Week 8 : Final Week - Final Exam
en-US
8386289 http://takeexam.n en-US
Time Remaining:
Page: 1 2
Final Exam Page 1
60237043 37240711 1 False
False rldbqn=1 MultipleSections NavigateFreely False
/main/CourseMod
1. (TCO A) Which of the following statements is NOT correct? (Points : 5)
The corporate valuation model can be used both for companies that pay dividends and those
that do not pay dividends.
The corporate valuation model discounts free cash flows by the required return on equity.
The corporate valuation model can be used to find the value of a division.
An important step in applying the corporate valuation model is forecasting the firm's pro forma
financial statements.
Free cash flows are assumed to grow at a constant rate beyond a specified date in order to find
the horizon, or terminal, value.
0 137529712 MultipleChoice 1
2. (TCO F) Which of the following statements is correct? (Points : 5)
One advantage of the NPV over the IRR is that NPV takes account of cash flows over a
project’s full life, whereas IRR does not.
One advantage of the NPV over the IRR is that NPV assumes that cash flows will be reinvested
at the WACC, whereas IRR assumes that cash flows are reinvested at the IRR. The NPV assumption is
generally more appropriate.
One advantage of the NPV over the MIRR method is that NPV takes account of cash flows over
a project’s full life, whereas MIRR does not.
One advantage of the NPV over the MIRR method is that NPV discounts cash flows, whereas
the MIRR is based on undiscounted cash flows.
Since cash flows under the IRR and MIRR are both discounted at the same rate (the WACC),
these two methods always rank mutually exclusive projects in the same order.
, 0 137529714 MultipleChoice 8
3. (TCO D) Church Inc. is presently enjoying relatively high growth because of a surge in the demand for
its new product. Management expects earnings and dividends to grow at a rate of 25% for the next 4
years, after which competition will probably reduce the growth rate in earnings and dividends to zero, i.e.,
g = 0. The company's last dividend, D0, was $1.25, its beta is 1.20, the market risk premium is 5.50%,
and the risk-free rate is 3.00%. What is the current price of the common stock?
a. $26.77
b. $27.89
c. $29.05
d. $30.21
e. $31.42
(Points : 20)
The ANSWER is "C"
Solution:
Required rate of return, r(m) = r(f) ) + b*r(p) ,
w here, r(f) is risk free rate and r(p) is risk premium and b is beta
So, r(m) = 3.00 + 1.2 * 5.5 = 9.6 %
Current price
P(0) = D1/(1+k) +D2/(1+k)^2 + D3/(1+k)^3 + D4/(1+k)^4 + P4/(1+k)^4
D1 = D0 * 1.25 = 1.25*1.25 = 1.25^2
D2 = 1.25D1 = 1.25^3
D3 = 1.25D2 = 1.25^4
D4 = 1.25D3 = 1.25^5
D5 = 1*D4 = 1.25^5 (g = 0, so (1+g) =1)
0 137529716 Essay 3
4. (TCO G) Singal Inc. is preparing its cash budget. It expects to have sales of $30,000 in January,
$35,000 in February, and $35,000 in March. If 20% of sales are for cash, 40% are credit sales paid in the
month after the sale, and another 40% are credit sales paid 2 months after the sale, what are the
expected cash receipts for March?
a. $24,057
b. $26,730
c. $29,700
d. $33,000
e. $36,300
(Points : 20)
en-US
8386289 http://takeexam.n en-US
Time Remaining:
Page: 1 2
Final Exam Page 1
60237043 37240711 1 False
False rldbqn=1 MultipleSections NavigateFreely False
/main/CourseMod
1. (TCO A) Which of the following statements is NOT correct? (Points : 5)
The corporate valuation model can be used both for companies that pay dividends and those
that do not pay dividends.
The corporate valuation model discounts free cash flows by the required return on equity.
The corporate valuation model can be used to find the value of a division.
An important step in applying the corporate valuation model is forecasting the firm's pro forma
financial statements.
Free cash flows are assumed to grow at a constant rate beyond a specified date in order to find
the horizon, or terminal, value.
0 137529712 MultipleChoice 1
2. (TCO F) Which of the following statements is correct? (Points : 5)
One advantage of the NPV over the IRR is that NPV takes account of cash flows over a
project’s full life, whereas IRR does not.
One advantage of the NPV over the IRR is that NPV assumes that cash flows will be reinvested
at the WACC, whereas IRR assumes that cash flows are reinvested at the IRR. The NPV assumption is
generally more appropriate.
One advantage of the NPV over the MIRR method is that NPV takes account of cash flows over
a project’s full life, whereas MIRR does not.
One advantage of the NPV over the MIRR method is that NPV discounts cash flows, whereas
the MIRR is based on undiscounted cash flows.
Since cash flows under the IRR and MIRR are both discounted at the same rate (the WACC),
these two methods always rank mutually exclusive projects in the same order.
, 0 137529714 MultipleChoice 8
3. (TCO D) Church Inc. is presently enjoying relatively high growth because of a surge in the demand for
its new product. Management expects earnings and dividends to grow at a rate of 25% for the next 4
years, after which competition will probably reduce the growth rate in earnings and dividends to zero, i.e.,
g = 0. The company's last dividend, D0, was $1.25, its beta is 1.20, the market risk premium is 5.50%,
and the risk-free rate is 3.00%. What is the current price of the common stock?
a. $26.77
b. $27.89
c. $29.05
d. $30.21
e. $31.42
(Points : 20)
The ANSWER is "C"
Solution:
Required rate of return, r(m) = r(f) ) + b*r(p) ,
w here, r(f) is risk free rate and r(p) is risk premium and b is beta
So, r(m) = 3.00 + 1.2 * 5.5 = 9.6 %
Current price
P(0) = D1/(1+k) +D2/(1+k)^2 + D3/(1+k)^3 + D4/(1+k)^4 + P4/(1+k)^4
D1 = D0 * 1.25 = 1.25*1.25 = 1.25^2
D2 = 1.25D1 = 1.25^3
D3 = 1.25D2 = 1.25^4
D4 = 1.25D3 = 1.25^5
D5 = 1*D4 = 1.25^5 (g = 0, so (1+g) =1)
0 137529716 Essay 3
4. (TCO G) Singal Inc. is preparing its cash budget. It expects to have sales of $30,000 in January,
$35,000 in February, and $35,000 in March. If 20% of sales are for cash, 40% are credit sales paid in the
month after the sale, and another 40% are credit sales paid 2 months after the sale, what are the
expected cash receipts for March?
a. $24,057
b. $26,730
c. $29,700
d. $33,000
e. $36,300
(Points : 20)
