Question
Which of the following statements is NOT correct? A. Investors are compensated for taking non-systematic risk. B. Non-systematic risk or asset-specific risk can be eliminated
Which of the following statements is NOT correct?
A. Investors are compensated for taking non-systematic risk.
B. Non-systematic risk or asset-specific risk can be eliminated via diversification.
C. Systematic risk - portion of asset's volatility that is common to the market cannot be eliminated via diversification.
The return shareholders require on their investment in a firm is called the:
A. cost of capital.
B. capital gains yield.
C. cost of equity.
D. dividend yield.
All else being equal, which of the following bond characteristics will lead to lower levels of coupon reinvestment risk for bonds that are held to maturity?
A. Shorter maturities and lower coupon levels.
B. Shorter maturities and higher coupon levels.
C. Longer maturities and higher coupon levels.
Which of the following hypothesis states that yield curves reflect the market's expectations on the future short-term interest rates?
A. The preferred habit hypothesis
B. The liquidity premium hypothesis
C. The expectations hypothesis
D. The segmented markets hypothesis
Which of the following bonds are considered to be default-risk free?
A. investment -grade bonds
B. U.S Treasury bonds
C. municipal bonds
A bond has a $1,000 face value, a market price of $1,045, and pays annual payments of $84.50 each. What is the coupon rate?
A. 7.00 percent
B. 8.45 percent
C. 6.76 percent
D. 7.12 percent
Which is true about liquidity premium theory of the term structure of interest rates?
A. The yield curve reflects the market's expectation about a bond's default risk.
B. The yield curve reflects a preference by lenders for shorter maturities because of interest rate risk associated with the long-term bonds.
C. Investors and many bond issuers have preferences for different maturity bonds.
D. The yield curve reflects the market's anticipation of future interest rates.
Which of the following statement is FALSE regarding bonds?
A. If the bond sells at a premium, then the coupon rate must be higher than the yield-to-maturity.
B. None of the statements is false.
C. If the market price is lower than the par value, then the coupon rate must ne lower than the yield-to-maturity.
D. If the par value is lower than the market price, then the yield-to-maturity must be lower than the coupon rate.
The $1,000 face value QDC bond has a coupon rate of 6%, with interest paid annually, and matures in 3 years. The bond is priced to yield 4% (The bond sells at a premium). If the bond's yield to maturity remains constant, then how will the bond price be in one year?
A. Higher
B. Higher or lower
C. Lower
D. Unchanged
Which of the following statements concerning the price volatility of bonds is most accurate?
A. Bonds with longer maturities have lower interest rate risk.
B. Bonds with higher coupons have lower interest rate risk.
C. As the yield on callable bonds approaches the coupon rate, the bond's price will approach a "floor" value.
What is a problem with using duration?
A. Only works for zero coupon bonds
B. No clear interpretation
C. Changes with interest rates
If convexity is 0, then the relationship between interest rates and bond prices would be a _____.
A. curved line sloping down
B. curved line sloping up
C. straight line
Based on our discussion, we're able to use duration to accurately approximate price changes for _________ changes in interest rates.
Group of answer choices
A. Small
B. No
C. Large
Which of the following bonds has the shortest duration? A bond with a:
A. 10-year maturity, 10% coupon rate.
B. 10-year maturity, 6% coupon rate
C. 20-year maturity, 6% coupon rate.
A firm in the 40% marginal tax bracket pays a bank 10% on a loan. What is the after-tax cost of debt for the firm?
A. 4%
B. 6%
C. 14%
The capital structure weights used in computing the weighted average cost of capital:
A. Are based on the market value of the firm's debt and equity securities.
B. Remain constant over time.
C. Are restricted to the firm's debt and common stock.
D. Are computed using the book value of the long-term debt and the book value of assets.
Which one of the following statements is correct concerning the weighted average cost of capital (WACC)?
A. The WACC will remain constant unless a firm retires some of its debt.
B. The WACC may decrease as a firm's debt-equity ratio increases.
C. A firm's WACC will decrease as the corporate tax rate decreases.
D. The weight of the common stock used in the computation of the WACC is based on the number of shares outstanding multiplied by the book value per share.
You were hired as a consultant to Kroncke Company, whose target capital structure is 40% debt and 60% common equity. The after-tax cost of debt is 6.00%and the cost of equity is 13.25%. The firm will not be issuing any new stock. What is its WACC?
A. 10.35%
B. 9.8%
C. 11.1%
D. 7.7%
KHD has 1,500 bonds outstanding that are selling for $1,000 each. The common stock is priced at $26 a share and there are 36,000 shares outstanding. What is the weight of the common stock as it relates to the firm's weighted average cost of capital?
A. 63.5%
B. 38.4%
C. 79.3%
D. 45.2%
If the corporate tax rate increases, the weighted average cost of capital (WACC) will:
A. increase
B. decrease
C. remain unchanged
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started