Financing exam 2
All else constant, a bond will sell at____ when the coupon rate is ______ the yield to maturity
A discount; less than
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 bond that has only one payment, which occurs at maturity, defines which one of these types of bonds?
zero coupon
Which one of the following bonds is the least sensitive to interest rate risk
3-year; 6 percent coupon
Isaac has analyzed two mutually exclusive projects that have 3-year lives. Project A has an NPV of $81,406, a payback period of 2.48 years, and an AAR of 9.31 percent. Project B has an NPV of $82,909, a payback period of 2.57 years, and an AAR of 9.22 percent. The required return for Project A is 11.5 percent while it is 12 percent for Project B. Both projects have a required AAR of 9.25 percent. Isaac must make a recommendation and justify it in 15 words or less. What should his recommendation be?
Accept Project B and reject Project A based on the NPVs
Which one of these statements related to preferred stock is correct
Cumulative preferred shares are more valuable than comparable non-cumulative shares.
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
When evaluating two mutually exclusive projects, the final decision on which project to accept ultimately depends upon which one of the following
net present value
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
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.
Bonds issued by the U.S. government:
are considered to be free of default risk
The annual dividend yield is computed by dividing _____ annual dividend by the current stock price.
Next years
Which one of the following is the rate at which a stocks price is expected to appreciate
capital gains yield
Ana just received the semiannual payment of $35 on a bond she owns. This is called the ______ payment.
coupon
A decrease in which of the following will increase the current value of a stock according to the dividend growth model
discount rate
Bui Bakery has a required payback period of two years for all of its projects. Currently, the firm is analyzing two independent projects. Project X has an expected payback period of 1.4 years and a net present value of $6,100. Project Z has an expected payback period of 2.6 years with a net present value of $18,600. Which project(s) should be accepted based on the payback decision rule?
Project X only
Preferred stock may have all of the following characteristics in common with bonds with the exception of
Tax-deductible payments
Which one of the following statements related to the internal rate of return is correct
The IRR is equal to the required return when the net present value is equal to zero
When the present value of a cash inflows exceeds the initial cost of a project, and the project should be
Accepted because the profitability index is greater than one
A newly issued 10-year, $1,000, zero coupon bond just sold for $311.05. What is the implicit interest, in dollars, for the first year of the bond's life? Assume semiannual compounding.
$38.53
Which of the following are advantages of the payback method of project analysis
Liquidity bias, ease of use
If a firm accepts Project X it will not be feasible to also accept Project Z because both projects would require the simultaneous and exclusive use of the same piece of machinery. These projects are considered to be:
Mutually Exclusive
A $1,000 par value corporate bond that pays $45 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 $989.42
The current yield exceeds the coupon rate.
Which one of the following statements related to the internal rate of return is currect
The irr is equal to the required return when the net present value is equal to zero
A project has a net present value of zero. Given this information...
The projects cash inflows equal its cash outflows in current dollar terms
Winston Co. Has a dividend yield of 5.4% and a total return for the year of 4.8%. Which of the following must be true.
The stock has a negative capital gains yield
Reyes 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.
Assume the current market price of a bond exceeds its par value. Which one of these equations applies
Yield to maturity < 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
A bond that can be paid off early at the issuer's discretion is referred to as being which type of bond?
callable
Olivares, Incorporated, bonds mature in 17 years and have a coupon rate of 5.4 percent. If the market rate of interest increases, then the:
market price of the bond will decrease.