FIN 571 Wk 1 – Practice: Wk 1 Practice Questions

In which type of organizational structure is the agency problem least likely to exist?

Multiple Choice

Limited Liability Corporation

Partnership

Professional Corporation

Sole Proprietorship

Which of the following is NOT a claim on the assets of a company?

Multiple Choice

Bond

Patent

Promissory Note

Stock

Which one of these determines the minimum acceptable rate of return on a capital investment?

Multiple Choice

• The alternative investment opportunities available to investors
• The profit margin of the existing firm
• The rate of return on the firm’s outstanding shares
• The rate of return on risk-free debt securities

You purchased a 6% annual coupon bond at face value and sold it one year later for $1,015.16. What was your rate of return on this investment if the face value at maturity was $1,000?

Multiple Choice

• 4.48%
• 6.15%
• 7.52%
• 6.07%

What are the conditions imposed on a debt issuer that are designed to protect bondholders ?

Multiple Choice

• Collateral agreements
• Vanilla wrappers
• Protective covenants
• Default provisions

What is the total return to an investor who buys a bond for $1,100 when the bond has a 9% annual coupon and 5 years until maturity, then sells the bond after 1 year for $1,085?

Multiple Choice

• 6.82%
• 6.91%
• 7.64%
• 9.00%

If the liquidation value of a corporation exceeds the market value of the equity, then the:

Multiple Choice

• firm has no value as a going concern.
• firm’s stock will sell for book value.
• firm is not taking advantage of available growth opportunities.
• dividend payout ratio has been too high.

If the price of a stock falls on 4 consecutive days of trading, then stock prices:

Multiple Choice

• cannot be following a random walk.
• can still be following a random walk.
• are almost certain to increase the following day.
• are almost certain to decrease the following day.

If The Wall Street Journal lists a stock’s dividend as $1, then it is most likely the case that the stock:

Multiple Choice

• pays $1 per share per quarter.
• paid $.25 per share per quarter for the past year.
• paid $1 during the past quarter, with no future dividends forecast.
• is expected to pay a dividend of $1 per share at the end of next year.

Jefferson’s recently paid an annual dividend of $1.31 per share. The dividend is expected to decrease by 4% each year. How much should you pay for this stock today if your required return is 16%?

Multiple Choice

• $6.29
• $5.74
• $10.48
• $11.57

Corporations that issue financial securities such as stock or debt obligations to the public do so primarily to:

Multiple Choice

increase sales.

become profitable.

increase their access to funds.

avoid double taxation of their profits.

Which of these duties are responsibilities of the corporate treasurer?

Multiple Choice

Financial statements and taxes

Cash management and tax reporting

Cash management and banking relationships

Raising capital and financial statements

Double taxation” refers to:

Multiple Choice

all partners paying equal taxes on profits.

corporations paying taxes on both dividends and retained earnings.

paying taxes on profits at the corporate level and dividends at the personal level.

the fact that marginal tax rates are doubled for corporations.

Which one of the following forms of compensation is most apt to align the interests of managers and shareholders?

Multiple Choice

A fixed salary

A salary that is linked to current company profits

A salary that is paid partly in the form of the company’s shares

A salary that is linked to the company’s market share

Which one of the following would ly differentiate general partners from limited partners in a limited partnership?

Multiple Choice

General partners have more job experience.

General partners have an ownership interest.

General partners are subject to double taxation.

General partners have unlimited personal liability.

Which one of the following would be considered a capital budgeting decision?

Multiple Choice

Planning to issue common stock rather than issuing preferred stock

Deciding to expand into a new line of products, at a cost of $5 million

Repurchasing shares of common stock

Issuing debt in the form of long-term bonds

How much should you be prepared to pay for a 10-year bond with a 6% coupon, semiannual payments, and a semiannually compounded yield of 7.5%?

Multiple Choice

$895.78

$897.04

$938.40

$1,312.66

Which one of these is included in the yield of a bond with a low credit rating but not included in a U.S. Treasury bond yield? Assume both bonds are selling at a premium.

Multiple Choice

Real rate of return

Inflation premium

Default premium

Loss of premium

What is the rate of return for an investor who pays $1,054.47 for a 3-year bond with an annual coupon payment of 6.5% and sells the bond 1 year later for $1,037.19?

Multiple Choice

4.53%

5.33%

5.16%

4.92%

What are the conditions imposed on a debt issuer that are designed to protect bondholders ?

Multiple Choice

Collateral agreements

Vanilla wrappers

Protective covenants

Default provisions

Periodic receipts of interest by the bondholder are known as:

Multiple Choice

the coupon rate.

principal payments.

coupon payments.

the default premium.

Which one of the following is  concerning real interest rates?

Multiple Choice

Real interest rates are constant.

Real interest rates must be positive.

Real interest rates must be less than nominal interest rates.

Real interest rates, if positive, increase purchasing power over time.

Which one of these statements is not ?

Multiple Choice

When a foreign government borrows dollars, investors worry that in some future crisis the government will not have sufficient dollars to repay the debt.

When the Japanese government borrows yen, investors worry that in some future crisis the government will not have sufficient yen to repay the debt.

When a Eurozone government borrows euros, investors worry that in some future crisis the government will not have sufficient euros to repay the debt.

When the U.S. government issues Treasury bonds, investors never need to worry that they will not be paid back.

Which statement is ?

Multiple Choice

It is much easier to judge whether the absolute level of stock prices is  rather than whether their relative levels are .

It is much easier to judge whether relative stock prices are  than to judge whether their absolute level is .

Most tests of market efficiency are concerned with the absolute level of stock prices.

If relative prices are , then absolute prices must be  also.

What is the expected constant-growth rate of dividends for a stock currently priced at $50, that just paid a dividend of $4, and has a required return of 18%?

Multiple Choice

3.41%

5.50%

9.26%

12.5%

If the price of a stock falls on 4 consecutive days of trading, then stock prices:

Multiple Choice

cannot be following a random walk.

can still be following a random walk.

are almost certain to increase the following day.

are almost certain to decrease the following day.

The growth of mature companies is primarily funded by:

Multiple Choice

issuing new shares of stock.

issuing new debt securities.

reinvesting company earnings.

increasing accounts payable.

Firms with valuable intangible assets are more likely to show a(n):

Multiple Choice

excess of book value over market value of equity.

high going-concern value.

low liquidation value.

low P/E ratio.

Which of the following is inconsistent with a firm that sells for very near book value?

Multiple Choice

Low current earnings

Few, if any, intangible assets

High future earning power

Low, unstable dividend payment