exam 2 fin. mgmt.
Fisher effect
(1+R nominal)=(1+r real)(1+h)
The Fisher Effect has all of the following components, except:
Expected Rate of Return, E
one of the biggest challenges for the Net Present Value method is:
Identifying the appropriate discount rate to use.
Real rates are defined as nominal rates that have been adjusted for which of the following?
Inflation
In actual practice, managers most frequently use which two types of investment criteria?
Internal rate of return and net present value
This morning, Clayton deposited $2,500 into an account that pays 5 percent interest, compounded annually. Also this morning, Jayda deposited $2,500 at 5 percent interest, compounded annually. Clayton will withdraw his interest earnings and spend it as soon as possible. Jayda will reinvest her interest earnings into her account. Given this information, which one of the following statements is true?
Jayda will earn more interest in Year 2 than Clayton will earn.
You are viewing a graph that plots the NPVs of a project against the various discount rates that could be applied to the project's cash flows. What is the name given to this graph?
NPV profile
The term structure of interest rates tells us what _________ interest rate are on default-free, pure discount bonds of all maturities.
Nominal
You are comparing two investment options that each pay 6 percent interest compounded annually. Both options will provide you with $12,000 of income. Option A pays $2,000 the first year followed by two annual payments of $5,000 each. Option B pays three annual payments of $4,000 each. Which one of the following statements is correct given these two investment options? Assume a positive discount rate. (No calculations needed.)
Option B has a higher present value at Time 0.
PI=
PV of future cash flows / cost
Nasafi Lumber paid an annual dividend of $1.37 per share yesterday. Today, the company announced that future dividends will be increasing by 3 percent annually. If you require a return of 14.6 percent, how much are you willing to pay to purchase one share of this stock today?
12.16
Farm Machinery stock currently sells for $54.80 per share. The market required return is 14.2 percent while the company maintains a constant 3 percent growth rate in dividends. What was the most recent annual dividend per share paid on this stock?
5.96
What are non-conventional cash flows?
A combination of cash outflows and inflows.
Which one of the following statements related to annuities and perpetuities is correct?
A perpetuity comprised of $100 monthly payments is worth more than an annuity of $100 monthly payments provided the discount rates are equal.
If you sell a bond with a coupon of 6 percent to a dealer when the market rate is 7 percent, which one of the following prices will you receive?
Bid price
A bond that can be paid off early at the issuer's discretion is referred to as being which type of bond?
Callable
Which one of following is the rate at which a stock's price is expected to appreciate?
Capital gains yield
You are trying to compare the present values of two separate streams of cash flows that have equivalent risks. One stream is expressed in nominal values and the other stream is expressed in real values. You decide to discount the nominal cash flows using a nominal annual rate of 8 percent. What rate should you use to discount the real cash flows?
Comparable real rate
An agent who maintains an inventory from which he or she buys and sells securities is called a:
Dealer
A decrease in which of the following will increase the current value of a stock according to the dividend growth model?
Discount rate
When short-term rates are higher than long-term rates, we say it is __________________.
Downward Sloping
Buxbaum Corporation is preparing a bond offering with a coupon rate of 6 percent, paid semiannually, and a face value of $1,000. The bonds will mature in 10 years and will be sold at par. Given this, which one of the following statements is correct?
The bonds will sell at a premium if the market rate is 5.5 percent.
Cullen invested $5,000 five years ago and earns 6 percent annual interest. By leaving his interest earnings in her account, he increases the amount of interest he earns each year. His investment is best described as benefitting from:
compounding.
The Average Accounting Return (AAR) Rule states that a company will accept a project that has an average account return that:
exceeds a pre-determined target average accounting return.
our aunt has promised to give you $5,000 when you graduate from college. You expect to graduate three years from now. If you speed up your plans to enable you to graduate two years from now, the present value of the promised gift will:
increase
Net Present Value:
is the best method of analyzing mutually exclusive projects
Olivares, Incorporated, bonds mature in 17 years and have a coupon rate of 5.4 percent. If the market rate of interest increases, then the:
market price of the bond will decrease.
Boston Free Press has a dividend policy whereby the firm pays a constant annual dividend of $2.40 per share of common stock. The firm has 1,000 shares of stock outstanding. The company:
must still declare each dividend before it becomes an actual company liability.
Interest rates that include an inflation premium are referred to as:
nominal rates
The stream of customer orders coming in to the NYSE trading floor is called the:
order flow
The length of time a firm must wait to recoup the money it has invested in a project is called the:
payback period
National Trucking has paid an annual dividend of $1 per share on its common stock for the past 15 years and is expected to continue paying a dollar per share long into the future. Given this, one share of the firm's stock is:
priced the same as a $1 perpetuity.
The pure time value of money is known as the:
term structure of interest rates
Javangula Foods is considering two mutually exclusive projects and has determined that the crossover rate for these projects is 12.3 percent. Given this information, you know that:
the project that is acceptable at a discount rate of 12 percent should be rejected at a discount rate of 13 percent.
A project has a net present value of zero. Given this information:
the project's cash inflows equal its cash outflows in current dollar terms.
Gehle Corporation pays a constant annual dividend of $.63 per share. The stock is priced at $5.38 per share. If your required rate of return is 11 percent per year, should you buy the stock? Why or why not?
yes; The stock has a present value of $5.73 per share.
The price the dealer is willing to pay is called the ________ price.
bid
The difference between the bid and ask prices is called the _________, and is the basic source of dealer profits.
Spread
A $1,000 par value corporate bond that pays $45 annually in interest was issued last year. Which one of these would apply to this bond today if the current price of the bond is $989.42?
The current yield exceeds the coupon rate.
The Internal Rate of Return (IRR) represents which of the following:
The discount rate that makes the net present value equal to zero.
All of the following are disadvantages of the Payback Period, except:
The method incorporates the time value of money.
Reyes has a dividend yield of 5.4 percent and a total return for the year of 4.8 percent. Which one of the following must be true?
The stock has a negative capital gains yield.
A premium bond that pays $60 in interest annually matures in seven years. The bond was originally issued three years ago at par. Which one of the following statements is accurate in respect to this bond today?
The yield to maturity is less than the coupon rate.
Which one of the following statements correctly defines a time value of money relationship?
Time and present value are inversely related, all else held constant.
which of the following are disadvantages of the Average Accounting Return (AAR)?
Time value of money is ignored. An arbitrary benchmark cutoff rate is established. Market values are not considered.
What is the first step when calculating the crossover rate?
To calculate the cash flow differences between each project.
The term structure of interest rates includes all of the following basic components, except:
Weighted Average Cost of Capital
The interest rate that is most commonly quoted by a lender is referred to as the:
annual percentage rate.
Protective covenants:
are primarily designed to protect bondholders
The length of time a firm must wait to recoup, in present value terms, the money it has invested in a project is referred to as the:
discounted payback period
Madelyn is calculating the present value of a bonus she will receive next year. The process she is using is called:
discounting.
