Maximize the Current Value Per Share Questions

MIDTERM QUESTIONS 1. Which one of the following best states the PRIMARY goal of financial management? Maximize the current value per share 2. If you double the monthly payment on a fixed rate loan, the loan will be paid off in: Less than half the time 3. Which of the following are advantages of the corporate form of business ownership? i. ii. iii. iv. Limited liability for firm debt Double taxation Ability to raise capital Unlimited firm life I, III, IV 4. Which of the following could be a potential solution to the agency problem between managers and shareholders? Giving the managers a part of the company though stock-based compensation 5. Which of the follow statements are true? i. ii. iii. iv. There is an inverse relationship between interest rates and future values The effective annual interest rate (EAR) will be higher than the annual percentage rate (APR) for a loan that compounds interest annually There is an inverse relationship between present values and interest rates All else equal, the more frequent interest is compounded on a loan, the more interest you will have to pay III and IV 6. The internal rate of return for a project will increase if: The initial cost of the project is reduced 7. If a project is assigned a required rate of return equal to zero, then: The timing of the project’s cash flows has no bearing on the value of the project 8. Which of the following are definite indicators of an accept decision for an independent project with conventional cash flows? i. ii. iii. iv. Positive net present value Profitability index greater than zero Internal rate of return greater than the require rate Positive internal rate of return I and III 9. You own a bond that has a 7% coupon and matures in 12 years. You purchased this bond at par value when it was originally issued. If the current market rate for this type and quality of bond is 7.5%, then you would expect: To realize a capital loss if you sold the bond at the market price 10. Which of the following bonds would have the highest price sensitivity to changes in interest rates? 30-year zero-coupon bond 11. Which of the following is NOT true regarding the term structure of interest rates, i.e. the yield curve? Yield curves can only be plotted for zero-coupon bonds 12. Which of the follow will happen when the yield on a bond goes up, assuming nothing else changes? i. ii. iii. iv. The coupon payments will increase The coupon payments will decrease The face value of the bond will increase The bond price will decrease IV only 13. Which of the following would you expect to happen in U.S. treasury markets if rating agencies downgraded U.S. government debt due to COVID-19? i. ii. iii. iv. U.S. treasury yields would go down U.S. treasury yields would go up Face-values of U.S. treasuries would go down Face-values of U.S. treasuries would go up II. only 14. Which of the following factors cause the yield on a corporate bond to differ from those on a comparable Treasury security? i. ii. iii. iv. Inflation risk Interest rate risk Taxability Default risk III and IV 15. The value of a common stock today depends on: Thee expected future dividends, capital gains, and the required rate of return 16. Which of the follow is/are true regarding debt and equity? i. Debt is a liability of the firm, whereas equity is not ii. iii. iv. Debt and equity both provide voting rights to the holders Excess debt might cause financial distress Equity holders can sue the company if they are not paid any dividends I and III 17. Which of the following banks would you choose for a savings account based on the following rates offered? 6% APR compound quarterly 18. Which of the following would NOT be an example of a principal-agent relation? Professor – student 19. Which of the follow statements is true? One must know the discount rate to compute the NPV of a project but one can compute the IRR without referring to the discount rate 20. Stock X just paid a dividend of $1 and is expected to pay a $3 dividend per year for the foreseeable future. Given that the required rate of return on Stock X is 5%, what would be the fair price of Stock X 3 years from today? $60 21. What is the maximum amount you would be willing to pay for an investment opportunity that you expect to bring you $1,100 in one year, $2,420 in two years, and 3,000 per year for the following 5 years given that you require a return of 10% on investments with similar level of risk? $12,398 22. Which of the following do you need to know to calculate the IRR of a project? i. ii. iii. iv. Project’s estimated cash flows Project’s level of risk Project’s required rate of return Project’s NPV I only 23. How much would you need to pay annually to pay off a $5,000 loan at 4% with equl payments over 4 years? $1,377 24. Which of the following bonds would you expect to have the highest yield? 10-year corporate bond 25. Which of the following could potentially impact the NPV of a project? i. ii. iii. iv. Initial investment amount Book value of initial investment at the end of the project Opportunity costs Sunk costs I, II, and III