University of San Carlos

College of Commerce - Accountancy Department

AC 513 FINANCIAL MANAGEMENT

MID-TERM DEPARTMENTAL EXAMINATION
August 4, 2016

ALL MULTIPLE-CHOICE ENTRIES

80 Numbers: 1.5 Hours; n x 2; Number of Pages: 18
Mid-Term Topics/Chapters Covered:
Risk and Rates of Return (Chapter 5); Time Value of Money
(Chapter 6); Valuation of Bonds (Chapter 7); Stocks and Their Valuation (Chapter 8); and,
Cost of Capital (Chapter 9)

May the Greatest Force Be With Yougo!

A. RISK AND RATES OF RETURN

1. Consider the following information of two possible investments:

The first investment is a Treasury bill, a government security that matures in 90 days and
promises to pay an annual return of 8 percent.

The second investment involves the purchase of the stock of a local publishing company.
Looking at the past returns of the firms stock, we have made the following estimate of the
annual returns from the investment:

Chance of Occurrence Rate of Return

on Investment
1 chance in 10 (10%) 0%
2 chances in 10 (20%) 5%
4 chances in 10 (40%) 15%
2 chances in 10 (20%) 25%
1 chance in 10 (10%) 30%

From the above, the following statements are given:

I. Investing in the publishing company could conceivably provide a return as high as 30 percent if all goes
well or no return (zero percent) if everything goes against the firm.
II. In the future years, we could expect a 15 percent return on average.
III. In the future years, we could expect a 25 percent return on average.
IV. Comparing the T-bill investment with the publishing company investment, we see that the T-bills offer
an expected 8 percent rate of return of 15 percent. However, our investment in the publishing
company firm is clearly more risky that is, there is greater variation or dispersion of possible returns,
implying greater risk.
V. Comparing the T-bill investment with the publishing company investment, we see that the T-bills offer
an expected 8 percent rate of return of 25 percent. However, our investment in the publishing
company firm is clearly less risky that is, there is lesser variation or dispersion of possible returns,
implying low risk.

From among the statements given, choose from below your best answer:
a. Only I and II are correct statements. c. Only I and III are correct statements.
b. Only I, II, and III are correct d. Only I, II, and IV are correct
statements. statements.
e. Only III and V are correct statements.

2. From #1, for the publishing company, the standard deviation is:
a. 8.89% c. 9.22%
b. 8.67% d. 9.58%
e. 10.15%

3. Based from #1 and #2, the actual returns for the publishing company, can reasonably be
anticipated to fall between:
a. 15.78% and 33.89% (k + ) c. 5.78% and 24.22% (k + )
b. 16.33% and 33.67% (k + ) d. 5.42% and 24.58% (k + )
e. 14.85% and 35.15% (k +
)

(The following data apply to number 4:)

You are given the following information:

Year Stock N Market

1 -5% 10%
2 -8% 15%
3 7 -10
The risk-free rate is equal to 7 percent, and the market required
 AC 513 Financial Management QUIZ BOWL, August 4, 2016

return is equal to 10 percent.

4. Stock Ns beta coefficient and required rate of return are:?

a. 1.00; 5.90% respectively c. 0.60; 6.40% respectively

b.-0.60; 5.20% respectively d. -0.75; 8.80% respectively
e. -0.50; 6.40% respectively

5. Stock Y, Stock Z, and the Market had the following rates of return during the last 4 years:

Y Z Market
2006 10.0% 10.0% 10.0%
2007 16.0 11.5 13.5
2008 -7.50 1.0 -4.0
2009 0.0 6.0 5.5
The expected future return on the market is 15 percent, the real risk-free
rate is 3.75 percent, and the expected inflation rate is a constant 5
percent.

If the market risk premium rises by 3 percentage points, what will be the change in the required
rate of return of the riskier stock? Per regression analysis, by =1.3374 and bz =0.6161.
a. 4.01% c. 4.88%
b. 3.67% d. 3.23%
e. 4.66%

6. Listed firm, Aquaculture security has an expected return of 5.5 percent, a standard deviation of
expected returns of 32.89 percent, a correlation coefficient with the market of -0.3, and a beta
coefficient of -0.5. Another listed telecom, Benpres security has an expected return of 9.15
percent, a standard deviation of returns of 9 percent, a correlation with the market of 0.7, and a
beta coefficient of 1.0. Based on these information, one of the following statements is most
rationalized:
a. Aquaculture is less risky if held in a diversified c. Aquaculture is less risky if held in isolation
portfolio because of its negative correlation with because of its negative correlation with other
other stocks. In a single-asset portfolio, stocks. In a diversified portfolio, Aquaculture
Aquaculture Security would be more risky Security would be more risky because Agri > Bayan
because Agri > Bayan and CVAgri > CVBayan. and CVAgri > CVBayan.

b. Aquaculture is more risky if held as a single
security because of its negative correlation with
other stocks. However, in a diversified portfolio,
Aquaculture Security would likewise be
significantly risky because Agri > Bayan and CVAgri
> CVBayan.
d. Aquaculture is less risky if held in a diversified
portfolio because of its negative correlation with
other stocks. In a single-asset portfolio,
Aquaculture Security would be more risky
because Agri > Bayan and CVAgri > CVBayan.

e. Aquaculture is less risky if held in a diversified

portfolio because of its negative correlation with
other stocks. In a single-asset portfolio,
Aquaculture Security would be more risky
because Agri > Bayan and CVAgri > CVBayan.

7. The expected return can equate with the risk-free rate, in a situation where the portfolio of stocks is
constructed, if:
a. and when, the portfolios beta is negative. c. the portfolios beta is nonpositive. Given that
Given that the portfolio is constructed, part of the the portfolio is constructed, part of the expected
expected return is being negated by the negative return is being held constant by the nonpositive
beta effect to equate with the risk-free rate. beta effect to equate with the risk-free rate.

b. the portfolios beta is equal to zero. It may be
impossible to find individual stocks that have a
nonpositive beta, and so it would also be
impossible to have a stock portfolio with a zero
beta.
d. and when, the portfolios beta is generally
constant. In this case, equating the RF returns
with the expected return is just possible in a
situation where the portfolio is constructed.

e. answer not given

8. A security had a 14 percent return last year, of which same period, the overall stock market
declined in value. Does this mean that the stock has a negative beta?
a. Yes. For a stock to have a negative beta, its c. No. However, the negation of the beta is
returns would have to logically be expected generally dependent on the overall inclination
to go down in the future in correlation with of the portfolio.
the falling of other stocks returns.
b. Yes. For a stock to have a negative beta, its d. No. For a stock to have a negative beta, its
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returns would have to logically be expected returns would have to logically be expected to
to go down in the future. go up in the future when other stocks returns
were falling. A stock in a given year may
move counter to the overall market, even
though the stocks beta is positive.
e. Answer not given.

9. The investors required rate of return can be defined as the minimum rate of return necessary to
attract an investor to purchase or hold a security.

I. The above definition considers the investors opportunity cost of making an investment; that
is, if an investment is made, the investor must forego the return available from the next best
investment.
II. The investment will be made only if the purchase price is high enough relative to expected
future cash flows to provide a rate of return greater than or equal to the required rate of
return.
III. The foregone return, basing from the opening statement, is an opportunity cost of undertaking
the investment and consequently is the investors required rate of return.
IV. The opening statement, means that we invest with the intention of achieving a rate of return
sufficient to warrant making the investment.
V. The risk-free rate of return embedded in the required rate of return does not consider rewards
for deferring consumption, but only assumes the risk; that is, the risk-free return reflects the
basic fact that we invest today with no regard as to our consumption later.

a. Statements I, II and IV are correct. c. Only Statements II and V are false or

incorrect.
b. Statements II, III, IV, and V are true. d. All statements, except statement V, are true
and correct.
e. Only statement II is incorrect and false.

Here are returns and standard deviations for four investments (for Questions 10 and 11):
Return Standard Deviation
Treasury bills 6% 0%
Stock P 10% 14%
Stock Q 14.5% 28%
Stock R 21.0% 26%

10. Based on the above information, calculate the standard deviations of the following portfolios:
a. 50 percent in Treasury bills, 50 percent in stock P.
b. 50 percent each in Q and R, assuming the shares have perfect positive correlation
Perfect negative correlation
No correlation

Respectively, the standard deviations (questions a and b) are:

a. a=7%; b=27% c. a=7%; b=30%

b. a=9%; b=30% d. a=9%; b=27%
e. a=9%; b=31%

11. Under same given information (in number 10 above), at 50 percent each in Q and R, (i) assuming
the shares have perfect negative correlation, and, (ii) assuming the shares have no correlation, the
standard deviations, respectively are:
a. 2.01% with perfect negative correlation; c. 1% with perfect negative correlation; 21.83%
21.83% with no correlation with no correlation
b. 2.01% with perfect negative correlation; d. 1.55% with perfect negative correlation;
19.1% with no correlation 19.1% with no correlation
e. 1.0% with perfect negative correlation;
19.1% with no correlation

12. For each of the following pairs of investments, state which would always be preferred by a rational
investor (assuming that these are the only investments available to the investor):
a. Portfolio A k = 18 percent = 20 percent
= 20 percent
Portfolio B k = 14 percent

b. Portfolio C k = 15 percent = 18 percent
= 8 percent
Portfolio D k = 13 percent

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 AC 513 Financial Management QUIZ BOWL, August 4, 2016

c. Portfolio E k = 14 percent = 16 percent

= 10 percent
Portfolio F k = 14 percent

Respectively, (a, b and c), the rational investor would prefer the following portfolios, assuming
these are the only investments available to this investor:
a. a=Portfolio A; b = cannot say; and c = c. a=Portfolio A; b = cannot say; and c =
Portfolio F Portfolio F
b. a=Portfolio A; b = cannot say; and c = d. a=Portfolio A; b = cannot say; and c =
Portfolio F Portfolio F
e. answer not given

The following beta table is reference for the next two questions:
Stock Beta (b) Expected Return
[kRF + b (kM- kRF)]
Amazon.com 2.22 16.5%
Dell 1.77 13.4%
Microsoft 1.70 12.9%
Ford 1.35 10.5%
GE 1.08 8.6%
Reebok .46 4.2%
ExxonMobil .40 3.8%
Pfizer .38 3.7%
Coca-Cola .28 3.0%
Heinz .28 3.0%
(Note: These estimates of the returns expected by investors in March 2008 were based on the capital asset pricing
model or CAPM. We assumed 1 percent for the interest rate, and 7 percent for the expected risk premium, k M-
kRF.)

Suppose that the Treasury bill rate is 4 percent and the expected return on the market is
10percent. Use the betas in the given beta table.

13. The expected return from Microsoft is:

a. 14.92% c. 13.05%
b. 13.74% d. 14.20%
e. 15%

14. From the same given Beta table above, the highest and lowest expected returns that are offered by
one of these stocks are, respectively:
a. Dell @ 18.5%; Coca-Cola @ 5.3% c. Amazon @ 17.3%; Heinz @ 5.7%
b. Dell @ 17.94%; Heinz @ 5.7% d. Amazon @ 17.3%; Coca-Cola @ 5.3%
e. answer not given

For numbers 16, 17 and 18: Solar Designs is considering an investment in an expanded product line. Two
possible types of expansion are being considered. After investigating the possible outcomes, the company
made the estimates shown in the following table:i

Expansion A Expansion B
Initial Investment $12,000 $12,000
Annual rate of return
Pessimistic 16% 10%
Most likely 20% 20%
Optimistic 24% 30%

15. From the above given information of Solar, determine the range of rates of return for each of the
two projects.

a. Expansion A: 20%; Expansion B: 20% c. Expansion A: 4%; Expansion B: 10%

b. Expansion A: 8%; Expansion B: 20% d. Expansion A: 14%; Expansion B: 20%
e. Expansion A: 24%; Expansion B: 30%

16. Which project is less risky? Why?

a. Project B is less risky @ pessismistic condition. c. Project B is less risky based on the range of

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 AC 513 Financial Management QUIZ BOWL, August 4, 2016

outcomes.
b. Project A is less risky @ optimistic condition. d. Project A is less risky based on the range of
outcomes.
e. Cannot be determined

17. If you were making the investment decision, which one would you choose? Why?

a. Expansion A, because the weighted average
of the range of returns is higher than
Expansion B.
b. Expansion B, because the weighted average
of the range of returns is higher than
Expansion B.
c. Expansion B, because the returns at riskiest
situation is the highest at 30%.
d. Any of projects A and B is a rational decision
because both has the same average returns of
20% on the average.
e. Since the most likely return for both projects
is 20% and the initial investments are equal,
the answer depends on your risk preference.

18. Inflation, recession, and high interest rates are economic events that are characterized as

a. Company-specific risk that can be diversified c. Systematic risk that can be diversified away.
away.
b. Market risk. d. Diversifiable risk.
e. Unsystematic risk that can be diversified
away.

19. Historical rates of return for the market and for Stock A are given below:

Year Market Stock A

1 6.0% 8.0%
2 -8.0 3.0
3 -8.0 -2.0
4 18.0 12.0

If the required return on the market is 11 percent and the risk-free rate is 6 percent, what is the
required return on Stock A, according to CAPM/SML theory?

a. 6.00% c. 7.25%
b. 6.57% d. 7.79%
e. 8.27%

20. Currently, the risk-free rate, kRF, is 5 percent and the required return on the market, k M, is 11
percent. Your portfolio has a required rate of return of 9 percent. Your sister has a portfolio with a
beta that is twice the beta of your portfolio. What is the required rate of return on your sisters
portfolio?

a. 12.0% c. 13.0%
b. 12.5% d. 17.0%
e. 18.0%

21. ii.Here are the expected returns on two stocks:

Returns
Probability X Y
0.1 -20% 10%
0.8 20 15
0.1 40 20

If you form a 50-50 portfolio of the two stocks, what is the portfolios standard deviation?

a. 8.1% c. 13.4%
b. 10.5% d. 16.5%
e. 20.0%

22. An analyst has estimated how a particular stocks return will vary depending on what will happen to the
economy:

Stocks Expected
State of Probability of Return if this
the Economy State Occurring State Occurs
Recession 0.10 -60%
Below average 0.20 -10
Average 0.40 15

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Above average 0.20 40

Boom 0.10 90

What is the coefficient of variation on the companys stock?

a. 2.121 c. 2.472
b. 2.201 d. 3.334
e. 3.727

B. TIME VALUE OF MONEY

23. An investment pays $100 every six months (semiannually) over the next 2.5 years. Interest,
however, is compounded quarterly, at a nominal rate of 8 percent. What is the future value of the
investment after 2.5 years?
a. $520.61 c. $542.07
d. $541.63 d. $543.98
e. $547.49

24. Today is your 21st birthday, and you are opening up an investment account. Your plan is to
contribute $2,000 per year on your birthday and the first contribution will be made today. Your 45 th,
and final, contribution will be made on your 65 th birthday. If you earn 10 percent a year on your
investments, how much money will you have in the account on your 65 th birthday, immediately
after making your final contribution?
a. $1,581,590.64 a. $1,579,590.64
b. $1,739,749.71 d. $1,387,809.67
e. $1,437,809.67

25. Foster Industries has a project that has the following cash flows:

Year Cash Flow

0 -$300.00
1 100.00
2 125.43
3 90.12
4 ?

What cash flow will the project have to generate in the fourth year in order for the project to have a
15 percent rate of return?
a. $15.55 c. $100.25
b. $58.95 d. $103.10
e. $150.75

26. If you buy a factory for $250,000 and the terms are 20 percent down, the balance to be paid off
over 30 years at a 12 percent rate of interest on the unpaid balance, what are the 30 equal annual
payments?
a. $20,593 c. $24,829
b. $31,036 d. $50,212
e. $ 6,667

27. An investment pays you $5,000 at the end of each of the next five years. Your plan is to invest the
money in an account that pays 8 percent interest, compounded monthly. How much will you have
in the account after receiving the final $5,000 payment in 5 years (60 months)?
a. $ 25,335.56 c. $367,384.28
b. $ 29,508.98 d. $304,969.90
e. $ 25,348.23

28. For an investment to grow eightfold in nine year, at what rate would it have to grow?
a. 7% c. 9%
b. 8% d. 10%
e. answer not
given

29. To what amount will the following investments accumulate?

a. $5,000 invested for 10 years at 10 percent compounded annually; and,
b. $775 invested for 12 years at 12 percent at 12 percent compounded annually

a. a=10,320; b=1,449.29 c. a=12,970; b=3,019.40

b. a=11,087; b=1,929.15 d. a=13,568; b=3,683.75
e. answer not given

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 AC 513 Financial Management QUIZ BOWL, August 4, 2016

30. In future value or present value problems, unless stated otherwise, cash flows are assumed to be

a. at the end of a time period c. in the middle of a time period

b. at the beginning of a time period d. spread out evenly over a time
period
e. answer not given

31. When the amount earned on a deposit has become part of the principal at the end of a specified
time period the concept is called
a. discount interest c. primary interest
b. compound interest d. future value
e. answer not given

32. True or False: Everything else being equal, the longer the period of time, the lower the present
value.
a. False c. it depends

b. True d. not sure

e. am lost

33. True or False: In general, with an amortized loan, the payment amount remains constant over the
life of the loan, the principal portion of each payment grows over the life of the loan, and the
interest portion of each payment declines over the life of the loan.
a. False c. it depends

b. True d. not sure

e. am lost again

34. True or False: In general, with an amortized loan, the payment amount remains constant over the
life of the loan, the principal portion of each payment declines over the life of the loan, and the
interest portion declines over the life of the loan.
a. False c. it depends

b. True d. not sure

e. need help this time

35. If the interest rate is zero, the future value interest factor equals_________.
a. -1.0 c. 1.0

b. 0.0 d. 2.0

e. 1.0 or -1.0

36. The rate of interest actually paid or earned, also called the annual percentage rate (APR), is the
_________ interest rate.
a. effective c. discounted
b. nominal d. continuous
e. answer not
given

C. BONDS AND THEIR VALUATION

37. A Treasury bond has an 8 percent annual coupon and a yield to maturity equal to 7.5 percent. Which
of the following statements is most correct?
a. The bond has a current yield greater than 8 c. If the yield to maturity remains constant, the
percent. price of the bond is expected to fall over time.
b. The bond sells at a price above par. d. Statements b and c are correct.

e. All of the statements above are correct.

38. Which of the following statements is most correct?

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 AC 513 Financial Management QUIZ BOWL, August 4, 2016

a. If a bond sells for less than par, then its yield
to maturity is less than its coupon rate.
b. If a bond sells at par, then its current yield
will be less than its yield to maturity.
c. Assuming that both bonds are held to
maturity and are of equal risk, a bond selling for
more than par with 10 years to maturity will
have a lower current yield and higher capital
gain relative to a bond that sells at par.
d. Statements a and c are correct.
e. None of the statements above is correct.

39. Delta Corporation has a bond issue outstanding with an annual coupon rate of 7 percent and 4
years remaining until maturity. The par value of the bond is $1,000. Determine the current value
of the bond if present market conditions justify a 14 percent required rate of return. The bond pays
interest annually.
a. $1,126.42 c. $796.04
b. $1,000.00 d. $791.00
e. $536.38

40. Refer to question 39. Suppose the bond had a semiannual coupon. Now what would be its current
value?
a. $1,126.42 c. $796.06
b. $1,000.00 d. $791.00
e. $536.38

41. Refer to Question 39. Assume an annual coupon but 20 years remaining to maturity. What is the
current value under these conditions?
a. $1,126.42 c. $796.06
b. $1,000.00 d. $791.00
e. $536.38

42. Refer to Question 39. What is the bonds current yield?

a. 8.8% c. 7%
b. 13.05% d. 11.82%
e. answer not
given

43. A 10-year bond with a 9 percent annual coupon has a yield to maturity of 8 percent. Which of the
following statements is most correct?

a. The bond is selling at a discount. d. Statements a and b are correct.

b. The bonds current yield is greater than 9 e. None of the statements above are correct.
percent.
c. If the yield to maturity remains constant, the
bonds price one year from now will be lower
than its current price.

44. Which of the following statements is most correct?

a. The current yield on Bond A exceeds the d. Statements a and b are correct.
current yield on Bond B; therefore, Bond A must
have a higher yield to maturity than Bond B.
b. If a bond is selling at a discount, the yield to e. Statements b and c are correct.
call is a better measure of return than the yield
to maturity.
c. If a coupon bond is selling at par, its current
yield equals its yield to maturity.

45. A 20-year bond with a par value of $1,000 has a 9 percent annual coupon. The bond currently sells
for $925. If the bonds yield to maturity remains at its current rate, what will be the price of the
bond 5 years from now?
a. $966.79 c. $1,090.00
b. $831.35 d. $933.09
e. $925.00

46. Consider a $1,000 par value bond with a 7 percent annual coupon. The bond pays interest
annually. There are 9 years remaining until maturity. What is the current yield on the bond
assuming that the required return on the bond is 10 percent?
a. 10.00% c. 7.00%
b. 8.46% d. 8.52%
e. 8.37%

47. A bond with a face value of $1,000 matures in 12 years and has a
9 percent semiannual coupon. (That is, the bond pays a $45 coupon every six months.) The bond

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 AC 513 Financial Management QUIZ BOWL, August 4, 2016

has a nominal yield to maturity of 7.5 percent, and it can be called in 4 years at a call price of
$1,045. What is the bonds nominal yield to call?
a. 6.61% c. 3.31%
b. 11.36% d. 9.98%
e. 5.68%

D. STOCKS AND THEIR VALUATION

48. Stability Inc. has maintained a dividend rate of $4 per share for many years. The same rate is
expected to be paid in future years. If investors require a 12% rate of return on similar investments,
determine the present value of the companys stock.
a. $15.00 c. $33.33
b. $30.00 d. $35.00
e. $40.00

49. Your associate, a stockholder at Invest Inc., is trying to sell you a stock with a current market price
of $25. The stocks last dividend (D 0) was $2.00, and earnings and dividends are expected to
increase at a constant rate of 10%. Your required return on this stock is 20%. From a strict valuation
standpoint, you should:
a. Buy the stock: it is fairly valued. c. Buy the stock; it is undervalued
by $2.00
b. Buy the stock; it is undervalued by d. Not buy the stock; it is
$3.00 overvalued by $2.00
e. Not buy the stock; it is
overvalued by $3.00

50. Prime Care Labs last dividend was $1.50. Its current equilibrium stock price is $15.75, and its
expected growth rate is a constant 5%. If the stockholders required rate of return is 15%, what is
the expected dividend yield and expected capital gains yield for the coming year?
a. 0%; 15% c. 10%; 5%
b. 5%; 10% d. 15%; 0%
e. 15%; 15%

51. The Canning Company has been hard hit by increased competition. Analysts predict that earnings
(and dividend) will decline at a rate of 5% annually into foreseeable future. If Cannings last
dividend (D0) was $2.00, and investors required rate of return is 15%, what will be Cannings stock
price in 3 years?
a. $8.15 c. $10.00
b. $9.50 d. $10.42
e. $10.96

52. Johnson Corporations stock is currently selling at $45.83 per share. The last dividend paid was
$2.50. Johnson is a constant growth firm. If investors require a return of 16% on Johnsons stock,
what do they think Johnsons growth rate will be?
a. 6% c. 8%
b. 7% d. 9%
e. 10%

53. Vogue Magazine is expected to pay a $0.45 per share dividend at the end of the year. The dividend
is expected to grow at a constant rate of 5 percent a year. The required rate of return on the stock,
ks, is 12 percent. What is the value per share of the companys stock?

a. 6.43 c. 9.00
b. 3.75 d. 7.15
e. answer not
given

Questions 54 and 55 pertain to the following information:

Dora Films recently paid a dividend, Do, of $1.50. The company expects to have supernormal growth of 15
percent for 3 years before the dividend is expected to grow at a constant rate of 7 percent. The firms cost
of equity is 10 percent.
54. From the given data, the terminal or horizon date and corresponding horizon or terminal value are:

a. before the 3rd year; w/ terminal value of c. end of 3 years; with terminal value of 70.62
75.61
b. before the 3rd year; w/ terminal value of d. end of 3 years; with terminal value of 75.61
70.62
e. answer not given

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55. The firms intrinsic value is:

a. 60.02 c. 61.61
b. 80.41 d. 78.82
e. answer not given

Tamara Jeans Corp. presented the companys expected financial highlights:

After-tax EBIT for 2010 is expected to be P30 M
Depreciation expense for 2010 is expected to be P7.5 M
Capital expenditures for 2010 is expected to be P9.0 M
Net operating working capital will remain the same.
The companys FCF is expected to grow at a constant rate of 5 percent per year.
The companys cost of equity is 14 percent.
WACC is 10 percent
Market value of companys debt is P126.67M
The company has 10 M shares outstanding

56. Using the FCF approach, what should be the companys stock price today?
a. 17/share c. 19/share
b. 18/share d. 20/share
e. answer not
given

57. Because of the global recession, sales are decreasing in value, while costs are depleting the scarce
resources of Franks Geo Corp. The companys earnings and dividends are declining at a constant
rate of 3 percent per year. Do=$7 and ks=12%, what is the value of Franks Geos stock?
a. 45.27 c. 80.11
b. 75.44 d. 48.07
e. answer not
given

58. A share of preferred stock pays a quarterly dividend of $2.50. If the price of this preferred stock is
currently $50, what is the nominal annual rate of return?
a. 12% c. 20%
b. 18% d. 23%
e. 28%

59. iii.The last dividend paid by Klein Company was $1.00. Kleins 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.
Kleins required rate of return on equity (ks) is 12 percent. What is the current price of Kleins common
stock?
a. $21.00 c. $42.25
b. $33.33 d. $50.16
e. $58.75

60. iv.An analyst estimating the intrinsic value of the Rein Corporation stock estimates that its free cash
flow at the end of the year (t = 1) will be $300 million. The analyst estimates that the firms free cash
flow will grow at a constant rate of 7 percent a year, and that the companys weighted average cost of
capital is 11 percent. The company currently has debt and preferred stock totaling $500 million. There
are 150 million outstanding shares of common stock. What is the intrinsic value (per share) of the
companys stock?
a. $16.67 c. $33.33
b. $25.00 d. $46.67
e. $50.00

61. v. A share of stock has a dividend of D0 = $5. The dividend is expected to grow at a 20 percent annual
rate for the next 10 years, then at a 15 percent rate for 10 more years, and then at a long-run normal
growth rate of 10 percent forever. If investors require a 10 percent return on this stock, what is its
current price?
a. $100.00 c. $195.50
b. $ 82.35 d. $212.62
e. answer not given

62. vi.A stock is expected to pay a $0.45 dividend at the end of the year (D1 = 0.45). The dividend is
expected to grow at a constant rate of 4 percent a year, and the stocks required rate of return is 11
percent. What is the expected price of the stock 10 years from today?
a. $18.25 c. $ 9.15
b. $9.52 d. $ 6.02
e. $12.65

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 AC 513 Financial Management QUIZ BOWL, August 4, 2016

63. vii.A stock expects to pay a year-end dividend of $2.00 a share (D1 = $2.00). The dividend is expected
to fall 5 percent a year, forever (g = -5%). The companys expected and required rate of return is 15
percent. Which of the following statements is most correct?
a. The companys stock price is $10. c. The companys stock price 5 years from now
is expected to be $7.74.
b. The companys expected dividend yield 5 d. Statements b and c are correct
years from now will be 20 percent.
e. All of the statements above are correct.

viii
64. . Which of the following statements is most correct?
a. If a market is strong-form efficient this implies c. If your uncle earns a return higher than the
that the returns on bonds and stocks should be overall stock market, this means the stock
identical. market is inefficient.

b. If a market is weak-form efficient this implies d. Statements a and b are correct.

that all public information is rapidly
incorporated into market prices.
e. None of the above statements is correct.

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 AC 513 Financial Management QUIZ BOWL, August 4, 2016

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