FIN 351 Ch. 7-9 Quizzes

Zero coupon

A bond that has only one payment, which occurs at maturity, defines which one of these types of bonds? Debenture Callable Floating-rate Junk Zero coupon

Discount rate

A decrease in which of the following will increase the current value of a stock according to the dividend growth model? Dividend amount Number of future dividends, provided the total number of dividends is less than infinite Dividend growth rate Discount rate Both the discount rate and the dividend growth rate

estimated future earnings.

A forward PE is based on: the last four quarterly dividend payments. the last dividend payment multiplied by 2. historical earnings. estimated future earnings. industry averages.

The yield to maturity is less than the coupon rate.

A premium bond that pays $60 in interest annually matures in seven years. The bond was originally issued three years ago at par. Which one of the following statements is accurate in respect to this bond today? The face value of the bond today is greater than it was when the bond was issued. The bond is worth less today than when it was issued. The yield to maturity is less than the coupon rate. The coupon rate is less than the current yield. The yield to maturity equals the current yield.

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

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 cash flow in Year 2 is valued just as highly as the cash flow in Year 1.

A project has a required payback period of three years. Which one of the following statements is correct concerning the payback analysis of this project? The cash flows in each of the three years must exceed one-third of the project's initial cost if the project is to be accepted. The cash flow in Year 3 is ignored. The project's cash flow in Year 3 is discounted by a factor of (1 + R)^3. The cash flow in Year 2 is valued just as highly as the cash flow in Year 1. The project is acceptable whenever the payback period exceeds three years.

You should not apply the IRR rule in this case. Since the cash flow direction changes twice, there are two IRR's. Thus, the IRR rule should not be used to determine acceptance or rejection.

An investment costs $239,000 and has projected cash flows of $123,900, $78,400, and −$22,300 for Years 1 to 3, respectively. The required rate of return is 15.5 percent. Based solely on the internal rate of return rule, should you accept the project? Why or why not? Yes; The IRR exceeds the required return. Yes; The IRR is less than the required return. No; The IRR is less than the required return. No; The IRR exceeds the required return. You should not apply the IRR rule in this case.

The project is acceptable if the required return exceeds the IRR.

Assume a project is independent and has financing-type cash flows. Which one of these statements is correct? The IRR cannot be used to determine the acceptability of the project. The project is acceptable if the required return exceeds the IRR. The project is acceptable only if the NPV is zero or negative. The project's required rate of return will always be negative. The project is acceptable if the internal rate of return is negative.

are considered to be free of default risk.

Bonds issued by the U.S. government: are considered to be free of interest rate risk. generally have higher coupons than comparable bonds issued by a corporation. are considered to be free of default risk. pay interest that is exempt from federal income taxes. are called "munis."

Net present value

Which one of the following methods predicts the amount by which the value of a firm will change if a project is accepted? Net present value Discounted payback Internal rate of return Profitability index Payback

mutually exclusive.

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

pay interest that is free from federal taxation.

Municipal bonds: are totally risk free. generally have higher coupon rates than corporate bonds. pay interest that is free from federal taxation. are rarely callable. are free of default risk.

priced the same as a $1 perpetuity.

National Trucking has paid an annual dividend of $1 per share on its common stock for the past 15 years and is expected to continue paying a dollar per share long into the future. Given this, one share of the firm's stock is: basically worthless as it offers no growth potential. equal in value to the present value of $1 paid one year from today. priced the same as a $1 perpetuity. valued at an assumed growth rate of 1 percent. worth $1 per share in the current market.

market price of the bond will decrease.

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: coupon rate will also increase. current yield will decrease. yield to maturity will be less than the coupon rate. market price of the bond will decrease. coupon payment will increase.

g

Which one of the following represents the capital gains yield as used in the dividend growth model? D1 D1/P0 P0 g g/P0

is unsustainable over the long term.

Supernormal growth is a growth rate that: is both positive and follows a year or more of negative growth. exceeds a firm's previous year's rate of growth. is generally constant for an infinite period of time. is unsustainable over the long term. applies to a single, abnormal year.

yield to maturity

The bond market requires a return of 6.2 percent on the 15-year bonds issued by Mingwel Manufacturing. The 6.2 percent is referred to as the: coupon rate face rate call rate yield to maturity current yield

$36.09 P0 = $4.80/.133 P0 = $36.09

The common stock of Salazar Insurance pays a constant annual dividend of $4.80 per share. What is one share of this stock worth at a discount rate of 13.3 percent? $40.89 $65.26 $36.09 $48.00 $57.60

Stocks can have negative growth rates.

Which one of the following statements is correct? Stocks can only be assigned one dividend growth rate. Preferred stocks generally have variable growth rates. Dividend growth rates must be either zero or positive. All stocks can be valued using the dividend discount models. Stocks can have negative growth rates.

market price.

The current yield is defined as the annual interest on a bond divided by the: coupon rate. face value. market price. call price. par value.

payback period.

The length of time a firm must wait to recoup the money it has invested in a project is called the: internal return period. payback period. profitability period. discounted cash period. valuation period.

discounted payback period.

The length of time a firm must wait to recoup, in present value terms, the money it has invested in a project is referred to as the: net present value period. internal return period. payback period. discounted profitability period. discounted payback period.

accepted because the profitability index is greater than 1.

When the present value of the cash inflows exceeds the initial cost of a project, then the project should be: accepted because the payback period is less than the required time period. accepted because the profitability index is greater than 1. accepted because the profitability index is negative. rejected because the internal rate of return is negative. rejected because the net present value is positive.

Long-term, taxable junk bond

Which bond would you generally expect to have the highest yield? Risk-free Treasury bond Nontaxable, highly liquid bond Long-term, high-quality, tax-free bond Short-term, inflation-adjusted bond Long-term, taxable junk bond

coupon rate > current yield > yield to maturity

Which one of the following applies to a premium bond? Yield to maturity > Current yield > Coupon rate Coupon rate = Current yield = Yield to maturity Coupon rate > Yield to maturity > Current yield Coupon rate < Yield to maturity < Current yield Coupon rate > Current yield > Yield to maturity

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

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.

Waiting until a machine finishes molding Product X before being able to mold Product Z

Which one of the following is the best example of two mutually exclusive projects? Building a furniture store beside a clothing outlet in the same shopping mall Producing both plastic forks and spoons on the same assembly line Using an empty warehouse to store both raw materials and finished goods Promoting two products during the same television commercial Waiting until a machine finishes molding Product X before being able to mold Product Z

Given a positive rate of inflation, the real rate must be less than the nominal rate.

Which one of the following statements is correct? The risk-free rate represents the change in purchasing power. Any return greater than the inflation rate represents the risk premium. Historical real rates of return must be positive. Nominal rates exceed real rates by the amount of the risk-free rate. Given a positive rate of inflation, the real rate must be less than the nominal rate.

Cumulative preferred shares are more valuable than comparable noncumulative shares.

Which one of these statements related to preferred stock is correct? Preferred shareholders normally receive one vote per share of stock owned. Preferred shareholders determine the outcome of any election that involves a proxy fight. Preferred shareholders are considered to be the residual owners of a corporation. Preferred stock normally has a stated liquidating value of $1,000 per share. Cumulative preferred shares are more valuable than comparable noncumulative shares.