FINA3310_MID03_Review - Problems(12 problems • Stock...

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Review for Midterm 3 (Chapters 7, 8 and 9-closed notes and books, one page with notes on only one side) Midterm 3 consists of 13 theoretical (multiple choice or true/false questions) and 12 problems Theoretical (13 true/false, multiple choice questions) Differences between stocks (both common and preferred) and bonds Tax treatment of dividends (preferred and common) and interest payments. Capital budgeting process Choice of mutually exclusive, independent projects Relevant cash flows, sunk costs, opportunity costs Payback acceptance rules NPV and IRR assumptions, conflicts and reasons for the conflicts when ranking mutually exclusive projects
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Unformatted text preview: Problems (12 problems) • Stock valuation using zero dividend growth and the constant dividend growth model. • Calculate the expected return (using the DGM model) and the required return (using the CAPM model) • Calculate the dividend growth rate (using the DGM-i.e. rearranging DGM to solve for g) • Initial investment and terminal cash flow calculations • Calculation of incremental OCFs for the new and old machine for years 1 and/or 2 • Payback period calculation • IRR and NPV calculation and acceptance criteria, crossover rate • Choice of project(s) based on rationing and the IRR rule...
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