1. Which of the following statements is CORRECT?
a. The preferred stock of a given firm is generally less risky to investors than the same firm's common stock.
b. Preferred dividends are not generally cumulative.
c. Preferred stockholders have a priority over bondholders in the event of bankruptcy to the income, but not to the proceeds in a liquidation.
d. Corporations cannot buy the preferred stocks of other corporations.
e. A big advantage of preferred stock is that dividends on preferred stocks are tax deductible by the issuing corporation.
2. If in the opinion of a given investor a stock's expected return exceeds its required return, this suggests that the investor thinks
a. the stock is a good buy.
b. the stock should be sold.
c. the stock is experiencing supernormal growth.
d. dividends are not likely to be declared.
e. management is probably not trying to maximize the price per share.
3. Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds?
a. Market interest rates decline sharply.
b. Market interest rates rise sharply.
c. Inflation increases significantly.
d. The company's bonds are downgraded.
e. The company's financial situation deteriorates significantly.
4. Suppose rRF = 4%, rM = 9%, and rA = 16%.
Calculate Stock A's beta. Round your answer to two decimal places. ___
If Stock A's beta were 1.4, then what would be A's new required rate of return? Round your answer to two decimal places.
___%
5. Nick's Enchiladas Incorporated has preferred stock outstanding that pays a dividend of $3 at the end of each year. The preferred stock sells for $30 a share. What is the stock's required rate of return? Round the answer to two decimal places.
___%
6. Washington-Pacific invests $2 million to buy a tract of land and plant some young pine trees. The trees can be harvested in 12 years, at which time W-P plans to sell the forest at an expected price of $4 million. What is W-P's expected rate of return? Round your answer to two decimal places.
___%
7. Which of the following statements is CORRECT?
a. If two bonds have the same maturity, the same yield to maturity, and the same level of risk, the bonds should sell for the same price regardless of the bond's coupon rates.
b. If a bond's yield to maturity exceeds its coupon rate, the bond's price must be less than its maturity value.
c. All else equal, an increase in interest rates will have a greater effect on higher-coupon bonds than it will have on lower-coupon bonds.
d. If a bond's yield to maturity exceeds its coupon rate, the bond's current yield must be less than its coupon rate.
e. All else equal, an increase in interest rates will have a greater effect on the prices of short-term than long-term bonds.
8. Kendall Corners Inc. recently reported net income of $2.4 million and depreciation of $336,000. What was its net cash flow? Assume it had no amortization expense.
___$
9. You plan to invest some money in a bank account. Which of the following banks provides you with the highest effective rate of interest?
a. Bank 1; 6.1% with annual compounding.
b. Bank 2; 6.0% with monthly compounding.
c. Bank 3; 6.0% with annual compounding.
d. Bank 4; 6.0% with quarterly compounding.
e. Bank 5; 6.0% with daily (365-day) compounding
10. Which of the following items is NOT included in current assets?
a. Inventory.
b. Cash.
c. Bonds.
d. Accounts receivable.
e. Short-term, highly liquid, marketable securities.
11. A 10-year bond with a 9% annual coupon has a yield to maturity of 8%. Which of the following statements is CORRECT?
a. If the yield to maturity remains constant, the bond's price one year from now will be higher than its current price.
b. The bond is selling below its par value.
c. The bond is selling at a discount.
d. The bond's current yield is greater than 9%.
e. If the yield to maturity remains constant, the bond's price one year from now will be lower than its current price.
12. Thress Industries just paid a dividend of $1.00 a share (i.e., D0 = 1.00). The dividend is expected to grow 4% a year for the next 3 years and then at 11% a year thereafter. What is the expected dividend per share for each of the next 5 years? Round your answers to the nearest cent.
D1 = ___$
D2 = ___$
D3 = ___$
D4 = ___$
D5 = ___$
13. Which of the following statements is CORRECT?
a. If you purchased 100 shares of Disney stock from your brother-in-law, this would be an example of a primary market transaction.
b. If Disney issues additional shares of common stock through an investment banker, this would be a secondary market transaction.
c. The IPO market is a subset of the secondary market.
d. Only institutions, and not individuals, can participate in derivatives market transactions.
e. As they are generally defined, money market transactions involve debt security with maturity if <1yr