1.          The  financing   decision   determines  how  firms  raise   cash  to  pay  for  their investments.

a.          True

b.          False

2.          Choose the most correct word from the following.  Companies usually buy  (a) assets. These include both tangible assets such as (b) and intangible assets such as

(c). In order to pay for these assets, they sell (d) assets such as (e). The decision about which assets to buy is usually termed the (f) and (g) decision. The decision about how to raise the money is usually termed (h) decision.

(a)_________________________ (b)__________________________ (c) _____________________________ (d)_________________________ (e)__________________________(f) _____________________________ (g)__________________________(h)__________________________

Financing,  productive,  bonds,  investment,  executive  airplanes,  financial,  capital budgeting, brand   names

3.          Which TWO of the following statements always apply to corporation?

a.   Unlimited liability

b.   Limited life

c.    Ownership can be transferred without affecting operations.

d.   Managers can be fired with no effect on ownership.

e.   Shares must be widely traded.

1.            ‘The further in the future you receive a dollar, the more it is worth today.

a.            True

b.            False

The higher the rate of interest, the more likely you will elect to invest your funds and forego current consumption.

True

False

The more frequently the interest payments are compounded, the larger the present value of $100 for a given time period (here, $100 is your FV).

a.

b.

Assuming the interest rate is constant, if Laura has to choose between a loan that charges quarterly interest and a loan that charges monthly interest, she should always choose the one charging quarterly interest.

a.

b.

You  have  received  news  about  an  inheritance  that  will  pay  you  $5,000  next  year. Beginning the  following year, your  inheritance will  increase by  5  percent  every year forever. This is a growing perpetuity.

a.

b.

6.          In question 5, if the interest rate is 10%, your PV is __________________________________.

Determine if the following statement is true or false. If false, correct the sentence.

1.   Interest payments are tax deductible while dividends are not.

2.   When a coupon rate > market interest rate, bonds are priced at discount.

3.   Zero coupon bonds sell well above their par value because they offer no coupons.

4.   The prices of lower coupon bonds and short-term bonds respond more sensitively to a change in market interest rates (therefore more price-volatile and greater interest rate risk!).

5.   The yield to  maturity  determines the  size  of the  coupon  paid  by  a  bond  issuing company.

6.   As interest rates decline, the prices of bonds rise; and as interest rates rise, the prices of bonds decline.

7.   Interest rate risk decreases as maturity increases.

Bond Valuation Practical Example

1.   Northrop  Real  Estate  Company  is  planning to  fund  a  development  project by issuing 10-year zero coupon bonds with a face value of $1,000. Assuming semi ‐ annual compounding, what will be the price of these bonds if the appropriate discount rate is 14 percent?

2.   Rockne, Inc., has 15-year bonds that will mature in six years and pay an 8            percent coupon, interest being paid semi-annually. If you paid $1036.65 today,  and your required rate of return was 6.6 percent, did you pay the right price for the bond?

1.          Which ONE of the following statements is TRUE about ordinary shares?

a.          Ordinary shares are considered to have a fixed maturity.

b.          Owners of ordinary shares are guaranteed dividend payment by the firm.

c.          Owners of ordinary shares have the lowest-priority claim on the firm’s assets in the event of bankruptcy.

d.          Ordinary shareholders have unlimited liability.

2.          Which TWOof the following statements are FALSEabout constant-growth stocks?

a.          Dividend stays constant over time.

b.          Mature companies with a history of stable growth show this pattern.

c.          Dividends grow at a constant rate each period forever.

d.          Dividends  grow  at  a  constant  rate  each  period  for  a  fixed  number  of

periods.

e.          Whenever the dividend growth rate exceeds the required rate of return, the constant-growth model provides invalid solutions.