# Test 2

**Topics:**Time value of money, Net present value, Rate of return

**Pages:**6 (1906 words)

**Published:**July 2, 2015

Test 2 Practice Test

1. K.I. Airlines paid an annual divided of $1.18 a share last month. The company is planning on paying $1.50, $1.75, and $1.80 over the next three years, respectively. After that, the dividend will be constant at $1.50 per share per year. What is the market price of this stock if the market rate of return is 10.5 percent? a) $13.98

b) $14.07

c) $14.71

d) $18.10

e) $17.16

2. Callander Enterprises stock is listed on NASDAQ. The firm is planning to issue some new equity shares for sale to the general public. This sale will occur in which one of the following markets? a) Private

b) Exchange floor

c) Primary

d) Auction

e) secondary

3. Global communications has a 7 percent, semiannual coupon bond outstanding with a current market price of $1023.46. the bond has a par value of $1000 and a yield to maturity of 6.72 percent. How many years is it till this bond matures? a) 12.26 years

b) 12.53 years

c) 25.05 years

d) 24.37 years

e) 18.49 years

4. Net present value:

a) Is less useful than the profitability index when comparing mutually exclusive projects b) Is less useful than the internal rate of return when comparing different sized projects c) Is very similar in its methodology to the average accounting return d) Is the easiest method of evaluation for non-financial managers to use e) Is the best method of analyzing mutually exclusive projects 5. Kelly’s baskets make handmade baskets for distribution to upscale retail outlets. The firm is currently considering making handmade wreaths as well. Which one of the following is the best example of incremental operating cash flow related to the wreath project? a) Storing supplies in the same space currently used for materials storage b) Planning on lower interest expense by assuming the proceeds of the wreath sales will be used to reduce the firms currently outstanding debt c) Utilizing the basket manager to oversee wreath production d) Hiring additional employees to handle the increased workload should the firm accept the wreath project e) Researching the market to determine if the wreath sales might be profitable before deciding to proceed 6. The dividend growth model:

a) Assumes that dividends increase at a constant rate forever b) Can be used to compute a stock price at any point in time c) Can be used to value zero-growth stocks

d) Requires the growth rate to be less than the required return a. I and III only

b. II and IV only

c. I, II, and IV only

d. I, II, III, and IV

e. I, III, and IV only

7. The semiannual, 8-year bonds of Alto Music are selling at par and have an effective annual yield of 8.6285 percent. What is the amount of each interest payment if the face value of the bonds is $1,000? a) $43.15

b) $85.00

c) $41.50

d) $42.25

e) $86.29

8. Which one of the following bonds is the best sensitive to interest rate risk? a) 3-year; 4 percent coupon

b) 7-year; 6 percent coupon

c) 5-year; 6 percent coupon

d) 3-year; 6 percent coupon

e) 7-year; 4 percent coupon

9. Gateway communications is considering a project with an initial fixed asset cost of $2.46 million, which will be depreciated straight-line to a zero book value over the 10 year life of the project. At the end of the project the equipment will be sold for an estimated $300,000. The project will not directly produce any sales but will reduce operating costs by $725,000 a year. The tax rate is 35%. The project will require $45,000 of inventory, which will be recouped when the project ends. Should this project be implemented if the firm requires a 14% required rate of return? Why or why not? a) Yes; the NPV is $466,940.57

b) No; the NPV is -$87,820.48

c) No; the NPV is -$172,937.49

d) Yes; the NPV is $387,516. 67

e) Yes; the NPV is $251,860.34

10. You are considering the purchase of a new machine. Your analysis includes the evaluation of two machines, which have differing initial and ongoing costs and...

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