# Finance: Multiple choice questions.

1) As the interest rate increases for any given period, the future value of an amount will

A) decrease.

B) remain unchanged.

C) increase.

D) move toward 1.

2) Bob plans to fund his individual retirement account (IRA) with the maximum contribution of $5,000 at the end of each year for the next 15 years. If Bob can earn 10 percent on his contributions, how much will he have at the end of the fifteenth year?

A) $144,104

B) $158,862

C) $38,030

D) $14,938

3) $100 is received at the end of year 1, $200 is received at the end of year 2, and $300 is received at the end of year 3. If the opportunity cost is 12 percent, their combined present value today is __________.

A) $600

B) $462

C) $1,245

D) $1,536

4) Marion makes annual end of year payments of $6,260.96 on a five year loan with an 8 percent interest rate. The original principal amount was

A) $25,000.

B) $20,000.

C) $31,000.

D) $30,000.

5) Indicate which of the following is true about annuities.

A) An ordinary annuity is an equal payment paid or received at the end of each period, that increases by an equal amount each period.

B) An annuity due is an equal payment paid or received at the beginning of each period.

C) An ordinary annuity is an equal payment paid or received at the beginning of each period.

D) An annuity due is a payment paid or received at the beginning of each period, that increases by an equal amount each period.

6) A college received a contribution to its endowment fund of $2 million. They can never touch the principal, but they can use the earnings. At an assumed interest rate of 9.5 percent, how much can the college earn to help its operations each year?

A) $95,000

B) $19,000

C) $190,000

D) $18,000

7) The present value of $500 received four years from now if your opportunity cost is 8 percent (paid semiannually) is __________.

A) $684

B) $456

C) $365

D) $500

8) The ______ the coefficient of variation, the ______ the risk.

A) lower, lower

B) higher, lower

C) lower, higher

D) more stable, higher

9) The expected value, standard deviation of returns, and coefficient of variation for asset A are (See below.)

i. Asset A

2.

A) 10 percent, 8 percent, and 1.25, respectively.

B) 9.33 percent, 8 percent, and 2.15, respectively.

C) 9.35 percent, 4.68 percent, and 2, respectively.

D) 9.35 percent, 2.76 percent, and 0.3, respectively.

10) Last year Mike bought 100 shares of Dallas Corporation common stock for $53 per share. During the year he received dividends of $1.45 per share. The stock is currently selling for $57.75 per share. What rate of return did Mike earn over the year?

A) 11.7 percent.

B) 13.2 percent.

C) 14.1 percent.

D) 15.9 percent.

11) Combining two assets having perfectly negatively correlated returns will result in the creation of a portfolio with an overall risk that

A) increases to a level above that of either asset.

B) remains unchanged.

C) decreases to a level below that of either asset.

D) stabilizes to a level between the asset with the higher risk and the asset with the lower

a. risk.

12) The higher an asset's beta,

A) the less responsive it is to changing market returns.

B) the more responsive it is to changing market returns.

C) the higher the expected return will be in a down market.

D) the lower the expected return will be in an up market.

3. Table 5.2

4. You are going to invest $20,000 in a portfolio consisting of assets A, B, and C, as follows:

i. Asset Annual Return Beta Proportion

ii. A 6 1.3 0.40

iii. B 9 1.5 0.25

iv. C 12 1.1 0.35

13) Given the information in Table 5.2, what is the expected annual return of this portfolio?

A) 8.85%

B) 9.0%

C) 10.55%

D) 11.75%

14) A downward-sloping yield curve that indicates generally cheaper long-term borrowing costs than short-term borrowing costs is called

A) normal yield curve.

B) inverted yield curve.

C) flat yield curve.

D) none of the above.

15) A feature that gives the issuer the opportunity to repurchase bonds at a stated price prior to maturity is called

A) stock purchase warrants.

B) call feature.

C) conversion feature.

D) None of the above.

16) If the required return is less than the coupon rate, a bond will sell at

A) par.

B) a discount.

C) a premium.

D) book value.

17) A firm has an issue of $1,000 par value bonds with a 9 percent stated interest rate outstanding. The issue pays interest annually and has 20 years remaining to its maturity date. If bonds of similar risk are currently earning 8 percent, the firm's bond will sell for __________ today.

A) $1,000

B) $716.67

C) $840.67

D) $1,098.18

18) What is the yield to maturity, to the nearest percent, for the following bond: current price is $908, coupon rate is 11 percent, $1,000 par value, interest paid annually, eight years to maturity?

A) 14 percent

B) 11 percent

C) 13 percent

D) 12 percent

19) What is the current price of a $1000 par value bond maturing in 10 years with a coupon rate of 14 percent, paid semiannually, that has a YTM of 15 percent?

A) $1,050

B) $604

C) $949

D) $1,088

20) A firm has an outstanding issue of 1,000 shares of preferred stock with a $100 par value and an 8 percent annual dividend. The firm also has 5,000 shares of common stock outstanding. If the stock is cumulative and the board of directors has passed the preferred dividend for the prior two years, how much must the preferred stockholders be paid prior to paying dividends to common stockholders?

A) $ 8,000

B) $16,000

C) $24,000

D) $25,000

21) Shares of stock currently owned by the firm's shareholders are called

A) authorized.

B) issued.

C) outstanding.

D) treasury shares.

22) Advantages of issuing common stock versus long-term debt include all of the following EXCEPT

A) the effects of dilution on earnings and voting power.

B) no maturity.

C) increases firm's borrowing power.

D) no fixed payment obligation.

23) Emmy Lou, Inc. has an expected dividend next year of $5.60 per share, a growth rate of dividends of 10 percent, and a required return of 20 percent. The value of a share of Emmy Lou, Inc.'s common stock is ________.

A) $28.00

B) $56.00

C) $22.40

D) $18.67

24) If expected return is less than required return on an asset, rational investors will

A) buy the asset, which will drive the price up and cause expected return to reach the

b. level of the required return.

B) sell the asset, which will drive the price down and cause the expected return to reach the level of the required return.

C) sell the asset, which will drive the price up and cause the expected return to reach the level of the required return.

D) buy the asset, since price is expected to increase.

25) Nico Corporation's common stock is expected to pay a dividend of $3.00 forever and currently sells for $21.42. What is the required rate of return?

A) 10%

B) 12%

C) 13%

D) 14%

Short Answer

1. Asset A was purchased six months ago for $25,000 and has generated $1,500 cash flow during that period. What is the asset's rate of return if it can be sold for $26,750 today?

2. The following historical returns have been reported for Best Buy:

2002 9%

2003 11.5%

2004 3%

2005 7.0%

2006 10.0%

A) What was the average return for Best Buy during this five year period?

B) What is the standard deviation of Best Buy's returns for this period?

C) What is the coefficient of variation of Best Buy?

3. The H&H Computer Company has an outstanding issue of bond with a par value of $1,000, paying 12 percent coupon rate semi-annually. The bond was issued 25 years ago and has 5 years to maturity. What is the value of the bond assuming 14 percent market interest rate?

4. To buy his favorite car, Larry is planning to accumulate money by investing his Christmas bonuses for the next five years in a security which pays a 10 percent annual rate of return. The car will cost $20,000 at the end of the fifth year and Larry's Christmas bonus is $3,000 a year. Will Larry accumulate enough money to buy the car? How much additional will he either need or have?

5. Compute the value of a share of common stock of a company whose most recent dividend was $2.50 and is expected to grow at 6 percent per year for the next 2 years, after which the dividend growth rate will decrease to 3 percent per year indefinitely. Assume a 10 percent required rate of return.

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#### Solution Summary

The problem deals with topics under accounting: Time value of money analysis, portfolio evaluation, and CAPM etc.

Finance - Multiple Choice Questions

1. The ________ is a weighted average of the cost of funds which reflects the interrelationship of financing decisions.

1. 1. risk-free rate

2. 2. nominal cost

3. 3. risk premium

4. 4. cost of capital

2. The firm's optimal mix of debt and equity is called its

1. 1. optimal ratio.

2. 2. maximum wealth.

3. 3. target capital structure.

4. 4. maximum book value.

3. If a corporation has an average tax rate of 40 percent, the approximate annual, after-tax cost of debt for a 10-year, 8 percent, $1,000 par value bond selling at $1,150 is

1. 1. 4.8 percent.

2. 2. 3.6 percent.

3. 3. 6 percent.

4. 4. 8 percent.

4. A corporation has concluded that its financial risk premium is too high. In order to decrease this, the firm can

1. 1. decrease the proportion of common stock equity to decrease financial risk.

2. 2. increase short-term debt to decrease the cost of capital.

3. 3. increase the proportion of long-term debt to decrease the cost of capital.

4. 4. increase the proportion of common stock equity to decrease financial risk.

5.________ leverage is concerned with the relationship between sales revenue and earnings per share.

1. 1. Operating

2. 2. Financial

3. 3. Total

4. 4. Variable

6.Breakeven analysis is used by the firm

1. 1. none of these.

2. 2. Both to determine the level of operations necessary to cover all operating costs and to evaluate the profitability associated with various levels of sales.

3. 3. to determine the level of operations necessary to cover all operating costs.

4. 4. to evaluate the profitability associated with various levels of sales.

7.Noncash charges such as depreciation and amortization ________ the firm's breakeven point.

1. 1. understate

2. 2. decrease

3. 3. overstate

4. 4. do not affect

8.If a firm's fixed operating costs decrease, the firm's operating breakeven point will

1. 1. decrease.

2. 2. change in an undetermined direction.

3. 3. increase.

4. 4. remain unchanged.

9.________ is the potential use of fixed operating costs to magnify the effects of changes in sales on earnings before interest and taxes.

1. 1. Ratio analysis

2. 2. Operating leverage

3. 3. Total leverage

4. 4. Financial leverage