Multiple Choice Answers

Judy’s Boutique just paid an annual dividend of $1.65 on its common stock. The firm increases its dividend by 2.5 percent annually. What is the rate of return on this stock if the current stock price is $38.20 a share?
6.93 percent
7.37 percent
7.54 percent
8.19 percent

Winter Wear, Inc. has 6 percent bonds outstanding that mature in 13 years. The bonds pay interest semiannually and have a face value of $1,000. Currently, the bonds are selling for $993 each. What is the firm’s pre-tax cost of debt?
5.97 percent
6.08 percent
6.14 percent
6.31 percent
8.33 percent
The 7.5 percent preferred stock of Home Town Brews is selling for $43 a share. What is the firm’s cost of preferred stock if the tax rate is 34 percent and the par value per share is $100?
14.47 percent
15.92 percent
16.17 percent
16.52 percent
17.44 percent

If inflation is expected to steadily decrease in the future, the term structure of interest rates will most likely be:
upward-sloping.
flat.
humped.
downward-sloping.
double-humped.

Which one of the following indicates that a project is expected to create value for its owners?
Profitability index less than 1.0
Payback period greater than the requirement
Positive net present value
Positive average accounting rate of return
Internal rate of return that is less than the requirement

A bond has a $1,000 face value, a market price of $1,036, and pays interest payments of $70 every year. What is the coupon rate?
6.76 percent
7.00 percent
7.12 percent
13.51 percent
14.00 percent

The Pancake House pays a constant annual dividend of $1.25 per share. How much are you willing to pay for one share if you require a 15 percent rate of return?
$7.86
$8.33
$10.87
$11.04
$11.38

Healthy Foods just paid its annual dividend of $1.45 a share. The firm recently announced that all future dividends will be increased by 2.8 percent annually. What is one share of this stock worth to you if you require a 14 percent rate of return?
$12.56
$12.95
$13.31
$13.68
$14.07

Blackwell Ink is losing significant market share and thus its managers have decided to decrease the firm’s annual dividend. The last annual dividend was $0.90 a share but all future dividends will be decreased by 5 percent annually. What is a share of this stock worth today at a required return of 15 percent?
$4.07
$4.28
$4.49
$4.72

A corporate bond pays 8.5 percent interest. You are in the 15 percent tax bracket. What is your after-tax yield on this bond?
1.28 percent
2.23 percent
7.23 percent
8.35 percent
9.78 percent
The 7 percent annual coupon bonds of TPO, Inc. are selling for $1,021. The bonds have a face value of $1,000 and mature in 6.5 years. What is the yield to maturity?
6.42 percent
6.59 percent
6.63 percent
6.68 percent
6.70 percent

Which one of the following activities is a source of cash?
Decreasing long-term debt
Increasing inventory
Repurchasing shares of stock
Increasing fixed assets
Decreasing accounts receivable

Which one of the following is a use of cash?
Issuing new shares of stock
Increasing accounts payable
Decreasing inventory
Decreasing fixed assts
Increasing accounts receivable

The weighted average cost of capital is defined as the weighted average of a firm’s:
return on its investments.
cost of equity and its aftertax cost of debt.
pretax cost of debt and equity securities.
bond coupon rates.
dividend and capital gains yields.

All else constant, an increase in a firm’s cost of debt will:
A. result in an increase in the firm’s cost of capital..
B. lower the firm’s weighted cost of capital.
C. lower the firm’s external cost of new equity.
D. increase the firm’s capital structure weight of debt.
E. increase the firm’s capital structure weight of debt.