Corporate Finance Final Exam

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1) Which one of these applies to the dividend growth model of
stock valuation?
A) The dividend must be for the same time period as the stock
price.
B
B) The growth rate must be less than the discount rate.
C) The rate of growth must be positive.
D) The model cannot be applied if the growth rate is zero.
E) The dividend amount must be constant over time.
2) If a stock pays a constant annual dividend then the stock can
be valued using the:
A) fixed coupon bond present value formula.
B) present value of an annuity due formula. E
C) payout ratio formula.
D) present value of an ordinary annuity formula.
E) perpetuity present value formula.
3) In the formula, P3 = Dx/(R g), the dividend is for period:
A) two.
B) five.
C
C) four.
D) three.
E) one.
4) The differential growth model of stock valuation:
A) makes allowance for one change in the discount rate.
B) uses DT + 1 as the dividend amount throughout the formula.
C
C) requires g2 to be less than the discount rate.
D) assumes the second growth rate will be zero.
E) assumes the first growth rate will be zero.
5) The constant dividend growth model:
A) is more complex than the differential growth model.
B) requires the growth period be limited to a set number of years.
C) is never used because firms rarely attempt to maintain steady D
dividend growth.
D) can be used to compute a stock price at any point in time.
E) most applies to stocks with differential growth rates.
6) The underlying assumption of the dividend growth model is that
a stock is worth:
A) the same amount to every investor regardless of their desired
rate of return.
B) the present value of the future income that the stock is expected
to generate.
B
C) an amount computed as the next annual dividend divided by
the market rate of return.
D) the same amount as any other stock that pays the same current
dividend and has the same required rate of return.
E) an amount computed as the next annual dividend divided by
the required rate of return.
7) Assume you are using the dividend growth model to value
stocks. If you expect the market rate of return to increase across
the board on all equity securities, then you should also expect the:
A) market values of all stocks to increase.
B) market values of all stocks to remain constant as the dividend
C
growth will offset the increase in the market rate.
C) market values of all stocks to decrease.
D) stocks that do not pay dividends to decrease in price while the
dividend-paying stocks maintain a constant price.
E) dividend growth rates to increase to offset this change.
8) Latcher's is a relatively new firm that is still in a period of rapid
development. The company plans on retaining all of its earn-
ings for the next six years. Seven years from now, the company
projects paying an annual dividend of $.25 a share and then
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increasing that amount by 3 percent annually thereafter. To value
this stock as of today, you would most likely determine the value of
the stock ________ years from today before determining today's
value.
A) 4 C
B) 5
C) 6
D) 7
E) 8
9) Phillips Co. currently pays no dividend. The company is an-
ticipating dividends of $.02, $.05, $.10, $.20, and $.30 over the
next 5 years, respectively. After that, the company anticipates
increasing the dividend by 3.5 percent annually. One common
step in computing the value of this stock today is to compute the
value of: D
A) P1.
B) P3.
C) P4.
D) P5.
E) P6.
10) Next year's annual dividend divided by the current stock price
is called the:
A) yield to maturity.
B) total yield. C
C) dividend yield.
D) capital gains yield.
E) earnings yield.
11) The rate at which a stock's price is expected to appreciate (or
depreciate) is called the ________ yield.
A) current
B) total D
C) dividend
D) capital gains
E) earnings
12) For a firm with a constant payout ratio, the dividend growth
rate can be estimated as:
A) Payout ratio × Return on equity.
B) Return on assets × Retention ratio. E
C) Return on equity × (1 + Retention ratio).
D) Payout ratio × Return on assets.
E) Return on retained earnings × Retention ratio.
13) The total return on a stock is equal to the:
A) dividend yield minus the capital gains yield.
B) dividend growth rate minus the dividend yield.
C) dividend yield plus the dividend growth rate. C
D) growth rate of the dividends.
E) dividend divided by the sum of the dividend yield and capital
gains yield.
14) A stock's PE ratio is primarily affected by which three factors?
A) Accounting practices, opportunities, and the market rate of
return
B) Dividend yield, capital gains yield, and opportunities E
C) Market rate of return, risk, opportunities
D) Accounting practices, market rate of return, risk
E) Risk, opportunities, accounting practices
15) Which one of these factors generally has the greatest impact
on a firm's PE ratio?
A) Required rate of return C
B) Current dividends
C) Future opportunities
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D) The overall risk level of the current firm
E) Depreciation method used by the firm
16) The closing price of a stock is quoted at 32.08, with a PE of
21 and a net change of .36. Based on this information, which one
of the following statements is correct?
A) The closing price on the previous day was $.36 higher than
today's closing price.
B) A dealer will buy the stock at $32.08 and sell it at $32.44 a D
share.
C) The current earnings per share equal $32.08/21 + $.36.
D) The current stock price is equivalent to 21 years of the firm's
current earnings per share.
E) The earnings per share have increased by $.36 this year.
17) A forward PE is generally based on the projected:
A) average earnings for the next five years.
B) average earnings for the next three years.
D
C) earnings for the upcoming quarter.
D) earnings for the next year.
E) stock price in one year.
18) A stock that is considered to be low risk is most apt to have:
A) a low PE ratio.
B) unlimited growth.
D
C) a dividend yield of zero.
D) a high PE ratio.
E) a growth rate of zero.
19) Enterprise value equals the:
A) combined market value of debt and equity minus excess cash.
B) market value of equity minus the market value of debt plus
excess cash.
A
C) market value of debt plus the book value of equity minus
excess cash.
D) combined market value of debt and equity.
E) combined book value of debt and equity minus excess cash.
20) One advantage of the EV/EBITDA ratio over the PE ratio is
the:
A) inclusion of depreciation charges.
B) increased reliance on leverage. E
C) averaging of annual sales.
D) inclusion of all the firm's cash reserves.
E) lessened impact of leverage on the ratio.
21) What amount of a firm's cash should be included in the
enterprise value?
A) Only the amount needed to run the business
B) None of the cash should be included
A
C) Somewhere between 25 and 50 percent at the user's discretion
D) Only the amount necessary to maintain a constant EV/EBITDA
ratio
E) The average cash balance over the past three years
22) The free cash flow model is most helpful for firms:
A) that have similar investment opportunities as other firms in their
industry.
B) that pay steady dividends and have excess cash.
C) that are financially sound and thus pay constant, high divi- D
dends.
D) with external financing needs that are not paying dividends.
E) that are projected to grow at a constant, steady pace while
increasing their dividends.
23) If the issuer of a stock receives the proceeds from a sale of
that issuer's stock, then the sale:

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A) had to have occurred on the floor of an exchange.
B) was a secondary market transaction.
C) was transacted on the NYSE. D
D) was conducted in the primary market.
E) had to have been a limit order.
24) Which one of these statements is correct?
A) Investors earn a return called a spread.
B) Dealers pay a fee, called the spread, to brokers.
D
C) Investors sell at the ask price.
D) Dealers buy at the bid price.
E) Brokers maintain an inventory of securities.
25) Supplemental liquidity providers (SLPs):
A) act as floor brokers.
B) only represent stock purchasers.
D
C) seek the best price for their customers.
D) do not operate on the floor of a stock exchange.
E) have been replaced by designated market makers.
26) A stop order to sell at $46 will be executed:
A) at a price of $46 at the end of the day on which the order was
placed.
B) at $46 following the first trade with a price below $46.
C
C) as a market order once a trade occurs at a price of $46 or less.
D) immediately at a price of $46.
E) as a market order once a trade occurs at a price of $46 or
higher.
27) A limit order to buy:
A) guarantees the quantity purchased but not the price.
B) guarantees both the purchase price and the order fulfillment.
C) is executed only if the purchase price is less than the limit
D
amount.
D) guarantees the purchase price but not the order execution.
E) will be executed either at the limit price or at the end-of-day
price.
28) A day order to sell at a limit of $32 will be:
A) executed at the next available price once a trade occurs at the
limit price.
B) cancelled at the end of the day if not executed.
C) executed only if the purchase price is less than the limit B
amount.
D) executed at the end-of-day price if $32 has not been obtained.
E) transferred to a market order on the following day if not exe-
cuted at the limit price.
29) NASDAQ:
A) has a single trading floor located in Chicago, Illinois.
B) has multiple trading floors.
D
C) is a designated market maker system.
D) has a multiple market maker system.
E) is closed to all electronic communications networks (ECNs).
30) You recently contacted a brokerage firm and purchased 100
shares of stock. The brokerage firm acquired the shares for you
by making a deal with a floor broker who represented one of the
stock issuer's shareholders. Given this, you know your purchase:
A) was conducted in the secondary market. A
B) occurred over-the-counter.
C) was for shares of a stock listed on NASDAQ.
D) occurred on an ECN.
E) involved the issuance of new shares.
31) Inside quotes on a stock are:
A) the prices available only to corporate insiders.

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B) prices obtained only on the actual floor of an exchange.
C) prices available only to stock market employees.
D) the lowest asked quote and the highest bid quote. D
E) prices paid that lie between yesterday's closing price and
today's closing price.
32) Rosita's announced that its next annual dividend will be $1.65
a share and all future dividends will increase by 2.5 percent an-
nually. What is the maximum amount you should pay to purchase
a share of this stock if you require a rate of return of 12 percent?
A) $13.75 E
B) $17.80
C) $15.46
D) $16.94
E) $17.37
38) Weisbro and Sons common stock sells for $21 a share and
pays an annual dividend that increases by 5 percent each year.
The rate of return on this stock is 9 percent. What is the amount
of the last dividend paid?
A) $.77 B
B) $.80
C) $.84
D) $.87
E) $.88
39) The common stock of Energy Saver pays an annual dividend
that is expected to increase by 4 percent annually. The stock
commands a market rate of return of 12 percent and sells for
$58.25 a share. What is the expected amount of the next dividend
to be paid?
D
A) $4.87
B) $5.02
C) $5.10
D) $4.66
E) $4.33
41) You have decided to purchase shares of GHC but need an ex-
pected 12 percent rate of return to compensate for the perceived
risk of such ownership. What is the maximum price you should pay
per share if the company pays a constant $2.70 annual dividend
per share?
B
A) $23.04
B) $22.50
C) $32.67
D) $34.29
E) $21.59
42) T&P common stock sells for $23.43 a share at a market rate of
return of 11.65 percent. The company just paid its annual dividend
of $1.20. What is the dividend growth rate?
A) 5.87 percent
E
B) 6.43 percent
C) 5.91 percent
D) 6.07 percent
E) 6.21 percent
43) S&P Enterprises will pay an annual dividend of $2.08 a share
on its common stock next year. The firm just paid a dividend of
$2.00 a share and adheres to a constant rate of growth dividend
policy. What will one share of S&P common stock be worth ten
C
years from now if the applicable discount rate is 8 percent?
A) $71.16
B) $74.01
C) $76.97

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D) $80.05
E) $83.25
44) The Merriweather Co. just announced that it will pay a dividend
next year of $1.60. The company will then increase its dividend
by 10 percent per year for two years after which it will maintain a
constant 2 percent dividend growth rate. What is one share worth
today at a required rate of return of 14 percent?
B
A) $21.60
B) $15.17
C) $23.14
D) $23.95
E) $24.79
65) The common stock of Fine China sells for $38.42 a share. The
stock is expected to pay an annual dividend of $1.80 next year
and increase that amount by 4 percent annually thereafter. What
is the market rate of return on this stock?
A) 9.04 percent C
B) 9.13 percent
C) 8.69 percent
D) 9.22 percent
E) 8.36 percent
71) Lory Company had net earnings of $127,000 this past year of
which $46,200 was paid out in dividends. The company's equity
was $1,587,500. Lory has 200,000 shares outstanding with a
current market price of $11.63 per share. Both the number of
shares and the dividend payout ratio are constant. What is the
required rate of return if the growth rate is 5.6 percent? C
A) 8.42 percent
B) 6.67 percent
C) 7.70 percent
D) 7.39 percent
E) 8.24 percent
76) Rudy's stock is currently valued at $28.40 a share. The firm
had earnings per share of $1.86 last year and projects earnings
of $2.09 a share for next year. What is the trailing twelve month
price-earnings ratio?
A) 13.59 E
B) 14.38
C) 12.84
D) 16.67
E) 15.27
77) L&R's stock is currently valued at $32.70 a share. The firm
had earnings per share of $1.88 last year and projects earnings
of $2.10 a share for next year. What is the forward price-earnings
ratio?
A) 15.57 A
B) 14.38
C) 17.39
D) 16.43
E) 15.06
78) Russell's has annual revenue of $387,000 with costs of
$216,400. Depreciation is $48,900 and the tax rate is 21 percent.
The firm has debt outstanding with a market value of $182,000
along with 9,500 shares of stock that is selling at $67 a share.
The firm has $48,000 of cash of which $29,500 is needed to run B
the business. What is the firm's EV/EBITDA ratio?
A) 5.57
B) 4.69
C) 3.39

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D) 3.93
E) 6.20
81) Allison's is expected to have annual free cash flow of $62,000,
$65,400, and $68,900 for the next three years, respectively. After
that, the free cash flow is expected to increase at a constant rate
of 2 percent per year. At a discount rate of 14.5 percent, what is
the present value of this firm?
D
A) $469,118
B) $603,509
C) $577,088
D) $524,467
E) $497,364
82) Danielsen's has 15,000 shares of stock outstanding and
projected annual free cash flows of $48,200, $57,900, $71,300,
and $72,500 for the next four years, respectively. After that, the
cash flows are expected to increase at a constant annual rate
of 1.6 percent. What is the current value per share of stock at a
discount rate of 15.4 percent? A
A) $31.57
B) $29.06
C) $28.99
D) $26.14
E) $34.08
6) The annual interest paid by a bond divided by the bond's face
value is called the:
A) coupon.
B) face value. E
C) maturity.
D) yield to maturity.
E) coupon rate.
7) A bond with a face value of $1,000 that sells for $1,000 in the
market is called a ________ bond.
A) par value
B) discount A
C) premium
D) zero coupon
E) floating rate
9) A bond with a coupon rate of 6 percent that pays interest
semiannually and is priced at par will have a market price of
________ and interest payments in the amount of ________
each.
A) $1,006; $60 D
B) $1,060; $30
C) $1,060; $60
D) $1,000; $30
E) $1,000; $60
10) All else constant, a bond will sell at ________ when the yield
to maturity is ________ the coupon rate.
A) a premium; greater than
B) a premium; equal to E
C) at par; greater than
D) at par; less than
E) a discount; greater than
12) The market price of a bond increases when the:
A) face value decreases.
B) coupon rate decreases.
C
C) discount rate decreases.
D) par value decreases.
E) coupon is paid annually rather than semiannually.

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14) A par value bond offers a coupon rate of 7 percent with
semiannual interest payments. The effective annual rate provided
by these bonds must be:
A) equal to 3.5 percent.
D
B) greater than 3.5 percent but less than 4 percent.
C) equal to 7 percent.
D) greater than 7 percent but less than 8 percent.
E) equal to 14 percent.
15) Rosina purchased one 15-year bond at par value when it was
initially issued. This bond has a coupon rate of 7 percent and
matures 13 years from now. If the current market rate for this type
and quality of bond is 7.5 percent, then Rosina should expect:
A) the bond issuer to increase the amount of all future interest
payments.
C
B) the yield to maturity to remain constant due to the fixed coupon
rate.
C) to realize a capital loss if she sold the bond at today's market
price.
D) today's market price to exceed the face value of the bond.
E) the current yield today to be less than 7 percent.
16) Interest rate risk ________ as the time to maturity decreases
and ________ as the coupon rate decreases.
A) decreases; increases
B) decreases; decreases A
C) increases; increases
D) increases; decreases
E) increases; is unaffected
17) A zero coupon bond:
A) is sold at a large premium.
B) has a price equal to the future value of the face amount given
a positive rate of return.
E
C) can only be issued by the U.S. Treasury.
D) has less interest rate risk than a comparable coupon bond.
E) has a market price that is computed using semiannual com-
pounding of interest.
18) Which one of these bonds is the most interest-rate sensitive?
A) 5-year zero coupon bond
B) 10-year zero coupon bond
B
C) 5-year, 6 percent, annual coupon bond
D) 10-year, 6 percent, semiannual coupon bond
E) 10-year, 6 percent, annual coupon bond
19) The yield to maturity:
A) that is expected will be realized any time a bond is sold.
B) will exceed the coupon rate when the bond is selling at a
premium.
C) equals the current yield for all annual coupon bonds. E
D) can only be realized if a bond is purchased on the issue date
at par value.
E) equals both the current yield and the coupon rate for par value
bonds.
20) If a bond's yield to maturity is less than its coupon rate, the
bond will sell at a ________, and increases in market interest
rates will:
A) discount; decrease this discount.
C
B) discount; increase this discount.
C) premium; decrease this premium.
D) premium; increase this premium.
E) premium; not affect this premium.
21) The longest term bonds ever issued had an initial maturity
date of:
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A) 25 years.
B) 50 years.
C) 100 years. E
D) 1,000 years.
E) never as the bonds are perpetual.
22) All else held constant, interest rate risk will increase when the
time to maturity:
A) decreases or the coupon rate increases.
B) decreases or the coupon rate decreases. D
C) increases or the coupon rate increases.
D) increases or the coupon rate decreases.
E) decreases and the coupon rate equals zero.
23) Which one of these combinations of bond ratings represents
a crossover situation?
A) BBB; Baa
B) BB; Ba D
C) Ba; B
D) Baa; BB
E) B; CCC
24) The interest paid on any municipal bond is:
A) free of default risk.
B) subject to default risk and is exempt from state income taxation.
C) free of both default risk and federal income taxation.
D
D) exempt from federal income taxation and may or may not be
exempt from state taxation.
E) taxable at the federal level and tax exempt at the state and local
level.
25) The interest rate for a tax-exempt bond that equates to the
rate paid on a taxable bond is computed as:
A) Taxable rate/(1 T*).
B) Tax-exempt rate × (1 T*). D
C) Taxable rate (1 + T*).
D) Taxable rate × (1 T*).
E) Tax-exempt rate/(1 + T*).
29) The dirty price of a bond is defined as the:
A) market price minus any taxes due on the accrued interest.
B) market price minus the accrued interest.
D
C) clean price minus the accrued interest.
D) quoted price plus the accrued interest.
E) clean price minus any taxes due on the accrued interest.
30) A newspaper listing of bond prices has an "Asked yield"
column. This yield is based on the asked price and represents
the:
A) yield to maturity.
B) difference between the current yield and the yield to maturity. A
C) difference between the bond's yield and the yield of a compa-
rable Treasury issue.
D) coupon rate.
E) current yield.
31) A bond is listed in a newspaper at a bid of 105.4844. This
quote should be interpreted to mean:
A) the bond will pay semiannual interest payments of $105.4844
per $1,000 of face value.
B) you can sell that bond at a price equal to 105.4844 percent of
B
face value.
C) the bond will pay annual interest payments of $105.4844 per
$1,000 of face value.
D) you can buy that bond at a price equal to 105.4844 percent of
face value.

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E) the bond dealer is willing to sell that bond for a price equal to
105.4844 percent of par.
33) The profit that is earned on a bond trade by a bond dealer is
called the:
A) asked price.
B) spread. B
C) bid price.
D) accrued interest.
E) quote value.
36) If you want to increase your purchasing power by investing in
a bond, then:
A) you must purchase that bond at a discount.
B) the nominal rate of return on that bond must be less than the
inflation rate. E
C) you should purchase a premium bond.
D) the nominal rate of return must equal or exceed the rate of
inflation.
E) you must earn a positive real rate of return on that bond.
37) The promised coupon payments on a US TIPS bond are
specified in:
A) euros.
B) Canadian dollars. E
C) nominal terms.
D) inflated terms.
E) real terms.
38) The monthly returns on US Treasury bills over the past 50
years have:
A) exceeded inflation for all periods.
B) provided consistently positive monthly rates of return for in-
E
vestors.
C) ranged between zero and five percent on an annualized basis.
D) always been positive on a real basis.
E) sometimes been less than the monthly rate of inflation.
40) The relationship between nominal interest rates on de-
fault-free, pure discount securities and the time to maturity is
called the:
A) liquidity effect.
C
B) Fisher effect.
C) term structure of interest rates.
D) inflation premium.
E) interest rate risk premium.
41) The ________ premium is that portion of a nominal interest
rate or bond yield that represents compensation for expected
future loss in purchasing power.
A) default risk
D
B) taxability
C) liquidity
D) inflation
E) interest rate risk
42) The ________ premium is that portion of the bond yield that
represents compensation for potential difficulties that might be
encountered should the bond holder wish to sell the bond prior
to maturity.
A) default risk D
B) taxability
C) inflation
D) liquidity
E) interest rate risk

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43) The term structure of interest rates reflects the:
A) real rate of interest.
B) real rate of interest plus the inflation premium.
C) nominal interest rate plus the interest rate risk premium. D
D) pure time value of money.
E) real rate, inflation premium, interest rate risk premium, and the
liquidity premium.
44) An upward-sloping term structure of interest rates indicates
that:
A) longer-term rates are higher than shorter-term rates.
B) investors should expect interest rates to decline in the future.
C) short and intermediate term rates are real rates while long term A
rates are nominal rates.
D) the Fed is expected to decrease rates in the near term.
E) the larger the investment in dollars, the higher the interest rate
paid.
45) The term structure of interest rates:
A) plots interest rates against bond ratings.
B) is just another name for the yield curve.
C) ignores interest rate risk premiums while the Treasury yield
E
curve includes those premiums.
D) ignores both inflation and interest rate risk premiums.
E) is based on pure discount bonds while the Treasury yield curve
is based on coupon bond yields.
46) The term structure of interest rates:
A) must be upward-sloping.
B) can be humped in the middle.
B
C) is downward-sloping when inflation is expected to rise.
D) obtains its slope from the real rate of return.
E) generally has the same degree of steepness each year.
47) Which of these is included in the return on a municipal bond
but excluded from the return on a US Treasury bond?
A) Inflation premium and liquidity premium
B) Taxability premium and interest rate risk premium E
C) Default risk premium and interest rate risk premium
D) Inflation premium and default risk premium
E) Liquidity premium and taxability premium
62) Mason's has 5-year, 8 percent annual coupon bonds out-
standing with a par value of $1,000. Dixon's has 10-year, 8 percent
annual coupon bonds outstanding with a par value of $1,000. Both
bonds currently have a yield to maturity of 8 percent. Which one
of the following statements is correct if the market rate decreases
to 7 percent? D
A) Both bonds will decrease in value by 4.10 percent.
B) Mason's bond will increase in value by $52.10.
C) Dixon's bond will increase in value by 4.61 percent.
D) Mason's bond will increase in value by $41.
E) Dixon's bond will increase in value by 6.87 percent.
63) A zero coupon bond with a face value of $1,000 is issued with
an initial price of $430.84 based on semiannual compounding.
The bond matures in 20 years. What is the implicit interest, in
dollars, for the first year of the bond's life?
A) $19.08 C
B) $22.56
C) $18.53
D) $21.47
E) $25.25
68) Suzette owns a corporate bond with a yield to maturity of
7.45 percent. She is in the 12 percent tax bracket. What is her
equivalent rate of return on a municipal bond? Ignore state taxes.
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A) 6.17 percent
B) 5.89 percent
C) 6.56 percent C
D) 8.26 percent
E) 8.47 percent
69) Currently, you own a municipal bond with a yield to maturity
of 4.86 percent. If you are in the 24 percent tax bracket, what is
your equivalent corporate tax rate? Ignore state taxes.
A) 7.17 percent
C
B) 6.61 percent
C) 6.39 percent
D) 6.59 percent
E) 6.82 percent
71) A corporate bond has a coupon rate of 5.5 percent, a $1,000
face value, and matures three years from today. The corporation is
in a serious financial situation and has announced that no future
annual interest payments will be paid and that the probability the
entire face value will be repaid is only 75 percent. If the entire face
value cannot be paid, then 60 percent of the face value will be
repaid. All payments will be made three years from now. What is A
the current value of this bond at a discount rate of 15 percent?
A) $591.76
B) $603.10
C) $611.90
D) $617.48
E) $622.04
73) Nathan is buying a $1,000 face value bond at a quoted price
of 101.364. The bond carries a coupon rate of 7.75 percent,
with interest paid semiannually. The next interest payment is two
months from today. What is the dirty price of this bond?
A) $1,039.47 A
B) $1,042.15
C) $1,056.02
D) $1,028.18
E) $1,026.56
74) Casey just purchased a $1,000 face value bond at an invoice
price of $1,288.16. The bond has a coupon rate of 6.2 percent,
semiannual interest payments, and the next interest payment
occurs one month from today. Of the amount paid for the bond,
what was the dollar amount of the accrued interest?
A
A) $25.83
B) $5.17
C) $31.00
D) $27.39
E) $6.20
76) The 5-year bond of XYZ Corp. has a bid quote of 131.2891
and an asked quote of 131.3047. Assume you purchase one of
these bonds with a face value of $5,000 and a coupon rate of
7.4 percent, paid semiannually. The next interest payment will be
paid two months from today. What will be your invoice price for
this purchase? B
A) $7,220.01
B) $6,690.68
C) $6,809.47
D) $7,001.32
E) $6,549.30
77) Last year, a bond yielded a nominal return of 7.37 percent
while inflation averaged 3.26 percent. What was the real rate of
C
return?
A) 3.42 percent

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B) 3.27 percent
C) 3.98 percent
D) 3.71 percent
E) 3.86 percent
78) A $1,000 par value bond carries a coupon rate of 6.5 percent
and has a yield to maturity of 7.29 percent. The inflation rate is
3.13 percent. What is the bond's real rate of return?
A) 3.27 percent
B
B) 4.03 percent
C) 3.37 percent
D) 4.42 percent
E) 3.86 percent
81) Stu wants to earn a real return of 3.4 percent on any bond he
acquires. The inflation rate is 2.8 percent. He has determined that
a particular bond he is considering should have an interest rate
risk premium of .27 percent, a liquidity premium of .08 percent,
and a taxability premium of 1.69 percent. What nominal rate of
return is Stu demanding from this particular bond? A
A) 8.34 percent
B) 7.19 percent
C) 8.40 percent
D) 7.38 percent
E) 8.74 percent
17) If a stock portfolio is well diversified, then the portfolio vari-
ance:
A) will equal the variance of the most volatile stock in the portfolio.
B) may be less than the variance of the least risky stock in the
portfolio.
C) must be equal to or greater than the variance of the least risky B
stock in the portfolio.
D) will be a weighted average of the variances of the individual
securities in the portfolio.
E) will be an arithmetic average of the variances of the individual
securities in the portfolio.
21) You are comparing five separate portfolios comprised of two
stocks each that have varying characteristics. Which characteris-
tic is most indicative of a diversified portfolio?
A) The standard deviation of the portfolio equals the weighted
average standard deviation of the two securities.
E
B) The correlation between the two securities is equal to zero.
C) The covariance of the two securities is equal to one.
D) There is a highly positive covariance between the two securi-
ties.
E) The correlation between the two securities is negative
24) The variance of a portfolio comprised of many securities is
primarily dependent upon the:
A) variances of the securities held within the portfolio.
B) beta of the portfolio. E
C) portfolio's correlation with the market.
D) covariance between the overall portfolio and the market.
E) covariances between the individual securities.
37) The separation principle states that an investor will:
A) choose between any efficient portfolio and a riskless asset to
generate the desired expected return.
B) choose a portfolio from the efficient set based on individual risk
tolerance. D
C) never choose to invest in a riskless asset due to the low
expected rate of return.
D) combine a riskless asset with the tangency portfolio based on
their risk tolerance level.

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E) combine a riskless asset with the minimum variance portfolio
based on their risk tolerance level.
40) Which one of these best describes steps of the separation
principle?
A) Determine the beta that best fits an investor's risk tolerance
level and then determine which assets can be combined to create
a portfolio that matches that beta
B) Determine the tangency point between the risk-free rate and
the efficient set of risky assets and determine how to combine
the tangency point portfolio with risk-free assets to match the
investor's risk tolerance level B
C) Determine the appropriate beta for an individual investor and
then determine the most efficient set of risky assets that falls
below that beta level
D) From a pool of assets determine which pairs of assets have
the lowest covariances and then determine how to combine these
pairs into a portfolio that matches the investor's preferred beta
E) Determine an investor's risk tolerance level and then determine
which portfolio rate of return best fits that level of risk tolerance
43) The beta of a security is calculated by dividing the:
A) covariance of the security return with the market return by the
variance of the market.
B) correlation of the security return with the market return by the
variance of the market.
C) variance of the market by the covariance of the security return A
with the market return.
D) variance of the market return by the correlation of the security
return with the market return.
E) covariance of the security return with the market return by the
correlation of the security and market returns.
58) Stock A is expected to return 14 percent in a normal economy
and lose 21 percent in a recession. Stock B is expected to return
11 percent in a normal economy and 5 percent in a recession.
The probability of the economy being normal is 75 percent and
being recessionary is 25 percent. What is the covariance of these
two securities? B
A) .007006
B) .006563
C) .005180
D) .007309
E) .006274
61) RTF stock is expected to return 10.6 percent if the economy
booms and only 4.2 percent if the economy goes into a reces-
sionary period. The probability of a boom is 55 percent while the
probability of a recession is 45 percent. What is the standard
deviation of the returns on RTF stock?
C
A) 4.03 percent
B) 2.97 percent
C) 3.18 percent
D) 3.69 percent
E) 5.27 percent
62) The rate of return on the common stock of Flowers by Flo is
expected to be 14 percent in a boom economy, 8 percent in a
normal economy, and only 2 percent in a recessionary economy.
The probabilities of these economic states are 20 percent for a
boom, 70 percent for a normal economy, and 10 percent for a A
recession. What is the variance of the returns?
A) .001044
B) .001280
C) .001863

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D) .002001
E) .002471
71) A portfolio is comprised of 100 shares of Stock A valued at $22
a share, 600 shares of Stock B valued at $17 each, 400 shares
of Stock C valued at $46 each, and 200 shares of Stock D valued
at $38 each. What is the portfolio weight of Stock C?
A) 46.87 percent E
B) 48.09 percent
C) 42.33 percent
D) 45.27 percent
E) 47.92 percent
73) A portfolio consists of three stocks. There are 540 shares of
Stock A valued at $24.20 share, 310 shares of Stock B valued
at $48.10 a share, and 200 shares of Stock C priced at $26.50
a share. Stocks A, B, and C are expected to return 8.3 percent,
16.4 percent, and 11.7 percent, respectively. What is the expected
return on this portfolio? D
A) 12.50 percent
B) 11.67 percent
C) 12.78 percent
D) 12.47 percent
E) 11.87 percent
74) Stock K is expected to return 12.4 percent while the return on
Stock L is expected to be 8.6 percent. You have $10,000 to invest
in these two stocks. How much should you invest in Stock L if you
desire a combined return from the two stocks of 11 percent?
A) $3,511 C
B) $4,209
C) $3,684
D) $2,907
E) $3,415

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