1) The present value of all future cash flows from an instrument is its _______.

a. Clean price
b. Market price
c. Dirty price
d. Assumed price
e. None of the above

a. Clean price - The present value of all future cash flows from an instrument

2) What you actually pay for the bond once the clean price is adjusted for
accrued interest is the ________.
a. Clean price
b. Market price
c. Dirty price
d. Assumed price
e. None of the above

c. Dirty price - What you actually pay for the bond once the clean price is
adjusted for accrued interest

3) Change in price is about equal to YieldChange x _______.

a. Duration
b. – Modified Duration
c. Modified duration
d. All of the above
e. None of the above

b. – Modified Duration – Change in price = - Modified Duration x Yield

Change

4) An equity ownership instrument, which provides the holder with legal rights
and the opportunity to participate in the company performance, is ______.
a. Preferred stock
b. Common stock
c. Both A & B
d. Neither A nor B

b. Common stock - An equity ownership instrument, which provides the holder with
legal rights and the opportunity to participate in the company performance

5) The two-stage valuation model can be simplified when extraordinary growth

rate is _______.
a. High
b. Low
c. Constant

c. Constant – When extraordinary growth is constant, the two-stage valuation model

can be simplified
 6) Which of the following is an assumption of the single stage FCFE model?
a. Capital spending is offset by depreciation
b. Beta of stock is 1.0
c. Both A & B
d. Neither A nor C

c. Both A & B - The assumptions of the single stage FCFE model are 1) Capital
spending is offset by depreciation and 2) Beta of stock is 1.0

7) DDM models value _____.

a. Expected dividends
b. Change in dividends
c. Interest rates
d. Depreciation
e. None of the above

a. Expected dividends – DDM models value expected dividends

8) FCFF models value all cash flows attributed to the firm’s ______.
a. Preferred stock claimholders
b. Bondholders
c. Common stock holders
d. All of the above
e. None of the above

d. All of the above - FCFF models value all cash flows attributed to the firm’s common
stockholders, bondholders, and preferred stock claimholders

9) The after-tax weighted average cost of capital is the _______.

a. Discount rate
b. Interest rate
c. Depreciation rate
d. Only B & C
e. None of the above

a. Discount rate – The discount rate is the after-tax weighted average cost of capital

10) Which stock dividend must be paid first?

a. Common stock
b. Preferred stock
c. Both have equal weight
d. Neither will get paid

b. Preferred stock – Preferred stock dividend must be paid before common stock
dividend is paid
11) Which of the following are investment grade?
a. AAA
b. BB
c. BBB
d. Both answers “A” and “C”

12) A $1000 par bond with 8 years to maturity has a coupon rate of 6%. If the
investor’s required rate of return is 11% and coupons are paid on an annual
basis, how much is this bond worth?
a. 862.15
b. 747.70
c. 773.92
d. 969.58
1
1- 1000
60 (1 + 0.11)8 + = 747.70
(1 + 0.11)8
0.11

13) A $1000 par bond with 5 years to maturity has a coupon rate of 4%. If the
bond is selling for $850 and coupons are paid on an annual basis, what is this
bond’s approximate yield-to-maturity?
a. 7.7%
b. 6.2%
c. 7.3%
d. 9.1%
1000-850
40 +
5
= 7.7%
.6(850) + .4(1000)

14) In terms of capitalization, the equity market is smaller than the bond market.
a. True
b. False

15) The bond market is not centralized and inefficient.

a. True
b. False

16) A bond with a coupon rate equal to that of its YTM is selling at ___________.
a. a discount to par
b. par
c. a premium to par
17) The coupon rate on a $1000 par value bond is 9% paid semiannually. If you
bought the bond and settled 60 days from the next coupon payment, you owe
the seller ______ in accrued interest
a. $0
b. $15
c. $30
d. $45
90 60
* 1- = 30
2 180

18) A bond with a modified duration of 6 experiences a 1.5% increase in market

yield. How much has the bond’s price been affected?
a. -9.0%
b. -7.5%
c. 7.5%
d. 9.0%
6 * 1.5% = 9.0%
19) A bond with a coupon rate of 9% has an effective monthly yield of
__________.
a. 8.78%
b. 9.00%
c. 9.38%
d. 9.52%
12
.09
1 + 12 = 9.38%

20) FCFE Models value __________________________________________.

a. Cash flows resulting from stock sales.
b. Residual cash flows leftover after meeting all financial obligations.
c. Residual cash flows leftover after meeting all investment needs.
d. Residual cash flows leftover after meeting all financial obligations and
investment needs.

21) The single stage FCFE model assumes:

a. Growth is irrelevant
b. Capital spending is offset by depreciation.
c. The firm’s beta is 1.0
d. Both answers “B” and “C”

22) ROE stands for

a. Return on equity
b. Rare outstanding entity
c. Return on effort
d. Clayton Kohl’s middle name
23) With all else being equal, the single stage FCFE model will tend to produce
higher valuations than the Gordon growth model.
a. True
b. False

24) A firm’s ROA is 6% while its ROE is 10%. If the firm’s payout ratio is 60%,
what is the growth in the FCFE?
a. 6.0%
b. 4.0%
c. 2.4%
d. 3.6%
10% (1 – 60%) = 4%

25) A company’s FCFF is $50,000, the firm is growing at 4%, and the firm’s
WACC is 8%. If the firm is valued at $1.5M, is it overvalued or undervalued?
a. Overvalued
b. Undervalued
50,000
= 1,250,000
8% - 4%

26) A company in steady state has a payout ration of 40%, the investor’s required
rate of return is 10%, and the company is growing at 5%. The firm’s P/E
should be near _______.
a. 1
b. 4
c. 5
d. 8
40%
= 8
10% - 5%
27) The four most commonly used techniques to find the value of a firm are?
a. Discounted Cash Flow (DCF) Analysis
b. Multiples Method
c. Comparable Transactions Method
d. Market Valuation
e. All of the Above

28) The “Terminal Value” represents the present value of all the future cash flows
of a chosen period.
a. True
b. False
29) The difference between the APV & WACC is? (Use statements i-iv to answer):

i. WACC incorporates the effect of tax shields into the discount

rate used to calculate the present value of cash flows
ii. WACC is typically calculated using estimated data and
numbers from balance sheets for chosen companies
iii. APV adds the present value of the financing effects (debt tax
shield) to the NPV assuming an all-equity value, and calculates
the adjusted present value
iv. APV is not useful in cases where subsidized costs of financing
are complex, like with leveraged buyouts

a. i, ii, and iii

b. i, ii, iii, and iv
c. i and iii
d. ii and iv
e. None of the Above

30) How would you value a company with no revenue? (Choose the best answer)
a. Make best guesses about the company’s projected revenues (and
projected cash flows) for future years
b. Use cash flows from other similar companies to make an educated decision
as to the projected revenues (and projected cash flows) for future years
c. Calculate the NPV of these cash flows
d. a, b, and c
e. a and c