# Rate of Return and Modified Accelerated Cost Recovery System

4. What is the rate of return for an investor who pays $1,054.47 for a three-year bond with a 7% coupon and sells the bond one year later for $1,037.19?

a) 5.00%.

b) 5.33%

c) 6.46%

d)7.00%

Chapter 8

10. The Modified Accelerated Cost Recovery System allows an increase:

a) in total depreciation over the asset's life.

b) in annual depreciation during earlier years.

C) in real but not nominal depreciation expense.

D) in the number of years in each recovery class.

Chapter 10

11. If one portfolio's variance exceeds that of another portfolio, its standard deviation will also be greater than that of the other portfolio.

A. True

B. False

C. Depends on other circumstances not mentioned.

12. An investor receives a 15% total return by purchasing a stock for $40 and selling it after one year with a 10% capital gain. How much was received in dividend income during the year?

A. $2.00

B. $2.20

C. $4.00

D. $6.00

Chapter 11

13. When the overall market is up by 10%, an investor with a portfolio of defensive stocks will probably have:

a) negative portfolio returns less than 10%.

b) negative portfolio returns greater than 10%.

c) positive portfolio returns less than 10%.

d) positive portfolio returns greater than 10%.

Chapter 12

16. Which component is more likely to be biased if book values are used in the calculation of WACC rather than market values?

A) debt.

B) Preferred stock.

C) Common stock,

D) All categories should be equally biased.

Chapter 16

17. A stock split will affect the stock's price while a stock dividend will not.

A. True

B. False

C. Depends on under/over valued the stock is.

18. The stock in your portfolio was selling for $40 per share yesterday, but has today declared a three for two split. Which of the following statements seems to be true?

A. There will be two-thirds as many shares outstanding, and they will sell for $60.00 each.

B. There will be four times as many shares outstanding, and they will sell for $160.00 each.

C. There will be 50 percent more shares outstanding, and they will sell for $26.67 each.

D. There will be one-and-one-half times as many shares outstanding, and they will sell for $60.00 each.

Chapter 22

19. Diversification is often a poor motive for mergers because:

A. vertical integration is rarely successful.

B. investors can diversify more efficiently on their own account.

C. it does not produce economies of scale.

D. the increase in taxes overcomes gains in earnings.

20. When a management team buys the firm from current shareholders while continuing to manage and often incurring large segments of debt, it is known as a:

A. management buy-out.

B. spin-off.

C. successful greenmail attempt.

D. corporate break-up.

Chapter 23

21. How many dollars will it take for a U.S. citizen to purchase a Japanese product priced at 60,000 yen if the indirect exchange rate is 104/1?

A. $577

B. $700

C. $5,769

D. $62,400

22. How much would you expect to receive for a nominal interest rate in Holland if funds can be invested in the U.S. at a rate of 7% when inflation is expected to be 4% in the U.S. and 8% in Holland?

A. 5.19%

B. 7.93%

C. 9.08%

D. 11.11%

23. Hedging reduces risk, but it is seldom cost free.

A. True

B. False

24. The spot price of silver closes at $7 per ounce at the expiration of an option contract. Which one of the following option positions will have value?

A. The buyer of a call with $5 strike price.

B. The seller of a call with $5 strike price.

C. The buyer of a put with $5 strike price.

D. The seller of a put with $5 strike price.

25. You enter into a forward contract to take delivery of one million Deutsche marks three months from now. What happens to the price you will pay at expiration if marks depreciate during the contract?

A. Your price will increase.

B. Your price will decrease.

C. Your price was fixed at the onset of the contract.

D. Your price was fixed, and you will receive correspondingly more marks due to the depreciation.

#### Solution Preview

4. What is the rate of return for an investor who pays $1,054.47 for a three-year bond with a 7% coupon and sells the bond one year later for $1,037.19? a) 5.00%. b) 5.33% c) 6.46% d)7.00%

Answer: a) 5.00%

Rate of return ={ (1037.19-1054.47) + 7% x $1000} / 1054.47 = ( -17.28 +70)/1054.47 =5%

10. The Modified Accelerated Cost Recovery System allows an increase: a) in total depreciation over the asset's life. b) in annual depreciation during earlier years. C) in real but not nominal depreciation expense. D) in the number of years in each recovery class.

Answer: b) in annual depreciation during earlier years.

Total depreciation remains the same. In the accelerated system there is more annual depreciation in the initial years and less annual depreciation in the later years

11. If one portfolio's variance exceeds that of another portfolio, its standard deviation will also be greater than that of the other portfolio.

A. True

B. False

C. Depends on other circumstances not mentioned.

Answer: A. True

Standard deviation is the square root of variance; higher the variance, higher is the standard deviation

12. An investor receives a 15% total return by purchasing a stock for $40 and selling it after one year with a 10% capital gain. How much was received in dividend income during the year?

A. $2.00

B. $2.20

C. $4.00

D. $6.00

Answer: A. $2.00

Total return = 15% x $40 = $6

Stock sold for $40 x 1.1=$ 44; capital gain= ...

#### Solution Summary

Multiple Choice Questions in Finance have been answered.