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Exam 3 practice questions

# Exam 3 practice questions - Practice Questions 1 Scanlon...

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Practice Questions 1. 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: r RF = 5.00%; RP M = 6.00%; and b = 0.90. Based on the CAPM approach, what is the cost of equity from retained earnings? a. 9.21% b. 9.49% c. 9.79% d. 10.09% e. 10.40% Answer: e 2. Assume that you are a consultant to Broske Inc., and you have been provided with the following data: D 1 = \$1.30; P 0 = \$42.50; and g = 7.00% (constant). What is the cost of equity from retained earnings based on the DCF approach? a. 9.08% b. 9.56% c. 10.06% d. 10.56% e. 11.09% Answer: c 3. Lanser Inc. hired you as a consultant to help them estimate its cost of capital. You have been provided with the following data: D 1 = \$0.80; P 0 = \$22.50; and g = 5.00% (constant). Based on the DCF approach, what is the cost of equity from retained earnings? a. 7.34% b. 7.72% c. 8.13% d. 8.56% e. 8.98% Answer: d 4. Which of the following statements is CORRECT? a. If the underlying stock does not pay a dividend, it makes good economic sense to exercise a call option as soon as the stock’s price exceeds the strike price by about 10%, because this permits the option holder to lock in an immediate profit. b. Call options generally sell at a price less than their

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Exam 3 practice questions - Practice Questions 1 Scanlon...

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