PART A – multiple choice questions

Number 1 to 10 down the margin of youranswer book and write the letter that corresponds to the answer youhave selected for each multiple choice question.

A 1,

Earnings per share is equal to:(1.5 marks)

a

EPS= Net Income / Number of Shares

  1. Net income divided by the total number of shares outstanding

  2. Net income divided by the par value of the common stock

  3. Gross income multiplied by the par value of the common stock

  4. Net income divided by total shareholder’s equity

A2,

Which of the following investment has thehighest net present value (NPV), give the interest rate is 5.5%? (1.5 marks)

b$925.81 formula used PV = FV * 1/(1+r%)n

  1. One that pays $250 at the end of each of the next four years =$924.48

  2. One that pays $500 at the end of next year, and $500 in four year’s time =$925.81

  3. One that pays $250 at the end of next year, and $750 in four year’s time= $888.71

  4. One that pays $200 at the end of next year, $200 at the end of the second year, and $300 at the end of the third and fourth years.= $914.59

A3,

c

A bank offers a loan which requires you topay 6% interest compounded monthly. Which of the following is closedto the ERA charged by the bank? (1.5 marks)

c

PV * (1+r%)n

  1. 5.84%

  2. 6%

  3. 6.17%

  4. 6.91%

A4,

The problem of multiple IRRSs can occurwhen:(1.5marks)

d

  1. There is only one sign change in the cash flows

  2. The first cash flow is always positive

  3. The cash flows decline over the life of the project

  4. There is more than one sign change in the cash flows

A5,

Creg purchased stock in Cocktatoo limitedat a price of $89 per share a year ago. The company was acquired byWombat investment limited at a price of $10 per share. What is Creg’sreturn on his investment? (1.5 marks)

a

  1. -88.76%

  2. 11.23%

  3. -79.6%

  4. 88.76%

A6

The Bell Co. is a new firm in rapidlygrowing industry. The firm is planning on increasing its annualdividend by 20% a year from the next four years and then decreasingthe growth rate to 5% per year. The company just paid its annualdividend in the amount of $1.00 per share. What is the current valueof one share if the required rate of return is 9.25%? (1.5 marks)

b

Re=D1/P0 + g

  1. $35.63

  2. $33.19

  3. $41.05

  4. $43.19

A 7

The Extreme ReachesCorp. last paid a $1.50 per share annual dividend. The company isplanning on paying $3.00, $5.00, $7.50, and $10.00 a share over thenext four years, respectively. After that the dividend will be aconstant $2.50 per share per year. What is the market price of thisstock if the market rate of return is 15%?&nbsp(1.5 marks)&nbsp

c

Re=D1/P0 + g

  1. $17.04

  2. $22.39

  3. $26.57

  4. $29.08

&nbsp

&nbspA8

NU YU announced todaythat it will begin paying annual dividends. The first dividend willbe paid next year in the amount of $.25 a share. The followingdividends will be $.40, $.60, and $.75 a share annually for thefollowing three years, respectively. After that, dividends areprojected to increase by 3.5% per year. How much are you willing topay to buy one share of this stock if your desired rate of return is12%?&nbsp (1.5 marks)

a

Re=D1/P0 + g

  1. $1.45

  2. $5.80

  3. $7.25

  4. $9.06

&nbsp

&nbsp

A 9

Consider a bond whichpays 8% semiannually and has 8 years to maturity. The market requiresan interest rate of 10% on bonds of this risk. What is this bond`sprice?&nbsp (1.5 marks)

C

PV = FV * 1/(1+r%)n

= $1,000/(1.04)16= $87.20

  1. $530.58 993 1158

  2. $891.62

  3. $893.88

  4. $3126.17

A10

The value of a 25year zero-coupon bond when the market required rate of return is 10%(semi-annual) is .&nbsp (1.5marks)&nbspa

PV = FV * 1/(1+r%)n

= $1,000/(1.05)50= $87.20

  1. $87.20

  2. $92.30

  3. $95.26

  4. None of these