1. Callable bond Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds? (Points: 1) A reduction in market interest rates. The company's bonds are downgraded. An increase in the call premium. Answers a and b are correct. Answers a, b, and c are correct.
2. Bond coupon rate All of the following may serve to reduce the coupon rate that would otherwise be required on a bond issued at par, except a (Points: 1) Sinking fund. Restrictive covenant. Call provision. Change in rating from Aa to Aaa. None of the answers above (all may reduce the required coupon rate).
3. Required return If the expected rate of return on a stock exceeds the required rate, (Points: 1) The stock is experiencing supernormal growth. The stock should be sold. The company is probably not trying to maximize price per share. The stock is a good buy. Dividends are not being declared.
4. Constant growth model A stockâ€™s dividend is expected to grow at a constant rate of 5 percent a year. Which of the following statements is most correct? (Points: 1) The expected return on the stock is 5 percent a year. The stockâ€™s dividend yield is 5 percent. The stockâ€™s price one year from now is expected to be 5 percent higher. Statements a and c are correct. All of the statements above are correct.
5. The preemptive right is important to shareholders because it (Points: 1) Allows management to sell additional shares below the current market price. Protects the current shareholders against dilution of ownership interests. Is included in every corporate charter. Will result in higher dividends per share. The preemptive right is not important to shareholders.
6. Efficient markets hypothesis Which of the following statements is most correct? (Points: 2) An individual who has information about past stock prices should be able to profit from this information in a weak-form efficient market. Semistrong-form market efficiency means that stock prices reflect all public information. An individual who has inside information about a publicly traded company should be able to profit from this information in a strong-form efficient market. Statements a and c are correct. All the statements above are correct.
7. Preferred stock concepts Which of the following statements is most correct? (Points: 1) Preferred stockholders have priority over common stockholders. A big advantage of preferred stock is that preferred stock dividends are tax deductible for the issuing corporation. Most preferred stock is owned by corporations. Statements a and b are correct. Statements a and c are correct.
8. Common stock concepts Which of the following statements is most correct? (Points: 1) One of the advantages of financing with stock is that a greater proportion of stock in the capital structure can reduce the risk of a takeover bid. A firm with classified stock can pay different dividends to each class of shares. One of the advantages of financing with stock is that a firmâ€™s debt ratio will decrease. Both statements b and c are correct. All of the statements above are correct.
9. Semistrong-form efficiency If the stock market is semistrong efficient, which of the following statements is most correct?
(Points: 2) All stocks should have the same expected returns; however, they may have different realized returns. In equilibrium, stocks and bonds should have the same expected returns. Investors can outperform the market if they have access to information which has not yet been publicly revealed. If the stock market has been performing strongly over the past several months, stock prices are more likely to decline than increase over the next several months. None of the statements above is correct.
10. Constant growth stock A share of common stock has just paid a dividend of $3.00. If the expected long-run growth rate for this stock is 5 percent, and if investors require an 11 percent rate of return, what is the price of the stock? Hint: P0 = D0(1 + g)/(rs-g) (Points: 2) $50.00 $50.50 $52.50 $53.00 $63.00
11. Preferred stock value The Jones Company has decided to undertake a large project. Consequently, there is a need for additional funds. The financial manager plans to issue preferred stock with a perpetual annual dividend of $5 per share and a par value of $30. If the required return on this stock is currently 20 percent, what should be the stock's market value? Hint: Vps = Dps/rps (Points: 2) $150 $100 $ 50 $ 25 $ 10
12. Sinking fund Which of the following statements is most correct? (Points: 1) Sinking fund provisions do not require companies to retire their debt; they only establish targets for the company to reduce its debt over time. Sinking fund provisions sometimes work to the detriment of bondholders â€“ particularly if interest rates have declined over time. If interest rates have increased since the time a company issues bonds with a sinking fund provision, the company is more likely to retire the bonds by buying them back in the open market, as opposed to calling them in at the sinking fund call price. Statements a and b are correct. Statements b and c are correct.
13. Bond value - semiannual payment Assume that you wish to purchase a bond with a 30-year maturity, an annual coupon rate of 10 percent, a face value of $1,000, and semiannual interest payments. If you require a 9 percent nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond? Hint: VB = PMT((1- 1/(1+i)n)/i) + M (1/(1+i)n) (Points: 3) $905.35 $1,102.74 $1,103.19 $1,106.76 $1,149.63
14. Bond value - semiannual payment Assume that you wish to purchase a 20-year bond that has a maturity value of $1,000 and makes semiannual interest payments of $40. If you require a 10 percent nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond? Hint: VB = PMT((1- 1/(1+i)n)/i) + M (1/(1+i)n) (Points: 3) $619 $674 $761 $828 $902
15. Bond value - semiannual payment You intend to purchase a 10-year, $1,000 face value bond that pays interest of $60 every 6 months. If your nominal annual required rate of return is 10 percent with semiannual compounding, how much should you be willing to pay for this bond? Hint: VB = PMT((1- 1/(1+i)n)/i) + M (1/(1+i)n) (Points: 3) $ 826.31 $1,086.15 $ 957.50 $1,431.49 $1,124.62