Finance Final
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%? A. $1.33 B. $1.49 C. $1.58 D. $1.67
B
The most likely reason that underpricing of new issues occurs more frequently than overpricing is that: A. underwriters want to reduce the risk of a firm commitment. B. the demand for a new issue is typically too high. C. underwriters earn low rates of return. D. issuing firms demand that equity be underpriced.
A
The weighted-average cost of capital for a firm with a 65/35 debt/equity split, 8% pre-tax cost of debt, 15% cost of equity, and a 35% tax rate would be: A. 8.63%. B. 9.12%. C. 10.45%. D. 13.80%.
A
Which one of the following equity concepts would you expect to be least important to a financial analyst? A. Par value per share B. Additional paid-in capital C. Retained earnings D. Net common equity
A
What is the expected yield on the market portfolio at a time when Treasury bills yield 6% and a stock with a beta of 1.4 is expected to yield 18%? A. 8.67% B. 10.84% C. 12.02% D. 14.57%
D
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? A. 8.69 years B. 5.37 years C. 7.51 years D. 4.46 years
D
If the opportunity cost of capital for a lending project exceeds the project's IRR, then the project has a(n): A. positive NPV. B. negative NPV. C. acceptable payback period. D. positive profitability index.
B
Those who benefit from the interest tax shield are: A. debtholders. B. equityholders. C. both debtholders and equityholders. D. only the firm's customers.
B
For most managers, discounted cash-flow analysis is in fact the dominant tool for project evaluation.
True
Historically speaking, the market risk premium in Italy has been higher than that of the United States.
True
If a low-risk company invests in a high-risk project, those cash flows should be discounted at a high cost of capital.
True
If a project has a zero NPV when the expected cash flows are discounted at the weighted- average cost of capital, then the project's cash flows are just sufficient to give debtholders and shareholders the return they require.
True
If one portfolio's variance exceeds that of another portfolio, its standard deviation will also be greater than that of the other portfolio.
True
If shareholders do not like the policies that management pursues, their easiest solution is to vote in a different board of directors.
True
In a rights offering, the shares are priced at a substantial discount to current market value, which ensures that the shareholders will either exercise the rights themselves or sell them to other investors.
True
Unlike using IRR, selecting projects according to their NPV will always lead to a correct accept- reject decision
True
A firm has perpetual debt of $10 million at an interest rate of 7%. What is the present value of the interest tax shield if the tax rate is 35%? A. $245,000 B. $700,000 C. $3,500,000 D. $10,000,000
C
A stock split will affect the stock's price, while a stock dividend will not.
False
All financial managers and economists believe that long-run historical returns are the best available measure of future returns.
False
A corporation with funded fixed-rate debt might prefer floating-rate debt if it thought that: A. interest rates would be declining. B. interest rates would be increasing. C. its bond rating might be lowered. D. its bonds were going to be converted into equity.
A
Which statement is true concerning the one-year after-tax return on the following stocks, assuming a 40% tax rate on dividends and a 20% tax rate on capital gains: Stock A is purchased for $50, offers a 5% dividend yield, and is sold for $56; stock B is purchased for $60, offers no dividend yield, but is sold after one year for $70. A. Stock A's after-tax return is higher by 1.27%. B. Stock B's after-tax return is higher by .73%. C. Stock A's after-tax return is higher by .27%. D. Stock B's after-tax return is higher by .58%.
B
Why do stock market investors seem to ignore unique risks when calculating expected rates of return? A. There is no method for quantifying unique risks. B. Unique risks are assumed to be diversified away. C. Unique risks are compensated by the risk-free rate. D. Beta includes a component to compensate for unique risk.
B
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
A stock has a beta of 1.4 and an expected return of 13.53%. What is the risk-free rate if the market rate of return is 10.6%? A. 2.825% B. 3.250% C. 3.275% D. 3.415%
C
A stock is currently selling for $40 a share. If the firm declares a 3-for-2 stock dividend there will be: A. two-thirds as many shares outstanding priced at $60 each. B. three times as many shares outstanding priced at $26.67 each. C. 50% more shares outstanding priced at $26.67 each. D. one-and-one-half times as many shares outstanding price at $60 each.
C
If a company's cost of capital is less than the required return on equity, then the firm: A. is financed with more than 50% debt. B. is perceived to be safe. C. has debt in its capital structure. D. is all equity financed.
C
The weighted-average cost of capital for a firm with a 40/60 debt/equity split, 8% cost of debt, 15% cost of equity, and a 34% tax rate would be: A. 12.20%. B. 8.63%. C. 11.11%. D. 13.80%.
C
A firm just issued 15,000 new shares of stock with a market price of $14 per share and par value of $2 per share. Which one of these correctly states the resulting change in the equity accounts? A. Capital surplus will increase by $180,000 B. Retained earnings will decrease by $210,000 C. Common stock will increase by $15,000 D. Common stock will increase by $210,000
A
A stock goes ex-dividend: A. two business days prior to the record date. B. two business days after the declaration date. C. three business days prior to the record date. D. three business days prior to the payment date.
A
An increase in a firm's financial leverage will: A. increase the variability in earnings per share. B. always reduce the operating risk of the firm. C. increase the value of the firm in a non-MM world. D. increase the WACC.
A
An investor was expecting a return of 14.7% on her portfolio with a beta of 1.13 before the market risk premium decreased from 8 to 7%. Based on this change, what return should she now expect on the portfolio? A. 13.57% B. 13.89% C. 14.67% D. 15.87%
A
Assume a firm is financed with 30% debt on which it pays 9%. What is the expected return on equity if the expected return on assets is 14%? A. 16.14% B. 17.86% C. 14.92% D. 15.50%
A
Based on the dividend growth model, the price of a stock will remain constant if the dividend is cut, provided that the: A. required return on the stock is proportionately increased. B. growth rate in dividends remains constant. C. reduction is offset by an increase in the growth rate. D. growth rate is decreased by the percent decrease in the dividend.
A
Calculate the WACC for a firm that pays 10% on its debt, requires an 18% rate of return on its equity, finances 45% of assets with debt, and has a tax rate of 35%. A. 12.83% B. 14.00% C. 14.40% D. 18.20%
A
How are investors most apt to interpret a reduction in a firm's regular dividend payment? A. Earnings are expected to decline. B. New investments are expected to increase. C. Stock repurchases are expected to increase. D. Share price is expected to increase.
A
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
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
MM's proposition II without taxes states that the: A. expected return on equity increases as financial leverage increases. B. expected return on assets decreases as expected return on debt decreases. C. firm's capital structure is irrelevant to the firm's overall value. D. greater the proportion of equity, the higher the expected return on debt.
A
To calculate the present value of a business, the firm's free cash flows should be discounted at the firm's: A. weighted-average cost of capital. B. pre-tax cost of debt. C. aftertax cost of debt. D. cost of equity.
A
What is the IRR for a project that costs $100,000 and provides annual cash inflows of $30,000 for 6 years starting one year from today? A. 19.91% B. 16.67% C. 15.84% D. 22.09%
A
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
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? A. $27.55 B. $30.28 C. $26.60 D. $31.37
A
When new shares of stock are sold at a price greater than par value, the excess over par is recorded as: A. capital surplus. B. retained earnings. C. treasury stock. D. authorized capital.
A
When securities are issued under a rights issue: A. existing shareholders have the opportunity to expand their holdings. B. shares are offered to the public at a discount. C. the existing shares will increase in price. D. current shareholders have the right to resell their stock to the issuer.
A
When underwriters issue securities on a best efforts basis, they: A. sell as much of the stock as possible, but with no guarantee. B. submit a bid for purchase, which the issuer compares to other bids. C. buy the entire issue from the firm. D. guarantee that the issuer will be charged the minimum spread.
A
Which one of the following statements about floating-rate preferred stock is correct? A. Its dividends increase as interest rates increase. B. Its market price increases at a set rate annually. C. It is the only stock issued without a par value. D. Its dividends are deductible for tax purposes by the paying corporation.
A
Which one of the following statements is correct concerning stock dividends? A. Common stock dividends cannot be paid if preferred stock dividends are in arrears. B. Preferred stock dividends cannot be paid if common stock dividends are in arrears. C. Common and preferred dividends must be paid simultaneously. D. No stock dividends can be paid without specific shareholder approval.
A
A firm has 12,000 shares of common stock outstanding with a book value of $20 per share and a market value of $39. There are 5,000 shares of preferred stock with a book value of $10 and a market value of $26. There is a $400,000 face value bond issue outstanding that is selling at 87% of par. What weight should be placed on the preferred stock when computing the firm's WACC? A. 7.25% B. 13.74% C. 11.48% D. 15.09%
B
A firm has just issued $250 million of equity which caused its stock price to drop by 3%. Calculate the loss in value of the firm's equity given that its market value of equity was $1 billion before the new issue. A. $7.5 million B. $30.0 million C. $33.3 million D. $37.5 million
B
A major purpose of the prospectus is to: A. inform investors of the security's rate of return. B. advise investors of the security's potential risks. C. distribute stock warrants to prospective investors. D. list the security's dividend payment dates.
B
A portfolio consists of an index mutual fund which represents the overall market and Treasury bills. The fund has a portfolio weight of 60%. The risk-free rate is 3.2% and the market risk premium is 7.6%. What is your best estimate of the portfolio expected rate of return? A. 8.39% B. 7.76% C. 10.80% D. 9.02%
B
A project with higher than average risk offers an expected return of 14%. Which statement is correct if the company's opportunity cost of capital is 12% and the project's opportunity cost of capital is 15%? A. Project NPV is positive; it should be accepted. B. Project NPV is negative; it should be rejected. C. Project NPV is positive but it should be rejected. D. Project NPV is negative but it should be accepted.
B
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? A. $82.20 B. $86.20 C. $87.20 D. $91.20
B
A stock's par value is represented by the: A. maturity value of the stock. B. price at which each share is recorded. C. price at which an investor could sell the stock. D. price received by the firm when the stock was issued.
B
According to pecking-order theory, managers will often choose to finance with: A. new equity rather than debt, due to bankruptcy costs. B. debt rather than new equity, to avoid reduced share price. C. debt rather than retained earnings, to lower the WACC. D. new equity rather than debt, to strengthen EPS.
B
According to the semistrong form of market efficiency, when new information becomes available in the market, the related stock prices will: A. remain unchanged because they already reflect this information. B. accurately and rapidly adjust to include this new information. C. adjust to accurately reflect this new information over the course of the next few days. D. most likely increase because all new information has a positive effect on stock prices.
B
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
Company X has 2 million shares of common stock outstanding at a book value of $2 per share. The stock trades for $3 per share. It also has $2 million in face value of debt that trades at 90% of par.What is the weight of debt for WACC purposes? A.13.91% B.23.08% C.31.03% D.27.67%
B
Financial risk refers to the: A. risk of owning equity securities. B. risk faced by equityholders of firms with debt. C. general business risk of the firm. D. possibility that interest rates will increase.
B
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
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
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
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
If the net present value of a project that costs $20,000 is $5,000 when the discount rate is 10%, then the: A. project's IRR equals 10%. B. project's rate of return is greater than 10%. C. net present value of the cash inflows is $4,500. D. project's cash inflows total $25,000.
B
In general, which stocks should be combined into a portfolio if the goal is the greatest reduction possible in overall portfolio risk? A. Stocks with returns that are positively correlated B. Stocks with returns that are negatively correlated C. Stocks with returns that are not correlated D. Stocks that have the highest expected returns
B
Stock repurchases are most commonly interpreted by investors as a signal that: A. future repurchases will be forthcoming. B. the firm's shares are underpriced. C. the firm has an increasing number of positive-NPV opportunities. D. stock repurchases will gradually replace the stock dividends.
B
The expected return on a common stock is equal to: A. [(1 + dividend yield) × (1 + capital appreciation rate)] - 1. B. the capital appreciation rate + dividend yield. C. (1 + capital appreciation rate)/(1 + dividend yield). D. the capital appreciation rate - dividend yield.
B
The idea that investors in a common stock may expect a lower total return if they purchase a stock with limited price volatility rather than one with high price volatility suggests that: A. investors are irrational. B. there is a relationship between risk and return. C. real rates of return will be lower during periods of price stability. D. stocks should be avoided when inflation is low.
B
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
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
The yield-to-maturity of a firm's bond is 8.5%. The firm has a beta of 1.3 and a tax rate of 34%. The market risk premium is 8.4% and the risk-free rate is 3.8%. What is the firm's WACC if the firm has a capital structure that is 40% debt financed? A. 10.74% B. 11.08% C. 11.61% D. 11.38%
B
What appears to be the targeted debt ratio of a firm that issues $15 million in bonds and $35 million in equity to finance its new capital projects? A. 15% B. 30% C. 35% D. 43%
B
What is the approximate variance of returns if over the past 3 years an investment returned 8%, -12%, and 15%? A. 31 B. 131 C. 182 D. 961
B
Which one of the following lists presents the order of financing from most preferred to least preferred according to the pecking-order theory? A. Debt issue, stock issue, internally generated funds B. Internally generated funds, debt issue, stock issue C. Stock issue, internally generated funds, debt issue D. Internally generated funds, stock issue, debt issue
B
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
When a firm announces a two-for-one stock split (in the absence of other new information), investors should expect that: A. the earnings per share will decrease by 50% but the stock price will remain constant. B. the stock price will decrease by 50% but earnings per share will remain constant. C. both the earnings per share and the stock price will remain the same. D. both earnings per share and the stock price will decrease by 50%.
D
When corporate taxes are considered, how does leverage affect the WACC? A. An increase in leverage will be offset by a decrease in equity financing, thus leaving WACC unchanged. B. Changes in leverage will affect the WACC only if the interest rate on debt changes. C. Increased leverage will increase the WACC. D. Increased leverage will decrease the WACC.
D
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
Which one of the following is correct for a firm with $400,000 in net earnings, 50,000 shares, and a 30% payout ratio? A. Retained earnings will increase by $120,000. B. Each share will receive a $1.20 dividend. C. $120,000 will be spent on new investments. D. The dividend per share will be $2.40.
D
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
Which one of the following statements is incorrect concerning the equity component of the WACC? A. The value of retained earnings is excluded. B. Market values should be used in the calculations. C. Preferred equity is a separate component of WACC. D. There is a tax shield on the dividends paid.
D
Which one of these statements is correct? A. Betas are exact measurements. B. If a stock has a very low beta, it is most apt to maintain that beta in the future. C. The expected future risk premium is easy to accurately determine. D. CAPM is widely used as a means of valuing stock.
D
Which one of these statements is correct? A. Dividends tend to fluctuate in direct relation to changes in annual earnings. B. Managers are less concerned with the change in the dividend than with the actual amount of the dividend. C. Managers tend to avoid smooth dividends as they don't signal the firm's most recent successes. D. Managers tend to only increase dividends when they believe the increased amount can be sustained.
D
Which one of these terms applies to a public company offering new shares to the general public? A. Rights offer B. Initial public offering C. Venture capital offer D. General cash offer
D
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%? A. 2.14% B. 1.71% C. 12.89% D. 16.06%
D
There is little doubt that the CAPM captures everything that is going on in the market.
False
Issue costs for debt are considerably lower than issue costs for equity securities.
True
MM's dividend irrelevance proposition is based on an efficient market system with no taxes or issue costs.
True
Once you recognize the fact that debt also increases financial risk and causes shareholders to demand a higher return on their investment, debt is no cheaper than equity.
True
Shares of stock that have been issued and subsequently repurchased by the issuer are known as treasury stock.
True
Suppose a firm needs fresh capital, but its management does not want to give up its controlling interest. The existing shares could be labeled Class A, and then Class B shares with limited voting rights could be issued to outside investors.
True
The "trade-off theory" of capital structure suggests that firms have an optimal level of debt.
True
The CAPM states that the expected risk premium on any security equals its beta times the market risk premium.
True
The S&P 500 accounts for nearly 75% of the total market value of stocks traded in the United States.
True
The SEC requires the sale of a private placement to be limited to a small number of knowledgeable investors.
True
The benefit of an interest tax shield is captured by the equity holders.
True
The capital asset pricing model (CAPM) assumes that the stock market is dominated by well- diversified investors who are concerned only with market risk.
True
The company cost of capital is the expected rate of return that investors demand from the company's assets and operations.
True
The expected return on an investment includes compensation for both the time value of money and the risks assumed.
True
The expected return on an investment provides compensation to investors both for waiting and for worrying.
True
The gap between internally generated cash and the cash that the company needs is called the financial deficit.
True
The pecking-order theory of capital structure depicts the fact that firms prefer internal financing to avoid sending out adverse signals that may lower the stock price.
True
The price at which new shares are sold to investors almost always exceeds par value. The difference is entered into the company's accounts as additional paid-in capital, or capital surplus.
True
The security market line sets a standard for other investments—investors will be willing to hold other investments only if they offer equally good prospects as shown by the points on the line.
True
The weighted-average cost of capital is the return the company needs to earn after tax in order to satisfy all its security holders.
True
Underwriters usually play a triple role—first providing the company with procedural and financial advice, then buying the stock, and finally reselling it to the public.
True
Weighted-average cost of capital is the expected rate of return on a portfolio of all the firm's securities, adjusted for tax savings related to interest payments.
True
When a public company makes a general cash offer of debt or equity, it essentially follows the same procedure used when it first went public.
True
When asked about key factors of debt policy, financial managers commonly mention the tax advantage of debt and the importance of maintaining their credit rating.
True
When choosing among mutually exclusive projects, the choice is easy using the NPV rule. As long as at least one project has positive NPV, simply choose the project with the highest NPV.
True
When firms retain cash, they are generating funds internally thereby decreasing the amount of external funds needed.
True
When securities are issued under a firm commitment, the underwriter bears the risk of low sales.
True
When there are no taxes and capital markets function well, the market value of a company does not depend on its capital structure.
True
When using a profitability index to select projects, a value of .63 is preferred over a value of .21
True
A firm's WACC: A. is the proper discount rate for every project the firm undertakes. B. is used to value all of the firm's existing projects. C. is a benchmark discount rate that is adjusted for the riskiness of each project. D. is an informational value only and should never be used as a discount rate.
C
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
A project has an assigned beta of 1.24, the risk-free rate is 3.8%, and the market rate of return is 9.2%. What is the project's expected rate of return? A. 15.21% B. 11.41% C. 10.50% D. 14.61%
C
A proxy contest is typically one in which: A. the Board attempts to gain control from the shareholders. B. management attempts to gain control from the Directors. C. outsiders attempt to gain control from management. D. the Board attempts to gain control from the Directors.
C
A secondary offering IPO occurs when: A. new shares are sold to provide the company with additional funds. B. the second public issue of equity becomes available. C. the company's founders or venture capitalists market a portion of their shares. D. not all of the shares in a primary IPO were sold.
C
A stock is expected to return 11% in a normal economy, 19% if the economy booms, and lose 8% if the economy moves into a recessionary period. The economists predict a 65% chance of a normal economy, a 25% chance of a boom, and a 10% chance of a recession. What is the expected return on the stock? A. 11.98% B. 12.06% C. 11.10% D. 11.23%
C
An increase in which one of the following is most apt to decrease the WACC of a firm that has both debt and equity in its capital structure? A. Firm's beta B. Market rate of return C. Tax rate D. Yield on preferred stock
C
An investor exercises the right to buy one additional share at $20 for every five shares held. How much should each share be worth after the rights issue if they previously sold for $50 each? A. $35.00 B. $41.67 C. $45.00 D. $46.00
C
An investor owns 300 shares of stock currently selling for $70 per share. After a 3-for-2 stock split, the investor will have: A. 200 shares selling for $93.10 each. B. 200 shares selling for $105.00 each. C. 450 shares selling for $46.67 each. D. 450 shares selling for $93.10 each.
C
An investor receives a 15% total return by purchasing a stock for $40 and selling it after one year with a 5% capital gain. How much was received in dividend income during the year? A. $2.00 B. $2.20 C. $4.00 D. $4.40
C
Boards of directors may be legally restricted in their declaration of dividends if: A. cash must be borrowed for the dividend payment. B. dividends have increased substantially over a short period of time. C. the dividend would create a situation of insolvency. D. the stock is selling at a low relative price.
C
Bonds that have been sold only to a limited number of institutional investors are considered: A. secured bonds. B. convertible bonds. C. private placements. D. indexed bonds.
C
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
Given a particular set of project cash flows, which one of the following statements must be correct? A. There can be only one NPV for the project, even with multiple discount rates. B. There can be only one IRR for the project. C. There can be more than one IRR for the project. D. There can be only one profitability index for the project, even with multiple discount rates.
C
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
If a security plots below the security market line, it is: A. ignoring all of the security's unique risk. B. underpriced, a situation that should be temporary. C. offering too little return to justify its risk. D. a defensive security, which expects to offer lower returns.
C
If a stock consistently goes down (up) by 1.6% when the market portfolio goes down (up) by 1.2%, then its beta equals: A. 1.04. B. 1.24. C. 1.33. D. 1.40.
C
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
If the total assets of a firm are unaffected by a stock dividend, then: A. the stock should retain the same price per share. B. stock dividends should be preferred by corporations over cash dividends. C. an investor's wealth should not be changed by the dividend. D. only bondholders benefit from stock dividends.
C
In return for providing funds, venture capitalists generally require: A. collateral equal in value to the funds provided. B. first right to all of the firm's assets. C. an equity position in the firm. D. ownership of the entire firm.
C
Leverage will _____ shareholders' expected return and ______ their risk. A. increase; decrease B. decrease; increase C. increase; increase D. increase; do nothing to
C
The trade-off theory of capital structure describes the optimal capital structure for any firm as being the level of debt that: A. minimizes the financial distress costs. B. maximizes the present value of the interest tax shield. C. equates the present values of the interest tax shield and the financial distress costs. D. maximizes the after-tax cash flows that are internally generated.
C
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? A. 2.5% B. 4.0% C. 10.0% D. 5.0%
C
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%? A. $13,397.57 B. $14,473.44 C. $16,081.60 D. $33,748.58
C
What is the beta of a U.S. Treasury bill? A. 1.0 B. -1.0 C. 0 D. Unknown
C
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
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%? A. $101,251.79 B. $109,200.00 C. $126,564.73 D. $130,800.00
C
What is the pretax cost of debt for a firm in the 35% tax bracket that has a 10% aftertax cost of debt? A. 5.85% B. 12.15% C. 15.38% D. 25.71%
C
What is the proportion of debt financing for a firm that expects a 24% return on equity, a 16% return on assets, and a 12% return on debt? Ignore taxes. A. 54.0% B. 60.0% C. 66.7% D. 75.0%
C
What is the standard deviation of returns of a 4-stock portfolio (each stock being equally weighted) that produced returns of 20%, 20%, 25%, and 30%? A. 2.15% B. 3.15% C. 4.15% D. 5.15%
C
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
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
Which one of the following statements seems most appropriate when the Dow Jones Industrial Average increases by 2%? A. All stocks on the exchange increased by 2%. B. All 30 DJIA stocks increased by 2%. C. One market indicator was up by 2%. D. The S&P 500 index increased by 2%.
C
Which one of these is considered to be the safest investment? A. U.S. Treasury bonds B. Common stock C. U.S. Treasury bill D. Preferred stock
C
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
XYZ Corp. has 1,000 shares outstanding and retained earnings of $25,000. Theoretically, what would you expect to happen to the price of their stock, currently selling for $30 per share, if a 25% stock dividend is declared? A. Price should increase to $44.00 per share. B. Price should increase to $37.50 per share. C. Price should decrease to $24.00 per share. D. Nothing; price should remain at $30.00.
C
A company's CFO wants to maintain a target debt-to-equity ratio of 1/4. If the WACC is 18.6%, and the pretax cost of debt is 9.4%, what is the cost of common equity assuming a tax rate of 34%? A. 19.90% B. 20.90% C. 21.70% D. 22.73%
D
A proposed investment must earn at least as much as the ______ if it is to be deemed acceptable. A. company cost of capital B. risk-free rate C. market risk premium D. project cost of capital
D
A share of stock currently sells for $60, pays an annual dividend of $4.00, and earned a rate of return of 20% over the past year. What did this stock sell for one year ago? A. $42.00 B. $46.15 C. $48.46 D. $53.33
D
ABC Corp. stock is selling for $30 per share when a 10% stock dividend is declared. If you own 100 shares of ABC Corp. then you will receive: A. shares valued at $3 each. B. $3 times 100 shares = $300 cash. C. $300 plus 10 shares of ABC Corp. D. 10 shares of ABC Corp.
D
According to MM II, as a firm's debt-equity ratio decreases: A. its financial risk increases. B. its operating risk increases. C. the required rate of return on equity increases. D. the required rate of return on equity decreases.
D
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
Debt may be the preferred form of external financing for many firms because: A. most firms already have too much equity. B. tax rates on equity are lower. C. debt will not adversely affect the firm's financial ratios. D. equity issuance is considered by investors to be a negative sign.
D
Funded debt refers to those liabilities that: A. have established a sinking fund for repayment. B. are not callable at the option of the firm. C. are secured by specific collateral. D. have a maturity of more than one year remaining.
D
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%? A. $0 B. $6 C. $8 D. $10
D
If a corporation issues 1,000 shares of $1 par value stock for $10 per share, then retained earnings will: A. increase by $1,000. B. increase by $9,000. C. decrease by $9,000. D. remain unchanged.
D
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? A. $24.30 B. $18.00 C. $22.22 D. $40.50
D
If the company cost of capital is 20% and a proposed project's cost of capital is 15%, then discounting the projects' cash flows at 20% would: A. determine where the project plots in relation to the security market line. B. make the project look more attractive than it should be. C. be correct from a theoretical perspective. D. be incorrect and could cause the project to be erroneously rejected.
D
In a year in which common stocks offered an average return of 18%, Treasury bonds offered 10%, and Treasury bills offered 7%. The risk premium for common stocks was: A. 1%. B. 3%. C. 8%. D. 11%.
D
In theory, the "market portfolio" should contain: A. the securities of the S&P 500. B. the securities of the Dow. C. the securities of the S&P 500 and Treasury bills. D. all risky assets.
D
Issue costs for equity are higher than those for debt for all of the following reasons except: A. equity issues have higher administrative costs. B. underwriting stock is riskier than underwriting bonds. C. equity issues involve significantly more time to sell. D. equity issues have no economies of scale.
D
Preferred stock dividends: A. have preference over bond interest payments. B. are guaranteed to be paid at least annually. C. are excluded from the taxable income of their recipients. D. have priority over common stock dividends.
D
The major benefit of diversification is the: A. increased expected return. B. removal of all negative risk assets from the portfolio. C. reduction in the portfolio's systematic risk. D. reduction in the portfolio's total risk.
D
The most important function of an underwriter is to: A. assess the firm's capital needs. B. approve the prospectus before distribution to the public. C. provide private placement of the firm's debt. D. buy the securities issue from the firm and resell the securities to the public.
D
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
What is the beta of a 3-stock portfolio including 25% of stock A with a beta of 0.90, 40% of stock B with a beta of 1.05, and 35% of stock C with a beta of 1.73? A. 1.0 B. 1.17 C. 1.22 D. 1.25
D
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%? A. 60% B. 80% C. 20% D. 40%
D
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? A. 15.03% B. 14.28% C. 14.09% D. 14.47%
D
Anyone holding a stock before its ex-dividend date is entitled to the dividend.
True
Beta measures a stock's sensitivity to market risks.
True
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
The IRR is the rate of return on the cash flows of the investment, also known as the opportunity cost of capital.
False
13. 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 cost of equity will generally increase for risky firms when the risk-free rate of return increases.
False
The payback period considers all project cash flows.
False
The risk that remains in a stock portfolio after efforts to diversify is known as unique risk.
False
Diversification decreases the variability of both unique and market risk.
False
Every additional stock added to a portfolio reduces the portfolio's level of risk by an equal amount.
False
For investment horizons greater than 20 years, long-term corporate bonds traditionally have outperformed common stocks.
False
For mutually exclusive projects, the project with the higher IRR is the correct selection.
False
If a project has multiple IRRs, the highest one is assumed to be correct.
False
Interest tax shields are available to the firm on debt and preferred stock but not on common equity.
False
MM's proposition I states that the required rate of return on equity increases as the firm's debt- equity ratio increases.
False
Market risk can be eliminated in a stock portfolio through diversification.
False
A 100% stock dividend results in a doubling of the number of outstanding shares, but it does not affect the company's assets, profits, or total value.
True
A capital surplus is obtained when the selling price of new shares is greater than the par value.
True
A firm's cost of capital will generally increase if the firm lowers its debt-equity ratio.
True
A rights issue is one in which a public company offers shares only to existing shareholders in order to raise additional cash.
True
According to the MM dividend irrelevance proposition, since investors do not need dividends to convert their shares to cash, they will not pay higher prices for firms with higher dividend payouts.
True
As a project's beta increases, the project's opportunity cost of capital increases.
True
As the opportunity cost of capital decreases, the net present value of a project increases.
True
Assuming a project has the same risk and financing as the firm, it will have a positive NPV if its rate of return is greater than the firm's WACC.
True
Capital structure refers to a firm's mix of long-term debt and equity financing.
True
Companies can pay out cash to their shareholders in two ways. They can pay a dividend or they can buy back some of their outstanding shares.
True
Corporate dividends are less volatile than corporate earnings.
True
Costs of financial distress are costs arising from bankruptcy or distorted business decisions before bankruptcy.
True
Debt finance does not affect the operating risk but it does add financial risk.
True
Differences in classes of stock often appear in their voting rights.
True
Dividend policy may be defined as the trade-off between retaining earnings on the one hand and paying out cash and issuing shares on the other.
True
Equity capital in young businesses is known as venture capital and it is provided by venture capital firms, wealthy individuals, and investment institutions such as pension funds.
True
Financial leverage describes debt financing's amplification of the effects of changes in operating income on the returns to stockholders.
True
For many firms the limits on capital funds are "soft." By this we mean that the capital rationing is not imposed by investors
True
In a three-for-two stock split, each investor would receive one additional share for each two shares already held.
True
Investors often interpret a stock split announcement as a signal of management's confidence in the future.
True
