Financial Management Exam 3

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

market price.

Avondale Homes has adopted a policy of increasing its annual dividend at a constant rate of 1.35 percent annually. The company just paid its annual dividend of $1.84. What will the dividend be nine years from now?

$2.08

The PV I find using the correct model has a time stamp of ____.

3

The taxability risk premium compensates bondholders for which one of the following?

A bond's unfavorable tax status

Which of the following is a factor contributing to the bond yield? (multiple) A. Inflation premium B. Interest rate risk premium C. Dividend premium D. Default risk premium E. Taxability premium

A,B,D,E

If the project breaks even, then ________ A. NPV = 0 B. NPV = 1 C. PI = 0 D. PI = 1 E. IRR = cost of capital F. IRR = discount rate G. Payback Period = x

A. NPV = 0 D. PI = 1 E. IRR = cost of capital F. IRR = discount rate

Which one of the following relationships applies to a par value bond?

Coupon rate = Current yield = Yield to maturity

Stock ABC just paid a dividend of $3. This $3 is ___?

D0

Which one of the following relationships is stated correctly?

Decreasing the time to maturity increases the price of a discount bond, all else constant.

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

Which one of the following is a feature of both Common stocks and Preferred stocks?

Dividends can be deferred

Which one of the following applies to the dividend growth model?

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

Which one of the following statements is correct?

Stocks can have negative growth rates.

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.

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.

An investment costs $239,000 and has projected cash flows of $123,900, $78,400, and −$22,300 for Years 1 to 3, respectively. The required rate of return is 15.5 percent. Based solely on the internal rate of return rule, should you accept the project? Why or why not?

You should not apply the IRR rule in this case.

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.

Mutually exclusive projects are best defined as competing projects that:

both require the total use of the same limited resource.

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

capital gains yeild

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

coupon rate decreases and the time to maturity increases.

When YTM increases, bond price will ________.

decreases

Credit rating agency assess a bond of its ______ risk.

default

The length of time a firm must wait to recoup, in present value terms, the money it has invested in a project is referred to as the:

discount payback period

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

discount rate

A forward PE is based on:

estimated future earnings.

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

g

Supernormal growth is a growth rate that:

is unsustainable over the long term.

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:

mutually exclusive

Which one of the following methods predicts the amount by which the value of a firm will change if a project is accepted?

net present value

Interest rates that include an inflation premium are referred to as:

nominal rates.

The length of time a firm must wait to recoup the money it has invested in a project is called the:

payback period

Stock XYZ will start to pay dividend in 4 years. It will pay a $5 dividend every year thereafter. Which model can be used to value this stock?

perpetuity

If a bond is traded at a price above its par value, it is called a _____ bond. Its coupon rate must be ________ the YTM.

premium, greater than

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:

priced the same as a $1 perpetuity.

The present value of an investment's future cash flows divided by the initial cost of the investment is called the:

profitability index

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

the project earns a return exactly equal to the discount rate.

Which of the following is different between bonds and common stocks?

voting rights, fixed (pre-determined) payments, tax-deductible expense

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:

yield of maturity

A bond that has only one payment, which occurs at maturity, defines which one of these types of bonds?

zero coupon