Multiple choice questions finance exam 2

the pre-tax cost of debt for a firm a. is based on the yield to maturity on the firm's outstanding bonds b. is equal to the coupon rate for the latest bond issue c. is equivalent tot he current yield to maturity that existed when the currently outstanding bonds were originally issued e. has to be estimated as it cannot be directly observed in the market

a

the stated interest payment, in dollars, made on a bond each period is called the bond's a. coupon b. face value c. maturity d. yield to maturity e. coupon rate

a

the annual coupon divided by the face value of a bond is called the a. coupon b. face value c. maturity d. yield to maturity e. coupon rate

e

an agreement giving the bond issuer the option to repurchase the bond at a specified price prior to maturity is the _______ provision a. sinking fund b. call c. seniority d. collateral e. debenture

b

the aftertax cost of debt generally increases when I. a firms bond rating increases II. the market rate of interest increases III. tax rates decreases IV. bond prices rise a. I and III b. II and III c. I, II, and III d. II,III, and IV e, all of them

b

the capital structure weights used in computing the weighted average cost of capital a. are based on the book values of total debt and total equity b. are based on the market value of the firm's debt and equity securities c. are computed using the book value of the long- term debt and the book value of equity d. remain constant over time unless the firm issues new securities e. are restricted to the firm's debt and common stock

b

the principle amount of a bond that is repaid at the end of the term is called the a. coupon b. face value c. maturity d. yield to maturity e. coupon rate

b

the return shareholders require on their investment in a firm is called the a. dividend yield b. cost of equity c. cost of capital d. capital gains yield e. income return

b

the stock valuation model that determines the current stock price by dividing the next annual dividend amount by the excess of the discount rate less the dividend growth rate is called the ______ model a. zero growth b. dividend growth c. capital pricing d. earnings capitalization e. discounted dividend

b

the total return on a security is based on the a. arithmetic average change in the price of the security b. average of the arithmetic and geometric average changes in the price of the security c. dividend yield d. capital gains yield e. both dividend yield and capital gains yield

e

the weighted average of a firm's cost of equity and aftertax cost of debt is called the a. reward to risk ratio b. weighted capital gains rate c.pure play cost of capital d. subjective cost of capital e.weighted average cost of capital

e

an account managed by a bond trustee for early bond redemption payments is called a. sinking fund b. collateral payment account c. deed in trust account d. call provision account e. conversion fund

a

the common stock of Ruby Janes pays a constant annual dividend. thus, the market price of Ruby Janes stock will: a. also remain constant b. increase over time c. decrease over time d. increase when the market rate of return increases e. decrease when the market rate of return increases

e

the owner of preferred stock a. is entitled to a distribution of income prior to the common shareholders b. has the right to veto the outcome of an election held by the common shareholders c. has the right to declare the company bankrupt whenever there are insufficient funds to pay dividends to the common shareholders d. receives tax free dividends if they are an individual and own more than 20% of the outstanding preferred shares e. has the right to collect payment on any unpaid dividends as long as the stock is noncumulative preferred

a

which one of the following correctly describes the dividend yield? a. next year's annual dividend by today's stock price b. this year's annual dividend by today's stock price c. this year's annual dividend divided by next year's expected stock price d. the annual dividend divided by the face value of the stock e. the increase in next year's dividend over this year's dividend divided by the current stock price

a

which one of the following statements is correct concerning the weighted average cost of capital a. the WACC may decrease as a firm's debt- equity ratio increases b. when computing the WACC, the weight assigned to the preferred stock is based on the coupon rate multiplied by the par value of the stock c. a firm's WACC will decrease as the corporate tax rate decreases d. the weight of the common stock used int eh computation of the WACC is based on the number of shares outstanding multiplied by the book value per share e. the WACC will remain constant unless a firm retires some of its debt

a

A floor broker on the NYSE does which one of the following? a. supervises the commission brokers for a financial firm b. trades for his or her personal inventory c. executes orders on behalf of a commission broker d. maintains an inventory and takes the role of a specialist e. is charged with maintaining a liquid, orderly market

c

A market maker who acts as a dealer in one or more securities on the floor of the NYSE is called a: a. floor trader b. floor post c. specialist d. floor broker e. commission broker

c

A securities market primarily comprised of dealers who buy and sell for their own inventories is referred to which type of market? a. auction b. private c. over the counter d. regional e. electronic network

c

What are the distributions to shareholders by a corporation called? a. retained earnings b. net income c. dividends d. capital payments e. diluted profits

c

Which one of the following is computed by dividing next year's annual dividend by the current stock price? a. yield to maturity b. total yield c. dividend yield d. capital gains yield e. growth rate

c

You want to be on the board of directors of Wisely Foods. Since you are the only shareholder that will vote for you, you will need to own more than half of the outstanding shares of stock if you are to be elected to the board. What is the type of voting called that requires this level of stock ownership to be successfully elected under these conditions? a. democratic b. cumulative c. straight d. deferred e. proxy

c

a firm's overall cost of equity is a. directly observable in the financial markets b. unaffected by changes in the market risk premium c. highly dependent upon the growth rate and risk level of the firm d. generally less than the firm's aftertax cost of debt e. inversely related to change in the firm's tax rate

c

all else constant, a bond will sell at ________ when the coupon rate is _______ the yield to maturity a. a premium; less than b. a premium; equal to c. a discount; less than d. a discount; higher than e. par; less than

c

the overall cost for a retail store a. is equivalent to the after tax cost of the firm's liabilities b. should be used as the required return when analyzing a potential acquisition of a wholesale distributor c. reflects the return investors require on the total assets on the firm d. remains constant when the debt- equity ratio changes e. is unaffected by changes in corporate tax rates

c

the return lenders require on loaned funds to a firm is called the a. coupon rate b. current yield c. cost of debt d. capital gains yield e. cost of capital

c

the specified date on which the principle amount of a bond is repaid is called the a. coupon b. face value c. maturity d. yield to maturity e. coupon rate

c

parts of the indenture limiting certain actions that might be taken during the term of the loan to protect the interests of the lender are called a. trustee relationships b. sinking funds provisions c. bond ratings d. deferred call provisions e. protective covenants

e

Davis Entertainment is considering developing and distributing a new board game for children. The project is similar in risk to the firm's current operations. The firm maintains a debt-equity ratio of .45 and retains all profits to fund the firm's rapid growth. How should the firm determine its cost of equity? a. by adding the market risk premium to the aftertax cost of debt b. by treating the common stock as if it were preferred stock c. by using the dividend growth formula d. by averaging the security market line approach e. by averaging the cost determined by both the dividend growth formula and the security market line approach

d

The secondary market is best defined by which one of the following? a. market in which subordinated shares are issued and resold b. market conducted solely by brokers c. market dominated by dealers d. market where outstanding shares of stock are resold e. market where warrants are offered and sold

d

Which one of following is the rate at which a stock's price is expected to appreciate? a. current yield b. total return c. dividend yield d. capital gains yield e. coupon rate

d

all else constant, a coupon bond that is selling at a premium, must have a. a coupon rate that is equal to the yield to maturity b. a market price that is less than par value c. semi- annual interest payments d. a yield to maturity that is less than the coupon rate e. a coupon rate that is less than the yield to maturity

d

assume that fixed, semi- annual coupon bond is outstanding. an increase in market interest rates will a. increase the coupon rate of the bond b. decrease the coupon rate of the bond c. increase the market price on the bond d. decrease the market price of the bond e. not affect the market price of the bond

d

assume that p1 is the purchase post, p2 represents the sale proceeds, and d represents dividend income. given these definitions, which one of the following is the correct formula for the total return on an equity security a. (p2- p1)/ p2+d b. (p1-p2)/ (p2+d) c. (p1- p2)/ p1 d. (p2-p1 +d)/p1 e. (p2-p1+d ) / p2

d

the cost of preferred stock is computed the same as a. pre tax cost of debt b. return on an annuity c. after tax cost of debt d. return on a perpetuity e. cost of an irregular growth common stock

d

the rate at which a stock's price is expected to appreciate (or depreciate) is called the _____ yield a. current b. total c. dividend d. capital gains e. earnings

d

the rate of return required by investors in the market for owning a bond is called the a. coupon b. face value c. maturity d. yield to maturity e. coupon rate

d

Callander Enterprises stock is listed on NASDAQ. The firm is planning to issue some new equity shares for sale to the general public. This sale will occur in which one of the following markets? a. private b. auction c. exchange floor d. secondary e. primary

e

Which one of the following is a type of equity security that has a fixed dividend and a priority status over other equity securities? a. senior bond b. debenture c. warrant d. common stock e. preferred stock

e

Which one of the following types of stock is defined by the fact that it receives no preferential treatment in respect to either dividends or bankruptcy proceedings? a. dual class b. cumulative c. non- cumulative d. preferred e. common

e

an indenture is a. the annual amount which a bond issuer agrees to pay as interest on the debt b. the written record of the original and all subsequent holder of each individual bond comprising a debt issue c. a bond which is past its maturity date but has yet to be repaid d. a bond which is secured by the fixed assets which are owned by the bond issuer e. the written agreement between the bond issuer and the bondholder which details the terms of the debt issue

e