1. Suppose a U.S. treasury bond will pay $2,500 five years from now. If the going interest rate on 5-year treasury bonds is 4.25%, how much is the bond worth today? (Points : 4)

      [removed] $1,928.78
      [removed] $2,030.30
      [removed] $2,131.81
      [removed] $2,238.40

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Question 2. 2. Jose now has $500. How much would he have after 6 years if he leaves it invested at 5.5% with annual compounding? (Points : 4)

      [removed] $591.09
      [removed] $622.20
      [removed] $654.95
      [removed] $689.42

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Question 3. 3. Which of the following statements regarding a 15-year (180-month) $125,000, fixed-rate mortgage is CORRECT? (Ignore taxes and transactions costs.) (Points : 4)

      [removed] The remaining balance after three years will be $125,000 less one third of the interest paid during the first three years.
      [removed] Because it is a fixed-rate mortgage, the monthly loan payments (which include both interest and principal payments) are constant.
      [removed] Interest payments on the mortgage will increase steadily over time, but the total amount of each payment will remain constant.
      [removed] The proportion of the monthly payment that goes towards repayment of principal will be lower 10 years from now than it will be the first year.
      [removed] The outstanding balance declines at a slower rate in the later years of the loan’s life.

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Question 4. 4. The primary operating goal of a publicly-owned firm interested in serving its stockholders should be to (Points : 4)

      [removed] Maximize the stock price per share over the long run, which is the stock’s intrinsic value.
      [removed] Maximize the firm’s expected EPS.
      [removed] Minimize the chances of losses.
      [removed] Maximize the firm’s expected total income.

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Question 5. 5. If a firm’s goal is to maximize its earnings per share, this is the best way to maximize the price of the common stock and thus shareholders’ wealth. (Points : 4)

      [removed] True
      [removed] False

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Question 6. 6. Rappaport Corp.’s sales last year were $320,000, and its net income after taxes was $23,000. What was its profit margin on sales? (Points : 4)

      [removed] 6.49%
      [removed] 6.83%
      [removed] 7.19%
      [removed] 7.55%

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Question 7. 7. Companies generate income from their “regular” operations and from other sources like interest earned on the securities they hold, which is called non-operating income. Lindley Textiles recently reported $12,500 of sales, $7,250 of operating costs other than depreciation, and $1,000 of depreciation. The company had no amortization charges and no non-operating income. It had $8,000 of bonds outstanding that carry a 7.5% interest rate, and its federal-plus-state income tax rate was 40%. How much was Lindley’s operating income, or EBIT? (Points : 4)

      [removed] $3,462
      [removed] $3,644
      [removed] $3,836
      [removed] $4,250

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Question 8. 8. Ratio analysis involves analyzing financial statements in order to appraise a firm’s financial position and strength. (Points : 4)

      [removed] True
      [removed] False

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Question 9. 9. Determining whether a firm’s financial position is improving or deteriorating requires analyzing more than the ratios for a given year. Trend analysis is one method of measuring changes in a firm’s performance over time. (Points : 4)

      [removed] True
      [removed] False

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Question 10. 10. Other things held constant, which of the following actions would increase the amount of cash on a company’s balance sheet? (Points : 4)

      [removed] The company repurchases common stock.
      [removed] The company pays a dividend.
      [removed] The company issues new common stock.
      [removed] The company gives customers more time to pay their bills.

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Question 11. 11. Quigley Inc.’s bonds currently sell for $1,080 and have a par value of $1,000. They pay a $100 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,125. What is their yield to maturity (YTM)?
(Points : 4)

      [removed] 8.56%
      [removed] 9.01%
      [removed] 9.46%
      [removed] 9.93%

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Question 12. 12. Bill Dukes has $100,000 invested in a 2-stock portfolio. $35,000 is invested in Stock X and the remainder is invested in Stock Y. X’s beta is 1.50 and Y’s beta is 0.70. What is the portfolio’s beta?
(Points : 4)

      [removed] 0.65
      [removed] 0.72
      [removed] 0.80
      [removed] 0.98

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Question 13. 13. Risk-averse investors require higher rates of return on investments whose returns are highly uncertain, and most investors are risk averse. (Points : 4)

      [removed] True
      [removed] False

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Question 14. 14. Sinking funds are devices used to force companies to retire bonds on a scheduled basis prior to their maturity. Many bond indentures allow the company to acquire bonds for a sinking fund by either purchasing bonds in the market or selecting the bonds to be acquired by a lottery administered by the trustee through a call at face value. (Points : 4)

      [removed] True
      [removed] False

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Question 15. 15. Which of the following statements is CORRECT? (Points : 4)

      [removed] An investor can eliminate virtually all market risk if he or she holds a very large and well diversified portfolio of stocks.
      [removed] The higher the correlation between the stocks in a portfolio, the lower the risk inherent in the portfolio.
      [removed] It is impossible to have a situation where the market risk of a single stock is less than that of a portfolio that includes the stock.
      [removed] An investor can eliminate virtually all diversifiable risk if he or she holds a very large, well-diversified, portfolio of stocks.

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Question 16. 16. Assume that you hold a well-diversified portfolio that has an expected return of 12.0% and a beta of 1.20. You are in the process of buying 100 shares of Alpha Corp at $10 a share and adding it to your portfolio. Alpha has an expected return of 15.0% and a beta of 2.00. The total value of your current portfolio is $9,000. What will the expected return, and beta on the portfolio, be after the purchase of the Alpha stock? 27
           rp            bp
(Points : 4)

      [removed] 11.69%; 1.22
      [removed] 12.30%; 1.28
      [removed] 12.92%; 1.34
      [removed] 13.56%; 1.41

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Question 17. 17. Calculate the required rate of return for Mercury, Inc., assuming that (1) investors expect a 4.0% rate of inflation in the future, (2) the real risk-free rate is 3.0%, (3) the market risk premium is 5.0%, (4) Mercury has a beta of 1.00, and (5) its realized rate of return has averaged 15.0% over the last 5 years.
 
(Points : 4)

      [removed] 10.29%
      [removed] 10.83%
      [removed] 11.40%
      [removed] 12.00%

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Question 18. 18. In a portfolio of three different stocks, which of the following could NOT be true? (Points : 4)

      [removed] The riskiness of the portfolio is less than the riskiness of each of the stocks if they were held in isolation.
      [removed] The riskiness of the portfolio is greater than the riskiness of one or two of the stocks.
      [removed] The beta of the portfolio is less than the betas of each of the individual stocks.
      [removed] The beta of the portfolio is greater than the beta of one or two of the individual stocks’ betas.

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Question 19. 19. Stock A’s beta is 1.5 and Stock B’s beta is 0.5. Which of the following statements must be true about these securities? (Assume market equilibrium.) (Points : 4)

      [removed] When held in isolation, Stock A has greater risk than Stock B.
      [removed] Stock B must be a more desirable addition to a portfolio than Stock A.
      [removed] Stock A must be a more desirable addition to a portfolio than Stock B.
      [removed] The expected return on Stock A should be greater than that on Stock B.

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Question 20. 20. Which of the following is NOT a potential problem with beta and its estimation? (Points : 4)

      [removed] Sometimes a security or project does not have a past history which can be used as a basis for calculating beta.
      [removed] Sometimes, during a period when the company is undergoing a change such as toward more leverage, or riskier assets, the calculated beta will be drastically different than the “true” or “expected future” beta.
      [removed] The beta of “the market,” can change over time, sometimes drastically.
      [removed] Sometimes the past data used to calculate beta do not reflect the likely risk of the firm for the future because conditions have changed.

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Question 21. 21. Anderson Systems is considering a project that has the following cash flow and WACC data. What is the project’s NPV? Note that if a project’s expected NPV is negative, it should be rejected.
WACC:  9.00%
Year                     0                  1            2          3       
Cash flows       -$1,000            $500    $500    $500 (Points : 4)

      [removed] $265.65
      [removed] $278.93
      [removed] $292.88
      [removed] $307.52

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Question 22. 22. Taggart Inc. is considering a project that has the following cash flow data. What is the project’s payback?
 
Year                 0                      1          2          3         
Cash flows       -$1,150            $500    $500    $500 (Points : 4)

      [removed] 1.86 years
      [removed] 2.07 years
      [removed] 2.30 years
      [removed] 2.53 years

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Question 23. 23. Which of the following statements is CORRECT? (Points : 4)

      [removed] One defect of the IRR method versus the NPV is that the IRR does not take account of cash flows over a project’s full life.
      [removed] One defect of the IRR method versus the NPV is that the IRR does not take account of the time value of money.
      [removed] One defect of the IRR method versus the NPV is that the IRR does not take account of the cost of capital.
      [removed] One defect of the IRR method versus the NPV is that the IRR does not take proper account of differences in the sizes of projects.

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Question 24. 24. Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows. (Points : 4)

      [removed] The longer a project’s payback period, the more desirable the project is normally considered to be by this criterion.
      [removed] One drawback of the regular payback for evaluating projects is that this method does not properly account for the time value of money.
      [removed] If a project’s payback is positive, then the project should be rejected because it must have a negative NPV.
      [removed] The regular payback ignores cash flows beyond the payback period, but the discounted payback method overcomes this problem.

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Question 25. 25. Which of the following statements is CORRECT? (Points : 4)

      [removed] The regular payback method recognizes all cash flows over a project’s life.
      [removed] The discounted payback method recognizes all cash flows over a project’s life, and it also adjusts these cash flows to account for the time value of money.
      [removed] The regular payback method was, years ago, widely used, but virtually no companies even calculate the payback today.
      [removed] The regular payback is useful as an indicator of a project’s liquidity because it gives managers an idea of how long it will take to recover the funds invested in a project.

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