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1a. Question - Chapter 1

This document discusses concepts related to corporate finance including present and future value calculations, discount rates, dividends, stock prices, risk and return. It contains examples of multiple choice and short answer questions related to these topics. The questions require calculations and explanations involving stocks, interest rates, dividends, risk and portfolio theory.

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65 views4 pages

1a. Question - Chapter 1

This document discusses concepts related to corporate finance including present and future value calculations, discount rates, dividends, stock prices, risk and return. It contains examples of multiple choice and short answer questions related to these topics. The questions require calculations and explanations involving stocks, interest rates, dividends, risk and portfolio theory.

Uploaded by

plinhcoco02
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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CORPORATE FINANCE 2

CHAPTER 1 – SOME BASIC CONCEPTS OF CORPORATE FINANCE

I/ MULTIPLE CHOICE

1. Luis is going to receive $20,000 six years from now. Soo Lee is going to receive
$20,000 nine years from now. Which one of the following statements is correct if both
Luis and Soo Lee apply a 7 percent discount rate to these amounts?

A. The present values of Luis and Soo Lee's monies are equal.

B. In future dollars, Soo Lee's money is worth more than Luis' money.

C. In today's dollars, Luis' money is worth more than Soo Lee's.

D. Twenty years from now, the value of Luis' money will be equal to the value of Soo
Lee's money.

2. You invested $1,400 in an account that pays 5 percent simple interest. How much
more could you have earned over a 20-year period if the interest had compounded
annually?

A. $830.11

B. $882.19

C. $901.15

D. $914.62

3. Which one of these statements related to growing annuities and perpetuities is


correct?

A. Growth rates cannot be applied to perpetuities if you wish to compute the present
value.

B. The future value of an annuity will decrease if the growth rate is increased.

C. An increase in the rate of growth will decrease the present value of an annuity.

D. The present value of a growing perpetuity will decrease if the discount rate is
increased.
4. You want to have $1.04 million in real dollars in an account when you retire in 38
years. The nominal return on your investment is 8 percent and the inflation rate is 3.5
percent. What is the real amount you must deposit each year to achieve your goal?

A. $10,667.67

B. $10,878.49

C. $11,194.39

D. $11,515.09

5. Hardwoods, Inc. is a mature manufacturing firm. The company just paid a $10
dividend, but management expects to reduce the payout by 9 percent each year,
indefinitely. How much are you willing to pay today per share to buy this stock if you
require a 15 percent rate of return?

A. $34.79

B. $37.92

C. $38.27

D. $41.33

6. The standard deviation of a portfolio:

A. is a weighed average of the standard deviations of the individual securities held in


that portfolio.

B. measures the amount of diversifiable risk inherent in the portfolio.

C. serves as the basis for computing the appropriate risk premium for that portfolio.

D. can be less than the weighted average of the standard deviations of the individual
securities held in that portfolio.

7. What is the variance of the returns on a portfolio that is invested 60 percent in stock
S and 40 percent in stock T?
A. .000017

B. .000023

C. .000118

D. .000136

II/ SHORT ANSWER

1. Jen's Fashions is growing quickly. Dividends are expected to grow at a 19 percent rate for
the next 3 years, with the growth rate falling off to a constant 8 percent thereafter. The
required return is 12 percent and the company just paid a $3.80 annual dividend. What is
the current share price?

2. Southern Utilities just issued some new preferred stock. The issue will pay a $19 annual
dividend in perpetuity beginning 9 years from now. What is one share of this stock worth
today if the market requires a 7 percent return on this investment?

3. Beatrice Markets is expecting a period of intense growth and has decided to retain more
of its earnings to help finance that growth. As a result, it is going to reduce its annual dividend
by 30 percent a year for the next 2 years. After that, it will maintain a constant dividend of
$2.50 a share. Last year, the company paid $3.60 as the annual dividend per share. What is
the market value of this stock if the required rate of return is 14.5 percent?

4. Suppose you observe the following situation:

Assume these securities are correctly priced. Based on the CAPM, what is the return on the
market?
5. Explain how the beta of a portfolio can equal the market beta if 50 percent of the portfolio
is invested in a security that has twice the amount of systematic risk as an average risky
security.

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