Bond Valuation

1. When the market's required rate of return for a particular bond is much less than its coupon
rate, the bond is selling at:
A. a premium.
B. a discount.
C. cannot be determined without more information.
D. face value.

2. In the United States, most bonds pay interest ………… a year, while many European bonds
pay interest …………. a year.
A. once; twice
B. twice; once
C. once; once
D. twice; twice

3. The value of a bond is calculated using the present value of discounted cash flows. What is
the discount rate?
A. The discount rate is the rate of return required for an investor to purchase the bond.
B. The discount rate is the difference between the face value and the purchase price
expressed as a percentage.
C. The discount rate is the amount above the face value an investor is willing to pay for
the bond.
D. The discount rate is the interest paid to the investor.

4. When the coupon rate is below the discount rate, the bond value is _____ the face value and
is considered to be at a _____.
A. Above; discount
B. Below; discount
C. Below; premium
D. Above; premium

5. Smith Darby has issued a five-year bond with a coupon rate of 8% and a face value of
$5,000. As a personal investor, you require a rate of return of 10%. What is the value of the
bond?
A. $5,000.00
B. $5,399.37
C. $4,620.94
D. $3,050.00

6. The annual interest payment divided by the present or current price of a bond is termed as
A. Yield to Maturity
B. Current Yield
 C. Maturity yield
D. Earnings Yield

7. The price of an outstanding bond increases when the market rate

A. Never changes
B. Increases
C. Decreases
D. Changes

8. Bonds that may be exchanged for common stock at the option of the bondholders are called
A. options.
B. stock bonds.
C. convertible bonds.
D. callable bonds

9. Long-term bonds are …….... than short-term bonds.

A. subject to more uncertainty
B. less risky
C. less sensitive to interest rate changes
D. more liquid

10. As a bond approaches its maturity date, its price approaches par value.
A. False
B. True
C. Inadequate information to decide
D. It depends

11. When you purchase a municipal bond, you are:

A. diversifying your portfolio
B. buying a portion of a municipality
C. loaning money to a municipality
D. investing in an index fund

12. What is the value of zero-coupon bond with 800 face value, which matures in 7 years with a
discount rate of 14%?
A. 1000
B. 450
C. 5600
D. 320

13. What will the value of a bond with a coupon rate of 10%, and a market rate of 10% be?
A. at par (or face value)
B. at a discount
C. not enough information
 D. at a premium

14. What will happen to the market value of a bond if interest rates rise?
A. market value will increase
B. market value will decrease
C. No idea
D. Stay the same
15. Which of the following bonds have a higher coupon (all else equal)?
A. senior debt
B. A bond without a sinking fund
C. callable bond
D. debenture

16. Bond duration refers to the remaining life of a bond.

A. True
B. False
C. Maybe
D. None

17. The _____ feature permits the issuer to repurchase bonds at a stated price prior to maturity.
A. Call
B. Conversion
C. Put
D. Capitalization

18. Since a puttable bond gives its holder the right to “put the bond” at specified times or actions
by the firm, the bond’s yield is lower than that of a non-puttable bond.
A. True
B. False
C. Maybe
D. None

19. Atomoh Limited has issued a bond with par value of $1,000, a coupon rate of 9 percent that
is paid semi-annually, and that matures in 10 years. What is the value of the bond if the
required rate of return is 12 percent?
A. 985.87
B. 754.98
C. 827.95
D. 1287.66

20. Jack & Jill just issued a bond with a par value of $1,000, coupon rate of 8 percent, and a 30-
year term to maturity. If the opportunity cost is 11 percent, what is the current yield of the
bond?
 A. 10.82%
B. 11.3%
C. 8.88%
D. 7.3%

21. The La Rosalinda Company bond has a current price of $800, a maturity value of $1,000 and
matures in 5 years. If interest is paid semi-annually and the bond is priced to yield 8%, what
is the bond’s annual coupon rate?

A. 4.03%
B. 3.07%
C. 6.5%
D. 4.22%

22. The $1,000 face value Kontonkyi Company bond has a coupon of 10% (paid semi-annually),
matures in 4 years, and has current price of $1,140. What is the bond's yield to maturity?

A. 6.08%
B. 7.30%
C. 12.34%
D. 11.01%

23. The expected rate of return on a bond if bought at its current market price and held to
maturity.
A. yield to maturity
B. current yield
C. coupon yield
D. capital gains yield

24. The formal written agreement between the issuer of a bond and the bond holders is termed as
A. Bond statement
B. Bond indenture
C. Bond specifics
D. Bond information

25. If a bond sells at a high premium, then which of the following relationships hold true? (P0
represents the price of a bond and YTM is the bond's yield to maturity.)
A. P0 < par and YTM > the coupon rate.
B. P0 > par and YTM > the coupon rate.
C. P0 > par and YTM < the coupon rate.
D. P0 < par and YTM < the coupon rate.
Stock Valuation

26. What is the model called that determines the present value of a stock based on its next annual
dividend, the dividend growth rate, and the applicable discount rate? 
A. zero growth
B. dividend growth
C. capital pricing
D. earnings capitalization
E. discounted dividend

27. Which one of the following is computed by dividing next year's annual dividend by the
current stock price? 
A. yield to maturity
B. total yield
C. dividend yield
D. capital gains yield
E. growth rate

28. Which one of following is the rate at which a stock's price is expected to appreciate? 
A. current yield
B. total return
C. dividend yield
D. capital gains yield
E. coupon rate

29. Which one of the following types of stock is defined by the fact that it receives no
preferential treatment in respect to either dividends or bankruptcy proceedings? 
A. dual class
B. cumulative
C. non-cumulative
D. preferred
E. common

30. A company has two open seats, Seat A and Seat B, on its board of directors. There are 6
candidates vying for these 2 positions. There will be a single election to determine the winner of
both open seats. As the owner of 100 shares of stock, you will receive one vote per share for
each open seat. You decide to cast all 200 of your votes for a single candidate. What is this type
of voting called? 
A. democratic
B. cumulative
C. straight
D. deferred
E. proxy
31. An increase in which of the following will increase the current value of a stock according to
the dividend growth model?
I. dividend amount
II. number of future dividends, provided the current number is less than infinite
III. discount rate
IV. dividend growth rate 
A. I and II only
B. III and IV only
C. I, II, and III only
D. I, II, and IV only
E. I, II, III, and IV

32. High Country Builders currently pays an annual dividend of $1.35 and plans on increasing
that amount by 2.5 percent each year. Valley High Builders currently pays an annual dividend of
$1.20 and plans on increasing its dividend by 3 percent annually. Given this information, you
know for certain that the stock of High-Country Builders has a higher ______ than the stock of
Valley High Builders. 
A. market price
B. dividend yield
C. capital gains yield
D. total return
E. The answer cannot be determined based on the information provided.

33. The dividend growth model:

I. assumes that dividends increase at a constant rate forever.
II. can be used to compute a stock price at any point in time.
III. can be used to value zero-growth stocks.
IV. requires the growth rate to be less than the required return. 
A. I and III only
B. II and IV only
C. I, III, and IV only
D. I, II, and IV only
E. I, II, III, and IV

34.Which one of the following statements is correct concerning the two-stage dividend growth
model? 
A. G1 cannot be negative.
B. Pt = Dt/R.
C. G1 must be greater than G2.
D. G1 can be greater than R.
E. R must be less than G1 but greater than G2.
35. Which one of the following statements is correct? 
A. The capital gains yield is the annual rate of change in a stock's price.
B. Preferred stocks have constant growth dividends.
C. A constant dividend stock cannot be valued using the dividend growth model.
D. The dividend growth model can be used to compute the current value of any stock.
E. An increase in the required return will decrease the capital gains yield

36.Which one of the following represents the capital gains yield as used in the dividend growth
model? 
A. D1
B. D1/P0
C. P0
D. g
E. g/P0

37. Winston Co. has a dividend-paying stock with a total return for the year of -6.5 percent.
Which one of the following must be true? 
A. The dividend must be constant.
B. The stock has a negative capital gains yield.
C. The dividend yield must be zero.
D. The required rate of return for this stock increased over the year.
E. The firm is experiencing supernormal growth.

13..  two-stage dividend growth model evaluates the current price of a stock based on the
assumption a stock will: 
A. pay an increasing dividend for a period of time and then cease paying dividends altogether.
B. increase the dividend amount every other year.
C. pay a constant dividend for the first two quarters of each year and then increase the dividend
the last two quarters of each year.
D. grow at a fixed rate for a period of time after which it will grow at a different rate indefinitely.
E. pay increasing dividends for a fixed period of time, cease paying dividends for a period of
time, and then commence paying increasing dividends for an indefinite period of time.

14.Which one of the following rights is never directly granted to all shareholders of a publicly-
held corporation? 
A. electing the board of directors
B. receiving a distribution of company profits
C. voting either for or against a proposed merger or acquisition
D. determining the amount of the dividend to be paid per share
E. having first chance to purchase any new equity shares that may be offered
15. Which one of these statements related to preferred stock is correct? 
A. Preferred shareholders normally receive one vote per share of stock owned.
B. Preferred shareholders determine the outcome of any election that involves a proxy fight.
C. Preferred shareholders are considered to be the residual owners of a corporation.
D. Preferred stock normally has a stated liquidating value of $1,000 per share.
E. Cumulative preferred shares are more valuable than comparable non-cumulative shares

16. How much are you willing to pay for one share of Jumbo Trout stock if the company just
paid a $0.70 annual dividend, the dividends increase by 1.6 percent annually, and you require a
10 percent rate of return? 
A. $8.29
B. $8.33
C. $8.47
D. $8.53
E. $8.59

17. Free Motion Enterprises paid a $2.20 per share annual dividend last week. Dividends are
expected to increase by 3.75 percent annually. What is one share of this stock worth to you today
if your required rate of return is 15 percent? 
A. $19.06
B. $19.30
C. $19.56
D. $20.29
E. $20.59

18. Show Boat Dinner Theatres has paid annual dividends of $0.32, $0.48, and $0.60 a share
over the past three years, respectively. The company now predicts that it will maintain a constant
dividend since its business has leveled off and sales are expected to remain relatively flat. Given
the lack of future growth, you will only buy this stock if you can earn at least a 16 percent rate of
return. What is the maximum amount you are willing to pay for one share of this stock today? 
A. $3.43
B. $3.75
C. $4.43
D. $4.69
E. $4.82

19. . Roy's Welding Supplies common stock sells for $38 a share and pays an annual dividend
that increases by 3 percent annually. The market rate of return on this stock is 8.20 percent. What
is the amount of the last dividend paid? 
A. $1.80
B. $1.86
C. $1.92
D. $1.98
E. $2.10
20. Douglass Gardens pays an annual dividend that is expected to increase by 4.1 percent per
year. The stock commands a market rate of return of 12.6 percent and sells for $24.90 a share.
What is the expected amount of the next dividend? 
A. $2.03
B. $2.12
C. $3.17
D. $2.20
E. $2.28

Mergers and Acquisition

1. Last month, Keyser Design acquired all of the assets and liabilities of Tenor Machine Works.
The combined firm is known as Keyser Design. Tenor Machine Works no longer exists as a
separate entity. This acquisition is best described as a: 
A. merger.
B. consolidation.
C. tender offer.
D. spinoff.
E. divestiture.

2. The Cat Box acquired The Dog House. As part of this transaction, both firms ceased to exist in
their prior form and combined to create an all-new entity, Animal World. Which one of the
following terms best describes this transaction? 
A. divestiture
B. consolidation
C. tender offer
D. spinoff
E. conglomeration

3. Diet Soda and High Caffeine are two firms that compete in the soft drink market. These two
competitors have decided to invest $10 million to form a new company, Fruit Tea, which will
manufacture flavored teas. This new firm is defined as a: 
A. consolidation.
B. strategic alliance.
C. joint venture.
D. merged alliance.
E. takeover project.
9. Alliance Chemicals recently acquired Swenson Industries in a transaction that produced a
NPV of $1.3 million. This NPV is referred to as: 
A. the agency effect.
B. the consolidating value.
C. diversification.
D. the consolidation effect.
E. synergy.

11. Which one of the following generally has a flip-in provision that significantly increases the
cost to a shareholder who is attempting to gain control over a firm? 
A. golden parachute
B. standstill agreement
C. greenmail
D. poison pill
E. white knight

23. An auto maker recently acquired a windshield manufacturer. Which type of an acquisition
was this? 
A. horizontal
B. longitudinal
C. conglomerate
D. vertical
E. indirect

24. If General Electric, a highly diversified company, were to acquire Ocean Freight Limited, the
acquisition would be classified as a _____ acquisition. 
A. horizontal
B. longitudinal
C. conglomerate
D. vertical
E. integrated

25. If Paul's Hardware were to acquire Suburban Hardware, the acquisition would be classified
as a _____ acquisition. 
A. horizontal
B. longitudinal
C. conglomerate
D. vertical
E. integrated
27. Firms A and B formally agree to each put up $25 million to create firm C. Firm C will
perform environmental testing on the products produced by both Firm A and Firm B. Which one
of the following terms describes Firm C? 
A. joint venture
B. going-private transaction
C. conglomerate
D. subsidiary
E. leveraged buyout

35. The incremental cash flows of a merger can relate to changes in which of the following?
I. revenue
II. capital requirements
III. operating costs
IV. income taxes 
A. I and II only
B. II, III, and IV only
C. I, III, and IV only
D. I, II, and III only
E. I, II, III, and IV

76. Sue's Bakery is planning on merging with Ted's Deli. Sue's will pay Ted's shareholders the
current value of their stock in shares of Sue's Bakery. Sue's currently has 4,500 shares of stock
outstanding at a market price of $19 a share. Ted's has 2,100 shares outstanding at a price of $20
a share. What is the value of the merged firm? 
A. $106,500
B. $107,800
C. $125,400
D. $127,500
E. $131,600

Cost of Capital
1. A group of individuals got together and purchased all of the outstanding shares of common
stock of DL Smith, Inc. What is the return that these individuals require on this investment
called? 
A. dividend yield
B. cost of equity
C. capital gains yield
D. cost of capital
E. income return

2. Textile Mills borrows money at a rate of 13.5 percent. This interest rate is referred to as the: 
A. compound rate.
B. current yield.
C. cost of debt.
D. capital gains yield.
E. cost of capital.

3. The average of a firm's cost of equity and aftertax cost of debt that is weighted based on the
firm's capital structure is called the: 
A. reward to risk ratio.
B. weighted capital gains rate.
C. structured cost of capital.
D. subjective cost of capital.
E. weighted average cost of capital.
6. The weighted average cost of capital for a wholesaler: 
A. is equivalent to the aftertax cost of the firm's liabilities.
B. should be used as the required return when analyzing a potential acquisition of a retail outlet.
C. is the return investors require on the total assets of the firm.
D. remains constant when the debt-equity ratio changes.
E. is unaffected by changes in corporate tax rates.

7. Which one of the following is the primary determinant of a firm's cost of capital? 
A. debt-equity ratio
B. applicable tax rate
C. cost of equity
D. cost of debt
E. use of the funds

18. The cost of preferred stock is computed the same as the: 

A. pre-tax cost of debt.
B. return on an annuity.
C. aftertax cost of debt.
D. return on a perpetuity.
E. cost of an irregular growth common stock.

19. The cost of preferred stock: 

A. is equal to the dividend yield.
B. is equal to the yield to maturity.
C. is highly dependent on the dividend growth rate.
D. is independent of the stock's price.
E. decreases when tax rates increase.

39. Flotation costs for a levered firm should: 

A. be ignored when analyzing a project because they are not an actual project cost.
B. be spread over the life of a project thereby reducing the cash flows for each year of the
project.
C. only be considered when two projects are mutually exclusive.
D. be weighted and included in the initial cash flow.
E. be totally ignored when internal equity funding is utilized.
40. Chelsea Fashions is expected to pay an annual dividend of $0.80 a share next year. The
market price of the stock is $22.40 and the growth rate is 5 percent. What is the firm's cost of
equity? 
A. 7.58 percent
B. 7.91 percent
C. 8.24 percent
D. 8.57 percent
E. 9.00 percent

41. The Shoe Outlet has paid annual dividends of $0.65, $0.70, $0.72, and $0.75 per share over
the last four years, respectively. The stock is currently selling for $26 a share. What is this firm's
cost of equity? 
A. 7.56 percent
B. 7.93 percent
C. 10.38 percent
D. 10.53 percent
E. 11.79 percent

44. Highway Express has paid annual dividends of $1.16, $1.20, $1.25, $1.10, and $0.95 over the
past five years respectively. What is the average dividend growth rate? 
A. -4.51 percent
B. -3.60 percent
C. 2.28 percent
D. 2.47 percent
E. 4.39 percent

45. Southern Home Cookin' just paid its annual dividend of $0.65 a share. The stock has a
market price of $13 and a beta of 1.12. The return on the U.S. Treasury bill is 2.5 percent and the
market risk premium is 6.8 percent. What is the cost of equity? 
A. 9.98 percent
B. 10.04 percent
C. 10.12 percent
D. 10.37 percent
E. 10.45 percent

Raising capital
1. Jones & Co. is funded by a group of individual investors for the sole purpose of providing
funding for individuals who are trying to convert their new ideas into viable products. What is
this type of funding called? 
A. green shoe funding
B. tombstone underwriting
C. venture capital
D. red herring funding
E. life cycle capital

9. Soup Galore is a partnership that was formed three years ago for the purpose of creating,
producing, and distributing healthy soups in a dried form. The firm has been extremely
successful thus far and has decided to incorporate and offer shares of stock to the general public.
What is this type of an equity offering called? 
A. venture capital offering
B. shelf offering
C. private placement
D. seasoned equity offering
E. initial public offering

11. Executive Tours has decided to take its firm public and has hired an investment firm to
handle this offering. The investment firm is serving as a(n): 
A. aftermarket specialist.
B. venture capitalist.
C. underwriter.
D. seasoned writer.
E. primary investor.

25. A group of five private investors recently loaned $6 million to Henderson Hardware for ten
years at 9 percent interest. This loan is best described as a: 
A. private placement.
B. debt SEO.
C. notes payable.
D. debt IPO.
E. term loan.

Dividend policy
6. Which one of the following dates is used to determine the names of shareholders who will
receive a dividend payment? 
A. ex-rights date
B. ex-dividend date
C. date of record
D. date of payment
E. declaration date

7. Dividend payments are mailed on which one of the following dates? 

A. ex-rights date
B. ex-dividend date
C. date of record
D. date of payment
E. declaration date

10. The common stock of Pierson Enterprises has historically had a high dividend yield and is
expected to continue to do so. As a result, the majority of its shareholders are individuals and
entities that are seeking a regular source of cash income. Most of these shareholders pay either
no taxes or a relatively low amount of taxes. The fact that most of these shareholders have
similar characteristics is referred to by which one of the following terms? 
A. information content effect
B. clientele effect
C. efficient markets hypothesis
D. distribution effect
E. market reaction effect

11. HJ Corporation has excess cash and has opted to buy some of its shares of outstanding
common stock. What is this process of buying called? 
A. stock dividend
B. stock split
C. stock repurchase
D. stock recap
E. stock repeal

12. Which one of the following involves a payment in shares by a stock issuer that increases the
number of shares a shareholder owns but also decreases the value per share? 
A. cash dividend
B. stock dividend
C. stock repurchase
D. stock split
E. reverse stock split
13. Which one of the following does not affect the total equity of a firm but does increase the
number of shares outstanding? 
A. special dividend
B. stock split
C. share repurchase
D. rights offer
E. liquidating dividend

21. All else equal, the market value of a stock will tend to decrease by roughly the aftertax value
of the dividend on the: 
A. dividend declaration date.
B. ex-dividend date.
C. date of record.
D. date of payment.
E. day after the date of payment.

Capital structure
2. Which one of the following states that the value of a firm is unrelated to the firm's capital
structure? 
A. Capital Asset Pricing Model
B. M&M Proposition I
C. M&M Proposition II
D. Law of One Price
E. Efficient Markets Hypothesis

3. Which one of the following states that a firm's cost of equity capital is directly and
proportionally related to the firm's capital structure? 
A. Capital Asset Pricing Model
B. M&M Proposition I
C. M&M Proposition II
D. Law of One Price
E. Efficient Markets Hypothesis

4. Which one of the following is the equity risk that is most related to the daily operations of a
firm? 
A. market risk
B. systematic risk
C. extrinsic risk
D. business risk
E. financial risk

5. Which one of the following is the equity risk related to a firm's capital structure policy? 
A. market
B. systematic
C. extrinsic
D. business
E. financial

7. The unlevered cost of capital refers to the cost of capital for a(n): 
A. private entity.
B. all-equity firm.
C. governmental entity.
D. private individual.
E. corporate shareholder.

8. The explicit costs, such as legal and administrative expenses, associated with corporate default
are classified as _____ costs. 
A. flotation
B. issue
C. direct bankruptcy
D. indirect bankruptcy
E. unlevered
9. The costs incurred by a business in an effort to avoid bankruptcy are classified as _____ costs. 
A. flotation
B. direct bankruptcy
C. indirect bankruptcy
D. financial solvency
E. capital structure

11. The proposition that a firm borrows up to the point where the marginal benefit of the interest
tax shield derived from increased debt is just equal to the marginal expense of the resulting
increase in financial distress costs is called: 
A. the static theory of capital structure.
B. M&M Proposition I.
C. M&M Proposition II.
D. the capital asset pricing model.
E. the open markets theorem.
12. Which one of the following is the legal proceeding under which an insolvent firm can be
reorganized? 
A. restructure process
B. bankruptcy
C. forced merger
D. legal takeover
E. rights offer

13. A business firm ceases to exist as a going concern as a result of which one of the following? 
A. divestiture
B. share repurchase
C. liquidation
D. reorganization
E. capital restructuring

16. A firm should select the capital structure that: 

A. produces the highest cost of capital.
B. maximizes the value of the firm.
C. minimizes taxes.
D. is fully unlevered.
E. equates the value of debt with the value of equity.

17. The value of a firm is maximized when the: 

A. cost of equity is maximized.
B. tax rate is zero.
C. levered cost of capital is maximized.
D. weighted average cost of capital is minimized.
E. debt-equity ratio is minimized.

25. The concept of homemade leverage is most associated with: 

A. M&M Proposition I with no tax.
B. M&M Proposition II with no tax.
C. M&M Proposition I with tax.
D. M&M Proposition II with tax.
E. static theory proposition.

27. M&M Proposition II is the proposition that: 

A. the capital structure of a firm has no effect on the firm's value.
B. the cost of equity depends on the return on debt, the debt-equity ratio, and the tax rate.
C. a firm's cost of equity is a linear function with a slope equal to (RA - RD).
D. the cost of equity is equivalent to the required rate of return on a firm's assets.
E. the size of the pie does not depend on how the pie is sliced.
32. M&M Proposition II with taxes: 
A. has the same general implications as M&M Proposition II without taxes.
B. states that a firm's capital structure is irrelevant.
C. supports the argument that business risk is determined by the capital structure decision.
D. supports the argument that the cost of equity decreases as the debt-equity ratio increases.
E. concludes that the capital structure decision is irrelevant to the value of a firm.

37. Bankruptcy: 
A. creates value for a firm.
B. transfers value from shareholders to bondholders.
C. technically occurs when total equity equals total debt.
D. costs are limited to legal and administrative fees.
E. is an inexpensive means of reorganizing a firm.

41. The capital structure that maximizes the value of a firm also: 

A. minimizes financial distress costs.
B. minimizes the cost of capital.
C. maximizes the present value of the tax shield on debt.
D. maximizes the value of the debt.
E. maximizes the value of the unlevered firm.

44. The basic lesson of M&M Theory is that the value of a firm is dependent upon: 
A. the firm's capital structure.
B. the total cash flow of the firm.
C. minimizing the marketed claims.
D. the amount of marketed claims to that firm.
E. size of the stockholders' claims.

45. Which form of financing do firms prefer to use first according to the pecking-order theory? 
A. regular debt
B. convertible debt
C. common stock
D. preferred stock
E. internal funds

15. The expected risk premium on a stock is equal to the expected return on the stock minus the: 
A. expected market rate of return.
B. risk-free rate.
C. inflation rate.
D. standard deviation.
E. variance.
16. Standard deviation measures which type of risk? 
A. total
B. nondiversifiable
C. unsystematic
D. systematic
E. economic

28. Unsystematic risk: 
A. can be effectively eliminated by portfolio diversification.
B. is compensated for by the risk premium.
C. is measured by beta.
D. is measured by standard deviation.
E. is related to the overall economy.

33. Which one of the following risks is irrelevant to a well-diversified investor? 

A. systematic risk
B. unsystematic risk
C. market risk
D. nondiversifiable risk
E. systematic portion of a surprise
41. Systematic risk is measured by: 
A. the mean.
B. beta.
C. the geometric average.
D. the standard deviation.
E. the arithmetic average.

42. Which one of the following is most directly affected by the level of systematic risk in a
security? 
A. variance of the returns
B. standard deviation of the returns
C. expected rate of return
D. risk-free rate
E. market risk premium

44. The systematic risk of the market is measured by: 

A. a beta of 1.0.
B. a beta of 0.0.
C. a standard deviation of 1.0.
D. a standard deviation of 0.0.
E. a variance of 1.0.

46. Total risk is measured by _____ and systematic risk is measured by _____. 

A. beta; alpha
B. beta; standard deviation
C. alpha; beta
D. standard deviation; beta
E. standard deviation; variance

47. The intercept point of the security market line is the rate of return which corresponds to: 
A. the risk-free rate.
B. the market rate.
C. a return of zero.
D. a return of 1.0 percent.
E. the market risk premium.

49. The market rate of return is 11 percent and the risk-free rate of return is 3 percent. Lexant
stock has 3 percent less systematic risk than the market and has an actual return of 12 percent.
This stock: 
A. is underpriced.
B. is correctly priced.
C. will plot below the security market line.
D. will plot on the security market line.
E. will plot to the right of the overall market on a security market line graph.
53. The excess return earned by an asset that has a beta of 1.34 over that earned by a risk-free
asset is referred to as the: 
A. market risk premium.
B. risk premium.
C. systematic return.
D. total return.
E. real rate of return.

54. The _____ of a security divided by the beta of that security is equal to the slope of the
security market line if the security is priced fairly. 
A. real return
B. actual return
C. nominal return
D. risk premium
E. expected return

64. If the economy is normal, Charleston Freight stock is expected to return 15.7 percent. If the
economy falls into a recession, the stock's return is projected at a negative 11.6 percent. The
probability of a normal economy is 80 percent while the probability of a recession is 20 percent.
What is the variance of the returns on this stock? 
A. 0.010346
B. 0.011925
C. 0.013420
D. 0.013927
E. 0.014315

66. The returns on the common stock of New Image Products are quite cyclical. In a boom
economy, the stock is expected to return 32 percent in comparison to 14 percent in a normal
economy and a negative 28 percent in a recessionary period. The probability of a recession is 25
percent while the probability of a boom is 10 percent. What is the standard deviation of the
returns on this stock? 
A. 19.94 percent
B. 21.56 percent
C. 25.83 percent
D. 32.08 percent
E. 39.77 percent

Capital budgeting

2. Which one of the following methods of project analysis is defined as computing the value of a
project based upon the present value of the project's anticipated cash flows? 
A. constant dividend growth model
B. discounted cash flow valuation
C. average accounting return
D. expected earnings model
3. The length of time a firm must wait to recoup the money it has invested in a project is called
the: 
A. internal return period.
B. payback period.
C. profitability period.
D. discounted cash period.
E. valuation period.

4. The length of time a firm must wait to recoup, in present value terms, the money it has in
invested in a project is referred to as the: 
A. net present value period.
B. internal return period.
C. payback period.
D. discounted profitability period.
E. discounted payback period.

5. A project's average net income divided by its average book value is referred to as the project's
average: 
A. net present value.
B. internal rate of return.
C. accounting return.
D. profitability index.
E. payback period.

10. The present value of an investment's future cash flows divided by the initial cost of the
investment is called the: 
A. net present value.
B. internal rate of return.
C. average accounting return.
D. profitability index.
E. profile period.

9. If a firm accepts Project A it will not be feasible to also accept Project B because both projects
would require the simultaneous and exclusive use of the same piece of machinery. These projects
are considered to be: 
A. independent.
B. interdependent.
C. mutually exclusive.
D. economically scaled.
E. operationally distinct.

12. Which one of the following will decrease the net present value of a project? 
A. increasing the value of each of the project's discounted cash inflows
B. moving each of the cash inflows back to a later time period
C. decreasing the required discount rate
D. increasing the project's initial cost at time zero

13. Which one of the following methods determines the amount of the change a proposed project
will have on the value of a firm? 
A. net present value
B. discounted payback
C. internal rate of return
D. profitability index

57. What is the net present value of a project with the following cash flows if the required rate of
return is 12 percent?

    
A. -$1,574.41
B. -$1,208.19
C. -$842.12
D. $729.09
E. $1,311.16

59. A project will produce cash inflows of $3,200 a year for 4 years with a final cash inflow of
$5,700 in year 5. The project's initial cost is $9,500. What is the net present value of this project
if the required rate of return is 16 percent? 
A. -$311.02
B. $2,168.02
C. $4,650.11
D. $9,188.98
E. $21,168.02
60. You are considering the following two mutually exclusive projects. The required rate of
return is 14.6 percent for project A and 13.8 percent for project B. Which project should you
accept and why?

    
A. project A; because it has the higher required rate of return
B. project A; because its NPV is about $4,900 more than the NPV of project B
C. project B; because it has the largest total cash inflow
D. project B; because it has the largest cash inflow in year one
E. project B; because it has the lower required return

62. Day Interiors is considering a project with the following cash flows. What is the IRR of this
project?

    

75. You are considering a project with an initial cost of $7,800. What is the payback period for
this project if the cash inflows are $1,100, $1,640, $3,800, and $4,500 a year over the next four
years, respectively? 
A. 3.21 years
B. 3.28 years
C. 3.36 years
D. 4.21 years
E. 4.29 years

76. A project has an initial cost of $6,500. The cash inflows are $900, $2,200, $3,600, and
$4,100 over the next four years, respectively. What is the payback period? 
A. 1.73 years
B. 2.51 years
C. 2.94 years
D. 3.51 years
E. 3.94 years
77. Alicia is considering adding toys to her gift shop. She estimates that the cost of inventory
will be $7,500. The remodeling expenses and shelving costs are estimated at $1,500. Toy sales
are expected to produce net cash inflows of $1,800, $2,700, $3,200, and $3,400 over the next
four years, respectively. Should Alicia add toys to her store if she assigns a three-year payback
period to this project? Why or why not? 
A. No; The payback period is 2.93 years.
B. No; The payback period is 3.38 years.
C. Yes; The payback period is 2.93 years.
D. Yes; The payback period is 3.01 years.
E. Yes; The payback period is 3.38 years.

78. A project has an initial cost of $18,400 and produces cash inflows of $7,200, $8,900, and
$7,500 over three years, respectively. What is the discounted payback period if the required rate
of return is 16 percent? 
A. 2.31 years
B. 2.45 years
C. 2.55 years
D. 2.62 years
E. never

82. The Green Fiddle is considering a project that will produce sales of $87,000 a year for the
next 4 years. The profit margin is estimated at 6 percent. The project will cost $90,000 and will
be depreciated straight-line to a book value of zero over the life of the project. The firm has a
required accounting return of 11 percent. This project should be _____ because the AAR is
_____ percent. 
A. rejected; 10.03
B. rejected; 10.25
C. rejected; 11.60
D. accepted; 10.25
E. accepted; 11.60

83. A project has an initial cost of $35,000 and a 3-year life. The company uses straight-line
depreciation to a book value of zero over the life of the project. The projected net income from
the project is $1,200, $2,300, and $1,800 a year for the next 3 years, respectively. What is the
average accounting return? 
A. 8.72 percent
B. 10.10 percent
C. 11.26 percent
D. 14.69 percent
E. 15.14 percent

86. Colin is analyzing a project and has gathered the following data. Based on this data, what is
the average accounting rate of return? The project's assets will be depreciated using straight-line
depreciation to a zero book value over the life of the project.
    
A. 6.94 percent
B. 13.88 percent
C. 15.66 percent
D. 27.75 percent
E. 31.31 percent

104. An investment project provides cash flows of $1,190 per year for 10 years. If the initial cost
is $8,000, what is the payback period? 
A. 3.36 years
B. 5.28 years
C. 6.72 years
D. 8.13 years