FIN335TestII

Fall2008
Dr.ClayM.Moffett

Name:________________________________________________

Questions1thru30areworth3points.Question31isworth10points.
1.Thecouponisthe:
A.amountofdiscountreceivedwhenabondispurchased.
B.amountpaidtoabonddealerwhenabondispurchased.
C.differencebetweenthebidandaskprice.
D.annualinterestdividedbythecurrentbondprice.
E.statedinterestpaymentonabond.
2.Thecouponrateforabondisbestdefinedasthe:
A.annualinterestdividedbythecurrentmarketprice.
B.annualcoupondividedbythedirtymarketprice.
C.annualinterestdividedbythecleanmarketprice.
D.semiannualinterestdividedbytheparvalue.
E.annualinterestdividedbythefacevalue.
3.Theannualinterestonabonddividedbythebond'smarketpriceiscalledthe:
A.yieldtomaturity.
B.yieldtocall.
C.totalyield.
D.currentyield.
E.requiredyield.
4.Thewrittenagreementbetweenacorporationanditslenderthatspellsoutthetermsofabondissueiscalledthe:
A.indenture.
B.debenture.
C.privateplacementagreement.
D.registrationstatement.
E.issuepaper.
5.Amyfoundabondlyinginastreet.Shepickeditup,detachedtheappropriatebondcoupon,andcollectedthecurrent
interestpayment.WhichtypeofbonddidAmyfind?
A.bearer
B.coupon
C.street
D.registered
E.secure
6.Adebentureis:
A.longtermdebtsecuredbyfixedassetsoftheborrower.
B.longtermdebtsecuredbyrealestate.
C.unsecureddebtthatgenerallymaturesintenyearsormore.
D.unsecureddebtthatgenerallymaturesinlessthantenyears.
E.anytypeofdebtthatisshortterminnature.

7.Aprotectivecovenant:
A.protectstheborrowerfromunscrupulouspracticesbythelender.
B.isdesignedtoensureareasonablebidaskspreadforthebonddealer.
C.preventsabondfrombeingcalled.
D.limitstheactionsoftheborrower.
E.guaranteesthatbondholderswillreceivealltheinterestandprincipalpaymentsthatareduetothem.
8.Abondthatpaysnointerestpaymentsandsellsatadeepdiscountiscalleda(n)_____bond.
A.callable
B.income
C.zerocoupon
D.convertible
E.taxfree
9.Thepriceatwhichaninvestorcanpurchaseabondfromadealeriscalledthe_____price.
A.asked
B.coupon
C.call
D.put
E.bid
10.Whichoneofthefollowingrepresentsadditionalcompensationprovidedtobondholderstooffsetthepossibilitythat
thebondissuermightnotpaytheinterestand/orprincipalpaymentsasexpected?
A.interestrateriskpremium
B.inflationpremium
C.liquiditypremium
D.taxabilitypremium
E.defaultriskpremium
11.Whenabond'syieldtomaturityisgreaterthanthebond'scouponrate,thebond:
A.willbecalled.
B.issellingatapremium.
C.hasreacheditsmaturitydate.
D.ispricedatpar.
E.issellingatadiscount.
12.Abondhasa$1,000facevalue,amarketpriceof$1,115,andpaysinterestpaymentsof$90everyyear.Whatisthe
couponrate?
A.4.50percent
B.6.75percent
C.7.39percent
D.8.25percent
E.9.00percent
13.A6percent$1,000bondmaturesin4years,paysinterestsemiannually,andhasayieldtomaturityof6.85percent.
Whatisthecurrentmarketpriceofthebond?
A.$768.76
B.$801.38
C.$869.15
D.$910.27
E.$970.69

14.Abondhasayieldtomaturityof7.12percent,a6.5percentcouponrate,afacevalueof$1,000,amarketpriceof
$961.85,andsemiannualinterestpayments.Thecurrentyieldis_____percentandtheeffectiveannualyieldis_____
percent.
A.6.76;6.87
B.6.76;7.25
C.6.50;7.25
D.6.50;7.12
E.3.38;7.12
15.Thesecuritythatrepresentstheresidualownershipofafirmandhasnopriorityinbankruptcyiscalled:
A.aconvertiblebond.
B.seniordebt.
C.commonstock.
D.preferredstock.
E.retainedearnings.
16.IfIgrantanotherindividualtherighttovoteonmybehalfforthedirectorsofacorporation,Iamvotingby:
A.thestraightmethod.
B.thecumulativemethod.
C.consent.
D.proxy.
E.preference.
17.Themarketwhereoneshareholdersellssharestoanothershareholderiscalledthe_____market.
A.primary
B.main
C.secondary
D.principal
E.dealer
18.Thepriceofastockatyear5canbeexpressedas:
A.P0 g5.
B.D0 (1+R)5.
C.P1 (1+R)5.
D.D6/(R g).
E.D5/(R g).
19.B&T,Inc.isexpectedtopayitsfirstannualdividendfiveyearsfromnow.Thatpaymentwillbe$3.10ashare.
Startinginyearsix,thecompanywillincreasethedividendby2percentperyear.Therequiredreturnis15percent.What
isthevalueofthisstocktoday?
A.$11.86
B.$12.09
C.$13.63
D.$14.66
E.$15.71

20.Thepaybackperiodistheperiodoftimeittakesaninvestmenttogeneratesufficientcashflowsto:
A.earntherequiredrateofreturn.
B.producetherequirednetincome.
C.produceayieldequaltoorgreaterthanthemarketrateonsimilarinvestments.
D.haveacashinflow,ratherthananoutflow,fortheyear.
E.recovertheinvestment'sinitialcost.
21.Thediscountratethatcausesthenetpresentvalueofaprojecttoequalzeroiscalledthe:
A.yieldtomaturity.
B.requiredreturn.
C.marketrate.
D.internalrateofreturn.
E.averageaccountingreturn.
22.Ifbyacceptingoneinvestmentyoueliminatetheoptionofanotherinvestment,youaredealingwith:
A.mutuallyexclusiveinvestments.
B.negativenetpresentvalues.
C.conventionalcashflows.
D.investmentswithmultipleIRRs.
E.multipleratesofreturn.
23.Whichoneofthefollowingindicatesaprojecthasarateofreturnthatexceedsitsrequiredreturn?
A.apositiveNPV
B.apaybackperiodthatexceedstherequiredperiod
C.aPIlessthan1.0
D.apositiveaccountingrateofreturn
E.anAARthatislessthantherequiredrate
24.Whichoneofthefollowingisthepreferredmethodofanalyzingaproposedinvestment?
A.payback
B.profitabilityindex
C.accountingrateofreturn
D.internalrateofreturn
E.netpresentvalue
25.Whichoneofthefollowingignoresthetimevalueofmoney?
A.netpresentvalue
B.internalrateofreturn
C.discountedcashflowanalysis
D.payback
E.profitabilityindex
26.Whichoneofthefollowingstatementsrelatedtotheinternalrateofreturn(IRR)iscorrect?
A.IftheIRRexceedstherequiredreturn,theprofitabilityindexwillbelessthan1.0.
B.TheIRRisabetterevaluationtoolthantheprofitabilityindexwhentwoprojectsaremutuallyexclusive.
C.WhentheIRRislessthantherequiredreturn,theNPVispositive.
D.AprojecthasmultipleIRRsiftheproject'scashflowsareunconventional.
E.Iftwoprojectsaremutuallyexclusive,youshouldselecttheprojectwiththehighestIRR.

27.Whatisthenetpresentvalueofaprojectwiththefollowingcashflowsifthediscountrateis10percent?

A.$1,085.25
B.$1,193.77
C.$3,498.28
D.$4,102.86
E.$4,513.15

28.Chance,Inc.isconsideringaprojectwithaninitialcostof$1million.Theprojectwillnotproduceanycashflowsfor
thefirsttwoyears.Startinginyear3,theprojectwillproducecashinflowsof$625,000ayearforfouryears.Thisproject
isrisky,sothefirmhasassigneditadiscountrateof20percent.Whatisthenetpresentvalue?
A.$243,117.95
B.$63,681.07
C.$123,582.71
D.$348,299.25
E.$617,959.10
29.Youareconsideringthefollowingtwomutuallyexclusiveprojects.Therequiredreturnoneachprojectis11percent.
Whichprojectshouldyouacceptandwhatisthebestreasonforthatdecision?

A.ProjectA;becauseitpaysbackfaster
B.ProjectA;becauseithasthehigherprofitabilityindex
C.ProjectB;becauseithasthehigherprofitabilityindex
D.ProjectA;becauseithasthehighernetpresentvalue
E.ProjectB;becauseithasthehighernetpresentvalue
30. You are using a net present value profile to compare projects A and B, which are mutually exclusive. At the crossover
point the:
A. internal rate of return for project A equals that of project B, but generally does not equal zero.
B. internal rate of return of each project is equal to zero.
C. net present value of each project is equal to zero.
D net present value of project A equals that of project B, but generally does not equal zero.
E. net present value of each project is equal to the respective project's initial cost.
31. (10 Points) What is the relationship between the dividend growth model and the perpetuity formula?

Fall08Test2Chap68Key
1.Thecouponisthe:

a.amountofdiscountreceivedwhenabondispurchased.
b.amountpaidtoabonddealerwhenabondispurchased.
c.differencebetweenthebidandaskprice.
d.annualinterestdividedbythecurrentbondprice.
E.statedinterestpaymentonabond.

2.Thecouponrateforabondisbestdefinedasthe:

a.annualinterestdividedbythecurrentmarketprice.
b.annualcoupondividedbythedirtymarketprice.
c.annualinterestdividedbythecleanmarketprice.
d.semiannualinterestdividedbytheparvalue.
E.annualinterestdividedbythefacevalue.

3.Theannualinterestonabonddividedbythebond'smarketpriceiscalledthe:
a.yieldtomaturity.
b.yieldtocall.
c.totalyield.
D.currentyield.
e.requiredyield.
4.Thewrittenagreementbetweenacorporationanditslenderthatspellsoutthetermsofabondissueiscalled

the:
A.indenture.
b.debenture.
c.privateplacementagreement.
d.registrationstatement.
e.issuepaper.

5.Amyfoundabondlyinginastreet.Shepickeditup,detachedtheappropriatebondcoupon,andcollectedthe
currentinterestpayment.WhichtypeofbonddidAmyfind?
A.bearer
b.coupon
c.street
d.registered
e.secure
6.Adebentureis:

a.longtermdebtsecuredbyfixedassetsoftheborrower.
b.longtermdebtsecuredbyrealestate.
C.unsecureddebtthatgenerallymaturesintenyearsormore.
d.unsecureddebtthatgenerallymaturesinlessthantenyears.
e.anytypeofdebtthatisshortterminnature.

7.Aprotectivecovenant:
a.protectstheborrowerfromunscrupulouspracticesbythelender.
b.isdesignedtoensureareasonablebidaskspreadforthebonddealer.
c.preventsabondfrombeingcalled.
D.limitstheactionsoftheborrower.
e.guaranteesthatbondholderswillreceivealltheinterestandprincipalpaymentsthatareduetothem.
8.Abondthatpaysnointerestpaymentsandsellsatadeepdiscountiscalleda(n)_____bond.
a.callable
b.income
C.zerocoupon
d.convertible
e.taxfree
9.Thepriceatwhichaninvestorcanpurchaseabondfromadealeriscalledthe_____price.
A.asked
b.coupon
c.call
d.put
e.bid
10.Whichoneofthefollowingrepresentsadditionalcompensationprovidedtobondholderstooffsetthe

possibilitythatthebondissuermightnotpaytheinterestand/orprincipalpaymentsasexpected?
a.interestrateriskpremium
b.inflationpremium
c.liquiditypremium
d.taxabilitypremium
E.defaultriskpremium
11.Whenabond'syieldtomaturityisgreaterthanthebond'scouponrate,thebond:
a.willbecalled.
b.issellingatapremium.
c.hasreacheditsmaturitydate.
d.ispricedatpar.
E.issellingatadiscount.

12.Abondhasa$1,000facevalue,amarketpriceof$1,115,andpaysinterestpaymentsof$90everyyear.
Whatisthecouponrate?
a.4.50percent
b.6.75percent
c.7.39percent
d.8.25percent
E.9.00percent

13.A6percent$1,000bondmaturesin4years,paysinterestsemiannually,andhasayieldtomaturityof6.85
percent.Whatisthecurrentmarketpriceofthebond?
a.$768.76
b.$801.38
c.$869.15
d.$910.27
E.$970.69

14.Abondhasayieldtomaturityof7.12percent,a6.5percentcouponrate,afacevalueof$1,000,amarket
priceof$961.85,andsemiannualinterestpayments.Thecurrentyieldis_____percentandtheeffectiveannual
yieldis_____percent.
a.6.76;6.87
B.6.76;7.25
c.6.50;7.25
d.6.50;7.12
e.3.38;7.12
15.Thesecuritythatrepresentstheresidualownershipofafirmandhasnopriorityinbankruptcyiscalled:
a.aconvertiblebond.
b.seniordebt.
C.commonstock.
d.preferredstock.
e.retainedearnings.
16.IfIgrantanotherindividualtherighttovoteonmybehalfforthedirectorsofacorporation,Iamvotingby:
a.thestraightmethod.
b.thecumulativemethod.
c.consent.
D.proxy.
e.preference.
17.Themarketwhereoneshareholdersellssharestoanothershareholderiscalledthe_____market.
a.primary
b.main
C.secondary
d.principal
e.dealer
18.Thepriceofastockatyear5canbeexpressedas:
a.P0 g5.
b.D0 (1+R)5.
c.P1 (1+R)5.
D.D6/(R g).
e.D5/(R g).
19.B&T,Inc.isexpectedtopayitsfirstannualdividendfiveyearsfromnow.Thatpaymentwillbe$3.10a
share.Startinginyearsix,thecompanywillincreasethedividendby2percentperyear.Therequiredreturnis
15percent.Whatisthevalueofthisstocktoday?
a.$11.86
b.$12.09
C.$13.63
d.$14.66
e.$15.71

20.Thepaybackperiodistheperiodoftimeittakesaninvestmenttogeneratesufficientcashflowsto:
a.earntherequiredrateofreturn.
b.producetherequirednetincome.
c.produceayieldequaltoorgreaterthanthemarketrateonsimilarinvestments.
d.haveacashinflow,ratherthananoutflow,fortheyear.
E.recovertheinvestment'sinitialcost.
21.Thediscountratethatcausesthenetpresentvalueofaprojecttoequalzeroiscalledthe:
a.yieldtomaturity.
b.requiredreturn.
c.marketrate.
D.internalrateofreturn.
e.averageaccountingreturn.
22.Ifbyacceptingoneinvestmentyoueliminatetheoptionofanotherinvestment,youaredealingwith:
A.mutuallyexclusiveinvestments.
b.negativenetpresentvalues.
c.conventionalcashflows.
d.investmentswithmultipleIRRs.
e.multipleratesofreturn.
23.Whichoneofthefollowingindicatesaprojecthasarateofreturnthatexceedsitsrequiredreturn?
A.apositiveNPV
b.apaybackperiodthatexceedstherequiredperiod
c.aPIlessthan1.0
d.apositiveaccountingrateofreturn
e.anAARthatislessthantherequiredrate
24.Whichoneofthefollowingisthepreferredmethodofanalyzingaproposedinvestment?
a.payback
b.profitabilityindex
c.accountingrateofreturn
d.internalrateofreturn
E.netpresentvalue

25.Whichoneofthefollowingignoresthetimevalueofmoney?
a.netpresentvalue
b.internalrateofreturn
c.discountedcashflowanalysis
D.payback
e.profitabilityinde

26.Whichoneofthefollowingstatementsrelatedtotheinternalrateofreturn(IRR)iscorrect?
a.IftheIRRexceedstherequiredreturn,theprofitabilityindexwillbelessthan1.0.
b.TheIRRisabetterevaluationtoolthantheprofitabilityindexwhentwoprojectsaremutuallyexclusive.
c.WhentheIRRislessthantherequiredreturn,theNPVispositive.
D.AprojecthasmultipleIRRsiftheproject'scashflowsareunconventional.
e.Iftwoprojectsaremutuallyexclusive,youshouldselecttheprojectwiththehighestIRR.

27.Whatisthenetpresentvalueofaprojectwiththefollowingcashflowsifthediscountrateis10percent?

a.$1,085.25
B.$1,193.77
c.$3,498.28
d.$4,102.86
e.$4,513.15

28.Chance,Inc.isconsideringaprojectwithaninitialcostof$1million.Theprojectwillnotproduceanycash
flowsforthefirsttwoyears.Startinginyear3,theprojectwillproducecashinflowsof$625,000ayearforfour
years.Thisprojectisrisky,sothefirmhasassigneditadiscountrateof20percent.Whatisthenetpresent
value?
a.$243,117.95
b.$63,681.07
C.$123,582.71
d.$348,299.25
e.$617,959.10
29.Youareconsideringthefollowingtwomutuallyexclusiveprojects.Therequiredreturnoneachprojectis
11percent.Whichprojectshouldyouacceptandwhatisthebestreasonforthatdecision?

a.ProjectA;becauseitpaysbackfaster
b.ProjectA;becauseithasthehigherprofitabilityindex
c.ProjectB;becauseithasthehigherprofitabilityindex
D.ProjectA;becauseithasthehighernetpresentvalue
e.ProjectB;becauseithasthehighernetpresentvalue
30. You are using a net present value profile to compare projects A and B, which are mutually exclusive. At the
crossover point the:
A. internal rate of return for project A equals that of project B, but generally does not equal zero.
B. internal rate of return of each project is equal to zero.
C. net present value of each project is equal to zero.
D net present value of project A equals that of project B, but generally does not equal zero.
E. net present value of each project is equal to the respective project's initial cost.
31. (10 Points) What is the relationship between the dividend growth model and the perpetuity formula?
When the growth rate is set equal to zero, the dividend growth model becomes the perpetuity formula.