MULTIPLE CHOICE CHAPTER 9
(9-5) Required return
1).

If in the opinion of a given investor a stocks expected return exceeds its required return,
this suggests that the investor thinks
a.
b.
c.
d.
e.

the stock is experiencing supernormal growth.
the stock should be sold.
the stock is a good buy.
management is probably not trying to maximize the price per share.
dividends are not likely to be declared.

(9-1) Preemptive right
2).

The preemptive right is important to shareholders because it
a.
b.
c.
d.
e.

allows managers to buy additional shares below the current market price.
will result in higher dividends per share.
is included in every corporate charter.
protects the current shareholders against a dilution of their ownership interests.
protects bondholders, and thus enables the firm to issue debt with a relatively low
interest rate.

(9-2) Classified stock
3).

Companies can issue different classes of common stock. Which of the following
statements concerning stock classes is CORRECT?
a.
b.
c.
d.
e.

All common stocks fall into one of three classes: A, B, and C.
All common stocks, regardless of class, must have the same voting rights.
All firms have several classes of common stock.
All common stock, regardless of class, must pay the same dividend.
Some class or classes of common stock are entitled to more votes per share than other
classes.
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Final exam MGT 5002

(9-5) Constant growth model
4).

If a stocks dividend is expected to grow at a constant rate of 5% a year, which of the
following statements is CORRECT? The stock is in equilibrium.
a.
b.
c.
d.
e.

The expected return on the stock is 5% a year.
The stocks dividend yield is 5%.
The price of the stock is expected to decline in the future.
The stocks required return must be equal to or less than 5%.
The stocks price one year from now is expected to be 5% above the current price.

(9-7) Corporate valuation model
5).

Which of the following statements is CORRECT?
a. To implement the corporate valuation model, we discount projected free cash flows at
the weighted average cost of capital.
b. To implement the corporate valuation model, we discount net operating profit after
taxes (NOPAT) at the weighted average cost of capital.
c. To implement the corporate valuation model, we discount projected net income at the
weighted average cost of capital.
d. To implement the corporate valuation model, we discount projected free cash flows at
the cost of equity capital.
e. The corporate valuation model requires the assumption of a constant growth rate in all
years.

(9-8) Preferred stock concepts
6).

Which of the following statements is CORRECT?
a. A major disadvantage of financing with preferred stock is that preferred stockholders
typically have supernormal voting rights.
b. Preferred stock is normally expected to provide steadier, more reliable income to
investors than the same firms common stock, and, as a result, the expected after-tax
yield on the preferred is lower than the after-tax expected return on the common
stock.
c. The preemptive right is a provision in all corporate charters that gives preferred
stockholders the right to purchase (on a pro rata basis) new issues of preferred stock.
d. One of the disadvantages to a corporation of owning preferred stock is that 70% of
the dividends received represent taxable income to the corporate recipient, whereas
interest income earned on bonds would be tax free.
e. One of the advantages to financing with preferred stock is that 70% of the dividends
paid out are tax deductible to the issuer.

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(9-5) Expected total return
7).

If D1 = $1.25, g (which is constant) = 5.5%, and P0 = $44, what is the stocks expected
total return for the coming year?
a.
b.
c.
d.
e.

7.54%
7.73%
7.93%
8.13%
8.34%

Chapter 10 - Multiple Choice
(10-6) Internal vs. external common
8).

Bankston Corporation forecasts that if all of its existing financial policies are followed,
its proposed capital budget would be so large that it would have to issue new common
stock. Since new stock has a higher cost than retained earnings, Bankston would like to
avoid issuing new stock. Which of the following actions would REDUCE its need to
issue new common stock?
a.
b.
c.
d.
e.

Increase the dividend payout ratio for the upcoming year.
Increase the percentage of debt in the target capital structure.
Increase the proposed capital budget.
Reduce the amount of short-term bank debt in order to increase the current ratio.
Reduce the percentage of debt in the target capital structure.

(10-5) Cost of equity: CAPM
9).

When working with the CAPM, which of the following factors can be determined with
the most precision?
a.
b.
c.
d.
e.

The market risk premium (RPM).
The beta coefficient, bi, of a relatively safe stock.
The most appropriate risk-free rate, rRF.
The expected rate of return on the market, rM.
The beta coefficient of the market, which is the same as the beta of an average
stock.
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Final exam MGT 5002

(10-9) Risk and projects
10).

LaPango Inc. estimates that its average-risk projects have a WACC of 10%, its belowaverage risk projects have a WACC of 8%, and its above-average risk projects have a
WACC of 12%. Which of the following projects (A, B, and C) should the company
accept?
a.
b.
c.
d.
e.

Project B, which is of below-average risk and has a return of 8.5%.
Project C, which is of above-average risk and has a return of 11%.
Project A, which is of average risk and has a return of 9%.
None of the projects should be accepted.
All of the projects should be accepted.

(10-5) Cost of RE: CAPM
11).

O'Brien Inc. has the following data: rRF = 5.00%; RPM = 6.00%; and b = 1.05. What is
the firm's cost of equity from retained earnings based on the CAPM?
a.
b.
c.
d.
e.

11.30%
11.64%
11.99%
12.35%
12.72%

(10-5) Cost of RE: CAPM
12).