Finance chapter 1-4

Question 1

Would a depositor prefer an APR of 8% with monthly compounding or an APR of 8.5% with
semiannual compounding?

Answer 1

8.5% with semiannual compounding

Question 2

Given a set future value, which of the following will contribute to a lower present value?
A) lower discount factor B) fewer time periods
C) higher discount rate D) less frequent discounting

Answer 2

higher discount rate

Question 3

Investors who buy which type of bond will be guaranteed a capital loss if they hold the bond to
maturity?
A) premium bond B) discount bond
C) junk bond D) zero-coupon bond

Answer 3

premium bond

Question 4

If an investor purchases a bond when its current yield is higher than the coupon rate, then the bond’s
price will be expected to:
A) be less than the face value at maturity.
B) exceed the face value at maturity.
C) decline over time, reaching par value at maturity.
D) increase over time, reaching par value at maturity.

Answer 4

increase over time, reaching par value at maturity

Question 5

The existence of an upward-sloping yield curve suggests that:
A) bonds will not return as much as common stocks.
B) bonds should be selling at a discount to par value.
C) interest rates will be increasing in the future.
D) real interest rates will be increasing soon.

Answer 5

interest rates will be increasing in the future

Question 6

When market interest rates exceed a bond’s coupon rate, the bond will:
A) decrease its coupon rate. B) increase its coupon rate.
C) sell for more than par value. D) sell for less than par value.

Answer 6

sell for less than par value

Question 7

Which of the following would not be associated with a zero-coupon bond?
A) discount bond B) interest-rate risk C) yield to maturity D) current yield

Answer 7

current yield

Question 8

Which one of the following is most apt to be correct for a CCC-rated bond, compared to a
BBB-rated bond?
A) the CCC bond will have a higher price for the same term.
B) the CCC bond will have a shorter term.
C) the CCC bond will have a variable-coupon rate.
D) the CCC bond will offer a higher promised yield to maturity

Answer 8

the CCC bond will offer a higher promised yield to maturity.

Question 9

Many investors may be drawn to bonds with capital gains only because:
A) high coupon payments. B) long periods until maturity.
C) reduced taxation on capital gains. D) no taxation on capital gains.

Answer 9

reduced taxation on capital gains

Question 10

Stocks that have the same expected risk should:
A) have the same price. B) have the same sustainable growth rate.
C) offer the same dividend payment. D) have the same expected rate of return

Answer 10

have the same expected rate of return

Question 11

In the calculation of rates of return on common stock, dividends are and capital gains are
.
A) not guaranteed; not guaranteed B) guaranteed; not guaranteed
C) guaranteed; guaranteed D) not guaranteed; guaranteed

Answer 11

not guaranteed; not guaranteed

Question 12

Security prices are said to follow a “random walk,” which means that:
A) it is impossible to know whether stocks offer higher returns than bonds.
B) successive price changes are unpredictable.
C) stock selection for portfolio composition is unimportant.
D) investment analysts are unnecessary.

Answer 12

successive price changes are unpredictable

Question 12

If stock prices follow a random walk, which of the following statement(s) is(are) correct?
A) Both successive stock price changes are not related and the history of stock prices cannot be
used to predict future returns to investors
B) the history of stock prices cannot be used to predict future returns to investors
C) successive stock price changes are not related
D) None of the choices are correct

Answer 12

Both successive stock price changes are not related and the history of stock prices cannot be
used to predict future returns to investors

Question 13

The g in the constant-growth dividend model refers to:
A) the annual growth rate for stock price.
B) The annual growth rate for stock price and for dividends.
C) the annual growth rate for dividends.
D) None of the choices are correct.

Answer 13

The annual growth rate for stock price and for dividends

Question 14

A project has a payback period of five years and the firm employs a 10 percent cost of capital.
Which of the following statements is correct concerning this Project’s discounted payback?
A) discounted payback will decrease if the Project’s IRR exceeds 10 percent.
B) discounted payback will exceed five years.
C) discounted payback will increase if the Project’s IRR is less than 10 percent.
D) discounted payback will be less than five years.

Answer 14

discounted payback will exceed five years

Question 14

If a Project’s expected rate of return exceeds its opportunity cost of capital, one would expect:
A) the opportunity cost of capital to be too low.
B) the IRR to exceed the opportunity cost of capital.
C) the NPV to be zero.
D) the profitability index to exceed 1.0.

Answer 14

the IRR to exceed the opportunity cost of capital

Question 14

soft capital rationing:
A) should be costless to the shareholders of the firm.
B) solves the problem of investment timing.
C) is used to determine mutually exclusive projects.
D) is costly to shareholders.

Answer 14

is used to determine mutually exclusive projects

Question 15

If projects A and B are independent, which of the following is true?
A) Value (A + B) = value (A) + value (B)
B) Value (A + B) > value (A) + value (B)
C) Value (A + B) < value (A) + value (B)
D) Value (A + B) - value (B) > value (A)

Answer 15

Value (A + B) = value (A) + value (B)

Question 16

If the opportunity cost of capital for a project exceeds the Project’s IRR, then the project has a(n):

Answer 16

negative NPV

Question 17

Soft capital rationing is imposed upon a firm from ________ sources, while hard capital rationing is imposed from
________ sources.
A) External; external B) External; internal
C) Internal; external D) Internal; internal

Answer 17

Internal; external

Question 18

A Project’s payback period is determined to be four years. If it is later discovered that additional cash flows will be
generated in years five and six, then:
A) the Project’s payback period will be reduced.
B) the Project’s payback period will be unchanged.
C) the Project’s payback period will be increased.
D) the discount rate must be known to determine whether the payback period changes.

Answer 18

the Project’s payback period will be unchanged

Question 19

A stream of equal cash payments lasting forever is termed as:
a. an annuity.
b. an annuity due.
c. an installment plan.
d. a perpetuity.

Answer 19

a perpetuity

Question 20

When an investment pays only simple interest, this means:
a. the interest rate is lower than on comparable investments.
b. the future value of the investment will be low.
c. the earned interest is nontaxable to the investor.
d. interest is earned only on the original investment.

Answer 20

the future value of the investment will be low

Question 21

The concept of compound interest refers to:
a. earning interest on the original investment.
b. payment of interest on previously earned interest.
c. investing for a multiyear period of time.
d. determining the APR of the investment

Answer 21

determining the APR of the investment

Question 22

Which one of the following bond values will change when interest rates change?
a. the expected cash flows
b. the present value
c. the coupon payment
d. the maturity value

Answer 22

the present value

Question 23

When market interest rates exceed a bond’s coupon rate, the bond will:
a. sell for less than par value.
b. sell for more than par value.
c. decrease its coupon rate.
d. increase its coupon rate

Answer 23

sell for less than par value

Question 24

A “convertible bond” provides the option to convert:
a. a bond into shares of common stock.
b. fixed-rate coupon payments into variable-rate payments.
c. a zero-coupon bond to a coupon-paying bond.
d. a junk bond to a zero-coupon investment-grade bond.

Answer 24

a bond into shares of common stock.

Question 25

Which of the following describes a seasoned offering?
a. an IPO of common stock for a well-known firm
b. an IPO that is offered during the best buying season
c. an additional equity issue from a publicly traded firm
d. any shares traded in the secondary market are seasoned offerings

Answer 25

an additional equity issue from a publicly traded firm

Question 26

Which of the following should increase the firm’s sustainable growth rate?
a. increase the dividend payout ratio
b. decrease the required return
c. decrease the ROE
d. increase the plow back ratio

Answer 26

increase the plow back ratio

Question 27

Common stock can be valued using the perpetuity valuation formula if the:
a. discount rate is expected to remain constant.
b. dividends are not expected to grow.
c. growth rate in dividends is not constant.
d. none of the above

Answer 27

discount rate is expected to remain constant