Stocks and bonds and risk analysis - multiple choice questions.

1. After 20 years, 100 shares of stock originally purchased for $1000 was sold for $5,000. What was the yield on the investment? Choose the closest answer.

a.         19%

b.        5%

c.         12.7%

d.        8%

2. The pre-tax cost of debt for a new issue of debt is determined by

a.         the investor's required rate of return on issued stock.

b.        the coupon rate of existing debt.

c.         the yield to maturity of outstanding bonds.

d.        all of the above.

3. The market allocates capital to companies based on

a.         risk.

b.        efficiency.

c.         expected returns.

d.        all of the above

4. The purpose of secondary trading is to

a.         provide liquidity and competition between investments.

b.        provide a market for securities not handled in primary trading.

c.         provide jobs for brokers and dealers.

d.        provide lower commissions than on the organized exchanges.

5. Although debt financing is usually the cheapest component of capital, it cannot be used to excess because

a.         interest rates may change.

b.        the firm's stock price will increase and raise the cost of equity financing.

c.         the financial risk of the firm may increase and thus drive up the cost of all sources of financing.

d.        underwriting costs may change.

6. The payback method has several disadvantages, among them:

a.         payback fails to choose the optimum or most economic solution to a capital budgeting problem.

b.        payback ignores cash inflows after the payback period.

c.         a and b.

d.        none of the above.

7. In using the internal rate of return method, it is assumed that cash flows can be reinvested at

a.         the cost of equity.

b.        the cost of capital.

c.         the internal rate of return.

d.        the prevailing interest rate.

8. A higher interest rate (discount rate) would

a.         reduce the price of corporate bonds.

b.        reduce the price of preferred stock.

c.         reduce the price of common stock.

d.        all of the above.

9. The risk premium is likely to be highest for

a.         U.S. government bonds

b.        corporate bonds

c.         gold mining expedition

d.        either b or c

10. Using higher discount rates,

a.         accelerated cost recovery depreciation is more valuable than straight line.

b.        straight-line depreciation is more valuable than the accelerated cost recovery system of depreciation.

c.         depreciation policy makes no difference.

d.        later year depreciation has a higher net present value.