FINANCE exam
manal_hassan
finance_exam.docxQuestions 1 to 20: Select the best answer to each question. Note that a question and its answers may be split across a page break, so be sure that you have seen the entire question and all the answers before choosing an answer.
1. The value of common stock depends on the
A. present value of cash flows.
B. price of the stock.
C. retirement date.
D. coupon rate.
2. Which of the following is a correct statement about default?
A. Default is failure to make interest payments only.
B. Default is failure to meet any of the terms of the indenture.
C. Default is failure to make dividend payments.
D. Default is failure to maintain more assets than liabilities.
3. Investment in investment companies reduce _______ risk.
B. unsystematic
C. market
D. systematic
4. Interest on _______ is exempt from federal income taxation.
A. federal bonds such as savings bonds
B. zero coupon bonds
C. state of Florida bonds
D. equipment trust certificates
5. Dividends come at the expense of
A. liabilities.
B. interest.
C. retained earnings.
D. stock.
6. A 10-year $1,000 bond has a coupon of 9 percent. What would be the price if the coupon is paid annually and comparable bonds yield 10 percent?
A. $1,159
B. $938
C. $1,000
D. $1,900
7. What is the value of a preferred stock that pays an annual dividend of $4 a share if competitive yields
are 5 percent?
A. $20
B. $60
C. $80
D. $40
8. Which of the following preferred stock properties would provide the best argument favoring purchase of
preferred stock by an investor?
A. When long-term bond yields decline, the value of preferred stock can potentially rise.
B. Because preferred stock trading volume is lower than common stock trading volume, preferred stock prices are less volatile than common stock prices.
C. The yield differential between preferred stock and bonds is smaller than would be expected on the basis of risk differentials.
D. Preferred stockholders receive preferential treatment over lower-class, common stockholders when the corporation earns sufficient profit to pay creditors and shareholders.
9. A 30-year $1,000 bond has an annual coupon of 6 percent. What would be the current yield if the bond
sells for $622?
A. 9.6 percent
B. 6 percent
C. 5.6 percent
D. 5 percent
10. If interest rates in general fall, the
A. prices of existing bonds fall.
B. coupon rate adjusts for the change in interest rates.
C. prices of existing bonds rise.
D. prices of existing bonds are unaffected.
11. Which of the following are supported by collateral?
A. Convertible bonds
B. Income bonds
C. Equipment trust certificates
D. Debentures
12. Preferred stock and bonds are similar because
A. neither interest nor dividends are tax deductible.
B. they both have voting power.
C. both may be subject to a call option.
D. interest and dividend payments are legal obligations.
13. If a perpetual preferred stock pays a dividend of $5 a year, and yields rise from 10 percent to 12 percent, the price of the stock will
A. fall from $50 to $41.67.
B. fall from $60 to $50.
C. rise from $41.67 to $50.
D. rise from $50 to $60.
14. If interest rates rise, which of the following is false?
A. Prices of existing bonds fall.
B. The market price of a zero coupon bond falls.
C. The yield to maturity rises more than the current yield.
D. Existing bonds may be called.
15. Which of the following is a correct statement about a stock split?
A. A stock split does not affect liabilities.
B. A stock split increases retained earnings.
C. A stock split generates capital gains.
D. A stock split increases equity.
16. What is the value of a common stock if the growth rate is 8 percent, the most recent dividend was $2, and investors require a 15 percent return on similar investments?
A. $27.34
B. $25.78
C. $28.57
D. $30.85
17. The dividend paid by a preferred stock is usually
A. fixed.
B. paid in stock.
C. tax deductible.
D. variable.
18. The yield to maturity on a bond is the
A. interest plus price appreciation (or loss) achieved by holding the bond to maturity.
B. interest paid divided by the price of the bond.
C. price appreciation earned by the bond.
D. bond's coupon divided by the principal amount.
19. Management may prefer not paying dividends in order to
A. increase the firm's liabilities.
B. finance growth and increase the value of their shares.
C. reduce corporate income taxes.
D. use money to reduce investments in assets.
20. An increase in investors' required return will cause the value of a common stock to
A. rise.
B. fall.
C. remain unchanged.
D. remain stable or rise slightly
