Business Finance Review Packet Questions

1. Bond and preferred stock valuation are not fundamentally different from common stock valuation, but the analysis of common stock and its valuation is more difficult because:
A. earnings and dividends are generally expected to grow
B. the cash flows of

D

If the market price of a bond increases then:
A. the expected rate of return decreases
B. the coupon rate decreases
C. the expected rate of return increases
D. b. and c.

A

1. Which of the following affect an asset's value to an investor?
I. Amount of an asset's expected cash flow
II. The riskiness of the cash flows
III. Timing of an asset's cash flows
IV. Investors required rate of return
a. I, II, III
b. I, III, IV
c. I, I

D

1. BCD's $1,000 par value bonds currently sell for $798.50. The coupon rate is 10 percent, paid annually. If the bonds have 5 years before maturity, what is the expected rate of return?
a. 10%
b. 15.9%
c. 9%
d. 8.5%

B

1. Regarding the SML, all of the following are true except:
A. the expected rate of return is equal to the risk-free rate plus a risk premium which
depends upon the investor attitudes toward risk and the riskiness of cash flows from the asset
B. the SML s

E

The appropriate measure for risk according to the capital asset pricing model is:
a. the standard deviation of a firm's cash flow
b. alpha
c. the coefficient of variation of a firm's cash flows
d. beta

D

Jerry will receive this _______________on the date his bond becomes due in the year 2010

Par-Value

Tom has invested in Music-Stor Inc. Each quarter he checks the amount of money the company has placed in the _________________ to be sure the company can pay off their bond issues on the maturity date.

Sinking Fund

Bill bought a ___________________ bond because he anticipated exchanging it for common stock at some point in the future.

Convertible

Caldwell Industries used real estate to secure their _____________________.

Mortgage Bond

Because it has declared bankruptcy in the past, and the future is uncertain, United Airlines would probably not be able to sell this type of bond issue. _________________

Debenture

TNG Enterprises issued their debentures with a _________________ because they forecasted a decline in interest rates in a few years.

Call Provision

One of the advantages of Burke's stock is that it contains a ______________________, so that if the company misses his dividend, the company must pay it before it pays any other.

Cumulative Provision

When Judi was deciding which kind of stock to purchase, she chose ______________ because the dividends are fixed and must be paid before other dividends are paid. Further, there are no voting rights with this type of stock, which is okay with her.

Preferred Stock

Carmen was considering buying ________________ until she learned that as a stockholder of this type, she would be the last to share in the firm's assets if the firm closed.

Common Stock

This provision, the ___________________, assures the stockholder the opportunity to purchase new shares when the firm issues new shares. This allows a stockholder the opportunity to maintain his proportionate share of ownership, if desired.

Preemptive Right Provision