Q1. In terms of risk, preferred stock is safer than common stock because it has a prior claim on assets and income.
a. True
b. False
Q2. Many preferred stocks have a provision that entitles a company to repurchase its preferred stock from their holders at stated prices over a given time period. What is the name of this provision?
a. cumulative
b. putable
c. callable
d. convertible
Q3. Common stock does not mature.
a. True
b. False
Q4. Public perception and reputation do not affect stock prices, which are strictly a function of dividends and required returns.
a. True
b. False
Q5. Shareholders, as owners of the corporation, face unlimited liability for the corporation's debts, while bondholders, as creditors, may only lose the value of their investment if the company goes bankrupt.
a. True
b. False
Q6. A firm can increase the growth rate of common stockholders' investment in the firm by retaining more earnings or increasing return on equity.
a. True
b. False
Q7. Preferred stock differs from common stock in that
a. preferred stock usually has a maturity date.
b. preferred stock investors have a higher required return than common stock investors.
c. preferred stock dividends are fixed.
d. common stock investors have a required return and preferred stock investors do not.
Q8. Convertibility is a common feature of common stock; it allows the common stockholders to convert their common shares into preferred shares or into bonds.
a. True
b. False
Q9. Many preferred stocks have a feature that requires a firm to periodically set aside an amount of money for the retirement of its preferred stock. What is the name of this feature?
a. convertible
b. callable
c. cumulative
d. sinking fund
Q10. TC Corp paid a dividend today of $5 per share. The dividend is expected to grow at a constant rate of 6.5% per year. If TC Corp stock is selling for $50.00 per share, the stockholders' expected rate of return is
a. 11.50%.
b. 13.56%.
c. 15.49%.
d. 16.50%.
Q11. If a common stockholder cannot personally attend the meeting of shareholders then their votes are lost.
a. True
b. False
Q12. Common stock cannot be worth less than its book value.
a. True
b. False
Q13. What provision entitles the common shareholder to maintain a proportionate share of ownership in a firm?
a. the cumulative feature
b. the convertible feature
c. the proportionality clause
d. the preemptive right
Q14. Backford Company just paid a dividend yesterday of $2.25 per share. The company's stock is currently selling for $60 per share, and the required rate of return on Backford Company stock is 16%. What is the growth rate expected for Backford Company dividends assuming constant growth?
a. 9.47%
b. 9.89%
c. 10.87%
d. 11.81%
Q15. Assume that an investment is forecasted to produce the following returns: a 20% probability of a 12% return; a 50% probability of a 16% return; and a 30% probability of a 19% return. What is the standard deviation of return for this investment?
a. 5.89%
b. 16.1%
c. 2.43%
d. 15.7%
Q16. You are considering an investment in Citizens Bank Corp. The firm has a beta of 1.6. Currently, U.S. Treasury bills are yielding 2.75% and the expected return for the S & P 500 is 14%. What rate of return should you expect for your investment in Citizens Bank?
a. 11.15%
b. 15.39%
c. 16.75%
d. 20.75%
Q17. Small company stocks have historically had higher average annual returns than large company stocks, and also a higher risk premium.
a. True
b. False
Q18. Assume that an investment is forecasted to produce the following returns: a 30% probability of a 12% return; a 50% probability of a 16% return; and a 20% probability of a 19% return. What is the expected percentage return this investment will produce?
a. 33.3%
b. 16.1%
c. 9.5%
d. 15.4%
Q19. A well-diversified portfolio includes investments in 50 securities. The portfolio's systematic risk is likely to be about
a. 50% of the total risk.
b. 40% of the total risk.
c. 25% of the total risk.
d. zero because risk is eliminated with a portfolio of 50 securities or more.
Q20. The capital asset pricing model
a. provides a risk-return trade off in which risk is measured in terms of the market volatility.
b. provides a risk-return trade off in which risk is measured in terms of beta.
c. measures risk as the coefficient of variation between security and market rates of return.
d. depicts the total risk of a security.
Q21. Variation in the rate of return of an investment is a measure of the riskiness of that investment.
a. True
b. False
Q22. Assume that you have $330,000 invested in a stock that is returning 11.50%, $170,000 invested in a stock that is returning 22.75%, and $470,000 invested in a stock that is returning 10.25%. What is the expected return of your portfolio?
a. 15.6%
b. 12.9%
c. 18.3%
d. 14.8%
Q23. Stock W has an expected return of 12% with a standard deviation of 8%. If returns are normally distributed, then approximately two-thirds of the time the return on stock W will be
a. between 12% and 20%.
b. between 8% and 12%.
c. between -4% and 28%.
d. between 4% and 20%.
Q24. Decker Corp. common stock has a required return of 17.5% and a beta of 1.75. If the expected risk free return is 3%, what is the expected return for the market based on the CAPM?
a. 11.29%
b. 14.29%
c. 13.35%
d. 15.27%
Q25. The rate on T-bills is currently 2%. Environment Help Company stock has a beta of 1.5 and a required rate of return of 17%. According to CAPM, determine the return on the market portfolio.
a. 27.5%
b. 19.0%
c. 14.0%
d. 12.0%
Q26. Which of the following statements concerning bonds and risk is true?
a. Because the interest payments and maturing value are known, the only risk associated with investing in bonds is default risk.
b. Zero coupon bonds are always more risky than bonds with high coupon rates because of the time value of money.
c. Bonds are generally less risky than common stock because of the preference for debt over equity in the event of bankruptcy and liquidation.
d. B-rated bonds are above average for risk, i.e., less risky than the average bond.
Q27. Callable bonds are most likely to be called if
a. interest rates decrease.
b. interest rates increase.
c. Shafer Corporation needs additional financing.
d. Shafer Corporation's stock price increases dramatically.
Q28. The Johnson Corporation issues a bond which has a coupon rate of 10.20%, a yield to maturity of 10.55%, a face value of $1,000, and a market price of $850. Therefore, the annual interest payment is
a. $101.75.
b. $102.
c. $105.50.
d. $120.0.
Q29. Other things held equal, a bond with a call provision is worth more to investors than a bond without a call provision.
a. True
b. False
Q30. Which of the following statements is true regarding convertible bonds?
a. The holder has the right to sell these bonds back to the issuer if the bonds don't perform well.
b. The holder can convert these bonds into an equal number of new bonds if they choose to do so.
c. These bonds are convertible into common stock of the issuing firm at a prespecified price.
d. These bonds have a variable interest rate.
Q31. Bart's Moving Company bonds have a 11% coupon rate. Interest is paid semiannually. The bonds have a par value of $1,000 and will mature 8 years from now. Compute the value of Bart's Moving Company bonds if investors' required rate of return is 9.5%.
a. $1,197.27
b. $1,133.05
c. $1,098.99
d. $1,082.75
Q32. The less risky the bond (or the higher the bond rating) the lower will be the yield to maturity on the bond.
a. True
b. False
Q33. If the demand for a new bond issue increases, it is likely that the coupon rate will be adjusted upward by the issuing company.
a. True
b. False
Q34. Bryant Inc. just issued $1,000 par 30-year bonds. The bonds sold for $1,107.20 and pay interest semiannually. Investors require a rate of 7.75% on the bonds. What is the bonds' coupon rate?
a. 9.333%
b. 7.750%
c. 4.125%
d. 8.675%
Q35. Nunavet Ocean Cruises sold an issue of 12-year $1,000 par bonds to build new ships. The bonds pay 4.85% interest, semiannually. Today's required rate of return is 9.7%. How much should these bonds sell for today? Round off to the nearest $1.
a. $771.86
b. $732.93
c. $660.45
d. $598.33
Q36. If a bond's rating declines, the interest rate demanded by investors, called the required return, also decreases.
a. True
b. False
Q37. PBJ Corporation issued bonds on January 1, 2006. The bonds had a coupon rate of 5.5%, with interest paid semiannually. The face value of the bonds is $1,000 and the bonds mature on January 1, 2021. What is the yield to maturity for an PBJ Corporation bond on January 1, 2012 if the market price of the bond on that date is $950?
a. 5.50%
b. 6.23%
c. 8.43%
d. 10.50%
Q38. Andre owns a corporate bond with a coupon rate of 8% that matures in 10 years. Ruth owns a corporate bond with a coupon rate of 12% that matures in 25 years. If interest rates go down, then
a. the value of Andre's bond will decrease and the value of Ruth's bond will increase.
b. the value of both bonds will increase.
c. the value of Ruth's bond will decrease more than the value of Andre's bond due to the longer time to maturity.
d. the value of both bonds will remain the same because they were both purchased in an earlier time period before the interest rate changed.
Q39. Cabell Corp. bonds pay an annual coupon rate of 10%. If investors' required rate of return is now 12% on these bonds, they will be priced at
a. par value.
b. a premium to par value.
c. a discount to par value.
d. Cannot be determined without knowing the number of years to maturity.
Q40. Biff deposited $9,000 in a bank account, and 10 years later he closes out the account, which is worth $18,000. What is the annual interest rate over the 10 years?
a. 6.45%
b. 7.18%
c. 9.10%
d. 10.0%
Q41. You decide you want your child to be a millionaire. You have a son today and you deposit $10,000 in an investment account that earns 7% per year. The money in the account will be distributed to your son whenever the total reaches $1,500,000. How old will your son be when he gets the money (rounded to the nearest year)?
a. 82 years
b. 74 years
c. 60 years
d. 49 years
Q42. You won the lottery and can receive either (1. $60,000 today, or (2. $10,000 one year from today plus $25,000 two years from today plus $35,000 three years from today. You plan to use the money to pay for your child's college education in 15 years. You should
a. take the $60,000 today because of the time value of money regardless of current interest rates.
b. take option two because you get $70,000 rather than $60,000 regardless of current interest rates.
c. take the $60,000 today only if the current interest rate is at least 16.67%
d. take the $60,000 today if you can earn 6.81% per year or more on your investments
Q43. It is your 6th birthday today. You have a trust fund with $50,000 that is earning 8% per year. You expect to withdraw $30,000 per year for 7 years starting on your 22nd birthday for graduate school. How much money will be left in the trust fund after your last withdrawal (rounded to the nearest $10)?
a. $125,660
b. $35,780
c. $4,140
d. You will not have enough money to pay for graduate school.
Q44. You want $20,000 in 5 years to take your spouse on a second honeymoon. Your investment account earns 7% compounded semiannually. How much money must you put in the investment account today? (round to the nearest $1).
a. $14,178
b. $12,367
c. $15,985
d. $13,349
Q45. One bank offers you 4% interest compounded semiannually. What is the equivalent rate if interest is compounded quarterly?
a. 3.98%
b. 3.96%
c. 3.92%
d. 1.00%
Q46. You are ready to retire. A glance at your 401(k) statement indicates that you have $750,000. If the funds remain in an account earning 9.0%, how much could you withdraw at the beginning of each year for the next 25 years?
a. $55,620
b. $70,050
c. $35,830
d. $2,500
Q47. If you put $2,000 in a savings account that yields 8% compounded semiannually, how much money will you have in the account in 20 years (round to nearest $10)?
a. $6,789
b. $8,342
c. $9,602
d. $9,972
Q48. A financial advisor tells you that you can make your child a millionaire if you just start saving early. You decide to put an equal amount each year into an investment account that earns 7.5% interest per year, starting on the day your child is born. How much would you need to invest each year (rounded to the nearest dollar) to accumulate a million for your child by the time he is 35 years old? (Your last deposit will be made on his 34th birthday.)
a. $6,525
b. $7,910
c. $12,500
d. $20,347
Q49. Auto Loans R Them loans you $24,000 for four years to buy a car. The loan must be repaid in 48 equal monthly payments. The annual interest rate on the loan is 9 percent. What is the monthly payment?
a. $500.92
b. $543.79
c. $563.82
d. $597.24
Q50. If you invest $750 every six months at 8 percent compounded semiannually, how much would you accumulate at the end of 10 years?
a. $10,065
b. $10,193
c. $22,334
d. $21,731