Finc 301 Exam 3

Cortez Art Gallery is adding to its existing buildings at a cost of $2 million. The gallery expects to bring in additional cash flows of $520,000, $700,000, and $1,000,000 over the next three years. Given a required rate of return of 10 percent, what is the NPV of this project? (Do not round intermediate computations. Round final answer to nearest dollar.) -$197,446 $197,446 $1,802,554 -$1,802,554

$-197,446

Champagne, Inc., had revenues of $12 million, cash operating expenses of $8 million, and depreciation and amortization of $1.5 million during 2008. The firm purchased $700,000 of equipment during the year while increasing its inventory by $500,000 (with no corresponding increase in current liabilities). The marginal tax rate for Champagne is 30 percent. Free cash flow: What is Champagne's NOPAT for 2008? $3,250,000 $1,750,000 $4,000,000 $2,500,000

$1,750,000

Cortez, Inc., is expecting to pay out a dividend of $2.50 next year. After that it expects its dividend to grow at 7 percent for the next four years. What is the present value of dividends over the next five-year period if the required rate of return is 10 percent? (Do not round intermediate calculations. Round final answer to two decimal places.) $9.80 $11.88 $11.50 $10.76

$10.76

University Corp. issued five-year bonds that pay a coupon of 6.5 percent semiannually. The current market rate for similar bonds is 5.5 percent. How much will you be willing to pay for the bond today? Do not round intermediate calculations. Round your answer to the nearest dollar. $1,043 $1,023 $1,000 $958

$1043

Regatta, Inc., has six-year bonds outstanding that pay an 8.25 percent coupon rate. Investors buying the bond today can expect to earn a yield to maturity of 6.875 percent. How much will you be willing to pay for Regatta's bond today? Assume annual coupon payments. (Do not round intermediate computations. Round your final answer to the nearest dollar.) $923 $1,014 $972 $1,066

$1066

Giant Electronics is issuing 20-year bonds that will pay coupons semiannually. The coupon rate on this bond is 7.8 percent. If the market rate for such bonds is 7 percent, what will the bonds sell for today? (Do not round intermediate computations. Round your final answer to the nearest dollar.) $861 $1,085 $1,037 $923

$1085

The Smart Start Corporation recently paid a dividend of $3.00 per share. Management expects dividends to grow at a constant rate of 10% per year. If the required rate of return on the company's stock is 14%, how much would the stock be worth at the end of three years from today? (Do not round intermediate calculations. Round final answer to two decimal places) $99.82 $109.81 $82.50 $21.42

$109.81

The cost of using an existing asset: Small Appliances, Inc., is considering starting a new line of business with the excess capacity it currently has on its rivet machine. The current machine is expected to last four years at the current rate of production. However, if a new line of business is taken on, then the machine will have to be replaced in three years instead of four. A new machine that will last four years would cost $50,000. What is the cost of taking on the new line of business? (Round to the nearest dollar and assume a 9 percent cost of capital.) $50,000 $12,500 $15,433 $11,917

$11917

Jeremy Kohn is planning to invest in a 10-year bond that pays a 12 percent coupon. The current market rate for similar bonds is 9 percent. Assume semiannual coupon payments. What is the maximum price that should be paid for this bond? (Do not round intermediate computations. Round your final answer to the nearest dollar.) $951 $1,033 $1,195 $882

$1195

Fifth Second Banc Corp. has issued preferred stock with no maturity date. It has a par value of $100 and pays a quarterly dividend of $3 per share. If the required rate of return is 10%, this stock is currently worth: $120. $300. $30. $100.

$120

Champagne, Inc., had revenues of $12 million, cash operating expenses of $8 million, and depreciation and amortization of $1.5 million during 2008. The firm purchased $700,000 of equipment during the year while increasing its inventory by $500,000 (with no corresponding increase in current liabilities). The marginal tax rate for Champagne is 30 percent. Free cash flow: What are Champagne's cash flows associated with investments for 2008? $700,000 $1,200,000 none of these $500,000

$1200000

Lincoln, Inc. expects to pay no dividends for the next four years. It has projected a growth rate of 35 percent for the next four years. After four years, the firm will grow at a constant rate of 6 percent. Its first dividend to be paid in year 5 will be worth $4.25. If your required rate of return is 20 percent, what is the stock worth today? (Do not round intermediate calculations. Round final answer to two decimal places.) $32.18 $36.43 $14.64 $21.82

$14.64

Starskeep, Inc., is a fast-growing technology company. The firm projects a rapid growth of 40 percent for the next two years and then a growth rate of 20 percent for the following two years. After that, the firm expects a constant-growth rate of 8 percent. The firm expects to pay its first dividend of $1.25 a year from now. If your required rate of return for such stocks is 20 percent, what is the current price of the stock? (Do not round intermediate calculations. Round final answer to two decimal places.) $30.30 $15.63 $22.68 $4.70

$15.63

Suppose a firm's expected dividends for the next three years are as follows: D1 = $1.10, D2 = $1.20, and D3 = $1.30. After three years, the firm's dividends are expected to grow at 5 percent per year. What should the current price of the firm's stock (P0) be today if investors require a rate of return of 12 percent on the stock? (Do not round intermediate calculations. Round off final answer to the nearest $0.01) $10.10 $16.74 $61.30 $24.12

$16.74

The Cyclone Golf Resorts is redoing its golf course at a cost of $2,744,320. It expects to generate cash flows of $1,223,445, $2,007,812, and $3,147,890 over the next three years. If the appropriate discount rate for the firm is 13 percent, what is the NPV of this project? (Do not round intermediate computations. Round final answer to nearest dollar.) $2,092,432 $4,836,752 $7,581,072 $3,112,459

$2,092,432

When to replace an asset: Burt's Pizzas is considering whether to purchase an oven. Burt's calculates that its current oven generates $4,000 of cash flow per year. A new oven would cost $15,000 and would provide cash flow of $6,000 per year for six years. What is the equivalent annual cash flow for the new oven (round to the nearest dollar), and should Burt's purchase the new oven? Assume the cost of capital for Burt's is 12 percent. $24,668, purchase the new oven $6,000, purchase the oven $2,352, do not purchase the oven $9,668, purchase the oven

$2,352 do not purchase the oven

Provo, Inc., had revenues of $10 million, cash operating expenses of $5 million, and depreciation and amortization of $1 million during 2008. The firm purchased $500,000 of equipment during the year while increasing its inventory by $300,000 (with no corresponding increase in current liabilities). The marginal tax rate for Provo is 40 percent. Free cash flow: What is Provo's NOPAT for 2008? $4,000,000 $2,400,000 $3,400,000 $2,600,000

$2,400,000

An investment of $105 generates after-tax cash flows of $30 in Year 1, $60 in Year 2, and $110 in Year 3. The required rate of return is 20 percent. The net present value is closest to $66.14. $25.32. $51.01. $65.67.

$25.32

Champagne, Inc., had revenues of $12 million, cash operating expenses of $8 million, and depreciation and amortization of $1.5 million during 2008. The firm purchased $700,000 of equipment during the year while increasing its inventory by $500,000 (with no corresponding increase in current liabilities). The marginal tax rate for Champagne is 30 percent. Free cash flow: What is Champagne's cash flow from operations for 2008? $4,000,000 $3,250,000 $2,500,000 $2,050,000

$3,250,000

Provo, Inc., had revenues of $10 million, cash operating expenses of $5 million, and depreciation and amortization of $1 million during 2008. The firm purchased $500,000 of equipment during the year while increasing its inventory by $300,000 (with no corresponding increase in current liabilities). The marginal tax rate for Provo is 40 percent. Free cash flow: What is Provo's cash flow from operations for 2008? $3,400,000 $4,000,000 $2,600,000 $2,400,000

$3,400,000

Computing the terminal-year FCF: Miles Cyprus Corp. purchased a truck that currently has a book value of $1,000. If the firm sells the truck for $5,000 today, then what is the amount of cash that it will net after taxes if the firm is subject to a 30 percent marginal tax rate? $3,800 $1,200 $5,000 $4,000

$3,800

A firm is considering taking a project that will produce $12 million of revenue per year. Cash expenses will be $5 million, and depreciation expenses will be $1 million per year. The project would also reduce the cash revenues of an existing project by $2 million. What is the free cash flow on the project, per year, if the firm is in the 40 percent marginal tax rate? $5.0 million $4.6 million $3.4 million $2.4 million

$3.4 Million

Metasteel Limited Co. has a stable track record with sales that are not expected to grow in the next several years. Its last annual dividend was $5.75. If the required rate of return on similar investments is 18 percent, what is the current stock price? (Round the answer to two decimal places.) $31.94 $39.30 $103.50 $13.50

$31.94

BioSci, Inc., a biotech firm has forecast the following growth rates for the next three years: 30 percent, 25 percent, and 20 percent. The company then expects to grow at a constant rate of 7 percent for the next several years. The company paid a dividend of $2.00 last week. If the required rate of return is 16 percent, what is the market value of this stock? (Do not round intermediate calculations. Round final answer to two decimal places.) $46.37 $51.03 $36.86 $56.12

$36.86

Jacob Suppliers has not paid out any dividend in the last three years. It does not expect to pay dividends in the next two years either as it recovers from an economic slowdown. Three years from now it expects to pay a dividend of $2.50 and then $3.00 in the following two years. What is the present value of the dividends to be received over the next five years if the discount rate is 15 percent? (Do not round intermediate calculations. Round final answer to two decimal places.) $4.85 $5.50 $5.37 $6.14

$4.85

You are considering purchasing a share of preferred stock that pays an annual dividend of $4.50. If you require an 11% rate of return on your investment, what is the maximum price you will pay for the stock? $51.57 $40.91 $5.00 $45.00

$40.91

The Pineapple Company's last dividend was $1.75. Its dividend growth rate is expected to be constant at 25% for 2 years, after which dividends are expected to grow at a rate of 6% forever. Its required return is 12%. What is the best estimate of the current stock price? $42.64 $32.76 $29.17 $63.28

$42.64

Computing the terminal-year FCF: Babaloo Nightclubs purchased a disco mirror that currently has a book value of $10,000. If Babaloo sells the disco mirror for $500 today, then what is the amount of cash that it will net after taxes if the firm is subject to a 39 percent marginal tax rate? $9,500 $500 $4,205 $3,705

$4205

The XYZ Corporation is expected to grow at a rate of 30% for the next two years and then settle at the industry median constant growth rate of 10%. If the company's last paid dividend was $1.50 per share, and the required rate of return is 15%, how much is the stock worth today? (Round your intermediate calculations and final answer to two decimal places.) $13.00 $45.81 $65.91 $55.77

$45.81

A client has expressed interest in a ten-year zero coupon bonds with a face value of $1,000. His opportunity cost is 7 percent. Assuming annual compounding, what would be the current market price of these bonds? Round to the nearest dollar. $1,000 $51 $700 $508

$508

Operating Cash Flow: Premier Steel, Inc. is considering the purchase of a new machine for $100,000 that has a useful life of 3 years. The firm's cost of capital is 11.0% and the tax rate is 40%. This machine will be sold for its salvage value of $20,000 at the end of 3-years. The machine will require an investment of $2,500 in spare parts inventory upon installation. The machine will cost $8,000 to ship and $4,000 to install and modify it. Sales are as follows: year 1 = $90,000; year 2 = $97,500; year 3 = $105,000. Operating expenses are year 1 = $25,000; year 2 = $27,000; year 3 = $29,000. The investment in working capital will be liquidated at termination of the project at the end of year 3. MACRS Rates 33% 45% 15% 7% Using MACRS, what is the operating cash flow in year 1? $35,238 $42,512 $86,999 $53,784

$53784

A machine costs $1,000 and has a 3-year life. The estimated salvage value at the end of three years is $100. The project is expected to generate after tax-cash flows of $600 per year. If the required rate of return is 10%, what is the NPV of the project? (Do not round intermediate computations. Round final answer to the nearest whole number.) $1,492 $567 $492 $1,567

$567

A company's earnings and dividends are growing at a constant rate of 8 percent. Last week it paid a dividend of $3.00. If the required rate of return is 15 percent, what is the price of the stock three years from now? (Do not round intermediate calculations. Round final answer to two decimal places.) $51.02 $42.83 $58.31 $46.29

$58.31

Gao Enterprises plans to build a new plant at a cost of $3,250,000. The plant is expected to generate annual cash flows of $1,225,000 for the next five years. If the firm's required rate of return is 18 percent, what is the NPV of this project? (Do not round intermediate computations. Round final answer to nearest dollar.) $2,875,000 $580,785 $3,830,785 $2,225,875

$580,785

Ryder Supplies has its stock currently selling at $63.25. The company is expected to grow at a constant rate of 7 percent. If the appropriate discount rate is 17 percent, what is the expected dividend, a year from now? (Round the answer to two decimal places.) $4.43 $6.33 $10.75 $3.25

$6.33

Expected cash flows: FireRock Wheel Corp is evaluating a project in which there is a 40 percent probability of revenues totaling $3 million and a 60 percent probability of revenues totaling $1 million per year. Its cash expenses will be $1.0 million while depreciation expense will be $200,000; then what is the expected free cash flow from taking the project if the marginal tax rate for the firm is 30 percent? $200,000 $420,000 $600,000 $620,000

$620,000

The Buckeye Corporation expects to pay a dividend of $3.15 per share at the end of next year. The firm expects the dividend to continue growing at the rate of 8% per year for the foreseeable future. If you require a return of 13% per year, the most you should pay for this stock is ______. $24.23 $68.04 $26.17 $63.00

$63.00

The National Bank of Columbia has issued perpetual preferred stock with a $100 par value. The bank pays a quarterly dividend of $1.40 on this stock. What is the current price of this preferred stock given a required rate of return of 8.5 percent? (Round off to two decimal places.) $23.06 $65.88 $43.25 $37.57

$65.88

Amsted, Inc. is considering a project that will increase revenues by $2.5 million, cash operating expenses by $700,000, and depreciation and amortization by $300,000 during 2011. For this project, the firm will purchase $800,000 of equipment during the year while decreasing its inventory by $200,000 (with no corresponding decrease in current liabilities). The marginal tax rate for Amsted is 35 percent. What is this project's incremental after-tax free cash flow for 2011? $475,000 $675,000 $975,000 $275,000

$675000

Givens, Inc., is a fast-growing technology company that paid a $1.25 dividend last week. The company's expected dividend growth rates over the next four years are as follows: 25 percent, 30 percent 35 percent, and 30 percent. The company then expects to settle down to a constant-growth rate of 8 percent annually. If the required rate of return is 12 percent, what is the present value of the dividends over the fast growth phase? (Do not round intermediate calculations. Round final answer to two decimal places.) $6.46 $7.23 $1.25 $8.37

$7.23

Briar Corp is issuing a 10-year bond with a coupon rate of 7 percent. The interest rate for similar bonds is currently 9 percent. Assuming annual payments, what is the present value of the bond? (Do not round intermediate computations. Round your final answer to the nearest dollar.) $1,066 $990 $945 $872

$872

Next year Jenkins Traders will pay a dividend of $3.00. It expects to increase its dividend by $0.25 in each of the following three years. If their required rate of return is 14 percent, what is the present value of their dividends over the next four years? (Do not round intermediate calculations. Round final answer to two decimal places.) $11.63 $13.50 $12.50 $9.72

$9.72

Equivalent Annual Cost: Your firm is considering an investment that will cost $750,000 today. The investment will produce cash flows of $250,000 in year 1, $400,000 in year 2, and $600,000 in year 3. The discount rate that your firm uses for projects of this type is 11.75%. What is the investment's equivalent annual cost? (Round off to the nearest whole dollar) $225,008 $163,613 $68,888 $92,845

$92845

Five years ago, Shirley Harper bought a 10-year bond that pays 8 percent semiannually for $981.10. Today, she sold it for $1,067.22. What is the realized yield on her investment? (Round to the nearest percent.) 8% 11% 10% 7%

10%

Shawna Carter wants to invest her recent bonus in a four-year bond that pays a coupon of 11 percent semiannually. The bonds are selling at $962.13 today. If she buys this bond and holds it to maturity, what would be her yield? (Round to the closest answer.) 11.5% 12.2% 12.5% 11.8%

12.2%

Suppose an investor earned a semiannual yield of 6.4 percent on a bond paying coupons twice a year. What is the effective annual yield (EAY) on this investment? (Round to two decimal places.) 13.21% 6.50% 6.40% 12.80%

13.21%

Signet Pipeline Co. is looking to install new equipment that will cost $2,750,000. The cash flows expected from the project are $612,335, $891,005, $1,132,000, and $1,412,500 for the next four years. What is Signet's internal rate of return? (Do not round intermediate computations. Round final answer to the nearest percent.) 11% 15% 17% 13%

15%

Boomer Biscuit Inc. needs to automate its production line. The project costs $275,000 and is expected to provide after-tax cash flows of $73,306 for eight years. Management estimates its cost of capital as 12 percent. What is the project's MIRR? (Do not round intermediate computations. Round final answer to the nearest whole percent.) 14% 12% 18% 16%

16%

Prior, Inc., is expected to grow at a constant rate of 9 percent. If the company's next dividend is $2.75 and its current price is $37.35, what is the required rate of return on this stock? (Do not round intermediate calculations. Round final answer to the nearest percent.) 21% 13% 20% 16%

16%

Rachel McGovern bought a 10-year bond for $921.77 seven years ago. The bond pays a coupon of 15 percent semiannually. Today, the bond is priced at $961.22. If she sold the bond today, what would be her realized yield? (Round to the nearest percent.) 9% 18% 17% 10%

17%

The market price of a 10-year, $1,000 bond is $1,158.91. Interest on this bond is paid semiannually and the YTM is 14%. What is the bond's annual coupon rate? (Round your answer to the nearest percent.) 14% 12% 17% 10%

17%

The Easton manufacturing Company is looking to replace its conveyor belt system. A new system will cost $345,000, and will result in cost savings of $220,000 in the first year, followed by savings of $100,000 per year over the following 3 years. The payback period for this project is closest to: Round your answer to two decimal places. 1.5 years. 2.25 years. 3 years. 2 years.

2.25 years

Initial Outlay Cash Flow in Period -20,000 7,730.85 7,730.85 7,730.85 7,730.85 The IRR is approximately: 16%. 18%. 20%. 14%.

20%

Modern Federal Bank is setting up a brand-new branch. The cost of the project will be $1.2 million. The branch will create additional cash flows of $235,000, $412,300, $665,000 and $875,000 over the next four years. The firm's cost of capital is 12 percent. What is the internal rate of return on this branch expansion? (Do not round intermediate computations. Round final answer to the nearest percent.) 27% 20% 25% 23%

23%

Kathleen Dancewear Co. has bought some new machinery at a cost of $1,250,000. The impact of the new machinery will be felt in the additional annual cash flows of $375,000 over the next five years. What is the payback period for this project? If its acceptance period is three years, will this project be accepted? (Round your answer to two decimal places.) 3.33 years; yes 2.67 years; yes 2.67 years; no 3.33 years; no

3.33 years; no

Three years ago, Joe bought a 5-year, 10% coupon paid semiannually bond for $1000. Currently, with interest rates having risen sharply, the bond is selling for $800 and you decide to sell it off. If you had re-invested the semi-annual coupons as you received them, what would your realized yield be over the 3-year holding period? Round to two decimal places. 12%. 6%. 10%. 3.63%.

3.63%

Roswell Energy Company is installing new equipment at a cost of $10 million. Expected cash flows from this project over the next five years will be $1,045,000, $2,550,000, $4,125,000, $6,326,750, and $7,000,000. The company's discount rate for such projects is 14 percent. What is the project's discounted payback period? (Do not round intermediate computations. Round your answer to one decimal place.) 4.8 years 4.2 years 5.0 years 4.4 years

4.2 years

John Wong purchased a five-year bond today at $1,034.66. The bond pays 6.5 percent semiannually. What will be his yield to maturity? (Round to the closest answer.) 3.25% 5.7% 6.7% 6.2%

5.7%

Carmen Electronics bought new machinery for $5 million. This is expected to result in additional cash flows of $1.2 million over the next seven years. The firm's cost of capital is 12 percent. What is the discounted payback period for this project? If the firm's acceptance period is five years, will this project be accepted? (Do not round intermediate computations. Round your answer to one decimal place.) 6.1 years; no 6.1 years; yes 4.2 years; yes 5.4 years; no

6.1 years; no

Jane Almeda is interested in a 10-year bond issued by Roberts Corp. that pays a coupon of 10 percent annually. The current price of this bond is $1,174.45. What is the yield that Jane would earn by buying it at this price and holding it to maturity? (Round to the closest answer.) 8.9% 7.5% 7.1% 8.5%

7.5%

Nathan Akpan is planning to invest in a seven-year bond that pays annual coupons at a rate of 7 percent. It is currently selling at $927.23. What is the current market yield on this bond? (Round to the closest answer.) 9.5% 8.4% 7.5% 10.4%

8.4%

A bond pays a coupon interest rate of 7.5 percent. The market rate on similar bonds is 8.4 percent. The bond will sell at _____. a premium a discount par book value

A discount

Capital rationing implies that funding needs are equal to funding resources. the available capital will be allocated equally to all available projects. none of these. a firm has constraints to fund all of the available projects.

A firm has constraints to fund all of the available projects

A construction firm is evaluating two value-adding projects. The first project deals with building access roads to a new terminal at the local airport. The second project is to build a parking garage on a piece of land that the firm owns adjacent to the airport. If both projects are positive-NPV projects, then the firm should not enough information is given to make a decision. select the higher NPV project because they are mutually exclusive. accept both projects because they are contingent projects. accept both projects because they are independent projects.

Accept both projects because they are independent projects

General Mills just is undertaking an analysis on a new cereal. The firm realizes that if they come out with a new product it would affect sales of existing products? What is the best course of action for General Mills in this analysis? Ignore the fact that sales of other products will be affected. Treat the reduction of sales from existing cereals as a sunk cost. Include the allocated costs of the new cereal in the sales of the pre-existing products. Account for the reduction of sales from existing cereals in the projection of cash flows on the new product.

Account for the reduction of sales from existing cereals in the projection of cash flows on the new product

The price of a bond is calculated by: adding the present value of the principal payment and the present value of coupon payments. subtracting the present value of principal payment from the present value of coupon payments. discounting the difference between the principal payment and the coupon payments. discounting the sum of coupon payments and principal.

Adding the present value of the principal payments and the present value of coupon payments

Which one of the following statements is true of a bond's yield to maturity? The yield to maturity of a bond is the discount rate that makes the present value of the coupon and principal payments equal to the price of the bond. It is the annual yield that the investor earns if the bond is held to maturity, and all the coupon and principal payments are made as promised. A bond's yield to maturity changes daily as interest rates increase or decrease. All of the above are true.

All of the above are true

The net present value uses the discounted cash flow valuation technique. is consistent with the shareholder wealth maximization goal. all of these. will provide a direct measure of how much a firm's value will change because of the capital project.

All of these

Which of the following is a disadvantage of the payback method? It ignores the time value of money. All of these. It ignores cash flows beyond the payback period. It is inconsistent with the goal of maximizing shareholder wealth.

All of these

Whenever a project has a negative impact on an existing project's cash flows, then that effect should: be ignored if the project is evaluated using the correct cost of capital. be included as a negative revenue amount on the new project's cash flow analysis. be included if the impact is limited to noncash expenditures. be ignored.

Be included as a negative revenue amount on the new project's cash flow analysis

Two projects are considered to be mutually exclusive if selecting one would automatically eliminate accepting the other. the projects perform the same function. both selecting one would automatically eliminate accepting the other and the projects perform the same function. none of these.

Both selecting one would automatically eliminate accepting the other and the projects perform the same function

Contingent projects would imply that none of these. the projects can be either mandatory or optional. both the acceptance of one project is dependent on the acceptance of the other and the projects can be either mandatory or optional. the acceptance of one project is dependent on the acceptance of the other.

Both the acceptance of one project is dependent on the acceptance of the other and the projects can be either mandatory or optional

In evaluating capital projects, the decisions using the NPV method and the IRR method may disagree if the projects are independent. the cash flows pattern is unconventional. the projects are mutually exclusive. both the cash flows pattern is unconventional the projects are mutually exclusive.

Both the cash flows pattern is unconventional the projects are mutually exclusive

Which of the following is an advantage of the payback method? None of the above It is a good measure of liquidity risk. The technique is simple for managers to compute and interpret. Both the technique is simple for managers to compute and interpret and it is a good measure of liquidity risk.

Both the technique is simple for managers to compute and interpret and it is a good measure of liquidity risk.

Depreciation expense _____. increases taxable income and increases taxes increases taxable income and decreases taxes decreases taxable income and increases taxes decreases taxable income and decreases taxes

Decreases taxable income and decreases taxes

Cash flows over a project's life should include _____. sunk costs interest paid depreciation and amortization expenses dividends paid

Depreciation and amortization expenses

Capital budgeting is the process of: determining which capital investments a firm should make. keeping track of all the revenues and expenses incurred by a firm during the year. determining how much capital a firm should raise. determining how much debt a firm should budget for in its capital structure.

Determining which capital investments a firm should make

The least efficient of all the different types of secondary markets is the: broker market. dealer market. auction market. direct search market.

Direct search market

The yield to maturity of a bond is the discount rate that makes the present value of the coupon and principal payments: exceed the price of the bond. equal to the price of the bond. equal to zero. less than the price of the bond.

Equal to the price of the bond

Which of the following is one of the steps necessary for conducting a capital budgeting analysis of a project? Estimating the project's future cash flows Computing the debt-to-equity ratio of the firm Deciding on how the capital required will be raised Determining the systematic risk of the project

Estimating the project's future cash flows

The cash flows used in capital budgeting calculations are based on: forecasts of net income. forecasts of future cash revenues, expenses, and investment outlays. historical estimates. forecasts of retained earnings available for financing projects.

Forecasts of future cash revenues, expenses, and investments outlays

Bonds sell at a discount when the market rate of interest is: less than the bond's coupon rate. greater than the bond's coupon rate. equal to the bond's coupon rate. none of the above is true.

Greater than the bond's coupon rate

The proper time to harvest an asset is when the percentage NPV increase of harvesting a project at a future point in time is at the last date where the increase is: greater than the cost of capital. less than the cost of capital. 10 percent greater than the cost of capital. none of the above.

Greater than the cost of capital

In regard to interest rate risk, short-term bonds: have less interest rate risk than longer-term bonds. have more interest rate risk than longer-term bonds. and longer-term bonds have the same amount of interest rate risk because their coupon interest rates are fixed. and longer-term bonds have no interest rate risk because their coupon interest rates are fixed.

Have less interest rate risk than longer term bonds

Which of the following is the best example of a sunk cost? Historical research and development costs. Future research and development costs. Future payments on a leased building. Historical noncash expenses.

Historical research and development costs

The value of a share of stock depends on how often it will pay a dividend. an investor's risk tolerance limit. how long an investor intends to keep it. the credit rating of the firm.

How often it will pay a dividend

Which of the following statements is true? The constant growth dividend model can be used effectively to value the common shares of a mixed growth stock. In order for the constant growth dividend model to properly value a firm's common stock, g must be greater than R. In order for the constant growth dividend model to properly value a firm's common stock, R must be greater than g. From a practical perspective, the growth rate in the constant growth dividend model must be greater than the sum of the long-term rate of inflation and the long-term real growth rate of the economy.

In order for the constant growth dividend model to properly value a firm's common stock, R must be greater than g.

_________ refers to the cash flow that a project is expected to generate after all operating expenses and taxes have been paid. Incremental cash flow from operations Operating income EBITDA None of the above

Incremental cash flow from operations

Bonds sell at a premium when the market rate of interest is: less than the bond's coupon rate. greater than the bond's coupon rate. equal to the bond's coupon rate. none of the above is true.

Less than the bond's coupon rate

The tax rate that should be used when forecasting cash flows from operations is the _____. average tax rate marginal tax rate investment-related tax rate total tax rate

Marginal tax rate

The rate used to discount a bond's cash flow stream in bond valuation is the: risk-free rate. prime interest rate. coupon interest rate. market interest rate.

Market interest rate

In order to calculate the price of a bond, which of the following input is needed? Sinking fund status. Dividend rate. Credit rating. Maturity period.

Maturity period

Which of the following is an example of an OTC market? Futures market London Stock Exchange NASDAQ New York Stock Exchange

NASDAQ

Which of the following statements is true about secondary markets in the United States? NASDAQ is an OTC (over-the-counter) market. Firms listed on the NASDAQ tend to be, on average, larger in size, and their shares trade more frequently than those traded on NYSE. In the United States, most secondary market transactions are done over the counter. In terms of total stock value of the firms listed, the NASDAQ is the largest in the world and the NYSE is the second largest.

NASDAQ is an OTC (over the counter) market

Which of the following statements is NOT true about common stock? Common stock is considered to have no fixed maturity. Common-stock holders have limited liability toward the obligations of the corporation. Owners of common stock are guaranteed dividend payments by the firm. Common-stock holders have the right to vote on the election of the board of directors of their company.

Owners of common stock are guaranteed dividend payments by the firm

Which of the following statements is true about common stock? Owners of common stock are guaranteed dividend payment by the firm. Common-stock holders have unlimited liability toward the obligations of the corporation. Owners of common stock have the lowest-priority claim on the firm's assets in the event of bankruptcy. Common stock is considered to have a fixed maturity.

Owners of common stock have the lowest-priority claim on the firm's assets in the event of bankruptcy

Preferred stock is sometimes treated like a debt security because: preferred stock holders receive a residual value and not a stated value. preferred dividends are deductible from taxable income just like interest payments on bonds. legally preferred stock is a debt security. preferred dividend payments are similar to bond interest payments and are fixed in nature regardless of the firm's earnings.

Preferred dividend payments are similar to bond interest payments and are fixed in nature regardless of the firm's earnings

Preferred stock is sometimes considered to be a special type of debt rather than equity because regular preferred stock confers voting rights. preferred stockholders receive a fixed dividend. if preferred stock dividends are not paid it would be legally viewed as a default. preferred stocks often have maturity.

Preferred stockholders receives a fixed dividend

The US has a ______________ tax system. flat progressive uniform regressive

Progressive

The capital budgeting process starts with a firm's: strategic plan. financial plan. business plan. sales forecast.

Strategic plan

Which of the following should not be included in a schedule of cash flows from operations when evaluating a capital project? Variable costs. Fixed costs. Depreciation and amortization. Sunk costs.

Sunk costs

A bond's coupon rate is defined as: the bond's face value divided by the annual coupon payment. the bond's market value divided by the annual coupon payment. the annual coupon payment of a bond divided by the bond's face value. the annual coupon payment of a bond divided by the bond's market value.

The annual coupon payment of a bond divided by the bond's face value

A corporate bond's coupon rate is the annual coupon payment divided by: the bond's face value. the bond's current price. $100. the bond's maturity period.

The bond's face value

The term free cash flows refers to the fact that: the cash flows are left over after the firm has made the necessary investments in working capital and long-term assets. all financial costs have been deducted from the cash flows. the cash flows are not subject to any transactions costs. the cash flows have been raised from the firm's retained earnings.

The cash flows are left over after the firm has made the necessary investments in working capital and long-term assets.

The internal rate of return is the discount rate that makes the NPV equal to zero. the discount rate that makes the NPV greater than zero. both the discount rate that makes the NPV greater than zero and the discount rate that makes the NPV less than zero. the discount rate that makes the NPV less than zero.

The discount rate that makes the NPV equal to zero

Which of the following statements is true? If investors believe inflation will be subsiding in the future, the prevailing yield curve will have a positive slope. The longer the maturity of a security, the greater its interest rate risk. The real rate of interest varies with the business cycle, with the lowest rates at the end of a period of business expansion and the highest at the bottom of a recession. The interest rate risk premium always adds a downward bias to the slope of the yield curve.

The longer the maturity of a security the greater its interest rate risk

Which of the following is the most typical example of a zero-growth dividend stock? The common stock of a firm in the health care industry. The preferred stock of a utility company. The common stock of a firm in the information technology industry. The common stock of a firm in the biotechnology industry.

The preferred stock of a utility company

The three economic factors that affect the shape of the yield curve are: the nominal rate of interest, the expected rate of inflation, and default risk. the real rate of interest, the nominal rate of interest, and currency risk. the real rate of interest, the expected rate of inflation, and interest rate risk. the real rate of interest, the expected rate of inflation, and marketability.

The real rte of interest, the expected rate of inflation, and interest rate risk

Which of the following is a key disadvantage of the IRR method? The IRR method ignores all cash flows after the arbitrary cutoff period. The IRR method is not based on a discounted cash flow technique. With conventional cash flows, the IRR method can yield multiple answers. With mutually exclusive projects, the IRR method can lead to incorrect investment decisions.

With mutually exclusive projects, the IRR method can lead to incorrect investment decisions.

Jane Thorpe has been offered a seven-year bond issued by Barone, Inc., for a price of $943.22. The bond has a coupon rate of 9 percent and pays the coupon semiannually. Similar bonds in the market have a yield to maturity of 10 percent today. Should she buy the bonds at the offered price? (Do not round intermediate computations. Round your final answer to the nearest dollar.) Yes, the bond is worth more at $951. No, the bond is only worth $912. No, the bond is only worth $921. Yes, the bond is worth more at $1,015.

Yes the bond is worth more at $951

The discount rate that makes the present value of a bond's coupons and principal payment equal to its price is the: effective annual yield. holding period yield. realized yield. yield to maturity.

Yield to maturity