Questions and Answers of Principles Of Finance

Chronowerx Inc. has issued a bond that has a face value of $1,000, a 3% coupon rate (with semiannual interest), and a maturity date four years from now. If the bond’s current price is $895, what is
The coupon rate of a bond is typically ________.a. Fixed at the time of bond issuanceb. Subject to change based on the federal funds ratec. Zero in the case of zero-coupon bondsd. Both A and C
You are considering adding a $1,000, 25-year bond to your portfolio. It has a coupon rate of 8%, which is paid annually, and your required return is 10%. What is the current price of the investment?
A zero-coupon bond is a bond that ________.a. Has no valueb. Has no periodic coupon paymentsc. Has been rated below investment graded. Both A and C
A Cameron Corp. bond has a $1,000 par value, a 5 percent coupon rate paid semiannually, and nine years until maturity. If similar investments yield 6%, what is the current value of Cameron Corp.
A bond that has a coupon rate less than prevailing interest rates will ________.a. Sell at par valueb. Sell at a discountc. Sell at a premiumd. Be overpriced
McLaren Motors just issued a series of $1,000.00 bonds with a 10-year maturity and an 8% coupon rate, paid quarterly. If you purchase a McLaren bond at a price of $920.00, what is your required rate
Determining bond prices often involves using which two TVM (time value of money) equations?a. The future value of a lump sum and the present value of a lump sumb. The present value of an annuity and
Three years ago, Petty Partners Inc. issued 15-year, $1,000 bonds that are currently priced at $911.37. If the prevailing rate of return on similar investments is 5%, what is the coupon rate on Petty
A normal yield curve will ________.a. Slope downward as it moves along its x-axis (term).b. Slope upward as it moves along its x-axis (yield).c. Fluctuate depending on the federal funds rated. Slope
A $1,000 Riker Corp. bond has a 20-year maturity and a 6% coupon rate, with interest paid annually. If similar bonds from Riker Corp. are yielding 4%, what is the current market value of the Riker
An inverted yield curve is an indication that ________.a. Long-term yields and interest rates are higher than short-term ratesb. The economy is in the process of a significant recoveryc. Short-term
A $1,000 bond that matures in eight years, has quarterly coupon payments of $25, and is currently priced at $962.00 will have a yield to maturity of ________.
Bond laddering is ________.a. A risky bond investment strategy that may yield tremendous returnsb. A strategy in which bonds with several different maturity periods are added to a portfolioc. A
A call feature ________.a. Is desirable to an investorb. May cause additional risk for the bond issuerc. May cause additional risk for an investord. Both A and B
The duration of a bond is ________.a. A measurement of the bond’s overall riskb. Synonymous with the bond’s termc. A measurement of how long an investor holds the bondd. A measurement of the
The price-to-earnings (P/E) ratio is _______________.a. Used to calculate a company’s book valueb. A multiplier used in enterprise valuationc. Only applied when valuing preferred stockd. A metric
Briefly discuss one of the primary benefits of using comparative P/E ratios.
Today, Sysco Enterprises paid dividends on its common stock of $1.25 per share. If dividends per share are expected to increase to $3.50 per share six years from now, what is the percentage dividend
In the efficient market hypothesis (EMH), describe what is meant by the terms weak form efficiency, semistrong form efficiency, and strong form efficiency. How do these forms of market efficiency
Name an important characteristic of companies for which the price-to-book (P/B) ratio does not work well.
Let’s say you want to purchase shares of Fontaine Ltd. and then hold this stock for six years. The company has a stated dividend policy of $2.00 annually per share for the next six years, at the
What is meant by the term random walk, and how does this concept relate to the EMH?
The two primary types of stock valuation multiples are _______________.a. Enterprise value multiples and comparable company value multiplesb. Equity multiples and enterprise value multiplesc. Asset
Briefly describe the main type of scenario in which the two-stage DDM approach might be used to value a firm and its stock.
Damian Painting Systems has established a dividend policy of $3.00 per share per year. If the company plans to be in business forever, what is the value of this stock if an investor wants a 10%
Discuss the relative risks of the following financial instruments and how they compare to each other: bonds, common stocks, and preferred stocks. How and why will these three investment types
Dividend yield is a form of equity multiple that is primarily used when _______________.a. The subject company is operating at a lossb. Conducting comparisons between companies in different
Briefly describe a major shortcoming of the zero growth DDM model.
Wilk Productions wants its shareholders to earn a 12% return on their investment in the company. At what value would Wilk stock be priced if the company paid $2.75 per share in constant annual
Discuss some of the important differences between preferred stocks and common stocks.
Dividend yield is computed as the proportion of dividend per share to _______________.a. Share priceb. Earnings per sharec. Market value per shared. Book value per share
Dax Industrial Systems has stock currently priced at $50.00 per share. If investors are earning a 7% return on Dax Industrial, what is the company’s annual dividend payment per share?
Which of the following statements about enterprise value metrics is NOT true?a. EV to revenue can be used to assess companies with negative cash flows or firms that are currently experiencing
Briefly describe preferred stock and some of its ownership advantages compared to common stock.
If a stock is selling at $400 with a current dividend of $40 and a potential investor’s required rate of return is 15%, what would be the anticipated dividend growth rate?
If an investor’s required rate of return increases and all other characteristics of a stock remain the same, the value of the stock will _______________.a. Remain the sameb. Increasec. Decreased.
Briefly explain what is meant by the terms cumulative and noncumulative as they relate to preferred stocks.
Mind Max Inc. has a dividend policy that increases annual dividends by 3% each year. If last year’s dividend was $2.00, the company intends to stay in business for 50 years, and an investor wants a
A major limitation of the dividend discount model (DDM) is that _______________.a. It is extremely complicated to useb. It cannot be used with companies that do not pay dividendsc. It must always be
Odon Corp. paid dividends today in the amount of $1.50 per share. If Odon will pay dividends of $5.00 10 years from today, what is the annual dividend growth rate over this 10-year period?
What are operational efficiency and informational efficiency, and how do they differ in terms of trading markets?
The Kirkson Distributors common stock is currently selling at $52.00 per share, pays dividends annually at $2.50 per share, and has an annual dividend growth rate of 2%. What is the required return?
The term efficient markets refers to the idea that _______________.a. Publicly traded companies always file their financial reports on timeb. Investors are able to identify underpriced stocks for
What is meant by informational efficiency, and how does it affect the price of a stock?
If a preferred share of stock pays dividends of $2.50 per year and the required rate of return for the stock is 6%, what is its intrinsic value?
Which of the following statements about Treasury bills is false?a. T-bills sell at a discount from face value and pay the face value at maturity.b. T-bills have maturities of 2, 3, 5, 7, or 10
Define the competitive and noncompetitive bid process for US Treasury bills.
Can you identify three apparent advantages and three disadvantages for investors in a SPAC (special purpose acquisition company) versus a traditional IPO process?
If an investor wishes to simply execute a stock trade at the current market price, they should issue a ________.a. Limit orderb. Stop loss orderc. Market orderd. Hedge order
How does a negotiable certificate of deposit (NCD) differ from the typical certificate of deposit you may see advertised by your local bank?
The video concludes with a question about whether SPACs are a current fad doomed to fade away or a new and growing method of publicly financing firms. What do you think? Search for information
If you are an investor concerned about unexpected inflation in the coming years which of the following investments offers the greatest protection against inflation, and why: T-notes, T-bonds, or TIPS?
How can an institution like the United State Federal Reserve System prevent bank runs?
Compared to a “best efforts” form of underwriting, how does “firm commitment” underwriting transfer risk from the issuing firm to the underwriter?
Market capitalization is a common way to rank firm size. Search the internet to identify and define at least two other ways to rank firms based on size. Identify at least one reason you prefer market
Since 1980, the compound average annual growth rate for large company stocks has been ________.a. Greater than Baa bonds but less than small company stocksb. Greater than small company stocks but
After the passage of the Federal Reserve Act in 1913 (https://openstax.org/r/federal-reserve-act), the United States has suffered through three great global financial crises: the Great Depression of
Debentures are more common than mortgage bonds issued by corporations. Why do you think debentures are more popular with investors? Be sure to define each bond contract in your discussion.
A $1 investment in a portfolio of small company stocks in 1928 would have grown to over ________ by mid-2019.a. $35,000b. $8,000c. $800d. $80
Assume you win a lottery that will pay you $10,000 immediately, plus $20,000 one year from now, $30,000 two years from now, $40,000 three years from now, and $75,000 four years from now. You’re
You can invest a windfall of $40,000 today at 4% compounded annually. You don’t believe you can make another investment one year from now, but you believe that you can save enough that two years
Using Excel, determine the future value of this series of expected unequal receipts five years from now if each payment is received at the end of each year, beginning one year from now, and the
Assume you win a lottery, and you are offered the following stream of payments by the lottery commission: $25,000 today, $32,000 one year from now, another $32,000 two years from now, and a final
When using Excel’s built-in Future Value function, why does Dr. Konners enter dollar amounts as negative numbers?
Donna can invest today in a fund that will guarantee her a 5% return compounded annually for five years. She can invest $1,200 today, $1,400 one year from now, $1,800 two years from now, and $2,100
You are offered a business partnership that guarantees you cash returns of $150,000 one year from now, nothing at the end of year 2, and $350,000 at the end of year 3. After year 3, the partnership
Jane wants to create a fund today that will provide her a 4% guaranteed compounded annual rate. She wants to withdraw $15,000 one year from now and $27,000 two years from now, after which the fund
For which of the following situations would you NOT be able to use the one-step shortcut provided by an annuity calculation?a. Planning an amortization table for a three-year car loan at 2%b.
Provide a practical example from your own personal financial management of why an understanding of the present value of future cash flows would be important.
How long will it take you to triple your money at 8%?
A company’s sales were $250 million in 2019. If sales grow at 6% per year, how large will they be 10 years later, in 2029 (as expressed in millions)?
A US government bond in the amount of $1,000 will mature in six years, has no coupon payments, and carries an interest rate of 8%. What is the value of this bond today?
You spend $725.00 to purchase a $1,000 bond that will have no coupon payments and matures in 12 years.What interest rate will you be earning on this bond?
At what interest rate would you be ambivalent about receiving either $50,000 10 years from now or $35,000 today?
Vance Corporation had earnings last year of $3.25 per share. The company has experienced 8% annual growth over the last several years, and management expects that growth rate to continue. Based on
What is the amount of total interest dollars earned on a $5,000 deposit earning 6% for 20 years?
You have decided that you will sell your $300,000 house when it appreciates in value to $500,000. If houses are appreciating at an average annual rate of 5% in your neighborhood, for approximately
You just won some money in the lottery and would like to save a portion of it so that you will have $50,000 to put a down payment on a house in five years. Your bank pays a 5% rate of interest. How
Bauer Bookstore sells books before they are published. Today, they offered the book Journeys in Finance for $14.20, but the book will not be published for another two years. Upon publishing, the
One of your professional goals is to one day earn a six-figure salary ($100,000). You hope to accomplish this objective within the next 30 years. Salaries grow at 3.75% per year in your field of
How much will $25,000 grow to in five years at a 5% annual rate that is compounded quarterly?
If Eisenberg Industries revenues have increased from $30 million to $90 million over a 10-year period, what has been their annual rate of growth?
If you are scheduled to receive $4,000 six years from today and the discount rate is 8.5%, what is the present value of this payment?
If you were to open a savings account that earns 3% interest and is compounded quarterly, what would be the total amount in your account after 10 years if you made an opening deposit of $9,500?
You are considering four possible options for your new savings account. You plan to deposit $13,000 and leave this amount in the account for 20 years with no additional deposits or withdrawals. All
The best example of a constant perpetuity would most likely be ________.a. An annuity dueb. Dividends from common stockc. Preferred stockd. An ordinary annuity
Steve purchases preferred stock in Berklee Corporation, with each share paying a $2.50 dividend. This dividend will remain constant. If the public’s required rate of return for Berklee stock is 8%,
What is the primary difference between this demonstration and our chapter examples, keeping the chapter "Time Value of Money I" in mind?
You wish to endow a university chair of accounting for a salary of $100,000 per year to the recipient. The university will withdraw $100,000 each year for the recipient’s salary. The amount of your
Donna enters into an investment contract that will guarantee her 4% per year if she deposits $3,500 each year for the next 10 years. She must make the first deposit one year from today, the day she
Explain the significance of Dr. van Biezen’s comment at 4:32 regarding a difference when payments are made at the beginning of each pay period rather than the end.
Preferred stock in Blue Agate Inc. is issued for dividends of $3.00 per share. The dividends will increase each year at 0.178%, a growing perpetuity. The required rate of return on a stock such as
Assume the same facts as in problem 2 above, except that Donna negotiates the chance to make her first payment now and continue to pay at the beginning of each year for the 10-year period. How much
Julio’s attorney negotiates a structured settlement after an injury, consisting of seven equal payments to Barry of $150,000 each. The first payment is due today, and the remaining payments will be
Bill will receive a royalty payment of $18,000 per year for the next 25 years, beginning one year from now, as a result of a book he has written. If a discount rate of 10 percent is applied, should
Annuities are often recommended to retirees and seniors. Why would a fixed annuity be more attractive to such a person than a variable annuity?
What is the approximate present value of an ordinary annuity (beginning one year from now) of a stream of 12 annual payments of $87,000 if you use a discount rate of 6%?a. $773,154.04b. $747,278.92c.
Debbie won the $60 million lottery. She is to receive $1 million a year for the next 50 years beginning one year from now, plus an additional lump sum payment of $10 million after 50 years. The
If Maria invests $2,700 at the end of each six-month period for six years at an annual rate of 4%, what is the approximate future value of her ordinary annuity? Review Chapter 7 for the techniques of

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