Sample-problems - FIN 303 Financial Management Sample...

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FIN 303 – Financial Management Sample Problems Part I: True or false 1. The fact that a proprietorship, as a business, pays no corporate income tax and that it is easily and inexpensively formed are often cited as key advantages to that form of business. (T) 2. Profitability ratios show the combined effects of liquidity, asset management, and debt management on operations. (T) 3. If the equity multiplier is 2.0, the debt ratio must be 0.5. (T) 4. Under our current tax laws, when investors pay taxes on their corporate dividend income, they are being subjected to a form of double taxation. (T) 5. When securities are combined into portfolios, the relevant risk is a security’s non- systematic risk. (F) 6. A stock’s risk consists of company-specific risk, which cannot be eliminated by diversification, plus market risk, which can be eliminated by diversification. (F) 7. If other things remain the same, the more frequently your money is compounded, the lower is the effective rate. (F) 8. If the discount (or interest) rate is positive, the present value of a series of cash flows will always exceed the future value of the same series. (F) 9. If the coupon rate of a bond is greater than the market interest rate of the bond, the market price of the bond is greater than the face value of the bond. (T) 10. For bonds, price sensitivity to a given change in interest rates generally increases as years remaining to maturity increase. (T) 1
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11. A bond that sells below its par value is called premium bond. (F) 12. The interest rate price risk refers to the risk of declines in bond prices to which investors are exposed due to increasing interest rates. (T) 13. The annual interest payment on a bond divided by its current market value is called the yield to call. (F) 14. The rate of return on a bond if it is held to maturity is called the bond’s current yield. (F) 15. Call provision in a bond contract gives the issuer the right to pay off the bonds prior to the stated maturity date. (T) 16. The market risk is the type of risk that can be diversified. (F) 17. The market in which firms issue new securities is called secondary market. (F) 18. When a new issue is underwritten, the risk of not selling it is born by the issuing corporation. (F) 19. Zero coupon bond is sold at a discount below par, thus providing compensation to investors in the form of capital appreciation. (T) 20. A necessary condition to use the constant growth model is that the required rate of return should be greater than the growth rate (i.e., k s > g). (T) 21. In general, the common stock price is the present value of all expected future dividends. (T) 22. For a constant growth firm, the expected capital gains yield is constant, but the expected dividend yield is not. (F) 23. If the NPV of a project is zero, then the IRR is equal to the required rate of return.
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