Finance Course work 1
COURSE: MBA-680-50-SUII12 Corporate Financial Theory
SEMESTER: Summer Session II Aug 2014
Coursework 1
Chapters 4,5,7,8,9
PART 1 SELF-TEST QUESTIONS
1. Casino Inc. is expected to pay a dividend of $3 per share at the end of year-1 (D1) and these dividends are expected to grow at a constant rate of 6% per year forever. If the required rate of return on the stock is 18%, what is current value of the stock today?
a. $25
b. $50
c. $100
d. $54
2. MJ Co. pays out 60% of its earnings as dividends. Its return on equity is 15%. What is the stable dividend growth rate for the firm?
a. 9%
b. 5%
c. 6%
d. 15%
3. If the discount rate is stated in real terms, then in order to calculate the NPV in a consistent manner requires that project: I) cash flows be estimated in nominal terms II) cash flows be estimated in real terms III) accounting income be used:
a. I only
b. II only
c. III only
d. None of the above
4. Proper treatment of inflation in the NPV calculation involves: I) Discounting nominal cash flows using the nominal discount rate II) Discounting real cash flows using the real discount rate III) Discounting nominal cash flows using the real discount rates
a. I only
b. II only
c. III only
d. I and II only
5. The cost of a resource that may be relevant to an investment decision even when no cash changes hand is called a (an):
a. Sunk cost
b. Opportunity cost
c. Working capital
d. None of the above
6. If the average annual rate of return for common stocks is 11.7%, and for treasury bills it is 4.0%, what is the market risk premium?
a. 15.8%
b. 4.1%
c. 7.7%
d. None of the above
7. A statistical measure of the degree to which securities ' returns move together is called:
a. Variance
b. Correlation Coefficient
c. Standard Deviation
d. None of the above
8. Investments A and B both offer an expected rate of return of 12%. If the standard deviation of A is 20% and that of B is 30%, then investors would:
a. Prefer
SEMESTER: Summer Session II Aug 2014
Coursework 1
Chapters 4,5,7,8,9
PART 1 SELF-TEST QUESTIONS
1. Casino Inc. is expected to pay a dividend of $3 per share at the end of year-1 (D1) and these dividends are expected to grow at a constant rate of 6% per year forever. If the required rate of return on the stock is 18%, what is current value of the stock today?
a. $25
b. $50
c. $100
d. $54
2. MJ Co. pays out 60% of its earnings as dividends. Its return on equity is 15%. What is the stable dividend growth rate for the firm?
a. 9%
b. 5%
c. 6%
d. 15%
3. If the discount rate is stated in real terms, then in order to calculate the NPV in a consistent manner requires that project: I) cash flows be estimated in nominal terms II) cash flows be estimated in real terms III) accounting income be used:
a. I only
b. II only
c. III only
d. None of the above
4. Proper treatment of inflation in the NPV calculation involves: I) Discounting nominal cash flows using the nominal discount rate II) Discounting real cash flows using the real discount rate III) Discounting nominal cash flows using the real discount rates
a. I only
b. II only
c. III only
d. I and II only
5. The cost of a resource that may be relevant to an investment decision even when no cash changes hand is called a (an):
a. Sunk cost
b. Opportunity cost
c. Working capital
d. None of the above
6. If the average annual rate of return for common stocks is 11.7%, and for treasury bills it is 4.0%, what is the market risk premium?
a. 15.8%
b. 4.1%
c. 7.7%
d. None of the above
7. A statistical measure of the degree to which securities ' returns move together is called:
a. Variance
b. Correlation Coefficient
c. Standard Deviation
d. None of the above
8. Investments A and B both offer an expected rate of return of 12%. If the standard deviation of A is 20% and that of B is 30%, then investors would:
a. Prefer