Financial Management Test 2

The current yield exceeds the coupon rate.

A $1,000 par value corporate bond that pays $45 annually in interest was issued last year. Which one of these would apply to this bond today if the current price of the bond is $989.42?

Discount rate

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

Greater than 5 percent.

A newly issued bond has a coupon rate of 5 percent and semiannual interest payments. The bonds are currently priced at par. The effective annual rate provided by these bonds must be:

Net present value

A project has an initial cost of $52,700 and a market value of $61,800. What is the difference between these two values called?

a discount; less than

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

Broker

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

Dealer

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

Coupon

Ana just received the semiannual payment of $35 on a bond she owns. This is called the ______ payment.

$52.20

Lohn Corporation is expected to pay the following dividends over the next four years: $16, $12, $8, and $3. Afterward, the company pledges to maintain a constant 4 percent growth rate in dividends forever.

a decrease in all stock values.

Answer this question based on the dividend growth model. If you expect the market rate of return to increase across the board on all equity securities, then you should also expect:

Yield to maturity < Coupon rate

Assume the current market price of a bond exceeds its par value. Which one of these equations applies?

Cash inflow in the final year of the project

Boyd Leasing is analyzing a project that requires purchasing $210,000 of new fixed assets. When the project ends, those assets are expected to have an aftertax salvage value of $22,000. How is the $22,000 salvage value handled when computing the net present value of the project?

Project X only

Bui Bakery has a required payback period of two years for all of its projects. Currently, the firm is analyzing two independent projects. Project X has an expected payback period of 1.4 years and a net present value of $6,100. Project Z has an expected payback period of 2.6 years with a net present value of $18,600. Which project(s) should be accepted based on the payback decision rule?

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

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

Face Value

Dilan owns a bond that will pay him $45 each year in interest plus $1,000 as a principal payment at maturity. The $1,000 is referred to as the:

$108.99

E-Eyes.com just issued some new preferred stock. The issue will pay an annual dividend of $10 in perpetuity, beginning 5 years from now. If the market requires a 7 percent return on this investment, how much does a share of preferred stock cost today?

mutually exclusive

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

Accept Project B and reject Project A based on the NPVs

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

the project that is acceptable at a discount rate of 12 percent should be rejected at a discount rate of 13 percent.

Javangula Foods is considering two mutually exclusive projects and has determined that the crossover rate for these projects is 12.3 percent. Given this information, you know that:

priced the same as a $1 perpetuity.

National Trucking has paid an annual dividend of $1 per share on its common stock for the past 15 years and is expected to continue paying a dollar per share long into the future. Given this, one share of the firm's stock is:

is the best method of analyzing mutually exclusive projects.

Net present value:

Market price of the bond will decrease.

Olivares, Incorporated, bonds mature in 17 years and have a coupon rate of 5.4 percent. If the market rate of interest increases, then the:

The stock has a negative capital gains yield.

Reyes has a dividend yield of 5.4 percent and a total return for the year of 4.8 percent. Which one of the following must be true?

Net present value

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

Weighted Average Cost of Capital

The term structure of interest rates includes all of the following basic components, except

Nominal

The term structure of interest rates tells us what _________ interest rate are on default-free, pure discount bonds of all maturities.

Downward sloping

When short-term rates are higher than long-term rates, we say it is

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

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

Profitability index

Which one of the following methods of analysis provides the best information on the benefits to be received from a project per dollar invested?

Net present value

Which one of the following methods predicts the amount by which the value of a firm will change if a project is accepted?

The effective annual rate equals the annual percentage rate when interest is compounded annually.

Which one of the following statements concerning interest rates is correct?

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

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

Increasing the project's initial cost at Time 0

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

The present value of a growing perpetuity will decrease if the discount rate is increased.

Which one of these statements related to growing annuities and perpetuities is correct?

NPV profile

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

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

You purchased a 10-year bond at par value when it was originally issued. It has an annual coupon of 5 percent and matures five years from now. Coupons are paid semiannually. Which one of the following statements applies to this bond if the relevant market interest rate is now 4.7 percent?