Question 1

Your 75-year-old grandmother expects to live for another 15 years.She currently has $1,000,000 of savings,which is invested to earn a guaranteed 5% rate of return.If inflation averages 2% per year,how much can she withdraw (to the nearest dollar) at the beginning of each year and keep the withdrawals constant in real terms,i.e.,growing at the same rate as inflation and thus enabling her to maintain a constant standard of living?

Accepted Answer

A)  $65,632
B)  $72,925
C)  $81,027
D)  $89,130
E)  $98,043F) B) and D)
G) A) and B)

Question 2

Suppose United Bank offers to lend you $10,000 for one year at a nominal annual rate of 8.00%,but you must make interest payments at the end of each quarter and then pay off the $10,000 principal amount at the end of the year.What is the effective annual rate on the loan?

Accepted Answer

A)  8.24%
B)  8.45%
C)  8.66%
D)  8.88%
E)  9.10%F) A) and B)
G) A) and C)

Question 3

Assume that the risk-free rate is 5%.Which of the following statements is CORRECT?

Accepted Answer

A)  If a stock's beta doubled, its required return under the CAPM would also double.
B)  If a stock's beta doubled, its required return under the CAPM would more than double.
C)  If a stock's beta were 1.0, its required return under the CAPM would be 5%.
D)  If a stock's beta were less than 1.0, its required return under the CAPM would be less than 5%.
E)  If a stock has a negative beta, its required return under the CAPM would be less than 5%.F) A) and B)
G) C) and D)

Question 4

JG Asset Services is recommending that you invest $1,500 in a 5-year certificate of deposit (CD) that pays 3.5% interest,compounded annually.How much will you have when the CD matures?

Accepted Answer

A)  $1,781.53
B)  $1,870.61
C)  $1,964.14
D)  $2,062.34
E)  $2,165.46F) A) and E)
G) A) and D)

Question 5

Some of the cash flows shown on a time line can be in the form of annuity payments while others can be uneven amounts.

Accepted Answer

A) True 
 B)False

Question 6

Fiske Roofing Supplies' stock has a beta of 1.23,its required return is 11.75%,and the risk-free rate is 4.30%.What is the required rate of return on the market? (Hint: First find the market risk premium.)

Accepted Answer

A)  10.36%
B)  10.62%
C)  10.88%
D)  11.15%
E)  11.43%F) A) and E)
G) C) and E)

Question 7

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 8

You are in negotiations to make a 7-year loan of $25,000 to DeVille Corporation.To repay you,DeVille will pay $2,500 at the end of Year 1,$5,000 at the end of Year 2,and $7,500 at the end of Year 3,plus a fixed but currently unspecified cash flow,X,at the end of each year from Year 4 through Year 7.You are confident the payments will be made,since DeVille is essentially riskless.You regard 8% as an appropriate rate of return on a low risk but illiquid 7-year loan.What cash flow must the investment provide at the end of each of the final 4 years,that is,what is X?

Accepted Answer

A)  $4,271.67
B)  $4,496.49
C)  $4,733.15
D)  $4,969.81
E)  $5,218.30F) B) and E)
G) A) and B)

Question 9

The present value of a future sum decreases as either the discount rate or the number of periods per year increases,other things held constant.

Accepted Answer

A) True 
 B)False

Question 10

Macintosh Lumber believes the following probability distribution exists for its stock.What is the coefficient of variation on the company's stock?   Probability  Stock’s  State of  of State  Expected  the Economy  Occurring  Return  Boom 0.4525% Normal 0.5015% Recession 0.055%\begin{array} { l c c }  & 	ext { Probability } & 	ext { Stock&#x27;s } \	ext { State of } & 	ext { of State } & 	ext { Expected } \	ext { the Economy }& 	ext { Occurring } & 	ext { Return } \	ext { Boom } & 0.45 & 25 \% \	ext { Normal } & 0.50 & 15 \% \	ext { Recession }&0.05&5\%\end{array} State of  the Economy  Boom  Normal  Recession ​ Probability  of State  Occurring 0.450.500.05​ Stock’s  Expected  Return 25%15%5%​

Accepted Answer

A)  0.2839
B)  0.3069
C)  0.3299
D)  0.3547
E)  0.3813 F) A) and B)
G) A) and C)

Question 11

Your aunt wants to retire and has $375,000.She expects to live for another 25 years and to earn 7.5% on her invested funds.How much could she withdraw at the end of each of the next 25 years and end up with zero in the account?

Accepted Answer

A)  $28,843.38
B)  $30,361.46
C)  $31,959.43
D)  $33,641.50
E)  $35,323.58F) B) and E)
G) A) and B)

Question 12

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

Question 13

A 10-year bond with a 9% annual coupon has a yield to maturity of 8%.Which of the following statements is CORRECT?

Accepted Answer

A)  The bond is selling below its par value.
B)  The bond is selling at a discount.
C)  If the yield to maturity remains constant, the bond's price one year from now will be lower than its current price.
D)  The bond's current yield is greater than 9%.
E)  If the yield to maturity remains constant, the bond's price one year from now will be higher than its current price.F) A) and C)
G) A) and E)

Question 14

Assume that the risk-free rate remains constant,but the market risk premium declines.Which of the following is most likely to occur?

Accepted Answer

A)  The required return on a stock with beta > 1.0 will increase.
B)  The return on "the market" will remain constant.
C)  The return on "the market" will increase.
D)  The required return on a stock with beta 
E)  The required return on a stock with beta = 1.0 will not change.F) None of the above
G) A) and E)

Question 15

Consider the following information and then calculate the required rate of return for the Universal Investment Fund,which holds 4 stocks.The market's required rate of return is 13.25%,the risk-free rate is 7.00%,and the Fund's assets are as follows:   Stock  Investment  Beta  A $200,0001.50 B $300,000−0.50 C $500,0001.25 D $1,000,0000.75\begin{array} { c c r } 	ext { Stock } & 	ext { Investment } & 	ext { Beta } \	ext { A } & \$ 200,000 & 1.50 \	ext { B } & \$ 300,000 & - 0.50 \	ext { C } & \$ 500,000 & 1.25 \	ext { D } & \$ 1,000,000 & 0.75\end{array} Stock  A  B  C  D ​ Investment $200,000$300,000$500,000$1,000,000​ Beta 1.50−0.501.250.75​

Accepted Answer

A)  9.58%
B)  10.09%
C)  10.62%
D)  11.18%
E)  11.77% F) A) and E)
G) B) and E)

Question 16

Brodkey Shoes has a beta of 1.30,the T-bill rate is 3.00%,and the T-bond rate is 6.5%.The annual return on the stock market during the past 3 years was 15.00%,but investors expect the annual future stock market return to be 13.00%.Based on the SML,what is the firm's required return?

Accepted Answer

A)  13.51%
B)  13.86%
C)  14.21%
D)  14.58%
E)  14.95%F) D) and E)
G) B) and D)

Question 17

The Y-axis intercept of the SML indicates the required return on an individual asset whenever the realized return on an average (b = 1)stock is zero.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following statements is CORRECT?

Accepted Answer

A)  The higher the correlation between the stocks in a portfolio, the lower the risk inherent in the portfolio.
B)  It is impossible to have a situation where the market risk of a single stock is less than that of a portfolio that includes the stock.
C)  Once a portfolio has about 40 stocks, adding additional stocks will not reduce its risk by even a small amount.
D)  An investor can eliminate virtually all diversifiable risk if he or she holds a very large, well-diversified portfolio of stocks.
E)  An investor can eliminate virtually all market risk if he or she holds a very large and well-diversified portfolio of stocks.F) None of the above
G) B) and E)

Question 19

You have a portfolio P that consists of 50% Stock X and 50% Stock Y.Stock X has a beta of 0.7 and Stock Y has a beta of 1.3.The standard deviation of each stock's returns is 20%.The stocks' returns are independent of each other,i.e.,the correlation coefficient,r,between them is zero.Given this information,which of the following statements is CORRECT?

Accepted Answer

A)  The required return on Portfolio P is equal to the market risk premium (rM − rRF) .
B)  Portfolio P has a beta of 0.7.
C)  Portfolio P has a beta of 1.0 and a required return that is equal to the riskless rate, rRF.
D)  Portfolio P has the same required return as the market (rM) .
E)  Portfolio P has a standard deviation of 20%.F) B) and D)
G) B) and C)

Question 20

Stocks X and Y have the following data.Assuming the stock market is efficient and the stocks are in equilibrium,which of the following statements is CORRECT?  XY Price $25$25 Expected dividend yield 5%3% Required return 12%10%\begin{array} { l c c } & \mathrm { X } & \mathrm { Y } \	ext { Price } & \$ 25 & \$ 25 \	ext { Expected dividend yield } & 5 \% & 3 \% \	ext { Required return } & 12 \% & 10 \%\end{array} Price  Expected dividend yield  Required return ​X$255%12%​Y$253%10%​

Accepted Answer

A)  Stock X pays a higher dividend per share than Stock Y.
B)  One year from now, Stock X should have the higher price.
C)  Stock Y has a lower expected growth rate than Stock X.
D)  Stock Y has the higher expected capital gains yield.
E)  Stock Y pays a higher dividend per share than Stock X. F) B) and C)
G) D) and E)

Exam 29: Basic Financial Tools: a Review

Which of the following statements is CORRECT?

Correct Answer
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Correct Answer
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The Y-axis intercept of the SML indicates the required return on an individual asset whenever the realized return on an average (b = 1)stock is zero.

Correct Answer
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Assume that the risk-free rate remains constant,but the market risk premium declines.Which of the following is most likely to occur?

Correct Answer
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Correct Answer
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A 10-year bond with a 9% annual coupon has a yield to maturity of 8%.Which of the following statements is CORRECT?

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

Correct Answer
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Some of the cash flows shown on a time line can be in the form of annuity payments while others can be uneven amounts.

Correct Answer
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Suppose United Bank offers to lend you $10,000 for one year at a nominal annual rate of 8.00%,but you must make interest payments at the end of each quarter and then pay off the $10,000 principal amount at the end of the year.What is the effective annual rate on the loan?

Correct Answer
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Correct Answer
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Fiske Roofing Supplies' stock has a beta of 1.23,its required return is 11.75%,and the risk-free rate is 4.30%.What is the required rate of return on the market? (Hint: First find the market risk premium.)

Correct Answer
verified

Correct Answer
verified

Assume that the risk-free rate is 5%.Which of the following statements is CORRECT?

Correct Answer
verified

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.

Correct Answer
verified

Your aunt wants to retire and has $375,000.She expects to live for another 25 years and to earn 7.5% on her invested funds.How much could she withdraw at the end of each of the next 25 years and end up with zero in the account?

Correct Answer
verified

JG Asset Services is recommending that you invest $1,500 in a 5-year certificate of deposit (CD) that pays 3.5% interest,compounded annually.How much will you have when the CD matures?

Correct Answer
verified

The present value of a future sum decreases as either the discount rate or the number of periods per year increases,other things held constant.

Correct Answer
verified

Correct Answer
verified

Brodkey Shoes has a beta of 1.30,the T-bill rate is 3.00%,and the T-bond rate is 6.5%.The annual return on the stock market during the past 3 years was 15.00%,but investors expect the annual future stock market return to be 13.00%.Based on the SML,what is the firm's required return?

Correct Answer
verified

Exam 29: Basic Financial Tools: a Review

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The Y-axis intercept of the SML indicates the required return on an individual asset whenever the realized return on an average (b = 1)stock is zero.

Correct AnswerverifiedShow Answer

Assume that the risk-free rate remains constant,but the market risk premium declines.Which of the following is most likely to occur?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A 10-year bond with a 9% annual coupon has a yield to maturity of 8%.Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Some of the cash flows shown on a time line can be in the form of annuity payments while others can be uneven amounts.

Correct AnswerverifiedShow Answer

Suppose United Bank offers to lend you $10,000 for one year at a nominal annual rate of 8.00%,but you must make interest payments at the end of each quarter and then pay off the $10,000 principal amount at the end of the year.What is the effective annual rate on the loan?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Fiske Roofing Supplies' stock has a beta of 1.23,its required return is 11.75%,and the risk-free rate is 4.30%.What is the required rate of return on the market? (Hint: First find the market risk premium.)

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Assume that the risk-free rate is 5%.Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Your aunt wants to retire and has $375,000.She expects to live for another 25 years and to earn 7.5% on her invested funds.How much could she withdraw at the end of each of the next 25 years and end up with zero in the account?

Correct AnswerverifiedShow Answer

JG Asset Services is recommending that you invest $1,500 in a 5-year certificate of deposit (CD) that pays 3.5% interest,compounded annually.How much will you have when the CD matures?

Correct AnswerverifiedShow Answer

The present value of a future sum decreases as either the discount rate or the number of periods per year increases,other things held constant.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Brodkey Shoes has a beta of 1.30,the T-bill rate is 3.00%,and the T-bond rate is 6.5%.The annual return on the stock market during the past 3 years was 15.00%,but investors expect the annual future stock market return to be 13.00%.Based on the SML,what is the firm's required return?

Correct AnswerverifiedShow Answer

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Correct Answer
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