Question

In: Finance

1. Since the expected inflation rate is one factor that affects interest rates, a large increase...

1. Since the expected inflation rate is one factor that affects interest rates, a large increase in expected inflation would normally lead to lower interest rates.

A. True

B. False

2. Assume that you are a consultant to a company, and you have the following information: expected dividend at the end of the current year (D1) = $0.67; current stock price = $45.00; and constant annual growth rate = 8.00%. What is the estimated cost of equity based on the discounted cash flow (DCF) constant growth model?

A. 7.59%

B. 9.49%

C. 11.10%

D. 10.15%

E. 8.63%

3. Exchange rate risk is the risk that the cash flows from a foreign project, when converted to the parent company's currency, will be worth less than originally projected because of exchange rate changes.

A. True

B. False

4. A company expects sales to increase during the coming year, and it uses the additional funds needed (AFN) equation to forecast the additional capital that will be needed. Which of the following conditions would cause the AFN to increase (assume everything else remains unchanged)?

A. The company reduces the fixed assets needed for a given level of sales.

B. The company increases its dividend payout ratio.

C. The company pays employees monthly rather than weekly.

D. The company’s profit margin increases.

E. The company reduces its inventories through better management.

Expert Solution

Ques-1)

Ans- False. The rise in expected inflation rate will increase the interest rates rather the lowering them.

Ques-2)

Calculating the Cost of equity based on the discounted cash flow (DCF) constant growth model:-

Ke = 9.49%

Hence, option B

Ques-3)

Ans- True

Exchange risk is the risk that the value of the Investment transacted in foreign currency will be less than its Orginal Investment due to change in value of Foreign currency

Ques-4)

Ans- Option B. The company increases its dividend payout ratio

Increase in Payout Ratio will decrease the Retained earnings. If Retained earnings are reduced the firm has to finance the additional AFN from outside. Thus, it will increase the AFN.

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jeff jeffy answered 1 year ago

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