Practice Exam 2 - Chapter 6-9

Your anticipated wedding is three years from today. You don't know who your spouse will be but you do know that you are saving $10,000 today and $17,000 one year from today for this purpose. You also plan to pay the final $12,000 of anticipated costs on your wedding day. At a discount rate of 5.5 percent, what is the current cost of your upcoming wedding?

$36,333.11 PV = $10,000 + $17,000/1.055 + $12,000/1.055^3

Read Corporation currently pays an annual dividend of $1.46 per share and plans on increasing that amount by 2.75 percent annually. Cho, Incorporated, currently pays an annual dividend of $1.42 per share and plans on increasing its dividend by 3.1 percent annually. Given this information, you know for certain that the stock of Cho has a higher ________ than the stock of Read.

Capital Gains Yield

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 the dividend growth model? - An individual stock has the same value to every investor. - Even if the dividend amount and growth rate remain - constant, the value of a stock can vary. - Zero-growth stocks have no market value. - Stocks that pay the same annual dividend will have equal market values. - The dividend growth rate is inversely related to a stock's market price.

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

Which one of the following will decrease the net present value of a project? - Increasing the value of each of the project's discounted cash inflows - Moving each cash inflow forward one time period, such as from Year 3 to Year 2 - Decreasing the required discount rate - Increasing the project's initial cost at Time 0 - Increasing the amount of the final cash inflow

Increasing the project's initial cost at Time 0

You are comparing two investment options that each pay 6 percent interest compounded annually. Both options will provide you with $12,000 of income. Option A pays $2,000 the first year followed by two annual payments of $5,000 each. Option B pays three annual payments of $4,000 each. Which one of the following statements is correct given these two investment options? Assume a positive discount rate. (No calculations needed.)

Option B has a higher present value at Time 0.

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

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 these statements related to growing annuities and perpetuities is correct? - You can compute the present value of a growing annuity but not a growing perpetuity. - In computing the present value of a growing annuity, you discount the cash flows using the growth rate as the discount rate. - The future value of an annuity will decrease if the growth rate is increased. - An increase in the rate of growth will decrease the present value of an annuity. - The present value of a growing perpetuity will decrease if the discount rate is increased.

The present value of a growing perpetuity will decrease if the discount rate is increased.

Which one of the following statements correctly defines a time value of money relationship? - Time and future values are inversely related, all else held constant. - Interest rates and time are positively related, all else held constant. - An increase in a positive discount rate increases the present value. - An increase in time increases the future value given a zero rate of interest. - Time and present value are inversely related, all else held constant.

Time and present value are inversely related, all else held constant.

Which one of the following statements related to loan interest rates is correct? - The annual percentage rate considers the compounding of interest. - When comparing loans you should compare the effective annual rates. - Lenders are most apt to quote the effective annual rate. - Regardless of the compounding period, the effective annual rate will always be higher than the annual percentage rate. - The more frequent the compounding period, the lower the effective annual rate given a fixed annual percentage rate.

When comparing loans you should compare the effective annual rates.

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: - an increase in all stock values. - all stock values to remain constant. - a decrease in all stock values. - dividend-paying stocks to maintain a constant price while non-dividend paying stocks decrease in value. - dividend-paying stocks to increase in price while non-dividend paying stocks remain constant in value.

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

Ana just received the semiannual payment of $35 on a bond she owns. This is called the ______ payment.

coupon

The internal rate of return is defined as the: - maximum rate of return a firm expects to earn on a project. - rate of return a project will generate if the project is financed solely with internal funds. - discount rate that equates the net cash inflows of a project to zero. - discount rate which causes the net present value of a project to equal zero. - discount rate that causes the profitability index for a project to equal zero.

discount rate which causes the net present value of a project to equal zero.

A forward PE is based on:

estimated future earnings.

A discount bond's coupon rate is equal to the annual interest divided by the:

face value

When using the two-stage dividend growth model,:

g1 can be greater than R.

A project has a net present value of zero. Given this information: - the project has a zero percent rate of return. - the project requires no initial cash investment. - the project has no cash flows. - the summation of all of the project's cash flows is zero. - the project's cash inflows equal its cash outflows in current dollar terms.

the project's cash inflows equal its cash outflows in current dollar terms.

The bond market requires a return of 6.2 percent on the 15-year bonds issued by Mingwei Manufacturing. The 6.2 percent is referred to as the:

yield to maturity