Finance Practice Problems

Which of the following statements is false?

a. If the discount (or interest) rate is positive, the future value of an expected series of payments will always exceed the present value of the same series.
b. To increase present consumption beyond present income normally requires either the payment of interest or else an opportunity cost of interest foregone.
c. Disregarding risk, if money has time value, it is impossible for the present value of a given sum to be greater than its future value.
d. Disregarding risk, if the present value of a sum is equal to its future value, either k = 0 or t = 0.
e. Each of the above statements is true.

The greater the number of compounding periods within a year, the greater the future value of a lump sum invested initially, and the greater the present value of a given lump sum to be received at maturity.

a. True
b. False

All other factors held constant, the present value of a given annual annuity decreases as the number of discounting periods per year increases.

a. True
b. False

The internal rate of return is that discount rate which equates the present value of the cash outflows (or costs) with the future value of the cash inflows.

a. True
b. False

One of the advantages of the payback period (either regular or discounted) is that it considers all cash flows throughout the entire life of a project.

a. True
b. False

The primary function of the capital budget is to forecast the funds required for future investments that must be raised through external funding, that is, by selling stock or bonds.

a. True
b. False

A firm should never undertake an investment if accepting the project would cause an increase in the firm's required rate of return.

a. True
b. False

The mix of debt, preferred stock, and common equity with which the firm plans to support its asset structure is known as the target capital structure.

a. True
b. False

Financial risk refers to the extra risk stockholders bear as a result of the use of debt as compared with the risk they would bear if no debt were used.

a. True
b. False

If Miller and Modigliani had considered the cost of bankruptcy, it is unlikely that they would have concluded that 100 percent debt financing is optimal for the firm.

a. True
b. False

Fundamental analysts primarily base their investment decisions on analyses of supply and demand relationships that influence trends in price movements in stocks and general financial market conditions.

a. True
b. False

The dividend discount model (DDM) can only be used to value a company's stock if it is expected that the company will pay a dividend that grows at a constant rate in the future.

a. True
b. False

There is an inverse relationship between bond ratings and the required return on a bond. The required return is lowest for AAA rated bonds, and required returns increase as the ratings get lower (worse).

a. True
b. False

A junk bond is a high risk, high yield debt instrument typically used to finance a leveraged buyout or a merger, or to provide financing to a company of questionable financial strength.

a. True
b. False

The terms and conditions to which a bond is subject are set forth in its

a. Debenture.
b. Underwriting agreement.
c. Indenture.
d. Restrictive covenants.
e. Call provision.

A call provision gives bondholders the right to demand, or "call for," repayment of a bond. Typically, calls are exercised if interest rates rise, because when rates rise the bondholder can get the principal amount back and reinvest it elsewhere at higher rates.

a. True
b. False