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Short ESSAY Questions: 1) Capital budgeting projects looks at net present value or return on investments computations in determining project priorities (those projects management should pursue first). Explain each method and identify which you believe to be the more appropriate measurement. 2) Discuss what the weighted average cost of capital is and why managers need to know this. Multiple choice questions 1-60: 1. An issue of preferred stock is paying an annual dividend of $5. The growth rate for the firm’s common stock is 15%. What is the preferred stock price if the required rate of return is 12%? a. $45.45 b. $41.67 c. $33.33 d. none of the above 2. Valuation of financial assets requires knowledge of a. future cash flows b. appropriate discount rate c. past asset performance d. a and b 3. The market allocates capital to companies based on a. risk b. efficiency c. expected returns d. all of the above 4. If expected dividends grow at 8% and the appropriate discount rate is 12%, what is the value of a stock with an expected dividend of $1.37? a. $36.99 b. $11.42 c. $17.13 d. $34.25 5. The dividend valuation model stresses the a. importance of earnings per share b. importance of dividends and legal rules for maximum payment c. relationship of dividends to market prices d. relationship of dividends to earnings per share
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6. Stock valuation models are dependent upon a. expected dividends, future dividend growth and an appropriate discount rate b. past dividends, flotation costs and bond yields c. historical dividends, historical growth and an appropriate discount rate d. all of the above 7. Which is a characteristic of the cost of preferred stock? a. since preferred stock dividends are fixed, they are tax deductible b. because preferred stock has no maturity, the cost analysis is similar to that of gold. c. preferred stock is valued as a perpetuity d. none of the above 8. An increase in the riskiness of a particular security would NOT affect a. the risk premium for that security b. the premium for expected inflation c. the total required return for the security d. investors’ willingness to buy the security 9. A common stock which pays a constant dividend can be valued as if it were a a. corporate bond b. stock paying a growing dividend c. preferred stock d. discount bond 10. In general sense, the value of any asset is the a. value of the dividends received from the asset b. present value of the cash flows received from the asset c. value of past dividends and price increases for the asset d. future value of the expected cash flows discounted by the asset’s cost of capital 11. If a firm’s bonds are currently yielding 8% in the marketplace, why would the firm’s cost of debt be lower?
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This note was uploaded on 01/05/2012 for the course 101 melissa jo taught by Professor Acc101 during the Spring '11 term at Aarhus Universitet.

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