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preferred stock valuation usually treats the preferred stock as a

Question 1 2 points Save

What is the yield to maturity of a 16-year bond that pays a coupon rate of 8% per year, has a $1,000 par value, and is currently priced at $916? Round your answer to the nearest whole percent and assume semi-annual coupon payments.

18%

11%

9%

7.5%

Question 2 2 points Save

If the market price of a bond decreases, then:

the yield to maturity decreases

the coupon rate increases

the yield to maturity increases

the yield to maturity is not affected

Question 3 2 points Save

Assume that you have $100,000 invested in a stock whose beta is .85, $200,000 invested in a stock whose beta is 1.05, and $300,000 invested in a stock whose beta is 1.25. What is the beta of your portfolio?

0.97

1.02

1.21

1.12

Question 4 2 points Save

By investing in different securities, an investor can lower his exposure to risk.

True

False

Question 5 2 points Save

Which of the following statements is true?

Short-term bonds have greater interest rate risk than do long-term bonds.

Long-term bonds have greater interest rate risk than do short-term bonds.

All bonds have equal interest rate risk.

None of the above.

Question 6 2 points Save

How can investors reduce the risk associated with an investment portfolio without having to accept a lower expected return?

Wait until the stock market rises.

Increase the amount of money invested in the portfolio.

Purchase a variety of securities; i.e., diversify.

Purchase stocks that have exceptionally high standard deviations.

Question 7 2 points Save

One characteristic of an annuity is that the payment amount is the same during each period.

True

False

Question 8 2 points Save

Preferred stock valuation usually treats the preferred stock as a:

capital asset

perpetuity

common stock

long-term bond

Question 9 2 points Save

For a given stated interest rate, an investor would receive a greater future value with daily compounding as opposed to monthly compounding.

True

False

Question 10 2 points Save

Department 65 has an issue of preferred stock that pays a dividend of $4.00. The preferred stockholders require a rate of return on this stock of 9%. At what price should the preferred stock sell for? Round off to the nearest $0.10.

$36.00

$44.40

$62.50

$88.80

Question 11 2 points Save

If we invest money for 10 years at 8 percent interest, compounded semi-annually, we are really investing money for 20 six-month periods, and receiving 4 percent interest each period.

True

False

Question 12 2 points Save

Tri State Pickle Company preferred stock pays a perpetual annual dividend of 2 1/2% of its $100 par value. If investors’ required rate of return on this stock is 15%, what is the value per share?

$37.50

$15.00

$16.67

$6.00

Question 13 2 points Save

Preferred stock has priority over common stock with respect to its claims on income for dividends.

True

False

Question 14 2 points Save

International Cruise Lines sold an issue of 15-year $1,000 par bonds to build new ships. The bonds pay 6.85% interest, semi-annually. Today’s required rate of return is 8.35%. How much should these bonds sell for today? Round off to the nearest $1.

$1,065

$873

$936

$918

Question 15 2 points Save

If a bond has a Standard & Poor’s rating of BB, or below, it is referred to as a _________.

Convertible bond.

Junk bond.

Capital bond.

Trash bond.

Question 16 2 points Save

The PDQ Company’s common stock is expected to pay a $1.00 dividend in the coming year. If investors require a 15% return and the growth rate in dividends is expected to be 5%, what will the market price of the stock be?

$5.00

$10.00

$15.00

$20.00

Question 17 2 points Save

The sum of the present values of an investment’s expected future cash flows is known as the investment’s intrinsic value.

True

False

Question 18 2 points Save

Unique security risk can be eliminated from an investor’s portfolio through diversification.

True

False

Question 19 2 points Save

A mortgage bond is secured by a lien on real property.

True

False

Question 20 2 points Save

Unlike market value, the intrinsic value of an asset is estimated independently of risk.

True

False

Question 21 2 points Save

The present value interest factor is the inverse of the future value interest factor.

True

False

Question 22 2 points Save

What is the present value of $12,500 to be received 10 years from today? Assume a discount rate of 8% compounded annually and round to the nearest $10.

$5,790

$11,574

$9,210

$17,010

Question 23 2 points Save

If a bond sells for its par value, the coupon interest rate and yield to maturity are equal.

True

False

Question 24 2 points Save

Who bears the greatest risk of loss of value if a firm should fail?

Bondholders.

Preferred stockholders.

Common stockholders.

All of the above bear equal risk of loss.

Question 25 2 points Save

The stock valuation model D1/(Rc – g) requires the stock to grow at a rate greater than the required return; otherwise, the stock is worthless.

True

False

Question 26 2 points Save

The expected cash flow of an investment takes the condition of the economy into consideration.

True

False

Question 27 2 points Save

The correct relationship for a premium bond is yield to maturity > coupon rate > current yield.

True

False

Question 28 2 points Save

The present value of the expected future cash flows of an asset represents the asset’s __________.

liquidation value

book value

intrinsic value

par value

Question 29 2 points Save

In estimating a security’s Beta, the market portfolio is commonly represented by the S&P 500 index.

True

False

Question 30 2 points Save

Bartiromo, Inc. bonds have a 6% coupon rate with semi-annual coupon payments and a $1,000 par value. The bonds have 14 years until maturity, and sell for $950. What is the current yield for Bartiromo’s bonds?

3.28%

6.32%

6.55%

7.52%

Question 31 2 points Save

Assume that you have $165,000 invested in a stock that is returning 11.50%, $85,000 invested in a stock that is returning 22.75%, and $235,000 invested in a stock that is returning 10.25%. What is the expected return of your portfolio?

15.6%

12.9%

18.3%

14.8%

Question 32 2 points Save

Bell Weather Inc. has a beta of 1.25. The return on the market portfolio is 12.5% and the risk free rate is 5%. According to CAPM, what is the required return on this stock?

20.62%

9.37%

14.38%

15.62%

Question 33 2 points Save

The Elvisalive Corporation, makers of Elvis memorabilia, has a beta of 2.75. The return on the market portfolio is 14% and the risk free rate is 4%. According to CAPM, what is the required rate of return on Elvisalive stock?

27.5%

31.5%

11%

10%

Question 34 2 points Save

All other things being equal, the future value of an investment will increase if:

the investment compounds more often during each year

the investment is compounded for more years

the investment is compounded at a higher interest rate

all of the above

Question 35 2 points Save

Common stock does not mature.

True

False

Question 36 2 points Save

What is the name given to the equation that financial managers use to measure an investor’s required rate of return?

The standard deviation.

The capital asset pricing model.

The coefficient of variation.

The MIRR.

Question 37 2 points Save

The formula for present value is:

PV = FVn(1+i)n

PV = (1+i)/FVn

PV = FVn/(1+i)n

PV = FVn(1+n)-i

Question 38 2 points Save

Cumulative preferred stock:

requires dividends in arrears to be carried over into the next period

has a right to vote cumulatively

has a claim to dividends before bonds

all of the above

Question 39 2 points Save

The future value of an annuity due is greater than the future value of an otherwise identical ordinary annuity.

True

False

Question 40 2 points Save

A share of preferred stock that pays the same annual dividend forever is an example of a perpetuity.

True

False

Question 41 2 points Save

The current yield is greater than the coupon rate for a discount bond.

True

False

Question 42 2 points Save

Which of the following is/are true:

The Beta of a U.S. Treasury Bill is zero

The Beta of the market is one

The estimate of Beta for a given stock will vary from analyst to analyst depending on the time period used, and the market portfolio used to estimate Beta.

All of the above are true

Question 43 2 points Save

In the case of insolvency, the claims of debt are honored prior to those of common stock and after those of preferred stock.

True

False

Question 44 2 points Save

Which of the following statements is true?

The value of a bond is inversely related to changes in investors’ present required rate of return.

If interest rates decrease, the value of a bond will decrease.

If interest rates increase, the value of a bond will increase.

None of the above.

Question 45 2 points Save

The formula for compound future value is:

FVn = PV(1+i)n

FVn = (1+i)/PV

FVn = PV/(1+i)n

FVn = PV(1+i)-n

Question 46 2 points Save

A $1,000 par value 8-year bond with a 7 percent coupon rate recently sold for $1,100. The yield to maturity is:

7 percent

greater than 7 percent

less than 7 percent

cannot be determined

Question 47 2 points Save

You purchased 1,000 shares of Oliver Inc. common stock one year ago for $50 per share. You decided to take your profit today by selling at $55.00 per share. What is your holding period return?

10.0%

12.5%

50.0%

15.0%

Question 48 2 points Save

Which of the following features, or benefits, belong to a firm’s common stockholders?

Limited liability.

Ownership of the firm.

Voting rights.

All of the above.

Question 49 2 points Save

The formula for calculating the present value (PV) of a perpetuity is

PV = PP/(1 + i), where PP is the perpetuity payment and i is the discount rate.

True

False

Question 50 2 points Save

The book value of a firm equals the present value of future cash flows from all of that firm’s securities.

True

False

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