Finance Final MCQ's

question and answers from previous two connect midterms

Which one of the following statements concerning net working capital is correct?

• Net working capital is the amount of cash a firm currently has available for spending.

• Net working capital increases when inventory is purchased with cash.

• Net working capital excludes inventory.

• Net working capital may be a negative value.

• Total assets must increase if net working capital increases.

Net working capital may be a negative value.

Which one of the following statements concerning interest rates is correct?

• Given the same annual percentage rate, savers would prefer annual compounding over monthly compounding.

• The effective annual rate decreases as the number of compounding periods per year increases.

• The effective annual rate equals the annual percentage rate when interest is compounded annually.

• Given the same annual percentage rate, borrowers would prefer monthly compounding over annual compounding. 

• For any positive rate of interest, the annual percentage rate will always exceed the effective annual rate.

The effective annual rate equals the annual percentage rate when interest is compounded annually.

An investor invested $2,000 six years ago at 4.5 percent interest. She spends all of her interest earnings immediately, so she only receives interest on her initial $2,000 investment. As a result, which type of interest is her principal experiencing?

• Free interest

• Complex interest

• Simple interest

• Interest on interest

• Compound interest

Simple Interest

Employee X expects to earn a bonus of $50,000 five years from now. Employee Y expects to earn a bonus of $50,000 ten years from now. Which one of the following statements is correct if both employees apply a discount rate of 5 percent?

• The present values of Employee X's and Employee Y's awards are equal.

• In future dollars, Employee Y's award is worth more than Employee X's award.

• In today's dollars, Employee X's award is worth more than Employee Y's.

• Twenty years from now, the value of Employee X's award will equal the value of Employee Y's award.

• Employee Y's award is worth more today than Employee X's award.

In today's dollars, Employee X's award is worth more than Employee Y's.

All else being constant, which one of the following combinations will result in the lowest present value of a lump sum?

• 9 percent interest for 7 years

• 9 percent interest for 11 years

• 9 percent interest for 15 years

• 11 percent interest for 7 years

• 11 percent interest for 15 years

11 percent interest for 15 years

According to the Rule of 72, you can do which one of the following?

• Approximately double your money in five years at 7.24 percent interest.

• Double your money in 7.2 years at 8 percent interest.

• Approximately double your money in 11 years at 6.55 percent interest.

  Correct

• Triple your money in 7.2 years at 7.2 percent interest.

• Approximately triple your money in 7.2 years at 10 percent interest.

Approximately double your money in 11 years at 6.55 percent interest.

The entire repayment of a(n) _________ loan is calculated by computing one single future value.

• interest-only

• balloon

• amortized

• pure discount

• bullet

pure discount

Which one of the following statements related to liquidity is correct?

• Any asset that can be sold for cash is considered liquid.

• Liquid assets are defined as assets that can be sold quickly regardless of the price obtained.

• Inventory is more liquid than accounts receivable because inventory is tangible.

• Liquid assets are valuable to a firm.

• Liquid assets tend to earn a higher rate of return than illiquid assets.

Liquid assets are valuable to a firm.

You are comparing two investment options that each pay 6 percent interest compounded annually. Both options will provide you with $12,000 of income. Option X pays $2,000 the first year followed by two annual payments of $5,000 each. Option Y pays three annual payments of $4,000 each. Which one of the following statements is correct given these two investment options? Assume a positive discount rate. (No calculations needed.)

• Both options are of equal value since they both provide $12,000 of income.

• Option X has the higher future value at the end of Year 3.

• Option Y has a higher present value at Time 0.

• Option Y is a perpetuity.

• Option X is an annuity.

Option Y has a higher present value at Time 0.

You have some property for sale and have received two offers. The first offer is for $70,000 today in cash. The second offer is the payment of $15,000 today and an additional guaranteed $54,000 two years from today. If the applicable discount rate is 8 percent, which offer should you accept and why?

• You should accept the $70,000 today because it has the higher present value.

• You should accept the $70,000 today because it has the lower future value.

• You should accept the first offer as it is a lump sum payment.

• You should accept the second offer because it has the higher present value.

• It does not matter which offer you accept as they are equally valuable.

You should accept the $70,000 today because it has the higher present value.

Which one of the following items is classified as a tangible fixed asset?

• Goodwill

• Cash

• Inventory

• Office furniture

• Accounts receivable

Office furniture

Which one of the following actions will decrease the value of a firm's net working capital?

• Collecting an account receivable

• Purchasing inventory on credit

• Depreciating an asset

• Using cash to pay a supplier

• Donating inventory to charity

Donating inventory to charity

Which one of the following financial reports summarizes a firm's revenue and expenses during a period of time?

• Statement of cash flows

• Market value report

• Tax reconciliation statement

• Income statement

• Balance sheet

Income statement

Total income taxes divided by total taxable income equals the _________ tax rate.

• average

• marginal

• deductible

• residual

• total

average

Assuming a firm earns taxable income, an increase in _________ will cause the cash flow from assets to increase.

• depreciation expense

• the change in net working capital

• income tax expense

• production costs

• net capital spending

depreciation expense

Which of the following actions could cause a company's change in net working capital to be negative for a given year?

• Borrow money from the bank using a note payable in nine months

• Increase the dividends paid to stockholders

• Purchase additional inventory with cash

• Use long-term debt to buy a building

  Incorrect

• Pay off long-term debt before the due date

Borrow money from the bank using a note payable in nine months

When developing a common-size balance sheet to evaluate last year’s performance, all accounts are expressed as a percentage of:

• last year’s total assets.

• the base year’s total assets.

• last year’s sales.

• the base year’s sales.

• the base year’s total equity.

last year’s total assets.

Which one of the following events is a source of cash for a tax-exempt firm?

• Decrease in accounts payable

• Increase in inventory

• Increase in accounts receivable

• Increase in common stock

• Increase in depreciation

Increase in common stock

Firm X has a fixed asset turnover rate of 1.48 and a total asset turnover rate of .79. Its competitor, Firm Y, has a fixed asset turnover rate of 1.63 and a total asset turnover rate of .67. Both companies have similar operations. Based on this information, Firm X must be _________blank than Firm Y.

Multiple Choice

• utilizing greater financial leverage

• generating net profit more efficiently

• generating net profit less efficiently

• utilizing its total assets more efficiently

• utilizing its fixed assets more efficiently

utilizing its total assets more efficiently

If a firm has a debt-equity ratio of 1.0, then its total debt ratio must be which one of the following?

• 1.5

• 0

• .5

• 2.0

• 1.0

.5

The price-sales ratio is especially useful when analyzing firms that have:

• a high Tobin's Q.

• increasing sales.

• negative earnings.

• positive PEG ratios.

• volatile market prices.

negative earnings.

the relationship between the return on assets and the return on equity is illustrated by the:

• DuPont identity.

• profitability determinant.

• debt-equity ratio.

• net profit margin.

• balance sheet multiplier.

DuPont identity.

The coding system established by the U.S. government to classify companies by the nature of their business operations is known as:

• The Centralized Business Index.

• Peer Grouping codes.

• Governmental ID codes.

• The Government Engineered Coding System.

• Standard Industrial Classification codes.

Standard Industrial Classification codes.

An investor invested $4,200 seven years ago and earns 8 percent annual interest. By leaving the interest earnings in the account, the investor increases the amount of interest they earn each year. The investment is best described as benefitting from:

• discounting.

• simplifying.

• compounding.

• accumulating.

• aggregating.

compounding

An employee just calculated the present value of a $12,500 bonus he expects to receive next year. The interest rate he used in his calculation is referred to as the:

• effective rate.

• simple rate.

• discount rate.

• compound rate.

• current yield.

discount rate.

A Canadian consol is best categorized as a(n):

• perpetuity.

• discounted loan.

• amortized cash flow.

• ordinary annuity.

• annuity due.

perpetuity

You will borrow $40,000 today at 6.5 percent annual interest. Which one of the following loans would be the least expensive for you? Assume interest is compounded monthly.

• 5-year interest-only loan paid monthly

• 10-year amortized loan with equal monthly loan payments

• 10-year Pure discount loan

• 5-year amortized loan with equal monthly loan payments

• 10-year balloon loan where 50 percent of the principal is repaid as a balloon payment at the end of year 5

5-year amortized loan with equal monthly loan payments

The actual interest rate on a loan that is compounded monthly but expressed as an annual rate is referred to as the __________ rate.

• periodic monthly

• consolidated monthly

• effective annual

• discounted annual

• stated

effective annual

A firm has 15-year bonds outstanding. The interest payments on these bonds are sent directly to each of the individual bondholders. These direct payments are a clear indication that the bonds can accurately be defined as being issued:

• as debentures.

• at par.

• in street form.

• as callable bonds.

• in registered form.

in registered form.

A retired investor is financially dependent upon the interest income produced by her bond portfolio. Which one of the following bonds is the least suitable for her to own?

• 5-year TIPS

• 6-year high coupon, put bond

• 7-year income bond

• 5-year floating rate bond

• 10-year AAA, coupon bond

7-year income bond

The items in an indenture that limit actions of the issuer in order to protect a bondholder's interests are referred to as the:

• protective covenants.

• legal bounds.

• trust deed.

• bylaws.

• trustee relationships.

protective covenants.

A note is generally defined as:

• any bond secured by a blanket mortgage.

• any bond maturing in 10 years or more.

• 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.

A Treasury yield curve plots Treasury interest rates relative to:

• market rates.

• time to maturity.

• inflation rates.

• comparable corporate bond rates.

• the risk-free rate.

time to maturity.

Which one of the following rights is never directly granted to all shareholders of a publicly held corporation? The right to:

• determine the amount of the dividend per share to be paid.

• have the first chance to purchase any new equity shares that may be offered.

• receive a distribution of the company’s profits.

• vote either for or against a proposed merger or acquisition.

• elect the board of directors.

determine the amount of the dividend per share to be paid.

Which one of the following statements related to corporate dividends is correct?

• Corporate shareholders may receive a tax break on a portion of their dividend income.

• Dividends are nontaxable income to shareholders.

• Dividends reduce the taxable income of the corporation.

• The chief financial officer of a corporation determines the amount of dividend to be paid.

• The chief executive officer of a corporation is responsible for declaring dividends.

Corporate shareholders may receive a tax break on a portion of their dividend income.

An agent who arranges a transaction between a buyer and a seller of equity securities is called a:

• principal.

• dealer.

• capitalist.

• broker.

• floor trader.

broker.

A floor broker on the NYSE performs which one of the following activities?

• Supervises the commission brokers of a specific financial firm

• Executes orders on behalf of customers

• Is charged with maintaining a liquid, orderly market

• Trades for his or her own personal inventory

• Maintains an inventory and assumes the role of a market maker

Executes orders on behalf of customers

A firm has 5,000 shareholders and is preparing to elect two new board members. You do not own enough shares to personally control the elections but are determined to oust the current leadership. Likewise, no other single shareholder owns sufficient shares to personally control the outcome of the election. Which one of the following scenarios is the most likely outcome of this situation given that some shareholders are happy with the existing management?

• Protracted legal battle over control of the board of directors.

• Control of the board decided without your influence.

• Negotiated settlement where each side is granted control over one of the open seats.

• Proxy fight for control of the board.

• Arbitrated settlement where the arbitrator determines who will be elected to the board.

Proxy fight for control of the board.

An agent who maintains an inventory from which he or she buys and sells securities is called a:

• trader.

• capitalist.

• broker.

• dealer.

• principal.

dealer.

What is the probability that small-company stocks will produce an annual return that is more than one standard deviation below the average?

Multiple Choice

• 16%

• 5%

• 2.5%

• 1%

• 32%

16%

Inside information has the least value when financial markets are:

• weak form efficient.

• inefficient.

• semistrong form efficient.

• semiweak form efficient.

• strong form efficient.

strong form efficient.

The rate of return on which one of the following securities is normally used as the risk-free rate of return?

• Intermediate-term Treasury bonds

• Intermediate-term corporate bonds

• Long-term Treasury bonds

• Long-term corporate bonds

• Treasury bills

Treasury bills

Assume that last year T-bills returned 2.5 percent while your investment in large-company stocks earned an average of 8 percent. Which one of the following terms refers to the difference between these two rates of return?

• Risk premium

• Variance

• Arithmetic average return

• Geometric average return

• Standard deviation

Risk premium

To convince investors to accept greater volatility, an investment 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.

If the risk-free rate is 3.5 percent, the inflation rate is 2 percent, and the market rate of return is 7.5 percent, what is the amount of the risk premium on a U.S. Treasury bill?

• 3.5%

• 5.5%

• 4%

• 1.5%

• 0%

0%

The excess return is computed as the:

• risk-free rate plus the inflation rate.

• return on a security minus the inflation rate.

• risk premium on a risky security minus the risk-free rate.

• return on a risky security minus the risk-free rate.

• risk-free rate minus the inflation rate.

return on a risky security minus the risk-free rate.

Which one of the following statements is true of a portfolio’s standard deviation?

• It is an arithmetic average of the standard deviations of the individual securities which comprise the portfolio.

• It can be less than the standard deviation of the least risky security in the portfolio.

• It is a weighted average of the standard deviations of the individual securities held in the portfolio.

• It can never be less than the standard deviation of the most risky security in the portfolio.

• It is equal to or greater than the lowest standard deviation of any single security held in the portfolio.

It can be less than the standard deviation of the least risky security in the portfolio.

__________ measures total risk, and __________ measures systematic risk.

• Alpha; beta

• Beta; alpha

• Beta; standard deviation

• Standard deviation; variance

• Standard deviation; beta

Standard deviation; beta

An unexpected post on social media caused the prices of 19 different companies’ stocks to immediately increase by approximately 20 percent. This occurrence is best described as an example of __________ risk.

• expected

• unsystematic

• portfolio

• market

• nondiversifiable

unsystematic

Of the options listed below, which one is the best measure of systematic risk?

• The geometric average

• The weighted average standard deviation

• Beta

• The standard deviation

• The arithmetic average

Beta

The __________ is a positively sloped linear function that plots securities’ expected returns against their betas.

• market real returns

• portfolio weight graph

• security market line

• normal distribution

• reward-to-risk matrix

security market line

The __________ is the slope of the security market line.

• beta coefficient

• market risk premium

• expected return of the market

• risk-free interest rate

• market standard deviation

market risk premium

Which one of the following statements related to market efficiency tends to be supported by current evidence?

• It is easy for investors to earn abnormal returns.

• Short-run price movements are easy to predict.

• Markets are most likely only weak form efficient.

• Mispriced stocks are easy to identify.

• Markets tend to respond quickly to new information.

Markets tend to respond quickly to new information.

The return earned in an average year over a multiyear period is called the __________ average return.

• arithmetic

• standard

• variant

• geometric

• real

arithmetic

Generally speaking, which of the following descriptors best correspond with a wide frequency distribution?

• High standard deviation, low rate of return

• Low rate of return, large risk premium

• Small risk premium, high rate of return

• Small risk premium, low standard deviation

• High standard deviation, large risk premium

High standard deviation, large risk premium

Which one of the following relationships best defines the variance of an investment's annual returns during a number of years?

• The average squared difference between the arithmetic and the geometric average annual returns

• The squared summation of the differences between the actual returns and the average geometric return

• The average difference between the annual returns and the average return for the period

• The difference between the arithmetic average and the geometric average return for the period

• The average squared difference between the actual returns and the arithmetic average return

The average squared difference between the actual returns and the arithmetic average return

You are aware that your neighbor trades stocks based on confidential information he overhears at his workplace. This information is not available to the general public. This neighbor often comments on the profits he earns from these trades. Given this, you would tend to argue that the financial markets are at best __________ form efficient.

• weak

• semiweak

• semistrong

• strong

• perfect

semistrong

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

While evaluating a stock, you estimate that it will earn a return of 14 percent if economic conditions are favorable, and 1 percent if economic conditions are unfavorable. Given the probabilities of favorable versus unfavorable economic conditions, you conclude that the stock will earn 9 percent next year. The 9 percent figure is called the:

• arithmetic return.

• historical return.

• expected return.

• geometric return.

• required return.

expected return.

With respect to unexpected returns, which one of the following statements is accurate?

• All announcements by a firm affect that firm's unexpected returns.

• Unexpected returns over time have a negative effect on the total return of a firm.

• Unexpected returns are relatively predictable in the short term.

• Unexpected returns generally cause the actual return to vary significantly from the expected return over the long term.

• Unexpected returns can be either positive or negative in the short term but tend to be zero over the long term.

Unexpected returns can be either positive or negative in the short term but tend to be zero over the long term.

Given a well-diversified stock portfolio, the variance of the portfolio:

• will equal the variance of the most volatile stock in the portfolio.

• may be less than the variance of the least risky stock in the portfolio.

• must be equal to or greater than the variance of the least risky stock in the portfolio.

• will be a weighted average of the variances of the individual securities in the portfolio.

• will be an arithmetic average of the variances of the individual securities in the portfolio.

may be less than the variance of the least risky stock in the portfolio.

An investor owns stocks issued by 14 different companies, plus bonds issued by seven different companies. Her investments are best described as a(n):

• index.

• portfolio.

• collection.

• grouping.

• risk-free position.

portfolio

Of the options listed below, which one is the best example of unsystematic risk?

• An across-the-board increase in income taxes

• An adoption of a national sales tax

• A decrease in the national level of inflation

• An increased feeling of global prosperity

• A national decrease in consumer spending on entertainment

A national decrease in consumer spending on entertainment

Which of the following statements are accurate?

I. Diversifiable risks can be essentially eliminated by investing in 30 unrelated securities.

II. There is no reward for accepting diversifiable risks.

III. Diversifiable risks are generally associated with an individual firm or industry.

IV. Beta measures diversifiable risk.

• I and III only

• II and IV only

• I and IV only

• I, II, and III only

• I, II, III, and IV

I, II, and III only

If a poorly-diversified portfolio becomes well diversified, we would expect the portfolio’s:

• beta to increase.

• beta to decrease.

• rate of return to increase.

• standard deviation to increase.

• standard deviation to decrease.

standard deviation to decrease.

The security market line intercepts the vertical axis at the:

• risk-free rate.

• market rate.

• return of zero.

• return of 1.0 percent.

• market risk premium.

risk-free rate.

A __________ is the market’s measure of systematic risk.

• beta of 1

• beta of 0

• standard deviation of 1

• standard deviation of 0

• variance of 1

beta of 1

According to the capital asset pricing model (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

Assume a stock experiences an actual return that is above the security market line. An analyst can safely conclude that the stock 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.

Which of the following statements are assumptions of the capital asset pricing model (CAPM)?

I. A risk-free asset has no systematic risk.

II. Beta is a reliable estimate of total risk.

III. The reward-to-risk ratio is constant.

IV. The market rate of return can be approximated.

• I and III only

• II and IV only

• I, III, and IV only

• II, III, and IV only

• I, II, III, and IV

I, III, and IV only

The value of which one of the following items is excluded from the firm's book value but included in the firm’s market value?

• The firm’s transportation equipment

• Company-wide computer software

• The company’s distribution warehouse

• Land the company acquired more than 50 years ago

• The collective experience of employees

The collective experience of employees

Which one of the following items is classified as a current asset?

• Accounts payable

• Patents

• Inventory

• Goodwill

• Office furniture

Inventory

Net working capital is defined as:

• total liabilities minus shareholders' equity.

• current liabilities minus shareholders' equity.

• fixed assets minus long-term liabilities.

• current assets minus current liabilities.

• total assets minus total liabilities.

current assets minus current liabilities.

Which one of the following statements concerning corporate income taxes is correct?

• U.S. corporations are exempt from federal taxation.

• Corporations pay no tax on their first $44,725 of income.

• The federal income tax is applied at a flat rate across all levels of taxable income.

• The marginal tax rate will always be lower than the average tax rate.

• The first 30 percent of corporate income is exempt from taxation.

The federal income tax is applied at a flat rate across all levels of taxable income.

A positive cash flow to stockholders indicates which one of the following with certainty?

• The dividends paid exceeded the net new equity raised.

• The amount of the sale of common stock exceeded the amount of dividends paid.

• No dividends were distributed, but new shares of stock were sold.

• Both the cash flow to assets and the cash flow to creditors must be negative.

• Both the cash flow to assets and the cash flow to creditors must be positive.

The dividends paid exceeded the net new equity raised.

Cash flow from assets is also known as the firm's:

• capital structure.

• earnings before interest and taxes.

• hidden cash flow.

• free cash flow.

• increase in transaction value.

free cash flow.

For a firm that must pay income taxes, depreciation expense:

• increases expenses and lowers taxes.

• increases the net fixed assets as shown on the balance sheet.

• reduces both the net fixed assets and the costs of a firm.

• is a noncash expense that increases the net income.

• decreases net fixed assets, net income, and operating cash flows.

increases expenses and lowers taxes.

Which one of the following events is a source of cash?

• Repurchase of common stock

• Acquisition of debt

• Purchase of inventory

• Payment to a supplier

• Granting credit to a customer

Acquisition of debt

All else being constant, if a firm decreases its operating costs, which one of the following ratios will also decrease?

• Return on equity

• Return on assets

• Net profit margin

• Total asset turnover

• Price-earnings ratio

Price-earnings ratio

Relationships determined from a company's financial information and used for comparison purposes are known as:

• financial ratios.

• identities.

• dimensional analysis.

• scenario analysis.

• solvency analysis.

financial ratios.

Which one of the following statements is correct?

• If the total debt ratio is greater than .50, then the debt-equity ratio must be less than 1.0.

• Long-term creditors would prefer the times interest earned ratio be 1.4 rather than 1.5.

• The debt-equity ratio can be computed as 1 plus the equity multiplier.

• An equity multiplier of 1.2 means a firm has $1.20 in sales for every $1 in equity.

• An increase in the depreciation expense will not affect the cash coverage ratio.

An increase in the depreciation expense will not affect the cash coverage ratio.

Which one of the following possibilities does not represent a problem encountered when comparing the financial statements of two separate firms? When the two firms:

• are conglomerates with unrelated lines of business.

• have geographically varying operations.

• use differing accounting methods.

• experience differing seasonal peaks.

• have the same fiscal year.

have the same fiscal year.

Callable bonds generally:

• 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.

have a sinking fund provision.

A sinking fund is managed by a trustee for which one of the following purposes?

• Paying bond interest payments

• Early bond redemption

• Converting bonds into equity securities

• Paying preferred dividends

• Reducing bond coupon rates

Early bond redemption

A six-year, $1,000 face value bond pays interest semiannually on March 1 and September 1. Assume today is November 1. What is the current difference, if any, between this bond's clean and dirty prices?

• No difference

• One month's interest

• Two months' interest

• Four months' interest

• Five months' interest

Two months' interest

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

• Short-term; high coupon

• Long-term; zero coupon

• Long-term; low coupon

• Long-term; high coupon

Long-term; zero coupon

If you sell a bond with a coupon of 6 percent to a dealer when the market rate is 7 percent, which one of the following prices will you receive?

• Call price

• Par value

• Bid price

• Asked price

• Bid-ask spread

Bid price

In response to a change in the market rate of interest, the price sensitivity of a bond increases 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.

A premium bond that pays $75 in interest annually matures in eight years. The bond was originally issued two years ago at par. Which one of the following statements is accurate in respect to this bond today?

• The face value of the bond today is greater than it was when the bond was issued.

• The bond is worth less today than when it was issued.

• The yield to maturity is less than the coupon rate.

• The coupon rate is less than the current yield.

• The yield to maturity equals the current yield.

The yield to maturity is less than the coupon rate.

Which one of the following statements concerning bond ratings is correct?

• Investment grade bonds are rated BB or higher by Standard & Poor's.

• Bond ratings assess both interest rate risk and default risk.

• Split-rated bonds are called crossover bonds.

• The highest rating issued by Moody's is AAA.

• A "fallen angel" is a term applied to all "junk" bonds.

Split-rated bonds are called crossover bonds.

The pure time value of money is known as the:

• liquidity effect.

• Fisher effect.

• term structure of interest rates.

• inflation factor.

• interest rate factor.

term structure of interest rates.

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.

The dividend growth model:

• assumes dividends increase at a decreasing rate.

• only values stocks at Time 0.

• cannot be used to value constant dividend stocks.

• can be used to value both dividend-paying and non-dividend-paying stocks.

• requires the growth rate to be less than the required return.

requires the growth rate to be less than the required return.

A firm has a dividend yield of 6.2 percent and a total return for the year of 5.9 percent. Which one of the following must be true?

• The dividend must be constant.

• The stock has a negative capital gains yield.

• The capital gains yield must be zero.

• The required rate of return for this stock increased over the year.

• The firm is experiencing supernormal growth.

The stock has a negative capital gains yield.

An investor owns 30 shares of stock of a firm 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. At present, the company is voting to elect three new directors. Given this information, which one of the following statements must be true?

• Regardless of the voting procedure, the investor does not own enough shares to gain a seat on the board.

• If straight voting applies, the investor is assured a seat on the board.

• If straight voting applies, the investor can control all of the open seats.

• If cumulative voting applies, the investor is assured one seat on the board.

• If cumulative voting applies, the investor can control all of the open seats.

If cumulative voting applies, the investor is assured one seat on the board.

You want to be on the board of directors of a local firm. Since you are the only shareholder who will vote for you, you will need to own more than half of the outstanding shares of stock if you are to be elected to the board. What type of voting is being described in this situation?

• Democratic

• Cumulative

• Straight

• Deferred

• Proxy

straight

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

The stream of customer orders coming into the NYSE trading floor is called the:

• paper trail.

• trading volume.

• order flow.

• bid-ask spread.

• commission trail.

order flow.

The owner of a trading license for the NYSE is called a(n):

• broker.

• member.

• agent.

• specialist.

• dealer.

member.

Which one of the following statements regarding the aftertax cost of debt is accurate?

• It varies inversely with changes in market interest rates.

• It will generally exceed the cost of equity if the relevant tax rate is zero.

• It will generally equal the cost of preferred stock if the tax rate is zero.

• It is unaffected by changes in the market rate of interest.

• It is highly dependent upon a company's tax rate.

It is highly dependent upon a company's tax rate.