Exam 3 Solutions - Fall 2002 Final Exam 1. Which of the...

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Fall 2002 Final Exam 1. Which of the following statements is incorrect (least correct)? A. Theoretically, the price of a share of stock will decline by the present value of the dividend given up when the stock goes ex dividend . B. If a share of stock is growing at a constant rate, then the growth rate of dividends should be equal to the growth rate of price (capital appreciation). In addition, if the stock price is in a state of equilibrium, then this growth rate should also be equal to the investors’ required rate of return minus the expected dividend yield. * C. The price sensitivity of a share of common stock increases with the time remaining until it matures. D. The preemptive right is important because it protects existing shareholders against dilution of their ownership interests. E. To evaluate theoretical changes in dividend policy we assume that capital budgeting (investing) and capital structure (financing) decisions have already been made. Thus, increasing a dividend is accomplished by issuing new equity and decreasing a dividend is accomplished by repurchasing existing equity. 2. Which of the following statements is correct (most correct)? A. Since there are no flotation costs associated with it, the cost of retained earnings will always be less than the after-tax cost of debt financing. B. When calculating the cost of preferred stock, a company needs to adjust for taxes, because preferred stock dividends are tax deductible for the issuing firm. C. If a company’s tax rate increases then, all else equal, the company’s weighted average cost of capital will also increase. D. A decrease in the risk-free rate, all else equal, will likely increase the marginal costs of both debt and equity securities. * E. A company’s targeted capital structure will affect its cost of capital. Changes from the target may cause the weighted average cost of capital to either increase or decrease. 3. Which of the following statements is incorrect (least correct)? A. In calculating a project’s cash flow, a firm should not subtract out financing costs, such as interest expense, since these costs are already included in the weighted average cost of capital, which is used to discount the project’s cash flows. * B. Since it is a non-cash expense, the firm does not need to know the depreciation rate (depreciation expense) associated with a project when calculating the operating cash flows for a project. C. The net present value method assumes that cash flows are reinvested at the firm’s cost of capital, while the internal rate of return method assumes that cash flows are reinvested at the project’s internal rate of return. D. If a project has only a single cash outlay and a single cash inflow (no intervening cash flows) then the modified internal rate of return for the project will be equal to the project’s internal rate of return. E.
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This note was uploaded on 02/10/2011 for the course FIN 3403 taught by Professor Tapley during the Fall '06 term at University of Florida.

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Exam 3 Solutions - Fall 2002 Final Exam 1. Which of the...

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