MEM 5241 - Finance Practice Quiz 2 (Ch 8, 9, 10, and 11) 2023-02

Question 1 0.75 / 0.75 points

The current price of XYZ stock is $51. Dividends are expected to grow at 7% indefinitely and the most recent dividend was $1. What is the
required rate of return on XYZ stock?

9.0%

9.1%

9.3%

10.6%
11.2%

Question 2 0.75 / 0.75 points

The stock valuation model that determines the current stock price as the next dividend divided by the (discount rate less the dividend growth
rate) is called the:

Zero growth model.

Dividend growth model.

Capital Asset Pricing Model.

Earnings capitalization model.
Perpetual growth model.

Question 3 0.75 / 0.75 points

A grant of authority by a shareholder allowing for another individual to vote his/her shares is a _____________.

Preferred stock.

Proxy.

Specialist.

Cumulative voting right.

Dual class stock.

Question 4 0 / 0.75 points

52 Weeks Yld Vol

Hi Lo Stock Sym Div % PE 100s Hi Lo Close Chg.
126.25 72.50 Big Hat BH 1.30 1.32 16 20925 98.38 97.88 98.13 -13

Assume that Big Hat paid a $1.12 annual dividend in the previous period. What is the dividend growth rate based on this quote?

1.16%

12.20%
14.15%

16.07%

16.29%

Question 5 0.75 / 0.75 points

Given constant earnings per share, an increase in dividends will generally:

Increase the dividend yield as well as the capital gains yield.

1/5
 Decrease the growth rate of the corporation and increase the current yield.

Increase the dividend yield and decrease the current yield.

Have no effect on either the capital gains yield or the total return.

Have no effect on either the total return or the current yield.

Question 6 0 / 0.75 points

You are considering a project with the following data:

Internal rate of return 8.7 percent

Profitability ratio .98
Net present value -$393
Payback period 2.44 years
Required return 9.65 percent

Which one of the following is correct given this information?

The discount rate used in computing the net present value must have been less than 8.7 %.
The discounted payback period will have to be less than 2.44 years.

The discount rate used to compute the profitability ratio was equal to the internal rate of return.

This project should be accepted based on the profitability ratio.

This project should be rejected based on the internal rate of return.

Question 7 0.75 / 0.75 points

The Blue Moon is considering a project which will produce sales of $120,000 a year for the next five years. The profit margin is estimated at
5.5 %. The project will cost $140,000 and will be depreciated straight-line to a book value of zero over the life of the project. The firm has a
required accounting return of 9.5 %. This project should be _____ because the AAR is _____ %.

Rejected; 4.71

Rejected; 8.57

Rejected; 9.43

Accepted; 9.67

Accepted; 9.43

Question 8 0.75 / 0.75 points

A project has an initial cost of $47,500 and produces cash inflows of $21,200, $24,800, and $21,500 over the next three years, respectively.
What is the discounted payback period if the required rate of return is 14 %?

2.07 years

2.13 years

2.46 years

2.68 years

2.74 years

Question 9 0.75 / 0.75 points

Which of the following is NOT correct?

NPV is one of the two or three most important concepts in finance.

NPV is always just the difference between the market value of an asset or project and its cost.

The financial manager acts in the shareholders' best interests by identifying and taking positive NPV projects.

NPV's can normally be directly observed in the market.

Investment criteria other than NPV provide additional information about whether or not a project truly has a positive NPV.

Question 10 0.75 / 0.75 points

What is the net present value of a project that has an initial cash outflow of $18,900 and the following cash inflows? The required return is
13.25 %.

2/5
 Year Cash Inflow
1 $3,600
2 $4,200
4 $12,500

($4,847.47)

($3,840.60)

($2,636.21)

$3,109.16

$4,052.53

Question 11 0.75 / 0.75 points

If a company making only cash sales is considering allowing customer credit, then __________.

Sales will likely decrease.

The change will result in a source of funds.

Receivables will likely increase.

Net working capital will decrease if funding needs are met with long-term liabilities.

Expenses will fall due to monthly billings and collection efforts.

Question 12 0.75 / 0.75 points

Judson Industries is considering a new project. The project will initially require $749,000 for new fixed assets, $238,000 for additional
inventory, and $25,000 for additional accounts receivable. Accounts payable is expected to increase by $70,000. The fixed assets will belong in
a 30% CCA class. At the end of the project, in four years' time, the fixed assets can be sold for 40% of their original cost. The net working
capital will return to its original level at the end of the project. The project is expected to generate annual sales of $944,000 with related cash
expenses of $620,000. The tax rate is 35% and the required rate of return is 14%.

What is the amount of the earnings before interest and taxes for the first year of this project?

-$425,000
-$276

$32,900

$113,400

$211,650

Question 13 0.75 / 0.75 points

The Best Company is reviewing two options for replacing a piece of machinery. The first machine costs $86,500 and has a four-year life. The
second machine costs $123,000 and has a six-year life. Neither machine will have a salvage value. The machines will be replaced at the end of
their life. What method should be used to determine which machine to purchase?

Net present value

Internal rate of return

Accounting rate of return

Total cash flows

Equivalent annual cost

Question 14 0.75 / 0.75 points

Adaptomatic Corp. has just issued their latest financial statements. The statement of financial position contains the following information.
Which one of the following statements is true?

Inventory required a use of cash during the period.

 Accounts receivable was a source of cash during the period.

Net working capital decreased by $200 during the period.

Net working capital increased by $200 during the period.

There was no change in net working capital.

Question 15 0.75 / 0.75 points

A project will increase sales by $140,000 and cash expenses by $95,001. The project will cost $100,000 and belong in a 30% CCA class. The
company has a marginal tax rate of 34%. What is the value of the depreciation tax shield in the second year?

$8,670

$17,000

$22,500

$25,000

$37,750

Question 16 0.75 / 0.75 points

What is the degree of operating leverage? Sales = 100,000 units; price = $50; variable cost = $30; fixed costs = $950,000; depreciation =
$250,000; tax rate = 34%.

1.06

1.22

1.37

1.63
2.22

Question 17 0.75 / 0.75 points

In previous chapters, we calculated NPV based on a project's forecast cash flows. When doing what-if analysis, this initial estimate is called the
______________.

Initial analysis.

First go-around.

Base case.
Initial projection.

Best case scenario.

Question 18 0.75 / 0.75 points

A farmer near Medicine Hat hires a grain harvesting crew from Saskatchewan to harvest his wheat at the end of each summer. Because the
crop yield varies from year to year, the crew charges the farmer according to the number of bushels actually harvested each year. For capital
budgeting purposes, the harvesting charges should be classified as

A fixed cost since they must be paid each year.

A fixed cost since the crew will be paid regardless of whether or not the crop is harvested.

A variable cost since, if the crop yield is zero bushels, the crew receives no payment.

A combination of fixed and variable cost, the variable portion of which is based on forecast bushels harvested.

A variable cost only if the crop yield is poor in a given year.

Question 19 0.75 / 0.75 points

Thomas Industrial Products is considering offering a special one-time deal to its best customers. The company expects this offering to increase
its total sales from 1,400 units to 1,550 units. The variable cost per unit is $134.31. The total fixed cost is $125,000. If the company is willing
to accept the lowest possible price without losing money, it should charge a price equal to:

$134.31 + ($125,000/1,550).

$134.31 + ($125,000/1,400).

$125,000/1,400.

$125,000/1,550.
 $134.31.

Question 20 0 / 0.75 points

When a fixed cost is replaced with a variable cost, the firm's ____________ effectively decreases.

Operating leverage.

Forecasting risk.
Projected cash flow.

Sensitivity contribution.

Total variable cost.

Attempt Score: 12.75 / 15 - A

Overall Grade (average of all attempts): 9.15 / 15 - C

Done