Finance questions

Investment X has a 25% chance of producing a 20% return, a 50% chance of producing a 15% return, and a 25% chance of producing a return of -5%. What's Investment X's coefficient of variation? a. 1.07 b. 0.93 c. 1.18 d. 0.85 e. 1.26

d. 0.85

A 2-stock portfolio that contains $40,000 of GE stock with a beta of 1.25 and $60,000 of Duke Energy stock with a beta of 0.60 would have a beta of 0.86. What would be the portfolio's beta, if the owner rebalanced the portfolio so that it contained $80,000 of GE and $20,000 of Duke Energy stock? a. 0.91 b. 1.00 c. 0.77 d. 1.12 e. 1.17

d. 1.12

Suppose a stock has a beta of 1.3, the risk-free rate is 6.0%, and the market risk premium is 4.5%. If the stock's beta falls to 1.0 but the other two variables remain unchanged, by how much would the stock's required rate of return decline? a. 2.28% b. 0.88% c. 0.62% d. 1.35% e. 1.71%

d. 1.35%

Projects S and L have the following cash flows, and both have an 11% cost of capital. What is L's NPV? WACC=11% .........S......L 0 -600 -600 1 500 100 2 300 300 3 100 600 a. $183.19 b. $178.88 c. $185.41 d. $172.29 e. $167.06 If S and L are independent, both should be accepted. True or false? a. True b. False

172.29 a. True

The weights in the expected rate of return calculation must sum to equal: a. One hundred. b. One. c. The expected rate of return. d. The current real market interest rate.

One

Firms can use different classes of common stock to meet specific needs of the company. Founders' shares are one such class. They are shares owned by the firm's founders that enable them to maintain control over the company without having to own a majority of stock. True or false? a. True b. False

True

The optimal financial policy often depends on the nature of the firm's assets. For example, a firm with highly liquid assets would be more likely to use a greater percentage of short-term debt than a firm whose assets are illiquid. True or false? a. True b. False

True

Assume that you have $10,000 which you plan to invest for 3 years. How much more would you have if you invested the funds at 10% with annual compound interest versus 10% with simple interest? No funds will be paid until the end of the 3rd year. a. $310.00 b. $297.72 c. $303.80 d. $291.77 e. $285.93

a. $310.00

What is the PV of an ordinary annuity with 5 annual payments of $10,000 each if the appropriate annual interest rate is 6%? a. $42,123.64 b. $42,966.11 c. $43,825.44 d. $44,701.94 e. $45,595.98

a. $42,123.64

Suppose you bought a condo and took out a 30-year, $100,000 amortized loan at a nominal annual rate of 8% with annual end-of-year payments. How large would your annual payments be? a. $8,882.74 b. $9,332.43 c. $7,929.38 d. $9,565.74 e. $9,804.88

a. $8,882.74

Suppose a U.S. government bond promises to pay $1,000 three years from now, with no payments until the end of the 3rd year. If the going annual interest rate on such bonds is 6%, how much is the bond worth today? a. $839.62 b. $971.97 c. $925.68 d. $881.60 e. $797.64

a. $839.62

Given the following facts, use the Hamada equation to calculate the unlevered beta, bU. bL = 1.25; T = 35%; wd = 55%; and wc = 45%. a. 0.70 b. 1.00 c. 0.85 d. 1.15 e. 1.30

a. 0.70

Given the following facts, use the Hamada equation to calculate the levered beta, bL. bU = 0.6; T = 35%; wd = 30%; and wc = 70%. a. 0.77 b. 1.25 c. 1.08 d. 0.55 e. 1.00

a. 0.77

Suppose you must estimate the cost of equity for a firm, and you have the following data: rRF = 5.5%; rM - rRF = 6%; b = 0.8; D1 = $1.00; P0 = $25.00; g = 6%; and rd = the firm's bond yield = 6.5%. What is this firm's cost of equity using the DCF approach? a. 10.0% b. 9.3% c. 10.3% d. 8.8% e. 10.5%

a. 10.0%

Investors expect Bae Corporation to pay a dividend of D1 = $1.50 and to grow at a constant rate of 7% per year. The stock sells at a price of $25. What is Bae's expected total rate of return? a. 13.0% b. 12.0% c. 11.0% d. 14.0% e. 10.0%

a. 13.0%

Assuming that all interest payments are reinvested, how long would it take $5,000 to double if it were invested in a bank that pays 5% per year? a. 14.21 years b. 15.67 years c. 14.92 years d. 16.45 years e. 17.27 years

a. 14.21 years

Project X has the following cash flows. If the firm's WACC is 15%, what is Project X's discounted payback? 0 -500 1 200 2 200 3 400 a. 2.66 years b. 1.73 years c. 3.50 years d. 2.25 years e. 3.11 years

a. 2.66 years

Project L has the following cash flows, and its cost of capital is 10%. What is L's MIRR? 0 -1500 1 200 2 2000 a. 21.66% b. 22.53% c. 25.40% d. 24.29% e. 23.17%

a. 21.66%

A bank states that it charges a 21% APR (or annual percentage rate) on credit card balances where the cardholder has been late making a payment. However, the bank compounds monthly. What EFF% is the bank charging? a. 23.14% b. 23.83% c. 21.12% d. 21.77% e. 22.45%

a. 23.14%

Longstreet Corporation's sales today are $10 million. If sales grow at a rate of 10% per year, how long will it take Longstreet's sales to hit $15 million? a. 4.25 years b. 4.68 years c. 5.66 years d. 5.14 years e. 3.83 years

a. 4.25 years

Suppose you won a $75,000 after-tax cash prize in the lottery. You want to start a new business that you think will lose money for a while, after which it will be up and running and bringing in big bucks. You plan to invest the funds immediately in securities that are expected to earn 10% per year. Suppose you would need only $20,000 per year during the start-up period. How long could you operate before you would require cash from the new business, i.e., how long could you receive payments of $20,000 per year? The first withdrawal will be made a year from today, and your answer will contain a fraction of a year. a. 4.93 years b. 5.42 years c. 5.97 years d. 6.56 years e. 4.44 years

a. 4.93 years

A company's perpetual preferred stock pays a $5 annual dividend per share, and it currently sells for $80 per share. If the company were to sell a new preferred issue, what is a good estimate of the cost of that capital? Ignore flotation costs. a. 6.25% b. 7.33% c. 5.00% d. 5.40% e. 6.75%

a. 6.25%

Wald Inc.'s bonds currently sell for $1,120 and have a par value of $1,000. They pay an $85 annual coupon and have a 20-year maturity, but they can be called in 5 years at $1,050. What is their YTC? a. 6.49% b. 5.95% c. 7.08% d. 6.71% e. 7.34%

a. 6.49%

The U.S. government offers to sell you a bond for $362.45. No payments will be made until the bond matures 15 years from now, at which time it will be redeemed for $1,000. What annual interest rate would you earn if you bought this bond for $362.45? a. 7.00% b. 6.65% c. 6.32% d. 7.72% e. 7.35%

a. 7.00%

Which of the following is not a feature of home equity lines of credit? a. A homeowner can borrow 100% of the market value of the home. b. They are among the cheapest forms of consumer credit. c. They are secured with a second mortgage on the home. d. A homeowner is allowed to deduct the interest charges on home equity lines of credit on his or her tax returns.

a. A homeowner can borrow 100% of the market value of the home.

Your credit score is: a. A numerical measurement of your ability to repay consumer debt as promised b. A numerical measurement of your waistline c. A numerical measurement of how much debt you have d. A numerical measurement of how many credit lines you have open at any given time

a. A numerical measurement of your ability to repay consumer debt as promised

An index is: a. A selected sample of a population that moves in the same way as the population b. A tool to tell you which stocks you should sell c. A tool at the back of a book that helps you find what you're looking for d. A tool to tell you which stocks you should buy

a. A selected sample of a population that moves in the same way as the population

Which of the following is likely to lead to lower interest rates on U.S. securities? a. A slowdown occurs in the U.S. economy, which reduces corporate borrowing. b. The Federal Reserve tightens the money supply. c. The federal government announces a larger than expected budget deficit. d. The expected trade deficit is increased.

a. A slowdown occurs in the U.S. economy, which reduces corporate borrowing.

12b-1 fees are: a. Annual fees or distribution fees on mutual funds b. Hidden fees that are hard to find when you sign up c. Trailing commissions paid to people who sold the fund over its lifetime d. Any of the above

a. Annual fees or distribution fees on mutual funds

Who, generally, benefits for a fixed interest rate bond if market interest rates are falling? a. Lenders or holders of bonds. b. Governments because it collects more in tax revenue. c. Borrowers or bond issuers. d. Equity holders.

a. Lenders or holders of bonds.

Your credit card balances are higher than you'd like. A good repayment plan includes which of the following? a. Pay off high-interest cards first. b. Pay off high-balance cards first. c. Pay off low-balance cards first. d. Make new charges on low-balance cards.

a. Pay off high-interest cards first.

One of the following projects has two IRRs. Which project would that be? a. Project 2: 0 -550 1 900 2 1100 3 -1675 b. Project 3: 0 -450 1 -800 2 -900 3 3650 c. Project 1: 0 -450 1 200 2 200 3 150

a. Project 2:

A project's incremental cash flow is the difference between the firm's cash flow if it accepts the project versus if it rejects the project. Thus, if a project has an initial cost of $1 million in Year 1 and no other costs or revenues, then the incremental cash flow in that year will be -$1 million. True or false? a. True b. False

a. True

Total return has two parts: a. Current income and capital gain or losses b. Current income and capital losses only c. Net income and capital losses only d. Current income and capital gains only

a. Current income and capital gain or losses

What does an inverted yield curve usually signal? a. Current or future recession. b. Future hyper inflation. c. A flight to quality. d. The onset of an asset bubble.

a. Current or future recession.

Treasuries are: a. Debts of the U.S. Government b. Assets of the U.S. Government c. Inventory of the U.S. Government d. Credits of the U.S. Government

a. Debts of the U.S. Government

A growth and income mutual fund's main purpose is to: a. Find a balance of financial assets to give both current income and long-term capital gains b. Create a balanced fund of stocks and bonds c. Find a balance of financial assets to give both stability and peace of mind d. Create a balanced diet of essential vitamins and minerals

a. Find a balance of financial assets to give both current income and long-term capital gains

Butcher Company plans to issue bonds to raise $10 million to finance expansion. It could use 10-year mortgage bonds backed by the firm's fixed assets, 10-year debentures that are not backed by any specific assets but are backed by the firm's general earning power, or 10-year subordinated debentures that would be subordinated to all of the firm's other debt. If it uses mortgage bonds, they would be rated A by Moody's and S&P, and their market interest rate would be 7.5%. Given this information, which of the following statements is most correct? a. Given the 7.5% interest rate on the mortgage bonds, the plain debentures might carry an interest rate of 8.0% and the subordinated debentures a rate of 8.5%. b. The debentures would be rated highest, probably AA. c. The subordinated debentures would be rated highest, probably AA. d. Given the 7.5% interest rate on the mortgage bonds, the subordinated debentures might carry an interest rate of 8.0% and the plain debentures a rate of 8.5%. e. Since bond ratings are highly subjective, information about the rating and interest rate on the A-rated bond tells us nothing about how the two types of debentures would be rated, or about their likely interest rates.

a. Given the 7.5% interest rate on the mortgage bonds, the plain debentures might carry an interest rate of 8.0% and the subordinated debentures a rate of 8.5%.

A stock with a Beta of more than one: a. Has experienced price changes that are more volatile than the over market. b. Will reduce the overall volatility of a stock portfolio. c. Has paid more dividends than the average stock in the market. d. Has paid out more than the rate of inflation.

a. Has experienced price changes that are more volatile than the over market.

Risk premium increases with: a. Higher default risk b. Government shutdowns c. Lower default risk d. Holiday weekends

a. Higher default risk

The Beta of a stock measures: a. How the stock price moves relative to the rest of the market. b. How many times the stock has split. c. How the stock price moves relative to interest rate movements. d. How much dividends the corporation has paid in the past.

a. How the stock price moves relative to the rest of the market.

A project's payback gives us an idea of the project's liquidity because it indicates how long funds will be tied up in the project. True or false? a. True b. False

a. True

Which of the following statements suggests that assuming reinvestment at the WACC is a more reasonable reinvestment rate assumption? a. If firms use internally generated cash flows from past projects rather than external capital, then they will save their costs of capital. Thus, their costs of capital represent the opportunity costs of their cash flows; thus, the effective returns on their reinvested funds. b. If firms have reinvestment opportunities with positive NPVs, they will be constrained in accepting them and financing them at their costs of capital. c. Firms do not have reasonably good access to the capital markets, so firms cannot raise all the capital they need at the going interest rate.

a. If firms use internally generated cash flows from past projects rather than external capital, then they will save their costs of capital. Thus, their costs of capital represent the opportunity costs of their cash flows; thus, the effective returns on their reinvested funds.

Coupon payments in finance refer to: a. Interest payment from owning a bond. b. Admissions into a financial market. c. Discounts paid to buyers. d. Dividends paid by stocks or equities.

a. Interest payment from owning a bond.

Which of the following is not true of the Wage Earner Plan? a. It is also known as Chapter 7 bankruptcy. b. It may be a viable option for someone with a steady source of income. c. It is a workout procedure involving debt restructuring. d. Creditors usually go along with the plan because they would lose more in a straight bankruptcy.

a. It is also known as Chapter 7 bankruptcy.

A growth and income mutual fund: a. Seeks to have a balance, but also has some risk and volatility b. Is more focused on current income than long-term capital gains c. Is more focused on vitamins and not minerals d. Is more focused on bonds than stocks

a. Seeks to have a balance, but also has some risk and volatility

An inverted yield curve occurs when: a. Short term bonds pay higher yields than longer term bonds. b. Corporate bonds pay higher yields than government bonds. c. Tax free bonds pay a higher yield than taxable bonds. d. Longer term bonds pay higher yields than shorter term bonds.

a. Short term bonds pay higher yields than longer term bonds.

Which of the following is most likely to occur during a recession? a. The demand for funds declines, leading to lower interest rates. b. The demand for funds increases, leading to lower interest rates. c. The demand for funds declines, leading to higher interest rates. d. The demand for funds increases, leading to higher interest rates.

a. The demand for funds declines, leading to lower interest rates.

Finance charges are: a. The interest that a borrower has to pay b. The interest a lender has to pay c. The interest a lender demands d. The interest that a borrower demands

a. The interest that a borrower has to pay

In capital budgeting if the present value of the cash inflows are LESS than the costs, then what should happen? a. The project should be killed. b. The project should be funded. c. Market interest rates should fall. d. The stock or equity should be purchased.

a. The project should be killed.

Average daily balance is: a. The sum of the balances owed on each day of the period divided by the number of days in the period b. The number of days in the period divided by the sum of the balances owed on each day of the period c. The number of days in the period divided by the largest balance of the month d. The number of days in the period divided by the smallest balance of the month

a. The sum of the balances owed on each day of the period divided by the number of days in the period

Suppose you just purchased 10 shares of GE stock in the open market. Which of the following statements best describes the transaction? a. This is a secondary market transaction. b. This is a primary market transaction. c. This is a futures market transaction. d. This is a private market transaction. e. This is a money market transaction.

a. This is a secondary market transaction.

A 20-year bond with a 6% coupon rate can have a par value of any amount that is a multiple of $1,000. The issuer will make payments of 6% of the par value each year, generally with one-half of the annual amount paid each 6 months. Bonds may include a sinking fund, which means that some of the bonds must be paid off each year rather than at maturity. Also, many bonds include a call provision, which gives the issuer the right to pay off the bonds prior to their stated maturity. True or false? a. True b. False

a. True

A credit card balance of $5,000 at 15% interest with a minimum 2% monthly payment will take more than 32 years to pay off, but by increasing the payment to 3%, you can pay off the balance in half the time. a. True b. False

a. True

A lender should prefer to lend at a rate of 10% with semiannual compounding, but a borrower would prefer a loan with a rate of 10%, annual compounding. True or false? a. True b. False

a. True

A leveraged buyout is a good way to reduce excess cash flow. In an LBO, debt is used to finance the purchase of a high percentage of the company's shares. High debt payments after the LBO force managers to conserve cash by eliminating unnecessary expenditures. True or false? a. True b. False

a. True

A positive maturity risk premium has the effect of raising interest rates on long-term bonds relative to those of short-term bonds. True or false? a. True b. False

a. True

A stock's price is simply the current market price, and it is easily observed for publicly traded companies. By contrast, intrinsic value, which represents the "true" value of the company's stock, cannot be directly observed and must instead be estimated. True or false? a. True b. False

a. True

A sunk cost is a cost that has been incurred and cannot be recovered regardless of whether a project is accepted or rejected. Sunk costs should not/ be reflected in a capital budgeting analysis. True or false? a. True b. False

a. True

An NPV profile is a graph that shows a project's NPV on the vertical axis, the cost of capital on the horizontal axis, and a line that shows the project's NPV at each cost of capital. The point on the horizontal axis where the NPV crosses the axis—i.e., where the NPV is zero—is the IRR. True or false? a. True b. False

a. True

An upward-sloping yield curve is often referred to as a "normal" yield curve, whereas a downward-sloping yield curve is often referred to as an inverted or "abnormal" yield curve. True or false? a. True b. False

a. True

Assume Lei's bonds paid interest annually rather than semiannually. You could find the value of these bonds, in a market where the going nominal annual rate on semiannual payment bonds is 7%, by finding the effective annual rate, which is 7.1225%, and then discounting the annual bond's cash flows by this effective rate. The annual payment bonds would have a value of $1,352.72 versus $1,374.17. True or false? a. True b. False

a. True

Assume that Project 2's cost of capital is 12% and analyze the following statement: "Even though Project 2's IRRs are both greater than the cost of capital, the project should still be rejected because its NPV is negative at the project's cost of capital, and consequently, the firm's value will be reduced if it is accepted." True or false? a. True b. False

a. True

Barlett Co. has two divisions. Its risky division, Division R, has a WACC = 12%, while its safer division, Division S, has a WACC = 8%. Since the two divisions are the same size, the company's composite WACC is 10%. A Division S project has a 9% expected return. Since this project's return exceeds the division's WACC, the company should accept the project even though its return is less than the company's composite WACC. True or false? a. True b. False

a. True

Betas can be found by plotting stocks' returns on the vertical axis and the returns on an index like the S&P 500 on the horizontal axis, and then calculating the slope of the resulting regression line. This slope is the stock's beta coefficient. The steeper the slope, the larger the beta and the riskier the stock. True or false? a. True b. False

a. True

Conflicts such as those between mutually exclusive projects can never occur between independent projects. One project might have the higher IRR and the other the higher NPV, but this does not lead to problems in deciding whether to invest in either, neither, or both of the projects. True or false? a. True b. False

a. True

Credit card issuers may charge you a fee even if you do not use your credit card. a. True b. False

a. True

Derivatives are financial assets (such as options and futures) whose values are derived from the values of some other "underlying" assets. They can be used either to reduce risks or to speculate. True or false? a. True b. False

a. True

Even if markets are efficient and all stocks and companies are fairly priced, an investor should still be careful when selecting stocks for his or her portfolio. Most importantly, the portfolio should be diversified, with a mix of stocks from various industries along with some bonds and other fixed-income securities. True or false? a. True b. False

a. True

Financial intermediaries such as banks and mutual funds help transfer capital from those with a surplus of funds to those who need capital. True or false? a. True b. False

a. True

Foreign bonds are issued by a foreign government or a foreign corporation. An additional risk exists when bonds are denominated in a currency other than that of the investor's home currency. True or false? a. True b. False

a. True

If all investors were completely indifferent to risk, i.e., if they had no aversion to risk at all, then the SML would plot as a horizontal line. True or false? a. True b. False

a. True

If the market interest rate remains at 5% for the next 29 years, and if Leggio's credit rating remains constant, then the price of its bonds will decrease gradually over time and be exactly $1,000 at maturity. True or false? a. True b. False

a. True

If two assets are held in a portfolio, the assets will generally be less risky than if they were held in isolation. True or false? a. True b. False

a. True

If two assets are perfectly positively correlated, then their returns will move up and down exactly in sync with one another. True or false? a. True b. False

a. True

If you normally pay your credit card balance in full every month, the most important feature to look for in a new card is no annual fee. a. True b. False

a. True

In Google's IPO, it conducted a Dutch auction where investors directly place bids for shares of stock. In a Dutch auction, the actual transaction price is set at the highest price that causes all of the offered shares to be purchased. Investors who submitted bids at or above this clearing price received shares of the company's stock. True or false? a. True b. False

a. True

In Miller's 1963 study, he noted that the deductibility of interest favors the use of debt financing, but the more favorable tax treatment of income from stocks lowers the required rates of return on stocks and thus favors the use of equity financing. Most observers believe that interest deductibility has the stronger effect, hence that our tax system favors the corporate use of debt. True or false? a. True b. False

a. True

In a perfect world, a firm would identify its optimal capital structure based on market values, raise capital so as to maintain that structure, and use the optimal percentages to calculate its WACC. However, the world is not perfect. It is impossible to identify a precisely optimal capital structure, and given the volatility inherent in financial markets, it would be impossible to remain on target over time even if the optimal capital structure could be identified. As a result, most firms focus on a target debt-to-capital ratio range as opposed to a single number. True or false? a. True b. False

a. True

In establishing credit, it is important to open checking and savings accounts and to manage them well by not overdrawing. a. True b. False

a. True

In response to concerns about the CAPM's validity, some researchers have developed models that include more explanatory variables than just beta. While these models are promising, the basic CAPM is still the most widely used method for estimating required rates of returns on stocks. True or false? a. True b. False

a. True

In some instances, replacements add capacity as well as lower operating costs. When this is the case, sales revenues would be increased; and if that led to an increase in net operating working capital, that number would be shown as a Time 0 expenditure along with its recovery at the end of the project's life. These changes would, of course, be reflected in the differential cash flows for the analysis. True or false? a. True b. False

a. True

Is this statement true or false? "The primary difference between the MIRR and the regular IRR is that MIRR assumes that cash inflows are reinvested at the WACC, whereas the regular IRR assumes reinvestment at the IRR. Since reinvestment is generally at a rate close to the WACC, the MIRR is generally closer to the "true" rate of return a project will provide." a. True b. False

a. True

Is this statement true or false? A rational person should choose to receive cash flows from an annuity due of $1,000 per year rather than from a similar ordinary annuity. a. True b. False

a. True

Is this statement true or false? If one set up time lines for an ordinary annuity of $1,000 per year for 3 years and a 3-year, $1,000 annuity due, the primary difference between the two time lines is that the $1,000 payments for the annuity due would begin at t = 0 and end at t = 2, whereas the ordinary annuity's payments would begin at t = 1 and end at t = 3. a. True b. False

a. True

Is this statement true or false? If you calculated the value of an ordinary annuity, you could find the value of the corresponding annuity due by multiplying the FV of the ordinary annuity by (1 + I), because this would take into account that each annuity due payment occurs one year earlier. a. True b. False

a. True

One important difference between capital budgeting and security analysis is that in security analysis the analyst must generally take the projected cash flows as given rather than something the analyst can influence, whereas firms can often influence the cash flows from projects by making operating changes. True or false? a. True b. False

a. True

People differ with regard to their willingness to bear risks. However, if two stocks have the same expected rate of return, then most individuals would prefer the less risky to the more risky stock. This is called risk aversion. True or false? a. True b. False

a. True

Preferred stock is a "hybrid" security. Preferreds typically pay a fixed dividend, so they are a fixed-income security like a bond. However, the directors can omit the preferred dividend without throwing the company into bankruptcy. True or false? a. True b. False

a. True

Proxy fights are attempts by a person or group that wants to take over control of a firm by getting the firms' stockholders to give their voting proxies to the new group. True or false? a. True b. False

a. True

Recently your puppy chewed up your shoes and you had to go buy another pair. This would be an example of risk assumption. a. True b. False

a. True

Reward cards, such as those that award frequent flyer miles, work best for those who typically do not carry a high balance from one month to the next. a. True b. False

a. True

Suppose the standard deviation of expected returns for a given corporate project is quite high, and the project's returns are also highly correlated with returns on the firm's other assets. This suggests that the project is quite risky. However, if the project is not perfectly positively correlated with returns on other stocks in the market, then the project's true risk to stockholders might not be very large. True or false? a. True b. False

a. True

The Security Market Line (SML) shows the relationship between stocks' required rates of return (measured on the vertical axis) and their betas (measured on the horizontal axis). The vertical axis intercept is the required rate of return on a riskless asset, and the required rate of return associated with b = 1.0 is the required rate of return on "the market." The difference between the required rate of return on the market and that on the riskless asset (rM - rRF) is defined as the "market risk premium." The steeper the SML, the larger the market risk premium, and the greater the average investor's aversion to risk. True or false? a. True b. False

a. True

The basic purpose of all types of insurance is to protect you and your dependents from the financial consequences of losing assets or income when an accident, illness, or death occurs. a. True b. False

a. True

The coefficient of variation is a better measure of risk if one is comparing assets that have substantially different expected returns, because it shows the amount of risk per unit of expected return. True or false? a. True b. False

a. True

The cost of depreciation-generated funds is approximately equal to the WACC calculated from retained earnings, preferred stock, and debt. True or false? a. True b. False

a. True

The greater the default risk, the higher the default risk premium. a. True b. False

a. True

The inputs used in most capital budgeting analyses are not known with certainty; hence, the results of a quantitative analysis may be quite different from the actual, after-the-fact results. Also, five capital budgeting criteria are commonly used, and each provides a somewhat different bit of information. Therefore, it is rational for a firm to calculate and give some consideration to each of the five criteria. For most decisions, the greatest weight should be given to the NPV, but it would be foolish to ignore the information provided by the other criteria. True or false? a. True b. False

a. True

The interest paid on a municipal bond, otherwise known as a muni, is generally exempt from federal income taxes. Therefore, the coupon rate on these bonds is considerably lower than a corporate bond of equivalent risk. True or false? a. True b. False

a. True

The investor-supplied items—debt, preferred stock, and common equity—are called capital components. Increases in assets must be financed by increases in these capital components. True or false? a. True b. False

a. True

The preemptive right is the right of current stockholders to buy new shares in an amount that will maintain their proportionate ownership in the firm. True or false? a. True b. False

a. True

The probability distribution for a stock would list the stock's set of possible returns and the probability of each return. We could use this data to find both the stock's expected rate of return and the standard deviation of that return, which is one measure of risk. True or false? a. True b. False

a. True

The rate at which the NPV profile lines of two mutually exclusive projects cross is called the "crossover rate." If the cost of capital is greater than the crossover rate, then no conflict will occur because the project with the higher NPV will also have the higher IRR. True or false? a. True b. False

a. True

The target capital structure is the mix of debt, preferred stock, and common equity the firm plans to raise to fund its future projects. True or false? a. True b. False

a. True

The value of a share of common stock depends on the cash flows it is expected to provide, and those flows consist of two elements: (1) the dividends the investor receives each year while he or she holds the stock and (2) the price received when the stock is sold. The final price includes the original price paid plus an expected capital gain. True or false? a. True b. False

a. True

The value of a share of stock can be estimated by using the PV of future dividends. An alternative valuation procedure, called the "corporate valuation model," calls for finding the expected future free cash flows, discounting those cash flows at the weighted average cost of capital, summing the PVs of the free cash flows, subtracting the market values of debt and preferred to calculate the value of the common equity, and then dividing by the number of shares outstanding to find the value of a share of common stock. In theory, the two methods should produce the same stock price. Is this statement true or false? a. True b. False

a. True

There has been a strong trend in recent years toward the use of the NPV and IRR methods as the primary criteria, and away from the regular payback as the primary criterion for selecting capital budgeting projects. True or false? a. True b. False

a. True

To estimate the value of a nonconstant growth stock, we can estimate the value of each dividend during the period of nonconstant growth, find the PVs of these dividends, find the value of the stock at the horizon date, find the PV of the horizon value, and then sum these PVs to find the value of the stock today. True or false? a. True b. False

a. True

Two key sections of the Bankruptcy Act are Chapter 7, which relates to liquidating firms and allocating the proceeds among its creditors, and Chapter 11, which deals with reorganizing businesses that are thought to be worth more as operating enterprises than they would bring in from liquidation of firms' assets. Troubled firms' managements generally try to reorganize, but if no feasible reorganization plan can be developed, then the bankruptcy judge will order liquidation. True or false? a. True b. False

a. True

Types of open account credit provided by financial institutions include credit cards, secured and unsecured revolving lines of credit, and overdraft protection lines. a. True b. False

a. True

Under an amortized loan, the periodic payments are all equal. However, the fraction of the payment that represents interest declines over time. True or false? a. True b. False

a. True

When looking at a stock market quote online you will sometimes see the letters 'ttm' following the company's price/earnings ratio and earnings per share. In this case, ttm stands for "trailing twelve months," and it contrasts with data based on analysts' forecasts. True or false? a. True b. False

a. True

When markets are efficient, investors can buy and sell stocks and be confident that they are getting fair prices. When markets are inefficient, investors may be afraid to invest and may put their money "under the pillow," which will lead to poor allocation of capital and economic stagnation. True or false? a. True b. False

a. True

When you use a "convenience check" sent to you by your credit card issuer, it will not be handled in the same manner as are purchases that you make on your credit card. a. True b. False

a. True

While Nasdaq began as a system that simply provided quotations on stocks, it has grown to the point where it is an organized securities market with its own listing requirements. True or False? a. True b. False

a. True

The portion of Private Equity that focuses on helping new companies grow is called: a. Venture Capital. b. Buyout market. c. Invertible private shares. d. Convertible debt.

a. Venture Capital.

Can the real interest rate ever be negative? a. Yes b. No

a. Yes

The "5 Cs of Credit" stand for a. character, capacity, collateral, capital, and condition. b. character, capacity, collateral, capital, and consumption. c. consumer debt, capacity, collateral, capital, and condition. d. character, capacity, consumer payments, collateral, and capital.

a. character, capacity, collateral, capital, and condition.

It is recommended that your review your card's credit terms and compare offers a. every 6 months. b. every 3 months. c. once per month. d. once per year.

a. every 6 months.

Many buildings are equipped with sprinkler systems that activate in the event of a fire. This protection is an example of a. loss control. b. loss prevention. c. risk assumption. d. risk avoidance.

a. loss control.

Projects S and L have the following cash flows, and both have an 11% cost of capital. What is S's NPV? WACC=11% .........S......L 0 -600 -600 1 500 100 2 300 300 3 100 600 a. $185.41 b. $167.06 c. $172.29 d. $183.19 e. $178.88 If S and L were mutually exclusive, both should be accepted. True or false? a. True b. False

b. $167.06 b. False

What's the present value of a 4-year ordinary annuity of $1,000 plus an additional $2,000 at the end of Year 4 if the annual interest rate is 10%? a. $4,719.14 b. $4,535.89 c. $4,356.27 d. $4,626.61 e. $4,445.17

b. $4,535.89

What is the present value of the following uneven cash flow stream: $0 at t = 0, $200 at t = 1, $300 at t = 2, and $400 at t = 3 if the appropriate annual interest rate is 10%? a. $701.07 b. $730.28 c. $673.03 d. $759.49 e. $646.1

b. $730.28

Suppose you must estimate the cost of equity for a firm, and you have the following data: rRF = 5.5%; rM - rRF = 6%; b = 0.8; D1 = $1.00; P0 = $25.00; g = 6%; and rd = the firm's bond yield = 6.5%. What is this firm's cost of equity using the bond-yield-plus-risk-premium approach? Use a 4% judgmental risk premium in your calculation. a. 10.0% b. 10.5% c. 8.8% d. 9.3% e. 10.3%

b. 10.5%

Investment X has a 25% chance of producing a 20% return, a 50% chance of producing a 15% return, and a 25% chance of producing a return of -5%. What is X's expected return? a. 10.15% b. 11.25% c. 10.69% d. 9.65% e. 9.33%

b. 11.25%

The cash flows for Projects SSS and LLL are shown below. Each project has a cost of capital equal to 11%. What is LLL's IRR? WACC= 11% ..........sss.....LLL 0 -800 -800 1 600 100 2 300 300 3 100 700 a. 14.11% b. 13.48% c. 12.75% d. 15.61% e. 16.43%

b. 13.48%

Wald Inc.'s bonds currently sell for $1,120 and have a par value of $1,000. They pay an $85 annual coupon and have a 20-year maturity, but they can be called in 5 years at $1,050. What return would an investor most likely earn, if interest rates remain at current levels for the foreseeable future? a. 5.95% b. 6.49% c. 7.34% d. 7.08% e. 6.71%

b. 6.49%

Wald Inc.'s bonds currently sell for $1,120 and have a par value of $1,000. They pay an $85 annual coupon and have a 20-year maturity, but they can be called in 5 years at $1,050. What is their YTM? a. 7.08% b. 7.34% c. 5.95% d. 6.71% e. 6.49%

b. 7.34%

Longstreet Corporation's sales today are $10 million. Sales are expected to grow by $1 million in each of the next 5 years, so that sales in 5 years are expected to be $15 million. What average rate of annual growth does Longstreet expect over the next five years? a. 8.20% b. 8.45% c. 8.96% d. 9.23% e. 8.70%

b. 8.45%

Your uncle the banker offers to lend you $25,000 to start a new business. You will have to make a payment of $7,000 at the end of each of the next 3 years plus a final payment of $10,000 at the end of Year 4. What annual interest rate is built into this loan? a. 9.74% b. 8.66% c. 10.13% d. 9.01% e. 9.37%

b. 8.66%

A firm's target capital structure consists of 10% debt and 90% common equity. Its tax rate = 40%; rd = 6.5%; and rs = 9.5%. Assuming that the firm will not be issuing new common stock, what is its WACC? a. 8.25% b. 8.94% c. 10.33% d. 6.50% e. 9.50%

b. 8.94%

A company has outstanding long-term bonds with a face value of $1,000, a 7% coupon, and a 9% yield to maturity. If the company were to issue new debt, what is a reasonable estimate of the interest rate (rd) on that debt? a. 8.0% b. 9.0% c. 6.2% d. 5.7% e. 7.0%

b. 9.0%

All else equal, which of the following is most likely to increase a company's retained earnings breakpoint? a. An increase in the company's dividend payout ratio b. A decrease in the fraction of equity used in the company's target capital structure c. both factors will lead to an increase in the retained earnings breakpoint.

b. A decrease in the fraction of equity used in the company's target capital structure

Business risk depends on a number of factors. Which of the following factors does not influence business risk? a. Demand variability b. Amount of debt used by a firm: financial leverage c. Foreign risk exposure d. Extent to which costs are fixed: operating leverage e. Ability to adjust output prices for changes in input costs

b. Amount of debt used by a firm: financial leverage

If the inflation rate is expected to remain constant at the current level in the future, say 3%, which of the following best describes the shape of the yield curve? Consider all factors that affect the yield curve, not just inflation. a. The Treasury yield curve would be downward sloping, as this is the normal shape of the Treasury yield curve. b. Because of the existence of a positive maturity risk premium, and even though the inflation rate is expected to remain constant, the shape of the Treasury yield curve would be upward sloping. c. Because the expectation of future inflation is expected to remain constant, the shape of the Treasury yield curve would be horizontal.

b. Because of the existence of a positive maturity risk premium, and even though the inflation rate is expected to remain constant, the shape of the Treasury yield curve would be upward sloping.

Which of the following statements is TRUE? a. A deposit will grow faster if simple interest rather than compound interest is paid. b. Compound interest means that interest in future periods is earned on the interest earned in the past, whereas under simple interest, interest is earned only on the original investment. c. It would be better to both lend and borrow money at a rate of 6%, simple interest, rather than at a rate of 6%, compound interest.

b. Compound interest means that interest in future periods is earned on the interest earned in the past, whereas under simple interest, interest is earned only on the original investment.

"Risk" in risk premium means: a. Foodborne illness risk b. Default risk c. Shark-attack risk d. Electrocution risk

b. Default risk

PE ratio is: a. Evaluating the market price of a stock by dividing the price by the earnest money b. Evaluating the market price of a stock by dividing the price by the earnings c. Physical education ratio d. Evaluating the market price of a stock by dividing the profits by the earnings

b. Evaluating the market price of a stock by dividing the price by the earnings

Which of the following factors would tend to be consistent with a downward-sloping yield curve? a. A high and positive default risk premium. b. Expected inflation is expected to decline in future years. c. A high and positive maturity risk premium. d. The absence of a liquidity premium.

b. Expected inflation is expected to decline in future years.

A credit bureau is a type of reporting agency that gathers and sells information about individual borrowers and also makes the decision whether to extend credit to a particular person or not. a. True b. False

b. False

A dollar today is worth less than a dollar tomorrow. a. True b. False

b. False

Adverse selection occurs when an insurance company has too great a proportion of medium-risk policyholders. a. True b. False

b. False

An opportunity cost is an amount that a firm would receive if it does not/make a given investment. An example would be the purchase price from a building that a firm owns and could sell if it does not make an investment that would call for the use of the building. Opportunity costs should not be reflected in a capital budgeting analysis. True or false? a. True b. False

b. False

If a firm goes bankrupt and must be liquidated, and if less money is available than the balance sheet values of bonds, preferred stock, and common equity, then some security holders will receive less than the book values of their investments. The priority system under our bankruptcy laws allocates funds first to preferred stock because of its preference, then to bonds, and then to common stockholders (only if there are funds left over after paying preferred stockholders and bondholders). True or false? a. True b. False

b. False

If a stock trades infrequently and has above average volatility, we would expect it to have a smaller than average bid-ask spread. True or false? a. True b. False

b. False

If you are unable to make a payment on time, you have no alternative other than skipping the payment. a. True b. False

b. False

If you obtain a cash advance from your credit card, you will not owe any interest on that amount so long as you pay your balance in full every month. a. True b. False

b. False

If your credit card is stolen, you are responsible for all unauthorized charges. a. True b. False

b. False

It is economically feasible for insurance companies to accept the risk of their policyholders because the loss for any one of the insureds individually is more predictable than are the losses for an entire group of policyholders. a. True b. False

b. False

Most bonds are owned by and traded among large financial institutions, and it is relatively easy for bond dealers to arrange the transfer of large blocks of bonds among the millions of large and small bondholders on the exchanges rather than the over-the counter market. True or false? a. True b. False

b. False

Nominal interest rate shows you a more accurate rate of return than the real interest rate. a. True b. False

b. False

Only institutions that subscribe to the services of a particular credit bureau are allowed access to the information contained in your credit file with that bureau. a. True b. False

b. False

Other things held constant, the higher a firm's financial leverage, the higher its business risk. True or false? a. True b. False

b. False

Suppose a project has a negative cash flow (a cost), then a series of positive cash inflows, and then another cost at the end of its life. In this situation it would be impossible for the project to have more than one IRR. True or false? a. True b. False

b. False

The higher the FICO score, the higher the borrower's credit risk. a. True b. False

b. False

The higher the positive correlation between two assets' returns, the greater is the risk reduction from holding them in a portfolio. True or false? a. True b. False

b. False

The optimal capital structure is the one where the percentages of debt, preferred stock, and common equity minimize the firm's value. True or false? a. True b. False

b. False

The yield curve for corporate bonds tends to have a shape similar to that for Treasury securities, but interest rates on corporate bonds are at lower levels because corporate yields include smaller default risk and liquidity premiums than do Treasury yields. True or false? a. True b. False

b. False

When a debit card is lost or stolen, federal banking laws state that the cardholder's maximum liability is $50 if the card is used before it is reported lost or stolen. a. True b. False

b. False

When you purchase an insurance policy, you are effectively transferring your risk of loss to the state government. a. True b. False

b. False

While individual stocks may have dropped in value, the overall stock market as measured by the S&P 500 and Dow Jones Industrial averages has increased in each of the last twenty-five years. True or false? a. True b. False

b. False

With open account credit, you must notify the lender anytime you wish to use your credit. a. True b. False

b. False

You will be labeled as a "late payer" only after you have paid your credit card bill late four or five times in a year. a. True b. False

b. False

In capital budgeting independent projects are projects that: a. Projects that are paid for the producer of the project. b. Have cash flows that do not depend on the other project. c. Are done by a private firm, not the government. d. Are not done by the firm.

b. Have cash flows that do not depend on the other project.

Which of the following statements is correct? a. Mutually exclusive projects generally have higher NPVs than independent projects. b. If a firm is considering 5 independent projects, then as a general rule it should invest in all 5 of them if the analysis shows that each of them has a positive NPV. If it were considering 5 mutually exclusive projects (i.e., 5 ways of performing a given task), then as a general rule it should not invest in all 5 of them even if they all have positive NPVs. c. If two projects are mutually exclusive, then the one with the higher IRR should be accepted.

b. If a firm is considering 5 independent projects, then as a general rule it should invest in all 5 of them if the analysis shows that each of them has a positive NPV. If it were considering 5 mutually exclusive projects (i.e., 5 ways of performing a given task), then as a general rule it should not invest in all 5 of them even if they all have positive NPVs.

Which are better in terms of fees? a. You should not spend any money on fees b. It depends on your needs c. Front load fees are better d. Rear load fees are better

b. It depends on your needs

Which of the following statements is correct? a. If you need a specific amount of money at a specific future date, you should be concerned about price risk, but you do not need to be concerned about reinvestment risk. b. Other things held constant, a 10-year bond has more reinvestment risk than a 30-year bond. c. If you need a specific amount of money at a specific future date, you could invest in a number of different kinds of bonds, but the one type of bond that you should avoid is a zero coupon bond, because such bonds do not pay any interest.

b. Other things held constant, a 10-year bond has more reinvestment risk than a 30-year bond.

Which of the following statements is true regarding real and nominal interest rates? a. Nominal interest rates are the real interest rate minus inflation b. Real interest rates are nominal interest rates minus inflation c. Real interest rates are the ones you see in the market d. Real interest rates are nominal interest rates plus inflation

b. Real interest rates are nominal interest rates minus inflation

According to the Pure Expectations Theory, an upward sloping yield curve signals markets believe what? a. Inflation rates will be lower in the future. b. Short term interest rates will be higher in the future than what they are today. c. Government budget deficits in the future will be higher than what they are today. d. The economy will slow down or enter into a recession.

b. Short term interest rates will be higher in the future than what they are today.

Average daily balance multiplied by the interest rate gives you: a. Beta b. The amount of interest that can be charged c. The rate of return d. The tax rate

b. The amount of interest that can be charged

If the IRS shortened the depreciable lives of the assets, thus increasing their depreciation rates, which of the following statements reflects what would happen to the calculated NPV? a. The calculated NPV would not change. b. The calculated NPV would increase. c. The calculated NPV would decrease.

b. The calculated NPV would increase.

Among the following factors that affect the cost of capital, which can the firm most directly control? a. Tax rates b. The firm's capital structure c. Interest rates

b. The firm's capital structure

In calculating the expected rate of return, the expected returns in each state are weighted by: a. The after tax rate of return earned. b. The probability of that state occurring. c. The rate of return expected. d. The time it takes to earn that return

b. The probability of that state occurring.

The term structure of interest rates is shown graphically with the: a. Beta curve analysis. b. Yield Curve. c. PE ratio curve. d. Market return curve.

b. Yield Curve.

If you pay off a past-due debt: a. All is forgiven b. You may still have a ding on your credit report for that incident c. No one will notice because they will be happy to have their money d. You will be black-balled forever for one indiscretion

b. You may still have a ding on your credit report for that incident

If you check your credit card company's website and see that better terms are being offered than you currently have, you should a. do nothing; these are introductory terms for new customers only. b. call the company and ask for the better deal. c. stop making your monthly payments. d. switch cards immediately.

b. call the company and ask for the better deal.

Generally speaking, the interest rates on credit cards are a. lower than any other form of consumer credit. b. higher than any other form of consumer credit. c. lower for cash advances. d. equal to other forms of consumer credit.

b. higher than any other form of consumer credit.

Credit cards that combine features of a traditional bank credit card with an incentive, such as cash, merchandise rebates, airlines tickets, or even investments, are known as a. retail charge cards. b. reward cards. c. secured credit cards. d. affinity cards.

b. reward cards.

Debit cards differ from credit cards in that a. there are no monthly statements. b. they work like writing a check. c. they aren't nearly as convenient. d. the interest rate is higher.

b. they work like writing a check.

Acceptable uses of credit include all of the following except a. using credit to spread payments over time for big ticket items, allowing us to use and enjoy these assets now. b. using credit to meet basic living expenses, such as buying groceries on credit because there's no money left from your paycheck. c. using credit for convenience to avoid having to carry cash; convenience users keep track of their expenditures and pay their credit card bills in full each month. d. using credit to meet financial emergencies, such as borrowing to meet living expenses during a time of unemployment.

b. using credit to meet basic living expenses, such as buying groceries on credit because there's no money left from your paycheck.

Assume that you just received an ordinary annuity with 5 annual payments of $1,000 each. You plan to invest the payments at a 6% annual interest rate. What will the value of the first payment be at the end of the 5th year? a. $1,187.87 b. $1,224.61 c. $1,262.48 d. $1,152.23 e. $1,300.35

c. $1,262.48

Lei Corporation's bonds have a 30-year maturity, a 10% semiannual coupon ($50 coupon payments are made every six months), a face value of $1,000, and cannot be called. The going nominal annual interest rate (rd) for similar semiannual payment bonds of equivalent risk is 7%. What is the bond's price? a. $1,000.00 b. $1,146.33 c. $1,374.17 d. $1,454.06 e. $ 957.49

c. $1,374.17

Your father is now planning to retire, and his employer has promised him a guaranteed, but fixed, income of $50,000 per year for the rest of his life. If the rate of inflation is 5% per year, how much in current dollars will the payment at the end of 20th year be worth? a. $20,293.43 b. $19,798.47 c. $18,844.47 d. $20,800.77 e. $19,315.58

c. $18,844.47

Calvert Industries invests a large sum of money in R&D; as a result, it retains and reinvests all of its earnings. In other words, Calvert doesn't pay any dividends and it has no plans to pay dividends in the near future. A major pension fund is interested in purchasing Calvert's stock. The pension fund manager has estimated Calvert's free cash flows for the next 3 years as follows: $1.2 million, $2.5 million, and $4.1 million. After the third year, free cash flow is projected to grow at a constant 5%. Calvert's WACC is 10%, the market value of its debt and preferred stock totals $10.9256 million, and it has 2.5 million shares of common stock outstanding. What is an estimate of Calvert's price per share? a. $28.37 b. $17.50 c. $24.00 d. $30.07 e. $20.25

c. $24.00

Your younger sister is just starting high school, and 4 years from today she should be entering college. Your father plans to start a college fund for her, beginning today. He will invest $6,000 per year in a mutual fund, beginning today, and he expects to earn an annual return of 9%. What is the expected value of the college fund when your sister enters college? a. $31,422.37 b. $29,160.55 c. $29,908.26 d. $28,431.54 e. $30,655.97

c. $29,908.26

Vara Technologies' is expected to pay a dividend of $2.00 per share one year from today. Vara's required rate of return is rs = 11%. If the expected growth rate is 5%, at what price should the stock sell? a. $36.79 b. $34.16 c. $33.33 d. $35.89 e. $35.02

c. $33.33

Silva Motors just paid a dividend of $2.00, i.e., D0 = $2.00. The dividend is expected to grow by 100% during Year 1, by 50% during Year 2, and then at a constant rate of 5% thereafter. If Silva's required rate of return is rs = 12%, what is the value of the stock today? a. $78.20 b. $74.24 c. $80.10 d. $82.36 e. $76.15

c. $80.10

A perpetuity pays $5,000 per year, with the first payment coming one year from now. If the appropriate annual interest rate is 6%, what is the perpetuity's present value? a. $78,408.33 b. $88,333.33 c. $83,333.33 d. $85,833.33 e. $80,833.33

c. $83,333.33

If inflation during the last 12 months was 3% and the interest rate during that period was 5%, what was the real rate of interest? a. 1% b. 5% c. 2% d. 3% e. 4%

c. 2%

A suggested credit guideline is to have no more than what percentage of your monthly take-home pay go toward consumer debt payments? a. 25% b. 15% c. 20% d. 10%

c. 20%

Special low introductory rates on credit cards are usually good for a. 3 to 6 months. b. as long as you keep the card. c. 6 to 12 months. d. 2 years.

c. 6 to 12 months.

Assume that the real risk-free rate is r* = 2.5% and the average expected inflation rate is 3% for each future year. The DRP and LP for Bond X are 1% each, and the applicable MRP is 1.5%. What is Bond X's interest rate? a. 7.5% b. 4.5% c. 9.0% d. 10.5% e. 6.0%

c. 9.0%

An REIT is really: a. A mutual fund that buys red eagle related assets b. A money market account that buys a bunch of mortgages c. A mutual fund that buys real estate related assets d. A money market account that buys a bunch of commercial real estate

c. A mutual fund that buys real estate related assets

When calculating a cash flow calendar, you are looking to see if a. Your income outpaced your expenses, leaving you with a surplus b. Your income could not keep up with your expenses, leaving you with a deficit c. Both of the above d. Neither of the above

c. Both of the above

The key difference between investment grade bonds and junk bonds are: a. Liquidity risk. b. Prepayment risk. c. Default risk. d. Length to maturity.

c. Default risk.

Who tends to issue junk bonds? a. The Federal Reserve. b. Local governments in the United States. c. Financially troubled firms. d. Foreign governments.

c. Financially troubled firms.

An increase in either risk or inflation would likely lead to which of the following results? a. Unlikely to affect the level of interest rates. b. Lower interest rates. c. Higher interest rates.

c. Higher interest rates.

The term structure of interest rates shows: a. How interest rates change over time. b. The relationship between default risk and return. c. How securities that are similar in every other way but have different maturities have different yields. d. How taxes impact the after tax rate of return on securities.

c. How securities that are similar in every other way but have different maturities have different yields.

Cash flows have two parts: a. Black and White b. Credits and Debits c. Income and Expenses d. Ups and Downs

c. Income and Expenses

The goal of quantitative easing is to: a. Push down the price of real estate. b. Increase the price of gold. c. Increase liquidity in financial markets. d. Increase interest rates.

c. Increase liquidity in financial markets.

A bond will sell at a premium if which of the following happened? a. The stock market increased. b. Tax rates increased. c. Interest rates fell below coupon rate. d. The borrower defaulted.

c. Interest rates fell below coupon rate.

The NPV should be used as the primary capital budgeting decision criterion because: a. It tells us how long it will take to recover the investment in a project. b. It tells us what rate of return is expected on a project. c. It tells us how much the project is expected to add or subtract from a firm's value.

c. It tells us how much the project is expected to add or subtract from a firm's value.

Quantitative easing came about because which policy was not working properly? a. Exchange Rate Policy. b. Fiscal Policy c. Monetary Policy. d. Trade Policy.

c. Monetary Policy.

Credit counselors are: a. People who will validate your feelings b. Nonprofit organizations that help young women dress professionally for work c. Nonprofit organizations that help educate people on consumer credit d. People you can talk to about your feelings

c. Nonprofit organizations that help educate people on consumer credit

The coupon rate refers to: a. The rate at which investors buy a bond. b. The rate at which a bond price changes. c. The interest rate a bond pays. d. The true market price of bond.

c. The interest rate a bond pays.

You observe that the Treasury yield curve has been upward sloping in recent weeks, and that its slope has steadily increased. Which of the following could explain the increase in the slope of the yield curve? a. The real risk-free rate of interest has increased. b. There has been a decline in the maturity risk premium. c. The market's forecast of expected inflation has increased in recent weeks. d. The market believes the default risk on corporate securities has increased.

c. The market's forecast of expected inflation has increased in recent weeks.

A call option bond is: a. The obligation but not the right to pay off a bond early b. The absolute requirement to pay off a bond early c. The right but not the obligation to pay off a bond early d. The absolute right to walk away from an obligation

c. The right but not the obligation to pay off a bond early

Secured loans differ from unsecured loans in that: a. They make you feel really safe b. They are kept in a safe deposit box at a bank c. They are backed by some collateral that was pledged d. They are tired down to a particular spot on the ground

c. They are backed by some collateral that was pledged

Which of the following statements best describes Kholdy Enterprises' bond? a. This bond is a par value bond since its price is equal to its par value of $1,000. b. This bond is a premium bond since its price is greater than its par value of $1,000. c. This bond is a discount bond since its price is less than its par value of $1,000.

c. This bond is a discount bond since its price is less than its par value of $1,000.

"Treasuries" do not include: a. Treasury Bonds b. Treasury Notes c. Treasury Stocks d. Treasury Bills

c. Treasury Stocks

Financial advisors recommend that you carry no more than how many bank credit cards? a. Five b. Ten c. Two d. One

c. Two

The two sides of the Private Equity market are: a. Public and Private shares. b. Invertible and Convertible shares. c. Venture Capital and Buyouts. d. Equities and Debt.

c. Venture Capital and Buyouts.

A low credit score means: a. You are highly likely to repay your debt b. You are one of the worst karaoke singers c. You are highly unlikely to repay your debt d. You are one of the best borrowers

c. You are highly unlikely to repay your debt

Advantages of home equity credit line include all of the following EXCEPT: a. The interest rate paid on home equity credit lines is usually lower than other types of credit b. They can be very useful if used properly c. You can use a home equity credit line to pay for things you can't really afford d. Since the house is collateral, the interest paid may be tax deductible

c. You can use a home equity credit line to pay for things you can't really afford

The cash flows for Projects SSS and LLL are shown below. Each project has a cost of capital equal to 11%. Which of the following statements is true? WACC=11% .....SSS.....LLL 0 -800 -800 1 600 100 2 300 300 3 100 700 a. If Projects SSS and LLL are independent, then according to the IRR decision criterion both should be accepted because both have an IRR that exceeds the cost of capital. b. If these projects are mutually exclusive, then according to the IRR decision criterion Project SSS should be accepted because it has the larger IRR. c. both statements are true.

c. both statements are true.

Which of the following factors could lead to a conflict between the NPV and IRR methods for two mutually exclusive projects? a. Differences in the timing of the projects' cash flows. b. Differences in the projects' sizes. c. both statements are true.

c. both statements are true.

Using consumer credit can a. help us attain our financial goals. b. help us raise our overall standard of living. c. cause us great financial pain when used improperly. d. do all of these.

d. do all of these.

Assume that you just received an ordinary annuity with 8 annual payments of $1,000 each. You plan to invest the payments at a 6% annual interest rate. How much would you have, in total, at the end of the 8th year? a. $10,713.34 b. $10,503.27 c. $10,095.42 d. $ 9,897.47 e. $10,297.33

d. $ 9,897.47

Assume that you must make a $1,000 payment one year from today. How much must you deposit today in a bank account that pays a 6% nominal rate, monthly compounding, to have the needed funds a year from now? a. $ 970.17 b. $1,029.25 c. $ 999.27 d. $ 941.91 e. $1,060.13

d. $ 941.91

Leggio Inc. issued bonds with a 30-year maturity one year ago. The bonds have a 6% coupon, make one payment per year, and sold at their $1,000 par value at issue because the going market rate at the time was 6%. Now, one year later, the market rate has declined from 6% to 5%. At what price should Leggio's bonds now sell? a. $1,000.00 b. $ 911.22 c. $1,067.54 d. $1,151.41 e. $1,209.10

d. $1,151.41

Suppose your rich uncle gave you $50,000, which you plan to use for graduate school. You will make the investment now, you expect to earn an annual return of 6%, and you will make 4 equal annual withdrawals, beginning 1 year from today. Under these conditions, how large would each withdrawal be so there would be no funds remaining in the account after the 4th withdrawal? a. $15,767.58 b. $15,308.33 c. $14,068.83 d. $14,429.57 e. $14,862.46

d. $14,429.57

Vara Technologies' is expected to pay a dividend of $2.00 per share one year from today. Vara's required rate of return is rs = 11%. What would Vara's price be if the expected growth rate were g = 0%? a. $16.43 b. $17.73 c. $17.28 d. $18.18 e. $16.85

d. $18.18

Suppose you bought a condo and took out a 30-year, $100,000 amortized loan at a nominal rate of 8% with end-of-month payments. How much interest would you pay the 2nd month? a. $614.50 b. $627.04 c. $639.84 d. $666.22 e. $652.90

d. $666.22

The interest rate on 3-year Treasury securities is currently 6%. The interest rate on 4-year Treasury securities is currently 7%. Assume that the pure expectations theory is correct. To the closest whole percent, what is a reasonable forecast of the rate on 1-year Treasury securities 3 years from now? a. 8.5% b. 9.0% c. 8.0% d. 10.0% e. 9.5%

d. 10.0%

Myers Corporation's stock currently trades at $40 a share. Investors estimate that the year-end dividend will be $2.00 a share and that its dividend will grow at 5% a year (i.e., D1 = $2.00 and g = 5%). The company needs to issue new stock in order to fund its upcoming projects, and investment bankers estimate that the flotation cost will be 4%. What is Myers' cost of new external equity? a. 12.0% b. 8.5% c. 11.3% d. 10.2% e. 9.6%

d. 10.2%

Project X has the following cash flows. What is its regular payback? 0 -500 1 200 2 200 3 400 a. 3.50 years b. 1.73 years c. 2.66 years d. 2.25 years e. 3.11 years

d. 2.25 years

Investors expect Bae Corporation to pay a dividend of D1 = $1.50 and to grow at a constant rate of 7% per year. The stock sells at a price of $25. What is Bae's expected dividend yield? a. 8.0% b. 7.0% c. 4.0% d. 6.0% e. 5.0%

d. 6.0%

Investors expect Bae Corporation to pay a dividend of D1 = $1.50 and to grow at a constant rate of 7% per year. The stock sells at a price of $25. What is Bae's expected capital gains yield? a. 8.0% b. 4.0% c. 5.0% d. 7.0% e. 6.0%

d. 7.0%

A company's perpetual preferred stock pays a $4.50 annual dividend per share, and it currently sells for $60 per share. If the company were to sell a new preferred issue, what would be the cost of that capital? Ignore flotation costs. a. 6.4% b. 4.5% c. 5.6% d. 7.5% e. 8.3%

d. 7.5%

A firm has the following data: target capital structure of 50% debt and 50% common equity; tax rate = 40%; rd = 7.5%; and rs = 12%. Assume the firm will not be issuing new common stock. What is this firm's WACC? a. 12.0% b. 9.5% c. 10.0% d. 8.3% e. 7.5%

d. 8.3%

Investment X has a 25% chance of producing a 20% return, a 50% chance of producing a 15% return, and a 25% chance of producing a return of -5%. What's Investment X's standard deviation? a. 11.4% b. 8.8% c. 10.7% d. 9.6% e. 9.3%

d. 9.6%

A money market mutual fund is: a. A mutual fund that buys only long-term securities that mature in over 5 years b. A waste of money c. A mutual fund that buys only stocks d. A mutual fund that buys securities that mature in under a year, so it is safe and fairly liquid

d. A mutual fund that buys securities that mature in under a year, so it is safe and fairly liquid

A high PE ratio might mean: a. A stock is undervalued in the market b. A stock is priced just right in the market c. A stock is a bargain and you should buy it right away d. A stock is overvalued in the market

d. A stock is overvalued in the market

A mutual fund is: a. A single purchase of a stock b. A waste of money c. When two or more funds hold some belief in common d. A way for investors to pool together money to have a well-diversified investment portfolio

d. A way for investors to pool together money to have a well-diversified investment portfolio

A credit report is: a. Your financial report card b. A consolidated history of your repayment of debt c. A place where companies, utilities, banks and courts can report about your credit d. All of the above

d. All of the above

Active investors: a. Are contently looking for market opportunities b. Change when market conditions change c. Pay a lot in commissions because they buy and sell a lot of securities d. All of the above

d. All of the above

Diversification is different for: a. Young and old people b. People with volatile incomes c. People who are risk averse d. All of the above

d. All of the above

Passive investors: a. Go with the flow b. Don't do much when market conditions change c. Don't pay a lot in commissions because they don't trade securities often d. All of the above

d. All of the above

A home equity credit line can be used to: a. Buy a car b. Pay to have a pool put in c. Pay for college tuition d. Any of the above

d. Any of the above

An index mutual fund: a. Offers a good deal of diversification for a small amount of money b. Allows smaller savers to pool together money to have a well-diversified investment portfolio c. Could be one like the S+P 500 index mutual fund d. Any of the above

d. Any of the above

Front and rear load fees are charged: a. On mutual funds b. Before you buy in to a mutual funds c. After you redeem your shares in a mutual funds d. Any of the above

d. Any of the above

Why would someone want to retire a bond early? a. They have the funds to do it b. If interest rates fall over time, they may want to pay off bonds issued at higher interest rates c. They are sick of having debt obligations d. Any of the above

d. Any of the above

Unsecured loans: a. Are also known as cash advances b. Can be mortgages with a lien on the house c. Can be auto loans with a lien on the automobile d. Are also known as signature loans

d. Are also known as signature loans

12b-1 fees: a. Are only 1%, that's not too bad! b. Are 1%, and are a deal breaker! c. Are used to buy nice cars for fund managers d. Are not really correlated with the actual performance of the mutual funds

d. Are not really correlated with the actual performance of the mutual funds

With the underwriting process, insurance companies a. decide whom they can insure. b. determine the applicable rates for those they do insure. c. guard against adverse selection. d. do all of these.

d. do all of these.

Ricardo's monthly take-home pay is $2,500. His monthly payments include his house payment of $800, his student loan payment of $200, and his car payment of $300. Which of the following is a correct statement concerning his consumer debt safety ratio? a. At 52% of his take-home pay, his consumer debt safety ratio is far in excess of the recommended maximum. He should immediately do what he can to reduce his debt load. b. At 36% of his take-home pay, his consumer debt safety ratio exceeds the recommended maximum. He should immediately do what he can to reduce his debt load. c. At 12% of his take-home pay, his consumer debt safety ratio is less than the recommended maximum. He could consider taking on a little more consumer debt if he felt it was necessary. d. At 20% of his take-home pay, his consumer debt safety ratio equals the recommended maximum. He would not want to incur any more consumer debt without paying off some of his existing debt.

d. At 20% of his take-home pay, his consumer debt safety ratio equals the recommended maximum. He would not want to incur any more consumer debt without paying off some of his existing debt.

Mutually Exclusive projects are projects that: a. Cannot be completed at this time. b. Are not affordable at this time. c. Are not profitable given current market conditions. d. Cannot be done together.

d. Cannot be done together.

The debt payment to disposable income ratio is calculated by: a. Dividing monthly utility bills by disposable income b. Dividing monthly student loan repayment by disposable income c. Dividing monthly credit card debt by disposable income d. Dividing monthly nonmortgage debt repayment by disposable income

d. Dividing monthly nonmortgage debt repayment by disposable income

Total return is: a. How much of a return you get from a fraudulent investment b. How much of a return you get from a fake investment c. How much of a return you get from a real investment d. How much of a return you get from a financial investment

d. How much of a return you get from a financial investment

Capital budgeting is used to determine: a. If a stock should be bought or sold. b. If a corporation should issue stocks or bonds. c. If interest rates will increase or decrease. d. If projects should be funded or killed.

d. If projects should be funded or killed.

A bond will sell at a discount if which of the following happened? a. Taxes increased. b. Market interest rates became negative. c. The bond was redeemed. d. Interest rates rose above coupon rate.

d. Interest rates rose above coupon rate.

If interest rates fall, the risk with a fixed rate instrument is that: a. Price of the financial instrument will fall rapidly. b. The real interest rate may increase very rapidly. c. Default risk will become counter cyclical. d. It will be paid off before maturity.

d. It will be paid off before maturity.

The default risk premium is an important contributor in determining what happens to which of the following? a. Bond maturity date b. Exchange rates c. Inflation rate d. Market interest rates

d. Market interest rates

The fine print on credit cards could include any of the following EXCEPT: a. Late fees b. Overlimit fees c. Application fees d. Mismatched socks fees

d. Mismatched socks fees

The weights in the expected rate of return calculation must sum to equal: a. One hundred. b. The current real market interest rate. c. The expected rate of return. d. One.

d. One.

What is discounting? a. The bank to bank lending rate b. Calculating the future value of a cash flow c. Adding inflation risk d. Reducing the value of future cash flows

d. Reducing the value of future cash flows

The debt payment to disposable income ratio: a. Is a lame and unimportant ratio you don't need to calculate b. Tells you what to spend money on c. Should be greater than 14% d. Tells you if you have too much nonmortgage debt

d. Tells you if you have too much nonmortgage debt

Which of the following statements is FALSE? a. Time lines typically show dollars below the line and years above the line. b. Cash flows do not have to occur for every period shown on the time line. A lump sum cash flow can be depicted as easily as annuities on a time line. c. Time lines put verbal information into a diagram that is useful for seeing the cash flows that occur, when they occur, and the interest rate used in the analysis. d. The FV as shown on a time line is always the cash flow at Time = 1. e. Time lines can show cash flows that occur over years, quarters, or any other periods.

d. The FV as shown on a time line is always the cash flow at Time = 1.

According to the Pure Expectations Theory, long term yields are determined by: a. The rate of current inflation. b. The expected growth rate of the economy. c. The size of the government budget deficit. d. The expected yield on short term bonds in the future.

d. The expected yield on short term bonds in the future.

In calculating the expected rate of return, the expected returns in each state are weighted by: a. The time it takes to earn that return. b. The after tax rate of return earned. c. The rate of return expected. d. The probability of that state occurring.

d. The probability of that state occurring.

Debt Management Plans are NOT: a. Formal agreements often brokered by a credit counselor b. Formal agreement to make fixed payments to go to each creditor until the debt is paid c. A way to help fix credit problems d. Useless agreements that lock you into more debt

d. Useless agreements that lock you into more debt

Diversification is NOT: a. Is a measure of how well you spreading out risks b. Is a good way to protect against catastrophic losses c. Can be described as holding a wide variety of financial assets d. Useless. Just buy Home Depot stock and stick with that

d. Useless. Just buy Home Depot stock and stick with that.

Steps to take in order to build a strong credit history may include a. obtaining a credit card and making a few credit purchases each month, occasionally carrying a balance from one month to the next. b. obtaining a small loan, even if you don't need one, and repaying it over time in order to give yourself a track record. c. having no more than three late payments per year on credit card or loan payments. d. both a and b.

d. both a and b.

Kholdy Enterprises' outstanding bonds mature in 6 years, have a par value of $1,000, and make an annual coupon payment of $60. The market yield on the bond is currently 10%. What is the bond's price? a. $ 967.55 b. $1,089.93 c. $1,125.00 d. $1,000.00 e. $ 825.79

e. $ 825.79

Suppose you deposited $1,000 in a credit union that pays a nominal rate of 7% with daily compounding and a 365-day year. How much could you withdraw after nine months, assuming this is three-fourths of a year? a. $ 980.69 b. $ 951.27 c. $1,011.02 d. $1,073.56 e. $1,053.90

e. $1,053.90

A company's sales today are $50 million. If sales grow at 7% annually, what will they be (in millions of dollars) 20 years later? a. $174.85 b. $179.33 c. $183.93 d. $188.64 e. $193.48

e. $193.48

What's the future value of this cash flow stream: $1,200 at the end of Year 1, $0 at the end of Year 2, and $500 at the end of Year 3? The appropriate annual interest rate is 12%. a. $1,858.61 b. $1,906.27 c. $2,055.41 d. $1,955.15 e. $2,005.28

e. $2,005.28

Wyatt Inc. uses the dividend-yield-plus-growth-rate approach to calculate the cost of equity. Investors expect Wyatt's year-end dividend (D1) to be $3.00 a share, its expected dividend growth rate is 5%, and the stock currently sells for $60 a share. What is Wyatt's cost of equity? a. 9.2% b. 7.4% c. 8.5% d. 5.0% e. 10.0%

e. 10.0%

Suppose you must estimate the cost of equity for a firm, and you have the following data: rRF = 5.5%; rM - rRF = 6%; b = 0.8; D1 = $1.00; P0 = $25.00; g = 6%; and rd = the firm's bond yield = 6.5%. What is this firm's cost of equity using the CAPM approach? a. 9.3% b. 10.0% c. 10.5% d. 8.8% e. 10.3%

e. 10.3%

The cash flows for Projects SSS and LLL are shown below. Each project has a cost of capital equal to 11%. What is SSS's IRR? WACC= 11% ..........sss.....LLL 0 -800 -800 1 600 100 2 300 300 3 100 700 a. 15.61% b. 12.75% c. 14.11% d. 13.48% e. 16.43%

e. 16.43%

The cash flows for Project 2 are shown below. One IRR for Project 2 is 81.30%. What is the other IRR? 0 -550 1 900 2 1100 3 -1675 Project 2: a. 18.10% b. 12.00% c. 23.33% d. 15.66% e. 21.08%

e. 21.08%

A company has outstanding long-term bonds with a face value of $1,000, a 7% coupon, and a 9% yield to maturity. If the company's tax rate is 30%, what would be its after-tax cost of debt? a. 8.0% b. 7.5% c. 5.2% d. 7.0% e. 6.3%

e. 6.3%

Which of the following statements is correct? More than one statement may be correct. a. A project's IRR is conceptually similar to a bond's YTM. b. A project's IRR is the discount rate that causes the project's NPV to equal zero. c. If an independent project's IRR exceeds its cost of capital, then the project should be accepted. d. If an independent project's IRR is less than its cost of capital, then the project should be rejected. e. All of these are all true.

e. All of these are all true.

Which of the following is NOT a financial institution? a. Investment bank b. Commercial bank c. Mutual fund d. Hedge fund e. All of these are examples of financial institutions.

e. All of these are examples of financial institutions.

What are the two items whose sum is the cost of equity? a. Inflation and dividends b. Dividends and interest c. Interest and inflation d. Interest and capital gains e. Dividends and capital gains

e. Dividends and capital gains

Select one of the choices below that best completes the following sentence: If an investor sold long-term bonds and used the proceeds to purchase short-term bonds, this would increase the investor's exposure to ________ risk and decrease the investor's exposure to ________ risk. a. price; default b. liquidity; reinvestment c. default; reinvestment d. price; reinvestment e. reinvestment; price

e. reinvestment; price