1. A stock with an enterprise value and a market capitalization of $100 million has a beta of 0.800 and is in the 35% marginal tax bracket. If it issues $20 million of bonds priced at par, what will its beta be?
A. 0.800
B. 0.887
C. 0.904
D. 1.000
2. What is the future value of an investment which will pay you $20 every month for the next 10 years with the first payment coming today and the last payment coming exactly 10 years from today? The APR is 8%.
A. $3,658.92
B. $3,683.31
C. $3,703.31
D. $3,728.00
3. You buy a share of Freeman stock today for $62.50 and expect to receive your first dividend of $5.00 a year from now. You then expect the annual dividend to grow at a rate of 3% per year forever. What rate of return do you expect to earn on your investment?
A. 8.0%
B. 11.0%
C. 12.5%
D. None of the above
4. If you want to short a stock, which of the following must you do first?
A. Buy the stock
B. Sell the stock
C. Borrow the stock
D. You must do all the above at the same time
5. Capital One Bank is advertising a one-year certificate of deposit paying 3.0%. The inflation rate was at 2.0% last year. You expect the inflation rate to be 1.5% this year. What is the real interest rate and the nominal interest rate that you expect to earn by investing in this CD?
A. 0.98% real; 3.0% nominal
B. 3.0% real; 0.98% nominal
C. 1.48% real; 3.0% nominal
D. 3.0% real; 1.48% nominal
6. Which of the following statements is false?
A. An asset which has an unusually high covariance with the market will have a beta greater than 1.0
B. The covariance of a stock's returns with itself is equal to its variance
C. The covariance between the risk-free asset and any risky asset is zero
D. A firm's asset beta is the slope of the regression line when you regress the return of the firm's stock on the returns of the market
7. If you expect to experience a cash inflow of $100 today and a cash outflow of $120 a year from now, the IRR is
A. -20%
B. 20%
C. $20
D. It depends on the cost of capital
8. Which of the following statements is false as it relates to free cash flow?
A. It should be discounted at the company's WACC
B. Interest payments to the firm's bondholders should never be subtracted from revenues
C. Depreciation should be subtracted from revenues, but then added back in after taxes are subtracted
D. Money that you won't actually receive, but would have received if you didn't do the project should not be counted as a cash flow.
9. Which of the following would be true for a stock with a negative beta if you found one?
A. Adding it to the market portfolio would not reduce the risk of the portfolio
B. Its expected return would be less than the risk-free rate of return
C. Its standard deviation would be negative
D. The correlation coefficient between it and Treasury Bills would be positive
10. Sirius XM Radio has a correlation of 0.6 with the market. The variance of the market is 0.09. The variance of Sirius XM is 0.04. What is Sirius XM's beta?
A. 0.267
B. 0.400
C. 1.000
D. There is not enough information to determine Sirius's beta
11. If you deposit $100 into a bank that advertises continuous compounding at a stated rate of 4.5 % per year, how much money will you have in your account at the end of four years?
A. $104.60
B. $110.25
C. $119.25
D. $119.72
12. If the market has an expected return of 10%, a standard deviation of 20%, and the risk-free rate is 4%, what proportion of your money should be invested in the market if you want an expected return of 16%?
A. 75%
B. 160%
C. 200%
D. It is impossible to get an expected return of 16% in this situation.
13. A stock had the following annual returns for the last six years: 4.7%, -6.5%, 12.3%, 7.5%, 0.6%, -8.5%. What was its buy-and-hold return?
A. 1.41%
B. 1.68%
C. 2.30%
D. None of the above are correct
14. The standard deviation of a portfolio is equal to
A. a weighted average of the standard deviations of the assets in the portfolio
B. the square root of the average variance of the assets in the portfolio
C. the correlation of the assets in the portfolio multiplied by their standard deviations
D. the square root of the sum of the cells in its weighted variance/covariance matrix
15. A project requires an immediate initial investment of $100,000. It produces a positive cash flow of $5,000 per year in perpetuity starting at the end of the first year. What is the internal rate of return (IRR) of this project?
A. 0.5%
B. 5.0%
C. 50%
D. It can't be calculated