Question 1.1.  Suppose a U.S. treasury bond will pay $2,500 five years from now. If the going interest rate on 5-year treasury bonds is 4.25%, how much is the bond worth today? (Points : 4)

$1,928.78

$2,030.30

$2,131.81

$2,238.40

Question 2. 2. 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 3. 3. Which of the following statements regarding a 15-year (180-month) $125,000, fixed-rate mortgage is CORRECT? (Ignore taxes and transactions costs.) (Points : 4)

The remaining balance after three years will be $125,000 less one third of the interest paid during the first three years.

Because it is a fixed-rate mortgage, the monthly loan payments (which include both interest and principal payments) are constant.

Interest payments on the mortgage will increase steadily over time, but the total amount of each payment will remain constant.

The proportion of the monthly payment that goes towards repayment of principal will be lower 10 years from now than it will be the first year 

The outstanding balance declines at a slower rate in the later years of the loan’s life.

Question 4. 4. The primary operating goal of a publicly-owned firm interested in serving its stockholders should be to (Points : 4)

Maximize the stock price per share over the long run, which is the stock’s intrinsic value.

Maximize the firm’s expected EPS.

Minimize the chances of losses.

Maximize the firm’s expected total income.

Question 5. 5. If a firm’s goal is to maximize its earnings per share, this is the best way to maximize the price of the common stock and thus shareholders’ wealth. (Points : 4)

True

False 

Question 6. 6. Rappaport Corp.’s sales last year were $320,000, and its net income after taxes was $23,000. What was its profit margin on sales? (Points : 4)

6.49%

6.83%

7.19%

7.55%

Question 7. 7. Companies generate income from their “regular” operations and from other sources like interest earned on the securities they hold, which is called non-operating income. Lindley Textiles recently reported $12,500 of sales, $7,250 of operating costs other than depreciation, and $1,000 of depreciation. The company had no amortization charges and no non-operating income. It had $8,000 of bonds outstanding that carry a 7.5% interest rate, and its federal-plus-state income tax rate was 40%. How much was Lindley’s operating income, or EBIT? (Points : 4)

$3,462

$3,644

$3,836

$4,250

Question 8. 8. Ratio analysis involves analyzing financial statements in order to appraise a firm’s financial position and strength. (Points : 4)

True

False 

Question 9. 9. Determining whether a firm’s financial position is improving or deteriorating requires analyzing more than the ratios for a given year. Trend analysis is one method of measuring changes in a firm’s performance over time. (Points : 4)

True

False 

Question 10. 10. Other things held constant, which of the following actions would increase the amount of cash on a company’s balance sheet? (Points : 4)

The company repurchases common stock.

The company pays a dividend.

The company issues new common stock.

The company gives customers more time to pay their bills.

Question 11. 11. Quigley Inc.’s bonds currently sell for $1,080 and have a par value of $1,000. They pay a $100 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,125. What is their yield to maturity (YTM)? 

(Points : 4) 

8.56%

9.01%

9.46%

9.93%

Question 12. 12. Bill Dukes has $100,000 invested in a 2-stock portfolio. $35,000 is invested in Stock X and the remainder is invested in Stock Y. X’s beta is 1.50 and Y’s beta is 0.70. What is the portfolio’s beta? 

(Points : 4)

0.65

0.72

0.80

0.98

Question 13. 13. 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 14. 14. Sinking funds are devices used to force companies to retire bonds on a scheduled basis prior to their maturity. Many bond indentures allow the company to acquire bonds for a sinking fund by either purchasing bonds in the market or selecting the bonds to be acquired by a lottery administered by the trustee through a call at face value. (Points : 4)

True

False 

Question 15. 15. 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 16. 16. Assume that you hold a well-diversified portfolio that has an expected return of 12.0% and a beta of 1.20. You are in the process of buying 100 shares of Alpha Corp at $10 a share and adding it to your portfolio. Alpha has an expected return of 15.0% and a beta of 2.00. The total value of your current portfolio is $9,000. What will the expected return, and beta on the portfolio, be after the purchase of the Alpha stock? [ rp; bp] (Points : 4)

11.69%; 1.22

12.30%; 1.28

12.92%; 1.34

13.56%; 1.41

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. In a portfolio of three different stocks, which of the following could NOT be true? (Points : 4)

The riskiness of the portfolio is less than the riskiness of each of the stocks if they were held in isolation.

The riskiness of the portfolio is greater than the riskiness of one or two of the stocks.

The beta of the portfolio is less than the betas of each of the individual stocks.

The beta of the portfolio is greater than the beta of one or two of the individual stocks’ betas.

Question 19. 19. Stock A’s beta is 1.5 and Stock B’s beta is 0.5. Which of the following statements must be true about these securities? (Assume market equilibrium.) (Points : 4)

When held in isolation, Stock A has greater risk than Stock B.

Stock B must be a more desirable addition to a portfolio than Stock A.

Stock A must be a more desirable addition to a portfolio than Stock B.

The expected return on Stock A should be greater than that on Stock B.

Question 20. 20. Which of the following is NOT a potential problem with beta and its estimation? (Points : 4)

Sometimes a security or project does not have a past history which can be used as a basis for calculating beta.

Sometimes, during a period when the company is undergoing a change such as toward more leverage, or riskier assets, the calculated beta will be drastically different than the “true” or “expected future” beta.

The beta of “the market,” can change over time, sometimes drastically.

Sometimes the past data used to calculate beta do not reflect the likely risk of the firm for the future because conditions have changed.

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. Taggart Inc. is considering a project that has the following cash flow data. What is the project’s payback? 

 Year                 0                      1          2          3          

Cash flows       -$1,150            $500    $500    $500 (Points : 4)

1.86 years

2.07 years

2.30 years

2.53 years

Question 23. 23. Which of the following statements is CORRECT? (Points : 4)

One defect of the IRR method versus the NPV is that the IRR does not take account of cash flows over a project’s full life.

One defect of the IRR method versus the NPV is that the IRR does not take account of the time value of money.

One defect of the IRR method versus the NPV is that the IRR does not take account of the cost of capital.

One defect of the IRR method versus the NPV is that the IRR does not take proper account of differences in the sizes of projects.

Question 24. 24. 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.

Question 25. 25. Which of the following statements is CORRECT? (Points : 4)

The regular payback method recognizes all cash flows over a project’s life

The discounted payback method recognizes all cash flows over a project’s life, and it also adjusts these cash flows to account for the time value of money

The regular payback method was, years ago, widely used, but virtually no companies even calculate the payback today

The regular payback is useful as an indicator of a project’s liquidity because it gives managers an idea of how long it will take to recover the funds invested in a project