Finance Exam 2 study guide

The terminal value of a share of stock:

refers to the share value at the end of an investor's holding period.

The growth of mature companies is primarily funded by

reinvesting company earnings

The growth of mature companies is primarily funded by:

reinvesting company earnings

Projects that are calculated as having negative NPVs should be:

rejected or abandoned.

When valuing stock with the dividend discount model, the present value of future dividends will:

remain constant regardless of the time horizon selected

mortgage back securities

represent claims on the cash flows generated by a pool of homeloans

The SML relates

required returns to firms' market risk

amortized loan

requires both principal and i pymt as you go by making equal payments each period

Financial risk refers to the:

risk faced by equity holders when debt is used

systematic risk

risk that can not be diversified away

When market interest rates exceed a bond's coupon rate, the bond will

sell for less than par value

When market interest rates exceed a bond's coupon rate, the bond will:

sell for less than par value.

The primary goal of the financial manager is to maximize

shareholder wealth

The primary goal of the financial manager is to maximize; shareholder wealth societal benefit earnings per share revenue

shareholder wealth

When the yield curve is upward-sloping, then

short-maturity bonds yield less than long-maturity bonds.

Soft capital rationing:

should be costless to the shareholders of the firm

If a firm unexpectedly raises its dividend permanently and by a substantial amount, the firm's stock price:

should rise, given dividend discount models

Which of the following statements is correct about a stock currently selling for $50 per share that has a 16% expected return and a 10% expected capital appreciation?

It is expected to pay $3 in annual dividends.

When is it appropriate to include sunk costs in the evaluation of a project?

It is never appropriate to include sunk costs.

In what manner does depreciation expense affect investment projects?

It reduces taxable income by the amount of the depreciation expense

In what manner does depreciation expense affect investment projects?

It reduces taxable income by the amount of the depreciation expense.

If a bond is priced at par value, then:

Its coupon rate equals its yield to maturity.

Which of the following is least likely to influence the opportunity cost of an asset?

Its current book value

Which of the following is correct for a bond currently selling at a premium to par?

Its current yield is lower than its coupon rate.

Which one of the following must be correct for a bond currently selling at a premium? Its current yield is lower than its coupon rate. Its yield to maturity is higher than its coupon rate. Its coupon rate is lower than the current market rate on similar bonds. Its coupon rate is variable.

Its current yield is lower than its coupon rate.

What happens to a firm that reinvests its earnings at a rate equal to the firm's required return?

Its stock price will remain constant.

Firms having a higher expected return have a higher:

Level of expected risk

Which of the following observations provides evidence against strong-form market efficiency?

Managers trading in their own stock obtain superior returns.

The market price of a bond with 12 years until maturity and an annual coupon rate of 8% increased yesterday. Which one of these may have caused this price increase?

Market interest rates decreased.

What type of risk is properly reflected in a project's discount rate? Diversifiable risk Unique risk Total risk Market risk

Market risk

Which one of the following risks is most important to a well-diversified investor in common stocks? Unsystematic risk Diversifiable risk Market risk Unique risk

Market risk

Which of the following values treats the firm as a going concern?

Market value

The sustainable growth rate represents the rate at which a firm can grow:

Maximum; while maintaining a constant debt-equity ratio

Financial Markets in which preownded securites (those that are not new issues) are traded

Money Market

Which one of the following changes, if of a sufficient magnitude, could turn a negative NPV project into a positive NPV project? An increase in the discount rate A decrease in the fixed costs A decrease in the estimated annual sales An increase in the initial investment

A decrease in the fixed costs

Assuming all of the following firms have a required return of 14%, which would you expect to have a positive present value of growth opportunities?

A firm with a P/E ratio of 9

Which of the following situations accurately describes a growth stock, assuming that each firm has a required return of 12%?

A firm with investment opportunities yielding 15%

Which of the following situations accurately describes a growth stock, assuming that each firm has a required return of 12%?

A firm with investment opportunities yielding 15%.

Which of the following is not correct rabout leverage?

A firm with no NO operating or financial leverage has no risk.

What is the difference between a fundamental analyst and a technical analyst?

A fundamental analyst analyzes information such as earnings and asset values

What is the difference between a fundamental analyst and a technical analyst?

A fundamental analyst analyzes information such as earnings and asset values.

The difference between a fundamental analyst and a technical analyst is:

A fundamental analyst analyzes such information as earnings and asset values.

The law of one price dictates:

A good must sell for the same price in all locations

The internal rate of return is most reliable when evaluating:

A single project with only cash inflows following the initial cash outflow

The cash flows from a bond can be viewed as two distinct cash flow streams which are;

A single sum equivalent to the par value received at maturity, and An annuity of periodic interest payments.

Approximately how much must be saved for retirement in order to withdraw $100,000 per year for the next 25 years if the balance earns 8% annually, and the first payment occurs one year from now? A. $1,067,477.62 B. $1,128,433.33 C. $1,487,320.09 D. $1,250,000.00

A. $1,067,477.62 PV = $100,000 {(1/.08) - [1/.08(1.08)25]} PV = $1,067,477.62

Miller's Hardware plans on saving $42,000, $54,000, and $58,000 at the end of each year for the next three years, respectively. How much will the firm have saved at the end of the three years if it can earn 4.5% on its savings? A. $160,295.05 B. $158,098.15 C. $167,508.33 D. $165,212.57

A. $160,295.05 FV = ($42,000 × 1.0452) + ($54,000 × 1.045) + $58,000 FV = $160,295.05

Which one of the following would not be expected to affect the decision of whether to undertake an investment?

Cost of the feasibility study that was conducted for this project

Which of the following is not correct when we calculate the cash flows of a proposed new project?

Count sunk costs.

Periodic receipts of interest by the bondholders are known as:

Coupon payments

Which of the following is fixed (e.g., cannot change) for the life of a given bond?

Coupon rate

Which one of the following is fixed for the life of a given bond? Coupon rate Yield to maturity Current yield Current price

Coupon rate

Which one of the following is fixed for the life of a given bond? Current price Yield to maturity Current yield Coupon rate

Coupon rate

Which of the following is fixed (e.g., cannot change) for the life of a given bond?

Coupon rate.

What causes bonds to sell for a premium? Long periods until maturity Investment-quality ratings Speculative-grade ratings Coupon rates that exceed market rates

Coupon rates that exceed market rates

Modigliani and Miller's debt-irrelevance proposition states that:

Firm value can't be increased by changing capital structure

Which of the following is true for a firm having a stock price of $42, and expected dividend of $3, and a sustainable growth rate of 8%?

It has a required return of 22%

What effect will a reduction in the cost of capital have on the accounting break-even level of revenues? This cannot be determined without knowing the length of the investment horizon. It reduces the break-even level. It has no effect on the break-even level. It raises the break-even level.

It has no effect on the break-even level.

Is the following an advantage in separating ownership and management in large corporations? Corporations, unlike sole proprietorships, do not pay tax; instead, shareholders are taxed on any dividends they receive.

No

Is the following an advantage in separating ownership and management in large corporations? Managers no longer have the incentive to act in their own interests.

No

Which group of investors is capable of earning consistent, superior profits if financial markets are strong-form efficient?

No one will be capable of sustained, superior profits.

The main difference between the three forms of market efficiency according to the classifications in the book is that

The definition of information differs.

The book value of a firm's equity is determined by:

The difference between book values of assets and liabilities.

For markets to be in equilibrium, that is, for there to be no strong pressure for prices to depart from their current levels,

The expected rate of return must be equal to the required rate of return; that is, = r.

If a firm unexpectedly raises its dividend permanently and by a substantial amount, the firm's stock price:

should rise, given dividend discount models.

Which group of investors is capable of earning consistent, superior profits if financial markets are semistrong-form efficient? Ignore any legal considerations.

company insiders

default premium

compensates the investor for the additional risk that the loan will not be repaid in full

The difference between an NPV break-even level of sales and an accounting break-even level of sales is the:

consideration of opportunity cost

The difference between an NPV break-even level of sales and an accounting break-even level of sales is the: consideration of opportunity cost. inclusion of income taxes. consideration of interest expense. allowance of the sales level to vary in response to changes in demand.

consideration of opportunity cost.

a crisis in the financial sector often spills over into other industries because when financial institutions borrowing ______, activity in most other industries _______.

contract; slows down

Under which of the following legal forms of organization is ownership readily​ transferable? partnerships sole proprietorships corporations limited partnerships

corporations

1. Periodic receipts of interest by the bondholder are known as:

coupon payments

Periodic receipts of interest by the bondholder are known as: the default premium. the coupon rate. coupon payments. a zero-coupon.

coupon payments.

Periodic receipts of interest by the bondholder are known as: the coupon rate. a zero-coupon. the default premium. coupon payments.

coupon payments.

Which of the following is fixed (e.g., cannot change) for the life of a given bond?

coupon rate

Net working capital is calculated by taking the difference between:

current assets and current liabilities.

Which of the following projects would you feel safest in accepting? Assume the opportunity cost of capital to be 12% for each project. a. "A" has a small, but negative, NPV. b. "B" has a positive NPV when discounted at 10%. c. "C's" cost of capital exceeds its rate of return. d. "D" has a zero NPV when discounted at 14%.

d. "D" has a zero NPV when discounted at 14%.

Which of the following statements is most likely correct for a project costing $50,000 and returning $14,000 per year for five years? a. NPV = $3,071.01. b. NPV = $20,000. c. IRR = 2.8%. d. IRR is greater than 10%.

d. IRR is greater than 10%.

Which one of the following statements is correct when Treasury bills yield 7.5% and the market risk premium is 9.5%? a. The S&P 500 would be expected to yield about 8.50%. b. The S&P 500 would be expected to yield about 9.50%. c. The S&P 500 would be expected to yield about 12.68%. d. The S&P 500 would be expected to yield about 17.00%.

d. The S&P 500 would be expected to yield about 17.00%.

A market that establishes correct prices for the securities that firms sell and allocates funds to their most productive uses is called

efficient markets

Investment banks are institutions that

engage in trading and market making activities

The cost of retained earnings is

equal to the cost of common stock equity

If a stock consistently goes down (up) by 1.6% when the market portfolio goes down (up) by 1.2% then its beta:

equals 1.33.

The average of beta values for all individual stocks is:

exactly 1.0; collectively these stocks represent the market.

If a project has a payback period of 5 years and a cost of capital of 10%, then the discounted payback will:

exceed 5 years

An example that specifically contradicts strong-form market efficiency in U.S. stock markets is that:

excess profits are observed in cases of insider trading

Many investors may be drawn to municipal bonds because of the bonds'

exemption from federal taxes

When projects are mutually exclusive, selection should be made according to the project with the: highest IRR. highest NPV. longer life. larger initial size.

highest NPV.

The purpose of sensitivity analysis is to show:

how variables in a project affect profitability

The purpose of sensitivity analysis is to show: how price changes affect break-even volume. seasonal variation in product demand. the optimal level of capital expenditures. how variables in a project affect profitability.

how variables in a project affect profitability.

Consider a 3-year bond with a par value of $1,000 and an 8% annual coupon. If interest rates change from 8 to 6% the bond's price will:

increase by $53.46.

In order for a manager to correctly decide to postpone an investment until one year into the future, the NPV of the investment should:

increase over that year

An increase in the risk-free rate is likely to

increase the marginal costs of both debt and equity financing.

An increase in a firms financial leverage will:

increase the variability in earnings per share

An increase in a firms financial leverage will:

increase the variability that interest rates will increase

An implicit cost of adding debt to the capital structure is that it:

increases the required return on equity

Other things equal, a firm's sustainable growth rate could increase as a result of:

increasing the plowback ratio

The following are advantages of separation of ownership and management of corporations except:

incur agency costs

A perpetuity is a constant stream of cash flows for a _______ period of time

infinite

coupon rate

interest rate paid as a percentage of par value

The existence of an upward-sloping yield curve suggests that:

interest rates will be increasing in the future.

Soft capital rationing is imposed upon a firm from _____ sources, while hard capital rationing is imposed from _____ sources.

internal; external

One of the easiest methods of diversifying away firm-specific risks is to:

purchase the shares of a mutual fund like Vanguard's S&P 500 Index 500 Trust.

Research indicates that the correlation coefficient between successive days' stock price changes is:

quite close to zero

Which of the following forms of organizations is the easiest to form? partnerships sole proprietorships corporations limited partnerships

sole proprietorships

Which of the following legal forms of organization has the ease of dissolution? partnerships sole proprietorships corporations limited partnerships

sole proprietorships

When investors are not capable of making superior investment decisions on a continual basis based on past prices or public or private information, the market is said to be:

strong-form efficient

A fundamental analyst:

studies a fir's financial statements to determine pricing ineffieicies.

When a depreciable asset is ultimately sold, the sales price is: nontaxable only if accelerated depreciation was used. taxable to the extent that the sales price exceeds book value. nontaxable. fully taxable.

taxable to the extent that the sales price exceeds book value.

Trends of past stock market prices would be considered useful or even essential to a(n):

technical analyst.

Weak-form market efficiency implies

that recent trends in stock prices would be of no use in selecting stocks

If a project's expected rate of return exceeds its opportunity cost of capital, one would expect:

the IRR to exceed the opportunity cost of capital

Which one of the following should be assumed about a project that requires a $100,000 investment at time zero, then returns $20,000 annually for 5 years?

the NPV is negative

Reinvesting earnings into a firm will not increase the stock price unless:

the ROE of new investments exceeds the firm's required return

Finance is the system of verifying, analyzing, and recording business transactions the art and science of managing money the art of merchandising product and services the science of production, distribution, and consumption of goods and services

the art and science of managing money

The constant growth model takes into consideration

the capital gains earned on a stock.

To justify postponing a project for one year, the NPV needs to increase over that year by a rate that is equal to or greater than:

the cost of capital

The book value of a firm's equity is determined by:

the difference between book values of assets and liabilities.

The value of common stock will likely decrease if:

the discount rate increases

the value of a common stock will likely decrease if..

the discount rate increases

The value of common stock will likely decrease if:

the discount rate increases.

A project's opportunity cost of capital is: equal to the average return on all company projects. the return earned by investing in the project. the foregone return from investing in the project. designed to be less than the project's IRR.

the foregone return from investing in the project.

The Annual Percentage Rate (APR) on a loan or investment is properly defined as

the interest rate per period multiplied by the number of compounding periods per year

The highest interest rate will always result in

the lowest present value, regardless of how many years in the future the value is expected to be received

What is the maximum gain after two coin tosses for a person who starts with $1 if the occurrence of a head produces a 50% gain while the occurrence of a tail produces a 50% loss?

$1.25

If the dividend yield for year 1 is expected to be 5% based on a stock price of $25, what will the year 4 dividend be if dividends grow annually at a constant rate of 6%?

$1.49

If the dividend yield for year one is expected to be 5% based on the current price of $25, what will the year four dividend be if dividends grow at a constant 6%?

$1.49

What is the value of the expected dividend per share for a stock that has a required return of 16%, a price of $45, and a constant growth rate of 12%?

$1.80

What is the value of the expected dividend per share for a stock that has a required return of 16%, a price of $45, and a constant-growth rate of 12%?

$1.80

An investor receives a 15% total return by purchasing a stock for $40 and selling it after one year with a 10% capital gain. How much was received in dividend income during the year?

$2.00

What is the current price of a share of stock for a firm with $5 million in balance-sheet equity, 500,000 shares of stock outstanding, and a price/book value ratio of 4?

$40.00

If a stock's P/E ratio is 13.5 at a time when earnings are $3 per share, what is the stock's current price?

$40.50

If a stock's P/E ratio is 13.5 at a time when earnings are $3 per year and the dividend payout ratio is 40%, what is the stock's current price?

$40.50

If a stock's P/E ratio is 13.5 at a time when earnings are $3 per year, what is the stock's current price?

$40.50

What should you pay for a stock if next year's annual dividend is forecast to be $5.25, the constant-growth rate is 2.85%, and you require a 15.5% rate of return?

$41.50

Suzi owns 100 shares of AB stock. She expects to receive a $238 in dividends next year. She also expects the stock to sell for $46 a share one year from now. What is the intrinsic value of this stock if the dividend payout ratio is 40% and the discount rate is 13.5%?

$42.63

If next year's dividend is forecast to be $5.00, the constant growth rate is 4%, and the discount rate is 16%, then the current stock price should be:

$43.33

You will receive $100 in 1 year, $200 in 2 years & $300 in 3 years. If you can earn a 7.5% rate of interest, what is the present value of this stream of cash flows?

$507.58 $100/(1.075)^1 + $200/(1.075)^2 + $300/(1.075)^3

What is the minimum cash flow that could be received at the end of year 3 to make the following project "acceptable"? Initial cost = $100,000; cash flows at end of years 1 and 2 = $35,000; opportunity cost of capital = 10%.

$52,250

A firm has 120,000 shares of stock outstanding, a sustainable rate of growth of 3.8, and $648,200 in free cash flows. What value would you place on a share of this firm's stock if you require a 14% rate of return?

$52.96

What is the approximate maximum amount that a firm should consider paying for a project that will return $15,000 annually for 5 years if the opportunity cost is 10%?

$56,860 [ Price = PV of Future CFs ]

What is the maximum amount a firm should pay for a project that will return $15,000 annually for 5 years if the opportunity cost is 10%?

$56,861.80

Jefferson's recently paid an annual dividend of $1.31 per share. The dividend is expected to decrease by 4% each year. How much should you pay for this stock today if your required return is 16%?

$6.29

What is the expected dividend to be paid in three years if yesterday's dividend was $6.00, dividends are expected to grow at a constant 6% annual rate, and the firm has a 10% expected return?

$7.15

If you purchase a five-year, zero-coupon bond for $500, how much could it be sold for three years later if interest rates have remained stable?

$757.86

How much does the $1,000 to be received upon a bond's maturity in four years add to the bond's price if the appropriate discount rate is 6%?

$792.09 $1,000/(1.06)4 = $792.09

Compound growth means that value increases after t periods by:

(1 + growth rate)^t

What is the profitability index for a project costing $40,000 and returning $15,000 annually for 4 years at an opportunity cost of capital of 12%?

0.139

What is the IRR of a project that costs $100,000 and provides cash inflows of $17,000 annually for 6 years?

0.57%

What is the beta of a three-stock portfolio including 25% of Stock A with a beta of .90, 40% Stock B with a beta of 1.05, and 35% Stock C with a beta of 1.73?

1.25

What dividend yield would be reported in the financial press for a stock that currently pays a $1 dividend per quarter and the most recent stock price was $40?

10.0%

What is the yield to maturity for a bond paying $100 annually that has six years until maturity and sells for $1,000?

10.0%

What is the yield to maturity for a bond paying $100 annually that has 6 years until maturity and sells for $1,000?

10.0% Since the bond is selling at par, the yield to maturity must equal the coupon rate which is: Coupon rate = $100/$1,000 = .10, or 10%

What price was reported in the financial press for a bond that was sold to an investor for $1,045.63?

104:18

What is future value of $100 invested at 10% for 1 years?

110

What is the approximate IRR for a project that costs $100,000 and provides cash inflows of $60,000 for 2 years?

13%

What is the required return for a stock that has a 6% constant growth rate, a price of $25, an expected dividend of $2, and a P/E ratio of 10?

14%

Wilt's has earnings per share of $2.98 and dividends per share of $.35. What is the firm's sustainable rate of growth if its return on assets is 14.6% and its return on equity is 18.2%?

16.06%

What is the return on equity for a firm that has a constant dividend growth rate of 7% and a dividend payout ratio of 60%?

17.50%

The expected return on the market portfolio is 30%, the risk free rate of return is 20%. An investment, say, Asset J, has a beta of 1.7. What is the asset's required rate?

37%

An investor buys a ten-year, 7% coupon bond for $1,050, holds it for one year and then sells it for $1,040. What was the investor's rate of return?

5.71% (70 - 10)/1,050 = 5.71%

What is the current yield of a bond with a 6% coupon, 4 years until maturity, and a price quote of 84?

7.14% Current yield = $60/(.84 × $1,000) = .0714, or 7.14%

You purchased a 6% annual coupon bond at par and sold it one year later for $1,015.16. What was your rate of return on this investment if the face value at maturity was $1,000?

7.52% Rate of return = [$1,015.16 + (.06 × $1,000) - $1,000]/$1,000 = .0752, or 7.52%

If a share of stock provided a 14.0% nominal rate of return over the previous year while the real rate of return was 6.0%, then the inflation rate was approximately:

8%

What is the coupon rate for a bond with three years until maturity, a price of $1,053.46, and a yield to maturity of 6%?

8%

If a project costs $72,000 and returns $18,500 per year for 5 years, what is its IRR?

8.98%

A company with a return on equity of 15% and a plowback ratio of 60% would expect a constant growth rate of:

9%

A company with a return on equity of 15% and a plowback ratio of 60% would expect a constant-growth rate of:

9%

Which of the following bonds would be considered to be of investment-grade?

A Baa-rated bond.

Which firm is expected to have the highest beta?

A Bank

Which one of the following changes in working capital is least likely, given an increase in the overall level of sales? A decrease in accounts receivable An increase in inventories An increase in accounts payable An increase in notes payable

A decrease in accounts receivable

Which of the following changes will increase the NPV of a project?

A decrease in the discount rate

Which one of the following changes will increase the NPV of a project?

A decrease in the discount rate

When calculating a project's payback period, cash flows are discounted at:

A discount rate of 0

The coupon rate of a bond equals:

A percentage of its face value

Which of the following costs probably should not be allocated to the investment needed for a new project?

A portion of the vice president's salary

What happens to the price of a three-year bond with an 8% coupon when interest rates change from 8% to 6%?

A price increase of $53.47

When hard capital rationing exists, projects may be accurately evaluated by use of:

A profitability index

Beta Brothers uses the CAPM to calculate the cost of equity capital. The company's capital structure consists of common stock, preferred stock, and debt. Which of the following events will reduce the company's WACC?

A reduction in the market risk premium

Which of the following forms of compensation is most likely to align the interests of managers and shareholders? A fixed salary A salary linked to company profits A salary that is paid partly in the form of the company's shares

A salary that is paid partly in the form of the company's shares

NPV fails as a decision rule when: A the firm faces capital rationing. B the firm faces mutually exclusive projects. C the firm faces long-lived projects. D none of these.

A the firm faces capital rationing.

A project's opportunity cost of capital is: A the forgone return from investing in the project. B the return earned by investing in the project. C equal to the average return on all company projects. D designed to be less than the project's IRR.

A the forgone return from investing in the project.

Which of the following bonds would be likely to exhibit a greater degree of interest-rate risk?

A zero-coupon bond with 30 years until maturity.

How much more would you be willing to pay today for an investment offering $10,000 in 4 years rather than in 5 years? Your discount rate is 8%. A. $544.47 B. $681.48 C. $740.74 D. $800.00

A. $544.47 Difference = FV/(1 + r)t - 1 - FV/(1 + r) Difference = $10,000/1.084 - $10,000/1.085 Difference = $544.47

Your car loan requires payments of $200 per month for the first year and payments of $400 per month during the second year. The annual interest rate is 12% and payments begin in one month. What is the present value of this 2-year loan? A. $6,246.34 B. $6,389.78 C. $6,428.57 D. $6,753.05

A. $6,246.34 PV = {$200 {(1/.01) - [1/.01(1.01)12]}} + ({$400 {(1/.01) - [1/.01(1.01)12]}/1.0112)} PV = $6,246.34

What will be the monthly payment on a home mortgage of $75,000 at 12% interest, to be amortized over 30 years? A. $771.46 B. $775.90 C. $1,028.61 D. $1,034.53

A. $771.46 Payment = $75,000/[(1/.01) - 1/.01(1.01)360] Payment = $771.46

Project A has an IRR of 20% while Project B has an IRR of 30%. Under which of the following situations might you be inclined to select Project A, assuming the projects to be mutually exclusive, lending projects? A Project A is riskier. B Project A requires a smaller initial investment. C Project A requires a larger initial investment. D Project A requires cash outflows in the final period.

C Project A requires a larger initial investment.

With $1.5 million in an account expected to earn 8% annually over the retiree's 30 years of life expectancy, what annual annuity can be withdrawn, beginning today? A. $112,148.50 B. $120,000.00 C. $123,371.44 D. $133,241.15

C. $123,371.44 $1,500,000 = PmtOA {(1/.08) - [1/.08(1.08)30]} PMTOA = $133,241.15 PMTAD = PMTOA/(1 + r) PMTAD = $133,241.15/1.08 PMTAD = $123,371.44

What is the future value of $10,000 on deposit for 5 years at 6% simple interest? A. $7,472.58 B. $10,303.62 C. $13,000.00 D. $13,382.26

C. $13,000.00 FV = PV + (PV × r × t) ($10,000) + [($10,000 × .06) × 5] = $13,000.00

How much will accumulate in an account with an initial deposit of $100, and which earns 10% interest compounded quarterly for 3 years? A. $107.69 B. $133.10 C. $134.49 D. $313.84

C. $134.49

What APR is being earned on a deposit of $5,000 made 10 years ago today if the deposit is worth $9,848.21 today? The deposit pays interest semiannually. A. 3.56% B. 6.76% C. 6.89% D. 7.12%

C. 6.89% FV = PV (1 + r)t $9,848.21 = $5,000 [1 + (r/2)]10 × 2 r = 6.89%

A cash-strapped young professional offers to buy your car with four, equal annual payments of $3,000, beginning 2 years from today. Assuming you're indifferent to cash versus credit, that you can invest at 10%, and that you want to receive $9,000 for the car, should you accept? A. Yes; present value is $9,510.08 B. Yes; present value is $11,372.67 C. No; present value is $8,645.09 D. No; present value is $7,461.17

C. No; present value is $8,645.09 PV = $3,000{(1/.1) - [1/(.1 × 1.14)]}/1.1 PV = $8,645.09

What happens over time to the real cost of purchasing a home if the mortgage payments are fixed in nominal terms and inflation is in existence? A. The real cost is constant. B. The real cost is increasing. C. The real cost is decreasing. D. The price index must be known to answer this question.

C. The real cost is decreasing.

A proposed project requires an initial investment of $8,500 in current assets, 75% of which will be financed with accounts payable. The project will have: A. an initial cash outflow of $8,500 at time zero for net working capital. B. a cash outflow for net working capital at the end of the project. C. a cash inflow at the end of the project from net working capital. D. a cash outflow for net working capital every year of the project's life.

C. a cash inflow at the end of the project from net working capital.

When the yield curve is upward-sloping, then: A. short-maturity bonds offer the highest coupon rates. B. long-maturity bonds are priced above par value. C. short-maturity bonds yield less than long-maturity bonds. D. long-maturity bonds increase in price when interest rates increase

C. short-maturity bonds yield less than long-maturity bonds.

A project can have as many different internal rates of return as it has: A cash inflows. B cash outflows. C periods of cash flow. D changes in the sign of the cash flows.

D changes in the sign of the cash flows.

When projects are mutually exclusive, selection should be made according to the project with the: A longer life. B larger initial size. C highest IRR. D highest NPV.

D highest NPV.

According to the semi-strong form of market efficiency, when new information becomes available in the market:

Stock prices will accurately and rapidly adjust to reflect this new information.

Which of the following is likely to be correct for a CCC-rated bond, compared to a BBB-rated bond?

The CCC bond will offer a higher promised yield to maturity.

A firm is considering expanding its current operations and has determined the internal rate of return on that expansion is 12.2%. The firm's WACC is 11.8%. Given this, you know the: appropriate discount rate for the project is between 11.8% and 12.2%. expansion should be undertaken as it has a positive net present value. project will have a lower debt-equity ratio than the firm's current operations. project has slightly more risk than the firm's current operations.

expansion should be undertaken as it has a positive net present value.

If the expected rate of return on a stock exceeds the required rate,

The stock is a good buy.

Treasury bills have a beta of zero.

True

The main purpose of a market-value balance sheet is to:

Value assets and liabilities without GAAP restrictions.

A project with an IRR that is less than the opportunity cost of capital should be:

accepted for all borrowing projects

Changes in net working capital can occur at:

any time during the life of the project

what can be expected to happen when stocks having the same expected risk do not have the same expected return?

at least one of the stocks becomes temporarily mispriced

A proposed project has a positive NPV when evaluated at the company cost of capital. If the firm employs debt in its capital structure, will the project remain acceptable after evaluation with the WACC?

Yes, using the WACC will increase the NPV.

A firm is considering a project with the following cash flows: Time 0 = +$20,000, Years 1-5 = -$4,500. Should the project be accepted if the cost of capital is 10%?

Yes; The IRR of the project is 4.06%

Assume a bond has been owned by four different investors during its 20-year history. Which one of the following is most apt to have been different for each of these owners? Yield to maturity Par value Coupon frequency Coupon rate

Yield to maturity

Assume that a bond has been owned by four different investors during its 20-year history. Which of the following is not likely to have been shared by these different owners?

Yield to maturity

The discount rate that makes the present value of a bond's payments equal to its price is termed the:

Yield to maturity

problem with using the dividend growth model is that is produces

a negative expected return whenever a firm cuts dividends

The coupon rate of a bond equals:

a percentage of its face value

Which of the following costs probably should not be allocated to the investment needed for a new project?

a portion of the vice president's salary

When hard capital rationing exists, projects may be accurately evaluated by use of:

a profitability index

when hard capital rationing occurs, projects may be accurately evaluated by the use of...

a profitability index

The internal rate of return is most reliable when evaluating:

a single project with only cash inflows following the initial cash outflow

The internal rate of return is most reliable when evaluating: a single project with cash outflows at time 0 and the final year and inflows in all other time periods. a single project with alternating cash inflows and outflows over several years. mutually exclusive projects of differing sizes. a single project with only cash inflows following the initial cash outflow.

a single project with only cash inflows following the initial cash outflow.

The weighted average cost of capital for a given capital budget level is

a weighted average of the marginal cost of each relevant capital component which makes up the firm's target capital structure.

Which of the following changes in working capital will result in an increase in cash flows? a. Increase in accounts payable b. Increase in inventories c. Increase in accounts receivable d. Decrease in other current liabilities

a. Increase in accounts payable

Which of the following statements is true for a project with $20,000 initial cost, cash inflows of $5,800 per year for six years, and a discount rate of 15%? a. Its payback period is roughly 3.5 years. b. Its NPV is $2,194. c. Its IRR is 1.85%. d. Its profitability index is 0.109.

a. Its payback period is roughly 3.5 years.

The slope and intercept of this line cannot

be controlled by the financial manager.

The __________ price is the highest price that a market maker offers to pay for a security and the __________ price is the lowest price at which a security is offered for sale.

bid, ask

convertible

bond feature allowing conversion to a fixed number of shares of common equity

callable

bond feature that gives the firm the right to force investors to sell the bond back to the firm

If a bond offers a current yield of 5% and a yield to maturity of 5.45%, then the: bond has a high default premium. bond is selling at a discount. promised yield is not likely to materialize. bond must be a Treasury Inflation-Protected Security.

bond is selling at a discount.

The yield curve depicts the current relationship between:

bond yields and maturity.

A bond's yield to maturity takes into consideration:

both current yield and price changes of a bond.

The expected return on a common stock is composed of:

both dividend yield and capital appreciation.

A bond's yield to maturity takes into consideration:

both the current yield and any price changes.

A bond's yield to maturity takes into consideration: price changes but not the current yield. neither the current yield nor any price changes. current yield but not any price changes. both the current yield and any price changes.

both the current yield and any price changes.

The stability of a firms operating income is the focus of:

business risk

stock repurchase

buying your own common equity

For mutually exclusive projects, the IRR can be used to select the best project:

by calculating the IRR based on incremental cash flows

Which one of the following best illustrates the problem imposed by capital rationing?

bypassing projects that have positive NPV's

A bond's par value can also be called its:

face value

par value

face value

A bond's par value can also be called its: market value. coupon payment. face value. present value.

face value.

WACC can be used to determine the value of a firm by discounting the firm's: free cash flows. cash inflows. after-tax net profits. pretax profits.

free cash flows.

The study of published financial information on a company in order to make investment decisions is known as:

fundamental anaysis

The value in t years of an investment made today at interest rate r is called the _______ of your investment

future value

Treasury bonds have provided a higher historical return than Treasury bills, which can be attributed to their: greater exposure to interest rate risk. higher level of unique risk. greater default risk. illiquidity.

greater exposure to interest rate risk.

A project that adds zero economic value:

has an NPV of zero

Based on the random walk theory, if a stock's price decreased last week, then this week the price:

has an equal chance of going either up or down

It is possible to ignore cash dividends that occur far into the future when using a dividend discount model because those dividends:

have an insignificant present value

It is possible to ignore cash dividends that occur far into the future when using a dividend discount model because those dividends:

have an insignificant present value.

What happens to the equivalent annual cost of a project as the opportunity cost of capital decreases?

it decreases

True of a secondary market

it is a market in which preowned securities are traded

If a project has a cost of $50,000 and a profitability index of .4, then:

its NPV is $20,000

If a bond is priced at par value, then:

its coupon rate equals its yield to maturity.

If a bond is priced at par value, then: it must be a zero-coupon bond. its coupon rate equals its yield to maturity. it has a very low level of default risk. the bond is quite close to maturity.

its coupon rate equals its yield to maturity.

Which one of the following is least likely to influence the opportunity cost of an asset?

its current book value

Which of the following descriptions is representative of scenario analysis? a. One variable at a time is allowed to change. b. It isolates the unknowns that belong in the model. c. Different combinations of variables are analyzed. d. It represents the "top-down" approach.

c. Different combinations of variables are analyzed.

When managers select correctly from among mutually exclusive projects, they:

may give up rate of return for NPV

The sustainable rate of growth

must be moderate over the long-term even if it is high in the short-term

Calculator keys & their correct functions

n= number of periods i= interest rate expressed as a % PV= Present Value FV= Future Value PMT= Constant recurring payment

New projects or products can have an indirect effect on the firm as well as direct effect. Which of the following appears to be an indirect effect of launching a new product? a. Additional working capital is required. b. Salesforce will need to be increased. c. Sales of our similar product will decline. d. Additional machinery must be purchased.

c. Sales of our similar product will decline.

which is most likely to be responsible for a firm having a low PVGO?

payout is very high

When an investor purchases a $1,000 par value bond that was quoted at 97.162, the investor:

pays 97.162% of face value for the bond.

When an investor purchases a $1,000 par value bond that was quoted at 97.162, the investor: receives $971.62 upon the maturity date of the bond. pays 97.162% of face value for the bond. pays $10,971.62 for a $10,000 face value bond. receives 97.162% of the stated coupon payments.

pays 97.162% of face value for the bond.

A firm with high operating leverage is expected to:

perform better when sales are high

When the overall market is up by 10%, an investor with a portfolio of defensive stocks will probably have:

positive portfolio returns less than 10%.

Which of these are examples of annuities? car payments house payments electric bill lump sum received as a gift annual $1,000 contribution to retirement account Variable interest received on bank CD

car payments house payments annual $1,000 contribution to retirement account

For an all-equity firm, adding depreciation expense to net profit equals:

cash flows from operations

A project will generate $1 million net cash flow annually in perpetuity. If the project costs $7 million, what is the lowest WACC shown below that will make the NPV negative? a. 10% b. 12% c. 14% d. 16%

d. 16%

Income that is measured after deduction of the cost of capital is called: a. operating income. b. operating profit. c. economic income. d. economic profit.

d. economic profit.

According to pecking order theory, managers will often choose to finance with:

debt rather than new equity, to avoid reduced share price

The appropriate opportunity cost of capital is the return that investors give up on alternative investments that: earn the risk-free rate of return. are included in the S&P 500 index. earn the average market rate of return. possess the same level of risk.

possess the same level of risk.

Generally, the order of cost from the least expensive to the most expensive, for long-term capital of a corporation is

preferred stock, retained earnings, common stock, and new common stock

Allocations of overhead should not affect a project's incremental cash flows unless the: overhead will not be recovered at the end of the project. project actually changes the total amount of overhead expenses. accountant is required to allocate costs to this project. overhead is not currently fully allocated to existing projects.

project actually changes the total amount of overhead expenses.

If the level of sales is less than that calculated as the economic break-even level, then the:

project will have a negative EVA

As long as the NPV of a project declines smoothly with increases in the discount rate, the project is acceptable if its:

rate of return exceeds the cost of capital

A firm's liquidation value is the amount

realized from selling all assets and paying off all creditors

a firm's liquidation value is the amount...

realized from selling all assets and paying off all creditors

A firm's liquidation value is the amount:

realized from selling all assets and repaying debts.

Given a positive discount rate, which one of the following changes would increase the NPV of a project?

realizing a net decrease in working capital

Sensitivity analysis evaluates projects by:

recording profitability changes while changing one variable at a time

The major benefit of diversification is to:

reduce the expected risk.

In what manner does depreciation expense affect investment projects?

reduces taxable income by the amount of the depreciation expense

If the line measuring a stock's historic returns against the market's historic returns has a slope greater than 1.0, then the:

stock has a beta exceeding 1.0.

When new information becomes available in the market, evidence generally suggests that:

stock prices will adjust to the information rapidly

he slope of the regression line that exhibits the past relationship between a stock's returns and the market's returns is the: market's beta. stock's standard deviation. stock's beta. market risk premium.

stock's beta.

The capital budget should be consistent with the firms:

strategic plans

Real-world investments often involve many payments received or paid over time. Managers refer to this as a

stream of cash flows

When a depreciable asset is ultimately sold, the sales price is:

taxable if sales price exceeds book value.

When a depreciable asset is ultimately sold, the sales price is:

taxable to the extent that the sales price exceeds book value.

The current yield tends to overstate a bond's total return when the bond sells for a premium because:

the bond's price will decline each year.

The expected return on a common stock is equal to:

the capital appreciation rate + dividend yield

The expected return on a common stock is equal to:

the capital appreciation rate + dividend yield.

underwriter

designs the structure of the IPO, markets the IPO, and assists with the necessary filings for an IPO.

Discounting a future value at interest rate "r" over time "t" is termed a _____ calculation

discounted cash-flow

A project's opportunity cost per capital is:

the foregone return from investing in the project

An amortizing loan is one in which

the principal balance is reduced with each payment.

An amortizing loan is one in which: (Best Answer) payments are made monthly. accrued interest is paid regularly. the maturity of the loan is known. the principal balance is reduced with each payment.

the principal balance is reduced with each payment.

dividend signaling

the theory that management conveys information about the firm through dividend payment

Borrowing and lending projects usually can be distinguished by whether:

the time-zero cash flow is positive or negative

Investment risk can best be described as the: elimination of macro risk through diversification. level of systematic risk for an undiversified investor. dispersion of possible returns. possibility of changes in the cost of capital.

dispersion of possible returns.

average tax

divide taxes by taxable income

The required return on an equity security is comprised of a:

dividend yield and a capital gains yield

Common stock can be valued using the perpetuity valuation formula if the:

dividends are not expected to grow.

The current yield of a bond can be calculated by:

dividing the annual coupon payments by the price.

The current yield of a bond can be calculated by: dividing the price by the par value. multiplying the price by the coupon rate. dividing the annual coupon payments by the price. dividing the price by the annual coupon payments.

dividing the annual coupon payments by the price.

indenture

document that provides details on the bond's features and covenants -written document between the bond issuers and bondholder

putable bond

essentially the reverse of a callable bond

When taxes are considered, the value of a levered firm equals the value of the:

unlevered firm plus the present value of the tax shield

Firms that make investment decisions based on the payback rule may be biased toward rejecting projects:

with long lives

Firms that make investment decisions based on the payback rule may be biased toward rejecting projects: with late cash inflows. with short lives. that have negative NPVs. with long lives.

with long lives.

The discount rate that makes the present value of a bond's payments equal to its price is termed the:

yield to maturity

The discount rate that makes the present value of a bond's payments equal to its price is termed the:

yield to maturity.

what is the minimum amount shareholders can expect to receive in the event of a complete corporate liquidation?

zero

(T/F) The method of financing a project affects the determination of its cash flows for capital budgeting purposes.

Fasle

A bank loan (Real asset or Financial asset)

Financial asset

Is the following a real asset or a financial asset? A bank loan agreement

Financial asset

Is the following a real asset or a financial asset? A personal IOU

Financial asset

Is the following a real asset or a financial asset? A share of stock

Financial asset

Is the following a real asset or a financial asset? The balance in the firm's checking account

Financial asset

Which of the following are investment decisions, and which are financing decisions? Alternatively, we can use the savings to repay some of our long-term debt.

Financing decision

The study of published financial information on a company in order to make investment decisions is known as:

Fundamental analysis

Janice has spent hours upon hours analyzing the last five years of financial statements of a firm and has concluded that the firm's stock is currently underpriced. What type of analyst is Janice?

Fundamental anayst

The existence of an upward-sloping yield curve suggests that:

Interest rates will be increasing in the future.

A positive value for PVGO suggests that the firm has:

Investment opportunities with superior returns

Which of the following presents the correct relationship? As the coupon rate of a bond increases, the bond's:

Interest payments increse

In general, if a firm has positive present value of growth opportunities, then its price-earnings ratio:

Is greater than is required rate of return

The value of a callable bond:

Is limited by its call price.

Which one of the following is more likely to be responsible for a firm having a low PVGO?

Payout is very high

Which of the following is more likely to be responsible for a firm having low PVGO?

Payout is very high.

more likely to be responsible for a firm having low PVGO?

Payout is very high.

If The Wall Street Journal lists a stock's dividend as $1, then it is most likely the case that the stock:

Pays $0.25 quarterly, or an estimated $1 annually.

When an investor purchases a $1,000 par value bond that was quoted at 97.16, the investor:

Pays 97.5% of face value for the bond

What is the equivalent annual cost for a project that requires a $40,000 investment at time zero, and a $10,000 annual expense during each of the next 4 years, if the opportunity cost of capital is 10%?

$22,618.83

Which one of the following companies is most apt to be exposed to the least amount of macro risk? A regional airline A large producer of flour A major commercial bank A machine tool manufacturer

A large producer of flour

You are evaluating a new project that will introduce a revolutionary new product that will be produced by a new, highly efficient machine. Which one of these will lower the net present value of that project?

A loss of current sales due to the introduction of the new product

You are evaluating a new project that will introduce a revolutionary new product that will be produced by a new, highly efficient machine. Which one of these will lower the net present value of that project? The increase in annual depreciation resulting from the asset purchase A reduction in the firm's total variable costs due to the purchase of the new machine A loss of current sales due to the introduction of the new product The sale of the machine after it is fully depreciated

A loss of current sales due to the introduction of the new product

Given a set future value, which of the following will contribute to a lower present value? A. Higher discount rate B. Fewer time periods C. Less frequent discounting D. Lower discount factor

A. Higher discount rate

Call option

An option to buy assets at an agreed price on or before a particular date.

Put option

An option to sell assets at an agreed price on or before a particular date.

Inflation can be defined as

An overall general rise in prices

An annuity forwhich the cash flow occurs at the beginning of each period.

Annuity Due

An analyst who relies upon past cycles of stock pricing to make investment decisions is:

Assuming that the market is not weak-form efficient

Pecking order theory is based on

Asymmetric information

How much interest is earned in just the third year on a $1,000 deposit that earns 7% interest compounded annually? A. $70.00 B. $80.14 C. $105.62 D. $140.00

B. $80.14 $1000.00 × (1.07)2 = $1,144.90 after 2 years $1,144.90 × .07 = $80.14

The statement "We've got too much invested in that project to pull out now" possible illustrates the need to:

Be reacquainted with the concept of sunk costs

True or False A bond's rate of return is equal to its coupon payment divided by the price paid for the bond.

False

The yield curve depicts the current relationship between:

Bond yields and maturity

Which of the following identifies the distinction between a U.S. Treasury bond and a Treasury note?

Bonds initially have more than 10 years until maturity; notes have fewer than 10 years initially.

Which of the following investment criteria does not take the time value of money into consideration?

Book rate of return

A bond's yield to maturity takes into consideration:

Both current yield and price changes of a bond.

The expected return on a common stock is composed of:

Both dividend yield and capital appreciation.

An investor is faced with the decision of whether to invest in a stock with an expected return of 14% or a stock in the same industry with an expected 20% return. Which of the following seems most likely?

Both stocks are priced correctly given their perceived risk.

Given the efficiency of our financial markets,

Both technical and fundamental analysts serve a useful function.

What is the yield to maturity for a bond paying $100 annually that has 6 years until maturity and sells for $1,000? A. 6.0% B. 8.5% C. 10.0% D. 12.5%

C. 10.0% $1,000 =$100 [1/i - 1/i(1+i)^6] + $1,000/ (1+i)^6

Use of a profitability index to evaluate mutually exclusive projects in the absence of capital rationing:

Can result in misguided selections

If the price of a stock falls on four consecutive days of trading, then stock prices:

Can still be following a random walk

A market that enables suppliers and demanders of long term funds to make transactions

Capital Market

The difference between book and market value is smallest for

Cash and equivalents

Which one of the following security classes has the highest standard deviation of returns? Treasury bills Corporate bonds Long-term Treasury bonds Common stocks

Common stocks

Capital budgeting analysis focuses on profits as opposed to cash flows.

False

An example that specifically contradicts strong-form market efficiency in U.S. stock markets is that:

Excess profits are observed in cases of insider trading

Many investors may be drawn to municipal bonds because of the bonds':

Exemption from federal taxes

When riskier corporations issue bonds that include a default premium, the promised yield will sometimes be:

Greater than the actual yield.

The primary distinction between securities sold in the capital and money market is the

Length of time until maturity of the securities, e.g. long- versus short-term.

The reason that financial leverage increases shareholder risk is that there is

Less equity to absorb the operational risk.

Dividends that are expected to be paid far into the future have:

Lesser impact on current stock price due to discounting.

A primary goal of fundamental analysis is to:

Locate stocks that are not correctly valued

Suppose a 30-year maturity bond currently selling for $1,040 is callable in 10 years at a call price of $1,060. If its yield to maturity is 8.14%, its yield to call is:

More than 8.14%

Which one of the following statements is most likely to be correct for a project in which the NPV is negative when the cash inflows are based on net income?

NPV may turn positive after adjusting for depreciation expense

When two firms merge, the value of the acquiring firm will change by the:

NPV of the merger

If the opportunity cost of capital for a lending project exceeds the project's IRR, the the project has a:

Negative NPV

future value

PV * (1 + r)^n

Capital losses will automatically be the case for bond investors who buy:

Premium bonds

According to the dividend discount model, the current value of a stock is equal to the:

Present value of all expected future dividends.

In a valuation of a non-constant dividend growth stock, the terminal value represents the:

Present value of future dividends from that point on

In a valuation of a nonconstant dividend growth stock, the terminal value represents the:

Present value of future dividends from that point on

What stock price reaction would you expect from a firm that unexpectedly raises its dividend permanently and by a substantial amount?

Price should rise, given dividend discount models

Semistrong form efficiency describes a market in which:

Prices reflect all publicly available information

Problems that occur when managers place personal goals ahead of the goals of shareholders

Principal Agency Problem

Which of the following investment criteria takes the time value of money into consideration?

Profitability index, internal rate of return, and net present value

A bond with 10 years until maturity, an 8% coupon, and an 8% yield to maturity increased in price to $1,107.83 yesterday. What apparently happened to interest rates?

Rates decreased by 1.5%

Is the following a real asset or a financial asset? A trademark

Real asset

Which one of the following changes offers the greatest chance of changing a project's NPV from negative to positive? Decreasing the marginal tax rate Substituting preferred stock for debt Selling the debt at less than par value Reducing the risk level of the project

Reducing the risk level of the project

Producers who hedge through the purchase of put options must remember that they may be:

Reducing their profits compared to not hedging.

The terminal value of a share of stock:

Refers to the share value at the end of the investor's holding period.

Evaluate the following project using an IRR criterion, based on an opportunity cost of 10%: CF0 = -6,224, CF1 = +3,300, CF2 = +3,300.

Reject, since opportunity cost exceeds IRR.

What is the net effect on a firm's working capital if a new project requires: $30,000 increase in inventory, $10,000 increase in accounts receivable, $35,000 increase in machinery, and a $20,000 increase in accounts payable?

Rise in WC by $20,000

The chance that actual outcomes may differ from those expected

Risk

Requiring compensation to bear risk

Risk Adverse

What does empirical evidence suggest about the distribution of gains from mergers?

Shareholders of the target firm gain the most.

An implicit cost of increasing the proportion of debt in a firm's capital structure is that:

Shareholders will demand a higher rate of return.

When the yield curve is upward-sloping, then:

Short-maturity bonds yield less than long-maturity bonds.

not considered a capital component for the purpose of calculating the weighted average cost of capital as it applies to capital budgeting?

Short-term debt used to finance seasonal current assets.

BestFirm has a 50-year history of solid growth and ever-increasing profits. It is widely regarded as the leading firm of its industry. Hence, BestFirm's stock:

Should be a safe buy

A fundamental analyst:

Studies a firm's financial statements to determine pricing inefficiencies.

The statement that prices follow a random walk implies that

Successive price changes are independent of each other

If stock prices follow a random walk:

Successive stock price changes are not related

Which one of the following statements is correct for a project with a positive NPV?

The IRR must be greater than 0

Reinvesting earnings into a firm will not increase the stock price unless:

The ROE of new investments exceeds the firm's required return.

Which of the following statements is correct when Treasury bills yield 7.5% and the market risk premium is 9.5%?

The S&P 500 would be expected to yield about 17.00%.

What is meant by the term true depreciation?

The amount necessary to overcome deterioration of corporate assets

Which of the following is correct for a bond investor whose bond offers a 5% current yield and an 8% yield to maturity?

The bond is selling at a discount to par value.

Agency cost (The cost resulting from conflicts of interest between managers and shareholders or The amount charged by a company's agents such as the auditors and lawyers)

The cost resulting from conflicts of interest between managers and shareholders

Which of the following will not happen for an investor who owns TIPS during a period of inflation?

The coupon payment will increase in real terms.

What happens to the coupon rate of a $1,000 face value bond that pays $80 annually in interest if market interest rates change from 9% to 10%?

The coupon rate remains at 8%.

The main difference between the three forms of market efficiency according to the classifications in the book is that

The definition of information differs

The value of common stock will likely decrease if:

The discount rate increases

If the liquidation value of a firm is negative, then:

The firm's debt exceeds the market value of assets.

Given that markets are efficient, what is the most logical explanation of the fact that a portfolio manager can outperform the S&P 500 by 5% annually?

The manager's results have not been adjusted for the riskiness of the portfolio

Your broker suggests that you can make consistent, excess profits by purchasing stocks on the 20th of the month and selling them on the last day of the month. If this is true, then:

The market violates even weak-form efficiency

If no price change occurs in a stock on the day that it announces its next dividend, it can be assumed that:

The market was expecting this information

over-the-counter market

The market where small unlisted securities are traded

Which of the following situations is most likely to occur today for a stock that went down in price yesterday?

The stock has no predictable price-change pattern.

Where does a "convertible bond" get its name?

The option of converting into shares of common stock.

Which of the following statements is incorrect regarding the payback period rule?

The payback rule makes managers focus on long term results.

What happens when a bond's expected cash flows are discounted at a rate lower than the bond's coupon rate?

The price of the bond increases

What happens when a bond's expected cash flows are discounted at a rate lower than the bond's coupon rate?

The price of the bond increases.

What happens when a bond's expected cash flows are discounted at a rate lower than the bond's coupon rate?

The price of the bond increases.

An amortizing loan is one in which:

The principal amount is reduced with each payment

Which one of the following statements is most likely to be correct for a project in which the NPV is negative when the cash inflows are based on net income?

The project should be rejected or abandoned.

The real interest rate can be defined as

The real change in value of an investment (or a real cost of a loan) after adjustment for inflation

Borrowing and lending projects usually can be distinguished by whether:

The time-zero cash flow is positive or negative

Responsible for bank relationships (The treasurer or The controller)

The treasurer

Given a particular set of project cash flows, which one of the following statements must be correct?

There can be more than one IRR for the project

Which one of the following statements is incorrect concerning the equity component of the WACC? The value of retained earnings is excluded. There is a tax shield on the dividends paid. Preferred equity is a separate component of WACC. Market values should be used in the calculations.

There is a tax shield on the dividends paid.

What is the relationship between a bondholder's rate of return and the bond's yield to maturity if he does not hold the bond until it matures?

There is no predetermined relationship between the rate of return and the yield to maturity.

What is the relationship between an investment's rate of return and its yield to maturity for an investor that does not hold a bond until maturity?

There is no predetermined relationship.

Investors are willing to purchase stocks having high P/E ratios because:

They expect these shares to have greater growth opportunities

(T/F) Capital budgeting analysis focuses on cash flow as opposed to profits.

True

(T/F) If a project permits a reduction in the level of working capital, this reduction is assumed to increase cash flows.

True

(T/F) In project analysis, allocations of overhead should be limited to only those that represent additional expense.

True

(T/F) Sunk costs do not affect the net present value of a project.

True

(T/F) The net cash flow from the sale of an asset will exceed the asset's sale price when a firm has positive taxable income and the asset's book value exceeds its market value.

True

(T/F) When additional funds must be committed to working capital, those funds are assumed to be recovered at the end of the project's life.

True

A project should be accepted (i.e., has a + NPV) if its return plots above the security market line.

True

Beta measures the sensitivity of a stock's returns to the markets returns.

True

Bond ratings measure a bond's credit risk.

True

Bonds that have a Standard & Poor's rating of BBB or better are considered to be investment-grade bonds. True False

True

Bonds that have a Standard & Poor's rating of BBB or better are considered to be investmentgrade bonds.

True

Business risk refers to the volatility of operating earnings - what comes from the asset side. Financial risk (leverage) refers to the volatility caused by the use of debt, which is reflective of the financing side of the balance sheet.

True

Even when the yield curve is upward-sloping, investors might rationally stay away from longterm bonds.

True

Holding all else the same, accepting projects with a negative NPV decrease shareholders' wealth by resulting in a lower stock price.

True

Technical and fundamental analysts help keep the market efficient by:

Trying to earn superior returns in the stock market.

Which one of these is considered to be the safest investment? U.S. Treasury bonds Common stock U.S. Treasury bill Preferred stock

U.S. Treasury bill

If investors can consistently profit from thorough reading of published financial information, then the market can, at best, be characterized as:

Weak-form efficient

The decision rule for net present value is to:

accept all projects with positive net present values.

What triggers an expansion option?

When the additional cash flows coming from the expansion will be enough to cover the additional investments needed.

What triggers a shutdown (abandonment option)?

When the cash flows value fall below the scrap value of the project

Is the following an advantage in separating ownership and management in large corporations? Shareholders can sell their holdings without disrupting the business.

Yes

When will you be indifferent between two mutually exclusive projects of similar size?

When the required return on the projects is equal to the crossover discount rate

A "convertible bond" provides the option to convert:

a bond into shares of common stock.

The coupon rate of a bond equals:

a defined percentage of its face value.

When calculating a project's payback period, cash flows are discounted at:

a discount rate of zero

As a result of IPO, Facebook received:

about the maximum value that it could

What happens to the equivalent annual cost of a project as the opportunity cost of capital decreases? a. It increases. b. It decreases. c. It is not affected. d. It depends on whether or not the projects are mutually exclusive.

b. It decreases.

The CAPM provides a model of determining expected security returns that is: excellent for high beta stocks. precise in its calculations of risk premiums. imprecise, but generally an acceptable guideline. excellent for all well-diversified portfolios.

imprecise, but generally an acceptable guideline.

The Modified Accelerated Cost Recovery System allows an increase:

in annual depreciation during earlier years.

As a source of financing, once retained earnings have been exhausted, the weighted average cost of capital will

increase

Which one of these represents a cash outflow for a project?

increase in accounts receivable

characteristics of a firm that sells for book value...

low unstable dividend payments, low current earnings, few intangible assets

If the opportunity cost of capital for a lending project exceeds the project's IRR, then the project has a(n):

negative NPV

The terminal value of a share of stock:

refers to the share value at the end of an investor's holding period

The statement that there are no free lunches on Wall Street suggests that

security prices reflect all available information

Which of the following projects would you feel safest in accepting? Assume the opportunity cost of capital to be 12% for each project.

"D" has a zero NPV when discounted at 14%

bird-in-hand theory

$1 in dividends today is worth more than promised future dividends

If the 7s of 2005 are offered at 102:23, then the price of a $1,000 bond would be:

$1,027.19 $1,000 + $20 + $10(23/32) = $1,027.19

How much would an investor expect to pay for a $1,000 par value bond with a 9% annual coupon that matures in 5 years if the interest rate is 7%?

$1,082.00

How much would an investor expect to pay for a $1,000 par value bond with a 9% annual coupon that matures in 5 years if the interest rate is 7%?

$1,082.00 Price = (.09 × $1,000) {(1/.07) - [1/.07(1.07)5]} + $1,000/1.075 Price = $1,082.00

If an investor purchases a 3%, two-year TIPS and the CPI increases 3% over each of the next two years, how much does the investor receive at maturity?

$1,092.73 1,030 x (1.03)2 = 1,092.73.

What price will be paid for a U.S. Treasury bond with an ask price of 135:20?

$1,356.25

Because of its age, your car costs $4,000 annually in maintenance expense. You could replace it with a newer vehicle costing $8,000. Both vehicles would be expected to last 4 more years. If your opportunity cost is 8%, by how much must maintenance expense decrease on the newer vehicle to justify its purchase?

$1,584.63

Today you deposit $1000 in an account paying 6% interest. At the end of years 1, 2, & 3 you will deposit $100 in that account. How much will you have at the end of year 4?

$1,599.94 $1000(1.06)^4 + $100(1.06)^3 + $100(1.06)^2 + $100(1.06)^1

By how much did the price of a $1,000 par-value bond increase if The Wall Street Journal shows a change of +6 from the previous day?

$1.875 6/32 x 10 = $1,875

How much of a stock's $30 price is reflected in PVGO if it expects to earn $4 per share, has an expected dividend of $2.50, and a required return of 20%?

$10

How much of a stock's $30 price is reflected in PVGO if it expects to earn $4 per share, has an expected dividend of $2.50, and a required return of 20%?

$10.00

A stock is expected to pay dividends of $1.20 per share in Year 1 and $1.35 per share in Year 2. After that, the dividend is expected to increase by 2.5% annually. What is the current value of the stock at a discount rate of 14.5%?

$10.87

What is the amount of the annual coupon payment for a bond that has six years until maturity, sells for $1,050, and has a yield to maturity of 9.37%?

$105.00

What is the undiscounted cash flow in the final year of an investment, assuming: $10,000 after-tax cash flows from operations, the fully depreciated machine is sold for $1,000, the project had required $2,000 in additional working capital, and a 35% tax rate?

$12,650

By how much will a bond increase in price over the next year if it currently sells for $925, has five years until maturity, and an annual coupon rate of 7%?

$12.55

Statement of the problem for the next three questions: The Test Company is evaluating the proposed acquisition of a new milling machine. The machine's base price is $108,000, and it would cost another $12,000 to modify it for special use by your firm. The machine will be depreciated under the straight line method, with a life of 3 years and a salvage value estimate of zero. The machine will be sold after 3 years for $50,000. The machine would require an increase in net working capital (inventory) of $2,000. The working capital will be recovered in full when the chipper is sold. The milling machine would have no effect on revenues, but it is expected to save the firm $40,000 per year in before-tax operating costs, mainly labor. Test's marginal tax rate is 40 percent, and the MACRS Depreciation rates are: 33%; 45%; 15%; and 7% for yrs. 1, 2, 3 and 4, respectively. Question: What is the total cash outflow required for this project at t = 0?

$122,000

What is the maximum that should be invested in a project at time zero if the inflows are estimated at $50,000 annually for 3 years, and the cost of capital is 9%?

$126,564.73

What is the sustainable growth rate for a company with with a payout ratio of 40% and a return on equity of 12%?

7.2%

If the liquidation value of a corporation exceeds the market value of the equity, then the:

Firm has no value as a going concern

If the liquidation value of a corporation exceeds the market value of the equity, then the:

Firm has no value as a going concern.

What price will be paid for a U.S. Treasury bond with an ask price of 135.4062 if the face value is $100,000?

$135,406.20 Price = 1.354062 × $100,000 = $135,406.20

What is the NPV for the following project cash flows at a discount rate of 15%? C0 = ($1,000), C1 = $700, C2 = $700.

$138.00

What is the required return for a stock that has a constant-growth rate of 3.3%, a price of $25, an expected dividend of $2.10, and a P/E ratio of 14.4?

11.70%

A currently used machine costs $10,000 annually to run. What is the maximum that should be paid to replace the machine with one that will last 3 years and cost only $4,000 annually to run? The opportunity cost of capital is 12%.

$14,410.99

What is the NPV of a project that costs $100,000 and returns $50,000 annually at the end of each of the next three years if the opportunity cost of capital is 14%?

$16,080.00

What is the NPV of a project that costs $100,000 and returns $50,000 annually for 3 years if the opportunity cost of capital is 14%

$16,081.60

What is the NPV of a project that costs $100,000 and returns $50,000 annually for three years if the opportunity cost of capital is 14%?

$16,085.00

Repeating the problem: The Test Company is evaluating the proposed acquisition of a new milling machine. The machine's base price is $108,000, and it would cost another $12,000 to modify it for special use by your firm. The machine will be depreciated under the straight line method, with a life of 3 years and a salvage value estimate of zero. The machine will be sold after 3 years for $50,000. The machine would require an increase in net working capital (inventory) of $2,000. The working capital will be recovered in full when the chipper is sold. The milling machine would have no effect on revenues, but it is expected to save the firm $40,000 per year in before-tax operating costs, mainly labor. Test's marginal tax rate is 40 percent, and the MACRS Depreciation rates are: 33%; 45%; 15%; and 7% for yrs. 1, 2, 3 and 4, respectively. Question: What's the tax on resale of the machine at the end of year 3?

$16,640

The XYZ Corporation paid a dividend of $1.60 for the first fiscal year just completed. It is estimated that this firm's dividends will grow at 8% per year for the foreseeable future. If you are considering buying XYZ's stock, and, because of risks involved, require a return of at least 18%, what is the most you should be willing to pay for this stock?

$17.28

How much would an investor lose if she purchased a 30-year zero-coupon bond with a $1,000 par value and 10% yield to maturity, only to see market interest rates increase to 12% one year later? (Hint: How much would the price change from a year earlier?)

$19.93 Price = 1,000/(1.10)30 = 57.31 New Price = 1,000/(1.12)29= 37.38 Difference = 19.93

A stock currently sells for $50 per share, has an expected return of 15%, and an expected capital appreciation rate of 10%. What is the amount of the expected dividend?

$2.50

What is the most likely value of the PVGO for a stock with a current price of $50, expected earnings of $6 per share, and a required return of 20%?

$20

What is the most likely value of the PVGO for a stock with current price of $50, expected earnings of $6 per share, and a required return of 20%?

$20

Repeating the problem: The Test Company is evaluating the proposed acquisition of a new milling machine. The machine's base price is $108,000, and it would cost another $12,000 to modify it for special use by your firm. The machine will be depreciated under the straight line method, with a life of 3 years and a salvage value estimate of zero. The machine will be sold after 3 years for $50,000. The machine would require an increase in net working capital (inventory) of $2,000. The working capital will be recovered in full when the chipper is sold. The milling machine would have no effect on revenues, but it is expected to save the firm $40,000 per year in before-tax operating costs, mainly labor. Test's marginal tax rate is 40 percent, and the MACRS Depreciation rates are: 33%; 45%; 15%; and 7% for yrs. 1, 2, 3 and 4, respectively. Question: What is the depreciation tax shield in year 2?

$21,600

What is the equivalent annual cost for a project that requires a $40,000 investment at time-period zero, and a $10,000 annual expense during each of the next 4 years, if the opportunity cost of capital is 10%?

$22,618.83 [ Use PV of Annuity formula ]

A polisher costs $10,000 and will cost $20,000 a year to operate and maintain. If the discount rate is 10% and the polisher will last for 5 years, what is the equivalent annual cost of the tool?

$22,637.98

Assume your firm has an unused machine that originally cost $75,000, has a book value of $20,000, and is currently worth $25,000. Ignoring taxes, the correct opportunity cost for this machine in capital budgeting decisions is:

$25,000

3. How does a bond dealer generate profits when trading bonds?

By maintaining bid prices lower than ask prices

What price would you pay today for a stock if you require a rate of return of 13%, the dividend growth rate is 3.6%, and the firm recently paid an annual dividend of $2.50?

$27.55

By how much did the price of a $1,000 par-value bond decrease if The Wall Street Journal shows a change of -12 from the previous day?

$3.75 12/32 x 10 = $3.75

What price would you expect to pay for a stock with 13% required rate of return, 4% rate of dividend growth, and an annual dividend of $2.50 which will be paid tomorrow?

$31.39

What should be the price of a stock that offers a $4 annual dividend with no prospects of growth, and has a required return of 12.5%?

$32.00

The ABC Corporation will pay a dividend of $2 at the end of the coming year. It is estimated that this firm's dividends will grow at 4% per year for the foreseeable future. If you are considering buying ABC's stock, and, because of risks involved, require a return of at least 10%, what is the most you should be willing to pay for this stock?

$33.33

What should be the price of a stock that offers a $4.32 annual dividend with no prospects of growth, and has a required return of 12.5%?

$34.56

For a profitable firm in the 35% marginal tax bracket with $100,000 of annual depreciation expense, the depreciation tax shield would be:

$35,000

What should be the current price of a stock if the expected dividend is $5, the stock has a required return of 20%, and a constant dividend growth rate of 6%?

$35.71

Your forecast shows $500,000 annually in sales for each of the next three years. If your second and third year predictions have failed to incorporate 2.5% expected annual inflation, how far off in total dollars is your three-year forecast?

$37,813

ABC common stock is expected to have extraordinary growth of 20% per year for 2 years, after which the growth rate will settle into a constant 6%. If the discount rate is 15% and the most recent dividend was $2.50, what should be the approximate current share price?

$37.39

ABC common stock is expected to have extraordinary growth of 20% per year for two years, at which time the growth rate will settle into a constant 6%. If the discount rate is 15% and the most recent dividend was $2.50, what should be the current share price?

$37.42

What should be the stock value one year from today for a stock that currently sells for $35, has a required return of 15%, an expected dividend of $2.80, and a constant dividend growth rate of 7%?

$37.45

What should be the current price of a share of stock if a $5 dividend was just paid, the stock has a required return of 20%, and a constant dividend growth rate of 6%?

$37.86

What should be the price for a common stock paying $3.50 annually in dividends if the growth rate is zero and the discount rate is 8%

$43.75

What should be the price for a common stock paying $3.50 annually in dividends if the growth rate is zero and the discount rate is 8%?

$43.75

If a project's IRR is 13% and the project provides annual cash flows of $15,000 for 4 years, how much did the project cost?

$44,617.07

How much should you pay for a share of stock that offers a constant growth rate of 10%, requires a 16% rate of return, and is expected to sell for $50 one year from now?

$45.45

A bond is priced at $1,100, has 10 years remaining until maturity, and has a 10% coupon, paid semiannually. What is the amount of the next interest payment?

$50 Coupon payment = (.10 × $1,000)/2 = $50

A firm generates sales of $250,000, depreciation expense of $50,000, taxable income of $50,000, and has a 35% tax rate. By how much does net cash flow deviate from net income?

$50,000

What would be the expected price of a stock when dividends are expected to grow at a 25% rate for three years, then grow at a constant rate of 5%, if the stock's required return is 13% and next year's dividend will be $4.00?

$68.62

What would be the approximate expected price of a stock when dividends are expected to grow at a 25% rate for 3 years, then grow at a constant rate of 5%, if the stock's required return is 13% and next year's dividend will be $4.00?

$68.64

Dani's just paid an annual dividend of $6 per share. What is the dividend expected to be in five years if the growth rate is 4.2%?

$7.37

A stock paying $5 in annual dividends currently sells for $80 and has an expected return of 14%. What might investors expect to pay for the stock one year from now?

$86.20

A stock paying $5 in annual dividends sells now for $80 and has an expected return of 14%. What might investors expect to pay for the stock one year from now?

$86.20

How much should you be prepared to pay for a 10-year bond with a 6% coupon, semi-annual payments, and a semi-annually compounded yield of 7.5%?

$895.78

How much should you be prepared to pay for a 10-year bond with a 6% coupon and a yield to maturity to maturity of 7.5%?

$897.04

If a 4-year bond with a 7% coupon and a 10% yield to maturity is currently worth $904.90, how much will it be worth 1 year from now if interest rates are constant?

$925.39

If a four year bond with a 7% coupon and a 10% yield to maturity is currently worth $904.90, how much will it be worth one year from now if interest rates are constant?

$925.39

How much should you pay for a $1,000 bond with 10% coupon, annual payments, and five years to maturity if the interest rate is 12%?

$927.90

How much should you pay for a $1,000 bond with 10% coupon, annual payments, and 5 years to maturity if the interest rate is 12%?

$927.90 Price = (.10 × $1,000) {(1/.12) - [1/.12(1.12)5]} + $1,000/1.125 Price = $927.90

Two years ago bonds were issued with 10 years until maturity, selling at par, and a 7% coupon. If interest rates for that grade of bond are currently 8.25%, what will be the market price of these bonds?

$928.84

If you purchase a three-year, 9% coupon bond for $950, how much could it be sold for two years later if interest rates have remained stable?

$981.56

Which of the following is not accurate in depicting cash flows from operations?

(revenues - expenses - taxes paid)

Stock X and the "Market" had the following rates of return during the last two years:

-1.5

Which one of the following changes will increase the NPV of a project? A decrease in the discount rate An increase in the initial cost of the project A decrease in the size of the cash inflows A decrease in the number of cash inflows

A decrease in the discount rate

What are valid interest compounding periods?

-Daily -Weekly -Monthly -Annually -Continuously -Quarterly -Semiannually

What are annuities?

-Installment loan payments -Monthly rent payments in a lease

With semi-strong form market efficiency:

-all historical information on past prices is reflected in the current stock price. -all currently published information is reflected in the current stock price.

Indicate the three bond features or bond types will allow the firm to pay a lower coupon rate.

-convertible -mortgage -senior

probabilities

-each possible outcome must have a non negative prob -prob is a statistical tool for estimating furure outcomes -sum of all prob = 100%

variance

-is essentially the variability from the average -the larger the variance the greater the dispersion -variance describes how spread out a set of numbers or values is around its mean or average

diversification

-spreading wealth over a variety of investment opportunities -common investment strategy -not putting all your eggs in one basket

An investor buys a five-year, 9% coupon bond for $975, holds it for one year and then sells the bond for $985. What was the investor's rate of return?

10.26% (90 + 10)/975 = 10.26%

What rate of return is expected from a stock that sells for $30 per share, pays $1.54 annually in dividends, and is expected to sell for $32.80 per share in one year?

14.47%

What rate of return is expected from a stock that sells for $30 per share, pays $1.50 annually in dividends, and is expected to sell for $33 per share in one year?

15.00%

What is the IRR for a project that costs $100,000 and proves annual cash inflows of $30,000 for 6 years starting one year from today?

19.91%

According to random-walk theory, what are the odds that a stock will increase in price after having increased on two consecutive days of trading?

50%

According to random-walk theory, what are the odds that a stock will increase in price after having increased on two consecutive days of trading?

50.0%

What is the expected, constant growth rate of dividends for a stock with current price of $100, expected dividend payment of $10 per share, and a required return of 16%?

6.00%

How does a bond dealer generate profits when trading bonds?

By maintaining bid prices lower than ask prices

If a stock is purchased for $25 per share and held one year, during which time a $3.50 dividend is paid and the price climbs to $28.25, the nominal rate of return is:

27.00%

If a bond offers an investor 11% in nominal return during a year in which the rate of inflation was 4%, then the investor's real return was:

6.73% 1 + real return = 1.11/1.04 real return = 6.73%

The expected return on the market portfolio is 20% and the risk free rate of return is 10%. An investment has a beta of 2. What is the required rate of return given the beta? 2) If this asset offered an expected rate of return of 25%, would it be overpriced/overvalued or undervalued?

30%; Overvalued

What is the plowback ratio for a firm that has earnings per share of $2.68 and pays out $1.75 per share in dividends?

34.70%

A payout ratio of 35% for a company indicates that:

35% of earnings are paid out as dividends.

What constant growth rate in dividends is expected for a stock valued at $32.00 if next year's dividend is forecast at $2.00 and the appropriate discount rate is 13%?

6.75%

What constant-growth rate in dividends is expected for a stock valued at $32.40 if next year's dividend is forecast at $2.20 and the appropriate discount rate is 13.6%?

6.81%

What is the total return to an investor who buys a bond for $1,100 when the bond has a 9% coupon rate and five years remaining until maturity, then sells the bond after one year for $1,085?

6.82% (90 - 15)/1,100 = 6.82%

What is the plowback ratio for a firm that has earnings per share of $12.00 and pays out $4.00 per share as dividends?

66.67%

How many round lots were traded in a specific stock on a day in which 467,800 shares changed hands?

4,678 round lots

What is the minimum number of years in which an investment costing $210,000 must return $65,000 per year at a discount rate of 13% in order to be an acceptable investment?

4.46 YEARS

What is the rate of return for an investor who pays $1,054.47 for a 3-year bond with coupon of 6.5% and sells the bond 1 year later for $1,037.19?

4.53% Rate of return = [$1,037.19 + (.065 × $1,000) - $1,054.47]/$1,054.47 = .0453, or 4.53%

What proportion of earnings is being plowed back into the firm if the sustainable growth rate is 8% and the firm's ROE is 20%?

40%

What is the rate of return for an investor who pays $1,054.47 for a three-year bond with a 7% coupon and sells the bond one year later for $1,037.19?

5.00% Rate of Return = ($70.00 - $17.28)/$1,054.47 = $52.72/$1,054.47 = 5%

What is the standard deviation of the expected returns, given the following distribution of rates of returns?

7.74%

What is the current yield of a bond with a 6% coupon, four years until maturity, and a price of $750?

8.0% $60/750 = 8%

What is the expected return on a portfolio that will decline in value by 13% in a recession, will increase by 16% in normal times, and will increase by 23% during boom times if each scenario has equal likelihood?

8.67%

How much would an investor need to receive in nominal return if she desires a real return of 4% and the rate of inflation is 5%?

9.20% 1.04 = 1 + nominal return/1.05 9.2% = nominal return

What is the expected constant growth rate of dividends for a stock currently priced at $50, that just paid a dividend of $4, and has a required return of 18%?

9.26%

What is the expected constant-growth rate of dividends for a stock currently priced at $50, that just paid a dividend of $4, and has a required return of 18%?

9.26%

What is the yield to maturity of a bond with the following characteristics? Coupon rate is 8% with semi-annual payments, current price is $960, three years until maturity.

9.57%

What is the expected constant-growth rate of dividends for a stock with a current price of $87, an expected dividend payment of $5.40 per share, and a required return of 16%?

9.79%

What price was quoted to an investor who paid $982.50 for a $1,000 par value bond?

98:08 980 + (8/32 x 10) = 982.50

Which of the following changes will increase the NPV of a project? A A decrease in the discount rate B A decrease in the size of the cash inflows C An increase in the initial cost of the project D A decrease in the number of cash inflows

A A decrease in the discount rate

Which of the following statements is correct for a project with a positive NPV? A The IRR must be greater than 0. B Accepting the project has an indeterminate effect on shareholders. C The discount rate exceeds the cost of capital. D The profitability index equals 1.

A The IRR must be greater than 0.

Which of the following should be assumed about a project that requires a $100,000 investment at time-period zero, then returns $20,000 annually for 5 years? A The NPV is negative. B The NPV is zero. C The profitability index is 1.0. D The IRR is negative.

A The NPV is negative.

The decision rule for net present value is to: A accept all projects with cash inflows exceeding initial cost. B reject all projects with rates of return exceeding the opportunity cost of capital. C accept all projects with positive net present values. D reject all projects lasting longer than 10 years.

A accept all projects with cash inflows exceeding initial cost.

Prizes are often not "worth" as much as claimed. Place a value on a prize of $5,000,000 that is to be received in equal payments over 20 years, with the first payment beginning today. Assume an interest rate of 7%. A. $2,833,898.81 B. $2,911,015.68 C. $2,609,144.14 D. $2,738,304.13

A. $2,833,898.81 Annual payment = $5,000,000/20 = $250,000 PV = ($250,000 {(1/.07) - [1/.07(1.07)20]}) × (1.07) PV = $2,833,898.81

You're ready to make the last of four equal, annual payments on a $1,000 loan with a 10% interest rate. If the amount of the payment is $315.47, how much of that payment is accrued interest? A. $28.68 B. $31.55 C. $100.00 D. $315.47

A. $28.68 $315.47 - ($315.47/1.1) = $28.68

What is the present value of a four-year annuity of $100 per year that begins 2 years from today if the discount rate is 9%? A. $297.22 B. $323.97 C. $356.85 D. $272.68

A. $297.22 PV = {$100[(1/.09) - 1/.09(1.09)4]}/1.09 PV = $297.22

How much must be saved at the end of each year for the next 10 years in order to accumulate $50,000, if you can earn 9% annually? Assume you contribute the same amount to your savings every year. A. $3,291.00 B. $3,587.87 C. $4,500.33 D. $4,587.79

A. $3,291.00 Payment = $50,000/[(1.0910 - 1)/.09] Payment = $3,291.00

How much must be invested today in order to generate a 5-year annuity of $1,000 per year, with the first payment 1 year from today, at an interest rate of 12%? A. $3,604.78 B. $3,746.25 C. $4,037.35 D. $4,604.78

A. $3,604.78 PV = $1,000{(1/.12) - [1/.12(1.125)]} PV = $3,604.78

Your forecast shows $500,000 annually in sales for each of the next 3 years. If your second and third year predictions have failed to incorporate the 3% expected annual inflation, how far off in total dollar sales is your 3-year forecast? A. $45,450 B. $60,900 C. $52,550 D. $76,250

A. $45,450 Difference = $500,000 + ($500,000 × 1.03) + ($500,000 × 1.032) - ($500,000 × 3) = $45,450

What is the present value of the following payment stream, discounted at 8% annually: $1,000 at the end of year 1, $2,000 at the end of year 2, and $3,000 at the end of year 3? A. $5,022.10 B. $5,144.03 C. $5,423.87 D. $5,520.00

A. $5,022.10 PV = $1,000/1.08 + $2,000/1.082 + $3,000/1.083 PV = $5,022.10

On the day you retire you have $1,000,000 saved. You expect to live another 25 years during which time you expect to earn 6.19% on your savings while inflation averages 2.5% annually. Assume you want to spend the same amount each year in real terms and die on the day you spend your last dime. What real amount will you be able to spend each year? A. $61,334.36 B. $79,644.58 C. $79,211.09 D. $61,931.78

A. $61,334.36 Real rate = (1.0619/1.025) - 1 = .036 $1,000,000 = PMT {(1/.036) - [1/.036(1.036)25]} PMT = $61,334.36

How much should you pay for a $1,000 bond with 10% coupon, annual payments, and 5 years to maturity if the interest rate is 12%? A. $927.90 B. $981.40 C. $1,000.00 D. $1,075.82

A. $927.90 Price = $100 ( 1/.12 - 1/.12(1.12)^5) + $1,000 / (1.12)^5 Price = $100 (8.333 - 4.7286) + 567.43 Price = 360.47 + 567.43 = 927.90

A credit card account that charges interest at the rate of 1.25% per month would have an annually compounded rate of _____ and an APR of ____. A. 16.08%; 15.00% B. 14.55%; 16.08% C. 12.68%; 15.00% D. 15.00%; 14.55%

A. 16.08%; 15.00% EAR = (1 + .0125)12 - 1 = .1608, or 16.08% APR = 1.25% × 12 = 15.00%

What is the rate of return for an investor who pays $1,054.47 for a 3-year bond with coupon of 6.5% and sells the bond 1 year later for $1,037.19? A. 4.53% B. 5.33% C. 5.16% D. 4.92%

A. 4.53% Rate of Return = ($65.00 - $17.28)/$1,054.47 Rate of Return = $4.53

If stock prices follow a random walk, which of the following statement(s) is(are) correct?

A. Successive stock price changes are not related. B. The history of stock prices cannot be used to predict future returns to investors. C. Both A and B.

What is the relationship between an annually compounded rate and the annual percentage rate (APR) which is calculated for truth-in-lending laws for a loan requiring monthly payments? A. The APR is lower than the annually compounded rate. B. The APR is higher than the annually compounded rate. C. The APR equals the annually compounded rate. D. The answer depends on the interest rate.

A. The APR is lower than the annually compounded rate.

What happens to a discount bond as the time to maturity decreases? A. The coupon rate increases. B. The bond price increases. C. The coupon rate decreases. D. The bond price decreases.

A. The coupon rate increases.

Assume a bond is currently selling at par value. What will happen if the bond's expected cash flows are discounted at a rate lower than the bond's coupon rate? A. The price of the bond will increase. B. The coupon rate of the bond will increase. C. The par value of the bond will decrease. D. The coupon payments will be adjusted to the new discount rate.

A. The price of the bond will increase.

With semi-strong form market efficiency:

A. all historical information on past prices is reflected in the current stock price. B. all currently published information is reflected in the current stock price. D. Both A and B

The numerator of the rate of return formula for bond consists of the following:

A. coupon income. B. bond price change. Both A and B.

The likely effect of discounting nominal cash flows with real interest rates will be to: A. make an investment's NPV appear more attractive. B. make an investment's NPV appear less attractive. C. correctly calculate an investment's NPV if inflation is expected. D. correctly calculate an investment's NPV, regardless of expected inflation.

A. make an investment's NPV appear more attractive.

The g in the constant-growth dividend model refers to:

A. the annual growth rate for dividends. B. the annual growth rate for stock price. C. both 'a' and 'b' above.

Which group of investors is capable of earning consistent, superior profits if financial markets are semistrong-form efficient? Ignore any legal considerations.

Company insiders

What level of management is responsible for originating capital budgeting proposals?

All levels of management

Normally, which of the following statements is correct for a project with a positive NPV?

All of the above can be true.

The risk free rate stays the same at 3%, but there is a sudden jump in the market risk premium from 10% to 15%. Which of the following is CORRECT about this statement?

All of the above in a, b and c.

Which of the following bond investment strategies should be selected by an investor who wants to maximize return over a three-year investment horizon? Bond A that offers a 10% yield for two years, then rolls the proceeds into a one-year bond, Bond B that offers an 11% yield for three years, or invest in three consecutive one-year bonds?

All strategies should offer similar, risk-adjusted yields

Which of the following describes a seasoned offering?

An additional equity issue from a publicly-traded firm.

Technical analysts can provide:

An important role in stock market efficiency

The value of a call option increases with

An increase in interest rate or an increase in stock price.

Which of the following statements regarding investment in working capital in incorrect?

An investment in working capital, unlike an investment in plant and equipment, represents a positive cash flow when the investment is made

Which of the following statements regarding investment in working capital is incorrect?

An investment in working capital, unlike an investment in plant and equipment, represents a positive cash flow when the investment is made

Changes in net working capital can occur at:

Any time during the life of a project

The benefits of portfolio diversification are highest when the individual securities within the portfolio have returns that:

Are less than perfectly correlated with the rest of the portfolio

What can be expected to happen when stocks having the same expected risk do not have the same expected return?

At least one of the stocks becomes temporarily misplaced.

What can be expected to happen when stocks having the same expected risk do not have the same expected return?

At least one of the stocks becomes temporarily mispriced

What can be expected to happen when stocks having the same expected risk do not have the same expected return?

At least one of the stocks becomes temporarily mispriced.

Has limited liability (Partnership or Corporation)

Corporation

What is the annually compounded rate of interest on an account with an APR of 10% and monthly compounding? A. 10.00% B 10.47% . C. 10.52% D. 11.05%

B 10.47% EAR = [1 + (.10/12)] 12 - 1 = .1047, or 10.47%

As the discount rate is increased, the NPV of a specific project will: A increase. B decrease. C remain constant. D decrease to zero, then remain constant.

B decrease.

The opportunity cost of capital is equal to: A the discount rate that makes project NPV equal zero. B the return offered by other projects of equal risk. C a project's internal rate of return. D the average rate of return for a firm's projects.

B the return offered by other projects of equal risk.

How much more is a perpetuity of $1,000 worth than an annuity of the same amount for 20 years? Assume an interest rate of 10% and cash flows at the end of each period. A. $297.29 B. $1,486.44 C. $1,635.08 D. $2,000.00

B. $1,486.44 PVPerpetuity = $1,000/.10 = $10,000 PVAnnuity = $1,000[1/.10 - 1/.10(1.10)20] PVAnnuity = $8,513.56 Difference = $10,000 - 8,513.56 = $1,486.44

You will be receiving cash flows of: $1,000 today, $2,000 at end of year 1, $4,000 at end of year 3, and $6,000 at end of year 5. What is the present value of these cash flows at an interest rate of 7%? A. $9,731.13 B. $10,412.27 C. $10,524.08 D. $11,524.91

B. $10,412.27 PV = FV/(1 + r)t PV = $1,000 + $2,000/1.071 + $4,000/1.073 + $6,000/1.075 PV = $10,412.27

What is the present value of $100 to be deposited today into an account paying 8%, compounded semiannually for 2 years? A. $85.48 B. $100.00 C. $116.00 D. $116.99

B. $100.00

How much interest can be accumulated during one year on a $1,000 deposit paying continuously compounded interest at an APR of 10%? A. $100.00 B. $105.17 C. $110.50 D. $115.70

B. $105.17 Interest = $1,000 × e.1 - $1,000 Interest = $1,000 × 1.10517 - $1,000 Interest = $105.17

How much interest will be earned in an account into which $1,000 is deposited for one year with continuous compounding at a 13% rate? A. $130.00 B. $138.83 C. $169.00 D. $353.34

B. $138.83 Interest = $1,000(e.13) - $1,000 = $138.83

Assume your firm has an unused machine that originally cost $75,000, has a book value of $20,000, and a market value of $25,000. Ignoring taxes, what is the opportunity cost of this machine? A. $75,000 B. $25,000 C. $20,000 D. $5,000

B. $25,000

What is the present value of your trust fund if you have projected that it will provide you with $50,000 on your 30th birthday (7 years from today) and it earns 10% compounded annually? A. $25,000.00 B. $25,657.91 C. $28,223.70 D. $29,411.76

B. $25,657.91 PV = FV/(1 + r)t PV = $50,000/1.107 PV = $25,657.91

A corporation has promised to pay $1,000 20 years from today for each bond sold now. No interest will be paid on the bonds during the 20 years, and the bonds are discounted at an interest rate of 7%, compounded semiannually. Approximately how much should an investor pay for each bond? A. $70.00 B. $252.57 C. $629.56 D. $857.43

B. $252.57 PV = FV/(1 + r)t PV = $1,000/[1 + (.07/2)]20 × 2 PV = $252.57

Approximately how much should be accumulated by the beginning of retirement to provide a $2,500 monthly check that will last for 25 years, during which time the fund will earn 6% interest with monthly compounding? A. $361,526.14 B. $388,017.16 C. $402,766.67 D. $414,008.24

B. $388,017.16 Monthly interest rate = .06/12 = .005 PV = $2,500 {(1/.005) - [1/.005(1.005)12 × 25]} PV = $388,017.16

The salesperson offers, "Buy this new car for $25,000 cash or, with an appropriate down payment, pay $500 per month for 48 months at 8% interest." Assuming that the salesperson does not offer a free lunch, calculate the "appropriate" down payment. A. $1,000.00 B. $4,519.04 C. $5,127.24 D. $8,000.00

B. $4,519.04 PV = $500 × {[1/(.08/12)] - [1/(.08/12)(1 + (.08/12)48)]} PV = $20,480.96 Down payment = $25,000 - 20,480.96 = $4,519.04

The present value of an annuity stream of $100 per year is $614 when valued at a 10% rate. By approximately how much would the value change if these were annuities due? A. $10 B. $61.40 C. $10 × Number of years in annuity stream D. $6.14 × Number of years in annuity stream

B. $61.40 PVAD = PVOA × (1 + r) Difference = [PVOA × (1 + r)] - PVOA Difference = $614(1.1) - $614 = $61.40

How much can be accumulated for retirement if $2,000 is deposited annually, beginning 1 year from today, and the account earns 9% interest compounded annually for 40 years? A. $87,200.00 B. $675,764.89 C. $736,583.73 D. $802,876.27

B. $675,764.89 FV = $2,000 {[(1 + .09)40 - 1]/.09} FV = $675,764.89

How long must one wait (to the nearest year) for an initial investment of $1,000 to triple in value if the investment earns 8% compounded annually? A. 9.81 years B. 14.27 years C. 22.01 years D. 25.00 years

B. 14.27 years

After reading the fine print in your credit card agreement, you find that the "low" interest rate is actually an 18% APR, or 1.5% per month. What is the effective annual rate? A. 18.47% B. 19.56% C. 18.82% D. 19.41%

B. 19.56% EAR = 1.01512 - 1 = .1956, or 19.56%

If the future value of an annuity due is $25,000 and $24,000 is the future value of an ordinary annuity that is otherwise similar to the annuity due, what is the implied discount rate? A. 1.04% B. 4.17% C. 5.00% D. 8.19%

B. 4.17% FVAD = FVOA × (1 + r) $25,000 = $24,000 × (1 + r) r =.0417, or 4.17%

If inflation in Wonderland averaged about 3% per month in 2013, what was the annual rate of inflation? A. 36.00% B. 42.58% C. 40.09% D. 41.27%

B. 42.58% (1.03)12 - 1 = .4258, or 42.58%

What is the expected real rate of interest for an account that offers a 12% nominal rate of return when the rate of inflation is 6% annually? A. 5.00% B. 5.66% C. 6.00% D. 9.46%

B. 5.66% 1 + real interest rate = (1 + nominal interest rate)/(1 + inflation) 1 + real interest rate = 1.12/1.06 Real interest rate = 5.66%

Your retirement account has a current balance of $50,000. What interest rate would need to be earned in order to accumulate a total of $1,000,000 in 30 years, by adding $6,000 annually? A. 5.02% B. 7.24% C. 9.80% D. 10.07%

B. 7.24% Financial calculator: n = 30; PV = -50,000; PMT = -6,000; FV = 1,000,000; CPT i = 7.24%

In calculating the present value of $1,000 to be received 5 years from today, the discount factor has been calculated to be .7008. What is the apparent interest rate? A. 5.43% B. 7.37% C. 8.00% D. 9.50%

B. 7.37% FV = PV(1 + r)t 1 = .7008(1 + r)5 r = .0737, or 7.37%

If a borrower promises to pay you $1,900 nine years from now in return for a loan of $1,000 today, what effective annual interest rate is being offered if interest is compounded annually? A. 5.26% B. 7.39% C. 9.00% D. 10.00%

B. 7.39% FV = PV × (1 + r)t $1,900 = $1,000 × (1 + r)9 r = 1.91/9 - 1 r = .0739, or 7.39%

Would a depositor prefer an APR of 8% with monthly compounding or an APR of 8.5% with semiannual compounding? A. 8.0% with monthly compounding B. 8.5% with semiannual compounding C. The depositor would be indifferent. D. The time period must be known to select the preferred account.

B. 8.5% with semiannual compounding EAR = [1 + (.08/12)]12 - 1 = 8.30% EAR = [1 + (.085/2)]2 - 1 = 8.68% The depositor will prefer the option with the higher EAR (effective annual rate).

A car dealer offers payments of $522.59 per month for 48 months on a $25,000 car after making a $4,000 down payment. What is the loan's APR? A. 6% B. 9% C. 11% D. 12%

B. 9% $25,000 - 4,000 = $522.59 {(1/r) - [1/r(1 + r)48]} Using a financial calculator, r = .0075 APR = .0075 × 12 APR = .09, or 9%

What is the effective annual interest rate on a 9% APR automobile loan that has monthly payments? A. 9.00% B. 9.38% C. 9.81% D. 10.94%

B. 9.38% EAR = [1 + (.09/12)]12 - 1 = .0938, or 9.38%

Which one of the following will increase the present value of an annuity, other things equal? A. Increasing the interest rate B. Decreasing the interest rate C. Decreasing the number of payments D. Decreasing the amount of the payment

B. Decreasing the interest rate

Which one of these represents a cash outflow for a project? A. A sunk cost B. Increase in accounts receivable C. Depreciation D. Accrued expenses

B. Increase in accounts receivable

Which one of the following factors is fixed and thus cannot change for a specific perpetuity? A. Present value B. Payment amount C. Interest rate D. Discount rate

B. Payment amount

What effect is expected at the end of the life of a project that initially required a $20,000 increase in net working capital? A. The $20,000 must now be paid by the firm. B. The firm receives a $20,000 cash inflow. C. Taxable income is reduced by $20,000. D. No effects are expected because the $20,000 is now a sunk cost.

B. The firm receives a $20,000 cash inflow.

The coupon rate of a bond equals: A. its yield to maturity. B. a defined percentage of its face value. C. the yield to maturity when the bond sells at a discount. D. the annual interest divided by the current market price.

B. a defined percentage of its face value.

Nominal U.S. Treasury bond yields: A. are constant over time. B. are equal to the real yields. C. include a default premium. D. include an inflation premium.

B. are equal to the real yields.

The opportunity cost of an asset: A. should be depreciated annually. B. can differ depending on market conditions. C. is typically ignored in capital budgeting. D. is important only for parcels of land.

B. can differ depending on market conditions.

The APR on a loan must be equal to the effective annual rate when: A. compounding occurs monthly. B. compounding occurs annually. C. the loan is for less than one year. D. the loan is for more than one year.

B. compounding occurs annually.

Investors who purchase bonds having lower credit ratings should expect: A. lower yields to maturity. B. higher default possibilities. C. lower coupon payments. D. higher purchase prices.

B. higher default possibilities.

Assume you are making $989 monthly payments on your amortized mortgage. The amount of each payment that is applied to the principal balance: A. decreases with each succeeding payment. B. increases with each succeeding payment. C. is constant throughout the loan term. D. fluctuates monthly with changes in market interest rates.

B. increases with each succeeding payment.

The concept of compound interest refers to: A. earning interest on the original investment. B. payment of interest on previously earned interest. C. investing for a multiyear period of time. D. determining the APR of the investment.

B. payment of interest on previously earned interest.

How does a bond dealer generate profits when trading bonds? By lowering the bond's coupon rate upon resale By maintaining bid prices higher than ask prices By maintaining bid prices lower than ask prices By retaining the bond's next coupon payment

By maintaining bid prices lower than ask prices

How does a bond dealer generate profits when trading bonds? By retaining the bond's next coupon payment By lowering the bond's coupon rate upon resale By maintaining bid prices lower than ask prices By maintaining bid prices higher than ask prices

By maintaining bid prices lower than ask prices

Which of the following best illustrates the problem imposed by capital rationing?

Bypassing projects that have positive NPVs

Which one of the following best illustrates the problem imposed by capital rationing?

Bypassing projects that have positive NPVs

Which one of the following best illustrates the problem imposed by capital rationing? Accepting projects with the highest IRRs first Bypassing projects that have positive NPVs Accepting projects with the highest NPVs first Bypassing projects that have zero IRRs

Bypassing projects that have positive NPVs

When mutually exclusive projects have different lives, the project that should be selected will have the: A highest IRR. B longest life. C lowest equivalent annual cost. D highest NPV, discounted at the opportunity cost of capital.

C lowest equivalent annual cost.

If the IRR for a project is 15%, then the project's NPV would be: A negative at a discount rate of 10%. B positive at a discount rate of 20%. C negative at a discount rate of 20%. D positive at a discount rate of 15%.

C negative at a discount rate of 20%.

If a project's expected rate of return exceeds its opportunity cost of capital, one would expect: A the profitability index to exceed 1.0. B the opportunity cost of capital to be too low. C the IRR to exceed the opportunity cost of capital. D the NPV to be zero.

C the IRR to exceed the opportunity cost of capital.

Three thousand dollars is deposited into an account paying 10% annually to provide three annual withdrawals of $1,206.34 beginning in one year. How much remains in the account after the second payment has been withdrawn? A. $1,326.97 B. $1,206.34 C. $1,096.69 D. $587.32

C. $1,096.69 FVYear 1 = PV(1 + r) - Withdrawal FVYear 1 = $3,000(1.1) - $1,206.34 FVYear 1 = $2,093.66 FVYear 2 = FVYear 1 (1 + r) - Withdrawal FVYear 2 = $2,093.66(1.1) - $1,206.34 FVYear 2 = $1,096.69

You invested $1,200 three years ago. During the three years, you earned annual rates of return of 4.8%, 9.2%, and 11.6%. What is the value of this investment today? A. $1,498.08 B. $1,512.11 C. $1,532.60 D. $1,549.19

C. $1,532.60 FV = PV(1 + r)t FV = PV(1 + r)t (1 + r)t (1 + r)t FV = $1,200(1.048)1 (1.092)1 (1.116)1 FV = $1,532.60

How much interest will be earned in the next year on an investment paying 12% compounded annually if $100 was just credited to the account for interest? A. $88 B. $100 C. $112 D. $200

C. $112 The investment will again pay $100 plus interest on the previous interest: $100 × 1.12 = $112

A loan officer states, "Thousands of dollars can be saved by switching to a 15-year mortgage from a 30-year mortgage." Calculate the difference in payments on a 30-year mortgage at 9% interest versus a 15-year mortgage with 8.5% interest. Both mortgages are for $100,000 and have monthly payments. What is the difference in total dollars that will be paid to the lender under each loan? (Round the monthly payment amounts to 2 decimal places.) A. $89,211 B. $98,406 C. $112,410 D. $124,300

C. $112,410 $100,000 = PMT([1/(.09/12)] - 1/{(.09/12)[1 + (.09/12)]30 × 12}) PMT = $804.62 $100,000 = PMT([1/(.085/12)] - 1/{(.085/12)[1 + (.085/12)]15 × 12}) PMT = $984.74 Total difference = ($804.62 × 12 × 30) - ($984.74 × 12 × 15) = $112,410

What is the present value of a five-period annuity of $3,000 if the interest rate per period is 12% and the first payment is made today? A. $9,655.65 B. $10,814.33 C. $12,112.05 D. $13,200.00

C. $12,112.05 PVAD = PVOA × (1 + r) PVAD = {$3,000[1/.12 - 1/.12(1.12)5]} × 1.12 PVAD = $12,112.05

Your real estate agent mentions that homes in your price range require a payment of $1,200 per month for 30 years at 9% interest. What is the size of the mortgage with these terms? A. $128,035.05 B. $147,940.29 C. $149,138.24 D. $393,120.03 PV = $1,200[(1/.0075) - 1/.0075(1.0075)360] PV = $149,138.24

C. $149,138.24

$50,000 is borrowed, to be repaid in three equal, annual payments with 10% interest. Approximately how much principal is amortized with the first payment? A. $2,010.60 B. $5,000.00 C. $15,105.74 D. $20,105.74

C. $15,105.74 Payment = $50,000/[1/.1 - 1/.1(1.1)3] Payment = $20,105.74 Principal payment = $20,105.74 - ($50,000 × .1) Principal payment = $15,105.74

What is the effect on a firm's net working capital if a new project requires a $30,000 increase in inventory, a $10,000 increase in accounts receivable, a $35,000 increase in machinery, and a $20,000 increase in accounts payable? A. -$5,000 B. $10,000 C. $20,000 D. $55,000

C. $20,000 Change in NWC = $30,000 + 10,000 - 20,000 = $20,000

Company A pays its managers a fixed salary. Company B ties compensation to the performance of the stock. Which company's compensation would most help to mitigate conflicts of interest between managers and shareholders?

Company B

How much must be deposited today in an account earning 6% annually to accumulate a 20% down payment to use in purchasing a car one year from now, assuming that the car's current price is $20,000, and inflation will be 4%? A. $3,774.61 B. $3,782.20 C. $3,924.53 D. $4,080.08

C. $3,924.53 Down payment needed = ($20,000 × 1.04) × .2 = $4,160 PV = FV/(1 + r)t PV = $4,160/(1.06) PV = $3,924.53

A perpetuity of $5,000 per year beginning today is said to offer a 15% interest rate. What is its present value? A. $33,333.33 B. $37,681.16 C. $38,333.33 D. $65,217.39

C. $38,333.33 PV = $5,000 + FV/r PV = $5,000 + $5,000/.15 PV = $5,000 + $5,000/.15 PV = $38,333.33

Lester's just signed a contract that will provide the firm with annual cash inflows of $28,000, $35,000, and $42,000 over the next three years with the first payment of $28,000 occurring one year from today. What is this contract worth today at a discount rate of 7.25%? A. $88,311.08 B. $89,423.91 C. $90,580.55 D. $91,341.41

C. $90,580.55 PV = $28,000/1.0725 + $35,000/1.07252 + $42,000/1.07253 PV = $90,580.55

You are considering the purchase of a home that would require a mortgage of $150,000. How much more in total interest will you pay if you select a 30-year mortgage at 5.65% rather than a 15-year mortgage at 4.9%? (Round the monthly payment amount to 2 decimal places.) A. $86,311.18 B. $78,487.92 C. $99,595.80 D. $102,486.68

C. $99,595.80 $150,000 = PMT([1/(.0565/12)] - 1/{(.0565/12)[1 + (.0565/12)]30 × 12}) PMT = $865.85 $150,000 = PMT([1/(.049/12)] - 1/{(.049/12)[1 + (.049/12)]15 × 12}) PMT = $1,178.39 Total difference = ($865.85 × 12 × 30) - ($1,178.39 × 12 × 15) = $99,595.80

A project is expected to increase inventory by $17,000, increase accounts payable by $10,000, and decrease accounts receivable by $1,000. What is the project's cash flow from net working capital at time zero? A. -$8,000 B. $8,000 C. -$6,000 D. $6,000

C. -$6,000 Cash flow0 = -$17,000 + 10,000 + 1,000 = -$6,000

"Give me $5,000 today and I'll return $10,000 to you in 5 years," offers the investment broker. To the nearest percent, what annual interest rate is being offered? A. 12.29% B. 13.67% C. 14.87% D. 12.84%

C. 14.87% FV = PV(1 + r)t $10,000 = $5,000(1 + r)5 r = 21/5 - 1 r = .1487, or 14.87%

What is the APR on a loan that charges interest at the rate of 1.4% per month? A. 10.20% B. 14.00% C. 16.80% D. 18.16%

C. 16.80% APR = 1.4% × 12 = 16.80%

What is the minimum nominal rate of return that you should accept if you require a 4% real rate of return and the rate of inflation is expected to average 3.5% during the investment period? A. 7.36% B. 7.50% C. 7.64% D. 8.01%

C. 7.64% 1 + nominal rate = (1 + real rate)(1 + inflation rate) Nominal rate = (1.04 × 1.035) - 1 Nominal rate = 7.64%

A furniture store is offering free credit on purchases over $1,000. You observe that a big-screen television can be purchased for nothing down and $4,000 due in one year. The store next door offers an identical television for $3,650 but does not offer credit terms. Which statement below best describes the cost of the "free" credit? A. 8.75% B. 9.13% C. 9.59% D. 0%

C. 9.59% FV = PV(1 + r)t $4,000 = $3,650(1 + r) r = .0959, or 9.59%

How many monthly payments remain to be paid on an 8% mortgage with a 30-year amortization and monthly payments of $733.76, when the balance reaches one-half of the $100,000 mortgage? A. Approximately 268 payments B. Approximately 180 payments C. Approximately 91 payments D. Approximately 68 payments

C. Approximately 91 payments PV = PMT [(1/r) - 1/r(1 + r)t] $50,000 = $733.76{[1/(.08/12)] - 1/(.08/12) [1 + (.08/12)]t} t ≈ 91

A profitable firm is considering a 7-year project that requires $135,000 of new equipment which will be depreciated as MACRS 5-year property, after which time it will be worthless. When will this equipment affect the project's cash flows? A. Every year for 5 years B. At the time of purchase only C. Every year for 6 years D. Every year for 7 years

C. Every year for 6 years

A bond's yield to maturity takes into consideration: A. current yield but not any price changes. B. price changes but not the current yield. C. both the current yield and any price changes. D. neither the current yield nor any price changes.

C. both the current yield and any price changes.

Real interest rates: A. always exceed inflation rates. B. can decline to zero but no lower. C. can be negative, zero, or positive. D. traditionally exceed nominal rates.

C. can be negative, zero, or positive.

Other things being equal, the more frequent the compounding period, the: A. higher the annual percentage rate. B. lower the annual percentage rate. C. higher the effective annual interest rate. D. lower the effective annual interest rate.

C. higher the effective annual interest rate.

The correct method to handle overhead costs in capital budgeting is to: A. allocate a portion to each project. B. allocate them to projects with the highest NPVs. C. ignore all except identifiable incremental amounts. D. ignore them in all cases.

C. ignore all except identifiable incremental amounts.

Consider a 3-year bond with a par value of $1,000 and an 8% annual coupon. If interest rates change from 8 to 6% the bond's price will: A. increase by $51.54. B. decrease by $51.54. C. increase by $53.46. D. decrease by $53.46.

C. increase by $53.46. PV = $80 [1/.06 - 1/.06I(1.06)^3] + $1,000/(1.06)^3 PV = $80 [16.667 - 13.994] + $1,000/(1.06)^3 PV = $213.84 + $839.63 PV = $1,053.47 Price change = $1,053.47 - $1,000 = $53.46

Assume your uncle recorded his salary history during a 40-year career and found that it had increased 10-fold. If inflation averaged 4% annually during the period, then over his career his purchasing power: A. remained on par with inflation. B. increased by nearly 1% annually. C. increased by nearly 2% annually. D. decreased.

C. increased by nearly 2% annually. FV = PV(1 + r)t 10 = 1(1 + i)40 r = 5.93% Real rate = (1.0593/1.04) - 1 = .0186, or 1.86%

When an investor purchases a $1,000 par value bond that was quoted at 97.162, the investor: A. receives 97.162% of the stated coupon payments. B. receives $971.62 upon the maturity date of the bond. C. pays 97.162% of face value for the bond. D. pays $10,971.62 for a $10,000 face value bond.

C. pays 97.162% of face value for the bond.

What is the decision rule in the case of sign changes that produce multiple IRRs for a project?

Evaluate the project according to NPV

Corporate income statements are designed primarily to show: A. cash flows during a period. B. account balances at the end of a period. C. performance during a period. D. market values of assets and liabilities.

C. performance during a period.

For an all-equity firm, adding depreciation expense to net profit equals:

Cash flows from operations

Company A pays its managers a fixed salary. Company B ties compensation to the performance of the stock. Other things equal, which company would experience the greatest variation in earnings?

Company A

A bond's PAR VALUE can also be called its:

FACE value

Which of the following would not be associated with a zero-coupon bond?

Current yield

Which of the following projects would you feel safest in accepting? Assume the opportunity cost of capital to be 12% for each project. A "A" has a small, but negative, NPV. B "B" has a positive NPV when discounted at 10%. C "C's" cost of capital exceeds its rate of return. D "D" has a zero NPV when discounted at 14%.

D "D" has a zero NPV when discounted at 14%.

Which of the following investment criteria takes the time value of money into consideration? A Net present value B Profitability index C Internal rate of return for borrowing projects D All of these

D All of these

What should occur when a project's net present value is determined to be negative? A The discount rate should be decreased. B The profitability index should be calculated. C The present value of the project cost should be determined. D The project should be rejected.

D The project should be rejected.

What is the amount of the annual coupon payment for a bond that has 6 years until maturity, sells for $1,050, and has a yield to maturity of 9.37%? A. $98.64 B. $95.27 C. $101.38 D. $104.97

D. $104.97 1,050 = pmt [1/.0937 - 1/.0937(1.0937)^6] + 1000/(1.0937)^6 = 104.97

Eighteen years from now, 4 years of college are expected to cost $150,000. How much more must be deposited into an account today to fund this expense if you could only earn 8% rather than the 11% you had hoped to earn on your savings? A. $12,211.18 B. $13,609.21 C. $14,006.41 D. $14,614.03

D. $14,614.03 Additional deposit = $150,000/1.0818 - $150,000/1.1118 Additional deposit = $14,614.03

If $120,000 is borrowed for a home mortgage, to be repaid at 9% interest over 30 years with monthly payments of $965.55, how much interest is paid over the life of the loan? A. $120,000 B. $162,000 C. $181,458 D. $227,598

D. $227,598 Interest = ($965.55 × 12 × 30) - $120,000 = $227,598

Assume the total expense for your current year in college equals $20,000. How much would your parents have needed to invest 21 years ago in an account paying 8% compounded annually to cover this amount? A. $952.46 B. $1,600.00 C. $1,728.08 D. $3,973.11

D. $3,973.11 PV = $20,000/(1.08)21 PV = $3,973.11

What is the discount factor for $1 to be received in 5 years at a discount rate of 8%? A. .4693 B. .5500 C. .6000 D. .6806

D. .6806 PV = FV/(1 + r)t PV = 1/1.085 PV = .6806

What is the APR on a loan with an effective annual rate of 15.26% and weekly compounding of interest? A. 14.35% B. 14.49% C. 13.97% D. 14.22%

D. 14.22% APR = [(1.1526)1/52 - 1] × 52 = .1422, or 14.22%

If the effective annual rate of interest is known to be 16.08% on a debt that has quarterly payments, what is the annual percentage rate? A. 4.02% B. 10.02% C. 14.50% D. 15.19%

D. 15.19% APR = [(1.1608).25 - 1] × 4 APR = .1519, or 15.19%

What will be the approximate population of the United States, if its current population of 300 million grows at a compound rate of 2% annually for 25 years? A. 413 million B. 430 million C. 488 million D. 492 million

D. 492 million FV = PV(1 + r)t FV = 300 million × (1.02)25 FV = 492.2 million ≈ 492 million

Would you prefer a savings account that paid 7% interest compounded quarterly, 6.8% compounded monthly, 7.2% compounded weekly, or an account that paid 7.5% with annual compounding? A. 7% compounded quarterly B. 6.8% compounded monthly C. 7.2% compounded weekly D. 7.5% compounded annually

D. 7.5% compounded annually EAR = [1 + (.07/4)]4 - 1 = .0719, or 7.19% EAR = [1 + (.068/12)]12 - 1 = .0702, or 7.02% EAR = [1 + (.072/52)]52 - 1 = .0746, or 7.46% EAR = APR = 7.5%

Which one of the following bonds would be likely to exhibit a greater degree of interest rate risk? A. A zero-coupon bond with 20 years until maturity B. A coupon-paying bond with 20 years until maturity C. A floating-rate bond with 20 years until maturity D. A zero-coupon bond with 30 years until maturity

D. A zero-coupon bond with 30 years until maturity

Which one of the following is least likely to influence the opportunity cost of an asset? A. Its current market value B. Alternative uses for the asset C. The current demand for the asset D. Its current book value

D. Its current book value

Net working capital is expected to increase by $25,000 over the 5-year life of a project. What is the effect of net working capital on the project's net present value if the cost of capital is 15%? A. NPV will not be affected because the $25,000 will all be recouped. B. NPV will increase by $12,429.42. C. NPV will decrease by $25,000. D. NPV will decrease by $12,570.58.

D. NPV will decrease by $12,570.58. CF0 = - $25,000 CF5 = ($25,000/1.155) = $12,429.42 ΔNPV = -$25,000 + 12,429.42 = $12,570.58

A project will reduce the amount of inventory that a firm must carry. What effect will this have on the project's cash flows if all inventory is purchased for cash? A. There will only be a cash outflow at time zero. B. There will be no effect on the cash flows since the inventory has already been paid for. C. There will be a cash outflow at time zero and an equal cash inflow when the project ends. D. There is an assumed cash outflow equal to the inventory reduction at the end of the project.

D. There is an assumed cash outflow equal to the inventory reduction at the end of the project.

Under which of the following conditions will a future value calculated with simple interest exceed a future value calculated with compound interest at the same rate? A. The interest rate is very high. B. The investment period is very long. C. The compounding is annually. D. This is not possible with positive interest rates.

D. This is not possible with positive interest rates.

A stream of equal cash payments lasting forever is termed: A. an annuity. B. an annuity due. C. an installment plan. D. a perpetuity.

D. a perpetuity.

If interest is paid m times per year, then the per-period interest rate equals the: A. effective annual rate divided by m. B. compound interest rate times m. C. effective annual rate. D. annual percentage rate divided by m.

D. annual percentage rate divided by m.

The present value of a perpetuity can be determined by: A. multiplying the payment by the interest rate. B. dividing the interest rate by the payment. C. multiplying the payment by the number of payments to be made. D. dividing the payment by the interest rate.

D. dividing the payment by the interest rate.

An interest rate that has been annualized using compound interest is termed the: A. simple interest rate. B. annual percentage rate. C. discounted interest rate. D. effective annual interest rate.

D. effective annual interest rate.

When an investment pays only simple interest, this means: A. the interest rate is lower than on comparable investments. B. the future value of the investment will be low. C. the earned interest is nontaxable to the investor. D. interest is earned only on the original investment.

D. interest is earned only on the original investment.

Projects that have negative NPVs should be: A. depreciated over a longer time period. B. charged less in overhead costs. C. discounted using lower rates. D. rejected or abandoned.

D. rejected or abandoned.

Cash flows occurring in different periods should not be compared unless: A. interest rates are expected to be stable. B. the flows occur no more than one year from each other. C. high rates of interest can be earned on the flows. D. the flows have been discounted to a common date.

D. the flows have been discounted to a common date.

An amortizing loan is one in which: A. the principal remains unchanged with each payment. B. accrued interest is paid regularly. C. the maturity of the loan is variable. D. the principal balance is reduced with each payment.

D. the principal balance is reduced with each payment.

Which of the following is a characteristic of a dealer market, rather than auction market, for common stock?

Dealers may not all offer the same price for the same security.

will increase the present value of an annuity, other things equal?

Decreasing the interest rate

Which of the following will increase the present value of an annuity, other things equal? Increasing the interest rate. Decreasing the interest rate. Decreasing the number of payments. Decreasing the amount of the payment.

Decreasing the interest rate.

U.S. Treasury bond yields do not contain a:

Default premium

Which of the following is incorrect regarding a company's tax bill and depreciation?

Depreciation requires cash paments. And, because depreciation reduces taxable income, it reduces taxes.

Which one of the formulas in incorrect?

Depreciation tax shield = depreciation x (1-tax rate)

Which is incorrect?

Depreciation tax shield = depreciation × (1 - tax rate)

Which one of the following methods will provide a correct analysis for capital budgeting purposes? Discounting nominal cash flows with real rates. Discounting nominal cash flows with either real or nominal rates. Discounting real cash flows with real rates. Discounting real cash flows with nominal rates.

Discounting real cash flows with real rates.

Risk factors that are expected to affect only a specific firm are referred to as

Diversifiable risk.

What is the best way to reduce market exposure risks?

Diversification

The required return on an equity security is comprised of a:

Dividend yield and a capital gains yield.

Common stock can be valued using the perpetuity valuation formula if the:

Dividends are not expected to grow

The current yield of a bond can be calculated by:

Dividing the annual coupon payments by the price.

Which of the following are incorrect when we calculate the cash flows of a proposed new project?

Do include debt interest payment as an expence in figuring out cash flows.

Which of the following is correct for a bond priced at $1,100 that has ten years remaining until maturity, and a 10% coupon, with semiannual payments?

Each payment of interest equals $50.

Studies indicate that stocks of firms with the best earnings news outperform the stocks of firms with the worst earnings news for at least six months. What type of market anomaly is this?

Earnings announcement puzzle

If a stock's price decreased during the past week, what is the most likely prediction about this week's price change?

Either direction of price change is equally likely.

If the coupon rate is lower than current interest rates, then the yield to maturity will be:

Equal to the coupon rate.

What is the future value of a series of $2000 end of year deposits into an IRA account paying 5% interest, over a period of 35 years? --financial calculator needed

FV=$180,640.61 n=35 i=5 PV=0 PMT=2000

A bond's par value can also be called its:

Face value

If the correlation of prices between two stocks is 0.35, then the price of one stock would be expected to:

Fall when the other stock price falls

(T/F) Accurate capital budgeting analysis depends on total cash flows as opposed to incremental cash flows.

False

(T/F) Investments in working capital, just like investments in plant and equipment, result in cash inflows at time zero.

False

(T/F) Sunk costs influence capital budgeting decisions only when the sunk costs exceed future cash inflows.

False

A bond's rate of return is equal to its coupon payment divided by the price paid for the bond.

False

A long-term investor would more likely be interested in a bond's current yield rather than its yield to maturity.

False

Holding all else the same, the higher a company's debt ratio the higher its stock beta?

False

It would be realistic to read an ask price listed as 100.127 and a bid price of 100.143.

False

Market risk can be eliminated in a stock portfolio through diversification.

False

Stock value is always increased whenever earnings are plowed back into the firm.

False

The dividend discount model does not hold for investors who have a preference for capital gains.

False

True or False The current yield measures the bond's total rate of return. True False

False

Which of the following are investment decisions, and which are financing decisions? Do we need a bank loan to help buy the inventory?

Financing decision

Which of the following are investment decisions, and which are financing decisions? With the savings we make from our new inventory system, it may be possible to increase our dividend.

Financing decision

For firms in a mature stage of life with free cash flows, why can it make sense for managers to waste cash?

Firms with excess cash can become acquisition candidates, making them want to reduce cash holdings. Since cash is accumulating, companies perhaps don't have good investment options, and may engage in mergers that are more a bootstrap effect, than due to synergy. Managers might do this to save their jobs, which might not be in the interest of the shareholders.

Which of the following is least assured for firms that plowback a portion of earnings into the firm?

Growth in stock price

Which of the following best characterizes the difference between growth stocks and income stocks?

Growth stocks have greater PVGO.

It is possible to ignore each dividends that occur far into the future when using a dividend discount model because those dividends:

Have an insignificant present value

How is it possible to ignore cash dividends that occur far into the future when using a dividend discount model? Those dividends:

Have an insignificant present value.

The rationale for not including sunk costs in capital budgeting decisions is that they:

Have no incremental effect

Stocks that have the same expected risk should:

Have the same expected rate of return.

Other things being equal, which one of the following would be consistent with a relatively low price/earnings ratio for a firm?

High financial risk, like a sudden jump in the debt to equity ratio.

Which of the following is inconsistent with a firm that sells for very near book value?

High future earning power

Firms with valuable intangible assets are more likely to show a(n):

High going-concern value.

Which of the following is least likely to contribute to going concern value?

High liquidation value

Investors who own bonds having lower credit ratings should expect:

Higher default possibilities.

Given a set future value, which of the following will contribute to a lower present value?

Higher discount rate

Given a set future value, which of the following will contribute to a lower present value? Higher discount rate Fewer time periods Less frequent discounting Lower discount factor

Higher discount rate

Which of the following is least likely to account for an excess of market value over book value of equity?

Inaccurate depreciation methods

Which one of the following is least likely to account for an excess of market value over book value of equity?

Inaccurate depreciation methods

Which one of these represents a cash outflow for a project?

Increase in accounts receivable

Which one of these represents a cash outflow for a project? Accrued expenses A sunk cost Depreciation Increase in accounts receivable

Increase in accounts receivable

If an investor purchases a bond when its current yield is higher than the coupon rate, then the bond's price will be expected to:

Increase over time, reaching par value at maturity.

Which of the following should increase the firm's sustainable growth rate?

Increase the plowback ratio

LookGood, Inc. has just announced the bad news that its earnings have dropped by 30 percent. In fact, its investors had anticipated even worse results (a decrease of 40 percent). As a result, LookGood's stock price:

Increases

Which of the following will reduce the yield to maturity from what the investor calculated at time of purchase?

Increasing interest rates; bonds sold before maturity.

Other things equal, a firm's sustainable growth rate could increase as a result of

Increasing the plowback ratio

Other things equal, a firm's sustainable growth rate could increase as a result of:

Increasing the plowback ratio

To calculate purchasing power parity we use

Inflation and the spot and forward exchange rate

As the coupon rate of a bond increases, the bond's:

Interest payments increases

Which of these strategies should offer Sam Spinach the same expected return as a stock with a beta of .75?

Investing a 75% of his money in the market portfolio and investing the remainder in T-bills.

Expenditure on research and development (Financial decision or Investment decision)

Investment decision

Which of the following are investment decisions, and which are financing decisions? Should we develop a new software package to manage our inventory?

Investment decision

Which of the following are investment decisions, and which are financing decisions? Should we stock up with inventory ahead of the holiday season?

Investment decision

Which of the following are investment decisions, and which are financing decisions? With a new automated inventory management system, it may be possible to sell off our Birdlip warehouse.

Investment decision

The rise of the dot.coms in the late 1990s is probably due to:

Investors being reluctant to incur losses and being overconfident

If it proves possible to make abnormal profits based on information regarding past stock prices, then the market:

Is not weak-form efficient

Dividing a stock's earnings per share by the expected rate of return will value the share correctly if no new shares are issued and the dividend yield:

Is zero

Which of the following is true for a firm having a stock price of $42, an expected dividend of $3, and a sustainable growth rate of 8%?

It has a required return of 15.14%

The fisher equation concerns the relationship between

Nominal interest rate and inflation

For a firm that pays no corporate taxes, changing its capital structure will have what impact on cash flows and risk of cash flows

None

Which of the following is incorrect regarding the measurement and interpretation of the beta of a security?

None. They are all correct statements.

In the calculation of rates of return on common stock, dividends are _______ and capital gains are ______.

Not guaranteed; not guaranteed

In the calculation of rates of return on common stock, dividends are and capital gains are .

Not guaranteed; not guaranteed

Technical analysts are most likely to be successful in a market that is considered:

Not to be weak-form efficient

The purpose of a floating-rate bond is to:

Offer rates adjusted to current market conditions.

Bootstrap effect

Only short term increase in EPS

Which of the following statements always apply to corporations? Unlimited liability Limited life Ownership can be transferred without affecting operations Managers can be fired with no effect on ownership

Ownership can be transferred without affecting operations Managers can be fired with no effect on ownership

With respect to the notion that stock prices follow a random walk, several researchers have concluded that:

Past stock price changes provide little useful information about current stock prices.

Which of the following investment decision rules tends to improperly reject long-lived projects?

Payback period

Which of the following investment decision rules tends to improperly reject long-lived projects? Payback period Profitability index Net present value Internal rate of return

Payback period

Which of the following investment criteria takes the time value of money into consideration? Profitability index, internal rate of return, and net present value Internal rate of return and net present value only Profitability index and net present value only Net present value only

Profitability index, internal rate of return, and net present value

Which mutually exclusive project would you select, if both are priced at $1,000 and your required return is 15%: Project A with three annual cash flows of $1,000; or Project B, with 3 years of zero cash flow followed by 3 years of $1,500 annually?

Project A

Projects A and B are mutually exclusive lending projects. Project A has an IRR of 20% while Project B has an IRR of 30%. You would be most apt to select Project A if:

Project A is twice the size of Project B

Allocations of overhead should not affect a project's incremental cash flows unless the:

Project actually changes the total amount of overhead expenses

A proposed investment must earn at least as much as the ________ if it is to be considered acceptable.

Project cost of capital

Listed on a stock exchange (Closely held corporation or Public corporation)

Public corporation

Research indicates that the correlation coefficient between successive days' stock price changes is:

Quite close to zero

When taxes are ignored, which of the following can be used to calculate the weighted average cost of capital?

Ratio of expected operating income to market value of all securities

Is the following a real asset or a financial asset? A truck

Real asset

Is the following a real asset or a financial asset? An experienced and hardworking sales force

Real asset

Is the following a real asset or a financial asset? Undeveloped land

Real asset

Which of the following statements best describes the real interest rate? Real interest rates exceed inflation rates. Real interest rates can decline only to zero. Real interest rates can be negative, zero, or positive. Real interest rates traditionally exceed nominal rates.

Real interest rates can be negative, zero, or positive.

describes the real interest rate?

Real interest rates can be negative, zero, or positive.

Which of the following is correct concerning real interest rates?

Real interest rates, if positive, indicate increased purchasing power.

A firm's liquidation value is the amount:

Realized from selling all assets and paying off all creditors

A firm's liquidation value is the amount:

Realized from selling all assets and paying off its creditors.

Given a positive discount rate, which one of the following changes would increase the NPV for a project?

Realizing a net decrease in working capital

Evaluate the following project using an IRR criterion, based on an opportunity cost of 10%: C0 = -$6,000, C1 = $3,300, C2 = $3,300.

Reject; because the opportunity cost exceeds the IRR

When valuing stock with the dividend discount model, the present value of future dividends will:

Remain constant regardless of the time horizon selected.

Which one of the following lists present the order of financing from most preferred to least preferred according to the pecking-order theory?

Retained earnings, debt issue, stock issue.

Which one of these is a specific risk? Inflation increase of 2.3% Revision to the corporate tax laws Reduction in the overall economic output Retirement of a company executive

Retirement of a company executive

Which one of the following techniques may be more appropriate to analyze projects with interrelated variables?

Scenario analysis

Which one of the following techniques may be more appropriate to analyze projects with interrelated variables? Scenario analysis DOL analysis Sensitivity analysis Break-even analysis

Scenario analysis

Which of the following is a characteristic of secondary markets for common stock?

Secondary-market trades do not provide funds for corporations whose stock is traded.

The primary governement agency responsible for enforcing federal securities laws

Securities Exchange Commission

The Securities Exchange Act of 1934 created the:

Securities Exchange Commission (SEC).

The statement that there are no free lunches on Wall Street suggests that:

Security prices reflect all available information

When market interest rates exceed a bond's coupon rate, the bond will:

Sell for more than par value.

If stock prices incorporate all publicly available information, then the market is considered to be:

Semi-strong-form efficient

Analysis results indicate that a project's level of success is primarily dependent upon the firm controlling the variable costs. What type of analysis was conducted? Scenario analysis Sensitivity analysis Real option analysis Break-even analysis

Sensitivity analysis

When new information becomes available in the market, evidence suggests that:

Stock prices will adjust to the information rapidly

Which of the following statements is incorrect regarding the present value of a stock?

Stockholders generally expect to receive cash dividends but not capital gains or losses.

Under which of the following forms of market efficiency would stock prices always reflect fair value?

Strong-form efficiency

When investors are not capable of making superior investment decisions on a continual basis based on past prices, public or private information, the market is said to be:

Strong-form efficient

Security prices are said to follow a "random walk," which means that:

Successive price changes are unpredictable

According to the constant dividend growth model, a stock price should equal the:

Sum of all discounted future dividends

TRUE or FALSE The discount factor refers to the present value of a $1 future payment

TRUE

TRUE or FALSE The nominal interest rate can be defined as an interest rate quoted today by a financial institution on a loan or investment, such as an APR or a periodic rate

TRUE

TRUE or FALSE? The time value of money functions that are provided by your financial calculator are also available as functions in an Excel spreadsheet

TRUE

What happens to the coupon rate of a $1,000 face value bond that pays $80 annually in interest if market interest rates change from 9% to 10%? The coupon rate remains at 8%. The coupon rate increases to 10%. The coupon rate remains at 9%. The coupon rate decreases to 8%.

The coupon rate remains at 8%.

What happens to the coupon rate of a bond that pays $80 annually in interest if interest rates change from 9% to 10%?

The coupon rate remains at 8%.

When a depreciable asset is ultimately sold, the sale price is:

Taxable to the extent that the sales price exceeds book value

Trends of past stock market prices would be considered useful or even essential to a(n):

Technical analyst

An investor holds two bonds, one with 5 years until maturity and the other with 20 years until maturity. Which of the following is more likely if interest rates suddenly increase by 2%?

The 20-year bond will decrease more in price.

An investor holds two bonds, one with five years until maturity and the other with 20 years until maturity. Which of the following is more likely if interest rates suddenly increase by 2%?

The 20-year bond will decrease more in price.

Which one of the following should be assumed about a project that requires a $100,000 investment at time zero, then returns $20,000 annually for 5 years?

The NPV is negative

Why may the IRR criterion lead to an incorrect decision when applied to mutually exclusive projects?

The NPV of mutually exclusive projects cross over at some discount rate

organized security exchanges

The New York Stock Exchange (NYSE) and the American Stock Exchange (AMEX) are both known as

What happens to a discount bond as the time to maturity decreases?

The bond price increases.

Which of the following is correct when a bond investor's rate of return for a particular period equals the bond's coupon rate?

The bond price remained unchanged during the period.

what would be the effect on the bond price, if the bond instead has a time to maturity of more than 10 years?

The bond price will be higher.

Which of the following statements is correct for a 10% coupon bond that has a current yield of 7%?

The bond's maturity value is lower than the bond's price.

The current yield tends to overstate a bond's total return when the bond sells for a premium because:

The bond's price will decline each year.

The current yield tends to understate a bond's total return when the bond sells for a discount because:

The bond's price will increase each year.

What causes bonds to sell for a premium compared to face value?

The bonds have a higher than market coupon rate.

What will happen to the expected return on a stock with a beta of 1.5 and a market risk premium of 9% if the Treasury bill yield increases from 3% to 5%?

The expected return will increase by 2.0%.

The opportunity to abandon a project loses some of its value when:

The future of the project is relatively certain

When the real rate of interest is less than the nominal rate of interest, then

The inflation rate is positive

The interest rate per period is most properly defined as

The interest rate that is applied to the current balance every compounding period

Which of the following factors will change when interest rates change?

The present value of a bond's payments

Which one of the following is a situation where a new project will require a cash investment in net working capital?

The project will increase inventory more than accounts payable

Which one of the following is a situation where a new project will require a cash investment in net working capital? Inventory levels will be reduced when the project is introduced. The project will require additional inventory which will be financed by a supplier. All sales related to the project will be cash sales to a subsidiary. The project will increase inventory more than accounts payable.

The project will increase inventory more than accounts payable.

Which one of the following capital budgeting proposals is most apt to be associated with a conflict of interests? The proposal to solve pollution problems cited by the EPA The proposal with the longest payback period The proposal with the highest IRR and quickest payback The proposal with the highest NPV

The proposal with the highest IRR and quickest payback

What is the relationship between a bondholder's rate of return and the bond's yield to maturity if he does not hold the bond until it matures? - The rate of return will be higher than the yield to maturity. - There is no predetermined relationship between the rate of return and the yield to maturity. - The rate of return will equal the yield to maturity. - The rate of return will be lower than the yield to maturity.

The rate of return will be lower than the yield to maturity.

The opportunity cost of a resource should be considered in project analysis, unless

The resource has no identifiable market value.

The opportunity cost of capital is equal to:

The return offered by other projects of equal risk

A maturity premium is offered on long-term Treasury bonds due to

The risk of changing interest rates

Which of the following is incorrect regarding diversification and risk reduction?

The risk that can be eliminated through diversification is known as market risk.

Which one of the following situations is most likely to occur today for a stock that went down in price yesterday?

The stock has no predictable price-change pattern

A firm plans to use the profitability index to select between two mutually exclusive investments. If no capital rationing has been imposed, which project should be selected?

Without capital rationing, the NPV method must be used instead

Net present value is the present value of the cash inflows, discounted at the project cost of capital, subtracted from it the initial investment.

True

True or False A Treasury bond's bid price will be lower than the ask price.

True

True or False A bond's payment at maturity is referred to as its face value. True False

True

True or False Asked yields can be guaranteed only to investors who buy a bond and hold it until maturity. True False

True

When the market interest rate exceeds the coupon rate, bonds sell for less than face value to provide enough compensation to investors.

True

Zero-coupon bonds are issued at prices below face value, and the investor's return comes from the difference between the purchase price and the payment of face value at maturity.

True

Nominal cash payments should be discounted using a nominal interest rate

True regarding the present value of a stream of cash payments

Real cash payments should be discounted using a real interest rate

True regarding the present value of a stream of cash payments

A company reports significantly higher earnings on a Monday. You purchase the stock on Tuesday and earn superior returns in the absence of other new information. The market appears to be:

Weak-form efficient at the best.

Which of the following is CORRECT regarding correlation and beta, when retating historical return of stock to the market portfolio?

When the regression line (line of best fit) plots horizental relative to the X-axis, this indicates a stock beta of zero.

Firms that make investment decisions based on the payback rule may be biased toward rejecting projects:

With long lives.

Is the following an advantage in separating ownership and management in large corporations? The corporation survives even if managers are dismissed.

Yes

What is the minimum amount shareholders should expect to receive in the event of a complete corporate liquidation?

Zero

What is the minimum amount that shareholders should expect to receive in the event of a complete corporate liquidation?

Zero

The coupon rate of a bond equals: its yield to maturity. the yield to maturity when the bond sells at a discount. a defined percentage of its face value. the annual interest divided by the current market price.

a defined percentage of its face value.

We can imagine the financial manager doing several things on behalf of the firm's stockholders. For example, the manager might do the following: a. Make shareholders as wealthy as possible by investing in real assets. b. Modify the firm's investment plan to help shareholders achieve a particular time pattern of consumption. c. Choose high- or low-risk assets to match shareholders' risk preferences. d. Help balance shareholders' checkbooks. However, in well-functioning capital markets, shareholders will vote for only one of these goals. Which one will they choose?

a. Make shareholders as wealthy as possible by investing in real assets

Which one of the following risks is most important to a well-diversified investor in common stocks? a. Market risk b. Unique risk c. Unsystematic risk d. Diversifiable risk

a. Market Risk

If a project's cash flows exceed the project's incremental cash flows, it is likely that the: a. project interacts with other aspects of the firm. b. project must have high depreciation expense. c. opportunity cost of capital must be high. d. project will have a negative NPV.

a. project interacts with other aspects of the firm.

A tax shield is equal to the reduction in a firm's: a. total tax liability resulting from a tax deductible expense. b. taxable income resulting from depreciation c. taxable income resulting from a decrease in long-term debt. d. net income caused by depreciation

a. total tax liability resulting from a tax deductible expense.

The variance of an investment's returns is a measure of the: a. volatility of the rates of return. b. probability of a negative return. c. historic return over long time periods. d. average value of the investment.

a. volatility of the rates of return

As a result of its IPO, Facebook received

about the maximum value that it could

The decision rule for net present value is to:

accept all projects with positive net present value

The decision rule for net present value is to: reject all projects lasting longer than 10 years. reject all projects with rates of return exceeding the opportunity cost of capital. accept all projects with positive net present values. accept all projects with cash inflows exceeding the initial cost.

accept all projects with positive net present values.

According to the semi strong form of market efficiency, when new information becomes available in the market, the related stock prices will:

accurately and rapidly adjust to include this new information

According to the semistrong form of market efficiency, when new information becomes available in the market, the related stock prices will:

accurately and rapidly adjust to include this new information.`

If two projects offer the same positive NPV, then they:

add the same amount of value to the firm

If sensitivity analysis concludes that the largest impact on profits would come from changes in the sales level, then: variable costs should be traded for fixed costs. fixed costs should be traded for variable costs. additional marketing analysis may be beneficial before proceeding. the project should not be undertaken.

additional marketing analysis may be beneficial before proceeding.

equity markets

are quite dynamic in terms of processing trades and incorporating information in prices and thus are considered very efficient markets

An analyst who relies on past cycles of stock pricing to make investment decisions is:

assuming that the market is not even weak-form efficient

Joseph signs a contract with a company that will pay him $25,000. Following the principles of the time value of money, Joseph would be best off if he received payment:

at the beginning of the project

The variance of a stock's returns can be calculated as the: average value of squared deviations from the mean. average value of deviations from the mean. sum of the deviations from the mean. square root of the average value of deviations from the mean.

average value of squared deviations from the mean.

Which of the following is least likely to be responsible for a regional manager's conflict of interest in promoting a capital budgeting proposal? a. Desire for professional advancement b. Thorough knowledge of the region c. Overly optimistic economic forecasts d. The need for quick profitability

b. Thorough knowledge of the region

Which one of the following risk types can be most eliminated by adding stocks to a portfolio? a. Systematic risk b. Unique risk c. Market risk d. Inflation rate risk

b. Unique risk

The coupon rate of a bond equals: a. its yield to maturity. b. a defined percentage of its face value. c. the yield to maturity when the bond sells at a discount. d. the annual interest divided by the current market price.

b. a defined percentage of its face value.

An increase in depreciation expense will (other things equal): a. increase net income. b. decrease net income. c. increase cash flow. d. decrease the market value of assets.

b. decrease net income.

The wider the dispersion of returns on a stock, the: a. lower the expected rate of return. b. higher the standard deviation. c. lower the real rate of return. d. lower the variance.

b. higher the standard deviation.

If a bond is priced at par value, then: a. it has a very low level of default risk. b. its coupon rate equals its yield to maturity. c. it must be a zero-coupon bond. d. the bond is quite close to maturity.

b. its coupon rate equals its yield to maturity.

When a manager does not accept a positive-NPV project, shareholders face an opportunity cost in the amount of the: a. project's initial cost. b. project's NPV. c. project's discounted cash flows. d. soft capital rationing budget.

b. project's NPV.

Firms that make investment decisions based upon the payback rule may be biased toward rejecting projects: a. with short lives. b. with long lives. c. with early cash inflows. d. that have negative NPVs.

b. with long lives.

The discount rate that makes the present value of a bond's payments equal to its price is termed the: a. dividend yield. b. yield to maturity. c. current yield. d. coupon rate.

b. yield to maturity.

The statement "We've got too much invested in that project to pull out now" possibly illustrates the need to:

be reacquainted with sunk costs

A project's payback period is determined to be 4 years. If it is later discovered that additional cash flows will be generated in years 5 and 6, then the project's payback period will:

be unchanged

The variance of an investment's returns is a measure of the:

volatility of the rates of return.

Which of the following changes in working capital is least likely, given an increase in the overall level of sales? a. An increase in inventories b. An increase in accounts payable c. A decrease in accounts receivable d. A decrease in accruals

c. A decrease in accounts receivable

If a project is expected to increase inventory by $17,000, increase accounts payable by $10,000, and decrease accounts receivable by $1,000, what effect does working capital have during the life of the project? a. Increases investment by $4,000. b. Increases investment by $5,000. c. Increases investment by $6,000. d. Working capital has no effect during the life of the project.

c. Increases investment by $6,000.

Which of the following is not subtracted from sales revenues to determine pretax profit? a. Depreciation b. Fixed costs c. Interest expense d. Variable costs

c. Interest expense

Project A has an IRR of 20% while Project B has an IRR of 30%. Under which of the following situations might you be inclined to select Project A, assuming the projects to be mutually exclusive, lending projects? a. Project A is more risky. b. Project A requires a smaller initial investment. c. Project A requires a larger initial investment. d. Project A requires cash outflows in the final period.

c. Project A requires a larger initial investment.

Which one of the following is most apt to be correct for a CCC-rated bond, compared to a BBB-rated bond? a. The CCC bond will have a variable-coupon rate. b. The CCC bond will have a shorter term. c. The CCC bond will offer a higher promised yield to maturity. d. The CCC bond will have a higher price for the same term.

c. The CCC bond will offer a higher promised yield to maturity.

If a firm earns the WACC as an average return on its average-risk assets, then: a. equityholders will be satisfied, but bondholders will not. b. bondholders will be satisfied, but equityholders will not. c. all investors will earn their minimum required rate of return. d. the firm is investing in only positive NPV projects.

c. all investors will earn their minimum required rate of return.

The opportunity to abandon a project loses some of its value when: a. fixed costs are high. b. markets are extremely competitive. c. the future is relatively certain. d. secondary markets exist and are active.

c. the future is relatively certain.

The opportunity cost of an asset: is typically ignored in capital budgeting. can differ depending on market conditions. should be depreciated annually. is important only for parcels of land.

can differ depending on market conditions.

Use of a profitability index to evaluate mutually exclusive projects in the absence of capital rationing:

can result in misguided selections

Use of a profitability index to evaluate mutually exclusive projects in the absence of capital rationing: will provide the same rankings as an NPV criterion. will maximize NPV, but not IRR. is technically impossible. can result in misguided selections.

can result in misguided selections.

If the price of a stock falls on 4 consecutive days of trading, then stock prices

can still be following a random walk

A firms investment decision is also called the:

capital budgeting decision

NPV fails as a decision rule when the firm encounters:

capital rationing

examples of annuities

car payment, house payments, annual $1,000 contribution to retirement account

A project can have as many different internal rates of return as it has:

changes in the sign of cash flows

A project can have as many different internal rates of return as it has: changes in the sign of the cash flows. cash outflows. periods of cash flow. cash inflows.

changes in the sign of the cash flows.

stock split

commonly a 2-for-1

Positive NPV projects exist because: a. analysts select sufficiently low discount rates. b. most projects are unique and innovative. c. cash-flow projections are extended into the future. d. of competitive advantages held by firms.

d. of competitive advantages held by firms.

A firm with high operating leverage is expected to: a. have high variable costs. b. have low fixed costs. c. have a high degree of profitability. d. perform better when sales are high.

d. perform better when sales are high.

The opportunity cost of a resource should be considered in project analysis, unless: a. negative cash flows result from its use. b. the resource was purchased in a prior time period. c. the resource has been fully depreciated. d. the resource has no identifiable market value.

d. the resource has no identifiable market value

If the general sentiment of investors is pessimistic, stock prices are more apt to

decline

If the general sentiment of investors is pessimistic, stock prices are more apt to:

decline

Will increase the PV of an investment

decrease the i rate

As the discount rate is increased, the NPV of a specific project will:

decrease4

An interest rate that has been annualized using compound interest is termed the: simple interest rate. annual percentage rate. discounted interest rate. effective annual interest rate.

effective annual interest rate.

A market that establishes correct prices for the securities that firms sell and allocates funds to their most productive uses is called a(n) ________. futures market forex market efficient market stock market

efficient market

The company cost of capital is the return that is expected on a portfolio of the company's: existing securities. debt securities. proposed securities. equity securities.

existing securities.

A bond's par value can also be called its: market value. face value. present value. coupon payment.

face value.

Which of the following is an example of agency cost? payment of interest failure of making the best investment decision payment of income tax costs incurred for setting up an agency

failure of making the best investment decision

Is a forum in which suppliers and demanders of funds can transact business directly

financial markets

Which of the following is a forum in which suppliers and demanders of funds can transact business directly? financial markets financial institutions

financial markets

If the liquidation value of a corporation exceeds the market value of the equity, then the:

firm has no value as a going concern

If the present value of the tax shield equals the present value of the costs of financial distress, then the:

firms market value equals the value of the unlevered firm

The "trade-off theory" of capital structure suggests that:

firms with higher risk should use less debt

A traditional (non-growing) annuity consists of a _____ stream of cash flows for a fixed period of time

fixed

The accounting break-even level of sales represents the point where:

fixed costs, variable costs, and depreciation are covered

The accounting break-even level of sales represents the point where: variable costs are covered. fixed costs, variable costs, and depreciation are covered. fixed costs and variable costs are covered. fixed costs are covered.

fixed costs, variable costs, and depreciation are covered.

dividend payout ratio

fraction of earnings paid out in dividends

For a firm that repurchases its stock, the dividend discount model might best be applied to the firm's:

free cash flows

Firms that lack competitive advantages will: be forced to operate with a high degree of operating leverage. be forced to capture larger market shares to be profitable. have difficulty finding positive NPV projects for investment. avoid the need to conduct sensitivity analyses.

have difficulty finding positive NPV projects for investment.

The rationale for not including sunk costs in capital budgeting decisions is that they: have no incremental effect. reduce the project's net present value. revert at the end of the investment. are usually small in magnitude.

have no incremental effect.

If you were willing to bet that the overall stock market was heading up on a sustained basis, it would be logical to invest in:

high beta stocks.

If you were willing to bet that the overall stock market was heading up on a sustained basis, it would be logical to invest in: low beta stocks. high beta stocks. stocks that plot below the security market line. stocks with large amounts of unique risk.

high beta stocks.

Firms with valuable intangible assets are more likely to show a(n):

high going-concern value

Investors who purchase bonds having lower credit ratings should expect: lower coupon payments. higher purchase prices. lower yields to maturity. higher default possibilities.

higher default possibilities.

6. If the coupon rate is lower than current interest rates, then the yield to maturity will be:

higher than the coupon rate

If the coupon rate is lower than current interest rates, then the yield to maturity will be:

higher than the coupon rate.

Other things being equal, the more frequent the compounding period, the

higher the effective annual interest rate.

Other things being equal, the more frequent the compounding period, the: higher the APR. lower the APR. higher the effective annual interest rate. lower the effective annual interest rate.

higher the effective annual interest rate.

The wider the dispersion of returns on a stock, the: lower the variance. lower the expected rate of return. lower the real rate of return. higher the standard deviation.

higher the standard deviation.

When projects are mutually exclusive, selection should be made according to the project with the:

highest NPV

Soft capital rationing is imposed upon a firm from _____ sources, while hard capital rationing is imposed from _____ sources. internal; internal external; external internal; external external; internal

internal; external

When managers cannot determine whether to invest now or wait until costs decrease later, the rule should be to:

invest at the date that provides the highest NPV today

When managers cannot determine whether to invest now or wait until costs decrease later, the rule should be to: invest now to maximize the NPV. postpone until costs reach their lowest level. invest at the date that provides the highest NPV today. postpone until the opportunity cost reaches its lowest level.

invest at the date that provides the highest NPV today.

A positive value for PVGO suggests that the firm has:

investment opportunities with superior returns

A positive value for PVGO suggests that the firm has:

investment opportunities with superior returns.

The investment timing decision is aimed at analyzing whether the:

investment should occur now or at some future point.

Which one of these probably contributed the least to the dot.com bubble?

investors risk aversion

A firm's WACC: is the proper discount rate for every project the firm undertakes. is used to value all of the firm's existing projects. is a benchmark discount rate that is adjusted for the riskiness of each project. is an informational value only and should never be used as a discount rate.

is a benchmark discount rate that is adjusted for the riskiness of each project.

british console bond

is a perpetuity

compound interest

is simply the interest earned in subsequent periods on the interest earned in prior periods

seasoned equity offering

is the process by which a public firm issues new shares.

In addition to the number of stocks represented, a difference between the S&P 500 and the Dow is that the S&P 500:

is value-weighted while the Dow is price-weighted.

Ignoring taxes, a firm's weighted-average cost of capital is equal to:

its expected return on assets

Ignoring taxes, a firms weighted average cost of capital is equal to

its expected return on assets

Which of the following statements is true for a project with a $20,000 initial cost, cash inflows of $5,800 per year for 6 years, and a discount rate of 15%?

its payback period is 3.45 years

What happens to a firm that reinvests its earnings at a rate equal to the firm's required return?

its stock price will remain constant

You can continue to use your less efficient machine at a cost of $8,000 annually for the next 5 years. Alternatively, you can purchase a more efficient machine for $12,000 plus $5,000 annual maintenance. At a cost of capital of 15%, you should:

keep the old machine and save $580 in equivalent annual costs

The profitability index selects projects based on the:

largest return per dollar invested

The profitability index selects projects based on the: highest net discounted value at time zero. highest internal rate of return. largest return per dollar invested. largest dollar investment per rate of return.

largest return per dollar invested.

maturity

length of time until the bond is redeemed

Market interest rates have risen substantially in the five years since an investor purchased Treasury bonds that were offering a 7% return. If the investor sells now she is likely to receive:

less than a 7% total return.

Technical analysts are most likely to be successful in a market that is considered to be

less than weak-form efficient

Which of the following is a strength of a corporation? limited liability less government regulation low taxes low organization costs

limited liability

When the overall market experiences a decline of 8%, investors with portfolios of aggressive stocks will probably experience portfolio: losses of less than 8%. gains of less than 8%. gains greater than 8%. losses greater than 8%.

losses greater than 8%.

When mutually exclusive projects have different lives, the project that should be selected will have the:

lowest equivalent annual cost.

When mutually exclusive projects have different lives, the project that should be selected will have the: highest NPV, discounted at the opportunity cost of capital. lowest equivalent annual cost. highest IRR. longest life.

lowest equivalent annual cost.

The likely effect of discounting nominal cash flows with real interest rates will be to: make an investment's NPV appear more attractive. correctly calculate an investment's NPV, regardless of expected inflation. correctly calculate an investment's NPV if inflation is expected. make an investment's NPV appear less attractive.

make an investment's NPV appear more attractive.

Investors want to

maximize return and minimize risk

The sustainable growth rate represents the ___ rate at which a firm can grow:

maximum; while maintaining a constant debt-equity ratio

The sustainable growth rate represents the ____ rate at which a firm can grow

maximum; while maintaining a constant debt-equity ratio

The sustainable growth rate represents the ____ rate at which a firm can grow:

maximum; while maintaining a constant debt-equity ratio

at its most basic level the function of financial intermediaries is to

move money from lenders to borrowers and back again

The modified internal rate of return can be used to correct for:

multiple internale rates of return

The sustainable rate of growth:

must be moderate over the long-term even if it is high in the short-term.

If the opportunity cost of capital for lending project exceeds the project's IRR, then the project has an

negative NPV

If the opportunity cost of capital for a lending project exceeds the project's IRR, then the project has a(n): positive profitability index. positive NPV. acceptable payback period. negative NPV.

negative NPV.

If the IRR for a project is 15%, then the project's NPV would be:

negative at a discount rate of 20%.

If the IRR for a project is 15%, then the project's NPV would be:

negative at any discount rate after 15%

If the IRR for a project is 15%, then the project's NPV would be:

negative at discount ate of 20%

The "gold standard" of investment criteria refers to the:

net present value

When a project's internal rate of return equals its opportunity cost of capital, then the:

net present value will be zero

When a project's internal rate of return equals its opportunity cost of capital, then the: project should be rejected. net present value will be positive. net present value will be zero. project has no cash inflows.

net present value will be zero.

As a key participant in financial transactions individuals are

net suppliers of funds because they save more money then they borrow

Which of the following statements is incorrect regarding internal rate of return of a project?

none of the above is incorrect.

Under the assumptions necessary for MM I, if investors can borrow or lend at the same terms as the firm, they will:

not be willing to pay more for a restructured firm

In the calculation of rates of return on common stock, dividends are ___ and capital gains are ___.

not guaranteed; not guaranteed

In the calculation of rates of return on common stock, dividends are _______ and capital gains are ______.

not guaranteed; not guaranteed

If it proves possible to make abnormal profits based on information regarding past stock prices, then the market is:

not weak-form efficient

the number of periods for a consumer loan is equal to

number of years times compounding periods per year

annuity due pymt

occur at the begining

ordinary annuity pymt

occur at the end of the period

If a security plots below the security market line, it is: offering too little return to justify its risk. underpriced, a situation that should be temporary. ignoring all of the security's unique risk. a defensive security, which expects to offer lower returns.

offering too little return to justify its risk.

According to the NPV rule, all projects should be accepted if NPV is positive when discounted at the:

opportunity cost of capital

A firm is said to be countercyclical if its returns:

outperform when most stocks do poorly

If The Wall Street Journal lists a stock's dividend as $1, then it is most likely the case that the stock:

paid $.25 per share per quarter for the past year

With respect to the notion that stock prices follow a random walk, several researchers have concluded that:

past stock price changes provide little useful information about current stock prices

Which of the following investment decision rules tends to improperly reject long-lived projects?

payback period

Generally, the order of cost, from the least expensive to the most expensive, for long-term capital of a corporation is

preferred stock, retained earnings, common stock, and new common stock

Capital losses will automatically be the case for bond investors who buy:

premium bonds.

the problem of motivating one party to act in the best interest of another party is known as the

principal agent problem

One definition of return

profit (or loss) / original cost

The ratio of net present value to initial investment is known as the:

profitability index

Which of the following investment criteria takes the time value of money into consideration?

profitability index, IRR, NPV

Which of the following investment criteria takes the time value off money into consideration?

profitability index, internal ate of return, and net present value

glass segal act

prohibited institutions that took deposits from engaging in activities such as security underwriting and trading which separated commercial and investment banks

Allocations of overhead should not affect a project's incremental cash flows unless the:

project actually changes the total amount of overhead expenses.

When a manager does not accept a positive-NPV project, shareholders face an opportunity cost in the amount of the:

project's NPV

When a manager does not accept a positive-NPV project, shareholders face an opportunity cost in the amount of the: soft capital rationing budget. project's initial cost. project's discounted cash inflows. project's NPV.

project's NPV.

If the net present value of project that costs $20,000 is $5,000 when the discount rate is 10%, then the:

project's rate of return is greater than 10%

The basic tenet of the CAPM is that a stock's expected risk premium should be: greater than the expected market return. proportionate to the market return. greater than the risk-free rate of return. proportionate to the stock's beta.

proportionate to the stock's beta.

An estimation of the opportunity cost of capital for projects that have an "average" level of risk is the rate of return on: Treasury bills. the market portfolio minus the rate of return on Treasury bills. Treasury bonds plus a maturity premium. the market portfolio.

the market portfolio.

On the Security Market Line (SML), which is a graph of the CAPM, the point on the line (SML) corresponding to a beta of 1 represents the rate of return of:

the market portfolio.

Your broker suggests that you can make consistent, excess profits by purchasing stocks on the 20th of the month and selling them on the last day of the month. If this is true, then:

the market violates even weak-form efficiency

Your broker suggests that you can make consistent, excess profits by purchasing stocks on the 20th of the month and selling them on the last day of the month. If this is true, then

the market violates even weak-form efficiency.

If no price change occurs in a stock on the day that it announces its next dividend, it can be assumed that:

the market was expecting this information

residual dividend policy

the practice of paying dividends with only the amount remaining after accepting all positive NPV projects

What should occur when a project's net present value is determined to be negative?

the project should be rejected.

Which one of the following is a situation where a new project will require a cash investment in net working capital?

the project will increase inventory more than accounts payable

The company (firm) cost of capital may be an inappropriate discount rate for a capital budgeting proposal if:

the proposed project has a different degree of risk then the overall firm.

the form of business organization in the US that has the greatest amount of capital is

the publicly traded corporation

According to MM II, as a firms debt-to-equity ratio decreases:

the required rate of return on equity decreases

The opportunity cost of capital is equal to:

the return offered by other projects of equal risk

The Securities Act of 1933 deals primarily with:

the sale of new securities.

The appropriate opportunity cost of capital is the return that investors give up on alternative investments with:

the same risk.

borrowing and lending projects can usually be distinguished by whether...

the time-zero cash flow is positive or negative

Macro events only are reflected in the performance of the market portfolio because: the unique risks have been diversified away. the market portfolio contains only risk-free securities. the firm-specific events would be too numerous to quantify. only macro events are tracked by economists.

the unique risks have been diversified away.

Investors are willing to purchase stocks having high P/E ratios because

they expect these shares to have greater growth opportunities

Investors are willing to purchase stocks having high P/E ratios because:

they expect these shares to have greater growth opportunities

why don't we include sunk costs in capital decisions?

they have no incremental effect

How many IRRs are possible for the following set of cash flows? CF0 = -$1,000, C1 = $500, C2 = -$300, C3 = $1,000, C4 = $200.

three

Which of the following is the best measure to ensure that management decisions are in the best interests of the stockholders? tie management pay to the level of dividends per share tie management pay to the performance of the company's common stock price remove management perks fir managers who are inefficient

tie management pay to the performance of the company's common stock price

One method that can be used to increase the NPV of a project is to decrease the:

time until the receipt of cash inflows

The return on a security includes premiums for: time value of money and market risk. unique risk and firm-specific risk. market risk and unique risk. diversification and portfolio risk.

time value of money and market risk.

A project costing $20,000 generates cash inflows of $9,000 annually for the first 3 years, followed by cash outflows of $1,000 annually for 2 years. At most, this project has ______ different IRR(s).

two

debenture

unsecured bond

You are analyzing a project that is equivalent to borrowing money. This project's:

value increases when the cost of capital increases

The benefits of portfolio diversification are highest when the individual securities have returns that:

vary indirectly (inversely) with the rest of the portfolio.

To calculate the present value of a business, the firm's free cash flows should be discounted at the firm's: aftertax cost of debt. weighted-average cost of capital. cost of equity. pre-tax cost of debt.

weighted-average cost of capital.

When will you be indifferent between two mutually exclusive projects of similar size?

when the required return on the projects is equal to the crossover discount rate

discount loan

when you pay off the principal and all of the interest at one time at the maturity date of the loan

The money market is a market

which brings together suppliers and demanders of short term funds