The par value of a bond: never equals its market value. is determined by the inv

Question

The par value of a bond:

never equals its market value.

is determined by the investor.

generally is $1,000.

is never returned to the bondholder.

3 points

Question 2

The interest on corporate bonds is typically paid:

semiannually.

annually.

quarterly.

monthly.

3 points

Question 3

The issuance of bonds to raise capital for a corporation:

magnifies the returns to the stockholders.

increases risk to the stockholders.

is a cheaper form of capital than the issuance of common stock.

All of these.

None of these.

3 points

Question 4

The yield to maturity on a bond:

is fixed in the indenture.

is lower for higher-risk bonds.

is the required return on the bond.

is generally equal to the coupon interest rate.

3 points

Question 5

Colby & Company bonds pay semiannual interest of $50. They mature in 15 years and have a par value of $1,000. The market rate of interest is 10%. The market value of Colby bonds is (round to the nearest dollar):

$1,173.

$743.

$1,000.

$827.

3 points

Question 6

If current market interest rates rise, what will happen to the value of outstanding bonds?

It will rise.

It will fall.

It will remain unchanged.

There is no connection between current market interest rates and the value of outstanding bonds.

3 points

Question 7

Which of the following bonds is sold by a corporation at a discount and pays no interest?

An indenture bond

A zero coupon bond

A junk bond

A eurobond

3 points

Question 8

You are evaluating the purchase of Cellars, Inc. common stock that just paid a dividend of $1.80. You expect the dividend to grow at a rate of 12% for the next three years. You plan to hold the stock for three years and then sell it. You estimate that a required rate of return of 17.5% will be adequate compensation for this investment. Calculate the present value of the expected dividends. Round to the nearest $0.10.

$4.90

$11.50

$9.80

$6.10

3 points

Question 9

ABC, Inc. will pay a dividend of $2, analysts expect. ABC expects dividends to grow at 10%. The return on stocks like ABC, Inc. is typically around 12%. What is the most you would pay for a share of ABC stock?

$100

$110

$120

$130

3 points

Question 10

Common stockholders expect greater returns than bondholders because:

they have no legal right to receive dividends.

they bear greater risk.

in the event of liquidation, they are only entitled to receive any cash that is left after all creditors are paid.

All of these.

3 points

Question 11

How is preferred stock affected by a decrease in the required rate of return?

The value of a share of preferred stock decreases.

The dividend increases.

The dividend decreases.

The value of a share of preferred stock increases.

3 points

Question 12

In the event of bankruptcy, preferred stockholders and common stockholders have the same claim on the firm's assets.

True

False

3 points

Question 13

Errors in capital budgeting decisions:

tend to average out over time.

decrease the firm's value.

are diminished because the time value of money makes future cash flows less important.

are easily reversed.

3 points

Question 14

Which of the following is a typical capital budgeting decision?

Purchase of office supplies

Granting credit to a new customer

Replacement of manufacturing equipment with more modern and efficient equipment

Financing the firm with more long-term debt and less equity

3 points

Question 15

Central Mass Ambulance Service can purchase a new ambulance for $200,000 that will provide an annual net cash flow of $50,000 per year for five years. The salvage value of the ambulance will be $25,000. Assume the ambulance is sold at the end of year 5. Calculate the NPV of the ambulance if the required rate of return is 9%. (Round your answer to the nearest $1.)

$(10,731)

$10,731

$(5,517)

$5,517

3 points

Question 16

Suppose you determine that the NPV of a project is $1,525,855. What does that mean?

In all cases, investing in this project would be better than investing in a project that has an NPV of $850,000.

The project would add value to the firm.

Under all conditions, the project's payback would be less than the profitability index.

Other investment criteria might need to be considered.

3 points

Question 17

3.43 years

3.17 years

2.88 years

2.6 years

3 points

Question 18

If a project has a profitability index greater than 1,

the npv will also be positive.

the irr will be higher than the required rate of return.

the present value of future cash flows will exceed the amount invested in the project.

All of these.

3 points

Question 19

Whenever the IRR on a project equals that project's required rate of return,

the NPV equals 0.

The NPV equals the initial investment.

The profitability index equals 0.

The NPV equals 1.

3 points

Question 20

Relevant incremental cash flows include:

sales captured from the firm's competitors.

retained sales that would have been lost to new competing products.

incremental sales brought to the firm as a whole.

All of these.

3 points

Question 21

Which of the following is an example of a sunk cost?

Overhead costs that are associated with a project

Interest expense associated with a project

Market study expenses incurred in order to decide if a firm should accept a project

Income taxes associated with a project

Depreciation expenses associated with a project

3 points

Question 22

If an investment project would make use of land which the firm currently owns, the project should be charged with:

a sunk cost.

an opportunity cost.

amortization.

interest.

abuse of power.

3 points

Question 23

Depreciation expenses affect capital budgeting analysis by increasing:

taxes paid.

incremental cash flows.

the initial outlay.

working capital.

3 points

Question 24

Which of the following is a reason why risk analysis is an important part of capital budgeting?

The people who propose projects have no vested interest in whether or not they are accepted.

Marketing managers are rarely excessively optimistic.

Project cash flows can be highly uncertain.

Financial analysts are rarely excessively pessimistic.

3 points

Question 25

Most of the variables used in forecasting cash flows are known with certainty.

True

False

3 points

Question 26

Which of the following are usually known with a high level of confidence at the beginning of a project?

The number of units that will be sold.

The price per unit that will result in the desired number of units sold.

Tax rates and depreciation rates.

None of these.

3 points

Question 27

Real options can have the effect of:

increasing a project's NPV.

reducing a project's risk.

gaining information about future opportunities.

All of these.

3 points

Question 28

The weights used to determine the relative importance of the firm's sources of capital should reflect:

book values in accord with generally accepted accounting principles.

current market values for bonds, common stock, and preferred stock and book values for retained earnings.

current market values.

subjective adjustments for firm risk.

3 points

Question 29

The minimum rate of return necessary to attract an investor to purchase or hold a security is called the cost of capital.

True

False

3 points

Question 30

The firm should continue to invest in new projects up to the point where the marginal rate of return earned on a new investment equals the marginal cost of new capital.

True

False

3 points

Question 31

Capital structure represents the mix of long-term sources of funds used by a firm.

True

False

3 points

Question 32

The CAPM approach is used to determine the cost of:

debt.

preferred stock.

common equity.

long term funds.

3 points

Question 33

Which of the following is NOT a component of a firm's capital structure?

Preferred stock

Bonds

Common stock

Accounts payable

Retained earnings

3 points

Question 34

The capital structure that minimizes the weighted average cost of capital will also:

maximize EPS for any given level of EBIT.

minimize the value of the firm.

minimizes bankruptcy costs.

maximize the price per share of common stock

never equals its market value.

is determined by the investor.

generally is $1,000.

is never returned to the bondholder.

Explanation / Answer

The par value of a bond: is generally $1000.

Par value means Face value of the Bond on which interst is calculated

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