FE 251 Quiz 3 | Course Paper

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1) Consider the following bond quote: a municipal bond quoted at 101.25. If the

municipal bond has a par value of $5,000, what is the price of the bond in dollars?

A.$5,089.06

B.$5,050.19

C.$5,062.50

D.$5,109.75

2) If the yield curve is downward sloping, what is the yield to maturity on a 30-year

Treasury bond relative to a 10-year Treasury bond?

A.The yield on the 10-year bond must be greater than the yield on the 30-year bond

B.The yield on the 10-year bond must be less than the yield on the 30-year bond

C.The yields on the two bonds are equal

D.We need to know the other risk premiums to answer this question

3) Suppose we observe the following rates: 1R1 = 13%, 1R2 = 16%, and E(2r1) = 10%.

If the liquidity premium theory of the term structure of interest rates holds, what is the

liquidity premium for year 2, L2?

A.8.7%

B.9.1%

C.9.7%

D.10.0%

4) Forecasting Interest Rates On May 23, 20XX, the existing or current (spot) one-year,

two-year, three-year, and four-year zero-coupon Treasury security rates were as follows:

Using the unbiased expectations theory, what is the one-year forward rate on

zero-coupon Treasury bonds for year four as of May 23, 20XX?

A.5.925%

B.6.45%

C.7.05%

D.10.32%

5) FlavR Co stock has a beta of 2.0, the current risk-free rate is 2, and the expected

return on the market is 9 percent. What is FlavR Co’s cost of equity?

A.11%

B.13%

C.16%

D.20%

6) Compute the IRR for Project X and note whether the firm should accept or reject the

project with the cash flows shown below if the appropriate cost of capital is 9 percent.

A.9%, accept

B.9%, reject

C.16.61%, accept

D.16.61%, reject

7) This is the investor’s combination of securities that achieves the highest expected

return for a given risk level.

A.efficient portfolio

B.modern portfolio

C.optimal portfolio

D.total portfolio

8) Interest-on-Interest Consider a $2,000 deposit earning 6 percent interest per year for

5 years. How much total interest is earned on the original deposit (excluding interest

earned on interest)?

A.$60.00

B.$76.45

C.$600.00

D.$676.45

9) Which of the following is a voluntary liquidation proceeding that passes the

liquidation of the firm’s assets to a third party that is designated as the assignee or

trustee?

A.liquidation

B.assignment

C.composition

D.consolidation

10) Which of the following is a formal bankruptcy proceeding which outlines the

process to be followed for liquidating a failed firm?

A.Chapter 7

B.Chapter 11

C.Chapter 13

D.Chapter 179

11) Risk Premium The annual return on the S&P 500 Index was 18.1 percent. The

annual T-bill yield during the same period was 6.2 percent. What was the market risk

premium during that year?

A.6.2%

B.11.9%

C.18.1%

D.24.3%

12) Which of the following statements is correct?

A.An auto manufacturer is less capital intensive than a bakery

B.An accounting firm is more capital intensive than a railroad

C.An oil refinery is more capital intensive than Starbucks

D.None of these

13) The interest rate, i, which we use to calculate present value, is often referred to as

the:

A.discount rate

B.multiplier

C.compound rate

D.dividend

14) Calculation of Altman’s Z-Score: Use the following financial statements for Lake

of Egypt Marina to calculate the Altman’s Z-score for this firm.

15) The maximum growth rate that can be achieved financing asset growth with new

debt and retained earnings is called the __________.

A.internal growth rate

B.retention rate

C.sustainable growth rate

D.operating expansion rate

16) As the number of days until the next dividend decreases, what will happen to the

present value of the stock?

A.It will decrease

B.It will increase

C.It will stay the same

D.One cannot determine what will happen to the price of the stock in this situation

17) Bond Prices and Interest Rate Changes A 6.75 percent coupon bond with 10 years

left to maturity is priced to offer a 6.5 percent yield to maturity. You believe that in one

year, the yield to maturity will be 6.65 percent. If this occurs, what would be the total

return of the bond in percent? (Assume semi-annual interest payments and $1,000 par

value.)

A.5.5%

B.5.6%

C.6.6%

D.6.7%

18) Your firm needs a computerized machine tool lathe which costs $50,000, requires

$10,000 in installation and another $12,000 in maintenance for each year of its 3-year

life. After 3 years, this machine will be replaced. The machine falls into the MACRS

3-year class life category. Assume a tax rate of 30% and a discount rate of 12%. If the

lathe can be sold for $7,000 at the end of year 3, what is the after-tax salvage value?

A.$6,233.80

B.$6,311.90

C.$5,927.20

D.$6,154.20

19) A linear probability model you have developed finds there are two factors

influencing the past bankruptcy behavior of firms: the equity multiplier and the total

asset turnover ratio. Based on past bankruptcy experience, the linear probability model

is estimated as:

PDi = .02 (equity multiplier) + .01 (total asset turnover)

A firm you are thinking of lending to has an equity multiplier of 3.2 times and a total

asset turnover ratio of 1.95. Calculate the firm’s expected probability of default, or

bankruptcy.

A.7.06%

B.7.92%

C.8.35%

D.9.12%

20) For most investors, the equalization of the tax rates on capital gains and dividends

did which of the following?

A.moved the real world further from the concept of the dividend indifference theory

B.moved the real world closer to the concept of the dividend indifference theory

C.moved the real world closer to the concept of the dividend irrelevance theorem

D.moved the real world further from the concept of the dividend irrelevance theorem

21) Interest rates A corporation’s 10-year bonds have an equilibrium rate of return of 7

percent. For all securities, the inflation risk premium is 1.50 percent and the real interest

rate is 3.0 percent. The security’s liquidity risk premium is 0.15 percent and maturity

risk premium is 0.70 percent. The security has no special covenants. What is the bond’s

default risk premium?

A.1.40%

B.1.65%

C.5.35%

D.9.35%

22) If you own 300 shares of Alaska Air at $15.88, 250 shares of Best Buy at $151.00,

and 1,150 shares of Ford Motor at $3.51, what are the portfolio weights of each stock?

A.Weight of Alaska Air: 10.23%; Weight of Best Buy: 81.09%; Weight of Ford Motor:

8.67%

B.Weight of Alaska Air: 6.23%; Weight of Best Buy: 71.09%; Weight of Ford Motor:

22.67%

C.Weight of Alaska Air: 15.23%; Weight of Best Buy: 81.09%; Weight of Ford Motor:

3.67%

D.Weight of Alaska Air: 20.23%; Weight of Best Buy: 76.09%; Weight of Ford Motor:

3.67%

23) Jane has been saving $500 in her retirement account each month for the last 20

years and plans to continue contributing $500 each month for the next 20 years. Her

account has been earning an 8% annual interest rate and she expects to earn the same

rate for the next 20 years. Her twin brother, Hal, has not saved anything for the last 20

years. Due to sibling rivalry, he wants to have as much as Jane is expected to have at

the end of 20 years. If Hal expects to earn the same annual interest rate as Jane, how

much must Hal save each month to achieve his goal?

A.$1,043.71

B.$1,517.92

C.$2,007.53

D.$2,963.40

24) If a firm has a cash cycle of 47 days and an operating cycle of 92 days, what is its

average payment period?

A.45

B.47

C.92

D.139

25) Which of the following is the termination of the firm as a going concern in which

assets are sold and any proceeds go to pay off the firm’s creditors?

A.liquidation

B.assignment

C.composition

D.consolidation

26) One-year Treasury bills currently earn 3.75 percent. You expect that one year from

now, one-year Treasury bill rates will increase to 4.15 percent. If the unbiased

expectations theory is correct, what should the current rate be on two-year Treasury

securities?

A.4.25%

B.3.85%

C.3.95%

D.4.35%

27) IBM’s stock price is $22, it is expected to pay a $2 dividend, and analysts expect the

firm to grow at 10% per year for the next 5 years. TDI’s stock price is $10, it is

expected to pay a $1 dividend, and analysts expect the firm to grow at 12% per year for

the next 5 years. What is the difference in the two firms’ required rate of returns?

A.2.91%

B.1.82%

C.2.03%

D.3.23%

28) Constant Growth Stock Valuation Best Buy Co (BBY) paid a $0.27 dividend per

share in 2003, which grew to $0.49 in 2007. This growth is expected to continue. What

is the value of this stock at the beginning of 2007 when the required rate of return is

17.23 percent?

A.$2.84

B.$42.24

C.$49.03

D.$78

29) Exchange Rate Quote Convert the following indirect quote to a dollar direct quote:

$1 = 7.2501 South African Rand

A.$0.1379

B.$0.72501

C.$1.00

D.$1.1379

30) Consider the characteristics of the following three stocks:

The correlation between Thumb Devices and Air Comfort is -0.12. The correlation

between Thumb Devices and Sport Garb is 0.89. The correlation between Air Comfort

and Sport Garb is -0.85. If you can pick only two stocks for your portfolio, which

would you pick? Why?

A.Combine Thumb Devices and Sport Garb because they have a high correlation

B.Combine Thumb Devices and Air Comfort because of high standard deviations

C.Combine Air Comfort and Sport Garb due to negative correlation

D.Combine Thumb Devices and Sport Garb because and Thumb Devices has the

highest return and Sport Garb has the lowest standard deviation

31) A perpetuity, a special form of annuity, pays cash flows

A.and is not effected by interest rate changes

B.that do not have time value of money implications

C.intermittently forever

D.continuously forever