FINC final clicker questions
You invest in a stock with a share price of $25. After one year, the stock price per share is $35. Each share paid a $2 dividend. What was your dollar return after one year? $2 $10 $12 $35 $37
$12 Dollar return = dividends + capital gains Dollar return = $2 + (35-25) = 12
How much would you pay for this stock if you hold it for two years and you expect the dividend and the selling price to grow by 5% in the 2nd year (and your required return remains at 20%)? $16.80 $11.67 $13.33 $14.00 Not possible to compute
$13.33
What do you think is the beta of a U.S. Treasury bill? 1.0 -1.0 0 0.5 Beta doesn't apply to T-bills
0
From 1926 until 2014, the average annual return for large companies was: 4.3 percent 6.4 percent 10.5 percent 12.1 percent 14.6 percent
12.1%
A taxable bond has a yield of 8% and a municipal bond has a yield of 6% At what tax rate would you be indifferent between the two bonds? 15% 20% 25% 33% 40%
25%
You invest in a stock with a share price of $25. After one year, the stock price per share is $35. Each share paid a $2 dividend. What was your % return after one year? 8% 40% 48% 34.3% 5.7%
48% (see slide 27 in clicker power point)
From 1926 until 2014, the average annual return for long-term corporate bonds was: 4.3 percent 6.4 percent 10.5 percent 12.1 percent 14.6 percent
6.4%
A firm uses its weighted average cost of capital to evaluate the proposed projects for all of its varying divisions. By doing so, the firm: A. automatically gives preferential treatment in the allocation of funds to its riskiest division. B. allocates capital funds evenly among its divisions. C. automatically maximizes the total value created for its shareholders. D. encourages the division managers to recommend only their most conservative projects. E. maintains the current risk level and capital structure of the firm.
A
All else constant, the weighted average cost of capital for a risky, levered firm will decrease if: A. the firm's bonds start selling at a premium rather than at a discount. B. the market risk premium increases. C. the firm replaces some of its debt with preferred stock. D. corporate taxes are eliminated. E. the dividend yield on the common stock increases.
A
Mary owns a risky stock and anticipates earning 16.5 percent on her investment in that stock. Which one of the following best describes the 16.5 percent rate? A. Expected return B. Real return C. Market rate D. Systematic return E. Risk premium
A
When a bond's yield to maturity is less than the bond's coupon rate, the bond: A. is selling at a premium. B. had to be recently issued. C. is selling at a discount. D. is priced at par. E. has reached its maturity date.
A
All else held constant, the present value of a bond increases when the... A. Coupon rate decreases. B. Yield to maturity decreases. C. Current yield increases. D. Time to maturity of a premium bond decreases. E. Time to maturity of a zero coupon bond increases.
B
All else held constant, the present value of a bond increases when the... A. Coupon rate decreases. B. Yield to maturity decreases. C. Current yield increases. D. Time to maturity of a zero coupon bond increases.
B
Old Town Industries has three divisions. Division X has been in existence the longest and has the most stable sales. Division Y has been in existence for five years and is slightly less risky than the overall firm. Division Z is the research and development side of the business. Given this, the firm should probably: A. require the highest rate of return from Division X since it has been in existence the longest. B. assign the highest cost of capital to Division Z because it is most likely the riskiest of the three divisions. C. use the firm's WACC as the cost of capital for Division Z as it provides analysis for the entire firm. D. use the firm's WACC as the cost of capital for Divisions A and B because they are part of the revenue-producing operations of the firm. E. allocate capital funds evenly amongst the divisions to maintain the current capital structure of the firm.
B
The dividend yield on a stock will increase if the: A. dividend growth rate decreases. B. stock price decreases. C. capital gains rate decreases. D. stock price increases. E. tax rate on dividends increases.
B
The weighted average cost of capital is defined as the weighted average of a firm's: A. return on all of its investments. B. cost of equity, cost of preferred, and its aftertax cost of debt. C. pretax cost of debt and its preferred and common equity securities. D. bond coupon rates. E. common and preferred stock.
B
When a bond's yield to maturity is less than the bond's coupon rate, the bond... A. Had to be recently issued. B. Is selling at a premium. C. Has reached its maturity date. D. Is priced at par. E. Is selling at a discount.
B
When a bond's yield to maturity is less than the bond's coupon rate, the bond: A. had to be recently issued. B. is selling at a premium. C. has reached its maturity date. D. is priced at par. E. is selling at a discount.
B
Which one of the following is the best example of unsystematic risk? A. Inflation exceeding market expectations B. A warehouse fire C. Decrease in corporate tax rates D. Decrease in the value of the dollar E. Increase in consumer spending
B
A key driver in determining the stock price of a company is the following: A. Yield to maturity B. Cash flow from assets C. Dividends paid and expected growth rate in dividends D. Market share E. Debt-to-equity ratio
C
An increase in a levered firm's tax rate will: A. decrease the cost of preferred stock. B. increase both the cost of preferred stock and debt. C. decrease the firm's cost of capital. D. decrease the cost of equity capital. E. increase the firm's WACC.
C
Bond ratings classify bonds based on: A. liquidity, market, and default risk. B. liquidity, interest rate, and default risk. C. default risk only. D. interest rate, inflation rate, and default risk. E. default and liquidity risks.
C
How would we determine the cost of debt? A. Use the coupon rate of existing debt B. Use the Fisher Effect formula to calculate the cost of debt C. Use the YTM (yield-to-maturity) of the current debt D. Use the CAPM formula E. Use the beta multiplied by the risk-free rate
C
If interest rates increase what happens to the price of a bond? A. Since the bond indenture is a fixed contract, nothing can change with the value of a bond. B. The bond price increases. C. The bond price decreases.
C
Katie owns 100 shares of ABC stock. Which one of the following terms is used to refer to the return that Katie and the other shareholders require on their investment in ABC? A. Weighted average cost of capital B. Pure play cost C. Cost of equity D. Subjective cost E. Cost of debt
C
Stock A comprises 28 percent of Susan's portfolio. Which one of the following terms applies to the 28 percent? A. Portfolio variance B. Portfolio standard deviation C. Portfolio weight D. Portfolio expected return E. Portfolio beta
C
The dividend yield is defined as: A. the last annual dividend divided by the current market price per share. B. the last annual dividend divided by the current book value per share. C. next year's expected dividend divided by the current market price per share. D. next year's expected dividend divided by the current book value per share. E. next year's expected dividend divided by the par value per share.
C
Which one of the following is most apt to cause a wise manager to increase a project's cost of capital? Assume the firm is levered. A. Management decides to issue new stock to finance the project. B. The initial cash outlay requirement is reduced. C. She learns the project is riskier than previously believed. D. The aftertax cost of debt just decreased. E. The project's life is shortened
C
Which one of the following is the primary determinant of an investment's cost of capital? A. Life of the investment B. Amount of the initial cash outlay C. The investment level of risk D. The source of funds used for the investment E. The investment's net present value
C
Which one of the following is used as the pretax cost of debt? A. Average coupon rate on the firm's outstanding bonds B. Coupon rate on the firm's latest bond issue C. Weighted average yield to maturity on the firm's outstanding debt D. Average current yield on the firm's outstanding debt E. Annual interest divided by the market price per bond for the latest bond issue
C
A stock is expected to return 13 percent in an economic boom, 10 percent in a normal economy, and 3 percent in a recessionary economy. Which one of the following will lower the overall expected rate of return on this stock? A. An increase in the rate of return in a recessionary economy B. An increase in the probability of an economic boom C. A decrease in the probability of a recession occurring D. A decrease in the probability of an economic boom E. An increase in the rate of return for a normal economy
D
According to the capital asset pricing model, the expected return on a security will be affected by all of the following except the: A. Market risk premium B. Risk-free rate C. Market rate of return D. Security's standard deviation E. Security's beta
D
Computing the present value of a growing perpetuity is most similar to computing the current value of which one of the following? A. Non-dividend paying stock B. Stock with a constant dividend C. Stock with irregular dividends D. Stock with a constant-growth dividend E. Stock with growing dividends for a limited period of time
D
Computing the present value of a growing perpetuity is most similar to computing the current value of which one of the following? A. Non-dividend-paying stock B. Stock with a constant dividend C. Stock with irregular dividends D. Stock with a constant-growth dividend E. Stock with growing dividends for a limited period of time
D
Portfolio diversification eliminates: A. All investment risk B. The portfolio risk premium C. Market risk D. Unsystemic risk E. The reward for bearing risk
D
Standard deviation measures _____ risk while beta measures _____ risk. A. systematic; unsystematic B. unsystematic; systematic C. total; unsystematic D. total; systematic E. asset-specific; market
D
Ted is trying to decide what cost of capital he should assign to a project. Which one of the following should be his primary consideration in this decision? A. Amount of debt used to finance the project B. Use, or lack, of preferred stock as a financing option C. Mix of funds used to finance the project D. Risk level of the project E. Length of the project's life
D
The constant growth model can be used to value the stock of firms that have which type(s) of dividends? A. Dividends that change by either a constant amount or a constant rate B. Dividends that change by either a constant amount or that are zero C. Dividends that change annually by a constant amount D. Dividends that are either constant or change annually at a constant rate E. Only dividends that increase at a constant rate
D
The current yield on a bond is equal to the annual interest divided by the: A. Issue price B. Maturity value C. Face amount D. Current market price E. Current par value
D
The rate of return on which one of the following has a risk premium of 0%? A. Long-term government bonds B. Long-term corporate bonds C. Intermediate-term government bonds D. U.S. Treasury bills E. Large-company stocks
D
What condition must exist if a bond's coupon rate is to equal both the bond's current yield and its yield to maturity? Assume the market rate of interest for this bond is positive. A. The bond sells at a discount B. The bond must be a zero coupon bond and mature in exactly one year. C. The market price must exceed the par value by the value of one year's interest. D. The bond must be priced at par. E. There is no condition under which this can occur.
D
What condition must exist if a bond's coupon rate is to equal both the bond's current yield and its yield to maturity? Assume the market rate of interest for this bond is positive. A. The clean price of the bond must equal the bond's dirty price. B. The bond must be a zero coupon bond and mature in exactly one year. C. The market price must exceed the par value by the value of one year's interest. D. The bond must be priced at par. E. There is no condition under which this can occur.
D
When valuing a stock using the constant-growth model, D1 represents the: A. Expected difference in the stock price over the next year B. Expected stock price in one year C. Last annual dividend paid D. The next expected annual dividend E. Discount rate
D
Which one of the following best describes an arithmetic average return? A. Total return divided by N - 1, where N equals the number of individual returns B. Average compound return earned per year over a multiyear period C. Total compound return divided by the number of individual returns D. Return earned in an average year over a multiyear period E. Positive square root of the average compound return
D
Which one of the following combinations will always result in an increased dividend yield? A. Increase in the stock price combined with a lower dividend amount B. Increase in the stock price combined with a higher dividend amount C. Decrease in the stock price combined with a lower dividend amount D. Decrease in the stock price combined with a higher dividend amount E. Increase in the stock price combined with a constant dividend amount
D
Which one of the following statements is correct? A. The risk-free rate of return has a risk premium of 1.0. B. The reward for bearing risk is called the standard deviation. C. Risks and expected return are inversely related. D. The higher the expected rate of return, the wider the distribution of returns. E. Risk premiums are inversely related to the standard deviation of returns.
D
Which one of the following will increase the present value of a lump sum future amount to be received in 15 years? A. An increase in the time period. B. An increase in the interest rate. C. A decrease in the future value. D. A decrease in the interest rate. E. Changing to compound interest from simple interest.
D
Which one of these is the best example of systematic risk? A. Discovery of a major gas field B. Decrease in textile imports C. Increase in agricultural exports D. Decrease in gross domestic product E. Decrease in management bonuses for banking executives
D
If you invest $100 today at 5% interest, you will have $105 in one year. If inflation was 5% over this one year period, how much did you actually earn on your investment? A. 5% B. 10% C. 0% D. Both A and C E. Both A and B
D From the standpoint of "purchasing power" you earned 0%. From the actual amount of cash you earned, you earned 5%.
The capital gains yield equals which one of the following? Total yield Required rate of return Market rate of return Dividend yield Dividend growth rate
Dividend growth rate
An upward-sloping term structure of interest rates indicates: A. the real rate of return is lower for short-term bonds than for long-term bonds. B. there is an indirect relationship between nominal interest rates and time to maturity. C. there is an indirect relationship between real interest rates and time to maturity. D. the nominal rate is declining as the real rate rises as the time to maturity increases. E. the nominal rate is increasing even though the real rate may be constant as the time to maturity increases.
E
An upward-sloping term structure of interest rates indicates: A. the real rate of return is lower for short-term bonds than for long-term bonds. B. there is an indirect relationship between real interest rates and time to maturity. C. there is an indirect relationship between nominal interest rates and time to maturity. D. the nominal rate is declining as the real rate rises as the time to maturity increases. E. the nominal rate is increasing even though the real rate may be constant as the time to maturity increases.
E
On a particular risky investment, investors require an excess return of 7 percent in addition to the risk-free rate of 4 percent. What is this excess return called? A. Inflation premium B. Required return C. Real return D. Average return E. Risk premium
E
One year ago, you purchased 600 shares of a stock. This morning you sold those shares and realized a total return of 3.1 percent. Given this information, you know for sure the: A. Stock price increased by 3.1 percent over the last year. B. Stock increased in value over the past year. C. Stock paid a dividend. D. Dividend yield is greater than zero. E. Sum of the dividend yield and the capital gains yield is 3.1 percent.
E
One year ago, you purchased 600 shares of a stock. This morning you sold those shares and realized a total return of 3.1 percent. Given this information, you know for sure the: A. stock price increased by 3.1 percent over the last year. B. stock increased in value over the past year. C. stock paid a dividend. D. dividend yield is greater than zero. E. sum of the dividend yield and the capital gains yield is 3.1 percent.
E
The price of a stock at Year 4 can be expressed as: A. D0 / (R+g4) B. D0 x (1+R)5 C. D1 x (1+R)5 D. D4 / (R-g) E. D5 / (R-g)
E
The required return on a stock is equal to which one of the following if the dividend on the stock decreases by a constant percent per year? A. Dividend yield - Capital gains yield B. Dividend yield × Capital gains yield C. (D1/P0)/g D. (P0/D1) - g E. Dividend yield + Capital gains yield
E
The security market line is a linear function that is graphed by plotting data points based on the relationship between the: A. risk-free rate and beta. B. market rate of return and beta. C. market rate of return and the risk-free rate. D. risk-free rate and the market rate of return. E. expected return and beta.
E
Which one of the following best describes an arithmetic average return? A. Total compound return divided by the number of individual returns B. Total return divided by N - 1, where N equals the number of individual returns C. Positive square root of the average compound return D. Average compound return earned per year over a multiyear period E. Return earned in an average year over a multiyear period
E
Which one of these represents systematic risk? -Major layoff by a regional manufacturer of power boats -Surprise firing of a firm's chief financial officer -Increase in consumption created by a reduction in personal tax rates -Closure of a major retail chain of stores -Product recall by one manufacturer
Increase in consumption created by a reduction in personal tax rates
A real rate of return is defined as a rate that has been adjusted for which one of the following? Inflation Interest rate risk Taxes Liquidity Default risk
Inflation
A real rate of return is defined as a rate that has been adjusted for which one of the following? Liquidity Inflation Default risk Interest rate risk Taxes
Inflation
Which one of the following provides compensation to a bondholder when a bond is not readily marketable at its full value? Inflation premium Taxability premium Interest rate risk premium Liquidity premium Default risk premium
Liquidity premium
A taxable bond has a yield of 8% and a municipal bond has a yield of 6%. If you are in a 40% tax bracket, which bond do you prefer? Taxable bond Municipal bond
Municipal
Which one of the following is defined as a bell-shaped frequency distribution that is defined by its average and its standard deviation? Arithmetic average return Variance Standard deviation Probability curve Normal distribution
Normal distribution
Both Bob and Jane bought a stock five years ago for $10. Today, Bob's stock is worth $20 and Jane's stock is worth $15. Who earned a higher return? Bob Jane Not enough information
Not enough information on dividends
On a particular risky investment, investors require an excess return of 7 percent in addition to the risk-free rate of 4 percent. What is this excess return called? Inflation premium Required return Real return Average return Risk premium
Risk premium
The expected return on a security is not affected by the: Security's unique risks. Risk-free rate. Security's risk premium. Security's beta. Market rate of return
Security's unique risks.
The risk premium for an individual security is based on which one of the following types of risk? Total Surprise Diversifiable Systematic Unsystematic
Systematic
Which one of the following premiums is paid on a corporate bond due to its tax status? Interest rate risk premium Inflation premium Liquidity premium Taxability premium Default risk premium
Taxability premium
For the period 1926-2014, which one of the following had the smallest risk premium? Large-company stocks Small-company stocks Long-term corporate bonds U.S. Treasury bills Long-term government bonds
U.S. Treasury bills
Which one of the following represents the amount of compensation an investor should expect to receive for accepting the unsystematic risk associated with an individual security? -Security beta multiplied by the market risk premium -Security beta multiplied by the market rate of return -Zero -Risk-free rate of return -Market risk premium
Zero
Which one of the following terms applies to a bond that initially sells at a deep discount and only makes one payment to bondholders? Callable Income Zero coupon Convertible Tax-free
Zero coupon
The current yield on a bond is equal to the annual interest divided by the: issue price. maturity value. face amount. current market price. current par value.
current market price.
The security market line is a linear function that is graphed by plotting data points based on the relationship between the: -market rate of return and the risk-free rate. -risk-free rate and the market rate of return. -expected return and beta. -market rate of return and beta. -risk-free rate and beta.
expected return and beta
The systematic risk principle states that the expected return on a risky asset depends only on the asset's ___ risk. unique diversifiable asset-specific market unsystematic
market
The Treasury yield curve plots the yields on Treasury notes and bonds relative to the ____ of those securities? face value market price maturity coupon rate issue date
maturity
The rate of return an investor earns on a bond prior to adjusting for inflation is called the: nominal rate. real rate. dirty rate. coupon rate. clean rate.
nominal rate
Assume a firm has a beta of 1.2. All else held constant, the cost of equity for this firm will increase if the: -beta decreases. -market risk premium decreases. -either the risk-free rate or the market rate of return decreases. -market rate of return decreases. -risk-free rate decreases.
risk-free rate decreases.
The standard deviation measures the _____ of a security's returns over time. average value frequency volatility mean arithmetic average
volatility
The market-required rate of return on a bond that is held for its entire life is called the: coupon rate. yield to maturity. dirty yield. call premium. current yield.
yield to maturity
