Exam4-Spring2011 - Exam 4 Finance 3320 May 10, 2011 Spring...

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Exam 4 – Finance 3320 May 10, 2011 Spring 2011 Fourth Examination – Finance 3320 – Spring 2011 (Moore) R-Number: ____________________ Printed Name: ____________________ Ethical conduct is an important component of any profession.  The Texas Tech University Code of  Student   Conduct   is   in   force   during   this   exam.     Students   providing   or   accepting   unauthorized  assistance will be assigned a score of zero (0) for this piece of assessment.   Using unauthorized  materials   during   the   exam   will   result  in  the  same  penalty.     Ours’   should  be  a  self-monitoring  profession.  It is the obligation of all students to report violations of the honor code in this course.  By  signing below, you are acknowledging that you have read the above statement and agree to abide by  the stipulated terms. Student’s Signature: ______________________________ Clearly Fill in the appropriate bubble on the Scantron form for each of the following questions.  Choose the  BEST  response.  There is only one answer per question. 1. Schalheim Sisters Inc. has always paid out all of its earnings as dividends, hence the firm has no retained earnings. This same situation is expected to persist in the future. The company uses the CAPM to calculate its cost of equity, its target capital structure consists of common stock, preferred stock, and debt. Which of the following events would REDUCE its WACC? a. The market risk premium declines. b. The flotation costs associated with issuing new common stock increase. c. The company’s beta increases. d. Expected inflation increases. e. The flotation costs associated with issuing preferred stock increase. 2. Duval Inc. uses only equity capital, and it has two equally-sized divisions. Division A’s cost of capital is 10.0%, Division B’s cost is 14.0%, and the corporate (composite) WACC is 12.0%. All of Division A’s projects are equally risky, as are all of Division B's projects. However, the projects of Division A are less risky than those of Division B. Which of the following projects should the firm accept? a. A Division B project with a 13% return. b. A Division B project with a 12% return. c. A Division A project with an 11% return. d. A Division A project with a 9% return. e. A Division B project with an 11% return. 3. Which of the following statements is CORRECT? a. When calculating the cost of preferred stock, a company needs to adjust for taxes, because preferred stock dividends are deductible by the paying corporation. b. All else equal, an increase in a company’s stock price will increase its marginal cost of retained earnings, r s . V1 - 1 -
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Exam 4 – Finance 3320 May 10, 2011 Spring 2011 c. All else equal, an increase in a company’s stock price will increase its marginal cost of new common equity, r e .
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This document was uploaded on 10/27/2011 for the course BUSINESS ALL at Texas Tech.

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Exam4-Spring2011 - Exam 4 Finance 3320 May 10, 2011 Spring...

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