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Quiz2 1. Question: stock expects to pay a year-end dividend of $2 a share (i.e.

, D1 = $2; assume that last year's dividend has already been paid). The dividend is expected to fall 5% a year forever (i.e., g = -5%). The company's expected and required rate of return is 15%. Which of the following statements is most correct? A. The company's stock price is $10. B. The company's expected dividend yield 5 years from now will be 20%. C. The company's stock price 5 years from now is expected to be $7.74. D. Both answers B and C are correct. E. All of the above answers are correct. CORRECT Instructor Explanation: Statement E is the correct choice; all the statements are correct. Statement A is correct; Po = $2/(.15+.05) = $10. Statement B is correct; Div yields = D6/P5 or ($2(.95)to the 5th power) = $1.547562/$7.74 = 20%. Statement C is correct; ($10(.95)to the 5th power) = $7.74. Points Received:6 of 6 Comments: 2. Question: Which of the following statements is most correct? A. If a stock's beta increased but its growth rate remained the same, then the new equilibrium price of the stock will be higher (assuming dividends continue to grow at the constant growth rate). B. Market efficiency says that the actual realized returns on all stocks will be equal to the expected rates of return. C. An implication of the semistrong form of the efficient markets CORRECT hypothesis is that you cannot consistently benefit from trading on information reported in the Wall Street Journal. D. Statements A and B are correct. E. All of the statements above are correct. Instructor Explanation: Statement C is correct; The other statements are false. If beta increased but g remained the same, the new stock price would be lower. Market efficiency says nothing abut the relationship between expected and realized rates of return. Points Received:0 of 6 Comments:

3.Question: Which of the following statements is most correct? Your Answer: A. If the stock market is weak-form efficient, this means you cannot use private information to outperform the market. B. If the stock market is semistrong-form efficient, this means the expected return on stocks and bonds should be the same. C. If the stock market is semistrong-form efficient, this means that high beta stocks should have the same expected return as low beta stocks. D. Statements B and C are correct. E. None of the statements above are correct. INCORREC T CORRECT ANSWER Instructor Explanation: Statement E is correct; the other statements are false. If the stock market is weak-form efficient, you could use private information to outperform the market. Semi-strong form efficiency means that current market prices reflect all publicly available information. Points Received:0 of 6 Comments: 4.Question: Which of the following statements is most correct? Your Answer: The CAPM approach to estimating a firm's cost of common stock never gives a better estimate than the DCF application. The CAPM approach is typically used to estimate a firm's cost of preferred stock. The risk premium used in the bond yield plus risk premium method is INCORRECT the same as the one used in the CAPM method. In practice (as opposed to in theory), the DCF method and the CAPM method usually produce exactly the same estimate for rs. CORRECT The statements above are all false. ANSWER Points Received:0 of 6 Comments: 5.Question: In applying the to CAPM estimate the cost of equity capital, which of the following elements is not subject to dispute or controversy? Your Answer: The expected rate of return on the market (rm) The stock's beta coefficient, b1 The risk-free rate (r rf) The market risk premium (RPm) All of the above are subject to dispute. Points Received:6 of 6 Comments: CORRE CT

1.Question: Which of the following statements is incorrect? Your Answer: Assuming a project has normal cash flows, the NPV will be positive CORRECT if the IRR is less than than the cost of capital. ANSWER If the multiple IRR problem does not exist, any independent project acceptable by the NPV method will also be acceptable by the IRR method. INCORREC If IRR= r (the cost of capital), the NPV = 0. T NPV can be negative if the IRR is positive. The NPV method is not affected by the multiple IRR problem. Instructor Explanation: The first statement is the incorrect statement. NPV is positive if IRR is greater than the cost of capital. Points Received:0 of 6 Comments: 2.Question: Which of the following statements is most correct? Your Answer: A. If a project with normal cash flows has an IRR that exceeds the cost of CORRE capital, then the project must have a positive NPV. CT B. If the IRR of project A exceeds the IRR of project B, then project A must also have a higher NPV. C. The modified internal rate of return (MIRR) can never exceed the IRR. D. Answers A and C are correct. E. None of the answers above are correct. Instructor Explanation: The correct answer is A; the other statements are false. The IRR is the discount rate at which a project's NPV is zero. If a project's IRR exceeds the firm's cost of capital, then its NPV must be positive since NPV is calculated using the firm's cost of capital to discount project cash flows. Points Received:6 of 6 Comments: 3.Question: Which of the following statements is most correct? Your Answer: A. The MIRR method will always arrive at the same conclusion as the NPV method. B. The MIRR method can overcome the multiple IRR problem and the NPV method cannot. C. The MIRR method uses a more reasonable assumption about CORRE reinvestment rates than the IRR method. D. Statements A and C are correct. E. All of the above statements are correct. CT Instructor Explanation:Statement C is correct; the other statements are false. MIRR and NPV can conflict for mutually exclusive projects if the projects differ in size. NPV does not suffer from the multiple IRR problem. Points Received:6 of 6 Comments: 4.Question: Which of the following statements is most correct? Your Answer: A. The rate of depreciation will often affect operating cash flows, even though depreciation is not a cash expense. B. Corporations should fully account for sunk costs when making investment decisions. C. Corporations should fully account for opportunity costs when making investment decisions. D. All of the answers above are correct. E. Answers A and C are correct. Points Received:6 of 6 Comments:

5. Question: Which of the following statements is most correct? Your Answer: A. Sunk costs should be incorporated into capital budgeting decisions. B. Opportunity costs should be incorporated into capital budgeting decisions. C. Relevant externalities should be incorporated into capital budgeting decisions. D. Answers B and C are correct. E. Answers A, B, and C are correct. Points Received:6 of 6 Comments: CORRE CT CORRE CT