Finance 350 Final exam practice
10. What is the beta of the treasury bills?
(a) 0 (b)1 (c)1.5 (d) 2 (e) none of the above
8. Betas measure
(a) firm-level risk (b) unique risk (c) systematic risk or market risk (d) idiosyncratic risk (e) none of the above
5.The risk that remains in a well-diversified stock portfolio is
(a) systematic risk (also called market risk) (b) firm-level risk (c) idiosyncratic risk (d) unique risk (e) none of the above
1. The stand alone risk of a stock is measured by
(a) the stock price (b) stock returns (c) the volatility of the stock return (standard deviation) (d) the mean of the stock price (e) none of the above
9.What is the beta of the market portfolio (market index)?
(a)0 (b)1 (c)1.5 (d) 2 (e) none of the above
22. In a liquidation process, priority of claims should be paid in the following order:
1. Trustee's costs 2. Secured creditors from sales of secured assets. 3. Wages, subject to limits 4. Taxes 5. Unfunded pension liabilities 6. Unsecured creditors 7. Preferred stock 8. Common stock B) 1. Secured creditors from sales of secured assets. 2. Trustee's costs 3. Wages, subject to limits 4. Taxes 5. Unfunded pension liabilities 6. Unsecured creditors 7. Preferred stock 8. Common stock C) 1. Unfunded pension liabilities 2. Secured creditors from sales of secured assets. 3. Trustee's costs 4. Wages, subject to limits 5. Taxes 6. Unsecured creditors 7. Preferred stock 8. Common stock D) 1. Preferred stock 2. Secured creditors from sales of secured assets. 3. Trustee's costs 4. Wages, subject to limits 5. Taxes 6. Unfunded pension liabilities 7. Unsecured creditors 8. Common stock
19. What is the present value of the following cash flows at a discount rate of 12%? t=0 -250,000 t=1 100,000 t=2 150,000 t=3 200,000
A) $101,221 B) $200,000 C) $142,208 D) $153.317
22. What's the future value of a 3-year $100 annuity, if the quoted interest rate is 10% compounded semiannually? - Payments occur annually, but compounding occurs every 6 months
A) $105*3 B) $386.74 C) $311.80 D) $331.80 E) $333.81
23. You are to make annual deposit of $3000/year into a retirement account that pays 11% interest compounded monthly. If your first deposit will be made one year from now, how large will your retirement account be in 30 years.
A) $666,480 B) $734,222 C) $597,063 D) $701,130 E) $580,023
4. How much would an investor expect to pay for a $1,000 par value bond with a 9% annual coupon that matures in 5 years if the interest rate is 7%?
A) $696.74 B) $1,075.82 C) $1,082.00 D) $1,123.01
13. What is the rate of investment return for an investor who pays $900 for a seven-year zero-coupon bond and sells the bond one year later for $890?
A) -8.9% B) -0.9% C) -1.1% D) -1% E) -0.7%
20. If you hold a $1.3 million portfolio made up of the following stocks: Market value Beta Stock A .2 million 1.5 B .5 million 1.2 C .6 million .8 What is the beta of the portfolio?
A) 1.17 B) 1.14 C) 1.38 D) 1.06 E) cannot be determined from the information given
18. Sibling Incorporated has a beta of 1.0. If the expected return on the market is 14 percent, what is the expected return on Sibling Incorporated's stock?
A) 10% B) 14% C) 18% D) cannot be determined without the risk-free rate
10. Find the current yield and the capital gains yield for a 10-year, 10% annual coupon bond that sells for $950, and has a face value of $1,000.
A) 10%, 0.67% B) 11.11%, 0.64% C) 10.53, 0.31% D) 9.5%, 0.76% E) 9.5%, 1.34%
11. Palmer Products has outstanding bonds with an annual 8 percent coupon. The bonds have a par value of $1,000 and a price of $865. The bonds will mature in 11 years. What is the yield to maturity on the bonds?
A) 10.09% B) 11.13% C) 9.25% D) 9.89%
12. You need $4,500 to buy a new stereo for your car. If now you have $1,800 to invest at 6% compounded daily, how long will you have to wait to buy the stereo?
A) 15.28 years B) 18.42 years C) 8.60 years D) 14.58 years E) 15.73 years
27. Given the stock trading information shown in the graph below, what is the ratio of stock price over twelve trailing month EPS (PE ratio) ? What is the highest stock price during the past year?
A) 2.16%;47.25 B) 17.25;47.25 C) 2.655;46.72 D) 1.4608;45.83 E) 45.83;46.72
8. What is the current yield of a bond with a 6% coupon, four years until maturity, and a price of $750?
A) 6% B) 8% C) 12% D) 14.7%
6. Which of the following bonds would be likely to exhibit a greater degree of interest-rate risk? That is, which bond's price will be most sensitive to changes in interest rate?
A) A zero-coupon bond with 30 years until maturity. B) A coupon-paying bond with 20 years until maturity. C) A floating-rate bond with 20 years until maturity. D) A zero-coupon bond with 20 years until maturity.
7. Which of the following statements is true?
A) Discounting means the procedure to find future values. B) On loans with monthly compounding, the EAR will exceed the APY. C) All else the same, the longer the term of a loan the lower will be the total interest you pay on it. D) Present values and interest rates (discount rates) move in the same direction with one another. E) Compounding essentially means earning interest on both principal and past interest.
21. Which of the following is/are true of the Capital Asset Pricing Model?
A) It uses the T-bill rate as the risk-free rate B) It uses beta as a measure of market risk C) all of the above
5. Which of the following is correct for a bond currently selling at a premium to par?
A) Its current yield is higher than its coupon rate. B) Its current yield is lower than its coupon rate. C) Its yield to maturity is higher than its coupon rate. D) Its default risk is extremely low.
18. Which of the following is/are true of the Capital Asset Pricing Model?
A) Its graph is referred to as the Security Market Line B) It usually uses the T-bill rate as the risk-free rate C) It uses beta as a measure of market risk D) all of the above
4. The goal of a financial manager is to:
A) Maximize sales B) Maximize profits C) Maximize the wealth of both bond holders and stock holders. D) Maximize the wealth of the shareholders E) Maximize the stock price on fiscal year end.
36. You are considering two independent investment projects. If you require a 15% return, which investment should you choose? Assume you have plenty of cash to make the investments. Year A B Cash Flow Cash Flow 0 -$100,000 -$125,000 1 20,000 75,000 2 40,000 45,000 3 80,000 40,000
A) Neither A nor B. B) Project B, because it has a higher NPV. C) Project A, because it has a smaller initial investment. D) Project A, because it has the higher internal rate of return. E) Project A and project B.
2. Which of the following would be considered a capital budgeting decision?
A) Planning to issue common stock rather than issuing preferred stock B) A decision to expand into a new line of products, at a cost of $5 million C) Repurchasing shares of common stock D) Issuing debt in the form of long-term bonds
3. Which of the following statements is true regarding the corporate form of organization compared to that of the sole proprietorship?
A) The owners of the sole proprietorship have limited liability for the firm's debts. B) The sole proprietorship is the simplest business form to start-up. C) The corporation has a limited life. D) Dividends received by the corporation's shareholders are tax-exempt. E) It is more difficult to transfer ownership in a corporation.
19. You determine that XYZ common stock will return 15 percent. XYZ has a beta of 1.5. The risk-free rate is 5 percent, and the market expected return is 15 percent. Which of the following is most likely to happen:
A) You and other investors will buy up XYZ stock and its price will rise. B) You and other investors will sell XYZ stock and its return will fall. C) You and other investors will buy up XYZ stock and its return will rise. D) You and other investors will sell XYZ stock and its price will fall.
14. You determine that XYZ common stock will return 8 percent. XYZ has a beta of 0. Risk free rate is 5%. The market expected return is 10 percent. Which of the following is most likely to happen:
A) You and other investors will sell XYZ stock and its return will fall. B) You and other investors will buy up XYZ stock and its price will rise. C) You and other investors will buy up XYZ stock and its return will rise. D) You and other investors will sell XYZ stock and its price will fall.
6 A portfolio is _____.
A) a group of assets, such as stocks and bonds, held collectively by an investor B) the expected return on a risky asset C) the expected return on a collection of risky assets that are in the same industry D) the variance of returns for a risky asset
6. In a corporation, creditor's interest might be hurt when management take which of the following project?
A) a very profitable project B) a very safe project C) a very risky project D) a government-contracted project
1. An example of a firm's capital structure decision would be:
A) acquisition of a competitive firm. B) how much to pay for a specific asset. C) the issuance of ten-year bonds versus the issuance of more stocks. D) whether or not to increase the price of its products.
3. The face value of a bond is received by the bondholder:
A) at the time of purchase. B) annually. C) whenever coupon payments are made. D) at maturity. E) none of the above
17. A(n) ____ is a type of debt security in which only the face value of the bond is promised to be paid to the investor, with any coupon payments being paid only if the issuing company has enough earnings to pay for the coupon payment.
A) callable bond B) putable bond C) indexed bond D) income bond
16. In finance, a ________bond is a type of bond that can be converted into shares of stock in the issuing company, usually at some pre-announced ratio. It is a hybrid security with debt- and equity-like features. A convertible bond typically has a ____yield to maturity than that of an otherwise comparable bond.
A) callable; lower B) indexed bond; lower C) putable bond; higher D) convertible; lower E) municipal bond; higher
1. The discount rate that makes the present value of a bond's payments equal to its price is termed the:
A) capital gain yield. B) yield to maturity. C) current yield. D) coupon rate.
7. U.S. Treasury bond yields do not contain a:
A) coupon interest payment. B) nominal interest rate. C) yield to maturity. D) default premium.
21. If a stock's beta is -1 during a period when the market portfolio was down by 10%, then, in advance, we could expect the return on this individual stock to:
A) go down by 10% . B) go up by 10%. C) have no change. D) go in no direction
15. If an investor purchases a bond when its current yield is higher than the coupon rate, then the bond's price will be expected to:
A) increase over time, reaching par value at maturity. B) decline over time, reaching par value at maturity. C) be less than the face value at maturity. D) exceed the face value at maturity.
11. If investors are uncertain that they will be able to sell a corporate bond quickly, the investors will demand a higher yield in the form of a(n) ____________.
A) inflation premium B) liquidity risk premium C) interest rate risk premium D) default risk premium
21. Sometimes a security cannot be sold in a market quickly unless the seller cuts price. This may happen because there are not many buyers /sellers in the market. This kind of risk is called:
A) inflation risk B) default risk C) liquidly risk D) Interest rate risk E) volume risk
2. The coupon rate of a bond equals:
A) its yield to maturity. B) coupon as a percentage of its face value. C) the maturity value. D) coupon as a percentage of its price.
9. Compared to other years, double taxation for corporate shareholders in year 2003 to 2012 is _________ .
A) less severe B) more severe C) no different
35. In order for a manager to correctly decide to take an investment, the NPV of the investment should be:
A) positive. B) larger than the cost of capital. C) less than the cost of capital D) same as the cost of capital E) none of the above
17. The capital asset pricing model
A) provides a risk-return trade-off in which risk is measured in terms of the market volatility. B) provides a risk-return trade-off in which risk is measured in terms of beta. C) measures risk as the coefficient of variation between security and market rates of return D) depicts the total risk of a security
5. Which of the following is an example of agency problem in corporations?
A) shirking B) empire building C) entrenchment D) excessive perks E) all of above
8. Making more investment than optimal and making firm sizes too big are called the ________ agency problem.
A) shirking B) empire building C) entrenchment D) excessive perks E) all of above
10. When the yield curve is upward-sloping, then:
A) short-maturity bonds offer high coupon rates. B) long-maturity bonds are priced above par value. C) short-maturity bonds yield less than long-maturity bonds. D) long-maturity bonds increase in price when interest rates increase.
26. You have discovered from looking at charts of past stock prices that if you buy just after a stock price has increased for five consecutive days, you make money every time! This is clearly a violation of _________ market efficiency. For another example, suppose that firms with high earnings earn abnormally high returns for several months after the earnings announcement. This is clearly a violation of _________ market efficiency.
A) strong form; semi-strong form B) semi-weak form; weak form C) semi-strong form; strong form D) weak form; semi-strong form E) strong form; weak form
7. Beta is a statistical measure of
A) unsystematic risk. B) stand alone risk. C) the relationship between an investment's returns and the market return. D) default risk. E) the standard deviation.
13. An 8 percent $1,000 bond matures in 13 years, pays interest semi-annually, and has a yield to maturity of 9.45 percent (nominal rate). What is the current market price of the bond?
A. $601.58 B. $647.76 C. $892.76 D. $909.09 E. $930.75
16. If stock A has an expected return of 10%, stock B has an expected return of 5%. What will be the expected return of a portfolio that invests 40% of the fund in stock A and 60% in stock B?
A. 10% B. 5% C. 15% D. 7.5% E. 7%
14. Find the current yield and the capital gains yield for a 10-year, 10% annual coupon bond that sells for $900, and has a face value of $1,000.
A. 10%;0.67% B. 11.11%;0.64% C. 9%;0.76% D. 9%;0.67%
12. Miller Brothers needs to raise $12 million for an expansion project. They propose raising this money by selling zero coupon bonds with a par value of $1,000 that mature in 15 years. The market yield on similar bonds is 7.4 percent. How many bonds must Miller Brothers sell to raise the money they need?
A. 12,000 bonds B. 16,216 bonds C. 18,009 bonds D. 28,919 bonds E. 35,015 bonds
17. A stock has a beta of 1.12 and a required return of 11.6 percent. The risk-free rate is 4.2 percent. What is the market risk premium?
A. 5.45 percent B. 6.61 percent C. 7.40 percent D. 8.28 percent E. 10.32 percent
15. If an investor chooses to hold just one stock in her/his portfolio (thus exposed to more risk than a diversified investor), should the investor be compensated for the firm-specific risk (earn higher returns)?
A. Yes B. No.
14. Can the beta of a security be negative?
A. Yes, but this is rare. B. Yes, most stocks have negative betas. C. No, all stocks must have positive betas.
25. If the financial markets are strong form efficient, then:
A. only the most talented analysts can determine the true value of a security. B. only company insiders have a marketplace advantage. C. technical analysis provides the best tool to use to gain a marketplace advantage. D. no one person has an advantage in the marketplace. E. the only true advantage in the marketplace is having insider information.
6. You are going to withdraw $5,000 at the end of each year for the next four years from an account that pays interest at a rate of 9% compounded annually. The account balance will reduce to zero when the last withdrawal is made. How much money will be in the account immediately after the second withdrawal is made?
a. $ 9185.50 b. $ 8795.56 c. $ 5,000.00 d. $ 9174.31 e. $10,000.00
22. Womack Toy Company's stock is currently trading at $10 per share. The stock's dividend is projected to increase at a constant rate of 7 percent per year. What is the expected price of the stock 4 years from today?
a. $10.00 b. $13.11 c. $10.70 d. $12.77 e. $10.63
9. Based on the following term structure, what is the price of a treasury bond with 6% annual coupon and face value of $1000? Year Spot rate 1 4% 2 5% 3 5% 4 6%
a. $1000 b. $1036 c. $1024 d. $998 e. $100
5. What's the present value of $4,000 discounted back 3 years if the appropriate interest rate is 12%, compounded quarterly?
a. $2,982.90 b. $3,149.02 c. $2,805.52 d. $2,023.74 e. $2,847.12
23.An analyst is trying to estimate the intrinsic value of the stock of Harkleroad Technologies. The analyst estimates that Harkleroad's free cash flow during the next year will be $25 million. The analyst also estimates that the company's free cash flow will maintain at this level forever and the company's WACC is 10 percent. Harkleroad has $200 million of debt , and 30 million outstanding shares of common stock. What is the estimated per-share price of Harkleroad Technologies' common stock?
a. $21.11 b. $18.37 c. $ 1.67 d. $27.78 e. $ 5.24
11. You want to go to grad school 4 years from now, and you can save $5,000 per year, beginning one year from today. You plan to deposit the funds in a mutual fund which you expect to return 9% per year. Under these conditions, how much will you have just after you make the 4th deposit, 4 years from now?
a. $22,865.65 b. $20,199.47 c. $21,513.78 d. $17,976.84 e. $19,390.50
You hope to buy a car 5 years from now, and you plan to save $4,000 per year, beginning immediately. You will make 5 deposits in an account that pays 8% interest. Under these assumptions, how much will you have 5 years from today?
a. $23,952.54 b. $35,851.92 c. $30,846.58 d. $26,698.30 e. $25,343.72
17. What's the present value of $4,000 discounted back 3 years if the appropriate interest rate is 8%, compounded monthly?
a. $3,149.02 b. $2,982.90 c. $2,649.78 d. $2,023.74 e. $3,708.26
40. The Allegheny Company owns a parcel of land which they purchased for $189,000. When they purchased the land they had it leveled so that it could provide overflow parking for a nearby sports arena. The cost of the leveling was $40,000. To date, the company has received $5,000 per year from parking fees. If the restaurant is built, the annual parking income of $5, 000 will be lost in the future. The discount rate is 10%. The company is now considering building a restaurant on this site. The cost of building the restaurant will be $15,000. As it currently exists, the market value of the land is estimated at $239,000. What relevant costs related to the land should be assigned to the restaurant project?
a. $304,000 b. $289,000 c. $234,000 d. $254,000 e. $259,000
13. What's the present value of a 6-year ordinary annuity of $1,000 per year plus an additional $1,500 at the end of Year 6 if the interest rate is 6%?
a. $5,324.89 b. $5,591.45 c. $5,974.77 d. $6,011.87 e. $4,854.13
15. Your father has $500,000 and wants to retire. He expects to live for another 20 years, and he also expects to earn 8% on his invested funds. How much could he withdraw at the beginning of each of the next 20 years and end up with zero in the account?
a. $53,431.83 b. $47,153.80 c. $54,764.40 d. $47,843.15 e. $45,119.76
14. Your father is about to retire, and he wants to buy an annuity that will provide him with $50,000 of income a year for 20 years, with the first payment coming immediately. The going rate on such annuities is 6%. How much would it cost him to buy the annuity today?
a. $607,905.82 b. $416,110.34 c. $517,513.68 d. $615,976.84 e. $488,349.15
24. A real estate investment has the following expected cash flows: Year Cash Flows 1 $10,000 2 25,000 3 0 4 35,000 If the discount rate (interest rate) is 8%, what is the investment's present value?
a. $64,107 b. $56,418 c. $55,661 d. $80,308 e. $37,900
39. The firm of Mitchell and Mitchell owns a small truck. The truck has a market value of $9,500 today. New, it cost $24,900. Last week, the company spent $3,500 repairing the engine and replacing the brake pads. The company still owes $1,200 in truck payments. If the company decides to use this vehicle for a new project, the cost assigned to that project for this truck should be:
a. $8,300. b. $9,500. c. $11,800. d. $13,000. e. $14,200.
16. How much would you pay for a perpetuity that pays $800 per month when interest rate (APR) is 12% monthly?
a. $80,000 b. $6,666.66 c. $960,000 d. $66,666.66 e. $92,000
20. What is the value of a 10-year, 10% semiannual coupon bond, if nominal discount rate rd = 13%? (Hint: lecture slides example.)
a. $834.72 b. $843.27 c. $1000.00 d. $884.96 e. $887.00
10. Suppose a U.S. government bond will pay $1,000 three years from now. If the going interest rate on 3-year government bonds is 4%, how much is the bond worth today?
a. $943.46 b. $991.43 c. $889.00 d. $907.91 e. $968.40
18. Credit card issuers must by law print their Annual Percentage Rate (APR) on their monthly statements. If the APR is stated to be 7.30% monthly, what is the interest rate per month?
a. 0.303% b. 0.608% c. 0.0608% d. 0.309%
19. Currently, you own a portfolio comprised of the following. What is the portfolio beta? Stock Value Beta A $2000 0.9 B $2000 1 C $4000 1.5
a. 1.225 b. 1.133 c. 1.000 d. 0.980
30. A common stock issue is currently selling for $31 per share. You expect the next dividend to be $1.40 per share. If the firm has a dividend growth rate of 5% that is expected to remain constant indefinitely, what is the firm's cost of equity?
a. 9.5% b. 11.3% c. 13.8% d. 14.2% e. 15.1%
32. Billick Brothers is estimating its WACC. The company has collected the following information: • Its capital structure consists of 40 percent debt and 60 percent common equity. • The company has 20-year bonds outstanding with a 9 percent annual coupon that are trading at par ($1000). • The company's tax rate is 40 percent. • The risk-free rate is 5.5 percent. • The market risk premium is 5 percent. • The stock's beta is 1.4. What is the company's WACC?
a. 9.71% b. 9.66% c. 8.31% d. 11.18% e. 11.10%
11. Which of the following statements best describes what would be expected to happen as you randomly select stocks and add them to your portfolio?
a. Adding more such stocks will reduce the portfolio's unsystematic, or diversifiable, risk. b. Adding more such stocks will reduce the portfolio's beta. c. Adding more such stocks will increase the portfolio's expected return. d. Adding more such stocks will reduce the portfolio's market risk. e. Adding more such stocks will have no effect on the portfolio's risk
15. Which of the following statements best describes what would be expected to happen as you randomly select stocks and add them to your portfolio?
a. Adding more such stocks will reduce the portfolio's unsystematic, or diversifiable, risk. b. Adding more such stocks will reduce the portfolio's beta. c. Adding more such stocks will increase the portfolio's expected return. d. Adding more such stocks will reduce the portfolio's market risk. e. Adding more such stocks will have no effect on the portfolio's risk.
7. Which of the following bank accounts has the highest effective annual return?
a. An account that pays 5.2% nominal interest with monthly compounding. b. An account that pays 4% nominal interest with quarterly compounding. c. An account that pays 4.5% nominal interest with daily compounding. d. An account that pays 5.4% nominal interest with annual compounding. e. An account that pays 4.5% nominal interest with monthly compounding
20. Which of the following bank accounts has the highest effective annual return?
a. An account that pays 5.2% nominal interest with monthly compounding. b. An account that pays 4% nominal interest with quarterly compounding. c. An account that pays 4.5% nominal interest with daily compounding. d. An account that pays 5.4% nominal interest with annual compounding. e. An account that pays 4.5% nominal interest with monthly compounding.
4. Inflation, recession, and high interest rates are economic events that are characterized as
a. Company-specific risk that can be diversified away. b. Market risk. c. Systematic risk that can be diversified away. d. Diversifiable risk. e. Unsystematic risk that can be diversified away.
25. APY is also called:
a. EAR b. APR c. quoted rate d. nominal rate e. periodic rate
38. ABC Plastics currently produces plastic plates. The company is considering expanding their production to include plastic silverware. Payment for which of the following are relevant to this project? I. the plastic used to make the silverware II. the labor involved in making the silverware III. the mortgage on the existing building used for production IV. the plastic needed to produce the additional plates they expect to sell if they expand their product offerings
a. I and II only b. III and IV only c. I, II, and IV only d. I, II, and III only e. I, II, III, and IV
12. Assume interest rates on long-term Treasury bond and two corporate bonds are as follows: Treasury bond : 7.72% Corpate bond with rating A : 9.64% Corpate bond with rating BBB : 10.18% All three bonds will mature in 20 years ; they all have very good liquidity. The differences in interest rates among these bonds are caused primarily by
a. Inflation differences. b. inflation premium. c. Default risk differences. d. Maturity risk differences
9. If a bond has a Standard & Poor's rating of BBB, it is referred to as a(n) .
a. Junk bond b. James Bond. c. High GPA bond. d. Barry's bond. e. Investment grade bond.
33. Braun Industries is considering an investment project that has the following cash flows: Year Cash Flow 0 -$1,000 1 400 2 300 3 500 4 400 The company's WACC is 10%. What is the project's payback, IRR, and NPV?
a. Payback = 2.4, IRR = 10.00%, NPV = $600. b. Payback = 2.4, IRR = 21.22%, NPV = $260. c. Payback = 2.6, IRR = 21.22%, NPV = $300. d. Payback = 2.6, IRR = 21.22%, NPV = $260. e. Payback = 2.6, IRR = 24.12%, NPV = $300.
31. A company estimates that a below-average risk project has a discount rate of 9 percent, an average-risk project has a discount rate of 10 percent, and an above-average risk project has a discount rate of 11 percent. Which of the following independent projects should the company accept?
a. Project A has average risk and a return of 9.5 percent. b. Project C has above-average risk and a return of 10.5 percent. c. Project B has below-average risk and a return of 8.5 percent. d. Project A and C should be accepted. e. None of the projects above should be accepted.
37. A company estimates that its weighted average cost of capital (WACC) is 10 percent. Which of the following independent projects should the company accept? (The projects have the same risk as the firm's existing assets. Also assume these projects are normal projects. )
a. Project A requires an up-front expenditure of $3,000,000 and has a net present value of - $200. b. Project B has an internal rate of return of 9.5 percent. c. Project C requires an up-front expenditure of $5,000,000 and generates a positive internal rate of return of 9.7 percent. d. Project D has an internal rate of return of 9 % and generates a net present value of - $6, 000. e. None of the projects above should be accepted.
16. Over the past 75 years, we have observed that investments with the highest average annual returns also tend to have the highest standard deviations of their annual returns. This observation supports the notion that there is a positive correlation between risk and return. Which of the following lists correctly ranks investments from highest to lowest returns and risk (thus, the highest risk security should be shown first, the lowest risk securities shown last)?
a. Small-company stocks, long-term corporate bonds, large-company stocks, long-term government bonds, U.S. Treasury bills. b. Small-company stocks, large-company stocks, long-term corporate bonds, long-term government bonds, U.S. Treasury bills. c. Large-company stocks, small-company stocks, long-term corporate bonds, U.S. Treasury bills, long-term government bonds. d. U.S. Treasury bills, long-term government bonds, long-term corporate bonds, small-company stocks, large-company stocks.
2. Which of the following statement is NOT true for a portfolio made up of several stocks?
a. The expected return = weighted average of each stock's expected return. b. The portfolio standard deviation is >= the weighted average of each stock's standard deviation. c. The portfolio beta is the weighted average of each stock's beta d. The portfolio standard deviation is <= the weighted average of each stock's standard deviation.
21. A lump sum payment of $1,000 is due at the end of 5 years. The nominal interest rate is 10%, semiannual compounding. Which of the following statements is CORRECT?
a. The present value of the $1,000 would be greater if interest were compounded monthly rather than semiannually. b. The periodic rate is greater than 5%. c. The periodic interest rate is 5%. d. The present value would greater if the lump sum were discounted back for more periods. e. The PV of the $1,000 lump sum has a higher present value than the PV of a 5-year, $200 ordinary annuity.
13. If the Treasury yield curve is downward sloping, what is the yield to maturity on a 10-year Treasury bond, relative to that on a 1-year Treasury bond?
a. The yields on the two bonds are equal. b. The yield on a 10-year Treasury bond will always be higher than the yield on a 1-year Treasury bond. c. It is impossible to tell without knowing the coupon rates of the bonds. d. The yield on the 10-year Treasury bond is less than the yield on a 1-year Treasury bond. e. e. It is impossible to tell without knowing the relative default risks of the two Treasury bonds.
29. Which of the following should NOT be considered when calculating a firm's WACC?
a. YTM on a firm's bonds. b. Cost of preferred stock. c. Cost of common stock. d. Cost of accounts payable. e. Corporate tax rate.
3. Which of the following statements is correct?
a. lower beta stocks have a higher required return. b. Two securities with the same stand-alone risk must have same betas. c. Company-specific risk can be diversified away. d. The market risk premium is not affected by investors' attitudes about risk. e. All above statements are correct.
The present value of $10,000 to be received in 10 years will____if the discount rate is increased.
a. remain constant b. decrease c. increase d. either remain constant or increase e. either remain constant or decrease
20. The beta of a Treasury bill is _____ and the beta of the overall market index is____:
a. risk free rate; 1. b. 1; 0. c. 1; 1. d. 0; 1. e. infinite; 1.
12. Most investors are:
a. risk neutral (do not care about risk.) b. risk averse c. risk loving
