Problem 1. Although quick and easy to apply, the payback method is deficient in that it
a. disregards the time value of money
b. is based on arithmetic rather than algebra
c. disregards cash flows after the payback period
d. a and c
Problem 2. The cost of particular capital components may be __________ the returns paid to investors in the underlying securities.
a. greater than
b. less than
c. equal to
d. all of the above
Problem 3. Projects with IRRs above the Marginal Cost of Captial,
a. should be accepted
b. should be rejected
c. have returns greater than the cost of financing
d. Both a & c
Problem 4. Preferred stock is paying an annual dividend of $9.50 and is currently trading at $79.16. Assume floatation costs of 12%. What is the cost of preferred stock?
a. 8.33%
b. 9.47%
c. 10.56%
d. 12.00%
e. 13.64%
Problem 5. Williamson Manufacturing paid a $2 dividend last year and expects dividends to grow at a constant rate of 7%. The firm's stock is selling at $45 per share and flotation costs on a new issue would be 15%. Calculate Williamson's cost of new equity.
a. 10.2%
b. 11.8%
c. 12.6%
d. 13.6%
Problem 6. Over the last four decades, commerce has become increasingly international. The changes have occurred through:
a. simply doing more business with other countries in terms of both imports and exports.
b. an expansion of direct investments in facilities and equipment in other countries
c. other governments actively promoting US products
d. a and b
Problem 7. An American dollar deposit in a London bank is a:
a. Europound deposit
b. Eurodollar deposit
c. US funds deposit
d. Liquid Assets deposit
Problem 8. Most Eurobonds are denominated in:
a. American dollars.
b. British pounds.
c. European euros.
d. Swiss francs.
Problem 9. A recent direct quote for the British pound was $1.5547. The pound's indirect quote is:
a. £1.5547
b. $0.6432
c. £1.1979
d. £0.6432
Problem 10. If recent direct quotes in U.S. dollars are $1.65 for the British pound and $.50 for the Australian dollar, the exchange rate between British pounds and Australian dollars (pounds/Australian dollars) is:
a. 3.30 Australian dollars to the British pound
b. 3.30 British pounds to the Australian dollar
c. .3030 Australian dollars to the British pound
d. .3030 British pounds to the Australian dollar