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Principles of Finance > Quiz II > Flashcards

Quiz II Flashcards

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1
Q

Currently, the bond market requires a return of 11.6 percent on the 10-year bonds issued by Winston Industries. The 11.6 percent is referred to as which one of the following?

A

yield to maturity

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2
Q

A bond that is payable to whomever has physical possession of the bond is said to be in:

A

bearer form

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3
Q

A call-protected bond is a bond that:

A

cannot be called during a certain period of time

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4
Q

A bond that has only one payment, which occurs at maturity, defines which one of the following?

A

zero cupon

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5
Q

You want to buy a bond from a dealer. Which one of the following prices will you pay?

A

asked price

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6
Q

The difference between the price that a dealer is willing to pay and the price at which he or she will sell is called the:

A

spread

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7
Q

The Fisher effect is defined as the relationship between which of the following variables?

A

real rates, inflation, and nominal rates

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8
Q

The interest rate risk premium is the:

A

compensation investors demand for accepting interest rate risk.

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9
Q

A Treasury yield curve plots Treasury interest rates relative to which one of the following?

A

maturity

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10
Q

Which one of the following risk premiums compensates for the possibility of nonpayment by the bond issuer?

A

default risk

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11
Q

The liquidity premium is compensation to investors for:

A

the lack of an active market wherein a bond can be sold for its actual value.

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12
Q

A bond has a market price that exceeds its face value. Which of the following features currently apply to this bond?
I. discounted price
II. premium price
III. yield-to-maturity that exceeds the coupon rate
IV. yield-to-maturity that is less than the coupon rate

A

II and IV only

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13
Q

All else constant, a bond will sell at _____ when the coupon rate is _____ the yield to maturity.

A

a discount, less than

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14
Q

The Walthers Company has a semi-annual coupon bond outstanding. An increase in the market rate of interest will have which one of the following effects on this bond?

A

decrease the market price

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15
Q

Green Roof Inns is preparing a bond offering with a 6 percent, semiannual coupon and a face value of $1,000. The bonds will be repaid in 10 years and will be sold at par. Given this, which one of the following statements is correct?

A

The bonds will sell at a premium if the market rate is 5.5 percent.

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16
Q

Which one of the following bonds is the least sensitive to interest rate risk?

A

3-year; 6 percent coupon

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17
Q

A company has two open seats, Seat A and Seat B, on its board of directors. There are 6 candidates vying for these 2 positions. There will be a single election to determine the winner of both open seats. As the owner of 100 shares of stock, you will receive one vote per share for each open seat. You decide to cast all 200 of your votes for a single candidate. What is this type of voting called?

A

cumulative

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18
Q

You want to be on the board of directors of Wisely Foods. Since you are the only shareholder that 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 is the type of voting called that requires this level of stock ownership to be successfully elected under these conditions?

A

straight

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19
Q

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

A

broker

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20
Q

A securities market primarily comprised of dealers who buy and sell for their own inventories is referred to which type of market?

A

over the counter

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21
Q

National Trucking has paid an annual dividend of $1.00 per share on its common stock for the past fifteen years and is expected to continue paying a dollar a share long into the future. Given this, one share of the firm’s stock is:

A

priced the same as a $1 perpetuity.

22
Q

The dividend growth model:
I. assumes that dividends increase at a constant rate forever.
II. can be used to compute a stock price at any point in time.
III. can be used to value zero-growth stocks.
IV. requires the growth rate to be less than the required return.

A

I, II, III, and IV

23
Q

Which one of the following is an underlying assumption of the dividend growth model?

A

A stock’s value is equal to the discounted present value of the future cash flows which it generates.

24
Q

Which one of the following represents the capital gains yield as used in the dividend growth model?

A

g

25
Q

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

A

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

26
Q

Which one of the following transactions occurs in the primary market?

A

a purchase of newly issued stock from AT&T

27
Q

A project has an initial cost of $27,400 and a market value of $32,600. What is the difference between these two values called?

A

net present value

28
Q

There are two distinct discount rates at which a particular project will have a zero net present value. In this situation, the project is said to:

A

have multiple rates of return

29
Q

Which one of the following methods determines the amount of the change a proposed project will have on the value of a firm?

A

net present value

30
Q

Samuelson Electronics has a required payback period of three years for all of its projects. Currently, the firm is analyzing two independent projects. Project A has an expected payback period of 2.8 years and a net present value of $6,800. Project B has an expected payback period of 3.1 years with a net present value of $28,400. Which projects should be accepted based on the payback decision rule?

A

Project A only

31
Q

A project has a required payback period of three years. Which one of the following statements is correct concerning the payback analysis of this project?

A

The cash flow in year two is valued just as highly as the cash flow in year one.

32
Q

Applying the discounted payback decision rule to all projects may cause:

A

some positive net present value projects to be rejected.

33
Q

The internal rate of return:

A

is the most popular evaluation techinque.

34
Q

The internal rate of return is:

A

tedious to compute without the use of either a financial calculator or a computer.

35
Q

Graphing the crossover point helps explain:

A

how decisions concerning mutually exclusive projects are derived.

36
Q

The profitability index is most closely related to which one of the following?

A

net present value

37
Q

When the present value of the cash inflows exceeds the initial cost of a project, then the project should be:

A

accepted because the profitability index is greater than 1.

38
Q

Southern Chicken is considering two projects. Project A consists of creating an outdoor eating area on the unused portion of the restaurant’s property. Project B would use that outdoor space for creating a drive-thru service window. When trying to decide which project to accept, the firm should rely most heavily on which one of the following analytical methods?

A

net present value

39
Q

Mutually exclusive projects are best defined as competing projects which:

A

both require the total use of the same limited resource.

40
Q

The depreciation tax shield is best defined as the:

A

amount of tax that is saved because of the depreciation expense.

41
Q

The annual annuity stream of payments that has the same present value as a project’s costs is referred to as which one of the following?

A

equivalent annual cost

42
Q

The stand-alone principle advocates that project analysis should be based solely on which one of the following costs?

A

incremental

43
Q

G & L Plastic Molders spent $1,200 last week repairing a machine. This week the company is trying to decide if the machine could be better utilized if they assigned it a proposed project. When analyzing the proposed project, the $1,200 should be treated as which type of cost?

A

sunk

44
Q

Which of the following should be included in the analysis of a new product?
I. money already spent for research and development of the new product
II. reduction in sales for a current product once the new product is introduced
III. increase in accounts receivable needed to finance sales of the new product
IV. market

A

II, III, and IV only

45
Q

You are considering the purchase of a new machine. Your analysis includes the evaluation of two machines which have differing initial and ongoing costs and differing lives. Whichever machine is purchased will be replaced at the end of its useful life. You should select the machine which has the:

A

lowest equivalent annual cost.

46
Q

Changes in the net working capital requirements:

A

can affect the cash flows of a project every year of the project’s life.

47
Q

Pro forma statements for a proposed project should:
I. be compiled on a stand-alone basis.
II. include all the incremental cash flows related to the project.
III. generally exclude interest expense.
IV. include all project-related fixed asset acquisitions and disposals.

A

I, II, III, and IV

48
Q

Which one of the following is a correct method for computing the operating cash flow of a project assuming that the interest expense is equal to zero?

A

NI + D

49
Q

The bid price always assumes which one of the following?

A

The net present value of the project is zero.

50
Q

Decreasing which one of the following will increase the acceptability of a project?

A

equivalent annual cost

Principles of Finance (3 decks)

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