Principles of Finance, 6e
Besley/Brigham
Chapter 16
Cengage Learning Testing, Powered by Cognero
Page 1
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
1. People who view investments as instruments that produce growth over a long period of time are referred to as
a.
Speculators.
b.
Investors.
c.
Brokers.
d.
Analysts.
e.
None of the above.
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Investment Process
2. Individuals who try to make a quick profit based on short-term market adjustments are referred to as
a.
Speculators.
b.
Investors.
c.
Brokers.
d.
Analysts.
e.
None of the above.
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Investment Process
3. Which of the following is not a common reason given for investing?
a.
Retirement planning.
b.
Supplement current income.
c.
Shelter current income from taxes.
d.
Eliminate slack from current budget.
e.
To achieve future goals, such as purchasing a house.
ANSWER:
d
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
Principles of Finance, 6e
Besley/Brigham
Chapter 16
Cengage Learning Testing, Powered by Cognero
Page 2
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
TOPICS:
Reason People Invest
4. Income securities are used primarily to
a.
Invest in retirement planning.
b.
Supplement current income.
c.
Shelter current income from taxes.
d.
Defer interest income to a later date.
e.
None of the above.
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Investment Process
5. An investor’s ability and willingness to accept risk is termed:
a.
Risk aversion.
b.
Risk seeking.
c.
Risk tolerance level.
d.
Risk-free rate of return.
e.
None of the above.
ANSWER:
c
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Risk Tolerance
6. The costs associated with trading securities, which include the costs of time, effort, and phone calls, as well as brokered
commissions are called
a.
Arbitrage.
b.
Economies of scale.
c.
Transaction costs.
d.
Portfolio management.
e.
Taxes.
ANSWER:
c
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Principles of Finance, 6e
Besley/Brigham
Chapter 16
Cengage Learning Testing, Powered by Cognero
Page 5
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
c.
Financial Intermediary.
d.
Full-service brokerage firm.
e.
None of the above.
ANSWER:
d
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Brokerage Firms
13. A firm that offers clients only the basic services associated with trading securities is called a(n)
a.
Discount Brokerage Firm.
b.
Investment Banker.
c.
Financial Intermediary.
d.
Full-service brokerage firm.
e.
None of the above.
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Brokerage Firms
14. An order to execute a trade at the best price available as soon as the transaction reaches the market is called a ____
order.
a.
Market
b.
Stop
c.
Limit
d.
Day
e.
Fill or kill
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Types of Orders
Principles of Finance, 6e
Besley/Brigham
Chapter 16
Cengage Learning Testing, Powered by Cognero
Page 6
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
15. An order that specifies the price at which a market order is initiated is called a ____ order.
a.
Fill or kill
b.
Stop
c.
Limit
d.
Day
e.
None of the above.
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Types of Orders
16. An order that gives instructions to cancel the order if the price conditions are not met by the end of the trading day is
called a ____ order.
a.
Market
b.
Stop
c.
Limit
d.
Day
e.
Fill or kill
ANSWER:
d
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Types of Orders
17. An order that gives instructions to cancel the order if the price conditions are not met when the order reaches the
market is called a ____ order.
a.
Market
b.
Stop
c.
Limit
d.
Day
e.
Fill or kill
ANSWER:
e
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
Principles of Finance, 6e
Besley/Brigham
Chapter 16
Cengage Learning Testing, Powered by Cognero
Page 9
immediately repay the loan she has outstanding.
d.
the Federal Reserve intends to sell a special issue of Treasury securities and it needs investors to subscribe to
the issue as quickly as possible.
e.
the price of the stock she purchased on margin has decreased enough so that the actual margin is below the
maintenance margin.
ANSWER:
e
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Margin Call
24. Angela Johnson bought Microsoft stock many years ago when the company was very young; so, clearly, she has done
very well with her investment. Now that Microsoft is more established, its stock price has started to falter somewhat.
Angela really thinks that Microsoft will continue to be a good investment in the future, so she plans to stay in the stock for
the time being. However, at the same time, she wants to protect the profits she has already amassed. She follows the
market every day, so she is confident she can initiate a sell order when necessary to ensure she receives the gains she has
realized to this point. Unfortunately, Angela is leaving the country for an extended vacation in China, where she will be
out of touch with the investment world, and she is worried that something might happen to Microsoft during the time she
is gone that will substantially decrease the “paper” profits she now has. Given that Angela believes Microsoft will
continue its upward movement but she also wants to protect her “paper” profits, which of the following orders should she
place with her broker before she leaves for China?
a.
Market sell
b.
Stop (sell)
c.
Limit (sell)
d.
Fill or kill
e.
Margin sell
ANSWER:
b
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Types of Orders
25. Use the information below to solve for the dividend yield for Lowes.
52 Weeks
Yld
Vol
Net
Hi
Lo
Stock
Sym
Div
%
PE
100s
Hi
Lo
Close
Chg
65
391/16
Lowes
LOW
.92
?
18
21590
52
487/8
49
−21/8
a.
1.9%
b.
1.4%
Principles of Finance, 6e
Besley/Brigham
Chapter 16
Cengage Learning Testing, Powered by Cognero
Page 10
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
c.
2.6%
d.
0.9%
e.
None of the above.
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Dividend Yield
26. Use the information below to solve for the dividend yield for Midas.
52 Weeks
Yld
Vol
Net
Hi
Lo
Stock
Sym
Div
%
PE
100s
Hi
Lo
Close
Chg
355/8
193/4
Midas
MDS
.08
?
20
41
35
341/2
341/2
−7/16
a.
0.23%
b.
0.41%
c.
1.60%
d.
0.92%
e.
None of the above.
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Dividend Yield
27. Use the information below to solve for the earnings per share for Adobe.
52 Weeks
Yld
Vol
Net
Hi
Lo
Stock
Sym
%
PE
100s
Hi
Lo
Close
Chg
743/8
37
Adobe
ADBE
?
17
4230
5611/16
525/8
557/8
+33/16
a.
$4.38
b.
$2.18
c.
$3.29
d.
$3.10
e.
None of the above.
ANSWER:
c
RATIONALE:
Principles of Finance, 6e
Besley/Brigham
Chapter 16
Cengage Learning Testing, Powered by Cognero
Page 12
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Annualized Return
30. An investor purchased 1,000 shares of AZT stock on January 5, 2012 for $83.25 per share. On March 20, a dividend
of $0.75 per share was paid. Fifty days later, on May 9, 2012, the stock was sold for $85.00. What is the holding period
return? Assume the dividend is not reinvested.
a.
21.6%
b.
3.0%
c.
9.5%
d.
15.1%
e.
1.0%
ANSWER:
b
RATIONALE:
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-2 – Application
Business Program-3 – Analytic
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Holding Period Return
31. Staci purchased a stock on April 12 for $78.00 and sold it on October 13 the same year, for $76.75. What is Staci’s
holding period return assuming she received a dividend of $2.20 per share on June 14, which was not reinvested?
a.
−1.6%
b.
4.4%
c.
1.2%
d.
9.0%
e.
2.4%
ANSWER:
c
RATIONALE:
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-2 – Application
Business Program-3 – Analytic
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Holding Period Return
32. Tristar Growth Mutual Fund reported annual holding period returns of 22 percent in 2010, 25 percent in 2011, and 31
percent in 2012. What was the simple arithmetic average return generated by Tristar for the period 2010 through 2012?
Principles of Finance, 6e
Besley/Brigham
Chapter 16
Cengage Learning Testing, Powered by Cognero
Page 13
a.
31.0%
b.
33.3%
c.
26.0%
d.
28.0%
e.
25.0%
ANSWER:
c
RATIONALE:
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-2 – Application
Business Program-3 – Analytic
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Simple Arithmetic Average Return
33. Use the following information to compute the simple arithmetic average return for Topwater Boats for the period from
2007 through 2012?
Year
1-year holding
period return
2007
−10%
2008
12
2009
22
2010
27
2011
24
2012
28
a.
28.0%
b.
17.2%
c.
20.6%
d.
16.3%
e.
None of the above.
ANSWER:
b
RATIONALE:
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-2 – Application
Business Program-3 – Analytic
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Simple Arithmetic Average Return
34. Your brokerage firm allows market trading with an initial margin requirement equal to 60 percent plus an 8 percent
broker loan rate. You have $6,000 to invest. How many shares of ABC can you purchase on margin? ABC stock currently
Principles of Finance, 6e
Besley/Brigham
Chapter 16
Cengage Learning Testing, Powered by Cognero
Page 14
sells for $50 a share.
a.
100
b.
200
c.
92
d.
194
e.
108
ANSWER:
b
RATIONALE:
Initial margin = $6,000 = 0.60(Total amount of margined investment)
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-2 – Application
Business Program-3 – Analytic
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Margin Trading
35. A stock purchased for $52 paid a dividend of $1 six days after it was purchased. The stock was sold for $51 ninety
days after it was purchased. What is the annualized rate of return? Assume the dividend was not reinvested.
a.
3.9%
b.
0.0%
c.
−7.7%
d.
15.7%
e.
−15.7%
ANSWER:
b
RATIONALE:
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-2 – Application
Business Program-3 – Analytic
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Annualized Return
36. You have an arrangement with your brokerage firm that allows you to purchase stock on margin with an initial margin
requirement of 25 percent and a broker loan rate of 10 percent. What is the maximum amount of stock you can purchase
on margin if you have $20,000 to invest?
a.
$150,000
b.
$72,000
Principles of Finance, 6e
Besley/Brigham
Chapter 16
c.
$80,000
d.
$22,000
e.
$200,000
ANSWER:
c
RATIONALE:
Initial margin = $20,000 = 0.25(Total amount of margined investment)
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-2 – Application
Business Program-3 – Analytic
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Margin Trading
37. At the beginning of 2010, Steve purchased ACME stock on margin. The initial margin requirement is 50 percent and
the broker loan rate is 8 percent. Steve invested $15,000 of his own funds and margined the maximum amount allowed by
the broker to purchase ACME stock. At the time, the purchase price of the stock was $25 a share. No dividends were paid
during the year, and the stock was sold for $32 a share at the end of the 2010. What is the one-year holding period return
for this investment?
a.
28.0%
b.
56.0%
c.
24.0%
d.
40.0%
e.
48.0%
ANSWER:
e
RATIONALE:
Initial margin = $15,000 = 0.50(Total amount of margined investment)
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-2 – Application
Business Program-3 – Analytic
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Margin Trading
38. At the beginning of 2010, Sally purchased Besham stock on margin. The initial margin requirement is 60 percent and
the broker loan rate is 10 percent. Sally invested $15,000 of her own funds and margined the maximum amount allowed
by the broker to purchase Besham stock. At the time, the purchase price of the stock was $50 a share. No dividends were
paid during the year, and the stock was sold for $48 a share at the end of the 2010. What is the one-year holding period
return for this investment?
Principles of Finance, 6e
Besley/Brigham
Chapter 16
a.
60.0%
b.
10.0%
c.
4.0%
d.
6.7%
e.
0.0%
ANSWER:
e
RATIONALE:
Initial margin = $15,000 = 0.60(Total amount of margined investment)
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-2 – Application
Business Program-3 – Analytic
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Margin Trading
39. An investor earned a holding period return equal to 10 percent on a stock that she purchased for $27.50. During the
time she held the stock, the company paid a $2 dividend. For what price did the investor sell the stock?
a.
$26.75
b.
$26.25
c.
$30.25
d.
$29.50
e.
$28.25
ANSWER:
e
RATIONALE:
P1 − $27.50 + $2.00 = 0.10($27.50)
P1 = $27.50(1.10) − $2.00 = 28.25
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-2 – Application
Business Program-3 – Analytic
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Selling Price
40. A bond with an annual coupon rate of 12 percent and face value of $1,000.00 was purchased for $990.00 and sold two
years later for $1,050.00. What was the holding period return?
a.
15.1%
b.
18.2%
Principles of Finance, 6e
Besley/Brigham
Chapter 16
Cengage Learning Testing, Powered by Cognero
Page 17
c.
30.3%
d.
28.5%
e.
30.0%
ANSWER:
c
RATIONALE:
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-2 – Application
Business Program-3 – Analytic
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Holding Period Return
41. An investor earned a 5 percent holding period return on a stock he originally purchased for $50. The stock paid a
dividend equal to $3. What was the price of the stock when it was sold?
a.
$52.50
b.
$50.50
c.
$50.00
d.
$49.50
e.
$47.50
ANSWER:
d
RATIONALE:
(P1 − $50) + $3 = 0.05($50) P1
= $50(1.05) − $3 = $49.50
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-2 – Application
Business Program-3 – Analytic
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Holding Period Return and Price
42. The simple arithmetic average return for the common stock of Saltwater Expeditions Incorporated for the eight-year
period from 2005 through 2012 was 21 percent. The one-year holding period returns from 2005 through 2011 are given
below. What is the implied one-year holding period return for 2012?
Year
1-year holding
period return
2005
17%
2006
22
2007
25
2008
20
2009
38
Principles of Finance, 6e
Besley/Brigham
Chapter 16
Cengage Learning Testing, Powered by Cognero
Page 18
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
2010
25
2011
24
2012
?
a.
21.4%
b.
24.4%
c.
3.0%
d.
13.0%
e.
−3.0%
ANSWER:
e
RATIONALE:
HPR99 = (8 × 21%) −
(17% + 22% + 25% + 20% + 38% + 25% + 24%) = −3.0%.
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-2 – Application
Business Program-3 – Analytic
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Simple Arithmetic Average Return
43. Use the following information to compute the geometric arithmetic average return for Topwater Boats for 2007
through 2012.
Year
1-year holding
period return
2007
−10%
2008
12%
2009
22%
2010
27%
2011
24%
2012
28%
a.
28.0%
b.
17.2%
c.
20.6%
d.
16.3%
e.
None of the above.
ANSWER:
d
RATIONALE:
Geometric average return = [(0.90)(1.12)(1.12)(1.27)(1.24)(1.28)]1/6 − 1 = 16.3%.
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-2 – Application
Business Program-3 – Analytic
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
