FIN 385 Week 6 Quiz

100% All 12 correct answers + Instructor’s explanations

FIN 385 Week 6 Quiz

Grade Details – All Questions
1. Question : (TCO 7) Which of these statements is not true?

Maturity has no impact on interest rate risk.

Interest rate risk is inversely proportional to a bond’s coupon rate.
The effective maturity of a bond’s cash flows (face value plus coupon payment annuity) is referred to as the bond’s duration.
All of these are true statements.

2. Question : (TCO 7) To calculate a bond’s duration, you must ________.

average the present values of all the coupon payments

take a weighted average of the present values of all the cash inflows
divide the face value by the PV of the coupon annuity

3. Question : (TCO 7) Which statement is true about immunization?

A well-diversified bond portfolio is automatically immunized.
Immunization depends upon matching bond maturities.

Immunization techniques shield an investor’s net worth from interest rate fluctuations.
None of the above

4. Question : (TCO 7) Convexity of a bond refers to _______.

the shape of the term structure of interest rate’s curve

the relationship between a bond’s price and its yield

how fast the portfolio’s efficient frontier changes shape

None of the above

5. Question : (TCO 7) Passive bond managers prefer to ______.

manage the prices of the bonds in their portfolios

manage only the interest rate risk of their fixed-income securities
Both of the above

None of the above

6. Question : (TCO 9) The dividend growth model to determine expected returns on common stock makes use of all but which of the following?

Dividend growth rate

Common stock par value

Expected next dividend

Prevailing average market return

7. Question : (TCO 9) Beta is a measure of ________.

the relative amount a stock’s return will change in relation to the percentage change in the overall market’s return
the percentage change in a bond’s valuation as a result of changing interest rates
the covariance of the risk-free rate and the rate of inflation
None of the above

8. Question : (TCO 9) Which is true about the cost of preferred stock in WACC calculations?

It’s equal to the preferred stock’s interest rate.

Stated interest rate x (1 – tax rate)

It’s a perpetuity calculated as the preferred stock’s dividend rate/current price.
None of the above

9. Question : (TCO 9) Flotation costs involve which of the following?

Costs incurred to sell obsolete inventory

Costs incurred to sell bonds or stocks in the marketplace

Costs incurred when an investor buys stocks or bonds

None of the above

10. Question : (TCO 9) If the only source of capital to the firm is an individual investor in the firm’s common stock who can earn 10% day in and day out on his other investments, then _______.

the WACC calculation would be immaterial

the firm’s cost of capital should be 10%

the firm’s cost of capital should be slightly less than the 10%
None of the above

11. Question : (TCO 9) Since it’s difficult to forecast projected dividend growth to use in the dividend discount formula, a common practice would be to ________.

average the dividend growth rates in recent years and assume that rate will repeat itself in the future
assume the most recent year-to-year growth rate will repeat itself in the future
assume dividend growth rates will equal GDP growth

None of the above

12. Question : (TCO 9) In applying the WACC formula, the capital structure weights come from ______.

bond and stock market values

balance sheet historical asset and liability values

bond and stock par values

None of the above