WorksheetsCorporate Finance Review
Total questions: 15
Worksheet time: 8mins
Assume a firm accepts a positive net present value project. An analyst would be most justified in concluding that:
the project will pay back within the required payback period.
the present value of the expected cash flows is equal to the project’s cost.
that all the projected cash flows will occur as expected.
the stockholders’ value in the firm is expected to increase.
Assume a firm is more concerned about quickly recovering its initial investment than it is about the amount of value created. Accordingly, the firm is most likely to employ the ________ method of capital project analysis.
internal rate of return
net present value
payback
profitability index
The ________ measures the interrelationship between two securities.
covariance
standard deviation
alpha coefficient
variance
When computing the expected return on a portfolio of stocks, the portfolio weights are based on the:
number of shares owned in each stock.
price per share of each stock.
market value of the total shares held in each stock.
original amount invested in each stock.
The beta of a security is calculated by dividing the
covariance of the security return with the market return by the variance of the market.
correlation of the security return with the market return by the variance of the market.
variance of the market by the covariance of the security return with the market return.
covariance of the security return with the market return by the correlation of the security and market returns.
The primary purpose of portfolio diversification is to:
increase returns and risks.
eliminate all risks.
eliminate asset-specific risk
eliminate systematic risk.
The market risk premium is computed by:
adding the risk-free rate of return to the inflation rate.
adding the risk-free rate of return to the market rate of return.
subtracting the risk-free rate of return from the inflation rate.
subtracting the risk-free rate of return from the market rate of return.
When computing WACC, an analyst should use.
pretax cost of debt because most corporations pay taxes at the same tax rate.
pretax cost of debt because it is the actual rate the firm is paying its bondholders.
current yield because it is based on the current market price of debt.
aftertax cost of debt because interest is partially, if not fully, tax deductible.
What is the cost of equity for a firm that has a beta of 1.22 if the risk-free rate of return is 1.4 percent and the expected market return is 6.6 percent?
6.6%
7.74%
8.27%
7.60%
Companies will generally have a ____ beta if their:
low; stock price is relatively low.
high; sales are highly dependent on the market cycle.
high; sales are growing at a steady rate of increase.
high; sales are high compared to other firms in their industry.
If two firms are equivalent in all other respects, an analyst should expect the beta of the levered firm’s common stock to be _____ the beta of the unlevered firm’s the common stock.
roughly equivalent to
significantly less than
slightly less than
greater than
A firm can repurchase its shares in all the following ways except through:
a tender offer.
a reverse stock split.
open market purchases.
a Dutch auction.
A ____ will increase the number of shares outstanding without affecting the book value of any of the owners’ equity account values.
special dividend
stock split
share repurchase
liquidating dividend
Ignoring taxes and all else held constant, on the ________, the market value of a stock should decrease by the amount of the dividend.
dividend declaration date
ex-dividend date
date of record
date of payment
Assume you purchased 200 shares of Capricorn stock on March 15th. On March 20th, you purchased another 100 shares and then on March 22nd you purchased your final 200. The company declared a dividend of $1.10 per share on March 5th to holders of record on Friday, March 23rd. The dividend is payable on March 31st. How much dividend income will you receive on March 31st?
$0
$220
$330
$440
