Question 1

Disregarding risk, if money has time value, it is impossible for the future value of a given sum to exceed its present value.

Accepted Answer

A) True 
 B)False

Question 2

Geraldine was injured in a car accident, and the insurance company has offered her the choice of $25,000 per year for 15 years, with the first payment being made today, or a lump sum. If a fair return is 7.5%, how large must the lump sum be to leave her as well off financially as with the annuity?

Accepted Answer

A)  $225,367 
B)  $237,229 
C)  $249,090 
D)  $261,545 
E)  $274,622 
A)  $225,367 
B)  $237,229 
C)  $249,090 
D)  $261,545 
E)  $274,622

Question 3

$35.50 per share is the current price for Foster Farms' stock. The dividend is projected to increase at a constant rate of 5.50% per year. The required rate of return on the stock, rs, is 9.00%. What is the stock's expected price 3 years from today?

Accepted Answer

A)  $37.86 
B)  $38.83 
C)  $39.83 
D)  $40.85 
E)  $41.69 
A)  $37.86 
B)  $38.83 
C)  $39.83 
D)  $40.85 
E)  $41.69

Question 4

Because short-term interest rates are much more volatile than long-term rates, you would, in the real world, generally be subject to much more interest rate price risk if you purchased a 30-day bond than if you bought a 30-year bond.

Accepted Answer

A) True 
 B)False

Question 5

You borrowed $50,000 which you must repay in 10 years. You plan to make an initial deposit today, then make 9 more deposits at the beginning of each the next 9 years, but with the deposits increasing at the inflation rate. You expect to earn 5% on your funds, and you expect a 3% inflation rate. To the nearest dollar, how large must your initial deposit be to enable you to reach your $50,000 target?

Accepted Answer

A)  $3,008 
B)  $3,342 
C)  $3,676 
D)  $4,044 
E)  $4,448 
A)  $3,008 
B)  $3,342 
C)  $3,676 
D)  $4,044 
E)  $4,448

Question 6

Assume that the risk-free rate, rRF, increases but the market risk premium, (rM σ rRF), declines, with the net effect being that the overall required return on the market, rM, remains constant. Which of the following statements is CORRECT?

Accepted Answer

A)  the required return will decline for stocks that have a beta less than 1.0 but will increase for stocks that have a beta greater than 1.0. 
B)  since the overall return on the market stays constant, the required return on each individual stock will also remain constant. 
C)  the required return will increase for stocks that have a beta less than 1.0 but decline for stocks that have a beta greater than 1.0. 
D)  the required return of all stocks will fall by the amount of the decline in the market risk premium. 
E)  the required return of all stocks will increase by the amount of the increase in the risk-free rate. 
A)  the required return will decline for stocks that have a beta less than 1.0 but will increase for stocks that have a beta greater than 1.0. 
B)  since the overall return on the market stays constant, the required return on each individual stock will also remain constant. 
C)  the required return will increase for stocks that have a beta less than 1.0 but decline for stocks that have a beta greater than 1.0. 
D)  the required return of all stocks will fall by the amount of the decline in the market risk premium. 
E)  the required return of all stocks will increase by the amount of the increase in the risk-free rate.

Question 7

You plan to borrow $35,000 at a 7.5% annual interest rate. The terms require you to amortize the loan with 7 equal end-of-year payments. How much interest would you be paying in Year 2?

Accepted Answer

A)  $1,994.49 
B)  $2,099.46 
C)  $2,209.96 
D)  $2,326.27 
E)  $2,442.59 
A)  $1,994.49 
B)  $2,099.46 
C)  $2,209.96 
D)  $2,326.27 
E)  $2,442.59

Question 8

Your Green Investment Tips subscription is about to expire. You plan to subscribe to the magazine for the rest of your life, and you can renew it by paying $85 annually, beginning immediately, or you can get a lifetime subscription for $850, also payable immediately. Assuming that you can earn 6.0% on your funds and that the annual renewal rate will remain constant, how many years must you live to make the lifetime subscription the better buy?

Accepted Answer

A)  7.48 
B)  8.80 
C)  10.35 
D)  12.18 
E)  14.33 
A)  7.48 
B)  8.80 
C)  10.35 
D)  12.18 
E)  14.33

Question 9

You have funds that you want to invest in bonds, and you just noticed in the financial pages of the local newspaper that you can buy a $1,000 par value bond for $800. The coupon rate is 10% (with annual payments), and there are 10 years before the bond will mature and pay off its $1,000 par value. You should buy the bond if your required return on bonds with this risk is 12%.

Accepted Answer

A) True 
 B)False

Question 10

What's the present value of a perpetuity that pays $250 per year if the appropriate interest rate is 5%?

Accepted Answer

A)  $4,750 
B)  $5,000 
C)  $5,250 
D)  $5,513 
E)  $5,788 
A)  $4,750 
B)  $5,000 
C)  $5,250 
D)  $5,513 
E)  $5,788

Question 11

You are considering two equally risky annuities, each of which pays $15,000 per year for 20 years. Investment ORD is an ordinary (or deferred) annuity, while Investment DUE is an annuity due. Which of the following statements is CORRECT?

Accepted Answer

A)  if the going rate of interest decreases from 10% to 0%, the difference between the present value of ord and the present value of due would remain constant. 
B)  the present value of ord must exceed the present value of due, but the future value of ord may be less than the future value of due. 
C)  the present value of due exceeds the present value of ord, while the future value of due is less than the future value of ord. 
D)  the present value of ord exceeds the present value of due, and the future value of ord also exceeds the future value of due. 
E)  the present value of due exceeds the present value of ord, and the future value of due also exceeds the future value of ord. 
A)  if the going rate of interest decreases from 10% to 0%, the difference between the present value of ord and the present value of due would remain constant. 
B)  the present value of ord must exceed the present value of due, but the future value of ord may be less than the future value of due. 
C)  the present value of due exceeds the present value of ord, while the future value of due is less than the future value of ord. 
D)  the present value of ord exceeds the present value of due, and the future value of ord also exceeds the future value of due. 
E)  the present value of due exceeds the present value of ord, and the future value of due also exceeds the future value of ord.

Question 12

Martin Ortner holds a $200,000 portfolio consisting of the following stocks: $\begin{array}{lll}
Stock&Investment&Beta\
A&\$ 50,000 & 0.95\
B&50,000 & 0.80 \
C&50,000 & 1.00 \
D&50,000 & 1.20\
Total&\$ 200,000 \
\end{array}$
What is the portfolio's beta?

Accepted Answer

A)  0.938 
B)  0.988 
C)  1.037 
D)  1.089 
E)  1.143 
A)  0.938 
B)  0.988 
C)  1.037 
D)  1.089 
E)  1.143

Question 13

A portfolio's risk is measured by the weighted average of the standard deviations of the securities in the portfolio. It is this aspect of portfolios that allows investors to combine stocks and thus reduce the riskiness of their portfolios.

Accepted Answer

A) True 
 B)False

Question 14

Burke Tires just paid a dividend of D0 = $1.32. Analysts expect the company's dividend to grow by 30% this year, by 10% in Year 2, and at a constant rate of 5% in Year 3 and thereafter. The required return on this low-risk stock is 9.00%. What is the best estimate of the stock's current market value?

Accepted Answer

A)  $41.59 
B)  $42.65 
C)  $43.75 
D)  $44.87 
E)  $45.99 
A)  $41.59 
B)  $42.65 
C)  $43.75 
D)  $44.87 
E)  $45.99

Question 15

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 16

Which of the following statements is CORRECT?

Accepted Answer

A)  a portfolio that consists of 40 stocks that are not highly correlated with "the market" will probably be less risky than a portfolio of 40 stocks that are highly correlated with the market, assuming the stocks all have the same standard deviations. 
B)  a two-stock portfolio will always have a lower beta than a one-stock portfolio. 
C)  if portfolios are formed by randomly selecting stocks, a 10-stock portfolio will always have a lower beta than a one-stock portfolio. 
D)  a stock with an above-average standard deviation must also have an above-average beta. 
E)  a two-stock portfolio will always have a lower standard deviation than a one-stock portfolio. 
A)  a portfolio that consists of 40 stocks that are not highly correlated with "the market" will probably be less risky than a portfolio of 40 stocks that are highly correlated with the market, assuming the stocks all have the same standard deviations. 
B)  a two-stock portfolio will always have a lower beta than a one-stock portfolio. 
C)  if portfolios are formed by randomly selecting stocks, a 10-stock portfolio will always have a lower beta than a one-stock portfolio. 
D)  a stock with an above-average standard deviation must also have an above-average beta. 
E)  a two-stock portfolio will always have a lower standard deviation than a one-stock portfolio.

Question 17

You have purchased a U.S. Treasury bond for $3,000. No payments will be made until the bond matures 10 years from now, at which time it will be redeemed for $5,000. What interest rate will you earn on this bond?

Accepted Answer

A)  3.82% 
B)  4.25% 
C)  4.72% 
D)  5.24% 
E)  5.77% 
A)  3.82% 
B)  4.25% 
C)  4.72% 
D)  5.24% 
E)  5.77%

Question 18

The $10.00 million mutual fund Henry manages has a beta of 1.05 and a 9.50% required return. The risk-free rate is 4.20%. Henry now receives another $5.00 million, which he invests in stocks with an average beta of 0.65. What is the required rate of return on the new portfolio?(Hint: You must first find the market risk premium, then find the new portfolio beta.)

Accepted Answer

A)  8.83% 
B)  9.05% 
C)  9.27% 
D)  9.51% 
E)  9.74% 
A)  8.83% 
B)  9.05% 
C)  9.27% 
D)  9.51% 
E)  9.74%

Question 19

What's the future value of $1,200 after 5 years if the appropriate interest rate is 6%, compounded monthly?

Accepted Answer

A)  $1,537.69 
B)  $1,618.62 
C)  $1,699.55 
D)  $1,784.53 
E)  $1,873.76 
A)  $1,537.69 
B)  $1,618.62 
C)  $1,699.55 
D)  $1,784.53 
E)  $1,873.76

Question 20

For bonds, price sensitivity to a given change in interest rates is generally greater the longer before the bond matures.

Accepted Answer

A) True 
 B)False

Exam 29: Basic Financial Tools: A review

Disregarding risk, if money has time value, it is impossible for the future value of a given sum to exceed its present value.

Geraldine was injured in a car accident, and the insurance company has offered her the choice of $25,000 per year for 15 years, with the first payment being made today, or a lump sum. If a fair return is 7.5%, how large must the lump sum be to leave her as well off financially as with the annuity?

$35.50 per share is the current price for Foster Farms' stock. The dividend is projected to increase at a constant rate of 5.50% per year. The required rate of return on the stock, rs, is 9.00%. What is the stock's expected price 3 years from today?

Because short-term interest rates are much more volatile than long-term rates, you would, in the real world, generally be subject to much more interest rate price risk if you purchased a 30-day bond than if you bought a 30-year bond.

Assume that the risk-free rate, rRF, increases but the market risk premium, (rM σ rRF), declines, with the net effect being that the overall required return on the market, rM, remains constant. Which of the following statements is CORRECT?

You plan to borrow $35,000 at a 7.5% annual interest rate. The terms require you to amortize the loan with 7 equal end-of-year payments. How much interest would you be paying in Year 2?

What's the present value of a perpetuity that pays $250 per year if the appropriate interest rate is 5%?

You are considering two equally risky annuities, each of which pays $15,000 per year for 20 years. Investment ORD is an ordinary (or deferred) annuity, while Investment DUE is an annuity due. Which of the following statements is CORRECT?

Martin Ortner holds a $200,000 portfolio consisting of the following stocks: Stock Investment Beta A \ 50,000 0.95 B 50,000 0.80 C 50,000 1.00 D 50,000 1.20 Total \ 200,000 What is the portfolio's beta?

A portfolio's risk is measured by the weighted average of the standard deviations of the securities in the portfolio. It is this aspect of portfolios that allows investors to combine stocks and thus reduce the riskiness of their portfolios.

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?

Which of the following statements is CORRECT?

You have purchased a U.S. Treasury bond for $3,000. No payments will be made until the bond matures 10 years from now, at which time it will be redeemed for $5,000. What interest rate will you earn on this bond?

What's the future value of $1,200 after 5 years if the appropriate interest rate is 6%, compounded monthly?

For bonds, price sensitivity to a given change in interest rates is generally greater the longer before the bond matures.

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 Criteria

Capital Budgeting-Estimating Cash Flows and Analyzing Risk

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

Other Topics in Working Capital Management

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

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