,1. Which of the following is a primary market transaction?,,a. You sell 200 shares of IBM stock on the NYSE through your broker.,b. You buy 200 shares of IBM stock from your brother. The trade is not made through a broker–you just give him cash and he gives you the stock.,c. IBM issues 2,000,000 shares of new stock and sells them to the public through an investment banker. ,d. One financial institution buys 200,000 shares of IBM stock from another institution. An investment banker arranges the transaction.,e. IBM sells 2,000,000 shares of treasury stock to its employees when they exercise options that were granted in prior years.,,,2. Which of the following statements is CORRECT?,,a. Hedge funds are legal in Europe and Asia, but they are not permitted to operate in the United States.,b. Hedge funds are legal in the United States, but they are not permitted to operate in Europe or Asia.,c. Hedge funds have more in common with investment banks than with any other type of financial institution.,d. Hedge funds have more in common with commercial banks than with any other type of financial institution.,e. Hedge funds are not as highly regulated as most other types of financial institutions. The justification for this light regulation is that only "sophisticated" investors (i.e., those with high net worth and high incomes) are permitted to invest in these funds, and such investors supposedly can do any necessary "due diligence" on their own rather than have it done by the SEC or some other regulator. ,,,3. Beranek Corp has $720,000 of assets, and it uses no debt–it is financed only with common equity. The new CFO wants to employ enough debt to raise the debt/assets ratio to 40%, using the proceeds from borrowing to buy back common stock at its book value. How much must the firm borrow to achieve the target debt ratio?,,a. $273,600,b. $288,000 ,c. $302,400,d. $317,520,e. $333,396,,,,4. Royce Corp’s sales last year were $280,000, and its net income was $23,000. What was its profit margin?,,a. 7.41%,b. 7.80%,c. 8.21% ,d. 8.63%,e. 9.06%,,,,5. How much would $5,000 due in 25 years be worth today if the discount rate were 5.5%?,,a. $1,067.95,b. $1,124.16,c. $1,183.33,d. $1,245.61,e. $1,311.17 ,,,6. Suppose the U.S. Treasury offers to sell you a bond for $747.25. No payments will be made until the bond matures 5 years from now, at which time it will be redeemed for $1,000. What interest rate would you earn if you bought this bond at the offer price? ,,a. 4.37%,b. 4.86%,c. 5.40%,d. 6.00% ,e. 6.60%,,,7. Ten years ago, Lucas Inc. earned $0.50 per share. Its earnings this year were $2.20. What was the growth rate in earnings per share (EPS) over the 10-year period?,,a. 15.17%,b. 15.97% ,c. 16.77%,d. 17.61%,e. 18.49%,,,,,,,,,8. Janice has $5,000 invested in a bank that pays 3.8% annually. How long will it take for her funds to triple?,,a. 23.99,b. 25.26,c. 26.58,d. 27.98,e. 29.46 ,,,,9. You want to buy a new sports car 3 years from now, and you plan to save $4,200 per year, beginning one year from today. You will deposit your savings in an account that pays 5.2% interest. How much will you have just after you make the 3rd deposit, 3 years from now?,,a. $11,973,b. $12,603,c. $13,267 ,d. $13,930,e. $14,626,,,,10. What is the PV of an ordinary annuity with 10 payments of $2,700 if the appropriate interest rate is 5.5%?,,a. $16,576,b. $17,449,c. $18,367,d. $19,334,e. $20,352 ,,,11. Suppose the real risk-free rate is 3.50% and the future rate of inflation is expected to be constant at 2.20%. What rate of return would you expect on a 1-year Treasury security, assuming the pure expectations theory is valid? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average.,,a. 5.14%,b. 5.42%,c. 5.70% ,d. 5.99%,e. 6.28%,,,,,,12. Suppose the real risk-free rate is 3.00%, the average expected future inflation rate is 2.25%, and a maturity risk premium of 0.10% per year to maturity applies, i.e., MRP = 0.10%(t), where t is the years to maturity. What rate of return would you expect on a 1-year Treasury security, assuming the pure expectations theory is NOT valid? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average.,,a. 5.08%,b. 5.35% ,c. 5.62%,d. 5.90%,e. 6.19%,,,13. Suppose 10-year T-bonds have a yield of 5.30% and 10-year corporate bonds yield 6.75%. Also, corporate bonds have a 0.25% liquidity premium versus a zero liquidity premium for T-bonds, and the maturity risk premium on both Treasury and corporate 10-year bonds is 1.15%. What is the default risk premium on corporate bonds?,,a. 1.08%,b. 1.20% ,c. 1.32%,d. 1.45%,e. 1.60%,,14. Kay Corporation’s 5-year bonds yield 6.20% and 5-year T-bonds yield 4.40%. The real risk-free rate is r* = 2.5%, the inflation premium for 5-year bonds is IP = 1.50%, the default risk premium for Kay’s bonds is DRP = 1.30% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t – 1) × 0.1%, where t = number of years to maturity. What is the liquidity premium (LP) on Kay’s bonds?,,a. 0.36%,b. 0.41%,c. 0.45%,d. 0.50% ,e. 0.55%,,15. Morin Company’s bonds mature in 8 years, have a par value of $1,000, and make an annual coupon interest payment of $65. The market requires an interest rate of 8.2% on these bonds. What is the bond’s price?,,a. $903.04 ,b. $925.62,c. $948.76,d. $972.48,e. $996.79,,,,16. Ryngaert Inc. recently issued noncallable bonds that mature in 15 years. They have a par value of $1,000 and an annual coupon of 5.7%. If the current market interest rate is 7.0%, at what price should the bonds sell?,,a. $817.12,b. $838.07,c. $859.56,d. $881.60 ,e. $903.64,,,,17. Adams Enterprises’ noncallable bonds currently sell for $1,120. They have a 15-year maturity, an annual coupon of $85, and a par value of $1,000. What is their yield to maturity? ,,a. 5.84%,b. 6.15%,c. 6.47%,d. 6.81%,e. 7.17% ,,,18. Dyl Inc.’s bonds currently sell for $1,040 and have a par value of $1,000. They pay a $65 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,100. What is their yield to maturity (YTM)?,,a. 5.78%,b. 6.09% ,c. 6.39%,d. 6.71%,e. 7.05%,,,19. Assume that you are considering the purchase of a 20-year, noncallable bond with an annual coupon rate of 9.5%. The bond has a face value of $1,000, and it makes semiannual interest payments. If you require an 8.4% nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond?,,a. $1,105.69 ,b. $1,133.34,c. $1,161.67,d. $1,190.71,e. $1,220.48,,,,,20. Dothan Inc.’s stock has a 25% chance of producing a 30% return, a 50% chance of producing a 12% return, and a 25% chance of producing a -18% return. What is the firm’s expected rate of return?,,a. 7.72%,b. 8.12%,c. 8.55%,d. 9.00% ,e. 9.50%, 21. 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?,,a. 0.65,b. 0.72,c. 0.80,d. 0.89,e. 0.98 ,,,22. Calculate the required rate of return for Climax 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) the firm has a beta of 1.00, and (5) its realized rate of return has averaged 15.0% over the last 5 years.,,a. 10.29%,b. 10.83%,c. 11.40%,d. 12.00% ,e. 12.60%,,23. Porter Inc’s stock has an expected return of 12.25%, a beta of 1.25, and is in equilibrium. If the risk-free rate is 5.00%, what is the market risk premium?,,a. 5.80% ,b. 5.95%,c. 6.09%,d. 6.25%,e. 6.40%,,,,,,,,24. A share of common stock just paid a dividend of $1.00. If the expected long-run growth rate for this stock is 5.4%, and if investors’ required rate of return is 11.4%, what is the stock price?,,a. $16.28,b. $16.70,c. $17.13,d. $17.57 ,e. $18.01,,,25. The Francis Company is expected to pay a dividend of D1 = $1.25 per share at the end of the year, and that dividend is expected to grow at a constant rate of 6.00% per year in the future. The company’s beta is 1.15, the market risk premium is 5.50%, and the risk-free rate is 4.00%. What is the company’s current stock price?,,a. $28.90 ,b. $29.62,c. $30.36,d. $31.12,e. $31.90,,26. The primary operating goal of a publicly-owned firm interested in serving its stockholders should be to,,a. Maximize its expected total corporate income.,b. Maximize its expected EPS.,c. Minimize the chances of losses.,d. Maximize the stock price per share over the long run, which is the stock’s intrinsic value. ,e. Maximize the stock price on a specific target date.
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