Question 1
1. Based on the table of zero coupon bond prices, below, what is the shape of the yield curve? Each bond has a face value of $100.
Flat
Upward sloping
Downward sloping
Not enough information
Question 2
1. Bank of America bonds are currently trading at $952.31. The bonds have a face value of $1,000, a coupon rate of 8% with payments made semi-annually, and mature in 20 years. What is the yield to maturity?
7.0%
7.5%
8.0%
8.5%
9.0%
Question 3
1. The real rate of interest is 2% and the expected inflation rate is 2%. What is the nominal rate of interest?
2.02%
3.04%
4.00%
4.04%
4.24%
Question 4
1. Crystal Clear Inc. is undertaking a new investment opportunity and would like to issue bonds to fund the project. The bonds would be 30-year zero-coupon bonds with a $1,000 face value, and 100 bonds will be issued. If the bonds are to yield 7%, how much will Crystal Clear receive when the bonds are issued?
$13,136.71
$14,056.28
$12,277.30
$10,000.00
$11,341.24
Question 5
1. The nominal rate of interest is 5% and the expected inflation rate is 2%. What is the real rate of interest?
2.50%
2.94%
3.94%
4.00%
4.04%
Question 6
1. Schlitz Brewery Inc. bonds are trading today for a price of $961.29. The bond currently has 10 years until maturity and has a yield to maturity of 5%. The bond pays annual coupons and the next coupon is due in one year. What is the coupon rate of the bond?
3.0%
3.5%
4.0%
4.5%
5.0%
Question 7
1. Tootsie Roll Industries' 10-year bonds are priced to yield 7%. Economists predict that real rates and inflation will remain constant over the next ten years at 3% and 2%, respectively. Bond analysts estimate that the maturity risk premium for a 10-year maturity is 0.25% and that the liquidity risk premium for Tootsie's bond is 0.50%. What is the default risk premium for Tootsie's bond?
0.94%
0.99%
1.00%
1.09%
1.19%
Question 8
1. A stock just paid a dividend of $1.15, has a required rate of return of 10%, and a constant dividend growth rate of 3%. What price should this stock be selling for?
$16.92
$15.20
$8.50
$8.20
$17.15
Question 9
1. The use of the ________ is especially helpful in valuing firms that are not publicly traded.
Question 10
1. Coors just paid out a dividend of $1.00 on its common stock, which is currently trading at $37.27. If dividends are paid annually and are expected to grow in value by 1% per annum forever, then what return will a shareholder earn if the stock is purchased today?
Question 11
1. A share of common stock has just paid a dividend of $2. If the expected long-run growth rate for this stock is 15%, and if investors require a 19% rate of return, what is the price of the stock?
Question 12
1. Due to unfavorable economic conditions, EFB Company's earnings and dividends are expected to remain unchanged for the next 3 years. After 3 years, dividends are expected to grow at a 10% annual rate forever. The last dividend was $2, and the required rate of return is 20%. What should be the current market value of EFB stock?
Question 13
1. The price/earnings ratio:
Is calculated by multiplying the market price of a stock by its earnings per share.
Is found by dividing the market price of a stock by the firm's total earnings.
Is computed by dividing the book value of a stock by the firm's EPS.
Is calculated by adding the market price of a stock to the firm's EPS.
Is found by dividing the market price of a stock by the firm's EPS.
Question 14
1. Bubble.com Inc. currently pays no dividends. You overhear the CFO tell the CEO that the plan is to begin paying annual dividends in 5 years. The first dividend will be $2 and dividends are expected to grow at 5% in perpetuity thereafter. Given a required return of 11%, what should the price of the stock be today?
Question 15
1. A firm has an expected dividend next year of $1.20 per share, a zero growth rate of dividends, and a required return of 10 percent. The value of a share of the firm's common stock is:
Question 16
1. A project costs $1,000 today and is expected to produce cash inflows of $800 at the end of each of the next two years. If the firm's cost of capital is 10%, what is the modified internal rate of return? Round answer to the nearest whole percent.
Question 17
1. All of the following are weaknesses of the payback period EXCEPT:
Question 18
1. All of the following are considered to be disadvantages of using the payback method except the fact that it:
Question 19
1. According to the net present value technique, a project is considered acceptable if:
Question 20
1. All of the following are steps in the capital budgeting process EXCEPT:
Question 21
1. An advantage of the net present value (NPV) method is that it:
Question 22
1. An 8 percent preferred stock with a market price of $110 per share and a $100 par value pays a cash dividend of ________.
Question 23
1. Which of the following is not a characteristic of preferred stock?
Common stock dividends must be paid before preferred dividends.
Preferred stock dividends may be delayed.
Preferred dividends are assumed to be infinite in duration.
Preferred dividends are typically given less legal priority than bond interest payments.
Preferred stock does not mature like a bond.
Question 24
1. Preferred stock is valued as if it were
Question 25
1. All of the following are characteristics of common stock EXCEPT:
Question 26
1. You just purchased preferred shares in Initech for $45.71. Initech pays annual dividends of $0.64. What is your required return on this investment?
Question 27
1. A firm has an issue of preferred stock outstanding that has a stated annual dividend of $4. The required return on the preferred stock has been estimated to be 16 percent. The value of the preferred stock is ________.
Question 28
1. Which of the following bonds carries the greatest amount of interest rate risk?
Question 29
1. Everything else being equal, a ________ bond's price will ________ as the bond approaches maturity.
Question 30
1. Which of the following statements is true?
Question 31
1. In general, if interest rates ________, bond prices ________.
Question 32
1. If the yield to maturity on Wee Beastie Animal Park bonds is 11.75% and the coupon yield is 8.55%, what is the capital gain yield?
Question 33
1. A $1,000 face value bond has a 9% annual coupon rate. The next coupon is due in one year. The bond matures in 15 years and the yield on the bond is 10%. What is the difference in price if the yield rises to 11%?
Question 34
1. You are considering the purchase of an investment that would pay you $5,000 per year for Years 1-5, $3,000 per year for Years 6-8, and $2,000 per year for Years 9 and 10. If you require a 14% rate of return, and the cash flows occur at the end of each year, then how much should you be willing to pay for this investment?
Question 35
1. What is the IRR for a project with a current cost of $7,000 that is expected to produce cash inflows of $1,000 at the end of each of the next 10 years? Round answer to the nearest whole percent.
Question 36
1. Analysts at Tabby Fur Storage predict that the net present value of a proposed new $10 million warehouse is $1 million. How should these findings be interpreted?
Question 37
1. ________ is the process of deciding which long-term investments or projects a firm will acquire using the long-term funds a firm has available.
Question 38
1. When the net present value is negative, the internal rate of return is ________ the cost of capital.
Question 39
1. What is the profitability index of a project that has a current cost of $100,000 and expected cash flows of $50,000 at the end of each of the next 7 years if the cost of capital is 20%?
Question 40
1. The ________ is the exact amount of time it takes the firm to recover its initial investment.
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