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Bus330 finance fall 2014 – Chapter 7-8-9

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Question Bus330 finance fall 2014 – Chapter 7-8-9 Chapter 7 The Valuation and Characteristics of Bonds 1) If a corporation were to choose between issuing a debenture, a mortgage bond, or a subordinated debenture, which would have the highest yield to maturity, everything else equal? A) the debenture B) the mortgage bond C) the subordinated debenture D) all of the above 2) Put the following in order of their claim on assets of a firm, starting with the LAST to have a claim: A. Subordinated debentures B. Debentures (unsubordinated) C. Common Stock D. Preferred stock A) C, B, A, D B) C, D, A, B C) B, A, C, D D) D, C, B, A3) 3. Which of the following statements concerning bonds and risk is true? A) Because the interest payments and maturing value are known, the only risk associated with investing in bonds is default risk. B) Zero coupon bonds are always more risky than bonds with high coupon rates because of the time value of money. C) Bonds are generally less risky than common stock because of the preference for debt over equity in the event of bankruptcy and liquidation. D) B-rated bonds are above average for risk, i.e., less risky than the average bond. 4) Finance theory suggests that the current market value of a bond is based upon which of the following? A) the future value of interest paid on a bond B) the sum total of principal and interest paid on a bond C) the sum of the present value of the bond’s interest payments and the present value of the principal D) the present value of a bond’s par value plus the future value of the bond’s present value 5) Which type of value is shown on the firm’s balance sheet? A) book value B) liquidation value C) market value D) intrinsic value 6) What is the value of a bond that matures in 5 years, has an annual coupon payment of $110, and a par value of $2,000? Assume a required rate of return of 8.69%. A) $938.50 B) $1,876.99 C) $1,891.36 D) $1,749.83 Chapter 8 The Valuation and Characteristics of Stock 7) Preferred stock is similar to a bond in the following way A) preferred stock always contains a maturity date. B) both investments provide a stated income stream. C) both contain a growth factor similar to common stock. D) both provide interest payments. 8) Stimpson Inc. preferred stock pays a $.50 annual dividend. What is the value of the stock if your required rate of return is 10%? A) $.05 B) $.50 C) $5.00 D) $50.00 9) Whistle Corp. has a preferred stock that pays a dividend of $2.40. If you are willing to purchase the stock at $11, what is your required rate of return (round your answer to the nearest .1% and assume that there are no transaction costs)? A) 21.8% B) 11.0% C) 9.1% D) 20.1% 10) How is preferred stock similar to common stock? A) Preferred dividend payments usually have unlimited growth potential. B) Investors cannot sue a corporation for the non-payment of dividends. C) Both preferred and common stockholders have voting control of a firm. D) Preferred stock dividends and common stock dividends are fixed. 11) ACME, Inc. expects its current annual $2.50 per share common stock dividend to remain the same for the foreseeable future. Therefore, the value of the stock to an investor with a required return of 12% is A) $3.00. B) $18.33. C) $20.83. D) $30.00. 12) Perrine Industrial Inc. just paid a dividend of $5 per share. Future dividends are expected to grow at a constant rate of 7% per year. What is the value of the stock if the required return is 16%? A) $33.44 B) $55.56 C) $59.44 D) $65.87 13) Beaver Corp preferred stock has a market price of $14.50. If it has a yearly dividend of $3.50, what is your expected rate of return if you purchase the stock at its market price? A) 41.43% B) 19.45% C) 22.36% D) 24.14% Chapter 9 The Cost of Capital 14) In general, which of the following rankings, from highest to lowest cost, is most accurate? A) cost of new common stock, cost of preferred stock, cost o

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