Which of the following conclusions would be true if you earn a higher rate of return on

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Which of the following conclusions would be true if you earn a higher

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your investments?

a. The greater the present value would be for any lump sum you would receive in the

future.

b. The lower the present value would be for any lump sum you would receive in the

future.

c. Your rate of return would not have any effect on the present value of any sum to be

received in the future.

d. The greater the present value would be for any annuity you would receive in the

future.

2) At what rate must $500 be compounded annually for it to grow to $1,079.46 in 10

years?

a. 6 percent

b. 7 percent

c. 8 percent

d. 5 percent

3) What is the present value of $12,500 to be received 10 years from today? Assume a

discount rate of 8% compounded annually and round to the nearest $10.

a. $17,010

b. $9,210

c. $11,574

d. $5,790

4) The appropriate measure for risk according to the capital asset pricing model is:

a. the standard deviation of a firm’s cash flows

b. alpha

c. the standard deviation of a firm’s stock returns

d. beta

5) 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. $2,195

b. $1,840

c. $2,028

d. $2,718

Unit 2 Examination

98

Introduction to Financial Management

6) You have the choice of two equally risk annuities, each paying $5,000 per year for

8 years. One is an annuity due and the other is an ordinary annuity. If you are going

to be receiving the annuity payments, which annuity would you choose to maximize

your wealth?

a. The annuity due

b. Either one because they have the same present value.

c. The ordinary annuity

d. Since we don’t know the interest rate, we can’t find the value of the annuities and

hence we cannot tell which one is better.

7) If you put $1,000 in a savings account that yields 8% compounded semi-annually,

how much money will you have in the account in 20 years (round to nearest $10)?

a. $4,660

b. $4,801

c. $2,190

d. $1,480

8) You want $20,000 in 5 years to take your spouse on a second honeymoon. Your

investment account earns 7% compounded semiannually. How much money must you

put in the investment account today? (round to the nearest $1)

a. $14,178

b. $15,985

c. $13,349

d. $12,367

9) You invest $1,000 at a variable rate of interest. Initially the rate is 4% compounded

annually for the first year, and the rate increases one-half of one percent annually for

five years (year two’s rate is 4.5%, year three’s rate is 5.0%, etc.). How much will you

have in the account after five years?

a. $1,462

b. $1,359

c. $1,276

d. $1,338

10) Assume that you have $165,000 invested in a stock that is returning 11.50%,

$85,000 invested in a stock that is returning 22.75%, and $235,000 invested in a

stock that is returning 10.25%. What is the expected return of your portfolio?

a. 14.8%

b. 12.9%

c. 18.3%

d. 15.6%

Unit 2 Examination

99

Introduction to Financial Management

11) Which of the following statements is most correct concerning diversification and risk?

a. Risk-averse investors often select portfolios that include only companies from the

same industry group because the familiarity reduces the risk.

b. Risk-averse investors often choose companies from different industries for their portfolios because the correlation of returns is less than if all the companies came from

the same industry.

c. Only wealthy investors can diversify their portfolios because a portfolio must contain

at least 50 stocks to gain the benefits of diversification.

d. Proper diversification generally results in the elimination of risk.

12) The yield to maturity on a bond ________.

a. is fixed in the indenture

b. is lower for higher risk bonds

c. is the required rate of return on the bond

d. is generally below the coupon interest rate

13) You are considering buying some stock in Continental Grain. Which of the following

are examples of non-diversifiable risks?

I. Risk resulting from a general decline in the stock market.

II. Risk resulting from a possible increase in income taxes.

III. Risk resulting from an explosion in a grain elevator owned by Continental.

IV. Risk resulting from a pending lawsuit against Continental.

a. III and IV

b. II, III, and IV

c. I and II

d. I only

14) Of the following, which differs in meaning from the other three?

a. Systematic Risk

b. Market Risk

c. Asset-unique Risk

d. Undiversifiable Risk

Unit 2 Examination

100

Introduction to Financial Management

15) You must add one of two investments to an already well- diversified portfolio.

Security A Security B

Expected Return = 12% Expected Return = 12%

Standard Deviation of Standard Deviation of

Returns = 20.9% Returns = 10.1%

Beta = .8 Beta = 2

If you are a risk-averse investor, which one is the better choice?

a. Security A

b. Security B

c. Either security would be acceptable.

d. Cannot be determined with information given.

16) Which of the following is true of a zero coupon bond?

a. The bond has a zero par value.

b. The bond sells at a premium prior to maturity.

c. The bond makes no coupon payments.

d. The bond has no value until the year it matures because there are no positive cash

flows until then.

17) In an efficient securities market the market value of a security is equal to

a. par value.

b. its intrinsic value.

c. its book value.

d. its liquidation value.

18) In 1998 Fischer Corp. issued bonds with an 8 percent coupon rate and a $1,000

face value. The bonds mature on March 1, 2023. If an investor purchased one of

these bonds on March 1, 2008, determine the yield to maturity if the investor paid

$1,050 for the bond.

a. 8.5%

b. The yield to maturity must be greater than 8% because the price paid for the bond

exceeds the face value.

c. The yield to maturity is $950 ($1,000 interest less $50 capital loss).

d. 7.44%

Unit 2 Examination

101

Introduction to Financial Management

19) A bond’s yield to maturity depends upon all of the following except:

a. the maturity of the bond

b. the coupon rate

c. the individual investor’s required return

d. the bond’s risk as reflected by the bond rating

20) A bond will sell at a discount (below par value) if:

a. The economy is booming.

b. Current market interest rates are moving in the same direction as bond values.

c. The market value of the bond is less than the present value of the discount rate of the

bond.

d. Investor’s current required rate of return is above the coupon rate of the bond.

21) How is preferred stock similar to bonds?

a. Investors can sue the firm if preferred dividend payments are not paid (much like

bondholders can sue for non-payment of interest payments).

b. Dividend payments to preferred shareholders (much like bond interest payments to

bondholders) are tax deductible.

c. Preferred stockholders receive a dividend payment (much like interest payments to

bondholders) that is usually fixed.

d. Preferred stock is not like bonds in any way.

22) Many preferred stocks have a feature that requires a firm to periodically set aside

an amount of money for the retirement of its preferred stock. What is the name of this

feature?

a. Callable

b. Cumulative

c. Sinking fund

d. Convertible

23) How is preferred stock affected by a decrease in the required rate of return?

a. The value of a share of preferred stock increases.

b. The dividend increases.

c. The dividend yield increases.

d. The dividend decreases.

Unit 2 Examination

102

Introduction to Financial Management

24) Modem Development, Inc. paid a dividend of $5.00 per share on its common stock

yesterday. Dividends are expected to grow at a constant rate of 10% for the next two

years, at which point the dividends will begin to grow at a constant rate indefinitely.

If the stock is selling for $50 today and the required return is 15%, what it the expected annual dividend growth rate after year two?

a. 5.000%

b. 3.365%

c. 4.556%

d. 3.878%

25) Market efficiency implies which of the following?

a. book value = intrinsic value

b. market value = intrinsic value

c. book value = market value

d. liquidation value = book value

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