1) Over the past four years, a stock produced returns of 15 percent, 6 percent, 11
percent, and 22 percent, respectively. Based on these four years, what range of returns
would you expect to see 95 percent of the time?
A.-6.58 percent to 31.33 percent
B.-6.58 percent to 27.02 percent
C.-6.58 percent to 24.39 percent
D.-0.02 percent to 24.39 percent
E.-0.02 percent to 27.02 percent
2) Assume you can currently exchange one U.S. dollar for one hundred Japanese yen.
Also assume the inflation rate will be 2.5 percent annually in the U.S. and 2 percent in
Japan. Given these assumptions, how many yen should you expect in exchange for one
U.S. dollar next year?
A.More than 100
B.Either 100 or more than 100
C.Exactly 100
D.Either 100 or less than 100
E.Less than 100
3) Which one of the following is the slope of the security market line?
A.Risk-free rate
B.Market risk premium
C.Beta coefficient
D.Risk premium on an individual asset
E.Market rate of return
4) You are considering the following two mutually exclusive projects. The crossover
point is _____ and Project _____ should be accepted if the discount rate is 14 percent.
A.12.79 percent; B
B.13.28 percent; A
C.13.28 percent; B
D.15.96 percent; A
E.15.96 percent; B
5) A stock has a beta of 1.24, an expected return of 13.68 percent, and lies on the
security market line. A risk-free asset is yielding 2.8 percent. You want to create a
$6,000 portfolio consisting of Stock A and the risk-free security such that the portfolio
beta is 0.65. What rate of return should you expect to earn on your portfolio?
A.8.50 percent
B.9.16 percent
C.9.33 percent
D.9.41 percent
E.9.56 percent
6) One year ago, you purchased 100 shares of a stock. This morning you sold those
shares and realized a total return of 8.2 percent. Given this information, you know for
sure the:
A.stock price increased by 8.2 percent over the last year
B.stock increased in value over the past year
C.stock paid a dividend
D.dividend yield is greater than zero
E.sum of the dividend yield and the capital gains yield is 8.2 percent
7) Given the following information, what is the variance of the returns on a portfolio
that is invested 40 percent in both Stocks A and B, and 20 percent in Stock C?
A.0.002102
B.0.002490
C.0.002513
D.0.005746
E.0.006143
8) A stock has an expected return of 17.2 percent and a beta of 1.65. The risk-free rate is
5.1 percent. What is the slope of the security market line?
A.7.25 percent
B.7.33 percent
C.7.78 percent
D.7.92 percent
E.8.03 percent
9) Which one of the following is the computation of the risk premium for an individual
security? E(R) is the expected return on the security, Rf is the risk-free rate, is the
security’s beta, and E(RM) is the expected rate of return on the market.
A.E(RM) – Rf
B.E(R) – E(RM)
C.E(R) – [E(RM) + Rf]
D.[E(RM) – Rf]
E.[E(R) – Rf]
10) On April 14, McCallister’s purchased $10,000 worth of inventory. The terms of sale
were 2/10, net 30 . The implicit interest is _____ and the effective annual rate is _____
percent.
A.$200; 14.95
B.$200; 44.59
C.$400; 14.95
D.$400; 27.38
E.$400; 44.59
11) According to purchasing power parity, if a Big Mac sells for $3.89 in the United
States and 47.25 pesos in Mexico, what is the peso/$ exchange rate?
A.Ps0.0739 = $1
B.Ps0.0823 = $1
C.Ps11.29 = $1
D.Ps12.15 = $1
E.Ps14.32 = $1
12) Mary’s Baked Goods has 20,000 shares of stock outstanding at a market price of
$25.00 per share. What will the price per share be after the firm declares a 6 percent
stock dividend? Ignore taxes and market imperfections.
A.$22.90
B.$23.58
C.$25.00
D.$25.31
E.$25.40
13) A recent alumnus of your university gifted money to the school to fund annual
scholarships for students in need. The school expects to earn an average rate of return of
5.5 percent and distribute $50,000 annually in scholarships. What was the amount of the
gift?
A.$384,090.91
B.$485,293.05
C.$615,384.62
D.$658,929.38
E.$909,090.91
14) The historical returns on large-company stocks, as reported by Ibbotson and
Sinquefield and reported in your textbook, are based on the:
A.largest 20 percent of the stocks traded on the NYSE
B.stock returns for the largest 10 percent of the publicly traded firms in the U.S
C.returns of the 100 largest firms in the U.S
D.returns of all the stocks listed on the NYSE
E.stocks of the 500 companies included in the S&P 500 index
15) LOG, Inc. currently has 300,000 shares of stock outstanding that sell for $73 per
share. Assuming no market imperfections or tax effects exist, what will the share price
be after LOG has a 5-for-3 stock split?
A.$43.80
B.$45.60
C.$73.00
D.$109.18
E.$121.67
16) Zero coupon bonds:
A.are valued using simple interest
B.are issued only by the U.S. Treasury
C.create a tax deduction for the issuer only at maturity
D.are issued at a premium
E.create annual taxable income to individual bondholders
17) Tressler Dry Cleaners has inventory of $1,700, accounts payable of $4,200, cash of
$1,950, and accounts receivable of $3,680. What is the cash ratio?
A.0.24
B.0.46
C.0.53
D.0.98
E.1.34
18) Which one of the following will increase the operating cycle?
A.Decreasing the days’ sales in inventory
B.Decreasing the accounts payable period
C.Increasing the accounts receivable turnover rate
D.Decreasing the inventory turnover rate
E.Decreasing the accounts payable turnover rate
19) Which one of the following statements is correct?
A.If the IRR exceeds the required return, the profitability index will be less than 1.0
B.The profitability index will be greater than 1.0 when the net present value is negative
C.When the internal rate of return is greater than the required return, the net present
value is positive
D.Projects with conventional cash flows have multiple internal rates of return
E.If two projects are mutually exclusive, you should select the project with the shortest
payback period
20) Which of the following characteristics apply to U.S. Treasury bills?
I. Income taxed at both the federal and state level
II. Minimal, if any, default risk
III. Marketable, but not liquid
IV. Short maturities
A.I and III only
B.II and IV only
C.I, II, and IV only
D.II, III, and IV only
E.I, II, III, and IV
21) Stock in ABC Enterprises has a beta of 1.06 . The market risk premium is 6.8
percent, and T-bills are currently yielding 3.2 percent. ABC’s most recent dividend was
$1.56 per share, and dividends are expected to grow at a 4 percent annual rate
indefinitely. If the stock sells for $43 a share, what is your best estimate of ABC’s cost
of equity?
A.7.78 percent
B.8.82 percent
C.9.09 percent
D.9.41 percent
E.9.69 percent
22) The use of borrowing by an individual to adjust his or her overall exposure to
financial leverage is referred to as:
A.M&M Proposition I
B.capitalrestructuring
C.homemade leverage
D.M&M Proposition II
E.financial risk management
23) Which one of the following is defined as an agreement to exchange two securities
or two currencies?
A.Hedge
B.Swap
C.SWIFT
D.Gilt
E.Arbitrage
24) A preferred stock pays an annual dividend of $6. What is one share of this stock
worth to you today if you require a 12 percent rate of return?
A.$6.14
B.$7.98
C.$43.00
D.$50.00
E.$98.00
25) Lisa has $1,000 in cash today. Which one of the following investment options is
most apt to double her money?
A.6 percent interest for 3 years
B.12 percent interest for 5 years
C.7 percent interest for 9 years
D.8 percent interest for 9 years
E.6 percent interest for 10 years
26) Trendsetters has a cost of equity of 18.1 percent. The market risk premium is 10.2
percent and the risk-free rate is 4.4 percent. The company is acquiring a competitor,
which will increase the company’s beta to 1.6 . What effect, if any, will the acquisition
have on the firm’s cost of equity capital?
A.No effect
B.Decrease of 2.62 percent
C.Decrease of 0.84 percent
D.Increase of 2.62 percent
E.Increase of 4.13 percent
27) What is the net present value of a project that has an initial cost of $40,000 and
produces cash inflows of $8,000 a year for 11 years if the discount rate is 15 percent?
A.$798.48
B.$1,240.23
C.$1,869.69
D.$2,111.41
E.$2,470.01
28) Which one of the following transactions occurred in the primary market?
A.Maria gave 100 shares of Alto stock to her best friend
B.Gene purchased 300 shares of Alto stock from Ted
C.South Wind Products sold 1,000 shares of newly issued stock to Mike
D.Terry sold 3,000 shares of Uno stock to his brother
E.The president of Trecco, Inc. sold 500 shares of Trecco stock to his son
29) Miller Farm Products is issuing a 15-year, unsecured bond. Based on this
information, you know that this debt can be described as a:
A.note
B.bearer form bond
C.debenture
D.registered form bond
E.call protected bond
30) How is the stated value of a preferred stock utilized?
31) Explain what is meant when a news broadcaster states “the value of the dollar fell
today relative to all currencies.” How will this change in value affect U.S. imports and
exports?
32) Explain the difference between a bid price and an asked price and also explain why
the prices are different.