1. Which of the following are correct?
I Interest is tax deductibe because it is considered on operating cost.
II A secured debt has higher risk than a debenture.
III A bond with higher default risk tends to pay higher coupon rate, all else equal.
IV Two bonds are identical except that one is subordinated and another one is a senior. If the subordinated bond is ranked B, the senior debt will not be ranked C.
A. I and II only
B I and IV only
C I, III and IV only
D II, III, IV only
E All of the above.
2. National Trucking has paid an annual dividend of $1.00 per share on its common stock for the past fifteen years and its expected to continue paying a dollar a share long into the future. Given this, one share of the firm’s stock is:
A basically worthless as it offers no growth potential.
B equal in value to the present value of $1 paid one year from today
C priced the same as a $1 perpetuity.
D valued at an assumed growth rate of one percent.
E worth $1 a share in the current market
3. An increase in which of the following will increase the current value of a stock according to the dividend growth model?
I next dividend
II par value
III discount rate
IV dividend growth rate
A I and II only
B I and IV only
C II and IIII only
D II and IV only
E I, III and IV only
4. Which of the following are the necessary requirements for a primary capital budgeting decision rule?
I The primary decision rule needs to consider time value of money.
II. The primary decision rule needs to indicate the profitability index of the project.
III The primary decision rule needs to indicate the time needed to cover the initial investment.
IV. The primary decision rule needs to indicate the amount of value added to the company.
A I and II only
B I and IV only
C II and IV only
D I, III and IV only
E All of the above
5. Which of the following is correct regarding the payback period?
A That it adjusts for uncertainty of later cash flow is its advantage.
B That it favors short-term project is its disadvantage.
C That it ignores time value of money is its advantage.
D That it requires an arbitrary cutoff point is its advantage.
E None of the above