Financial Management Exam 2 – Advanced Corporate Finance, Capital Budgeting & Risk
Analysis MCQ Test
What proportion of earnings is being plowed back into the firm if the sustainable growth rate is
8% and the firm's ROE is 20%?
a. 60%
b. 80%
c. 20%
d. 40% - correct answer ✔✔d. 40%
8% = 20% × plowback; Plowback = 40%
A firm has 120,000 shares of stock outstanding, a sustainable rate of growth of 3.8, and
$648,200 in free cash flows. What value would you place on a share of this firm's stock if you
require a 14% rate of return?
a. $61.58
b. $48.09
c. $52.96
d. $54.02 - correct answer ✔✔c. $52.96
Price = [$648,200/(.14 - .038)]/120,000 = $52.96
What price would you pay today for a stock if you require a rate of return of 13%, the dividend
growth rate is 3.6%, and the firm recently paid an annual dividend of $2.50?
a. $27.55
b. $30.28
c. $26.60
d. $31.37 - correct answer ✔✔a. $27.55
,Price = ($2.50 × 1.036)/(.13 - .036) = $27.55
Which one of the following is more likely to be responsible for a firm having a low PVGO?
a. Book value of equity is low.
b. ROE exceeds required return.
c. Payout is very high.
d. Plowback is very high. - correct answer ✔✔c. Payout is very high.
A firm's liquidation value is the amount:
a. realized from selling all assets and paying off all creditors.
b. necessary to repurchase all outstanding shares of common stock.
c. shown on the balance sheet as total owners' equity.
d. a purchaser would pay to acquire all of the firm's assets. - correct answer ✔✔a. realized from
selling all assets and paying off all creditors.
What is the expected constant-growth rate of dividends for a stock currently priced at $50, that
just paid a dividend of $4, and has a required return of 18%?
a. 9.26%
b. 3.41%
c. 12.5%
d. 5.50% - correct answer ✔✔a. 9.26%
$50 = $4(1 + g)/(.18 - g); g = 9.26%
What can be expected to happen when stocks having the same expected risk do not have the
same expected return?
, a. This is a common occurrence indicating that one stock has more PVGO.
b. At least one of the stocks becomes temporarily mispriced.
c. This cannot happen if the shares are traded in an auction market.
d. The expected risk levels will change until the expected returns are equal. - correct answer
✔✔b. At least one of the stocks becomes temporarily mispriced.
The sustainable growth rate represents the ____ rate at which a firm can grow:
a. minimum; while maintaining a constant debt-equity ratio.
b. maximum; based solely on internal financing.
c. maximum; while maintaining a constant debt-equity ratio.
d. minimum; based solely on internal financing. - correct answer ✔✔c. maximum; while
maintaining a constant debt-equity ratio.
What is the plowback ratio for a firm that has earnings per share of $2.68 and pays out $1.75
per share in dividends?
a. 34.70%
b. 28.20%
c. 71.80%
d. 66.67% - correct answer ✔✔a. 34.70%
Plowback ratio = ($2.68 - 1.75)/$2.68 = .3470, or 34.70%
What is the minimum amount shareholders should expect to receive in the event of a complete
corporate liquidation?
a. Shareholders may be required to pay to be liquidated.
b. Market value of equity
c. Book value of equity
Analysis MCQ Test
What proportion of earnings is being plowed back into the firm if the sustainable growth rate is
8% and the firm's ROE is 20%?
a. 60%
b. 80%
c. 20%
d. 40% - correct answer ✔✔d. 40%
8% = 20% × plowback; Plowback = 40%
A firm has 120,000 shares of stock outstanding, a sustainable rate of growth of 3.8, and
$648,200 in free cash flows. What value would you place on a share of this firm's stock if you
require a 14% rate of return?
a. $61.58
b. $48.09
c. $52.96
d. $54.02 - correct answer ✔✔c. $52.96
Price = [$648,200/(.14 - .038)]/120,000 = $52.96
What price would you pay today for a stock if you require a rate of return of 13%, the dividend
growth rate is 3.6%, and the firm recently paid an annual dividend of $2.50?
a. $27.55
b. $30.28
c. $26.60
d. $31.37 - correct answer ✔✔a. $27.55
,Price = ($2.50 × 1.036)/(.13 - .036) = $27.55
Which one of the following is more likely to be responsible for a firm having a low PVGO?
a. Book value of equity is low.
b. ROE exceeds required return.
c. Payout is very high.
d. Plowback is very high. - correct answer ✔✔c. Payout is very high.
A firm's liquidation value is the amount:
a. realized from selling all assets and paying off all creditors.
b. necessary to repurchase all outstanding shares of common stock.
c. shown on the balance sheet as total owners' equity.
d. a purchaser would pay to acquire all of the firm's assets. - correct answer ✔✔a. realized from
selling all assets and paying off all creditors.
What is the expected constant-growth rate of dividends for a stock currently priced at $50, that
just paid a dividend of $4, and has a required return of 18%?
a. 9.26%
b. 3.41%
c. 12.5%
d. 5.50% - correct answer ✔✔a. 9.26%
$50 = $4(1 + g)/(.18 - g); g = 9.26%
What can be expected to happen when stocks having the same expected risk do not have the
same expected return?
, a. This is a common occurrence indicating that one stock has more PVGO.
b. At least one of the stocks becomes temporarily mispriced.
c. This cannot happen if the shares are traded in an auction market.
d. The expected risk levels will change until the expected returns are equal. - correct answer
✔✔b. At least one of the stocks becomes temporarily mispriced.
The sustainable growth rate represents the ____ rate at which a firm can grow:
a. minimum; while maintaining a constant debt-equity ratio.
b. maximum; based solely on internal financing.
c. maximum; while maintaining a constant debt-equity ratio.
d. minimum; based solely on internal financing. - correct answer ✔✔c. maximum; while
maintaining a constant debt-equity ratio.
What is the plowback ratio for a firm that has earnings per share of $2.68 and pays out $1.75
per share in dividends?
a. 34.70%
b. 28.20%
c. 71.80%
d. 66.67% - correct answer ✔✔a. 34.70%
Plowback ratio = ($2.68 - 1.75)/$2.68 = .3470, or 34.70%
What is the minimum amount shareholders should expect to receive in the event of a complete
corporate liquidation?
a. Shareholders may be required to pay to be liquidated.
b. Market value of equity
c. Book value of equity
