BUS 401 Week 2 Quiz

1.) The longer we have to wait for a future amount to be received

the lower its present value will be.

the higher its present value will be.

Time does not affect present value, so it doesn’t matter how long we have to wait.

Beyond 10 years the value doesn’t change anymore because 10 years might as well be 20 years.

2.) Compounding means that:

dollar interest the first year is multiplied by the number of years to get total interest.

the same dollar amount of interest is paid each period.

interest is paid on interest earned in earlier periods.

the rate of interest grows over time.

3.) An ordinary annuity has its first payment , but an annuity due has its first payment ___.

at the beginning of the period; at the beginning of the period.

at the beginning of the period; at the end of the period.

at the end of the period; at the end of the period.

at the end of the period; at the beginning of the period.

4.) The great majority of stock trades occur:

in the secondary markets.

in the primary market.

as IPOs (initial public offerings).

directly between the company and investors.

5.) Shareholders gains come in the form of:

only dividends.

only capital gains.

dividends and capital gains.

interest payments.

6.) Interest rates are given as annual rates. If semiannual (twice a year) compounding is being used, then you would make the following adjustments:

Double the rate and double the number of years.

Double the rate and halve the number of years.

Halve the rate and halve the number of years.

Halve the rate and double the number of years.

7.) Which of the following is true of the structure of a zero-coupon bond?

an annuity of interest payments and a single principal payment at maturity
no interim interest payments but a variable payment at maturity, depending on interest rates
an annuity of payments comprised of both interest and principal
no interim interest payments and a single payment at maturity

8.) If we make the assumption that a company’s dividends grow at some constant rate, then we can value the stock as:

a growing perpetuity.

a growing annuity.

a perpetuity.

an annuity.

9.) Which of the following is NOT true of preferred stock?

Preferred stock generally pays a fixed dividend.

Preferred stock is a perpetuity.

Dividends on preferred stock are tax deductible.

Preferred stock dividends have a higher priority than common stock dividends.

10.) Zeta Corporation just paid a $2.00 dividend. Analysts believe that Zeta Corporation’s dividend will grow by 20% next year, and then settle into a constant growth regime at 5% per year into the future. If investors assign a required rate of return of 12% to Zeta’s stock, what should the stock sell for today?

$30.00

$32.14

$34.29

$36.00