FIN 650 Exam 1

Which one of these statements related to growing annuities and perpetuities is correct? - You can compute the present value of a growing annuity but not a growing perpetuity. - In computing the present value of a growing annuity, you discount the cash flows using the growth rate as the discount rate. - The future value of an annuity will decrease if the growth rate is increased. - An increase in the rate of growth will decrease the present value of an annuity. - The present value of a growing perpetuity will decrease if the discount rate is increased.

The present value of a growing perpetuity will decrease if the discount rate is increased.

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 face value of the bond today is greater than it was when the bond was issued. - The bond is worth less today than when it was issued. - The yield to maturity is less than the coupon rate. - The coupon rate is less than the current yield. - The yield to maturity equals the current yield.

The yield to maturity is less than the coupon rate.

All else constant, a bond will sell at _____ when the coupon rate is _____ the yield to maturity. - a premium; less than - a premium; equal to - a discount; less than - a discount; higher than - par; less than

a discount; less than

The interest rate that is most commonly quoted by a lender is referred to as the: - annual percentage rate. - compound rate. - effective annual rate. - simple rate. - common rate.

annual percentage rate. (APR)

Financial managers should strive to maximize the current value per share of the existing stock to: - guarantee the company will grow in size at the maximum possible rate. - increase employee salaries. best represent the interests of the current shareholders. - increase the current dividends per share. - provide managers with shares of stock as part of their compensation.

best represent the interests of the current shareholders.

A firm which opts to "go dark" in response to the Sarbanes-Oxley Act: - must continue to provide audited financial statements to the public. - must continue to provide a detailed list of internal control deficiencies on an annual basis. - can provide less information to its shareholders than it did prior to "going dark". - can continue publicly trading its stock but only on the exchange on which it was previously listed. - ceases to exist.

can provide less information to its shareholders than it did prior to "going dark".

A discount bond's coupon rate is equal to the annual interest divided by the: - call price. - current price. - face value. - clean price. - dirty price.

Face Value

The decision to issue additional shares of stock is an example of: - working capital management. - a net working capital decision. - capital budgeting. - a controller's duties. - a capital structure decision.

a capital structure decision.

A bond's principal is repaid on the ____ date. - coupon - yield - maturity - dirty - clean

maturity

deferred call provision: - requires the bond issuer to pay the current market price, minus any accrued interest, should the bond be called. - allows the bond issuer to delay repaying a bond until after the maturity date should the issuer so opt. - prohibits the issuer from ever redeeming bonds prior to maturity. - prohibits the bond issuer from redeeming callable bonds prior to a specified date. - requires the bond issuer pay a call premium that is equal to or greater than one year's coupon should the bond be called.

prohibits the bond issuer from redeeming callable bonds prior to a specified date.

Al is retired and his sole source of income is his bond portfolio. Although he has sufficient principal to live on, he only wants to spend the interest income and thus is concerned about the purchasing power of that income. Which one of the following bonds should best ease Al's concerns? - 6-year coupon bonds - 5-year TIPS - 20-year coupon bonds - 5-year municipal bonds - 7-year income bonds

5-year TIPS

Nadine is a retired widow who is financially dependent upon the interest income produced by her bond portfolio. Which one of the following bonds is the least suitable for her to own? - 6-year, high-coupon, put bond - 5-year TIPS - 10-year AAA coupon bond - 5-year floating rate bond - 7-year income bond

7-year income bond

Which one of the following statements related to annuities and perpetuities is correct? - An ordinary annuity is worth more than an annuity due given equal annual cash flows for 10 years at 7 percent interest, compounded annually. - A perpetuity comprised of $100 monthly payments is worth more than an annuity of $100 monthly payments provided the discount rates are equal. - Most loans are a form of a perpetuity. - The present value of a perpetuity cannot be computed but the future value can. - Perpetuities are finite but annuities are not.

A perpetuity comprised of $100 monthly payments is worth more than an annuity of $100 monthly payments provided the discount rates are equal.

Which one of the following compounding periods will yield the lowest effective annual rate given a stated future value at Year 5 and an annual percentage rate of 10 percent? - Annual - Semi-annual - Monthly - Daily - Continuous

Annual

Which of the following individuals have unlimited liability for a firm's debts based on their ownership interest? - Only general partners - Only sole proprietors - All stockholders - Both limited and general partners - Both general partners and sole proprietors

Both general partners and sole proprietors

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

Callable

Allison just received the semiannual payment of $35 on a bond she owns. Which term refers to this payment? - Coupon - Face value - Discount - Call premium - Yield

Coupon

Which one of the following applies to a premium bond? - Yield to maturity > Current yield > Coupon rate - Coupon rate = Current yield = Yield to maturity - Coupon rate > Yield to maturity > Current yield - Coupon rate < Yield to maturity < Current yield - Coupon rate > Current yield > Yield to maturity

Coupon rate > Current yield > Yield to maturity

Which one of the following relationships is stated correctly? - The coupon rate exceeds the current yield when a bond sells at a discount. - The call price must equal the par value. - An increase in market rates increases the market price of a bond. - Decreasing the time to maturity increases the price of a discount bond, all else constant. - Increasing the coupon rate decreases the current yield, all else constant.

Decreasing the time to maturity increases the price of a discount bond, all else constant.

The actual interest rate on a loan that is compounded monthly but expressed as an annual rate is referred to as the _____ rate. - stated - discounted annual - effective annual - periodic monthly - consolidated monthly

Effective annual

Which one of the following is least apt to help convince managers to work in the best interest of the stockholders? Assume there are no golden parachutes. - Compensation based on the value of the stock - Stock option plans - Threat of a company takeover - Threat of a proxy fight - Increase managers' base salaries

Increase managers' base salaries

You expect interest rates to decline in the near future even though the bond market is not indicating any sign of this change. Which one of the following bonds should you purchase now to maximize your gains if the rate decline does occur? - Short-term; low coupon - Short-term; high coupon - Long-term; zero coupon - Long-term; low coupon - Long-term; high coupon

Long-term; zero coupon

The Sarbanes-Oxley Act of 2002 holds a public company's _____ responsible for the accuracy of the company's financial statements. - managers - internal auditors - external legal counsel - internal legal counsel - Securities and Exchange Commission agent

Managers

Which one of the following best states the primary goal of financial management? - Maximize current dividends per share - Maximize the current value per share - Increase cash flow and avoid financial distress - Minimize operational costs while maximizing firm efficiency - Maintain steady growth while increasing current profits

Maximize the current value per share

A Canadian consol is best categorized as: A. An ordinary annuity. B. An amortized cash flow. C. An annuity due. D. A discounted loan. E. A perpetuity.

Perpetuity

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.) - Both options are of equal value since they both provide $12,000 of income. - Option A has the higher future value at the end of Year 3. - Option B has a higher present value at Time 0. - Option B is a perpetuity. - Option A is an annuity.

Option B has a higher present value at Time 0.

Which one of the following functions should be the responsibility of the controller rather than the treasurer? - Depositing cash receipts - Processing cost reports - Analyzing equipment purchases - Approving credit for a customer - Paying a vendor

Processing cost reports

Project A has cash flows of $4,000, $3,000, $0, and $3,000 for Years 1 to 4, respectively. Project B has cash flows of $2,000, $3,000, $2,000, and $3,000 for Years 1 to 4, respectively. Which one of the following statements is correct assuming the discount rate is positive? (No calculations needed) - The cash flows for Project B are an annuity, but those of Project A are not. - Both sets of cash flows have equal present values as of Time 0. - The present value at Time 0 of the final cash flow for Project A will be discounted using an exponent of three. - Both projects have equal values at any point in time since they both pay the same total amount. - Project B is worth less today than Project A.

Project B is worth less today than Project A.

Project X has cash flows of $8,500, $8,000, $7,500, and $7,000 for Years 1 to 4, respectively. Project Y has cash flows of $7,000, $7,500, $8,000, and $8,500 for Years 1 to 4, respectively. Which one of the following statements is true concerning these two projects given a positive discount rate? - Both projects have the same future value at the end of Year 4. - Both projects have the same value at Time 0. - Both projects are ordinary annuities. - Project Y has a higher present value than Project X. - Project X has both a higher present and a higher future value than Project Y.

Project X has both a higher present and a higher future value than Project Y.

Which one of the following grants an individual the right to vote on behalf of a shareholder? - Proxy - By-laws - Indenture agreement - Stock option - Stock audit

Proxy

A loan where the borrower receives money today and repays a single lump sum on a future date is called a(n) _____ loan. - Amortized - Continuous - Balloon - Pure Discount - Interest-Only

Pure Discount

Financial managers should primarily focus on the interests of: - stakeholders. - the vice president of finance. - their immediate supervisor. - shareholders. - the board of directors.

Shareholders

Which one of the following is a working capital management decision? - What type(s) of equipment is (are) needed to complete a current project? - Should the firm pay cash for a purchase or use the credit offered by the supplier? - What amount of long-term debt is required to complete a project? - How many shares of stock should the firm issue to fund an acquisition? - Should a project should be accepted?

Should the firm pay cash for a purchase or use the credit offered by the supplier?

Which one of the following statements concerning bond ratings is correct? - Investment grade bonds are rated BB or higher by Standard & Poor's. - Bond ratings assess both interest rate risk and default risk. - Split-rated bonds are called crossover bonds. - The highest rating issued by Moody's is AAA. - A "fallen angel" is a term applied to all "junk" bonds.

Split-rated bonds are called crossover bonds.

Hot Foods has an investment-grade bond issue outstanding that pays $30 semiannual interest payments. The bonds sell at par and are callable at a price equal to the present value of all future interest and principal payments discounted at a rate equal to the comparable Treasury rate plus .50 percent. Which one of the following correctly describes this bond? - The bond rating is B. - Market value is less than face value. - The coupon rate is 3 percent. - The bond has a "make whole" call price. - The interest payments are variable.

The bond has a "make whole" call price.

Which one of the following correctly defines the upward chain of command in a typical corporate organizational structure? - The vice president of finance reports to the chairman of the board. - The chief executive officer reports to the president. - The controller reports to the chief financial officer. - The treasurer reports to the president. - The chief operations officer reports to the vice president of production.

The controller reports to the chief financial officer

Which one of the following statements concerning interest rates is correct? - Savers would prefer annual compounding over monthly compounding given the same annual percentage rate. - The effective annual rate decreases as the number of compounding periods per year increases. - The effective annual rate equals the annual percentage rate when interest is compounded annually. - Borrowers would prefer monthly compounding over annual compounding given the same annual percentage rate. - For any positive rate of interest, the annual percentage rate will always exceed the effective annual rate.

The effective annual rate equals the annual percentage rate when interest is compounded annually.

Agency problems are most associated with: - sole proprietorships. - general partnerships. - limited partnerships. - corporations - limited liability companies

corporations

The price sensitivity of a bond increases in response to a change in the market rate of interest as the: - coupon rate increases. - time to maturity decreases. - coupon rate decreases and the time to maturity increases. - time to maturity and coupon rate both decrease. - coupon rate and time to maturity both increase.

coupon rate decreases and the time to maturity increases.

Samantha owns a reverse convertible bond. At maturity, the principal amount will be repaid in: - shares of stock. - cash while the interest is paid in shares of stock. - the form of a newly issued bond. - either shares of stock or a newly issued bond. - either cash or shares of stock.

either cash or shares of stock

Capital structure decisions include determining: - which one of two projects to accept. - how to allocate investment funds to multiple projects. - the amount of funds needed to finance customer purchases of a new product. - how much debt should be assumed to fund a project. - how much inventory will be needed to support a project.

how much debt should be assumed to fund a project

A "fallen angel" is a bond that has moved from: - being publicly traded to being privately traded. - being a long-term obligation to being a short-term obligation. - being a premium bond to being a discount bond. - senior status to junior status for liquidation purposes. - investment grade to speculative grade.

investment grade to speculative grade

The current yield is defined as the annual interest on a bond divided by the: - coupon rate. - face value. - market price. - call price. - par value.

market price

Decisions made by financial managers should primarily focus on increasing the: - size of the firm. - growth rate of the firm. - gross profit per unit produced. - market value per share of outstanding stock. total sales.

market value per share of outstanding stock.

A perpetuity is defined as: - a limited number of equal payments paid in even time increments. - payments of equal amounts that are paid irregularly but indefinitely. - varying amounts that are paid at even intervals forever. - unending equal payments paid at equal time intervals. - unending equal payments paid at either equal or unequal time intervals.

unending equal payments paid at equal time intervals

The treasurer of a corporation generally reports directly to the: - board of directors. - chairman of the board. - chief executive officer. - president. - vice president of finance.

vice president of finance.

Shareholder A sold 500 shares of ABC stock on the New York Stock Exchange. This transaction: - took place in the primary market. - occurred in a dealer market. - was facilitated in the secondary market. - involved a proxy. - was a private placement.

was facilitated in the secondary market.