1. Jose now has $500. How much would he have after 6 years if he leaves it invested at 5.5% with annual compounding? (Points : 4)
$591.09
$622.20
$654.95
$689.42
| Question 2. 2. Suppose you have $1,500 and plan to purchase a 5-year certificate of deposit (CD) that pays 3.5% interest, compounded annually. How much will you have when the CD matures? (Points : 4) $1,781.53 $1,870.61 $1,964.14 $2,062.34 |
| Question 3. 3. A $150,000 loan is to be amortized over 7 years, with annual end-of-year payments. Which of these statements is CORRECT? (Points : 4) The annual payments would be larger if the interest rate were lower. If the loan were amortized over 10 years rather than 7 years, and if the interest rate were the same in either case, the first payment would include more dollars of interest under the 7-year amortization plan. The proportion of each payment that represents interest as opposed to repayment of principal would be higher if the interest rate were lower. The proportion of each payment that represents interest versus repayment of principal would be higher if the interest rate were higher. |
| Question 4. 4. Which of the following statements is CORRECT? (Points : 4) It is generally more expensive to form a proprietorship than a corporation because, with a proprietorship, extensive legal documents are required. Corporations face fewer regulations than sole proprietorships. One disadvantage of operating a business as a sole proprietorship is that the firm is subject to double taxation, at both the firm level and the owner level. One advantage of forming a corporation is that equity investors are usually exposed to less liability than in a regular partnership. If a regular partnership goes bankrupt, each partner is exposed to liabilities only up to the amount of his or her investment in the business. |
| Question 5. 5. Which of the following statements is CORRECT? (Points : 4) A time line is not meaningful unless all cash flows occur annually. Time lines are not useful for visualizing complex problems prior to doing actual calculations. Time lines cannot be constructed to deal with situations where some of the cash flows occur annually but others occur quarterly. Time lines can be constructed where some of the payments constitute an annuity but others are unequal and thus are not part of the annuity. |
| Question 6. 6. An investor is considering starting a new business. The company would require $475,000 of assets, and it would be financed entirely with common stock. The investor will go forward only if she thinks the firm can provide a 13.5% return on the invested capital, which means that the firm must have an ROI of 13.5%. How much net income must be expected to warrant starting the business? (Points : 4) $52,230 $54,979 $57,873 $64,125 |
| Question 7. 7. Orono Corp.’s sales last year were $435,000, its operating costs were $362,500, and its interest charges were $12,500. What was the firm’s times interest earned (TIE) ratio? (Points : 4) 4.72 4.97 5.23 5.80 |
| Question 8. 8. Which of the following items cannot be found on a firm’s balance sheet under current liabilities? (Points : 4) Accounts payable. Short-term notes payable to the bank. Accrued wages. Cost of goods sold. |
| Question 9. 9. Which of the following would indicate an improvement in a company’s financial position, holding other things constant? (Points : 4) The inventory and total assets turnover ratios both decline. The debt ratio increases. The profit margin declines. The current and quick ratios both increase. |
| Question 10. 10. Debt management ratios show the extent to which a firm’s managers are attempting to magnify returns on owners’ capital through the use of financial leverage. (Points : 4) True False |
| Question 11. 11. Tom O’Brien has a 2-stock portfolio with a total value of $100,000. $37,500 is invested in Stock A with a beta of 0.75 and the remainder is invested in Stock B with a beta of 1.42. What is his portfolio’s beta? (Points : 4) 1.17 1.23 1.29 1.35 |
| Question 12. 12. Wachowicz Corporation issued 15-year, non-callable, 7.5% annual coupon bonds at their par value of $1,000 one year ago. Today, the market interest rate on these bonds is 5.5%. What is the current price of the bonds, given that they now have 14 years to maturity? (Points : 4) $1,077.01 $1,104.62 $1,132.95 $1,191.79 |
| Question 13. 13. Which of the following statements is CORRECT? (Points : 4) An investor can eliminate virtually all market risk if he or she holds a very large and well diversified portfolio of stocks. The higher the correlation between the stocks in a portfolio, the lower the risk inherent in the portfolio. It is impossible to have a situation where the market risk of a single stock is less than that of a portfolio that includes the stock. An investor can eliminate virtually all diversifiable risk if he or she holds a very large, well-diversified, portfolio of stocks. |
| Question 14. 14. Which is the best measure of risk for a single asset held in isolation, and which is the best measure for an asset held in a diversified portfolio? (Points : 4) Variance; correlation coefficient. Standard deviation; correlation coefficient. Beta; variance. Coefficient of variation; beta. |
| Question 15. 15. Risk-averse investors require higher rates of return on investments whose returns are highly uncertain, and most investors are risk averse. (Points : 4) True False |
| Question 16. 16. You hold a diversified portfolio consisting of a $5,000 investment in each of 20 different common stocks. The portfolio beta is equal to 1.12. You have decided to sell a lead mining stock (b = 1.00) at $5,000 net and use the proceeds to buy a like amount of a steel company stock (b = 2.00). What is the new beta of the portfolio? (Points : 4) 1.1139 1.1700 1.2311 1.2927 |
| Question 17. 17. Calculate the required rate of return for Mercury, Inc., assuming that (1) investors expect a 4.0% rate of inflation in the future, (2) the real risk-free rate is 3.0%, (3) the market risk premium is 5.0%, (4) Mercury has a beta of 1.00, and (5) its realized rate of return has averaged 15.0% over the last 5 years. (Points : 4) 10.29% 10.83% 11.40% 12.00% |
| Question 18. 18. We will almost always find that the beta of a diversified portfolio is less stable over time than the beta of a single security. (Points : 4) True False |
| Question 19. 19. Which is the best measure of risk for an asset held in isolation, and which is the best measure for an asset held in a diversified portfolio? (Points : 4) Variance; correlation coefficient. Standard deviation; correlation coefficient. Beta; variance. Coefficient of variation; beta. |
| Question 20. 20. The CAPM is a multi-period model which takes account of differences in securities’ maturities, and it can be used to determine the required rate of return for any given level of systematic risk. (Points : 4) True False |
| Question 21. 21. Anderson Systems is considering a project that has the following cash flow and WACC data. What is the project’s NPV? Note that if a project’s expected NPV is negative, it should be rejected. WACC: 9.00% Year 0 1 2 3 Cash flows -$1,000 $500 $500 $500 (Points : 4) $265.65 $278.93 $292.88 $307.52 |
| Question 22. 22. A company’s perpetual preferred stock currently sells for $92.50 per share, and it pays an $8.00 annual dividend. If the company were to sell a new preferred issue, it would incur a flotation cost of 5.00% of the issue price. What is the firm’s cost of preferred stock? (Points : 4) 7.81% 8.22% 8.65% 9.10% |
| Question 23. 23. The internal rate of return is that discount rate that equates the present value of the cash outflows (or costs) with the present value of the cash inflows. (Points : 4) True False |
| Question 24. Assume a project has normal cash flows. All else equal, which of the following statements is CORRECT? (Points : 4) A project’s IRR increases as the WACC declines. A project’s NPV increases as the WACC declines. A project’s MIRR is unaffected by changes in the WACC. A project’s regular payback increases as the WACC declines. |
| Question 25. Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows. (Points : 4) The longer a project’s payback period, the more desirable the project is normally considered to be by this criterion. One drawback of the regular payback for evaluating projects is that this method does not properly account for the time value of money. If a project’s payback is positive, then the project should be rejected because it must have a negative NPV. The regular payback ignores cash flows beyond the payback period, but the discounted payback method overcomes this problem. |