1.) The ________ method provides the number of years required for a project to repay its initial investment. a. modified internal rate of return b. internal rate of return c. net present value d. payback
2.) Crater Lake Diagnostics Inc. is considering the purchase of a new piece of equipment that has an initial investment of $75,000, has annual expenses associated with its operation of $10,000 per year and has a six year life. What is the equivalent annual cost of this investment if the firms considers the appropriate discount rate to be 11%? a. $17,728 b. $19,551 c. $22,500 d. $27,728
3.) The ________ method is a capital budgeting technique for evaluating projects of unequal lives. a. equivalent annual cost b. equal amortization c. straight-line annuity d. none of the above
4.) The profitability index method of project evaluation provides an answer that is a ______. a. rate of interest b. dollar value. c. time period d. ratio
5.) Which of the following statements regarding the MIRR and how it solves problems with the IRR is not accurate? a. The MIRR eliminates the problem of multiple IRRs. b. The MIRR eliminates the problem of the assumption of always reinvesting at the IRR. c.The MIRR eliminates the problem of arbitrarily choosing a required rate of return (AKA the hurdle rate). d. all of the above are accurate
6.) If a project has a ________ NPV, it should also have an IRR ________ the hurdle rate. a. positive; greater than b. positive; less than c. negative; greater than d. negative; equal to
7.) The ________ measure is similar to the yield to maturity measure for bonds. a. NPV b. IRR c. MIRR d. payback
8.) The decision rule for net present value declares that a project is acceptable if ______. a. it pays back within a specified time period b. the rate of return is greater than the firm’s cost of capital c. the present value of the cash inflows exceeds the initial cash outflow d. all of the statements above are true
9.) Corporate bond yields are higher than similar maturity government bond yields due to ______. a. higher overall tax rates on corporate bonds than on government bonds b. Interest rates are deductible as expenses for tax purposes c. they include a sinking fund feature d. greater risk on the part of corporate bonds
10.) Empirical evidence supports the notion that U.S. stock markets are generally _________ form efficient. a. weak b. semi-strong c. strong d. The studies have shown mixed results.
11.) The ________ is a regulatory document filed with the SEC that describes the details of the IPO and is meant to help investors make informed decisions. a. red herring b. prospectus c. indenture d. debenture
12.) Which of the following interest rates would be inappropriate for use as a base rate for a variable rate bond? a. the prime rate b. LIBOR c. a rate determined by the bond issuer’s board of directors d. the 10-year Treasury bond rate
13.) Which of the following statements is NOT true? a. Investments rated below BBB- are known as high quality bonds. b. Investment grade securities should include those with a bond rating of AA. c.
A “fallen angel” is a bond that at one time was an investment grade security, but whose bond ratings has subsequently dropped. d. Another colorful term for non-investment grade bonds is “junk bonds.”
14.) The least frequently issued capital financial instruments listed herein are ______. a. preferred shares b. common shares c. bonds d. all these instruments are issued in similar magnitude
15.) The ________ feature found with many issues of preferred stock requires that all current and past due preferred dividends must be paid prior to any dividend payout to common shareholders.
a. cumulative b. participating c. convertible d. historical
16.) Firms must make regular payments to ________ but are under no contractual obligation to pay dividends to ________. a. common stockholders; preferred stockholders b. preferred stockholders; bondholders c. bondholders; common stockholders d. common stockholders, bondholders
17.) ________ is a measure of dispersion and is one way of measuring the risk of securities and portfolios. a. Diversification b. Expected return c. Standard deviation d. Statistics
18.) Another name for market risk is ______. a. systematic risk b. standard deviation c. unsystematic risk d. total risk
19.) If a firm has publicly traded debt then the yield to maturity is approximately the same as ______.
a. the after-tax cost of debt b. the before-tax cost of debt c. the 10-year Treasury bond rate d. the WACC 20.) If a firm increases the amount of debt that it has this could lead to an increase in ______. a. financial risk b. the cost of equity c. both the cost of equity and the financial risk d. none of the above
21.) ________ represent current investor expectations about a firm whereas ________ are representations of historical costs. a. Book values; market values b. Market values; book values c. Regulators; investment bankers d. Common equity holders; bondholders
22.) A firm with a beta of 1.0 and when held in a well-diversified portfolio should be considered to have ________ risk than the market portfolio. a. less b. neither more nor less c. more d. There is not enough information to answer this question.
23.) Transit Design Inc. recently paid a $1.00 dividend, has a beta of 0.75, has determined that the market risk premium is 10% and the current risk-free rate is 4%. What is the firm’s required return on equity? a. 14.00% b. 14.50% c. 11.50% d. 8.50%
24.) If a firm does not have publicly traded debt and therefore does not have a yield to maturity as an estimate for its cost of debt, a common practice is to estimate the cost of debt by adding a premium to the rate on ______. a. the cost of accounts payable b. equity c. long-term government bonds d. collateralized debt obligations
25.) All else being equal, investors “like” ________ and “dislike” ________. a. risk; return b. return; risk c. standard deviation; risk d. diversification; return
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