FIN Final 6406 (NO WRITEN - ONLY MULTIPLE CHOICE)
What is the probability that small-company stocks will produce an annual return that is more than one standard deviation below the average? -1.0 percent -2.5 percent -5.0 percent -16 percent -32 percent
16 percent
Kuthrapali would like your advice as he has to make an investment in bonds. Which one of the following bonds is the least sensitive to interest rate risk? -3-year; 4 percent coupon -3-year; 6 percent coupon -5-year; 6 percent coupon -7-year; 6 percent coupon -7-year; 4 percent coupon
3-year; 6 percent coupon
Mary Cooper is retired and her sole source of income is her bond portfolio. Although she has sufficient principal to live on, she only wants to spend the interest income and thus is concerned about the purchasing power of that income. Which one of the following bonds should best ease Mary's concerns? -6-year coupon bonds -5-year TIPS -20-year coupon bonds -5-year municipal bonds -7-year income bonds
5-year TIPS
The Michael Scott Paper Company owns 50,000 shares of preferred stock in Serenity by Jan. What percentage, if any, of the dividend income received by The Michael Scott Paper Company from this investment is excluded from federal income taxation in 2018? -0 percent -100 percent -25 percent -70 percent -50 percent
50 percent
Stuart is a small business owner who is financially dependent upon the interest income produced by his bond portfolio. Which one of the following bonds is the least suitable for him to own? -5-year floating rate bond -10-year AAA coupon bond -7-year income bond -5-year TIPS -6-year, high-coupon, put bond
7-year income bond
Which one of these will increase a company's aftertax cost of debt? -A decrease in the company's debt-equity ratio -A decrease in the company's tax rate -An increase in the credit rating of the company's bonds -An increase in the company's beta -A decrease in the market rate of interest
A decrease in the company's tax rate
Which one of the following is the best example of a diversifiable risk? -Interest rates increase -Energy costs increase -Core inflation increases -A firm's sales decrease -Taxes decrease
A firm's sales decrease
Which one of the following statements is correct concerning a portfolio beta? -Portfolio betas range between −1.0 and +1.0. -A portfolio beta is a weighted average of the betas of the individual securities contained in the portfolio. -A portfolio beta cannot be computed from the betas of the individual securities comprising the portfolio because some risk is eliminated via diversification. -A portfolio of U.S. Treasury bills will have a beta of +1.0. -The beta of a market portfolio is equal to zero.
A portfolio beta is a weighted average of the betas of the individual securities contained in the portfolio.
All else constant, which one of the following will increase a company's cost of equity if the company computes that cost using the security market line approach? Assume the firm currently pays an annual dividend of $1 a share and has a beta of 1.2. -A reduction in the dividend amount -An increase in the dividend amount -A reduction in the market rate of return -A reduction in the firm's beta -A reduction in the risk-free rate
A reduction in the risk-free rate
Which one of the following measures the amount of systematic risk present in a particularly risky asset relative to the systematic risk present in an average risky asset? -Beta -Reward-to-risk ratio -Risk ratio -Standard deviation -Price-earnings ratio
Beta
If Raj sells a bond with a coupon of 6 percent to Howard, a dealer when the market rate is 7 percent, which one of the following prices will Raj receive? -Call price -Par value -Bid price -Asked price -Bid-ask spread
Bid price
Which one of these statements is correct? -A debenture is a senior secured debt. -All bonds are treated equally in a bankruptcy proceeding. -The risk of a company financially failing decreases when the company issues bonds. -Bonds often provide tax benefits to issuers. -Most long-term bond issues are referred to as unfunded debt.
Bonds often provide tax benefits to issuers.
Which one of the following is the formula that explains the relationship between the expected return on a security and the level of that security's systematic risk? -Capital asset pricing model -Time value of money equation -Unsystematic risk equation -Market performance equation -Expected risk formula
Capital asset pricing model
Which one of following is the rate at which a stock's price is expected to appreciate? -Current yield -Total return -Dividend yield -Capital gains yield -Coupon rate
Capital gains yield
Which one of the following types of stock is defined by the fact that it receives no preferential treatment in respect to either dividends or bankruptcy proceedings? -Common -Preferred -Non-cumulative -Cumulative -Dual class
Common
Amy is trying to compare the present values of two separate streams of cash flows that have equivalent risks. One stream is expressed in nominal values and the other stream is expressed in real values. She decides to discount the nominal cash flows using a nominal annual rate of 8 percent. What rate should she use to discount the real cash flows? -Nominal rate minus the risk-free rate -Comparable risk-free rate -EAR of 8 percent compounded monthly -Comparable real rate -8 percent
Comparable real rate
Which one of the following best describes NASDAQ? -Largest U.S. stock market in terms of dollar trading volume -Market where dealers buy at the asked price -Market where the designated market makers are located at posts -Computer network of securities dealers -Market with three physical trading floors
Computer network of securities dealers
What is the model called that determines the market value of a stock based on its next annual dividend, the dividend growth rate, and the applicable discount rate? -Maximal-growth model -Constant-growth model -Capital pricing model -Realized-earnings model -Realized-growth model
Constant-growth model
Which one of the following statements related to corporate dividends is correct? -Dividends are nontaxable income to shareholders. -Dividends reduce the taxable income of the corporation. -The chief executive officer of a corporation is responsible for declaring dividends. -The chief financial officer of a corporation determines the amount of dividend to be paid. -Corporate shareholders may receive a tax break on a portion of their dividend income.
Corporate shareholders may receive a tax break on a portion of their dividend income.
A group of individuals got together and purchased all of the outstanding shares of common stock of ZenGen Inc. What is the return that these individuals require on this investment called? -Dividend yield -Cost of equity -Capital gains yield -Cost of capital -Income return
Cost of equity
Leonard just received the semiannual payment of $70 on a bond he owns. Which term refers to this payment? -Face value -Coupon -Discount -Call premium -Yield
Coupon
Which one of the following relationships applies to a par value bond? -Yield to maturity > Current yield > Coupon rate -Coupon rate > Yield to maturity > Current yield -Coupon rate = Current yield = Yield to maturity -Coupon rate < Yield to maturity < Current yield -Coupon rate > Current yield > Yield to maturity
Coupon rate = Current yield = Yield to maturity
Which one of the following applies to a premium bond? -Coupon rate > Current yield > Yield to maturity -Coupon rate < Yield to maturity < Current yield -Coupon rate > Yield to maturity > Current yield -Coupon rate = Current yield = Yield to maturity -Yield to maturity > Current yield > Coupon rate
Coupon rate > Current yield > Yield to maturity
Which one of these statements related to preferred stock is correct? -Preferred shareholders normally receive one vote per share of stock owned. -Preferred shareholders determine the outcome of any election that involves a proxy fight. -Preferred shareholders are considered to be the residual owners of a corporation. -Preferred stock normally has a stated liquidating value of $1,000 per share. -Cumulative preferred shares are more valuable than comparable noncumulative shares.
Cumulative preferred shares are more valuable than comparable noncumulative shares.
The Comic Center of Pasadena just issued 20-year, 7.25 percent, unsecured bonds at par. These bonds fit the definition of which one of the following terms? -Debenture -Note -Discounted -Zero-coupon -Callable
Debenture
Grand Admiral Thrawn is analyzing a project that currently has a projected NPV of zero. Which one of the following changes that he is considering is most apt to cause that project to produce a positive NPV instead? Consider each change independently. -Decrease the sales price -Increase the materials cost per unit -Decrease the labor hours per unit produced -Decrease the sales quantity -Increase the amount of the initial investment in net working capital
Decrease the labor hours per unit produced
Which one of the following rights is never directly granted to all shareholders of a publicly held corporation? -Electing the board of directors -Receiving a distribution of company profits -Voting either for or against a proposed merger or acquisition -Determining the amount of the dividend to be paid per share -Having first chance to purchase any new equity shares that may be offered
Determining the amount of the dividend to be paid per share
A decrease in which of the following will increase the current value of a stock according to the dividend growth model? -Dividend amount -Number of future dividends, provided the total number of dividends is less than infinite -Dividend growth rate -Discount rate -Both the discount rate and the dividend growth rate
Discount rate
Which one of the following sets of dividend payments best meets the definition of two-stage growth as it applies to the two-stage dividend growth model? -No dividends for five years, then increasing dividends forever -$1 per share annual dividend for two years, then $1.25 annual dividends forever -Decreasing dividends for six years followed by one final liquidating dividend payment -Dividends payments that increase by 2, 3, and 4 percent respectively for three years followed by a constant dividend thereafter -Dividend payments that increase by 10 percent per year for five years followed by dividends that increase by 3 percent annually thereafter
Dividend payments that increase by 10 percent per year for five years followed by dividends that increase by 3 percent annually thereafter
What are the distributions of either cash or stock to shareholders by a corporation called? -Coupon payments -Retained earnings -Dividends -Capital payments -Diluted profits
Dividends
Assume all stock prices fairly reflect all of the available information on those stocks. Which one of the following terms best defines the stock market under these conditions? -Riskless market -Evenly distributed market -Zero volatility market -Blume's market -Efficient capital market
Efficient capital market
You own a stock that you think will produce a return of 11 percent in a good economy and 3 percent in a poor economy. Given the probabilities of each state of the economy occurring, you anticipate that your stock will earn 6.5 percent next year. Which one of the following terms applies to this 6.5 percent? -Arithmetic return -Historical return -Expected return -Geometric return -Required return
Expected return
Penny owns a bond that will pay her $80 each year in interest plus $1,000 as a principal payment at maturity. What is the $1,000 called? -Coupon -Discount -Yield -Face value -Dirty price
Face Value
Which of the following statements concerning risk are correct? I. Non-diversifiable risk is measured by beta. II. The risk premium increases as diversifiable risk increases. III. Systematic risk is another name for non-diversifiable risk. IV. Diversifiable risks are market risks you cannot avoid. I and III only II and IV only I and II only III and IV only I, II, and III only
I and III only
Which of the following are examples of diversifiable risk? I. An earthquake damages an entire town II. The federal government imposes a $100 fee on all business entities III. Employment taxes increase nationally IV. All toymakers are required to improve their safety standards -I and III only -II and IV only -II and III only -I and IV only -I, III, and IV only
I and IV only
The expected return on a portfolio considers which of the following factors? I. Percentage of the portfolio invested in each individual security II. Projected states of the economy III. The performance of each security given various economic states IV. Probability of occurrence for each state of the economy -I and III only -II and IV only -I, III, and IV only -II, III, and IV only -I, II, III, and IV
I, II, III, and IV
The expected return on a portfolio: I. can never exceed the expected return of the best performing security in the portfolio. II. must be equal to or greater than the expected return of the worst performing security in the portfolio. III. is independent of the unsystematic risks of the individual securities held in the portfolio. IV. is independent of the allocation of the portfolio amongst individual securities. -I and III only -II and IV only -I and II only -I, II, and III only -I, II, III, and IV
I, II, and III only
At a minimum, which of the following would you need to know to estimate the amount of additional reward you will receive for purchasing a risky asset instead of a risk-free asset? I. Asset's standard deviation II. Asset's beta III. Risk-free rate of return IV. Market risk premium -I and III only -II and IV only -III and IV only -I, III, and IV only -I, II, III, and IV
II and IV only
Scenario analysis is best suited to accomplishing which one of the following when analyzing a project? -Determining how fixed costs affect NPV -Estimating the residual value of fixed assets -Identifying the potential range of reasonable outcomes -Determining the minimal level of sales required to break-even on an accounting basis -Determining the minimal level of sales required to break-even on a financial basis
Identifying the potential range of reasonable outcomes
Pam owns 30 shares of stock in Dunder-Mifflin and wants to win a seat on the board of directors. The firm has a total of 100 shares of stock outstanding. Each share receives one vote. Presently, the company is voting to elect three new directors. Which one of the following statements must be true given this information? -Regardless of the voting procedure, Pam does not own enough shares to gain a seat on the board. -If straight voting applies, Pam is assured a seat on the board. -If straight voting applies, Pam can control all of the open seats. -If cumulative voting applies, Pam is assured one seat on the board. -If cumulative voting applies, Pam can control all of the open seats.
If cumulative voting applies, Pam is assured one seat on the board.
Which one of these combinations must increase the contribution margin? -Increasing both the sales price and the variable cost per unit -Increasing the sales quantity and increasing the variable cost per unit -Decreasing the sales price and increasing the sales quantity -Decreasing both fixed costs and depreciation expense -Increasing the sales price and decreasing the variable cost per unit
Increasing the sales price and decreasing the variable cost per unit
Real rates are defined as nominal rates that have been adjusted for which of the following? -Inflation -Default risk -Accrued interest -Interest rate risk -Both inflation and interest rate risk
Inflation
Which one of the following risks would a floating-rate bond tend to have less of as compared to a fixed-rate coupon bond? -Real rate risk -Default risk -Interest rate risk -Liquidity risk -Taxability risk
Interest rate risk
Which one of the following is an example of systematic risk? -Investors panic causing security prices around the globe to fall precipitously -A flood washes away a firm's warehouse -A city imposes an additional one percent sales tax on all products -A toymaker has to recall its top-selling toy -Corn prices increase due to increased demand for alternative fuels
Investors panic causing security prices around the globe to fall precipitously
Which bond would you generally expect to have the highest yield? -Long-term, taxable junk bond -Short-term, inflation-adjusted bond -Long-term, high-quality, tax-free bond -Nontaxable, highly liquid bond -Risk-free Treasury bond
Long-term, taxable junk bond
After having to listen to Sofia go on and on and on about interest rates for weeks on end, you expect interest rates to decline in the near future even though the bond market is not indicating any sign of this change. Which one of the following bonds should you purchase now to maximize your gains if the rate decline does occur? -Short-term; low coupon -Long-term; zero coupon -Short-term; high coupon -Long-term; low coupon -Long-term; high coupon
Long-term; zero coupon
Qui-Gon Jinn, the sales manager for Obi One Light Sabers, wants to sponsor a one-week "Customer Appreciation Sale" where the firm offers to sell additional units of a product at the lowest price possible without negatively affecting the firm's profits. Which one of the following represents the price that should be charged for the additional units during this sale? -Average variable cost -Average total cost -Average total revenue -Marginal revenue -Marginal cost
Marginal cost
Which one of the following is represented by the slope of the security market line? -Reward-to-risk ratio -Market standard deviation -Beta coefficient -Risk-free interest rate -Market risk premium
Market risk premium
Which one of the following is an example of unsystematic risk? -An across the board increase in income taxes -Adoption of a national sales tax -Decrease in the national level of inflation -An increased feeling of global prosperity -National decrease in consumer spending on entertainment
National decrease in consumer spending on entertainment
By definition, which one of the following must equal zero at the accounting break-even point? -Net present value -Depreciation -Contribution margin -Net income -Operating cash flow
Net income
Last year, ZanGen Pharmaceuticals issued $1 million in unsecured, noncallable debt. This debt pays an annual interest payment of $55 and matures six years from now. The face value is $1,000 and the market price is $1,020. Which one of these terms correctly describes a feature of this debt? -Semiannual coupon -Discount bond -Note -Trust deed -Collateralized
Note
A securities market primarily composed of dealers who buy and sell for their own inventories is referred to which type of market? -Auction -Private -Over-the-counter -Regional -Insider
Over-the-counter
Which one of the following statements is correct? -The subjective approach assigns a discount rate to each project based on other companies in the same category as the project. -Overall, a company makes better decisions when it uses the subjective approach than when it uses its WACC as the discount rate for all projects. -Companies will correctly accept or reject every project if they adopt the subjective approach. -Mandatory projects should only be accepted if they produce a positive NPV when the overall company WACC is used as the discount rate. -The pure play approach should only be used with low-risk projects.
Overall, a company makes better decisions when it uses the subjective approach than when it uses its WACC as the discount rate for all projects.
Leonard owns five different bonds and twelve different stocks. Which one of the following terms most applies to his investments? -Index -Portfolio -Collection -Grouping -Risk-free
Portfolio
Penny has invested in twelve different stocks that have a combined value today of $121,300. Fifteen percent of that total is invested in The Cheesecake Factory Inc. The 15 percent is a measure of which one of the following? -Portfolio return -Portfolio weight -Degree of risk -Price-earnings ratio -Index value
Portfolio weight
Vance Refrigeration stock is listed on NASDAQ. The firm is planning to issue some new equity shares for sale to the general public. This sale will definitely occur in which one of the following markets? -Primary -Secondary -Tertiary -Auction -Private
Primary
The Michael Scott Paper Company has a capital structure that includes bonds, preferred stock, and common stock. Which one of the following rights is most apt to be granted to the preferred shareholders? -Right to share in company profits prior to other shareholders -Right to elect the corporate directors -Right to vote on proposed mergers -Right to all residual income after the common dividends have been paid -Right to a permanent seat on the board of directors
Right to share in company profits prior to other shareholders
Assume that last year T-bills returned 2.8 percent while your investment in large-company stocks earned an average of 7.6 percent. Which one of the following terms refers to the difference between these two rates of return? -Risk premium -Geometric average return -Arithmetic average return -Standard deviation -Variance
Risk premium
Which of the following variables will be forecast at their highest expected level under a best-case scenario? -Fixed costs and units value -Variable costs and sales price -Fixed costs and sales price -Salvage value and units sold -Initial cost and variable costs
Salvage value and units sold
Mon Mothma is fairly cautious when analyzing a new project and thus she projects the most optimistic, the most realistic, and the most pessimistic outcome that can reasonably be expected. Which type of analysis is she using? -Simulation testing -Sensitivity analysis -Break-even analysis -Rationing analysis -Scenario analysis
Scenario analysis
Which one of the following statements concerning scenario analysis is correct? -The pessimistic case scenario determines the maximum loss, in current dollars, that a firm could possibly incur from a given project. -Scenario analysis defines the entire range of results that could be realized from a proposed investment project. -Scenario analysis determines which variable has the greatest impact on a project's final outcome. -Scenario analysis helps managers analyze various outcomes that are possible given reasonable ranges for each of the assumptions. -Management is guaranteed a positive outcome for a project when the worst-case scenario produces a positive NPV.
Scenario analysis helps managers analyze various outcomes that are possible given reasonable ranges for each of the assumptions.
A firm's managers realize they cannot monitor all aspects of their projects but do want to maintain a constant focus on the key aspect of each project in an attempt to maximize their firm's value. Given this specific desire, which type of analysis should they require for each project and why? -Sensitivity analysis; to identify the key variable that affects a project's profitability -Scenario analysis; to guarantee each project will be profitable -Cash breakeven; to ensure the firm recoups its initial investment -Accounting breakeven; to ensure each project earns its required rate of return -Financial breakeven; to ensure each project has a positive NPV
Sensitivity analysis; to identify the key variable that affects a project's profitability
Penny owns a bond that pays an annual coupon of 7 percent that matures five years from now. She purchased this 10-year bond at par value when it was originally issued. Which one of the following statements applies to this bond if the relevant market interest rate is now 5.8 percent? -The current yield to maturity is greater than 7 percent. -The current yield is 7 percent. -The next interest payment will be $30. -The bond is currently valued at one-half of its issue price. -She will realize a capital gain on the bond if you sell it today.
She will realize a capital gain on the bond if you sell it today.
Which one of the following categories of securities had the highest average annual return for the period 1926-2016? -Small-company stocks -Large-company stocks -Long-term corporate bonds -U.S. Treasury bills -Long-term government bonds
Small-company stocks
Which one of the following should earn the highest risk premium based on CAPM? -Diversified portfolio with returns similar to the overall market -Stock with a beta of 1.38 -Stock with a beta of .74 -U.S. Treasury bill -Portfolio with a beta of 1.01
Stock with a beta of 1.38
Grand Moff Tarkin is considering improvements to the Death Star. Which one of the following will best reduce the risk of a project by lowering the degree of operating leverage? -Hiring additional employees rather than using temporary outside contractors -Subcontracting portions of the project rather than purchasing new equipment to do all the work in-house -Buying equipment rather than leasing it short-term -Lowering the projected selling price per unit -Changing the proposed labor-intensive production method to a more capital-intensive method
Subcontracting portions of the project rather than purchasing new equipment to do all the work in-house
Which one of the following is a risk that applies to most securities? -Unsystematic -Diversifiable -Systematic -Asset-specific -Industry
Systematic
Which one of the following statements related to WACC is correct for a company that uses debt in its capital structure? -The WACC would most likely decrease if the firm replaced its preferred stock with debt. -The weight assigned to preferred stock decreases as the market value of the preferred stock increases. -The WACC will decrease as the corporate tax rate decreases. -The weight of equity is based on the number of shares outstanding and the book value per share. -The WACC will remain constant unless a company retires some of its debt.
The WACC would most likely decrease if the firm replaced its preferred stock with debt.
String Theory Inc has an investment-grade bond issue outstanding that pays $30 semiannual interest payments. The bonds sell at par and are callable at a price equal to the present value of all future interest and principal payments discounted at a rate equal to the comparable Treasury rate plus .50 percent. Which one of the following correctly describes this bond? -The bond has a "make whole" call price. -The interest payments are variable. -The coupon rate is 3 percent. -Market value is less than face value. -The bond rating is B.
The bond has a "make whole" call price.
Your firm is preparing a bond offering with a coupon rate of 6 percent, paid semiannually, and a face value of $1,000. The bonds will mature in 10 years and will be sold at par. Given this, which one of the following statements is correct? -The bonds will become discount bonds if the market rate of interest declines. -The bonds will pay 10 interest payments of $60 each. -The bonds will sell at a premium if the market rate is 5.5 percent. The bonds will initially sell for $1,030 each. The final payment will be in the amount of $1,060.
The bonds will sell at a premium if the market rate is 5.5 percent.
A $1,000 par value convertible corporate bond that pays $80 annually in interest was issued last year. Which one of these would apply to this bond today if the current price of the bond is $996.20? -The bond is currently selling at a premium. -The current yield exceeds the coupon rate. -The bond is selling at par value. -The current yield exceeds the yield to maturity. -The coupon rate has increased to 7 percent.
The current yield exceeds the coupon rate.
Which one of the following is the most likely reason why a stock price might not react at all on the day that new information related to the stock's issuer is released? Assume the market is semistrong form efficient. -Company insiders were aware of the information prior to the announcement. -Investors do not pay attention to daily news. -Investors tend to overreact. -The news was positive. -The information was expected.
The information was expected.
Which one of the following will be used in the computation of the best-case analysis of a proposed project? -Minimal number of units that are expected to be produced and sold -The lowest expected salvage value that can be obtained for a project's fixed assets -The most anticipated sales price per unit -The lowest variable cost per unit that can reasonably be expected -The highest level of fixed costs that is actually anticipated
The lowest variable cost per unit that can reasonably be expected
Which one of the following statements related to risk is correct? -The beta of a portfolio must increase when a stock with a high standard deviation is added to the portfolio. -Every portfolio that contains 25 or more securities is free of unsystematic risk. -The systematic risk of a portfolio can be effectively lowered by adding T-bills to the portfolio. -Adding five additional stocks to a diversified portfolio will lower the portfolio's beta. -Stocks that move in tandem with the overall market have zero betas.
The systematic risk of a portfolio can be effectively lowered by adding T-bills to the portfolio.
The rate of return on which type of security is normally used as the risk-free rate of return? -Intermediate-term corporate bonds -Intermediate-term Treasury bonds -Long-term corporate bonds -Treasury bills -Long-term Treasury bonds
Treasury bills
Which one of the following categories of securities had the lowest average risk premium for the period 1926-2016? -Long-term government bonds -Small-company stocks -Large-company stocks -Long-term corporate bonds -U.S. Treasury bills
U.S. Treasury bills
A news flash just appeared that caused about a dozen stocks to suddenly increase in value by 12 percent. What type of risk does this news flash best represent? -Portfolio -Non-diversifiable -Market -Unsystematic -Expected
Unsystematic
Which one of the following risks is irrelevant to a well-diversified investor? -Systematic risk -Unsystematic risk -Market risk -Non-diversifiable risk -Systematic portion of a surprise
Unsystematic risk
Standard deviation is a measure of which one of the following? -Average rate of return -Volatility -Probability -Risk premium -Real returns
Volatility
You cannot attend the shareholder's meeting for Athleap so you authorize another shareholder to vote on your behalf. What is the granting of this authority called? -Alternative voting -Cumulative voting -Straight voting -Indenture voting -Voting by proxy
Voting by proxy
Barry Kripke has researched Tata Motors and believes the firm is poised to vastly increase in value. He has decided to purchase Tata Motors bonds as he needs a steady stream of income. However, he still wishes that he could share in the firm's success along with the shareholders. Which one of the following bond features will help him fulfill his wish? -Put provision -Positive covenant -Warrant -Crossover rating -Call provision
Warrant
Which form of market efficiency would most likely offer the greatest profit potential to an outstanding professional stock analyst? -Weak -Semiweak -Semistrong -Strong -Perfect
Weak
Which one of these equations applies to a bond that currently has a market price that exceeds par value? -Market value < Face value -Yield to maturity = Current yield -Market value = Face value -Current yield > Coupon rate -Yield to maturity < Coupon rate
Yield to maturity < Coupon rate
Answer this question based on the dividend growth model. If you expect the market rate of return to increase across the board on all equity securities, then you should also expect: -an increase in all stock values. -all stock values to remain constant. -a decrease in all stock values. -dividend-paying stocks to maintain a constant price while non-dividend paying stocks decrease in value. -dividend-paying stocks to increase in -price while non-dividend paying stocks remain constant in value.
a decrease in all stock values.
All else constant, a bond will sell at ________ when the coupon rate is ________ the yield to maturity. -a premium; less than -a premium; equal to -a discount; less than -a discount; higher than -par; less than
a discount; less than
A stock with an actual return that lies above the security market line has: -more systematic risk than the overall market. -more risk than that warranted by CAPM. -a higher return than expected for the level of risk assumed. -less systematic risk than the overall market. -a return equivalent to the level of risk assumed.
a higher return than expected for the level of risk assumed.
The expected return on a stock computed using economic probabilities is: -a mathematical expectation based on a weighted average and not an actual anticipated outcome. -the actual return you should anticipate as long as the economic forecast remains constant. -guaranteed to equal the actual return for the immediate twelve month period. -guaranteed to be the minimal rate of return on the stock over the next two years. -guaranteed to equal the actual average return on the stock for the next five years.
a mathematical expectation based on a weighted average and not an actual anticipated outcome.
A note is generally defined as: -any bond maturing in 10 years or more. -any bond secured by a blanket mortgage. -a secured bond that initially matures in less than 10 years. -an unsecured bond with an initial maturity of 10 years or less. -a secured bond with an initial maturity of 10 years or more.
an unsecured bond with an initial maturity of 10 years or less.
The capital structure weights used in computing a company's weighted average cost of capital: -are based on the book values of debt and equity. -are based on the market values of the outstanding securities. -depend upon the financing obtained to fund each specific project. -remain constant over time unless new securities are issued or outstanding securities are redeemed. -are restricted to debt and common stock.
are based on the market values of the outstanding securities.
Fixed costs: -change as a small quantity of output produced changes. -are constant over the short run regardless of the quantity of output produced. -are defined as the change in total costs when one more unit of output is produced. -are subtracted from sales to compute the contribution margin. -can be ignored in scenario analysis since they are constant over the life of a project.
are constant over the short-run regardless of the quantity of output produced.
Kuthrapali Industries has two separate divisions. Each division is in a separate line of business. Division A is the largest division and represents 65 percent of the company's overall sales. Division A is also the riskier of the two divisions. When management is deciding which of the various divisional projects should be accepted, the managers should: -allocate more funds to Division A since it is the larger of the two divisions. -fund all of Division B's projects first since they tend to be less risky and then allocate the remaining funds to the Division A projects that have the highest net present values. -allocate the company's funds to the projects with the highest net present values based on the company's weighted average cost of capital. -assign appropriate, but differing, discount rates to each project and then select the projects with the highest net present values. -fund the highest net present value projects from each division based on an allocation of 65 percent of the funds to Division A and 35 percent of the funds to Division B.
assign appropriate, but differing, discount rates to each project and then select the projects with the highest net present values.
The systematic risk of the market is measured by a: -beta of 1 -beta of 0. -standard deviation of 1. -standard deviation of 0. -variance of 1.
beta of 1
Systematic risk is measured by: the mean. beta. the geometric average. the standard deviation. the arithmetic average.
beta.
A company's current cost of capital is based on: -only the return required by the company's current shareholders. -the current market rate of return on equity shares. -the weighted costs of all future funding sources. -both the returns currently required by its debtholders and stockholders. -the company's original debt-equity ratio.
both the returns currently required by its debtholders and stockholders.
A $2,000 face value bond can be redeemed early at the issuer's discretion for $2,050, plus any accrued interest. The additional $50 is called the: -dirty price. -redemption value. -call premium. -original-issue discount. -redemption discount.
call premium.
Unsystematic risk: -can be effectively eliminated by portfolio diversification. -is compensated for by the risk premium. -is measured by beta. -is measured by standard deviation. -is related to the overall economy.
can be effectively eliminated by portfolio diversification.
An example of a negative covenant that might be found in a bond indenture is a statement that the company: -shall maintain a current ratio of 1.1 or higher. -cannot lease any major assets without bondholder approval. -must maintain the loan collateral in good working order. -shall provide audited financial statements in a timely manner. -shall maintain a cash surplus of $100,000 at all times.
cannot lease any major assets without bondholder approval.
Recently, you discovered a convertible, callable bond with a semiannual coupon of 5 percent. If you purchase this bond you will have the right to: -force the issuer to repurchase the bond prior to maturity. -convert the bond into equity shares. -defer all taxable income until the bond matures. -convert the bond into a perpetuity paying 5 percent. -have the principal amount adjusted for inflation.
convert the bond into equity shares.
ZenGen Pharmaceuticals is investing in a new project. The minimum rate of return the firm requires on this project is referred to as the: -average arithmetic return. -expected return. -market rate of return. -internal rate of return. -cost of capital.
cost of capital.
The Comic Book Store of Pasadena borrows money at a rate of 8.7 percent. This interest rate is referred to as the: -compound rate. -current yield. -cost of debt. -capital gains yield. -cost of capital.
cost of debt.
The price sensitivity of a bond increases in response to a change in the market rate of interest as the: -coupon rate increases. -time to maturity decreases. -coupon rate decreases and the time to maturity increases. -time to maturity and coupon rate both decrease. -coupon rate and time to maturity both increase.
coupon rate decreases and the time to maturity increases.
Sensitivity analysis determines the: -range of possible outcomes given that most variables are reliable only within a stated range. -degree to which the net present value reacts to changes in a single variable. -net present value range that can be realized from a proposed project. -degree to which a project relies on its initial costs. -ideal ratio of variable costs to fixed costs for profit maximization.
degree to which the net present value reacts to changes in a single variable.
The cost of capital for a new project: is determined by the overall risk level of the firm. -is dependent upon the source of the funds obtained to fund that project. -is dependent upon the firm's overall capital structure. -should be applied as the discount rate for all other projects considered by the firm. -depends upon how the funds raised for that project are going to be spent.
depends upon how the funds raised for that project are going to be spent.
Bernadette owns a reverse convertible bond. At maturity, the principal amount will be repaid in: -the form of a newly issued bond. -cash while the interest is paid in shares of stock. -shares of stock. -either shares of stock or a newly issued bond. -either cash or shares of stock.
either cash or shares of stock.
The primary purpose of portfolio diversification is to: -increase returns and risks. -eliminate all risks. -eliminate asset-specific risk. -eliminate systematic risk. -lower both returns and risks.
eliminate asset-specific risk.
A forward PE is based on: -the last four quarterly dividend payments. -the last dividend payment multiplied by 2. -historical earnings. -estimated future earnings. industry averages.
estimated future earnings.
A discount bond's coupon rate is equal to the annual interest divided by the: -call price. -current price. -face value. -clean price. -dirty price.
face value.
Operating leverage is the degree of dependence a firm places on its: -variable costs. -fixed costs. -sales. -operating cash flows. -depreciation tax shield.
fixed costs.
As the degree of sensitivity of a project to a single variable rises, the: -less important the variable is to the final outcome of the project. -less volatile the project's net present value is to that variable. -greater is the importance of accurately predicting the value of that variable. -greater is the sensitivity of the project to the other variable inputs. -less volatile is the project's outcome.
greater is the importance of accurately predicting the value of that variable.
The two-stage dividend growth model evaluates the current price of a stock based on the assumption a stock will: -pay an increasing dividend for a period of time and then cease paying dividends altogether. -increase the dividend amount every other year. -pay a constant dividend for the first two quarters of each year and then increase the dividend the last two quarters of each year. -grow at a fixed rate for a period of time after which it will grow at a different rate indefinitely. -pay increasing dividends for a fixed period of time, cease paying dividends for a period of time, and then commence paying increasing dividends for an indefinite period of time.
grow at a fixed rate for a period of time after which it will grow at a different rate indefinitely.
A zero coupon bond: -provides no taxable income to the bondholder until the bond matures. -has more interest rate risk than a comparable coupon bond. -can only be issued by the U.S. Treasury. -pays interest that is tax deductible to the issuer at the time of payment. -is sold at a large premium.
has more interest rate risk than a comparable coupon bond.
Callable bonds generally: -have a sinking fund provision. -grant the bondholder the option to call the bond any time after the deferment period. -are callable at par as soon as the call-protection period ends. -are called when market interest rates increase. -are called within the first three years after issuance.
have a sinking fund provision.
The key means of defending against forecasting risk is to: -rely primarily on the net present value method of analysis. -increase the discount rate assigned to a project. -shorten the life of a project. -identify sources of value within a project. -ignore any potential salvage value that might be realized.
identify sources of value within a project.
Forecasting risk is defined as the possibility that: -some proposed projects will be rejected. -some proposed projects will be temporarily delayed. -incorrect decisions will be made due to erroneous cash flow projections. -some projects will be mutually exclusive. -tax rates could change over the life of a project.
incorrect decisions will be made due to erroneous cash flow projections.
To convince investors to accept greater volatility, you must: -decrease the risk premium. -increase the risk premium. -decrease the real return. -decrease the risk-free rate. -increase the risk-free rate.
increase the risk premium.
The Fisher effect primarily emphasizes the effects of ________ on an investor's rate of return. -default -market movements -interest rate changes -inflation -the time to maturity
inflation
A "fallen angel" is a bond that has moved from: -investment grade to speculative grade. -senior status to junior status for liquidation purposes. -being a premium bond to being a discount bond. -being a long-term obligation to being a short-term obligation. -being publicly traded to being privately traded.
investment grade to speculative grade.
The dividend growth model: -is only as reliable as the estimated rate of growth. -can only be used if historical dividend information is available. -considers the risk that future dividends may vary from their estimated values. -applies only when a company is currently paying dividends. -is based solely on historical dividend information.
is only as reliable as the estimated rate of growth.
Poe Dameron Leather Wear started a new project last year. As it turns out, the project has been operating at its accounting break-even level of output and is now expected to continue at that level over its lifetime. Given this, you know that the project: -will never pay back. -has a zero net present value. -is operating at a higher level than if it were operating at its cash break-even level. -is operating at a higher level than if it were operating at its financial break-even level. -is lowering the total net income of the firm.
is operating at a higher level than if it were operating at its cash break-even level.
A company's weighted average cost of capital: -is equivalent to the aftertax cost of the outstanding liabilities. -should be used as the required return when analyzing any new project. -is the return investors require on the total assets of the firm. -remains constant when the debt-equity ratio changes. -is unaffected by changes in corporate tax rates.
is the return investors require on the total assets of the firm.
Assume the market rate of return is 10.1 percent and the risk-free rate of return is 3.2 percent. Hofsteder Inc stock has 2 percent less systematic risk than the market and has an actual return of 10.2 percent. This stock: -is underpriced. -is correctly priced. -will plot below the security market line. -will plot on the security market line. -will plot to the right of the overall market on a security market line graph.
is underpriced.
Supernormal growth is a growth rate that: -is both positive and follows a year or more of negative growth. -exceeds a firm's previous year's rate of growth. -is generally constant for an infinite period of time. -is unsustainable over the long term. -applies to a single, abnormal year.
is unsustainable over the long term.
The base case values used in scenario analysis are the values considered to be the most: -optimistic. -desired by management. -pessimistic. -likely to create a positive net present value. -likely to occur.
likely to occur.
General Holdo is considering a project and is concerned about the reliability of the cash flow forecasts. To reduce any potentially harmful results from accepting this project, he should consider: -lowering the degree of operating leverage. -lowering the contribution margin per unit. increasing the initial cash outlay. -increasing the fixed costs per unit. -lowering the operating cash flow.
lowering the degree of operating leverage.
Individual investors who continually monitor the financial markets seeking mispriced securities: -earn excess profits on all of their investments. -make the markets increasingly more efficient. -are never able to find a security that is temporarily mispriced. -are overwhelmingly successful in earning abnormal profits. -are always quite successful using only historical price information as their basis of evaluation.
make the markets increasingly more efficient.
Cheesecake Factory Inc. bonds mature in 11 years and have a coupon rate of 7 percent. If the market rate of interest increases, then the: -coupon rate will also increase. -current yield will decrease. -yield to maturity will be less than the coupon rate. -market price of the bond will decrease. -coupon payment will increase.
market price of the bond will decrease.
The current yield is defined as the annual interest on a bond divided by the: -par value. -coupon rate. -face value. -market price. -call price.
market price.
According to CAPM, the amount of reward an investor receives for bearing the risk of an individual security depends upon the: -amount of total risk assumed and the market risk premium. -market risk premium and the amount of systematic risk inherent in the security. -risk-free rate, the market rate of return, and the standard deviation of the security. -beta of the security and the market rate of return. -standard deviation of the security and the risk-free rate of return.
market risk premium and the amount of systematic risk inherent in the security.
The expected rate of return on a stock portfolio is a weighted average where the weights are based on the: -number of shares owned of each stock. -market price per share of each stock. -market value of the investment in each stock. -original amount invested in each stock. -cost per share of each stock held.
market value of the investment in each stock.
A bond's principal is repaid on the ________ date. -coupon -maturity -yield -dirty -clean
maturity
Serenity by Jan has a dividend policy whereby the firm pays a constant annual dividend of $2.40 per share of common stock. The firm has 1,000 shares of stock outstanding. Serenity by Jan: -must always show a current liability of $2,400 for dividends payable. -must still declare each dividend before it becomes an actual company liability. -is obligated to pay $2.40 per share each year in perpetuity. -will be declared in default if it does not pay at least $2.40 per share per year on a timely basis. -incurs a liability that must be paid at a later date should the company miss paying an annual dividend payment.
must still declare each dividend before it becomes an actual company liability.
The annual dividend yield is computed by dividing ________ annual dividend by the current stock price. -this year's -last year's -next year's -the past 5-year average -the next 5-year average
next year's
Dunder-Mifflin has paid an annual dividend of $1 per share on its common stock for the past 15 years and is expected to continue paying a dollar a share long into the future. Given this, one share of the firm's stock is: -basically worthless as it offers no growth potential. -equal in value to the present value of $1 paid one year from today. -priced the same as a $1 perpetuity. -valued at an assumed growth rate of 1 percent. -worth $1 a share in the current market.
priced the same as a $1 perpetuity.
Bernadette Boutiques is a national boutique chain with a cost of capital of 12.4 percent. This chain is considering opening a high-end resort that is expected to have a cost of capital that is at least 13 percent. The estimated net present value of the resort project is $500 when discounted at 12.4 percent. The best representation of this situation is that the resort project should: -be accepted immediately. -be financed solely with debt in order for the project to have a positive NPV. -probably be put on hold until its cost of capital can be lowered. -be permanently rejected. -probably be expanded.
probably be put on hold until its cost of capital can be lowered.
A deferred call provision: -requires the bond issuer pay a call premium that is equal to or greater than one year's coupon should the bond be called. -prohibits the bond issuer from redeeming callable bonds prior to a specified date. -prohibits the issuer from ever redeeming bonds prior to maturity. -allows the bond issuer to delay repaying a bond until after the maturity date should the issuer so opt. -requires the bond issuer to pay the current market price, minus any accrued interest, should the bond be called.
prohibits the bond issuer from redeeming callable bonds prior to a specified date.
For the period 1926-2016, U.S. Treasury bills always: -provided an annual rate of return that exceeded the annual inflation rate. -had an annual rate of return in excess of 1.2 percent. -provided a positive annual rate of return. -earned a higher annual rate of return than long-term government bonds. -had a greater variation in returns year-over-year than did long-term government bonds.
provided a positive annual rate of return.
When a manager develops a cost of capital for a specific project based on the cost of capital for another firm that has a similar line of business as the project, the manager is utilizing the ________ approach. -subjective risk -pure play -divisional cost of capital -capital adjustment -security market line
pure play
The weighted average cost of capital for a firm with debt is the: -discount rate that the firm should apply to all of the projects it undertakes. -rate of return a company must earn on its existing assets to maintain the current value of its stock. -coupon rate the firm should expect to pay on its next bond issue. -minimum discount rate the firm should require on any new project. -rate of return debtholders should expect to earn on their investment in this firm.
rate of return a company must earn on its existing assets to maintain the current value of its stock.
The excess return is computed as the: -return on a security minus the inflation rate. -return on a risky security minus the risk-free rate. -risk premium on a risky security minus the risk-free rate. -risk-free rate plus the inflation rate. -risk-free rate minus the inflation rate.
return on a risky security minus the risk-free rate.
The excess return earned by an asset that has a beta of 1.34 over that earned by a risk-free asset is referred to as the: -market risk premium. -risk premium. -systematic return. -total return. -real rate of return.
risk premium.
The expected risk premium on a stock is equal to the expected return on the stock minus the: -expected market rate of return. -risk-free rate. -inflation rate. -standard deviation. -variance.
risk-free rate.
The contribution margin per unit is equal to the: -sales price per unit minus the total costs per unit. -variable cost per unit minus the fixed cost per unit. -sales price per unit minus the variable cost per unit. -pretax profit per unit. -aftertax profit per unit.
sales price per unit minus the variable cost per unit.
An analysis of the change in a project's NPV when a single variable is changed is called ________ analysis. -forecasting -scenario -sensitivity -simulation -break-even
sensitivity
Small-company stocks, as the term is used in the textbook, are best defined as the: -500 newest corporations in the U.S. -companies whose stock trades OTC. -smallest 20 percent of the companies listed on the NYSE. -smallest 25 percent of the companies listed on NASDAQ. -companies whose stock is listed on NASDAQ.
smallest 20 percent of the companies listed on the NYSE.
Wedge Antilles LLC has three divisions. As part of the planning process, Wedge requested that each division submit its capital budgeting proposals for next year. These proposals represent positive net present value projects that fall within the long-range plans of the firm. The requests from the divisions are $4.2 million, $3.1 million, and $6.8 million. For the firm as a whole, management has limited spending to $10 million for new projects next year even though the firm could afford additional investments. This is an example of: -scenario analysis. -sensitivity analysis. -an operating leverage application. -soft rationing. -hard rationing.
soft rationing.
The difference between the price that Howard, a dealer is willing to pay and the price at which Raj will sell is called the: -call price. -discount. -premium. -spread. -equilibrium.
spread.
The principle of diversification tells us that: -concentrating an investment in two or three large stocks will eliminate all of the unsystematic risk. -concentrating an investment in three companies all within the same industry will greatly reduce the systematic risk. -spreading an investment across five diverse companies will not lower the total risk. -spreading an investment across many diverse assets will eliminate all of the systematic risk. -spreading an investment across many diverse assets will eliminate some of the total risk.
spreading an investment across many diverse assets will eliminate some of the total risk.
The weighted average cost of capital for a company is least dependent upon the: -company's beta. -coupon rate of the company's outstanding bonds. -growth rate of the company's dividends. company's marginal tax rate. -standard deviation of the company's -common stock.
standard deviation of the company's common stock.
Total risk is measured by ________ and systematic risk is measured by ________. -beta; alpha -beta; standard deviation -alpha; beta -standard deviation; beta -standard deviation; variance
standard deviation; beta
Inside information has the least value when financial markets are: -strong form efficient. -semistrong form efficient. -semiweak form efficient. -inefficient. -weak form efficient.
strong form efficient.
Preferred stock may have all of the following characteristics in common with bonds with the exception of: -the lack of voting rights. -a possible conversion option into common stock. -annuity payments. -a fixed liquidation value. -tax-deductible payments.
tax-deductible payments.
A project that has a payback period exactly equal to the project's life is operating at: -its maximum capacity. -the financial break-even point. -the cash break-even point. -the accounting break-even point. -a zero level of output.
the accounting break-even point.
The discount rate assigned to an individual project should be based on: -the company's overall weighted average cost of capital. -the actual sources of funding used for the project. -an average of the company's overall cost of capital for the past five years. -the current risk level of the overall firm. -the risks associated with the use of the funds required by the project.
the risks associated with the use of the funds required by the project.
The primary advantage of using the dividend growth model to estimate a company's cost of equity is: -the ability to apply either current or future tax rates. -the model's applicability to all corporations. -is the model's consideration of risk. -the stability of the computed cost of equity over time. -the simplicity of the model.
the simplicity of the model.
Variable costs can be defined as the costs that: -remain constant for all time periods. -remain constant over the short run. -vary directly with sales. -are classified as noncash expenses. -are inversely related to the number of units sold.
vary directly with sales.
The expected return on a stock given various states of the economy is equal to the: -highest expected return given any economic state. -arithmetic average of the returns for each economic state. -summation of the individual expected rates of return. -weighted average of the returns for each economic state. -return for the economic state with the highest probability of occurrence.
weighted average of the returns for each economic state.
The secondary market is best defined as the market: -in which subordinated shares are issued and resold. -conducted solely by brokers. -dominated by dealers. -where outstanding shares of stock are resold. -where warrants are offered and sold.
where outstanding shares of stock are resold.
Simulation analysis is based on assigning a ________ and analyzing the results. -a narrow range of values to a single variable -narrow range of values to multiple -variables simultaneously -wide range of values to a single variable -wide range of values to multiple variables simultaneously -single value to each of the variables
wide range of values to multiple variables simultaneously
The bond market requires a return of 7.8 percent on the 5-year bonds issued by Pasadena Industries. The 7.8 percent is referred to as the: -coupon rate. -face rate. -call rate. -yield to maturity. -current yield.
yield to maturity.
