Assignment:
Sample Questions
1) Which of the following goals of the firm are synonymous (equivalent) to the maximization of shareholder wealth?
A) profit maximization
B) risk minimization
C) maximization of the total market value of the firm's common stock
D) none of the above
2) You inherit $300,000 from your parents and want to use the money to supplement your retirement. You receive the money on your 65th birthday, the day you retire. You want to withdraw equal amounts at the end of each of the next 20 years. What constant amount can you
withdraw each year and have nothing remaining at the end of 20 years if you are earning 7% interest per year?
A) $15,000
B) $28,318
C) $33,574
D) $39,113
3) The risk-free rate of interest is 4% and the market risk premium is 9%. Howard Corporation has a beta of 2.0, and last year generated a return of 16% with a standard deviation of returns of 27%. The required return on Howard Corporation stock is
A) 36%.
B) 34%.
C) 26%.
D) 22%.
4) Today is your 21st birthday and your bank account balance is $25,000. Your account is earning 6.5% interest compounded monthly. How much will be in the account on your 50th birthday?
A) $159,795
B) $162,183
C) $163,823
D) $164,631
5) All of the following statements about agency problems are true except:
A) Agency problems interfere with the goal of maximizing shareholder value.
B) Agency costs are paid by the managers who do not act in the shareholders' best interest.
C) Agency problems result from the separation of management and the ownership of a firm.
D) The root cause of agency problems is conflicts of interest.
6) Which of the following conclusions would be true if you earn a higher rate of return on your investments?
A) The greater the present value would be for any lump sum you would receive in the future.
B) The lower the present value would be for any lump sum you would receive in the future.
C) Your rate of return would not have any effect on the present value of any sum to be received in the future.
D) The greater the present value would be for any annuity you would receive in the future.
7) Investment A has an expected return of 14% with a standard deviation of 4%, while investment B has an expected return of 20% with a standard deviation of 9%. Therefore,
A) a risk averse investor will definitely select investment A because the standard deviation is lower.
B) a rational investor will pick investment B because the return adjusted for risk (20% -9%) is higher than the return adjusted for risk for investment A ($14% - 4%).
C) it is irrational for a risk-averse investor to select investment B because its standard deviation is more than twice as big as investment A's, but the return is not twice as big.
D) rational investors could pick either A or B, depending on their level of risk aversion.
8) Joe purchased 800 shares of Robotics Stock at $3 per share on 1/1/15. He sold the shares on 12/31/15 for $3.45. Robotics stock has a beta of 1.9, the risk-free rate of return is 4%, and the market risk premium is 9%. Joe's holding period return is:
A) 15.0%.
B) 16.5%.
C) 17.6%.
D) 21.1%.