Question 1

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?
  AB Price $25$25 Expected growth (constant)  10%5% Required return 15%15%\begin{array}{llr}& \mathrm { A } & \mathrm { B }  \	ext { Price } & \$ 25 & \$ 25 \	ext { Expected growth (constant)  } & 10 \% & 5 \% \	ext { Required return } & 15 \% & 15 \%\end{array} Price  Expected growth (constant)   Required return ​A$2510%15%​B$255%15%​

Accepted Answer

A)   stock a has a higher dividend yield than stock b.
B)   currently the two stocks have the same price, but over time stock b's price will pass that of a.
C)   since stock a's growth rate is twice that of stock b, stock a's future dividends will always be twice as high as stock b's.
D)   the two stocks should not sell at the same price. if their prices are equal, then a disequilibrium must exist.
E)   stock a's expected dividend at t = 1 is only half that of stock b. F) A) and E)
G) None of the above

Question 2

The prices of high-coupon bonds tend to be less sensitive to a given change in interest rates than low-coupon bonds, other things held constant.

Accepted Answer

A) True 
 B)False

Question 3

You were left $100,000 in a trust fund set up by your grandfather. The fund pays 6.5% interest. You must spend the money on your college education, and you must withdraw the money in 4 equal installments, beginning immediately. How much could you withdraw today and at the beginning of each of the next 3 years and end up with zero in the account?

Accepted Answer

A)   $24,736
B)   $26,038
C)   $27,409
D)   $28,779
E)   $30,218F) A) and D)
G) A) and C)

Question 4

If the returns of two firms are negatively correlated, then one of them must have a negative beta.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following statements is CORRECT, assuming positive interest rates and holding other things constant?

Accepted Answer

A)   banks a and b offer the same nominal annual rate of interest, but a pays interest quarterly and b pays semiannually. deposits in bank b will provide the higher future value if you leave your funds on deposit.
B)   the present value of a 5-year, $250 annuity due will be lower than the pv of a similar ordinary annuity.
C)   a 30-year, $150,000 amortized mortgage will have larger monthly payments than an otherwise similar 20-year mortgage.
D)   a bank loan's nominal interest rate will always be equal to or less than its effective annual rate.
E)   if an investment pays 10% interest, compounded annually, its effective annual rate will be less than 10%.F) B) and D)
G) B) and C)

Question 6

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) A) and E)
G) B) and E)

Question 7

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) B) and D)
G) B) and E)

Question 8

If its yield to maturity declined by 1%, which of the following bonds would have the largest percentage increase in value?

Accepted Answer

A)   a 1-year bond with an 8% coupon.
B)   a 10-year bond with an 8% coupon.
C)   a 10-year bond with a 12% coupon.
D)   a 10-year zero coupon bond.
E)   a 1-year zero coupon bond.F) B) and C)
G) A) and B)

Question 9

Portfolio P has equal amounts invested in each of the three stocks, A, B, and C. Stock A has a beta of 0.8, Stock B has a beta of 1.0, and Stock C has a beta of 1.2. Each of the stocks has a standard deviation of 25%. The returns on the three stocks are independent of one another (i.e., the correlation coefficients all equal zero) . Assume that there is an increase in the market risk premium, but the risk-free rate remains unchanged. Which of the following statements is CORRECT?

Accepted Answer

A)   the required return on stock a will increase by less than the increase in the market risk premium, while the required return on stock c will increase by more than the increase in the market risk premium.
B)   the required return on the average stock will remain unchanged, but the returns of riskier stocks (such as stock c)  will increase while the returns of safer stocks (such as stock a)  will decrease.
C)   the required returns on all three stocks will increase by the amount of the increase in the market risk premium.
D)   the required return on the average stock will remain unchanged, but the returns on riskier stocks (such as stock c)  will decrease while the returns on safer stocks (such as stock a)  will increase.
E)   the required return of all stocks will remain unchanged since there was no change in their betas.F) All of the above
G) C) and E)

Question 10

According to the Capital Asset Pricing Model, investors are primarily concerned with portfolio risk, not the risks of individual stocks held in isolation. Thus, the relevant risk of a stock is the stock's contribution to the riskiness of a well-diversified portfolio.

Accepted Answer

A) True 
 B)False

Question 11

What annual payment must you receive in order to earn a 6.5% rate of return on a perpetuity that has a cost of $1,250?

Accepted Answer

A)   $77.19
B)   $81.25
C)   $85.31
D)   $89.58
E)   $94.06F) A) and E)
G) A) and D)

Question 12

Data for Atwill Corporation is shown below. Now Atwill acquires some risky assets that cause its beta to increase by 30%. In addition, expected inflation increases by 2.00%. What is the stock's new required rate of return?
   Initial beta 1.00 Initial required return (rs) 10.20% Market risk premium, RPM6.00% Percentage increase in beta 30.00% Increase in inflation premium, IP 2.00%\begin{array}{lr}	ext { Initial beta } & 1.00 \	ext { Initial required return }\left(\mathrm{r}_{\mathrm{s}}ight)  & 10.20 \% \	ext { Market risk premium, } \mathrm{RP}_{\mathrm{M}} & 6.00 \% \	ext { Percentage increase in beta } & 30.00 \% \	ext { Increase in inflation premium, IP } & 2.00 \%\end{array} Initial beta  Initial required return (rs​)  Market risk premium, RPM​ Percentage increase in beta  Increase in inflation premium, IP ​1.0010.20%6.00%30.00%2.00%​

Accepted Answer

A)   14.00%
B)   14.70%
C)   15.44%
D)   16.21%
E)   17.02% F) A) and B)
G) B) and D)

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) C) and D)
G) B) and C)

Question 14

Kellner Motor Co.'s stock has a required rate of return of 11.50%, and it sells for $25.00 per share. Kellner's dividend is expected to grow at a constant rate of 7.00%. What was the last dividend, D0?

Accepted Answer

A)   $0.95
B)   $1.05
C)   $1.16
D)   $1.27
E)   $1.40F) None of the above
G) A) and B)

Question 15

Which of the following statements is CORRECT?

Accepted Answer

A)   if you found a stock with a zero historical beta and held it as the only stock in your portfolio, you would by definition have a riskless portfolio.
B)   the beta coefficient of a stock is normally found by regressing past returns on a stock against past market returns. one could also construct a scatter diagram of returns on the stock versus those on the market, estimate the slope of the line of best fit, and use it as beta. however, this historical beta may differ from the beta that exists in the future.
C)   the beta of a portfolio of stocks is always larger than the betas of any of the individual stocks.
D)   it is theoretically possible for a stock to have a beta of 1.0. if a stock did have a beta of 1.0, then, at least in theory, its required rate of return would be equal to the risk-free (default-free)  rate of return, rrf.
E)   the beta of a portfolio of stocks is always smaller than the betas of any of the individual stocks.F) A) and B)
G) A) and E)

Question 16

You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows. Which of the following would lower the calculated value of the investment?

Accepted Answer

A)   the discount rate decreases.
B)   the cash flows are in the form of a deferred annuity, and they total to $100,000. you learn that the annuity lasts for only 5 rather than 10 years, hence that each payment is for $20,000 rather than for $10,000.
C)   the discount rate increases.
D)   the riskiness of the investment's cash flows decreases.
E)   the total amount of cash flows remains the same, but more of the cash flows are received in the earlier years and less are received in the later years.F) B) and E)
G) A) and B)

Question 17

It is possible for a firm to have a positive beta, even if the correlation between its returns and those of another firm is negative.

Accepted Answer

A) True 
 B)False

Question 18

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 D)
G) B) and E)

Question 19

Alcott's preferred stock pays a dividend of $1.00 per quarter. If the price of the stock is $45.00, what is its nominal (not effective)  annual rate of return?

Accepted Answer

A)   8.03%
B)   8.24%
C)   8.45%
D)   8.67%
E)   8.89%F) A) and E)
G) C) and E)

Question 20

At the end of 10 years, which of the following investments would have the highest future value? Assume that the effective annual rate for all investments is the same and is greater than zero.

Accepted Answer

A)   investment a pays $250 at the beginning of every year for the next 10 years (a total of 10 payments) .
B)   investment b pays $125 at the end of every 6-month period for the next 10 years (a total of 20 payments) .
C)   investment c pays $125 at the beginning of every 6-month period for the next 10 years (a total of 20 payments) .
D)   investment d pays $2,500 at the end of 10 years (just one payment) .
E)   investment e pays $250 at the end of every year for the next 10 years (a total of 10 payments) .F) A) and B)
G) A) and E)

Exam 29: Basic Financial Tools: A review

Kellner Motor Co.'s stock has a required rate of return of 11.50%, and it sells for $25.00 per share. Kellner's dividend is expected to grow at a constant rate of 7.00%. What was the last dividend, D₀?

Correct Answer
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Alcott's preferred stock pays a dividend of $1.00 per quarter. If the price of the stock is $45.00, what is its nominal (not effective) annual rate of return?

Correct Answer
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What annual payment must you receive in order to earn a 6.5% rate of return on a perpetuity that has a cost of $1,250?

Correct Answer
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If the returns of two firms are negatively correlated, then one of them must have a negative beta.

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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It is possible for a firm to have a positive beta, even if the correlation between its returns and those of another firm is negative.

Correct Answer
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At the end of 10 years, which of the following investments would have the highest future value? Assume that the effective annual rate for all investments is the same and is greater than zero.

Correct Answer
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Correct Answer
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The prices of high-coupon bonds tend to be less sensitive to a given change in interest rates than low-coupon bonds, other things held constant.

Correct Answer
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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
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Which of the following statements is CORRECT, assuming positive interest rates and holding other things constant?

Correct Answer
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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
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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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You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows. Which of the following would lower the calculated value of the investment?

Correct Answer
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Correct Answer
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According to the Capital Asset Pricing Model, investors are primarily concerned with portfolio risk, not the risks of individual stocks held in isolation. Thus, the relevant risk of a stock is the stock's contribution to the riskiness of a well-diversified portfolio.

Correct Answer
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Correct Answer
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If its yield to maturity declined by 1%, which of the following bonds would have the largest percentage increase in value?

Correct Answer
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Exam 29: Basic Financial Tools: A review

Kellner Motor Co.'s stock has a required rate of return of 11.50%, and it sells for $25.00 per share. Kellner's dividend is expected to grow at a constant rate of 7.00%. What was the last dividend, D0?

Correct AnswerverifiedShow Answer

Alcott's preferred stock pays a dividend of $1.00 per quarter. If the price of the stock is $45.00, what is its nominal (not effective) annual rate of return?

Correct AnswerverifiedShow Answer

What annual payment must you receive in order to earn a 6.5% rate of return on a perpetuity that has a cost of $1,250?

Correct AnswerverifiedShow Answer

If the returns of two firms are negatively correlated, then one of them must have a negative beta.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

It is possible for a firm to have a positive beta, even if the correlation between its returns and those of another firm is negative.

Correct AnswerverifiedShow Answer

At the end of 10 years, which of the following investments would have the highest future value? Assume that the effective annual rate for all investments is the same and is greater than zero.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The prices of high-coupon bonds tend to be less sensitive to a given change in interest rates than low-coupon bonds, other things held constant.

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

Which of the following statements is CORRECT, assuming positive interest rates and holding other things constant?

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

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

You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows. Which of the following would lower the calculated value of the investment?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

According to the Capital Asset Pricing Model, investors are primarily concerned with portfolio risk, not the risks of individual stocks held in isolation. Thus, the relevant risk of a stock is the stock's contribution to the riskiness of a well-diversified portfolio.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

If its yield to maturity declined by 1%, which of the following bonds would have the largest percentage increase in value?

Correct AnswerverifiedShow Answer

Kellner Motor Co.'s stock has a required rate of return of 11.50%, and it sells for $25.00 per share. Kellner's dividend is expected to grow at a constant rate of 7.00%. What was the last dividend, D₀?

Correct Answer
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