Chapter 5

Which of the following is the actual rate of interest paid or earned over a year's time?
Wrong Answer: the periodic rate

Which of the following has the highest time value of money at the same time interest rate for the same number of
payments
Correct Answer: the future value or an annuity-due

Which of the following would increase the present value of a single cash flow?
Wrong Answer: a decrease in the cash flow

You invest $1000 at 6% compounded annually and want to know how much money you will have in 5 years. What
does the $1000 represent?
Correct Answer: the present value

What is the appropriate interest rate and number of time periods to use to find the monthly payment for a 30-year
mortgage at 6% compounded monthly?
Correct Answer: 0.5% and 360

Which of the following would increase the present value of a single cash flow?
a. an increase in the time period
b. a decrease in the cash flow
c. an increase in the interest rate
d. none of the above
Answer: D

At what point in time is the future value of an annuity-due found?

a. at the time of the last annuity payment

b. at the time of the first annuity payment
c. a period after the last annuity payment
d. a period before the first annuity payment
Answer: A IS WRONG, B IS WRONG

Which of the following has the lowest time value of money at the same interest rate for the same number of
payments?

a. The present value of an ordinary annuity

b. The present value of an annuity-due
c. The future value of an ordinary annuity
d. The future value or an annuity-due
Answer: A

Which of the following is the actual rate of interest paid or earned over a year's time?

a. the periodic rate

b. the effective annual rate
c. the nominal annual rate
d. the annual percentage rate
Answer: B

Which of the following would increase the future value of a single cash flow?
a. a decrease in the interest rate
b. a decrease in the cash flow
c. an increase in the interest rate
d. a decrease in the time period
Answer: C

Which of the following would decrease the present value of a single cash flow? 

 a. a decrease in the interest rate
 b. an increase in the cash flow
 c. an increase in the interest rate
 d. a decrease in the time period
Answer: C

At what point in time is the present value of an ordinary annuity found? 

 a. at the time of the last annuity payment
 b. at the time of the first annuity payment
 c. a period after the last annuity payment
 d. a period before the first annuity payment
Answer: D

-------------------------

Which of the following would increase the future value of a single cash flow? 

 a. a decrease in the interest rate
 b. a decrease in the cash flow
 c. an increase in the interest rate
 d. a decrease in the time period
Answer: C

Which of the following would increase the present value of a single cash flow? 

 a. an increase in the time period
 b. a decrease in the cash flow
 c. an increase in the interest rate
 d. none of the above
Answer: D

A series of or equal periodic cash flows is known as a(n) _______________. 

 a. annuity
 b. future value
 c. present value
 d. none of the above
Answer: A

 a. The present value of an ordinary annuity
 b. The present value of an annuity­due
 c. The future value of an ordinary annuity
 d. The future value or an annuity­due
Answer: D

Which of the following is the actual rate of interest paid or earned over a year's time? 

 a. the periodic rate
 b. the effective annual rate
 c. the nominal annual rate
 d. the annual percentage rate
Answer: B

What is the appropriate interest rate and number of time periods to use to find the monthly payment for a 
30­year mortgage at 6% compounded monthly? 

 a. 6% and 30
 b. 6% and 360
 c. 0.5% and 30
 d. 0.5% and 360
Answer: D

___________________________________

Which of the following would increase the future value of a single cash flow?

a. a decrease in the interest rate

b. a decrease in the cash flow
c. a decrease in the interest rate
d. an increase in the time period
ANSWER: D

Which of the following would decrease the present value of a single cash flow?

a. a decrease in the interest rate

b. an increase in the cash flow
c. an increase in the interest rate
d. a decrease in the time period
ANSWER: C

At what point in time is the present value of an ordinary annuity found?

a. at the time of the last annuity payment

b. at the time of the first annuity payment
c. a period after the last annuity payment
d. a period before the first annuity payment
ANSWER: D

Which of the following has the lowest time value of money at the same interest rate for the same number of
payments?

a. The present value of an ordinary annuity

b. The present value of an annuity-due
c. The future value of an ordinary annuity
d. The future value or an annuity-due
ANSWER: A

Which of the following is the actual rate of interest paid or earned over a year's time?

a. the periodic rate

b. the effective annual rate
c. the nominal annual rate
d. the annual percentage rate
ANSWER: B

What is the appropriate interest rate and number of time periods to use to find the monthly payment for a 30-year
mortgage at 6% compounded monthly?

a. 6% and 30
b. 6% and 360
c. 0.5% and 30
d. 0.5% and 360
ANSWER: D

Chapter 5 Post-Quiz

1.
(Points: 1)
Which of the following bank accounts has the highest effective annual return?
 a. An account that pays 10% nominal interest with monthly compounding.

b. An account that pays 9% nominal interest with daily compounding.

c. An account that pays 9% nominal interest with monthly compounding.

d. An account that pays 10% nominal interest with annual compounding.

e. An account that pays 10% nominal interest with daily compounding. RIGHT ANSWER

2.
(Points: 1)
Suppose someone offered you the choice of two equally risky annuities, each paying $10,000 per year for five
years. One is an ordinary (or deferred) annuity, while the other is an annuity due. Which of the following
statements is CORRECT?

a. If interest rates increase, the difference between the present value of the ordinary annuity and the present value
of the annuity due remains the same.

b. The present value of the ordinary annuity must exceed the present value of the annuity due, but the future value
of an ordinary annuity may be less than the future value of the annuity due.

c. The present value of the annuity due exceeds the present value of the ordinary annuity, while the future value of
the annuity due is less than the future value of the ordinary annuity. WRONG ANSWER

d. The present value of the ordinary annuity exceeds the present value of the annuity due, and the future value of
an ordinary annuity also exceeds the future value of the annuity due.

e. The present value of the annuity due exceeds the present value of the ordinary annuity, and the future value of
the annuity due also exceeds the future value of the ordinary annuity.

3.
(Points: 1)
Which of the following is NOT CORRECT?

a. If there is annual compounding, then the effective, periodic, and nominal rates of interest are all the same.
WRONG ANSWER

b. An investment that compounds interest semiannually, and has a nominal rate of 10%, will have an effective rate
less than 10%.

c. The proportion of the payment of a fully amortized loan that goes toward interest declines over time.

d. The present value of a 5-year, $100 annuity due will exceed the present value of a 5-year, $100 ordinary
annuity.
 e. If a loan has a nominal rate of 10%, then the effective rate can never be less than 10%.

4.
(Points: 1)
What is the PV of an annuity due with 5 payments of $3,000 at an interest rate of 5%?

a. $14,976.84

b. $12,513.68

c. $15,349.15 WRONG ANSWER

d. $11,110.34

e. $13,637.85

5.
(Points: 1)
Your father is about to retire, and he wants to buy an annuity that will provide him with $50,000 of income per
year for 20 years, beginning a year from today. The going rate on such annuities is 6%. How much would it cost
him to buy such an annuity today?

a. $416,110.34

b. $488,349.15

c. $615,976.84

d. $573,496.06 RIGHT ANSWER

e. $517,513.68

6.
(Points: 1)
South Penn Trucking is financing a new truck with a loan of $10,000 to be repaid in 5 annual end-of-year
installments of $2,504.56. What annual interest rate is the company paying?

a. 10%

b. 8%

c. 9% WRONG ANSWER

d. 7%
 e. 11%

7.
(Points: 1)
Bill plans to deposit $200 into a bank account at the end of every month. The bank account has a nominal interest
rate of 8% and interest is compounded monthly. How much will Bill have in the account at the end of 2½ years
(30 months)?

a. $ 5,232.43

b. $ 6,617.77 RIGHT ANSWER

c. $22,656.74

d. $ 502.50

e. $ 6,594.88

8.
(Points: 1)
Today, Bruce and Brenda each have $150,000 in an investment account. No other contributions will be made to
their investment accounts. Both have the same goal: They each want their account to reach $1 million, at which
time each will retire. Bruce has his money invested in risk-free securities with an expected annual return of 5%.
Brenda has her money invested in a stock fund with an expected annual return of 10%. How many years after
Brenda retires will Bruce retire?

a. 19.9

b. 19.0

c. 29.4

d. 12.6 WRONG ANSWER

e. 38.9

9.
(Points: 1)
Today is your 23rd birthday, and you just received a gift of $1,000. You have used the money to open up a
brokerage account. Your plan is to contribute an additional $2,000 to the account each year on your birthday, up
through and including your 65th birthday, starting next year. The account has an annual expected return of 12%.
How much do you expect to have in the account right after you make the final $2,000 contribution on your 65th
birthday?

a. $1,824,502
 b. $2,045,442 RIGHT ANSWER

c. $2,031,435

d. $2,292,895

e. $1,811,996

10.
(Points: 1)
Bank A offers to lend you $10,000 at a nominal rate of 6%, simple interest, with interest paid monthly. Bank B
offers to lend you the $10,000, but it will charge 7%, simple interest, with interest paid at the end of the year.
What is the difference in the effective annual rates charged by the two banks?

a. 1.17%

b. 1.28%

c. 0.91%

d. 0.83% RIGHT ANSWER

e. 1.12%

Chapter 5 Post-Quiz
1.
(Points: 1)
Which of the following bank accounts has the highest effective annual return?

a. An account that pays 9% nominal interest with monthly compounding.

b. An account that pays 10% nominal interest with annual compounding.
c. An account that pays 10% nominal interest with monthly compounding.
d. An account that pays 9% nominal interest with daily compounding.
e. An account that pays 10% nominal interest with daily compounding. YES
2.
(Points: 1)
Which of the following statements regarding a 30-year, $100,000 mortgage with a nominal interest rate of 10%,
compounded monthly, is NOT CORRECT?

a. The total dollar amount of principal being paid off each month gets larger as the loan approaches maturity. NO
b. Over 90% of the first payment goes toward interest.
c. The monthly payments will decline over time.
 d. The amount paid toward interest in the first payment would be lower if the nominal interest rate were 8%.
e. The proportion of the monthly payment that represents interest will be lower for the last payment than for the
first payment on the loan.
3.
(Points: 1)
Suppose someone offered you the choice of two equally risky annuities, each paying $10,000 per year for five
years. One is an ordinary (or deferred) annuity, while the other is an annuity due. Which of the following
statements is CORRECT?

a. The present value of the ordinary annuity must exceed the present value of the annuity due, but the future value
of an ordinary annuity may be less than the future value of the annuity due.
b. If interest rates increase, the difference between the present value of the ordinary annuity and the present value
of the annuity due remains the same.
c. The present value of the annuity due exceeds the present value of the ordinary annuity, while the future value of
the annuity due is less than the future value of the ordinary annuity.
d. The present value of the ordinary annuity exceeds the present value of the annuity due, and the future value of
an ordinary annuity also exceeds the future value of the annuity due.
e. The present value of the annuity due exceeds the present value of the ordinary annuity, and the future value of
the annuity due also exceeds the future value of the ordinary annuity. YES
4.
(Points: 1)
You want to buy a condo 5 years from now, and you plan to save $3,000 per year, beginning one year from today.
You will deposit the money in an account that pays 6% interest. How much will you have just after you make the
5th deposit, 5 years from now?

a. $16,911.28YES
b. $17,843.15
c. $14,764.40
d. $15,119.76
e. $13,431.83
5.
(Points: 1)
Your father has $500,000 and wants to retire. He expects to live for another 20 years, and to be able to earn 8% on
his invested funds. How much could he withdraw at the end of each of the next 20 years and end up with zero in
the account?

a. $54,764.40
b. $50,926.10 YES
c. $55,119.76
d. $47,843.15
e. $53,431.83
6.
(Points: 1)
Your father has $500,000 invested at 8%, and he now wants to retire. He wants to withdraw $50,000 at the end of
each year, beginning at the end of this year. How many years will it take to exhaust his funds, i.e., run the account
down to zero?

a. 13.91 years
b. 18.49 years
c. 15.27 years
 d. 20.91 years
e. 11.34 yearsNO
7.
(Points: 1)
Suppose you borrowed $25,000 at a rate of 8% and must repay it in 4 equal installments at the end of each of the
next 4 years. How large would your payments be?

a. $7,548.02YES
b. $7,854.13
c. $7,691.45
d. $7,011.87
e. $7,324.89
8.
(Points: 1)
You just put $1,000 in a bank account that pays 6% nominal annual interest, compounded monthly. How much
will you have in your account after 3 years?

a. $1,196.68YES
b. $1,056.45
c. $1,006.00
d. $1,191.00
e. $1,180.32
9.
(Points: 1)
If a bank pays a 6% nominal rate, with monthly compounding, on deposits, what effective annual rate does the
bank pay?

a. 5.10%NO
b. 5.91%
c. 6.59%
d. 6.71%
e. 6.17%
10.
(Points: 1)
A 30-year, $115,000 mortgage has a nominal annual rate of 7%. All payments are made at the end of each month.
What is the remaining balance on the mortgage after 5 years?

a. $107,623.52NO
b. $108,251.33
c. $106,919.83
d. $107,988.84
e. $106,545.45

1.
(Points: 1)
Your bank account pays an 8% nominal rate of interest. The interest is compounded quarterly. Which of the
following statements is CORRECT?
 a. The periodic rate of interest is 8% and the effective rate of interest is 8%.

b. The periodic rate of interest is 2% and the effective rate of interest is greater than 8%. CORRECT

c. The periodic rate of interest is 2% and the effective rate of interest is 4%.

d. The periodic rate of interest is 8% and the effective rate of interest is greater than 8%.

e. The periodic rate of interest is 4% and the effective rate of interest is 8%.

Save Answer

2.
(Points: 1)
Which of the following statements regarding a 30-year, $100,000 mortgage with a nominal interest rate of 10%,
compounded monthly, is NOT CORRECT?

a. Over 90% of the first payment goes toward interest.

b. The monthly payments will decline over time. WRONG

c. The proportion of the monthly payment that represents interest will be lower for the last payment than for the
first payment on the loan.

d. The amount paid toward interest in the first payment would be lower if the nominal interest rate were 8%.

e. The total dollar amount of principal being paid off each month gets larger as the loan approaches maturity.

Save Answer

3.
(Points: 1)
Which of the following is NOT CORRECT?

a. If there is annual compounding, then the effective, periodic, and nominal rates of interest are all the same.
WRONG

b. The proportion of the payment of a fully amortized loan that goes toward interest declines over time.

c. An investment that compounds interest semiannually, and has a nominal rate of 10%, will have an effective rate
less than 10%.

d. The present value of a 5-year, $100 annuity due will exceed the present value of a 5-year, $100 ordinary
 annuity.

e. If a loan has a nominal rate of 10%, then the effective rate can never be less than 10%.

Save Answer

4.
(Points: 1)
What is the PV of an annuity due with 5 payments of $3,000 at an interest rate of 5%?

a. $14,976.84 WRONG

b. $11,110.34

c. $13,637.85

d. $15,349.15

e. $12,513.68

Save Answer

5.
(Points: 1)
Suppose you have $2,000 and plan to purchase a 3-year certificate of deposit (CD) that pays 4% interest,
compounded annually. How much will you have when the CD matures?

a. $2,591.45

b. $2,011.87

c. $2,249.73 CORRECT

d. $2,324.89

e. $2,854.13

Save Answer

6.
(Points: 1)
You want to buy a condo 5 years from now, and you plan to save $3,000 per year, beginning immediately. You
will make 5 deposits in an account that pays 6% interest. Under these assumptions, how much will you have 5
years from today?
 a. $18,349.15

b. $17,925.96

c. $16,110.34 WRONG

d. $15,976.84

e. $17,513.68

Save Answer

7.
(Points: 1)
Elizabeth has $35,000 in an investment account, but she wants the account to grow to $100,000 in 10 years
without making any additional contributions to the account. What effective annual rate of interest does she need to
earn on the account to meet her goal?

a. 9.03%

b. 10.23% WRONG

c. 8.65%

d. 12.32%

e. 11.07%

Save Answer

8.
(Points: 1)
Assume that you will receive $2,000 a year in Years 1 through 5, $3,000 a year in Years 6 through 8, and $4,000 in
Year 9, with all cash flows to be received at the end of the year. If you require a 14% rate of return, what is the
present value of these cash flows?

a. $ 9,851

b. $11,714

c. $17,353 WRONG

d. $13,250
 e. $15,129

Save Answer

9.
(Points: 1)
A magazine subscription is running out and you can renew it by sending $10 a year (the regular rate) or get a
lifetime subscription to the magazine for $100. Your cost of capital is 7%. How many years would you have to
live to make the lifetime subscription the better buy? Payments for the regular subscription are made at the
beginning of each year. (Round up if necessary to obtain a whole number of years.)

a. 10 years

b. 7 years

c. 8 years

d. 15 years CORRECT

e. 18 years

10.
(Points: 1)
Steve and Robert were college roommates, and each is celebrating their 30th birthday today. When they graduated
from college nine years ago (on their 21st birthday), they each received $5,000 from family members for
establishing investment accounts. Steve and Robert have added $5,000 to their separate accounts on each of their
following birthdays (22nd through 30th birthdays). Steve has withdrawn nothing from the account, but Robert
made one withdrawal on his 27th birthday. Steve has invested the money in Treasury bills that have earned a 6%
annual return, while Robert has invested his money in stocks that have earned a 12% annual return. Both Steve
and Robert have the same amount in their accounts today. How much did Robert withdraw on his 27th birthday?

a. $ 7,832.22

b. $10,865.11

c. $15,545.07 CORRECT

d. $ 8,879.52

e. $13,879.52

Chapter 3

Assets and equity on a non-financial company's balance sheet are reported at

a. market value
b. book value -
c. present value
d. future value

Which of the following is true about an income statement?

a. The income statement accurately represents all cash inflows and outflows for a given period of time.
b. The income statement is a snapshot of a company's financial position.
c. The income statement is reported on an accrual basis. -
d. The income statement shows how a company's retained earnings changed over a given period of time.

What liabilities are subtracted from current assets to find net operating working capital?
a. accounts payable

b. accruals (accrued taxes and wages)

c. notes payable

d. Both A and B

e. All of the above

Answer: D

Which of the following defines net cash flow?

a. net income

b. net income minus dividends

c. net income plus net working capital

d. net income plus depreciation

Answer: D

Which of the following makes up the change in cash on the balance sheet over a period of time?

a. cash flow from operations + investing cash flow + financing cash flow
b. net income plus depreciation
c. net income minus dividends
d. cash flow from operations
Answer: A

Which of the following illustrates an outflow of cash?

a. a decrease in inventory
b. an increase in long-term debt
c. an increase in common stock
d. an increase in accounts receivable -
What does net operating profit after taxes plus depreciation measure?
a. net cash flow
b. operating cash flow
c. free cash flow
d. investing cash flow
Answer: B

Which of the following sources of investment income has the highest marginal tax rate for an individual?
a. Dividends
b. Interest from a savings account -
c. Long-term capital gains
d. Interest from a municipal bond
Answer: B

Which of the following measures the cash available to the company's investors?
a. net cash flow
b. operating cash flow
c. free cash flow -
d. investing cash flow

Which of the following is NOT tax deductible for a corporation?

a. dividends paid
b. interest paid
c. depreciation
d. all of the above are tax deductible
Answer: A

For which of the following sources of income does a corporation receive a tax break?

a. Interest Income from a non-municipal bond

b. Long-term capital gains
c. Short-term capital gains
d. Dividend income
Answer: D

Which of the following is NOT tax deductible for a corporation?

a. dividends paid
b. interest paid
c. depreciation
d. all of the above are tax deductible
Answer A

What does the statement of cash flows measure?

a. How the company's assets are financed.

b. How the company's cash account changed over a period of time.
c. How the company's retained earnings changed over a period of time.
d. The market value of the company's assets and equity.
Answer B
Which of the following sources of investment income has the highest marginal tax rate for an individual?

a. Dividends
b. Interest from a savings account
c. Long-term capital gains
d. Interest from a municipal bond
Answer B

Which of the following is NOT tax deductible for a corporation?

a. dividends paid
b. interest paid
c. depreciation
d. all of the above are tax deductible
Answer

_________________________________________

What does the statement of cash flows measure?

a. How the company's assets are financed.

b. How the company's cash account changed over a period of time.
c. How the company's retained earnings changed over a period of time.
d. The market value of the company's assets and equity.

------

1. Assets and equity on a non­financial company's balance sheet are reported at 
a. market value 
* b. book value 
c. present value 
d. future value

2. Which of the following defines net cash flow? 
a. net income 
b. net income minus dividends 
c. net income plus net working capital 
* d. net income plus depreciation

3. Which of the following makes up the change in cash on the balance sheet over a period of time? 
* a. cash flow from operations + investing cash flow + financing cash flow 
b. net income plus depreciation 
c. net income minus dividends 
d. cash flow from operations

4. Which of the following measures the cash available to the company's investors? 
a. net cash flow 
b. operating cash flow 
* c. free cash flow
d. investing cash flow

5. Which of the following sources of investment income has the highest marginal tax rate for an 
individual? 
a. Dividends 
* b. Interest from a savings account 
c. Long­term capital gains 
d. Interest from a municipal bond

6. For which of the following sources of income does a corporation receive a tax break? 
a. Interest Income from a non­municipal bond 
b. Long­term capital gains 
c. Short­term capital gains 
* d. Dividend income

Which of the following is true about an income statement?

a. The income statement accurately represents all cash inflows and outflows for a given period of time.
b. The income statement is a snapshot of a company's financial position.
c. The income statement is reported on an accrual basis.
d. The income statement shows how a company's retained earnings changed over a given period of time.

CHAPTER 4

Why did AT&T have identical current and quick ratios? 

 a. AT&T reported no short­term debt on their balance sheets.
 b. AT&T reported no accounts receivable on their balance sheets.
 c. AT&T reported no accounts payable on their balance sheets.
 d. AT&T reported no inventory on their balance sheets.
Answer: D

Which of the following ratios were clearly better for Verizon vs. AT&T in both 2007 and 2006? 

 a. Days Sales Outstanding
 b. Fixed Asset Turnover
 c. Total Asset Turnover
 d. None of the above were better for Verizon both years.
Answer: A

Which of the following ratios would you like to see decline over time for a company? 

 a. Inventory Turnover
 b. Days Sales Outstanding
 c. Fixed Asset Turnover
 d. Total Asset Turnover
Answer: B

Which ratio(s) were better for AT&T vs. Verizon in both 2007 and 2006? 

 a. only the debt ratio
 b. only the times­interest­earned ratio
 c. the debt and time­interest­earned ratios
 d. none of AT&T debt management ratios were better than Verizon both years.
Answer: C

What are the operational component(s) of the DuPont Equation? 

 a. profit margin
 b. total asset turnover
 c. equity multiplier
 d. Both A and B
Answer: D

Which of the following ratios tries to factor out the effect of financing on profitability? 

 a. Return on assets
 b. Profit margin on sales
 c. Return on equity
 d. Basic earning power
Answer: D

Under what conditions could a company artificially increase their current ratio at the end of their accounting
reporting period by taking out a short term loan and placing the proceeds in the cash account?

a. When the current ratio is equal to one before this transaction.

b. When the current ratio is less than one before this transaction.
c. When the current ratio is greater than one before this transaction.
d. The company's current ratio would not increase after this transaction. WRONG ANSWER
Answer:
Which of the following ratios might favor a company with older assets vs. a company with newer assets?

a. Inventory Turnover
b. Days Sales Outstanding
c. Fixed Asset Turnover
d. Current Ratio
Answer:C

Which of the following would increase a company's return on equity (all else constant)?

a. An increase in the debt ratio.

b. A decrease in the debt ratio.
c. A decrease in the profit margin
d. A decrease in total asset turnover.
Answer:A

-----------

1. Why did AT&T have identical current and quick ratios? 
a. AT&T reported no short­term debt on their balance sheets. 
b. AT&T reported no accounts receivable on their balance sheets. 
c. AT&T reported no accounts payable on their balance sheets. 
d. AT&T reported no inventory on their balance sheets.

2. Which of the following ratios were clearly better for Verizon vs. AT&T in both 2007 and 2006? 
a. Days Sales Outstanding 
b. Fixed Asset Turnover 
c. Total Asset Turnover 
d. None of the above were better for Verizon both years.

3. Which of the following ratios would you like to see decline over time for a company? 
a. Inventory Turnover 
b. Days Sales Outstanding 
c. Fixed Asset Turnover 
d. Total Asset Turnover

4.Which ratio(s) were better for AT&T vs. Verizon in both 2007 and 2006? 
a. only the debt ratio 
b. only the times­interest­earned ratio 
c. the debt and time­interest­earned ratios 
d. none of AT&T debt management ratios were better than Verizon both years.

5.What are the operational component(s) of the DuPont Equation? 
a. profit margin 
b. total asset turnover 
c. equity multiplier 
d. Both A and B

6. Which of the following ratios is equal to profit margin times total asset turnover? 
a. basic earning power 
b. return on assets
c. return on equity 
d. equity multiplier

­­
1. Under what conditions could a company artificially increase their current ratio at the end of their accounting
reporting period by taking out a short term loan and placing the proceeds in the cash account?

a. When the current ratio is equal to one before this transaction.

b. When the current ratio is less than one before this transaction.
c. When the current ratio is greater than one before this transaction.
d. The company's current ratio would not increase after this transaction.

2. Which of the following ratios might favor a company with older assets vs. a company with newer assets?

a. Inventory Turnover
b. Days Sales Outstanding
c. Fixed Asset Turnover
d. Current Ratio

3. Which of the following ratios were clearly better for Verizon vs. AT&T in both 2007 and 2006?

a. Days Sales Outstanding

b. Fixed Asset Turnover
c. Total Asset Turnover
d. None of the above were better for Verizon both years.

4. Which of the following trends would be the biggest sign of decline in a company's debt management situation?

a. An increase in both the debt and times-interest earned ratios.

b. A decrease in the debt ratio and an increase in the times-interest earned ratio.
c. An increase in the debt ratio and a decrease in the times-interest earned ratio. FUCK YOU
TSOUKALAS<----My answers didn't have this part
d. A decrease in the debt ratio.

5. What are the operational component(s) of the DuPont Equation?

a. profit margin
b. total asset turnover
c. equity multiplier
d. Both A and B

6. Which of the following ratios tries to factor out the effect of financing on profitability?
a. Return on assets
b. Profit margin on sales
c. Return on equity
d. Basic earning power

Which of the following ratios is equal to profit margin times total asset
turnover?

a. basic earning power

b. return on assets
c. return on equity
d. equity multiplier

Which group of financial ratios measure a company's ability to meet short term obligations?

a. Liquidity
b. Asset Management
c. Debt Management
d. Profitability

CHAPTER 2 & 6 Pre-Flight

Which of the following is an example of a capital market security? 
 a. Common stock
 b. Treasury bills
 c. Commercial paper
 d. A corporate bond that matures in 10 months.
Answer: A

Which of the following is an example of a secondary market transaction? 

 a. Mr. and Mrs. MBA take out a mortgage to buy a house.
 b. The U.S. Treasury auctions off 2­year Treasury Notes.
 c. Google institutes a Dutch Auction to sell additional shares of common stock to the public.
 d. Phil Mickelson instructs his broker to sell his shares of Nike common stock.
Answer: D

Which form of market efficiency says technical analysis or charting cannot out perform the market? 

 a. Weak
 b. Semi­strong
 c. Strong
 d. None of the above
Answer: A
Which of the following explains why corporate bonds have higher nominal interest rates than US Treasury 
bonds with the same time to maturity? 

 a. more maturity risk
 b. more default risk
 c. a higher inflation premium
 d. a higher real rate of interest
Answer: B

Which of the following are included in the nominal interest rate for a long­term corporate bond? 

 a. Maturity risk premium
 b. Default risk premium
 c. Liquidity premium
 d. All of the above.
Answer: D

What does a downward sloping yield curve mean according to the pure expectations hypothesis? 

 a. Investors expect interest rates to be higher in the future.
 b. Investors expect interest rates to be lower in the future.
 c. Investors expect interest rates to remain the same in the future.
 d. Investors expect the maturity risk premium to rise in the future.
Answer: B

Which of the following is an assumption of the pure expectations hypothesis? 

 a. The maturity risk premium is positive.
 b. The maturity risk premium is negative.
 c. The maturity risk premium is zero.
 d. Treasury bonds have a liquidity premium
Answer: C

--------
Which of the following is an example of a capital market security? 
a. Common stock
b. Treasury bills
c. Commercial paper
d. A corporate bond that matures in 10 months.

Which of the following is an example of a secondary market transaction? 
a. Mr. and Mrs. MBA take out a mortgage to buy a house.
b. The U.S. Treasury auctions off 2­year Treasury Notes.
c. Google institutes a Dutch Auction to sell additional shares of common stock to the public.
d. Phil Mickelson instructs his broker to sell his shares of Nike common stock

Which form of market efficiency says technical analysis or charting cannot out perform the market? 
a. Weak
b. Semi­strong
c. Strong
d. None of the above

Which of the following would increase nominal interest rates? 
a. An increase in the savings rate for individuals and businesses
b. A decrease in expected inflation
c. An increase in good investment opportunities for businesses.
d. None of the above

Which of the following are included in the nominal interest rate for a long­term US Treasury bond? 
a. Maturity risk premium
b. Default risk premium
c. Liquidity premium
d. All of the above

What does a downward sloping yield curve mean according to the pure expectations hypothesis? 
a. Investors expect interest rates to be higher in the future.
b. Investors expect interest rates to be lower in the future.
c. Investors expect interest rates to remain the same in the future.
d. Investors expect the maturity risk premium to rise in the future.

A money market is the market for _______C__________. 

a. common stock
b. long­term bonds
c. short­term debt securities
d. both A and B.

Martha Stewart served jail time for insider trading because markets are not ___________ form efficient.

a. Weak
b. Semi-strong
c. Strong
d. None of the above

Which of the following explains how can a yield curve be flat or downward sloping if a maturity risk premium
exists?
a. Investors expect inflation to be higher in the future.
b. Investors expect inflation to be lower in the future.
c. Investors expect inflation to remain the same in the future.
d. Investores expect the real rate of interest to rise in the future.

CH2/6 Post Quiz

Chapter 2&6 Post-Quiz
1.
(Points: 1)
Which of the following statements is CORRECT?

a. If you purchase 100 shares of Disney stock from your brother-in-law, this is an example of a primary market
transaction.
b. As they are generally defined, money market transactions involve debt securities with maturities of less than
one year.
c. If Disney issues additional shares of common stock through an investment banker, this would be a secondary
market transaction.
d. Only institutions, and not individuals, can engage in the derivatives markets.
e. The NYSE is an example of an over-the-counter market.
2.
(Points: 1)
Which of the following statements is CORRECT?

a. The NYSE does not exist as a physical location; rather it represents a loose collection of dealers who trade stock
electronically.
b. An example of a primary market transaction would be your uncle transferring 100 shares of Wal-Mart stock to
you as a birthday gift.
c. If your uncle in New York sold 100 shares of Microsoft through his broker to an investor in Los Angeles, this
would be a primary market transaction.
d. Capital market instruments include both long-term debt and common stocks.
e. While the two frequently perform similar functions, investment banks generally specialize in lending money,
whereas commercial banks generally help companies raise large blocks of capital from investors.
3.
(Points: 1)
Most studies of stock market efficiency suggest that the stock market is highly efficient in the weak-form and
reasonably efficient in the semistrong-form. Assuming these findings are correct, which of the following
statements is CORRECT?

a. Even if you possess insider information, you cannot use this information to earn above-average returns because
such information will already be reflected in stock prices.
b. Information you read in The Wall Street Journal cannot be used to select stocks that are likely to produce
above-average rates of return.
c. If you apply financial analysis properly, you can use information provided in companies' annual reports to earn
above-average returns.
d. You notice that a company's stock price always seems to swing back and forth--whenever it falls by 10% or
more, it seems to recover and to eventually exceed its former high. Since its price has fallen during the past 2
months, now is a great time to buy it before it takes off again.
e. You have been tracking a stock's price over the past 6 months, and you note that this particular stock has tended
to rise sharply immediately after it has fallen for three days. You can use this information to devise a trading
strategy that will help you beat the market.
4.
(Points: 1)
Which of the following statements is CORRECT?

a. If your uncle earned a higher return on his portfolio over a 10-year period than the return on the overall stock
market, this would demonstrate that the stock market is inefficient.
b. Because of increased globalization, all of the world's stock markets are equally efficient as that term is defined
in the text.
c. If a market is strong-form efficient, this implies that the returns on bonds and stocks should be identical.
d. If a market is weak-form efficient, this implies that above-average returns can best be achieved by focusing on
past movements of stock prices.
e. If a market is semistrong-form efficient, this implies that above-average returns cannot be achieved by
analyzing publicly available data because such information is already reflected in stock prices.
5.
(Points: 1)
Assume that inflation is expected to decline steadily in the future, but that the real risk-free rate, r*, will remain
constant. Which of the following statements is CORRECT?

a. If the expectations theory holds, the Treasury yield curve must be downward sloping.
b. If there is a positive maturity risk premium, the Treasury yield curve must be upward sloping.
c. The expectations theory cannot hold if inflation is decreasing.
d. If inflation is expected to decline, there can be no maturity risk premium.
e. If the expectations theory holds, the corporate yield curve must be downward sloping.
6.
(Points: 1)
Which of the following statements is CORRECT?

a. If the expectations theory holds, the yield curve will never be downward sloping.
b. Because long-term bonds are riskier than short-term bonds, yields on long-term Treasury bonds will always be
higher than yields on short-term T-bonds.
c. If the maturity risk premium (MRP) equals zero, the yield curve must be flat.
d. If inflation is expected to increase in the future and the maturity risk premium (MRP) is greater than zero, the
yield curve will be upward sloping.
e. If the maturity risk premium (MRP) is greater than zero, the yield curve must be upward sloping.
7.
(Points: 1)
Suppose the rate of return on a 10-year T-bond is currently 5.00% and that on a 10-year Treasury Inflation
Protected Security (TIP) is 2.10%. Suppose further that the MRP on a 10-year T-bond is 0.9%, that no MRP is
required on TIPs, and that no liquidity premiums are required on any T-bonds. Given this data, what is the
expected rate of inflation over the next 10 years? Disregard cross-product terms, i.e., if averaging is required, use
the arithmetic average.

a. 2.00%
b. 2.10%
c. 1.80%
d. 2.20%
e. 1.90%
8.
(Points: 1)
 The real risk-free rate is 3%. Inflation is expected to be 4% this coming year, jump to 5% next year, and increase
to 6% the year after. According to the expectations theory, what should be the interest rate on 3-year, risk-free
securities today?

a. 10%
b. 6%
c. 12%
d. 8%
e. 18%
9.
(Points: 1)
The real risk-free rate is expected to remain constant at 3%. Inflation is expected to be 2% a year for the next 3
years, and then 4% a year thereafter. The maturity risk premium is 0.1%(t - 1), where t equals the maturity of the
bond. A 5-year corporate bond has a yield of 8.4%. What is the yield on a 7-year corporate bond that has the same
default risk and liquidity premiums as the 5-year corporate bond? Disregard cross-product terms, i.e., if averaging
is required, use the arithmetic average.

a. 7.98%
b. 9.24%
c. 8.73%
d. 8.65%
e. 8.94%
10.
(Points: 1)
An investor in Treasury securities expects inflation to be 3% in Year 1, 4% in Year 2, and 5% each year thereafter.
Assume that the real risk-free rate is 3%, and that this rate will remain constant over time. Two-year Treasury
securities yield 6.8%, while 4-year Treasury securities yield 7.6%. What is the difference in the maturity risk
premiums (MRPs) on the two securities, that is, what is MRP4 - MRP2? Disregard cross-product terms, i.e., if
averaging is required, use the arithmetic average.

a. 0.80%
b. 0.90%
c. 0.05%
d. 0.15%
e. 0.10%

If the pure expectations theory of the term structure is correct, which of the following statements is CORRECT?

a. The yield on a 5-year corporate bond should always exceed the yield on a 3-year Treasury bond.
b. An upward sloping yield curve would imply that interest rates are expected to be lower in the future.
c. Interest rate price risk is higher on short-term bonds, but reinvestment rate risk is higher on long-term bonds.
d. If a 1-year Treasury bill has a yield to maturity of 7% and a 2-year Treasury bill has a yield to maturity of 8%, this
would imply the market believes that 1-year rates will be 7.5% one year from now.
e. Interest rate price risk is higher on long-term bonds, but reinvestment rate risk is higher on short-term
bonds.

The real risk­free rate of interest is expected to remain constant at 
3% for the foreseeable future. However, inflation is expected to increase steadily over the next 30 years, 
so the Treasury yield curve has an upward slope. Assume that the pure expectations theory holds. You 
are also considering two corporate bonds, one with a 5­year maturity and one with a 10­year maturity. 
Both have the same default and liquidity risks. Given these assumptions, which of these statements is 
CORRECT?

 a. The 10­year Treasury bond must have a higher yield than the 5­year corporate bond.
 b. Since the pure expectations theory holds, 10­year corporate bonds must have the same yield as 10­
year Treasury bonds.
 c. The 10­year corporate bond must have a higher yield than the 5­year corporate bond.
 d. Since the pure expectations theory holds, all 5­year Treasury bonds must have higher yields than all 
10­year Treasury bonds.
 e. Since the pure expectations theory holds, the 10­year corporate bond must have the same yield as the 
5­year corporate bond.

1.
(Points: 1)
Which of the following statements is CORRECT?

a. It is possible that the price set in an IPO is so low that investors will want to buy more shares than the company
wants to sell. In that case, the company will have to issue more shares than it wants to sell.

b. IPO prices are generally established by the market, and buyers of the new stock must pay the price that prevails
at the close of trading on the day the stock is offered to the public.

c. In a "Dutch auction," investors who want to buy shares in an IPO submit bids indicating how many shares they
want to buy and the price they are willing to pay. The company determines how many shares it wants to sell. The
highest price that enables the company to sell the desired number of shares is the price that all buyers will pay.

d. It is possible that the price set in an IPO is so high that investors will he NYSE is an that the company wants to
sell. In that case, the company is said to have "left money on the table."

e. The term "IPO" stands for introductory price offered, and it is the price at which shares of a new company are
offered to the public.

Save Answer

2.
(Points: 1)
You recently sold 100 shares of Microsoft stock to your brother at a family reunion. At the reunion your brother
gave you a check for the stock and you gave your brother the stock certificates. Which of the following best
describes this transaction?

a. This is an example of an exchange of physical assets.

b. This is an example of a primary market transaction.

 c. This is an example of a money-market transaction.

d. This is an example of a derivative market transaction.

e. This is an example of a direct transfer of capital.

Save Answer

3.
(Points: 1)
Which of the following statements is CORRECT?

a. An implication of the semistrong-form of the efficient markets hypothesis is that you cannot, over the long run,
benefit from trading on information reported in The Wall Street Journal.

b. If the stock market is efficient, then the actual realized returns on all stocks will be equal to their expected rates
of return.

c. If the market is strong-form efficient, all stocks will be equally risky.

d. Because of increased globalization, all of the world's stock markets are equally efficient.

e. If a stock's risk increases but its expected rate of growth in earnings and dividends remains constant, then the
new equilibrium price of the stock will almost certainly increase.

Save Answer

4.
(Points: 1)
Which of the following statements is CORRECT?

a. Because of increased globalization, all of the world's stock markets are equally efficient as that term is defined
in the text.

b. If a market is strong-form efficient, this implies that the returns on bonds and stocks should be identical.

c. If a market is semistrong-form efficient, this implies that above-average returns cannot be achieved by
analyzing publicly available data because such information is already reflected in stock prices.

d. If your uncle earned a higher return on his portfolio over a 10-year period than the return on the overall stock
market, this would demonstrate that the stock market is inefficient.

e. If a market is weak-form efficient, this implies that above-average returns can best be achieved by focusing on
past movements of stock prices.
 Save Answer

5.
(Points: 1)
Assuming that the term structure of interest rates is determined as posited by the pure expectations theory, which
of the following statements is CORRECT?

a. In equilibrium, long-term rates must be equal to short-term rates.

b. Consumer prices as measured by an index of inflation are expected to rise at a constant rate.

c. The maturity risk premium is zero.

d. Inflation is expected to be zero.

e. An upward-sloping yield curve implies that future short-term rates are expected to decline.

Save Answer

6.
(Points: 1)
Assume the following: The real risk-free rate, r*, is expected to remain constant at 3%. Inflation is expected to be
3% next year and then to be constant at 2% a year thereafter. The maturity risk premium is zero. Given this
information, which of the following statements is CORRECT?

a. The real risk-free rate cannot be constant if inflation is not expected to remain constant.

b. This problem's assumption of a zero maturity risk premium is probably not valid in the real world.

c. The yield curve for U.S. Treasury securities will be upward sloping.

d. A 5-year corporate bond will have a lower yield than a 7-year Treasury security.

e. A 5-year corporate bond will have a lower yield than a 5-year Treasury security.

Save Answer

7.
(Points: 1)
Suppose the real risk-free rate is 3.50% and the future rate of inflation is expected to be constant at 2.25%. 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. 5.50%
 b. 5.25%

c. 5.75%

d. 6.25%

e. 6.00%

Save Answer

8.
(Points: 1)
Looking in today's newspaper, you observe the following yield curve information:

Maturity Yield
1 year 5.0%
2 years 5.5
3 years 6.0
4 years ???
5 years 7.0

Assume that the pure expectations hypothesis holds and that the market expects that the one-year rate will be
7.2% four years from today. What is the four-year rate today?

a. 6.95%

b. 6.80%

c. 5.20%

d. 6.50%

e. 6.20%

Save Answer

9.
(Points: 1)
Keys Corporation's 5-year bonds yield 6.50%, and 5-year T-bonds yield 4.40%. The real risk-free rate is r* =
2.5%, the default risk premium for Keys' bonds is DRP = 0.40% versus zero for T-bonds, the liquidity premium on
Keys' bonds is LP = 1.7%, 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 inflation premium (IP) on 5-year bonds?

a. 1.90%
 b. 1.70%

c. 1.80%

d. 1.50%

e. 1.60%

Save Answer

10.
(Points: 1)
The 10-year bonds of Gator Corporation are yielding 8% per year. Treasury bonds with the same maturity are
yielding 6.4% per year. The real risk-free rate (r*) is expected to be constant at 3%. The average inflation
premium is 2.5% and the maturity risk premium takes the form: MRP = 0.l%(t - l), where t = number of years to
maturity. If the liquidity premium is 0.5%, what is the default risk premium on the corporate bond? Disregard
cross-product terms, i.e., if averaging is required, use the arithmetic average.

a. 1.1%

b. 1.6%

c. 1.2%

d. 2.5%

e. 0.7%

Which of the following statements is CORRECT?

a. If inflation is expected to increase, then the yield on a 2-year bond will exceed that on a 3-year bond.

b. The yield on a 3-year corporate bond should always exceed the yield on a 2-year corporate bond.

c. The real risk-free rate increases if people expect inflation to increase.

d. The yield on a 2-year corporate bond should always exceed the yield on a 2-year Treasury bond.

e. The yield on a 3-year Treasury bond should always exceed the yield on a 2-year Treasury bond.

6.
(Points: 1)
 If the pure expectations theory holds, which of the following statements is CORRECT?

a. The yield curve for Treasury securities would be flat, but the yield curve for corporate securities
might be downward sloping.

b. The maturity risk premium would be zero.

c. If 2-year bonds yield more than 1-year bonds, an investor with a 2-year time horizon would almost
certainly end up with more money if he or she bought 2-year bonds.

d. The yield curve for Treasury securities cannot be downward sloping.

e. The yield curve for both Treasury and corporate bonds would be flat.

8.
(Points: 1)
Three-year treasury securities yield 5%, 5-year treasury securities yield 6%, and 8-year treasury
securities yield 7%. If the expectations theory is correct, what is the expected yield on 5-year
Treasury securities three years from now?

a. 5.09%

b. 6.71%

c. 6.03%

d. 7.00%

e. 8.22%

Save Answer

9.
(Points: 1)
The real risk-free rate is 3%. Inflation is expected to be 4% this coming year, jump to 5% next year,
and increase to 6% the year after. According to the expectations theory, what should be the interest
rate on 3-year, risk-free securities today?

a. 6%

b. 18%

c. 10%

d. 12%
 e. 8%

Save Answer

10.
(Points: 1)
An investor in Treasury securities expects inflation to be 3% in Year 1, 4% in Year 2, and 5% each
year thereafter. Assume that the real risk-free rate is 3%, and that this rate will remain constant over
time. Two-year Treasury securities yield 6.8%, while 4-year Treasury securities yield 7.6%. What is
the difference in the maturity risk premiums (MRPs) on the two securities, that is, what is MRP4 -
MRP2? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average.

a. 0.90%

b. 0.80%

c. 0.15%

d. 0.10%

e. 0.05%
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1.
(Points: 1)
Which of the following statements is CORRECT?
a. Consumer automobile loans are traded in the money market.
b. The New York Stock Exchange is an auction market with a physical
location.
c. If an investor sells shares of stock through a broker, then it would be a
primary market transaction.
d. While the distinctions are blurring, investment banks generally
specialize in lending money, whereas commercial banks generally help
companies raise capital from other parties. e. Capital market transactions
involve only the purchase and sale of equity securities.
Save Answer

2.
(Points: 1)
You recently sold to your brother 200 shares of Disney stock, and the
transfer was made through a broker. This is an example of:
a. A secondary market transaction. CORRECT
b. An over-the-counter market transaction.
c. A primary market transaction.
d. A futures market transaction. e. A money market transaction.
Save Answer
3.
(Points: 1)
Which of the following statements is CORRECT?
a. Capital market transactions involve only preferred stock or common
stock.
b. The most important difference between spot markets versus futures
markets is the maturity of the instruments that are traded. Spot market
transactions involve securities that have maturities of less than one year
whereas futures markets transactions involve securities with maturities
greater than one year.
c. Money market transactions do not involve securities denominated in
currencies other than the U.S. dollar.
d. Both Nasdaq dealers and "specialists" on the NYSE hold
inventories of stocks. CORRECT e. If General Electric were to issue
new stock this year, it would be considered a secondary market
transaction since the company already has stock outstanding.
Save Answer

4.
(Points: 1)
If the stock market is semistrong-form efficient, which of the following
statements would be CORRECT?
a. A trading strategy in which you buy stocks that have recently fallen in
price is likely to provide you with a return that exceeds the return on the
overall stock market.
b. If you have insider information about a particular stock, you cannot
expect to earn an above average return on this information because it is
already incorporated into the current stock price.
c. The required returns on stocks equal the required returns on bonds.
d. Even if a market is semistrong-form efficient, an investor could
still earn a better return than the market return if he or she had inside
information. CORRECT e. The required returns on all stocks are the
same, and the required returns on stocks are higher than the required
returns on bonds.
Save Answer

5.
(Points: 1)
Short Corp just issued bonds that will mature in 10 years, and Long Corp
issued bonds that will mature in 20 years. Both bonds promise to pay a
semiannual coupon and they are non-callable, so they cannot be retired
early. Also, they are equally liquid, and we assume that the Treasury yield
curve is based on the pure expectations theory. Under these conditions,
which of the following statements is CORRECT?
a. If the yield curve for Treasury securities is upward sloping, Long's
bonds must under all conditions have a higher yield than Short's
bonds. WRONG
b. If the yield curve for Treasury securities is flat, Short's bond must under
all conditions have the same yield as Long's bonds.
c. If the Treasury yield curve is upward sloping and Short has less default
 risk than Long, then Short's bonds must under all conditions have the
lower yield.
d. If Long's and Short's bonds have the same default risk, their yields must
under all conditions be equal. e. If the Treasury yield curve is downward
sloping, Long's bonds must under all conditions have the lower yield.
Save Answer

6.
(Points: 1)
The real risk-free rate of interest is expected to remain constant at3% for
the foreseeable future. However, inflation is expected to increase steadily
over the next 30 years, so the Treasury yield curve has an upward slope.
Assume that the pure expectations theory holds. You are also considering
two corporate bonds, one with a 5-year maturity and one with a 10-year
maturity. Both have the same default and liquidity risks. Given these
assumptions, which of these statements is CORRECT?
a. Since the pure expectations theory holds, 10-year corporate bonds must
have the same yield as 10-year Treasury bonds.
b. The 10-year Treasury bond must have a higher yield than the 5-year
corporate bond.
c. Since the pure expectations theory holds, all 5-year Treasury
bonds must have higher yields than all 10-year Treasury bonds.
WRONG
d. The 10-year corporate bond must have a higher yield than the 5-year
corporate bond. e. Since the pure expectations theory holds, the 10-year
corporate bond must have the same yield as the 5-year corporate bond.
Save Answer

7.
(Points: 1)
Suppose the real risk-free rate is 3.50%, the average future inflation rate is
2.25%, and a maturity 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 5-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. 6.15% WRONG
b. 6.05%
c. 5.95%
d. 6.25%
e. 6.35%
Save Answer

8.
(Points: 1)
Assume that r* = 2.0%; the maturity risk premium is found as MRP = 0.1%
(t - 1), where t = years to maturity; the default risk premium for corporate
bonds is found as DRP = 0.05%(t - 1); the liquidity premium is 1% for
corporate bonds only; and inflation is expected to be 3%, 4%, and 5%
during the next three years and then 6% thereafter. What is the difference
 in interest rates between 10-year corporate and Treasury bonds?
Disregard cross-product terms, i.e., if averaging is required, use the
arithmetic average.
a. 0.45%
b. 2.75%
c. 2.20%
d. 1.45%
e. 3.25% WRONG
Save Answer

9.
(Points: 1)
One-year Treasury securities yield 5%, 2-year Treasury securities yield
5.5%, and 3-year Treasury securities yield 6%. Assume that the
expectations theory holds. What does the market expect will be the yield
on 1-year Treasury securities two years from now?
a. 7.01%
b. 6.51%
c. 6.01%
d. 8.01% WRONG
e. 7.51%
Save Answer

10.
(Points: 1)
The real risk-free rate is 2%. The market expects that inflation will be 3%
each year for the next five years, and then will average 5% a year
thereafter. The maturity risk premium is estimated to be MRPt = 0.1%(t -
1). A 10-year corporate bond yields 8.6%. What is the yield on an 8year
corporate bond that has the same default risk and liquidity as the 10year
bond? Disregard cross-product terms, i.e., if averaging is required, use the
arithmetic average.
a. 7.90%
b. 8.15%
c. 6.45% WRONGGGGGG
d. 8.42%
e. 8.60%
Save Answer

1.
(Points: 1) Which of the following statements is CORRECT?

a. The term "IPO" stands for introductory price offered, and it is the price at which shares of a new company are
offered to the public.
b. IPO prices are generally established by the market, and buyers of the new stock must pay the price that prevails
at the close of trading on the day the stock is offered to the public.
c. In a "Dutch auction," investors who want to buy shares in an IPO submit bids indicating how many shares they
want to buy and the price they are willing to pay. The company determines how many shares it wants to sell. The
highest price that enables the company to sell the desired number of shares is the price that all buyers will pay.
d. It is possible that the price set in an IPO is so high that investors will refuse to buy the number of shares that the
company wants to sell. In that case, the company is said to have "left money on the table."
e. It is possible that the price set in an IPO is so low that investors will want to buy more shares than the company
wants to sell. In that case, the company will have to issue more shares than it wants to sell.
Save Answer
2.
(Points: 1) You recently sold to your brother 200 shares of Disney stock, and the transfer was made through a
broker. This is an example of:

a. A money market transaction.

b. A primary market transaction.
c. An over-the-counter market transaction.
d. A futures market transaction.
e. A secondary market transaction.
Save Answer
3.
(Points: 1) Which of the following statements is CORRECT?

a. The most important difference between spot markets versus futures markets is the maturity of the instruments that
are traded. Spot market transactions involve securities that have maturities of less than one year whereas futures
markets transactions involve securities with maturities greater than one year.
b. Capital market transactions involve only preferred stock or common stock.
c. Both Nasdaq dealers and "specialists" on the NYSE hold inventories of stocks.
d. If General Electric were to issue new stock this year, it would be considered a secondary market transaction since
the company already has stock outstanding.
e. Money market transactions do not involve securities denominated in currencies other than the U.S. dollar.
Save Answer
4.
(Points: 1) Which of the following statements is CORRECT?

a. If your uncle earned a higher return on his portfolio over a 10-year period than the return on the overall stock
market, this would demonstrate that the stock market is inefficient.
b. If a market is semistrong-form efficient, this implies that above-average returns cannot be achieved by analyzing
publicly available data because such information is already reflected in stock prices.
c. If a market is strong-form efficient, this implies that the returns on bonds and stocks should be identical.
d. Because of increased globalization, all of the world's stock markets are equally efficient as that term is defined in
the text.
e. If a market is weak-form efficient, this implies that above-average returns can best be achieved by focusing on
past movements of stock prices.
Save Answer
5.
(Points: 1) Which of the following statements is CORRECT?

a. If inflation is expected to increase in the future and the maturity risk premium (MRP) is greater than zero, the
yield curve will be upward sloping.
b. If the maturity risk premium (MRP) is greater than zero, the yield curve must be upward sloping.
c. Because long-term bonds are riskier than short-term bonds, yields on long-term Treasury bonds will always be
higher than yields on short-term T-bonds.
d. If the maturity risk premium (MRP) equals zero, the yield curve must be flat.
e. If the expectations theory holds, the yield curve will never be downward sloping.
Save Answer
6.
(Points: 1) Which of the following statements is CORRECT?

a. Most evidence suggests that the maturity risk premium is zero.

b. The pure expectations theory states that the maturity risk premium for long-term Treasury bonds is zero and that
differences in interest rates across different maturities are driven by expectations about future interest rates.
c. The real risk-free rate is higher for corporate than Treasury bonds.
d. The yield on a 3-year Treasury bond cannot exceed the yield on a 10-year Treasury bond.
e. Liquidity premiums are higher for Treasury than corporate bonds.
Save Answer
7.
(Points: 1) The real risk-free rate is 3%, inflation is expected to be 2% this year, and the maturity risk premium is
zero. Ignoring any cross-product terms, what is the equilibrium rate of return on a 1-year Treasury bond?

a. 5.30%
b. 5.20%
c. 5.00%
d. 4.90%
e. 5.10%
Save Answer
8.
(Points: 1) You observe the following yields on various Treasury securities:
Maturity Yield
1 year 6.0%
3 years 6.4
6 years 6.5
9 years 6.8
12 years 7.0
15 years 7.2

Using the expectations theory, forecast the interest rate on 6-year Treasuries, nine years from now.

a. 7.80%
b. 6.70%
c. 7.20%
d. 6.95%
e. 8.00%
Save Answer
9.
(Points: 1) Looking in today's newspaper, you observe the following yield curve information:
Maturity Yield
1 year 5.0%
2 years 5.5
3 years 6.0
4 years ???
5 years 7.0

If the pure expectations hypothesis holds, what does the market expect that the one-year rate will be one year from
now?

a. 6.5%
b. 5.5%
c. 7.0%
d. 5.0%
e. 6.0%
Save Answer
10.
(Points: 1) The real risk-free rate is 2%. The inflation rate is expected to be 3% a year for the next three years and
then 4% a year thereafter. Assume that the default risk and liquidity premiums on all Treasury securities equal zero.
You observe that 10-year Treasury bonds yield 1% more than the yield on 5-year Treasury bonds. What is the
difference in the maturity risk premium on the two bonds? (That is, what is MRP10 - MRP5?) Disregard cross-
product terms, i.e., if averaging is required, use the arithmetic average.

a. 1.0%
b. 0.1%
c. 0.5%
d. 0.7%
e. 0.3%
Save Answer

Chapter 7 Preflight

A bond's annual coupon is ____________.

a. the coupon rate times the par value.
b. the required rate times the par value.
c. the coupon rate times the bond's value.
d. the required rate times the bond's value.

If a bond's required return falls, what will happen to its price?

a. It will fall only if the bond sells at a premium.
b. It will remain the same.
c. It will rise.
d. It will fall.

A 10-year semi-annual coupon bond with an $1000 par value pays an annual coupon rate of 6% and the market
requires 8% APR. What is the appropriate coupon, time period, and discount rate respectively that needs to be used
to correctly value this bond?
a. $60, 10, & 8%
b. $30, 10, & 4%
c. $30, 20, & 4% NO, THIS IS RIGHT
d. $30, 20, & 8%

4. Which of the following can cause an increase in the price of a bond selling at par?

a. An increase in the YTM.

b. A decrease in the YTM.
c. The passage of time.
d. Both A and C
e. Both B and C -

*Be sure to copy the RIGHT answers/problems.*

Which of the following bonds would have the most re-investment rate risk?
a. A 10-year, 10% coupon bond.
b. A 10-year, zero coupon bond.
c. A 20-year, 10% coupon bond.
d. A 20-year zero coupon bond.

Which of the following bonds would have the most default risk?
a. An AAA-rated bond.
b. A BBB-rated bond.
c. A CCC-rated bond.
d. A C-rated bond.

How is a bond's value determined?

a. By finding the present value of the bond's expected coupon payments at the bond's required rate of return.
b. By finding the present value of the bond's expected coupon payments and par value at the bond's required
rate of return.
c. By finding the present value of the bond's expected coupon payments at the bond's coupon rate.
d. By finding the present value of the bond's expected coupon payments and par value at the bond's coupon rate.

What is a bond's annual coupon divided by its market price called?

a. coupon rate
b. current yield
c. expected capital gains yield
d. yield to maturity

Quirk Drugs sold an issue of 30-year $1,000 par value bonds to the public that carry a 10.85% coupon rate,
payable semi-annually. It is now 10 years later and the current market rate of interest is 9.00%. If interest rates
remain at 9.00% until Quirk's bonds mature, what will happen to the value of the bonds over time?

a. The bonds will sell at a premium and decline in value until maturity.
b. The bonds will sell at a discount and rise in value until maturity.
c. The bonds will sell at a premium and rise in value until maturity.
d. The bonds will sell at a discount and fall in value until maturity.

Which of the following bonds would have the most interest rate risk?

a. A 10-year, 10% coupon bond.

b. A 10-year, zero coupon bond.
c. A 20-year, 10% coupon bond.
d. A 20-year zero coupon bond.

Under what condition(s) would a company want to consider calling a callable bond issue?

a. If interest rates have risen since issue of the bond.

b. If interest rates have remained the same since issue of the bond.
c. If interest rates have fallen since issue of the bond.
d. Investors decide whether a company can call the bond issue.
A 10-year semi-annual coupon bond with an $1000 par value pays an annual coupon rate of 6% and the market
requires 8% APR. What is the appropriate coupon, time period, and discount rate respectively that needs to be used
to correctly value this bond?

a. $60, 10, & 8%

b. $30, 10, & 4%
c. $30, 20, & 4%
d. $30, 20, & 8%

CHAPTER 7 PRE-FLIGHT
A bond's annual coupon is ____________. 

 a. the coupon rate times the par value.
 b. the required rate times the par value.
 c. the coupon rate times the bond's value.
 d. the required rate times the bond's value.
Answer:

If a bond's required return falls, what will happen to its price? 

 a. It will fall only if the bond sells at a premium.
 b. It will remain the same.
 c. It will rise.
 d. It will fall.
Answer:

A 10­year semi­annual coupon bond with an $1000 par value pays an annual coupon rate of 6% and the 
market requires 8% APR. What is the appropriate coupon, time period, and discount rate respectively that 
needs to be used to correctly value this bond? 

 a. $60, 10, & 8%
 b. $30, 10, & 4%
 c. $30, 20, & 4%
 d. $30, 20, & 8%
Answer:

Which of the following can cause an increase in the price of a bond selling at par? 

 a. An increase in the YTM.
 b. A decrease in the YTM.
 c. The passage of time.
 d. Both A and C
 e. Both B and C
Answer:

Which of the following can cause an increase in the price of a discount bond?

a. An increase in the YTM.

b. A decrease in the YTM.
c. The passage of time.
d. Both A and C
e. Both B and C
Answer: E

2Which of the following is true for a bond whose required return is greater than its coupon rate?

a. The bond sells for its par value

b. The bond sells at a premium to par.
c. The bond sells at a discount to par.
d. The bond pays coupon payments in counterfeit money.
Answer:

3What is a bond's expected total rate of return called?

a. coupon rate
b. current yield
c. expected capital gains yield
d. yield to maturity

Which of the following bonds would have the most re­investment rate risk? 

 a. A 10­year, 10% coupon bond.
 b. A 10­year, zero coupon bond.
 c. A 20­year, 10% coupon bond.
 d. A 20­year zero coupon bond.
Answer:

Under what condition(s) would a company want to consider calling a callable bond issue? 

 a. If interest rates have risen since issue of the bond.
 b. If interest rates have remained the same since issue of the bond.
 c. If interest rates have fallen since issue of the bond.
 d. Investors decide whether a company can call the bond issue.
Answer:

When will a bond's value and par (or face) value be the same?

a. If the coupon rate is higher than the required rate of return.

b. If the coupon rate is less than the required rate of return.
c. The bond's value and par value are always the same.
d. If the coupon rate is equal to the required rate of return.
Answer:

MAD Inc.'s bond rating is upgraded by Standard and Poor's from CCC to BBB. Which of the following would occur
in light of this news?

a. MAD Inc.'s bond price would fall.

b. MAD Inc.'s bond price would increase.
c. MAD Inc.'s bond price would remain the same.
d. There is no relationship between bond ratings and bond prices.
Answer:

Chapter 8 Pre-Flight

Which of the following measures the risk associated with the returns or cash flows of a single asset?

a. correlation coefficient
b. standard deviation
c. beta
d. none of the above

Which of the following is true for a stock whose returns are more variable than the market's returns?

a. The stock's beta will be zero.

b. The stock's beta will be equal to one.
c. The stock's beta will be less than one.
d. The stock's beta will be greater than one.

What does the return for a stock given by the CAPM/SML Equation represent?

a. The minimum return that an investor should demand for the stock.
b. The maximum return that an investor should demand for the stock.
c. The historical return for the stock.
d. The holding period return for the stock.

What is the market return in the Intel CAPM Example?

a. 1.6%
b. 8.6%
c. 10.2%
d. 13.2%

Which of the following describes an undervalued stock?

a. The stock's expected return and required return are the same.
b. The stock's expected return is less than its required return.
c. The stock's expected return is greater than its required return.
d. The stock's expected return is less than the risk-free rate.
What would happen to the SML if risk aversion on the part of investors decreased (all else constant)?

a. The SML would shift down but its slope would be unchanged.
b. The slope SML would become flatter.
c. The SML would shift down but its slope would become steeper.
d. The slope SML would become steeper.

A portfolio could own a share of every asset traded in the world and still have what kind of risk?

a. market
b. diversifiable
c. company-specific
d. none, this portfolio would have no risk

What is reduced by adding more stocks to a portfolio?

a. market risk
b. beta
c. systematic risk
d. diversifiable risk

Which of the following would be the CAPM return for a stock with a beta of 1?

a. the risk-free rate

b. the market return
c. the market risk premium
d. the stock risk premium

Which of the following is expected for a stock whose expected return is less than its required return?

a. The stock's price will go up.

b. The stock's price will stay the same.
c. The stock's price will go down.
d. The stock's expected return will increase.
e. Both C and D are expected.

According to the CAPM/SML Equation, what would happen if inflation increased (all else constant)?

a. The required returns of all stocks would decrease by the same amount.
b. The required returns of lower beta stocks would increase more than those of higher beta stocks.
c. The required returns of higher beta stocks would increase more than those of lower beta stocks.
d. The required returns of all stocks would increase by the same amount.

Chapter 8
Which of the following measures the risk associated with the returns or cash flows of a single 
asset? 
a. correla.

tion coefficient
b. standard deviation
c. beta
d. none of the above

What is the beta of the market portfolio? 
a. 0.0
b. 0.5
c. 1.0
d. 2.0

Which of the following is the definition of the market risk premium? 
a. the risk­free rate
b. the market return
c. the difference between the market return and the risk free rate
d. beta times the difference between the market return and the risk free rate

Which of the following is true about the beta of a portfolio of stocks? 
a. Portfolio beta is the weighted average of the betas of the stocks that make up the portfolio.
b. Portfolio beta is dependent upon the correlation coefficients between the stocks that make up 
the portfolio.
c. Portfolio beta is higher than the weighted average of the betas of the stocks that make up the 
portfolio.
d. None of the above are true.

Which of the following is expected for a stock whose expected return is less than its required 
return? 
a. The stock's price will go up.
b. The stock's price will stay the same.
c. The stock's price will go down. Not this one
d. The stock's expected return will increase.
e. Both C and D are expected.

According to the CAPM/SML Equation, what would happen if inflation increased (all else 
constant)? 

a. The required returns of all stocks would decrease by the same amount.
b. The required returns of lower beta stocks would increase more than those of higher beta 
stocks.
c. The required returns of higher beta stocks would increase more than those of lower beta 
stocks.
d. The required returns of all stocks would increase by the same amount.

What is the relevant risk measure for a stock to be added or held in a well­diversified portfolio? 

a. correlation coefficient
b. standard deviation
c. beta
d. none of the above

What would happen if risk aversion on the part of investors increased? 

a. The risk­free rate would increase.
b. The risk­free rate would decrease.
c. The market risk premium would increase.
d. The market risk premium would decrease.

What is reduced by adding more stocks to a portfolio? 

 a. market risk
 b. beta
 c. systematic risk
 d. diversifiable risk

Which of the following would be the CAPM return for a stock with a beta of 1? 

 a. the risk­free rate
 b. the market return
 c. the market risk premium
 d. the stock risk premium

Which of the following is true about the beta of a portfolio of stocks? 

 a. Portfolio beta is the weighted average of the betas of the stocks that make up the portfolio.
 b. Portfolio beta is dependent upon the correlation coefficients between the stocks that make up the 
portfolio.
 c. Portfolio beta is higher than the weighted average of the betas of the stocks that make up the portfolio.
 d. None of the above are true.

Chapter 8­ Preflight

A portfolio could own a share of every asset traded in the world and still have what kind of risk? 
a. market
b. diversifiable
c. company­specific
d. none, this portfolio would have no risk

What is the beta of the market portfolio? 
a. 0.0
b. 0.5
c. 1.0
d. 2.0

Which of the following would be the CAPM return for a stock with a beta of 1? 
a. the risk­free rate
b. the market return
c. the market risk premium
d. the stock risk premium

Which of the following is true about the beta of a portfolio of stocks? 
a. Portfolio beta is the weighted average of the betas of the stocks that make up the portfolio.
b. Portfolio beta is dependent upon the correlation coefficients between the stocks that make up the 
portfolio.
c. Portfolio beta is higher than the weighted average of the betas of the stocks that make up the portfolio.
d. None of the above are true

Which of the following is expected for a stock whose expected return is less than its required return? 
a. The stock's price will go up.
b. The stock's price will stay the same.
c. The stock's price will go down.
d. The stock's expected return will increase.
e. Both C and D are expected.

What would happen if risk aversion on the part of investors increased? a. The risk­free rate would 
increase.
b. The risk­free rate would decrease.
c. The market risk premium would increase.
d. The market risk premium would decrease.

Should we buy Best Buy? Why or why not?

a. Yes, because the required return for Best Buy is less than its expected return.
b. No, because the required return for Best Buy is less than its expected return.
c. No, because the required return for Best Buy is greater than its expected return.
d. Yes, because the market return is less than Best Buy's expected return.

CH 9 Preflight
Which of the following investors are the owners of a corporation?

a. bondholders
b. preferred stockholders
c. common stockholders
d. Both B and C-

Which of the following is NOT true about common stock and common stock valuation?

a. Common stock never matures.

b. Future common stock dividends are known for certain in advance, the only risk is not receiving these promised
cash flows.What does yellow mean?
c. A stock's value is the present value of the future expected dividends.
d. All the above statments are true.

Krustyburger just paid a dividend of $2 and has a required return of 15%. Which of the following equations
represent's today's value of this stock if Krustyburger expects a 10 percent constant growth rate in dividends?

a. $2/[0.15 - 0.10]
b. $2(1.10)/0.15
c. $2/0.15
d. $2(1.10)/[0.15-0.10]-

Which of the following is true for a constant growth stock whose market value is equal to its intrinsic value?

a. The stock's expected and required return are the same.-

b. The stock's expected return exceeds the required return.
c. The stock's expected return is less the required return.
d. The stock's dividend yield is equal to it's growth rate.

A stock is expecting 4 years of non-constant growth in dividends followed by a constant growth rate in year 5 and
beyond. How would you go about finding the value of this stock today?

a. Find the present value of the next 4 expected dividends.

b. Find the present value of the next 4 expected dividends plus the present value of the expected year 5 constant
growth stock value.
c. Find the present value of the next 4 expected dividends plus the present value of the expected year 4 constant
growth stock value.-
d. Find the present value of the expected year 4 constant growth stock value.

What cash flows and discount rate are used in the Corporate Valuation Approach to stock valuation?

a. expected dividends and the stock's required return

b. expected free cash flows and the company's WACC-
c. expected free cash flows and the stock's required return
d. expected dividends and the company's WACC

Valuing a common stock that expects no growth rate in its future dividends is the same as valuing a _________.

a. zero coupon bond.

b. coupon bond
c. preferred stock
d. perpetuity
e. Both C and D

Which of the following measures the expected capital gains yield for a constant growth stock?

a. The current dividend divided by the stock price.

b. The expected dividend divided by the stock price.
c. The expected constant growth rate.-
d. The historical growth rate in dividends for the stock.

What is the value of a share of common stock using the Corporate Valuation Approach for a company that has
outstanding debt and preferred stock?

a. The firm value divided by the number of shares of common stock.

b. The firm value minus the market value of debt and preferred stock, all divided by the number of shares of
common stock-
c. The firm value minus the market value of only preferred stock, all divided by the number of shares of common
stock
d. The firm value minus the market value of debt only, all divided by the number of shares of common stock

Who has the highest claim on a corporation's assets in the event of bankruptcy?

a. bondholders
b. preferred stockholders
c. common stockholders
d. Both C and D

The constant growth stock valuation model can't be used under which of the following conditions?

a. A zero growth rate

b. A negative growth rate.
c. A growth rate less than the stock's required return.
d. A growth rate greater than the stock's required return.

Which of the following is true for a elconstant growth stock whose market value is equal to its intrinsic value?

a. The stock's expected and required return are the same.

b. The stock's expected return exceeds the required return.
c. The stock's expected return is less the required return.
d. The stock's dividend yield is equal to it's growth rate.
What does the horizon (or terminal) value at year n represent for a variable growth stock?

a. The present value at year n of all the constant growth dividends expected after year n.
b. Today's value of the stock.
c. The present value today (t = 0) of all the constant growth dividends expected after year n.
d. The present value today (t = 0) of the expected variable growth dividends prior to year n.

What is the value of a share of common stock using the Corporate Valuation Approach for a company that has
outstanding debt and preferred stock?
a. The firm value divided by the number of shares of common stock.
b. The firm value minus the market value of debt and preferred stock, all divided by the number of shares of
common stock
c. The firm value minus the market value of only preferred stock, all divided by the number of shares of common
stock
d. The firm value minus the market value of debt only, all divided by the number of shares of common stock

1. Who has the highest claim on a corporation's assets in the event of bankruptcy? 
a. bondholders
b. preferred stockholders
c. common stockholders
d. Both C and D

2.Valuing a common stock that expects no growth rate in its future dividends is the same as valuing a 
_________. 
a. zero coupon bond.
b. coupon bond
c. preferred stock
d. perpetuity
e. Both C and D

3. The constant growth stock valuation model can't be used under which of the following conditions? 
a. A zero growth rate
b. A negative growth rate.
c. A growth rate less than the stock's required return.
d. A growth rate greater than the stock's required return.

4.Which of the following is true for a constant growth stock whose market value is equal to its intrinsic 
value? 
a. The stock's expected and required return are the same.
b. The stock's expected return exceeds the required return.
c. The stock's expected return is less the required return.
d. The stock's dividend yield is equal to it's growth rate
5.What does the horizon (or terminal) value at year n represent for Stephanie Sims 
<stephanie.sims@sjcnc.org>a variable growth stock? 
a. The present value at year n of all the constant growth dividends expected after year n.
b. Today's value of the stock.
c. The present value today (t = 0) of all the constant growth dividends expected after year n.
d. The present value today (t = 0) of the expected variable growth dividends prior to year n.

6.What cash flows and discount rate are used in the Corporate Valuation Approach to stock valuation? 
a. expected dividends and the stock's required return
b. expected free cash flows and the company's WACC
c. expected free cash flows and the stock's required return
d. expected dividends and the company's WACC

Chapter 10- Preflight

1.What does the cost of capital measure or estimate? 
a. The cost of new financing.
b. The cost of existing financing.
c. The historical cost of financing.
d. The cost of short­term borrowing.

2.Which of the following would be a reasonable estimate for a company's before­tax cost of debt? 
a. The coupon rate on the company's existing bonds.
b. The interest rate charged on a bank loan that the company received last year.
c. The current yield on the company's existing bonds.
d. The yield to maturity on the company's existing bonds.

3. Burns Power is considering issuing new preferred stock with a par value of $100 and an annual 
dividend yield of 10%. The company's tax rate is 40%. What is Burns cost of preferred stock if the new 
issue is expected to net the company $90 per share? 
a. 6.0%
b. 6.7%
c. 10.0%
d. 11.1%

4.The CAPM/SML and Discounted Cash Flow approaches to estimating the cost of retained earnings will 
be the same under which of the following conditions? 
a. The company's common stock price is in equilibrium.
b. The company's preferred stock price is in equilibrium.
c. The company's common stock is undervalued.
d. None of the above.

5.Which of the following factors that influence WACC are within the corporation's control? 
a. Market interest rates
b. Dividend policy
c. Tax rates
d. None of the above

6. Which of the following should Fortune Brands use as the WACC for an average risk project within its 
Titliest Golf division? 
a. Fortune Brands corporate WACC.
b. A rate slightly higher than Fortune Brands corporate WACC.
c. Titliest Golf's divisional WACC.
d. A rate slightly lower than Titliest Golf's divisional WACC.Adjusting WACC

What is capital budgeting? 

 a. The process of managing cash flow.
 b. The analysis of real asset investment opportunities.
 c. The process of managing current assets.
 d. None of the above.

MAD Corp. has 20­year bonds with an 8% coupon rate and a 10% yield to maturity. What would be MAD's 
appropriate after­tax cost of debt if their tax rate is 40%? 

 a. 4.8%
 b. 6.0%
 c. 8.0%
 d. 10.0%

A company's retained earnings have a financing cost associated with them because retained earnings 
belong to which of the following? 

 a. The company
 b. The preferred stockholders
 c. The common stockholders
 d. The company's long­term debt holders

Which of the following factors that influence WACC are beyond the corporation's control? 

 a. Investment policy
 b. Dividend policy
 c. Tax rates
 d. Capital structure

Which of the following is the hardest estimate to find in the Discounted Cash Flow approach for the cost of retained
earnings?

a. Beta
b. Growth rate
c. Dividends
d. Stock price

What is the proper estimate for the cost of preferred stock in estimating a company's WACC? 

 a. The estimated cost of newly issued preferred stock
 b. The dividend yield on existing preferred stock's par value.
 c. The historical return on the company's preferred stock.
 d. None of the above.

Which of the following is true for a company that doesn't adjust their WACC for project risk?

a. The company would accept more average risk projects than they should otherwise.
b. The company would accept more less than average risk projects than they should otherwise.
c. The company's risk would decrease.
d. The company would accept more riskier than average projects than they should otherwise.

Which of the following is not an input in a company's WACC?

a. Long-term debt.
b. Preferred stock
c. Retained earnings
d. Short-term debt

Chapter 11 Preflight

Projects A and B are mutually exclusive. Project A has a NPV of -$10,000 and Project B has a NPV of -$15,000.
Which project(s) should be accepted?

a. Project A
b. Project B
c. Both projects A and B
d. Neither project should be accepted
a. The project's required rate of return.
b. The increase in the company's wealth or value if the project is accepted.
c. The cost of the project
d. The project's expected return.

When should a normal project be accepted according to internal rate of return (IRR)? 

 a. IRR < WACC
 b. Only if IRR = WACC
 c. IRR > WACC
 d. None of the above.

What is the crossover rate?

a. The rate where two normal projects have the same net present value.
b. A project's expected return.
c. A project's required return.
d. The difference between two normal project's internal rates of return.

What is given by the point where a normal project's net present value profile crosses the x-axis?

a. The crossover rate.

b. MIRR
c. IRR
d. None of the above.

The MIRR is the compound annual interest rate that equates ________ with ________ for a project?

a. The present value of the future cash flows at the IRR; the cost.
b. The future value of the cash inflows at the WACC; the present value of the outflows at the WACC
c. The present value of the cash inflows at the WACC; the present value of the outflows at the WACC
d. None of the above.

What does the discounted payback period ignore?

a. The time value of money

b. Cash flows beyond the payback period
c. The cost of the project.
d. Both a and b.

----
1. Projects A and B are mutually exclusive. Project A has a NPV of ­$10,000 and Project B has a NPV of ­
$15,000. Which project(s) should be accepted? 
a. Project A
b. Project B
c. Both projects A and B
d. Neither project should be accepted
2. Which of the following is true for a normal project whose IRR is greater than its WACC (cost of capital)? 

a. The project's NPV < 0.
b. The project's NPV = 0.
c. The project's NPV > 0.
d. The project has multiple IRRs

3.When does a ranking conflict exist between NPV and IRR for two normal projects? 
a. When the WACC equals the crossover rate.
b. When the WACC is less than the crossover rate.
c. When the WACC is greater than the crossover rate.
d. A ranking conflict cannot exist between NPV and IRR for two normal projects.

4.Projects C and D are normal and mutually exclusive with the same WACC. Project C has a NPV of 
$10,000 and an IRR of 21%. Project D has a NPV of $12,000 and an IRR of 19%. Which project(s) should 
be selected? 
a. Project C
b. Project D
c. Both projects C and D
d. Neither project should be selected.

5.When should a normal project be accepted according to the modified internal rate of return (MIRR)? 
a. MIRR < WACC
b. Only if MIRR = WACC
c. MIRR > WACC
d. MIRR > IRR.

When should a project be accepted according to net present value (NPV)? 

NPV > 0
NPV < 0
Only if the NPV = 0
None of the above

What does the payback period ignore? 

a. The time value of money
b. Cash flows beyond the payback period
c. The cost of the project.
d. Both a and b.
Chapter 12 Pre-Flight

If a company would still have a cash flow item even if they rejected potential new Project A, should this 
particular cash flow item be included in Project A's cash flow analysis? 
a. Yes
b. No 
c. Maybe, it depends on the situation

In the cash flow information for the Ping Kings project, Ping spent $300,000 for research and 
development of the golf clubs. Ping's tax rate is 40%. How much of this cost should be included in the 
initial (t = 0) cash flow for this project? 
a. $300,000  

b. $180,000
c. $120,000
d. $0

What is operating cash flow? 
a. Incremental Operating income
b. incremental net income
c. incremental operating income plus depreciation
d. incremental net income plus depreciation

A company expects to need to increase their net working capital by $100,000 at the beginning of a 
potential project's life. By how much would this event affect the project's terminal cash flow at the end of 
its expected life if the company's tax rate is 40% 
a. ­$100,000
b. $0
c. +$60,000
d. +$100,000

Which of the following should be included from the cash flow analysis for a potential project? 
a. opportunity costs
b. interest expense
c. sunk costs
d. none of the above

How many years should be used to find the extended net present value for two repeatable mutually 
exclusive projects with a 3­year and 4­year life? 
a. 3
b. 4 
c. 6
d. 12

If a company would need to increase net working capital to start a potential new project how should it be treated in
the project's cash flow analysis?
a. The increase in net working capital should be an inflow as part of the project's initial cash flow.

b. The increase in net working capital should be an outflow as part of the project's initial cash flow

c. The increase in net working capital times (one minus the company's tax rate) should be an inflow as part of the
project's initial cash flow.

d. The increase in net working capital times (one minus the company's tax rate) should be an outflow as part of the
project's initial cash flow.

Which of the following methods can be used to compare mutually exclusive repeatable projects with unequal lives if
inflation in the costs and/or cash flows of the projects is expected when the projects are repeated?

a. Equivalent annual annuity

b. Replacement chain approach

c. Both a and b can be used

d. None of the above

What needs to be determined when estimating cash flows for a potential new project? 
a. The incremental after­tax cash flows associated with the project
b. Only the incremental net income associated with the project
c. Only the incremental operating income associated with the project
d. None of the above.

Which of the following should be used in determining a potential project's operating cash flow? 
a. Incremental revenue
b. Depreciation on new equipment purchased for the project
c. Incremental expenses
d. All of the above

Which of the following should be excluded from the cash flow analysis for a potential project? 
a. Externalities
b. Opportunity Costs
c. Interest expense
d. Cannibalization effects
What are the different type(s) of cash flows that need to be forecasted for a new project?
a. Initial Cash Flow
b. Operating Cash Flows
c. Terminal Cash Flow
d. All of the above

All else constant, how would an increase in annual depreciation affect a project's operating cash flow?
a. The operating cash flow would decrease.
b. The operating cash flow would be unchanged.
c. The operating cash flow would increase
d. The operating cash flow can go up or down.

4. A potential new project has an expected salvage value of $200,000 and an expected book value of $120,000 at the
end of its 5-year expected life. What taxes would the company own at the end of year 5 because of this project's
expected salvage value of their tax rate is 40%.

a. $0
b. $32,000
c. $48,000
d. $80,000

Which of the following methods can be used to compare mutually exclusive repeatable projects with 
unequal lives if inflation in the costs and/or cash flows of the projects is expected when the projects are 
repeated? 
 a. Equivalent annual annuity
 b. Replacement chain approach
 c. Both a and b can be used
 d. None of the above

ch 12 post-test

8. Tech Engineering Company is considering the purchase of a new machine to replace an existing one. The old
machine was purchased 5 years ago at a cost of $20,000, and it is being depreciated on a straight-line basis to a zero
salvage value over a 10-year life. The current market value of the old machine is $14,000. The new machine, which
falls into the MACRS 5-year class, has an estimated life of 5 years, it costs $30,000, and Tech plans to sell the
machine at the end of the fifth year for $1,000. The applicable depreciation rates are 0.20, 0.32, 0.19, 0.12, 0.11, and
0.06. The new machine is expected to generate before-tax cash savings of $3,000 per year. The company's tax rate is
40%. What is the year 5 total (operating plus terminal) cash flow of the proposed project?

a. $2,320
b. $4,150
c. $3,320
d. $2,580
e. $3,640

9. Grease Gougers International is considering replacing their existing grease gouging equipment with new
equipment that has a technology that will not only be less costly to operate but will gouge more grease. The original
equipment was purchased 5 years ago at a cost of $240,000 and is being depreciated using 8-year straight-line
depreciation to zero. The original equipment can be sold for $70,000 today. The new equipment cost is $500,000,
qualifies for the 3-year MACRS depreciation class and has a 3-year useful life. The applicable MACRS rates are
33%, 45%, 15% and 7%, respectively.

The new grease gouging equipment would increase revenues $40,000 annually and would decrease operating costs
(other than depreciation) by $90,000 annually. At the end of the 3-year life of this replacement analysis, the old
equipment has an estimated salvage value of zero and the new equipment's salvage value is expected to be $100,000.
The company's tax rate is 40% and their WACC is 16%. Also, the company expects to have enough other taxable
income to write off any losses that may occur as a result of the replacement project.

What is the total year 3 cash flow (operating plus terminal cash flow) for the Grease Gouger's replacement project?

a. $96,000
b. $161,600
c. $170,000
d. $128,000
e. $141,700

10. Borden Books is interested in purchasing a computer system to use for the next 10 years. Currently, Borden is
considering two mutually exclusive systems, System S and System L.
System S has an up-front cost of $3 million at t = 0 and will produce positive cash flows of $2.5 million per year for
two years (at t = 1 and 2). This system can be repeated forever. In other words, every two years the company can
repurchase the system under exactly the same terms.
System L has an up-front cost of $5 million at t = 0 and will produce positive cash flows of $2 million per year for
five years (at t = 1, 2, 3, 4, and 5). This system can be replaced at a cost of $4 million at t = 5, after which time it
will produce positive cash flows of $1.5 million per year for the subsequent five years (at t = 6, 7, 8, 9, and 10).
Borden's CFO has determined that the company's WACC is 12%. Over a 10-year extended basis, which system is
the better system and what is its NPV?

a. System L; $3.01 million

b. System S; $6.13 million
c. System S; $4.10 million
d. System L; $4.41 million
e. System L; $2.21 million

Mom's Cookies Inc. is considering the purchase of a new cookie oven. The original cost of the old oven was
$30,000; it is now 5 years old, and it has a current market value of $13,333.33. The old oven is being depreciated
over a 10-year life toward a zero estimated salvage value on a straight-line basis, resulting in a current book value of
$15,000 and an annual depreciation expense of $3,000. The old oven can be used for 6 more years but has no market
value after its depreciable life is over. Management is contemplating the purchase of a new oven whose cost is
$25,000 and whose estimated salvage value is zero. Expected before-tax cash savings from the new oven are $4,000
a year over its full MACRS depreciable life. Depreciation is computed using MACRS over a 5-year life, and the cost
of capital is 10%. The applicable depreciation rates are 0.20, 0.32, 0.19, 0.12, 0.11, and 0.06. Assume a 40% tax rate.
What is the initial cash flow (t=0) for this replacement analysis?

a. -$25,000
b. -$10,000
c. -$11,000
d. -$15,000
e. -$12,000

Meals on Wings Inc. supplies prepared meals for corporate aircraft (as opposed to public commercial airlines), and it
needs to purchase new broilers. If the broilers are purchased, they will replace old broilers purchased 10 years ago
for $105,000 and which are being depreciated on a straight-line basis to a zero salvage value (15-year depreciable
life). The old broilers can be sold for $60,000. The new broilers will cost $200,000 installed and will be depreciated
using MACRS over their 5-year class life; they will be sold at their book value at the end of the fifth year. The
applicable depreciation rates are 0.20, 0.32, 0.19, 0.12, 0.11, and 0.06. The firm expects to increase its revenues by
$18,000 per year if the new broilers are purchased, but cash expenses will also increase by $2,500 per year. If the
firm's cost of capital is 10% and its tax rate is 35%, what is the total year 5 cash flow (operating plus terminal cash
flow) for this replacement analysis?

a. $29,775
b. $27,325
c. $25,150
d. $21,775
e. $15,325

A small manufacturer is considering two alternative machines. Machine A costs $1 million, has an expected life of 5
years, and generates after-tax cash flows of $350,000 per year. At the end of 5 years, the salvage value of the
original machine is zero, but the company will be able to purchase another Machine A at a cost of $1.2 million. The
second Machine A will generate after-tax cash flows of $375,000 a year for another 5 years at which time its salvage
value will again be zero. Alternatively, the company can buy Machine B at a cost of $1.5 million today. Machine B
will produce after-tax cash flows of $400,000 a year for 10 years, and after 10 years it will have an after-tax salvage
value of $100,000. Assume that the WACC is 12%. If the company chooses the machine that adds the most value to
the firm, by how much will the company's value increase?

a. $633,481.19
b. $451,775.21
c. $811,357.66
d. $792,286.54
e. $347,802.00

Chapter 18- Pre-Flight

What does a put option on a stock allow its owner to do at expiration of the contract? 
a. Buy the stock at a specified price.
b. Sell the stock at a specified price.
c. Buy the stock at the market price.
d. Sell the stock at the market price.

An IBM call option has an exercise price of $100 and cost $4. What would be the net payoff for the writer 
of this naked call option at expiration if IBM's stock price is $110? 
a. ­$6
b. ­$4
c. +$4
d. +$6
e. ­$10

An AT&T put option has an exercise price of $30 and cost $3. What would be the net payoff for the owner 
of this option at expiration if AT&T's stock price is $25? 
a. ­$5
b. ­$3
c. +$2
d. +$3
e. +$5

An investor who owns a stock can protect against the price of the stock falling by doing which of the 
following? 
a. Buying a call option on the stock.
b. Selling (writing) a call option on the stock.
c. Buying a put option on the stock.
d. Selling (writing) a put option on the stock.

Imagine Steve Jobs of Apple decides to retire and he and Apple's board decides to sell Apple to Microsoft 
in exchange for shares of Microsoft stock. Mr. Jobs receives a billion shares of Microsoft stock worth $20 
per share in exchange for his Apple stock holdings. He wants to sell his Microsoft stock in 6 months and 
decides to write (sell) October call options on his Microsoft stock with an exercise price of $22 and use the 
proceeds to buy October put options on his Microsoft stock with an exercise price of $18. What will 
happen at expiration in 6 months if Microsoft's stock sells for $23 per share? 
a. Neither of Mr. Jobs' options will be exercised, and he can sell his stock for $23 per share.
b. Only Mr. Jobs' put options will be exercised, and he will sell his stock for $18 per share.
c. Only Mr. Jobs' call options will be exercised, and he will have to buy more stock for $22 per share.
d. Only Mr. Jobs' call options will be exercised, and he will sell his stock for $22 per share.

GE has set the coupon rate on a new long­term bond issue that will be sold a month from now. What risk 
is GE concerned about and how can they hedge against this risk? 
a. GE is concerned about falling interest rates and should buy Treasury Bond futures.
b. GE is concerned about falling interest rates and should sell Treasury Bond futures.
c. GE is concerned about rising interest rates and should buy Treasury Bond futures.
d. GE is concerned about rising interest rates and should sell Treasury Bond futures

What does a call option on a stock allow its owner to do at expiration of the contract? 

a. Buy the stock at a specified price.
b. Sell the stock at a specified price.
c. Buy the stock at the market price.
d. Sell the stock at the market price.

An AT&T put option has an exercise price of $30 and cost $3. What would be the net payoff for the writer 
of this option at expiration if AT&T's stock price is $25? 

a. ­$5
b. ­$3
c. ­$2
d. +$3
e. +$2
The payoff at expiration from owning a share of stock and a put option on that stock looks similar to which 
of the following? 

a. The payoff from a long call position.
b. The payoff from a short call position.
c. The payoff from a long put position.
d. The payoff from a short put position.

How did Mark Cuban guarantee a minimum and maximum price of his Yahoo stock with options? 

a. He bought call options with a lower exercise price and sold (wrote) puts at a higher exercise price.
b. He bought call options with a higher exercise price and sold (wrote) puts at a lower exercise price.
c. He bought put options with a lower exercise price and sold (wrote) calls at a higher exercise 
price.
d. He bought put options with a higher exercise price and sold (wrote) calls at a lower exercise price.

Which of the following is true about hedging with options and futures? 

a. Hedging with options eliminates both upside and downside risks.
b. Hedging with futures eliminates both upside and downside risks.
c. Hedging with futures limits downside risk while slightly reducing upside risk.
d. None of the above

Your company needs to buy indigo ink in 3 months in order to manufacture ink pens and is worried about the price
of ink rising. How can your company hedge against this risk?

a. They can sell indigo ink futures.

b. They can buy indigo ink futures.

c. They can sell (write) indigo ink call options.

d. They can buy indigo ink put options.

Well, I don't know when we upped this sheet to 29 collaborators, but the more the merrier. Share
the love of post-test 18 here.

The value of a stock option depends on all of the following EXCEPT:

a. Risk-free rate of interest.

b. Variability of the stock price.
c. Exercise price.
d. Bond price.
e. Option's time to maturity.

Which of the following statements concerning risk management is NOT CORRECT?

a. Risk management involves identifying events that could have adverse financial consequences and then taking
actions to prevent and/or to minimize the damage caused by these events.
b. Companies with volatile earnings pay more taxes than more stable companies due to the treatment of tax credits
and the rules governing corporate loss carry-forwards and carry-backs. Therefore, our tax system encourages risk
management to stabilize earnings.
c. Risk management can reduce the likelihood of low cash flows, and therefore reduce the probability of financial
distress.
d. Risk management can reduce the volatility of cash flows, and this decreases the probability of bankruptcy.
e. Risk management makes sense for firms directly engaged in activities that involve commodities whose values
can be hedged, and it doesn't make much sense for most other firms.

An option that gives the holder the right to buy a stock at a specified price at some time in the future is called a(n)

a. Covered option.
b. Call option.
c. Put option.
d. Naked option.
e. Out-of-the-money option.

A(n) ____________ option can be exercised only on the expiration date.

a. European option
b. At-the-money option
c. Short option
d. American option

1.
(Points: 1)
Which of the following is NOT an example of a derivative security?

a. Preferred stock.

b. Forward contracts.

c. Futures.

d. Swaps.

e. Options.

Save Answer

2.
(Points: 1)
Which of the following events is likely to decrease the value of call options on the common stock of GCC
Company?

a. An increase in the risk-free rate.

b. An increase in the amount of time until the option expires.

c. GCC's stock price becomes more risky (higher variance).

d. An increase in GCC's stock price.

e. An increase in the exercise price of the option.

Save Answer

3.
(Points: 1)
A(n) ____________ option can be exercised only on the expiration date.

a. European option

b. At-the-money option

c. Short option

d. American option

Save Answer

4.
(Points: 1)
Which of the following statements regarding factors that affect call option prices is CORRECT?

a. Two call options on the same stock will have the same value even if they have different strike prices.

b. An option on an extremely volatile stock is worth less than one on a very stable stock.

c. If you observe a put option on a stock increase in value, a call option on the stock should also increase.

d. The price of a call option increases as the risk-free rate increases.

e. The longer the call option has to run the smaller its value and the smaller its premium.

Save Answer

5.
(Points: 1)
Which of the following would cause an increase in both a put and call option's value?

a. A higher exercise price.

b. A longer time to expiration.

c. Less stock price volatility.

d. An increase in stock price.

Save Answer

6.
(Points: 1)
Deeble Construction Co.'s stock is trading at $30 a share. There are also call options on the company's stock, some
with an exercise price of $25 and some with an exercise price of $35. All options expire in three months. Which of
the following best describes the value of these options?

a. The options with the $35 exercise price have an exercise value greater than $0.

b. The options with the $25 exercise price will sell for $5.

c. The options with the $25 exercise price will sell for less than the options with the $35 exercise price.

d. The options with the $25 exercise price have an exercise value greater than $5.

e. If Deeble's stock price rose by $5, the exercise value of the options with the $25 exercise price would also
increase by $5.

Save Answer

7.
(Points: 1)
Suppose you believe that Du Pont's stock price is going to decline from its current level of $82.50 sometime
during the next 5 months. For $510.25 you could buy a 5-month put option giving you the right to sell 100 shares
at a price of $83.00 per share. If you bought a 100-share contract for $510.25 and Du Pont's stock price actually
dropped to $63.00, what would be your net profit (after transactions costs but before taxes)?

a. $2,435.00

b. $1,439.75

c. $2,000.00

d. $1,489.75
 e. $1,950.00

Save Answer

8.
(Points: 1)
Six months from expiration, a call option on Romer Technologies' stock that has an exercise price of $45 is selling
in the market for $8.25. Romer's current stock price is $48. What is the exercise value of the option?

a. $3.00

b. $4.50

c. $8.25

d. $5.75

e. $7.25

Save Answer

9.
(Points: 1)
Six months from expiration, a call option on Meyers Inc.'s stock that has an exercise price of $45 is selling in the
market for $8.25. Meyers' current stock price is $48. What is the option premium?

a. $5.25

b. $3.00

c. $6.50

d. $7.25

e. $4.50

Save Answer

10.
(Points: 1)
Acrue Company common stock is currently selling for $125 per share. You can buy a put option on this stock for
$3.50 per share on a normal contract of 100 shares. This option has an exercise price of $128 and expires in 5
months. Compute the time value of this option.

a. $3.00

b. $3.50
c. $6.50

d. $0.50