Principles of Finance Exam 2

Is the yield to maturity on a bond the same thing as the required return? Is YTM the same thing as the coupon rate? Suppose today a 10 percent coupon bond sells at par. Two years from now, the required return on the same bond is 8 percent. What is the coupon rate on the bond?

Coupon rate 10%

Nikita Enterprises has bonds on the market making annual payments, with eight years to maturity, a par value of $1,000, and selling for $952. At this price, the bonds yield 6.1 percent. What must the coupon rate be on the bonds?

Coupon rate 5.32%

Pro forma financial statements can best be described as financial statements: that express the assets as a percentage of total assets, and the costs as a percentage of sales. expressed in real dollars, given a stated base year. that state projected values for future time periods. expressed in a foreign currency. for which all accounts are expressed as a percentage of last year's values.

that state projected values for future time periods.

If a project has a net present value equal to zero, then: a decrease in the project's initial cost will cause the project to have a negative NPV. the project earns a return exactly equal to the discount rate. any delay in receiving the projected cash inflows will cause the project to have a positive NPV. the project's PI must also be equal to zero. the total of the cash inflows must equal the initial cost of the project.

the project earns a return exactly equal to the discount rate.

If expected inflation rises, market interest rates will rise. How will this impact the prices and yields of existing bonds? The prices of existing bonds will fall and the yields will fall. The prices of existing bonds will rise and the yields will fall. The prices of existing bonds will rise and the yields will rise. The prices of existing bonds will fall and the yields will rise.

The prices of existing bonds will fall and the yields will rise.

Ashburn Corporation issued 10-year bonds two years ago at a coupon rate of 8.7 percent. The bonds make semiannual payments. If these bonds currently sell for 108 percent of par value, what is the YTM?

YTM 7.68%

Is the yield to maturity on a bond the same thing as the required return? Is YTM the same thing as the coupon rate? Suppose today a 10 percent coupon bond sells at par. Two years from now, the required return on the same bond is 8 percent. What is the YTM on the bond?

YTM 8%

A Japanese company has a bond outstanding that sells for 93 percent of its ¥100,000 par value. The bond has a coupon rate of 5.2 percent paid annually and matures in 14 years. What is the yield to maturity of this bond?

Yield to Maturity 5.91%

A Japanese company has a bond outstanding that sells for 88 percent of its ¥100,000 par value. The bond has a coupon rate of 4.7 percent paid annually and matures in 18 years. What is the yield to maturity of this bond?

Yield to maturity 5.79%

The price of a 12% semiannual coupon bond with five years to maturity and a yield to maturity of 8% is $1,162.22 $852.80 $1,104.84 $1,000.00

$1,162.22

Esfandairi Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.18 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $1.645 million in annual sales, with costs of $610,000. The tax rate is 21 percent and the required return on the project is 12 percent. What is the project's NPV?

$150,376.79

Bruno's Lunch Counter is expanding and expects operating cash flows of $20,200 a year for 5 years as a result. This expansion requires $51,000 in new fixed assets. These assets will be worthless at the end of the project. In addition, the project requires $4,600 of net working capital throughout the life of the project. What is the net present value of this expansion project at a required rate of return of 12 percent? $26,730 $19,827 $25,323 $21,816 $23,635

$19,827

Z Space, Incorporated, is a new company and currently has negative earnings. The company's sales are $2.7 million and there are 175,000 shares outstanding. What if the price-sales ratio were 3.6?

$55.54

Winnebagel Corporation currently sells 20,000 motor homes per year at $103,000 each and 14,000 luxury motor coaches per year at $155,000 each. The company wants to introduce a new portable camper to fill out its product line; it hopes to sell 25,000 of these campers per year at $19,000 each. An independent consultant has determined that if the company introduces the new campers, it should boost the sales of its existing motor homes by 2,700 units per year and reduce the sales of its motor coaches by 1,300 units per year. What is the amount to use as the annual sales figure when evaluating this project?

$551,600,000

The Dahlia Flower Company has earnings of $3.64 per share. The benchmark PE for the company is 18. a.What stock price would you consider appropriate? Stock price at a PE of 18

$65.52

Z Space, Incorporated, is a new company and currently has negative earnings. The company's sales are $2.7 million and there are 175,000 shares outstanding. If the benchmark price-sales ratio is 4.3, what is your estimate of an appropriate stock price?

$66.34

The Dahlia Flower Company has earnings of $3.64 per share. The benchmark PE for the company is 18. What if the benchmark PE were 21?

$76.44

Esfandairi Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.18 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $1.645 million in annual sales, with costs of $610,000. If the tax rate is 21 percent, what is the OCF for this project?

$970,250

The next dividend payment by Im, Incorporated, will be $1.87 per share. The dividends are anticipated to maintain a growth rate of 4.3 percent forever. The stock currently sells for $37 per share. What is the expected capital gains yield?

4.3%

The next dividend payment by Im, Incorporated, will be $1.87 per share. The dividends are anticipated to maintain a growth rate of 4.3 percent forever. The stock currently sells for $37 per share. What is the dividend yield?

5.05%

Chamberlain Company wants to issue new 11-year bonds for some much-needed expansion projects. The company currently has 10.8 percent coupon bonds on the market that sell for $1,202.32, make semiannual payments, and mature in 11 years. What coupon rate should the company set on its new bonds if it wants them to sell at par? Assume a par value of $1,000. 8.30% 8.00% 7.70% 7.90% 4.00%

8.00%

Yan Yan Corporation has a $3,000 par value bond outstanding with a coupon rate of 5.2 percent paid semiannually and 25 years to maturity. The yield to maturity on this bond is 4.8 percent. What is the dollar price of the bond?

Bond price $3,173.63

Union Local School District has a bond outstanding with a coupon rate of 3.8 percent paid semiannually and 29 years to maturity. The yield to maturity on this bond is 2.9 percent, and the bond has a par value of $10,000. What is the dollar price of the bond?

Bond price $58

A bond that can be paid off early at the issuer's discretion is referred to as being which type of bond? Subordinated Senior Par value Unsecured Callable

Callable

Which one of following is the rate at which a stock's price is expected to appreciate? Current yield Capital gains yield Coupon rate Total return Dividend yield

Capital gains yield

Westco Company issued 10-year bonds a year ago at a coupon rate of 7 percent. The bonds make semiannual payments and have a par value of $1,000. If the YTM on these bonds is 5.3 percent, what is the current bond price in dollars?

Current bond price $1,120.44

Westco Company issued 14-year bonds a year ago at a coupon rate of 8.6 percent. The bonds make semiannual payments and have a par value of $1,000. If the YTM on these bonds is 6.9 percent, what is the current bond price in dollars?

Current bond price $1,144.38

Even though most corporate bonds in the United States make coupon payments semiannually, bonds issued elsewhere often have annual coupon payments. Suppose a German company issues a bond with a par value of €1,000, 15 years to maturity, and a coupon rate of 6.5 percent paid annually. If the yield to maturity is 7.6 percent, what is the current price of the bond?

Current price €903.50

Which one of the following methods predicts the amount by which the value of a firm will change if a project is accepted? Internal rate of return Net present value Profitability index Payback Discounted payback

Net present value

Fegley, Incorporated, has an issue of preferred stock outstanding that pays a $3.80 dividend every year in perpetuity. If this issue currently sells for $93 per share, what is the required return?

Required Return 4.09%

Caccamise Company is expected to maintain a constant 3.4 percent growth rate in its dividends indefinitely. If the company has a dividend yield of 5.3 percent, what is the required return on the company's stock?

Required Return 8.7%

Five Star Corporation will pay a dividend of $3.04 per share next year. The company pledges to increase its dividend by 3.75 percent per year indefinitely. If you require a return of 11 percent on your investment, how much will you pay for the company's stock today?

Stock price $41.93

Which one of the following types of costs was incurred in the past and cannot be recouped? Erosion Side Opportunity Sunk Incremental

Sunk

Ana just received the semiannual payment of $35 on a bond she owns. This is called the ______ payment. coupon call premium discount face value yield

coupon

The internal rate of return is defined as the: discount rate that causes the profitability index for a project to equal zero. rate of return a project will generate if the project is financed solely with internal funds. discount rate which causes the net present value of a project to equal zero. discount rate that equates the net cash inflows of a project to zero. maximum rate of return a firm expects to earn on a project.

discount rate which causes the net present value of a project to equal zero.

Dilan owns a bond that will pay him $45 each year in interest plus $1,000 as a principal payment at maturity. The $1,000 is referred to as the: discount. coupon. yield. face value. dirty price.

face value.

A newly issued bond has a coupon rate of 5 percent and semiannual interest payments. The bonds are currently priced at par. The effective annual rate provided by these bonds must be: less than 2.5 percent. greater than 2.5 percent but less than 5 percent. greater than 5 percent. 2.5 percent. 5 percent.

greater than 5 percent.

The difference between a company's future cash flows if it accepts a project and the company's future cash flows if it does not accept the project is referred to as the project's: external cash flows. financing cash flows. incremental cash flows. internal cash flows. erosion effects.

incremental cash flows.

The internal rate of return: is easy to understand. may produce multiple rates of return when cash flows are conventional. is rarely used in the business world today. is best used when comparing mutually exclusive projects. is principally used to evaluate small dollar projects.

is easy to understand

Net present value: is the best method of analyzing mutually exclusive projects. Correct cannot be applied when comparing mutually exclusive projects. is very similar in its methodology to the average accounting return. is less useful than the internal rate of return when comparing different-sized projects. is the easiest method of evaluation for nonfinancial managers.

is the best method of analyzing mutually exclusive projects.

The length of time a firm must wait to recoup the money it has invested in a project is called the: profitability period. internal return period. Incorrect discounted cash period. payback period. valuation period.

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. equal in value to the present value of $1 paid one year from today. worth $1 per share in the current market. basically worthless as it offers no growth potential. valued at an assumed growth rate of 1 percent.

priced the same as a $1 perpetuity.

If a project has a net present value equal to zero, then: a decrease in the project's initial cost will cause the project to have a negative NPV. the project's PI must also be equal to zero. the project earns a return exactly equal to the discount rate. the total of the cash inflows must equal the initial cost of the project. Incorrect any delay in receiving the projected cash inflows will cause the project to have a positive NPV.

the project earns a return exactly equal to the discount rate.

The present value of a bond or other debt instrument is None of the above. the amount to which this investment will grow after earning interest. the value today of all the future cash flows from this investment. the discount rate.

the value today of all the future cash flows from this investment.

The bond market requires a return of 6.2 percent on the 15-year bonds issued by Mingwei Manufacturing. The 6.2 percent is referred to as the: yield to maturity. call rate. face rate. current yield. coupon rate.

yield to maturity

The bond market requires a return of 6.2 percent on the 15-year bonds issued by Mingwei Manufacturing. The 6.2 percent is referred to as the: coupon rate. call rate. yield to maturity. face rate. current yield.

yield to maturity.