1. Although preferred stock provides added financial leverage in much the same way as? bonds, it differs from bonds in that the issuer can pass a dividend payment without suffering the consequences that result when an interest payment is missed on a bond.
True
False
2. Which of the following is an advantage of NPV?
A. It takes into account the time value of investors' money.
B. It measures the risk exposure.
C. It measures how quickly a firm can breakeven.
D. It is highly sensitive to the discount rates.
3. Since the issuer of zero (or low) coupon bonds can annually deduct the current year's interest accrual without having to actually pay the interest until the bond matures (or is called), its cash flow each year is increased by the amount of the tax shield provided by the interest deduction.
True
False
4. Treasury stock generally does not have voting rights, does not earn dividends, and does not have a claim on assets in liquidation.
True
False
5. Combining two assets having perfectly positively correlated returns will result in the creation of a portfolio with an overall risk that? ________.
A. decreases to a level below that of either asset
B. increases to a level above that of either asset
C. lies between the asset with the higher risk and the asset with the lower risk
D. remains unchanged
6. Stock purchase warrants are instruments that give their holders ________.
A. the obligation to sell a certain number of shares of the issuer's preferred stock at a specified price over a certain period of time
B. the right to sell a certain number of shares of the issuer's preferred stock at a specified price over a certain period of time
C. the right to purchase a certain number of shares of the issuer's common stock at a specified price over a certain period of time
D. the obligation to purchase a certain number of shares of the issuer's common stock at a specified price over a certain period of time
7. Zheng Corporation plans to issue new bonds to finance its expansion plans. In its efforts to price the issue, Zheng Corporation has identified a company of similar risk with an outstanding bond issue that has an 8 percent coupon rate having a maturity of ten years. This firm's bonds are currently selling for $1,091.96. If interest is paid annually for both bonds, what must the coupon rate of the new bonds be in order for the issue to sell at par?
A. 6.88%
B. 5.78%
C. 6.71%
D. 6.50%
8. The value of a bond is the present value of the ________.
A. interest payments and maturity value
B. interest and dividend payments
C. dividends and maturity value
D. maturity value
9. A(n) ________ is a paid individual, corporation, or a commercial bank trust department that acts as a third party to a bond indenture.
A. investment banker
B. trustee
C. bond issuer
D. bond rating agency
10. Which of the following is a reason for firms not using the payback method as a guideline in capital investment decisions?
A. It cannot be specified in light of the wealth maximization goal.
B. It is a measure of risk exposure and projects the possibility of a calamity.
C. It gives an explicit consideration to the timing of cash flows.
D. It is easy to calculate and has intuitive appeal.