Question 1

Wildwoods, Inc. earned $1.50 per share five years ago. Its earnings this year were $3.20. What was the growth rate in earnings per share (EPS) over the 5-year period?

Accepted Answer

A)  15.54% 
B)  16.36% 
C)  17.18% 
D)  18.04% 
E)  18.94%

Question 2

Any change in its beta is likely to affect the required rate of return on a stock, which implies that a change in beta will likely have an impact on the stock's price, other things held constant.

Accepted Answer

A) True 
 B)False

Question 3

If an investor buys enough stocks, he or she can, through diversification, eliminate all of the market risk inherent in owning stocks, but as a general rule it will not be possible to eliminate all diversifiable risk.

Accepted Answer

A) True 
 B)False

Question 4

Which of the following statements is CORRECT?

Accepted Answer

A)  if the risk-free rate rises, then the market risk premium must also rise. 
B)  if a company's beta is halved, then its required return will also be halved. 
C)  if a company's beta doubles, then its required return will also double. 
D)  the slope of the security market line is equal to the market risk premium, (rm σ rrf). 
E)  beta is measured by the slope of the security market line.

Question 5

DHF Company has a beta of 1.5 and is currently in equilibrium. The required rate of return on the stock is 12.00% versus a required return on an average stock of 10.00%. Now the required return on an average stock increases by 30.0% (not percentage points). Neither betas nor the risk-free rate change. What would DHF's new required return be?

Accepted Answer

A)  14.89% 
B)  15.68% 
C)  16.50% 
D)  17.33% 
E)  18.19%

Question 6

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 7

The payment made each period on an amortized loan is constant, and it consists of some interest and some principal. The closer we are to the end of the loan's life, the greater the percentage of the payment that will be a repayment of principal.

Accepted Answer

A) True 
 B)False

Question 8

Portfolio AB was created by investing in a combination of Stocks A and B. Stock A has a beta of 1.2 and a standard deviation of 25%. Stock B has a beta of 1.4 and a standard deviation of 20%. Portfolio AB has a beta of 1.25 and a standard deviation of 18%. Which of the following statements is CORRECT?

Accepted Answer

A)  stock a has more market risk than stock b but less stand-alone risk. 
B)  portfolio ab has more money invested in stock a than in stock b. 
C)  portfolio ab has the same amount of money invested in each of the two stocks. 
D)  portfolio ab has more money invested in stock b than in stock a. 
E)  stock a has more market risk than portfolio ab.

Question 9

The market value of any real or financial asset, including stocks, bonds, or art work purchased in hope of selling it at a profit, may be estimated by determining future cash flows and then discounting them back to the present.

Accepted Answer

A) True 
 B)False

Question 10

If you plotted the returns of a company against those of the market and found that the slope of your line was negative, the CAPM would indicate that the required rate of return on the stock should be less than the risk-free rate for a well-diversified investor, assuming that the observed relationship is expected to continue in the future.

Accepted Answer

A) True 
 B)False

Question 11

A $250,000 loan is to be amortized over 8 years, with annual end-of-year payments. Which of these statements is CORRECT?

Accepted Answer

A)  the proportion of interest versus principal repayment would be the same for each of the 8 payments. 
B)  the annual payments would be larger if the interest rate were lower. 
C)  if the loan were amortized over 10 years rather than 8 years, and if the interest rate were the same in either case, the first payment would include more dollars of interest under the 8-year amortization plan. 
D)  the proportion of each payment that represents interest as opposed to repayment of principal would be lower if the interest rate were lower. 
E)  the last payment would have a higher proportion of interest than the first payment.

Question 12

Your older brother turned 35 today, and he is planning to save $7,000 per year for retirement, with the first deposit to be made one year from today. He will invest in a mutual fund that's expected to provide a return of 7.5% per year. He plans to retire 30 years from today, when he turns 65, and he expects to live for 25 years after retirement, to age 90. Under these assumptions, how much can he spend each year after he retires?His first withdrawal will be made at the end of his first retirement year.

Accepted Answer

A)  $58,601 
B)  $61,686 
C)  $64,932 
D)  $68,179 
E)  $71,588

Question 13

Suppose Randy Jones plans to invest $1,000. He can earn an effective annual rate of 5% on Security A, while Security B has an effective annual rate of 12%. After 11 years, the compounded value of Security B should be somewhat less than twice the compounded value of Security A. (Ignore risk, and assume that compounding occurs annually.)

Accepted Answer

A) True 
 B)False

Question 14

Stuart Company's manager believes that economic conditions during the next year will be strong, normal, or weak, and she thinks that the firm's returns will have the probability distribution shown below. What's the standard deviation of the estimated returns? (Hint: Use the formula for the standard deviation of a population, not a sample.)
 $\text { Economic }$
$\begin{array}{lrr}
Conditions&Prob.&Return\
\text { Strong } & 30 \% & 32.0 \% \
\text { Normal } & 40 \% & 10.0 \% \
\text { Weak } & 30 \% & -160 \%
\end{array}$

Accepted Answer

A)  17.69% 
B)  18.62% 
C)  19.55% 
D)  20.52% 
E)  21.55%

Question 15

An 8-year Treasury bond has a 10% coupon, and a 10-year Treasury bond has an 8% coupon. Both bonds have the same yield to maturity. If the yield to maturity of both bonds increases by the same amount, which of the following statements would be CORRECT?

Accepted Answer

A)  both bonds would decline in price, but the 10-year bond would have the greater percentage decline in price. 
B)  the prices of both bonds would increase by the same amount. 
C)  one bond's price would increase, while the other bond's price would decrease. 
D)  the prices of the two bonds would remain constant. 
E)  the prices of both bonds will decrease by the same amount.

Question 16

Partners Bank offers to lend you $50,000 at a nominal rate of 5.0%, simple interest, with interest paid quarterly. An offer to lend you the $50,000 also comes from Community Bank, but it will charge 6.0%, simple interest, with interest paid at the end of the year. What's the difference in the effective annual rates charged by the two banks?

Accepted Answer

A)  1.56% 
B)  1.30% 
C)  1.09% 
D)  0.91% 
E)  0.72%

Question 17

Recession, inflation, and high interest rates are economic events that are best characterized as being

Accepted Answer

A)  company-specific risk factors that can be diversified away. 
B)  among the factors that are responsible for market risk. 
C)  risks that are beyond the control of investors and thus should not be considered by security analysts or portfolio managers. 
D)  irrelevant except to governmental authorities like the federal reserve. 
E)  systematic risk factors that can be diversified away.

Question 18

A stock's beta is more relevant as a measure of risk to an investor who holds only one stock than to an investor who holds a well-diversified portfolio.

Accepted Answer

A) True 
 B)False

Question 19

Hirshfeld Corporation's stock has a required rate of return of 10.25%, and it sells for $57.50 per share. The dividend is expected to grow at a constant rate of 6.00% per year. What is the expected year-end dividend, D1?

Accepted Answer

A)  $2.20 
B)  $2.44 
C)  $2.69 
D)  $2.96 
E)  $3.25

Question 20

Stocks A and B have the same price and are in equilibrium, but Stock A has the higher required rate of return. Which of the following statements is CORRECT?

Accepted Answer

A)  stock b must have a higher dividend yield than stock a. 
B)  stock a must have a higher dividend yield than stock b. 
C)  if stock a has a higher dividend yield than stock b, its expected capital gains yield must be lower than stock b's. 
D)  stock a must have both a higher dividend yield and a higher capital gains yield than stock b. 
E)  if stock a has a lower dividend yield than stock b, its expected capital gains yield must be higher than stock b's.

Exam 29: Basic Financial Tools: A review

Wildwoods, Inc. earned $1.50 per share five years ago. Its earnings this year were $3.20. What was the growth rate in earnings per share (EPS) over the 5-year period?

Any change in its beta is likely to affect the required rate of return on a stock, which implies that a change in beta will likely have an impact on the stock's price, other things held constant.

If an investor buys enough stocks, he or she can, through diversification, eliminate all of the market risk inherent in owning stocks, but as a general rule it will not be possible to eliminate all diversifiable risk.

Which of the following statements is CORRECT?

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

The payment made each period on an amortized loan is constant, and it consists of some interest and some principal. The closer we are to the end of the loan's life, the greater the percentage of the payment that will be a repayment of principal.

The market value of any real or financial asset, including stocks, bonds, or art work purchased in hope of selling it at a profit, may be estimated by determining future cash flows and then discounting them back to the present.

A $250,000 loan is to be amortized over 8 years, with annual end-of-year payments. Which of these statements is CORRECT?

An 8-year Treasury bond has a 10% coupon, and a 10-year Treasury bond has an 8% coupon. Both bonds have the same yield to maturity. If the yield to maturity of both bonds increases by the same amount, which of the following statements would be CORRECT?

Recession, inflation, and high interest rates are economic events that are best characterized as being

A stock's beta is more relevant as a measure of risk to an investor who holds only one stock than to an investor who holds a well-diversified portfolio.

Hirshfeld Corporation's stock has a required rate of return of 10.25%, and it sells for $57.50 per share. The dividend is expected to grow at a constant rate of 6.00% per year. What is the expected year-end dividend, D₁?

Stocks A and B have the same price and are in equilibrium, but Stock A has the higher required rate of return. Which of the following statements is CORRECT?