Reference no: EM131103800

1. A deferred annuity will pay you $500 at the end of each year for 10 years, however the first payment will not be made until three years from today (payments will be made at the end of years 3 through 12). What amount will you have to deposit today to fund this deferred annuity? Use an 8% discount rate and round your answer to the nearest $100.

a. $2,200

b. $2,400

c. $2,900

d. $3,400

2. It is your 6th birthday today. You have a trust fund with $50,000 that is earning 8% per year. You expect to withdraw $30,000 per year for 7 years starting on your 22nd birthday for graduate school. How much money will be left in the trust fund after your last withdrawal (rounded to the nearest $10)?

a. $125,660

b. $35,780

c. $4,140

d. You will not have enough money to pay for graduate school.

3. You believe in the power of compounding and decide to save $1 per day by avoiding the purchase of a soda. You deposit the $1 at the end of each day in a bank account that pays 8% interest compounded daily. You are going to take a trip in 20 years with the money you have accumulated. How much money will you have in 20 years, assuming 365 days per year?

a. $7,500

b. $12,438

c. $18,032

d. $22,456

4. How much money must you pay into an account at the end of each of 20 years in order to have $100,000 at the end of the 20th year? Assume that the account pays 6% per year, and round to the nearest $1.

a. $1,840

b. $2,028

c. $2,195

d. $2,718

5. You are going to pay $800 into an account at the beginning of each of 20 years. The account will then be left to compound for an additional 20 years until the end of year 40, when it will turn into a perpetuity. You will receive the first payment from the perpetuity at the end of the 41st year. If the account pays 14%, how much will you receive from the perpetuity each year (round to nearest $1,000)?

a. $140,000

b. $150,000

c. $160,000

d. $170,000

6. You are going to pay $100 into an account at the beginning of each of the next 40 years. At the beginning of the 41st year you buy a 30year annuity whose first payment comes at the end of the 41st year (the accounts earn 12%). How much will you receive at the end of the41st year (i.e. the first annuity payment). Round to nearest $100.

a. $93,000

b. $7,800

c. $11,400

d. $10,700

7. You want $20,000 in 5 years to take your spouse on a second honeymoon. Your investment account earns 7% compounded semi annually. How much money must you put in the investment account today? (round to the nearest $1).

a. $14,178

b. $12,367

c. $15,985

d. $13,349

8. An investment is expected to yield $300 in three years, $500 in five years, and $300 in seven years. What is the present value of this investment if our opportunity rate is 5%?

a. $735

b. $864

c. $885

d. $900

9. Biff deposited $9,000 in a bank account, and 10 years later he closes out the account, which is worth $18,000. What is the annual interest rate over the 10 years?

a. 6.45%

b. 7.18%

c. 9.10%

d. 10.0%

10. A financial analyst tells you that investing in stocks will allow you to double your money in 7 years. What annual rate of return is the analyst assuming you can earn?

a. 8.76%

b. 9.87%

c. 10.01%

d. 10.41%

11. A well-diversified portfolio includes investments in 50 securities. The portfolio's systematic risk is likely to be about

a. 50% of the total risk.

b. 40% of the total risk.

c. 25% of the total risk.

d. zero because risk is eliminated with a portfolio of 50 securities or more.

12. Assume that you expect to hold a $40,000 investment for one year. It is forecasted to have a yearend value of $42,000 with a 30%probability; a year end value of $48,000 with a 45% probability; and a yearend value of $60,000 with a 25% probability. What is the expected holding period return for this investment?

a. 50%

b. 25%

c. 23%

d. 18%

 

13. (T/F)Diversifying among different kinds of assets is called asset allocation.

 

14. Wendy purchased 800 shares of Genetics Stock at $3 per share on 1/1/12. Wendy sold the shares on 12/31/12 for $3.45. Geneticsstock has a beta of 1.9, the risk-free rate of return is 4%, and the market risk premium is 9%. Wendy's holding period return is

a. 15.0%.

b. 16.5%.

c. 17.6%.

d. 21.1%.

15. You purchased 500 shares of A.M.J. Inc. common stock one year ago for $50 per share. You received a dividend of $2 per share today and decide to take your profits by selling at $54.50 per share. What is your holding period return?

a. 13.0%

b. 9.0%

c. 6.5%

d. 4.0%

16. Beta is a statistical measure of

a. unsystematic risk.

b. total risk.

c. the standard deviation.

d. the relationship between an investment's returns and the market return.

17. The capital asset pricing model

a. provides a risk-return trade off in which risk is measured in terms of the market volatility.

b. provides a risk-return trade off in which risk is measured in terms of beta.

c. measures risk as the coefficient of variation between security and market rates of return.

d. depicts the total risk of a security.

18. Which of the following measures the average relationship between a stock's returns and the market's returns?

a. coefficient of validation

b. standard deviation

c. geometric regression

d. beta coefficient

19. Rogue Recreation, Inc. has normally distributed returns with an expected return of 15% and a standard deviation of 5%, while Lake Tours, Inc. has normally distributed returns with an expected return of 15% and a standard deviation of 15%. Which of the following is true?

a. Lake Tours' investors are not being adequately compensated for relevant risk.

b. Rogue Rec is likely to experience returns larger than those of Lake Tours.

c. Lake Tours is more likely to have negative returns than Rogue Rec.

d. Rational investors will prefer Lake Tours, Inc. over Rogue Recreation, Inc.

20. Assume that an investment is forecasted to produce the following returns: a 20% probability of a 12% return; a 50% probability of a16% return; and a 30% probability of a 19% return. What is the standard deviation of return for this investment?

a. 5.89%

b. 16.1%

c. 2.43%

d. 15.7%

21. The yield to maturity on long-term bonds

a. is equal to the current yield if the bond is selling for face value.

b. is equal to the coupon rate on the bond.

c. is equal to the net present value of the bond's future cash flows.

d. is set by the indenture agreement and will not change over the life of the bond.

22. Bryant Inc. just issued $1,000 par 30-year bonds. The bonds sold for $1,107.20 and pay interest semiannually. Investors require a rate of 7.75% on the bonds. What is the bonds' coupon rate?

a. 9.333%

b. 7.750%

c. 4.125%

d. 8.675%

23. (T/F) The sum of the present values of an investment's expected future cash flows is known as the investment's intrinsic value.

24. (T/F) The less risky the bond (or the higher the bond rating) the lower will be the yield to maturity on the bond.

25. Messenger, Inc. bonds have a 4% coupon rate with semiannual coupon payments and a $1,000 par value. The bonds have 11 years until maturity, and sell for $925. What is the current yield for Messinger's bonds?

a. 2.16%

b. 3.45%

c. 4.32%

d. 5.52%

26. If a corporation were to choose between issuing a debenture, a mortgage bond, or a subordinated debenture, which would have the highest yield to maturity, everything else equal?

a. the debenture

b. the mortgage bond

c. the subordinated debenture

d. all of the above

27. When the intrinsic value of an asset exceeds the market value

a. the asset is undervalued to the investor.

b. the asset is overvalued to the investor.

c. market value and intrinsic value are always the same; therefore, this could not happen.

d. liquidation value must be higher than book value.

28. (T/F) If a bond's rating declines, the interest rate demanded by investors, called the required return, also decreases.

29. In an efficient securities market the market value of a security is equal to

a. its liquidation value.

b. its book value.

c. its intrinsic value.

d. par value.

30. Andre owns a corporate bond with a coupon rate of 8% that matures in 10 years. Ruth owns a corporate bond with a coupon rate of12% that matures in 25 years. If interest rates go down, then

a. the value of Andre's bond will decrease and the value of Ruth's bond will increase.

b. the value of both bonds will increase.

c. the value of Ruth's bond will decrease more than the value of Andre's bond due to the longer time to maturity.

d. the value of both bonds will remain the same because they were both purchased in an earlier time period before the interest rate changed.

31. (T/F) In terms of risk, preferred stock is safer than common stock because it has a prior claim on assets and income.

32. (T/F) Convertibility is a common feature of common stock; it allows the common stockholders to convert their common shares into preferred shares or into bonds.

Q33. Bacon Signs Company preferred stock pays a perpetual annual dividend of 4.5% of its $100 par value. If investors' required rate of return on this stock is 12%, what is the value per share?

a. $37.50

b. $31.82

c. $8.50

d. $45.00

34. Glacier Inc. preferred stock has a 5% stated dividend percentage, and a $100 par value. What is the value of the stock if your required rate of return is 6% per year?

a. $83.33

b. $94.05

c. $100.00

d. $30.00

35. Most preferred stocks have a feature that requires all past unpaid preferred dividend payments be paid before any common stock dividends can be paid. What is the name of this feature?

a. participating

b. cumulative

c. provisional

d. convertible

36. (T/F) The amount of the preferred stock dividend is generally fixed either as a dollar amount or as a percentage of the par value.

37. Southland Tours has net income of $2 million this year. The book value of Southland Tours common equity is $8 million dollars. The company's dividend payout ratio is 60% and is expected to remain this way. What is Southland Tours' internal growth rate?

a. 6%

b. 9%

c. 10%

d. 15%

38. (T/F) Common stock does not mature.

39. Backford Company just paid a dividend yesterday of $2.25 per share. The company's stock is currently selling for $60 per share, and the required rate of return on Backford Company stock is 16%. What is the growth rate expected for Backford Company dividends assuming constant growth?

a. 9.47%

b. 9.89%

c. 10.87%

d. 11.81%

40. (T/F) Preferred stock and common stock issued by the same firm will have the same required return because the riskiness of the firm's cash flows is the same for both securities.