Finance exam 2
An agent who arranges a transaction between a buyer and a seller of equity securities is called a: A) broker. B) floor trader. C) capitalist. D) principal. E) dealer.
Answer: A
Real rates are defined as nominal rates that have been adjusted for which of the following? A) Inflation B) Default risk C) Accrued interest D) Interest rate risk E) Both inflation and interest rate risk
Answer: A
What are the distributions of either cash or stock to shareholders by a corporation called? A) Coupon payments B) Retained earnings C) Dividends D) Capital payments E) Diluted profits
Answer: C
Which one of the following risk premiums compensates for the inability to easily resell a bond prior to maturity? A) Default risk B) Taxability C) Liquidity D) Inflation E) Interest rate risk
Answer: C
An agent who maintains an inventory from which he or she buys and sells securities is called a: A) broker. B) trader. C) capitalist. D) principal. E) dealer.
Answer: E
Samuelson Electronics has a required payback period of three years for all of its projects. Currently, the firm is analyzing two independent projects. Project A has an expected payback period of 2.9 years and a net present value of $4,200. Project B has an expected payback period of 3.1 years with a net present value of $26,400. Which project(s) should be accepted based on the payback decision rule? A) Project A only B) Project B only C) Both A and B D) Neither A nor B E) Either, but not both projects
Answer: A
Which one of the following indicates an accept decision for an independent project with conventional cash flows? A) PI greater than 1.0 B) AAR lower than the required rate C) Payback period that exceeds the requirement D) Required discount rate greater than the IRR E) Discounted payback period less than the payback period
Answer: A
Which one of the following methods predicts the amount by which the value of a firm will change if a project is accepted? A) Net present value B) Discounted payback C) Internal rate of return D) Profitability index E) Payback
Answer: A
Which one of the following premiums is compensation for the possibility that a bond issuer may not pay a bond's interest or principal payments as expected? A) Default risk B) Taxability C) Liquidity D) Inflation E) Interest rate risk
Answer: A
The length of time a firm must wait to recoup the money it has invested in a project is called the: A) internal return period. B) payback period. C) profitability period. D) discounted cash period. E) valuation period.
Answer: B
When the present value of the cash inflows exceeds the initial cost of a project, then the project should be: A) accepted because the payback period is less than the required time period. B) accepted because the profitability index is greater than 1. C) accepted because the profitability index is negative. D) rejected because the internal rate of return is negative. E) rejected because the net present value is positive
Answer: B
Which one of the following is the price at which a dealer will sell a bond? A) Call price B) Asked price C) Bid price D) Bid-ask spread E) Par value
Answer: B
Winston Co. has a dividend yield of 5.4 percent and a total return for the year of 4.8 percent. Which one of the following must be true? A) The dividend must be constant. B) The stock has a negative capital gains yield. C) The capital gains yield must be zero. D) The required rate of return for this stock increased over the year. E) The firm is experiencing supernormal growth.
Answer: B
A discount bond's coupon rate is equal to the annual interest divided by the: A) call price. B) current price. C) face value. D) clean price. E) dirty price.
Answer: C
Isaac has analyzed two mutually exclusive projects that have 3-year lives. Project A has an NPV of $81,406, a payback period of 2.48 years, and an AAR of 9.31 percent. Project B has an NPV of $82,909, a payback period of 2.57 years, and an AAR of 9.22 percent. The required return for Project A is 11.5 percent while it is 12 percent for Project B. Both projects have a required AAR of 9.25 percent. Isaac must make a recommendation and justify it in 15 words or less. What should his recommendation be? A) Accept both projects because both NPVs are positive B) Accept Project A because it has the shortest payback period C) Accept Project B and reject Project A based on the NPVs D) Accept Project A and reject Project B based on their AARs E) Accept Project A because it has the lower required return
Answer: C
NYSE designated market makers: A) execute trades on behalf of their clients. B) are guaranteed a profit on every stock purchased and resold. C) act as dealers. D) provide a one-sided market. E) are also referred to as "$2 brokers."
Answer: C
Which one of the following statements related to the internal rate of return (IRR) is correct? A) The IRR yields the same accept and reject decisions as the net present value method given mutually exclusive projects. B) A project with an IRR equal to the required return would reduce the value of a firm if accepted. C) The IRR is equal to the required return when the net present value is equal to zero. D) Financing type projects should be accepted if the IRR exceeds the required return. E) The average accounting return is a better method of analysis than the IRR from a financial point of view.
Answer: C
A decrease in which of the following will increase the current value of a stock according to the dividend growth model? A) Dividend amount B) Number of future dividends, provided the total number of dividends is less than infinite C) Dividend growth rate D) Discount rate E) Both the discount rate and the dividend growth rate
Answer: D
The Fisher effect is defined as the relationship between which of the following variables? A) Default risk premium, inflation risk premium, and real rates B) Nominal rates, real rates, and interest rate risk premium C) Interest rate risk premium, real rates, and default risk premium D) Real rates, inflation rates, and nominal rates E) Real rates, interest rate risk premium, and nominal rates
Answer: D
The bond market requires a return of 9.8 percent on the 5-year bonds issued by JW Industries. The 9.8 percent is referred to as the: A) coupon rate. B) face rate. C) call rate. D) yield to maturity. E) current yield.
Answer: D
The final decision on which one of two mutually exclusive projects to accept ultimately depends upon which one of the following? A) Initial cost of each project B) Timing of the cash inflows C) Total cash inflows of each project D) Net present value E) Length of each project's life
Answer: D
The secondary market is best defined as the market: A) in which subordinated shares are issued and resold. B) conducted solely by brokers. C) dominated by dealers. D) where outstanding shares of stock are resold. E) where warrants are offered and sold.
Answer: D
Which one of the following represents the capital gains yield as used in the dividend growth model? A) D1 B) D1/P0 C) P0 D) g E) g/P0
Answer: D
Which one of the following transactions occurs in the primary market? A) Purchase of 500 shares of GE stock from a current shareholder B) Gift of 100 outstanding shares to a charitable organization C) Gift of 200 shares of stock by a mother to her daughter D) A purchase of newly issued stock from the issuer E) IBM's purchase of GE stock from a dealer
Answer: D
Callable bonds generally: A) grant the bondholder the option to call the bond any time after the deferment period. B) are callable at par as soon as the call-protection period ends. C) are called when market interest rates increase. D) are called within the first three years after issuance. E) have a sinking fund provision.
Answer: E
The difference between the price that a dealer is willing to pay and the price at which he or she will sell is called the: A) equilibrium. B) premium. C) discount. D) call price. E) spread.
Answer: E
The length of time a firm must wait to recoup, in present value terms, the money it has invested in a project is referred to as the: A) net present value period. B) internal return period. C) payback period. D) discounted profitability period. E) discounted payback period.
Answer: E
There are two distinct discount rates at which a particular project will have a zero net present value. In this situation, the project is said to: A) have two net present value profiles. B) have operational ambiguity. C) create a mutually exclusive investment decision. D) produce multiple economies of scale. E) have multiple rates of return.
Answer: E
Treasury yield curve plots Treasury interest rates relative to: A) market rates. B) comparable corporate bond rates. C) the risk-free rate. D) inflation rates. E) time to maturity.
Answer: E
Which one of the following methods of analysis provides the best information on the cost-benefit aspects of a project? A) Net present value B) Payback C) Internal rate of return D) Average accounting return E) Profitability index
Answer: E
Which one of these equations applies to a bond that currently has a market price that exceeds par value? A) Market value < Face value B) Yield to maturity = Current yield C) Market value = Face value D) Current yield > Coupon rate E) Yield to maturity < Coupon rate
Answer: E
You cannot attend the shareholder's meeting for Alpha United so you authorize another shareholder to vote on your behalf. What is the granting of this authority called? A) Alternative voting B) Cumulative voting C) Straight voting D) Indenture voting E) Voting by proxy
Answer: E
