7-9 FIN

New Homes...

"E"

cash flows of -161,900,...

B; 10.41, reject

cash flows -152,000,...

B; 13.96 accept

assume investment has cash flows -39,700

B; 2764.89, accept

you are considering 2 independent projects

B; accept a, reject B

2 mutually exclusive projects $47500

B; proj A > npv

Project A required return 9.2%

B; reject a, accept B

15 yr, zero coupon bond

C

KNJ companies

C

galloway inc.

C

garden shoppe

C

investment offers

C

isaac...

C

jk industries zero coupon

C

k's fashion

C

real rate 3.45%

C

uptown tours

C

A bond that is payable to whomever has physical possession of the bond is said to be paid in:

bearer form

Mutually exclusive projects are best defined as competing projects that:

both require the total use of the same limited resource

An agent who arranges a transaction between a buyer and a seller of equity securities is called a:

broker

A decrease in which of the following will increase the current value of a stock according to the dividend growth model?

discount rate

The internal rate of return is defined as the:

discount rate which causes the net present value of a project to equal zero

What are the distributions of either cash or stock to shareholders by a corporation called?

dividends

A sinking fund is managed by a trustee for which one of the following purposes?

early bond redemption

A discount bond's coupon rate is equal to the annual interest divided by the:

face value

Bert owns a bond that will pay him $45 each year in interest plus $1,000 as a principal payment at maturity. What is the $1,000 called?

face value

Which one of the following represents the capital gains yield as used in the dividend growth model?

g

The two-stage dividend growth model evaluates the current price of a stock based on the assumption a stock will:

grow at a fixed rate for a period of time after which it will grow at a different rate indefinitely.

There are two distinct discount rates at which a particular project will have a zero net present value. In this situation, the project is said to:

have multiple rates of return

A premium bond that pays $60 in interest annually matures in seven years. The bond was originally issued three years ago at par. Which one of the following statements is accurate in respect to this bond today?

the yield to maturity is less than the coupon rate

A Treasury yield curve plots Treasury interest rates relative to:

time to maturity

A six-year, $1,000 face value bond issued by Taylor Tools pays interest semiannually on February 1 and August 1. Assume today is October 1. What will be the difference, if any, between this bond's clean and dirty prices today?

two months' interest

You cannot attend the shareholder's meeting for Alpha United so you authorize another shareholder to vote on your behalf. What is the granting of this authority called?

voting by proxy

The bond market requires a return of 9.8 percent on the 5-year bonds issued by JW Industries. The 9.8 percent is referred to as the:

yield to maturity

Which one of these equations applies to a bond that currently has a market price that exceeds par value?

yield to maturity < coupon rate

A project has a net present value of zero. Which one of the following best describes this project?

the project's cash inflows equal its cash outflows in current dollar terms

Which one of the following is the price at which a dealer will sell a bond?

asked price

A bond's principal is repaid on the ________ date.

maturity

Which one of the following transactions occurs in the primary market?

a purchase of newly issued stock from the issuer

Bonds issued by the U.S. government:

are considered to be free of default risk

The relevant discount rate is 14 percent for a project with cash flows of −$9,200, $4,600, $3,300, and $3,800 for Years 0 to 3, respectively. What is the profitability index?

.99

When the present value of the cash inflows exceeds the initial cost of a project, then the project should be:

accepted because the profitability index is greater than 1

A project has cash flows of -$108,000, $52,800, $53,200, and $83,100 for Years 0 to 3, respectively. The required payback period is two years. Based on the payback period of ________ years for this project, you should ________ the project.

2.02; reject

Which one of the following bonds is the least sensitive to interest rate risk?

3-year; 6 percent coupon

Hot Teas

A

Luxury Properties...

A

Tyler Rentals

A

Wheeler's

A

bond invoice price $1119

A

electric utilities

A

global logistics

A

shore hotels

A

sweatshirts ltd.

A

ytm 8.76%

A

A&B mutually exclusive

A; 0 percent

firm evaluates IRR

A; 18.42 accept

you are considering 2 mutually exclusive projects

A; accept A, reject B

Project A $47,800...

A; accept both

A note is generally defined as:

An unsecured bond with an initial maturity of 10 years or less.

10 year zero coupon bond

B

HG Enterprises

B

JL Co.

B

bare trees united

B

farm machinery

B

timber co.

B

world travel

B

western beef exporters

C; override accept decision

a proposed project

C; yes, irr > required return

10,000 Face value treasury bond

D

Dexter Mills

D

Yummy bakery

D

a treasury bond

D

farmco

D

grist mill

D

uptowner

D

Home services

E

sew 'n more

E

your local toy store

E

you are considering 2 mutually exclusive projects...

E; dont use irr, use diff method

net present value:

Is the best method of analyzing mutually exclusive projects.

Hardy Lumber has a capital structure that includes bonds, preferred stock, and common stock. Which one of the following rights is most apt to be granted to the preferred shareholders?

Right to share in company profits prior to other shareholders

U. S. Treasury bonds:

are quoted as a percentage of par

All else constant, a bond will sell at ________ when the coupon rate is ________ the yield to maturity.

a discount; less than

An example of a negative covenant that might be found in a bond indenture is a statement that the company:

cannot lease any major assets without bondholder approval

Which one of following is the rate at which a stock's price is expected to appreciate?

capital gains yield

Rossiter Restaurants is analyzing a project that requires $180,000 of fixed assets. When the project ends, those assets are expected to have an aftertax salvage value of $45,000. How is the $45,000 salvage value handled when computing the net present value of the project?

cash inflow in the final year of the project

A bond is quoted at a price of $1,011. This price is referred to as the:

clean price

Which one of the following best describes NASDAQ?

computer network of securities dealers

What is the model called that determines the market value of a stock based on its next annual dividend, the dividend growth rate, and the applicable discount rate?

constant-growth model

Allison just received the semiannual payment of $35 on a bond she owns. Which term refers to this payment?

coupon

Which one of the following applies to a premium bond?

coupon rate > current yield > yield to maturity

The price sensitivity of a bond increases in response to a change in the market rate of interest as the:

coupon rate decreases and the time to maturity increases

The IRR that causes the net present value of the differences between two project's cash flows to equal zero is called the:

crossover rate

An agent who maintains an inventory from which he or she buys and sells securities is called a:

dealer

Jason's Paints just issued 20-year, 7.25 percent, unsecured bonds at par. These bonds fit the definition of which one of the following terms?

debenture

Which one of the following premiums is compensation for the possibility that a bond issuer may not pay a bond's interest or principal payments as expected?

default risk

Today, June 15, you want to buy a bond with a quoted price of 98.64. The bond pays interest on January 1 and July 1. Which one of the following prices represents your total cost of purchasing this bond today?

dirty price

Road Hazards has 12-year bonds outstanding. The interest payments on these bonds are sent directly to each of the individual bondholders. These direct payments are a clear indication that the bonds can accurately be defined as being issued:

in registered form

As a bond's time to maturity increases, the bond's sensitivity to interest rate risk:

increases at a decreasing rate

Which one of the following will decrease the net present value of a project?

increasing the project's initial cost at time zero

Real rates are defined as nominal rates that have been adjusted for which of the following?

inflation

In actual practice, managers most frequently use which two types of investment criteria?

internal rate of return and net present value

Which one of the following risk premiums compensates for the inability to easily resell a bond prior to maturity?

liquidity

Which bond would you generally expect to have the highest yield?

long-term, taxable junk bond

The current yield is defined as the annual interest on a bond divided by the:

market price

DLQ Inc. bonds mature in 12 years and have a coupon rate of 6 percent. If the market rate of interest increases, then the:

market price of the bond will decrease

If a firm accepts Project A it will not be feasible to also accept Project B because both projects would require the simultaneous and exclusive use of the same piece of machinery. These projects are considered to be:

mutually exclusive

A project has an initial cost of $31,800 and a market value of $29,600. What is the difference between these two values called?

net present value

Southern Chicken is considering two projects. Project A consists of creating an outdoor eating area on the unused portion of the restaurant's property. Project B would use that outdoor space for creating a drive-thru service window. When trying to decide which project to accept, the firm should rely most heavily on which one of the following analytical methods?

net present value

The final decision on which one of two mutually exclusive projects to accept ultimately depends upon which one of the following?

net present value

The profitability index is most closely related to which one of the following?

net present value

The annual dividend yield is computed by dividing ________ annual dividend by the current stock price.

next year's

municipal bonds

pay interest that is federally tax-free

National Trucking has paid an annual dividend of $1 per share on its common stock for the past 15 years and is expected to continue paying a dollar a share long into the future. Given this, one share of the firm's stock is:

priced the same as a $1 perpetuity

Which one of the following methods of analysis provides the best information on the cost-benefit aspects of a project?

profitability index

The items included in an indenture that limit certain actions of the issuer in order to protect a bondholder's interests are referred to as the:

protective covenants

The Fisher effect is defined as the relationship between which of the following variables?

real rates, inflation rates, and nominal rates

The dividend growth model:

requires the growth rate to be less than the required return

The difference between the price that a dealer is willing to pay and the price at which he or she will sell is called the:

spread

Which one of the following statements is correct?

stocks can have negative growth rates

the internal rate of return is:

tedious to compute without the use of either a financial calculator or a computer

The pure time value of money is known as the:

term structure of interest rates

Which one of the following statements related to the internal rate of return (IRR) is correct?

the IRR is equal to the required return when the net present value is equal to zero

Why is payback often used as the sole method of analyzing a proposed small project?

the benefits of payback analysis usually outweigh the costs of the analysis

Round Dot Inns is preparing a bond offering with a coupon rate of 6 percent, paid semiannually, and a face value of $1,000. The bonds will mature in 10 years and will be sold at par. Given this, which one of the following statements is correct?

the bonds will sell at a premium if the market rate is 5.5%

A project has a required payback period of three years. Which one of the following statements is correct concerning the payback analysis of this project?

the cash flow in year 2 is valued just as highly as the cash flow in year 1

If a project has a net present value equal to zero, then:

the project earns a return exactly equal to the discount rate

Swenson's is considering two mutually exclusive projects, Projects A and B, and has determined that the crossover rate for these projects is 11.7 percent. Given this you know that:

the project that is acceptable at a discount rate of 11 percent should be rejected at a discount rate of 12 percent.