Question:1.An annuity may be defined as A)A payment at a fixed interest rate. B)A series of payments of unequal amount. C)A series of yearly payments. D)A series of consecutive payments of equal amounts. 2.You are to receive $12,000 at the end of 5 years. The available yield on the investment is 6%. Which table would you use to determine the value of that sum today? A)Present value of an annuity of $1. B)Future value of an annuity. C)Present value of $1. D)Future value of $1. 3.As the interest rate increases, the present value of an amount to be received at the end of a fixed period A)Increases. B)Decreases. C)Remains the same. D)Not enough information to tell. 4.In determining the future value of a single amount, one measures A)The future value of periodic payments at a given interest rate. B)The present value of an amount discounted at a given interest rate. C)The future value of an amount allowed to grow at a given interest rate. D)The present value of periodic payments at a given interest rate. 5.The concept of time value of money is important to financial decision making because A)It emphasizes earning a return on invested capital. B)It recognizes that earning a return makes $1 worth more today than $1 received in the future. C)It can be applied to future cash flows in order to compare different streams of income. D)all of the above. 6.Babe Ruth Jr. has agreed to play for the Cleveland Indians for $3 million per year for the next 10 years. What table would you use to calculate the value of this contract in today's dollars? A)Present value of an annuity. B)Present value of a single amount. C)Future value of an annuity. D)None of the above. 7.Football player Walter Johnson signs a contract calling for payments of $250,000 per year, to begin 10 years from now. To find the present value of this contract, which table or tables should you use? A)The future value of $1. B)The future value of an annuity of $1 and the future value of $1. C)The present value of an annuity of $1 and the present value of $1. D)None of the above. 8.As the discount rate becomes higher and higher, the present value of inflows approaches A)0. B)Minus infinity. C)plus infinity. D)Need more information. 9.Janice Hardin sets aside $ 5,000 each year for 10 years. She then withdraws the funds on an equal annual basis for the next 10 years. The two tables she should use in the correct order are: A)Present value of an annuity of $1; future value of an annuity of $1. B)Future value of an annuity of $1; present value of an annuity of $1. C)Future value of an annuity of $1; present value of a $1. D)Future value of an annuity of $1; future value of a $1. 10.The future value of a $1000 investment today at 8 percent annual interest compounded semi-annually for 5 years is A)$1,469. B)$1,480. C)$1,520. D)$1,555. 11.Mr. Blochirt is creating a college investment fund for his daughter. He will put in $850 per year for the next 15 years and expect to earn an 8% annual rate of return. How much money will his daughter have when she starts college? A)$11,250. B)$12,263. C)$24,003. D)$23,079. 12.Which of the following is not one of the components that make up the required rate of return on a bond? A)Risk premium. B)Real rate of return. C)Inflation premium. D)Maturity payment. 13.A 14-year-zero-coupon bond was issued with a $1000 par value to yield 12%. What is the approximate market value of the bond? A)$597. B)$205. C)$275. D)$482. 14.Valuation of financial assets requires knowledge of A)Future cash flows. B)Appropriate discount rate. C)Past asset performance. D)A and b 15.An issue of common stock has just paid a dividend of $3.75. Its growth rate is 8%. What is its price if the market rate of return is 16%? A)$25.01 B)$46.88 C)$50.63 D)None of the above 16.An issue of common stock is selling for $57.30. The year end dividend is expected to be $2.32 assuming a constant growth rate of 6%. What is the required rate of return? A)10.3% B)10.1% C)4.1% D)None of the above 17.The market allocates capital to companies based on A)Risk. B)Efficiency. C)Expected returns. D)all of the above. 18.The relationship between a bonds price and the yield to maturity A)Changes at a constant level for each percentage change of yield to maturity. B)Is an inverse relationship. C)Is a linear relationship. D)A and b. 19.Which of the following does not influence the yield to maturity for a security? A)Required real rate of return. B)Risk free rate. C)Business risk. D)Yields of similar securities. 20.The value of a common stock is based on its A)Past performance. B)Dividend yield. C)Current earnings. D)Value of future benefits to the holder. 21. Which is a characteristic of the cost of preferred stock? A)Since preferred stock dividends are fixed, they are tax deductible. B)Because preferred stock has no maturity, the cost analysis is similar to that of debt. C)Preferred stock is valued as perpetuity. D)None of the above. 22.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. 23.A common stock which pays a constant dividend can be valued as if it were A)Corporate bond. B)Stock paying a growing dividend. C)Preferred stock. D)Discount bond. 24.In a general sense, the value of any asset is the A)Value of the dividends received from the asset. B)Present value of the cash flows received from the asset. C)Value of past dividends and price increase for the asset. D)Future value of the expected earnings discounted by the assets cost of capital. 25.A bond which has a yield to maturity greater than its coupon interest rate will sell for a price A)Below par. B)At par. C)Above par. D)What is equal to the face value of the bond plus the value of all interest payment. 26. Preferred stock has all but which of the following characteristics? A) No stated maturity. B) A fixed dividend payment that carries a higher precedence than common dividends. C) The same binding contractual obligation as debt. D) Preferred lacks the ownership privilege of common stock. 27.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. 28.If the inflation premium for a bond goes up, the price of the bond A)is unaffected. B)Goes down. C)Goes up. D)Need more information. 29.Although debt financing is usually the cheapest component of capital, it cannot be used to excess because A)Interest rates may change. B)The firms 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. 30.A firm in a cyclical industry should use A)A large amount of debt to lower the cost of capital. B)No debt at all. C)preferred stock in place of debt. D)A limited amount of debt to lower the cost of capital. 31.A firms debt to equity ratio varies at times because A)A firm will want to sell common stock when prices are high and bonds when interest rates are low. B)A firm will want to take advantage of timing its fund rising in order to minimize costs over the long run. C)The market allows some leeway in the debt to equity ratio before penalizing the firm with a higher cost of capital. D)All of the above are accurate statements. 32.Using the constant dividend growth model for common stock, if Po goes up A)The assumed cost goes up. B)The assumed cost goes down. C)The assumed cost remains unchanged. D)Need further information. 33.Marginal cost of capital A)Recognizes that cost of capital does not stay constant as more funds are raised. B)Usually provides the same capital budgeting choices as the use of weighted average cost of capital. C)Can be defined as the cost of capital when no retained earnings are available for expansion. D)None of the above applies. 34.Expected cash dividends are $2.50, the dividend yield is 6%, flotation costs are 4%, and the growth rate is 3%. Compute cost of new common stock. A)9.00% B)9.25% C)9.18% D)9.44% 35.A firms stock is selling for $78. The next annual dividend is expected to be $2.70. The growth rate is 9%. The flotation cost is $5.00. What is the cost of retained earnings? A)13.09% B)12.46% C)12.75% D)None of the above. 36.If projects are mutually exclusive A)They can only be accepted under capital rationing. B)The selection of one alternative precludes the selection of other alternatives. C)The payback method should be used. D)The net present-value should be used. 37.The _____________ assumes returns are invested at the cost of capital. A)Payback method B)Internal rate of return C)Net present value D)Capital rationing 38.Capital rationing A)Is a way of preserving the assets of the firm over the long term. B)Is a less than optimal way to arrive at capital budgeting decisions. C)Assures stockholder wealth maximization. D)Assures maximum potential profitability. 39.Which of the following is not a step in creating the net present value profile? A)Determining the net present value at a zero discount rate. B)Determining the net present value at a normal discount rate. C)Determining the projects internal rate of return. D)Determining the payback for the project. 40.Which statement, or statements, is true about depreciation? A)Depreciation is a non-cash expense that provides tax shield benefits. B)The greater the depreciation expenses in earlier years, the higher the present value of the project. C)The MACRS depreciation schedules supersede the old methods of sum-of-the-years digits, double declining balance, etc. D)All the above are true. 41.As the cost of capital increases A)Fewer projects are accepted. B)More projects are accepted. C)Project selection remains unchanged. D)None of the above. 42.The net present value profile A)Does not work if projects have a negative net present value. B)Is a substitute for the IRR. C)Graphically portrays the relationship between the discount rate and the net present value. D)Two of the above. 43.The longer the life of an investment A)The more significant the discount rate. B)The less significant the discount rate. C)Makes no difference. D)None of the above. 44.The net present value method is a better method of evaluation than the internal rate of return method because the NPV method A)Assumes cash flows are reinvested at the internal rate of return. B)Is a more liberal method of analysis. C)Assumes that cash flow can be reinvested at the firms more conservative cost of capital. D)None of the above. 45.The first step in the capital budgeting process is A)Collection of data. B)Idea development. C)Assign probabilities. D)Determine cash flow. 46.There are several disadvantages to the payback method, among them: A)Payback ignores the time value of money. B)Payback emphasizes receiving money back as fast as possible for reinvestment. C)Payback is easy to use and to understand. D)Payback can be used in conjunction with time adjusted methods of evaluation. 47.The Net Present Value Method is a more conservative technique for selecting investment projects than the Internal Rate of Return method because the NPV method A)Assumes that cash flows are reinvested at the projects internal rate of return. B)Concentrates on the liquidity aspects of investment projects. C)assumes that cash flows are reinvested at the firms weighted average cost of capital. D)None of the above. 48.If the capital budgeting decision includes a replacement analysis, then A)A gain from the sale of the old asset will represent a tax savings inflow. B)Only incremental cash flows should be looked at. C)The sale price and tax savings will increase the cash inflows throughout the assets life. D)Two of the above. 49.Assuming that a firm has no capital rationing constraint and that the firms investment alternatives are not mutually exclusive, the firm should accept all investment proposals A)For which it can obtain financing. B)That has a positive net present value. C)That has positive cash flows. D) That provides returns greater than the after-tax cost of debt. 50.Capital budgeting is primarily concerned with A)Capital formation in the economy. B)Planning future financing needs. C)Evaluating investment alternatives. D)Minimizing the cost of capital.