A stock has returns for five years of 23 percent, -17 percent, 8 percent, 22 percent, and
3 percent, respectively. The stock has an average return of ______ percent and a
standard deviation of _____ percent.
A. 7.80; 13.54
B. 7.80; 14.63
C. 7.80; 16.36
D. 14.60; 14.63
E. 14.60; 16.36
The Steel Factory is considering a project that will produce annual cash flows of
$36,800, $45,500, $56,200, and $21,800 over the next four years, respectively. What is
the internal rate of return if the initial cost of the project is $135,000?
A. 7.56 percent
B. 9.19 percent
C. 11.28 percent
D. 12.24 percent
E. 12.83 percent
Appalachian Bank offers you a $135,000, nine-year term loan at 7.5 percent annual
interest. What will your annual loan payment be?
A. $18,507.16
B. $19,229.08
C. $20,660.02
D. $20,889.20
E. $21,163.57
Baxters, Inc. generally holds $125,000 in cash in case an unexpected investment
opportunity arises. Which one of the following refers to holding cash for this type of
purpose?
A. Precautionary motive
B. Opportunistic motive
C. Speculative motive
D. Reserve motive
E. Transaction motive
Lester had $6,270 in his savings account at the beginning of this year. This amount
includes both the $6,000 he originally invested at the beginning of last year plus the
$270 he earned in interest last year. This year, Lester earned a total of $282.15 in
interest even though the interest rate on the account remained constant. This $282.15 is
best described as:
A. simple interest.
B. interest on interest.
C. discounted interest.
D. complex interest.
E. compound interest.
Which one of the following is an implication of M&M Proposition II, without taxes?
A. A firms optimal capital structure is 100 percent debt.
B. WACC is unaffected by the capital structure of a firm.
C. WACC decreases as the debt-equity ratio increases.
D. A firms capital structure is irrelevant.
E. The risk of equity depends on both the degree of financial leverage and the riskiness
of the firms operations.
If Treasury bills are currently paying 3.2 percent and the inflation rate is 2.8 percent,
what is the approximate real rate of interest? The exact real rate?
A. 0.40 percent; 3.89 percent
B. 0.40 percent; 3.98 percent
C. 6.00 percent; 5.67 percent
D. 6.00 percent; 5.87 percent
E. 6.00 percent; 5.92 percent
Which one of the following terms is defined as having international operations in a
world where relative currency values change?
A. Political risk
B. Relative purchasing power parity
C. Interest rate parity
D. Absolute purchasing power parity
E. Exchange rate risk
Based on the capital asset pricing model, investors are compensated based on which of
the following?I. Market risk premiumII. Portfolio standard deviationIII. Portfolio
betaIV. Risk-free rate
A. I and III only
B. II and IV only
C. I, II, and III only
D. I, III, and IV only
E. I, II, III, and IV
Which of the following are weaknesses of the dividend growth model?I. Market risk
premium fluctuationsII. Lack of dividends for some firmsIII. Reliance on historical
betaIV. Sensitivity of model to dividend growth rate
A. II only
B. I and II only
C. I and III only
D. II and IV only
E. I, II, III, and IV
Cromwell Enterprises is acquiring Athens, Inc. for $899,000. Athens has agreed to
accept annual payments of $210,000 at an interest rate of 8.5 percent. How many years
will it take Cromwell Enterprises to pay for this purchase?
A. 5.00 years
B. 5.18 years
C. 5.55 years
D. 5.47 years
E. 5.80 years
Which of the following are effective means of aligning management goals with
shareholder interests?I. Employee stock optionsII. Threat of a takeoverIII. Management
bonuses tied to performance goalsIV. Threat of a proxy fight
A. I and III only
B. II and IV only
C. I, II, and III only
D. I, III, and IV only
E. I, II, III, and IV
The Farmers Market recently announced that it will pay its first annual dividend two
years from today. The first dividend will be $0.50 a share with that amount doubling
each year for the following two years. After that, the dividend is expected to increase by
4 percent annually. What is the value of this stock today if the required return is 10
percent?
A. $23.57
B. $25.16
C. $26.21
D. $28.32
E. $30.18