FINC 303 CH 5,6,12 Quizzes

Which type of bond grants its holder the right to force repayment of the bond at a stated price prior to maturity? Income Call Put Structured note Convertible

PUT

Lester's Diner just paid an annual dividend of $.24 a share and plans on increasing this amount by 2 percent annually. What is the expected dividend for Year 6? $.30 $.33 $.24 $.27 $.35

.27

Bonds issued by the U.S. government: a) are considered to be default-free. b) are exempt from interest rate risk. c) provide totally tax-free income. d) pay interest that is exempt from federal income tax. e) are taxed the same as municipal bonds.

a

The beta of a firm is more likely to be high under which two conditions? a) High cyclical business activity and high operating leverage b) High cyclical business activity and low operating leverage c) Low cyclical business activity and low financial leverage d) Low cyclical business activity and low operating leverage e) Low operating and financial leverage

a

A firm with high operating leverage is best defined as a firm that has: a) a high debt-to-equity ratio. b) high fixed costs relative to variable costs. c) a low, relatively stable beta. d) high variable costs relative to fixed costs. e) a high sales/assets ratio.

b

Which one of the following statements concerning bond ratings is correct? a) Moody's is the sole provider of bond ratings. b) Bond ratings only assess the possibility of default. c) Investment grade bonds include only those bonds receiving an A or higher rating. d) Bond ratings consider the potential price volatility of a bond. e) A "fallen angel" is a bond that fell from f) an A rating or above to a BBB rating.

b

A firm s cost of debt will decrease when: a) market interest rates increase. b) the coupon rate on the firm's bonds increase. c) tax rates increase. d) inflation rates increase e) interest is paid semiannually versus annually.

c

Alto stock pays an annual dividend of $1.10 a share and has done so for the past six years. No changes in the dividend amount are expected. The relevant market rate of return is 7.8 percent. Given this, one share of this stock: a) is basically worthless as it offers no growth potential. b) is valued as a constant growth stock. c) is valued as a perpetuity. d) is valued as a differential growth stock. e) has a current market value of $1.10.

c

The total return on a stock is equal to: the annual dividend divided by the current stock price. a) the difference between the capital b) gains yield and the dividend yield. c) the capital gains yield plus the dividend yield. d) (1 + Dividend yield ) × (1 + Inflation rate). e) (1 + Capital gains yield) × (1 + Dividend yield).

c

The owner of preferred stock: a) owns shares that generally have a stated liquidating value of $1,000 per share. b) has the right to veto the outcome of an election held by the common shareholders. c) has the right to collect payment on any unpaid dividends as long as the stock is non-cumulative preferred. d) is entitled to a distribution of income prior to the common shareholders. e) is guaranteed voting rights similar to a common shareholder.

d

The terminal value of a firm is based on which one of these assumptions? a) The growth rate of the future cash flows will exceed the firm's WACC. b) All future cash flows will be constant. c) The cash flows after Time T will diminish on an annual basis. d) The cash flows will increase in the future at a constant perpetual rate. e) The firm will be sold at Time T for the stated terminal value.

d

The yield to maturity on a bond is the rate: a) computed as annual interest divided by the bond's market price. b) an investor earns if the bond is sold prior to the maturity date. c) of annual interest initially offered when the bond was issued. d) of return currently required by the market. e) of annual interest paid on the bond.

d

What does the spread between the bid and asked bond prices represent? a) Difference between the coupon rate and the current yield b) Difference between the current yield and the yield to maturity c) Accrued interest d) Dealer's profit e) Bondholder's profit

d

Which of the following are the two primary advantages of CAPM? I. Simplicity II. Absence of estimation error III. Applicability to both dividend and non-dividend paying firms IV. Explicit adjustment for risk a) I and II b) II and III c) I and III d) III and IV e) I and IV

d

Which one of these statements is true? a) The betas used in the CAPM must be greater than 1 but less than 2. b) By convention, the market is given a beta of zero. c) There is zero chance of default on a U.S. Treasury bill. d) A U.S. Treasury bill has a beta of zero. e) The rate of return on a U.S. Treasury bill is used as the value of RM in the CAPM.

d

Today, July 15, you are buying a bond from a dealer with a quoted price of 100.023. The bond pays interest on February 1 and August 1. The invoice price you pay for this purchase will equal: the clean price. the asked price. the dirty price. par value. the bid price.

dirty price

Differential growth refers to a firm that increases its dividend by: a) three or more percent per year b) an amount that is determined on an annual basis. c) a rate that is expected to be sustainable indefinitely. d) an amount in excess of $.25 per year. e) varying rates over a period of time.

e

You own a fixed-rate bond that has a coupon rate of 6.5 percent and matures in 12 years. You purchased this bond at par value when it was originally issued. If the current market rate for this type and quality of bond is 6.8 percent, then you would expect: a) the bond issuer to increase the amount of each interest payment. b) the yield to maturity to remain constant due to the fixed coupon rate. c) the current yield today to be less than 6.5 percent. d) today's market price to exceed the face value of the bond. e) to realize a capital loss if you sold the bond at the market price today.

e

The underlying assumption of the dividend growth model is that a stock is worth: a) the present value of the future income provided by that stock. b) the same amount to every investor. c) an amount computed as the next annual dividend divided by the market rate of return. d) an amount computed as the last annual dividend divided by the required rate of return. e) the same amount as any other stock that paid the same dividend this year.

a

A stock report contains the following information: P/E 21.4, closing price 28.16, dividend 1.10, net chg .06, and an ask of 28.22 × 300. Which one of the following statements is correct given this information? a) The stock price has increased by 6 percent thus far this year. b) The closing price on the previous trading day was $28.10. c) The earnings per share are approximately $2. d) The dividend yield is 21.4 percent. e) The bid-ask spread is $.300.

b

Greener Grass Co. pays a constant annual dividend of $1 a share and has 1,000 shares of common stock outstanding. The company: a) must always show a current liability on its balance sheet of $1,000 for dividends payable. b) must still declare each dividend before it becomes an actual company liability. c) is obligated to continue paying $1 a share each year. d) can deduct $1,000 a year as a business expense as a result of its dividend payment. e) can be forced into bankruptcy by its shareholders if it fails to pay at least $1 a year in dividends.

b

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

d