I. MULTIPLE CHOICE (35 questions, 2 points each). Choose the one alternative tha
ID: 2636038 • Letter: I
Question
I. MULTIPLE CHOICE (35 questions, 2 points each). Choose the one alternative that best
completes the statement or answers the question.
1) Your parents plan to spend $20,000 on a car for you upon graduation from college. If
you will graduate in three years and your parents can earn 4.125% annually on their
investment, how much money must they set aside today for your car?
A) $16,387
B) $17,716
C) $20,000
D) $17,704
2) You gave your little sister two rabbits for Easter three years ago and now she has 84
of the cute little bunnies. What is the average annual rate of increase in the number
of rabbits your sister owns? Note: Your parents are not very pleased with you right
now.
A) 247.60%
B) 410.00%
C) 14.00%
D) The TVM equations are designed for currency amounts and cannot be used
for non-financial calculations such as this one.
3) In 1975, the era of major league baseball free agency began. The average player
salary was $16,000. In 1980, the average salary was $30,000. What was the average
annual growth in the minimum salary in major league baseball over those five years?
A) 37.50%
B) 10.67%
C) 5.92%
D) 13.40%
4) You need $32,000 at the end of 6 years. If you can earn 0.625% per month, how
much would you need to invest today to meet your objective?
A) $18,319
B) $20,735
C) $20,433
D) $17,600
5) Given the following cash flows, what is the future value at year ten when
compounded at an interest rate of 12.0%?
Year
0
1
5
10
Cash Flow
$4,000
$3,000
$2,000
$1,000
A) $25,267.31
B) $10,000.00
C) $31,864.17
D) $11,948.32
6) You dream of endowing a chair in finance at the local university that will provide a
salary of $150,000 per year forever, with the first cash flow to be one year from
today. If the university promises to invest the money at a rate of 5% per year, how
much money must you give the university today to make your dream a reality?
A) $15,000,000
B) $3,000,000
C) $2,857,143
D) This question cannot be answered
7) You are saving money for a down payment on a new house. You intend to place
$5,000 at the end of each year for three years into an account earning 6% per year.
At the end of the fourth year, you will place $10,000 into this account. How much
money will be in the account at the end of the fourth year?
A) $25,000.00
B) $26,518.17
C) $26,873.08
D) $25,918.00
8) You estimate that the little drive-through coffee kiosk you own will generate ordinary
annuity after-tax cash flows of $150,000 per year for the next ten years. If you
discount these cash flows at an annual rate of 14%, what is the present value of your
expected cash flows?
A) $891,955.78
B) $2,900,594.27
C) $782,417.35
D) $1,500,000
9) Your parents have an investment portfolio of $400,000, and they wish to take out
cash flows of $50,000 per year as an ordinary annuity. How long will their portfolio
last if the portfolio is invested at an annual rate of 4.50%? Use a calculator to
determine your answer.
A) 9.60 years
B) 10.14 years
C) 9.10 years
D) 8.00 years
10) Suppose you invest $3,500 today, compounded semiannually, with an annual
interest rate of 8.50%. What amount of interest will you earn in one year?
A) $307.12
B) $313.82
C) $303.82
D) $309.13
11) The Cougar Corporation has issued 20-year semi-annual coupon bonds with a face
value of $1,000. If the annual coupon rate is 10% and the current yield to maturity is
12%, what is the firm's current price per bond?
A) $849.54
B) $1,170.27
C) $1,171.59
D) $850.61
12) Ten years ago Bacon Signs Inc. issued twenty-five-year 8% annual coupon bonds
with a $1,000 face value each. Since then, interest rates in general have fallen and
the yield to maturity on the Bacon bonds is now 7%. Given this information, what is
the price today for a Bacon Signs bond?
A) $1,116.54
B) $1,000
C) $1,091.08
D) $914.41
13) Rogue Racing Inc. has $1,000 par value bonds with a coupon rate of 8% per year
making semiannual coupon payments. If there are twelve years remaining prior to
maturity and these bonds are selling for $876.40, what is the yield to maturity for
these bonds?
A) 9.80%
B) 9.77%
C) 8.00%
D) 8.33%
14) You want to invest in a stock that pays $3.50 annual cash dividends for the next six
years. At the end of the six years, you will sell the stock for $22.50. If you want to
earn 12.5% on this investment, what is a fair price for this stock if you buy it today?
A) about $25.29
B) about $12.45
C) about $25.94
D) about $14.25
15) The Belgium Bike Company just paid an annual dividend of $1.12. If you expect a
constant growth rate of 4% and have a required rate of return of 13%, what is the
current stock price according to the constant growth dividend model?
A) $13.46
B) $12.94
C) $12.44
D) There is not enough information to answer this question.
16) In a stream of past dividends, the initial dividend is $0.75 and the most recent
dividend is $1.25. The number of years between these two dividends (n) is 8 years.
What is the average growth rate during this eight-year period? Use a calculator to
determine your answer.
A) 6.62%
B) 6.69%
C) 6.59%
D) 6.72%
17) Given an expected market return of 12.0%, a beta of 0.75 for Benson Industries,
and a risk-free rate of 4.0%, what is the expected return for Benson Industries?
A) 10.0%
B) 13.0%
C) 4.0%
D) 9.0%
18) Richard owns the following portfolio of securities. What is the beta for the portfolio?
Company
Beta
Percent of Portfolio
Apple
2.50
25%
Wells Fargo
0.65
50%
Ebay
1.70
25%
A) 1.38
B) 1.00
C) 0.65
D) 1.62
19) Given the expected returns and probabilities of various states of the world in this
table, what is the expected return for Carbide Company?
Carbide Company
State of the Economy
Probability of State
Return on State
Boom
.30
18%
Steady
.55
10%
Recession
.15
-5%
A) 5.40%
B) -0.75%
C) 5.50%
D) 10.15%
20) Jarvis bought a share of stock for $15.75 that paid a dividend of $.45 and sold three
months later for $18.65. What was his dollar profit or loss and holding period return?
A) -$2.90, -18.41%
B) $.45, 2.86%
C) $2.90, 18.41%
D) $3.35, 21.27%
Year
0
1
5
10
Cash Flow
$4,000
$3,000
$2,000
$1,000
Explanation / Answer
1 b 2 a 3 d 4 c 5 a 6 c 7 c 8 c 9 b 10 c 11 d 12 c