Final Exam (Chapter 7, 8, 9)

Name: ______________________________
Multiple Choice Questions (3*33=99100)

1. The difference between the present value of an investment and its cost is the:
A. net present value.
B. internal rate of return.
C. payback period.
D. profitability index.
E. discounted payback period.

2. The Winston Co. is considering two mutually exclusive projects with the following cash
flows. The crossover rate is _____ and if the required rate is higher than the crossover rate
then project _____ should be accepted.

A. 13.94%; A
B. 13.94%; B
C. 15.44%; A
D. 15.44%; B
E. 15.86%; A

3. The discount rate that makes the net present value of an investment exactly equal to zero is
called the:
A. external rate of return.
B. internal rate of return.
C. average accounting return.
D. profitability index.
E. equalizer.

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Matt is analyzing two mutually exclusive projects of similar size and has prepared the
following data. Both projects have 5 year lives.
4.

Matt has been asked for his best recommendation given this information. His recommendation
should be to accept:
A. project B because it has the shortest payback period.
B. both projects as they both have positive net present values.
C. project A and reject project B based on their net present values.
D. project B and reject project A based on other criteria not mentioned in the problem.
E. project B and reject project A based on both the payback period and the average accounting
return.

5. Modified internal rate of return:

A. handles the multiple IRR problem by combining cash flows until only one change in sign
change remains.
B. requires the use of a discount rate.
C. does not require the use of a discount rate.
D. Both A and B.
E. Both A and C.

6. A project will have more than one IRR if:

A. the IRR is positive.
B. the IRR is negative.
C. the NPV is zero.
D. the cash flow pattern exhibits more than one sign change.
E. the cash flow pattern exhibits exactly one sign change.
7. If there is a conflict between mutually exclusive projects due to the IRR, one should:
A. drop the two projects immediately.
B. spend more money on gathering information.
C. depend on the NPV as it will always provide the most value.
D. depend on the payback because it does not suffer from these same problems.
E. None of the above.

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8. What is the net present value of a project with the following cash flows and a required
return of 12%?

A. -$287.22
B. -$177.62
C. $177.62
D. $204.36

9. You are considering two mutually exclusive projects with the following cash flows. Will
your choice between the two projects differ if the required rate of return is 8% rather than
11%? If so, what should you do?

A. yes; Select A at 8% and B at 11%.

B. yes; Select B at 8% and A at 11%.
C. yes; Select A at 8% and select neither at 11%.
D. no; Regardless of the required rate, project A always has the higher NPV.
E. no; Regardless of the required rate, project B always has the higher NPV.

10. An investment has the following cash flows. Should the project be accepted if it has been
assigned a required return of 9.5%? Why or why not?

A. yes; because the IRR exceeds the required return by about 0.39%.
B. yes; because the IRR is less than the required return by about 3.9%.
C. yes; because the IRR is positive.
D. no; because the IRR exceeds the required return by about 3.9%.
E. no; because the IRR is 9.89%.

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11. Jack is considering adding toys to his general store. He estimates that the cost of inventory
will be $4,200. The remodeling and shelving costs are estimated at $1,500. Toy sales are
expected to produce net cash inflows of $1,200, $1,500, $1,600, and $1,750 over the next four
years, respectively. Should Jack add toys to his store if he assigns a three-year payback period
to this project?
A. yes; because the payback period is 2.94 years.
B. yes; because the payback period is 2.02 years.
C. yes; because the payback period is 3.80 years.
D. no; because the payback period is 2.02 years.
E. no; because the payback period is 3.80 years.

12. Yancy is considering a project which will produce cash inflows of $900 a year for 4 years.
The project has a 9% required rate of return and an initial cost of $2,800. What is the
discounted payback period?
A. 3.11 years
B. 3.18 years
C. 3.82 years
D. 4.18 years
E. never

13.
Maturity

Coupon

Bid

Asked

Chg

Asked Yield

2037 Feb 15

4.75

103:07

103:09

-15

4.5446

What is the previous days asked price?

A.
B.
C.
D.
E.

102:26
103:24
102:24
103:26
103:09

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14. A bond that makes no coupon payments and is initially priced at a deep discount is called
a _____ bond.
A. Treasury
B. municipal
C. floating-rate
D. junk
E. zero coupon

15. The principal amount of a bond that is repaid at the end of the loan term is called the
bond's:
A. coupon.
B. face value.
C. maturity.
D. yield to maturity.
E. coupon rate.

16. The rate of return required by investors in the market for owning a bond is called the:
A. coupon.
B. face value.
C. maturity.
D. yield to maturity.
E. coupon rate.

17. All else constant, a bond will sell at _____ when the yield to maturity is _____ the coupon
rate.
A. a premium; higher than
B. a premium; equal to
C. at par; higher than
D. at par; less than
E. a discount; higher than

18. The relationship between nominal rates, real rates, and inflation is known as the:
A. Miller and Modigliani theorem.
B. Fisher effect.
C. Gordon growth model.
D. term structure of interest rates.
E. interest rate risk premium.

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19.

The relationship between nominal interest rates on default-free, pure discount securities
and the time to maturity is called the:
A. liquidity effect.
B. Fisher effect.
C. term structure of interest rates.
D. inflation premium.
E. interest rate risk premium.

20. A bond with a 7% coupon that pays interest semi-annually and is priced at par will have a
market price of _____ and interest payments in the amount of _____ each.
A. $1,007; $70
B. $1,070; $35
C. $1,070; $70
D. $1,000; $35
E. $1,000; $70

21. All else constant, a coupon bond that is selling at a premium, must have:
A. a coupon rate that is equal to the yield to maturity.
B. a market price that is less than par value.
C. semi-annual interest payments.
D. a yield to maturity that is less than the coupon rate.
E. a coupon rate that is less than the yield to maturity.

22. A bond with semi-annual interest payments, all else equal, would be priced _________
than one with annual interest payments.
A. higher
B. lower
C. the same
D. it is impossible to tell
E. either higher or the same

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23. The Merriweather Co. just announced that it will pay a dividend next year of $1.60 and is
establishing a policy whereby the dividend will increase by 3.5% annually thereafter. How
much will one share be worth five years from now if the required rate of return is 12%?
A. $21.60
B. $22.36
C. $23.14
D. $23.95
E. $24.79

24. Your firm offers a 10-year, zero coupon bond. The yield to maturity is 8.8%. What is the
current market price of a $1,000 face value bond?
A. $430.24
B. $473.26
C. $835.56
D. $919.12
E. $1,088.00

25. A corporate bond with a face value of $1,000 matures in 4 years and has an 8% coupon
paid at the end of each year. The current price of the bond is $932. What is the yield to
maturity for this bond?
A. 5.05%
B. 6.48%
C. 8.58%
D. 10.15%
E. 11.92%

26. A bond that pays interest annually yields a 7.25% rate of return. The inflation rate for the
same period is 3.5%. What is the real rate of return on this bond?
A. 3.50%
B. 3.57%
C. 3.62%
D. 3.72%
E. 3.75%

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27. The total rate of return earned on a stock is comprised of which two of the following?
I. current yield
II. yield to maturity
III. dividend yield
IV. capital gains yield
A. I and II only
B. I and IV only
C. II and III only
D. II and IV only
E. III and IV only

28. Fred Flintlock wants to earn a total of 10% on his investments. He recently purchased
shares of ABC stock at a price of $20 a share. The stock pays a $1 a year dividend. The price
of ABC stock needs to _____ if Fred is to achieve his 10% rate of return.
A. remain constant
B. decrease by 5%
C. increase by 5%
D. increase by 10%
E. increase by 15%

29. How much are you willing to pay for one share of stock if the company just paid an $.80
annual dividend, the dividends increase by 4% annually and you require an 8% rate of return?
A. $19.23
B. $20.00
C. $20.40
D. $20.80
E. $21.63

30. The Bell Weather Co. is a new firm in a rapidly growing industry. The company is
planning on increasing its annual dividend by 20% a year for the next four years and then
decreasing the growth rate to 5% per year. The company just paid its annual dividend in the
amount of $1.00 per share. What is the current value of one share if the required rate of return
is 9.25%?
A. $35.63
B. $38.19
C. $41.05
D. $43.19
E. $45.81

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31. Leslie's Unique Clothing Stores offers a common stock that pays an annual dividend of
$2.00 a share. The company has promised to maintain a constant dividend. How much are you
willing to pay for one share of this stock if you want to earn a 12% return on your equity
investments?
A. $10.00
B. $13.33
C. $16.67
D. $18.88
E. $20.00
32. The common stock of Eddie's Engines, Inc. sells for $25.71 a share. The stock is expected
to pay $1.80 per share next month when the annual dividend is distributed. Eddie's has
established a pattern of increasing its dividends by 4% annually and expects to continue doing
so. What is the market rate of return on this stock?
A. 7%
B. 9%
C. 11%
D. 13%
E. 15%

33. Shares of common stock of the Samson Co. offer an expected total return of 12%. The
dividend is increasing at a constant 8% per year. The dividend yield must be:
A. -4%.
B. 4%.
C. 8%.
D. 12%.
E. 20%.

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