Exam3 FIN370 B Key.doc

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Exam3 FIN370 Winter 2009 KeyVersion B

1. One year ago, you purchased 200 shares of stock for $29 a share. The stock pays $.60 a share in dividends

each year. Today, you sold your shares for $31.60 a share. What is your total dollar return on this investment?

a. $480

b. $670

c. $610

D. $640

e. $520

BLOOMS TAXONOMY QUESTION TYPE: APPLICATION

LEARNING OBJECTIVE NUMBER: 1

LEVEL OF DIFFICULTY: BASIC

Ross - Chapter 010 #44

SECTION: 10.1

TOPIC: DOLLAR RETURN

TYPE: PROBLEMS

2. The amount of systematic risk present in a particular risky asset relative to that in an average risky asset is

called the:

a. mean.

B. beta coefficient.

c. risk premium.

d. standard deviation.

e. variance.

BLOOMS TAXONOMY QUESTION TYPE: KNOWLEDGE




SECTION: 11.6

TOPIC: BETA COEFFICIENT

TYPE: DEFINITIONS


2/25

3. Huckster's is reviewing its current accounts to determine how a proposed project might affect the account

balances. The firm estimates the project will initially require $86,000 in current assets and $69,000 in additional

current liabilities. The firm also estimates the project will require an additional $9,000 a year in current assets

for each one of the five years of the project. How much net working capital will the firm recoup at the end of

the project assuming that all net working capital can be recaptured?

a. $62,000

b. $17,000

C. $62,000

d. $28,000

e. $17,000





SECTION: 9.2

TOPIC: NET WORKING CAPITALTYPE: PROBLEMS

4. The return on a risky asset that is anticipated in the future is called the:

a. real return.

b. risk premium.

c. systematic return.

D. expected return.

e. beta.





SECTION: 11.1

TOPIC: EXPECTED RETURN

TYPE: DEFINITIONS


3/25

5. Which of the following will increase the sustainable growth rate of a firm?

I. eliminating all dividends

II. increasing the target debt-equity ratio

III. increasing the profit margin

IV. increasing the total asset turnover rate

a. I, III, and IV only

B. I, II, III, and IV

c. I, II, and III only

d. I and II only

e. II, III, and IV only



LEVEL OF DIFFICULTY: INTERMEDIATE


SECTION: 3.4

TOPIC: SUSTAINABLE GROWTH RATETYPE: CONCEPTS

6. Truman Florists pays a constant annual dividend of $2.20 per share on its stock. Last year at this time, the

market rate of return on this stock was 12.6 percent. Today, the market rate has fallen to 9.7 percent. What

would your capital gains yield have been if you had purchased this stock one year ago and then sold the stock

today?

A. 29.90 percent

b. 14.57 percent

c. 9.70 percentd. 23.02 percent

e. 2.90 percent





SECTION: 10.1

TOPIC: CAPITAL GAINS YIELD

TYPE: PROBLEMS


4/25

7. A premium bond has a:

I. market price equal to the face value.

II. market price that exceeds the face value.

III. yield to maturity that exceeds the coupon rate.

IV. yield to maturity that is less than the coupon rate.

A. II and IV only

b. I only

c. I and III only

d. II and III only

e. I and IV only

BLOOMS TAXONOMY QUESTION TYPE: COMPREHENSION




SECTION: 6.1

TOPIC: PREMIUM BONDTYPE: CONCEPTS

8. Which of the following are advantages of the corporate form of organization?

I. ability to raise large sums of capital

II. ease of ownership transfer

III. corporate taxation

IV. unlimited firm life

A. I, II, and IV only

b. II, III, and IV onlyc. I, II, III, and IV

d. III and IV only

e. I and II only





SECTION: 1.3TOPIC: CORPORATION

TYPE: CONCEPTS


5/25

9. Which one of the following is the preferred method of analyzing a proposed investment?

a. payback

B. net present value

c. internal rate of return

d. profitability index

e. accounting rate of return





SECTION: 8.1

TOPIC: NET PRESENT VALUE

TYPE: CONCEPTS

10. When comparing loans of equal amounts and equal time periods, you should select the loan that has the

lowest:

a. quoted rate.

b. annual percentage rate.

c. nominal rate.

d. stated rate.

E. effective annual rate.


LEARNING OBJECTIVE NUMBER: 4LEVEL OF DIFFICULTY: BASIC


SECTION: 5.3

TOPIC: EFFECTIVE ANNUAL RATE

TYPE: CONCEPTS


6/25

11. Which one of the following is a correct statement, all else held constant?

a. The present value is inversely related to the future value.

b. The period of time is directly related to the interest rate.

c. The interest rate is inversely related to the future value.

d. The future value is inversely related to the period of time.

E. The present value is inversely related to the interest rate.





SECTION: 4.2

TOPIC: PRESENT VALUE

TYPE: CONCEPTS

12. Over the period of 1926-2006:

a. the risk premium on long-term government bonds was zero percent.

b. the risk premium on large-company stocks was 10.2 percent.

C. the risk premium on small-company stocks exceeded the risk-premium on large-company stocks.

d. the risk premium on long-term government bonds exceeded the risk premium on the long-term corporate

bonds.

e. U.S. Treasury bills had a risk premium of 2 percent.




SECTION: 10.3

TOPIC: HISTORICAL RISK PREMIUM

TYPE: CONCEPTS


7/25

13. A project has the following cash flows. What is the payback period?

a. 1.77 years

b. 1.48 years

c. 1.53 years

d. 1.31 years

E. 1.82 years





SECTION: 8.2

TOPIC: PAYBACK

TYPE: PROBLEMS

14. Limited liability companies are primarily designed to:

I. be taxed like a partnership.

II. be taxed like a corporation.

III. operate like a corporation.

IV. provide limited liability for the owners.

a. II and III only

b. I and III only

c. IV onlyD. I and IV only

e. II and IV only





SECTION: 1.3

TOPIC: LIMITED LIABILITY COMPANY

TYPE: CONCEPTS


8/25

15. The excess return required on a risky investment over that of a risk-free investment is called the:

a. real return.

b. inflation premium.

c. average actual return.

d. required return.

E. risk premium.





SECTION: 10.3

TOPIC: RISK PREMIUM

TYPE: DEFINITIONS

16. If a project with conventional cash flows has a profitability index equal to one, the project:

I. will not pay back during its life.

II. will have an internal rate of return that equals the project's required rate of return.

III. will have a zero net present value.

IV. will produce more cash inflows than outflows in today's dollars.

a. III and IV only

b. I, III, and IV only

c. I and II only

D. II and III only

e. I, II, and IV only





SECTION: 8.5

TOPIC: PROFITABILITY INDEX

TYPE: CONCEPTS


9/25

17. A net present value of zero implies that an investment:

A. is earning a return that exactly matches the requirement.

b. has no initial cost.

c. never pays back its initial cost.

d. should be rejected even if the discount rate is lowered.

e. has an expected return that is less than the required return.





SECTION: 8.1


TYPE: CONCEPTS

18. Anderson Enterprises currently has $400 in cash. The company owes $1,200 to suppliers for merchandise

and $4,500 to the bank for a long-term loan. Customers owe Anderson's $1,900. The inventory has a book value

of $3,700 and an estimated market value of $4,400. If Anderson's compiled a financial statement today, how

much would it show as the value of the current assets?

A. $6,000

b. $6,700

c. $6,300

d. $5,600

e. $5,200




SECTION: 2.1

TOPIC: CURRENT ASSETS

TYPE: PROBLEMS


10/25

19. What is the net present value of a project with the following cash flows if the discount rate is 10 percent?

a. $4,513.15

b. $1,085.25

c. $3,498.28

D. $1,193.77

e. $4,102.86





SECTION: 8.1


TYPE: PROBLEMS

20. You have just won the lottery! You can receive $10,000 a year for 8 years or $57,000 as a lump sum

payment today. What is the interest rate on the annuity?

a. 8.46 percent

b. 7.93 percent

c. 8.39 percent

d. 8.35 percent

E. 8.22 percent





SECTION: 5.2

TOPIC: INTEREST RATE

TYPE: PROBLEMS


11/25

21. Scott invests $5,000 today into a retirement account. He expects to earn 9 percent, compounded quarterly,

on his money for the next 30 years. After that, he wants to be more conservative, so only expects to earn 6

percent, compounded semi-annually. How much money will Scott have in his account when he retires 45 years

from now, assuming this is the only deposit he makes into the account?

A. $175,260.78

b. $173,043.77

c. $115,361.12

d. $90,237.16

e. $112,493.22



LEVEL OF DIFFICULTY: CHALLENGE


SECTION: 4.1

TOPIC: FUTURE VALUE

TYPE: PROBLEMS

22. Which one of the following statements is correct?

a. The returns on stocks are considered to be normally distributed but the returns on bonds are not.

B. The returns on stocks are treated as a normal distribution that can be defined by the mean and standard

deviation.

c. The distribution of U.S. Treasury bills over the period of 1926-2006 appears as a single vertical line.

d. The annual rates of inflation for the period 1926-2006 have a narrower bell curve than do the returns on U.S.

Treasury bills.

e. Long-term bonds must have a higher standard deviation than stocks as the returns on bonds produce a widerbell curve than do the returns on stocks.





SECTION: 10.4

TOPIC: NORMAL DISTRIBUTION

TYPE: CONCEPTS


12/25

23. You have a portfolio comprised of the following. What is your portfolio beta?

a. 1.26b. 1.18

c. 1.12

D. 1.07

e. 1.23




Ross - Chapter 011 #75SECTION: 11.6

TOPIC: PORTFOLIO BETA

TYPE: PROBLEMS

24. The average compound return earned per year over a multiyear period is called the _____ return.

a. arithmetic average

b. annual percentage

c. real

D. geometric average

e. standardized mean





SECTION: 10.5

TOPIC: GEOMETRIC AVERAGE RETURN

TYPE: DEFINITIONS


13/25

25. The analysis of the effect that a single variable has on the net present value of a project is called _____

analysis.

a. erosion

b. scenario

c. variable

d. cost-benefit

E. sensitivity





SECTION: 9.6

TOPIC: SENSITIVITY ANALYSIS

TYPE: DEFINITIONS

26. Systematic risk is:

a. also called diversifiable risk.

b. unique to an individual firm.

c. also called asset-specific risk.

d. the total risk inherent in an individual security.

E. a risk that affects a large number of assets.




SECTION: 11.4

TOPIC: SYSTEMATIC RISK

TYPE: DEFINITIONS


14/25

27. Thayer, Inc. has earnings before interest and taxes of $10,350 and net income of $2,528.50. The tax rate is

35 percent. What is the times interest earned ratio?

A. 1.60

b. .96

c. .62

d. .22

e. 1.04





SECTION: 3.2

TOPIC: TIMES INTEREST EARNED RATIO

TYPE: PROBLEMS

28. Hunter's Paradise purchased $387,000 of equipment 3 years ago. The equipment is 7-year MACRS

property. The firm is selling this equipment today for $247,500. What is the aftertax cash flow from this sale if

the tax rate is 34 percent? The MACRS allowance percentages are as follows:

a. $176,497.28

B. $220,889.93

c. $198,409.98

d. $224,007.11e. $163,350.00





SECTION: 9.4

TOPIC: AFTERTAX SALVAGE VALUE

TYPE: PROBLEMS


15/25

29. You are considering the following two mutually exclusive projects. The crossover point is _____ and

Project _____ should be accepted if the discount rate for the project exceeds the crossover rate.

a. 11.02 percent; B

b. 9.93 percent; B

c. 9.54 percent; B

d. 9.93 percent; A

E. 11.02 percent; A





SECTION: 8.4

TOPIC: NPV PROFILE

TYPE: PROBLEMS

30. A U.S. Treasury bill has a beta of _____ while the overall market has a beta of _____.

a. 1; 0

B. 0; 1

c. 1; 1

d. 0; 0e. infinity; 1





SECTION: 11.6

TOPIC: BETA

TYPE: CONCEPTS


16/25

31. Coats & More just announced that it will commence paying annual dividends next year. It plans to pay $.75

a year for four years, $.90 a year for the following three years, and then cease paying dividends altogether. How

much is one share of this stock worth to you today if you require a 12 percent rate of return?

a. $4.09

b. $5.89

C. $3.65

d. $4.40

e. $3.34





SECTION: 7.1

TOPIC: UNEQUAL DIVIDENDS

TYPE: PROBLEMS

32. All of the following are characteristics of common stock except the:

a. right to share proportionally in dividends paid to common shareholders.

b. right to share proportionally in any residual value in a bankruptcy proceeding.

c. ability to vote for corporate directors.

d. ability to vote on key issues such as a merger.

E. priority over other equity in a bankruptcy proceeding.




SECTION: 7.2

TOPIC: COMMON STOCK CHARACTERISTICS

TYPE: CONCEPTS


17/25

33. A bond yielded a real rate of return of 4.79 percent for a time period when the inflation rate was 1.96

percent. What was the actual nominal rate of return?

A. 6.84 percent

b. 7.08 percent

c. 6.55 percent

d. 6.75 percent

e. 7.57 percent





SECTION: 6.6

TOPIC: FISHER EFFECT

TYPE: PROBLEMS

34. A project has the following cash flows. What is the internal rate of return?

a. 13.96 percent

b. 11.64 percent

c. 15.51 percent

d. 19.08 percent

E. 17.23 percent





SECTION: 8.4

TOPIC: INTERNAL RATE OF RETURN

TYPE: PROBLEMS


18/25

35. The discount rate that causes the net present value of a project to equal zero is called the:

a. average accounting return.

b. market rate.

C. internal rate of return.

d. yield to maturity.

e. required return.





SECTION: 8.4

TOPIC: INTERNAL RATE OF RETURN

TYPE: DEFINITIONS

36. If the managers of COA only invest in projects that have a profitability index greater than 1.0, then:

A. COA should increase in value.

b. the required rate of return should increase.

c. the required rate of return should decrease.

d. the value of COA's stock should remain constant.

e. COA will most likely decrease in value.





SECTION: 8.5

TOPIC: PROFITABILITY INDEX

TYPE: CONCEPTS


19/25

37. Boone Brothers purchased a parcel of land 8 years ago for $392,500. At that time, the firm invested

$127,000 modifying the site so that it could be leased to an adjacent car dealer for displaying used car

inventory. The lease payment was $39,000 a year. Boone Brothers is now considering building a hotel on the

site as the auto dealer is relocating to make room for a nearby shopping mall to expand. The current value of the

land is $1.14 million. Boone Brothers has no loans or mortgages secured by the property. What value should be

included in the initial cost of the hotel project for the use of this land?

a. $1,267,000

B. $1,140,000

c. $519,500

d. $828,000

e. $0





SECTION: 9.2

TOPIC: OPPORTUNITY COST

TYPE: PROBLEMS

38. The concept of investing in a variety of diverse assets to reduce risk is referred to as:

A. the principle of diversification.

b. beta measuring.

c. the systematic risk principle.

d. the principle of elimination.

e. split investing.





SECTION: 11.5

TOPIC: PRINCIPLE OF DIVERSIFICATION

TYPE: DEFINITIONS


20/25

39. Company insiders cannot earn excess profits based on the knowledge they have related to their employer if

the financial markets are:

a. aware that the trader is an insider.

b. semistrong form efficient.

C. strong form efficient.

d. efficient at any level.

e. weak form efficient.





SECTION: 10.6

TOPIC: EFFICIENT MARKETS

TYPE: CONCEPTS

40. The stock of Uptown Men's Wear is expected to produce the following returns given the various states of

the economy. What is the expected return on this stock?

a. 10.4 percent

b. 13.6 percentc. 12.8 percent

D. 9.6 percent

e. 15.3 percent





SECTION: 11.1

TOPIC: EXPECTED RETURN

TYPE: PROBLEMS


21/25

41. The amount by which a firm's tax bill is reduced as a result of the depreciation expense is referred to as the

depreciation:

A. tax shield.

b. erosion.

c. opportunity cost.

d. credit.

e. adjustment.





SECTION: 9.3

TOPIC: DEPRECIATION TAX SHIELD

TYPE: DEFINITIONS

42. The most valuable alternative that is forfeited if a particular investment is undertaken is called:

a. a sunk cost.

B. an opportunity cost.

c. a marginal cost.

d. a side effect.

e. erosion.




SECTION: 9.2

TOPIC: OPPORTUNITY COST

TYPE: DEFINITIONS


22/25

43. A 5-year project is expected to generate revenues of $92,000, variable costs of $67,000, and fixed costs of

$11,000. The annual depreciation is $4,000 and the tax rate is 35 percent. What is the annual operating cash

flow?

a. $11,100

B. $10,500

c. $8,700

d. $9,900

e. $9,100





SECTION: 9.3

TOPIC: OPERATING CASH FLOW

TYPE: PROBLEMS

44. You expect the inflation rate to be 3.6 percent and the U.S. Treasury bill yield to be 4.3 percent for the next

year. The risk premium on small-company stocks is 8.1 percent. What rate of return do you expect to earn on

small-company stocks next year?

A. 12.40 percent

b. 11.99 percent

c. 7.90 percent

d. 11.70 percent

e. 8.05 percent





SECTION: 10.3

TOPIC: RISK PREMIUM

TYPE: PROBLEMS


23/25

45. The change in a firm's future cash flows that results from adding a new project are referred to as _____ cash

flows.

a. direct

b. deviated

C. incremental

d. eroded

e. residual





SECTION: 9.1

TOPIC: INCREMENTAL CASH FLOWS

TYPE: DEFINITIONS

46. Which of the following will increase the net income of a profitable firm?

I. decreasing the depreciation

II. increasing the variable cost per unit

III. decreasing fixed costs

IV. increasing revenue

a. III and IV only

b. I, II, and III only

C. I, III, and IV only

d. I and IV only

e. II, III, and IV only





SECTION: 2.2

TOPIC: NET INCOME

TYPE: CONCEPTS


24/25

47. Over the past six years, a stock had annual returns of 2 percent, 10 percent, 14 percent, 8 percent, -6

percent, and 8 percent, respectively. What is the standard deviation of these returns?

a. 7.19 percent

b. 12.27 percent

C. 7.04 percent

d. 11.97 percent

e. 8.38 percent





SECTION: 10.4

TOPIC: STANDARD DEVIATION

TYPE: PROBLEMS

48. The NPV rule states that you should accept an investment if the NPV:

a. is less than or equal to zero.

b. is less than the investment's initial cost.

C. is positive.

d. exceeds the investment's initial cost.

e. is negative.




SECTION: 8.1


TYPE: CONCEPTS


25/25

49. A portfolio is a(n):

a. type of risk-free asset.

b. security that has a beta equal to the market beta.

c. asset that has a beta greater than 1.0.

d. new issue of securities that are being offered to the public.

E. group of assets held by an investor.





SECTION: 11.2

TOPIC: PORTFOLIO

TYPE: DEFINITIONS

50. A sunk cost is:

a. the value of an asset currently owned by a firm.

b. a form of erosion.

c. a cost for which there is no alternative option.

D. a cost that has already been incurred and cannot be recouped.

e. another name for a fixed cost.





SECTION: 9.2

TOPIC: SUNK COST

TYPE: DEFINITIONS

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