CHAPTER 01 - GOALS AND GOVERNANCE OF THE FIRM

Easy
Question 1:
Finance, generally, deals with: I) Money; II) Markets; III) People
*a/ I, II and III
b/ I only
c/ I and II only
d/ I and III only
Question 2:
Shareholders of a corporation may be, among others:
I) Individuals; II) Pension Funds; III) Insurance Companies
*a/ I, II and III
b/ I only
c/ I and II only
d/ II only
Question 3:
Generally, a corporation is owned by the:
I) Managers; II) Board of Directors; III) Shareholders
*a/ III only
b/ I only
c/ II and III
d/ I, II and III
Question 4:
Corporations, potentially, have infinite life because:
*a/ of separation of ownership and management
b/ it is a legal entity
c/ it has limited liability
d/ None of the answers are correct
Question 5:
Limited liability is an important feature of:
*a/ Corporations
b/ Sole proprietorships
c/ Partnerships
d/ All of the answers are correct
Question 6:
A firm's investment decision is also called the:
*a/ Capital budgeting decision
b/ Financing decision
c/ Liquidity decision
d/ None of the answers are correct
Question 7:
The Chief Financial Officer (CFO) of a corporation oversees:
*a/ All of the answers are correct
b/ Treasurer's functions
c/ Controller's functions
d/ None of the answers are correct
Question 8:
Conflicts of interest between shareholders and managers of a firm result in:
*a/ All of the answers are correct
b/ Principal-agent problem
c/ Increased agency costs
d/ Managers owning the firm
Question 9:
Costs associated with the conflicts of interest between the bondholders and the shareholders of a
corporation are called:
*a/ Agency costs
b/ Legal costs
c/ Bankruptcy costs
d/ Administrative costs
Question 10:
The financial goal of a corporation is to:
*a/ Maximize value of the corporation to the stockholders
b/ Minimize stockholder wealth
c/ Maximize profit
d/ Decrease job security
Question 11:
Agency costs are incurred by a corporation because:
*a/ All of the answers are correct.
b/ managers may not attempt to maximize the value of the firm to shareholders
c/ shareholders incur monitoring cost
d/ separation of ownership and management
Question 12:
The financial goal of a corporation is to:
*a/ Maximize the value of the firm for the shareholders
b/ Maximize profits
c/ Maximize sales
d/ Maximize managers' benefits
Question 13:
The purchase of real assets is also referred to as the:
*a/ Investment decision
b/ Capital decision
c/ CFO decision
d/ Financing decision
Question 14:
The sale of financial assets is also referred to as the:
*a/ Financing decision
b/ Capital decision
c/ CFO decision
d/ Investment decision
Question 15:
The treasurer and the controller of a corporation generally report to the:
*a/ chief financial officer
b/ chairman of the board
c/ board of directors
d/ chief executive officer
Question 16:
Which position is generally directly responsible for financial planning and capital expenditures?
*a/ Treasurer
b/ Controller
c/ Director
d/ Chairman of the board
Question 17:
Which type of business is the easiest to form?
*a/ Sole proprietorship
b/ Limited partnership
c/ Corporation
d/ Limited liability company
Question 18:
Sole proprietorships:
*a/ are limited to the business owner's life
b/ are faced with double taxation of profits
c/ can have multiple owners
d/ are expensive to setup
Question 19:
Which one of these terms refers to a conflict of interest between the stockholders and managers
of a corporation?
*a/ Agency problem
b/ Corporate activism
c/ Stakeholder claim
d/ Breach of indemnity
Question 20:
Agency costs refer to:
*a/ the costs of any conflicts of interest between stockholders and management
b/ corporate income subject to double taxation
c/ the costs that result from default and bankruptcy of a firm
d/ the total interest paid to creditors over the lifetime of the firm
Question 21:
A stakeholder is best described as:
*a/ any person or entity other than a stockholder or creditor who potentially has a claim on the
cash flows of a firm
b/ a person who founded a firm and currently controls that firm based on his/her current
ownership of company stock
c/ any person or entity having voting rights based on stock ownership
d/ any person or entity owning shares of corporate stock

Medium
Question 22:
The treasurer is usually responsible the following functions of a corporation:
I) Tax obligations; II) Investor relationships; III) Cash management; IV) raising new capital
*a/ II, III and IV only
b/ I only
c/ I and II only
d/ I, II, III and IV
Question 23:
The controller usually oversees the following functions of a corporation:
I) Preparation of financial statements; II) Internal accounting; III) Cash management and IV)
Taxes
*a/ I, II and IV only
b/ III only
c/ I and II only
d/ II and III
Question 24:
The controller is usually responsible for the following functions of a corporation except:
I) Preparation of financial statements; II) Internal accounting; III) Cash management; IV) Taxes
*a/ III only
b/ I only
c/ I and II only
d/ IV only
Question 25:
Of the following list, which is a stakeholder?
I) Employee; II) Customer; III) Community; IV) Supplier
*a/ All of the answers are correct
b/ I, II and IV only
c/ III only
d/ I and II only
Question 26:
The following are examples of financial assets except:
*a/ Buildings
b/ Common stock
c/ Bank loan
d/ Preferred stock
Question 27:
The following are examples of real assets:
I) Machinery; II) Office buildings; III) Warehouse; IV) Common stock
*a/ I, II, and III only
b/ I and II only
c/ IV only
d/ I only
Question 28:
The following are examples of tangible assets except:
I) Machinery; II) Office buildings; III) Warehouse; IV) Training for employees
*a/ IV only
b/ I only
c/ I and II only
d/ I, II, and III only
Question 29:
The following are examples of intangible assets except:
*a/ Building
b/ Trademarks
c/ Patents
d/ Technical expertise
Question 30:
The following are examples of tangible assets except:
*a/ Trademarks
b/ Factories
c/ Machinery
d/ Offices
Question 31:
The treasurer usually oversees the following functions of a corporation except:
I) Preparation of financial statements; II) Investor relationships; III) Cash management; IV)
raising new capital
*a/ I only
b/ I and II only
c/ II, III and IV only
d/ III only
Question 32:
The following are some of the actions that shareholders can take if the corporation is not
performing well:
*a/ All of the answers are correct
b/ Replace the board of directors in an election.
c/ Force the board of directors to change the management team.
d/ Sell their shares of stock in the corporation.
Question 33:
Which one of the following is a capital budgeting decision?
*a/ Deciding whether or not to open a new store
b/ Determining how much inventory to keep on hand
c/ Determining how much debt should be borrowed from a particular lender
d/ Determining how much cash to keep on hand
Question 34:
The process of planning and managing a firm's long-term investments is referred to as:
*a/ capital budgeting
b/ agency cost analysis
c/ financial depreciation
d/ working capital management
Question 35:
Capital structure refers to:
*a/ decisions related to long-term debt and equity financing
b/ the acquisition or disposition of a building or other long-term asset
c/ the determination of the ideal mix of current versus long-term assets
d/ the methods by which fixed assets are used to produce a tangible product.
Question 36:
Managers' actions are monitored by:
*a/ All the answers are correct
b/ The board of directors
c/ Commercial banks that have loaned funds to the firm
d/ The Wall Street analysts
Question 37:
Which one of the following statements is correct concerning the organizational structure of a
corporation?
*a/ The chief executive officer reports to the board of directors.
b/ The controller reports to the president
c/ The chief operations officer reports to the vice president of production
d/ The vice president of finance reports to the chairman of the board

Difficult
Question 38:
The following are important functions of financial markets:
I) Source of financing; II) Provide liquidity; III) Reduce risk; IV) Source of information
*a/ I, II, III, and IV
b/ I only
c/ I and II only
d/ IV only
Question 39:
The following groups are some of the claimants to a firm's income stream:
I) Shareholders; II) Bondholders; III) Employees; IV) Management and V) Government
*a/ I, II, III, IV and V
b/ I and II only
c/ I, II, and III only
d/ I, II, III and IV only
Question 40:
The mixture of debt and equity, used to finance a corporation is also known as:
*a/ Capital structure
b/ Capital budgeting
c/ Investing
d/ Treasury
Question 41:
Which of the following is not a common function of the firm's chief financial officer?
*a/ Hiring CEO
b/Hiring controller
c/ Investing capital
d/ Paying dividends
Question 42:
Which one of these best describes the key difference between the duties of the controller and
those of the treasurer?
*a/ Separation of cash control from accounting records
b/ Separation of duties related to assets versus those related to debt and equity
c/ Separation of authority over tax records versus accounting records
d/ Separation of duties related to production versus marketing
Question 43:
Which one of the following best describes the primary advantage of being a limited partner
rather than a general partner?
*a/ Liability for firm debts limited to the capital invested
b/ Entitlement to a larger portion of the partnership's income
c/ No potential financial loss
d/ Greater management responsibility
Question 44:
A general partner:
*a/ has more management responsibility than a limited partner
b/ cannot lose more than the amount of his/her equity investment
c/ has less legal liability than a limited partner
d/ faces double taxation whereas a limited partner does not
Question 45:
The division of profits and losses among the members of a partnership is formalized in the:
*a/ partnership agreement
b/ indemnity clause
c/ statement of purpose
d/ group charter
Question 46:
Which one of these is a corporate document that sets forth the intended life of the firm?
*a/ Articles of incorporation
b/ Corporate bylaws
c/ Indenture contract
d/ Federal charter
Question 47:
Which one of the following statements concerning a sole proprietorship is correct?
*a/ The owner of a sole proprietorship may be forced to sell his/her personal assets to pay
company debts
b/ The owners of a sole proprietorship share profits as established by the partnership agreement.
c/ The profits of a sole proprietorship are taxed twice
d/ A sole proprietorship is often structured as a limited liability company
Question 48:
A limited partnership generally:
*a/ permits limited partners to sell their ownership interest without the partnership terminating.
b/ has less of an ability to raise capital than a proprietorship
c/ has ten or more limited partners and no general partners
d/ provides for the transfer of a general partner's ownership interest to any outside party
Question 49:
Which of the following are disadvantages of a general partnership?
I. Limited life of the firm
II. Personal liability for firm debt
III. Greater ability to raise capital than a sole proprietorship
IV. Lack of ability to transfer partnership interest
*a/ I, II, and IV only
b/ I and II only
c/ III and IV only
d/ I, III, and IV only
Question 50:
In a limited partnership:
*a/ each limited partner's liability is limited to the amount he/she invested
b/ limitations are placed on both the salary and personal liability of each limited partner
c/ there is no limitation on liability; only a limitation on what the partner can earn
d/ each limited partner's liability is limited to his annual salary
Question 51:
The articles of incorporation:
*a/ set forth the number of shares of stock that can be issued
b/ are amended annually by the company stockholders
c/ set forth the rules by which the corporation regulates its existence
d/ can set forth the conditions under which the firm can avoid double taxation
Question 52:
The articles of incorporation:
*a/ establish the rights of the shareholders
b/ address only those issues related to a corporation's managers and directors
c/ establish the compensation to be granted to senior managers.
d/ are rules which apply only to limited liability companies
Question 53:
The primary goal of financial management is to:
*a/ maximize the current value per share of the existing stock
b/ maximize current dividends per share of the existing stock
c/ minimize operational costs and maximize firm efficiency
d/ maintain steady growth in both sales and net earnings
CHAPTER 02 - HOW TO CALCULATE PRESENT VALUES
Easy:
Question 1:
The present value of $100 expected in two years from today at a discount rate of 6% is:
*a/ $89.00
b/ $116.64
c/ $108.00
d/ $100.00
Question 2:
Present Value is defined as:
*a/ Future cash flows discounted to the present at an appropriate discount rate
b/ Inverse of future cash flows
c/ Present cash flow compounded into the future
d/ None of the answers are correct
Question3:
If the interest rate is 12%, what is the 2-year discount factor?
*a/ 0.7972
b/ 0.8929
c/ 1.2544
d/ 1.8672
Question 4:
If the present value of the cash flow X is $240, and the present value cash flow Y $160, then the
present value of the combined cash flow is:
*a/ $400
b/ $240
c/ $160
d/ $80
Question 5:
The rate of return is also called: I) discount rate; II) hurdle rate; III) opportunity cost of capital
*a/ I, II, and III
b/ I only
c/ I and II only
d/ None of the given ones
Question 6:
Present value of $121,000 expected to be received one year from today at an interest rate
(discount rate) of 10% per year is:
*a/ $110,000
b/ $121,000
c/ $100,000
d/ 80,000
Question7:
One year discount factor at a discount rate of 25% per year is:
*a/ 0.8
b/ 1.25
c/ 1.0
d/ 1.53
Question 8:
The one-year discount factor at an interest rate of 100% per year is:
*a/ 0.5
b/ 1.5
c/ 0.25
d/ 0.75
Question 9:
Present Value of $100,000 that is, expected, to be received at the end of one year at a discount
rate of 25% per year is:
*a/ $80,000
b/ $125,000
c/ $100,000
d/ $90,000
Question 10:
If the one-year discount factor is 0.8333, what is the discount rate (interest rate) per year?
*a/ 20%
b/ 10%
c/ 30%
d/ 40%
Question 11:
If the present value of $480 to be paid at the end of one year is $400, what is the one-year
discount factor?
*a/ 0.83
b/ 1.20
c/ 0.20
d/ 1.83
Question 12:
If the present value of $250 expected to be received one year from today is $200, what is the
discount rate?
*a/ 25%
b/ 10%
c/ 20%
d/ 15%
Question 13:
If the one-year discount factor is 0.90, what is the present value of $120 to be received one year
from today?
*a/ $108
b/ $100
c/ $96
d/ $85
Question 14:
If the present value of $600 expected to be received one year from today is $400, what is the
one-year discount rate?
*a/ 50%
b/ 15%
c/ 20%
d/ 25%
Question 15:
The present value formula for one period cash flow is:
*a/ PV = C1/(1 + r)
b/ PV = C1(1 + r)
c/ PV = C1/r
d/ None of the answers are correct
Question 16:
An initial investment of $400,000 will produce an end of year cash flow of $480,000. What is
the NPV of the project at a discount rate of 20%?
*a/ $0 (zero)
b/ $176,000
c/ $80,000
d/ $67,000
Question 17:
If the present value of a cash flow generated by an initial investment of $200,000 is $250,000.
What is the NPV of the project?
*a/ $50,000
b/ $250,000
c/ $200,000
d/ $100,000
Question 18:
An annuity is defined as
*a/ Equal cash flows at equal intervals of time for a specified period of time
b/ Equal cash flows at equal intervals of time forever
c/ Unequal cash flows at equal intervals of time forever
d/ None of the answers are correct
Question19:
If you receive $1,000 payment at the end each year for the next five years, what type of cash
flow do you have?
*a/ An annuity
b/ Uneven cash flow stream
c/ An annuity due
d/ None of the answers are correct
Question 20:
What is the present value annuity factor at a discount rate of 11% for 8 years?
*a/ 5.1461
b/ 6.7122
c/ 11.8594
d/ 8.2736
Question 21:
If you invest $100 at 12% APR for three years, how much would you have at the end of 3 years
using simple interest?
*a/ $136
b/ $140.49
c/ $240.18
d/ $163
Question 22:
If you invest $100 at 12% APR for three years, how much would you have at the end of 3 years
using compound interest?
*a/ $140.49
b/ $136
c/ $240.18
d/ $152.91
Question 23:
What is the present value annuity factor at an interest rate of 9% for 6 years?
*a/ 4.4859
b/ 7.5233
c/ 1.6771
d/ 5.8276

Medium
Question 24:
What is the present value of the following cash flow at a discount rate of 9%?

Year -1 Year - 2 Year - 3

$100,000 $150,000 $200,000

*a/ $372,431.81
b/ $450,000
c/ $405,950.68
d/ $327,231.18
Question 25:
At an interest rate of 10%, which of the following cash flows should you prefer?
Option Year 1 Year 2 Year 3
A 500 300 100
B 100 300 500
C 300 300 300
D Any of the above as they all add up to $900

*a/ Option A
b/ Option B
c/ Option C
d/ Option D
Question 26:
What is the net present value of the following cash flow at a discount rate of 11%?
Year 0 1 2
CF ($) -120,000 300,000 -100,000

*a/ $69,108.03
b/ $231,432.51
c/ $80,000
d/ $110,000
Question 27:
What is the present value of the following cash flow at a discount rate of 16% APR?
Year 1 2
CF ($) -100,000 300,000
*a/ $136,741.97
b/ $122,948.87
c/ $158,620.69
d/ $176,278.34
Question 28:
What is the net present value (NPV) of the following cash flows at a discount rate of 9%?
Year 0 1 2 3
CF ($) -250,000 100,000 150,000 200,000

*a/ $122,431.81
b/ $200,000
c/ $155,950.68
d/ $273,638.12
Question 29:
What is the present value of $1,000 per year annuity for five years at an interest rate of 12%?
*a/ $3,604.78
b/ $6,352.85
c/ $567.43
d/ $2,463.87
Question 30:
What is the present value of $5,000 per year annuity at a discount rate of 10% for 6 years?
*a/ $16,760.78
b/ $21,776.30
c/ $3,371.91
d/ $7,728.81
Question 31:
According to the net present value rule, an investment in a project should be made if the:
*a/ Net present value is positive
b/ Net present value is greater than the cost of investment
c/ Net present value is greater than the present value of cash flows
d/ Net present value is negative
Question 32:
A perpetuity is defined as:
*a/ Equal cash flows at equal intervals of time forever
b/ Equal cash flows at equal intervals of time for a specific number of periods
c/ Unequal cash flows at equal intervals of time forever
d/ None of the answers are correct
Question 33:
What is the present value of $10,000 per year perpetuity at an interest rate of 10%?
*a/ $100,000
b/ $10,000
c/ $200,000
d/ $110,000
Question 34:
You would like to have enough money saved to receive $80,000 per year perpetuity after
retirement so that you and your family can lead a good life. How much would you need to save in
your retirement fund to achieve this goal (assume that the perpetuity payments start one year from
the date of your retirement. The interest rate is 8%)?
*a/ $1,000,000
b/ $7,500,000
c/ $750,000
c/ $3,500,000
Question 35:
After retirement, you expect to live for 25 years. You would like to have $75,000 income each
year. How much should you have saved in the retirement to receive this income, if the interest is
9% per year (assume that the payments start on the day of retirement)?
*a/ $802,995.88
b/ $736,693.47
c/ $2,043,750
d/ $3,500,000
Question36:
You would like to have enough money saved to receive $100,000 per year perpetuity after
retirement so that you and your family can lead a good life. How much would you need to save in
your retirement fund to achieve this goal (assume that the perpetuity payments start one year from
the date of your retirement. The interest rate is 12.5%)?
*a/ $800,000
b/ $1,000,000
c/ $10,000,000
d/ $3,500,000
Question 37:
After retirement, you expect to live for 25 years. You would like to have $75,000 income each
year. How much should you have saved in the retirement to receive this income, if the interest is
9% per year (assume that the payments start one year after the retirement)?
*a/ $736,693.47
b/ $6,352,567.22
c/ $1,875,000
d/ $3,500,000
Question 38:
John House has taken a $250,000 mortgage on his house at an interest rate of 6% per year. If the
mortgage calls for twenty equal annual payments, what is the amount of each payment?
*a/ $21,796.14
b/ $10,500.00
c/ $16,882.43
d/ $3,500,000
Question 39:
If the present value annuity factor at 8% APR for 10 years is 6.71, what is the equivalent future
value annuity factor?
*a/14.487
b/ 3.108
c/ 2.159
d/ 7.827
Question 40:
Mr. Hopper is expected to retire in 25 years and he wishes accumulate $750,000 in his retirement
fund by that time. If the interest rate is 10% per year, how much should Mr. Hopper put into the
retirement fund each year in order to achieve this goal? [Assume that the payments are made at
the end of each year]
*a/ $7,626.05
b/ $4,559.44
c/ $2,500
d/ $3,500
Question 41:
Mr. Hopper is expected to retire in 30 years and he wishes accumulate $1,000,000 in his
retirement fund by that time. If the interest rate is 12% per year, how much should Mr. Hopper
put into the retirement fund each year in order to achieve this goal?
*a/ $4,143.66
b/ $8,287.32
c/ $4,000
d/ $3,500
Question 42:
You would like to have enough money saved to receive a $50,000 per year perpetuity after
retirement so that you and your family can lead a good life. How much would you need to save
in your retirement fund to achieve this goal (assume that the perpetuity payments starts on the
day of retirement. The interest rate is 8%)?
*a/ $675,000
b/ $1,000,000
c/ $625,000
d/ $3,500,000
Question 43:
You would like to have enough money saved to receive an $80,000 per year perpetuity after
retirement so that you and your family can lead a good life. How much would you need to save
in your retirement fund to achieve this goal (assume that the perpetuity payments starts on the
day of retirement. The interest rate is 10%)?
*a/ $880,000
b/ $1,500,000
c/ $800,000
d/ $3,500,000
Question 44:
An investment at 10.47% effective rate compounded monthly is equal to a nominal (annual) rate
of:
*a/ 10%
b/ 10.99%
c/ 9.57%
d/ 7.88%
Question 45:
An investment at 12% nominal rate compounded monthly is equal to an annual rate of:
*a/ 12.68%
b/ 12.36%
c/ 12%
d/ 7.88%
Question 46:
An investment at 10% nominal rate compounded continuously is equal to an equivalent annual
rate of:
*a/ 10.517%
b/ 10.250%
c/10.381%
d/ 10.88%

Difficult
Question 47:
You would like to have enough money saved to receive a growing annuity for 20 years, growing
at a rate of 5% per year, the first payment being $50,000 after retirement. That way, you hope that
you and your family can lead a good life after retirement. How much would you need to save in
your retirement fund to achieve this goal. (assume that the growing annuity payments start one
year from the date of your retirement. The interest rate is 10%)?
*a/ $605,604.20
b/ $1,000,000
c/ $425,678.19
d/ $1,800,000
Question 48:
You are considering investing in a retirement fund that requires you to deposit $5,000 per year,
and you want to know how much the fund will be worth when you retire. What financial technique
should you use to calculate this value?
*a/ Future value of an annuity
b/ Future value of a single payment
c/ Present value of an annuity
d/ None of the answers are correct
Question 49:
The managers of a firm can maximize stockholder wealth by:
*a/ Taking all projects with positive NPVs
b/ Taking all projects with NPVs greater than the cost of investment
c/ Taking all projects with NPVs greater than present value of cash flow
d/ All of the answers are correct
Question 50:
Ms. Colonial has just taken out a $150,000 mortgage at an interest rate of 6% per year. If the
mortgage calls for equal monthly payments for twenty years, what is the amount of each
payment? (Assume monthly compounding or discounting.)
*a/ $1,254.70
b/ $1,625.00
c/ $1,363.06
d/ $1,423.78
Question 51:
You would like to have enough money saved to receive a growing annuity for 25 years, growing
at a rate of 4% per year, the first payment being $60,000 after retirement, so that you and your
family can lead a good life. How much would you need to save in your retirement fund to
achieve this goal? (assume that the growing perpetuity payments start one year from the date of
your retirement. The interest rate is 12%)?
*a/ $632,390
b/ $1,500,000
c/ $452,165
d/ $1,800,000
Question 52:
Mr. William expects to retire in 30 years and would like to accumulate $1 million in the pension
fund. If the annual interest rate is 12% per year, how much should Mr. Williams put into the
pension fund each month in order to achieve his goal? Assume that Mr. Williams will deposit the
same amount each month into his pension fund and also use monthly compounding.
*a/ $286.13
b/ $771.60
c/ $345.30
d/ $180.04
Question 53:
The net present value formula for one period is:
I) NPV = C0 + [C1/(1 + r)]; II) NPV = PV required investment; and III) NPV = C0/C1
*a/ I and II only
b/ I only
c/ III only
d/ None of the answers are correct
Question 54:
The following statements regarding the NPV rule and the rate of return rule are true except:
*a/ Accept a project if its rate of return > 0
b/ Accept a project if its NPV > 0
c/ Reject a project if the NPV < 0
d/ Accept a project if its rate of return > opportunity cost of capital
Question 55:
The concept of compound interest is most appropriately described as:
*a/ Interest earned on interest
b/ Interest earned on an investment
c/ The total amount of interest earned over the life of an investment
d/ None of the answers are correct
Question 56:
The opportunity cost of capital for a risky project is
*a/ The expected rate of return on a portfolio of securities of similar risks as the project
b/ The expected rate of return on a government security having the same maturity as the project
c/ The expected rate of return on a well-diversified portfolio of common stocks
d/ None of the answers are correct

Question 57:
Which of the following is generally considered an example of a perpetuity?
*a/ Consols
b/ Interest payments on a 10-year bond
c/ Interest payments on a 30-year bond
d/ None of the answers are correct
CHAPTER 03 - VALUING BONDS
Easy
Question 1:
A bond with both a face value and a market value of $1,000 is called a _____ bond
*a/ par value
b/ premium
c/ discount
d/ Zero coupon
Question 2:
The following entities issue bonds to raise long-term loans except:
*a/ Individuals
b/ The federal government
c/ State and local governments
d/ Companies
Question 3:
If a bond is paying interest semi-annually, then:
*a/ interest is paid every six months
b/ interest is paid once a year
c/ interest is paid every three months
d/ None of the answers are correct
Question 4:
A 5-year treasury bond with a coupon rate of 8% has a face value of $1000. What is the semi-
annual interest payment?
*a/ $40
b/ $80
c/ $100
d/ $50
Question 5:
A bond with duration of 10 years has yield to maturity of 10%. This bond's volatility is:
*a/ 9.09%
b/ 6.8%
c/ 14.6%
d/ 6.0%
Question 6:
A bond with duration of 5.7 years has yield to maturity of 9%. The bond's volatility is:
*a/ 5.2%
b/ 1.9%
c/ 5.7%
d/ 9.0%

Medium
Question 7:
A government bond issued in Germany has a coupon rate of 5%, face value of euros 100 and
maturing in five years. The interest payments are made annually. Calculate the price of the bond
(in euros) if the yield to maturity is 3.5%.
*a/ 106.77
b/ 100
c/ 106.33
d/ 108
Question 8:
A government bond issued in Germany has a coupon rate of 5%, face value of euros 100 and
maturing in five years. The interest payments are made annually. Calculate the yield to maturity
of the bond (in euros) if the price of the bond is 106 euros.
*a/ 3.80%
b/ 5.00%
c/ 3.66%
d/ 4.54%
Question 9:
A 3-year bond with 10% coupon rate and $1000 face value yields 8% APR. Assuming annual
coupon payment, calculate the price of the bond.
*a/ $1051.54
b/ $857.96
c/ $951.96
d/ $789.87
Question 10:
A three-year bond has 8.0% coupon rate and face value of $1000. If the yield to maturity on the
bond is 10%, calculate the price of the bond assuming that the bond makes semi-annual coupon
interest payments.
*a/ $949.24
b/ $857.96
c/ $1057.54
d/ $789.87
Question 11:
A four-year bond has an 8% coupon rate and a face value of $1000. If the current price of the
bond is $878.31, calculate the yield to maturity of the bond (assuming annual interest
payments).
*a/ 12%
b/ 8%
c/ 10%
d/ 9%
Question 12:
A 5-year bond with 10% coupon rate and $1000 face value is selling for $1123. Calculate the
yield to maturity on the bond assuming annual interest payments.
*a/ 7.0%
b/ 10.0%
c/ 8.9%
d/ 9.7%

Question 13:
A bond with a face value of $1,000 has coupon rate of 7%, yield to maturity of 10%, and twenty
years to maturity. The bond's duration is:
*a/ 10.0 years
b/ 7.4 years
c/ 20.0 years
d/ 19.0 years
Question 14:
A bond with a face value of $1,000, coupon rate of 0%, yield to maturity of 9%, and ten years to
maturity. This bond's duration is:
*a/ 10.0 years
b/ 6.7 years
c/ 7.5 years
d/ 19.0 years
Question 15:
All else constant, a coupon bond that is selling at a premium, must have:
*a/ a yield to maturity that is less than the coupon rate
b/ a coupon rate that is equal to the yield to maturity
c/ a coupon rate that is less than the yield to maturity
d/ a market price that is less than par value
Question 16:
Antonio's offers a 10-year bond that has a coupon rate of 5 percent and semiannual payments.
The face value is $1,000 and the yield to maturity is 12.6 percent. What is the current value of
this bond?
*a/ $574.56
b/ $273.09
c/ $580.92
d/ $356.98
Question 17:
A Treasury bond matures in 17 years, pays interest semiannually, and carries a coupon rate of
3.5 percent. How much are you willing to pay for a $1,000 face value bond if you desire a rate of
return of 4.25 percent?
*a/ $909.86
b/ $701.67
c/ $554.64
d/ $356.98
Question 18:
A 20-year zero coupon bond has a $1,000 face value, a required rate of return of 5 percent, and
semiannually compounding. What is this bond worth today?
*a/ $372.43
b/ $610.27
c/ $208.29
d/ $356.98
Question 19:
The bonds issued by North & South bear a coupon rate of 7.5 percent, payable semiannually.
The bonds mature in 6.5 years, sell at par, and have a $1,000 face value. What is the yield to
maturity?
*a/ 7.50%
b/ 7.59%
c/ 7.86%
d/ 7.92%
Question 20:
A General Co. bond has a coupon rate of 7 percent and pays interest annually. The face value is
$1,000 and the current market price is $1,020.50. The bond matures in 20 years. What is the
yield to maturity?
*a/ 6.81%
b/ 6.59%
c/ 7.04%
d/ 7.92%
Question 21:
Webster's has a 12-year bond issue outstanding that pays a coupon rate of 6.5 percent. The bond
is currently priced at $938.76 and has a par value of $1,000. Interest is paid semiannually. What
is the yield to maturity?
*a/ 7.27%
b/ 7.80%
c/ 14.07%
d/ 7.92%

Difficult
Question 22:
Which of the following statements about the relationship between interest rates and bond prices
is true?
I) There is an inverse relationship between bond prices and interest rates.
II) There is a direct relationship between bond prices and interest rates.
III) The price of short-term bonds fluctuates more than the price of long-term bonds for a given
change in interest rates. (Assuming that coupon rate is the same for both)
IV) The price of long-term bonds fluctuates more than the price of short-term bonds for a given
change in interest rates. (Assuming that the coupon rate is the same for both)
*a/ I and IV only
b/ I and III only
c/ II and III only
d/ None of the answers are correct
Question 23:
Consider a bond with a face value of $1,000, a coupon rate of 6%, a yield to maturity of 8%, and
ten years to maturity. This bond's duration is:
*a/ 7.6 years
b/ 8.7 years
c/ 4.1 years
d/ 6.8 years
Question 24:
If a bond's volatility is 10% and the interest rate goes down by 0.75% (points) then the price of
the bond:
*a/ increases by 7.5%
b/ decreases by 10%
c/ decreases by 7.5%
d/ increases by 0.75%
Question 25:
If a bond's volatility is 5% and the interest rate changes by 0.5% (points) then the price of the
bond:
*a/ changes by 2.5%
b/ changes by 5%
c/ changes by 7.5%
d/ changes by 9.5%
Question 26:
Volatility of a bond is given by:
I) Duration/ (1 + yield)
II) Slope of the curve relating the bond price to the interest rate
III) Yield to maturity
*a/ I and II only
b/ I only
c/ II only
d/ III only
Question 27:
The term structure of interest rates can be described as the:
*a/ Relationship between spot interest rates and maturity of a bond
b/ Relationship between the spot interest rates and the bond prices
c/ Relationship between spot interest rates and stock prices
d/ None of the answers are correct
Question 28:
Interest rate risk increases with
*a/ increases in time to maturity and decreases in coupon rates.
b/ both increases in time to maturity and coupon rates.
c/ decreases in market rates and increases in time to maturity
d/ both decreases in coupon rates and market rates.
Question 29:
Interest rates or rates of return on investments that have been adjusted for the effects of inflation
are called _____ rates.
*a/ real
b/ nominal
c/ effective
d/ coupon
Question 30:
A bond with a 5 percent coupon that pays interest semiannually and is priced at par will have a
market price of _____ and interest payments in the amount of _____ each.
*a/ $1,000; $25
b/ $1,005; $50
c/ $1,050; $25
d/ $1,000; $50
Question 31:
All else constant, a bond will sell at _____ when the yield to maturity is _____ the coupon rate.
*a/ a discount; higher than
b/ at par; less than
c/ a premium; equal to
d/ a premium; higher than
Question 32:
Your firm offers a 20-year, semiannual coupon bond with a yield to maturity of 8.35 percent, a
face value of $1,000, and a market price of $1,054. What is the coupon rate?
*a/ 8.91%
b/ 17.64%
c/ 8.82%
d/ 19.81%
Question 33:
A 12-year, 5 percent coupon bond with a face value of $1,000 pays interest semiannually. What
is the percentage change in the price of this bond if the market yield rises to 6 percent from its
current level of 4.5 percent?
*a/ -12.49%
b/ 12.38%
c/ 14.13%
d/ 19.81%
Question 34:
A 15-year, 4 percent coupon bond with a face value of $1,000 pays interest semiannually. Assume
the bond currently sells at par. What will the percentage change in the price of this bond be if
market rates increase by 10 percent?
*a/ -1.96%
b/ 1.32%
c/ -1.32%
d/ 1.96%
Question 35:
The Doolittle bonds have a face value of $1,000, a current market price of $1,048.50, a coupon
rate of 4.6 percent, compounded semiannually. What is the current yield on these bonds?
*a/ 4.39%
b/ 5.64%
c/ 6.51%
d/ 7.81%
CHAPTER 04 - THE VALUE OF COMMON STOCKS
Easy
Question 1:
The market in which new securities are originally sold to investors is called the _____ market.
*a/ primary
b/ dealer
c/ over-the-counter
d/ secondary
Question 2:
The value of a common stock today depends on:
*a/ The expected future dividends and the discount rate
b/ Number of shares outstanding and the number of shareholders
c/ The Wall Street analysts
d/ Present value of the future earnings per share.
Question 3:
An agent who arranges security transactions among investors without maintaining an inventory
is called a:
*a/ broker
b/ trader
c/ capitalist
d/ principal
Question 4:
ALP Inc. has decided to issue preferred stock with an annual dividend of $4 a share. Similar
stocks are currently yielding 11 percent. What price should the firm expect to receive for each
new share issued?
*a/ $36.36
b/ $40.00
c/ $14.92
d/ $19.81
Question 5:
The underlying assumption of the dividend growth model is that a stock is worth:
*a/ the present value of the future income provided by that stock.
b/ the same amount to every investor.
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 paid the same dividend this year.
Question 6:
Assume General Electric (GE) has about 10.3 billion shares outstanding and the stock price is
$37.10. Also assume the P/E ratio is about 18.3. Calculate the market capitalization for GE.
(Approximately)
*a/ $382 billion
b/ $679 billion
c/ $188 billion
d/ $465 billion
Question 7:
Company X has a P/E ratio of 10 and a stock price of $50 per share. Calculate earnings per share
of the company.
*a/ $5 per share
b/ $6 per share
c/ $10 per share
d/ $7 per share
Question 8:
The Wall Street Journal quotation for a company has the following values: Div: $1.12, PE: 18.3,
Close: $37.22. Calculate the dividend payout ratio for the company (Approximately).
*a/ 55%
b/ 18%
c/ 45%
d/ 81%
Question 9:
Super Computer Company's stock is selling for $100 per share today. It is expected that this
stock will pay a dividend of 6 dollars per share, and then be sold for $114 per share at the end of
one year. Calculate the expected rate of return for the shareholders.
*a/ 20%
b/ 15%
c/ 10%
d/ 25%
Question 10:
If the Wall Street Journal Quotation for a company has the following values close: 55.14; Net
chg: = + 1.04; then the closing price for the stock for the previous trading day was?
*a/ $54.10
b/ $56.18
c/ $55.66
d/ $57.91
Question 11:
CK Company stockholders expect to receive a year-end dividend of $5 per share and then be
sold for $115 dollars per share. If the required rate of return for the stock is 20%, what is the
current value of the stock?
*a/ $100
b/ $122
c/ $132
d/ $142
Question 12:
MJ Co. pays out 60% of its earnings as dividends. Its return on equity is 15%. What is the stable
dividend growth rate for the firm?
*a/ 6%
b/ 9%
c/ 5%
d/ 7%
Question 13:
Michigan Co. is currently paying a dividend of $2.00 per share. The dividends are expected to
grow at 20% per year for the next four years and then grow 6% per year thereafter. Calculate the
expected dividend in year 5.
*a/ $4.40
b/ $4.15
c/ $2.95
d/ $3.78
Question 14:
Otobai Motor Company is currently paying a dividend of $1.40 per year. The dividends are
expected to grow at a rate of 18% for the next three years and then a constant rate of 5%
thereafter. What is the expected dividend per share in year 5?
*a/ $2.54
b/ $2.35
c/ $2.91
d/ $3.78
Question 15:
Deluxe Company expects to pay a dividend of $2 per share at the end of year-1, $3 per share at
the end of year-2 and then be sold for $32 per share. If the required rate on the stock is 15%,
what is the current value of the stock?
*a/ $28.20
b/ $32.17
c/ $32.00
d/ $33.78
Question 16:
Casino Inc. is expected to pay a dividend of $3 per share at the end of year-1 (D1) and these
dividends are expected to grow at a constant rate of 6% per year forever. If the required rate of
return on the stock is 18%, what is current value of the stock today?
*a/ $25
b/ $50
c/ $100
d/ $75
Question 17:
Lester's Diner just paid an annual dividend of $.24 a share and plans on increasing this amount
by 2 percent annually. What is the expected dividend for Year 6?
*a/ $.27
b/ $.30
c/ $.33
d/ $.50

Medium
Question 18:
Dirt Bikes just announced that its next annual dividend will be $1.42 a share and that all future
dividends are expected to increase by 2.5 percent annually. What is the market rate of return if
this stock is currently selling for $14.11 a share?
*a/ 12.56%
b/ 13.67%
c/ 9.76%
d/ 19.81%
Question 19:
Will Co. is expected to pay a dividend of $2 per share at the end of year -1(D1) and the dividends
are expected to grow at a constant rate of 4% forever. If the current price of the stock is $20 per
share calculate the expected return or the cost of equity capital for the firm.
*a/ 14%
b/ 10%
c/ 4%
d/ 19%
Question 20:
World-Tour Co. has just now paid a dividend of $2.83 per share (D0); the dividends are expected
to grow at a constant rate of 6% per year forever. If the required rate of return on the stock is
16%, what is the current value on stock?
*a/ $70
b/ $30
c/ $56
d/ $40
Question 21:
The In-Tech Co. has just paid a dividend of $1 per share. The dividends are expected to grow at
25% per year for the next three years and at the rate of 5% per year thereafter. If the required rate
of return on the stock is 18%(APR), what is the current value of the stock?
*a/ $12.97
b/ $11.93
c/ $15.20
d/ $19.81
Question 22:
R&D Technology Corporation has just paid a dividend of $0.50 per share. The dividends are
expected to grow at 24% per year for the next two years and at 8% per year thereafter. If the
required rate of return in the stock is 16% (APR), calculate the current value of the stock.
*a/ $8.82
b/ $1.11
c/ $7.71
d/ $6.83
Question 23:
Wilton's Market just announced its next annual dividend will be $1.50 a share with future
dividends increasing by 1.8 percent annually. How much will one share of this stock be worth
five years from now if the required return is 15.5 percent?
*a/ $11.97
b/ $11.76
c/ $14.14
d/ $18.19
Difficult
Question 24:
XanEx is a new firm that just paid an annual dividend of $1 a share. The firm plans to increase
its dividend by 20 percent a year for the next four years and then decrease the growth rate to 5
percent annually. If the required rate of return is 10.25 percent, what is one share of this stock
worth today?
*a/ $33.04
b/ $38.19
c/ $41.05
d/ $19.81
Question 25:
The Extreme Reaches Corp. last paid a $1.50 per share annual dividend. The company is
planning on paying $3, $5, $7.50, and $10 a share over the next four years, respectively. After
that the dividend will be a constant $2.50 per share per year. What is the current price of this
stock if the rate of return is 14 percent?
*a/ $28.03
b/ $24.59
c/ $31.96
d/ $19.81
Question 26:
Mario's is going to pay $1, $2.50, and $5 a share over the next three years, respectively. After
that, the company plans to pay annual dividends of $1.25 per share indefinitely. If your required
return is 13 percent, how much are you willing to pay for one share today?
*a/ $12.97
b/ $13.87
c/ $10.87
d/ $11.67
Question 27:
Dille Inc. pays no dividend at the present time. In Years 2 and 3, the firm will pay annual
dividends of $3 a share. After that, it will pay a constant $1 a share dividend indefinitely. What is
this stock worth at a required return of 15 percent?
*a/ $8.62
b/$7.50
c/ $9.91
d/ $19.81
Question 28:
New Tours last annual dividend was $2 a share. The company plans to lower the dividend by
$.50 each year for the next three years. In Year 5, it will pay a final liquidating dividend of $22 a
share. If the required return is 16 percent, what is the current per share value of this stock?
*a/ $12.83
b/ $13.08
c/ $14.13
d/ $9.80
Question 29:
Midtown Enterprises paid its first annual dividend yesterday in the amount of $.28 a share. The
company plans to double each annual dividend payment for the next three years. After that, it
will pay a constant $1.50 per share dividend indefinitely. What is one share of this stock worth
today if the market rate of return on similar securities is 11.5 percent?
*a/ $12.43
b/ $11.40
c/ $9.41
d/ $10.45
Question 30:
Last week, Railway Cabooses paid its annual dividend of $1.20 a share. The company has been
reducing its dividends by 6 percent each year. What is one share of stock worth at a required
return of 14 percent?
*a/ $5.64
b/ $8.06
c/ $10.80
d/ $14.10
Question 31:
Nu-Tek, Inc. is expecting a period of intense growth, so it has decided to retain more of its earnings
to help finance that growth. As a result, it is going to reduce its annual dividend by 20 percent a
year for the next three years. After that it will maintain a constant dividend of $1.60 a share. Last
year, the annual dividend was $2.60 a share. What is the market value of this stock if the required
rate of return is 13 percent?
*a/ $12.60
b/ $9.86
c/ $16.08
d/ $14.23
Question 32:
Felix Pet Foods plans to pay an annual dividend of $.75 next year, increase the dividend by 12
percent for the following three years, and then increase the dividend by 2 percent annually
thereafter. The required rate of return is 12.5 percent. What is this stock worth per share today?
*a/ $9.04
b/ $12.95
c/ $7.05
d/ $8.03
Question 33:
The constant dividend growth formula P0 = Div1/(r - g) assumes:
I) the dividends are growing at a constant rate g forever.
II) r > g
III) g is never negative.
*a/ I and II only
b/ I only
c/ II only
d/ III only
Question 34:
Dividend growth rate for a stable firm can be estimated as:
*a/ Plow back rate * the return on equity (ROE)
b/ Plow back rate/the return on equity (ROE)
c/ Plow back rate + the return on equity (ROE)
d/ Plow back rate - the return on equity (ROE)
Question 35:
Doctors-On-Call, a newly formed medical group, just paid a dividend of $.50 a share. The
dividends are expected to increase by 20 percent a year for the next two years and then increase
by 3 percent annually thereafter. What is the current value of a share if the appropriate discount
rate is 12 percent?
*a/ $7.68
b/ $6.91
c/ $8.26
d/ $8.42