Finance Ch. 5-7 Quiz Questions

Lester's Diner just paid an annual dividend of $.24 a share and plans on increasing this amount by 2 percent annually. What is the expected dividend for Year 6?

.27

A project has an initial cost of $38,300 and anticipated cash flows of $9,200, $18,700, $14,600 for Years 1 to 3, respectively. What is the profitability index value if the required return is 9.5 percent?

.92

A stock report contains the following information: P/E 21.4, closing price 28.16, dividend 1.10, net chg .06, and an ask of 28.22 × 300. Which one of the following statements is correct given this information?

The closing price on the previous trading day was $28.10

You are considering a project with the following data: IRR = 8.7 percent; PI = .98; NPV = -$393; Payback period = 2.44 years. Which one of the following statements is correct given this information?

The required rate of return must be greater than 8.7 percent

What is the primary shortcoming of the average accounting rate of return from a financial perspective?

The use of net income rather than cash flows

A project has an initial cost of $68,300 and cash flows of $38,700, $102,300, and -$18,100 for Years 1 to 3, respectively. If the required rate of return for this investment is 8.7 percent, should you accept it based solely on the internal rate of return rule? Why or why not?

You cannot apply the IRR rule in this case because there are multiple IRRs.

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

a discount; higher than

Bonds issued by the U.S. government:

are considered to be default-free

One advantage of the payback method of project analysis is the method's:

bias towards liquidity

Two key weaknesses of the internal rate of return rule are the:

failure to correctly analyze mutually exclusive projects and the multiple rate of return problem

The yield to maturity on a bond is the rate:

of return currently required by the market

Toy World bonds have a face value of $1,000, mature in 13 years, pay interest semiannually, and have a coupon rate of 6.5 percent. The next interest payment will be paid four months from today. What is the dirty price of this bond if the market rate of return is 6.3 percent?

$1,028.40

Feltwater Furniture has 120,000 shares of stock outstanding. The firm expects to earn net income of $325,000 next year with annual increases of 3 percent per year thereafter. The firm also expects to pay out 75 percent of its net income in dividends and share repurchases. The required return is 14 percent. What is its share price?

$18.47

A $5,000 face value zero coupon bond is quoted at a price of 46.874. What is the amount you would pay to purchase this bond today?

$2,343.70

XanEx is a new firm that just paid an annual dividend of $1 a share. The firm plans to increase its dividend by 20 percent a year for the next four years and then decrease the growth rate to 5 percent annually. If the required rate of return is 10.25 percent, what is one share of this stock worth today?

$33.04

A project will not produce any cash flows for two years. Starting in the third year, it will produce annual cash flows of $11,900 a year for two years. The project initially costs $43,600. In Year 6, the project will be closed and as a result should produce a final cash inflow of $50,500. What is the net present value of this project if the required rate of return is 8.7 percent?

$4,802.57

A 12-year, 5 percent coupon bond with a face value of $1,000 pays interest semiannually. What is the percentage change in the price of this bond if the market yield rises to 6 percent from its current level of 4.5 percent?

-12.49%

What is the internal rate of return on an investment that has an initial cost of $38,400 and projected cash inflows of $11,200, $19,600, and $18,100 for Years 1 to 3, respectively?

12.15%

A project is expected to have annual cash flows of $22,400, $13,600 and -$4,200 for Years 1 to 3, respectively. The initial cash outlay is $27,500 and the discount rate is 12 percent. What is the modified IRR?

13.12%

Westover Company needs $2.5 million to expand its business. To accomplish this, the firm plans to sell 30-year, $1,000 face value zero-coupon bonds. The bonds will be priced to yield 6.25 percent with interest compounded semiannually. What is the minimum number of bonds the company must sell? Ignore all issue costs.

15,841 bonds

The Walk-Up Window is considering two mutually exclusive projects. Project A has an initial cost of $49,230 and annual cash flows of $31,200 for three years. Project B has an initial cost of $21,400 and annual cash flows of $21,400 for two years. What is the crossover rate?

29.39%

Delray bonds offer a coupon rate of 5 percent and currently sell at 96.5 percent of face value. What is the current yield on these bonds?

5.18%

Gugenheim offers a 15-year coupon bond with semiannual payments. The yield to maturity is 5.85 percent and the bonds sell at 94 percent of par. What is the coupon rate?

5.24%

A corporate bond yields 7.3 percent. What municipal bond rate is equivalent to the corporate rate for an investor with a 25 percent marginal tax rate?

5.48%

A $1,000 face value corporate bond matures in 28 years, pays interest semiannually, and has a market quote of 98.625. The coupon rate is 7.25 percent, the current yield is ___ percent, and the yield to maturity is ____ percent.

7.35; 7.37

Project Q has an initial cost of $211,415 and projected cash flows of $121,300 in Year 1 and $176,300 in Year 2. Project R has an initial cost of $415,000 and projected cash flows of $187,500 in Year 1 and $236,600 in Year 2. The discount rate is 8.5 percent and the projects are independent. Which project(s), if either, should be accepted based on its profitability index value?

Accept Project Q and reject Project R

Benji's has an opportunity with an initial cash flow of $48,900 and future cash flows of -$31,300 in Year 1 and -$21,600 in Year 2. The discount rate is 7 percent. Should this project be accepted or rejected? Why?

Accepted; because the IRR of 5.77 percent is less than the discount rate

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

Bond ratings only assess the possibility of default

What does the spread between the bid and asked bond prices represent?

Dealer's profit

A 20-year zero coupon bond has a $1,000 face value, a required rate of return of 5 percent, and semiannually compounding. What is this bond worth today?

FV= 1000, N= 20 x 2=40, I/Y= 5/2= 2.5, CPT PV= $372.43

A General Co. bond has a coupon rate of 7 percent and pays interest annually. The face value is $1,000 and the current market price is $1,020.50. The bond matures in 20 years. What is the yield to maturity?

FV= 1000, N= 20, PV= -1020.50, PMT= .07 x1000= 70, CPT I/Y= 6.81%

Which type of bond grants its holder the right to force repayment of the bond at a stated price prior to maturity?

Put

Janice is considering an investment costing $102,500 with cash flows of $9,800 in Year 2, $48,700 in Year 3, and $82,900 in Year 4. The discount rate is 9 percent and the required discounted payback period is 2.5 years. Should this project be accepted or rejected? What is the discounted payback period?

Rejected; 3.96 years

The Depot is considering a project with annual sales of $325,000 for four years. The profit margin is 4.65 percent. The initial cost for equipment will be $330,000. The equipment will be depreciated by $55,000 each year. The required average accounting rate of return is 11.4 percent. Should this project be accepted or rejected? What is the AAR?

Rejected; 6.87%

If the net present value of a project is positive (non-zero), then the project's:

internal rate of return will exceed its required rate of return

The owner of preferred stock:

is entitled to a distribution of income prior to the common shareholders

Alto stock pays an annual dividend of $1.10 a share and has done so for the past six years. No changes in the dividend amount are expected. The relevant market rate of return is 7.8 percent. Given this, one share of this stock:

is valued as a perpetuity.

Greener Grass Co. pays a constant annual dividend of $1 a share and has 1,000 shares of common stock outstanding. The company:

must still declare each dividend before it becomes an actual company liability

The total return on a stock is equal to:

the capital gains yield plus the dividend yield

Today, July 15, you are buying a bond from a dealer with a quoted price of 100.023. The bond pays interest on February 1 and August 1. The invoice price you pay for this purchase will equal:

the dirty price

The underlying assumption of the dividend growth model is that a stock is worth:

the present value of the future income provided by that stock

You own a fixed-rate bond that has a coupon rate of 6.5 percent and matures in 12 years. You purchased this bond at par value when it was originally issued. If the current market rate for this type and quality of bond is 6.8 percent, then you would expect:

to realize a capital loss if you sold the bond at the market price today

Differential growth refers to a firm that increases its dividend by:

varying rates over a period of time

The internal rate of return:

will provide the same accept/reject decision as NPV when cash flows are conventional and projects are independent