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Sample Test for Midterm 2
C. 1. What dividend yield would be reported in the financial press for a stock that
currently pays a $1 dividend per quarter and the most recent stock price was $40?
A. 2.5%
B. 4.0%
C. 10.0%
D. 15.0%
B. 2. Which of the following observations provides evidence against strong-form
market efficiency?
A. Some mutual funds outperformed the market in 1997.
B. Managers trading in their own stock obtain superior returns.
C. You cannot make superior profits by trading stocks after earnings reports are
issued.
D. Stock prices follow a random walk.
D. 3. What is the current price of a share of stock for a firm with $5 million in
balance-sheet equity, 500,000 shares of stock outstanding, and a price/book value
ratio of 4?
A. $2.50
B. $10.00
C. $20.00
D. $40.00
B. 4. A company with a return on equity of 15% and a plowback ratio of 60% would
expect a constant-growth rate of:
A. 4%.
B. 9%.
C. 21%.
D. 25%.
B. 5. If the net present value of a project that costs $20,000 is $5,000 when the
discount rate is 10%, then the:
A. project's IRR equals 10%.
B. project's rate of return is greater than 10%.
C. net present value of the cash inflows is $4,500.
D. project's cash inflows total $25,000.
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D. 6. What is the minimum cash flow that could be received at the end of year 3 to
make the following project "acceptable"? Initial cost = $100,000; cash flows at end of
years 1 and 2 = $35,000; opportunity cost of capital = 10%.
A. $29,494
B. $30,000
C. $39,256
D. $52,250
D. 7. What is the decision rule in the case of sign changes that produce multiple IRRs
for a project?
A. Select the lowest IRR to be conservative.
B. Select the highest IRR to maximize the benefits.
C. Any or all of the IRRs are justified to use.
D. Evaluate the project according to NPV.
C. 8. A polisher costs $10,000 and will cost $20,000 a year to operate and maintain.
If the discount rate is 10% and the polisher will last for 5 years, what is the
equivalent annual cost of the tool?
A. $17,163
B. $22,000
C. $22,638
D. $85,816
C. 9. If the adoption of a new product will reduce the sales of an existing product,
then the:
A. new product should not be undertaken.
B. old product should be abandoned.
C. incremental benefits of the new product may be overestimated.
D. incremental benefits of the new product may be underestimated.
C. 10. The rationale for not including sunk costs in capital budgeting decisions is that
they:
A. are usually small in magnitude.
B. revert at the end of the investment.
C. have no incremental effect.
D. reduce the estimated NPV.
B. 11. Assume your firm has an unused machine that originally cost $75,000, has a
book value of $20,000, and is currently worth $25,000. Ignoring taxes, the correct
opportunity cost for this machine in capital budgeting decisions is:
A. $75,000
B. $25,000
C. $20,000
D. $5,000
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D. 12. What is the amount of the operating cash flow for a firm with $500,000 profit
before tax, $100,000 depreciation expense, and a 35% marginal tax rate?
A. $260,000
B. $325,000
C. $360,000
D. $425,000
C. 13. Which of the following presents the correct relationship? As the coupon rate
of a bond increases, the bond's:
A. face value increases.
B. current price decreases.
C. interest payments increase.
D. maturity date is extended.
C. 14. What happens to the price of a 3-year bond (with par value $1,000) with an
8% coupon when interest rates change from 8 to 6%?
A. A price increase of $51.54
B. A price decrease of $51.54
C. A price increase of $53.47
D. A price decrease of $53.47
C. 15. What is the yield to maturity of a bond with the following characteristics?
Coupon rate is 8% with semiannual payments, current price is $960, 3 years until
maturity.
A. 4.78%
B. 5.48%
C. 9.57%
D. 12.17%
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