Finance exam 2
Which one of the following methods of project analysis is defined as computing the value of a project based on the present value of the project's anticipated cash flows?
Discounted cash flow valuation
Allison just received the semiannual payment of $35 on a bond she owns. Which term refers to this payment?
Coupon
Which one of the following applies to a premium bond?
Coupon rate > Current yield > Yield to maturity
The annual dividend yield is computed by dividing _____ annual dividend by the current stock price.
next year's
Which one of the following will decrease the net present value of a project?
Increasing the project's initial cost at time zero
Which one of these equations applies to a bond that currently has a market price that exceeds par value?
Yield to maturity < Coupon rate
Which one of the following is an example of a sunk cost?
$1,200 paid to repair a machine last year
Dependable Motors just purchased some MACRS five-year property at a cost of $216,000. The MACRS rates are .2, .32, and .192 for Years 1 to 3, respectively. Assume the firm opted to forego any bonus depreciation. Which one of the following will correctly give you the book value of this equipment at the end of Year 2?
$216,000(1 − .2 − .32)
Which one of the following time periods is associated with low rates of inflation?
2014-2015
Which one of the following bonds is the least sensitive to interest rate risk?
3-year; 6 percent coupon
The Blue Marlin is owned by a group of five shareholders who all vote independently and who all want personal control over the firm. What is the minimum percentage of the outstanding shares one of these shareholders must own if he or she is to gain personal control over this firm given that the firm uses straight voting?
50 percent plus one vote
For the period 1926-2016, the average risk premium on large-company stocks was about
8.6 percent
A discount bond's coupon rate is equal to the annual interest divided by the:
face value
Which one of the following statements related to capital gains is correct?
An increase in an unrealized capital gain will increase the capital gains yield.
Which one of following is the rate at which a stock's price is expected to appreciate?
Capital gains yield
Which of the following yields on a stock can be negative?
Capital gains yield and total return
Rossiter Restaurants is analyzing a project that requires $180,000 of fixed assets. When the project ends, those assets are expected to have an aftertax salvage value of $45,000. How is the $45,000 salvage value handled when computing the net present value of the project?
Cash inflow in the final year of the project
What is the model called that determines the market value of a stock based on its next annual dividend, the dividend growth rate, and the applicable discount rate?
Constant-growth model
Which one of the following is a project cash inflow? Ignore any tax effects.
Decrease in inventory
Which one of the following relationships is stated correctly?
Decreasing the time to maturity increases the price of a discount bond, all else constant.
A decrease in which of the following will increase the current value of a stock according to the dividend growth model?
Discount rate
Which one of these statements related to discounted payback is correct?
Discounted payback is biased toward short-term projects
Which one of the following sets of dividend payments best meets the definition of two-stage growth as it applies to the two-stage dividend growth model?
Dividend payments that increase by 10 percent per year for five years followed by dividends that increase by 3 percent annually there after
Which one of the following best illustrates erosion as it relates to a hot dog stand located on the beach?
Selling fewer hot dogs because hamburgers were added to the menu
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
Jen owns 30 shares of stock in Delta Fashions and wants to win a seat on the board of directors. The firm has a total of 100 shares of stock outstanding. Each share receives one vote. Presently, the company is voting to elect three new directors. Which one of the following statements must be true given this information?
If cumulative voting applies, Jen is assured one seat on the board.
The stand-alone principle advocates that project analysis should be based solely on which one of the following costs?
Incremental
All of the following are related to a proposed project. Which one of these should be included in the cash flow at Time 0?
Initial investment in inventory to support the project
Which one of the following statements correctly applies to the period 1926-2016?
Long-term corporate bonds outperformed long-term government bonds.
Which one of the following should not be included in the analysis of a new product?
Money already spent for research and development of the new product
A project has an initial cost of $31,800 and a market value of $29,600. What is the difference between these two values called?
Net present value
Samuelson Electronics has a required payback period of three years for all of its projects. Currently, the firm is analyzing two independent projects. Project A has an expected payback period of 2.9 years and a net present value of $4,200. Project B has an expected payback period of 3.1 years with a net present value of $26,400. Which project(s) should be accepted based on the payback decision rule?
Project A only
Assume that last year T-bills returned 2.8 percent while your investment in large-company stocks earned an average of 7.6 percent. Which one of the following terms refers to the difference between these two rates of return?
Risk premium
Which one of the following categories of securities had the highest average annual return for the period 1926-2016?
Small-company stocks
Which one of the following earned the highest risk premium over the period 1926-2016?
Small-company stocks
The historical record for the period 1926-2016 supports which one of the following statements?
Small-company stocks have lost as much as 50 percent and gained as much as 100 percent in a single year
The fact that a proposed project is analyzed based on the project's incremental cash flows is the assumption behind which one of the following principles?
Stand-alone principle
Which one of the following statements is correct?
Stocks can have negative growth rates.
Why is payback often used as the sole method of analyzing a proposed small project?
The benefits of payback analysis usually outweigh the costs of the analysis.
Round Dot Inns 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.
Stacy purchased a stock last year and sold it today for $4 a share more than her purchase price. She received a total of $1.15 per share in dividends. Which one of the following statements is correct in relation to this investment?
The capital gains yield is positive.
A project has a net present value of zero. Which one of the following best describes this project?
The project's cash inflows equal its cash outflows in current dollar terms
Winston Co. 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
The rate of return on which type of security is normally used as the risk-free rate of return?
Treasury bills
Which one of the following categories of securities had the lowest average risk premium for the period 1926-2016?
U.S. Treasury bills
Which one of the following statements is a correct reflection of the U.S. financial markets for the period 1926-2016?
U.S. Treasury bills had an annual return in excess of 10 percent in three or more years
You own a bond that pays an annual coupon of 6 percent that matures five years from now. You purchased this 10-year bond at par value when it was originally issued. Which one of the following statements applies to this bond if the relevant market interest rate is now 5.8 percent?
You will realize a capital gain on the bond if you sell it today
Which one of the following relationships applies to a par value bond?
coupon rate = current yield = yield to maturity
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
When using the two-stage dividend growth model:
g1 can be greater than R
A newly issued bond has a coupon rate of 7 percent and semiannual interest payments. The bonds are currently priced at par. The effective annual rate provided by these bonds must be:
greater than 7 percent
The average accounting rate of return (AAR)
is similar to the return on assets ratio.
Supernormal growth is a growth rate that:
is unsustainable over the long term.
Which of the following are advantages of the payback method of project analysis?
liquidity bias, ease of use
What was the average rate of inflation over the period of 1926-2016?
Between 2.8 and 3.2 percent
Which one of the following rights is never directly granted to all shareholders of a publicly held corporation?
Determining the amount of the dividend to be paid per share
Bert owns a bond that will pay him $45 each year in interest plus $1,000 as a principal payment at maturity. What is the $1,000 called?
Face value
Kelley's Baskets makes handmade baskets and is currently considering making handmade wreaths as well. Which one of the following is the best example of an incremental operating cash flow related to the wreath project?
Hiring additional employees to handle the increased workload should the firm accept the wreath project
Which one of the following correctly describes the dividend yield?
Next year's annual dividend divided by today's stock price
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?
Long-term; zero coupon
Which one of the following methods predicts the amount by which the value of a firm will change if a project is accepted?
Net present value
The option that is forgone so that an asset can be utilized by a specific project is referred to as which one of the following?
Opportunity cost
Frank's is a furniture store that is considering adding appliances to its offerings. Which one of the following is the best example of an incremental cash flow related to the appliances?
Selling furniture to appliance customers
GL Plastics spent $1,200 last week repairing a machine. This week the company is trying to decide if the machine could be better utilized if they assigned it a proposed project. When analyzing the proposed project, the $1,200 should be treated as which type of cost?
Sunk
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
Which one of the following best describes the concept of erosion?
The cash flows of a new project that come at the expense of a firm's existing cash flows
A $1,000 par value corporate bond that pays $60 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 $996.20?
The current yield exceeds the coupon rate.
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
A project's average net income divided by its average book value is referred to as the project's average:
accounting return
For the period 2009-2016, U.S. Treasury bills had an annual rate of return that was:
between 0 and .25 percent
Changes in the net working capital requirements:
can affect the cash flows of a project every year of the project's life.
Incremental
can create either an initial cash inflow or outflow.
Dixie South currently pays an annual dividend of $1.46 a share and plans on increasing that amount by 2.75 percent annually. Northern Culture currently pays an annual dividend of $1.42 a share and plans on increasing its dividend by 3.1 percent annually. Given this information, you know for certain that the stock of Northern Culture has a higher ______ than the stock of Dixie South.
capital gains yield
The price sensitivity of a bond increases in response to a change in the market rate of interest as the:
coupon rate decreases and the time to maturity increases
Bayside Marina just announced it is decreasing its annual dividend from $1.48 per share to $1.45 per share effective immediately. If the dividend yield remains at its pre-announcement level, then you know the stock price:
decreased proportionately with the dividend decrease
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
The two-stage dividend growth model evaluates the current price of a stock based on the assumption a stock will:
grow at a fixed rate for a period of time after which it will grow at a different rate indefinitely
Pro forma statements for a proposed project should generally do all of the following except:
include interest expense.
As a bond's time to maturity increases, the bond's sensitivity to interest rate risk:
increases at a decreasing rate
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:
incremental cash flows.
Net present value
is the best method of analyzing mutually exclusive projects.
The current yield is defined as the annual interest in a bond divided by the:
market price
DLQ Inc. bonds mature in 12 years and have a coupon rate of 6 percent. If the market rate of interest increases, then the:
market price of the bond will decrease
A bond's principal is repaid on the ____ date.
maturity
A project's cash flow is equal to the project's operating cash flow:
minus both the project's change in net working capital and capital spending.
A project has a discounted payback period that is equal to the required payback period. Given this, the project
must have a profitability index that is equal to or greater than 1.0
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 a share long into the future. Given this, one share of the firm's stock is:
priced the same as a $1 perpetuity.
For the period 1926-2016, U.S. Treasury bills always:
provided a positive annual rate of return
The dividend growth model:
requires the growth rate to be less than the required return.
The excess return is computed as the:
return on a risky security minus the risk-free rate
Pro forma financial statements can best be described as financial statements:
showing projected values for future time periods.
Small-company stocks, as the term is used in the textbook, are best defined as the:
smallest 20 percent of the companies listed on the NYSE.
Applying the discounted payback decision rule to all projects may cause:
some positive net present value projects to rejected
Which one of the following costs was incurred in the past and cannot be recouped?
sunk
The net present value of a project will increase if
the aftertax salvage value of the fixed assets increases
If a project has a net present value equal zero, then
the project earns a return exactly equal to the discount rates
The bond market requires a return of 9.8 percent on the 5-year bonds issued by JW Industries. The 9.8 percent is referred to as the:
yield to maturity