- Next year’s annual dividend divided by the current stock price is called the:

(a) yield to maturity.

(b) total yield.

(c) dividend yield.

(d) capital gains yield.

(e) earnings yield.

2. Payments made by a corporation to its shareholders, in the form of either

cash, stock or payments in kind, are called:

(a) retained earnings.

(b) net income.

(c) dividends.

(d) redistributions.

(e) infused equity.

3. The excess return required from a risky asset over that required from a risk-free asset is called the:

(a) risk premium.

(b) geometric premium.

(c) excess return.

(d) average return.

(e) variance.

4. A stock had returns of 8 percent, -2 percent, 4 percent, and 16 percent over

the past four years. What is the standard deviation of this stock for the past

four years?

(a) 6.3 percent

(b) 6.6 percent

(c) 7.1 percent

(d) 7.5 percent (Based on Sample. If we wont to calculate based on Population its 6.5%)

(e) 7.9 percent

5. Nuvo, Inc. stock has a beta of .86 and an expected return of 10.5 percent.

The risk-free rate of return is 3.2 percent and the market rate of return is 11.2 percent. Which one of the following statements is true given this information?

(a) The return on Nuvo stock will graph below the Security Market Line.

(b) Nuvo stock is underpriced.

(c) The expected return on Nuvo stock based on the Capital Asset Pricing

Model is 9.88 percent.

(d) Nuvo stock has more systematic risk than the overall market.

(e) Nuvo stock is correctly priced.

6. The common stock of Flavorful Teas has an expected return of 14.4 percent.

The return on the market is 10 percent and the risk-free rate of return is 3.5

percent. What is the beta of this stock?

(a) 0.65

(b) 1.09

(c) 1.32

(d) 1.44

(e) 1.68

7. An investment is acceptable if its IRR:

(a) is exactly equal to its net present value (NPV).

(b) is exactly equal to zero.

(c) is less than the required return.

(d) exceeds the required return.

(e) is exactly equal to 100 percent.

8. A project costing $20,000 generates cash inflows of $9,000 annually for the

rst 3 years, followed by cash out

ows of $1,000 annually for 2 years. At

most, this project has different IRR(s).

(a) one

(b) two

(c) three

(d) Five

9. Which of the following stocks is (are) incorrectly priced if the risk-free rate is 4% and the market risk premium is 6%?

Stock A B C

Beta 1.25 .80 1.06

Expected Return 12.6% 8.8% 11.2%

(a) A only

(b) B only

(c) C only

(d) A and C only

(e) A, B, and C

10. The standard deviation of a portfolio that contains all securities in the market will equal:

(a) Zero.

(b) One.

(c) The portfolio beta.

(d) The systematic risk.

(e) The risk premium of the portfolio.

11. The internal rate of return on a project is 11.24%. Choose the TRUE state-

ment(s) if the project has a Required Rate of Return (RRR) of 9.5%? (Cash flows are conventional.)

I. Both NPV > 0 and IRR > RRR

II. IRR > RRR.

III. NPV > 0.

IV. IRR > RRR but there is not enough information to determine if

NPV > 0 or if NPV

(a) I, II and III are the only true statements.

(b) II and IV are the only true statements.

(c) II is the only true statement.

(d) IV is the only true statement.

(e) All of the statements are true.

3

12. The principle of diversification states that spreading an investment over a

number of assets will eliminate:

(a) All of the risk.

(b) All of the systematic risk and part of the unsystematic risk.

(c) All of the unsystematic risk and part of the systematic risk.

(d) The systematic risk.

(e) The unsystematic risk.

13. Suppose you observe the following situation:

Beta Expected Return

Pete Corp. 1.3 24%

Repeat Corp 0.65 13%

Assume these securities are correctly priced. Based on the CAPM, what is

the market risk premium?

(a) 14.9%

(b) 2.9%

(c) 16.9%

(d) 4.9%

(e) 17.9%

The following is for problems 13-15. A stock has a beta of 1.3 and an expected return of 17%. The market portfolio currently earns 12%.

14. What is the expected return on a portfolio that is equally invested in the two

assets? (The stock and the market portfolio).

(a) 14.5%

(b) 13.5%

(c) 12%

(d) 17%

(e) 16.5%

15. If a portfolio of the two assets has a beta of 0.80 what is the portfolio weights

on the stock?

(a) 2/3

(b) -2/3

(c) 1/3

(d) 23/45

(e) -23/45

16. If a portfolio of the two assets has an expected return of 10% what is it’s

beta? (If you found a negative risk-free rate you are on the right track)

(a) 0.78

(b) 0.88

(c) 1.08

(d) 1.18

(e) 3.54

17. Analyzing a Portfolio. You have to invest in a portfolio containing Stock X,

Stock Y, and a risk free asset. You must invest all of you money. Your goal

is to create a portfolio that has an expected return of 13% and that has only

80% of the risk of the overall market. If X has an expected return of 31%

and a beta of 1.8. Y has an expected return of 20% and a beta of 1.3 and

the risk free rate is 7%, what is the portfolio weight on X?

(a) 2/3

(b) -2/3

(c) 2/6

(d) -2/6

(e) -0.237

18. Efficient portfolios are those that are :

(a) Highest expected return for a given level of risk

(b) Highest risk for a given level of expected return

(c) The maximum risk and expected return

(d) All of the above

19. A project anticipates net cash flows of $10,000 at the end of year 1, with such amount growing at the expected 5% rate of inflation over the subsequent 4

years. Calculate the real present value of this 5-year cash stream if the rm

employs a nominal discount rate of 15%.

(a) $33,522

(b) $38,377

(c) $43,294

(d) $55,000

20. Arm generates sales of $250,000, depreciation expense of $50,000, taxable income of $50,000, and has a 35% tax rate. By how much does net cash flow deviate from net income?

(a) $17,500

(b) $50,000

(c) $67,500

(d) $82,500

21. How does net working capital a effect the NPV of a 5-year project if working capital is expected to increase by $25,000 and the rm has a 15% cost of

capital?

(a) NPV will increase by $9,322.

(b) NPV will increase by $12,571.

(c) NPV will decrease by $25,000.

(d) NPV will decrease by $12,571.

22. A parcel of corporate land was recently dedicated as the new plant site. Whatcost allocation should the land receive, based on the following: original cost of $200,000, market value of $300,000, net book value of $200,000, a recent oer to purchase for $250,000.

(a) $200,000

(b) $250,000

(c) $275,000

(d) $300,000

23. New projects or products can have an indirect effect on the rm as well as

a direct effect. Which of the following appears to be an indirect effect of

launching a new product?

(a) Additional working capital is required.

(b) Sales force will need to be increased.

(c) Sales of a similar product of your

rm’s will decline.

(d) Additional machinery must be purchased.

24. Mr. Hopper is expected to retire in 28 years and he wishes accumulate

$750,000 in his retirement fund by that time. If the interest rate is 10%

per year, how much should Mr. Hopper put into the retirement fund at the

end of each year in order to achieve this goal?

(a) $4,559.44

(b) $5,588.26

(c) $9,118.88

(d) $10,018.67

25. What is the monthly mortgage payment on a $150,000 mortgage for 30 years

an APR 5.85%?

(a) $784.71

(b) $805.65

(c) $884.91

(d) $925.64

26. The present value of a $2.50 dividend received at the end of this year that

grows at 4% forever given a cost of capital of 12% is worth how much today?

(a) $20.83

(b) $62.50

(c) $54.23

(d) $31.25

27. You would like to have enough money saved to receive a $100,000 per year

perpetuity after retirement so that you and your family can lead a good life.

How much would you need to save in your retirement fund to achieve this

goal (assume that the perpetuity payments start one year from the date of

your retirement. The interest rate is 10%)?

(a) $1,000,000

(b) $10,000,000

(c) $100,000

(d) None of the above

28. Sam’s Company expects to pay a dividend of $6 per share at the end of year one, $9 per share at the end of year two and then be sold for $136 per share.

If the required rate on the stock is 20%, what is the current value of the

stock?

(a) $100.10

(b) $105.69

(c) $110.00

(d) $120.29

29. Which of the following is the likely price on a bond that has a current price

of $1,100 when interest rates rise?

(a) $1,050

(b) $1,100

(c) $1,225

(d) Can not be determined

30. What is the expected YTM on a bond that pays a $15 coupon annually has

a $1,000 par value, and matures in 6 years if the current price of the bond is

$978?

(a) 1.89%

(b) 3.67%

(c) 9.78%

(d) 15.00%