FNAN 300 ch 6, 7, 8
A PE ratio that is based on estimates future earnings is known as a (blank) PE ratio
Forward
A bond with a BBB rating has a (blank) than a bond with an A rating
Higher risk of default
A corporation issues 50,000 bonds at $1000 each. The bonds mature in 5 years and have a coupon rate of 7%. What will the total annual interest expense be for the corporation?
$3.5 million (50,000 x $1000 x .07 = $3500000)
A bond's coupon payment is
A fixed amount of interest that is paid annually or semiannually by the issuer to its bond holders
The NYSE differs from the NASDAQ primarily because the NYSE has
A physical location A face to face auction market
The internal rate of return is a function of
A project's cash flows
The payback period rule (blank) a project of it has a payback period that is less than or equal to a particular cutoff date
Accepts
How does the timing and the size of cash flows affect the payback method?
An increase in the size of the first cash inflow will decrease the payback period
What is a bond's current yield?
Annual coupon payment divided by current price
Which of the following are cash flows to investors in stock?
Capital gains Dividends
Which of the following are weaknesses of the payback method?
Cash flows received after the payback period are ignored Time value of money principles are ignored The cutoff date is arbitrary
As an investor in the bond market, why should you be concerned about changes in interest rates?
Changes in interest rates cause changes in bond prices
Three special case patterns of dividend growth discussed in the text include
Constant growth Zero growth Non-constant growth
The profitability index is also called the (blank) ratio
Cost-benefit
What four variables are required to calculate the value of a bond?
Coupon rate Time remaining to maturity Par value Yield to maturity
If unpaid preferred dividends must be "caught up" before any common dividends can be paid, they are called (blank) dividends
Cumulative
Someone who maintains an inventory of stocks and buys and sells those stocks is known as a
Dealer
All else constant, the dividend yield will increase if the stock price
Decreases
What information do we need to determine the value of a stock using the zero growth model?
Discount rate Dividend
In the dividend discount model, the expected return for investors comes from which two sources?
Dividend yield Growth rate
Which is true about dividend growth patterns?
Dividends may growth at a constant rate
A corporate bond's yield to maturity
Is usually not the same as a bond's coupon rate Changes over time
What are the advantages of the payback period method for management?
It allows lower level managers to make small decisions effectively The payback period method is easy to use The payback period method is ideal for short projects
Which of the following is true about a bond's face value?
It is also known as par value It is the principle amount repaid at maturity
What is the nominal rate of return on an investment?
It is the actual percentage change in the dollar value of an investment unadjusted for inflation
What is the definition of a bond's time to maturity?
It is the number of years until the face value is paid off
NASDAQ has which of these features?
Multiple market maker system Computer network of securities dealers
If a firm is evaluating two possible projects, both is which require the use of the same production facilities, these projects would be considered
Mutually exclusive
Which of the following present problems when using the IRR method?
Mutually exclusive projects Non-conventional cash flows
The two most important stock markets in the U.S. Are the New York stock exchange and
NASDAQ
Examples of secondary markets in the U.S. Include which of the following?
NASDAQ the New York stock exchange The Chicago stock exchange
In capital budgeting (blank) determines the dollar value of a project to the company
Net present value
According to Graham and Harvey's 1999 survey of 392 CFOs which of the following two capital budgeting methods are widely used by firms in the U.S. And Canada?
Net present value Internal rate of return
Bonds are classified based on the collateral provided to protect bond holders in case of default. Which of the following are unsecured forms of debt?
Notes Debentures (in the U.S.)
When voting for the board of directors, the number of votes a shareholder is entitled to is generally determined as follows
One vote per share held
The basic NPV investment rule is
Reject a project is its NPV is less than zero Accept a project if the NPV is greater than zero If the NPV is equal to zero, acceptance or rejection of the project is a matter of indifference
If the IRR is greater than the (blank) we should accept the project
Required return
The trading is existing shares occurs in the (blank) market
Scondary
If you are holding two identical bonds, except that one matures in 10 years and the other in 5, which bond's price will be more sensitive to interest rate risk?
The 10 year bond
Which of the following are methods of the calculating the MIRR of a project?
The combination approach The discounting approach The reinvestment approach
The relationship between nominal rates, real rates and inflation is called
The fisher effevt
As a general rule, which of the following are true of debt and equity?
The maximum reward for owning debt is fixed Equity represents an ownership interest
Which ratios might be used to estimate the value of a stock?
The price/earnings ratio The price/sales ratio
Define the primary market
The primary market is where stocks are issues for the first time
Which of the following are rights of common stock holders?
The right to share proportionally in the common dividends paid The right to vote on matters of importance The right to share proportionally in any residual value in the event of liquidation
Which of the following are usually included in a bond's indenture?
The total amount of bonds issued The repayment arrangements
Which of the following are true about bonds?
They are issued by both corporations and governments They are interest-only loans
The sensitivity of a bond's price to interest rate changes is dependent on which of the following two variables?
Time to maturity Coupon rate
The IRR is the discount rate that makes NPV equal to
Zero
