Multiple Choice: Choose the one alternative that best completes the statement or answers
the question.
1. You are considering an investment in a AAA-rated U.S. corporate bond but you
are not sure what rate of interest it should pay. Assume that the real risk-free rate
of interest is 1.0%; inflation is expected to be 1.5%; the maturity risk premium is
2.5%; and, the default risk premium for AAA rated corporate bond is 3.5%. What
rate of interest should the U.S. corporate pay?
A) 6.0%
B)8.5%
C)2.5%
D)5.0%
2. Bill and Cathy will be retiring in fifteen years and would like to buy an Italian
villa. The villa costs $500,000 today, and the housing in Italy is expected to
increase by 6% per year. Bill and Cathy want to make fifteen equal annual
payments into an account, starting today, so there will be enough money to
purchase the villa in fifteen years. If the account earns 10% per year, what is the
amount of each deposit?
A) $72,623 B)$79,885
C)$34,286
D)32,947
3. Today is your 21st birthday and your bank account balance is $25,000. Your
account is earning 6.5% interest compounded quarterly. How much will be in the
account on your 50th birthday?
A)$162,183 B)$159,795 C)$163,832 D)$164,631
4. 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)
A)$15,985
B)$12,367
C)$14,178
D)$13,349
5. If you hold a portfolio made up of the following stocks:
Investment Value Beta
Stock A
$8,000
1.5
Stock B
$10,000
1.0
Stock C
$2,000
.5
What is the beta of the portfolio?
A)1.00
B)1.24
C)1.15
D)1.33
6. PDQ Corp. has sales of $4,000,000; the firm’s cost of goods sold is $2,500,000;
and its total expenses are $600,000. The firm’s interest expense is $250,000, and
the corporate tax rate is 40%. The firm paid dividends to preferred stockholders of
$40,000, and the firm distributed $60,000 in dividend payments to common
stockholders. What is PDQ’s “Addition to Retained Earnings?”
A)$290,000 B)$330,000 C)$650,000 D)$390,000
7. Use the following information to calculate the company’s accounting net income for
the year.
Credit Sales
Cash Sales
Operating Expenses on Credit
Cash Operating Expenses
Accounts Receivable (Beg of Year)
Accounts Receivable (End of Year)
Accounts Payable (Beg of Year)
Accounts Payable (End of Year)
Corporate Tax Rate
A) $240,000 B)$300,000
C)$125,000
$800,000
$500,000
$200,000
$700,000
$50,000
$80,000
$50,000
$100,000
40%
D)$120,000
8. You want to travel to Europe to visit relatives when you graduate from college three
years from now. The trip is expected to cost a total of $10,000 at that time. Your parents
have deposited $5,000 for you in a CD paying 6% interest annually, maturing three years
from now. Aunt Hilda has agreed to finance the balance. If are going to put Aunt Hilda’s
gift in an investment earning 10% over the next three years, how much must she deposit
now, so you can visit your relatives at the end of three years?
A)$3,757
B)$5,801
C)$3,039
D)$3,345
9. The return on the market portfolio is currently 12%. Mobile Phone Corporation
stockholders require a rate of return of 30% and the stock beta of 3.2. Accoding to
CAPM, determine the risk-free rate.
A) 4.64%
B)9.80%
C)3.82%
D)6.50%
10. You have been depositing money at the end of each year into an account drawing 8%
interest. What is the balance in the account at the end of year four if you deposited the
following amounts?
Year
End of Year Deposit
1
$350
2
$500
3
$725
4
$400
A)$1,622
B)$2,687
C)$2,384
D)$2,207
ESSAY. Write your answer in the space provided or on a separate sheet of paper.
11. The expected return for the market portfolio is 15%, the expected return on U.S.
Treasury Bills is 4% and the expected return on AAA-rated short-term corporate bonds is
8%. Calculate the required return for a stock with a beta equal to 1.4.
12. Use the following date:
Market risk premium= 8%
Risk free rate= 4%
Beta of XYZ stock= 1.5
Beta of PDQ stock= 2.0
Investment in XYZ stock= $50,000
Investment in PDQ stock= $100,000
You have no assets other than your investments in XYZ and PDQ stock.
What is the expected return of your portfolio? Show all work.
13. An investment promises to pay you the following amounts at the end of each of the
next 10 years: (1) $1,000, (2) $2,000, (3) $3,000, (4) $4,000, (5) – (10) $5,000 per year.
If you want to earn a return of 8% per year, how much will you be willing to pay for the
investment today?
14. Given the information below, calculate the company’s cash balance at the end of the
year.
Cash Balance at the Beginning of Year
Activity During the Year
Increase in Accounts Payable
Decrease in Accounts Receivable
Depreciation Expense
Net Income
Purchase of Fixed Assets
Sales of Common Stock
Decrease in Notes Payable
Dividends Paid
$80,000
$60,000
$40,000
$500,000
$2,000,000
$800,000
$100,000
$85,000
$15,000
Please refer to Table 4-7 for the following question.
Table 4-7
Hokie Corporation Comparative Balance Sheet
For the Years Ending December 31, 2009 and 2010
(Millions of Dollars)
Assets
Current Assets:
Cash
Accounts Receivable
Inventory
Total Current Assets
Gross Fixed Assets:
Less Accumulated Depreciation
Net fixed Assets
Total Assets
2009
$2
16
2010
$10
12
22
26
$48
$120
(60)
$124
(64)
$40
60
$100
Liabilities and Owner’s Equity
Current Liabilities:
Accounts Payable
Notes Payable
Total Current Liabilities
$16
Long-term Debt
20
Owner’s Equity
Common Stock
Retained Earnings
40
Total Liabilities and Owner’s
Equity
$100
60
$108
$18
10
10
$28
$26
18
40
14
22
$108
Hokie had net income of $28 million for 2010 and paid total cash dividends of $20
million to their common stockholders.
15. Calculate the following 2010 financial ratios of Hokie Corporation using the
information given in Table 4-7:
i. current ratio
Current Assets/Current Liabilities
48/28
1.71
ii. acid test ratio
Quick Assets/Current Liabilities
(Current Assets-Invenories)/Current Liabilities
(48-26)/28
22/28
.79
iii. debt ratio
Total Debt/Total Assets
(Total Assets-Owners Equity)/Total Assets
46/108
.43
iv. return on total assets
EBIT/Total Net Assets
(28/108)*100
25.92%
v. return on common equity
Net Income/Shareholders Equity
(28/62)*100
45.16%