1.On a graph, consumer surplus is represented by the area
| a. below the demand curve and above price. |
| b. below the price and above the supply curve. |
| c. between the demand and supply curves. |
| d. below the demand curve and to the right of equilibrium price. |
2.
| Buyer | Willingness to Pay(Dollars) |
| Calvin | 150 |
| Sam | 135 |
| Andrew | 120 |
| Lori | 100 |
Refer to Table 7-1. If the price of the product is $110, then who would be willing to purchase the product?
| a. Calvin |
| b. Calvin and Sam |
| c. Calvin, Sam, and Andrew |
| d. Calvin, Sam, Andrew, and Lori |
3.
| Buyer | Willingness to Pay(Dollars) |
| Michael | 500 |
| Earvin | 400 |
| Larry | 350 |
| Charles | 300 |
Refer to Table 7-5. You are selling extra tickets to the Midwest Regional Sweet 16 game in the men’s NCAA basketball tournament. The table shows the willingness to pay of the four potential buyers in the market for a ticket to the game. Which of the following graphs represents the market demand curve?
a.  |
b.  |
c.  |
d.  |
Correct Answer Is- a
4. Bob purchases a book for $6, and his consumer surplus is $2. How much is Bob willing to pay for the book?
| a. $2 |
| b. $4 |
| c. $8 |
| d. $6 |
5. If the price a consumer pays for a product is equal to a consumer’s willingness to pay, then the consumer surplus relevant to that purchase is
| a. zero. |
| b. negative, and the consumer would not purchase the product. |
| c. positive, and the consumer would purchase the product. |
| d. There is not enough information given to answer this question. |
6. All else equal, what happens to consumer surplus if the price of a good increases?
| a. Consumer surplus increases |
| b. Consumer surplus may increase, decrease, or remain unchanged |
| c. Consumer surplus decreases |
| d. Consumer surplus is unchanged |
7. Cost is a measure of the
| a. producer shortage. |
| b. seller’s producer surplus. |
| c. seller’s willingness to buy. |
| d. seller’s willingness to sell. |
8.
| Seller | Cost(Dollars) |
| Abby | 1,600 |
| Bobby | 1,300 |
| Dianne | 1,100 |
| Evaline | 900 |
| Carlos | 800 |
Refer to Table 7-7 . If the market price is $1,000, the producer surplus in the market is
| a. $300. |
| b. $1000. |
| c. $700. |
| d. $1,700. |
9.
| Seller | Cost(Dollars) |
| LeBron | 700 |
| Kobe | 600 |
| Kevin | 450 |
| Steve | 400 |
Refer to Table 7-10. You want to hire a professional photographer to take pictures of your family. The table shows the costs of the four potential sellers in the local photography market. Which of the following graphs represents the market supply curve?
a.  |
b.  |
c.  |
d.  |
Correct Answer Is-a
10.
Figure 7-4
Refer to Figure 7-4 . Which area represents producer surplus when the price is P 1 ?
| a. BCG |
| b. ACH |
| c. DGH |
| d. ABGD |
11.
Figure 7-5
Refer to Figure 7-5. If the supply curve is S, the demand curve is D, and the equilibrium price is $100, what is the producer surplus?
| a. $1,250 |
| b. $5,000 |
| c. $2,500 |
| d. $625 |
12.
Refer to Figure 7-5. If the supply curve is S and the demand curve shifts from D to D’, what is the change in producer surplus?
| a. Producer surplus decreases by $3,125 |
| b. Producer surplus decreases by $5,625 |
| c. Producer surplus increases by $3,125 |
| d. Producer surplus increases by $5,625 |
13.
Figure 7-5
Refer to Figure 7-5. If the supply curve is S and the demand curve shifts from D to D’, what is the increase in producer surplus due to new producers entering the market?
| a. $2,500 |
| b. $3,125 |
| c. $625 |
| d. $5,625 |
14.
Refer to Figure 7-6. When the price is P2, producer surplus is
| a. A+B+C. |
| b. A+C. |
| c. D+G. |
| d. A. |
15.
Refer to Figure 7-8. Total surplus can be measured as the area
| a. JRL. |
| b. JNK. |
| c. JNL. |
| d. JNML. |
16. The area below the demand curve and above the supply curve measures the producer surplus in a market.
False
17. The lower the price, the lower the producer surplus, all else equal.
True
18. Producer surplus measures the benefit to sellers from receiving a price above their costs.
True
19. When markets fail, public policy can potentially remedy the problem and increase economic efficiency.
True
20. Market power and externalities are examples of market failures.
True
21. In a competitive market, sales go to those producers who are willing to supply the product at the lowest price.
True
22. Producer surplus is the cost of production minus the amount a seller is paid.
False
23. All else equal, a decrease in demand will cause an increase in producer surplus.
False
24. The area below the price and above the supply curve measures the producer surplus in a market.
True
25. The cost of production plus producer surplus is the price a seller is paid.
True
26. Henry is willing to pay 45 cents, and Janine is willing to pay 55 cents, for 1 pound of bananas. When the price of bananas falls from 50 cents a pound to 40 cents a pound,
| a. only existing customers who now get lower prices on the gowns they were already planning to purchase. |
| b. both existing customers who now get lower prices on the gowns they were already planning to purchase and new customers who enter the market because of the lower prices. |
| c. only new customers who enter the market because of the lower prices. |
| d. Consumer surplus does not increase; it decreases. |
27. Suppose there is an early freeze in California that reduces the size of the lemon crop. As the price of lemons rises, what happens to consumer surplus in the market for lemons?
| a. We would have to know whether the demand for lemons is relatively elastic or inelastic to make this determination. |
| b. Consumer surplus increases. |
| c. Consumer surplus is not affected by this change in market forces. |
| d. Consumer surplus decreases. |
28. If the cost of producing sofas decreases causing the price of sofas to decrease, consumer surplus in the sofa market will
| a. remain constant. |
| b. increase. |
| c. decrease. |
| d. increase for some buyers and decrease for other buyers. |
29. When the demand for a good increases and the supply of the good remains unchanged, consumer surplus
| a. decreases. |
| b. is unchanged. |
| c. may increase, decrease, or remain unchanged. |
| d. increases. |
30.
Figure 7-1
Refer to Figure 7-1 . When the price rises from P 1 to P 2 , consumer surplus
| a. increases by an amount equal to A. |
| b. decreases by an amount equal to C. |
| c. increases by an amount equal to B+C. |
| d. decreases by an amount equal to B+C. |
31. Producer surplus is
| a. the amount a seller is paid minus the cost of production. |
| b. measured using the demand curve for a good. |
| c. always a negative number for sellers in a competitive market. |
| d. the opportunity cost of production minus the cost of producing goods that go unsold. |
32.
Figure 7-6
Refer to Figure 7-6. Area A represents
| a. the increase in total surplus when sellers are willing and able to increase supply from Q1 to Q2. |
| b. the increase in consumer surplus that results from an upward-sloping supply curve. |
| c. the increase in producer surplus to those producers already in the market when the price increases from P1 to P2. |
| d. producer surplus to new producers entering the market as the result of an increase in price from P1 to P2. |
33.
Producer surplus directly measures
| a. the well-being of society as a whole. |
| b. the well-being of buyers and sellers. |
| c. sellers’ willingness to sell. |
| d. the well-being of sellers. |
34. Which of the following will cause an increase in producer surplus?
| a. Buyers expect the price of the good to be lower next month |
| b. The price of a substitute increases |
| c. The imposition of a binding price ceiling in the market |
| d. Income increases and buyers consider the good to be inferior |
35. Which of the following events would increase producer surplus?
| a. Sellers’ costs increase and the price of the good decreases. |
| b. Sellers’ costs increase and the price of the good stays the same. |
| c. Sellers’ costs stay the same and the price of the good decreases. |
| d. Sellers’ costs stay the same and the price of the good increases. |
36. Which tools allow economists to determine if the allocation of resources determined by free markets is desirable?
| a. Profits and costs to firms |
| b. Incomes of and prices paid by buyers |
| c. The equilibrium price and quantity |
| d. Consumer and producer surplus |
37. We can say that the allocation of resources is efficient if
| a. producer surplus is maximized. |
| b. consumer surplus is maximized. |
| c. total surplus is maximized. |
| d. sellers’ costs are minimized. |
38. The distinction between efficiency and equality can be described as follows:
| a. Efficiency refers to maximizing the number of trades among buyers and sellers; equality refers to maximizing the gains from trade among buyers and sellers. |
| b. Efficiency refers to minimizing the price paid by buyers; equality refers to maximizing the gains from trade among buyers and sellers. |
| c. Efficiency refers to maximizing the size of the pie; equality refers to producing a pie of a given size at the least possible cost. |
| d. Efficiency refers to maximizing the size of the pie; equality refers to distributing the pie fairly among members of society. |
39. If an allocation of resources is efficient, then
| a. all potential gains from trade among buyers are sellers are being realized. |
| b. producer surplus is maximized. |
| c. consumer surplus is maximized. |
| d. the allocation achieves equality as well. |
40. Moving production from a high-cost producer to a low-cost producer will
| a. raise producer surplus but lower consumer surplus. |
| b. lower total surplus. |
| c. raise total surplus. |
| d. lower producer surplus. |
41.If a consumer places a value of $15 on a particular good and if the price of the good is $17, then the
| a. price of the good will fall due to market forces. |
| b. consumer has consumer surplus of $2 if he or she buys the good. |
| c. market is not a competitive market. |
| d. consumer does not purchase the good. |
42. An example of a perfectly competitive market would be the
| a. shampoo market. |
| b. soybean market. |
| c. breakfast cereal market. |
| d. cable TV market. |
43. The line that relates the price of a good and the quantity demanded of that good is called the demand
| a. curve, and it usually slopes upward. |
| b. schedule, and it usually slopes downward. |
| c. curve, and it usually slopes downward. |
| d. schedule, and it usually slopes upward. |
44. Which of the following changes would not shift the demand curve for a good or service?
| a. A change in the price of a related good or service. |
| b. A change in income. |
| c. A change in the price of the good or service. |
| d. A change in expectations about the future price of the good or service. |
45. Which of the following changes would not shift the demand curve for a good or service?
| a. A change in the price of a related good or service. |
| b. A change in income. |
| c. A change in the price of the good or service. |
| d. A change in expectations about the future price of the good or service. |
46. If a decrease in income increases the demand for a good, then the good is
| a. a complementary good. |
| b. a normal good. |
| c. an inferior good. |
| d. a substitute good. |
47. A likely example of substitute goods for most people would be
| a. peanut butter and jelly. |
| b. televisions and subscriptions to cable television services. |
| c. pencils and pens. |
| d. tennis balls and tennis rackets. |
48. When the quantity demanded has increased at every price, it might be because
| a. income has increased, and the good is an inferior good. |
| b. the price of a complementary good has decreased. |
| c. the number of buyers in the market has decreased. |
| d. the costs incurred by sellers producing the good have decreased. |
49. Which of the following demonstrates the law of supply?
| a. When sweater producers expected sweater prices to rise in the near future, they decreased their current supply of sweaters. |
| b. When ketchup prices rose, ketchup sellers increased their quantity supplied of ketchup. |
| c. When car production technology improved, car producers increased their supply of cars. |
| d. When leather became more expensive, belt producers decreased their supply of belts. |
50. When we move along a given supply curve,
| a. only price is held constant. |
| b. all determinants of quantity supplied are held constant. |
| c. technology and price are held constant. |
| d. all nonprice determinants of supply are held constant. |
51. If something happens to alter the quantity supplied at any given price, then
| a. we move along the supply curve. |
| b. the supply curve shifts. |
| c. the supply curve becomes flatter. |
| d. the supply curve becomes steeper. |
52. If the supply of a product increases, then we would expect equilibrium price
| a. to decrease and equilibrium quantity to increase. |
| b. and equilibrium quantity to both increase. |
| c. and equilibrium quantity to both decrease. |
| d. to increase and equilibrium quantity to decrease. |
53.If a surplus exists in a market, then we know that the actual price is
| a. above the equilibrium price, and quantity supplied is greater than quantity demanded. |
| b. below the equilibrium price, and quantity demanded is greater than quantity supplied. |
| c. below the equilibrium price, and quantity supplied is greater than quantity demanded. |
| d. above the equilibrium price, and quantity demanded is greater than quantity supplied. |
54.
Figure 4-7
Refer to Figure 4-7. At a price of $35, there would be a
| a. shortage of 400 units. |
| b. surplus of 600 units. |
| c. surplus of 200 units. |
| d. surplus of 400 units. |
55. What would happen to the equilibrium price and quantity of lattés if coffee shops began using a machine that reduced the amount of labor necessary to produce them?
| a. Both the equilibrium price and quantity would increase. |
| b. Both the equilibrium price and quantity would decrease. |
| c. The equilibrium price would decrease, and the equilibrium quantity would increase. |
| d. The equilibrium price would increase, and the equilibrium quantity would decrease. |
56.
Refer to Figure 4-10. Which of the following movements would illustrate the effect in the market for golf balls of an increase in green fees?
| a. Point A to Point B |
| b. Point C to Point D |
| c. Point A to Point D |
| d. Point C to Point B |
57.
Figure 4-10
Refer to Figure 4-10. Which of the following movements would illustrate the effect in the market for chocolate chip cookies of an improved high-speed mixer that allows bakers to produce cookies in less time?
| a. Point C to Point D |
| b. Point A to Point D |
| c. Point A to Point B |
| d. Point C to Point B |
58. The law of demand states that, other things equal, when the price of a good rises, the quantity demanded of the good falls, and when the price falls, the quantity demanded rises.
True
59. A decrease in demand shifts the demand curve to the left.
True
60. If the demand for a good falls when income falls, then the good is called an inferior good.
False
61. A decrease in the price of a complement will shift the demand curve for a good to the left.
False
62. If baked potatoes and sour cream are complements, then an increase in the price of sour cream decreases the demand for baked potatoes.
True
63. If a person expects the price of pumpkins to increase next month, then that person’s current demand for pumpkins will increase.
True
64. Price cannot fall so low that some sellers choose to supply a quantity of zero.
False
65. An increase in the price of a product and an increase in the number of sellers in the market affect the supply curve in the same general way.
False
66. If there is an improvement in the technology used to produce a good, then the supply curve for that good will shift to the left.
False
67. The equilibrium price is the same as the market-clearing price.
True
68. The actions of buyers and sellers naturally move markets toward equilibrium.
True
69. When the market price is above the equilibrium price, suppliers are unable to sell all they want to sell.
True
70. Demand refers to the amount buyers wish to buy, whereas the quantity demanded refers to the position of the demand curve.
False
71. An increase in supply will cause a decrease in price, which will cause an increase in demand.
False
72.
Figure 4-2
| Consumer 1 | Consumer 2 |
 |  |
Refer to Figure 4-2. If these are the only two consumers in the market, then the market quantity demanded at a price of $15 is
| a. 25 units. |
| b. 15 units. |
| c. 0 units. |
| d. 10 units. |
73. The board of directors is the highest ranking body in a corporation, and the chairman of the board is the highest ranking individual. The CEO generally works under the board and its chairman, and the board generally has the authority to remove the CEO under certain conditions. The CEO, however, cannot remove the board, but he or she can endeavor to have the board voted out and a new board voted in should a conflict arise. It is possible for a person to simultaneously serve as CEO and chairman of the board, though many corporate control experts believe it is bad to vest both offices in the same person.
True
74. Partnerships and proprietorships generally have a tax advantage over corporations.
True
75. A disadvantage of the corporate form of organization is that corporate stockholders are more exposed to personal liabilities in the event of bankruptcy than are investors in a typical partnership.
False
76. In most corporations, the CFO ranks under the CEO.
True
77. The more capital a firm is likely to require, the greater the probability that it will be organized as a corporation.
True
78. Organizing as a corporation makes it easier for the firm to raise capital. This is because corporations’ stockholders are not subject to personal liabilities if the firm goes bankrupt and also because it is easier to transfer shares of stock than partnership interests.
True
79. In order to maximize its shareholders’ value, a firm’s management must attempt to maximize the stock price in the long run, or the stock’s “intrinsic value.”
True
80.A stock’s market price would equal its intrinsic value if all investors had all the information that is available about the stock. In this case the stock’s market price would equal its intrinsic value.
True
81. For a stock to be in equilibrium as the book defines it, its market price should exceed its intrinsic value.
False
82. The primary operating goal of a publicly-owned firm trying to best serve its stockholders should be to
Use a well-structured managerial compensation package to reduce conflicts that may exist between stockholders and managers.
83. The annual report contains four basic financial statements: the income statement, the balance sheet, the cash flow statement, and the statement of stockholders’ equity.
True
84. On the balance sheet, total assets must always equal the sum of total liabilities and equity.
True
85. The income statement shows the difference between a firm’s income and its costs—i.e., its profits—during a specified period of time. However, not all reported income comes in the form of cash, and reported costs likewise may not be consistent with cash outlays. Therefore, there may be a substantial difference between a firm’s reported profits and its actual cash flow for the same period.
True
86. The balance sheet represents a snapshot in time, whereas the income statement reports on operations over a period of time.
True
87. EBIT, often referred to as operating income, stands for “earnings before interest and taxes.”
True
88.
| Consider the following balance sheet for Games Inc. Because Games has $800,000 of retained earnings, we know that the company would be able to pay cash to buy an asset with a cost of $200,000.Cash$50,000 Accounts payable$100,000 Inventory$200,000 Accruals$100,000 Accounts receivable$250,000 Total CL$200,000 Total CA$500,000 Long-term debt$200,000 Net fixed assets$900,000 Common stock$200,000 Retained earnings$800,000 Total assets$1,400,000 Total L & E$1,400,000 |
False
89. The value of any asset is the present value of the cash flows the asset is expected to provide. The cash flows a business is able to provide to its investors is its free cash flow. This is the reason that FCF is so important in finance.
True
90. Typically, the statement of stockholders’ equity starts with total stockholders’ equity at the beginning of the year, adds net income, subtracts dividends paid, and ends with total stockholders’ equity at the end of the year. Over time, a profitable company will have earnings in excess of the dividends it pays out, resulting in a substantial amount of retained earnings shown on the balance sheet.
True
91.The balance sheet measures the flow of funds into and out of various accounts over time, while the income statement measures the firm’s financial position at a point in time.
False
92. To estimate the cash flow from operations, depreciation must be added back to net income because depreciation is a non-cash charge that has been deducted from revenue in the net income calculation.
True
93. The higher the interest rate the higher the FV.
True
94. This is a question on the Finance quiz
True
95. What is my monthly mortgage payment on a $200,000 mortgage with a 5% interest rate on a 30-year mortgage?
$1,074
96. What is the FV of a series of $7,000 annual payments over 10 years if I can earn 9%?
$106,350.51
97. The lower the discount rate the lower my PV on a series of future payments?
False
98. The further out I receive a FV, the higher the PV.
False
99. The higher the rate earned the fewer number of years it will take to get to a given future value
True
100. The higher the future payments the higher my PV all else equal?
True
101. What is the PV of a series of $5,000 annual payments over 5 years if the discount rate is 8%?
$19,964
102. The higher the discount rate or interest rate the lower my PV.
True
103. What rate of return did I earn if I invest $50,000 and receive $75,000 seven years later?
5.96% per year
104. The more money I invest the higher the Future Value (FV)
True
105. Essentially, the value of stocks and bonds is the discounted value of their cash flows or dividends?
True
106. How much would I pay for a lump sum of $15,000 in 3 years if my required return is 10%?
$11,269,72
107. How many years will it take to generate $500,000 if I can invest $50,000 now and invest $5,000 annually at a rate of8%?
21 Years
108. To calculate a loan payment I must adjust my number of periods and my interest rate to reflect the payment terms (monthly, quarterly)
True
109. What is the PV of $40,000 received in 5 years if the rate or return or discount rate is 6%?
$29,890.33
110. What is the FV of $10,000 in 5 years at a 7% rate of return?
$14,025.52
111. The more time I have to invest the lower my FV
False
112. What is the FV of $50,000 invested in 9 years if I can earn 5%?
$77,566.41
113. Assume that interest rates on 20-year Treasury and corporate bonds with different ratings, all of which are noncallable, are as follows:
T-bond = 7.72% A = 9.64%
AAA = 8.72% BBB = 10.18%
The differences in rates among these issues were most probably caused primarily by:
Default risk and liquidity differences
114. The price sensitivity of a bond to a given change in interest rates is generally greater the longer the bond’s remaining maturity.
True
115. A call provision gives bondholders the right to demand, or “call for,” repayment of a bond. Typically, companies call bonds if interest rates rise and do not call them if interest rates decline.
False
116. The board of directors is the highest ranking body in a corporation, and the chairman of the board is the highest ranking individual. The CEO generally works under the board and its chairman, and the board generally has the authority to remove the CEO under certain conditions. The CEO, however, cannot remove the board, but he or she can endeavor to have the board voted out and a new board voted in should a conflict arise. It is possible for a person to simultaneously serve as CEO and chairman of the board, though many corporate control experts believe it is bad to vest both offices in the same person.
True
117. Partnerships and proprietorships generally have a tax advantage over corporations.
True
118. A disadvantage of the corporate form of organization is that corporate stockholders are more exposed to personal liabilities in the event of bankruptcy than are investors in a typical partnership.
False
119. In most corporations, the CFO ranks under the CEO.
True
120. The more capital a firm is likely to require, the greater the probability that it will be organized as a corporation.
True
121. Organizing as a corporation makes it easier for the firm to raise capital. This is because corporations’ stockholders are not subject to personal liabilities if the firm goes bankrupt and also because it is easier to transfer shares of stock than partnership interests.
True
122. In order to maximize its shareholders’ value, a firm’s management must attempt to maximize the stock price in the long run, or the stock’s “intrinsic value.”
True
123. A stock’s market price would equal its intrinsic value if all investors had all the information that is available about the stock. In this case the stock’s market price would equal its intrinsic value.
True
124. For a stock to be in equilibrium as the book defines it, its market price should exceed its intrinsic value.
False
125. The primary operating goal of a publicly-owned firm trying to best serve its stockholders should be to
Use a well-structured managerial compensation package to reduce conflicts that may exist between stockholders and managers.
126. The annual report contains four basic financial statements: the income statement, the balance sheet, the cash flow statement, and the statement of stockholders’ equity.
True
127. On the balance sheet, total assets must always equal the sum of total liabilities and equity.
True
128. The income statement shows the difference between a firm’s income and its costs—i.e., its profits—during a specified period of time. However, not all reported income comes in the form of cash, and reported costs likewise may not be consistent with cash outlays. Therefore, there may be a substantial difference between a firm’s reported profits and its actual cash flow for the same period.
True
129. The balance sheet represents a snapshot in time, whereas the income statement reports on operations over a period of time.
True
130. EBIT, often referred to as operating income, stands for “earnings before interest and taxes.”
True
131.
| Consider the following balance sheet for Games Inc. Because Games has $800,000 of retained earnings, we know that the company would be able to pay cash to buy an asset with a cost of $200,000.Cash$50,000 Accounts payable$100,000Inventory$200,000 Accruals$100,000Accounts receivable$250,000 Total CL$200,000Total CA$500,000 Long-term debt$200,000Net fixed assets$900,000 Common stock$200,000 Retained earnings$800,000Total assets$1,400,000 Total L & E$1,400,000 |
False
132. The value of any asset is the present value of the cash flows the asset is expected to provide. The cash flows a business is able to provide to its investors is its free cash flow. This is the reason that FCF is so important in finance.
True
133. Typically, the statement of stockholders’ equity starts with total stockholders’ equity at the beginning of the year, adds net income, subtracts dividends paid, and ends with total stockholders’ equity at the end of the year. Over time, a profitable company will have earnings in excess of the dividends it pays out, resulting in a substantial amount of retained earnings shown on the balance sheet.
True
134. The balance sheet measures the flow of funds into and out of various accounts over time, while the income statement measures the firm’s financial position at a point in time.
False
135. To estimate the cash flow from operations, depreciation must be added back to net income because depreciation is a non-cash charge that has been deducted from revenue in the net income calculation.
True
136. Assume that interest rates on 20-year Treasury and corporate bonds with different ratings, all of which are noncallable, are as follows:
T-bond = 7.72% A = 9.64%
AAA = 8.72% BBB = 10.18%
The differences in rates among these issues were most probably caused primarily by:
Default risk and liquidity differences.
137. The price sensitivity of a bond to a given change in interest rates is generally greater the longer the bond’s remaining maturity.
True
138. A call provision gives bondholders the right to demand, or “call for,” repayment of a bond. Typically, companies call bonds if interest rates rise and do not call them if interest rates decline.
False
139. Assume that all interest rates in the economy decline from 10% to 9%. Which of the following bonds would have the largest percentage increase in price?
A 10-year zero coupon bond.
140. A 10-year bond pays an annual coupon, its YTM is 8%, and it currently trades at a premium. Which of the following statements is CORRECT?
| If the yield to maturity remains at 8%, then the bond’s price will decline over the next year. |
141. Because short-term interest rates are much more volatile than long-term rates, you would, in the real world, generally be subject to much more price risk if you purchased a 30-day bond than if you bought a 30-year bond.
False
142. Sinking funds are provisions included in bond indentures that require companies to retire bonds on a scheduled basis prior to their final maturity. Many indentures allow the company to acquire bonds for sinking fund purposes by either (1) purchasing bonds on the open market at the going market price or (2) selecting the bonds to be called by a lottery administered by the trustee, in which case the price paid is the bond’s face value.
True
143. A 12-year bond has an annual coupon of 9%. The coupon rate will remain fixed until the bond matures. The bond has a yield to maturity of 7%. Which of the following statements is CORRECT?
| If market interest rates remain unchanged, the bond’s price one year from now will be lower than it is today. |
144. A bond has a $1,000 par value, makes annual interest payments of $100, has 5 years to maturity, cannot be called, and is not expected to default. The bond should sell at a premium if market interest rates are below 10% and at a discount if interest rates are greater than 10%.
True
145. There is an inverse relationship between bonds’ quality ratings and their required rates of return. Thus, the required return is lowest for AAA-rated bonds, and required returns increase as the ratings get lower.
True
146. Which of the following statements is CORRECT?
| You hold two bonds, a 10-year, zero coupon, issue and a 10-year bond that pays a 6% annual coupon. The same market rate, 6%, applies to both bonds. If the market rate rises from its current level, the zero coupon bond will experience the larger percentage decline. |
147. Three $1,000 face value, 10-year, noncallable, bonds have the same amount of risk, hence their YTMs are equal. Bond 8 has an 8% annual coupon, Bond 10 has a 10% annual coupon, and Bond 12 has a 12% annual coupon. Bond 10 sells at par. Assuming that interest rates remain constant for the next 10 years, which of the following statements is CORRECT?
| Bond 8 sells at a discount (its price is less than par), and its price is expected to increase over the next year. |
148. Which of the following statements is CORRECT?
| All else equal, if a bond’s yield to maturity increases, its price will fall. |
149. Which of the following statements is CORRECT?
| All else equal, long-term bonds have less reinvestment risk than short-term bonds. |
150. A 15-year bond with a face value of $1,000 currently sells for $850. Which of the following statements is CORRECT?
| The bond’s yield to maturity is greater than its coupon rate. |
151. If you own stock in a company you have loaned the company money that the company must payback.
True
152. A firm pays a current dividend of $2 per share and has a growth rate of 4%. If the required return on equity is 9% and the WACC is 7%, what is the intrinsic value of the stock?
$41.60
153. A firm has earnings per share (EPS) of $3.00 and the industry PE ratio is 15. Some other company’s stock is valued at $50. What should I pay for the stock?
$45
154. Stocks are better investments than bonds.
True
155. The higher the growth rate the higher the intrinsic value of stock in both the dividend discount model and the free cash flow model.
True
156. What is the payback period of a machine that costs 500,000 that has operating cash flows of 100,000 per year
5 Years
157. What is the IRR of the following project:
Cost of machine 2 million
Working capital needed at time 0 is $250,000 none is recovered at the projects end
Cash flow year 1 $500,000
Cash Flow years 2 through 4 $700,000
Salvage value end of year 4 is $300,000
WACC 9%
IRR=9.85%
158. What is the NPV of the following machine if the WACC is 7% and the following information.
Machine price $700,000
Year 1 cash flow $300,000
Year 2 cash flow $400,000
Year 3-5 cash flow $50,000
$44,358.29
159. What is the NPV of the following project:
Cost of machine 2 million
Working capital needed at time 0 is $250,000 none is recovered at the projects end
Cash flow year 1 $500,000
Cash Flow years 2 through 4 $700,000
Salvage value end of year 4 is $300,000
WACC 9%
$46,845
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