FIN 300 exam 2
Matthews Company has two classes of common stock, and each share represents the same proportion of ownership in the company. Class A has 2 votes for each share. Class B has one vote per share. Which class is more valuable?
class A
The interest rate risk premium is the: (ch 7)
compensation investors demand for accepting interest rate risk
Which one of the following best describes NASDAQ? (ch 8)
computer network of securities dealers
the ____ can be interpreted as the capital gains yield
constant growth rate
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
Someone who maintains an inventory of stocks and buys and sells those stocks is known as 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
If the liquidity of a bond increases then the bond's yield will
decrease
A decrease in which of the following will increase the current value of a stock according to the dividend growth model? (ch 8)
discount rate
R
discount rate
NPV ____ cash flows properly
discounts
D1
dividend in 1 year
common stock
equity without priority for dividends or in bankruptcy
The price of a share of common stock is equal to the present value of all ______ future dividends.
expected
a PE ratio that is based on estimated future earnings is known as a ______ PE ratio
forward
An asset's value is determined by the present value of its ___ cash flows.
future
Which one of the following represents the capital gains yield as used in the dividend growth model? (ch 8)
g
one requirement of the dividend growth model is:
g<R
the value of a firm is the function of its ____ rate and its _____ rate
growth; discount
a bond with a BBB rating has a _____ than a bond with an A rating
higher risk of default
a ______ project does not rely on the acceptance or rejection of another project
independent
Real rates are defined as nominal rates that have been adjusted for which of the following? (ch 7)
inflation
the present value of all cash flows (after the initial investment) is divided by the ______ to calculate the profitability index
initial investment
real rates
interest rates or rates of return that have been adjusted for inflation
nominal rates
interest rates or rates of return that have not been adjusted for inflation
the most important alternative to NPV is the ____ method
internal rate of return
stock price reporting has increasingly moved from traditional print media to the ___ in recent years
internet
IRR continues to be very popular in practice, partly because:
it gives a rate of return rather than a dollar value
which of the following is true about a multi-year typical bonds coupon?
it is a fixed annuity payment
what is the nominal rate of return on an investment?
it is the rate that has not been adjusted for inflation
Which of the following are advantages of the payback method of project analysis?
liquidity bias, ease of use
a zero-coupon bond is a bond that
makes no interest payments
Most voting in large corporations is done by proxy because:
most small shareholders do not attend the annual meeting
By ignoring time value, the payback period rule may accept projects with a ______ NPV
negative
When cash flows are conventional, NPV is ___ if the discount rate is above the IRR
negative
preferred stock
stock with dividend priority over common stock, normally with a fixed dividend rate, sometimes without voting rights
in case of default:
subordinated debt holders must give preference to other specified creditors
the payback period rule ______ a project if it has a payback period that is less than or equal to a particular cutoff date
suggests accepting
the point at which the NPV profile crosses the vertical axis is the:
sum of the cash flows of the project
the 2 most important stock markets in the US are the New York stock exchange and
the NASDAQ
coupon rate
the annual coupon divided by the face value of a bond
which as a higher value, the bid price quote or the asked price quote
the asked price quote is higher
which of the following entities declares a dividend?
the board of directors
assume you own a bond that was issued by a blue-chip company. if the market rate of interest rises, what will happen to the value of your bond?
the bond value will fall
the amount by which the call price exceeds the par value of the bond is called:
the call premium
what is the difference between a bonds "clean price" and its "dirty price"?
the clean price excludes interest accrued since the last coupon payment, while the dirty price includes accused interest
interest rate risk premium
the compensation investors demand for bearing interest rate risk
the dividend yield is determined by dividing the expected dividend (d1) by:
the current price (p0)
Net Present Value (NPV)
the difference between an investment's market value and its cost
bid-ask spread
the difference between the bid price and the asked price
Internal Rate of Return (IRR)
the discount rate that makes the NPV of an investment zero
wen the stock being valued does not currently pay dividends,
the dividend growth model can still be used based on the future dividends
capital gains yield
the dividend growth rate, or the rate at which the value of an investment grows
order flow
the flow of customer orders to buy and sell securities
the fisher effect decomposes the nominal rate into:
the inflation rate and the real rate
Discounted Payback Period
the length of time required for an investment's discounted cash flows to equal its initial cost
primary market
the market in which new securities are originally sold to investors
secondary market
the market in which previously issued securities are traded among investors
If you own corporate bonds, you will be concerned about interest rate risk as it affects ___.
the market price of the bonds
liquidity premium
the portion of a nominal interest rate or bond yield that represents compensation for lack of liquidity
default risk premium
the portion of a nominal interest rate or bond yield that represents compensation for the possibility of default
taxability premium
the portion of a nominal interest rate or bond yield that represents compensation for unfavorable tax status
inflation premium
the portion of a nominal interest rate that represents compensation for expected future inflation
bid
the price a dealer is willing to pay for a security
asked prices
the price a dealer is willing to take for a security
clean price
the price of a bond net of accrued interest; this is the price that is typically quoted
A project has a net present value of zero. Which one of the following best describes this project?
the projects cash inflows equal its cash outflows in current dollar terms
yield to maturity (YTM)
the rate required in the market on a bond
term structure of interest rates
the relationship between nominal interest rates on default-free, pure discount securities and time to maturity; that is, the pure time value of money
fisher effect
the relationship between nominal returns, real returns, and inflation
maturity
the specified date on which the principal amount of the bond is paid
A Treasury yield curve plots Treasury interest rates relative to:
time to maturity
A proposed project has an initial cost of $38,000 and cash inflows of $12,300, $24,200, and $16,100 for Years 1 through 3, respectively. The required rate of return is 16.8 percent. Based on IRR, should this project be accepted? Why or why not? (ch 9b)
yes; the IRR exceed the required return
Which one of these equations applies to a bond that currently has a market price that exceeds par value?
yield to maturity < coupon rate
what is the value of a stock if next years dividends is $6, the discount rate is 22 percent and the constant rate of growth is 3 percent?
$75 -> 6/(0.11-0.03)
which of these correctly specifies the relationship between the nominal rate and the real rate?
(1+R)=(1+r)x(1+h)
if you are in the 15 percent federal tax bracket, what will be your aftertax yield on a US treasury bond that is currently priced at par value and yielding 5 percent?
4.25%
Say you own an asset that had a total return last year of 11.5 percent. If the inflation rate last year was 6.5 percent, what was your real return?
4.70%
New Homes has a bond issue with a coupon rate of 5.5 percent that matures in 8.5 years. The bonds have a par value of $1,000 and a market price of $1,022. Interest is paid semiannually. What is the yield to maturity? (ch 7)
5.18 percent
The 7 percent bonds issued by Modern Kitchens pay interest semiannually, mature in eight years, and have a $1,000 face value. Currently, the bonds sell for $987. What is the yield to maturity?
7.22 percent
A project has cash flows of -$148,400, $42,500, $87,300, and $43,200 for Years 0 to 3, respectively. The required rate of return is 11 percent. Based on the internal rate of return of _____ percent for this project, you should _____ the project. (ch 9b)
8.03; reject
What is the IRR for a project with an initial investment of $250 and subsequent cash inflows of $100 per year for 3 years?
9.70%
A note is generally defined as: (ch 7)
An unsecured bond with an initial maturity of 10 years or less.
structured note
Based on financial securities, commodities, or currencies
supplemental liquidity providers (SLPs)
Investment firms that are active participants in stocks assigned to them. Their job is to make a one-sided market (i.e., offering to either buy or sell). They trade purely for their own accounts.
designated market makers (DMMs)
NYSE members who act as dealers in particular stocks. Formerly known as "specialists"
floor brokers
NYSE members who execute customer buy and sell orders
Is a company required to pay preferred dividends?
No; the company may defer dividends on preferred stock; however they can not pay dividends to common shareholders until preferred dividends are paid.
Which one of the following indicates an accept decision for an independent project with conventional cash flows?
PI greater than 1.0
what is the total return for a stock that currently sells for $100, pays a dividend in one year of $2, and has a constant growth rate of 8 percent?
R= $2/$100+0.08 =10%
what does a bonds rating reflect?
The ability of the firm to repay its debt and interest on time
Profitability Index (PI)
The present value of an investment's future cash flows divided by its initial cost. Also called the benefit-cost ratio.
dirty price
The price of a bond including accrued interest, also known as the full or invoice price. This is the price the buyer actually pays.
face value
The principal amount of a bond that is repaid at the end of the term. Also called par value.
what is a premium bond?
a bond tat sells for more than face value
zero coupon bonds
a bond that makes no coupon payments and is thus initially priced at a deep discount
current yield
a bond's annual coupon divided by its price
a bonds YTM will exceed its current yield when the bond is selling at :
a discount
All else constant, a bond will sell at _____ when the coupon rate is _____ the yield to maturity.
a discount; less than
proxy
a grant of authority by a shareholder allowing another individual to vote his or her shares
net present value profile
a graphical representation of the relationship between an investment's NPVs and various discount rates
dividend growth model
a model that determines the current price of a stock as its dividend next period divided by the discount rate less the dividend growth rate
protective covenant
a part of the indenture limiting certain actions that might be taken during the term of the loan, usually to protect the lender's interest
treasury yield curve
a plot of the yields on treasury notes and bonds relative to maturity
straight voting
a procedure in which a shareholder may cast all votes for each member of the board of directors
cumulative voting
a procedure in which a shareholder may cast all votes for one member of the board of directors
mutually exclusive investment decisions
a situation in which taking one investment prevents the taking of another
Dividend Yield
a stock's expected cash dividend divided by its current price
According to the average accounting return rule, a project is acceptable if its average accounting return exceeds:
a target average accounting return
the PI rule for an independent project is to ______ the project if the PI is greater than 1
accept
You are considering two mutually exclusive projects. Project A has cash flows of −$72,000, $21,400, $22,900, and $56,300 for Years 0 to 3, respectively. Project B has cash flows of −$81,000, $20,100, $22,200, and $74,800 for Years 0 to 3, respectively. Both projects have a required 2.5-year payback period. Should you accept or reject these projects based on payback analysis? (ch 9a)
accept project a and reject project b
payback period tells the time it takes to break even in an _____ sense. discounted payback period tells the time it takes to break even in an ______ or financial sense
accounting; economic
NYSE designated market makers:
act as dealers
Broker
an agent who arranges security transactions among investors
dealer
an agent who buys and sells securities from inventory
call provision
an agreement giving the corporation the option to repurchase a bond at a specified price prior to maturity
Average Accounting Return (AAR)
an investment's average net income divided by its average book value
debenture
an unsecured debt, usually with a maturity of 10 years or more
note
an unsecured debt, usually with a maturity under 10 years
An agent who arranges a transaction between a buyer and a seller of equity securities is called a
broker
convertible bonds
can be exchanged for shares of stock
te goal of many successful organizations is a(n) _____ rate of growth in dividends
steady
You purchase a bond with an invoice price of $1,119. The bond has a coupon rate of 6.25 percent, a face value of $1,000, and there are four months to the next semiannual coupon date. What is the clean price of this bond?
$1,108.58
Wesimann Co. issued 14-year bonds a year ago at a coupon rate of 8.6 percent. The bonds make semiannual payments and have a par value of $1,000. If the YTM on these bonds is 6.9 percent, what is the current bond price? (ch 7)
$1,144.38
Scott Corporation does not pay dividends. The PE ratio for its industry is 13.3, and Scott's EPS were $1.47. At what price should Scott's stock trade?
$19.55
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? (ch 8)
$19.57
Your local toy store just announced its annual dividend will be $4 dividend next year, $3 the following year, and then a final liquidating dividend of $46 a share in Year 3. At a discount rate of 18 percent, what should one share sell for today? (ch 8)
$33.54
suppose Depp corporation issues $1000 par value zero coupon with ten years to maturity and a YTM of 5%. what is the imputed interest in the third year of the bond? For calculation, assue semiannual period
$34.10
if you invest in a $1,000 corporate bond that has a 9 percent coupon and makes semi-annual payments, you can expect to receive
$45 every 6 months
A Treasury bond is quoted at a price of 101.4621. What is the market price of this bond if the face value is $5,000?
$5,073.11
what is the NPV of a project wit an initial investment of $95, a cas flow in one year of $107, and a discount rate of 6 percent?
$5.94
a bond pays annual interest payment of $50, has a par value of $1,000, and a market price of $1,200. ow is the coupon rate computed?
$50/$1,000
A project will produce cash inflows of $5,400 a year for 3 years with a final cash inflow of $2,400 in Year 4. The project's initial cost is $13,400. What is the net present value if the required rate of return is 14.2 percent? (ch 9a)
$505.92
Lohn Corporation is expected to pay the following dividends over the next four years: $13, $9, $6, and $2.75. Afterward, the company pledges to maintain a constant 5 percent growth rate in dividends forever. If the required return on the stock is 10.75 percent, what is the current share price? (ch 8)
$58.70
dusty corporation as an issue of preferred stock that pays a dividend of 7% of its state value, which is $100. which of the following would be a commonly used name for that preferred stock?
$7 preferred
A project has cash flows of −$152,000, $60,800, $62,300 and $75,000 for Years 0 to 3, respectively. The required rate of return is 13 percent. What is the profitability index? Should you accept or reject the project based on this index value? (ch 9b)
1.02; accept
An investment project has annual cash inflows of $4,700, $5,800, $6,600 for the next four years, respectively, and $7,900, and a discount rate of 14 percent. What is the discounted payback period for these cash flows if the initial cost is $8,000? (ch 9a)
1.87 years
The current dividend yield on CJ's common stock is 1.89 percent. The company just paid an annual dividend of $1.56 and announced plans to pay $1.70 next year. The dividend growth rate is expected to remain constant at the current level. What is the required rate of return on this stock? (ch 8)
10.86%
The next dividend payment by Savitz, Inc., will be $1.92 per share. The dividends are anticipated to maintain a growth rate of 6 percent forever. If the stock currently sells for $38 per share, what is the required return? (ch 8)
11.05%
Redesigned Computers has 6.5 percent coupon bonds outstanding with a current market price of $548. The yield to maturity is 13.2 percent and the face value is $1,000. Interest is paid annually. How many years is it until these bonds mature?
17.84 years
mota motors as eight directors on its board, two of whom go up for election each year. this is an example of a
staggered board
The final decision on which one of two mutually exclusive projects to accept ultimately depends upon which one of the following?
net present value
Interest rates that include an inflation premium are referred to as:
nominal rates
the default risk premium refers to the extra compensation demanded by investors for the possibility tat the issuer might
not make all the promised payments
When voting for the board of directors, the number of votes a shareholder is entitled to is generally determined as follows:
one vote per share held
the constant growth formula calculates the stock price:
one year prior (year 1) to the first dividend payment (D t+1)
Fundamentally, the business of the NYSE is to attract and process ____.
order flow
A securities market primarily composed of dealers who buy and sell for their own inventories is referred to which type of market? (ch 8)
over-the-counter
put bond
owner can force issuer to repay prior to maturity at a stated price
Which two methods of project analysis are the most biased towards short-term projects?
payback and discounted payback
This capital budgeting method allows lower management to make smaller, everyday financial decisions effectively
payback method
the amount of time needed for the cash flows from an investment to pay for its initial cost is the
payback period
Dividends
payments of cash from a corporation to its stockholders
For a project with conventional cash flows, the NVP is ______ if the required return is less than the IRR, and it is ______ if the required return is greater tan the IRR
positive; negative
in capital budgeting, the net _____ determines the value of a project to the company
present value
P1
price in 1 year
P0
price today
initial public offerings of stock occur in the ____ market
primary
Two mutually exclusive projects have an initial cost of $47,500 each. Project A produces cash inflows of $25,300, $37,100, and $22,000 for Years 1 through 3, respectively. Project B produces cash inflows of $43,600, $19,800 and $10,400 for Years 1 through 3, respectively. The required rate of return is 14.7 percent for Project A and 14.9 percent for Project B. Which project(s) should be accepted and why? (ch 9a)
project A, because it has the larger NPV
CAT bond
protects insurance companies from natural disasters
what are the 2 major forms of long-term debt?
public issues and privately placed
How is an APR computed?
rate per period x number of periods per year
according to the basic IRR rule, we should
reject a project if the IRR is less than the required return
A project has a discount rate of 15.5 percent, an initial cost of $109,200, an inflow of $56,400 in Year 1 and an inflow of $75,900 in Year 2. Your boss requires that every project return a minimum of $1.06 for every $1 invested. Based on this information, what is your recommendation on this project? (ch 9b)
reject the project because the PI is .97
a sinking fund is one type of:
repayment provision
over-the-counter (OTC) market
securities market in which trading is almost exclusively done through dealers who buy and sell for their own inventories
The NYSE member who acts as a dealer in a small number of securities is called a(n) _____.
specialist
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
An investment costs $152,000 and has projected cash inflows of $71,800, $86,900, and −$11,200 for Years 1 to 3, respectively. If the required rate of return is 15.5 percent, should you accept the investment based solely on the internal rate of return rule? Why or why not?
you should not apply the IRR rule in this case
Capital Corp is considering a project whose internal rate of return is 14%. If Capital's required return is 14%, the project's NPV is:
zero