FIN 3309 Test 2

The financial statement that summarizes a firm's accounting value as of a particular date is called the: A. income statement B. cash flow statement C. liquidity position D. balance sheet E. periodic operating statement

D. balance sheet

All else constant, the dividend yield will increase if the stock price ____.

Decreases

True or False: For investors in the stock market, dividends from stocks are fixed and guaranteed, while capital gains are variable and not guaranteed.

False

If the growth rate (g) is zero, the capital gains yield is ____.

ZERO! Capital gains yield = growth rate

Which of the following are reasons that make valuing a share of stock more difficult than valuing a bond? a. Stock has no set maturity b. The required rate of return is unobservable c. Dividends are unknown and uncertain d. Different stock issues have different maturity dates

a. Stock has no set maturity b. The required rate of return is unobservable c. Dividends are unknown and uncertain

Which of the following are cash flows to investors in stocks? a. dividends b. fees c. interest d. capital gains

a. dividends & d. capital gains

The price of a share of common stock is equal to the present value of all ______ future dividends. a. expected b. paid c. growing d. stable

a. expected

The present value of a lump-sum future amount: a. increases as the interest rate decreases. b. decreases as the time period decreases. c. is inversely related to the future value. d. is directly related to the interest rate. e. is directly related to the time period.

a. increases as the interest rate decreases.

A corporate bond's yield to maturity: a. is usually not the same as a bond's coupon rate b. changes over time c. is alway equal to a bond's coupon rate d. remains fixed over the life of the bond

a. is usually not the same as a bond's coupon rate AND b. changes over time

If a firm has a negative cash flow from assets every year for several years, the firm: a. may be continually increasing in size. b. is operating at a high level of efficiency. c. is repaying debt every year. d. has annual net losses. e. must also have a negative cash flow from operations each year.

a. may be continually increasing in size.

The weighted average cost of capital is defined as the weighted average of a firm's: a. return on all of its investments. b. cost of equity, cost of preferred, and its aftertax cost of debt. c. pretax cost of debt and its preferred and common equity securities. d. bond coupon rates. e. common and preferred stock.

b. cost of equity, cost of preferred, and its aftertax cost of debt.

When a bond's yield to maturity is less than the bond's coupon rate, the bond: a. had to be recently issued. b. is selling at a premium. c. has reached its maturity date. d. is priced at par. e. is selling at a discount.

b. is selling at a premium.

All else constant, an increase in a firm's cost of debt: a. could be caused by an increase in the firm's tax rate. b. will result in an increase in the firm's cost of capital. c. will lower the firm's weighted average cost of capital. d. will lower the firm's cost of equity. e. will increase the firm's capital structure weight of debt.

b. will result in an increase in the firm's cost of capital.

When interest rates in the market rise, we can expect the price of bonds to ____. a. increase b. not change c. decrease

c. decrease

A firm has a cost of equity of 13 percent, a cost of preferred of 11 percent, an aftertax cost of debt of 5.2 percent, and a tax rate of 35 percent. Given this, which one of the following will increase the firm's weighted average cost of capital? a. Increasing the firm's tax rate b. Issuing new bonds at par c. Redeeming shares of common stock d. Increasing the firm's beta e. Increasing the debt-equity ratio

d. Increasing the firm's beta

Stacey deposits $5,000 into an account that pays 2 percent interest, compounded annually. At the same time, Kurt deposits $5,000 into an account paying 3.5 percent interest, compounded annually. At the end of three years: a. Both Stacey and Kurt will have accounts of equal value. b. Kurt will have twice the money saved that Stacey does. c. Kurt will earn exactly twice the amount of interest that Stacey earns. d. Kurt will have a larger account value than Stacey will e. Stacey will have more money saved than Kurt.

d. Kurt will have a larger account value than Stacey will

Which one of the following represents the minimum rate of return a firm must earn on its assets if it is to maintain the current value of its securities? a. Cost of equity b. Pretax cost of debt c. Aftertax cost of debt d. Weighted average cost of capital e. Weighted average cost of preferred and common stock

d. Weighted average cost of capital

A bond's coupon payment is: a. interest that is paid by the bond issuer when a bond matures b. a coupon that can be used by bondholders to receive discounts on goods produced by the corporation issuing the bonds c. a variable interest amount that is paid to bondholders based on the federal funds rate d. a fixed amount of interest that is paid annually or semiannually by the issuer to its bondholders

d. a fixed amount of interest that is paid annually or semiannually by the issuer to its bondholders

An increase in which one of the following will increase operating cash flow for a profitable, tax-paying firm? a. Fixed expenses b. Marginal tax rate c. Net capital spending d. Inventory e. Depreciation

e. Depreciation

Which one of the following will increase the current value of a stock? a. Decrease in the dividend growth rate b. Increase in the required return c. Increase in the market rate of return d. Decrease in the expected dividend for next year e. Increase in the capital gains yield

e. Increase in the capital gains yield

Kendall is investing $3,333 today at 3 percent annual interest for three years. Which one of the following will increase the future value of that amount? a. Shortening the investment time period b. Paying interest only on the principal amount c. Paying simple interest rather than compound interest d. Paying interest only at the end of the investment period rather than throughout the investment period e. Increasing the interest rate

e. Increasing the interest rate

All else held constant, the present value of an annuity will decrease if you: a. increase the annuity's future value. b. increase the payment amount. c. increase the time period. d. decrease the discount rate. e. decrease the annuity payment.

e. decrease the annuity payment.