BMGT 228 - Study Guide 3 SP10

1. Peter Mills is considering a project with the following cash flows. Should this project be accepted based on its rate of return if the company requires a 14 percent return?

A. yes; the project's rate of return is 14.12 percent

B. yes; the project's rate of return is 17.57 percent

C. no; the project's rate of return is 9.49 percent

D. no; the project's rate of return is 11.78 percent

E. The project's rate of return cannot be computed because the cash flows are unconventional

2. Which one of the following statements is correct?

A. You should accept a project only if the profitability index is less than 1.0.

B. The payback method is biased towards long-term projects.

C. The modified internal rate of return is most useful when projects are mutually exclusive.

D. The average accounting return has the least value from a financial point of view.

E. The net present value method is only applicable if a project has conventional cash flows.

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

I. will not pay back during its life.

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

III. will have a zero net present value.

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

A. I and II only

B. III and IV only

C. II and III only

D. I, III, and IV only

E. I, II, and IV only

4. You are considering the following two mutually exclusive projects. The crossover point is _____ percent.

A. 7.76

B. 9.25

C. 11.89

D. 12.08

E. 13.75

5. For a project with conventional cash flows, a profitability index less than 1.0 indicates the:

A. internal rate of return is equal to the firm's required rate of return.

B. project never pays back.

C. internal rate of return is less than the project's required discount rate.

D. net present value is positive.

E. accounting rate of return is positive.

6. You are considering the following two mutually exclusive projects. The required return on each project is 16 percent. Which project should you accept and what is the best reason for that decision?

A. Project A; because it pays back faster

B. Project A; because it has the higher internal rate of return

C. Project B; because it has the higher internal rate of return

D. Project A; because it has the higher net present value

E. Project B; because it has the higher net present value

7. A project has an average accounting return that is less than the requirement. Which one of the following indicates that the project should be accepted anyways?

A. payback period in excess of the requirement

B. positive NPV

C. negative IRR

D. PI less than 1.0

E. negative MIRR

8. You are using a net present value profile to compare projects A and B, which are mutually exclusive. At the crossover point the:

A. internal rate of return for project A equals that of project B, but generally does not equal zero.

B. internal rate of return of each project is equal to zero.

C. net present value of each project is equal to zero.

D. net present value of project A equals that of project B, but generally does not equal zero.

E. net present value of each project is equal to the respective project's initial cost.

9. The discounting approach to the modified internal rate of return:

A. individually discounts each separate cash flow back to the present.

B. sums all of the cash flows, excluding the initial cash flow, and then discounts that amount back to the present where it is compared to the initial cost.

C. discounts all negative cash flows to the present and compounds all positive cash flows to the end of the project.

D. discounts all negative cash flows back to the present and combines them with the initial cost.

E. reinvests all of the cash flows until the end of the project and then discounts the total back to the present.

10. You are considering the following two mutually exclusive projects. The required return on each project is 11 percent. Which project should you accept and what is the best reason for that decision?

A. Project A; because it pays back faster

B. Project A; because it has the higher profitability index

C. Project B; because it has the higher profitability index

D. Project A; because it has the higher net present value

E. Project B; because it has the higher net present value

11. Which one of the following statements related to the internal rate of return (IRR) is correct?

A. If the IRR exceeds the required return, the profitability index will be less than 1.0.

B. The IRR is a better evaluation tool than the profitability index when two projects are mutually exclusive.

C. When the IRR is less than the required return, the NPV is positive.

D. A project has multiple IRRs if the project's cash flows are unconventional.

E. If two projects are mutually exclusive, you should select the project with the highest IRR.

12. You are considering the following two mutually exclusive projects. The crossover point is _____ and Project _____ should be accepted if the discount rate for the project exceeds the crossover rate.

A. 9.54 percent; B

B. 9.93 percent; A

C. 9.93 percent; B

D. 11.02 percent; A

E. 11.02 percent; B

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

A. has no initial cost.

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

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

D. never pays back its initial cost.

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

14. The net present value of a project's cash inflows is $9,456 at a 7 percent discount rate. The profitability index is 1.16 and the firm's tax rate is 35 percent. What is the initial cost of the project?

A. $5,298.62

B. $5,910.00

C. $6,146.40

D. $6,782.12

E. $8,151.72

15. Which of the following would create a problem if you are trying to determine which one of two projects you should accept using the internal rate of return method of analysis?

I. one of the projects has cash outflows for two years and cash inflows thereafter

II. the projects are mutually exclusive

III. one project has an initial cost of $22,000 while the other one costs $324,000

IV. one of the projects has unconventional cash flows

A. I and III only

B. II and IV only

C. II, III, and IV only

D. I, II, and IV only

E. I, II, III, and IV

16. You are considering the following two mutually exclusive projects. The crossover point is _____ and project _____ should be accepted at an 18 percent discount rate.

A. 14.92 percent; B

B. 14.92 percent; A

C. 15.23 percent; B

D. 17.54 percent; A

E. 17.54 percent; B

17. The Plush Toy Co. is considering a new toy that will produce the following cash flows. Should the company produce this toy based on its rate of return if the required return is 10 percent?

A. yes; the project's rate of return is 11.90 percent

B. yes; the project's rate of return is 21.03 percent

C. no; the project's rate of return is 8.23 percent

D. no; the project's rate of return is 9.48 percent

E. The project's rate of return cannot be determined as the cash flows are unconventional

18. Dennis wants to determine if the discount rate really makes any difference in the net present value of a project. He feels that if a project is acceptable at one rate of return, it will be acceptable at all rates of return. To explain why his thinking is incorrect, you are creating an example to illustrate your point. The cash flows you are using are as follows: time zero is -$71,000, years 1 through 4 are $17,500 each, and years 5 and 6 are $22,500 each. The net present value at a discount rate of 12 percent is _____ as compared to _____ at 17 percent.

A. $4,668.80; $10,325.14

B. $4,920.72; $2,730.89

C. $5,098.31; $62.64

D. $6,319.92; $3,959.52

E. $13,660.64; $4,256.82

19. Sue and Tina are both considering the same project with the cash flows shown below. Sue is content earning 10 percent on the project but Tina wants to earn at least 14 percent. Who, if either, should accept this project?

A. Sue, but not Tina

B. Tina, but not Sue

C. Sue, Tina can go either accept or reject as her NPV is zero

D. neither Sue nor Tina

E. both Sue and Tina

20. The internal rate of return can lead to faulty decisions if:

A. any of an investment's cash flows are equal to zero.

B. the PI exceeds 1.0.

C. the investment has a life that exceeds the required payback period.

D. two or more projects are mutually exclusive.

E. the cash flows are conventional.

21. A project has an initial requirement of $310,000 for fixed assets and $62,000 for net working capital. The fixed assets will be depreciated to a zero book value over the 3-year life of the project and have an estimated salvage value of $155,000. All of the net working capital will be recouped at the end of the project. The annual operating cash flow is $345,000 and the discount rate is 18 percent. What is the project's net present value if the tax rate is 34 percent?

A. $403,618.02

B. $414,141.41

C. $446,047.36

D. $478,122.21

E. $510,197.06

22. Harvest Fields is considering expanding its wine-making operations. The expansion will require new equipment costing $489,000 that would be depreciated on a straight-line basis to a zero balance over the 5-year life of the project. The estimated salvage value is $172,000. The project requires $41,000 initially for net working capital, all of which will be recouped at the end of the project. The projected operating cash flow is $201,500 a year. What is the net present value of this project if the relevant discount rate is 16 percent and the tax rate is 34 percent?

A. $183,818.52

B. $203.339.15

C. $211,661.61

D. $231,182.24

E. $237,689.09

23. Firm A uses straight-line depreciation. Firm B uses MACRS depreciation. Both firms bought $100,000 worth of equipment two years ago. The equipment has a 7-year life. Both firms are in the 34 percent tax bracket. The operating cash flows for each firm are identical except for the depreciation effects. Given this, you know the:

A. depreciation expense for Firm A will be greater than Firm B's expense for this year.

B. equipment has a higher value on Firm B's books than on Firm A's at the end of year two.

C. operating cash flow of Firm A is less than that of Firm B for this year.

D. market value of Firm A's equipment is greater than the market value of Firm B's equipment.

E. market value of Firm B's equipment is greater than the market value of Firm A's equipment.

24. Fun Land is considering adding a miniature golf course to its facility. The course would cost $52,000, would be depreciated on a straight line basis over its 4-year life, and would have a zero salvage value. The estimated income from the golfing fees would be $33,000 a year with $9,000 of that amount being variable cost. The fixed cost would be $7,200. In addition, the firm anticipates an additional $10,000 in revenue from its existing facilities if the course is added. The project will require $6,000 of net working capital, which is recoverable at the end of the project. What is the net present value of this project at a discount rate of 14 percent and a tax rate of 28 percent?

A. $8,828.91

B. $12,381.39

C. $15,407.11

D. $17,388.78

E. $19,420.15

25. Concord Wines is considering expanding its wine-making operations. It would need new equipment that costs $648,000 that would be depreciated on a straight-line basis to a zero balance over the 5-year life of the project. The estimated salvage value is $224,000. The project requires $46,000 initially for net working capital, all of which will be recouped at the end of the project. The projected operating cash flow is $198,500 a year. What is the internal rate of return on this project if the relevant tax rate is 37 percent?

A. 13.78 percent

B. 15.67 percent

C. 17.22 percent

D. 18.49 percent

E. 19.01 percent

26. A project has an initial requirement of $1.2 million for fixed assets and $135,000 for net working capital. The fixed assets will be depreciated to a zero book value over the 6-year life of the project and have an estimated salvage value of $320,000. All of the net working capital will be recouped at the end of the project. The expected annual operating cash flow is $285,000. What is the project's internal rate of return if the tax rate is 32 percent?

A. 12.36 percent

B. 12.49 percent

C. 13.08 percent

D. 13.41 percent

E. 13.97 percent

27. Jasper Industries allocates capital funding using a soft rationing approach. Which one of the following situations is likely to exist in this case?

A. Division managers will underestimate the expected rate of return on their proposed projects in the hope of receiving additional capital funding.

B. Division managers will be given blanket approval to accept all positive net present value projects.

C. Divisions managers will vie with each other for additional capital allocations.

D. Division managers will not receive any funding for new projects but will be allowed to expand current operations.

E. Division managers will not receive capital funding for any project.

28. Scenario analysis:

A. determines the impact a $1 change in sales has on the internal rate of return.

B. determines which variable has the greatest impact on a project's net present value.

C. can be used to evaluate projects that have unconventional cash flows.

D. evaluates a project's net present value while sensitivity analysis evaluates a project's internal rate of return.

E. presents the absolute worst and absolute best outcome that could ever occur.

29. Assume a firm has positive net earnings. The operating cash flow of this firm:

A. ignores both depreciation and taxes.

B. is unaffected by the depreciation expense.

C. occurs at time zero of a project.

D. increases when tax rates decrease.

E. is equal to net income minus depreciation.

30. You are analyzing a project and have developed the following estimates. The depreciation is $9,500 a year and the tax rate is 34 percent. What is the worst case operating cash flow?

A. $5,408

B. $7,952

C. $8,407

D. $10,952

E. $12,408

31. Two years ago, Angelina's purchased some 5-year MACRS property for $37,800. Today, it is selling this property for $26,000. How much tax will the firm owe on this sale if the tax rate is 30 percent? The MACRS allowance percentages are as follows:

A. $2,356.80

B. $2,409.19

C. $2,828.17

D. $17,680.00

E. $18,200.00

32. The Corner Book Shoppe has decided to sell books online. Currently, the majority of its sales are related to young children's books. Online, the firm expects to sell primarily fiction to young adults. Which of the following anticipated reactions are erosion effects related to this decision?

I. decrease in in-store sales to young adults

II. online sales of young children's books

III. faster delivery of special book orders due to increased orders placed with suppliers

IV. increased walk-in patronage due to increased name recognition from online exposure

A. I only

B. II only

C. I and III only

D. II and IV only

E. I, II, III, and IV

33. A cost-cutting project will decrease costs by $37,500 a year. The annual depreciation on the project's fixed assets will be $7,200 and the tax rate is 35 percent. What is the amount of the change in the firm's operating cash flow resulting from this project?

A. $2,520

B. $19,695

C. $26,895

D. $31,435

E. $34,655

34. Scenario analysis asks questions such as:

A. How will changing the number of units sold affect the outcome of this project?

B. What is the worst outcome that should reasonably be expected?

C. How much will a $1 decrease in the variable cost per unit change the net present value?

D. Will the internal rate of return increase or decrease if the quantity sold increases by 100 units?

E. How will the operating cash flow change if the fixed costs increase by 3 percent?

35. The Sports Club wants to expand its facility. The expansion will require $438,000 in building improvements that will be depreciated on a straight-line basis over a 20-year period. The expanded area is expected to generate $203,000 in additional sales. Variable costs are 60 percent of sales and the annual fixed costs are $13,600. The tax rate is 34 percent. What is the operating cash flow for the first year of this project?

A. $36,767

B. $37,025

C. $48,275

D. $52,062

E. $57,200

36. Kites Galore is considering making and selling custom kites in two sizes. The small kites would be priced at $14 and the large kites would be $21. The variable cost per unit is $8 and $12, respectively. Tom, the owner, feels that he could sell 3,800 of the small kites and 2,400 of the large kites each year. The fixed costs would only be $4,000 a year and the tax rate is 35 percent. What is the annual operating cash flow if the annual depreciation expense is $2,700?

A. $26,260

B. $27,205

C. $27,845

D. $29,130

E. $29,245

37. Junior's has a new project in mind that will increase accounts receivable by $27,000, increase accounts payable by $19,000, increase fixed assets by $46,000, and decrease inventory by $17,000. What is the amount the firm should use as the initial cash flow attributable to net working capital when it analyzes this project?

A. $9,000

B. $10,000

C. $44,000

D. $63,000

E. $109,000

38. The opportunity to modify a project in the future is referred to as:

A. sensitivity analysis.

B. a managerial option.

C. scenario planning.

D. a restructuring.

E. an erosion control measure.

39. Which one of the following statements is correct when a firm faces hard rationing?

A. All positive net present value projects will be accepted.

B. Each division within a firm will be allocated an amount for capital expenditures that will be less than the total value of its positive net present value projects.

C. The firm will have zero dollars for capital expenditures.

D. The firm will fund only those projects that create value for its shareholders.

E. The firm will be faced with the difficult decision of determining which one of two highly valuable projects will be funded.

40. The analysis of the effects that what-if questions have on the net present value of a project is called _____ analysis.

A. sensitivity

B. erosion

C. scenario

D. benefit

E. opportunity

41. A stock produced returns of 12 percent, 3 percent, and 14 percent over three of the past four years. The arithmetic average for the past four years is 7.5 percent. What is the standard deviation of the stock's returns for the 4-year period?

A. 0.10 percent

B. 1.28 percent

C. 1.67 percent

D. 6.45 percent

E. 6.67 percent

42. Windsor stock has produced returns of 41.6 percent, 32.9 percent, 27.4 percent, 43.8 percent, and 11.4 percent over the past five years, respectively. What is the variance of these returns?

A. .1287

B. .1346

C. .1360

D. .1392

E. .1407

43. Over the past six years, a stock had annual returns of 2 percent, 10 percent, 14 percent, 8 percent, -6 percent, and 8 percent, respectively. What is the standard deviation of these returns?

A. 7.04 percent

B. 7.19 percent

C. 8.38 percent

D. 11.97 percent

E. 12.27 percent

44. Over the last four years, the stock of Wagner's Paints has had an arithmetic average return of 6.5 percent. Three of those four years produced returns of 9 percent, 3 percent, and 1 percent. What is the geometric average return for this 4-year period?

A. 3.00 percent

B. 4.48 percent

C. 6.33 percent

D. 7.07 percent

E. 8.69 percent

45. Your portfolio has provided you with returns of 7.9 percent, 11.2 percent, 3.8 percent, and 14.7 percent over the past four years, respectively. What is the geometric average return for this period?

A. 8.98 percent

B. 9.16 percent

C. 9.33 percent

D. 9.40 percent

E. 9.44 percent

46. Over the last four years, the stock of Stephensen's Motors has had an arithmetic average return of 8.5 percent. Three of those four years produced returns of 8 percent, 19 percent, and 13 percent. What is the geometric average return for this 4-year period?

A. 6.46 percent

B. 6.54 percent

C. 8.09 percent

D. 8.83 percent

E. 10.03 percent

47. A stock has an average return of 13.6 percent and a standard deviation of 8.4 percent. In any one given year, you have a 95 percent chance that you will not lose more than _____ percent nor earn more than ____ percent if you invest in this security.

A. 5.2 percent to 22.0 percent

B. 3.2 percent to 30.4 percent

C. 3.2 percent to 30.4 percent

D. 5.2 percent to 22.0 percent

E. 13.6 percent to 38.8 percent

48. Which one of the following statements is correct?

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

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

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

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

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

49. The common stock of Whole Foods has produced returns of 9 percent, 13 percent, 11 percent, -6 percent, and 5 percent for the past five years, respectively. What is the standard deviation of these returns?

A. 6.99 percent

B. 7.08 percent

C. 7.54 percent

D. 8.33 percent

E. 8.49 percent

50. The arithmetic average:

I. is greater in value than the geometric average.

II. is easier to compute than the geometric average.

III. involves a power that is equal to 1/N.

IV. ignores the effects of compounding.

A. I and III only

B. II and IV only

C. III and IV only

D. II and III only

E. I, II, and III only

51. Over the past 4 years, large-company stocks and U.S. Treasury bills have produced the returns stated below. During this period, inflation averaged 3.4 percent. Given this information, the average real rate of return on large-company stocks was ___ percent as compared to _____ percent for Treasury bills and the standard deviation for large-company stocks was _____ as compared to ____ for Treasury bills.

A. 7.83; .23; 7.55; .78

B. 7.83; .15; 7.47; .71

C. 7.83; .15; 7.55; .96

D. 8.02; .34; 7.47; .71

E. 8.02; .34; 7.55; .96

52. Which of the following statements are correct?

I. The risk-free rate of return has a zero risk premium.

II. The reward for bearing risk is called the standard deviation.

III. Based on historical returns, there are rewards for bearing risk.

IV. In general, the higher the risk, the higher the expected return.

A. I and II only

B. III and IV only

C. I, III, and IV only

D. II, III, and IV only

E. I, II, III, and IV

53. Five years ago, you purchased 200 shares of RST stock. The annual returns have been 9.8 percent, 6.4 percent, 7.5 percent, 1.2 percent, and 10.6 percent, respectively for those five years. What is the variance of these returns?

A. .0008

B. .0014

C. .0027

D. .0049

E. .0063

54. Over the past five years, a stock returned 9.8 percent, -22.6 percent, -3.8 percent, 19.2 percent and 4.6 percent. What is the variance of these returns?

A. .0250

B. .0268

C. .0347

D. .0381

E. .0394

55. Which one of the following statements is correct based on the historical record for 1926-2006?

A. Long-term government bonds have had a positive annual rate of return every year since 1940.

B. Large-company stocks suffered greater losses during the Great Depression years than any other investment category.

C. The rate of inflation as measured by the Consumer Price Index has been positive every year for the past fifty years.

D. Large-company stocks have never suffered back-to-back negative annual returns since the Great Depression.

E. The annual return on U.S. Treasury bills exceeded the rate of inflation for every year since 1926.

56. Over the past 6 years, a stock produced returns of 32 percent, 11 percent, 19 percent, -44 percent, 21 percent, and 15 percent. Based on these six years, what range of returns would you expect to see 99 percent of the time?

A. 82.16 percent to 93.18 percent

B. 82.16 percent to 94.07 percent

C. 82.16 percent to 94.19 percent

D. 71.74 percent to 89.74 percent

E. 71.74 percent to 90.38 percent

57. A security produced returns of 12 percent, -11 percent, -2 percent, 15 percent, and 9 percent over the past five years, respectively. Based on these five years, what is the probability that an investor in this stock will lose more than 17.06 percent in any one given year?

A. 0.5 percent

B. 1.0 percent

C. 2.5 percent

D. 5.0 percent

E. 16.0 percent

58. Mountain Minerals pays a constant annual dividend. One year ago, when you purchased shares of that stock at $40 a share, the dividend yield was 6.5 percent. Over this past year, the inflation rate has been 3.2 percent. Today, the required return on this stock is 9.8 percent and you just sold all of your shares. What is your total real return on this investment?

A. 31.87 percent

B. 29.43 percent

C. 26.67 percent

D. 25.48 percent

E. 23.09 percent

59. If the financial markets are efficient then:

A. stock prices should remain constant.

B. stock prices should increase or decrease slowly as new events are analyzed and the information is absorbed by the markets.

C. an increase in the value of one security should be offset by a decrease in the value of another security.

D. stock prices will only change when an event actually occurs, not at the time the event is anticipated.

E. stock prices should only respond to unexpected news and events.

60. A stock has produced returns of 16.7 percent, 9.5 percent, 12.3 percent, and -8.9 percent over the past four years, respectively. What is the geometric average return?

A. 6.93 percent

B. 7.40 percent

C. 11.81 percent

D. 11.85 percent

E. 12.23 percent

61. You want to create a $75,000 portfolio comprised of two stocks plus a risk-free security. Stock A has an expected return of 13.6 percent and stock B has an expected return of 11.4 percent. You want to own $30,000 of stock B. The risk-free rate is 4 percent and the expected return on the market is 10 percent. If you want the portfolio to have an expected return equal to that of the market, how much should you invest in the risk-free security?

A. $21,250

B. $23,750

C. $25,000

D. $27,750

E. $29,250

62. A portfolio is invested 20 percent in stock A, 50 percent in stock B, and 30 percent in stock C. Assuming the returns are normally distributed, what is the 68 percent probability range of returns for any given year?

A. -3.89 percent to 15.77 percent

B. -3.89 percent to 22.32 percent

C. 2.66 percent to 15.77 percent

D. 2.66 percent to 22.32 percent

E. 6.55 percent to 15.77 percent

63. Given the following information, what is the variance for this stock?

A. .016570

B. .018477

C. .020046

D. .025454

E. .027835

64. Stock A has a beta of 1.7 and has the same reward-to-risk ratio as stock B. Stock B has a beta of .8 and an expected return of 12 percent. What is the expected return on stock A if the risk-free rate is 4.5 percent?

A. 12.89 percent

B. 14.46 percent

C. 16.67 percent

D. 18.97 percent

E. 20.44 percent

65. Given the following information, what is the standard deviation for this stock?

A. 6.87 percent

B. 7.55 percent

C. 7.72 percent

D. 7.91 percent

E. 8.03 percent

66. Given the following information, what is the variance for this stock?

A. .004638

B. .006667

C. .012121

D. .017406

E. .019949

67. Given the following information, what is the standard deviation of a portfolio that is invested 20 percent in stock A, 65 percent in stock B, and 15 percent in stock C?

A. 0.16 percent

B. 0.48 percent

C. 1.45 percent

D. 1.78 percent

E. 2.11 percent

68. Given the following information, what is the standard deviation for this stock?

A. 8.98 percent

B. 10.23 percent

C. 10.55 percent

D. 12.22 percent

E. 14.47 percent

69. A stock has a beta of 1.1, an expected return of 12.44 percent, and lies on the security market line. A risk-free asset is yielding 3.2 percent. You want to create a $15,000 portfolio that is comprised of these two securities and that will have a portfolio beta of .7. What is the expected return on this portfolio?

A. 8.40 percent

B. 9.08 percent

C. 9.90 percent

D. 10.79 percent

E. 11.60 percent

70. A $16,000 portfolio is invested in a risk-free security and two stocks. The beta of stock A is .74 while the beta of stock B is 1.9. One-half of the portfolio is invested in the risk-free security. How much is invested in stock A if the beta of the portfolio is .60?

A. $3,411.16

B. $4,141.41

C. $4,827.59

D. $5,258.25

E. $5,434.09

71. Given the following information, what is the variance of a portfolio that is invested 25 percent in both stocks A and C, and 50 percent in stock B?

A. .000025

B. .000106

C. .000232

D. .001414

E. .005285

72. Currently, you own a portfolio comprised of the following. How much of the riskiest stock should you sell and replace with risk-free securities if you want your portfolio beta to equal 95 percent of the market beta?

A. $0

B. $666.67

C. $863.02

D. $1,811.19

E. $2,136.98

73. The standard deviation of a portfolio:

A. is a weighted value of the standard deviations of the individual securities included in the portfolio.

B. is equal to the weighted geometric average of the standard deviations of the individual securities included in the portfolio.

C. is an arithmetic average of the standard deviations of the individual securities included in the portfolio.

D. is a weighted value with the weights being the probabilities of occurrence for the various economic states.

E. is a weighted average of the betas of the individual securities held in the portfolio.

74. You own a $90,000 portfolio that is invested in stock A and B. The portfolio beta is equal to the market beta. Stock A has an expected return of 14.1 percent and a beta of 1.2. Stock B has a beta of .76. What is the value of your investment in stock A?

A. $39,333

B. $40,909

C. $49,091

D. $50,545

E. $50,667

75. Based on the capital asset pricing model, which one of the following will increase the expected return on a security, all else constant?

A. an increase in the security's standard deviation

B. a decrease in the risk-free rate given a security beta of 1.3

C. a decrease in the market rate of return given a security beta of 1.4

D. a decrease in the market rate of return given a security beta of .78

E. a 1.2 percent increase in the market risk premium

76. You currently own a $150,000 portfolio that is equally as risky as the market. Given the information below, what is the beta of stock C?

A. .95

B. 1.06

C. 1.23

D. 1.44

E. 1.51

77. A portfolio has an expected return of 10.6 percent. This portfolio contains two stocks and one risk-free security. The expected return on stock X is 8.6 percent and on stock Y it is 23 percent. The risk-free rate is 4.4 percent. The portfolio value is $80,000 of which $25,000 is the risk-free security. How much is invested in stock X?

A. $0

B. $7,281.18

C. $27,411.16

D. $36,597.22

E. $40,009.13

78. You have computed the expected return on a security based on multiple economic states that have unequal probabilities of occurrence. Which one of the following statements is correct concerning the variance of this security?

A. The variance will remain constant if the probabilities of occurrence are changed.

B. The variance ignores the probabilities of occurrence.

C. The variance will most likely be negative if there is a high probability of an economic state occurring that will produce a highly negative return.

D. The variance will be negative only when the overall expected rate of return on the security is negative.

E. The variance depends on both the rates of return and the probability of occurrence for each economic state.

79. The expected return on a security depends on which of the following?

I. pure time value of money

II. amount of systematic risk as measured by standard deviation

III. the reward for bearing market risk

IV. the slope of the security market line

A. I and III only

B. II and IV only

C. II, III, and IV only

D. I, III, and IV only

E. I, II, III, and IV

80. Given the following information, what is the standard deviation of a portfolio that is invested 40 percent in stock A, 25 percent in stock B, and 35 percent in stock C?

A. 1.11 percent

B. 2.89 percent

C. 3.46 percent

D. 3.59 percent

E. 4.01 percent

1. Peter Mills is considering a project with the following cash flows. Should this project be accepted based on its rate of return if the company requires a 14 percent return?

A. yes; the project's rate of return is 14.12 percent

B. yes; the project's rate of return is 17.57 percent

C. no; the project's rate of return is 9.49 percent

D. no; the project's rate of return is 11.78 percent

E. The project's rate of return cannot be computed because the cash flows are unconventional

2. Which one of the following statements is correct?

A. You should accept a project only if the profitability index is less than 1.0.

B. The payback method is biased towards long-term projects.

C. The modified internal rate of return is most useful when projects are mutually exclusive.

D. The average accounting return has the least value from a financial point of view.

E. The net present value method is only applicable if a project has conventional cash flows.

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

I. will not pay back during its life.

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

III. will have a zero net present value.

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

A. I and II only

B. III and IV only

C. II and III only

D. I, III, and IV only

E. I, II, and IV only

4. You are considering the following two mutually exclusive projects. The crossover point is _____ percent.

A. 7.76

B. 9.25

C. 11.89

D. 12.08

E. 13.75

5. For a project with conventional cash flows, a profitability index less than 1.0 indicates the:

A. internal rate of return is equal to the firm's required rate of return.

B. project never pays back.

C. internal rate of return is less than the project's required discount rate.

D. net present value is positive.

E. accounting rate of return is positive.

6. You are considering the following two mutually exclusive projects. The required return on each project is 16 percent. Which project should you accept and what is the best reason for that decision?

A. Project A; because it pays back faster

B. Project A; because it has the higher internal rate of return

C. Project B; because it has the higher internal rate of return

D. Project A; because it has the higher net present value

E. Project B; because it has the higher net present value

7. A project has an average accounting return that is less than the requirement. Which one of the following indicates that the project should be accepted anyways?

A. payback period in excess of the requirement

B. positive NPV

C. negative IRR

D. PI less than 1.0

E. negative MIRR

8. You are using a net present value profile to compare projects A and B, which are mutually exclusive. At the crossover point the:

A. internal rate of return for project A equals that of project B, but generally does not equal zero.

B. internal rate of return of each project is equal to zero.

C. net present value of each project is equal to zero.

D. net present value of project A equals that of project B, but generally does not equal zero.

E. net present value of each project is equal to the respective project's initial cost.

9. The discounting approach to the modified internal rate of return:

A. individually discounts each separate cash flow back to the present.

B. sums all of the cash flows, excluding the initial cash flow, and then discounts that amount back to the present where it is compared to the initial cost.

C. discounts all negative cash flows to the present and compounds all positive cash flows to the end of the project.

D. discounts all negative cash flows back to the present and combines them with the initial cost.

E. reinvests all of the cash flows until the end of the project and then discounts the total back to the present.

10. You are considering the following two mutually exclusive projects. The required return on each project is 11 percent. Which project should you accept and what is the best reason for that decision?

A. Project A; because it pays back faster

B. Project A; because it has the higher profitability index

C. Project B; because it has the higher profitability index

D. Project A; because it has the higher net present value

E. Project B; because it has the higher net present value

11. Which one of the following statements related to the internal rate of return (IRR) is correct?

A. If the IRR exceeds the required return, the profitability index will be less than 1.0.

B. The IRR is a better evaluation tool than the profitability index when two projects are mutually exclusive.

C. When the IRR is less than the required return, the NPV is positive.

D. A project has multiple IRRs if the project's cash flows are unconventional.

E. If two projects are mutually exclusive, you should select the project with the highest IRR.

12. You are considering the following two mutually exclusive projects. The crossover point is _____ and Project _____ should be accepted if the discount rate for the project exceeds the crossover rate.

A. 9.54 percent; B

B. 9.93 percent; A

C. 9.93 percent; B

D. 11.02 percent; A

E. 11.02 percent; B

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

A. has no initial cost.

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

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

D. never pays back its initial cost.

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

14. The net present value of a project's cash inflows is $9,456 at a 7 percent discount rate. The profitability index is 1.16 and the firm's tax rate is 35 percent. What is the initial cost of the project?

A. $5,298.62

B. $5,910.00

C. $6,146.40

D. $6,782.12

E. $8,151.72

15. Which of the following would create a problem if you are trying to determine which one of two projects you should accept using the internal rate of return method of analysis?

I. one of the projects has cash outflows for two years and cash inflows thereafter

II. the projects are mutually exclusive

III. one project has an initial cost of $22,000 while the other one costs $324,000

IV. one of the projects has unconventional cash flows

A. I and III only

B. II and IV only

C. II, III, and IV only

D. I, II, and IV only

E. I, II, III, and IV

16. You are considering the following two mutually exclusive projects. The crossover point is _____ and project _____ should be accepted at an 18 percent discount rate.

A. 14.92 percent; B

B. 14.92 percent; A

C. 15.23 percent; B

D. 17.54 percent; A

E. 17.54 percent; B

17. The Plush Toy Co. is considering a new toy that will produce the following cash flows. Should the company produce this toy based on its rate of return if the required return is 10 percent?

A. yes; the project's rate of return is 11.90 percent

B. yes; the project's rate of return is 21.03 percent

C. no; the project's rate of return is 8.23 percent

D. no; the project's rate of return is 9.48 percent

E. The project's rate of return cannot be determined as the cash flows are unconventional

18. Dennis wants to determine if the discount rate really makes any difference in the net present value of a project. He feels that if a project is acceptable at one rate of return, it will be acceptable at all rates of return. To explain why his thinking is incorrect, you are creating an example to illustrate your point. The cash flows you are using are as follows: time zero is -$71,000, years 1 through 4 are $17,500 each, and years 5 and 6 are $22,500 each. The net present value at a discount rate of 12 percent is _____ as compared to _____ at 17 percent.

A. $4,668.80; $10,325.14

B. $4,920.72; $2,730.89

C. $5,098.31; $62.64

D. $6,319.92; $3,959.52

E. $13,660.64; $4,256.82

19. Sue and Tina are both considering the same project with the cash flows shown below. Sue is content earning 10 percent on the project but Tina wants to earn at least 14 percent. Who, if either, should accept this project?

A. Sue, but not Tina

B. Tina, but not Sue

C. Sue, Tina can go either accept or reject as her NPV is zero

D. neither Sue nor Tina

E. both Sue and Tina

20. The internal rate of return can lead to faulty decisions if:

A. any of an investment's cash flows are equal to zero.

B. the PI exceeds 1.0.

C. the investment has a life that exceeds the required payback period.

D. two or more projects are mutually exclusive.

E. the cash flows are conventional.

21. A project has an initial requirement of $310,000 for fixed assets and $62,000 for net working capital. The fixed assets will be depreciated to a zero book value over the 3-year life of the project and have an estimated salvage value of $155,000. All of the net working capital will be recouped at the end of the project. The annual operating cash flow is $345,000 and the discount rate is 18 percent. What is the project's net present value if the tax rate is 34 percent?

A. $403,618.02

B. $414,141.41

C. $446,047.36

D. $478,122.21

E. $510,197.06

22. Harvest Fields is considering expanding its wine-making operations. The expansion will require new equipment costing $489,000 that would be depreciated on a straight-line basis to a zero balance over the 5-year life of the project. The estimated salvage value is $172,000. The project requires $41,000 initially for net working capital, all of which will be recouped at the end of the project. The projected operating cash flow is $201,500 a year. What is the net present value of this project if the relevant discount rate is 16 percent and the tax rate is 34 percent?

A. $183,818.52

B. $203.339.15

C. $211,661.61

D. $231,182.24

E. $237,689.09

23. Firm A uses straight-line depreciation. Firm B uses MACRS depreciation. Both firms bought $100,000 worth of equipment two years ago. The equipment has a 7-year life. Both firms are in the 34 percent tax bracket. The operating cash flows for each firm are identical except for the depreciation effects. Given this, you know the:

A. depreciation expense for Firm A will be greater than Firm B's expense for this year.

B. equipment has a higher value on Firm B's books than on Firm A's at the end of year two.

C. operating cash flow of Firm A is less than that of Firm B for this year.

D. market value of Firm A's equipment is greater than the market value of Firm B's equipment.

E. market value of Firm B's equipment is greater than the market value of Firm A's equipment.

24. Fun Land is considering adding a miniature golf course to its facility. The course would cost $52,000, would be depreciated on a straight line basis over its 4-year life, and would have a zero salvage value. The estimated income from the golfing fees would be $33,000 a year with $9,000 of that amount being variable cost. The fixed cost would be $7,200. In addition, the firm anticipates an additional $10,000 in revenue from its existing facilities if the course is added. The project will require $6,000 of net working capital, which is recoverable at the end of the project. What is the net present value of this project at a discount rate of 14 percent and a tax rate of 28 percent?

A. $8,828.91

B. $12,381.39

C. $15,407.11

D. $17,388.78

E. $19,420.15

25. Concord Wines is considering expanding its wine-making operations. It would need new equipment that costs $648,000 that would be depreciated on a straight-line basis to a zero balance over the 5-year life of the project. The estimated salvage value is $224,000. The project requires $46,000 initially for net working capital, all of which will be recouped at the end of the project. The projected operating cash flow is $198,500 a year. What is the internal rate of return on this project if the relevant tax rate is 37 percent?

A. 13.78 percent

B. 15.67 percent

C. 17.22 percent

D. 18.49 percent

E. 19.01 percent

26. A project has an initial requirement of $1.2 million for fixed assets and $135,000 for net working capital. The fixed assets will be depreciated to a zero book value over the 6-year life of the project and have an estimated salvage value of $320,000. All of the net working capital will be recouped at the end of the project. The expected annual operating cash flow is $285,000. What is the project's internal rate of return if the tax rate is 32 percent?

A. 12.36 percent

B. 12.49 percent

C. 13.08 percent

D. 13.41 percent

E. 13.97 percent

27. Jasper Industries allocates capital funding using a soft rationing approach. Which one of the following situations is likely to exist in this case?

A. Division managers will underestimate the expected rate of return on their proposed projects in the hope of receiving additional capital funding.

B. Division managers will be given blanket approval to accept all positive net present value projects.

C. Divisions managers will vie with each other for additional capital allocations.

D. Division managers will not receive any funding for new projects but will be allowed to expand current operations.

E. Division managers will not receive capital funding for any project.

28. Scenario analysis:

A. determines the impact a $1 change in sales has on the internal rate of return.

B. determines which variable has the greatest impact on a project's net present value.

C. can be used to evaluate projects that have unconventional cash flows.

D. evaluates a project's net present value while sensitivity analysis evaluates a project's internal rate of return.

E. presents the absolute worst and absolute best outcome that could ever occur.

29. Assume a firm has positive net earnings. The operating cash flow of this firm:

A. ignores both depreciation and taxes.

B. is unaffected by the depreciation expense.

C. occurs at time zero of a project.

D. increases when tax rates decrease.

E. is equal to net income minus depreciation.

30. You are analyzing a project and have developed the following estimates. The depreciation is $9,500 a year and the tax rate is 34 percent. What is the worst case operating cash flow?

A. $5,408

B. $7,952

C. $8,407

D. $10,952

E. $12,408

31. Two years ago, Angelina's purchased some 5-year MACRS property for $37,800. Today, it is selling this property for $26,000. How much tax will the firm owe on this sale if the tax rate is 30 percent? The MACRS allowance percentages are as follows:

A. $2,356.80

B. $2,409.19

C. $2,828.17

D. $17,680.00

E. $18,200.00

32. The Corner Book Shoppe has decided to sell books online. Currently, the majority of its sales are related to young children's books. Online, the firm expects to sell primarily fiction to young adults. Which of the following anticipated reactions are erosion effects related to this decision?

I. decrease in in-store sales to young adults

II. online sales of young children's books

III. faster delivery of special book orders due to increased orders placed with suppliers

IV. increased walk-in patronage due to increased name recognition from online exposure

A. I only

B. II only

C. I and III only

D. II and IV only

E. I, II, III, and IV

33. A cost-cutting project will decrease costs by $37,500 a year. The annual depreciation on the project's fixed assets will be $7,200 and the tax rate is 35 percent. What is the amount of the change in the firm's operating cash flow resulting from this project?

A. $2,520

B. $19,695

C. $26,895

D. $31,435

E. $34,655

34. Scenario analysis asks questions such as:

A. How will changing the number of units sold affect the outcome of this project?

B. What is the worst outcome that should reasonably be expected?

C. How much will a $1 decrease in the variable cost per unit change the net present value?

D. Will the internal rate of return increase or decrease if the quantity sold increases by 100 units?

E. How will the operating cash flow change if the fixed costs increase by 3 percent?

35. The Sports Club wants to expand its facility. The expansion will require $438,000 in building improvements that will be depreciated on a straight-line basis over a 20-year period. The expanded area is expected to generate $203,000 in additional sales. Variable costs are 60 percent of sales and the annual fixed costs are $13,600. The tax rate is 34 percent. What is the operating cash flow for the first year of this project?

A. $36,767

B. $37,025

C. $48,275

D. $52,062

E. $57,200

36. Kites Galore is considering making and selling custom kites in two sizes. The small kites would be priced at $14 and the large kites would be $21. The variable cost per unit is $8 and $12, respectively. Tom, the owner, feels that he could sell 3,800 of the small kites and 2,400 of the large kites each year. The fixed costs would only be $4,000 a year and the tax rate is 35 percent. What is the annual operating cash flow if the annual depreciation expense is $2,700?

A. $26,260

B. $27,205

C. $27,845

D. $29,130

E. $29,245

37. Junior's has a new project in mind that will increase accounts receivable by $27,000, increase accounts payable by $19,000, increase fixed assets by $46,000, and decrease inventory by $17,000. What is the amount the firm should use as the initial cash flow attributable to net working capital when it analyzes this project?

A. $9,000

B. $10,000

C. $44,000

D. $63,000

E. $109,000

38. The opportunity to modify a project in the future is referred to as:

A. sensitivity analysis.

B. a managerial option.

C. scenario planning.

D. a restructuring.

E. an erosion control measure.

39. Which one of the following statements is correct when a firm faces hard rationing?

A. All positive net present value projects will be accepted.

B. Each division within a firm will be allocated an amount for capital expenditures that will be less than the total value of its positive net present value projects.

C. The firm will have zero dollars for capital expenditures.

D. The firm will fund only those projects that create value for its shareholders.

E. The firm will be faced with the difficult decision of determining which one of two highly valuable projects will be funded.

40. The analysis of the effects that what-if questions have on the net present value of a project is called _____ analysis.

A. sensitivity

B. erosion

C. scenario

D. benefit

E. opportunity

41. A stock produced returns of 12 percent, 3 percent, and 14 percent over three of the past four years. The arithmetic average for the past four years is 7.5 percent. What is the standard deviation of the stock's returns for the 4-year period?

A. 0.10 percent

B. 1.28 percent

C. 1.67 percent

D. 6.45 percent

E. 6.67 percent

42. Windsor stock has produced returns of 41.6 percent, 32.9 percent, 27.4 percent, 43.8 percent, and 11.4 percent over the past five years, respectively. What is the variance of these returns?

A. .1287

B. .1346

C. .1360

D. .1392

E. .1407

43. Over the past six years, a stock had annual returns of 2 percent, 10 percent, 14 percent, 8 percent, -6 percent, and 8 percent, respectively. What is the standard deviation of these returns?

A. 7.04 percent

B. 7.19 percent

C. 8.38 percent

D. 11.97 percent

E. 12.27 percent

44. Over the last four years, the stock of Wagner's Paints has had an arithmetic average return of 6.5 percent. Three of those four years produced returns of 9 percent, 3 percent, and 1 percent. What is the geometric average return for this 4-year period?

A. 3.00 percent

B. 4.48 percent

C. 6.33 percent

D. 7.07 percent

E. 8.69 percent

45. Your portfolio has provided you with returns of 7.9 percent, 11.2 percent, 3.8 percent, and 14.7 percent over the past four years, respectively. What is the geometric average return for this period?

A. 8.98 percent

B. 9.16 percent

C. 9.33 percent

D. 9.40 percent

E. 9.44 percent

46. Over the last four years, the stock of Stephensen's Motors has had an arithmetic average return of 8.5 percent. Three of those four years produced returns of 8 percent, 19 percent, and 13 percent. What is the geometric average return for this 4-year period?

A. 6.46 percent

B. 6.54 percent

C. 8.09 percent

D. 8.83 percent

E. 10.03 percent

47. A stock has an average return of 13.6 percent and a standard deviation of 8.4 percent. In any one given year, you have a 95 percent chance that you will not lose more than _____ percent nor earn more than ____ percent if you invest in this security.

A. 5.2 percent to 22.0 percent

B. 3.2 percent to 30.4 percent

C. 3.2 percent to 30.4 percent

D. 5.2 percent to 22.0 percent

E. 13.6 percent to 38.8 percent

48. Which one of the following statements is correct?

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

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

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

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

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

49. The common stock of Whole Foods has produced returns of 9 percent, 13 percent, 11 percent, -6 percent, and 5 percent for the past five years, respectively. What is the standard deviation of these returns?

A. 6.99 percent

B. 7.08 percent

C. 7.54 percent

D. 8.33 percent

E. 8.49 percent

50. The arithmetic average:

I. is greater in value than the geometric average.

II. is easier to compute than the geometric average.

III. involves a power that is equal to 1/N.

IV. ignores the effects of compounding.

A. I and III only

B. II and IV only

C. III and IV only

D. II and III only

E. I, II, and III only

51. Over the past 4 years, large-company stocks and U.S. Treasury bills have produced the returns stated below. During this period, inflation averaged 3.4 percent. Given this information, the average real rate of return on large-company stocks was ___ percent as compared to _____ percent for Treasury bills and the standard deviation for large-company stocks was _____ as compared to ____ for Treasury bills.

A. 7.83; .23; 7.55; .78

B. 7.83; .15; 7.47; .71

C. 7.83; .15; 7.55; .96

D. 8.02; .34; 7.47; .71

E. 8.02; .34; 7.55; .96

52. Which of the following statements are correct?

I. The risk-free rate of return has a zero risk premium.

II. The reward for bearing risk is called the standard deviation.

III. Based on historical returns, there are rewards for bearing risk.

IV. In general, the higher the risk, the higher the expected return.

A. I and II only

B. III and IV only

C. I, III, and IV only

D. II, III, and IV only

E. I, II, III, and IV

53. Five years ago, you purchased 200 shares of RST stock. The annual returns have been 9.8 percent, 6.4 percent, 7.5 percent, 1.2 percent, and 10.6 percent, respectively for those five years. What is the variance of these returns?

A. .0008

B. .0014

C. .0027

D. .0049

E. .0063

54. Over the past five years, a stock returned 9.8 percent, -22.6 percent, -3.8 percent, 19.2 percent and 4.6 percent. What is the variance of these returns?

A. .0250

B. .0268

C. .0347

D. .0381

E. .0394

55. Which one of the following statements is correct based on the historical record for 1926-2006?

A. Long-term government bonds have had a positive annual rate of return every year since 1940.

B. Large-company stocks suffered greater losses during the Great Depression years than any other investment category.

C. The rate of inflation as measured by the Consumer Price Index has been positive every year for the past fifty years.

D. Large-company stocks have never suffered back-to-back negative annual returns since the Great Depression.

E. The annual return on U.S. Treasury bills exceeded the rate of inflation for every year since 1926.

56. Over the past 6 years, a stock produced returns of 32 percent, 11 percent, 19 percent, -44 percent, 21 percent, and 15 percent. Based on these six years, what range of returns would you expect to see 99 percent of the time?

A. 82.16 percent to 93.18 percent

B. 82.16 percent to 94.07 percent

C. 82.16 percent to 94.19 percent

D. 71.74 percent to 89.74 percent

E. 71.74 percent to 90.38 percent

57. A security produced returns of 12 percent, -11 percent, -2 percent, 15 percent, and 9 percent over the past five years, respectively. Based on these five years, what is the probability that an investor in this stock will lose more than 17.06 percent in any one given year?

A. 0.5 percent

B. 1.0 percent

C. 2.5 percent

D. 5.0 percent

E. 16.0 percent

58. Mountain Minerals pays a constant annual dividend. One year ago, when you purchased shares of that stock at $40 a share, the dividend yield was 6.5 percent. Over this past year, the inflation rate has been 3.2 percent. Today, the required return on this stock is 9.8 percent and you just sold all of your shares. What is your total real return on this investment?

A. 31.87 percent

B. 29.43 percent

C. 26.67 percent

D. 25.48 percent

E. 23.09 percent

59. If the financial markets are efficient then:

A. stock prices should remain constant.

B. stock prices should increase or decrease slowly as new events are analyzed and the information is absorbed by the markets.

C. an increase in the value of one security should be offset by a decrease in the value of another security.

D. stock prices will only change when an event actually occurs, not at the time the event is anticipated.

E. stock prices should only respond to unexpected news and events.

60. A stock has produced returns of 16.7 percent, 9.5 percent, 12.3 percent, and -8.9 percent over the past four years, respectively. What is the geometric average return?

A. 6.93 percent

B. 7.40 percent

C. 11.81 percent

D. 11.85 percent

E. 12.23 percent

61. You want to create a $75,000 portfolio comprised of two stocks plus a risk-free security. Stock A has an expected return of 13.6 percent and stock B has an expected return of 11.4 percent. You want to own $30,000 of stock B. The risk-free rate is 4 percent and the expected return on the market is 10 percent. If you want the portfolio to have an expected return equal to that of the market, how much should you invest in the risk-free security?

A. $21,250

B. $23,750

C. $25,000

D. $27,750

E. $29,250

62. A portfolio is invested 20 percent in stock A, 50 percent in stock B, and 30 percent in stock C. Assuming the returns are normally distributed, what is the 68 percent probability range of returns for any given year?

A. -3.89 percent to 15.77 percent

B. -3.89 percent to 22.32 percent

C. 2.66 percent to 15.77 percent

D. 2.66 percent to 22.32 percent

E. 6.55 percent to 15.77 percent

63. Given the following information, what is the variance for this stock?

A. .016570

B. .018477

C. .020046

D. .025454

E. .027835

64. Stock A has a beta of 1.7 and has the same reward-to-risk ratio as stock B. Stock B has a beta of .8 and an expected return of 12 percent. What is the expected return on stock A if the risk-free rate is 4.5 percent?

A. 12.89 percent

B. 14.46 percent

C. 16.67 percent

D. 18.97 percent

E. 20.44 percent

65. Given the following information, what is the standard deviation for this stock?

A. 6.87 percent

B. 7.55 percent

C. 7.72 percent

D. 7.91 percent

E. 8.03 percent

66. Given the following information, what is the variance for this stock?

A. .004638

B. .006667

C. .012121

D. .017406

E. .019949

67. Given the following information, what is the standard deviation of a portfolio that is invested 20 percent in stock A, 65 percent in stock B, and 15 percent in stock C?

A. 0.16 percent

B. 0.48 percent

C. 1.45 percent

D. 1.78 percent

E. 2.11 percent

68. Given the following information, what is the standard deviation for this stock?

A. 8.98 percent

B. 10.23 percent

C. 10.55 percent

D. 12.22 percent

E. 14.47 percent

69. A stock has a beta of 1.1, an expected return of 12.44 percent, and lies on the security market line. A risk-free asset is yielding 3.2 percent. You want to create a $15,000 portfolio that is comprised of these two securities and that will have a portfolio beta of .7. What is the expected return on this portfolio?

A. 8.40 percent

B. 9.08 percent

C. 9.90 percent

D. 10.79 percent

E. 11.60 percent

70. A $16,000 portfolio is invested in a risk-free security and two stocks. The beta of stock A is .74 while the beta of stock B is 1.9. One-half of the portfolio is invested in the risk-free security. How much is invested in stock A if the beta of the portfolio is .60?

A. $3,411.16

B. $4,141.41

C. $4,827.59

D. $5,258.25

E. $5,434.09

71. Given the following information, what is the variance of a portfolio that is invested 25 percent in both stocks A and C, and 50 percent in stock B?

A. .000025

B. .000106

C. .000232

D. .001414

E. .005285

72. Currently, you own a portfolio comprised of the following. How much of the riskiest stock should you sell and replace with risk-free securities if you want your portfolio beta to equal 95 percent of the market beta?

A. $0

B. $666.67

C. $863.02

D. $1,811.19

E. $2,136.98

73. The standard deviation of a portfolio:

A. is a weighted value of the standard deviations of the individual securities included in the portfolio.

B. is equal to the weighted geometric average of the standard deviations of the individual securities included in the portfolio.

C. is an arithmetic average of the standard deviations of the individual securities included in the portfolio.

D. is a weighted value with the weights being the probabilities of occurrence for the various economic states.

E. is a weighted average of the betas of the individual securities held in the portfolio.

74. You own a $90,000 portfolio that is invested in stock A and B. The portfolio beta is equal to the market beta. Stock A has an expected return of 14.1 percent and a beta of 1.2. Stock B has a beta of .76. What is the value of your investment in stock A?

A. $39,333

B. $40,909

C. $49,091

D. $50,545

E. $50,667

75. Based on the capital asset pricing model, which one of the following will increase the expected return on a security, all else constant?

A. an increase in the security's standard deviation

B. a decrease in the risk-free rate given a security beta of 1.3

C. a decrease in the market rate of return given a security beta of 1.4

D. a decrease in the market rate of return given a security beta of .78

E. a 1.2 percent increase in the market risk premium

76. You currently own a $150,000 portfolio that is equally as risky as the market. Given the information below, what is the beta of stock C?

A. .95

B. 1.06

C. 1.23

D. 1.44

E. 1.51

77. A portfolio has an expected return of 10.6 percent. This portfolio contains two stocks and one risk-free security. The expected return on stock X is 8.6 percent and on stock Y it is 23 percent. The risk-free rate is 4.4 percent. The portfolio value is $80,000 of which $25,000 is the risk-free security. How much is invested in stock X?

A. $0

B. $7,281.18

C. $27,411.16

D. $36,597.22

E. $40,009.13

78. You have computed the expected return on a security based on multiple economic states that have unequal probabilities of occurrence. Which one of the following statements is correct concerning the variance of this security?

A. The variance will remain constant if the probabilities of occurrence are changed.

B. The variance ignores the probabilities of occurrence.

C. The variance will most likely be negative if there is a high probability of an economic state occurring that will produce a highly negative return.

D. The variance will be negative only when the overall expected rate of return on the security is negative.

E. The variance depends on both the rates of return and the probability of occurrence for each economic state.

79. The expected return on a security depends on which of the following?

I. pure time value of money

II. amount of systematic risk as measured by standard deviation

III. the reward for bearing market risk

IV. the slope of the security market line

A. I and III only

B. II and IV only

C. II, III, and IV only

D. I, III, and IV only

E. I, II, III, and IV

80. Given the following information, what is the standard deviation of a portfolio that is invested 40 percent in stock A, 25 percent in stock B, and 35 percent in stock C?

A. 1.11 percent

B. 2.89 percent

C. 3.46 percent

D. 3.59 percent

E. 4.01 percent

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