Question 1

Which of the following statements is CORRECT,assuming positive interest rates and holding other things constant?

Accepted Answer

A) Banks A and B offer the same nominal annual rate of interest, but A pays interest quarterly and B pays semiannually. Deposits in Bank B will provide the higher future value if you leave your funds on deposit. 
B) The present value of a 5-year, $250 annuity due will be lower than the PV of a similar ordinary annuity. 
C) A 30-year, $150,000 amortized mortgage will have larger monthly payments than an otherwise similar 20-year mortgage. 
D) A bank loan's nominal interest rate will always be equal to or less than its effective annual rate. 
E) If an investment pays 10% interest, compounded annually, its effective annual rate will be less than 10%. 
A) Banks A and B offer the same nominal annual rate of interest, but A pays interest quarterly and B pays semiannually. Deposits in Bank B will provide the higher future value if you leave your funds on deposit. 
B) The present value of a 5-year, $250 annuity due will be lower than the PV of a similar ordinary annuity. 
C) A 30-year, $150,000 amortized mortgage will have larger monthly payments than an otherwise similar 20-year mortgage. 
D) A bank loan's nominal interest rate will always be equal to or less than its effective annual rate. 
E) If an investment pays 10% interest, compounded annually, its effective annual rate will be less than 10%.

Question 2

Billy Thornton borrowed $20,000 at a rate of 7.25%,simple interest,with interest paid at the end of each month.The bank uses a 360-day year.How much interest would Billy have to pay in a 30-day month?

Accepted Answer

A) $120.83 
B) $126.88 
C) $133.22 
D) $139.88 
E) $146.87 
A) $120.83 
B) $126.88 
C) $133.22 
D) $139.88 
E) $146.87

Question 3

You expect to receive $5,000 in 25 years.How much is it worth today if the discount rate is 5.5%?

Accepted Answer

A) $1,067.95 
B) $1,124.16 
C) $1,183.33 
D) $1,245.61 
E) $1,311.17 
A) $1,067.95 
B) $1,124.16 
C) $1,183.33 
D) $1,245.61 
E) $1,311.17

Question 4

You want to open a sushi bar 3 years from now,and you plan to save $7,000 per year,beginning immediately.You will make 3 deposits in an account that pays 5.2% interest.Under these assumptions,how much will you have 3 years from today?

Accepted Answer

A) $20,993 
B) $22,098 
C) $23,261 
D) $24,424 
E) $25,645 
A) $20,993 
B) $22,098 
C) $23,261 
D) $24,424 
E) $25,645

Question 5

It is possible for a firm to have a positive beta,even if the correlation between its returns and those of another firm is negative.

Accepted Answer

A) True 
 B)False

Question 6

The slope of the SML is determined by the value of beta.

Accepted Answer

A) True 
 B)False

Question 7

Your friend is considering adding one additional stock to a 3-stock portfolio,to form a 4-stock portfolio.She is highly risk averse and has asked for your advice.The three stocks currently held all have b = 1.0,and they are perfectly positively correlated with the market.Potential new Stocks A and B both have expected returns of 15%,are in equilibrium,and are equally correlated with the market,with r = 0.75.However,Stock A's standard deviation of returns is 12% versus 8% for Stock B.Which stock should this investor add to his or her portfolio,or does the choice not matter?

Accepted Answer

A) Stock A. 
B) Stock B. 
C) Neither A nor B, as neither has a return sufficient to compensate for risk. 
D) Add A, since its beta must be lower. 
E) Either A or B, i.e., the investor should be indifferent between the two. 
A) Stock A. 
B) Stock B. 
C) Neither A nor B, as neither has a return sufficient to compensate for risk. 
D) Add A, since its beta must be lower. 
E) Either A or B, i.e., the investor should be indifferent between the two.

Question 8

Stock X has a beta of 0.7 and Stock Y has a beta of 1.7.Which of the following statements must be true,according to the CAPM?

Accepted Answer

A) Stock Y's realized return during the coming year will be higher than Stock X's return. 
B) If the expected rate of inflation increases but the market risk premium is unchanged, the required returns on the two stocks should increase by the same amount. 
C) Stock Y's return has a higher standard deviation than Stock X. 
D) If the market risk premium declines, but the risk-free rate is unchanged, Stock X will have a larger decline in its required return than will Stock Y. 
E) If you invest $50,000 in Stock X and $50,000 in Stock Y, your 2-stock portfolio would have a beta significantly lower than 1.0, provided the returns on the two stocks are not perfectly correlated. 
A) Stock Y's realized return during the coming year will be higher than Stock X's return. 
B) If the expected rate of inflation increases but the market risk premium is unchanged, the required returns on the two stocks should increase by the same amount. 
C) Stock Y's return has a higher standard deviation than Stock X. 
D) If the market risk premium declines, but the risk-free rate is unchanged, Stock X will have a larger decline in its required return than will Stock Y. 
E) If you invest $50,000 in Stock X and $50,000 in Stock Y, your 2-stock portfolio would have a beta significantly lower than 1.0, provided the returns on the two stocks are not perfectly correlated.

Question 9

What annual payment must you receive in order to earn a 6.5% rate of return on a perpetuity that has a cost of $1,250?

Accepted Answer

A) $77.19 
B) $81.25 
C) $85.31 
D) $89.58 
E) $94.06 
A) $77.19 
B) $81.25 
C) $85.31 
D) $89.58 
E) $94.06

Question 10

Stocks A and B each have an expected return of 15%,a standard deviation of 20%,and a beta of 1.2.The returns on the two stocks have a correlation coefficient of +0.6.Your portfolio consists of 50% A and 50% B.Which of the following statements is CORRECT?

Accepted Answer

A) The portfolio's expected return is 15%. 
B) The portfolio's standard deviation is greater than 20%. 
C) The portfolio's beta is greater than 1.2. 
D) The portfolio's standard deviation is 20%. 
E) The portfolio's beta is less than 1.2. 
A) The portfolio's expected return is 15%. 
B) The portfolio's standard deviation is greater than 20%. 
C) The portfolio's beta is greater than 1.2. 
D) The portfolio's standard deviation is 20%. 
E) The portfolio's beta is less than 1.2.

Question 11

A stock just paid a dividend of D0 = $1.50.The required rate of return is rs = 10.1%,and the constant growth rate is g = 4.0%.What is the current stock price?

Accepted Answer

A) $23.11 
B) $23.70 
C) $24.31 
D) $24.93 
E) $25.57 
A) $23.11 
B) $23.70 
C) $24.31 
D) $24.93 
E) $25.57

Question 12

A 15-year bond has an annual coupon rate of 8%.The coupon rate will remain fixed until the bond matures.The bond has a yield to maturity of 6%.Which of the following statements is CORRECT?

Accepted Answer

A) The bond is currently selling at a price below its par value. 
B) If market interest rates remain unchanged, the bond's price one year from now will be lower than it is today. 
C) The bond should currently be selling at its par value. 
D) If market interest rates remain unchanged, the bond's price one year from now will be higher than it is today. 
E) If market interest rates decline, the price of the bond will also decline. 
A) The bond is currently selling at a price below its par value. 
B) If market interest rates remain unchanged, the bond's price one year from now will be lower than it is today. 
C) The bond should currently be selling at its par value. 
D) If market interest rates remain unchanged, the bond's price one year from now will be higher than it is today. 
E) If market interest rates decline, the price of the bond will also decline.

Question 13

A salt mine you inherited will pay you $25,000 per year for 25 years,with the first payment being made today.If you think a fair return on the mine is 7.5%,how much should you ask for it if you decide to sell it?

Accepted Answer

A) $284,595 
B) $299,574 
C) $314,553 
D) $330,281 
E) $346,795 
A) $284,595 
B) $299,574 
C) $314,553 
D) $330,281 
E) $346,795

Question 14

If a bank compounds savings accounts quarterly,the effective annual rate will exceed the nominal rate.

Accepted Answer

A) True 
 B)False

Question 15

Since the market return represents the expected return on an average stock,the market return reflects a certain amount of risk.As a result,there exists a market risk premium,which is the amount over and above the risk-free rate,that is required to compensate stock investors for assuming an average amount of risk.

Accepted Answer

A) True 
 B)False

Question 16

Erickson Inc.is considering a capital budgeting project that has an expected return of 25% and a standard deviation of 30%.What is the project's coefficient of variation?

Accepted Answer

A) 1.20 
B) 1.26 
C) 1.32 
D) 1.39 
E) 1.46 
A) 1.20 
B) 1.26 
C) 1.32 
D) 1.39 
E) 1.46

Question 17

Which of the following bonds would have the greatest percentage increase in value if all interest rates fall by 1%?

Accepted Answer

A) 20-year, 10% coupon bond. 
B) 20-year, 5% coupon bond. 
C) 1-year, 10% coupon bond. 
D) 20-year, zero coupon bond. 
E) 10-year, zero coupon bond. 
A) 20-year, 10% coupon bond. 
B) 20-year, 5% coupon bond. 
C) 1-year, 10% coupon bond. 
D) 20-year, zero coupon bond. 
E) 10-year, zero coupon bond.

Question 18

Portfolio A has but one security,while Portfolio B has 100 securities.Because of diversification effects,we would expect Portfolio B to have the lower risk.However,it is possible for Portfolio A to be less risky.

Accepted Answer

A) True 
 B)False

Question 19

A "growing annuity" is a cash flow stream that grows at a constant rate for a specified number of periods.

Accepted Answer

A) True 
 B)False

Question 20

Suppose you borrowed $15,000 at a rate of 8.5% and must repay it in 5 equal installments at the end of each of the next 5 years.How much would you still owe at the end of the first year,after you have made the first payment?

Accepted Answer

A) $10,155.68 
B) $10,690.19 
C) $11,252.83 
D) $11,845.09 
E) $12,468.51 
A) $10,155.68 
B) $10,690.19 
C) $11,252.83 
D) $11,845.09 
E) $12,468.51

Exam 29: Basic Financial Tools: a Review

Which of the following statements is CORRECT,assuming positive interest rates and holding other things constant?

Billy Thornton borrowed $20,000 at a rate of 7.25%,simple interest,with interest paid at the end of each month.The bank uses a 360-day year.How much interest would Billy have to pay in a 30-day month?

You expect to receive $5,000 in 25 years.How much is it worth today if the discount rate is 5.5%?

You want to open a sushi bar 3 years from now,and you plan to save $7,000 per year,beginning immediately.You will make 3 deposits in an account that pays 5.2% interest.Under these assumptions,how much will you have 3 years from today?

It is possible for a firm to have a positive beta,even if the correlation between its returns and those of another firm is negative.

The slope of the SML is determined by the value of beta.

Stock X has a beta of 0.7 and Stock Y has a beta of 1.7.Which of the following statements must be true,according to the CAPM?

What annual payment must you receive in order to earn a 6.5% rate of return on a perpetuity that has a cost of $1,250?

Stocks A and B each have an expected return of 15%,a standard deviation of 20%,and a beta of 1.2.The returns on the two stocks have a correlation coefficient of +0.6.Your portfolio consists of 50% A and 50% B.Which of the following statements is CORRECT?

A stock just paid a dividend of D0 = $1.50.The required rate of return is rs = 10.1%,and the constant growth rate is g = 4.0%.What is the current stock price?

A 15-year bond has an annual coupon rate of 8%.The coupon rate will remain fixed until the bond matures.The bond has a yield to maturity of 6%.Which of the following statements is CORRECT?

A salt mine you inherited will pay you $25,000 per year for 25 years,with the first payment being made today.If you think a fair return on the mine is 7.5%,how much should you ask for it if you decide to sell it?

If a bank compounds savings accounts quarterly,the effective annual rate will exceed the nominal rate.

Erickson Inc.is considering a capital budgeting project that has an expected return of 25% and a standard deviation of 30%.What is the project's coefficient of variation?

Which of the following bonds would have the greatest percentage increase in value if all interest rates fall by 1%?

Portfolio A has but one security,while Portfolio B has 100 securities.Because of diversification effects,we would expect Portfolio B to have the lower risk.However,it is possible for Portfolio A to be less risky.

A "growing annuity" is a cash flow stream that grows at a constant rate for a specified number of periods.

Suppose you borrowed $15,000 at a rate of 8.5% and must repay it in 5 equal installments at the end of each of the next 5 years.How much would you still owe at the end of the first year,after you have made the first payment?

An Overview of Financial Management and the Financial Environment

Risk and Return: Part I

Risk and Return: Part Ii

Bond Valuation

Financial Options

Accounting for Financial Management

Analysis of Financial Statements

Basic Stock Valuation

Corporate Valuation and Financial Planning

Corporate Governance

Determining the Cost of Capital

Capital Budgeting: Decision Rules

Cash Flow Estimation and Risk Analysis

Real Options

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Dynamic Capital Structures and Corporate Valuation

Initial Public Offerings, investment Banking, and Financial Restructuring

Lease Financing

Hybrid Financing: Preferred Stock, Warrants, and Convertibles

Supply Chains and Working Capital Management

Providing and Obtaining Credit

Advanced Issues in Cash Management and Inventory Control

Enterprise Risk Management

Bankruptcy, reorganization, and Liquidation

Mergers and Corporate Control

Multinational Financial Management

Time Value of Money

Pension Plan Management

Financial Management in Not-For-Profit Businesses

a Values of the Areas Under the Standard Normal

Filters

A stock just paid a dividend of D₀ = $1.50.The required rate of return is r_s = 10.1%,and the constant growth rate is g = 4.0%.What is the current stock price?