Consider a portfolio comprised of four risky securities. Assume the economy has three
states with varying probabilities of occurrence. Which one of the following will
guarantee that the portfolio variance will equal zero?
A. The portfolio beta must be 1.0.
B. The portfolio expected rate of return must be the same for each economic state.
C. The portfolio risk premium must equal zero.
D. The portfolio expected rate of return must equal the expected market rate of return.
E. There must be equal probabilities that the state of the economy will be a boom or a
bust.
Answer:
If the appropriate discount rate for the following cash flows is 11.7 percent per year,
what is the present value of the cash flows?
A. $71,407.19
B. $74,221.80
C. $78,270.77
D. $80,407.16
E. $81,121.03
Answer:
Which of the following are important factors to consider when seeking a venture
capitalist?
I. Exit strategy
II. Management style
III. Personal contacts
IV. Financial strength
A. I and III only
B. II and IV only
C. III and IV only
D. II, III, and IV only
E. I, II, III, and IV
Answer:
All else constant, which of the following will increase the aftertax cost of debt for a
firm?
I. Increase in the yield to maturity of the firm’s outstanding debt
II. Decrease in the yield to maturity of the firm’s outstanding debt
III. Increase in the firm’s tax rate
IV. Decrease in the firm’s tax rate
A. I only
B. I and III only
C. I and IV only
D. II and III only
E. II and IV only
Answer:
Green Thumb Nursery has 6,000 shares of stock outstanding at a market price of $20 a
share. The earnings per share are $1.62. The firm has total assets of $315,000 and total
liabilities of $186,000. Today, the firm is repurchasing $4,800 worth of stock. Ignore
taxes. What will the earnings per share be after the stock repurchase?
A. $1.283
B. $1.232
C. $1.620
D. $1.688
E. $1.848
Answer:
Obama and Biden International just announced it will be paying an annual dividend of
$0.90 a share plus an extra dividend of $0.30 a share this year. The company also
announced that its regular dividend, which is all it anticipates paying after this year, will
increase by 4.5 percent annually. What is the anticipated dividend per share next year?
A. $0.82
B. $0.90
C. $0.94
D. $1.15
E. $1.19
Answer:
Vegan Delite stock is valued at $124.20 a share. The company pays a constant annual
dividend of $8.80 per share. What is the total return on this stock?
A. 6.62 percent
B. 7.00 percent
C. 7.09 percent
D. 7.49 percent
E. 7.82 percent
Answer:
Billingsley, Inc. is borrowing $60,000 for five years at an APR of 8 percent. The
principal is to be repaid in equal annual payments over the life of the loan with interest
paid annually. Payments will be made at the end of each year. What is the total payment
due for year 3 of this loan?
A. $13,920
B. $14,880
C. $15,220
D. $15,840
E. $16,800
Answer:
Which one of the following best defines the economic order quantity (EOQ)?
A. Minimum size of an order needed to qualify for free shipping
B. Minimum amount that must be ordered to obtain the quantity discount
C. Number of items that are sold on average each month
D. Restocking quantity that minimizes the total cost of inventory
E. Minimal amount of inventory that must be purchased to receive a cash discount
Answer:
Based on the capital asset pricing model, which one of the following must increase the
expected return on an individual security, all else constant?
A. An increase in the risk level of that security as measured by the standard deviation
B. An increase in the risk-free rate given a security beta of 1.42
C. A decrease in the market rate of return given a security beta of 1.13
D. A decrease in the market rate of return given a security beta of .78
E. A decrease in the risk-free rate given a security beta of 1.06
Answer:
You are comparing three investments, all of which pay $100 a month and have an 8
percent interest rate. One is ordinary annuity, one is an annuity due, and the third
investment is a perpetuity. Which one of the following statements is correct given these
three investment options?
A. To be the perpetuity, the payments must occur on the first day of each monthly
period.
B. The ordinary annuity would be more valuable than the annuity due if both had a life
of 10 years.
C. The present value of the perpetuity has to be higher than the present value of either
the ordinary annuity or the annuity due.
D. The future value of all three investments must be equal.
E. The present value of all three investments must be equal.
Answer:
Last year, Paul invested $38,000 in Oil Town stock, $11,000 in long-term government
bonds, and $8,000 in U.S. Treasury bills. Over the course of the year, he earned returns
of 12.1 percent, 7.2 percent, and 4.1 percent, respectively. What was the nominal risk
premium on Oil Town’s stock for the year?
A. 2.1 percent
B. 4.9 percent
C. 6.0 percent
D. 7.8 percent
E. 8.0 percent
Answer:
PayDay Loans wants to earn an effective annual return on its consumer loans of 18
percent per year. The bank uses daily compounding on its loans. What interest rate is
the bank required by law to report to potential borrowers?
A. 16.23 percent
B. 16.56 percent
C. 17.62 percent
D. 18.39 percent
E. 18.88 percent
Answer:
Which one of the following is a use of cash?
A. Issuing new shares of stock
B. Increasing accounts payable
C. Decreasing inventory
D. Decreasing fixed assts
E. Increasing accounts receivable
Answer:
The rate of return on which one of the following is used as the risk-free rate?
A. Long-term government bonds
B. Long-term corporate bonds
C. Inflation, as measured by the Consumer Price Index
D. U.S. Treasury bill
E. Large-company stocks
Answer: