Question 1 of 405.0 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 405.0 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 3 of 405.0 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 4 of 405.0 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 5 of 405.0 Points
Bonds are different from stocks because__________.
A. bonds promise fixed payments for the length of their maturity
B. bonds give payments only after other owners are paid
C. bonds do not have maturity dates
D. bonds promise growth in earnings
Question 6 of 405.0 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 7 of 405.0 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 8 of 405.0 Points
Which of the statements below is NOT correct?
A. If two investments have the same expected return, the investment with the lower risk is preferred.
B. If two investments have the same expected return, the investment with the greater risk is preferred.
C. If two investments have the same expected risk, the investment with the higher expected return is preferred.
D. If one investment has a higher expected return and a greater level of risk than another, it is not clear which investment is the preferred choice.
Question 9 of 405.0 Points
Correlation, a standardized measure of how stocks perform relative to one another in different states of the economy, has a range from __________ .
A. 0.0 to +10.0
B. 0.0 to +1.0
C. -1.0 to +1.0
D. There is no range; correlation is a calculated number that can take on any value.
Question 10 of 405.0 Points
A more risky stock has a higher __________.
A. expected return
B. standard deviation
C. variance
D. B and C
Question 11 of 405.0 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 12 of 405.0 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 13 of 405.0 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 14 of 405.0 Points
Which of the statements below is TRUE?
A. Investors want to maximize return and maximize risk.
B. Investors want to maximize return and minimize risk.
C. Investors want to minimize return and maximize risk.
D. Investors want to minimize return and minimize risk.
Question 15 of 405.0 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 16 of 405.0 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 405.0 Points
Shortcomings of the dividend pricing models suggest that we need a pricing model that is more inclusive than the dividend models and that provides expected returns for companies based on aspects besides their historical dividend patterns. Which of these below is NOT one of these aspects?
A. the company's risk
B. the premium for taking on risk
C. the reward for waiting
D. stable dividends
Question 18 of 405.0 Points
Joe bought a share of stock for $47.50 that paid a dividend of $0.72 and sold one year later for $51.38. What was Joe's dollar profit or loss and holding period return?
A. $0.72, 7.55%
B. $3.88, 8.95%
C. $4.60, 9.68%
D. $3.88, 9.68%
Question 19 of 405.0 Points
__________ is the absence of knowledge of the outcome of an event before it happens.
A. Return
B. Diversification
C. Uncertainty
D. Certainty
Question 20 of 405.0 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 21 of 405.0 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 22 of 405.0 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 23 of 405.0 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 24 of 405.0 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 25 of 405.0 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 26 of 405.0 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 27 of 405.0 Points
The capital budgeting decision model that utilizes all the discounted cash flow of a project is the __________ model, which is one of the single most important models in finance.
A. Net Present Value (NPV)
B. Internal Rate of Return (IRR)
C. Profitability Index (PI)
D. Discounted Payback Period
Question 28 of 405.0 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 29 of 405.0 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 30 of 405.0 Points
Find the Modified Internal Rate of Return (MIRR. for the following annual series of cash flows, given a discount rate of 10.50%: Year 0: -$75,000; Year 1: $15,000; Year 2: $16,000; Year 3: $17,000; Year 4: $17,500; and, Year 5: $18,000.
A. about 6.35%
B. about 6.88%
C. about 7.35%
D. about 7.88%
Question 31 of 405.0 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 32 of 405.0 Points
__________ involve(s) a cash flow that never occurs, but we need to add it as a cost or outflow of a new project.
A. Cost recovery of divested assets
B. Capital expenditures
C. Sunk costs
D. Opportunity costs
Question 33 of 405.0 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 34 of 405.0 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 35 of 405.0 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 36 of 405.0 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 37 of 405.0 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. INCORRECT
D. By using the EAA approach for mutually exclusive projects, we overcome all potential problems.
Question 38 of 405.0 Points
The projected revenues and costs that form the basis of the potential for a project's acceptance or rejection are estimates of __________ .
A. future activity
B. past activity
C. known activity
D. current activity
Question 39 of 405.0 Points
In regard to the NPV method, which of the statements below is TRUE?
A. In the NPV Model, if two projects are being compared, the one with the highest IRR is selected.
B. In the NPV Model, the present cash flows are discounted at the rate r, the cost of capital.
C. In the NPV Model, most future cash flows are stated in present value or current dollars and the inflow is "netted" against the outflow to see if the net amount is positive or negative.
D. In the NPV Model, the net present value of an investment is the present value of all benefits (cash inflow) minus the present value of all costs (cash outflow) of the project.
Question 40 of 405.0 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
