Corporate Finance: Sample Test Problems

Topics: Net present value, Internal rate of return, Investment Pages: 4 (1228 words) Published: November 15, 2014
Sample Test Problems
9.1Which type of secondary market provides the most efficient market for securities?

9.2Is preferred stock classified as debt or equity?

9.3Burnes, Inc. is a mature firm that is growing at a constant rate of 5.5 percent per year. The firm’s last dividend was $1.50. If the required rate of return is 12 percent, what is the market value of this stock assuming dividend growth equals the growth rate of the firm?

9.4Abacus Corp. will pay dividends of $2.25, $2.95 and $3.15 for the next three years. After three years, the firm will grow at a constant rate of 4 percent. If the required rate of return is 14.5 percent, what is the current value of the stock?

9.5The preferred stock of Wellcare Inc. is currently trading at $115.79. If the required rate of return is 9.5 percent, what is the quarterly dividend paid by this stock?

10.1Testco Corp. is considering adding a new product line. The cost of the factory and equipment to produce this product is $1,780,000, and the company expects increased cash flows from the sale of this product to be $450,000 for each of the next eight years. If the company uses a discount rate of 12 percent, what is the net present value of this project? What is the internal rate of return of this project? 10.2Flowers Unlimited is considering purchasing an additional delivery truck. The cost of the new truck will be $42,000. Cost savings are expected to be $12,800 for the next two years and $8,900 for the following two years and $5,000 for the last 3 years of the truck’s useful life. What is the payback period for this project? What is the discounted payback period for this project assuming a discount rate of 10 percent? 10.3What is the average accounting rate of return (ARR) on equipment that will initially cost $1.2 million and will result in pretax cost savings of $380,000 for the next three years and then $280,000 for the following three years. The machinery will be depreciated to a salvage value of...
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