FE 323 Midterm Practice Questions This packet of practice questions contains a total of 18 multiple choice questions and 22 long answer questions You can get plenty of practice here Please note that there are additional multiple choice practice questions found on Connect A typical FE 323 Midterm Exam will contain 20 25 multiple choice questions and 8 10 long answer questions You will be given 1 hour and 45 minutes to complete the exam You will be provided an equation sheet during the exam the same sheet that is also included in this packet The answers to these practice questions will be posted on SMGtools This is great practice for the exam and we encourage you to try to complete these problems under exam conditions using only your HP10b II calculator and the equation sheet provided After reviewing the solutions if you have any questions please first review the SMGtools FE Midterm Exam forum to see if your question has already been answered If your question has not been asked please post it to the SMGtools FE Midterm Exam forum clearly titled Midterm Exam Practice Questions MC or LA Best of luck PART 1 Multiple Choice Practice Questions 1 Which of the following conditions is NOT consistent with the constant dividend growth model used in stock valuation there is no growth in dividends Dividend growth is negative The required rate of return r is grater than 20 D1 the next dividend is 15 greater than the dividend three years ago The long term growth rate is greater than the required rate of return 2 A premium bond will 3 Which of the following is the highest rate of interest Yield higher returns than a discount bond Always sell at a premium Have less risk than a discount bond Have a lower yield to maturity than it coupon rate None of the above a b c d e 8 effective annual rate 7 9 APR compounded quarterly 7 85 APR compounded weekly 7 8 APR compounded continuously All of the above are equivalent a b c d e 4 If a project is acceptable to management the following must be true The NPV is zero and the required return is greater than the IRR The NPV is positive and the required return is less than the IRR The NPV is positive and the required return is greater than the IRR The NPV is negative but the IRR is positive 5 A given rate is quoted at 12 APR but has an EAR of 12 55 What is the rate of compounding during the year Annual Semi annual Quarterly Monthly Continuously a b c d e a b c d a b c d e 2 6 As illustrated using the dividend growth model the total return on a share of common stock is comprised of a a b c d e capital gains yield and a dividend growth rate Dividend yield and the present dividend Capital gains growth rate and a dividend growth rate Dividend yield and a capital gains yield Dividend yield and a required rate of return 7 Which of the following CANNOT be calculated Future value of perpetuity Interest rate on a perpetuity given the present value and payment Present value of annuity due Future value of an annuity due Present value of a perpetuity 8 Which of the following statements regarding bond pricing is true The lower the discount rate the more valuable the coupon payments are today Bonds with higher coupon payments all else the same are more sensitive to changes in interest rates than bonds with lower coupon payments When market interest rates rise bond prices will also rise all else the same Bonds with short maturities are all else the same more sensitive to changes in interest rates than bonds with longer maturities 9 All else constant the net present value of a project increases when The discount rate increases The initial cost of a project increases Each cash inflow is delayed by one year The required rate of return decreases All cash inflows occur during the last year of a project s life instead of periodically throughout the life of the project a b c d e a b c d a b c d e 3 a b c d e a b c d f a b c d e 10 The most valuable investment given up if an alternative investment is chosen is a n Salvage value cost Opportunity cost Net working capital cost Sunk cost Fixed investment cost 11 Consider a project with an initial cost and positive future cash flows As the discount rate is increased IRR remains constant and NPV increases NPV remains constant and IRR decreases IRR remains constant and NPV decreases NPV and IRR remain constant No determination regarding the change in NPV or IRR can be made 12 The common stock of the Zalman Co pays a constant annual dividend Thus the market price of Zalman stock will Decrease over time Increase when the market rate of return increases Also remain constant Decrease when the market rate of return increases Increase over time 13 Your firm s CFO presents you with two capital budgeting analyses one for a new microcomputer for the Payroll department and one for a 3 ton metal stamping press for use on the plant floor This is an example of a decision involving a Mutually exclusive projects b Independent projects c Payback projects d Dependent projects e None of the above 14 If perpetuity payments are separated by a period of half a year the periodic interest rate needed to calculate the present value is a b c d e The EAR The EAR divided by 2 The APR semi annual compounding The APR semi annual compounding divided by 2 The APR semi annual compounding multiplied by 2 4 15 Shelly s Boutique is evaluating a project which will increase annual sales by 70 000 and annual costs by 40 000 The project will initially require 100 000 in fixed assets which will be depreciated straight line to a zero book value over the 5 year life of the project The applicable tax rate is 34 percent What is the operating cash flow for this project a 26 400 b 26 600 c 30 000 d 46 400 e 6 600 16 The common stock of Kangaroo Tours is selling for 24 a share and has a 12 percent rate of return One third of the return on this stock is derived from dividends and the other two thirds is derived from capital gains What is the amount of the next dividend a 0 78 b 0 72 c 0 96 d 0 84 e 0 67 17 Gerold s Travel Service just paid 1 79 to its shareholders as the annual dividend Simultaneously the company announced that future dividends will be increasing by 3 2 percent If you require a 10 5 percent rate of return how much would you willing to pay to purchase one share of this stock in 4 years 18 Wimbley Corporation has bonds on the market with 22 years to maturity a YTM …