1/ One can estimate the expected rate of return or the cost of equity capital as:

A. Dividend yield + expected rate of growth in dividends

B. Dividend yield - expected rate of growth in dividends
C. (Dividend yield) / (expected rate of growth in dividends)
D. (Dividend yield) x (expected rate of growth in dividends)
2/ World-Tour Co. has just now paid a dividend of $2.83 per share (Div0); its
dividends are expected to grow at a constant rate of 6 percent per year forever. If
the required rate of return on the stock is 16 percent, what is the current value of
the stock, after paying the dividend?
A. 30
B. 56
C. 70
D. 48

r
 e=
D1
P0
+g

2.83×(1+6 %)
 16 %= +6 %
P0
 P0=30

 D1=D0 ×(1+ g)
3/ Mr. Dell has $100 income this year and zero income next year. The expected
return from investing in the stock market is 10 percent a year. Mr. Dell also has an
investment opportunity – having the same risk as the market in which he can invest
$50 this year and receive $80 next year. Suppose Mr. Dell comsumes $50 this year
and invests in the project. What is the NPV of the investment opportunity?
A. $0
B. $5
C. $22.73
D. None of the options

80
 NPV = −50+
(1+10 %)1

4/ An initial investment of $400,000 is expected to produce an end-of-year cash flow

of $480,000. What is the NPV of the project at a discount rate of 20 percent?
 A. $64,000
B. $0 (zero)
C. $176,000
D. $80,000

480,000
 NPV = -400,000 + 1
(1+20 %)

5/ What is the net present value of the following cash flow sequence at a discount
rate of 11 percent? Year 0: -120,000, Year 1: 300,000, Year 2: -100,000
A. $231,432.51
B. $69,108.03
C. $80,000.00
D. $88,000.00

300,000 −120,000
 NPV = 120,000+ 1
+ 2
(1+11 %) (1+11%)

6/ Deluxe Company expects to pay a dividend of $2 per share at the end of year 1, $3
per share at the end of year 2, and then be sold for $32 per share at the end of year
2. If the required rate of return on the stock is 15 percent, what is the current value
of the stock?
A. $28.20
B. $32.17
C. $32.00
D. $29.18

2 (3+ 32)
 P 0= + =28.20
( 1+15 % ) (1+15 %)2

7/ Ms. Newcastle has $60,000 income this year and $40,000 next year. The market
interest rate is 10 percent per year. Suppose Ms. Newcastle wishes to consume
$62,000 next year. What will be her consumption this year?
A. $19,000
B. $40,000
C. $60,000
D. $70,000
 22,000
 Consumption this year = 60,000 - =40,000
(1+10 %)

8/ A firm’s total asset value belongs entirely to the shareholders.

A. True
B. False
9/ The In-Tech Co. just paid a dividend of $1 per share. Analysts expect its dividend
to grow at 25 percent per year for the next three years and then 5 percent per year
thereafter. If the required rate of return on the stock is 18 percent, what is the
current value of the stock?
A. $12.97
B. $11.93
C. $15.20
D. $15.78

1.25 1.5625 1.9531 2.0508

 (1+18 %) + 2
+ 3
+[ ÷(1+18 %)3 ]=12.97
(1+18 %) (1+18 % ) (18 %−5 % )

10/ The firm’s purchase of real assets is also referred to as the

A. Capital structure decision
B. CFO decision.
C. Financing decision.
D. Capital investment decision.
11/ The sale of financial assets by corporation is also referred to as the
A. Capital structure decision
B. CFO decision.
C. Financing decision.
D. investment decision.
12/ The ultimate financial goal of a corporation is to
A. Minimize stockholder risk.
B. Maximize profit
C. Maximize the value of the corporation to the stockholders.
D. Increase the size of the firm
13/ After retirement, you expect to live for 25 years. You would like to have $75,000
income each year. How much should you have saved in your retirement account to
receive this income, if the annual interest rate is 9 percent per year? (Assume that
the payments start on the day of your retirement.)
A. $2,043,750.21
B. $802,995.88
C. $1,427,831.93
D. $736,693.47

75,000 1
 [ 9 % ×(1− 25
) ¿ x (1+9%) = 802,995.88
(1+9 % )

13*/ After retirement, you expect to live for 25 years. You would like to have
$75,000 income each year. How much should you have saved in your retirement
account to receive this income, if the annual interest rate is 9 percent per year?
(Assume that the payments start one year after your retirement.)
E. $2,043,750.21
F. $802,995.88
G. $1,427,831.93
H. $736,693.47

1 1
 (9%− 25
¿ x 75,000 = 736,693.47
9 % ×(1+ 9 %)

14/ As CFO of your corporation, you would prefer (all these equal) to see the price
of your corporation’s bonds
A. Decrease, indicating that bond investors view your firm as less risky.
B. Increase, indicating that bond investors view your firm as less risky.
15/ Shareholders of corporation may be, among others
A. Individuals
B. Individuals and pension funds
C. Pension funds
D. Individuals, pension funds, and insurance companies
16/ The choice of the proper mixture of debt and equity, used to finance a
corporation, is also referred to as the
A. Capital budgeting decision
B. Capital structure decision
C. Investment decision.
D. Liquidity decision.
17/ Present value is defined as
A. Inverse of future cash flows
B. Future cash flows discounted to the present by an appropriate discount rate.
C. Present cash flows compounded into the future
D. Future cash flow multiplied by the factor (1+r)^t
18/ The present value of $100,000 expected at the end of one year, at a discount rate
of 25 percents per year, is
A. $125,000
B. $80,000
C. $100,000
D. $75,000

100,000
 NPV = 1 = 80,000
(1+25 %)

19/ A three-year bond has an 8 percent coupon rate and a $1,000 face value. If the
yield to maturity on the bond is 10 percent, calculate the price of the bond assuming
that the bond makes semiannual coupon payments.
A. $857.96
B. $949.24
C. 1,057.54
D. $1,000.00

1
1−
 40 x (1+5 %)6 1 = 949.24
+1000 × 6
5% ( 1+5 % )

20/ A four-year bond has an 8 percent coupon rate and a $1,000 face value. If the
current price of the bond is $878.31, calculate the yield to maturity of the bond
(assuming annual interest payments).
A. 8%
 B. 12 %
C. 10%
D. 6%

1
1−
 878.31= 80 × (1+rd )4 1
+1,000 × 4
rd (1+rd)

 Rd = 12%
21/ According to the net present value rule, an investment in a project should be
made if the
A. Net present value is negative
B. Net present value is positive
C. Net present value is greater than the cost of investment
D. Net present value is greater than the present value of cash flows.
22/ What is the present value of $10,000 per year in perpetuity at an annual interest
rate of 10 percent? Assume the perpetuity starts in one year.
A. $10,000
B. $100,000
C. $200,000
D. $1,000

CF 10,000
 PV perpetuity= = = 100,000
r 10 %

23/ A five-year treasury bond with a coupon rate of 8 percent has a face value of
$1,000. What is the semiannual interest payment?
A. $80
B. $40
C. $100
D. $50

 (8% x 1000)/2