Question 1
1. Based on the table of zero coupon bond prices, below, what is the shape of the yield curve? Each bond has a face value of $100.
Flat
Upward sloping
Downward sloping
Not enough information
2.5 points
Question 2
1. Bank of America bonds are currently trading at $952.31. The bonds have a face value of $1,000, a coupon rate of 8% with payments made semi-annually, and mature in 20 years. What is the yield to maturity?
7.0%
7.5%
8.0%
8.5%
9.0%
2.5 points
Question 3
1. The real rate of interest is 2% and the expected inflation rate is 2%. What is the nominal rate of interest?
2.02%
3.04%
4.00%
4.04%
4.24%
2.5 points
Question 4
1. Crystal Clear Inc. is undertaking a new investment opportunity and would like to issue bonds to fund the project. The bonds would be 30-year zero-coupon bonds with a $1,000 face value, and 100 bonds will be issued. If the bonds are to yield 7%, how much will Crystal Clear receive when the bonds are issued?
$13,136.71
$14,056.28
$12,277.30
$10,000.00
$11,341.24
2.5 points
Question 5
1. The nominal rate of interest is 5% and the expected inflation rate is 2%. What is the real rate of interest?
2.50%
2.94%
3.94%
4.00%
4.04%
2.5 points
Question 6
1. Schlitz Brewery Inc. bonds are trading today for a price of $961.29. The bond currently has 10 years until maturity and has a yield to maturity of 5%. The bond pays annual coupons and the next coupon is due in one year. What is the coupon rate of the bond?
3.0%
3.5%
4.0%
4.5%
5.0%
2.5 points
Question 7
1. Tootsie Roll Industries' 10-year bonds are priced to yield 7%. Economists predict that real rates and inflation will remain constant over the next ten years at 3% and 2%, respectively. Bond analysts estimate that the maturity risk premium for a 10-year maturity is 0.25% and that the liquidity risk premium for Tootsie's bond is 0.50%. What is the default risk premium for Tootsie's bond?
0.94%
0.99%
1.00%
1.09%
1.19%
2.5 points
Question 8
1. A stock just paid a dividend of $1.15, has a required rate of return of 10%, and a constant dividend growth rate of 3%. What price should this stock be selling for?
$16.92
$15.20
$8.50
$8.20
$17.15
2.5 points
Question 9
1. The use of the ________ is especially helpful in valuing firms that are not publicly traded.
liquidation value
book value
P/E multiple
present value of the dividends
2.5 points
Question 10
1. Coors just paid out a dividend of $1.00 on its common stock, which is currently trading at $37.27. If dividends are paid annually and are expected to grow in value by 1% per annum forever, then what return will a shareholder earn if the stock is purchased today?
2.68%
2.71%
3.71%
5.03%
101.00%
2.5 points
Question 11
1. A share of common stock has just paid a dividend of $2. If the expected long-run growth rate for this stock is 15%, and if investors require a 19% rate of return, what is the price of the stock?
$57.50
$62.25
$71.86
$64.00
$44.92
2.5 points
Question 12
1. Due to unfavorable economic conditions, EFB Company's earnings and dividends are expected to remain unchanged for the next 3 years. After 3 years, dividends are expected to grow at a 10% annual rate forever. The last dividend was $2, and the required rate of return is 20%. What should be the current market value of EFB stock?
$13.46
$14.51
$15.22
$16.03
$16.95
2.5 points
Question 13
1. The price/earnings ratio:
Is calculated by multiplying the market price of a stock by its earnings per share.
Is found by dividing the market price of a stock by the firm's total earnings.
Is computed by dividing the book value of a stock by the firm's EPS.
Is calculated by adding the market price of a stock to the firm's EPS.
Is found by dividing the market price of a stock by the firm's EPS.
2.5 points
Question 14
1. Bubble.com Inc. currently pays no dividends. You overhear the CFO tell the CEO that the plan is to begin paying annual dividends in 5 years. The first dividend will be $2 and dividends are expected to grow at 5% in perpetuity thereafter. Given a required return of 11%, what should the price of the stock be today?
$19.78
$20.77
$21.96
$24.24
$24.37
2.5 points
Question 15
1. A firm has an expected dividend next year of $1.20 per share, a zero growth rate of dividends, and a required return of 10 percent. The value of a share of the firm's common stock is:
$120
$10
$12
$100
2.5 points
Question 16
1. A project costs $1,000 today and is expected to produce cash inflows of $800 at the end of each of the next two years. If the firm's cost of capital is 10%, what is the modified internal rate of return? Round answer to the nearest whole percent.
30%
23%
13%
21%
33%
2.5 points
Question 17
1. All of the following are weaknesses of the payback period EXCEPT:
a disregard for cash flows after the payback period.
only an implicit consideration of the timing of cash flows.
the difficulty of specifying the appropriate payback period.
it uses cash flows, not accounting profits.
2.5 points
Question 18
1. All of the following are considered to be disadvantages of using the payback method except the fact that it:
ignores the time value of money.
has no clearly defined decision rule.
does not consider cash flows that occur beyond the payback period.
does not adjust for risk.
does not provide a good measure of the project's liquidity.
2.5 points
Question 19
1. According to the net present value technique, a project is considered acceptable if:
the sum of all cash inflows and outflows is positive.
the difference between all discounted cash inflows and outflows exceeds zero.
it lowers costs below an acceptable hurdle rate.
its rate of return is greater than the firm's cost of capital.
it returns the initial investment faster than competing projects.
2.5 points
Question 20
1. All of the following are steps in the capital budgeting process EXCEPT:
identifying opportunities.
the pre-audit.
evaluating opportunities.
the post audit.
implementing the project.
2.5 points
Question 21
1. An advantage of the net present value (NPV) method is that it:
does not employ time value of money techniques.
is easy to use when available capital or resources are limited.
does not rely on the cost of capital.
provides its users with a clear decision criterion.
provides a "bang for the buck" analysis for each project.
2.5 points
Question 22
1. An 8 percent preferred stock with a market price of $110 per share and a $100 par value pays a cash dividend of ________.
$4.00
$80.00
$8.00
$8.80
$32.00
2.5 points
Question 23
1. Which of the following is not a characteristic of preferred stock?
Common stock dividends must be paid before preferred dividends.
Preferred stock dividends may be delayed.
Preferred dividends are assumed to be infinite in duration.
Preferred dividends are typically given less legal priority than bond interest payments.
Preferred stock does not mature like a bond.
2.5 points
Question 24
1. Preferred stock is valued as if it were
a fixed-income obligation.
a bond.
a perpetuity.
a common stock.
2.5 points
Question 25
1. All of the following are characteristics of common stock EXCEPT:
Tax-deductible dividends
Claims on income and assets which are subordinate to the creditors of the firm
Voting rights which permit selection of the firm's directors
That there is no fixed payment obligation
2.5 points
Question 26
1. You just purchased preferred shares in Initech for $45.71. Initech pays annual dividends of $0.64. What is your required return on this investment?
1.40%
5.40%
8.50%
10.00%
14.00%
2.5 points
Question 27
1. A firm has an issue of preferred stock outstanding that has a stated annual dividend of $4. The required return on the preferred stock has been estimated to be 16 percent. The value of the preferred stock is ________.
$25
$50
$64
$16
2.5 points
Question 28
1. Which of the following bonds carries the greatest amount of interest rate risk?
A 7%, 3-year bond
A 5%, 12-year bond
A 2%, 25-year bond
A 25%, 1-year bond
A 4%, 9-year bond
2.5 points
Question 29
1. Everything else being equal, a ________ bond's price will ________ as the bond approaches maturity.
premium; remain the same
discount; decrease
discount; increase
discount; remain the same
premium; increase
2.5 points
Question 30
1. Which of the following statements is true?
A bond sells at a discount if its price exceeds its face value.
A bond sells at a premium if the yield is above the coupon rate.
A bond sells at par if investors expect to earn a capital gain.
A bond sells at a discount if the yield is above its coupon rate.
A bond never sells at par value.
2.5 points
Question 31
1. In general, if interest rates ________, bond prices ________.
increase; increase
decrease; decrease
increase; decrease
decrease; increase
Answers increase; decrease and decrease; increase are correct.
2.5 points
Question 32
1. If the yield to maturity on Wee Beastie Animal Park bonds is 11.75% and the coupon yield is 8.55%, what is the capital gain yield?
3.20%
7.50%
32.00%
3.20%
20.30%
2.5 points
Question 33
1. A $1,000 face value bond has a 9% annual coupon rate. The next coupon is due in one year. The bond matures in 15 years and the yield on the bond is 10%. What is the difference in price if the yield rises to 11%?
-$67.76
-$6.77
$6.77
$9.24
$67.76
2.5 points
Question 34
1. You are considering the purchase of an investment that would pay you $5,000 per year for Years 1-5, $3,000 per year for Years 6-8, and $2,000 per year for Years 9 and 10. If you require a 14% rate of return, and the cash flows occur at the end of each year, then how much should you be willing to pay for this investment?
$15,819.27
$21,937.26
$32,415.85
$38,000.00
$52,815.71
2.5 points
Question 35
1. What is the IRR for a project with a current cost of $7,000 that is expected to produce cash inflows of $1,000 at the end of each of the next 10 years? Round answer to the nearest whole percent.
10%
8%
7%
11%
6%
2.5 points
Question 36
1. Analysts at Tabby Fur Storage predict that the net present value of a proposed new $10 million warehouse is $1 million. How should these findings be interpreted?
Although NPV is positive, its value is too low for such a large expenditure and as a result, the project should be rejected.
The project should be rejected because the NPV is less than the cost of the warehouse.
The project should be accepted because it will add value to the firm.
More information such as the payback period should be evaluated since the reliance on only one capital budgeting technique should be discouraged.
The project does not meet the acceptance criteria of the NPV method and should be rejected.
2.5 points
Question 37
1. ________ is the process of deciding which long-term investments or projects a firm will acquire using the long-term funds a firm has available.
Investment analysis
Capital budgeting
Capital marketing
Liability management
Corporate governance
2.5 points
Question 38
1. When the net present value is negative, the internal rate of return is ________ the cost of capital.
greater than
greater or equal to
less than
equal to
2.5 points
Question 39
1. What is the profitability index of a project that has a current cost of $100,000 and expected cash flows of $50,000 at the end of each of the next 7 years if the cost of capital is 20%?
.001
.018
1.80
1.18
1.25
2.5 points
Question 40
1. The ________ is the exact amount of time it takes the firm to recover its initial investment.
average rate of return
internal rate of return
net present value
payback period
