13. Sharon Smith will receive $1 million in 50 years. The discount rate is 14. As an
alternative, she can receive $2,000 today. Which should she choose?
the $1 million dollars in 50 years
$2,000 today
She should be indifferent.
need more information
14. Dr. J. wants to buy a Dell computer which will cost $2,788 four years from today. He
would like to set aside an equal amount at the end of each year in order to accumulate the
amount needed. He can earn 7% annual return. How much should he set aside?
$627.93
$697.00
$823.15
$531.81
15. Mr. Fish wants to build a house in 10 years. He estimates that the total cost will be
$170,000. If he can put aside $10,000 at the end of each year, what rate of return must he
earn in order to have the amount needed?
Between 11% and 12%
Between 8% and 9%
17%
none of the above
16. The shorter the length of time between a present value and its corresponding future
value:
the lower the present value, relative to the future value.
the higher the present value, relative to the future value.
the higher the interest rate used in the present-valuation.
none of the above
17. A dollar today is worth more than a dollar to be received in the future because:
the dollar can be invested today and earn interest.
of the risk of nonpayment in the future.
inflation will reduce purchasing power of a future dollar.
none of the above
18. The higher the rate used in determining the future value of a $1 annuity:
the smaller the future value at the end of the period.
the greater the future value at the end of a period.
the greater the present value at the beginning of a period.
None of the above - the interest has no effect on the future value of an annuity.
19. Mr. Darden is selling his house for $165,000. He bought it for $55,000 nine years
ago. What is the annual return on his investment?
3%
Between 14% and 16%
13%
none of the above
20. Increasing the number of periods will increase all of the following EXCEPT:
the present value of an annuity.
the present value of $1.
the future value of $1.
the future value of an annuity.
3. A bond that has a yield to maturity greater than its coupon interest rate will sell for a
price:
below par.
at par.
above par.
that is equal to the face value of the bond plus the value of all interest payments.
5. A 20-year bond pays 12% on a face value of $1,000. If similar bonds are currently
yielding 9%, What is the market value of the bond? Use annual analysis.
over $1,000
under $1,000
over $1,200
Not enough information given to tell
6. A ten-year bond, with par value equals $1000, pays 10% annually. If similar bonds are
currently yielding 6% annually, what is the market value of the bond? Use semi-annual
analysis.
$1,000
$1127.50
$1297.85
$2549.85
7. A 30-year zero-coupon bond that yields 12% percent is issued with a $1000 par value.
What is the issuance price of the bond (round to the nearest dollar)?
$33
$83
$8,333
$3,888
10. An increase in the riskiness of a particular security would NOT affect:
the risk premium for that security.
the premium for expected inflation.
the total required return for the security.
investors' willingness to buy the security.
11. If the inflation premium for a bond goes up, the price of the bond:
is unaffected.
goes down.
goes up.
is unpredictable.
14. The relationship between a bond's price and the yield to maturity:
changes at a constant level for each percentage change of yield to maturity.
is an inverse relationship.
is a linear relationship.
has no relationship.
15. The longer the time to maturity:
the greater the price increase from an increase in interest rates.
the less the price increase from an increase in interest rates.
the greater the price increase from a decrease in interest rates.
the less the price decrease from a decrease in interest rates.
16. What is the approximate yield to maturity for a seven-year bond that pays 11%
interest on a $1000 face value annually if the bond sells for $952?
10.5%
10.6%
11.9%
12.0%
18. A bond pays 9% yearly interest in semi-annual payments for 6 years. The current
yield on similar bonds is 12%. To determine the market value of this bond, you must:
find the interest factors (IFs) for 12 periods at 12%.
find the interest factors (IFs) for 6 periods at 9%.
find the interest factors (IFs) for 12 periods at 6%.
find the interest factors (IFs) for 6 periods at 6%.
19. A 15-year bond pays 11% on a face value of $1,000. If similar bonds are currently
yielding 8%, what is the market value of the bond? Use annual analysis.
Over $1,000
Under $1,000
Over $1,200
not enough information to tell
20. A 10-year bond pays 8% on a face value of $1,000. If similar bonds are currently
yielding 10%, what is the market value of the bond? Use annual analysis.
Less than $900
More than $900 and less than $1100
More than $1100
not enough information to tell
2. The overall weighted average cost of capital is used instead of costs for specific
sources of funds because:
use of the cost for specific sources of capital would make investment decisions
inconsistent.
a project with the highest return would always be accepted under the specific cost
criteria.
investments funded by low cost debt would have an advantage over other investments.
Both A and C
3. Debreu Beverages has an optimal capital structure that is 50% common equity, 40%
debt, and 10% preferred stock. Debreu's pretax cost of equity is 12%. It's pretax cost of
preferred equity is 7%, and it's pretax cost of debt is also 7%. If the corporate tax rate is
35%, what is the weighed average cost of capital?
Between 7% and 8%
Between 8% and 9%
Between 9% and 10%
Between 10% and 12%
4. For a firm paying 7% for new debt, the higher the firm's tax rate:
the higher the after-tax cost of debt.
the lower the after-tax cost of debt.
after-tax cost is unchanged.
Not enough information to judge.
5. If a firm's bonds are currently yielding 8% in the marketplace, why would the firm's
cost of debt be lower?
Interest rates have changed.
Additional debt can be issued more cheaply than the original debt.
There should be no difference; cost of debt is the same as the bond's market yield.
Interest is tax-deductible.
6. A firm's cost of financing, in an overall sense, is equal to its:
weighted average cost of capital.
required yield that investors seek for various kinds of securities.
required rate of return that investors seek for various kinds of securities.
All of the above
7. A firm has $25 million in assets and its optimal capital structure is 60% equity. If the
firm has $18 million in retained earnings, at what asset level will the firm need to issue
additional stock? (Assume no growth in retained earnings.)
The firm should have already issued additional stock.
The firm can increase assets to $30 million.
The firm can increase assets to $41.67 million.
There is insufficient information to determine an answer.
9. The cost of equity capital in the form of new common stock will be higher than the
cost of retained earnings because of:
the existence of taxes.
the existence of flotation costs.
investors' unwillingness to purchase additional shares of common stock.
the existence of financial leverage.
10. If the flotation cost goes up, the cost of retained earnings will:
go up.
go down.
stay the same.
slowly increase.
11. Why is the cost of debt normally lower than the cost of preferred stock?
Preferred stock dividends are tax deductions.
Interest is tax deductible.
Preferred stock dividends must be paid before common stock dividends.
Common stock dividends are not tax deductible.
12. If flotation costs go down, the cost of new preferred stock will:
go up.
go down.
stay the same.
slowly increase.
13. A firm's debt to equity ratio varies at times because:
a firm will want to sell common stock when prices are high and bonds when interest rates
are low.
a firm will want to take advantage of timing its fund raising in order to minimize costs
over the long run.
the market allows some leeway in the debt to equity ratio before penalizing the firm with
a higher cost of capital.
All of the above
16. In computing the cost of common equity, if D1 goes downward and Po goes up, Ke
will:
go up.
go down.
stay the same.
slowly increase.
17. In determining the cost of retained earnings:
the dividend valuation model is inappropriate.
flotation costs are included.
growth is not considered.
the capital asset pricing model can be used.
18. Within the capital asset pricing model:
the risk-free rate is usually higher than the return in the market.
the higher the beta the lower the required rate of return.
beta measures the volatility of an individual stock relative to a stock market index.
None of the above
19. Using the constant growth model, a firm's expected (D1) dividend yield is 3% of the
stock price, and it's growth rate is 7%. If the tax rate is .35%, what is the firm's cost of
equity?
10%
6.65%
8.95%
More information is required.
20. For many firms, the cheapest and most important source of equity capital is in the
form of:
debt.
common stock.
preferred stock.
retained earnings.
1. The reason cash flow is used in capital budgeting is because:
cash rather than income is used to purchase new machines.
cash outlays need to be evaluated in terms of the present value of the resultant cash
inflows.
to ignore the tax shield provided from depreciation ignores the cash flow provided by the
machine which should be reinvested to replace old worn out machines.
All of the above
2. The first step in the capital budgeting process is:
collection of data.
idea development.
assign probabilities.
determine cashflow.
3. Capital budgeting is primarily concerned with:
capital formation in the economy.
planning future financing needs.
evaluating investment alternatives.
minimizing the cost of capital.
4. The longer the life of an investment:
the more significant the discount rate.
the less significant the discount rate.
makes no difference.
None of the above
5. If projects are mutually exclusive:
they can only be accepted under capital rationing.
the selection of one alternative precludes the selection of other alternatives.
the payback method should be used.
the net present-value should be used.
6. The internal rate of return and net present value methods:
always give the same investment decision answer.
never give the same investment decision answer.
usually give the same investment decision answer.
always give answers different from the payback method.
7. A characteristic of capital budgeting is:
a large amount of money is always involved.
the internal rate of return must be less than the cost of capital.
the internal rate of return must be greater than the cost of capital.
the time horizon is at least five years.
8. The Net Present Value Method is a more conservative technique for selecting
investment projects than the Internal Rate of Return method because the NPV method:
assumes that cash flows are reinvested at the project's internal rate of return.
concentrates on the liquidity aspects of investment projects.
assumes that cash flows are reinvested at the firm's weighted average cost of capital.
None of the above
9. The __________ assumes returns are reinvested at the cost of capital.
payback method
internal rate of return
net present value
capital rationing
10. In using the internal rate of return method, it is assumed that cash flows can be
reinvested at:
the cost of equity.
the cost of capital.
the internal rate of return.
the prevailing interest rate.
11. The term "risk averse" means that:
an individual refuses to take risks.
most investors and businessmen seek risk.
an individual will seek either to avoid risk or to be compensated with a higher return.
only investment proposals with no risk should be accepted.
12. The coefficient of variation (V) can be defined as the:
expected value multiplied by the standard deviation.
standard deviation divided by the expected value.
expected value divided by the standard deviation.
standard deviation squared, divided by the expected value.
13. In determining the appropriate discount rate for an individual project, the financial
manager will be most influenced by the:
expected value.
internal rate of return.
standard deviation.
coefficient of variation. Not sure
14. Which of the following is a characteristic of beta?
Beta measures only the volatility of returns on an individual bond relative to a bond
market index.
A beta of 1.0 is of equal risk with the market.
A beta of greater than 1.0 has less risk than the market.
Two of the above are true.
15. Which investment has the least amount of risk?
Coefficient of variation =11%, expected return = $800
Coefficient of variation =11%, Standard deviation = $200
Standard deviation = $500, expected return = $5,000
Standard deviation = $100, expected return = $80
16. Risk may be integrated into capital budgeting decisions by:
adjusting the standard deviation of possible outcomes.
determining the expected value.
adjusting the discount rate.
adjusting the time horizon.
17. The firm's highest risk-adjusted discount should be applied to:
the repair of old machinery.
a new product in a related field.
a new product in a foreign market.
the purchase of new equipment.
18. Using the risk-adjusted discount rate approach, projects with high coefficients of
variation will have __________ net present values than projects with low coefficients of
variation.
somewhat higher
substantially higher
lower
Either A or B
19. Using the risk-adjusted discount rate approach, the cost of capital is applied to
projects with:
normal risk.
high risk.
no risk.
low risk.
20. Using the risk-adjusted discount rate approach, the firm's weighted average cost of
capital is applied to projects with:
no risk.
low risk.
normal risk.
high risk.