FIN 301 Final Exam

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?

Constant growth model

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

Coupon

______ risk is measured using the standard deviation.

Total

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

Assume the current market price of a bond exceeds its par value. Which one of these equations applies?

Yield to maturity < Coupon rate

If a poorly-diversified portfolio becomes well diversified, we would expect the porfolio's:

Standard deviation to decrease

Based on the capital asset pricing model (CAPM), which of the following should earn the highest risk premium?

Stock with a beta of 1.24

A bond's principal is repaid on the ______ date.

Maturity

To calculate the expected risk premium on a stock, one must subtract the ______ from the stock's expected return.

Risk-free rate

All else constant, a bond will sell at ______ when the coupon rate is ______ the yield to maturity.

A discount; less than

When calculating a firm's weighted average cost of capital, the capital structure weights:

Are based on the market values of the outstanding securities.

Bonds issued by the U.S. government:

Are considered to be free of default risk.

Of the options listed below, which is the best measure of systematic risk?

Beta

A ______ is the market's measure of systematic risk.

Beta of 1

Which one of the following rights is never directly granted to all shareholders of a publicly held corporation?

Determining the amount of the dividend to be paid per share

While evaluating a stock, you estimate that it will earn a return of 11 percent if economic conditions are favorable, and 3 percent if economic conditions are unfavorable. Given the probabilities of favorable versus unfavorable economic conditions, you conclude that the stock will earn 7.2 percent next year. The 7.2 figure is called the:

Expected return

Which of the following statements regarding unsystematic risk is accurate?

It can be effectively eliminated by portfolio diversification

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.

With respect to returns, which one of the following statements is accurate?

Over time, the average unexpected return will be zero

Municipal bonds:

Pay interest that is free from federal taxes.

The cost of preferred stock is equivalent to the:

Rate of return on perpetuity

To determine a firm's financial cost of capital, one must include:

The returns currently required by both debt holders and stockholders