middle Sample term
. 1. Businesses can be organized as A) sole proprietorships B) partnerships C) corporations D) any of the above E) None of the above Answer: D
2. Generally, a corporation is owned by the: A) Managers B) Board of Directors C) Shareholders D) All of the above. Answer: C 3. Limited liability is an important feature of: A) Sole proprietorships B) Partnerships C) Corporations D) All of the above Answer: C
4. A firm's investment decision is also called the: A) Financing decision B) Capital budgeting decision C) Liquidity decision D) None of the above Answer: B 5. The goal of a financial manager is to: A) Maximize sales B) Maximize profits C) Maximize the value of the shareholders D) Maximize the value of the firm with both bond and stock holders Answer: C ( Many of you chose D)
6. Which of the following is the function of a financial market A) provide liquidity B) risk management C) efficient allocation of money D) provide information. E) all of the above Answer: E 7. One common reason for partnerships to convert to a corporate form of organization is that the partnership: A) faces rapidly growing marketing requirements. B) wishes to avoid taxation of profits. C) has issued all of its allotted shares. D) agreement expires after ten years of use. E) faces rapidly growing capital needs Answer: E . 8. Unlimited liability is faced by the owners of: A) corporations. B) partnerships and corporations. C) sole proprietorships and partnerships. D) all forms of business organization. Answer: C . 9. A board of directors is elected as a representative of the corporation's: A) top management. B) stakeholders. C) shareholders. D) customers. E) bond and stock holders Answer: C 10. Which of the following would be considered a capital budgeting decision? A) Planning to issue common stock rather than issuing preferred stock B) A decision to expand into a new line of products, at a cost of $5 million C) Repurchasing shares of common stock D) Issuing debt in the form of long-term bonds Answer: B
11. Corporations are referred to as public companies when their: A) shareholders have no tax liability. B) shares are held by the federal or state government. C) stock is widely traded. D) products or services are available to the public. Answer: C . 12. Which of the following statements best distinguishes the difference between real and financial assets? A) Real assets have less value than financial assets. B) Real assets are tangible; financial assets are not. C) Financial assets represent the voting power on real assets. D) Financial assets claim to cash flows that are generated by real assets. E) Financial assets appreciate in value; real assets depreciate in value. Answer: D 13. Corporations that do not issue more financial securities such as stock or debt obligations: A) will not be able to increase sales. B) have internal cash flows to fulfill their needs C) cannot be profitable. D) generate insufficient funds to fulfill their needs. E) do not face taxation of their profits. Answer: B 14. The net present value formula for one period is: A) NPV = PV cash flows/initial investment B) NPV = C0/C1 C) NPV = C0+[C1/(1 + r)] D) Any of the above E) None of the above Answer: C
15. The managers of a firm are supposed to A) B) C) D) E) take all projects with positive NPVs take all projects with NPVs greater than the discount rate take all projects with NPVs greater than present value of cash flow All of the above None of the above
Answer: A 16. What is the net present value of the following cash flows at a discount rate on 12%?
t = 0 - 2 5 0 ,0 0 0 t = 1 1 0 0 ,0 0 0 t= 2 1 5 0 ,0 0 0 t= 3 2 0 0 ,0 0 0
A) B) C) D)
$101,221 $200,000 $142,208 None of the above
Answer: A NPV = -250,000 + (100,000/1.12) + (150,000/(1.12^2)) + 200,000/(1.12^3) = 101,221 17. You would like to have enough money saved to receive a perpetuity, with the first payment being $60,000, after retirement so that you and your family can lead a good life. How much would you need to save in your retirement fund to achieve this goal (assume that the perpetuity payments start one year from the date of your retirement. The interest rate is 10%)? A) $7,500,000 B) $1,500,000 C) $600,000 D) None of the above Answer: C PV = 60,000/0.1 = 600,000 18. Three yeas from now, if the economy is good, you will receive $100; if the economy is bad, you will receive $50. If the probability for the good economy is 30% and the economy has only two states three years from now: good and bad, what is the present value of this expected payment if the discount rate is 3.5%? A) $65.00 B) $72.07 C) $59.48 D) None of the above E) Any of the above Answer : D 19. 10 years from now, you will receive a payment, which is 1.5 times the present value of this payment? If the discount rate is the same for every year, what is the annual discount rate ? A) 8.10% B) 8.18% C) 7.18% D) 4.14% E) none of the above
Answer D. 20. You have a car loan of $30,000 (which is called the principle) with the interest rate of 6.5%. You decide to pay off this loan in next four years with equal payment each year, what is the remaining principle before the last payment? A) $7,621.03 B) $8,757.08 C) $9,523.36 D) $ 8,222.61 E) none of the above
Answer: D. 21.The annual coupon rate of a bond equals: A) its yield to maturity. B) a percentage of its price. C) the maturity value. D) the ratio of the annual coupon payment to the par value. E) None of the above Answer: D 22.The face value of a bond is received by the bondholder: A) at the time of purchase. B) annually. C) whenever coupon payments are made. D) at maturity. E) none of the above Answer: D 23.Which of the following presents the correct relationship? As the coupon rate of a bond decreases, the bond's: A) face value increases. B) bond price tends to increase. C) interest payments increase. D) maturity date is extended. E) coupon payments decrease Answer: E 24. How much would an investor expect to pay for a $1,000 par value bond with a 9% annual coupon that matures in 5 years if the interest rate is 9%? A) $696.74 B) $1,075.00 C) $1,000.00 D) $1,123.01 E) None of the above
Answer: C 25.The current yield of a bond can be calculated by: A) multiplying the price by the coupon rate. B) dividing the price by the annual coupon payments. C) dividing the price by the par value. D) dividing the annual coupon payments by the price. E) none of the above Answer: D
26. Which of the following statements is correct for a 10% coupon bond that has a current yield of 13%? A) The face value of the bond has decreased. B) The discount rate is 13%. C) The bond's price is smaller than the bond's maturity value (par value). D) The bond has few years remaining until maturity. E) None of the above Answer: C 27.What is the coupon rate for a bond (par value of $1,000) with three years until maturity, a price of $1,000, and a yield to maturity of 6%? A) 6% B) 7% C) 8% D) 9% E) None of the above Answer: A $1,000 = PMT
1 .06
-
1
.06(1.06)
3
+
$1,000 (1.06) 3
$60.00 = PMT
$60 = 6% coupon rate. In fact you don't need to calculate. Why? 1000
28.What happens to the price of a three-year bond with an 8% coupon when interest rates change from 8% to 6%? A) A price increase of $53.47 B) A price decrease of $51.54 C) A price decrease of $53.47 D) No change in price E) None of the above Answer: A
$1,000 1 1 - + PV = $80 3 3 .06 .06i(1.06) (1.06) = $80[16.667 13.994] + = $213.84 + $839.63 = $1,053.47 This represents a price change of $53.47, since the bond had sold for par. 29.Which of the following bonds would be considered be to of speculative-grade? A) A Caa-rated bond. B) An Aaa-rated bond. C) An AAA-rated bond. D) A Baa-rated bond. E) None of the above Answer: A 30.What is the rate of return for an investor who pays $1,054.47 for a three-year bond with a 7% coupon and sells the bond one year later for $1,037.19? A) 5.00% B) 5.33% C) 6.46% D) 7.00% E) none of the above Answer: A Rate of Return = ($70.00 - $17.28)/$1,054.47 = $52.72/$1,054.47 = 5% 31.According to the dividend discount model, the current value of a stock is equal to the: A) present value of all expected future dividends. B) sum of all future expected dividends. C) next expected dividend, discounted to the present. D) discounted value of all dividends growing at a constant rate. E) none of the above Answer: A 32.If a stock's P/E ratio is 13.5 at a time when earnings are $3 per year, what is the stock's current price? A) $4.50 B) $18.00 C) $22.22 D) $40.50 E) None of the above Answer: D
(1.06 ) 3
$1000 ,
P/E = 13.5 Then P = 13.5 x $3 Price = $40.50
33. A stock paying $5 in annual dividends sells now for $100 and has an expected return of 20%. What might investors expect to pay for the stock one year from now? A) $182.00 B) $186.00 C) $115.00 D) $110.00 E) None of the above Answer: C . Expected return 20% = = Div1 + P1 - Po Po
$5 + P1- $100 $100
$115 = P1 34.How much should you pay for a share of stock that offers a constant dividend growth rate of 10%, has a discount rate of 16%, and pays a dividend of $3 next year? A) $42.00 B) $45.00 C) $45.45 D) $50.00 E) none of the above Answer: D P0=C1/(r-g)=3/0.06=$50 35.The price of a stock will likely increase if: A) the investment horizon decreases. B) the growth rate of dividends increases. C) the discount rate increases. D) dividends are discounted back to the present. E) none of the above Answer: B 36.What should be the price for a common stock paying $3.50 annually in dividends if the growth rate is zero and the discount rate is 8%? A) $22.86 B) $28.00 C) $42.00
D) $43.75 E) None of the above Answer: D Div 3.50 Po = = = $43.75 r .08
37.What is the plowback ratio for a stock with current price of $30, earnings of $5 per share next year, a discount rate of 20% , and a rate of return on equity of 25% ? A) 0.5 B) 0.2 C) 0.4 D) 0.1 E) None of the above Answer: C g= 0.4*0.25=10%; P0=C1/(r-g)=0.6*5/0.1=30 38.What is the expected constant growth rate of dividends for a stock currently priced at $50, that is expected to pay a dividend of $5 next year, and has a required return of 20%? A) 13% B) 10% C) 11% D) 12% E) none of the above Answer: B $50 = $5/(.2 g) = 0.1=10% g 39.If the (current) dividend yield is 5% and the stock price is $25, what will the year three dividend be if dividends grow at a constant 6%? A) $1.33 B) $1.49 C) $1.58 D) $1.67 E) none of the above Answer: B .05 x 25 = 1.25 = Div0 then, Div3 = 1.25 x (1.06)3 = $1.49 40.What would be the expected price of a stock when dividends are expected to grow at a 25% rate for three years, then grow at a constant rate of 5%, if the stock's required return is 13% and next year's dividend will be $4.00? A) $61.60 B) $62.08 C) $68.62 D) $79.44 E) None of the above Answer: C
$4.00 Po = (1.13)
+
$4.00(1.25) (1.13)2 $6.25
+
$4.00(1.25)2 (1.13)3 6.56 .08
$4.00(1.25)2 (1.05) + .13 -.05 (1.13)3
$5.00 = 3.54 + 1.2769
+
1.4429
+
1.4429 = 3.54 + 3.92 + 4.33 + 56.83 = $68.62 41. Given the following cash flows for project A: C0 = -2000, C1 = +500 , C2 = +1500 and C3 = +5000, calculate the payback period. A) One year B) 2 years C) 3 years D) None of the above
Answer : B
42. The IRR is defined as: A) The discount rate that makes the NPV equal to zero B) The difference between the cost of capital and the present value of the cash flows C) The discount rate used in the NPV method D) The discount rate used in the discounted payback period method Answer: A 43. Given the following cash flows for Project M: C0 = -2,000, C1 = +500, C2 = +1,500, C3 = +1455, calculate the IRR for the project. A) 10% B) 18% C) 28% D) None of the above E) Any of the above Answer : C 44. Project A has the following cash flows: C0 = +100, C1 = -120. What is the IRR? A) 10% B) 15% C) 20% D) None of the above Answer: C 45. In the lecture, how many approaches are discussed to calculate the cash flows from operations?
A) one B) two C) three D) None of the above Answer: C 46. In Finance, depreciation is not actual cash flows but affects actual cash flows by A) B) C) D) reducing a firm's tax payment increasing a firm's tax payment not changing a firm's ...