FINA 3000 Final Exam T/F Questions

An amortized loan is a regular annuity for a set number of payments

True

Private equity firms try to acquire firms by minimizing the amount of debt in the purchase.

False

For a mortgage, most of the interest is paid early in the loan

True

A bond has a yield to maturity that is larger than the coupon rate. We can say that this bond will trade at a premium.

False

If we increase the interest rate on a set of cashflows, we can say that the present value increases also.

False

Our dividend stock pricing model can accurately estimate a firm that does not pay dividends

False

If we add enough assets to a portfolio, we can reduce the overall volatility to 0%.

False

Market risk is the same as non-systematic risk.

False

If the interest rate is greater than zero, the present value of $1,000 received five years from today is greater than the present value of $1,000 received ten years from today.

True

If the yield to maturity increases, the bond trading price will fall. (all else equal).

True

The EAR is always larger than the APR.

False

The relationship between the interest rate and the present value is an inverse.

True

For a short-term investor, the current yield would be a more favorable measure than the yield to maturity for evaluating an investment.

True

Private equity firms try to acquire firms by minimizing the amount of equity in the purchase.

True

For a mortgage, most of the interest is paid late in the loan.

False

A bond has a yield to maturity that is larger than the coupon rate. We can say that this bond will trade at a discount.

True

If we increase the interest rate on a set of cashflows, we can say that the present value increases also.

False

Our dividend stock pricing model can accurately estimate a firm that does not pay dividends.

False

If we add enough assets to a portfolio, we can remove all the non-systematic risk

False

Market risk is the same as systematic risk

True

If the interest rate is greater than zero, the present value of $1,000 received five years from today is greater than the present value of $1,000 received ten years from today.

True

If the yield to maturity increases, the bond trading price will fall. (all else equal).

True

If we add enough assets to a portfolio, we can reduce the overall volatility to 0%

False

The average retirement savings versus the median level of retirement savings shows that the lower and middle classes are benefitting from the stock market’s growth.

False

The market portfolio risk premium is larger for riskier firms

False

In class, we talked about the differences between a short option and short selling. A short seller faces more risk as the potential losses are unlimited.

True

A stock’s expected return is currently less than the required return. We can say that the stock is undervalued and the price of the stock will increase.

False

In the last 50 years, the largest value for the VIX was during COVID

False

If projects are mutually exclusive, we defer to the NPV rule to pick the best project.

True

The profitability index will give us the optimal project order to select.

False

When investment banks value a company or share of common stock, they pick one valuation model and use it exclusively.

False

An financial analyst is considering two projects, A and B. It is possible for project A to have a shorter payback period, but also have a lower NPV than project B.

True

Suppose that the credit rating of a firm is upgraded. This would likely mean that its cost of capital will decrease if the firm maintains its capital structure

True

The value of a real option decreases if there is more volatility in project cash flows.

False

A firm that makes consumer staples such as milk or cereal would likely have a smaller beta than the average firm. (all else equal)

True

An exchange traded fund has less liquidity than a typical mutual fund.

False

A negative free cash flow means that the firm is always in danger of bankruptcy.

False

The weighted average cost of capital is the one interest rate or percentage that is applied to every project considered by a firm

False

Preferred stock is like common equity in that it features a variable dividend payment.

False

An investor is considering two stocks with the same standard deviation. She would want a higher required return for the stock with greater correlation with the market portfolio.

True

The IRR assumes that all cash flows are re-invested at the firm’s cost of capital.

False

The market portfolio risk premium is the same for all firms, no matter the risk.

True

A stock’s expected return is currently less than the required return. We can say that the stock is undervalued and the price of the stock will increase.

False

If projects are mutually exclusive, we defer to the IRR rule to pick the best project.

False

The value of a real option increases if there is more volatility in project cash flows.

True

A firm that makes consumer staples such as milk or cereal would likely have a higher beta than the average firm. (all else equal)

False

An exchange traded fund is less expensive to start than a typical mutual fund.

True

A negative free cash flow is not unusual for a growing firm

True