Question

51. The relationship between nominal returns, real returns, and inflation is referred to as the:
A. call premium.
B. Fisher effect.
C. conversion ratio.
D. spread.
E. current yield.
52. Which of the following bonds would have the greatest percentage decrease in value if all interest rates in the
economy rise by 1%?
A. 10-year, zero coupon bond;
B. 30-year, zero coupon bond;
C. 20-year, 10% coupon bond;
D. 10-year, 10% coupon bond;
E. 20-year, 5% coupon bond;


53. If a security is risker than average stock, what is the possible value of the stock’s beta?
A. -0.5
B. 0
C. 0.5
D. 1
E. 1.5
54 .What is the standard deviation of the stock?
Economy Prob. Return
Strong 0.3 80%
Normal 0.4 10%
Weak 0.3 -60%
A. 57%
B. 54%
C. 26%
D. 30%
E. None of above
55 .The slope of security market line is
A. Risk-free rate
B. Beta
C. Market risk premium
D. Market return
E. None of above
56 .Stocks A and B each have an expected return of 12%, a beta of 1.2, and a standard deviation of 25%. The returns
on the two stocks have a correlation of +0.6. Portfolio P has 50% in Stock A and 50% in Stock B. Which of the
following statements is correct?
A. Portfolio P has a beta that is greater than 1.2.
B. Portfolio P has a standard deviation that is greater than 25%.
C. Portfolio P has an expected return that is less than 12%.
D. Portfolio P has a standard deviation that is less than 25%.
E. Portfolio P has a beta that is less than 1.2.
57 .A bond’s annual interest divided by its face value is referred to as the:
A. market rate.
B. call rate.
C. coupon rate.
D. current yield.
E. yield-to-maturity.


58. The risk free rate is 3% and the market risk premium is 4%. Stock A has a beta of 1.5. What is the required rate
of return on stock A.
A. 9.0%
B. 7.8%
C. 4.8%
D. 7%
E. None of above is correct.
59 .An individual has $40,000 invested in a stock with a beta of 0.8 and another $40,000 invested in a stock with a
beta of 1.4, what is her portfolio’s beta?
A. 0.9
B. 1.10
C. 2.2
D. 1.12
60 .Last year, you earned a rate of return of 6.42 percent on your bond investments. During that time, the inflation
rate was 1.6 percent. What was your real rate of return?
A. 4.69 percent
B. 4.80 percent
C. 4.83 percent
D. 4.74 percent
E. 4.71 percent
61 .Capital Asset Pricing Model (CAPM) reflects the risk before diversification.
A. True
B. False
62 .The 8 percent, $1,000 face value bonds of Sweet Sue Foods are currently selling at $1,057. These bonds have 16
years left until maturity. What is the current yield?
A. 7.38 percent
B. 7.57 percent
C. 8.00 percent
D. 8.23 percent
E. 8.28 percent
63 .A $1,000 face value bond currently has a yield to maturity of 8.22 percent. The bond matures in five years and
pays interest semiannually. The coupon rate is7.5 percent. What is the current price of this bond? [Match time
period and interest rate]
A. $948.01
B. $989.60
C. $1,005.26
D. $970.96
E. $1,010.13
64 .Which of following is incorrect?


A. Systematic risk can be eliminated by proper diversification.
B. Market risk is the risk remains after diversification.
C. Market risk is also known as systematic risk.
D. All of above are correct.
65. Which one of the following bonds is most apt to have the smallest liquidity premium?
A. Treasury bill
B. Corporate bond issued by a new firm
C. Municipal bond issued by the State of New York
D. Municipal bond issued by a rural city in Alaska
E. Corporate bond issued by General Motors (GM)
66 .If g=6%, ??1 = 2, and ???? = 13%, what is the stock’s value?
A. 25.89
B. 28.57
C. 30.29
D. 50.22
E. None of the above
67 .If g=6%, ??1 = 2, and ???? = 13%, what is the stock’s value two years from now?
A. 25.89
B. 32.10
C. 30.29
D. 34.02
E. None of the above
68 .Investors require a 13% rate of return on the Levine Company’s stock. If the dividend increase at a constant rate
of 6%, what is the capital gain yield?
A. 6%
B. 13%
C. 7%
D. 19%
E. None of the above
69 .Negative growth rate stocks have negative values.
A. True
B. False
70 .If a zero growth rate shock with an annual dividend of $5 sells for $50, what is the stock’s expected return?
A. 5%
B. 10%
C. 15%
D. 20%
E. Can not be determined
71 .New Markets has $1,000 face value bonds outstanding that pay interest semiannually, mature in 14.5 years, and
have a 4.5 percent coupon. The current price is quoted at 97.6. What is the yield to maturity? [Match time period and interest rate]
A. 5.32 percent
B. 4.73 percent
C. 4.92 percent
D. 5.13 percent
E. 5.27 percent
72 .All else held constant, the present value of a bond increases when the:
A. coupon rate decreases.
B. yield to maturity decreases.
C. current yield increases.
D. time to maturity of a premium bond decreases.
E. time to maturity of a zero coupon bond increases.
73 .Schnusenberg Corporation just paid a dividend of D0 = $0.75 per share, and that dividend is expected to grow at
a constant rate of 6.50% per year in the future. The company’s beta is 1.25, the required return on the market is
8.50%, and the risk-free rate is 3.50%. What is the company stock price?
A. $ 9.33
B. $ 10.47
C. $ 24.58
D. $ 33.84
E. None of the above.
74 .Capital gains yield will always equal the growth rate.
A. True
B. False
75 .A six-year, semiannual coupon bond is selling for $991.38. The bond has a face value of $1,000 and a yield to
maturity of 9.19 percent. What is the coupon rate? [Match time period and interest rate]
A. 4.50 percent
B. 4.60 percent
C. 6.00 percent
D. 9.00 percent
E. 9.20 percent
76 .Which of following information is not required to calculate WACC?
A. Weight of debt
B. Weight of common equity
C. Tax rate
D. Cost of preferred stock
E. All of above are required
77 .If tax rate increases, WACC will decrease.
A. True
B. False
78 .If a firm can borrow at an interest rate of 8% and its tax rate is 40%, its after-tax cost of debt is
A. 3.2%
B. 4%
C. 4.8%
D. 6%
E. 8%
79 .If a firm pays out $5 preferred dividend per share, and the stock is priced at $40 per share. The component cost
of preferred stock is
A. 8%
B. 10%
C. 12.5%
D. 17.5%
E. 25%
80 .The cost of preferred stock to a firm must be adjusted to an after-tax figure.
A. True.
B. False.
81 .Assuming a stock’s dividend yield is 5% and capital gains yield is 8%, what is the stock’s total return?
A. 3%
B. 5%
C. 8%
D. 13%
82 .Which of the following is the criticism of dividend discount model?
A. It does not account for the firm’s dividend
B. It does not account for the firm’s growth
C. It does not account for investor’s required rate of return
D. It does not account the situation that dividend is zero
E. None of the above
83 .Under which of the following situations, the constant growth dividend discount model does not apply?
A. When dividend is positive
B. The growth rate (g) is constant
C. When the growth rate (g) is negative
D. When the growth rate (g) > investor required rate of return (rs)
E. None of the above
84 .Sugar Cookies will pay an annual dividend of $1.23 a share next year. The firm expects to increase this dividend
by 8 percent per year the following 5 years and then decrease the dividend growth to 2 percent annually
thereafter. Which one of the following is the correct computation of the dividend for Year 8?
A. ($1.23) x(1.08 x4) x(1.02 x3)
B. ($1.23) x(1.08 x4) x(1.02 x2)
C. ($1.23) x(1.08)5x(1.02)2
D. ($1.23) x(1.08)4x(1.02)3
E. ($1.23)x (1.08)5x(1.02)2

85. Newly issued securities are sold to investors in which one of the following markets?
A. Proxy
B. Stated value
C. Inside
D. Secondary
E. Primary
86 .Firms with riskier projects generally have a lower WACC.
A. True
B. False
87 .Which of the following statements is correct?
A. Since debt capital can cause a company to go bankrupt but equity capital cannot, debt is riskier than
equity.
B. The tax-adjusted cost of debt is always greater than the interest rate on debt, provided the company
does in fact pay taxes.
C. If a company assigns the same cost of capital to all of its projects regardless of each project’s risk,
then the company is likely to reject some safe projects that it actually should accept and to accept
some risky projects that it should reject.
D. Because no flotation costs are required to obtain capital as retained earnings, the cost of retained
earnings is generally lower than the after-tax cost of debt.
E. Higher flotation costs tend to reduce the cost of equity capital.
88 .The sum of weight of debt, weight of preferred stock, and weight of common equity should be
A. -1
B. 0
C. 0.5
D. 1
E. 1.5
89 .An agent who buys and sells securities from inventory is called a:
A. floor trader.
B. dealer.
C. commission broker.
D. broker.
E. floor broker.
90 .Solar Energy will pay an annual dividend of $2 per share next year. The company just announced that future
dividends will be increasing by 2 percent annually. How much are you willing to pay for one share of this stock
if you require a rate of return of 12 percent?
A. $20.4
B. $20
C. $14.29
D. $16.67
91 .The internal rate of return is the:
A. discount rate that causes a project’s aftertax income to equal zero.
B. discount rate that results in a zero net present value for the project.
C. discount rate that results in a net present value equal to the project's initial cost.
D. rate of return required by the project's investors.
E. project's current market rate of return.
92 .The possibility that more than one discount rate can cause the net present value of an investment to equal zero is
referred to as:
A. duplication.
B. the net present value profile.
C. multiple rates of return.
D. the AAR problem.
E. the dual dilemma.
93 .Now a firm has 40% debt, 10% preferred stock, and 50% common equity. The after-tax cost of debt is 5%, cost
of preferred stock is 8%, and the cost of common equity is 10%. What is WACC of the firm?
A. 5%
B. 7.4%
C. 7.8%
D. 8%
E. 10%
94 .Which of following is correct?
A. Increase of tax rate and increase of cost of preferred stock must result in decrease of WACC.
B. Increase of tax rate and decrease of cost of preferred stock must result in decrease of WACC.
C. Decrease of tax rate and increase of cost of preferred stock must result in decrease of WACC.
D. Decrease of tax rate and decrease of cost of preferred stock must result in decrease of WACC.
E. None of above.
95 .Which one of the following is an indicator that an investment is acceptable? Assume cash flows are
conventional.
A. Modified internal rate of return that is equal to zero
B. Profitability index of zero
C. Internal rate of return that exceeds the required return
D. Payback period that exceeds the required period
E. Negative average accounting return
96 .Which of the following is not an advantage of MIRR compared to IRR?
A. Assumes reinvestment of cash flows at WACC
B. Assumes reinvestment of cash flows at IRR
C. Avoids multiple IRR issue
D. None of the above
97 .What’s the crossover rate of the following two cash flow series?
Year 0 1 2 3
Project X -$1,150 $1000 $300 $400
Project Y -$1,150 $500 $300 $1000
A. 12%
B. 11%
C. 10.3%
D. 9.5%
E. None of the above
98 .Which of the following is the criterion to evaluate mutually exclusive projects using NPV decision rule?
A. If NPV>0, accept the project
B. If NPV<0, accept the project
A. Select the project with the highest positive NPV
B. Select the project with the highest negative NPV
C. None of the above
99 .Which of the following is the criterion to evaluate independent project using IRR decision rule?
A. If IRR>WACC, accept the project
B. If IRR<WACC, accept the project
C. Select the project with the highest IRR
D. Select the project with the highest WACC
E. None of the above
100 .You are using a net present value profile to compare Projects A and B, which are mutually exclusive. Which
one of the following statements correctly applies to the crossover point between these two?
A. The internal rate of return for Project A equals that of Project B, but generally does not equal zero.
B. The internal rate of return of each project is equal to zero.
C. The net present value of each project is equal to zero.
D. The net present value of Project A equals that of Project B, but generally does not equal zero.
E. The net present value of each project is equal to the respective project's initial cost.

Answer 1

51. The relationship between nominal returns, real returns, and inflation is referred to as the Fisher Effect.

Call premium is the amount at which the call price exceeds the par value.

Conversion ratio is the number of common shares received at the time of conversion for each convertible security.

Spread is the difference between two prices or interest rates.

Current yield is a bond's annual return based on its annual coupon payments and current price.

52. Bonds which would have the greatest percentage decrease in value if all interest rates in the
economy rise by 1% is 30 year zero coupon bond because bond that pays coupons will be less affected by interest rate changes than one that doesn’t pay coupons and interest rate risk is higher in one with more years to maturity.

53.  If a security is risker than average stock, what is the possible value of the stock’s beta is 1.5 becuase beta with value more than 1 are risker and also provide higher return in bullish market and more losses in bearish market than average stocks.

54. Standard Deviation

Economy	Probability	Return
Strong	0.3	0.8
Normal	0.4	0.1
Weak	0.3	-0.6

p = probability

Er = expected return

Br = Base return (return in normal condition) = 10% = 0.1

Standard Deviation = 0

Correct option in none of the above.