FIN 300 MIDTERM EXAM QUESTIONS AND
ANSWERS SURE A+
✔✔Which of the following is most correct.
A ) There is seldom much difference between realized returns and expected returns.
B ) Realized returns always exceed expected returns.
C ) Realized returns always are lower than expected returns.
D ) There generally are large differences between expected and realized returns. - ✔✔D
) There generally are large differences between expected and realized returns.
✔✔The price of a stock is: - ✔✔The present value of all expected future dividends,
discounted at the investor's required return.
✔✔The above formula represents the constant growth model of valuing stocks. Which
of the following is true of the above model? - ✔✔Dividends are assumed to grow at a
constant rate
✔✔Two firms with the same dividend and growth rate must also have the same stock
price. - ✔✔False
✔✔Since preferred stock dividends are fixed, valuing preferred stock is roughly
equivalent to
valuing: - ✔✔a zero growth common stock.
✔✔An initial public offering (IPO):
A ) occurs whenever a company buys back its stock on the open market.
B ) occurs when common stock is given a special designation such as Class A or Class
B.
C ) occurs when a company's stock is offered to the public for the first time.
, D ) occurs when shares of a company are traded in the secondary market - ✔✔occurs
when a company's stock is offered to the public for the first time.
✔✔If the market is semistrong-form efficient, you can expect to outperform the overall
market by
observing the past price history of an individual stock. - ✔✔False
✔✔Studies almost unanimously show that you cannot make an abnormal profit in the
U.S. market by
using inside information. - ✔✔False
✔✔Timeless Corporation issued preferred stock with a par value of $600. The stock
promised to pay an annual dividend equal to 10.0% of the par value. If the appropriate
discount rate for this stock is 14.0%, what is the value of the stock? - ✔✔$428.57
✔✔You are considering buying common stock in Grow On, Inc. You have projected that
the next dividend the company will pay will equal $7.40 and that dividends will grow at a
rate of 9.0% per year thereafter. If you would want an annual return of 13.0% to invest
in this stock, what is the most you should pay for the stock now? - ✔✔$185.00
✔✔_______ is the return on the best alternative use of an asset, or the highest return
that will not be earned if funds are invested in a particular project. - ✔✔Opportunity cost
✔✔________ are effects of a project on cash flows in other parts of the firm. -
✔✔Externalities
✔✔A company is considering a new project. The company's CFO plans to calculate the
project's NPV by discounting the relevant cash flows (which include the initial up-front
costs, the operating cash flows, and the terminal cash flows) at the company's cost of
capital (WACC). Which of the following factors should the CFO include when estimating
the relevant cash flows?
A ) Any sunk costs associated with the project.
B ) Any interest expenses associated with the project.
C ) Any opportunity costs associated with the project.
D ) All of the statements above are correct - ✔✔Any opportunity costs associated with
the project.
✔✔When evaluating a new project, the firm should consider all of the following factors
except:
A ) Changes in net operating working capital attributable to the project.
B ) Previous expenditures associated with a market test to determine the feasibility of
the project
if the expenditures have been expensed for tax purposes.
ANSWERS SURE A+
✔✔Which of the following is most correct.
A ) There is seldom much difference between realized returns and expected returns.
B ) Realized returns always exceed expected returns.
C ) Realized returns always are lower than expected returns.
D ) There generally are large differences between expected and realized returns. - ✔✔D
) There generally are large differences between expected and realized returns.
✔✔The price of a stock is: - ✔✔The present value of all expected future dividends,
discounted at the investor's required return.
✔✔The above formula represents the constant growth model of valuing stocks. Which
of the following is true of the above model? - ✔✔Dividends are assumed to grow at a
constant rate
✔✔Two firms with the same dividend and growth rate must also have the same stock
price. - ✔✔False
✔✔Since preferred stock dividends are fixed, valuing preferred stock is roughly
equivalent to
valuing: - ✔✔a zero growth common stock.
✔✔An initial public offering (IPO):
A ) occurs whenever a company buys back its stock on the open market.
B ) occurs when common stock is given a special designation such as Class A or Class
B.
C ) occurs when a company's stock is offered to the public for the first time.
, D ) occurs when shares of a company are traded in the secondary market - ✔✔occurs
when a company's stock is offered to the public for the first time.
✔✔If the market is semistrong-form efficient, you can expect to outperform the overall
market by
observing the past price history of an individual stock. - ✔✔False
✔✔Studies almost unanimously show that you cannot make an abnormal profit in the
U.S. market by
using inside information. - ✔✔False
✔✔Timeless Corporation issued preferred stock with a par value of $600. The stock
promised to pay an annual dividend equal to 10.0% of the par value. If the appropriate
discount rate for this stock is 14.0%, what is the value of the stock? - ✔✔$428.57
✔✔You are considering buying common stock in Grow On, Inc. You have projected that
the next dividend the company will pay will equal $7.40 and that dividends will grow at a
rate of 9.0% per year thereafter. If you would want an annual return of 13.0% to invest
in this stock, what is the most you should pay for the stock now? - ✔✔$185.00
✔✔_______ is the return on the best alternative use of an asset, or the highest return
that will not be earned if funds are invested in a particular project. - ✔✔Opportunity cost
✔✔________ are effects of a project on cash flows in other parts of the firm. -
✔✔Externalities
✔✔A company is considering a new project. The company's CFO plans to calculate the
project's NPV by discounting the relevant cash flows (which include the initial up-front
costs, the operating cash flows, and the terminal cash flows) at the company's cost of
capital (WACC). Which of the following factors should the CFO include when estimating
the relevant cash flows?
A ) Any sunk costs associated with the project.
B ) Any interest expenses associated with the project.
C ) Any opportunity costs associated with the project.
D ) All of the statements above are correct - ✔✔Any opportunity costs associated with
the project.
✔✔When evaluating a new project, the firm should consider all of the following factors
except:
A ) Changes in net operating working capital attributable to the project.
B ) Previous expenditures associated with a market test to determine the feasibility of
the project
if the expenditures have been expensed for tax purposes.
