FIN 701 Exam 2

When the present value of the cash inflows exceeds the initial cost of a project, then the project should be: a. accepted b/c payback period is less than the required time period b. accepted b/c profitability index is greater than 1 c. accepted b/c profitability index is negative d. rejected b/c IRR is negative e. rejected b/c NPV is postitive

accepted b/c profitability index is greater than 1

A project's average net income divided by its average book value is referred to: a. net present value b. internal rate of return c. accounting return d. profitability index e. payback period

accounting return

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

capital gains yield

Municipal bonds: a. are totally risk free b. generally have higher coupon rates than corporate bonds c. pay interest that is federally tax free d. are rarely callable e. are 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. internal return period b. payback period c. profitability period d. discounted cash period e. valuation period

payback period

Suzie owns 5 different bonds and 12 different stocks. Which of the following terms most applies to her investments? a. index b. portfolio c. collection d. grouping e. risk free

portfolio

Steve has invested in 12 different stocks that have a combined value today of $121,300 .15% of that total is invested in Wise Man Foods. The 15% is a measure of which of the following? a. portfolio return b. portfolio weight c. degree of risk d. price-earnings ratio e. index value

portfolio weight

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

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

You purchase a bond with an invoice price of $1,119. The bond has a coupon rate of 6.25 percent, a face value of $1,000, and there are 4 months to the next semiannual coupon date. What is the clean price of this bond? a. $1,108.58 b. $1,052.17 c. $1,114.14 d. $1,087.75 e. $1,083.50

$1,108.58

TCM paid an annual dividend of $1.42 a share last month. today, the co. announced the future dividends will increase by 1.3% annually. If you require a return of 14.6%, how much are you willing to pay to purchase one share of this stock today? a. $11.23 b. $10.82 c. $10.68 d. $9.68 e. $11.57

$10.82

KNJ is preparing to pay annual dividends of $1.48, $1.61, and $1.75 over the next 3 years. After that, annual dividend will be $1.9 indefinitely. What is this stock worth to you if you require a return of 14.6%? a. $11.22 b. $12.21 c. $12.32 d. $11.47 e. $12.03

$12.32

The common stock of Water Town Mills pays a constant dividend of $2.25. What is one share of stock worth at a discount rate of 16.2%? a. $13.89 b. $14.01 c. $14.56 d. $13.79 e. $13.28

$13.89

The Garden Shoppe has adopted a policy of increasing its annual dividend at a constant rate of 1.35% annually. The co. just paid its annual dividend of $1.84 what will the dividend be in 9yrs from now? a. $2.10 b. $2.05 c. $2.08 d. $2.02 e. $2.15

$2.08

Yummy Bakery just paid annual dividend of $3.40 and is expected to increase that amount by 2.2% per year. If you are planning to buy 1,000 shares of this stock next year, how much should you expect to pay per share if the market return is 14.8% at the time of purchase? a. $29.89 b. $27.58 c. $29.83 d. $28.18 e. $27.20

$28.18

NP pays no dividends at the present time. Starting in year 3 the firm will pay a dividend of $0.25 for 2 years. After that, plans on paying a constant $0.75 dividend indefinitely. How much should you pay to purchase this stock today at a required return of 13.8%? a. $3.78 b. $3.56 c. $4.37 d. $4.61 e. $4.98

$3.56

You are purchasing a 15yr zero coupon bond. YTM is 6.85% and face value $1,000. What is the current market price? (semiannual) a. $406.67 b. $408.18 c. $364.11 d. $321.50 e. $358.47

$364.11

Preferred stock sells for $63.60 and provides a return of 8.40% What is the amount of the dividend per share? a. $5.45 b. $5.25 c. $5.34 d. $5.43 e. $5.28

$5.34

Over the next 3 years, DG will pay annual dividends of $0.65, $0.70, and $0.75. After that, dividends are projected to increase by 2% per year. What is one share of this stock worth today at a required return of 14.5%? a. $5.49 b. $5.94 c. $5.68 d. $5.55 e. $5.86

$5.68

Hi-Tek is a young start up company that is currently retaining all of its earnings. The company plans to pay a $2 per share dividend in year 7 and increases that dividend by 2.2% annually thereafter. What is the current share price if the required rate of return is 16%? a. $5.95 b. $6.62 c. $8.59 d. $14.29 e. $11.78

$5.95

A treasury bond is quotes at 99.6325 asked and 99.1250 bid. What is the bid-ask spread in dollars on a $10,000 face value bond? a. $25.38 b. $5.75 c. $5.08 d. $50.75 e. $2.54

$50.75

J&J Foods wants to issue some 5.4% preferred stock that has a stated liquidating value of $100 a share. The company has determined that stocks with similar characteristics provide a 8.2 percent rate of return. What should the offer price be? a. $67.26 b. $61.38 c. $64.20 d. $65.85 e. $64.60

$65.85

Dee's made two announcements concerning its common stock today. First, the company announced that the next annual dividend will be $1.58 a share. Secondly, all dividends after that will decrease by 1.15 percent annually. What is the value of this stock at a discount rate of 15.5 percent? a. $9.49 b. $10.10 c. $9.82 d. $10.51 e. $11.01

$9.49

Oil Wells offers 5.65% coupon bonds w/ semiannual payments and YTM 6.94%. bond matures in 7yrs. What is market price if face value is $1,000? a. $949.70 b. $929.42 c. $936.48 d. $902.60 e. $913.48

$929.42

A 13year, 6% coupon bond pays interest semiannually. Face value $1,000. What is % change in the price of the bond if the market YTM rises to 5.7% from the current rate of 5.5%? a. -1.79% b. -1.38% c. -1.64% d. 1.79%

-1.79%

The current dividend yield on the common stock is 1.89%. The company just paid an annual dividend of $1.56 and announced to pay $1.70 next year. The dividend growth rate is expected to remain constant at the current level. What is the required rate of return? a. 10.86% b. 15.82% c. 9.08% d. 13.39% e. 12.75%

10.86%

Home Products common stock sells for $36.84 a share and has a market rate of return of 15.8%. The co. just paid an annual dividend of $1.61. What is the dividend growth rate? a. 11.43% b. 11.06% c. 10.87% d. 11.18% e. 10.95%

10.95%

Southern Markets recently paid a $2.62 annual dividend on its common stock. This dividend increases at an average rate of 3.8 percent per year. The stock is currently selling for $28.12 a share. What is the market rate of return? a. 13.88% b. 14.07% c. 14.21% d. 14.37% e. 13.47%

13.47%

RC has 6.5% coupon bonds outstanding w/ current market price $548. YTM 13.2% and face value of $1,000. interest is paid annually. How many years until bonds mature? a. 17.84 years b. 14.19 years c. 17.41 years d. 16.16 years e. 18.32 years

17.84 years

It will cost $9,600 to acquire an ice cream cart that is expected to produce cash inflows of $3,600 a year for 3 years. After the 3yrs, the cart is expected to be worthless. What is payback period? a. 1.82 years b. 2.67 years c. 2.82 years d. 1.67 years e. 1.79 years

2.67 years

The common stock of Dayton Repair sells for $47.92. The stock is expected to pay $2.28 next year when the annual dividend is distributed. The company increases its dividends by 1.65% annually. What is the market rate of return? a. 4.84% b. 6.41% c. 9.92% d. 6.14% e. 7.28%

6.41%

The 7% bonds issued by MK pay interest semi-annually. mature in 8yrs and have $1,000 face value. PV $987. What is YTM? a. 6.97% b. 6.92% c. 6.88% d. 7.22% e. 7.43%

7.22%

Do-Wells bonds have a face value of $1,000 and currently quoted at $867.25. coupon rate of 6.5%. What is the current yield on these bonds? a. 7.45% b. 7.67% c. 7.49% d. 8.03% e. 8.47%

7.49%

The formula that explains the relationship between the expected return on a security and the level of that security's systematic risk? a. CAPM b. time value of money equation c. unsystematic risk equation d. market performance equation e. expected risk formula

CAPM

expected return on a portfolio considers which of the following factors? I. % of the portfolio invested in each individual security II.projected states of the economy III. performance of each security given various economic states IV. probability of occurrence for each state of the economy a. I and III only b. II and IV only c. I, III and IV only d. II, III and IV only e. I, II, III, IV

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 of the following statements related to the IRR is correct? a. IRR yields the same accept/reject decisions as the NPV method given mutually exclusive projects b. project with an IRR equal to the required return would reduce the value of the firm if accepted c. IRR is equal to the required rate of return when the NPV is 0 d. financing type projects should be accepted if IRR exceeds required return e. avg accounting return is better method of analysis than IRR

IRR is equal to the required rate of return when the NPV is 0

Which one of the following is a project acceptance indicator given an independent project with investing type cash flows? a. profitability index is less than 1 b. IRR is less than required return c. discounted payback period is greater than required return d. avg accounting return is less than IRR e. MIRR that exceeds the required return

MIRR that exceeds the required rate of return

The final decision on which one of the 2 mutually exclusive projects to accept ultimately depends on: a. initial cost of the project b. timing of the cash inflows c. total cash inflows of each project d. NPV e. length of each project's life

NPV

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

SD; beta

Which one of these equations applies to a bond that currently has a market price that exceeds par value? a. market value < face value b. YTM = current yield c. market value = face value d. current yield > coupon rate e. YTM < coupon rate

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

a decrease in all stock values

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

benefits of payback analysis usually outweigh the costs of the analysis

Net present value: a. best method of analyzing mutually exclusive projects b. less useful than the internal rate of return when comparing different sized projects c. easiest method of evaluation for non financial managers d. cannot be applied when comparing mutually exclusive projects e. very similar in its methodology to the average accounting return

best method of analyzing mutually exclusive projects

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

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 for by the risk premium c. measured by beta d. measure by standard deviation e. related to the overall economy

can be effectively eliminated by portfolio diversification

The standard deviation of a portfolio: a. weighted average of the SD of the individual securities held b. can never be less than the SD of the most risky security c. must be equal or greater than the lowest SD of any single security held d. is an arithmetic avg of SD of the individual securities which compromise the portfolio e. can be less than the SD of the least risky security in the portfolio

can be less than the SD of the least risky security in the portfolio

Which of the following related to unexpected returns is correct? a. all announcements affect return b. over time have negative effects on total return c. relatively predictable in the short term d. generally cause actual return to vary significantly over the long term e. can either be positive or negative in the short term but tend to be 0 over the long term

can either be positive or negative in the short term but tend to be 0 in the long term

A project has a net present value of zero. Which one of the following best describes this project? a. zero percent rate of return b. requires no initial cash investment c. no cash flows d. summation of all project's cash flows is zero e. cash inflows = cash outflows in current dollar terms

cash inflows = cash outflows in current dollar terms

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 present 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. dividends are nontaxable income to shareholders b. dividends reduce the taxable income of the corporation c. the CEO of a corporation is responsible for declaring the dividend d. the CFO of a corporation determines the amount of dividends to be paid e. Corporate shareholders may receive a tax break on a portion of their dividend income

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

Allison just received her 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

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 time to maturity increases d. time to maturity and coupon rate both decrease e. coupon rate and time to maturity both increase

coupon rate decreases and 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

Which of the following indicates a portfolio is being effectively diversified? a. increase in beta b. decrease in beta c. increase in rate of return d. increase in standard deviation e. decrease in standard deviation

decrease in standard deviation

Which one of the following relationships is stated correctly? a. the coupon rate exceeds that current yield when a bond sells at a discount b. the call price must equal the par value c. an increase in market rates increases the market price of a bond d. decreasing the time to maturity increases the price of a discounted bond, all else constant e. increasing the coupon rate decreases the current yield, all else constant

decreasing the time to maturity increases the price of a discounted bond, all else constant

Which one of the following rights is never directly granted to all shareholders of a publicly held corporation? a. electing a board of directors b. receiving a distribution of company profits c. voting either for or against a proposed merger/acquisition d. determining the amount of the dividend to be paid per share e. having first chance to purchase any new equity shares that may be 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. dividend amount b. number of future dividends, provided the total number of dividends is less than infinite c. dividend growth rate d. discount rate e. both the discount rate and the dividend growth rate

discount rate

A sinking fund is managed by a trustee for which 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 coupon rates

early bond redemption

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

eliminate asset-specific risk

A floor broker on the NYSE does which of the following? a. supervises the commission brokers of a specific financial firm b. trades for his/her own personal inventory c. executes orders on behalf of customers d. maintains an inventory and assumes the role of a market maker e. is charged with maintaining a liquid, orderly market

executes orders on behalf of customers

Which of the following is most directly affected by the level of systematic risk in a security? a. variance of the returns b. SD of the returns c. expected rate of return d. risk free rate e. market risk premium

expected rate of return

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 him $45 each year in interest plus a $1,000 principal payment at maturity. What is the $1,000 called? a. coupon b. face value c. discount d. yield e. dirty price

face value

Which of the following represents the capital gains yield as used in the dividend growth model? a. D1 b. D1/P0 c. P0 d. g e. g/P0

g

A zero coupon bond: a. is sold at a large premium b. pays interest that is tax deductible to the issuer at the time of payment c. can only be issued by the US treasury d. has more interest rate risk than a comparable coupon bond e. provides no taxable income to the bondholder until the bond matures

has more interest rate risk than a comparable coupon bond

Road Hazards has 12-year bonds outstanding. The interest payments 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

Which one of the following will decrease the net present value of a project? a. increasing the value of each of the discounted cash inflows b. moving each cash inflow forward one time period c. decreasing the required discount rate d. increasing initial cost at time zero e. increasing amount of final cash inflow

increasing 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 bond? a. real rate risk b. interest rate risk c. default risk d. liquidity risk e. taxability risk

interest rate risk

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

is unsustainable over the long term.

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

maturity

If a stock is well diversified, then the portfolio variance: a. will equal the variance of the most volatile stock in the portfolio b. may be less than the variance of the least risky stock in the portfolio c. must be equal/greater than the variance of the least risky stock in the portfolio d. will be a weighted average of the variances of the individual securities in the portfolio e. will be an arithmetic average of the variances of the individual securities in the portfolio

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 b/c both would require simultaneous and exclusive use of the same piece of machinery. The projects are considered to be: a. independent b. interdependent c. mutually exclusive d. economically scaled e. operationally distinct

mutually exclusive

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

over the counter

Which of the following is least apt to reduce the unsystematic risk of a portfolio? a. reducing # of stocks held b. adding bonds to stock portfolio c. adding internal securities d. adding US treasury bills to risky portfolio e. adding technology stocks to portfolio of industrial stocks

reducing # of stocks held

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

requires the growth rate to be less than the required rate of return

Which of the following will be constant for all securities if the market is efficient and securities are priced fairly? a. variance b. standard deviation 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 rate of return b. risk free rate c. inflation rate d. standard deviation e. variance

risk free rate

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 0 d. return of 1% e. market risk premium

risk free rate

Which of the following is a positively sloped linear function that is created when expected returns are graphed against security betas? a. reward to risk matrix b. portfolio weight graph c. normal distribution d. security market line e. market real returns

security market line

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

spread

The principle of diversification tells us that:

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

Which of the following should earn the highest risk premium based on CAPM? a. diversified portfolio with returns similar to overall market b. stock with beta of 1.38 c. stock with beta of .74 d. US Treasury bill e. portfolio with beta of 1.01

stock with beta of 1.38

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. contingent callable bond d. structured note e. sukuk

sukuk

Which of the following is a risk that applies to most securities? a. unsystematic b. diversifiable c. systematic d. asset-specific e. industry

systematic

The yields on a corporate bond differ from those on a comparable treasury security primarily b/c of: a. interest rate risk and taxes b. taxes and default risk c. default and interest rate risks d. liquidity and inflation rate risks e. default, inflation and interest rate risks

taxes and default risk

Which one of the following statements is correct? a. The risk free rate represents the change in purchasing power b. any return greater than the inflation rate represents the risk premium c. historical real rates of return must be positive d. nominal rates exceed real rates by the amount of the risk free rate e. the real rate must be less than the nominal rate given a positive rate of inflation

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

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. portfolio b. non-diversifiable c. market d. unsystematic e. expected

unsystematic

Which 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 a surprise

unsystematic risk

The expected return on a stock given various states of the economy is equal to the: a. highest expected return given any economic state b. arithmetic average of the returns for each economic state c. summation of the individual expected rates of return d. weighted average of the returns for each economic state e. return for the economic state with the highest probability of occurence

weighted average of the returns for each economic state