Finance CH 6, 7, 8

Which of the following statements is true regarding convertible​ bonds?A. The holder has the right to sell these bonds back to the issuer if the bonds​ don’t perform well.B. These bonds are convertible into common stock of the issuing firm at a prespecified price.C. The holder can convert these bonds into an equal number of new bonds if they choose to do so.D. These bonds have a variable interest rate. B
If a corporation were to choose between issuing a​ debenture, a mortgage​ bond, or a subordinated​ debenture, which would have the highest yield to​ maturity, everything else​ equal?A. the mortgage bondB. the subordinated debentureC. the debentureD. all of the above B
Progressive Corporation issued callable bonds. The bonds are most likely to be called ifA. interest rates increase.B. Progressive​ Corporation’s stock price increases dramatically.C. Progressive Corporation needs additional financing.D. interest rates decrease. D
Which of the following statements concerning junk bonds is MOST​ correct?A. A rational investor will always prefer a AAAminusrated bond to a junk bond.B. Junk bonds may also be called lowminusyielding securities.C. Junk bonds are priced higher than AAAminusrated bonds because junk bonds are more risky.D. Junk bonds have higher interest rates than AAAminusrated bonds because of the higher risk. D
​Speculative, or nonminusinvestmentminus​grade, bonds have an​ S&P bond rating ofA. BBB or less.B. C or less.C. BB or less.D. CCC or less. C
____ is the value of an asset as shown on the​ firm’s balance sheet book value
____ is the dollar sum that could be realized if an asset were sold. liquidation value
____ is the value observed in the market place. market value
____ is the present value of an​ asset’s expected future cash flows. intrinsic value
If markets were entirely efficient​ (perfect), which of the following would we​ conclude?A. Book value would be the same as market value.B. There would be no inflation.C. No firms would ever default on their bonds.D. Market value and intrinsic value would be the same. D
As interest​ rates, and consequently​ investors’ required rates of​ return, change over time the​ ________ of outstanding bonds will change as a result.A. priceB. par valueC. coupon interest paymentD. maturity date A
Charlie Corporation has two bonds outstanding. Both bonds mature in 10​ years, have a face value of​ $1,000, and have a yield to maturity of​ 8%. One bond is a zero coupon bond and the other bond has a coupon rate of​ 8%. Which of the following statements is​ true?A. Both bonds must sell for the same price if markets are in equilibrium.B. The zero coupon bond must have a higher price because of its greater capital gain potential.C. The zero coupon bond must sell for a lower price than the bond with an​ 8% coupon rate.D. All rational investors will prefer the​ 8% bond because it pays more interest. C
Which of the following will cause the value of a bond to​ increase, other things held the​ same? A. The​ company’s debt rating drops from AAA to BBB.B. The bond is callable. C. Interest rates decrease.D. ​Investors’ required rate of return increases. C
A corporate bond has a coupon rate of​ 9%, a face value of​ $1,000, and matures in 15 years. Which of the following statements is MOST​ correct?A. If the​ bond’s market price is​ $900, then the annual interest payments on the bond will be​ $81.B. An investor with a required return of​ 10% will value the bond at more than​ $1,000.C. An investor who buys the bond for​ $900 and holds the bond until maturity will have a capital loss.D. An investor who buys the bond for​ $900 will have a yield to maturity on the bond greater than​ 9%. D
If market interest rates riseA. shortminusterm bonds will decline in value more than longminusterm bonds.B. longminusterm bonds will rise in value more than shortminusterm bonds.C. longminusterm bonds will decline in value more than shortminusterm bonds.D. shortminusterm bonds will rise in value more than longminusterm bonds. C
correct, 6.2-16 You must add one of two investments to an already wellminus diversified portfolio.Security ASecurity BExpected Return​ = 14%Expected Return​ = 14%Standard Deviation ofStandard Deviation ofReturns​ = ​ 15.8%Returns​ = 19.7%Beta​ = 1.8Beta​ = 1.5If you are a riskminusaverse ​investor, which one is the better​ choice?A. Security AB. Security BC. Either security would be acceptable.D. Cannot be determined with information given B
You are considering investing in Ford Motor Company. Which of the following are examples of diversifiable​ risk?I. Risk resulting from possibility of a stock market crash.II. Risk resulting from uncertainty regarding a possible strike against Ford.III. Risk resulting from an expensive recall of a Ford product.IV. Risk resulting from interest rates decreasing.A. I onlyB. ​I, II,​ III, IVC. I and IVD. ​II, III D
Of the​ following, which differs in meaning from the other​ three?A. market riskB. systematic riskC. assetminusunique riskD. undiversifiable risk C
Beta is a statistical measure ofA. total risk.B. the standard deviation.C. unsystematic risk.D. the relationship between an​ investment’s returns and the market return. D
Portfolio risk is typically measured by​ ________ while the risk of a single investment is measured by​ ________.A. standard​ deviation; betaB. ​beta; slope of the characteristic lineC. security market​ line; standard deviationD. ​beta; standard deviation D
Investment A has an expected return of​ 14% with a standard deviation of​ 4%, while investment B has an expected return of​ 20% with a standard deviation of​ 9%. Therefore,A. a risk averse investor will definitely select investment A because the standard deviation is lower.B. it is irrational for a riskminusaverse investor to select investment B because its standard deviation is more than twice as big as investment​ A’s, but the return is not twice as big.C. rational investors could pick either A or​ B, depending on their level of risk aversion.D. a rational investor will pick investment B because the return adjusted for risk​ (20% minus ​9%) is higher than the return adjusted for risk for investment A​ ($14% minus ​4%). C
Changes in the general​ economy, like changes in interest rates or tax​ laws, represent what type of​ risk?A. diversifiable riskB. unsystematic riskC. companyminusunique riskD. market risk D
The capital asset pricing modelA. provides a riskminusreturn trademinusoff in which risk is measured in terms of beta.B. depicts the total risk of a security.C. provides a riskminusreturn trademinusoff in which risk is measured in terms of the market volatility.D. measures risk as the coefficient of variation between security and market rates of return. A
Which of the following has a beta of​ zero? ​(Select the best choice​ below.)A. The marketB. A​ high-risk assetC. A​ risk-free assetD. Both A and B C
How is preferred stock similar to​ bonds?A. Preferred stockholders receive a dividend payment​ (much like interest payments to​ bondholders) that is usually fixed.B. Investors can sue the firm if preferred dividend payments are not paid​ (much like bondholders can sue for nonminuspayment of interest​ payments).C. Dividend payments to preferred shareholders​ (much like bond interest payments to​ bondholders) are tax deductible.D. Preferred stock is not like bonds in any way. A
Cumulative preferred stockA. has a claim to dividends before bonds.B. requires dividends in arrears to be carried over into the next period.C. has a higher required return than common stock.D. has a right to vote cumulatively. B
Many preferred stocks have a provision that entitles a company to repurchase its preferred stock from their holders at stated prices over a given time period. What is the name of this​ provision?A. callableB. convertibleC. cumulativeD. putable A
Preferred stock differs from common stock in thatA. preferred stock investors have a higher required return than common stock investors.B. preferred stock dividends are fixed.C. preferred stock usually has a maturity date.D. common stock investors have a required return and preferred stock investors do not. B
If a shareholder cannot attend the​ corporation’s annual​ meeting, the shares may still be voted usingA. the cumulative voting right.B. a proxy.C. majority voting rules.D. the preemptive right. B
What provision entitles the common shareholder to maintain a proportionate share of ownership in a​ firm?A. the convertible featureB. the preemptive rightC. the cumulative featureD. the proportionality clause B
Which of the following​ features, or​ benefits, belong to a​ firm’s common​ stockholders?A. voting rightsB. ownership of the firmC. limited liabilityD. all of the above D
Who bears the greatest risk of loss of value if a firm should​ fail?A. bondholdersB. common stockholdersC. preferred stockholdersD. All of the above bear equal risk of loss. B
You observe Thundering Herd Common Stock selling for​ $40.00 per share. The next dividend is expected to be​ $4.00, and is expected to grow at a​ 5% annual rate forever. If your required rate of return is​ 12%, should you purchase the​ stock?A. ​yes, because the present value of the expected future cash flows is greater than​ $40B. ​yes, because the present value of the expected future cash flows is less than​ $40C. ​no, because the present value of the expected future cash flows is less than​ $40D. ​no, because the present value of the expected future cash flows is greater than​ $40 A
Stock A has the following returns for various states of the economy:(Table)Stock A’s expected return isA) 9.9%. B) 12.7%. C) 13.8%. D) 16.5%. B
Your investment has a 40% chance of earning a 15% rate of return, a 50% chance of earning a 10% rate of return, and a 10% chance of losing 3%. What is the standard deviation of this investment?A) 7.59% B) 8.43% C) 5.14% D) 9.29% C
You must add one of two investments to an already well-diversified portfolio.(Table)If you are a risk-averse investor, which one is the better choice? A) Security A B) Security B C) Either security would be acceptable. D) Cannot be determined with information given B
You are considering buying some stock in Continental Grain. Which of the following are examples of non-diversifiable (i.e. systematic) risks?I. Risk resulting from a general decline in the stock market.II. Risk resulting from a possible increase in inflation.III. Risk resulting from an explosion in a grain elevator owned by Continental.IV. Risk resulting from a pending lawsuit against Continental. A) I only B) I and II C) III and IV D) II, III, and IV B
If you hold a portfolio made up of the following stocks: Investment Value/BetaStock X: $4,000/1.5Stock Y: $5,000/1.0Stock Z: $1,000/0.5What is the beta of the portfolio? A) 1.24 B) 1.15 C) 1.00 D) 1.33 B
Which of the following statements is MOST correct concerning diversification and risk? A) Risk-averse investors often select portfolios that include only companies from the same industry group because the familiarity reduces the risk. B) Proper diversification generally results in the elimination of all risk. C) Risk-averse investors often choose companies from different industries for their portfolios because the correlation of returns is less than if all the companies came from the same industry. D) Only wealthy investors can diversify their portfolios because a portfolio must contain at least 50 stocks to gain the benefits of diversification. C
A stock’s beta is a measure of its A) systematic risk. B) company-unique risk. C) diversifiable risk. D) unsystematic risk. A
The risk-free rate of interest is 4%, the market risk premium is 9%, and Howard Corporation has a beta of 2.0. The required return on Howard Corporation stock is: A) 36%. B) 34%. C) 22%. D) 26%. C
You are considering an investment in Citizens Bank Corp. The firm has a beta of 1.6. Currently, U.S. Treasury bills are yielding 2.75% and the expected return for the S&P 500 stock index is 14%. What rate of return should you expect for your investment in Citizens Bank? A) 20.75% B) 11.15% C) 15.39% D) 16.75% A
Progressive Corporation issued callable bonds. The bonds are most likely to be called if A) interest rates increase. B) Progressive Corporation’s stock price increases dramatically. C) interest rates decrease. D) Progressive Corporation needs additional financing. C
Which of the following statements concerning bonds and risk is true? A) Coupon bonds are always riskier than zero-coupon bonds because of the time value of money. B) AA-rated bonds are considered to have extremely high default risk. C) One reason bonds are considered less risky than common stock is because of the preference for debt over equity in the event of bankruptcy and liquidation. D) Because the interest payments and maturity value are known, there is no risk to investing in corporate bonds. C
A 15-year annual coupon bond issued by Liberty, Inc. has a coupon rate of 8% and a face value of $1,000. What is the value to an investor with a required return of 12.5%? A) $658.94 B) $750.86 C) $701.52 D) $800.00 C
If the market price of a bond decreases, then A) the yield to maturity decreases. B) the coupon rate decreases. C) the yield to maturity increases. D) the coupon rate increases. C
What is the yield to maturity of a corporate bond with 13 years to maturity, a coupon rate of 8% per year, a $1,000 par value, and a current market price of $1,250? Assume semiannual coupon payments. (Round answer to nearest 0.1%) A) 6.0% B) 4.2% C) 4.7% D) 5.3% D
Alice Kitchen’s, Inc. bonds have a 10% coupon rate with semiannual coupon payments. They have 12.5 years to maturity and a par value of $1,000. Compute the value of Alice’s bonds if investors’ required rate of return is 8%. A) $1,084.44 B) $1,239.33 C) $1,156.22 D) $1,137.10 C
The above table shows the yields to maturity on a number of three-year, zero-coupon securities. What is the price per $100 of the face value of a three-year, zero-coupon corporate bond with a BBB rating? A) $66.04 B) $99.06 C) $115.57 D) $82.55 D
Which of the following statements is MOST correct? A) If a bond’s yield to maturity exceeds its coupon rate, the bond’s price must be less than its par value. B) If two bonds have the same maturity, the same yield to maturity, and the same level of risk, the bonds should sell for the same price regardless of the bond’s coupon rate. C) If a bond’s yield to maturity exceeds its coupon rate, the bond’s current yield must also exceed its coupon rate. D) All of the above are correct. A
If market interest rates increase, A) short-term bonds will rise in value more than long-term bonds. B) long-term bonds will rise in value more than short-term bonds. C) long-term bonds will decline in value more than short-term bonds. D) short-term bonds will decline in value more than long-term bonds. C
Whistle Corp. has a preferred stock that pays a dividend of $2.40. If you are willing to purchase the stock at $11, what is your required rate of return? (Round your answer to the nearest 0.1%) A) 11.0% B) 20.1% C) 9.1% D) 21.8% D
Which of the following is NOT true regarding common stock? A) Common stock, unlike bond principal, does not mature. B) Dividend payments, like interest payments, are fixed. C) Common stockholders are owners of the firm, whereas bondholders are creditors. D) Dividends, unlike interest payments, are not tax deductible. B
The Western State Company’s common stock is expected to pay a $2.00 dividend in the coming year. If investors require a 17% return and the growth rate in dividends is expected to be 8%, what will the market price of the stock be? A) $22.22 B) $11.76 C) $24.00 D) $23.11 A
The decision that most directly influences the growth rate of future common stock earnings per share and dividends per share is: A) issuing new stock to provide capital for future growth. B) acquiring a loan to fund an investment in emerging markets. C) retaining profits in order to reinvest into the firm. D) acquiring another firm to quickly increase total assets. C
Bensen Co. paid a dividend of $5.25 on its common stock yesterday. The company’s dividends are expected to grow at a constant rate of 8.5% indefinitely. The required rate of return on this stock is 15.5%. You observe a market price of $78.50 for the stock. Should you purchase this stock? A) Yes, but only if you can keep the stock for at least 5 years. B) No, the market price is above the intrinsic value of the stock. C) No, the growth rate in dividends is too far below the required return. D) Yes, the market price is below the intrinsic value of the stock. D
Gremlin Industries is expected to pay a dividend of $1.90 per share this year. It is expected that this dividend will grow by 4% per year each year in the future. If the current price of Gremlin’s stock is $23.70 per share, what is the required rate of return for Gremlin’s stock? A) 12.0% B) 14.0% C) 16.0% D) 11.0% A
Todd Mountain Development Corporation is expected to pay a dividend of $3 in the upcoming year, and dividends are expected to grow at the rate of 8% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 17%. The stock of Todd Mountain Development Corporation has a beta of .75. Using the constant-growth dividend discount model, the intrinsic value of the stock is ________. A) 50.00 B) 4.00 C) 37.50 D) 17.65 A

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