# MCQ in Finance

4. You expect KT Industries (KTI) will have earnings per share of $3 this year and expect that they will pay out $1.50 of these earnings to shareholders in the form of a dividend. KTI's return on new investments is 15% and their equity cost of capital is 12%. The expected growth rate for KTI's dividends is closest to:

A) 6.0%

B) 7.5%

C) 4.5%

D) 3.0%

5. You expect KT industries (KTI) will have earnings per share of $3 this year and expect that they will pay out $1.50 of these earnings to shareholders in the form of a dividend. KTI's return on new investments is 15% and their equity cost of capital is 12%. The value of a share of KTI's stock is closest to:

A) $39.25

B) $20.00

C) $33.35

D) $12.50

6. JRN Enterprises just announced that it plans to cut its dividend from $2.50 to $1.50 per share and use the extra funds to expand its operations. Prior to this announcement, JRN's dividends were expected to grow at 4% per year and JRN's stock was trading at $25.00 per share. With the new expansion, JRN's dividends are expected to grow at 8% per year indefinitely. Assuming that JRN's risk is unchanged by the expansion, the value of a share of JRN after the announcement is closest to:

A) $25.00

B) $15.00

C) $31.25

D) $27.50

7. You expect that Bean Enterprises will have earnings per share of $2 for the coming year. Bean plans to retain all of its earnings for the next three years. For the subsequent two years, the firm plans on retaining 50% of its earnings. It will then retain only 25% of its earnings from that point forward. Retained earnings will be invested in projects with an expected return of 20% per year. If Bean's equity cost of capital is 12%, then the price of a share of Bean's stock is closest to:

A) $17.00

B) $10.75

C) $27.75

D) $43.50

8. Sinclair Pharmaceuticals, a small drug company, develops a vaccine that will protect against Helicobacter pylori, a bacteria that is the cause of a number of diseases of the stomach. It is expected that Sinclair Pharmaceuticals will experience extremely high growth over the next three years and will reinvest all of its earnings in expanding the company over this time. Earnings were $1.20 per share before the development of the vaccine and are expected to grow by 40% per year for the next three years. After this time, it is expected growth will drop to 5% and stay there for the expected future. Four years from now Sinclair will pay dividends that are 75% of its earnings. If its equity cost of capital is 10%, what is the value of a share of Sinclair Pharmaceuticals today?

A) $33.33

B) $39.05

C) $48.30

D) $52.00

11. Suppose you invested $98 in the Ishares High Yield Fund (HYG) a month ago. It paid a dividend of $0.47 today and then you sold it for $99. What was your dividend yield and capital gains yield on the investment?

A) 0.45%, 1.09%

B) 0.47%, 1.02%

C) 0.47%, 1.08%

D) 1.02%, 1.12%

12. Amazon.com stock prices gave a realized return of 5%, -5%, 10%, and -10% over four successive quarters. What is the annual realized return for Amazon.com for the year?

A) -1.25%

B) 2.50%

C) 0.00%

D) 1.25%

Use the following information for question 15, 16, 17 and 18:

Consider an economy with two types of firms, S type and I type. S type firms always move together, but I type firms move independently of each other. For both types of firms there is a 70% probability that the firm will have a 20% return and a 30% probability that the firm will have a -30% return.

15. What is the expected return for an individual firm?

A) 3%

B) 5%

C) 14%

D) -5%

16. The standard deviation for the return on an individual firm is closest to:

A) 23%

B) 5%

C) 20%

D) 30%

17. If there are 10 firms are of type S in this economy, and you are holding a portfolio of these 10 firms of type S. The standard deviation for the return on your portfolio is closest to:

A) 20%

B) 23%

C) 30%

D) 230%

18. If there are 10 firms are of type I in this economy, and you are holding a portfolio of these 10 firms of type I. The standard deviation for the return on your portfolio is likely to be:

A) 0%

B) greater than 0% but less than 25%

C) greater than 25% but less than 200%

D) greater than 200%

23. A corporate bond makes payments of $9.67 every month for ten years with a final payment of $2009.67. Which of the following best describes this bond?

A) a 10-year bond with a face value of $2000 and a coupon rate of 4.8% with monthly payments

B) a 10-year bond with a face value of $2000 and a coupon rate of 5.8% with monthly payments

C) a 10-year bond with a face value of $2009.67 and a coupon rate of 4.8% with monthly payments

D) a 10-year bond with a face value of $2009.67 and a coupon rate of 5.8% with monthly payments

24. Elinore is asked to invest $5000 in a friend's business with the promise that the friend will repay $5500 in one year's time. Elinore finds her best alternative to this investment, with similar risk, is one that will pay her $5400 in one year's time. U.S. securities of similar term offer a rate of return of 6%. What is the opportunity cost of capital in this case?

A) 6%

B) 8%

C) 9%

D) 10%

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4. You expect KT industries (KTI) will have earnings per share of $3 this year and expect that they will pay out $1.50 of these earnings to shareholders in the form of a dividend. KTI's return on new investments is 15% and their equity cost of capital is 12%. The expected growth rate for KTI's dividends is closest to:

A) 6.0%

B) 7.5%

C) 4.5%

D) 3.0%

Answer: B) 7.5%

g= plow back ratio x return on investment = (1-1.5/3)*(15%)= 7.50%

5. You expect KT industries (KTI) will have earnings per share of $3 this year and expect that they will pay out $1.50 of these earnings to shareholders in the form of a dividend. KTI's return on new investments is 15% and their equity cost of capital is 12%. The value of a share of KTI's stock is closest to:

A) $39.25

B) $20.00

C) $33.35

D) $12.50

Answer: C) $33.35

g= 7.50% (calculated in question above)

g= plow back ratio x return on investment = (1-1.5/3)*(15%)= 7.50%

Using the Dividend Discount (Constant Growth) Model

Po= Div1/ (r-g)

Dividend for next year= Div1 = $1.50

Cost of equity= r= 12.00%

growth rate of dividends/earnings= g= 7.5%

Current stock price= Po=

Plugging in the values:

Po= $33.33 =1.5/(12.%-7.5%)

6. JRN Enterprises just announced that it plans to cut its dividend from $2.50 to $1.50 per share and use the extra funds to expand its operations. Prior to this announcement, JRN's dividends were expected to grow at 4% per year and JRN's stock was trading at $25.00 per share. With the new expansion, JRN's dividends are expected to grow at 8% per year indefinitely. Assuming that JRN's risk is unchanged by the expansion, the value of a share of JRN after the announcement is closest to:

A) $25.00

B) $15.00

C) $31.25

D) $27.50

Answer: A) $25.00

Step 1: Calculate the value of r

Using the Dividend Discount (Constant Growth) Model

Po= Div1/ (r-g)

Dividend for next year= Div1 = $2.50

Cost of equity= r=

growth rate of dividends/earnings= g= 4%

Current stock price= Po= $25.00

Plugging in the values:

r= 14.% =4.%+2.5/25

Step 2: Calculate the new share price

Dividend for next year= Div1 = $1.50

Cost of equity= r= 14.%

growth rate of dividends/earnings= g= 8%

Current stock price= Po=

Plugging in the values:

Po= $25.00 =1.5/(14.%-8.%)

7. You expect that Bean Enterprises will have earnings per share of $2 for the coming year. Bean plans to retain all of its earnings for the next three years. For the subsequent two years, the firm plans on retaining 50% of its earnings. It will then retain only 25% of its earnings from that point forward. Retained earnings ...

#### Solution Summary

Explains and answers MCQ dealing with stock valuation, corporate bonds, growth rate of dividends, dividend yield and capital gains yield on the investment,

11 MCQ: Finance, Capital Structure, Leverage, Debt financing,

Please show a detail (step and explanation) as how to get the result.

Quiz 8

Chpt. 12 & 13: Capital Structure

1. If an airline began to experience reductions in ticket sales associated with news of its difficulty in servicing its debt (making debt payments), this would be an example of

a. agency problems

b. a tax shield

c. financial distress

d. managerial entrenchment

e. the pecking order view of capital structure

2.Which of the following assets would be most suitable to financing with relatively larger amounts of debt?

a. current assets, such as inventory

b. specialized long term assets

c. intangible long term assets

d. tangible (physical), standardized, and widely tradable fixed assets

e. This question is irrelevant because firms should avoid using debt whenever possible.

3. Existing shareholders generally consider leverage increasing events to be

a. good news

b. bad news

4. Empirical evidence suggests that larger firm (based on assets or sales) tend to have

a. more leverage

b. less leverage

5. Financial distress generally

a. increases firm value, since it signals to investors that the firm's managers are working for the shareholders

b. increases firm value, since it signals that the firm is operating extremely efficiently by not having too much liquidity

c. decreases firm value, since it means the firm may be losing sales revenue and/or the manager's focus may be distracted from the core business operations

d. decreases firm value, since it means the firm's product line is becoming obsolete

e. all of the above

6. Which of the following statements is (are) TRUE regarding the pecking order view of capital structure for financing new projects? (Please read all alternatives carefully before answering)

a. firms prefer borrowing (debt) over issuing more equity.

b. firms prefer internally generated funds over borrowing.

c. firms prefer equity over debt

d. firms prefer paying out all of the firm's earnings as dividends to existing shareholders to maximize shareholders' wealth

e. BOTH A & B.

7. All of the following are advantages of debt financing except which one?

a. interest is a tax-deductible expense

b. it allows for the use of "other people's money" in financing a business

c. the cost of debt financing is cheaper than equity financing.

d. it results in loss of ownership control of the business

e. Owners do not have to share the potential gains of the business, since debt only requires repayment of the amount owed

8. If a tax paying firm went from zero debt to successively higher levels of debt, why would you expect its stock price to rise? (Note: beyond a point, excessive use of debt would cause the stock price to then hit a peak, and then begin to decline.)

a. concentration of ownership (i.e., increased use of "other people's money" on operating the firm)

b. debt is a cheaper cost of capital, thus the use of debt decreases the financing expenses for the firm.

c. Debt payments, i.e., interest payments, are a tax-deductible expense, which creates a debt tax shield

d. All of the above

e. None of the above.

9. Which of the following industries would tend to generally have less debt in their capital structure mix?

a. transportation industry firms

b. high tech firms

10. According to the Miller & Modigliani (MM) Value of a Levered Firm with corporate taxes view (aka, the corporate tax view) of capital structure, the value of a levered firm increases as debt is increased.

a. True, because of a debt tax shield (corporate tax)

b. True, because debt increases potential financial distress

c. False, because the debt tax shield decreases value

d. False, because debt is bad for the firm

e. None of the above

11. Bonus: Assume the following scores for the components of this course: Exam=70%, Quiz Ave = 70%, Class participation = 95%, WSJ Group Activity = 95%, Article Review = 100%, Fundamental Skills Assessment Activity you get 12 of 15 correct (hint: see syllabus for implications of scoring 60% correct or better on this activity), Learning Reflection = 100%, Extra Credit submissions = 2. Based on these assumptions and the weights of the various components of your course portfolio, what would be your course score (number)? (Note: Based on this portfolio return process you should be able to estimate your individual current course grade under various assumptions.)

a. 81.2

b. 81.6

c. 80.8

d. 79.8

e. 78.6