Chương 7

1.Which of the following theorems is not one of the theorems explaining the
relationship between interest rates and bond prices?
a. For a given change in interest rates, the prices of long-term bonds will change more
drastically than the prices of short-term bonds.
b. For a given change in interest rates, the prices of short-term bonds will change more
drastically than the prices of long-term bonds.
c.Bond prices are inversely related to interest rate movements.
d.For a given change in interest rates, the prices of low coupon bonds will change more
drastically than the prices of high coupon bonds.
2.Most corporate bonds trade on the
a. New York Stock Exchange
b. Over-the-Counter market
c.American Stock Exchange.
d.Chicago Board of Trade.
3.If John buys a 5-year bond with a 9% coupon rate (paid semi-annually) and
$1000 par value for $925, his yield to maturity would be closest to
a.9%.
b.10.99%.
c.8.5%.
d.5.49%.
4.A corporate bond's coupon rate is the annual coupon payment divided by
a.$100
b. The bond's maturity period.
c.The bond's current price
d.The bond's par value.

5.Mary just bought a 20-year bond with an 8% coupon rate (paid semi-annually)
and $1000 par value for $1050. She is expecting an effective annual yield (EAY) of
a.7.65%
b.8.51%
c.10%.
d.9.5%.
6.In order to calculate the price of a bond we need all of the following inputs except
a. Coupon rate.
b. Its yield to maturity.
c.Its sinking fund status.
d.Maturity.
7.University Corp. issued five-year bonds that pay a coupon of 6.5 percent
semiannually. The current market rate for similar bonds is 5.5 percent. How much
will you be willing to pay for University's bond today? Round to the nearest dollar.
a.$1,023
b.$958
c.$1,000
d.$1,043

8.Three years ago, Joe bought a 5-year, 10% coupon (paid semi-annually) bond for
$1000. Currently, with interest rates having risen sharply, the bond is selling for
$800 and you decide to sell it off. If you had re-invested the semi-annual coupons
as you received them, what would your realized yield be over the 3-year holding
period ?
a.3.63%.
b.6%.
c.10%.
d.12%.
9.The discount rate that makes the present value of a bond's coupons and principal
payment equal to its price is the
a. Holding period yield.
b. Promised yield.
c.Realized compound yield.
d.Current yield.
10.Which of the following is not another name for a bond's yield to maturity?
a. Promised yield.
b. Discount rate.
c.Current yield
d.Opportunity cost.
11.A client has expressed interest in a ten-year zero coupon bonds with a face value
of $1,000. His opportunity cost is 7 percent. Assuming annual compounding, what
would be the current market price of these bonds? Round to the nearest dollar.
a.$508
b.$51
c.$1,000
d.$700
Chương 8
1.The XYZ Corporation is expected to grow at a rate of 30% for the next two years
and then settle at the industry median constant growth rate of 10%. If the
company's last paid dividend was $1.50 per share, and the required rate of return
is 15%, how much is the stock worth today?
a.$13.00
b.$55.77
c.$45.78
d.$65.91
2.Which of the following is not a major role of secondary markets ?
a.To provide good arbitrage opportunities.
b.To provide good marketability for securities.
c.To allow information to be quickly and accurately reflected in security prices.
d.To bring buyers and sellers together.
3.Fifth Second Banc Corp. has issued preferred stock with no maturity date. It has
a par value of $100 and pays a quarterly dividend of $3 per share. If the required
rate of return is 10%, this stock is currently worth
a.$100
b.$300
c.$30
d.$120

4.Growth stocks are typically defined as the stocks of companies whose

a.Sales are growing at above-average rates.
b.Dividends are growing at above-average rates.
c.Book values are growing are above-average rates.
d.Earnings are growing at above-average rates.

5.The Buckeye Corporation expects to pay a dividend of $3.15 per share at the end
of next year. The firm expects the dividend to continue growing at the rate of 8%
per year for the foreseeable future. If you require a return of 13% per year, the
most you should pay for this stock is
a.$68.04.
b.$63.00
c.$26.17
d.$24.23
6.The reason we cannot apply the constant growth dividend model in the case
where the growth rate, g, is greater than or equal to the required rate, R, is because
it would result in the value of the stock becoming
a.Negative.
b.Infinite
c.Negative or infinite
d.Zero.
7.In which of the following types of security markets do sellers often rely primarily
on word-of-mouth communication to find interested buyers?
a.Direct search
b.Broker.
c.Auction.
d.Dealer.
8.Preferred stock is considered to be a special type of debt rather than equity
because of all of the following reasons except that
a.If preferred stock dividends are not paid it would be legally viewed as a default .
b.Preferred stocks often have credit ratings.
c.Preferred stockholders receive a fixed dividend.
d.Regular preferred stock confers no voting rights.
9.Which of the following steps is not necessary when computing the value of
common stock ?
a.Determine the required rate of return based on the riskiness of the cash flows.
b.Compute the present value of the future cash flows.
c.Multiply each cash flow by the year in which it is expected to be received.

d.Estimate the future cash flows.

10.Which of the following is a simplifying assumption that is made when applying
the dividend discount model to common stock valuation ?
a.Dividends grow at a non-constant rate over time.
b.Dividends grow at a constant rate forever.
c.All of these are simplifying assumptions.
d.Dividends remain constant over time.
11.PRE Utilities preferred stock has an annual dividend payment of $8 (quarterly),
a stated (par) value of $100, and an effective maturity of 30 years. If similar
preferred stock issues have market yields of 7 percent, what is the value of the
preferred stock ?
a.$185.49
b.$100.03
c.$244.91
d.$112.50

12.Which of the following is not a characteristic of common stock ?

a.Fixed dividends.
b.Limited liability for owners.
c.Infinite life.
d.Voting rights.
13.The Stagnant Growth Corporation has paid a constant dividend of $2.50 per
year for the past 3 years and is expected to continue paying the same dividend per
share for the foreseeable future. If the required rate of return on its common stock
is 12%, the most an investor should pay per share is
a.$2.50
b.$7.50
c.$40
d.$20.83.

14.For the constant growth rate dividend model to work, which of the following
assumptions must hold?
a.The growth rate must be less than the required rate of return.
b.The growth rate must be greater than the required rate of return
c.None of these.
d.The growth rate must be equal to the required rate of return.
15.The Smart Start Corporation recently paid a dividend of $3.00 per share.
Management expects dividends to grow at the rate of 10% per year for 3 more
years. If the required rate of return on the company's stock is 14%, how much
would the stock be worth at the end of three years from today ?
a.$21.42
b.$109.81

c.$99.82.
d.$82.50
Chương 9
1.You are viewing a graph that plots the NPVs of a project to various discount
rates that could be applied to the project's cash flows. What is the name given to
this graph?
a.NPV profile
b.NPV route
c.project tract
d.projected risk profile
2.The RST Corp. is considering the purchase of some new equipment which will
cost $120,000, last for 5 years, and generate after-tax cost savings of $45,000,
$37,000, $25,000, $20,000, and $20,000 respectively per year. The firm's cost of
capital is 10%. The IRR of this project is
a.8.58%
b.-8.58%
c.12%
d.8.36%
3.If a project's IRR exceeds its ..., the project should be ...
a.NPV; accepted
b.Cost of capital; accepted
c.Cost of capital; rejected
d.MIRR; rejected
4.The NPV and IRR methods will always agree when you are evaluating ... projects
and the project's cash flows are ...
a.Mutually exclusive; conventional.
b.Independent projects; conventional.
c.Independent projects; unconventional
d.Mutually exclusive; unconventional
5.Which one of the following is not an advantage of the NPV method of analyzing
capital projects ?
a.It is easy to understand even without an accounting or finance background.
b.It provides a direct (dollar) measure of how much a capital project will increase or
decrease the value of a firm by.
c.It uses a discounted cash flow technique to adjust for the time value of money.
d.It is consistent with the goal of maximizing shareholder value.
6.A machine costs $1,000 and has a 3-year life. The estimated salvage value at the
end of three years is $100. The project is expected to generate after tax-cash flows
of $600 per year. If the required rate of return is 10%, what is the NPV of the
project ?
a.$1,567
b.$492
c.$567
d.$1,492
7.The WedLink Company is considering the possibility of developing a new
wedding planning website. The cost of development is assumed to be $250,000 and
the company expects to generate after-tax cash flows of $70,000 per year for the
next 5 years from subscribers. If the firm's discount rate is 12%, the NPV of this
project is
a.$350,000
b.$100,000
c.$2,334.33
d.$15,000.
8.Which one of the following is not a key disadvantage of the IRR method?
a. With mutually exclusive projects, the IRR method can lead to incorrect investment
decisions.
b. The IRR is not based on a discounted cash flow technique.
c.An extremely high IRR can be unrealistic in terms of the reinvestment rate that is
assumed.
d.With unconventional cash flows, the IRR method can yield multiple answers.
9.Which of the following is not one of the steps necessary for conducting a capital
budgeting analysis?
a. Estimate the project's future cash flows.
b. Determine the cost of the project.
c.Compute the project's NPV.
d.Decide on how the capital required will be raised.
10.Capital budgeting is the process of
a. Determining how much capital a firm should raise.
b. Determining how much debt a firm should budget for in its capital structure.
c.Determining which capital investments a firm should make.
d.Keeping track of all the revenues and expenses incurred by a firm during the year.