of earnings retained by the firm does not affect market price or the P/E.
D.
the firm can increase market price and P/E by retaining more earnings and increasing the growth rate.
E.
None of the options
If required return and ROE are equal, investors are indifferent as to whether the firm retains more earnings or increases dividends. Thus, retention rates and growth rates do not affect market price and P/E.
23) The present value of growth opportunities (PVGO) is equal to
I) the difference between a stock's price and its no-growth value per share.
II) the stock's price.
III) zero if its return on equity equals the discount rate.
IV) the net present value of favorable investment opportunities. A.
I and IV
B.
II and IV
C.
I, III, and IV
D.
II, III, and IV
E.
III and IV
All are correct except II—the stock's price equals the no-growth value per share plus the PVGO.
24) The most appropriate discount rate to use when applying a FCFE valuation model is the
Name:______________________________
1) A firm has a higher quick (or acid test) ratio than the industry average, which implies A. the firm has a higher P/E ratio than other firms in the industry.
B.
the firm is more likely to avoid insolvency in the short run than other firms in the industry.
C.
the firm may be less profitable than other firms in the industry.
D.
the firm has a higher P/E ratio than other firms in the industry and the firm is more likely to avoid insolvency in the short run than other firms in the industry.
E.
the firm is more likely to avoid insolvency in the short run than other firms in the industry and the firm may be less profitable than other firms in the industry. …show more content…
Utica Manufacturing Company is expected to have before-tax cash flow from operations of $500,000 in the coming year. The firm's corporate tax rate is 30%. It is expected that $200,000 of operating cash flow will be invested in new fixed assets. Depreciation for the year will be $100,000. After the coming year, cash flows are expected to grow at 6% per year. The appropriate market capitalization rate for unleveraged cash flow is 15% per year. The firm has no outstanding debt. The total value of the equity of Utica Manufacturing Company should be A.
$1,000,000.
B.
$2,000,000.
C.
$3,000,000.
D.
$4,000,000.
Projected free cash flow = $180,000; V0 = 180,000/(.15 - .06) = $2,000,000.
21) The growth in dividends of Music Doctors, Inc. is expected to be 8% per year for the next two years, followed by a growth rate of 4% per year for three years; after this five-year period, the growth in dividends is expected to be 3% per year, indefinitely. The required rate of return on Music Doctors, Inc. is 11%. Last year's dividends per share were $2.75. What should the stock sell for today? A.
$8.99
B.
$25.21
C.
$39.71
D.
$110.00
E.
None of the options
Calculations are shown …show more content…
the firm can increase market price and P/E by retaining more earnings.
B.
the firm can increase market price and P/E by increasing the growth rate.
C.
the amount of earnings retained by the firm does not affect market price or the P/E.
D.
the firm can increase market price and P/E by retaining more earnings and increasing the growth rate.
E.
None of the options
If required return and ROE are equal, investors are indifferent as to whether the firm retains more earnings or increases dividends. Thus, retention rates and growth rates do not affect market price and P/E.
23) The present value of growth opportunities (PVGO) is equal to
I) the difference between a stock's price and its no-growth value per share.
II) the stock's price.
III) zero if its return on equity equals the discount rate.
IV) the net present value of favorable investment opportunities. A.
I and IV
B.
II and IV
C.
I, III, and IV
D.
II, III, and IV
E.
III and IV
All are correct except II—the stock's price equals the no-growth value per share plus the PVGO.
24) The most appropriate discount rate to use when applying a FCFE valuation model is the