Question 1

Preferred stock is often referred to as a hybrid security for which of the following reasons?

Accepted Answer

A) Preferred stock dividends are fixed like bond payments but the maturity is indefinite like common stock. 
B) Preferred stockholders have preference over common stock holders in bankruptcy,but are subordinate to bondholders. 
C) Both A and B are typically true. 
D) Neither A nor B are typically true. 
A) Preferred stock dividends are fixed like bond payments but the maturity is indefinite like common stock. 
B) Preferred stockholders have preference over common stock holders in bankruptcy,but are subordinate to bondholders. 
C) Both A and B are typically true. 
D) Neither A nor B are typically true. C

Question 2

If a bond sells for its par value then the yield to maturity is greater than the coupon rate.

Accepted Answer

A) True 
 B)False  False

Question 3

Blanton Consulting Inc.just paid a $2.00 per share dividend.The firm also announced that it anticipates a long-run growth in dividends of 3% per year.Inflation is also expected to be 3% per year,and the firms required rate of return on common stock is 11%.What is the current price per share of the firm's stock?

Accepted Answer

A) $14.71 
B) $14.29 
C) $25.75 
D) $25.00 
A) $14.71 
B) $14.29 
C) $25.75 
D) $25.00 C

Question 4

Nic is a great basketball player with a long professional career in front of him.He plays for a European professional team that has made him a very interesting offer.If he will take a "below market" salary beginning one year from today,they will guarantee a 5% annual raise forever - even after he stops playing ball.If the offer is for a $5,000,000 salary to be received one year from today with subsequent payments as described,what is the present value of the contract offer if the cash flows should be discounted at a rate of 12%?

Accepted Answer

A) $71,428,571 
B) $75,000,000 
C) $41,666,667 
D) $43,750,000 
A) $71,428,571 
B) $75,000,000 
C) $41,666,667 
D) $43,750,000

Question 5

To increase the present value of a future cash flow,you could increase the discount rate.

Accepted Answer

A) True 
 B)False

Question 6

Preferred stock share prices tend to act much like bond prices - so long as the firm is not experiencing any financial distress.

Accepted Answer

A) True 
 B)False

Question 7

Which of the following could be considered a form of perpetuity?

Accepted Answer

A) The college tuition payments that students make for four years. 
B) A 20-year corporate bond. 
C) A university scholarship endowment that promises to pay out $10,000 per year for an indefinite time period. 
D) A contract from the winning lottery ticket to receive cash flows for the next 30 years. 
A) The college tuition payments that students make for four years. 
B) A 20-year corporate bond. 
C) A university scholarship endowment that promises to pay out $10,000 per year for an indefinite time period. 
D) A contract from the winning lottery ticket to receive cash flows for the next 30 years.

Question 8

Your new employer makes you an unusual salary offer.Choice A is to receive a $20,000 lump sum today and another $50,000 in one year.Choice B is to receive nothing today,and $80,000 in one year.You carefully consider what you have learned in your finance class and determine that the risk and uncertainty of this offer as well as the difficulty of having to find money for living expenses for one more year leads you to conclude that the appropriate interest rate at which to evaluate these offers is 40%.Based strictly on the results of your calculations,which offer should you accept and why?

Accepted Answer

A) Choice A because the present value of $57,142.86 is greater than the PV of $55,714.29 for Choice B. 
B) Choice A because the present value of $70,000 is greater than the PV of $57,142.86 for Choice B. 
C) Choice B because the present value of $80,000 is greater than the PV of $70,000 for Choice A. 
D) Choice B because the present value of $57,142.86 is greater than the PV of $55,714.29 for Choice A. 
A) Choice A because the present value of $57,142.86 is greater than the PV of $55,714.29 for Choice B. 
B) Choice A because the present value of $70,000 is greater than the PV of $57,142.86 for Choice B. 
C) Choice B because the present value of $80,000 is greater than the PV of $70,000 for Choice A. 
D) Choice B because the present value of $57,142.86 is greater than the PV of $55,714.29 for Choice A.

Question 9

You plan to purchase a new car with a retail price of $26,499 after your trade-in and astute negotiations with the dealership sales manager.You have agreed to make 5 ANNUAL payments with an annual interest rate of 3.90%.How large are your equal annual end-of-the-year payments for your new car?

Accepted Answer

A) $5299.80 
B) $5,462.21 
C) $5,841.89 
D) $5,935.68 
A) $5299.80 
B) $5,462.21 
C) $5,841.89 
D) $5,935.68

Question 10

Suppose a preferred share pays perpetual quarterly dividends of $0.25 and has a per annum dividend yield of 6 percent.What is the fair value of this preferred share?

Accepted Answer

A) $14.67 
B) $15.33 
C) $16.00 
D) $16.67 
A) $14.67 
B) $15.33 
C) $16.00 
D) $16.67

Question 11

Another name for the lump sum cash flow that occurs when a bond matures is the:

Accepted Answer

A) face value. 
B) maturity value. 
C) par value. 
D) All of the above could be used to describe the cash flow in question. 
A) face value. 
B) maturity value. 
C) par value. 
D) All of the above could be used to describe the cash flow in question.

Question 12

Zero coupon bonds pay no intermediate cash flows prior to maturity.

Accepted Answer

A) True 
 B)False

Question 13

You own a contract that promises an annuity cash flow of $100 end-of-the-year cash flows for each of the next three years (note: the first cash flow is exactly one year from today).At an interest rate of 10%,what is the future value of this contract exactly three years from today?

Accepted Answer

A) $248.69 
B) $273.55 
C) $331.00 
D) $364.10 
A) $248.69 
B) $273.55 
C) $331.00 
D) $364.10

Question 14

Which of the following is NOT an example of an annuity cash flow?

Accepted Answer

A) Your pay check which is the same every month. 
B) Your tuition payments which are the same every term. 
C) The identical payment you make every two years for your share of a lake cabin that you own with other family members. 
D) These are all annuity cash flows. 
A) Your pay check which is the same every month. 
B) Your tuition payments which are the same every term. 
C) The identical payment you make every two years for your share of a lake cabin that you own with other family members. 
D) These are all annuity cash flows.

Question 15

Which of the following is a type of financial security issued by a corporation in need of capital?

Accepted Answer

A) bonds 
B) preferred stock 
C) common stock 
D) all of the above 
A) bonds 
B) preferred stock 
C) common stock 
D) all of the above

Question 16

Simpson Industries Inc.bonds currently have 12 years remaining to maturity.What is the current price of the firm's semi-annual bonds if they carry a face value of $1,000,an annual coupon rate of 8% and an annual yield to maturity of 7%?

Accepted Answer

A) $924.64 
B) $1,000.00 
C) $1,079.43 
D) $1,080.29 
A) $924.64 
B) $1,000.00 
C) $1,079.43 
D) $1,080.29

Question 17

Firms attempt to price bonds so that at issue they sell for the:

Accepted Answer

A) face value. 
B) coupon value. 
C) firm value. 
D) same price as shares of preferred stock. 
A) face value. 
B) coupon value. 
C) firm value. 
D) same price as shares of preferred stock.

Question 18

Zero coupon bonds have which of the following features?

Accepted Answer

A) annual interest payments 
B) semi-annual interest payments 
C) no interest payments 
D) Any of the above may apply. 
A) annual interest payments 
B) semi-annual interest payments 
C) no interest payments 
D) Any of the above may apply.

Question 19

The time value of money implies that one dollar today is worth more than one dollar tomorrow,due primarily to the opportunity cost of foregoing consumption today

Accepted Answer

A) True 
 B)False

Question 20

After a bond issue if the yield to maturity increases a conventional bond will see the price:

Accepted Answer

A) increase. 
B) decrease. 
C) stay the same. 
D) Not enough information to answer this question. 
A) increase. 
B) decrease. 
C) stay the same. 
D) Not enough information to answer this question.

Preferred stock is often referred to as a hybrid security for which of the following reasons?

If a bond sells for its par value then the yield to maturity is greater than the coupon rate.

To increase the present value of a future cash flow,you could increase the discount rate.

Preferred stock share prices tend to act much like bond prices - so long as the firm is not experiencing any financial distress.

Which of the following could be considered a form of perpetuity?

You plan to purchase a new car with a retail price of $26,499 after your trade-in and astute negotiations with the dealership sales manager.You have agreed to make 5 ANNUAL payments with an annual interest rate of 3.90%.How large are your equal annual end-of-the-year payments for your new car?

Suppose a preferred share pays perpetual quarterly dividends of $0.25 and has a per annum dividend yield of 6 percent.What is the fair value of this preferred share?

Another name for the lump sum cash flow that occurs when a bond matures is the:

Zero coupon bonds pay no intermediate cash flows prior to maturity.

You own a contract that promises an annuity cash flow of $100 end-of-the-year cash flows for each of the next three years (note: the first cash flow is exactly one year from today).At an interest rate of 10%,what is the future value of this contract exactly three years from today?

Which of the following is NOT an example of an annuity cash flow?

Which of the following is a type of financial security issued by a corporation in need of capital?

Simpson Industries Inc.bonds currently have 12 years remaining to maturity.What is the current price of the firm's semi-annual bonds if they carry a face value of $1,000,an annual coupon rate of 8% and an annual yield to maturity of 7%?

Firms attempt to price bonds so that at issue they sell for the:

Zero coupon bonds have which of the following features?

The time value of money implies that one dollar today is worth more than one dollar tomorrow,due primarily to the opportunity cost of foregoing consumption today

After a bond issue if the yield to maturity increases a conventional bond will see the price:

Overview of Financial Management

Sizing up a Business: a Non-Financial Perspective

Understanding Financial Statements

Measuring Financial Performance

Managing Day-To-Day Cash Flow

Projecting Financial Requirements and Managing Growth

Making Investment Decisions

Overview of Capital Markets: Long-Term Financing Instruments

Assessing the Cost of Capital: What Return Investors Require

Understanding Financing and Payout Decisions

Designing an Optimal Capital Structure

Measuring and Creating Value

Comprehensive Case Study: Wal-Mart Stores,inc

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Exam 7: Time Value of Money Basics and Applications

Preferred stock is often referred to as a hybrid security for which of the following reasons?

If a bond sells for its par value then the yield to maturity is greater than the coupon rate.

To increase the present value of a future cash flow,you could increase the discount rate.

Preferred stock share prices tend to act much like bond prices - so long as the firm is not experiencing any financial distress.

Which of the following could be considered a form of perpetuity?

You plan to purchase a new car with a retail price of $26,499 after your trade-in and astute negotiations with the dealership sales manager.You have agreed to make 5 ANNUAL payments with an annual interest rate of 3.90%.How large are your equal annual end-of-the-year payments for your new car?

Suppose a preferred share pays perpetual quarterly dividends of $0.25 and has a per annum dividend yield of 6 percent.What is the fair value of this preferred share?

Another name for the lump sum cash flow that occurs when a bond matures is the:

Zero coupon bonds pay no intermediate cash flows prior to maturity.

You own a contract that promises an annuity cash flow of $100 end-of-the-year cash flows for each of the next three years (note: the first cash flow is exactly one year from today).At an interest rate of 10%,what is the future value of this contract exactly three years from today?

Which of the following is NOT an example of an annuity cash flow?

Which of the following is a type of financial security issued by a corporation in need of capital?

Simpson Industries Inc.bonds currently have 12 years remaining to maturity.What is the current price of the firm's semi-annual bonds if they carry a face value of $1,000,an annual coupon rate of 8% and an annual yield to maturity of 7%?

Firms attempt to price bonds so that at issue they sell for the:

Zero coupon bonds have which of the following features?

The time value of money implies that one dollar today is worth more than one dollar tomorrow,due primarily to the opportunity cost of foregoing consumption today

After a bond issue if the yield to maturity increases a conventional bond will see the price:

Overview of Financial Management

Sizing up a Business: a Non-Financial Perspective

Understanding Financial Statements

Measuring Financial Performance

Managing Day-To-Day Cash Flow

Projecting Financial Requirements and Managing Growth

Making Investment Decisions

Overview of Capital Markets: Long-Term Financing Instruments

Assessing the Cost of Capital: What Return Investors Require

Understanding Financing and Payout Decisions

Designing an Optimal Capital Structure

Measuring and Creating Value

Comprehensive Case Study: Wal-Mart Stores,inc

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