Finance-Exam2

Finance-Exam2

Which one of the following statements correctly defines a time value of money relationship?

Time and future values are inversely related, all else held constant.

Interest rates and time are positively related, all else held constant.

An increase in a positive discount rate increases the present value.

Time and present value are inversely related, all else held constant.

Time and present value are inversely related, all else held constant.

Project X has cash flows of $2,500, $2,000, $1,500, and $1,000 for Years 1 to 4, respectively. Project Y has cash flows of $1,000, $1,500, $2,000, and $2,500 for Years 1 to 4, respectively. Given a positive discount rate, which one of the following statements is true regarding these two projects?

• Both projects have the same value at Time 0. 

• Both projects are ordinary annuities. 

• Project Y has a higher present value than Project X. 

• Project X has both a higher present and a higher future value than Project Y.

• Project X has both a higher present and a higher future value than Project Y. 

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?

• 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 Y is a perpetuity.

An ordinary annuity is best defined as:

Equal payments paid at the end of regular intervals over a stated time period

A perpetuity is defined as:

unending equal payments paid at equal time intervals.

A Canadian consol is best categorized as:

perpetuity

The interest rate that is most commonly quoted by a lender is referred to as the:

APR

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

effective annual rate

Your credit card charges you 1.5 percent interest each month. When multiplied by 12 this rate is called the:

APR

Given a stated future value at Year 12 and an annual percentage rate of 7 percent, what compounding frequency will yield the lowest effective annual rate?

Annual

An investor just received the semiannual payment of $35 on a bond she owns. This payment is called the:

Coupon payment

An investor owns a bond that will pay him $45 each year in interest plus $1,000 as a principal payment at maturity. The $1,000 is referred to as the:

Face value

A bond's principal is repaid on the:

maturity date

A $1,000 par value corporate bond that pays $60 annually in interest was issued last year. If the current price of the bond is $887.96, which one of the following statements is correct? 

• The bond is currently selling at a premium.

• The current yield exceeds the coupon rate.

• The bond is selling at par value.

• The current yield exceeds the yield to maturity.

The current yield exceeds the coupon rate.

Which one of the following relationships applies to a premium bond?

• Coupon rate > Yield to maturity > Current yield

• Coupon rate < Yield to maturity < Current yield

• Coupon rate > Current yield > Yield to maturity

Coupon rate > Current yield > Yield to maturity

Which one of the following relationships applies to a par value bond?

• Coupon rate = Current yield = Yield to maturity

• Coupon rate < Yield to maturity < Current yield

• Coupon rate > Current yield > Yield to maturity

Coupon rate = Current yield = Yield to maturity

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

Coupon rate decreases and the time to maturity increases

As a bond's time to maturity increases, the bond's sensitivity to interest rate risk

increases at a decreasing rate

Which one of the following statements regarding bonds is correct? 

• Most long-term bond issues are referred to as unfunded debt.

• Bonds often provide tax benefits to issuers.

• The risk of a company financially failing decreases when the company issues bonds.

Bonds often provide tax benefits to issuers.

Callable bonds generally:

Have a sinking fund provision

Protective covenants:

are primarily designed to protect bondholders.

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:

In registered form

What is the model called that determines the market value of a stock based on its next annual dividend, the dividend growth rate, and the applicable discount rate?

Constant growth model

The annual dividend yield is computed by dividing _________blank annual dividend by the current stock price.

Next year’s

Which one of following is the rate at which a stock's price is expected to appreciate?

• Dividend yield

• Capital gains yield

• Coupon rate

Capital gains yield

A firm has paid an annual dividend of $1 per share on its common stock for the past 15 years and is expected to continue doing so long into the future. Given this information, one share of the firm's stock is:

• priced the same as a $1 perpetuity.

A forward PE ratio is based on:

estimated future earnings.

According to the dividend growth model, a decrease in which one of the following inputs will increase the current value of a stock?

Discount rate

The dividend growth model:

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

When applying the dividend growth model, which one of the following variables represents the capital gains yield?

• D1

• P0

• g

g

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 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 stock has a negative capital gains yield.

A firm is owned by a group of five shareholders who all vote independently and who all want personal control over the firm. What is the minimum percentage of the outstanding shares one of these shareholders must own if he or she is to gain personal control over this firm given that the firm uses straight voting?

50 percent plus one vote

Which type of stock is defined by the fact that it receives no preferential treatment regarding dividends or bankruptcy proceedings?

Common

A project has a net present value of zero. Given this information:

The project's cash inflows equal its cash outflows in current dollar terms.

Which one of the following will decrease the net present value of a project?

Increasing the project's initial cost at Time 0

Which method predicts the amount by which the market value of a firm will change if a project is accepted?

Net present value

If a project has a net present value equal to zero, then:

the project earns a return exactly equal to the discount rate.

The net present value of a project will increase if:

the aftertax salvage value of the fixed assets increases

Net present value:

is the best method of analyzing mutually exclusive projects

The length of time a firm must wait to recoup the money it has invested in a project is called the:

Payback period

Why is payback often used as the sole method of analyzing a proposed small project?

The benefits of payback analysis may outweigh the costs of the analysis.

Which of the following are advantages of the payback method of project analysis?

• Considers time value of money; liquidity bias

• Liquidity bias; subjective cutoff point

• Liquidity bias; ease of use

Liquidity bias; ease of use

A project's average net income divided by its average book value is referred to as the project's average:

Accounting return

Which one of the following methods of analysis provides the best information on the benefits to be received from a project per dollar invested?

Profitability index

You are considering two mutually exclusive projects. Project X has cash flows of −$72,000, $21,400, $22,900, and $56,300 for Years 0 to 3, respectively. Project Y has cash flows of −$81,000, $20,100, $22,200, and $74,800 for Years 0 to 3, respectively. Both projects have a required 2.5-year payback period. Should you accept or reject these projects based on payback analysis?

Accept Project X and reject Project Y