Krossaspurningar 2017 Flashcards
1
Q
- Which of the following statements is FALSE?
a) The relationship between the investment term and the interest rate is called the term structure
of interest rates.
b) The real interest rate indicates the rate at which your money will grow if invested for a certain
period.
c) The yield curve is a potential leading indicator of future economic growth.
d) The shape of the yield curve will be strongly influenced by interest rate expectations.
A
b) The real interest rate indicates the rate at which your money will grow if invested for a certain
period.
2
Q
- Which of the following statements is FALSE?
a) Bond prices converge to the bond’s face value due to the time effect, but simultaneously move
up and down due to unpredictable changes in bond yields.
b) As interest rates and bond yields fall, bond prices will rise.
c) A bond with credit risk has a lower yield to maturity than an otherwise identical bond without
credit risk .
d) Shorter maturity zero coupon bonds are less sensitive to changes in interest rates than are
longer‐term zero coupon bonds.
A
c) A bond with credit risk has a lower yield to maturity than an otherwise identical bond without
credit risk
3
Q
- If the debt‐to‐value ratio is 0.20, what is the debt‐to‐equity ratio?
a) 0.10
b) 0.25
c) 0.33
d) None of the above.
A
b) 0.25
4
Q
- Consider a bond with three years to maturity that pays a coupon of 5 at the end of each year. The face value is 100 and the price of the bond is 90. The yield to maturity is closest to:
a) 6%
b) 7%
c) 8%
d) 9%
A
d) 9%
5
Q
- Which of the following statements is CORRECT?
a) Firms with long‐term stable cash‐flows typically maintain high debt‐to value ratios.
b) The pecking order hypothesis explains how dividend policy affects firm value.
c) When a firm issue equity it signals to the market that its equity is undervalued.
d) None of the above.
A
a) Firms with long‐term stable cash‐flows typically maintain high debt‐to value ratios.
6
Q
- Which of the following statements is CORRECT?
a) When the debt‐to‐equity ratio varies over time, using the WACC method to value a project is
relatively straightforward and is therefore the preferred method with alternative leverage
policies.
b) When the debt‐to‐equity ratio is held constant, we can discount interest tax shields using the
firm’s cost of debt, rD.
c) When a firm maintains a constant debt, we can discount interest tax shields using the firm’s cost
of debt, rD.
d) None of the above alternatives.
A
c) When a firm maintains a constant debt, we can discount interest tax shields using the firm’s cost
of debt, rD.
7
Q
- Which of the following statements is CORRECT?
a) The volatility of the price of a bond generally decreases as time to maturity decreases.
b) The yield curve is more often downward sloping than upward sloping.
c) The yield curve is always downward sloping.
d) Real interest rates are normally higher than nominal interest rates.
A
a) The volatility of the price of a bond generally decreases as time to maturity decreases.
8
Q
- Which of the following statements is CORRECT?
a) At maturity the price of a bond equals the face value minus the sum of all coupon payments.
b) The yield to maturity of a bond is a function of the coupon rate only.
c) The price of a bond equals the present value of all future coupon payments .
d) Longer maturity zero coupon bonds are more sensitive to changes in interest rates than are
shorter‐term zero coupon bonds.
A
d) Longer maturity zero coupon bonds are more sensitive to changes in interest rates than are
shorter‐term zero coupon bonds.
9
Q
- Which of the following statements is FALSE?
a) In a perfect capital market the value of a firm is dependent on the risk of its expected cash‐flow.
b) In a market with imperfections the the value of a firm is dependent on the risk of its expected
cash‐flow.
c) In a perfect capital market the WACC of a levered firm equals the required rate of return of a firm
that is 100 percent equity financed.
d) In a perfect capital market the required rate of return on debt is independent of the firm’s capital
structure.
A
b) In a market with imperfections the the value of a firm is dependent on the risk of its expected
cash‐flow.
10
Q
- Which of the following statements is FALSE?
a) Tax at personal investor level may offset the tax advantage of debt at the firm level.
b) The majority of stock owners prefer levered firms since the expected return on equity is higher
than for unlevered firms.
c) The value of a levered firm (with debt and equity securities only) is always equal to the sum of
the value of the debt and the value of the equity.
d) If corporate tax is not the only market imperfection, the increase in value of an unlevered firm
that takes on debt may not be equal to the present value of all future expected tax shields.
A
b) The majority of stock owners prefer levered firms since the expected return on equity is higher
than for unlevered firms.
11
Q
- Which of the following statements is FALSE?
a) Because the cash flows promised by the bond are the most that bondholders can hope to
receive, the cash flows that a buyer of a bond with credit risk expects to receive may be less
than that amount.
b) By consulting bond ratings, investors can assess the credit‐worthiness of a particular bond issue.
c) Because the yield to maturity for a bond is calculated using the promised cash flows, the yield of
bond’s with credit risk will be lower than that of otherwise identical default‐free bonds.
d) A higher yield to maturity does not necessarily imply that a bond’s expected return is higher.
A
c) Because the yield to maturity for a bond is calculated using the promised cash flows, the yield of
bond’s with credit risk will be lower than that of otherwise identical default‐free bonds.
12
Q
- Consider a bond with three years to maturity that pays a coupon of 10 at the end of each year. The face value is 100 and the price of the bond is 105. The yield to maturity is closest to:
a) 6%
b) 7%
c) 8%
d) 9%
A
c) 8%
13
Q
- Which of the following statements is FALSE?
a) If we can identify a comparison firm whose assets have the same risk as the project being
evaluated, and if the comparison firm is levered, then we can use its equity cost of capital as the
cost of capital for the project.
b) We can calculate the cost of capital of the firm’s assets by computing the weighted average of
the firm’s equity and debt cost of capital, which we refer to as the firm’s weighted average cost
of capital.
c) In a perfect capital market the portfolio of a firm’s equity and debt replicates the returns we
would earn if the firm was unlevered.
d) When evaluating any potential investment project, we must use a discount rate that is
appropriate given the risk of the project’s free cash flow.
A
a) If we can identify a comparison firm whose assets have the same risk as the project being
evaluated, and if the comparison firm is levered, then we can use its equity cost of capital as the
cost of capital for the project.
14
Q
- Which of the following statements is CORRECT?
a) When the debt‐to‐equity ratio varies over time, using the WACC method to value a project is
relatively straightforward and is therefore the preferred method with alternative leverage
policies.
b) When the debt‐to‐equity ratio is held constant, we can discount interest tax shields using the
firm’s cost of debt, rD.
c) When a firm maintains a constant debt, we can discount interest tax shields using the firm’s cost
of debt, rD.
d) None of the above alternatives.
A
b) When the debt‐to‐equity ratio is held constant, we can discount interest tax shields using the
firm’s cost of debt, rD.
