MBA 702 - Exam 2

Allison just received the semiannual payment of $35 on a bond she owns. Which term refers to this payment? a. Coupon b. Face Value c. Discount d. Call premium e. Yield

Coupon

When the present value of the cash inflows exceeds the initial cost of a project, then the project should be: a. Accepted payback is < required time period b. accepted - profitability index > 1 c. accepted - profitability index is (-) neg d. rejected IRR is neg (-) e. rejected - NPV is pos (+)

accepted because the profitability index is great than 1

A projects average NI/Average Book Value is referred to as the projects' average: a. NPV b. IRR c. Accounting Return d. Profitability Index e. Payback Period

accounting return

Municipal bonds a. totally risk free b. generally have higher coupon rate than corp bonds c. pay interest that is federally tax free d. rarely callable e. free of default risk

pay interest that is federally tax free

The length of time a firm must wait to recoup the money it has invested in a project is called the: a. IRR b. payback period c. profitability period d. discounted cash period e. valuation period

payback period

A deferred call provision: a. requires bond issuer to pay current market price, minus any accrued interest, should the bond be called b. prohibits issuer from ever redeeming bonds prior to maturity c. prohibits issuer from redeeming callable bonds prior to specified date d. allows issuer to delay repaying bond until after maturity e. requires issuer to pay a call premium that is = to or > than one yr's coupon should bond be called

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

Which one of the following indicates a portfolio is being effectively diversified? a. increase beta b. decrease beta c. increase RoR d. increase Sd. e. decrease Sd

A decrease in the portfolio standard deviation

Isasc 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%. Project B has an NPV of $82,909, a payback period of 2.57 years, and an ARR of 9.22%. The required rate of return for project A is 11.5% while it is 12% for project B. Both projects have a required AAR of 9.25%. Isaac must make a recommendation and justify it in 15 words or less. What should his recommendation be? a. Accept bot because both NPV's are pos (+) b. Accept proj A - has shortest payback period c. Accept proj B and Reject proj A based on NPVs d. Accept proj A and reject prj B based on AARs e. Accept Proj a - lower rate of return

Accept Project B and reject Project A based on the NPV's

The systematic risk of the market is measured by a: a. beta of 1 b. beta of 0 c. Sd of 1 d. Sd of 0 e. variance of 1

Beta of 1

Which one of the following is the formula that explains that relationship between the expected return on a security and the level of that security systematic risk? a. Capital asset pricing model b. Time value of money equation c. Unsystematic risk equation d. Market performance equation e. Expected risk formula

Capital asset pricing model

Which one of the following is the rate at which a stock's price is expected to appreciate? a. Current yield b. dividend yield c. total return d. capital gain's yield e. coupon rate

Capital gains yield

Which one of the following types of stock is defined by the fact that it receives no preferential treatment in respect to either dividends or bankruptcy proceedings? a. Dual class b. Cumulative c. Non-cumulative d. Preferred e. Common

Common

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? a. Maximal growth model b. Constant growth model c. capital pricing model d. Realized earnings model e. Realized growth model

Constant-growth model

Which one of the following statements related to corporate dividends is correct? a. Div are nontaxable income to shareholders b. Div reduce taxable income to corp c. CEO of corp responsible for declaring div d. CFO determines amount of div paid e. Corp shareholders may receive tax break on portion of div income

Corporate shareholders may receive a tax break on a portion of their dividend income.

Which one of the following relationships is stated correctly? a. Decreasing the time to maturity increases the price of a discount bond, all else held constant b. The CR exceeds the current yield when a bond less at discount c. The call price must = par value d. Increasing coupon rate decreases the current yield all else constant e. An increase in market rates increases the market price of bond

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

Which one of the following rights is never directly granted to all shareholders of a public held corporation? a. Electing a board of directors b. Receiving distribution profits c. Voting either for or against merger or acquisition d. Determine amount of div per paid per share e. 1st chance to purchase any new equity shares offered

Determining the amount of the dividend to be paid per share

A DECREASE in which of the following will INCREASE the current value of a stock according to the dividend growth model? a. div amount b. # of future div, provided total # of div are less than infinite c. Div growth rate d. Discount rate e. Both discount and div growth rates

Discount rate

A sinking fund is managed by a trustee for which one of the following purposes? a. Paying bond interest payments b. Early bond redemption c. Converting bonds into equity securities d. Paying preferred dividends e. Reducing bond rates

Early bond redemption

Which one of the following statements is correct concerning unsystematic risk? a. investor rewarded for assuming unsystematic risk b. eliminating unsystematic risk is the responsibility of the individual investor c. unsystematic risk is rewarded when > market level of unsystematic risk d. beta measures the level of unsystematic risk e. Sd measure unsystematic risk

Eliminating unsystematic risk is the responsibility of the individual investor

A floor broker on the NYSE does which of the following? a. Supervises commission brokers of specified financial firm b. Traders own personal inventory c. Executes order on behalf of customers d. Maintains an inventory and assume role of market dealer e. charged with maintain a liquid orderly market

Executes orders on behalf of customers

You own a stock that you think will produce a return of 11 percent in a good economy and 3 percent in a poor economy. Given the probabilities of each state of the economy occurring, you anticipate that your stock will earn 6.5 percent next year. Which one of the following terms applies to this 6.5 percent? a. arithmetic return b. historical return c. expected return d. geometric return e.required return

Expected return

Bert owns a bond that will pay $45 each year in interest plus $1000 as a principal payment in maturity. What is the $1000 called? a. Coupon b. Face Value c. Discount d. Yield e. Dirty Price

Face Value

Which one of the following statements concerning risk are correct? I. Non-diversified risk is measured by beta II. The risk premium increases as diversifiable risk increases III. Systematic risk is another name for non-diversifiable risk IV. Diversifiable risk are market risks you cannot avoid

I and III only

The expected return on a portfolio considers which of the following? I. Percentage of the portfolio invested in each individual security II. Projected states of the economy III. The performance of each security given various economic states IV. Probability of occurrence for each state of the economy

I, II, III, and IV

At a minimum, which of the following would you need to know to estimate the amount of additional reward you will receive for purchasing a risky asset instead of a risk-free asset? I. asset's standard deviation II. asset's beta III. risk-free rate of return IV. market risk premium

II and IV only

Which one of the following will DECREASE the NPV of a project? a. increasing value of each project's discounted cash inflows b. moving each cash inflow forward one time period such as from yr 3 to 2 c. decrease the required discount rate d. Increasing the projects' initial cost at time zero e. increase the amount of the initial cost at time zero

Increasing the projects' initial cost at time zero

Which one of the following risks would a floating-rate bond tend to have less of as compared to a fixed-rate coupon bond? a. real rate risk b. interest rate risk c. default risk d. liquidity risk e. taxability risk

Interest rate risk

Which one of the following is represented by the slope of the market security line? a. Rewards to Risk ratio b. Market Risk premium c. Beta coefficient d. Risk free interest rate e. Market Sd

Market risk premium

A bond's principal is repaid on the ____________ date. a. coupon b. yield c. maturity d. dirty e. clean

Maturity

Which of the following is a project acceptance indicator given a independent project with investing type cash flows? a. Profitability Index < 0 b. IRR < required return c. Discounted payback period > d. Avg acct'g return < IRR e. modified IRR > required return

Modified internal rate of return that exceeds the required return

The final decision on which of two mutually exclusive projects to accept ultimately depends upon which one of the following? a. Initial costs of project b Timing of cash flows c. Total cash inflows of each project d. NPV e. Length of project's life

NPV

A securities market primarily composed of dealers who buy and sell for their own inventories is referred to as which type of market? a. auction b. private c. over the counter d. regional e. insider

Over-the-counter

Suzie owns five different bonds and twelve different stocks. Which one of the following terms most applies to her investments? a. portfolio b. index c. collection d. grouping e. risk free

Portfolio

Steve has invested in twelve different stocks that have a combined value today of $121,300. Fifteen percent of that total is invested in Wise Man Foods. The 15 percent is a measure of which one of the following? a. portfolio return b. portfolio weight c. degree of risk d. price earning ratio e. Index value

Portfolio weight

Which one of the following is a positively sloped linear function that is created when expected returns are graphed against security betas? a. Rewards to Risk matrix b. Portfolio weight graph c. Normal Distro d. Security market line e. Market Real returns

Security market line

Total risk is measured by _____ and systematic risk is measured by _____. a. beta;alpha b. beta;Sd c. alpha;beta d. Sd;beta e. Sd;variance

Standard deviation; beta

Which one of the following is a risk that applies to most securities a. Unsystematic b. Diversifiable c. Systematic d. Asset-specific e. Industry

Systematic

Which one of the following statements related to the internal rate of return (IRR) is correct? a. IRR yields same accept and reject decision based on NPV method given mutually exclusive projects b. IRR equal to required return would reduce the value of firm if accepted c. IRR is equal to the required return when the NPV is equal to zero d. Financing type project should be accepted if the IRR exceeds required return e. Avg acct'ing return is a better method of analysis that hte IRR from a financial point of view

The IRR is equal to the required return when the NPV is equal to zero

Why is payback often used as the sole method of analyzing a proposed small project? a. Payback considers time value of money b. all relevant cashflows are included in payback analysis c. benefits of payback analysis usually outweigh the cost of the analysis d. most desirable of various financial methods of analysis e. focused on long-term impact of project

The benefits of payback analysis usually outweigh the cost of the analysis

A project has a NPV of zero. Which one of the following best describes this project? a. project has 0% RoR b. project requires no initial cash investment c. project has no cash flows d. summation of all projects cash flows are zero e. projects cash inflows equal its cash outflows in current dollar terms

The projects' cash inflows equal its cash outflows in current dollar terms

Which one of the following statements in correct? a. Risk free represents change in pricing power b. Return greater than the inflation rate represents risk premium c. Historical real rates of return must be positive d. Nominal rates exceed real rates by the amount of risk free rate e. The real rate must be less than the nominal rate given a positie rate of inflation

The real rate must be less than the nominal rate given a positive rate of inflation

Which one of the following events would be included in the expected return on Sussex stock? a. CFO unexpectedly resigned b. labor union called a strike c. This morning, Sussex confirmed that its CEO is retiring at the end of the year as was anticipated d. Stock unexpectedly declined because a toxic product e. board unprecedented decision to give sizeable bonus to auditors for efforts uncovering wasteful spending

This morning, Sussex confirmed that its CEO is retiring at the end of the year as was anticipated

Which one of the following statements related to unexpected returns is correct? a. All announcements affect unexpected returns b. unexpected returns over time have neg (-) impact on total return c. unexpected returns relatively predictable in short-term d. Unexpected returns can be either positive or negative in the short term but tend to be zero over the long term e. Unexpected returns generally cause actual return to vary from expected return in long run

Unexpected returns can be either positive or negative in the short term but tend to be zero over the long term

A news flash just appeared that caused about a dozen stocks to suddenly increase in value by 12%. What type of risk does this news flash best represent? a. Unsystematic b. Non-Diversifiable c. Maket d. Asset-specific e. Expected

Unsystematic

Which one of the following risks is irrelevant to a well-diversified investor? a. systematic risk b. unsystematic risk c. Market risk d. Non-diversifiable risk e. systematic portion of surprise

Unsystematic risk

Which one of the following is most directly affected by the level systematic risk in a security? a. Variance of returns b. Sd of returns c. Expected RoR d. Risk Free rate e. Market Risk Premium

Variance of the returns

Which one of these equations applies to a bond that currently has a market price that exceeds par value? a. Market Value < FV b. YTM=Current Yield c. Current Yield > Coupon Rate d. Market Value = FV e. YTM < Coupon Rate

Yield to maturity (YTM) < 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. an increase in all stock values b. all stock values remain constant c. decrease in all stock values d. div paying stocks maintain constant price while non-div paying stocks decrease in value e. div paying stocks increase in price while non-div paying stocks maintain constant in value

a DECREASE in all stock values

An agent who arranges a transaction between a buyer and a seller of equity securities is called a: a. broker b. floor trader c. capitalist d. principal e. dealer

broker

A $1,000 face value bond can be redeemed early at the issuer's discretion for $1,030, plus any accrued interest. The additional $30 is called the: a. dirty price b. redemption value c. call premium d. original - issue discount e. redemption discount

call premium

unsystematic risk a. can be effectively eliminated by portfolio diversification. b. compensated by risk premium c. measured by beta d. measured by Sd e. related to overall economy

can be effectively eliminated by portfolio diversification.

The standard deviation of a portfolio a. weighted avg of Sd of indiv securities b. never < Sd of most risky security c. equal to or grater than lowest Sd in any single security d. arithmetic avg of Sd of idiv securities e. Sd < Sd of least risky security

can be less than the standard deviation of the least risky security in the portfolio.

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

coupon rate decreases and the time to maturity increases

An agent who maintains an inventory from which he or she buys and sells securities is called a: a. broker b. trader c. capitalist d. principal e. dealer

dealer

The primary purpose of portfolio diversification is to: a. increase returns on risks b. eliminates all risk c. eliminates asset specific risk d. eliminates systematic risk e. lower both returns and risks

eliminate asset-specific risk

Which one of the following represents the capital gains yield as used in the dividend growth model? a. D1 b. D1/Po c. Po d. g e. g/Po

g

A zero coupon bond a. sold at large premium b. pay interest that is tax deductible c. only issued by US Treasury d. has more interest rate risk compared to coupon bond e. no taxable income until maturity

has more interest rate risk than a comparable coupon bond

Road Hazards has 12-year bonds outstanding. The interest payment on these bonds are sent directly to each of the individual bondholders. These direct payments are a clear indication that the bonds can accurately be defined as being issued: a. at par b. in registered form c. in street form d. as debentures e. as callable bonds

in registered form

NPV a. best method of analyzing mutually exclusive projects b. less useful that the IRR when comparing different size projects c. easiest method for non-financial managers d. cannot be applied when comparing mutually exclusive projects e. similar to average accounting of return

is the best method of analyzing mutually exclusive projects

Supernormal growth is a growth rate that: a. is both + and follows a yr or more of negative growth b. all stock values remain constant c. exceeds previous tear's growth d. is unsustainable over the long term e. applies to a single abnormal year

is unsustainable over the long term

According to CAPM, the amount of reward an investor receives for bearing the risk of an individual security depends upon the: a. amount of total risk and the market risk premium b .market risk premium and the amount of systematic risk inherent in the security c. risk free rate, MRoR, Sd of security d. beta and MRoR e. Sd and risk free RoR

market risk premium and the amount of systematic risk inherent in the security

If a stock portfolio is well diversified, then the portfolio variance: a. equal variance of most volatile stock in portfolio b. be < variance of least risky stock in portfolio c. be less equal to or greater than variance of least risky stock d. weighted avg of variances of indiv securities e. arithmetic avg of variances in indiv securities

may be less than the variance of the least risky stock in the portfolio

If a firm accepts Project A it will not be feasible to also accept Project B because both projects would require the simultaneous and exclusive use of the same piece of machinery. These projects are considered to be: a. independent b. interdependent c. mutually exclusive d. economically scaled e. operationally distinct

mutually exclusive

Which one of the following is least apt to reduce the unsystematic risk of a portfolio? a. reduce # of stocks b. add bonds c. add international securities d. add US treasury Bills e. add tech stocks

reducing the number of stocks held in a portfolio

The dividend growth model: a. assumes div increase at a decreasing rate b. only values stocks at TIME 0 c. cannot be used to value constant div stocks d. can be used to value both div-paying and non-div-paying stocks e. requires both growth rate less than the required return

requires the growth rate to be less than the required return

Which one of the following will be constant for all securities if the market is efficient and securities are priced fairly? a. variance b. Sd c. reward-to-risk ratio d beta e. risk premium

reward-to-risk ratio

The expected risk premium on a stock is equal to the expected return on the stock minus the: a. expected market RoR (mRoR) b. risk free rate c. inflation rate d. Sd (standard deviation) e. variance

risk-free rate

The difference between the price that dealer is willing to pay and the price at which he or she will sell call the: a. equilibrium b. premium c. discount d. call price e. spread

spread

The principle of diversification tells us that: a. concentrating 2 or 3 lge stocks eliminates unsystematic risk b. concentrating 3 companies within same industry will greatly reduce systematic risk c. spreading an investment across 5 diverse companies will eliminate systematic risk d. spreading an investment across many diverse assets will some of the total risk

spreading an investment across many diverse assets will eliminate some of the total risk

A highly illiquid bond that pays no interest but might entitle its holder to rental income from an asset is most apt to be a: a. NoNo bond b. put bond c. callable bond d. sukuk

sukuk

The yields on a corporate bond differ from those on a comparable Treasury security primarily because: a. interest rate risk and taxes b. taxes and default risk c. default and interest rate risk d. liquidity and inflation risks

taxes and default risk

The intercept point of the security market line is the rate of return which corresponds to: a. risk free rate b. market rate c. return of zero d. return of 1% e. market risk premium

the risk free rate

The expected return on a stock given various stages of the economy is equal to the: a. highest expected return to give any economic state b. arithmetic avg of the returns for each economic state c. summation of the indiv. expected RoR d. weighted avg of the returns for each economic state e. return of the economic state with highest probability

weighted average of the returns for each economic state