# FINA 4315 EXAM 1

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```					FINA 4315 SAMPLE EXAM 1
Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.

____    1. Consider a \$1,000 par value bond with a 7 percent annual coupon. The bond pays interest annually. There are 9
years remaining until maturity. What is the current yield on the bond assuming that the required return on the
bond is 10 percent?
a. 10.00%
b. 8.46%
c. 7.00%
d. 8.52%
e. 8.37%
____    2. Which of the following statements is most correct?
a. If a market is strong-form efficient this implies that the returns on bonds and stocks should
be identical.
b. If a market is weak-form efficient this implies that all public information is rapidly
incorporated into market prices.
c. If your uncle earns a return higher than the overall stock market, this means the stock
market is inefficient.
d. Both answers a and b are correct.
e. None of the above answers is correct.
____    3. Waters Corporation has a stock price of \$20 a share. The stock's year-end dividend is expected to be \$2 a share
(D1 = \$2.00). The stock's required rate of return is 15 percent and the stock's dividend is expected to grow at the
same constant rate forever. What is the expected price of the stock seven years from now?
a. \$28
b. \$53
c. \$27
d. \$23
e. \$39
____    4. The tighter the probability distribution of expected future returns, the smaller the risk of a given investment as
measured by the standard deviation.
a. True
b. False
____    5. The last dividend paid by Klein Company was \$1.00. Klein's growth rate is expected to be a constant 5 percent for
2 years, after which dividends are expected to grow at a rate of 10 percent forever. Klein's required rate of return
on equity (rs) is 12 percent. What is the current price of Klein's common stock?
a. \$21.00
b. \$33.33
c. \$42.25
d. \$50.16
e. \$58.75
____    6. For bonds, price sensitivity to a given change in interest rates generally increases as years remaining to maturity
increases.
a. True
b. False
____    7. There is an inverse relationship between bond ratings and the required return on a bond. The required return is
lowest for AAA-rated bonds, and required returns increase as the ratings get lower.
a. True
b. False
____    8. Assume that you wish to purchase a bond with a 30-year maturity, an annual coupon rate of 10 percent, a face
value of \$1,000, and semiannual interest payments. If you require a 9 percent nominal yield to maturity on this
investment, what is the maximum price you should be willing to pay for the bond?
a. \$905.35
b. \$1,102.74
c. \$1,103.19
d. \$1,106.76
e. \$1,149.63
____    9. In 1958 the average tuition for one year at an Ivy League school was \$1,800. Thirty years later, in 1988, the
average cost was \$13,700. What was the growth rate in tuition over the 30-year period?
a. 12%
b. 9%
c. 6%
d. 7%
e. 8%
____   10. You are currently investing your money in a bank account which has a nominal annual rate of 8 percent,
compounded annually. If you invest \$2,000 today, how many years will it take for your account to grow to
\$10,000?
a. 22.91 years
b. 20.91 years
c. 18.91 years
d. 16.91 years
e. 14.91 years
____   11. Assume that you wish to purchase a 20-year bond that has a maturity value of \$1,000 and makes semiannual
interest payments of \$40. If you require a 10 percent nominal yield to maturity on this investment, what is the
maximum price you should be willing to pay for the bond?
a. \$619
b. \$674
c. \$761
d. \$828
e. \$902
____   12. A share of common stock has just paid a dividend of \$3.00. If the expected long-run growth rate for this stock is 5
percent, and if investors require an 11 percent rate of return, what is the price of the stock?
a. \$50.00
b. \$50.50
c. \$52.50
d. \$53.00
e. \$63.00
____   13. Calculate the required rate of return for Mars Inc.'s stock given the following information. The Mars's beta is 1.2,
the rate on a T-bill is 6 percent, and the expected return on the market is 11.5 percent.
a. 12.6%
b. 13.2%
c. 14.0%
d. 15.6%
e. 16.2%
____ 14. Given the following probability distribution, what is the expected return and the standard deviation of returns for
Security J?

State              Pi              rJ
1               0.2             10%
2               0.6             15
3               0.2             20

a. 15%; 6.50%
b. 12%; 5.18%
c. 15%; 3.16%
d. 15%; 10.00%
e. 20%; 5.00%
____ 15.    The current price of a 10-year, \$1,000 par value bond is \$1,158.91. Interest on this bond is paid every six months,
and the nominal annual yield is 14 percent. Given these facts, what is the annual coupon rate on this bond?
a. 10%
b. 12%
c. 14%
d. 17%
e. 21%
____ 16.    Assume that the risk-free rate is 5 percent, and that the market risk premium is 7 percent. If a stock has a required
rate of return of 13.75 percent, what is its beta?
a. 1.25
b. 1.35
c. 1.37
d. 1.60
e. 1.96
____ 17.    You can earn 8 percent interest, compounded annually. How much must you deposit today to withdraw \$10,000
in 6 years?
a. \$5,402.69
b. \$6,301.70
c. \$6,756.76
d. \$8,432.10
e. \$9,259.26
____ 18.    You deposit \$2,000 in a savings account that pays 10 percent interest, compounded annually. How much will
your account be worth in 15 years?
a. \$2,030.21
b. \$5,000.00
c. \$8,091.12
d. \$8,354.50
e. \$9,020.10
____ 19.    Your portfolio consists of \$100,000 invested in a stock which has a beta = 0.8, \$150,000 invested in a stock which
has a beta = 1.2, and \$50,000 invested in a stock which has a beta = 1.8. The risk-free rate is 7 percent, and the
market risk premium is 7.1429 percent. What is the portfolio's current required rate of return?
a. 5.14%
b. 7.14%
c. 11.45%
d. 15.33%
e. 16.25%
____ 20. If a bank uses quarterly compounding for savings accounts, the nominal rate will be greater than the effective
annual rate.
a. True
b. False
____ 21. Which of the following events would make it more likely that a company would choose to call its outstanding
callable bonds?
a. A reduction in market interest rates.
b. The company's bonds are downgraded.
c. An increase in the call premium.
d. Answers a and b are correct.
e. Answers a, b, and c are correct.
____ 22. A bond has an annual 8 percent coupon rate, a maturity of 10 years, a face value of \$1,000, and makes semiannual
payments. If the price is \$934.96, what is the annual nominal yield to maturity on the bond?
a. 8%
b. 9%
c. 10%
d. 11%
e. 12%
____ 23. Which of the following statements is most correct?
a. Semistrong-form market efficiency implies that all private and public information is
rapidly incorporated into stock prices.
b. Market efficiency implies that all stocks should have the same expected return.
c. Weak-form market efficiency implies that recent trends in stock prices would be of no use
in selecting stocks.
d. All of the answers above are correct.
e. None of the answers above is correct.
____ 24. You are interested in investing your money in a bank account. Which of the following banks provides you with
the highest effective rate of interest?
a. Bank 1; 8 percent with monthly compounding.
b. Bank 2; 8 percent with annual compounding.
c. Bank 3; 8 percent with quarterly compounding.
d. Bank 4; 8 percent with daily (365-day) compounding.
e. Bank 5; 7.8 percent with annual compounding.
____ 25. If a firm raises capital by selling new bonds, the buyer is called the "issuing firm," and the coupon rate is
generally set equal to the required rate.
a. True
b. False
____ 26. Albright Motors is expected to pay a year-end dividend of \$3.00 a share (D1 = \$3.00). The stock currently sells for
\$30 a share. The required (and expected) rate of return on the stock is 16 percent. If the dividend is expected to
grow at a constant rate, g, what is g?
a. 13.00%
b. 10.05%
c. 6.00%
d. 5.33%
e. 7.00%
____ 27. Which of the following statements is most correct?
a. The slope of the security market line is beta.
b. The slope of the security market line is the market risk premium, (r M - rRF).
c. If you double a company's beta its required return more than doubles.
d. Statements a and c are correct.
e. Statements b and c are correct.
____ 28. Inflation, recession, and high interest rates are economic events which are characterized as
a. Company-specific risk that can be diversified away.
b. Market risk.
c. Systematic risk that can be diversified away.
d. Diversifiable risk.
e. Unsystematic risk that can be diversified away.
____ 29. A share of preferred stock pays a quarterly dividend of \$2.50. If the price of this preferred stock is currently \$50,
what is the nominal annual rate of return?
a. 12%
b. 18%
c. 20%
d. 23%
e. 28%
____ 30. You observe the following information regarding Company X and Company Y:

•     Company X has a higher expected mean return than Company Y.
•     Company X has a lower standard deviation than Company Y.
•     Company X has a higher beta than Company Y.

Given this information, which of the following statements is most correct?
a. Company X has a lower coefficient of variation.
b. Company X has more company-specific risk.
c. Company X is a better stock to buy.
d. Statements a and b are correct.
e. Statements a, b, and c are correct.
____ 31. Thames Inc.'s most recent dividend was \$2.40 per share (i.e., D0 = \$2.40). The dividend is expected to grow at a
rate of 6 percent per year. The risk-free rate is 5 percent and the return on the market is 9 percent. If the
company's beta is 1.3, what is the price of the stock today?
a. \$72.14
b. \$57.14
c. \$40.00
d. \$68.06
e. \$60.57
____ 32. A stock has an expected return of 12.25 percent. The beta of the stock is 1.15 and the risk-free rate is 5 percent.
What is the market risk premium?
a. 1.30%
b. 6.50%
c. 15.00%
d. 6.30%
e. 7.25%
____ 33. Portfolio diversification reduces the variability of the returns on each security held in the portfolio.
a. True
b. False
____ 34. The last dividend paid by a company was \$2.20. Klein's growth rate is expected to be 10 percent for one year,
after which dividends are expected to grow at a rate of 6 percent forever. The company's stockholders require a
rate of return on equity (rs) of 11 percent. What is the current price of the stock?
a. \$44.00
b. \$46.64
c. \$48.40
d. \$48.64
e. \$50.40
____ 35. The payment made each period on an amortized loan is constant, and it consists of some interest and some
principal. The later we are in the loan's life, the larger the principal portion of the payment.
a. True
b. False
____ 36. You just put \$1,000 in a bank account which pays 6 percent nominal annual interest, compounded monthly. How
much will you have in your account after 3 years?
a. \$1,006.00
b. \$1,056.45
c. \$1,180.32
d. \$1,191.00
e. \$1,196.68
____ 37. If you buy a factory for \$250,000 and the terms are 20 percent down, the balance to be paid off over 30 years at a
12 percent rate of interest on the unpaid balance, what are the 30 equal annual payments?
a. \$20,593
b. \$31,036
c. \$24,829
d. \$50,212
e. \$6,667
____ 38. Which of the following statements is most correct?
a. All else equal, if a bond's yield to maturity increases, its price will fall.
b. All else equal, if a bond's yield to maturity increases, its current yield will fall.
c. If a bond's yield to maturity exceeds the coupon rate, the bond will sell at a premium over
par.
d. All of the answers above are correct.
e. None of the answers above is correct.
____ 39. You are given the following cash flows. What is the present value (t = 0) if the discount rate is 12 percent?

a. \$3,277
b. \$4,804
c. \$5,302
d. \$4,289
e. \$2,804
____ 40. According to the basic stock valuation model, the value an investor assigns to a share of stock is dependent upon
the length of time the investor plans to hold the stock.
a. True
b. False

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