A stock has produced returns of 16.6 percent, 3.4 percent, 11.7 percent, and -9.2 percent
over the past four years, respectively. What is the geometric average return?
A. 5.16 percent
B. 5.47 percent
C. 6.23 percent
D. 6.61 percent
E. 10.12 percent
Angela has just received an insurance settlement of $35,000. She wants to save this
money until her daughter goes to college. If she can earn an average of 5.5 percent,
compounded annually, how much will she have saved when her daughter enters college
10 years from now?
A. $48,000.00
B. $50,929.02
C. $51,374.89
D. $59,875.06
E. $59,785.06
Which one of the following is the risk arising from changes in value caused by political
actions?
A. Exchange rate risk
B. Political risk
C. Translation risk
D. LIBOR risk
E. Cross-rate risk
Old Town Industries has three divisions. Division X has been in existence the longest
and has the most stable sales. Division Y has been in existence for five years and is
slightly less risky than the overall firm. Division Z is the research and development side
of the business. When allocating funds, the firm should probably:
A. require the highest rate of return from Division X since it has been in existence the
longest.
B. assign the highest cost of capital to Division Z because it is most likely the riskiest of
the three divisions.
C. use the firms WACC as the cost of capital for Division Z as it provides analysis for
the entire firm.
D. use the firms WACC as the cost of capital for Divisions A and B because they are
part of the revenue-producing operations of the firm.
E. allocate capital funds evenly amongst the divisions to maintain the current capital
structure of the firm.
Rocky Top, Inc. purchased some welding equipment six years ago at a cost of
$579,000. Today, the company is selling this equipment for $110,000. The tax rate is 35
percent. What is the aftertax cash flow from this sale? The MACRS allowance
percentages are as follows, commencing with year 1: 14.29, 24.49, 17.49, 12.49, 8.93,
8.92, 8.93, and 4.46 percent.
A. $81,380
B. $96,152
C. $98,635
D. $101,540
E. $110,000
Which one of the following statements concerning IPOs and underpricing is correct?
A. IPO underpricing primarily benefits a firms pre-issue owners.
B. IPO underpricing is a function of the underwriting spread.
C. The more an issue is underpriced, the more it tends to be oversubscribed.
D. Underpricing tends to discourage investors from participating in the IPO market.
E. Undersubscribed shares generally tend to also be underpriced shares.
Assume the SEC approved the registration statement for a new securities issue this
morning. Which one of the following statements must be true about this issue?
A. The red herrings can now be distributed as the distribution was awaiting the SEC
approval.
B. The waiting period started when the approval was received this morning.
C. The SEC believes the issue will be a profitable investment for all purchases made at
the offer price.
D. The issuer is following all the required rules and regulations in regard to this issue.
E. The final prospectuses were all delivered or the SEC would not have approved the
issue.
Interest rate parity defines the relationships among which of the following?
A. Spot exchange rates, future exchange rates, interest rates, and inflation rates
B. Real and nominal interest rates across countries
C. Real interest and inflation rates
D. Forward exchange rates, relative interest rates, and spot exchange rates
E. Spot exchange rates, forward exchange rates, nominal interest rates, and real interest
rates
Kurt wants to have $25,000 in an investment account four years from now. The account
will pay 0.2 percent interest per month. If he saves money every month, starting one
month from now, how much will he have to save each month to reach his goal?
A. $496.75
B. $497.03
C. $497.75
D. $501.03
E. $502.14
Which one of the following is the best example of unsystematic risk?
A. Inflation exceeding market expectations
B. A warehouse fire
C. Decrease in corporate tax rates
D. Decrease in the value of the dollar
E. Increase in consumer spending
What is the expected return on a security given the following information?
A. 8.78 percent
B. 9.43 percent
C. 9.97 percent
D. 10.22 percent
E. 11.48 percent
Which one of the following best exemplifies unsystematic risk?
A. Unexpected economic collapse
B. Unexpected increase in interest rates
C. Unexpected increase in the variable costs for a firm
D. Sudden decrease in inflation
E. Expected increase in tax rates
Which one of the following is included in the market value of a firm but not in the book
value?
A. Raw materials
B. Partially built inventory
C. Tax liability
D. Reputation of the firm
E. Value of a partially depreciated machine
Which one of the following situations is most apt to create an agency conflict?
A. Compensating a manager based on his or her divisions net income
B. Giving all employees a bonus if a certain level of efficiency is maintained
C. Hiring an independent consultant to study the operating efficiency of the firm
D. Rejecting a profitable project to protect employee jobs
E. Selling an underproducing segment of the firm
Which one of the following indicates that a firm has generated sufficient internal cash
flow to finance its entire operations for the period?
A. Positive operating cash flow
B. Negative cash flow to creditors
C. Positive cash flow to stockholders
D. Negative net capital spending
E. Positive cash flow from assets
You own a portfolio equally invested in a risk-free asset and two stocks. If one of the
stocks has a beta of 1.12 and the total portfolio is equally as risky as the market, what
must the beta be for the other stock in your portfolio?
A. 1.37
B. 1.54
C. 1.88
D. 1.98
E. 2.97