Problem 1) John invested $1,000 in a risky investment and Bill invested $1,000 in a less risky investment. One year later, Bill's investment is worth $1,030. Which of the following statements is most correct?
A) John's investment must be worth more than $1,030 because of the risk-return tradeoff, given that John's investment was more risky.
B) If John's investment is worth more than $1,030, then Bill was irrational to invest in the less risky investment.
C) If John's investment is worth less than $1,030, then John was irrational to invest in the risky project.
D) The worth of John's investment cannot be determined with the information given.
Problem 2) Insurance companies invest in the "long-end" of the securities market by purchasing securities with longer maturities. In which of the following instruments would an insurance company be least likely to invest most of its assets?
A) commercial paper
B) mortgages
C) corporate bonds
D) corporate stocks
Problem 3) High Inc. has an accounts receivable turnover ratio of 7.3. Low Company has an accounts receivable turnover ratio of 5. Assuming that High and Low have the same sales level, which of the following statements is correct?
A) Low Company has (on average) a lower accounts receivable balance than does High.
B) High's average collection period is less than Low's.
C) Low's average collection period is less than High's.
D) High has a higher accounts receivable balance on average than does Low Company.
Problem 4) H. J. Corp.'s common stock paid $2.50 in dividends last year (D0). Dividends are expected to grow at a 12-percent annual rate forever. If H. J.'s current market price is $40.00, and your required rate of return is 23 percent, should you purchase the stock?
A) No, the stock is overpriced.
B) Yes, the stock is expected to return more than you require.
C) No, the percentage return on the stock is too high, thus it is too risky.
D) Not enough information is given.