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Unformatted text preview: Introduction to Financial Management Unit 2 Examination Multiple Choice Questions (Enter your answers on the enclosed answer sheet) 1) Suppose a corporation can change its depreciation method so that its tax payments
will decrease by $1,000 this year but increase by $1,000 next year. a. The change will decrease the value of the company because lower tax payments this
year resuit from tower reported income. b. The change will increase the value of the company because the value of the cash sav
ings this year exceeds the cost of the cash payments next year. c. The change will have no impact on the value of the company because its cash 1flow
over time will be the same. d. The change will decrease the vaiue of the company because investors don’t like
changes in accounting methods. 2) At what rate must $500 be compounded annually for it to grow to $1,079.46 in 10 years?
a. 6 percent
b. 7 percent
c. 8 percent
d. 5 percent 3) What is the present value of $12,500 to be received 10 years from today? Assume a
discount rate of 8% compounded annually and round to the nearest $10. $17,010
$9,210
$11,574
$5,790 4) It is your 5th birthday today. You have a trust fund with $50,000 that is earning
8% per year. You expect to withdraw $20,000 per year for 4 years starting on your
2lst birthday for graduate school. How much money wiEt be left in the trust fund after
your last withdrawal (rounded to the nearest $10)? a. $125,660 1). $9130 0. $135,780 d. You will not have enough money to pay for graduate schooi. 5) How much money must you pay into an account at the end of each of 20 years in
order to have $100,000 at the end of the 20th year? Assume that the account pays
6% per year, and round to the nearest $1. a. $2,195
b. $1,840
C. $2,028
d. $2,718 98 Introduction to Financial Management v nit 2 Examination 6) You have the choice of two equaily risk annuities, each paying $5,000 per year for
8 years. One is an annuity due and the other is an ordinary annuity. if you are going
to be receiving the annuity payments, which annuity would you choose to maximize
your wealth? The annuity due
Either one because they have the same present value. The ordinary annuity
Since we don’t know the interest rate, we can’t find the value of the annuities and
hence we cannot tell which one is better. move 7) If you put $1,000 in a savings account that yields 8% compounded semiannually,
how much money will you have in the account in 20 years (round to nearest $10)? $4,660
$4,801
$2,190
$1,480 8) You want $20,000 in 5 years to take your spouse on a second honeymoon. Your
investment account earns 7% compounded semiannually. How much money must you
put in the investment account today? (round to the nearest $1) $14J78
$15385
$13,349
$12367 new? 9) You invest $1,000 at a variable rate of interest. Initially the rate is 4% compounded
annually for the first year, and the rate increases one~half of one percent annually for
five years (year two's rate is 4.5%, year three’s rate is 5.0%, etc). How much will you
have in the account after five years? a. $1,462
b. $1,359
(3. $1,276
d. $1,338 10) Assume that you have $165,000 invested in a stock that is returning 11.50%,
$85,000 invested in a stock that is returning 22.75%, and $235,000 invested in a
stock that is returning 10.25%. What is the expected return of your portfolio? 3. 14.8%
b. 12.9%
c. 18.3%
d. 15.6% 99 Introduction to Financial Management Unit 2 Examination 11) Which of the following statements is most correct concerning diversification and risk? a. Riskaverse investors often select portfolios that include only companies from the
same industry group because the familiarity reduces the risk. b. Risk—averse investors often choose companies from different industries for their port
folios because the correlation of returns is less than if all the companies came from
the same industry. C. Only wealthy investOrs can diversify their portfolios because a portfolio must contain
at least 50 stocks to gain the benefits of diversification. d. Proper diversification generally results in the elimination of risk. 12) An investor currently holds the following portfolio: Amount Invested
5,000 shares of Stock A $10,000 Beta = 1.8
10,000 shares of Stock B $30,000 Beta = 1.5
20,000 shares of Stock C $20,000 Beta = 1.2 The investor is worried that the beta of his portfolio is too high, so he wants to sell some
stock A and add stock 0, which has a beta of 0.70, to his portfolio. If the investor wants
his portfolio to have a beta of 1.30, how much stock A must he replace with stock 0? a. $8,182
b. $7,230
c. $6,875
d. $9,309 13) You are considering buying some stock in Continental Grain. Which of the following
are exampies of nondiversifiable risks? l. Risk resulting from a general deciine in the stock market.
l. Risk resulting from a possible increase in income taxes.
Ill. Risk resuEting from an explosion in a grain elevator owned by Continental. IV. Risk resulting from a pending lawsuit against Continental.
a. “I and IV b. II, ll,and IV c. l and II d. I only 14) 0f the following, which differs in meaning from the other three? a. Systematic Risk b. Market Risk c. Assetunique Risk
d. Undiversifiable Risk 100 Introduction to Financial Management
Unit 2 Examination 15) You must add one of two investments to an already well diversified portfolio. Security A Security B
Expected Return = 12% Expected Return = 12%
Standard Deviation of Standard Deviation of
Returns = 20.9% Returns = 10.1%
Beta 2 .8 Beta = 2 If you are a riskaverse investor, which one is the better choice? a. Security A D. Security B c. Either security would be acceptable. d. Cannot be determined with information given. 16) Which of the following is true of a zero coupon bond? a. The bond has a zero par value. b. The bond sells at a premium prior to maturity. c. The bond makes no coupon payments. d. The bond has no value until the year it matures because there are no positive cash
flows until then. 17) In an efficient securities market the market value of a security is equal to a. par value. b. its intrinsic value. c. its book value. d. its liquidation value. 18) in 1998 Fischer Corp. issued bonds with an 8 percent coupon rate and a $1,000
face value. The bonds mature on March 1, 2023. If an investor purchased one of
these bonds on March 1, 2008, determine the yield to maturity if the investor paid
$1,050 for the bond. a. 8.5%
b. The yield to maturity must be greater than 8% because the price paid for the bond exceeds the face value.
c. The yield to maturity is $950 {$1,000 interest less $50 capital loss).
d. 7.44% 101 Introduction to Financial Management
Unit 2 Examination 19) A bond’s yield to maturity depends upon all of the following except: a. the maturity of the bond b. the coupon rate c. the individual investor's required return d. the band's risk as reflected by the bond rating 20) A bond will sell at a discount (below par value) if: a. The economy is booming.
b. Current market interest rates are moving in the same direction as bond values.
0. The market value of the bond is less than the present vaEue of the discount rate of the bond.
d. investor’s current required rate of return is above the coupon rate of the bond. 21) How is preferred stock simiiar to bonds? a. investors can sue the firm if preferred dividend payments are not paid (much like
bondholders can sue for nonpayment of interest payments).
b. Dividend payments to preferred shareholders (much like bond interest payments to bondholders) are tax deductible.
c. Preferred stockholders receive a dividend payment (much like interest payments to bondholders) that is usually fixed.
d. Preferred stock is not like bonds in any way. 22) Many preferred stocks have a feature that requires a firm to periodically set aside
an amount of money for the retirement of its preferred stock. What is the name of this feature? a. Caliabie t). Cumulative
c. Sinking fund
d. Convertible 23) How is preferred stock affected by a decrease in the required rate of return? a. The value of a share of preferred stock increases.
b. The dividend increases. c. The dividend yield increases. d. The dividend decreases. 102 Introduction to Financial Management
Unit 2 Examination 24) Modern Development, Inc. paid a dividend of $5.00 per share on its common stock
yesterday. Dividends are expected to grow at a constant rate of 10% for the next two
yearsr at which point the dividends will begin to grow at a constant rate indefinitely.
If the stock is selling for $50 today and the required return is 15%, what it the ex
pected annual dividend growth rate after year two? a. 5.000%
b. 3.365%
c. 4.556%
d. 3.878% 25) H. J. Corp. common stock paid $2.50 in dividends last year (00). Dividends are
expected to grow at a 12percent annual rate forever. If H. J.'s current market price
is $40.00, what is the stock’s expected rate of return (nearest .01 percent)? a. 5.50% b. 18.25%
c. 19.00%
d. 11.00% ...
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