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Exercises FOR Midterm EXAM A182
Advanced Financial Management (BWFF2043)
Universiti Utara Malaysia
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BWFF2043 EXERCISES FOR MIDTERM EXAM A
- Time value of money indicates that A. there is no difference in the value of money obtained today and tomorrow. B. a unit of money obtained today is worth less than a unit of money obtained in the future. C. a unit of money obtained today is worth more than a unit of money obtained in the future. D. None of the above
- Which of the following statements is TRUE? A. An annuity is a series of cash flows of variable amount. B. Frequency of compounding has no effect on rate of interest. C. The nominal rate of interest is equal to or more than the effective rate of interest if the compound frequency is more than once a year. D. Cash flows occurring in different time periods cannot be compared unless they are discounted to a common date.
- Assuming two investments have equal lives, a high discount rate tends to favour: A. the investment with even cash flow. B. the investment with large cash flow late. C. the investment with large cash flow early. D. neither investment since they have equal lives. Use the following information to answer Questions 4 to 6. Safar Tayara Inc. deposited RM2,000 in a bank account that pays 12% interest annually.
- What will the amount be in four years? A. RM2, B. RM3, C. RM3, D. RM3,
- What will the amount be if the interest is compounded semi-annually for those four years? A. RM3, B. RM3, C. RM3, D. RM3,
- The __________ value is the value placed on an asset based upon the expected future cash flows to be realized from the investment, the investors required return
and the riskiness of the asset. A. book B. market C. intrinsic D. liquidation 7. The items included in an indenture that limit certain actions of the issuer in order to protect bondholder's interests are referred to as the A. by laws. B. legal bounds. C. trustee relationships. D. protective covenants 8. When the required rate of return is constant and equal to the coupon rate, the price of a bond when it approaches maturity date will A. equal to par value. B. increase from par value. C. decrease from par value. D. constant with par value. 9. If the expected return is less than the required return on an asset, rational investors will A. buy the asset, since the price is expected to decrease. B. buy the asset, which will drive the price up and cause the expected to reach the level of the required return. C. sell the asset, which will drive the price down and cause the expected return to reach the level of the required return. D. sell the asset, which will drive the price up and cause the expected return to reach the level of the required return. 10. A bond has a market price that exceeds its face value. Which of the following features currently apply to this bond? I. premium price II. discounted price III. yield-to-maturity that exceeds the coupon rate IV. yield-to-maturity that is less than the coupon rate A. III only B. I and III only C. I and IV only D. II and IV only 11. OWS Supply offers 7 percent coupon bonds with semiannual payments and a yield to maturity of 7 percent. The bonds mature in 6 years. What is the market
A. RM791.
B. RM1,000.
C. RM1,052.
D. RM1,113.
- Bitcoins Industries has issued bonds which have RM1,000 par value and a RM semi-annual coupon payment. These bonds will mature in 10 years and currently sell for RM1,250 per unit. Using the YTM formula, calculate the yield to maturity of these bonds. A. 11 % B. 15 % C. 27 % D. 42 %
- En Kay Berhad (EKB) has an expected dividend next year of RM5 per share. The dividend is expected to grow at 10 percent for an unforeseeable future. What is the value of EKB common stock if the required return is 20 percent? A. RM18. B. RM22. C. RM28. D. RM56.
- The Kayu Kitchen company has recently sold 1000 shares of preferred stocks with a promised dividend of RM6 per share. What is the value of the stock (per share) assuming 10 percent required rate of return? A. RM56. B. RM67. C. RM675. D. RM6,750.
- The most recent dividend of KT shares was RM2 and expected to grow at 3 percent every year for the next 2 years. After which, the dividend will grow at 6 percent every year indefinitely. Assuming 10 percent required rate of return, what is the value of KT’s share? A. RM57.
B. RM62.
C. RM93.
D. RM100.
- Which of the following statements are TRUE? I The price of common stock cannot be worth less than its intrinsic value. II. The common stock of a non-growth firm is valued in the same manner as preferred stock. III The higher the expected growth in dividends for a share of common stock, the lower its required rate of return. IV A firm’s common equity as reported in the balance sheet determines the market price of that firm’s common stock. A. I only B. II only C. II and III only D. I, II, III and IV only
- Which one of the following types of stock is defined by the fact that it receives no preferential treatment in respect to either dividends or bankruptcy proceedings? A. cumulative B. non-cumulative C. preferred D. common
- A firm is planning to issue some new equity shares for sale to the general public. This sale will occur in which one of the following markets? A. auction B. exchange floor C. secondary D. primary
- An increase in which of the following will increase the current value of a stock according to the dividend growth model? I. discount rate II. dividend amount III. dividend growth rate IV. number of future dividends, provided the current number is less than infinite
C. RM18.
D. RM21.
Greenfield Inc.’s preferred stock is currently selling for RM25 per share. If the company promises to pay RM3 annual dividends, what is your expected return from the purchase of this stock? A. 8 % B. 10 % C. 12 % D. 15 %
If Talita Corporation’s preferred stock pays quarterly dividends of RM2 and your required rate of return for this investment is 12 percent, how much would you be willing to pay for this preferred stock? A. RM20. B. RM42. C. RM67. D. RM83.
You are considering purchasing Elvira Corporation common stock, and you are planning to hold the stock for 5 years. At the end of year 5, the price of the stock is anticipated to be RM68 per share. Dividends on this stock are anticipated to increase at an annual rate of 20 percent for an unforeseeable future from the most recent dividend of RM2. If your required rate of return is 16 percent, how much are you willing to pay for Elvira’s stock today? A. RM11. B. RM32. C. RM43. D. RM51.
A company's weighted average cost of capital (WACC) is best described by which of the following statements? A. The cost of capital is the cost of raising specific sources of funds in financial markets today. B. The weighted average cost of capital is the return earned and paid on a company's securities in the past. C. The cost of capital is the required return on new company securities today independent of where the funds are invested. D. The weighted cost of capital is the minimum acceptable return on any current average risk project under consideration today.
Which of the following statements are TRUE? I. The cost of preferred stock is computed the same as a perpetuity. II. The after-tax cost of debt generally decreases when tax rates decrease. III. The cost of equity is unaffected by changes in the market risk premium. IV. The after-tax cost of debt generally increases when bond prices decline. A. I and II only B. I and IV only C. II and III only D. III and IV only
The cost of retained earnings is less than the cost of new common stock because A. marginal tax brackets increase. B. dividends are not tax deductible. C. flotation costs are incurred when new stocks are issued. D. accounting rules allow a deduction when using retained earnings.
Which of the following costs needs to apply a tax adjustment to its yield measure? A. Cost of debt. B. Cost of common equity. C. Cost of preferred stock. D. Cost of retained earnings.
A firm has concluded that its financial risk premium is too high in its capital structure. In order to decrease this, the firm can __________. A. increase short-term debt to decrease the cost of capital. B. increase the proportion of long-term debt to decrease the cost of capital. C. increase the proportion of common stock equity to decrease financial risk. D. decrease the proportion of common stock equity to decrease financial risk.
A firm has determined that it can issue preferred stock at RM115 per share. The stock will pay a RM6 dividend for every six month. The cost of issuing and selling the stock is RM3 per share. The cost of the preferred stock is __________. A. 5% B. 5% C. 10% D. 12%
A firm has RM10 million in long-term debt, RM2 million in preferred stock, and RM8 million in common equity. The before-tax cost for debt, preferred stock, and common equity forms of capital are 8%, 9%, and 15%, respectively. The corporate
Exercises FOR Midterm EXAM A182
Course: Advanced Financial Management (BWFF2043)
University: Universiti Utara Malaysia
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