Objective Questions:-

1.Which of the statements below is true about the cash flows from stocks and bonds?

1. In order to remain solvent, public corporations must pay interest coupons, principal amounts that are due, and common stock dividends every period.
2. Dividends and coupon interest payments are optional for public corporations.
3. Dividends are optional but interest coupons and principal amount due must be paid, if a firm is to remain solvent.
4. Common stock dividends may be delayed but must be paid eventually, while coupon interest payments must be paid by their due date.

2. Pepsico issued 7% coupon bonds at par value one year ago. Immediately after issuance of these bonds, market interest rates decreased to 6.5%. Which of the statements below is true regarding these Pepsico bonds?

1. The bonds became premium bonds when market rates decreased to 6.5%.
2. The bonds became discount bonds when market rates decreased to 6.5%.
3. The coupon interest payment on the bonds adjusted to the market rates when market interest rates decreased.
4. Answers a and c are true.
5. Answers b and c are true.

3. Suppose you open the Economic Times and see that 30 year Treasury bonds are yielding 1.6%. This is the

1. risk premium
2. real return
3. nominal return
4. inflation premium
5. apocalypse

4. Suppose you are using the PI method to evaluate independent capital budgeting projects. You should choose the project with the highest PI, as long as that PI is greater than zero.

1. true
2. false

5. Which of the statements below are true for the payback method of evaluating projects?

1. The payback method ignores the time value of money.
2. The payback method considers all of the project cash flows.
3. The payback method uses an arbitrary decision rule.
4. All of the above statements are true.
5. Two of the above statements are true.

6. For independent projects, the NPV method and the IRR method will always lead to the same accept/reject decision.

1. True
2. False

7. Suppose an independent project is evaluated using the internal rate of return method. The project should be accepted if the internal rate of return is

a) less than the cost of capital.

b) greater than the cost of capital.

c) equal to the cost of capital.

d) negative.

e) positive.

8. Consider a project with an initial investment and positive future cash flows. As the cost of capital for the project is increased, the _____________________.

1. IRR remains constant while the NPV increases.
2. IRR decreases while the NPV remains constant.
3. IRR remains constant while the NPV decreases.
4. IRR increases while the NPV remains constant.
5. IRR decreases while the NPV decreases.

9. ABC Co. bonds sell for $950. The coupon interest rate on these 8 year bonds is 6%. However, interest is paid semiannually. The par value is $1,000. If they are purchased at the market price, what is the yield to maturity?

a. 3.41%

b. 6.82%

c. 2.75%

d. 5.49%

e. 6.12%

10. Joe Co. bonds have a 9% annual coupon rate, a face value of $1,000 and mature in 7 years. Interest is paid semi-annually. The current market yield on bonds in this risk class is 8.5%. Calculate the current market price of this bond.

a. $ 984

b. $1,040

c. $ 986

d. $1,059

e. $1,026