1. You have the choice of two equally risk annuities, each paying 5,000 per year for 8 years. One is an annuity due and the other is an ordinary annuity. If you are going to be receiving the annuity payments, which annuity would you choose to maximize your wealth? (Points :1)

The annuity due

The ordinary annuity

Since we do not know the interest rate, we cannot find the value of the annuities and hence cannot tell which is better

Either one because they have the same present value

4. A financial adviser tells you that you can make your child a millionaire if you just start saving early. You decide to put an equal amount each year into an investment account that earns 8 % interest per year, starting on the day your child is born. How much money would you need to invest each year [rounded to the nearest dollar] to accumulate a million for your child by the time he is 50 years old [You last deposit will be made on his 49th birthday]. (Points :1)

$8,000

$1,614

18,000

$2,347

5. Investment A has an expected rate of return of 15 % per year, while investment B has an expected rate of return of 12 % per year. A rational investor will choose _________. (Points :1)

Investment A because of the higher expected return

Investment B because a lower return means a lower risk

Investment A if A and B are of equal risk

Investment A only if the standard deviation of returns for A is higher than the standard deviation of returns for B.

6. Emery Inc. has a beta equal to 1.5 and a required return of 14 % based on the CAPM. If the risk free rate of return is 2%, the expected return on the market portfolio is _______________. (Points :1)

10%

9%

8%

6%

7. Suppose interest rates have been at historically low levels the past two years. A reasonable strategy for bond investors during this time would be to (Points :1)

Invest in long-term bonds to reduce interest rate risk

Invest in short-term bonds to reduce interest rate risk

Buy only junk bonds which have higher interest rates

Invest in long-term bonds to lock in a bond position for when interest rates increase in the future.

8. If two firms have the same current dividend and the same expected growth rate, their stocks must sell at the same current price or else the market will not be in equilibrium. (Points :1)

True

False

True if markets are semi strong form efficient

True if investors are risk adverse

9. Which of the following statements concerning stock valuation is most correct? (Points :1)

The free cash flow method will result in a higher valuation than the dividend valuation method because cash flows are higher than dividends.

The free cash flow method can only be used if a company does not pay dividends.

The dividend valuation approach is more accurate than the free cash flow approach.

When using the free cash flow method, interest bearing debt must be subtracted from firm value to determine the stock value.

10. Using the constant growth dividend valuation model and assuming dividends will grow at a constant rate forever; the increase in the value of the stock each year should be equal to ______ (Points :1)

Growth rate in dividends

Required return on the stock

Dividend yield plus the capital gains yield

Dividend yield

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The annuity due

The ordinary annuity

Since we do not know the interest rate, we cannot find the value of the annuities and hence cannot tell which is better

Either one because they have the same present value

4. A financial adviser tells you that you can make your child a millionaire if you just start saving early. You decide to put an equal amount each year into an investment account that earns 8 % interest per year, starting on the day your child is born. How much money would you need to invest each year [rounded to the nearest dollar] to accumulate a million for your child by the time he is 50 years old [You last deposit will be made on his 49th birthday]. (Points :1)

$8,000

$1,614

18,000

$2,347

5. Investment A has an expected rate of return of 15 % per year, while investment B has an expected rate of return of 12 % per year. A rational investor will choose _________. (Points :1)

Investment A because of the higher expected return

Investment B because a lower return means a lower risk

Investment A if A and B are of equal risk

Investment A only if the standard deviation of returns for A is higher than the standard deviation of returns for B.

6. Emery Inc. has a beta equal to 1.5 and a required return of 14 % based on the CAPM. If the risk free rate of return is 2%, the expected return on the market portfolio is _______________. (Points :1)

10%

9%

8%

6%

7. Suppose interest rates have been at historically low levels the past two years. A reasonable strategy for bond investors during this time would be to (Points :1)

Invest in long-term bonds to reduce interest rate risk

Invest in short-term bonds to reduce interest rate risk

Buy only junk bonds which have higher interest rates

Invest in long-term bonds to lock in a bond position for when interest rates increase in the future.

8. If two firms have the same current dividend and the same expected growth rate, their stocks must sell at the same current price or else the market will not be in equilibrium. (Points :1)

True

False

True if markets are semi strong form efficient

True if investors are risk adverse

9. Which of the following statements concerning stock valuation is most correct? (Points :1)

The free cash flow method will result in a higher valuation than the dividend valuation method because cash flows are higher than dividends.

The free cash flow method can only be used if a company does not pay dividends.

The dividend valuation approach is more accurate than the free cash flow approach.

When using the free cash flow method, interest bearing debt must be subtracted from firm value to determine the stock value.

10. Using the constant growth dividend valuation model and assuming dividends will grow at a constant rate forever; the increase in the value of the stock each year should be equal to ______ (Points :1)

Growth rate in dividends

Required return on the stock

Dividend yield plus the capital gains yield

Dividend yield

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