FIN EXAM 3

Assume a project is independent and has financing-type cash flows. Which one of these statements is correct?

The project is acceptable if the required return exceeds the IRR

Avondale Homes has adopted a policy of increasing its annual dividend at a constant rate of 1.35 percent annually. The company just paid its annual dividend of $1.84. What will the dividend be nine years from now?

$2.08

Which one of following is the rate at which a stock's price is expected to appreciate?

Capital gains yield

Which one of the following applies to a premium bond?

Coupon rate > Current yield > Yield to maturity

Which one of the following relationships is stated correctly?

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

Which one of the following premiums is compensation for the possibility that a bond issuer may not pay a bond's interest or principal payments as expected?

Default risk

Which one of the following will decrease the net present value of a project?

Increasing the project's initial cost at Time 0

An investment costs $239,000 and has projected cash flows of $123,900, $78,400, and −$22,300 for Years 1 to 3, respectively. The required rate of return is 15.5 percent. Based solely on the internal rate of return rule, should you accept the project? Why or why not?

You should not apply the IRR rule in this case.

A bond that has only one payment, which occurs at maturity, defines which one of these types of bonds?

Zero coupon

Answer this question based on the dividend growth model. If you expect the market rate of return to increase across the board on all equity securities, then you should also expect:

a decrease in all stock values

All else constant, a bond will sell at _____ when the coupon rate is _____ the yield to maturity.

a discount; less than

When the present value of the cash inflows exceeds the initial cost of a project, then the project should be:

accepted because the profitability index is greater than 1.

Mutually exclusive projects are best defined as competing projects that:

both require the total use of the same limited resource.

In response to a change in the market rate of interest, the price sensitivity of a bond increases as the:

coupon rate decreases and the time to maturity increases

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

A forward PE is based on:

estimated future earnings.

Which one of the following represents the capital gains yield as used in the dividend growth model?

g

The Fisher effect primarily emphasizes the effects of ________ on an investor's rate of return.

inflation

Supernormal growth is a growth rate that:

is unsustainable over the long term.

The current yield is defined as the annual interest on a bond divided by the:

market price

Municipal bonds:

pay interest that is free from federal taxation

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 present value of an investment's future cash flows divided by the initial cost of the investment is called the:

profitability index.

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

Which one of the following applies to the dividend growth model?

Even if the dividend amount and growth rate remain constant, the value of a stock can vary.

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:

Face Value

Which one of the following statements is correct?

Stocks can have negative growth rates.

A project has a required payback period of three years. Which one of the following statements is correct concerning the payback analysis of this project?

The cash flow in Year 2 is valued just as highly as the cash flow in Year 1.