1.Preferred stock is similar to a bond because:

Group of answer choices

it represents an ownership interest.

all of these.

it has a fixed amount to the investor.

it has a maturity at which time the corporation repays par value.

2.Serial bonds are attractive to investors because

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The coupon rate on these bonds is adjusted to the maturity date.

All bonds in the issue mature on the same date

The yield to maturity is the same for all bonds in the issue.

Investors can choose the maturity that suits their financial needs

3.A bond that pays no annual interest but is sold at a discount below the par value is called:

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a zero coupon bond.

a floating rate bond.

a fixed maturity date bond.

an original maturity bond.

4.Common stock may be valued using the following, except:

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Super normal growth model

Constant growth model

None of these

Zero growth model

5.Which one of the following characteristics distinguishes income bonds from other bonds?

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Income bonds are junior to subordinated debt but senior to preferred and common stock

The bondholder is guaranteed an income over the life of the security

Income bonds pay interest only if the issuing company has earned the interest.

By promising a return to the bondholder, an income bond is junior to preferred and common stock.

6.Risk free rate represents:

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The market rate of return

Beta

The rate provided by short term government securities

The rate provided by long term government securities

7.The disadvantages of debt include all but which of the following?

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Principal and interest payments must be met.

Inflation will make the debt payments higher.

Too much debt might hurt the firm's stock price.

Indenture agreements can put restrictions on the borrower.

8.Weighted average cost of capital is the combined cost of capital using a capital mix. The capital mix should be measured in terms of:

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Carrying value of total assets

Carrying value of debt and equity

Contribution margin ratio

Market value of debt and equity

9.Debentures are:

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Subordinated debt and rank behind convertible bonds

A form of lease financing similar to equipment trust certificates.

Bonds secured by the full faith and credit of the issuing firm.

Income bonds that require interest payments only when earnings permit.

10.Which statement is true?

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Preferred stock is similar to corporate bonds because dividends on preferred stock, like interest on bonds, are a tax-deductible expense to the corporation.

Preferred stockholders have priority over bondholders when it comes to the payment of

Preferred stockholders are considered to be the true owners of corporations.

Preferred stock is similar to corporate bonds because the corporation usually pays the holders of the securities a fixed amount.

11.The component of the risk-adjusted discount rate that compensates the investor for holding risky assets is the:

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risk-free rate

risk premium

cost of capital

default risk

12.The three elements needed to estimate the cost of equity capital for use in determining a firm's weighted-average cost of capital are

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Current earnings per share, expected growth rate in earnings per share, and current book value per share of common stock.

Current dividends per share, expected growth rate in dividends per share, and current market price per share of common stock.

Current dividends per share, expected growth rate in dividends per share, and current book value per share of common stock.

Current earnings per share, expected growth rate in dividends per share, and current market price per share of common stock.

13.The pre-tax cost of capital is higher than the after-tax cost of capital because

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dividend payments to stockholders are deductible for tax purposes.

principal payments on debt are deductible for tax purposes.

interest expense is deductible for tax purposes.

the cost of capital is a deductible expense for tax purposes.

14.Security X has an expected rate of return of 0.11 and a beta of 1.5. The risk-free rate is 0.05 and the market expected rate of return is 0.09. According to the Capital Asset Pricing Model, this security is

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overpriced.

fairly priced.

under priced.

cannot be determined from data provided

15.A general rule in choosing among alternative investments is the greater the risk taken, the

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greater the price of the investment.

lower the potential expected.

lower the profits expected.

greater the return required.