FIN3403 Exam 2

The Blue Marlin is owned by a group of five shareholders who all vote independently and who all want personal control over the firm. What is the minimum percentage of the outstanding shares one of these shareholders must own if he or she is to gain personal control over this firm given that the firm uses straight voting?

50 percent plus one vote

Rossiter Restaurants is analyzing a project that requires $180,000 of fixed assets. When the project ends, those assets are expected to have an aftertax salvage value of $45,000. How is the $45,000 salvage value handled when computing the net present value of the project?

Cash inflow in the final year of the project.

A call-protected bond is a bond that:

Cannot be called at this point in time.

The interest rate risk premium is the:

Compensation investors demand for accepting interest rate risk.

Tedder Mining has analyzed a proposed expansion project and determined that the internal rate of return is lower than the firm desires. Which one of the following changes to the project would be most expected to increase the project's internal rate of return?

Condensing the firm's cash inflows into fewer years without lowering the total amount of those inflows.

Recently, you discovered a convertible, callable bond with a 5 percent semiannual coupon. If you purchase this bond you will have the right to:

Convert the bond into equity shares.

Which one of the following statements related to corporate dividends is correct?

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

Which one of the following relationships applies to a par value bond?

Coupon rate = current yield = yield-to-maturity.

Which one of the following applies to a premium bond?

Coupon rate > current yield > yield to maturity.

The price sensitivity of a bond increases in response to a change in the market rate of interest as the:

Coupon rate decreases and the time to maturity increases.

The collar of a floating-rate bond refers to the minimum and maximum:

Coupon rates.

Which one of these statements related to preferred stock is correct?

Cumulative preferred shares are more valuable than comparable noncumulative shares.

Which one of the following is a project acceptance indicator given an independent project with investing type cash flows?

Modified internal rate of return that exceeds the required return.

Boston Free Press has a dividend policy whereby the firm pays a constant annual dividend of $2.40 per share of common stock. The firm has 1,000 shares of stock outstanding. The company:

Must still declare each dividend before it becomes an actual company liability.

Which one of the following is an advantage of the average accounting return method of analysis?

Easy availability of information needed for the computation,

Which one of the following applies to the dividend growth model?

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

A floor broker on the NYSE does which one of the following?

Executes orders on behalf of a commission broker.

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:

in registered form

Real rates are defined as nominal rates that have been adjusted for which of the following?

inflation

The Fisher effect primarily emphasizes the effects of _____ on an investor's rate of return.

inflation

The internal rate of return:

is easy to understand

Which one of the following risk premiums compensates for the inability to easily resell a bond prior to maturity?

liquidity

Which of the following are advantages of the payback method of project analysis?

liquidity bias; ease of use

The current yield is defined as the annual interest on a bond divided by which one of the following?

market price

A Treasury yield curve plots Treasury interest rates relative to which one of the following?

maturity

The bond principal is repaid on which one of these dates?

maturity due

The owner of a trading license for the NYSE is called a:

member

Which one of the following statements applies to NASDAQ?

multiple market maker system

If a firm accepts Project A it will not be feasible to also accept Project B because both projects would require the simultaneous and exclusive use of the same piece of machinery. These projects are considered to be:

mutually exclusive

A project has an initial cost of $27,400 and a market value of $32,600. What is the difference between these two values called?

net present value

Southern Chicken is considering two projects. Project A consists of creating an outdoor eating area on the unused portion of the restaurant's property. Project B would use that outdoor space for creating a drive-thru service window. When trying to decide which project to accept, the firm should rely most heavily on which one of the following analytical methods?

net present value

The profitability index is most closely related to which one of the following?

net present value

Which one of the following methods determines the amount of the change a proposed project will have on the value of a firm?

net present value

Interest rates that include an inflation premium are referred to as:

nominal rates

Last year, Lexington Homes issued $1 million in unsecured, noncallable debt. This debt pays an annual interest payment of $55 and matures six years from now. The face value is $1,000 and the market price is $1,020. Which one of these terms correctly describes a feature of this debt?

note

The stream of customer orders coming in to the NYSE trading floor is called the:

order flow

A securities market primarily composed of dealers who buy and sell for their own inventories is referred to which type of market?

over-the-counter

Kristi wants to start training her most junior assistant, Amy, in the art of project analysis. Amy has just started college and has no experience or background in business finance. To get her started, Kristi is going to assign the responsibility for all projects that have initial costs less than $1,000 to Amy to analyze. Which method is Kristi most apt to ask Amy to use in making her initial decisions?

payback

The length of time a firm must wait to recoup the money it has invested in a project is called the:

payback period

The counter area on the floor of the NYSE where a designated market maker operates is called a:

post

Which one of the following is a type of equity security that has a fixed dividend and a priority status over other equity securities?

preferred stock

Which one of the following characteristics is most associated with financing type projects?

prepaid services

Emst & Frank stock is listed on NASDAQ. The firm is planning to issue some new equity shares for sale to the general public. This sale will definitely occur in which one of the following markets?

primary

The present value of an investment's future cash flows divided by the initial cost of the investment is called the:

profitability index

Which one of the following methods of analysis provides the best information on the cost-benefit aspects of a project?

profitability index

Samuelson Electronics has a required payback period of three years for all of its projects. Currently, the firm is analyzing two independent projects. Project A has an expected payback period of 2.8 years and a net present value of $6,800. Project B has an expected payback period of 3.1 years with a net present value of $28,400. Which projects should be accepted based on the payback decision rule?

project A only

The items included in an indenture that limit certain actions of the issuer in order to protect a bondholder's interests are referred to as the:

protective covenants

Which one of the following statements related to the internal rate of return (IRR) is correct?

The IRR is equal to the required return when the net present value is equal to zero.

Round Dot Inns is preparing a bond offering with a coupon rate of 6 percent, paid semiannually, and a face value of $1,000. The bonds will mature in 10 years and will be sold at par. Given this, which one of the following statements is correct?

The bonds will sell at a premium if the market rate is 5.5 percent.

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 flow in year two is valued just as highly as the cash flow in year one.

Which one of the following is the best example of two mutually exclusive projects?

Waiting until a machine finishes molding Product A before being able to mold Product B.

A bond has a market price that exceeds its face value. Which one of these features currently applies to this bond?

Yield to maturity less than the coupon rate.

You own a bond that has a 6 percent annual coupon and matures five years from now. You purchased this 10-year bond at par value when it was originally issued. Which one of the following statements applies to this bond if the relevant market interest rate is now 5.8 percent?

You will realize a capital gain on the bond if you sell it today.

Rosita paid a total of $1,189 to purchase a bond that has 7 of its initial 20 years left until maturity. This price is referred to as the:

dirty price

Today, June 15, you want to buy a bond with a quoted price of 98.64. The bond pays interest on January 1 and July 1. Which one of the following prices represents your total cost of purchasing this bond today?

dirty price

A decrease in which of the following will increase the current value of a stock according to the dividend growth model?

discount rate

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?

dividend growth

Which one of the following is computed by dividing next year's annual dividend by the current stock price?

dividend yield

What are the distributions of either cash or stock to shareholders by a corporation called?

dividends

A sinking fund is managed by a trustee for which one of the following purposes?

early bond redemption

A bond that has only one payment, which occurs at maturity, defines which one of these types of bonds?

zero coupon

Graphing the crossover point helps explain:

How decisions concerning mutually exclusive projects are derived.

In actual practice, managers most frequently use which two types of investment criteria?

IRR and NPV

Which one of the following statements concerning bond ratings is correct?

Split-rated bonds are called crossover bonds.

Which one of the following statements is correct?

Stocks can have negative growth rates.

The internal rate of return is:

Tedious to compute without the use of either a financial calculator or a computer.

The pure time value of money is known as the:

Term structure of interest rates.

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:

call premium

A bond that can be paid off early at the issuer's discretion is referred to as being which type of bond?

callable

Which one of the following premiums is compensation for the possibility that a bond issuer may not pay a bond's interest or principal payments as expected?

default risk

The typical range for the price-sales ratio is ___ but younger, faster-growing firms may have ratios that are much _____.

.8 - 2.0; higher

Which one of the following transactions occurs in the primary market?

A purchase of newly issued stock from ATamp;T.

Mutually exclusive projects are best defined as competing projects that:

Both require the total use of the same limited resource.

The secondary market is best defined by which one of the following?

Market where outstanding shares of stock are resold.

Applying the discounted payback decision rule to all projects may cause:

Some positive net present value projects to be rejected.

An agent who arranges a transaction between a buyer and a seller of equity securities is called a:

broker

A market maker who acts as a dealer in one or more securities on the floor of the NYSE is called a:

designated market maker.

You own one share of a cumulative preferred stock that pays quarterly dividends. The firm has recently suffered some financial setbacks and has failed to pay the last two dividends. However, new funding has been arranged and the firm intends to restore all dividends, both common and preferred, this quarter. As a preferred shareholder, you should expect to receive the equivalent of ____ quarter(s) of dividends when the next dividend is paid.

3

Which one of the following bonds is the least sensitive to interest rate risk?

3-year; 6 percent coupon.

Al is retired and his sole source of income is his bond portfolio. Although he has sufficient principal to live on, he only wants to spend the interest income and thus is concerned about the purchasing power of that income. Which one of the following bonds should best ease Al's concerns?

5 year TIPS

Nadine is a retired widow who is financially dependent upon the interest income produced by her bond portfolio. Which one of the following bonds is the least suitable for her to own?

7- year income bond.

A project with financing type cash flows is typified by a project that has which one of the following characteristics?

A cash inflow at time zero.

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 decrease in all stock values.

Isaac has analyzed two mutually exclusive projects that have 3-year lives. Project A has an NPV of $81,406, a payback period of 2.48 years, and an AAR of 9.31 percent. Project B has an NPV of $82,909, a payback period of 2.57 years, and an AAR of 9.22 percent. The required return for Project A is 11.5 percent while it is 12 percent for Project B. Both projects have a required AAR of 9.25 percent. Isaac must make a recommendation and justify it in 15 words or less. What should his recommendation be?

Accept Project B and reject Project A based on the NPVs.

When the present value of the cash inflows exceeds the initial cost of a project, then the project should be:

Accepted because the profitability index is greater than 1.

You are comparing two mutually exclusive projects. The crossover point is 12.3 percent. You have determined that you should accept project A if the required return is 13.1 percent. This implies you should:

Always accept Project A if the required return exceeds the crossover rate.

Which one of the following increases the net present value of a project?

An increase in the aftertax salvage value of the fixed assets.

A note is generally defined as:

An unsecured bond with an initial maturity of 10 years or less.

Bonds issued by the U.S. government:

Are considered to be free of default risk.

Protective covenants:

Are primarily designed to protect bondholders.

Roger's Meat Market is considering two independent projects. The profitability index decision rule indicates that both projects should be accepted. This result most likely does which one of the following?

Assumes the firm has sufficient funds to undertake both projects.

Which one of these is a strength of the average accounting return method of project analysis?

Based on easily obtainable information.

Which one of these statements is correct?

Bonds provide tax benefits to issuers.

Which one of the following relationships is stated correctly?

Decreasing the time to maturity increases the price of a discount bond, all else constant.

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.

The internal rate of return is defined as the:

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

Which one of the following methods of project analysis is defined as computing the value of a project based on the present value of the project's anticipated cash flows?

Discounted cash flow valuation.

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:

Discounted payback period.

Which one of the following sets of dividend payments best meets the definition of two-stage growth as it applies to the two-stage dividend growth model?

Dividend payments that increase by 10 percent per year for five years followed by dividends that increase by 3 percent annually thereafter

Treasury bonds are:

Generally issued as semiannual coupon bonds.

A newly issued bond has a 7 percent coupon with semiannual interest payments. The bonds are currently priced at par. The effective annual rate provided by these bonds must be:

Greater than 7 percent.

The two-stage dividend growth model evaluates the current price of a stock based on the assumption a stock will:

Grow at a fixed rate for a period of time after which it will grow at a different rate indefinitely.

A zero coupon bond:

Has more interest rate risk than a comparable coupon bond.

Callable bonds generally:

Have a sinking fund provision.

There are two distinct discount rates at which a particular project will have a zero net present value. In this situation, the project is said to:

Have multiple rates of return.

Jen owns 30 shares of stock in Delta Fashions and wants to win a seat on the board of directors. The firm has a total of 100 shares of stock outstanding. Each share receives one vote. Presently, the company is voting to elect three new directors. Which one of the following statements must be true given this information?

If cumulative voting applies, Jen is assured one seat on the board.

As a bond's time to maturity increases, the bond's sensitivity to interest rate risk:

Increases at a decreasing rate.

Which one of the following will decrease the net present value of a project?

Increasing the project's initial cost at time zero.

Cat bonds are primarily designed to help:

Insurance companies fund excessive claims.

Which one of the following risks would a floating-rate bond tend to have less of as compared to a fixed-rate coupon bond?

Interest rate risk

A "fallen angel" is a bond that has moved from:

Investment grade to speculative grade.

Net present value:

Is the best method of analyzing mutually exclusive projects.

Supernormal growth is a growth rate that:

Is unsustainable over the long term.

Which one of the following correctly applies to the average accounting rate of return?

It can be compared to the return on assets ratio.

Hot Foods has an investment-grade bond issue outstanding that pays $30 semiannual interest payments. The bonds sell at par and are callable at a price equal to the present value of all future interest and principal payments discounted at a rate equal to the comparable Treasury rate plus .50 percent. Which one of the following correctly describes this bond?

It has a "make whole" call price.

Why is payback often used as the sole method of analyzing a proposed small project?

It is the only method where the benefits of the analysis outweigh the costs of that analysis.

Which one of these is most apt to be included in a bond's indenture one year after the bond has been issued?

List of collateral used as bond security.

Which bond would you generally expect to have the highest yield?

Long-term, taxable junk bond

You expect interest rates to decline in the near future even though the bond market is not indicating any sign of this change. Which one of the following bonds should you purchase now to maximize your gains if the rate decline does occur?

Long-term; zero coupon.

Last year, you purchased a TIPS at par. Since that time, both market interest rates and the inflation rate have increased by .25 percent. Your bond has most likely done which one of the following since last year?

Maintained a fixed real rate of return.

DLQ Inc. bonds mature in 12 years and have a coupon rate of 6 percent. If the market rate of interest increases, then the:

Market price of the bond will decrease.

Who can access Level 3 of NASDAQ's information?

NASDAQ market makers

You are viewing a graph that plots the NPVs of a project to various discount rates that could be applied to the project's cash flows. What is the name given to this graph?

NPV profile

Which one of the following indicates an accept decision for an independent project with conventional cash flows?

PI greater than 1.0.

Municipal bonds:

Pay interest that is federally tax free.

Which two methods of project analysis are the most biased towards short-term projects?

Payback and discounted payback.

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 a share long into the future. Given this, one share of the firm's stock is:

Priced the same as a $1 perpetuity.

A deferred call provision is which one of the following?

Prohibition which prevents bond issuers from redeeming callable bonds prior to a specified date.

The Fisher effect is defined as the relationship between which of the following variables?

Real rates, inflation rates, and nominal rates

The dividend growth model:

Requires the growth rate to be less than the required return.

Hardy Lumber has a capital structure that includes bonds, preferred stock, and common stock. Which one of the following rights is most apt to be granted to the preferred shareholders?

Right to share in company profits prior to other shareholders.

Which one of these is a negative covenant that might be found in a bond indenture?

The company cannot lease any major assets without bondholder approval.

A corporate bond with a 6 percent coupon was issued last year. Which one of these would apply to this bond today if the current yield to maturity is 7 percent?

The current yield exceeds the coupon rate.

You are considering a project with conventional cash flows, an IRR of 11.63 percent, a PI of 1.04, an NPV of $987, and a payback period of 2.98 years. Which one of the following statements is correct given this information?

The discount rate used in computing the net present value was less than 11.63 percent.

Which one of these statements related to discounted payback is correct?

The discounted payback period decreases as the discount rate decreases.

Western Beef Exporters is considering a project that has an NPV of $32,600, an IRR of 15.1 percent, and a payback period of 3.2 years. The required return is 14.5 percent and the required payback period is 3.0 years. Which one of the following statements correctly applies to this project?

The payback decision rule could override the accept decision indicated by the net present value.

Which one of the following statements would generally be considered as accurate given independent projects with conventional cash flows?

The payback decision rule could override the net present value decision rule should cash availability be limited.

If a project has a net present value equal to zero, then:

The project earns a return exactly equal to the discount rate.

Assume a project is independent with financing cash flows. Which one of these statements is correct?

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

A project has a discounted payback period that is equal to the required payback period. Given this, which of the following statements must be true?

The project must have a profitability index that is equal to or greater than 1.0.

Swenson's is considering two mutually exclusive projects, Projects A and B, and has determined that the crossover rate for these projects is 11.7 percent. Given this you know that:

The project that is preferred at a discount rate of 11 percent will be the opposite project of that preferred at a discount rate of 12 percent.

A project has a net present value of zero. Which one of the following best describes this project?

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

Which one of the following statements is correct?

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

Winston Co. has a dividend-paying stock with a total return for the year of -6.5 percent. Which one of the following must be true?

The stock has a negative capital gains yield.

Which one of the following statements is false concerning the term structure of interest rates?

The term structure of interest rates and the time to maturity are always directly related.

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 yield-to-maturity is less than the coupon rate.

The taxability risk premium compensates bondholders for which one of the following?

a bond's unfavorable tax status

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

a discount; less than

A project's average net income divided by its average book value is referred to as the project's average:

accounting return

NYSE designated market makers:

act as dealers

U. S. Treasury bonds:

are quotes as a percentage of par

Which one of the following is the price at which a dealer will sell a bond?

asked price

A bond that is payable to whomever has physical possession of the bond is said to be in:

bearer form

If you sell a 6 percent bond to a dealer when the market rate is 7 percent, which one of the following prices will you receive?

bid price

Dixie South currently pays an annual dividend of $1.46 a share and plans on increasing that amount by 2.75 percent annually. Northern Culture currently pays an annual dividend of $1.42 a share and plans on increasing its dividend by 3.1 percent annually. Given this information, you know for certain that the stock of Northern Culture has a higher ______ than the stock of Dixie South.

capital gains yield

Which one of following is the rate at which a stock's price is expected to appreciate?

capital gains yield

A bond is quoted at a price of $1,011. This price is referred to as the:

clean price

A person on the floor of the NYSE who executes buy and sell orders on behalf of customers is called a(n):

commission broker

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?

common

You are trying to compare the present values of two separate streams of cash flows that have equivalent risks. One stream is expressed in nominal values and the other stream is expressed in real values. You decide to discount the nominal cash flows using a nominal annual rate of 8 percent. What rate should you use to discount the real cash flows?

comparable real rate

Which one of the following best describes NASDAQ?

computer network of securities dealers

Allison just received her semiannual payment of $35 on a bond she owns. Which term refers to this payment?

coupon

The IRR that causes the net present value of the differences between two project's cash flows to equal zero is called the:

crossover rate

A company has four open seats on its board of directors. There are seven candidates vying for these four positions. There will be a single election to determine the winners. As the owner of 100 shares of stock, you will receive one vote per share for each open seat. You decide to cast all 400 of your votes for a single candidate. What is this type of voting called?

cumulative

An agent who maintains an inventory from which he or she buys and sells securities is called a:

dealer

Jason's Paints just issued 20-year, 7.25 percent, unsecured bonds at par. These bonds fit the definition of which one of the following terms?

debenture

A forward PE is based on:

estimated future earnings

Which one of the following statements related to the NYSE is correct?

exchange members must purchase trading licenses

A bond's coupon rate is equal to the annual interest divided by which one of the following?

face value

Bert owns a bond that will pay him $75 each year in interest plus a $1,000 principal payment at maturity. What is the $1,000 called?

face value

An individual on the floor of the NYSE who owns a trading license and buys and sells for his or her personal account is called a:

floor trader

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

g

Which one of the following statements is correct concerning the two-stage dividend growth model?

g1 can be greater than R.

Chemical Mines has 5,000 shareholders and is preparing to elect two new board members. You do not own enough shares to personally control the elections but are determined to oust the current leadership. Likewise, no other single shareholder owns sufficient shares to personally control the outcome of the election. Which one of the following is the most likely outcome of this situation given that some shareholders are happy with the existing management?

proxy fight for control of the board

Which one of the following rates represents the change, if any, in your purchasing power as a result of owning a bond?

real rate

The final decision on which one of two mutually exclusive projects to accept ultimately depends upon which one of the following?

required rate of return

The difference between the price that a dealer is willing to pay and the price at which he or she will sell is called the:

spread

You want to be on the board of directors of Uptown Communications. Since you are the only shareholder who will vote for you, you will need to own more than half of the outstanding shares of stock if you are to be elected to the board. What is the type of voting called that requires this level of stock ownership to be successfully elected?

straight

Sue is considering purchasing a bond that will only return its principal at maturity if the stock market declines. However, if the stock market increases in value during the bond term, at maturity, she will receive both the bond principal and a percentage of the stock market gain. What type of bond is this?

structured note

Which one of the following is the electronic system used by the NYSE for directly transmitting orders to specialists?

superDOT

Preferred stock may have all of the following characteristics in common with bonds with the exception of:

tax-deductible payments

The yields on a corporate bond differ from those on a comparable Treasury security primarily because of:

taxes and default risk

NASDAQ has:

three separate markets

A six-year, $1,000 face value bond issued by Taylor Tools pays interest semiannually on February 1 and August 1. Assume today is October 1. What will be the difference, if any, between this bond's clean and dirty prices today?

two month's interest

You cannot attend the shareholder's meeting for Alpha United so you authorize another shareholder to vote on your behalf. What is the granting of this authority called?

voting by proxy

Kurt has researched T-Tek and believes the firm is poised to vastly increase in value. He has decided to purchase T-Tek bonds as he needs a steady stream of income. However, he still wishes that he could share in the firm's success along with the shareholders. Which one of the following bond features will help him fulfill his wish?

warrant

The bond market requires a return of 9.8 percent on the five-year bonds issued by JW Industries. The 9.8 percent is referred to as which one of the following?

yield to maturity