second finance midterm conceptual questions

Okonjo Economics has a debt-equity ratio of .38. All of the firm's outstanding shares were purchased by a small number of investors. The return these investors require is called the

cost of equity

Which one of the following applies to a premium bond?

Coupon rate > Current yield > Yield to maturity

A bond that can be paid off early at the issuer's discretion is referred to as being which type of bond?

callable

Anya just completed analyzing a project. Her analysis indicates that the project will have a six-year life and require an initial cash outlay of $98,000. Annual sales are estimated at $64,000 and the tax rate is 21 percent. The net present value is negative $98,000. Based on this analysis, the project is expected to operate at the

cash break-even point

The interest rate risk premium is the:

compensation investors demand for accepting interest rate risk

The equivalent annual cost considers all of the following except the

costs of research conducted to identify equipment choices.

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

coupon

The two-stage dividend growth model evaluates the current price of a stock based on theassumption a stock will:

grow at a fixed rate for a period of time after which it will grow at a differentrate indefinitely

The CFO of Shelby & Muhammad receives frequent capital funding requests from the firm's divisionmanagers. These requests are seeking funding for positive net present value projects. The CFOcontinues to deny all funding requests due to the financial situation of the company. Apparently, thecompany is

facing hard rationing.

You would like to know the minimum level of sales that is needed for a project to be acceptedbased on its net present value. To determine that sales level you should compute the

financial break-even point

Pro forma statements for a proposed project should generally do all of the following, except

include interest expense

Assume a firm utilizes its WACC as the discount rate for every capital project it implements.Accordingly, the firm will tend to:

increase the average risk level of the company over time

A strength of the average accounting return (AAR) method of project analysis is the fact that AAR:

is easy to calculate.

If a project has a net present value equal to zero, then:

the project earns a return exactly equal to the discount rate.

To determine a firm's cost of capital, one must include

the returns currently required by both debtholders and stockholders

The flotation cost for a company is computed as:

the weighted average of the flotation costs associated with each form offinancing.

A company that utilizes the MACRS system of depreciation but does not use bonus depreciation

will have a greater depreciation tax shield in Year 2 than in Year 1

The bond market requires a return of 6.2 percent on the 15-year bonds issued by MingweiManufacturing. The 6.2 percent is referred to as the

yield to maturity

You own one share of a cumulative preferred stock that pays quarterly dividends. The firm hasrecently suffered some financial setbacks and has failed to pay the last two dividends. However,new funding has been arranged and the firm intends to restore all dividends, both common andpreferred, this quarter. As a preferred shareholder, you should expect to receive the equivalent of________ quarter(s) of dividends when the next dividend is paid.

3

The taxability risk premium compensates bondholders for which one of the following?

A bond's unfavorable tax status

Which one of the following will increase a bid price?

An increase in the required rate of return

Which one of the following statements related to corporate dividends is correct?

Corporate shareholders may receive a tax break on a portion of theirdividend income.

A company has four open seats on its board of directors. There are seven candidates vying forthese four positions. There will be a single election to determine the winners. As the owner of 100shares of stock, you will receive one vote per share for each open seat. You decide to cast all 400of your votes for a single candidate. What is this type of voting called?

Cumulative

Assume a profitable, tax-paying company uses the bottom-up approach to compute operating cashflow. An increase in which one of the following items will result in an increase in operating cashflow?

Depreciation expense

Which one of the following methods of project analysis is defined as computing the value of aproject based on the present value of the project's anticipated cash flows?

Discounted cash flow valuation

Assume both the discount and tax rates are positive values. At the financial break-even point, the

IRR equals the required return

Last year, you purchased a TIPS at par. Since that time, both market interest rates and the inflation rate have increased by .25 percent. Your bond has most likely done which one of the following since last year?

Maintained a fixed real rate of return

Who can access Level 3 of Nasdaq's information?

Nasdaq market makers

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

Net present value

A firm's managers realize they cannot monitor all aspects of their projects but do want to maintain a constant focus on the most critical aspect of each project in an attempt to maximize their firm's value. Given this specific desire, which type of analysis should they require for each project and why?

Sensitivity analysis; to identify the key variable that affects a project's profitability

Which one of the following statements concerning bond ratings is correct?

Split-rated bonds are called crossover bonds

Which one of the following will best reduce the risk of a project by lowering the degree of operatingleverage?

Subcontracting portions of the project rather than purchasing new equipment to do all the work in-house

Viveros Foods has an investment-grade bond issue outstanding that pays $30 semiannual interest payments. The bonds sell at par and are callable at a price equal to the present value of all future interest and principal payments discounted at a rate equal to the comparable Treasury rate plus .50percent. Which one of the following correctly describes this bond?

The bond has a "make whole" call price

Which of the following is the main advantage of using the dividend growth model to estimate a firm's cost of equity?

The simplicity of the model.

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?

The stock has a negative capital gains yield

A premium bond that pays $60 in interest annually matures in seven years. The bond was originally issued three years ago at par. Which one of the following statements is accurate in respect to this bond today?

The yield to maturity is less than the coupon rate.

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

Yield to maturity < Coupon rate

NYSE designated market makers:

act as dealers

Charles owns a reverse convertible bond. At maturity, the principal amount will be repaid in

either cash or shares of stock

Webster Iron Works started a new project last year. As it turns out, the project has been operating atits accounting break-even level of output and is now expected to continue at that level over itslifetime. Given this information, you know that the project

is operating at a higher level than if it were operating at its cash break-even level

Bonds often provide tax benefits to

issuers

A bond's principal is repaid on the ________ date.

maturity

A project has a discounted payback period that is equal to the required payback period. Given this information, the project:

must have a profitability index that is equal to or greater than 1.0.

By definition, which one of the following must equal zero at the accounting break-even point?

net income

Ernst & Frank stock is listed on Nasdaq. The firm is planning to issue some new equity shares forsale to the general public. This sale will definitely occur in which one of the following markets?

primary

A deferred call provision

prohibits the bond issuer from redeeming callable bonds prior to a specified date

The cost of preferred stock is equivalent to the

rate of return on a perpetuity

Humberto is fairly cautious when analyzing a new project and thus he projects the most optimistic, the most realistic, and the most pessimistic outcome that can reasonably be expected. Which type of analysis is he using?

scenario analysis

Combining scenario analysis with sensitivity analysis can yield a crude form of _____ analysis

simulation

The internal rate of return is:

tedious to compute without the use of either a financial calculator or a computer

The dividend growth model requires

the growth rate to be less than the required return

Given a positive rate of inflation, the real rate must be less than

the nominal rate