13. (TCO 3) Fine Oak Woodworks is considering a project that has cash flows of $5,000, $3,000, and $8,000 for the next three years. If the appropriate discount rate of this project is 10 percent, which of the following statements is true? (Points : 3)
The current value of the project’s inflows is $16,000
The approximate current value of the project’s inflows is $13,000
The current value of the project’s inflows is somewhere in between $14,000 and $16,000
The project should be rejected because its present value is negative
14. (TCO 4) You are considering two investments. Investment I, is in a software company and Investment II, is an engineering company. The investments offer the following cash flows:
Year Software Company Engineering Company
1 $5,000 $15,000
2 $3,000 $8,000
3 $4,000 $9,000
4 $3,600 $11,000
If the appropriate discount rate is 10 percent, what is the approximate present value of the Software Company investment? (Points : 3)
$15,600
$12,500
$12,750
$15,000
15. (TCO 3) North Bank offers you an APR of 9.76 percent compounded semiannually, and South Bank offers you an effective rate of 9 percent on a business loan. Which bank should you choose and why? (Points : 3)
South Bank because its effective rate is higher.
North Bank because the APR is lower.
South Bank because its effective rate is lower.
North Bank because its effective rate is lower.
1. (TCO 3) Given an interest rate of zero percent, the future value of a lump sum invested today will always: (Points : 3)
remain constant, regardless of the investment time period.
decrease if the investment time period is shortened.
decrease if the investment time period is lengthened.
be equal to $0.
be greater than the initial investment amount.
2. (TCO 3) Which one of the following best exemplifies a perpetuity? (Points : 3)
a mortgage of $860 a month for 30 years
$2,000 annual payments from a trust fund indefinitely
social security payments of $2,500 a month for life
student loan payments of $600 a month for three years
$250 a month over the life of a lease
3. (TCO 3) Fanta Cola has $1,000 par value bonds outstanding at 12 percent interest. The bonds mature in 25 years. What is the current price of the bond if the YTM is 11 percent? Assume annual payments. (Points : 3)
$1080
$1085
$925
$1000
4. (TCO 6 and 8) A bond’s debenture will include which of the following? (Points : 3)
description of any loan collateral
call provisions
total amount of the bond issue
protective covenants
all of the above
none of the above
5. (TCO 3) Bonds issued by Blue Sky Airlines have a face value of $1,000 and currently sell for $1,080. The annual coupon payments are $125. If the bonds have 20 years until maturity, what is the approximate YTM of the bonds? (Points : 3)
10.50%
11.50%
11.75%
12%
6. (TCO 3) Bean Coffee issued preferred stock many years ago. It carries a dividend of $8 per share, fixed. As time has passed, yields have decreased from the original eight percent (at the time of issuance) to six percent. What was the current price of the stock? Hint: Yield is the same as required rate of return. (Points : 3)
$100
$133
$102
$86.40
None of the above
7. (TCO 3) Intelligence Research, Inc. will pay a common stock dividend of $1.60 at the end of the year. The required rate of return by common stockholders is 13 percent. The firm has a constant growth rate of 7.5 percent. What is the current price of the stock? (Points : 3)
$23
$32
$27
$29
8. (TCO 3) Royal Electric paid a $2 dividend last year. The dividend is expected to grow at a constant rate of five percent over the next three years. Common stockholders require a 12 percent return. What is the total amount of dividends stockholders will receive during the next three years? (Points : 3)
$6.62
$6.03
$6.52
$6.85
9. (TCO 6) Which of the following is true regarding the primary market? (Points : 3)
it is the market where the largest number of shares are traded on a daily basis.
it is the market in which the largest number of issues are listed.
it is the market with the largest number of participants.
it is the market where new securities are offered.
it is the market where shareholders trade most frequently with each other.
10. (TCO 6) A member of the NYSE who trades on the floor of the exchange for his or her personal account is called a(n): (Points : 3)
specialist.
independent broker.
floor trader.
stand-alone agent.
dealer.
11. (TCO 6) The yield to maturity on a bond is: (Points : 3)
equal to the coupon rate divided by the current market price.
another name for the current yield.
equal to the annual interest divided by the face value.
the current required market rate.
another name for the coupon rate.
12. (TCO 6) Star Industries has one outstanding bond issue. An indenture provision prohibits the firm from redeeming the bonds during the first two years. This provision is referred to as a _____ provision. (Points : 3)
deferred call
market
liquidity
debenture
sinking fund
13. (TCO 8) Which of the following is true regarding bonds? (Points : 3)
Most bonds do not carry default risk.
Municipal bonds are free of default risk.
Bonds are not sensitive to changes in the interest rates.
Moody’s and Standard and Poor’s provide information regarding a bond’s interest rate risk.
None of the above is true
14. (TCO 6) Which of the following best describes a zero-coupon bond? (Points : 3)
A bond that adjusts the coupon payments based on an interest rate index, such as the T-bill.
A bond that is issued by the U.S. government.
A bond that adjusts the coupon payment date.
A bond that has no coupons and pays a face value at maturity.
An EE Savings Bond
15. (TCO 6) Which of the following is true regarding convertible bonds? Select all that apply: (Points : 3)
Are relatively common
Can be exchanged for a fixed number of shares at maturity only
Can be exchanged for a fixed number of shares before maturity
Allow the holder to require the issuer to buy the bond back