Question 1
1. Finance is:
The study of investment management
The study of the stock exchange
The study of the capital market and its many players
The study of money management for personal use
1.5 points
Question 2
1. A firm raises capital to finance new equipment by selling bonds in the
secondary market.
primary market.
futures market.
options market.
federal funds market.
1.5 points
Question 3
1. According to your text, major players in the money market include all of the following EXCEPT:
The U.S. Treasury
The Federal Reserve System
Commercial Banks
Companies
The U.S. Commerce Department
1.5 points
Question 4
1. The ________ price is ________ the ________ price.
bid; above; ask
bid; below; ask
ask; below; bid
ask; above; bid
Answers bid; below; ask and ask; above; bid are correct.
1.5 points
Question 5
1. You want to have $14,521 at the end of four years. How much do you have to invest today to accumulate that total if you can earn 6% compounded annually?
$11,501.99
$12,192.11
$11,524.60
$11,287.51
$11,853.46
1.5 points
Question 6
1. The rate of interest agreed upon contractually charged by a lender or promised by a borrower is the ________ interest rate.
effective
nominal
discounted
continuous
1.5 points
Question 7
1. If you presently have $6,000 invested at a rate of 15%, how many years will it take for you investment to triple? (Round up to obtain a whole number of years if necessary.)
2
4
6
8
10
1.5 points
Question 8
1. Kathy deposited $100 in a savings account that paid 8% interest, compounded annually. How much compound interest did she earn after 2 years?
$15.64
$16.64
$8.08
$8.00
$8.64
1.5 points
Question 9
1. Given some amount to be received several years in the future, if the interest rate increases, the present value of the future amount will be:
Higher
Lower
Stay the same
Cannot tell
Variable
1.5 points
Question 10
1. A semi-annual coupon matures in one year. It has a face value of $1,000, a coupon rate of 4%, and the next semi-annual coupon is due in six months. The bond trades for $971.50. What is the yield to maturity of the bond?
3.50%
3.56%
4.00%
7.00%
7.12%
This is incorrect
Question 11
1. A bond sold five weeks ago for $950. The bond is worth $900 in today's market. The face value of the bond is $1,000. Assuming no changes in risk, which of the following is mostly likely true?
The coupon rate increased.
Interest rates are lower now than they were five weeks ago.
The bond is within one year of maturity.
The issuer threatened to call the bond at 110% of par value.
Interest rates are higher now than they were five weeks ago.
1.5 points
Question 12
1. What is the yield to maturity of a zero-coupon bond that sells for $990 and will pay $1,000 in one year?
0.1%
1.0%
1.1%
10.0%
11.0%
1.5 points
Question 13
1. The yield to maturity for a bond selling at par is
unchanged once the bond sells at par.
below the coupon rate.
above the coupon rate.
a value that remains fixed, unlike the coupon rate which changes daily.
equal to the coupon rate.
1.5 points
Question 14
1. You just took out a $12,000 loan for your small business. The loan has a four year term and repayment is in the form of four equal end-of-year payments. The interest rate on the loan is 11.5%. What is your total interest expense in the first year of the loan?
$1,380.00
$1,089.13
$764.81
$403.20
$2,529.29
1.5 points
Question 15
1. A Silver Hummer H3 sells for $98,000 tax included. GMAC lends money at the rate of 6.9% APR. You are at the beginning of the fourth year of a seven year term. You are making monthly payments on the loan. How much interest do you pay in the first month of the fourth year of the loan?
$354.70
$359.81
$395.62
$371.08
$362.44
1.5 points
Question 16
1. Actively managed mutual funds charge higher management fees than passive funds. Assume that the net return to an active fund (after fees) is 9.5% (0.79% per month) and the net return to a passive fund is 10.5% (0.875% per month). Assume that an investor saves $600 per month (end-of-month) over thirty years. What is the difference in the future value of savings between investing in an active fund and a passive fund?
$295,152.00
$120,519.40
$247,352.36
$301,732.21
1.5 points
Question 17
1. Ty was seriously injured in a planking accident. He successfully sued the railway company and was awarded $700,000. The railway cannot afford to pay the lump sum immediately and would prefer to make ten annual payments (at the end of each of the next ten years). If the interest rate is 10%, then what size of payment makes Ty indifferent between the lump-sum and the payments?
$113,921.78
$70,000.00
$73,907.45
$109,074.06
$102,862.66
1.5 points
Question 18
1. How much must be invested today to make four annual withdrawals of $20,000 each for tuition payments if you can earn 8% compounded annually on your investment and the first withdrawal will take place in one year? (Round to the nearest whole dollar.)
$66,243
$51,242
$79,854
$47,393
$57,341
1.5 points
Question 19
1. If a firm has 100,000 shares of common stock outstanding and has just recorded a $45,000 profit, what is its price/earnings ratio if its current share price is $35?
0.78
0.45
14.00
45.00
78.00
1.5 points
Question 20
1. ________ ratios measure the efficiency with which assets are converted to sales or cash.
Liquidity
Activity
Profitability
Market
Financing
1.5 points
Question 21
1. A firm has accounts receivable of $150,000. During the year, total sales are $500,000, of which $300,000 are cash sales. What is the average collection period?
109.5 days
182.5 days
273.8 days
486.7 days
None of these
1.5 points
Question 22
1. What is the return on equity if net income was $55,000, total assets are $115,000, EBIT was $100,000, and equity is $75,000?
47.8%
63.1%
73.3%
87.0%
55.0%
1.5 points
Question 23
1. A popular value-weighted index is constructed out of shares in the two companies shown in the table, below. On Day 1 you construct a portfolio that mimics the index. In order for your portfolio to earn the same return as the index from Day 2 to Day 3, what portfolio weight do you need for Company 1 on Day 2?
12%
13%
14%
15%
16%
1.5 points
This is incorrect
Question 24
1. If Geek Computer has a beta of .8, the return from Treasury bills is 3% and the return from the market portfolio is 20%, what is the required return from Geek stock?
16.6%
15.7%
22.8%
20.0%
17.5%
1.5 points
Question 25
1. Calculate the required rate of return for Mercury Inc., assuming that the real risk-free rate is equal to 4% and the market risk premium (note that is not the same as the market return) is 6%. Mercury has a beta of 1.5, and its realized rate of return has averaged 15% over the last 5 years.
6%
16%
18%
13%
17%
1.5 points
Question 26
1. Refer to the performance data for three mutual funds and the market portfolio in the following table. Which is the best investment based on its excess return per unit of systematic risk?
AGF
AIM
Alta
Market
Risk-Free
1.5 points This is incorrect
Question 27
1. You pay $1,000 to flip a two-sided, fair coin at the local fair. If you flip heads, you walk away with $3,000, a return of 200%. However, if you flip tails,you walk away with $250, a return of -75%. What is the standard deviation of the returns?
0.1375%
1.375%
13.75%
137.5%
1,375%
1.5 points
Question 28
1. An expected return from a portfolio
can be calculated more accurately than the expected return from any of the securities in the portfolio.
will lie somewhere between the highest and lowest expected returns from securities in the portfolio.
cannot be computed if there are fewer than three securities in the portfolio.
will exceed the highest expected return from any of the securities in the portfolio.
will be lower than the expected return from the security in the portfolio with the lowest yield because portfolios have less risk than individual securities.
1.5 points
Question 29
1. A company has a 40% probability of earning 20%, a 40% probability of earning 10%, and a 20% probability of earning 5%. The standard deviation is:
13.0%
36.0%
37.0%
6.0%
15.0%
1.5 points
Question 30
1. Haugen-Dass Ice Cream just paid a $2.00 dividend and expects to increase it by 5% each year. If the required return is 17%, what is its dividend yield (i.e., what is D1/P0)?
12.00%
11.90%
11.40%
12.33%
13.01%
1.5 points
Question 31
1. Bubble.com Inc. currently pays no dividends. You overhear the CFO tell the CEO that the plan is to begin paying annual dividends in 5 years. The first dividend will be $2 and dividends are expected to grow at 5% in perpetuity thereafter. Given a required return of 11%, what should the price of the stock be today?
$19.78
$20.77
$21.96
$24.24
$24.37
1.5 points
Question 32
1. According to the random walk hypothesis, the best prediction of tomorrow's stock price is:
Current earnings per share.
Today's stock price.
P/E ratios of other firms in the industry.
The most recent dividend.
Predictions by the best informed analysts.
1.5 points
Question 33
1. A firm has an expected dividend next year of $1.20 per share, a zero growth rate of dividends, and a required return of 10 percent. The value of a share of the firm's common stock is:
$120
$10
$12
$100
1.5 points
Question 34
1. A project costs $12,000 and has a discount rate of 15%. Calculate the profitability index of the project that has cash flows of $2,500 in years 1 and 2, and $4000 in years 3 and 4.
0.75
0.98
1.08
1.14
1.28
1.5 points
Question 35
1. The capital budgeting director of Sparrow Corporation is evaluating a project which costs $200,000, is expected to last for 10 years and produce after-tax cash flows, including depreciation, of $44,503 per year. If the firm's cost of capital is 14% and its tax rate is 40%, what is the projected IRR?
8%
14%
18%
-5%
12%
1.5 points
Question 36
1. Perhaps the greatest disadvantage of using the IRR method to evaluate investment opportunities is:
dealing with uncertain cash flows from the project.
the assumption that all cash flows from the project will be reinvested at the IRR.
the inability to calculate most IRRs without a computer.
the need to compare IRR with the firm's cost of capital which cannot be estimated precisely.
the fact that the technique does not account for risk.
33 out of 36 correct. Which answers are incorrect are mentioned.
