BU 340 BU340 EXAM 6 AND 7 ANSWERS - ASHWORTH

BU 340 BU340 EXAM 6 AND 7 ANSWERS - ASHWORTH

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BU340 Managerial Finance I Exam 6&7 Answers
Question 1

2.5 / 2.5 points
The ________ is the expiration date of the bond.
Question options:
a) 
future value

b) 
yield to maturity

c) 
maturity date

d) 
coupon

Question 2

2.5 / 2.5 points
When real property is used as collateral for a bond, it is termed a/an:
Question options:
a) 
debenture.

b) 
mortgaged security.

c) 
indenture.

d) 
senior bond.

Question 3

2.5 / 2.5 points
The ________ is the annual coupon payment divided by the current price of the bond and is not always an accurate indicator of anticipated current yield.
Question options:
a) 
current yield

b) 
yield to maturity

c) 
bond discount rate

d) 
coupon rate

Question 4

2.5 / 2.5 points
"Junk" bonds are a street name for ________ grade bonds.
Question options:
a) 
investment

b) 
speculative

c) 
extremely speculative

d) 
speculative and investment

Question 5

2.5 / 2.5 points
Most U.S. corporate and government bonds choose to make ________ coupon payments.
Question options:
a) 
annual

b) 
semiannual

c) 
quarterly

d) 
monthly

Question 6

2.5 / 2.5 points
The ________ is the regular interest payment of the bond.
Question options:
a) 
dividend

b) 
par

c) 
coupon rate

d) 
coupon

Question 7

2.5 / 2.5 points
Espresso Petroleum, Inc., has a contractual option to buy back, prior to maturity, bonds the firm issued five years ago. This is an example of what type of bond?
Question options:
a) 
Putable bond

b) 
Callable bond

c) 
Convertible bond

d) 
Junior bond

Question 8

2.5 / 2.5 points
When the ________ is less than the yield to maturity, the bond sells at a/the ________ the par value.
Question options:
a) 
coupon rate, premium over

b) 
coupon rate, discount to

c) 
time to maturity, discount to

d) 
time to maturity, same price as

Question 9

2.5 / 2.5 points
As the rating of a bond increases (for example, from A, to AA, to AAA, it generally means that:
Question options:
a) 
the credit rating increases, the default risk increases, and the required rate of return decreases.

b) 
the credit rating increases, the default risk decreases, and the required rate of return increases.

c) 
the credit rating increases, the default risk decreases, and the required rate of return decreases.

d) 
the credit rating decreases, the default risk decreases, and the required rate of return decreases.

Question 10

2.5 / 2.5 points
The ________ is the return the bondholder receives on the bond if held to maturity.
Question options:
a) 
coupon

b) 
coupon rate

c) 
yield to maturity

d) 
par rate

Question 11

2.5 / 2.5 points
When a company is in financial difficulty and cannot fully pay all of its creditors, the first lenders to be paid are the:
Question options:
a) 
stockholders

b) 
sinking fund holders

c) 
junior debtholders

d) 
senior debtholders

Question 12

2.5 / 2.5 points
Moody's has developed a corporate bond default-risk rating system using capital and lowercase letters and numbers. Below are several examples of Moody's ratings. Which answer choice lists a collection of ratings for "high credit investment grade" bonds?
Question options:
a) 
Baa1, A1, A3

b) 
Ba1, Baa2, Baa3

c) 
Aa2, Aa3, A1

d) 
Caa, Ca, C

Question 13

2.5 / 2.5 points
Which of the following types of bonds by definition has two coupon payments per year?
Question options:
a) 
Consol

b) 
Semiannual

c) 
Zero-coupon

d) 
Putable

Question 14

2.5 / 2.5 points
A bond is a ________ instrument by which a borrower of funds agrees to pay back the funds with interest on specific dates in the future.
Question options:
a) 
long-term equity

b) 
long-term debt

c) 
short-term debt

d) 
short-term equity

Question 15

2.5 / 2.5 points
The four steps to determining the price of a bond are:
Question options:
a) 
determine the amount and timing of the present cash flows, determine the appropriate discount rate, find the present value of the lump-sum principal and the annuity stream of coupons, and add the PVs of the principal and coupons.

b) 
determine the amount and timing of the future cash flows, determine the appropriate discount rate, find the future value of the lump-sum principal and the annuity stream of coupons, and add the FVs of the principal and coupons.

c) 
determine the amount and timing of the future cash flows, determine the appropriate discount rate, find the present value of the lump-sum principal and the annuity stream of coupons, and multiply the PVs of the principal and coupons.

d) 
determine the amount and timing of the future cash flows, determine the appropriate discount rate, find the present value of the lump-sum principal and the annuity stream of coupons, and add the PVs of the lump-sum principal and coupons.

Question 16

2.5 / 2.5 points
With a bearer bond, whoever held it was entitled to the ________ and the ________.
Question options:
a) 
interest payments; principal

b) 
dividend payments; principal

c) 
interest payments; dividend payments

d) 
interest payments; voting rights

Question 17

2.5 / 2.5 points
The ________ is a market-derived interest rate used to discount the future cash flows of the bond.
Question options:
a) 
coupon rate

b) 
semiannual coupon rate

c) 
yield to maturity

d) 
compound rate

Question 18

2.5 / 2.5 points
________ are always unsecured bonds.
Question options:
a) 
Mortgage bonds

b) 
Debentures

c) 
Callable bonds

d) 
Junior debt bonds

Question 19

2.5 / 2.5 points
Which of the following is NOT a category for rating classifications of bonds?
Question options:
a) 
Investment-grade bonds

b) 
American-grade bonds

c) 
Extremely speculative bonds

d) 
Speculative-grade bonds

Question 20

2.5 / 2.5 points
Blackburn, Inc., has issued 30-year, $1,000 face value, 10% annual coupon bonds, with a yield to maturity of 9%. The annual interest payment for the bond is:
Question options:
a) 
$100

b) 
$90

c) 
$50

d) 
$45

Question 21

2.5 / 2.5 points
Stocks are different from bonds because:
Question options:
a) 
stocks, unlike bonds, are major sources of funds.

b) 
stocks, unlike bonds, represent residual ownership.

c) 
stocks, unlike bonds, give owners legal claims to payments.

d) 
bonds, unlike stocks, represent voting ownership.

Question 22

2.5 / 2.5 points
The _____ is the interest rate printed on the bond.
Question options:
a) 
rate of return

b) 
coupon rate

c) 
par value

d) 
pay back rate

Question 23

2.5 / 2.5 points
What if the company goes out of business in 15 years and thus pays an annual dividend of $2.10 for only those 15 years? What is the present value of a share for this company if we want a 10% return on the stock?
Question options:
a) 
$15.97

b) 
$16.97

c) 
$17.97

d) 
$18.97

Question 24

2.5 / 2.5 points
Strong-form efficient markets theory proclaims that:
Question options:
a) 
one can chart historical stock prices to predict future stock prices such that you can identify mispriced stocks and routinely outperform the market.

b) 
one can exploit publicly available news or financial statement information to routinely outperform the market.

c) 
current prices reflect the price and volume history of the stock, all publicly available information, and all private information.

d) 
current prices reflect the price and volume history of the stock, all publicly available information, but no private information.

Question 25

2.5 / 2.5 points
The hiring process for an investment banker can happen in two ways. Which is one of these ways?
Question options:
a) 
Randomly choose an investment banking firm from a list of underwriting firms.

b) 
Pick a desirable investment banking firm, usually basing the choice on the reputation and history of the banker in its particular industry.

c) 
Have the primary government regulator of your industry choose the best investment banking firm for your company.

d) 
Solicit advice from a government agency and use it as your primary guide in choosing an investment banker.

Question 26

2.5 / 2.5 points
Which of these statements is FALSE?
Question options:
a) 
If an investor purchases 20 percent of the initial issue of the company, the investor then owns 20 percent of the company, given the one vote/one share norm.

b) 
After an initial offering, the company can sell more shares to the public at a later date. If the investor who originally purchased 20 percent does not purchase 20 percent of the subsequent issue, his or her ownership is diluted below 20 percent.

c) 
A preemptive right enables one to maintain one's proportional level of ownership.

d) 
A preemptive right is never particularly valuable to shareholders with large ownership percentages.

Question 27

2.5 / 2.5 points
Which of the statements is TRUE?
Question options:
a) 
A problem with using the dividend growth model is that it appears to underestimate the expected return for all stocks.

b) 
A problem with using the dividend growth model is that it produces a negative expected return whenever a firm cuts dividends.

c) 
A problem with using the dividend growth model is that it produces a positive expected return whenever a firm cuts dividends.

d) 
A problem with using the dividend growth model is that it produces a negative expected return whenever a firm increases its dividends.

Question 28

2.5 / 2.5 points
Which of these statements FALSE?
Question options:
a) 
In estimating the current price using the constant growth dividend model, we let g be the growth rate on the dividend stream and r be the rate of return required by the potential buyer of the stock.

b) 
Constant growth means that the percentage increase in the dividend is the same each year.

c) 
Div0 refers to the dividends that had just been paid to the current owner of the stock.

d) 
One unlikely dividend pattern is to raise or grow dividends by a fixed amount at fixed intervals.

Question 29

2.5 / 2.5 points
In ______efficient markets, current prices already reflect the stock's price history and volume as well as all available public information. It is useless to try to exploit publicly available news or financial statement information to routinely outperform the market.
Question options:
a) 
informational

b) 
strong-form

c) 
semi-strong-form

d) 
stable-form

Question 30

2.5 / 2.5 points
If we know the dividend stream, the future price of the stock, the future selling date of the stock, and the required return, we can price stocks just as we priced:
Question options:
a) 
annuities.

b) 
perpetuities.

c) 
bonds.

d) 
preferred stocks.

Question 31

2.5 / 2.5 points
The value of a financial asset is the:
Question options:
a) 
present value of all of the future cash flows that will be received.

b) 
sum of all previous cash flows received.

c) 
future value of just the capital gains but not the dividends.

d) 
present value of just the capital gains but not the dividends.

Question 32

2.5 / 2.5 points
The ________ are quite dynamic in terms of processing trades and incorporating information in prices, and thus are considered very efficient markets.
Question options:
a) 
domestic bond markets

b) 
equity markets

c) 
fixed income markets

d) 
foreign bond markets

Question 33

2.5 / 2.5 points
________ means that the percentage increase in the dividend is the same each year.
Question options:
a) 
Constant growth

b) 
Inconsistent growth

c) 
No growth

d) 
A constant cash flow

Question 34

2.5 / 2.5 points
The ________ is the market of first sale in which companies first sell their authorized shares to the public.
Question options:
a) 
primary market

b) 
secondary market

c) 
bull market

d) 
Nasdaq market

Question 35

2.5 / 2.5 points
Which of these statements is TRUE?
Question options:
a) 
The dealers of stock are not allowed to make money on the difference between what they buy the stock for and what they sell it for.

b) 
A bear market is a prolonged rising market, one in which stock prices in general are increasing.

c) 
The ask price is the price at which a dealer is willing to sell, and the bid price is the price at which a dealer is willing to buy.

d) 
A bull market is a prolonged declining market, one in which stock prices in general are decreasing.

Question 36

2.5 / 2.5 points
You buy a stock for which you expect to receive an annual dividend of $2.10 for the 15 years that you plan on holding it. After 15 years, you expect to sell the stock for 32.25. What is the present value of a share for this company if you want a 10% return?
Question options:
a) 
$7.72

b) 
$15.97

c) 
$23.69

d) 
$31.41

Question 37

2.5 / 2.5 points
Dividend models suggest that the value of a financial asset is determined by the ________ cash flows the owner is entitled to while holding the asset.
Question options:
a) 
present

b) 
past

c) 
future

d) 
past and present

Question 38

2.5 / 2.5 points
Which of the statements below is FALSE?
Question options:
a) 
The profits for common stock owners come before payment to employees, suppliers, government, and creditors.

b) 
Shareholders elect the board of directors, which ultimately selects the management team that runs the day-to-day operations of the company.

c) 
Stock is a major financing source for public companies.

d) 
Common stock's ownership claim on the assets and cash flow of a company is often referred to as a residual claim.

Question 39

2.5 / 2.5 points
You can think of the ________ as the "used stock" market because these shares have been owned or "used" previously.
Question options:
a) 
secondary market

b) 
primary market

c) 
NYSE market

d) 
initial public offering market

Question 40

2.5 / 2.5 points
There are two typical ways to alter the one vote/one share standard. One way is to:
Question options:
a) 
have companies buy back nonvoting common stock.

b) 
not have companies pay dividends.

c) 
have companies issue classes of stock whereby one or more classes have super voting rights.

d) 
not have companies issue bonds.


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