1. __ is the process of converting future dollars into a current value.

Discounting
2. ____ refers to the difference between a firm's current assets and its current liabilities. Net working
capital
3. ____ refers to the firm's dividend payments less any net new equity raised. Cash flow to
stockholders
4. ____ refers to the firm's interest payments less any net new borrowing. Cash flow to creditors (Cash
flow paid to creditors = Interest paid - Net new borrowing)
5. _____ is calculated by adding back noncash expenses to net income and adjusting for changes in
current assets and liabilities. Cash flow from operations
6. _____ refers to the cash flow that results from the firm's ongoing, normal business activities. Cash
flow from operating activities
7. _____ refers to the changes in net capital assets. Cash flow from investing
8. ______ risk is reduced as more securities are added to the portfolio Idiosyncratic
Unique & Unsystematic
9. 15.2382%. The NPV is ______ and the IRR is ______ for the project. $0; 15.2382%

A
10. A $1,000 face value coupon bond will pay 5 percent interest annually for 12 years. What is the
percentage change in the price of this bond if the market yield rises to 6 percent from the current
level of 5.5 percent? −4.26 percent
11. A $1,000 face value coupon bond will pay 5 percent interest annually for 12 years. What isthe
percentage change in the price of this bond if the market yield rises to 6 percent from the current
level of 5.5 percent? −4.26 percent
12. A $1,000 par value bond carries a coupon rate of 6.5 percent and has a yield to maturity of 7.29
percent. The inflation rate is 3.13 percent. What is the bond's real rate of return? 4.03 percent
13. A $1,000 par value bond carries a coupon rate of 6.5 percent and has a yield to maturity of 7.29
percent. The inflation rate is 3.13 percent. What is the bond's real rate of return? 4.03 percent
14. A $25 investment produces $27.50 at the end of the year with no risk. Which of the following is
true? Both NPV is positive if the required return is less than 10%; and NPV is zero if the required
15. A _____ is an alternative method to cash dividends which is used to pay out a firm's
earnings to shareholders. share reapurchase
16. A _____ standardizes items on the income statement and balance sheet as a percentage of total
sales and total assets, respectively. common-size statement
17. A 12-year, 5% coupon bond pays interest annually. The bond has a face value of $1,000. What is the
change in the price of this bond if the market yield rises to 6% from the current yield of
4.5%? 12.38% decrease
18. A 9% preferred stock pays an annual dividend of $4.50. What is one share of this stock worth today?
$50.00

AB
19. A banker considering loaning a firm money for ten years would most likely prefer the firm have a
debt ratio of _____ and a times interest earned ratio of _____. 0.35; 3.0
20. A banker considering loaning money to a firm for ten years would most likely prefer the firmhave a
debt ratio of , and a times interest earned ratio of . 0.40; 1.75
21. A bond has a coupon rate of 8.2 percent, a $1,000 par value, matures in 11.5 years, has a yield to
maturity of 7.67 percent, and pays interest annually. What is the current yield? 7.89 percent
22. A bond has a coupon rate of 8.2 percent, a $1,000 par value, matures in 11.5 years, has ayield to
maturity of 7.67 percent, and pays interest annually. What is the current yield? 7.89 percent
23. A bond is listed in a newspaper at a bid of 105.4844. This quote should be interpreted to mean: you
can sell that bond at a price equal to 105.4844 percent of face value.
24. A bond is listed in a newspaper at a bid of 105.4844. This quote should be interpreted tomean: you
can sell that bond at a price equal to 105.4844 percent of face value.
25. A bond is listed in The Wall Street Journal as a 12 3/4s of July 2009. This bond pays: $63.75 in July
and January.
26. A bond that makes no coupon payments and is initially priced at a deep discount is called a _____
bond. zero coupon
27. A bond that makes no coupon payments and is initially priced at a deep discount is called a bond.
zero coupon
28. A bond with a 7% coupon that pays interest semi-annually and is priced at par will have a market
price of _____ and interest payments in the amount of _____ each. $1,000; $35
29. A bond with a coupon rate of 6 percent that pays interest semiannually and is priced at par willhave
a market price of and interest payments in the amount of each. $1,000; $60
30. A bond with a face value of $1,000 that sells for $1,000 in the market is called a _____ bond. par
value
31. A bond with a face value of $1,000 that sells for $1,000 in the market is called a _bond. par value
32. A bond with a face value of $1,000 that sells for less than $1,000 in the market is called a _____
bond. Discount
33. A bond with a face value of $1,000 that sells for less than $1,000 in the market is called a bond.
Discount
34. A bond with semi-annual interest payments, all else equal, would be priced ________ than one with
annual interest payments. Lower
35. A bull market is characterized by ______ sentiment while a bear market is characterized by ______
sentiment of investors in the stock market. optimistic; pessimistic
Reason:
A bull market is characterized by rising prices (an optimistic sentiment) while a bear market is
characterized by falling prices (a pessimistic sentiment).
36. A business created as a distinct legal entity and treated as a legal "person" is called a: corporation.
37. A business entity operated and taxed like a partnership, but with limited liability for the owners, is
called a: limited liability company
38. A business formed by two or more individuals who each have unlimited liability for business debts is
called a: general partnership.
39. A business owned by a single individual is called a: sole proprietorship.
40. A business partner whose potential financial loss in the partnership will not exceed his orher
investment in that partnership is called a: limited partner.
41. A capital intensity ratio of 1.03 means a firm has $1.03 in: total assets for every $1 in sales
42. A car dealer is willing to lease you a car for $319 a month for 60 months. Payments are dueon the
first day of each month starting with the day you sign the lease contract. If your cost of money is 4.9
percent, compounded monthly, what is the current value of the lease? $17,014.34 (APVADue =
{$319{[1 − 1/(1 + .049/12)60]/(.049/12)}(1 + .049/12)
43. A cash payment made by a firm to its owners in the normal course of business is called a: regular
cash dividend.
44. A cash payment made by a firm to its owners when some of the firm's assets are sold off is called a:
liquidating dividend
45. A change in dividend policy does not affect the value of a share of stock as long as: all of the
distributable cash flow is paid out.
46. A company just paid an annual dividend of $.40 a share and plans to increase the dividend by7
percent a year for the next 6 years and then increase it by 4 percent annually thereafter. What isthe
value of this stock at the end of Year 6 if the discount rate is 11 percent? P6 =

[$.40(1.076)(1.04)]/(.11 − .04)= $8.92

47. A company plans to pay an annual dividend of $.30 a share for two years commencing twoyears
from today. After that time, a constant $1 a share annual dividend is planned indefinitely.Given a
 required return of 14 percent, what is the current value of this stock? P0 = $.30/1.142 + $.30/1.143 +

($1/.14)/1.143 = $5.25
48. A conflict of interest between the stockholders and management of a firm is called: the agency
problem.
49. A corporate bond has a coupon of 7.5 percent and pays interest annually. The face value is $1,000
and the current market price is $1,108.15. The bond matures in 14 years. What is the yield to
maturity? 6.31 percent
50. A corporate bond has a coupon of 7.5 percent and pays interest annually. The face value is $1,000
and the current market price is $1,108.15. The bond matures in 14 years. What is theyield to
maturity? 6.31 percent
51. A corporate bond has a coupon rate of 5.5 percent, a $1,000 face value, and matures three years
from today. The corporation is in a serious financial situation and has announced that no future
annual interest payments will be paid and that the probability the entire face value will be repaid is
only 75 percent. If the entire face value cannot be paid, then 60 percent of the face value will be
repaid. All payments will be made three years from now. What is the current value of this bond at a
discount rate of 15 percent? $591.76
52. A corporate bond has a coupon rate of 5.5 percent, a $1,000 face value, and matures three years
from today. The corporation is in a serious financial situation and has announced that no future
annual interest payments will be paid and that the probability the entire face value will berepaid is
only 75 percent. If the entire face value cannot be paid, then 60 percent of the face value will be
repaid. All payments will be made three years from now. What is the current valueof this bond at a
discount rate of 15 percent? $591.76
53. A corporate bond has a coupon rate of 6 percent, a $1,000 face value, and matures two years from
today. The corporation is in a serious financial situation and has announced that no future annual
interest payments will be paid and that only 50 percent of the face value will be repaid but that
payment will be delayed by one year. What is the current value of this bond to a bondholder with a
required rate of return of 14 percent? $337.49
54. A corporate bond has a coupon rate of 6 percent, a $1,000 face value, and matures two years from
today. The corporation is in a serious financial situation and has announced that no future annual
interest payments will be paid and that only 50 percent of the face value will be repaid butthat
payment will be delayed by one year. What is the current value of this bond to a bondholder with a
required rate of return of 14 percent? $337.49
55. A corporate bond is currently quoted at 101.633. What is the market price of a bond with a $1,000
face value? $1,016.33
56. A corporate bond is currently quoted at 101.633. What is the market price of a bond with a $1,000
face value?A) $1,016.33
57. A corporate bond is quoted at a current price of 102.767. What is the market price of a bond with a
$1,000 face value? $1,027.67 (Market price = 102.767  10 = $1,027.67)
58. A corporate bond with a face value of $1,000 matures in 4 years and has a coupon rate of 6.25
percent. The current price of the bond is $932 and interest is paid semiannually. What is the yield to
maturity? 8.28 percent
59. A corporate bond with a face value of $1,000 matures in 4 years and has an 8% coupon paid at the
end of each year. The current price of the bond is $932. What is the yield to maturity for this
bond? 10.15% (Current Price = Int(PVIFAr,4) + Face value(PVIFr,4) $932 = $80[1 - 1/(1 + r)4]/r +
$1000/(1 + r)4 r = 10.152)
60. A corporate bond with a face value of $1,000 matures in 4 years and has a coupon rate of 6.25
percent. The current price of the bond is $932 and interest is paid semiannually. What is theyield to
maturity? 8.28 percent
61. A credit card compounds interest monthly and has an effective annual rate of 12.67 percent.What is

the annual percentage rate? 11.99 percent (APR = (1.12671/12 − 1)(12))

62. A current asset is: an item currently owned by the firm that will convert to cash within the next 12
months ( Current assets are the most liquid and include cash and assets that will be turned into cash
within a year from the date of the balance sheet)
63. A day order to sell at a limit of $32 will be: cancelled at the end of the day if not executed.
64. A dollar tomorrow is worth ______ a dollar today.less than
65. A dominant portfolio within an opportunity set that has the lowest possible level of risk isreferred to
as the: minimum variance portfolio.

AF
66. A financing project has an initial cash inflow of $42,000 and cash flows of −$15,600, −$22,200, and
−$18,000 for Years 1 to 3, respectively. The required rate of return is 13 percent. What is the
internal rate of return? Should the project be accepted? A project: (42.000; -15.600; -22.000; -
18.000); 42.000 - 15.600/(1+IRR) - 22.200/(1+IRR)^2 - 18.000/ (1+IRR)^3=0; => IRR =15.26% > 13% =>
Reject ;a.15.26%; reject
67. A financing project is acceptable if its IRR is: c.less than the discount rate
68. A firm announces that it is willing to purchase a number of shares back at various prices and
shareholders have the option to indicate how many shares they are willing to sell at various prices.
This process is called a: Dutch auction.
69. A firm announces that it is willing to repurchase a number of shares at various prices and
shareholders have the option to indicate how many sharesthey are willing to sell at the
various prices. This process is called a: free market sale.
70. A firm can repurchase its shares in all of the following ways except through: a reverse stock split.
71. A firm can repurchase its shares in all the following ways except through: a reverse stock
split.
72. A firm faces many risks. Which of the following are examples of unsystematic risks faced by a firm?
The death of the CEO
A hosile takeover attempt by a competitor
73. A firm has $300 in inventory, $600 in fixed assets, $200 in accounts receivable, $100 in accounts
payable, and $50 in cash. What is the amount of the current assets? $550 (Current assets = $300 +
$200 + $50 = $550)
74. A firm has $450 in inventory, $700 in fixed assets, $210 in accounts receivable, $50 in accounts
payable, and $60 in cash. What is the amount of the current assets? the current assets= 450+210+60
= $720
75. A firm has 12,000 shares of stock outstanding, sales of $638,100, a profit margin of 8.2 percent, a
tax rate of 21 percent, a price-earnings ratio of 11.3, and a book value per share of $7.98. What is
the market-to-book ratio?6.17 (Explanation: Market-to-book ratio =
{11.3[.082($638,100)]/12,000}/$7.98; Market-to-book ratio = 6.17)
76. A firm has a market value equal to its book value, excess cash of $1,000, and equity worth
$17,800. The firm has 5,000 shares of stock outstanding and net income of $31,200.
What will be the new earnings per share if the firm uses its excess cash to complete a
stock repurchase? $6.61 Price per share = $17,800/5,000Price per share = $3.56
Number of shares repurchased = $1,000/$3.56Number of shares repurchased = 280.90
New EPS = $31,200/(5,000 − 280.90)New EPS = $6.61
77. A firm has a total debt ratio of .47. This means the firm has 47 cents in debt for every: $.53 in total
equity.
78. A firm has a total market value of $89,600 with 6,500 shares of stock outstanding. What
will be the total market value of the firm if it does a 1-for-2 reverse stock split? $44,800
79. A firm has cash flows of $100 at the end of years 1 - 4. What is the net present value of an
investment in this firm if we pay $300 to purchase the firm and the discount rate is 10 percent?
$16.99
$100 × [(1 - (1/1.10)^4))/.10] - $300
80. A firm is exposed to both systematic and unsystematic risks. Which of the following are examples of
systematic risks? An increase in the Federal funds rate
An increase in the corporate tax rate
81. A firm offers a zero coupon bond with a face value of $1,000 that matures in 10 years. What is the
current market price if the yield to maturity is 7.6 percent, given semiannual compounding? $474.30
82. A firm offers a zero coupon bond with a face value of $1,000 that matures in 10 years. Whatis the
current market price if the yield to maturity is 7.6 percent, given semiannual compounding? $474.30
83. A firm starts its year with a positive net working capital. During the year, the firm acquires more
short-term debt than it does short-term assets. This means that: the ending net working capital can
be positive, negative, or equal to zero.
84. A firm which opts to "go dark" in response to the Sarbanes-Oxley Act: can provide less information
to its shareholders than it did prior to "going dark".
85. A firm which opts to "go dark" in response to the Sarbanes-Oxley Act: can, and mostly likely will,
provide less information to its shareholders than it did priorto the act.
86. A firm which opts to "go dark" in response to the Sarbanes-Oxley Act: can provide less information
to its shareholders than it did prior to "going dark".
87. A firm with a high level of growth opportunities is most apt to have a: high PE ratio and a high EV
multiple.
88. A flow of unending annual payments that increase by a set percentage each year and occur atregular
intervals of time is called a(n): growing perpetuity.
89. A form of equity which receives no preferential treatment in either the payment of dividends or in
bankruptcy distributions is called _____ stock. common
90. A forward PE is generally based on the projected: earnings for the next year.
91. A General Co. bond has an 8% coupon and pays interest annually. The face value is $1,000 and the
current market price is $1,020.50. The bond matures in 20 years. What is the yield to

maturity? 7.79%
92. A general partner: has more management responsibility than a limited partner
93. A general partner: is solely responsible for all the partnership debts.
94. A growing annuity has a(n) ____. finite number of growing cash flows
95. A growing perpetuity is currently valued $6,225.81. The next annuity payment will be $386and the
discount rate is 9 percent. What is the annuity's rate of growth? 2.80 percent ($6,225.81 = $386/(.09
− g))
96. A limit order to buy: guarantees the purchase price but not the order execution.
97. A limited partnership: has a greater ability to raise capital than a sole proprietorship.Which of the
following apply to a partnership that consists solely of general partners? I. double taxation of
partnership profits -II limited partnership life.- III. active involvement in the firm by all the partners
IV. unlimited personal liability for all partnership debts: II, III, and IV only
98. A loan might be repaid in equal ________ over a specific period of time. installments
99. A market where brokers and agents match buyers with sellers is called a(n): auction market.
100. A minimum variance portfolio has the ____. Lowest possible variance
101. A minimum variance portfolio will be characterized by its ___.• Lowest possible standard deviation •
Lowest possible variance
102. A mutually exclusive project is a project whose: acceptance or rejection affects other projects.
103. A newspaper listing of bond prices has an "Asked yield" column. This yield is based on the asked
price and represents the: yield to maturity.
104. A newspaper listing of bond prices has an "Asked yield" column. This yield is based on theasked price
and represents the: yield to maturity.
105. A one-for-four reverse stock split will: increase a $1 par value to $4.

AP
106. A par value bond offers a coupon rate of 7 percent with semiannual interest payments. The effective
annual rate provided by these bonds must be: greater than 7 percent but less than 8 percent.
107. A partnership: terminates at the death of any general partner
108. A payment made by a firm to its owners in the form of new shares of stock is called a _____
dividend. stock
109. A perpetuity differs from an annuity because: perpetuity cash flows never cease.
110. A perpetuity is a constant stream of cash flows for a(n) ______ period of time. infinite
111. A portfolio consists of Stocks A and B and has an expected return of 11.6 percent. Stock Ahas an
expected return of 17.8 percent while Stock B is expected to return 8.4 percent. What isthe portfolio
weight of Stock A? 34.04 percent
112. A portfolio consists of three stocks. There are 540 shares of Stock A valued at $24.20 share,310
shares of Stock B valued at $48.10 a share, and 200 shares of Stock C priced at $26.50 a share.
Stocks A, B, and C are expected to return 8.3 percent, 16.4 percent, and 11.7 percent, respectively.
What is the expected return on this portfolio? 12.47 percent
113. A portfolio contains four assets. Asset 1 has a beta of .8 and comprises 30% of the portfolio. Asset 2
has a beta of 1.1 and comprises 30% of the portfolio. Asset 3 has a beta of 1.5 and comprises 20% of
the portfolio. Asset 4 has a beta of 1.6 and comprises the remaining 20% of the portfolio. If the
 riskless rate is expected to be3% and the market risk premium is 6%, what is the beta of the
portfolio? 1.19
114. A portfolio contains two assets. The first asset comprises 40% of the portfolio and has a beta of 1.2.
Theother asset has a beta of 1.5. The portfolio beta is: 1.38
115. A portfolio contains two securities and has a beta of 1.08. The first security comprises 54percent of
the portfolio and has a beta of 1.27. What is the beta of the second security? .86
116. A portfolio has 25% of its funds invested in Security C and 75% of its funds invested in Security
D. Security C has an expected return of 8% and a standard deviation of 6%. Security D has an
expected return of10% and a standard deviation of 10%. The securities have a coefficient of
correlation of 0.6. Which of the following values is closest to portfolio return and variance?
.095; .0072 (E(R) = .25(.08) + .75(.10) = .095 = 9.5%; Variance = .252(.06)2 + .752(.10)2 +
2(.25)(.75)(.06)(.60)(.10) = .0072)
117. A portfolio has 38 percent of its funds invested in Security C and 62 percent invested in Security D.
Security C has an expected return of 8.47 percent and a standard deviation of 7.12percent. Security
D has an expected return of 13.45 percent and a standard deviation of 16.22 percent. The securities
have a coefficient of correlation of .89. What are the portfolio rate of return and variance values?
11.56 percent ; .015688
118. A portfolio has 45 percent of its funds invested in Security One and 55 percent invested in Security
Two. Security One has a standard deviation of 6 percent. Security Two has a standarddeviation of 12
percent. The securities have a coefficient of correlation of .62. What is the portfolio variance?
.007295
119. A portfolio has 50% of its funds invested in Security One and 50% of its funds invested in Security
Two. Security One has a standard deviation of 6%. Security Two has a standard deviation of 12%.
The securities havea coefficient of correlation of 0.5. Which of the following values is closest to
portfolio variance? .0063 (Var. = .52(.06)2 + .52(.12)2 + (.5)(.5)(.5)(.06)(.12) = .0009 + .0036 + .0018
= .0063)
120. A portfolio is comprised of 100 shares of Stock A valued at $22 a share, 600 shares of StockB valued
at $17 each, 400 shares of Stock C valued at $46 each, and 200 shares of Stock D valued at $38 each.
What is the portfolio weight of Stock C? 47.92 percent
121. A portfolio is entirely invested into BBB stock, which is expected to return 16.4 percent, andZI bonds,
which are expected to return 8.6 percent. Stock BBB comprises 48 percent of the portfolio. What is
the expected return on the portfolio? 12.34 percent
122. A portfolio is entirely invested into Buzz's Bauxite Boring equity, which is expected to return 16%,
andZum's Inc. bonds, which are expected to return 8%. 60% of the funds are invested in Buzz's and
the rest in Zum's. What is the expected return on the portfolio? 12.8%
123. A portfolio is: a group of assets, such as stocks and bonds, held as a collective unit by an investor.
124. A portfolio will usually contain: two or more assets.
125. A positive cash flow to stockholders indicates which one of the following with certainty? A. The
dividends paid exceeded the net new equity raised.
126. A preferred stock pays an annual dividend of $6.50 a share and has an annual rate of return of 7.35
percent. What is the stock price?$88.44 (PV = $6.50/.0735)
127. A project has an initial cost of $2,100. The cash inflows are $0, $500, $900, and $700 over the next
four years, respectively. What is the payback period? Never
128. A project has an initial cost of $8,600 and produces cash inflows of $3,200, $4,900, and $1,500 over
the next three years, respectively. What is the discounted payback period if the required rate of
return is 8%? Never
129. A project is expected to produce cash flows of $48,000, $39,000, and $15,000 over the nextthree
years, respectively. After three years, the project will be worthless. What is the net presentvalue of
this project if the applicable discount rate is 15.25 percent and the initial cost is $78,500? $2,309.09
(Explanation: NPV = −$78,500 + $48,000/1.1525 + $39,000/1.15252 + $15,000/1.15253 NPV =
$2,309.09)
130. A project will have more than one IRR if, any only if, the: c.cash flow pattern exhibits more than one
sign change.
131. A project will have more than one IRR if: the cash flow pattern exhibits more than one sign change.
132. A project will produce cash inflows of $1,750 a year for four years. The project initially costs $10,600
to get started. In year five, the project will be closed and as a result should produce a cash inflow of
$8,500. What is the net present value of this project if the required rate of return is 13.75%? -
$1,011.40 (NPV = $10,600 + $1,750[(1 - 1/1.1375^3)/.1375] + $8,500/1.1375^4)
133. A proxy fight occurs when: a group solicits proxies to replace the board of directors.
134. A public firm's market capitalization is equal to the: price per share multiplied by number of shares
outstanding.
AR
135. A reasonable estimate for the US equity risk premium is 7%
136. A retail store has days' sales in inventory of 68 days and an average collection period of 32days. The
firm pays its suppliers in an average of 42 days, on average. Taken together, what do these average
values imply about the firm's operations and its cash flows? It takes a total of 100 days (= 68 + 32) to
sell inventory and collect payment on the saleof that inventory. Meanwhile, 42 days after acquiring
 the inventory and prior to the inventory even being sold, the retailer must pay its suppliers. Thus, the
firm must pay out cash 58 (= 100 −42) days prior to receiving payment. This creates a negative cash
flow which the firm must be able to finance.
137. A reverse split is when: several old shares, such as 4, are replaced by 1 new share.
138. A reverse stock split is sometimes used as a means of: keeping a firm's stock eligible for trading on a
stock exchange.
139. A risk that affects a large number of assets, each to a greater or lesser degree is called: systematic
risk.
AS
140. A scenario exists that supports an argument in favor of a low dividendpolicy when: tax
laws allow capital gains to be deferred until the gain is realized
141. A secondary market where an individual or entity buys and sells for themselves at theirown
risk is called a market. Dealer
142. A security that is fairly priced will have a return that plots the security market line. on
143. A situation in which accepting one investment prevents the acceptance of another investment is
called the: mutually exclusive investment decision.
144. A situation in which accepting one investment prevents the acceptance of another An independent
investment is acceptable if the profitability index (PI) of the investment is: a.greater than one.
145. A small craft store located in a kiosk expects to generate annual cash flows of $6,800 for the next
three years. At the end of the three years, the business is expected to be sold for $15,000. What is
the value of this business at a discount rate of 15 percent? $25,388.67 (PV = [$6,800[(1 −

1/1.153)/.15] + $15,000/1.153)
146. A small stock dividend is generally defined as a stock dividend of less than _____ percent. 20 to 25
147. A stakeholder is: any person or entity other than a stockholder or creditor who potentially has a
claim on the cash flows of the firm.
148. A stock had a total return of 9.62 percent last year. The dividend amount was $.70 a sharewhich
equated to a dividend yield of 2.39 percent. What is the dividend growth rate? g = .0962 − .0239 =
.0723, or 7.23%
149. A stock listing contains the following information: P/E 17.5, closing price 33.10, dividend .80, YTD%
chg 3.4, and net chg - .50. Which of the following statements are correct given this information? I
and III only
I. The stock price has increased by 3.4% during the current year.
II. The closing price on the previous trading day was $32.60.
III. The earnings per share are approximately $1.89.
IV. The current yield is 17.5%.
 150. A stock pays a constant annual dividend and sells for $31.11 a share. If the dividend yield of this

stock is 9%, what is the dividend amount? $2.80

151. A stock split: does not affect the total value of any of the equity accounts.
152. A stock that is considered to be low risk is most apt to have: a high PE ratio.
153. A stock with a beta of zero would be expected to have a rate of return equal to: the risk-free rate.
154. A stock with an actual return that lies above the security market line: has yielded a higher return than
expected for the level of risk assumed.
155. A stock you are interested in paid a dividend of $1 last month. The anticipated growth rate in
dividends and earnings is 25% for the next 2 years before settling down to a constant 5% growth
rate. The discount rate is 12%. Calculate the expected price of the stock. $21.04
156. A stock you are interested in paid a dividend of $1 last week. The anticipated growth rate in
dividends and earnings is 20% for the next year and 10% the year after that before settling down to
a constant 5% growth rate. The discount rate is 12%. Calculate the expected price of the stock.
$17.90
157. A stock's PE ratio is primarily affected by which three factors? Risk, opportunities, accounting
practices
158. A stop order to sell at $46 will be executed: as a market order once a trade occurs at a price of $46
or less.
159. A stream of cash flows that grows at a constant rate for a finite period is called a(n) _____. growing
annuity
160. A supplier, who requires payment within ten days, is most concerned with which one of the

t following
A 161. ratios when granting credit? cash
A total asset turnover measure of 1.03 means that a firm has $1.03 in: sales for every $1 in total
assets.
162. A traditional (non-growing) annuity consists of a(n) ________ stream of cash flows for a fixed period
of time. level
163. A trust has been established to fund scholarships in perpetuity. The next annual distribution will be
$1,200 and future payments will increase by 3 percent per year. What is the value of thistrust at a
discount rate of 7.4 percent? $27,272.73 (PV = $1,200/(.074 − .03))
164. A typical investor is assumed to be: risk averse.

Aw 165. A well-diversified portfolio has eliminated most of the: unsystematic risk.

 AZ
166. A zero coupon bond with a face value of $1,000 is issued with an initial price of $463.34. The bond
matures in 25 years. What is the implicit interest, in dollars, for the first year of the bond's

r = 3.125%; PV = = $477.82; Implicit interest = $477.82 -

life? $14.48$463.34 = $14.48
167. A zero coupon bond with a face value of $1,000 is issued with an initial price of $430.84 based on
semiannual compounding. The bond matures in 20 years. What is the implicit interest, in dollars, for
the first year of the bond's life? $18.53
168. A zero coupon bond with a face value of $1,000 is issued with an initial price of $430.84 based on
semiannual compounding. The bond matures in 20 years. What is the implicit interest,in dollars, for
the first year of the bond's life? $18.53
169. A zero coupon bond: has a market price that is computed using semiannual compounding of
interest.
170. A zero coupon bond: has a market price that is computed using semiannual compounding of
interest.
171. A zero coupon bond: has implicit interest which is calculated by amortizing the loan.

A_ 172. A will increase the number of shares outstanding withoutaffecting the book value
of any of the owners' equity account values. stock split
173. A(n) ____ asset is one which can be quickly converted into cash without significant loss in
value. liquid
174. A(n) is an alternative method to cash dividends which is used topay out a firm's
earnings to shareholders in the form of a cash payment. stock repurchase
175. A.G. Thomas & Sons just paid an annual dividend of $2.25. In conjunction with the payment, the

A.G. company announced that future dividends will be increasing by 3%. If you require an 11% rate of
return, how much are you willing to pay today to purchase one share of Thomas' stock? $28.97

AC
176. Accepting positive NPV projects benefits the stockholders because: the present value of the
expected cash flows are greater than the cost.
177. According to generally accepted accounting principles (GAAP), revenue is recognized as income
when: the transaction is complete and the goods or services are delivered.
178. According to Generally Accepted Accounting Principles, costs are: matched with revenues.
179. According to the Capital Asset Pricing Model: the expected return on a security is positively and
linearly related to the security's beta.
180. According to the CAPM, the expected return on a security is: positively and linearly related to the
security's beta.
181. According to the CAPM: the expected return on a security is positively related to the security's beta.
182. According to the clientele effect, firms can only boost their stock price: if an unsatisfied clientele
group exists.
183. According to the Rule of 72, at 18% per year, it will take ________ years to double your money.
Hint: round your answer to the nearest whole number of years. 4 (72/18)

AG
184. Agency costs refer to: the costs of any conflicts of interest between stockholders and management.
185. Aivree is buying a $1,000 face value bond at a quoted price of 99.486. The bond carries a coupon
rate of 5.6 percent, with interest paid semiannually. The next interest payment is four months from
today. What is the clean price of this bond? $994.86
186. Aivree is buying a $1,000 face value bond at a quoted price of 99.486. The bond carries acoupon
rate of 5.6 percent, with interest paid semiannually. The next interest payment is fourmonths from
today. What is the clean price of this bond? $994.86
187. All else constant, a bond will sell at _____ when the yield to maturity is _____ the coupon rate. a
discount; higher than
188. All else constant, a bond will sell at when the yield to maturity is thecoupon rate. a discount;
greater than
189. All else constant, a coupon bond that is selling at a premium, must have: a yield to maturity that is
less than the coupon rate.
190. All else constant, a coupon bond that is selling at a premium, must have: a coupon rate that is less
than the yield to maturity.
191. All else constant, the net present value of a typical investment project increases when: the rate of
return decreases.
192. All else constant, which of the following will increase the dividend yield of a stock? I.an increase in
the dividend amount -II.a decrease in the dividend amount III.an increase in the stock price-IV. a
decrease in the stock price I and IV only
193. All else equal, a stock dividend will _____ the number of shares outstanding and _____ the value
per share. increase; decrease
194. All else equal, the market value of a stock will tend to decrease by roughly the amount of ex-
dividend date.
195. All else equal, the payback period for a project will decrease whenever the: cash inflows are moved
earlier in time.
196. All else held constant, interest rate risk will increase when the time to maturity: increases or the
coupon rate decreases.
197. All else held constant, interest rate risk will increase when the time to maturity: increases or the
coupon rate decreases.
198. Allison's has a market value equal to its book value. Currently, the firmhas excess cash
of $1,100 and other assets of $12,400. Equity is worth $13,500. The firm has 2,500 shares
of stock outstanding and net income of $10,800. What will be the new earnings per share
if the firm uses its excesscash to complete a stock repurchase? $4.70 Price per share
=$13,500/2,500Price per share = $5.40 Number of shares repurchased = $1,100/$5.40
Number of shares repurchased = 203.70 sharesNew EPS = $10,800/(2,500 − 203.70)
New EPS = $4.70
199. Allison's is expected to have annual free cash flow of $62,000, $65,400, and $68,900 for thenext
three years, respectively. After that, the free cash flow is expected to increase at a constant rate of 2
percent per year. At a discount rate of 14.5 percent, what is the present value of this firm? PV =

$62,000/1.145 + $65,400/1.1452 + $68,900/1.1453 + [$68,900(1.02)/(.145− .02)]/1.1453 = $524,467

200. Allison's wants to raise $12.4 million to expand its business. To accomplish this, it plans to sell 25-
year, $1,000 face value, zero-coupon bonds. The bonds will be priced to yield 6.5 percent, with
semiannual compounding. What is the minimum number of bonds the firm must sell to raise the
$12.4 million it needs? 61,366
201. Allison's wants to raise $12.4 million to expand its business. To accomplish this, it plans tosell 25-
year, $1,000 face value, zero-coupon bonds. The bonds will be priced to yield 6.5 percent, with
semiannual compounding. What is the minimum number of bonds the firm must sell to raise the
$12.4 million it needs? 61,366
202. Alpha Co. is paying a $.72 per share dividend today. There are 138,000shares
outstanding with a par value of $1 per share. As a result of this dividend, the: retained
earnings will decrease by $99,360.
203. Alpha Industries is going to pay annual dividends of $.35, $.50, and $.80 a share over the next three
years, respectively. After that, the dividend will be $1.25 per share indefinitely. Whatis this stock

worth today at a discount rate of 13.45 percent? : P0 = $.35/1.1345 + $.50/1.13452 + $.80/1.13453

+ ($1.25/.1345)/1.13453= $7.61
204. American Fortunes is preparing a bond offering with an 8% coupon rate. The bonds will be repaid in
10 years. The company plans to issue the bonds at par value and pay interest semiannually. Given
this, which of the following statements are correct? I. The initial selling price of each bond will be
$1,000 - II. After the bonds have been outstanding for 1 year, you should use 9 as the number of
compounding periods when calculating the market value of the bond - III. Each interest payment per
bond will be $40- IV. The yield to maturity when the bonds are first issued is 8%. I, III, and IV only
205. Amortization is the process of paying off loans by regularly reducing the _________. principal
206. An annuity costs $70,000 today, pays $3,500 a year, and earns a return of 4.5 percent. Whatis the
length of the annuity time period? 52.31 years

Explanation: $70,000 = $3,500[(1 − 1/1.045T)/.045]

10 = 1.045T
ln10 = Tln1.045
T = 52.31 years
207. An annuity due is a series of payments that are made ____. at the beginning of each period
208. An annuity stream of cash flow payments is a set of: equal cash flows occurring at equal periods of
time over a fixed length of time.
209. An annuity stream of cash flow payments is a set of: level cash flows occurring each time period for
a fixed length of time.
210. An annuity stream where the payments occur forever is called a(n): perpetuity.
211. An annuity: is a level stream of equal payments through time.
212. An asset characterized by cash flows that increase at a constant rate forever is called a: growing
perpetuity.
213. An efficient set of portfolios is comprised of: the dominant portion of the opportunity set.
214. An efficient set of portfolios is: the dominant portion of the opportunity set.
215. An increase in a firm's number of shares outstanding without any change in owners' equity is called
a: stock split.
216. An increase in the depreciation expense will do which of the following? I. increase net income-II.
decrease net income-III. increase the cash flow from assets-IV. decrease the cash flow from assets: II
and III only
217. An increase in the rate of inflation will: increase the nominal interest rate but will not affect the real
interest rate.
218. An increase in the rate of inflation will: increase the nominal interest rate but will not affect the real
interest rate.
219. An increase in total assets: must be offset by an equal increase in liabilities and shareholders' equity.
( Assets = Liabilities + Stockholders’ equity)
220. An increase in which one of the following accounts increases a firm's current ratio without affecting
its quick ratio? Inventory
221. An increase in which one of the following will cause the operating cash flow to
increase? depreciation
222. An insurance settlement offer includes annual payments of $36,000, $42,000, and $50,000 over the
next three years, respectively, with the first payment being made one year from today. What is the
minimum amount you should accept today as a lump sum settlement if your discountrate is 7
percent? $111,144.18 (Explanation: PV = $36,000/1.07 + $42,000/1.072 + $50,000/1.073 PV =
$111,144.18)
223. An interest rate that is compounded monthly, but is expressed as if the rate were compounded
annually, is called the rate. effective annual
224. An investment cost $10,000 with expected cash flows of $3,000 for 5 years. The discount rate is
0.2382%. The NPV is ______ and the IRR is ______ for the project. $0; 15.2382%
225. An investment cost $12,000 with expected cash flows of $4,000 for 4 years. The discount rate is
226. An investment has the following cash flows. Should the project be accepted if it has been assigned a
required return of 9.5%? Why or why not? A. yes; because the IRR exceeds the required return by
about 0.39%.

227. An investment is acceptable if its IRR: exceeds the required return.

228. An investment is acceptable if the payback period: is less than some pre-specified period of time.
229. An investment is acceptable if the profitability index (PI) of the investment is: greater than one.
230. An investment project has the cash flow stream of $-250, $75, $125, $100, and $50. The cost of
capital is 12%. What is the discounted payback period? 3.38 years
231. An investment project has the cash flow stream of $-3250, $80, $200, $75, and $90. The cost of
capital is 12%. What is the discounted payback period? 2.24 years
232. An investment with an initial cost of $14,000 produces cash flows of $4,000 annually for 5 years. If
the cash flow is evenly spread out over the year and the firm can borrow at 10%, the discounted
payback period is _____ years. 4.53
Payback Period = Years before Full Recovery + (Unrecovered Investment atstart of the
year / Cash flow during the year)
= 4 + (1,321 / 2,484)
= 4 + 0.53
= 4.53
233. An investment with an initial cost of $15,000 produces cash flows of $5,000 annually for 5 years. If
the cash flow is evenly spread out over the year and the firm can borrow at 10%, the discounted
payback period is _____ years. 3.75
234. An investor is more likely to prefer a high dividend payout if a firm: has few, if any, positive net
present value projects.
235. An upward-sloping term structure of interest rates indicates that: longer-term rates are higher than
shorter-term rates.
236. An upward-sloping term structure of interest rates indicates that: longer-term rates are higher than
shorter-term rates.
237. Analysis using the profitability index: is useful as a decision tool when investment funds are limited.
238. Ancient Industries just paid a dividend of $1.03 a share. The company announced today thatit
expects to pay $.90 a share next year and a final liquidating dividend of $18.44 in two years. What is
one share of this stock worth today if the required rate of return is 16 percent? : P0 = $.90/1.16 +

$18.44/1.162 = $14.48
239. Angela borrowed $5,000 for five years at an APR of 6.2 percent. The loan calls for equal, annual
principal payments. Interest will also be paid annually. What will be her loan payment inYear 2?
$1,248 (Year 2 loan payment = $5,000/5 + ($5,000 − 1,000)(.062) Year 2 loan payment = $1,248)
240. Angelina's made two announcements concerning its common stock today. First, the company
announced that its next annual dividend has been set at $2.16 a share. Secondly, the company
announced that all future dividends will increase by 4% annually. What is the maximum amount you
should pay to purchase a share of Angelina's stock if your goal is to earn a 10% rate of return?

$36.00
241. Angelo has decided to invest $24,500 in a portfolio with an expected return of 9.8 percent and
invest $10,000 in a risk-free asset that he expects to return 3.6 percent. What rate of return ishe
expecting on this portfolio? 8.00 percent
242. Anna has $38,654 in a savings account that pays 2.3 percent interest. Assume she withdraws
$10,000 today and another $10,000 one year from today. If she waits and withdraws the remaining
entire balance four years from today, what will be the amount of that withdrawal?
$20,676.53(Explanation: $38,654 = $10,000 + $10,000/1.023 + C4/1.0234 C4 = $20,676.53)
243. Anna's grandmother established a trust and deposited $250,000 into it. The trust pays a guaranteed
4.25 percent rate of return. Anna will receive all the interest earnings on an annual basis and a
charity will receive the principal amount at Anna's passing. How much income willAnna receive each
year? $10,625 (C = $250,000(.0425))
244. Anne is considering two independent projects with 2-year lives. Both projects have been assigned a
discount rate of 13 percent. She has sufficient funds to finance one or both projects. Project A costs
$38,500 and has cash flows of $19,400 and $28,700 for Years 1 and 2, respectively. Project B costs
$41,000, and has cash flows of $25,000 and $22,000 for Years 1 and 2, respectively. Which project,
or projects, if either, should you accept based on the profitability index method and what is the
correct reason for that decision? PIA = ($19,400 / 1.13 + $28,700 / 1.132) / $38,500 = 1.03; PIB =
($25,000 / 1.13 + $22,000 / 1.132) / $41,000 = .96; e.You should only accept project A since it has the
largest PI and the PI exceeds one
245. Annuities where the payments occur at the end of each time period are called _____, whereas
_____ refer to annuity streams with payments occurring at the beginning of each time
period. ordinary annuities; annuities due
246. Annuities where the payments occur at the end of each time period are called , whereas refer
to annuity streams with payments occurring at the beginning of eachtime period. ordinary annuities;
annuities due
247. Another name for idiosyncratic risk is ______ risk. Unsystematic & diversifiable
248. Another term for a partial amortization loan is a(n) ____ loan. Balloon-bullet
249. Another term for an annuity due is _____. an annuity in advance

AR
250. As of 2008, which one of the following statements concerning corporate income taxes is correct? A
firm's tax is computed on an incremental basis.
251. As seen on an income statement: depreciation reduces both the pretax income and the net income.
252. As the compounding frequency increases, the future value will increase
253. As we add more diverse securities to a portfolio, the risks of the portfolio willdecrease. total and
unsystematic
254. As we add more securities to a portfolio, the will decrease: unsystematic risk.
255. Aspens is preparing a bond offering with a coupon rate of 5.5 percent. The bonds will be repaid in
10 years. The company plans to issue the bonds at par value and pay interest annually. Which one of
the following statements is correct? Assume a face value of $1,000. At issuance, the bond's yield to
maturity is 5.5 percent.
256. Aspens is preparing a bond offering with a coupon rate of 5.5 percent. The bonds will be repaid in 10
years. The company plans to issue the bonds at par value and pay interest annually.Which one of the
following statements is correct? Assume a face value of $1,000. At issuance, the bond's yield to
maturity is 5.5 percent.
257. Assets are listed on the balance sheet in order of: decreasing liquidity.
258. Assume a cash flow of $82,400 in the first year and $148,600 in the second year. Also assume a
present value of $303,764.34 at a discount rate of 12.75 percent. What is the cash flowin the third
year if that is the only other cash flow? $163,100 (Explanation: $303,764.34 = $82,400/1.1275 +
$148,600/1.12752 + C3/1.12753 C3 = $163,100)
259. Assume a firm has a market value equal to its book value, excess cash of $900, other
assets of $16,500, and equity valued at $17,400. The firm has 1,200 shares of stock
outstanding and net income of $15,400. If the firm spends all of its excess cash on share
repurchases, how many shares will beoutstanding after the repurchases are completed?
(Round your answer up tothe nearest whole share) 1,138 shares : Price per share =
$17,400/1,200 Price per share = $14.50 Number of shares repurchased = $900/$14.50
Number of shares repurchased = 62.07 New number of shares outstanding = 1,200 −
62.07 New number of shares outstanding = 1,137.93, or 1,13
260. Assume an annuity will pay $1,000 a year for five years with the first payment occurring in Year 4,
that is, four years from today. When you compute the present value of that annuity usingthe PV
formula, the PV will be as of which point in time? Year 3
261. Assume Downtown Markets latest balance sheet shows $15,000 in the common stock
account, $315,000 in the capital in excess of par account, and $189,000 in the retained
earnings account. What will be the capital in excess of par account value if the firm does a
5-for-3 stock split? $315,000
262. Assume mortgage rates increase to 7.5 percent and you borrow $329,000 for 30 years topurchase a
house. What will your loan balance be at the end of the first 15 years of monthly payments?
$248,153.73

Explanation: $329,000 = C{[1 − 1/(1 + .075/12)30(12)]/(.075/12)}

C = $2,300.42
PV = $2,300.42{[1 − 1/(1 + .075/12)(30 − 15)(12)]/(.075/12)}
PV = $248,153.73
263. Assume personal tax rates are lower than corporate tax rates. From a tax-paying shareholder point
of view, how should a firm spend its excess cash once it has funded all positive net present value
projects? repurchase shares
264. Assume personal tax rates are lower than corporate tax rates. From atax-paying
shareholder point of view, how should a firm spend its excess cash once it has funded all
positive net present value projects? Repurchase shares
265. Assume that you are using the dividend growth model to value stocks. If you expect the market rate
of return to increase across the board on all equity securities, then you should also expect the:
market values of all stocks to decrease, all else constant.
266. Assume you are looking at an opportunity set representing many securities. Where would the
minimum variance portfolio be located in relation to this set? At the far-left point of the set
267. Assume you are using the dividend growth model to value stocks. If you expect the marketrate of
return to increase across the board on all equity securities, then you should also expect the: market
values of all stocks to decrease.
268. Assume you borrow $12,000 for 5 years with equal annual repayments. If the interest rate onthe
actual loan turns out to be higher than you anticipated, then the: annual payments will be higher
than you anticipated.
269. Assume you borrow $6,600 for three years. How much will you still owe after the three yearsif you
pay all of the payments as set forth in the loan's amortization schedule? $0
270. Assume you could invest $25,000 at a continuously compounded rate of 10 percent. Whatwould
your investment be worth at the end of 50 years? $3,710,329 (FV = $25,000e.10(50))
271. Assume you graduate with $31,300 in student loans at an interest rate of 5.25 percent,
compounded monthly. If you want to have this debt paid in full within three years, how muchmust
you pay each month? $941.61 ($31,300 = C{[1 − 1/(1 + .0525/12)3(12)]/(.0525/12)})
272. Assume you own 300 shares of ABC stock and receive a stock dividend of5 percent. As a
result, the number of shares you own will change to shares while your total wealth
will increase by percent. 315; 0 New number of shares = 300(1.05)New number of
shares = 315
273. Assume you use all available methods to evaluate projects. If there is a conflict in the indicated
decision between two mutually exclusive projects due to the IRR-based indicator, you should: ignore
the IRR and rely on the decision indicated by the NPV method.
274. Assume your employer will contribute $50 a week for twenty years to your retirement plan. At a
discount rate of 5 percent, compounded weekly, what is this employee benefit worth to youtoday?
$32,861.08 (APV = $50{[1 − 1/(1 + .05/52)20(52)]/(.05/52)})

AT
275. At a discount rate of 5 percent, which one of the following is the correct formula forcomputing the
PV of $1 to be received one year from today? $1/1.05
B
276. B&K Enterprises will pay an annual dividend of $2.08 a share on its common stock next year. Last
week, the company paid a dividend of $2.00 a share. The company adheres to a constant rate of
growth dividend policy. What will one share of B&K common stock be worth ten years from now if
the applicable discount rate is 8%? $76.97

277. Baker Foods made two announcements concerning its common stock today. First, the company
announced that the next annual dividend has been set at $3.20 a share. Secondly, the company
announced that all future dividends after that will increase by 2% annually. What is the maximum
amount you should pay today to purchase one share of Baker's stock if your goal is to earn a 9% rate
of return? $45.71
278. Based on the capital asset pricing model (CAPM) there is generally ___ relationship between beta
and the expected return on a security. a positive
Reason:
The market risk premium is the slope of the CAPM. As long as the market risk premium is positive, the
relationship between beta and the expected return on a security will be positive.
279. Based on the concept of the clientele effect, which one of these combinations correctly aligns an
investor group with its preferred type of stocks? tax-free institutions; medium-payout stocks
280. Based on the concept of the clientele effect, which one of these combinations correctly
aligns an investor group with its preferred type ofstocks? Tax-free institutions; medium-
payout stocks
281. Based on the profitability index (PI) rule, should a project with the following cash flows be accepted
if the discount rate is 8%? Why or why not? No; because the PI is .992.
282. BC 'n D just paid its annual dividend of $.60 a share. The projected dividends for the next five years
are $.30, $.50, $.75, $1.00, and $1.20, respectively. After that time, the dividends willbe held

constant at $1.40 per share. What is this stock worth today at a discount rate of 14 percent? P0 =

$.30/1.14 + $.50/1.142 + $.75/1.143 + $1.00/1.144 + $1.20/1.145 +($1.40/.14)/1.145 = $7.56

283. BC 'n D just paid its annual dividend of $.60 a share. The projected dividends for the next five years
are $.30, $.50, $.75, $1.00, and $1.20, respectively. After that time, the dividends will be held
 constant at $1.40. What is this stock worth today at a 6% discount rate? $20.48

284. Beaksley, Inc. is a very cyclical type of business which is reflected in its dividend policy. The firm pays
a $2.00 a share dividend every other year. The last dividend was paid last year. Five years from now,
the company is repurchasing all of the outstanding shares at a price of $50 a share. At an 8% rate of
return, what is this stock worth today? B. $37.21
285. Beatrice invests $1,000 in an account that pays 4% simple interest. How much more could she have
earned over a five-year period if the interest had compounded annually? $16.65 (Ending value at 4%
simple interest = $1,000 + ($1,000  .04  5) = $1,200.00; Ending value at 4% compounded annually
= $1,000  (1 +.04)5 = $1,216.65;Difference = $1,216.65 - $1,200.00 = $16.65)

286. Beatrice invests $1,000 in an account that pays 5 percent simple interest. How much morecould she
have earned over a period of 10 years if the interest had compounded annually? $128.89
(Explanation: FVSimple = $1,000 + $1,000(.05)(10) FVSimple = $1,500 -FV = $1,000(1.0510) FV =
$1,628.89- Difference = $1,628.89 − 1,500 Difference = $128.89)
287. Benson's established a trust fund that provides $125,000 in college scholarships each year. The trust
fund earns 6.15 percent and distributes only its annual income. How much money didBenson's
contribute to establish this fund? $2,032,520 (PV = $125,000/.0615)
288. Berkshire Homes recently paid $2.20 as an annual dividend. Future dividends are projected at $2.30,
$2.50, and $2.75 over the next 3 years, respectively. Beginning four years from now, the dividend is
expected to increase by 3% annually. What is one share of this stock worth to you today if you
require an 11% rate of return? $32.00
289. Bernstein's proposed project has an initial cost of $128,600 and cash flows of $64,500, $98,300, and
−$15,500 for Years 1 to 3 respectively. If all negative cash flows are moved to Time 0 at a discount
rate of 10 percent, what is the modified internal rate of return? -128.600 + 64.500/(1+IRR) +
98.300/(1+IRR)^2 - 15.500/(1+ 0.1)^3 =9.82%
290. Beta measures the ____ risk of a security. systematic
291. Beta measures: how an asset covaries with the market.
292. Bet'R Bilt Bikes just announced that its annual dividend for this coming year will be $2.42 a share
and that all future dividends are expected to increase by 2.5% annually. What is the market rate of

return if this stock is currently selling for $22 a share? 13.5%

293. BGL Enterprises increases its operating efficiency such that costs decrease while sales remain
constant. As a result, given all else constant, the: return on equity will increase.
294. Bikes and More just announced its next annual dividend will be $2.42 a share and all futuredividends
will increase by 2.5 percent annually. What is the market rate of return if this stock isurrently selling
for $22 a share? R = $2.42/$22 + .025= .1350, or 13.50%
295. Bill Bailey and Sons pays no dividend at the present time. The company plans to start paying an
annual dividend in the amount of $.30 a share for two years commencing two years from today.
After that time, the company plans on paying a constant $1 a share dividend indefinitely. Given a
required return of 14%, what is the value of this stock? $5.25

296. Binder and Sons borrowed $138,000 for three years from their local bank and now they are paying
monthly payments that include both principal and interest. Paying off debt by making instalment
payments, such as this firm is doing, is referred to as: amortizing the debt.
297. Black Stone Mills has an enterprise value ratio of 9.8, a profit margin of 6.5 percent, sales of
$946,200, costs of $631,400, depreciation of $17,900, interest expense of $4,500, and a total tax
rate of 23 percent. What is the value of the enterprise? $3,085,040 (Explanation: Enterprise value =
9.8($946,200 − 631,400) Enterprise value = $3,085,040)
298. Bob's Auto Group has 25,000 shares of stock outstanding at a marketprice of $4.50 a
share. What will be the market price per share if the company does a 1-for-5 reverse
stock split? $22.50 Market price = $4.50(5/1)Market price = $22.50
299. Bond dealers report all of their trading information using the system known as: TRACE.
300. Bond dealers report all of their trading information using the system known as: TRACE.
301. Book value: is based on historical cost.
302. BPJ stock is expected to earn 14.8 percent in a recession, 6.3 percent in a normal economy, and lose
4.7 percent in a booming economy. The probability of a boom is 20 percent while the probability of
a normal economy is 55 percent. What is the expected rate of return on this stock?6.23 percent
303. Bradley Snapp has deposited $7,000 in a guaranteed investment account with a promised rate of 6%
compounded annually. He plans to leave it there for 4 full years when he will make a down payment
 on a car after graduation. How much of a down payment will he be able to make? $8,837.34 ($7,000
(1.06)4 = $8,837.34)
304. Brad's Company has equipment with a book value of $500 that could be sold today at a 50%
discount. Its inventory is valued at $400 and could be sold to a competitor for that amount. The firm
has $50 in cash and customers owe it $300. What is the accounting value of its liquid assets? $750
(Liquid assets = $400 + $50 + $300 = $750)
305. Brewster Mills has total revenues of $684,350, costs of goods sold of $472,500, net incomeof
$11,520, and average inventory of $91,600. What is the days' sales in inventory? 70.76 days
(Explanation: Days' sales in inventory = 365/($472,500/$91,600) Days' sales in inventory = 70.76 days)
306. Browning's has a debt-equity ratio of .47. What is the equity multiplier?1.47 (Explanation: EM = Total
assets/Total equity - EM = Total equity/Total equity + Total debt/Total equity EM = 1 + .47 -EM =
1.47)
307. Brown's Market has 15,000 shares of stock outstanding with a par value of $1 per share
and a market value per share of $8. The firm just announceda stock dividend of 10
percent. What will be the market price per share after the dividend? $7.27 Market price
per share = [15,000($8)]/[15,000(1.10)]Market price per share = $7.27 This can also be
simplified to: Market price per share = $8/1.10Market price per share = $7.27
308. Butterup's 'N More wants to offer some preferred stock that pays an annual dividend of $2.00 a
share. The company has determined that stocks with similar characteristics provide a 9% rate of
return. What price should Butterup's expect to receive per share for this stock offering? $22.22
309. By definition, the market's beta is ___.1
Reason:
The market's beta is 1 because beta is a measure of the movement of the security in relation to the
market. So when the market moves 1%, the market moves 1%.

C
310. Cado Industries has total debt of $6,800 and a debt-equity ratio of .36. What is the value ofthe total
assets? $25,689 (Explanation: Total equity = $6,800/.36 Total equity = $18,889 Total assets = $6,800
+ 18,889 Total assets = $25,689)
311. Camille, your boss, insists that only projects that can return at least $1.10 in today's dollars for every
$1 invested can be accepted. She also insists on applying a 10% discount rate to all cash flows. Based
on these criteria, you should: reject the project because the PI is 1.05
312. Can't Hold Me Back, Inc. is preparing to pay its first dividends. It is going to pay $1.00, $2.50, and
$5.00 a share over the next three years, respectively. After that, the company has stated that the
 annual dividend will be $1.25 per share indefinitely. What is this stock worth to you per share if you

demand a 7% rate of return? $21.78

313. Capital structure decisions include which of the following? determining the number of shares of
stock to issue
314. Carlos owns 500 shares of Samson Timber. This year, there are 3 open seats on the board of
directors. If Samson uses cumulative voting, Carlos will receive a total of votes of which he can
cast a maximum of votes for one candidate. 1,500; 1,500
315. Casey just purchased a $1,000 face value bond at an invoice price of $1,288.16. The bond has a
coupon rate of 6.2 percent, semiannual interest payments, and the next interest payment occurs
one month from today. Of the amount paid for the bond, what was the dollar amount of the
accrued interest? $25.83
316. Casey just purchased a $1,000 face value bond at an invoice price of $1,288.16. The bond has a
coupon rate of 6.2 percent, semiannual interest payments, and the next interest payment occurs
one month from today. Of the amount paid for the bond, what was the dollar amount ofthe accrued
interest? $25.83
317. Cash flow from assets is also known as the firm's: free cash flow.
318. Cash flow to stockholders is defined as: cash dividends plus repurchases of equity minus new equity
financing.
319. Cash flow to stockholders must be positive when: the dividends paid exceed the net new equity
raised
320. Catherine's Consulting paid dividends of $3,300 and total equity of $39,450. The debt-equityratio is
1 and the plowback ratio is 40 percent. What is the return on assets? 7.23 percent (Explanation: A
debt-equity ratio of 1 means that total debt equals total equity while a plowback ratio of 40 percent
means that the dividends were 60 percent of net income. ROA = ($3,300/.60)/($39,450 + 39,450) ROA
= .0697, or 6.97%)
321. Cf*{[(1+r)t−1]/r} is the formula for the _______ value of an annuity. future
322. Characteristics of a sensible dividend policy include: All of the above (over time pay out all free cash
flows & set the current regular dividend consistent with a long-run target payout ratio & use
repurchases to distribute transitory cash flow increases)
323. Charlie's Fish Market is planning on paying annual dividends of $1.20, $1.35, and $1.50 over the next
3 years, respectively. After that, Charlie's plans to pay a constant dividend of $1.75 per share each
 year. To compute the value of Charlie's stock today, you should first determine the value of the stock
at the end of year. 3
324. China Imports paid a $1.50 per share annual dividend last week. Dividends are expected to increase
by 4% annually. What is one share of this stock worth to you today if the appropriate discount rate is
12%?$19.50
325. Chocolate and More offers a bond with a coupon rate of 6 percent, semiannual payments, and a
yield to maturity of 7.73 percent. The bonds mature in 9 years. What is the market price of a $1,000
face value bond? $889.29
326. Chocolate and More offers a bond with a coupon rate of 6 percent, semiannual payments, and a
yield to maturity of 7.73 percent. The bonds mature in 9 years. What is the market price ofa $1,000
face value bond? $889.29
327. City Movers announced its next annual dividend will be $.40 a share. The following dividends will be
$.60, and $.75 a share annually for the following two years, respectively. Afterthat, dividends are
projected to increase by 3.5 percent per year. How much is one share of this stock worth at a rate of

return of 12 percent? P0 = $.40/1.12 + $.60/1.122 + $.75/1.123 + {[$.75(1.035)]/(.12 − .035)}/1.123=

$7.87
328. Common stockholders have the right to: vote on any proposed acquisition or merger.
329. Compound interest: allows for the reinvestment of interest payments.
330. Consider a bond which pays 7% semiannually and has 8 years to maturity. The market requires an
interest rate of 8% on bonds of this risk. What is this bond's price? $941.74
331. Consider a bond with a coupon rate of 8 percent that pays semiannual interest and matures in eight
years. The market rate of return on bonds of this risk is currently 11 percent. What is the current
value of a $1,000 face value bond? $843.07
332. Consider a bond with a coupon rate of 8 percent that pays semiannual interest and matures ineight
years. The market rate of return on bonds of this risk is currently 11 percent. What is the current
value of a $1,000 face value bond? $843.07
333. Consider an investment with an initial cost of $20,000 and is that expected to last for 5 years. The
expected cash flows in years 1 and 2 are $5,000, in years 3 and 4 are $5,500 and in year 5 is $1,000.
The total cash inflow is expected to be $22,000 or an average of $4,400 per year. Compute the
payback period in years. 3.82 years
334. Corporate bylaws: determine how a corporation regulates itself.
335. Correlation is expressed as the symbol: ρ.
336. Currently, you own 5% of the common stock of Alberta Industries. The right which grants you the
ability to maintain your current level of ownership should the company opt to issue additional
shares of stock is called the right. preemptive
337. Currently, you own a municipal bond with a yield to maturity of 4.86 percent. If you are in the 24
percent tax bracket, what is your equivalent corporate tax rate? Ignore state taxes. 6.39 percent
338. Currently, you own a municipal bond with a yield to maturity of 4.86 percent. If you are inthe 24
percent tax bracket, what is your equivalent corporate tax rate? Ignore state taxes. 6.39 percent

D
339. Daily Movers is a relatively new firm. The company paid its first annual dividend yesterday in the
amount of $.40 a share. The company plans to double each annual dividend payment for the next 2
years. After that time, it is planning on paying a constant $2 per share indefinitely. What is one share
of this stock worth today if the market rate of return on similar securities is 14.5%? $12.44
340. Danielsen's has 15,000 shares of stock outstanding and projected annual free cash flows of $48,200,
$57,900, $71,300, and $72,500 for the next four years, respectively. After that, the cashflows are
expected to increase at a constant annual rate of 1.6 percent. What is the current value per share of

stock at a discount rate of 15.4 percent? P0 = {$48,200/1.154 + $57,900/1.1542 + $71,300/1.1543 +

$72,500/1.1544 +[$72,500(1.016)/(.154 − .016)]/1.1544}/15,000 = $31.57

341. Davidsons has 15,000 shares of stock outstanding with a par value of $1per share and a
market value of $45 per share. The balance sheet shows $15,000 in the common stock
account, $158,000 in the capital in excess of par account, and $132,500 in the retained
earnings account. The firm just announced a stock dividend of 50 percent. What is the
value of the retainedearnings account after the dividend? $125,000 Retained earnings =
−[($15,000/$1)(.50)($1)] + $132,500 Retained earnings = $125,000
342. Days' sales in inventory is measured as: 365 days divided by the inventory turnover.
343. DC Motors recently paid $1.10 as its annual dividend. Future dividends are projected at $1.06,
$1.02, and $1.00 over the next three years, respectively. After that, the dividend is expected to
decrease by 2 percent annually. What is one share of this stock worth at a rate ofreturn of 17

percent? P0 = $1.06/1.17 + $1.02/1.172 + $1.00/1.173 + ({$1.00[1 + (−.02)]}/(.17 −(−.02))/1.173 =

$5.50
344. DD&L has a market value equal to its book value, excess cash of $400, other assets of
$7,600, equity of $8,000, 200 shares of stock outstanding, and net income of $900. The
 firm has decided to pay out all its excess cash as a cash dividend. What will be the
earnings per share after the dividend ispaid? $4.50 EPS = $900/200EPS = $4.50
345. Dealer markets: are called over-the-counter markets.
346. Debt is a contractual obligation that: Both B and C ( requires a repayment of a stated amount and
interest over the period & allows the bondholders to sue the firm if it defaults)
347. Decisions made by financial managers should primarily focus on increasing which one ofthe
following? market value per share of outstanding stock
348. Deep Falls Timber has net sales of $642,100, net income of $50,800, dividends paid of $r12,700,
total assets of $658,000, and total equity of $444,400. What is the internal growth rate? 6.15
percent (Explanation: Internal growth rate = {($50,800/$658,000)[1 − ($12,700/$50,800)]}/(1
−{($50,800/$658,000)[1 − ($12,700/$50,800)]}); Internal growth rate = .0615, or 6.15%)
349. Deep Water Drilling has 160,000 shares of stock outstanding at a market price of $109 a
share. The company has just announced a 7-for-3 stock split. What will be the market price
per share after the split? $46.71
350. Deltona Homes common stock sells for $52.64 a share. The total return is 11.3%. The company just
paid their annual dividend of $2.10. What is the dividend growth rate? 7.03%
351. Denise will receive annual payments of $10,000 for the next 25 years. The discount rate is 6.8
percent. What is the difference in the present value of these payments if they are paid at the
beginning of each year rather than at the end of each year? $8,069.29

Explanation: APVADue = $10,000[(1 - 1/1.06825)/.068](1.068)

APVADue = $126,735.21
APV = $10,000[(1 −
1/1.06825)/.068]APV =
$118,665.92
Difference = $126,735.21 −
118,665.92Difference = $8,069.29
352. Depreciation: reduces both taxes and net income.
353. Depreciation: is a noncash expense that is recorded on the income statement.
354. Dexter's has a fixed dividend payout ratio of 40 percent, current net income of $5,200, total assets of
$56,400, and total equity of $21,600. Given this information, what estimate would you use as the
dividend growth rate if the last dividend paid was $.464 per share? g = (1 − .40)($5,200/$21,600) =
.1444, or 14.44%
355. Differential growth refers to a firm that increases its dividend by: a rate which is most likely not
sustainable over an extended period of time.
356. Discount Mart has $876,400 in sales with a profit margin of 3.8 percent. There are 32,500shares of
stock outstanding at a market price per share of $21.60. What is the price-earnings ratio? 21.08
(Explanation: PE ratio = $21.60/{[.038($876,400)]/32,500} PE ratio = 21.08)
357. Discounting cash flows involves: discounting all expected future cash flows to reflect the time value
of money.
358. Discounting is the process of converting ______ dollars into a ______ value. future; present
359. Diversification can effectively reduce risk. Once a portfolio is diversified, the type of risk remainingis:
risk related to the market portfolio.
360. Diversification will not lower the risk: systematic risk.
361. Dividends are relevant and dividend policy irrelevant when: cash dividends are increased for one
year while others are held constant, thus causing an increase in stock price, and dividend policy
establishes the trade-off between dividends at different dates.
362. Dividends per share is equal to dividends paid: divided by the total number of shares outstanding
363. Dividends per share: are equal to the amount of net income distributed to shareholders divided by
the number of shares outstanding.
364. DL Motors has sales of $22,400, net income of $3,600, net fixed assets of $18,700, inventoryof
$2,800, and total current assets of $6,300. What is the common-size statement value of inventory?
11.20 percent (Explanation: Common-size inventory = $2,800/($6,300 + 18,700) -Common-size
inventory = .1120, or 11.20%)
365. Doctors-On-Call, a newly formed medical group, just paid a dividend of $.50. The company's
dividend is expected to grow at a 20% rate for the next 5 years and at a 3% rate thereafter. What is
the value of the stock if the appropriate discount rate is 12%?$11.17
366. Donaldson's purchased some property for $1.2 million, paid 25 percent down in cash, and financed
the balance for 12 years at 7.2 percent, compounded monthly. What is the amount ofeach monthly
mortgage payment? $9,351.66 Explanation: Amount financed = $1,200,000(1 − .25) = $900,000;
$900,000 = C{[1 − 1/(1 + .072/12)12(12)]/(.072/12)})
367. DowntownDeli has 2,000 shares of stock outstanding with a par value of $1 per share
and a market value of $26 per share. The balance sheet shows $2,000 in the common
stock account, $9,500 in the capital in excess of paraccount, and $14,500 in the retained
earnings account. The firm just announced a stock dividend of 75 percent. What is the
market value per share after the dividend? ) $14.86 Market value per share =
[2,000($26)]/[($2,000/$1)(1.75)] Market value per share = $14.86
E
368. Earnings per share is equal to: net income divided by the total number of shares outstanding.
369. Earnings per share will increase if net income increases and number of shares remains constant.
370. Edie's Health Supply has 125,000 shares of stock outstanding with a parvalue of $1 per
share and a market value of $5 a share. The company has retained earnings of $76,500
and capital in excess of par of $340,000. The company just announced a 1-for-5 reverse
stock split. What will be the par value per share after the split? $10.00 Par value per
share = $1(5/1)Par value per share = $5
371. Eleven years ago, a guitar cost $1,800. Today, that same guitar costs $3,650. What has beenthe
inflation rate on this instrument? 6.64 percent ($3,650 = $1,800(1 + r)11 R = .0664, or 6.64%
372. Engine Builders stock sells for $24.20 a share. The firm just paid an annual dividend of $2per share
and has a long-established record of increasing its dividend by a constant 2.5 percentannually. What
is the market rate of return on this stock? R = [$2(1.025)]/$24.20 + .025= .1097, or 10.97%
373. Enterprise value equals the: combined market value of debt and equity minus excess cash.
374. Enterprise value is based on the: market value of interest-bearing debt plus the market value of
equity minus cash.
375. eslie purchased 100 shares of GT stock on Wednesday, June 7th. Marti purchased 100 shares of GT
stock on Thursday, July 8th. GT declared a dividend on June 20th to shareholders of record on July
12th that is payable on August 1st. Which one of the following statements concerning the dividend
paid on August 1st is correct given this information? Leslie is entitled to the dividend but Marti is not.
376. Everson Importers has 1,500 shares of common stock outstanding of which Dino owns 500 shares.

The company has 3 open seats on the board of directors. Dino wishes to be elected to the board but
realizes that no one else will vote for him. To guarantee his election, Dino will have to own of
1,500 plus 1 of the shares if the firm uses straight voting versus owning of 1,500 plus 1 of the
th
shares if the firm uses cumulative voting. 1/2; 1/4

F
377. F & D Industry's common stock sells for $43.05 a share and pays an annual dividend that increases
by 5% annually. The market rate of return on this stock is 10%. What is the amount of the last
dividend paid by F & D? $2.05
378. Face value is: None of the above (always higher than current price & always lower than current price
& the same as the current price & the coupon amount.)
379. Financial executives place the greatest importance on which one of these factors when setting
dividend policy? maintaining a consistent dividend policy
380. Financial executives place the greatest importance on which one of thesefactors when
setting dividend policy? Maintaining a consistent dividend policy
381. Financial managers should strive to maximize the current value per share of the existing stock
because: the current stockholders are the owners of the corporation
382. Financial managers should strive to maximize the current value per share of theexisting stock
because: they have been hired for the purpose of representing the interest of the current
shareholders.
383. Financial managers: are reluctant to cut dividends.
384. Financial planning models are most apt to omit: the timing, risk, and size of the cash flows.
385. Financial ratios that measure a firm's ability to pay its bills over the short run without undue stress
are known as _____ ratios. short-term solvency
386. Find the present value of $5,325 to be received in one period if the rate is 6.5%. $5,000.00
387. Firms generally: allow their dividend changes to lag their earnings changes.
388. Fixed payment loans are typically used for which of the following mortgages-student loans-
car loans
389. Fixed payments that result in a zero loan balance
390. Flo's Restaurant has sales of $418,000, total equity of $224,400, a tax rate of 23 percent, adebt-
equity ratio of .37, and a profit margin of 5.1 percent. What is the return on assets? 6.93 percent
(Explanation: ROA = [.051($418,000)]/[(1 + .37)($224,400)] ROA = .0693, or 6.93%)
391. For a diversified investor, what is the best way to measure the systematic risk of an individual
security? Beta
392. For a firm with a constant payout ratio, the dividend growth rate can be estimated as: Return on
retained earnings × Retention ratio.
393. For a highly diversified equally weighted portfolio with a large number of securities, the portfolio
variance is: the average covariance.
394. For a positive annual percentage rate (APR) and multiple (more than one) compounding periods per
year, the EAR is always ______ the APR. larger than
395. For a proposed purchase to be acceptable, the PV of the future cash flows must: equal or exceed the
cost of the purchase.
396. For a tax-paying firm, an increase in _____ will cause the cash flow from assets to increase.
Depreciation
397. For every 3% movement in the market, the market must move by: 3%
398. For investment projects, the internal rate of return (IRR): is the rate generated solely by the cash
flows of the investment.
399. Fred Flintlock wants to earn a total of 10% on his investments. He recently purchased shares of ABC
stock at a price of $20 a share. The stock pays a $1 a year dividend. The price of ABC stock needs to
_____ if Fred is to achieve his 10% rate of return. increase by 5%
400. Fred purchased a city lot for $39,900. That lot has appreciated at 6.5 percent annually and isnow
valued at $287,400. How long has Fred owned this lot? 29.11 years ($287,400 = $39,900(1.065)T)
401. Frederico's has a net income of $29,600, a total asset turnover of 1.4, total assets of $318,600, and a
debt-equity ratio of .35. What is the return on equity? 14.67 percent ( Explanation: ROE =
($29,600/$318,600)(1 + .35) ROE = .1254, or 12.54%)
402. Free cash flow is: cash that the firm is free to distribute to creditors and stockholders.
403. From a cash flow position, which one of the following ratios best measures a firm's ability to pay the
interest on its debts? cash coverage ratio
404. From a tax-paying investor's point of view, a stock repurchase: is more desirable than a cash
dividend.
405. From a tax-paying investor's point of view, a stock repurchase: is more desirable than a
cash dividend
406. From an investor's perspective, an optimal portfolio will ___. maximize expected return and minimize
risk
407. From highest to lowest, rank the following compounding periods effective annual rates Continuous
Weekly
Semiannual
Annual
408. Future equity risk premiums may not be equal to past equity risk premiums due to which of the
following factors? Future risk is different from historical risk. The risk aversion of investors will change
in the future.

G
409. George Jefferson established a trust fund that provides $150,000 in scholarships each year for
worthy students. The trust fund earns a 4.25% rate of return. How much money did Mr. Jefferson
contribute to the fund assuming that only the interest income is distributed? $3,529,411.77
410. Georgetown Supply has sales of $318,200, net income of $41,400, current assets of $118,400, net
fixed assets of $238,300, net working capital of $18,900, and long-term debt of $175,000. What is
 the equity multiplier?4.34 ( Explanation: Equity multiplier = ($118,400 + 238,300)/[$118,400 +
238,300 − ($118,400 − 18,900) − $175,000] ;Equity multiplier = 4.34)
411. Ginny Trueblood is considering an investment which will cost her $120,000. The investment
produces no cash flows for the first year. In the second year the cash inflow is $35,000. This inflow
will increase to $55,000 and then $75,000 for the following two years before ceasing permanently.
Ginny requires a 10% rate of return and has a required discounted payback period of three years.
Ginny should _______ this project because the discounted payback period is ______. reject; 3.97
years
412. Given a stated interest rate, which form of compounding will yield the highest effective rateof
interest? Continuous compounding
413. Given that the net present value (NPV) is generally considered to be the best method of analysis,
why should you still use the other methods? The other methods help validate whether or not the
results from the net present value analysis are reliable.
414. Graham and Harvey (2001) found that _____ and _____ were the two most popular capital
budgeting methods. Internal Rate of Return; Net Present Value
415. Graphing the NPVs of mutually exclusive projects over different discount rates helps
demonstrate: how decisions concerning mutually exclusive projects are derived.
416. Green Lumber has total sales of $387,200 on total assets of $429,600, current liabilities of $45,000,
and $24,000 of dividends paid on net income of $57,700. Assume that all costs, assets, and current
liabilities change spontaneously with sales. The tax rate and dividend payout ratios remain constant.
If the firm's managers project a firm growth rate of 12 percent for next year, what will be the
amount of external financing needed to support this level of growth? Assume thefirm is currently
operating at full capacity. $8,408 (Explanation: EFN = $429,600(.12) − $45,000(.12) − $57,700(1.12)[1
− ($24,000/$57,700)]; EFN = $8,408)
417. Growth can be reconciled with the goal of maximizing firm value: because growth must be an
outcome of decisions that maximize NPV
418. Gugenheim, Inc. offers a 7% coupon bond with annual payments. The yield to maturity is 5.85% and
the maturity date is 9 years. What is the market price of a $1,000 face value bond? $1,078.73

The
419. Guggenheim offers a bond with annual payments and a coupon rate of 5 percent. The yield to
maturity is 5.62 percent and the maturity date is 9 years away. What is the market price of one
$1,000 face value bond? D) $957.12
420. Guggenheim offers a bond with annual payments and a coupon rate of 5 percent. The yield to
maturity is 5.62 percent and the maturity date is 9 years away. What is the market price of one
$1,000 face value bond? $957.12

H
421. High Noon Sun, Inc. has a 5%, semiannual coupon bond with a current market price of $988.52. The
bond has a par value of $1,000 and a yield to maturity of 5.29%. How many years is it until this bond

matures? 4.5 years

422. Highland Lumber has net sales of $642,100, depreciation of $138,400, interest expense of $15,600,
cost of goods sold of $409,800, and taxes of $16,400. What is the cash coverage ratio?14.89
(Explanation: Days' sales in inventory = 365/($472,500/$91,600) Days' sales in inventory = 70.76 days)
423. Hilltop Markets will pay an annual dividend of $2.73 a share on its common stock next week. Last
year, the company paid a dividend of $2.60 a share. The company adheres to a constant rate of
growth dividend policy. What will one share of B&K common stock be worth 5 years from now if the
applicable discount rate is 9.5%?$77.43
424. Home Systems has sales of $312,800, cost of goods sold of $218,400, inventory of $46,300,and
accounts receivable of $62,700. How many days, on average, does it take the firm to both sell its
inventory and collect payment on the sale? 150.54 (Explanation: Days' sales in inventory =
365/($218,400/$46,300) Days' sales in inventory = 77.38 ;Days' sales in receivables =
365/($312,800/$62,700) Days' sales in receivables = 73.16;Total days' sales in inventory and
receivables = 77.38 + 73.16 ;Total days' sales in inventory and receivables = 150.54)
425. Homemade dividends are described by Modigliani and Miller to be the: re-arrangement of the firm's
dividend stream by investors buying or selling their holdings
426. Homer is considering a project which will produce cash inflows of $950 a year for 4 years. The
project has a 9% required rate of return and an initial cost of $2,900. What is the discounted
payback period? never
427. How are the unsystematic risks of two different companies in two different industries related?
There is no relationship.
Reason:
Unsystematic risk is specific only to a single company or industry. Thus, one company's unsystematic
risk will generally be unrelated to another company's systematic risk.
428. How long will it take to double your money at 10% per year? 7.2% (72/10)
429. How many variance and covariance terms will be needed in order to calculate the variance of a
portfolio consisting of 100 stocks? 100 variance terms and 9,900 covariance terms
Rationale:Var terms = 100Cov terms = N2 - N = 100^2 - 100 = 9,900
430. How much are you willing to pay for one share of stock if the company just paid an annual dividend
of $1.03, the dividends increase by 3 percent annually, and you require a rate of returnof 15
percent? $8.84 P0 = [$1.03(1.03)]/(.15 − .03) = $8.84

431. How much are you willing to pay for one share of stock if the company just paid an $.80 annual
dividend, the dividends increase by 4% annually and you require an 8% rate of return? $20.80

432. How much are you willing to pay today for one share of stock if the company just paid a $1.40
annual dividend, the dividends increase by 4% annually, and you require a 12% rate of return?
$18.20
433. How should a profitability index of zero be interpreted? project's cash flows subsequent to the initial
cash flow have a present value of zero.

I
IF
434. If $100 earns compound interest for 2 years at 10 percent per year, the future value will be
____.$121.00 (FV = $100 × 1.10^20
435. If a bond provides a real rate of return of 2.89 percent at a time when inflation is 3.21 percent, what
is the nominal rate of return on the bond? 6.19 percent
436. If a bond provides a real rate of return of 2.89 percent at a time when inflation is 3.21percent, what
is the nominal rate of return on the bond? 6.19 percent
437. If a bond's yield to maturity is less than its coupon rate, the bond will sell at a ________, and
increases in market interest rates will: premium; decrease this premium.
438. If a bond's yield to maturity is less than its coupon rate, the bond will sell at a , andincreases in
market interest rates will: premium; decrease this premium.
439. If a company paid a dividend of $0.40 last month and it is expected to grow at 7% for the next 6
years and then grow at 4% thereafter, the dividend expected in year 8 is ___.$0.65
440. If a firm bases its growth projection on the rate of sustainable growth, shows positive netincome,
and has a dividend payout ratio of 30 percent, then the: debt-equity ratio will remain constant while
retained earnings increase
441. If a firm decreases its operating costs, all else constant, then the: price-earnings ratio will decrease.
442. If a firm decreases its operating costs, all else constant, then: both the return on assets and the
return on equity increase.
443. If a firm produces a 10% return on assets and also a 10% return on equity, then the firm: has no debt
of any kind.
444. If a firm produces a return on assets of 15 percent and also a return on equity of 15 percent,then
the firm: Has no debt of any kind.
445. If a project has a net present value equal to zero, then: I. the present value of the cash inflows
exceeds the initial cost of the project.- II. the project produces a rate of return that just equals the
rate required to accept the project.-II. the project is expected to produce only the minimally
required cash inflows.-IV. any delay in receiving the projected cash inflows will cause the project to
have a negative net present value. II, III, and IV only
446. If a project is assigned a required rate of return equal to zero, then: the timing of the project's cash
flows has no bearing on the value of the project.
447. If a stock pays a constant annual dividend then the stock can be valued using the: perpetuity present
value formula.
448. If a stock portfolio is well diversified, then the portfolio variance: may be less than the variance of
the least risky stock in the portfolio.
449. If investors are risk averse, it is reasonable to assume that the risk premium for the stock market will
be: positive
Reason:
If investors are averse to risk, they will demand higher returns from the market, thereby meaning
that the risk premium will be positive (greater than zero).
450. If investors have homogeneous expectations, they ___. all possess the same estimates regarding
expected returns, variances, and covariances
Reason:
Risk aversion is not a component of homogeneous expectations.
451. If investors possess homogeneous expectations over all assets in the market portfolio, when riskless
lending and borrowing is allowed, the market portfolio is defined to: All of the above ( be the same
portfolio of risky assets chosen by all investors & have the securities weighted by their market value
proportions & be a diversified portfolio)
452. If its yield to maturity is less than its coupon rate, a bond will sell at a _____, and increases in market
interest rates will _____. premium; decrease this premium.
453. If Portfolio P has a lower expected return but a higher standard deviation than the minimum
variance portfolio, we say that Portfolio P is ______ by the minimum variance portfolio. dominated
454. If reinvestment of interest or dividends does not occur, then the future value of an investment will
be _____ and the realized yield will be ____ than if reinvestment had occurred. lower; lower
455. If shareholders want to know how much profit a firm is making on their entire investment in the
firm, the shareholders should look at the: return on equity.
456. If stockholders want to know how much profit the firm is making on their entire investmentin that
firm, the stockholders should refer to the: return on equity.Assume BGL Enterprises increases its
operating efficiency by lowering its costs whileholding its sales constant. As a result, given all else
constant, the: return on equity will increase.
457. If the correlation between two stocks is +1, then a portfolio combining these two stocks will have a
variance that is: equal to the weighted average of the two individual variances.
458. If the correlation between two stocks is −1, the returns on the stocks: move perfectly opposite to one
another.
459. If the correlation between two stocks is -1, the returns: move perfectly opposite one another.
460. If the covariance between stocks C and D is -.05, what is the correlation between these stocks?
Assume the standard deviation of returns is .45 for Stock C and .30 for Stock D. -.05/(.45 × .30) = -.37
461. If the covariance of stock 1 with stock 2 is - .0065, then what is the covariance of stock 2 with stock
1? -0.0065
462. If the covariance of Stock A with Stock B is .20, then what is the covariance of Stock B withStock A?
.20
463. If the economy booms, RTF, Inc. stock is expected to return 10%. If the economy goes into a
recessionaryperiod, then RTF is expected to only return 4%. The probability of a boom is 60% while
the probability of a recession is 40%. What is the variance of the returns on RTF, Inc. stock? .000864
(E(r) = (.60 × .10) + (.40 ×.04) = .06 + .016 = .076; Var = .60 × (.10 - .076)2 + .40 × (.04 - .076)2 =
.0003456 + .0005184 = .000864)
464. If the expected return is 10 percent and the standard deviation is 12 percent, what is the range of
returns that will occur about 68 percent of the time? -2% to 22%
10% ± 12% = -2% to 22%
465. If the expected return of a portfolio is 15 percent and the standard deviation of the portfolio is 10
percent, then the 68 percent probability range is ____ percent. +5 to 25
Reason:
To have a 68 percent probability of occurring, the outcome must be between + and - one standard
deviation of the mean. The mean is 15% and the SD is 10%, so investors can be 68% sure of a return
between 5% (15%-10%) and 25% (15%+10%).
466. If the issuer of a stock receives the proceeds from a sale of that issuer's stock, then the sale was
conducted in the primary market.
467. If the variance of a portfolio increases, then the portfolio standard deviation will _____. increase
468. If the variance of a portfolio is .0025, what is the standard deviation? Reason:
σp= .0025.5= .05, or 5%
469. If the variance of a security is 0.01545, what is the standard deviation? .1243
470. If there is a conflict between mutually exclusive projects due to the IRR, one should: depend on the
NPV as it will always provide the most value.
471. If you have a choice to earn simple interest on $10,000 for three years at 8% or annually
compounded interest at 7.5% for three years which one will pay more and by how

much? Compound interest by $22.97

472. If you ignore taxes and transaction costs, a stock repurchase will: I, II, and IV only
I. reduce the total assets of a firm.
II. increase the earnings per share.
III. reduce the PE ratio more than an equivalent stock dividend.
IV. reduce the total equity of a firm.
473. If you invest $100 at a stated annual rate of 10 percent compounded quarterly, how much more
money will you have in 10 years than if the rate was compounded annually? $9.13
($100 × (1 + .10/4)^40- $100 × (1.10)^10)
474. If you invest $2,500 today, an investment guarantees you will have $3,600 four years fromtoday.
What rate of interest will you earn? 9.54 percent (Explanation: $3,600 = $2,500(1 + r)4 r = .0954, or
9.54%)
475. If you want to increase your purchasing power by investing in a bond, then: you must earn a positive
real rate of return on that bond.
476. If you want to increase your purchasing power by investing in a bond, then: you must earn a positive
real rate of return on that bond.
477. If you want to review a project from a benefit-cost perspective, you should use the _______ method
of analysis. profitability index
478. Ignore commissions, taxes, and other imperfections. If a firm substitutes a repurchase for a cash
dividend, the primary difference will be an increase in the earnings per share.
479. Ignore commissions, taxes, and other imperfections. If a firm substitutes a repurchase for a
cash dividend, the primary difference will be an increase in Which one of the following is
not a reason why firms choose repurchases rather than dividends? Conserve cash
480. Ignoring capital gains as an alternative, the tax law changes in 2003 tend to favor a: higher dividend
policy.
481. Ignoring taxes and all else held constant, the market value of a stock should decrease by the amount
of the dividend on the: ex-dividend date.
482. Ignoring taxes and all else held constant, the market value of a stockshould decrease by
the amount of the dividend on the: ex-dividend date.

IN
483. In a reverse stock split the: number of shares outstanding decreases while the book
value of owners'equity is unchanged.
484. In a reverse stock split: the number of shares outstanding decreases but owners' equity is
unchanged.
485. In actual practice, managers may use the: I. IRR because the results are easy to communicate and
understand -II. payback because of its simplicity - III. net present value because it is considered by
many to be the best method of analysis. I, II, and III
486. In an efficient market, ignoring taxes and time value, the price of stock should: decrease by the
amount of the dividend immediately on the ex-dividend date.
487. In the context of a portfolio of two securities, the opportunity set ___. Shows the range of risk-
return combinations, based on various weights for the two securities
488. In the financial planning model, the external financing needed (EFN) as shown on a proforma
balance sheet is equal to the changes in assets: minus the changes in both liabilities and equity.
489. In the formula for the future value of an annuity, the expression in brackets is equal to the Future
value interest factor for an annuity
490. In the formula, P3 = Dx/(R − g), the dividend is for period: four.

491. Inside quotes on a stock are: prices available only to stock market employees.
492. Insider trading is: illegal.
493. Interest rate risk ________ as the time to maturity decreases and ________ as the coupon rate
decreases. decreases; increases
494. Interest rate risk as the time to maturity decreases and as the couponrate decreases.
decreases; increases
495. Investors cannot attain a portfolio below the feasible set or opportunity set because they cannot
____. increase the standard deviation of the securities
increase the correlation between two securities
lower the return on individual securities
496. It is easier to evaluate a firm using its financial statements when the firm: uses the same accounting
procedures as other firms in its industry.
497. It will cost $3,000 to acquire a small ice cream cart. Cart sales are expected to be $1,400 a year for
three years. After the three years, the cart is expected to be worthless as that is the expected
remaining life of the cooling system. What is the payback period of the ice cream cart? 2.14 years
(3,000/1,400)
498. It will cost $3,000 to acquire a small ice cream cart. Cart sales are expected to be $1,400 a year for
three years. After the three years, the cart is expected to be worthless as that is the expected
remaining life of the cooling system. What is the payback period of the ice cream cart? 2+
200/1400=2.14 years

J
499. J&J Tools pays no dividend at the present time. The company plans to start paying an annual
dividend in the amount of $.25 a share for 3 years commencing next year. After the 3 years, the
company plans on paying a constant $1 a share dividend indefinitely. How much are you willing to
pay to buy a share of this stock if your required return is 13%?$5.92
500. Jack is considering adding toys to his general store. He estimates that the cost of inventory will be
$4,200. The remodeling and shelving costs are estimated at $1,500. Toy sales are expected to
produce net cash inflows of $1,200, $1,500, $1,600, and $1,750 over the next four years,
respectively. Should Jack add toys to his store if he assigns a three-year payback period to this
project? No; because the payback period is 3.80 years.
501. Jackson Central has a 6-year, 8% annual coupon bond with a $1,000 par value. Earls Enterprises has
a 12-year, 8% annual coupon bond with a $1,000 par value. Both bonds currently have a yield to
 maturity of 6%. Which of the following statements are correct if the market yield increases to
7%? The Earls bond will decrease in value by 7.56%.
502. Jackson's has $1,000 face value, zero-coupon bonds outstanding that mature in 13.5 years. What is
the current value of one of these bonds if the market rate of interest is 7.6 percent? Assume
semiannual compounding. $365.32
503. Jackson's has $1,000 face value, zero-coupon bonds outstanding that mature in 13.5 years.What is
the current value of one of these bonds if the market rate of interest is 7.6 percent? Assume
semiannual compounding. $365.32 Price = $1,000/(1 + .076/2)13.5(2) Price = $365.32
504.
Janet plans on saving $3,000 a year and expects to earn 8.5%. How much will Janet have at the end
of twenty-five years if she earns what she expects? $236,003.38

505. Janet saves $3,000 a year at an interest rate of 4.2 percent. What will her savings be worth atthe end
of 35 years? $230,040.06 (AFV = $3,000[(1.04235 − 1)/.042])
506. Jaxon's has total revenue of $418,300, earnings before interest and taxes of $102,600, depreciation
of $59,200, and a tax rate of 21 percent. The firm is all-equity financed with 15,000shares
outstanding at a book value of $38.03 a share and a price-to-book ratio of 3.2. What is thefirm's
EV/EBITDA ratio if the firm has excess cash of $49,300? EV/EBITDA = [15,000($38.03)(3.2) −
$49,300]/($102,600 + 59,200) = 10.98
507. JB Markets has sales of $848,600, net income of $94,000, dividends paid of $28,200, total assets of
$913,600, and current liabilities of $78,900. Assume that all costs, assets, and current liabilities
change spontaneously with sales. The tax rate and dividend payout ratios remain constant. If the
firm's managers project a firm growth rate of 15 percent for next year, what willbe the amount of
external financing needed to support this level of growth? Assume the firm is currently operating at
full capacity. $49,535 (Explanation: EFN = $913,600(.15) − $78,900(.15) − $94,000(1.15)[1 −
($28,200/$94,000)] ; EFN = $49,535)
508. Jeanette expects to live 30 years after she retires. At the end of the first year of her retirement, she
wants to withdraw $35,000 from her savings. Each year thereafter, she wants toincrease her annual
withdrawal by 3.5 percent. If she can earn 5.5 percent on her savings, how much does she need to
have in retirement savings on the day she retires? $764,458.87 (APV = $35,000{[1 −
(1.035/1.055)30]/(.055 − .035)}
509. Jenni's Diner has expected net annual cash flows of $16,200, $18,600, $19,100, and $19,500 for the
next four years, respectively. At the end of the fourth year, the diner is expectedto be worth $57,900
cash. What is the present value of the diner at a discount rate of 11.6 percent? $93,090.25 (PV =
$16,200/1.116 + $18,600/1.1162 + $19,100/1.1163 + ($19,500 + 57,900)/1.1164)
510. Jensen's has a market value equal to its book value, excess cash of $500, other assets of
$9,500, and equity worth $10,000. The firm has 250 shares ofstock outstanding and net
income of $1,400. What will be the stock price per share if the firm pays out its excess
cash as a cash dividend? $38 Price per share = ($10,000 − 500)/250= $38
511. Jessica's Boutique has cash of $218, accounts receivable of $457, accounts payable of $398,and
inventory of $647. What is the value of the quick ratio? 1.70 (Explanation: Quick ratio = ($218 +
457)/$398 Quick ratio = 1.70)
512. Jessica's Home Interiors offers a common stock that pays an annual dividend of $1.60 a share. The
company has promised to maintain a constant dividend. How much are you willing to pay for one
share of this stock today if you want to earn a 9% return on your investments? $17.78
513. Jim owns shares of Abco, Inc. preferred stock which he says provides him with a constant 6.58% rate
of return. The stock is currently priced at $45.60 a share. What is the amount of the dividend per
share? $3.00
514. JK Inc. is a very cyclical type of business which is reflected in its dividend policy. The firm pays a
dividend of $2.00 a share every other year with the last payment having just been paid. Five years
from now, the company is repurchasing all of the outstanding shares at a price of $50a share. What

is the current value of one share at a discount rate of 12 percent? P0 = $2/1.122 + $2/1.124 +

$50/1.125 = $31.24
515. Joe's has old, fully depreciated equipment. Moe's just purchased all new equipment which will be
depreciated over eight years. If Joe's and Moe's have the same sales, costs, tax rate, andenterprise
value, then: Moe's and Joe's will have the same EV multiple.
516. Jones Mfg. has current assets of $26,900, net working capital of $8,200, long-term debt of $21,500,
and total equity of $57,800. What is the equity multiplier? 1.70 (Explanation: Total assets = Total
liabilities and equity = $26,900 − 8,200 + 21,500 + 57,800Total assets = $98,000; Equity multiplier =
$98,000/$57,800;Equity multiplier = 1.70)

K
517. Kali's Ski Resort stock is quite cyclical. In a boom economy, the stock is expected to return 30
percent in comparison to 12 percent in a normal economy and a negative 20 percent in a
recessionary period. The probability of a recession is 15 percent while it is 30 percent for a booming
 economy. The remainder of the time, the economy will be at normal levels. What is thestandard
deviation of the returns? 15.83 percent
518. Kay owns two annuities that will each pay $500 a month for the next 12 years. One paymentis
received at the beginning of each month while the other is received at the end of each month. At a
discount rate of 7.25 percent, compounded monthly, what is the difference in the present values of
these annuities? $289.98

Explanation: APVADue = $500{[1 − 1/(1 + .0725/12)12(12)]/(.0725/12)}(1 + .0725/12)

APVADue = $48,285.87
APV = $500{[1 − 1/(1 +
.0725/12)12(12)]/(.0725/12)}APV = $47,995.89
519. Kelso's balance sheet shows $15,000 in the common stock account,$315,000 in the
capital in excess of par account, and $189,000 in the retained earnings account. The firm
just announced a 3-for-2 stock split. What will be the value of the common stock account
after the split if the parvalue per share is $1? $15,000
520. Kelso's has a return on equity of 16.2 percent, a debt-equity ratio of 44 percent, a capital intensity
ratio of 1.08, a current ratio of 1.25, and current assets of $138,000. What is the profitmargin? 12.15
percent (Explanation: Profit margin = .162/[(1/1.08)(1 + .44)] Profit margin = .1215, or 12.15%)
521. Kettle Korn, Inc. just paid a $1.40 per share annual dividend. The company is planning on paying
$1.50, $1.65, $1.90, and $2.00 a share over the next 4 years, respectively. After that, the dividend
will be a constant $2.25 per share per year. What is the market price of this stock if the market rate
of return is 12%?$17.19
522. Kurt's Adventures, Inc. stock is quite cyclical. In a boom economy, the stock is expected to return
30% in comparison to 12% in a normal economy and a negative 20% in a recessionary period. The
probability of a recession is 15%. There is a 30% chance of a boom economy. The remainder of the
time, the economy will be atnormal levels. What is the standard deviation of the returns on Kurt's
Adventures, Inc. stock? 15.83%
523. Kurt's Interiors has annual revenue of $506,000 with costs of $369,400. Depreciation is $64,900 and
the tax rate is 21 percent. The firm has debt outstanding with a market value of $240,000 along with
7,500 shares of stock that is valued at $87 a share. The firm has $51,200 ofcash, all of which is
needed to run the business. What is the firm's EV/EBITDA ratio? EV/EBITDA = [$240,000 + 7,500($87)
− ($51,200 − 51,200)/($506,000 −369,400) = 6.53
L
524. L&R's stock is currently valued at $32.70 a share. The firm had earnings per share of $1.88 last year
and projects earnings of $2.10 a share for next year. What is the forward price-earningsratio?
PEForward = $32.70/$2.10PEForward = 15.57

525. Last week, Railway Cabooses paid its annual dividend of $1.20 per share. The company has been
reducing the dividends by 10% each year. How much are you willing to pay to purchase stock in this
company if your required rate of return is 14%?$4.50
526. Last year, a bond yielded a nominal return of 7.37 percent while inflation averaged 3.26 percent.
What was the real rate of return? 3.98 percent
527. Last year, a bond yielded a nominal return of 7.37 percent while inflation averaged 3.26percent.
What was the real rate of return? 3.98 percent
528. Last year, Alfred's Automotive had a price-earnings ratio of 15 and earnings per share of $1.20. This
year, the price-earnings ratio is 18 and the earnings per share is $1.20. Based on thisinformation, it
can be stated with certainty that: the investors' outlook for the firm has improved.
529. Last year, Alfred's Automotive had a price-earnings ratio of 15. This year, the price earnings ratio is
18. Based on this information, it can be stated with certainty that: either the price per share, the
earnings per share, or both changed.
530. Latcher's Inc. is a relatively new firm that is still in a period of rapid development. The company
plans on retaining all of its earnings for the next six years. Seven years from now, the company
projects paying an annual dividend of $.25 a share and then increasing that amount by 3% annually
thereafter. To value this stock as of today, you would most likely determine the value of the stock
_____ years from today before determining today's value. 6
531. Latcher's is a relatively new firm that is still in a period of rapid development. The company plans on
retaining all of its earnings for the next six years. Seven years from now, the company projects
paying an annual dividend of $.25 a share and then increasing that amount by 3 percent annually
thereafter. To value this stock as of today, you would most likely determine the value ofthe stock
years from today before determining today's value. 6
532. Lee Hong Imports paid a $1.00 per share annual dividend last week. Dividends are expected to
increase by 5% annually. What is one share of this stock worth to you today if the appropriate

discount rate is 14%?$11.67

533. Leo received $7,500 today and will receive another $5,000 two years from today. If he invests these
funds immediately at 11.5 percent, what will his investments be worth five yearsfrom now?
$19,856.13(FV = $7,500(1.1155) + $5,000(1.1153)
534. Leo's Markets has sales of $684,000, costs of $437,000, interest paid of $13,800, total assets of
$712,000, and depreciation of $109,400. The tax rate is 21 percent and the equity multiplier is 1.6.
What is the return on equity? 21.98 percent ( Net income = ($684,000 − 437,000 − 109,400 −
13,800)(1 − .21) Net income = $97,802 Equity = $712,000/1.6 Equity = $445,000 ROE =
$97,802/$445,000 ROE = .2198, or 21.98%)
535. Leslie purchased 100 shares of GT stock on June 7th. Marti purchased 100shares of GT
stock on Monday, July 9th. GT declared a dividend on June 20th to shareholders of record
on July 13th that is payable on August 1st. Which one of the following statements
concerning the dividend paid on August 1st is correct given this information? Both Marti
and Leslie are entitled to the dividend.
536. Leslie purchased 100 shares of GT, Inc. stock on Wednesday, June 7th. Marti purchased 100 shares
of GT, Inc. stock on Thursday, July 8th. GT declared a dividend on June 20th to shareholders of
record on July 12th and payable on August 1st. Which one of the following statements concerning
the dividend paid on August 1st is correct given this information? Leslie is entitled to the dividend
but Marti is not.
537. Leslie's Unique Clothing Stores offers a common stock that pays an annual dividend of $2.00 a share.
The company has promised to maintain a constant dividend. How much are you willing to pay for
one share of this stock if you want to earn a 12% return on your equity investments? $16.67

538. Lester's has a return on equity of 11.6 percent, a profit margin of 6.2 percent, and a payoutratio of
35 percent. What is the firm's growth rate? g = .116(1 − .35)= .0754, or 7.54%
539. Liquidity is: valuable to a firm even though liquid assets tend to be less profitable to own.
540. Lo Sun Corporation offers a 6% bond with a current market price of $875.05. The yield to maturity is
7.34%. The face value is $1,000. Interest is paid semiannually. How many years is it until this bond

matures? 16 years
541. Logistics just paid an annual dividend of $2.20 and announced that all future dividends would be
$2.25 a share indefinitely. What is your required rate of return if you are willing to pay $15.25 a
share for this stock? R = $2.25/$15.25 = .1475, or 14.75%
542. Lois is purchasing an annuity that will pay $5,000 annually for 20 years, with the first annuity
payment made on the date of purchase. What is the value of the annuity on the purchasedate given
a discount rate of 7 percent? $56,677.98

Explanation: APVADue = $10,000[(1 - 1/1.06825)/.068](1.068)

APVADue = $126,735.21
APV = $10,000[(1 −
1/1.06825)/.068]APV =
$118,665.92
Difference = $126,735.21 −
118,665.92Difference = $8,069.29
543. Lory Company had net earnings of $127,000 this past year of which $46,200 was paid out in
dividends. The company's equity was $1,587,500. Lory has 200,000 shares outstanding with a
current market price of $11.63 per share. Both the number of shares and the dividend payout ratio
are constant. What is the required rate of return if the growth rate is 5.6 percent? R =
[($46,200/200,000)(1.056)]/$11.63 + .056 = .0770, or 7.70%
544. Lucas invested $4,500 at 6.2 percent, compounded continuously. What will his investment beworth
after 15 years? $11,405.29 (FV = $4,500e.062(15))

M
545. M&D Enterprises paid its first annual dividend yesterday in the amount of $.28 a share. The
company plans to double each annual dividend payment for the next three years. After that time, it
plans to pay a constant $2.25 per share indefinitely. What is one share of this stock worth todayif the
market rate of return on similar securities is 11.5 percent? Dividends for the next three years are

$.56, $1.12, and $2.24. P0 = $.56/1.115 + $1.12/1.1152 + $2.24/1.1153 + ($2.25/.115)/1.1153 =

$17.13
546. Main Street Tool & Die is in a downsizing mode. The company paid a $2 annual dividend last year.
The company has announced plans to lower the dividend by $.50 a year. Once the dividend amount
becomes zero, the company will cease all dividends permanently. You place a required rate of return
of 18% on this particular stock given the company's situation. What is one share of this stock worth
to you today? $2.29
547. Majestic Homes' stock traditionally provides an 8% rate of return. The company just paid a $2 a year
dividend which is expected to increase by 5% per year. If you are planning on buying 1,000 shares of
 this stock next year, how much should you expect to pay per share if the market rate of return for

this type of security is 9% at the time of your purchase? $55.13

548. Managers are encouraged to act in shareholders' interests by: All of the above (shareholder election
of a board of directors who select management & the threat of a takeover by another firm &
compensation contracts that tie compensation to corporate success.)
549. Marcie's Mercantile wants to maintain its current dividend policy, which is a payout ratio of35
percent. The firm does not want to increase its equity financing but is willing to maintain its current
debt-equity ratio. Given these requirements, the maximum rate at which Marcie's can grow is equal
to: the sustainable rate of growth.
550. Marcos will receive an annuity payment of $2,500, payable every two years, for the next ten years.
The next payment is due two years from today. What is the present value of this annuity ata
discount rate of 5 percent? $9,416.75

: 2-year interest rate = 1.052 − 12-year

interest rate = .1025, or 10.25%
PV = $2,500[(1 −
1/1.102510/2)/.1025]PV = $9,416.75

551. Marlene and Darlene are each the recipient of an annuity that pays $1,000 at the end of eachyear
for twelve years. They both received their first payment on the same day. Explain how Marlene and
Darlene could have different NPVs for their annuities. The value of an annuity depends on the
payment amount, the timing of the payments(beginning or end of period), the number of annuity
periods, and also the discount rate. If Marlene and Darlene assign different discount rates to their
annuities, then the values of their annuities will differ. The higher the discount rate, the lower the
present value.
552. Martha left an inheritance to her grandson that will pay him $1,500 on the first day of everyother
year. When computing the PV of this inheritance, the grandson should use: a 2-year discount rate.
553. Martha receives $100 on the first of each month. Stewart receives $100 on the last day of each
month. Both Martha and Stewart will receive payments for five years. At an 8% discount rate, what
is the difference in the present value of these two sets of payments? $32.88
 Difference = $4,964.72 - $4,931.84 = $32.88

554. Martha's Enterprises spent $2,400 to purchase equipment three years ago. This equipment is
currently valued at $1,800 on today's balance sheet but could actually be sold for $2,000. Net
working capital is $200 and long-term debt is $800. Assuming the equipment is the firm's only fixed
asset, what is the book value of shareholders' equity? $1,200 (Book value of shareholders' equity =
$1,800 + $200 - $800 = $1,200)
555. Martha's recently paid an annual dividend of $3.60 on its common stock. This dividend increases by
2.5 percent per year. What is the market rate of return if the stock is selling for $32.65 a share? R =
[$3.60(1.025)]/$32.65 + .025= .1380, or 13.80%
556. Martha's Vineyard recently paid a $3.60 annual dividend on its common stock. This dividend
increases at an average rate of 3.5% per year. The stock is currently selling for $62.10 a share. What

is the market rate of return? 9.5%

557. Martin Industries pays a constant $2.50 a share annual dividend. The market price of this stock will:
decrease if the required return increases.
558. Martin's Yachts has paid annual dividends of $1.40, $1.75, and $2.00 a share over the past three
years, respectively. The company now predicts that it will maintain a constant dividend since its
business has leveled off and sales are expected to remain relatively constant. Given the lack of
future growth, you will only buy this stock if you can earn at least a 15% rate of return. What is the

maximum amount you are willing to pay to buy one share today? $13.33
559. Martin's Yachts is expected to pay annual dividends of $1.40, $1.75, and $2.00 a share over the next
three years, respectively. After that, the dividend is expected to remain constant. What isthe current

value per share at a discount rate of 14 percent? $13.57 P0 = $1.40/1.14 + $1.75/1.142 +

($2.00/.14)/1.142 = $13.57
560. Mason's has 5-year, 8 percent annual coupon bonds outstanding with a par value of $1,000. Dixon's
has 10-year, 8 percent annual coupon bonds outstanding with a par value of $1,000. Both bonds
currently have a yield to maturity of 8 percent. Which one of the following statements is correct if
the market rate decreases to 7 percent? Mason's bond will increase in value by $41.
561. Mason's has 5-year, 8 percent annual coupon bonds outstanding with a par value of $1,000. Dixon's
has 10-year, 8 percent annual coupon bonds outstanding with a par value of $1,000. Bothbonds
currently have a yield to maturity of 8 percent. Which one of the following statements is correct if
the market rate decreases to 7 percent? Mason's bond will increase in value by $41.
562. Massey Motors is a new firm in a rapidly growing industry. The company is planning on increasing its
annual dividend by 10% a year for the next 3 years and then decreasing the growth rate to 4% per
year. The company just paid its annual dividend in the amount of $1.00 per share. What is the
current value of one share of this stock if the required rate of return is 13.75%?$12.45
563. Master Technicians just announced that it is increasing its annual dividend to $4 and establishing a
policy whereby the dividend will increase by 2% annually thereafter. How much will one share of this
stock be worth 10 years from now if the required rate of return is 14%? $40.63
564. Matt has been asked for his best recommendation given this information. His recommendation
should be to accept: project A and reject project B based on their net present values.
565. Matt is analyzing two mutually exclusive projects of similar size and has prepared the following data.
Both projects have 5 year lives.

566. Merriweather's has a policy of increasing its annual dividend by 1.75 percent each year. Howmuch
will one share be worth five years from now if the required rate of return is 15 percent and the next

dividend will be $3.40? P5 = [$3.40(1.01755)]/(.15 − .0175)= $27.99

567. MJ Enterprises stock traditionally provides an average rate of return of 11.6 percent. The firm's next
annual dividend is projected at $2.40 with future increases of 3 percent per year. Whatprice should
 you pay for this stock if you are satisfied with the firm's average rate of return? $27.91 P0 =

$2.40/(.116 − .03) = $27.91

568. Modified internal rate of return: Both handles the multiple IRR problem by combining cash flows
until only one change in sign change remains; and requires the use of a discount rate.
569. Moon Lite Cafe has a semiannual, 5 percent coupon bond with a current market price of $988.52.
The bond has a par value of $1,000 and a yield to maturity of 5.68 percent. How many years is it
until this bond matures? 1.8 years
570. Moon Lite Cafe has a semiannual, 5 percent coupon bond with a current market price of $988.52.
The bond has a par value of $1,000 and a yield to maturity of 5.68 percent. How manyyears is it until
this bond matures? 1.8 years
571. Mortgage Instruments Inc. is expected to pay dividends of $1.03 next year. The company just paid a
dividend of $1. This growth rate is expected to continue. How much should be paid for Mortgage
Instruments stock just after the dividend if the appropriate discount rate is 5%.$51.50
572. Most of the trading in bonds is conducted: electronically.
573. Most of the trading in bonds is conducted: electronically.
574. Mother and Daughter Enterprises is a relatively new firm that appears to be on the road to great
success. The company paid its first annual dividend yesterday in the amount of $.28 a share. The
company plans to double each annual dividend payment for the next three years. After that time, it
is planning on paying a constant $1.50 per share indefinitely. What is one share of this stock worth
today if the market rate of return on similar securities is 11.5%? $12.43

575. Mountain Gear, Inc. just announced that its annual dividend for this coming year will be $1.40 a
share and that all future dividends are expected to increase by 4.5% annually. What is the market
rate of return if this stock is currently selling for $28 a share? 9.50%
576. Mountain Top Markets has total assets of $48,700, net working capital of $1,100, and retained
earnings of $21,200. The firm has 12,500 shares of stock outstanding with a par value of $1 per
share and a market value of $7.10 per share. The stock was originally issued to the firm'sfounders at
par value. What is the market-to-book ratio? 2.63 (Explanation: Market-to-book ratio =
$7.10/{[$1(12,500) + $21,200]/12,500} Market-to-book ratio = 2.63)

N
577. Narrow Falls Lumber has total assets of $913,600, total debt of $424,500, net sales of $848,600, and
net income of $94,000. The tax rate is 21 percent and the dividend payout ratio is30 percent. What
 is the firm's sustainable growth rate? 14.46 percent (Explanation: Sustainable growth rate =
{[$94,000/($913,600 – 424,500)](1 – .30)}/(1 –{[$94,000/($913,600 – 424,500)](1 – .30)}); Sustainable
growth rate = .1554, or 15.54%)
578. NASDAQ: has a multiple market maker system.
579. Nathan is buying a $1,000 face value bond at a quoted price of 101.364. The bond carries a coupon
rate of 7.75 percent, with interest paid semiannually. The next interest payment is two months from
today. What is the dirty price of this bond? $1,039.47
580. Nathan is buying a $1,000 face value bond at a quoted price of 101.364. The bond carries acoupon
rate of 7.75 percent, with interest paid semiannually. The next interest payment is two months from
today. What is the dirty price of this bond? $1,039.47 Dirty price = 101.364%($1,000) +
.0775($1,000)(4/12)Dirty price = $1,039.47
581. Net capital spending is equal to: the net change in fixed assets.
582. Net capital spending: is equal to zero if the decrease in the net fixed assets is equal to the
depreciation expense.
583. Net present value: is more useful to decision makers than the internal rate of return when
comparing different sized projects.
584. Net working capital is defined as: current assets minus current liabilities. (Net working capital is
current assets minus current liabilities)
585. New Corp. just paid a per share annual dividend of $1.50. The company is planning on paying $1.62,
$1.68, $1.75, and $1.80 a share over the next four years, respectively. After that the dividend will be
a constant $2.00 per share per year. What is the market price of this stock ifthe market rate of

return is 15 percent? $12.48: P0 = $1.62/1.15 + $1.68/1.152 + $1.75/1.153 + $1.80/1.154 +

($2.00/.15)/1.154 = $12.48
586. New Metals has depreciation of $28,300, interest expense of $11,400, EBIT of $62,700, aprice-
earnings ratio of 8.6, a profit margin of 7.2 percent, a tax rate of 21 percent, and 37,500shares of
stock outstanding. What is the market price per share? $9.29 (Explanation: Market price per share =
8.6{[($62,700 − 11,400)(1 − .21)]/37,500} Market price per share = $9.29)
587. New Tek has a sustainable growth rate of 11.2 percent. However, the firm's managers are
determined that the firm should grow by at least 20 percent next year. What must the firm do ifthe
managers are to reach their desired level of growth for the firm? One reason that causes firms to go
out of business is the lack of external funding to support the growth of the firm. Understanding the
implications of both the internal and sustainable growth rates can help management know when to
limit firm growth such that the growth does not exceed the availability of the necessary financing to
fund that growth. For the firm to achieve growth beyond the sustainable rate, the firm must increase
 its debt-equity ratio,obtain additional external equity financing, reduce its dividends, improve its
profitability, or some combination of these actions.
588. Next year's annual dividend divided by the current stock price is called the: dividend yield.
589. Next year's annual dividend divided by the current stock price is called the: dividend yield
590. No matter how many forms of investment analysis you do: the actual results from a project may
vary significantly from the expected results.
591. Noncash items refer to: expenses charged against revenues that do not directly affect cash flow.
592. Northern Industries has accounts receivable of $42,300, inventory of $61,200, sales of $544,200,
and cost of goods sold of $393,500. How many days, on average, does it take the firmto sell its
inventory? 56.77 (Explanation: Days' sales in inventory = 365/($393,500/$61,200) Days' sales in
inventory = 56.77)
593. Now or Later, Inc. recently paid $1.10 as an annual dividend. Future dividends are projected at
$1.14, $1.18, $1.22, and $1.25 over the next four years, respectively. After that, the dividend is
expected to increase by 2% annually. What is one share of this stock worth to you if you require an
8% rate of return on similar investments? $19.57

594. Nu Tech is a technology firm with good growth prospects. The firm wishesto do something
to acknowledge the loyalty of its shareholders but needs allits available cash to fund its
rapid growth. The market price of its stock is currently trading in the upper end of its
preferred trading range. The firm could consider: a cash distribution.
595. Nu Tech, Inc. is a technology firm with good growth prospects. The firm wishes to do something to
acknowledge the loyalty of its shareholders but needs all of its available cash to fund its rapid
growth. The market price of its stock is currently trading in the middle of its preferred trading range.
The firm could consider: issuing a stock dividend
596. NU YU announced today that it will begin paying annual dividends. The first dividend will be paid
next year in the amount of $.25 a share. The following dividends will be $.40, $.60, and $.75 a share
annually for the following three years, respectively. After that, dividends are projected to increase
by 3.5% per year. How much are you willing to pay to buy one share of this stock if your desired rate
of return is 12%?$7.25

597. Nu-Tech is expecting a period of intense growth and has decided to reduce its annual dividend by 10
percent a year for the next two years. After that, it will maintain a constant dividend of $.70 a share.
 The company just paid $1.80 per share. What is the value of this stockif the required rate of return is

13 percent? P0 = {$1.80[1 + (−.10)]}/1.13 + {$1.80[1 + (−.10)]2}/1.132 + ($.70/.13)/1.132 = $6.79

598. Nu-Tek, Inc. is expecting a period of intense growth and has decided to retain more of its earnings to
help finance that growth. As a result it is going to reduce its annual dividend by 10% a year for the
next three years. After that, it will maintain a constant dividend of $.70 a share. Last month, the
company paid $1.80 per share. What is the value of this stock if the required rate of return is
13%?$7.22
599. Nu-Tools plans to set aside an equal amount of money each year, starting today, so that itwill have
$25,000 saved at the end of three years. If the firm can earn 4.7 percent, how much does it have to
save annually? $7,596.61 ($25,000 = C[(1.0473 − 1)/.047](1.047) )

O
600. Of the following factors, which one is considered to be the primary factor affecting afirm's dividend
decision? consistent dividend policy
601. Of the following factors, which one is considered to be the primary factor affecting a firm's dividend
decision? maintaining a consistent dividend policy
602. Of the following factors, which one is considered to be the primary factor affecting a
firm's dividend payout decision? Maintaining a consistent dividend policy
603. Olivia is willing to pay $185 a month for four years for a car payment. If the interest rate is 4.9
percent, compounded monthly, and she has a cash down payment of $2,500, what price carcan she
afford to purchase? $10,549.07 (PV = $2,500 + $185{[1 − 1/(1 + .049/12)4(12)]/(.049/12)})
604. On a common-size balance sheet, all _____ accounts are shown as a percentage of _____. liability;
total assets
605. On May 18th, you purchased 1,000 shares of Buy Lo stock. On June 5th, you sold 200
shares of this stock for $21 a share. You sold an additional 400 shares on July 8th at a
price of $22.50 a share. The company declared a $.50per share dividend on June 25th to
holders of record as of Thursday, July 10th. This dividend is payable on July 31st. How
much dividend income will you receive on July 31st as a result of your ownership of this
firm's stock? $400 Dividend received = $.50(1,000 − 200)= $400
606. On the date of record the stock price drop is: zero because it happens on the ex-dividend date.
607. On the day she retired, Kate had $101,900 in retirement savings. She expects to earn 4.5 percent,
compounded monthly, and live 24 more years. How much can she withdraw from hersavings each
month during her retirement if she plans to die on the day she spends her last penny? $579.22
($101,900 = C{[1 − 1/(1 + .045/12)24(12)]/(.045/12)})
608. One advantage of the EV/EBITDA ratio over the PE ratio is the: lessened impact of leverage on the
ratio.
609. One basis point is equal to: .01%.
610. One example of a nondiversifiable risk is the sudden: passing of a well-respected Federal Reserve
Bank chairman.
611. One key reason a long-term financial plan is developed is because: there are direct connections
between achievable corporate growth and the financial policy.
612. One of the most basic principles of finance is that rational individuals prefer to receive a dollar ____
than a dollar ______. today; tomorrow
613. One of the reasons why cash flow analysis is popular is because: it is difficult to manipulate, or spin
the cash flows.
614. One year ago, the Jenkins Family Fun Center deposited $3,600 in an investment account for the
purpose of buying new equipment four years from today. Today, it is adding another $5,000 to this
account. It plans on making a final deposit of $7,500 to the account next year. How much will be
available when it is ready to buy the equipment, assuming it earns a 7% rate of return? $20,790.99
615. Otto Enterprises has a bond issue outstanding with a coupon of 8 percent that matures in 15 years.
The bond is currently priced at $923.60 and has a par value of $1,000. Interest is paid semiannually.
What is the yield to maturity? 8.93 percent
616. Otto Enterprises has a bond issue outstanding with a coupon of 8 percent that matures in 15years.
The bond is currently priced at $923.60 and has a par value of $1,000. Interest is paid semiannually.
What is the yield to maturity? 8.93 percent
617. Over the next three years, Marti plans to save $2,000, $2,500, and $3,000, respectively, starting one
year from today. You want to have as much money as Marti does three years from now but you plan
to make one lump sum investment today. What amount must you save today ifyou both earn 4.65
annually? $6,811.50 (Explanation: PV = $2,000/1.0465 + $2,500/1.04652 + $3,000/1.04653 PV =
$6,811.50)

P
618. P3 = $17.66; Purchase cost = 100($17.66) Purchase cost = $1,766

619. Party Time, Inc. has a 6% coupon bond that matures in 11 years. The bond pays interest
semiannually. What is the market price of a $1,000 face value bond if the yield to maturity is
 12.9%? $600.34

620. Payback is frequently used to analyze independent projects because: it is easy and quick to calculate.
621. Paying off long-term debt by making installment payments is called: amortizing the debt.

622. Payments in a partial amortization loan are based on the amortization period, not the loan period.
The remaining balance is then ____. paid off in a lump sum bullet payment
623. Payments made by a corporation to its shareholders, in the form of either cash, stock or payments
in kind, are called: dividends.
624. Payments made by a firm to its owners from sources other than current or accumulated earnings
are called: distributions.
625. Payments made out of a firm's earnings to its owners in the form of cash or stock are called:
dividends.
626. Payments made out of a firm's earnings to its owners in the form of cashor stock are
called: dividends.
627. Peterson Nurseries just paid a $3.20 annual dividend. The company has a policy whereby the
dividend increases by 3% annually. You would like to purchase 100 shares of stock in this firm but
realize that you will not have the funds to do so for another two years. If you desire a 12% rate of
return, how much should you expect to pay for 100 shares when you can afford to buy this stock?
$3,885
628. Phillips Co. currently pays no dividend. The company is anticipating dividends of $.02, $.05, $.10,
$.20, and $.30 over the next 5 years, respectively. After that, the company anticipates increasing the
dividend by 3.5 percent annually. One common step in computing the value of thisstock today is to
compute the value of: P6.

629. Portfolios A and B have an expected return of 10%. Portfolio A has a standard deviation of 6% while
Portfolio B has a standard deviation of 13%. Which portfolio would a rational investor choose?
Reason:
Portfolio A is better as it offers the same return at a lower level of risk.
630. Preferred shareholders are generally granted the right to: first priority for any dividend distributions
631. Present value represents what an amount of money promised or expected in the future is worth
______. today
632. Preston Woods has 17,500 shares of stock outstanding along with $408,000 of interest-bearing debt.
The market and book values of the debt are the same. The firm has sales of $697,000 and a profit
margin of 6.8 percent. The tax rate is 21 percent, the debt-equity ratio is 40percent, and the price-
earnings ratio is 11.8. The firm has $130,000 of current assets of which $41,200 is cash. What is the
enterprise value multiple?$926,073 (Explanation: EV multiple = 11.8[.068($697,000)] + $408,000 −
41,200 EV multiple = $926,073B) $994,520)
633. Priscilla owns 500 shares of Deltona stock. It is January 1, 2018, and the company
recently issued a statement that it will pay a $1 per share dividendon December 31, 2018,
a $2.50 per share dividend on December 31, 2019, and then cease all dividend payments.
Priscilla does not want any dividend income this year but does want as much dividend
income as possible next year. Priscilla can earn 8 percent on her investments. Ignoring
taxes, what will Priscilla's homemade dividend per share be in 2019? $3.58 Homemade
dividend = $1(1.08) + $2.50= $3.58
634. Probably the best argument for a reverse stock split is to: maintain a minimum share
price as set by a stock exchange.
635. Probably the best argument for a reverse stock split is to: raise additional capital from current
stockholders.
636. Project A has an initial cost of $75,000 and annual cash flows of $33,000 for three years. Project B
costs $60,000 and has cash flows of $25,000, $30,000, and $25,000 for Years 1 to 3, respectively.
Projects A and B are mutually exclusive. The incremental IRR is _______ and if the required rate is
higher than the crossover rate then Project _______ should be accepted. IRR A = 15.27% ;IRR B=
15.86%; B-A: (15;-8;-3;-8) ;2.89%; B
637. Project A is opening a bakery at 10 Center Street. Project B is opening a specialty coffee shop at the
same address. Both projects have unconventional cash flows, that is, both projects have positive and
negative cash flows that occur following the initial investment. When trying to decide which project
to accept, given sufficient funding to accept either, you should rely most heavily on the _____
method of analysis. net present value
638. Project X has an initial cost of $20,000 and a cash inflow of $25,000 in Year 3. Project Y costs
$40,700 and has cash flows of $12,000, $25,000, and $10,000 in Years 1 to 3, respectively. The
discount rate is 6 percent and the projects are mutually exclusive. Based on the individual project's
IRRs you should accept Project _____; based on NPV you should accept Project ____; the
639. Projected future financial statements are called: pro forma statements.
640. Projected future financial statements are called: pro forma statements
641. Public offerings of debt and equity must be registered with which one of the following? Securities
and Exchange Commission
642. Puffy's Pastries generates five cents of net income for every $1 in sales. Thus, Puffy's has a _____ of
5%. profit margin
643. Puffy's Pastries generates five cents of net income for every $1 in equity. Thus, Puffy's has of 5
percent. a return on equity
644. PV = C/(r - g) is the formula for the present value of a growing perpetuity

Q
R
645. Ralph has $1,000 in an account that pays 10 percent per year. Ralph wants to give this money to his
favorite charity by making three equal donations at the end of the next 3 years. How much will
Ralph give to the charity each year? $402.11
$1,000/[(1 - 1/1.10^3)/.10]
646. Ratios that measure a firm's ability to pay its bills over the short run without undue stress areknown
as: Liquidity Measures (A Short Run Solvency)
647. Ratios that measure a firm's financial leverage are known as _____ ratios. long-term solvency
648. Ratios that measure how efficiently a firm uses its assets to generate sales are known as _____
ratios. asset management
649. Ratios that measure how efficiently a firm's management uses its assets and equity to generate
bottom line net income are known as _____ ratios. profitability
650. Redline Motors has adopted a policy of increasing the annual dividend on its common stock at a
constant rate of 3.5% annually. The last dividend it paid was $1.21 a share. What will its dividend be
7 years from now? $1.54
651. Relationships determined from a firm's financial information and used for comparison purposes are
known as: financial ratios.
652. Required return 8.50% .Based on the net present value of _______ for this project, you should

_______ the project. $7,978.72; accept

653. Required return 8.50% Based on the internal rate of return of _______ for this project, you should
_______ the project. 10.75%; accept

654. Required return 8.50% Based on the profitability index of _______ for this project, you should

_______ the project. 1.05; accept

655. return is equal to 10%.
656. Risk that affects a large number of assets, each to a greater or lesser degree, is called risk.
systematic
657. Risk that affects a large number of assets, each to a greater or lesser degree, is called risk. systematic
658. Risk that affects at most a small number of assets is called risk. Total
659. Risk that affects at most a small number of assets is called risk. unsystematic
660. Riverton Stores is all-equity financed and has net sales of $217,800, taxable income of $32,600, a
return on assets of 11.5 percent, a tax rate of 21 percent, and total debt of $63,700.What are the
values for the three components of the DuPont identity? 11.82 percent; .9725; 1.3975 (Explanation:
Profit margin = $32,600(1 − .21)/$217,800 Profit margin = .1182, or 11.82%
661. Robinson's has 15,000 shares of stock outstanding with a market price of $6 a share.
What will be the market price per share if the firm does a 1-for-3reverse stock split? $18
Explanation: Market price per share = $6(3/1)Market price per share = $18
662. Robinson's has 15,000 shares of stock outstanding with a par value of $1per share and
a market price of $36 a share. How many shares of stock will be outstanding of the firm
does a 3-for-2 stock split? A 3-for-2 stock indicates that for every 2 stocks, post split
there would be 3 stocks post-event. So, for 15,000 shares,Number of shares
outstanding = 15,000 * 3/2 = 22,500 shares
663. Rosebud Florists pays a constant dividend of $1.50 a share. The company announced today that it
will continue to do this for another 2 years after which time it will discontinue paying dividends
permanently. What is one share of this stock worth today if the required rate of return is
7.5%?$2.69
664. Rosina purchased one 15-year bond at par value when it was initially issued. This bond has a coupon
rate of 7 percent and matures 13 years from now. If the current market rate for this type and quality
of bond is 7.5 percent, then Rosina should expect: to realize a capital loss if she sold the bond at
today's market price.
665. Rosina purchased one 15-year bond at par value when it was initially issued. This bond has acoupon
rate of 7 percent and matures 13 years from now. If the current market rate for this type and quality
of bond is 7.5 percent, then Rosina should expect: to realize a capital loss if she sold the bond at
today's market price.
666. Rosita's announced that its next annual dividend will be $1.65 a share and all future dividends will
increase by 2.5 percent annually. What is the maximum amount you should pay topurchase a share
of this stock if you require a rate of return of 12 percent? $17.37 (P0 = $1.65/(.12 − .025) ;P0 =
$17.37)
667. Rosita's Resources paid $11,310 in interest and $16,500 in dividends last year. The timesinterest
earned ratio is 2.9, the depreciation expense is $7,900, and the tax rate is 21 percent. What is the
value of the cash coverage ratio? 3.60 ( Explanation: EBIT = 2.9($11,310) EBIT = $32,799 ;Cash
coverage ratio = ($32,799 + 7,900)/$11,310 ;Cash coverage ratio = 3.60)
668. RTF stock is expected to return 10.6 percent if the economy booms and only 4.2 percent if the
economy goes into a recessionary period. The probability of a boom is 55 percent while the
probability of a recession is 45 percent. What is the standard deviation of the returns on RTF stock?
3.18 percent
669. Rudy's stock is currently valued at $28.40 a share. The firm had earnings per share of $1.86last year
and projects earnings of $2.09 a share for next year. What is the trailing twelve monthprice-earnings
ratio? PETTM = $28.40/$1.86PETTM = 15.27

670. Russell's has annual revenue of $387,000 with costs of $216,400. Depreciation is $48,900and the tax
rate is 21 percent. The firm has debt outstanding with a market value of $182,000 along with 9,500
shares of stock that is selling at $67 a share. The firm has $48,000 of cash ofwhich $29,500 is needed
to run the business. What is the firm's EV/EBITDA ratio? EV/EBITDA = [$182,000 + 9,500($67) −
($48,000 − 29,500)]/($387,000 −216,400)= 4.69

S
671. S&P Enterprises will pay an annual dividend of $2.08 a share on its common stock next year.The firm
just paid a dividend of $2.00 a share and adheres to a constant rate of growth dividend policy. What
will one share of S&P common stock be worth ten years from now if the applicablediscount rate is 8

percent? $76.97 g = ($2.08 − 2.00)/$2.00 = .04 ; P10 = [$2.08(1.0410)]/(.08 − .04)= $76.97

672. S&P Enterprises will pay an annual dividend of $2.08 a share on its common stock next year. Last
week, the company paid a dividend of $2.00 a share. The company adheres to a constant rate of
growth dividend policy. What will one share of S&P common stock be worth ten years from now if
 the applicable discount rate is 8%? $76.97 (g = ($2.08 - $2.00) / $2.00; g = .04; P10 = $2.08 x (1 +
.04)10 / (.08 - .04))
673. Sally and Alicia currently are general partners in a business located in Atlanta, Georgia. They are
content with their current tax situation but are both very uncomfortable with the unlimited liability
to which they are each subjected. Which form of business entity should they consider to replace
their general partnership assuming they wish to remain the only two owners of their business?
Whichever organization they select, they wish to be treated equally. limited liability company
674. Sam, Alfredo, and Juan want to start a small U.S. business. Juan will fund the venture butwants to
limit his liability to his initial investment and has no interest in the daily operations. Sam will
contribute his full efforts on a daily basis but has limited funds to invest in the business. Alfredo will
be involved as an active consultant and manager and will also contribute funds. Sam and Alfredo are
willing to accept liability for the firm's debts as they feel they have nothing to lose by doing so. All
three individuals will share in the firm's profitsand wish to keep the initial organizational costs of the
business to a minimum. Which form ofbusiness entity should these individuals adopt? limited
partnership
675. Samuel's has 42,000 shares of stock outstanding with a par value of $1per share and a
market price per share of $41. The balance sheet shows $1,358,000 in the capital in
excess of par account and $2,212,500 in the retained earnings account. The firm just
announced a stock dividend of 50percent. What is the value of the capital in excess of par
account after thedividend? $1,358,000
676. Samuelson's has sales of $317,000, a profit margin of 8.6 percent, an equity multiplier of 1.8,and
total debt of $144,400. What is the return on equity? 15.10 percent (Explanation: Debt-equity ratio =
1.8 − 1 Debt-equity ratio = .8 ;Equity = $144,400/.8 Equity = $180,500; ROE =
.086($317,000)/$180,500 ROE = .1510, or 15.10%
677. Sara is the recipient of a trust that will pay her $500 on the first day of each month, starting
immediately and continuing for 40 years. What is the value of this inheritance today if the applicable
discount rate is 7.3 percent, compounded monthly? $78,192.28 (APVADue = $500{[1 − 1/(1 +
.073/12)40(12)]/(.073/12)}(1 + .073/12)
678. Schaeffer Shippers announced on May 1 that it will pay a dividend of $1.20 per share
on June 15 to all holders of record as of May 31st. The firm'sstock price closed today at
$42 a share. Assume all investors are in the 22 percent tax bracket. If tomorrow is the ex-
dividend date, what would you expect the opening price to be tomorrow morning
assuming all else is held constant? $41.06 Opening price = $42 − $1.20(1 − .22)Opening
price = $41.06
679. Scott has been offered an employment contract for ten years at a starting salary of $65,000with
guaranteed annual raises of 5 percent. What is the current value of this offer at a discountrate of 7
percent? $558,845.85 ( APV = $65,000({1 − [(1.05/1.07)10]}/(.07 − .05)))
680. Semiannual compounding means that interest is paid ______ per year. two times
681. Seven years ago, Carlos took out a mortgage for $185,000 at 5.6 percent, compounded monthly, for
30 years. He has made all of the monthly payments as agreed. What is his currentloan balance?
$164,621.06

: $185,000 = C{[1 − 1/(1 + .056/12)30(12)]/(.056/12)}

C = $1,062.05
PV = $1,062.05{[1 − 1/(1 + .056/12)(30 − 7)(12)]/(.056/12)}
PV = $164,621.06
682. Several years ago, Sara invested $4,208. Today, that investment is worth $28,406 and hasearned an
average annual rate of return of 7.38 percent. How long ago did Sara make her investment? 26.82
years ($28,406 = $4,208(1.0738)T)
683. Share repurchases: can be difficult to verify.
684. Shareholder A sold 500 shares of ABC stock on the New York Stock Exchange. Thistransaction: was
facilitated in the secondary market.
685. Shareholder A sold shares of Maplewood Cabinets stock to Shareholder B. The stock islisted on the
NYSE. This trade occurred in which one of the following? secondary, auction market
686. Shareholders' equity: represents the residual value of a firm.
687. Shares of Bleckwell Remodelers common stock are currently selling for $32.50 a share. The last
annual dividend paid was $2.25 per share. The market rate of return is 14%. At what rate is the
dividend growing? 6.62%
688. Shares of common stock of the Samson Co. offer an expected total return of 12%. The dividend is
increasing at a constant 8% per year. The dividend yield must be: 4%.

689. Shares of common stock of the Timken Co. offer an expected total return of 16%. The dividend is
increasing at a constant 6% per year. What is the capital gain yield? 10.0%
690. Shares of the Samson Co. offer an expected total return of 12 percent. The dividend is increasing at
a constant 3.25 percent per year. What is the value of the next dividend if the stockis selling at 28 a
share? .12 = D1/$28 + .0325 = $2.45

691. Shawn has $2,500 invested at a guaranteed rate of 4.35 percent, compounded annually. Whatwill his
investment be worth after five years? $3,093.16 (Explanation: FV5 = $2,500(1.04355) FV5 =
$3,093.16)
692. Since the implementation of Sarbanes-Oxley, the cost of going public in the United States
has: increased
693. Sole proprietorships are predominantly started because: All of the above (they are easily and
cheaply setup & the proprietorship life is limited to the business owner's life & all business taxes are
paid as individual tax)
694. Southern Foods has net income of $39,900, net sales of $318,600, total assets of $663,000,
common stock of $106,800 with a par value of $1 per share, and retained earnings of $224,400.The
stock has a market value of $5.45 per share. What is the price-earnings ratio? 14.59 (Explanation: PE
ratio = $5.45/[$39,900/($106,800/$1)] PE ratio = 14.59)
695. Southern Markets has sales of $78,400, net income of $2,400, costs of goods sold of $43,100, and
depreciation of $6,800. What is the common-size statement value of EBIT? 36.35 percent
(Explanation: Common-size EBIT = ($78,400 − 43,100 − 6,800)/$78,400Common-size EBIT = .3635, or
36.35%)
696. Standard deviation measures ______ risk while beta measures ______ risk. total; systematic
697. Standard deviation measures risk while beta measures risk. total; systematic
698. Standard deviation measures risk. total
699. Starting today, Alicia is going to contribute $100 a month to her retirement account. Her employer
matches her contribution by 50 percent. If these contributions remain constant, and sheearns a
monthly rate of .55 percent, how much will her savings be worth 40 years from now? $354,087.88
(AFVADue = ($100 + 50)[(1.005540(12) − 1)/.0055](1.0055)
700. State the assumptions that underlie the internal growth rate and interpret what that ratemeans. The
usual assumptions are: Costs, assets, and current accounts (excluding notes payable) increase
proportionately with sales, the dividend payout ratio is fixed (or is given), andno new external
financing will be raised. The internal growth rate is the maximum rate at which sales can increase
given the stated assumptions while maintaining the funding required by that growth.
701. Stock A has a beta of .68 and an expected return of 8.1 percent. Stock B has a beta of 1.42 and an
expected return of 13.9 percent. Stock C has beta of 1.23 and an expected return of 12.4 percent.
Stock D has a beta of 1.31 and an expected return of 12.6 percent. Stock E has a beta of .94 and an
expected return of 9.8 percent. Which one of these stocks is the most accurately priced if the risk-
free rate of return is 2.5 percent and the market risk premium is 8 percent? Stock B
702. Stock A has a beta of .69 and an expected return of 9.27 percent. Stock B has a beta of 1.13and an
expected return of 11.88 percent. Stock C has a beta of 1.48 and an expected return of 15.31
percent. Stock D has a beta of .71 and an expected return of 8.79 percent. Lastly, Stock E has a beta
of 1.45 and an expected return of 14.04 percent. Which one of these stocks is most accurately
 priced if the risk-free rate of return is 3.6 percent and the market rate of return is 10.8percent?
Stock E
703. Stock A has a beta of 1.2, Stock B's beta is 1.46, and Stock C's beta is .72. If you invest $2,000 in Stock
A, $3,000 in Stock B, and $5,000 in Stock C, what will be the beta of yourportfolio? 1.038
704. Stock A has a variance of .1428 while Stock B's variance is .0910. The covariance of thereturns for
these two stocks is −.0206. What is the correlation coefficient? −.1807
705. Stock A has an expected return of 12 percent and a variance of .0203. The market has anexpected
return of 11 percent and a variance of .0093. What is the beta of Stock A if the covariance of Stock A
with the market is .0137? 1.47
706. Stock A has an expected return of 17.8 percent, and Stock B has an expected return of 9.6 percent.
However, the risk of Stock A as measured by its variance is 3 times that of Stock B. Ifthe two stocks
are combined equally in a portfolio, what would be the portfolio's expected return? 13.70 percent
707. Stock A has an expected return of 20%, and stock B has an expected return of 4%. However, the risk
ofstock A as measured by its variance is 3 times that of stock B. If the two stocks are combined
equally in a portfolio, what would be the portfolio's expected return? 12% (Rp = 20(.5) + .04(.5) =
12%)
708. Stock A is expected to return 12 percent in a normal economy and lose 7 percent in a recession.
Stock B is expected to return 8 percent in a normal economy and 2 percent in a recession. The
probability of the economy being normal is 80 percent and the probability of arecession is 20
percent. What is the covariance of these two securities? .003915
709. Stock K is expected to return 12.4 percent while the return on Stock L is expected to be 8.6 percent.
You have $10,000 to invest in these two stocks. How much should you invest in Stock Lif you desire a
combined return from the two stocks of 11 percent? $3,684
710. Stock M has a beta of 1.2. The market risk premium is 7.8 percent and the risk-free rate is
711. Stock M has a beta of 1.2. The market risk premium is 7.8 percent and the risk-free rate is 3.6
percent. Assume you compile a portfolio equally invested in Stock M, Stock N, and a riskfree
security; the portfolio has a beta equal to the overall market. What is the expected return on the
portfolio? 11.4 percent
712. Stock S is expected to return 12 percent in a boom and 6 percent in a normal economy. StockT is
expected to return 20 percent in a boom and 4 percent in a normal economy. There is a probability
of 40 percent that the economy will boom; otherwise, it will be normal. What is the portfolio
variance if 30 percent of the portfolio is invested in Stock S and 70 percent is invested in Stock T?
.004056
713. Stock S is expected to return 12 percent in a boom, 9 percent in a normal economy, and 2 percent in
a recession. Stock T is expected to return 4 percent in a boom, 6 percent in a normaleconomy, and 9
percent in a recession. The probability of a boom is 10 percent while the probability of a recession is
25 percent. What is the standard deviation of a portfolio which is comprised of $4,500 of Stock S
and $3,000 of Stock T? 1.4 percent
714. Stock splits are often used to: adjust the market price of a stock such that it falls within a preferred
trading range
715. Stu can purchase a house today for $110,000, including the cost of some minor repairs. He expects
to be able to resell it in one year for $129,000 after cleaning up the property. At a discount rate of
5.5 percent, what is the expected net present value of this purchase opportunity?$12,274.88
716. Stu has decided to invest $6,800 in a risky asset that has an expected return of 11.3 percentand a
standard deviation of 21.2 percent. He will also invest $3,200 in a risk-free asset with anexpected
return of 4.2 percent. The market risk premium is 7.1 percent. What is the standard deviation of his
portfolio? 14.42 percent
717. Stu wants to earn a real return of 3.4 percent on any bond he acquires. The inflation rate is 2.8
percent. He has determined that a particular bond he is considering should have an interest rate risk
premium of .27 percent, a liquidity premium of .08 percent, and a taxability premium of 1.69
percent. What nominal rate of return is Stu demanding from this particular bond? 8.34 percent
718. Stu wants to earn a real return of 3.4 percent on any bond he acquires. The inflation rate is 2.8
percent. He has determined that a particular bond he is considering should have an interest rate risk
premium of .27 percent, a liquidity premium of .08 percent, and a taxability premium of1.69
percent. What nominal rate of return is Stu demanding from this particular bond? 8.34 perce
719. Sun Shade's has sales of $363,000, total assets of $323,500, and a profit margin of 14.6percent. The
firm has a total debt ratio of 54 percent. What is the return on equity? 35.61 percent (Explanation:
ROE = [.146($363,000)]/[$323,500(1 − .54)] ROE = .3561, or 35.61%)
720. Supplemental liquidity providers (SLPs): do not operate on the floor of a stock exchange.
721. Suppose a firm calculates its external financial need for a growth rate of ten percent andfinds that
the need is a negative value. What are the firm's options in this case? With a negative external
financing need, the firm can expect to have a surplus of fundsgiven the projected rate of growth. The
firm can use those funds to reduce current liabilities, reduce long-term debt, buy back common stock,
increase dividends, or invest in assets and resources, as needed, to increase its growth rate.
722. Suppose you have a car loan that lasts 6 years, a discount rate of 7%, and a loan balance of $15,000
requiring annual payments. What is the annual payment? $3,146.94
723. Suppose you paid a $1,200 loan off by paying $400 in principal each year plus 10 percent annual
interest. How much is the interest payment in the second year of the loan? $80
($1,200 - 400) = 800
$800 × 0.1 = $80
724. Suppose you paid off a $1,200 loan by paying $400 in principal each year plus 10 percent annual
interest over a 3-year period. What is the total payment (interest plus principal) in Year 3? $440
$400 + ($1,200 - 800) × .10
725. Sustainable growth can be determined by the: profit margin, the payout ratio, the debt-to-equity
ratio, and the asset requirement or asset turnover ratio.
726. Suzette is going to receive $10,000 today as the result of an insurance settlement. In addition, she
will receive $15,000 one year from today and $25,000 two years from today. She plans on saving all
of this money and investing it for her retirement. If Suzette can earn an average of 11% on her
investments, how much will she have in her account if she retires 25 years from today? $595,098.67
727. Suzette is receiving $10,000 today, $15,000 one year from today, and $25,000 four yearsfrom today.
If she invests these funds immediately and earns 9.6 percent annually, how muchwill she have in
savings 30 years from today? $641,547.39 (FV = $10,000(1.09630) + $15,000(1.09629) +
$25,000(1.09626) )
728. Suzette owns a corporate bond with a yield to maturity of 7.45 percent. She is in the 12 percent tax
bracket. What is her equivalent rate of return on a municipal bond? Ignore state taxes 6.56 percent.
729. Systematic risk is measured by: beta.
730. Systematic risk is sometimes referred to as: market risk
731. Systematic risk will ____ when securities are added to a portfolio not change

T
732. T&P common stock sells for $23.43 a share at a market rate of return of 11.65 percent. Thecompany
just paid its annual dividend of $1.20. What is the dividend growth rate? 6.21 percent $23.43 =
[$1.20(1 + g)]/(.1165 − g)g = .0621, or 6.21%
733. Taylor's Hardware offers credit at an APR of 14.9 percent and compounds interest monthly.What
actual rate of interest are they charging? 15.96 percent (EAR = (1 + .149/12)12 – 1)
734. Ted purchased an annuity today that will pay $1,000 a month for five years. He received hisfirst
monthly payment today. Allison purchased an annuity today that will pay $1,000 a month for five
years. She will receive her first payment one month from today. Which one of the following
statements is correct concerning these two annuities? Ted's annuity has a higher present value than
Allison's.
735. Ted's Co. offers a zero coupon bond with an 11.3% yield to maturity. The bond matures in 16 years.
What is the current price of a $1,000 face value bond? $180.33

736. Terry owns a stock that is expected to earn 8.7 percent in a booming economy, 9.2 percent ina
normal economy, and 12.6 percent in a recessionary economy. Each economic state is equally likely
to occur. What is his expected rate of return on this stock? 10.17 percent
737. TH Manufacturers expects to generate cash flows of $129,600 for the next two years. At theend of
the two years the business will be sold for an estimated $3.2 million. What is the value of this
business at a discount rate of 14 percent? $2,675,703 (PV = [$129,600[(1 − 1/1.142)/.14)] +
$3,200,000/1.142)
738. The "EST SPREAD" shown in The Wall Street Journal listing of corporate bonds represents the
estimated: difference between the bond's yield and the yield of a particular Treasury issue.
739. The ____ line shows a security's return in relation to the market's return. characteristic
740. The _____ breaks down return on equity into three component parts. Du Pont identity
741. The _____ portfolio is the market value weighted portfolio of all existing securities. market
742. The _____ premium is that portion of a nominal interest rate or bond yield that represents
compensation for expected future overall price appreciation. Inflation
743. The ________ premium is that portion of the bond yield that represents compensation for potential
difficulties that might be encountered should the bond holder wish to sell the bond prior to
maturity. liquidity
744. The 5-year bond of XYZ Corp. has a bid quote of 131.2891 and an asked quote of 131.3047. Assume
you purchase one of these bonds with a face value of $5,000 and a coupon rate of 7.4 percent, paid
semiannually. The next interest payment will be paid two months from today. What will be your
invoice price for this purchase? $6,690.68
745. The 5-year bond of XYZ Corp. has a bid quote of 131.2891 and an asked quote of 131.3047.Assume
you purchase one of these bonds with a face value of $5,000 and a coupon rate of 7.4 percent, paid
semiannually. The next interest payment will be paid two months from today. Whatwill be your
invoice price for this purchase? $6,690.68
THE A
746. The ability of shareholders to undo the dividend policy of the firm and create an alternative dividend
payment policy via reinvesting dividends or selling shares of stock is called (a): homemade dividends.
747. The advantages of the payback method of project analysis include the: I. application of a discount
rate to each separate cash flow - II. bias towards liquidity- III. ease of use - IV. arbitrary cutoff point:
II and III only
748. The Ajax Co. just decided to save $1,500 a month for the next five years as a safety net for
recessionary periods. The money will be set aside in a separate savings account which pays 3.25%
interest compounded monthly. It deposits the first $1,500 today. If the company had wanted to
deposit an equivalent lump sum today, how much would it have had to deposit? $83,189.29

You need some money today and the only friend you have that has any is your ‘miserly' friend. He
agrees to loan you the money you need, if you make payments of $20 a month for the next six
months. In keeping with his reputation, he requires that the first payment be paid today. He also
charges you 1.5% interest per month. How much money are you borrowing? $115.65

749. The amount of systematic risk present in a particular risky asset, relative to the systematicrisk
present in an average risky asset, is called the particular asset's: beta coefficient.
750. The amount of systematic risk present in a particular risky asset, relative to the systematic risk
present in anaverage risky asset, is called the particular asset's: beta coefficient.
751. The annual coupon of a bond divided by its face value is called the bond's: coupon rate.
752. The annual dividend per share stated as a percentage of the annual earnings per share is called the:
dividend payout.
753. The annual interest paid by a bond divided by the bond's face value is called the: coupon rate.
754. The annual percentage rate: equals the effective annual rate when the interest on an account is
designated as simpleinterest.
755. The APR is meaningful for comparisons only when the number of ______ per year is given.
compounding periods
756. The articles of incorporation: I.- describe the purpose of the firm. – II. are amended periodically. – III.
set forth the number of shares of stock that can be issued. – IV.detail the method that will be used
to elect corporate directors: I and III only
757. The articles of incorporation: set forth the number of shares of stock that can be issued.

THE B
758. The balance sheet shows $32,500 in the capital in excess of par account, $12,000 in
the common stock account, and $68,700 in the retained earnings account. The firm just
announced a stock dividend of 10 percent. What will be the balance in the retained
earnings account after the dividend? $39,180 Retained earnings =
−[($12,000/$1)(.10)($24.60)] + $68,700 Retained earnings = $39,180
759. The behavioral finance concept of self-control is an argument in favor of: high cash dividends.
760. The Bell Weather Co. is a new firm in a rapidly growing industry. The company is planningon
increasing its annual dividend by 20 percent next year and then decreasing the growth rate to a
constant 5 percent per year. The company just paid its annual dividend in the amount of $1 per
share. What is the current value of a share if the required rate of return is 14 percent? P0 =

[$1(1.20)]/1.14 + {[($1(1.20)(1.05)]/(.14 − .05)}/1.14= $13.33

761. The Bell Weather Co. is a new firm in a rapidly growing industry. The company is planning on
increasing its annual dividend by 20% a year for the next four years and then decreasing the growth
rate to 5% per year. The company just paid its annual dividend in the amount of $1.00 per share.
What is the current value of one share if the required rate of return is 9.25%?$41.05

Dividends for the first 4 years are: $1.20, $1.44, $1.728, and $2.0736.

762. The beta of a security is calculated by dividing the: covariance of the security return with the market
return by the variance of the market.
763. The beta of an individual security is calculated by: dividing the covariance of the security with the
market by the variance of the market.
764. The Blue Giant has a profit margin of 6.2 percent and a dividend payout ratio of 40 percent.The
capital intensity is 1.08 and the debt-equity ratio is .54. What is the sustainable rate of growth? 5.60
percent (Explanation: ROE = .062(1/1.08)(1 + .54) ROE = .088407; Sustainable growth rate =
[.088407(1 −.40)]/{1 – [.088407(1 − .40)]} Sustainable growth rate = .0560, or 5.60%)
765. The Bluebird Company has a $10,000 liability it must pay three years from today. The company is
opening a savings account so that the entire amount will be available when this debt needs to be
paid. The plan is to make an initial deposit today and then deposit an additional $2,500 a year for the
next three years, starting one year from today. The account pays a 3% rate of return. How much
does the Bluebird Company need to deposit today? $2,079.89
766. The bonds issued by Jensen & Son bear a 6% coupon, payable semiannually. The bond matures in 8
years and has a $1,000 face value. Currently, the bond sells at par. What is the yield to

maturity? 6.00%

767. The bonds issued by Manson and Son bear a coupon of 6 percent, payable semiannually. The bond
matures in 15 years and has a $1,000 face value. Currently, the bond sells at par. What is the yield to
maturity? 6.00 percent
768. The bonds issued by Manson and Son bear a coupon of 6 percent, payable semiannually. Thebond
matures in 15 years and has a $1,000 face value. Currently, the bond sells at par. What is the yield to
maturity? 6.00 percent
769. The book value of a firm is: based on historical cost.
770. The bylaws: mandate the procedure for electing corporate directors
THE C
771. The Camel Company is considering two mutually exclusive projects with the following cash flows.
The incremental IRR is _______ and if the required rate is higher than the crossover rate then
project _______ should be accepted. 13.94%; B
772. The Cameron Co. is paying a dividend of $.82 a share today. There are 120,000 shares
outstanding with a par value of $1 per share. As a result ofthis dividend, the: retained
earnings will decrease by $98,400.

773. The Capital Market Line is the pricing relationship between: the optimal portfolio and the standard
deviation of portfolio return.
774. The capital market line: has a vertical intercept at the risk-free rate of return.
775. The carrying value or book value of assets: is determined under GAAP and is based on the cost of
the asset.
776. The cash flow of a firm which is available for distribution to the firm's creditors and stockholders is
called the: cash flow from assets.
777. The cash flow of the firm must be equal to: cash flow to stockholders plus cash flow to debtholders.
778. The cash flow to creditors includes the cash: outflow when interest is paid on outstanding debt.
779. The cash ratio is measured as: cash on hand divided by current liabilities
780. The characteristic line graphically depicts the relationship between the: return on a security and the
return on the market.
781. The characteristic line is graphically depicted as: the plot of the security returns against the market
index returns.
782. The closing price of a stock is quoted at 22.87, with a P/E of 26 and a net change of 1.42. Based on
this information, which one of the following statements is correct? The earnings per share are equal
to 1/26th of $22.87.
783. The closing price of a stock is quoted at 32.08, with a PE of 21 and a net change of .36.Based on this
information, which one of the following statements is correct? The current stock price is equivalent
to 21 years of the firm's current earnings per share.
784. The combination of the efficient set of portfolios with a riskless lending and borrowing rateresults in
the: capital market line which shows that all investors will invest in a combination of the risklessasset
and the tangency portfolio.
785. The combination of the efficient set of portfolios with a riskless lending and borrowing rate results
in: the capital market line which shows that all investors will invest in a combination of the riskless
asset and the tangency portfolio.
786. The common set of standards and procedures by which audited financial statements are prepared is
known as the: Generally Accepted Accounting Principles.
787. The common stock of CTI has an expected return of 14.48 percent. The return on the marketis 11.6
percent and the risk-free rate of return is 3.42 percent. What is the beta of this stock? 1.35
788. The common stock of Eddie's Engines, Inc. sells for $25.71 a share. The stock is expected to pay
$1.80 per share next month when the annual dividend is distributed. Eddie's has established a
pattern of increasing its dividends by 4% annually and expects to continue doing so. What is the

market rate of return on this stock? 11%

789. The common stock of Energizer's pays an annual dividend that is expected to increase by 10%
annually. The stock commands a market rate of return of 12% and sells for $60.50 a share. What is
the expected amount of the next dividend to be paid on Energizer's common stock? $1.21

790. The common stock of Energy Saver pays an annual dividend that is expected to increase by 4percent
annually. The stock commands a market rate of return of 12 percent and sells for $58.25 a share.
What is the expected amount of the next dividend to be paid? $4.66 $58.25 = D1/(.12 − .04) D1 =

$4.66
791. The common stock of Filmore Brands returned a 12.6% rate of return last year. The dividend amount
was $1.10 a share which equated to a dividend yield of 2.2%. What was the rate of price
appreciation on the stock? 10.4%
792. The common stock of Fine China sells for $38.42 a share. The stock is expected to pay anannual
dividend of $1.80 next year and increase that amount by 4 percent annually thereafter.What is the
market rate of return on this stock? R = $1.80/$38.42 + .04= .0869, or 8.69%
793. The common stock of Flavorful Teas has an expected return of 14.4%. The return on the market is
10% and the risk-free rate of return is 3.5%. What is the beta of this stock? 1.68
794. The common stock of Grady Co. had an 11.25% rate of return last year. The dividend amount was
$.70 a share which equated to a dividend yield of 1.5%. What was the rate of price appreciation on
the stock? 9.75% (g = .1125 - .015 = .0975 = 9.75%)
795. The common stock of J. K. Laminates sells for $32.60 a share. The stock is expected to pay $2.10 per
share next month when the annual dividend is distributed. J. K.'s has established a pattern of
increasing its dividends by 3.5% annually and expects to continue doing so. What is the market rate
of return on this stock? 9.94%
796. The common stock of Singer Machines pays an annual dividend that is expected to increase by 6%
annually. The stock commands a market rate of return of 11% and sells for $54.20 a share. What is
the expected amount of the next dividend? $2.71
797. The computation of variance requires 4 steps. Place the steps in the correct order from the first step
to the last step. 1. Calculating the expected return.
2. Calculate the deviation of each return from the expected return.
3. Square each deviation.
4. Calculate the average squared deviation.
798. The concept of future value implies that a dollar today is worth ______ a dollar in the future,
assuming positive interest rates. more than
799. The constant dividend growth model is: generally not used in practice because most stocks grow at
a non constant rate.
800. The constant dividend growth model: can be used to compute a stock price at any point in time.
801. The constant dividend growth model: I and II only
I. assumes that dividends increase at a constant rate forever.
II. can be used to compute a stock price at any point of time.
III. states that the market price of a stock is only affected by the amount of the dividend.
IV. considers capital gains but ignores the dividend yield.
802. The controller of a corporation generally reports directly to the: vice president of finance.
803. The corporate document that sets forth the business purpose of a firm is the: articles of
incorporation ( indenture contract & state tax agreement & corporate bylaws & debt charter)
804. The correlation between Stocks A and B is computed as the: covariance between A and B divided by
the standard deviation of A times the standarddeviation of B.
805. The correlation between stocks A and B is the: covariance between A and B divided by the standard
deviation of A times the standard deviation of B.
806. The correlation between two stocks: All of the above (can take on positive values ;can take on
negative values ; cannot be greater than 1 ;cannot be less than -1)
807. The current ratio is measured as: current assets divided by current liabilities
808. The current yield on Alpha's common stock is 4.8%. The company just paid a $2.10 dividend. The
rumor is that the dividend will be $2.205 next year. The dividend growth rate is expected to remain
constant at the current level. What is the required rate of return on Alpha's stock? 10.04%

809. The current yield on Zeta's common stock is 5.6%. The company pays a constant dividend of $1.80.
What is the required rate of return on Zeta's stock? 5.60%

THE D
810. The date before which a new purchaser of stock is entitled to receive a declared dividend, but on or
after which she does not receive the dividend, is called the _____ date. ex-dividend
811. The date by which a stockholder must be registered on the firm's roll as having share ownership in
order to receive a declared dividend is called the: date of record.
812. The date by which a stockholder must be registered on the firm's roll as having share
ownership in order to receive a declared dividend is called the: date of record.
813. The date on which a firm actually distributes its declared dividend iscalled the: date of
payment.
814. The date on which the board of directors passes a resolution authorizing payment of a
dividend to the shareholders is the _____ date.
A. ex-rights
B. ex-dividend
C. record
D. payment
E. declaration
815. The date on which the board of directors passes a resolution authorizing payment of a dividend to
the shareholders is the _____ date. declaration
816. The date on which the firm mails out its declared dividends is called the: date of payment.
817. The debt-equity ratio is measured as total: debt divided by total equity.
818. The decision to issue additional shares of stock is an example of which one of thefollowing? capital
structure decision
819. The decision to issue debt rather than additional shares of stock is an example of: the capital
structure decision.
820. The decisions made by financial managers should all be ones which increase the: market value of the
existing owners' equity.
821. The difference between the highest and lowest prices at which a stock has traded is called its:
trading range.
822. The difference between the present value of an investment and its cost is the: net present value.
823. The differential growth model of stock valuation: assumes the second growth rate will be zero.
824. The dirty price of a bond is defined as the: market price minus any taxes due on the accrued
interest.
825. The dirty price of a bond is defined as the: quoted price plus the accrued interest.
826. The discount rate in equity valuation is composed entirely of: the dividend yield and the growth rate.
827. The discount rate that makes the net present value of an investment exactly equal to zero is called
the: internal rate of return.
828. The discounted payback period of a project will decrease whenever the: amount of each project cash
inflow is increased.
829. The discounted payback period rule: considers the time value of money.
830. The discounted payback rule may cause: Both some positive net present value projects to be
rejected & the most liquid projects to be rejected in favor of less liquid projects.
831. The discounted payback rule states that you should accept projects: if the discounted payback
period is less than some pre-specified period of time.
832. The diversification effect of a portfolio of two stocks: Both increases as the correlation between the
stocks declines and increases as the correlation between the stocks rises.
833. The dividend growth model: considers both the dividend yield and the capital gains yield.
834. The dividend yield on a common stock is most similar to which yield on a bond? current yield
835. The dividend yield on Alpha's common stock is 5.2 percent. The company just paid a $2.10dividend.
The rumour is that the dividend will be $2.30 next year. The dividend growth rate is expected to
remain constant at the current level. What is the required rate of return on Alpha's stock? R = .052 +
($2.30 − 2.10)/$2.10 = .1472, or 14.72%
836. The dividend-irrelevance proposition of Miller and Modigliani depends on the following relationship
between investment policy and dividend policy: The investment policy is set before the dividend
decision and not changed by dividend
837. The dividend-irrelevance proposition of Miller and Modigliani depends onwhich one of
the following relationships between investment policy and dividend policy? The investment
policy is set ahead of time and not altered by changes individend policy.
838. The division of profits and losses among the members of a partnership is formalized in
the: partnership agreement.
839. The dominant portfolio with the lowest possible risk is: the minimum variance portfolio.
840. The Double Dip Co. is expecting its ice cream sales to decline due to the increased interest in healthy
eating. Thus, the company has announced that it will be reducing its annual dividend by 5% a year
for the next two years. After that, it will maintain a constant dividend of $1 a share. Two weeks ago,
the company paid a dividend of $1.40 per share. What is this stock worth if you require a 9% rate of
return? $11.64
841. The DuPont identity can be computed as: Profit margin × 1/Capital intensity ratio × (1 + Debt-equity
ratio).

THE E
842. The earnings per share will: increase as net income increases.
843. The easiest way to solve this problem is using a financial calculator. You can then use the calculator
answer as the time period in the formula just to verify that your answer is correct. The number of
six-month periods is 32. The number of years is 16.

844. The efficient set of portfolios: Both contain the portfolio combinations with the highest return for a
given level of risk and contains the portfolio combinations with the lowest risk for a given level of
return.
845. The Elder Co. is in downsizing mode. The company paid an annual dividend of $2.50 last year. The
company has announced plans to lower the dividend by $.50 a year. Once the dividendamount
becomes zero, the company will cease all dividends permanently. The required rate of return is 14.5

percent. What is one share of this stock worth? P0 = $2.00/1.145 + $1.50/1.1452 + $1.00/1.1453 +

$.50/1.1454 = $3.85
846. The elements along the diagonal of the variance/covariance matrix are: variances.
847. The elements in the off-diagonal positions of the variance/covariance matrix are: covariances.
848. The elements that cause problems with the use of the IRR in projects that are mutually exclusive
are: timing and scale problems.
849. The equity multiplier measures: financial leverage.
850. The equity multiplier ratio is measured as total: assets divided by total equity
851. The Eternal Gift Insurance Company is offering you a policy that will pay you and your heirs $10,000
a year forever. The cost of the policy is $285,000. What is the rate of return on this policy? 3.64%
852. The excess return earned by an asset that has a beta of 1.0 over that earned by a risk-freeasset is
referred to as the: market risk premium.
853. The expected return on a portfolio is best described as average of the expectedreturns on the
individual securities held in the portfolio. a weighted
854. The expected return on a portfolio: is limited by the returns on the individual securities within the
portfolio.
855. The expected return on a portfolio: is limited by the returns on the individual securities within the
portfolio.
856. The expected return on a stock that is computed using economic probabilities is: a mathematical
expectation and not an actual anticipated outcome.
857. The expected return on a stock that is computed using economic probabilities is: a mathematical
expectation based on a weighted average and not an actual anticipated outcome.
858. The expected return on GenLabs is: 12.5%
859. The expected return on HiLo stock is 13.69% while the expected return on the market is 11.5%. The
beta ofHiLo is 1.3. What is the risk-free rate of return? 4.2%
860. The expected return on HiLo stock is 14.08 percent while the expected return on the marketis 11.5
percent. The beta of HiLo is 1.26. What is the risk-free rate of return? 1.58 percent
861. The expected return on the market will increase if the risk-free rate _________ or if the market risk
premium _____. increases; increases
Reason:
The expected return on the market will increase if the risk-free rate increases or if the market risk
premium increases, because RM=RF- risk premium.
862. The External Funds Needed (EFN) equation does not measure the: rate of return to shareholders
given the change in sales.
863. The Extreme Reaches Corp. last paid a $1.50 per share annual dividend. The company is planning on
paying $3.00, $5.00, $7.50, and $10.00 a share over the next four years, respectively. After that the
dividend will be a constant $2.50 per share per year. What is the market price of this stock if the
market rate of return is 15%?$26.57
THE F
864. The fact that flotation costs can be significant is justification for: maintaining a low dividend policy
and rarely issuing extra dividends
865. The Felix Corp. projects to pay a dividend of $.75 next year and then have it grow at 12% for the
following 3 years before growing at 8% indefinitely thereafter. The equity has a required return of
10% in the market. The price of the stock should be ____. $41.67
866. The Felix Corp. will pay an annual dividend of $1.00 next year. The dividend will increaseby 12
percent a year for the following two years before growing at 4 percent indefinitely thereafter. If the
required rate of return is 10 percent, what is the stock's current value? P0 = $1.00/1.10 +

$1.12/1.102 + $1.122/1.103 + {[$1.122(1.04)]/(.10 − .04)}/1.103 = $19.11

867. The financial ratio days' sales in inventory is measured as: 365 days divided by the inventory
turnover.
868. The financial ratio days' sales in receivables is measured as: 365 days divided by the receivables
turnover.
869. The financial ratio measured as earnings before interest and taxes, divided by interest expense is
the: times interest earned ratio.
870. The financial ratio measured as earnings before interest and taxes, plus depreciation, divided by
interest expense, is the: cash coverage ratio.
871. The financial ratio measured as net income divided by sales is known as the firm's: profit margin
872. The financial ratio measured as net income divided by total assets is known as the firm's: return on
assets
873. The financial ratio measured as net income divided by total equity is known as the firm's: return on
equity.
874. The financial ratio measured as the price per share of stock divided by earnings per share is known
as the: price-earnings ratio.
875. The financial ratio measured as total assets minus total equity, divided by total assets, is the: total
debt ratio.
876. The financial statement showing a firm's accounting value on a particular date is the: balance sheet
877. The financial statement summarizing a firm's accounting performance over a period of time is
the: income statement.
878. The first cash flow at the end of week 1 is $100, the second cash flow at the end of month 2 is $100,
and the third cash flow at the end of year 3 is $100. This cash flow pattern is a(n) ______ type of
cash flow. uneven
879. The Fisher Effect primarily emphasizes the effects of _____ risk on an investor's rate of
return. inflation
880. The Fisher formula is expressed as _____ where R is the nominal rate, r is the real rate, and h is the
inflation rate. 1 + R = (1 + r)  (1 + h)
881. The Fisher formula is expressed as where R is the nominal rate, r is the real rate,and h is the
inflation rate. 1 + R = (1 + r)(1 + h)
882. The formula for finding the net present value of a cash outflow now, a positive cash flow in 1 year, a
positive cash flow in 2 years, and a positive cash flow in 3 years is-C0+ C1/(1 + r)^1 + C2/(1 + r)^2+
C3/(1 + r)^3
883. The formula for the ______ value interest factor of an annuity is {1-[1/(1+r)t]} / r present
884. The free cash flow model is most helpful for firms: with external financing needs that are not paying
dividends.
885. The Good Life Insurance Co. wants to sell you an annuity which will pay you $500 per quarter for 25
years. You want to earn a minimum rate of return of 5.5%. What is the most you are willing to pay as
a lump sum today to buy this annuity? $27,082.94

886. The government has imposed a fine on the Not-So-Legal Company. The fine calls for annual
payments of $100,000, $250,000, and $250,000, respectively over the next three years. The first
payment is due one year from today. The government plans to invest the funds until the final
payment is collected and then donate the entire amount, including investment earnings, to a
national health center. The government will earn 3.5% on the funds held. How much will the
national health center receive three years from today? $615,872.50
887. The government imposed a fine on a firm that requires a payment of $100,000 today, $150,000 one
year from today, and $200,000 two years from today. The government will hold the funds until the
final payment is collected and then donate the entire amount to charity. Howmuch will be donated if

the government pays 3 percent interest on the held funds? $460,590 (FV = $100,000(1.032) +
$150,000(1.03) + $200,000)
888. The Great Giant Corp. has a management contract with its newly hired president. The contract
requires a lump sum payment of $25 million be paid to the president upon the completion of her
 first ten years of service. The company wants to set aside an equal amount of funds each year to
cover this anticipated cash outflow. The company can earn 6.5% on these funds. How much must
the company set aside each year for this purpose? $1,852,617.25

889. The higher the degree of financial leverage employed by a firm, the: higher the probability that the
firm will encounter financial distress.
890. The higher the inventory turnover measure, the: faster a firm sells its inventory.
891. The higher the inventory turnover, the: less time inventory items remain on the shelf.
892. The highest effective annual rate that can be derived from an annual percentage rate of 9% is
computed as: e.09 - 1.
893. The historical market risk premium for equities has been ______. positive
894. The idea behind ______ is that interest is earned on interest. compounding
895. The Inferior Goods Co. stock is expected to earn 14% in a recession, 6% in a normal economy, and
lose 4% in a booming economy. The probability of a boom is 20% while the probability of a normal
economy is 55% and the chance of a recession is 25%. What is the expected rate of return on this
stock? 6.00%
896. The information content effect implies that stock prices will rise when dividends are increased
provided that the dividend increase: causes stockholders to increase their expectations of future cash
flows.
897. The information content of a dividend increase generally signals that: management believes the
future earnings of the firm will be strong.
898. The information content of a dividend increase generally signals that: management
believes the future earnings of the firm will be strong.
899. The intercept point of the security market line is the rate of return which corresponds to: the risk-
free rate of return.
900. The intercept point of the security market line is the rate of return which corresponds to: the risk-
free rate of return.
901. The interest paid on any municipal bond is: exempt from federal income taxation and may or may
not be exempt from state taxation.
902. The interest paid on any municipal bond is: taxable at the federal level and tax exempt at the state
and local level.
903. The interest rate charged per period multiplied by the number of periods per year is called the
_____ rate. annual percentage
904. The interest rate expressed as if it were compounded once per year is called the _____
rate. effective annual
905. The interest rate expressed in terms of the interest payment made each period is called the _____
rate. stated annual interest
906. The interest rate for a tax-exempt bond that equates to the rate paid on a taxable bond is computed
as: Taxable rate × (1 − T*).
907. The interest rate for a tax-exempt bond that equates to the rate paid on a taxable bond iscomputed

as: Taxable rate × (1 − T*).

908. The internal rate of return (IRR): I. rule states that a typical investment project with an IRR that is
less than the required rate should be accepted - II. is the rate generated solely by the cash flows of
an investment - III. is the rate that causes the net present value of a project to exactly equal zero- IV.
can effectively be used to analyze all investment scenarios. II and III only
909. The internal rate of return for a project will increase if: the initial cost of the project can be reduced.
910. The internal rate of return is: computed using a project's cash flows as the only source of inputs.
911. The internal rate of return is: difficult to compute without the use of either a financial calculator or a
computer.
912. The internal rate of return may be defined as: the discount rate that makes the NPV equal to zero.
913. The internal rate of return tends to be: easier for managers to comprehend than the net present
value.
914. The inventory turnover ratio is measured as: cost of goods sold divided by inventory.
915. The last date on which you can purchase shares of stock and still receive the dividend is the date
_____ business day(s) prior to the date of record. three
916. The least problems encountered when comparing the financial statements of one firm withthose of
another firm occur when the firms: have the same fiscal year-end.
917. The length of time required for a project's discounted cash flows to equal the initial cost of the
project is called the: discounted payback period.
918. The length of time required for an investment to generate cash flows sufficient to recover the initial
cost of the investment is called the: payback period.
919. The Liberty Co. is considering two projects. Project A consists of building a wholesale book outlet on
lot #169 of the Englewood Retail Center. Project B consists of building a sit-down restaurant on lot
#169 of the Englewood Retail Center. When trying to decide whether to build the book outlet or the
 restaurant, management should rely most heavily on the analysis results from the _____ method of
analysis. net present value
920. The Lighthouse Co. is in a downsizing mode. The company paid a $2.50 annual dividend last year.
The company has announced plans to lower the dividend by $.50 a year. Once the dividend amount
becomes zero, the company will cease all dividends permanently. The required rate of return is 16%.

What is one share of this stock worth? $3.76

921. The linear relation between an asset's expected return and its beta coefficient is the: security market
line.
922. The Lo Sun Corporation offers a bond with a current market price of $1,029.75, a couponrate of 8
percent, and a yield to maturity of 7.52 percent. The face value is $1,000. Interest is paid
semiannually. How many years is it until this bond matures? 8.5 years
923. The longest term bonds ever issued had an initial maturity date of: never as the bonds are perpetual.
924. The longest term bonds ever issued had an initial maturity date of: never as the bonds are perpetual.
925. The long-term debt ratio is probably of most interest to a firm's: mortgage holder.
926. The long-term debts of a firm are liabilities: that do not come due for at least 12 months.
927. The Lory Company had net earnings of $127,000 this past year. Dividends of $38,100 were paid. The
company's equity was $1,587,500. If Lory has 100,000 shares outstanding with a current market
price of $11.625 per share, and the growth rate is 5.6%, what is the required rate of return? 9%
928. The Lumber Mill has total assets of $591,600, current liabilities of $49,700, dividends paid of
$12,000, net sales of $68,400, and net income of $55,400. Assume that all costs, assets, and current
liabilities change spontaneously with sales. The tax rate and dividend payout ratios remain constant.
If the firm's managers project a firm growth rate of 6 percent for next year, whatwill be the amount
of external financing needed to support this level of growth? Assume the firm is currently operating
at full capacity. −$13,490 (EFN = $591,600(.06) − $49,700(.06) − $55,400(1.06)[1 −
($12,000/$55,400)]; EFN = −$13,490)
929. The main objective of long-term financial planning models is to: All of the above (determine the
asset requirements given the investment activities of the firm & plan for contingencies or uncertain
events & determine the external financing needs)
930. The majority of the benefits from portfolio diversification can generally be achieved with just ____
diverse securities. 30
931. The management of a firm's short-term assets and liabilities is called: working capital management.
932. The market has an expected rate of return of 9.8 percent. The long-term government bond is
expected to yield 4.5 percent and the U.S. Treasury bill is expected to yield 3.4 percent. The inflation
rate is 3.1 percent. What is the market risk premium? 6.4 percent
933. The market has an expected rate of return of 9.8%. The long-term government bond is expected to
yield4.5% and the U.S. Treasury bill is expected to yield 3.4%. The inflation rate is 3.1%. What is the
market riskpremium? Risk premium = 9.8% - 3.4% = 6.4%
934. The market price of a bond increases when the: discount rate decreases.
935. The market price of a bond increases when the: discount rate decreases.
936. The market price of a bond is equal to the present value of the: face value plus the present value of
the annuity payments.
937. The market risk premium is computed by: subtracting the risk-free rate of return from the market
rate of return.
938. The market risk premium is computed by: subtracting the risk-free rate of return from the market
rate of return.
939. The market's reaction to the announcement of a change in the firm's dividend payout is likely the:
information content effect.
940. The market's reaction to the announcement of a change in the firm's dividend payout is
referred to as the: information content effect.
941. The market-to-book ratio is measured as: market value of equity per share divided by book value of
equity per share.
942. The maximum rate at which a firm can grow while maintaining a constant debt-equity ratiois best
defined by its: sustainable rate of growth.
943. The McDonald Group purchased a piece of property for $1.2 million. It paid a down payment of 20%
in cash and financed the balance. The loan terms require monthly payments for 15 years at an
annual percentage rate of 7.75% compounded monthly. What is the amount of each mortgage
payment? $9,036.25 (Amount financed = $1,200,000  (1 - .2) = $960,000)

944. The measure of beta associates most closely with: systematic risk.
945. The measure of beta associates most closely with: systematic risk.
946. The Merriweather Co. just announced that it will pay a dividend next year of $1.60. The company
will then increase its dividend by 10 percent per year for two years after which it will maintain a
constant 2 percent dividend growth rate. What is one share worth today at a requiredrate of return

of 14 percent? $15.17 P0 = $1.60/1.14 + [$1.60(1.10)]/1.142 + [$1.60(1.102)]/1.143 + {[$1.60(1.102)

(1.02)]/(.14 − .02)}/1.143 = $15.17

947. The Merriweather Co. just announced that it will pay a dividend next year of $1.60 and is
establishing a policy whereby the dividend will increase by 3.5% annually thereafter. How much will
one share be worth five years from now if the required rate of return is 12%?$22.36

P5 = $22.36

948. The MerryWeather Firm wants to raise $10 million to expand its business. To accomplish this, it
plans to sell 30-year, $1,000 face value zero-coupon bonds. The bonds will be priced to yield 6%.
What is the minimum number of bonds it must sell to raise the $10 million it needs? 57,435

PV = = $174.11; (rounded)

949. The mixture of debt and equity used by a firm to finance its operations is called: capital structure.
950. The modified internal rate of return: is computed by combining cash flows until only one change in
sign remains.
951. The monthly returns on US Treasury bills over the past 50 years have: sometimes been less than the
monthly rate of inflation.
952. The monthly returns on US Treasury bills over the past 50 years have: sometimes been less than the
monthly rate of inflation.
953. The most effective method of directly evaluating the financial performance of a firm is tocompare
the financial ratios of the firm to: the firm's ratios from prior time periods and to the ratios of firms
with similar operations.
954. The net present value of a growth opportunity, NPVGO, can be defined as the net present value per
share of an investment in a new project.:
955. The net present value of a project is equal to the: present value of the future cash flows minus the
initial cost.
956. The newly issued bonds of the Wynslow Corp. offer a 6% coupon with semiannual interest
payments. The bonds are currently priced at par value. The effective annual rate provided by these
bonds must be: greater than 6% but less than 7%.
957. The nominal rate of return on a bond is 7.28 percent while the real rate is 3.09 percent. What is the
rate of inflation? 4.06 percent
958. The nominal rate of return on a bond is 7.28 percent while the real rate is 3.09 percent. Whatis the
rate of inflation? 4.06 percent
959. The observed empirical fact that stocks attract particular investors based on the firm's
dividend policy and the resulting tax impact on investors is called the: clientele effect.
960. The only difference between Joe's and Moe's is that Joe's has old, fully depreciated equipment.
Moe's just purchased all new equipment which will be depreciated over eight years. Assuming all
else equal: Moe's will have a lower profit margin.
961. The opportunity set of portfolios is: all possible risk-return combinations of those securities.
962. The owners of a limited liability company prefer: being taxed personally on all business income
963. The owners of a limited liability company prefer: being taxed personally on all business income.

THE P
964. The pawn shop adds 2 percent to loan balances for every two weeks a loan is outstanding.What is
the effective annual rate of interest? 67.34 percent (EAR = 1.0252/2 – 1)
965. The payback period rule accepts all investment projects in which the payback period for the cash
flows is: less than the cutoff point.
966. The payback period rule is a convenient and useful tool because: All of the above (it provides a quick
estimate of how rapidly the initial investment will be recouped & results of a short payback rule
decision will be quickly seen & it does not have to take into account time value of mone)
967. The payback period rule: None of the above ( discounts cash flows & ignores initial cost & always
uses all possible cash flows in its calculation)
968. The payback period rule: requires an arbitrary choice of a cutoff point.
969. The percentage of a portfolio's total value invested in a particular asset is called that asset's:
portfolio weight.
970. The percentage of sales method: Both separates accounts that vary with sales and those that do not
vary with sales and allows the analyst to calculate how much financing the firm will need to support
the predicted sales level.
971. The person generally directly responsible for overseeing the cash and credit functions, financial
planning, and capital expenditures is the: treasurer.
972. The person generally directly responsible for overseeing the tax management, cost accounting,
financial accounting, and information system functions is the: controler
973. The person generally directly responsible for overseeing the tax management, cost accounting,
financial accounting, and data processing functions is the: controller.
974. The portfolio expected return considers which of the following factors?I.the amount of money
currently invested in each individual security – II.various levels of economic activity III.the
performance of each stock given various economic scenarios -IV. the probability of various states of
the economy I, II, III, and IV
975. The possibility that more than one discount rate will make the NPV of an investment equal to zero is
called the _____ problem. multiple rates of return
976. The preferred stock of ABC Co. offers a rate of return of 7.87 percent. The stock is currentlypriced at
$63.53 per share. What is the amount of the annual dividend? $5.00 (C = $63.53(.0787))
977. The preferred stock of ABC Co. offers an 8.4% rate of return. The stock is currently priced at $50.00
per share. What is the amount of the annual dividend? $4.20
978. The preferred stock of North Coast Shoreline pays an annual dividend of $1.70 and sells for $20.24 a
share. What is the rate of return on this security? 8.40%
979. The present value interest factor for a 30-year annuity with an interest rate of 10 percent per year is
______.9.4269
[1 - (1/1.10^30)]/.10]
980. The present value of an investment's future cash flows divided by the initial cost of the investment is
called the: profitability index.
981. The present value of future cash flows minus initial cost is called: the net present value of the
project.
982. The primary goal of financial management is to: maximize the current value per share of the existing
stock.
983. The primary market is the market in which: newly issued securities are offered for sale.
984. The primary purpose of portfolio diversification is to: eliminate asset-specific risk.
985. The primary reason that company projects with positive net present values are considered
acceptable is that: they create value for the owners of the firm.
986. The principal amount of a bond that is repaid at the end of the loan term is called the bond's: face
value.
987. The principal amount of a bond that is repaid at the end of the loan term is called the bond's: face
value.
988. The principle of diversification tells us that: spreading an investment across many diverse assets will
eliminate some of the risk.
989. The probability of the economy booming is 10 percent, while it is 60 percent for being normal, and
30 percent for being recessionary. A stock is expected to return 16 percent in a boom, 11 percent in
a normal economy, and lose 8 percent in a recession. What is the standarddeviation of the returns? )
9.15 percent
990. The probability the economy will boom is 10 percent while the probability of a recession is 20
percent. Stock A is expected to return 15 percent in a boom, 9 percent in a normal economy, and
lose 14 percent in a recession. Stock B should return 10 percent in a boom, 6 percent in a normal
economy, and 2 percent in a recession. Stock C is expected to return 5 percent in a boom,7 percent
in a normal economy, and 8 percent in a recession. What is the standard deviation of a portfolio
invested 20 percent in Stock A, 30 percent in Stock B, and 50 percent in Stock C? 2.2 percent
991. The probability the economy will boom is 15 percent; otherwise, it will be normal. Stock Gshould
return 15 percent in a boom and 8 percent in a normal economy. Stock H should return 9percent in
a boom and 6 percent otherwise. What is the variance of a portfolio consisting of
992. The probability the economy will boom is 20 percent, while it is 70 percent for a normal economy,
and 10 percent for a recession. Stock A will return 18 percent in a boom, 11 percent ina normal
economy, and lose 10 percent in a recession. Stock B will return 9 percent in boom, 7 percent in a
normal economy, and 4 percent in a recession. Stock C will return 6 percent in a boom, 9 percent in
a normal economy, and 13 percent in a recession. What is the expected returnon a portfolio which is
invested 20 percent in Stock A, 50 percent in Stock B, and 30 percent in Stock C? 8.25 percent
993. The problem of multiple IRRs can occur when: there is more than one sign change in the cash flows
994. The process of planning and managing a firm's long-term investments is called: capital budgeting.
995. The profit that is earned on a bond trade by a bond dealer is called the: spread.
996. The profit that is earned on a bond trade by a bond dealer is called the: spread.
997. The profitability index is closely related to: net present value.
998. The profitability index is the ratio of: present value of cash flows to initial investment cost
999. The profitability index: is useful as a decision tool when investment funds are limited and all
available funds are allocated.
1000. The projected addition to retained earnings can be calculated as: PM × Projected sales × (1 −
Dividend payout ratio).
1001. The promised coupon payments on a US TIPS bond are specified in: real terms.
1002. The promised coupon payments on a US TIPS bond are specified in: real terms.
1003. The quick ratio is measured as: current assets minus inventory, divided by current liabilities.
1004. The range of possible correlations between two securities is defined as: +1 to −1.
1005. The range of risk-return combinations possible with a portfolio of securities is captured by the
opportunity set, which is also known as the ______ set. feasible
1006. The rate at which a stock's price is expected to appreciate (or depreciate) is called the __ yield.
capital gains
1007. The rate at which a stock's price is expected to appreciate (or depreciate) is called the _____
yield. capital gains
1008. The rate of return on the common stock of Flowers by Flo is expected to be 14% in a boom
economy, 8% ina normal economy, and only 2% in a recessionary economy. The probabilities of
these economic states are 20% for a boom, 70% for a normal economy, and 10% for a recession.
What is the variance of the returns on the common stock of Flowers by Flo? .001044
1009. The rate of return required by investors in the market for owning a bond is called the: yield to
maturity.
1010. The rate of return required by investors in the market for owning a bond is called the: yield to
maturity
1011. The Reading Co. has adopted a policy of increasing the annual dividend on its common stock at a
constant rate of 3% annually. The last dividend it paid was $0.90 a share. What will the company's

dividend be in six years? $1.07

1012. The receivables turnover ratio is measured as: sales divided by accounts receivable
1013. The Red Bud Co. just paid a dividend of $1.20 a share. The company announced today that it will
continue to pay this constant dividend for the next 3 years after which time it will discontinue paying
dividends permanently. What is one share of this stock worth today if the required rate of return is

7%? $3.15
1014. The relationship between nominal interest rates on default-free, pure discount securities and the
time to maturity is called the: term structure of interest rates.
1015. The relationship between nominal interest rates on default-free, pure discount securities andthe
time to maturity is called the: term structure of interest rates.
1016. The relationship between nominal rates, real rates, and inflation is known as the: Fisher effect.
1017. The relationship between the covariance of the security with the market to the variance is called
the: beta.
1018. The Rent It Company declared a dividend of $.60 a share on October 20th to holders of
record on Monday, November 1st. The dividend is payable on December 1st. You
 purchased 100 shares of this stock on Wednesday, October 27th. How much dividend
income will you receive on December 1st as a result of this declaration? $60.00
1019. The Retail Outlet has 6,000 shares of stock outstanding and the current market value of
the firm is $429,000. The company just announced a 2-for-1stock split. What will be the
market price per share after the split? $35.75 Market price per share = ($429,000/6,000
shares)(1/2) Market price per share = $35.75
1020. The Retail Outlet has 8,000 shares of stock outstanding with a par value of $1 per
share. The current market value of the firm is $620,000. The balance sheet shows a capital
in excess of par account value of $66,000 andretained earnings of $234,000. The
company just announced a 3-for-1 stock split. What will be the retained earnings account
balance after the split? $234,000
1021. The return on equity can be calculated as: ROA × Equity multiplier.
1022. The return on market minus the risk-free rate is the market risk premium
1023. The risk of a large, diversified portfolio will ____ if a security with a negative beta is added to the
portfolio. decrease
Reason:
The risk of a large, diversified portfolio will decrease if a security with a negative beta is added to the
portfolio, because the security is expected to do well when the market does poorly.
1024. The risk premium for an individual security is computed by: multiplying the security's beta by the
market risk premium.
1025. The risk-free rate of return is 3.68 percent and the market risk premium is 7.84 percent. Whatis
the expected rate of return on a stock with a beta of 1.32? 14.03 percent
1026. The risk-free rate of return is 4% and the market risk premium is 8%. What is the expected rate of
return ona stock with a beta of 1.28? 14.24%
1027. The Robert Phillips Co. currently pays no dividend. The company is anticipating dividends of $0,
$0, $0, $.10, $.20, and $.30 over the next 6 years, respectively. After that, the company anticipates
increasing the dividend by 4% annually. The first step in computing the value of this stock today, is
to compute the value of the stock when it reaches constant growth in year: 6
1028. The rules by which corporations govern themselves are called: bylaws.
1029. The Sarbanes Oxley Act of 2002 is intended to: protect investors from corporate abuses.
1030. The Sarbanes Oxley Act was enacted in 2002
1031. The Sarbanes-Oxley Act of 2002 is a governmental response to: corporate scandals.
1032. The Sarbanes-Oxley Act of 2002 is a governmental response to: management greed and abuses.
1033. The Sarbanes-Oxley Act of 2002: caused some firms to "go dark".
1034. The Saw Mill has shares of stock outstanding with a par value of $1 per share and a
market-to-book ratio of 2.1. The balance sheet shows $5,000 inthe common stock
account, $58,000 in the capital in excess of par account,and $32,500 in the retained
earnings account. The firm just announced a stock dividend of 50 percent. What is the
book value of the common stock account after the dividend? $5,000 Book valueCommon

stock = [($5,000/$1)(.5)($1)] + $5,000Book valueCommon stock = $7,5

1035. The Scott Co. has a general dividend policy whereby it pays a constant annual dividend of $1 per
share of common stock. The firm has 1,000 shares of stock outstanding. The company: must still
declare each dividend before it becomes an actual company liability
1036. The secondary market is the market in which: one shareholder sells securities to another
shareholder.
1037. The Securities Exchange Act of 1934 focuses on: insider trading.
1038. The separation principle states that an investor will: combine a riskless asset with the tangency
portfolio based on their risk tolerance level.
1039. The separation principle states that an investor will: invest only in the riskless asset and tangency
portfolio choosing the weights based on individual risk tolerance.
1040. The Sister's Market is preparing to pay its first dividends. It is going to pay $.60, $1.10, and $1.50
a share over the next 3 years, respectively. After that, the company has stated that the annual
dividend will be $1.98 per share indefinitely. What is this stock worth to you per share if you demand
a 9% rate of return? $19.62
1041. The slope of an asset's security market line is the: market risk premium.
1042. The slope of the security market line is the: market risk premium.
1043. The Smart Bank wants to be competitive based on quoted loan rates and thus must offerloans at
an annual percentage rate of 7.9 percent. What is the maximum rate the bank can actually earn
based on this quoted rate? 8.22 percent (EAR = e.079 – 1)
1044. The specified date on which the principal amount of a bond is repaid is called the
bond's: maturity.
1045. The specified date on which the principal amount of a bond is repaid is called the bond's:
maturity.
1046. The standard deviation decreases over the ______ bending portion of the feasibility set.
backward
1047. The standard deviation is ___. the square root of the variance
1048. The standard deviation of a portfolio will tend to increase when: the portfolio concentration in a
single cyclical industry increases.
1049. The standard deviation of a portfolio will tend to increase when: the portfolio concentration in a
single cyclical industry increases.
1050. The standard deviation of GenLabs returns is .2069
1051. The stated interest payment, in dollars, made on a bond each period is called the bond's: coupon
1052. The stated interest payment, in dollars, made on a bond each period is called the bond's: coupon.
1053. The stated rate of interest is 10%. Which form of compounding will give the highest effective rate
of interest? continuous compounding
1054. The stock of Big Joe's has a beta of 1.14 and an expected return of 11.6%. The risk-free rate of
return is 4%.What is the expected return on the market? 10.67%
1055. The stock of Big Joe's has a beta of 1.38 and an expected return of 16.26 percent. The risk-free
rate of return is 3.42 percent. What is the expected return on the market? 12.72 percent
1056. The stock of Martin Industries has a beta of 1.43. The risk-free rate of return is 3.6 percentand
the market risk premium is 9 percent. What is the expected rate of return? 16.47 percent
1057. The stock of Martin Industries has a beta of 1.43. The risk-free rate of return is 3.6% and the
market riskpremium is 9%. What is the expected rate of return on Martin Industries stock? 16.5%
1058. The stock valuation model that determines the current stock price by dividing the next annual
dividend amount by the excess of the discount rate less the dividend growth rate is called the _____
model. dividend growth
1059. The sustainable growth rate will be equivalent to the internal growth rate when, and onlywhen: a
firm has no debt.
1060. The sustainable growth rate: is normally higher than the internal growth rate.
1061. The sustainable rate of growth for a firm can be increased by: increasing the total asset turnover.
1062. The systematic risk of the market is measured by: a beta of 1.0.
1063. The term structure of interest rates reflects the: pure time value of money.
1064. The term structure of interest rates reflects the: pure time value of money.
1065. The term structure of interest rates: can be humped in the middle.
1066. The term structure of interest rates: can be humped in the middle.
1067. The term structure of interest rates: is based on pure discount bonds while the Treasury yield
curve is based on coupon bond yields.
1068. The term structure of interest rates: is based on pure discount bonds while the Treasury yield
curve is based on coupon bondyields.
1069. The three parts of the Du Pont identity can be generally described as:I. operating efficiency, asset
use efficiency and firm profitability.-II. financial leverage, operating efficiency and asset use
 efficiency.-II. the equity multiplier, the profit margin and the total asset turnover.-IV. the debt-equity
ratio, the capital intensity ratio and the profit margin. : II and III only
1070. The time value of money concept can be defined as: the relationship between a dollar to be
received in the future and a dollar today.
1071. The Tinslow Co. has 125,000 shares of stock outstanding at a market price of $93 a
share. The company has just announced a 5-for-2 stock split.How many shares of stock will
be outstanding after the split? 312,500
1072. The total asset turnover ratio is measured as: sales divided by total assets.
1073. The total interest paid on a zero-coupon bond is equal to: the face value minus the issue price.
1074. The total number of variance and covariance terms in a portfolio is N2. How many of these would
be(including non-unique) covariances? N2- N
1075. The total price you pay to purchase a premium bond is referred to as the: dirty price or the full
price.
1076. The total price you pay to purchase a premium bond is referred to as the: dirty price or the full
price.
1077. The total rate of return earned on a stock is comprised of which two of the following? III and IV
only
I. current yield
II. yield to maturity
III. dividend yield
IV. capital gains yield
1078. The total return on a stock is equal to the: dividend yield plus the dividend growth rate.
1079. The transfer of ownership of outstanding shares of a NYSE listed stock: is facilitated in the
secondary markets.
1080. The treasurer and the controller of a corporation generally report to the: chief financial officer.
1081. The treasurer of a corporation generally reports to the: vice president of finance.
1082. The two fatal flaws of the internal rate of return rule are: failure to correctly analyze mutually
exclusive investment projects and the multiple rate of return problem.
1083. The underlying assumption of the dividend growth model is that a stock is worth: the present
value of the future income that the stock is expected to generate.
1084. The underlying assumption of the dividend growth model is that a stock is worth: the present
value of the future income which the stock generates
1085. The use of homemade dividends allows stockholders to change the: cash payout received by
selling off shares to receive current dividends or purchasing additional shares with the dividends, as
desired.
1086. The value of a 20 year zero-coupon bond when the market required rate of return is 9%
(semiannual) is ____. $171.93
1087. The value of a firm can be found by taking the _____ value of all _____ cash flows. present;
future
1088. The value of a future cash flow stated in today's dollars is referred to as the _____. present value
1089. The value of common stock today depends on: the expected future dividends, capital gains and
the discount rate.
1090. The value of the variable "b" as used in the internal growth rate formula can be computed as:
1 − Dividend payout ratio.
1091. The variance of a portfolio comprised of many securities is primarily dependent upon the:
covariances between the individual securities.
1092. The variance of GenLabs returns is: .0428
1093. The variance of Stock A is .0036, the variance of the market is .0059, and the covariancebetween
the two is .0026. What is the correlation coefficient? D) .5642
1094. The variance of Stock A is .004, the variance of the market is .007 and the covariance between the
two is . 0026. What is the correlation coefficient? .4913
1095. The yield to maturity is: All of the above ( the rate that equates the price of the bond with the
discounted cash flows & the expected rate to be earned if held to maturity & the rate that is used to
determine the market price of the bond & equal to the current yield for bonds priced at par.)
1096. The yield to maturity: equals both the current yield and the coupon rate for par value bonds
1097. The yield to maturity: equals both the current yield and the coupon rate for par value bonds.
1098. The zero coupon bonds of Mark Enterprises have a market price of $394.47, a face value of
$1,000, and a yield to maturity of 6.87 percent based on semiannual compounding. How many years
is it until this bond matures? 13.77 years
1099. The zero coupon bonds of Mark Enterprises have a market price of $394.47, a face value of
1,000, and a yield to maturity of 6.87 percent based on semiannual compounding. How manyyears is
it until this bond matures? 13.77 years
1100. The zero coupon bonds of Markco, Inc. have a market price of $394.47, a face value of $1,000,
and a yield to maturity of 6.87%. How many years is it until this bond matures? 14 years
1101. The premium is that portion of a nominal interest rate or bond yield that represents
compensation for expected future loss in purchasing power. inflation
1102. The premium is that portion of the bond yield that represents compensation for potential
difficulties that might be encountered should the bond holder wish to sell the bond priorto maturity.
liquidity
1103. The tells us that the expected return on a risky asset depends only on that asset's
nondiversifiable risk. systematic risk principle
1104. Theo is depositing $1,300 today in an account with an expected rate of return of 8.1 percent.If he
deposits an additional $3,200 two years from today, and $4,000 three years from today, what will
his account balance be ten years from today? $15,699.54 (Explanation: FV = $1,300(1.08110) +
$3,200(1.0818) + $4,000(1.0817) FV = $15,699.54)
1105. There are multiple factors that affect the value of an annuity. Explain what these four factorsare
and discuss how a change in each factor will impact both the present value and the future value of
the annuity. The factors are the interest rate, payment amount, payment timing (beginning or end of
period), and number of payments. An increase in either the payment amount or the number of
paymenats will increase both the present value and the future value of the annuity. An annuity due
(paymaent at beginning of period) will have a higher present value and a higher future value than a
comparable ordinary annuity (payment at end of period). An increase in the interest rate will decrease
the present value but increase the future value.
1106. There is ______ correlation between the unsystematic risk of two companies from different
industries. no
1107. There is a probability of 25 percent that the economy will boom; otherwise, it will be normal.
Stock Q is expected to return 18 percent in a boom and 9 percent otherwise. Stock R is expected to
return 9 percent in a boom and 5 percent otherwise. What is the standard deviation of a portfolio
that is invested 40 percent in Stock Q and 60 percent in Stock R? 2.6 percent
1108. Thirty-five years ago, your father invested $2,000. Today that investment is worth $98,407.What
annual rate of return has been earned on this investment? 11.77 percent ($98,407 = $2,000(1 + r)35
r = .1177, or 11.77%)
1109. TJ's offers a $1,000 face value, zero coupon bond with a yield to maturity of 11.3 percent, given
annual compounding. The bond matures in 16 years. What is the current price? $180.33
1110. TJ's offers a $1,000 face value, zero coupon bond with a yield to maturity of 11.3 percent,given
annual compounding. The bond matures in 16 years. What is the current price? $180.33
1111. To calculate sustainable growth rate without using return on equity, the analyst needs the: All of
the above ( profit margin & payout ratio & debt-to-equity ratio & total asset turnover)
1112. To find the future value annuity factor from a time value of money table, read down the rows to
find T = 10 and across the columns to find 10 percent. The factor where that column and row
intersect is _____.15.937
1113. To find the future value annuity factor using the time value of money table, read down the rows
to find T = 2, then across the columns for an interest rate of 10 percent. The intersection of that row
and column will show the factor ____.2.100
1114. To find the present value of an annuity of $100 per year for 10 years at 10 percent per year using
the tables, look up the present value interest factor which is ______ and multiply that by
______.6.1446; $100
1115. Tobi owns a perpetuity that will pay $1,500 a year, starting one year from now. He offers tosell
you all the payments remaining after the first 25 payments have been paid. What price should you
offer him today for payments 26 onward if the discount rate is 8 percent? What doesyour offer price
illustrate about the value of perpetuities?
Perpetuity value:
PV =
$1,500/.08
PV =
$18,750

Value of payments for first 25 years:

PV = $1,500[(1 -
1/1.0825)/.08]PV =
$16,012.16

Value of payments after the first 25 years:

PV = $18,750 −
16,012.16PV =
$2,737.84

This can also be calculated as:

PV =
$18,750/1.0825
PV = $2,737.84

This illustrates that the value of a perpetuity is derived primarily from the payments receivedearly
in the perpetuity's life.
1116. Today is January 1. Starting today, Sam is going to contribute $140 on the first of each month to
his retirement account. His employer contributes an additional 50% of the amount contributed by
Sam. If both Sam and his employer continue to do this and Sam can earn a monthly rate of ½ of 1
 percent, how much will he have in his retirement account 35 years from now? $300,685.11

1117. Todd is able to pay $160 a month for five years for a car. If the interest rate is 4.9%, how much
can Todd afford to borrow to buy a car? $8,499.13

1118. Toni adds $3,000 to her savings on the first day of each year. Tim adds $3,000 to his savings on
the last day of each year. They both earn a 9% rate of return. What is the difference in their savings
account balances at the end of thirty years? $36,803.03

Difference
= $445,725.65 - $408,922.62 = $36,803.03
Note: Difference = $408,922.62  .09 = $36,803.03
1119. Total assets = $32,600(1 − .21)/.115 Total assets = $223,947.83; Total asset turnover =
$217,800/$223,947.83 Total asset turnover = .9725; Equity multiplier = $223,947.83/($223,947.83 −
63,700) Equity multiplier = 1.3975)
1120. Total assets are $1000, fixed assets are $700, long-term debt is $250, and short-term debt is
$300. What is the amount of net working capital? the amount of net working capita= current assets –
current liabilities =(1000-700)-(300) =0
1121. Total assets are $900, fixed assets are $600, long-term debt is $500, and short-term debt is $200.
What is the amount of net working capital? $100 (Net working capital = $900 - $600 - $200 = $100)
1122. Total risk can be divided into: systematic risk and unsystematic risk.
1123. Tracie will receive payments of $550 a month for ten years. What are these payments worthtoday
at a discount rate of 6 percent, compounded monthly? $49,540.40 (APV = $550{[1 − 1/(1 +

.06/12)10(12)]/(.06/12)})
1124. Treynor Industries has paid annual dividends of $1.55, $1.70, and $1.85 a share over the past
three years, respectively. The company now predicts that it will maintain a constant dividend since
its business has leveled off and sales are expected to remain relatively constant. Given the lack of
future growth, you will only buy this stock if you can earn at least a 16% rate of return. What is the
maximum amount you are willing to pay to buy one share of this stock today? $11.56
1125. True or false: A well-diversified portfolio will eliminate all risks. False
1126. True or false: In practice, economists use proxies for the market portfolio instead of the actual
market portfolio. true
1127. True or false: It is possible for the unsystematic risk of a portfolio to be reduced to practically
zero. true
Reason:
If enough securities are added, all the unsystematic risk of the securities in the portfolio should
cancel one another out.
1128. True or false: Receiving $10 today has the same value as receiving $1 today and $9 one year from
now. False
1129. True or false: Risk aversion means that investors will not take risks. False
Reason:
Investors will take risks as long as they are adequately compensated for the risk
1130. True or false: Systematic risk will impact all securities in every portfolio equally. False
1131. True or false: The formula for finding the net present value of a cash outflow now, a positive cash
flow in 1 year, and a positive cash flow in 2 years is -C0+ C1/(1 + r)^1 + C2/(1 + r)^2. True
1132. True or false: The formula for the present value of an annuity factor is {1-[1/(1+r)^t]} / r True
1133. True or false: The Rule of 72 is a short cut approach to estimate the time needed to double your
interest rate. False
1134. True or false: The spreadsheet (Excel) formula for calculating the present value of $100 at the
end of each year for 2 years at 10 percent per year is: PV(.1,2,-100,0). True
1135. True or false: Unsystematic risk is eliminated in a well-diversified portfolio of securities. True
Reason:
Unsystematic risk is eliminated in a well-diversified portfolio of securities.
1136. Turner's Inc. has a price-earnings ratio of 16. Alfred's Co. has a price-earnings ratio of Thus, you
can state with certainty that one share of stock in Alfred's: has a higher market price per dollar of
earnings than does one share of Turner's.
1137. Turner's Inc. has a price-earnings ratio of 16. Alfred's Co. has a price-earnings ratio of 19.Thus,
you can state with certainty that one share of stock in Alfred's: has a higher market price per dollar of
earnings than does one share of Turner's.
1138. Turnips and Parsley common stock sells for $39.86 a share at a market rate of return of 9.5%. The
company just paid its annual dividend of $1.20. What is the rate of growth of its dividend? 6.3%

1139. Two mutually exclusive projects have 3-year lives and a required rate of return of 10.5 percent.
Project A costs $75,000 and has cash flows of $18,500, $42,900, and $28,600 for Years 1 to 3,
respectively. Project B costs $72,000 and has cash flows of $22,000, $38,000, and $26,500 for Years
1 to 3, respectively. Using the IRR, which project, or projects, if either, should be accepted? reject
both projects
1140. Two Sisters Dresses has net working capital of $43,800, net fixed assets of $232,400, netincome
of $43,900, and current liabilities of $51,300. The tax rate is 21 percent and the profitmargin is 9.3
percent. How many dollars of sales are generated from every $1 in total assets? $1.44 ( Explanation:
Total asset turnover = ($43,900/.093)/($43,800 + 51,300 + 232,400) Total asset turnover = 1.44 ;Every
$1 in total assets generates $1.44 in sales.)
1141. Two ways to measure the relationship between the returns of two securities are ______ and
______.-covariance
-correlation

U
1142. U Do It Centers deposited $3,200 in an account two years ago and is depositing another $5,000
today. A final deposit of $3,500 will be made one year from now. What will the account balance be
three years from now if the account pays 4.85 percent interest, compounded annually?$13,666.10
(Explanation: FV3 = $3,200(1.04855) + $5,000(1.04853) + $3,500(1.04852) FV3 = $13,666.10)
1143. Under GAAP, a firm's assets are reported at: cost.
1144. Unique Stores common stock pays a constant annual dividend of $1.75 a share. What is thevalue
of this stock at a discount rate of 13.25 percent? ) $13.21 P0 = $1.75/.1325

1145. Unsystematic risk: can be effectively eliminated through portfolio diversification.

1146. Unsystematic risk: can be effectively eliminated through portfolio diversification.
1147. Upland Motors recently paid a per share dividend of $1.48. Dividends are expected to increase by
2.5 percent annually. What is one share of this stock worth today if the appropriatediscount rate is
14 percent? $13.19 P0 = [$1.48(1.025)]/(.14 − .025) = $13.19

1148. Upriver Tours has balance sheet values of: Inventory $70,500; accounts receivable $50,700;
accounts payable $58,900; cash $32,300, notes payable $20,000, long-term debt $134,700, and net
fixed assets $504,500. What is the current ratio? 1.95 (Explanation: Current ratio = ($32,300 + 50,700
+ 70,500)/($58,900 + 20,000) Current ratio = 1.95)
1149. Uptown Clothing just paid $1.50 as its annual dividend and increases its dividend by 2.5percent
each year. What will Uptown's stock price be in ten years at a discount rate of 12.25percent? P10 =

[$1.50(1.02511)]/(.1225 − .025)= $20.19

1150. Uptown Homes just paid a $1.60 annual dividend. This dividend is expected to increase by 3% per
year. If you are planning on buying 1,000 shares of this stock one year from now, how much should
you expect to pay per share if the market rate of return for this type of security is 13.5% at the time
of your purchase? $16.17
1151. Uptown Industries just decided to save $3,000 a quarter for the next three years. The moneywill
earn 2.75 percent, compounded quarterly, and the first deposit will be made today. If the company
had wanted to deposit one lump sum today, rather than make quarterly deposits, how much would
it have had to deposit to have the same amount saved at the end of the three years? $34,678.35
(APVADue = $3,000{[1 − 1/(1 + .0275/4)3(4)]/(.0275/4)}(1 + .0275/4))
1152. Using internal rate of return, a conventional project should be accepted if the internal rate of
return is: greater than the discount rate.
1153. Using the internal rate of return method, a conventional investment project should be accepted
if the internal rate of return is: greater than the discount rate.

V
1154. Vinnie's Motors has a market-to-book ratio of 3. The book value per share is $4.00. Holding
market-to-book constant, a $1 increase in the book value per share will: tend to cause the market
price per share to rise
1155. Vinnie's Motors has a market-to-book ratio of 3.4. The book value per share is $34 and earnings
per share are $1.36. Holding the market-to-book ratio and earnings per share constant, a $1
increase in the book value per share will: increase the price-earnings ratio.

W
1156. Weisbro and Sons' common stock sells for $21 a share and pays an annual dividend that
increases by 5% annually. The market rate of return on this stock is 9%. What is the amount of the

last dividend paid by Weisbro and Sons? $.80

1157. Weisbro and Sons common stock sells for $21 a share and pays an annual dividend that increases
by 5 percent each year. The rate of return on this stock is 9 percent. What is the amountof the last
dividend paid? $.80 $21 = D0(1.05)/(.09 − .05)= $.80

1158. West Coast Wines recently paid a $4.40 annual dividend on its common stock. This dividend
increases at an average rate of 4% per year. The stock is currently selling for $70.30 a share. What is
the market rate of return? 10.51%
1159. Western Wear has total sales of $642,100, EBIT of $93,900, net income of $50,800, currentassets
of $153,500, total assets of $658,000, current liabilities of $78,900, and total liabilities of $213,600.
What are the values of the three components of the DuPont identity?7.91 percent; .98; 1.48 (
Explanation: Profit margin = $50,800/$642,100 Profit margin = .0791, or 7.91% Total asset turnover =
$642,100/$658,000 Total asset turnover = .98 ; Equity multiplier = $658,000/($658,000 − 213,600)
Equity multiplier = 1.48)
1160. Weston has sales of $38,900, net income of $2,400, total assets of $43,100, and total equityof
$24,700. Interest expense is $830. What is the common-size statement value of the interest
expense? 2.13 percent (Explanation: Common-size interest expense = $830/$38,900Common-size
interest expense = .0213, or 2.13%)
1161. Westover's has an outstanding bond with a coupon rate of 5.5 percent that matures in 12 years.
The bond pays interest semiannually. What is the market price of one $1,000 face value bond if the
yield to maturity is 7.13 percent? $870.01
1162. Westover's has an outstanding bond with a coupon rate of 5.5 percent that matures in 12 years.
The bond pays interest semiannually. What is the market price of one $1,000 face valuebond if the
yield to maturity is 7.13 percent? ) $870.01 Bond price = (.055/2)($1,000){[1 − 1/(1 +

.0713/2)12(2)]/(.0713/2)} + $1,000/(1 +.0713/2)12(2) = $870.01

WHAT
1163. What are the implications of the time value of money concept? A dollar tomorrow is worth less
than a dollar today A dollar today is worth more than a dollar tomorrow
1164. What are the two components of risky return (U) in the total return equation? Market risk
Unsystematic risk
U=m+e
1165. What are the two components of the expected return on the market (RM)? The risk-free rate
(RF) ZZZZZZZZZZZZZZZZZZZZZ7The risk premium
1166. What can we conclude if the covariance between the returns of two securities is zero? The
returns of the two securities are unrelated
1167. What concerns might a loan officer have when loaning funds to a sole proprietorship thathe or
she might not have when loaning funds to a corporation? The existence and viability of a sole
proprietor is dependent upon one individual. Should thatindividual die, the entity would cease to exist.
Likewise, should the owner lose interest in thebusiness or become ill, the business might also cease to
exist. With a corporation, the company ownership could be sold in any one of those situations such
that the business entitywould continue to exist.
1168. What do covariance and correlation measure? They both measure how two random variables are
related
1169. What does a normal return depend upon? All relevant information available to shareholders
1170. What does beta measure? It measures the risk of a security in relation to the overall market.
1171. What does it mean if the returns of two stocks, A and B, are negatively correlated? It means that,
on average, if the returns of stock A are positive, the returns of stock B will be negative.
1172. What does the backward bending portion of the feasibility set indicate? A reduction in portfolio
risk due to diversification benefits.
1173. What does the characteristic line for a security show? It shows a security's return in relation to
the market's return.
1174. What effect will an increase in the discount rate have on the present value of a project that hasan
initial cash outflow followed by five years of cash inflows? The PV will decrease.
1175. What is a normal return? It is the return that shareholders predict or expect.
1176. What is a reasonable estimate for the U.S. equity risk premium? 7%
1177. What is a risk premium? It is additional compensation for taking risk, over and above the risk-free
rate
1178. What is an uncertain or risky return? It is the portion of return that depends on information that
is currently unknown.
1179. What is expected return? The return that an individual expects to earn over the next period.
1180. What is Stock B's beta if the covariance between stock B and the market is 3.75, and variance of
the market is 2.5? Reason:3.75/2.5 = 1.5
1181. What is systematic risk? It is a risk that pertains to a large number of assets.
1182. What is the annual percentage rate on a loan that charges interest of 1.65 percent per quarter?
6.60 percent (APR = .0165(4))
1183. What is the annual percentage rate on a loan with a stated rate of 2% per quarter? 8.00%
1184. What is the appropriate measure of risk for an individual security if an investor holds a diversified
portfolio? Beta
Reason: Standard deviation measures total risk. The unsystematic portion can be diversified away,
so beta is the appropriate measure of risk.
1185. What is the beta for stock A if the covariance between stock A and the market is 1.5 and the
variance of the market is 2.5? .6
Rationale:1.5/2.5 = .6
1186. What is the beta of a portfolio comprised of the following securities? ValuePortfolio = $2,000 +
$3,000 + $5,000 = $10,000; BetaPortfolio = ($2,000 $10,000 × 1.20) + ($3,000 $10,000 × 1.46) +

($5,000 $10,000 × .72) = .24 + .438 + .36 = 1.038

1187. What is the correlation of returns between stocks A and B based on the following information?
The standard deviation of returns is .30 for A and .20 for B and the covariance between A and B's
returns is .045.
Multiple choice question. 045/(.3 × .2) = .75
1188. What is the covariance for two securities with returns that are unrelated to each other? Zero
1189. What is the difference between a bull market and a bear market? A bull market is characterized
by rising prices while a bear market is characterized by falling prices.
1190. What is the difference between an ordinary annuity and an annuity due? What value can beused
to quickly convert both the present value and the future value of an ordinary annuity into annuity
due values? An ordinary annuity has payments that occur at the end of each time period while
annuity due payments occur at the beginning of each time period. If you multiply either thepresent
value or the future value of an ordinary annuity by a factor of (1 + r), where r is theinterest rate per
period, you have the value of the annuity due.
1191. What is the difference in the future value of $100 at 7 percent interest for 5 years if the interest
is compounded semiannually rather than annually? $0.80
1192. What is the effective annual rate if your credit card charges you 10.64 percent compoundeddaily?
(Assume a 365-day year.) 11.22 percent (EAR = (1 + .1064/365)365 – 1)
1193. What is the effective annual rate of 10.25 percent compounded continuously? 10.79 percent
(EAR = e.1025 – 1)
1194. What is the expected return of a portfolio consisting of stocks A and B if the expected return is 10
percent for A and 15 percent for B? Assume you are equally invested in both the stocks. (.5 x 10%) +
(.5 x1 5%)= 12.5%
1195. What is the expected return on a portfolio comprised of $3,000 in stock K and $5,000 in stock L if

theeconomy is normal? 5.63%

1196. What is the expected return on a portfolio comprised of $4,000 in stock M and $6,000 in stock N
if theeconomy enjoys a boom period? 13.2%

1197. What is the expected return on a portfolio which is invested 20% in stock A, 50% in stock B, and

30% in stock C? 8.25%

1198. What is the expected return on this portfolio? 10.59% (Portfolio value = (520 × $25) + (300
× $48) + (250 × $26) = $13,000 + $14,400 + $6,500 = $33,900; E(r) = ($13,000 $33,900 × .08)
+ ($14,400 $33,900 × .15) + ($6,500 $33,900 × .06) = .03068 + .06372 + . 01150 = .1059 =

10.59%)
1199. What is the future value of $1,000 a year for five years at a 6% rate of interest? $5,637.09
1200. What is the future value of $2,400 a year for three years at an 8% rate of interest? $7,791.36

1201. What is the future value of $3,100 a year for six years at interest rate of 8.9 percent?$23,263.57
(AFV = $3,100[(1.0896 − 1)/.089])
1202. What is the future value of $845 a year for seven years at an interest rate of 11.3 percent?
$8,343.51(AFV = $845[(1.1137 − 1)/.113])
1203. What is the future value of investing $5,650 for 14 years at a continuously compounded rateof
8.6 percent? $18,833.85 (FV = $5,650e.086(14) )
1204. What is the future value of the following cash flows at the end of year 3 if the interest rate is

6%? The cash flows occur at the end of each year $18,246.25 (5,180
* 1.06^2 + 9,600 * 1.06 + 2,250 = 18,246.25)
1205. What is the future value of the following cash flows at the end of year 3 if the interest rate is

9%? The cash flows occur at the end of each year. $16,177.14 (9,820
* 1.09^2 + 0 * 1.09 + 4,510 = 16,177.14)
1206. What is the future value of the following cash flows at the end of year 3 if the interest rate is

7.25%? The cash flows occur at the end of each year. $10,073.99
(6,800 * 1.0725^2 + 2,100 * 1.0725 + 0 = 10,07399)
1207. What is the impact on the variance of a two-asset portfolio if the covariance between the two
securities is negative? The variance will decrease
1208. What is the internal rate of return on an investment with the following cash flows? 5.96%

1209. What is the market portfolio? It is the market value weighted portfolio of all existing securities.
1210. What is the net present value of a project that has an initial cash outflow of $12,670 and the
following cash inflows? The required return is 11.5% $218.68 (NPV = $-4,375 + $0/1.115 +
 $8,750/1.115^3 + $4,100/1.115^4)

1211. What is the net present value of a project with an initial cost of $36,900 and cash inflows of
$13,400, $21,600, and $10,000 for Years 1 to 3, respectively? The discount rate is 13 percent.
.−$1,195.12
1212. What is the net present value of a project with the following cash flows and a required return of
12%? $177.6 ( NPV = $-28,900 + $12,450/1.12 + $19,630/1.12^2 + $2,750/1.12^3)

1213. What is the portfolio variance if 30% is invested in stock S and 70% is invested in stock T? .004056

1214. What is the present value of $100 each year for 20 years at 10 percent per year? $851.36
$100{[1 - (1/(1.10)^20)]/0.10}
1215. What is the present value of $6,811 to be received in one year if the discount rate is 6.5percent?
$6,395.31
1216. What is the present value of an ordinary annuity that pays $100 per year for three years if the
interest rate is 10 percent per year? $248.69
$100{[1 - (1/(1.10)^3)]/.10}
1217. What is the profitability index for an investment with the following cash flows given a 9%
required return? . 1.02

1218. What is the return on a portfolio that consists of: $50,000 in an index fund, $30,000 in a bond
fund, and $20,000 in a foreign stock fund? The expected returns are 7 percent, -3 percent, and 18
percent, respectively. .5 × 7% + .3 × -3% + .2 × 18% = 6.2%
1219. What is the standard deviation of a portfolio that is invested 40% in stock Q and 60% in stock R?

2.6%
1220. What is the standard deviation of a portfolio which is comprised of $4,500 invested in stock S and

$3,000 in stock T? 1.4%

1221. What is the standard deviation of a portfolio which is invested 20% in stock A, 30% in stock B and

50% in stock C? 2.2%

1222. What is the standard deviation of the returns on a stock given the following information? 9.15%

1223. What is the value of a 20-year, zero-coupon bond with a face value of $1,000 when the market
required rate of return is 9.6 percent, compounded semiannually? $153.30
1224. What is the value of a 20-year, zero-coupon bond with a face value of $1,000 when themarket
required rate of return is 9.6 percent, compounded semiannually? $153.30
1225. What is the variance of a portfolio consisting of $3,500 in stock G and $6,500 in stock H? .000247

1226. What is unsystematic risk? It is a risk that affects a single asset or a small group of assets
1227. What is variance? A measure of the squared deviations of a security's return from its expected
return
1228. What rate of return should be used to compute the NPV of a proposed purchase of Smiley's,an
operating business? The discount rate applicable to other investments with similar risks
1229. What will happen to the risk of a portfolio composed of two securities as more dollars are
invested in the riskier asset? It can increase or decrease.
1230. What would be the maximum an investor should pay for the common stock of a firm that hasno
growth opportunities but pays a dividend of $1.36 per year? The required rate of return is 12.5
percent. P0 = $1.36/.125 = $10.88

1231. What would be the maximum an investor should pay for the common stock of a firm that has no
growth opportunities but pays a dividend of $1.36 per year? The next dividend will be paid in exactly
1 year. The required rate of return is 12.5%.$10.88
1232. When a security is added to a portfolio the appropriate return and risk contributions are: the
expected return and the beta.
1233. When computing the expected return on a portfolio of stocks the portfolio weights are basedon
the: market value of the total shares held in each stock.
1234. When computing the expected return on a portfolio of stocks the portfolio weights are based on
the: market value of the total shares held in each stock.
1235. When considering a capital budgeting project the financial manager should consider the: I. size
of the project – II. timing of the project's cash flows – III. risk associated with the project's cash
flows : I, II, and III
1236. When expressing covariance between two securities, the ordering of variables: does not matter
1237. When finding the present value of an annuity using a spreadsheet (Excel), the interest rate
should be entered as a whole number. False
1238. When investing in large US stocks, the reinvestment of dividends and capital gains generates
compound interest
1239. When making financial decisions related to assets, you should: always consider market values.
1240. When new securities are added to a portfolio, the total unsystematic risk portion of that portfolio
is most likely to _____.decrease
1241. When stocks with the same expected return are combined into a portfolio: the expected return
of the portfolio is equal to the weighted average expected return of the stocks.
1242. When the present value of the cash inflows exceeds the initial cost of a project, then the project
should be: accepted because the profitability index is greater than 1.
1243. When two projects both require the total use of the same limited economic resource, the
projects are generally considered to be: mutually exclusive.
1244. When using an annuity table to find the present value of an annuity, you multiply the annuity
cash flow by the present value interest ________ for annuities. factor
1245. When you are making a financial decision, the most relevant tax rate is the _____ rate. marginal

WHICH
1246. Which account is least apt to vary directly with sales? Notes payable
1247. Which compounding interval will result in the lowest future value assuming everything else is
held constant? annual
1248. Which entity provides a daily snapshot of bond prices for the most active issues? FINRA
1249. Which entity provides a daily snapshot of bond prices for the most active issues? NYSE
1250. Which equality is the basis for the balance sheet? Assets = Liabilities + Stockholder's Equity
1251. Which form of business structure faces the greatest agency problems? Corporation
1252. Which form of business structure is most associated with agency problems? corporation
1253. Which is a more meaningful measure of profitability for a firm, return on assets or return on
equity? Why? Most would argue ROE since it measures returns relative to the amount shareholders
have invested in the firm. In addition, since shareholder wealth maximization is a firm's primarygoal,
it makes more sense to look at this measure.
1254. Which of the following accounts are included in shareholders' equity? I. interest paid - II. retained
earnings - III. capital surplus -V. long-term debt: II and III only
1255. Which of the following accounts are included in working capital management? accounts payable -
accounts receivable-fixed assets-inventory : I, II, and IV only
1256. Which of the following amounts is closest to the value of a bond that pays $55 semiannually and
has an effective semiannual interest rate of 5%? The face value is $1,000 and the bond matures in 3
years. There are exactly six months before the first interest payment. $1,025 (Value = $55(PVIFA5%,6)
+ $1,000(PVIF5%,6) = $279.16 + $746.22 = $1,025.38)
1257. Which of the following amounts is closest to what should be paid for Overland common stock?
Overland has just paid a dividend of $2.25. These dividends are expected to grow at a rate of 5% in
the foreseeable future. The required rate of return is 11%.$39.38
1258. Which of the following are advantages of the corporate form of business ownership? I. limited
liability for firm debt-II. double taxation-III. ability to raise capital-IV. unlimited firm life : I, III, and IV
only
1259. Which of the following are all components of the statement of cash flows? Cash flow from
operating activities, cash flow from investing activities, and cash flow from financing activities
1260. Which of the following are annuities? Monthly rent payments in a lease
Installment loan payments
1261. Which of the following are cash flows from a corporation into the financial markets? I. repayment
of long-term debt – II. payment of government taxes- III. payment of loan interest- IV. payment of
quarterly dividend : I, III, and IV only
1262. Which of the following are current assets? I. patent -II. Inventory-III. accounts payable- IV. Cash: II
and IV only
1263. Which of the following are disadvantages of a partnership? I. limited life of the firm - II. personal
liability for firm debt -III. greater ability to raise capital than a sole proprietorship-IV. lack of ability to
transfer partnership interest : I, II, and IV only
1264. Which of the following are examples of information that may impact the risky return of a stock?
1. The outcome of an application currently pending with the Food ad Drug Administration.
2. The Fed's decision on interest rate at their meeting next week.
1265. Which of the following are examples of systematic risk? -future rates of inflation
-regulatory changes in tax rates
1266. Which of the following are examples of unsystematic risk? 1. Changes is management. 2. Labor
strikes.
1267. Which of the following are expenses for accounting purposes but are not operating cash flows for
financial purposes? I. interest expense-II. Taxes-III. costs of goods sold- IV. Depreciation: I and IV only
1268. Which of the following are factors that favor a high dividend policy? I, II, III, and IV
I. stockholders desire for current income
II. tendency for higher stock prices for high dividend paying firms
III. investor dislike of uncertainty
IV. high percentage of tax-exempt institutional stockholders
1269. Which of the following are included in current assets? I. equipment- II. Inventory-III. accounts
payable- IV. cash : II and IV only
1270. Which of the following are included in current liabilities? I. note payable to a supplier in eighteen
months - II. debt payable to a mortgage company in nine months- III. accounts payable to suppliers-
IV. loan payable to the bank in fourteen months : II and III only
1271. Which of the following are included in current liabilities? I. note payable to a supplier in eight
months -II. amount due from a customer next month-III. account payable to a supplier that is due
next week-IV. loan payable to the bank in fourteen months: I and III only
1272. Which of the following are included in the market value of a firm but are excluded from the firm's
book value? I. value of management skills-II. value of a copyright-II. value of the firm's reputation-IV.
value of employee's experience: I, III, and IV only
1273. Which of the following are key requirements of the Sarbanes-Oxley Act? I. Officers of the
corporation must review and sign annual reports.-II. Officers of the corporation must now own more
than 5% of the firm's stock. - III. Annual reports must list deficiencies in internal controls - IV. Annual
reports must be filed with the SEC within 30 days of year end : I and III only
1274. Which of the following are likely to be true if we observe the returns of two stocks in the same
industry, such as Pfizer and Merck? -The returns will be positively correlated over time. -The returns
will move in the same direction (i.e. positive) but not by the same magnitude.
1275. Which of the following are liquidity ratios? I. cash coverage ratio-II. current ratio-III. quick ratio-
IV. inventory turnover : II and III only
1276. Which of the following are needed in order to compute the variance of a portfolio consisting of
two stocks, A and B? The variances of stocks A and B
The covariance between stocks A and B
The market value, in dollars, of the investments in stocks A and B
1277. Which of the following are real-world examples of annuities? Pensions
Mortgages
1278. Which of the following are reasons why an investor cannot attain a portfolio above the feasible
or opportunity set? An investor cannot increase the return on individual securities & An investor
cannot decrease the standard deviation of individual securities & An investor cannot decrease the
correlation between the two securities
1279. Which of the following are results related to the enactment of the Sarbanes-Oxley Act of2002? I.
increased foreign stock exchange listings of U.S. stocks – II. decreased compliance costs – III.
increased privatization of public corporations – IV. increased public disclosure by all corporations : I
and III only
1280. Which of the following are true about risk aversion? The degree of risk aversion varies among
investors & Investors who are more risk averse will tend to demand relatively higher compensation
for taking risk & Risk aversion implies that investors will not take risks unless they are adequately
compensated for it.
1281. Which of the following are true if AIG's beta is -4.53? If the market declines 1%, AIG should rise
by about 4.53% & If the market rises 1%, AIG is should decline by about 4.53%.
1282. Which of the following are valid reasons for a firm to reduce or eliminate its cash
dividends? I, II, and IV only
I. The firm is on the verge of violating a bond restriction which requires a current ratio of 1.8 or
higher.
II. A firm has just received a patent on a new product for which there is strong market demand and
it needs the funds to bring the product to the marketplace.
III. The firm can raise new capital easily at a very low cost.
IV. The tax laws have recently changed such that dividends are taxed at an investor's marginalrate
while capital gains are tax exempt.
1283. Which of the following are ways to amortize a loan? Pay the interest each period plus some fixed
amount of the principal & Pay principal and interest every period in a fixed payment.
1284. Which of the following does not characterize NPV? NPV does not explicitly incorporate risk into
the analysis.
1285. Which of the following help convince managers to work in the best interest of the stockholders?
I. compensation based on the value of the stock -II. stock option plans -III. threat of a proxy fight -IV.
threat of conversion to a partnership:- I, II and III only
1286. Which of the following indexes is a good proxy for the market portfolio? The Standard & Poor's
500 index
Reason:
The Dow Jones Industrial Average consists of only 30 securities, so it does not represent a broad
market portfolio.
1287. Which of the following individuals have unlimited liability based on their ownershipinterest?
general partner -sole proprietor-stockholder-limited partner: I and II only
1288. Which of the following is a perpetuity? A constant stream of cash flows forever
1289. Which of the following is not included in the computation of operating cash flow? Interest paid
1290. Which of the following is the formula for the present value of a growing perpetuity? C/(r - g)
1291. Which of the following is true about a growing annuity? The cash flows grow for a finite period.
1292. Which of the following lists events in chronological order from earliest to latest? declaration date,
ex-dividend date, date of record.
1293. Which of the following may tend to keep dividends low? . I, II, III, and IV
I. a state law restricting dividends in excess of retained earnings
II. a term contained in bond indenture agreements
III. the desire to maintain constant dividends over time
IV. flotation costs
1294. Which of the following methods of project analysis are biased towards short-term projects? I.
internal rate of return - II. net present value -III. Payback -IV. discounted payback : III and IV only
1295. Which of the following parties are considered stakeholders of a firm? I. employee- II. long-term
creditor – III. Government – IV. common stockholder : I and III only
1296. Which of the following payment methods amortizes a loan? Interest plus fixed amount
1297. Which of the following questions are addressed by financial managers? I.How should a product
be marketed? - II. Should customers be given 30 or 45 days to pay for their credit purchases? -
III.Should the firm borrow more money?-IV.Should the firm acquire new equipment?-I and IV only: II,
III, and IV only
1298. Which of the following questions are addressed by financial managers? I. How long will it take
to produce a product? -II. Should customers be given 30 or 45 days to pay for their credit
purchases? – III. Should the firm borrow more money? – IV. Should the firm acquire new
equipment? II, III, and IV only
1299. Which of the following represent cash outflows from a corporation? I. issuance of securities – II.
payment of dividends – III. new loan proceeds – IV. payment of government taxes : II and IV only
1300. Which of the following represents an infinite and constant stream of cash flows? A perpetuity
1301. Which of the following should a financial manager consider when analyzing a capitalbudgeting
project? I.project start up costs – II. timing of all projected cash flows – III. dependability of future
cash flows - IV.ollar amount of each projected cash flow: I, II, III, and IV
1302. Which of the following spreadsheet (Excel) functions will calculate the $614.46 present value of
an ordinary annuity of $100 per year for 10 years at 10 percent per year? =PV(.10,10,-100,0,0)
1303. Which of the following statement is true? A. One must know the discount rate to compute the
NPV of a project but one can compute the IRR without referring to the discount rate.
1304. Which of the following statements are true about expected return? The actual return can be
higher or lower than the expected return & The expected return can be calculated as the average of
the returns in previous periods & The expected return reflects an estimate that can be based on
sophisticated forecasts of future outcomes.
1305. Which of the following statements are true about variance? -Variance is a measure of the squared
deviations of a security's return from its expected return.
-Standard deviation is the square root of variance.
1306. Which of the following statements concerning the effective annual rate are correct? I. When
making financial decisions, you should compare effective annual rates rather than annual
percentage rates.-II. The more frequently interest is compounded, the higher the effective annual
rate.-III. A quoted rate of 6% compounded continuously has a higher effective annual rate than if the
rate were compounded daily.-IV. When borrowing and choosing which loan to accept, you should
select the offer with the highest effective annual rate: I, II, and III only
1307. Which of the following statements concerning the income statement is true? All of the above ( It
measures performance over a specific period of time & It determines after-tax income of the firm &
It includes deferred taxes & It treats interest as an expense)
1308. Which of the following tend to increase the appeal of a firm's stock to the average
investor? II, III, and IV only
I. a cessation of dividends by a firm which has a long history of increasing dividends
II. the distribution of a special dividend by a dividend-paying firm
III. a reverse stock split for a low-priced stock
IV. the declaration of a stock dividend by a growth firm
A. I and III only
 B. II and IV only
C. I, II, and IV only
1309. Which of the following two-asset portfolios displays characteristics that would allow it to be
included in the efficient set of portfolios? Portfolio A has a higher expected return and higher
standard deviation than the minimum variance portfolio.
1310. Which of the following values is closest to the amount that should be paid for a stock that will
pay a dividend of $10 in one year and $11 in two years? The stock will be sold in 2 years for an
estimated price of $120. The appropriate discount rate is 9%.$119.43
1311. Which of the following will be true in a world with homogeneous expectations? All investors will
hold the market portfolio.
Reason:
Investors would either hold the market portfolio or a combination of the market portfolio and the
risk-free security.
1312. Which of the following will increase sustainable growth? Increase profit margin
1313. Which of these are squared values? Covariance and variance
1314. Which of these is included in the return on a municipal bond but excluded from the return on a
US Treasury bond? Liquidity premium and taxability premium
1315. Which of these is included in the return on a municipal bond but excluded from the return ona
US Treasury bond? Liquidity premium and taxability premium
1316. Which one of the following actions by a financial manager creates an agency problem? agreeing
to expand the company at the expense of stockholders' value
1317. Which one of the following actions by a financial manager creates an agency problem? agreeing
to expand the company at the expense of stockholders' value
1318. Which one of the following actions by a financial manager is most apt to create an agency
problem? increasing current profits when doing so lowers the value of the firm's equity
1319. Which one of the following assets is generally the most liquid? accounts receivable (Current
assets are the most liquid and include cash and assets that will be turned into cash within a year
from the date of the balance sheet. Accounts receivable are amounts not yet collected from
customers for goods or services sold to them )
1320. Which one of the following best describes the primary advantage of being a limited partner
rather than a general partner? liability for firm debts limited to the capital invested
1321. Which one of the following best describes the primary advantage of being a limitedpartner
instead of a general partner? maximum loss limited to the capital invested
1322. Which one of the following best describes the primary advantage of being a limitedpartner
rather than a general partner? liability for firm debts is limited to the capital invested
1323. Which one of the following best illustrates that the management of a firm is adhering tothe goal
of financial management? increase in the market value per share
1324. Which one of the following best states the primary goal of financial management? maximize the
current value per share
1325. Which one of the following business types is best suited to raising large amounts of
capital? Corporation
1326. Which one of the following characteristics applies to a limited liability company? taxed similar to a
partnership
1327. Which one of the following correctly defines the chain of command in a typicalcorporate
organizational structure? The chief executive officer reports to the board of directors
1328. Which one of the following correctly defines the upward chain of command in a typicalcorporate
organizational structure? The treasurer reports to the vice president of finance.
1329. Which one of the following functions should be the responsibility of the controller ratherthan the
treasurer? income tax returns
1330. Which one of the following grants an individual the right to vote on behalf of ashareholder? proxy
1331. Which one of the following is a capital budgeting decision? deciding whether or not to purchase a
new machine for the production line
1332. Which one of the following is a capital budgeting decision? deciding whether or not to open a
new store
1333. Which one of the following is a capital structure decision? determining how much debt should be
assumed to fund a project
1334. Which one of the following is a liquidity ratio? Quick ratio
1335. Which one of the following is a means by which shareholders can replace companymanagement?
proxy fight
1336. Which one of the following is a primary market transaction? a dealer buying newly issued
shares of stock from a corporation
1337. Which one of the following is a primary market transaction? sale of a new share of stock to an
individual investor
1338. Which one of the following is a working capital management decision? determining whether to
pay cash for a purchase or use the credit offered by the supplier
1339. Which one of the following is an agency cost? hiring outside accountants to audit the company's
financial statements
1340. Which one of the following is an argument in favor of a low dividend policy? the tax on capital
gains is deferred until the gain is realized
1341. Which one of the following is an example of a nondiversifiable risk? a well respected chairman of
the Federal Reserve suddenly resigns
1342. Which one of the following is an example of systematic risk? the Federal Reserve increases
interest rates
1343. Which one of the following is an example of unsystematic risk? An oil tanker runs aground and
spills its cargo
1344. Which one of the following is an example of unsystematic risk? an oil tanker runs aground and
spills its cargo
1345. Which one of the following is an unintended result of the Sarbanes-Oxley Act? corporations
delisting from major exchanges
1346. Which one of the following is cited as an argument for a high dividend payout? agency costs
related to excess cash reserves
1347. Which one of the following is classified as an intangible fixed asset? Trademark
1348. Which one of the following is included in a firm's market value but yet is excluded from the firm's
accounting value? good reputation of the company
1349. Which one of the following is least likely to be an agency problem? increasing the market value of
the firm's shares
1350. Which one of the following is most apt to cause a profitable, stable firm to have a higherprice-
earnings ratio? Very low current earnings
1351. Which one of the following is not a reason why firms choose repurchases rather than dividends?
conserve cash
1352. Which one of the following is NOT included in cash flow from assets? interest expense
1353. Which one of the following is the best example of systematic risk? The Federal Reserve increases
interest rates
1354. Which one of the following is the best example of two mutually exclusive projects? using an
empty warehouse for storage or renting it entirely out to another firm.
1355. Which one of the following is true according to Generally Accepted Accounting Principles? Costs
of goods sold are recorded based on the matching principle.
1356. Which one of the following lists dividend events in the correct chronological order from earliest
to latest? declaration date, ex-dividend date, date of record
1357. Which one of the following measures is relevant to the systematic risk principle? beta
1358. Which one of the following must be true if a firm had a negative cash flow from assets? The firm
utilized outside funding.
1359. Which one of the following parties has ultimate control of a corporation? shareholders
1360. Which one of the following parties is considered a stakeholder of a firm? Employee
1361. Which one of the following represents the most liquid asset? $100 of inventory that is sold today
for $100 cash
1362. Which one of the following sets of ratios applies most directly to shareholders? market-to-book
ratio and price-earnings ratio
1363. Which one of the following sets of ratios would generally be of the most interest tostockholders?
Return on equity and price-earnings ratio
1364. Which one of the following statements concerning a sole proprietorship is correct? The owner of
a sole proprietorship may be forced to sell his/her personal assets to pay company debts.
1365. Which one of the following statements concerning a sole proprietorship is correct? The life of the
firm is limited to the life span of the owner.
1366. Which one of the following statements concerning a sole proprietorship is correct? The owner of
a sole proprietorship is personally responsible for all of the company's debts.
1367. Which one of the following statements concerning a sole proprietorship is correct? It is easy to
create a sole proprietorship.
1368. Which one of the following statements concerning a sole proprietorship is correct? The life of a
sole proprietorship is limited to the life span of the owner
1369. Which one of the following statements concerning interest rates is correct? An effective annual
rate is the rate that applies if interest were charged annually
1370. Which one of the following statements concerning liquidity is correct? Balance sheet accounts are
listed in order of decreasing liquidity.
1371. Which one of the following statements concerning NASDAQ is FALSE? NASDAQ is an auction
market.
1372. Which one of the following statements concerning net present value (NPV) is correct? An
investment should be accepted if the NPV is positive and rejected if it is negative.
1373. Which one of the following statements concerning net working capital is correct? A decrease in
the cash balance also decreases net working capital.
1374. Which one of the following statements concerning net working capital is correct? Net working
capital increases when inventory is sold for cash at a profit.
1375. Which one of the following statements concerning stock exchanges is correct? Some large
companies are listed on NASDAQ.
1376. Which one of the following statements concerning the annual percentage rate is correct? The
annual percentage rate equals the effective annual rate when the rate on an account is designated
as simple interest.
1377. Which one of the following statements is correct concerning a corporation with taxable income
of $125,000? An increase in depreciation will increase the operating cash flow.
1378. Which one of the following statements is correct concerning corporations? The largest firms are
usually corporations.
1379. Which one of the following statements is correct concerning ratio analysis? A single ratio is often
computed differently by different individuals
1380. Which one of the following statements is correct concerning the expected rate of return on an
individual stock given various states of the economy? The expected return is a weighted average
where the probabilities of the economic states are used as theweights.
1381. Which one of the following statements is correct concerning the NYSE? The listing requirements
for the NYSE are more stringent than those of NASDAQ.
1382. Which one of the following statements is correct concerning the NYSE? A firm is expected to
have a market value for its publicly held shares of at least $100million to be listed on the NYSE.
1383. Which one of the following statements is correct concerning the organizational structure of a
corporation? The chief executive officer reports to the board of directors.
1384. Which one of the following statements is correct concerning the payback period? An investment
is acceptable if its calculated payback period is less than some pre-specified period of time
1385. Which one of the following statements is correct concerning the standard deviation of a
portfolio? The standard deviation of a portfolio can often be lowered by changing the weights of the
securities in the portfolio.
1386. Which one of the following statements is correct concerning the standard deviation of a
portfolio? The standard deviation of a portfolio can often be lowered by changing the weights of the
securities in the portfolio.
1387. Which one of the following statements is correct given these two investment options? Option A is
the better choice of the two given any positive rate of return.
1388. Which one of the following statements is correct if a firm has a receivables turnover measure of
10? The firm has an average collection period of 36.5 days.
1389. Which one of the following statements is correct? Both sole proprietorship and partnership
income is taxed as individual income.
1390. Which one of the following statements is correct? Corporations can raise large amounts of capital
generally easier than partnerships can.
1391. Which one of the following statements is correct? Both sole proprietorships and partnerships are
taxed in a similar fashion.
1392. Which one of the following statements is correct? Financial statements are frequently the basis
used for performance evaluations.
1393. Which one of the following statements is generally correct? Auction markets match buy and sell
orders.
1394. Which one of the following statements is true? You must know the discount rate to compute the
NPV but you can compute the IRR without having a discount rate.
1395. Which one of the following statements related to an income statement is correct? Assume
accrual accounting is used. The labor costs for producing a product are expensed when the product is
sold.
1396. Which one of the following statements related to an income statement is correct? Taxes reduce
both net income and operating cash flow.
1397. Which one of the following statements related to liquidity is correct? Liquid assets are valuable to
a firm.
1398. Which one of the following statements related to taxes is correct? The marginal tax rate for a firm
can be either higher or lower than the average tax rate.
1399. Which one of the following statements related to the cash flow to creditors is correct? A positive
cash flow to creditors represents a net cash outflow from the firm.
1400. Which one of the following stocks is correctly priced if the risk-free rate of return is 2.5% and the

marketrisk premium is 8%? B

1401. Which one of the following stocks is correctly priced if the risk-free rate of return is 3.6% and the

marketrate of return is 10.5%? C

1402. Which one of the following terms is defined as a conflict of interest between the corporate
shareholders and the corporate managers? agency problem
1403. Which one of the following types of risk is not reduced by diversification? Systematic, or market
risk
1404. Which one of the following will increase the cash flow from assets, all else equal? decrease in net
capital spending
1405. Which one of the following will increase the value of a firm's net working capital? selling
inventory at a profit
1406. Which one of the following would indicate a portfolio is being effectively diversified? A decrease
in the portfolio standard deviation
1407. Which one of the following would indicate a portfolio is being effectively diversified? a decrease
in the portfolio standard deviation
1408. Which one of these applies to the dividend growth model of stock valuation? The growth rate
must be less than the discount rate.
1409. Which one of these best describes steps of the separation principle? Determine the tangency
point between the risk-free rate and the efficient set of risky assetsand determine how to combine
the tangency point portfolio with risk-free assets to match the investor's risk tolerance level
1410. Which one of these bonds is the most interest-rate sensitive? 10-year zero coupon bond
1411. Which one of these bonds is the most interest-rate sensitive? 10-year zero coupon bond
1412. Which one of these combinations of bond ratings represents a crossover situation? Baa; BB
1413. Which one of these conditions must exist if the standard deviation of a portfolio comprisedof two
securities is to be less than the weighted average of the standard deviations of the individual
securities held within that portfolio? ρ < 1
1414. Which one of these factors generally has the greatest impact on a firm's PE ratio? Future
opportunities
1415. Which one of these is a characteristic of a sensible payout policy? avoid rejecting positive NPV
projects to increase dividends or buyback shares
1416. Which one of these is a characteristic of a sensible payout policy? Avoid Share
repurchases: can be difficult to verify.
1417. Which one of these is a con of paying dividends? Dividends are frequently taxed as
ordinary income.
1418. Which one of these is a measure of the interrelationship between two securities?Covariance
1419. Which one of these is most apt to be a fixed cost? office salaries
1420. Which one of these ratios measures the efficiency at which a firm employs its assets? Total asset
turnover
1421. Which one of these statements is correct concerning the time value of money? Decreasing the PV
decreases the FV.
1422. Which one of these statements is correct? Dealers buy at the bid price.
1423. Which one of these statements is correct? Much of the dividend income paid in the U.S. is
related to a small number of firms.
1424. Which one of these statements is true? Firms should never give up a positive NPV project to
increase a dividend.
1425. Which one of these terms is most synonymous with the term "income from operations"? EBIT
1426. Which one of these values best represents the funds needed to acquire a firm and payoff allof
that firm's debt? Enterprise value
1427. Which portfolio will an investor who is very risk averse select from the opportunity set of risky
assets? The minimum variance portfolio
1428. Which term relates to the cash flow which results from a firm's ongoing, normal business
activities? operating cash flow
1429. Which two of the following are most apt to cause a firm to have a higher price-earnings ratio? I.
slow industry outlook-II. high prospect of firm growth-III. very low current earnings-IV. investors with
a low opinion of the firm : II and III only
1430. Which type of amortization is most commonly used in the real world for mortgages and car
loans? Fixed payment
1431. Which type of business organization has all the respective rights and privileges of a legal
person? Corporation
1432. Which type of risk does not change as we add more securities to a portfolio? Systematic, or
market, risk
Reason:Unsystematic risk can be reduced by adding more securities to a portfolio.
1433. Which type of risk is unaffected by adding securities to a portfolio? Systematic risk
Reason:Unsystematic risk can be reduced by diversification.
1434. Why are the deviations of returns squared when computing variance? This ensures that that the
sum of the deviations is a positive number.
1435. Why can an investor holding a well-diversified portfolio of securities ignore the unsystematic risk
of individual securities? Because unsystematic risk should be eliminated through diversification
Reason: Unsystematic risk should be eliminated through diversification
1436. Why is the determination of the efficient set for 50 securities more complex than the
determination of the efficient set for two securities? The number of variance, return, and correlation
calculations increases dramatically.
1437. Why should financial managers strive to maximize the current value per share of theexisting
stock? because they have been hired to represent the interests of the current shareholders
1438. Wilbert's Clothing Stores just paid a $1.20 annual dividend. The company has a policy whereby
the dividend increases by 2.5% annually. You would like to purchase 100 shares of stock in this firm
but realize that you will not have the funds to do so for another three years. If you desire a 10% rate
 of return, how much should you expect to pay for 100 shares when you can afford to buy this stock?
Ignore trading costs. $1,766

P3 = $17.66; Purchase cost = 100  $17.66 = $1,766

1439. Wilbert's Clothing Stores just paid an annual dividend of $1.20 and increases its dividend by 2.5
percent annually. You would like to purchase 100 shares of stock in this firm but realize thatyou will
not have the funds to do so for another three years. If you desire a rate of return of 10 percent, how
much should you expect to pay for 100 shares when you can afford to buy this stock? Ignore trading

costs. $1,810 P3 = [$1.20(1.0254)]/(.10 − .025)

1440. Wilt has a consulting contract that calls for annual payments of $50,000 a year for five yearswith
the first payment due today. What is the current value of this contract if the discount rate is 8.4
percent? $214,142.50 (APVADue = $50,000[(1 − 1/1.0845)/.084](1.084))
1441. Wine and Roses, Inc. offers a 7% coupon bond with semiannual payments and a yield to maturity
of 7.73%. The bonds mature in 9 years. What is the market price of a $1,000 face value

bond? $953.28
1442. Winston Enterprises has a 15-year bond issue outstanding that pays a 9% coupon. The bond is
currently priced at $894.60 and has a par value of $1,000. Interest is paid semiannually. What is the
yield to maturity? 10.40%

1443. Winter Green Decors announced today that it will begin paying annual dividends. The first
dividend will be paid next year in the amount of $.40 a share. The following dividends will be $.60,
 $.85, and $1.00 a share annually for the following 3 years, respectively. After that, dividends are
projected to increase by 2% per year. How much are you willing to pay to buy one share of this stock
today if your desired rate of return is 10%? Value after year 4=(D4*Growth rate)/(Required return-
Growth rate) =(1*1.02)/(0.1-0.02)=12.75 Hence current price=Future dividend and value*Present
value of discounting factor(rate%,time period) =0.4/1.1+0.6/1.1^2+0.85/1.1^3+1/1.1^4+12.75/1.1^4
=$10.89(Approx).
1444. Working capital management includes decisions concerning which of the following? I. accounts
payable- II. long-term debt-III. accounts receivable- IV. inventory : I, III, and IV only
1445. Working capital management: is concerned with the upper portion of the balance sheet.
1446. Wydex, Inc. stock is currently trading at $82 a share. The firm feels that its primary clientele can
afford to spend between $2,000 and $2,500 to purchase a round lot of 100 shares. The firm should
consider a: stock split

X
Y
1447. Yesterday, Railway Tours paid its annual dividend of $1.20 per share. The company has been
reducing the dividends by 10 percent each year. What is the value of this stock at a discount rate of
13 percent? P0 = {$1.20[1 + (−.10)]}/[.13 − (−.10)] = $4.70

1448. You are analyzing a project and have prepared the following data: Required payback period 2.5
years cash flow: 175,000; 56,400;61800;72000;75000 required payback period 2.5 years Based on
the profitability index of _____ for this project, you should _____ the project. A. 0.93; accept
1449. You are analyzing a project and have prepared the following data: Required payback period 2.5
years. 175,000; 56,400;61800;72000;75000 required payback period 2.5 years . Based on the
internal rate of return of _____ percent for this project, you should _____ the project. 17.91; accept
1450. You are analyzing a project and have prepared the following data: Required payback period 2.5
years. 175,000; 56,400;61800;72000;75000 required payback period 2.5 years; required AAR 11.5
percent; required return: 14.5 percent .Based on the net present value of _____, you should _____
the project. $12,995.84; accept
1451. You are analyzing a project and have prepared the following data: Required payback period 2.5
years. 175,000; 56,400;61800;72000;75000 required payback period 2.5 years; required AAR 11.5
percent; required return: 14.5 percent . Based on the payback period of _____ years for this project,
you should _____ the project. 2.79; reject
1452. You are analyzing a project and have prepared the following data: Required payback period 2.5
years Required return 8.50% ased on the payback period of _______ for this project, you should

_______ the project. 2.87 years; reject

1453. You are analyzing two mutually exclusive projects and have developed the following information.

What is the incremental IRR? 17.90%

1454. You are borrowing $5,200 at 7.8 percent, compounded monthly. The monthly loan paymentis
$141.88. How many loan payments must you make before the loan is paid in full? 42 (Explanation:
$5,200 = $141.88{[1 − 1/(1 + .078/12)T]/(.078/12)} ln1.3127 = Tln1.0065)
1455. You are buying a car for $7,500, paying $900 down in cash, and financing the balance for 24
months at 6.5 percent, compounded monthly. What is the amount of each monthly loan payment?
$294.01
Explanation: Amount financed = $7,500 − 900 = $6,600
$6,600 = C{[1 − 1/(1 + .065/12)24]/(.065/12)}
C = $294.01
1456. You are buying a previously owned car today at a price of $6,890. You are paying $500 down in
cash and financing the balance for 36 months at 7.9%. What is the amount of each loan
payment? $199.94(Amount financed = $6,890 - $500 = $6,390)

1457. You are comparing five separate portfolios comprised of two stocks each that have varying
characteristics. Which characteristic is most indicative of a diversified portfolio? The correlation
between the two securities is negative.
1458. You are comparing stock A to stock B. Given the following information, which one of these two
stocks should you prefer and why? Stock A; because it has a higher expected return and appears to be
less risky than stock B. (E(r)A = (.60 × .09) + (.40 × .04) = .054 + .016 = .07 = 7% ;E(r)B = (.60 × .15) +
(.40 × -.06) = .09 - .024 = .066 = 6.6%.You should select stock A because it has a higher expected
 return and also appears to be less risky.)

1459. You are comparing Stock A to Stock B. Stock A will return 9 percent in a boom and 4 percentin a
recession. Stock B will return 15 percent in a boom and lose 6 percent in a recession. The probability
of a boom is 60 percent while the chance of a recession is 40 percent. Given this information, which
one of these two stocks should you prefer and why? Stock A; because it has a higher expected return
and appears to be less risky than Stock B
1460. You are comparing the common-size financial statements for two firms in the same industrythat
have very similar operations. You note that their sales revenues are similar in dollar value but yet
the common-size EBIT for one firm is 30 percent compared to only 26 percent for the other firm.
What are some possible explanations for this difference given the strong similarities of the two
firms? Some possible explanations are: (1) difference in the age of the fixed assets leading to
differences in the depreciation expense, (2) different depreciation methods, (3) different inventory
methods which affects the cost of goods sold, (4) different sales markets that allows the one firm to
have a higher markup per item, (5) different markets that cause higher costs per unit sold, and (6)
differing fiscal years.
1461. You are comparing two annuities which offer monthly payments for ten years. Both annuities are
identical with the exception of the payment dates. Annuity A pays on the first of each month while
annuity B pays on the last day of each month. Which one of the following statements is correct
concerning these two annuities? Annuity A has a higher future value than annuity B.
1462. You are comparing two annuities with equal present values. The applicable discount rate is 7.5%.
One annuity pays $5,000 on the first day of each year for twenty years. How much does the second
annuity pay each year for twenty years if it pays at the end of each year? $5,375 ( Because each
 payment is received one year later, then the cash flow has to equal: $5,000  (1 + .075) = $5,375)

1463. You are comparing two annuities with equal present values. The applicable discount rate is 6.5
percent. One annuity will pay $2,000 annually, starting today, for 20 years. The second annuity will
pay annually, starting one year from today, for 20 years. What is the annual paymentfor the second
annuity? $2,130

APVADue = $2,000[(1 − 1/1.06520)/.065](1.065)APVADue =

$23,469.42
$23,469.42 = C[(1 − 1/1.06520)/.065]
C = $2,130

This can also be computed as:

C = $2,000(1.065) = $2,130
1464. You are comparing two investment options, each of which will provide $15,000 of total income.
Option A pays five annual payments starting with $5,000 the first year followed by four annual
payments of $2,500 each. Option B pays five annual payments of $3,000 each. Which oneof the
following statements is correct given these two investment options? Given a positive rate of return,
Option A is worth more today than Option B.
1465. You are considering a project with an initial cost of $4,300. What is the payback period for this
project if the cash inflows are $550, $970, $2,600, and $500 a year over the next four years? 3.36
years (pb=3+( $4,300-$550-$970-$2,600)$500)
1466. You are considering a project with projected annual cash flows of $32,200, $41,800, and $22,900
for the next three years, respectively. What is the present value of these cash flows at adiscount rate
of 14 percent? $75,866.20 (Explanation: PV = $32,200/1.14 + $41,800/1.142 + $22,900/1.143 PV =
$75,866.20)

1467. You are considering a project with the following cash flows: What is the
present value of these cash flows, given an 11% discount rate? $8,695.61
1468. You are considering a project with the following cash flows: What is
the present value of these cash flows, given a 3% discount rate? $13,732.41 $13,812.03 $14,308.08
$14,941.76 $14,987.69
1469. You are considering a project with the following data: Internal rate of return 8.7%
Profitability ratio .98 - Net present value -$393 - Payback period 2.44 years - Required return 9.5% -
Which one of the following is correct given this information? This project should be rejected based
on the internal rate of return.
1470. You are considering an annuity which costs $100,000 today. The annuity pays $6,000 a year. The
rate of return is 4.5%. What is the length of the annuity time period? 31.49 years

1471. You are considering an investment with the following cash flows. If the required rate of return for
this investment is 13.5%, should you accept it based solely on the internal rate of return rule? Why
or why not? E. You can not apply the IRR rule in this case because there are multiple IRRs.
1472. You are considering purchasing stock S. This stock has an expected return of 8% if the economy

booms and3% if the economy goes into a recessionary period. The overall expected rate of return
on this stock will: increase as the probability of a boom economy increases.
1473. You are considering the following two mutually exclusive projects that will not be repeated. The
required rate of return is 11.25% for project A and 10.75% for project B. Which project should you
accept and why? project A; because its NPV is about $335 more than the NPV of project B.

1474. You are considering the following two mutually exclusive projects. Both projects will be
depreciated sing straight-line depreciation to a zero book value over the life of the project. Neither
project has any salvage value. Required rate of return 10% 13% Required payback period 2.0 years
2.0 years Based on the net present value method of analysis and given the information in the
 problem, you should: accept project B and reject project A.

1475. You are considering the following two mutually exclusive projects. Both projects will be
depreciated using straight-line depreciation to a zero book value over the life of the project Neither
project has any salvage value. Required rate of return 10% 13% Required payback period 2.0 years
2.0 years Based upon the internal rate of return (IRR) and the information provided in the problem,

you should: accept project A and reject project B.

1476. You are considering the following two mutually exclusive projects. Both projects will be
depreciated using straight-line depreciation to a zero book value over the life of the project. Neither
project has any salvage value. Required rate of return 10% 13% Required payback period 2.0 years
2.0 years . Based upon the payback period and the information provided in the problem, you should:
require that management extend the payback period for project A since it has a higher initial cost.

1477. You are considering the following two mutually exclusive projects. Both projects will be
depreciated using straight-line depreciation to a zero book value over the life of the project. Neither
project has any salvage value. Required rate of return 10% 13% Required payback period 2.0 years
2.0 years Based upon the profitability index (PI) and the information provided in the problem, you

should: disregard the PI method in this case.

1478. You are considering two independent projects both of which have been assigned a discount rate
of 8%. Based on the profitability index, what is your recommendation concerning these projects?
You should accept both projects since both of their PIs are greater than 1.

1479. You are considering two independent projects with the following cash flows. The required return

for both projects is 10%. Given this information, which one of the following statements is correct? E.
You should accept both projects if the funds are available to do so since both NPV's are > 0.
1480. You are considering two mutually exclusive projects with the following cash flows. Will your
choice between the two projects differ if the required rate of return is 8% rather than 11%? If so,

what should you do? yes; Select A at 8% and B at 11%.

1481. You are considering two projects with the following cash flows:

Which of the following statements are true concerning these two projects? I. Both projects have the
same future value at the end of year 4, given a positive rate of return - II. Both projects have the
same future value given a zero rate of return-III. Both projects have the same future value at any
point in time, given a positive rate of return.-IV. Project A has a higher future value than project B,
given a positive rate of return: II only

1482. You are considering two projects. Project A has projected cash flows of $6,500, $4,500, and
$2,500 for the next three years, respectively. Project B has projected cash flows of $2,500, $4,500,
and $6,500 for the next three years, respectively. Assuming both projects have the sameinitial cost,
you know that: Project A is more valuable than Project B given a positive discount rate.
1483. You are paying an effective annual rate of 13.8% on your credit card. The interest is compounded
monthly. What is the annual percentage rate on your account? 14.71%
1484. You are retired, have $264,500 in your savings, withdraw $2,000 each month, and earn 4.5
percent, compounded monthly. How long will it be until you run out of money? 15.25 years

Explanation: $264,500 = $2,000{[1 − 1/(1 + .045/12)T]/(.045/12)}

ln1.9839 = Tln1.00375
T = 183.02 months, or 15.25 years
1485. You are scheduled to receive annual payments of $10,000 for each of the next 25 years. Your
discount rate is 8.5%. What is the difference in the present value if you receive these payments at
the beginning of each year rather than at the end of each year? $8,699

Difference = $111,040.97 - $102,341.91 = $8,699.06 = $8,699 (rounded)

Note: The difference = .085  $102,341.91 = $8,699.06
1486. You are the beneficiary of a life insurance policy. The insurance company informs you that you
have two options for receiving the insurance proceeds. You can receive a lump sum of $50,000
today or receive payments of $641 a month for ten years. You can earn 6.5% on your money. Which
option should you take and why? You should accept the payments because they are worth

$56,451.91 today.
1487. You are trying to determine whether to accept project A or project B. These projects are mutually
exclusive. As part of your analysis, you should compute the incremental IRR by determining: the
internal rate of return for the differences in the cash flows of the two projects.
1488. You borrow $12,600 to buy a car. The terms of the loan call for monthly payments for fiveyears at
an interest rate of 4.65 percent, compounded monthly. What is the amount of each payment?
$235.76 ($12,600 = C{[1 − 1/(1 + .0465/12)5(12)]/(.0465/12)})
1489. You borrow $149,000 to buy a house. The mortgage rate is 7.5% and the loan period is 30 years.
Payments are made monthly. If you pay for the house according to the loan agreement, how much
total interest will you pay? $226,059( Total interest = ($1,041.83  30  12) - $149,000 =
$226,058.80 = $226,059 (rounded))

1490. You borrow $199,000 to buy a house. The mortgage rate is 5.5 percent, compounded monthly.
The loan period is 30 years, and payments are made monthly. If you pay for the houseaccording to
the loan agreement, how much total interest will you pay? $207,764 ($199,000 = C{[1 − 1/(1 +
.055/12)30(12)]/(.055/12)})
1491. You borrow $5,600 to buy a car. The terms of the loan call for monthly payments for four years at
a 5.9% rate of interest. What is the amount of each payment? $131.26

1492. You buy an annuity which will pay you $12,000 a year for ten years. The payments are paid on
the first day of each year. What is the value of this annuity today at a 7% discount rate? $90,182.79
1493. You desire a portfolio beta of 1.1. Currently, your portfolio consists of $100 invested in Stock A
with a beta of 1.4 and $300 in Stock B with a beta of .6. You have another $400 to investand want to
divide it between Stock C with a beta of 1.6 and a risk-free asset. How much should you invest in the
risk-free asset to obtain your desired beta? $50
1494. You estimate that you will have $24,500 in student loans by the time you graduate. The interest
rate is 6.5%. If you want to have this debt paid in full within five years, how much must you pay each
month? $479.37

1495. You expect an investment to return $11,300, $14,600, $21,900, and $38,400 annually over the
next four years, respectively. What is this investment worth to you today if you desire a rateof return
of 16.5 percent? $55,153.57 (Explanation: PV = $11,300/1.165 + $14,600/1.1652 + $21,900/1.1653 +
$38,400/1.1654 PV = $55,153.57)
1496. You have $2,500 to deposit into a savings account. The five banks in your area offer thefollowing
rates. In which bank should you deposit your savings? Bank B: 3.69%, compounded monthly
Explanation: EARBank A =
3.75%EARBank B = (1 +
.0369/12)12 − 1EARBank B =
.03753, or 3.753% EARBank C =
(1 + .0370/2)2 − 1 EARBank C =
.03734, or 3.734% EARBank D =
e.0367 − 1 EARBank D = .03738,
or 3.738% EARBank E = (1 +
.0365/4)4 − 1 EARBank E =
.03700, or 3.700%
Bank B offers the highest EAR.
1497. You have a $1,000 portfolio which is invested in stocks A and B plus a risk-free asset $400 is
invested in stock A. Stock A has a beta of 1.3 and stock B as a beta of .7.How much needs to be
invested in stock B if you want a portfolio beta of .90? $543
1498. You have a $1,250 portfolio which is invested in Stocks A and B plus a risk-free asset. $350is
invested in Stock A which has a beta of 1.36 and Stock B has a beta of .84. How much needsto be
invested in Stock B if you want a portfolio beta of .95? $847
1499. You have a portfolio comprised of two risky securities. This combination produces no
diversification benefit. The lack of diversification benefits indicates the returns on the twosecurities:
move perfectly in sync with one another.
1500. You have a portfolio consisting solely of stock A and stock B. The portfolio has an expected
return of 10.2%.Stock A has an expected return of 12% while stock B is expected to return 7%.
What is the portfolio weight of stock A? 64% (0.102 = [.12 × x] + [.07 × (1 - x)] = .12x + .07 - .07x;
.032 = .05x; x = 64%)
1501. You have a portfolio of two risky stocks which turns out to have no diversification benefit. The
reasonyou have no diversification is the returns: move perfectly with one another.
1502. You have a sub-contracting job with a local manufacturing firm. Your agreement calls for annual
payments of $50,000 for the next five years. At a discount rate of 12%, what is this job worth to you

today? $180,238.81
1503. You have been awarded an insurance settlement of $250,000 that is payable one year from
today. What is the minimum amount you should accept today in exchange for this settlement ifyou
can earn 6.7 percent on your investments? $234,301.78 (Explanation: PV = $250,000/1.067 PV =
$234,301.78)
1504. You have been offered a job that pays an annual salary of $48,000, $51,000, and $55,000 over
the next three years, respectively. The offer also includes a starting bonus of $2,500 payable
immediately. What is this offer worth to you today at a discount rate of 6.5 percent? $138,066.75
(Explanation: PV = $2,500 + $48,000/1.065 + $51,000/1.0652 + $55,000/1.0653 PV = $138,066.75)
1505. You have decided that you would like to own some shares of GH Corp. but need an expected 12%
rate of return to compensate for the perceived risk of such ownership. What is the maximum you
 are willing to spend per share to buy GH stock if the company pays a constant $3.50 annual dividend

per share? $29.17

1506. You have decided that you would like to own some shares of Martin & Miller (M&M) but need an
expected 15% rate of return to compensate for the perceived risk of such ownership. What is the
maximum you are willing to spend today to buy one share of M&M stock if the company pays a
constant $3 annual dividend per share? $20.00
1507. You have decided to purchase shares of GHC but need an expected 12 percent rate of return
compensate for the perceived risk of such ownership. What is the maximum price you shouldpay per
share if the company pays a constant $2.70 annual dividend per share? $22.50 P = $2.70/.12 =
$22.50
1508. You have plotted the data for two securities over time on the same graph, i.e., the monthly
return of each security for the last 5 years. If the pattern of the movements of each of the two
securities rose and fellas the other did, these two securities would have: a strong positive
correlation.
1509. You have plotted the monthly returns for two securities for the past five years on the same
graph. The pattern of the movements of each of the two securities generally rose and fell to the
same degree in step with each other. This indicates the securities have: a strong positive correlation.
1510. You have some property for sale and have received two offers. The first offer is for $189,000
today in cash. The second offer is the payment of $100,000 today and an additional $100,000 two
years from today. If the applicable discount rate is 8.75%, which offer should you accept and why?
You should accept the $189,000 today because it has the higher net present value.
1511. You invest $100 today. With positive interest rates, the concept of future value implies that the
future value of your $100 will be ____ $100. greater than
1512. You just paid $350,000 for a policy that will pay you and your heirs $12,000 a year forever. What
rate of return are you earning on this policy? 3.43%
1513. You just paid $525,000 for a security that will pay you and your heirs $25,000 a year forever.What
rate of return will you earn? 4.76 percent (r = $25,000/$525,000)
1514. You just won the lottery! As your prize you will receive $1,200 a month for 100 months. If you
can earn 8% on your money, what is this prize worth to you today? $87,380.23 (PV = $1,200({1 - 1/[1
 + (.08/12)]100}/(.08/12)) = $87,962.77)

1515. You just won the lottery! As your prize you will receive $1,500 a month for 150 months. Ifyou can
earn 7 percent, compounded monthly, on your money, what is this prize worth to you today?
$149,676.91 (APV = $1,500{[1 − 1/(1 + .07/12)150]/(.07/12)}
1516. You need some money today and the only friend you have that has any is your 'miserly' friend.
He agrees to loan you the money you need, if you make payments of $20 a month for thenext six
months. In keeping with his reputation, he requires that the first payment be paid today.He also
charges you 1.5 percent interest per month. How much total interest does he expect to earn? $4.35
Explanation: APVADue = $20[(1 −
1/1.0156)/.015](1.015)APVADue = $115.65
Total interest = 6($20) −
$115.65Total interest = $4.35
1517. You own 100 shares of XY Corporation. There are several key items which will be voted on at the
next board meeting. You are unable to physically attend the meeting but would like your votes cast
so your opinion counts. The procedure by which you can cast your votes without attending the
meeting is called voting. proxy
1518. You own 200 shares of Loner stock. The firm announced that it will be issuing a
dividend of $.20 a share one year from today followed by a final liquidating dividend of
$1.60 a share two years from today. If you can earn 7percent on your funds, what will be
the value of your total investment income in two years if you do not want to receive any
funds until then? $362.80 Total value = [$.20(1 + .07) + $1.60](200)= $362.80
1519. You own 300 shares of Abco stock. The firm plans on issuing a dividend of$2.10 a share
one year from today and then issuing a final liquidating dividend of $36.45 a share two
years from today. Your required rate of return is 14.5 percent. Ignoring taxes, what is the
value of one share of this stock toyou today? $29.64 Value per share = $2.10/1.145 +

$36.45/1.1452= $29.64
1520. You own a bond that has a 7% coupon and matures in 12 years. You purchased this bond at par
value when it was originally issued. If the current market rate for this type and quality of bond is
7.5%, then you would expect: to realize a capital loss if you sold the bond at the market price today.
1521. You own a portfolio with the following expected returns given the various states of the economy.
What is theoverall portfolio expected return? 6.8% (E(r) = (.15 × .18) + (.60 × .11) + (.25 × -.10) = .027

+ .066 - .025 = .068 = 6.8%)

1522. You own the following portfolio of stocks. What is the portfolio weight of stock C? 47.9%

1523. You owned 200 shares last year and received a stock dividend of 5% at the end of last year. The
number of shares you now have is _____ and your wealth has increased by ______%.210; 0 ( #
shares = 200(1.05) = 210 The only change is in value per share)
1524. You plan to invest $6,500 for three years at 4 percent simple interest. What will yourinvestment
be worth at the end of the three years? $7,280.00 (Explanation: ValueYear 3 = $6,500 +
$6,500(.04)(3) ValueYear 3 = $7,280.00)
1525. You plan to save $2,400 a year and earn an average rate of interest of 5.6 percent. How much
more will your savings be worth at the end of 40 years if you save at the beginning of each year
rather than at the end of each year? $18,821.10

Explanation: AFV = $2,400[(1.05640 −

1)/.056]AFV = $336,091.14
AFVADue = $2,400[(1.05640 −
1)/.056](1.056)AFVADue = $354,912.24
Difference = $354,912.24 −
336,091.14Difference = $18,821.10

1526. You purchased 200 shares of ABC stock on July 15th. On July 20th, you purchased
another 100 shares and then on July 22nd you purchased your final 200 shares of ABC
stock. The company declared a dividend of $1.10 a share on July 5th to holders of record
on Friday, July 23rd. The dividend is payable on July 31st. How much dividend income will
you receive on July 31st from ABC? $330 Dividend income = $1.10(200 + 100) = $330
1527. You recently contacted a brokerage firm and purchased 100 shares of stock. The brokerage firm
acquired the shares for you by making a deal with a floor broker who represented one of thestock
issuer's shareholders. Given this, you know your purchase: was conducted in the secondary market.
1528. You recently purchased a grocery store. At the time of the purchase, the store's market value
equaled its book value. The purchase included the building, the fixtures, and the inventory. Which
one of the following is most apt to cause the market value of this store to be lower than the book
 value? construction of a new restricted access highway located between the store and the
surrounding residential areas
1529. You recently purchased a stock that is expected to earn 12% in a booming economy, 8% in a
normal economy and lose 5% in a recessionary economy. There is a 15% probability of a boom, a
75% chance of a normal economy, and a 10% chance of a recession. What is your expected rate of
return on this stock? 7.30% (E(r) = (.15 × .12) + (.75 × .08) + (.10 × -.05) = .018 + .06 - .005 = .073 =
7.3% )
1530. You recently purchased a stock that is expected to earn 12.6 percent in a booming economy, 8.9
percent in a normal economy, and lose 5.2 percent in a recessionary economy. Each economic state
is equally likely to occur. What is your expected rate of return on this stock? 5.43 percent
1531. You retire at age 60 and expect to live another 27 years. On the day you retire, you have
$464,900 in your retirement savings account. You are conservative and expect to earn 4.5% on
your money during your retirement. How much can you withdraw from your retirement savings
each month if you plan to die on the day you spend your last penny? $2,481.27

1532. You want to compile a portfolio valued at $1,000 which will be invested in Stocks A and B plus a
risk-free asset. Stock A has a beta of 1.2 and Stock B has a beta of .7. If you invest $300 inStock A and
want a portfolio beta of .9, how much should you invest in Stock B? $771.43
1533. You want to design a portfolio that has a beta of zero. Stock A has a beta of 1.69 and StockB's beta
is also greater than 1. You are willing to include both stocks as well as a risk-free security in your
portfolio. If your portfolio will have a combined value of $5,000, how much should you invest in
Stock B? $0
1534. You want to earn a 12% rate of return. Panco, Inc. preferred stock pays a $4.50 annual dividend.
What Cumulative voting is the procedure whereby a shareholder: may cast all of his or her votes for
one candidate for the board of directors.
1535. You want to establish a trust fund that will provide $50,000 a year forever for your heirs. Ifthe
fund can earn a guaranteed rate of return of 4.5 percent, how much must you deposit in a solitary
lump sum to establish this trust? $1,111,111 (PV = $50,000/.045)
1536. You want to have $20,000 saved in five years. If you can earn 4.5 percent on your savings,what
amount must you save each year if the amount you save each year is the same? $3,655.83 ($20,000
= C[(1.0455 − 1)/.045])
1537. You want to purchase an annuity that will pay you $1,200 a quarter for 15 years and earn areturn
of 5.5 percent, compounded quarterly. What is the most you should pay to purchase thisannuity?
$48,811.20 (APV = $1,200{[1 − 1/(1 + .055/4)15(4)]/(.055/4)})
1538. You want to save an equal amount each year for the next 38 years, at which time you will retire.
What amount of annual savings are needed if you desire a retirement income of $55,000 ayear for
25 years and earn 7.5 percent, compounded annually? $3,146.32 (Explanation: PV = $55,000[(1 −
1/1.07525)/.075] PV = $613,082.02- $613,082.02 = C[(1.07538 − 1)/.075]-C = $3,146.32)
1539. You want your portfolio beta to be 1.20. Currently, your portfolio consists of $100 invested in
stock A with a beta of 1.4 and $300 in stock B with a beta of .6. You have another $400 to invest and
want to divide it betweenan asset with a beta of 1.6 and a risk-free asset. How much should you
invest in the risk-free asset? $0
1540. You would be making a wise decision if you chose to: accept the loan with the lower effective
annual rate rather than the loan with the lower annualpercentage rate.
1541. You would like to combine a highly risky stock with a beta of 2.6 with U.S. Treasury bills insuch a
way that the risk level of the portfolio is equivalent to the risk level of the overall market.What
percentage of the portfolio should be invested in Treasury bills? 61.54 percent
1542. You would like to combine a risky stock with a beta of 1.5 with U.S. Treasury bills in such a way
that therisk level of the portfolio is equivalent to the risk level of the overall market. What
percentage of the portfolio should be invested in Treasury bills? BetaPortfolio = 1.0 = [(1 - w) × 1.5] +
[w × 0] = 1.5 - 1.5w; 1.5w = .5; w = 0.33 or 33%
1543. You would like to combine a risky stock with a beta of 1.87 with U.S. Treasury bills in such away
that the risk level of the portfolio is equivalent to the risk level of the overall market. What
percentage of the portfolio should be invested in the risky stock? 53.48 percent
1544. You would like to compare your firm's cost structure to that of your competitors. However, your
competitors are much larger in size than your firm. Which one of these would best enableyou to
compare costs across your industry? Common-size income statement
1545. You would like to establish a trust fund that will provide $50,000 a year forever for your heirs. The
trust fund is going to be invested very conservatively so the expected rate of return is only 2.75%.
How much money must you deposit today to fund this gift for your heirs? $1,818,181.82
1546. You would like to have $50,000 saved at the end of Year 5. At the end of Year 2, you can deposit
$7,500 for this purpose. If you earn 4.5 percent, how much must you deposit today toreach your
 goal assuming no other deposits are made? $33,254.58 (FV = $10,000(1.09630) + $15,000(1.09629) +
$25,000(1.09626) FV)

1547. You would like to invest in the following project.

1548. Your _____ tax rate is the amount of tax payable on the next taxable dollar you earn. marginal
1549. Your _____ tax rate is the total taxes you pay divided by your taxable income. Average
1550. Your car dealer is willing to lease you a new car for $299 a month for 60 months. Payments are
due on the first day of each month starting with the day you sign the lease contract. If your cost of
money is 4.9%, what is the current value of the lease? $15,947.61

1551. Your credit card company charges you 1.35 percent per month. What is the annualpercentage
rate on your account? 16.20 percent ($98,407 = $2,000(1 + r)35 r = .1177, or 11.77%)
1552. Your credit card company charges you 1.5% per month. What is the annual percentage rate on
your account? 18.00%
1553. Your employer contributes $25 a week to your retirement plan. Assume that you work for your
employer for another twenty years and that the applicable discount rate is 5%. Given these
assumptions, what is this employee benefit worth to you today? $16,430.54
1554. Your firm offers a 10-year, zero coupon bond. The yield to maturity is 8.8%. What is the current
market price of a $1,000 face value bond? $430.24

1555. Your firm wants to save $250,000 to buy some new equipment three years from now. The plan is
to set aside an equal amount of money on the first day of each year starting today. The firm can
earn a 4.7% rate of return. How much does the firm have to save each year to achieve its
goal? $75,966.14

1556. Your great-aunt left you an inheritance in the form of a trust. The trust agreement states that you
are to receive $2,500 on the first day of each year, starting immediately and continuing for fifty
years. What is the value of this inheritance today if the applicable discount rate is
6.35%? $39,942.42

1557. Your local travel agent is advertising an extravagant global vacation. The package deal requires
that you pay $5,000 today, $15,000 one year from today, and a final payment of $25,000 on the
day you leave two years from today. What is the cost of this vacation in today's dollars if the
discount rate is 6%?$41,400.85
1558. Your parents are giving you $100 a month for four years while you are in college. At a 6%
discount rate, what are these payments worth to you when you first start college? $4,258.03

1559. Your parents plan to give you $200 a month for four years while you are in college. At a discount
rate of 6 percent, compounded monthly, what are these payments worth to you whenyou first start
college? $8,516.06 (APV = $200{[1 − 1/(1 + .06/12)4(12)]/(.06/12)}
1560. Your portfolio has a beta of 1.18 and consists of 15 percent U.S. Treasury bills, 30 percent Stock
A, and 55 percent Stock B. Stock A has a risk level equivalent to that of the overall market.What is
the beta of Stock B? 1.60
1561. Your portfolio has a beta of 1.18. The portfolio consists of 15% U.S. Treasury bills, 30% in stock A,
and55% in stock B. Stock A has a risk-level equivalent to that of the overall market. What is the beta
of stock B? A. .551.60
1562. Your portfolio is comprised of 30 percent of Stock X, 50 percent of Stock Y, and 20 percentof
Stock Z. Stock X has a beta of .64, Stock Y has a beta of 1.48, and Stock Z has a beta of 1.04.What is
the portfolio beta? 1.14
1563. Your portfolio is comprised of 30% of stock X, 50% of stock Y, and 20% of stock Z. Stock X has a
beta of .64, stock Y has a beta of 1.48, and stock Z has a beta of 1.04. What is the beta of your
portfolio? BetaPortfolio = (.30 × .64) + (.50 × 1.48) + (.20 × 1.04) = .192 + .74 + .208 = 1.14
1564. Your rich uncle establishes a trust in your name and deposits $150,000 in it. The trust pays a
guaranteed 4% rate of return. How much will you receive each year if the trust is required to pay
you all of the interest earnings on an annual basis? $6000 ( Annual earnings=$150,000*rate of
return)
1565. Your total wealth will remain constant as the value per share will decrease by 5
percent.

Z
1566. Zelo stock has a beta of 1.23. The risk-free rate of return is 2.86 percent and the market rateof
return is 11.47 percent. What is the amount of the risk premium on Zelo stock? 12.30 percent
1567. Zelo, Inc. stock has a beta of 1.23. The risk-free rate of return is 4.5% and the market rate of
 return is 10%. What is the amount of the risk premium on Zelo stock? 6.77% (Risk premium = 1.23 ×
(.10 - .045) = .06765 = 6.77%)
1568. Zeta Corporation has issued a $1,000 face value zero-coupon bond. Which of the following
values is closest to the correct price for the bond if the appropriate discount rate is 4% and the
bond matures in 8 years? $730.69 (Current Price = Face Value/(1 + r)n = 1000/(1 + 0.04)8 =
$730.69
1569. Zoom stock has a beta of 1.46. The risk-free rate of return is 3.07 percent and the market rateof
return is 11.81 percent. What is the amount of the risk premium on Zoom stock? 12.76 percent