Chapter 10 Finance

The value of a share of stock, currently selling for $100, after it has a 5 for 1 split is: a) $20 b) $50 c) $200 d) $500

$100/5=$20

Long term business funds are obtained by issuing commercial paper and corporate bonds.

False commercial paper is a source of short-term financing for businesses

Global bonds are generally denominated in euros and are marketed globally.

False denominated in dollars

Preferred stock pays a dividend that is equal to its par value

False dividend may be a percentage of its par value

A bond with a coupon rate of 4% , and a discount rate of 6% will pay $60 in interest each year.

False dollar interest on bonds is based on the coupon rate not a discount rate, par (face) value=$1,000-->$1,000(.04)=$40

The shorter the maturity of a fixed rate debt instrument, the greater the reduction in its value to a given interest rate increase.

False either a longer term to maturity or a lower coupon rate, all else equal-->increase a bond's sensitivity to market interest rate changes

A bond will sell at a premium if its required return or discount rate is greater than its coupon rate.

False it will sell at premium if its required return is less than its coupon rate

The call price of a callable bond is typically equal to par value plus two years interest.

False one year of interest

The par value of a common stock is meaningful in that it is often used to determine the fixed annual dividend.

False par value of common stock has little relationship to the current price or book value of the stock, a preferred stock's dividend may be a percentage of its par value.

Real assets are against the income or assets of individuals, businesses, and governments.

False real assets include direct ownership of land, buildings or homes, equipment, etc.

A trustee represents the company to ensure that the covenants of the bond indenture are met.

False represents the bond holders

The values of stocks and bonds are not affected by time value of money concepts

False this chapter showed how to use TVM to place a clue on stocks and bonds

Private placements must by approved by the Securities and Exchange Commission (SEC)

False Public placements must be approved by the SEC

A convertible bond can be converted, at the issuing firm's option, into a specific number of shares of the issuer's common stock.

False, at the investor's option

Mortgage bonds are secured by home mortgages

False, backed by specifically pledged property of a firm

Preferred stock is an equity security that has a senior claim to the firm's earning s and assets over bonds.

False, bonds must be paid first, preferred stock is senior over common stock

The par value of a preferred stock is meaningful in that it may be used to determine the fixed annual dividend.

True dividend may be a percentage of its par value

The higher the discount rate is yield to maturity, the lower the price of a bond.

True, a higher discount rate-->a lower present value

A document which is administered by a trustee, and includes in great detail the various provisions of the loan agreement is called the: a) trust indenture b) debenture c) bond covenant d) bearer bond

a)

The value of share of stock, currently selling for $100, after it has a 2 for 1 split is: a) $50 b) $150 c) $200 d) $250

a) $100/2= $50

Which of the following statements is true about long-term external financing: a) Borrowing is cheaper than raising equity financing b) Most of the funds raised annually from security issues come from corporate stock sales. c) Stocks have a maturity date d) Firms cannot repurchase their outstanding stock

a) Borrowing is cheaper than raising equity financing

An example of asset securitization is: a) a first mortgage bond b) a debenture c) a subordinated debenture d) a junk bond

a) a first mortgage bond

Putable bonds: a) allow the investor to force the issuer to redeem the bonds prior to maturity b) can be redeemed prior to maturity by the issuing firm c) can be converted, at the investor's option, into a specific number of shares of the issuer's common stock d) allows the same assets to be used as a security in future issues

a) allow the investor to force the issuer to redeem the bonds prior to maturity

Which type of bond is currently prohibited from being issued in the United States? a) bearer bonds b) unregulated debentures c) tax avoidance bonds d) income bonds

a) bearer bonds

When the market interest rate is above the coupon rate for a particular quality of bond, the bond will be priced: a) below its par value b) at its par value c) above its par value d) its price compared to its par value cannot be determined without further information

a) below its par value

The risk of having a bond issuer request the bond back from the bondholder thus forcing the bondholder to reinvest the proceeds at a lower interest rate is called: a) call risk b) reinvestment rate risk c) interest rate risk d) put risk

a) call risk

Which of the following bonds can be redeemed prior to maturity by the firm? a) callable bonds b) convertible bonds c) Putable bonds d) retractable bonds

a) callable bonds

Which of the following types of bonds have the lowest bondholder security risk? a) closed-end mortgage bond b) subordinated debenture c) open-end mortgage bond d) all the above would have the same risk

a) closed-end mortgage bond

The three types of risk faced by investors in domestic bonds include all of the following EXCEPT: a) exchange rate risk b) credit risk c) interest rate risk d) reinvestment rate risk

a) exchange rate risk

Suppose a firm's $1,000 par value convertible bond is currently worth $1,000. Its conversion ratio is 30 and the stock currently sells for $25 per share. Would it make better financial sense to hold onto the bond or convert it? a) hold onto the bond b) convert the bond c) can't tell from this information d) none of the above

a) hold onto the bond PV bond=$1,000 PV stock= $25(30)=$750

A(n)___________ is an extra dividend declared by the firm over and above its regular dividend payout. a) special dividend b) speculative dividend c) extra-large dividend d) treasury dividend e) none of the above

a) special dividend

The effect of _____ and ______ on the value of a firm's stock and the wealth of shareholders is zero. a) stock dividends, stock splits b) cash dividends, stock dividends c) cash dividends, stock splits d) none of the above

a) stock dividends, stock splits a stock dividend and cash dividends are very different

Bond ratings are paid for by: a) the issuing firm b) the trustee c) the investment banker d) the Securities and Exchange Commission

a) the issuing firm

A bond's market value is the same as its par value when the coupon rate is: a) the same as the required rate of return b) higher than the required rate of return c) lower than the required rate of return d) lower than the inflation rate

a) the same as the required rate of return

The value of a share of stock, currently selling for $100, after it has a 1 for 5 split is: a) $20 b) $40 c) $500 d) $1000

c) one new share is worth 5 old shares--> $100 (5)=$500

A potential investment pays $10 per year indefinitely. The appropriate discount rate for the potential investor is 10%. The present value of this cash flow is: a) $1 b)$10 c)$100 d)$1,000

c) $100 this is a perpetuity $10/0.10=$100

The value of a share of a share of stock currently selling for $50 after a 1 for 5 split is: a) $10 b) $200 c) $250 d) $500

c) $250 one new share is worth 5 old shares--> $50(5)=$250

_____ assess both the collateral and the ability of the issuer to make timely interest and principal payments. a) Bond covenants b) Bond indentures c) Bond ratings d) none of the above

c) Bond ratings

Dollar-denominated bonds that are issued in the United States by a foreign issuer are called: a) Eurodollar bonds b) foreign bonds c) Yankee bonds d) global bonds

c) Yankee bonds

Which of the following statements is false? a) Preferred stock that is both cumulative and convertible is a popular financing choice for investors b) Bond issues of a single firm can have different bond ratings if their security provisions differ c) Yankee bonds are dollar-denominated bonds that are sold outside the Unites States d) All of the above statements are correct

c) Yankee bonds are dollar-denominated bonds that are sold outside the Unites States

When the market interest rate is below the coupon rate for a particular quality of bond, the bone will be priced: a) below its par value b) at its par value c) above its par value d) its price compared to its par value cannot be determined without further information

c) above its par value

Bonds that have coupons that are literally clipped and presented, like a check, to the bank for payment, and where the bond issuer does not know who is receiving the coupon payments are called: a)registered bonds b) first mortgage bonds c) bearer bonds d) junk bonds

c) bearer bonds

A bond that does not permit future bond issues to be secured by any of the assets pledged as security to it is called a(n): a) first mortgage bond b) equipment trust certificate c) closed-end mortgage bond d) open-end mortgage bond

c) close-end mortgage bond

All of the following represent bonds secured by assets except a(n): a) closed-end mortgage bond b) equipment trust certificate c) debenture d) open-end mortgage bond

c) debenture

A potential investment pays $10 per year indefinitely. The appropriate discount rate for the potential investor is 10%. The present value of this cash flow is calculated by: a) multiplying $10 by the current prime rate b) dividing $10 by 10 c) multiplying $10 by the Fed's current discount rate d) dividing $10 by 0.10

d) dividing $10 by 0.10 this is a perpetuity

Which of the following risks would not be faced by investors in domestic bonds? a) credit (or default) risk b) interest rate risk c) reinvestment rate (or rollover) risk d) exchange rate risk

d) exchange rate risk

Private placements: a) are sold to the general public b) have expedited SEC scrutiny c) require public disclosure of the firm's financial information d) none of the above

d) none of the above

A bond that allows the same assets to be used as security in future issues is called a (n): a) first mortgage bond b) equipment trust certificate c) closed-end mortgage bond d) open-end mortgage bond

d) open-end mortgage bond

A bond that allows investors to force the issuer to redeem the bond prior to maturity is called a: a) convertible bond b) callable bond c) debenture bond d) putable bond

d) putable bond

Eurodollar bonds are: a) denominated in Eurodollars b) extremely long-term obligations c) scrutinized by the SEC d) sold outside the United States

d) sold outside the United States dollar-denominated bonds sold outside the United States

Select all of the following that are not bond rating agencies. a) Standard and Poor's b) Fitch's c) Moody's d) Treasury e) Federal Reserve Board of Governors

d)Treasury and e) Federal Reserve Board of Governors

An unrated bond: a) is perceived as having lower than average risk b) are termed as "debentures" c) generally has a lower yield than rated bonds d) will likely obtain a cool reception from investors

d)will likely obtain a cool reception from investors

Several factors will be considered by the board of directors and management as they consider the level of dividend payout. Some of these factors include: a) the ability of the firm to generate cash to sustain the level of dividends b) legal and contractual considerations c) growth opportunities d) tax rates e) all of the above f) none of the above

e) all of the above

Several factors will be considered by the board of directors and managements as they consider the level of dividend payout. These factors include: a) the ability of the firm to generate cash to sustain the level of dividends. b) legal and contractual considerations c) growth opportunities d) cost of other financing sources e) all of the above f) none of the above

e) all of the above

A(n) __________ is an extra dividend declared by the firm over and above its regular dividend payout. a) strong dividend b) speculative dividend c) extra-large dividend d) treasury dividend e) none of the above

e) none of the above

The____ policy states that dividends will vary based upon how much excess funds the firm has from year-to-year, whereas under a ______ policy the firm pays a constant percentage of earnings as dividends, so as earnings rise and fall so does the dollar amount of dividends. a) constant payout ratio, regular dividend b) regular dividend, constant payout ratio c) constant dividend, variable payout ratio d) variable payout ratio, constant dividend e) none of the above

e) none of the above residual dividend, constant payout ratio is correct

The effect of ________ and ________ on the value of a firm's stock and the wealth of shareholders is positive. a) share repurchases, stock splits b) cash dividends, stock diviends c) cash dividends, stock splits d) stock dividends, share repurchases e) none of the above

e)None of the above stock splits have zero effect stock dividends have zero effect stock splits have zero effect stock dividends have zero effect

Zero coupon bonds are not suited for tax-exempt accounts such as IRAs or pension funds.

False

During periods of economic expansion, firms usually rely more on internal sources of funds

False They usually rely on external funds

Common stock possesses the highest claim on the assets and cash flow of the firm.

False bonds have a higher claim

Most of the annual funds raised from security issues come from corporate bonds sales.

True

The bond issuer does not necessarily know who is receiving interest payments on a bearer bonds.

True

The claims of subordinated debenture bondholders are junior to the claims of debenture holders.

True

The par value of a common stock is an accounting and legal concepts that bears little relationship to a firm's stock price or book value.

True

There is an inverse relation between debt instruments prices and nominal interest rates in the marketplace.

True

Yankee bonds are U.S. dollar-denominated bonds that are issued in the United States by a foreign issuer.

True

Subordinate debentures are bonds whose claims are junior to the claims of those holding debenture bonds.

True definition of subordinate debentures

Most bonds currently issued in the United States today are bearer bonds.

False

A bond will sell at a discount if its required return or discount rate is greater than its coupon rate

True

A debt holder may force the firm to abide by the terms of the debt contract even if the result is reorganization or dissolution of the firm.

True

Bond covenants are the best way for bondholders to protect themselves against dubious management actions.

True

Bond issues of a single firm can have different bond ratings if their security provisions differ.

True

Bondholders have priority claims over equity holders to a firm's assets and cash flows.

True

Callable bonds can be redeemed prior to maturity by the firm.

True

Callable preferred stock gives the corporation the right to retire the preferred stock at its option.

True

Common stock possesses the lowest claim on the assets and cash flow of the firm

True

Convertible preferred stock has a special provision that makes it possible to convert it to common stock of the corporation, generally at the stockholder's option.

True

Credit risk is another term of default risk

True

Eurodollar bonds are dollar-denominated bonds that are sold outside the Unites States

True

Financial assets are claims against the income or assets of individuals, businesses, and governments

True

Firms issue more bonds than equities

True

Global bonds usually are denominated in U.S. dollars and have offering sized that typically exceed $1 billion.

True

Inflation-protected Treasure notes have a principal value that changes in accordance with the consumer price index (CPI).

True

Many callable bonds posses a call deferment period which is a specified period of time after the issue during which the bonds cannot be called.

True

Most bonds currently issued in the Unites States today are registered bonds

True

Select all of the following statements that are true about zero-coupon bonds: a) they pay no interest over the life of the bond b) they pay interest semiannually over the life of the bond c) they pay interest annually over the life of the bond d) they can be converted, at the investor's option, into a specific number of shares of the issuer's common stock e) because of their tax-implications these bonds are best suited for tax-exempted accounts f) they are bonds with ratings that are below investment grade

a) they pay no interest over the life of the bond e) because of their tax-implications these bonds are best suited for tax-exempted accounts

A speculative (junk) bond issue as rated under Standard & Poor's would be rated _____ or below: a) AA- b) BB+ c) CCC d) CC

b) BB+

Which of the following statements is correct? a) A closed-end mortgage bond is one that allows the same asset to be used as security in future bond issues b) Covenants in a trust indenture restrict or limit the actions the firm can take c) Retractable bonds can be redeemed prior to maturity by the firm d) All of the above are correct

b) Covenants in a trust indenture restrict or limit the actions the firm can take

_______ allows stock to be held in the name of a brokerage house. a) The Federal Reserve b) Street name c) The Securities Exchange Act of 1944 d) The Treasury

b) Street name

When the market interest rate is the same as the coupon rate for a particular quality of bond, the bond will be priced: a) below its par value b) at its par value c) above its par value d) its price compared to its par value cannot be determined without further information

b) at its par value

The largest annual supply of external funds for business corporations comes from issuance of which one of the following sources? a) privately places stocks b) bonds c) preferred stocks d) common stocks

b) bonds bonds accounted for 90% of total securities issued 1998-2011

A bond that can be changed into a specified number of shares of the issuer's common stock is called a: a) retractable bond b) convertible bond c) callable bond d) collateralized bond

b) convertible bond

Which of the following types of stocks have the lowest risk to shareholders? a) common stock b) cumulative preferred stock c) non-cumulative preferred stock d) callable preferred stock

b) cumulative preferred stock

Most firms that issue dividends try to maintain a consistent ________. a) dividend per share b) dividend payout ratio c) both policies are frequently employed d) neither policy is frequently employed

b) dividend payout ratio statement based on empirical evidence

A(n) _____ gives the bondholder a claim to specific assets (identified through serial numbers) such as railroad cars or airplanes. a) first mortgage bond b) equipment trust certificate c) inventory bond d) collateralized bond

b) equipment trust certificate

Which of the following is not an advantage of owning debt securities/ a) priority claim on cash flows of a firm b) highest return of corporate securities c) debtholders must receive the funds owed to them before funds are distributed to stockholders in the case of bankruptcy d) none of the above

b) highest return of corporate securities equity holders usually receive higher returns

The ______ policy states the dividend will vary based upon how much excess funds the firm has from year-to-year, whereas under a _____ policy the firm pays a constant percentage of earnings as dividends, so as earnings rise and fall so does the dollar amount of dividends. a) constant payout ratio, residual dividend b) residual dividend, constant payout ratio c) constant dividend, variable payout ratio d) variable payout ratio, constant dividend e) none of the above

b) residual dividend, constant payout ratio

According to the Gordon dividend model, which of the following variables would not affect a stock's price? a) the firm's expected growth rate in dividends b) the number of shares outstanding c) the shareholder's required return d) all of the above affect stock prices

b) the number of shares outstanding

The terms or covenants of a bond contract are set out in which of the following documents? a) debenture b) trust indenture c) mortgage d) negative pledge clauses

b) trust indenture

An individual or organization that represents the bondholders to ensure the indenture's provisions are respected by the bond issuer is called a(n): a) trust indenture b) trustee c) investment banker d) trust organization

b) trustee

Reasons why U.S. firms are continuing to raise funds overseas include all of the following EXCEPT: a) it makes sense to raise funds in the country where a firm has a facility b) financing costs are sometimes lower overseas c) foreign underwriters often have more experiences than U.S. underwriters d) issuers avoid the costly SEC approval process

c) foreign underwriters often have more experiences than U.S. underwriters

All other things being equal, a bond's value will be below its maturity value of $1,000 if it pays interest of $100 per year and investors require a rate of return that is: a) less than 10% b) exactly 10% c) higher than 10% d) could be either less than or greater than 10%

c) higher than 10% $100 interest per year: If price= $1,000--> 10% return, if price > $1,000--> less than 10% return if price < $1,000--> investors will get more than 10% which would give investors a return equal to alternative equal risk investments which is what they would require

The ________ is the difference in return earning by investing in a longer term bond that has the same credit risk as a shorter-term bond a) purchasing power spread b) credit risk permium c) horizon risk premium d) rollover risk premium e) none of the above

c) horizon risk premium

To accurately compare the rate of return on one investment with another, they should be: a) equal in size or dollar amount b) measured over different time periods c) measured over equal time periods d) held for more than one year

c) measured over equal time periods

Which of the following is not a component of the Gordon (or constant dividend growth rate) model for valuing stocks? a) next year's expected dividend b) a constant dividend growth rate c) next year's expected earnings d) a discount rate that reflects the riskiness of the stock

c) next year's expected earnings

A sinking fund: a) is a special fund set up to pay for the creditors of bankrupt firms b) requires specific approval by the firm's board of directors c) requires the issuer to retire a bond issue incrementally over time d) requires specific approval by the SEC

c) requires the issuer to retire a bond issue incrementally over time

Most American bonds pay coupon interest: a) monthly b) quarterly c) semi-annually d) annually e) none of the above

c) semi-annually

The constant dividend growth model assumes: a) a constant annual dividend b) a constant dividend growth rate for no more than the first 10 years c) that the discount rate must be greater than the dividend growth rate d) two of the above are true assumptions

c) that the discount rate must be greater than the dividend growth rate

When the market interest rate rises for a particular quality of bond, the price of the bond falls, which gives investors a new: a) coupon rate b) interest payment amount c) yield to maturity d) maturity

c) yield to maturity

_______ has the lowest claim on the assets and cash flow of the firm a) A bond b) A subordinated debenture c) Preferred stock d) Common stock

d) Common stock

Which of the following bonds has the greatest interest rate risk? a) a 5 year, 10% coupon bond b) a 10 year, 10% coupon bond c) a 5 year, 5% coupon bond d) a 10 year, 5% coupon bond

d) a 10 year, 5% coupon bond Either a longer term to maturity or a lower coupon rate, all else equal--> increase a bond's sensitivity (risk) to market interest rate changes

Preferred stock can have which of the following characteristics? It can be: a) cumulative b) non-cumulative c) convertible d) all of the above

d) all of the above

The following factors may affect a bond rating: a) security provisions b) indenture provisions c) expected trends of industry operations d) all the above e) none of the above

d) all of the above

Which of the following constitute default on a bond? a) nonpayment of par value b) nonpayment of coupon c) violation of the indenture d) all the above e) none of the above

d) all the above

Which of the following is considered to be the most risky? a) U.S. government bonds b) mortgage bonds c) corporate bonds d) common stocks

d) common stocks

Which of the following bond types would describe unsecured obligations that depend on the general credit strength of the corporation? a) closed-end mortgage bonds b) mortgage bonds c) equipment trust certificates d) debenture bonds

d) debenture bonds