Fin 335 exam 2 (comprehensive)

For a discount bond, the current yield is _________ the yield to maturity, and the coupon rate is _____________ the yield to maturity

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You are told the Profitability Index of a project is exactly one. What does this mean? A) The discount rate employed equals the internal rate of return. B) If a higher discount rate were used, the NPV would be negative C) The present value of the cash inflows exactly equals the present value of the cash outflows. D) A, B and C only

A B and C

The payback rule can be best stated as:

A) An investment is acceptable if its calculated payback period is less than some prespecified number of years.

The internal rate of return (IRR) rule can be best stated as:

An investment is acceptable if its IRR exceeds the required return, else it should be rejected.

The profitability index (PI) rule can be best stated as:

An investment is acceptable if its PI is greater than one.

The net present value (NPV) rule can be best stated as:

An investment should be accepted if the NPV is positive and rejected if its is negative.

Which of the following statements is true? A) NPV should never be used if the project under consideration has nonconventional cash flows. B) NPV is similar to a cost/benefit ratio. C) If the financial manager relies on NPV in making capital budgeting decisions, she acts in the shareholders' best interests. D) NPV can normally be directly observed in the marketplace. E) IRR is generally preferred to NPV in making correct capital budgeting acceptance decisions.

C) If the financial manager relies on NPV in making capital budgeting decisions, she acts in the shareholders' best interests.

Which of the following statements regarding dividend yields is true? A) It measures how much the stock's price will increase in a year. B) It incorporates the par value of the stock into the calculation. C) It is analogous to the current yield for a bond. D) It is always greater than the stock's capital gains yield. E) It measures the total annual return an investor can expect to earn by owning the stock.

C) It is analogous to the current yield for a bond.

Suppose you have a project with the payback period exactly equal to the life of the project. What do you know about the IRR of the project?

It is exactly equal to 0

A situation in which taking one investment prevents the taking of another is called:

Mutually exclusive investment decisions

The length of time required for an investment to generate cash flows sufficient to recover its initial cost is the

Payback period.

A bond with a face value of $1,000 that sells for more than $1,000 in the market is called a

Premium bond

An investment generates $1.10 in present value benefits for each dollar of invested costs. This conclusion was most likely reached by calculating the project's:

Profitability index

Your broker offers you the opportunity to purchase a bond with coupon payments of $90 per year and a face value of $1000. If the yield to maturity on similar bonds is 8%, this bond

Sell at a premium

When pricing bonds, if a bond's coupon rate is more than the required rate of return, then:

The bond sells at a larger premium if it has a long maturity and at a smaller premium if it has a short maturity

If some shareholders have greater voting power than others, it must be that:

The company has multiple classes of common stock.

When pricing bonds, if a bond's coupon rate is less than the required rate of return, then:

The holder of the bond will realize a capital gain if the bond is held to maturity.

Which of the following statements regarding bond pricing is true? A) The lower the discount rate, the more valuable the coupon payments are today. B) Bonds with high coupon payments are generally (all else the same) more sensitive to changes in interest rates than bonds with lower coupon payments. C) When market interest rates rise, bond prices will also rise, all else the same. D) Bonds with short maturities are generally (all else the same) more sensitive to changes in interest rates than bonds with longer maturities. E) All else the same, bonds with larger coupon payments will have a lower price

The lower the discount rate, the more valuable the coupon payments are today.

If a project with conventional cash flows has an IRR less than the required return, then:

The profitability index is less than one. & The NPV is negative

The rate of return required by investors in the market for owning a bond is called the:

YTM

The price a dealer is willing to accept for selling a security to an investor is called

ask price

If you divide a bond's annual coupon payment by its current yield you get the ___________.

bond price

The rate at which the stock price is expected to appreciate (or depreciate) is the:

capital yields gain

A bond which, at the election of the holder, can be swapped for a fixed number of shares of common stock at any time prior to the bond's maturity is called a _____________

convertible

The stated interest payment in dollars made on a bond each period

coupon

The annual coupon of a bond divided by its face value is called the bond's:

coupon rate

The annual coupon payment of a bond divided by its market price is called the:

current yield

Which of the following items generally appears in a corporate bond quote from The Wall Street Journal?

current yield

A bond with a face value of $1,000 that sells for less than $1,000 in the market is called a:

discount bond

The stock valuation model that determines the current stock price as the next dividend divided by the (discount rate less the dividend growth rate) is called the:

dividend growth model

A stock's next expected dividend divided by the current stock price is the:

dividend yield

Which of the following items would usually appear for a stock quote in The Wall Street Journal? A) Capital gains rate B) Dividend yield C) Number of shares outstanding D) Par value of the stock E) Dividend growth rate

dividend yield

As illustrated using the dividend growth model, the total return on a share of common stock is comprised of a ___________.

dividend yield and a capital gains yield

Payments made by a corporation to its shareholders, in the form of either cash, stock, or payments in kind, are called:

dividends

The principal amount of a bond that is repaid at the end of the loan term is called the bond's:

face value

The discount rate that makes the net present value of an investment exactly equal to zero is the:

internal rate of return

Net present value _____________.

is equal to zero when the discount rate used is equal to the IRR

If investors are uncertain that they will be able to sell a corporate bond quickly, the investors will demand a higher yield in the form of a(n) ____________.

liquidity risk premium

You own some manufacturing equipment that must be replaced. Two different suppliers present a purchase and installation plan for your consideration. This is an example of a business decision involving _____________ projects

mutually exclusive

The _______ decision rule is considered the "best" in principle.

net present value

The difference between the market value of an investment and its cost is the:

net present value

Which of the following decision rules is best for evaluating projects for which cash flows beyond a specified point in time, and the time value of money, can both be ignored? A) Payback B) Net present value C) Average accounting return D) Profitability index E) Internal rate of return

payback

The length of time required for an investment to generate cash flows sufficient to recover its initial cost is the:

payback period

The market in which new securities are originally sold to investors is the ________ market.

primary

The present value of an investment's future cash flows divided by its intial cost is the:

profitability index

The market in which previously issued securities are traded among investors is the:

secondary market

All else the same, a(n) __________ will decrease the required return on a bond.

sinking fund

The long-term bonds issued by the United States government are called:

treasury bonds

A bond that makes no coupon payments (and thus is initially priced at a deep discount to par value) is called a _______ bond.

zero coupon