16.

_______ allow the holder to purchase a certain number of shares of the

firms common stock at a specified price over a certain period of time and
are occasionally part of a debt agreement.
A) Rights
B) Stock-purchase warrants
C) Calls
D) Puts 5
17. When the required return is constant and equal to the coupon rate, the
price of a bond as it approaches its maturity date will
A) remain constant.
B) increase.
C) decrease.
D) change depending on whether it is a discount or premium bond.
18. If the required return is less than the coupon rate, a bond will sell at
A) par.
B) a discount.
C) a premium.
D) book value.
19. An investment advisor has recommended a $50,000 portfolio containing
assets R, J, and K; $25,000 will be invested in asset R, with an expected
annual return of 12 percent; $10,000 will be invested in asset J, with an
expected annual return of 18 percent; and $15,000 will be invested in asset
K, with an expected annual return of 8 percent. The expected annual return
of this portfolio is
A) 12.67%.
B) 12.00%.
C) 10.00%.
D) unable to be determined from the information provided.
20. Nico Corp issued bonds bearing a coupon rate of 12 percent, pay
coupons semiannually, have 3 years remaining to maturity, and are
currently priced at $940 per bond. What is the EAR of yield to maturity?
A) 12.00%
B) 13.99%
C) 14.54%
D) 15.07%
23. Which of the following statements is CORRECT?
A) Since in bankruptcy they must be paid in full before stockholders receive
anything, corporate bondholders generally prefer to see corporate
managers to invest in high risk/high return projects rather than low risk/low
return projects.
B) Since bondholders receive fixed payments, they do not share in the gains
if risky projects turn out to be highly successful, but they do share in the
losses if risky projects fail and drive the firm into bankruptcy. Therefore
bondholders generally want corporate managers to invest in low risk/low
return projects rather than high risk/high return projects.
C) In a typical partnership, liability for other partners misdeeds is limited to

the amount of a particular partners investment in the business.

D) One drawback of forming a corporation is that you lose the limited
liability that you would otherwise receive as a sole proprietor.
27. You are planning to purchase the stock of Teds Sheds Inc. and you
expect it to pay a dividend of $3 in 1 year, $4.25 in 2 years, and $6.00 in 3
years. You expect to sell the stock for $100 in 3 years. If your required return
for purchasing the stock is 12 percent, how much would you pay for the
stock today?
A) $75.45
B) $77.24
C) $81.52
D) $85.66
28. The cost of preferred stock is
A) lower than the cost of long-term debt.
B) higher than the cost of common stock.
C) higher than the cost of long-term debt and lower than the cost of
common stock.
D) lower than the cost of convertible long-term debt and higher than the
cost of common stock.

31. What is the market risk premium if the risk free rate is 5 percent and the
expected market return is given as follows?

A) 10.5%
B) 11.0%
C) 16.0%
D) 16.5%
32. Jias Fashions recently paid a $2 annual dividend. The company is
projecting that its dividends will grow by 20 percent next year, 12 percent
annually for the two years after that, and then at 6 percent annually
thereafter. Based on this information, how much should Jias Fashions
common stock sell for today if her required return is 10.5%?
A) $54.90
B) $60.80
C) $66.60
D) $69.30