Test Bank for final ExamChapters 6,7, 8,141.An ordinary annuity is best defined by which one of the following?A.increasing payments paid for a definitive period of timeB.increasing payments paid foreverC.equal payments paid at regular intervals over a stated time periodD.equal payments paid at regular intervals of time on an ongoing basisE.unequal payments that occur at set intervals for a limited period of time2.Which one of the following accurately defines a perpetuity?A.a limited number of equal payments paid in even time incrementsB.payments of equal amounts that are paid irregularly but indefinitelyC.varying amounts that are paid at even intervals foreverD.unending equal payments paid at equal time intervalsE.unending equal payments paid at either equal or unequal time intervals3.Which one of the following terms is used to identify a British perpetuity?A.ordinary annuityB.amortized cash flowC.annuity dueD.discounted loanE.consol4.The interest rate that is quoted by a lender is referred to as which one of the following?A.stated interest rateB.compound rateC.effective annual rateD.simple rateE.common rate5.A monthly interest rate expressed as an annual rate would be an example of which one of the following rates?A.stated rateB.discounted annual rateC.effective annual rateD.periodic monthly rateE.consolidated monthly rate6.What is the interest rate charged per period multiplied by the number of periods per year called?A.effective annual rateB.annual percentage rateC.periodic interest rateD.compound interest rateE.daily interest rate

7.A loan where the borrower receives money today and repays a single lump sum on a future date is called a(n) _____ loan.A.amortizedB.continuousC.balloonD.pure discountE.interest-only8.Which one of the following terms is used to describe a loan that calls for periodic interest payments and a lump sum principal payment?A.amortized loanB.modified loanC.balloon loanD.pure discount loanE.interest-only loan9.Which one of the following terms is used to describe a loan wherein each payment is equal in amount and includes both interest and principal?A.amortized loanB.modified loanC.balloon loanD.pure discount loanE.interest-only loan10.Which one of the following terms is defined as a loan wherein the regular payments, including both interest and principal amounts, are insufficient to retire the entire loan amount, which then must be repaid in one lump sum?A.amortized loanB.continuing loanC.balloon loanD.remainder loanE.interest-only loan11.You are comparing two annuities which offer quarterly payments of $2,500 for five years and pay 0.75 percent interest per month. Annuity A will pay you on the first of each month while annuity B will pay you on the last day of each month. Which one of the following statements is correct concerning these two annuities?A.These two annuities have equal present values but unequal futures values at the end of year five.B.These two annuities have equal present values as of today and equal future values at the end of year five.C.Annuity B is an annuity due.D.Annuity A has a smaller future value than annuity B.E.Annuity B has a smaller present value than annuity A.12.You are comparing two investment options that each pay 5 percent interest, compounded annually. Both options will provide you with $12,000 of income. Option A pays three annual payments starting with $2,000 the first year followed by two annual payments of $5,000 each. Option B pays three annual payments of $4,000 each. Which one of the following statements is correct given these two investment options?A.Both options are of equal value given that they both provide $12,000 of income.B.Option A has the higher future value at the end of year three.C.Option B has a higher present value at time zero than does option A.D.Option B is a perpetuity.E.Option A is an annuity.13.You are considering two projects with the following cash flows:

Which of the following statements are true concerning these two projects?I. Both projects have the same future value at the end of year 4, given a positive rate of return.II. Both projects have the same future value given a zero rate of return.III. Project X has a higher present value than Project Y, given a positive discount rate.IV. Project Y has a higher present value than Project X, given a positive discount rate.A.II onlyB.I and III onlyC.II and III onlyD.II and IV onlyE.I, II, and IV only14.Which one of the following statements is correct given the following two sets of project cash flows?

A.The cash flows for Project B are an annuity, but those of Project A are not.B.Both sets of cash flows have equal present values as of time zero given a positive discount rate.C.The present value at time zero of the final cash flow for Project A will be discounted using an exponent of three.D.The present value of Project A cannot be computed because the second cash flow is equal to zero.E.As long as the discount rate is positive, Project B will always be worth less today than will Project A.15.Which one of the following statements related to annuities and perpetuities is correct?A.An ordinary annuity is worth more than an annuity due given equal annual cash flows for ten years at 7 percent interest, compounded annually.B.A perpetuity comprised of $100 monthly payments is worth more than an annuity comprised of $100 monthly payments, given an interest rate of 12 percent, compounded monthly.C.Most loans are a form of a perpetuity.D.The present value of a perpetuity cannot be computed, but the future value can.E.Perpetuities are finite but annuities are not.16.Which of the following statements related to interest rates are correct?I. Annual interest rates consider the effect of interest earned on reinvested interest payments.II. When comparing loans, you should compare the effective annual rates.III. Lenders are required by law to disclose the effective annual rate of a loan to prospective borrowers.IV. Annual and effective interest rates are equal when interest is compounded annually.A.I and II onlyB.II and III onlyC.II and IV onlyD.I, II, and III onlyE.II, III, and IV only17.Which one of the following statements concerning interest rates is correct?A.Savers would prefer annual compounding over monthly compounding.B.The effective annual rate decreases as the number of compounding periods per year increases.C.The effective annual rate equals the annual percentage rate when interest is compounded annually.D.Borrowers would prefer monthly compounding over annual compounding.E.For any positive rate of interest, the effective annual rate will always exceed the annual percentage rate.18.Which one of these statements related to growing annuities and perpetuities is correct?A.The cash flow used in the growing annuity formula is the initial cash flow at time zero.B.Growth rates cannot be applied to perpetuities if you wish to compute the present value.C.The future value of an annuity will decrease if the growth rate is increased.D.An increase in the rate of growth will decrease the present value of an annuity.E.The present value of a growing perpetuity will decrease if the discount rate is increased.19.Which one of the following statements correctly states a relationship?A.Time and future values are inversely related, all else held constant.B.Interest rates and time are positively related, all else held constant.C.An increase in the discount rate increases the present value, given positive rates.D.An increase in time increases the future value given a zero rate of interest.E.Time and present value are inversely related, all else held constant.20.Which one of the following compounding periods will yield the smallest present value given a stated future value and annual percentage rate?A.annualB.semi-annualC.monthlyD.dailyE.continuous21.The entire repayment of which one of the following loans is computed simply by computing a single future value?A.interest-only loanB.balloon loanC.amortized loanD.pure discount loanE.bullet loan22.How is the principal amount of an interest-only loan repaid?A.The principal is forgiven over the loan period so does not have to be repaid.B.The principal is repaid in equal increments and included in each loan payment.C.The principal is repaid in a lump sum at the end of the loan period.D.The principal is repaid in equal annual payments.E.The principal is repaid in increasing increments through regular monthly payments.23.An amortized loan:A.requires the principal amount to be repaid in even increments over the life of the loan.B.may have equal or increasing amounts applied to the principal from each loan payment.C.requires that all interest be repaid on a monthly basis while the principal is repaid at the end of the loan term.D.requires that all payments be equal in amount and include both principal and interest.E.repays both the principal and the interest in one lump sum at the end of the loan term.24.You need $25,000 today and have decided to take out a loan at 7 percent for five years. Which one of the following loans would be the least expensive? Assume all loans require monthly payments and that interest is compounded on a monthly basis.A.interest-only loanB.amortized loan with equal principal paymentsC.amortized loan with equal loan paymentsD.discount loanE.balloon loan where 50 percent of the principal is repaid as a balloon payment25.Your grandmother is gifting you $100 a month for four years while you attend college to earn your bachelor's degree. At a 5.5 percent discount rate, what are these payments worth to you on the day you enter college?A.$4,201.16B.$4,299.88C.$4,509.19D.$4,608.87E.$4,800.00

26.You just won the grand prize in a national writing contest! As your prize, you will receive $2,000 a month for ten years. If you can earn 7 percent on your money, what is this prize worth to you today?A.$172,252.71B.$178,411.06C.$181,338.40D.$185,333.33E.$190,450.25

27.Phil can afford $180 a month for 5 years for a car loan. If the interest rate is 8.6 percent, how much can he afford to borrow to purchase a car?A.$7,750.00B.$8,348.03C.$8,752.84D.$9,266.67E.$9,400.00

28.You are the beneficiary of a life insurance policy. The insurance company informs you that you have two options for receiving the insurance proceeds. You can receive a lump sum of $200,000 today or receive payments of $1,400 a month for 20 years. You can earn 6 percent on your money. Which option should you take and why?A.You should accept the payments because they are worth $209,414 to you today.B.You should accept the payments because they are worth $247,800 to you today.C.You should accept the payments because they are worth $336,000 to you today.D.You should accept the $200,000 because the payments are only worth $189,311 to you today.E.You should accept the $200,000 because the payments are only worth $195,413 to you today.

29.Your employer contributes $75 a week to your retirement plan. Assume that you work for your employer for another 20 years and that the applicable discount rate is 7.5 percent. Given these assumptions, what is this employee benefit worth to you today?A.$40,384.69B.$42,618.46C.$44,211.11D.$44,306.16E.$44,987.74

30.The Design Team just decided to save $1,500 a month for the next 5 years as a safety net for recessionary periods. The money will be set aside in a separate savings account which pays 4.5 percent interest compounded monthly. The first deposit will be made today. What would today's deposit amount have to be if the firm opted for one lump sum deposit today that would yield the same amount of savings as the monthly deposits after 5 years?A.$80,459.07B.$80,760.79C.$81,068.18D.$81,333.33E.$81,548.20

Chapter 71.Mary just purchased a bond which pays $60 a year in interest. What is this $60 called?A.couponB.face valueC.discountD.call premiumE.yield2.Bert owns a bond that will pay him $75 each year in interest plus a $1,000 principal payment at maturity. What is the $1,000 called?A.couponB.face valueC.discountD.yieldE.dirty price3.A bond's coupon rate is equal to the annual interest divided by which one of the following?A.call priceB.current priceC.face valueD.clean priceE.dirty price4.The specified date on which the principal amount of a bond is payable is referred to as which one of the following?A.coupon dateB.yield dateC.maturityD.dirty dateE.clean date5.Currently, the bond market requires a return of 11.6 percent on the 10-year bonds issued by Winston Industries. The 11.6 percent is referred to as which one of the following?A.coupon rateB.face rateC.call rateD.yield to maturityE.interest rate6.The current yield is defined as the annual interest on a bond divided by which one of the following?A.couponB.face valueC.market priceD.call priceE.dirty price

7.An indenture is:A.another name for a bond's coupon.B.the written record of all the holders of a bond issue.C.a bond that is past its maturity date but has yet to be repaid.D.a bond that is secured by the inventory held by the bond's issuer.E.the legal agreement between the bond issuer and the bondholders.8.Atlas Entertainment has 15-year bonds outstanding. The interest payments on these bonds are sent directly to each of the individual bondholders. These direct payments are a clear indication that the bonds can accurately be defined as being issued:A.at par.B.in registered form.C.in street form.D.as debentures.E.as callable.9.A bond that is payable to whomever has physical possession of the bond is said to be in:A.new-issue condition.B.registered form.C.bearer form.D.debenture status.E.collateral status.10.The Leeward Company just issued 15-year, 8 percent, unsecured bonds at par. These bonds fit the definition of which one of the following terms?A.noteB.discountedC.zero-couponD.callableE.debenture11.Which of the following defines a note?I. securedII. unsecuredIII. maturity less than 10 yearsIV. maturity in excess of 10 yearsA.III onlyB.I and III onlyC.I and IV onlyD.II and III onlyE.II and IV only

12.A sinking fund is managed by a trustee for which one of the following purposes?A.paying interest paymentsB.early bond redemptionC.converting bonds into equity securitiesD.paying preferred dividendsE.reducing coupon rates13.A bond that can be paid off early at the issuer's discretion is referred to as being which one of the following?A.zero couponB.callableC.seniorD.collateralizedE.unsecured14.A $1,000 face value bond can be redeemed early at the issuer's discretion for $1,030, plus any accrued interest. The additional $30 is called which one of the following?A.dirty priceB.redemption valueC.call premiumD.original-issue discountE.redemption discount15.A deferred call provision is which one of the following?A.requirement that a bond issuer pay the current market price, plus accrued interest, should the firm decide to call a bondB.ability of a bond issuer to delay repaying a bond until after the maturity date should the issuer so optC.prohibition placed on an issuer which prevents that issuer from ever redeeming bonds prior to maturityD.prohibition which prevents bond issuers from redeeming callable bonds prior to a specified dateE.requirement that a bond issuer pay a call premium which is equal to or greater than one year's coupon should that issuer decide to call a bond16.A call-protected bond is a bond that:A.is guaranteed to be called.B.can never be called.C.is currently being called.D.is callable at any time.E.cannot be called during a certain period of time.17.The items included in an indenture that limit certain actions of the issuer in order to protect bondholder's interests are referred to as the:A.trustee relationships.B.bylaws.C.legal bounds.D."plain vanilla" conditions.E.protective covenants.18.A bond that has only one payment, which occurs at maturity, defines which one of the following?A.debentureB.callableC.floating-rateD.junkE.zero coupon19.Which one of the following is the price a dealer will pay to purchase a bond?A.call priceB.asked priceC.bid priceD.bid-ask spreadE.par value20.You want to buy a bond from a dealer. Which one of the following prices will you pay?A.call priceB.auction priceC.bid priceD.asked priceE.bid-ask spread21.The difference between the price that a dealer is willing to pay and the price at which he or she will sell is called the:A.equilibrium.B.premium.C.discount.D.call price.E.spread.22.A bond is quoted at a price of $989. This price is referred to as which one of the following?A.call priceB.face valueC.clean priceD.dirty priceE.wholesale price23.Pete paid $1,032 as his total cost of purchasing a bond. This price is referred to as the:A.quoted price.B.spread price.C.clean price.D.dirty price.E.call price.24.Real rates are defined as nominal rates that have been adjusted for which of the following?A.inflationB.default riskC.accrued interestD.interest rate riskE.both inflation and interest rate risk25.Interest rates that include an inflation premium are referred to as:A.annual percentage rates.B.stripped rates.C.effective annual rates.D.real rates.E.nominal rates.26.The Fisher effect is defined as the relationship between which of the following variables?A.default risk premium, inflation risk premium, and real ratesB.nominal rates, real rates, and interest rate risk premiumC.interest rate risk premium, real rates, and default risk premiumD.real rates, inflation rates, and nominal ratesE.real rates, interest rate risk premium, and nominal rates27.The pure time value of money is known as the:A.liquidity effect.B.Fisher effect.C.term structure of interest rates.D.inflation factor.E.interest rate factor.28.Which one of the following premiums is compensation for expected future inflation?A.default riskB.taxabilityC.liquidityD.inflationE.interest rate risk29.The interest rate risk premium is the:A.additional compensation paid to investors to offset rising prices.B.compensation investors demand for accepting interest rate risk.C.difference between the yield to maturity and the current yield.D.difference between the market interest rate and the coupon rate.E.difference between the coupon rate and the current yield.30.A Treasury yield curve plots Treasury interest rates relative to which one of the following?A.market ratesB.comparable corporate bond ratesC.the risk-free rateD.inflationE.maturityChapter 8

1.What is the model called that determines the present value of a stock based on its next annual dividend, the dividend growth rate, and the applicable discount rate?A.zero growthB.dividend growthC.capital pricingD.earnings capitalizationE.discounted dividend2.Which one of the following is computed by dividing next year's annual dividend by the current stock price?A.yield to maturityB.total yieldC.dividend yieldD.capital gains yieldE.growth rate3.Which one of following is the rate at which a stock's price is expected to appreciate?A.current yieldB.total returnC.dividend yieldD.capital gains yieldE.coupon rate4.Which one of the following types of stock is defined by the fact that it receives no preferential treatment in respect to either dividends or bankruptcy proceedings?A.dual classB.cumulativeC.non-cumulativeD.preferredE.common5.A company has two open seats, Seat A and Seat B, on its board of directors. There are 6 candidates vying for these 2 positions. There will be a single election to determine the winner of both open seats. As the owner of 100 shares of stock, you will receive one vote per share for each open seat. You decide to cast all 200 of your votes for a single candidate. What is this type of voting called?A.democraticB.cumulativeC.straightD.deferredE.proxy6.You want to be on the board of directors of Wisely Foods. Since you are the only shareholder that will vote for you, you will need to own more than half of the outstanding shares of stock if you are to be elected to the board. What is the type of voting called that requires this level of stock ownership to be successfully elected under these conditions?A.democraticB.cumulativeC.straightD.deferredE.proxy7.You cannot attend the shareholder's meeting for Alpha United so you authorize another shareholder to vote on your behalf. What is the granting of this authority called?A.alteringB.cumulative votingC.straight votingD.indenture agreementE.voting by proxy8.What are the distributions to shareholders by a corporation called?A.retained earningsB.net incomeC.dividendsD.capital paymentsE.diluted profits9.Which one of the following is a type of equity security that has a fixed dividend and a priority status over other equity securities?A.senior bondB.debentureC.warrantD.common stockE.preferred stock10.Callander Enterprises stock is listed on NASDAQ. The firm is planning to issue some new equity shares for sale to the general public. This sale will occur in which one of the following markets?A.privateB.auctionC.exchange floorD.secondaryE.primary11.The secondary market is best defined by which one of the following?A.market in which subordinated shares are issued and resoldB.market conducted solely by brokersC.market dominated by dealersD.market where outstanding shares of stock are resoldE.market where warrants are offered and sold12.An agent who maintains an inventory from which he or she buys and sells securities is called a:A.broker.B.trader.C.capitalist.D.principal.E.dealer.13.An agent who arranges a transaction between a buyer and a seller of equity securities is called a:A.broker.B.floor trader.C.capitalist.D.principal.E.dealer.14.The owner of one of the 1,366 trading licenses for the NYSE is called a:A.broker.B.member.C.agent.D.specialist.E.dealer.15.The person on the floor of the NYSE who executes buy and sell orders on behalf of customers is called a(n):A.floor trader.B.dealer.C.specialist.D.executor.E.commission broker.16.A market maker who acts as a dealer in one or more securities on the floor of the NYSE is called a:A.floor trader.B.floor post.C.specialist.D.floor broker.E.commission broker.17.A floor broker on the NYSE does which one of the following?A.supervises the commission brokers for a financial firmB.trades for his or her personal inventoryC.executes orders on behalf of a commission brokerD.maintains an inventory and takes the role of a specialistE.is charged with maintaining a liquid, orderly market18.An individual on the floor of the NYSE who owns a trading license and buys and sells for his or her personal account is called a:A.floor trader.B.exchange customer.C.specialist.D.floor broker.E.market maker.19.Which one of the following is the electronic system used by the NYSE for directly transmitting orders to specialists?A.OTCDOTB.SuperDOTC.InstinetD.InternetE.Floornet20.The stream of customer orders coming in to the NYSE trading floor is called the:A.paper trail.B.trading volume.C.order flow.D.bid-ask spread.E.commission trail.21.The counter area on the floor of the NYSE where a specialist operates is called a:A.pit.B.hot spot.C.seat.D.post.E.DOT.22.A securities market primarily comprised of dealers who buy and sell for their own inventories is referred to which type of market?A.auctionB.privateC.over-the-counterD.regionalE.electronic network23.An ECN is best described as:A.an electronic network which transmits orders directly to the floor of the NYSE.B.the network used in the primary market for selling newly issued shares.C.the international trading network of the NYSE.D.a website that allows individual investors to trade directly with one another.E.a computerized network used by independent brokers.24.National Trucking has paid an annual dividend of $1.00 per share on its common stock for the past fifteen years and is expected to continue paying a dollar a share long into the future. Given this, one share of the firm's stock is:A.basically worthless as it offers no growth potential.B.equal in value to the present value of $1 paid one year from today.C.priced the same as a $1 perpetuity.D.valued at an assumed growth rate of one percent.E.worth $1 a share in the current market.25.An increase in which of the following will increase the current value of a stock according to the dividend growth model?I. dividend amountII. number of future dividends, provided the current number is less than infiniteIII. discount rateIV. dividend growth rateA.I and II onlyB.III and IV onlyC.I, II, and III onlyD.I, II, and IV onlyE.I, II, III, and IV26.High Country Builders currently pays an annual dividend of $1.35 and plans on increasing that amount by 2.5 percent each year. Valley High Builders currently pays an annual dividend of $1.20 and plans on increasing its dividend by 3 percent annually. Given this information, you know for certain that the stock of High Country Builders' has a higher ______ than the stock of Valley High Builders.A.market priceB.dividend yieldC.capital gains yieldD.total returnE.The answer cannot be determined based on the information provided.27.The dividend growth model:I. assumes that dividends increase at a constant rate forever.II. can be used to compute a stock price at any point in time.III. can be used to value zero-growth stocks.IV. requires the growth rate to be less than the required return.A.I and III onlyB.II and IV onlyC.I, III, and IV onlyD.I, II, and IV onlyE.I, II, III, and IV28.Which one of the following is an underlying assumption of the dividend growth model?A.A stock has the same value to every investor.B.A stock's value is equal to the discounted present value of the future cash flows which it generates.C.A stock's value changes in direct relation to the required return.D.Stocks that pay the same annual dividend have equal market values.E.The dividend growth rate is inversely related to a stock's market price.29.Answer this question based on the dividend growth model. If you expect the market rate of return to increase across the board on all equity securities, then you should also expect:A.an increase in all stock values.B.all stock values to remain constant.C.a decrease in all stock values.D.dividend-paying stocks to maintain a constant price while non-dividend paying stocks decrease in value.E.dividend-paying stocks to increase in price while non-dividend paying stocks decrease in value.30.Which one of the following statements is correct concerning the two-stage dividend growth model?A.G1 cannot be negative.B.Pt = Dt/R.C.G1 must be greater than G2.D.G1 can be greater than R.E.R must be less than G1 but greater than G2.Chapter 141.A group of individuals got together and purchased all of the outstanding shares of common stock of DL Smith, Inc. What is the return that these individuals require on this investment called?A.dividend yieldB.cost of equityC.capital gains yieldD.cost of capitalE.income return2.Textile Mills borrows money at a rate of 13.5 percent. This interest rate is referred to as the:A.compound rate.B.current yield.C.cost of debt.D.capital gains yield.E.cost of capital.3.The average of a firm's cost of equity and aftertax cost of debt that is weighted based on the firm's capital structure is called the:A.reward to risk ratio.B.weighted capital gains rate.C.structured cost of capital.D.subjective cost of capital.E.weighted average cost of capital.4.When a manager develops a cost of capital for a specific project based on the cost of capital for another firm which has a similar line of business as the project, the manager is utilizing the _____ approach.A.subjective riskB.pure playC.divisional cost of capitalD.capital adjustmentE.security market line5.A firm's cost of capital:A.will decrease as the risk level of the firm increases.B.for a specific project is primarily dependent upon the source of the funds used for the project.C.is independent of the firm's capital structure.D.should be applied as the discount rate for any project considered by the firm.E.depends upon how the funds raised are going to be spent.6.The weighted average cost of capital for a wholesaler:A.is equivalent to the aftertax cost of the firm's liabilities.B.should be used as the required return when analyzing a potential acquisition of a retail outlet.C.is the return investors require on the total assets of the firm.D.remains constant when the debt-equity ratio changes.E.is unaffected by changes in corporate tax rates.7.Which one of the following is the primary determinant of a firm's cost of capital?A.debt-equity ratioB.applicable tax rateC.cost of equityD.cost of debtE.use of the funds8.Scholastic Toys is considering developing and distributing a new board game for children. The project is similar in risk to the firm's current operations. The firm maintains a debt-equity ratio of 0.40 and retains all profits to fund the firm's rapid growth. How should the firm determine its cost of equity?A.by adding the market risk premium to the after tax cost of debtB.by multiplying the market risk premium by (1 - 0.40)C.by using the dividend growth modelD.by using the capital asset pricing modelE.by averaging the costs based on the dividend growth model and the capital asset pricing model9.All else constant, which one of the following will increase a firm's cost of equity if the firm computes that cost using the security market line approach? Assume the firm currently pays an annual dividend of $1 a share and has a beta of 1.2.A.a reduction in the dividend amountB.an increase in the dividend amountC.a reduction in the market rate of returnD.a reduction in the firm's betaE.a reduction in the risk-free rate10.A firm's overall cost of equity is:A.is generally less that the firm's WACC given a leveraged firm.B.unaffected by changes in the market risk premium.C.highly dependent upon the growth rate and risk level of the firm.D.generally less than the firm's aftertax cost of debt.E.inversely related to changes in the firm's tax rate.11.The cost of equity for a firm:A.tends to remain static for firms with increasing levels of risk.B.increases as the unsystematic risk of the firm increases.C.ignores the firm's risks when that cost is based on the dividend growth model.D.equals the risk-free rate plus the market risk premium.E.equals the firm's pretax weighted average cost of capital.12.The dividend growth model can be used to compute the cost of equity for a firm in which of the following situations?I. firms that have a 100 percent retention ratioII. firms that pay a constant dividendIII. firms that pay an increasing dividendIV. firms that pay a decreasing dividendA.I and II onlyB.I and III onlyC.II and III onlyD.I, II, and III onlyE.II, III, and IV only13.The dividend growth model:A.is only as reliable as the estimated rate of growth.B.can only be used if historical dividend information is available.C.considers the risk that future dividends may vary from their estimated values.D.applies only when a firm is currently paying dividends.E.uses beta to measure the systematic risk of a firm.14.Which one of the following statements related to the SML approach to equity valuation is correct? Assume the firm uses debt in its capital structure.A.This model considers a firm's rate of growth.B.The model applies only to non-dividend paying firms.C.The model is dependent upon a reliable estimate of the market risk premium.D.The model generally produces the same cost of equity as the dividend growth model.E.This approach generally produces a cost of equity that equals the firm's overall cost of capital.15.Which of the following statements are correct?I. The SML approach is dependent upon a reliable measure of a firm's unsystematic risk.II. The SML approach can be applied to firms that retain all of their earnings.III. The SML approach assumes a firm's future risks are similar to its past risks.IV. The SML approach assumes the reward-to-risk ratio is constant.A.I and III onlyB.II and IV onlyC.III and IV onlyD.I, II, and III onlyE.II, III, and IV only16.The pre-tax cost of debt:A.is based on the current yield to maturity of the firm's outstanding bonds.B.is equal to the coupon rate on the latest bonds issued by a firm.C.is equivalent to the average current yield on all of a firm's outstanding bonds.D.is based on the original yield to maturity on the latest bonds issued by a firm.E.has to be estimated as it cannot be directly observed in the market.17.The aftertax cost of debt generally increases when:I. a firm's bond rating increases.II. the market rate of interest increases.III. tax rates decrease.IV. bond prices rise.A.I and III onlyB.II and III onlyC.I, II, and III onlyD.II, III, and IV onlyE.I, II, III, and IV18.The cost of preferred stock is computed the same as the:A.pre-tax cost of debt.B.return on an annuity.C.aftertax cost of debt.D.return on a perpetuity.E.cost of an irregular growth common stock.19.The cost of preferred stock:A.is equal to the dividend yield.B.is equal to the yield to maturity.C.is highly dependent on the dividend growth rate.D.is independent of the stock's price.E.decreases when tax rates increase.20.The capital structure weights used in computing the weighted average cost of capital:A.are based on the book values of total debt and total equity.B.are based on the market value of the firm's debt and equity securities.C.are computed using the book value of the long-term debt and the book value of equity.D.remain constant over time unless the firm issues new securities.E.are restricted to the firm's debt and common stock.21.Morris Industries has a capital structure of 55 percent common stock, 10 percent preferred stock, and 45 percent debt. The firm has a 60 percent dividend payout ratio, a beta of 0.89, and a tax rate of 38 percent. Given this, which one of the following statements is correct?A.The aftertax cost of debt will be greater than the current yield-to-maturity on the firm's bonds.B.The firm's cost of preferred is most likely less than the firm's actual cost of debt.C.The firm's cost of equity is unaffected by a change in the firm's tax rate.D.The cost of equity can only be estimated using the SML approach.E.The firm's weighted average cost of capital will remain constant as long as the capital structure remains constant.22.The after tax cost of debt:A.varies inversely to changes in market interest rates.B.will generally exceed the cost of equity if the relevant tax rate is zero.C.will generally equal the cost of preferred if the tax rate is zero.D.is unaffected by changes in the market rate of interest.E.has a greater effect on a firm's cost of capital when the debt-equity ratio increases.23.The weighted average cost of capital for a firm may be dependent upon the firm's:I. rate of growth.II. debt-equity ratio.III. preferred dividend payment.IV. retention ratio.A.I and III onlyB.II and IV onlyC.I, II, and IV onlyD.I, III, and IV onlyE.I, II, III, and IV24.The weighted average cost of capital for a firm is the:A.discount rate which the firm should apply to all of the projects it undertakes.B.rate of return a firm must earn on its existing assets to maintain the current value of its stock.C.coupon rate the firm should expect to pay on its next bond issue.D.minimum discount rate the firm should require on any new project.E.rate of return shareholders should expect to earn on their investment in this firm.25.Which one of the following statements is correct for a firm that uses debt in its capital structure?A.The WACC should decrease as the firm's debt-equity ratio increases.B.When computing the WACC, the weight assigned to the preferred stock is based on the coupon rate multiplied by the par value of the preferred.C.The firm's WACC will decrease as the corporate tax rate decreases.D.The weight of the common stock used in the computation of the WACC is based on the number of shares outstanding multiplied by the book value per share.E.The WACC will remain constant unless a firm retires some of its debt.26.If a firm uses its WACC as the discount rate for all of the projects it undertakes then the firm will tend to:I. reject some positive net present value projects.II. accept some negative net present value projects.III. favor high risk projects over low risk projects.IV. increase its overall level of risk over time.A.I and III onlyB.III and IV onlyC.I, II, and III onlyD.I, II, and IV onlyE.I, II, III, and IV27.Preston Industries has two separate divisions. Each division is in a separate line of business. Division A is the largest division and represents 70 percent of the firm's overall sales. Division A is also the riskier of the two divisions. Division B is the smaller and least risky of the two. When management is deciding which of the various divisional projects should be accepted, the managers should:A.allocate more funds to Division A since it is the largest of the two divisions.B.fund all of Division B's projects first since they tend to be less risky and then allocate the remaining funds to the Division A projects that have the highest net present values.C.allocate the company's funds to the projects with the highest net present values based on the firm's weighted average cost of capital.D.assign appropriate, but differing, discount rates to each project and then select the projects with the highest net present values.E.fund the highest net present value projects from each division based on an allocation of 70 percent of the funds to Division A and 30 percent of the funds to Division B.28.Markley and Stearns is a multi-divisional firm that uses its WACC as the discount rate for all proposed projects. Each division is in a separate line of business and each presents risks unique to those lines. Given this, a division within the firm will tend to:A.receive less project funding if its line of business is riskier than that of the other divisions.B.avoid risky projects so it can receive more project funding.C.become less risky over time based on the projects that are accepted.D.have equal probability of receiving funding as compared to the other divisions.E.prefer higher risk projects over lower risk projects.29.The discount rate assigned to an individual project should be based on:A.the firm's weighted average cost of capital.B.the actual sources of funding used for the project.C.an average of the firm's overall cost of capital for the past five years.D.the current risk level of the overall firm.E.the risks associated with the use of the funds required by the project.30.Assigning discount rates to individual projects based on the risk level of each project:A.may cause the firm's overall weighted average cost of capital to either increase or decrease over time.B.will prevent the firm's overall cost of capital from changing over time.C.will cause the firm's overall cost of capital to decrease over time.D.decreases the value of the firm over time.E.negates the firm's goal of creating the most value for the shareholders.