PoF State

The ________ compensates the investor for the additional risk that the loan will not be repaid in full. A) real rate B) default premium C) inflation premiumD) interest rate

B) default premium

Nominal interest rates are the sum of two major components. These components are ________. A) the real interest rate and the t-bill rate. B) the risk-free rate and expected inflation. C) the real interest rate and default premium. the real interest rate and expected inflation.

the real interest rate and expected inflation.

) Find the variance for a security that has three one-year returns of -5%, 15%, and 20%. A) 58.33% B) 175.00% C) 75.00% D) 25.00%

175.00%

) When the coupon rate is less than the yield to maturity, the bond sells for a premium over the par value. A) TrueB) False

True

Amounts of money can be added or subtracted only if they are at the same point in time. A) TrueB) False

True

If the stock price is $20, earnings per share is $1, and the earnings growth rate is 5%, then the PEG ratio is four. A) True B) False

True

A bond is a ________ instrument by which a borrower of funds agrees to pay back the funds with interest on specific dates in the future. A) short-term equityB) short-term debt C) long-term debtD) long-term equity

long-term debt

The constant growth dividend model requires that ________. A) the return rate r is lesser than the growth rate g of the dividend stream. B) the return rate g is greater than the growth rate r of the dividend stream. C) we set g = 0 if the return rate r is greater than the growth rate g of the dividend stream. the return rate r is greater than the growth rate g of the dividend stream.

the return rate r is greater than the growth rate g of the dividend stream.

The ________ is the yield an individual would receive if the individual purchased the bond today and held the bond to the end of its life. A) yield to maturity

yield to maturity

) If you borrow $50,000 at an annual interest rate of 12% for six years, what is the annual payment (prior to maturity) on a fully amortized loan? A) $6,000.00 B) $12,161.29 C) $8,333.33 D) $0.00

$12,161.29

Johnson has an annuity due that pays $600 per year for 15 years. What is the value of the cash flows 15 years from today if they are placed in an account that earns 7.50%? Note: You are asked to find the FV one year after the last cash flow is realized. A) $9,000.00 B) $15,671.02 C) $9,675.00 D) $16,846.35

$16,846.35

The real rate is 2.50% and inflation is 3.25%. Roughly speaking, what is the nominal rate? A) 5.75%B) 1.25%C) 3.25%D) 5.25%

5.75%

The Cougar Corporation has issued 20-year semi-annual coupon bonds with a face value of $1,000. If the annual coupon rate is 10% and the current yield to maturity is 12%, what is the firm's current price per bond? A) $850.61 B) $849.54 C) $1,171.59 D) $1,170.27

B) $849.54

Consider the TVM equation: The future value is always greater than the present value, even if the interest rate is negative. A) TrueB) False

B) False

What is the EAR if the APR is 5% and compounding is quarterly? A) Slightly below 5.09% B) Slightly above 5.09% C) Under 5.00% D) Over 5.25%

B) Slightly above 5.09%

Which of the following actions will INCREASE the present value of an investment? A) Increase the amount of time. B) Decrease the future value. C) Decrease the interest rate. D) All of the above will increase the present value.

C) Decrease the interest rate.

) A/An ________ is a series of equal end-of-the-period cash flows. A) perpetuity due B) annuity due C) annuityD) None of the above.

C) annuity

65) The measure of systematic risk is called ________. A) variance. B) correlation. C) beta. D) covariance.

C) beta

The next dividend (Div1) is $1.80, the growth rate (g) is 6%, and the required rate of return (r) is 12%. What is the stock price, according to the constant growth dividend model? A) $15.00 B) $30.80 C) $31.80 D) $30.00

D) $30.00

Tiger has $2,500 but needs $5,000 to purchase a new golf cart. If he can invest his money at a rate of 12% per year, approximately how many years will it take the money in Tiger's account to grow to $5,000? Use the Rule of 72 to determine your answer. Note: The golf cart's price may have changed by the time Tiger's account reaches a value of $5,000. A) 4 years B) 8 years C) 2 years D) 6 years

D) 6 years

) Which of the following statements about the relationship between yield to maturity and bond prices is FALSE? A) When interest rates go up, bond prices go up. B) A bond selling at a discount means that the coupon rate is less than the yield to maturity. C) A bond selling at a premium means that the coupon rate is greater than the yield to maturity. When the yield to maturity and coupon rate are the same, the bond is called a par value bond.

A) When interest rates go up, bond prices go up.

Dividend models suggest that the value of a financial asset is determined by future cash flows. A problem arises, however, in that future cash flows may be difficult to predict as to ________ of these cash flows. A) both the timing and the amount B) the timing but not the amount C) neither the timing nor the amountD) the amount but not the timing

A) both the timing and the amount

The present value of a $100 three-year annuity due discounted at a rate of 10% is equal to ________. A) $135.17 B) $273.55 C) $300.00 D) $248.69

B) $273.55

You want to invest in a stock that pays $6.00 annual cash dividends for the next five years. At the end of the five years, you will sell the stock for $30.00. If you want to earn 10% on this investment, what is a fair price for this stock if you buy it today? A) $40.37 B) $41.37 C) $18.63 D) $22.75

B) $41.37

A PEG ratio of 0.5 indicates that a firm is overvalued. A) TrueB) False

B) False

You have just won the university lottery. If you graduate, you will receive a refund equal to the amount of tuition you paid in your first four years of school. However, you need money now and a firm that specializes in buying expected future cash flows has offered to discount the lottery winnings at a rate of 8% and pay you cash today in exchange for your future lottery winnings. Since you have studied finance, you insist that they discount the cash flows at 12% instead of 8% because there is some risk as to the certainty of your graduating. If the firm agrees to your demand, then this means they will increase the present value of what they will pay you today. A) True B) False

B) False

Assume you just bought a new home and now have a mortgage on the home. The amount of the principal is $150,000, the loan is at 7% APR, and the monthly payments are spread out over 30 years. What is the loan payment? Use a calculator to determine your answer. A) $999.75B) $990.95C) $997.95D) $1,000.35

C) $997.95

Which of the following choices will result in a greater future value at age 65? Choice number 1 is to invest $3,000 per year from ages 20 through 26 (a total of seven investments) into an account and then leave it untouched until you are 65--another 40 years. Choice number 2 is to begin at age 27 and make $3,000 deposits into an investment account every year until you are 65 years old (a total of 39 investments). Each account earns an average of 10% per year. (The investments are end-of-year payments.) A) Choice 2 is better than choice 1 because it has a FV of $1,304,146.89, which is greater than choice 1 FV of $1,204,343.33. B) Choice 1 is better than choice 2 because it has a FV of $1,288,146.89, which is greater than choice 2 FV of $1,204,343.33. C) Choice 2 is better than choice 1 because it has a FV of $1,288,146.89, which is greater than choice 1 FV of $1,204,343.33. D) Choice 1 is better than choice 2 because it has a FV of $1,304,146.89, which is greater than choice 2 FV of $1,204,343.33.

Choice 2 is better than choice 1 because it has a FV of $1,288,146.89, which is greater than choice 1 FV of $1,204,343.33.

You dream of endowing a chair in finance at the local university that will provide a salary of $150,000 per year forever, with the first cash flow to be one year from today. If the university promises to invest the money at a rate of 5% per year, how much money must you give the university today to make your dream a reality? A) $2,857,143 B) This question cannot be answered. C) $15,000,000 D) $3,000,000

D) $3,000,000

Which of the following will result in a future value greater than $100? A) PV = $90, r = an annual interest rate of 14%, and n = 1 year. B) PV = $75, r = an annual interest rate of 12%, and n = 3 years. C) PV = $50, r = an annual interest rate of 10%, and n = 8 years. D) All of the future values are greater than $100.

D) All of the future values are greater than $100.

A series of equal periodic finite cash flows that occur at the beginning of the period are known as a/an ________. A) amortization. B) ordinary annuity. C) perpetuity.D) annuity due.

D) annuity due.

Blackburn Inc. has issued 30-year $1,000 face value, 10% annual coupon bonds, with a yield to maturity of 9.0%. The annual interest payment for the bond is ________. A) $100. B) $45. C) $50. D) $90.

$100

RC Inc. just issued zero-coupon bonds with a par value of $1,000. If the bond has a maturity of 15 years and a yield to maturity of 10%, what is the current price of the bond if it is priced in the conventional manner? A) This question cannot be answered because the coupon payment information is missing. B) $231.38 C) $1,000 D) $239.39

$231.38

You plan to place a $40,000 down payment on a lake cabin in Northern Minnesota in five years. If you invest in a long-term CD earning an annual rate of 5.50%, how much would you need to invest today to have enough for the down payment in five years? A) $18,264 B) $24,379 C) $33,326 D) $30,605

$30,605

Your employer has agreed to place year-end deposits of $1,000, $2,000 and $3,000 into your retirement account. The $1,000 deposit will be one year from today, the $2,000 deposit two years from today, and the $3,000 deposit three years from today. If your account earns 5% per year, how much money will you have in the account at the end of year three when the last deposit is made? A) $6,727.88 B) $6,000 C) $5,357.95 D) $6,202.50

$6,202.50

Caldwell Inc. just paid a dividend of $0.73. Its stock has a dividend growth rate of 5.62% and a required return of 10.21%. What is the current stock price if we anticipate dividends stopping in 20 years? A) $8.62B) $11.62C) $10.62D) $9.62

$9.62

We can write the true relationship between the nominal interest rate and the real rate and expected inflation as: A) r = (1 + r*) × (1 + h) + 1 B) r* = (1 + r) × (1 + h) -1 C) r = (1 + r*) × (1 + h) - 1 D) (1 + r) = (1 + r) × (1 + h*)

(1 + r) = (1 + r) × (1 + h*)

What type of loan makes interest payments throughout the life of the loan and then pays the principal and final interest payment at the maturity date? A) Amortized loan. B) Discount loan. C) Interest-only loan.D) Compound loan.

Amortized loan

$0.25 dividend. What was Alice's holding period return (HPR), Annual Percentage Rate (APR), and Effective Annual Rate (EAR)? A) 20.34%, 40.68%, 9.70% B) 18.63%, 37.27%, 40.74% C) 20.34%, 40.68%, 44.82% D) 17.15%, 34.29%, 37.23%

20.34%, 40.68%, 44.82%

Your firm intends to finance the purchase of a new construction crane. The cost is $1,500,000. What is the size of the annual ordinary annuity payment if the loan is amortized over a ten-year period at a rate of 8.50%? A) $228,611.56 B) $3,391,475.16 C) $127,500

228,611.56

Stocks A, B, C, and D have returns of 5%, 15%, 30%, and 110%, respectively. What is their standard deviation? A) 64.25%B) 47.78%C) 56.75%D) 32.05

47.78%

Which of the statements below is TRUE? A) Total asset turnover is profits divided by total assets. B) Receivables turnover is accounts receivable divided by sales. C) Inventory turnover is cost of goods sold divided by accounts receivables. A higher inventory turnover ratio signifies that inventory is moving faster.

A higher inventory turnover ratio signifies that inventory is moving faster

If for the next 40 years you place $3,000 in equal year-end-deposits into an account earning 8% per year, how much money will be in the account at the end of that time period? A) $777,169.56 B) $2,606,942.58 C) $839,343.12 D) $120,000.00

A) $777,169.56

The one-time payment of money at a future date is often called a ________. A) lump-sum payment. B) perpetuity payment. C) principal amount.D) present value.

A) lump-sum payment.

A never-ending stream of equal periodic, end-of-the-period cash flows is called a/an ________. A) perpetuity.B) amortization.C) annuity.D) annuity due.

A) perpetuity

A current ratio greater than one can tell us that the company ________. A) should be able to cover the current liabilities. B) may have too much capital tied up in current assets. C) should be able to keep away from short-term cash problems. All of these

All of these

Which of the statements below is FALSE? A) An equity claim is a claim to all the assets and cash flows of a company once debt claimants have been paid. B) For common stock, there is no maturity date and the promised cash flow is not stated on the asset, but is determined at a later date by the board of directors. C) Like a bond, common stock entitles the owner to some of the cash flow of a company. Bond ownership gives the right to participate in the management of the company.

Bond ownership gives the right to participate in the management of the company.

Which of the following statements is TRUE? A) By INCREASING the number of payments per year, you BOOST your total cash outflow but INCREASE your effective borrowing rate. B) By INCREASING the number of payments per year, you REDUCE your total cash outflow but DECREASE your effective borrowing rate. C) By INCREASING the number of payments per year, you REDUCE your total cash outflow but INCREASE your effective borrowing rate.

By INCREASING the number of payments per year, you REDUCE your total cash outflow but INCREASE your effective borrowing rate.

The Millville School District had 3,071 students enrolled five years ago. Today, the district enrollment is 2,418 students. What has been the annual rate of change of student enrollment in the Millville School District over this time period? A) -4.25% B) -5.40% C) -4.67% D) 4.25%

C) -4.67%

The four steps to determining the price of a bond are: A) determine the amount and timing of the future cash flows, determine the appropriate discount rate, find the present value of the lump-sum principal and the annuity stream of coupons, and multiply the PVs of the principal and coupons. B) determine the amount and timing of the present cash flows, determine the appropriate discount rate, find the present value of the lump-sum principal and the annuity stream of coupons, and add the PVs of the principal and coupons. C) determine the amount and timing of the future cash flows, determine the appropriate discount rate, find the present value of the lump-sum principal and the annuity stream of coupons, and add the PVs of the principal and coupons. determine the amount and timing of the future cash flows, determine the appropriate discount rate, find the future value of the lump-sum principal and the annuity stream of coupons, and add the FVs of the principal and coupons.

C) determine the amount and timing of the future cash flows, determine the appropriate discount rate, find the present value of the lump-sum principal and the annuity stream of coupons, and add the PVs of the principal and coupons.

24) What is the present value today of an ordinary annuity cash flow of $3,000 per year for forty years at an interest rate of 10.0% per year if the first cash flow is six years from today? A) $1,327,777.67 B) $120,000.00 C) $29,337.15 D) $18,216.06

D) $18,216.06

Ordinary annuity payments occur at the beginning of the period, whereas annuity due payments occur at the end of the period. A) TrueB) False

False

Which of the statements below is TRUE? A) The frequency of bankruptcy for a high-tech up-start firm is lower than for a blue-chip firm, so we see lower borrowing rates for start-ups than for mature firms. B) The frequency of bankruptcy for a high-tech up-start firm is lower than for a blue-chip firm, so we see higher borrowing rates for start-ups than for mature firms. C) The frequency of bankruptcy for a high-tech up-start firm is higher than for a blue-chip firm, so we see lower borrowing rates for start-ups than for mature firms. The frequency of bankruptcy for a high-tech up-start firm is higher than for a blue-chip firm, so we see higher borrowing rates for start-ups than for mature firms.

D) The frequency of bankruptcy for a high-tech up-start firm is higher than for a blue-chip firm, so we see higher borrowing rates for start-ups than for mature firms.

What is the present value of a stream of annual end-of-the-year annuity cash flows if the discount rate is 0%, and the cash flows of $50 last for 20 years? A) More than $1,000. B) This question cannot be answered because we have an interest rate of 0.0%. C) Less than $1,000. Exactly $1,000.

Exactly $1,000.

Which of the statements below is FALSE? A) Examples of liquidity ratios include the current ratio, the cash coverage ratio, and the quick ratio. B) The current ratio is current assets divided by current liabilities. C) Inventory turnover equals cost of goods sold divided by inventory. The acid ratio test equals current assets - inventories divided by current liabilities.

Examples of liquidity ratios include the current ratio, the cash coverage ratio, and the quick ratio.

Which of the following is NOT an example of ordinary annuity cash flows? A) Insurance payments due at the start of the period. B) Mortgage payments due at the end of the period. C) Car loans due at the end of the period. All of the examples above are annuity cash flows.

Insurance payments due at the start of the period.

Which of the statements below is TRUE? A) Investors want to minimize return and minimize risk. B) Investors want to maximize return and maximize risk. C) Investors want to minimize return and maximize risk. Investors want to maximize return and minimize risk.

Investors want to maximize return and minimize risk.

A manufacturer of LCD televisions has seen sales increase from 125,000 units per year to 500,000 units per year in 8 years. What has been the firm's average annual rate of increase in the number of television sets sold? Use the Rule of 72 to determine your answer. A) The average annual rate of change has been between 10% and 11%. B) The average annual rate of change has been between 15% and 16%. C) The average annual rate of change has been between 18% and 19%. D) There is not enough information to answer this question

The average annual rate of change has been between 18% and 19%.

Which of the statements below is FALSE? A) The debt ratio basically tells us the amount in debt for every dollar of assets. B) Times interest earned equals EBIT divided by interest expense. C) The times interest earned ratio tells us the number of times a company has resorted to debt financing over the year. The cash coverage ratio is EBIT + depreciation divided by interest expense.

The cash coverage ratio is EBIT + depreciation divided by interest expense.

Which of the statements below is FALSE? A) For the shareholder, receipt of dividends is a taxable event. B) A typical practice of many companies is to distribute part of the earnings to shareholders through cash dividends. C) Unlike coupon payments on bonds, which are treated as an interest expense of the firm, common stock dividends are considered a return of capital to shareholders and not an expense of the firm. The payment of cash dividends to shareholders is a deductible expense for the company.

The payment of cash dividends to shareholders is a deductible expense for the company.

Which of the following is NOT true with regard to an amortization table? A) The remaining principal balance at the end of a payment period is equal to the beginning-of-the-period principal less the total payment. B) The interest payment for a period is equal to the periodic interest rate multiplied by the beginning-of-the-period principal balance. C) The total payment is calculated by using the present value of an annuity formula. All of the above are true.

The remaining principal balance at the end of a payment period is equal to the beginning-of-the-period principal less the total payment.

An annuity is a series of: 1. variable cash payments at regular intervals across time 2. equal cash payments at different intervals across time 3. variable cash payments at different intervals across time equal cash payments at regular intervals across time

equal cash payments at regular intervals across time

APRs must be converted to the appropriate periodic rates when compounding is ________. A) more frequent than once a month. B) less frequent than once a year. C) more frequent than once a year. less frequent than once every six months.

more frequent than once a year.

Earnings per share is the ________. A) market value per shares divided by the book value per share. B) price per share divided by the earnings per share. C) P/E ratio divided by the earnings growth rate times 100. net income divided by the number of outstanding shares.

net income divided by the number of outstanding shares.

Stocks are different from bonds because ________. A) stocks, unlike bonds, are major sources of funds. B) bonds, unlike stocks, represent voting ownership. C) stocks, unlike bonds, give owners legal claims to payments. stocks, unlike bonds, represent residual ownership.

stocks, unlike bonds, represent residual ownership.