Question 1

If D0 = $2.25, g (which is constant) = 3.5%, and P0 = $50, what is the stock's expected dividend yield for the coming year?

Accepted Answer

A)  4.42% 
B)  4.66% 
C)  4.89% 
D)  5.13% 
E)  5.39%

Question 2

Assume that the risk-free rate is 6% and the market risk premium is 5%. Given this information, which of the following statements is CORRECT?

Accepted Answer

A)  if a stock has a negative beta, its required return must also be negative. 
B)  an index fund with beta = 1.0 should have a required return less than 11%. 
C)  if a stock's beta doubles, its required return must also double. 
D)  an index fund with beta = 1.0 should have a required return greater than 11%. 
E)  an index fund with beta = 1.0 should have a required return of 11%.

Question 3

Assume that you own an annuity that will pay you $15,000 per year for 12 years, with the first payment being made today. You need money today to open a new restaurant, and your uncle offers to give you $120,000 for the annuity. If you sell it, what rate of return would your uncle earn on his investment?

Accepted Answer

A)  6.85% 
B)  7.21% 
C)  7.59% 
D)  7.99% 
E)  8.41%

Question 4

Your business has just taken out a 1-year installment loan for $72,500 at a nominal rate of 11.0% but with equal end-of-month payments. What percentage of the 2nd monthly payment will go toward the repayment of principal?

Accepted Answer

A)  73.67% 
B)  77.55% 
C)  81.63% 
D)  85.93% 
E)  90.45%

Question 5

Suppose a Google.com bond will pay $4,500 ten years from now. If the going interest rate on safe 10-year bonds is 4.25%, how much is the bond worth today?

Accepted Answer

A)  $2,819.52 
B)  $2,967.92 
C)  $3,116.31 
D)  $3,272.13 
E)  $3,435.74

Question 6

If the discount (or interest) rate is positive, the present value of an expected series of payments will always exceed the future value of the same series.

Accepted Answer

A) True 
 B)False

Question 7

The YTMs of three $1,000 face value bonds that mature in 10 years and have the same level of risk are equal. Bond A has an 8% annual coupon, Bond B has a 10% annual coupon, and Bond C has a 12% annual coupon. Bond B sells at par. Assuming interest rates remain constant for the next 10 years, which of the following statements is CORRECT?

Accepted Answer

A)  since the bonds have the same ytm, they should all have the same price, and since interest rates are not expected to change, their prices should all remain at their current levels until maturity. 
B)  bond c sells at a premium (its price is greater than par), and its price is expected to increase over the next year. 
C)  bond a sells at a discount (its price is less than par), and its price is expected to increase over the next year. 
D)  over the next year, bond a's price is expected to decrease, bond b's price is expected to stay the same, and bond c's price is expected to increase. 
E)  bond a's current yield will increase each year.

Question 8

The store where you bought new home furnishings offers you two alternative payment plans. The first plan requires a $4,000 immediate up-front payment. The second plan requires you to make monthly payments of $137.41, payable at the end of each month for 3 years. What nominal annual interest rate is built into the monthly payment plan?

Accepted Answer

A)  12.31% 
B)  12.96% 
C)  13.64% 
D)  14.36% 
E)  15.08%

Question 9

Stocks A and B have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?
 $\begin{array} { l c c } 
& \mathrm { A } & \mathrm { B }  \
\text { Required return } & 1 \overline{0 \%} & 1 \overline{2} \% \
\text { Market price } & \$ 25 & \$ 40 \
\text { Expected growth } & 7 \% & 9 \%
\end{array}$

Accepted Answer

A)  these two stocks must have the same dividend yield. 
B)  these two stocks should have the same expected return. 
C)  these two stocks must have the same expected capital gains yield. 
D)  these two stocks must have the same expected year-end dividend. 
E)  these two stocks should have the same price.

Question 10

Stock A has a beta of 0.8 and Stock B has a beta of 1.2. 50% of Portfolio P is invested in Stock A and 50% is invested in Stock B. If the market risk premium (rM σ rRF) were to increase but the risk-free rate (rRF) remained constant, which of the following would occur?

Accepted Answer

A)  the required return would decrease by the same amount for both stock a and stock b. 
B)  the required return would increase for stock a but decrease for stock b. 
C)  the required return on portfolio p would remain unchanged. 
D)  the required return would increase for stock b but decrease for stock a. 
E)  the required return would increase for both stocks but the increase would be greater for stock b than for stock a.

Question 11

Kelly Enterprises' stock currently sells for $35.25 per share. The dividend is projected to increase at a constant rate of 4.75% per year. The required rate of return on the stock, rs, is 11.50%. What is the stock's expected price 5 years from now?

Accepted Answer

A)  $40.17 
B)  $41.20 
C)  $42.26 
D)  $43.34 
E)  $44.46

Question 12

McGaha Enterprises expects earnings and dividends to grow at a rate of 25% for the next 4 years, after the growth rate in earnings and dividends will fall to zero, i.e., g = 0. The company's last dividend, D0, was $1.25, its beta is 1.20, the market risk premium is 5.50%, and the risk-free rate is 3.00%. What is the current price of the common stock?

Accepted Answer

A)  $26.77 
B)  $27.89 
C)  $29.05 
D)  $30.21 
E)  $31.42

Question 13

Which of the following statements is CORRECT?

Accepted Answer

A)  an investment that has a nominal rate of 6% with semiannual payments will have an effective rate that is smaller than 6%. 
B)  the present value of a 3-year, $150 annuity due will exceed the present value of a 3-year, $150 ordinary annuity. 
C)  if a loan has a nominal annual rate of 8%, then the effective rate can never be greater than 8%. 
D)  if a loan or investment has annual payments, then the effective, periodic, and nominal rates of interest will all be different. 
E)  the proportion of the payment that goes toward interest on a fully amortized loan increases over time.

Question 14

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. By how much would you reduce the amount you owe in the first year?

Accepted Answer

A)  $2,404.91 
B)  $2,531.49 
C)  $2,658.06 
D)  $2,790.96 
E)  $2,930.51

Question 15

You are considering investing in a European bank account that pays a nominal annual rate of 18%, compounded monthly. If you invest $5,000 at the beginning of each month, how many months would it take for your account to grow to $250,000? Round fractional months up.

Accepted Answer

A)  23 
B)  27 
C)  32 
D)  38 
E)  44

Question 16

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

Question 17

Franklin Corporation is expected to pay a dividend of $1.25 per share at the end of the year (D1 = $1.25). The stock sells for $32.50 per share, and its required rate of return is 10.5%. The dividend is expected to grow at some constant rate, g, forever. What is the equilibrium expected growth rate?

Accepted Answer

A)  6.01% 
B)  6.17% 
C)  6.33% 
D)  6.49% 
E)  6.65%

Question 18

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

Question 19

The coefficient of variation, calculated as the standard deviation of expected returns divided by the expected return, is a standardized measure of the risk per unit of expected return.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following statements is CORRECT?

Accepted Answer

A)  portfolio diversification reduces the variability of returns on an individual stock. 
B)  risk refers to the chance that some unfavorable event will occur, and a probability distribution is completely described by a listing of the likelihoods of unfavorable events. 
C)  the sml relates a stock's required return to its market risk. the slope and intercept of this line cannot be controlled by the firms' managers, but managers can influence their firms' positions on the line by such actions as changing the firm's capital structure or the type of assets it employs. 
D)  a stock with a beta of σ1.0 has zero market risk if held in a 1-stock portfolio. 
E)  when diversifiable risk has been diversified away, the inherent risk that remains is market risk, which is constant for all stocks in the market.

Exam 29: Basic Financial Tools: A review

If D0 = $2.25, g (which is constant) = 3.5%, and P0 = $50, what is the stock's expected dividend yield for the coming year?

Assume that the risk-free rate is 6% and the market risk premium is 5%. Given this information, which of the following statements is CORRECT?

Your business has just taken out a 1-year installment loan for $72,500 at a nominal rate of 11.0% but with equal end-of-month payments. What percentage of the 2nd monthly payment will go toward the repayment of principal?

Suppose a Google.com bond will pay $4,500 ten years from now. If the going interest rate on safe 10-year bonds is 4.25%, how much is the bond worth today?

If the discount (or interest) rate is positive, the present value of an expected series of payments will always exceed the future value of the same series.

Stock A has a beta of 0.8 and Stock B has a beta of 1.2. 50% of Portfolio P is invested in Stock A and 50% is invested in Stock B. If the market risk premium (rM σ rRF) were to increase but the risk-free rate (rRF) remained constant, which of the following would occur?

Kelly Enterprises' stock currently sells for $35.25 per share. The dividend is projected to increase at a constant rate of 4.75% per year. The required rate of return on the stock, rs, is 11.50%. What is the stock's expected price 5 years from now?

Which of the following statements is CORRECT?

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. By how much would you reduce the amount you owe in the first year?

You are considering investing in a European bank account that pays a nominal annual rate of 18%, compounded monthly. If you invest $5,000 at the beginning of each month, how many months would it take for your account to grow to $250,000? Round fractional months up.

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?

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?

The coefficient of variation, calculated as the standard deviation of expected returns divided by the expected return, is a standardized measure of the risk per unit of expected return.

Which of the following statements is CORRECT?