Fin 3610 Exam 2 with correct |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\
answers
You are going to choose between two investments. Both cost $50,000, but investment A pays
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$25,000 a year for 3 years while investment B pays $20,000 a year for 4 years. If your required
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return is 12%, which should you choose? - correct answer✔✔Solve for higher NPV
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B has higher NPV
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Which of the following calculations ignores the impact of the time value of money?
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I. Payback
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II. Discounted Payback
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III. Profitability index - correct answer✔✔I. Payback
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You own some manufacturing equipment that must be replaced. Two different suppliers
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present a purchase and installation plan for your consideration. This is an example of a
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business decision involving _________ projects. |||\\\ |||\\\ |||\\\ |||\\\
a. mutually exclusive
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b. independent
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c. working capital
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d. positive NPV
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e. crossover - correct answer✔✔A. mutually exclusive
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Which of the following are biased in favor of liquid investments?
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I. Profitability index
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II. Payback|||\\\
, III. Discounted payback - correct answer✔✔II and III payback and discounted payback
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Common stock valuation requires, among other things, information regarding the: |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\
I. Expected dividend growth rate.
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II. Current dividend payment.
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III. Par value of the common stock. - correct answer✔✔I and II Expected dividend growth rate
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and current dividend payment |||\\\ |||\\\ |||\\\
The Upton Company's last dividend (Do) was $1.75. Its dividend growth rate is expected to be
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constant at 18.00% for 2 years, after which dividends are expected to grow at a rate of 6.00% |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\
forever. Upton's required return (rs) is 12.00%. What is Upton's current stock price? - correct
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answer✔✔Dividend in year 1, D1=1.75(1.18)=2.065 |||\\\ |||\\\ |||\\\ |||\\\
Dividend in year 2, D2=2.065(1.18)=2.4367 |||\\\ |||\\\ |||\\\ |||\\\
Dividend in year 3, D3=2.4367(1.06)=2.583 |||\\\ |||\\\ |||\\\ |||\\\
Price at the end of year 2, P2=D3 / (r-g) ; So P2 = 2.583/0.06 = 43.05.
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So, we have three cash flows to worry about - D1, D2, and P2.
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Now use the CF keys where C0=0; C1=2.065; F1=1; C2=(2.4367+43.05); F2=1; I=12%
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NPV = 38.10 |||\\\ |||\\\
How much should you pay for a share of stock that offers a constant growth rate of 10%,
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requires a 16% rate of return, and is expected to sell for $50 one year from now? - correct |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\
answer✔✔The growth in price equals the growth rate in dividends in the constant dividend |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\
growth model. Hence growth in price is 10% per year. So, price today = 50/1.1 = 45.45
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A firm has a return on equity of 16%, a dividend payout ratio of 40%, an equity multiplier of
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1.6, and a profit margin of 4.2%. What is the sustainable growth rate? - correct
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answer✔✔Sustainable growth gs = ROE * b / (1 - ROE * b) |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\
gs = 0.16 * 0.60 / ( 1 - 0.16*0.60) = 10.6%
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answers
You are going to choose between two investments. Both cost $50,000, but investment A pays
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$25,000 a year for 3 years while investment B pays $20,000 a year for 4 years. If your required
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return is 12%, which should you choose? - correct answer✔✔Solve for higher NPV
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B has higher NPV
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Which of the following calculations ignores the impact of the time value of money?
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I. Payback
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II. Discounted Payback
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III. Profitability index - correct answer✔✔I. Payback
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You own some manufacturing equipment that must be replaced. Two different suppliers
|||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\
present a purchase and installation plan for your consideration. This is an example of a
|||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\
business decision involving _________ projects. |||\\\ |||\\\ |||\\\ |||\\\
a. mutually exclusive
|||\\\ |||\\\
b. independent
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c. working capital
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d. positive NPV
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e. crossover - correct answer✔✔A. mutually exclusive
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Which of the following are biased in favor of liquid investments?
|||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\
I. Profitability index
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II. Payback|||\\\
, III. Discounted payback - correct answer✔✔II and III payback and discounted payback
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Common stock valuation requires, among other things, information regarding the: |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\
I. Expected dividend growth rate.
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II. Current dividend payment.
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III. Par value of the common stock. - correct answer✔✔I and II Expected dividend growth rate
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and current dividend payment |||\\\ |||\\\ |||\\\
The Upton Company's last dividend (Do) was $1.75. Its dividend growth rate is expected to be
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constant at 18.00% for 2 years, after which dividends are expected to grow at a rate of 6.00% |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\
forever. Upton's required return (rs) is 12.00%. What is Upton's current stock price? - correct
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answer✔✔Dividend in year 1, D1=1.75(1.18)=2.065 |||\\\ |||\\\ |||\\\ |||\\\
Dividend in year 2, D2=2.065(1.18)=2.4367 |||\\\ |||\\\ |||\\\ |||\\\
Dividend in year 3, D3=2.4367(1.06)=2.583 |||\\\ |||\\\ |||\\\ |||\\\
Price at the end of year 2, P2=D3 / (r-g) ; So P2 = 2.583/0.06 = 43.05.
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So, we have three cash flows to worry about - D1, D2, and P2.
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Now use the CF keys where C0=0; C1=2.065; F1=1; C2=(2.4367+43.05); F2=1; I=12%
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NPV = 38.10 |||\\\ |||\\\
How much should you pay for a share of stock that offers a constant growth rate of 10%,
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requires a 16% rate of return, and is expected to sell for $50 one year from now? - correct |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\
answer✔✔The growth in price equals the growth rate in dividends in the constant dividend |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\
growth model. Hence growth in price is 10% per year. So, price today = 50/1.1 = 45.45
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A firm has a return on equity of 16%, a dividend payout ratio of 40%, an equity multiplier of
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1.6, and a profit margin of 4.2%. What is the sustainable growth rate? - correct
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answer✔✔Sustainable growth gs = ROE * b / (1 - ROE * b) |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\ |||\\\
gs = 0.16 * 0.60 / ( 1 - 0.16*0.60) = 10.6%
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