Question 1 of 40 2.5 Points
Your firm has issued 10-year, zero-coupon bonds with a $1,000 face value. If the bonds are currently selling for $514.87, what is the yield to maturity?
A. 6.75%
B. 6.86%
C. 10.45%
D. This question cannot be answered because there is no coupon payment provided.
Question 2 of 40 2.5 Points
Which of the following statements is TRUE?
A. Preferred stock usually has a stated or par value and, like bonds, this par value is not repaid at maturity because preferred stocks do not have a maturity date.
B. The par value for preferred stock, unlike bonds, is never paid back.
C. A preferred stock's cash dividend due each year is based on the stated dividend rate times the market value of the stock.
D. Some preferred stocks are cumulative in dividends, meaning that if a company skips a cash dividend, it must pay it at some point in the future.
Question 3 of 40 2.5 Points
The four steps to determining the price of a bond are: __________.
A. determine the amount and timing of the present cash flows, determine the appropriate discount rate, find the present value of the lump-sum principal and the annuity stream of coupons, and add the PVs of the principal and coupons.
B. determine the amount and timing of the future cash flows, determine the appropriate discount rate, find the future value of the lump-sum principal and the annuity stream of coupons, and add the FVs of the principal and coupons.
C. determine the amount and timing of the future cash flows, determine the appropriate discount rate, find the present value of the lump-sum principal and the annuity stream of coupons, and multiply the PVs of the principal and coupons.
D. determine the amount and timing of the future cash flows, determine the appropriate discount rate, find the present value of the lump-sum principal and the annuity stream of coupons, and add the PVs of the principal and coupons.
Question 4 of 40 2.5 Points
The correlation coefficient, a measurement of the comovement between two variables, has what range?
A. From 0.0 to +10.0
B. From 0.0 to +1.0
C. From -1.0 to +10.0
D. From =1.0 to -1.0
Question 5 of 40 2.5 Points
The practice of not putting all of your eggs in one basket is an illustration of ___________.
A. variance
B. diversification
C. portion control
D. expected return
Question 6 of 40 2.5 Points
Stocks differ from bonds because __________ .
A. bond cash flows are known while stock cash flows are uncertain
B. firms pay bond cash flows prior to paying taxes while stock cash flows are after tax
C. the ending par value of a bond is known at purchase while the ending value of a share of stock is unknown at purchase
D. all of all of the above
Question 7 of 40 2.5 Points
MicroMedia Inc. $1,000 par value bonds are selling for $1,265. Which of the following statements is TRUE?
A. The bond market currently requires a rate (yield. less than the coupon rate.
B. The bonds are selling at a premium to the par value.
C. The coupon rate is greater than the yield to maturity.
D. All of the above are true.
Question 8 of 40 2.5 Points
Stocks are different from bonds because __________.
A. stocks, unlike bonds, are major sources of funds
B. stocks, unlike bonds, represent residual ownership
C. stocks, unlike bonds, give owners legal claims to payments
D. bonds, unlike stocks, represent voting ownership
Question 9 of 40 2.5 Points
Ten years ago, Bacon Signs Inc. issued 25-year, 8% annual coupon bonds with a $1,000 face value each. Since then, interest rates in general have fallen and the yield to maturity on the Bacon bonds is now 7%. Given this information, what is the price today for a Bacon Signs, Inc. bond?
A. $1,000
B. $1,116.54
C. $1,091.08
D. $914.41
Question 10 of 40 2.5 Points
The ___________ is the yield an individual would receive if the individual purchased the bond today and held the bond to the end of its life.
A. current yield
B. yield to maturity
C. prime rate
D. coupon rate
Question 11 of 40 2.5 Points
Preferred stock __________.
A. reflects residual ownership of a company
B. represents a preferential claim on dividends
C. will be "paid" before the bondholders
D. always has a legal and specific claim to a fixed amount (listed as a liability.
Question 12 of 40 2.5 Points
__________ may be defined as a measure of uncertainty in a set of potential outcomes for an event in which there is a chance for some loss.
A. Diversification
B. Risk
C. Uncertainty
D. Collaboration
Question 13 of 40 2.5 Points
Which of the following statements about the relationship between yield to maturity and bond prices is FALSE?
A. When the yield to maturity and coupon rate are the same, the bond is called a par value bond.
B. A bond selling at a premium means that the coupon rate is greater than the yield to maturity.
C. When interest rates go up, bond prices go up.
D. A bond selling at a discount means that the coupon rate is less than the yield to maturity.
Question 14 of 40 2.5 Points
Which of the following investments is considered to be default risk-free?
A. currency options
B. AAA rated corporate bonds
C. common stock
D. Treasury bills
Question 15 of 40 2.5 Points
A more risky stock has a higher __________.
A. expected return
B. standard deviation
C. variance
D. B and C
Question 16 of 40 2.5 Points
Diversification is __________ .
A. not putting all of your eggs in one basket
B. spreading wealth over a variety of investment opportunities
C. a common investment strategy
D. all of the above
Question 17 of 40 2.5 Points
Which of the choices below is FALSE?
A. When issuing a puttable bond, the firm anticipates that interest rates will rise over the life of the bond.
B. When issuing a callable bond, the firm anticipates that interest rates will fall over the life of the bond.
C. When issuing a callable bond, the firm anticipates that interest rates will rise over the life of the bond.
D. A puttable bond is essentially the reverse of a callable bond.
Question 18 of 40 2.5 Points
When the __________ is less than the yield to maturity, the bond sells at a/the __________ par value.
A. coupon rate, premium over
B. coupon rate, discount to
C. time to maturity, discount to
D. time to maturity, same price as
Question 19 of 40 2.5 Points
Which of the statements below is FALSE?
A. It is common for companies to issue preferred stock with the right to convert to common shares after a specific waiting period.
B. Preferred stock does not have a maturity date.
C. Preferred stock cannot be converted into common stock.
D. Preferred shareholders' dividend claims take precedence over common shareholders' dividend claims.
Question 20 of 40 2.5 Points
The __________ is the annual coupon payment divided by the current price of the bond, and is not always an accurate indicator.
A. current yield
B. yield to maturity
C. bond discount rate
D. coupon rate
Question 21 of 40 2.5 Points
The initial outlay or cost is $1,000,000 for a four-year project. The respective future cash inflows for years one, two, three and four are: $500,000, $300,000, $300,000, and $300,000. What is the payback period without discounting cash flows?
A. about 2.50 years
B. about 2.67 years
C. about 3.67 years
D. about 4.50 years
Question 22 of 40 2.5 Points
Without a computer and special calculator, __________.
A. computing the payback period is much more difficult than computing the IRR
B. finding the IRR will typically be a very easy process
C. finding the IRR may be a very tedious process only if the NPV is negative
D. finding the IRR may be a very tedious process since it is an iterative process
Question 23 of 40 2.5 Points
__________ cash flow is the increase in cash generated by a new project above the current cash flow without the new project.
A. Future
B. Current
C. Discounted
D. Incremental
Question 24 of 40 2.5 Points
Berra, Inc. is currently considering an eight-year project that has an initial outlay or cost of $120,000. The future cash inflows from its project for years one through eight are the same at $30,000. Berra has a discount rate of 11%. Because of capital rationing (shortage of funds for financing), Berra wants to compute the profitability index (PI) for each project. What is the PI for Berra's current project?
A. about 1.29
B. about 1.31
C. about 1.33
D. about 1.39
Question 25 of 40 2.5 Points
Which of the statements below describes the IRR decision criterion?
A. The decision criterion is to accept a project if the IRR falls below the desired or required return rate.
B. The decision criterion is to reject a project if the IRR exceeds the desired or required return rate.
C. The decision criterion is to accept a project if the IRR exceeds the desired or required return rate.
D. The decision criterion is to accept a project if the NPV is positive.
Question 26 of 40 2.5 Points
In terms of revenues and costs for a project, which of the statements below is FALSE?
A. Projected revenues and costs are estimates of future activity.
B. Estimates of revenues and costs begin with operating cash flow of the project.
C. Projected revenues and costs form the basis of the potential for a project's acceptance or rejection.
D. Estimates of revenues and costs begin with sales forecasts and the production costs associated with the sales forecast.
Question 27 of 40 2.5 Points
There are two ways to correct for projects with unequal lives when using the NPV approach. Which of the answers below is one of these ways?
A. One way is to find a common life, without the need to extend the projects to the least common multiple of their lives.
B. One way is to find the present value factors and then compare them.
C. One way is to compare the lengths of the projects and take the project with the shortest life.
D. One way is to find a common life by extending the projects to the least common multiple of their lives.
Question 28 of 40 2.5 Points
The __________ method of capital budgeting is a ratio of the present value of cash inflows divided by the initial investment.
A. Payback Period
B. Net Present Value (NPV.
C. Internal Rate of Return (IRR.
D. Profitability Index (PI.
Question 29 of 40 2.5 Points
The net present value of an investment is __________ .
A. the present value of all benefits (cash inflows)
B. the present value of all benefits (cash inflows) minus the present value of all costs (cash outflows) of the project
C. the present value of all costs (cash outflows) of the project
D. the present value of all costs (cash outflow) minus the present value of all benefits (cash inflow) of the project
Question 30 of 40 2.5 Points
Consider the following 10-year project. The initial after-tax outlay or after-tax cost is $1,000,000. The future after-tax cash inflows each year for years one through 10 are $200,000 per year. What is the payback period without discounting cash flows?
A. 10 years
B. 5 years
C. 2.5 years
D. 0.5 years
Question 31 of 40 2.5 Points
Which of the following in NOT a potential problem suffered by the IRR method of capital budgeting?
A. multiple IRRs
B. disagreement with the NPV as to whether a project with ordinary cash flows is profitable or not.
C. the incorporation of the IRR as the reinvestment rate for the future cash flows
D. the comparison of mutually exclusive projects
Question 32 of 40 2.5 Points
Which of the statements below is FALSE?
A. We calculate the equivalent annual annuity by taking the NPV of the project and find the annuity stream that equates to the NPV, using the appropriate discount rate for the project and life of the project.
B. In dealing with mutually exclusive projects of unequal lives, we can compute the EAA for the NPV of the project over the life of the project.
C. One of the advantages of NPV over other decision models is that we can select the appropriate discount rate for each individual project and still compare the resulting NPVs across different projects.
D. By using the EAA approach for mutually exclusive projects, we overcome all potential problems.
Question 33 of 40 2.5 Points
The initial outlay or cost for a four-year project is $1,000,000. The respective cash inflows for years one, two, three and four are: $500,000, $300,000, $300,000 and $300,000. What is the discounted payback period if the discount rate is 10%?
A. about 2.67 years
B. about 3.35 years
C. about 3.67 years
D. about 4.50 years
Question 34 of 40 2.5 Points
In the NPV Model, all cash flows are stated __________ .
A. in future value dollars, and the total inflow is "netted" against the outflow to see if the net amount is positive or negative
B. in present value or current dollars, and the outflow is "netted" against the total inflow to see if the gross amount is positive or negative
C. in present value or current dollars, and the total inflow is "netted" against the initial outflow to see if the net amount is positive or negative
D. in future dollars, and the initial outflow is "netted" against the total inflow to see if the net amount is positive
Question 35 of 40 2.5 Points
Managers typically look at the initial outlay for the project as its capital expenditure and determine __________ from this capital expenditure.
A. interest expenses
B. dividends
C. depreciation
D. CEO expenses
Question 36 of 40 2.5 Points
The most popular alternative to NPV for capital budgeting decisions is the __________ method.
A. Internal Rate of Return (IRR)
B. Payback Period
C. Discounted Payback Period
D. Profitability Index (PI)
Question 37 of 40 2.5 Points
__________is at the heart of corporate finance because it is concerned with making the best choices about project selection.
A. Capital budgeting
B. Capital structure
C. Payback period
D. Short-term budgeting
Question 38 of 40 2.5 Points
The __________ model is usually considered the best of the capital budgeting decision-making models.
A. Internal Rate of Return (IRR)
B. Net Present Value (NPV)
C. Profitability Index (PI)
D. Discounted Payback Period
Question 39 of 40 2.5 Points
__________ corrects for most, but not all, of the problems of IRR and gives the solution in terms of a return.
A. Profitability Index
B. Discounted Payback Period
C. Net Present Value
D. MIRR
Question 40 of 40 2.5 Points
Consider the following four-year project. The initial after-tax outlay or after-tax cost is $1,000,000. The future after-tax cash inflows for years one, two, three and four are: $400,000, $300,000, $200,000 and $200,000, respectively. What is the payback period without discounting cash flows?
A. 2.5 years
B. 3.0 years
C. 3.5 years
D. 4.0 years
