ASHWORTH C09.V.5.1 PRINCIPLES OF FINANCE Online Exam 5_05 (2015)

Part 1 of 2 - Lesson 4 Questions 42.5/ 50.0 Points

Question 1 of 40 2.5/ 2.5 Points
Which of the statements below is FALSE?

A. It is common for companies to issue preferred stock with the right to convert to common shares after a specific waiting period.

B. Preferred stock does not have a maturity date.

C. Preferred stock cannot be converted into common stock.

D. Preferred shareholders' dividend claims take precedence over common shareholders' dividend claims.

Question 2 of 40 0.0/ 2.5 Points
Which of the statements below is TRUE?

A. Investors want to maximize return and maximize risk.

B. Investors want to maximize return and minimize risk.

C. Investors want to minimize return and maximize risk.

D. Investors want to minimize return and minimize risk.

Question 3 of 40 2.5/ 2.5 Points
__________ is the absence of knowledge of the outcome of an event before it happens.

A. Return

B. Diversification

C. Uncertainty

D. Certainty

Question 4 of 40 2.5/ 2.5 Points
MicroMedia Inc. $1,000 par value bonds are selling for $1,265. Which of the following statements is TRUE?

A. The bond market currently requires a rate (yield. less than the coupon rate.

B. The bonds are selling at a premium to the par value.

C. The coupon rate is greater than the yield to maturity.

D. All of the above are true.

Question 5 of 40 2.5/ 2.5 Points
The ___________ is the yield an individual would receive if the individual purchased the bond today and held the bond to the end of its life. ?

A. current yield

B. yield to maturity

C. prime rate

D. coupon rate

Question 6 of 40 2.5/ 2.5 Points
Preferred stock __________.

A. reflects residual ownership of a company

B. represents a preferential claim on dividends

C. will be "paid" before the bondholders

D. always has a legal and specific claim to a fixed amount (listed as a liability.

Question 7 of 40 2.5/ 2.5 Points
Stocks are different from bonds because __________. ?

A. stocks, unlike bonds, are major sources of funds

B. stocks, unlike bonds, represent residual ownership

C. stocks, unlike bonds, give owners legal claims to payments

D. bonds, unlike stocks, represent voting ownership

Question 8 of 40 2.5/ 2.5 Points
The Security Market Line has __________ .

A. a positive slope

B. a negative slope

C. no slope

D. a beta of 1.0

Question 9 of 40 2.5/ 2.5 Points
The four steps to determining the price of a bond are: __________.

A. determine the amount and timing of the present cash flows, determine the appropriate discount rate, find the present value of the lump-sum principal and the annuity stream of coupons, and add the PVs of the principal and coupons.

B. determine the amount and timing of the future cash flows, determine the appropriate discount rate, find the future value of the lump-sum principal and the annuity stream of coupons, and add the FVs of the principal and coupons.

C. determine the amount and timing of the future cash flows, determine the appropriate discount rate, find the present value of the lump-sum principal and the annuity stream of coupons, and multiply the PVs of the principal and coupons.

D. determine the amount and timing of the future cash flows, determine the appropriate discount rate, find the present value of the lump-sum principal and the annuity stream of coupons, and add the PVs of the principal and coupons.

Question 10 of 40 2.5/ 2.5 Points
The __________ is the annual coupon payment divided by the current price of the bond, and is not always an accurate indicator.

A. current yield

B. yield to maturity

C. bond discount rate

D. coupon rate

Question 11 of 40 2.5/ 2.5 Points
The practice of not putting all of your eggs in one basket is an illustration of ___________.

A. variance

B. diversification

C. portion control

D. expected return

Question 12 of 40 2.5/ 2.5 Points
Correlation, a standardized measure of how stocks perform relative to one another in different states of the economy, has a range from __________ .

A. 0.0 to +10.0

B. 0.0 to +1.0

C. -1.0 to +1.0

D. There is no range; correlation is a calculated number that can take on any value.

Question 13 of 40 2.5/ 2.5 Points
Which of the following investments is considered to be default risk-free?

A. currency options

B. AAA rated corporate bonds

C. common stock

D. Treasury bills

Question 14 of 40 0.0/ 2.5 Points
Which of the following statements is TRUE?

A. Preferred stock usually has a stated or par value and, like bonds, this par value is not repaid at maturity because preferred stocks do not have a maturity date.

B. The par value for preferred stock, unlike bonds, is never paid back.

C. A preferred stock's cash dividend due each year is based on the stated dividend rate times the market value of the stock.

D. Some preferred stocks are cumulative in dividends, meaning that if a company skips a cash dividend, it must pay it at some point in the future.

Question 15 of 40 2.5/ 2.5 Points
Which of the following are issued with the shortest time to maturity?

A. Treasury bills

B. Treasury notes

C. Treasury bonds

D. Treasury stocks

Question 16 of 40 2.5/ 2.5 Points
Shortcomings of the dividend pricing models suggest that we need a pricing model that is more inclusive than the dividend models and that provides expected returns for companies based on aspects besides their historical dividend patterns. Which of these below is NOT one of these aspects?

A. the company's risk

B. the premium for taking on risk

C. the reward for waiting

D. stable dividends

Question 17 of 40 0.0/ 2.5 Points
Which of the choices below is FALSE?

A. When issuing a puttable bond, the firm anticipates that interest rates will rise over the life of the bond.

B. When issuing a callable bond, the firm anticipates that interest rates will fall over the life of the bond.

C. When issuing a callable bond, the firm anticipates that interest rates will rise over the life of the bond.

D. A puttable bond is essentially the reverse of a callable bond.

Question 18 of 40 2.5/ 2.5 Points
Which of the statements below is NOT correct?

A. If two investments have the same expected return, the investment with the lower risk is preferred.

B. If two investments have the same expected return, the investment with the greater risk is preferred.

C. If two investments have the same expected risk, the investment with the higher expected return is preferred.

D. If one investment has a higher expected return and a greater level of risk than another, it is not clear which investment is the preferred choice.

Question 19 of 40 2.5/ 2.5 Points
The correlation coefficient, a measurement of the comovement between two variables, has what range?

A. From 0.0 to +10.0

B. From 0.0 to +1.0

C. From -1.0 to +10.0

D. From =1.0 to -1.0

Question 20 of 40 2.5/ 2.5 Points
MicroMedia Inc. $1,000 par value bonds are selling for $832. Which of the following statements is TRUE?

A. The bonds must have more than six years to maturity.

B. The bonds are selling at a premium to the par value.

C. The coupon rate is greater than the yield to maturity.

D. None of the above are true.

Part 2 of 2 - Lesson 5 Questions 47.5/ 50.0 Points

Question 21 of 40 2.5/ 2.5 Points
The initial outlay or cost is $1,000,000 for a four-year project. The respective future cash inflows for years one, two, three and four are: $500,000, $300,000, $300,000, and $300,000. What is the payback period without discounting cash flows?

A. about 2.50 years

B. about 2.67 years

C. about 3.67 years

D. about 4.50 years

Question 22 of 40 2.5/ 2.5 Points
Which of the statements below describes the IRR decision criterion? ?

A. The decision criterion is to accept a project if the IRR falls below the desired or required return rate.

B. The decision criterion is to reject a project if the IRR exceeds the desired or required return rate.

C. The decision criterion is to accept a project if the IRR exceeds the desired or required return rate.

D. The decision criterion is to accept a project if the NPV is positive.

Question 23 of 40 2.5/ 2.5 Points
The initial outlay or cost for a four-year project is $1,000,000. The respective cash inflows for years one, two, three and four are: $500,000, $300,000, $300,000 and $300,000. What is the discounted payback period if the discount rate is 10%?

A. about 2.67 years

B. about 3.35 years

C. about 3.67 years

D. about 4.50 years

Question 24 of 40 2.5/ 2.5 Points
__________ corrects for most, but not all, of the problems of IRR and gives the solution in terms of a return.

A. Profitability Index

B. Discounted Payback Period

C. Net Present Value

D. MIRR

Question 25 of 40 2.5/ 2.5 Points
The projected revenues and costs that form the basis of the potential for a project's acceptance or rejection are estimates of __________ .

A. future activity

B. past activity

C. known activity

D. current activity

Question 26 of 40 2.5/ 2.5 Points
The IRR is the discount rate that produces a zero NPV or the specific discount rate at which the present value of the cost equals __________ .

A. the future value of the present cash outflows

B. the present value of the future benefits or cash inflows

C. the present value of the cash outflow

D. the investment

Question 27 of 40 2.5/ 2.5 Points
Which of the following may be TRUE regarding mutually exclusive capital budgeting projects?

A. There is need for only one project, and both projects can fulfill that current need.

B. By using funds for one project, there are not enough funds available for the other project.

C. There is a scarce resource that both projects would need.

D. All of the above

Question 28 of 40 2.5/ 2.5 Points
Consider the following four-year project. The initial after-tax outlay or after-tax cost is $1,000,000. The future after-tax cash inflows for years one, two, three and four are: $400,000, $300,000, $200,000 and $200,000, respectively. What is the payback period without discounting cash flows?

A. 2.5 years

B. 3.0 years

C. 3.5 years

D. 4.0 years

Question 29 of 40 0.0/ 2.5 Points
In the NPV Model, all cash flows are stated __________ .

A. in future value dollars, and the total inflow is "netted" against the outflow to see if the net amount is positive or negative

B. in present value or current dollars, and the outflow is "netted" against the total inflow to see if the gross amount is positive or negative

C. in present value or current dollars, and the total inflow is "netted" against the initial outflow to see if the net amount is positive or negative

D. in future dollars, and the initial outflow is "netted" against the total inflow to see if the net amount is positive

Question 30 of 40 2.5/ 2.5 Points
The capital budgeting decision model that utilizes all the discounted cash flow of a project is the __________ model, which is one of the single most important models in finance.

A. Net Present Value (NPV)

B. Internal Rate of Return (IRR)

C. Profitability Index (PI)

D. Discounted Payback Period

Question 31 of 40 2.5/ 2.5 Points
Consider the following 10-year project. The initial after-tax outlay or after-tax cost is $1,000,000. The future after-tax cash inflows each year for years one through 10 are $200,000 per year. What is the payback period without discounting cash flows?

A. 10 years

B. 5 years

C. 2.5 years

D. 0.5 years

Question 32 of 40 2.5/ 2.5 Points
The __________Model provides a single measure (return. but must apply risk outside the model, thus allowing for errors in rankings of projects.

A. Payback Period

B. Internal Rate of Return (IRR)

C. Net Present Value (NPV)

D. Profitability Index (PI)

Question 33 of 40 2.5/ 2.5 Points
Project A has an NPV of $20,000 and a PI of 1.2. Project B has an NPV of $10,000 and a PI of 1.3. Both projects have equal lives. Which project should be preferred if we are NOT concerned with capital rationing (that is, we are NOT concerned with being short of funds)?

A. We should prefer Project B since it has a higher PI.

B. We should compute the EAA before we make any decision.

C. We should prefer Project A since it has a higher NPV.

D. We should prefer Project B if it has a higher IRR.

Question 34 of 40 2.5/ 2.5 Points
Managers typically look at the initial outlay for the project as its capital expenditure and determine __________ from this capital expenditure.

A. interest expenses

B. dividends

C. depreciation

D. CEO expenses

Question 35 of 40 2.5/ 2.5 Points
The most popular alternative to NPV for capital budgeting decisions is the __________ method. ?

A. Internal Rate of Return (IRR)

B. Payback Period

C. Discounted Payback Period

D. Profitability Index (PI)

Question 36 of 40 2.5/ 2.5 Points
__________is at the heart of corporate finance because it is concerned with making the best choices about project selection.

A. Capital budgeting

B. Capital structure

C. Payback period

D. Short-term budgeting

Question 37 of 40 2.5/ 2.5 Points
The net present value of an investment is __________ .

A. the present value of all benefits (cash inflows)

B. the present value of all benefits (cash inflows) minus the present value of all costs (cash outflows) of the project

C. the present value of all costs (cash outflows) of the project

D. the present value of all costs (cash outflow) minus the present value of all benefits (cash inflow) of the project

Question 38 of 40 2.5/ 2.5 Points
Find the Modified Internal Rate of Return (MIRR. for the following annual series of cash flows, given a discount rate of 10.50%: Year 0: -$75,000; Year 1: $15,000; Year 2: $16,000; Year 3: $17,000; Year 4: $17,500; and, Year 5: $18,000.

A. about 6.35%

B. about 6.88%

C. about 7.35%

D. about 7.88%

Question 39 of 40 2.5/ 2.5 Points
__________ involve(s) a cash flow that never occurs, but we need to add it as a cost or outflow of a new project.

A. Cost recovery of divested assets

B. Capital expenditures

C. Sunk costs

D. Opportunity costs

Question 40 of 40 2.5/ 2.5 Points
The __________ method of capital budgeting is a ratio of the present value of cash inflows divided by the initial investment.

A. Payback Period

B. Net Present Value (NPV.

C. Internal Rate of Return (IRR.

D. Profitability Index (PI.