Finance Exam 3 Smartbook Questions

True or false: The crossover rate is the rate at which the NPVs of two projects are equal.

True

By ignoring time value, the payback period rule may incorrectly accept projects with a _____ (positive/negative) NPV.

Negative

Initial public offerings of stock occur in the ____ market.

Primary

What does a bond's rating reflect?

The ability of the firm to repay its debt and interest on time

True or false: Some projects, such as mines, have cash outflows followed by cash inflows, which are then followed by cash outflows, giving the project multiple rates of return.

True

True or false: The price you actually pay to purchase a bond will generally exceed the clean price.

True

Which of the following is not one of the six factors used to determine the yield on a bond?

Voting rights

Match each one of these bonds with their characteristic.

-CAT bond: Protects insurance companies from natural disasters -Convertible bond: Can be exchanged for shares of stock -Structured note: Based on financial securities, commodities, or currencies -Put bond: Owner can force issuer to repay prior to maturity at a stated price

What are the advantages of the payback period method for management?

-The payback period method is ideal for short projects. -The payback period method is easy to use. -It allows lower level managers to make small decisions effectively.

Which of the following are usually included in a bond's indenture?

-The total amount of bonds issued -The repayment arrangements

In financial markets the difference between the ____ price and the ask price is known as the spread

Bid

The _____ premium is the portion of a nominal interest rate that represents the compensation for expected future _____.

Both Inflation

If a given set of cash flows is expressed in _____ terms and discounted at the ____ rate, the resulting present value will be the same as if the cash flows were expressed in real terms and discounted at the real rate.

Both Nominal

True or false: Cumulative voting means board members are elected one at a time, with each shareholder casting his or her allotted votes for each seat on the board.

False

True or false: Opportunity costs can be ignored when determining the financial feasibility of a project.

False

True or false: The MIRR function eliminates multiple IRRs and should replace NPV.

False

True or false: The inflation premium will be higher if the rate of inflation is low.

False

True or false: The real rate of return will generally be higher than the nominal rate of return.

False

The written agreement between the corporation and the lender detailing the terms of the debt issue is the______.

Indenture

A stock with dividend priority over common stock is called a ______ stock.

Preferred

Net ____ value is a measure of how much value is created or added today by undertaking an investment

Present

The NYSE member who acts as a dealer in a small number of securities is called a(n) _____

Specialist

In a _____board, only a fraction of the directorships are up for election at any one time.

Staggered

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

The IRR is the discount rate that makes the NPV of a project equal to ______.

Zero

For a project with conventional cash flows, the NPV is ______ if the required return is less than the IRR, and it is ______ if the required return is greater than the IRR.

positive, negative

In capital budgeting, the net ______ determines the value of a project to the company.

present value

Opportunity costs are classified as:

relevant costs

Most of the time, a floating-rate bond's coupon adjusts ____.

with a lag to some base rate

A bond pays annual interest payments of $50, has a par value of $1,000, and a market price of $1,200. How is the coupon rate computed?

$50/$1,000

Which of the following are expected cash flows to investors in stocks?

-Dividends -Capital gains

Using your personal savings to invest in your business is considered to have an _____ _____ because you are giving up the use of these funds for other investments or uses, such as a vacation or paying off a debt.

-Opportunity -Cost

Which of the following institutions issue bonds that are traded in the bond market?

-Public corporations -The federal government

As a general rule, which of the following are true of debt and equity?

-The maximum reward for owning debt is fixed -Equity represents an ownership interest

A zero-growth stock pays a dividend of $2 per share and has a discount rate of 10%. What will the stock's price be?

20.00

The _____ rate is the rate at which the NPVs of two projects are equal.

Crossover

The _____ yield is the bond's annual coupon divided by its price

Current

Using the payback period rule will bias toward accepting which type of investment?

Short-term investment

The payback period can lead to incorrect decisions if it is used too literally because it ____.

ignores cash flows after the cutoff date

True or false: Interest earned on Treasury notes and bonds is taxable

False

Which is the largest security market in the world in terms of trading volume?

The U.S. Treasuries market

Capital ______ is the decision-making process for accepting and rejecting projects.

Budgeting

An NYSE member who acts as a dealer in particular stocks is called a _______ market maker.

Designated

Which capital budgeting decision method finds the present value of each cash flow before calculating a payback period?

Discounted payback period

NPV ______ cash flows properly.

Discounts

When voting for the board of directors, the number of votes a shareholder is entitled to is usually ______ vote per share held.

One

What are three important features of Treasury notes and bonds?

-Highly liquid -Default-free -Taxable

Which of the following occurs in the primary market?

Newly-issued stocks are initially sold

The federal government can raise money from financial markets to finance its deficits by ___.

Issuing bonds

What is a real rate of return?

It is a rate of return that has been adjusted for inflation.

Which one of these correctly specifies the relationship between the nominal rate and the real rate?

(1 + R) = (1 + r) × (1 + h)

NASDAQ has which of these features?

-Computer network of securities dealers -Multiple market maker system

How is investing in U.S. Treasury bonds different from investing in corporate bonds?

-Interest from U.S. Treasuries is exempt from taxes at the state level but corporate interest is not. -Treasury issues have no default risk.

Which of the following are features of common stock?

-It generally has voting rights. -It has no special preference in receiving dividends. -It has no special preference in bankruptcy.

Which six factors determine the yield on a bond?

-Liquidity -Expected future inflation -Default risk -Interest rate risk -Taxability -Real rate of return

If a project has multiple internal rates of return, which of the following methods should be used?

-NPV -MIRR

Which of these correctly identify differences between U.S. Treasury bonds and corporate bonds?

-Treasury bonds are issued by the US government while corporate bonds are issued by corporations. -Treasury bonds are considered free of default risk while corporate bonds are exposed to default risk. -Treasury bonds offer certain tax benefits to investors that corporate bonds cannot offer.

Which of the following are mutually exclusive investments?

-Two different choices for the assembly lines that will make the same product. -A restaurant or a gas station on the same piece of land.

What are some reasons why the bond market is so big?

-Various state and local governments also participate in the bond market. -Federal government borrowing activity in the bond market is enormous. -Many corporations have multiple bond issues outstanding.

A benchmark PE ratio can be determined using:

-a company's own historical PEs -the PEs of similar companies

The IRR rule can lead to bad decisions when _____ or _____.

-cash flows are not conventional -projects are mutually exclusive

Three special case patterns of dividend growth include _____.

-nonconstant growth -zero growth -constant growth

Preferred stock has preference over common stock in the _____.

-payment of dividends -distribution of corporate assets

The basic NPV investment rule is:

-reject a project if its NPV is less than zero. -accept a project if the NPV is greater than zero. -if the NPV is equal to zero, acceptance or rejection of the project is a matter of indifference

The three attributes of NPV are that it:

-uses cash flows. -discounts the cash flows properly. -uses all the cash flows of a project.

A project should be __________ if its NPV is greater than zero.

Accepted

One of the weaknesses of the payback period is that the cutoff date is a(n) ______ standard.

Arbitrary

The main reason it is important to distinguish between debt and equity is that the benefits and risks _____.

Are different

A person who brings buyers and sellers together is called a(n) ______.

Broker

As an investor in the bond market, why should you be concerned about changes in interest rates?

Changes in interest rates cause changes in bond prices.

Suppose Bob owns 20 shares and Vikki owns 30 shares in Good Company, and there are five members of the board of directors. Under which voting arrangement can Bob assure himself of a board member that represents his interests?

Cumulative voting

Someone who maintains an inventory of stocks and buys and sells those stocks is known as a _____.

Dealer

A firm's bond rating sheds light on its _________ risk.

Default

The ____________ method differs from NPV because it evaluates a project by determining the time needed to recoup the initial investment.

Payback

This capital budgeting method allows lower management to make smaller, everyday financial decisions effectively.

Payback method

If a given set of cash flows is expressed in nominal terms and discounted at the nominal rate, the resulting present value will be the same as if the cash flows were expressed in real terms and discounted at the ____ rate.

Real

Which of the following is an example of an opportunity cost?

Rental income likely to be lost by using a vacant building for an upcoming project

The payback period method allows lower management to make _____ (smaller/larger), everyday financial decisions effectively.

Smaller

Within the context of financial markets, complete the following equation: Bid − Ask =

Spread

The goal of many successful organizations is a(n) ______ rate of growth in dividends.

Steady

With ______voting, the directors are elected one at a time and the only way to guarantee a seat is to own 50 percent plus one share.

Straight

Investment firms that are active participants in stocks assigned to them are called _____ liquidity providers.

Supplemental

Which of the following entities declares a dividend?

The board of directors

Why does a bond's value fluctuate over time?

The coupon rate and par value are fixed, while market interest rates change

If you own corporate bonds, you will be concerned about interest rate risk as it affects ____.

The market price of the bonds

What does the clean price for a bond represent?

The quoted price, which excludes interest accrued since the last coupon date.

The internal rate of return is a function of ____.

a project's cash flows

Secondary markets in sukuk are extremely illiquid because most sukuk are:

bought and held to maturity

A zero-growth model for stock valuation is distinguished by a ____.

constant dividend amount

The assumption of constant growth infers that _________.

dividends change at a constant rate

The present value of all cash flows (after the initial investment) is divided by the ______ to calculate the profitability index.

initial investment

In general, a corporate bond's coupon rate ____,

is fixed until the bond matures

A zero coupon bond is a bond that ____.

makes no interest payments

One of the flaws of the payback period method is that cash flows after the cutoff date are ___.

not considered in the analysis

The IRR rule can lead to bad decisions when cash flows are _____ or projects are mutually exclusive.

not conventional

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

When the stock being valued does not pay dividends,

the dividend growth model can still be used.

The Fisher effect decomposes the nominal rate into:

the inflation rate and the real rate

Mota Motors has eight directors on its board, two of whom go up for election each year. This is an example of a:

Staggered board

A _____is a payment by a corporation to shareholders, made in either cash or stock.

Dividend

Common stock has no special preference either in receiving ______ or in bankruptcy.

Dividend

Which one of the following is true about dividend growth patterns?

Dividends may grow at a constant rate.

Which of the following is not a difference between debt and equity?

Equity is publicly traded while debt is not

A situation in which taking one investment prevents the taking of another is called a mutually _____ investment decision.

Exclusive

For investors in the stock market, dividends from stocks are fixed and guaranteed, while capital gains are variable and not guaranteed.

False

True or false: A bond's value is not affected by changes in the market rate of interest.

False

With ____-rate bonds, the coupon payments are adjustable

Floating

An NYSE member who executes customer buy and sell orders is called a _____ broker.

Floor

The profitability index is calculated by dividing the PV of the _________ cash flows by the initial investment.

Future

Stock price reporting has increasingly moved from traditional print media to the ______ in recent years.

Internet

With nonconventional cash flows, there is a possibility that more than one discount rate will make the NPV of an investment zero. This is called the ______ rates of return problem.

Multiple

WinWin Corporation has five board members, and each shareholder gets one vote per share. The company uses a straight board voting procedure. How does this arrangement affect minority shareholders?

No minority shareholder would have enough votes to win any seat on the board.

What are the cash flows involved in the purchase of a 5-year zero coupon bond that has a par value of $1,000 if the current price is $800? Assume the market rate of interest is 5 percent.

Pay $800 today and receive $1,000 at the end of 5 years

True or false: Equity represents an ownership interest.

True

True or false: The major difference between Western financial practices and Islamic law is that Islamic law does not permit charging or paying interest.

True

Arrange the steps involved in the discounted payback period in order starting with the first step.

1. Discount the cash flows using the discount rate 2. Add the discounted cash flows 3. Accept if the discounted payback period is less than some prespecified number of years

What is the coupon rate on a bond that has a par value of $1,000, a market value of $1,100, and a coupon interest payment of $100 per year?

10%

A bond with exotic features is often called a _____ bond.

Cat

What is a bond's current yield?

Current yield = Annual coupon payment/Current price

The U.S. Treasuries market is the _____ in the world in terms of trading volume.

Largest