Sample Question - FIN331 Fall 2010 Extra Credit Dr. Rhee 1....

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FIN331 Fall 2010 Extra Credit Dr. Rhee 1. Which one (s) is (are) an external financing and has the flotation cost? a. Retained earnings b. Bonds c. Preferred stock d. e. b & c Answer: e Retained earnings are internal source of fund. Issuing bonds, preferred stocks, and common stocks are external source of fund, which have the floation cost. 2. The costs of financing from different sources are as follows: IEF = 5%, EEF=6%, cost of debt before tax = 5%, tax rate=20%, the size of retained earnings=$30m. The capital structure is: We=40% and Wd=60%. Determine the WAMCC before and after the break point. a. 4.4% 4.8% b. 4.4% 5.2% c. 4.6% 4.8% d. 4.6% 5.2% e. 4.8% 5.2% Answer: a 5%*(1 – 0.2)*0.6 + 5%*0.4 = 4.4%, 5%*(1 – 0.2)*0.6 + 6%*0.4 =4.8% 3. Given D1 = $1.00 and K=10%, what is the value of the stock at 8% growth rate? If the current price of the stock is $50, would you buy it? a. $55, Buy b. $54, Buy c. $55, Don’t d. $54, Don’t e. $50, Indifferent Answer: e PV=D 1 /(k-g)=1.00/(0.10 - 0.08) = $50. Since the price=PV, you are indifferent. 4. For a preferred stock with the dividend amount of $2.00 each quarter, what is the PV of it with an annual discount rate of 8%? If the price of the preferred stock is $80, what is the yield (ROI, APR) of this security? a. $60, 8% b. $80, 8% c. $60, 10% d. $80, 10% e. $100, 10% Answer: e V 0 = D/k = 8/0.08 = $100. ROI = (80+8)/80 = 10% 5. I checked the Microsoft stock price at 9:12am this morning. It was $24.88. The last 12 month trailing (ttm) net earnings is $14.58 billion with 9 billion shares. What is the 12 month trailing EPS and P/E ratio?
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a. $1.62, 15.36 b. $2.26, 13.31 c. $1.26, 17.88 d. $2.32, 12.21 e. $1.18, 20.33 Answer: a EPS = NE/Shares Outstanding = $14.58/9 = $1.62 P/E = Price per share/Earnings per share = $24.88/$1.62 = 15.36 6. For a common stock with the current dividend amount of = $.70 (Do = .70), what is the (P)V of it with an annual discount rate of 12% and the dividend is expected to grow at the rate of 10% per annum forever? a. $33.5 b. $35.0 c. $38.5 d. $45.0 e. $37.5 Answer: c V 0 = D 1 / (k-g) = (0.70* 1.1)/(0.12-0.10) = 38.5 7. The preemptive right is important to shareholders because it a. allows managers to buy additional shares below the current market price. b. will result in higher dividends per share. c. is included in every corporate charter. d. protects the current shareholders against a dilution of their ownership interests. e. protects bondholders, and thus enables the firm to issue debt with a relatively low interest rate. Answer: d 8. Which of the following statements is CORRECT? a. The constant growth model takes into consideration the capital gains investors expect to earn on a stock. b.
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Sample Question - FIN331 Fall 2010 Extra Credit Dr. Rhee 1....

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