Chapter 01 - Introduction to Corporate Finance
1. The excess return required from a risky asset over that required from a risk-free asset is called
the:
A. risk premium.
B. geometric premium.
C. excess return.
D. average return.
E. variance.
2. The averag
Chapter 01 - Introduction to Corporate Finance
37. You have decided that you would like to own some shares of GH Corp. but need an expected
12% rate of return to compensate for the perceived risk of such ownership. What is the
maximum you are willing to s
Chapter 01 - Introduction to Corporate Finance
Essay Questions
60. Calculate the YTM on a bond priced at $1,036 which has 2 years to maturity, a 10% annual
coupon rate, and a return of $1,000 at maturity.
$1,036 = $100/(1 + YTM)1+ $1,100/(1 + YTM)2? YTM =
Chapter 01 - Introduction to Corporate Finance
78. The Mini-Max Company has the following cost information on its new prospective project.
Calculate the accounting break-even point.
Initial investment: $700
Fixed costs: $200 per year
Variable costs: $3 pe
Chapter 01 - Introduction to Corporate Finance
43. A 12-year, 5% coupon bond pays interest annually. The bond has a face value of $1,000. What
is the change in the price of this bond if the market yield rises to 6% from the current yield of
4.5%?
A. 11.11
Chapter 01 - Introduction to Corporate Finance
24. Face value is:
A. always higher than current price.
B. always lower than current price.
C. the same as the current price.
D. the coupon amount.
E. None of the above.
25. One basis point is equal to:
A. .0
Chapter 01 - Introduction to Corporate Finance
53. The outstanding bonds of Boutelle, Inc. provide a real rate of return of 3.6%. The current rate
of inflation is 2.5%. What is the nominal rate of return on these bonds?
A. 6.10%
B. 6.13%
C. 6.16%
D. 6.19%
Chapter 01 - Introduction to Corporate Finance
Chapter 09 How to Value Stocks Answer Key
Multiple Choice Questions
1. The stock valuation model that determines the current stock price by dividing the next annual
dividend amount by the excess of the discou
Chapter 01 - Introduction to Corporate Finance
68. Martin's Yachts has paid annual dividends of $1.70, $1.8, and $2.1 a share over the past three
years, respectively. The company now predicts that it will maintain a constant dividend since its
business ha
Chapter 01 - Introduction to Corporate Finance
86. Wilson's Antiques is considering a project that has an initial cost today of $10,000. The
project has a two-year life with cash inflows of $6,500 a year. Should Wilson's decide to wait one
year to commenc
Chapter 01 - Introduction to Corporate Finance
70. The current yield on Alpha's common stock is 5.2%. The company just paid a $2.10 dividend.
The rumor is that the dividend will be $2.3 next year. The dividend growth rate is expected to
remain constant at
Chapter 01 - Introduction to Corporate Finance
66. Interest rate risk is often explained by using the concept of a teeter-totter. Explain interest
rate risk and how it is related to the movements of a teeter-totter.
67. The discussion of asset pricing in
Chapter 01 - Introduction to Corporate Finance
17. The average annual return on long-term corporate bonds for the period of 1926 to 2012 was
_%.
A. 3.8
B. 5.8
C. 6.4
D. 7.9
E. 8.4
18. The average annual return on small company stocks was about _ percentag
Chapter 01 - Introduction to Corporate Finance
21. A zero coupon bond:
A. is sold at a large premium.
B. has a price equal to the future value of the face amount given a specified rate of return.
C. can only be issued by the U.S. Treasury.
D. has less int
Chapter 01 - Introduction to Corporate Finance
72. A project has a contribution margin of $5, projected fixed costs of $12,000, a projected
variable cost per unit of $12, and a projected present value break-even point of 5,000 units. What
is the operating
Chapter 01 - Introduction to Corporate Finance
97. Sensitivity analysis is a method which allows for evaluation of the NPV given a series of
changes to the underlying assumptions. Discuss why and how scenario analysis is used in
addition to sensitivity an
Chapter 01 - Introduction to Corporate Finance
56. The Lo Sun Corporation offers a 8% bond with a current market price of $875.05. The yield to
maturity is 9.18%. The face value is $1,000. Interest is paid semiannually. How many years is it
until this bon
Chapter 01 - Introduction to Corporate Finance
31. The value of a 25 year zero-coupon bond when the market required rate of return is 10%
(semiannual) is _.
A. $87.20
B. $92.30
C. $95.26
D. $98.31
E. None of the above
$1,000/(1.05)50 = $87.20
Difficulty l
Chapter 01 - Introduction to Corporate Finance
57. What is the contribution margin under the expected case scenario?
A. $8
B. $8.32
C. $10
D. $16
E. $18
Contribution margin for the base case = $18 - $8 = $10
Difficulty level: Medium
Topic: Sensitivity Ana
Chapter 01 - Introduction to Corporate Finance
64. At a production level of 6,000 units a project has total costs of $120,000. The variable cost per
unit is $14.50. What is the amount of the total fixed costs?
A. $25,165
B. $28,200
C. $30,570
D. $32,000
E
Chapter 01 - Introduction to Corporate Finance
9. A bond with a face value of $1,000 that sells for less than $1,000 in the market is called a
_ bond.
A. par
B. discount
C. premium
D. zero coupon
E. floating rate
10. The relationship between nominal rates
Chapter 01 - Introduction to Corporate Finance
7. The annual coupon of a bond divided by its face value is called the bond's:
A. coupon.
B. face value.
C. maturity.
D. yield to maturity.
E. coupon rate.
Difficulty level: Easy
Topic: Bonds and Bond Valuati
Chapter 01 - Introduction to Corporate Finance
3. The standard deviation for a set of stock returns can be calculated as the:
A. positive square root of the average return.
B. average squared difference between the actual return and the average return.
C.
Chapter 01 - Introduction to Corporate Finance
62. Doctors-On-Call, a newly formed medical group, just paid a dividend of $.50. The company's
dividend is expected to grow at a 20% rate for the next 5 years and at a 3% rate thereafter. What
is the value of
Chapter 01 - Introduction to Corporate Finance
43. The Extreme Reaches Corp. last paid a $1.50 per share annual dividend. The company is
planning on paying $3.00, $5.00, $7.50, and $10.00 a share over the next four years, respectively.
After that the divi
Chapter 01 - Introduction to Corporate Finance
28. The current yield on Alpha Inc. common stock is 4.8%. The company just paid a $2.10
dividend. The rumor is that the dividend will be $2.205 next year. The dividend growth rate is
expected to remain consta
Chapter 01 - Introduction to Corporate Finance
20. The net present value of a growth opportunity, NPVGO, can be defined as:
A. the initial investment necessary for a new project.
B. the net present value per share of an investment in a new project.
C. a c
Chapter 01 - Introduction to Corporate Finance
40. Your firm offers a 10-year, zero coupon bond. The yield to maturity is 8.8%. What is the
current market price of a $1,000 face value bond?
A. $430.24
B. $473.26
C. $835.56
D. $919.12
E. $1,088.00
41. Ted'
Chapter 01 - Introduction to Corporate Finance
59. Excelsior shares are currently selling for $25 each. You bought 200 shares one year ago at $24
and received dividend payments of $1.50 per share. What was your percentage capital gain this
year?
A. 4.17%
Chapter 01 - Introduction to Corporate Finance
82. From the information below, calculate the accounting break-even point.
Initial investment: $2,000
Fixed costs are $2,000 per year
Variable costs: $6 per unit
Depreciation: $250 per year
Price: $20 per uni