Question

1: The discounted payback period will

A: always be longer than the payback period.

B: uses discounted cash flows

C: both "A" and "B" are correct

D: is the same as the payback period

2: The cost of capital is:

A: another term for the market risk premium.

B: another term for the risk-free rate of return. c

C: the return on the overall market.

D: the minimum required return on a new investment

3: A special dividend

A: is paid once each year.

B: is not paid with any frequency, and may never be repeated.

C: is another name for the regular dividend.

D: all of the above are correct.

4: A net present value of zero implies that an investment:

A: has no initial cost.

B: never pays back its initial cost.

C: is earning a return that exactly matches the requirement.

D: both "A" and "B" are correct.

5: A limitation of the payback as a tool of capital budgeting is

A: it does not take the time value of money into consideration.

B: it is always more than 3 years.

C: it has no limitations and is the best way to select an alternative.

D: all of the above are correct.

6: The dividend yield can be found by

A: dividing the price of a stock by its quarterly dividend.

B: dividing the past year's dividend by the current price of the stock.

C: adding the last four dividends that were paid.

D: both "A" and "B" are correct.

7: When a stock is $2.00, a reverse stock split of 1 for 10 will result in

A: owning i share for every 10 previously held for $20 per share

B: owning 10 shares for every one previously held for $.20 per share

C: more information is needed to answer this question.

D: both "A" and "B" are correct.

8: Large companies as compared to smaller growth firms

A: are less likely to pay a dividend.

B: are equally likely to pay a dividend.

C: are more likely to pay a dividend.

D: almost never pay a dividend.

9: A stock split

A: has no effect on stock price

B: lowers the price of the stock

C: increases the number of shares.

D: both "B" and "C" are correct

10:Which one of the following indicates a project has a rate of return that exceeds its required return (WACC)?

A: a payback period that exceeds the required period

B: a positive NPV

C: both "A" and "B" are correct

D: neither "A" or "B" is correct

Answer 1

1: Correct answer is C: both "A" and "B" are correct

The discounted payback period will -

• always be longer than the payback period.
• uses discounted cash flows.

Payback period is the time period required to cover the initial investment back. Discounted payback period takes in to account the time value of money of future cash inflows. Cash flows are discounted hence it will take more time to cover the initial cost. Hence it will always be longer than the payback period.

2:Correct answer is D: the minimum required return on a new investment

The cost of capital is the minimum required return on a new investment. It is the minimum expected return required by the shareholders on their investments.

3: Correct answer is B: is not paid with any frequency, and may never be repeated.

A special dividend is not paid with any frequency, and may never be repeated. It is extra dividend which is in non recurring nature. It is one time gift which is paid when company’s earnings booming.

4: Correct answer is C: is earning a return that exactly matches the requirement.

A net present value of zero implies that an investment is earning a return that exactly matches the requirement.

NPV = Present value of cash inflows - present value of cash outflows.

When it is 0 means that the Present value of cash inflows is equal to present value of cash outflows.

5: Correct answer is A: it does not take the time value of money into consideration.

A limitation of the payback as a tool of capital budgeting is that it does not take the time value of money into consideration.

Hope it helps !