Exam #2 Finnance
What is non-constant growth?
"supernormal" growth rates over some infinite time length
Suppose a bond's clean price is $1,050, and the bond currently has accrued interest of $30. What is the dirty price?
$1,080
Whatever, Incorporated, has a bond outstanding with a coupon rate of 5.96 percent and semiannual payments. The yield to maturity is 5.3 percent and the bond matures in 19 years. What is the market price if the bond has a par value of $1,000?
$1,081.52
If the present value of the interest payments on a bond is $320 and the present value of the par value to be paid at maturity is $900, the total value of the bond must be ____.
$1,220
A bond with 16 years to maturity and a semiannual coupon rate of 5.08 percent has a current yield of 5.39 percent. The bond's par value is $2,000. What is the bond's price?
$1,884.97
What is the price in one year for a stock that pays a dividend in one year of $2 for the growth rate of 8% and a required return of 10%?
$108 P1=(D2) / (r-g) = [D1 * (1+g) / (r-g) = ($2 * 1.08) / .10-.08)
Scott Corporation does not pay dividends. The PE ratio for its industry is 13.3, and Scott's EPs were $1.47. At what price should Scott's stock trade?
$19.55
If you receive a $2 dividend per share on your 100 shares, your total dividend income is ____. $2 x 100 $1002 $2/100 $100/2
$2 x 100
A small project has cash flows of -$10 and $45, and a large project has cash flows of -$30 and $70. What is the incremental NPV at a discount rate of 10%?
$2.73
What is the price of a stock at the end of the year (P1) if the dividend for year two (Div2) is $5, the price for year two (P2) is $20, and the discount rate is 10%?
$22.73 P1 = (Div2 + P2) / (1 + r)
What is the formula to determine the price of a U.S. Treasury bond listed at 122 if the par value is $5,000?
$5,000 × 122%
What information do we need to determine the value of stock using the zero-growth model?
- Discount rate - Annual dividend amount
Preferred stock has preference over common stock in the:
- Distribution of corporate assets - Payment of dividends
In the dividend discount model, the expected return for investors comes from which two sources?
- Dividend yield - Growth rate/capital gains yield
Which of the following is a feature of common stock?
- It generally has voting rights - It has no special preference in bankruptcy - It has no special preference in receiving dividends
The discount rate assigned to a project reflects the _________.
- opportunity cost to the investor - risk of the project
In which ways is preferred stock like a bond?
- preferred shareholders receive a stated dividend, similar to interest on a bond - preferred shareholders receive a stated value if the firm liquidates, like bondholders _ preferred stock sometimes has a sinking fund, giving it a set maturity like bonds - some preferred stock has credit ratings, like bonds
Which of the following is true about projects with a negative cash flow followed by positive cash flow and then another negative?
- the npv decision rule is accept if npv is greater than 0 - npv can be used to make the correct accept/reject decision
What are two ways to calculate a balloon payment?
-Amortize the loan over the loan life to find the ending balance -Find the present value of the payments remaining after the loan term
Which are true about growing annuity?
-Cash flows grow for a finite period -Cash flows grow at a constant rate
Which is equal to an effective annual rate of 12.36 percent?
-EAR= (1+.12/2)^2-1 -12% compounded semiannually
An investment offers $6,700 per year for 15 years, with the first payment occurring one year from now. If the required return is 6 percent, what is the value of the investment?
-Finding PV for an annuity =PV in excel =65072.07
Which of the following payment methods amortizes a loan?
-Fixed payments that result in a zero loan balance -Interest plus fixed amount
Which are real world examples of annuities?
-Mortgages -Pensions
A benchmark PE ratio can be determined using:
-The PEs of similar companies -A companies own historical PEs
Which of the following are true about a partial amortization loan?
-The amortization period is longer than the loan period -The monthly payments do not fully pay off the loan by the end of the loan period -The borrower makes a large balloon payment at the end of the loan period. -The monthly payment is based on a longer amortization period than the maturity of the loan.
Which of the following are real-world examples of annuities?
-pensions -mortgages
Treasury Bills yielded a nominal average return over 86 years of 3.5% versus an average inflation rate of 3.0% over the same period. This makes the real return on T-bills approximately equal to _____.
0.5%
What is the total number of inputs that change while doing sensitivity analysis?
1
The basic NPV investment rules are:
1) Accept a project if the NPV is greater than zero 2) If the NPV is equal to zero, acceptance or rejection of the project is a matter of indifference 3) Reject a project if its NPV is less than zero
What are the advantages of the payback period method for management?
1. The payback period method is easy to use 2. the payback period method is ideal for short projects 3. it allows lower level managers to make small decisions effectively
Name two features of municipal bonds:
1. They are exempt from federal taxes 2. They are issued by state and local government's
What are the weaknesses of the payback method?
1. Time value of money principles are ignored 2. Cash flows received after the payback period are ignored 3. the cutoff date is arbitrary
Arrange the following investments in ascending order from lowest historical risk premium at the top to highest historical risk premium at the bottom.
1. U.S. Treasury Bills 2. Long-term corporate bonds 3. Large company stocks 4. Small company stocks
A dividend yield of 10% says that, for each dollar we invest, we get _______ cents in dividends.
10
What is the coupon rate on a bond that has a par value of $1,000, a market value of $1,100, and a coupon interest payment of $100 per year?
10%
What is the coupon rate on a bond that has a par value of $1000, a market value of $1100, and a coupon interest payment of $100 per year?
10%
If the stated interest rate is 10 percent, what is the EAR if interest is compounded monthly?
10.47%
$100 at the end of each year forever at 10% per year is worth how much today?
100/.1=1000
According to the top-down approach, what is the operating cash flow if sales are $200,000, total cash costs are $190,636, and the tax bill is $1,144?
200,000-190,636-1144= 8,220
What is the price of a stock at the end of one year (P1) if the dividend for year 2 (Div2) is $5, the price for year 2 (P2) is $20, and the discount rate is 10%?
22.73 (5+20)/(1+0.10)
With a normal distribution, the probability that we end up withing two standard deviations is about ______ percent.
95
What is the value of a bond if the present value of interest cash flows is $200 and the present value of the par value to be received when the bond matures is $750?
950
What is the PI for a project with an initial cash outflow of $30 and subsequent cash inflows of $80 in year 1 and $20 in year 2 if the discount rate is 12%?
= 2.91 CF 0 = -30, CF 1 = 80, CF 2 = 20 ; r = 12% PV = 80/1.12 + 20/1.12^2 = 87.37 PI = 87.37/30 = 2.91
What is the PI for a project with an initial cash outflow of $30 and a subsequent cash inflows of $80 in Year 1 and $20 in Year 2 if the discount rate is 12%?
=((80/1.12)+(20/1.12^2))/30=2.91
You agree to pay back $1100 in 4 weeks for a $1000 payday loan. Your annual percentage rate APR rounded to two decimal places is _____% assume weekly compounding and 52 weeks in the year.
=(1100/1000-1)*52/4 =130%
Your bank quotes a 9% APR on your car loan. (.75 percent interest each month). What is the EAR?
=1.0075^12-1 =9.38%
What is the PV of an ordinary annuity that pays $100 per year for 3 years if the interest rate is 10% per year?
=248.69
You borrow $100 and agree to pay back your payday loan in 2 weeks for 10% interest over that 2 week period. What is your APR?
=260.71%
Find future value of $400 per year for 10 years at 5%
=FV(.05,10,-400,0,0) 5,031.16
Which rating means that a firm is in a strong position to meet its debt obligations?
AAA
Another common term for the effective annual rate (EAR) is the:
APY (annual percentage yield
The PI rule for an independent project is to ______ the project if the PI is greater than 1.
Accept
A project should be _____ if the NPV is greater than zero
Accepted
The payback period rule _______ a project if it has a paycheck period that is less or equal to a particular cutoff date.
Accepts
Which of the following is true about interest rate risk?
All else equal, the longer the time to maturity, the greater the interest rate risk. All else equal, the lower the coupon rate, the greater the interest rate risk.
How does the timing and the size of cash flows affect the payback method? Assume the project does pay back within the project's lifetime.
An increase in the size of the first cash inflow will decrease the payback period, all else held constant.
Which compounding interval will result in the lowest future value assuming everything else is held constant?
Annual
How much can a corporation expect to receive per bond if it sells ten-year zero coupon bonds with a face value of $1000 if the market rate of interest is 9%?
Answer: $414.64 Zero coupon bonds use semi annual compounding: $1000/[1 + (.09/2)] ^20 (Make N=20 because there are 20 periods in a 10 year semi-annual bond)
Which of these are required to calculate the current value of a bond? Check all that apply. -applicable market rate -coupon rate -par value -Price at the time of bond issue -Time remaining to maturity
Applicable market rate Coupon rate Par value Time remaining to maturity
Percentage returns are more convenient than dollar returns because they _________.
Apply to any amount invested
An annuity due is a series of payments that are made _______
At the beginning of each period
The Average Accounting Return is defined as:
Average NI / Average BV
Payback period rule:
Based on the payback rule, an investment is acceptable if its calculated payback period is less than some prespecified number of years.
The dividend yield for a 1-year period is equal to the annual dividend amount divided by the ___________.
Beginning stock price
When an investor sells Avon, the price received is always the?
Bid price
provision allows the company to repurchase or "
Blank 1: call Blank 2: call
price excludes interest accrued since the last coupon payment, while the
Blank 1: clean Blank 2: dirty
premium is the portion of a nominal interest rate that represents compensation for expected future
Blank 1: inflation Blank 2: inflation
premium is the portion of a nominal interest rate or bond yield that represents compensation for lack of
Blank 1: liquidity Blank 2: liquidity
Protective covenants are classified into two types:
Blank 1: negative Blank 2: positive or affirmative
If a given set of cash flows is expressed in
Blank 1: nominal Blank 2: nominal
premium is the portion of a nominal interest rate or bond yield that represents compensation for unfavorable
Blank 1: taxability Blank 2: tax
The term for the number of years until the face value of a bond is due to be paid is:
Bond's time to maturity
What are original issue discount bonds?
Bonds that are issued with a very low coupon rate.
What are municipal bonds?
Bonds that have been issued by state or local governments
What are crossover bonds?
Bonds that have both an investment grade and a junk bond rating
What are "fallen angel" bonds?
Bonds that have dropped from investment grade to junk bond status
What is a broker?
Brings buyers and sellers together without maintaining their own inventory.
A person who brings buyers and sellers together but does not maintain in inventory of stocks.
Broker
Capital _______ is the decision-making process for accepting and rejecting projects
Budgeting
This type of bond protects insurance companies from natural disasters.
CAT bond
Overhead cost
CEO salary, other expenses to a company that won't change because of a project
Externalities
Cannebalization (erosion)
Name to cash flows to investors in stocks:
Capital gains and dividends
The average return on the stock market can be used to _________.
Compare stock returns with the returns on other securities.
What are the three components of the nominal rate of return?
Compensation for the inflation effect on the investment earnings Real rate of return Compensation for the inflation effect on the original investment
The geometric rate of return takes _________ into account.
Compounding
Name to NASDAQ features:
Computer network of security dealers, multiple market maker system
The ___ can be interpreted as the capital gains yield.
Constant growth rate
Three special case patterns of dividend growth include:
Constant growth, non-constant growth, zero growth.
How is a conventional bond different from a zero coupon bond?
Conventional bonds can sell at par, at a discount from par, or at a premium over par while zeros must be offered at a discount from par A conventional bond pays periodic interest whiles zeros make no interest payments.
This type of bond can be exchanged for shares of stock.
Convertible bond
How has TRACE improved transparency in the corporate bond market?
Corporate bond dealers are now required to report trade information through TRACE.
Opportunity cost
Cost of capital
The Profitability Index is also called the ______ ratio.
Cost-Benefit
Which of these are required to calculate the current value of a bond?
Coupon rate Time remaining to maturity Applicable market rate Par value
What information is needed to compute a bond's yield-to-maturity?
Coupon rate Time to maturity The bond's current price
Which of these is included in the calculation of a bonds yield to maturity? Check all that apply. -coupon rate -current price -par value -Number bonds issued
Coupon rate, current price, and par value.
Dividends not paid any particular year, and are carried forward as an arrearage.
Cumulative dividends
Name two types of dividends payable on preferred stock:
Cumulative or noncumulative
This type of voting permits minority participation.
Cumulative voting
How would we determine D1 when we have a growth rate g per period?
D1 = D0 * (1+g)
OCF=
EBIT-TAX+DEPR
Upon the merger with which company did the NYSE become the "first global exchange"
Euronext a stock exchange based in amersterdam
How frequently does continuous compounding occur?
Every instant
The __________ rate of return is the difference between risky returns and risk-free returns.
Excess
The price of a share of common stock is equal to the present value of all _________ future dividends.
Expected
What are the three components of the Treasury yield curve?
Expected inflation Real rate of return Interest rate risk premium
Which is the formula for the FV of an annuity?
FV= C*(((1+r)^t-1)/r)
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:
Face Value
Long-term bonds have greater interest rate sensitivity because a large portion of a bonds value comes from the $1000 _______ ________.
Face amount.
True or False: An advantage of the AAR is that is based on book values, not market values
False
True or false the scale of a project is never a concern when using irr.
False
True or false: A bond's value is not affected by changes in the market rate of interest.
False
True or false: If you invest in junk bonds, there is a high likelihood that you will earn a very high return.
False
True or false: Percentage returns are difficult to use for comparisons because they depend on the dollar amount invested. True False
False
True or false: The capital gains yield = (Pt+1 - Pt)/Dt
False
True or false: The capital gains yield = (Pt+1 - Pt)/Dt True False
False
True or false: The dividend yield minus the capital gains yield is the total return percentage.
False
True or false: The dividend yield minus the capital gains yield is the total return percentage. True False
False
True or false: The inflation premium will be higher if the rate of inflation is low.
False
True or false: The real rate of return will generally be higher than the nominal rate of return.
False
True or false: To get the average return, the yearly returns are summed and then multiplied by the number of returns.
False
True or false: zero coupon bond make interest payments.
False
True or false: In the Ibbotson-Sinquefield studies, U. S. Treasury bill data is based on T-bills with a maturity of one year.
False; one month
Dividends are the _________ component of the total return from investing in a stock.
Income
Based on the historical returns shown in the text, the average __________ was 2.9 percent per year over the 94-year span depicted.
Inflation
Nominal rates are called "nominal" because they have not been adjusted for _____________.
Inflation
Which three components determine the shape of the term structure of interest rates?
Inflation premium Real interest rate Interest rate risk premium
One reason corporations use staggering boards is that:
It makes take over attempts to be less likely to be successful.
A single cash flow is also known as a:
Lump sum
What is NASDAQ?
National Association of Securities Dealers Automated Quotations, "over the counter trading" with no floor dealers act as market makers by posting bid/ask prices to computer screens all over the world
There is a(n) ________________ relationship between market interest rates and bond values.
Negative
What are the two most important stock exchanges?
New York Stock Exchange and the NASDAQ
Match the following terms relating to stock valuation.
P1 ................................................ Price in one year D1 ................................................ Dividend in one year R ................................................ Discount rate P0 ................................................ Price today
C/r is the formula for the PV of a ______
Perpetuity
Match the following terms relating to stock valuation. P1 D1 R P0
Price in one year; Dividend in one year; Discount rate; Price today
Which for the following indicates that a project should be rejected? Assume the cash flows are normal, i.e., the initial cash flow is negative.
Profitability Index less than 1.0
Name three institutions that issue bonds that are traded in the bond market.
Public corporations, the federal government, state governments.
The owner of this bond can force issuer to repay prior to maturity at a stated price.
Put bond
The Sharpe ratio measures __________.
Reward to risk
Within the context of financial markets, complete the following equation: Bid − Ask =
Spread
How to calculate fixed costs?
TC=VC+TC
What is the asked price?
The asked price is the price at which a dealer is willing to sell.
Which has a higher value, the bid price quote or the asked price quote?
The asked price quote is higher.
Given two or more mutually exclusive investments, which one is the best?
The best one is the one with the largest NPV.
What is the bid price?
The bid is the price at which a dealer is willing to buy securities.
Which two prices can be found in the Wall Street Journal's daily Treasury bond listing?
The bid price and the asked price.
Which of the following entities declares a dividend?
The board of directors
Assume you own a bond that was issued by a blue-chip company. If the market rate of interest rises, what will happen to the value of your bond?
The bond value will fall.
You own two bonds—one with a 5 percent coupon and one with a 6 percent coupon. Which one is more sensitive to interest rate risk, all other things being equal?
The bond with the 5 percent coupon rate is more sensitive.
The amount by which the call price exceeds the par value of the bond is called?
The call premium
Marginal or incremental revenue
The change in revenue when there is a small change in output
What is the difference between a bond's "clean price" and its "dirty price"?
The clean price excludes interest accrued since the last coupon payment, while the dirty price includes accrued interest.
Why does a bond's value fluctuate over time?
The coupon rate and par value are fixed, while market interest rates change.
Why does a bond's value fluctuate overtime?
The coupon rate and par value are fixed, while market interest rates change.
Why is the YTM of a discount bond greater than the bond's current yield?
The current yield does not include the capital gain from the price discount.
What does the AAA rating assigned by S&P mean?
The firm is in a strong position to meet its debt obligations
Which of the following are features of municipal bonds?
The interest on municipal bonds is exempt from federal taxes. They are issued by state and local governments.
Why did Disney issue 100-year bonds, dubbed "Sleeping Beauty" bonds, in the 1990s?
To lock-in historically low interest rates for a long time
Because of _______ and _______, interest rates are often quoted in many different ways.
Tradition, legislation
To a false: all else equal, the lower the coupon rate, the greater the interest rate risk.
True
True or False: Some projects, such as mines, have cash outflows followed by cash inflows and cash outflows again, giving the project multiple internal rates of return
True (Whenever subsequent cash flows are both negative and positive, multiple internal rates of return may occur)
Jimbo Bobcat has a book deal. He will receive $50,000 in advance to write a book about his life. It will take two years to write. In order to write it, he'll have to quit a second job, where he earns $26,000 per year, so his cash flow for each of those two years is -$26,000. What is the IRR decision rule for this investment if his opportunity cost of capital is 8%?
accept if IRR <8%, reject otherwise; because initial CF is positive and subsequent CFs are negative
For a project with a positive initial cash flow followed by negative cash flows we should _______.
accept if the IRR is less than R
A project should be _____ when its NPV is greater than zero
accepted
If a project's payback period is less than or equal to a particular cutoff date, the payback period rule suggests...
accepting
Percentage returns are more convenient than dollar returns because they: apply to any amount invested allow comparison against other investments avoid using the dollar sign are more accurate than dollar amounts
apply to any amount invested allow comparison against other investments
One of the weaknesses of the payback period is that the cutoff date is a(n) ____ standard.
arbitrary
The amount by which the call price exceeds the par value of the bond is called the _____.
call premium
The decision making process for accepting and rejecting projects
capital budgeting
The percentage change in the price of a stock over a period of time is called its ___________.
capital gain yield
The total dollar return is the sum of dividends and __________.
capital gains or losses
The total dollar return is the sum of dividends and __________. capital gains or losses overall market fluctuations percentage returns government payouts
capital gains or losses
A bond with exotic features is often called a _____ bond.
cat
The geometric average return is the average _________stock, Incorrect Unavailable return earned per year over a multiyear period.
compound
Method #2: The reinvestment approach (MIRR)
compound all cash flows (positive and negative) except the first out to the end of the project's life and then calculate the IRR.
The two potential ways to make money as a stockholder are through _______ and capital appreciation.
dividends
The third important characteristics of dividends?
dividends by an individual shareholder are taxable
The constant-growth model infers that ___.
dividends change at a constant rate
The total dollar return on a stock is the sum of the ____ and the _____.
dividends; capital gains
The total dollar return on a stock is the sum of the ____ and the _____. capital gains; interest payments interest payments; dividends dividends; capital gains
dividends; capital gains
When are directors elected?
elected each year at an annual meeting by a vote of holders with majority of the shares and who have the right to vote
True or false: Because T-bills have low risk relative to common stocks, T-bills cannot outperform common stocks. True False
false
True or false: The average return of a given period is typically not a good estimate of the returns over that same period. True False
false
The second lesson from studying capital market history is that risk is: to be avoided altogether largely ignored handsomely rewarded always detrimental to returns
handsomely rewarded
The movie industry frowned upon NPV analysis because their cash flows are _______ to predict (hard or easy)
hard
The correlation between the real rate of interest and every interest rate is:
high
The risk-return relationship states that a riskier investment should demand a ____________ return.
higher
A bond with a BBB rating has a ______ than a bond with an A rating.
higher risk of default
One of the components of the nominal rate of return is the compensation for the
inflation
The term structure of interest rates is determined by the real rate of interest, the interest rate risk premium, and the
inflation
The three components of the Treasury yield curve include the real rate, expected future
inflation
When comparing a 1-year bond's price to a 30-year bond's price, the 1-year bond's price is relatively
insensitive
The U.S. Treasuries market is the _____ in the world in terms of trading volume.
largest
All other things being equal, the
lower
Which of the following occurs in the primary market?
newly-issued stocks are initially sold
The OTC has _____ designated physical location.
no
Normally, the excess rate of return is ___.
positive
For a project with normal cash flows, the NPV is ____ if the required return is less than the IRR, and it is ____ if the required return is greater than the IRR.
positive, negative
An unrealized gain is treated the same as a realized gain when computing the total __________
return
The discount rate is determined by the ________ of a project.
risk
The excess return is the difference between the rate of return on a risky asset and the ______ rate. prime inflation risk-free federal funds
risk free
The excess return is the difference between the rate of return on a risky asset and the ______ rate.
risk-free
What else can we use the dividend growth model for?
ro get the stock price at any point in time, not just today. The pice of stock at time t Pt = Dt*(1+g) / R-g = Dt+1 / (R-g)
NPV accounts for the size of the project and eliminates the effects of _____.
scale
When evaluating mutually exclusive projects the profitability index has a problem with ________.
scale
The trading of existing shares occurs in the ___ market.
secondary
Interest paid twice a year is known as _____ compounding.
semi-annual
The Ibbotson SBBI data show that over the long-term, ___. long-term corporate bonds had the lowest risk large-company stocks generated the highest average return small-company stocks generated the highest average return T-bills, which had the lowest risk, generated the lowest return small-company stocks had the highest risk level
small-company stocks generated the highest average return T-bills, which had the lowest risk, generated the lowest return small-company stocks had the highest risk level
What is capital budgeting is all about?
trying to determine whether a proposed investment or project will be worth more, once it is in place, than it costs. Capital budgeting becomes much more difficult when we cannot observe the market price for at least roughly comparable investments.
If the growth rate (g) is zero, the capital gains yield is ___.
zero
The IRR is the discount rate that makes the NPV of a project equal to ___
zero
Where are is the discount rate that makes the npv of a project equal to ______.
zero
You expect the following dividends from ABC Stock: Year 1- $3.00 Year 2- $2.00 Year 3 $1.00 You expect that from year 4 onward, the dividend will grow at a constant 3% growth rate. If your required rate of return is 7%, what is your estimate for the current stock price?
$26.39
A firm decides to raise money by issuing 5 million bonds with a par value of $5,000 each for 10 years at a coupon rate of 7 percent. At the time of issue, the bonds were sold for $5,500 each. What will the par value of the bonds be in year 5?
$5,000 per bond
What is the NPV of a project with an initial investment of $95, a cash flow in one year of $107, and a discount rate of 6%?
$5.94
Whipple Corporation just issued 315,000 bonds with a coupon rate of 6.23 percent paid semiannually that mature in 20 years. The bonds have a YTM of 6.67 percent and have a par value of $2,000. How much money was raised from the sale of the bonds? (Round your intermediate calculations to two decimal places and final answer to the nearest whole dollar amount.)
$644,334,000
Dusty Corporation has an issue do preferred stock that pays a dividend of 7% of its state value, which is $100. Which of the following would be a commonly used name for that preferred stock?
$7 preferred
Dusty corporation has an issue of preferred stock that pays a dividend of 7% of it stated value which is $100. Which of the following would be a commonly used name for that preferred stock?
$7 preferred
What is the value of a stocks if next year's dividend is $6, the discount rate is 11 percent and the constant rate of growth is 3 percent?
$75 because $6/(0.11-0.03)
What is the price of a stock if it's dividend a year from now is expected to be $3.20, the discount rate is 9%, and the constant rate of growth is 5%?
$80
What is the price of a U.S. Treasury bond that is listed at 90 if the par value is $1,000?
$900
Wine and Roses, Incorporated, offers a bond with a coupon of 5.0 percent with semiannual payments and a yield to maturity of 5.90 percent. The bonds mature in 10 years. What is the market price of a $1,000 face value bond?
$932.74
Which one of these correctly specifies the relationship between the nominal rate and the real rate?
(1 + R) = (1 + r) × (1 + h)
The formula for the present value of annuity due is:
(1 + r) x (PV of an ordinary annuity)
A credit card charges 18% interest per year (APR) (1.5% each month). What is the EAR?
(1.051)^12-1= 19.56%
You agree to repay $1200 in 2 weeks for a $1000 payday loan. What is you EAR assuming there are 52 weeks in a year?
(1200/1000)^52/2-1= 11,347.55
How to calculate break even?
(FC+D)/(P-v)
How is an APR computed?
(Rate per period X Number of periods in a year) - 1
What will your after-tax you'll be on a corporation bond that is currently priced to yield 7% if you are in the 25% tax bracket?
(yield) X (1 - tax rate) .07 X (1 - .25) .07 X .75 = 5.25
The Ibbotson SBBI data show that over the long-term, ___.
* small-company stocks had the highest risk level * small-company stocks generated the highest average return * T-bills, which had the lowest risk, generated the lowest return
The Ibbotson-Sinquefield data shows that:
*long-term corporate bonds had less risk or variability than stocks *U.S. T-bills had the lowest risk or variability
The NYSE differs from the NASDAQ primarily because the NYSE has:
- A physical location - An auction market - Specialists
Which of the following are expected cash flows to investors in stocks?
- Capital gains - Dividends
Which of the following are weaknesses of the payback method?
- Cash flows received after the payback are ignored - time value of money principles are ignored - the cutoff date is arbitrary
Two basic effects of a staggering board:
- Makes it more difficult for a minority to elect director because there are fewer directors to be elected at one time. - makes take over attempt less likely to be successful because it makes it more difficult to vote in a majority of new directors.
NASDAQ has which of these features?
- Multiple market maker system - Computer network of securities dealers
In general, NPV is ______.
- Negative for discount rates above the irr - positive for discount rates below the irr - equal to zero when the discount rate equals the irr
In which way(s) is preferred stock like a bond?
- Preferred shareholders receive a stated value if the firm liquidates, like bondholders - Preferred shareholders receive a stated dividend, similar to interest on a bond - Some preferred stock has credit ratings, like bonds - Preferred stock sometimes has a sinking fund, giving in a set maturity like bonds.
A benchmark PE ratio can be determined using:
- The PEs of similar companies - A company's own historical PEs
Which of the following are reasons why it is more difficult to value common stock than it is to value bonds?
- The life of a common stock is essentially forever - The rate of return required by the market is not easily observed - Common stock cash flows are not known in advance
Which of the following is usually a right of common shareholders?
- The right to a proportional share of dividends paid - Voting rights
What does value additivity mean for a firm?
- The value of a firm is simply the combined value of a firm's projects, divisions, and entities owned by the firm - The NPV values of individual projects can be added together
Which of the following are true for a project with a negative initial cash flow followed by positive cash flows?
- accept if npv is greater than 0 - reject if irr is less than market rate of financing
The discounted payback has which of these weaknesses?
- arbitrary cut-off date - exclusion of some cash flows - loss of Simplicity as compared to the payback method
Two mutually exclusive projects can be correctly evaluated by _________.
- comparing the NPVs of the two projects - examining the NPV of the incremental cash flows - comparing the incremental irr to the discount rate
Name three features of a common stock:
- it has no special preference in bankruptcy -it has no special preference in receiving dividends -it generally has voting rights
Which of the following is true about a growing annuity?
-The cash flows grow for a finite period -The cash flows grow at a constant rate
Which of the following are common protective covenants? -The firm cannot merge with any other firm -The firm is pledge assets to other lenders -The firm must limit dividends to equity holders -The firm must maintain working capital at or above a specified level -The firmest issue additional long-term debt within a specified.
-The firm cannot merge with any other firm -The firm must limit dividends to equity holders -The firm must maintain working capital at or above a specified level
Which of the following are reasons why it is more difficult to value common stock than it is to value bonds? -The life of a common stock is essentially forever - all bond cash flows are guaranteed to be paid -common stock cash flows are not known in advance -The rate of return required by the market is not easily observed.
-The life of a common stock is essentially forever -common stock cash flows are not known in advance -The rate of return required by the market is not easily observed.
What are the advantages of the payback period method for management?
-The payback period method is easy to use - it allows lower-level managers to make small decisions effectively - the payback period method is ideal for minor projects *** the payback period DOES NOT adjust for the discount rate***
Which of the following processes can be used to calculate future value for multiple cash flows?
-calculate the future value of each cash flow first and then add them up -compound the accumulated balance forward one year at a time
Name six factors that determine the yield on a bond.
-expected future inflation -default risk -Real rate of return -taxability -interest rate risk - liquidity
Which of the following are annuities?
-installment loan payments -monthly rent payments in a lease
Which of the following are ways to amortize a loan?
-pay the interest each period plus some fixed amount of the principal -pay principal and interest every period in a fixed payment
Preferred stock has a preference over common stock in the colon
-payment of dividends -The distribution of corporate assets in the event of liquidation
Which of the following should be valued using a perpetuity formula?
-preferred stock -cash flows from a product whose sales are expected to remain constant forever -a consol (bond that pays interest only and does not mature)
Which six factors determine the yield on a bond?
-real rate of return -interest rate risk -expected future inflation -liquidity -default risk -taxability
A firm evaluating two mutually exclusive projects can _______________.
-reject both projects -accept one of the projects - reject of the projects
Which of the following are true about the amortization of a fixed payment loan?
-the amount of interest paid decreases each period -the principal amount paid increases each period
In the Excel setup of a loan amortization problem, which of the following occurs?
-the payment is found using PMT (rate, nper, -pv, fv) -to find the principal payment each month, you subtract the interest payment from the total payment.
Price at rime t = Pt = benchmark PE * EPS
...
If you are holding a municipal bond that is trading at par to yield 6 percent, by how much will your aftertax yield change if your income tax bracket increases from 15 percent to 20 percent. Assume there are no state or local taxes
0%
What are the advantages of the payback period method for management?
1) It allows lower level managers to make small decisions effectively 2) The payback period method is ideal for minor projects 3) The paycheck period is method is easy to use
According to Graham and Harvey's 1999 survey of 392 CFO's, what two capital budgeting methods are widely used by firms in the US and Canada?
1) NPV 2) IRR
If a project has multiple internal rates of return, what methods should be used?
1) NPV 2) MIRR
What presents problems when using the IRR method?
1) Non-conventional cash flows 2) Mutually Exclusive Projects
In general, NPV is _____.
1) Positive for discount rates below the IRR 2) Negative for discount rates above the IRR 3) Equal to zero when the discount rate equals the IRR
What are the reasons why IRR continues to be used in practice?
1) The IRR of a proposal can be calculated without knowing the appropriate discount rate 2)Business people prefer to talk about rates of return 3) It is easier to communicate information about a proposal with an IRR
What are the methods of calculating the MIRR of a project?
1) The Reinvestment Approach 2)The Discounting Approach 3) The Combination Approach
What are weaknesses of the payback method?
1) The cutoff date is arbitrary 2) Time value of money principles are ignored 3) Cash flows received after the paycheck period is ignored
Which of these correctly identify differences between Treasury bonds and corporate bonds? Check all that apply. -Treasury bonds are issued by the US government will corporate bonds are issued by corporations. -Treasury bonds do not offer any tax benefits to investors but corporate bonds do. -Treasury bonds offered to certain tax benefits to investors the corporate bonds cannot offer. -Treasury bonds are free of default risk while corporate bonds are exposed to default risk.
1,3,4
A corporate bonds yield to maturity can do two things:
1. Change over time 2. Can't be greater than, equal to, or less than the bonds coupon rate
What are the steps involved in the discounted payback period in order starting with the first step?
1. Discount the CFs using the discount rate 2. Add the discounted CFs 3. Accept if the discounted payback period is less than some pre-specified number of years
Two key differences between the NYSE and NASDAQ:
1. NASDAQ is a computer network and his new physical location where trading takes place. 2. NASDAQ has multiple market maker system rather than a DMM system.
What are the two key difference between NASDQ and NYSE?
1. NASDAQ is a computer network that has no physical location where trading takes place 2. NASDAQ has multiple market maker system rather than a specialist system.
The NYSE differs from the NASDAQ primarily because the NYSE has: name three things
1. Physical location 2. Specialists 3. And auction market
When cash flows are conventional, NPV is ___
1. Positive for discount rates below the IRR 2. equal to zero when the discount rate equals the IRR 3. negative for discount rates above the IRR
Arrange the following investments starting from lowest historical risk premium to highest historical risk premium.
1. US Treasury Bills 2. Long-term corporate bonds 3. Large-company stocks 4. Small-company stocks
According to the basic investment rule for NPV, a firm should ____________.
1. accept a project if the NPV is greater than zero 2. be indifferent towards accepting a project if NPV is equal to zero 3. reject a project if NPV is less than zero
Side effects from investing in a project refer to cash flows from:
1. beneficial spillover effects 2. erosion effects
What are considered to be relevant cash flows?
1. cash flows from erosion effects 2. cash flows from beneficial spillover effects 3. cash flows from opportunity costs
Investment in networking capital arises when _____.
1. inventory is purchases 2. cash is kept for unexpected expenditures 3. credit sales are made
What are the weaknesses of the discounted payback period?
1. loss of simplicity as compared to the payback method 2. exclusion of some cash flows 3. arbitrary cutoff date
Identify the three main sources of cash flows over the life of a typical project:
1. net cash flows from sales and expenses over the life of a project 2. net cash flows from salvage value at the end of the project 3. cash outflows from investment in plant and equipment at the inception of the project
Why is common stock more difficult to value in practice than a bond? (three reasons)
1. promised cash flows are not known in advance 2. the life of investment is forever because stock has no maturity 3. no easy way to determine the rate of return the market require
What are the three cases of simplifying assumptions we must make about the pattern of future dividends to come up with a value for stock?
1. the dividend has zero growth rate 2. the dividend grows at a constant rate 3. the dividend grows at a constant rate after some length of time
What are three additional rights of shareholders beside voting?
1. the right to share proportionally in dividends 2. The right to share proportionally in assets remaining after liabilities have been paid in a liquidation 3. The right to vote on stockholder matters of grave importance such as a merger. Done at annual or special meeting
When evaluating cost-cutting proposals, how are operating cash flows affected?
1. there is an additional depreciation deduction 2. the decrease in costs increases operating income
The three attributes of NPV are that it:
1. uses all the cash flows of a project 2. uses cash flows 3. discounts the cash flows properly
What is the current yield on $1000 par value bond that sells for $900 with the coupon rate is 10%?
11.11%. Current yield equals annual amount divided by PV (aka Price of bond). First myltiply .10 X $1000 to get payment. It's already annualized at $100. So, $100/$900= .11111 =11.11%
The arithmetic mean for large-company stock returns from 1926 to 2017 is:
12.1%
Suppose you buy a share of stock for $100. At the end of one year the stock price is $114 and a $1 dividend is paid. If you do not sell the stock, your total annual return is ________.
15%
Based on average historical returns shown in the text, small-company stocks increased in value by _________ percent in a typical year.
16
The standard deviation for large-company stock returns from 1926 to 2017 is:
19.8%
Most corporate bonds pay coupon interest payments
2
Bonds used in Ibbotson SBBI long-term U.S. government bond portfolio had maturities of ____ years.
20
A zero-growth stock pays a dividend of $2 per share and has a discount rate of 10%. The stock's price will be 0.
20.00
A project with a cash inflow of $200 followed by a cash outflow of -$250 1 year later we'll have an IRR of _____ percent. (25, 30, -20, or 20)
25 Explanation: 0 = +200 - $250/1 + IRR IRR = $250/200 - 1 = 25%
What is the record seat price in the NYSE?
4 million
Roger Ibbotson and Rex Sinquefield presented year-to-year historical rates of return on types _________ of financial investments.
5
If you are in the 20 percent tax bracket, what is your aftertax yield on a par value municipal bond yielding 5 percent? Ignore state and local taxes.
5%
If you are in the 20% tax bracket, what is your after-tax yield on a par value municipal bond yielding 5%? Ignore state and local taxes.
5%. Interest income from the Muni is exempt from the federal income tax so the after-tax yield equals the before tax yield.
You are planning to buy a CD for $1,352. You will receive $1500 in 2 years. Use a financial calculator to find the interest rate you will receive on that investment, assuming annual compounding.
5.33%
What is the after-tax yield on a US treasury bond using 7% if you are in the 20% tax bracket?
5.6% .07 X (1- 0.2) = 5.6%
If an investment appreciates by 7 percent while the rate of inflation is 2 percent, what is the nominal rate of return?
7%
If an investment appreciates by 7% while the rate of inflation is 2%, what is the nominal rate of return?
7%. The nominal rate is the observed rate, in this case the appreciation is the observed rate. It includes inflation. (P 223)
There is a bond that has a quoted price of 110.547 and a par value of $2,000. The coupon rate is 7.05 percent and the bond matures in 19 years. If the bond makes semiannual coupon payments, what is the effective annual interest rate?
7.12%
A bond has a par value of $1,000, a current yield of 7.67 percent, and semiannual coupon payments. The bond is quoted at 100.39. What is the coupon rate of the bond?
7.70%
A bond with a current yield of 7.55 percent is quoted at 104.696. What is the coupon rate of the bond:?
7.90%
If the rate of inflation is 3 percent and the real rate of return is 5 percent, the nominal rate is approximately ____ percent.
8
If the rate of inflation is 3% and the real rate of return is 5%, the nominal rate is approximately what percent?
8% To find nominal rate simply add inflation to the real rate.
Your bank quotes a 9% APR on your car loan (.75 percent interest each month). What is the EAR?
9.38%
The present value interest factor for an annuity with an interest rate of 8% per year over 20 years is _______
9.8181
Ralph has $1000 in an account that pays 10% per year. Ralph wants to give his money to his favorite charity by making three equal donations at the end of the next 3 years. How much will Ralph give to the charity each year?
=402.11
You owe $1200 on your credit card, which charges 1.5% per month. If you pay $50 per month starting at the end of this month, how many months will it take to pay off your credit card?
=NPER(.015,-50,1200,0,0) 30 months
The spreadsheet function for calculating Net Present Value is:
=NPV()
Which excel functions will calculate $614.46 present value of an ordinary annuity of $100 per year for 10 years at 10% per year?
=PV(.10,10,-100,0) -Make payment negative
You want to borrow $103,000 from your local bank to buy a new sailboat. You can afford to make monthly payments of $2,350, but no more. Assuming monthly compounding, what is the highest rate you can afford on a 54-month APR loan?
????
Who are specialists?
A NYSE member acting as a dealer in a small number of securities on the exchange floor "market maker" represent the second largest number of people on NYSE
The internal rate of return is a function of ________.
A Projects cash flows
What is a premium bond?
A bond that sells for more than face value
The NYSE differs from the NASDAQ primarily because the NYSE has:
A physical location; an auction market; specialists
A bond that sells for more than face value is what type of bond?
A premium bond
Which is the simplest form of loan?
A pure discount loan
Which of the following is the simplest form of loan?
A pure discount loan
What is the dividend yield?
A stock's expected cash dividend divided by its current price D1/P0
According to the average accounting return rule, a project is acceptable if its average accounting return exceeds:
A target average accounting return
Match each one of these bonds with their characteristic.
CAT bond matches Choice, Protects insurance companies from natural disasters Protects insurance companies from natural disasters Convertible bond matches Choice, Can be exchanged for shares of stock Can be exchanged for shares of stock Put bond matches Choice, Owner can force issuer to repay prior to maturity at a stated price Owner can force issuer to repay prior to maturity at a stated price Structured note matches Choice, Based on financial securities, commodities, or currencies Based on financial securities, commodities, or currencies
What is a disadvantage of the Profitability Index?
Cannot Rank mutually exclusive projects
The ___________ gains yield can be found by taking the difference between the ending stock price and the initial stock price and dividing it by the initial stock price.
Capital
If you buy a stock for $10 and later sell it for $16, you will have a _________.
Capital gain of $6
Which of the following are ways to make money by investing in stocks? Capital gains Dividends Amortization Interest
Capital gains Dividends
Which of the following are cash flows to investors in stocks? - interest - Capital gains - dividends - fees
Capital gains and dividends. Stock investors do not receive interest. Their cash flows come from capital gains and dividends only!
The total dollar return is the sum of dividends and ______________.
Capital gains or losses
Which of the following are cash flows to investors in stocks?
Capital gains; Dividends
When a company declares a dividend, shareholders generally receive __________.
Cash
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.
Matthews Company has two classes of common stock, and each share represents the same proportion in the company. Class A has 2 votes for each share. Class B has one vote per share. Which class is more valuable?
Class A
Matthews company has two classes of common stock, and each share represents the same proportion of ownership in the company. Class A has two votes for each share. Class B has one vote per share. Which class is more valuable?
Class A. Larger voting rights add value to the class A shares.
The largest number of NYSE members are registered as?
Commission brokers
Which of the following are true based on the year-to-year returns from 1926-2014? Common stocks frequently experience negative returns. T-bills sometimes outperform common stocks. Consumer price index is always positive.
Common stocks frequently experience negative returns. T-bills sometimes outperform common stocks.
Supposed Bob owns 20 shares and Vicky owns 30 shares in Good Company, and there are five members of the Board of Directors. Under which voting arrangement can Bob assure himself of a board member that represents his interests?
Cumulative voting
What is a bond's current yield?
Current yield = Annual coupon payment/Current price
How would we determine D2 when we have a growth rate g per period?
D2 = D0 * (1+g)^2
A person who maintains an inventory and stands ready to buy and sell stocks at any time.
Dealer
If the liquidity of a bond increases than the bonds you will what?
Decrease.
All else constant, the dividend yield will increase if the stock price ____________________.
Decreases
A firms bond rating sheds light on its ____________ risk.
Default
What are three important features of Treasury notes and bonds?
Default-free Highly liquid Taxable
Historically, there is a(n) _________ relationship between risk and expected return in the stock market.
Direct
What is a discount bond?
Discount bonds are bonds that sell for less than the face value
What information do we need to determine the value of stock using the zero growth model?
Discount rate and annual dividend amount
What information do we need to determine the value of stock using the zero-growth model?
Discount rate; annual dividend amount
What are the two components of the required or total return?
Dividend Yield Capital Gains Yeild
In the dividend discount model, the expected return for investors comes from which to sources? -amount of last dividend paid -tax rate -dividend yield -growth rate
Dividend yield and growth rate
What two sources make up the expected return:
Dividend yield and growth rate
The two potential ways to make money as a stockholder are through _______ and capital appreciation. coupon payments dividends interest payments bankruptcy distributions
Dividends
The two potential ways to make money as a stockholder are through ___________ and capital appreciation.
Dividends
Which of the following are ways to make money by investing in stocks?
Dividends Capital gains
The total dollar return on a stock is the sum of the __________ and the _________.
Dividends and capital gains
Which of the following are ways to make money by investing in stocks?
Dividends and capital gains
Which one of the following is true about dividend growth patterns?
Dividends may grow at a constant rate
Which three of the following common shapes for the term structure of interest rates? -v-shaped -downward sloping -upward sloping -humps
Downward sloping, upward sloping, and humped. (P 226)
What is the formula for determining the dividend for a period with growth rate g?
Dt = D0 * (1+g)^t
If the interest rate is 10% per week, what is the EAR? assume 52 weeks in a year.
EAR=1.1^52-1 =14104.29%
FCF=
EBIT-TAX+DEPR-Change in NWC-CX
Assume interest is compounded monthly. The _______ annual rate will express this rate as though it were compounded annually.
Effective
Which of the following is not a difference between debt and equity?
Equity is publicly traded while debt is not
What is the difference between debt and equity?
Equity is publicly traded while debt is not.
As a general rule, which of the following are true of debt and equity?
Equity represents an ownership interest The maximum reward for owning debt is fixed
suppose we are interested in the price of stock in five years P5
First we need to determine D5 D5 = 2.3 (1+.05)^5 = 2.93 P5 = 2.94*(1+.05) / .13-0.5 = $38.53
This person executes trades for customers, with an emphasis on getting the best price as possible.
Floor broker
A PE ratio that is based on estimated future earnings is known as a ___ PE ratio.
Forward
A PE ratio that is based on estimated future earnings is known as a _____________ PE ratio.
Forward
One way to visually depict the dispersion of returns over a period of time is through a _________.
Frequency distribution
And assets value is determined by the present value of its ___________ cash flows.
Future
Average returns can be calculated using ___________ or arithmetic average.
Geometric
In terms of investments, the greater the potential risk, the __________ should be the expected return.
Greater
The _________ the risk, the greater the required return.
Greater
In the dividend discount model, the expected return for investors comes from which two sources?
Growth rate; Dividend Yield
The value of a firm is the function of it's ________ rate and it's _______ rate.
Growth; discount
The value of a firm is the function of its ___ rate and its ___ rate.
Growth; discount
A bond with a BBB rating has a (higher or lower) risk than a bond with an A rating.
Higher risk of default
The most important alternative to npv is the _______ method
IRR
According to Graham and Harvey's 1999 survey of 392 CFO's, which of the following two Capital budgeting methods are most used by firms in the U.S. And Canada?
IRR and NPV
Junk bonds typically have what rating?
If rated at all, they're rated below BBB grade.
Which three components determine the shape of the term structure of interest rates?
Inflation premium, real interest rate, and interest rate risk premium.
The capital gains yield can be found by finding the difference between the ending stock price and the initial stock price and dividing it by the __________.
Initial stock price
A bonds you to maturity considers the interest earnings in the change in the bonds price while the current yield considers what?
Interest earnings only
How is investing in U.S. Treasury bonds different from investing in corporate bonds?
Interest from U.S. Treasuries is exempt from taxes at the state level but corporate interest is not. Treasury issues have no default risk.
Stock price reporting has increasingly moved from traditional print media to the ___ in recent years.
Internet
Stock price reporting has increasingly moved from traditional print media to the ___________ in recent years.
Internet
If the dispersion of returns on a particular security is very spread out from the security's mean return, the security ________.
Is highly risky
Preferred dividends (is /not like) interest on a bond?
Is not like interest on a bond
Capital budgeting is probably the most important of the three key areas of concern to the financial manager because _________.
It defines the business of the firm
Which of the following is a feature of common stock?
It generally has voting rights; It has no special preference in bankruptcy; It has no special preference in receiving dividends
The payback period can lead to foolish decisions if it is used too literally because:
It ignores cash flows after the cutoff date
What does the dirty price represent?
It includes the quoted price and interest accrued since the last coupon payment.
Which of the following is true about a typical multiple-year bond's coupon?
It is a fixed annuity payment.
What is a real rate of return?
It is a rate of return that has been adjusted for inflation.
One common reason for having two classes of common stock with different voting rights is:
It is easier for insider such as founding families to maintain control of the company. This is an uncommon practice in the United States. Example: Ford, Google, GE
One common reason for having two classes of common stock with different voting rights is:
It is easier for insiders such as founding families to maintain control of the company
What is accrued interest?
It is interest that has been earned but not yet received.
What is the definition of a bond's time to maturity?
It is the number of years until the face value is due to be repaid.
Which of the following are true about a bond's face value?
It is the principal amount repaid at maturity. It is also known as the par value.
What is the nominal rate of return on an investment?
It is the rate that has not been adjusted for inflation.
What is a proxy fight?
It is when unhappy stockholders can act to replace existing management. A proxy is the authority to vote someone elses stock.
One reason corporations use staggered boards is that:
It makes takeover attempts less likely to be successful
What is the likely impact on all interest rates when the real rates are high?
It will increase
What will happen to the default risk premium during periods of economic uncertainty?
It will increase.
In general, a corporate bonds coupon rate?
It's fixed until the bond matures.
A market is considered transparent if?
It's prices and trading volume are easily observed
If a $1000 par value bond is trading at a discount, it means that the market value of the bond is (equal to, less than, or more than) $1000.
Its market value is less than $1000.
Greater return volatility produces a ___________ difference between the arithmetic and geometric averages.
Larger
For a positive stated annual interest rate and multiple compounding periods per year, the EAR is always ________ the APR
Larger than
All junk bonds typically have which of these features?
Less than investment-grade rating High probability of default
A traditional (non-growing) annuity consists of a ______ stream of cash flows for a fixed period of time.
Level
The discounted payback period has which of these weaknesses?
Loss of simplicity as compared to the payback method Arbitrary cutoff date Exclusion of some cash flows
Why is the bond market less transparent than the stock market?
Many bond transactions are negotiated privately.
What is the most important source of risk from owning bonds?
Market interest rate fluctuations
Which one of the following is the most important source of risk from owning bonds?
Market interest rate fluctuations
Which of the following variables are required to calculate the value of a bond?
Market yield Coupon rate Remaining life of bond
Which one of the following is specifically designed to compute the rate of return on a project that has multiple negative cash flows that are interrupted by one or more positive cash flows?
Modified internal rate of return
Higher cash flows earlier in a project's life are ______ valuable than higher cash flows later on.
More
How significant is the inflation premium on the shape of the term structure of interest rates? (Select all that apply.)
More significant than the real rate of return Very significant
Which bond comes first in order of security as defined in the US: -Debentures -Mortgage bonds
Mortgage bonds are first, debentures our second.
Most voting in large corporations is done by proxy because:
Most small shareholders cannot attend the annual meeting.
Most voting in large corporations is done by proxy because:
Most the small shareholders do not attend the annual meeting
Most investments involve:
Multiple cash flows
NASDAQ has which of these features?
Multiple market maker system; computer network of securities dealers
Name to NASDAQ features:
Multiple marketmaker system, and computer network of securities dealers.
Both projects A and B are acceptable as independent projects. However, the selection of either one of these projects eliminates the option of selecting the other project. Which one of the following terms best describes the relationship between Project A and Project B?
Mutually Exclusive
If a firm is evaluating two possible projects, both of which require the use of the same production facilities, these projects would be considered ____________.
Mutually Exclusive
Are unpaid preferred dividend debts of the firm?
NO
In capital budgeting, ______ determines the dollar value of a project to the company
NPV
The dollar difference in value between mutually exclusive projects can be found by calculating the ________ of the incremental cash flows.
NPV
You must know the discount rate to compute _______, while the discount rate is necessary to apply ________. (IRR or NPV)
NPV, IRR
Once cash flows have been estimated, which investment criteria can be applied to them?
NPV, payback period, IRR
What is the NPV of a project with an initial investment of $95, a cash flow in one year of $107, and a discount rate of 6%?
NPV=-$95+(107/1.06)=$5.94
What are commission brokers?
NYSE members who execute customer orders to buy and sell stock transmitted to the exchange floor largest number of people on NYSE
Who are floor brokers?
NYSE members who execute orders for commission brokers on a fee basis used by commission broker when they are too busy to do it themselves.
What are floor traders?
NYSE members who trade their own accounts trying to anticipate temporary price flucuations
Mary has just been asked to analyze an investment to determine if it is acceptable. Unfortunately, she is not being given sufficient time to analyze the project using various methods. She must select one method of analysis and provide an answer based solely on that method. Which method do you suggest she use in this situation?
Net Present Value
Which of the following occurs in the primary market?
Newly-issued stocks are initially sold
Winwin Corporation has five board members, and each shareholder gets one vote per share. the company uses a straight board voting procedure. how does this arrangement affect minority shareholders?
No minority shareholder would have enough votes to win any seat on the board
WinWin Corporation has five board members, and each shareholder gets one vote per share. The company uses a straight board voting procedure. How does this arrangement affect minority shareholders?
No minority shareholder would have enough votes to win any seat on the board.
Is a company required to pay preferred dividends?
No; the company may differ dividends on preferred stock; however, they cannot pay dividends to come in shareholders until preferred dividends are paid.
How significant is the real rate of return in determining the shape of the term structure of interest rates?
Not very significant Less significant than inflation
How significant is the real rate of return in determining the shape of the term structure of interest rates?
Not very significant and also less significant than inflation.
Studying market history can reward us by demonstrating that __________.
On average, investors will earn a reward for bearing risk The greater the potential reward is, the greater the risk
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
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
How does the constant growth formula calculate the stock price?
One year prior (year t) to the first dividend payment (Dt+1).
The constant growth formula calculates the stock price:
One year prior (year t) to the first dividend payment (d t+1)
What are the federal income tax implications of receiving $50 in interest income from a municipal bond versus a corporate bond?
Only the interest on the corporate bond will be taxed.
Fundamentally, the business of the NYSE is to attract and process _______________.
Order flow
Fundamentally, the business of the NYSE is to attract and process what?
Order flow
The term that refers to the flow of customer orders to buy and sell stocks.
Order flow
Suppose D0 is $2.3 and R is 13% and g is 5% What is the price per share?
P0 = (2.3*1.05) / 0.12-0.05 30.19
What is the generic formula for determining buying price (PV) of a stock today?
P0 = (D1 + P1) / (1+R) P0 is current price of stock P1 is the price of stock in one period D1 is the dividend to be paid in one period R is the required return in the market on the investment
Suppose Paradise Prototyping Company has a policy of paying $10 per share dividend every year. If this policy continues indefinitely what is the value of the a share of stock if the R is 20%?
P0 = 10/.2 = $50
What is the per share value for zero growth Dividend?
P0 = D/R where R is required return
To simplify...as long as the growth rate (g) is less than the discount rate (r) the present value of the stock is
P0 = D0*(1+g) / R-g = D1 / (R-g)
What would be the value of the stock for a zero growth dividend?
P0 = D1/ (1+R) + D2/(1+R)^2 + D3 /(1+R)^3 + D4/(1+R)^4
If we take D0 to be the dividend just paid, and g to be the growth rate, the value of a share of stock can be written...
P0 = [D0(1+g)^1/ (1+R)] + [D0(1+g)^2/(1+R)^2] + [D0(1+g)^3 /(1+R)^3] + [D0(1+g)^4/(1+R)^4]
How would we determine the price of the stock TODAY if we have the price of stock and dividend payout for period 2?
P1 = (D2 + P2) / (1+R) Then we subsitute P0 = D1/ (1+R) + D2/(1+R)^2 + P2 / (1+R)^2
For the above example, what would be in the P1?
P1 = D1 * (1+g) (R-g) P1 = $1 * (1+.1) (.15-.10) P1= 1.10/.05 $22
If we need to get a price in three periods?
P2 = (D3 + P3) / (1+R) Then we substitute P0 = D1/ (1+R) + D2/(1+R)^2 + D3 /(1+R)^3 + P3/(1+R)^3
Which of the following is the best tool for ranking projects in the presence of capital rationing? PI or NPV
PI; ranking by NPV does not take into account the initial cost of the project, so sometimes ranks wrong when there is capital rationing
I plan to buy stock and sell in one year at $70 per stock. The stock will pay a $10 dividend at the end of the year. If I require a 25% investment, what is the most i would pay today? (what is the present value)
PV = ($70 + 10) /1.25 = $64
Beginning three months from now, you want to be able to withdraw $2,300 each quarter from your bank account to cover college expenses over the next four years. If the account pays .45 percent interest per quarter, how much do you need to have in your bank account today to meet your expense needs over the next four years?
PV annuity= 2300*((1-(1/(1+r)^16)/r)=35429.66
What is the present value of the annual interest payments on a 20 year, $1000 par value bond with a 5% coupon paid annually, if the yield on similar bonds is 10%?
PV= (.05 X $1000) X (1-1/1.10^20) .10 = $425.68
You're funding an account that will pay your descendants the inflation adjusted equivalent of $100 per year forever. You assume inflation will be 3% per year, and you expect the account to earn 7% per year. How much do you need to put in the bank today to ensure your gift will continue forever?
PV= C/(r-g) 2500
You will receive a bonus of $5000 in one year and would like to take a loan against it now. How much can you borrow if you plan to use the entire amount to pay back the loan and your interest rate is 3%?
PV=500/(1.03)^1 =4854.37
The Maybe Pay Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $24,000 per year forever. Suppose a sales associate told you the policy costs $469,000. At what interest rate would this be a fair deal?
PV=C/r 469,900=24,000/r solve for r =5.11%
The PV interest factor for a 30 year annuity with an interest rate of 10% per year is __________
PVIFA= {1-(1/1.1^30)}/.10 =9.4269
Which of these is included in the calculation of a bond's yield to maturity?
Par value Coupon rate Current price
Which of the following terms apply to a bond?
Par value Time to maturity Coupon rate
The reason that interest rate risk is greater for long-term bonds than for short-term bonds is that the change in rates has a greater effect on the present value of ____ value than on the present value of the ____________ payments.
Par, coupon
What are the cash flows involved in the purchase of a 5-year zero coupon bond that has a par value of $1,000 if the current price is $800? Assume the market rate of interest is 5 percent.
Pay $800 today and receive $1,000 at the end of 5 years
The _____ method evaluates a project by determining the time needed to recoup the initial investment
Payback
The ______ is best suited for decisions on relatively small, minor projects while _______ is more appropriate for large complex projects.
Payback Period; NPV
____________ returns tell how much was received for each dollar invested, so they can be applied to any initial investment amount.
Percent
Variance is measured in _________, while standard deviation is measured in ________.
Percent squared and percent
Formula for two stage growth?
Po = D1 / R-g1 * [1- (1+g1/ 1+R) ^t] + P/ (1+R)^t
The formula for valuing a constant growth stock is:
Po = D1/ (R - g)
The NPV is _______ if the required return is less than the IRR, and it is ______ if the required return is greater than the IRR.
Positive; Negative
In which way(s) is preferred stock like a bond?
Preferred shareholders receive a stated value if the firm liquidates, like bondholders; Preferred shareholders receive a stated dividend, similar to interest on a bond; Some preferred stock has credit ratings, like bonds; Preferred stock sometimes has a sinking fund, giving in a set maturity like bonds.
____________ stock has a preference over ____________ stock in the payment of dividends.
Preferred, common
what is the formula for any growing perpetuity?
Present Value = C0(1+g)/(R-g)
Scott corporation does not pay dividends. The PE ratio for its industry is 13.3, and Scott's EPS were a dollar 47. And what price should Scott's stock trade?
Price at time (t) = Benchmark PE X EPS = $19.55
Historically, the real return on Treasury bills has been _________.
Quite low
Suppose we observe a stock selling for $20 a share. The next dividend will be $1 per share. You think the dividend will grow by 10% per year more or less indefinitely. What return does this stock offer if this is correct?
R = dividend yield + the capital gains yeild R = D1/PO + g R= $1/20 + .1 R=.15 or 15%
What is the equation for approximating the nominal rate of return?
R = r + h
Sunk costs
R&D- inmaterial, marketing cost. Should do NPV analysis before spending
Discounted payback rule
Rarely used in practice because it really isn't any simpler to use then NPV. Cutoff still is has to be arbitrarily set, and cash flows beyond that point are ignored. As a result, a project with a positive NPV may be found unacceptable because the cutoff is to short. Also, just because one project has a shorter discounted payback than another does not mean it has a larger NPV.
How is an APR computed?
Rate per period × Number of periods per year
A rate of return that has been adjusted for inflation:
Real rate of return
What are the three components of the treasury of curve?
Real rate of return, expected future inflation, and the interest rate risk premium.
If a given set of cash flows is expressed in nominal terms and discounted at the nominal rate, the resulting present value will be the same as if the cash flows were expressed in real terms and discounted at the ___________ rate.
Real rate.
Which of the following variables are required to calculate the value of a bond? Check all that apply. -original issue price of bond - remaining life of bond -market yield -coupon rate
Remaining life of bond, market yield, coupon rate.
Which of the following are usually included in the bond's indenture? -The bond's rating -The names of the bondholders -The repayment arrangements -The total amount of bonds issued
Repayment arrangements and total amount of bonds issued.
If the IRR is greater than the _______ ________, we should accept the project.
Required Return Rate
Rights of shareholders:
Right to vote, right to share dividends paid, right to share assets after liquidation, preemptive right (right to share in any new stocks sold).
Mona Corporation has a variance of returns of 343, while Scott Corporation has a variance of returns of 898. Which company's actual returns vary more from their mean return?
Scott Corporation
The trading of existing shares occurs in the _________________market.
Secondary
Interest paid twice a year is known as _______ compounding
Semi-annual
is the term that indicates preference in position over other lenders.
Seniority
The __________ ratio is calculated as the risk premium of the asset divided by the standard deviation.
Sharpe
Which bond is not greatly affected by small changes in interest rates? Choose short-term or long-term.
Short term
Geometric averages are _________ arithmetic averages.
Smaller than
What does historical data suggest about the nature of short-term and long-term interest rates?
Sometimes short-term rates are higher and sometimes long-term rates are higher.
The NYSE member who acts as a dealer in a small number of securities is called a _________.
Specialist, whom is the only type of NYSE member whose role is to act as a dealer in a small number of securities, often acting as a marketmaker.
Mota Motors has eight directors on its board, two of whom go up for election each year. This is an example of a:
Staggered board
Motor Motors has eight directors on its board, two of whom go up for election each year. This is an example of:
Staggered board
When companies have staggered elections for directors this is called a:
Staggered board also called classified boards because the directors are placed in different classes with terms that expire at different times.
The goal of many successful organizations as a ____________ rate of growth and dividends.
Steady
the goal of many successful organizations is a ______ rate of growth in dividends.
Steady
Which is more transparent, the stock market or the bond market?
Stock market
A capital gain on a stock results from an increase in __________.
Stock price
This type of bond is based on financial securities, commodities, or currencies.
Structured note
A normal distribution has a _________ shape.
Symmetrical
Corporate bond dealers are now required to report trade information through _____.
TRACE
True or false: The crossover rate is the rate at which the npv of two projects are equal
TRUE
If you are holding two identical bonds, except that one matures in 10 years and the other matures in 5 years, which bond's price will be more sensitive to interest rate risk?
The 10-year bond
Which of the following entities declares a dividend? - The management of the company - The CFO - existing shareholders - The Board of Directors
The Board of Directors
When calculating NPV, the present value of the Nth cash flow is found by dividing the Nth cash flow by 1 plus ______ rate raised to the Nth power
The Discount
Suppose you own a 30-year bond issued by GE and a 2-year bond issued by PG with identical coupon rates and par values. Which bond will you decrease in value more as interest rates rise?
The GE bond will lose more because it has a longer maturity.
What is the largest stock exchange in the worl measured in terms of the total value of share listed
The New York Stock Exchange
What are some features of the OTC market for bonds?
The OTC has no designated physical location. OTC dealers are connected electronically.
Which is the largest security market in the world in terms of trading volume?
The U.S. Treasuries market
The price at which the dealer is willing to sell is called:
The ask price
Which two prices can be found in the Wall Street Journal's daily Treasury bond listing?
The asked price The bid price
Can the dividend growth model still be used when the stock being value does not pay dividends?
The dividend growth model can still be used. The analyst message to him that, at some point in the company's future, it begins to pay dividends.
What is two stage growth rate?
The dividend will grow at a rate at a rate g1 for t years and then grow at a rate of g2. Thereafter, forever. In this case, the value of the stock can be written as Po = D1 / R-g1 * [1- (1+g1/ 1+R) ^t] + P/ (1+R)^t
Which of the following institutions issue bonds that are traded in the bond market?
The federal government State governments Public corporations
A company currently does not pay dividends. In five years they will. it will be $0.50 per share. I expect that this dividend will grow at the rate of 10% per year indefinitely. the R is 20%, what is the price today?
The first dividend paid will be in five years and it will grow streadily from then on. The P4 years is P4 = D4*(1+g) / (R-g) P4 = D5 / (R-g) P4 = 0.50 / (0.2-0.1) $5 If the stock is $5 in four years, then we can get the current (present value) by discounting it backwards $5/(1+.2)^4 = $2.41 P0 = $5 /(1.20)^4 = $2.41
APR:
The interest rate per period multiplied by the number of periods in the year
EAR:
The interest rate stated as though it were compounded once per year.
What does a Moody's bond rating of C typically indicate?
The issuer is in default
Which of the following are reasons why it is more difficult to value common stock than it is to value bonds?
The life of a common stock is essentially forever; The rate of return required by the market is not easily observed; Common stock cash flows are not known in advance
Which of the following are needed to describe the distribution of stock returns? The mean return The standard deviation of returns The variety of returns The life span of the stock
The mean return The standard deviation of returns
How is the number of votes casted for cumulative voting determined?
The number of shares * the number of directors to be elected
Which of the following statement is correct?
The payback method is biased toward short-term projects
Second important characteristic of dividends?
The payment of dividends by the corporation is not a business expense dividends are not deductible for corporate tax purposes paid out of after tax profits
What does the clean price for a bond represent?
The quoted price, which excludes interest accrued since the last coupon date.
How is the real rate of return different from the nominal rate of return?
The real rate of return excludes inflation from the nominal rate.
How is the real rate of return different from the nominal rate of return?
The real rate of return is adjusted for the effect of inflation whereas nominal rate is not adjusted for the effect of inflation.
Which of the following are usually included in a bond's indenture?
The repayment arrangements The total amount of bonds issued
Which of the following are usually included in a bond's indenture? -The repayment arrangements -The name of bondholders -The bonds rating -The total amount of bonds issued
The repayment arrangements and the total amount of bonds issued.
Which of the following is usually a right of common shareholders?
The right to a proportional share of dividends paid; Voting rights; The right to purchase a proportional share of new stock issued
Which of the following are needed to describe the distribution of stock returns?
The standard deviation of returns The mean return
Which is more transparent, the stock market or the bond market?
The stock market is more transparent.
A capital gain on a stock results from an increase in ___________.
The stock price
Name three important features of treasury notes and bonds:
They are highly liquid, default-free, and taxable on the state or local level but not the federal level.
Which is greater, the APY or the EAR?
They are the same
A firm decides to raise money by issuing 5 million bonds with a par value of $5000 each for 10 years at a coupon rate of 7%. At the time of issue the bonds were sold for $5500 each. But with the par value of the bonds be in five years?
They will be the par value of $5000.
Which of these correctly identify differences between U.S. Treasury bonds and corporate bonds?
Treasury bonds are issued by the US government while corporate bonds are issued by corporations. Treasury bonds are considered free of default risk while corporate bonds are exposed to default risk. Treasury bonds offer certain tax benefits to investors that corporate bonds cannot offer.
Three vehicles the US government issues to borrow money:
Treasury notes, treasury bonds, and treasury bills.
T/F Roger Ibbotson and Rex Sinquefield conducted a famous set of studies dealing with rates of return in U.S. financial markets.
True
True or False: A project with non-conventional cash flows will produce two or more IRRs
True
True or False: The MIRR method eliminate multiple IRR problems and it is an alternative to the NPV method.
True
True or false junk bonds are rated less than investment-grade rating?
True
True or false junk bonds have a high probability of default.
True
True or false: A capital gain on a stock is counted as part of the total return whether or not the gain is realized from selling the stock.
True
True or false: A capital gain on a stock is counted as part of the total return whether or not the gain is realized from selling the stock. True False
True
True or false: A capital loss is the same thing as a negative capital gain.
True
True or false: A capital loss is the same thing as a negative capital gain. True False
True
True or false: Equity represents an ownership interest.
True
True or false: If you invest in a bond that is rated AAA by S&P, you can be reasonably assured that your investment has very little default risk.
True
True or false: In general, the price that is paid for a bond will exceed its quoted price.
True
True or false: In general, the stock market is more transparent than the real estate market.
True
True or false: Interest earned on Treasury notes and bonds is taxable
True
True or false: Some projects, such as mines, have cash outflows followed by cash inflows, which are then followed by cash outflows, giving a project multiple rates of return.
True
True or false: The dividend yield = Dt+1/Pt
True
True or false: The dividend yield = Dt+1/Pt True False
True
True or false: The major difference between Western financial practices and Islamic law is that Islamic law does not permit charging or paying interest.
True
True or false: The price you actually pay to purchase a bond will generally exceed the clean price.
True
True or false: Two challenges with the irr approach When comparing two mutually exclusive projects are scale and cash flow timing
True
True or false: a conventional bond pays periodic interest while zeros make no interest payments.
True
True or false: all else equal, the longer the time to maturity, the greater the interest rate risk.
True
True or false: conventional bonds can sell at par, and a discount from par, or at a premium over par while zeros can not.
True
True or false: dividends may grow at a constant rate.
True
Two or false: most dividends payable on preferred stock are cumulative.
True
True or false: A project with an initial cash outflow followed by a cash inflow has an NPV that is negatively related to the discount rate.
True; NPV will decrease as discount rate increases
If you invest in a corporate bond, how many times can you expect, in general, to receive interest?
Twice a year
Average returns can be calculated _________.
Two different ways
The first cash flow at the end of week 1 is $100, the second cash flow at the end of month 2 is $100, and the third cash flow at the end of year 3 is $100. This cash flow pattern is an ________ cash flow
Uneven
When to use payback period rule?
Used by large and sophisticated companies when they are making relatively minor decisions.
How to calculate total variable cost?
VC=Q*Cost/unit
What are some reasons why the bond market is so big?
Various state and local governments also participate in the bond market. Federal government borrowing activity in the bond market is enormous. Many corporations have multiple bond issues outstanding.
Which of the following is not one of the six factors used to determine the yield on a bond?
Voting rights
What will the dividend income be on W number of shares of XYZ stock if XYZ distributes a $Y per share dividend? $Y - W W/$Y W x $Y W - $Y
W x $Y
When valuing a stock, the advantage to considering the stock price in the distant future, rather than a more near-term price, as a cash flow is that:
When discounted to present value, a stock price in the distant future is nearly 0.
When valuing a stock, the advantage to considering the stock price in the distant future (rather than a more near-term price) as a cash flow is that:
When discounted to present value, a stock price in the distant future is nearly zero
What is a corporate bond's yield to maturity (YTM)?
YTM is the prevailing market interest rate for bonds with similar features. YTM is the expected return for an investor who buys the bond today and holds it to maturity.
A bond has a quoted price of $984.36, a face value of $1000, semi-annual coupon of $20, and a maturity of 10 years. Match its current yield and it's YTM below. YTM Current Yield 4.06% 4.19%
YTM= CY=
Do the IRR and NPV rules always lead to identical decisions?
Yes, as long as two very important conditions are met. 1. the project's cash flows must be conventional, meaning that the first cash flow (the initial investment) is negative and al the rest are positive. 2. the project must be independent,meaning that the decision to accept or reject this project does not affect the decision to accept or reject any other. -first condition is usually met but the second is often not.
An investment has initial cost of $2.7 million net income of $189,400, $178,600 and $172,500 for Years 1 to 3. This investment will be depreciated by $900,000 a year over the three-year life of the project. Should this project be accepted based on the average accounting rate of return if the required rate is 12.5 percent? Why or Why not?
Yes, because the AAR is greater than 12.5 percent
Will is deciding whether or not to buy Dang Corporation stock, whose current price is $54.95. Dang paid a dividend of $2.17 this year. Will estimates that dividends will grow very quickly, at a rate of 12%, for the next four years. After that, he expects the dividend growth rate to fall 5%. Should Will buy the stock if his required rate of return is 10%?
Yes; using the two stage growth model, the stock's value is $58.06
Will is deciding whether or not to buy Dang Corporation stock, whose current price is $54.95. Dang paid a dividend of $2.17 this year. Will estimates that dividends will grow very quickly, at a rate of 12%, for the next four years. After that, he expects the dividend growth rate to fall to 5%. Should Will buy the stock if his required rate of return is 10%?
Yes; using the two-stage growth model, the stocks value is $58.06.
The dividend _________ is defined as the annual dividend amount divided by the beginning stock price.
Yield
A Treasury yield curve depicts the _____.
Yields for different maturities of Treasury securities.
What will the impact be on your risk exposure if your bond has recently been categorized as a "fallen angel"?
Your risk will increase.
If the growth rate (g) is zero, the capital games yield is?
Zero
The IRR is the discount rate that makes NPV equal to _______.
Zero
How is a zero coupon bond different from a conventional bond?
Zero coupon bonds make no interest payments. Zero coupon bonds are always issued at a discount.
What is a forward PE?
a Price per share that is based on potential future earnings
Simulation analysis
a combination of scenario and sensitivity analysis.
What is a sunk cost?
a cost incurred in the past that is irrelevant to the capital investment decision process
A bond's YTM will exceed its current yield when the bond is selling at ____.
a discount
What is a specialists post?
a fixed place on the exchange floor where the specialist operates maintain order and make sure that all buyers and sellers receive a fair price
Net present value profile
a graphical representation of the relationship between an investment's NPVs and various discount rates.
What is an asset that has cash flows that grows at a constant rate?
a growing perpetuity
What is the dividend growth model?
a model that determines the current price of a stock dividend next period divided by the discount rate less the dividend growth
What is the definition of straight-line voting?
a procedure in which a shareholder may cast all votes for each member of the board of directors
What is cumulative voting?
a procedure in which a shareholder may cast all votes for one member of the board of directors encourages minority participation because make there vote matter directors elected all at once
Average accounting return rule:
a project is acceptable if its average accounting return exceeds a target average accounting return.
The most common way to repay a loan is to pay _________
a single fixed payment every period which includes both interest and principal
Mutually exclusive investment decisions
a situation in which taking one investment prevents the taking of another.
According to the average accounting return rule, a project is acceptable if its average accounting return exceeds:
a target average accounting return
Discounted payback period
a variation of the payback period, the discounted payback period, fixes this particular problem of ignored time value. Discounted payback period is the length of time until the sum of the discounted cash flows is equal to the initial investment.
NPV ________ cash flows properly. a. discounts b. compounds
a. discounts
The Incremental irr is used to account for the problem of __________ when evaluating project cash flows. a. scale b. risk c. uncertainty d. financial loss
a. scale
What is the IRR for a project with an initial investment of $250 and subsequent cash inflows of $100 per year for 3 years?
about 9.71%; use trial and error until both sides equal zero when plugging in IRR
The PI rule for an independent project is to _________ the project if the PI is greater than 1. (delay, accept, or reject)
accept
The payback period rule ______ a project if it has a payback period that is less than or equal to a particular cut off date. (accepts or rejects)
accepts
The property of value ______ implies that the contribution of any project to a firm's value is simply the NPV of the project.
additivity
What is a dealer?
an agent who buys and maintains and inventory. and sells securities from inventory
What is the superDOT system?
an electronic NYSE system allowing orders to be transmitted directly to the specialist
A positive capital gain on a stock results from ___.
an increase in price
A positive capital gain on a stock results from ___. an increase in the coupon rate an increase in price an increase in the dividend a decrease in price
an increase in price
How does the timing and the size of cash flows affect the payback method? Assume the project does pay back within the project's lifetime
an increase in the size of the first cash inflow will decrease the payback period, all else held constant
Discounted payback rule:
an investment is acceptable if its discounted payback is less than some prespecified number of years. In general, we won't accidentally take any projects with a negative estimated NPV.
Internal rate of return rule:
an investment is acceptable if the IRR exceeds the required return. It should be rejected otherwise.
Net present value rule:
an investment should be accepted if the net present value is positive and rejected if it is negative. In the unlikely event that the net present value turned out be exactly zero, we would be indifferent between taking the investment and not taking it.
Because the dividend is always the same, what can the stocked be viewed as?
an ordinary perpetuity with same cash flows coming in cash flow = D every period
The main reason it is important to distinguish between debt and equity is that the benefits and risks _____.
are different
U. S. Treasury bonds:
are quoted as a percentage of par.
If a $1,000 face value U.S. Treasury bond is quoted at 85, then the bond can be purchased _____.
at 85 percent of face value plus any accrued interest
If a $1,000 face value U.S. Treasury bond is quoted at 99.5, then the bond can be purchased _____.
at 99.5 percent of face value plus any accrued interest
According to the basic IRR rule, we should ______ a project if the IRR is ______ than the discount rate. a. reject; greater b. accept; greater c. reject; less d. accept; less
b. accept; greater c. reject; less
Where could the benchmark Price per share come from?
based on similar companies based on a company average based on historical values for the company
The dividend yield for a one-year period is equal to the annual dividend amount divided by the ____.
beginning stock price
The dividend yield for a one-year period is equal to the annual dividend amount divided by the ____. beginning stock price average of the beginning and ending stock prices ending stock price
beginning stock price
Some important characteristics of the normal distribution are that it is: skewed to the right bell-shaped very "bumpy" and not smooth symmetrical
bell-shaped symmetrical
Opportunity costs are ____.
benefits lost due to taking on a particular project
In financial markets the difference between the
bid
The price that represents what a dealer is willing to pay for a security is the _____.
bid price
When an investor sells a bond, the price received by a dealer is always the ____.
bid price
Secondary markets in sukuk are extremely illiquid because most sukuk are:
bought and held to maturity
A person who brings buyers and sellers together is called a(n) __________.
broker
Capital ________ is the decision-making process for accepting and rejecting projects.
budgeting
To calculate PV of cash flows:
calculate each year's PV individually (Principal/(1+r^t)) then add them
The percentage change in the price of a stock over a period of time is called its ___________. price change yield growth yield total return capital gain yield
capital gains yeild
When a company declares a dividend, shareholders generally receive ____.
cash
When a company declares a dividend, shareholders generally receive ____. interest income store credit promissory notes cash
cash
A corporate bond's yield to maturity ____.
changes over time can be greater than, equal to, or less than the bond's coupon rate
A corporate bond's yield to maturity:
changes over time can be greater than, equal to, or less than the bond's coupon rate
What are staggered boards often called?
classified boards. because directors are placed into different classes with terms that expire at different times
The largest number of NYSE members are registered as ___.
commission brokers
The average return on the stock market can be used to ___. compare stock returns with the returns on other securities find ways to beat the market accurately forecast the market's returns in the future
compare stock returns with the returns on other securities
The effective annual rate (EAR) takes into account the ________ of interest that occurs within a year
compounding
inflation
cost of capital already includes inflation
Variable costs
cost that change when the quantity of output changes
Fixed costs
cost that do not change when the quantity of output changes during a particular time period
Ana just received the semiannual payment of $35 on a bond she owns. This is called the ______ payment..
coupon
rate is the stated interest payment made on a bond.
coupon
If a bond is rated Baa by Moody's and BB by Standard & Poor's, the bond will be regarded as a(n) _____ bond.
crossover
yield does not include the capital gain from the price discount, whereas the YTM does include it.
current
yield is the bond's annual coupon divided by its price.
current
is an unsecured bond, for which no specific pledge of property is made.
debenture
The payback period method allows upper management to evaluate the _______ abilities of lower management.
decision-making
If the market rate of interest
declines
When interest rates in the market rise, we can expect the price of bonds to ____.
decrease
All else constant, the dividend yield will increase if the stock price ___.
decreases
Incremental cash flows come about as a(n) ____ consequence of taking a project under consideration
direct
IRR must be compared to the ___________ rate in order to determine the acceptability of a project.
discount
Method #1: the discounting approach (MIRR)
discount all negative cash flows back to the present at the required return and add them to the initial cost. Then, calculate the IRR.
Which capital budgeting decision method finds the present value of each cash flow before calculating a payback period?
discounted payback period
Preferred stock has preference over common stock in the:
distribution of corporate assets; payment of dividends
The total return percentage is the _______ yield plus the capital gains yield.
dividend
The total return percentage is the _________ yield plus the capital gains yield.
dividend
What are ECNs?
electronic communications network a website that allows investors to trade directly with each other increase liquidity and competition
In almost all multiple cash flow calculations, it is implicitly assumed that the cash flows occur at the ______ of each period.
end
What is common stock?
equity without priority for dividends or in bankruptcy
What does it mean to say that the dividend grows at a constant growth rate?
every period the dividend increases by the a specific rate
A 10-year AAA corporate bond is most apt to have a yield that ____ the yield on a 10-year AAA state government bond.
exceeds
The ______ rate of return is the difference between the rate of return on a risky asset and the risk-free rate of return.
excess
The ______ rate of return is the difference between the rate of return on a risky asset and the risk-free rate of return. excess nominal subliminal real
excess
A discount bond's coupon rate is equal to the annual interest divided by the:
face value.
True or false: The dividend yield minus the capital gains yield is the total return percentage.
false
True or false: The smaller the variance or standard deviation is, the more spread out the returns will be.
false
The interest from a municipal bond is exempt from ____ income taxes.
federal
A growing annuity has a(n) ______________
finite number of growing cash flows
Roger Ibbotson and Rex Sinquefield presented year-to-year historical rates of return on ______ types of financial investments.
five
-rate bonds, the coupon payments are adjustable.
floating
A limitation of bond ratings is that they ____.
focus exclusively on default risk
Why would dividends want to grow at a constant rate?
for many companies this is a specific goal.
What are target prices?
forecasted prices in the future
A PE ratio that is based on estimated future earnings is known as a ___ PE ratio.
forward
An asset's value is determined by the present value of its ___ cash flows.
future
The profitability index is calculated by dividing the PV of the ____ cash flows by the initial investments
future
One requirement of the dividend growth model is:
g<R
One requirement of the dividend growth model is: (in other words is g greater than or less than r)?
g<r Growth rate must be less than the discount rate.
The longer the term, the
greater
Accept a project if its NPV is _______ zero.
greater than
If a bond is selling at a discount from its par value, the YTM must be _____ the coupon rate.
greater than
In an inflationary environment, the nominal rate will be _________ the real rate.
greater than
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:
greater than 5 percent.
The ___ can be interpreted as the capital gains yield.
growth rate
The value of a firm is the function of its ___ rate and its ___ rate.
growth; discount
If the dispersion of returns on a particular security is very spread out from the security's mean return, the security ____. is risk-free is highly risky has a low level of risk
highly risky
What does cumulative dividends mean?
if dividends are not paid to preferred stockholders in one year, they will be carried over
You should take a project with financing type cash flows only
if it is an inexpensive source of financing, meaning that its IRR is lower than your required return.
Salvage value
if you resell, what it will be worth
One of the main disadvantages of the discounted payback period rule is that the cutoff is arbitrarily set and cash flows beyond that point are _____.
ignored
Why can the payback period lead to incorrect decisions if it is used to literally?
ignores cash flows after the cutoff date
Average accounting return (AAR) flaws
ignores time value. It doesn't even look at the right things. Instead of cash flow and market value, it uses net income and book value. These are both poor substitutes. AAR doesn't tell us what the effect on share price will be of taking an investment, so it doesn't tell us what we really want to know.
Dividends are the ______ component of the total return from investing in a stock.
income
Dividends are the ______ component of the total return from investing in a stock. capital gains price appreciation income amortization
income
If you were classified as a high income/high tax bracket investor, you might find municipal bonds an attractive investment because ____.
income from municipal bonds is exempt from federal taxes
According to the approximation formula for the nominal rate of return (R), the nominal rate will ________ if inflation (h) increases.
increase
Assume you own a bond currently valued at $989. If the market rate of interest drops, the bond's current market value will _____.
increase
When interest rates in the market fall, bond values are likely to increase because the present value of the bond's remaining cash flows ____.
increases
As the maturity of a bond increases, interest rate risk ____.
increases at a decreasing rate
As the time to maturity increases, the interest rate risk premium ____.
increases at a decreasing rate
The problems with scale in the profitability index can be corrected by using ________ analysis.
incremental
The written agreement between the corporation and the lender detailing the terms of the debt issue is the
indenture
An _______ project does not rely on the acceptance or rejection of another project.
independent
The net present value of a project's cash flows is divided by the ________ to calculate the profitability index.
initial investment
The capital gains yield can be found by finding the difference between the ending stock price and the initial stock price and dividing it by the:
initial stock price
The capital gains yield can be found by finding the difference between the ending stock price and the initial stock price and dividing it by the: cost of capital ending stock price initial stock price dividend yield
initial stock price
What does staggering provide?
institutional continuity. continuity of the board of directors.
A bond's yield to maturity considers the interest earnings and the change in the bond's price while the current yield considers ____.
interest earnings only
Stock price reporting has increasingly moved from traditional print media to the ___ in recent years.
internet
Sensitivity analysis
investigation of what happens to NPV when only one variable is changed
In general, a corporate bond's coupon rate ____,
is fixed until the bond matures
If the dispersion of returns on a particular security is very spread out from the security's mean return, the security ____.
is highly risky
Payback
is the length of time it takes to recover our initial investment or "get our bait back."
The federal government can raise money from financial markets to finance its deficits by ___.
issuing bonds
What happens to the present value of the stock if we push the sale stock far enough away into the future?
it is essentially zero no matter what the stock price is
What is an interest-only loan?
it's a loan which the borrower pays interest periodically and repays the principle when the bond matures
A market is considered transparent if ____.
its prices and trading volume are easily observed
For a positive stated annual interest rate and multiple (more than one) compounding periods per year, the EAR is always ___________ the APR.
larger than
A dollar received one year from today has ______ value than a dollar received today.
less
If a $1,000 par value bond is trading at a discount, it means that the market value of the bond is ______ $1,000.
less than
A traditional (non-growing) annuity consists of a(n) _________ stream of cash flows for a fixed period of time
level
The _____ premium is the portion of a nominal interest rate or bond yield that represents compensation for lack of _____.
liquidity; liquidity
The interest rate risk premium is the additional compensation demanded by investors for holding ____ bonds.
longer-term
When using trial and error to compute the yield to maturity (YTM) for a 6 percent coupon bond that trades at a premium, the process can be shortened if the initial guess is ____ 6 percent.
lower than
The second lesson from studying capital market history states that the _______ the potential reward, the _______ the risk lower; lower greater; greater greater; less less; greater
lower; lower greater; greater
A single cash flow is also known as a:
lump sum
A zero coupon bond is a bond that ____.
makes no interest payments
What is the primary reason for making more than one class of stock?
management of a firm can raise equity capital by issuing nonvoting or limited-voting stock while maintaining control of the company
The current yield is defined as the annual interest on a bond divided by the:
market price
A bond's principal is repaid on the ________ date.
maturity
The Treasury yield curve plots the yields on Treasury notes and bonds relative to
maturity
is the number of years until the face value is due to be repaid.
maturity
A project with an initial cash outflow followed by a cash inflow and then a cash outflow_________.
may have multiple rates of return
Ignoring time value of money:
may lead to taking investments that are actually worth less than they cost. By ignoring cash flows beyond the cutoff, may be led to reject profitable long-term investments. Using payback period rule will tend to be bias toward shorter-term investments.
To get the average, or ______ return, the yearly returns are summed and then divided by the number of returns.
mean
To get the average, or ________ return, the yearly returns are summed and then divided by the number of returns.
mean
Higher cash flows earlier in a project's life are _______valuable than cash flows later on.
more
Internal rate of return (IRR)
most important alternative to NPV. IRR is closely related to NPV. With IRR, we try to find a single rate of return that summarizes the merits of a project. We want this rate to be an "internal" rate in which it depends only on the cash flows of a particular invesment. (The discount rate that makes the NPV of an investment zero.)
Most investments involve:
multiple cash flows
What is the only way to guarantee a seat in the straight line method?
nedd 50% plus one share
When cash flows are conventional NPV is _________ if the discount rate is above the IRR (positive, negative, or zero).
negative
When cash flows are conventional, NPV is ____ if the discount rate is above the IRR
negative
Method #3: The combination approach (MIRR)
negative cash flows are discounted back to the present, and positive cash flows are compounded to the end of the project.
The difference between a firm's current assets and its current liabilities is known as ____
net working capital
Would a company that never pays dividends work?
no because they would in all the money in and never put anything valuable out. "black hole" stock would be worthless.
The rates on financial securities are generally quoted as
nominal
The rates on financial securities are generally quoted as _____ rates.
nominal
Three special case patterns of dividend growth include:
non-constant growth; zero growth; constant growth
The default risk premium refers to the extra compensation demanded by investors for the possibility that the issuer might ____.
not make all the promised payments
Why does preferred stock look like it could be debt?
often callable recieve a dividend only get stated value if liquidation occurs carry credit ratings convertible into common stock have obligatory sinking funds
A project with a cash outflow followed by three cash inflows will always have _________ internal rate of return.
one
What are staggered elections?
only a fraction of the dictatorships (often one third) are up for election at a particular time. thus if only two directors are up for election at one time, it will take 1/(2+1) or 33% of the stock plus one share to guarantee a seat
Using your personal savings to invest in your business is considered to have an ____ because you are giving up the use of these funds for other investments or uses, such as, a vacation or paying off a debt
opportunity cost
The payments in a __________ amortization loan are NOT based on the life of the loan
partial
The ________ method is ideal for companies with limited funds that need a quick turnover of their capital.
payback
The amount of time needed for the cash flows from an investment to pay for its initial cost is the _____ period.
payback
What capital budgeting method allows lower management to make smaller, everyday financial decisions effectively?
payback method
What method differs from NPV because it evaluates a project by determining the time needed to recoup the initial investment
payback method
The _________ method is best suited for decisions on small projects while the _________ method is most appropriate for large, complex projects.
payback; NPV
When using the spreadsheet (Excel) function for finding the PV of an annuity, it's a good idea to enter the _______ as a negative value.
payment
What are dividends?
payments by a corporation to shareholders, made in either cash or stock this payment is at the discretion of the board
C/r is the formula for the present value of a(n) ________
perpetuity
Normally, the excess rate of return is ___. zero positive negative
postive
The interest rate risk
premium
is the compensation investors demand for bearing interest rate risk.
premium
The formula for the __________ value interest factor of an annuity is {1 - [1/(1 + r)^t]/r}
present
In capital budgeting the net _________ is the value of a project to the company
present value
In capital budgeting, the net ____ determines the value of a project to the company
present value
The information needed to compute a bond's yield to maturity includes the bond's , coupon rate, and maturity date. Listen to the complete question
price
Amortization is the process of paying off loans by regularly reducing the _________
principal
The original load amount is called the:
principal
Historically, the real return on Treasury bills has been:
quite low
If a given set of cash flows is expressed in nominal terms and discounted at the nominal rate, the resulting present value will be the same as if the cash flows were expressed in real terms and discounted at the ____ rate.
real
Erosion will _____ the sales of existing products
reduce
The decision rule for a project for which the first cash flow is an inflow and subsequent cash flows are negative states that we should _________ the project when the irr is ________ than the discount rate
reject; greater accept; less
The term structure of interest rates examines the ____.
relationship between short-term and long-term interest rates
Opportunity costs are classified as _____ costs in project analysis
relevant
The first step in estimating cash flow is to determine the ______ cash flows
relevant
With interest only loans that are not perpetutities, the entire principal is:
repaid at some point in the future
With interest-only loans that are NOT perpetuities, the entire principal is:
repaid at some point in the future
A sinking fund is one type of:
repayment provision
IRR must be compared to the ____ in order to determine the acceptability of a project.
required return
If the IRR is greater than _____ _____, we should accept the project.
required return
What is an over the counter market?
securities market in which trading is most exclusively done through dealers who buy and sell for their own inventory
When using ____ all of the variables except one are frozen in order to determine how sensitive the NPV estimate is to changes in that particular variable
sensitivity analysis
fund is an account managed by the bond trustee for the purpose of repaying the bonds.
sinking
You are planning to make monthly deposits of $470 into a retirement account that pays 9 percent interest compounded monthly. If your first deposit will be made one month from now, how large will your retirement account be in 35 years?
solving for FV =FV(.09/12,35*12,-470,0,0) -divide the interest rate by 12, since it is compounded monthly -For N multiply years by 12 -PV is 0
Average accounting return (AAR)
some measure of average accounting profit / some measure of average accounting value. Specific definition: Average net income / Average book value.
The standard deviation is the ______ of the variance.
square root
The standard deviation is the ______ of the variance. square root square inverse exponent
square root
Mota Motors has eight directors on its board, two of whom go up for election each year. This is an example of a:
staggered board
What are the two basic effects of staggering a board?
staggering makes it more difficult for a minority to elect a director because fewer directors to elect at once staggering makes takeover attempts less likely to be successful in a majority of new directors.
According to the _____ principle, once the incremental cash flows from a project have been identified, the project can be viewed as a "minifirm."
stand-alone
This type of voting gives one vote for each percentage share. For example if you want 20% you get 20 votes. If you are 80% you get 80 boots.
straight voting
In case of default:
subordinated debt holders must give preference to other specified creditors
The payback period rule ______ a project if it has a payback period that is less than or equal to a particular cutoff date.
suggests accepting
To get the average return, the yearly returns are
summed and then divided by the number of returns.
The taxability premium is the additional compensation demanded on ____.
taxable bonds
Operating cash flow is a function of:
taxes, EBIT, depreciation
What assumption does the dividend growth model make?
that the stock price will grow at the same constant rate as the dividend. as the cash flows on an investment grow at a constant rate through time, so does the value of the investment
The internal rate of return
the IRR on an investment is the required return that results in a zero NPV when it is used as the discount rate. (discount rate that makes the NPV equal to zero)
The two most important stock markets in the U.S. are the New York Stock Exchange and ___.
the NASDAQ
A benchmark PE ratio can be determined using:
the PEs of similar companies; a company's own historical PEs
What does it mean to say the dividend has zero growth?
the amount is costant through time I.E preferred stock D1 = D2 = D3 .... etc
Payback period
the amount of time required for an investment to generate cash flows sufficient to recover its initial cost.
Bond ratings are based on the probability of default risk, which is the risk that ___.
the bond's issuer may not be able make all the required payments
Marginal or incremental cost
the change in costs that occurs when there is a small change in output
The dividend yield is determined by dividing the expected dividend (D1) by:
the current price
Scenario analysis
the determination of what happens to NPV estimates when we ask what if questions. Best case/worst case/base case
NPV
the difference between an investment's market value and its cost. how much value is created or added today by undertaking an investment
Net present value (NPV) of the investment:
the difference between an investments market value and its cost. Is a measure of how much value is created or added today by undertaking an investment. NPV can be used to determine whether an investment is desirable or not. One way of assessing the profitability of a proposed investment.
What is the spread?
the difference between the bid price and the offering price. source of dealer profit
What is straight line voting?
the directors are elceted one at a time. Each time, Jones smith can cast 20 votes and Jones can cast 80 votes. As a consequence jones can elect all the candidates.
When the stock being valued does not pay dividends,
the dividend growth model can still be used
What is the capital gains yield?
the dividend growth rate or the rate at which the value of the investment grows
What are shareholders rights?
the elect directors who hire managers "one share, One vote"
Which of the following are common protective covenants?
the firm must limit dividends to equity holders the firm must maintain working capital at or above a specified level the firm cannot merge with any other firm
what is orderflow?
the flow of customer orders to buy and sell securities
What is proxy?
the grant of authority by a shareholder to someone else to vote on his/her shares done for convenience in large corporations
The Fisher effect decomposes the nominal rate into:
the inflation rate and the real rate
What is a primary market?
the market in which new securities are originally sold to investors
What is the secondary market?
the market in which previously issued securities are traded among investors
If you own corporate bonds, you will be concerned about interest rate risk as it affects ____.
the market price of the bonds
what is market cap?
the number of share outstanding * current price per share
What is market depth?
the number of shares traded today, followed by the average daily volume over the past three months
Among the 3 main sources of cash flow, which source of cash flow is the most important and also the most difficult to forecast?
the operating cash flows from net sales over the life of the project
What is a member of the NYSE?
the owner of a trading license on the on the NYSE said to own "seats" also the owners
What does the color of the coat indicate?
the persons job/position
Multiple rates of return
the possibility that more than one discount rate will make the NPV of an investment zero.
What are the jobs of specialists?
the post bid prices and ask prices for securities assigned to them make the market by standing ready to buy at bid prices and sell at ask prices
What is preferred stock?
the preference of the payment of dividends and payment following liquidation goes to them before common stock holders,
Profitability Index (PI)
the present value of an investments future cash flows divided by its initial cost. Also called the benefit-cost ratio.
What is the bid price?
the price a dealer is willing to pay
What is the ask/offering price?
the price at which the dealer is willing to sell
Discounted cash flow (DCF) valuation:
the process of valuing an investment by discounting its future cash flows.
What is the PE ratio?
the ratio of a stock's price per share to its earnings per share over the previous year.
What is a preemptive right?
the right of stockholders to share proportionally in any new stock sold must first be offered to existing stockholders before to public helps give protection of ownership to stockholders
Accounting break-even
the sales level that results in zero project net income
The degree of interest rate risk depends on ____.
the sensitivity of the bond's price to interest rate changes
What would happen if the growth rate g > then discount rate R?
the stock price is infinitely large the present value of the dividends keeps getting bigger, this is "illegal" and nonsense
What is the stated value of preferred stock?
the value a preferred stockholder would receive upon liquidation (ex. 100 per share)
What is the rule of thumb for floor traders?
they buy low and sell high
What is important to note about preferred stock?
they often have no voting rights
Payback period rule
time value of money is completely ignored. Fails to consider any risk differences. The payback would be calculated the same way for both very risky and very safe projects. Biggest problem is coming up with the right cutoff period: We don't really have an objective basis for choosing a particular number. We end up using a number that is arbitrarily chosen.
What does having a license allow you to do on the NYSE?
to buy and sell securities on the floor of the exchange
what is the primary responsibility to customers for the commission brokers?
to get the best possible price for customer orders
What is the relationship between variable costs and output?
total variable costs are directly related to the level of output
If a $1,000 par value bond is trading at a premium, the bond is _____.
trading for more than $1,000 in the market
Because of ____________ and ____________, interest rates are often quoted in many different ways.
tradition; legislation
True or False: Roger Ibbotson and Rex Sinquefield conducted a famous set of studies dealing with rates of return in U.S. financial markets.
true
True or false: The risk premium can be interpreted as a reward for bearing risk True False
true
True or false: two challenges with the IRR approach when comparing two mutually exclusive projects are scale and cash flow timing
true
In a competitive market, positive NPV projects are:
uncommon
What is the first important characteristics about dividends?
unless a dividend is declared by the board of directors, it is not a liability of the corporation You cannot default on an undeclared dividend cannot become bankrupt due to not paying dividends
The square of the standard deviation is equal to the ____.
variance
The normal distribution is completely described by the _______ and ________. correlation coefficient variance or standard deviation mean median
variance or standard deviation mean
The coupon rate on an original issue discount bond will be ___.
very low
Internal rate of return
very popular in practice - more so then NPV because people prefer talking about rates of return rather than dollar values. Also because we can't estimate the NPV unless we know the appropriate discount rate, but we can still estimate the IRR.
What do we do if the company is new (not earning profit yet) and don't pay dividends
we find the price per share/sales per share
If the dividend grows at a steady rate, what problem have we replaced?
we have replaced the problem of forecasting an infinite number of future dividends with the problem of coming up with a single growth rate
What do we use when companies don't pay dividends?
we use the PE ratio
To avoid the problem of having to forecast and discount an infinite number of dividends what do we do
we will require that the dividends start growing at a constant rate at some point in the future
When valuing a stock, the advantage to considering the stock price in the distant future (rathen than a more near-term price) as a cash flow is that:
when discounted to present value, a stock price in the distant future is nearly zero
Most of the time, a floating-rate bond's coupon adjusts ____.
with a lag to some base rate
Suppose Smith with 20 shares and Jones with 80 shares both take place in a cumulative vote where four director positions are available. Both want to be a director, but Jones does not want smith. Can Smith win?
yes, all smith needs is 1/(1+N) percent of the stock plus one share to win 1/(1+4) = 20%
The bond market requires a return of 6.2 percent on the 15-year bonds issued by Mingwei Manufacturing. The 6.2 percent is referred to as the:
yield to maturity.
