Question;1.Suppose a U.S. treasury bond;will pay $2,500 five years from now. If the going interest rate on 5-year;treasury bonds is 4.25%, how much is the bond worth today? (Points: 4);$1,928.78;$2,030.30;$2,131.81;$2,238.40;Question;2. 2.Jose now has $500. How much would he have after 6 years if he;leaves it invested at 5.5% with annual compounding? (Points: 4);$591.09;$622.20;$654.95;$689.42;Question;3. 3.Which of the following statements regarding a 15-year;(180-month) $125,000, fixed-rate mortgage is CORRECT? (Ignore taxes and;transactions costs.) (Points: 4);The remaining balance after three years will be $125,000 less one third of;the interest paid during the first three years.;Because it is a fixed-rate mortgage, the monthly loan payments (which include;both interest and principal payments) are constant.;Interest payments on the mortgage will increase steadily over time, but the;total amount of each payment will remain constant.;The proportion of the monthly payment that goes towards repayment of;principal will be lower 10 years from now than it will be the first year.;The outstanding balance declines at a slower rate in the later years of the;loan?s life.;Question;4. 4.The primary operating goal of a publicly-owned firm interested;in serving its stockholders should be to (Points: 4);Maximize the stock price per share over the long run, which is the stock?s;intrinsic value.;Maximize the firm's expected EPS.;Minimize the chances of losses.;Maximize the firm's expected total income.;Question;5. 5.If a firm's goal is to maximize its earnings per share, this;is the best way to maximize the price of the common stock and thus;shareholders' wealth. (Points: 4);True;False;Question;6. 6.Rappaport Corp.'s sales last year were $320,000, and its net;income after taxes was $23,000. What was its profit margin on sales?;(Points: 4);6.49%;6.83%;7.19%;7.55%;Question;7. 7.Companies generate income from their "regular;operations and from other sources like interest earned on the securities;they hold, which is called non-operating income. Lindley Textiles recently;reported $12,500 of sales, $7,250 of operating costs other than;depreciation, and $1,000 of depreciation. The company had no amortization;charges and no non-operating income. It had $8,000 of bonds outstanding;that carry a 7.5% interest rate, and its federal-plus-state income tax rate;was 40%. How much was Lindley's operating income, or EBIT? (Points: 4);$3,462;$3,644;$3,836;$4,250;Question;8. 8.Ratio analysis involves analyzing financial statements in;order to appraise a firm's financial position and strength. (Points: 4);True;False;Question;9. 9.Determining whether a firm's financial position is improving;or deteriorating requires analyzing more than the ratios for a given year.;Trend analysis is one method of measuring changes in a firm's performance;over time. (Points: 4);True;False;Question;10. 10.Other things held constant, which of the following actions;would increase the amount of cash on a company?s balance sheet? (Points;4);The company repurchases common stock.;The company pays a dividend.;The company issues new common stock.;The company gives customers more time to pay their bills.;Question;11. 11.Quigley Inc.'s bonds currently sell for;$1,080 and have a par value of $1,000. They pay a $100 annual coupon and;have a 15-year maturity, but they can be called in 5 years at $1,125. What;is their yield to maturity (YTM)?;(Points: 4);8.56%;9.01%;9.46%;9.93%;Question;12. 12.Bill Dukes has $100,000 invested in a;2-stock portfolio. $35,000 is invested in Stock X and the remainder is;invested in Stock Y. X's beta is 1.50 and Y?s beta is 0.70. What is the;portfolio's beta?;(Points: 4);0.65;0.72;0.80;0.98;Question;13. 13.Risk-averse investors require higher rates of return on;investments whose returns are highly uncertain, and most investors are risk;averse. (Points: 4);True;False;Question;14. 14.Sinking funds are devices used to force companies to retire;bonds on a scheduled basis prior to their maturity. Many bond indentures;allow the company to acquire bonds for a sinking fund by either purchasing;bonds in the market or selecting the bonds to be acquired by a lottery;administered by the trustee through a call at face value. (Points: 4);True;False;Question;15. 15.Which of the following statements is CORRECT? (Points: 4);An investor can eliminate virtually all market risk if he or she holds a very;large and well diversified portfolio of stocks.;The higher the correlation between the stocks in a portfolio, the lower the;risk inherent in the portfolio.;It is impossible to have a situation where the market risk of a single stock;is less than that of a portfolio that includes the stock.;An investor can eliminate virtually all diversifiable risk if he or she holds;a very large, well-diversified, portfolio of stocks.;Question;16. 16.Assume that you hold a well-diversified;portfolio that has an expected return of 12.0% and a beta of 1.20. You are;in the process of buying 100 shares of Alpha Corp at $10 a share and adding;it to your portfolio. Alpha has an expected return of 15.0% and a beta of;2.00. The total value of your current portfolio is $9,000. What will the;expected return, and beta on the portfolio, be after the purchase of the;Alpha stock? 27;rp bp(Points: 4);11.69%, 1.22;12.30%, 1.28;12.92%, 1.34;13.56%, 1.41;Question;17. 17.Calculate the required rate of return for;Mercury, Inc., assuming that (1) investors expect a 4.0% rate of inflation;in the future, (2) the real risk-free rate is 3.0%, (3) the market risk;premium is 5.0%, (4) Mercury has a beta of 1.00, and (5) its realized rate;of return has averaged 15.0% over the last 5 years.;(Points: 4);10.29%;10.83%;11.40%;12.00%;Question;18. 18.In a portfolio of three different stocks, which of the;following could NOT be true? (Points: 4);The riskiness of the portfolio is less than the riskiness of each of the;stocks if they were held in isolation.;The riskiness of the portfolio is greater than the riskiness of one or two of;the stocks.;The beta of the portfolio is less than the betas of each of the individual;stocks.;The beta of the portfolio is greater than the beta of one or two of the;individual stocks? betas.;Question;19. 19.Stock A?s beta is 1.5 and Stock B?s beta is 0.5. Which of;the following statements must be true about these securities? (Assume;market equilibrium.) (Points: 4);When held in isolation, Stock A has greater risk than Stock B.;Stock B must be a more desirable addition to a portfolio than Stock A.;Stock A must be a more desirable addition to a portfolio than Stock B.;The expected return on Stock A should be greater than that on Stock B.;Question;20. 20.Which of the following is NOT a potential problem with beta;and its estimation? (Points: 4);Sometimes a security or project does not have a past history which can be;used as a basis for calculating beta.;Sometimes, during a period when the company is undergoing a change such as;toward more leverage, or riskier assets, the calculated beta will be;drastically different than the ?true? or ?expected future? beta.;The beta of ?the market,? can change over time, sometimes drastically.;Sometimes the past data used to calculate beta do not reflect the likely risk;of the firm for the future because conditions have changed.;Question;21. 21.Anderson Systems is considering a project that has the;following cash flow and WACC data. What is the project's NPV? Note that if;a project's expected NPV is negative, it should be rejected.;WACC: 9.00%;Year;0;1;2 3;Cash flows;-$1,000;$500 $500 $500 (Points: 4);$265.65;$278.93;$292.88;$307.52;Question;22. 22.Taggart Inc. is considering a project that has the following;cash flow data. What is the project's payback?;Year;0;1;2;3;Cash flows;-$1,150;$500 $500 $500 (Points: 4);1.86 years;2.07 years;2.30 years;2.53 years;Question;23. 23.Which of the following statements is CORRECT? (Points: 4);One defect of the IRR method versus the NPV is that the IRR does not take;account of cash flows over a project?s full life.;One defect of the IRR method versus the NPV is that the IRR does not take;account of the time value of money.;One defect of the IRR method versus the NPV is that the IRR does not take;account of the cost of capital.;One defect of the IRR method versus the NPV is that the IRR does not take;proper account of differences in the sizes of projects.;Question;24. 24.Which of the following statements is CORRECT? Assume that;the project being considered has normal cash flows, with one outflow;followed by a series of inflows. (Points: 4);The longer a project?s payback period, the more desirable the project is normally;considered to be by this criterion.;One drawback of the regular payback for evaluating projects is that this;method does not properly account for the time value of money.;If a project?s payback is positive, then the project should be rejected;because it must have a negative NPV.;The regular payback ignores cash flows beyond the payback period, but the;discounted payback method overcomes this problem.;Question;25. 25.Which of the following statements is CORRECT? (Points: 4);The regular payback method recognizes all cash flows over a project?s life.;The discounted payback method recognizes all cash flows over a project?s;life, and it also adjusts these cash flows to account for the time value of;money.;The regular payback method was, years ago, widely used, but virtually no;companies even calculate the payback today.;The regular payback is useful as an indicator of a project?s liquidity;because it gives managers an idea of how long it will take to recover the;funds invested in a project.
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