Finance Project

Grading Summary

These are the automatically computed results of your exam. Grades for essay questions, and comments from your instructor, are in the "Details" section below. Date Taken: 10/12/2013

Time Spent: 2 h , 04 min , 09 secs

Points Received: 97 / 100 (97%)

Question Type: # Of Questions: # Correct:

Multiple Choice 9 9

Essay 1 N/A

Grade Details - All Questions

1. Question : (TCO D) A share of common stock just paid a dividend of $1.00. If the expected long-run growth rate for this stock is 5.4%, and if investors' required rate of return is 11.4%, what is the stock price?

Student Answer: $16.28

$16.70

$17.13

$17.57

$18.01

Instructor Explanation: Chapter 7

Last dividend (D0) $1.00

Long-run growth rate 5.4%

Required return 11.4%

D1 = D0(1 + g) = $1.054

P0 = D1/(rs − g) $17.57

Points Received: 10 of 10

Comments:

2. Question : (TCO D) If D1 = $1.50, g (which is constant) = 6.5%, and P0 = $56, what is the stock's expected capital gains yield for the coming year?

Student Answer: 6.50%

6.83%

7.17%

7.52%

7.90%

Instructor Explanation: Chapter 7

D1 $1.50

g 6.5%

P0 $56.00

Capital gains yield = g = 6.50%

Points Received: 9 of 9

Comments:

3. Question : (TCO D) Molen Inc. has an outstanding issue of perpetual preferred stock with an annual dividend of $7.50 per share. If the required return on this preferred stock is 6.5%, at what price should the preferred stock sell?

Student Answer: $104.27

$106.95

$109.69

$112.50

$115.38

Instructor Explanation: Chapter 7

Preferred dividend $7.50

Required return 6.5%

Preferred price = DP/rP = $115.38

Points Received: 9 of 9

Comments:

4. Question : (TCO E) Schalheim Sisters Inc. has always paid out all of its earnings as dividends; hence, the firm has no retained earnings. This same situation is expected to persist in the future. The company uses the CAPM to calculate its cost of equity, and its target capital structure consists of common stock, preferred stock, and debt. Which of the following events would REDUCE its WACC?

Student Answer: The market risk premium declines.

The flotation costs associated with issuing new common stock increase.

The company's beta increases.

Expected inflation increases.

The flotation costs associated with issuing preferred stock increase.

Instructor Explanation: Chapter 9

Points Received: 9 of 9

Comments:

5. Question : (TCO E) Duval Inc. uses only equity capital, and it has two equally-sized divisions. Division A's cost of capital is 10.0%, Division B's cost is 14.0%, and the corporate (composite) WACC is 12.0%. All of Division A's projects are equally risky, as are all of Division B's projects. However, the projects of Division A are less risky than those of Division B. Which of the following projects should the firm accept?

Student Answer: A Division B project with a 13% return.

A Division B project with a 12% return.

A Division A project with an 11% return.

A Division A project with a 9% return.

A Division B project with an 11% return.

Instructor Explanation: Chapter 9

Points Received: 10 of 10

Comments:

6. Question : (TCO D) Scanlon Inc.'s CFO hired you as a consultant to help her estimate the cost of capital. You have been provided with the following data: rRF = 4.10%; RPM = 5.25%; and b = 1.30. Based on the CAPM approach, what is the cost of common from retained earnings?

Student Answer: 9.67%

9.97%

10.28%

10.60%

10.93%

Instructor Explanation: Chapter 9

rRF 4.10%

RPM 5.25%

b