Questions on Finance

1947 WordsJan 6, 20158 Pages
FIN 3403 SAMPLE MIDTERM EXAM II 1. A share of common stock has a current price of $82.50 and is expected to grow at a constant rate of 10 percent. If you require a 14 percent rate of return, what is the current dividend on this stock? a. $3.00 b. $3.81 c. $4.29 d. $4.75 e. $6.13 ANS: A = $4.40 = D0 (1.10) D0 = $3.00. DIF: Easy OBJ: TYPE: Problem TOP: Constant growth stock 2. The last dividend paid by Klein Company was $1.00. Klein's growth rate is expected to be a constant 5 percent for 2 years, after which dividends are expected to grow at a rate of 10 percent forever. Klein's required rate of return on equity (ks) is 12 percent. What is the current price of Klein's common stock? a. $21.00 b. $33.33 c. $42.25 d. $50.16 e. $58.75…show more content…
(In other words, what is P3?) a. $40.00 b. $42.35 c. $45.67 d. $46.31 e. $49.00 ANS: E Step 1 Calculate ks: ks = kRF + (RPM) = 6% + (5%)1.2 = 12%. Step 2 Calculate g: 7% = g Step 3 Calculate : = (1 + g)3 = $40(1.07)3 = $49.00 7. The Seattle Corporation has been presented with an investment opportunity which will yield cash flows of $30,000 per year in Years 1 through 4, $35,000 per year in Years 5 through 9, and $40,000 in Year10. This investment will cost the firm $150,000 today, and the firm's required rate of return is 10 percent. Assume cash flows occur evenly during the year, 1/365th each day. What is the payback period for this investment? a. 5.23 years b. 4.86 years c. 4.00 years d. 6.12 years e. 4.35 years ANS: B Using the even cash flow distribution assumption, the project will completely recover initial investment after 30/35 = 0.86 of Year 5: DIF: Easy OBJ: TYPE: Problem TOP: Payback period 8. The capital budgeting director of Sparrow Corporation is evaluating a project which costs $200,000, is expected to last for 10 years and produce after-tax cash flows, including depreciation, of $44,503 per year. If the firm's required rate of return is 14 percent and its tax rate is 40 percent, what is the project's IRR? a. 8% b. 14% c. 18% d. -5% e. 12% ANS: C Tabular solution: $200,000 = $44,503 (PVIFAIRR,10) PVIFAIRR,10 = 4.49408 IRR  18% Financial calculator

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