FIN 300 Exam 2 Practice Exam

A firm has a current EPS of $1.63 and a benchmark PE of 11.7. Earnings are expected to grow 2.6 percent annually. What is the target stock price in one year? a. $19.57 b. $22.89 c. $19.07 d. $20.14 e. $21.08

a. $19.57

Nazarian's has bonds on the market with 13 years to maturity, a YTM of 7.6 percent, and a current price of $901.98. The bonds make semiannual payments and have a face value of $1,000. What is the coupon rate? a. 6.40% b. 6.33% c. 6.60% d. 6.67% e. 6.50%

a. 6.40%

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? a. Default risk b. Taxability c. Liquidity d. Inflation e. Interest rate risk

a. Default risk

Bui Bakery has a required payback period of two years for all of its projects. Currently, the firm is analyzing two independent projects. Project X has an expected payback period of 1.4 years and a net present value of $6,100. Project Z has an expected payback period of 2.6 years with a net present value of $18,600. Which project(s) should be accepted based on the payback decision rule? a. Project X only b. Project Z only c. Both X and Z d. Neither X nor Z e. Either, but not both projects

a. Project X only

You purchased an investment that will pay you $8,000, in real dollars, per year for the next three years. Each payment will be received at the end of the period with the first payment occurring one year from today. The nominal discount rate is 8.46 percent and the inflation rate is 3.1 percent. What is the present value of these payments in real dollars? a. $20,720 b. $21,705 c. $20,447 d. $18,811 e. $18,529

b. $21,705

Your car dealer is willing to lease you a new car for $190 a month for 36 months. Payments are due on the first day of each month starting with the day you sign the lease contract. If your cost of money is 6.5 percent, what is the current value of the lease? a. $10,331.03 b. $6,232.80 c. $9,197.74 d. $7,203.14 e. $11,008.31

b. $6,232.80

Which one of the following applies to the dividend growth model? a. An individual stock has the same value to every investor. b. Even if the dividend amount and growth rate remain constant, the value of a stock can vary. c. Zero-growth stocks have no market value. d. Stocks that pay the same annual dividend will have equal market values. e. The dividend growth rate is inversely related to a stock's market price.

b. Even if the dividend amount and growth rate remain constant, the value of a stock can vary.

A $1,000 par value corporate bond that pays $45 annually in interest was issued last year. Which one of these would apply to this bond today if the current price of the bond is $989.42? a. The bond is currently selling at a premium. b. The current yield exceeds the coupon rate. c. The bond is selling at par value. d. The current yield exceeds the yield to maturity. e. The coupon rate has increased to 7 percent.

b. The current yield exceeds the coupon rate.

Dilan owns a bond that will pay him $45 each year in interest plus $1,000 as a principal payment at maturity. The $1,000 is referred to as the: a. coupon. b. face value. c. discount. d. yield. e. dirty price.

b. face value.

Darriji Systems has 10-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: a. at par. b. in registered form. c. in street form. d. as debentures. e. as callable bonds.

b. in registered form.

You borrowed $185,000 for 30 years to buy a house. The interest rate is 4.35 percent compounded monthly. If you pay all of your monthly payments as agreed, how much total interest will you pay on this mortgage? (Round the monthly payment to the nearest whole cent.) a. $150,408 b. $147,027 c. $146,542 d. $154,319 e. $141,406

c. $146,542

A credit card company quotes you an APR of 18.9 percent. What is the actual rate of interest you are paying if interest is computed monthly? a. 18.90% b. 19.21% c. 20.63% d. 19.57% e. 20.72%

c. 20.63%

You expect interest rates to decline in the near future even though the bond market is not indicating any sign of this change. Which one of the following bonds should you purchase now to maximize your gains if the rate decline does occur? a. Short-term; low coupon b. Short-term; high coupon c. Long-term; zero coupon d. Long-term; low coupon e. Long-term; high coupon

c. Long-term; zero coupon

Which one of the following statements related to the internal rate of return (IRR) is correct? a. The IRR yields the same accept and reject decisions as the net present value method given mutually exclusive projects. b. A project with an IRR equal to the required return would reduce the value of a firm if accepted. c. The IRR is equal to the required return when the net present value is equal to zero. d. Financing type projects should be accepted if the IRR exceeds the required return. e. The average accounting return is a better method of analysis than the IRR from a financial point of view.

c. 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? a. Payback considers the time value of money. b. All relevant cash flows are included in the payback analysis. c. The benefits of payback analysis usually outweigh the costs of the analysis. d. Payback is the most desirable of the various financial methods of analysis. e. Payback is focused on the long-term impact of a project.

c. The benefits of payback analysis usually outweigh the costs of the analysis.

Read Corporation currently pays an annual dividend of $1.46 per share and plans on increasing that amount by 2.75 percent annually. Cho, Incorporated, currently pays an annual dividend of $1.42 per share and plans on increasing its dividend by 3.1 percent annually. Given this information, you know for certain that the stock of Cho has a higher ________ than the stock of Read. a. market price b. dividend yield c. capital gains yield d. total return e. real return

c. capital gains yield

The actual interest rate on a loan that is compounded monthly but expressed as an annual rate is referred to as the _____ rate. a. stated b. discounted annual c. effective annual d. periodic monthly e. consolidated monthly

c. effective annual

If a firm accepts Project X it will not be feasible to also accept Project Z because both projects would require the simultaneous and exclusive use of the same piece of machinery. These projects are considered to be: a. independent. b. interdependent. c. mutually exclusive. d. economically scaled. e. operationally distinct.

c. mutually exclusive.

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 per share long into the future. Given this, one share of the firm's stock is: a. basically worthless as it offers no growth potential. b. equal in value to the present value of $1 paid one year from today. c. priced the same as a $1 perpetuity. d. valued at an assumed growth rate of 1 percent. e. worth $1 per share in the current market.

c. priced the same as a $1 perpetuity.

The Blue Marlin is owned by a group of five shareholders who all vote independently and who all want personal control over the firm. What is the minimum percentage of the outstanding shares one of these shareholders must own if he or she is to gain personal control over this firm given that the firm uses straight voting? a. 17 percent b. 20 percent plus one vote c. 25 percent plus one vote d. 50 percent plus one vote e. 51 percent

d. 50 percent plus one vote

Which one of the following rights is never directly granted to all shareholders of a publicly held corporation? a. Electing the board of directors b. Receiving a distribution of company profits c. Voting either for or against a proposed merger or acquisition d. Determining the amount of the dividend to be paid per share e. Having first chance to purchase any new equity shares that may be offered

d. Determining the amount of the dividend to be paid per share

The Fisher effect is defined as the relationship between which of the following variables? a. Default risk premium, inflation risk premium, and real rates b. Nominal rates, real rates, and interest rate risk premium c. Interest rate risk premium, real rates, and default risk premium d. Real rates, inflation rates, and nominal rates e. Real rates, interest rate risk premium, and nominal rates

d. Real rates, inflation rates, and nominal rates

The two-stage dividend growth model evaluates the current price of a stock based on the assumption a stock will: a. pay an increasing dividend for a period of time and then cease paying dividends altogether. b. increase the dividend amount every other year. c. pay a constant dividend for the first two quarters of each year and then increase the dividend the last two quarters of each year. d. grow at a fixed rate for a period of time after which it will grow at a different rate indefinitely. e. pay increasing dividends for a fixed period of time, cease paying dividends for a period of time, and then commence paying increasing dividends for an indefinite period of time.

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

The net present value of a project will increase if: a. the required rate of return increases. b. the initial capital requirement increases. c. some of the cash inflows are deferred until a later year. d. the after-tax salvage value of the fixed assets increases. e. the final cash inflow decreases.

d. the after-tax salvage value of the fixed assets increases.

The bond market requires a return of 6.2 percent on the 15-year bonds issued by Mingwei Manufacturing. The 6.2 percent is referred to as the: a. coupon rate. b. face rate. c. call rate. d. yield to maturity. e. current yield.

d. yield to maturity.

Schwartz Imports just paid an annual dividend of $2.69 per share and is expected to increase that amount by 5.2 percent per year. If you are planning to buy 1,000 shares of this stock next year, how much should you expect to pay per share if the market rate of return for this type of security is 12.6 percent at the time of your purchase? a. $38.24 b. $36.35 c. $40.93 d. $22.46 e. $40.23

e. $40.23

Which one of these statements related to preferred stock is correct? a. Preferred shareholders normally receive one vote per share of stock owned. b. Preferred shareholders determine the outcome of any election that involves a proxy fight. c. Preferred shareholders are considered to be the residual owners of a corporation. d. Preferred stock normally has a stated liquidating value of $1,000 per share. e. Cumulative preferred shares are more valuable than comparable noncumulative shares.

e. Cumulative preferred shares are more valuable than comparable noncumulative shares.

Which one of these statements related to discounted payback is correct? a. Payback is a better method of analysis than discounted payback. b. Discounted payback is used more frequently in business than payback. c. Discounted payback does not require a cutoff point. e. Discounted payback is biased towards short-term projects. e. The discounted payback period increases as the discount rate decreases.

e. Discounted payback is biased towards short-term projects.

Ernst & Frank stock is listed on Nasdaq. The firm is planning to issue some new equity shares for sale to the general public. This sale will definitely occur in which one of the following markets? a. Private b. Auction c. Tertiary d. Secondary e. Primary

e. Primary

Project X has cash flows of $8,500, $8,000, $7,500, and $7,000 for Years 1 to 4, respectively. Project Y has cash flows of $7,000, $7,500, $8,000, and $8,500 for Years 1 to 4, respectively. Which one of the following statements is true concerning these two projects given a positive discount rate? (No calculations needed.) a. Both projects have the same future value at the end of Year 4. b. Both projects have the same value at Time 0. c. Both projects are ordinary annuities. d. Project Y has a higher present value than Project X. e. Project X has both a higher present and a higher future value than Project Y.

e. Project X has both a higher present and a higher future value than Project Y.

Which one of these statements related to growing annuities and perpetuities is correct? a. You can compute the present value of a growing annuity but not a growing perpetuity. b. In computing the present value of a growing annuity, you discount the cash flows using the growth rate as the discount rate. c. The future value of an annuity will decrease if the growth rate is increased. d. An increase in the rate of growth will decrease the present value of an annuity. e. The present value of a growing perpetuity will decrease if the discount rate is increased.

e. The present value of a growing perpetuity will decrease if the discount rate is increased.

Which one of the following statements correctly defines a time value of money relationship? a. Time and future values are inversely related, all else held constant. b. Interest rates and time are positively related, all else held constant. c. An increase in a positive discount rate increases the present value. d. An increase in time increases the future value given a zero rate of interest. e. Time and present value are inversely related, all else held constant.

e. Time and present value are inversely related, all else held constant.

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? a. Alternative voting b. Cumulative voting c. Straight voting c. Indenture voting e. Voting by proxy

e. Voting by proxy

Protective covenants: a. apply to short-term debt issues but not to long-term debt issues. b. only apply to privately issued bonds. c. are a feature found only in government-issued bond indentures. d. only apply to bonds that have a deferred call provision. e. are primarily designed to protect bondholders.

e. are primarily designed to protect bondholders.

An agent who maintains an inventory from which he or she buys and sells securities is called a: a. broker. b. trader. c. capitalist. d. principal. e. dealer.

e. dealer.

A person on the floor of the NYSE who executes buy and sell orders on behalf of customers is called a: a. designated market maker. b. dealer. c. specialist. d. supplemental liquidity provider. e. floor broker.

e. floor broker.

Callable bonds generally: a. grant the bondholder the option to call the bond any time after the deferment period. b. are callable at par as soon as the call-protection period ends. c. are called when market interest rates increase. d. are called within the first three years after issuance. e. have a sinking fund provision.

e. have a sinking fund provision.

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: a. have two net present value profiles. b. have operational ambiguity. c. create a mutually exclusive investment decision. d. produce multiple economies of scale. e. have multiple rates of return.

e. have multiple rates of return.

A loan that calls for periodic interest payments and a lump sum principal payment is referred to as a(n) ____ loan. a. amortized b. modified c. balloon d. pure discount e. interest-only

e. interest-only

A project has a net present value of zero. Given this information: a. the project has a zero percent rate of return. b. the project requires no initial cash investment. c. the project has no cash flows. d. the summation of all of the project's cash flows is zero. e. the project's cash inflows equal its cash outflows in current dollar terms.

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